DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 12 December 2016 Asia Pacific/China/Hong Kong Equity Research Electronic Components & Connectors China Components Sector Research Analysts Sam Li 852 2101 6775 [email protected]Kyna Wong 852 2101 6950 [email protected]THEME Chinese smartphones in 2017: Shipments slowing down but upgrades continue Figure 1: Focus on key themes for stock ideas Source: Credit Suisse estimates For the China smartphone market in 2017, we see divergence in shipment growth for the two major forces (Chinese brands slowing down and Apple picking up), even as spec upgrade remains the key differentiator in a competitive market. Overall, we see the value pool continuing to favour upstream names (semi and components) more than downstream ones (assembly and OEMs), and recommend investors to focus on spec upgrades for supply chain investment: ■ China shipments slowing down but the upgrade cycle just taking off. We estimate China market shipments growth to decelerate to 4% in 2017 from 11% in 2016 (by MIIT). However, the upgrade trend, which has started this year, seems far from over yet. A potential major inventory correction in May/June 2017, and margins will diverge in the supply chain. ■ iPhone8 up-cycle with spec upgrades. The CS Apple analyst estimates iPhone shipments to grow 5%/15% YoY in 2017/18 vs. down 10% in 2016, driven by the iPhone8 sales 2H17 onwards. We see increasing adoption for glass casing, OLED, dual-cam, haptic, and wireless charging in the iPhone8, and expect Chinese smartphones to copy (or be front-runners). ■ Stock calls. We downgrade Tongda to NEUTRAL on retreating metal casing demand, downgrade Truly to NEUTRAL on slower AMOLED ramp up, and slightly raise Sunny's estimates/TP on higher dual-cam shipments. We now have OUTPERFORMs on Sunny/AAC in H-share and Lens/ GoerTek/Luxshare/TSHT in A-share. Key risks: Demand volatility in Apple or China smartphones, changes in global macro/FX/trade environment, changes in technology, and M&As.
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DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
12 December 2016 Asia Pacific/China/Hong Kong
Equity Research Electronic Components & Connectors
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 6: Downgrade Tongda on slowing metal
casing cycle
Figure 7: Downgrade Truly on NM pressures
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 8: Earnings/rating/TP changes and related themes
Company Ticker 17E EPS Rating TP (lc)
∆ Prior New ∆ Prior New ∆ Prior New Key themes in 2017
AAC 2018.HK ↔ 4.04 4.04 ↔ O O ↔ 86.9 86.9 Acoustics, haptic upgrades
Sunny 2382.HK ↑ 1.40 1.41 ↔ O O ↑ 43.8 44.6 Dual-cam
Tongda 0698.HK ↓ 0.19 0.19 ↓ O N ↑ 2.1 2.2 Slowing metal casing adoption
Truly 0732.HK ↓ 0.34 0.28 ↓ O N ↓ 4.6 3.3 Slower AMOLED ramp
Coolpad 2369.HK ↓ -0.05 -0.04 ↔ U U ↓ 0.9 0.6 Share loss in China market, uncertainty in Leshi cooperation
Source: Company data, Credit Suisse estimates
-20%
0%
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80%
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2011 2012 2013 2014 2015 2016E 2017EOthers Lenovo Samsung Apple
Meizu Gionee Coolpad LeEco
ZTE Vivo Oppo Xiaomi
Huawei YoY
mn units
0%
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2011 2012 2013 2014 2015 2016E 2017E
Others Coolpad Lenovo Gionee
ZTE Meizu Vivo Xiaomi
Oppo Huawei YoY
mn units
0%
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2011 2012 2013 2014 2015 2016E 2017E 2018E
Avg Component GM Avg Assembly GM
Avg Upstream GM Avg OEM GM
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2014 2015 2016E 2017E 2018E 2019E
Plastic Metal 2/2.5D glass 3D glass Others
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2013 2014 2015 2016E 2017E 2018E
Net income OP OPM NM
(HK$,mn)
12 December 2016
China Components Sector 3
Chinese smartphones in 2017: Shipments slowing down but upgrades continue For the China smartphone market in 2017, we review our stance, and see divergence in
shipment growth for the two major forces (Chinese brands slowing down and Apple
picking up), even as spec upgrades remain the key differentiator in a competitive market.
