High-margin products hold up FY22F EPS
? Tongda is switching its business focus to automotive and AR/VR components
and decreasing investment in legacy smartphone casings.
? Automotive, AR/VR and tri-proof components should lead an earnings
recovery in FY22-24F, thanks to better margin and higher revenue growth.
? We retain our Hold call as Tongda trades at an attractive 5.4x FY22F P/E.
Tongda is switching the business focus to automotive and AR/VR
We believe that non-handset casings business segments such as high-precision plastics
components and metal parts for automotive, AR/VR and tri-proof components will lead
Tongda Group’s (Tongda) production migration and earnings growth in FY22-24F,
underpinned by new orders won for augmented reality head-mounted displays (AR-HMDs)
and EV batteries, as well as growing dollar contents for Apple’s devices. We believe the
abovementioned business segment should deliver c.24% revenue CAGR in FY22-24F and
revenue contribution from c.32% in FY21 to c.44% in FY24F. On the flipside, smartphone
casings revenue should decrease from 50% in FY21 to c.41% in FY24F. Tongda FY21 net
profit fell 37% yoy to HK$222m, 50% below our previous FY21F forecast due to fasterthan-expected ASP and GPM decline in smartphone casings. FY21 revenue merely edged
up 2% yoy, mainly driven by non-handset casings segments (tri-proof parts, automotive
and household products), while GPM contracted 1% pt yoy to 16.5% on the back of rising
raw material prices and surging labour costs. We cut our FY22F/23F EPS 53%/46% as
decrease in shipments and GPM in smartphone casings but partially offset by higher
revenue growth in automotive components.
High-margin products could be new growth drivers in FY22-24F
In FY21, the company recorded over 50% yoy growth in automotive business (estimate
revenue at HK$500m) for supplying aluminum parts for CATL’s (300750 CH, Not Rated)
electric vehicle (EV) batteries. In addition to high-margin products, sales of its tri-proof
components for Apple devices remained strong, benefitting from stable dollar content
growth. For AR/VR products, Tongda started to produce plastics casings for Meta Oculus
2 in FY21. We believe that this segment could achieve 30%+ revenue CAGR in FY22-24F
due to customers launching new models.
FY22F net profit to rise 8% yoy on stable GPM outlook
Although we expect FY22F revenue to decline 1% yoy on adjustment of product mix to
increase contribution from high-margin business (automotive, AR/VR components), we
expect net profit to rise 8% yoy to HK$241m in FY22F (-14% yoy EPS), thanks to stable
GPM outlook. We believe Tongda should achieve positive free cash flow in FY22F-24F on
decrease in capex to HK$600m-700m p.a. (c.HK$800m-1.0bn p.a. in FY19-21F), which
should help reduce the gearing ratio from 27% in FY21 to 19% in FY24F.
Reiterate Hold with a lower target price of HK$0.148
We retain Hold rating on Tongda due to its cheap valuation (c.5x/4x FY22F/23F P/E, –
14%/+43% FY22F/23F EPS) and the potentially fast-growing automotive and AR/VR
components business. We cut our TP to HK$0.148 due to EPS downward revision, still
based on 5x FY23F P/E, at the lower-end of its 3-year average range, reflecting the
sustained GPM pressure on the smartphone casings segment. Re-rating catalysts: strong
revenue growth in EV and AR/VR components and stabilised GPM in smartphone casings.
Downside risks: prolonged Omicron outbreak in China and sustained ASP and GPM
pressure in casings.