长飞光纤:Weak 1H 2019results;no major recovery signs

    Weak 1H 2019results

    YOFC-A reported a 41% YoY decline in turnover and 46% YoY decline in net profit in 1H 2019, which implies that turnover and net profit dropped 45.7% YoY and 58.0% YoY, respectively, in Q22019. Q2was a challenging period for the industry, given soft end demand. YOFC-A’s gross profit margin in 1H 2019dropped 4.7ppts to 23.5% (Q12019: 26.9%; Q22019: 19.7%). According to YOFC-A management, the drop in gross profit margin in 1H 2019was due to an unfavourable product mix, as the Company intended to hold sales of preform and wait for better pricing going forward. We should see better Q3and Q42019results, as China Mobile kicked off delivery of optical cable in late Q22019. China Telecom is expected to kick off delivery of optical cable in 2H 2019. Management expects sales of preform to pick up in 2H vs. 1H 2019, as shipments of optical cable to two operators started. YOFC-A management mentioned that the Company’s bidding price for products to China Telecom was about 12.5% higher than the products to China Mobile. Management believes that this is a sign of stabilization and that it is not a surprise that some investors might treat this as a catalyst for the optical fibre cable supply chain, including YOFC-A. However, we don’t think it is a sign of recovery, as there are over 20players on China Telecom’s supplier list, and the bidding price still dropped YoY. It is unlikely that the ASP of optical cable will move up further in Sep-Dec 2019.

    No bottom fishing yet in the short term

    YOFC-A management remains positive on the outlook for the Company, given the 5G roll-out and believes demand for optical cable products will pick up after installation of wireless equipment in 2020. Co-building and co-sharing are expected ease financial pressure on the telecom operators, especially China Telecom and China Unicom, which may result in the roll-out process speeding up in early stage. In the long term, YOFC-A’s growth will be supported by new product development, such as ULL optical fibre, which is expected to be used to upgrade the main trunk of the optical fibre network of Chinese telecom operators. However, we suggest investors wait for confirmation of demand pick-up before re-rating YOFC-A. We still believe that the optical cable supply chain will be later-cycle names under the 5G theme.

    Downward earnings revision

    We cut our turnover forecast for 2019F by 16.8% and for 2020F by 18.9%, after the 1H 2019results revision. We also cut our 2018F and 2019F net profit forecasts by 3.2% and 8.1%, respectively, due to downward revision of the turnover forecasts. Our gross margin forecasts for 2019F and 2020F are also cut by 0.32ppt and 0.18ppt, respectively.