Expand Overseas Market to Stabilize Shipments, Outperform 扩展海外市场以稳定产品出货量, 跑赢大市

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1 GTJA Research 国泰君安研究 : Telecommunication Equipment Sector Ricky Lai 黎柏坚 行业报告 : 通信设备行业 ricky.lai@gtjas.com.hk Expand Overseas Market to Stabilize Shipments, Outperform 扩展海外市场以稳定产品出货量, 跑赢大市 215 Global mobile phone shipments are expected to grow by 3.2% YoY. The slow growth of mobile phone shipments is attributable to the phasing out of feature phones. The CAGR of mobile phone shipments in is expected to be 2.5%. 215 Global smartphone shipments are expected to grow by 12.2% YoY, which is supported by telecom operators reduction of service tariffs and the launch of government policies Broadband China 215 and Internet +. Most Chinese handset makers are expanding overseas markets share in order to overcome the problem of strong market competition in China s mobile industry. ZTE (763 HK), Lenovo (992 HK) and Huawei are some of the examples for approaching overseas markets through the launch of new brands or by acquisitions. Maintain sector rating of Outperform due to the launch of Internet +, Broadband China 215 and One Belt One Road policies by the government and robust product demand in the emerging markets. Our sector top pick for the sector is ZTE (763 HK) with the investment rating of Buy and TP of HK$3.5. The TP represents 23.6x FY15 PER, 21.8x FY16 PER, 2.5x FY17 PER and 3.3x FY15 PBR. Rating: Outperform Maintained 评级 : 跑赢大市 ( 维持 ) Stock Performance 股价表现 % of return HSI Index Lenovo (2.) (4.) (6.) Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Source: Bloomberg, China All Access Coolpad ZTE 预计 215 年全球手机出货量同比增长 3.2%, 手机增长放缓因功能手机被淘汰 年手机出货量的复合增长率预计为 2.5% 预计 215 年全球智能手机出货量将同比增长 12.2%, 因受惠于电信运营商降低服务资费 和政府推出的 宽带中国 215 和 互联网 + 政策 大部份中国手机制造商正扩大海外市场份额, 以改善中国通信行业市场的激烈竞争问题 中兴通讯 (763 HK) 联想 (992 HK) 及华为是当中的例子, 正通过推出新品牌或收购以 扩展海外市场 维持 跑赢大市 的行业评级, 是由于政府推出 互联网 + 宽带中国 215 和 一带一路 政策及新兴市场强劲的产品需求 行业首选为中兴通讯 (763 HK), 投资评级为 买入 及目标价为 3.5 港元 目标价相当于 23.6 倍 15 年市盈率 21.8 倍 16 年市盈率 2.5 倍 17 年市盈率及 3.3 倍 15 年市净率 Company Name 公司名称 Code 编号 Price 股价 (HK$) Rating 投资评级 15 PER 市盈率 16 PER 市盈率 17PER 市盈率 15 ROE 净资产收益率 (%) 15 P/B 市净率 15 Yield 股息率 (%) China All Access Buy ZTE Buy Lenovo Buy Coolpad Sell Weighted Average. 市值加权平均 Outperform Source.. the Companies, Guotai Junan International, Bloomberg. See the last page for disclaimer Page 1 of 6

2 mail 215 Global mobile phone shipments are expected to grow by 3.2% yoy. According to Gartner, global mobile phone shipments in 1Q15 and 214 were 46.3 million (up 2.5% YoY) and 1.9 billion (up 3.9% YoY), respectively. The growth rate in 215 is expected to slow down with the phasing out of feature phone shipments. Five Chinese mobile phone makers were among the top 1 global mobile phone shipments in 1Q15, which included Lenovo (992 HK), Huawei, Xiaomi, TCL Communication (2618 HK) and ZTE (763 HK). Chinese mobile phone makers were able to have strong shipments thanks to its aggressive pricing strategies and extensive network. Lenovo ranked fourth position in 1Q15 global mobile phone shipments with shipments of 19.3 million (up 11.5% YoY) due to the acquisition of Motorola Mobility which significantly improved its market share. The global mobile phone shipments are expected to show a YoY growth of slowing down due to the phasing out of feature phones. Gartner estimates that the global mobile phone shipments in 215 to be 1.94 billion, up 3.2% yoy. Gartner forecast the global mobile phone shipments would grow from 1.9 billion in 214 to 2.1 billion in 218, representing a CAGR of 2.5%. Figure-1: Quarter Global Mobile Phone Shipments and YoY Growth Figure-2: 1Q15 Major Mobile Phone Makers Shipments and YoY Growth Mobile phone shipments (LHS) 5.4% 7.%.