We downgrade Tongda to HOLD (from Buy) and cut TP to HK$0.53 as we trimmed FY20/21E EPS by 48%/48% to reflect FY19 results miss, ASP/margin pressure and weaker Apple demand amid COVID-19 outbreak. Our TP is based on lower 7x FY20E P/E (vs 8x prev.) for slower earnings growth and order uncertainties. Our FY20E/21E EPS is 40%/44% below consensus. In longer term, we believe Tongda will benefit glastic adoption, 5G iPhone recovery and IoT opportunities in 2021, but it is too early to bottom fish now.
- Results miss due to margin pressure from casings/iPhone segments. Tongda’s FY19 revenue grew 3% YoY to HK$9.2bn, largely in-line with expectations, while net profit declined 26% YoY to HK$402, 38%/33% below our/consensus estimates. The miss was mainly due to margin pressure in 2.5D glastic/metal casing and limited upgrade in iPhone components.
- Conservative guidance on more glastic casing competition. Despite rapid adoption of glastic casings in Android smartphones (esp. Samsung, Vivo), mgmt. stated that intense competition over 2.5D glastic casing will lead to Tongda’s shifting focus to 3D/unibody glastic with better pricing (US$3.6/6, vs $2.4 for 2.5D). Mgmt. expected to ship 160mn casing in 2020 (vs 140mn in 2019) with 2.5D/3D/unibody glastic accounting for 15mn/70mn/50mn, and gross margin will stablise in 2020 due to better yield and scale. We estimate glastic revenue to grow 38%/3% in FY20/21E, accounting for 60%/60% of FY19/20E sales. We expect top 4 clients will be Samsung, Apple, Xiaomi and Vivo in 2020.
- iPhone: Expect flattish revenue in FY20E and IoT expansion in FY21E. While we expect revenue from iPhone segment to remain flattish in FY20E due to slower iPhone sales on COVID-19 impact, we are positive on Tongda’s product roadmap to focus on Apple’s IoT categories (e.g. Watch/ Airpod/AR wearables) in FY21E onwards. We estimate this segment will grow 2%/31% YoY in FY20/E21E.
- Earnings to recover in 2020 but outlook remains cloudy. We downgrade the stock to Hold as we cut FY20/21E EPS by 48%/48% to factor in casings ASP pressure and iPhone uncertainties due to COVID-19. We lowered TP HK$0.53 (from HK$1.15) based on lower 7x FY20E P/E (from 8x prev.) given lower earnings visibility and sector de-rating on demand uncertainties. We recommend to wait for better entry point before new products start to ramp.
