EUR 65.60 For Business Accounts Only

2017F optical communication orders a major factor for operational growth

​Reiterate BUY and raise our TP to NT$59: We believe operations have bottomed in 3/4Q16 and are likely to see QoQ growth in 1Q17F. For its LD/VCSEL epiwafer business, the company currently has three clients, and we expect these clients to become its biggest growth driver in 2017F if epiwafer shipments go smoothly. We also expect GM to benefit from better product mix thanks to higher sales exposure to optical communication products. After resuming trading on October 7 following its capital reduction, VPEC’s share price has declined 22%. The stock is trading at 14.4x 2017F EPS, below the mid-point of its historical P/E range. According to mgmt, the company still has a net cash position after capital reduction, with a cash dividend payout rate of 80%+, making it an ideal target for long-term investors. We expect VPEC to be the main beneficiary in the high frequency (5G) era in 2018F. Our TP of NT$59 is based on 18x 2017F EPS of NT$3.28. We raise our target P/E multiple given 1) our higher 2017F earnings assumption; and 2) good response from LD/VCSEL clients, which are likely to become the main growth driver in 2017F. For reference, peer Landmark is trading at a 2016F P/E of 27x.