Luxshare Earnings: Shares Cheap on Improved Auto and Communication Prospects

We reduce our fair value estimate for Luxshare Precision 002475 to CNY 41.50 per share from CNY 47 after baking in more conservative consumer electronics growth, partially offset by higher long-term revenue in the automotive and communication segments. Shares of the company look attractive as it is more likely to benefit from faster transmission speeds of servers and outperforming electric vehicle growth by offering a wider range of components. We think the market is overly bearish on the dilutive effects of Luxshare’s assembly business on gross margin as such effects will dwindle as automotive and communication contributions grow (both segments’ gross margins are estimated at 20%).

We tapered our long-term estimates on the back of a less enthusiastic view of other consumer products like earphones and smartwatches as new features become more incremental and bigger innovations like health monitoring become less certain. We have also become more conservative about the first few years of the adoption of XR headsets. Even though Apple’s Vision Pro is an engineering feat, we think it will take longer for XR headsets to proliferate owing to high costs and limited battery lives, not to mention that a new ecosystem between developers and paying users will take time to build. Luxshare believes reducing component costs will take two to three years, leading us to halve XR-related estimates up to 2027.

We have lifted 2022-27 sales CAGR of the automotive and communications segments from 26.8% to 35.7% and from 29.6% to 40.4% respectively, as their results surpassed our expectations and recent developments support the case for a stronger outlook. Luxshare said the firm is stepping up cooperation with domestic automakers, which we believe may support stronger growth until at least 2027. Earlier projects will be responsible for propelling near-term results, while Luxshare’s growing presence in autonomous driving and infotainment will become important around 2026.