Shengyi Tech announced FY20 preliminary results with revenue/net profit of RMB14,687mn/1,663mn, up 11%/14% YoY, and earnings is 12%/10% below our/consensus estimates. By 4Q20, revenue/net profit grew +6%/-11.6% YoY. We believe the miss is mainly due to 1) weak telecom demand on slower 5G deployment in 4Q20 and 2) margin pressure with copper price hike given delayed cost transfer to downstream clients. We cut FY20-22E estimates by 10-13% to reflect more conservative assumptions, and trimmed our TP to RMB29.45 based on same 30x FY21E P/E. We expect Shengyi’s GPM to improve in next 1-2 quarters given that CCL price will start to rise in 1Q21E. Maintain BUY.
- Weaker 4Q20 due to slower 5G deployment and cost hike. With over 30% revenue exposure to telecom segment (2019: 30% of CCL, 47% of PCB), we believe the miss was mainly due to 1) weaker telecom demand with soft 5G BTS deployment in 4Q20, and 2) lower gross margin given delay of cost transfer (e.g. copper) to downstream clients. Given continued copper price hike, we expect Shengyi will start to raise CCL ASP in 1Q21E, and gross margin will gradually improve in FY21E.
- Capacity expansion of prepreg and CCL to drive future growth. Shengyi announced a new project last week to add 11.4mn sq m capacity for CCL and 36mn m capacity for prepreg. Total investment is RMB945mn which will be funded by own capital or financing. Total construction period will be 15 months, and production will start in 3Q22E. Shengyi expected new capacity to generate RMB1,319mn/143mn revenue/net profit each year. The new product lines will cover HDI, 5G communications, consumer electronics, auto and wearables. We believe it will help Shengyi to diversify revenue sources and accelerate expansion into consumer electronics and automobile markets.
- Maintain BUY with new TP of RMB29.45. We trimmed our FY20-22E EPS by 10-13% and lower TP to RMB29.45 (same 30x FY21/P/E), reflecting more conservative revenue and margin assumptions. Trading at 23.8x FY21E P/E, close to 1-sd below historical P/E, the stock is attractive in our view. Near-term catalysts include increase in CCL price and 5G BTS tenders. Potential risks include slower-than-expected transfer of material costs and delay in 5G upgrades.
