Favourable industry dynamics not yet priced in. We initiate coverage on Tripod with aBuy rating and a TP of TWD113. Tripod is a conventional print circuit board (PCB)manufacturer. After share price rallied 53% since 2016, the question is: “is there stillupside?” We believe investors are aware of the positives in auto andserver/communication PCB but we believe the market has yet to factor in improving highdensity interconnect (HDI) PCB dynamics and could still be conservative on 2018. We are14% above consensus on 2018e earnings driven by our more optimistic view on HDIdevelopment.
Positive HDI outlook in 2018. We expect HDI supply to remain tight in 2018, and Tripodto benefit highly as an HDI supplier (c20% revenue). The limited supply growth can beattributed to 1) conservative capex over the last 3 years and 2) Apple’s (AAPL, NR)adoption of substrate-like PCB (SLP) for the iPhone 8 is likely to reduce effective HDIcapacity during the conversion process and reduce effective output with a lower yield rate.
On the demand side, we see growth from 1) non-Apple smartphones, which will adoptmore advanced HDI and 2) more high-end NB migrating to HDI from conventional multilayerPCB. Given most HDI suppliers for Apple will be at capacity to meet its SLPdemand, we see scope for Tripod to benefit from the rising HDI demand from othersmartphone companies and expand its market share.
Earnings growth to accelerate in 2018e; we are 14% above consensus. Earningsgrowth in 2016/17e is mainly driven by an improving cost structure such as flat labourcosts, falling depreciation and favourable FX. Looking ahead, we expect earnings growthto be driven by the resurgence of sales growth. Aside from the HDI opportunity, webelieve auto and server-related PCB will remain long-term growth drivers. We forecastTripod’s 2018e earnings to grow 20%.
Valuation: Our TWD113 TP is based on 10x 2018e EPS plus net cash of TWD22.8, ascash accounts for 25% of Tripod’s market cap. The stock trades at an undemanding 8x2018e cash-adjusted PE, and we see a re-rating opportunity on higher-than-averageearnings growth in 2018-19e. Risks: 1) weak end demand, 2) sharp rise in raw materialprices, 3) appreciating RMB, and 4) unexpected rise in China labour costs.
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