20210531-招银国际-China_Technology_Sector_Positive_outlook_for_PCB_CCL_sector_amid_cost_pressure_13页_1mb

China Technology Sector Summary

Core Content

The document provides an analysis of the performance and outlook for the China Technology Sector, focusing specifically on the Printed Circuit Board (PCB) and Copper Clad Laminate (CCL) industries. It highlights the positive outlook for the sector due to economic recovery and increased demand, particularly from telecommunications, consumer electronics, and electric vehicles (EVs). The report also evaluates two key companies, Shengyi Tech and Shennan Circuits, and provides investment ratings and financial forecasts for both.

Main Points

• PCB/CCL Sector Outlook:

  • Prismark revised its FY21E global PCB sales forecast to 14% YoY from 8.6% YoY, citing strong economic recovery and pent-up consumer demand post-pandemic.
  • The growth is expected across all sectors and regions, with telecom, consumer electronics, and EVs being major drivers.
  • CCL suppliers are expected to outperform PCB manufacturers due to stronger bargaining power to pass on rising material costs.

• Material Cost Pressures:

  • Copper prices reached a new high since 2011 in May 2021, with $10k per ton.
  • Glass fiber and resin prices also surged significantly, with glass fiber ASP rising 59% YTD (April 2021) and resin ASP dropping slightly in May 2021.
  • The upcycle in material costs is expected to persist in the short term due to low inventory levels, tight supply chains, and government intervention.

• Company-Specific Analysis:

Shengyi Tech (600183 CH)

• Investment Rating: BUY
• Target Price: RMB 30.5
• Key Strengths:
  • Leading market share in the rigid CCL market (global No.2).
  • 74% CCL revenue mix in FY21E, contributing to better gross margin performance.
  • Expected revenue and EPS growth of 29% / 37% YoY in FY21E.
• Valuation:
  • Trading at 21.4x FY21E P/E, 1-sd below historical P/E.
  • ROE is projected to rise to 20.6% in FY21E.
• Risks:
  • Less-than-expected transfer of material costs.
  • Delay in 5G upgrades.

Shennan Circuits (002916 CH)

• Investment Rating: HOLD
• Target Price: RMB 82.7
• Key Strengths:
  • Strong growth in IC substrate business with 22% YoY revenue growth in FY21E.
• Weaknesses:
  • PCB segment growth is constrained due to lower ASP on de-spec products for 700MHz 5G BTS.
  • Margin pressure from rising material costs.
• Valuation:
  • Trading at 30.8x FY21E P/E.
  • ROE is expected to decline to 16% in FY21E.
• Risks:
  • Delay in China's 3rd batch of 5G BTS tenders.
  • Material cost pressures may persist.

Key Financial Highlights

Shengyi Tech

• Revenue is projected to grow from RMB 13,241 mn (FY19A) to RMB 25,237 mn (FY23E).
• Gross margin is expected to increase from 26.6% (FY19A) to 27.8% (FY23E).
• Net profit is forecasted to rise from RMB 1,449 mn (FY19A) to RMB 3,246 mn (FY23E).
• EPS is projected to grow from RMB 0.66 (FY19A) to RMB 1.42 (FY23E).

Shennan Circuits

• Revenue is expected to grow from RMB 10,524 mn (FY19A) to RMB 17,338 mn (FY23E).
• Gross margin is projected to decline slightly from 26.5% (FY19A) to 26.0% (FY23E).
• Net profit is forecasted to increase from RMB 1,233 mn (FY19A) to RMB 1,970 mn (FY23E).
• EPS is expected to grow from RMB 2.62 (FY19A) to RMB 4.03 (FY23E).

Investment Recommendations

• Shengyi Tech is recommended as a BUY due to its strong position in the CCL market, favorable product mix, and ability to transfer costs.
• Shennan Circuits is recommended as a HOLD due to short-term margin pressures and uncertainty in 5G demand.

Key Indicators to Monitor

• TC/RC (Copper concentrate treatment and refining charges) for supply and demand dynamics.
• 10-year U.S. Treasury yield as a barometer for copper prices.
• CCL and PCB price trends, especially in relation to material costs.

Conclusion

The PCB/CCL sector is expected to have a strong year in FY21E, driven by economic recovery, technological upgrades, and supply chain improvements. While CCL suppliers are anticipated to outperform PCB manufacturers due to their stronger bargaining power, Shengyi Tech is highlighted as a top performer with a BUY rating, while Shennan Circuits is advised to be held due to ongoing margin pressures and uncertain demand. Investors should monitor key financial indicators and market conditions to gauge the sector's performance and potential.