GoerTek Inc:Sony PS VR to launch in Oct &iPhone 7supporting strong 3Q;Buy

News

    1) On July 27, Sony announced that PS VR launch in China will be part ofthe global launch on October 13. Pre-orders start on July 28 with the retailprice set at Rmb2,999, in line with the oversea price of US$399. Sony willoffer a demo for 20 VR games at ChinaJoy, the largest annualentertainment and gaming expo in China, during July 28-31. Virtual reality(VR) is one of the key themes for this year’s event with many leading VRdevices showcasing products, including Sony PS VR, HTC Vive and Pico.

    2) During Facebook’s 2Q earnings conference, although no quantitativeguidance was provided, mgmt. noted that they “filled all of the preordersfor Oculus Rift and are seeing increasing demand from retail as stores planfor the holidays”, which we believe indicates on track shipments byGoerTek in 2Q.

    Analysis

    We expect a robust 3Q16 ahead for GoerTek with 50%+ yoy earningsgrowth driven by VR shipment ramp up for Sony’s October launch as wellas iPhone7 inventory build-up cycle. Apple’s modestly higher 3Q revenueguidance vs. consensus should also be reassuring for component supplierssuch as GoerTek as it suggests limited downside, in our view.

    Implications

    GoerTek shares have underperformed CSI 300 by 7% in the past two weeksand are trading at 20X NTM P/E vs. last 12m peak of 26X. We thinkearnings growth reacceleration should drive a re-rating of the stock, withour TP implying 26X on NTM. Our unchanged Rmb31.6 12m TP is based on20X P/E applied to 2020E earnings then discounting back to 2016E at 8.4%COE. Key downside risks: Slower-than-expected VR ramp up; weaker-thanexpectediPhone sales