China Industrials 22 October 2019 Luxshare Precision Industry (002475 CH) Luxshare Pr ecision Industr y Target price: CNY36.00 (from CNY34.00) Share price (22 Oct): CNY29.88 | Up/downside: +20.5% Promising prospects on strong position and execution Kylie Huang (886) 2 8758 6248 Near-term outlook solid on strong iPhones sales with increased orders [email protected] We see earnings growth of 37-55% YoY in 2019-21 on multiple drivers Steven Yang (886) 2 8758 6245 Reiterating Buy (1); lifting TP to CNY36; a preferred sector pick [email protected] What's new: Luxshare’s strong 3Q19 results reaffirm our positive thesis Forecast revisions (%) (see Initiation: multiple drivers for a bright earnings outlook, 7 Year to 31 Dec 19E 20E 21E October) and our optimistic view on new iPhones sales due to attractive Revenue change 9.8 6.1 6.0 Net profit change 4.9 5.1 2.6 pricing (see our sector report), while our recent industry research shows a Core EPS (FD) change 4.9 5.1 2.6 rise in orders in iPhones. We reiterate our Buy (1); it remains a preferred Source: Daiwa forecasts sector pick. Share price performance What's the impact: 3Q19 results beat. Luxshare’s 3Q19 net profit of (CNY) (%) CNY1.4bn (+57% QoQ; +67% YoY) was ahead of our and the consensus 30 180 estimates by 28-36% and the midpoint of guidance by 30%, driven by 25 150 better revenue from strong shipments in iPhones and AirPods, on top of the 20 120 15 90 ongoing share gains and margin expansion on a favourable product mix 10 60 and increasing operating efficiency, in our view (see our memo). Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Luxshare P (LHS) Relative to SZASHR Index (RHS) Near-term outlook solid; increased orders for new iPhones. We have highlighted market expectations for new iPhones sales as too conservative. 12-month range 10.10-29.88 The sales status of new iPhones reaffirms our confidence; currently, the Market cap (USDbn) 22.61 wait time remains 1-3 weeks for most models vs. <3 days for last-year’s 3m avg daily turnover (USDm) 232.67 Shares outstanding (m) 5,349 models over the same period (see page 5), while our industry research also Major shareholder The Wang family (45.3%) shows a 5-8% order increase for iPhone component vendors. We now forecast new iPhones shipments of 76.5m in 2H19 (vs.72.5m earlier). We Financial summary (CNY) view Luxshare as a major beneficiary of strong iPhones sales on its major Year to 31 Dec 19E 20E 21E supplier position in LCP antenna, haptics, acoustics, etc. We also see the Revenue (m) 56,350 72,800 93,000 upcoming new AirPods in 4Q19 as another revenue growth driver. Overall, Operating profit (m) 5,195 7,659 10,379 Net profit (m) 4,228 6,334 8,663 we forecast Luxshare’s 4Q19 revenue to come in at CNY18.5 bn (+13% Core EPS (fully-diluted) 0.790 1.184 1.620 QoQ; +35% YoY), with flattish QoQ earnings of CNY1.3bn (-3% QoQ; EPS change (%) 19.5 49.8 36.8 +26% YoY) on higher operating expense due to new project development Daiwa vs Cons. EPS (%) 6.9 15.2 24.5 costs and employee compensation, vs. its guidance of CNY1.1-1.3bn. PER (x) 37.8 25.2 18.4 Dividend yield (%) 0.1 0.3 0.4 DPS 0.038 0.079 0.118 Robust earnings likely in 2019-21E. We expect Luxshare to deliver PBR (x) 7.3 5.7 4.5 strong earnings growth of 37-55% YoY in 2019-21, led by multiple drivers: EV/EBITDA (x) 24.5 16.3 11.8 