20210201-招银国际-中际旭创-300308.SZ-4Q20_in-line__400G_upgrade_and_hyperscale_capex_recovery_to_drive_growth_in_2021_6页_1mb

Innolight (300308 CH) Company Update Summary

Core Content

Innolight, a leading supplier of optical modules, reported its FY20E preliminary net profit of RMB780mn-905mn, up 52%-76% YoY, with the mid-point of RMB843mn (+64% YoY) aligning closely with consensus estimates. The company's 4Q20 revenue and net profit are estimated at RMB1,909mn and RMB252mn respectively, representing 30% and 62% YoY growth. This performance was driven by strong data traffic and increased capex from global and Chinese hyperscalers, as well as the ongoing 400G upgrade cycle.

Main Points

• Strong 4Q20 Performance: Revenue and net profit grew by 30% and 62% YoY, respectively, with the growth attributed to better product mix and yield of 400G products, despite slower China 5G deployment.
• Outlook for 2021: The company expects weaker performance in 1Q21E due to seasonality, but anticipates sequential demand pick-up in 2Q/3Q21E from datacom demand growth, especially from overseas clients.
• Growth Projections: Innolight is expected to achieve a 29%/37% CAGR in revenue and net profit over FY20-22E, driven by its leadership in the optical module market and increasing presence in the telecom sector.
• Valuation: The target price (TP) is adjusted to RMB72.66, based on a 41.9x FY21E P/E ratio, which is slightly below the 2-year historical average. The stock currently trades at 29.7x FY21E P/E, suggesting it is undervalued compared to its growth potential.
• Catalysts: Upcoming factors include stronger cloud capex and 5G deployment, which are expected to drive further growth.
• Risks: Potential risks include weaker capex from global cloud companies, slower 5G infrastructure deployment, and ASP (average selling price) pressure.

Key Financials and Forecasts

Forecasts Revision

Valuation Band

• 12M Forward P/E Band: Innolight is currently trading at 29.7x FY21E P/E, which is 1 SD below the 2-year average.
• 12M Forward P/B Band: The P/B ratio is at 4.0x FY21E, showing a decline from previous years.
• ROE: Expected to increase from 13.6% in FY21E to 15.0% in FY22E.

Analyst Ratings and Recommendations

• Rating: BUY (Maintain)
• Target Price (TP): RMB72.66 (41.5% upside from current price)
• CMBIS Ratings:
  • BUY: Stock with potential return of over 15% over next 12 months
  • HOLD: Stock with potential return of +15% to -10% over next 12 months
  • SELL: Stock with potential loss of over 10% over next 12 months
  • NOT RATED: Stock is not rated by CMBIS
  • OUTPERFORM: Industry expected to outperform the relevant broad market benchmark
  • MARKET-PERFORM: Industry expected to perform in-line with the relevant broad market benchmark
  • UNDERPERFORM: Industry expected to underperform the relevant broad market benchmark

Shareholding and Stock Performance

Financial Summary

• Cash Flow: Net cash from operating activities is expected to increase significantly in FY21E, reflecting improved performance.
• Balance Sheet: Total assets are projected to rise from RMB8,080mn in FY18A to RMB19,192mn in FY22E, indicating strong growth.
• Key Ratios:
  • Revenue Mix: 25% for 10G/40G modules, 75% for 25G/100G/400G modules, and 3% for high-end equipment.
  • Gross Margin: Expected to increase from 24.9% in FY20E to 25.9% in FY22E.
  • Operating Margin: Projected to rise from 14.0% in FY20E to 15.5% in FY22E.
  • Net Margin: Anticipated to increase from 12.0% in FY20E to 13.5% in FY22E.
  • ROE: Expected to grow from 9.4% in FY20E to 15.0% in FY22E.

Conclusion

Innolight is well-positioned to benefit from the 400G datacom upgrade cycle and the growth of the Chinese telecom market. The company's strong performance in 4Q20 and its growth prospects for 2021 suggest a favorable investment outlook. The current valuation appears attractive, and the analyst reiterates a BUY recommendation with a revised target price of RMB72.66. Investors should consider the potential risks associated with capex slowdowns, 5G deployment delays, and ASP pressures.