Summary of the report
Pay close attention to the opportunity of penetration and promotion of metal shell of mobile phone. IDC estimates that global smartphone shipments of 2016-20ECAGR will be only about 3.5%, to 1.7 billion units in 2020E. We believe that the era of high growth of global smartphones is over, and under the fierce market competition, major mobile phone brands will increase their investment in product innovation, product differentiation and user experience. Among them, product appearance innovation will lead more consumption upgrading points. Tongda Jiyi is the leading shell supplier of consumer electronics products in China. It has mastered the technology of plastic, metal, glass and new materials. It is estimated that the market share of domestic smartphone shell is about 22%. The main customers include Huawei, OPPO and XIAOMI. We believe that it has become a trend for plastic mobile phone cases to be replaced by metal. It is expected that the penetration rate of metal cases in global smartphones will gradually increase from 25.3% in 2015 to 65.4% in 2019E, driving the company's mobile phone business 2017E-19E revenue to 23.6% CAGR to about HK $10.25 billion in 2019E.
3D glass, waterproof accessories and automotive businesses are the new growth engines. We expect that the following three business segments will provide a strong driving force for the company's future revenue: 1) 3D glass-curved glass will begin to be used in a number of flagship mobile phone brands because of its "high appearance" and "good touch". At the same time, it can also bring more room for optimization of mobile phone function design, which is expected to achieve rapid penetration, and we conservatively expect that related business will bring greater revenue contribution to the company in 2018E. 2) Waterproof accessories-the company entered the Apple Inc industrial chain in the third quarter of 2016, mainly providing LSR components and O-ring rubber bands, with a share of about 15%. It is expected that 2017E/18E/19E shipments will reach 46 million / 89 million / 143 million units respectively. 3) Automobile interior decoration-the company mainly supplies decorative parts in the car, such as door trim, light panel, instrument panel trim, etc., the main customers include BYD, Ford, Volkswagen, Geely Automobile, Guangzhou Automobile and so on. It is expected to enter mass production in the next two years.
Forecast 2017E-19E net profit CAGR will reach 25.9%. We expect the company's 2017E-19E revenue to reach 22.9% CAGR to HK $14.58 billion in 2019E, of which mobile phones / appliances / laptops / hardware / communications equipment and other business revenues account for 70.3%, 4.8%, 6.3%, 3.6%, and 15.1%, respectively. We expect that the overall gross profit margin will gradually increase from 24.1% in 2016 to 26% in 2019E, driven by the increase in the share of new business with higher gross profit margin; the rate of sales expenses will be maintained at about 10%. The above will drive the company's 2017E-19E net profit CAGR to 25.9%. The net profit of 2019E will reach HK $2.01 billion and the net profit margin will reach 13.8%.
Give a "buy" rating for the first time. The company's current 2017E/18E dynamic price-to-earnings ratio is only 10.6 Sterling 8.4 times. We believe that I) continued penetration of metal cases in smartphones; ii) gradual increase in shipments of three major new businesses; and iii) gradual release of results will be the catalyst for stock prices to rise. We price at 0.5 times 2017E-19E PEG (or 13 times 2017 E dynamic P / E) with a target price of HK $3.16, with a "buy" rating for the first time.
Risk hint: smartphone metal case penetration is slower than expected; global smartphone industry shipments are lower than expected; market competition is more intense than expected, dragging down gross profit margin.