Mon, 29 Aug 2016 Equity Research Truly Int ’l (732 HK) Display Module/ China All-around player Fingerprint ramp up in FY16E, expected to contribute RMB1.6bn sales, representing 7.6% of total sales Truly is well positioned to ride on the rapid adoption of LTPS/AMOLED display and potential upside on 1H17E panel shortage Initiate BUY with TP HK$4.90 based on 12x FY17E PE Fingerprint ramp up as a short-term catalyst. Truly launched its fingerprint business in FY15 with HK$90mn revenue, representing 0.5% of total revenue. In FY16E, Truly expanded its fingerprint capacity from 2.5mn units in 1Q16 to 7.5mn units in Jun16, to ride on the rapid adoption rate of fingerprint in smartphones. We expect global/China fingerprint penetration will increase from 29%/15% in 2015 to 67%/65% in 2018E, which drives an enormous demand for fingerprint modules, as fingerprint offers a clear differentiation from non-fingerprint module-applied smartphones and facilitates mobile payments. We estimate Truly will ship 50mn/80mn/104mn units fingerprint modules in FY16E, and contribute HK$1.6bn/HK$2.0bn/HK$2.1bn sales, representing 7.6%/8.8%/8.2% of total revenue. Well positioned to ride on increase of LTPS/AMOLED display adoption. In 2015, LTPS/AMOLED penetration in China market was ~28%/9%, and it is expected to hit 39%/12% in 2016E, and 45%/19% in 2018E, thanks to the better display effect and decreasing costs as production yield rate improves. iPhone 8 is expected to adopt AMOLED, and we expect China smartphone vendors will also increase LTPS/AMOLED displays in smartphones. Hence, Truly is well positioned to ride on the increase in LTPS/AMOLED adoption via its G4.5 plant, which plans to start LTPS/AMOLED MP with 60k/30k monthly capacity in Aug16/2H17E. Moreover, Samsung Display will be iPhone8’ s AMOLED display suppliers, we expect that an increasing number of Japan and Taiwan panel suppliers will upgrade their production lines from LTPS to AMOLED, to catch up with the coming AMOLED heat. Thus, we forecast a likely LTPS/AMOLED panel supply shortage in 1H17E, which will provide further potential upside for Truly. Strong automotive display pipeline and capacity expansion of G5 plant. Truly ranks 8th in global automotive TFT display in 2015, and is expected to increase TFT display shipment penetration from 21% in FY15 to 22%/26%/34% in FY16/17/18E, as global TFT display shipment proportion is expected to improve from 53% in 2015 to 61% in 2018E. As TFT display enjoys a higher ASP which is 5-10 times of non-TFT display, we believe it will drive a steady growth of sales. Besides, Truly enjoys a strong pipeline of automotive products in the coming 2-3 years, which guarantees a steady sales growth. Truly’ s G5 plant is planned to start MP in 1Q18E with 100k monthly capacity, providing strong support for automotive business expansion. We expect automotive displays revenue to record 21% 3-year CAGR from FY16E to FY19E. We initiate BUY with TP of HK$4.90 based on 12x FY17E PE, 52% discount to peers. We estimate Truly to record a 10%/16% revenue/net profit CAGR from FY15 to FY18E, given its main clients, China smartphones venders are grabbing market share rapidly, and it is actively diversifying its business, including fingerprint and automotive display, which help on margin expansion. Risks: 1) delay or slow ramp up of G4.5 and G5 plant; 2) ASP erosion is faster than expected. Chloe Liu +852 2135 0209 [email protected]Yuji Fung +852 2135 0236 [email protected]Initial Coverage BUY UNCHANGED Close price: HK$3.45 Target Price: HK$4.90 (+42.0%) Key Data HKEx code 732 HK 12 Months High (HK$) 4.53 12 Month Low (HK$) 1.54 3M Avg Dail Vol. (mn) 17.98 Issue Share (mn) 2,907.10 Market Cap (HK$mn) 10,029.49 Fiscal Year 12/2016 Major shareholder (s) Lam Wai Wah (44.5%) Source: Company data, Bloomberg, OP Research Closing price are as of 26/08/2016 Price Chart 1mth 3mth 6mth Absolute % -3.2 -19.7 -12.9 Rel. MSCI CHINA % -8.5 -30.6 -32.3 PE Company Profile Truly International Holdings Limited, through its subsidiaries, manufactures and sells liquid crystal display products, electronic consumer products including calculators, pagers, MP3 player, and electronic components. Exhibit 1: Forecast and Valuation Year to Dec (HK$ mn) FY14A FY15A FY16E FY17E FY18E Revenue 21,416 19,427 21,006 23,230 26,011 Growth (%) 3.6 (9.3) 8.1 10.6 12.0 Net Profit 1,118.4 845.4 897.9 1,192.4 1,303.1 Growth (%) (31.0) (24.4) 6.2 32.8 9.3 Diluted EPS (HK$) 0.384 0.291 0.309 0.410 0.448 EPS growth (%) (33.1) (24.3) 6.2 32.8 9.3 Change to previous EPS (%) 0.0 0.0 0.0 Consensus EPS (HK$) 0.314 0.359 0.426 ROE (%) 16.0 11.9 12.1 14.7 14.4 P/E (x) 11.9 11.2 8.4 7.7 P/B (x) 1.4 1.4 1.3 1.2 1.1 Yield (%) 4.3 2.9 2.7 3.6 3.9 DPS (HK$) 0.150 0.100 0.093 0.123 0.134 Source: Bloomberg, OP Research 0.0 1.0 2.0 3.0 4.0 5.0 Aug/15 Nov/15 Feb/16 May/16 HK$ 732 HK MSCI CHINA 0 2 4 6 8 10 12 14 16 Dec/13 Jun/14 Dec/14 Jun/15 Dec/15 Jun/16 Forward P/E Ratio +1std. avg. -1std.
Transcript
Mon, 29 Aug 2016
Equi ty Research Truly Int’l (732 HK) Display Module / China
All-around player Fingerprint ramp up in FY16E, expected to contribute RMB1.6bn sales,
representing 7.6% of total sales Truly is well positioned to ride on the rapid adoption of LTPS/AMOLED
display and potential upside on 1H17E panel shortage Initiate BUY with TP HK$4.90 based on 12x FY17E PE
Fingerprint ramp up as a short-term catalyst. Truly launched its fingerprint business in FY15 with HK$90mn revenue, representing 0.5% of total revenue. In FY16E, Truly expanded its fingerprint capacity from 2.5mn units in 1Q16 to 7.5mn units in Jun16, to ride on the rapid adoption rate of fingerprint in smartphones. We expect global/China fingerprint penetration will increase from 29%/15% in 2015 to 67%/65% in 2018E, which drives an enormous demand for fingerprint modules, as fingerprint offers a clear differentiation from non-fingerprint module-applied smartphones and facilitates mobile payments. We estimate Truly will ship 50mn/80mn/104mn units fingerprint modules in FY16E, and contribute HK$1.6bn/HK$2.0bn/HK$2.1bn sales, representing 7.6%/8.8%/8.2% of total revenue.
Well positioned to ride on increase of LTPS/AMOLED display adoption. In 2015, LTPS/AMOLED penetration in China market was ~28%/9%, and it is expected to hit 39%/12% in 2016E, and 45%/19% in 2018E, thanks to the better display effect and decreasing costs as production yield rate improves. iPhone 8 is expected to adopt AMOLED, and we expect China smartphone vendors will also increase LTPS/AMOLED displays in smartphones. Hence, Truly is well positioned to ride on the increase in LTPS/AMOLED adoption via its G4.5 plant, which plans to start LTPS/AMOLED MP with 60k/30k monthly capacity in Aug16/2H17E. Moreover, Samsung Display will be iPhone8’s AMOLED display suppliers, we expect that an increasing number of Japan and Taiwan panel suppliers will upgrade their production lines from LTPS to AMOLED, to catch up with the coming AMOLED heat. Thus, we forecast a likely LTPS/AMOLED panel supply shortage in 1H17E, which will provide further potential upside for Truly.
