Shenzhen Luxshare Precision Ind:Valuation assumes no iPhone contribution,sell-off overdone,CL-Buy

Source of opportunity

    Luxshare is down 12% since it lowered 1H16 earnings guidance on July 8 onshipment delays to Apple. We view the sell-off as overdone; reiterate CL-Buy. 1)We see the delay as a one-off and expect the impact to be largely contained in1H. Shipments resumed in late June after passing quality checks and we expect35%/36% yoy earnings growth in 3Q/4Q16. 2) Long-term, we stay positive onshare gains in the fragmented global connector market through newapplications. 3) The current share price implies no iPhone sales contributionto Luxshare’s earnings until 2020E. Our bear-case scenario suggests 30% shareupside (37% in base case) if iPhone sales are 20% lower than our base-case.

    Catalyst

    (1) We expect Luxshare’s net profit to grow strongly at 35% yoy in 2H2016,driven by Apple product ramp-up, and Type-C and base station antennas.

    The company will report interim results on Aug 9, when we expect it toprovide 3Q guidance and reveal the latest new product developments; (2)We forecast GPM will recover to 24% in 2H16 from 22% in 1H16 on yieldand mix improvement.

    Valuation

    Our 12m TP is unchanged at Rmb24, derived by applying global peers’average 2016E P/E to 2020E EPS forecast and discounting back at a cost ofequity of 8.4%. The stock underperformed its Asian peers by 18% in the pasttwo days and is currently trading at 21X NTM P/E, one-standard deviationbelow its historical average since listing, providing a good opportunity toadd to positions.

    Key risks

    Slower-than-expected ramp up of new products.