Yangtze Optical Fibre and Cable released its 1Q19 results, with revenue down 35.2% YoY to Rmb1.6bnand net profit down 31.2% YoY to Rmb253.4m. The firm’s recurring net profit declined 58.7% YoY.
We maintain our EPS forecasts of Rmb0.82 in 19E （-60.8% YoY）， Rmb0.84 in 20E （+2.4% YoY）， andRmb0.84 in 21E （flat YoY）。 Our target price is unchanged at HK$21.00 （1.5x 19E PB）。 With 5% upside,we maintain our Hold rating.
Tender offer. We believe Yangtze Optical’s bottom line was largely affected by China Mobile’s（00941:HK – Not rated） recent tender offer. Fibre and cable prices have reached historical lows overthe past three years. We expect fibre and cable prices will remain low this year.
Supply and demand dynamics. We believe the heyday of the fibre industry has passed. We think thebiggest challenge for the industry is oversupply. In the past three years, the urge for wide coverageof 4G networks and China Mobile’s fixed-line broadband construction have been the main growthdrivers for the fibre industry. However, the industry suffers from limited 5G investment and declining4G Capex. Given increasing fibre and cable capacity, fibre companies have to cut prices. In themeantime, those with the most performing capacity may suffer less during this downcycle.
Overseas revenue. At present, c.10% of Yangtze Optical’s revenue comes from overseas markets.
However, we believe overseas sales will not be able to offset the domestic fibre price decline.
Maintain Hold. We maintain our EPS forecasts of Rmb0.82 in 19E （-60.8% YoY）， Rmb0.84 in 20E（+2.4% YoY）， and Rmb0.84 in 21E （flat YoY）。 The stock is trading at 21.1x 19E PE and 1.4x 19E PB. Ourtarget price is unchanged at HK$21.00 （1.5x 19E PB）。 With 5% upside, we maintain our Hold rating.