Tongda:Riding on metal and glass casing

Following our Macvisits (SZ-HK Connect, Nov 8), we initiate coverage on

Tongda with an Outperform rating and a HK$3.0 TP. We forecast a 44% EPSCAGR in 2016-18E driven by: 1) casing – gaining market share in metal casingand just ventured into 3D glass; and, 2) improving product mix as it shifts focuson to high-margin businesses such as metal casing and 3D glass. The stocktrades at 10x our 2017E PE, which is attractive on our 44% EPS CAGR. Ourtarget PE multiple of 12x is in line with Tongda’s peer average.

GM expansion, rare play in smartphone components

Tongda has been transitioning its business to focus on high margins whichhelped its GM expand from 19% in 2011 to 25% in 2015 despite a slowingsmartphone market. We expect GM to keep expanding given 1) rising metalcasing contribution – 60% of revenue in 1H16 with room for further growth; and,2) high-margin new businesses, such as 3D glass and waterproof components,which should support overall gross margins in the long run.

Shifting from metal casing to 3D glass

A major player in metal casing, Tongda has recently entered 3D glass, enrichingits casing portfolio and reducing the concentration risk. The company’s 3D glasscould be bundled with metal frame, providing one-stop offering for its end-clients.Tongda’s entry into premium non-metal casing echoes our view of rising glass /ceramic casing trend due to its product differentiation, wireless charging (report,Nov 25), and radio frequency transparent features (better supports datatransmission and 5G).

Valuation and downside risks

The stock currently trades at 10x our 2017E PE, which is attractive consideringits 44% EPS CAGR in 2016-19E and compared with its peers’ average PE of12x, which is also our target PE multiple. Our 2017-18E EPS is 28-43% higherthan consensus on higher revenue estimates (on mainly metal casing and 3Dglass). Downside risks include a slower-than-expected smartphone market and aslower-than-expected ramp-up of 3D glass.