Hiwin Technologies Corp

(Sept 11: NT$273.50)

UPGRADE TO OUTPERFORM. We expect Hiwin’s sales to recover from 1Q2020, turning its 1H2020 y-o-y sales growth positive, as it benefits from the smartphone capex cycle and machine tool order recovery. But its near-term outlook is likely to remain soft, with 5% q-o-q decline in 3Q2019E, while utilisation cut could also impact its margin. We believe contribution from China capacity relocation is likely to start in 2020, leveraging its tight relationships with ODM/ EMS and equipment makers, as well as its global footprint. Amid the ongoing Japan-South Korea trade tensions, Hiwin has also started seeing new orders from South Korean customers in September. We expect 3Q to mark the trough for sales changes y-o-y and earnings. We lower 2019-2020E EPS by 7% to 11% on weaker sales, but raise 2021E by 3%. New price target of NT$305 (versus prior NT$245) is based on 25x 2020E PER, as we believe inventory digestion, smartphone capex and relocation should drive 2020 sales to grow 14% y-o-y, after a weaker 2019 on weaker demand/channel inventory. —