Summary. BYDE reported a significant miss with 58% NP decline in 1H19, 41% below our estimates, mainly due to 1) Huawei order cut in May/June, 2) slower-than-expected plastic/glass casing, 3) lower GPM with weaker mix, and 4) higher R&D expense. We expect margin pressure to continue into 2H19E, given higher assembly mix and slower plastic/ glass ramp. We trimmed FY19-21E EPS by 30%/12%/3%, and cut our TP to HK$10.4, based on same 10x FY20E P/E. Maintain Hold, as we wait for better visibility on margin and plastic/glass orders.
- 1H19 worse than expected on Huawei ban and lower margin. BYDE’s 1H revenue growth (+19% YoY) was driven by 1) strong assembly service (+38% YoY) and auto/intelligent segment (+55% YoY), but 2) weak casing segment (-8% YoY) given Huawei's order cut and slow plastic/glass casing. However, given weaker mix and margin pressure in metal/assembly, 1H19 net profit slumped 58% YoY with GPM declined to 6.7% (vs 10.2% in 1H18).
- Margin pressure to persist during metal-to-plastic/glass transition. We believe ASP/margin pressure in metal casing (23% of FY19E sales) and slow ramp of plastic/glass casing (11%/4%) will continue to drag BYDE’s profitability in 2H19E. We estimate metal/glass/plastic will deliver -14%/ +50%/+30% growth in FY19E, and GPM will reach 8.2% in 2H19 (vs 10.1% in 2H18, 6.7% in 1H19). Looking forward into 5G era, BYDE sees opportunities in 1) 5G antenna on metal mid-frame, 2) metalistic plastic casing with CNC/PVD, and 3) ceramic functional parts on RFFE/filters.
- Closer Huawei/Apple partnership; auto/smart intelligence on fast track. We expect BYDE to accelerate collaboration with Huawei/Apple in 2H19/ 20E, in terms of 1) Huawei’s casing/assembly/5G BTS/servers, 2) Huawei’s production expansion in India/Brazil/Hungry, and 3) Apple’s new products in 3Q19E/FY20E. In addition, we expect auto/smart intelligent biz to deliver 31%/42% sales FY19-21E CAGR, backed by 1) Di-Link on BYD Dynasty/e/s series, 2) foreign tier-1 OEMs, and 3) intelligent-driving modules in FY22E.
- Maintain HOLD with lowered TP of HK$10.4. We cut FY19-21E EPS by 30%/12%/3% to reflect 1H19 miss, lower GPM, and slower glass/plastics casing. Our TP is trimmed to HK$10.4, based on same 10x FY20E P/E. Stay Hold given lack of 2H19E visibility on margin and plastic/glass orders.
