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_25页_1mb

Tongda Group Holdings Ltd (698 HK) 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 growing demand for metal casings in the Chinese smartphone market and the potential adoption of 3D glass and waterproof features in both Chinese and US markets.

Main Points

• Market Position: Tongda is a major supplier of metal casings for leading Chinese smartphone vendors such as OPPO, Huawei, and Xiaomi. It is also entering the US market through waterproof components.
• Technology Advancements: Tongda has developed three levels of metal casing technologies (Metal 1.0, 2.0, and 3.0) and has completed R&D on 3D glass casing. The company is also focusing on waterproof components, which are critical for high-end smartphones.
• Growth Drivers:
  • Increasing metal casing penetration in the global smartphone market, expected to rise from 25% in 2015 to 54% in 2018.
  • Adoption of 3D glass casing, which is suitable for OLED displays and wireless charging, is anticipated to start from 2017.
  • Penetration of US smartphone vendor supply chain through waterproof components, including LSR and O-rings, starting in 3Q16.
• Financial Performance:
  • Revenue is forecasted to grow significantly, with a 3-year CAGR of 65% for metal casing and 68% for waterproof components.
  • Gross margin is expected to expand, driven by the higher GPM of metal casing (30%) and waterproof components (30%), from 24.9% in FY15 to 25.5% in FY16, 26.5% in FY17, and 26.6% in FY18.
• Investment Rating: The report initiates a BUY rating with a target price of HK$2.75, based on a 15x FY17E PE, as the company is expected to deliver strong earnings growth and successfully expand into new markets.

Key Information

• Key Data:
  • Close price: HK$2.09
  • Target Price: HK$2.75 (+31.6%)
  • Market Cap: HK$12,003.81 million
  • Issue Share: 5,743.45 million
  • 3M Avg Daily Vol.: 24.60 million
• Revenue Growth:
  • FY16E: HK$7,162 million (17.9% growth)
  • FY17E: HK$8,982 million (25.4% growth)
  • FY18E: HK$9,552 million (6.3% growth)
• Net Profit Growth:
  • FY16E: HK$826.9 million (17.6% growth)
  • FY17E: HK$1,178.5 million (42.5% growth)
  • FY18E: HK$1,262.7 million (7.1% growth)
• EPS Growth:
  • FY16E: HK$0.129 (8.3% growth)
  • FY17E: HK$0.184 (42.5% growth)
  • FY18E: HK$0.197 (7.1% growth)
• PE and PB:
  • P/E (FY17E): 11.4x
  • P/B: 2.1x
• Yield:
  • FY16E: 3%
  • FY17E: 2.6%
• 3D Glass Casing Revenue:
  • FY17E: HK$25 million
  • FY18E: HK$247 million
  • FY20E: HK$2,535 million
  • CAGR from FY17E to FY20E: 367%
• Waterproof Components Revenue:
  • FY16E: HK$117 million
  • FY17E: HK$456 million
  • CAGR from FY16E to FY19E: 68%
• Metal Casing Revenue:
  • FY16E: HK$3,960 million
  • FY17E: HK$5,643 million
  • FY18E: HK$5,905 million
  • CAGR from FY16E to FY18E: 65%
• Margin Expansion:
  • GPM for metal casing and waterproof components is expected to be higher than the company's blended GPM of 24% in 1H16.
  • GPM is projected to increase from 24.9% in FY15 to 25.5% in FY16, 26.5% in FY17, and 26.6% in FY18.

Risks

• Lower than expected smartphone shipment growth, especially in the Chinese market.
• ASP erosion and margin squeeze for metal casing, 3D glass casing, and waterproof components.
• Lower than expected adoption of 3D glass casing and waterproof components.

Investment Highlights

• Tongda is expected to benefit from the increasing use of metal casings in the Chinese smartphone market.
• The company is poised to gain from the adoption of 3D glass casing, which is anticipated to be used in the iPhone 8 and other leading models.
• Successful entry into the US market via waterproof components, including LSR and O-rings, is expected to drive revenue and margin growth.
• The company is also expanding into the automotive sector with significant revenue growth expected from FY18E onwards.

Conclusion

Tongda Group Holdings Ltd is a promising investment opportunity due to its strong position in the metal casing market, potential growth from 3D glass casing adoption, and successful penetration into the US supply chain through waterproof components. The company's financial performance and margin expansion are expected to improve significantly over the next few years, supporting the BUY rating and target price of HK$2.75.