Company Report China Merchants Securities (HK) Co., Ltd. Hong Kong Equity Research TCL Comm (2618 HK) NDR takeaways: Conservative shipment outlook; Positive on stable margin Expect FY15E Smartphone/tablets/feature phone shipment at 45-5mn/5mn/3mn units; Potential upside from better-than-expected Idol 3/ Alcatel OneTouch Watch sales Stable GPM on lower material cost and better geographic mix Maintain Neutral with TP of HK$6.18, based on 7.x FY15E P/E (down-cycle P/E mean) Conservative shipment guidance; Potential upside from flagship Idol 3 rollout/ higher Watch sales After weak 2Q15 (revenue/ NP: -2%/ +5%YoY) results, TCLC mgmt. has cut their FY15E sales guidance to 1YoY from 3YoY. By product, we expect FY15E smartphone/ tablet shipment to be 45-5mn/5mn units while ASP is at US$7+/ US$9-1 respectively. As the decline in feature phone is not as severe as previously expected (rebounded in 2Q15 to 7.9mn, up 31%QoQ), we estimate FY15E shipment to be around 3mn units. Middle East (Iran) and Africa (Nigeria) are the key growth drivers in FY15E. Potential upside in 2H15E comes from flagship model Idol 3 rollout (ASP: US$12-15) and better-than-expected Alcatel OneTouch watch sales (ASP: US$15-16; GPM: >2). Stable margin on lower cost and better geographic mix GPM was up by.4ppt to 19.5% in 2Q15, and mgmt. remains positive on stable FY15E margin (vs. FY14 GPM at 19.3%) despite concerns on sluggish smartphone market, thanks to (1) lower material cost on some components (e.g. metal casing) and (2) better geographic mix with lowermargin (approx. 1) China sales contribution decreased to <1. Maintain NEUTRAL on dim outlook Trading at 6.5x of our FY15E EPS, we believe the valuation is fair given increasing concerns on shipment slowdown and pricing pressure. We maintain NEUTRAL with TP HK$6.18, based on 7.x FY15E P/E (in-line with its down-cycle P/E mean). Upside risks include faster economic recovery, stronger smartphone sales and less severe pricing pressure. Financials HKD mn 213 214 215E 216E 217E Revenue 19,362 3,691 33,223 36,257 38,243 Growth (%) 61% 59% 8% 9% 5% Net profit 313 1,93 1,19 1,28 1,3 Growth (%) -251% 249% 2% 9% 8% EPS (HKD).28.89.88.96 1.3 DPS (HKD).1.4.31.34.36 P/E (x) 2.2 6.3 6.3 5.8 5.4 P/B (x) 1.5 1.6 1.4 1.2 1.1 ROE (%) 1.8% 26.1% 22.6% 21.2% 19.9% Source: Company data, CMS (HK) estimates Alex Ng 852-3189 6125 nglh@cmschina.com.hk WHAT S NEW N/A NEUTRAL Previous Price 12-month Target Price (Potential upside) Previous Price Performance (%) 2-2 -4 Marley Ngan 852-31896635 marleyngan@cmschina.com.hk NEUTRAL HK$5.58 HK$6.18 (+11%) -6 Aug/14 Dec/14 Mar/15 Jul/15 HK$6.18 Source: Bigdata % 1m 6m 12m 2618 HK (18.7) (21.4) (46.6) HSI (4.5) (2.8) (3.3) Hardware Technology Hang Seng Index 23,815 HSCEI 1,962 Key Data 52-week range (HK$) 5.-1.9 Market cap (HK$ mn) 727 Avg. daily volume (mn) 5.59 BVPS (HK$) 3.28 Shareholdings Structure TCL Corporation 62.4% No. of shares outstanding 1,224.2M Free float 75.1% Related Research 2618 HSI Index 1. TCL Comm (2618 HK) FY15 guidance cut; D/G to NEUTRAL on uncertainties (13/8/215) 2. TCL Comm (2618 HK) NDR takeaway: Profitability outlook intact; Reiterate BUY (1/3/215) To access our research reports on the Bloomberg terminal, type CMHK <GO> 1
