E 2017E

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1 Cowell e Holdings [1415.HK] Apple s New Product Launch Offers Exit Opportunity; Reiterate SELL Apple is likely to introduce its iphone 7 series during tonight s event, which the market is treating as a catalyst for Apple s supply chain, including Cowell e Holdings (Cowell). We share the view that the market treats Cowell as a proxy for new iphones and that news flow on Apple s new product launch will boost Cowell shares. Even if we assume a strong rebound in 2H 2016 due to volume shipment of rear camera modules and other iphone components, Cowell doesn t look particularly attractive compared with other smaller HK-listed handset component names. After a series of earnings disappointments, we don t anticipate a major re-rating of Cowell unless there is a major breakthrough in either client acquisitions or new product development. At this stage, however, we don t see any major breakthrough. We maintain the view that potential share price strengthening due to rotational buying and Apple s new product launch might offer a good exit opportunity. Maintain SELL with a target price of HK$2.54 (based on 7x 2016E PER). September 07, 2016 TMT Sector-Hardware SELL Close: HK$3.14 (Sep 06, 2016) Target Price: HK$2.54 (-19.0%) Investment Highlights Apple s new product launch tonight. Apple is likely to introduce the iphone 7 and iphone 7 Plus during the event tonight. According to news flow from the internet, the form factor of the iphone 7 and iphone 7 Plus is similar to that of the iphone 6 series. Apple will introduce features to enhance the consumer experience and trigger upgrading demand. The new iphones will be powered by A10 processors by TSMC vs. the iphone 6 s A9 processors. The new iphone will have a pressure sensitive home button and better water resistance, but no 3.5mm headphone jack. The iphone 7 Plus will have a dual-lens camera. Entry level memory will be configured at 32GB vs. 16GB in the current model. The built-in memory of the new iphone is 3GB DRAM vs. 2 GB in prior models. The iphone 7 will be priced in the US$649-$849 range and iphone 7 Plus will be US$749-$949. Apple s dual-lens camera will have a wide-angle lens and a telephoto lens. Both lenses will feature 12 megapixel sensors. The Apple s dual-lens camera is different from the technology adopted by Huawei in its dual-camera P9 model. We believe that the market is now waiting for Apple demos in regard to the image quality of the dual-lens camera. Apple is a double-edged sword. The outlook for Cowell in 2H 2016 and 2017 hinges on the iphone SE and the new iphone, given its substantial sales exposure to Apple, which accounted for 82.0% of Cowell s turnover in Production of rear cameras for the iphone SE, which Cowell started to supply in Apr 2016, is ramping up, and front-camera delivery for the new iphone started in Q We are expecting a major HoH improvement in Cowell s operating performance in 2H 2016, given volume shipment of camera modules for the iphone SE and new iphone. We share the view that Cowell s net profit growth momentum will resume in 2H 2016 following the official launch of the new iphone and the ramp-up of delivery for the iphone SE since June. However, we still maintain the view that Cowell may face pricing pressure from Apple, which is asking for price reductions from suppliers to enhance its profitability, given slower shipment growth. We still hold a cautious view. We believe that there is increasing interest in Apple s supply chain, given the new product launch. The market treats Cowell as a proxy for new iphones, and news flow on Apple s new product launch will boost Cowell shares. However, after a series of earnings disappointments, we don t anticipate a major re-rating of Cowell unless there is a major breakthrough either in client acquisitions or new product development. At this stage, however, we don t see any major breakthrough. Key Financials (in USDm) E 2017E Revenue ,102.9 Change (YoY %) (12.6) 28.7 Gross Profit Gross Margin % Net Profit Net Margin % EPS (Basic) Change (YoY %) (36.2) 25.1 DPS $0.000 $0.000 $0.000 $0.007 $0.012 Share Price Performance (HK$) Sep15 Nov15 Jan16 Mar16 May16 Jul16 Market Cap Shares Outstanding Auditor Mark Po, CFA Senior Analyst (852) markpo@chinastock.com.hk Wong Chi Man, CFA Head of Research (852) cmwong@chinastock.com.hk US$337m 832m KPMG Free Float 28.8% 52W range Turnover (RHS) 3M average daily T/O Major Shareholding Price (LHS) (HK$ million) HK$ US$1.3m Chairman, Mr Kwak Joung Hwan (45%) Hahn & Co. (26%) 0 ROE (%) Dividend Yield (%) PER (x) PBR (x) FCF Yield (%) 1.54% 3.56% 1.60% 0.82% 0.09% Capex (m) (15.8) (21.5) (36.9) (36.9) (51.7) Free cash flow per share Net Gearing (%) Net Cash Net Cash Net Cash Source: Bloomberg, CGIS Research 1

