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Taiwan Information Technology
What's new: Our market research indicates that the 5.5” version of the next iPhone, which we call the iPhone 7 Plus and expect to be launched in 2H16, is likely to feature high-end-spec dual cameras. We would see Largan as a key beneficiary of such a development, and recommend buying the shares into any weakness associated with a slow 1Q16 and a weak outlook from Apple for iPhones in the near term. What's the impact: iPhone 7 Plus likely to have high-end dual cam. As discussed in Good entry point for an undervalued industry leader (15 October 2015), we see a good possibility that at least 1 new iPhone model will feature a dual cam. In our view, the market is concerned Apple may decide not to adopt a dual cam or go only with mid-range specs (ie, 12MP+5MP or 8MP+8MP). However, our market research indicates that development work is on track and suppliers are making the necessary preparations. Hence, we now expect the iPhone 7 Plus to feature 12MP+12MP dual cams. Largan, currently the major lens supplier for iPhones, should be a major beneficiary and could see a 100% ASP premium over current levels, if not more. Moreover, if Apple were to adopt dual cams for a 4.7” iPhone model in 2H17, which we view as quite likely, we estimate there would be 5-6% upside to our 2017E earnings; if adoption comes earlier, in 2H16, earnings upside for 2016-17E could reach 7-16% (see pages 5-6). We have not factored dual-cam adoption in the 4.7” model into our forecasts. More broadly, we believe the dual-cam trend should widen Largan’s leading edge and relieve some of the market’s concerns on capacity build-up in the lens industry. Limited impact from removal of voice coil motor (VCM) assembly. Due to a change in camera structure, we expect Largan to no longer provide a VCM assembly service for the dual-cam iPhone model. This change should reduce Largan’s revenue by 3-6% in 2016-17E, but have only a 0.5-1% impact on earnings, which we have factored into our revised estimates. We would view this development as a positive for Largan in the long run, as it should allow it to allocate more resources to its higher-margin lens business. 1Q16: good time for bottom-fishing. Due to the traditional light season and iPhone order weakness (see iPhone: a slow start for 1Q16, 28 December 2015), we expect Largan’s 1Q16 revenue to fall by 39% QoQ. However, we view this as a good time to build positions in the stock ahead of solid earnings growth. Largan is trading at 9.7x 2016E PER, which we see as attractive based on our forecast for 12-20% YoY growth in operating profit for 2016-17E. What we recommend: Factoring in the above factors, we raise 2016-17E EPS by 3-8%. We reaffirm our Buy (1) rating with a new 12-month target price of TWD3,150 (from TWD3,060), based on an unchanged16x PER, the mid-point of Largan’s past-5-year trading range of 8-24x, on our revised 2016E EPS. The main risk to our call: weaker-than-expected smartphone sell-through. How we differ: Likely because we are more positive on dual-cam developments, our 2016-17 EPS is 8-9% above the Bloomberg consensus.
21 January 2016
Largan Precision
12MP+12MP likely for iPhone 7 Plus
Dual-cam adoption in iPhone would likely spell earnings upside
Good time to buy ahead of solid operating-profit growth for 2016-17E
Reiterate Buy (1); looks undervalued at 9.7x 2016E PER
Source: Daiwa forecasts
Source: FactSet, Daiwa forecasts
Largan Precision (3008 TT)
Target price: TWD3,150 (from TWD3,060)
Share price (20 Jan): TWD1,900 | Up/downside: +65.7%
Kylie Huang(886) 2 8758 6248
Forecast revisions (%)
Year to 31 Dec 15E 16E 17ERevenue change - 0.2 0.5Net profit change - 3.1 7.8Core EPS (FD) change - 3.1 7.8
80
96
113
129
145
1,800
2,288
2,775
3,263
3,750
Jan-15 Apr-15 Jul-15 Oct-15 Jan-16
Share price performance
Largan (LHS)Relative to TWSE Index (RHS)
(TWD) (%)
12-month range 1,830-3,710Market cap (USDbn) 7.563m avg daily turnover (USDm) 85.87Shares outstanding (m) 134Major shareholder Ch'en Shih Ch'ing (5.0%)
Financial summary (TWD)
Year to 31 Dec 15E 16E 17ERevenue (m) 55,868 60,250 67,950Operating profit (m) 27,650 31,059 37,203Net profit (m) 24,158 26,343 31,636Core EPS (fully-diluted) 180.095 196.385 235.841EPS change (%) 24.3 9.0 20.1Daiwa vs Cons. EPS (%) 0.0 8.5 9.2PER (x) 10.5 9.7 8.1Dividend yield (%) 3.3 4.1 5.0DPS 63.0 78.6 94.3PBR (x) 4.0 3.1 2.5EV/EBITDA (x) 7.3 6.4 4.9ROE (%) 44.0 36.4 34.4
2
Largan Precision (3008 TT): 21 January 2016
How do we justify our view?
