Tongda announced 1H20 profit warning, stating net profit to decline 85-95% YoY, mainly due to 1) GPM pressure on intense competition and slower product upgrades given COVID-19 impact, and 2) net exchange loss in 1H20 (vs FX gain in 1H19). While Tongda’s 1H20 challenges are largely in-line with our concerns in our downgrade note on 19 March, we expect ASP/margin pressure will persist into 2H20E due to inferior casing product mix and weaker demand on automotive /electrical appliances/household & sport goods. We lowered FY20-22E EPS by 71%/19%/10% to reflect 1H20 miss, slower upgrade and weaker consumer demand. Maintain HOLD with new TP of HK$0.50 based on rollover 7x FY21E P/E (vs 7x FY20E prev.).
- 1H20 profit warning due to margin pressure and FX loss. Tongda stated 1H20 net profit will decrease 85-95% YoY, below our estimates of 55% YoY decline, mainly due to weaker GPM and FX loss. We estimate 1H20 revenue /NP to decline 8%/93% YoY, while GPM dropped to 15.7% (vs 21.1% in 1H19) given higher mix of lower-margin glastic casings (80% of 70mn 1H shipment) and limited upgrade in iPhone components.
- 2H20E outlook: casing and iPhone under pressure in near term. Despite rapid glastic casings adoption on 5G smartphones (esp. Samsung, Vivo), we believe 2H20E casing shipment will decline 5% YoY to 80mn (vs 84mn in 2H19) and blended ASP will remain weak with 22% YoY decline (vs -24% YoY in 1H20) given higher mix of lower-ASP glastic product. In addition, while we expect iPhone revenue to remain flattish in FY20E, product launch delays will drag GPM to 19% in FY20E (vs 22% in FY19). Overall, we estimate 2H20E revenue to decline 17% YoY (vs -8% in 1H20E), and top 4 clients will remain Samsung, Apple, Xiaomi and Vivo in 2020.
- Our FY20-22E EPS are 29-73% below consensus; Maintain HOLD. We cut FY20-22E EPS by 10-71% to factor in 1H20 miss, ASP/margin pressure and weak demand due to CONVID-19. We rollover to FY21E target P/E and revised down TP to HK$0.50 (from HK$0.53) based on 7x FY21E P/E (1-sd below hist. avg.) given weak earnings visibility and demand uncertainties. Current valuation at 7.7x FY21E P/E is fair in our view, and we recommend to stay on the sidelines. 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 in the meantime.
