(218.HK/218 HK) May 9, 214 Institutional portal: http://research.kgi.com Electronics Hong Kong Outperform Resume coverage 1 Huei-chen Flannery 2 852.2878.427 3 hueichen.flannery@kgi.com 1 Richard Ko (Coordinator) 2 88.2.2181.87 3 richard.ko@kgi.com 1 Annie Su 2 88.2.2181.8741 3 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$mn Outstanding H-shares (mn) Free floating shares (%) The Largest Shareholder (%): 3M avg. daily trading (mn) Abs. performance (3,,12M) (%) Rel. performance (3,,12M) (%) L 7.51.3 37.2 82.8 M 3.2 2.5 Cash N 3.1 -.2/1,32 1,192 48 TCL Corporation 52 5 2.2; 19.7; 13.9 1; 29.8; 172. Another hyper growth year Strong shipment growth & margin expansion in 214 TCL shipped.3mn smartphones in 1Q14, up strongly by 12% YoY. Shipments to the Americas and EMEA were the strongest in 1Q14, reaching 3.5mn and 1.9mn units, respectively. Management targets 214 revenue to grow 45% YoY with LTE smartphone and tablet as key growth drivers, and 5% of products will support LTE. In order to fulfill market needs, it will launch 4G products for both the entry-level and premium segments. Overall, we forecast its 214 smartphone shipments to reach 33.5mn units, up 9% YoY. We estimate smartphone will account for 77% of total sales, up from 4% in 213. Thanks to product mix shift and scale expansion, we expect gross margin will rise from 19% in 213 to 19.8% in 214. Robust product step-up strategy to sustain competitiveness TCL recently launched the Idol series, including the 2S and the 2 mini S with added LTE capability, as well as the X+ with octa-core and the Alpha with aluminum casing. It also introduced the Pop tablets with 7 and 8 displays. We believe it will strengthen product offerings with large-sized smartphones and tablets, equipped with the latest octa-core processor and metal casing for the premium segment. We estimate TCL s global market share will rise from 1.8% in 213 to 2.8% in 214. Target price HK$.3, for 37.2% upside Resume coverage with Outperform We resume coverage of TCL Comm with a 12-month target price of HK$.3 based on 11x the average of our 214-15F EPS. We believe it will benefit from: (1) strong shipment growth in emerging markets; (2) further share gain in Americas and European markets with newly launched LTE smartphones and tablets. Year to Sales Gross profits EBIT EBITDA Net profits EPS 31-Dec (HK$ mn) (HK$ mn) (HK$ mn) (HK$ mn) (HK$ mn) (HK$) 212A 12,31 2,97 (21) 772 (28) (.18) 213A 19,32 3,72 45 1,543 313.28 214F 29,731 5,874 1,9 2,35 99.85 215F 3,498 7,235 1,554 2,88 1,13 1.2 Year to EV/Sales EV/EBIT EV/EBITDA P/E EV/Inv. C. ROAE 31-Dec (x) (x) (x) (x) (x) (%) 212A.3 (179.9) 4.8 N.M..4 N.A. 213A.3 12.8 3.4 15.5 1.2 12. 214F (.) (1.) (.4). (.2) 28.7 215F.2 5. 2.7 7.8 1.4 2.3 http://research.kgi.com May 9, 214 33
Figure 77: Comparison-2Q14&3Q14 forecasts vs. consensus 2Q14 3Q14 HK$mn KGI Consensus Diff. (%) KGI Consensus Diff. (%) Sales,4,542 1.5 8,211 8,725 (5.9) Gross profit 1,31 1,25 2.9 1,18 1,719 (5.9) Operating income 232 221 5. 29 3 (1.5) Net profit 218 28 4. 242 34 (2.4) EPS (HK$).19.18 9.1.21.2 (1.7) Gross margin (%) 19. 19.3.3 ppts 19.7 19.7. ppts OP margin (%) 3.5 3.4.1 ppts 3. 3.4.2 ppts Net margin (%) 3.3 3.2.1 ppts 2.9 3.5 (.5) ppts ; Bloomberg; KGI Research estimates Figure 78: Comparison-214&215 forecasts vs. consensus 214F 215F HK$mn KGI Consensus Diff. (%) KGI Consensus Diff. (%) Sales 29,731 29,58. 