china smartphone sector 2016 outlook 20160105
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Technology│Hong Kong│Equity research│January 5, 2016
Sector Note │ Alpha series
IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN THE UNITED STATES IT IS DISTRIBUTED BY CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH. CIMB Securities Limited has had an investment banking relationship with Cowell e Holdings Inc within the preceding 12 months.
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Technology - Handsets Chinese vendors pursue quality over quantity
■ Hong Kong-listed components manufacturers with strong Chinese customer bases, such as AAC Tech, Tongda Group and Sunny Optical, will be the clear winners, in our view.
■ Top-tier Chinese vendors should still gain market share in China and globally.
■ Huawei and Xiaomi will lead shipment growth in domestic brands, we forecast. We estimate the top ten vendors’ shipments to increase 24% yoy to 703m units in 2016.
■ Gross margin should be protected by significant specification upgrades for smartphones.
■ Maintain sector Overweight. Top picks are AAC Tech, Tongda Group and Sunny Optical.
Components manufacturers are the key beneficiaries We stay positive on Hong Kong-listed component manufacturers that have strong Chinese customer bases, such as AAC Tech (2018 HK, Add), Tongda Group (698 HK, Add) and Sunny Optical (2382 HK, Add). We believe that they will be the key beneficiaries of the new round of hardware upgrade cycle due to 1) dominant supply chain status, 2) above industry-average smartphone shipment growth from their customers, and 3) the ability to elevate the value of their components, with stable gross margins.
Top-tier Chinese vendors continue gaining market share Seven Chinese vendors tapped into the top 10 global smartphone market and captured over 31% of the global smartphone market in 3Q15. In our view, the top-tier Chinese brands will continue gaining market share in the next couple of years (2016 - 17) due to their competitive affordable smartphone offerings for China and emerging markets.
Huawei and Xiaomi to lead growth in Chinese brands We estimate smartphone shipments from the top 10 Chinese vendors will increase 24% yoy to 703m units in 2016 led by Huawei’s (25% yoy) and Xiaomi’s (33% yoy) robust shipment growth. Global market intelligence firm IDC expects global smartphone shipments to grow c.5% yoy to approximately 1.5bn units in 2016.
Gross margin is protected Thanks to the fierce competition in the Chinese market, domestic brands have widely adopted high-end components such as metal casings, high-resolution cameras (with added functions), high-quality speaker boxes, haptics and ‘phablet’ size screens in an attempt to differentiate their smartphones. In our view, this trend should lead to a steady rise in component value for the key suppliers.
Outperformance expected to continue AAC Tech’s share price rose 24% while Sunny Optical’s advanced 35% and Tongda Group’s went up 53% in 2015 due to strong earnings growth and the bright industry outlook. We believe that the share price momentum will continue in 2016 as the latest hardware upgrade cycle just took place, even in the sub-Rmb1,000 (US$150) segment.
Maintain Overweight on China smartphone sector We stay Overweight on China’s smartphone sector; our top picks are AAC Tech, Tongda Group and Sunny Optical. AAC Tech will benefit, in our view, from the new product launches for Apple and strong sales growth prospects for the Chinese brands. Tongda, in our view, is set to benefit from the rising metal casing demand from Huawei and Xiaomi. Sunny Optical is moving up the value chain to being an upstream smartphone and automotive optical components manufacturer.
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Figure 1: Selected component manufacturers’ share price movements (2013 - 2015)
SOURCES: CIMB, BLOOMBERG
▎Hong Kong
Overweight (no change) Highlighted companies
AAC Technologies ADD, TP HK$65.00, HK$49.80 close
AAC Tech has a promising new product pipeline for Apple (haptics and speaker box upgrades) and strong sales growth prospects for the Chinese brands (acoustics upgrades and RF/mechanical project wins).
Sunny Optical Technology (Group) ADD, TP HK$21.40, HK$17.70 close
Sunny Optical is a key beneficiary from significant camera upgrades in Chinese vendors. Rapid growth in handset lens sets and vehicle lens sets help it move up to become an upstream optical component manufacturer.
Tongda Group Holdings Ltd ADD, TP HK$2.00, HK$1.34 close
Tongda is a beneficiary of rising metal casing penetration among leading Chinese brands, especially Huawei, Xiaomi, Oppo and QiKU.
Summary valuation metrics
Analysts
Ray KWOK
T (852) 2532 1113 E ray.kwok@cimb.com
Bertram LAI T (852) 2532 1111 E bertram.lai@cimb.com
Felix PAN T (886) 2 8729 8386 E felix.pan@cimb.com
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AAC Technologies 16.73 13.67 11.98
Sunny Optical Technology (Group) 21.85 16.50 13.60
Tongda Group Holdings Ltd 10.43 8.07 6.68
P/BV (x) Dec-15F Dec-16F Dec-17F
AAC Technologies 4.90 4.07 3.43
Sunny Optical Technology (Group) 3.26 2.39 1.85
Tongda Group Holdings Ltd 1.78 1.50 1.31
Dividend Yield Dec-15F Dec-16F Dec-17F
AAC Technologies 2.49% 3.05% 3.48%
Sunny Optical Technology (Group) 1.34% 1.78% 2.15%
Tongda Group Holdings Ltd 2.88% 3.72% 4.49%
Technology│Hong Kong│Equity research│January 5, 2016
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KEY CHARTS
Gross margin protected Components manufacturers with high exposure to top-tier Chinese vendors enjoy a stable gross margin outlook, underpinned by product mix improvements, rising automation and new product launches, thanks to the ongoing specification upgrades in smartphones.
Apple supply chain gross margin will be protected, in our view, by continuous specifications upgrades in each generation of iPhones.
Top 10 Chinese brands’ share of global smartphone market Chinese handset vendors gained significant market share in China and globally since 2014, thanks to their cost advantage and capabilities in high performance smartphone design and manufacturing. Huawei and Xiaomi lead the way.
Export shipments support Chinese vendors’ growth Although overall smartphone shipment growth is slowing due to the high smartphone penetration rate in China and developed countries, we expect the global smartphone market to expand steadily at c.5% in 2016 and 2017, underpinned by rapid growth of the smartphone-using population in emerging markets such as India, Latin America and South East Asia. Tier-1 Chinese vendors are rapidly gaining market share in emerging markets due to their high cost-to-performance quotient and affordable smartphones.
Estimated shipments of top 10 Chinese vendors in 2016 Total smartphone shipments by the top 10 Chinese vendors are expected to rise 24% yoy to 703m units in 2016. We expect Huawei to post robust output growth of 25% yoy and Xiaomi 33% yoy in 2016.
SOURCE: CIMB RESEARCH, COMPANY REPORTS, COUNTERPOINT
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Technology│Hong Kong│Equity research│January 5, 2016
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Figure 2: Peer comparison
SOURCE: CIMB RESEARCH, COMPANY DATA
Bloomberg Price Target Price Market Cap 3-year EPS P/BV (x) ROE (%) EV/EBITDA (x) Yield (%)
Company Ticker Recom. (local curr) (local curr) (US$ m) CY2015 CY2016 CY2017 CAGR (%) CY2016 CY2016 CY2016 CY2016Handset vendorsCoolpad Group 2369 HK ADD 1.47 2.27 826 14.0 17.5 16.0 -8.2% 0.86 8.5% 4.0 0.0%Lenovo Group 992 HK HOLD 7.46 7.90 10,693 56.5 15.7 9.8 -2.3% 2.82 5.0% 34.8 2.6%TCL Communication 2618 HK HOLD 5.70 6.34 932 6.9 6.7 6.5 -1.4% 1.50 22.8% 5.2 6.1%ZTE Corp - H 763 HK NOT RATED 16.94 n.a. 9,015 15.8 13.8 12.2 n.a. 1.71 12.4% 11.0 1.8%LG Electronics 066570 KS ADD 52500 65000 7,327 21.5 8.3 6.2 52.2% 0.70 3.4% 3.5 1.3%Samsung Electronic 005930 KS ADD 1205000 1800000 151,376 9.8 8.8 8.3 0.0% 1.12 12.1% 2.8 1.7%Apple AAPL US NOT RATED 105.3 n.a. 586,859 11.2 10.6 9.7 7.4% 4.02 38.0% 5.3 2.1%Blackberry BB CN NOT RATED 12.84 n.a. 4,844 n.a. n.a. n.a. n.a. 1.56 -5.9% 13.0 0.0%Nokia NOKIA FH NOT RATED 6.54 n.a. 28,531 20.7 19.9 17.8 n.a. 2.45 12.3% 9.9 2.7%Average (not including Blackberry) 19.0 12.2 10.4 -0.9% 2.01 16.5% 10.5 2.4%