ROE (%) 21.9 25.5 27.2 1) market-share gains and new project wins in Apple products on its strong Source: FactSet, Daiwa forecasts execution and R&D capability, 2) increasing benefits from the upcoming 5G on its years of investment and Huawei’s support of domestic suppliers amid the US-China trade dispute, and 3) the margin expansion on improving operating efficiency and increasing benefits from vertical integration. What we recommend: We raise our 2019-21E EPS by 3-5% on our more optimistic revenue assumptions. We reiterate our Buy (1) rating and raise our 12-month TP to CNY36 (from CNY34), still based on target PER of 30x on our revised 2020E EPS. Key risks: weak iPhone and AirPod sales. How we differ: Our 2020-21E EPS are 15-25% above the consensus, likely as we are more positive on Luxshare’s margin expansion. See important disclosures, including any required research certifications, beginning on page 10 Luxshare Precision Industry (002475 CH): 22 October 2019 Financial summary Key assumptions Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Computers sales (CNY mn) 3,339 3,890 4,612 4,348 3,733 3,437 3,836 3,944 Consumer electronics sales (CNY mn) 2,734 4,417 6,898 15,187 26,807 44,335 57,386 73,521 Automotive sales (CNY mn) 1,121 1,110 1,957 3,009 4,791 5,309 5,393 5,469 Communication sales (CNY mn) 415 842 903 1,131 1,728 2,266 2,719 3,317 Profit and loss (CNYm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E PC connector/cable 3,339 3,890 4,612 4,348 3,733 3,437 3,836 3,944 Mobile device & components 2,734 4,417 6,898 15,187 26,807 44,335 57,386 73,521 Other Revenue 1,223 1,832 2,253 3,291 5,310 8,578 11,577 15,535 Total Revenue 7,296 10,139 13,763 22,826 35,850 56,350 72,800 93,000 Other income 0 0 0 0 0 0 0 0 COGS (5,597) (7,819) (10,804) (18,260) (28,304) (44,573) (57,279) (73,098) SG&A (510) (505) (620) (887) (1,288) (2,138) (2,553) (3,093) Other op.expenses (312) (635) (1,008) (1,665) (2,678) (4,444) (5,309) (6,430) Operating profit 877 1,180 1,330 2,014 3,580 5,195 7,659 10,379 Net-interest inc./(exp.) (50) (44) (60) (75) (161) (216) (223) (217) Assoc/forex/extraord./others 37 156 119 100 (137) 171 175 182 Pre-tax profit 864 1,293 1,389 2,039 3,282 5,151 7,610 10,344 Tax (125) (161) (207) (291) (469) (773) (1,126) (1,531) Min. int./pref. div./others (109) (53) (26) (57) (91) (150) (150) (150) Net profit (reported) 630 1,079 1,157 1,691 2,723 4,228 6,334 8,663 Net profit (adjusted) 630 1,079 1,157 1,691 2,723 4,228 6,334 8,663 EPS (reported)(CNY) 0.757 0.858 0.546 0.533 0.662 0.790 1.184 1.620 EPS (adjusted)(CNY) 0.757 0.858 0.546 0.533 0.662 0.790 1.184 1.620 EPS (adjusted fully-diluted)(CNY) 0.757 0.858 0.546 0.533 0.662 0.790 1.184 1.620 DPS (CNY) 0.046 0.053 0.053 0.053 0.046 0.038 0.079 0.118 EBIT 877 1,180 1,330 2,014 3,580 5,195 7,659 10,379 EBITDA 1,080 1,471 1,769 2,663 4,564 6,661 9,930 13,395 Cash flow (CNYm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Profit before tax 864 1,293 1,389 2,039 3,282 5,151 7,610 10,344 Depreciation and amortisation 211 299 450 669 1,008 1,466 2,272 3,016 Tax paid (125) (161) (207) (291) (469) (773) (1,126) (1,531) Change in working capital (448) (809) (2,092) (1,781) (1,641) (971) (1,947) (2,704) Other operational CF items (16) 2 (21) (184) (123) (131) (135) (142) Cash flow from operations 485 624 (481) 452 