Deutsche Bank Markets Research
Rating Company Date 5 January 2017 Buy JONHON Optronic Company Update Asia China Reuters Bloomberg Exchange Ticker Price at 4 Jan 2017 (CNY) 38.65 Industrials 002179.SZ 002179 CH SHZ 002179 Price target - 12mth (CNY) 50.00 Manufacturing 52-week range (CNY) 45.20 - 27.55
Shenzhen Index 2,078
From a discounted defense name to a Nick Zheng, CFA Sky Hong, CFA premium connector industry leader Research Analyst Research Analyst (+852 ) 2203 6198 (+852 ) 2203 6131 Best proxy to China's weapon modernization; civil market to drive re-rating [email protected] [email protected] Rising electronic content in modern weapons is a secular trend and makes Jonhon our preferred way to invest in the China army modernization theme. On top of that, our deep dive into China’s connector market leads us to believe Key changes Jonhon is well positioned to expand its presence in the civil market. In the Sales (FYE) 6,008 to 5,970 ↓ -0.6% absence of an asset injection story, Jonhon has long been known as a “cheap” Op prof 16.1 to 15.5 ↓ -3.3% outlier in the A-share defense sector, but its successful transformation into a margin (FYE) connector industry leader should help drive a re-rating; reiterating Buy. Net profit 785.4 to 759.1 ↓ -3.4% (FYE) Defense business to grow at c.2x China’s weapon spending Source: Deutsche Bank With rising electronic content in modern weapon systems and Jonhon’s increasing penetration of non-aviation defense markets, we expect the Price/price relative company to record a CAGR of 22% for its defense business over 2016-20, nearly double our projected weapon spending growth for China (12% CAGR 60 during the same period). We also see upside potential from its newly-launched 50 integrated product (i.e. aircraft equipment racks). 40 30 Civil business to post a 26% CAGR vs. 10% for its addressable market 20 China’s civil connector market is big but highly fragmented. Jonhon has 10 positioned itself in the high-end segment, with a unique focus on harsh 1/15 7/15 1/16 7/16 environments, where the competitive landscape is more favorable and import JONHON Optronic Shenzhen Index (Rebased) substitution potential is substantial. We expect the total size of Jonhon’s focused civil markets to post a 10% CAGR to reach Rmb64bn by 2020. With a Performance (%) 1m 3m 12m strong pipeline of new products and accelerating import substitution, we Absolute 4.5 -4.2 10.5 project a 26% CAGR for its civil sales over 2016-20, accounting for c.50% of Shenzhen Index -4.7 -0.5 -6.3 total by 2020 vs. 45% in 2015. Strong gov’t support, new capacity rollout and Source: Deutsche Bank its management incentive scheme should facilitate civil market penetration.
Reiterating Buy and target price of Rmb50; risks We make minor changes to our earnings forecasts. Our target price remains at Rmb50, which is based on a 2017 P/E of 30x (vs. c.30% EPS CAGR over 2017- 18E), largely in line with its historical mid-cycle level and the average of its A-share listed connector peers. Key risks include an unexpected decrease in China’s military spending and slower-than-expected civil market penetration.
Forecasts And Ratios Year End Dec 31 2014A 2015A 2016E 2017E 2018E Sales (CNYm) 3,491.2 4,725.2 5,970.3 7,243.0 8,889.2 EBITDA (CNYm) 573.1 855.1 1,081.1 1,357.5 1,693.6 Reported NPAT (CNYm) 339.6 568.4 759.1 989.7 1,267.8 DB EPS FD(CNY) 0.56 0.94 1.26 1.64 2.10 OLD DB EPS FD(CNY) 0.56 0.94 1.30 1.69 2.14 % Change 0.0% 0.0% -3.4% -2.5% -1.5% DB EPS growth (%) 34.3 67.4 33.6 30.4 28.1 PER (x) 27.2 35.5 30.7 23.5 18.4 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close
______Deutsche Bank AG/Hong Kong Distributed on: 04/01/2017 18:12:37 GMT Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016.
5 January 2017
Manufacturing JONHON Optronic
Model updated:21 December 2016 Fiscal year end 31-Dec 2013 2014 2015 2016E 2017E 2018E
Running the numbers Financial Summary Asia DB EPS (CNY) 0.42 0.56 0.94 1.26 1.64 2.10 Reported EPS (CNY) 0.42 0.56 0.94 1.26 1.64 2.10 China DPS (CNY) 0.20 0.10 0.10 0.19 0.25 0.32 BVPS (CNY) 5.6 6.2 5.6 6.8 8.3 10.1 Manufacturing Weighted average shares (m) 582 603 603 603 603 603 JONHON Optronic Average market cap (CNYm) 6,441 9,248 20,194 23,287 23,287 23,287 Enterprise value (CNYm) 6,489 9,634 20,328 23,316 23,126 22,922 Reuters: 002179.SZ Bloomberg: 002179 CH Valuation Metrics P/E (DB) (x) 26.3 27.2 35.5 30.7 23.5 18.4 Buy P/E (Reported) (x) 26.3 27.2 35.5 30.7 23.5 18.4 Price (4 Jan 17) CNY 38.65 P/BV (x) 2.29 2.92 6.73 5.68 4.68 3.82
Target Price CNY 50.00 FCF Yield (%) nm nm 1.9 0.9 1.5 1.6 Dividend Yield (%) 1.8 0.7 0.3 0.5 0.6 0.8 52 Week range CNY 27.55 - 45.20 EV/Sales (x) 2.5 2.8 4.3 3.9 3.2 2.6 Market Cap (m) CNYm 23,287 EV/EBITDA (x) 15.6 16.8 23.8 21.6 17.0 13.5 EV/EBIT (x) 19.1 21.0 28.4 25.1 19.5 15.3 USDm 3,348 Income Statement (CNYm) Company Profile Sales revenue 2,602 3,491 4,725 5,970 7,243 8,889 Jonhon Optronic develops and manufactures electric Gross profit 866 1,146 1,592 2,011 2,450 3,024 connectors, optical devices and cable components. EBITDA 417 573 855 1,081 1,358 1,694 Depreciation 70 97 109 129 146 169 Amortisation 7 18 30 25 26 26 EBIT 340 458 716 927 1,186 1,499 Net interest income(expense) -47 -35 -51 -37 -27 -16 Associates/affiliates 4 16 21 38 51 66 Exceptionals/extraordinaries 0 0 0 0 0 0 Other pre-tax income/(expense) 6 -1 9 0 0 0 Profit before tax 304 438 695 928 1,210 1,549 Price Performance Income tax expense 46 63 91 122 159 204 Minorities 13 35 35 47 61 78 60 Other post-tax income/(expense) 0 0 0 0 0 0 50 Net profit 244 340 568 759 990 1,268
40 DB adjustments (including dilution) 0 0 0 0 0 0 30 DB Net profit 244 340 568 759 990 1,268 20 Cash Flow (CNYm) 10 Jan 15Apr 15 Jul 15 Oct 15Jan 16Apr 16 Jul 16 Oct 16 Cash flow from operations 204 153 624 522 701 890 Net Capex -234 -158 -243 -310 -360 -510 JONHON Optronic Shenzhen Index (Rebased) Free cash flow -30 -4 380 212 341 380 Equity raised/(bought back) 808 2 1 0 0 0 Margin Trends Dividends paid -88 -121 -127 -60 -114 -148 Net inc/(dec) in borrowings 423 -52 -50 -185 40 -511 20 Other investing/financing cash flows -56 -131 31 -37 -27 -16 18 Net cash flow 1,058 -305 235 -71 240 -296 17 Change in working capital -211 -419 -182 -438 -497 -601
15 Balance Sheet (CNYm) 14 Cash and other liquid assets 1,457 1,155 1,396 1,326 1,566 1,270 12 Tangible fixed assets 1,057 1,228 1,414 1,585 1,789 2,120 13 14 15 16E 17E 18E Goodwill/intangible assets 192 295 280 266 251 235 EBITDA Margin EBIT Margin Associates/investments 40 55 70 108 159 225
Other assets 2,578 3,507 4,303 5,402 6,513 7,896 Growth & Profitability Total assets 5,325 6,240 7,464 8,687 10,278 11,747 Interest bearing debt 1,217 1,173 1,140 955 995 484 40 25 Other liabilities 1,207 1,783 2,466 3,128 3,743 4,525 30 20 Total liabilities 2,424 2,956 3,606 4,084 4,738 5,010 15 Shareholders' equity 2,572 2,861 3,397 4,096 4,972 6,091 20 Minorities 329 423 461 507 568 646 10 10 Total shareholders' equity 2,901 3,284 3,858 4,604 5,540 6,738 5 Net debt -240 19 -256 -371 -571 -786 0 0 13 14 15 16E 17E 18E Key Company Metrics Sales growth (%) 18.1 34.2 35.3 26.4 21.3 22.7 Sales growth (LHS) ROE (RHS) DB EPS growth (%) 8.1 34.3 67.4 33.6 30.4 28.1 Solvency EBITDA Margin (%) 16.0 16.4 18.1 18.1 18.7 19.1 EBIT Margin (%) 13.1 13.1 15.2 15.5 16.4 16.9 2 120 Payout ratio (%) 47.7 17.7 10.6 15.0 15.0 15.0 0 100 ROE (%) 11.9 12.5 18.2 20.3 21.8 22.9 -2 -4 80 Capex/sales (%) 9.0 4.5 5.2 5.2 5.0 5.7 -6 60 Capex/depreciation (x) 3.1 1.4 1.8 2.0 2.1 2.6 -8 40 Net debt/equity (%) -8.3 0.6 -6.6 -8.1 -10.3 -11.7 -10 -12 20 Net interest cover (x) 7.3 12.9 14.0 24.9 43.8 95.4
-14 0 Source: Company data, Deutsche Bank estimates 13 14 15 16E 17E 18E
Net debt/equity (LHS) Net interest cover (RHS)
Nick Zheng, CFA +852 2203 6198 [email protected]
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Investment Thesis
Outlook
Rising electronic content in modern weapons is a secular trend and makes Jonhon our preferred proxy to play China’s army modernization theme. We expect the company to record a CAGR of 22% for its defense business over 2016-20, nearly double our projected weapons spending growth for China.