Overall, we see the value pool continuing to favour upstream names (semi and
components) more than downstream ones (assembly and OEMs), and recommend
investors to focus on spec upgrades for supply chain investment.
We want to highlight to investors our numeric analysis on 2017 China smartphone demand
and metal casing cycle, our non-consensus calls on Tongda and Truly, and the key supply
chain time window (late 1Q17 for iPhone8 and May/June for Chinese smartphones).
Shipments slowing down but upgrades just taking off
We estimate China market shipments (demand) growth to decelerate to 4% in 2017 from
11% in 2016 (by MIIT), due to a larger base, saturated penetration, and decelerating 4G
net adds growth. Total Chinese brand shipments (supply) could still grow 9% YoY in 2017
(vs. 18% in 2016), helped by exports. However, our research shows the upgrade trend,
which started this year, is far from over yet. For example, our analysis shows only 25% of
the sub-Rmb1000 sales in 2015/16 were upgraded to above-Rmb1000 phones.
Component upgrades still remain the key differentiator in the commoditised market. We
believe the key upgrades include dual-cam, glass casing, OLED, acoustic, and Type C.
Meanwhile, metal casing adoption/growth should slow down. A potential major inventory
correction in May/June, and margins will diverge in the supply chain.
iPhone8 up-cycle with spec upgrades
On the other side, the CS Apple analyst estimates iPhone shipments to grow 5%/15% YoY
in 2017/18 vs. down 10% in 2016, driven by iPhone8 sales 2H17 onwards, which could be
positive to Apple supply chain names. We see increasing adoption for OLED, glass
casing, dual-cam, haptic, and wireless charging in the iPhone8, and expect Chinese
smartphones to copy (or be front-runners). Timing-wise, as always, we expect late 1Q17
or early 2Q17 to be the key time window for investment in the iPhone supply chain, due to
better visibility on specs, ASPs, and allocation by then. In addition, although the overall
impact of US elections would be limited to the tech supply chain, we feel potential fund
flows and individual cases would from time to time put pressure on the sector, especially
on Apple supply chain stocks.
Downgrade Tongda and Truly, and raise Sunny TP
We downgrade Tongda to NEUTRAL from Outperform on decreasing metal casing
demand; we downgrade Truly to NEUTRAL from Outperform on slower AMOLED ramp-
up, and slightly raise Sunny's estimates/TP for higher dual-cam shipments. Overall, we
are relatively more positive on the A-share coverage due to the lower-than-historical
average valuations and a closed investment environment from overseas fund flows. Our
H-share coverage NTM P/E valuation is at a historical high, especially after the recent
hikes for the SZ-HK Connect. We now have OUTPERFORMs on Sunny/AAC in H-share
and Lens/GoerTek/Luxshare/TSHT in A-share.
Key risks: Demand volatility in Apple or China smartphones, changes in global
macro/FX/trade environment, changes in technology, and M&As
12 December 2016
China Components Sector 4
Valuation summary
Figure 9: H-share NTM P/E at a historical high Figure 10: A-share below the historical average
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 11: Comp sheet of our hardware supply chain coverage
Analyst Certification Sam Li and Kyna Wong each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for AAC Technologies Holdings Inc (2018.HK)
2018.HK Closing Price Target Price
Date (HK$) (HK$) Rating
16-Dec-13 35.90 NR
04-Aug-14 47.45 51.00 N *
10-Nov-14 44.00 54.00 O
12-Jun-15 41.90 50.00
19-Oct-15 47.55 56.00 *
10-Nov-15 50.65 55.40 N
13-Nov-15 53.50 56.90
15-Jan-16 45.70 48.80
24-Mar-16 57.10 53.90
11-May-16 56.15 65.50 O
15-Jun-16 64.85 75.70
28-Aug-16 82.00 94.90
25-Oct-16 74.40 91.80
14-Nov-16 68.80 86.90
* Asterisk signifies initiation or assumption of coverage.
