Wangsu Technology Alert:FY17profit guidance inline but some positives emerging

Profit guidance inline with DB forecast

    Wangsu’s profit guidance of a 32-40% decline in FY17net profit (midpoint -36%) was broadly inline with our forecast of a 35% reduction. Both revenueand net profit saw improvement QoQ. While seasonally 4Q is a strongerquarter due to timing of iPhone upgrades etc, company also indicated thatgross margin has improved QoQ due to improving product mix (from growth inhigher value security and web acceleration services).

    Some easing in industry competition

    Our recent channel checks suggest that most CDN providers are barelybreaking even and have limited room for further price declines. As a resultcompetitive intensity has eased somewhat in 2H17with the rate of pricereduction not as severe as the first half. Wangsu continues to charge premiumpricing vs peers however given their better service quality and more stablenetwork. It is uncertain what premium customers would be willing to place onservice quality and hence there is still risk that Wangsu’s pricing will convergecloser to that of its peers. As such despite these positive signs, given the stockis still trading on 33x FY17PE and still limited earnings visibility, we retain theSELL.