On top of that, leveraging its superior military connector technology, Jonhon is well positioned to expand its presence in the civil connector market. With a strong pipeline of new products and accelerating import substitution, we project a 26% CAGR for Jonhon’s civil sales over 2016-20, accounting for c.50% of its total by 2020 vs. 45% in 2015.
In the absence of an asset injection story, Jonhon has long been known as a “cheap” outlier in the A-share defense sector, but we believe its successful transformation into a connector industry leader should help drive a re-rating.
Valuation
We base our target price of Rmb50 on a 2017 P/E of 30x (vs. c.30% EPS CAGR over 2017-18E), largely in line with its historical mid-cycle level and the average of its A-share listed connector peers.
Risks
Key downside risks include: 1) an unexpected decrease in China's weapon spending, 2) intensifying competition from electronic component suppliers of other Chinese defense groups or potential new non-SOE entrants as a result of the promotion of military-civil integration, and 3) slower-than-expected market share expansion in civil markets.
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Executive summary
Defense business to grow at 2x China’s weapon spending
Figure 1: The logic behind our 22% CAGR (2016-20) projected for Jonhon’s Two positive drivers: 1) rising military connector sales electronic content in modern weapon systems and 2) 8.5% CAGR (2016-20E) in China's military Jonhon’s increasing spending penetration in the non- Over the past decade Over the 13th Five-Year (2005-15) Plan period (2016-20) aviation defense markets 30% 25% 27% 22% CAGR 22% 25% Rising (2016-20E) 20% allocation to 20% 2.0x weapon in Jonhon's 1.9x procurement 15% (12% CAGR)
15% 13% miltary 12%
15 CAGR (%) CAGR 15 20E CAGR (%) CAGR 20E - 10% business -
10%
2005 2016 5% 5%
0% 0% China's weapon Jonhon's military Rising China's weapon Jonhon's military spending business electronic spending business content in modern weapon system
Source: Deutsche Bank estimates
Civil business to post 26% CAGR vs. 10% for its addressable market
Figure 2: Significant growth potential for Jonhon’s focused civil markets Total size of Jonhon’s addressable civil markets in 40% China to reach Rmb64bn by *Bubble size: Market New energy vehicle 35% size by 2020E 2020
30%
Rmb8bn
25%
20E) -
20%
Telecom/Datacom 15%
Industrial Medical 10%
Market CAGR (2016 CAGR Market Railway Rmb41bn 5% Rmb2bn Rmb3bn Rmb10bn 0% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% -5% Jonhon's sales CAGR (2016-20E)
Source: Deutsche Bank estimates
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Three positive drivers to facilitate the development
Positive driver #1: Strong policy support from the government “Made in China 2025” and Positive driver #2: New capacity rollout to enhance long-term growth “Military-Civil Integration” visibility
Figure 3: Production capacity expansion for Jonhon’s Luoyang plant c.30% production capacity
7,000 increase by 2019 upon the c.30% sales CAGR over completion of Luoyang Phase 2014-15 since new capacity 6,000 came into operation III 1,375
5,000
1,525 4,000
6,375 3,000
Annual sales (Rmb bn) (Rmb sales Annual 2,000 3,475
1,000
0 Luoyang Phase I Phase II (2012-14) Phase III (2017-19) By end-2019
Source: Company data, Deutsche Bank estimates.
Positive driver #3: Better aligned interests through management Restricted share incentive incentive scheme scheme to be in place soon Figure 4: How does Jonhon’s restricted share incentive scheme work?
Lock-up period (2-year/24-month) Vesting period (3-year/36-month)
Vesting period (year 1) Vesting period (year 3) Proportion vested: 33.3% (cap) Proportion vested: 33.4% (cap) Year of grant & lock-up period (year 1) Performance targets: Performance targets: Covers 2.5% of total employees 1) Sales CAGR for the preceding 3 1) Sales CAGR for the preceding 3 fiscal years is no less than 15% fiscal years is no less than 15% 1% dilution after issuing new shares 2) ROE for the preceding fiscal year 2) ROE for the preceding fiscal year Grant price: Rmb28.19 (c.30% discount to is no less than 13% is no less than 13.6% last closing price) 3) Op margin for the preceding fiscal 3) Op margin for the preceding fiscal Already approved by SASAC and AVIC year is no less than 12.2% year is no less than 12.2% Subject to shareholders' approval 4) All of the above three metrics are 4) All of the above three metrics are EGM to be held on 17 January above industry average level above industry average level
2017 2018 2019 2020 2021
Lock-up period (year 2) Vesting period (year 2) Proportion vested: 33.3% (cap) Performance target: 1) Sales CAGR for the preceding 3 fiscal years is no less than 15% 2) ROE for the preceding fiscal year is no less than 13.3% 3) Op margin for the preceding fiscal year is no less than 12.2% 4) All of the above three metrics are above industry average level
Source: Company data, Deutsche Bank
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Manufacturing JONHON Optronic
Defense business
Key points
Rising electronic content in modern weapon systems, along with increasing penetration in the non-aviation defense markets should drive a CAGR of 22% for Jonhon’s military sales over 2016-20.
Compared to AVIC Avionics, Jonhon’s military business exposure is a better proxy to China’s weapon modernization program.
Newly-launched integrated products (i.e. aircraft equipment racks) will likely offer additional upside potential in the coming years. Our preferred way to invest in the China army modernization theme
As a leading supplier of basic electronic components (i.e. electrical/optical connectors) that are used in virtually every modernized weapons system, Jonhon Optronic’s military business exposure has proved to be the best proxy to China’s weapon modernization program in the past—see Figure 5.
