Company Reports

We cut our fair value estimate for Luxshare Precision to CNY 40 from CNY 41.50 per share after modeling a milder five-year revenue compound annual growth rate, or CAGR, in the consumer electronics segment to 10.8% from 15.3%, partly offset by faster growth in other segments. Luxshare has become more cautious in consumer electronics capital expenditure, which we think makes reversing its multiyear decline in gross margins more probable. Shares of Luxshare are undervalued, in our view, as the company benefits from demand for faster data transmission speeds on artificial intelligence, or AI, servers and some other supporting functions.

Since its public listing in 2010, Luxshare Precision has successfully penetrated Apple's supply chain, and Apple’s share of Luxshare’s overall sales has increased to more than 75% in 2023 from less than 10% in 2011. Over the past decade, the company has built up a solid track record at Apple, which has enabled Luxshare to expand its footprint beyond cables and connectors for iPhones and MacBooks to acoustic, haptic, and assembly services for AirPods and Watch. Despite often entering into Apple’s competitive supply chain as a second- or third-sourced player, Luxshare has managed to maintain an average gross margin of 15% between 2019 and 2023. This has contributed to the firm’s average return on invested capital of 20% over the same period.

We retain our CNY 41.50 fair value estimate for no-moat Luxshare Precision, ahead of the firm’s 2023 results and first-quarter 2024 report due in late April. The company is undervalued, in our view, as a recent report in the South China Morning Post of iPhone discounting in China and buyers being underwhelmed by Vision Pro overshadows its sound progress in Apple products, automotive, and communication offerings.

Our fair value estimate on Luxshare Precision stays at CNY 41.50 per share after minor model adjustments that reflect a change in accounting policy. We like Luxshare’s efforts to improve its profitability, possibly reversing decade-long falling gross margins. Shares of Luxshare are undervalued in our view as it promptly capitalizes on demand for faster data transmission speeds on servers and for electric vehicles, and supports that with a wide range of components.

Following Apple’s launch event, we make no change to our forecasts and fair value estimates for Apple's suppliers like TSMC (TWD 850), Sunny Optical (HKD 107), Luxshare Precision (CNY 41.50), Largan (TWD 2,500), and AAC Technologies (HKD 17). We think the launch is slightly negative to the supply chain. This is due to possible renewed fears that Apple is increasing pressure on its suppliers to maintain its profitability, at the latter's expense. No-moat Luxshare and AAC should bear the brunt of such pressure, in our view. Sentiment may worsen further as China says it has noticed “security incidents" concerning Apple's iPhones, reinforcing worries that China may extend its iPhone usage ban to groups beyond civil servants.

We reduce our fair value estimate for Luxshare Precision to CNY 41.50 per share from CNY 47 after baking in more conservative consumer electronics growth, partially offset by higher long-term revenue in the automotive and communication segments. Shares of the company look attractive as it is more likely to benefit from faster transmission speeds of servers and outperforming electric vehicle growth by offering a wider range of components. We think the market is overly bearish on the dilutive effects of Luxshare’s assembly business on gross margin as such effects will dwindle as automotive and communication contributions grow (both segments’ gross margins are estimated at 20%).

Since its public listing in 2010, Luxshare Precision has successfully penetrated into the supply chain of Apple, whose share of Luxshare’s overall sales has increased to more than 70% in 2022 from less than 10% in 2011. Over the past decade, the company has built up a solid track record at Apple, which has enabled Luxshare to expand its footprint beyond cables and connectors for iPhones and Macbooks to acoustic, haptic, and assembly services for AirPods and Watch. Despite often entering into Apple’s competitive supply chain as a second- or third-sourced player, Luxshare has managed to maintain an average gross margin of 17% between 2018 and 2022. This has contributed to the firm’s average return on invested capital of 20% over the same period.

We leave our fair value estimate on Luxshare Precision at CNY 47 per share after adding extended reality—XR includes augmented, virtual, and mixed reality—revenue and making minor adjustments to our forecasts. Our fair value estimate corresponds to 24 times 2023 P/E, lower than the company’s five-year historical average of 30 times. We view shares of Luxshare as attractive due to the upside from extended reality, communications (server-oriented), and automotive markets.

Since its public listing in 2010, Luxshare Precision has successfully penetrated into the supply chain of Apple, whose share of Luxshare’s overall sales has increased to more than 70% in 2022 from less than 10% in 2011. Over the past decade, the company has built up a solid track record at Apple, which has enabled Luxshare to expand its footprint beyond cables and connectors for iPhones and Macbooks to acoustic, haptic, and assembly services for AirPods and Watch. Despite often entering into Apple’s competitive supply chain as a second- or third-sourced player, Luxshare has managed to maintain an average gross margin of 17% between 2018 and 2022. This has contributed to the firm’s average return on invested capital of 20% over the same period.

We retain our CNY 47 fair value estimate on no-moat Luxshare before the firm reports full-year 2022 results and first-quarter 2023 results in late April. The company is undervalued, in our view, as it executes well on winning more Apple-related orders and proceeds to devote more effort to automotive and communications products. A possible catalyst is Apple’s highly anticipated augmented reality headset garnering favorable reviews and preorders in 2023.

Since its public listing in 2010, Luxshare Precision has successfully penetrated into the supply chain of Apple, whose share of Luxshare’s overall sales has increased to about 70% in 2021 from less than 10% in 2011. Over the past eight years, the company has built up a solid track record at Apple, which has enabled Luxshare to expand its footprint beyond cables and connectors for iPhones and Macbooks to acoustic, haptic, and assembly services for AirPods and Watch. Despite often entering into Apple’s competitive supply chain as a second- or third-sourced player, Luxshare has managed to maintain an average gross margin of 18% between 2017 and 2021. This has contributed to the firm’s average return on invested capital of 20% over the same period.

