Focused Photonics Inc:Strong growth +attractive valuation =a buying opportunity

Strong results; positive conference call takeaways.

    2016 results in line; 2017 off to a good start FPI reported strong 2016 results (+63% YoY) and a solid 1Q17 (+48% YoY) last night. We hosted a post-results conference call today and came away with positive takeaways. Management expects organic growth to be sustained at 20-30% driven by the EMS up-cycle and import substitution for laboratory instruments. Further upside might come from environmental PPP projects with Huangshan project starting to contribute in 2017. Against a 31% EPS CAGR over 2017-19, the current valuation of 19x 2018E P/E looks compelling. Buy.

    2016 results in line; 2017 off to a good start.

    2016 NP of Rmb402m, up 63% YoY, was in line with our estimate. By segment, sales of EMS (+7% YoY) were shy of expectations as project executions are typically slow in the first year of a five-year-plan period. This, however, was more than offset by strength across other segments including laboratory (+69% YoY), environmental governance instruments (+152% YoY), industrial process analysis (+32% YoY). The strong growth momentum was largely sustained in 1Q17, with NP up 48% YoY on 34% YoY top-line growth.

    Growth outlook remains encouraging; PPP projects to drive further upside.

    At the post-result conference call, management guided for organic growth of 20-30% for 2017 driven by: 1) 20-30% growth for both EMS and laboratory; and 2) recovery at the water conservancy segment (back to the 2015 level) as severe flooding in 2H16 in South China should boost instrument demand for water conservancy. On top of this, the execution of the Huangshan PPP project could potentially yield NP upside of Rmb30-40m for 2017. With possible participation in more PPP projects ahead (in a disciplined way), management noted that earnings growth could potentially hit 50% in the coming years.

    Reiterating Buy on compelling valuation; risks.

    We keep our estimates largely unchanged for 2017/18 and introduce our 2019 forecasts (31% EPS CAGR over 2017-19E). We retain our Rmb45 DCF-based target price (WACC: 8.5% and TGR: 2%) and our Buy rating. Valuation looks compelling at 24x/19x P/E on 2017E/18E, compared with its mid-cycle average of 36x and global peers’ average of 29x/24x on 2017E/18E with 16% EPS CAGR. Key risks: slower-than-expected EMS growth, poor execution of investments.