Luxshare Earnings: Automotive and Communications’ Bright Outlook Slightly Clouded by Cash Position

We leave our fair value estimate on Luxshare Precision 002475 at CNY 47 per share after adding extended reality—XR includes augmented, virtual, and mixed reality—revenue and making minor adjustments to our forecasts. Our fair value estimate corresponds to 24 times 2023 P/E, lower than the company’s five-year historical average of 30 times. We view shares of Luxshare as attractive due to the upside from extended reality, communications (server-oriented), and automotive markets.

Shares are cheap, in our view, as we forecast a 20% top-line CAGR up to 2027, while the market appears to have priced in 15%. XR products should augment other consumer electronics assembly businesses to drive just over 20% CAGR. For other segments, Luxshare aims to grow its communications business at a 40% CAGR, give or take, in the next few years from a base of CNY 12.8 billion sales in 2022. However, we assume a 30% CAGR, seeing the target as far-fetched when compared with our data center revenue five-year CAGR of over 20%. We view offering more capable optical products (such as higher transmission speeds) as being more beneficial to the company’s drive than relying on assembly income, almost a prerequisite for reaching Luxshare’s target.

We also expect the automotive segment to attain 30% top-line CAGR in the next five years. Luxshare backs its vision of becoming a major direct supplier to automakers with a robust research and development pipeline outlined in its annual report. A wide range of products are covered, including electric vehicle charger parts, semiconductor packaging, powertrain, and power supplies. Disclosed projects should be commercialized within three years, and there are those undisclosed (due to uncertain commercialization) that stretch at least five years ahead.

The company has updated its shareholder return policy, stating cash dividends will be preferred. We like its move to pay at least 20% of net profit each year, compared with 10% or so in previous years.