Focus charts Figure 1: 2Q15 ASP down by 1YoY on higher feature phone mix mn units 18 16 14 12 1 8 6 4 2 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15E 4Q15E USD 58 Feature Phone Smartphone & Tablets Overall ASP (RHS) 56 54 52 5 48 46 44 42 Figure 2: Stable GPM in 2H15 with new mid-end smartphone (Idol 3) launch in America/EMEA despite 2Q15 high GPM (+4ppts to 19.5%) 25% 2 15% 1 5% -5% -1-15% Gross Margin Operating Margin Net Profit Margin Figure 3: Shipment breakdown by product 1 9 17% 27% 8 34% 4 46% 7 53% 58% 62% 62% 56% 6 5 4 83% 73% 3 66% 6 54% 2 47% 42% 38% 38% 44% 1 Figure 4: Revenue breakdown product 1 8 49% 63% 61% 69% 6 78% 81% 87% 9 9 91% 4 51% 2 37% 39% 31% 22% 19% 13% 1 1 9% Feature Phone Smartphone & Tablets Feature Phone Smartphone & Tablets Figure 5: Shipment breakdown by region 1 Figure 6: Revenue breakdown by region 1 8 6 4 2 28% 35% 35% 37% 4 37% 36% 33% 27% 41% 2% 9% 6% 15% 1 6% 8% 4% 4% 7% 6% 12% 8% 12% 6% 1 1 3% 12% 8% 47% 44% 49% 48% 55% 48% 5 49% 56% 48% 8 6 4 2 26% 33% 32% 22% 28% 23% 34% 37% 49% 1 5% 1% 57% 2% 11% 6% 2% 4% 7% 5% 1 12% 7% 1 4% 1 4% 4% 2% 5% 55% 53% 5 53% 55% 59% 53% 49% 42% 37% Americas China APAC EMEA Americas China APAC EMEA To access our research reports on the Bloomberg terminal, type CMHK <GO> 2
NDR takeaways: Positive on stable margin; conservative on shipment amid weak macro We hosted post-result NDR with TCLC on 17 Aug (Mon) and below are the key takeaways: 1. Conservative on shipment revenue guidance; Possible upside from Idol 3/ Alcatel OneTouch watch After weak 2Q15 (revenue/ NP: -2%/ +5%YoY) results, TCLC mgmt. has cut their FY15E sales guidance to 1YoY (from previous 3YoY). By product, we estimate FY15E smartphone/ tablet shipment to be 45-5mn/ 5mn units while ASP is at US$7+/ US$9-1 respectively. In 1H15, 18mn smartphones and 1.7mn tablets were shipped. For feature phone, as the decline is not as negative as previously estimated (rebounded in 2Q15 to 7.9mn units, up 31%QoQ), we expect FY15E feature phone shipment to be around 3mn units. TCLC targeted Middle East (Iran) and Africa (Nigeria) to be the key growth drivers in FY15E with new subsidiary being set up in Dubai. Potential upside in 2H15E comes from flagship model Idol 3 roll-out (ASP: US$12-15) and better-than-expected Alcatel OneTouch watch sales (ASP: US$15-16; GPM: > 2). 2. Positive on stable gross margin TCLC has achieved margin expansion in 2Q15 (GPM: up.4ppt to 19.5%) and mgmt. remains positive to maintain stable GPM in FY15E (vs. FY14 GPM at 19.3%) amid concerns on sluggish smartphone market. Mgmt explained that as China revenue contribution is low at <1 of total, China lower GPM which is at 1 breakeven level will be offset by 9 overseas sales with GPM at 18-19%. Also, mgmt. sees parts of the material cost going down. Currently, we estimate 7 of COGS is build-up material cost with 2/2/2/1 cost split for chips/memory/display/camera components 3. Limited impacts from currency fluctuation; Beneficiary of RMB depreciation Mgmt expects minimal impacts from currency fluctuation as TCLC has continued its hedging strategy. 