3Q16 results miss GPM recovery Truly released its 3Q16 results with 3Q16sales up 21% yoy and 20% qoq to HK$6.0bn, in line with our expectations. GPMwas down further by 0.5ppt qoq to 10.1%, missing our expectations. We believethe miss on GPM was mainly due to exchange rate loss issue as well shortage oftouch component. Net profit was up 23% yoy and up 1% qoq to HK$173mn,missing our estimates, mainly due to 1.0ppt lower than expected 3Q16 GPM.HK$85mn 3Q16 net loss from associate is in line with expectations.
We revised down our FY16/17E earnings estimate by 17.5%/8.3% as werevised up our FY16/17E sales by 2.6%/4.6% to HK$21.6bn/HK24.3bn givenon-track ramp up of its fingerprint business which recorded HK$740mn sales in9M16, in line with management guided HK$1.0bn full year sales target.Fingerprint sensor shipment was up from 0.1mn units in 9M15 to 19.4mn unitswith ASP of HK$38 per unit in 9M16 as compared to HK$39 in 1H16. Wecurrently estimate 30mn/75mn units of fingerprint module shipment in FY16/17Ewith ASP of HK$35/HK$28 respectively, representing HK$1.05bn/HK$2.10bnsales in FY16/17E. We revised down our FY16/17E GPM assumption by0.5ppt/0.4ppt to 10.8%/11.4% given unexpected qoq drop in 3Q16 GPM andslower than expected recovery from panel price hike and exchange rate loss.Lastly, despite 3Q16 net loss from associate was in line with our expectations, weturned more conservative to the net loss for its G4.5 panel line associate in4Q16E given our recent channel check, hence we revised up our FY16E net lossfrom associate by 49% from HK$192mn to HK$285mn, implying a net loss fromassociate of HK$126mn in 4Q16E as compared to HK$85mn in 3Q16. Thus werevised down our FY16/17E fully diluted EPS estimate by 17.5%/8.3% toHK$0.255/HK$0.376.
Maintain BUY on undemanding valuation We maintain our BUY rating onTruly with TP lowered to HK$4.50 from HK$4.90 based on same 12x FY17Egiven promising growth from fingerprint module business and strengthen marketto positive by ramping up its owned G4.5 panel line. Truly currently trades at12.6x/8.5x FY16/17E PE. We believe the concern over net loss from associateand GPM were priced-in in our forecast.
Risks: 1) delay or slow ramp up of G4.5 plant; 2) ASP erosion is faster than expected, 3)fingerprint module GPM may be lower than we expect