N O T RA T ED
N EU T RA L
O U T PERFO RM
12 December 2016
China Components Sector 37
3-Year Price and Rating History for BYD Electronic (International) Company Limited (0285.HK)
0285.HK Closing Price Target Price
Date (HK$) (HK$) Rating
10-Sep-15 4.78 5.00 N *
19-Oct-15 5.56 4.90
22-Feb-16 4.36 4.70
07-Jul-16 4.89 5.10
29-Aug-16 6.11 6.20
* Asterisk signifies initiation or assumption of coverage.
N EU T RA L
3-Year Price and Rating History for Coolpad Group Limited (2369.HK)
2369.HK Closing Price Target Price
Date (HK$) (HK$) Rating
05-Jun-14 1.92 2.00 N *
22-Aug-14 1.78 1.85
13-Jan-15 1.51 1.60
24-Mar-15 1.50 1.25 U
11-May-15 2.79 2.00
24-Jul-15 2.02 1.95
22-Aug-15 1.49 1.40 N
21-Mar-16 1.34 0.90 U *
02-May-16 1.54 1.20
11-Jul-16 1.32 1.15
30-Aug-16 1.49 1.20
21-Nov-16 0.91 0.90
* Asterisk signifies initiation or assumption of coverage.
N EU T RA L
U N D ERPERFO RM
3-Year Price and Rating History for FIH Mobile (2038.HK)
2038.HK Closing Price Target Price
Date (HK$) (HK$) Rating
06-Jan-16 2.74 3.50 O *
25-Jan-16 2.73 3.40
11-Apr-16 3.22 3.31 N
06-May-16 2.38 2.93
12-Aug-16 2.58 2.80
* Asterisk signifies initiation or assumption of coverage.
O U T PERFO RM
N EU T RA L
12 December 2016
China Components Sector 38
3-Year Price and Rating History for GoerTek Inc. (002241.SZ)
002241.SZ Closing Price Target Price
Date (Rmb) (Rmb) Rating
10-Sep-15 23.88 23.50 N *
20-Oct-15 27.38 24.40
28-Oct-15 25.64 24.30
24-Nov-15 33.91 41.80 O
07-Dec-15 31.40 40.80
18-Jan-16 27.95 39.10
01-Mar-16 24.33 36.10
22-Apr-16 28.78 36.50
08-Jun-16 29.31 36.80
18-Aug-16 28.71 37.70
25-Oct-16 31.76 41.30
* Asterisk signifies initiation or assumption of coverage.
N EU T RA L
O U T PERFO RM
3-Year Price and Rating History for Hangzhou Hikvision Digital Technology Co., Ltd. (002415.SZ)
002415.SZ Closing Price Target Price
Date (Rmb) (Rmb) Rating
01-Sep-15 24.92 34.23 O *
19-Oct-15 27.08 33.92
11-Nov-15 27.67 32.00
18-Feb-16 20.53 25.23
11-Apr-16 23.86 29.92
01-Jul-16 22.33 26.00
01-Aug-16 24.94 32.10
12-Oct-16 25.00 32.30
05-Dec-16 25.42 36.90
* Asterisk signifies initiation or assumption of coverage.
O U T PERFO RM
3-Year Price and Rating History for Jiangsu Changjiang Electronics Technology Co., Ltd (600584.SS)
600584.SS Closing Price Target Price
Date (Rmb) (Rmb) Rating
18-May-16 15.24 10.50 U *
11-Sep-16 18.04 11.00
28-Oct-16 19.36 12.60
* Asterisk signifies initiation or assumption of coverage.
