欧菲科技(002456)

Negative profit warnings, largely due to bad debt provision on Gionee’s A/R

In our Jan 17 industry report (titled Gionee woes, likely more to come; weprefer iPhone to China supply chain), we highlighted Gionee’s cash flow issueand how O Film could take the hardest hit among companies under ourcoverage. Our concern has come true. O-Film just issued a negative profit alert,cutting 2017 net profit guidance by 22%-26%. For 2018, O-Film highlights thatthey will gain market shares in China’s dual cam market and more newprojects from Apple (touch sensor and Face ID’s RX module). We remainconcerned that there could be more bad debt provision in 2018, as O-Film hasrelatively higher exposure to China’s tier-two brands; maintaining Hold.

More details about profit alert and the bad debt provision

O-Film is reducing its 2017 net profit guidance from “RMB129m to RMB158m”to “RMB100m to RMB115m”, and attributes the miss to a non-cash bad debtprovision of RMB300m. O-Film highlights that the total outstanding A/R fromGionee is about RMB600m. Gionee is still in operation, despite facing cashflow issues. As a result, O-Film believes that a RMB300m provision should beenough to cover the risk. Aside from the bad debt, we believe Q-Film’s 4Q17results were also negatively impacted by order cuts from Oppo and Vivo.

Other business updates

Other key highlights in the analyst call included: 1) for Apple business, O-Filmexpects to become the back-up supplier for iPhone’s ITO touch sensor and RXmodule in iPhone’s Face ID system in 2H18; 2) for dual cam, O-Film expectsgrow its shipments from sub-50m in 2017 to 100m+ in 2018, driven by marketshare gain in China’s tier-one OEMs – particularly, O-Film expects to becomethe largest dual-cam supplier for Huawei’s high-end phones (P/Mate series)and 3) ASP of dual cams could rise from RMB100-RMB110 in 2017 to RMB120in 2018, due to better product mix (with gross margin of ~18%).

Valuation and investment risks

We cut 2017/18/19 EPS ests by 27%/24%/11% (to reflect bad debt provision andOppo/Vivo weakness) and reduce our TP from RMB23 to RMB17.5, still based on26x 2018E EPS or 0.8x PEG (2017-20E EPS CAGR of 33%). 0.8x PEG is in linewith regional tech peer avg. Upside risks include: 1) faster than expected takeoffof fingerprint sensor business; 2) stronger than expected smartphone cameraupgrade trend. Downside risks include: 1) fiercer than expected pricecompetition in touch panel sector; 2) more significant margin erosion in handsetcamera sector stemming from smartphone consolidation trend.