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Research Report: Stock code:
  29-08-2014 (五)    Tongda Group (698.HK) - Growth prospect can be more optimistic in 2H14
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Tongda Group(0698)
29-08-14
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Recommendation on   29-08-14 
Recommendation Buy
Price on Recommendation Date $ 1.070
Suggested purchase price N/A
Target Price $ 1.370
Weekly Special - 941 China Mobile
Written by: Research Team
Tel:
+852 2277 6751

Email:
research@phillip.com.hk

Tongda Group (698.HK) - Growth prospect can be more optimistic in 2H14

-The sales revenue and net profit of Tongda Group has reached about 2.1 billion HKD (similarly hereinafter) and 167 million in 1H14, respectively increasing by 24.3% and 28.3% yearly which mainly benefits from the over-expectation performance of non-phone revenue and the promotion of profitability. The gross profit margin rises to 23.0% from 21% compared with the same period of last year, and gross profit increases by 35.6% to 482 million. Overall speaking, it maintains a steady growth.

-The growth of cellphone casing business slowed down in the first half of year. But in the next half of year, China Telecom and China Unicom will accelerate the 4G construction and will provide pre-commercial services in 16 cities, and more alternative terminals and the 4G tariff which is hopeful to go down again may stimulate the shipment of 4G cellphones. The market shares of Tongda's major clients such as Huawei, Lenovo, Xiaomi and Coolpad are further rising. Meanwhile, the newly built plants in Xiamen are predicted to go into operation in September, the number of CNC machines will increase from 200 in 2013 to 500 at the end of this year, and the company's cellphone casing business will be improved both in production capacity and product structure.

-The data of July shows that the selling of household appliances in inland is persistently improved. In addition, China may launch subsidy programs to encourage the wider use of energy-efficient household appliances, together with the successive withdrawal of home-purchase restriction policies. The household appliance industry is hopeful to continue the trend of recovery, and the company will also benefit from this.

-The company begins to disperse the business into the production of automobile parts. The auto industry is holding a steady growth, and the annual output of 90 million cars shows that the market witnesses a broad prospect. In addition, auto parts also enjoy good profitability, so we predict that auto parts are hopeful to become the new growth impetus of the company in the medium term.

Investment Action

The factors such as the slowing down of smartphone's growth, etc. make the company perform poorly. But in the next half of year, both cellphone shell and household appliance business will face the possibility of improvement. In the meantime, the promotion expectation of product structure will still support the improvement of profitability.

Although the company's scale of operation is not equipped with any advantage now, its ability of sustainable growth is rare in the same industry. Based on more optimistic prospect in the second half of year, we give the company the valuation level of 15 times earnings per share corresponding to 2014, and the target price of 1.37 HKD, with the rating of "Buy ".

Solid growth in 1H14

The interim report of 2014 show that the sales revenue and net profit of Tongda Group has reached about 2.1 billion HKD (similarly hereinafter) and 167 million in 1H14, respectively increasing by 24.3% and 28.3% yearly which mainly benefits from the over-expectation performance of non-phone revenue and the promotion of profitability. The gross profit margin rises to 23.0% from 21% compared with the same period of last year, and gross profit increases by 35.6% to 482 million. Overall speaking, it maintains a steady growth.

According to category, although benefiting from becoming the certified supplier of Xiaomi and Coolpad and the increased market share of domestic cellphone brands, the slowing down of smartphones` growth makes the turnover growth of cellphone casing business accounting for half of its revenue slow down to 16.4%, reaching about 960 million. But the performance of other businesses exceeds the expectation, for example: the selling of electrical appliance business increases by 19.9% from 270 million to 324 million compared with the same period of last year; in the aspect of laptop, though the client Sony VAIO is lost, benefiting from the order growth of HP, Lenovo and NEC, and the income increases by 28.5% to 287 million; while ironware component department benefits from the increase of the demand for high-end household electrical appliances IML decoration shell, and the revenue increases by 39.8% from 224 million to 314 million; the revenue of communication equipment department also increases by 47.0% from 148 million to 218 million on year-on-year basis; and the demand for SATV receiver and plastic STB shell increases under the World Cup effect.

The company's profitability continues to increase, the gross profit margin increases from 21.0% to 23.0% on year-on-year basis, while the operating profit margin increases from 11.2% to 12.9%, among which the operating profit margin of electrical accessories increases from 12% to 14.5%, and the operating profit margin of communication equipment vastly increases from 5.1% to 11.5%.

The growth of smartphone in 2H14 may speed up

Although the growth of phone shell business slowed down in the first half of year, we expect that it will speed up in the second half of year. The 4G business of China Mobile is on the trend of steady increasing, and the number of clients in the first half of year was only about 13.94 million, but the monthly growth of July increased by over 10% to 6.5 million. Looking into 2H14, China Telecom and China Unicom will accelerate the 4G construction and will provide pre-commercial service in 16 cities, more alternative terminals and the 4G tariff that is hopeful to decrease again may stimulate the shipment of 4G cellphones. Meanwhile, the market shares of its major clients such as Huawei, Lenovo, Xiaomi and Coolpad are further rising, which planned the annual growth of 50% to 220% respectively, and completed the annual target of 43% to 65% in the first half of year.

In addition, the company has also built new plants in Xiamen, and the plants are expected to go into operation in September. What is worth mentioning, the company is vastly investing in metal shell production capacity, the number of CNC machines will increase from 200 in 2013 to 500 at the end of this year, and the metal shell enjoy more attractive selling price and profitability in general. Therefore, the cellphone shell business of the company will be improved both in production capacity and product structure.

Electric appliance shell business is hopeful to recover

After the global financial crisis in 2008, China has launched a series of household appliance subsidy programs, and the stimulation policy of 4 trillion yuan made the demand for household appliances released in advance. The related business of Tongda realized the fast growth of 176% and 35% in 2009 and 2010 respectively, but the income of household appliance shell continued to decrease in the past two years because of the withdrawal of relative subsidy policies.

In 1H14, although domestic real estate market became sluggish, the electric appliance shell business of Tongda vastly increased by 20%, and the latest data of July shows that the selling of household appliances in inland continues to improve. What is worth mentioning, China may launch subsidy programs to encourage the wider use of energy-efficient household appliances, and household appliance industry is hopeful to continue the trend of recovery, and the company will also benefit from it.

Auto parts may become the new driving force

In the past 10 years, it was the diversified business structure of cellphones, laptops and electric appliances that ensured the solid growth of the company. However, the company starts to disperse the business into the production of auto parts this year, and produces decoration parts for a Sino-US joint automobile brand set up in Shanghai from the beginning of this year. We think that this action aims to relieve the downturn of laptops and other businesses. The auto industry is always on the trend of steady growth, and the annual production of 90 million cars shows that the market witnesses broad prospect. In addition, auto parts also provide good profitability, and the gross profit margin of over 30% far exceeds the current level of about 20% of the company. Therefore, we expect that the auto parts are hopeful to become the new growth impetus of the company.

Catalyst

New plants are put into operation;

To win more smartphone vendors.

Risks

Price pressure by intensified competition of smartphone vendors;

New plants are not put into operation as expected.

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