Sunwoda Battery:iPhone 8momentum is coming through strongly

Good results and optimistic 2H17outlook on iPhone 8strength

    Sunwoda released better 2Q17operating results thanks to sequential handset(iPhone/China smartphone) battery share gains and initial penetration of theiPad supply chain. Management anticipates 30-35% YoY EPS growth in 2H17,propelled by iPhone 8strength. We expect Sunwoda’s iPhone allocation to riseto 35-45% in 2017-2018vs. 20% in 2016. Driven by continued ASP increasesstimulated by dual cell battery proliferation, we expect Sunwoda’s iPhonerevenue CAGR to ramp to 40%+ in 2017-2020. Sunwoda is one of our toppicks in the iPhone supply chain, featuring both an ASP and an order allocationgain story. We believe its continued iPad share gains and increase in organicEV orders should ensure its long-term growth outlook. Reiterating Buy.

    2Q17operating results tracking ahead of our expectations

    Sunwoda reported 2Q17earnings of RMB109mn (+5% YoY, +50% QoQ) onrevenue of RMB3.3bn (+76% YoY, +47% QoQ). Operating profit of RMB166mn(+130% QoQ, 39% YoY) was 20% higher than our estimate thanks to stronghandset/iPad battery share gains at major customers (Huawei, OPPO andApple, in our view). PC battery margin dropped to 12% in 2Q17vs. 15-16%previously; management attributes the unfavorable result to lower yieldresulting from new iPad battery production. After the initial learning curve,Sunwoda expects PC GPM to return to normal levels starting 3Q17. Thecompany also anticipates continued iPad allocation gains from 10-15% in 2017to 30-40% in 2018, supporting a 100% PC revenue CAGR in 2017-2018.

    Major beneficiary of iPhone 8battery spec upgrade

    Sunwoda indicates that its development process for the iPhone 8battery(upgraded to dual cell vs. single cell in iPhone 7) is nearly complete.Management is confident of winning a 50% share in both iPhone 8and thenew 5.5” LCD iPhone in 2H17. Due to the meaningful iPhone 8spec upgrade,Sunwoda anticipates a 50-100% increase in battery ASP, with 15-16% GPM vs.its historical average of 13-14%. Sunwoda also expects some of its Androidhandset customers to follow Apple’s new battery design (dual cell) given risingpower consumption needs and safety concerns about single cell design. Thecompany believes the ASP hike/share expansion at almost all of its handsetcustomers will help it deliver a 30%+ earnings CAGR in 2017-2018.Valuation and risks

    We fine-tune our model but keep our forecasts largely unchanged. We baseour RMB14.5target price on 24x 2018E P/E, or 0.9x PEG (vs. China IT industryaverage of 25-30x P/E, or 1.2x PEG), which we believe is reachable given thestrong sector outlook. Risks: iPhone share loss, slower China EV demand,unfavorable FX.