TCL Communication (2618 HK)

Transcription

1 COMPANY NOTE HKG Technology Comm. Equipment TCL Communication (2618 HK) Look Forward to Smartphone Growth Key Takeaway TCL Comm reported Q1 earnings materially below our/consensus expectations due to pricing pressure, higher than expected opex, and delay of smartphone ramp. Total ASP was US$34.6, up 11% YoY, driven by increasing mix of smartphone. Management reiterated 2012 revenue growth of 30% YoY. We maintain our Buy rating on attractive valuation and its shares are likely to start working when smartphone mix and ASP increases. Our new PT is HK$3.78. Weak quarter in EMEA and Americas. TCL Comm reported Q1 revenue of HK$2,105mn (down 1% YoY) and EPS of HK$0.02 (down 86% YoY) versus our/consensus estimates of HK $1,953/HK$2,018mn and HK$0.08/HK$0.06, respectively. Gross margin was down 260 bps sequentially to 19.9%. Management noted challenging demand dynamics in the EMEA and Americas resulted in feature phone margin erosion. EMEA declined 24% YoY to 2.5mn units. Americas declined 23% YoY to 3.4mn units. Asia Pacific decreased 1% YoY to 0.6mn units. China grew 216% YoY to 1.3mn units. Guidance. Management reiterated 2012 revenue growth of 30% YoY, driven by higher smartphone ASP (typically 3x feature phones ASP), smartphone market expansion, and new relationship with carriers. The company will continue to invest in R&D and S&M to promote new smartphone models going forward. Management expects shipment of smartphone to grow sequentially onward. Revising down our earnings estimates. We believe TCL Comm is going to start benefiting from growth in the smartphone market, which is going to lift its ASPs. However, we also expect weak feature phone demand and intensifying competition in smartphone. We raise our 2012/13 revenue estimates by 1%/3% and revise down net income estimates by 18%/16% to reflect gross margin erosion and higher than expected investment in R&D and S&M. Valuation is attractive. With our optimism on its smartphone product roadmap, we view TCL Comm s share price at 5x 2012 P/E attractively valued. We believe risk/reward is favorable and shares are likely to start working when smartphone mix and ASP increases. Valuation/Risks We reiterate our Buy on TCL Comm and adjust our PT from HK$4.65 PT to HK$3.78, based on 6x our 2012E EPS of HK$0.63. This target multiple is at the low end of its historical forward PE band of 6-11x. Key risks: competition, slowdown in handset demand, and pricing pressure. Financial Summary Book Value (MM): Book Value/Share: Net Debt (MM): BUY Price target HK$3.78 (from HK$4.65) Price HK$3.26 Bloomberg: 2618 HK Reuters: 2618.HK HK$2,506.0 HK$2.24 (HK$220.0) Return on Avg. Equity: 4.0% Net Debt/Capital: 0.0% Long-Term Debt (MM): HK$6,017.0 Dividend Yield: 2.8% Cash & ST Invest. (MM): Market Data HK$6, Week Range: HK$ HK$2.48 Total Entprs. Value (MM): Market Cap. (MM): HK$3,479.1 HK$3,699.1 Insider Ownership: 3.4% Institutional Ownership: 49.3% Shares Out. (MM): 1,134.7 Float (MM): Avg. Daily Vol.: 6,657,766 Branden Chen * Equity Analyst bchen@jefferies.com Anita Chen * Equity Analyst achen@jefferies.com Cynthia Meng * Equity Analyst cmeng@jefferies.com * Jefferies Hong Kong Limited EQUITY RESEARCH ASIA HKD Prev. 2010A Prev. 2011A Prev. 2012E Prev. 2013E Rev. (MM) -- 8, , , , , ,641.0 EV/Rev 0.4x 0.3x 0.3x 0.2x Net Profit Chg (% YoY) -- 2,951.0% % 9.2% (10.7)% 6.9% 10.3% ROE % % 27.2% 22.8% 23.1% 20.5% EPS FY Dec FY P/E 5.2x 4.7x 5.2x 4.7x Price Performance APR-11 AUG-11 DEC-11 APR-12 Jefferies does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Jefferies may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see analyst certifications, important disclosure information, and information regarding the status of non-us analysts on pages 9 to 12 of this report.

