JONHON Optronic:Earnings growth to stay in the fast lane;maintain Buy

Strongest growth yet cheapest valuation in DB A-share A&D coverage universe.

    We believe JONHON's strong 2015 result (+67% yoy) was not just a one-time boost from the new capacity roll-out, but more importantly was a reflection of genuinely strong demand as evidenced by continued growth momentum in the last two quarters, when comparison bases began to normalise. With a small cut in earnings, we now project a 34% EPS CAGR in 2016-17. JONHON remains our preferred pick in the A-share A&D sector because of its exposure to multiple growth drivers. Currently trading at 27x 2016 P/E (vs. 75x avg. for A-share A&D names), the stock is a cheaper way to play China's defence build-up theme. Our new TP implies 28% upside potential from the current level.

    2016 off to a strong start - 1Q16 NP to increase by 40-80% yoy.

    In addition to sustained strong momentum seen in 4Q15 (+42% yoy), robust order intake from new markets including NEVs (+2x yoy) and overseas markets (+34% yoy) is another key highlight of JONHON’s 2015 results, which should strengthen its NT earnings visibility. The company also issued a positive profit alert, expecting its 1Q16 NPAT to surge by 40-80% yoy, which would imply an achieved ratio of 15-19% vs. revised 2016DBe (five-year avg. of 14% for Q1).

    Proposed capacity expansion project to enhance long-term growth prospect.

    The company also said that it plans to launch a new-technology industrial base located in Luoyang with capex of c.Rmb1bn, covering a total area of 114mu (vs. the current 330mu). Construction is expected to be started by the year-end and to be completed by 2019. This project is aimed at strengthening its manufacturing capabilities in various new business areas (mostly connector-related). JONHON expects that the new production base will contribute annual sales of Rmb1.4bn and a pre-tax profit of Rmb217mn upon completion.

    Revisions, valuation and risks.

    Incorporating 2015 results and slower connector sales to the telecom sector, we trim our estimates by 7%/8% for 2016/17 and introduced our 2018 forecasts. Correspondingly, we lower our P/E based TP to Rmb45.5. Our slightly lowered target 2016 P/E of 35x is largely in line with the average of its A-share listed connector peers. Key downside risks include an unexpected delay in military orders and slower-than-expected civil market penetration.