Growth outlook Valuation Earnings revisions
Growth outlook Largan: revenue, QoQ growth, and YoY Growth
Due to the traditional light season and iPhone order
weakness, we forecast Largan to see a 39% QoQ revenue
decline in 1Q16. However, we expect its revenue growth to
resume from 2Q16, followed by vigorous growth HoH in
2H16, driven by a ramp-up in shipments for new
smartphone models, spec upgrades, and peak seasonality.
In addition, given our expectation that the iPhone 7 Plus
will adopt dual cams in 2H16, we look for Largan’s
operating profit to resume strong YoY growth from 2H16. In
sum, we forecast operating profit growth of 12% YoY for
2016E and 20% YoY for 2017E.
Source: Company, Daiwa forecast
Valuation Largan: one-year forward PER bands
Our revised 12-month target price of TWD3,150 is based
on an unchanged PER of 16x, the mid-point of the stock’s
past-5-year trading range of 8-24x, on our revised 2016E
EPS. The stock is trading at a 2016E PER of 9.7x, the low
end of its historical range, which we consider to be
attractive on our forecast for solid earnings growth.
We believe PER is the most appropriate way to value
downstream tech companies such as Largan. We
recognise the flaws in the methodology, such as a lack of
insight into the long-term business outlook, and a
mismatch between earnings and cash flows. However, we
think PER is a straightforward, intuitive, and accurate way
to predict a tech company’s earnings power, at least over
the near term.
Source: TEJ, Daiwa forecasts
Earnings revisions Largan: consensus 2016-17 EPS-forecast revisions (TWD)
The 2016-17 Bloomberg-consensus earnings forecasts
have been revised down gradually since mid-2015,
particularly near the end of the year, due to the slowdown
in demand for iPhones and overall macro uncertainties.
However, as we are more positive on possible dual-cam
developments, our 2016-17E EPS forecasts are 8-9%
higher than the Bloomberg consensus.
Source: Bloomberg
(40%)
(20%)
0%
20%
40%
60%
0
5,000
10,000
15,000
20,000
25,000
1Q16E 2Q16E 3Q16E 4Q16E
Sales QoQ Growth YoY Growth
(TWDm)
0
400
800
1,200
1,600
2,000
2,400
2,800
3,200
3,600
4,000
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
Jul-1
2
Jan-
13
Jul-1
3
Jan-
14
Jul-1
4
Jan-
15
Jul-1
5
Jan-
16
(TWD)
Largan 6x 12x 18x 24x
100
120
140
160
180
200
220
240
260
280
Jan-
15
Feb
-15
Ma
r-15
Apr
-15
Ma
y-15
Jun-
15
Jul-1
5
Aug
-15
Sep
-15
Oct
-15
Nov
-15
Dec
-15
Jan-
16
2016E EPS 2017E EPS
3
Largan Precision (3008 TT): 21 January 2016
Financial summary
Key assumptions
Profit and loss (TWDm)
Cash flow (TWDm)
Source: FactSet, Daiwa forecasts
Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E
Mobile phone lens shipment ('000 units) 215,100 286,554 344,730 483,614 691,655 800,869 849,343 955,454
Blended ASP of handset lens (USD) 1.21 1.33 1.34 1.47 1.77 1.78 1.84 1.92
Gross margin of VCM assembly (%) 7.3 6.8 5.3 6.0 7.4 8.4 7.5 7.5
Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E
Mobile Phone Lens Revenues 11,433 15,243 19,190 26,623 44,926 55,540 59,980 67,682
DSC Lens Revenues 555 391 415 449 393 41 40 40
Other Revenue 363 351 468 362 491 288 230 228
Total Revenue 12,351 15,984 20,072 27,433 45,810 55,868 60,250 67,950
Other income 0 0 0 0 0 0 0 0
COGS (6,546) (9,043) (11,710) (14,472) (21,291) (23,817) (24,281) (25,685)
