Tue, 08 Nov 2016 Equity Research Tongda (698 HK) TMT/ China Riding on the ramp of smartphone metal casing with 3D Glass and waterproof components Well-positioned to reap the increasing metal casing penetration in China smartphones market from FY16E onwards and potential upside on 3D glass casing from FY17E onwards Successfully tap into US client supply chain via waterproof featured components from 3Q16 onwards Margin expansion by metal casing and waterproof component orders Initiate BUY with TP HK$2.75 based on 15x FY17E PE Market leader in China smartphone metal casing, 3D glass casing a new earnings growth driver. Tongda is the primary metal casing supplier for leading China smartphone vendor such as OPPO, Huawei and Xiaomi. Given metal casing penetration in global smartphone market is expected to improve from 25% in 2015 to 54% in 2018E, we expect Tongda to ship 44mn/55mn/63mn units of metal casing in FY16/17/18E from 20mn/11mn units in 1H16/FY15 and metal casing revenue to reach HK$4.0bn/HK$5.6bn/HK$5.9bn in FY16/17/18E, representing 55%/63%/62% of total revenue and 65% 3 year sales CAGR. Tongda also completed the R&D on 3D glass casing and is currently in discussion with leading China smartphone vendor. We expect 3D glass casing sales to materialize in 2H17E as Apple’s next generation iPhone 8 is likely to adopt 3D glass casing for better outlook and wireless charging efficiency. We estimate HK$25mn/HK$247mn revenue from 3D glass casing in FY17/18E, representing 0.3%/2.6% total revenue in FY17/18E. Penetrating into new US client’ s supply chain in waterproof featured component. Tongda successfully tapped into a leading US client’s supply chain from 3Q16 by shipping waterproof featured components, comprising 2 LSR and 4 O-rings and 10-15% order allocation from this new US client. We forecast 12mn/45mn units shipment in FY16/17E with ASP US$1.3, thus we forecast revenue from waterproof feature component to reach HK$117mn/HK$456mn in FY16/17E, representing 2%/5% of total revenue. Tongda will set up a new plant in Xiamen to assure the waterproof components to that US client. Margin expansion driven by increasing metal casing penetration, pick up in high margin waterproof component sales growth Metal casing, 3D glass casing, and waterproof components all enjoy 30% GPM, higher than company blended 24% GPM in 1H16. Ramping up of these products sales are likely to drive up margin from FY16E onward and we estimate GPM to improve from 24.9% in FY15 to 25.5%/26.5%/26.6% in FY16/17/18E respectively. Initial BUY. We initiate our BUY rating on Tongda with target price HK$2.75 based on 15x FY17E PE. We expect Tongda to deliver 21% earnings CAGR, as it is well positioned to reap the new technology trend in smartphones, including metal casing, 3D glass casing and waterproof components. Risks: 1) lower than expected smartphone shipment growth, especially china smartphone; 2) ASP erosion and margin squeeze of metal casing, 3D glass casing and waterproof component; 3) lower than expected 3D glass casing and waterproof components adoption. Chloe Liu +852 2135 0209 [email protected]Yuji Fung +852 2135 0236 [email protected]Initial Coverage BUY Close price: HK$2.09 Target Price: HK$2.75 (+31.6%) Key Data HKEx code 698 12 Months High (HK$) 2.15 12 Month Low (HK$) 1.18 3M Avg Dail Vol. (mn) 24.60 Issue Share (mn) 5,743.45 Market Cap (HK$mn) 12,003.81 Fiscal Year 12/2015 Major shareholder (s) Landmark worldwide (30.13%) Source: Company data, Bloomberg, OP Research Closing price are as of 07/11/2016 Price Chart 1mth 3mth 6mth Absolute % 8.9 29.7 33.0 Rel. MSCI CHINA % 14.7 27.3 20.2 PE Company Profile Tongda Group Holdings Ltd is a one-stop service provider of consumer electronics casing products. The Group has established a solid presence in handset, notebook computer casings, electrical appliances, and related products., Exhibit 1: Forecast and Valuation Year to Dec (HK$ mn) FY14A FY15A FY16E FY17E FY18E Revenue 4,791 6,074 7,162 8,982 9,552 Growth (%) 32.1 26.8 17.9 25.4 6.3 Net Profit 501.7 702.8 826.9 1,178.5 1,262.7 Growth (%) 39.3 40.1 17.6 42.5 7.1 Diluted EPS (HK$) 0.093 0.119 0.129 0.184 0.197 EPS growth (%) 26.4 27.9 8.3 42.5 7.1 Change to previous EPS (%) 0.0 0.0 0.0 Consensus EPS (HK$) 0.169 0.203 0.232 ROE (%) 16.2 18.3 19.1 23.0 20.8 P/E (x) 17.6 16.2 11.4 10.6 P/B (x) 3.1 2.9 2.6 2.1 1.8 Yield (%) 1.4 1.8 1.8 2.6 2.8 DPS (HK$) 0.030 0.037 0.039 0.055 0.059 Source: Bloomberg, OP Research 0.0 0.5 1.0 1.5 2.0 2.5 Nov/15 Feb/16 May/16 Aug/16 HK$ 698 HK MSCI CHINA 0 2 4 6 8 10 12 14 Dec/13 Jun/14 Dec/14 Jun/15 Dec/15 Jun/16 Forward P/E Ratio +1std. avg. -1std.
