Company Profile
Jiangsu Changjiang Electronics Technology Co., Ltd. is a China-based company, principally engaged insemiconductor business. The Company is engaged in the testing and distribution of integrated circuitsand discrete devices, and chip design and manufacture of discrete devices. The company's productsare applies in computers, network communications, consumer electronics and intelligent mobileterminals, industrial automation control, power management, automotive electronics and otherelectronic machine and intelligent areas. The Company distributes its products within domesticmarkets and to overseas markets. (Source: Reuters)
Event: JCET (the company) released financial report for Q317on Oct. 29. During the first threequarters of 2017, Changjiang Electronics registered a 26.9% YoY growth in operating revenue (CNY16.86bn) and a 176.63% YoY growth in shareholder attributable net profit (CNY 165mn), implying anEPS of CNY 0.12. In Q317alone, the company realized a 13.28% YoY growth in operating revenue(CNY 6.54) and a 55.49% YoY growth in shareholder attributable net profit (CNY 76.19mn), implyingan EPS of CNY 0.06.
Comments
Major financial indicators for Q317: company’s operating revenue grew 13.28% YoY and 23.42% QoQto CNY 6.54bn; company’s shareholder attributable net profit grew 55.49% YoY and 50.3% QoQ toCNY 76.19mn, implying an EPS of CNY 0.06; company’s gross margin fell 1.32percentage points YoYand 0.26percentage point QoQ to 9.98%; company’s expense ratio dropped 0.84percentage pointYoY and 2.4percentage points QoQ; company’s days of inventory turnover rose by 3days on YoY basisand fell 2days on QoQ basis.
STATS ChipPAC registered healthier earnings: the subsidiary of JECT had finished moving factory andreported smooth recovery in getting orders. Benefited by higher steam in smart-phone industry andgrowing GPU orders driven by Bitcoin, capacity utilization of factories located in South Korea pickedup rapidly. Factories in Singapore turned losses into gains by developing new customers. Generallyspeaking, the earnings of STATS ChipPAC have improved since Q4417.
The CNY 240mn losses of STATS ChipPAC in Q317mainly attributed to relocation of its Shanghaifactory (moved to Jiangyin), which had been completed in September. Based on the order growth ofits new Jiangyin factory during Q417, we think it can see a 50% QoQ growth in operating revenuefrom Jiangyin factory alone. Abundant orders are a result of quick reconnection with its oldcustomers. We think Jiangyin factory can achieve relative high capacity utility in Q417.
Net profit margin growth of JSCK SiP bet expectation and fueled positive outlook for Q417: JSCKrealized an operating revenue of CNY 1.5bn, a net profit of CNY 72mn and a net profit margin of4.8% in Q3alone, overshooting market’s expectation. Major clients postponed orders to Q4, brewing expectation for earnings growth in Q417and a USD 20mn net profit for the whole year.
JSCT’s traditional business remained steady growth, government subsidy ramped up in Q317. For Q317,the company registered a 7.9% YoY growth in operating revenue (to CNY 3bn), a 28.83% YoY growthin net profit (to CNY 260mn). The CNY 2.6mn total net profit includes CNY 173mn governmentsubsidy. The uptick in net profit, if taking away government subsidies, was CNY 25mn higher thanQ217and CNY 60mn higher than Q316.
Having successfully raised capital, the company will also report less financial costs and higher income.Company’s financial costs was as high as CNY 960mn last year. The company has raised CNY 2.5bnthis year and paid off debt of ewlb of about USD 200~300mn (at 7,5%), saving the company afinancial outlay of about CNY 130mn. STATS ChipPAC had a debt balance of about USD 420mn at8.5% when JCET acquired it. The company expects to pay it off by October 2018, which will decreaseits financial costs by about CNY 250mn next year.
Earnings forecast and investment recommendation:
JCET is the leader in domestic packaging & testing industry. It got access to global advanced Fan-outeWLBand SiP technologies and suprior international clients by acquiring STATS ChipPAC. It owns thehighest certainty in benefiting from the thriving semi-conductor industry of China by binding withSemiconductor Manufacturing International Corporation (0981.HK).
JCET’s cross-border business integration starts to bear fruit, its earnings will pick up in Q417. Itsfuture earnings are highly elastic and the growth is quite certain. We maintain ‘Buy’ rating for it andestimate its net profit for year 2017/2018/2019to be CNY 451mn/ 1.2bn/ 1.65bn respectively,implying an EPS of CNY 0.33/ 0.88/ 1.22and a P/E ratio of 59x/22x/16x. STATS ChipPAC has aproduction capacity that two times that of the old JCET, it can boost the company’s aggregate profitto over CNY 2bn if it can achieve 100% capacity utilization, indicating a huge return elasticity.Potential risks: business integration may be weaker than expected; the output of SiP may be lowerthan expected; downstream industries’ demand may fail expectation.
