Initiate at Buy: Don’t leave the party too early
Disclosures & Disclaimer This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it. Issuer of report: HSBC Securities (Taiwan) Corporation Limited View HSBC Global Research at: https://www.research.hsbc.com Votingstarts6thJulyIf youvalueourserviceandinsight,voteforHSBCClickheretovote ✔VoteinAsiamoneyBrokersPoll2017 What’s new? Improving HDI industry dynamics not yet appreciated by investors; we see upside to 2018e consensus We estimate 2017/18e earnings to grow 10%/20% and ROE of 15%/16% vs 5-year average of 1% and 10%, respectively Initiate at Buy with a TP of TWD113; c17% upside with 5% 2018e dividend yield; we are 14% above 2018e consensus Favourable industry dynamics not yet priced in. We initiate coverage on Tripod with a Buy rating and a TP of TWD113. Tripod is a conventional print circuit board (PCB) manufacturer. After share price rallied 53% since 2016, the question is: “is there still upside?” We believe investors are aware of the positives in auto and server/communication PCB but we believe the market has yet to factor in improving high density interconnect (HDI) PCB dynamics and could still be conservative on 2018. We are 14% above consensus on 2018e earnings driven by our more optimistic view on HDI development. Positive HDI outlook in 2018. We expect HDI supply to remain tight in 2018, and Tripod to benefit highly as an HDI supplier (c20% revenue). The limited supply growth can be attributed to 1) conservative capex over the last 3 years and 2) Apple’s (AAPL, NR) adoption of substrate-like PCB (SLP) for the iPhone 8 is likely to reduce effective HDI capacity during the conversion process and reduce effective output with a lower yield rate. On the demand side, we see growth from 1) non-Apple smartphones, which will adopt more advanced HDI and 2) more high-end NB migrating to HDI from conventional multi-layer PCB. Given most HDI suppliers for Apple will be at capacity to meet its SLP demand, we see scope for Tripod to benefit from the rising HDI demand from other smartphone companies and expand its market share. Earnings growth to accelerate in 2018e; we are 14% above consensus. Earnings growth in 2016/17e is mainly driven by an improving cost structure such as flat labour costs, falling depreciation and favourable FX. Looking ahead, we expect earnings growth to be driven by the resurgence of sales growth. Aside from the HDI opportunity, we believe auto and server-related PCB will remain long-term growth drivers. We forecast Tripod’s 2018e earnings to grow 20%. Valuation: Our TWD113 TP is based on 10x 2018e EPS plus net cash of TWD22.8, as cash accounts for 25% of Tripod’s market cap. The stock trades at an undemanding 8x 2018e cash-adjusted PE, and we see a re-rating opportunity on higher-than-average earnings growth in 2018-19e. Risks: 1) weak end demand, 2) sharp rise in raw material prices, 3) appreciating RMB, and 4) unexpected rise in China labour costs. 5 July 2017 INITIATE AT BUY TARGET PRICE (TWD) PREVIOUS TARGET (TWD) 113.00 - SHARE PRICE (TWD) UPSIDE/DOWNSIDE 96.30 +17.3% (as of 04 Jul 2017) MARKET DATA Market cap (TWDm) 50,616 Free float 85% Market cap (USDm) 1,664 BBG 3044 TT 3m ADTV (USDm) 5 RIC 3044.TW FINANCIALS AND RATIOS (TWD) Year to 12/2016a 12/2017e 12/2018e 12/2019e HSBC EPS 7.65 7.51 9.01 9.66 HSBC EPS (prev) - - - - Change (%) - - - - Consensus EPS 6.26 7.41 7.88 8.23 PE (x) 12.6 12.8 10.7 10.0 Dividend yield (%) 3.4 4.4 4.9 5.9 EV/EBITDA (x) 5.3 5.8 4.9 4.5 ROE (%) 13.6 13.3 15.4 15.5 52-WEEK PRICE (TWD) Source: Thomson Reuters IBES, HSBC estimates Samson Hung* Analyst HSBC Securities (Taiwan) Corporation Limited samson.hm.hung@hsbc.com.tw +886 2 6631 2863 Anthony Liao* Associate HSBC Securities (Taiwan) Corporation Limited anthony.wc.liao@hsbc.com.tw +886 2 6631 2865 * Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations Tripod Technology (3044 TT) EQUITIES ELECTRONIC EQUIPMENT Taiwan 54.0087.00120.0007/1601/1707/17Target price: 113.00High: 96.90 Low: 61.30 Current: 96.30Initiate at Buy: Don’t leave the party too early EQUITIES ● ELECTRONIC EQUIPMENT 5 July 2017 2 Financial statements Year to 12/2016a 12/2017e 12/2018e 12/2019e Profit & loss summary (TWDm) Revenue 43,513 45,375 49,976 54,449 EBITDA 6,893 6,606 7,712 8,174 Depreciation & amortisation -2,754 -2,041 -2,112 -2,168 Operating profit/EBIT 4,139 4,564 5,600 6,006 Net interest 188 184 174 195 PBT 4,927 4,967 5,919 6,347 HSBC PBT 0 0 0 0 Taxation -904 -1,022 -1,184 -1,269 Net profit 4,023 3,946 4,736 5,077 HSBC net profit 4,023 3,946 4,736 5,077 Cash flow summary (TWDm) Cash flow from operations 8,374 5,436 6,053 6,054 Capex -931 -3,083 -3,154 -1,633 Cash flow from investment -1,512 -3,554 -3,154 -1,633 Dividends -1,708 -2,234 -2,486 -2,983 Change in net debt -4,464 1,884 -409 -1,437 FCF equity 4,
