Luxshare:Multiple new businesses with iPhone

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

    Strong 1Q17 results: 51% net profit growth on 88% top-line growth Luxshare’s 2016 results were in line (see Figure 2), but 1Q17 EPS beat our estimate by 10%, on strong top-line growth. 2Q17 guidance came in above expectation and the 2017 outlook looks promising, driven by dollar content increase for new iPhones (wireless charging module, stereo speaker/receiver, and Wi-Fi/BT/GPS antenna) as well as rising USB Type-C penetration (on PC, Android phones and headphones/earpods). Retaining Buy rating.

    Strong 1Q17 results: 51% net profit growth on 88% top-line growth.

    Luxshare reported 1Q17 net profit of RMB301mn (+51% YoY; -37% QoQ) and operating profit of RMB364mn (+62% YoY; -28% QoQ) on sales of RMB3.9bn (+88% YoY; -26% QoQ). Sales and net profit came in 14% and 10% above our estimates. The firm attributes the strength to dollar content increase for the iPhone (audio/Lightning adaptor), strong Type-C connector/cable orders from PC and Android clients, and market share gain in the automotive/telecom space. GPM increased 0.8ppt QoQ to 20.4%, thanks to improved production yield in audio/Lightning adaptor.

    Strong 2Q17 guidance and positive 2017 outlook.

    Luxshare expects 2Q17 net profit to reach RMB300mn-RMB420mn (up 51% to 111% YoY) on sales of RMN4.0bn+, and believes GPM will continue to improve, on the back of rising capacity utilization, and better product mix (less audio/Lightning adapter). For 2017, Luxshare expects to post 30%+ sales growth, driven by: 1) more headphones/earpods adopting Type-C or Lightning cables, 2) USB Type-C becoming a standard spec for high-end Android phones (with rising adoption in mid-end devices), 3) market share gain in the automotive/ telecom connector business, and 4) new iPhone components - wireless charging modules (~50% market share), speaker box/receivers (~10% market share), and Wi-Fi/BT/GPS antenna (less than 10% market share).

    Valuation and risks.

    We revise our 2017-18 EPS by 8%/12% to reflect dollar content increase for the iPhone and market share gains in the telecom/auto business. We thus revise up our TP from RMB26.5 to RMB30, based on 30x 2017-18 average EPS (from 32x 2017 EPS previously due to valuation rollover), or 1.0x PEG (vs. regional peers of 0.8x PEG). We see the premium valuation (vs. regional peers) as justifiable, given its improved sector growth outlook and long-term market share gain potential. Downside risks include slow USB type-C proliferation, price competition, and forex fluctuations.