UN D ERPERFO RM
12 December 2016
China Components Sector 39
3-Year Price and Rating History for Lens Technology Co., Ltd (300433.SZ)
300433.SZ Closing Price Target Price
Date (Rmb) (Rmb) Rating
10-Sep-15 52.15 49.17 N *
26-Oct-15 66.37 49.25
18-Jan-16 53.73 51.33
01-Feb-16 54.33 56.33
18-Apr-16 58.25 55.58
25-Apr-16 61.11 57.42
28-Apr-16 60.67 21.30
19-Jul-16 25.76 24.00
07-Nov-16 27.48 33.20 O
* Asterisk signifies initiation or assumption of coverage.
N EU T RA L
O U T PERFO RM
3-Year Price and Rating History for Luxshare Precision Industry Co., Ltd (002475.SZ)
002475.SZ Closing Price Target Price
Date (Rmb) (Rmb) Rating
10-Sep-15 18.17 23.67 O *
13-Oct-15 20.72 24.33
16-Oct-15 21.94 24.93
07-Dec-15 22.97 31.47
18-Jan-16 18.03 29.20
26-Feb-16 18.73 29.80
01-Jul-16 19.15 29.40
11-Jul-16 17.98 26.00
10-Aug-16 18.65 24.80
20-Oct-16 22.71 26.90
* Asterisk signifies initiation or assumption of coverage.
O U T PERFO RM
3-Year Price and Rating History for Nantong Fujitsu Microelectronics Co., Ltd (002156.SZ)
002156.SZ Closing Price Target Price
Date (Rmb) (Rmb) Rating
11-Jan-16 10.06 11.54 N *
29-Feb-16 8.51 11.92 O
27-Apr-16 9.87 11.54
30-May-16 11.30 11.54 N
31-Oct-16 11.72 11.63
* Asterisk signifies initiation or assumption of coverage.
N EU T RA L
O U T PERFO RM
12 December 2016
China Components Sector 40
3-Year Price and Rating History for Sanan Optoelectronics Co. Ltd (600703.SS)
600703.SS Closing Price Target Price
Date (Rmb) (Rmb) Rating
26-Sep-16 11.98 13.80 N *
28-Oct-16 12.12 13.40
* Asterisk signifies initiation or assumption of coverage.
N EU T RA L
3-Year Price and Rating History for Shenzhen O-film Tech Co., Ltd (002456.SZ)
002456.SZ Closing Price Target Price
Date (Rmb) (Rmb) Rating
10-Sep-15 20.85 15.20 U *
11-Nov-15 26.54 16.10
29-Feb-16 19.80 15.40
20-Apr-16 26.70 25.60 N
22-Aug-16 35.27 33.90
09-Nov-16 39.60 40.70
* Asterisk signifies initiation or assumption of coverage.
U N D ERPERFO RM
N EU T RA L
3-Year Price and Rating History for Sunny Optical Technology Group Co.Limited (2382.HK)
2382.HK Closing Price Target Price
Date (HK$) (HK$) Rating
16-Dec-13 6.81 NR
04-Aug-14 9.82 11.00 N *
10-Mar-15 13.46 14.00
19-Oct-15 17.20 16.50 *
12-Feb-16 16.62 20.40 O
15-Mar-16 19.32 22.80
11-Apr-16 24.00 23.30 N
11-Jul-16 27.85 32.50 O
10-Aug-16 32.65 37.70
17-Aug-16 36.85 43.00
12-Sep-16 37.00 43.80
* Asterisk signifies initiation or assumption of coverage.
N O T RA T ED
N EU T RA L
O U T PERFO RM
12 December 2016
China Components Sector 41
3-Year Price and Rating History for Tianshui Huatian Technology Co., Ltd (002185.SZ)
002185.SZ Closing Price Target Price
Date (Rmb) (Rmb) Rating
19-Nov-15 13.92 R
11-Jan-16 10.12 14.23 O *
25-Aug-16 12.06 14.00
22-Sep-16 13.21 15.00
31-Oct-16 12.68 15.30
* Asterisk signifies initiation or assumption of coverage.
