23,315 PRICE: HK$3.55 EARNINGS

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1 Recommendation: BUY TP: HK$4.87(+37.2%) Comba Telecom Systems Holdings Limited (2342.HK) 06 October 2014 SECTOR: Telecom Equipment HSI: 23,315 PRICE: HK$3.55 EARNINGS (reported in HK$m) KEY DATA For the fiscal year ended E 2015E 2016E Issued Capital (m Shrs) 1,526.2 Turnover 6,333 5,721 7,688 8,048 8,667 M arket Cap (HK$m) 5,418 Operating Profit (106) (105) Avg. 6M Turnover (HK$m) 26.7 Net Profit (216) (241) Week High/Low (HK$) 3.9 / 1.87 EPS (HK$) (0.13) (0.16) Net Gearing (%) (0.84) % Change (40.7%) 18.5% 194.3% 46.7% 18.2% Book Value per Share (HK$) 2.40 DPS (HK$) Free Float (%) 54.80% Dividend yield (%) 0.0% 0.0% 1.0% 1.4% 1.7% M ajor Shareholder(s) M r. Fok Tung Ling (33.0%) M r. Zhang Yue Jun (10.1%) INTERIM RESULTS (HK$m) For the fiscal year ended 1H14 1H15 % change Turnover 2,162 3, % Operating Profit (111) % Net Profit (151) % EPS (HK$) (0.10) % Note: Differences may arise due to rounding errors Source: Bloomberg, HKEx, Company data, Platinum estimates SECTION 1 RESULTS BRIEFING Turnaround in 1H14. Balance sheet on the weak side, but cash flow to improve in FY14E 1H14 results higher than market expectation; Turnaround successful, backed by increasing demand for 4G. Comba reported RMB3.0b revenue, a 39.8% YoY increase. The improvement is due to sustained equipment investments in China s telecommunications industry. The overall margin improved, as operating margin rose from -5.1% to 4.5%. Net profit was RMB72.3m, compared with net losses of 150.7m in 1H13, attributable to strong antenna sales (+90.4% YoY). Gross profit margin improved 2.7ppts from 1H13 to 28.2%. Weak balance sheet. Comba reported a net debt position of RMB687.5m, compared with FY2013 s RMB108.6m net cash position. Trade receivables turnover days remained stable at 293 days, while inventory turnover days increased 12 days from Bonus share issuance. Comba will issue bonus shares to shareholders on the basis of 1 bonus share for every 10 ordinary shares. The share issuance will dilute future EPS by roughly 9.9%. The bonus issuance is waiting for approval in the upcoming extraordinary general meeting. Platinum Broking IMPORTANT DISCLOSURES ARE PROVIDED ON THE LAST PAGE OF THIS REPORT

2 SECTION 2 COMPANY BACKGROUND Leading China antennas provider. Comba, established in 1997, primarily develops, manufactures and markets wireless coverage solutions in China. The Company provides infrastructure and wireless enhancement solutions to mobile operators and enterprises to enhance and extend wireless communications networks. Comba was one of the leading antennas providers, ranked third globally in terms of antennas market share back in The company has four product segments including: wireless enhancement, antennas & subsystems, wireless access, and services. Comba listed on the Hong Kong Stock Exchange back in SECTION 3 BUSINESS OUTLOOK Turnaround stock FAI boosted by 4G rollout. According to NBS, total fixed assets investment in the telecom sector reached its highest point in the last four years in 2013 to RMB375.5b (+3.9% YoY), slightly lower than the peak of RMB377b back in 2009 during the 3G network construction period. The sluggish growth in FAI explains Comba s declining revenue in 2012 and However, it would turnaround thanks to the 4G rollout and rising telco capex. The Ministry of Industrial and Technology ( MIIT ) rolled out China s first 4G licences for TD-LTE on December 4th 2013 to all three operators, namely China Mobile ( CM ), China Unicom ( CU ) and China Telecom ( CT ). Currently all three operators have commercialized their 4G services among China s major cities and are expected to cover more than 300 cities by the end of In addition the MIIT is expected to roll out the FDD-LTE licenses soon. Exhibit 1: China s FAI in telecom sector ( ) 400 FAI (LHS) YoY chg (RHS) Source: NBS 30% 25% 20% 15% 10% 5% 0% (5%) (10%) (15%) (20%) (25%) Exhibit 2: China s telecom operators capex RMB b China Mobile China Unicom China Telecom E Source: Company data, Platinum research Set to benefit from telco FAI expansion For Comba, as China s largest antennas provider, rising capex related to 4G is one of the key catalysts for growth. The capex on mobile networks will increase, and we estimate the overall capex from operators will reach RMB388b within the year, and over 40% will directly go to mobile networks. Platinum Broking 2

