FIT announced to acquire 26.83% of Kantatsu through preferred shares for JPY5,905mn (USD54.4mn), implying 18.8x FY19E P/E or 1.9x P/B. Kantatsu is global No. 3/ No. 4 handset/vehicle lens supplier, which is poised to benefit from secular trend of automobile ADAS and handset multi-cam/3D sensing, in our view. We are positive on the deal, and expect it to accelerate FIT’s expansion into ADAS market leveraging its auto camera JV with Sharp in 2018. Reiterate BUY.
- Accelerate expansion into auto market; Significant synergies in vehicle camera/ADAS. Automobile market has been FIT's strategic M&A focus since IPO in 2017, targeting infotainment (display) and ADAS (camera/ lidar/radar) segments. Kantatsu is global No.4 auto lens supplier (8% mkt share) behind Sunny (30%), Hitachi Maxwell (9-10%) and Fujifilm (9-10%). We believe this deal will accelerate 1) FIT’s vertical integration with key components (i.e. vehicle lens) in auto camera module, and 2) further integration/synergies with Sharrp and other auto biz under Hon Hai Group, 3) boost Kantatsu auto lens shipment and profitability in the long term with FIT’s partnership. We expect FIT’s auto biz to deliver 50% revenue CAGR in next three years as part of its strategic focus ahead.
- Fair valuation; Limited NT earnings impact. Compared to Sunny’s 34.3x and Largan’s 19.9x FY19E P/E, we think the deal valuation of 18.8x FY19E P/E is fair, assuming that FY19 NP is two times of 1H19 NP (JPY584mn). We expect NT earnings impact is minimal (1-2% of NP). After deal completion on 8 Nov 2019, FIT will become 2nd largest shareholder with 28.4% stake (vs 1.5% before), while Sharp's stake will be reduced to 49.9% from 76.8%.
- Kantatsu’s handset lens is fast-growing. Apart from vehicle lens, Kantatsu is global No.3 handset lens vendor supplying high-end (13MP+) lens mainly for Apple and Huawei, which is one of the fastest growing segments backed by rising multi-cam/3D sensing adoption. We estimate Kantatsu handset lens capacity is 30-40kk/m, compared to Sunny’s 150kk/m and Largan’s 200kk/m. After Sharp’s being acquired by Honhai in 2018, Kantatsu have built two plants in China, and mid-term target is to ramp existing capacity by 2-3 times.
- Positioning for next growth phase; Reiterate BUY with TP HK$3.77. We believe FIT is on track to realize its long-term strategy of stepping into the automobile ADAS space. We estimate 2H19 sales /NP growth of 9%/23% YoY. Trading at 9.2x FY20E P/E, the stock is attractive with 14% FY19-21E EPS CAGR. Our TP of HK$ 3.77 is based on 11x FY20E P/E.
