TCL Communications (02618.HK/2618 HK)

Transcription

1 (218.HK/218 HK) May 9, 214 Institutional portal: Electronics Hong Kong Outperform Resume coverage 1 Huei-chen Flannery hueichen.flannery@kgi.com 1 Richard Ko (Coordinator) richard.ko@kgi.com 1 Annie Su annie.su@kgi.com Return Price as of May 9, 214 (HK$/shr) 12M target price (HK$/shr) Upside/downside (%) The percentile of excess return (%) Dividend yield-12/14e (%) Balance Sheet Book value/shr-12/14e (HK$) P/B-12/14E (x) Net debt/equity-12/14e (%) Trading 52-week trading range (HK$) Mkt cap-hk$ bn/us$mn Outstanding H-shares (mn) Free floating shares (%) The Largest Shareholder (%): 3M avg. daily trading (mn) Abs. performance (3,,12M) (%) Rel. performance (3,,12M) (%) L M Cash N /1,32 1, TCL Corporation ; 19.7; ; 29.8; 172. Another hyper growth year Strong shipment growth & margin expansion in 214 TCL shipped.3mn smartphones in 1Q14, up strongly by 12% YoY. Shipments to the Americas and EMEA were the strongest in 1Q14, reaching 3.5mn and 1.9mn units, respectively. Management targets 214 revenue to grow 45% YoY with LTE smartphone and tablet as key growth drivers, and 5% of products will support LTE. In order to fulfill market needs, it will launch 4G products for both the entry-level and premium segments. Overall, we forecast its 214 smartphone shipments to reach 33.5mn units, up 9% YoY. We estimate smartphone will account for 77% of total sales, up from 4% in 213. Thanks to product mix shift and scale expansion, we expect gross margin will rise from 19% in 213 to 19.8% in 214. Robust product step-up strategy to sustain competitiveness TCL recently launched the Idol series, including the 2S and the 2 mini S with added LTE capability, as well as the X+ with octa-core and the Alpha with aluminum casing. It also introduced the Pop tablets with 7 and 8 displays. We believe it will strengthen product offerings with large-sized smartphones and tablets, equipped with the latest octa-core processor and metal casing for the premium segment. We estimate TCL s global market share will rise from 1.8% in 213 to 2.8% in 214. Target price HK$.3, for 37.2% upside Resume coverage with Outperform We resume coverage of TCL Comm with a 12-month target price of HK$.3 based on 11x the average of our F EPS. We believe it will benefit from: (1) strong shipment growth in emerging markets; (2) further share gain in Americas and European markets with newly launched LTE smartphones and tablets. Year to Sales Gross profits EBIT EBITDA Net profits EPS 31-Dec (HK$ mn) (HK$ mn) (HK$ mn) (HK$ mn) (HK$ mn) (HK$) 212A 12,31 2,97 (21) 772 (28) (.18) 213A 19,32 3, , F 29,731 5,874 1,9 2, F 3,498 7,235 1,554 2,88 1, Year to EV/Sales EV/EBIT EV/EBITDA P/E EV/Inv. C. ROAE 31-Dec (x) (x) (x) (x) (x) (%) 212A.3 (179.9) 4.8 N.M..4 N.A. 213A F (.) (1.) (.4). (.2) F May 9,

2 Figure 77: Comparison-2Q14&3Q14 forecasts vs. consensus 2Q14 3Q14 HK$mn KGI Consensus Diff. (%) KGI Consensus Diff. (%) Sales,4, ,211 8,725 (5.9) Gross profit 1,31 1, ,18 1,719 (5.9) Operating income (1.5) Net profit (2.4) EPS (HK$) (1.7) Gross margin (%) ppts ppts OP margin (%) ppts ppts Net margin (%) ppts (.5) ppts ; Bloomberg; KGI Research estimates Figure 78: Comparison-214&215 forecasts vs. consensus 214F 215F HK$mn KGI Consensus Diff. (%) KGI Consensus Diff. (%) Sales 29,731 29,58. 3,498 3,18.9 Gross profit 5,874 5, ,235 7,23.4 Operating income 1,9 1,18 (.2) 1,554 1,51 (.5) Net profit (2.5) 1,13 1,283 (9.3) EPS (HK$).85.8 (1.1) (.7) Gross margin (%) ppts (.1) ppts OP margin (%) (.3) ppts (.1) ppts Net margin (%) (.1) ppts (.4) ppts ; Bloomberg; KGI Research estimates Figure 79: TCL s new product line up LTE models May 9,