2 Figure 1: Results highlights Results Highlights (US$ m) 1H H H H H H 2016E Revenue Cost of sales and services Gross profit Other income and other gains and losses Distribution and selling expenses Administrative expenses Finance costs JV & Associates Profit before tax Income tax expense MI Profit for the period Owners of the Company Gross margin (%) Operating margin (%) Net Margin (%) Source: Company, CGIS Research Figure 2: Key assumptions for Cowell F 2017F Turnover (USDm) Flip-chip COB Optical components SiP Products Total ,102.9 Flip-chip (21.3) 34.2 COB (5.6) (26.0) 6.2 (27.5) Optical components (14.4) SiP Products Total (12.6) 28.7 Gross margin (%) Flip-chip COB Optical components Net margin (%) Cost (USDm) S,G&A (14.3) (25.9) (34.4) (39.2) (57.2) (54.3) (69.9) Financial Expenses (1.0) (4.4) (5.2) (3.1) (1.6) (0.6) (0.8) S,G&A (5.1) 28.7 Financial Expenses (40.4) (47.9) (61.6) 28.7 CAPEX (USDm) Net Gearing (%) Net Cash Net Cash Net Cash Sales volume (m units) ASP (US$) Sales volume (2.1) 2.1 (20.0) 20.0 ASP Source: Company, CGIS Research 2

3 Figure 3: Earnings projection Income Statement (USDm) FY2013 FY2014 FY2015 FY2016F FY2017F Cash Flow Statement (USDm) FY2013 FY2014 FY2015 FY2016F FY2017F Revenue ,103 Net Income Growth yoy% 53.3% 8.9% 10.6% (12.6%) 28.7% Depreciation & Amort Gross Profit Change in Working Capital (27) 22 (15) (9) (29) Growth yoy% 124.3% 8.6% 22.1% (26.0%) 28.7% Cash from Ops Selling General & Admin Exp. (34) (39) (57) (54) (70) Capital Expenditure (16) (22) (37) (37) (52) Others Operating Expenses/Items (0) (3) (1) 2 1 Sale of Property, Plant, and Equipment Operating Income Change in Investing Acitivities (1) (1) (12) 48 (4) Growth yoy% n.a. n.a. n.a. n.a. n.a. Cash from Investing (16) (23) (48) 11 (56) Interest Expense (5.2) (3.1) (1.6) (0.6) (0.8) Net increase in bank borrowings (20) (30) (51) (25) 5 Interest and Invest. Income Income/(Loss) from Affiliates Issuance of Common Stock Other Non-Operating Inc. (Exp.) Common Dividends Paid (6) Impairment of Goodwill Special Dividend Paid Gain (Loss) On Sale Of Invest Other Financing Activities (10) (20) (21) (13) (16) Gain (Loss) On Sale Of Assets Cash from Financing (30) (50) (31) (38) (17) Income Tax Expense (14) (14) (16) (10) (13) Minority Int. in Earnings Net Change in Cash 6 32 (1) 32 (19) Net Income Growth yoy% 200.9% 6.0% 14.1% (36.2%) 25.1% Balance Sheet (USDm) FY2013 FY2014 FY2015 FY2016F FY2017F Ratios FY2013 FY2014 FY2015 FY2016F FY2017F ASSETS Sources: Company, CGIS Research Profitability Cash And Equivalents Return on Assets % 12.9% 11.7% 12.7% 8.6% 10.0% Receivables Return on Capital % 22.6% 20.6% 20.4% 11.8% 13.7% Inventory Return on Equity % 44.4% 32.0% 25.4% 12.7% 14.2% Other Current Assets Total Current Assets Margin Analysis Net Property, Plant & Equipment Gross Margin % 12.7% 12.6% 14.0% 11.8% 11.8% Long-term Investments SG&A Margin % 4.2% 4.4% 5.8% 6.3% 6.3% Other Intangibles EBIT Margin % 8.5% 8.0% 8.0% 5.8% 5.6% Deferred Tax Assets, LT EBITDA Margin % 10.0% 9.6% 9.8% 8.1% 7.7% Other Long-Term Assets Net Income Margin % 6.2% 6.0% 6.2% 4.5% 4.4% Goodwill Accounts Receivable Long-Term Asset Turnover Total Long Term Assets Total Asset Turnover 2.0x 1.8x 2.2x 1.9x 2.1x Total Assets Fixed Asset Turnover 7.7x 7.6x 7.9x 6.0x 6.3x Accounts Receivable Turnover 5.0x 4.6x 6.0x 8.7x 10.5x LIABILITIES & EQUITY Inventory Turnover 14.8x 13.4x 9.7x 7.9x 7.9x Accounts Payable Accrued Exp Liquidity Short-term Borrowings Current Ratio 1.1x 1.2x 2.0x 2.4x 2.1x Curr. Port. of LT Debt Quick Ratio 0.9x 1.0x 1.4x 1.6x 1.3x Curr. Income Taxes Payable Avg. Days Sales Out Unearned Revenue, Current Avg. Days Inventory Out Other Current Liabilities Avg. Days Payable Out Total Current Liabilities Avg. Cash Conversion Cycle Long-Term Debt Net Debt to Equity 55% 5% Net Cash Net Cash Net Cash Def. Tax Liability, Non-Curr Other Non-Current Liabilities Growth Over Prior Year Total Liabilities Total Revenue 53.3% 8.9% 10.6% (12.6%) 28.7% Common Stock Net Income 200.9% 6.0% 14.1% (36.2%) 25.1% Additional Paid In Capital Payout Ratio % 0.0% 0.0% 0.0% 15.0% 20.0% Retained Earnings Treasury Stock Comprehensive Inc. and Other Minority Interest Total Equity Total Liabilities And Equity

