Largan Precision:Buy,Weaker 2Q sales,but competition remains healthy

2Q17 sales weaker than our original expectation: On 5 July, Largan reportedconsolidated June revenue of TWD3,859m, which represents an increase of 2%MoM and 7% YoY. Accumulated 2Q17 sales totalled TWD11,315m, up 5% QoQ and13% YoY though slightly below consensus growth estimates of 12%/21% QoQ/YoY.

    The product mix of June shipments remained steady, with 10MP+ representing 70-80% of shipments, 8MP 10-20%, and 5MP 10-20%.

    Slower Apple ramps partially offset by gradual Chinese smartphone recovery:Despite management’s previous comments of a stronger monthly rebound, webelieve the weaker-than-expected June and 2Q17 sales momentum is primarilyattributable to slower pickup in both Apple and Chinese smartphones. However, wecontinue to expect a stronger smartphone recovery going into the second half of theyear from both the well-anticipated new iPhone launches and new Chinesesmartphone model launches. We would note that we now expect demand to bepushed out in late 3Q17, 4Q17, and 1Q18.

    Competition landscape remains healthy: Despite Largan’s near-term weakness,we maintain our positive view on the company and the overall competitive landscapeas we see other peers lagging technological capability in areas such as 6P migrationto potentially result in an even slower ramp up and inability to tackle other businessessuch as the widely speculated 3D sensing. We reiterate our positive view on Largandue to: (1) rising dual camera penetration; (2) well-anticipated iPhone product; and (3)higher mix of premium iPhone models. The gap between Largan and peers could furtherwiden in 2019e if we see meaningful lens spec upgrades.

    We adjust estimates for weaker 2Q and product push out; maintain Buy:Following Largan’s monthly sales announcement, we fine tune our 2017/18/19estimates which fall between -1% and -9% as we factor in the later-than-expectedproduction push out. Despite these changes, we roll our valuation over from2H17/1H18e to 2018e EPS and maintain our target PE of 20x. This results in ahigher target price of TWD5,514 from TWD5,282. This implies 14.5% upside and werate the stock Buy. Key downside risks include: (1) weaker-than-expected endmarket demand; (2) worse-than-expected ASP pressure/execution; and (3) strongerthan-expected competition.