Neutral (maintained) TCL COMMUNICATION 2618 HK Expect a tough 2016F. Weak 4Q15 results. Tough macro environment in emerging markets the major overhang

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1 TMT MARCH 23, 2016 TCL COMMUNICATION 2618 HK Expect a tough 2016F Weak 4Q15 results Tough macro environment in emerging markets the major overhang Lack of catalysts; maintain Neutral Neutral (maintained) Current price: Target: HK$5.48 HK$5.60 (as at 23 Mar 2016) (down from HK$6.00) Weak 4Q15 results. TCLC reported 4Q15 revenue of HK$8.3b, down 22.6% YoY and 13% below Bloomberg consensus owing to the unfavorable macro environment in emerging markets. Smart device shipments grew 7% YoY in 4Q15 to 13.4m while blended ASP fell 14% QoQ to US$ Gross profit margin improved from 21.8% in 3Q15 to 23.4% due to a shift in the sales mix towards mid-end products and less sales exposure to low-margin emerging markets. TCLC s opexto-sales ratio rose from 19.1% in 3Q15 to 21.9% while net profit declined 21.6% YoY to HK$288m, broadly in line with consensus. Sluggish demand in emerging markets the major overhang. In 2015, revenue from Latin America/APAC declined 11%/60% YoY. In view of the unfavorable macro backdrop, especially for emerging markets, we lower our FY16F/17F smart device shipment assumption from 56m/61m to 49m/52m. On a positive note, we approve of management s efforts to prioritize profitability over shipment growth in the current tough environment. 4Q15 gross margin improved 166bp QoQ to 23.4%. Maintain Neutral and lower target price to HK$5.60. We maintain our Neutral rating on TCLC and trim our FY16-17F earnings forecasts 5-6% to reflect our lower revenue assumptions. We cut our target price from HK$6.00 to HK$5.60, still basing it on 8x 2016F earnings. We like TCLC s well-established global sales channel but believe global economic uncertainty will continue to weigh on its 2016 performance. With few potential catalysts and low visibility at this stage, we suggest investors wait for a better entry point. FORECAST AND VALUATION Year to 31 Dec F 2017F Revenue (HK$ m) 19,362 30,691 28,558 28,995 30,420 YoY (%) Net profit (HK$ m) 313 1,093 1, YoY (%) N/A Fully diluted EPS (HK$) YoY (%) P/E (x) DPS (HK$) Dividend yield (%) P/B (x) ROAE (%) Net debt/equity (%) TRADING DATA 52-week range HK$ Market capitalization (m) HK$6,952/US$896 Shares outstanding (m) 1,269 Free float (%) 32 3M average daily T/O (m share) 1 3M average daily T/O (US$ m) 1 Expected return (%) 12 month 2 PRICE VS HSCEI HK$ Jan-11 Apr-12 Aug-13 Dec-14 Mar-16 TCLC STOCK PERFORMANCE Performance over 1M 3M 12M Absolute Relative (%) to HSCEI HSCEI (rebased) Ronnie Ho (852) ronnieho@ccbintl.com Rocky Zhang (852) rockyz@ccbintl.com Source: Company, CCBIS Analyst certifications and other important disclosures on last page 1

2 TCL COMMUNICATION 4Q15 SNAPSHOT P&L (HK$ m) 4Q15 4Q15F Actual vs. forecast (%) 3Q15 QoQ (%) 4Q14 YoY (%) Revenue 8,275 9, , , Gross profit 1,940 1, , , GPM (%) OPEX -1,813-1, , , OPEX/sales (%) Operating profit OPM (%) Profit before tax Profit before tax (%) Net profit Net profit (%) Source: Company, CCBIS estimates TCL COMMUNICATION EARNINGS REVISIONS New Previous % change P&L (HK$ m) 2016F 2017F 2016F 2017F 2016F 2017F Revenue 28,995 30,420 33,045 35, Gross profit 6,002 6,267 6,444 6, Opex -5,393-5,612-5,849-6, Operating profit 1,077 1,139 1,116 1, Net profit , % Gross margin Opex to sales OPM Net margin Source: CCBIS estimates 2

3 CHINA TECHNOLOGY SECTOR VALUATION MATRIX Stock CCBIS Share price* Market cap EPS growth (%) P/E (x) Company code rating (local currency) (US$ m) CY15F CY16F CY17F CY15F CY16F CY17F China handset brands Lenovo 992 HK Outperform ,004 N/A N/A 27.7 N/M ZTE 763 HK Outperform , HTC 2498 TT Not Rated ,430 N/A N/A N/A N/M N/M N/M TCL Communication 2618 HK Neutral Coolpad 2369 HK Neutral N/A N/A N/M Average Handset components and other Mediatek 2454 TT Not Rated , Largan Precision 3008 TT Not Rated 2, , AAC 2018 HK Outperform , GoerTek CH Not Rated , Catcher 2474 TT Not Rated , Foxconn Technology 2354 TT Not Rated , FIH 2038 HK Not Rated , O-film Technology CH Not Rated , Lite-On Technology 2301 TT Not Rated , BYD Electronics 285 HK Outperform , Jinlong Machinery & Electronic CH Not Rated , Everwin Precision CH Not Rated , JANUS Dongguan Precision CH Not Rated ,859 N/A N/A 41.5 N/M Sunny Optical 2382 HK Outperform , TPK 3673 TT Not Rated , Casetek 5264 TT Not Rated N/A N/A N/A Truly 732 HK Not Rated Tongda Group 698 HK Outperform , Cowell 1415 HK Not Rated N/A N/A 15.5 N/A Merry Electronics 2439 TT Not Rated Average Average (excl. A shares) * Price as at close 23 Mar

