Market Wrap. Market Highlight

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1 Equity Market Hong Kong Equity Morning Notes Elsie Sheng (SFC CE:AWT319) (852) November 21, 2018 Market Wrap HSI 2.02% HSCEI 1.56% Turnover HK$77 bn 19% (30-day average) SSE Composite 2.13% SZSE Component 1.97% Sector tracking Stock tracking 1D % 1Y % 1D % 1Q % Parts 0.7 Const & Eng 32.4 MADISON HLDG(8057) 40.0 FURNIWEB HOLDING(8480) Household Prod 0.4 Household Prod 23.6 SHEEN TAI HOLDIN(1335) 39.5 BASETROPHY GROUP(8460) Woods 0.2 Retail 19.1 CHONG SING(8207) 21.3 SHIRBLE DEPARTME(312) Textiles 18.2 HANG SANG SIU PO(3626) 14.7 TAKBO GROUP HOLD(8436) Oil & Gas 17.7 CHINA HAISHENG(359) 12.9 DENOX ENVIRONMEN(1452) Market Highlight BYD Electronic(285 HK): 5G opportunity in glass casing with attractive valuation After 57% downward correction in share price since end-february this year, valuation of BYDE has dropped to attractive level and we think it provides a good time to look into this stock. All of the flagship smartphone models this year have adopted double-side glass casing, and BYDE will benefit from this trend towards glass as a key provider of glass back-cover and metal middle frame. BYDE is quickly expanding its glass casing capacity to meet the demand and has already supplied glass casing and metal middle frame to Huawei P20, Vivo X21 and Xiaomi 8 this year. Global provider of electronic products and components A leading electronic components and assembly service provider: BYD Electronics ( BYDE ) was established in 2003 as a subsidiary of BYD (1211 HK) providing design, components manufacturing and assembly services to global consumer electronics brands, and is listed separately on HKSE in Its main business can be divided into two segments, 1) ODM, EMS or JDM assembly services mainly for top smartphone and PC brands and automotive brands, which accounted for 55% of its 2017 revenue, and 2) mobile handset components and modules for global top smartphone brands like Samsung, Huawei, LG, Xiaomi, etc., which mainly include metal parts, plastic parts and glass casings and accounted for 45% of BYDE s 2017 revenue. Among mobile handset components and modules, metal parts made up the largest part in 2017 (35% of total revenue), and glass casings will be the most important growth driver going forward. Vertically integration to provide one-stop solution: BYDE is vertically integrated from material research, forming technology, surface treatment, PCB assembly and components manufacture all the way to OEM/EMS. This integration can reinforce its relationship with clients and can improve its operation efficiency and management cost. Assemble now still makes up over half of BYDE s total revenue. Top player of metal parts for smartphone: BYDE owns 25,000 units of CNC machine plus 5,000 borrowed, with very mature metal production yield. Utilizing on its second-large number of CNC among peers, BYDE is a leading provider of metal casing for Samsung, Huawei, Vivo, and Xiaomi, etc. 3D glass casing as the most important growth driver: BYDE started to enter glass casing since 2016 and now owns 300k pieces/day of glass casing capacity. The company targets to expand it to 800k/day by end This will be the key growth driver of the company in coming two years to follow the industry trend towards glass casing. Sales of mobile handset components and modules Metal parts Glass casing Plastic parts Others Notebook Smartphone Tablet Chargers Assembly services Assembly services Assembly services Assembly services Multimedia modules Communication modules Smart products Orient Securities (Hong Kong) 1 November 21, 2018

2 Industry trend of smartphone casing towards glass casing Smartphone shift towards glass/plastic casing to follow the trend of 5G: Telecom operators are now building up for 5G communication, and China is targeting to launch first batch of 5G commercial terminals and to start commercial operation of 5G in The mainstream of smartphone industry has shifted from plastic casing to metal casing since 2012, but as metal would interferes with RF signals and thus cannot support 5G communication, 5G-enabled smartphone devices will have to switch to non-metal materials, i.e. plastic, glass or ceramics. Model Samsung S9 Huawei P20 OPPO R15 Vivo X21 XIaomi 8 Vivo NEX OPPO Find X Selling price Rmb5,799 (64G) Rmb4,288 Rmb2,699 Rmb2,998 Rmb2,999 Rmb3,898 Rmb4,999 (8G+128G) Release Mar 2018 Mar 2018 Mar 2018 Mar 2018 May 2018 June 2018 July 2018 Screen ratio 18:5.9 18:7.9 16:9 19:9 18:7.9 19:3.9 19:5.9 Screen 3D OLED 2.5D LCD (P20) OLED (P20 Pro) 2.5D OLED 2.5D OLED OLED 2.5D OLED 3D OLED Back cover Glass 