Leading PCB supplier in data communication is expanding to enhance profitability Shengyi Electronics (SYE), established in 1985, was spun off to be listed by Shengyi Technology, a leading copper-clad laminate manufacturer in China. Positioned in high-end applications, SYE’s products are mainly used in communication, network equipment and servers. Its industry-leading tech know-how has led its adoption by well-known customers. Revenue came to RMB3.63bn in 2020, +17.35% yoy, and net profit was RMB439m, -0.44% yoy. Affected by rising raw material prices and weak downstream communications demand, 1H21 revenue was RMB1.69bn, -11.41% yoy, and net profit was RMB129m, -56.59% yoy. With self-financed and IPO investment projects coming to fruition, we expect incremental new capacity of 155,000/568,000/1.195m sq m in 2021/22/23E to contribute to profit. Mid-to-high-end boards: high tech barriers and stringent customer certification SYE’s main products, including communication equipment boards, network equipment boards and server boards, meet high requirements in terms of performance, stability and reliability. The bulk of them are multi-layer boards and high-frequency, high-speed boards. The overall technology threshold is high at the company, including special processing techniques for certain specific performance parameters. Industry concentration is high in communication equipment, network equipment and servers, products that have to fulfill stringent customer certification requirements. SYE’s products are well received in the market. Its customers include well-known names such as Huawei, ZTE, Samsung Electronics, IBM, Inspur Information, FiberHome and Nokia. Its technical strength is recognized in the industry, giving it a competitive advantage. This supports capacity digestion after its production expansion. 2H21 5G base stations buildout recovery bodes well for the medium to long term Affected by Sino-US trade friction, 5G construction pace adjustments, a core shortage and other factors in 2H21, 5G construction has been slowing significantly in China. The 5G buildout at China Radio and Television, China Mobile 700MHz, China Unicom and China Telecom 2.1G base station main equipment have stepped up recently to a small peak in 2H21. In the medium to long term, 5G base station construction will expand the market, in our view. With the number of 5G base stations currently at 1.56m in China, 175,000 in Japan, 500,000 in the US and 109,000 in South Korea, we are optimistic about the recovery in 5G station construction after Covid-19. The advancement of 5G SA construction and 5G distributed capacity deployment are driving rapid growth in the 5G core network market, which could increase to USD8.4bn by 2024E, at a CAGR of about 313%, implying enormous potential for 5G construction. Data center capex increases and server platform upgrades expand PCB market The cloud computing market continues to expand, data center capital expenditures are increasing, along with more investment into network equipment and servers, which would drive growth of network equipment and server shipments. We expect server shipments to drive a CAGR of 5-6% in 2021-24E. Shipments could reach 14.18m units in 2024E as server platform upgrades stimulate replacement demand. With PCB materials upgrades, more layers and higher process complexity, the value of a single terminal would increase 20-30%. We estimate a PCB market for servers of USD5.4-6.1bn by 2024E, on a CAGR of 10-13% over 2020-24E. Valuation and risks We expect net profit of RMB374m/548m in 2201/22E, -14.90%/+46.49% yoy. We assign a 25x PE in 2022E and initiate coverage with a BUY call and target price of RMB16.50. Risks include: 5G base station construction and core network construction not progressing as expected; network equipment boards, server/computer boards, industrial control / medical boards, consumer electronic boards falling below expectations; raw material price fluctuations affecting the company's profitability; production capacity construction progress slower than expected; and a less-than-expected pandemic impact. |