2 TCL Communication Buy: $3.78 Price Target Scenarios Target Investment Thesis Organic revenue growth of about 23% in 2012 Gross margin compresses to 20.0% in 2012 Operating margin declines to 2.9% in 2012 Continued market share gains through new customer wins and further customer penetration 2012 EPS: HK$0.63; Target Multiple: 6x; Target Price: HK$3.78 Upside Scenario Growth of about 28% for 2012: higher consumer spending on mobile phones Higher share gains Continued customer penetration Operating margin expands to 3.1% as this growth drives operating leverage 2012 EPS: HK$0.67; Target Multiple: 8x; Target Price: HK$5.36 Downside Scenario Organic growth of about 18% for 2012 Lower consumer spending on mobile phones Increasing competition adversely impacts top-line and bottom-line growth Operating margins compressed to 2.7% 2012 EPS: HK$0.59; Target Multiple: 5x; Target Price: HK$2.95 THE LONG VIEW Long-Term Analysis 1 Year Forward P/E Source: Bloomberg, Jefferies Long-Term Financial Model Drivers LT Earnings CAGR 10-15% Organic Revenue Growth 15-20% Acquisition Contribution 0% Operating Margin Expansion % Other Considerations Our positive stance on the company comes from our view, based on its recent results, that management has finally taken the right steps to turn the company s structure to more aggressive, flexible and leaner, capable of competing in a market that requires adapting to new and enhanced product specification and changing customer tastes. Peer Group Group P/Es Source: Bloomberg, Jefferies Earnings Growth vs P/E Source: Bloomberg, Jefferies Recommendation / Price Target Ticker Rec. PT 2618 HK Buy HK$3.78 NOK1V FH Hold 2.76 MMI US Hold US$40.00 RIMM US Underperform US$12.00 AAPL US Buy US$ TT NC NC 2369 HK NC NC 285 HK NC NC Catalysts Monthly handset shipment improves Favorable product mix Market share gains in China Company Description Founded in 1999 and headquartered in Shenzhen, TCL Communication Technology started as TCL Mobile, a manufacturer of a wide range of mobile handsets. The company currently offers its products under two brands: The TCL brand for the domestic Chinese market, and the Alcatel brand for the overseas market. In addition, the company runs an ODM business, accounting for roughly 20-30% of the total revenue. At the end of 2011, TCL Comm had a total of 9,600+ employees at production sites located in Huizhou, five R&D centers and over 50 offices worldwide. page 2 of 12

3 Other Quarterly Highlights: Total ASP increased 11% YoY to US$34.6 in 1Q12 due to increasing mix of smartphone, up from US$31.3 in 1Q11. The company shipped 7.8mn units of handsets in Q1, down 10% YoY. EMEA (32% of shipment mix) declined 24% YoY to 2.5mn units. Americas (43% of shipment mix) declined 23% YoY to 3.4mn units. Asia Pacific (8% of shipment mix) decreased 1% YoY to 0.6mn units. China (17% of shipment mix) grew 216% YoY to 1.3mn units. Overseas revenue was HK$1,736mn, down 39% QoQ and China revenue was HK$370mn, down 4% QoQ. Overseas market made up about 82% of revenue mix, down from 89% in 4Q11. China made up 18% of revenue mix, up from 12% in 4Q11. Inventory increased 29% QoQ to HK$1,262mn, up from HK$981mn in 4Q11. The gross margin was 19.9% in 1Q12, down from 22.5% in 4Q11 and down from 22.3% in 1Q11. The operating margin was -3.3% in the quarter versus 3.3% in 4Q11 and 4.9% in 1Q11. TCL Comm ended 1Q12 with HK$6,238mn in total cash and HK$6,017mn in total debt. Net cash was HK$220mn. TCL Comm ended 1Q12 with HK$2,017mn in total receivables and HK$1,799mn in total payables. DSIs were 53 days, an increase of 14 days from 4Q11 and an increase of 6 days from 1Q11. Chart 1: Model Revision 2012E 2012E Revision 2013E 2013E Revision HK$ mn New Old % change New Old % change Total Revenue 13,119 12, % 15,641 15, % Growth % 23.2% 21.7% 1.5% 19.2% 17.3% 1.9% Net income % % YoY% change -10.7% 9.2% -19.9% 10.3% 6.9% 3.4% Net profit margin 5.4% 6.7% -1.3% 5.0% 6.1% -1.1% Diluted EPS (HK$) % % YoY% -11% 9% -19.8% 10% 7% 3.4% Source: Jefferies page 3 of 12