SG&A (374) (506) (530) (887) (1,349) (1,720) (1,919) (1,978)
Other op.expenses (770) (963) (1,034) (1,293) (2,103) (2,681) (2,991) (3,084)
Operating profit 4,661 5,472 6,798 10,781 21,067 27,650 31,059 37,203
Net-interest inc./(exp.) 28 50 84 122 250 271 400 548
Assoc/forex/extraord./others (356) 314 (71) 598 1,646 1,233 356 457
Pre-tax profit 4,334 5,837 6,811 11,501 22,963 29,155 31,815 38,207
Tax (289) (638) (1,234) (1,891) (3,525) (4,997) (5,472) (6,572)
Min. int./pref. div./others 0 0 0 0 0 0 0 0
Net profit (reported) 4,044 5,199 5,578 9,610 19,438 24,158 26,343 31,636
Net profit (adjusted) 4,044 5,199 5,578 9,610 19,438 24,158 26,343 31,636
EPS (reported)(TWD) 30.150 38.755 41.581 71.640 144.909 180.095 196.385 235.841
EPS (adjusted)(TWD) 30.150 38.755 41.581 71.640 144.909 180.095 196.385 235.841
EPS (adjusted fully-diluted)(TWD) 30.150 38.755 41.581 71.640 144.909 180.095 196.385 235.841
DPS (TWD) 13.500 17.000 17.000 28.500 51.000 63.033 78.554 94.336
EBIT 4,661 5,472 6,798 10,781 21,067 27,650 31,059 37,203
EBITDA 5,398 6,372 8,005 12,229 22,728 29,529 31,059 37,203
Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E
Profit before tax 4,334 5,837 6,811 11,501 22,963 29,155 31,815 38,207
Depreciation and amortisation 737 900 1,208 1,448 1,661 1,879 2,299 2,771
Tax paid (289) (638) (1,234) (1,891) (3,525) (4,997) (5,472) (6,572)
Change in working capital (539) 1,202 (783) (363) (920) (2,696) (927) (1,682)
Other operational CF items 21 18 (2) 51 (32) (2) (6) (7)
Cash flow from operations 4,263 7,318 6,000 10,746 20,147 23,338 27,709 32,718
Capex (1,066) (3,149) (2,865) (1,504) (5,568) (4,000) (4,500) (4,500)
Net (acquisitions)/disposals (1) (2) (101) 9 194 (10) (10) (10)
Other investing CF items (21) (23) (19) (1,593) (695) 411 0 0
Cash flow from investing (1,088) (3,173) (2,985) (3,088) (6,069) (3,599) (4,510) (4,510)
Change in debt 142 319 (356) 12 108 (112) 0 0
Net share issues/(repurchases) 0 0 0 0 0 0 0 0
Dividends paid (1,341) (1,811) (2,280) (2,280) (3,823) (6,841) (8,455) (10,537)
Other financing CF items (23) 37 (43) 51 138 0 0 0
Cash flow from financing (1,223) (1,456) (2,679) (2,217) (3,577) (6,954) (8,455) (10,537)
Forex effect/others 0 0 0 0 0 0 0 0
Change in cash 1,952 2,690 336 5,440 10,501 12,786 14,744 17,670
Free cash flow 3,197 4,169 3,136 9,242 14,579 19,338 23,209 28,218
4
Largan Precision (3008 TT): 21 January 2016
Financial summary continued …
Balance sheet (TWDm)
Key ratios (%)
Source: FactSet, Daiwa forecasts
As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E
Cash & short-term investment 8,579 11,268 11,604 17,045 27,546 40,332 55,076 72,746
Inventory 902 1,461 2,532 2,693 3,538 3,969 3,916 4,143
Accounts receivable 3,182 3,510 6,581 6,823 13,338 14,541 15,682 17,686
Other current assets 153 234 255 248 388 430 430 485
Total current assets 12,815 16,473 20,973 26,809 44,809 59,272 75,104 95,060
Fixed assets 5,795 8,057 9,731 9,800 13,722 15,843 18,044 19,773
Goodwill & intangibles 0 0 0 0 0 0 0 0
Other non-current assets 386 379 485 2,004 2,523 2,123 2,140 2,157
Total assets 18,996 24,909 31,188 38,614 61,054 77,239 95,288 116,990
Short-term debt 112 444 93 83 190 100 100 100
Accounts payable 560 1,358 3,555 2,507 4,999 5,593 5,702 6,052
Other current liabilities 1,871 3,243 4,426 5,507 9,594 7,981 8,033 8,287
