20210302-招银国际-FIT_HON_TENG-06088.HK-Weak_FY20_priced_in__Belkin_PC_EV_demand_on_track_6页_1mb

CMB International Securities | Equity Research | Company Update Summary

Core Content

This report provides an analysis of FIT Hon Teng (6088 HK), a company in the China technology sector, with a focus on its FY20E earnings performance and future outlook. The key findings and insights are as follows:

Earnings Performance

• FY20E Earnings Decline: FIT reported a significant earnings decline of 50.4% YoY, primarily due to the impact of the pandemic, fair value changes, and higher income tax expenses in 4Q20E.
• 4Q20E Net Profit: Net profit declined by 38% YoY, compared to a -66% YoY decline in 2Q20E, indicating a recovery in the second half of the year.
• EPS Decline: EPS for FY20E was 1.77 US$ cents, -27% below the CMBIS estimate and -26% below the consensus.

Key Factors Affecting FY20E

• iPhone Headphone Removal: The removal of in-box headphones in the iPhone 12 led to a US$200 million loss in FY20E.
• PC and WFH Demand: Strong demand for PCs driven by remote work and learning (WFH) helped offset some of the losses.
• Belkin's Recovery: Belkin's performance improved in 2H20E, contributing to a recovery in FIT's earnings.

Outlook for FY21E and FY22E

• Earnings Recovery: CMBIS expects a 76% YoY rebound in FY21E and 16% YoY in FY22E.
• Product Mix Improvement: With reduced reliance on iPhone earphones and optical modules, the company is expected to see better profitability.
• New Product Launches: FIT is anticipated to accelerate the launch of 5G/smart home products, including handset antennas, base station backplanes, and Belkin's wireless/audio products.

Main Points

Earnings Revisions

• Revenue: Revised down to 4,174 US$ million for FY20E, with a -3% change from the old estimate.
• Net Profit: Revised down to 118 US$ million for FY20E, with a -27% change from the old estimate.
• EPS: Revised down to 1.77 US$ cents for FY20E, with a -27% change from the old estimate.

Valuation and Target Price

• Target Price: CMBIS maintains a BUY rating and sets a new target price of HK$3.63, based on a 15x FY21E P/E (in-line with 5-year historical average).
• Current Price: HK$2.83, with a +28% upside to the new target price.
• P/E Ratio: Trading at 11.4x FY21E P/E, which is 1 standard deviation below average, indicating an attractive risk/reward ratio.

Key Financial Metrics

Revenue Growth

• FY18A–FY20E: Revenue growth was 17.9%, 9.2%, and -4.5% respectively.
• FY21E–FY22E: Revenue growth is expected to be -0.9% and 7.6% respectively.

Profitability

• Net Margin: Improved from 2.8% in FY20E to 5.4% in FY22E.
• Gross Margin: Increased from 14.8% in FY20E to 16.7% in FY22E.
• Operating Margin: Improved from 3.6% in FY20E to 6.4% in FY22E.

Earnings Forecast

• EPS CAGR: Estimated 43% CAGR for EPS from FY20E to FY22E.
• Revenue CAGR: Estimated 3% CAGR for revenue over the same period.

Shareholding and Performance

• Shareholding Structure:

  • Foxconn Far East Ltd: 76.92%
  • Lu Sung-Ching: 6.40%

• Stock Performance:

  • 1-month: -23.7%
  • 3-months: +10.8%
  • 6-months: +1.4%
  • 12-months: -10.8%

• Market Cap: HK$19,506 million

• Average 3-months Turnover: HK$118.75 million

• 52-week High/Low: HK$4.76 / HK$1.56

Catalysts for Recovery

• New Product Launches: Especially from Belkin and FIT's own 5G and smart home initiatives.
• Improving Margins: Expected due to better revenue mix and cost management.
• EV Momentum: Continued growth in EV-related business segments.

Peer Comparison (Figure 6)

• P/E Ratio: FIT's FY21E P/E is 11.4x, below the industry average of 18.5x.
• P/B Ratio: FIT's FY21E P/B is 11.4x, below the industry average of 14.0x.
• ROE: FIT's FY22E ROE is 9.6%, slightly above the industry average of 14.5%.

Analyst Certification and Disclaimer

• The report is prepared by CMB International Securities Limited, a subsidiary of China Merchants Bank.
• The analyst certifies that the views expressed are their own and not influenced by compensation.
• The report is for informational purposes only and should not be used as investment advice. Investors are encouraged to seek independent financial advice.

Conclusion

CMBIS maintains a BUY rating for FIT Hon Teng, citing the attractive risk/reward ratio, potential earnings recovery, and improving profitability. The new target price of HK$3.63 is based on a 15x FY21E P/E and reflects the company's expected performance over the next 12 months.