3D Glass 2.5D Glass 3D Glass 3D Glass 3D Glass 3D Glass Glass (back) Biel, Lens Lens Tech, Lens Tech, Lens Tech, Lens Tech, BYDE Lens Tech Lens Tech supplier Tech BYDE BYDE VictoryPrecision Model Huawei nova3e Vivo Y71 OPPOA3 Vivo Z1 Vivo Y71 Huawei CW7A RedMi 6 Selling price Rmb1,999 Rmb1,399 Rmb1,799 (4G+128G) Rmb1,598 Rmb1,398 Rmb799 (2G+32G) Rmb799 (3G+32G) Release Mar 2018 June 2018 May 2018 April 2018 May 2018 April 2018 June 2018 Screen ratio 19:9 19:9 19:9 19:9 18:9 18:9 18:9 Screen LCD LCD LCD LCD LCD LCD LCD Back cover 2.5D Glass 2.5D Glass 2.5D Glass Plastic Plastic Plastic Plastic BYDE has leading position in smartphone metal parts BYDE owns leading metal casing manufacturing capability: CNC (computer numeric controlled) machine can help manufacturers to achieve mass production as it operates according to preinstalled computer programs, and it is required for metal parts (both back cover and middle frame) processing like CNC unibody, CNC + die casting and CNC + stamping. CNC machine is very costly (~Rmb0.5mn per unit) and thus is one of the key entry barriers of the metal parts manufacturing industry. BYDE has started to purchase CNC machines since 2015, and has already achieved satisfactory yield. Now BYDE has a total of 30,000 CNC machine (25,000 self-owned and 5,000 borrowed), which is more than most of its peers. Will be driven by demand of metal middle frame for 2.5D/3D glass back cover: The penetration rate of smartphone metal back cover is expected to drop in coming three years as metal casing will be replaced by glass casing to follow the industry trend, but this does not mean that the demand for metal parts will drop. Actually, 2.5D/3D glass back cover requires metal middle frame to hold the front cover, the components and back cover together, and the technical requirement (hardness, accuracy, etc.) of metal middle frame is higher than metal back cover. Thus metal middle frame (~Rmb150) enjoys higher ASP than metal back cover (Rmb50-70 for mid-to-lower end hybrid solution; Rmb for high-end hybrid solution). The demand for metal middle frame will be driven by the penetration of glass casing in coming three years, and this will support a stable growth of BYDE s metal parts revenue. BYDE s metal parts revenue to grow stably Production process of 2.5D/3D glass back cover Rmb mn 20,000 15,000 Metal parts revenue YoY % High growth driven by To be driven by capacity expansion demand of metal and penetration of middle frame metal casing 100% 80% Raw material cut off CNC precise cutting and drilling Ultrasonic cleaning Thermal bending 10,000 5,000 60% 40% 20% AF coating CNC dimensions touch up Chemical hardening Glass polishing and grinding E 2019E 2020E 0% Surface treatment 2.5D/3D finished products Started to largely purchase CNC machines Negatively affected by weak demand of Samsung this year Orient Securities (Hong Kong) 2 November 21, 2018

3 BYDE actively expanding capacity of glass casing Thermal bending machine capex entry barrier of glass casing industry: BYDE has started to largely increase glass casing capacity since 2017 to prepare for the new trend towards glass. The most important process during the production of 2.5D/3D glass back cover is the thermal bending, i.e. bend the glass panel to form a curved arch. This is done by thermal bending machine, which is very costly. If purchased from the market, one thermal bending machine can cost Rmb2-3mn. The processing time of a glass back cover is usually 1-3 mins, depending on whether it s 2.5D (~1 min) or 3D (~3mins). Assuming that the machine works 20 hours per day, the output volume of one thermal bending machine is only 1,200 pieces of 2.5D glass or 400 pieces of 3D glass per day. This means that in order to achieve a capacity of 50,000 pieces per day, a company will have to spend Rmb mn to buy thermal bending equipment. This represents a capex entry barrier for smaller-sized companies. BYDE has large size among its metal casing peers Metal casing 2017 market share in China (by shipment) Others, 14% BYDE, 19% Foxconn, 21% Tongda, 25% Everwin, 21% By domestic shipment volume, BYDE s market share is slightly lower than Tongda and Everwin, but BYDE enjoys higher ASP and overseas percentage than the domestic peers. Glass casing key competitors: As the industry trend towards glass + metal middle frame becomes more and more clear, both traditional glass cover makers (like Lens Tech, Biel Crystal and Firstar Panel) and traditional metal casing makers (like BYDE, Tongda, and Victory Precision) entered this market. Lens Tech ( CH) and Biel Crystal (Private) are key provider of cover glass to