TCL Communication Technology Holdings Limited 2618.HK / 2618 HK

Transcription

1 Company Update 03 Mar 2015 TCL Communication Technology Holdings Limited 2618.HK / 2618 HK BUY Maintain Hong Kong / China Mobile technology Mobile devices Upbeat 2014 results, diverse products popping up HK$7.61* Target price: HK$10.30 Financials in-line, NP tripled TCL Comm reported a revenue of HK$30.7b and NP of HK$1.09b in 2014, up 59% and 251% respectively, both within consensus. Revenue soared on 33.1% growth in shipment and 17.5% blended ASP improvement. GPM is maintained at 19.3% for full year and 19.2% for 4Q due to 9.8% and 3.2% ASP improvement YoY and QoQ respectively. NPM improved 2.0 ppts to 3.6% on stringent cost control, leading to OPEX to revenue ratio down to 16.8% compared 18.7% in QoQ, revenue and NP grew 37.5% and 25% to HK$10.7b and HK$368m respectively, beating our estimates. The company declared a final dividend of 26 HK cents on top of 12 HK cents interim dividend, translating into 42% payout ratio for 2014 representing a full-year yield of almost 5%. Achieving 30% top-line growth by sound strategy We believe TCL Comm s guidance of 30% revenue growth is reasonable by their multi-tier strategy. For the low tier, they intend to focus efforts on 4G handset and tablets releases. On the mid/high-tier, the company expects to release value-for-money handsets with innovations. We opine the strategy to be sound in terms of capturing market share in emerging regions and maintaining ASP improvement. In addition, the management unveiled its Double + Strategy which consists of Smart + Internet and Product + Service. Diverse products in pipeline to sustain growth TCL Comm announced an award-winning smart watch in January s CES 2015 which will be available from late 1Q15. For low/mid-end phones, TCL Comm has updated its portfolio with Pixi 3 and Pop 2; as well as the new Pop 10 tablet which doubles as an entry level 2-1 computer. For mid/high-end handsets, the company will release idol 3 which features a rare symmetric design which allows users to use the phone upside down. We believe phone innovation and watch-phone integration, if well received, could help TCL Comm gain market share and improve ASP in the near term. Upside: 35% HSI: 24, *Closing price as at 02 Mar 2015 Share Data 52week Hi/Lo (HK$) 10.96/6.60 Avg. daily t/o (US$m) Market Cap. (US$m) 1,201 Total issued shares (m) 1,224 Auditor E&Y Public float (%) 33.95% Major shareholder: TCL Corporation 60.07% Value Partners 5.98% Source: HKEx & Bloomberg Company Profile TCL Comm manufactures and sells mobile devices and internet products. The company sells to over 120 countries worldwide including China, the Americas and EMEA. Share Price Chart Maintain BUY rating and TP at HK$10.30 We maintain our 2015/16 and added 2017 revenue and NP forecasts at HK$39.4b/51.3b/65.1b and HK$1.24b/1.58b/1.97b respectively. Our TP of HK$10.30 is based on 10x 2015E P/E, implying 35% upside. Current stock price implies only 7.1x 2015E and 5.6x 2016E P/E, which makes this stock very attractive. Earnings Forecasts & Valuation Summary Year ended 31 Dec 2013A 2014A 2015E 2016E 2017E Sales (HK$ m) 19,362 30,691 39,406 51,331 65,126 EBITDA (HK$ m) 484 1,417 2,881 3,713 4,697 Net profit (HK$ m) 313 1,092 1,236 1,575 1,973 EPS - Fully diluted (HK$ ) YoY change (%) N/A Consensus EPS PER (x) DPS (HK$) * N/A Yield (%) N/A ROE (%) Net debt/equity (%) Source: Company data, Sunwah Kingsway Research estimates Source: Bloomberg Phelix Lee (852) Phelix.lee@sunwahkingsway.com Kingsway Financial Services Group Limited Please see the important disclaimer and disclosures (if any) at the end of this report

2 2014 results: Actual vs Forecast FY14 FY14 SWK Actual Expectation Variance 4Q14 4Q14 SWK Variance Comment Actual Expectation Blended ASP (US$) % % Faster migration to smartphones Revenue (HK$'m) 30,691 30, % 10,695 10, % Gross profit (HK$'m) 5,918 5, % 2,055 1, % Gross profit margin 19.3% 18.2% 1.1 ppt 19.2% 18.8% 0.4 ppt ASP higher than expected Net profit (HK$'m) 1, % % Basic EPS (HK Cents) % % estimates Upcoming product releases of TCL Comm TCL Comm 03 Mar

