Joyson Electronics:1H17beat on one-off;core profit dragged down by rising costs

Stronger revenue offset weaker margins

    1H17revenue expanded 1.2x YoY to RMB13.1bn, driven by RMB8.5bncontribution from full-period KSS/PCC consolidation (65% of revenue) but partlyoffset by 7.3% YoY drop in HMI segment due to sales decline at one major OEMcustomer. Meanwhile, gross profit grew 93.3% YoY to RMB2.3bn in 1H17with2.5ppt YoY gross margin deterioration. The margin contraction was mainly due to1.8ppt YoY margin dip from HMI and 0.6ppt drop from KSS. Together with 1.1xYoY jump in SG&A expenses and 53.0% YoY increase in finance cost, but partiallyoffset by RMB320.3m one-off disposal gain (before-tax) of industrial automationbusiness, 1H17net profit increased by 1.5x YoY to RMB615.6m (62% of FY17DBeand 53% of consensus). Excluding after-tax disposal gain of RMB220m, 1H17core net profit grew 61.5% YoY to RMB395.6m, with 1.1ppt deterioration in corenet margin.

    On a quarterly basis, 2Q17revenue was flattish QoQ (+73.0% YoY). Gross margindeteriorated 1.1ppt QoQ (2.3ppt YoY) to 17.4%. 2Q17net profit increased by96.1% QoQ (2.3x YoY) to RMB407.7m.

    Deutsche Bank view - consolidation of KSS on track; maintaining Buy

    With the sequential recovery in gross margin of auto safety segment (1H1717.5%vs. 2H1614.7%), Joyson is on track to consolidate KSS albeit at a slower-thanexpectedpace. The segment recorded USD1.3bn new contract wins in 1H17,including USD130m for active safety. Maintain Buy on our optimistic view on thegrowth potential of KSS in active safety and ADAS, a market in China that weestimate could grow to c.USD11bn by 2020.

    We raise our FY17-19E revenue by 1.4-8.9% to reflect stronger revenue growthand FY17E net profit by 13.8% to include the one-off gain from disposal ofindustrial automation business. Our FY18-19E net profit estimates are revisedup by only 0.8-3.4% to factor in lower margins. We expect Joyson to deliver27.7% FY16-19revenue CAGR, driven mainly by KSS acquisition. Our TP is setat 27x FY18E P/E (unchanged), 25% below its mid-cycle P/E of 36x. This isjustified, in our view, since we expect the company to deliver a 36% EPS CAGRin FY16-19. Key downside risks include 1) weaker-than-expected auto sales; 2)failure to consolidate KSS/TS or improve profitability; 3) future capital raising tofund potential acquisitions.