20211102-招银国际-深南电路-002916.SZ-Strong_3Q_results__Cost_pressure_remains_8页_1mb

Shennan Circuits (002916 CH) | Equity Research Summary

Core Content

Shennan Circuits reported strong 3Q21 results with revenue of RMB3.9bn (+26.3% YoY) and net profit of RMB4.67bn (+24.8% YoY). Gross profit margin (GPM) remained stable at 24.6%, while net profit margin (NPM) improved to 12.0% from 10.1% in 2Q21. The growth was primarily driven by domestic and overseas 5G investments, particularly the resumption of the third batch of 5G tender in China and global 5G capex growth.

Key Highlights

• Revenue Growth:

  • 3Q21: RMB3.875bn (+26.3% YoY, +22.8% QoQ)
  • FY21E: RMB13.141bn (+13.3% YoY)
  • FY22E: RMB15.629bn (+18.9% YoY)
  • FY23E: RMB17.668bn (+13.0% YoY)

• Profitability:

  • GPM: 24.6% in 3Q21 (vs 24.5% in 2Q21)
  • NPM: 12.0% in 3Q21 (vs 8.9% in 1Q21)
  • OPM: 13.1% in 3Q21 (vs 10.7% in 2Q21)

• Market Position:

  • PCB business is the primary revenue driver, with a significant portion from the telecom market.
  • Substrate business is also performing well, with the Wuxi factory in the mid-to-late ramp-up phase.

• Capacity Expansion:

  • New PCB capacity: Phase II plant in Nantong (58w sq m, mid-to-late ramp-up), Phase III plant in Nantong (expected to begin production in 4Q22).
  • New substrate capacity: Wuxi plant (60w, high-end substrate, mid-to-late ramp-up), Guangzhou plant (expected to begin production in 2023).

• Challenges:

  • Material cost pressure continues, with copper prices at US$9.5k/ton and low domestic inventory.
  • 4Q demand is expected to be weaker than 3Q due to economic uncertainty and supply chain constraints.

Target Price and Rating

• Target Price (TP): RMB110.75 (+13.3% upside from current price of RMB97.71)
• Rating: HOLD
• Reasoning: The 3Q21 results are likely the best quarter of the year, but continued cost pressure and supply chain constraints may limit future growth.

Valuation

• Forward P/E (FY22E): 30.0x
• Valuation Band:
  • The company's valuation is in line with peers, with a 30.0x P/E ratio for FY22E.
  • Potential upside risks include faster material cost declines and higher-than-expected 5G infrastructure spending.
  • Potential downside risks include continued price increases in upstream materials and slower 5G deployment.

Financial Summary

Income Statement (YE 31 Dec)

• Revenue: RMB13.141bn (FY21E), RMB15.629bn (FY22E), RMB17.668bn (FY23E)
• Net Profit: RMB1.423bn (FY21E), RMB1.818bn (FY22E), RMB2.218bn (FY23E)
• EPS: RMB2.90 (FY21E), RMB3.69 (FY22E), RMB4.50 (FY23E)

Cash Flow Summary (YE 31 Dec)

• Net Cash from Operating: RMB2.194bn (FY21E), RMB2.131bn (FY22E), RMB3.986bn (FY23E)
• Capex: RMB893m (FY21E), RMB1.114bn (FY22E), RMB1.316bn (FY23E)
• Net Cash from Financing: RMB719m (FY21E), RMB-758m (FY22E), RMB-835m (FY23E)
• Net Change in Cash: RMB2.046bn (FY21E), RMB432m (FY22E), RMB1.832bn (FY23E)

Balance Sheet (YE 31 Dec)

• Total Assets: RMB17.140bn (FY21E), RMB19.743bn (FY22E), RMB20.409bn (FY23E)
• Total Liabilities: RMB8.667bn (FY21E), RMB10.313bn (FY22E), RMB9.797bn (FY23E)
• Total Equity: RMB8.472bn (FY21E), RMB9.431bn (FY22E), RMB10.612bn (FY23E)
• Current Ratio: 1.4 (FY21E), 1.5 (FY22E), 1.7 (FY23E)
• ROE: 16.8% (FY21E), 19.3% (FY22E), 20.9% (FY23E)

Key Ratios

• Growth:
  • Revenue: 13.3% (FY21E), 18.9% (FY22E), 13.0% (FY23E)
  • Net Profit: 10.8% (FY21E), 11.6% (FY22E), 12.6% (FY23E)
• Profitability:
  • Gross Margin: 24.2% (FY21E), 25.0% (FY22E), 25.7% (FY23E)
  • Operating Margin: 11.9% (FY21E), 13.0% (FY22E), 13.9% (FY23E)
  • Net Profit Margin: 10.8% (FY21E), 11.6% (FY22E), 12.6% (FY23E)
• Liquidity:
  • Current Ratio: 1.4 (FY21E), 1.5 (FY22E), 1.7 (FY23E)
  • Receivable Turnover Days: 73 (FY21E), 81 (FY22E), 73 (FY23E)
  • Inventory Turnover Days: 76 (FY21E), 81 (FY22E), 81 (FY23E)

Outlook and Risks

• Outlook:
  • 5G capex is expected to remain stable in 2022E and grow 22% in 2022E for overseas markets.
  • Substrate business is expected to continue strong growth, driven by demand from the semiconductor industry.
• Risks:
  • Continued material cost pressure.
  • Uncertainty in economic growth and 5G deployment.
  • Supply chain constraints.

Summary

Shennan Circuits has delivered strong performance in 3Q21, driven by 5G investments both domestically and internationally. Despite the cost pressure from high copper prices, the company has managed to improve its profitability. The company is expected to benefit from the ongoing 5G infrastructure buildout, particularly in overseas markets. However, the analysts maintain a HOLD rating due to uncertainties in the economy, material costs, and supply chain. The target price has been adjusted to RMB110.75, reflecting the company's expected growth and valuation.