Handset components - AcousticAAC Technologies 2018 HK ADD 49.80 65.00 7,891 16.7 13.6 11.9 20.9% 4.86 31.8% 12.2 2.5%GoerTek Inc 002241 CH NOT RATED 31.38 n.a. 7,335 33.3 22.8 18.3 n.a. 4.17 18.3% 16.4 0.5%Average 25.0 18.2 15.1 20.9% 4.52 25.0% 14.3 1.5%
Handset components - OpticalsCowell e Holdings 1415 HK ADD 3.18 4.44 341 5.5 5.0 4.4 11.0% 1.15 25.3% 2.6 0.0%Q Tech 1478 HK NOT RATED 1.49 n.a. 198 7.5 6.4 6.4 n.a. 0.91 14.1% 3.9 2.8%Sunny Optical Tech 2382 HK ADD 17.70 21.40 2,505 21.6 16.4 13.5 25.0% 3.24 19.0% 13.2 1.3%Zhejiang Crystal-Optech 002273 CH NOT RATED 36.54 n.a. 2,443 93.7 62.5 40.8 n.a. 5.62 9.0% n.a. 0.5%Shenzhen O-film Tech 002456 CH NOT RATED 27.92 n.a. 4,406 42.5 28.6 23.8 n.a. 4.02 14.1% 19.6 0.5%Largan Precision 3008 TT HOLD 2175 2600 8,885 11.8 10.9 9.2 17.0% 4.56 44.2% 7.8 2.3%Liteon Tech 2301 TT HOLD 30.6 33.4 2,172 10.2 8.2 7.5 10.9% 0.93 9.4% 2.4 6.4%LG Innotek 011070 KS ADD 95000 143000 1,918 10.3 7.3 n.a. n.a. 1.05 10.7% 2.9 0.3%Partron 091700 KS NOT RATED 9970 n.a. 455 12.8 9.3 8.3 n.a. 1.40 15.0% 5.3 2.9%SEMCO 009150 KS ADD 60300 82000 3,841 59.3 14.0 11.2 -8.8% 1.05 1.8% 4.1 1.2%Average 32.8 19.6 13.9 11.0% 2.73 15.4% 6.9 1.9%
Handset components - Casings / EMSBYD Electronic 285 HK NOT RATED 3.90 n.a. 1,134 6.6 5.2 5.1 n.a. 0.63 11.9% 2.1 1.3%FIH Mobile Ltd 2038 HK NOT RATED 2.96 n.a. 3,014 10.9 9.3 8.1 20.9% 0.68 7.3% 0.9 2.9%TK Group 2283 HK ADD 2.18 3.22 233 9.2 7.0 5.8 26.8% 2.75 33.0% 5.6 4.1%Tongda Group 698 HK ADD 1.34 2.00 990 10.4 8.1 6.7 28.7% 1.78 18.8% 7.1 2.9%Janus Dongguan precision 300083 CH NOT RATED 42.6 n.a. 2,321 n.a. 30.9 22.0 n.a. 7.92 25.6% 23.4 0.5%Shenzhen Everwin 300115 CH NOT RATED 30.7 n.a. 2,610 33.4 23.0 17.5 n.a. 4.63 20.1% 15.0 0.7%Catcher Technology 2474 TT ADD 272.5 455.0 6,394 8.3 7.0 6.2 21.0% 1.80 24.1% 4.3 2.2%Foxconn Technology 2354 TT HOLD 68.0 83.0 2,889 7.2 8.2 8.7 2.4% 1.02 15.2% 2.5 3.7%Hon Hai Precision 2317 TT ADD 79.0 100.0 37,625 8.3 7.9 7.0 5.6% 1.24 15.3% 3.7 4.8%Wistron Corporation 3231 TT HOLD 18.2 17.0 1,413 22.0 11.8 9.4 9.8% 0.67 2.9% 3.2 6.6%Jabil JBL US NOT RATED 23.3 n.a. 4,408 12.6 8.6 8.2 24.5% 1.72 19.9% 3.9 1.4%Average 12.9 11.5 9.5 17.5% 2.26 17.7% 6.5 2.8%
Handset components - othersTruly International 732 HK NOT RATED 1.81 n.a. 679 6.8 6.2 6.1 n.a. 0.61 9.9% 4.4 4.8%Silicon Works 108320 KS ADD 36550 34000 507 12.4 12.2 n.a. n.a. 1.92 15.8% 5.8 2.5%Delta Electronics Inc 2308 TT HOLD 149.0 170.0 11,787 19.2 14.9 13.0 6.5% 3.47 18.5% 11.9 4.5%Flexium Interconnect 6269 TT HOLD 78.5 107.0 664 7.7 7.3 6.6 27.5% 1.99 28.8% 4.3 3.2%MediaTek Inc 2454 TT REDUCE 245 210 11,726 13.7 16.3 n.a. -20.1% 1.58 11.6% 8.4 5.3%Pagetron 4938 TT ADD 70.8 130.0 5,613 6.8 5.9 5.3 30.6% 1.23 18.4% 3.1 5.7%TPK Holding Co 3673 TT HOLD 80.5 96.0 862 na 8.8 8.3 74.0% 0.89 n.a. n.a. 0.6%Zhen Ding Technology 4958 TT ADD 76.7 130.0 1,880 7.4 6.5 5.5 13.4% 1.81 24.1% 5.6 4.8%Average 10.1 8.8 7.5 22.0% 1.70 18.1% 5.9 3.7%
Core P/E (x)
Technology│Hong Kong│Equity research│January 5, 2016
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Chinese vendors pursue quality over quantity
INVESTMENT VIEW
Hong Kong-listed components manufacturers are the key beneficiaries in the new round of hardware upgrade cycle
Stay positive on component manufacturers. We stay positive on Hong Kong-listed component manufacturers that have strong Chinese customer bases, such as AAC Tech (2018 HK, Add), Sunny Optical (2382 HK, Add) and Tongda Group (698 HK, Add). This is because we believe that they will be the key beneficiaries from their:
1) dominant supply chain status for tier-1 Chinese vendors,
2) above industry-average smartphone shipment growth from their customers, underpinned by market share gains in China and rapid expansion overseas, and
3) their ability to elevate the value of their components, with stable gross margins, due to significant specification upgrades in the new round of hardware upgrade cycle (high-resolution cameras, metal casings, speaker boxes and haptics) in the mid-range segment (sub Rmb2,000/US$320).
Another good year for component manufacturers in 2016. After strong share price runs in 2015 by AAC Tech (+24%), Sunny Optical (+35%) and Tongda Group (53%) due to strong earnings growth and the bright industry outlook, we believe that the share price momentum will continue in 2016 as the latest hardware upgrade cycle just took place, even in the sub-Rmb1,000 (US$150) segment.
Figure 3: China smartphone players share price return (2013 - 2015)
SOURCES: CIMB, BLOOMBERG
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Technology│Hong Kong│Equity research│January 5, 2016
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Maintain Overweight on China smartphone sector. Our sector top picks for 2016 are AAC Tech, Tongda Group and Sunny Optical.
AAC Tech (2018 HK, Add) has a strong new product pipeline for Apple (haptics and speaker box upgrades) and strong sales growth prospects for Chinese brands (acoustics upgrades and RF/mechanical project wins).
Tongda Group (698 HK, Add) is the likely key beneficiary of the low metal casing penetration rate among Chinese vendors thanks to its dominant position as a domestic supplier of smartphone casings (metal casings and high-end precision plastic casings).
We are also positive on Sunny Optical (2382 HK, Add), as we believe it is moving up the value chain towards becoming an upstream optical component manufacturer and will benefit from the continuous camera upgrades among Chinese vendors.
What you need to know:
Component manufacturers are key beneficiaries. Components manufacturers with high exposure to top-tier Chinese brands such as Huawei, Xiaomi, Oppo and Vivo, are key beneficiaries of the significant hardware upgrade cycle due to their dominant supply chain status.
Significant specification upgrades protect component manufacturers’ gross margins. Thanks to the fierce competition in China market, domestic brands widely adopt high-end components such as metal casings, high-resolution cameras, high-quality speaker boxes, haptics and ‘phablet’ size screens in their flagship models, even in the sub-Rmb1,000 (US$150) segment, in an attempt to differentiate their smartphones. It has driven a consistent increase in component value for the key suppliers.
Leading Chinese handset vendors are gaining market share. Seven Chinese vendors tapped into the top 10 global smartphone market. Together, they captured 31% of the global smartphone market in 3Q15 (26.5% in 4Q14, 18.6% in 4Q13). We believe that the top-tier Chinese brands will continue gaining market share in the next couple of years (2016 – 17) due to their competitive and affordable smartphone offerings for China and emerging markets.
Chinese vendors are expanding rapidly into overseas markets. Export shipments from the top seven Chinese vendors jumped 85% yoy in 9M15, driven by market share gains in local vendors in those markets and tier-1 International brands, mainly in Latin America, India and South East Asia markets.
Chinese brands provide better growth rate via Samsung and Apple. Total smartphone shipments from the top seven Chinese vendors reached 308m units in 9M15, i.e. 27% higher than Samsung’s and 96% higher than Apple’s. The average growth rate of the top seven Chinese brands was 40% yoy in 9M15, which outpaced Samsung’s flat growth and Apple’s 33% yoy growth rate.
Global smartphone demand is still growing, albeit at a slower rate. Market consensus expects global smartphone shipments to rise c.5% yoy to approximately 1.5bn units in 2016. IDC forecast smartphone demand will increase from 1.3bn units in 2014 to 1.6bn units in 2017, a CAGR of 7%.
China remains the largest single smartphone market in the world. China smartphone demand will be flattish at 433m units in 2015. Nevertheless, China smartphone demand will resume 7% growth to 465m units in 2016, underpinned by the restoration of handset subsidies by the operators, abundant high-spec low-priced 4G smartphone launches and the net addition of 131m smartphone users.
Huawei, Xiaomi, Oppo, Vivo, ZTE and LeTV could lead growth in Chinese brands in 2016. We estimate top 10 Chinese vendors’ shipments could rise 24% yoy to 703m units in 2016, led by Huawei and Xiaomi. We expect Huawei to post robust output growth of 25% yoy and Xiaomi 33% yoy in 2016.