Figure 5: Jonhon’s military sales growth significantly Figure 6: …and we expect this trend to continue into the outpaced China’s weapon spending growth over the past 13th Five-Year-Plan Period (2016-20) decade… 30% 25% 27% 22% 25% 20%
20% 2.0x 1.9x 15%
15% 13% 12%
15 CAGR (%) CAGR 15 20E CAGR (%) CAGR 20E
- 10% -
10%
2005 2016 5% 5%
0% 0% China's weapon Jonhon's military China's weapon Jonhon's military spending business spending business
Source: Ministry of Defense, Company data, Deutsche Bank estimates Source: Ministry of Defense, Company data, Deutsche Bank estimates
Rising electronic content in modern military equipment and increasing penetration in the non-aviation defense markets (e.g. shipbuilding, aerospace, etc.) have been the two key drivers behind the strong growth and we expect these two drivers to power a CAGR of 22% over 2016-20 for Jonhon’s military sales (Figure 6).
In particular, for the aviation defense business, we expect the kick-starting of a series of new aircraft model cycles to drive fast-growing electronic content (Figure 7). We project a sales CAGR of 25% over 2016-20 for Jonhon’s aviation defense sales vs. a 20% CAGR for non-aviation defense sales.
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Figure 7: The kick-starting of a series of new aircraft model cycles to drive fast-growing electronic content Aircraft type Positive drivers Jet fighters We expect China’s jet fighter fleet upgrade to be a significant driver. We estimate that avionics systems will likely account for 25-30% of the total cost for a modernized fourth generation jet fighter (e.g. J-10B) and more than 30% for a fifth generation jet fighter (e.g. J-20). Such a ratio was only 10-15% for a third generation one and 20-25% for an older fourth generation model (i.e. J-10). Trainers Fleet upgrade from intermediate model (K-8) to advanced model (L-15). Transport aircraft Larger-sized transport aircraft will be the key driver as Y-20, China’s indigenous heavy transport aircraft, has recently entered into service. The electronic content in a heavy transport aircraft is much higher than that in the small- and medium-sized ones. Helicopters Expansion of PLA Army’s attack helicopter fleet (electronic-heavy) and upgrade of its multi-role helicopter fleet (to medium-lift ones) will be the two key drivers. Special mission These aircraft models, including electronic intelligence, airborne early warning, electronic warfare, and reconnaissance, are electronics-heavy in nature. Source: Deutsche Bank estimates
Jonhon Optronic vs. AVIC Avionics – why we prefer Jonhon First of all, Jonhon’s military market exposures (Figure 8), with two-thirds of its Jonhon’s business portfolio is military revenue coming from non-aviation defense, are more diversified than more diversified AVIC Avionics’ (Figure 9). This is mainly driven by the fact that connector technology, as a basic electronic component, is highly transferable. By contrast, avionics system, as a dedicated aviation electronic system, seems less flexible in other applications.
Figure 8: Jonhon Optronic – revenue breakdown by end- Figure 9: AVIC Avionics – revenue breakdown by end- market (2015) market (2015)
Medical Industrial Others Aviation Service Others 1% 1% 3% defense Non- 2% 2% 16% Railway aviation 4% civil NEV 12% 9% Non- aviation defense 7%
Telcommun ication 27% Non- aviation Aviation defense 77% 39%
Source: Company data, Deutsche Bank Source: Company data, Deutsche Bank
Additionally, the avionics assets currently held by AVIC Avionics are structurally not a good proxy to China’s military aviation spending, as the majority of high-value-added system integration works are currently done by the unlisted part of AVIC, namely the five research institutes (Figure 10). This has resulted in a notable growth divergence between AVIC’s listed avionics assets (i.e. AVIC Avionics) and its unlisted ones (Figure 11).
This leads us to believe that, prior to any meaningful asset injections taking place, we believe Jonhon Optronic’s organic exposure to the military market is a better proxy to China’s weapon spending at the moment, compared with AVIC Avionics.
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Figure 10: AVIC’s avionics segment sales – listed vs. Figure 11: AVIC’s avionics segment sales growth – listed unlisted (2012-15A) vs. unlisted (2013-15A) 12,000 16% 10,730 14% 9,575 14% 10,000 12% 12% 8,403 12% 7,600 11% 8,000 10% 5,657 6,000 5,326 8% 4,461 4,744 6% 6% 6%
4,000
Sales (Rmb mn) (Rmb Sales Sales (Rmb mn) (Rmb Sales 4% 2,000 2%
0 0% 2012A 2013A 2014A 2015A 2013A 2014A 2015A
Unlisted Listed Unlisted Listed
Source: Company data, Deutsche Bank Source: Company data, Deutsche Bank
New integrated products likely to offer further upside
In modern aircraft, equipment racks are deployed for easy installation and connection of airborne electronic equipment, cable assemblies, etc. Jonhon initially developed this integrated product (Figure 12) for China’s narrow-body commercial aircraft program – C919, and was subsequently selected as the tier-1 supplier. Aircraft equipment racks are also gaining popularity in military aircraft and Jonhon sees substantial potential for the use of this integrated product in Chinese military aircraft models. The benefits are clear – by supplying equipment racks, Jonhon can move its position up (Figure 13) and capture more value in the aircraft manufacturing supply chain.
Figure 12: Jonhon’s aircraft equipment rack product Figure 13: Aircraft manufacturing value chain
• AVIC Aircraft Airframers • Hongdu Aviation • Avicopter
System • AVIC Avionics • AVIC Electromechanical integrators • AVIC Engine
• Jonhon Optronic • Chengfa S&T Component suppliers • AVIC Aero- engine Control • ZEMIC
Source: Deutsche Bank Source: Deutsche Bank
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Civil business
Key points
China’s connector market is a big but highly fragmented market. We believe Jonhon has the potential to consolidate the industry and become the industry leader.
With continued market share gain, we expect Jonhon to significantly outgrow the industry in its focused end-markets.
We see three positive drivers that will facilitate its civil market penetration. These positive drivers are: 1) strong policy support from the government; 2) new capacity rollout; and 3) better aligned interests. A big and yet fragmented Chinese market
China is the single largest connector market globally in 2015, accounting for Figure 14: Global connector market c.30% of the global total (Figure 14). The total size of China’s connector market size breakdown by region (2015) reached Rmb133bn in 2015, according to the China Electronic Components ROW Association (CECA). Looking ahead, we expect the growth of China’s North 4% America connector market to be sustained at 5% over 2016-20 (Figure 15), largely on a Asia-Pacific 22% 17% par with DB’s forecast for GDP growth for China (with a multiplier of c.0.8x).
Figure 15: China connector market size (2013A-20E)
180 12% Europe 11% 20% 160 China 28% 10% 140 Japan 9% 120 7% 8% 100 Source: Bishop & Associates. Deutsche Bank 6%
Rmb bn Rmb 80 5% 5% 5% 5% 5% chg% yoy 5% 60 4%
40 2% 20 114 127 133 139 146 154 161 170 0 0% 2013A 2014A 2015A 2016E 2017E 2018E 2019E 2020E
Total connector market size (Rmb bn) yoy chg%
Source: China Electronic Components Association, Deutsche Bank estimates.
China’s connector industry is very fragmented, with the top 10 local producers representing only 18% market share, half of whom generate annual sales of only less than Rmb1bn (Figure 16 and Figure 17). On the other hand, the global connector market is much more concentrated, with the top 10 players combined accounting for c.50% market share (Figure 18). In terms of sales revenue, Jonhon was the second-largest local connector producer overall among domestic players.
