TCL Communication (LHS)

Transcription

1 China / Hong Kong Company Focus Bloomberg: 2618 HK EQUITY Reuters: 2618.HK DBS Group Research. Equity 13 August 2015 Refer to important disclosures at the end of this report HOLD Last Traded Price: HK$5.73 (HSI : 23,916) Price Target: HK$ 5.50 (4% downside) (Prev HK$7.4) Potential Catalyst: Stronger smartphone shipment and monetisation of new mobile internet businesses Where we differ: We are more conservative on near-term earnings Analyst Tsz Wang TAM CFA, tw_tam@hk.dbsvickers.com Price Relative HK$ Aug-11 Aug-12 Aug-13 Aug-14 Aug-15 (LHS) Relative Index Relative HSI INDEX (RHS) Forecasts and Valuation FY Dec (HK$ m) 2014A 2015F 2016F 2017F Turnover 30,691 34,210 37,950 41,370 EBITDA 1,413 1,507 1,540 1,558 Pre-tax Profit 1,149 1,199 1,224 1,222 Net Profit 1,093 1,127 1,151 1,149 Net Pft (Pre Ex) 1,093 1,127 1,151 1,149 EPS (HK$) EPS Gth (%) (0.4) (0.3) (2.6) Diluted EPS (HK$) DPS (HK$) BV Per Share (HK$) PE (X) P/Cash Flow (X) P/Free CF (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): (1) (2) Consensus EPS (HK$) Other Broker Recs: B: 11 S: 2 H: 7 ICB Industry: Technology ICB Sector: Technology Hardware & Equipment Principal Business: TCLC is a global-oriented handset manufacturer with production based in China Source of all data: Company, DBSV, Thomson Reuters, HKEX Slow 1H15 results reaffirms cautious outlook 1H15 earnings growth of 5% was below market expectations Management revised down full year sales growth guidance to 10%, from 30% previously Uncertain outlook from ASP and margin pressure Maintain HOLD with a lower TP of HK$5.5 1H15 results below market expectations. Revenue grew by 8% y-o-y to HK$13,267m in 1H15, with net profit increasing by 5% to HK$453m. The results were below market expectations, in our view. Sales growth momentum was behind the previous full year guidance of 30% growth. We note that 2Q15 revenue declined by 2% y-o-y. Management has revised down its sales growth target to 10%. The results also included an exchange gain of HK$131m due to ineffective hedging, which is nonrecurring in nature. The company has proposed an interim DPS of HK$0.128, representing 35% payout ratio. Uncertain outlook with ASP and margin pressure. Smartphone shipments grew by 31% y-o-y to 19.7m in 1H15. We estimate that smartphone ASP decreased by 12% y-o-y, due to higher contribution from entry level products. The company has failed to upgrade its overall product mix, in the absence of any flagship models or products. Blended ASP fell to US$50.3, from 1H14 s US$52.3. Group gross margin was slightly lower at 19.3% (vs. 19.5% in 1H14). Overall margin was stable, but we expect pressure going forward due to product commoditisation. Business outlook is uncertain in the nearterm. Maintain HOLD with a lower TP of HK$5.5. We have revised down our FY15-16F earnings slightly by 1% and 2% after lowering our ASP assumptions. We now expect earnings to grow by 3% and 2% in the coming 2 years. In view of the uncertain business outlook, we maintain our HOLD recommendation, but lower our TP to HK$5.5, based on 6x FY16F PE (from 8x FY15F PE previously), representing a down cycle PE (around 1SD below average PE). The stock offers 5%+ dividend yield (based on 35% payout ratio), which should provide downside protection at current level. At A Glance Issued Capital (m shrs) 1,259 Mkt. Cap (HK$m/US$m) 7,216 / 930 Major Shareholders TCL Corporation (%) 62.4 Free Float (%) m Avg. Daily Val. (US$m) ed- JS / sa- DL

2 INVESTMENT THESIS Profile TCL Comm is a China-based, global-oriented mobile handset provider which currently manages two brands, namely TCL and ALCATEL. It is now one of the top ten global handset manufacturers in terms of shipment volume. Rationale Unfavourable supply- and demand-side factors Global smartphone shipment growth is slowing down. Commodisation of smartphone is also leading to margin pressure. Valuation We rate Technology Holdings a HOLD. Our target price is based on 6x FY16 price-earnings. Risks Slow innovation Failure to develop flagship products, which would negatively impact shipment volumes and margins. Inability to keep up with any technology transition in the industry. Source: DBS Vickers Page 2