3 Strong antennas sales revenue growth expected to continue. Comba s antenna sales recorded the strongest growth among segments in 1H14. Antenna and subsystems revenue increased 90.4% YoY to HK$1.4bn (accounted for 44.8% of revenue in 1H14), mainly due to CM s large scale 4G deployment. The strong antennas sales growth will maintain in 2H14 and FY15, as China s mobile operator continued to increase its overall capex to 4G network coverage. Higher revenue growth from China s mobile operators expected. In 1H14, revenue from all of China s mobile operators increased 34.7% YoY, accounting for 75.8% of Comba s revenue. Among operators, China Mobile remained the major revenue contributor, accounting for 43.8% of total revenue. Revenue from China Telecom and China Unicom saw stronger growth of 177.8% and 21.8% in 1H14. In addition, management guided higher growth in wireless enhancement in 2H14 from China Mobile due to 4G coverage expansion. In addition, China Telecom and China Unicom expects to receive commercial FDD-LTE licenses later in FY14, which will result in higher capex from both operators to catch up to China Mobile s network coverage. Thus, we estimate that Comba s revenue from telecom operators will maintain at double digit growth in FY14E and FY15E. Exhibition 3: Comba s revenue breakdown. Source: Company data, Platinum estimated. Margin improvement expected. The operating margin rebounded in 1H14, which stood at 4.5%, compared with -5.1% in 1H13. The increase of operating margin was mainly attributed to the improving gross margin (+2.7ppts in 1H14). We estimate gross margin to continue to improve thanks to the increasing revenue contribution from higher margin 4G products and stringent cost control. The operating margin is estimated to rebound to 5.2% and 5.8% in FY14E and FY15E respectively, backed by improving gross margin, but lower than the previous level during the 3G construction period as we expect intensive competition from larger telecom equipment vendors, such as ZTE. Exhibition 4: Comba s operating margin and gross margin. Source: Company data, Platinum estimated. Platinum Broking 3

4 International sales expansion. Comba was the official turnkey wireless solution supplier of the 2014 FIFA World Cup along with solutions being implemented for the 2014 Winter Olympics in Sochi, Russia. The successful international business expansion enhanced Comba s presence in global markets, especially for major sporting events. Looking ahead, Comba is expected to participate in the infrastructure for the 2016 Summer Olympics in Rio de Janeiro, Brazil, which may further enhance its market presence. Higher than average turnover days. The inventory turnover days decreased 57 days from 1H13 to 200 days in 1H14, but still higher than FY13 s 188 days. Meanwhile A/R turnover days remained at a high level of 293 days (compared with an average of 231 days for last FY). We believe that the inventory turnover days should decline given the strong sales growth expected. Exhibition 5: Comba A/R and Inventory turnover days FY10 FY11 FY12 FY13 1H14 A/R turnover days Inventory turnover days Source: Company data, Platinum estimated. Potential competition from peers. Indoor wireless enhancement equipment accounted for 19.1% of Comba s revenue in 1H14. The growth will potentially be affected by large-scale equipment vendors interest within the segment, such as ZTE. ZTE noted small cell opportunities in the enterprises market, and see this as a long term deployment plan for telecom operators. The potential competition will result in lower revenue growth for Comba s indoor wireless enhancement equipment segment and gross margin. Platinum Broking 4

