Morgan Stanley gave Fuzhikang (02038.HK) a reduction rating, and the target price was lowered from 3.7 yuan to 2.7 yuan.

Morgan Stanley pointed out that Fuzhikang's profit warning fell short of expectations, mainly due to operational deleveraging and market share competition. The negative impact has overshadowed the increase in mainland OEM share and the expansion of the Indian market. The bank lowered the company's profit forecast for 2016-2018 by 63%, 50% and 65%, reflecting lower sales and gross profit expectations.

The bank believes that although Fuzhikang is still an intermediary for long-term investment in the Indian smartphone market, in the face of a decline in sales from customers such as Sony and Lenovo that is larger than expected. Coupled with the drag of price competition for metal cases, it is expected that the market will also lower its profit forecast. Although Fuzhikang's valuation is below book value and there is sufficient free cash flow, it is expected that stock prices will be under pressure.

The bank believes that the company's sales will record a recovery in the second half of 2016. As Huawei aggressively expands its market share, India's expansion will also help attract more outsourced orders. It is expected that Huawei will become the company's largest customer, with Xiaomi accounting for 26% and 20% of the company's sales, respectively. However, Daimo expects that the expansion of market share will bring pressure on pricing and profits. Under the influence of an unfavorable product mix, the operating profit margin for the next two years will be between 1.6% and 1.8%.