2H16 operation picked up as expected
　　Management expressed in our recent meeting that TK’s 2H16 operationpicked up as expected driven by improved utilization rate in plastic injection.
　　The improvement was led by smartphone & wearables segment, medical &healthcare. As TK’s 1H16 revenue normally accounted for 40-45% of full yearin FY13-FY15, we expect TK’s FY16E sales to post a low-single digit Yoygrowth (at ~3%), while net profit to hand in a high-single digit Yoy growth (at~9%). We continue to see TK’s GPM still possesses an upside due to: i) TK’sautomobile segment order backlog to drive ultra-large molds revenue, ii)Utilization and automation enhancement in both mold fabricaiton andplastic injection segments; iii) strong order backlogs from mobilephones & wearables, medical & health devices.
　　Plastic injection utilization picked up in 2H16; Raised FY17ECAPEX guidance on strong order backlog
　　With utilization rate expected to pick up to ~70% in 2H16E (vs 64.3% in1H16), together with RMB depreciation favours exports and stableprocurement cost (in RMB), we foresee the segment GPM to rise to ~27% inFY16E (vs 26.4% in 1H16). TK raised their FY17E CAPEX guidance toHK$140mn, of which ~50% will be used for adding automation equipment,this implies the strong backlog is still well-supported by smartphones &wearables, medical & health devices (incl. Philips) and from higher margin(25-30% GPM) ultra-large molds for automobiles. We continue to expect TKto enhance its product quality through fine tuning production process , we seeTK’s FY17E mid-teens growth guidance can still be achieved.
　　Current automobile backlog set up a good foundation for FY17E;Smart home growth momentum expect to resume in FY17EManagement expressed in our recent update that current automobile backlogamounted to ~HK$500mn , which we believe has set up a good foundation forautomobile segment growth in FY17E. For smart home segment,management saw a growth slowdown in 2H16 (vs. 1H16 at 220% Yoy growth)due to consolidation between Google Home and Nest. The segmentaccounted for ~7% of TK’s 1H16 revenue, and management expect growth toresume in FY17E on recent order inflows.
　　Maintain BUY on FY17E 7.5x PE, a good defensive play to ride onindustry 4.0 in China
　　We lowered TK’s FY16E/17E EPS by -11.2%/-16.0% due to lower salesforecast with GPM assumption remained unchanged, nevertheless, it is stillcurrently trading at FY17E 7.5x PE (~41% discount to Hong Kong andinternational peers).With TK’s EPS expected to grow at 14.4% CAGR fromFY15-17E driven by existing clients’ product pipeline, ramp up of new clients’
　　order as well as GPM expansion. We raised TK’s TP from HK$2.56 toHK$2.75 which translates to FY17E 9.5x PE (~25% discount to peers due toits secondary market liquidity, and unfavorable market sentiment for smallcaps). With solid fundamentals and health financial position (CAPEX to befinanced by increasing operating cash inflow), we expect TK to raise dividendpayout ratio to ~50% in FY16E (vs 44.2% in FY15), its 5.7%/6.7% inFY16E/17E dividend yield also makes it a good defensive play to ride onindustry 4.0 despite facing economic headwinds, we maintain TK’s BUYrating.