Sunway released full set of 1Q21/FY20 results with net profit growth of +84%/-5% YoY, largely in-line with its earnings preview earlier, but we are disappointed by GPM decline to 21.4%/21.2% in 1Q21/4Q20 (vs 40.5%/24.0% in 3Q20/1Q20). While we remain positive on revenue outlook, we are cautious on near-term margin pressure due to rising competition and higher mix of lower-margin wireless charging products. We cut FY21/22E EPS by 36-37%, and downgrade the stock to HOLD given lower earnings visibility and margin pressure. We cut TP to RMB29.9 based on the same 31x FY21 P/E.
- Sharp drop on 4Q20/1Q21 GPM. Although 4Q20/1Q21 revenue was solid at 32%/54% YoY growth, we are cautious on GPM decline to 21.4%/21.2% (vs. 24.0%/34.4%/40.5% in 1Q/2Q/3Q20), mainly due to 1) rising competition on traditional antenna products; 2) delayed progress in 5G LCP antenna; 3) higher mix of lower margin wireless charging products. We believe margin pressure will remain in the near future given 1) no signs of easing competition in traditional antenna products; 2) low yield and rising material costs for new products given early stage of development; 3) in unfavorable sales mix with fast-growing wireless charging segment.
- Positive outlook for 5G antenna upgrade and wireless charging. Backed by smartphone demand recovery and 5G upgrade cycle, we remain positive for Sunway’s LDS antenna and wireless charging businesses, as we believe Sunway will benefit from share gain in 5G antenna and wireless charging adoption (cancellation of in-box chargers). Overall, we lowered our FY21/22E revenue by 6%/9% due to progress delays in new LCP antenna products.
Downgrade to HOLD on margin pressure. We adjusted our estimates and lower TP to RMB29.4 (same 31x FY21 P/E) to reflect more conservative margin assumptions. We expect near-term pressure on stock price given intense competition. Potential risks include slower-than-expected market share gain and delay in 5G upgrades.
