Benefiting from wireline and wireless upgrades
Benefiting from wireline and wireless upgrades
We continue to view Luxshare (along with Sunway) as the top Buy in our ChinaA-share coverage. It continues to deliver solid results and a positive outlook.Long term, it benefits from USB Type-C and fast-charging upgrades on mobiledevices, which demand high quality cable/connectors. Some people areconcerned that wireless power charging (WPC) will likely disrupt Luxshare’score business (connectors/cables). However, Luxshare will likely benefit. First,wireline and wireless charging should co-exist for long time (given the gap incharging efficiency). Second, WPC requires a charging cable/pad (TX) and areceiving module (RX), for which Luxshare has a high market share.
2Q17 beats expectation on strong GPM
Luxshare reported 2Q17 EPS of RMB0.12 (+89% yoy; +26% qoq) on operatingprofits of RMB450m (+54% yoy; 24% qoq) on sales of TWD 4.4bn (+65% yoy;+12% qoq). EPS/operating profit beat our estimate by 14%/13%, with GPM up2.4ppt to 22.8% (vs our 20.5%), due to better product mix, capacity utilizationand stabilized ASP trend (on i-device components). In terms of segmentperformance, mobile device components led, reporting 156% yoy growth(market share gain + iPhone audio adaptor) in 1H17, followed by automotive(+29% yoy), telecom equipment (+23%) and PC (-9% yoy).
Promising 2H17 outlook, due to new iPhones and new components
Luxshare expects 3Q17 net profit to reach RMB339-RMB475m (up 21% to 70%yoy). We expect Luxshare could achieve the high-end of its guidance, as wesee multiple growth drivers ahead in 2H17, including: 1) a stronger new iPhonecycle (iPhone 8 with OLED, 3D sensing, WPC), 2) the addition of a wirelesscharging module (RX) and three-in-one (Wi-Fi/GPS/BT) antenna for newiPhones, 3) new Apple Watch (series 3) launch (Luxshare supplies the WPCpad) and 4) a rising penetration of USB Type-C and fast charging technologieson Android devices.
Valuation and investment risks
We revise our 2017-18E EPS by 7%/12% to reflect dollar content increase forthe iPhone and market share gains in the telecom/auto. We raise our targetprice from RMB20 to RMB24, based on 30x 2018E EPS (from 30x 2017-18Eaverage EPS). 30x PER represents 0.9x PEG (vs. regional peers of 0.8x PEG).We see the premium valuation as justifiable, given its improved sector growthoutlook and long-term market share gain potential. Downside risks include:slow USB type-C proliferation, price competition and forex fluctuations.