Technology│Hong Kong│Equity research│January 5, 2016
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OUTLOOK
We need a high-performance smartphone
One device for everything. Smartphones have changed almost every aspect of our lives: social communication, leisure, gaming, shopping, payments, information, and work. Smartphones are starting to replace many of our existing electronic devices, such as cameras, TVs, PCs, video recorders, CD players, game consoles, books, calendars, clocks, wallets etc., making them increasingly indispensable to us. It is natural, therefore, that the performance requirements of smartphones will continue to rise, as consumers demand higher performance from the one device that replaces every other device which they used to own (Figure 4).
Figure 4: Smartphones can replace almost every other device we own
SOURCE: CIMB RESEARCH
Component manufacturers are the key beneficiaries of the significant hardware upgrade cycle
Continuous specification upgrades in smartphones. Vendors have been upgrading hardware specifications (cameras, haptics, acoustics, antennas, display, fingerprint, battery, chipset), user interface (improved user experience, based on Android O/S) and improving handset designs (slim and light, plastics or metal casings, waterproof, small or phablet size) of their latest models. This is in an effort to differentiate themselves and win market share in the competitive smartphone market (especially in the Android-camp), as well as fulfil the consumers’ pursuit of smartphones that are faster, thinner, lighter, with longer battery life, better functionality and user experience. While this inevitably increases vendors’ bill of materials (BOM) cost, the room for price hikes is limited.
Top-tier Chinese brands tap into high-end segment. More importantly, top-tier Chinese brands such as Huawei, Oppo and Xiaomi have launched many high-spec mid-priced smartphones. They have successfully tapped into the high-end smartphone segment (Rmb3,000/US$500) thanks to strong consumer demand for their flagship models (Huawei Mate 7 and Oppo R7) in China and overseas. According to Counterpoint, Oppo took up 11% market share in the US$400-499 ASP segment in 3Q15 while Huawei managed 2% although the
Connect to
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Things (in the future)
Technology│Hong Kong│Equity research│January 5, 2016
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high-end smartphone segment is believed to be dominated by Apple and Samsung (Figure 5).
We noticed more high-spec smartphone launches by Chinese brands in 2015, while consumers increasingly bought Chinese brands’ high-end smartphones due to their improved brand image and high-performance capability. This has exerted pricing pressure on tier-1 international brands, especially in the Android camp.
Figure 5: Market share breakdown - smartphones with US$400-499 ASP
SOURCES: CIMB, COUNTERPOINT
Stabilised smartphone ASP. According to Counterpoint, smartphone’s ASP has stabilised since 3Q14 in China thanks to the launch of iPhone 6 and the popularity of high-spec mid-priced smartphones. The ASP of smartphones in China bottomed out at US$150 in 3Q14 and surged 40% to c.US$210 in 3Q15 (Figure 6).
Figure 6: Global Smartphone ASP by region
SOURCES: CIMB, COUNTERPOINT
Smartphone component manufacturers are the clear winners. Competition in the China smartphone market has become fiercer than that in overseas markets given the slowdown in domestic demand growth and entry of many vendors with Internet background. Even in the sub-Rmb1,000 (US$150) segment, smartphones have already adopted high-end components like high resolution cameras, metal casings, Hi-Fi sound speaker box, HFD screen and fingerprint etc. While vendors are suffering from lower ASP and higher BOM costs, component suppliers are enjoying sustainable ASP hikes and margin
Title:
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Samsung31%
Oppo11%
LG9%
Sony5%
Huaw ei2%
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Technology│Hong Kong│Equity research│January 5, 2016
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expansion via continuous product mix improvements, thanks to the innovative and tailor-made components to meet their customers’ needs.
Hong Kong-listed component manufacturers are our focus. We believe Chinese vendors will continue to gain market share in their home market and globally in the low-to mid-end segment (US$150 – US$300) in the next couple of years (2016 – 2017) due to high specification and affordably priced smartphones, while Apple will continue to dominate in the ultra-high-end segment (>US$600) due to its innovative and technology- leading smartphones.
We, therefore, suggest investors consider the following Hong Kong-listed smartphone component manufacturers: AAC Tech (2018 HK, Add), Sunny Optical (2382 HK, Add), Tongda Group (698 HK, Add), and Cowell (1415 HK, Add). In our view, these companies will benefit from upgrades in key components such as cameras, metal casings, haptics and acoustics etc., among Chinese vendors and Apple, thanks to their dominant status in the supply chain.
We highlight below four key components: Cameras, metal casings, force touch (haptics) and acoustics are the key upgrade components in smartphones manufactured by AAC Tech, Sunny Optical, Tongda Group and Cowell for Chinese vendors and Apple.
Cameras – Digital cameras have almost all been phased out on the back of the high quality of pictures taken using a smartphone. Handset vendors have consistently been upgrading the resolution and functions of both the front-facing and rear-facing cameras, in a bit to meet consumer demand for better image quality for their smartphone photographs and selfies. This has created a huge demand for high-quality camera modules and as a result, handset lens makers and camera module manufacturers are benefiting from rising ASP due to constantly changing camera technology.
Apart from mega pixel migration in cameras, the functionality of cameras has become a very important feature of the user experience. The major camera function additions nowadays include optical image stabilisation (OIS), dual-camera, phase detection auto focus (PDAF), iris recognition and 4K video. Furthermore, vendors have also requested for smaller and thinner sized camera modules for their handset designs. All these additional functions and features require technology know-how and increase the production cost due to difficulties in assembly.
As the largest camera modules supplier to Chinese brands and the largest domestic handset lens sets manufacturer, Sunny Optical is set to benefit from the significant camera upgrades cycle among Chinese vendors. Cowell stands to benefit from the endless iPhone camera upgrades due to its primary front-facing camera module status with Apple.
Figure 7: Oppo R7s (Rmb2,599)
Camera specification : 13MP, PDAF
Figure 8: Honor 6 plus (Rmb1,850)
Camera specification : 8MP dual-camera, wide angle
Figure 9: Xiaomi Note (Rmb2,499)
Camera specification : 13MP, OIS, 4K video
SOURCE: OPPO SOURCE: HUAWEI SOURCE: XIAOMI
Technology│Hong Kong│Equity research│January 5, 2016
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Metal casings – The adoption of metal casings for smartphones is the latest trend among Chinese brands, following the lead set by Apple and Samsung (in metallic high-end models). Leading Chinese vendors have shifted to metal casing for their flagship models and started to adopt metal casings in their low-to mid-range models (sub-Rmb1,000 – Rmb2,000 / US$150 – US$320). On the back of low metal casing penetration rate among leading Chinese vendors, we believe there is tremendous demand potential for metal casings from Chinese brands due to their durability and better appearance, underpinned by 1) sturdier support for the enlarged screen size, 2) thinner and lighter handset designs, and 3) lower production cost.
We have seen wide adoption of metal casings for flagship models (Huawei P8 and Honor 5X, Xiaomi Mi4, OPPO R7, Meizu MX5 and Vivo X5) among leading Chinese brands in 9M15 and this has even spread into the sub-Rmb1,000 (US$150) segment in 4Q15. Recent new model launches, such as QiKU Youth Edition (Rmb999) and Xiaomi Redmi Note3 (Rmb899), also feature metal casings.
Cheaper metal casing solution. The new metal stamping technology, which combines new molding technology and CNC processing, lowers the cost of production without compromising on quality. Based on the metal stamping method, production costs can be substantially reduced due to the shorter time required for CNC processing (Figure 10).
Tongda set to benefit from this trend. Tongda is currently one of the high-precision manufacturers to own this technology on the production of metal casings, and also the key metal casings supplier to Chinese brands such as Huawei, Xiaomi, Oppo, Vivo and QiKU.
Figure 10: Comparisons on metal casings manufacturing processing
SOURCE: CIMB RESEARCH, COMPANY DATA
Metal casing penetration rate remains low in China. Based on our channel checks, the metal casing penetration rate among China brands remains low (c.16% at the end-2015) vs. tier-1 international brands (100% in Apple, 100% in Samsung’s high-end models and over 50% in Samsung’s mid-range models). We estimate the penetration rate to jump from an average of 16% in 2015 to c.30% in 2016 and c.40% in 2017, thanks to the lower production costs and wide adoption of metal casings
CNC UnibodyMetal stamping (NMT Molding* / PMH# +
CNC Processing)
Internal components
Estimate CNC lead
time20 to 30 minutes per unit
10 to 15 minutes per unit (50% of lead time
shorten)
Bill of material costs US$ 28 to 32 per unitUS$ 15 to 22 per unit (around 30% - 40%
cheaper than traditional method)
Design flexibility Limited Flexible
ModelsiPhones, Samsung Galaxy serises, HTC M9, Xiaomi Mi4,
Huawei Mate 8, Vivo X5, OPPO R7 etc.,
Huawei P7 / P8, Huawei G7, Honor 5, Redmi Note 3,
QiKU Youth Edition etc.,
ManufacturersHon Hai Precision (2317 TT), Catcher Tech (2474 TT), FIH
(2038 HK), Tongda Group (698 HK), BYDE (285 HK),
Everwin (300115 CH)
Tongda Group (698 HK), BYDE (285 HK), Everwin (300115
CH)
* NMT Molding is the proprietary technology developed by Tongda which is a chemical adhesion technology for joining metal and plastics at Nano
level. # PHM is the proprietary technology developed by BYD Electronic which adopts plastics-and-metal hybrid technology.
Technology│Hong Kong│Equity research│January 5, 2016
10
in low-to mid-range smartphones (Rmb1,000 – Rmb2,000 / US$150 – US$320) (Figure 11).
