麦格理-中国PCB行业：在5G时代日益占据主导地位-2019.8.16-72页.pdf

Please refer to page 70 for important disclosures and analyst certification,or on our website August 2019 Greater China EQUITIES Recommendations and target prices Mkt cap 3M ADTO Price TP Up-Stock Ticker(US$m)(US$m)(lcy)Rec(lcy)side SYTECH 600183 CH 6,722 92 20.78 O 25.00 20%SCC 002916 CH 5,818 72 120.63 O 139.50 16%WUS 002463 CH 4,581 171 18.69 N 18.50 -1%Source:Bloomberg,Macquarie Research,August 2019,share prices at close 15 August 2019 Comparative valuations PE PB ROE Company 18 19E 20E 18 19E 20E 18 19E 20E SYTECH 44.0 33.8 26.8 6.9 6.1 5.6 15%17%20%SCC 48.4 42.5 29.7 9.1 9.1 7.3 19%21%25%Wus 56.3 34.2 27.7 8.0 6.6 5.7 14%20%21%Source:Bloomberg,Macquarie Research,August 2019 Contents Key charts 2 Growing dominance in the 5G era 5 Valuations 6 Risks 8 China PCB industrys version of “supply-side reform”10 PCB demand to ride on the rise of 5G 17 5G PCB requires high speed,high frequency laminate 24 Appendices 27 Stocks inside Shengyi Technology(A-Share)(600183 CH)28 Shennan Circuits(A-Share)(002916 CH)43 WUS Printed Circuit(Kunshan)(A-Share)(002463 CH)57 Analysts Macquarie Capital Limited Erica Chen +86 21 2412 9024 Fiona Liu +852 3922 1368 China PCB sector Growing dominance in the 5G era Key points We initiate coverage on the China PCB sector with a positive view on both supply(consolidation)and demand(5G).We believe the sector features more growth prospects and is less cyclical than in previous cycles.Valuation multiples are likely to re-rate.Top picks are SYTECH(Huaweis plan B)and SCC(import substitution),both rated Outperform with 20%and 16%upside.We rate WUS(turnaround)Neutral.China PCB industrys version of“supply-side reform”Under the banner of“environmental protection”centred on cutting waste water discharge and improving air quality,Chinas PCB industry has been seeing“supply-side reforms”since late 2017.Authorities have indirectly forced many PCB“shops”out of business via suspension orders.As the policy continues to be tightened and enforced strictly,environmental bills(either fine or additional expenditure in environmental equipment)are eating up profits of the remaining small PCB companies who could gradually exit the market.The rise of 5G to drive PCB demand Initially,5G will be rolled out in telecom,then IDC and,finally,in consumer electronics,all benefitting the PCB sector in both volume and ASP growth from upgrades in materials and manufacturing process.The growing demand for 5G was seen in the 2Q19 result comments of global leading tech companies,such as TSMC(reality check link).We expect the PCB content value per station for 5G macro station to be 3 times of 4G stations in the initial stages and 1.8 times in the mature stage.More growth and less cyclical than in previous technology cycles PCB is commonly perceived as a commodity-like sector.However,we believe with positives in both supply and demand,the 5G cycle presents more growth and less cyclical features in the next 2-3 years for select China PCB companies.SYTECH,the worlds 2nd largest laminate company in capacity,is closing the technology gap with industry leaders and is part of Huaweis plan B.SCC earns 60%of its revenues from telecom and is the#1 PCB supplier for Huawei.We view it as the best substrate company in China and should benefit from import substitution.WUS earns 60%of its revenues from telecom and is the#2 PCB supplier to Huawei.It turned around in 1H18 after 4 years of barely breaking even.Stock recommendations We have an Outperform ratings on SYTECH(TP of Rmb25.00 at 32x 2020E PER,currently trading at 34x/27x 19/20E EPS)and SCC(TP of Rmb139.50 at 34x 2020E PER,currently trading at 43/30 x 19/20E EPS).By contrast,we are Neutral on WUS(TP of Rmb18.50 at 27x 2020E