We expect earnings growth to reaccelerate in 4Q after decline in past 4 consecutive quarters, driven by Huawei recovery, 5G replacement cycle, share gain in Huawei/Apple and expansion into base station/ automobile/ smart IoT. We believe BYDE is well-positioned to benefit from Apple/Huawei supply chain shift and industry consolidation. We raised FY20/21E EPS by 9%/5%, and upgraded TP to HK$18.4 with higher 17x FY20E P/E (from 15x). Reiterate BUY.
- Expect earnings to reaccelerate in 4Q19E and FY20E. We expect net profit to resume growth with 21% YoY in 4Q19 after earnings decline for past 4 quarters (-35%/-71%/-16%/-36% in 3Q19/2Q19/1Q19/4Q18). We expect earnings recovery to be driven by metal/glass casing upgrade, share gain in assembly business and improving casing/assembly margin. We believe growth momentum will continue into 2020 backed by 5G smartphone replacement and Huawei/Apple supply chain consolidation.
- Solid 5G product roadmap for next growth phase. We are positive on mgmt. revenue target to reach RMB100bn in FY20E and 200bn in FY24E (vs. RMB50-60bn in FY19E). Riding on 5G upcycle in next 5 years, BYDE is confident to capture growth opportunities from 1) share gain in Huawei assembly for handset/server/BTS, 2) metal casing ASP hike with antenna/ design upgrade, 3) glass casing to ramp with 5G adoption, and 4) auto/smart intelligent segments to maintain robust growth with rising IoT adoption.
- Huawei/Apple partnership to expand into non-smartphone segments. As the largest domestic handset assembly supplier in China, BYDE plans to accelerate expansion into Huawei/Apple non-smartphone supply chain. For Huawei, we expect BYDE to 1) start shipment of 5G BTS (mainly AAU) in 2020, and 2) establish production plants with Huawei in India/Brazil/Hungry. For Apple, we expect BYDE to expand penetration into Airpod, Watch, TV and Macbook, and thus BYDE plans to add 7-8 production lines (vs 1 now) for Watch/ Macbook and new products in 2020.
- Accumulate ahead of 5G upgrade cycle; Raise TP to HK$18.4. We are positive on BYDE’s product roadmap to capture multiple growth trends, such as 5G smartphone cycle, casing design upgrade, Huawei/Apple supply chain consolidation, and auto/IoT secular trend. We lifted our TP to HK$18.4, based on higher 17x FY20E P/E (from 15x) given higher earnings visibility and 5G upcycle. Upcoming catalysts include 5G smartphone shipment and Huawei/Apple product launches.