Apple. Firstar Panel ( CH) and Victory Precision ( CH) completed their production chain of glass casing + metal middle frame through M&A. Tongda chose not to enter the capex-intensive front-end process (require thermal bending machine), but rather chose to focus on the back-end process (decoration) of glass casing manufacturing. BYDE didn't manufacture front-cover glass for the moment. But 80% of the processing between front-cover and back-cover glass is the same, so it s not very difficult to transform. BYDE s glass casing key client mix v.s. peers is on the right side. Catcher Foxconn Casetek BYDE Tongda Everwin 股票代码 2474 TT 2354 TT 5264 TT 285 HK 698 HK CH Overseas brands Apple Samsung Sony HTC Domestic brands Huawei OPPO Xiaomi Vivo ZTE Dot represents largest client Many players entering glass casing industry Lens Tech Biel Crystal BYDE Tongda Firstar Panel Victory Precision Code CH Private 285 HK 698 HK CH CH Overseas brands Apple Samsung Sony HTC Domestic brands Huawei OPPO Xiaomi Vivo Glass products Front-cover Back-cover Manufacturing process Front-end Back-end Metal?? BYDE s competitive advantage: scale effect Metal casing: large CNC base and higher ASP than domestic peers: Comparing with its metal casing peers, BYDE s margin is not the highest (dragged by its low-margin assembly business), but BYDE enjoys the second largest CNC machines base, and its metal casing ASP is also higher than domestic peers (higher percentage of overseas revenue from Samsung). It also enjoys the highest ROE in 2017 among is peers. Glass casing: quickly expanding capacity at lower capex spending: BYDE is quickly building up its glass casing capacity to reach mn/day by end-2018, only lower than Lens Tech and Biel Crystal. Another important advantage is that BYDE self-made its thermal bending machine (cost Rmb1mn), instead of purchasing from outsider equipment manufacturers (cost Rmb2-3mn). This largely reduces the capex spending of BYDE to a level much lower than its peers. Orient Securities (Hong Kong) 3 November 21, 2018

4 Handset metal casing peers comparison Catcher Foxconn Casetek BYDE Tongda Everwin Stock code 2474 TT 2354 TT 5264 TT 285 HK 698 HK CH Headquarter Taiwan Taiwan Taiwan Shenzhen Fujian Shenzhen Product line Handset, PC & consumer electronics casing casing, electronic cooling metal casing Handset casing and keyboard, EMS Handset casing, electronic appliance casing, etc. casing, connector 2017 metal casing TWD93.3bn TWD147.8bn TWD33.3bn HK$4.0bn Rmb5.9bn Rmb13.6bn revenue (Rmb20.5bn) (Rmb33.0bn) (Rmb7.3bn) (Rmb3.4bn) (HK$6.9bn) CNC machines 27,800 34,000 11,000 30,000 6,000 10, Capex TWD13.2bn TWD1.4bn TWD6.6bn HK$1.2bn Rmb2.3bn (Rmb2.9bn) (Rmb0.3bn) (Rmb1.4bn) (Rmb1.0bn) Rmb1.2bn Capex % of sales 14.1% 0.9% 2017 GP margin 45.0% 9.6% 14.5% 23.2% (Excl. assembly) 26.1% 24.1% 2017 NP margin 23.4% 6.7% 5.0% 6.7% 11.7% 7.0% 2017 ROE 17.1% 8.3% 5.8% 19.9% 19.2% 12.9% Dividend yield 3.4% 4.4% 2.2% 1.9% 4.3% 1.5% Handset glass casing peers comparison Lens Tech Biel Crystal BYDE Tongda Firstar Panel Victory Precision Stock code CH Private 285 HK 698 HK CH CH Headquarter Hunan Hong Kong Shenzhen Fujian Zhejiang Suzhou Largest provider Largest provider Only focus on Position of glass of glass capacity back-end capacity capacity for back-cover front-cover decoration OPPO 2017 Glass revenue Rmb16.8bn - Rmb450mn <Rmb50mn Rmb458mn ~Rmb700mn 2018 glass capacity >800mn/year E shipment >650mn (2.5D) 70mn (3D) mn/day (>200mn/year) 2017 Capex Rmb6.0bn - Rmb2.3bn 2017 GP margin 29.8% (glass) - - n.a. 120mn/yr(2.5D) 75mn/yr (3D) - 43mn 10mn n.a. ~50mn 23.2% (Excl. assembly) HK$1.2bn (Rmb1.0bn) Rmb0.7bn Rmb1.5bn 26.1% 10.8% (glass) 10.8% (total) 2017 NP margin 8.5% - 6.7% 11.7% 1.2% 2.9% 2017 ROE 12.2% % 19.2% 2.0% 5.3% Dividend yield 1.44% - 1.9% 4.3% 0.6% 1.3% Assembly business to maintain client relationship Assembly business has contributed around half of BYDE s total revenue during past ten years. And revenue from assembly has experienced fast growth in , but stabilized since Although the margin of assembly business is quite low (1%) as compared to the corporate level (11% in 2017), BYDE keeps this business mainly in order to maintain its relationship with big clients and to increase client stickiness. For example, its assembly business client Huawei is also an important client of its handset components business. Drivers of assembly business: Key clients of BYDE s assembly business include Huawei, Lenovo, Asus and Razer, etc. Lenovo and Huawei are BYDE s top two clients of assembly segment by revenue contribution. Key drivers of this segment include:1) Automotive electronics