4 Chart 2: Handset Shipment by Geography Handset By Geography (mn units) 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 Overseas % of Total Shipment 79% 78% 82% 86% 92% 90% 96% 97% 95% 88% 88% 84% 83% Y/Y growth -43% -27% 20% 98% 199% 249% 160% 105% 56% 25% 7% -9% -22% Seq. growth -40% 21% 61% 69% -10% 42% 20% 33% -31% 14% 3% 13% -41% EMEA Y/Y growth -34% 6% 29% 71% 122% 131% 74% 120% 61% 36% 37% -10% -24% Seq. growth -34% 38% 42% 32% -14% 44% 7% 67% -37% 21% 8% 9% -47% % of Total Shipment 41% 46% 43% 35% 35% 35% 33% 42% 38% 37% 39% 36% 32% Americas Y/Y growth -47% -50% 12% 117% 251% 416% 264% 93% 59% 21% -13% -21% -23% Seq. growth -48% 1% 93% 112% -15% 49% 36% 13% -30% 14% -2% 2% -32% % of Total Shipment 35% 29% 36% 48% 48% 49% 59% 50% 50% 47% 45% 38% 43% APAC Y/Y growth -65% -48% 10% 233% 612% 421% 132% 127% 16% 4% 51% 136% -1% Seq. growth 0% 26% 55% 70% 114% -8% -31% 66% 9% -18% 1% 160% -54% % of Total Shipment 3% 3% 3% 4% 9% 6% 3% 4% 7% 5% 5% 10% 8% Overseas - Annual Y/Y growth 12% 155% 13% China, PRC % of Total Shipment 21% 22% 18% 14% 8% 10% 4% 3% 5% 12% 12% 16% 17% Y/Y growth 84% 69% 16% 104% -8% 43% -44% -58% -8% 46% 208% 441% 216% Seq. growth 8% 26% 22% 23% -51% 96% -52% -8% 6% 212% 1% 62% -38% China - Annual Y/Y growth 61% -23% 138% Source: Company data, Jefferies Chart 3: Revenue by Geography Revenue By Geography (HK$ mn) 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 Overseas ,813 1,372 1,828 2,066 2,941 1,996 2,185 2,546 2,842 1,736 % of Total Revenue 84% 85% 87% 92% 93% 92% 96% 95% 94% 88% 89% 89% 82% Y/Y growth -53% -39% -3% 89% 166% 200% 121% 62% 45% 20% 23% -3% -13% Seq. growth -46% 18% 54% 94% -24% 33% 13% 42% -32% 9% 17% 12% -39% Overseas - Annual 3,874 8,207 9,569 Y/Y growth -4% 112% 17% China % of Total Revenue 16% 15% 13% 8% 7% 8% 4% 5% 6% 12% 11% 12% 18% Y/Y growth -21% -13% -12% 24% 3% 43% -34% 3% 25% 95% 251% 153% 189% Seq. growth -17% 5% 31% 7% -30% 46% -40% 69% -16% 127% 9% 22% -4% China - Annual ,120 Y/Y growth -6% 1% 127% Total ,073 1,960 1,474 1,978 2,156 3,093 2,124 2,476 2,862 3,191 2,105 Source: Company data, Jefferies Chart 4: ASP by Geography ASP by Geography (HK$) 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 Overseas Y/Y growth -18% -17% -19% -5% -11% -14% -15% -21% -6% -4% 15% 6% 11% Seq. growth -11% -3% -5% 15% -16% -6% -6% 7% -1% -4% 13% -1% 3% China, PRC Y/Y growth -57% -48% -24% -39% 13% 0% 16% 145% 37% 34% 14% -53% -9% Seq. growth -23% -16% 8% -13% 43% -25% 26% 83% -20% -27% 7% -25% 56% Blended ASP Y/Y growth -25% -24% -20% -9% -6% -9% -10% -14% -4% -2% 15% -2% 10% Seq. growth -14% -5% -1% 13% -11% -8% -3% 9% -2% -5% 13% -7% 11% Source: Company data, Jefferies page 4 of 12

