Luxshare Precision Still Undervalued Even If It Doesn’t Reach Its 30% Growth Target

We retain our CNY 47 fair value estimate on no-moat Luxshare 002475 before the firm reports full-year 2022 results and first-quarter 2023 results in late April. The company is undervalued, in our view, as it executes well on winning more Apple-related orders and proceeds to devote more effort to automotive and communications products. A possible catalyst is Apple’s highly anticipated augmented reality headset garnering favorable reviews and preorders in 2023.

Luxshare targets 30% CAGR for the next 3-5 years without specifying whether it is revenue or net profit. We see the target as an aggressive one, as it is higher than our 2021-26 revenue CAGR estimate of 24.3%, and revenue target growth rates according to its employee option schemes. Management expects its auto electronics business to grow the fastest, followed by communications, then by consumer. We think Luxshare is undervalued even if it doesn’t meet its targets, as the market appears to have priced in less than 20% sales CAGR.

We maintain our view that gross and operating margins would rebound from 2021 lows but nowhere as high as in the mid-2010s. The upside in both margins should come from automotive (such as cables) and communications products (such as transceivers), which would be partially offset by increase in system-in-package, or SiP, business and other assembly related services. SiP is mostly used for assembling subsystems where size is important, like in smart watches and probably in the future, augmented reality glasses.