Innolight preannouned a weak 1Q21 net profit of RMB118-145mn, implying 6-23% YoY decline, and mid-point accounted for 13%/12% of our/consensus estimates. Excluding RMB27mn equity incentive fees, net profit would be RMB150-195mn, implying growth of -2% to 27% YoY. Despite a weak 1Q, we believe client demand will recover QoQ in 2Q/3Q20, as 200G products will start shipment in 2Q21 and domestic 5G deployment will kick off in the near term. We trimmed FY21-22E EPS by 16-17%, and revised our TP to RMB49.27 based on lower 34x FY21E P/E (vs prior 42x). Innolight now trades at trough valuation of 24.1x FY21E P/E, well below 34x P/E for 1-sd below historical average. Maintain BUY.
- 1Q21 net profit miss; expect demand recovery in Q2/Q3. Innolight’s 1Q21 net profit weakness is mainly due to 1) weaker demand on seasonality similar to last year; 2) delayed procurement of major clients and 2) one-time charge of RMB27mn of equity incentive fee. We believe the demand will pick up in 2Q, mainly driven by global capex from major cloud clients. Based on latest guidance from overseas cloud companies, we are positive on their FY21E capex: 1) Google expects server continues to be the largest driver of tech infrastructure and 2) Facebook expects FY21E capex to reach $21-23bn (vs. $16bn in FY20), driven by data centers and servers.
- Mgmt. increased stake as positive sign of future growth. On 25 Feb, senior mgmt. announced termination of their share reduction plan and some core employees will increase their shareholdings in the next 6 months, with total amount of RMB114-181mn. We think it is a positive sign to regain market confidence as the stock is now trading at a trough valuation of 24x 1-year forward P/E, the lowest level in past 3 years.
Maintain BUY; Trim TP to RMB49.27. We maintain BUY and adjusted our target price to RMB49.27 based on lower 34x FY21E P/E (vs prior 42x given recent sector de-rating). Trading at 24.1x FY21E P/E (lower than 1-sd below 2-year avg.), we think the stock is attractive, backed by 20%/25% revenue/ NP FY20-22E CAGR. Potential risks include weaker capex from global cloud companies, slower deployment of 5G infrastructure and ASP pressure.