5 01/ HK 07/08 01/09 07/09 01/10 07/10 01/11 07/11 01/12 01/08 07/08 01/09 07/09 01/10 07/10 01/11 07/11 01/12 Chart 5: Peer comparison Company Name Ticker FX Last Close Market Cap PE PB ROE Jefferies (USD mn) FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E Rating TCL Communication 2618 hk equity HKD % 32.7% 27.2% Buy Nokia NOK US Equity USD , na % na 3.5% Hold Motorola Mobility MMI US Equity USD ,634 na % 3.7% 5.1% Hold Research in Motion RIMM US Equity USD , % 20.3% 9.0% Underperform Apple AAPL US Equity USD , % 41.2% 34.9% Buy HTC 2498 TT Equity NTD , % 43.4% NC ZTE 763 HK Equity HKD , % 14.5% Buy China Wireless 2369 HK Equity HKD % 15.5% NC Foxconn International 2038 HK Equity HKD ,240 na % 5.0% Underperform BYD Electronics 285 HK Equity HKD % 7.9% NC Average % 18.5% 15.4% Source: Company data, Bloomberg for NC companies, Jefferies; closing prices as of April 26th, 2012 Chart 6: TCL Comm Forward PE Band Chart 7: TCL Comm Forward PB Band Share price 12 Share price x x 2x 6 8x 6 1.5x 4 2 6x 4x 4 2 1x 0 0 Source: Bloomberg, Jefferies Stock Price 4.0 x 6.0 x 8.0 x 10.0 x Stock Price 1.0 x 1.5 x 2.0 x 2.5 x Source: Bloomberg, Jefferies page 5 of 12

6 Chart 8: Annual Income Statement HK$ mn E 2013E Revenue 4,361 8,701 10,653 13,119 15,641 % growth -3.9% 99.5% 22.4% 23.2% 19.2% COGS 3,412 6,752 8,325 10,497 12,534 Gross profit 949 1,948 2,328 2,622 3,107 % growth 16.9% 105.4% 19.5% 12.6% 18.5% Gross margin 21.8% 22.4% 21.9% 20.0% 19.9% Operating Expense Research & Development Sales and marketing ,006 1,208 General and administrative Operating Income (5) Operating margin -0.1% 6.2% 4.2% 2.9% 3.2% Net Other income/expense Profit before tax Provision for income taxes (17) effective tax rate 32.5% 5.8% -2.2% 2.8% 6.0% Net income after tax Less: noncontrolling interest 0.0 (0.1) 0.7 (3.8) (2.8) Net income attributable to TCL Comm % Growth -19.3% % 14.0% -10.7% 10.3% Net margin 0.5% 8.1% 7.5% 5.4% 5.0% Basic EPS (HK$) Diluted EPS (HK$) Source: Company data, Jefferies page 6 of 12

