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CSCI-Technology-O-Net Technology (877 HK)：Don’t miss a technology “dark horse” - 20171117

Don’t miss a technology “dark horse”

• With more 10 years of operating history and several acquisitions of upstream R&D/chip/fab companies, O-Net has increasingly become a front-runner amid the rising number of optics-related applications.
• We expect O-Net to sustain strong double-digit growth over the coming five years, driven by 100GB telecoms, Datacom and automation over the next two years, LiDAR starting from 2019.
• After nudging up our FY17E-19E revenue and earnings estimates by 2.3%-6.7% and 6.4%-3.1%%, we raised our DCF-based price target to HKD6.80 for end-2018 (from HKD6.00 for end-2017). Maintain Buy.

A new round of optical-network upgrade, on 4G/5G. Our latest update with management suggests stronger demand for O-Net’s 100GB passive optical products, as telecoms operators worldwide rush to upgrade their transmission network ahead of 5G (to bring about strong data traffic). Looking forward, we expect an acceleration in migration from fixed broadband to FTTH on a worldwide basis over the coming 2-3 years. Thus, having become a strategic partner of Ciena, the leading telecoms equipment vendor in North America in mid-2017, O-Net is set to further tap into the huge optical network market, in our view. In particularly, being a front-runner in both passive, active and Datacom products, we expect O-Net to secure strong revenue growth in the coming 2-3 years. 

An emerging mega trend of optics-related applications. Global technology evolution has been dominated by digital processing following the ‘Moore’s law’. However, there is a second technology camp, the optical technology, that is rapidly emerging and used in various new applications like 3D sensing, Datacom, AR/VR, LiDAR etc. In the optical industry, O-Net has acquired many cutting-edge technologies, spanning from upstream photonic integration, VCSEL to industry laser and InP & GaAs based chip manufacturing, which allows the company to adopt various optics-related applications like machine vision, coating, driverless car (LiDAR) and 3D sensing modules (VCSEL).

Good entry level to ride a technology “dark horse”. On the back of stronger-than-expected demand for 100GB telecoms and Datacom products, we have revised up our FY17/18/19E revenue and earnings estimates by 2.3%/6.0%/6.7% and 6.4%/3.4%/3.1% respectively, and raised our DCF-based price target to HKD6.80 for end-2018 (from HKD6.00 for end-2017). O-Net trades at FY18E 15.8x PER and 1.9x PBR, which looks attractive in view of its strong growth momentum to be sustainable over the next 3-5 years.