We lift our Fair Value Estimate on Luxshare Precision to CNY 47 per share from CNY 40.50 after updating USD/CNY assumptions and factoring in more upbeat computer-related and display module sales. Our Fair Value Estimate corresponds to 24 times 2023 P/E; lower than the company's 5-year historical average of 30 times since we presume the company's topline growth to slow from over 50% (2012-21 average) to about 24% in the next five years. We think the recent tech rout has provided a decent entry point to the stock as an Apple-heavy upstream play with a call option on automotive and communications segments. Prudent investors may hold off until the offer price of share placement (announced Feb 2022) is confirmed, which is probable in the next six months.

We lift our fair value estimate on Luxshare Precision to CNY 40.50 per share from CNY 37.50 after updating USD/CNY assumptions and factoring in a less drastic drop in profitability after the company showed better-than-expected progress in expanding computer-related offerings. Our fair value estimate corresponds to 24.2 times 2023 P/E. This is lower than the company’s five-year historical average of 31.5 times as the company’s top-line growth should decelerate from over 50% (2012-2021 average) to about 20% in the next five years. We think upside to the stock is modest due to uncertainties in the automotive segment and a share placement pending regulatory approval. We also lower our Morningstar Uncertainty Rating on Luxshare to High from Very High as the company sells more products to Apple and disruptive lockdowns become less likely.

Since its public listing in 2010, Luxshare Precision has successfully penetrated into the supply chain of Apple, whose share of Luxshare’s overall sales has increased to about 70% in 2021 from less than 10% in 2011. Over the past eight years, the company has built up a solid track record at Apple, which has enabled Luxshare to expand its footprint beyond cables and connectors for iPhones and Macbooks to acoustic, haptic, and assembly services for AirPods and Watch. Despite often entering into Apple’s competitive supply chain as a second- or third-sourced player, Luxshare has managed to maintain an average gross margin of 18% between 2017 and 2021. This has contributed to the firm’s average return on invested capital of 20% over the same period.

We increase our fair value estimate on Luxshare Precision to CNY 37.50 per share after factoring in faster revenue growth but lower profitability, mostly associated with an updated view on the company’s display module and device assembly operations. Our fair value estimate corresponds to 25.1 times 2023 P/E; lower than the company’s five-year historical average of 35 times. We view Luxshare shares as fairly valued amid fears of macro slowdown with the company managing to grow first quarter of 2022 EPS by 32% year on year.

Since its public listing in 2010, Luxshare Precision has successfully penetrated into the supply chain of Apple, whose share of Luxshare’s overall sales has increased to about 70% in 2021 from less than 10% in 2011. Over the past eight years, the company has built up a solid track record at Apple, which has enabled Luxshare to expand its footprint beyond cables and connectors for iPhones and Macbooks to acoustic, haptic, and assembly services for AirPods and Watch. Despite often entering into Apple’s competitive supply chain as a second- or third-sourced player, Luxshare has managed to maintain an average gross margin of 18% between 2017 and 2021. This has contributed to the firm’s average return on invested capital of 20% over the same period.

We maintain our fair value estimate on Luxshare Precision at CNY 35.50 for now after the company released unaudited net profit for the December 2021 quarter and net profit guidance for the March 2022 quarter. We view the current spew of bad news has driven Luxshare down 30% year to date, but shares are still uncompelling as its recent numbers suggest its margin dilution can be worse than we thought earlier. Luxshare is not alone, with fellow smartphone component suppliers like Sunny Optical and AAC Technologies joining the share price rout. Relative to our fair value estimates and year-to-date share price movements, we like Sunny Optical (fair value estimate HKD 236) the most as it remains the best long-term play to take advantage of both smartphone content growth (via cameras) and proliferation of automotive optical systems.

We leave our fair value estimate of CNY 35.50 and earnings projections intact after Luxshare Precision proposes to raise CNY 13.5 billion in equity. Based on the midday share price (CNY 41.50), we believe the final offer price should be near our fair value estimate. Overall, we view the equity raise to be mildly negative. While we like that this may signify Luxshare is on track to win more share in Apple products, including probable augmented/virtual reality devices, we do not like the small allocation to electric vehicles, or EVs, as it hints further capital raises are needed to quell the massive capital needs in realizing Luxshare’s ambitions to become a major Tier 1 supplier. The raise also has us concerned about Luxshare’s capital allocation.

We retain our CNY 35.50 fair value estimate on Luxshare Precision following its cooperation agreement with Chery Group, a Chinese automaker with over 20 years of history. Shares continue to look fairly valued after the agreement. While we think it shows Luxshare Precision is rightly diversifying away from consumer electronics, particularly Apple, we identify several issues that the company has to resolve in order to sustain its growth for the next few years. These issues, and the fact that customers have to rebuild almost from scratch, back our view that financial benefits are minimal for the next three to five years.

We retain our fair value estimate on Luxshare at CNY 35.50 in the absence of major change to our model. The worst appears to be over for Luxshare as near-term headwinds in chip supply and COVID-19 restrictions are starting to ease. The stock’s upside seems to be limited by the margin dilution of new iPhone assembly businesses, and our five-year revenue CAGR of 24.7% has factored in future successes in AR/VR, automotive, and datacenters. Potential upside surprises are Luxshare decides to widen its auto component lineup, Apple confirms its VR/AR products, and breakthroughs in noncore electronics businesses like e-cigarettes.