Tongda’s 1H20 net profit of 90% YoY decline is in-line with profit warning (85-90%YoY decline) due to slower upgrade and net exchange loss (vs FX gain in 1H19).
　　Looking into 2H20E, we expect intense competition on glastic casing and sloweriPhone waterproof upgrade will continue to drag margin in the near term,offsetting Xiaomi/Samsung’s recovery and 5G iPhone cycle in 2H20E. Werevised up FY20-22E revenue for better Samsung/Xiaomi shipment but loweredGPM by 0.1-9ppt for inferior product mix and intense competition. We maintainHold on the stock with TP HK$0.5, based on 7x FY21E P/E.
1H20 weakness in-line due to slower upgrade and FX loss. Tongda’s1H20 net profit decline of 90% YoY is largely in-line with profit warning (85-95% YoY) due to weaker GPM and FX loss, while 1H20 revenue growth of2% YoY is 11%/5% higher than our/market estimates, thanks to solid casingrevenue (+10% YoY) offsetting NB/automobile/household product weaknessamid COVID-19 impact. GPM came in at 15.2% (vs 21.1% in 1H19) givenslower upgrade of glastic casings and lower margin of iPhone components.
2H20E: Xiaomi/Samsung’s recovery but margin risk persists. Despiterapid glastic casings adoption on Xiaomi/Samsung 5G smartphones, mgmt.
　　maintained FY20E shipment of 150mn, which implies 5% YoY decline to80mn in 2H20E (vs 84mn in 2H19). We estimate 2H20E handset revenue todecline 3% YoY with flattish blended ASP given higher mix of lower-ASPglastic product. In addition, we expect iPhone revenue to remain flattish inFY20E, and product launch delays will drag GPM to 19% in FY20E (vs 22%in FY19). Overall, we estimate 2H20E revenue to decline 4% YoY (vs +2%in 1H20E), and top 3 clients will remain Xiaomi, Apple and Samsung,accounting for 30%/20%/15% of FY20E revenue.
Maintain Hold with TP HK$0.5. We raised FY20-22E revenue given betterSamsung/Xiaomi shipment but trimmed GPM by 0.1-9ppt for inferior productmix and intense competition. We maintain Hold with TP HK$0.50 based on7x FY21E P/E (1-sd below hist. avg.), given weaker growth visibility andmargin downside risks. In the long term, we believe Tongda will benefit fromglastic casing adoption, 5G iPhone upcycle and IoT opportunities, but currentvaluation of 6.5x FY21E P/E is fair in our view, given lack of near-termcatalysts.