Figure 11: Estimated metal casing penetration rate for major Chinese vendors
SOURCES: CIMB RESEARCH
Force touch/3D touch (haptics) – Huawei was the first vendor to introduce force touch technology when it introduced its model “Mate S” in Sep 15 (Figure 12), just two days ahead of the launch of Apple’s iPhone 6S. Apple introduced 3D touch in the iPhone 6S and 6S Plus while iWatch, which was launched in April 2015, had already adopted haptics technology but with a smaller haptic engine.
3D touch technology in iPhone 6S, using a haptic engine, senses how much pressure you apply to the display. Apart from the traditional feedback from tap, swipe and pinch gestures, Apple introduced peek and pop, which allowed you to preview all kinds of content (email, photo gallery, websites, etc.) without having to actually open it and weigh objects by placing them on the phone’s screen (Figure 13).
AAC Tech currently manufactures the haptic engine, the key component for the force touch module, for Apple’s iPhones and iWatch. Supported by further function enhancement, led by Apple and the launch of new applications, such as mobile games using 3D touch technology, we believe the adoption of force touch in smartphones will gradually increase, especially in Chinese brands.
Figure 12: Huawei Mate S – press the screen for a shortcut to email, photo preview, website etc.,
Figure 13: iPhone 6S, peek and pop
SOURCES: CIMB, HUAWEI SOURCES: CIMB, APPLE
Estimated metal casing penetration rate Huawei Xaiomi Oppo Vivo Others Overall
2014E 4% 7% 0% 0% 1% 2%
2015F 25% 19% 30% 35% 9% 16%
2016F 50% 40% 55% 55% 15% 30%
2017F 60% 55% 65% 65% 20% 40%
Estimated metal casing volume Huawei Xaiomi Oppo Vivo Others Overall
2014E 3 4 - - 3 10
2015F 25 14 12 14 28 94
2016F 63 40 29 26 57 215
2017F 96 72 44 39 86 337
Technology│Hong Kong│Equity research│January 5, 2016
11
Acoustics – Acoustic components include speakers, receivers and microphones. AAC Tech is currently the leading global supplier of high-end acoustic components, such as speaker boxes, to tier-1 international brands (Apple, Samsung, LG Electronics, etc.) and top-tier Chinese brands. The iPhone’s on-board speakers have excellent sound, thanks to its high-quality speaker box provided by AAC Tech.
Apple has made minor improvements with each generation of iPhone (iPhone 4 to iPhone 6S). Nevertheless, the speaker box for the next generation iPhone 7 (Sep 2016) could be waterproof, which will require new technology in terms of design and assembly for the manufacturer. AAC will be the key beneficiary of the upcoming speaker box upgrade.
On the other hand, Chinese brands have been widely adopting high-end speaker boxes and receivers in their flagship models, even those in the sub-Rmb1,000 segment, in order to improve sound quality.
Figure 14: Vivo X5 Max, the world’s thinnest speaker box at 0.09 inch and Hi-Fi sound quality
Figure 15: Xiaomi Mi Note on-board speaker box (professional-grade Hi-Fi system, studio-grade sound quality)
SOURCES: CIMB, VIVO SOURCES: CIMB, XIAOMI
Technology│Hong Kong│Equity research│January 5, 2016
12
Component makers’ gross margin is protected by specification upgrades
There is fierce competition among domestic brands as they rollout flagship models with high-end components such as metal casings, high-resolution cameras (OIS / dual camera / PDAF/ 4K video), high-quality speaker boxes, fingerprints, haptics and “phablet” size FHD screens in an attempt to differentiate their smartphones. Hence, we believe that component manufacturers’ gross margin would stay protected in the new round of hardware upgrade cycle in the next couple of years. This is underpinned by 1) improved product mix, i.e. higher contribution from high-margin components, 2) increased automation boosting production yield, and 3) new product launches raising ASP (Figure 16).
Figure 16: Measures of margin protection in component manufacturers
SOURCES: CIMB, COMPANY REPORTS
Figure 17: Component manufacturers’ gross margin trend
SOURCES: CIMB, COMPANY REPORTS
AAC Tech Cowell Sunny Optical Tongda Group
Products mix improvement
Benefits from the adoption of
haptics in iPhone 6S and the
widening adoption of speaker boxes
among Chinsese vendors.
Blended ASP rising on the back of
new iPhone launches. Started
shipping 8MP+ and 13MP+ COB
camera modules to LGE
Contribution from high-resolution
products continually rising in both
handset lens sets and HCM
divisions.
Rising contribution from high-margin
metal smartphone casings.
Economies of scale
Non-acoustics products achieved
significant economies of scale after
substantial ramp-up of products
such as RF/mechanical solutions.
Apple's products account for 77% of
Cowell's total sales.
Sunny commands over 50% market
share in the domestic handset
camera module supply chain.
Tongda is Huawei's primary
smartphone casings supplier and
Xiaomi's key smartphone casings
supplier. The two customers
account for over 40% of total sale.
Products yield
Switching its semi-auto production
lines to full automated lines. AAC
expected to achieve better
production yield in haptic
components vs. rivals.
High automation rate in its flip-chip
production facilities for Apple
products. Constantly achieving over
90% of production yield.
Significant production yield
improvement in its handset lens set
division due to better economies of
scale, thanks to surge in volume
output.
Has achieved above-industry-
average production yield in metal
casing manufacturing due to higher
automation rate and leadership in
technology know-how.
New products
Products that could be launched in
2016 include waterproof speaker
boxes for Android and new RF
mechanical solutions (plastic +
metal casing).
Rear-facing camera modules for
Apple's products. SiP products for
the next-generation of iPhones.
Started shipping 16MP handset
lens sets and commenced mass
production of 13MP (ultra-thin)
handset lens sets. Potentially
launching 23MP handset lens sets
in 2016. New products in HCM
include dual-cameras, OIS, iris
recognition modules, PDAF camera
modules etc.
Next generation of metal casings for
Chinese vendors. Precision rubber
parts (excellent sealing, waterproof
and insulating properties) for
smartphone protection.
Title:
Source:
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0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
AAC Cowell Sunny Tongda
2012 2013 2014 2015F 2016F
Stable
Stablised
Stablised
Technology│Hong Kong│Equity research│January 5, 2016
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Figure 18: Operational comparison for component manufacturers
SOURCE: CIMB RESEARCH, COMPANY DATA
Company name AAC Technologies Cowell Sunny Opitcal Tongda Group
Code 2018 HK 1415 HK 2382 HK 698 HK
Revenue breakdow n by products
Handset dynamic components
(~55%), Microphones (~8%), Non
acoustics products (~35%)
Flip-chip camera module (~77%),
COB camera module (~22%),
Optical components (~1%)
Handset camera modules (~70%),
Handset and vehicle lens sets
(~25%),
Handset casing (~60%), home
applicances casing (~10%) and
PC casing(~11%) , Ironw are and
communication facilities (~19%)
Major customers in handset segmentApple, Xiaomi, Samsung, Huaw ei
and Oppo etc.,Apple, LG, Samsung
Huaw ei, Xiaomi, Coolpad,
Samsung, Lenovo, Oppo, Sony,
Sharp etc.,
Huaw ei, Xiaomi, Lenovo, Oppo,
Vivo, ZTE, Coolpad and TCLC etc.,
Market cap (US$m) 7,840 339 2,489 984
