Investment suggestion
We expect the company's net profit per share to increase significantly by 222.8% to HK $0.23 in 2018, mainly due to 1) the one-time full provision of HK $550 million for bad and doubtful debts caused by Letv Mobile. 2) 2H18 of Huizhou 4.5 generation line will achieve a quarterly turnaround and thickening points will account for the performance of the associated company. We believe that the company's non-smartphone business, which mainly includes on-board displays, will further expand its revenue share, from 25.7% in 2017 to 38.1% in 2019. As the vehicle panel has the advantages of 1) unit price and 2) high supply chain barriers (compared with consumer electronics panels, vehicle panels generally enter the vehicle factory or take a longer time for customer verification, and the products are not easily replaced by competitors after entering the supply chain), we believe that the differentiation of the company will bring steady revenue growth from 2018. We raise our target price to HK $4.14 and give a recommended rating based on 18.0 times 2018 earnings. The reasons are as follows:
Differentiated development, transformation of vehicle-specific business: the automobile industry supply chain has the characteristics of high entry barriers, low supplier replacement rate and high product unit price. 1) the development prospect of vehicle panel market: black and white screen to color screen, increasing number of each vehicle, large screen (from 10.1 "at present to 15.6" in 2019), customization. 2) the company's market share is expected to increase: the company plans to use 50% of the production capacity of Shanwei and Renshou 5th generation line for on-board display business. We expect 2016-2019 CAGR shipments of vehicle panels to be 37.8%, with a market share rising from 6.4% in 2016 to 12.6% in 2019.
Huizhou production line 2H18 single-quarter turnaround, thickening investment income: the company Huizhou 4.5 generation line 1H17 loss of 270 million Hong Kong dollars, the company expects Huizhou production line to achieve a quarterly turnaround in 2H18, 2019 full-year profit. After the turnaround of the production line, the company's non-operating income will be greatly increased, and we estimate that it will account for 390 million of the associated company's revenue in 2019.
What is the biggest difference between us and the market? The stock price has fully reflected the negative, we are more optimistic about cutting into the vehicle display market, and the company will actively seize the market share in the future.
Potential catalyst: Xinli Shanwei A shares listed, expected to be completed in early 2018.
Profit forecast and valuation
We expect the company to have a net profit of HK $19,000,000, or HK $0.23 per share, with a target price increase of 12.2% to HK $4.14, which is at the top of the company's historical valuation range of 4.0-20.0 times based on 18.0 times 2018 price-to-earnings ratio.
Risk
The customer expansion of the vehicle display screen is not up to expectations; the good rate of the panel production line and production capacity climbing are lower than expected.