PER,currently trading at 34/28x 19/20E EPS)due to stretched valuations near-term.We estimate SYTECH,SCC,and WUS will show 19-21E EPS CAGRs of 28%/35%/25%,respectively.Key catalysts include 2Q19 results beat,5G infrastructure take-off,Downside risks include Huawei order relocation,trade war,looser environmental policy.Macquarie Research China PCB sector 16 August 2019 2 Key charts Supply side reforms Fig 1 China PCB market growth trend Source:Prismark,Macquarie Research,August 2019 Fig 2 National environmental fine and average fine per case trend Fig 3 Production restriction/suspension cases trend from environmental policy Source:MEE(Ministry of Ecology and Environment of the PRC),Company data,Macquarie Research,August 2019 Source:MEE(Ministry of Ecology and Environment of the PRC),Company data,Macquarie Research,August 2019.Note:2018 full year number is estimated based on 11M18 number(Number in 11months)5G demand from infrastructure deployment Fig 4 2019 5G network deployment by China operators Telecom operators Cities where 5G has been tested,and network deployed Cities with selective 5G test,network deployment China Mobile 5 cities:Hangzhou,Shanghai,Guangzhou,Suzhou,Wuhan 12 cities:Beijing,Chengdu,Shenzhen,Qingdao,Tianjin,Fuzhou,Wuhan,Nanjing,Guiyang,Shenyang,Zhengzhou China Unicom 7 cities:Beijing,Shanghai,Guangzhou,Shenzhen,Nanjing,Hangzhou,Xiongan Target:33 cities by 2021 China Telecom 5G network built in 17 cities:Beijing,Shanghai,Chongqing,Chengdu,Fuzhou,Qinghai,Nanjing,Haikou,Yingtan,Ningbo Target:40 cities Source:Counterpoint,Company data,Macquarie Research,August 2019 -5%42%9%-2%14%7%2%1%10%10%3%4%4%5%5%-20%-10%0%10%20%30%40%50%60%0102030405060200820092010201120122013201420152016201720182019E2020E2021E2022E2023EChina PCB marketChina Market Growth rate(RHS)Global Market Growth Rate(RHS)China as%of Global(RHS)USD bnStage 1Production moves from developed countries to ChinaStage 2China domestic playersexpand capacity with capital support from IPOStage 3China domestic leadersrise up riding ontightening environmental policy44 53 50 82 77 -10 20 30 40 50 60 70 80 90-2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.020152016201720184M19National enviornmental fine(LHS)Average fine per case(RHS)Rmb bnRmb k-1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,00020152016201720184M1920152016201720184M19Macquarie Research China PCB sector 16 August 2019 3 China PCB vs Taiwan peers Fig 5 China PCB PE valuation multiples vs TW peers weighted index Source:Bloomberg,Macquarie Research,August 2019.Note:TW PE weighted index is the market cap weighted index,companies including ITEQ,Elite Material,Kinsus,Tripod,Hannstar,Flexium,ZDT,Compeq,TUC.Fig 6 China PCB gross margin vs.TW peers Fig 7 China PCB R&D expense to sales ratio vs.TW peers Source:Bloomberg,Company data,Macquarie Research,August 2019.Note:TW weighted line is the market cap weighted margin of companies including ITEQ,Elite Material,Kinsus,Tripod,Hannstar,Flexium,ZDT,Compeq,TUC.Source:Bloomberg,Company data,Macquarie Research,August 2019.Note:TW weighted line is the market cap weighted ratios of companies including ITEQ,Elite Material,Kinsus,Tripod,Hannstar,Flexium,ZDT,Compeq,TUC.Fig 8 China PCB player(Blue)end market exposure vs TW peers(Yellow)Company End market exposure PCB SCC Telecom 60%,Industrial 20%,Consumer 15%WUS Telecom 60%,Automotive 20%,Industrial 10%Kinsus Smartphone/SLP 45%,PC(PCB)14%,Base station 8%,Consumer 7%,Connectivity 3%,GPU 9%,others(contact lens subsidiary)14%ZDT Smartphone 75-80%,NB/Tablet 10%Flexium Communication(smartphone)74%,Computer 19%(NB+tablet),Consumer 7%.Hannstar PC 43%,Telecom 17%,STB 13%,Server 5%,Game 4%Compeq Mobile phones 39%,PC 27%,Telecom 5%,SMT 24%,Consumer 5%CCL SYTECH Telecom 30%,Automotive 25%,Home