Shennan Circuits’ 2Q22 revenue/NP to shareholders grew 15.8%/33.1% YoY and 10.3%/16.2% QoQ. GPM stabled at 26%+ (vs. 22.5%-24.6% for 1Q21-4Q21), benefiting from easing material cost pressure and product structure adjustment. For 2022, Prismark forecasts PCB market to grow 4.2% YoY, moderate growth after significant growth of 24.1% YoY in 2021. Again, substrate market will lead the growth. For Shennan, we expect the PCB/substrate sales to grow 8.8%/18.9% respectively, driven by capacity ramp up and growing demand from auto markets. Total revenue growth is estimated at 7.7% for 2022. Overall, we think the Company will continue to face challenges, such as 1) slowdown of domestic 5G telecom capex, 2) delayed upgrade for Eagle stream platform, 3) soft consumer demand. We maintain HOLD and lower our TP to RMB96.6.
Although auto PCB capacity is ramping up and segment margin improves, PCB segment outlook remains cautious. PCB sales grew 19.6% YoY in 2Q, due to growing demand from telecom (mainly overseas), datacenter and auto electronics markets. As Nantong phase III factory is ramping up capacity, we believe auto PCB sales will deliver decent growth this year. Meanwhile, material price is declining from the peak, which helps Shennan’s PCB GPM improve to 27.3% in 1H22 (vs. 24.8% in 2H21). However, we maintain our cautious outlook, given detailed timeline of 5G deployment and upgrade of new datacenter platform is still unclear. Although the strong growth from auto PCB could partially offset these impacts, its revenue contribution is still insignificant (est. <5% in 2021).
Substrate demand weakening and supply chain constraint is easing. Substrate sales grew 24.8% YoY in 1H22, mainly driven by new capacity released from Wuxi Phase II factory. The results was solid, after a good year for substrate in 2021 (segment rev. growth of 56.3% YoY). However, we think the unbalanced supply/demand situation is improving as consumer demand is weakening.
Maintain HOLD and lower TP to RMB96.6 We think Shennan is doing its best to navigate through macro uncertainties. However, we maintain our cautious outlook for PCB segment and lowered our FY22/23E EPS forecasts by 9%/12%. TP cut to RMB96.6, equal to 23x FY23E P/E, ~1SD below avg. 2-yr historical forward P/E. Potential upside: 1) stronger recovery in consumer demand, 2) resumed 5G deployment and Eagle steam platform upgrade.
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