REST RICT ED
O U T PERFO RM
3-Year Price and Rating History for Tongda Group Holdings Ltd (0698.HK)
0698.HK Closing Price Target Price
Date (HK$) (HK$) Rating
19-Oct-15 1.53 1.70 O *
17-Mar-16 1.49 1.90
18-Mar-16 1.51 2.00
16-Aug-16 1.63 2.10
* Asterisk signifies initiation or assumption of coverage.
O U T PERFO RM
3-Year Price and Rating History for Truly International (0732.HK)
0732.HK Closing Price Target Price
Date (HK$) (HK$) Rating
12-May-16 2.91 3.70 O *
02-Jun-16 3.50 4.10
27-Jun-16 3.54 4.20
28-Jul-16 4.28 5.40
18-Aug-16 4.13 5.00
23-Sep-16 3.49 4.70
17-Nov-16 3.02 4.60
* Asterisk signifies initiation or assumption of coverage.
O U T PERFO RM
12 December 2016
China Components Sector 42
3-Year Price and Rating History for ZTE Corporation (000063.SZ)
000063.SZ Closing Price Target Price
Date (Rmb) (Rmb) Rating
16-Oct-14 12.29 13.17 N *
26-Mar-15 18.27 14.67
16-Apr-15 21.01 18.33
24-Apr-15 23.97 18.67
14-Jul-15 16.47 15.60
21-Jul-15 20.84 19.20
04-Jul-16 14.42 9.20 U *
14-Nov-16 16.65 11.40
* Asterisk signifies initiation or assumption of coverage.
N EU T RA L
U N D ERPERFO RM
3-Year Price and Rating History for Zhejiang Dahua Technology Co., Ltd (002236.SZ)
002236.SZ Closing Price Target Price
Date (Rmb) (Rmb) Rating
01-Sep-15 19.41 24.33 O *
26-Oct-15 18.28 23.33
29-Feb-16 17.17 27.39
29-Apr-16 13.87 19.70
18-Aug-16 15.80 19.20
19-Oct-16 14.32 20.60
05-Dec-16 14.28 18.80
* Asterisk signifies initiation or assumption of coverage.
O U T PERFO RM
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant count ry or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiv eness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12 -month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.
12 December 2016
China Components Sector 43
*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 44% (64% banking clients) Neutral/Hold* 38% (60% banking clients) Underperform/Sell* 15% (54% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.
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Target Price and Rating Valuation Methodology and Risks: (12 months) for AAC Technologies Holdings Inc (2018.HK)
Method: Our target price of HK$86.90 for AAC is based on up-cycle P/E (price-to-earnings) of 17.7x. Our OUTPERFORM rating is based on positive view on haptics and acoustic ASP trends.
Risk: Risks that could impede achievement of our OUTPERFORM rating and HK$86.90 target price for AAC include: (1) weaker or stronger China smartphone demand, (2)better or worse-than-expected ASP/GMs on competition.(3) tech upgrades.
Target Price and Rating Valuation Methodology and Risks: (12 months) for BYD Electronic (International) Company Limited (0285.HK)
Method: Our NEUTRAL rating and target price of HK$6.20 for BYD Electronic (International) Company Limited is based on BYDE's own historical average NTM P/E (price-to-earnings) of 9x. Our NEUTRAL rating is based on BYDE's increasing metal casing business in revenue mix but heavy CNC assets and relatively low utilization.
Risk: Risks that could cause the share price to diverge from our NEUTRAL rating and target price of HK$6.20 for BYD Electronic (International) Company Limited include client concentration risk, product design changes, pricing pressure and forex risk.