3 Revenue splits of TCL Comm by geography: 4Q13 (left) vs. 4Q14 (right) While APAC and China sales gained importance in 4Q14, sales in the Americas nearly doubled for the whole year. The importance of the Americas is stressed in the TCL Comm s announcement where it mentioned around 12% of its revenue is generated from one single customer in the area. Of course, new business from anywhere is always highly regarded; the company entered the South Korean recently by distributing its handsets through a top-tier carrier. Margins of TCL Comm steady for past 8 quarters 25% 20% 15% 10% 5% 0% -5% -10% -15% GPM OPM NPM 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 TCL Comm 03 Mar

4 ASP in HK$ ASP in HK$ Blended ASP still trending up through smartphone adoption % % % % % 53% Blended ASP (LHS) Smartphone proportion % (RHS) 58% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 0.0% ASP uptrend is safe even if smartphone ASP slows in near-term Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 Smartphone ASP Non-smartphone ASP Blended ASP We reckon on top of smartphone substitution, ASP can be enhanced through its US$149 smartwatch and functional tablets like Pop 10. Our ASP assumption is that the company will compete mainly on price and fast-fashion positioning. Success in complementing the above approaches with its Double + Strategy will very likely beat our forecasts. Key Risks - Developing mobile services steer resources away from hardware R&D to no avail - Expectations of 4G adoption and phone replacement may not realize - Currency swings and geopolitical events continue to haunt company s ability to collect receivables TCL Comm 03 Mar

5 Financial forecasts TCL Comm (2618) Year ended 31 Dec F 2016F 2017F Year ended 31 Dec F 2016F 2017F Income Statement (HK$m) Ratios Turnover 19,362 30,691 39,406 51,331 65,126 Gross margin (%) YoY% Operating margin (%) COGS (15,690) (24,774) (31,958) (41,681) (52,882) Net margin (%) Gross profit 3,672 5,918 7,448 9,650 12,244 R&D exp/sales (%) Gross margin 18.97% 19.28% 18.90% 18.80% 18.80% Selling & dist'n exp/sales (%) Other income Admin exp/sales (%) R&D (1,064) (1,479) (1,497) (1,899) (2,410) Payout ratio (%) Selling & distribution (1,611) (2,420) (3,074) (4,004) (5,080) Effective tax (%) Admin (946) (1,246) (1,616) (2,053) (2,540) Total debt/equity (%) Other opex (158) (105) (236) (308) (391) Net debt/equity (%) Total opex (3,267) (4,669) (5,847) (7,654) (9,773) Current ratio (x) Operating profit (EBIT) 405 1,249 1,601 1,997 2,471 Quick ratio (x) Operating margin 2.09% 4.07% 4.06% 3.89% 3.79% Provisions Inventory T/O (days) Finance costs (105) (100) (95) (65) (73) AR T/O (days) Profit after financing costs 300 1,149 1,506 1,931 2,399 AP T/O (days) Associated companies & JVs (2) (0) Cash conversion cycle (days) Pre-tax profit 298 1,149 1,506 1,932 2,398 Tax 18 (41) (274) (345) (430) Asset turnover (x) Minority interests Financial leverage (x) Net profit 313 1,093 1,231 1,585 1,966 EBIT margin (%) YoY% (250.8) Interest burden (x) Net margin 1.62% 3.56% 3.12% 3.09% 3.02% Tax burden (x) EBITDA 484 2,095 2,885 3,716 4,700 Return on equity (%) 12.9% 26.7% 24.6% 25.0% 24.6% EBITDA margin 2.50% 6.83% 7.32% 7.24% 7.22% ROIC (%) 8.0% 23.6% 22.2% 23.4% 23.3% EPS (HK Cents) YoY% DPS (HK Cents) Year ended 31 Dec F 2016F 2017F Year ended 31 Dec F 2016F 2017F Cash Flow (HK$m) Balance Sheet (HK$m) EBITDA 484 2,095 2,885 3,716 4,700 Fixed assets 1,070 1,598 1,559 1,525 1,498 Chg in working cap (762) ,148 1,917 Intangible assets 1,210 1,514 1,469 1,469 1,469 Others 1,301 (1,333) (1,865) (646) (3,083) Associated companies & JVs Operating cash 1, ,866 4,218 3,534 Long-term investments Interests paid (16) (105) (100) (95) (65) Other non-current assets Interests income (113) (69) (80) (86) (86) Non-current assets 2,557 3,691 3,456 3,423 3,395 Tax (119) (41) (274) (345) (430) Net cash from operations ,412 3,692 2,952 Inventories 2,649 3,293 7,564 6,140 11,246 AR 5,551 7,873 8,753 11,498 13,839 Capex + Investments (1,543) (3614) (2008) (2508) (3048) Prepayments & deposits 1,151 1,492 1,482 1,482 1,482 Interest + Dividends received Pledged deposits 1,698 1,914 1,758 1,758 1,758 Change of non-cash equiv. deposits Other current assets ,665 1,970 2,230 Sales of assets Cash , Investing cash (1,263) (3,325) (1,728) (2,219) (2,759) Current assets 11,866 16,006 21,998 23,848 31,315 AP 3,875 5,167 8,142 9,216 12,807 FCF (488) (2672) (316) Tax Issue of shares Accruals & other payables 3,148 4,953 3,502 4,406 5,605 Buy-back Bank loans 2,690 3,941 6,343 4,350 4,874 Minority interests Factored advances ,278 1,538 Dividends paid 0 (318) (246) (317) (393) Derivatives Net change in bank loans (3,519) 1,540 2,402 (1,993) 524 Other current liabilities 1, ,238 1,426 1,643 Others 3,211 (330) Current liabilities 11,706 15,408 20,251 20,728 26,520 Financing cash (230) 1,053 2,914 (2,005) 391 Bank loans (1,619) 2,598 (533) 584 Other loans/financing Net change in cash (828) (240) Deferred tax Adj Other non-current liabilities Opening cash ,001 MI Closing cash Non-current liabilities CFPS (HK$) (0.736) (0.200) Net assets/net Equity 2,425 4,089 5,002 6,341 7,989 Share capital 1,162 1,221 1,221 1,221 1,221 Reserves 1,747 2,868 3,781 5,120 6,769 Total debts 2,886 3,941 6,343 4,350 4,874 Net cash/(debts) (1,046) (1,553) (3,809) (1,591) (2,355) BVPS (HK$) estimates TCL Comm 03 Mar

