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Neonode Inc

Research note


Neonode: Increases its AirBar capacity due to anticipated high demand

Today, Thursday, Neonode announced a completed relocation of its AirBar end-assembly process to Malaysia due to an anticipated high demand for AirBar, meaning a specialization where the full focus for Neonode's Gothenburg production line will be the zForce AIR sensor modules. These sensor modules are, as mentioned in the press release, the heart of the AirBar sensor. Packaging and final assembly will from now on be made by Malaysian partner Salutica Allied Solutions (Salutica). Neonode has been looking at this solution for a good while and Salutica is a partner since several years back.

AirBar is Neonode's solution to touch-enable any non-touch PC, as can be seen in this video. Here is another video showing the 99 percent automatized production process.

There are no news on pre-orders or what exactly caused this "anticipation of high demand". Our assumption is that Neonode has received positive signals from Ingram, following Ingram's introduction of the AirBar in all its channels. Logically, the sensor manufacturing capacity in Gothenburg should increase signifcantly as the more manual end-assemby process is outsourced, although exactly how much is uncertain. Our interpretation and main takeaway of this action is that the former monthly capacity of 150 000 AirBar's in Sweden apparantely was not enough for Neonode, which we find very positive. As a comparison, our AirBar estimates for 2017 are 500 000 units, growing to only 700 000 in 2018, meaning an extensive margin of safety according to us.

The Neonode share is down well over 20 percent since the publising of our research report when we initiated coverage a month ago. This could be due to selloffs from the private placement that was made at USD 1 in the end of August or old owners who bought into the share on the previous e-readers case 3 years ago and are now down over 80 percent using all upticks in volume to sell. Whatever the reason for the plunging Neonode share we find no fundamental reason that can justify these share price levels below our bear case of 1.2 and with a 270 percent upside to our base case of USD 3.7 per share. Instead, this press release of today indicates a solid demand for the AirBar. However, even in a complete AirBar failure, calculating with no AirBar gross profit at all, Neonode is now trading at 7 times earnings on our 2018 estimates. Neonode's enterprise value is now about USD 43 million (including the private placement) meaning a valuation of EV/EBIT 6x and 2x for 2017E and 2018E respectively.

Download our latest Research Report from 2017-08-15

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