聚光科技(300203)

Overnight, FPI unveiled its second round share buyback plan. We like it. Throughthis innovative scheme (first case in A share), the share price would moreaccurately reflect FPI’s underlying value going forward while its operations couldalso improve. Stock has rebounded +30% from the lows in mid-Oct (vs. +4% forSME composite over the same period), but it is still substantially undervalued,in our view, trading at 13x forward P/E vs. 33% earnings CAGR over 2017-20E.Given the valuation, we would not rule out the possibility that FPI’s two founderswould also increase their stakes through purchase from the secondary market;Buy, with TP of RMB42.

A bit more detail on the plan

FPI will buy back shares each year , with accumulative stakes not exceeding 10%of issued shares. The size of buyback each year will be 15-30% of net earningsin the previous year . These purchased shares will be used mainly for employeeincentives. FPI’s board gave the green light on this plan on 28 November andshareholders’ voting will take place on 18 December (2/3 passing ratio for currentshareholders).

We like it a lot

The most innovative part of this plan (first case in A share) is that it makes sharebuyback a systematic project. Currently, most company’s share buybacks arenot only one-off but also short-term, with the main purpose of bolstering stockplunge. Given their nature, these plans often fail to support share prices andinvestors' response is also increasingly muted to them. By making the buybackplan systematic, regular , and a bit longer-term, we believe share prices would bemore likely to track a company’s underling value.

In addition, these buyback shares will be largely used to reward employees, butwill be linked to their performance. This could help to improve the company’soperations as well. For example, FPI currently is focusing on improving its cashflows. As a result, whether and how many shares a sales person can get not onlydepends on his/her overall sales, but also on A/R collections.

Valuation and risks

We use DCF to value FPI given its stable cash flow. Our target price of RMB42assumes a WACC of 8.5%, which is based on a 3.9% risk-free rate, a 5.6%equity risk premium and a beta of 0.9x. We have also assumed a terminal growthof 2% to reflect its long-term horizontal expansion potential. Our target pricecorresponds to a P/E of 30x/24x on 2018E/2019E, largely in line with its long-termhistorical mid-cycle level.

Key downside risks include: 1) slower-than-expected growth for China'sEMS market; 2) slower-than-expected import substitution progress in China'slaboratory analysis equipment market; and 3) poor execution of M&As and PPPprojects.