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Tongda Group (698 HK) Summary

Core Content

Tongda Group is a leading provider of high-precision components for consumer electronic products in China, listed on the Hong Kong Stock Exchange in 2000. The company is positioned to benefit significantly from the rapid growth of the China 4G handset market, which is expected to drive double-digit earnings growth. The report initiates a "Buy" recommendation, citing a target price of HK$1.80, representing an upside potential of 20.8% from its current share price of HK$1.49.

Main Points

• 4G Market Growth: The China 4G handset market experienced a 472% YoY increase in shipments in April 2015, with 4G accounting for 83.8% of total mobile handset shipments. This shift from 2G and 3G is expected to continue, providing growth opportunities for Tongda Group.

• Market Position: Tongda Group has a strong presence in the China consumer electronics market, with over 90% of its sales coming from the PRC. It has established relationships with major players such as Huawei, Xiaomi, ZTE, and Lenovo, among others.

• Sales Mix Improvement: The company has started providing high-end metal casing solutions, which have a higher average selling price (ASP) than low-end plastic casing. It planned to purchase 1,000 CNC machines in 2015 to support this shift, enhancing profitability.

• Automotive Expansion: Tongda Group is diversifying into the automotive interior decoration market using its in-mold lamination (IML) technology. The first automotive orders are expected in 2015, with potential for long-term growth.

• Financial Performance:

  • Revenue is projected to grow at a CAGR of 15.4% from 2014 to 2017.
  • Net profit is expected to grow at a CAGR of 20.2% over the same period.
  • EPS is projected to increase from HK$0.07 in 2013 to HK$0.16 in 2017.

• Valuation: At HK$1.49, the company's 2015E PE is 12.2x, which is 20% lower than the average of its peers. The target price of HK$1.80 is set at 15x 2015E earnings, indicating a valuation adjustment to align with peer standards.

Key Financial Metrics (2013–2017E)

Key Risks

• Technological and Market Changes: Rapid changes in technology and consumer preferences could affect Tongda Group's production plans and profitability.
• Economic Slowdown: A slowing Chinese economy may delay the 2G/3G to 4G migration, increasing market competition.
• Intense Competition: The mobile handset market is highly competitive, potentially leading to price pressures.
• Raw Material Price Fluctuations: These could significantly impact the profitability of low-margin products.

Peer Comparison

Investment Highlights

• Target Price: HK$1.80
• Upside Potential: 20.8%
• Valuation: 15x 2015E earnings
• Growth Projections:
  • Revenue: 15.4% CAGR
  • Net Profit: 20.2% CAGR
  • EPS: 29.5% growth in 2015E, 16.7% in 2016E

Strategic Initiatives

• High-end Casing Products: Tongda Group has transitioned to providing high-end metal casing solutions, contributing to a higher ASP and improved gross margin.
• Automotive Market Expansion: The company is exploring the automotive interior decoration market, aiming for long-term growth through IML technology.

Analyst Recommendation

• Rating: Buy
• Expected Outperformance: >15% over the next six months
• Analyst Certification: The analyst certifies that the views in the report reflect their personal opinions and are not influenced by compensation or investment banking activities.

Disclosure

• China Everbright Securities International Limited is a substantial shareholder but does not have a financial interest equal to or exceeding 1% of the market capitalization of the company.
• No investment banking relationship exists with the company within the past 12 months.
• The report is for general reference and not an offer, invitation, or inducement to buy or sell securities.