O-Film Alert:No hurry on Apple camera module business
Strong growth on fingerprint and dual camera theme.
We hosted a tech tour in Shenzhen and visited O-Film. The firm is positive onboth fingerprint/camera modules businesses and expects revenue contributionto lift to RMB7/7-8bn in 2016 vs. RMB1/5bn in 2015, owing to acceleratingpenetration in China handset. The firm is also upbeat on its recent acquisitionof Sony’s China factory (iPhone CCM supplier). We think it is unlikely that OFilmcould get iPhone CCM orders in 2017, but do see a fair chance for this totake place in 2018-2019, by leveraging its superior execution and Sony’s longtermpartnership with Apple. We recognize O-Film’s aggressive expansion innew growing area, but are skeptical about its continued margin erosion giventhe intensifying competition. Retain Hold rating.
Rising dual handset camera proliferation in China.
During the meetings, most investors were curious on dual camera penetrationin China smartphone market. O-Film is upbeat on the trend with rising newprojects win from both existing (Xiaomi) and new customers (Huawei, Gionee).
Management indicates that most of the orders in pipeline are featuring depthtype solution (13MP+8MP or 13MP+5MP) due to the still immature algorithmfor zoom type CCM and stricter active alignment requirement in hardwareassembling field. O-Film’s dual CCM monthly capacity is 3-4mn units now withshipment of 1.5-2 mn units per month, which implies there’s still room for yieldimprovement. However, owing to stricter quality/precision requirement, thecompany still enjoys the ASP hike (2.3x higher vs. two single camerascombined) stemming from strong dual camera demand.
2017: fingerprint outgrows, Apple CCM more like a 2018-2019 story.
O-Film delivers strong revenue growth in fingerprint module. The companytargets to generate RMB7bn sales from fingerprint business in 2016 vs. lessthan RMB1bn in 2015. Thanks to its production scale advantage. O-Film willkeep GPM at 9-10% despite intensifying price competition (ASP drops toRMB30 in 2H16 vs. RMB35 in 1H16). For its recent acquisition of Sony’s ChinaCCM factory (including 100 R&D engineers), O-Film expects the deal to beclosed by 1Q17. This factory mainly supplies CCMs for Apple (flip-chiptechnology) and Sony (COB technology). O-Film comments that it cannot startthe qualification process with Apple, before the deal is done. As a result, wedon’t think O-Film could win iPhone CCM projects in 2017, owing to thelengthy qualification process. However, management is confident on itsexecution and sees high possibility for them to win new Apple CCM orders in2018-2019E.
Valuation and investment risks.
We fine tune our earnings model but leave our 2017E EPS forecast largelyunchanged. Our TP of RMB33 is still based on 22x 2017E P/E, (inline with Asharetech peers). Risks: strong/weak handset demand.