Globetronics’ ramp-up in sensor production volume is going well and has led to improved revenue visibility for 2H18. Mass production for laser headlamps is also on track to start in Sep 18. We opine the recent share price run-up reflects the optimism for 3Q18. Downgrade the stock to HOLD although we still foresee longer-term value creation. Sustainable sensor production volume beyond 3Q18 and clinching of new jobs are rerating catalysts. Target price: RM2.52. Entry price: RM2.30.

WHAT’S NEW

Share price rebounded. Globetronics’ share price has increased 22% from that of 11 June, after being affected by the newsflow that Apple is decreasing its parts order by 20% for the upcoming IPhone models, as compared with 2017.

Revenue visibility improved in 2H18… Despite expecting a weak 2Q18, Globetronics’ revenue visibility has improved. Mass production of new-generation light sensors commenced in June, and monthly production volume will increase from the year’s low of 10-12m units in May to 40m units in Aug-Oct 18 (2x higher than in June). Note that 40m monthly production volume is a new high for light sensor (previous high was 32m units in Dec 17). Recall that Globetronics invested in new machines which increased its capacity to 45-46m units/month in June, vs 36m units/month prior.

…on sensors’ production ramp-up. Meanwhile, monthly production volume of gesture sensors is on a healthy uptrend, gradually increasing from April’s 11m to 16m-17m in June to Aug. Globetronics’ steady ramp-up in gesture production volume suggests that bundling of wireless headsets into one of its US-end customer’s upcoming premium smartphone is likely possible.

Client guided for strong growth in 3Q18; in the midst of widening customer base. Globetronics’ direct sensor client announced its 2Q18 results yesterday, recording a 42% qoq drop and 18% yoy increase in revenue. It reported operating loss due to underutilisation of its manufacturing capacity in Singapore. Moving into 3Q18, the client expects strong revenue growth of 46-59% yoy and 78-94% qoq, driven by high volume ramp-up in consumer optical sensing, in line with Globetronics’ strong production pipeline for 3Q18. Positively, Globetronics’ client, whose revenue is also highly dependent on the USsmartphone player, recently announced a design-win in Android 3D sensing for Chinese smartphone vendor Xiaomi. Although this potential job is not relevant to Globetronics, the client’s success in penetrating the non-US smartphone market could pave the way for more job wins from Android phone makers in the future, which could eventually benefit Globetronics.STOCK IMPACT

Commercialisation of laser headlamps progressing well. With a phase 1 investment of RM9m capex, the small volume mass production of laser headlamps (for one car model) is poised to start in Oct 18, after more than two year’s stringent qualification process with end-customers in Europe. Laser headlamps could be a catalyst in 2019 once volume ramps up, and could also pave the way for Globetronics to seek growth beyond mobile device-related products. While the trade concerns are currently weighing on the sentiment of European car makers (US is considering to raise tariffs to 20% from 2.5% on European cars), automotive is still one of the key segments to watch out for over the mid-to-long term due to the proliferation of electric and autonomous cars.

Expecting weak 2Q18 due to transition to new generation sensor production. Globetronics has experienced soft production volume for light sensors from March to May due to its direct sensor client’s need to deplete the inventory of first-generation light sensor, before transitioning to the production of second-generation light sensor in June. We expect Globetronics’ net margin to contract qoq to low-teen levels in 2Q18 as lower sales is associated with fixed operating costs and depreciation charges. Having said that, we expect a positive earnings growth yoy in 2Q18 as 2Q17 only captured a one-month impact of light sensor production.

Floor space expansion suggests roadmap for new products is on the way. Globetronics’ efforts to co-develop new products with its sensor client are ongoing. Globetronics’ sensor client has requested the company to prepare another 30,000sf of floor space (up 75%) with a RM6m capex for further expansion of its new sensor product range, suggesting an aggressive roadmap for new products is on the way. Phase 1 expansion of 8,000 sf was completed in June.

EARNINGS REVISION/RISK

None.

VALUATION/RECOMMENDATION

Downgrade to HOLD with an unchanged target price of RM2.52, pegged to 15.5x 2019F PE (one multiple higher than mean PE). Following the recent jump in share price, we view that the optimism of the high run rate of light sensor in 3Q18 has been largely priced in. The next share price catalyst should come from the confirmation of sustainability of sensor loading volume (depending on consumers’ interest on upcoming new smartphone models) in 2019 and the ability to clinch new jobs.

SHARE PRICE CATALYST

Diversification beyond the US-smartphone end client is a key catalyst. Due to its high dependency on its US-smartphone end-client (contributes ~65% of 2018F net profit), Globetronics’ earnings have been volatile and share price sentiment has been largely affected by newsflow on this US-smartphone end-client. Working together with its direct sensor client, successful diversification of revenue streams into Korean or Chinese smartphone brands could be a key re-rating catalyst for Globetronics. Separately, we understand that Globetronics is also seeking diversification beyond the current sole direct sensor client on automotive-related sensors.

Source: UOB Kay Hian Research - 25 Jul 2018