3 Results highlights HK$ m 1H14 1H15 YoY YoY QoQ 2Q14 1Q15 2Q15 chg chg chg Revenue 12,218 13,227 8% 6,677 6,690 6,537-2% -2% Gross profit 2,381 2,555 7% 1,294 1,278 1,276-1% 0% Gross margin (%) 19.5% 19.3% 19.4% 19.1% 20 Other income % % 46% Research and development costs (517) (813) 57% % -7% Selling and distribution expenses (1,033) (897) -13% % -1% Administrative expenses (527) (621) 18% % -3% Other operating expenses (9) (67) 633% % 93% Finance costs (42) (69) 62% % -4% Profit before income tax % % 48% Net profit % % 45% Source: Company PE band chart PB band chart Share Price (HK$) x 10x 7x 5x 3x Share Price (HK$) x 3.2x 2.3x 1.5x 0.7x Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Source: Thomson Reuters, DBS Vickers Source: Thomson Reuters, DBS Vickers Page 3

4 Peer Table Mkt PE PE Yield Yield P/Bk P/Bk EV /EBITDA ROE ROE Currency Price Cap Fiscal 15F 16F 15F 16F 15F 16F 15F 16F 15F 16F Company Name Code Local$ US$m Y r x x % % x x x x % % TCL Comm* 2618 HK HKD Dec Apple AAPL US USD ,202 Sep HTC 2498 TT TWD 55 1,442 Dec n.a. n.a (2.8) (6.7) (15.0) (12.6) Coolpad Group 2369 HK HKD Dec Nokia NOK1V FH EUR ,752 Dec Sim Technology Gp HK HKD Dec n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Blackberry# BB CN CAD ,040 Feb n.a. n.a n.a. n.a. (2.4) 2.5 Samsung Electronics KS KRW 1,154, ,370 Dec ZTE 'H'* 763 HK HKD ,130 Dec # FY15: FY16; FY16: FY17 Source: Thomson Reuters, *DBS Vickers Page 4

5 Key Assumptions FY Dec 2013A 2014A 2015F 2016F 2017F Sensitivity Analysis Unit shipment (m) Smartphone shipment Smartphone +/ Net Profit +/- 9% (m) 1% Gross margin +/- ASP (US$) Net Profit +/- 29% 1% Gross Margin % Key Assumption Name 5 N/A N/A N/A N/A N/A Income Statement (HK$ m) FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 19,362 30,691 34,210 37,950 41,370 Cost of Goods Sold (15,690) (24,774) (27,676) (30,773) (33,622) Gross Profit 3,672 5,918 6,534 7,178 7,748 Other Opng (Exp)/Inc (3,380) (4,737) (5,300) (5,918) (6,491) Operating Profit 292 1,180 1,234 1,259 1,257 Other Non Opg (Exp)/Inc Associates & JV Inc (2) Net Interest (Exp)/Inc 8 (31) (35) (35) (35) Dividend Income Exceptional Gain/(Loss) Pre-tax Profit 298 1,149 1,199 1,224 1,222 Tax 18 (41) (72) (73) (73) Minority Interest (3) (15) Preference Dividend Net Profit 313 1,093 1,127 1,151 1,149 Net Profit before Except ,093 1,127 1,151 1,149 EBITDA 482 1,413 1,507 1,540 1,558 Growth Revenue Gth (%) EBITDA Gth (%) N/A Opg Profit Gth (%) N/A (0.2) Net Profit Gth (%) N/A (0.2) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x) NM Source: Company, DBS Vickers Margins Trend 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 2013A 2014A 2015F 2016F 2017F Operating Margin % Net Income Margin % Page 5

6 Interim Income Statement (HK$ m) Revenue Trend FY Dec 1H2013 2H2013 1H2014 2H2014 1H2015 Revenue 6,407 12,955 12,218 18,473 13,227 Cost of Goods Sold (5,278) (10,412) (9,837) (14,937) (10,672) Gross Profit 1,129 2,543 2,381 3,537 2,555 Other Oper. (Exp)/Inc (1,366) (2,014) (1,907) (2,830) (2,056) Operating Profit (237) Other Non Opg (Exp)/Inc Associates & JV Inc (1) (1) 0 0 (2) Net Interest (Exp)/Inc 11 (3) (13) (18) (29) Exceptional Gain/(Loss) Pre-tax Profit (227) Tax 18 (1) (20) (21) (14) Minority Interest 2 (5) (10) (5) (1) Net Profit (207) Net profit bef Except. (207) ,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2, H2010 1H2011 2H2011 1H2012 2H2012 1H2013 2H2013 1H2014 2H2014 Revenue Revenue Growth % (YoY) 1H % 100% 80% 60% 40% 20% 0% Growth Revenue Gth (%) Opg Profit Gth (%) N/A N/A N/A Net Profit Gth (%) N/A N/A N/A Margins Gross Margins (%) Opg Profit Margins (%) (3.7) Net Profit Margins (%) (3.2) Source: Company, DBS Vickers Page 6

