Soft start in 1Q20 ; GM pressure across the board, guided down handsetcasing shipment volume
　　We recently met Tongda’s management, they provided us an operational updateand discussed near term outlook. Tongda’s 1Q20 revenue dropped 1.5% Yoy toHK$1,662mn, in which handset related sales grew 7.8% to ~HK$1,300mn, whilenon-handset sales slipped 25% to HK$362mn, due to sluggish demand in homeappliance and household products, as well as auto due to COVID-19 outbreak.
　　Management mentioned that GM pressure was seen across the board. Inhandset related segment, the GM squeeze was attributed to i) margin pressurein 2.5D glastic/metal casing, ii) lack of component upgrade for US client’ssmartphone which was unveiled in 3Q19.
　　Due to global lockdown, both Xiaomi and Samsung’s orders were 30% less thanexpected in Apr and May. In view of near term headwinds, Tongda guided downFY20E handset casing shipment 150mn (vs. 160mn/180mn in FY19 result and inearly Jan 2020), in which ~50% would be shipped in 2H20E. We expect glasticswould take up ~70-80% of total shipment (with Samsung and Xiaomi tocontribute most of the shipment, while the remaining will be shared among Vivo,oppo). For glass and metal casings, they would each account for low-teens andhigh single digit of the total shipment.
　　Tri-proof and high precision components GM remains weak in 1H20E,still capable of share gain
　　In 1Q20, Tongda still faced lower ASP and GM on legacy products, due to nomajor spec upgrade in iPhone 11, we expect GM stays weak in 1H20 and wouldrecover in 2H20E upon successful launch of Apple’s new flagship smartphones.
　　Though the rumoured iPhone 12 would face a 1-2 month delay in shipment dueto COVID-19, it is still expected to unveil in 3Q20E with massive upgrade incomponents. Tongda currently received ~40% of Apple’s Tri-proof and highprecision components order, we expect this allocation would remain stablethroughout FY20E. Apple is still Tongda’s top 3 customer, and given thewell-established relationship, we continue to believe Tongda would be capable ofgaining further market share ahead, in which they would be involved in Apple’snew product pipeline which include wearables and AR products).
　　Dipole antenna contribution minimal in FY19Due to the delayed buildout of 5G BTS, Tongda’s 5G dipole antenna sales wasminimal (< RMB2mn) in FY19, but we expect sales would gradually ramp up inupon full launch of 5G service in China. We still stick to our view that Tongda’sprevious years’ investment (commenced in 2012) in LDS technology began tobear fruit, which now makes them well-prepared to tap into equipment vendors’
　　supply chain. Tongda is currently the third supplier supplying 5G dipole antennato equipment vendors, other leading players include Huizhou Speed (300302CH) and FRD (300602 CH).
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　　Tongda Group | 698.HK
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　　FY20E(old) FY20E(new) Change(%) FY21E(old) FY21E(new) Change(%)Revenue 9,898 8,757 -11.5% 10,778 9,671 -10.3%GP 1,904 1,556 -18.3% 2,068 1,761 -14.9%
　　GM 19.2% 17.8% -140bps 19.5% 18.5% -100bpsOP 870 646 -25.8% 942 756 -19.8%
　　Net Profit 538 391 -27.2% 581 467 -19.6%
　　Diluted EPS 0.083 0.060 -27.2% 0.090 0.072 -19.6%Undemanding valuation, diversifying client and product mix to drive earnings ;Maintain BUY with TP HK$0.52We lower Tongda’s FY20E/21E EPS by 27.2%/19.6% on lower casing shipment, sales and GM assumption. Our latest netprofit forecasts are ~24%/15% lower than Bloomberg consensus, as current consensus has not fully reflect the short termGM pressure on all business fronts. Nevertheless, we still forecast Tongda’s GM would gradually recover in FY21E, drivenby glastics casing, potential increased order allocation from US smartphone clients, while faster than expected ramp up ofdipole antenna sales would be an upside catalyst.
　　Tongda’s share price has underperformed HK listed peers and tumbled 55% YTD (vs. HK listed peers at ~23%), due toinvestors’ much lower appetite for small caps. Tongda is trading at 7.3x/5.9x FY20E/21E PE (~54/57% discount to casingpeers). We maintain Tongda’s rating at BUY with TP at HK$0.52 (based on FY21E EPS, hence implies 6.9x forward PEand 50% discount to peers).