Gross margin rising on copper price declines…Copper prices declined by 13% in 1H15(vs 2H14) and are currently an additional 11% below the 1H15 average. With copperaccounting for c35% of total COGS and more than 30% of revenue, the company sawgross margin increase by 340bp h-o-h to 17.4% in 1H15 (despite a 4.2% h-o-h revenuedecline). We expect margin to continue expanding and now model 18.8% for 2H15 and18.1% for 2015e (prior 17.2%).
…but offset by slightly higher tax and operating expense and slightly lower revenue.While ASP has remained stable despite the steep copper price declines, the company hasalso stopped building new capacity given the weak demand environment. As a result, wenow expect revenue to remain mostly flattish for 2015 and 2016 (previously modelledlow-single digit percent growth). The company is also guiding to a slightly higher tax rate,and operating expense has tracked slightly higher. Combined, these mostly offset thegross margin upside, prompting us to lower our estimates slightly with 2015e EPS 3%lower at HKD0.46 and 2016e EPS 7% lower at HKD0.47.
Reiterate Hold. While shares may appear cheap, currently trading at 6x 2016e EPS, thisstill falls within the historical trading band of 5-11x PE range over the past four years.Given the extremely pessimistic investor sentiment due to fears over a meaningfullyweaker Chinese economy, we believe a valuation at the low end of this range isappropriate. We thus lower our TP to HKD2.85, which is based on 6x 2016e EPS (priortarget of HKD3.75 was based on 8x 2015e EPS).