SHENNAN CIRCUITS(002916)：POSITIVE ON CAPACITY EXPANSION PLAN; MAINTAIN HOLD ON FAIR VALUATION-格隆汇

机构：招银国际
研究员：Lily Yang/Alex Ng

　　Shennan announced to expand substrate capacity (200mn FC-BGA, 3mn panelRF/FC-CSP) in Guangzhou. Total investment is ~RMB6bn, of which fixed assetinvestment will be over RMB5.8bn (1st/2nd phase: RMB 3.8bn/2bn). We believerevenue will start to contribute in FY23/24E. Meanwhile, we are positive on PCBdemand pick-up in 3Q21E as China 3rd batch of 5G BTS deployment has kickedoff recently. We raised our TP to RMB101.92 as we rollover to 30x 2022E P/E.
　　Maintain HOLD given fair valuation and overhang on margin pressure.
　　New capacity to capture upcycle of substrate market. Shennanannounced to expand substrate capacity in Guangzhou production base,which will add 200mn FC-BGA and 3mn panel RF/FC-CSP substratecapacity. We expect the new project to contribute revenue in 2023/24E.
　　Shennan’s existing substrate capacity has been in full production since lastyear, driven by strong semiconductor demand. We believe strong substraterevenue will continue into 2H21E, driving 22% YoY growth in FY21E.
　　Demand for PCB to pick up in 2H21E. Based on our recent checks, despitedelay of bidding announcement of China 3rd batch of 5G BTS tenders in1H21, China 5G BTS deployment has already kicked off (120k 2.6GHz byCM, 320k 3.5GHz/2.1GHz by CU/CT). CM/CBN will also resume its 700MHz5G BTS deployment (400k+ in 2 years). This week, CBN has announced thetender to transfer its 700MHz frequency band, suggesting that CBN officiallystarted the cleanup work for 700MHz BTS deployment. We believe PCBdemand from telecom equipment providers will pick up in 3Q21E, which willdrive Shennan’s PCB business to recover in 2H21E.
　　Near-term cost pressure to continue. 3M LME copper price is currently at$9,488/tonne, slightly down 8% from its previous new high. Although materialcost pressure has hindered willingness in production (especially for lowmarginconsumer products), we expect material cost pressure to continue innear term. In the long run, we believe top PCB players will enjoy scale benefitsand Shennan will gain share with accelerated industry consolidation.
　　Maintain HOLD with new TP of RMB101.92. We raised our TP toRMB101.92 as we rollover to 30.0x FY22E P/E (vs 30x FY21E prior). Wemaintain HOLD given rich valuation and margin overhang.