Sunwoda Battery:Major market share winner in iPhone and EV

Strong IT growth + new EV catalyst = Buy

    Sunwoda is the leading handset/EV battery pack maker in China. We expectthe company to deliver a 26%+ EPS CAGR in 2017-2020, stimulated by: 1)continued iPhone share gain/ASP hike; 2) initial taking off in iPad and Macbookbatteries; and 3) strong EV momentum propelled by accelerating EVpenetration in China. We also anticipate Sunwoda will deliver ongoing batterymargin expansion, given its superior quality stemming from verticallyintegrated production (in-house BMS/cell supply). Initiating with Buy rating.

    Strong i-device battery share gain is fueling accelerating growth ahead

    Sunwoda is the major battery supplier to both Apple and leading Chinasmartphone brands. We expect it to deliver 40%+ iPhone battery sales CAGRin 2017-2020thanks to 1) continued share gain (allocation lift to 30-45% vs.only 20% in 2016), and 2) ASP hike stemming from iPhone 8spec upgrades(changed to dual cell design with 50%+ price increase). We also anticipateongoing handset margin growth (15%+ vs. industry average of 8-10%)propelled by rising in-house battery cell (rising from 3% now to 40-60% in2018-2019E) and BMS supply for Android customers, and enhanced factoryautomation. Sunwoda also taps into iPad battery supply starting 2017andaims to win Macbook orders in 2018. Persistent Apple orders gains and non-Apple PC customer wins (Dell, HP) should stimulate 100%+ PC battery revenuegrowth in 2017-2018.

    EV batteries fuelling long-term momentum

    Sunwoda is an early mover in EV battery pack assembly and is establishingsolid partnerships with domestic auto OEMs (Wuling Motors, BAIC Motor,Dongfeng Motor, Geely). The company is expanding its EV battery cell capacityand aims to lift its in-house battery cell supply ratio. We expect Sunwoda todeliver a 35%+ EV profit CAGR in 2017-2020, propelled by acceleratingindustry growth (DB expects China EV market to expand at a 30% CAGR) andpersistent new customer gain.s given higher manufacturing flexibility overpeers (given its commitment in in-house battery cell and BMS development).

    Valuation and risks

    We base our RMB14.5target price on 24x 2018E P/E, or 0.9x PEG (vs. China ITindustry average of 25-30x P/E, or 1.2x PEG), which we believe is reachablegiven the strong sector outlook. Risks: iPhone share loss, slower China EVdemand, unfavorable FX.