Company Report. TCL Comm (2618 HK) Strong FY15E ahead backed by solid product roadmap in smartphone/wearables/apps/cloud; Reiterate BUY BUY

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1 Company Report China Merchants Securities (HK) Co.Ltd. Hong Kong Equity Research TCL Comm (2618 HK) Strong FY15E ahead backed by solid product roadmap in smartphone/wearables/apps/cloud; Reiterate BUY Expect FY15E shipment of 94mn (+28% YoY); Expansion into wearables/mobile apps/cloud services well on track Improving GPM/ASP and operating leverage on emerging global leadership to No. 3 handset brand in FY15E Maintain BUY on valuation (8.3x FY15E P/E, vs peers 11x+ P/E) What s new TCL Comm hosted Spring product launch event in Shenzhen this week, and released four major products in smartphone (Idol 3), smart watch (TCL Watch), mobile healthcare app (Fortune Doctor) and cloud-based video platform (partnership with Cisco). The company also reported a solid set of March data with 22% total shipment growth (vs 16% yoy growth in 1Q15). Mgmt reiterated guidance of 3 yoy revenue growth in FY15E, in our view, backed by strengthening ecosystem and strong device shipment of 94mn in FY15E (+28% yoy, 15mn in China, 4-6mn in tablet). We slightly revise our FY15E-16E EPS to factor in stronger shipment and better product mix. Our EPS are -17% above consensus. Our views/ Implications We maintain our positive view on company outlook in FY15-16E, thanks to 1) strong FY15E revenue guidance, 2) continued share gains in America/China, 2) ASP uptrend on high-end model launches (USD15+. e.g. Idol 3), 3) improving operating leverage with scaling benefits (mn shipment target for Idol3), and 4) expanding product categories into higher-margin mobile apps and cloud services. We expect further revenue upside since our estimates do not model in contribution from TCL Watch, mobile apps and cloud-based services. Valuation/ Risks Trading at 8.3x of our new FY15E EPS, we believe the valuation remains attractive (vs peers 11x+ P/E), and maintain BUY with new TP HK$11.96 (based on x FY15E P/E, in-line with its 4-year historical average). Catalysts include monthly sales and product launches. Downside risks include competition, slower EM demand and component shortage. Financials HKD mn E 216E 217E Revenue 19,362 3,691 4,883 47,99 55,56 Growth (%) 61% 59% 33% 17% 16% Net profit 313 1,93 1,427 1,624 1,832 Growth (%) -251% 249% 31% 14% 13% EPS (HKD) DPS (HKD) P/E (x) P/B (x) ROE (%).8% 26.1% 28.2% 26.8% 25.5% Source: Company data, CMS (HK) estimates Alex Ng nglh@cmschina.com.hk WHAT S NEW TP/Estimate upgrade BUY Previous Price 12-month Target Price (Potential upside) Previous Price Performance (%) BUY HK$9.97 HK$11.96 (21%) Hk$.42-3 Apr/14 Aug/14 Nov/14 Mar/15 Source: Bigdata % 1m 6m 12m 2618 HK HSI Industry: Hardware Technology Hang Seng Index 27,272 HSCEI 13,988 Key Data 52-week range (HK$) Market cap (HK$ mn) 12,279 Avg. daily volume (mn) 5.46 BVPS (HK$) 3.29 Shareholdings Structure TCL Corporation 6. VALUE PARTNERS LIMITED 5. DONG SHENG LI 3.8% No. of shares outstanding 1,224.2M Free float 36. Related Research 2618 HSI Index 1. TCL Comm (2618 HK) NDR takeaway: Profitability outlook intact; Reiterate BUY (/3/215) 2. TCL Comm (2618 HK) Solid FY14 and stronger outlook with China/Palm/wearables potential upside (13/1/215) To access our research reports on the Bloomberg terminal, type CMHK <GO> 1

2 Focus charts Figure 1: Smart devices shipment remains strong with stable ASP Figure 2: Better operating leverage to offset gross margin downward pressure (mn units) (USD) % 2 15% 1 5% -5% -1 1Q14 2Q14 3Q14 4Q14 1Q15E 2Q15E 3Q15E 4Q15E Feature Phone Smartphone & Tablets Overall ASP (RHS) 5-15% Gross Margin Operating Margin Net Profit Margin Figure 3: Shipment breakdown by product Figure 4: Revenue breakdown product % 27% 34% 4 46% 53% 58% 62% % 63% 61% 69% 78% 81% 87% % 73% 66% 6 54% 47% 2 42% 38% Feature Phone Smartphone & Tablets 4 51% 2 37% 39% 31% 22% 19% 13% 1 Feature Phone Smartphone & Tablets Figure 5: Shipment breakdown by region Figure 6: Revenue breakdown by region % 35% 37% 4 6% 1 6% 6% 12% 8% 12% 6% 28% 9% 8% 37% 36% 33% 4% 4% 7% % % 32% 34% 4% 7% 5% 1 12% 7% 49% 4% 4% 26% 36% 37% 1 1 1% 8% 4% 1 57% 2% 5% 2 47% 44% 49% 48% 55% 48% 5 49% 2 53% 5 53% 42% 55% 55% 49% 37% Americas China APAC EMEA America China APAC EMEA To access our research reports on the Bloomberg terminal, type CMHK <GO> 2