Strong automotive display pipeline and capacity expansion of G5 plant. Truly ranks 8th in global automotive TFT display in 2015, and is expected to increase TFT display shipment penetration from 21% in FY15 to 22%/26%/34% in FY16/17/18E, as global TFT display shipment proportion is expected to improve from 53% in 2015 to 61% in 2018E. As TFT display enjoys a higher ASP which is 5-10 times of non-TFT display, we believe it will drive a steady growth of sales. Besides, Truly enjoys a strong pipeline of automotive products in the coming 2-3 years, which guarantees a steady sales growth. Truly’s G5 plant is planned to start MP in 1Q18E with 100k monthly capacity, providing strong support for automotive business expansion. We expect automotive displays revenue to record 21% 3-year CAGR from FY16E to FY19E.
We initiate BUY with TP of HK$4.90 based on 12x FY17E PE, 52% discount to peers. We estimate Truly to record a 10%/16% revenue/net profit CAGR from FY15 to FY18E, given its main clients, China smartphones venders are grabbing market share rapidly, and it is actively diversifying its business, including fingerprint and automotive display, which help on margin expansion.
Risks: 1) delay or slow ramp up of G4.5 and G5 plant; 2) ASP erosion is faster than expected.
Company Profi le Truly International Holdings Limited, through
its subsidiaries, manufactures and sells liquid
crystal display products, electronic consumer
products including calculators, pagers, MP3
player, and electronic components.
Exhibit 1: Forecast and Valuation Year to Dec (HK$ mn) FY14A FY15A FY16E FY17E FY18E
Revenue 21,416 19,427 21,006 23,230 26,011
Growth (%) 3.6 (9.3) 8.1 10.6 12.0
Net Profit 1,118.4 845.4 897.9 1,192.4 1,303.1
Growth (%) (31.0) (24.4) 6.2 32.8 9.3
Diluted EPS (HK$) 0.384 0.291 0.309 0.410 0.448
EPS growth (%) (33.1) (24.3) 6.2 32.8 9.3
Change to previous EPS (%)
0.0 0.0 0.0
Consensus EPS (HK$)
0.314 0.359 0.426
ROE (%) 16.0 11.9 12.1 14.7 14.4
P/E (x)
11.9 11.2 8.4 7.7
P/B (x) 1.4 1.4 1.3 1.2 1.1
Yield (%) 4.3 2.9 2.7 3.6 3.9
DPS (HK$) 0.150 0.100 0.093 0.123 0.134
Source: Bloomberg, OP Research
0.0
1.0
2.0
3.0
4.0
5.0
Aug/15 Nov/15 Feb/16 May/16
HK$732 HK MSCI CHINA
0
2
4
6
8
10
12
14
16
Dec/13 Jun/14 Dec/14 Jun/15 Dec/15 Jun/16
Forward P/E Ratio
+1std.
avg.
-1std.
Mon, 29 Aug 2016
Truly Int’l (732 HK)
Page 2 of 30
Table of Contents
Table of Contents ......................................................................................................................................... 2
Fingerprint ramp up as a short-term catalyst ................................................................................................ 3
Truly is well positioned to ride on the increase of LTPS/AMOLED adoption and potential upside on panel
G5 TFT production line provides strong supply for automotive
display expansion
Truly bought G5 TFT production line from Samsung, with capacity of 100k sheets
per month, the mass production expected to begin in 1Q18E, to provide solid
support for automotive display expansion.
Exhibit 26: Sales of automotive products from FY14 to FY18E
Source: Company, OP Research
Truly enjoys strong pipeline of
automotive products and
expected to maintain 10%-30%
yoy sales growth to FY18E
Truly’s G5 TFT plant is expected
to start MP in 1Q18E, providing
solid support for automotive
display expansion.
