Shennan announced 1Q21 results with revenue of RMB2,725mn (+9.1% YoY) and net profit of RMB244mn (-12% YoY), which accounted for 20%/18% and 19%/14% of our/consensus FY21E forecasts. We think the miss was a result of 1) weak PCB demand due to delayed 3rd batch 5G BTS tender, 2) strong IC substrate business given surging demand and 3) lower gross margin due to rising cost pressure. We revised down our FY21/22E EPS by 15/11% to reflect cost pressure and lower ASP, and adjusted our TP to RMB82.7 based on same 30x FY21E P/E. Maintain HOLD as margin pressure remains a major overhang.
- PCB demand to improve sequentially and IC substrate to remain strong. We believe 1Q21 PCB weakness was mainly due to delay of China 3rd batch of 5G BTS tender. We expect this business to improve sequentially in 2Q/3Q when the tender is released and global economy continues to recover. In addition, we expect IC substrate business to maintain robust growth with 22% YoY in FY21E driven by strong demand for package substrate.
- Near-term cost pressure to accelerate consolidation in the long run. 1Q21 GPM came in lower at 23.4% (vs. 25.6%/26.5% in 1Q20/FY20), mainly due to rising laminate cost on higher copper price since 2H20. Looking ahead, we think cost hike cannot be fully transferred to downstream clients in 1H21E, and copper price will rise further in near term given global economy rebound and tight supply in Chile and Peru due to new wave of COVID-19 and labor issues. We expect 1H20 growth will be at a lower gear and gross margin pressure will continue in short term. In the long run, we believe top PCB players can enjoy scale benefits and Shennan will gain share with accelerated industry consolidation.
Maintain HOLD with new TP of RMB82.7. We trimmed FY21-22E EPS by 11-15% for lower ASP/margin assumptions, and reduced our TP to RMB82.8 based on same 30.0x FY21E P/E. We maintain HOLD and expect near-term pressure on the stock due to 1) price pressure on PCB de-spec for 700MHz 5G BTS and 2) continued surge in material costs. Potential risks include lower 5G CAPEX from telco and raw material cost hike.
