聚光科技(300203)

Buy on recent dip

The solid 3Q and stock buyback announced today reaffirm our positive stance onthis stock. With the environmental monitoring equipment (EMS) cycle expectedto pick up in coming years and valuations (11x 2019E PE) trading down to thelowest historically, we strongly suggest investors buy on the recent correction.Management thought that 25x PE ss reasonable, which is how they come up withRMB35 uplimit of the buyback plan, but with 33% earnings growth over 2017-20,we think the stock deserves an even higher valuation. Our TP is Rmb42/share.Share buyback - a bit more details

The plan came out post market today. Total amount to be used for buybacks willbe no less than RMB100m but no more than RMB200m (about 0.6-1.3% of totalshares), with the purchase price up to RMB35/share (vs. RMB21/share currently).The company will use its own money plus borrowing to fund the buyback. Theactual buyback might take place as early as in November. The move, in ourview, clearly reflects the divergence between FPI’s solid fundamentals and softshare price. In this fragile market, we certainly welcome it and hope it can boostinvestors’ confidence, in turn.

3Q - a quick recap

3Q preliminary results were released last Friday. 9M net earnings are expected torise 25-35% YoY to RMB403-435m, accounting for 64-69% of full-year DBe (vs.average of 63% in past five years). Excluding one-off items (mainly governmentsubsidy), core earnings grew even stronger, up 37-48% YoY to RMB386-419m.On solid order momentum, we think the company is well positioned to meet ourfull-year estimate (RMB630m) and surpass the consensus forecast (RMB600m).

By segments, 9M orders for EMS maintained strength in 2H (60% YoY vs 70%+ YoY in 1H), which means revenue growth is likely to sustain. Full-year EMSorders can potentially reach more than RMB3bn (vs. RMB2bn in 2017), driven byaccelerated procurement from both government departments and corporationsdue to rising environmental concerns. Mgmt guided EMS orders growth to beabove 50%YoY in 2019/20. Other segments like laboratory analysis, industrialprocess analysis and water conservancy water intelligent system all deliveredsolid results and management expect their growth to be higher in 2H.

Reiterating Buy; risks

We retain our estimates post 3Q preliminary results and believe FPI is wellpositioned to ride on the industry upcycle in the coming three years. FPI's superiorR&D capability enables it to develop more accurate products at a faster pace andits better price-to-performance ratio for its products should enable it to furtherreplace MNCs. In addition, FPI continues to make efforts to improve its financialposition, through its internal cost control and shorter cash collection cycles.

We keep our DCF-based target price of RMB42 (WACC: 8.5% and TGR: 2%)unchanged and reiterate Buy. The valuation looks compelling at 23x 2019E P/E,against 33% EPS CAGR over 2017-20. Key risks: slower-than-expected growth forChina's EMS market and poor execution of investments.