We initiate Wingtech with BUY and TP of RMB93.12. We hold an optimistic view as the Company has expanded into the semi IDM and optical imaging module market successfully in recent years, transitioning from a top ODM manufacturer. New business units can immediately boost the Company’s top line (FY21: RMB13.8bn semi rev on top of RMB38.7bn ODM rev) and improve profitability as new BUs have higher NPMs (FY21 NPM: 19.1% for semi vs. 0.5% for ODM). The Company emerges as a more resilient hardware play with more diversified and lucrative businesses. Our TP of RMB93.12 is based on 25x FY23 P/E, which is 2SD lower than its historical mean (46x).
Business in transition. Through two acquisitions, Wingtech successfully enters new markets with big TAMs and better growth outlook. The Company also reduces its reliance on smartphone ODM and moves to other diversified ODM markets (e.g. AIoT, auto). Revenue growth slowed down during this period (FY21: 2% YoY). We expect a rebound with a higher growth starting from 2022 as revenue contributions from new BUs grow faster (2022-24E CAGR: Semi IDM/Optical module 41.6%/100.5% vs. ODM 26.2%).
Outlook is bright. 1) For ODM, we believe the Company’s new projects will start to contribute to revenue in 2022/23. Product mix in ODM is expected to improve (higher contribution from non-mobile: 6.7% in FY20 vs. 25.2% in FY22E) that can offset weakness in mobile market. 2) For semi IDM, this segment grew 40% YoY in FY21, showing Wingtech’s capability of business integration. Riding on the localization tailwind in China with a global footprint of factories and diversified client base, we expect the semi IDM business will continue to deliver stellar results (semi IDM rev CAGR of 41.6% in 2022- 2024E). 3) For optical module business, Wingtech has shipped products to tier-1 clients and passed its rigorous verification process in 2021. We expect this segment will return to profitability in 2022.
Share price looks attractive as most bad news are priced in. Wingtech’s share price has been corrected by 41.9% YTD vs CSI300 down by 9.6%. We talked to mgmt. recently and believe the Company’s operation remains normal. In our view, the current share price has already factored in many uncertainties and looks attractive with forward P/E at 2SD below its historical mean.
Upside catalysts: 1) Better-than-expected earnings result; 2) new 12-inch factory to begin production in 2H; 3) ODM’s new projects to contribute in 2H. Downside risks: 1) macro challenges such as overseas inflation, slowdown in economic growth; 2) geopolitical tension that could disrupt supply chain.
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