On December 31, 2024, Wingtech signed a “Letter of Intent for Sale” for nine wholly-owned ODM subsidiaries with Luxshare Limited in an all-cash deal. This move follows its recent addition to the US trade blacklist (news). According to mgmt., this transaction serves two primary purposes: (1) to align with the risk preferences of certain ODM clients, and (2) to mitigate potential risks to its semiconductor leg. The deal reflects a broader 2025 trend of event-driven M&A opportunities in China's semiconductor sector amid strategic geopolitical shifts and favourable policies, as indicated in our 2025 outlook report as a new investment theme (link). Maintain BUY on Wingtech, with TP unchanged at RMB52.

The sale exclusively involves its Android-focused ODM business, a burden on the company’s financial performance and valuation.

Together, these subsidiaries held a total asset value of RMB28.2bn as of 9M24, representing 36.1% of the company’s total assets and over 50% of total revenue (triggering one of CSRC’s asset restructuring regulations) in 3Q24. In 9M24, the ODM segment contributed ~79% of total revenue but recorded a substantial net loss of RMB1.2bn.

Wingtech will focus on its high-margin semiconductor business, Nexperia. In 9M24, semi segment generated RMB10.9bn in sales (~20% of total revenue), with GPM at 37% (RMB4bn) and NPM at 16% (RMB1.7bn), outperforming the company’s overall 9% GPM and 1% NPM during the same period. In 2Q/3Q24, semi segment saw sequential growth of 6%/6%, driven by 1) strong domestic auto sales, recovering consumer electronics and robust computing demand. We expect the company’s semi segment sales to grow by 11.8%/12.9% in FY25/26E, compared to Bloomberg consensus of 9%/9%.

Maintain BUY, with TP unchanged at RMB52, corresponding to 24.8x FY25E P/E. We expect this business transformation will lead to a higher valuation for Wingtech, as it has almost transformed into a predominately semi-focused company. The company currently trades at 17.7x/12.2x FY25/26E P/E, which is appealing comparing to its domestic peers that trade at an average 25/26E P/E of 30.3x/23.8x. Potential risks include: heightened China-US trade relations, and unfavourable exchange rates.