1H15 results miss CICC estimates by 7.7%
FMSH reported 1H15 revenue of Rmb419.88mn(+13.3% YoY, vs. CICC estimates of Rmb448mn), withnet profit of Rmb66.12mn (+3.6% YoY, vs. CICC estimates ofRmb71.61mn). The results were below our expectation mainlydue to the delay of Bank Card IC projects and Bank Card IC’srapid ASP decline. We expect Bank Card IC’s ASP to drop fromRmb4.5 to Rmb4.3 in 2015 and further to Rmb4.0 in 2016.
Trends to watch
Better non-Bank Card IC revenue. FMSH secured more than40% of the integrated circuit supply orders from the State Grid,surpassing the market leader Renesas. We expect a highermarket share for the company’s non-volatile memory and smartmeter ASIC products.
Bank Card IC projects behind schedule. Delayed
localization of bank IC cards may drag performance; CCB projectwill ramp up in 2H15. Although banks’ adoption process is slow,we estimate the total issuance to be ~10mn for Shanghai Fudanin 2015, representing >50% of the total bank card ICs suppliedby local companies. Also considering the confirmed tenderorders from China Construction Bank early this year, we expectfinancial IC orders to ramp up in 2H15.
Earnings revisions
We revise down 2015e earnings by 6.8% and 2016e by3.2%, to reflect the slower-than-expected financial IC chipsetshipment and a rapid ASP decline in Bank Card IC. We cut2015/16e EPS in a descending order by 6.8%/3.2% respectively.
Valuation and recommendation
Given the trimmed 2015/16 earnings forecast and a 15.42%decline in SOX (PHLX Semiconductor Sector Index) over the pasttwo months, we cut our TP from HK$11.98 to HK$6.74,based on 11.62x NTM P/E. Maintain BUY.
Risks
Slower roll-out of EMV or NFC technologies in China.