6 Disclaimer This document is not an offer to sell or the solicitation of an offer to buy or subscribe for any securities. The securities referred to in this document may not be eligible for sale in some jurisdiction. Neither this document nor any portion hereof may be taken distributed or transmitted directly or indirectly into such jurisdiction nor to any resident thereof. Any failure to comply with this restriction may constitute a violation of the applicable laws and regulations and persons into whose possession this document comes should inform themselves about, and observe, any such restrictions. This document has been produced for private circulation and may not be copied, photocopied, duplicated, or redistributed without prior written consent of Kingsway Financial Services Group Limited ( KFS ) and its affiliated companies (collectively, Kingsway Group ). This report is distributed in Hong Kong Special Administrative Region of the People s Republic of China ( Hong Kong ) by KFS which is registered as a licensed corporation under the Securities and Futures Ordinance (Cap.571 of The Laws of Hong Kong) with the Securities and Futures Commission of Hong Kong ( SFC ) and its SFC CE number is ADF346. The information contained in this report has been taken from sources believed to be reliable but no representation or warranty expressed or implied is made as to their accuracy or correctness. This report is published for the assistance of recipients but is not to be relied upon as authoritative or taken in substitution for the exercise of judgment by any recipient. It is not to be construed as an offer, invitation or solicitation to buy or sell any securities of the company or companies covered herein. Any recommendation contained in this report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. All opinions and estimates reflect our judgment on the date of this report and are subject to change without notice. KFS, including its parent, subsidiaries and/or affiliates, may act as lead or co-manager in an offering of the securities of any issuer discussed herein, may from time to time perform financial services or other advisory services for, or solicit financial services or other business from, any issuer. Within the past year, KFS, including its parent, subsidiaries and/or affiliates, may have acted as market maker or traded on a principal basis in the financial instruments of any issuer discussed herein and may act as underwriter, placement agent, advisor or lender to such issuer. KFS, including its parent, subsidiaries, affiliates, shareholders, officers, directors, and employees may have long or short positions in, and buy or sell, the securities, commodities or derivatives (including options) or any other financial instruments thereof, of any issuers. An employee of KFS, including its parent, subsidiaries and/or affiliates, may act as director, or be represented on the boards of directors, of any such entities or issuers. Additional information is available upon request. Copyright 2015 Kingsway Group. All rights reserved. Head Office Hong Kong Kingsway Financial Services Group Limited 7/F, Tower One, Lippo Centre, 89 Queensway, Hong Kong Tel: Fax: Affiliated & Overseas Offices Canada Kingsway Capital of Canada Inc., Suite 900, 10 King Street East, Toronto, Ontario, Canada M5C 1C3 Tel: Fax: China Kingsway Financial Services Group Limited Beijing Representative Office Beijing Kingsway Financial Consultancy Limited Rm 801, Building A, Beijing Fortune Plaza, No.7, Dongsanhuan Zhong Road, Chaoyang District, Beijing, , PRC Tel: Fax: Shanghai Kingsway Financial Consultancy Limited 2039, 20/F, Catic Building, 212 Jiangning Road. Jingan, Shanghai, PRC Tel: Fax: Shenzhen Kingsway Financial Consultancy Limited 701, Tower A, Aerospace Skyscraper, 4019 Shennan Road, Futian District, Shenzhen, , PRC Tel: Fax: TCL Comm 03 Mar