Luxshare announced on 17 July that Luxshare and its parentco will acquire 100% of Wistron's two subsidiaries in Kunshan for a deal value of RMB3.3bn. Luxshare will invest no more than RMB600mn (7.2% of 1Q20 cash) for 18% stake of the assets. We think it will allow Luxshare to expand into iPhone assembly business as No.3 supplier (7-10% of share) behind Foxconn and Pegatron, and it is positive to Luxshare in long term given greater synergy with its other iPhone components (acoustics/haptics/wireless/LCP) and earnings upside after turning Wistron's OEM biz into profitability. We lifted FY20-22E EPS by 1-11 % to reflect better AirPods/Watch sales but does not factor in financial impact of this transaction. Reiterate BUY and lifted TP to RMB 74.2 based on rollover 42x FY21E P/E.
Long-term synergy with Apple ecosystem; Limited financial impact in near term. We think the deal is a milestone for Luxshare to become a best-in-class vertically-integrated Apple supplier covering both assembly and components for iPhone, AirPods and Watch. Leveraging its strong partnership with Apple, we think Luxshare will continue to gain share on existing iPhone components, such as acoustics, haptics, wireless charging and LCP modules. Given that Wistron’s iPhone OEM remains loss-making and no consolidation is required for Luxshare’s 18% stake, we expect limited financial impact in FY20-21E and we have not included in our forecasts yet.
Implications to iPhone OEM supply chain. We estimate Wistron currently accounted for 7-10% share allocation of total iPhone shipment, lagging behind Foxconn/Pegatron (60%/30% share). After deal is closed by end-FY20, we expect Wistron will focus on iPhone OEM in its India plant, while Luxshare will start to expand share in iPhone OEM in China, backed by its vertically-integrated supply chain and strong execution capability.
Raise FY20-22E EPS by 1-11 % for better AirPods/Watch. In view of stronger AirPods/Watch demand and more positive iPhone outlook, we lifted FY20-22E EPS by 1-11% as we estimate Luxshare’s AirPods shipment to reach 69mn/85mn and Watch sales to reach RMB 6bn/9bn in FY20/21E.
Beneficiary of Apple supplier diversification; Raise TP to RMB 74.2. Our new TP of RMB 74.2 is based on rollover 42x FY21E P/E given strong earnings CAGR and promising growth profile in iPhone/AirPods/Watch. Upcoming catalysts include stronger AirPods and 5G iPhone launch.