% 2.5% % 1Q14 2Q14 3Q14 4Q14 1Q15 1% % -1% -2% -3% -4% -5% Mobile phone shipments (LHS) 12 6% 53.1% % 4% 31.5% 27.4% 18.7% 5.1% 2% 11.6% % % -8.7% -2% 4-4% % % -8% Samsung Apple Microsoft LG Lenovo Huawei Xiaomi TCL ZTE Micromax 215 Global smartphone shipments are expected to grow by 12.2% YoY. Smartphone shipments in 1Q15 were million, up 19.3% YoY. Samsung maintained the highest market share in global smartphone shipments in 1Q15, but recorded 5.1% YoY decline because the Company s shipments in China declined significantly. Apple s shipments in 1Q15 improved by 39.7% YoY thanks to the launch of larger screen to suit for customers preferences. Lenovo acquired the Motorola Mobility branding and able to reach the third position in global market share. Global smartphone demand was lower than market estimations, which was impacted by the sluggish Europe economic growth, strong dollar and plunging oil prices. The growth rate of smartphone demand in emerging markets is estimated to outpace that of the development markets. The emerging markets are still demanding smartphones robustly thanks to lower penetration rate. IDC estimated that the global smartphone shipment in 215 would grow by 12.2% YoY, reaching 1.4 billion units. The annual growth of smartphone demand is slowing down due to market saturation in the developed markets. Mobile phone manufacturers are launching new technologies and step up marketing efforts in order to stimulate product demand and increase product differentiation. According to IDC, smartphone ASP is expected to drop from USD297 in 214 to USD241 in 218, because of the increase in product similarities and intensifying market competition. See the last page for disclaimer Page 2 of 6

3 mail Figure-3: Quarter Smartphone Shipments and YoY Growth Global smartphone shipments (LHS) % % 3% % 25% 25.3% 25.2% 2% 2 15% 16.7% 1% 5% % 1Q14 2Q14 3Q14 4Q14 1Q15 Figure-4: 1Q15 Major Smartphone Makers Shipments and YoY Growth Smartphone shipments (LHS) 12 25% 231.9% 2% % % % 4 49.% % % % % 27.9% 2.3% 34.4% 4.8% % Apple Samsung Huawei Xiaomi LG Lenovo TCL ZTE Microsoft Sony China s overall mobile users declined sequentially in May 215. According to MIIT, Chinese 4G subscribers have reached 2 million by May 215. The net additions of 4G subscribers in May 215 were over 22.8 million, signaling a faster pace of 4G subscribers growth. However, the overall mobile users in China are actually shrinking amid stronger pace of 2G and 3G subscribers losses. There were 61 thousand net losses of mobile users in May 215. The strong 4G subscribers growth is supporting the demand for 4G smartphones. We expect China s 4G subscriber growth can accelerate thanks to the launch of Internet + and telecom operators reduction of service tariff. But China s smartphone market competition is intensified by the rise of new entrants and the aggressive pricing strategies. Most Chinese handset providers position their entry level 4G smartphones with less than RMB4 which is expected to affect the overall market environment. We think Chinese handset providers gross profit margins would be affected. China s smartphone shipments in 1Q15 were 98.8 million, down 4.3% YoY, the first quarter that witnessed a decline. The decline was due to the market saturation, telecom operators reduction of handset subsidies and slowing down of economic growth. China telecom operators had trimmed their handset subsidies in 214. In FY14, China Mobile (941 HK), China Unicom (762 HK) and China Telecom (728 HK) had reduced their handset subsidies by 28.5% YoY to RMB18.8 billion, 4.4% YoY to RMB4.6 billion and 32.7% YoY to RMB15.3 billion, respectively. Instead of offering handset subsidies to subscribers, telecom operators in China subsidize service tariffs. China Mobile is expected to spend RMB17. billion for handset subsidies in FY15, down 9.6% YoY. Chinese economic growth showed signs of slowing down, which is expected to affect handset shipments amid weaker consumption sentiment. In 215, telecom operators are adhering to the State Council of China s advice of reducing service tariffs and roaming service fees. The State Council has launched the Internet + strategy in 215 to boost mobile internet development by advising telecom operators to raise network transmission speed, and lower their service tariffs and roaming fees. Carriers network equipment demand to be stimulated by the launch of Broadband China 215 and One Belt One Road policies. MIIT has launched the Broadband China 215 strategy to expand telecom network facilities by improving network transmission speed and coverage. National Development and