Revenue (US$m)
2013 1,303 814 938 465
2014 1,429 887 1,359 614
1H2015 759 460 750 369
2015F 1,877 956 1,634 799
2016F 2,272 1,091 1,951 961
Revenue (yoy %)
2014 9.7% 8.9% 45.0% 32.1%
1H2015 26.7% 31.0% 21.2% 37.1%
2015F 31.4% 7.9% 20.2% 30.1%
2016F 21.0% 14.1% 19.4% 20.3%
Net profit (US$m)
2013 373 51 71 46
2014 378 58 93 64
1H2015 200 30 50 38
2015F 500 63 121 92
2016F 605 68 160 121
Net profit (yoy %)
2014 1.3% 13.8% 31.2% 39.2%
1H2015 26.7% 171.8% 36.3% 31.8%
2015F 32.4% 9.2% 30.3% 42.7%
2016F 21.1% 7.5% 31.8% 31.5%
Gross profit margin (%)
2013 42.7% 12.7% 16.6% 22.0%
2014 41.4% 12.6% 15.3% 23.9%
1H2014 41.2% 10.8% 14.6% 23.0%
1H2015 41.5% 13.0% 15.5% 23.5%
2015F 41.8% 13.3% 16.5% 24.6%
2016F 42.0% 13.0% 16.8% 24.9%
Net profit margin (%)
2013 28.6% 6.2% 7.6% 9.9%
2014 26.4% 6.5% 6.9% 10.5%
1H2014 26.4% 3.9% 6.9% 7.9%
1H2015 26.4% 6.5% 6.7% 10.2%
2015F 26.6% 6.6% 7.4% 11.5%
2016F 26.7% 6.2% 8.2% 12.5%
Technology│Hong Kong│Equity research│January 5, 2016
14
Figure 19: Huawei smartphone components supply chain
SOURCE: CIMB RESEARCH
Figure 20: Xiaomi smartphone components supply chain
SOURCE: CIMB RESEARCH
Display - JDI, AUO,
Camera lens sets / module -
Largan, Lite-On, Sunny Optical, Primax, SEMCO
Mechanical parts / Casings -Tongda, FIH, BYDE, Zowee
Accoustic components, -
AAC Tech, Goertek, Knowles,
Battery pack - SCUD,
Desay, Sunwoda
Memory - Samsung, SK
Hynix, ToshibaChipset - HiSilicon, MTK,
Panel makers - O Film, J-
Touch, Laibao
Assembled - BYDE,
FIH
RF solutions - Sunway,
Amphenol
Display - JDI, Sharp
Camera lens sets / module -
Largan, Lite-On, Sunny Optical, Primax, SEMCO
Mechanical parts / Casings -Tongda, FIH, BYDE
Accoustic components, -
AAC Tech, Knowles
Battery pack - SCUD,
Coslight, Desay,
Memory - Samsung, SK
Hynix Chipset - MTK, Qualcomm
Panel makers - O Film,
Laibao, GoWorld
Assembled - Inventec,
FIH
RF solutions - AAC Tech,
Amphenol, Molex
Technology│Hong Kong│Equity research│January 5, 2016
15
Figure 21: Specification comparison of the flagship models
SOURCE: CIMB RESEARCH, zol.com.cn
Figure 22: Specification comparison of Sub-Rmb1,000
SOURCE: CIMB RESEARCH, zol.com.cn
Brand Apple Samsung Huawei Xiaomi ZTE Oppo Vivo LeTV QiKU
Model iPhone 6SGalaxy S6
EdgeMate 8 Mi Note Axon R7 Plus X6 Plus
Superphone 1
ProQiKU AK47
Retail price Rmb 4,999 Rmb 5,288 Rmb 4,100 Rmb 2,499 Rmb 3,888 Rmb 2,999 Rmb 3,198 Rmb 2,100 Rmb 3,599
Launch date In Sep 2015 In Mar 2015 In Nov 2015 In Jun 2015 In Jul 2015 In May 2015 In Dec 2015 In Jan 2015 In Aug 2015
CPU
Apple A9+M9
1.8GHz (dual
core)
Samsung
Exynos 7420
2.1/GHz (quad-
core)
Huawei Kirin
950 2.3GHz
(quad-core)
Qualcomm
Snapdragon 810
2.0GHz (quad-
core)
Qualcomm
Snapdragon 810
2.0GHz (quad-
core)
Qualcomm
Snapdragon 615
1.5GHz (octa-
core)
Qualcomm
Snapdragon 615
1.7GHz (octa-
core)
Qualcomm
Snapdragon 810
2.0GHz (octa-
core)
Qualcomm
Snapdragon 810
2.0GHz (octa-
core)
Display size / type 4.7 inch 5.1 inch 6.0 inch 5.7 inch 5.5 inch 6.0 inch 5.7 inch 5.5 inch 6.0 inch
Display resolution1334 × 750 pixel
(326ppi, Retain HD)
2560 x 1440 (576
ppi, Amoled)
1920 x 1080 (367
ppi)
2560 x 1440 (515
ppi)
2560 x 1440 (534
ppi)
1920 x 1080 (367
ppi)
1920 x 1080 (386
ppi, Amoled)
2560 x 1440 (534
ppi)
2560 x 1440 (490
ppi)
Rear camera (mega pixel) 12MP16MP (4K video,
OIS)16MP (OIS, PDAF)
13MP (4K video,
OIS)
13MP + 2MP (dual-
camera, 4K video)13MP (RGBW) 13MP 13MP (OIS)
13MP + 13MP (dual-
camera, 4K video)
Front camera (mega pixel) 5MP 5MP 8MP 4MP 8MP 8MP 8MP 4MP 8MP
RAM 2GB RAM 3GB RAM 4GB RAM 4GB RAM 4GB RAM 3GB RAM 4GB RAM 4GB RAM 4GB RAM
ROM 16GB/64GB/128GB 16GB/64GB 128GB 64GB 128GB 32GB 64GB 32GB/64GB 64GB
Battery capacityNon-replaceable ,
1715mAh
Non-replaceable ,
2600mAh
Non-replaceable ,
4000mAh
Non-replaceable ,
3090mAh
Non-replaceable ,
3000mAh
Non-replaceable ,
4100mAh
Non-replaceable ,
4000mAh
Non-replaceable ,
3000mAh
Non-replaceable ,
3700mAh
Dimension (mm) 138.3 x 67.1 x 7.1 142.1 x 70.1 x 7 157.1 x 80.6 x 7.9 155.1 x 77.6 x 6.95 154.5 x 75.3 x 9.7 158 x 82.3 x 7.75 158.2 x 79.9 x 7.7 148.4 x 73.8 x 9.4 157.6 x 79.8 x 8.6
Casings metal casing metal casing metal casing metal casing metal casing metal casing metal casing metal casing metal casing
Brand Huawei Huawei Xiaomi Meizu QiKU LeTV Oppo Vivo One Plus
Model Honor 5X P8 Lite Redmi Note 3Meizu M2
NoteYouth edition
Superphone
1SA33 Y33 One Plus x
Retail price Rmb 1,399 Rmb 1,250 Rmb 899 Rmb 799 Rmb 999 Rmb 1,099 Rmb 1,399 Rmb 999 Rmb 1,599
Launch date In Oct 2015 In Oct 2015 In Nov 2015 In Jun 2015 In Aug 2015 In Oct 2015 In Oct 2015 In Jun 2015 In Oct 2015
CPU
Qualcomm
Snapdragon 616
1.5GHz (octa-
core)
Huawei Kirin
620 1.2GHz
(octa-core)
MTK Helio X10
2.0GHz (octa-
core)
MTK MT6753
1.3GHz (octa-
core)
MTK MT6753
1.3GHz (octa-
core)
MTK Helio X10
2.2GHz (octa-
core)
Qualcomm
Snapdragon 410
1.2GHz (quad-
core)
MTK MT6735
1.3GHz (quad-
core)
Qualcomm
Snapdragon 801
2.3GHz (quad-
core)
Display size / type 5.5 inch 5.0 inch 5.5 inch 5.5 inch 5.5 inch 5.5 inch 5.0 inch 4.7 inch 5.0 inch
Display resolution1920 × 1080 pixel
(401ppi)
1280 x 720 pixel
(294 ppi)
1920 x 1080 (401
ppi)
1920 x 1080 (401
ppi)
1920 x 1080 (401
ppi)
1920 x 1080 (401
ppi)960 x 540 (401 ppi)
1280 x 720 (312
ppi)
1920 x 1080 (441
ppi, Amoled)
Rear camera (mega pixel) 13MP 13MP 13MP (PDAF) 13MP 13MP (PDAF) 13MP (4K video) 8MP 13MP (PDAF) 8MP
Front camera (mega pixel) 5MP 5MP 5MP 5MP 8MP 5MP 5MP 8MP 5MP
RAM 3GB RAM 2GB RAM 2GB RAM 2GB RAM 2GB RAM 3GB 2GB RAM 3GB RAM 1GB
ROM 16GB 16GB 16GB 16GB/32GB 16GB 16GB/32GB 16GB 128GB 8GB
Battery capacityNon-replaceable ,
3000mAh
Non-replaceable ,
2200mAh
Non-replaceable ,
4000mAh
Non-replaceable ,
3100mAh
Non-replaceable ,
3000mAh
Non-replaceable ,
3000mAh
Non-replaceable ,
2400mAh2200mAh
Non-replaceable ,
2525mAh
Dimension (mm) 151.3 x 76.3 x 8.15 143 x 70.6 x 7.7 150 x 76 x 8.7 150.9 x 75.2 x 8.7 150.2 x 75.7 x 9 151.1 x 74.2 x 7.5 142.7 x 71.7 x 7.55 136.9 x 67.9 x 7.49 140 x 69 x 6.9
Casing Metal casing Plastic casing Metal casing Plastic casing Metal casing Metal casing Plastic casing Plastic casing Plastic casing
Technology│Hong Kong│Equity research│January 5, 2016
16
Leading Chinese handset vendors gaining market share
Market share gains have accelerated since 1Q14. Since 2014, Chinese handset vendors have gained significant market share in China and globally, underpinned by their cost advantage and capabilities in high performance smartphone design and manufacturing. This was led by Huawei, Xiaomi, TCL, Oppo and Vivo, thanks to their affordable 4G smartphone which has a user-friendly user interface (UI) and appealing handset design.
The top ten Chinese handset vendors’ global market share increased by 16.9% pts over the last nine quarters from 22.9% in 4Q13 to 39.7% in 3Q15, according to Counterpoint (Figure 23).
Figure 23: Chinese brands’ share of global smartphone market
SOURCES: CIMB, COUNTERPOINT
Figure 24: Top-tier Chinese brands gaining market share
SOURCES: CIMB, COUNTERPOINT
Chinese brands are among the top 10 smartphone vendors. In 3Q15, seven of the top 10 handset vendors were Chinese brands that collectively captured 29% of the global smartphone market. Huawei (7.5%), Xiaomi (5.0%), Lenovo (4.6%) were ranked No.3-5, after Samsung at No.1 (23.1%) and Apple at No.2 (13.2%). ZTE was ranked No.7 (3.9%), while Oppo was ranked No.8 (3.6%), TCL at No. 9 (3.4%) and Vivo at No.10 (2.8%) (Figure 24).
