20180822-中国银河国际证券-昂纳科技集团-00877.HK-1H_2018_results_a_mixed_bag._Concerns_behind_it__good_foundation_for_future_growth._4页_1mb

O-Net Technologies 2018 H1 Summary

Core Content

O-Net Technologies (0877.HK) is a leading Chinese high-tech enterprise involved in optical networking, electronic cigarettes, coating services, and machine vision solutions. The company reported mixed results for the first half of 2018, with net profit rising by 51.8% year-over-year (YoY) to HK$111.9m, aligning with its profit alert from July 2018. Turnover increased by 37.1% YoY to HK$1,207.6m, driven by strong performance in the optical networking and smart manufacturing applications segments.

Main Financial Highlights

• Revenue: Increased by 37.1% YoY to HK$1,207.6m in 1H 2018.
• Net Profit: Rose by 51.8% YoY to HK$111.9m.
• Gross Profit: Grew by 14% YoY to HK$362.3m.
• Gross Margin: Declined to 30.0% from 36.4% in 1H 2017.
• Operating Cash Flow: Improved significantly, turning from a negative outflow of HK$20.3m in 1H 2017 to an inflow of HK$262.8m in 1H 2018.
• Net Gearing: Reduced from 12.1% at the end of 2017 to 3.2% at the end of Jun 2018.
• EPS (Basic): Increased to HK$0.40 in 1H 2018, up 37.4% YoY.
• Dividend Yield: Expected to rise to 1.62% in 2018 and 1.85% in 2019.
• PER (x): Traded at 11.6x for 2018, lower than its historical mean.
• PBR (x): At 1.6x for 2018, showing a discount to peers.

Key Business Segments

Optical Networking Business

• Turnover Growth: 36.1% YoY in 1H 2018, with strong performance in the data centre interconnect (DCI) segment.
• Growth Drivers: High-speed optical transceivers, EDFAs, Raman, ICRs, TNF, VCSEL, and EML products.
• Future Outlook: Expected to continue driving growth, especially with the expansion of 5G infrastructure.

Smart Manufacturing Applications

• Turnover Growth: 63.1% YoY in 1H 2018, primarily due to the industrial laser business.
• Technology Synergy: Result of the 2014 acquisition of ITF Technologies Inc., offering unique single-mode kilowatt fibre laser products with better beam quality and lower energy consumption starting from 2H 2018.

Consumer Electronics (Smartphone Coatings)

• Segment Challenges: Faced pressure in 1H 2018 due to weak end demand for smartphones.
• Recovery Outlook: Management expects a recovery in 2H 2018 after realigning product and cost structures.

Other Business Areas

• Acquisition of 3SP Technologies S.A.S.: Expected to be completed by the end of 2018, enhancing O-Net's capabilities in laser chips, high-speed optical transceivers, and LiDAR solutions.
• Market Position: O-Net is one of the few HK-listed companies benefiting from the increasing demand for high-speed communication equipment and components.

5G and Future Growth

• 5G Opportunity: The rollout of 5G is expected to significantly increase the number of Chinese base stations and optical modules, creating strong growth potential for O-Net.
• Market Estimates: 5G era will have 1.5 to 3 times more base stations than 4G, and 2 to 3 times more optical modules per base station.
• Demand for Optical Components: Expected sharp increase in demand for FSI, WDM, tunable filters, CWDM/WD devices, and ROADM systems.

Analyst View

• Valuation: O-Net is currently undervalued compared to its historical mean and peers, with strong operating performance and R&D capability.
• Growth Drivers: Industrial lasers and emerging sectors like LiDAR and VCSEL.
• Catalysts: Higher spending by Internet giants on data centres, policy support for the industry, and development news on LiDAR and VCSEL.

Conclusion

O-Net Technologies is positioned to benefit from the growth of the optical networking and smart manufacturing sectors, particularly with the expansion of 5G infrastructure. The company has shown strong financial improvements, including better cash flow and reduced gearing, which should alleviate investor concerns. Its current valuation suggests potential for share price appreciation, especially with the expected growth in key segments and the completion of strategic acquisitions.