3,498 3,18.9 Gross profit 5,874 5,835.7 7,235 7,23.4 Operating income 1,9 1,18 (.2) 1,554 1,51 (.5) Net profit 99 994 (2.5) 1,13 1,283 (9.3) EPS (HK$).85.8 (1.1) 1.2 1.9 (.7) Gross margin (%) 19.8 19.7. ppts 19.8 19.9 (.1) ppts OP margin (%) 3.7 4. (.3) ppts 4.3 4.3 (.1) ppts Net margin (%) 3.3 3.4 (.1) ppts 3.2 3.5 (.4) ppts ; Bloomberg; KGI Research estimates Figure 79: TCL s new product line up LTE models http://research.kgi.com May 9, 214 34
Figure 8: TCL s new product line up - 3G models Figure 81: TCL s Step-up product strategy Figure 82: China s octa-core smartphones comparison Vendor ZTE Coolpad Xiaomi Huawei TCL Model Qing Yang 2 F1 Hongmi Note Honor 3X S72T Screen type 294ppi 294ppi 27ppi 27ppi 37ppi Screen size 5" 5" 5.5" 5.5" 5.5" Resolution 128x72 128x72 128x72 128x72 128x72 CPU MT592 MT592 MT592 MT592 MT592 Core Octa-core 1.7GHz Octa-core 1.7GHz Octa-core 1.7GHz Octa-core 1.7GHz Octa-core 1.4GHz Rear camera 8MP 13MP 13MP 13MP 8MP RAM 1GB 2GB 2GB 2GB 1GB Thickness 7.85mm 9.3mm 9.45mm 8.9mm 7.95mm Starting price 1,599 98 999 998 889 Launch date Jan-14 Jan-14 Mar-14 Dec-13 Mar-14 http://research.kgi.com May 9, 214 35
Figure 83: Quarterly income statement 1Q14F 2Q14F 3Q14F 4Q14F 1Q15F 2Q15F 3Q15F 4Q15F 213A 214F 215F Income Statement (HK$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 213 232 29 355 323 339 413 479 45 1,9 1,554 Depreciation 279 335 147 279 335 Amortization 991 991 991 991 991 EBITDA 213 232 29 1,25 323 339 413 1,8 1,543 2,35 2,88 Interest Income 14 41 38 3 28 35 29 29 113 13 121 Net Investment Income/ (Loss) (1) (2) (4) (23) (2) (55) (23) (157) (99) (98) Net Other Non-operating Income/(Loss) 1 43 1 Total Non-Oper. Income (Loss) () 21 (2) 13 28 15 (27) 7 (2) 32 23 Interest Expense 24 34 33 31 3 29 27 27 5 122 114 Total Non-Oper. Expenses 24 34 33 31 3 29 27 27 5 122 114 Pretax Income 188 22 21 337 321 325 3 459 298 1, 1,44 Income Taxes Expense /(Gains) 7 2 18 5 (2) 287 15 1 (18) 33 3 Net Income Before Extraordinaries 18 218 242 332 323 38 344 458 31 972 1,13 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 177 218 242 332 323 38 344 458 313 99 1,13.1.19.23.3.28.28.32.4.2.88 1.28.15.19.21.29.28.3.3.4.28.85 1.2 19. 19. 19.7 2. 19.7 19.7 19.8 2. 19. 19.8 19.8 3.8 3.5 3. 3.8 4.3 4.1 4.3 4.3 2.1 3.7 4.3 3.8 3.5 3. 17.4 4.3 4.1 4.3 1.2 8. 8. 7.9 3.4 3.3 3.2 3. 4.3 3.9 3.7 4.1 1.5 3.4 4. 3.2 3.3 2.9 3. 4.3.5 3. 4.1 1. 3.3 3.2 (2.1) 19.8 23.7 13.8 (2.4) 11.1 1.8 15.5 (2.2) 19.7 24.3 15.5 (21.5) 11. 17.4 1.7 (35.) 9.3 27.2 2.1 (9.1) 5. 21.9 1.1 (85.5) 9.3 27.2 449. (8.1) 5. 21.9 337.2 (38.7) 17.1 18.5 29.5 (5.) 1.3.7 27. (4.) 23.2 11.2 37.2 (2.8) (88.3) 89.2 33.2 12.3 7.7 5. 24.5 34.3 24.4 17.5 19.4 17.9 53. 22.8 17.2 79.1 51.1 2.8 34.9 25.1 18.1 19.4 15.3. 23.2 (23.) 499. 22.7 7.5 51.7 45.8 39.7 35.1 15.7 17.5 41.8 (23.) 499. 22.7. 51.7 45.8 39.7 11.1 17. 53.3 21.8 (177.8) 1,478. 18..2 7.8 47.7 38. 3. 18.7 237. 45. (171.7) 453.2 7.3 12.8 82.8 (82.) 42.1 37.9 13.5 29.1 2.1 http://research.kgi.com May 9, 214 3