Title:
Source:
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0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
2012Q
1
2012Q
2
2012Q
3
2012Q
4
2013Q
1
2013Q
2
2013Q
3
2013Q
4
2014Q
1
2014Q
2
2014Q
3
2014Q
4
2015Q
1
2015Q
2
2015Q
3
Glo
bal m
ark
et share
(%
)
Top 3 Chinese vendors Top 10 Chinese vendors Apple Samsung
Top 3 - Huawei, Xiaomi, Lenovo; Top 10 - Huawei, Xiaomi, Lenovo, ZTE, Oppo, TCL-Alcatel, Vivo, Coolpad, Meizu, Tianyu
Handset vendors Rank 2012Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3 2014Q4 2015Q1 2015Q2 2015Q3
Samsung 1 27.4% 29.1% 31.1% 27.6% 30.5% 30.0% 32.4% 28.7% 30.0% 24.2% 23.9% 19.4% 24.2% 21.3% 23.1%
Apple 2 21.7% 15.4% 14.4% 21.3% 16.5% 12.6% 12.4% 16.9% 14.8% 11.4% 11.9% 19.5% 17.8% 13.6% 13.2%
Huawei 3 2.9% 3.3% 4.1% 5.6% 4.4% 4.4% 4.7% 5.7% 4.6% 6.7% 5.1% 6.3% 5.1% 8.7% 7.5%
Xiaomi 4 0.7% 1.0% 1.1% 1.0% 1.4% 1.7% 1.8% 2.1% 3.7% 4.9% 5.5% 4.5% 4.4% 5.4% 5.0%
Lenovo 5 2.9% 3.9% 3.8% 4.0% 3.7% 4.3% 4.6% 4.6% 4.4% 5.1% 5.1% 3.7% 4.3% 3.7% 4.6%
LG 6 3.0% 3.4% 4.1% 3.5% 4.6% 4.9% 4.4% 4.4% 4.2% 4.7% 5.1% 4.1% 4.5% 4.0% 4.1%
ZTE 7 2.8% 4.2% 3.2% 3.2% 4.0% 4.6% 2.8% 2.8% 3.0% 3.0% 3.5% 3.9% 3.8% 4.9% 3.9%
Oppo 8 0.5% 0.5% 0.6% 0.6% 0.7% 0.8% 0.9% 0.9% 1.1% 1.2% 2.1% 2.1% 2.0% 2.8% 3.6%
TCL-Alcatel 9 0.4% 0.9% 1.1% 1.0% 0.6% 1.3% 1.9% 2.5% 2.1% 2.8% 3.3% 4.1% 2.8% 3.2% 3.4%
Vivo 10 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.7% 0.7% 1.8% 1.9% 2.4% 2.8% 2.8%
Coolpad 11 2.3% 2.5% 2.8% 2.6% 2.7% 3.3% 3.5% 2.8% 3.2% 3.5% 3.3% 2.5% 2.0% 1.7% 2.1%
Sony / Sony Ericsson 12 3.6% 4.5% 4.7% 3.9% 3.6% 3.9% 3.7% 3.5% 3.0% 3.0% 3.0% 3.1% 2.3% 2.1% 1.8%
Meizu 13 0.2% 0.3% 0.3% 0.3% 0.3% 0.2% 0.2% 0.2% 0.3% 0.4% 0.4% 0.6% 1.3% 1.3% 1.8%
Nokia 14 7.3% 6.1% 3.4% 2.9% 2.7% 3.0% 3.2% 2.7% 3.2% 3.2% 3.5% 3.1% 2.8% 2.5% 1.7%
Others 24.2% 25.1% 25.3% 22.5% 24.3% 24.9% 23.4% 22.1% 21.7% 25.3% 22.6% 21.2% 20.3% 22.1% 21.3%
Grand Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Top 10 Chinese brands 13.1% 17.0% 17.5% 18.9% 18.7% 21.7% 21.8% 22.9% 26.9% 33.1% 35.4% 34.0% 32.6% 39.9% 39.7%
Technology│Hong Kong│Equity research│January 5, 2016
17
Figure 25: Global market share (3Q14) Figure 26: Global market share (3Q15)
SOURCES: CIMB, COUNTERPOINT SOURCES: CIMB, COUNTERPOINT
Figure 27: Global smartphone market share in 3Q15
SOURCES: CIMB, COUNTERPOINT
Market share gains in Chinese brands expected to continue. We believe that Chinese handset vendors will continue to gain market share in China and globally on the back of 1) the strong components supply chain support, and 2) new product launches such as Huawei P8 (Nov 15), Xiaomi Redmi Note 3 (Nov 15), Xiaomi Mi5 (rumour Jan16), Oppo R7s (Nov 15) and Vivo X6 (Nov 15) etc., This would be supported by improved brand awareness, further channel expansion in China and relationship establish with overseas carriers.
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Samsung24%
Apple12%
Huaw ei5%
Xiaomi6%
Lenovo5%
LG5%
ZTE3%
Oppo2%
TCL-Alcatel3%
vivo2%
others33%
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Samsung23%
Apple13%
Huaw ei7%
Xiaomi5%
Lenovo5%
LG4%
ZTE4%
Oppo4%
TCL-Alcatel3%
vivo3%
others29%
Vendor Ranking Shipments (mil units) Market share % (3Q15)Market share QoQ
change (% pt)
Market share YoY
change (% pt)
Samsung 1 84.0 23.1% 1.8% -0.8%
Apple 2 48.0 13.2% -0.4% 1.3%
Huawei 3 27.4 7.5% -1.2% 2.5%
Xiaomi 4 18.2 5.0% -0.4% -0.4%
Lenovo (included Motorola) 5 16.5 4.6% 0.9% -0.5%
LG 6 14.9 4.1% 0.1% -1.0%
ZTE 7 14.3 3.9% -0.9% 0.5%
Oppo 8 13.0 3.6% 0.8% 1.5%
TCL-Alcatel 9 12.5 3.4% 0.3% 0.1%
Vivo 10 10.2 2.8% 0.0% 1.0%
Others 104.2 28.7% -1.0% -4.1%
Total 363.3 100%
Technology│Hong Kong│Equity research│January 5, 2016
18
Chinese brands aggressively expanding into overseas markets
Although we believe that overall smartphone shipment growth is slowing due to the relatively high smartphone penetration rate in developed countries, the size of the global smartphone market is still expanding steadily, underpinned by rapid growth of the smartphone-using population in emerging markets. We expect smartphone demand in certain emerging markets such as India, Latin America and Southeast Asia to remain robust, thanks to the sizeable 3G/4G migration and consumers’ demand for high-performance smartphones.
According to the International Data Corporation (IDC), emerging markets, including China and India, are expected to lead global smartphone shipment growth in the next few years, driven by accelerated 3G/4G migration in India and other emerging markets, as well as strong replacement demand from China (Figure 28).
Figure 28: Global smartphone shipments forecast (2011-2020F)
SOURCES: CIMB, BI INTELLIGENCE, IDC
Chinese vendors expanding into overseas markets. As China’s smartphone market is coming close to saturation, the Chinese vendors have been aggressively expanding into overseas markets via network carrier and e-commerce channels in the past few years, especially India, Southeast Asia and Latin America. At this point, Huawei, TCL, Lenovo, ZTE, Xiaomi, Oppo and Vivo have good presence in the Southeast Asia, India, Latin America, North America, Russia and the Middle East markets.
ZTE, Huawei, Lenovo and TCL ranked top 5 in most regions. According to Counterpoint, ZTE ranked no. 4 in the US market in 3Q15, thanks to its sponsorship of the National Basketball Association (NBA) (Figure 29), while Huawei grabbed 5% market share in Europe due to its strong relationships with the local mobile network operators and improved awareness of its brand (Figure 31). TCL has always had the highest export shipment ratio (c.95% in 2014 and 9M15) among the China handset vendors, riding on the well-known international brand name Alcatel that ranked No. 3 (10% market share) in Latin America and No. 4 in Europe (5% market share) in 3Q15 (Figure 30). In 2Q15, Xiaomi launched the Mi 4i model that targets overseas markets, especially India and Southeast Asia.
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Technology│Hong Kong│Equity research│January 5, 2016
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Figure 29: North America smartphone market share (3Q15) Figure 30: Latin America smartphone market share (3Q15)
SOURCES: CIMB, COUNTERPOINT SOURCES: CIMB, COUNTERPOINT
Figure 31: Europe smartphone market share (3Q15) Figure 32: Asia Pacific region smartphone market share (3Q15)
SOURCES: CIMB, COUNTERPOINT SOURCES: CIMB, COUNTERPOINT
Top seven vendors’ shipments jumped 85% yoy in 9M15. Supported by their affordable high-performance 4G smartphones and established worldwide distribution networks, the top seven Chinese vendors’ total export shipments increased by 85% yoy to 130m units in 9M15 (+62% yoy in 3Q15), according to Counterpoint (Figure 33, 34).
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Technology│Hong Kong│Equity research│January 5, 2016
20
Figure 33: Top seven Chinese vendor's export shipments, by quarter
SOURCES: CIMB, COUNTERPOINT
Figure 34: Smartphone overseas shipments (million units)
SOURCES: CIMB, COUNTERPOINT
Overseas market expansion to continue. Given the high cost-to-performance quotient and affordability of their 4G smartphones, we believe that the tier-1 Chinese vendors will easily grab market share in countries with relatively-weak consumption power and price-sensitive consumers. Therefore, we believe that the Chinese brands will achieve robust overseas shipment growth in the next couple of years, especially in emerging markets, thanks to stronger relationships with local carriers and improved brand awareness.
India’s fast-growing smartphone market. India is the third largest smartphone market in the world. We believe that India will be the fastest-growing smartphone market over the next few years (2016-18) due to the low smartphone penetration rate.
According to the International Data Corporation (IDC), India had around 1 billion mobile phone users in 2Q15 but only around 150m smartphone users. The smartphone penetration rate was only c.15% (vs. 59% in China, 75% in the US). India’s total smartphone demand was 80m units in 2014 and the IDC forecasts that smartphone shipments will reach c.110m units in 2015 (+38% yoy).
