20160222-招商证券_香港_-通达集团-00698.HK-Best-positioned_to_capture_metal_casing_trend._Initiate_with_BUY_25页_2mb_2mb

Tongda Group (698 HK) Summary

Core Content

Tongda Group is a leading supplier of smartphone handsets casing solutions, particularly in the non-unibody metal casing segment. The report highlights its strong position in capturing the growing demand for metal casing among Chinese smartphone brands, especially Huawei, Xiaomi, Oppo, and Vivo. The company is expected to benefit from the increasing adoption of metal casing, driven by design trends and cost-effective hybrid solutions.

Main Points

• Investment Thesis:

  • Initiate coverage with a BUY rating and a target price of HK$1.57, representing a 29% upside.
  • Based on a 9.5x FY16E P/E ratio, which is 1 standard deviation above the 3-year P/E mean.
  • The stock is currently trading at 0.6x FY16E PEG, indicating a 37% discount compared to its HK-listed peers.

• Market Growth:

  • The global smartphone metal casing market is expected to grow at 15% CAGR from FY15 to FY17, with a TAM of US$13.9bn in FY17.
  • The non-Apple metal casing industry is growing faster at 48% CAGR compared to 3% for Apple.
  • Metal casing shipment is expected to grow at 125% CAGR during the same period, driven by the demand for hybrid metal/plastic solutions.

• Revenue and Profit Outlook:

  • FY16E revenue is expected to reach HK$7.6bn (+20% YoY).
  • FY16E net profit is projected at HK$905mn (+28% YoY).
  • Handset casing revenue is forecasted to reach HK$5.2bn (+32% YoY), contributing 69% of total revenue.
  • ASP is expected to grow at 10% CAGR due to the product mix shift towards metal casing.

• Customer Base and Market Share:

  • Tongda has a strong customer base with Huawei, Xiaomi, Oppo, and Vivo as its key clients.
  • Huawei is Tongda's largest customer, contributing 28% of Group's revenue in FY16E.
  • Tongda is expected to supply 32% of Huawei's metal casing for its smartphones, with 10.6mn units in FY16E.

• Technology and Innovation:

  • Tongda is developing a precision O-ring for waterproof applications on a component level, likely to be adopted by Apple in the future.
  • The O-ring technology could lead to a 1% to 3% net profit increase in FY16E and FY17E, respectively.

• Risk Analysis:

  • The report suggests limited downside to FY16E EPS if Tongda's handset casing shipment growth is only 1% YoY and ASP increases by 6%.
  • The over-supply risk is mitigated by prudent investment in CNC machines, which are key to production efficiency.

• Financial Highlights:

  • EPS (HKD): Expected to be HK$0.17 in FY16E, up from HK$0.13 in FY15E.
  • DPS (HKD): Expected to be HK$0.05 in FY16E, up from HK$0.04 in FY15E.
  • ROE (%): Expected to reach 20% in FY16E and FY17E, showing strong profitability.
  • Dividend Yield (%): Expected to be 4% in FY16E, with a stable payout ratio.

• Competitive Landscape:

  • Tongda is less exposed to over-supply risks compared to peers like BYDE.
  • Tongda's CNC machine investment is more strategic, with +1,500 in FY15E and +300 in FY16E, compared to BYDE's doubling of machines in FY15E.

Key Information

• Handset Casing Revenue:

  • FY15E: HK$3.9bn
  • FY16E: HK$5.2bn (+32% YoY)
  • FY17E: HK$5.9bn (+11% YoY)

• Metal Casing Penetration:

  • FY15E: 13% for top-4 Chinese brands
  • FY16E: Expected to reach 24%
  • FY17E: Expected to reach 33%

• Handset Casing Shipment Growth:

  • FY15E-17E: Expected to grow at 11% CAGR
  • Top-4 Chinese brands: Expected to grow at 14% CAGR during the same period

• ASP Growth:

  • Blended ASP: Expected to grow at 10% CAGR
  • Metal casing ASP: Expected to be HK$107 per piece in FY16E
  • Non-metal casing ASP: Expected to be HK$52 per piece in FY16E

• Tongda's Share in Huawei Supply Chain:

  • Metal casing: 28%
  • Non-metal casing: 11%
  • Huawei's metal casing penetration: Expected to reach 30% in FY16E

• EPS Sensitivity Test:

  • If handset casing shipment growth is only 1% YoY and ASP increases by 6%, the downside to FY16E EPS is estimated at 13%.

• Tongda's Potential for Apple:

  • The new O-ring molding process is likely to be used by Apple for iPhone 7 waterproofing.
  • Gross margin for O-ring business is expected to be over 30%, higher than the company's average of 24%.

Figures

• Figure 1: Tongda's revenue is expected to grow at 15% CAGR from FY15 to FY17.
• Figure 2: Handset casing revenue is expected to contribute 71% of Group's revenue by FY17E.
• Figure 3: Total handset casing shipment is expected to grow at 11% CAGR, while metal casing shipment is expected to grow at 125% CAGR.
• Figure 4: Sensitivity analysis on FY16E EPS shows 13% downside if shipment growth is only 1% YoY and ASP increases by 6%.
• Figure 5: Tongda's revenue from Huawei is expected to reach HK$2bn (+28% YoY) in FY16E.
• Figure 6: Metal casing shipment to Huawei is expected to reach 10.6mn units in FY16E, contributing 28% of metal-bodied smartphone.
• Figure 7: Tongda's revenue from Huawei is expected to grow at 25% CAGR, reaching HK$2.49bn by FY17E.
• Figure 8: Huawei's smartphone shipment is expected to grow at 18% YoY, with 30% metal casing penetration in FY16E.
• Figure 9: Tongda's share in Huawei's supply chain is expected to be 16% in FY16E and 17% in FY17E.
• Figure 10: The waterproof casing business is expected to add 1% to 3% to net profit in FY16E and FY17E, respectively.

Conclusion

Tongda Group is well-positioned to benefit from the growing demand for metal casing among Chinese smartphone brands, particularly Huawei. Its lower-cost hybrid solutions and strong customer relationships provide a competitive edge in the market. The company is also exploring waterproof casing technology, which could lead to future growth opportunities. With a BUY rating and a target price of HK$1.57, the stock is seen as undervalued, offering significant upside potential.