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CSCI-Technology-O-Net Technology (877 HK)：Solid growth prospects intact - 20181016

Solid growth prospects intact

• In spite of the escalating China-U.S. trade disputes, we see limited impacts on O-Net given its insignificant exposure to the U.S. market.
• O-Net’s investment in and partnership with InLC Technology would substantially bolster its product portfolio and help better capture the immense opportunities brought about by 5G investments.
• We trimmed our FY18E/19E revenue estimates by 7.2%/6.9% and earnings by 14.7%/18.8% respectively and lowered our DCF-based PT to HKD6.50 (from HKD7.60). Maintain Buy.

Limited impacts of China-U.S. trade war. The escalating China-U.S. trade disputes have led to deep share price corrections in most Chinese technology names, with O-Net not being spared. Nonetheless, O-Net is far from being an outright victim, in our view. In 1H18, North America accounted for only 14.7% of O-Net’s revenue, and a much smaller percentage by product destinations. On sourcing, O-Net derives over 70% of its revenue from passive optical products that are well supplied by domestic suppliers. In datacom and active optical products, O-Net has strong in-house capacities ranging from designand foundry to manufacturing (ITF Technologies, ArtIC, 3SPTechnologies, ViS).

Strategic partnership with InLC Technology. O-Net announced that it has invested in and formed a strategic partnership with InLC Technology, a Korea-based technology company focused on liquid crystal (LC) and liquid-crystal-on-silicon (LCoS) WSS (wavelength selective switch) and DGE (dynamic gain equalizer). The partnership would substantially bolster O-Net’s downstream capabilities (more modules), in our view.

An early beneficiary of 5G. With commercial trials scheduled to be conducted in 2019, commercial 5G will likely be initially launched by telcos in China and major developed markets in 2020. 5G will substantially increase wireless and wireline data traffic, which requires much higher bandwidth of optical networks. Having started shipments of 100GB/200GB products, O-Net is well poised to capture the immense opportunities brought about by the global wide 5G investments over the coming 3-5 years, in our view. 

Unwarranted drop provides compelling entry opportunities. Factoring in the potential impacts of the China-U.S. trade war, we trimmed our FY18E/19E revenue estimates by 7.2%/6.9% and earnings forecasts by 14.7%/18.8% (on lower gross margin assumption) respectively and lowered our DCF-based price target to HKD6.50 (from HKD7.60). O-Net’s share price has dropped by more than 40% over the past few months along with a broad-based selloff in technology names, which in our view, is unwarranted and provides  compelling entry opportunities.