Reform Commission of China announced that the total investment in the telecom sectors will be no less than RMB1.3 trillion within three years to support the development of Broadband China strategy. MIIT advises Chinese telecom operators to accelerate the construction of city-wide fiber-optic network and 4G networks, network construction investment in China in 215 with the total investment of RMB43 billion in 215 and the cumulative investment in with less than RMB7 billion. In 215, it is expected to add 8 million new Fiber-To-The Hone (FTTH) accounts, urban cities broadband transmission speed to reach 2M and some cities even to reach M. State Council of China has launched the One Belt One Road plan in 215 to develop transportation network with the co-operation of different countries, which would stimulate the demand for carriers network equipment for building the telecom facilities. ZTE is expected to benefit from more network equipment project related to the policy. See the last page for disclaimer Page 3 of 6

4 m mail Expanding overseas is expected to be the tactic for overcoming the strong market competition issue in China. In light of strong competition in China s handset industry, many Chinese handset makers are expanding overseas market especially the emerging markets, trying to improve product shipments. ZTE has launched different smartphone series, which include Nubia for high end market, Red Bull for low end market and Goo for Japan market, for different regions and market segments. ZTE s smartphone shipments in FY15-17 are expected to grow by 25.%/21.7%/9.6% YoY and reach 6. million/73 million/8 million, respectively. Lenovo is able to improve overseas market share instantly through the acquisitions of Motorola Mobility in 214. We expect Lenovo s smartphone shipments in FY16-18 to grow by 44.7%/17.3%/8.5% YoY and reach 11. million/129. million/14. million, respectively. Coolpad has formed a JV with Qihoo 36 (QIHU US) with the launch of a new brand smartphone Qikoo. Most of Coolpad s product shipments depend on China and the proportion is much higher than other rivals, which is expected to be impacted by China s intensifying market competition. We expect Coolpad s smartphone shipments in FY15-17 to grow by 21.4%/22.9%/14.% YoY and reach 51. million/62.7 million/71.5 million, respectively. Figure-5: ZTE s Smartphone Shipments and YoY Growth Figure-6: Lenovo s Smartphone Shipments and YoY Growth Smartphone Shipments (LHS) YoY Growth (RHS) 25.% 21.7% % 3% 2% 1% % Smartphone shipments (LHS) 52.% 44.7% % 14 5% 4% 3% % 214A 215F 216F 217F Source: the Company, Guotai Junan International. -1% -2% -3% % 8.5% FY14A FY15A FY16F FY17F FY18F Source: the Company, Guotai Junan International. 2% 1% % Figure-7:Coolpad s Smartphone Shipments and YoY Growth 8 6 Smartphone Shipments (LHS) 52.1% 51. YoY Growth (RHS) % 5% 4% % 21.4% 22.9% 14.% 3% 2% 1% Source: the Company, Guotai Junan International F 216F 217F % Maintain the sector rating of Outperform. Due to the launch of Internet +, Broadband China 215, One Belt One Road policies by Government, we maintain the sector s investment rating of Outperform. Our sector top pick is ZTE (763 HK) with the TP HK$3.5 and investment rating of Buy. The TP represents 23.6x FY15 PER, 21.8x FY16 PER, 2.5x FY17 PER and 3.3x FY15 PBR. ZTE is expected to improve smartphone overseas market share by launching new branding and benefit from the One Belt One Road with stronger demand for carriers network equipment demand. See the last page for disclaimer Page 4 of 6

5 Table-1: Peer Comparisons: PER PB ROE (%) D/Y (%) ROA (%) Company Ticker Currency Price 15F 16F 17F 15F 16F 17F 15F 15F 15F HK Listed Companies TCL Communications 2618 HK HKD Haier Electronics 1169 HK HKD ZTE 763 HK HKD Hisense Kelon 921 HK HKD n.a.. n.a. Coolpad Group Ltd HK HKD Lenovo Group 992HK HKD Simple Average Weighted Average Japan Listed Companies Sony Corp JP YEN n.a (5.5). (.8) Panasonic Group 6752 JP YEN NEC Corp. 671 JP YEN Toshiba Corp. 652 JP YEN Simple Average Weighted Average US & Europe Listed Companies Ascom Holding ASCN SW EUR Nokia NOK1V FH EUR Apple AAPL US USD Simple Average Weighted Average Overall Average Overall Weighted Average Source: Bloomberg. See the last page for disclaimer Page 5 of 6

