20180828-中国银河国际证券-长飞光纤光缆-06869.HK-1H_2018_results_better_than_we_expected._Correction_is_overdone._Maintain_BUY_4页_1mb

YOFC 1H 2018 Results and Investment Summary

Core Content

Yangtze Optical Fibre & Cable Joint Stock Limited Company (YOFC) reported strong first-half (1H) 2018 results that exceeded expectations. The company's performance was attributed to the continued growth in demand for optical fibre products driven by national initiatives like "Broadband China" and "Internet plus" as well as the expansion of telecom infrastructure. YOFC's management emphasized that the U.S.-China trade tensions had minimal impact on the company due to its limited reliance on U.S. imports and the fact that the U.S. is not a major market.

Key Financial Highlights (1H 2018)

• Revenue: RMB5,631.9m, up 21.1% YoY
• Net Profit: RMB808.7m, up 44.3% YoY
• Gross Margin: 28.2%, up from 26.7% in 1H 2017
• Gross Profit: RMB1,589.2m, up 28.2% YoY
• Dividend: Interim dividend of RMB0.50 per share declared

Revenue Breakdown

• Optical fibre preforms and fibres: RMB2,416.2m, representing 42.9% of total revenue
• Optical fibre cables: RMB2,790.5m, representing 49.5% of total revenue
• Other products and services: RMB525.3m, representing the remaining 17.6%

Growth Drivers

• Domestic Sales: Increased by 19.2% YoY
• Overseas Sales: Increased by 37.5% YoY
• Telecom Infrastructure: Continued investment by telecom operators is a key driver of demand
• ULL Optical Fibre: YOFC is the only company in China capable of producing ULL optical fibre, which is expected to be used in network upgrades by Chinese telecom operators

Investment View

• Valuation: YOFC (H-share) is trading at a discount to its peers despite its leading global position
• Share Price Correction: The recent correction is considered overdone
• Rating: Maintain BUY for H-shares with a new target price of HK$40.56 (based on 15x 2018E PER), and HOLD for A-shares
• Target Price (A-share): RMB47.5, based on a 17% premium over YOFC-H
• Upward Earnings Adjustment: Net profit forecasts for 2018 and 2019 were revised upwards by 8.2% and 9.3%, respectively, due to higher gross margin assumptions

Financial Metrics (2015–2019E)

Market Performance

• Closing Price (Aug 27, 2018): HK$29.4
• Target Price (H-share): HK$40.6 (+38.0%)
• Target Price (A-share): RMB47.5 (-8.0%)
• 52-Week Range (H-share): HK$21.50–HK$41.30

Shareholder Information

• Market Cap: US$197m
• Shares Outstanding: 757.9m
• Auditor: KPMG
• Free Float: 43.6%
• Major Shareholders: Draka (23.7%), China Huaxin (23.7%)

Key Assumptions and Projections

• Optical Fibre Preforms and Fibres: Expected to grow at 17.1% in 2018 and 8.2% in 2019
• Optical Fibre Cables: Expected to grow at 20.8% in 2018 and 15.4% in 2019
• Total Revenue Growth: Expected to be 19.0% in 2018 and 12.3% in 2019
• Gross Margin: Expected to remain stable at 27.3% in 2018 and 27.1% in 2019
• Net Income Growth: Expected to be 43.4% in 2018 and 12.4% in 2019

Analysts

• Mark Po, CFA – Senior Analyst
• Wong Chi Man, CFA – Head of Research

Disclaimer

This report is not intended for distribution to individuals or entities in jurisdictions where it would be illegal or subject to registration requirements. The information is believed to be reliable but not guaranteed. No warranties are made regarding accuracy or completeness. This report is for institutional clients only and does not constitute an offer to buy or sell securities.

Disclosure of Interests

China Galaxy International Securities may have financial interests in the subject company(ies) and may have provided investment banking services. The report may include personal views of analysts that do not necessarily reflect the views of the firm.

Equity Rating Explanation

• BUY: Expected share price increase >20% within 12 months
• HOLD: No clear catalyst, no clear indication of future price movement
• SELL: Expected share price decrease >20% within 12 months

Copyright

No part of this material may be reproduced or redistributed without the prior written consent of China Galaxy International Securities (Hong Kong) Co., Limited.