20180827-东英亚洲证券-华显光电-00334.HK-1H18_results_in_line_with_expectations_8页_1mb

Equity Research Summary: CDOT (334 HK)

Core Information

• Company Name: CDOT (China Display Technology)
• Sector: Display Module
• Stock Code: 334 HK
• Close Price (as of 24/08/2018): HK$0.47
• Target Price: HK$0.67 (+43%)
• Issue Share (mn): 2,086.72
• Market Cap (HK$mn): 980.76
• Fiscal Year: 12/2017
• Major Shareholder: Shenzhen China Star (52.6%)

Key Financial Data

1H18 Results

• Revenue: Down 15.6% to RMB1,264mn due to a 17.5% drop in shipments, partially offset by product mix improvement.
• GPM: Decreased by 7.6ppts to 1.9% due to increased marginal costs from lower utilization.
• Net Loss: RMB12mn, which aligns with OP expectations excluding a RMB12mn gain from the disposal of scraps.
• Product Penetration: Full-screen, LTPS, and laminated products saw improved penetration in 1H18 compared to 1H17.

Earnings Revisions

• FY18E Shipments (Non-laminated): Revised down by 7.7% to 19mn.
• FY18E Shipments (Laminated): Revised down by 5.7% to 29mn.
• FY19E Shipments (Non-laminated): Revised down by 24.5% to 17mn.
• FY19E Shipments (Laminated): Revised down by 5.7% to 37mn.
• Revenue Revisions:
  • FY18E: Revised down by 6.2% to RMB3,285mn.
  • FY19E: Revised down by 9.9% to RMB3,929mn.
• Gross Profit Revisions:
  • FY18E: Revised down by 22.3% to RMB128mn.
  • FY19E: Revised down by 11.7% to RMB270mn.
• Opex Revisions:
  • FY18E: Revised down by 5.4ppts to RMB153mn.
  • FY19E: Revised down by 8.1ppts to RMB167mn.
• Net Profit Revisions:
  • FY18E: Revised down by 40.4% to RMB13mn.
  • FY19E: Revised down by 0.0% to RMB129mn.
• Diluted EPS Revisions:
  • FY18E: Revised down by 40.4% to HK$0.007.
  • FY19E: Revised down by 0.0% to HK$0.075.

Key Points

• Maintain BUY Rating: Despite the downward revision in earnings, the company is maintained with a BUY rating, with a revised target price of HK$0.67 based on a 9x FY19E P/E.
• Reasons for Buy Rating:
  1. Cautious sentiment on smartphone components.
  2. Continuous product mix upgrade with higher penetration of full-screen, in-cell, LTPS, and laminated products.
  3. Synergies with CSOT expected in mid-to-long term to benefit from the flexible OLED display market.
  4. Proactive cooperation with Internet giants in IoT applications.

Risks

• Slower Ramp-up of Wuhan Factory: Could impact production capacity and revenue growth.
• Higher ASP Pressure: In LCD module market, potentially affecting gross margins.
• Oversupply of LTPS Panels: May lead to decreased demand and pricing pressure.

Exhibit Highlights

• Exhibit 1: Provides forecast and valuation for FY16A to FY20E.
• Exhibit 2: Shows earnings revision details for FY18E and FY19E.
• Exhibit 3: Reviews 1H18E results compared to historical data.
• Exhibit 4: Demonstrates improvement in laminated product penetration in 1H18.
• Exhibit 5: Shows historical ASP for CDOT panel modules.
• Exhibit 6: Peer group comparison with other companies in the display sector.

Peer Group Comparison

• Sector Average (Adjusted):
  • P/E: 11.1
  • P/B: 1.3
  • Gross Margin: 6.9%
  • Operating Margin: 3.9%
  • Net Margin: 3.3%
• Key Peers:
  • Truly International Hldgs (732 HK): P/E 57.7, P/B 0.49, Gross Margin 5.5, Operating Margin 3.8, Net Margin 8.1.
  • Boe Technology-A (000725 CH): P/E 16.3, P/B 1.42, Gross Margin 8.1, Operating Margin 6.2, Net Margin 20.6.
  • Tianma-A (000050 CH): P/E 20.3, P/B 0.93, Gross Margin 18.5, Operating Margin 11.4, Net Margin 30.8.
  • Samsung Electron (005930 KS): P/E 7.7, P/B 1.22, Gross Margin 3.0, Operating Margin 2.5, Net Margin 17.3.
  • LG Display Co Lt (034220 KS): P/E 4.3, P/B 0.55, Gross Margin 2.2, Operating Margin 3.6, Net Margin 6.5.

Summary

CDOT (334 HK) provides small-to-medium-sized display modules, primarily for LCD modules in handheld mobile devices on an ODM basis. The company's 1H18 results were in line with expectations, with a 15.6% revenue decline and a net loss of RMB12mn, primarily due to a 17.5% drop in shipments, partially offset by product mix improvements. Earnings estimates for FY18E and FY19E were revised down by 40.4% and 0.0%, respectively, reflecting lower shipments and the impact of automation. Despite these challenges, the company is maintained with a BUY rating, with a revised target price of HK$0.67 based on a 9x FY19E P/E. The firm is expected to turn around in 2H18E and remain profitable for FY18E. Key risks include a slower-than-expected ramp-up of the Wuhan factory, higher ASP pressure, and an oversupply of LTPS panels. The company's product mix is improving, with increased penetration of full-screen, in-cell, LTPS, and laminated products. CDOT is also collaborating with Internet giants in IoT applications, which is expected to drive future growth.