6 Company Rating Definition The Benchmark: Hong Kong Hang Seng Index Time Horizon: 6 to 18 months Rating Definition Buy Relative Performance >15%; or the fundamental outlook of the company or sector is favorable. Accumulate Relative Performance is 5% to 15%; or the fundamental outlook of the company or sector is favorable. Neutral Relative Performance is -5% to 5%; or the fundamental outlook of the company or sector is neutral. Reduce Relative Performance is -5% to -15%; or the fundamental outlook of the company or sector is unfavorable. Sell Relative Performance <-15%; or the fundamental outlook of the company or sector is unfavorable. Sector Rating Definition The Benchmark: Hong Kong Hang Seng Index Time Horizon: 6 to 18 months Rating Definition Outperform Relative Performance >5%; or the fundamental outlook of the sector is favorable. Neutral Relative Performance is -5% to 5%; or the fundamental outlook of the sector is neutral. Underperform Relative Performance <-5%; or the fundamental outlook of the sector is unfavorable. DISCLOSURE OF INTERESTS (1) The Analysts and their associates do not serve as an officer of the issuer mentioned in this Research Report. (2) The Analysts and their associates do not have any financial interests in relation to the issuer mentioned in this Research Report. (3) Except for SMI Holdings Group Limited (198), China Fire Safety Enterprise Group Limited (445), Guangshen Railway Company Limited-H shares (525), China All Access (Holdings) Limited (633), Guotai Junan International Holdings Limited (1788) and Binhai Investment Company Limited (2886), Guotai Junan and its group companies do not hold equal to or more than 1% of the market capitalization of the issuer mentioned in this Research Report. (4) Guotai Junan and its group companies have not had investment banking relationships with Coolpad (2369 HK)/ZTE (763 HK)/TCL Communication (2618 HK)/Lenovo (992 HK)/China Mobile (941 HK)/China Unicom (762 HK)/China Telecom (728 HK)/Qihoo 36 (QIHU US) mentioned in this Research Report within the preceding 12 months. Guotai Junan and its group companies have had investment banking relationships with China All Access (633 HK) mentioned in this Research Report within the preceding 12 months. DISCLAIMER This Research Report does not constitute an invitation or offer to acquire, purchase or subscribe for securities by Guotai Junan Securities (Hong Kong) Limited ("Guotai Junan"). Guotai Junan and its group companies may do business that relates to companies covered in research reports, including investment banking, investment services and etc. (for example, the placing agent, lead manager, sponsor, underwriter or invest proprietarily). Any opinions expressed in this report may differ or be contrary to opinions or investment strategies expressed orally or in written form by sales persons, dealers and other professional executives of Guotai Junan group of companies. Any opinions expressed in this report may differ or be contrary to opinions or investment decisions made by the asset management and investment banking groups of Guotai Junan. Though best effort has been made to ensure the accuracy of the information and data contained in this Research Report, Guotai Junan does not guarantee the accuracy and completeness of the information and data herein. This Research Report may contain some forward-looking estimates and forecasts derived from the assumptions of the future political and economic conditions with inherently unpredictable and mutable situation, so uncertainty may contain. Investors should understand and comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers prior to any investment decision. This Research Report is not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject Guotai Junan and its group companies to any registration or licensing requirement within such jurisdiction. 215 Guotai Junan Securities (Hong Kong) Limited. All Rights Reserved. 27/F., Low Block, Grand Millennium Plaza, 181 Queen s Road Central, Hong Kong. Tel.: (852) Fax: (852) Website: See the last page for disclaimer Page 6 of 6