Mon, 29 Aug 2016
Truly Int’l (732 HK)
Page 18 of 30
21,416 19,427
21,006 23,230
26,011
3.6%
-9.3%
8.1%
10.6%12.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
0
5,000
10,000
15,000
20,000
25,000
30,000
2014 2015 2016E 2017E 2018E
Revenue (HK$mn) YoY%
(HK$mn)
Initiate BUY with TP HK$4.90 with 42% upside
Steady revenue growth thanks to robust increase of Chinese
smartphone vendors and diversified business
We expect Truly to recover from revenue decrease in FY15, and experience ~10%
yoy revenue growth from FY16E onwards. Despite the slowdown in global
smartphone shipment growth, we believe it will be offset by fast growth of
Chinese smartphone vendors, including Huawei, Vivo and Oppo, which are also
Truly’s major clients. Besides, Truly is diversifying business, including fingerprint
and automotive displays to keep the steady growth.
Exhibit 27: Revenue from FY14 to FY18E
Source: Company, OP Research
Improved product mix with higher GPM
In FY15, touch panel for smartphone related and smartphone displays without
touch panel accounted for the largest and second largest proportion of revenue,
representing 41%/19% of total revenue. Smartphone displays without touch panel
are mainly supplied to Samsung for its low end handsets, therefore its GPM is
relatively low, we expect its proportion of revenue will decrease from 19% in FY15
to 6% in FY16E, and further decrease to 1% in FY18E. Instead, the proportion of
automotive products/fingerprint module is expected to increase from 11%/0% in
FY15 to 12%/8% in FY16E and further increase to 14%/8% in FY18E, thanks to
G5 plant mass production start in 1Q18E (mainly for automotive displays) and the
ramp up and capacity expansion of fingerprint module. As automotive displays
and fingerprint module has higher GPM of ~15%/12%, we believe the (1)
improved product mix and (2) economics of scale of its fingerprint business can
help GPM expansion from 10.9% in FY15 to 11.4% in FY16E and 11.8% in
FY18E.
We expect Truly to record ~10%
yoy sales growth from FY16E
onwards, thanks to robust growth
of major clients, China top
smartphone vendors and
diversified revenue sources
including fingerprint and
automotive displays
We expect GPM expansion to hit
11.4% in FY16E from 10.9% in
FY15 thanks to upgraded product
mix.
Mon, 29 Aug 2016
Truly Int’l (732 HK)
Page 19 of 30
9% 11% 12% 12% 14%
11%14% 14% 14% 14%
44%41%
44% 47%48%
13% 15%16%
16% 16%23% 19% 6% 2% 1%
8% 9% 8%
0%
20%
40%
60%
80%
100%
2014 2015 2016E 2017E 2018E
Automotive products Industrial, medical, and other productsTouch panel for smartphone related Compact camera moduleSmartphone display (without touch panel) Fingerprint identification module
7.8%
5.2%
4.4% 4.3%
5.1% 5.0%
14.0%
11.6%10.9%
11.4%11.8% 11.8%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
FY13A FY14A FY15A FY16E FY17E FY18E
Net profit margin Gross profit margin
Exhibit 28: Revenue by segment from FY14 to FY18E
Source: Company, OP Research
Exhibit 29: Overall GPM from FY13 to FY18E
Source: Company, OP Research
1H16 result review. Revenue was up 2.2% yoy in 1H16 to HK$9.72bn, touch
related products for smartphone and compact camera modules recorded robust
growth of 23% and 18% yoy growth, while smartphones display without touch
panel was down 67% yoy, reflecting the upgrade of product mix. 2Q16 GPM
dropped to 10.6% from 12.2% in 1Q16, mainly due to panel price increase.
Management has actively renegotiated the products price to clients in 2H16E, to
transfer material costs increase, we see margin will gradually recover in 3Q16
onwards. Net profit was down 12.3% to HK$390mn, due to 1) HK$79mn
exchange loss, 2) HK$74mn share of loss from Huizhou associate. Huizhou
associate will start MP from Aug16E, we expect it to record HK$192mn/HK$77mn
/HK$77mn net loss in FY16/17/18E due to significant depreciation and interest
expenses, however, it can strengthen its market position by securing in-house
panel supply to module production, and increase bargaining power to obtain large
orders.
Initiate BUY with TP of HK$4.90 based on 12x FY17E PE, 52% discount to
peers. We believe Truly is well-positioned to ride on increasing LTPS/AMOLED
adoption in smartphones, fingerprint business ramp up and capacity expansion in
FY16E and strong automotive displays pipeline in the coming few years.
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