Lens Technology:We are positive on double glass,but not so much on 3D glass
We see unit upside but little ASP upside
We are positive on Lens’ 4Q17/2018outlook, from the angle of high unitgrowth (driven by the rising adoption of double cover-glass design). However,we are concerned that the market could have overestimated its ASP growth,given the adoption of 3D glass (which costs 100%+ more than 2.5D glass)could be slower than expected. Our industry check suggests Apple is unlikelyto adopt 3D glass in 2018. Retaining Hold rating on valuation.
3Q17earnings preview below expectation
According to Lens’ 3Q17earnings preview, 3Q17net profit should reachRMB54.7mn to RMB63.0mn (+0% to +15% YoY), a deceleration from 26% YoYgrowth in 1H17net profit. Considering the launch of iPhone 8/8Plus with thenew double cover-glass design, the magnitude of growth appears low. Themid-point of the guidance (RMB59mn) trailed our estimates and Bloombergconsensus by 20%-25%. Lens attributes the weakness to low capacityutilization and unsatisfactory production yield in its new production site. Webelieve the delay to the iPhone X launch is also partly to blame.
Double glass remains the trend, but 3D glass adoption appears slower
We agree that the rising adoption of a double cover-glass design on high-endsmartphones is a clear trend for the coming two to three years (for wirelesscharging or aesthetic purposes), which is positive for a cover-glass leader likeLens. However, we caution that the upgrade to 3D glass (USD10+) from 2.5Dglass (~USD4) or 2D glass has been slower than expected. Our industry checkindicates the new iPhone in 2018will still have 2.5D glass. Most of the highendsmartphones from Chinese OEMs will stay with 2.5D glass too, due to costconcerns and durability issues (3D glass is more breakable at the edge).
Valuation and investment risks
We trim 2017-19net profit forecasts by 7%-13% (to reflect lower GPM andASP assumptions), but raise our TP from RMB26to RMB29.4. Our new TP isstill based on 22x PER, but we roll over the valuation from 22x 2017E EPS to22x 2018E EPS. 22x PER mirrors 0.8x PEG, in line with regional peers.Upside/downside risks include: strong/weak iPhone demand, ASP hike/decline,and market share gain/loss.