20210625-招银国际-深南电路-002916.SZ-Positive_on_capacity_expansion_plan__Maintain_HOLD_on_fair_valuation_6页_1mb

Shennan Circuits (002916 CH) - Equity Research Summary

Core Content

Shennan Circuits (002916 CH) is a Chinese company operating in the PCB and IC substrate sectors. The company has announced a capacity expansion plan in Guangzhou, which includes adding 200 million FC-BGA and 3 million panel RF/FC-CSP substrate capacity. The total investment for this project is approximately RMB6 billion, with fixed asset investment exceeding RMB5.8 billion.

The report highlights the positive outlook for the company due to the upcycle in the substrate market and the expected recovery in PCB demand in the second half of 2021. The company's PCB business is anticipated to benefit from the resumption of 5G BTS deployment in China, which has already started despite initial delays. This is expected to drive Shennan's revenue and profitability in the coming quarters.

Main Points

• Capacity Expansion:

  • Shennan announced a capacity expansion in Guangzhou.
  • New capacity: 200mn FC-BGA and 3mn panel RF/FC-CSP.
  • Total investment: ~RMB6bn.
  • Fixed asset investment: over RMB5.8bn (1st/2nd phase: RMB3.8bn/RMB2bn).
  • Revenue contribution expected in FY23/24E.

• PCB Demand Recovery:

  • 5G BTS deployment in China has kicked off.
  • 120k 2.6GHz by CM, 320k 3.5GHz/2.1GHz by CU/CT.
  • CBN will resume 700MHz 5G BTS deployment (400k+ in 2 years).
  • PCB demand is expected to recover in 3Q21E, leading to improved performance in 2H21E.

• Cost Pressure:

  • Near-term cost pressure continues due to upstream material costs.
  • Copper price reached a new high in May 2021, with 3M LME copper price at $9,488/tonne.
  • PCB business, especially low-margin consumer products, is affected by production willingness due to cost pressure.

• Valuation and Recommendation:

  • The target price (TP) has been raised to RMB101.92.
  • The TP is based on a 30x FY22E P/E multiple.
  • The recommendation is to Maintain HOLD due to fair valuation and margin overhang.

• Financial Performance:

  • Revenue growth is expected to continue, with a projected 14.8% YoY in FY21E and 14.5% in FY22E.
  • Gross margin is expected to remain stable, with a slight decline in FY21E to 24.6%.
  • Net profit is projected to increase from RMB1,348m in FY21E to RMB1,970m in FY23E.
  • EPS is expected to grow from RMB2.76 in FY21E to RMB4.03 in FY23E.

Key Financial Data

Revenue (RMB mn)

• FY19A: 10,524
• FY20A: 11,600
• FY21E: 13,320
• FY22E: 15,141
• FY23E: 17,338

YoY Revenue Growth (%)

• FY19A: 38.4
• FY20A: 10.2
• FY21E: 14.8
• FY22E: 13.7
• FY23E: 14.5

Net Profit (RMB mn)

• FY19A: 1,233
• FY20A: 1,430
• FY21E: 1,348
• FY22E: 1,662
• FY23E: 1,970

EPS (RMB)

• FY19A: 2.62
• FY20A: 3.00
• FY21E: 2.76
• FY22E: 3.40
• FY23E: 4.03

P/E Ratio

• FY19A: 40.8
• FY20A: 35.6
• FY21E: 39.0
• FY22E: 31.5
• FY23E: 26.6

P/B Ratio

• FY19A: 7.3
• FY20A: 7.0
• FY21E: 6.3
• FY22E: 5.5
• FY23E: 4.8

Dividend Yield (%)

• FY19A: 1.4
• FY20A: 1.2
• FY21E: 1.1
• FY22E: 1.4
• FY23E: 1.6

ROE (%)

• FY19A: 25
• FY20A: 19
• FY21E: 16
• FY22E: 17
• FY23E: 18

Shareholding and Stock Performance

Shareholding Structure

• AVID International: 67.05%
• HKSCC: 2.60%
• China Asset Mgmt. Co.: 0.99%

Stock Data

• Market Cap: RMB52,308m
• Average 3-month turnover: RMB361m
• 52-week High/Low: RMB198.00/RMB74.88
• Total Issued Shares: 489.3m

Share Performance

• 1-month: +23.2%
• 3-month: +5.6%
• 6-month: -10.4%

Valuation Comparison

Peers' Valuation

Risks and Catalysts

Risks

1. Continued price increase in upstream materials.
2. De-spec of 5G BTS and ASP pressure.
3. Slower than expected 5G deployment.

Catalysts

• Further details on the 3rd phase of 5G BTS tenders.
• Possible recovery in PCB demand and increased market share due to industry consolidation.

Conclusion

The report maintains a HOLD recommendation for Shennan Circuits, citing fair valuation and margin overhang as key factors. The company is expected to benefit from the expansion of 5G infrastructure in China, particularly in the PCB and IC substrate sectors. However, the near-term cost pressures and potential risks related to the 5G deployment timeline remain a concern. The updated target price reflects the analyst's adjusted expectations based on the FY22E P/E multiple.