中航光电(002179)　

Recent development and outlook by end-market

Defense: Jonhon sees limited impact from China's military reform in theform of tenders for military-grade connectors as it has already adoptedopen bidding in the past. That said, due to organizational reshufflingwithin the military headquarters due to the reform and the fact that orderflows are typically slow in the first two years during a five-year-plan period,the company did see a slowdown in terms of defence order intakes in2017. However, management expects new orders to improve in 2018 (2Hin particular, given the seasonality) and to further take off in 2019-20.

Telecom: Management expects 5G to become a significant growth driverin 2019-20 as the capex cycle kicks off. Before that, management doessee some pressure for its existing product portfolio as 4G capex continuesto trend down. This, however, could be mitigated by the surging exportorders, which saw 30%+ growth in 2017 (overseas customers include:Samsung and Nokia).

NEV: New order growth significantly picked up in 2H17 and theproduction schedule for 4Q17 was extremely busy. Overall, managementexpects this segment to continue to be a key growth driver in the comingyears. Moreover, cooperation with Tesla has been progressing well,with its high-voltage connector product likely entering Tesla’s suppliercatalogue, in addition to the existing EV charge coupler.

New capacity and new products

New products: High-speed connectors and liquid-cooling systems are thetwo major new products Jonhon is rolling out. For high-speed connectors,management estimates that China's market size is at the Rmb billionlevel, and it is currently dominated by foreign brands. For liquid-coolingsystems, is estimates the total market size for defense application ataround Rmb0.8-1bn p.a. while the market size for civil application couldpotentially reach the tens of millions level. The switch from fan-cooling toliquid-cooling will be a structural trend.

New capacity expansion: The Luoyang Phase III will be fully completedby 2019, with 50% of the capacity likely to be rolled out in 2018. Upon fullcompletion and utilization, the plant will contribute Rmb1.3bn in revenue.This new plant will be mainly used for NEV, high-speed connectors andliquid-cooling systems. Moreover, the company recently announced itsplan to build Luoyang Phase IV, which will likely kick off construction in2018 and be put into use after 2020. The company estimates revenuecontribution from this new plant to be up to Rmb1bn.

Revenue target under management incentive plan implies a robust 2018

The first batch of incentive shares (issued in 2017) will be due for unlocking in2019, when key financial metrics for the preceding years will be reviewed againstits targets under the plan. In particular, the revenue target is set at a 15% CAGRfor the preceding three years, which implies a significant acceleration from arelatively slow 2017.