Total current liabilities 2,543 5,045 8,075 8,097 14,783 13,674 13,835 14,438
Long-term debt 0 0 0 0 0 0 0 0
Other non-current liabilities 67 54 49 71 72 50 50 50
Total liabilities 2,610 5,099 8,124 8,168 14,855 13,724 13,885 14,488
Share capital 1,341 1,341 1,341 1,341 1,341 1,341 1,341 1,341
Reserves/R.E./others 15,045 18,469 21,723 29,104 44,857 62,174 80,061 101,160
Shareholders' equity 16,386 19,810 23,064 30,445 46,198 63,515 81,403 102,501
Minority interests 0 0 0 0 0 0 0 0
Total equity & liabilities 18,996 24,909 31,188 38,614 61,054 77,239 95,288 116,990
EV 246,400 244,042 243,355 237,904 227,511 214,634 199,891 182,220
Net debt/(cash) (8,467) (10,824) (11,511) (16,962) (27,356) (40,232) (54,976) (72,646)
BVPS (TWD) 122.156 147.685 171.943 226.965 344.402 473.497 606.849 764.135
Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E
Sales (YoY) 51.5 29.4 25.6 36.7 67.0 22.0 7.8 12.8
EBITDA (YoY) 61.4 18.0 25.6 52.8 85.9 29.9 5.2 19.8
Operating profit (YoY) 71.3 17.4 24.2 58.6 95.4 31.3 12.3 19.8
Net profit (YoY) 62.7 28.5 7.3 72.3 102.3 24.3 9.0 20.1
Core EPS (fully-diluted) (YoY) 61.7 28.5 7.3 72.3 102.3 24.3 9.0 20.1
Gross-profit margin 47.0 43.4 41.7 47.2 53.5 57.4 59.7 62.2
EBITDA margin 43.7 39.9 39.9 44.6 49.6 52.9 51.6 54.8
Operating-profit margin 37.7 34.2 33.9 39.3 46.0 49.5 51.6 54.8
Net profit margin 32.7 32.5 27.8 35.0 42.4 43.2 43.7 46.6
ROAE 26.9 28.7 26.0 35.9 50.7 44.0 36.4 34.4
ROAA 23.3 23.7 19.9 27.5 39.0 34.9 30.5 29.8
ROCE 30.8 29.8 31.3 40.2 54.8 50.3 42.8 40.4
ROIC 57.9 57.7 54.2 72.0 110.3 108.8 103.5 109.5
Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Effective tax rate 6.7 10.9 18.1 16.4 15.4 17.1 17.2 17.2
Accounts receivable (days) 82.1 76.4 91.7 89.2 80.3 91.1 91.5 89.6
Current ratio (x) 5.0 3.3 2.6 3.3 3.0 4.3 5.4 6.6
Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Net dividend payout 44.8 43.9 40.9 39.8 35.2 35.0 40.0 40.0
Free cash flow yield 1.3 1.6 1.2 3.6 5.7 7.6 9.1 11.1
Company profile
In Asia ex-Japan, Largan Precision is the leading lens manufacturer for mobile handsets. It currently
has over 30% market share of the global handset-lens market.
5
Largan Precision (3008 TT): 21 January 2016
Benefits of dual-cam adoption arriving soon
Dual cams for the next generation iPhones
Expect iPhone 7 Plus to adopt 12MP+12MP dual camera
As discussed in our report, Good entry point for an undervalued industry leader, published
on 15 October 2015, we see a high possibility of at least one new iPhone model adopting a
dual camera in 2H16, but the market still seems worried that Apple might not do so or only
adopt it in its mid-range specs (ie, 12MP+5MP or 8MP+8MP) due to software issues and
cost concerns. Our recent market research shows that development progress is on track
and that Apple has informed suppliers to prepare. We now expect the 5.5” version of the
next iPhone, which we call as iPhone 7 Plus and expect to be launched in 2H16, to adopt
12MP+12MP dual cams.
Largan, the main lens supplier for iPhones, should be a major beneficiary of this, and will
see its ASP rise by 100% or more from current levels after the release of the dual-cam
phone, in our view. We also think that the increasing trend to adopt dual cams will widen
Largan’s leading edge and should relieve some of the market’s concerns about the recent
capacity build-up in the lens industry.