3 Earnings revisions Figure 7: Key assumptions and revisions 3Q14 4Q14 1Q15E 2Q15E 3Q15E 4Q15E 215E 216E 217E Shipment (mn unit) 7,772 9,345 6,39 6,341 6,658 6,991 26,29 19,522 15,32 Feature Phone ASP (HKD) Revenue (HKD mn) 1, 1, ,843 1,919 1,33 Shipment (mn unit),896 15,532 9,79 14,98 18,891 25,53 68,281 88,765 1,69 Smartphone & Tablet ASP (HKD) Revenue (HKD mn) 6,8 9,6 6,51 8,19,426 13,372 38,4 45,99 54,176 Blended ASP (USD) Total Revenue (HKD mn) 7,8,7 6,726 8,885 11,149 14,123 4,883 47,99 55,56 YoY Revenue Growth % 22.3% 32.6% 42.9% % 17.2% 15.9% Gross Margin % 19.3% % % 18.7% 18.6% Figure 8: Estimate revisions New Old Change (%) (HKD mn) 215E 216E 215E 216E 215E 216E Revenue 4,883 47,99 4,445 46,76 1% 3% Gross profit 7,732 8,959 7,657 8,734 1% 3% Operating profit 1,66 2,6 1,584 2,8 1% 3% Net profit 1,427 1,624 1,47 1,579 1% 3% EPS (HKD) % 2% Gross margin 18.9% 18.7% 18.9% 18.7% Operating margin 4.3% 4.3% 4.3% 4.3% Net margin 3.5% 3.4% 3.5% 3.4% Figure 9: CMS (HK) estimates vs consensus (HKD mn) CMS (HK) Consensus Diff (%) 215E 216E 217E 215E 216E 217E 215E 216E 217E Revenue 4,883 47,99 55,56 38,4 44,4 51,7 6% 8% 7% Gross profit 7,732 8,959,324 7,273 8,33 9,539 6% 8% 8% Operating profit 1,66 2,6 2,331 1,44 1,6 1,82 12% 29% 28% Net profit 1,427 1,624 1,832 1,33 1,47 1,62 7% 1 13% EPS (HKD) % 17% Gross margin 18.9% 18.7% 18.6% 18.9% 18.7% 18.5% ppt ppt.2 ppt Operating margin 4.3% 4.3% 4.2% 3.8% 3.6% 3.5%.5 ppt.7 ppt.7 ppt Net margin 3.5% 3.4% 3.3% 3.5% 3.3% 3.1% ppt.1 ppt.2 ppt Source: CMS (HK), Bloomberg To access our research reports on the Bloomberg terminal, type CMHK <GO> 3

4 Valuation Reiterate BUY with up-revised TP of HK$11.96 We set our 12-month price target of HK$11.96 based on our unchanged target P/E multiple of.x (in-line with 4-year historical average) and new FY15E EPS of HK$1.2. As an emerging global handset leader (No.4 in total handset; No.7 in smartphones) with continued share gains and stronger product portfolio, we see the valuation of 8.3x 215E P/E as undemanding and maintain our BUY rating. Catalysts include new product releases and monthly shipment data. Downside risks include component shortage and delayed 4G product launches. Figure : 1-yr fwd P/E bands Price (HKD) Closing Px 6x 7x 14 8x 9x x Jan/11 Jan/12 Jan/13 Jan/14 Jan/ Figure 11: 1-yr fwd P/B bands Price (HKD) Closing Px 1.x 1.5x 16 2.x 2.5x 3.x Jan/11 Jan/12 Jan/13 Jan/14 Jan/15 Peers Comparison Figure 12: Sector valuation comparison Company Ticker Rating Mkt Cap (USD mn) Current Price (local) Target Price (HKD) Upside (%) P/E (x) P/B (x) ROE (%) FY15E FY16E FY15E FY16E FY15E FY16E TCL Comm 2618 HK BUY 1, % % 27% Coolpad 2369 HK SELL 1, % % 13% ZTE 763 HK NR 12, N/A N/A % 12% Sunny Optical 2382 HK BUY 2, % % 21% AAC Tech 218 HK NEUT 8, % % 26% Truly Intl 732 HK BUY 1, % % 16% BYD E 285 HK NR 3, N/A N/A % 14% Catcher 2474 TT NR 8, N/A N/A % 22% Largan 38 TT NR 11, N/A N/A % 42% Average % 22% Source: CMS (HK), Bloomberg To access our research reports on the Bloomberg terminal, type CMHK <GO> 4

5 Financial Summary Statement of financial position HKD million E 215E 216E 217E Current Assets 11,866 16,6 19,566 2,8 25,467 Cash & equivalents ,412 2,654 Trading investments Trade notes Trade receivables 5,551 7,873 9,377 8,737,424 Other receivables 1,67 1,959 2,65 3,53 3,537 Inventories 2,649 3,293 4,336 4,21 6,445 Other current assets 1,854 2,47 2,47 2,47 2,47 Non-current assets 2,557 3,691 3,899 4,42 4,12 Investment property PPE 941 1,439 1,537 1,69 1,611 Intangible assets 1,2 1,514 1,514 1,514 1,514 Other non-current assets Total assets 14,423 19,696 23,465 24,852 29,587 Liquid Liabilities 11,221 15,48 18,2 18,557 22,129 Bank loans 2,25 3,941 3,941 3,941 3,941 Trade payables 3,875 5,167 6,64 6,85 9,287 Prepaid Accounts Other liquid liabilities 5,141 6,3 7,619 7,8 8,92 Long term Liabilities Loans 196 Others Total Liabilities 11,5 15,517 18,411 18,83 22,414 Issued capital 1,162 1,221 1,221 1,221 1,221 Capital reserves Reserves 1,747 2,868 3,724 4,699 5,798 NCI Parents 2,99 4,89 4,945 5,919 7,19 Total equity and liabilities 14,423 19,696 23,465 24,852 29,587 Statement of cash flows HKD million E 215E 216E 217E CF from OA 64 1,5 1,238 2,521 1,225 PBT 298 1,149 1,66 1,913 2,184 D&A 1, Finance costs Investment income Changes of WC (762) (271) (417) 673 (854) Others (135) (191) (3) (438) (5) CF from IA (1,263) (3) (3) (3) (25) Capital expenditure (484) (3) (3) (3) (25) Other investments (779) CF from FA (23) (473) (571) (65) (733) Borrowings 18,185 Share capital 78 Changes of reserves Dividends (473) (571) (65) (733) Others (18) Net cash flow (853) , Statement of comprehensive income HKD million E 215E 216E 217E Revenues 19,362 3,691 4,883 47,99 55,56 Cost of sales (15,69) (24,774) (33,151) (38,95) (45,182) Selling exp (1,611) (2,42) (3,123) (3,641) (4,218) Admin exp (946) (1,246) (1,65) (1,868) (2,165) Op expenses (3,267) (4,87) (5,979) (6,899) (7,993) Op Profit 45 1,249 1,754 2,6 2,331 Fin. costs (5) () (146) (146) (146) Impairments FV changes Inv income (2) () (1) (1) (1) Non-op inc Non-op exp PBT 298 1,149 1,66 1,913 2,184 Taxes 18 (41) (161) (268) (328) PAT 316 1,8 1,446 1,645 1,856 NCI Net Profit 313 1,93 1,427 1,624 1,832 EPS (HKD) Ratios YoY growth rate E 215E 216E 217E Revenue 61% 59% 33% 17% 16% Op profit -255% 28% 4 17% 13% Net profit -251% 249% 31% 14% 13% Profitability Gross margin % 18.9% 18.7% 18.6% NP margin 1.6% 3.6% 3.5% 3.4% 3.3% ROE.8% 26.1% 28.2% 26.8% 25.5% ROIC 6.4% 22.3% 22.7% % Liquidity D/A % 15.9% 13.3% ND/A 17.6% 17.6% 13.2% 6.2% 4.3% Liquid ratio Quick ratio Operating efficiency Asset turnover Inventory turnover AR turnover AP turnover Per share ratios (HKD) EPS CFPS BVPS DPS Valuation PE PB EV/EBITDA Source: Company, CMS(HK) To access our research reports on the Bloomberg terminal, type CMHK <GO> 5

6 Investment Ratings Rating Definition BUY Expected to outperform the market index by >1 over the next 12 months NEUTRAL Expected to outperform or underperform the market index by 1 or less over the next 12 months SELL Expected to underperform the market index by >1 over the next 12 months Analyst Disclosure The analysts primarily responsible for the preparation of all or part of the research report contained herein hereby certify that: (i) the views expressed in this research report accurately reflect the personal views of each such analyst about the subject securities and issuers; and (ii) no part of the analyst s compensation was, is, or will be directly or indirectly, related to the specific recommendations or views expressed in this research report. Regulatory Disclosure Please refer to the important disclosures on our website Disclaimer This document is prepared by China Merchants Securities (HK) Co., Limited ( CMS HK ). 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