JONHON Optronic:Luoyang HQ visit reaffirms earnings uptrend;raising target price

Order momentum picking up; Buy on multi-year earnings upcycle ahead。

    We visited Jonhon Optronic's Luoyang headquarters last week and came backwith positive takeaways. Despite lagging revenue conversion in 3Q, the strongpick-up in new orders, along with new capacity expansion, should accelerateearnings growth to 26% yoy in 2H17(vs. 11% in 1H17) and 30%+ starting2018. With similar drivers ahead, the 2013-15earnings upcycle - when the stockoutperformed its benchmark (SZCOMP) by 100% on strong earnings growth -looks likely to be repeated. We raise our target price by 23% to Rmb43andmaintain Buy.。

    Strong new order pipeline。

    Management guided for a back-end loaded 2017at the beginning of this year andexpects growth for defence and NEV to speed up in 2H. Since the beginning of3Q, the company has indeed been seeing a strong new order pipeline from itscustomers for both segments though the actual signing of contracts may come abit later than expected due to military reform (hence organizational reshuffle) andstricter subsidy scheme (hence reevaluation of subsidy eligibility required). Givencapacity constraints (for NEV) and defense customers' delivery schedules, webelieve deliveries could be very skewed towards 4Q17with revenue conversionof some orders potentially delayed to 1H18.。