Limited impact from the removal of the VCM assembly business
Largan has provided a VCM assembly service for iPhone models on Apple’s request. But
for the dual-cam model (iPhone 7 Plus), due to the change in the camera structure, we
expect the VCM assembly business to move to the camera module suppliers from the lens
makers. Thus, based on our estimates, this should negatively affect Largan’s revenue by
3-6% in 2016-17. However, as the VCM assembly is a low-margin business (single-digit
gross margin only), we expect the earnings impact to be limited at only 0.5-1% for 2016-
17, and have factored this change into our revised estimates. In the long term, we see this
change as a positive for Largan because it should be able to allocate the space freed up to
its high-margin lens business.
Further earnings upside likely on further adoption of dual cams in iPhones
We do not expect Apple to adopt dual cams in its 4.7” iPhone model this year, but think this
is highly likely in 2017. If Apple does adopt a dual camera in its 4.7” model in 2H17, this
should provide extra earnings upside (5-6%) to our 2017 earnings estimates, depending on
the specs it adopts (see the following tables). In addition, if the adoption of this dual
camera happens earlier, in 2H16, the earnings upside could reach 7-16% for our 2016-17
estimates. We haven’t factored dual-cam adoption in the 4.7” model into our earnings
estimates.
Largan: potential upside to Daiwa’s 2016-2017E if Apple adopts dual cams in 4.7" iPhone in 2H17
Scenario 1: iPhone 4.7" model to adopt dual cams in 2H17
(TWDm) 2017 2017
Dual lens specs 12MP+8MP 12MP+12MP
Revenue contribution_Lens 3,097 3,716
Revenue impact_VCM (2,610) (2,610)
Revenue net-added 487 1,106
Gross profits contribution_Lens 2,186 2,623
Gross profits impact_VCM (196) (196)
Gross profits net-added 1,990 2,427
Net profits increase 1,639 1,989
EPS upside (%) 5.2% 6.3%
Source: Daiwa forecasts Note: 1) We have not factored the upside from this scenario into our earnings estimates 2) Other key assumptions: a) Largan to maintain 70% market share in dual-cam lens sets, b) for extra orders, 70% of opex is fixed and 30% is
variable (in proportion to sales growth or contraction), and c) non-op gain/loss (interest income/expense, forex gains/losses, etc.) and tax rate are unchanged in this sensitivity analysis
Dual-cam adoption in the
iPhone 7 Plus should
provide another
earnings growth driver
6
Largan Precision (3008 TT): 21 January 2016
Largan: potential upside to Daiwa’s 2016-17 earnings forecasts if Apple adopts dual cams in 4.7" iPhone in 2H16
Senario 2: if the iPhone 4.7" model adopts dual cams in 2H16
(TWDm) 2016 2017 2016 2017
Dual lens specs 12MP+8MP 12MP+12MP
Revenue contribution: lenses 3,388 7,829 4,066 9,395
Revenue impact: VCM (2,797) (6,598) (2,797) (6,598)
Revenue net-added 591 1,231 1,269 2,796
Gross profit contribution: lenses 2,379 5,526 2,855 6,631
Gross profit impact: VCM (210) (495) (210) (495)
Gross profit: net-added 2,169 5,031 2,645 6,137
Net profit: increase 1,784 4,143 2,165 5,029
EPS upside (%) 6.8% 13.1% 8.2% 15.9%
Source: Daiwa estimates Note: 1) We have not factored the upside from this scenario into our earnings estimates 2) Other key assumptions: a) Largan to maintain 70% market share in dual-cam lens sets, b) for extra orders, 70% of opex is fixed and 30% is
variable (in proportion to sales growth or contraction), and c) non-op gain/loss (interest income/expense, forex gains/losses, etc.) and tax rate are unchanged in this sensitivity analysis
Slow 1Q16 a good time to bottom fish
Soft 1Q16 due to iPhone weakness
As discussed in iPhones: a slow start for 1Q16, published on 28 December 2015, iPhone
production orders are still on track to meet our 4Q15 forecast of 76m units, but we now see
that the supply chain facing order revisions for 1Q16. We expect the total iPhone
production volume for 1Q16 to arrive at 46m units, down 40% QoQ and 21% YoY, driven
by macro uncertainty globally and slower-than-expected demand for the iPhone 6S/6S+
due to unfavourable FX fluctuations, particularly in emerging markets. Given that 1Q16 is
the traditional light season and that we are seeing iPhone shipment weakness, we expect
Largan’s 1Q16 revenue to decline by 39% QoQ and 11% YoY, but look for growth to
resume in 2Q16, followed by strong growth HoH in 2H16, on a ramp-up in shipments for
new smartphone models and spec upgrades.