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Figure 16: Top 10 local connector Figure 17: Top 10 local connector Figure 18: Top 10 connector producers in China by sales revenue producers in China by sales – market producers globally by sales – market (2015) share (2015) share (2015)
Luxshare 10,139 Luxshare 7.6% TE Connectivity 15.9% Jonhon Optronic 4,725 Jonhon Optronic 3.6% Amphenol 8.1% Deren 2,920 Deren 2.2% Molex 6.0% Space Appliance 1,873 Space Appliance 1.4% Delphi Connection 4.5% Hexing Group 1,108 Hexing Group 0.8% FIT 4.2% Electric Connector Tech 908 Electric Connector Tech 0.7% Yazaki 3.2% Huada Tech 603 Huada Tech 0.5% JAE 1.8% Jinyang Electronic 597 Jinyang Electronic 0.4% JST 1.6% Huafeng 537 Huafeng 0.4% Hirose 1.0% Yonggui 511 Yonggui 0.4% Sumitomo Wiring 0.7%
0 4,000 8,000 12,000 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 0.0% 5.0% 10.0% 15.0% 20.0% Sales (Rmb mn) Market share (%) 2015 market share (%)
Source: China Electronic Components Association, Deutsche Bank Source: China Electronic Components Association, Deutsche Bank Source: Frost & Sullivan, Deutsche Bank
In terms of market segmentation, the connector market typically can be divided into four major segments including consumer-grade (e.g. computers & peripherals, consumer electronics, etc.), industrial-grade (e.g. telecom, industrial, transportation, etc.), automotive-grade and military-grade connectors. From a technological point of view, consumer-grade is mostly viewed as the low-end market among these four major segments.
Military- and industrial-grade connectors are often designed for use in harsh environments (i.e. high pressure, vibration, high-voltage, moisture, high/low temperature). In China’s connector market, the two categories combined account for over half of the total (Figure 19).
Figure 19: China connector industry sales by end-market Figure 20: Global connector industry sales by end-market (2015) (2015)
Other equipment Other equipment Computer & 2% 4% peripherals Consumer Consumer 15% Business/office 6% Computer & peripherals 5% equipment 27% 1% Instrumentation Telecom/Datacom 3% 21% Telecom/Datacom Business/office Medical 31% equipment 3% 1% Instrumentation 2% Industrial Military/aerospace 12% Medical 6% 1% Military/aerospace Industrial 2% 7% Transportation Transportation 7% Automotive Automotive 6% 15% 23%
Source: Bishop & Associates. Deutsche Bank Source: Bishop & Associates. Deutsche Bank.
This, to some extent, explains why foreign players still have the lion’s share of China’s connector market, as the majority of local players primarily focus on the low-end consumer-grade segment with very little differentiation in products. On the other hand, foreign players are favorably positioned in the high-end industrial grade segment, leveraging on their competitive advantage in technology (Figure 21).
Jonhon Optronic is the largest local player in both the military-grade and industrial-grade connector market in terms of sales.
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Figure 21: Major listed companies in China’s connector market 2015 Company name Ticker Major end-markets Connector sales Market share in (Rmb mn) China (%) TE Connectivity TEL.N Industrial, automotive, transportation, military/aerospace, 14,877* 11.2% communication, consumer, etc. Amphenol APH.N Industrial, automotive, transportation, military/aerospace, 10,531 7.9% communication, consumer, etc. Luxshare Precision 002475.SZ Computer & peripherals, automotive, communication, consumer 10,139 7.6% electronics, etc. JONHON Optronic 002179.SZ Aviation, aerospace, shipbuilding, weapon, rail, communication, new 4,725 3.6% energy vehicle, industrials, medical, etc. Shenzhen Deren Electronic 002055.SZ Home appliances, automotive, etc. 2,920 2.2% Guizhou Space Appliance 002025.SZ Aviation, aerospace, shipbuilding, weapon, nuclear, communication, 1,873 1.4% medical, rail, home appliances, etc. Shenzhen Everwin Precision 300115.SZ Consumer electronics 781 0.6% Zhejiang Yonggui Electric 300351.SZ Rail, new energy vehicle, communication, consumer electronics, etc. 511 0.4% Source: Company data, Deutsche Bank. Note: For TE Connectivity, fiscal year (end in 30 September) sales number was taken
A deep dive into Jonhon’s focused civil markets
We have undertaken a detailed analysis of Jonhon’s focused civil connector markets, namely telecoms, new energy vehicles, rail, industrial and medical and estimate its aggregate market size to reach Rmb64bn by 2020 (Figure 21). With accelerating market share gain, we expect Jonhon to deliver higher-than- industry growth in all end-civil-markets (Figure 22).
We estimate Jonhon will have 10% share in these end-markets on an aggregate basis by 2020 from 5% in 2015. By 2020, we expect Jonhon to have an 8% share in China’s connector market vs. 4% in 2015 (Figure 23). This essentially means that in five years, the company will reach a market position that is comparable to the current size of TE Connectivity and Amphenol in China and have a similar size as its domestic peer Luxshare today. This should be achievable, in our view, given the favorable competitive landscape in Jonhon’s focused end-markets.
Figure 22: We expect Jonhon’s Figure 23: …and Jonhon to outgrow Figure 24: …driven by accelerating focused civil connector market to the market in every single end- market share gain reach Rmb64bn by 2020… market… 70.0 12% 22% Telecom/Datacom 10% 60.0 8% 10% New energy vehicle 40% 50.0 31% 8% 8% 40.0 Railway 14% 5% 6% 30.0 18% 5% Rmb bn Rmb Industrial 8% 4% 20.0 4% Medical 34% (%) share Market 7% 10.0 2% Addressable civil market 26% 0.0 10% 2015A 2020E 0% 0% 10% 20% 30% 40% 50% Telecom/Datacom New energy vehicle Focused civil markets China's connector market Railway Industrial 2016-20E CAGR Jonhon's growth Segment growth 2015A 2020E Medical Source: Deutsche Bank estimates Source: Deutsche Bank estimates Source: Deutsche Bank estimates
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Telecom/Datacom – total addressable market size of Rmb41bn by 2020 Telecom/datacom is the single largest end-market for the connector industry in Figure 25: China’s connector sales China (Figure 19). Mobile & wireless and enterprise network are the two for telecom/datacom industry by largest end-markets for connector sales to the telecom/datacom industry in sub-segment (2015) China, which on a combined basis accounted for >80% of total (Figure 25). Other telecommunications Carrier network 3% 7% Cable-equipment- infrastructure Jonhon’s telecom connector sales managed to grow >20% over 2011-15, 7%
outpacing telecom equipment sales for Huawei and ZTE combined (Figure 26), Enterprise network driven by new products, market share gains and successful penetration into 31% foreign players’ supply chain (e.g. Samsung, Ericsson, etc.).
Mobile & wireless 52% Figure 26: Telecom equipment sales – Huawei and ZTE (2010-15)
350 Source: Company data, Deutsche Bank
300 68
250 53
200 58 54 59 52
Rmb bn Rmb 150 260 100 211 172 180 152 159 50
- 2010A 2011A 2012A 2013A 2014A 2015A
Huawei ZTE
Source: Company data, Deutsche Bank
We expect China’s telecom/datacom connector sales to post a CAGR of 8% We expect Internet of Things over 2016-20 (Figure 28). We see four emerging trends that could facilitate the (IoT) and mobility to be the market development. two key drivers for China’s telecom market connectors. IoT: Hirose estimates that by 2020 there will be more than 50 billion devices connected to the Internet (Figure 27). These devices, while Figure 27: Total number of IoT/IoE typically connected wirelessly, still give rise to equipment (computers, device estimated by Hirose servers, storage and network) that communicate and save all the data that is being collected. 60.0 50.0 Exponential growth in data transmission and storage: demand for data 50.0
is growing exponentially. This is propelling equipment evolution 40.0 toward faster systems with greater bandwidth to carry the volume which in turn is driving the performance capabilities of high speed 30.0 25.0 backplane and I/O connectors. 20.0
12.5 # of devices (in billions) (in devices of # 5G on the horizon: China is expected to launch commercial operation 10.0 of a 5G mobile network in 2020, which means a capex up-cycle for 0.0 2010 2015 2020 base stations will likely kick off starting 2018 at the earliest. Backhaul infrastructure expansion: rapidly-rising demand for data, Source: Hirose estimates along with technology upgrades in the last mile of both fixed line and mobile businesses, is driving bandwidth demand in the backhaul links that connect cell towers to the central facilities, which in turn is driving backhaul infrastructure build-out by wireless carriers.