3 Figure 8: TCL s new product line up - 3G models Figure 81: TCL s Step-up product strategy Figure 82: China s octa-core smartphones comparison Vendor ZTE Coolpad Xiaomi Huawei TCL Model Qing Yang 2 F1 Hongmi Note Honor 3X S72T Screen type 294ppi 294ppi 27ppi 27ppi 37ppi Screen size 5" 5" 5.5" 5.5" 5.5" Resolution 128x72 128x72 128x72 128x72 128x72 CPU MT592 MT592 MT592 MT592 MT592 Core Octa-core 1.7GHz Octa-core 1.7GHz Octa-core 1.7GHz Octa-core 1.7GHz Octa-core 1.4GHz Rear camera 8MP 13MP 13MP 13MP 8MP RAM 1GB 2GB 2GB 2GB 1GB Thickness 7.85mm 9.3mm 9.45mm 8.9mm 7.95mm Starting price 1, Launch date Jan-14 Jan-14 Mar-14 Dec-13 Mar-14 May 9,

4 Figure 83: Quarterly income statement 1Q14F 2Q14F 3Q14F 4Q14F 1Q15F 2Q15F 3Q15F 4Q15F 213A 214F 215F Income Statement (HK$mn) Sales 5,541,4 8,211 9,34 7,438 8,22 9,49 11,149 19,32 29,731 3,498 Cost of Goods Sold 4,454 5,338,593 7,472 5,972,35 7,739 8,919 15,9 23,857 29,24 Gross Profits 1,87 1,31 1,18 1,88 1,47 1,28 1,911 2,23 3,72 5,874 7,235 Total Operating Expenses 874 1,9 1,322 1,513 1,144 1,289 1,498 1,75 3,27 4,778 5,81 EBIT ,9 1,554 Depreciation Amortization EBITDA , ,8 1,543 2,35 2,88 Interest Income Net Investment Income/ (Loss) (1) (2) (4) (23) (2) (55) (23) (157) (99) (98) Net Other Non-operating Income/(Loss) Total Non-Oper. Income (Loss) () 21 (2) (27) 7 (2) Interest Expense Total Non-Oper. Expenses Pretax Income , 1,44 Income Taxes Expense /(Gains) (2) (18) 33 3 Net Income Before Extraordinaries ,13 Extraordinaries (4) (3) (4) Net Income after Extraordinaries Pretax EPS (HK$) After-tax EPS (HK$) Margins (%) Gross margin EBIT margin EBITDA margin Pre-tax margin Net margin Sequential growth (%) Sales Gross Profits EBIT EBITDA Pretax Income Net Income YoY growth (%) Sales Gross Profits EBIT EBITDA Pretax Income Net Income , (2.1) (2.4) (2.2) (21.5) (35.) (9.1) (85.5) (8.1) (38.7) (5.) (4.) (2.8) (88.3) (23.) (23.) (177.8) 1, (171.7) (82.) May 9, 214 3

5 Figure84: Company profile TCL Communication designs, manufactures and markets an expanding portfolio of mobile and internet products worldwide with two key brands-alcatel onetouch and TCL. The company s portfolio is currently sold in China and over 1 countries throughout the Americas, Europe, the Middle East, Africa and Asia Pacific. According to Gartner, TCL-Alcatel mobile phone shipments ranked seventh in the world in 213 with a market share of 2.7%. Source: KGI Research Figure 85: TCL to focus on American market Revenue breakdown by application, 214F, percent APAC China 9 Figure 88: Gross margin to rise in 214F Gross margin, percent F ; KGI Research estimates Figure 89: Earnings to ramp up in 2H14F EPS, NT$ Americas EMEA - 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14F 3Q14F 4Q14F -2-3 Source: KGI Research estimates Source: TEJ Figure 8: Smart devices are key growth drivers Sales, HK$bn Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 Smart devices Others ; KGI Research estimates 2.3 Figure 9: TCL s 12M forward PE band Share price, NT$ (L HS); PE ratio, x (RHS) 13.x Source: KGI Research estimates 11.x 9.x 7.x 5.x 3.x 1.x Figure 87: Smart device to enhance product ASP ASP, US$ (LHS); sales weighting of smart devices, percent (RHS) Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14F 3Q14F ASP Sales proportion of smart devices 4Q14F Figure 91: TCL s 12M forward PB band Share price, NT$ (LHS); PB ratio, x (RHS) 3.2x x 2.2x 1.7x 1.2x.7x.2x ; KGI Research estimates Source: KGI Research estimates Institutional portal: February 13,

