Yangtze Optical Fibre reported 1H18 revenue of Rmb5.6bn （+21.2% YoY） and net profit of Rmb808.7m（+44.3% YoY）， largely in line with our expectations. Given decreasing fibre demand in the short termand a dilution effect due to the listing of A shares, we revise down our EPS forecasts from Rmb2.68to Rmb2.41 in 18E （+29.6% YoY）， from Rmb3.17 to Rmb2.85 in 19E （+18.3% YoY）， and from Rmb3.32to Rmb2.99 in 20E （+4.9% YoY）。 We lower our target price from HK$40.00 to HK$30.00, representing11x 18E PE. With 10.3% upside, we maintain our Outperform recommendation.
Uncertain demand. Based on domestic 5G schedule: three operators will start 5G outdoor networktrial in 2018 while scale commercial use will roll out in 2020. 5G is still too early to mention whileFibre demand in the recent years is mainly comes from 4G network and fix-line broadbandinfrastructure. According to three operators’ data. Operators’4G DOU witness triple digit growth in1H 2018 while the 4G network utilization rate is only 36% for China Telecom （728:HK – Hold）。 ChinaMobile’s （941:HK – N-R） fix-line broadband subscriber now is comparable to China Telecom’s. Thuswe do have some concern about coming 1-2 years fibre demand considering decreasing operators’capex cycle.
Fibre prices. The current cable price reach more than 120Rmb after China Mobile tender offer in 2H2017. At this standpoint, the overall demand is still higher than mainland supply. Recently Chinesegovernment continue to impose antidumping duties on oversea fibre and extend this ruling to 2022,We still project a stable price trend for both cable and fibre product for Yangtze optical in the next 3years. If fibre price go down in the future, it will hurt company’s topline and gross margin. The nextto watch is operator’s this year fibre tender offer.
Other updates. We think overall telecom operators capex will decline in 2018 and slightly raise in2019 while it is uncertain that whether fibre demand will continue to grow in next years. Someinvestor might concern about fibre industry threat from US trade war. We like to highlight thatroughly all Yangtze Optical’s product sell to three operators thus have limited impact on US tradewar. Rmb deprecation or appreciation also have limited impact on company’s earnings.
Maintain Outperform. The stock is trading at 9.8x 18E PE and 2.7x 18E PB. Given decreasing fibredemand in the short term and a dilution effect due to the listing of A shares, we revise down our EPSforecasts from Rmb2.68 to Rmb2.41 in 18E （+29.6% YoY）， from Rmb3.17 to Rmb2.85 in 19E （+18.3%YoY）， and from Rmb3.32 to Rmb2.99 in 20E （+4.9% YoY）。 We lower our target price from HK$40.00 toHK$30.00, representing 11x 18E PE. With 10.3% upside, we maintain our Outperform rating.