Strong growth continued in 2018. We participated in the reverse roadshow of Dongjiang Group in Shenzhen on April 20 and were optimistic about the overall performance outlook for 2018. Following solid results in 2017, management expects revenue to grow by more than 20% in 2018, thanks to: 1) more customers at the mobile and wearable level (e.g., Beats, MagicLeap), 2) rapid growth in smart home customers (e.g., Nest,Google Home), and 3) solid growth and automotive recovery trends in the healthcare industry. With regard to the 1Q18 guidelines, management expects revenue growth to be close to the full-year guidance.
Mobile phones and wearables (20% of revenue in 2017): customers expand to Autobox/ Beats/Magic Leap. Although Apple Inc remains the largest customer in the segment (sales are expected to grow 30 per cent year-on-year in 2018 based on continued orders), management expects revenue from wearables from Autobox cases and Beats to grow rapidly from 40 million / 5 million in 2017 to 60 million / 70 million in 2018, driving 25 per cent year-on-year growth in 2018. In addition, the company recently received an order for Magic Leap AR equipment, which is expected to be released in 2018, fully reflecting the company's market recognition in this field.
Smart home (11% of revenue in 2017): product launches that benefit from Nest and Google Home. Following a 132% year-on-year increase in revenue in 2017, the company expects strong growth in 2018. Benefiting from the rapid penetration of smart home products, the company believes that demand from major customers in this segment will continue to be strong in 2018, including Nest and Google Home, both of which are expected to achieve more than 50% revenue growth in 2018.
Keep profit margins improving through investment in robots and automation. Management believes that the expansion of gross profit margin (33.8% in 2017, compared with 26.1% in 2015) is mainly due to the company's continued investment in production line automation and efforts to develop smart production. The company plans to invest HK $230 million in 18 years to expand automation equipment (HK $170 million in 2017), which is expected to further increase the gross margin of the mold manufacturing and plastic products business.
Exogenous growth through mergers and acquisitions will continue for 18 years. After several successful acquisitions in China / Europe / US over the past few years, the company said that mergers and acquisitions were an important part of its strategy and that it currently had HK $500 million in cash and would continue to look for acquisition opportunities. Potential targets should meet three criteria: 1) injection molding as the core business; 2) large-scale and profitable; and 3) potential synergy of production capacity, customers and technology.
Valuation. According to Bloomberg's consensus forecast, the company's current FY18E price-to-earnings ratio is 12.9 times earnings per share, up 29% / 21% from 2018 / 19. Based on the strong product stock, customer product launches and continuous improvement in ROE, we expect the valuation to be further revalued.