Tongda issued a profit warning for FY2018, which expects profit attributable to shareholders to fall by 40-50 per cent to HK $5.03-603 million compared with FY2017, mainly due to sharp declines in metal shell shipments and gross profit margins. Glasstic products have not yet reached their target profit margins (more than 25 per cent). The contribution of 5G business to revenue will be maintained at a low level. Based on the revised earnings forecast, we use the DCF model to lower the target price to HK $1.00, which is equivalent to 7.5 times the forecast price-to-earnings ratio for 2019. Downgrade the rating to increase holdings.

FY18 forecasts a 40-50% drop in net profit due to the metal shell business. With smartphone shipments weakening, Tongda warned that its profit could fall 40-50 per cent to HK $5.03-603 million from FY17's HK $1 billion. In particular, all-metal shell products account for about half of mobile phone shipments, with a significant reduction in shipments, a decline in average selling prices and gross profit margins, increased competition and customer destocking, resulting in a write-off of inventory of about HK $100 million.

"Glasstic" (imitation glass plastic shell): although management believes that growth is strong, gross margin is expected to fall. Glasstic gross margin has fallen to 20-25%, below the 25% + target. Tongda is still optimistic that shipments could reach 8000-90 million units in 2019 (about 50 million in 2018), as Samsung / XIAOMI vigorously promotes the use of Glasstic mid-and low-end phones when exploring India / other emerging markets.

Apple Inc's contribution income is expected to reach 250 million US dollars in 2019. As orders for waterproof components from Apple Inc continue to increase, Tongda expects Apple Inc's contribution income to grow 25 per cent year-on-year to $250 million in 2019, as the waterproof components of the Macbook keyboard and iPad Pro charger shell make a full-year contribution. Tongda also plans to supply accessories (such as iPhone fast charging adapter) to Apple Inc in 2019.

At present, the contribution of 5G polarized base station antenna revenue is negligible. Since Tonda didn't start shipping until the second half of 2019, we expect the segment's FY19/FY21 revenue to be HK $30 million / HK $300m, with a gross profit margin of about 30 per cent.

Downgrade the rating to increase holdings. We expect revenue to grow by 15% and earnings per share to grow by 54% and 30% respectively in 2020 compared with the same period last year. The main growth drivers over the next two years include Apple Inc's business, the fast-growing Samsung business and strong demand for Glasstic from Chinese smartphone brands, while Tongda has a competitive advantage. Based on the revised earnings forecast, we use the DCF model to lower the target price to HK $1.00, which is equivalent to 7.5 times the forecast price-to-earnings ratio for 2019, with 15 per cent room for increase.