business, which mainly involves providing control panels and entertainment modules for automotive. Around half of revenue from this part is from BYD group, and outside clients include Audi (as tier-2 supplier), BMW and Bosch, etc.2) Smart products. This business mainly includes assembly service for smart products like drone, smart speaker, and vacuum cleaning robot, etc. The revenue contribution of this business is still very minimal but it has the potential to grow very fast given strong demand. The company just entered into supply chain of irobot (IBRT US) in Assembly business to remain flat Client base of assembly business Rmb mn Assembly services income Assembly as % of total revenue E 2019E 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Orient Securities (Hong Kong) 4 November 21, 2018

5 Analyst Certification I, Elsie Sheng (Sheng Yiran), being the person primarily responsible for the content of this research report, in whole or in part, hereby certify that: (1) all of the views expressed in this report accurately reflect my personal view about the subject company(ies) and its (or their) securities; (2) no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report, or our Investment Banking Department; (3) I am not, directly or indirectly, supervised by or reporting to our Investment Banking Department; (4) the subject company(ies) do(es) not fall into the restriction of the quiet period as defined in paragraph 16.5(g) of SFC Code of Conduct; (5) I and my associates do not deal in or trade in the stock(s) covered in this report within 30 calendar days prior to the date of issue of the report; (6) I and my associates do not serve as an officer(s) of the listed company(ies) covered in this report; and (7) I and my associates have no financial interests in relation to the listed company (ies) covered in this report Disclaimer Orient Securities (Hong Kong) Limited does and seeks to do business with the company or companies covered in this report. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Orient Securities (Hong Kong) Limited and its affiliates, officers, directors, and employees may from time to time have long or short positions in securities, warrants, futures, options, derivatives or other financial instruments referred to in this report. In no event will Orient Securities (Hong Kong) Limited or any other member of Orient Securities (Hong Kong) Limited be liable or responsible for loss of any kind, whether direct, indirect, consequential or incidental, resulting from the act or omission of any third party occurring in reliance upon the contents of this report. Any information provided in this research report is for information purpose only and have no regards to the investment objectives, financial situation or risk tolerance level of any specific recipient and does not constitute any solicitation or any offer to buy or sell any securities or any other financial instruments. Before entering into any investment contract, individual should exercise judgment or seek for professional advice when necessary. Orient Securities (Hong Kong) Limited may not execute transactions for individual(s) in the securities/instruments mentioned. Although the information in this report is obtained or complied from sources that Orient Securities (Hong Kong) Limited believes to be reliable, no representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the materials contained in this report. All price-related information is indicative only, and value of the investment(s) referred to in this report and the income from them may fluctuate because of changes in foreign exchange rates, market indexes, relevant operational / financial conditions of the company and other factors. Information contained in this report may change at any time and Orient Securities (Hong Kong) Limited gives no undertaking to provide notice of any such change. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to any law, regulation, rule or other registration or licensing requirement. Investment(s) in securities / financial instructions put through/execute outside Hong Kong are subject to the applicable laws and regulations of the relevant overseas jurisdiction, the entity issuing this research report and the analyst(s) authoring this research report are not subject to all the disclosures and other regulatory requirements in other countries. This report may not be copied, reproduced, distributed, redistribute or published by any person for any purpose without the prior written consent of Orient Securities (Hong Kong) Limited. All rights are reserved. Orient Securities (Hong Kong) 5 November 21, 2018