appliances 15%,Consumer electronics 10%Elite Material Handheld 46%,Infrastructure 29%,Auto 22%,others 3%ITEQ Telecom 48%,Consumer 32%,Auto 11%,Smartphone 9%Source:Company data,Macquarie Research,August 2019 0102030405060Jan-16Feb-16Mar-16Apr-16May-16Jun-16Jul-16Aug-16Sep-16Oct-16Nov-16Dec-16Jan-17Feb-17Mar-17Apr-17May-17Jun-17Jul-17Aug-17Sep-17Oct-17Nov-17Dec-17Jan-18Feb-18Mar-18Apr-18May-18Jun-18Jul-18Aug-18Sep-18Oct-18Nov-18Dec-18Jan-19Feb-19Mar-19Apr-19May-19Jun-19Jul-19xSCCWusSYTECHTW PE weighted indexCSI 300 PE0%5%10%15%20%25%20142015201620172018TW weightedSCCWUSSYTECH0%1%2%3%4%5%6%7%20142015201620172018TW weightedSCCWUSSYTECH Macquarie Research China PCB sector 16 August 2019 4 Fig 9 Comparison between SCC,WUS,SYTECH SCC(002916 CH)WUS(002463 CH)SYTECH(600183 CH)Recommendation|TP Outperform|Rmb 139.50|+16%upside Neutral|Rmb 18.50|-1%upside Outperform|Rmb 25.00|+20%upside Investment thesis 60%revenues from telecom#1 PCB supplier for Huawei The best substrate company in China and should benefit from further import substitution.60%revenues from telecom#2 PCB supplier for Huawei Turned around in 1H18 after barely breaking even for 4 years.Worlds 2nd largest laminate company in capacity Closing the technology gap with industry leaders Part of Huaweis plan B Product mix(%)in 2018 Region mix(%)in 2018 End market mix(%)in 2018 Top 1|Top 5 customer contribution(%20-25%(Huawei)|40-50%25-30%(Huawei)|60-70%NA|20%-25%Customer profile Huawei,Honeywell,GE Med,BOSCH,Lenovo,ASE Huawei,Cisco,Continental,ZTE,Ericsson,Nokia Direct:SCC,WUS|End:Huawei,Samsung,Nokia,Inspur Earnings 16-21E (Rmb m)Source:Bloomberg,Company data,Macquarie Research,August 2019.Note:For more customer profile,refer to individual company report.PCB71%IC Substrate12%PCB Assembly12%Others5%PCB97%Others3%Rigid CCL63%Flex CCL3%Prepreg16%PCB17%Others1%Mainland China,61%Overseas,39%Mainland China,41%Overseas,59%Mainland China,75%Overseas,25%Telecom60%Industrial20%Consumer electronics13%Server/Memory2%Others5%Telecom64%Industrial Control9%Automotive23%Consumer electronics1%Other3%Telecom30%Automotive25%Home appliances15%Consumer electronics10%Others20%2744486979641,3771,7662016201720182019E2020E2021E+35%CAGR in 19-21E1312045709381,1621,4722016201720182019E2020E2021E+25%CAGR in 19-21E7481,0751,0001,3701,7662,2482016201720182019E2020E2021E+28%CAGR in 19-21EMacquarie Research China PCB sector 16 August 2019 5 Growing dominance in the 5G era We initiate coverage of China PCB sector with a positive stance We believe structural changes on both the supply(consolidation)and demand sides(5G)will make Chinas PCB sector trade as a non-commodity-like sector.For specific China PCB company names,the new technology 5G cycle presents more growth and less cyclical features in the coming 2-3 years.Supply:Tightening environmental policy prompts industry reform Chinas government has been pushing for a tighter policy for“environmental protection”since late 2017.This has indirectly pushed many small PCB“shops”out of business,forming a supply-side reform wave.PCB small“shops”are facing a dilemma between 1)being fined while continuing with existing operations,and 2)adding policy-approved systems.Yet both actions will take 30%off their profit,forcing them to close down.We sees the tightening policy continuing in the coming years,leading to more consolidation and thus benefitting leading PCB players.Demand:5G to drive PCB upcycle for the next decade The PCB sector has been strongly impacted by product cycles,from PCs to feature phones,to smartphones,and now 5G.Countries around the world have been competing for this multi-billion business sector.With 5G commercialization having already started in 1H19 in the US/Korea,and 5G infrastructure being deployed in China,there