Wistron:Hold,Positive catalysts likely in the price

iPhone shipment growth is positive, yet profitability remains the key concern.

    Wistron started 5.5” iPhone assembly in small volumes in 2015. While order allocation oftotal iPhone production has been increasing, from c2% in FY15 and c4% in FY16, theassembly business was loss-making due to lack of scale, and lower yield and efficiency.

    For FY17e, we expect Wistron to have 50% share of the next generation 5.5” iPhone,with order allocation going up to c8% and sales contribution at 27%. Despite scaleimprovement, the business could continue to make losses until 4Q17e, given initial costsinvolved in yield curve ramp-up and employee hiring and training. Earnings visibilityfurther out is limited, as order volatility in different quarters tends to pose greaterchallenges for smaller suppliers in terms of capacity and labour management.

    Notebook (NB) stabilization and server sales growth likely in the price. Wistronposted 18% y-o-y NB unit growth in 1Q17 backed by share gains in key customers.

    Guidance for 2Q is for 5% unit growth q-o-q, implying +3% y-o-y. For FY17e,management expects shipment to be flat y-o-y, better than feared. Another potentialbright spot would be servers. Wistron has long been a key ODM partner for Dell, HP,Lenovo and Inspur for enterprise servers but is also increasing its exposure to white-boxserver/rack through 45%-owned subsidiary “Wiwynn” (unlisted). We expect server salesto grow at 24%/14% in FY17/18e (c10%/11% of sales), backed by Wiwynn’s risingexposure to Microsoft and FaceBook. That said, we think the growth is well-expected andreflected in consensus.

    Maintain Hold with TP of TWD28, from TWD26. We cut our FY17e earnings c9%mainly to reflect the initial cost in 3Q17 for the iPhone ramp-up. However, we raise FY18eearnings 4% as our previous opex assumption was more aggressive than what has beenreported recently. Our new TP is now set at TWD28 (was TWD26), still based on 12xFY18e earnings (roll forward from FY17e). The shares have gone up by 24% y-t-d inabsolute term, which we believe has reflected share gains in iPhone, solid server salesgrowth from Wiwynn, and NB stabilization. At the current price (16.1x/13.3x FY17/18ePE), we see little prospect of share price upside currently, considering uncertainty inprofitability of iPhone assembly and order sustainability of 5.5” iPhone after initial rampup.

    We maintain our Hold rating as we expect the upcoming launch of the new iPhoneand cash yield of 3.9% would provide share price support.

    With this note, Carrie Liu is assuming primary coverage of Wistron.