FIT's 2H19 revenue/net profit grew 7%/6% YoY, largely in-line with our/market expectations. Given COVID-19 outbreak and supply chain disruption, mgmt. stated 1) production was back to 90% level in early March, 2) 1Q20 orders will be delayed to 2Q20E, and 3) pricing of some components went up slightly due to disruption. We lowered FY20/21E EPS by 20%/23% to reflect COVID-19 impact and product launch delays, and we expect FIT's revenue/NP will recover to 5%/5% YoY in 2H20E. In longer term, we believe Belkin integration with improving operating leverage will drive earnings in FY21/22E, and 400G/ auto / smart home will become growth drivers ahead. Maintain BUY with new TP HK$2.64 based on lowered 10x FY20E P/E (vs 11x prev.).
- 2H19 in-line; softer GPM offset by R&D savings and tax benefits in Vietnam. FIT’s 2H19 revenue growth of 7% YoY was largely in-line, mainly driven by stronger iPhone, Belkin’s integration and automobile momentum, despite slower PC and optical module weakness due to trade dispute. Given change of optical module's business model with R&D transferred to Broadcom since 4Q19, FIT delivered lower GPM of 15.4% in 2H19 (vs 19.6% in 1H19), which is partly offset by lower R&D costs and tax benefits from factory expansion in Vietnam.
- 1H20 COVID-19 impact largely anticipated. Despite production decline in 1Q20, mgmt. stated that most of 1Q20 orders are postponed to 2Q20 rather than being cancelled. We expect negative impact mainly focuses on consumer electronic (mobile, smart accessories), while increasing adoption of work-from-home will boost demand for smart home products (routers, smart speaker) and datacenter (optical module).
- Expect earnings recovery in 2H but weaker 5G/ optical module ramp. We estimate FIT's revenue/NP will decline 15%/18% YoY in 1H20E and then return to 5%/5% YoY in 2H20E, driven by new product launches and demand recovery. However, we believe 5G network deployment delay in US will lead to weaker demand for 5G smartphones and optical modules.
- Maintain BUY; Lower TP to HK$2.64. We trimmed FY20/21E EPS by 20-23% and new TP of HK$ 2.64 is based on lowered 10x FY20E P/E due to weaker visibility. We now estimate 11% EPS FY20-22E CAGR, backed by 7% sales CAGR and improving product mix. Upcoming catalysts include new products from Belkin/private label and 400G launches in 2H20E.
