joseph ho, cfa as - gfgroup.com.hk · ratings we initiate coverage of ju teng at hold given its...

China Smartphone Sector

Oct 24, 2014 Equity Research | Information Technology

Neutral (initiation)

Be selective - we prefer upstream smartphone component makers to downstream brand owners

Joseph Ho, CFA SFC CE No. AFP308 [email protected] +852 3719 1030 Ryan Zhu SFC CE No. BDK820 [email protected] +86 755 88263160 GF Securities (Hong Kong) Brokerage Limited 29-30/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong

Chinese handset sector has outperformed the MSCI China Index YTD The Chinese

handset sector (represented by a basket of ten handset-related stocks in this report; see table below) has outperformed the MSCI China Index by 23% so far this year. The sector valuation remains reasonable, currently at an average of 11.1x 2015 P/E, supported by sector average EPS growth of 17% in 2015, according to our estimates. While we see strong underlying smartphone volume growth, we are concerned about margin compression among downstream smartphone brand owners. We initiate coverage of the sector with a Neutral sector rating. Multi-year handset replacement cycle China is at a nascent stage in its 4G adoption,

as it only began to launch 4G services at the beginning of 2014. We see a multi-year handset replacement cycle driven by the transition from the 3G to 4G era in China. An increase in handset exports will also drive volume growth at Chinese handset makers. Our investment strategy focuses on buying a selected group of upstream component makers that are set to benefit from this volume growth. On the other hand, we recommend avoiding downstream smartphone brand owners given margin contractions in this crowded and competitive market. Our top picks We initiate coverage of AAC Tech, Sunny Optical, Tongda and Scud

with Buy ratings. These upstream component makers will benefit from strong shipment momentum at domestic handset makers. Underperform ratings We are cautious on downstream handset brand owners given

pricing pressure amid intense market competition and the 3G inventory overhang. We initiate coverage of Coolpad with an Underperform rating. We initiate coverage of FIH Mobile at Underperform given their poor profitability metrics.

Hold ratings We initiate coverage of Ju Teng at Hold given its ex-growth notebook

casings business and the limited contribution from its smartphone casings business. We initiate coverage of TCL Comm with a Hold rating as its margins are likely to contract as overseas competition increases. We initiate coverage of Truly at Hold given their weak earnings outlook due to unfavorable customer mix. We initiate BYD Electronic at Hold

following the recent rally and suggest waiting for a better entry point. Key risks Write-downs of 3G inventory, margin contractions at downstream handset

brand owners, and component shortages which will limit shipment volume for handset makers.

China smartphone sector – Summary of investment recommendations

Company Stock code

Market

Cap

(US$m)

Rating

Share

price

(HK$)

Target

Price

(HK$)

Upside /

downside

2015 target

P/E (x)

AAC Tech 2018 HK 7,013 Buy 44.30 56.65 28% 16.0

FIH Mobile 2038 HK 3,949 Underperform 3.94 3.59 -9% Ex-cash 8.0

BYD Electronic 285 HK 2,759 Hold 9.50 9.99 5% 13.0

Sunny Optical 2382 HK 1,819 Buy 12.86 15.05 17% 18.0

Truly 732 HK 1,499 Hold 4.00 3.79 -5% 6.0

TCL Comm 2618 HK 1,230 Hold 7.85 8.27 5% 9.0

Coolpad 2369 HK 841 Underperform 1.52 1.21 -21% 7.0

Tongda 698 HK 719 Buy 1.02 1.22 20% 10.0

Ju Teng 3336 HK 677 Hold 4.50 4.71 5% 7.0

Scud 1399 HK 138 Buy 1.04 1.42 36% 8.0

Share prices as of 22-Oct-2014 Sources: Bloomberg, GF Securities

Sector performance vs MSCI China Index

Source: Bloomberg

mailto:[email protected]


Oct 24, 2014

Sector report

China handset sector outperforming MSCI China Index Our basket of handset-related stocks has outperformed the MSCI China index by 23% YTD

The market-cap weighted basket of ten Hong Kong-listed handset-related stocks that we have initiated in this report has risen by 21% YTD, and has outperformed the MSCI China Index, which declined by 2% in the same period. At the individual stock level, small-cap stocks including Scud (battery handset maker) and Tongda (smartphone casing maker) have more than doubled, driven

mainly by their inclusion in the Xiaomi supply chain (both companies became component suppliers to Xiaomi this year) as well as their deep valuation discount prior to the share price rally – Scud and Tongda were trading at 0.25x and 0.75x 2014E P/B at the beginning of 2014. BYD Electronic’s

share price has also doubled so far this year driven by the ramp-up in its metal casings business. Among large cap stocks, Sunny Optical (China’s largest camera module maker) outperformed AAC Tech (China’s largest handset acoustic components maker) given substantially stronger

earnings momentum so far this year.

Figure 1: Handset Sector* vs MSCI China Index (YTD) Figure 2: Handset-related stock – YTD share price (%)

-20%

-10%

0%

10%

20%

30%

40%

Handset Sector MSCI China

(12)

(6)

(4)

(1)

18

20

71

96

111

114

(50) (30) (10) 10 30 50 70 90 110 130

Ju Teng

FIH Mobile

Truly

TCL Comm

AAC Tech

Coolpad

Sunny Optical

Tongda

BYD Electronic

Scud

Source: Bloomberg, *the ten stocks covered in this report (market-cap weighted)

Source: Bloomberg

Sector valuation at reasonable level supported by earning growth Handset sector trading at a low-teen 2015 P/E The sector is currently trading at an average of

11.1x 2015E P/E, underpinned by average EPS growth of 17% in 2015, according to our estimates (see valuation table below). We believe the sector valuation remains reasonable. We see healthy underlying smartphone demand in China, driven by a multi-year handset replacement cycle as China enters the 4G era. Nonetheless, we see margin compression risk among downstream smartphone makers. We initiate coverage of the sector with a Neutral rating.

Figure 3: Valuation – Hong Kong-listed handset-related stocks

Market

cap

Share

price

YTD share

price chg

Company Stock code (US$m) (HK$ 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015E (%)

AAC Tech 2018 HK 7,013 44.30 17.0 14.2 4.6 3.9 2.9 3.5 27.2 27.3 (1) 20 18

FIH Mobile 2038 HK 3,949 3.94 27.6 24.3 1.0 1.0 - - 3.8 4.1 76 13 (6)

BYD Electronic 285 HK 2,759 9.50 14.4 12.4 1.7 1.5 0.7 0.8 12.6 13.1 82 17 111

Sunny Optical 2382 HK 1,819 12.86 20.7 15.4 3.5 3.0 1.4 2.0 17.9 21.0 14 35 71

Truly 732 HK 1,499 4.00 7.7 6.7 1.4 1.2 3.9 4.4 18.4 18.4 (10) 14 (4)

TCL Comm 2618 HK 1,230 7.85 8.3 8.5 2.6 2.2 4.8 4.7 34.4 27.7 256 (3) (1)

Coolpad 2369 HK 841 1.52 8.3 8.8 1.9 1.6 1.8 1.7 25.3 19.8 125 (6) 20

Tongda 698 HK 719 1.02 11.4 8.3 1.5 1.3 2.6 3.6 14.9 16.4 22 37 96

Ju Teng 3336 HK 677 4.50 6.9 6.7 0.8 0.7 3.6 3.7 12.2 11.4 4 3 (12)

Scud 1399 HK 138 1.04 8.2 5.9 0.7 0.6 3.1 4.3 9.0 11.6 175 39 114

Average 13.0 11.1 2.0 1.7 2.5 2.9 17.6 17.1 74 17

Share price as of 22-Oct-2014

P/B (x)P/E (x) Div yield (%) ROE (%)EPS

growth (%)

Sources: Bloomberg, GF Securities

Oct 24, 2014

Sector report

Figure 4: Valuation – 2015 P/E (x) Figure 5: Valuation – 2014 P/E (x)

24.3

15.4 14.2

12.4

8.8 8.5 8.3 6.7 6.7 5.9

-

5.0

10.0

15.0

20.0

25.0

30.0

FIHMobile

SunnyOptical

AACTech

BYDE Coolpad TCLComm

Tongda Truly Juteng Scud

2015 P/E Average = 11.1

27.6

20.7

17.0

14.4

11.4

8.3 8.3 8.2 7.7 6.9

-

5.0

10.0

15.0

20.0

25.0

30.0

FIHMobile

SunnyOptical

AACTech

BYDE Tongda Coolpad TCLComm

Scud Truly Juteng

2014 P/E (x) Average = 13.0

Source: GF Securities

Stocks trading at a high P/B are supported by high ROE The following regression analysis compares 2015 P/B with ROE. AAC Tech and Sunny Optical, which are trading at a high P/B, are supported by their high return on equity. At the other end, FIH Mobile, which generates low single-digit ROE is trading at around 1.0x 2015E P/B. Small cap companies such as Scud and Tongda

are trading “below-the-line” or at a discount to the sector average, as some large institutional investors are unable to buy these stocks due to market capitalization and liquidity constraints.

Figure 6: Valuation – 2015 P/B vs ROE regression analysis Figure 7: Valuation – 2015 P/B (x)

3.9

3.0

2.2

1.6 1.5 1.3 1.2

1.0 0.7 0.6

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

AACTech

SunnyOptical

TCLComm

Coolpad BYDE Tongda Truly FIHMobile

Juteng Scud

2015 P/B Average = 1.7

Sources: GF Securities Sources: GF Securities

Oct 24, 2014

Sector report

Stock recommendations: buy upstream components makers; avoid downstream handset brand owners Investment strategy We recommend buying a selected group of upstream component makers that

are set to benefit from volume growth at Chinese smartphone markers. We also recommend

investors avoid downstream China-centric handset brand owners who will be subject to mounting

margin contraction risk in this crowded and competitive market. The following table is a summary

of our recommendations and investment highlights for individual stocks.

Figure 8: Investment highlights Company Stock

code

Rating Major businesses Customer mix Investment highlights 1H14

earnings

(Rmb m

equivalent)

1H14

earnings

momentu

mAAC Tech 2018 HK Buy Handset speakers,

speaker box,

microphones, haptics,

LDS antennas

Apple, Samsung, Nokia, Xiaomi;

64% of sales from top three

customers in 2Q14; 25% of sales

from PRC customers

iPhone 6/6+ to drive resumption

of EPS growth in 4Q14 and early

2015; ramp-up in non-acoustic

products

950 Rmb950m

(-11% YoY)

Truly 732 HK Hold Handset display (79% of

sales), automotive

display (10%)

BBK, Gionee, Huawei, K-touch,

Longcheer, OPPO, Samsung,

Sony, TCL, ZTE; top 10 customers

account for over 80% of sales of

handset division

Weak earning prospects due to

poor momentum from Samsung

and not having Xiaomi as a

customer (Xiaomi uses high-end

displays from Japan's Sharp)

428 HK$535m

(-25% YoY)

BYD

Electronic

285 HK Hold Handset casings (40% of

sales), handset

EMS/ODM (45%)

Huawei (20%), Nokia (20%), HTC

(15%)

Margin expansion on ramp-up of

metal casings business

412 Rmb412m

(+30% YoY)

TCL Comm 2618 HK Hold Smartphones, feature

phones

Over 90% of sales from overseas

market; China (<10%)

Margin contraction to continue

in 2015

345 HK$431m

(loss for

1H13)Coolpad 2369 HK Underperform Smartphones Over 90% from China (mainly via

carrier channels)

Margin pressure amid intense

competition in China's

smartphone market

330 HK$412m

(+94% YoY)

FIH Mobile 2038 HK Underperform Handset EMS Sony Mobile (40%), Xiaomi,

Motorola, Nokia

Weak momentum from Sony

Mobile to offset growth from

Chinese customers

310 US$50m

(+182%

YoY)Sunny

Optical

2382 HK Buy Handset lens/camera

modules; 81% of sales

from handset-related

products in 1H14

Top 5 customers (Huawei,

Xiaomi, Oppo, Coolpad, Lenovo)

account for 55% of sales

Direct proxy of the growth at

Chinese smartphone makers;

Margin expansion on vertical

integration

267 Rmb267m

(+36% YoY)

Juteng 3336 HK Hold Casings for notebooks

(80%), tablets (10%),

smartphone (5%)

Lenovo, HP, Asus for notebooks;

Motorola, Asus for smartphones

Weak earnings momentum due

to ex-growth NB casings business

and small contribution from

handset casings business

249 HK$311m

(+19% YoY)

Tongda 698 HK Buy Casings for smartphones

(46% of sales), home

appliances (15%),

notebook (14%), etc.

Huawei (30%), ZTE, Xiaomi,

Coolpad, Lenovo, TCL for

handsets; Haier, Gree, Midea for

home appliances

Direct proxy of growth at China's

smartphone makers; positive

earnings outlook on capacity

expansion and new products

134 HK$167m

(+28% YoY)

Scud 1399 HK Buy ODM and onw-brand

handset batteries

Huawei (38%), Xiaomi (27%), ZTE

(13%), TCL 9%), Oppo (8%)

Direct proxy of growth at China's

smartphone makers; positive

earnings outlook on capacity

expansion

30 Rmb30m

(+161%

YoY)

Sources: Company data, GF Securities

We prefer upstream component makers Our top picks in the components space include AAC

Tech, Sunny Optical, Tongda and Scud, which we initiate with Buy ratings. These component

makers will benefit from strong shipment momentum at domestic handset makers. We initiate

coverage of Juteng with Hold ratings given their weak earnings outlook in view of the ex-growth

notebook casings business. We initiate coverage of BYD Electronic with a Hold rating following

the recent rally and suggest waiting for a better entry point. We initiate coverage of Truly with a

Hold rating given their weak earnings outlook due to unfavorable customer mix. We initiate

coverage of FIH Mobile with an Underperform rating in view of their poor profitability metrics given

the structural issues of their labour-intensive and low value-added handset assembly business.

Oct 24, 2014

Sector report

Avoid downstream smartphone brand owners We are cautious on downstream handset brand

owners given pricing pressure amid intense market competition and a 3G inventory overhang. We initiate coverage of Coolpad with an Underperform rating. TCL Comm, the overseas-centric

smartphone maker, is facing a similar situation and we initiate coverage with a Hold rating given a worsening competitive environment in overseas markets. The following charts show sales mix by region and our 2015 EPS growth estimates.

Figure 9: Geo exposure*: HK-listed handset-related companies Figure 10: 2015 YoY EPS growth (%)

90 9080

7060 55

3220 20

8

10 1020

3040 45

6880 80

92

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Coolpad Scud Tongda Truly BYDE SunnyOptical

AACTech

FIHMobile

Juteng TCLComm

China Overseas

39 37

35

20 17

14 13

3

(3)(6) (10)

(5)

-

5

10

15

20

25

30

35

40

45

Scud Tongda SunnyOptical

AACTech

BYDE Truly FIHMobile

Juteng TCLComm

Coolpad

2015 EPS growth (%) Average = 17

Sources: Company data, GF Securities,*by revenue Sources: GF Securities

Figure 11: Customer matrix – major customers of the handset component makers

Components makers AAC TechFIH

Mobile

BYD

ElectronicTruly

Sunny

OpticalTongda Ju Teng Scud

Key productsSpeakers

microphonesEMS Casings Display

Camera

modulesCasings Casings Battery

Overseas smartphone markers

Samsung

Apple

Nokia

Sony

LG

HTC

Motorola

Asustek

Sharp

Domestic smartphone makers

Huawei

Xiaomi

Lenovo

Coolpad

ZTE

TCL Comm

BBK

Gionee

Oppo

K-touch (Tianyu) Sources: Company data, GF Securities

Oct 24, 2014

Sector report

Figure 12: Peer comp: 2014E and 2015E gross profit margin (%) Figure 13: Peer comp: 2014E and 2015E net profit margin (%)

43.0

24.0

19.4 18.4 16.3

13.9 13.0 12.5 12.5

6.0

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

AACTech

Tongda Ju Teng TCLComm

SunnyOptical

Scud Truly BYDE Coolpad FIHMobile

2014E 2015E

27.8

10.7

8.2 7.3 6.8 6.3

3.4 3.1 2.9 1.8

-

5.0

10.0

15.0

20.0

25.0

30.0

AACTech

Tongda Ju Teng SunnyOptical

Truly BYDE Scud TCLComm

FIHMobile

Coolpad

2014E 2015E

Sources: GF Securities

Multi-year handset replacement cycle as China enters 4G era

China is at a nascent stage in its 4G adoption China Mobile officially started to launch 4G

services in January 2014. The ramp-up in 4G subscribers accelerated in 2H14 after a slow start in 1Q14. Total 4G mobile subscribers reached 41m by September 2014. Monthly net 4G subscriber addition reached 11m in August, and we believe it is very likely that China Mobile will exceed its 2014 4G subscriber target of 50m before the end of the year. The 4G transition will drive a multi-year handset replacement cycle given the huge 3G and 2G subscriber base in China. Using China Mobile as an example, 2G and 3G users accounted for 64% and 31% of its total subscriber base of 799m as of September 2014, respectively.

Figure 14 : China Mobile – ramp-up in 4G mobile subscribers Figure 15 : China Mobile: mobile subscribers by network

- 1 3 5

8

14

21

30

41

50

-

10

20

30

40

50

60

70

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

4G subscribers (m)

2G64%

3G31%

4G5%

Sources: China Mobile Sources: China Mobile, *September 2014

Global market – smartphone migration to continue Global smartphone shipments reached 1bn

units in 2013 and surpassed feature phone shipments for the first time. In 2Q14, global smartphone shipments grew 27% YoY to 295m units, and feature phone to smartphone migration is set to accelerate. According to Gartner, smartphones will make up 88% of global mobile phone shipments by 2018, up from 66% in 2014.

Oct 24, 2014

Sector report

Figure 16: Global market - Smartphones vs feature phones (m units)

Figure 17: - Global market - smartphones vs feature phones

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2011 2012 2013 2014E 2015E 2016E 2017E 2018E

Smartphone Feature phones

28%42%

56%66% 70% 76%

81%88%

72%58%

44%34% 30% 24%

19%12%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2011 2012 2013 2014E 2015E 2016E 2017E 2018E

Smartphone Feature phones

Sources: Gartner

Sources: Gartner

Chinese smartphone makers well positioned to capture growth In 2Q14, six of the top ten

global smartphone makers were from China. The six companies are Huawei, Lenovo, Xiaomi,

Coolpad, ZTE and TCL Comm, which collectively accounted for 28.1% of global smartphone

market share in 2Q14, up from 22.2% in 2Q13. The Chinese smartphone makers are taking

market share away from Samsung, in particular in the mid-to-low end smartphone segment.

Samsung suffered a YoY decline in smartphone market share for the first time in 2Q14.

Component suppliers to the Chinese smartphone markers will benefit from strong volume growth

while those components makers with exposure to Samsung will come under pressure.

Figure 18: Global smartphone shipments (2Q14) Figure 19: Global smartphone shipments (m units)

Rank Company

2Q14

shipments

(m units)

2Q14

Market share

(%)

YoY growth

(%)

1 Samsung 74.5 25.3 (2.0)

2 Apple 35.2 11.9 12.6

3 Huawei 20.1 6.8 81.1

4 Lenovo 15.8 5.4 39.8

5 Xiaomi 15.1 5.1 268.3

6 LG 14.5 4.9 19.8

7 Coolpad 13 4.4 26.2

8 ZTE 10.6 3.6 (7.8)

9 Sony 9.4 3.2 (2.1)

10 TCL Comm 8.4 2.8 147.1

Others 78.4 26.6 49.6

Total 295 100.0 26.6

339

176

80 80 60 60 52

40 40 20

-

50

100

150

200

250

300

350

400

2012 2013 2014E

Sources: Strategy Analytics

Sources: IDC, Company data

Oct 24, 2014

Sector report

Sub-Rmb500 4G smartphones driving 4G adoption in China The favorable ramp-up in 4G

services is driven by a wide choice of 4G handsets at affordable prices and reasonable 4G tariffs. In August, China Mobile started to offer sub-Rmb500 4G smartphones under bundle contracts. The starting price of a 4G smartphone at China Mobile is Rmb399, subject to taking out a 12-month 4G contract at Rmb88 per month.

Figure 20: China Mobile 4G smartphone offering*

Brand Lenovo Tianyu Hisense ZTE Huawei Coolpad Oppo Huawei Samsung

Model A320t Touch 2 E600M U9180 3C 8730L X9007 P7 S4

Display size 4" 4.5" 4.5" 5" 5" 5.5" 5.5" 5" 5"

Resolution 480x800 480 x 854 480 x 854 720x1280 720x1280 720x1280 1920x1080 1920x1080 1920x1080

Front camera 0.3MP 0.3MP 0.3MP 5MP 5MP 2MP 5MP 8MP 2MP

Rear camera 2MP 5MP 5MP 13MP 8MP 8MP 13MP 13MP 12MP

Price (Rmb) 399 499 499 999 999 999 2,999 2,999 2,999

Low-end Mid-end High-end

Sources: China Mobile (Oct 2014), *Rmb600 rebate for 12-month contract of Rmb88 per month

Figure 21 : China Mobile – 4G tariffs Figure 22 : China Mobile monthly 4G subscriber net addition

Monthly fee Data Voice (mins)

Rmb58 500M 50

Rmb88 700M 200

Rmb138 1G 500

Rmb158 2G 500

Rmb238 2G 1,000

Rmb268 3G 1,000

Rmb338 3G 2,000

Rmb588 6G 4,000

1.3 1.5 2.0

3.3

5.8 6.5

9.1

11.3

-

2

4

6

8

10

12

Jan Feb Mar Apr May Jun Jul Aug Sep

4G subscriber net addition (m)

Sources: China Mobile (Oct 2014)

Sources: China Mobile

Xiaomi launched its first 4G smartphone (Mi4) in July 2014 Xiaomi will also help to drive 4G

adoption with its “low-price/high specification” product offering. The company launched the Mi4, its first 4G smartphone, in July 2014. The device offers matching or even superior specifications compared to the iPhone 6/6+ (see table below), but it is priced at just one-third of its Apple counterparts. Xiaomi is likely to ship 60m units of the smartphone in 2014, and management targets over 60% YoY growth in 2015 to 100m units. Xiaomi was the leader in the Chinese smartphone market in 2Q14, according to Canalys, with 15m units shipped (+240% YoY). Xiaomi’s suppliers will benefit from the ramp-up in shipment momentum.

Figure 23: Flagship smartphone – Xiaomi vs Apple Figure 24: Smartphone shipments: Xiaomi vs Apple*

Model Mi4 iPhone 6 iPhone 6+

Announced 2014.7.22 2014.9.9 2014.9.9

Display size 5" 4.7" 5.5"

CPU Qualcomm A8 A8

Resolution by pixel 1920 x1080 1334 x 750 1920x 1080

Resolution by ppi 401 326 401

Thickness 8.9mm 6.9mm 7.1mm

Front camera 8MP 1.2MP 1.2MP

Back camera 13MP 8MP/f2.2 8MP/f2.2 (OIS)

Weight 149g 129g 172g

16GB Rmb1,999 Rmb5,288 Rmb6,088

3 7 19

60

100 96

136153

176

197

-

50

100

150

200

250

2011 2012 2013 2014E 2015E

(M u

nit

s)

Xiaomi Apple


Sources: Company data, GF Securities, *global shipments

Oct 24, 2014

Sector report

Figure 25: Xiaomi Mi4 Figure 26: China smartphone market share (2Q14)

Xiaomi13%

Samsung11%

Lenovo11%

Coolpad11%Huawei

11%

Apple6%

Others37%

Sources: Companies, GF Securities,*by revenue

Sources: Canalys

Double-digit volume growth for Chinese handset shipments: 17% CAGR in 2014-16E.

According to Sino, China mobile phone shipments will reach 685m units by 2016, a CAGR of 17%

from 429m units in 2013. Growth will be mainly driven by a replacement cycle from the 1.26bn

existing mobile subscribers in China. On the other hand, the global handset market is expected to

see low-single digit growth to 2,043m units by 2016, according to Gartner. As such, China is likely

to continue to outpace the global mobile phone market over the next few years, and account for

33% of the global demand by 2016, up from 24% in 2013.

Figure 27: China mobile phone sales volume forecasts Figure 28: China mobile phone sales volume vs global demand

269 300

429

516

602685

19%

12%

43%

20%17%

14%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0

100

200

300

400

500

600

700

800

900

1000

2011 2012 2013 2014E 2015E 2016E

China mobile phone sales volume (m units - LHS) YoY chg (RHS)

15% 17%24% 27% 31% 34%

85% 83%76% 73% 69% 66%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2011 2012 2013 2014E 2015E 2016E

China Rest of the world

Sources: Sino

Sources: Sino, Gartner

Risks

Key risks include: 1) margin pressure amid price wars between handset brand owners as they compete for market share; 2) write-downs of 3G inventory amid the 3G to 4G transition; 3) component shortages limit shipments by handset makers.

AAC Technologies (2018 HK)

Oct 24, 2014 Equity Research | Information technology

Buy (initiation)

Target price: HK$56.65

Recent share price correction provides good re-entry point


Initiate at Buy We initiate our coverage of AAC Technologies (AAC Tech) with a Buy

rating as we expect: 1) a resumption in YoY sales and earnings growth from 4Q14 onwards driven by a strong sell-through rate for the iPhone 6, and; 2) sustainable earnings growth in 2015 driven by its core acoustic products and a ramp-up in sales of non-acoustic components. Its valuation is undemanding at 14.3x 2015E P/E given our projection for double-digit EPS growth in 2015/16. We see good re-entry opportunities after the recent share price correction on profit-taking following the launch of the iPhone 6 on September 9. We set a 12-month target price of HK$56.65, based on a 2015 target P/E of 16x. AAC Tech is a constituent stock of the Shanghai-Hong Kong Stock Connect program Resumption of sales and earnings growth from 4Q14 onwards AAC’s 1H14

performance was disappointing, with flattish top line and earnings growth, largely due to a slowdown in iPhone purchases ahead of the launch of the iPhone 6. So far, the iPhone 6/6+ have received a favorable market response, with 10m units sold in the week following its launch. We expect 100m iPhone6/6+ units to be shipped between its launch in September and end-1Q15. AAC Tech will be a direct beneficiary given that Apple is its single largest customer (over 40% of sales, according to our estimate). We forecast a strong pick-up in YoY sales and earnings growth in 4Q14. Double-digit earnings growth in 2015/16 We project double-digit sales growth in

2015/16, driven by both overseas (Apple, Samsung) and domestic customers (Xiaomi, Huawei). We see mid-teen sales growth to overseas customers in 2015/16, and expect domestic customers to account for 24% of sales in 2015, up from 21% in 2014E. We believe earnings growth in 2015 will largely depend on sales momentum for the iPhone 6/6+ and the improvement in sales and profitability for non-acoustic components. Wearable investment story Despite market skepticism on the Apple Watch (being

launched in early 2015), this new category of smartwatch will generate incremental demand for acoustic components. AAC Tech has experience as a supplier of acoustic components for wearable products (e.g. Google glass and PRC-based inWatch) and is well positioned to enter the supply chain. Key risks Disruptions to iPhone 6 shipments due to component shortages, a slowdown in the China smartphone market, and price competition among rivals (GoerTek in China, Knowles in the US).

Stock valuation

Turnover

(Rmb m)

YoY

chg

(%)

Net profit

(Rmb m)

EPS

(Rmb)

YoY

chg

(%)

P/E

(x)

P/B

(x)

Dividend

Yield

(%)

ROE

(%)

Net

gearing

(%)

2012 6,283 55 1,763 1.44 71 24.6 7.2 1.6 29.0 cash

2013 8,096 29 2,578 2.10 46 16.9 5.5 2.4 32.7 cash

2014E 9,243 14 2,557 2.08 (1) 17.0 4.6 2.4 27.2 cash

2015E 11,013 19 3,067 2.50 20 14.2 3.9 2.8 27.3 cash

2016E 12,542 14 3,478 2.83 13 12.5 3.3 3.2 26.1 cash Sources: Company data, GF Securities (HK) Research Note: Calculated based on diluted shares.

Stock performance

25

30

35

40

45

50

55

Oct-13 Jan-14 Apr-14 Jul-14 Oct-14

Source: Bloomberg

Key data

Oct 22 close (HK$) 44.30

Share in issue (m) 1,228

Major shareholder Benjamin Pan (40.8%)

Market cap (HK$bn) 54.4

3M avg. vol. (m) 1.7

52W high/low (HK$) 54.50 /29.55 Source: Bloomberg



Oct 24, 2014

Company report

Figure 1: Quarterly sales and gross profit margin Figure 2: Sales and blended gross profit margin

1.9 1.9 2.1 2.2

1.9 1.9 2.1

3.5

42.7 42.8 42.5 42.8 40.2

42.1 42.5 43.0

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14E 4Q14E

Sales (Rmb bn) (LHS) GPM (%) (RHS)

2.3 2.2 3.3

4.1

6.3

8.1 9.2

11.0 12.5

41.7 44.9 45.1 44.0 44.2 42.7 42.2 43.0 43.0

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

2008 2009 2010 2011 2012 2013 2014E 2015E 2016E



Figure 3: Revenue mix by customer (2Q14) Figure 4: Revenue mix by product (2Q14)

Top 364%

4th and 5th9%

Others27%

Speaker box37%

Receiver26%

Speaker15%

Microphones10%

Haptics2%

RF (Antennas)5%

Others5%

Sources: Company data

Figure 5: Apple iPhone shipment forecast (m units) Figure 6: Revenue mix by region

14% 16% 14% 13%

25%32%

21% 24% 25%

86% 84% 86% 87%

75%68%

79% 76% 75%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 2014E 2015E 2016E

PRC domestic Overseas customers


Oct 24, 2014

Company report

Figure 7: Financial statement

FYE Dec (Rmb m) 2012 2013 2014E 2015E 2016E FYE Dec (Rmb m) 2012 2013 2014E 2015E 2016EOverseas 5,381 6,967 7,325 8,424 9,435 Cash/ST Investments 1,314 2,354 2,300 2,833 3,791Domestic 902 1,129 1,918 2,589 3,107 Account receivables 2,329 2,581 3,039 3,621 4,123

Turnover 6,283 8,096 9,243 11,013 12,542 Inventory 958 832 1,025 1,204 1,371

Gross profit 2,774 3,459 3,896 4,736 5,393 Other Current Assets 5 5 5 5 5

Other income 71 90 48 40 68 Total current assets 4,607 5,802 6,369 7,662 9,291

FX forward contracts 1 - - - - Property, plant and equipment 3,624 3,969 5,198 6,048 6,793

Distribution exp. (186) (182) (190) (220) (251) Intangible assets 145 179 179 179 179

Admin exp. (277) (349) (318) (396) (502) Other LT Assets 549 549 549 549 549

R&D (462) (553) (668) (771) (878) Total Assets 8,925 10,677 12,295 14,438 16,812

Operating profit 1,921 2,465 2,768 3,388 3,831

Share of profits 26 12 0 17 34 ST Debt 1,035 909 909 909 909

FX gains 45 46 (1) - - Trade payables 1,575 1,617 1,758 2,064 2,350

Disposal gains & others 35 323 - - - Other Current Liabilities 98 98 98 98 98

Finance costs (12) (11) (7) - - Total current liabilities 2,751 2,679 2,765 3,071 3,357

Pre-tax income 2,016 2,835 2,761 3,405 3,865 LT Debt 0 0 0 0 0

Taxation (259) (263) (226) (340) (386) Other LT Liab 44 66 66 66 66

Minority Interests 6 6 2 3 - Minority Interests 52 56 54 51 51

Net profit 1,763 2,578 2,557 3,067 3,478 Shareholders' Equity 6,078 7,876 9,410 11,250 13,337

Total Equity & liabilities 8,925 10,677 12,295 14,438 16,812

FYE Dec (Rmb m) 2012 2013 2014E 2015E 2016E FYE Dec (Rmb m) 2012 2013 2014E 2015E 2016E

Pretax profit 2,016 2,835 2,761 3,405 3,865 Margins

Tax Paid (259) (263) (226) (340) (386) Gross margin (%) 44.2 42.7 42.2 43.0 43.0

Depr/Amort 315 428 571 650 755 EBITDA margin (%) 35.6 35.7 36.0 36.6 36.5

Change in working capital (564) (84) (511) (454) (383) EBIT margin (%) 30.6 30.5 30.0 30.8 30.5

Others 28 (368) - - - Net margin (%) 28.1 31.8 27.7 27.8 27.7

Operational cash flow 1,535 2,548 2,595 3,260 3,850 Return/Profitability

Capex (1,327) (906) (1,800) (1,500) (1,500) ROA (%) 29.0 32.7 27.2 27.3 26.1

Assoc, MI, Invsmt (12) 190 - - - ROE (%) 29.0 32.7 27.2 27.3 26.1

Investment cash flow (1,339) (716) (1,800) (1,500) (1,500) Balance sheet

Net Change in Debt 144 (126) - - - Net gearing (%) cash cash cash cash cash

New Capital - - - - - Current ratio (x) 1.7 2.2 2.3 2.5 2.8

Dividend (417) (740) (1,023) (1,227) (1,391) Working capital

Others 22 91 - - - Days receivable (days) 135 116 120 120 120

Financing cash flow (251) (775) (1,023) (1,227) (1,391) Days inventory (days) 100 65 70 70 70

FX and others (7) (17) 173 - - Days payable (days) 164 127 120 120 120

Chg in Cash (62) 1,040 (55) 533 959 Others

Beginning cash 1,376 1,314 2,354 2,300 2,833 Effective tax (%) 12.8 9.3 8.2 10.0 10.0

Ending cash 1,314 2,354 2,300 2,833 3,791 Dividend payout ratio (%) 40 41 40 40 40

Income Statement Balance Sheet

Cash Flow Statement Financial Ratio


FIH Mobile (2038 HK)


Underperform (initiation)


Sales momentum to Chinese customers offset by weakness at Sony Mobile


Initiate at Underperform We initiate our coverage of FIH Mobile with an Underpeform

rating as: 1) we expect sales momentum to Chinese customers (e.g. Xiaomi) to be offset by weakening sales to Sony Mobile, and; 2) we project persistently poor profitability

(single-digit gross profit margin and low single-digit ROE) due to the structural issues of a labor-intensive and low value-added handset assembly business. Even though FIH Mobile is a constituent stock of the Shanghai-Hong Kong Stock Connect program, we expect limited buying given the company’s weak fundamentals. We set a six month target price of HK$3.64, based on a 7x ex-cash 2015 target P/E and our 2015 net profit forecast of US$162m. Growth momentum from Chinese customers offset by weakness at Sony Mobile

Sony Mobile is currently FIH Mobile’s single largest customer, and accounted for about 40% of sales in 2013. In September 2014, Sony announced a US$1.7bn impairment loss due to poor performance at Sony Mobile. Going forward, Sony Mobile will shrink its product offering to focus on profitability rather than market share, and has cut its shipment target by 16% from 50m units to 43m units for FYE March 2015. We expect growth momentum from Chinese customers (e.g. Xiaomi) to be offset by this weakness at Sony Mobile. Poor profitability due to structural issues The labor-intensive and low value-added

nature of handset assembly offers rather low profitability. In 1H14, gross profit margin was 5.9% and net margin was razor thin at about 2%, after stripping out operating expenses. Return on equity has been poor at low single-digits. We expect rising wages and pricing pressure to limit improvements in profitability. Zero-yield stock FIH Mobile has been rather unfriendly to long-term investors, with no

dividend paid out since its listing in 2007. It will continue to be a zero-yield stock, as we expect the company to continue its zero dividend payout policy in 2014-16. Trading at low-teens 2015 ex-cash P/E The company has around 64% of its current

market cap of US$3.9bn in cash (based on end-June net cash of US$2.5bn). Stripping out net cash, the stock is trading 10.5x 2015 P/E. Key risks Upside risks include a rapid recovery in business momentum at Sony Mobile,

and strong performance at Xiaomi.

Stock valuation

Turnover

(US$ m)

YoY

chg

(%)

Net profit

(US$ m)

EPS

(US$)

YoY

chg

(%)

P/E (x) P/B

(x)

Dividend

Yield

(%)

ROE

(%)

Net

gearing

(%)

2012 5,240 (18) (316) (0.043) NA (11.7) 1.0 - (9) cash

2013 4,997 (5) 77 0.010 NA 48.6 1.0 - 2 cash

2014E 5,156 3 142 0.018 76 27.6 1.0 - 4 cash

2015E 5,517 7 162 0.021 13 24.3 1.0 - 4 cash

2016E 5,793 5 166 0.021 2 23.7 0.9 - 4 cash Sources: Company data, GF Securities (HK) Research Note: Calculated based on diluted shares.

Stock performance

3

4

5

6


HK$

Source: Bloomberg

Key data



Major shareholder Foxconn (Far East) (65.8%)


3M avg. vol. (m) 10.8




Oct 24, 2014

Company report

Figure 1: Customer mix (2013) Figure 2: Sales and margin assumptions

Top customer

40%

2nd to 5th

customers38%

Others22%

10.7 9.3

7.2 6.6 6.4 5.2 5.0 5.2 5.5 5.8

9.2

6.9

5.9

4.3

5.3

4.5

6.2 6.0 6.1

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

-

5.0

10.0

15.0

20.0

2007 2008 2009 2010 2011 2012 2013 2014E2015E2016E

Sales (US$ bn) (LHS) GPM (%) (RHS)


Figure 3: Earnings projection (2014E-16E) (US$ m) Figure 4: Half-yearly earnings projections (US$ m)

721

122

40

(220)

75

(316)

77 142 162 166

(400)

(200)

-

200

400

600

800

2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

(224)

(92)

17

60 50

93

(250)

(200)

(150)

(100)

(50)

-

50

100

150

1H12 2H12 1H13 2H13 1H14 2H14E


Oct 24, 2014

Company report


Year end Dec (US$ m) 2012 2013 2014E 2015E 2016E Year end Dec (US$ m) 2012 2013 2014E 2015E 2016EAsia 2,810 2,912 2,990 3,255 3,476 Cash/ST Investments 2,356 2,517 2,707 2,966 3,245Europe 1,398 1,323 1,180 1,214 1,217 Account receivables 1,132 1,678 1,695 1,814 1,905Amercia 1,032 763 986 1,048 1,101 Inventory 348 226 265 284 298

Turnover 5,240 4,997 5,156 5,517 5,793 Other Current Assets 1 0 0 0 0

Gross profit (1) 224 321 331 353 Total current assets 3,837 4,421 4,668 5,065 5,448

Other income/gains 193 271 256 260 260 Property, plant and equipment 1,094 987 888 768 634

Selling & distribution exp. (21) (18) (17) (17) (17) Intangible assets 0 0 0 0 0


R&D (173) (156) (146) (154) (162) Total Assets 5,088 5,585 5,732 6,009 6,258

Other expenses (102) (21) (38) (40) (40)

Operating profit (320) 108 207 198 203 ST Debt 215 138 138 138 138

Finance costs (11) (6) (9) (10) (10) Trade payables 1,203 1,585 1,590 1,705 1,788

Share of profits 1 (1) (1) - - Other Current Liabilities 101 121 121 121 121

Pre-tax income (330) 101 197 188 193 Total current liabilities 1,519 1,844 1,849 1,964 2,047

Taxation 14 (24) (54) (26) (27) LT Debt 0 - - - -

MI (0) (0) (0) - - Other LT Liab 43 33 33 33 33

Net profit (316) 77 142 162 166 Minority Interests 11 10 10 10 10

Shareholders' Equity 3,516 3,699 3,841 4,003 4,168


Year end Dec (US$ m) 2012 2013 2014E 2015E 2016E 2012 2013 2014E 2015E 2016E

Pretax profit (330) 101 197 188 193 Margins

Tax Paid 14 (24) (54) (26) (27) Gross margin (%) (0.0) 4.5 6.2 6.0 6.1

Depr/Amort 215 154 179 200 214 EBITDA margin (%) (2.0) 5.2 7.5 7.2 7.2

Change in working capital 528 (42) (51) (22) (21) Operating profit margin (%) (6.1) 2.2 4.0 3.6 3.5

Others 175 43 - - - Net margin (%) (6.0) 1.5 2.8 2.9 2.9

Operational cash flow 602 232 270 339 358 Return/Profitability

Capex (42) (77) (80) (80) (80) ROA (%) (12.4) 1.4 2.5 2.8 2.7

Assoc, MI, Invsmt 96 64 - - - ROE (%) (9.0) 2.1 3.8 4.1 4.1

Investment cash flow 54 (13) (80) (80) (80) Balance sheet

Net Change in Debt 215 (77) - - - Net gearing cash cash cash cash cash


Dividend - - - - - Working capital

Others (480) 22 - - - Receivables (days) 79 123 120 120 120

Financing cash flow (265) (55) - - - Inventory (days) 24 17 20 20 20

FX and others 13 (3) - - - Payables (days) 84 121 120 120 120

Chg in Cash 404 161 190 259 278 Others

Beginning cash 1,952 2,356 2,517 2,707 2,966 Effective tax (%) 4 23 27 14 14

Ending cash 2,356 2,517 2,707 2,966 3,245 Dividend payout ratio (%) 0 0 0 0 0




BYD Electronic (285 HK)


Hold (initiation)


Metal casings to drive earnings growth


Initiate with Hold rating We initiate our coverage of BYD Electronic (BYDE) with a Hold

rating as we believe the recent share price rally has largely priced in the positive outlook for margin expansion on the ramp-up in its metal casings business. We set a 12-month target price of HK$9.99, based on a 2015 target P/E of 13x. From plastic to metal casings BYDE is a 65%-owned subsidiary of BYD (1211 HK)

engaged in the handset casings, handset ODM, and handset chargers business. Key customers include Huawei, Nokia, HTC and Samsung. In 2013, plastic casings

accounted for 20% of sales, followed by metal casings (20%), handset ODM (15%), handset EMS (30%) and handset chargers & other products (15%). Growth in metal casings BYDE began mass production of metal casings in 2013,

primarily for HTC. We expect metal casings revenue to account for about 30% of group sales in 2014, up from 20% in 2013. The recent share price rally has been mainly driven by margin expansion as metal casings offer higher margins than plastic casings. Strong balance sheet to support capacity expansion To capture business

opportunities in metal casings, management increases production capacity for these products. It currently has over 7,000 units of CNC (computer-numeric control) machines, up from 5,000 in 1H14. The significant capital investment needed for CNC machines (US$50,000 per set) is a major barrier for new entrants to the metal casings business. BYDE’s strong balance sheet and strong cash inflow from operations provides solid support allowing it to fund capacity expansion. BYDE had Rmb2bn net cash as of June 30 2014. In 2014, BYDE will invest up to Rmb1.5bn in capex, up from Rmb1.0bn in 2013. Margin expansion expected in 2014 We expect blended gross profit margin to improve

in 2014, underpinned by the change in revenue mix, with a higher revenue contribution from metal casings. We expect gross profit margin to increase to 13.0% in 2016, up from 10.5% in 2013. Stock fairly priced While we see positive business momentum for BYDE, these positive

factors have been priced in by the recent share price rally. We initiate with a Hold rating and suggest waiting for a re-entry point. Risks Downside risks include a slowdown in the adoption of metal casings by customers,

which would result in under-utilization of its production capacity and a slowdown in momentum from key customers such as Nokia, HTC and Samsung. Upside risks include inclusion in the Apple supply-chain.

Stock valuation

Turnover

(Rmb m)

YoY

chg

(%)

Net profit

(Rmb m)

EPS

(Rmb)

YoY

chg

(%)

P/E

(x)

P/B

(x)

Dividend

Yield

(%)

ROE

(%)

Net

gearing

(%)

2012 14,091 (11) 379 0.17 (37) 44.7 2.1 - 4.7 cash

2013 16,062 14 648 0.29 71 26.2 1.9 0.4 7.6 cash

2014E 19,236 20 1,180 0.53 82 14.4 1.7 0.7 12.6 cash

2015E 21,802 13 1,375 0.62 17 12.4 1.5 0.8 13.1 cash


Stock performance

3

4

5

6

7

8

9

10

11


Source: Bloomberg

Key data



Major shareholder BYD (65.2%)






Oct 24, 2014

Company report

Figure 1: Revenue mix projections Figure 2: Sales and margin forecasts

45%56% 56% 59% 61%

55%44% 44% 41% 39%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012 2013 2014E 2015E 2016E

Handset components Handset EMS/ODM

8.6 11.2

16.6 15.9 14.1

16.1 19.2

21.8 24.2

20.0

13.9 12.4

10.9

8.4

10.5 11.3

12.5 13.0

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

-

10.0

20.0

30.0

40.0

50.0

2008 2009 2010 2011 2012 2013 2014E 2015E 2016E



Figure 3: Earnings projections (2014E-16E) (Rmb m) Figure 4: OPEX to sales (%)

1,093

766 759

1,038

603

379

648

1,180

1,375

1,614

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

3.5 3.9 3.8 3.5 3.0 3.1 3.1

0.7 0.8 0.9

0.8 0.9 0.9 0.9

2.1

2.8 2.1

2.1 1.9 1.9 1.9

6.3

7.5

6.8 6.4

5.8 5.9 5.9

-

5.0

10.0

2010 2011 2012 2013 2014E 2015E 2016E

R&D exp. Distribution exp. Admin exp. OPEx to sales


Figure 5: Revenue mix by customer (2013) Figure 6: Revenue mix by product (2013)

Nokia20%

Huawei20%

HTC15%

Samsung

8%

Others

37%

Nokia Huawei HTC Samsung Others

Plastic casings20%

Metal casings20%

Chargers, lenses, others

15%

ODM15%

Assembly30%

Plastic casings Metal casings Chargers, lenses, others ODM Assembly

Sources: Company data

Oct 24, 2014

Company report


Year end Dec (Rmb m) 2012 2013 2014E 2015E 2016E Year end Dec (Rmb m) 2012 2013 2014E 2015E 2016E

Handset components 6,287 9,056 10,693 12,831 14,756 Cash/ST Investments 2,111 2,575 2,539 3,160 4,253

Handset EMS/ODM 7,804 7,006 8,544 8,971 9,419 Account receivables 2,752 3,437 4,216 4,779 5,299

Turnover 14,091 16,062 19,236 21,802 24,175 Inventory 1,739 1,862 2,337 2,613 2,881

Cost of sales (12,901) (14,383) (16,959) (19,077) (21,033) Other Current Assets 578 916 916 916 916

Gross profit 1,190 1,679 2,277 2,725 3,143 Total current assets 7,180 8,790 10,008 11,468 13,349

Other income/gains 250 262 274 260 260 Property, plant and 3,914 4,209 4,893 5,223 5,330

R&D (530) (560) (577) (676) (749) Intangible assets 8 9 9 9 9

Distribution exp. (126) (133) (167) (196) (218) Other LT Assets 786 868 868 868 868

Admin exp. (299) (343) (366) (414) (459) Total Assets 11,888 13,876 15,778 17,568 19,556

Other expenses (52) (146) (84) (90) (90)

Operating profit 433 759 1,357 1,609 1,886 ST Debt 0 0 0 0 0


Share of profits - - - - - Other Current Liabilities 884 1,208 1,208 1,208 1,208

Pre-tax income 431 752 1,349 1,599 1,876 Total current liabilities 3,634 5,042 5,882 6,435 6,970

Taxation (51) (103) (169) (224) (263) LT Debt 0 - - - -

MI (0) (0) - - - Other LT Liab 0 0 0 0 0

Net profit 379 648 1,180 1,375 1,614 Minority Interests 0 0 0 0 0



Year end Dec (Rmb m) 2012 2013 2014E 2015E 2016E 2012 2013 2014E 2015E 2016E

Pretax profit 431 752 1,349 1,599 1,876 Margins



Change in working capital - 276 (428) (272) (252) EBIT margin (%) 3.1 4.7 7.1 7.4 7.8

Others (326) 91 - - - Net margin (%) 2.7 4.0 6.1 6.3 6.7

Operational cash flow 744 1,647 1,568 1,973 2,254 Return/Profitability

Capex (770) (1,043) (1,500) (1,200) (1,000) ROA (%) 3.1 5.0 8.0 8.2 8.7

Assoc, MI, Invsmt 134 (322) - - - ROE (%) 4.7 7.6 12.6 13.1 13.6

Investment cash flow (636) (1,365) (1,500) (1,200) (1,000) Balance sheet

Net Change in Debt - - - - - Net gearing cash cash cash cash cash


Dividend - (64) (118) (138) (161) Working capital

Others (123) 57 - - - Days receivable (days) 71 78 80 80 80

Financing cash flow (123) (7) (118) (138) (161) Days inventory (days) 49 47 50 50 50

FX and others - 189 - - - Days payable (days) 78 97 100 100 100

Net chg in cash (15) 464 (50) 635 1,093 Others


Ending cash 2,111 2,575 2,525 3,160 4,253 Dividend payout ratio (%) - 9.9 10.0 10.0 10.0




Sunny Optical (2382 HK)


Buy (initiation)


Direct upstream proxy for demand in China’s smartphone market


Initiate with Buy rating We initiate our coverage of Sunny Optical with a Buy rating as:

1) it is a direct proxy for the China smartphone market given its market leadership in handset camera modules used in the Chinese market; 2) we expect the downtrend in blended gross profit margin since 2010 to be reversed in 2015, driven by margin expansion for its core camera module products via vertical integration (i.e. increased in-house production of the camera lenses used in its camera modules), and; 3) at 15.4x 2015E P/E, we see its valuation as undemanding given our projection for double-digit EPS growth in 2015/16. We set a 12-month target price of HK$15.05, based on a 2015 target P/E of 18x. Largest handset camera modules supplier in China; good proxy for Chinese demand Ningbo-based Sunny Optical is the largest manufacturer of camera modules in

China, with a market share of over 30%. 2013 total camera module shipments reached 132m units. In 1H14, camera modules accounted for 82% of sales. Sunny is a good proxy for demand at Chinese smartphone makers, with 55% of group sales in 1H14 derived from its top five customers (Huawei, Xiaomi, Oppo, Yulong, Lenovo). We are positive

on the growth outlook for this core business given favorable smartphone shipment momentum at these PRC customers. Expect blended gross profit margin to rebound in 2015 We believe margin expansion

will be driven by vertical integration and pixel migration. Gross profit margin for camera modules is currently in the low-teens (1H14: 12.1%). Sunny Optical has in-house production for its lens sets (a critical part of camera modules) and buys from external suppliers such as Largan in Taiwan and Kantatsu in Japan. Management aims to almost

double lens set output to 100m units in 2014, up from 55m units in 2013, for both internal consumption and external sales, and raise its in-house lens set procurement ratio to 30% in 2014 (up from about 22% in 2013). In addition, pixel migration will help margin improvement. Management wants 8MP and above handset lens sets to account for 30% of total shipments in 2014, up from 9% in 2013. Strong earnings momentum We expect over 20% top line growth in 2015 and 2016 and

more rapid EPS growth of 35% and 29%, respectively, due to margin expansion and improved economies of scale. Key risks A slowdown in China’s smartphone market, and poor production yields for its

in-house lens sets.

Stock valuation

Turnover

(Rmb m)

YoY

chg

(%)

Net profit

(Rmb m)

EPS

(Rmb)

YoY

chg

(%)

P/E

(x)

P/B

(x)

Dividend

Yield

(%)

ROE

(%)

Net

gearing

(%)2012 3,984 59 346 0.35 72 29.1 5.2 1.0 19.3 cash

2013 5,813 46 441 0.44 23 23.6 3.7 1.2 18.5 cash

2014E 8,185 41 544 0.50 14 20.7 3.5 1.4 17.9 cash

2015E 10,042 23 734 0.67 35 15.4 3.0 2.0 21.0 cash

2016E 12,237 22 944 0.86 29 12.0 2.6 2.5 23.2 cash Sources: Company data, GF Securities (HK) Research Note: Calculated based on diluted shares.

Stock performance

4

5

6

7

8

9

10

11

12

13


Source: Bloomberg

Key data



Major shareholder Ye Liaoning (42.4%)






Oct 24, 2014

Company report

Figure 1: Revenue by product Figure 2: Sales and blended gross profit margin (annual)

38%45%

62%76%

82% 84% 86%

52%48%

33%20%

15% 13% 11%10% 7% 5% 4% 3% 3% 2%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2010 2011 2012 2013 2014E 2015E 2016E

Optoelectronic products Optical components Optical instruments

1.8 2.5 4.0

5.8

8.2 10.0

12.2

21.6 20.9

18.6

16.6 15.2

16.3 16.8

-

5.0

10.0

15.0

20.0

25.0

-

5.0

10.0

15.0

20.0

25.0

30.0

2010 2011 2012 2013 2014E 2015E 2016E



Figure 3: Gross profit margin by product (%) Figure 4: Sales and blended gross profit margin (semi-annual)

13.314.7 14.1

12.6 12.0 14.0 15.0

22.2 22.4 22.824.6

27.3 27.0 27.0

37.4

34.5 34.1

37.3 37.0 36.0 36.0

0

5

10

15

20

25

30

35

40

2010 2011 2012 2013 2014E 2015E 2016E

Optoelectronic products Optical components Optical instruments

1.1 1.4 1.8

2.2 2.8 3.0

3.8 4.3

21.4 20.6

19.2 18.1

15.8 17.4

14.6 15.8

-

5.0

10.0

15.0

20.0

25.0

-

2.0

4.0

6.0

8.0

10.0

1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14



Figure 5: Monthly camera modules shipment (m units) Figure 6: Revenue mix by application

-

5

10

15

20

25


2013 2014

61%

73%83% 85% 86%

4%

5%

5%6% 7%

20%

11%

5% 3% 2%15% 11% 7% 6% 5%

0%

50%

100%

2012 2013 2014E 2015E 2016E

Handset-related Vehicle-related DSC-related Other


Oct 24, 2014

Company report


Year end Dec (RMB m) 2012 2013 2014E 2015E 2016E Year end Dec (RMB m) 2012 2013 2014E 2015E 2016EOptical components 1,309 1,164 1,255 1,318 1,384 Cash/ST Investments 244 709 779 966 1,286Optoelectronic products 2,490 4,416 6,774 8,467 10,584 Account receivables 901 1,172 1,794 2,201 2,682Optical instruments 185 233 245 257 270 Inventory 748 768 950 1,152 1,394

Turnover 3,984 5,813 8,185 10,042 12,237 Other Current Assets 375 1,118 1,118 1,118 1,118

Cost of sales (3,243) (4,846) (6,938) (8,408) (10,179) Total current assets 2,267 3,766 4,641 5,437 6,481

Gross profit 741 967 1,247 1,634 2,058 Property, plant and equipment 646 785 935 1,056 1,158

Other income/gains 46 50 59 50 50 Intangible assets 0 0 0 0 0

Selling & distribution exp. (64) (88) (108) (151) (184) Other LT Assets 89 114 114 114 114

R&D (163) (251) (323) (402) (489) Total Assets 3,002 4,665 5,690 6,606 7,752

Admin exp. (150) (166) (222) (271) (330)

Other expenses (5) - - - - ST Debt 103 489 489 489 489

Operating profit 404 512 653 860 1,105 Trade payables 939 1,257 1,901 2,304 2,789

Finance costs (3) (7) (14) (7) (7) Other Current Liabilities 11 36 36 36 36

Share of profits (4) (1) - - - Total current liabilities 1,052 1,782 2,426 2,828 3,313

Pre-tax income 397 505 638 853 1,098 LT Debt 0 - - - -

Taxation (58) (64) (94) (119) (154) Other LT Liab 18 23 23 23 23

MI 7 (0) - - - Minority Interests 10 10 10 10 10

Net profit 346 441 544 734 944 Shareholders' Equity 1,922 2,850 3,231 3,745 4,405


Year end Dec (RMB m) 2012 2013 2014E 2015E 2016E 2012 2013 2014E 2015E 2016E

Pretax profit 397 505 638 853 1,098 Margins



Change in working capital (209) 28 (161) (206) (239) EBIT margin (%) 10.1 8.8 8.0 8.6 9.0

Others 19 52 - - - Net margin (%) 8.7 7.6 6.7 7.3 7.7


Capex (320) (319) (300) (300) (300) ROA (%) 12.9 11.5 10.5 11.9 13.2

Assoc, MI, Invsmt 140 (721) - - - ROE (%) 19.3 18.5 17.9 21.0 23.2

Investment cash flow (180) (1,039) (300) (300) (300) Balance sheet

Net Change in Debt 23 386 - - - Net gearing cash cash cash cash cash

New Capital - 617 - - - Current ratio (x) 2.2 2.1 1.9 1.9 2.0

Dividend (71) (105) (163) (220) (283) Working capital

Others (38) (61) - - - Days receivable 83 74 80 80 80

Financing cash flow (86) 838 (163) (220) (283) Days inventory 84 58 50 50 50

FX and others 0 (1) - - - Days payable 106 95 100 100 100

Chg in Cash (8) 466 70 187 320 Others

Beginning cash 252 244 709 779 966 Effective tax (%) 14.7 12.6 14.7 14.0 14.0

Ending cash 244 709 779 966 1,287 Dividend payout ratio (%) 29.7 27.8 30.0 30.0 30.0




Truly (732 HK)


Hold (initiation)


Cheap but lack of upside catalysts


Initiate at Hold The company issued a profit warning on October 6 to announce a 9M14

net profit decline of over 25% YoY. We initiate coverage of Truly with an Hold rating as we do not see an appealing investment story given its lackluster client mix. We believe it is still too early to bargain hunt at current levels. We set a 12-month target price of HK$3.79, based on a target P/E of 6x. Smartphone-centric display maker Truly is a Guangdong-based manufacturer of LCD

displays for handsets and vehicles. Handset displays accounted for 79% of group sales in 1H14, followed by vehicle-related displays (10%) and displays for industrial and medical use (10%). Key customers include Samsung, Sony and domestic smartphone makers (Huawei, ZTE, BBK, Oppo, TCL Comm, Gionee etc). China is Truly’s main market,

accounting for 70% of group sales in 2013, followed by South Korea at 20%. Xiaomi not a customer Not having Xiaomi as a customer is one of the key reasons for

Truly’s weakness, in our view. Xiaomi uses displays from Japan’s Sharp for its smartphones under its “high product specification, low-price” strategy. Truly did not benefit from the rapid ramp-up in shipments at Xiaomi in the China market, and at the same time suffered as its Chinese smartphone customers lost market share to the company. Decelerating top line growth – two profit warnings in 2014 Truly’s monthly sales have

weakened since April. YoY sales growth turned flattish in 2Q14 (-1% YoY) and 3Q14 (+4% YoY), compared with 27% YoY sales growth in 1Q14, due to weak demand from Samsung (note: South Korea is a major market for Truly which accounted for 20% of sales in 2013) and Chinese domestic customers. The company issued a profit warning in August and again in October for 1H14 and 9M14, respectively. Truly believes 9M14 net profit could decline by more than 25% YoY due to margin contraction given a lower-than-expected capacity utilization rate. Spin-off of compact camera modules and touch panel businesses The proposed

spin-off of its camera modules and touch panel businesses in the A-share market was approved by the Hong Kong Stock Exchange in July 2014. The two business accounted for about 46% of group sales in 2013. Management is currently working with mainland regulators and cannot offer a concrete timeline for an A-share listing, given the sizeable backlog of pending IPOs in the A-share market. Truly would benefit from one-off gains, but investor interest in the two businesses will be diluted following the spin-off. Risks Upside risks include a recovery in Samsung smartphone shipment momentum,

Xiaomi adopting domestic handset display suppliers, and a special dividend as part of the spin-off of its camera modules and touch panel businesses in the A-share market.

Stock valuation

Turnover

(HK$ m)

YoY

chg

(%)

Net profit

(HK$m)

EPS

(HK$)

YoY

chg

(%)

P/E

(x)

P/B

(x)

Dividend

Yield

(%)

ROE

(%)

Net

gearing

(%)

2012 12,374 18 710 0.26 87 15.6 2.2 2.5 14.3 36.7

2013 20,681 67 1,620 0.57 124 7.0 1.6 4.8 23.5 15.6

2014E 22,399 8 1,463 0.52 (10) 7.7 1.4 3.9 18.4 15.7

2015E 24,639 10 1,673 0.59 14 6.7 1.2 4.4 18.4 7.0


Stock performance

3

4

5

6


Source: Bloomberg

Key data



Major shareholder Lam Wai Wah (43.9%)






Oct 24, 2014

Company report

Figure 1: Revenue mix by application Figure 2: Sales and gross profit margin forecasts

73%82% 81% 81% 80%

13%9% 9% 9% 10%

15% 10% 10% 10% 10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012 2013 2014E 2015E 2016E

Handset display Automotive display Others (industrial, medical)

5.8 7.7

10.5 12.4

20.7 22.4

24.6 26.1

14.3

11.8 12.2 12.6

14.0 12.8 13.0 13.0

-

5.0

10.0

15.0

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

2009 2010 2011 2012 2013 2014E 2015E 2016E

Sales (HK$ bn) (LHS) GPM (%) (RHS)


Figure 3: Sales by region (HK$ bn) Figure 4: Sales mix by region (2013)

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

PRC South Korea Japan HK Europe Others

2010 2011 2012 2013

PRC70%

South Korea20%

Japan2%

HK2%

Europe3%

Others3%


Figure 5: Monthly sales (HK$ bn) Figure 6: Quarterly sales and gross profit margin forecasts

-

0.5

1.0

1.5

2.0

2.5


2013 2014

2.4 2.9 3.3 3.7 3.4

5.3 5.9 6.1

4.3 5.2

6.1 6.7 10.0 10.4

11.4

17.0

12.0

15.1

12.3

15.7

12.5 12.6 12.6 13.5

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

(1.0)

1.0

3.0

5.0

7.0

9.0

11.0

13.0

15.0

Sales (HK$ m) (LHS) GPM (%) (RHS)


Oct 24, 2014

Company report


Year end Dec (HK$ m) 2012 2013 2014E 2015E 2016E Year end Dec (HK$ m) 2012 2013 2014E 2015E 2016EHandset display 9,010 16,860 18,107 19,918 20,914 Cash/ST Investments 1,330 2,806 2,642 3,250 4,153Automotive display 1,570 1,790 2,059 2,264 2,491 Account receivables 4,009 5,908 6,751 7,426 7,868Others (industrial, medical) 1,794 2,031 2,234 2,457 2,703 Inventory 1,016 1,489 1,872 2,056 2,178

Turnover 12,374 20,681 22,399 24,639 26,107 Other Current Assets 116 8 8 8 8


Other income and losses 71 107 (2) - - Property, plant and equipment 4,893 5,517 5,917 6,267 6,517

Admin exp. (365) (480) (412) (517) (548) Intangible assets 1 1 1 1 1

Distribution exp. (206) (326) (451) (419) (444) Other LT Assets 223 553 553 553 553

Share of results 0 0 0 0 0 Total Assets 11,587 16,281 17,743 19,559 21,278

Finance costs (73) (79) (83) (80) (80)

Pre-tax income 984 2,115 1,930 2,187 2,322 ST Debt 2,249 2,949 2,949 2,949 2,949

Taxation (268) (346) (349) (394) (418) Trade payables 3,091 5,029 5,348 5,873 6,223

MI (6) (148) (119) (120) (120) Other Current Liabilities 164 84 84 84 84

Net profit 710 1,620 1,463 1,673 1,784 Total current liabilities 5,505 8,062 8,381 8,906 9,256

LT Debt 906 935 935 935 935

Other LT Liab 36 58 58 58 58

Minority Interests 163 323 442 562 682



Year end Dec (HK$ m) 2012 2013 2014E 2015E 2016E 2012 2013 2014E 2015E 2016E

Pretax profit 984 2,115 1,930 2,187 2,322 Margins


Depr/Amort 562 619 600 650 750 EBIT margin (%) 8.5 10.6 9.0 9.2 9.2

Change in working capital (117) (434) (906) (334) (215) Operating profit margin (%) 8.5 10.6 9.0 9.2 9.2

Others (94) 149 - - - Net profit margin (%) 5.7 7.8 6.5 6.8 6.8

Operational cash flow 1,067 2,102 1,276 2,109 2,439 Returns and profitability - - - - -

Capex (799) (1,184) (1,000) (1,000) (1,000) ROE (%) 14.3 23.5 18.4 18.4 17.2

Assoc, MI, Invsmt 148 (80) - - - ROA (%) 6.6 11.6 8.6 9.0 8.7

Investment cash flow (651) (1,264) (1,000) (1,000) (1,000) Balance sheet

Net Change in Debt 123 729 - - - Net gearing (%) 36.7 15.6 15.7 7.0 cash



Others 110 421 - - - Receivables (days) 118 104 110 110 110

Financing cash flow 40 614 (439) (502) (535) Inventory (days) 34 31 35 35 35

FX and others 6 24 - - - Payable (days) 104 103 100 100 100

Chg in Cash 462 1,476 (163) 607 904 Others

Beginning cash 868 1,330 2,806 2,642 3,250 Effective tax rate (%) 27.2 16.4 18.1 18.0 18.0

Ending cash 1,330 2,806 2,642 3,250 4,153 Dividend payout (%) 39.0 33.1 30.0 30.0 30.0




TCL Comm (2618 HK)


Hold (initiation)


Margin contraction to continue in 2015


Initiate at Hold We initiate coverage of TCL Comm with a Hold rating given the intensifying competitive environment in overseas markets: 1) Samsung, the market

leader in the global handset market, which has lost market share to Chinese handset makers, may fight back with price cuts; 2) other domestic Chinese handset makers (e.g. Xiaomi) are expanding into overseas markets; 3) Lenovo will help Motorola, which it

acquired in January this year, to regain market share in overseas markets, and; 4) we expect margin contraction to continue in 2015. We set a 12-month target price of HK$8.27, based on a 2015 target P/E of 9x. Overseas-centric revenue mix TCL Comm is the sixth-largest global handset market

with total handset shipments of 48.8m units in 9M14 (+35% YoY) sold mostly under the “Alcatel” brand. The company generates over 90% of its revenue from sales of feature phones and smartphones in overseas markets via both carriers and open market channels. Americas is its most important market, accounting for around half of its revenue in 3Q14, while it was also the leader in Central America and second in Latin America. EMEA (Europe, the Middle East and Africa) accounted for 35% of sales in 3Q14, while the Chinese market accounted for 10%. Worsening competitive environment We expect smartphone margins and ASP to come

under pressure overseas due to intensifying competition. We are concerned about Samsung cutting its prices to regain market share from Chinese smartphone makers to halt its recent decline in market share. Separately, we expect Motorola to regain momentum in 2015, with help from Lenovo. Motorola has strong brand recognition and will compete against TCL’s “Alcatel” smartphone for market share in the US and EMEA. Margin contraction to continue in 2015 3Q14 results showed the first indications of

margin contraction. 3Q14 gross profit margin fell sequentially to 19.0%, down from 19.4% in 2Q14, despite higher sales in the quarter. We expect margin contraction to continue in 2015 due to pricing pressure. Earnings to peak in 2014 We expect 19% top line growth in 2015 driven largely by

volume growth. However, we expect margin pressure will lead to decline in EPS in 2015 and in 2016. Risks Upside risk include Samsung pulling out of the low-end smartphone market.

Stock valuation

Turnover

(HK$ m)

YoY

chg

(%)

Net profit

(HK$m)

EPS

(HK$)

YoY

chg

(%)

P/E (x) P/B (x) Dividend

Yield

(%)

ROE

(%)

Net

gearing

(%)

2012 12,031 13 (208) (0.18) n.a. n.a. 3.8 0.4 (8) 31.5

2013 19,362 61 313 0.27 n.a. 29.6 3.2 1.3 12 19.3

2014E 29,795 54 1,115 0.95 256 8.3 2.6 4.8 34 10.3

2015E 35,396 19 1,083 0.92 (3) 8.5 2.2 4.7 28 14.9

2016E 40,103 13 1,033 0.88 (5) 9.0 1.9 4.5 23 16.6 Sources: Company data, GF Securities (HK) Research Note: Calculated based on diluted shares.

Stock performance

5

6

7

8

9

10

11


Source: Bloomberg

Key data



Major shareholder TCL Corp (50.2%)






Oct 24, 2014

Company report

Figure 1: Shipment mix Figure 2: Sales and margin forecasts

15%

41%

57%

90% 95%

85%

88%

43%

10% 5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012 2013 2014E 2015E 2016E

Smartphone Feature phone

2.4 4.0

5.5

7.5

5.5 6.7

7.8

9.8

6.8

8.3 9.2

11.4 16.4

18.4

19.6 19.6 19.6 19.4 19.0 19.0 18.7 18.5 18.3 18.2

10.0

12.0

14.0

16.0

18.0

20.0

22.0

-

5.0

10.0

15.0

20.0

Sales (HK$bn) (LHS) GPM (%) (RHS)


Figure 3: Handset shipment and ASP assumptions Figure 4: Quarterly Handset shipment and ASP assumptions

43

55

72 80

88 36.2

45.0

53.3 57.0 58.7

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

-

50

100

150

2012 2013 2014E 2015E 2016E

Handset shipment (m units) (LHS) ASP (US$) (RHS)

8.5

12.1 15.4

19.2

13.6 16.3

18.7

23.1

15.6

18.7 20.5

25.4

37.0 41.8

45.4 50.2

52.2 52.4 53.4 54.5 55.6 56.7 57.3 57.8

10.0

20.0

30.0

40.0

50.0

60.0

70.0

-

10.0

20.0

30.0

40.0

Handset shipment (m units) (LHS) ASP (US$) (RHS)


Figure 5: Sales mix by region Figure 6: Sales mix by region (3Q14)

43% 45%52% 52% 53%

37%40%

35% 34% 33%

13%7% 7% 7% 6%

7%8% 6% 7% 8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012 2013 2014E 2015E 2016E

America EMEA APAC China

America52%

EMEA35%

APAC5%

China8%


Oct 24, 2014

Company report

Figure 7: Earnings projection (2014E-16E) (HK$ m) Figure 8: Quarterly earnings projections (HK$ m)

800

(208)

313

1,115 1,083 1,033

(400)

(200)

-

200

400

600

800

1,000

1,200

2011 2012 2013 2014E 2015E 2016E

(87)

(226)(246)

39

226

295

177

254 294

344

250 268 269

300

(300)

(200)

(100)

-

100

200

300

400



Year end Dec (HK$ m) 2012 2013 2014E 2015E 2016E Year end Dec (HK$ m) 2012 2013 2014E 2015E 2016E

America 5,117 8,715 15,493 18,406 21,406 Cash/ST Investments 5,190 1,840 2,032 1,768 1,596

EMEA 4,481 7,759 10,428 12,035 13,234 Account receivables 2,842 5,550 7,347 8,728 9,889

APAC 817 1,476 1,788 2,478 3,057 Inventory 1,263 2,649 3,297 3,957 4,505

China 1,616 1,412 2,086 2,478 2,406 Other Current Assets 1,917 1,827 1,827 1,827 1,827

Turnover 12,031 19,362 29,795 35,396 40,103 Total current assets 11,212 11,866 14,503 16,280 17,816

Cost of sales (9,934) (15,690) (24,071) (28,886) (32,885) Property, plant and 587 940 1,060 1,160 1,240

Gross profit 2,097 3,672 5,724 6,510 7,219 Intangible assets 1,174 1,174 1,174 1,174 1,174

Other income 543 513 693 600 600 Other LT Assets 348 442 442 442 442

R&D (740) (1,064) (1,293) (1,557) (1,644) Total Assets 13,321 14,422 17,179 19,056 20,672

Distribution exp. (1,154) (1,611) (2,420) (2,796) (3,208)

Admin exp. (658) (946) (1,236) (1,416) (1,604) ST Debt 5,726 2,204 2,204 2,204 2,204

Other operating (109) (158) (181) (40) (150) Trade payables 2,429 3,874 5,935 7,123 8,109

Operating profit (20) 405 1,287 1,300 1,212 Other Current Liabilities 2,450 5,142 5,142 5,142 5,142

Finance costs (166) (105) (83) (80) (90) Total current liabilities 10,605 11,220 13,281 14,469 15,455

Share of profits (2) (2) (0) - - LT Debt 194 196 196 196 196

Pre-tax income (188) 298 1,204 1,220 1,122 Other LT Liab 199 93 93 93 93

Taxation (32) 18 (62) (98) (79) Minority Interests 2 4 31 71 81

MI 12 (3) (27) (40) (10) Shareholders' Equity 2,321 2,909 3,578 4,228 4,848

Net profit (208) 313 1,115 1,083 1,033 Total Equity & liabilities 13,321 14,422 17,179 19,056 20,672


Pretax profit (188) 298 1,204 1,220 1,122 Margins

Tax Paid (32) 18 (62) (98) (79) Gross margin (%) 17.4 19.0 19.2 18.4 18.0


Change in working capital (63) (2,649) (384) (853) (723) EBIT margin (%) (0.2) 2.1 4.3 3.7 3.0

Others - - - - - Net margin (%) (1.7) 1.6 3.7 3.1 2.6


Capex (246) (483) (300) (300) (300) ROA (%) (1.5) 2.3 7.1 6.0 5.2

Assoc, MI, Invsmt (806) (779) - - - ROE (%) (8.3) 12.0 34.4 27.7 22.8

Investment cash flow (1,052) (1,262) (300) (300) (300) Balance sheet

Net Change in Debt (1,302) (3,520) - - - Net gearing (%) 31.5 19.3 10.3 14.9 16.6


Dividend (202) - (446) (433) (413) Working capital

Others 273 767 - - - Days receivable 86 105 90 90 90

Financing cash flow (1,231) (2,753) (446) (433) (413) Days inventory 46 62 50 50 50

FX and others (29) 25 - - - Days payable 89 90 90 90 90

Chg in Cash (2,088) (3,350) 192 (264) (173) Others

Beginning cash 7,278 5,190 1,840 2,032 1,768 Effective tax (%) (16.8) (6.0) 5.1 7.0 7.0

Ending cash 5,190 1,840 2,032 1,768 1,596 Dividend payout (%) - 37.7 40.0 40.0 40.0




Coolpad (2369 HK)


Underperform (initiation)


Margin under pressure amid intense end-market competition


Initiate at Underperform We initiate coverage of Coolpad with an Underperform rating

as: 1) the reduction in handset subsidies offered by Chinese carriers is driving this carrier-centric smartphone maker to compete more actively in the fierce open market, 2) the competitive environment in the Chinese smartphone end-market is deteriorating with key rival Xiaomi adopting a strategy of “low price/high specification” to gain market share, and 3) we expect Coolpad to miss its 2014 shipment target and its earnings to decline in 2015 on a margin contraction. We set a 12-month target price of HK$1.21 based on a 2015 target P/E of 7x. Company competing more in open market Headquartered in Shenzhen, Coolpad is

the 4th largest smartphone vendor in China with a market share of 11.7% in 2Q14, according to Canalys Research. Coolpad focuses on the Chinese market with more than 90% of its sales sold through the Chinese carrier channel (mostly covered by handset subsidy programs). However, carrier-centric smartphone vendors including Coolpad are increasingly driven to compete in the fierce open market in China as the carriers slash handset subsidies to improve their own profitability. Coolpad likely to miss 2014 shipment target Coolpad is facing serious competition

from Xiaomi which surpassed the other rivals and became the No.1 smartphone maker in China in 2Q14 according to Canalys Research. The competitive environment is deteriorating given Xiaomi’s priority on market share growth and its strategy of “low price/high specification”. Coolpad recorded shipments of 24m units in 1H14, which represented just 40% of its full-year target of 60m units. We expect the company to miss its 2014 shipment target by 18% with a total of 49m units shipped (meaning 2H14 shipments of 25m units). Earnings to decline on margin contraction Management is spending more on

advertising to boost online sales through JD.com as well as Coolpad’s own online store, and the company is operating at a very thin margin (net margin at low single-digit levels). We expect earnings to decline in 2015 due to a margin contraction on higher advertising expense and pricing pressure in the end-market. We expect EPS to decline in 2015, versus Bloomberg consensus of an 11% YoY increase. Risk Upside risks include the rationalization of Xiaomi’s sales and pricing strategies, and

takeover bids by other rivals.

Stock valuation

Turnover

(HK$m)

YoY

chg

Net profit

(HK$m)

EPS

(HK cents)

EPS YoY

chg (%)

P/E

(x)

P/B

(x)

Dividend

Yield

(%)

ROE

(%)

Net

gearing

(%)

2012 14,359 96% 324 0.08 24 20.1 2.7 1.0 14.1 56.7

2013 19,624 37% 348 0.08 7 18.7 2.4 0.7 13.5 60.6

2014E 32,037 63% 782 0.18 125 8.3 1.9 1.8 25.3 65.5

2015E 41,576 30% 739 0.17 (6) 8.8 1.6 1.7 19.8 52.6

2016E 49,481 19% 636 0.15 (14) 10.3 1.4 1.5 14.7 58.9 Sources: Company data, GF Securities (HK) Research Note: Calculated based on diluted shares.

Stock performance

0

1

2

3


Source: Bloomberg

Key data



Major shareholder Guo Deying (39.0%)


3M avg. vol. (m) 35.9




Oct 24, 2014

Company report


91% 96%

43%

7%0%

9% 3%

55%

90%96%

0% 1% 2% 3% 4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012 2013 2014E 2015E 2016E

3G smartphones 4G smartphones Application service income

1.0 2.6

4.6 7.3

14.4 19.6

32.0

41.6

49.5 35.6

27.4

24.3

14.7 12.0 12.9 13.3 12.5 12.0

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

-

10.0

20.0

30.0

40.0

50.0

2008 2009 2010 2011 2012 2013 2014E 2015E 2016E



Figure 3: Handset shipment assumptions (m units) Figure 4: Quarterly handset shipment (m units)

19

33

49

60

70

-

10

20

30

40

50

60

70

80

2012 2013 2014E 2015E 2016E

7.5 7.6 9.1 8.4

11.0

13.0 13.7

11.8

-

5.0

10.0

15.0

20.0

25.0

1Q 2Q 3Q 4QE

2013 2014


Revenue by region

Figure 5: Handset ASP assumptions (HK$) Figure 6: Half-yearly sales and GPM assumptions

776

602 652

685 698

-

100

200

300

400

500

600

700

800

900

2012 2013 2014E 2015E 2016E

6.2 8.1

9.6 10.0

14.9 17.1

12.0 12.0 13.0 12.8

13.6 13.0

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

-

5.0

10.0

15.0

20.0

1H12 2H12 1H13 2H13 1H14 2H14E



Oct 24, 2014

Company report

Figure 7: Earnings projection (2014E-16E) (HK$ m) Figure 8: Half-yearly earnings projections (HK$ m)

(76)

240

480

271 324 348

782 739

636

(200)

(100)

-

100

200

300

400

500

600

700

800

900

2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

119

152 152 172

213

136

413

370

-

50

100

150

200

250

300

350

400

450

1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14E



Year end Dec (HK$ m) 2012 2013 2014E 2015E 2016E Year end Dec (HK$ m) 2012 2013 2014E 2015E 2016E3G smartphones 13,097 18,935 17,845 8,215 4,888 Cash/ST Investments 1,274 1,628 1,057 1,168 5924G smartphones 1,230 514 13,762 32,861 43,993 Account receivables 2,183 2,998 4,389 5,126 6,100Application service income 32 175 430 500 600 Inventory 1,811 2,595 3,807 4,983 5,965

Turnover 14,359 19,624 32,037 41,576 49,481 Other Current Assets 1,591 1,589 1,589 1,589 1,589


Other income/gains 321 382 343 500 500 Property, plant and equipment 537 568 753 913 1,055

Selling & distribution exp. (870) (1,302) (1,833) (2,495) (2,969) Intangible assets 161 174 174 174 174

Admin exp. (674) (984) (1,670) (2,079) (2,474) Other LT Assets 546 510 510 510 510

Other expenses (18) (166) (83) (150) (150) Total Assets 8,103 10,062 12,277 14,463 15,985

Operating profit 480 461 1,006 974 845

Finance costs (55) (23) (61) (50) (50) ST Debt 2,617 3,299 3,299 3,299 3,299

Share of profits (6) (0) - - - Trade payables 1,742 1,876 3,426 4,983 5,965

Pre-tax income 418 437 945 924 795 Other Current Liabilities 1,233 2,068 2,068 2,068 2,068

Taxation (94) (89) (162) (185) (159) Total current liabilities 5,592 7,243 8,793 10,350 11,332

MI - - (1) - - LT Debt 24 - - - -

Net profit 324 348 782 739 636 Other LT Liab 75 58 58 58 58

Minority Interests 3 3 4 4 4




Pretax profit 418 437 945 924 795 Margins



Change in working capital (389) (1,465) (1,052) (357) (975) EBIT margin (%) 3.3 2.3 3.1 2.3 1.7

Others 936 1,710 - - - Net margin (%) 2.3 1.8 2.4 1.8 1.3

Operational cash flow 912 647 (204) 472 (231) Return/Profitability

Capex (212) (287) (250) (250) (250) ROA (%) 4.1 3.8 7.0 5.5 4.2

Assoc, MI, Invsmt 402 52 - - - ROE (%) 14.1 13.5 25.3 19.8 14.7

Investment cash flow 190 (235) (250) (250) (250) Balance sheet

Net Change in Debt (234) 659 - - - Net gearing (%) 56.7 60.6 65.5 52.6 58.9

New Capital 116 21 - - - Current ratio (x) 1.2 1.2 1.2 1.2 1.3


Others (725) (625) - - - Days receivable (days) 55 56 50 45 45

Financing cash flow (886) (51) (117) (111) (95) Days inventory (days) 52 55 50 50 50

FX and others (2) (7) - - - Days payable (days) 50 40 45 50 50

Chg in Cash 215 355 (572) 111 (576) Others


Ending cash 1,274 1,628 1,057 1,168 592 Dividend payout ratio (%) 19.8 12.3 15.0 15.0 15.0




Tongda (698 HK)


Buy (initiation)


Earnings growth to accelerate on capacity expansion and new business development


Initiate at Buy We initiate coverage with a Buy rating as: 1) we have a positive outlook

on the company’s handset casing business given strong shipment momentum at its major customers including Huawei, ZTE, Xiaomi and Lenovo; 2) it will likely achieve double-

digit earnings growth in 2015 and 2016 on the back of a 20% expansion in its handset casing capacity and increased revenue from its handset antenna business, and; 3) its valuation is undemanding at 8.3x 2015 P/E. We set a 12-month target price of HK$1.22 based on a 2015 target P/E of 10x. Positive shipment outlook from domestic-centric customer base Tongda is a Fujian-

based plastic and metal casing manufacturer, with 46% of its 1H14 revenue coming from handset casings, 15% from home appliance casings and 14% from notebook casings. Plastic and metal casings account for around 90% and 5% of its products respectively. We have a positive outlook on its handset casing business given strong shipment momentum at its major customers including Huawei, ZTE, Xiaomi, Coolpad, Lenovo, TCL and Oppo. Main customers for its home appliance casings include Haier, Gree and Midea, while Lenovo is its biggest notebook casing customer.