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 24. 22.4 22. 21.8 21.9 2. 19.8 17.9 19. 18. 17. 17.4 1. 14.4 14. 12.. 2 27 28 29 2 211 212 213 214F ; KGI Research estimates Figure 89: Earnings to ramp up in 2H14F EPS, NT$ 4 3 2 Americas 44 41 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$bn 8 7 5 1.2 2.1 4 3 1.5 2. 5.2 4.3 2.4 2. 1.8 1.5 2 1.2 3.4 2.4 1.5 2.5 1.4.. 1.1 1. 1.9 1.2.1 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 Smart devices Others ; KGI Research estimates 2.3 Figure 9: TCL s 12M forward PE band Share price, NT$ (L HS); PE ratio, x (RHS) 13.x 12 8 4 2 29 2 211 212 213 214 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) 55 5 45 4 35 3 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14F 3Q14F ASP Sales proportion of smart devices 4Q14F 5 4 3 2 Figure 91: TCL s 12M forward PB band Share price, NT$ (LHS); PB ratio, x (RHS) 3.2x 12 8 4 2 29 2 211 212 213 214 2.7x 2.2x 1.7x 1.2x.7x.2x ; KGI Research estimates Source: KGI Research estimates Institutional portal: http://research.kgi.com February 13, 214 37
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 29 3 3 3 3 Net fixed Assets 497 597 941 97 941 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 1,248 3 3 Others 1, 1,95 5,75,52,55 Long-term Liabilities 43 394 289 224 224 Long-term Debts 3 19 131 131 Others 43 84 93 93 93 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 885 988 988 988 988 Retained Earnings 7 25 73 1,5 2,828 Preferred Stock Key Ratios Year to 31 Dec (HK$ mn) 211A 212A 213A 214F 215F Growth (% YoY) Sales 22.4 12.9.9 53. 22.8 OP 14.4 N.A. N.A. 17.5 41.8 EBITDA 22.7 (35.7) 99.9 53.3 21.8 NP 14. N.A. N.A. 29.1 2.1 EPS 12. N.A. N.A. 27.4 2.7 Profitability (%) Gross Margin 21.9 17.4 19. 19.8 19.8 Operating Margin 8.7 (.2) 2.1 3.7 4.3 EBITDA Margin 11.3.4 8. 8. 7.9 Net Profit Margin 7.5 (1.7) 1. 3.3 3.2 ROAA.1 (1.5) 2.3.2.5 ROAE 32.7 N.A. 12. 28.7 2.3 Stability Gross Debt/Equity (%) 282.3 278.7 49. 11.5 8.8 Net Debt/Equity (%) 3.9 48.8 Net cash Net cash Net cash Interest Coverage (x). (.1) 3.8 9.2 13.9 Interest & ST Debt Coverage (x).1 (.).3 2. 3.7 Cash Flow Interest Coverage (x).9 1.4.1 14.5 14. Cash Flow/Interest & ST Debt (x)...5 4.1 3.8 Current Ratio (x) 1.1 1.1 1.1 1.1 1.2 Quick Ratio (x) 1..9.8.9.9 Net Debt (HK$ mn) (547) 18 321 (1,51) (1,532) Per Share Data (HK$) EPS.73 (.18).28.85 1.2 CFPS.98.52 1.28 1.91 2.12 BVPS 2.4 2. 2.51 3.23 4.21 SPS 9.5. 1. 24.98 3.7 EBITDA/Share.84 (.2).3.93 1.32 DPS.29.3... Activity Asset Turnover (x).8.9 1.4 1.9 2. Days Receivables 1.5 1.4 115.3 1. 97.4 Days Inventory 43. 4.4 1. 43.7 42. Days Payable 92.8 93.4 97.9 93.3 89.4 Cash Cycle 51.7 54.5 79.1 52. 5. Profit & Loss Year to 31 Dec (HK$ 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 55 47 8 8 8 Interest Income 19 213 113 13 121 Interest Expense 14 1 5 122 114 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) 313 99 1,13 EBITDA 1,21 772 1,543 2,35 2,88 EPS (HK$).73 (.18).28.85 1.2 Cash Flow Year to 31 Dec (HK$ mn) 211A 212A 213A 214F 215F Operating Cash Flow 122 224 4 1,7 1,59 Net Profit 8 (28) 318 99 1,13 Depreciation & Amortization 27 793 1,138 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 13 2 192 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 1- + + = 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.1..1 3.2 212A.2..1 2.9 213A...1 5. 214F...1 7.9 215F.1...7 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% 3.2 11.7% 32.5% 213A (.2%) 2.9.% (.5%) 214F 2.1% 5. 9.7% 11.3% 215F 3.7% 7.9 79.5% 23.% http://research.kgi.com May 9, 214 38