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TMT/ China Tongda (698 HK)698 HK) Riding on the... · Equity Research Tongda (698 HK) ... 1) lower than expected smartphone shipment growth, ... Order allocation gain from China No.
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Tue, 08 Nov 2016
Equi ty Research Tongda (698 HK) TMT/ China
Riding on the ramp of smartphone metal casing with 3D Glass and waterproof components Well-positioned to reap the increasing metal casing penetration in China
smartphones market from FY16E onwards and potential upside on 3D glass casing from FY17E onwards
Successfully tap into US client supply chain via waterproof featured components from 3Q16 onwards
Margin expansion by metal casing and waterproof component orders Initiate BUY with TP HK$2.75 based on 15x FY17E PE
Market leader in China smartphone metal casing, 3D glass casing a new earnings growth driver. Tongda is the primary metal casing supplier for leading China smartphone vendor such as OPPO, Huawei and Xiaomi. Given metal casing penetration in global smartphone market is expected to improve from 25% in 2015 to 54% in 2018E, we expect Tongda to ship 44mn/55mn/63mn units of metal casing in FY16/17/18E from 20mn/11mn units in 1H16/FY15 and metal casing revenue to reach HK$4.0bn/HK$5.6bn/HK$5.9bn in FY16/17/18E, representing 55%/63%/62% of total revenue and 65% 3 year sales CAGR. Tongda also completed the R&D on 3D glass casing and is currently in discussion with leading China smartphone vendor. We expect 3D glass casing sales to materialize in 2H17E as Apple’s next generation iPhone 8 is likely to adopt 3D glass casing for better outlook and wireless charging efficiency. We estimate HK$25mn/HK$247mn revenue from 3D glass casing in FY17/18E, representing 0.3%/2.6% total revenue in FY17/18E.
Penetrating into new US client’s supply chain in waterproof featured component. Tongda successfully tapped into a leading US client’s supply chain from 3Q16 by shipping waterproof featured components, comprising 2 LSR and 4 O-rings and 10-15% order allocation from this new US client. We forecast 12mn/45mn units shipment in FY16/17E with ASP US$1.3, thus we forecast revenue from waterproof feature component to reach HK$117mn/HK$456mn in FY16/17E, representing 2%/5% of total revenue. Tongda will set up a new plant in Xiamen to assure the waterproof components to that US client.
Margin expansion driven by increasing metal casing penetration, pick up in high margin waterproof component sales growth Metal casing, 3D glass casing, and waterproof components all enjoy 30% GPM, higher than company blended 24% GPM in 1H16. Ramping up of these products sales are likely to drive up margin from FY16E onward and we estimate GPM to improve from 24.9% in FY15 to 25.5%/26.5%/26.6% in FY16/17/18E respectively.
Initial BUY. We initiate our BUY rating on Tongda with target price HK$2.75 based on 15x FY17E PE. We expect Tongda to deliver 21% earnings CAGR, as it is well positioned to reap the new technology trend in smartphones, including metal casing, 3D glass casing and waterproof components.
Risks: 1) lower than expected smartphone shipment growth, especially china smartphone; 2) ASP erosion and margin squeeze of metal casing, 3D glass casing and waterproof component; 3) lower than expected 3D glass casing and waterproof components adoption.
Exhibit 1: Forecast and Valuation Year to Dec (HK$ mn) FY14A FY15A FY16E FY17E FY18E
Revenue 4,791 6,074 7,162 8,982 9,552
Growth (%) 32.1 26.8 17.9 25.4 6.3
Net Profit 501.7 702.8 826.9 1,178.5 1,262.7
Growth (%) 39.3 40.1 17.6 42.5 7.1
Diluted EPS (HK$) 0.093 0.119 0.129 0.184 0.197
EPS growth (%) 26.4 27.9 8.3 42.5 7.1
Change to previous EPS (%)
0.0 0.0 0.0
Consensus EPS (HK$)
0.169 0.203 0.232
ROE (%) 16.2 18.3 19.1 23.0 20.8
P/E (x)
17.6 16.2 11.4 10.6
P/B (x) 3.1 2.9 2.6 2.1 1.8
Yield (%) 1.4 1.8 1.8 2.6 2.8
DPS (HK$) 0.030 0.037 0.039 0.055 0.059
Source: Bloomberg, OP Research
0.0
0.5
1.0
1.5
2.0
2.5
Nov/15 Feb/16 May/16 Aug/16
HK$698 HK MSCI CHINA
0
2
4
6
8
10
12
14
Dec/13 Jun/14 Dec/14 Jun/15 Dec/15 Jun/16
Forward P/E Ratio
+1std.
avg.
-1std.
Tue, 08 Nov 2016
Tongda (698 HK)
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Table of Contents
Table of Contents ......................................................................................................................................... 2
Riding on increasing metal casing penetration, 3D glass casing is a new growth driver ............................... 3
Penetrating leading US smartphone vendor’s supply chain in waterproof featured component .................... 9
Margin expansion driven by increasing metal casing penetration, pick up in high margin waterproof
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