20% casing capacity increase and new product to support earnings growth Tongda

opened a new plant in Sep which has raised its casing production capacity by 20% and resolved its capacity constraint issue. This should drive earnings growth in 2015. In addition, the company is strengthening its metal casing production capability as its number of CNC machines increased 50% from 200 sets in 2013 to 300 sets in 1H14. Management is targeting to raise the number by over 60% to 500 sets by end-2014. Lastly, Tongda is also strengthening its new LDS (laser direct structuring technology) handset antenna business with Huawei and ZTE its key customers. We expect LDS antennas to account for up to 10% of sales in 2015. Double-digit earnings growth expected Overall, we expect earnings growth to

accelerate in 2015 driven by high top line growth on strong demand from customers and the opening of new plants as well as a margin expansion driven by new products (i.e. LDS and increased metal casing production). Likelihood of equity fund raising remote The company raised HK$672m (600m shares

at HK$1.12 per share) from a share placement in Mar 2014. The likelihood of another equity fund raising in 2015 is very limited given its healthy balance sheet with a low gearing ratio. Risks Key risks include a slowdown in the smartphone market in China and hiccups in

the ramping up of its LDS antennas business.

Stock valuation

Turnover

(HK$ m)

YoY

chg

(%)

Net profit

(HK$m)

EPS

(HK$)

YoY

chg

(%)

P/E

(x)

P/B

(x)

Dividend

Yield

(%)

ROE

(%)

Net

gearing

(%)

2012 3,408 8 300 0.06 20 16.0 2.3 2.0 15.2 20.6

2013 3,627 6 360 0.07 16 13.9 2.0 2.5 15.8 27.4

2014E 4,613 27 438 0.09 22 11.4 1.5 2.6 14.9 10.5

2015E 5,598 21 598 0.12 37 8.3 1.3 3.6 16.4 13.3

2016E 6,570 17 772 0.16 29 6.5 1.1 4.6 18.7 9.8 Sources: Company data, GF Securities (HK) Research Note: Calculated based on diluted shares.

Stock performance

0.00

0.50

1.00

1.50


Source: Bloomberg

Key data



Major shareholder Wang Ya Nan (47.4%)


3M avg. vol. (m) 30.9




Oct 24, 2014

Company report


46% 51% 51% 52% 54%

21% 15% 14% 14% 14%

16% 16% 15% 13% 11%

17% 18% 20% 21% 21%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012 2013 2014E 2015E 2016E

Handset Home appliances Notebook Others

1.4 1.8

2.3

3.1 3.4 3.6

4.6

5.6

6.6

15.6 16.8 17.4

19.2 21.4 22.0

23.5 24.0 24.5

-

5.0

10.0

15.0

20.0

25.0

30.0

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

2008 2009 2010 2011 2012 2013 2014E 2015E 2016E




175

65 102

201 250

300

360

438

598

772

-

100

200

300

400

500

600

700

800

900

2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

102

148

113

187

130

230

167

271

-

50

100

150

200

250

300

1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14E


Oct 24, 2014

Company report


Year end Dec (HK$ m) 2012 2013 2014E 2015E 2016E Year end Dec (HK$ m) 2012 2013 2014E 2015E 2016EHandset 1,568 1,850 2,344 2,930 3,516 Cash/ST Investments 221 178 489 337 418Home appliances 716 544 666 800 919 Account receivables 1,456 1,586 2,022 2,454 2,880Notebook 545 580 680 714 749 Inventory 802 1,088 1,353 1,632 1,903Others 579 653 923 1,154 1,385 Other Current Assets 247 197 197 197 197Turnover 3,408 3,627 4,613 5,598 6,570 Total current assets 2,726 3,048 4,061 4,619 5,397Gross profit 731 798 1,085 1,343 1,610 Property, plant and 1,230 1,328 1,503 1,623 1,638Other income/gains 17 47 - - - Intangible assets 23 6 6 6 6Selling & distribution exp. (82) (79) (98) (123) (145) Other LT Assets 226 275 275 275 275Admin exp. (211) (278) (353) (420) (460) Total Assets 4,204 4,657 5,845 6,522 7,315Other expenses (9) (21) 0 - -Operating profit 446 467 634 800 1,005 ST Debt 564 592 592 592 592Finance costs (49) (52) (57) (50) (50) Trade payables 1,014 894 1,063 1,282 1,495Share of profits 4 (0) - - - Other Current Liabilities 287 328 328 328 328Pre-tax income 401 415 577 750 955 Total current liabilities 1,866 1,814 1,983 2,202 2,415Taxation (67) (46) (99) (113) (143) LT Debt 89 258 258 258 258Minority interests (33) (9) (41) (40) (40) Other LT Liab 56 36 36 36 36Net profit 300 360 438 598 772 Minority Interests 91 94 135 175 215

Shareholders' Equity 2,102 2,455 3,433 3,852 4,392Total Equity & liabilities 4,204 4,657 5,845 6,522 7,315

Year end Dec (HK$ m) 2012 2013 2014E 2015E 2016E 2012 2013 2014E 2015E 2016EPretax profit 401 415 577 750 955 Margins

Tax Paid (67) (46) (99) (113) (143) Gross margin (%) 21.4 22.0 23.5 24.0 24.5Depr/Amort 136 153 175 180 185 EBITDA margin (%) 17.1 17.1 17.5 17.5 18.1Change in working capital (124) (536) (533) (491) (484) Operating profit margin (%) 13.1 12.9 13.7 14.3 15.3Others (8) 65 - - - Net margin (%) 8.8 9.9 9.5 10.7 11.7Operational cash flow 338 51 120 327 513 Return/Profitability

Capex (286) (210) (350) (300) (200) ROA (%) 7.6 8.1 8.3 9.7 11.2Assoc, MI, Invsmt (33) (23) - - - ROE (%) 15.2 15.8 14.9 16.4 18.7Investment cash flow (319) (233) (350) (300) (200) Balance sheet

Net Change in Debt 14 197 - - - Net gearing 20.6 27.4 10.5 13.3 9.8New Capital - - 672 - - Current ratio (x) 1.5 1.7 2.0 2.1 2.2Dividend (85) (102) (131) (179) (232) Working capital

Others 19 23 - - - Days receivable (days) 156 160 160 160 160

Financing cash flow (52) 117 541 (179) (232) Days inventory (days) 109 140 140 140 140

FX and others - 22 - - - Days payable (days) 138 115 110 110 110

Chg in Cash (33) (43) 311 (153) 81 Others

Beginning cash 254 221 178 489 337 Effective tax (%) 16.8 11.1 17.1 15.0 15.0Ending cash 221 178 489 337 418 Dividend payout ratio (%) 31.4 34.0 30.0 30.0 30.0




Ju Teng (3336 HK)


Hold (initiation)


An ex-growth notebook casing maker


Initiate at Hold We initiate coverage of Ju Teng with a Hold rating given: 1) its ex-growth

core notebook casing business, 2) slow growth in the contribution from its smartphone casing business, and 3) a higher-than-peers net gearing position which makes it more vulnerable to the interest rate up cycle. The stock is trading at below book value, but we see this more as a value trap. We set a 12-month target price of HK$4.71 based on a 2015 target P/E of 7.0x. An ex-growth notebook casing maker Ju Teng is of Taiwan origin and it is the world’s

largest notebook casing maker with a ~30% global market share. 80% of 1H14 sales came from notebook casings, followed by tablet (10%) and smartphone casings (5%). Plastic casings accounted for 60% of sales, following by metal casings (10%) and composite materials (5%). Top line sales growth was stagnant in 2012 and 2013 as the notebook replacement cycle slowed with tablets becoming increasingly popular among consumers. In addition, Ju Teng could not benefit from growing tablet sales as it failed to become part of the Apple tablet supply chain. Limited contribution from smartphone casing business Smartphone casings

accounted for a mere 5% of sales in 1H14. Ju Teng has two customers in this segment, namely Motorola and Asustek. The company is building a US$90m new plant in

Chongqing which will focus primarily on metal casings for notebooks and smartphones, with initial annual capacity of 10m pieces, which will double to 20m pieces by end-2015. The plant is scheduled to come on line by the end of 2014, and it will increase metal casing production capacity by about 20% at opening with the installation of 600 sets of new CNC machines on top of the existing 3,000 sets. We are concerned that the new capacity might be underutilized given weak momentum at the company’s key customers and the limited likelihood of Ju Teng entering the domestic handset supply chain. Vulnerability to interest rate up cycle Ju Teng’s net gearing ratio stood at 49% at end-

Jun, higher than its domestic rivals including BYD Electronic (Rmb2bn net cash) and Tongda (10% net gearing). As such it will be viewed by the market as more vulnerable in the interest rate up cycle and face more selling pressure amid news flows of interest rate hikes in the US. A value trap Ju Teng is trading at 0.7x 2015 P/B and 6.4x 2015 P/E. We see this more

as a value trap as the company lacks catalysts for a re-rating unless there is a strong increase in smartphone casing sales. Key risks Upside risks include a pick-up in Motorola’s sales momentum under Lenovo’s

management and Ju Teng’s entrance into the domestic handset supply chain.

Stock valuation

Turnover

(HK$m)

YoY

chg

(%)

Net profit

(HK$m)

EPS

(HK cents)

YoY

chg

(%)

P/E (x) P/B

(x)

Dividend

Yield

(%)

ROE

(%)

Net gearing

(%)

2012 9,201 12 601 0.51 127 8.8 1.0 2.7 11.9 44.1

2013 9,257 1 762 0.63 23 7.2 0.9 3.3 13.1 42.4

2014E 9,458 2 795 0.66 4 6.9 0.8 3.6 12.2 43.2

2015E 9,931 5 815 0.67 3 6.7 0.7 3.7 11.4 36.2

2016E 10,527 6 945 0.78 16 5.8 0.7 4.3 12.1 29.5 Sources: Company data, GF Securities (HK) Research Note: Calculated based on diluted shares.

Stock performance

4

5

6

7


Source: Bloomberg

Key data



Major shareholder Chen Family Trust (24.9%)






Oct 24, 2014

Company report

Figure 1: Revenue mix by products (1H14) Figure 2: Sales mix by casings materials (1H14)

Notebook80%

Tablets10%

Smartphones

5% Others

5%

Plastic casings70%

Metal casings

25%

Composite

materials5%


Figure 3: Revenue mix by region (2014E) Figure 4: Sales and margin forecasts

China

97%

Taiwan1%

Others2%

5.3 7.2 7.5 7.2

8.2 9.2 9.3 9.5

10.6 11.8

15.1 16.7

18.0

12.0 10.5

15.2

20.2 19.4 19.7

20.5

-

5.0

10.0

15.0

20.0

25.0

-

10.0

20.0

30.0

2007 2008 2009 2010 2011 2012 2013 2014E2015E2016E




410

658 705

331

257

601

762 795

855

945

-

100

200

300

400

500

600

700

800

900

1,000

2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

111 146

244

357

260

502

311

484

-

100

200

300

400

500

600

1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14E


Oct 24, 2014

Company report


Year end Dec (HK$ m) 2012 2013 2014E 2015E 2016E Year end Dec (HK$ m) 2012 2013 2014E 2015E 2016EChina 8,850 8,928 9,174 9,633 10,211 Cash/ST Investments 1,163 1,062 705 1,025 1,390Taiwan 125 132 95 99 105 Account receivables 3,239 3,954 4,146 4,353 4,614Others 226 197 189 199 211 Inventory 938 1,183 1,253 1,316 1,388

Turnover 9,201 9,257 9,458 9,931 10,527 Other Current Assets 1,023 817 817 817 817


Other income/gains 100 66 138 100 100 Property, plant and equipment 6,193 7,291 8,091 8,291 8,491

Selling & distribution exp. (94) (102) (131) (139) (137) Intangible assets 40 40 40 40 40


Other expenses (27) (62) (29) (30) (30) Total Assets 13,249 14,718 15,423 16,213 17,111

Operating profit 850 1,194 1,176 1,202 1,344

Op. margin (%) 9 13 12 12 13 ST Debt 2,499 2,664 2,664 2,664 2,664


Share of profits (1) - - - - Other Current Liabilities 917 1,226 1,226 1,226 1,226

Pre-tax income 787 1,132 1,079 1,102 1,244 Total current liabilities 5,045 5,445 5,456 5,534 5,624