4 Figure 4: Peer comparison Ticker Company PE EV/EBITDA P/B ROE ROA Div yield Price Market Cap 2016F 2017F 2018F 2016F 2017F 2018F F F F F Lcy US$m x x x x x x x x % % % % % % 1415 HK Cowell E Holdings Inc n.a n.a HK Sunny Optical Tech HK Aac Technologies Holdings In n.a HK Truly International Holdings HK Q Technology Group Co Ltd HK Tongda Group Holdings Ltd HK Byd Electronic Intl Co Ltd HK Fih Mobile Ltd HK O-Net Technologies Group Ltd n.a. n.a. n.a. 2.0 n.a n.a. 0.0 n.a HK Ten Pao Group Holdings Ltd n.a. n.a. n.a Average HK Zte Corp-H n.a n.a HK Tcl Communication Tech Hldgs n.a HK Lenovo Group Ltd n.a HK Coolpad Group Ltd n.a HK Sim Technology Group Ltd n.a. n.a. n.a. n.a. n.a. n.a. 0.5 n.a. 3.4 n.a. 2.0 n.a. 0.0 n.a. Average CH Shenzhen O-Film Tech Co-A n.a. n.a CH Lida Optical & Electronic -A n.a. n.a. n.a. n.a. n.a. n.a. 9.8 n.a. 3.1 n.a. 1.9 n.a. n.a. n.a CH Zhejiang Crystal-Optech -A n.a. n.a. n.a n.a CH Phenix Optical Co Ltd-A n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 3.9 n.a n.a. n.a. n.a CH Goertek Inc -A n.a. n.a CH Lens Technology Co Ltd-A n.a Average n.a KS Lg Innotek Co Ltd n.a. n.a KS Partron Co Ltd n.a. n.a KS Samsung Electro-Mechanics Co n.a. n.a TT Lite-On Technology Corp n.a. n.a TT Primax Electronics Ltd n.a. n.a JP Sharp Corp n.a n.a n.a. n.a TT Largan Precision Co Ltd n.a. n.a TT Genius Electronic Optical Co n.a. n.a. n.a n.a n.a. n.a. n.a KS Digital Optics Co Ltd n.a. n.a. n.a. n.a. n.a. n.a. 1.4 n.a n.a n.a. n.a. n.a KS Sekonix Co Ltd n.a. n.a JP Fujifilm Holdings Corp n.a. 1.8 Average n.a. 2.1 Sources: Bloomberg, Company, CGIS Research estimates for covered stocks 4

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Explanation on Equity Ratings BUY SELL HOLD : : share price will increase by >20% within 12 months in absolute terms share price will decrease by >20% within 12 months in absolute terms : no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL Copyright Reserved No part of this material may be reproduced or redistributed without the prior written consent of China Galaxy International Securities (Hong Kong) Co., Limited. China Galaxy International Securities (Hong Kong) Co. Limited, CE No.AXM459 Room , 35/F, Cosco Tower, Grand Millennium Plaza, 183 Queen s Road Central, Sheung Wan, Hong Kong. General line: