Ennoconn:Termination of coverage,Equity research

HSBC has decided to terminate Equity coverage of Ennoconn as a result of a reallocationof resources.

    Please note that you should no longer rely on any previous research, ratings, targetprices, estimates or trading strategies for this company.

    2Q17 results review: During 2Q17, revenue was broadly in line with consensusestimates of 16% q-o-q/18% y-o-y sequential growth. The revenue was primarilydriven by the strong contribution of SMT, though both gross margin (16.9%; down109bps q-o-q/502bps y-o-y) and operating margin (4.7%; down 335bps q-o-q/741bpsy-o-y) disappointed as a result of higher component prices, unfavourable product mixof higher contribution from products such as ATM, and significant investments inR&D for new applications such as data centres and gaming.

    Valuation methodology: Our target price is based on a PE of 25.5x, a reference tothe company’s peer valuation. We note that Ennoconn was listed in March 2014, so itonly has a short trading history. The company is unique within the IPC (Industrial PC)sector due to its light-asset business model. In our view, Advantech (2395 TT, Hold,CMP TWD229.5, TP TWD210), the leader in the industry, offers a unique brandingproposition on a global scale. As such, we believe the trading history of Advantechcould be a useful reference for Ennoconn. Advantech’s historical average PE was21.5x (2012-current) and one standard deviation above the historical mean was26.5x. We use one standard deviation above the average as our benchmark butdiscount the multiple slightly, considering Ennoconn’s smaller market share in theindustry. As such, we derive our TP of TWD500 by applying a 25.5x target PE to our2H17-1H18 EPS of TWD19.55. Our final rating is Buy, considering the potentialmarket expansion by the alliance of Ennoconn, S&T and Kontron.

    Key downside risks to our view: (1) worse-than-expected end demand; (2) poorexecution; and (3) stronger-than-expected competition/ASP pressure.