风华高科(000636)

Key points

Management guided MLCC capacity expansion to continue in 2019 andmovement to smartphones and automotive components.

2019 capacity guidance: 1) MLCC at +45% YoY to 22bn/month; 2)resistance at +43% YoY to 50bn/month; and 3) inductor at +50% YoY to3bn/month.

Management expects MLCC procurement volume from clients to slow downsoon, leading to lower ASP / GM; yet GM should be sustained at 30-40%.

Event

Fenghua’s management guided MLCC capacity expansion will continuein 2019, as will expansion of end-markets to smartphones and automotivefrom current home appliance and communication markets (base station,routers, switch, etc). Management guided capacity expansion in all threepassive components in 2019, post a slower expansion in 2018 on equipmenttightness. Management expects MLCC procurement volume from clients toslow down soon on inventory digestion; however, management is confident tohave GM to sustain at 30-40% vs 50-60% now.

2019 capacity guidance: 1) MLCC at +45% YoY to 22bn per month; 2)resistance at +43% YoY to 50bn per month; and 3) inductors at +50% YoY to3bn per month. The capacity expansion plan is announced in Oct 2017.

Key takeaways

MLCC price expected to fall, capacity expansion will continue, overseascustomers around 10% of MLCC revenues: Management expects MLCCprice to fall in the near term on inventory digestion. However, management isconfident GM will not fall back to 20-30% as before but will sustain at 30-40%(vs 50-60% currently), given the previous price was too low, and thecompetitive environment is now less intense. Capacity expansion will continuein 2019, based on the plan announced in Oct 2017. There’s no capacityexpansion plan for 2020 currently. Management is confident on demand, giventhe current small market share and expansion into new markets.

MLCC, expansion to smartphones and automotive markets: Forsmartphones, management highlights capability in small-size MLCC forsmartphones, such as 01005 type, while capacity is the main reason it is not inleading smartphone brands yet. For automotive, management highlights it willtarget the non-power / non-balance systems initially, such as in-vehicleinfotainment system, displays, speakers, air conditioners, etc. These MLCCproducts’ quality is required to be higher than those in home appliances, asautomobiles operate in more demanding conditions (high-speed movement,frequent vibration, unstable temperature, etc.)

Resistors - not much of a price increase in 2018, now facing fallingprices: Management said prices of resistors have dropped 20% in the pastone month; however, it is confident GM will expand to 40-50% in coming years(vs 32% in 1H18) through higher automated production rate, better costcontrol, and manufacturing process.

Financials

The stock is trading at 14.0x/11.0x 2018 / 19E PE with a 13% EPS CAGR in2018-20E, based on Bloomberg consensus estimates.