Taxation (129) (255) (187) (187) (199) LT Debt 1,583 1,634 1,634 1,634 1,634

MI (58) (115) (98) (100) (100) Other LT Liab 5 6 6 6 6

Net profit 601 762 795 815 945 Minority Interests 1,231 1,397 1,495 1,595 1,695




Pretax profit 787 1,132 1,079 1,102 1,244 Margins



Change in working capital (582) (1,034) (251) (192) (243) Operating profit margin (%) 9.2 12.9 12.4 12.1 12.8

Others (255) 545 - - - Net margin (%) 6.5 8.2 8.4 8.2 9.0

Operational cash flow 411 1,056 1,342 1,524 1,602 Return/Profitability

Capex (1,274) (1,706) (1,500) (1,000) (1,000) ROA (%) 4.9 5.5 5.3 5.2 5.7

Assoc, MI, Invsmt (70) 414 - - - ROE (%) 11.9 13.1 12.2 11.4 12.1

Investment cash flow (1,344) (1,292) (1,500) (1,000) (1,000) Balance sheet

Net Change in Debt 1,460 216 - - - Net gearing (%) 44.1 42.4 43.2 36.2 29.5

New Capital 39 17 - - - Current ratio (x) 1.3 1.3 1.3 1.4 1.5


Others - (0) - - - Days receivable (days) 129 156 160 160 160

Financing cash flow 1,408 95 (199) (204) (236) Days inventory (days) 44 58 60 60 60

FX and others (4) 40 - - - Days payable (days) 76 77 75 75 75

Chg in Cash 471 (102) (357) 320 365 Others

Beginning cash 693 1,163 1,062 705 1,025 Effective tax (%) 16.3 22.6 17.3 16.9 16.0

Ending cash 1,163 1,062 705 1,025 1,390 Dividend payout ratio 23.4 23.8 25.0 25.0 25.0




Scud (1399 HK)


Buy (initiation)


ODM handset battery business continues to show strong momentum


Initiate at Buy We initiate coverage with a Buy rating as: 1) the prospects for the

company’s core ODM handset battery business are positive given the favorable shipment outlook for its major customers including Huawei, Xiaomi, and ZTE; 2) a 50% ODM

capacity expansion will support double-digit earnings growth in 2015 and 2016, and; 3) its valuation is undemanding at 0.6x 2015 P/B and 5.9x 2015 P/E. We have a 12-month target price of HK$1.42 (36% upside) based on a 2015 target P/E of 8x. Positive prospects for core ODM handset battery business Scud is a Fuzhou-based

handset battery maker. Over the past two years, it has developed from an own-brand handset battery maker targeting the replacement market into an ODM selling its batteries directly to major domestic handset makers. The company recovered from a deep loss in 2012 caused by battery recalls and turned profitable in 2013. Its ODM handset battery business accounted for 75% of 1H14 sales, up from 45% in 2012. Scud’s major ODM customers include Huawei, Xiaomi and ZTE which account for 38%, 27% and 13% of its ODM sales. 50% production capacity increase to support earnings growth The company’s annual

ODM handset battery production capacity currently stands at around 100m units. It is running nearly at full capacity utilization with 42.7m ODM handset battery units shipped in 1H14, and we expect 2014 full-year shipments to reach 100m units. Management has set a target to expand capacity by 50% to 150m units by end-2015, which will support our double-digit sales growth projections for 2015 and 2016. 2015 capex of Rmb100m will be funded by internal resources. Overall, we forecast high-teens EPS growth for 2015, taking into account a moderate decline in its blended gross profit margin due to the increase of ODM handset batteries in its sales mix which generate a lower margin than its own-brand batteries. Equity fund raising unlikely Despite the recent share price rally, we see little chance of

the company raising equity given its undemanding valuation (below book value). In addition, Scud has a healthy balance sheet with a net cash position of Rmb411m at end-Jun. Valuation undemanding – trading at below book value The stock is trading at 5.9x

2015 P/E and 0.6x 2015 P/B, an undemanding valuation given its positive 2015 and 2016 earnings outlook. Risks Key risks include a slowdown in the smartphone market in China, disruptions in

bare battery cell supply from key upstream vendors (LG Chemicals, Samsung SDI, etc), and handset battery quality issues (e.g. explosions of batteries supplied by Scud).

Stock valuation

Turnover

(Rmb m)

YoY

chg

(%)

Net profit

(Rmb m)

EPS

(Rmb)

YoY

chg

(%)

P/E

(x)

P/B

(x)

Dividend

Yield

(%)

ROE

(%)

Net

gearing

(%)

2012 1,822 10 (163) (0.16) N.A. N.A. 0.8 - (11.0) cash

2013 2,393 31 38 0.04 N.A. 22.4 0.8 1.2 3.4 cash

2014E 3,226 35 105 0.10 175 8.2 0.7 3.1 9.0 cash

2015E 4,340 35 146 0.14 39 5.9 0.6 4.3 11.6 cash

2016E 5,196 20 175 0.17 19 4.9 0.6 5.1 12.5 cash Sources: Company data, GF Securities (HK) Research Note: Calculated based on diluted shares.

Stock performance

0.30

0.50

0.70

0.90

1.10

1.30

1.50


Source: Bloomberg

Key data



Major shareholder Fang Jin (49.5%)






Oct 24, 2014

Company report


40%

26%21% 16% 13%

45%66% 79% 84% 86%

15%7%

0% 0% 0%0% 1% 0% 0% 0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012 2013 2014E 2015E 2016E

Own brand battery ODM battery Bare battery Others

1.3 1.3 1.5 1.7 1.8 2.4

3.2 4.3

5.2

21.1

18.1 17.1 17.6

16.2 15.5 14.4 13.9 13.8

-

5.0

10.0

15.0

20.0

25.0

(1.0)

1.0

3.0

5.0

7.0

9.0

11.0

13.0

15.0

2008 2009 2010 2011 2012 2013 2014E 2015E 2016E



Figure 3: Earnings projection (2014E-2016E) (Rmb m) Figure 4: Half-yearly earnings projections (Rmb m)

132

47 54 59

(163)

38

105

146

175

(200)

(150)

(100)

(50)

-

50

100

150

200

2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

32 27 12

(175)

12 27 30

75

(200)

(150)

(100)

(50)

-

50

100

1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14E


Figure 5: Sales mix by product (1H14) Figure 6: Sales mix of ODM battery (1H14)

Own brand battery

24%

ODM battery75%

Others1%

Huawei38%

Xiaomi27%

ZTE13%

TCL 9%

BBK8%

Panasonic1%

Others4%


Oct 24, 2014

Company report


Year end Dec (Rmb m) 2012 2013 2014E 2015E 2016E Year end Dec (Rmb m) 2012 2013 2014E 2015E 2016EOwn brand battery 722 631 663 676 689 Cash/ST Investments 421 592 670 763 913ODM battery 820 1,575 2,552 3,650 4,490 Account receivables 637 576 795 1,070 1,281Bare battery 274 175 - - - Inventory 460 424 530 717 859Others 6 12 11 14 17 Other Current Assets 155 322 322 322 322

Turnover 1,822 2,393 3,226 4,340 5,196 Total current assets 1,673 1,914 2,317 2,871 3,376

Gross profit 294 372 464 603 715 Property, plant and equipment 358 359 329 259 179

Other income/gains 11 32 10 5 5 Intangible assets 44 31 31 31 31

Selling & distribution exp. (60) (58) (63) (87) (104) Other LT Assets 39 19 19 19 19

R&D - - - - - Total Assets 2,114 2,323 2,696 3,181 3,606

Admin exp. (289) (259) (201) (273) (333)

Other expenses (159) (14) (18) (10) (10) ST Debt 289 321 321 321 321

Operating profit (201) 73 191 238 273 Trade payables 465 720 984 1,331 1,596

Finance costs (14) (26) (29) (30) (30) Other Current Liabilities 192 107 107 107 107

Share of profits - (0) (0) - - Total current liabilities 946 1,148 1,412 1,759 2,024

Pre-tax income (215) 47 162 208 243 LT Debt 0 0 0 0 0

Taxation 22 (20) (31) (42) (49) Other LT Liab 3 5 5 5 5

Minority interests 30 11 (25) (20) (20) Minority Interests 61 48 73 93 113

Net profit (163) 38 105 146 175 Shareholders' Equity 1,103 1,122 1,206 1,323 1,463


Year end Dec (Rmb m) 2012 2013 2014E 2015E 2016E 2012 2013 2014E 2015E 2016E

Pretax profit (215) 47 162 208 243 Margins

Tax Paid 22 (20) (31) (42) (49) Gross margin (%) 16.2 15.5 14.4 13.9 13.8

Depr/Amort 75 63 90 120 130 EBITDA margin (%) (6.9) 5.7 8.7 8.2 7.8

Change in working capital 488 352 (61) (114) (89) Operating profit margin (%) (11.0) 3.1 5.9 5.5 5.3

Others (547) (251) - - - Net margin (%) (8.9) 1.6 3.3 3.4 3.4

Operational cash flow (177) 191 159 172 236 Return/Profitability

Capex (47) (66) (60) (50) (50) ROA (%) (5.6) 1.7 4.2 5.0 5.1

Assoc, MI, Invsmt (10) (79) - - - ROE (%) (11.0) 3.4 9.0 11.6 12.5

Investment cash flow (57) (145) (60) (50) (50) Balance sheet

Net Change in Debt (350) 32 0 0 0 Net gearing (%) cash cash cash cash cash



Others 572 99 - - - Days receivable 128 88 90 90 90

Financing cash flow 137 29 (21) (29) (35) Days inventory 110 77 70 70 70

FX and others 120 96 - - - Days payable 111 130 130 130 130

Chg in Cash 23 171 78 93 151 Others

Beginning cash 398 421 592 670 763 Effective tax (%) 10.4 41.7 19.4 20.0 20.0

Ending cash 421 592 670 763 913 Dividend payout ratio (%) - 21.6 20.0 20.0 20.0




Oct 24, 2014

Company report

Rating definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months

Company ratings

Buy Stock expected to outperform benchmark by more than 15%

Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15%

Hold Expected stock relative performance ranges between -5% and 5%

Underperform Stock expected to underperform benchmark by more than 5%

Sector ratings

Positive Sector expected to outperform benchmark by more than 10%

Neutral Expected sector relative performance ranges between -10% and 10%

Cautious Sector expected to underperform benchmark by more than 10%

Analyst Certification The research analyst(s) primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the company or relevant securities that the analyst(s) covered in this report: (1) all of the views expressed accurately reflect his or her personal views on the company or relevant securities mentioned herein; and (2) no part of his or her remuneration was, is, or will be, directly or indirectly, in connection with his or her specific recommendations or views expressed in this research report.

Disclosure of Interests (1) The proprietary trading division of GF Securities (Hong Kong) Brokerage Limited (“GF Securities (Hong Kong)”) and/or its affiliated or associated companies do not hold any shares of the securities mentioned in this research report. (2) GF Securities (Hong Kong) and/or its affiliated or associated companies did not have any investment banking relationships with the companies mentioned in this research report in the past 12 months. (3) All of the views expressed in this research report accurately reflect the independent views of the analyst(s). Neither the analyst(s) preparing this report nor his/her associate(s) serves as an officer of the companies mentioned in this report, or has any financial interests in or holds any shares of the securities mentioned in this report.

Disclaimer This report is prepared by GF Securities (Hong Kong). It is published solely for information purpose and does not constitute an offer to buy or sell any securities or a solicitation of an offer to buy, or a recommendation for investing in, any securities. This research report is intended solely for use by the clients of GF Securities (Hong Kong). The securities mentioned in this research report may not be allowed to be sold in certain jurisdictions. No action has been taken to permit the distribution of this research report to any persons in any jurisdictions that the circulation or distribution of such research report is unlawful. The information contained in this research report has been compiled or arrived at from publically available sources believed to be reliable in good faith, and no representation or warranty, either express or implied, is made by GF Securities (Hong Kong) as to their accuracy and completeness. GF Securities (Hong Kong) accepts no liability for any losses arising from the use of the materials presented in this research report, unless otherwise required by applicable laws or regulations. Please be aware of the fact that investments involve risks and that the prices of securities may fluctuate and therefore returns may vary. Past results do not guarantee future performance. Any recommendations contained in this research report do not have regard to the specific investment objectives, financial situation and the particular needs of any individuals. This report is not to be taken in substitution for the exercise of judgment by the respective recipients of this report. Where necessary, the recipients should obtain professional advice before making investment decisions. GF Securities (Hong Kong) may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this research report. The points of view, opinions and analytical methods adopted in this research report are solely expressed by the analyst(s) but not GF Securities (Hong Kong) or its subsidiaries. The information, opinions and forecasts presented in this research report are the current opinions of the analyst(s) as of the date appearing on this material and are subject to changes at any time without notice. The salespersons, dealers or other professionals of GF Securities (Hong Kong) may deliver opposite points of view to their clients and the proprietary trading division with respect to market commentaries and dealing strategies either in writing or verbally. The proprietary trading division of GF Securities (Hong Kong) may have investment decisions which are contrary to the opinions expressed in this research report. GF Securities (Hong Kong) or its affiliates or respective directors, officers, analysts and employees may have rights and interests in the securities mentioned in this research report. The recipients should be aware of relevant disclosures of interests (if any) when reading this report. Copyright © GF Securities (Hong Kong) Brokerage Limited. Without the prior written consent obtained from GF Securities (Hong Kong) Brokerage Limited, any part of the materials contained herein should not (i) in any forms be copied or reproduced or (ii) be re-disseminated. © GF Securities (Hong Kong) Brokerage Limited. All rights reserved. 29-30/F, Li Po Chun Chambers, 189 Des Voeux Road Central, Hong Kong Tel: +852 3719 1111 Fax: +852 2907 6176 Website: http://www.gfgroup.com.hk

http://www.gfgroup.com.hk/

joseph ho, cfa as - gfgroup.com.hk · ratings we initiate coverage of ju teng at hold given its...

Documents