Investment points: Dongjiang Holdings is an one-stop injection molding solution supplier, mainly engaged in the design and manufacture of injection moulds and the manufacture of main plastic products. After years of development and good executive ability, Dongjiang has successfully established a diversified and well-known customer base. We believe that Dongjiang will benefit from the strong growth of the mobile phone and smart home sectors, as well as the steady growth of automobiles and business communications equipment. The company's orders-on-hand as at the end of October exceeded HK $800 million, helping to maintain growth. We expect potential earnings as well as potential acquisitions and new investments to be a boost to the stock price. Dongjiang is currently valued at 12x 2017E and 10x 2018E P / E.
Car molds are growing moderately. Dongjiang's super-large standard moulds began to produce automotive dashboards, door panels and grille moulds after they were put into production in 2014. at present, automotive mold customers are mainly first-class parts suppliers from well-known automobile brands such as Mercedes-Benz, BMW, Volkswagen and Tesla, Inc.. As the delivery cycle of automobile moulds is usually 9-12 months, there are some fluctuations in Dongjiang's financial statements, such as the decline in capacity utilization due to the company's upgrading and integration of production lines in 2015. Looking ahead, management aims to maintain annual output growth of 10-15%.
Mobile phones and wearable devices are growing rapidly. Dongjiang supplies injection molding products to famous global brands such as Apple, Fitbit, Jabra and GoPro. For Apple, which sells mainly headphones, USB connectors and injection molded parts of charging devices, including wireless charging, management expects growth of 50 per cent this year and 30 per cent next year. Dongjiang also provides OtterBox with a protective shell for iPhone. Management expects revenue of about HK $4000-HK $50 million this year and has the opportunity to rise to nearly HK $100m next year. In addition, Dongjiang expects BEATS (supplier of accessories for Apple products) to bring strong growth.
Smart home is a new growth point. Nest (which has been acquired by Alphabet) and Google Home are Dongjiang customers. Smart homes accounted for only 5.6 per cent of Dongjiang's total revenue in the first half of this year, but management expects the contribution to rise to more than 10 per cent next year, mainly due to Dongjiang's increased share of Google Home orders.
Moderate growth in medical and personal care. Dongjiang, which supplies injection molding components for oral care products to Philips, expects revenue to grow by more than 25 per cent this year and will continue to grow more moderately in the future.
Other plates. Polycom is a major customer in Dongjiang's commercial communications equipment business, and we expect to maintain steady growth in the future. The contribution of home appliances and digital equipment business to Dongjiang will gradually decline, mainly due to weak customer demand for end products.
The gross profit margin rose further. The gross profit margin of the automobile mold is higher than that of the precision mold, and we expect that the gross profit margin of the mold plate will rise further with the increase of the contribution of the automobile mold (34.8% in the first half of this year). In addition, with the further improvement of the product and customer structure, we expect the gross profit margin of injection molded products to increase from 30.7% in the first half of this year. We expect the overall gross profit margin for the whole year to rise to 34%, up from 32.3% in the first half of the year.
Risk factors: (1) the sharp rise in RMB exchange rate leads to higher costs; (2) delays in mold delivery; (3) low business visibility in the middle line, mainly due to products involving different industries; (4) low free circulation leads to less trading volume.
