20161108-东英亚洲证券-通达集团-00698.HK-Riding_on_the_ramp_of_smartphone_metal_casing_with_3D_Glass_and_waterproof_components_24页_2mb

Tongda Group Holdings Ltd (698 HK) Equity Research Summary

Core Content

Tongda Group Holdings Ltd is a leading provider of consumer electronics casing products, particularly in the areas of metal casing, 3D glass casing, and waterproof components. The company is well-positioned to benefit from the increasing adoption of metal casing in the China smartphone market, which is expected to rise from 25% in 2015 to 54% in 2018. Tongda serves as a primary supplier for major Chinese smartphone brands such as Huawei, OPPO, and Xiaomi, and has successfully expanded into the US market by supplying waterproof components to a leading US client.

The company's stock closed at HK$2.09 as of 07/11/2016, with a target price of HK$2.75, implying a 31.6% upside. The initial BUY rating is based on the expectation of 15x FY17E PE, with a forecasted 21% earnings CAGR.

Key Growth Drivers

• Metal Casing Penetration:

  • Expected to grow from 20mn units in 1H16 to 44mn/55mn/63mn units in FY16/17/18E.
  • Metal casing revenue is projected to reach HK$4.0bn/HK$5.6bn/HK$5.9bn in FY16/17/18E, representing 55%/63%/62% of total revenue.
  • Metal casing enjoys a GPM of 30%, which is 7 ppts higher than plastic casing, contributing to margin expansion.

• 3D Glass Casing:

  • Expected to become a new growth driver, with adoption rising from 5% in 2016E to 25% in 2018E.
  • Tongda is in discussions with major Chinese smartphone vendors to supply 3D glass casing, with potential revenue of HK$25mn/HK$247mn in FY17/18E.
  • 3D glass casing has a high ASP of RMB80-RMB100 and can reach RMB260+ when combined with metal frames.

• Waterproof Components:

  • Tongda has started shipping waterproof components (2 LSR + 4 O-rings) to a US client from August 2016.
  • Revenue from waterproof components is expected to reach HK$117mn in FY16E and HK$456mn in FY17E, representing 2% and 5% of total revenue respectively.
  • Waterproof components enjoy a high GPM of 30%, contributing to margin expansion.

• Automotive Decorations:

  • Tongda has acquired 4 new automotive clients in 1H16 and is expected to see significant revenue growth from FY18E onwards.
  • Automotive decorations revenue is forecasted to reach HK$315mn in FY18E, contributing 3% to total revenue.
  • These products also enjoy a GPM of 30%, supporting further margin improvements.

Financial Highlights

Main Points

• Tongda is a key supplier of metal casing for leading Chinese smartphone vendors, including Huawei, OPPO, and Xiaomi.
• The company is expanding its presence in the US market through the supply of waterproof components, with the first shipments in Q3 2016.
• 3D glass casing is expected to be a significant growth driver, with adoption rates increasing from 5% in 2016E to 25% in 2018E.
• The company is expected to benefit from margin expansion due to the high GPM of metal casing, 3D glass casing, waterproof components, and automotive decorations.
• Tongda's GPM is projected to increase from 24.9% in FY15 to 25.5% in FY16E, 26.5% in FY17E, and 26.6% in FY18E.

Key Risks

1. Lower-than-expected smartphone shipment growth, especially in China.
2. ASP erosion and margin squeeze due to competition or cost pressures.
3. Lower-than-expected adoption of 3D glass casing and waterproof components.

Investment Recommendation

• Rating: BUY
• Target Price: HK$2.75
• Reasoning: Based on 15x FY17E PE, with expectations of strong earnings growth and successful expansion into the US and automotive markets.

Summary

Tongda Group Holdings Ltd is well-positioned to benefit from the growing demand for metal casing, 3D glass casing, and waterproof components in the smartphone industry. The company has established a solid presence in the Chinese market and is expanding into the US supply chain. With a forecasted 21% earnings CAGR and significant margin expansion, Tongda is a promising investment. The BUY rating is based on the potential for strong revenue growth and improved profitability from new product lines and markets.