iPhone: production volume by quarter
Source: Daiwa estimates and forecasts Note: This chart represents Daiwa’s iPhone production estimates and forecasts, which differ slightly from the iPhone sales figures reported by Apple
iPhone: production volume by model
(m units) 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15E 1Q16E
iPhone 4 & 4S 15.5 12.0 9.5 9.0 7.5 7.5 5.0 2.0 2.0 0.5 0.0 0.0 0.0
iPhone 5 20.0 18.5 10.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
iPhone 5C 0.0 0.0 9.0 7.5 6.5 5.0 4.0 3.0 2.5 1.0 0.5 0.0 0.0
iPhone 5S 0.0 0.0 5.0 36.5 26.5 24.0 13.0 6.0 8.0 4.5 4.0 2.5 2.5
iPhone 6 & 6 Plus 0.0 0.0 0.0 0.0 0.0 0.0 17.0 63.0 45.5 47.0 19.5 13.5 7.0
iPhone 6S & 6S Plus 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 22.0 60.0 36.5
Total 35.5 30.5 33.5 53.0 40.5 36.5 39.0 74.0 58.0 53.0 46.0 76.0 46.0
Source: Daiwa estimates and forecasts Note: This chart represents Daiwa’s iPhone production estimates and forecasts, which differ slightly from the iPhone sales figures reported by Apple
35.530.5
33.5
53.0
40.536.5 39.0
74.0
58.053.0
46.0
76.0
46.0 45.5
53.5
95.0
0
10
20
30
40
50
60
70
80
90
100
1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E
(m units)
Weak 1Q16 due to soft
iPhone demand and
seasonality; good time
to bottom fish
7
Largan Precision (3008 TT): 21 January 2016
Valuation and recommendation
Reiterate Buy (1) and raise target price
We are raising our revenue forecasts by 0.2% for 2016 and 0.5% for 2017 to factor in the
increase in revenue that we expect from the adoption of dual cams in the iPhone 7 Plus
and the revenue loss that we expect from the removal of its VCM assembly business. We
are raising our gross margin assumption to 59.7% for 2016 and 62.2% for 2017 (from
57.8% for 2016 and 58.1% for 2017), on a better product mix and increasing contribution
from its high-margin lens business. In total, we raise our earnings estimates by 3-8% in
2016-17. We reaffirm Buy (1) rating and raise our 12-month target price to TWD3,150 (from
TWD3,060), on an unchanged16x PER, the mid-point of its past-5-year trading range of 8-24x,
on our revised 2016 EPS.
Trading at less than 10x 2016 PER, seemingly undervalued
Due to the global macro uncertainty and market concerns about the sell-through of
iPhones, Largan’s share price has fallen by ~35% over the past 3 months. But we believe
the stock has been oversold. We expect Largan to deliver operating profit growth of 12-
20% YoY for 2016-17, and have not yet factored in the potential upside from the likely
adoption of dual cameras in the 4.7” models. The stock is trading at 9.7x 2016 PER, and
we view the risk-reward as attractive.
Risks to our call
The main risk to our rating and target price would be weaker-than-expected smartphone
sell-through, which could lead to slower-than-expected revenue growth. A secondary risk
would be greater-than-expected price competition, which could lead to a weaker-than-
expected gross margin.
