Shengyi Tech pre-announced 1Q21 net profit with 59-62% YoY growth, above our/consensus expectations, as 1Q21 NP accounted for 24%/25% of our/ consensus FY21E NP forecast (vs 20%/17% in FY20/FY19). We believe strong results was driven by better volume and pricing of CCL products given demand recovery and CCL ASP upcycle. Although PCB segment remained slow in near term given delayed 5G deployment in 1Q21, we expect it will recover in next batch of 5G rollout in 2Q21E. We remain positive on CCL upcycle, and lifted our TP to RMB30.48 based on same 30x FY21E P/E. Maintain BUY.
- 1Q21 beat on strong CCL business despite delayed PCB demand. We believe strong 1Q21 growth was driven by 1) increasing demand for CCL due to global economic recovery and 2) rising CCL ASP as material cost burden was gradually transferred to downstream clients. We believe the growth was slightly dragged by slower PCB as telcos delayed next 5G tender in 1Q21.
- Expect GPM recovery due to stronger bargaining power. Copper price (the largest material cost for CCL) has surged 20% YTD. Given the current low inventory level and sustained demand, we expect copper price to rise further in 2Q21E. The price of other CCL raw materials were also up significantly since last year, resulting in GPM decline to 24.1% in 2H20 (vs 27.3% in 1H20). We believe cost pressure started to transfer to downstream PCB suppliers since 1Q21, reflecting a stronger bargaining power of CCL suppliers over PCB players. We believe Shengyi’s GPM will recover to 27.3% in FY21E (vs 26.8% in FY20).
- Positive outlook on demand recovery and capacity expansion. We expect CCL supply will remain tight this year as demand from domestic and overseas will continue to grow post-pandemic. PCB business will also pick up once Chinese telcos start the next phase of 5G deployment in 2Q21E (64k 5G BTS est. for FY21). Shengyi planned to add new capacity (CCL: 11.4mn sqm/ prepreg: 36mn m) earlier this year to capture future opportunities.
- Maintain BUY; Lift TP to RMB30.48. Our new TP is RMB30.48 based on same 30x FY21/P/E. Trading at 24.5x FY21E P/E, 1-sd below historical P/E, the stock is very attractive in our view. Near-term catalysts include continued increase in CCL price and 5G BTS tenders. Potential risks include less-than-expected transfer of material costs and delay in 5G upgrades.