5 SECTION 4 VALUATION Exhibit 6: Peer group comparison Name Ticker FY13 Total Assets (HK$m) Mkt cap (HK$m) EV (HK$) Sources: Company data, Bloomberg, Platinum estimates Closing price (HK$) 52-week High/Low (HK$) 6M Volume (m shrs) 6M Turnover (HK$m) Cur. P/E (x) TP: HK$ % BUY. Based on forward earnings, Comba is currently trading at mid 20x P/E, at the high end of its historical P/E, and 32.1% premium to current peers average. Such valuation has priced in the confirmed turnaround. Looking further ahead, we believe that Comba s strong earnings growth will maintain in FY15 as 1) strong demand for network equipment backed by 4G network construction, 2) margin improvement, 3) further international expansion, and 4) low base growth, as FY15E EPS is set to grow almost 50% YoY, or currently trades at about 15x FY15E P/E. Valuing the Company in line with the likes of ZTE and SMIC, all turnaround stocks currently trading at mid-20x FY14 P/E, we arrived at a target price of HK$4.87, representing an upside of 36%. BUY. FY14E P/E (x) FY15E P/E (x) FY16E P/E (x) Cur. P/B (x) FY14E P/B (x) FY15E P/B (x) FY16E P/B (x) FY13 FY14E FY15E FY16E ROE (%) ROE (%) ROE (%) ROE (%) Chian Telecom Equipment Providers 1 Zte Corp-H 763 HK 102,473 64,911 74, / China Communications Servi-H 552 HK 48,251 25,003 18, / Semiconductor Manufacturing 981 HK 4,523 28,255 34, / Solomon Systech (Intl) Ltd 2878 HK / O-Net Communications Group 877 HK 1,583 1,510 1, / Mobi Development Co Ltd 947 HK 1,885 1,491 1, / Synertone Communication Corp 1613 HK 979 4,108 4, / Sim Technology Group Ltd 2000 HK 2,859 1,061 1, / (12.07) China All Access Holdings 633 HK 7,700 4,317 5, / China Fiber Optic Network Sy 3777 HK 3,468 3,963 3, / Comba Telecom Systems Holdin 2342 HK 10,318 5,387 5, / (6.44) Simple avg Mkt cap wtd avg Platinum Broking 5

6 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Volume (m shares) Share price (HK$) Comba Telecom Systems Holdings Ltd. 06 October 2014 Exhibit 7: Comba 2-year Price Chart Comba Telecom Systems Holdin (2342.HK) Last price (Oct 06,14) = HK$3.55 SMA(50) = 3.13 SMA(100) = 2.73 SMA(200) = Volume (Oct 06,14) = 8m 6M avg. = 26.8m Source: Bloomberg, Platinum estimates Platinum Broking 6

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8 IMPORTANT HONG KONG REGULATORY DISCLOSURES ON HONG KONG LISTED COMPANIES OF WHICH WE HAVE COMMENTED ON. Research Certification. No part of the compensation of the analyst(s) who are primarily responsible for producing this report was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the analyst(s) in this research. Market Making. This firm does not make a market in securities of the companies covered in this report. Conflicts of Interest. This firm does not own 1% or more of the common class of securities of the companies covered in this report. The analysts involved in the preparation of this report do not have financial interests in the common class of securities of the companies covered in this report. Investment Banking. Within the past 12 months a company controlled by the holding company of this firm has not provided investment banking services to, and received compensation from, one of the companies covered in this report. Relevant relationships. This firm and individuals employed by or associated with the firm are not officers of the companies covered in this report. GENERAL DISCLOSURES. This report is for distribution only under such circumstances and in such jurisdictions as may be permitted by applicable law. This report is not intended to offer or solicit purchase or sale of any financial instrument in any jurisdiction where such an offer or solicitation would be illegal, including but not limited to the United States of America and the United Kingdom and the rest of Europe. It does not take into account the specific investment objectives, financial situation or needs of any specific recipient. While reasonable effort has been made to ensure the information contained herein is not untrue or misleading at the time of publication, its correctness and completeness are not guaranteed, and they are subject to change without notice. Neither Platinum Broking Company Limited, nor any of its holding or affiliated companies, nor any of its or their directors or employees, represent or warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which may be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents thereof. Use of any information herein shall be at the sole discretion and risk of the user. Investors are expected to make their own investment decisions without relying on this publication. This report is produced by Platinum Broking Company Limited Hong Kong Office: 21/F LHT Tower, 31 Queen s Road Central, Hong Kong Telephone: Fax: Shanghai Office: Platinum Holdings Company Ltd (Shanghai Representative Office), 11B Jin Ming Building, Block 2, 8 South Zun Yi Road, Shanghai Tel: Fax: Singapore Office: Platinum Securities Company Ltd, 1 Scotts Road, #24-14 Shaw Centre, Singapore Tel: Fax: Platinum Broking Company Limited. All rights reserved. This publication may not be reproduced, distributed or published by any person for any purpose without the prior express consent of Platinum Broking Company Limited. Platinum Broking 8