Smartphone demand hit 250m units in 2018. The smartphone penetration rate in India is expected to reach c.36% by 2018, according to the IDC. Hence, total smartphone users in India could reach 280m in 2018, with smartphone demand of over 250m units p.a. This represents a CAGR of 31% over the next three years (2015 – 2018) (Figure 35).
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Smartphone overseas shipments 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15
TCL-Alcatel 0.59 1.28 1.70 2.07 1.27 2.89 4.78 7.19 5.82 7.80 9.81 14.76 9.30 10.54 11.89
Lenovo 0.10 0.10 0.25 0.32 0.38 0.55 0.95 2.00 1.75 2.40 3.30 4.00 6.50 7.00 10.94
Huawei 1.85 2.30 3.00 4.59 3.00 3.55 4.85 7.50 5.70 8.72 7.24 12.30 6.30 13.90 10.10
ZTE 1.70 3.00 2.50 3.30 3.90 3.90 2.70 3.05 2.90 3.10 5.30 8.10 8.20 11.90 9.80
Xiaomi 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.50 0.70 1.30 1.50 1.30 1.90 2.00
Oppo 0.00 0.00 0.10 0.25 0.20 0.25 0.40 0.40 0.50 0.84 2.30 3.10 2.10 2.20 2.00
Vivo 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.15 0.15 0.25 0.50 0.40 1.00 1.10
Top 7 domestic vendors 4.24 6.68 7.55 10.53 8.75 11.14 13.68 20.14 17.32 23.71 29.50 44.26 34.10 48.44 47.83
% of total shipments in overseas
TCL-Alcatel 84% 86% 85% 90% 87% 89% 92% 94% 92% 89% 90% 95% 95% 95% 95%
Lenovo 2% 2% 4% 4% 5% 5% 8% 14% 14% 15% 20% 28% 44% 55% 66%
Huawei 39% 42% 39% 37% 30% 32% 38% 44% 42% 42% 43% 51% 36% 46% 37%
ZTE 38% 43% 42% 46% 43% 34% 36% 36% 32% 34% 46% 47% 54% 63% 54%
Xiaomi 0% 0% 0% 0% 0% 0% 0% 0% 5% 5% 7% 10% 8% 13% 13%
Oppo 0% 0% 9% 20% 13% 13% 17% 15% 16% 23% 33% 38% 30% 22% 15%
Vivo 0% 0% 0% 0% 0% 0% 0% 0% 7% 7% 4% 7% 5% 10% 11%
Top 7 domestic vendors 26% 29% 29% 31% 26% 26% 30% 36% 30% 31% 34% 44% 40% 44% 43%
Technology│Hong Kong│Equity research│January 5, 2016
21
Figure 35: India smartphone shipment (2011 - 2018F)
SOURCES: CIMB, IDC
Local Indian vendors dominate the low-end segment. Currently, local Indian vendors still dominate the country’s mobile phone market but mainly, the low-end segment (smartphone priced at US$50-80 per unit). The top three largest domestic vendors in India are Micromax, Intex and Lava, with combined India smartphone market share of around 35% market in 2Q15. Samsung remains the largest vendor, with 23% India smartphone market share, according to IDC (Figure 36).
Figure 36: India smartphone market share (2Q15)
SOURCES: CIMB, IDC
The next battlefield for Chinese vendors - India. Chinese vendors Huawei, Xiaomi, Lenovo, Oppo, Vivo, Meizu and Coolpad have been selling smartphones in India via online channels (flipkart.com, Mi India) and physical stores since 2014. Xiaomi registered India sales of more than 3m units (mainly Redmi) in 9M15, which is commendable given that its first shipment was in 4Q14 while Huawei sold about 2m units in 9M15. Xiaomi and Foxconn also jointly set up a handset assembly factory in Andhra Pradesh state in Jul 2015 to avoid the 12.5% import tariff. Lenovo also established an assembly factory in Chennai in 2H15 to increase its penetration into the India market.
We believe that the Chinese brands will successfully capture market share in India from both foreign and local brands in the low-end segment (smartphone priced at US$100 per unit), thanks to their high specifications, low prices and high-performance smartphones. As such, we expect overseas markets, including India, to become a key shipment growth driver for Chinese vendors.
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Technology│Hong Kong│Equity research│January 5, 2016
22
Chinese vendors provide better growth potential
During 2016-17, we expect tier-1 Chinese vendors to provide better volume growth than Samsung and Apple thanks to their continuous market share expansion in China and globally.
According to Counterpoint, the top seven Chinese brands’ market share exceeded Samsung’s and Apple’s in 3Q15. Shipments from the top seven Chinese vendors amounted to 112m units in 3Q15, i.e. 31% of the global smartphone market. In 9M15, their collective output reached 308m units which was 27% higher than Samsung’s and 96% higher than Apple’s (Figure 37). The average growth rate of the top seven Chinese brands was 40% yoy in 9M15 (29% yoy in 3Q15) which outpaced Samsung’s flat growth and Apple's 33% yoy growth rate (Figure 38).
As the Hong Kong-listed components manufacturers dominate the supply chain for tier-1 Chinese brands, we believe that they can benefit from the latter’s growth rate overtaking Apple’s and Samsung’s.
Figure 37: Total smartphone shipment in 9M15 – Chinese vendors vs. Samsung and Apple
Figure 38: Volume growth in 9M15 - Chinese vendors vs. Samsung and Apple
SOURCES: CIMB, COUNTERPOINT SOURCES: CIMB, COUNTERPOINT
Figure 39: Top 10 handset vendors shipment (volume) in 9M15 Figure 40: Top 10 handset vendors shipment growth (yoy%) in 9M15
SOURCES: CIMB, COUNTERPOINT SOURCES: CIMB, COUNTERPOINT
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Technology│Hong Kong│Equity research│January 5, 2016
23
iPhone shipments should decline yoy in 1H16. After strong growth over the past eight years, Our analyst (Felix PAN) expects to see the first-ever yoy shipment decline for the iPhone in 1H16. Despite expecting a strong rebound in 2H16 on the back of iPhone 7’s launch in Sep 2016, he does not expect a repeat of the hypergrowth of yesteryear, as demand is saturated (Figure 41).
iPhone demand is still growing. Our analyst expects iPhone unit shipments to rise 20.3% yoy to c.232m units in 2015, increase 5.7% to 245m units in 2016 and go up 8.2% yoy to 265m units in 2017, driven by replacement demand from existing iPhone fans and market share gains from other brands (Figure 42).
Figure 41: iPhone shipment volume, by quarter yoy% (3Q09-4Q17F)
SOURCES: CIMB RESEARCH, COMPANY DATA
Figure 42: iPhone shipment volume (2012 - 2017F)
SOURCES: CIMB RESEARCH, COMPANY DATA
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Technology│Hong Kong│Equity research│January 5, 2016
24
Global smartphone demand is still growing, albeit at a slower rate
Global smartphone shipments increased 13% yoy in 9M15. Global smartphone demand rose at a moderate rate of c.10-15% yoy in the first three quarters of 2015, with total smartphone shipments amounting to 1.06bn units. We expect a mere 1% yoy growth in 4Q15 off a high base in 4Q14 which would bring FY15 smartphone shipments to 1.46bn units, i.e. an 11% yoy increase (Figure 43).
China remains the largest single smartphone market in the world, with a 30% share, while the Asia Pacific region accounts for 22%. The developed markets of North America and Europe make up 12% and 15%, respectively (Figure 44). Nevertheless, China posted a slower shipment growth of 3% yoy in 9M15 due to its high smartphone penetrate rate. The Asia Pacific region achieved a 15% yoy shipment growth. North America and Europe registered decent growth of 15% yoy and 9% yoy, respectively. The Middle East/Africa region recorded the highest growth rate of 54% yoy due to strong 2G/3G migration (Figure 45).
Figure 43: Global smartphone demand by units (1Q12 to 4Q15F)
SOURCES: CIMB, COUNTERPOINT
Figure 44: Global smartphone shipments by region (9M15) Figure 45: Global smartphone shipments growth rate by regions (9M15 vs. 9M14, % yoy)
SOURCES: CIMB, COUNTERPOINT SOURCES: CIMB, COUNTERPOINT
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Technology│Hong Kong│Equity research│January 5, 2016
25
Global smartphone shipments expected to rise c.5% yoy to 1.5bn units in 2016. IDC expects global smartphone shipments to rise c.5% yoy to approximately 1.52bn units in 2016 and to maintain a moderate pace until 2018. This is underpinned by replacement demand for high-performance smartphones from North America, Europe and China as well as 2G/3G/4G migration demand from emerging markets such as India, Latin America, South East Asia, Eastern Europe, Africa and the Middle East. According to IDC’s forecast, global smartphone demand could reach 1.6bn units by 2017 and 7% CAGR in 2014-17, driven by the rising smartphone penetration rate in emerging markets such as India and Africa, and the stable smartphone migration demand from China, the US and Europe (Figure 46).
Figure 46: Global smartphone shipments forecast (2011 to 2017F)
SOURCES: CIMB RESEARCH, IDC
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Technology│Hong Kong│Equity research│January 5, 2016
26
China remains the largest smartphone market in the world
China accounts for over 31% of global smartphone shipments. China is the single largest smartphone market in the world, accounting for 31% of the total smartphone market, by volume, in 9M15. Strong performance in the China market would enable a vendor to increase its brand awareness and lower production costs in order to raise profitability through economies of scale.
China smartphone demand increased steadily in 9M15. China smartphone shipments rose 3% yoy to 323m units in 9M15 (4% yoy in 1Q, 0% in 2Q and 7% in 3Q15), driven by strong replacement demand for high-specification 4G smartphones and ongoing 3G/4G migration.