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Figure 28: We expect China’s telecom connector sales to Figure 29: …and Jonhon’s telecom connector sales to post a CAGR of 8% over 2016-20… post a CAGR of 22% over the same period 50.0 4,000 35%
3,500 30% 40.0 2.6 2.4 3,000 2.4 25% 2.3
30.0 yoy chg% 2.0 2.1 22.1 2,500 20.2 20% 17.3 18.3 2,000 Rmb mn mn Rmb 20.0 15.4 14.8 15% 1,500
10.0 mn) (Rmb Sales 10.8 11.8 13.1 10% 8.7 9.1 9.9 1,000 0.0 1.9 1.9 2.1 2.2 2.3 2.4 500 5% 2015A 2016E 2017E 2018E 2019E 2020E Carrier network Enterprise network 0 0% 2015A2016E2017E2018E2019E2020E Mobile & wireless Cable-equipment-infrastructure Other telecommunications Telcommunication yoy chg%
Source: Company data, Deutsche Bank estimates. Source: Company data, Deutsche Bank estimates.
More importantly, we expect new product rollout to enable Jonhon to enjoy New products will allow higher-than-industry growth over 2016-20 (Figure 29). Jonhon has been Jonhon to enjoy higher-than- actively positioning itself in the data center segment (one of the high-growth industry growth for the sub-segments within the telecom sector), with the addition of several new telecom segment products into its portfolio including: high-speed backplane connectors, liquid cooling connectors, active optical cables, etc. In particular:
We see substantial import substitution opportunities in the high-speed Substantial import backplane connector segment, which is currently dominated by substitution opportunities for foreign players. With strong support from the government, Jonhon has high-speed backplane successfully developed its indigenous high-speed backplane connectors connectors (Figure 30) that are capable of transferring data at speeds of up to 56Gps, which represent the highest technology standard in the Chinese market.
Liquid cooling systems are gaining popularity in data centers, as The switch from air cooling to replacement for traditional air cooling systems, as they reduce cooling liquid cooling for data centers energy consumption and overall annual power consumption as well as presents new opportunities improving Power Utilization Effectiveness (PUE). This should bode well for Jonhon, with its early positioning in the liquid cooling connector market (Figure 31).
Figure 30: GF3A series high-speed Figure 31: TSA series fluid High-speed backplane and backplane connectors connectors liquid cooling connector markets are currently dominated by foreign players
Source: Company data, Deutsche Bank Source: Company data, Deutsche Bank
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New energy vehicle – total addressable market size of Rmb8.5bn by 2020 NEV connectors and military connectors are used in very similar harsh Figure 32: NEV connector sales for environments – high-voltage and high-current in particular, which imposes a major listed local players (2015) high technology requirement for connector makers, hence high barriers to entry. Leveraging on its superior technology in the military area, Jonhon has 450 413 400 managed to establish a leading position in China’s NEV connector segment, 350 with 20-30% share in 2015 based on our estimates (Figure 32). 300
250
Currently, Jonhon has a wide range of on-vehicle product offerings (Figure 33) 200 181 Rmb mn Rmb 152 and its customer base covers all mainstream local NEV manufacturers 150 including BYD, JAC, Chery, Chang’an, Dongfeng, Yutong, etc. 100 50
0 Figure 33: Jonhon’s current NEV interconnection product portfolio Jonhon Optronic Zhejiang Kangni Yonggui
Charging Source: Company data, Deutsche Bank coupler
High-voltage connector
PDU (Power Distribution Unit) Power switch connector
Signal connector Battery interconnection cable assemblies High-voltage cable assemblies
Source: Company data, Deutsche Bank
Leveraging on our auto research team’s forecasts for China’s NEV sales, we Please refer to Appendix estimate that China’s NEV connector market will post a CAGR of 31% over (Figure 50-52) for our detailed 2016-20 (Figure 34). With the successful introduction of its connector products sets of forecasts for charging facilities, we expect Jonhon to deliver a 40% CAGR (Figure 35) for its NEV connector sales, outstripping the growth pace at the industry level. We expect revenue contribution from the NEV segment to rise to 17% by 2018 vs. 2015’s 9%.
Figure 34: We expect China’s NEV Figure 35: We expect Jonhon’s NEV Figure 36: …and to account for 17% connector market to grow at a CAGR sales to outgrow the industry, with a of total sales by 2018 of 31% over 2016-20 CAGR of 40%... 9.0 2,500 350% 20% 17% 8.0 300% 18% 17% 17% 1.7 2,000 7.0 15% 250% 16%
1.4 yoy chg% 6.0 1,500 14% 12% 2.9 200% 5.0 1.1 12% 2.4 150% 4.0 0.8 1,000 Rmb bn Rmb 1.9 10% 9%
Sales (Rmb mn) (Rmb Sales 100% 3.0 0.6 1.5 500 8% 2.0 0.4 1.1 3.9 50% 3.3 sales total of % As 6% 0.8 2.6 1.0 2.0 0 0% 1.0 1.4 4% 0.0 2% 2015A 2016E 2017E 2018E 2019E 2020E 0% Passenger NEV Commercial NEV Charging poles NEV yoy chg% 2015A 2016E 2017E 2018E 2019E 2020E
Source: Company data, Deutsche Bank estimates. Source: Company data, Deutsche Bank estimates. Source: Company data, Deutsche Bank estimates.
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Rail – total addressable market size of Rmb2.9bn by 2020 China’s rail connector market is still largely dominated by foreign players, with Figure 37: Major local rail connector the top five local producers accounting for less than 30% of total shares makers by market share (2015) (Figure 37). Jonhon Optronic was the third-largest local player in China’s rail connector market, with a 5% share in 2015, behind Zhejiang Yonggui and 12.0% 10.0% 9.7% Sichuan Huafeng. 10.0%
8.0% German players (Harting and Weidmuller) and Japanese players (JAE and YUTAKA) still have the lion’s share in China’s rail connector market. In 6.0% 5.0%
particular, based on our channel checks, we estimate that the connector 4.0% Market share (%) share Market localization ratio for locomotives is only 50-60% and the ratio is only 20-30% 1.7% 2.0% 1.0% for high-speed trains (multiple units). With continued technology improvement 0.0% post the CSR-CNR merger, the upcoming rollout of Chinese standard high- Yonggui Huafeng Jonhon Kangni Yecheng Optronic speed trains (likely starting 2017 at the earliest) and the kick-start of a heavy maintenance cycle, we expect import substitution for rail connectors to Source: Company data, Deutsche Bank estimates accelerate in China.
Leveraging on the industry forecasts of our rail analyst, Phyllis Wang, we forecast China’s rail connector market to post a CAGR of 5% over 2016-20. Benefiting from accelerating import substitution, we expect Jonhon’s rail connector sales to deliver a CAGR of 14% during the same period.
Figure 38: We expect China’s rail connector market to Figure 39: …and Jonhon’s rail connector sales to deliver post a CAGR of 5% over 2016-20E… a CAGR of 14% during the same period 3.5 350 45.0% 40.0% 3.0 300 35.0% 2.5 0.7 250 0.6 0.5 30.0%
0.3 0.3 0.4 yoy chg% 2.0 200 0.2 25.0% 1.2 Rmb bn Rmb 1.5 0.2 1.1 150 20.0% 0.2 0.2 1.1 1.1 1.1 1.1 0.9 0.5 mn) (Rmb Sales 15.0% 0.5 0.5 1.0 100 0.2 0.3 0.3 0.3 0.2 0.2 0.2 0.2 10.0% 0.3 0.3 0.2 0.2 0.2 0.2 0.2 0.2 0.5 0.1 0.2 0.2 50 0.2 5.0% 0.6 0.5 0.6 0.6 0.4 0.4 0.4 0.5 0.5 0.5 0.0 0 0.0% 2011A 2012A 2013A 2014A 2015A 2016E 2017E 2018E 2019E 2020E 2014A 2015A 2016E 2017E 2018E 2019E 2020E
Locomotive Passenger carriage Freight wagon Multiple Units Rapid transit vehicles Railway yoy chg%
Source: Company data, China Railway Corporation, Deutsche Bank estimates. Source: Company data, Deutsche Bank estimates
Three positive drivers to facilitate the civil market penetration
Positive driver #1: Strong policy support from the government We believe the rollout of two important policy initiatives, namely Made in China 2025 and military-civil integration, should help facilitate the consolidation of China’s connector market and accelerate the import substitution progress, which should in turn benefit local leaders like Jonhon.