7 Chart 9: Quarterly Income Statement HK$ mn Q1-12 Q2-12E Q3-12E Q4-12E Q1-13E Q2-13E Q3-13E Q4-13E Revenue 2,105 2,954 3,639 4,421 2,764 3,695 4,102 5,080 % growth -0.9% 19.3% 27.2% 38.5% 31.3% 25.1% 12.7% 14.9% COGS 1,687 2,395 2,910 3,506 2,226 2,961 3,287 4,059 Gross profit ,020 % growth -11.5% 3.3% 22.2% 27.6% 28.4% 31.2% 11.7% 11.5% Gross margin 19.9% 18.9% 20.0% 20.7% 19.5% 19.9% 19.9% 20.1% Operating Expense Research & Development Sales and marketing General and administrative Operating Income (70) Operating margin -3.3% 1.0% 4.2% 6.1% 0.5% 3.6% 3.2% 4.4% Net Other income/expense Profit before tax Provision for income taxes effective tax rate 21.9% 2.0% 2.0% 2.0% 6.0% 6.0% 6.0% 6.0% Net income after tax Less: noncontrolling interest (2.1) (0.4) (0.5) (0.6) (0.9) (0.6) (0.6) (0.7) Net income attributable to TCL Comm % Growth -85.7% -43.8% 5.8% 76.7% 266.6% 73.0% -12.0% -15.9% Net margin 1.2% 4.0% 6.2% 7.7% 3.4% 5.6% 4.9% 5.7% Basic EPS (HK$) Diluted EPS (HK$) Source: Company data, Jefferies page 7 of 12

8 Chart 10: Annual Balance Sheet HK$ mn E 2013E Inventories ,227 1,349 Trade receivables 1,304 2,535 2,585 2,869 3,156 Factored trade receivables Prepayments, deposits and other receivables ,053 Pledged deposits 1,187 6,201 6,092 6,092 6,092 Cash and cash equivalents 1,170 1,345 1,187 1,702 2,012 Other current assets 1, Current assets Property and equipment Other acquired intangible assets Goodwill Other non current asset Non-current asset ,773 2,034 2,122 Total assets 6,766 12,254 14,027 15,465 16,368 Interest bearing bank and other borrowings 1,461 6,488 7,222 7,222 7,222 Trade and notes payables 1,074 1,843 1,952 2,343 2,577 Bank advances on factored trade receivables Other payables and accruals 737 1,214 1,431 1,574 1,732 Due to related companies Other current liabilities 1, Current liabilities 5,310 10,014 11,315 11,849 12,240 Deferred tax liabilities Other long term liabilities Non-current liabilities Total liabilities 5,671 10,031 11,354 11,887 12,279 Total Shareholders' Equity 1,095 2,222 2,673 3,577 4,089 Total Liabilities and Equity 6,766 12,254 14,027 15,465 16,368 Current Ratio Quick Ratio Total Cash 2,357 7,546 7,279 7,794 8,104 Total Debt 1,461 6,488 7,222 7,222 7,222 Net Cash 896 1, Days Sales Of Inventory (DSI) Days Sales Outstanding (DSO) Days Payable Outstanding (DPO) Return on Average Equity (ROAE) 2% 42% 33% 23% 21% Return on Average Assets (ROAA) 0% 7% 6% 5% 5% Return on Average Capital Employed (ROACE) 7% 41% 35% 26% 30% Total Debt to Capital 57% 74% 73% 67% 64% Total Debt to Equity 133% 292% 270% 202% 177% Net Debt to Equity NM NM NM NM NM Net Gearing (Total Debt/Total Asset) 22% 53% 51% 47% 44% Average Shares Outstanding (MM) , , , ,117.0 Book Value / Share Cash/Share Net Cash / Share Source: Company data, Jefferies page 8 of 12

