16 August 2019 Greater China EQUITIES China PCB sector Growing dominance in the 5G era Recommendations and target prices Stock SYTECH SCC WUS Ticker 600183 CH 002916 CH 002463 CH 3M Mkt cap ADTO Price TP Up(US$m) (US$m) (lcy) Rec (lcy) side 6,722 92 20.78 O 25.00 20% 5,818 72 120.63 O 139.50 16% 4,581 171 18.69 N 18.50 -1% 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 Source: Bloomberg, Macquarie Research, August 2019, share prices at close 15 August 2019 than in previous cycles. Valuation multiples are likely to re-rate. Top picks are SYTECH (Huawei's plan B) and SCC (import substitution), Comparative valuations Company SYTECH SCC Wus PE 18 19E 20E 44.0 33.8 26.8 48.4 42.5 29.7 56.3 34.2 27.7 18 6.9 9.1 8.0 PB 19E 6.1 9.1 6.6 both rated Outperform with 20% and 16% upside. We rate WUS (turnaround) Neutral. ROE 20E 18 19E 20E 5.6 15% 17% 20% 7.3 19% 21% 25% 5.7 14% 20% 21% China PCB industry’s version of “supply-side reform” Source: Bloomberg, Macquarie Research, August 2019 Contents Key charts 2 Growing dominance in the 5G era 5 Valuations 6 Risks 8 China PCB industry’s 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) Shennan Circuits (A-Share) (002916 CH) WUS Printed Circuit (Kunshan) (A-Share) (002463 CH) 28 43 57 Under the banner of “environmental protection” centred on cutting waste water discharge and improving air quality, China’s 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 world’s 2nd largest laminate company in capacity, is closing the technology gap with industry leaders and is part of Huawei’s 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 Analysts Macquarie Capital Limited Erica Chen +86 21 2412 9024
[email protected] Fiona Liu +852 3922 1368
[email protected] 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/ 30x 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. Please refer to page 70 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures. Macquarie Research China PCB sector Key charts Supply side reforms Fig 1 China PCB market growth trend Stage 1 Production moves from developed countries to China USD bn 60 50 Stage 2 China dom