We upgrade Tongda to BUY (from Hold) with TP HK$0.56 on same 7x FY21E P/E, after we raised FY20-22E EPS estimates by 11-75% to reflect recent iPhone 12 strength and Xiaomi/Samsung’s share gain in 2H20E. Being Xiaomi/ Samsung’s largest glastic casing supplier (30%/15% of sales) and Apple’s major waterproof component vendor (20% of sales), we estimate Tongda’s net profit will rebound with 235%/62% YoY in 2H20E/2021E. We recommend investors to accumulate on recent weakness given upcoming earnings turnaround and its distressed valuation at 5.1x FY21E P/E (1-sd below 5-yr hist. avg. P/E). Major catalysts include stronger 4Q20, iPhone 12 upside and Apple order wins.
- Expect 4Q20E sales to grow 18% YoY on iPhone 12 delay. Tongda reported 9M20 sales of -0.5% YoY (vs 2% in 1H20) as handset business (casing & Apple) was largely flattish at 1% YoY given iPhone launch delay. Following a slower 3Q20, we expect Tongda’s 4Q20E sales to accelerate with 18% YoY (vs -4%/+5% in 3Q/2Q20), driven by strong iPhone 12 demand and Xiaomi/Samsung restocking due to Huawei weakness.
- Benefiting from iPhone 12 and Xiaomi/Samsung’s share gain. Given 5G smartphone adoption and Xiaomi/Samsung’s share expansion, we revised up Tongda’s FY20E casing shipment to 160mn (from 150mn) with flattish 2H20E blended ASP at RMB38 (vs RMB39 in 2H19). In addition, we are more positive on iPhone 12 demand in 2H20E, and we believe Tongda will benefit from recent iPhone order upward revision. We raised Tongda’s Apple revenue by 14% to RMB1.2bn with GPM of 22% in FY20E (vs 19% prev). Overall, we estimate 2H20E revenue/NP to grow 7%/235% YoY (vs +2/-91% YoY in 1H20).
- Upgrade to BUY on Xiaomi/Samsung/Apple strength; Lift TP to HK$0.56 (36% upside). We raised FY20-22E EPS by 11-75% to factor in higher GPM, recent iPhone 12 strength and Xiaomi/ Samsung’s share gain in 2H20E. Our new TP of HK0.56 is based on higher EPS and same 7x FY21E P/E. We think current valuation of 5.1x FY21E P/E is extremely attractive (1-sd below 5-year hist. P/E) as we expect Tongda’s earnings growth to turn around in FY21E. Looking ahead, we believe Tongda will benefit from glastic adoption, 5G iPhone upcycle and expansion into Apple’s wearables (AR/VR/TWS) in 2021E. We recommend to accumulate ahead of further order wins from Apple.
