1H22 results in line with our expectations
Sunway Communication announced its 1H22 results: Revenue grew 21% YoY to Rmb3.69bn, and attributable net profit rose 7% YoY to Rmb184mn, in line with our expectations. In 2Q22, revenue increased 23% YoY to Rmb1.78bn, and attributable net profit grew 10% YoY to Rm63mn. We attribute Sunway’s steady growth in 1H22 to the following factors: 1) The firm has continued to facilitate its business transformation, and its mature businesses such as antenna and wireless charging have maintained steady growth; and 2) Its efforts to develop various new businesses (e.g., high-precision connectors, passive components, and automotive interconnect products) have paid off, with business scale expanding continuously. We think that the firm’s steady revenue and profit growth amid sluggish demand for consumer electronics in 1H22 shows its strong business resilience.
Trends to watch
Traditional businesses grow steadily driven by new application fields. We note that the firm’s antenna and wireless charging products are increasingly used in the Artificial Intelligence of Things (AIoT)-related segments such as watches and headphones. We believe these new application fields can contribute to steady revenue and profit growth. We expect the firm’s traditional businesses to maintain steady growth in the future. The firm’s new products will enter the market on the back of its in-depth cooperation with AIoT clients and comprehensive solutions provided to its customers, in our view.
Diversifying new businesses to drive continuous growth. 1) High-precision connectors: On the back of experience accumulated from its radio frequency (RF) and magnetic materials businesses, the firm has ventured into high-end segments such as high-frequency high-speed connectors, magnetic connectors, and board-to-board (BTB) connectors. Meanwhile, its gross margin has improved steadily thanks to continuous import substitution. 2) Automotive connectors: The firm provides customized products and integrated support services according to clients’ requirements. At present, it has obtained the qualification to supply products to automakers such as Volkswagen, Dongfeng Honda, Guangqi Honda, and FAW Group. The firm’s R&D projects are progressing smoothly, which we think will lay a solid foundation for the rapid development of its automotive connector business in the next 2-3 years. 3) Liquid crystal polymers (LCP) and mmWave antennas: The firm has strengthened its integrated presence from LCP materials, antennas, to modules, and strives to improve the competitiveness of its LCP products. According to a company announcement, the firm has entered the supply chains of global major clients, and it has enhanced cooperation with North American customers. 4) Passive components: The firm has targeted the high-end passive component market, and it has established an international R&D system covering many regions. Sunway announced that it has successfully developed a diverse range of resistors and multilayer ceramic capacitor (MLCC) products. Meanwhile, the firm has built diversified distribution channels, which help it gain growing recognition from clients.
Financials and valuation
Considering the development of new businesses may weigh on the firm’s earnings, we lower our 2022 EPS forecast 14% to Rmb0.80, and leave our 2023 forecast unchanged at Rmb1.13. The stock is trading at 22.0x 2022e and 15.6x 2023e P/E. We maintain OUTPERFORM and, considering new business may increase the average valuation of Sunway, we maintain our TP of Rmb19.8 (24.8x 2022e and 17.5x 2023e P/E), offering 13% upside.
Risks
Disappointing development of new businesses such as passive components and LCP antennas; intensifying competition in the antenna and wireless charging markets.
