Investment logic

With the high prosperity of the industry, the inflection point in the development of TWS headphones has arrived and can be expected in the future. With technological breakthroughs, Apple Inc's dominant market pattern began to be pried. This year, the market share of Q1-Q3 Apple Inc TWS headphones has dropped from 55% to 45%. Global mobile phone shipments have gradually stabilized and rebounded, which will lay the foundation for the growth of TWS headphones. At the same time, the stock mobile phone market also has great potential, especially those that support Bluetooth version 5.0 and remove the 3.5mm headphone Jack. At present, the Chinese market alone can contribute more than 200 million sets of TWS headphones with high certainty. TWS headphones have completed consumer education, low-cost white cards inspire consumers to seek novelty and experience consumption, realize the cultivation of user habits, and lay the foundation for penetration and shipments growth.

According to GFK data, the penetration rate of TWS headphones was 37.5% in 2018 and is expected to increase to 56.12% by 2020, and the industry will achieve a compound growth of 43%.

Old customers are flexible and new customers are developing. The company focuses on headphone manufacturing as its core business, accounting for 93.1% of the related business. Compared with its peers, the company has a relatively large volume of income, a high cash content of net profit and a certain bargaining power in terms of core customers. Harman, the largest customer, accounts for nearly 50% of its revenue. In recent years, its contribution income growth rate is higher than that of the main income growth rate in the same period, and has strong growth flexibility.

In 2016, the company cooperated with Anke and ushered in revenue volume in 2018. In the first half of this year, Anke became the second largest customer with a contribution of 120 million yuan more than the whole of last year. The second new customers are in the business volume stage, and the related business revenue has a good foundation for growth. In the first half of this year, Huawei began to contribute revenue, while the company also entered Samsung's supplier list. It is optimistic that the company will expand new intelligent hardware customers and create new growth points on the basis of the original electro-acoustic brand customers.

The company's expansion capacity matches the high prosperity of the industry, and there is a strong certainty of future growth. The company's assets have not expanded rapidly in recent years, with fixed assets of 244 million yuan in the first half of this year, an increase of only 10.4% over the same period last year, and 247 million yuan at the end of the third quarter. Combined with the continuous increase in the proportion of production, marketing and outsourcing production of the company (2016-1H2019 is 38.57% and 63.45% respectively), the company has insufficient production capacity at this stage. Next year, the company's Vietnam factory will release 400 million yuan of production capacity, and IPO investment capacity will also be fully released the year after next.

Capacity expansion overlays the industry's high-profile demeanor, and the company's business growth has a high degree of certainty.

Valuation and investment advice

The company's core customer income is highly flexible, the second new customer order volume, new development customers began to contribute income.

Next year, the company's Vietnam factory capacity release, in the TWS headphones high scene demeanor, the scale of rapid expansion with high certainty. We predict that the EPS of the company from 2019 to 2021 will be 0.80 EPS 1.21111.79 yuan respectively, the first coverage will be 55 times PE valuation in 2020, corresponding to the target price of 66.55 yuan, the company will be given an "overweight" rating.

Risk hint

The risk of global sales of TWS headphones falling short of expectations; the risk that the company's capacity expansion is not as expected; the risk of losing major customers; and the risk of large exchange rate fluctuations.