4 TCL COMMUNICATION INCOME STATEMENT FYE 31 Dec (HK$ m) F 2017F 1Q15 2Q15 3Q15 4Q15 Revenue 19,362 30,691 28,558 28,995 30,420 6,690 6,537 7,056 8,275 Mobile device shipments (m units) Blended ASP (US$) Cost of revenue (15,690) (24,774) (22,525) (22,993) (24,153) (5,411) (5,261) (5,519) (6,335) Gross profit 3,672 5,918 6,032 6,002 6,267 1,278 1,276 1,537 1,940 Gross profit margin (%) Other gains Selling & marketing expense (1,611) (2,420) (2,077) (2,030) (2,099) (451) (446) (558) (622) General & administrative expense (946) (1,246) (1,548) (1,595) (1,673) (315) (306) (409) (518) R&D expenses (1,064) (1,479) (1,746) (1,667) (1,734) (420) (393) (342) (591) Other operating income/expenses (158) (105) (189) (101) (106) (23) (44) (40) (82) Operating profit 292 1,180 1,214 1,077 1, Operating margin (%) Net financing cost 8 (31) (79) (75) (70) (14) (15) (24) (27) Share of result of associates (2) (0) (23) (30) (30) (1) (1) (9) (11) PBT 298 1,149 1, , Tax expense 18 (41) (55) (78) (83) (3) (11) (32) (10) MI (3) (15) (0) 0 (8) (0) (0) (2) 3 Profit to shareholders 313 1,093 1, Net profit margin (%) EPS cents (HK$) EPS growth (%) N/A (5.7) (16.1) (23.8) Gross profit margin (%) Operating profit margin (%) Net profit margin (%) ROE (%) Net debt/equity (%) Smartphone shipments (m units) Source: Company data, CCBIS 4

5 TCL COMMUNICATION 2618 HK FINANCIAL SUMMARY PROFIT AND LOSS FYE 31 Dec (HK$ m) F 2017F Revenue 19,362 30,691 28,558 28,995 30,420 COGS (15,690) (24,774) (22,525) (22,993) (24,153) Gross profit 3,672 5,918 6,032 6,002 6,267 Other income Operating expenses (3,780) (5,251) (5,560) (5,393) (5,612) EBIT 292 1,180 1,214 1,077 1,139 Net financial inc. (exp.) 8 (31) (79) (75) (70) JVs and associates (2) (0) (23) (30) (30) Profit before tax 298 1,149 1, ,039 Tax 18 (41) (55) (78) (83) Total profit 316 1,108 1, Minority interest (3) (15) (0) (0) (8) Net profit attributable to 313 1,093 1, shareholders Reported EPS (HK$) Diluted EPS (HK$) Dividend (HK$ m) DPS (HK$) BALANCE SHEET FYE 31 Dec (HK$ m) F 2017F Cash and equivalents Pledge dep., restricted cash 1,698 1,914 1,028 1,028 1,028 Receivables 7,221 9,832 7,713 8,269 8,661 Inventory 2,649 3,293 2,541 2,835 2,978 Other current assets Total current assets 11,866 16,006 12,243 12,951 14,024 Property, plant & equipment 941 1,439 1,725 1,833 1,914 Intangible assets 956 1,260 1,464 1,319 1,354 JVs and associates Other non-current assets ,114 1,114 1,114 Total non-current assets 2,557 3,691 4,364 4,297 4,384 Total assets 14,423 19,696 16,607 17,249 18,407 Short-term borrowings 2,205 3,941 2,803 2,803 2,803 Trade and bills payable 7,508 10,492 8,345 8,393 8,798 Other current liabilities 1, ,161 Total current liabilities 11,221 15,408 12,018 12,193 12,763 Long-term borrowings Other non-current liabilities Total non-current liabilities Total liabilities 11,510 15,517 12,569 12,744 13,314 Share capital 1,162 1,221 1,268 1,268 1,268 Reserves and retained profits 1,747 2,868 2,685 3,152 3,732 Shareholders' equity 2,909 4,089 3,953 4,419 5,000 Minority interest Total equity 2,913 4,179 4,038 4,505 5,094 Total equity and liabilities 14,423 19,696 16,607 17,249 18,407 CASH FLOW FYE 31 Dec (HK$ m) F 2016F 2017F Profit before tax 298 1,149 1, ,039 Amortization & depreciation 1,136 1,351 1,717 1,237 1,084 Net financial charge adj. (127) (59) (62) (65) (65) Non-cash items adjusted 109 (91) Change in working capital (2,644) (1,735) 2,502 (827) (214) Tax paid (16) (83) (55) (78) (83) Other 1,883 1,552 (2,764) Operating cash flow 640 2,083 2,451 1,422 2,040 Disposal of fixed assets 6 1 Capex (1,489) (2,155) (1,800) (1,200) (1,200) Investment (54) (178) Net interest received (paid) Other Investment cash flow (1,263) (2,264) (1,728) (1,135) (1,135) Change in borrowings (3,519) 1,540 (959) 0 0 Amount due (761) Dividend paid (274) (480) (427) (367) Other 3,289 (71) 808 Financing cash flow (230) 434 (631) (427) (367) Change in cash flow (853) (140) 537 Cash & equivalents, begin Forex Cash & equivalents, end RATIOS FYE 31 Dec F 2017F Growth (%) Revenue (7.0) EBITDA (21.1) (3.9) EBIT (224.7) (11.3) 5.8 Net profit (250.8) (3.3) (15.4) 6.0 Profitability (%) Gross margin EBITDA margin EBIT margin Net margin Tax rate (6.0) Efficiency (days) Inventory turnover Trade receivables Trade payable Returns & leverage (%) ROAA ROAE Net debt (cash)/equity Liquidity (x) Current ratio Quick ratio Free cash flow (849) (71) Source: Company, CCBIS 5

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