Target Price and Rating Valuation Methodology and Risks: (12 months) for Coolpad Group Limited (2369.HK)
Method: Our target price of HK$0.60 for Coolpad is based on DCF based valuation (6.8% WACC and 1.5% terminal growth). Our TP also implied 0.6x 2018E P/B which is in-line with its 2.8% ROE. We rate the stock UNDERPERFORM due to (1) intensifying competition in the China smartphone market and (2) more time for open channels and mobile Internet business to emerge.
Risk: Risks to our HK$0.60 target price and UNDERPERFORM rating for Coolpad include the following: Upside -- (1) better-than-expected smartphone shipment growth; (2) faster-than-expected cost reduction to maintain margins; (3) smartphone spec upgrade, which could help Coolpad's ASP and (4) upside of mobile phone sales from LeTV cooperation.
Target Price and Rating Valuation Methodology and Risks: (12 months) for FIH Mobile (2038.HK)
Method: Our target price of HK$2.80 for FIH Mobile is based on 0.75x downcycle P/B (price-to-book) and 2017E BVPS (book value per share). Our NEUTRAL rating is based on the fair valuation on FIH's yield and cash value.
Risk: Key investment risks to our NEUTRAL rating and target price of HK$2.80 for FIH Mobile include: Weakening demand from smartphone customers, losing/gaining share on key customers' allocation, rising competition and pricing pressure, slower/faster than expected metal casing upgrade cycle and forex risk.
Target Price and Rating Valuation Methodology and Risks: (12 months) for GoerTek Inc. (002241.SZ)
Method: Our target price of Rmb41.30 for GoerTek Inc is based on its historical average P/E (price-to-earnings) of 27.5x.Our OUTPERFORM rating is based on the thesis that GoerTek will benefit from the VR (Oculus Rift and Sony PlayStation VR) and acoustic cycles in 2016E desipte 1Q headwind.
Risk: Risks that could impede achievement of our OUTPERFORM rating and target price of Rmb41.30 for GoerTek Inc include: slower-than-expected progress at new businesses, new competitors, higher-than-expected opex on new businesses, weak global smartphone demand, and FX risks.
Target Price and Rating Valuation Methodology and Risks: (12 months) for Hangzhou Hikvision Digital Technology Co., Ltd. (002415.SZ)
Method: Our target price of Rmb36.9 for Hangzhou Hikvision Digital Technology Co., Ltd is based on its historical average P/E (price-to-earnings) of 20x. Our OUTPERFORM rating is based on Hikvision's strong leadership in video surveillance sector, sustainable growth and attractive valuation.
Risk: Risks to our OUTPERFORM rating and target price of Rmb36.9 for Hikvision include weak macro economy to impact global industry demand, price competition from Chinese followers, weak China public security sector demand due to government budget fluctuations, long-term potential internet competitors in home and SME markets, and local currency depreciation against USD is negative to the company’s overseas sales and competency.
Target Price and Rating Valuation Methodology and Risks: (12 months) for Jiangsu Changjiang Electronics Technology Co., Ltd (600584.SS)
Method: Our target price of Rmb12.6 for JCET is based on 1.7x NTM P/B which is in line with its trough cycle P/B. Our UNDERPERFORM rating is based on the thesis that JCET will continue with a weak balance sheet, due to low ROE and margin dilution from its STATS merger in 2016/17.
Risk: Key investment risks to our UNDERPERFORM rating and Rmb12.6 target price for JCET include post-deal execution surprising on the upside, better control on costs post the merger, higher demand from key clients, and positive impact on the bottom line due to depreciation of the RMB.
Target Price and Rating Valuation Methodology and Risks: (12 months) for Lens Technology Co., Ltd (300433.SZ)
Method: Our Rmb33.2 target price for Lens Technology Co., Ltd is based on updated sector average P/E (price-to-earnings) of 22x. Our OUTPERFORM rating is based on the up-cycle for glass industry and Lens' leading position.
Risk: Risks to our OUTPERFORM rating and Rmb33.2 target price for Lens Technology Co., Ltd include: Client concentration risks on Apple and Samsung, slower than expected upgrade progress, product design changes, pricing pressure, and FX risk.
