Upstream chip supplier AMBA confirms business growth momentum. Reiterate the buy rating
We think the market may be overreacting to AMBA's 4Q15E revenue guidance. Tiancai's stock price already reflects the downward pressure on GoPro sports camera shipments
Two major growth drivers in 2016: the Arlo Q (Netgear) home network lens and the wearable police camera (TASER) began shipping in December
Maintaining the buying rating, target price of HK$3.36, based on a 2016 forecast price-earnings ratio of 8.0 times
Tiancai's stock price has reflected AMBA 4Q15e's guidance on the slowdown in GoPro sports camera shipments
Ambarella (AMBA US), the only imaging semiconductor supplier to GoPro (GPRO US), announced 3Q15 results that were higher than market forecasts. Although 4Q15E's revenue guidance was lower than expected (revenue fell 7% year over year to a slight increase of 4%), this was in line with our forecast for GoPro 4Q15 shipments (down 19% year over year to 1.9 million units). We think that the market overinterpreted the impact of the slowdown in GoPro sports camera shipments on Tiancai. We believe that the problem with GoPro shipments mainly comes from the pricing and positioning of the Hero4 Session model. Hero4Session was launched in July, but GoPro has already lowered the product price twice in September and December, from the original US$399 to US$199. This professional-grade sports camera was manufactured by Taiwan's Chicony (2385TT), while Tiancai only made the consumer-grade series (HERO+) and did not do the HERO4 Session. AMBA also mentioned at the analyst meeting that Chicony's revenue contribution to AMBA had already dropped to 21% in 3Q15, far lower than 41% in the same period last year. We have also communicated with Tiancai's management. The company has yet to see any significant change in orders from GoPro on the 4Q15e. We expect Tiancai Sports Camera's revenue to increase 12% year over year in 2016 and launch at least 2 new models.
New source of growth: smart home+ dedicated camera
We believe IP cameras and dedicated cameras are Tiancai's new growth engine, and AMBA is also seeing a continuous increase in demand for home security and professional wearable cameras. We believe that the visibility of the new growth engine is gradually increasing. Based on: 1) Netgear (NTGR US), a next-generation indoor IP camera Arlo Q (with an average price above $40), began shipping in December, and with the addition of the outdoor IP camera Arlo launched last year, Netgear will become the only supplier in the world that provides indoor and outdoor security solutions; 2) orders for police wearable cameras launched in collaboration with TASER (TASR US) of the United States (average price above $80) have been strong, since October After the initial launch, the company had already received orders for nearly 25,000 units from the British Police Force within two months. We expect Tiancai's home imaging and specialty camera revenue to grow at a compound rate of 35% and 37% in 2015-17.
High ROE and dividend ratios but undervalued
Tiancai's 2016 forecast price-earnings ratio is 5.5 times, a 34% discount compared to peers. Considering the company's 30% ROE and 9% dividend rate, we think the current valuation is underestimated. Maintain the buy rating and maintain the target price of HK$3.36 based on the 2016 forecast price-earnings ratio of 8.0 times. Downside risks include reduced GoPro orders, lower than expected demand for IP cameras, and delays in the launch of new products.