7 Balance Sheet (HK$ m) Asset Breakdown FY Dec 2013A 2014A 2015F 2016F 2017F Net Fixed Assets - 8.2% Net Fixed Assets 1,070 1,555 1,482 1,401 1,301 Invts in Associates & JVs Other LT Assets 1,482 2,083 2,247 2,392 2,534 Cash & ST Invts 1,933 2,807 2,723 2,778 2,912 Inventory 2,649 3,293 4,117 4,940 5,681 Debtors 6,036 8,244 10,212 12,180 13,952 Other Current Assets 1,248 1,661 2,034 2,407 2,743 Total Assets 14,423 19,696 22,868 26,152 29,175 Debtors % Inventory % Assocs'/JVs - 0.3% Bank, Cash and Liquid Assets % ST Debt 2,690 4,312 4,312 4,312 4,312 Creditors 3,875 5,167 6,458 7,750 8,913 Other Current Liab 4,656 5,929 7,198 8,438 9,552 LT Debt Other LT Liabilities Shareholder s Equity 2,909 4,089 4,700 5,452 6,199 Minority Interests Total Cap. & Liab. 14,423 19,696 22,868 26,152 29,175 Non-Cash Wkg. Capital 1,402 2,103 2,707 3,340 3,911 Net Cash/(Debt) (953) (1,505) (1,589) (1,535) (1,400) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X) Source: Company, DBS Vickers Cash Flow Statement (HK$ m) FY Dec 2013A 2014A 2015F 2016F 2017F Pre-Tax Profit 298 1,149 1,199 1,224 1,222 Dep. & Amort. 1,136 1,351 1,697 1,850 2,011 Tax Paid (16) (83) (41) (72) (73) Assoc. & JV Inc/(loss) (Pft)/ Loss on disposal of FAs Chg in Wkg.Cap. (762) (184) (634) (634) (571) Other Operating CF (17) (150) (65) (65) (65) Net Operating CF 640 2,083 2,155 2,303 2,524 Capital Exp.(net) (484) (684) (200) (200) (200) Other Invts.(net) (1,005) (1,471) (1,588) (1,715) (1,853) Invts in Assoc. & JV (3) (47) Div from Assoc & JV Other Investing CF 229 (63) Net Investing CF (1,263) (2,264) (1,723) (1,850) (1,988) Div Paid 0 (274) (516) (399) (402) Chg in Gross Debt (3,467) 1, Capital Issues Other Financing CF 3,158 (880) Net Financing CF (230) 434 (516) (399) (402) Currency Adjustments Chg in Cash (828) 331 (84) Opg CFPS (HK$) Free CFPS (HK$) Source: Company, DBS Vickers Capital Expenditure HK$ A 2014A 2015F 2016F 2017F Capital Expenditure (-) Page 7

8 Target Price & Ratings History HK$ S.No. Date Closing Target Rating Price Price 1: 15-Aug-14 HK$10.52 HK$13.70 Buy 2: 24-Oct-14 HK$7.78 HK$11.90 Buy 3: 26-Nov-14 HK$7.92 HK$11.90 Buy 4: 5-Jan-15 HK$7.19 HK$11.90 Buy 5: 9-Jun-15 HK$7.76 HK$ 7.40 Hold 6: 8-Jul-15 HK$7.25 HK$7.40 Hold Aug-14 Oct-14 Jan-15 Mar-15 May-15 Aug-15 Source: DBS Vickers Page 8

9 DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Vickers (Hong Kong) Limited ( DBSVHK ), a direct wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd ("DBSVH"). This report is intended for clients of DBSV Group only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVHK. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBSVHK and/or DBSVH) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. 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10 COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBSVHK and its subsidiaries do not have a proprietary position in the securities recommended in this report as of the date the report is published. 2. DBSVHK, DBSVUSA, DBS Bank Ltd and/or other affiliates may beneficially own a total of 1% or more of any class of common equity securities of the subject company mentioned in this document as of the latest available date of the updated information. 3. Compensation for investment banking services: DBSVHK, DBSVUSA, DBS Bank Ltd and/or other affiliates may have received compensation, within the past 12 months, and within the next 3 months may receive or intends to seek compensation for investment banking services from the subject company mentioned in this document. DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. 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