9 Company Description TCL Communication Technology is a manufacturer of a wide range of mobile handsets. The company currently offers its products under two brands: The TCL brand for the domestic Chinese market, and the Alcatel brand for the overseas market. Analyst Certification I, Branden Chen, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I, Anita Chen, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I, Cynthia Meng, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. Registration of non-us analysts: Branden Chen is employed by Jefferies Hong Kong Limited, a non-us affiliate of Jefferies & Company, Inc. and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies & Company, Inc., a FINRA member firm, and therefore may not be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst. Registration of non-us analysts: Anita Chen is employed by Jefferies Hong Kong Limited, a non-us affiliate of Jefferies & Company, Inc. and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies & Company, Inc., a FINRA member firm, and therefore may not be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst. Registration of non-us analysts: Cynthia Meng is employed by Jefferies Hong Kong Limited, a non-us affiliate of Jefferies & Company, Inc. and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies & Company, Inc., a FINRA member firm, and therefore may not be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst. As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in this report receives compensation based in part on the overall performance of the firm, including investment banking income. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Aside from certain industry reports published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analyst's judgement. 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For Hold rated stocks with an average stock price consistently below $10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. For Underperform rated stocks with an average stock price consistently below $10, the expected total return (price appreciation plus yield) is minus 20% within a 12- month period. NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/ or Jefferies policies. CS - Coverage Suspended. Jefferies has suspended coverage of this company. NC - Not covered. Jefferies does not cover this company. Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policy or applicable securities regulations prohibit certain types of communications, including investment recommendations. Monitor - Describes stocks whose company fundamentals and financials are being monitored, and for which no financial projections or opinions on the investment merits of the company are provided. Valuation Methodology Jefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and expected total return over the next 12 months. The price targets are based on several methodologies, which may include, but are not restricted to, analyses of market risk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF, P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value, dividend returns, and return on equity (ROE) over the next 12 months. Conviction List Methodology 1. The aim of the conviction list is to publicise the best individual stocks ideas from the Jefferies Global Research. page 9 of 12

10 2. Only stocks with a Buy rating are allowed to be included in the recommended list. 3. Stocks are screened for minimum market capitalisation and adequate daily turnover. Furthermore, a valuation, correlation and style screen is used to ensure a well-diversified portfolio. 4. Stocks are sorted to a maximum of 30 stocks with the maximum country exposure at around 50%. Limits are also imposed on a sector basis. 5. Once a month, analysts are invited to recommend their best ideas. Analysts stock selection can be based on one or more of the following: non-consensus investment view, difference in earnings relative to Consensus, valuation methodology, target upside/downside % relative to the current stock price. These are then assessed against existing holdings to ensure consistency. Stocks that have either reached their target price, been downgraded over the course of the month or where a more suitable candidate has been found are removed. 6. All stocks are inserted at the last closing price and removed at the last closing price. There are no changes to the conviction list during the month. 7. Performance is calculated in US dollars on an equally weighted basis and is compared to MSCI World AC US$. 8. The conviction list is published once a month whilst global equity markets are closed. 9. Transaction fees are not included. 10. All corporate actions are taken into account. Risk which may impede the achievement of our Price Target This report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, the financial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Past performance of the financial instruments recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, and income from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, financial and political factors. If a financial instrument is denominated in a currency other than the investor's home currency, a change in exchange rates may adversely affect the price of, value of, or income derived from the financial instrument described in this report. In addition, investors in securities such as ADRs, whose values are affected by the currency of the underlying security, effectively assume currency risk. Other Companies Mentioned in This Report Apple Inc. (AAPL: $610.00, BUY) Foxconn International Holdings (2038 HK: HK$4.49, UNDERPERFORM) France Telecom SA (FTE FP: 10.48, BUY) Motorola Mobility Holdings, Inc. (MMI: $38.52, HOLD) Nokia (NOK1V FH: 2.83, HOLD) Research in Motion, Inc. (RIMM: $13.65, UNDERPERFORM) Vodafone plc (VOD LN: p171.75, BUY) ZTE Corporation (763 HK: HK$19.28, BUY) Distribution of Ratings IB Serv./Past 12 Mos. Rating Count Percent Count Percent BUY % % HOLD % % UNDERPERFORM % % page 10 of 12

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