Target Price and Rating Valuation Methodology and Risks: (12 months) for Luxshare Precision Industry Co., Ltd (002475.SZ)
Method: Our target price of Rmb26.9 for Luxhare Precision Industry is based on the share's -0.5SD historical average NTM P/E of 28.5x. Our OUTPERFORM rating is based on Luxshare's business portfolio expansion, rising Type C adoption and Apple business and strong earnings growth.
Risk: Key investment risks to our OUTPERFORM rating and target price of Rmb26.9 for Luxhare Precision Industry are: worse-than-expected demand for key clients' products; execution risks on new businesses; pricing and margin pressures; M&A and forex risks.
Target Price and Rating Valuation Methodology and Risks: (12 months) for Nantong Fujitsu Microelectronics Co., Ltd (002156.SZ)
Method: Our target price of Rmb11.63 for Nantong Fujitsu Microelectronics Co., Ltd is based on 2.7x 2017E P/B (price-to-book) which is in line with its mid-to-upcycle P/B. Our NEUTRAL rating is based on NFME's fair valuation and uncertainty on its plan of JVs' controlling power.
Risk: Risks to our Rmb11.63 target price and NEUTRAL rating for Nantong Fujitsu Microelectronics Co., Ltd include: (1) post-deal execution risk, (2) plan of rising controlling power over JVs, (3) slower-than-expected demand from key clients, and (4) currency exchange rates.
Target Price and Rating Valuation Methodology and Risks: (12 months) for Sanan Optoelectronics Co. Ltd (600703.SS)
Method: Our target price of Rmb13.40 for Sanan Optoelectronics is based on trough-to-mid-cycle 24x 2017E P/E (price-to-earnings) which is also supported by the weighted DCF (discounted cash flow) value on the potential JV impact for RF business. Our NEUTRAL rating is based on the thesis that we like Sanan on its strong growth, leadership and profitability in LED, while we think the RF business is value accretive but will be a near-term earnings drag.
12 December 2016
China Components Sector 45
Risk: Key investment risks to our NEUTRAL rating and Rmb13.40 target price for Sanan Optoelectronics include (1) slower LED demand, (2) aggressive capacity expansion in other Chinese players, (3) pricing pressure, (4) changes on government policy and support, (5) IP risks, (6) any potential disruptive technology in lighting area, (7) risk in GCS JV on RF business.
Target Price and Rating Valuation Methodology and Risks: (12 months) for Shenzhen O-film Tech Co., Ltd (002456.SZ)
Method: Our target price of Rmb40.7 for Shenzhen O-film Tech is based on historical down cycle average P/E of 24.5x. Our NEUTRAL rating is based on O-film's rising fingerprint business and better cost control while valuation already full.
Risk: Key risks to our NEUTRAL rating and target price of Rmb40.7 for Shenzhen O-film Tech are: China smartphone demand, stronger/milder-than-expected competition on TP/HCM businesses, M&A risks and faster/slower-than-expected progress in new businesses.
Target Price and Rating Valuation Methodology and Risks: (12 months) for Sunny Optical Technology Group Co.Limited (2382.HK)
Method: Our target price of HK$44.6 for Sunny Optical Technology Group Co., Limited is based on 24x P/E (price-to-earnings), which is in line with key ADAS upstream suppliers average P/E. Our OUTPERFORM rating is based on margin improvement cycle and long term vehicle lens thesis.
Risk: Risks that could affect our OUTPERFORM rating and HK$44.6 target price for Sunny Optical Technology Group Co., Limited include: slower progress at high-end or new products, weakening China smartphone demand/ vehicle demand, pricing and margin pressure on competition.
Target Price and Rating Valuation Methodology and Risks: (12 months) for Tianshui Huatian Technology Co., Ltd (002185.SZ)
Method: Our target price of Rmb15.3 for Tianshui Huatian Technology (TSHT) is based on a 2.8x NTM P/B which is in line with +0.5SD of historical average. Our OUTPERFORM rating is supported by Huatian's higher-than-peers OPM derived from (1) cost advantage (2) strengthening packaging technology and client base, (3) ramping CIS/fingerprint/MEMS products as well as (4) relatively attractive valuation.