7/1/1 of revenue is received in USD/Euro/RMB while 7/3 of cost is paid in USD/RMB. Given its limited exposure to RMB in terms of revenue, TCLC is expected to be the beneficiary of RMB depreciation. Other takeaways: - Maintain dividend payout at 3-4 - FY15E capex will be around HK$8mn, mainly for setting up R&D centre in Shenzhen - 7 Utilization rate with 15-2mn units annual capacity Figure 7: ASP to rebound in 2H15E with new mid-end smartphone launch (Idol 3) in America and EMEA FY14 1Q15 2Q15 3Q15E 4Q15E FY15E FY16E FY17E Shipment (mn unit) 32. 6.1 7.9 8.7 9.4 32.2 3.6 29. Feature Phone ASP (HKD) 143.6 115.3 75.6 75.6 75.6 83.1 78.9 73.4 Revenue (HKD mn) 4,6 7 6 66 713 2,673 2,412 2,131 Shipment (mn unit) 41.5 9.7 1. 13. 16.2 48.9 54.7 6.2 Smartphone & Tablet ASP (HKD) 629.5 618.1 591.5 621.1 652.1 624.7 618.5 599.9 Revenue (HKD mn) 26,1 6, 5,9 8,54 1,57 3,524 33,845 36,112 Blended ASP (USD) 53.6 54.7 47.1 51.5 56.4 52.5 54.5 54.9 Total Revenue (HKD mn) 3,7 6,7 6,5 8,714 11,283 33,197 36,257 38,243 To access our research reports on the Bloomberg terminal, type CMHK <GO> 3
Valuation Maintain NEUTRAL with TP of HK$6.18 Trading at 6.3x our FY15E EPS, we believe the valuation is fair given 2H15 outlook uncertainties and lack of nearterm catalysts. We maintain NEUTRAL with TP HK$6.18 (11% upside), based on 7.x FY15E P/E, in-line with its down-cycle P/E mean. Upside risks include faster economic recovery in EM, stronger-than-expected Idol 3 sales and less severe pricing pressure. Figure 8: 1-yr fwd P/E bands Figure 9: 1-yr fwd P/B bands Price (HKD) 12 Closing Px 6x 7x 8x 9x 1x Price (HKD) 14 Closing Px 1.x 1.5x 2.x 2.5x 3.x 1 12 8 1 6 4 2 Jan/11 Jan/12 Jan/13 Jan/14 Jan/15-2 -4 8 6 4 2 Jan/11 Jan/12 Jan/13 Jan/14 Jan/15 Peers Comparison Figure 1: 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 NEUTRAL 97 5.58 6.18 11% 6.3 5.8 1.4 1.2 23% 23% Coolpad 2369 HK SELL 927 1.65 1.5-36% 13.8 12.7 1.9 1.6 13% 13% ZTE 763 HK NR 13,16 17.38 N/A N/A 16.4 14.1 1.9 1.8 13% 13% Sunny Optical 2382 HK BUY 2,18 14.26 16.21 14% 14.8 12. 3.1 2.6 21% 21% AAC Tech 218 HK NEUTRAL 6,639 41.9 42.67 2% 14.7 12.5 3.8 3.2 26% 26% Truly Intl 732 HK BUY 859 2.29 2.76 21% 5.6 5.1.9.8 16% 16% BYD E 285 HK NR 1,832 6.3 N/A N/A 8. 6.5 1.1.9 14% 14% Catcher 2474 TT NR 8,542 346.5 N/A N/A 11.3 9.9 2.4 1.9 23% 23% Largan 38 TT NR 12,749 297. N/A N/A 16.6 13.6 6.2 4.8 43% 43% Average 11.95 1.24 2.53 2.11 21% 21% Source: CMS (HK), Bloomberg To access our research reports on the Bloomberg terminal, type CMHK <GO> 4
