【Company Research】FIT Hon Teng (6088 HK) – Major overhang removed; Lift TP for 2H recovery

FIT’s 1H20 profit warning is largely expected in our view, which stated 1H20 net profit to decline to US$20mn (vs US$101mn in 1H19), due to 1) 1Q20 NP decline of 98% YoY on production shutdown as announced earlier, and 2) weak consumer demand given major cities lockdown in 2Q20. We lowered FY20-22E EPS by 6-36% to reflect 1H20 profit warning and project delays. In longer term, we believe Belkin’s improving operating leverage and iPhone shipment recovery will drive earnings in FY21/22E. We now estimate FIT's revenue/NP recovery to 5%/6% YoY in 2H20E. We believe major overhang on 1H earnings is removed, and we lifted TP to HK$4.16 based on rollover 15.0x FY21E P/E (5-yr hist. avg.).

 

  • 1H20 profit warning as expected due to COVID-19.  We think FIT’s 1H20 profit warning is largely anticipated given 1Q20 NP decline of 98% YoY and previous guidance on higher expense and global demand weakness in 2Q20E. As production resumption has been on track since late-March, we estimate 2Q20E revenue decline narrowed to -5% YoY (vs -10% YoY in 1Q20), mainly dragged by weak consumer electronic (mobile, smart accessories, Belkin) due to US/EU lockdown. We estimate 2Q20E NP decline of 66% YoY, compared to -98% YoY in 1Q20. Looking ahead, apart from 5G iPhone upcycle in 2H20E, we expect increasing trend of work-from-home will boost demand for smart home products (routers, smart speaker) and datacenter (optical module) in 2H20E.

 

  • Vietnam production base to offset trade war impact. FIT has moved part of manufacturing capacity from China to Vietnam for iPhone/Belkin in 2019, which will ease pressure from rising labor cost, and mitigate tariff impact for Belkin’s cable/routers under US$250bn tariff catalog. Mgmt. expected that number of workers in Vietnam will reach 30k in peak season in 2020 (vs 20k in 2019). After the relocation, we expect FIT will start to manufacture Belkin’s new TWS products in Vietnam in 2H20E.

 

  • Major overhang removed; Lift TP to HK$4.16 on 2H recovery. We lowered FY20/21/22E EPS by 36%/6%/6% mainly for 1H20 profit warning and project delays, but we lifted TP to HK$4.16 as we rollover to 15x FY21E P/E (in-line with 5-year hist. avg.) given our positive view on post-COVID-19 earnings recovery. We estimate 35% EPS FY20-22E CAGR, backed by 10% revenue CAGR. Upcoming catalysts include new products from Belkin/private label and 400G launches in 2H20E.
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