is no doubt the 5G uptrend has started in 2019.5G product upgrades will move from the telecom sector initially to the IDC sector and then to the consumer electronics sector,lifting PCB demand in terms of both volume and ASP growth in material and manufacturing process.We expect the PCB content value per station for 5G macro station will be 3 times of 4G station in the initial stage and 1.8 times in the mature stage.Upstream:5G requires high speed,high frequency material 5G networks essential upgrade characteristics are high speed,low power and low latency.And these upgrades will need PCB to help fulfil the“high speed and high frequency”features.To achieve these two features,PCB makers need to have a more precise manufacturing process,and more importantly,upstream laminate/CCL makers need to provide an upgraded material.As the trade war uncertainty continues,we expect the growing preference for domestic supply chain could be extended to PCB and laminate/CCL segment,thus benefitting Chinas high speed,high frequency laminate makers.Top picks:SYTECH,WUS,SCC While we have a general positive view on the sector,we believe leading companies with high telecom exposure will benefit more.We initiate coverage of SCC with an Outperform rating and WUS with a Neutral rating.SCC,with 60%revenues coming from telecom and it being the#1 PCB supplier to Huawei,is the best substrate company in China and should benefit from further import substitution.WUS,with 60%revenues from telecom and it being the#2 PCB supplier to for Huawei,had turnaround in 1H18 after 4-year barely breakeven.We also like upstream PCB laminate leader,SYTECH,initiating with an Outperform rating.SYTECH,worlds 2nd largest laminate company in capacity,is closing the technology gap with industry leaders and is part of Huaweis plan B.SYTECH is our top pick in the China PCB sector.Macquarie Research China PCB sector 16 August 2019 6 Valuations Fig 10 Peer comp valuation Company Ticker Mkt cap (US$m)3M ADTO(US$m)Price (lcy)Stock performance TP (lcy)Up-side Rec PE PB ROE Analyst 1M 1Y 18 19E 20E 18 19E 20E 18 19E 20E PCB Avary 002938 CH 12,985 27 39.53 26%NA 30.4 29.8 25.3 5.1 4.3 3.8 18%14%15%SCC 002916 CH 5,818 72 120.63 15%115%139.50 16%O 48.4 42.5 29.7 9.1 9.1 7.3 19%21%25%Erica Chen WUS 002463 CH 4,581 171 18.69 31%283%18.50 -1%N 56.3 34.2 27.7 8.0 6.6 5.7 14%20%21%Erica Chen Kinwong 603228 CH 3,972 20 46.40 20%21%33.0 25.9 20.8 6.4 5.3 4.4 22%20%21%ZDT 4958 TT 3,014 21 117.50 12%57%103.00 -12%N 11.2 11.4 11.5 1.7 1.7 1.6 17%15%15%Kaylin Tsai Suntak 002815 CH 2,128 15 17.94 25%5%3.6 20.9 16.0 5.1 4.5 3.8 21%22%24%Tripod 3044 TT 1,893 7 113.00 4%24%12.2 11.2 10.3 1.8 1.7 1.6 16%16%16%Ellington 603328 CH 1,514 13 10.68 -2%6%16.2 NA NA 2.4 NA NA 14%NA NA Victory 300476 CH 1,467 15 13.25 22%-9%27.0 18.8 14.7 3.4 2.8 2.4 13%15%17%Compeq 2313 TT 1,086 16 28.60 1%-3%14.3 12.2 10.6 1.5 1.4 1.2 10%11%12%Flexium 6269 TT 948 14 93.50 2%-4%84.00 -10%N 10.9 11.1 10.0 1.5 1.4 1.3 14%13%14%Kaylin Tsai Kinsus 3189 TT 542 3 37.70 -7%-24%39.00 3%N 48.1 -9.0 86.7 0.6 0.7 0.7 1%-7%1%Kaylin Tsai Chaohua 002288 CH 597 20 4.51 -9%10%121.9 45.1 30.1 2.7 2.6 2.4 2%6%8%Hannstar 5469 TT 575 10 39.30 23%52%11.4 9.8 NA 1.0 1.1 NA 9%NA NA Average 12%41%31.8 20.3 24.4 3.6 3.3 3.0 14%14%16%CCL SYTECH 600183 CH 6,722 92 20.78 38%96%25.00 20%O 44.0 33.8 26.8 6.9 6.1 5.6 15%17%20%Erica Chen Hitachi Chemical 4217 JP 5,872 22 2,985.00 -1%37%17.1 19.0 21.5 1.6 1.5 1.4 9%8%7%Rogers ROG US 2,461 33 132.59 -18%4%28.2 24.5 19.2 2.9 2.6 2.3 11%NA NA Kingboard 1888 HK 2,267 4 5.77 -10%-25%5.5 6.4 5.7 1.0 NA NA 19%NA NA ITEQ 6213 TT 1,371 25 142.00 21%108%24.4 17.7 13.6 5.4 4.6 4.0 23%27%31%MC 2383 TT 1,350 26 132.50 17%43%134.00 1%O 24.9 15.7 13.2 3.6 3.1 2.8 15%21%21%Kaylin Tsai TUC 6274 TT