Financial Summary Statement of financial position HKD million 213 214 215E 216E 217E Current Assets 11,866 16,6 17,57 18,92 19,752 Cash & equivalents 142 473 3,498 3,11 5,519 Trading investments Trade notes Trade receivables 5,551 7,873 6,145 7,563 5,639 Other receivables 1,67 1,959 2,117 2,31 2,437 Inventories 2,649 3,293 2,89 3,539 3,751 Other current assets 1,854 2,47 2,47 2,47 2,47 Non-current assets 2,557 3,691 3,796 3,871 3,866 Investment property PPE 941 1,439 1,59 1,555 1,529 Intangible assets 1,21 1,514 1,514 1,514 1,514 Other non-current assets 47 694 729 759 779 Total assets 14,423 19,696 2,852 22,791 23,618 Liquid Liabilities 11,221 15,48 15,778 16,914 16,883 Bank loans 2,25 3,941 3,941 3,941 3,941 Trade payables 3,875 5,167 5,139 6,111 5,756 Prepaid Accounts Other liquid liabilities 5,141 6,3 6,697 6,862 7,187 Long term Liabilities 289 19 173 188 198 Loans 196 Others 93 19 173 188 198 Total Liabilities 11,51 15,517 15,95 17,12 17,81 Issued capital 1,162 1,221 1,221 1,221 1,221 Capital reserves Reserves 1,747 2,868 3,589 4,374 5,219 NCI 4 9 92 94 97 Parents 2,99 4,89 4,81 5,595 6,44 Total equity and liabilities 14,423 19,696 2,852 22,791 23,618 Statement of cash flows HKD million 213 214 215E 216E 217E CF from OA 64 2,83 3,712 326 3,123 PBT 298 1,149 1,152 1,254 1,35 D&A 1,136 1,351 23 255 275 Finance costs 15 1 136 136 136 Investment income Changes of WC (762) (184) 2,338 (1,128) 1,552 Others (135) (173) (143) (191) (19) CF from IA (1,263) (2,264) (3) (3) (25) Capital expenditure (484) (684) (3) (3) (25) Other investments (779) (1,58) CF from FA (23) 434 (388) (423) (455) Borrowings 18,185 19,174 Share capital 78 161 Changes of reserves Dividends (274) (388) (423) (455) Others (18) (19) Net cash flow (853) 253 3,24 (397) 2,418 Statement of comprehensive income HKD million 213 214 215E 216E 217E Revenues 19,362 3,691 33,223 36,257 38,243 Cost of sales (15,69) (24,774) (26,869) (29,332) (3,939) Selling exp (1,611) (2,42) (2,248) (2,429) (2,562) Admin exp (946) (1,246) (1,561) (1,722) (1,797) Op expenses (3,267) (4,87) (5,63) (5,531) (5,815) Op Profit 45 1,249 1,291 1,394 1,489 Fin. costs (15) (1) (136) (136) (136) Impairments FV changes Inv income (2) () (3) (3) (3) Non-op inc Non-op exp PBT 298 1,149 1,152 1,254 1,35 Taxes 18 (41) (4) (44) (47) PAT 316 1,18 1,111 1,21 1,32 NCI 3 15 2 2 2 Net Profit 313 1,93 1,19 1,28 1,3 EPS (HKD).28.89.88.96 1.3 Ratios YoY growth rate 213 214 215E 216E 217E Revenue 61% 59% 8% 9% 5% Op profit -255% 28% 3% 8% 7% Net profit -251% 249% 2% 9% 8% Profitability Gross margin 19% 19% 19% 19% 19% NP margin 2% 4% 3% 3% 3% ROE 11% 26% 23% 21% 2 ROIC 6% 22% 23% 28% 31% Liquidity D/A 2 2 19% 17% 17% ND/A 18% 18% 2% 4% -7% Liquid ratio 1. 1. 1.1 1.1 1.2 Quick ratio.8.8.9.9.9 Operating efficiency Asset turnover 1.2 1.9 1.9 1.9 1.9 Inventory turnover 4.8 7.5 9.3 8.3 8.2 AR turnover 2.5 3.9 5.4 4.8 6.8 AP turnover 2. 3.1 4.4 3.9 5.5 Per share ratios (HKD) EPS.28.89.88.96 1.3 CFPS 1.83 1.75 2.95.26 2.48 BVPS 3.68 3.5 3.9 4.53 5.2 DPS.1.4.31.34.36 Valuation PE 2.2 6.3 6.3 5.8 5.4 PB 1.5 1.6 1.4 1.2 1.1 EV/EBITDA 5.6 4.5 6.6 6.3 5. Source: Company, CMS(HK) To access our research reports on the Bloomberg terminal, type CMHK <GO> 5
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 http://www.newone.com.hk/cmshk/en/disclosure.html. Disclaimer This document is prepared by China Merchants Securities (HK) Co., Limited ( CMS HK ). 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