Summary. We hosted NDR with FIT mgmt. this week, and investors are interested about 1) 400G progress, 2) Belkin's profitability, and 3) manufacturing transition to Vietnam. Overall, we expect a backend loaded 2H19E driven by new products in smart accessories/ connected home/ automotive, despite headwinds in PC/mobile/comm. We expect improving product mix to continue into 2H19E and operating leverage will kick in with cost synergy in Vietnam. Maintain BUY.
- Double-digit growth revenue guidance on track. We expect FY19E revenue growth to come from 1) Belkin integration (+200% YoY on full-year consolidation), contributing 23% of sales, 2) auto's strong growth of 80% YoY, 3) mobile decline of 7% YoY given loss of dongle partly offset by Huawei and iPhone share gain, 4) PC to decline 15% YoY on gaming product design changes, and 5) comm. decline of 6% YoY ahead of 5G and 400G ramp.
- Comm: 400G optical module in 2020 and copper recovery in 2H19. Following 1H19 decline of 3% YoY due to soft socket demands with servers (Dell/HP) destocking, mgmt. expected copper demand to recover in 2H19E, while challenges in optical will persist before 400G optical modules gain traction from datacenters in 4Q19. As one of two first-movers in 400G (another is InnoLight), FIT is well-prepared to ride on rising demand for high-performance computing of Amazon with mass production in 4Q19E.
- Belkin: new roll-outs with improving profitability. We forecast Belkin's integration will evolve as new growth driver and achieve 10% CAGR in FY19-21E, supported by 1) well-established product portfolio with new debuts, such as Wi-Fi 6 and audio products in 2H19E, 2) improving profitability with production ramp in Vietnam to boost 70%+ in-house manufacture (vs 40% before M&A), and 3) software applications on Linksys Velop platform with enhanced features (incl. security/motion sensing/health & wellness).
- Automobile: actively seeking M&A and stepped-up R&D efforts. After doubled revenue in 1H19, and mgmt. expects newly acquired biz, BMW's smart key and JV with Sharp, will continue to serve as major contributors of auto segment. Looking ahead, FIT will prioritize M&A opportunities for auto biz and will strengthen R&D to capture infotainment/ADAS opportunities.
- Backend loaded 2H19E; Belkin/400G launch as catalysts. We estimate 2H19 sales /NP growth of 9%/23% YoY. Trading at 9.2x FY20E P/E, the stock is attractive with 14% FY19-21E EPS CAGR. Our TP of HK$ 3.77 is based on 11x FY20E P/E. Catalysts include Belkin/400G launches in 2H19E.