One of the key tasks under the Made in China 2025 initiative is to strengthen Strengthening industrial the country’s industrial foundation so that it can occupy the highest parts of foundations is a key task global production chains. The government has made very comprehensive under the Made in China plans and set out aggressive targets, aiming to raise the domestic content of 2025 initiative core components and materials to 40% by 2020 and 70% by 2025. The implications for the connector market are two-fold:
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Direct impact: For some high-end connectors that fit the government’s Local connector leaders will definition of core components, local leaders will be appointed to direct benefit from the country’s the R&D projects funded by the government. A most recent example is localization effort for core 56Gps high-speed backplane connectors, the R&D project that was components awarded to Jonhon.
Indirect impact: Oftentimes, connectors are imported because they come as part of imported electronic systems. These imported electronic systems, in some cases, also fall into the definition of “core components”. Therefore, import substitution of these systems should in turn benefit local connector makers.
Military-civil integration is an another key policy initiative that the government The push for military-civil has been pushing since the new leadership came on board, aiming to attract integration should accelerate the private sector’s participation in defense build-ups and encourage the the conversion of Jonhon’s transformation of SOE defense companies. military connector technology
To elaborate, in the absence of proper policy guidance and support, a large amount of “convertible technologies” are currently kept within the defense sector. Such an “invisible wall”, however, is poised to be broken as SOE defense companies will likely be allowed to convert certain technologies and extend their applications into civil areas.
Given the connector is a basic electronic component, we believe the barriers to convert Jonhon’s high-standard military connector technology into civil use should be relatively low. This should help Jonhon to further strengthen its leading position in the civil connector market.
Positive driver #2: New capacity rollout to enhance long-term growth visibility In the past, production capacity expansion has proved to be a significant earnings growth driver. With the rollout of Luoyang Phase II in May 2014, Jonhon has managed to deliver a 52% earnings CAGR in the past two years (Figure 40).
Figure 40: Jonhon Optronic – quarterly earnings growth (1Q07-3Q16) Capacity expansion has
250 120% proved to be a significant earnings growth driver… 100% 200 Luoyang Phase II put 80% into operation 60% 150 yoy chg%
40%
100
20% Net profit (Rmb mn) (Rmb profit Net 0% 50 -20%
0 -40%
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16
Net profit Net profit growth (%)
Source: Company data, Deutsche Bank
Luoyang Phase III already kicked off construction at end-2016 and is expected … and we expect Luoyang to come into full operation in 2019, with estimated sales of Rmb1.4bn per Phase III to be a significant annum (c.30% increase vs. its current capacity of Rmb5bn estimated for the driver going forward Luoyang plant).
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In addition, Jonhon’s Xi’An-based subsidiary – Forstar – also planned to expand its production capacity by building a new production facility in Xi’An, which upon completion (by end-2019), should increase Forstar’s production capacity from the current Rmb600mn (in terms of annual sales) to c.Rmb1bn. The new production facility will be mainly used to consolidate and further expand Forstar’s military businesses.
Positive driver #3: Better aligned interests The company announced, post its 3Q16 earnings release, its proposal to adopt a restricted share incentive scheme which, once implemented, would make Jonhon one of the very few SOE defense listcos to have such a scheme in place.
The proposed scheme, with an effective term of 10 years, has already received approval from SASAC and the AVIC Group (still subject to shareholders’ approval). More specifically, for the proposed initial grant:
It covers 266 employees (2.5% of total) including senior management both at the headquarter level and subsidiary level, mid-level management, core R&D staff, etc.
The scheme has a lock-up period of two years and a vesting period of three years based on key performance targets.
Key performance targets include a revenue CAGR of 15%, an ROE of 13-14% and an operating profit margin of 12.2%.
The grant price is set at Rmb28.19 per share (c.20% discount to its last closing price). Total restricted shares to be issued will have a 1% dilution, if implemented.
Margin pressure should be manageable, in our view
Given connectors for military use yield a higher GP margin than those for civil Figure 41: GP margin for each end- markets (Figure 41), one of the key concerns is the negative impact on margins market from the rising contribution from connector sales to the civil market (Figure 42 End market GP margin (%) and Figure 43), especially during 2016-18, when civil products will see visibly Military >40% higher growth than military products. That said, we see several positive drivers Telecom 15-25% that could potentially mitigate the downside risk to margin, including: NEV (high-voltage) 25-35% Rail 40-60% Rising economies of scale Source: Deutsche Bank estimates. Improving operational efficiency from automation upgrades
Rising contribution from higher-margin one-stop solution offering
New product offerings including high-speed backplane connectors, liquid cooling connectors, aircraft equipment racks, etc., which generate higher margins.
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Figure 42: Jonhon’s sales breakdown by end-market Figure 43: Jonhon’s sales split by civil and military (2015A-20E) market (2015A-20E) 100% 100% 90% 9% 90% 12% 15% 17% 17% 17% 80% 80% 45% 47% 48% 49% 49% 49% 70% 28% 27% 70% 25% 25% 25% 26% 60% 60% 50% 50% 40% 39% 37% 37% 36% 35% 34% 40% 30% 30% 20% 55% 53% 52% 51% 51% 51% 20% 10% 16% 15% 15% 15% 16% 17% 10% 0% 2015A 2016E 2017E 2018E 2019E 2020E 0% Aviation defense Non-aviation defense Telcommunication 2015A 2016E 2017E 2018E 2019E 2020E NEV Railway Medical Military Civil Industrial Others
Source: Deutsche Bank estimates. Source: Deutsche Bank estimates.
In addition, we believe the scope of margin expansion for its 62.87% owned subsidiary – Shenyang Xinghua, has been underestimated by the market.
To elaborate, Shenyang Xinghua, which used to be a sister company under the AVIC family before Jonhon underwent its IPO, generated 15% of Jonhon’s total sales in 2015 (Figure 44) but only represented 3% of Jonhon’s total net profit (Figure 45). This was mainly driven by Xinghua’s significantly lower profitability compared to the headquarter (Figure 46) despite more favorable end-market exposure (i.e. military and rail), reflecting poor management.
Figure 44: Shenyang Xinghua Figure 45: …but only represented Figure 46: Low profitability has been generated 15% of Jonhon’s sales in 3% of Jonhon’s net profit the key drag but the situation is 2015… improving Xi'An Branch 20.0% (Forstar) Others Xi'An Branch Others 0% 17.3% 10% (Forstar) 4% 18.0% 7% 16.0% Shenyang 16.0% Shenyang Xinghua Xinghua 3% 14.0% 12.7% 15% 11.4% 12.0% 10.0% 7.6%
8.0% Net margin (%) margin Net 6.0% 4.1% 3.4% 4.0% 2.4% Headquarter 2.0% 75% Headquarter 0.0% 86% 2013A 2014A 2015A 1H16A
Headquarter Shenyang Xinghua
Source: Company data, Deutsche Bank Source: Company data, Deutsche Bank Source: Company data, Deutsche Bank
That said, since 2014, when Jonhon increased its equity stake in Shenyang Xinghua (from 51% to 62.87%) through additional capital contribution, the company has been striving to strengthen its operational management over Xinghua, hoping to improve its profitability.
In fact, its efforts began to bear fruit in 1H16, with Xinghua’s net margin expanding to 8% vs. a low single digit in the past (Figure 46). With better aligned interests, following the introduction of restricted share incentive scheme, we believe scope of further margin expansion for Shenyang Xinghua exists.
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Valuation and risks
Reiterating Buy and target price of Rmb50
With minor earnings revisions, we keep our target price of Rmb50 unchanged. We continue to base our target price on a 2017 P/E of 30x (vs. c.30% EPS CAGR over 2017-18E), largely in line with its historical mid-cycle level (Figure 47) and the average of its A-share listed connector peers (Figure 49).