2,058 4,741 6,675 8,982 Capex (881) (935) (1,911) (3,335) (4,414) (4,834) (4,373) (4,373) Net (acquisitions)/disposals (64) (31) (10) (52) (39) (90) (90) (90) Other investing CF items (215) (159) (374) (203) (282) (426) (511) (613) Cash flow from investing (1,160) (1,126) (2,295) (3,590) (4,735) (5,350) (4,974) (5,076) Change in debt 1,065 519 302 2,508 2,525 724 398 418 Net share issues/(repurchases) 0 0 0 0 0 0 0 0 Dividends paid (38) (67) (113) (170) (190) (206) (423) (633) Other financing CF items 1,235 (97) 0 0 0 0 0 0 Cash flow from financing 2,262 355 189 2,339 2,335 518 (25) (215) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash 1,587 (146) (2,587) (799) (342) (90) 1,676 3,691 Free cash flow (396) (311) (2,392) (2,883) (2,356) (93) 2,302 4,609 Source: FactSet, Daiwa forecasts 2 Luxshare Precision Industry (002475 CH): 22 October 2019 Financial summary continued … Balance sheet (CNYm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Cash & short-term investment 2,242 2,042 4,637 4,055 3,840 4,834 6,360 9,900 Inventory 1,161 1,509 2,122 3,474 4,735 6,857 8,812 11,246 Accounts receivable 2,286 2,948 4,871 7,206 11,216 16,982 21,940 28,027 Other current assets 283 545 2,916 2,637 3,288 3,635 3,551 3,875 Total current assets 5,972 7,043 14,545 17,372 23,078 32,309 40,663 53,048 Fixed assets 2,434 3,078 4,550 7,235 10,665 14,033 16,134 17,491 Goodwill & intangibles 0 0 0 0 0 0 0 0 Other non-current assets 1,286 1,466 1,860 2,279 2,699 3,346 4,081 4,926 Total assets 9,692 11,587 20,955 26,886 36,441 49,687 60,878 75,466 Short-term debt 2,151 2,806 3,074 4,551 5,737 6,368 6,687 7,021 Accounts payable 1,754 2,136 4,291 6,341 10,238 17,096 21,970 28,038 Other current liabilities 502 582 1,242 819 1,204 1,610 1,618 1,691 Total current liabilities 4,407 5,524 8,607 11,712 17,179 25,075 30,275 36,750 Long-term debt 284 140 84 706 1,499 1,592 1,672 1,755 Other non-current liabilities 36 44 133 543 1,089 1,089 1,089 1,089 Total liabilities 4,727 5,708 8,825 12,961 19,767 27,756 33,035 39,594 Share capital 832 1,257 2,120 3,173 4,115 5,349 5,349 5,349 Reserves/R.E./others 4,132 4,621 10,010 10,752 12,560 16,583 22,494 30,523 Shareholders' equity 4,964 5,879 12,130 13,925 16,675 21,932 27,843 35,872 Minority interests 0 0 0 0 0 0 0 0 Total equity & liabilities 9,692 11,587 20,955 26,886 36,441 49,687 60,878 75,466 EV 160,022 160,732 158,350 161,030 163,225 162,955 161,827 158,704 Net debt/(cash) 194 904 (1,478) 1,202 3,397 3,127 1,999 (1,124) BVPS (CNY) 5.967 4.675 5.721 4.389 4.053 4.100 5.205 6.706 Key ratios (%) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Sales (YoY) 58.9 39.0 35.7 65.9 57.1 57.2 29.2 27.7 EBITDA (YoY) 77.7 36.2 20.2 50.6 71.4 45.9 49.1 34.9 Operating profit (YoY) 77.3 34.5 12.7 51.4 77.8 45.1 47.4 35.5 Net profit (YoY) 85.4 71.2 7.2 46.2 61.0 55.3 49.8 36.8 Core EPS (fully-diluted) (YoY) 22.0 13.3 (36.4) (2.3) 24.2 19.5 49.8 36.8 Gross-profit margin 23.3 22.9 21.5 20.0 21.0 20.9 21.3 21.4 EBITDA margin 14.8 14.5 12.9 11.7 12.7 11.8 13.6 14.4 Operating-profit margin 12.0 11.6 9.7 8.8 10.0 9.2 10.5 11.2 Net profit margin 8.6 10.6 8.4 7.4 7.6 7.5 8.7 9.3 ROAE 15.6 19.9 12.8 13.0 17.8 21.9 25.5 27.2 ROAA 7.9 10.1 7.1 7.1 8.6 9.8 11.5 12.7 ROCE 14.7 14.5 11.0 11.7 16.6 19.3 23.2 25.7 ROIC 16.8 17.3 13.0 13.4 17.4 19.6 23.8 27.4 Net debt to equity 3.9 15.4 n.a.