Risk: Key investment risks for our OUTPERFORM rating and target price of Rmb15.3 for Huatian include: post-deal execution risk, losing FCI customers, slower-than-expected demand from key clients, and forex risks.
Target Price and Rating Valuation Methodology and Risks: (12 months) for Tongda Group Holdings Ltd (0698.HK)
Method: Our target price of HK$2.20 for Tongda Group Holdings Ltd is based on an upcycle P/E (price-to-earning) of 10.3x our 2018 estimates. Our NEUTRAL rating is based on slowing down metal cycle and fair valuation.
Risk: Risks that could impede achievement of our NEUTRAL rating and HK$2.20 target price for Tongda Group Holdings Ltd include: weakening China smartphone demand, pricing/margin pressure, product launches at key clients, notebook PC demand and China electrical appliance outlook.
Target Price and Rating Valuation Methodology and Risks: (12 months) for Truly International (0732.HK)
Method: Our target price of HK$3.3 for Truly International is based on 10.3x 2018E P/E (price-to-earnings) which is based on mid-to-up-cycle P/E. Our NEUTRAL rating is based on low visibility to Huizhou JV breakeven and lack of near term catalysts. We still like the stock given its long term growth on automotive displays after 2018 but AMOLED progress remains a near term swing factor to our investment view.
Risk: Risks to our HK$3.3 target price and NEUTRAL rating for Truly International include: volatility of China smartphones, losing share to in-cell/on-cell TFT-LCD-based TP, fierce competition in TP/HCM, ramping schedule in AMOLED panels, dual cam yield improvement.
Target Price and Rating Valuation Methodology and Risks: (12 months) for ZTE Corporation (000063.SZ)
Method: Our target price of Rmb9.2 for ZTE Corporation (A-share) is based on 14.2x historical down-cycle P/E and 17% discount for uncertainty from the investigation, and supported by its in line growth and lower ROE vs. peers. We rate ZTE Underperform as we see ZTE is still in a share gain momentum in global telecom equipment markets, although at slower pace due to the down cycle, but feel the US investigation would act as a big overhang for share price in a near term.
Risk: Risks to our target price of Rmb9.2 and UNDERPERFORM rating for ZTE Corporation (A-share) include: (1) better-than-expected results on the US investigation, (2) faster-than-expected share gains in China and overseas, (3) better-than-expected opex control, (4) high volatility in non-op items such as interest/FX/investment gains
Target Price and Rating Valuation Methodology and Risks: (12 months) for Zhejiang Dahua Technology Co., Ltd (002236.SZ)
12 December 2016
China Components Sector 46
Method: Our target price of Rmb18.8 for Dahua is based on sector P/E (price-to-earnings) of 20x. Our OUTPERFORM rating is based on Dahua's accelerating solution business as overseas/domestic share gains story due to cost and R&D advantages as well as business recovery underway.
Risk: Risks to our OUTPERFORM rating and Rmb18.8 target price for Zhejiang Dahua Technology Co., Ltd include: Weak macro economy to impact global industry demand, price competition from Chinese followers, weak China public security sector demand due to government budget fluctuations, long-term potential internet competitors in home and SME markets, over-expense on new projects such as solution and oversea channels, and local currency depreciation against US$ is negative to the company’s oversea sales and competency.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names The subject company (002185.SZ, 2038.HK, 000063.SZ) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (2038.HK) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (2038.HK) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (2018.HK, 0732.HK, 2382.HK, 002185.SZ, 600703.SS, 2038.HK, 0285.HK, 002415.SZ, 000063.SZ) within the next 3 months. Credit Suisse beneficially holds >0.5% long position of the total issued share capital of the subject company (002241.SZ).
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