Risk/reward looks
attractive; our target
price indicates 60%-plus
upside
8
Largan Precision (3008 TT): 21 January 2016
Largan: Daiwa’s previous vs. revised annual forecasts
Revised forecasts Previous forecasts Change
TWDm 2015E 2016E 2017E
2015E 2016E 2017E
2015E 2016E 2017E
Revenue 55,868 60,250 67,950
55,868 60,150 67,600
0.0% 0.2% 0.5%
Gross profit 32,051 35,969 42,265
32,051 34,767 39,276
0.0% 3.5% 7.6%
Operating profit 27,650 31,059 37,203
27,650 30,075 34,408
0.0% 3.3% 8.1%
Pre-tax income 29,155 31,815 38,207
29,155 30,781 35,356
0.0% 3.4% 8.1%
Net profit 24,158 26,343 31,636
24,158 25,549 29,346
0.0% 3.1% 7.8%
EPS (TWD) 180.09 196.38 235.84
180.09 190.46 218.77
0.0% 3.1% 7.8%
Margins (%)
Gross margin 57.4% 59.7% 62.2%
57.4% 57.8% 58.1%
Operating margin 49.5% 51.6% 54.8%
49.5% 50.0% 50.9%
Pre-tax margin 52.2% 52.8% 56.2%
52.2% 51.2% 52.3%
Net margin 43.2% 43.7% 46.6%
43.2% 42.5% 43.4%
Source: Company, Daiwa forecasts
Largan: quarterly and annual P&L statements
2015E 2016E
2015E 2016E 2017E
(TWDm) 1Q 2Q 3Q 4QE 1QE 2QE 3QE 4QE
Net sales 10,567 13,776 16,086 15,440 9,459 11,819 17,493 21,478 55,868 60,250 67,950
COGS 4,574 5,825 7,222 6,196 4,020 4,870 7,382 8,009 23,817 24,281 25,685
Gross profit 5,994 7,951 8,863 9,244 5,439 6,950 10,111 13,469 32,051 35,969 42,265
Operating costs 813 845 1,447 1,296 874 908 1,419 1,709 4,401 4,910 5,062
Operating profit 5,181 7,106 7,416 7,947 4,565 6,041 8,692 11,760 27,650 31,059 37,203
Pre-tax income 5,082 6,972 9,219 7,882 4,665 6,231 8,881 12,039 29,155 31,815 38,207
Net income 4,407 4,824 8,206 6,721 4,012 4,486 7,549 10,296 24,158 26,343 31,636
Net EPS (TWD) 32.86 35.96 61.17 50.10 29.91 33.44 56.28 76.76 180.09 196.38 235.84
Operating ratios
Gross margin 56.7% 57.7% 55.1% 59.9% 57.5% 58.8% 57.8% 62.7% 57.4% 59.7% 62.2%
Operating margin 49.0% 51.6% 46.1% 51.5% 48.3% 51.1% 49.7% 54.8% 49.5% 51.6% 54.8%
Pre-tax margin 48.1% 50.6% 57.3% 51.1% 49.3% 52.7% 50.8% 56.1% 52.2% 52.8% 56.2%
Net margin 41.7% 35.0% 51.0% 43.5% 42.4% 38.0% 43.2% 47.9% 43.2% 43.7% 46.6%
YoY (%)
Net revenue 54% 38% 33% -9% -10% -14% 9% 39% 22% 8% 13%
Gross profit 57% 37% 40% 8% -9% -13% 14% 46% 31% 12% 18%
Operating income 61% 39% 37% 9% -12% -15% 17% 48% 31% 12% 20%
Pre-tax income 44% 39% 53% -6% -8% -11% -4% 53% 27% 9% 20%
Net income 47% 30% 55% -10% -9% -7% -8% 53% 24% 9% 20%
QoQ (%)
Net revenue -37% 30% 17% -4% -39% 25% 48% 23%
Gross profit -30% 33% 11% 4% -41% 28% 45% 33%
Operating income -29% 37% 4% 7% -43% 32% 44% 35%
Pre-tax income -39% 37% 32% -14% -41% 34% 43% 36%
Net income -41% 9% 70% -18% -40% 12% 68% 36%
Source: Company, Daiwa forecasts
Largan: 1-year-forward PER Largan: 1-year-forward PBR
Source: TEJ, Daiwa forecasts
Source: TEJ, Daiwa forecasts
0
400
800
1,200
1,600
2,000
2,400
2,800
3,200
3,600
4,000
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
Jul-1
2
Jan-
13
Jul-1
3
Jan-
14
Jul-1
4
Jan-
15
Jul-1
5
Jan-
16
(TWD)
Largan 6x 12x 18x 24x
0
400
800
1,200
1,600
2,000
2,400
2,800
3,200
3,600
4,000
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
Jul-1
2
Jan-
13
Jul-1
3
Jan-
14
Jul-1
4
Jan-
15
Jul-1
5
Jan-
16
(TWD)
Largan 2x 4x 6x 8x
9
Largan Precision (3008 TT): 21 January 2016
Daiwa’s Asia Pacific Research Directory
HONG KONG
Takashi FUJIKURA (852) 2848 4051 [email protected]
Regional Research Head
Kosuke MIZUNO (852) 2848 4949 / (852) 2773 8273
Regional Research Co-head
John HETHERINGTON (852) 2773 8787 [email protected]
Regional Deputy Head of Asia Pacific Research
Rohan DALZIELL (852) 2848 4938 [email protected]
Regional Head of Product Management
Kevin LAI (852) 2848 4926 [email protected]
Chief Economist for Asia ex-Japan; Macro Economics (Regional)
Junjie TANG (852) 2773 8736 [email protected]
Macro Economics (China)
Jonas KAN (852) 2848 4439 [email protected]
Head of Hong Kong and China Property
Cynthia CHAN (852) 2773 8243 [email protected]
Property (China)
Leon QI (852) 2532 4381 [email protected]
Banking (Hong Kong/China); Broker (China); Insurance (China)
Anson CHAN (852) 2532 4350 [email protected]
Consumer (Hong Kong/China)
Jamie SOO (852) 2773 8529 [email protected]