Figure 47: Jonhon Optronic – 1-year forward P/E Figure 48: Jonhon Optronic – 1-year forward P/B vs. ROE
55.0 10.0 24.0 50.0 22.0 45.0 8.0 40.0 36.2x 20.0 5.3x 35.0 6.0 18.0 30.0 28.4x
3.9x 16.0 P/B (x) P/B
P/E (x) P/E 4.0 25.0 (%) ROE 20.0 14.0 20.5x 2.0 2.6x 15.0 12.0 10.0 0.0 10.0 5.0
1yr fwd P/B (x) Avg P/B 1yr fwd P/E (x) Avg P/E +1 STDEV -1 STDEV +1 STDEV -1 STDEV 1yr fwd ROE (RHS, %)
Source: Company data, Bloomberg Finance LP, Deutsche Bank estimates Source: Company data, Bloomberg Finance LP, Deutsche Bank estimates
Risks
Key downside risks include 1) an unexpected decrease in China's weapon spending, 2) intensifying competition from electronic component suppliers of other Chinese defense groups or potential new non-SOE entrants, as a result of the promotion of military-civil integration, and 3) slower-than-expected market share expansion in civil markets.
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0.9 2.2 2.5 0.7 0.5 0.3 0.9 1.2 0.4 1.0 1.6 1.8 0.9 1.9 0.7 1.5
2017E
(%)
0.8 0.8 2.1 2.3 1.7 0.5 0.3 0.2 0.7 0.8 0.4 0.5 0.9 1.6 1.8 1.4 Dividend yield 2016E
8.6 8.7 4.8 4.0 6.4 18.3 17.7 15.5 25.1 14.5 24.5 20.6 10.4 15.2 11.9 19.6 2017E
9.0 9.7 5.4 4.6 7.0 19.4 22.1 19.3 30.4 19.7 27.4 33.5 10.9 19.3 12.7 25.4 EV/EBITDA (x) 2016E
7.8 9.1 6.9 9.2 9.4 21.5 16.2 22.2 21.5 21.1 12.9 19.6 12.1 14.9 15.2 17.7 2017E
.8
ROE (%) 7.6 6.8 6.9 7.3 8.7 22.8 22.2 20.9 19.3 18.0 12.5 16.7 11 13.4 17.5 15.7 2016E
3.7 4.6 2.6 1.6 2.9 4.6 4.8 5.7 4.4 4.4 5.5 4.9 1.1 1.7 1.3 1.4 2017E
P/B (x) 6
4.3 5.5 2.9 1.6 3.3 5. 5.8 6.1 5.6 5.0 6.6 5.8 1.2 1.8 1.4 1.5 2016E
9.7 22.9 24.4 57.2 22.2 33.2 31.7 25.2 14.5 23.8 15.5 19.7 31.9 16.4 26.8 19.7 2017E
P/E (x)
29.7 32.6 96.3 30.3 39.4 45.9 11.0 26.5 18.9 25.6 16.6 21.9 45.7 18.8 36.7 21.3 2016E
18)
- 8.5 0.7 0.5 3.2 9.0 9.3 EPS EPS 31.3 16.9 47.4 45.0 18.1 49.1 34.6 34.6 24.2 17.6 (16 CAGR CAGR %
633 3,353 6,144 1,580 3,180 1,617 1,438 5,058 1,344 1,101 24,504 20,801 (US$ mn) Market Market cap
mo mo 1 1 26 30 41 24 33 11 10 10 86 85 - 3 turnover (US$mn)
de
4% 2% (%) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. - 29% 32% or Japanese players, numbers for the next fiscal year are taken as fiscal years ending in March March in ending years fiscal as taken are year fiscal next forthe numbers players, orJapanese Upside/ ; f downsi
01/2017 /
04 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. price Target CNY50 USD70 USD65 as of as CNY26.5
.4 100 , 860 , 712 ,
CNY26 USD69 CHF55.9 CNY38.7 CNY20.1 CNY24.4 CNY24.5 CNY25.2 USD67 JPY1 JPY14 Share price KRW73 Note: All prices are are prices All Note:
;
valuation comp sheet valuation
DB NC NC NC NC NC NC NC NC – Buy Buy Buy Hold rating
.SZ sector sector
ticker TEL.N APH.N 6806.T 6807.T Reuters HUBN.S 002179.SZ 002475.SZ 002055.SZ 300115.SZ 002025.SZ 300351 025540.KS
connector
Global
:
49
Company data, Bloomberg Finance LP, Deutsche Bank estimates Bank Deutsche LP, Finance Bloomberg data, Company
enzhen Everwin Precision Figure Figure U.S./Europe average Other Asia average Asia average HK/China Average
Huber+Suhner Source: U.S./Europe Amphenol ConnectivityTE JAE Other Asia KET Hirose Guizhou Guizhou Space Appliance Zhejiang Yonggui Luxshare Precision Shenzhen Deren Sh Asia HK/China JONHON Optronic Stock Stock name
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JONHON Optronic
Appendix A – NEV connector market forecast
Figure 50: China NEV on-vehicle connector market forecasts Volume in units, ASP in Rmb, market size in 2014A 2015A 2016E 2017E 2018E 2019E 2020E 2016-20E Rmb mn Passenger NEV on-vehicle connectors Passenger EV sales volume 34,090 146,129 200,000 320,000 420,000 510,000 600,000 2,050,000 yoy chg% 329% 37% 60% 31% 21% 18% 33% ASP of connectors per vehicle 5,000 5,000 5,000 4,500 4,275 4,275 4,275 4,381 yoy chg% 0% 0% -10% -5% 0% 0% -3% Market size for passenger EV 170 731 1,000 1,440 1,796 2,180 2,565 8,981 yoy chg% 329% 37% 44% 25% 21% 18% 29% Passenger PHEV sales volume 17,559 60,664 100,000 160,000 240,000 318,000 396,000 1,214,000 yoy chg% 245% 65% 60% 50% 33% 25% 46% ASP of connectors per vehicle 4,000 4,000 4,000 3,600 3,420 3,420 3,420 3,491 yoy chg% 0% 0% -10% -5% 0% 0% -3% Market size for passenger PHEV 70 243 400 576 821 1,088 1,354 4,239 yoy chg% 245% 65% 44% 43% 32% 25% 41% Total market size for passenger NEV 241 973 1,400 2,016 2,616 3,268 3,919 13,219 yoy chg% 304% 44% 44% 30% 25% 20% 32% Commercial NEV on-vehicle connectors Commercial EV sales volume 7,125 68,536 90,000 140,000 180,000 220,000 250,000 880,000 yoy chg% 862% 31% 56% 29% 22% 14% 30% ASP of connectors per vehicle 10,000 10,000 10,000 9,000 8,550 8,550 8,550 8,770 yoy chg% 0% 0% -10% -5% 0% 0% -3% Market size for commercial EV 71 685 900 1,260 1,539 1,881 2,138 7,718 yoy chg% 862% 31% 40% 22% 22% 14% 26% Commercial PHEV sales volume 10,340 18,277 30,000 40,000 60,000 80,000 110,000 320,000 yoy chg% 77% 64% 33% 50% 33% 38% 43% ASP of connectors per vehicle 8,000 8,000 8,000 7,200 6,840 6,840 6,840 6,994 yoy chg% 0% 0% -10% -5% 0% 0% -3% Market size for commercial PHEV 83 146 240 288 410 547 752 2,238 yoy chg% 77% 64% 20% 43% 33% 38% 39% Total market size for commercial NEV 154 832 1,140 1,548 1,949 2,428 2,890 9,956 yoy chg% 440% 37% 36% 26% 25% 19% 28% Summary – on-vehicle connectors Passenger NEV connectors 241 973 1,400 2,016 2,616 3,268 3,919 13,219 Passenger EV 170 731 1,000 1,440 1,796 2,180 2,565 8,981 Passenger PHEV 70 243 400 576 821 1,088 1,354 4,239 Commercial NEV connectors 154 832 1,140 1,548 1,949 2,428 2,890 9,956 Commercial EV 71 685 900 1,260 1,539 1,881 2,138 7,718 Commercial PHEV 83 146 240 288 410 547 752 2,238 Total market size for on-vehicle connectors 395 1,805 2,540 3,564 4,566 5,696 6,809 23,175 yoy chg% 357% 41% 40% 28% 25% 20% 30% Source: CAAM, Company data, Deutsche Bank estimates
