Action
We expect Truly International’s EPS to surge 222.8% to HK$0.23 in2018 because: 1） the company recognized HK$550mn of bad debtprovisions related to Leshi Mobile in 1H17; and, 2） its generation-4.5production line in Huizhou may turn profitable in 2H18, enhancingthe company’s profits from associates.
We expect non-smartphone businesses’ – mainly auto displaypanels – share of operating revenue to further expand from 25.7%in 2017 to 38.1% in 2019. We believe Truly’s diversification will likelybring steady revenue growth starting from 2018, thanks to autodisplay panels’ high unit price and supply chains’ high entry barriers.
We thus raise our target price by +12.2% to HK$4.14 （based on 18.0x2018e P/E） and upgrade the stock to BUY.
What’s changed?
Truly International diversified its business lines to enter theauto display panel market.
Huizhou production line may turn profitable in 2H18,enhancing the company’s investment gains.
How do we differ from the market
Truly International’s share pricehas fully priced in negative factors. We are more confident about itsentry into the automotive display market. The company will strive togain more market share.
Potential catalysts: A-share IPO of its subsidiary in Shanwei is likely tobe completed in early 2018.
Financials and valuation
We expect 2017/18 net profit to be HK$190mn/720mn with EPS ofHK$0.06/0.23. Our new target price of HK$4.14 （+12.2%） is based on18.0x 2018e P/E, close to the upper limit of its historical valuationrange of 4.0–20.0x. Upgrade to BUY.
Risks
Negative surprise in efforts to acquire automotive display clients;weaker-than-expected panel yield and production capacity ramp-up.