Luxshare:3Q16miss doesn't eclipse positive long-term outlook

New component and market share gain to drive long-term growth.

    Despite strong top-line growth (owing to iPhone Lightning/audio adapter),Luxshare 3Q16 EPS missed our estimate, largely due to one-offcosts/expenses. Luxshare expects 4Q16 EPS to resume strong growth, with the2017 outlook staying positive. We believe Luxshare’s market share gain (incable/connector) will continue in the long term, and new business (acousticand antenna for iPhone 8) diversification is about to bear fruit in 2017.

    Retaining Buy rating.

    3Q16 EPS miss largely due to last-minute spec change on iPhone adapter.

    Luxshare reported 3Q16 net profit of RMB280mn (+3% YoY; +39% QoQ) onsales of RMB3.7bn (+44% YoY; +39% QoQ). Sales came in 10% above ourestimate, as Luxshare secured a dominant market share (50%+) inLightning/audio adapter, iPhone 7’s new component. However, EPS missed DBestimate by 30%, with GPM dipping 1.9ppt to 21.1% (vs. DBe 24.3%) and opexrising 20% QoQ to RMB432mn (vs. DBe RMB 370mn). Luxshare highlights themiss is largely attributed to the client’s last minute redesign of new products(Lightning/audio adapter), which led to lower production yield/efficiency in theinitial stage, and higher R&D/tooling/molding expenses.

    4Q16/2017 outlook remains promising.

    Luxshare expects 4Q16 net profit to reach RMB452mn-RMB560mn (up 61% to100% QoQ) on sales of RMN4.0bn+, and believes GPM will recover to thenormal range (22%-24%), on the back of rising capacity utilization, improvingproduction yield and the removal of one-off expenses. For 2017, Luxshareexpects to post ~30% sales growth, driven by: 1) Lightning cable proliferatingfrom power charger to earpod application, 2) USB Type C becoming a standardspec for high-end Android phones (with some adoption in mid-end devices), 3)market share gain in automotive/telecom connector business, and 4) newiPhone components (speaker box/receiver and antenna).

    Valuation and risks.

    We revise our 2016 EPS by 13.7% to RMB0.62, but leave 2017/2018 EPSforecasts largely unchanged. However, we lift our TP from RMB24 toRMB26.5, as we roll over to 2017 EPS. Our new TP is still based on 32x 2017EPS, or 1.1x PEG (vs. regional peers of 0.8x PEG). We see the premiumvaluation (vs. regional peers) as justifiable given its improved sector growthoutlook and long-term market share gain potential. Downside risks includeslow USB type-C proliferation, price competition, and forex fluctuations.