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Figure 51: China NEV charging pole connector market forecasts Volume in units, ASP in Rmb, market size in Rmb mn 2014A 2015A 2016E 2017E 2018E 2019E 2020E 2016-20E Private charging pole per NEV 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 Total addition of private charging poles 62,203 264,245 378,000 594,000 810,000 1,015,200 1,220,400 4,017,600 yoy chg% 57% 36% 25% 20% 36% ASP of connectors per charging pole 1,200 1,200 1,200 1,080 1,026 1,026 1,026 1,050 yoy chg% -10% -5% 0% 0% Market size for private charging poles 75 317 454 642 831 1,042 1,252 4,220 yoy chg% 325% 43% 41% 30% 25% 20% 32% Public charging pole per NEV 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 Total addition of public charging poles 6,911 29,361 42,000 66,000 90,000 112,800 135,600 446,400 yoy chg% 325% 43% 57% 36% 25% 20% 36% ASP of connectors per charging pole 3,500 3,500 3,500 3,150 2,993 2,993 2,993 3,064 yoy chg% 0% 0% -10% -5% 0% 0% -3% Market size for public charging poles 24 103 147 208 269 338 406 1,368 yoy chg% 325% 43% 41% 30% 25% 20% 32% Summary - charging poles Private charging poles 75 317 454 642 831 1,042 1,252 4,220 Public charging poles 24 103 147 208 269 338 406 1,368 Total market size for charging poles 99 420 601 849 1,100 1,379 1,658 5,587 yoy chg% 325% 43% 41% 30% 25% 20% 32% Source: CAAM, Company data, Deutsche Bank estimates
Figure 52: China NEV connector market forecasts 2014A 2015A 2016E 2017E 2018E 2019E 2020E 2016-20E China NEV sales (mn units) 0.07 0.29 0.42 0.66 0.90 1.13 1.36 4.46 yoy chg% 325% 43% 57% 36% 25% 20% 36% Passenger NEV 0.05 0.21 0.30 0.48 0.66 0.83 1.00 3.26 yoy chg% 300% 45% 60% 38% 25% 20% 37% Passenger EV 0.03 0.15 0.20 0.32 0.42 0.51 0.60 2.05 yoy chg% 329% 37% 60% 31% 21% 18% 33% Passenger PHEV 0.02 0.06 0.10 0.16 0.24 0.32 0.40 1.21 yoy chg% 245% 65% 60% 50% 33% 25% 46% Commercial NEV 0.02 0.09 0.12 0.18 0.24 0.30 0.36 1.20 yoy chg% 397% 38% 50% 33% 25% 20% 33% Commercial EV 0.01 0.07 0.09 0.14 0.18 0.22 0.25 0.88 yoy chg% 862% 31% 56% 29% 22% 14% 30% Commercial PHEV 0.01 0.02 0.03 0.04 0.06 0.08 0.11 0.32 yoy chg% 77% 64% 33% 50% 33% 38% 43% Vehicle-borne connectors (Rmb mn) 395 1,805 2,540 3,564 4,566 5,696 6,809 23,175 Passenger NEV 241 973 1,400 2,016 2,616 3,268 3,919 13,219 Commercial NEV 154 832 1,140 1,548 1,949 2,428 2,890 9,956 Connectors for charging poles (Rmb mn) 99 420 601 849 1,100 1,379 1,658 5,587 Private charging poles 75 317 454 642 831 1,042 1,252 4,220 Public charging poles 24 103 147 208 269 338 406 1,368 Total market size 493 2,225 3,141 4,413 5,666 7,075 8,467 28,762 yoy chg% 351% 41% 41% 28% 25% 20% 31% Source: CAAM, Company data, Deutsche Bank estimates
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Appendix B – global connector peer comparison
Figure 53: Comparison of sales exposures to different end-markets – global connector peers (FY2015)
Source: Company data, Deutsche Bank estimates
Figure 54: Global connector peer comparison – GP Figure 55: Global connector peer comparison – ROE margin (FY2015) (FY2015)
Hirose 45.0 TE Connectivity 26.0 Zhejiang Yonggui 44.6 Amphenol 24.8 Guizhou Space Applicance 36.1 Luxshare Precision 21.3 Huber+Suhner 34.6 JONHON Optronic 18.2 JONHON Optronic 33.5 JAE 17.6 TE Connectivity 33.4 Shenzhen Everwin Precision 17.0 Amphenol 32.0 KET 13.0 Shenzhen Everwin Precision 27.8 Guizhou Space Applicance 12.5 JAE 24.4 Zhejiang Yonggui 11.1 Luxshare Precision 22.5 Hirose 8.2 KET 19.2 Shenzhen Deren 5.6 Shenzhen Deren 17.6 Huber+Suhner 3.7
0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 50.0 0.0 5.0 10.0 15.0 20.0 25.0 30.0 GPM (%) ROE (%)
Source: Company data, Deutsche Bank Source: Company data, Deutsche Bank
Figure 56: Global connector peer comparison – net profit Figure 57: Global connector peer comparison – R&D as growth (FY2013-15 CAGR) % of total sales (FY2015)
JAE 70% Guizhou Space Applicance 8.8 Luxshare Precision 60% Shenzhen Everwin Precision 6.8 JONHON Optronic 41% JONHON Optronic 6.4 Shenzhen Everwin Precision 34% Zhejiang Yonggui 6.3 KET 32% Luxshare Precision 5.8 Zhejiang Yonggui 30% KET 5.7 TE Connectivity 30% TE Connectivity 5.1 Hirose 21% Hirose 4.9 Guizhou Space Applicance 15% JAE 4.8 Amphenol 11% Shenzhen Deren 4.8 Huber+Suhner 5% Huber+Suhner 4.2 Shenzhen Deren-6% Amphenol 2.2
-10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 2013-15 net profit CAGR (%) R&D as % of sales (%)
Source: Company data, Deutsche Bank Source: Company data, Deutsche Bank
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Appendix 1
Important Disclosures
*Other information available upon request
Disclosure checklist Company Ticker Recent price* Disclosure JONHON Optronic 002179.SZ 38.65 (CNY) 4 Jan 17 NA Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr. Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.
For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=002179.SZ
Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Nick Zheng
Historical recommendations and target price: JONHON Optronic (002179.SZ) (as of 1/4/2017)
70.00 Previous Recommendations
Strong Buy 60.00 Buy Market Perform Underperform 50.00 3 Not Rated 1 Suspended Rating 40.00 2 Current Recommendations
Buy 30.00 Hold SecurityPrice Sell 20.00 Not Rated Suspended Rating
*New Recommendation Structure 10.00 as of September 9,2002
**Analyst is no longer at Deutsche 0.00 Bank
Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Date
1. 25/11/2015: Upgrade to Buy, Target Price Change CNY50.00 Nick 3. 09/08/2016: Buy, Target Price Change CNY50.00 Nick Zheng, CFA Zheng, CFA 2. 04/04/2016: Buy, Target Price Change CNY45.50 Nick Zheng, CFA
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Equity rating key Equity rating dispersion and banking relationships Buy: Based on a current 12- month view of total 500 53 % share-holder return (TSR = percentage change in 450 share price from current price to projected target price 400 350 37 % plus pro-jected dividend yield ) , we recommend that 300 investors buy the stock. 250 200 Sell: Based on a current 12-month view of total share- 150 17 % 10 % 100 18 % 20 % holder return, we recommend that investors sell the 50 stock 0 Buy Hold Sell Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not Companies Covered Cos. w/ Banking Relationship recommend either a Buy or Sell. Asia-Pacific Universe Newly issued research recommendations and target
prices supersede previously published research.
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