Luxshare Earnings: Shares Cheap Amid Steps to Boost Profitability in Automotive and Communications

Our fair value estimate on Luxshare Precision 002475 stays at CNY 41.50 per share after minor model adjustments that reflect a change in accounting policy. We like Luxshare’s efforts to improve its profitability, possibly reversing decade-long falling gross margins. Shares of Luxshare are undervalued in our view as it promptly capitalizes on demand for faster data transmission speeds on servers and for electric vehicles, and supports that with a wide range of components.

We are pleased to see that Luxshare has taken steps to boost its profitability. It has phased out parts of the communications business operating under an original equipment manufacturer. Furthermore, Luxshare says it will emphasize bolstering its optical modules offerings, and will attempt to cross-sell them to automotive and communications customers by leveraging its presence in connectors. As we anticipate sales CAGR of the two sectors will exceed 35% compared with 17.7% of the company, and gross margins to be higher at 18%, this should help reverse Luxshare’s history of declining gross margins.

Management comments echo other firms in our coverage that the worst is over for smartphones. The company sees no further weakness in iPhones but admits Mac and iPad sales are slow without new refreshes. For the next two to three years, we presume Luxshare to grow its consumer electronics business by co-operating with Apple on new features for Apple Watch and AirPods, and possibly bringing the camera module business in-house. Apple buys some of its camera modules from Cowell, a Hong Kong-listed company majority-owned by Luxshare’s chairwoman and her siblings. Luxshare currently supplies voice coil motors to Cowell. Taking Cowell under Luxshare would help the combined entity gain rear camera module exposure, at the expense of LG Innotek.

Luxshare posted third quarter of 2023 results that were on track with our full-year EPS estimates published in August, though revenue was lower than expected.