We hosted a NDR call with Shennan mgmt. this week, and investors mainly focused on 5G telecom demand, laminate cost pressure, IDC/auto segments and capacity expansion. For FY20, Shennan reported revenue of RMB11.9bn (10% YoY) and net profit of RMB1.4bn (16% YoY), in-line with our/consensus estimates, mainly driven by 8%/33% YoY growth in PCB/IC substrate and 4% YoY decline in PCBA. Looking into 2021, we expect PCB/PCBA to grow 15%/5% thanks to telecom recovery and improving product mix, while IC substrate will grow at 19% YoY on strong demand and supply tightness. We revised down our FY21/22E EPS by 18/14% to reflect cost pressure and lower ASP, and adjusted our TP to RMB97.8 based on lower 30x FY21E P/E. Maintain HOLD.
- Positive outlook for PCB demand on 5G rollout recovery and improved product mix. With 60% telecom exposure, PCB/PCBA segment delivered weaker growth of +8%/-4% YoY in FY20, given slower 5G BTS build-out in 2H20 after a strong ramp in 1H20, while IDC/auto products grew 58%/50% YoY. Looking into 2021, we believe PCB segment will regain its strength as 1) China 5G deployment will reaccelerate in 1H21E (3rd batch 5G BTS tender in Mar-Apr) and overseas demand is recovering as COVID-19 is easing; 2) Nantong (2nd phase) is expected to reach its full capacity this year and 3) product mix will continue to improve as auto/server demand remains strong.
- Capacity expansion on track for IC substrate segment. Shennan’s IC substrate clients mainly come from MEMS, fingerprint sensor, memory segments (30%/20%+/20%+ of substrate rev). As 2020 was a big year for semiconductor, IC substrate segment grew 33% YoY, and we expect strong momentum will continue into 2021 given solid demand and recent supply tightness. Mgmt. expect capacity of Wuxi plant will reach full utilization in 1H22E.
- Maintain HOLD with new TP of RMB97.8. We trimmed FY21-22E EPS by 14-18% for lower ASP/margin assumptions, and reduced our TP to RMB97.8 based on lower 30.0x FY21E P/E (vs prior 32.4x). We maintain HOLD and expect near-term pressure on the stock due to 1) price pressure on PCB de-spec for 700MHz 5G BTS and 2) rising laminate cost starting from late 1Q21E. Potential risks include lower 5G CAPEX from telco and raw material cost hike.