Gaming and Leisure (Hong Kong/China)
Dennis IP (852) 2848 4068 [email protected]
Power; Utilities; Renewables and Environment (Hong Kong/China)
John CHOI (852) 2773 8730 [email protected]
Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap
Kelvin LAU (852) 2848 4467 [email protected]
Head of Automobiles; Transportation and Industrial (Hong Kong/China)
Brian LAM (852) 2532 4341 [email protected]
Transportation – Railway; Construction and Engineering (China)
Jibo MA (852) 2848 4489 [email protected]
Head of Custom Products Group
Thomas HO (852) 2773 8716 [email protected]
Custom Products Group
PHILIPPINES
Bianca SOLEMA (63) 2 737 3023 [email protected]
Utilities and Energy
SOUTH KOREA
Sung Yop CHUNG (82) 2 787 9157 [email protected]
Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel
Mike OH (82) 2 787 9179 [email protected]
Banking; Capital Goods (Construction and Machinery)
Iris PARK (82) 2 787 9165 [email protected]
Consumer/Retail
SK KIM (82) 2 787 9173 [email protected]
IT/Electronics – Semiconductor/Display and Tech Hardware
Thomas Y KWON (82) 2 787 9181 [email protected]
Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Game
Kevin JIN (82) 2 787 9168 [email protected]
Small/Mid Cap
TAIWAN
Rick HSU (886) 2 8758 6261 [email protected]
Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design (Regional)
Christie CHIEN (886) 2 8758 6257 [email protected]
Banking; Insurance (Taiwan); Macro Economics (Regional)
Steven TSENG (886) 2 8758 6252 [email protected]
IT/Technology Hardware (PC Hardware)
Christine WANG (886) 2 8758 6249 [email protected]
IT/Technology Hardware (Automation); Pharmaceuticals and Healthcare; Consumer
Kylie HUANG (886) 2 8758 6248 [email protected]
IT/Technology Hardware (Handsets and Components)
Helen CHIEN (886) 2 8758 6254 [email protected]
Small/Mid Cap
INDIA
Punit SRIVASTAVA (91) 22 6622 1013 [email protected]
Head of India Research; Strategy; Banking/Finance
Saurabh MEHTA (91) 22 6622 1009 [email protected]
Capital Goods; Utilities
SINGAPORE
Ramakrishna MARUVADA (65) 6499 6543 [email protected]
Head of Singapore Research; Telecommunications (China/ASEAN/India)
Royston TAN (65) 6321 3086 [email protected]
Oil and Gas; Capital Goods
David LUM (65) 6329 2102 [email protected]
Property and REITs
Shane GOH (65) 64996546 [email protected]
Small/Mid Cap (Singapore)
Jame OSMAN (65) 6321 3092 [email protected]
Telecommunications (ASEAN/India); Pharmaceuticals and Healthcare; Consumer (Singapore)
10
Largan Precision (3008 TT): 21 January 2016
Daiwa’s Offices
Office / Branch / Affiliate Address Tel Fax
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11
Largan Precision (3008 TT): 21 January 2016
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12
Largan Precision (3008 TT): 21 January 2016
Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory.
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Research Analyst Conflicts
For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.
Research Analyst Certification
For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.
The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report.
"1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months. Disclosure of investment ratings
Rating Percentage of total
Buy* 63.9%
Hold** 21.3%
Sell*** 14.8%
Source: Daiwa
Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 31 December 2015. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings. Additional information may be available upon request.
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(This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)
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In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.
In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.
For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.
There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.
There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.
Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.
When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us.
Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association
