Summary of the report

Function parts and structural parts work together, advanced local die-cutting suppliers. The company is one of the main die-cutting suppliers in Hong Kong, and has experienced continuous breakthroughs in new customers and new products for many years. At present, the company has basically formed a business structure dominated by consumer electronic functional devices, structural devices, optical components and heat dissipation components, and the genes of the world's first-class integrated suppliers of consumer electronics precision components have initially emerged. Among them, the structural device is a new business focused on the layout of the company after listing, which successfully achieved a breakthrough in 2019, helping the company to achieve rapid performance growth. At present, the application of 5G on the smartphone side has taken the lead in opening, functional devices and structural devices will usher in changes in varying degrees, and the market space will be expanded. For the company, the traditional functional device business will benefit from the increase in the value of a single product and grow steadily, while the structural parts business based on composite plates is expected to grow rapidly under the trend of accelerated penetration of 5G smartphones into the middle and low-end market. The current active layout of businesses such as wearable components, heat dissipation components, amorphous nanocrystalline materials and other businesses are also expected to contribute new incremental elasticity. The growth of the company in the next 2-3 years is worth looking forward to.

5G replacement wave opened, composite plate backplane to meet the opportunity to accelerate infiltration, fund-raising to expand production to strengthen competitiveness.

After post-processing, PMMA/PC composite plate has been able to achieve the appearance of glass-like effect, and the cost is much lower than the glass shell, so it is expected to become the mainstream scheme of demetallization of the back panel of middle and low-end 5G mobile phones. So far this year, although China's 5G smart phones have achieved a round of rapid penetration, and the mobile phone industry and capital market have given high expectations for the shipments of 5G mobile phones this year and next. But for Android brand manufacturers, on the one hand, middle-and low-end mobile phones are the main force of their shipments, and on the other hand, they need to face Apple Inc's competition directly in the high-end market. at the initial stage of penetration, how to reduce the price of middle and low-end 5G mobile phones, and then take the lead in competitors is the focus of the work, and this just gives the composite panel backplane the opportunity to give full play to the cost advantage. With the continuous increase of mid-and low-end 5G smartphone models and the further improvement of the overall permeability, the composite plate backplane market is expected to usher in a highlight moment of growth. Part of the company's additional funds will be used for the reconstruction of the consumer electronic structure production base and the 49% equity of Ates, which is an important measure to further strengthen the supply capacity of structural components and take the lead in the competition of 5G smart phone composite panel market in the future.

The price advantage of composite plate helps the Android Nuggets blue ocean market in Southeast Asia, and the construction of Vietnam base strengthens the supporting capacity of localization. As China's smartphone market has entered the stock game stage, Android brand manufacturers have set their sights on the Southeast Asian market. After nearly two years of layout, they have achieved good results. India, Vietnam and other markets have experienced a round of rapid growth after China's Android brand manufacturers entered, but limited by consumers' purchasing ability, the current Southeast Asian market Mid-and low-end models are still the absolute main force, and the success of major brand manufacturers is also closely related to the cost-effective pricing strategy. in this case, the composite plate backplane is expected to become one of the best assistants in the future Android Nuggets Southeast Asian market. At the same time, the company's core customers value the convenient geographical location, preferential policy support, cheap labor and expanding market scale in Southeast Asia, such as Vietnam and India. has gradually transferred the mobile phone assembly production base in China to the emerging areas of Southeast Asia. The company has used its own funds to complete the construction and renovation of the Vietnam factory, which will further strengthen the company's ability to provide localization packages to Android customers.

The application space of heat dissipation components will be greatly increased in the 5G era. In the 5G mobile phone, the amount of data transmission will be significantly increased, and the function will be more complex, which puts forward new requirements for the computing power and speed of the chip. at the same time, the density of chips, modules and components in the 5G mobile phone has greatly increased, which makes the heat dissipation problem become more serious. it is difficult to meet the heat dissipation demand by using graphite sheet alone, so it is necessary to introduce new heat dissipation components. In the 5G mobile phone released this year, "VC liquid cooling / heat pipe liquid cooling + graphite sheet" has become a more mainstream cooling system configuration, and it is expected to further introduce new cooling devices / materials with better cooling effect in the future. therefore, the value of components related to heat dissipation management will be clearly enhanced in smart phones. As a representative local supplier of functional components and structural components, Smart Power is expected to meet the needs of traditional core customers such as Samsung and OPPO after mastering the manufacturing technology of heat pipes, soaking plates and new heat dissipation components and having the capacity of mass production.

Earnings forecast and rating: cover for the first time and give a buy rating. 2018-2020, which is a very important integration for Smart Power, in the next three years, the company has completed the increment and improvement of its products from functional parts to exterior structural components, and customers have successfully shifted from relying solely on Samsung to balancing the share of multiple Android manufacturers. In the industrial application of composite panels, the company has established a stable and long-term cooperative relationship with major Android brands, which is an important starting point to help Android customers to achieve cost advantage to seize market share in Southeast Asia, Western Europe, South America and other markets. what's more, it is an important component that reduces costs but does not significantly reduce quality under the constraints of the current 5G smartphone cost pressure. Zhi Power has proved its strength with its excellent performance in the downstream brand client. In the future 5G mobile phone application mature cycle, the company is expected to continue to write brilliant in the field of functional and structural devices, such as the current focus on heat dissipation components and wireless charging components, and the downstream space will also be extended from consumer electronics to new energy vehicles and other related fields. The company's net profit from 2020 to 2022 is expected to be 130 million, 287 million and 378 million respectively. The current stock price corresponds to PE 33.09,15.02 and 11.42 times. If considered according to Ates 100% consolidated table for the whole year, the net profit in 2020 is expected to reach 170 million yuan, and the current stock price corresponds to 25.29 times PE. As the global 5G smartphone penetration continues to increase and the COVID-19 epidemic is gradually brought under control, the company's growth flexibility has recovered rapidly in the third quarter, covering the company for the first time and giving it a buy rating.

Risk tips: (1) repeated outbreaks in Southeast Asia have led to another decline in smartphone shipments in this market, and the resumption of work at the company's local factories has been blocked; (2) the weak global economy has led to the penetration of 5G mobile phones that is not as expected; and (3) increased competition in the composite backplane industry has weakened profitability.