Earnings in the second half of 2018 are expected to be flat from the previous month.

We expect the performance of Jiantao Laminates to be flat in the second half of 2018. As the downstream electronics industry enters a downward cycle in the second half of the year, demand for the company's products is weak. The company's laminate business revenue growth momentum is relatively weak, but the company accelerated real estate sales to offset the slowdown in demand for laminates. We estimate that real estate sales may make a significant contribution to the company's revenue in the second half of 2018.

We further cut net profit forecasts for 2018 and 2019 by 8 per cent and 16 per cent to reflect weak demand and a slowdown in the downstream market. Maintain the recommended rating and lower the target price by 16% to HK $9.40.

Pay attention to the main points

Jiantao laminate 5G related products have begun to ship. Since the 3G era, the company has been working with Nokia and Ericsson. Due to strong customer demand, the company's 5G-related laminate products have been fully put into production. Incremental output accounts for about 5% of total revenue. The company is expected to continue to increase production in 2019.

The raw material production capacity of Jiantao laminate continues to increase as planned. Glass fiber production increased by 30% in 2018. The company plans to increase copper foil production by 20% in the first quarter of 2019 and achieve its expansion target in the second quarter of 2019.

We expect the company to maintain its dividend ratio above 50%. The dividend payout rate in the first half of 2018 is about 30%, and the company plans to maintain the dividend payout rate at more than 50%. We believe that the dividend yield will continue to be maintained at this level in the future.

Valuation and suggestion

We have cut our 2018 and 2019 net profit forecasts by 8 per cent and 16 per cent to HK $3.12 billion and HK $2.88 billion to reflect the pressure of weak demand. We have cut revenue forecasts by 7 per cent and 16 per cent to HK $19.58 billion and HK $20.35 billion in 2018 and 2019 to reflect slower growth downstream. The share price now trades at 6.5 times 2018 and 7.0 times 2019 earnings. Maintain the recommended rating and downgrade the target price by 16 per cent to HK $9.4, corresponding to a price-to-earnings ratio of 10 times 2019 and 43 per cent higher than the current share price.

Risk

The macroeconomic downturn led to weak demand in downstream industries; demand for 5G products was lower than expected.