Sunway:A good investment proxy for the rising wireless charging trend

Ready to capture the rising WPC adoption in both iPhone and Android phones

    Sunway delivered solid 2Q17results and kept 2017EPS guidance (100%+ YoYgrowth) unchanged. Sunway is positive about the 2018outlook and identifiesthree key catalysts: 1) ASP increase for iPhone components; 2) market sharegain in Samsung three-in-one module; and 3) the rising adoption of wirelesspower charging (WPC) on both iPhone and Android camp. Maintain Buy rating.

    In-line 2Q17results: strong YoY growth continues

    Sunway reported 2Q17EPS of RMB0.2(+109% YoY; -7% QoQ) and operatingprofit of RMB156m (+54% YoY; -5% QoQ) on sales of RMB714m (+73% YoY;

    flat QoQ). Sales missed market expectations by ~10%, due to soft iPhonedemand and some project delays from Chinese clients. However, GPM rose3ppt QoQ to 32.7% (vs. market expectations for 31-32%), owing to improvedproduct yields. Propelled by a higher non-op gain (government subsidiary andequity investment income), EPS came in 4% above consensus.

    Positive 2H17/2018outlook: ASP increase, market share gain and WPC

    For iPhone antenna, due to a key design change (placing Wi-Fi/BT antenna ontop of a supporting frame of dual cam), ASP could increase to USD2.5+ (upfrom USD1.5for legacy iPhone antenna). For Samsung’s WPC/NFC/MSTmodule (ASP of USD4+), Sunway expects its market share to grow from 10-15% in 2016to 25-30% in 2017and further to 40-50% in 2018. To cope withthe strong order increase, Sunway is now evaluating if it should set up afactory in Korea (dedicated for Samsung) and could finalize this decision inSep. For iPhone’s WPC module, Sunway missed the 2017project, but see afair chance that it can be a qualified supplier of this module for new iPhones in2018. In the Android camp, Chinese OEMs (Huawei, Xiaomi, etc.) are keen onadopting WPC modules (ASP of USD2+) in their 2018flagship devices.Sunway believes that it will be the primary WPC module supplier for ChineseOEMs, given its first-mover advantage and solid relationship with them.

    Valuation and investment risks

    We raise our 2018/19EPS forecasts by 2% and increase our target price fromRMB40to RMB45. Our new target price is still based on 35x PER (but rollingover from 2017-18average EPS to 2018EPS) or 0.8x PEG, which is in line withregional peers. Risks: order allocation loss on i-devices; severe pricecompetition; and global smartphone weakness.