Better GM due to higher non-smartphone sales mix
Truly reported 4Q15 revenue of HK$4.935bn (-0.8%QoQ & -14.2% YoY). Production of both its fingerprintrecognition and full in-cell modules commenced in November2015, and thus contributed to 4Q revenue. Given the margin ofnon-smartphone products is relatively higher than those ofsmartphone products, the former’s increasing contributionimproved Truly’s overall GM by 1ppt QoQ.
Trends to watch
Non-smartphone segment to drive growth. Truly hasestablished a strong foothold in the auto segment, with Volvo,Chrysler, BMW and Ford now all clients. Although itsnon-smartphone segment turnover was still only 25% of 4Q15’stotal, we expect this share to continue rising over the next fewquarters. Given non-smartphone products’ margin is higher thanthe company’s average, overall GM should improve marginally.
More competitors entering in-cell module production;Truly started full in-cell module shipments in November 2015,with LeTV as its major client and can now make 9~10mnunits/month. With a thinner form factor, in-cell modules haveseen rising adoption on high-end smartphones since beingadopted on Apple’s iPhone 5. Although in-cell modules arecurrently only supplied by LGD, JDI and Sharp, China’s BOE andTianma are expected to start mass production in 2016e; we thuswe see potential ASP and GM pressure in the near future.
Earnings revisions
ASP of TLI modules, one of Truly’s core touch panel products,fell >30% YoY in 2015 due to industry-wide oversupply anddecreased adoption on high-end smart phones. Slow shipmentgrowth and fierce peer competition sees us maintain our bearcase scenario and cut 2016e EPS by 5.8% to HK$0.30.
Valuation and recommendation
At HK$1.96, Truly is valued at 6.4x/6.6x 2016/17e P/E, >40%below peers’ average. Its poor near-term outlook leads us to seta TP of HK$1.9 (6.3x/6.4x 16/17e earnings). Maintain HOLD.
Risks
Lower market share due to increased competition.