6 Balance Sheet Year to 31 Dec (HK$ mn) 211A 212A 213A 214F 215F Total Assets 14,27 13,321 14,423 1,997 18,75 Current Assets 12,254 11,212 11,8 14,35 1,19 Cash & ST Investments 7,428 5,337 1,933 2,55 1,893 Inventories 981 1,23 2,49 2,857 3,39 Accounts Receivable 2,92 3,344,118 8,28 9,737 Others 883 1,29 1,15 1,174 1,17 Non-current Assets 1,773 2,9 2,557 2,31 2,59 LT Investments Net fixed Assets Others 1,247 1,482 1,587 1,25 1,25 Total Liabilities 11,358 11, 11,5 13,154 13,759 Current Liabilities 11,315, 11,221 12,93 13,535 Accounts Payable 2,117 2,541 4,28,99 7,17 ST Borrowings 7,532,159 1, Others 1, 1,95 5,75,52,55 Long-term Liabilities Long-term Debts Others Shareholders' Equity 2,9 2,321 2,913 3,842 5, Common Stock 1,114 1,128 1,12 1,19 1,19 Capital Surplus Retained Earnings ,5 2,828 Preferred Stock Key Ratios Year to 31 Dec (HK$ mn) 211A 212A 213A 214F 215F Growth (% YoY) Sales OP 14.4 N.A. N.A EBITDA 22.7 (35.7) NP 14. N.A. N.A EPS 12. N.A. N.A Profitability (%) Gross Margin Operating Margin 8.7 (.2) EBITDA Margin Net Profit Margin 7.5 (1.7) ROAA.1 (1.5) ROAE 32.7 N.A Stability Gross Debt/Equity (%) Net Debt/Equity (%) Net cash Net cash Net cash Interest Coverage (x). (.1) Interest & ST Debt Coverage (x).1 (.) Cash Flow Interest Coverage (x) Cash Flow/Interest & ST Debt (x) Current Ratio (x) Quick Ratio (x) Net Debt (HK$ mn) (547) (1,51) (1,532) Per Share Data (HK$) EPS.73 (.18) CFPS BVPS SPS EBITDA/Share.84 (.2) DPS Activity Asset Turnover (x) Days Receivables Days Inventory Days Payable Cash Cycle Profit & Loss Year to 31 Dec (HK$ mn) 211A 212A 213A 214F 215F Sales,53 12,31 19,32 29,731 3,498 Cost of Goods Sold 8,325 9,935 15,9 23,857 29,24 Gross Profit 2,328 2,97 3,72 5,874 7,235 Operating Expenses 1,43 2,117 3,27 4,778 5,81 Operating Profit 925 (21) 45 1,9 1,554 Net Interest Income Interest Income Interest Expense Net Investment Income/(Loss) 8 (48) (157) (99) (98) Net other Non-op. Income/(Loss) (35) (17) 43 1 Pretax Income 783 (17) 29 1,2 1,44 Income Taxes (17) 32 (18) 33 3 Net Extraordinaries (1) 12 (3) (4) Net Profit After Extraordinaries 8 (28) ,13 EBITDA 1, ,543 2,35 2,88 EPS (HK$).73 (.18) Cash Flow Year to 31 Dec (HK$ mn) 211A 212A 213A 214F 215F Operating Cash Flow ,7 1,59 Net Profit 8 (28) ,13 Depreciation & Amortization ,138 1,27 1,32 Change in Working Capital (57) (72) (1,882) (473) (899) Others (448) 312 1,5 () Investment Cash Flow (9) (1,52) (1,23) (2) (3) Net CAPEX (232) (24) (484) (2) (3) Change in LT Investment Change in Other Assets (87) (1,11) (971) Free Cash Flow (844) (827) (23) 1,5 1,29 Financing Cash Flow 37 4 (23) (4) (4) Change in Share Capital (3) (17) 78 (4) (4) Net Change in Debt 1,13 (1,54) (2,884) Change in Other LT Liab. (1) 1,87 2,57 Net Cash Flow (159) (217) (828) 112 (12) Rates of Return on Invested Capital Year to COGS Dep./Amortization SGA Exp. Operating = 31-Dec Revenue Revenue Revenue Margin 211A 75.% 2.% 13.2% 8.7% 212A 7.%.% 17.% (.2%) 213A 75.2% 5.9% 1.9% 2.1% 214F 7.% 4.3% 1.1% 3.7% 215F 7.5% 3.% 15.% 4.3% Operating Year to Working Net PPE Other Assets Capital 1/ + + = capital 31-Dec Revenue Revenue Revenue Turnover 211A A A F F Year to Operating Capital Cash 1 - Tax After-tax Return x x = 31-Dec Margin Turnover Rate on Inv. Capital 211A 9.3%. 2.2% 57.% 212A 8.7% % 32.5% 213A (.2%) 2.9.% (.5%) 214F 2.1% % 11.3% 215F 3.7% % 23.% May 9,