Figure 47: China smartphone shipments, by quarter
SOURCES: CIMB, COUNTERPOINT
Huawei clinched the top spot in China in 3Q15. Huawei replaced Xiaomi as the top-ranking handset vendor in 3Q15, with 15.6% market share (+0.3% pt qoq, +6.4% pts yoy), thanks to its many new product launches via e-commerce and social channels. In contrast, Xiaomi lacked innovative models and suffered keen competition from newcomers in the e-commerce channel, including LeTV QiKU and Meizu. Xiaomi fell to No.2 in 3Q15, with 14.6% market share (-1.2% pts qoq, -1.4% pts yoy). Apple’s market share increased slightly to 12.4% in 3Q15 (+0.2% pt qoq, +6.5% pts yoy) to stay at No.3, although the new iPhone 6S was only shipped out at end-Sep 2015. OPPO climbed to No.4 in 3Q15, with 9.9% market share (+2.9% pts qoq, +5.4% yoy) thanks to the excellent design and high performance of its smartphones, as well its well-established social channel. Vivo ranked No.5 in 3Q15, with 8.2% market share (flat qoq, +2.8% pts yoy), thanks to the Hi-Fi speaker box in its flagship model. Samsung's ranking fell to No.6 in 3Q15, as its market share shrank to 7.7% (-0.1% pt qoq, -4.0% pts yoy) due to keen competition from Chinese brands, given Samsung’s lack of product differentiation (Figure 48, 49).
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Technology│Hong Kong│Equity research│January 5, 2016
27
Figure 48: Top 10 China smartphone brands (3Q14) Figure 49: Top 10 China smartphone brands (3Q15)
SOURCES: CIMB, COUNTERPOINT SOURCES: CIMB, COUNTERPOINT
Meizu, Vivo and Oppo were the best performers in 9M15. In 9M15, the best performers among the domestic vendors in terms of China sales were Meizu (+330% yoy), Vivo (+140%), Oppo (+122%), and Huawei (+42%). The worst performers in 9M15 were Lenovo (-48% yoy) and Coolpad (-32%). Xiaomi faced keen competition from Huawei’s Honor, Meizu, LeTV and QiKU in the e-commerce channel and thus, it posted relatively slow domestic sales growth of 14% yoy in 9M15, although it maintained market share of 14.7% in 9M15 (+17.0% in 9M14) (Figure 50).
Figure 50: China top 10 vendors’ smartphone shipments in China, by brand (9M15 vs. 9M14)
SOURCES: CIMB, COUNTERPOINT
3G/4G migration and replacement demand lead the volume growth. According to the Ministry of Industry and Information Technology (MIIT), the overall smartphone penetration rate was 59% at end-Nov 2015, on the back of around 780m smartphone users (3G/4G) and around 530m feature phone (2G) users.
Handset subsides to be restored in 2016. China Mobile and China Unicom both announced aggressive subsidy plans in 2016 to boost their number of 4G subscribers. China Mobile revealed that it will allocate Rmb100bn for subsidies (including handset subsidies and channels subsidies for wholesalers and retailers) in 2016 (estimated Rmb20bn in 2015) in order to boost the number of 4G subscribers to 500m (c.300m at end-2015). China Unicom will spend approximately Rmb55bn for subsidies in 2016 (c.Rmb6bn in 2015) given the
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Technology│Hong Kong│Equity research│January 5, 2016
28
significant subscriber outflows in 2015 (average outflow of c.1m 3G/4G subscribers per month).
Smartphone penetration rate to hit 68% in 2016. We believe that the penetration rate will reach around 60% in 2015 and rise further to hit 68% by 2016, representing an increase in the number of new smartphone users by 131m in 2016, driven by lower 4G tariffs, the abundance of affordable high-performance 4G smartphones and enhanced 4G promotions by the three Chinese operators.
We estimate that China smartphone shipments will merely inch up 1% to 433m units in 2015 due to reduced handset subsidies and the weak economy. Nevertheless, we believe that China smartphone demand will achieve 7% growth in 2016 to 465m units, underpinned by the restoration of handset subsidies by the operators, abundant high-spec low-priced 4G smartphone launches and net addition of 131m smartphone users (Figure 51,52,53).
Figure 51: Estimated China mobile subs and smartphone demand
SOURCES: CIMB, COMPANY REPORTS
Figure 52: Estimated no. of mobile subscribers and 3G/4G penetration rate
SOURCES: CIMB, COMPANY REPORTS
China mobile market metrics 2011 2012 2013 2014 2015F 2016F
No. of mobile subscribers (million) 976 1,110 1,233 1,291 1,308 1,330
No. of mobile subscribers (yoy %) 16% 14% 11% 5% 1% 2%
No. of 2G subscribers 848 877 816 688 529 419
No. of 3G subscribers 128 233 417 513 446 227
No. of 4G subscribers - - - 90 333 683
Total 3G/4G subscribers 128 233 417 604 779 910
Total 3G/4G subscribers (yoy %) 171% 83% 79% 45% 29% 17%
2G penetration rate (%) 87% 79% 66% 53% 40% 32%
3G penetration rate (%) 13% 21% 34% 40% 34% 17%
4G penetration rate (%) - - - 7% 25% 51%
Total 3G/4G penetration rate (%) 13% 21% 34% 47% 60% 68%
2G net adds (million) 53 29 (61) (128) (159) (110)
3G net adds (million) 80 106 184 96 (67) (219)
4G net adds (million) - - - 90 243 350
3G/4G net adds (million) 80 106 184 187 176 131
Estimated smartphone demand (million) 105 202 353 430 433 465
Estimated smartphone demand (yoy %) 163% 93% 74% 22% 1% 7%
New 3G/4G users (million) 80 106 184 187 176 131
Replacement demand (million) 25 96 169 244 257 334
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Technology│Hong Kong│Equity research│January 5, 2016
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Figure 53: Estimated China smartphone demand
SOURCES: CIMB, COMPANY REPORTS
Leading Chinese brands gained market share in China. Although overall smartphone demand rose slowly in 2015, leading domestic vendors gained market share from white-box and foreign brands due to the high specifications, low prices and high performance of their smartphones, rising sales through the e-commerce channel, and strong penetration in low-tier cities via physical stores.
According to Counterpoint, the combined market share of the top seven Chinese vendors increased from 39% in 3Q13 to 65% in 3Q15 (Figure 54), while the foreign brands’ market share dropped from above 30% in 3Q13 to less than 20% in 3Q15.
Figure 54: Top seven Chinese vendors continue gaining market share in home market
SOURCES: CIMB, COUNTERPOINT
Leading brands’ market share gain in home markets is expected to continue. We expect the consolidation in the China smartphone market to continue due to fierce competition, especially in the low-to mid-end segment (Rmb1,000 – Rmb2,000 / US$150 – US$320). Therefore, we expect the leading Chinese handset vendors to continue gaining market share in the home market moving forward due to: 1) their strong domestic components supply chain, and 2) diversified distribution channels, comprising both physical stores and online platforms.
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Top 7 Chinese v endors in China: Huawei, Xiaomi, Oppo, Vivo, Coolpad, Lenovo, Meizu
Technology│Hong Kong│Equity research│January 5, 2016
30
Huawei, Xiaomi, Oppo, Vivo, ZTE and LeTV to lead growth in Chinese brands in 2016
Top 10 Chinese handset vendors to post estimated 24% yoy shipment growth in 2016. We remain positive on the tier-1 Chinese handset vendors’ smartphone shipment growth outlook for 2016 on the back of strong support from the domestic components supply chain, improving brand awareness in China and globally, the high specifications, low prices and high performance of their smartphones, as well as the many distribution channels comprising mobile network operators (domestic and overseas), online platforms (domestic and overseas) and physical stores (in top-tier cities to low-tier cities in China).
Top 10 vendors’ shipments reach 703m units in 2016. With the exception of Lenovo, we expect all top 10 Chinese vendors to beat the industry growth rate in 2016. We estimate that total smartphone shipment by the top 10 Chinese vendors will reach 703m units in 2016, an increase of 24% yoy from approximately 570m units (+27% yoy) in 2015 (Figure 55). We believe that Huawei and Xiaomi will continue to post robust output growth of 25% and 33% yoy, respectively, in 2016 due to their strong new product pipelines (Huawei: P8, Mate 8. Xiaomi: Redmi Note 3 and Mi 5). We also expect Oppo and Vivo to maintain strong output growth of 30% and 20% yoy respectively, in 2016 thanks to their market share gains in the mid-end smartphone segment in China and Southeast Asia (Figure 56).
Figure 55: Estimated total smartphone output of top 10 Chinese handset vendors (2011 to 2016F)
SOURCES: CIMB RESEARCH
Figure 56: Estimated shipments of top 10 Chinese vendors (2014 - 2016F)
SOURCES: CIMB RESEARCH
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Technology│Hong Kong│Equity research│January 5, 2016
31
Huawei’s smartphone shipments jumped 63% yoy in 3Q15. Huawei’s shipments surged 63% yoy in 3Q15 to 27.4m units (+48% yoy in 9M15 with 75.4m units) driven by both China and overseas markets due to improved brand awareness and high cost-to-performance quotient smartphones (Huawei’s P7 (Rmb1,200), G7 (Rmb1,799) and Mate 7 (Rmb2,999)). Furthermore, Huawei’s flagship models launches in the US$300-500 range for both China and overseas markets, and marketing strategy via e-commerce in the domestic market and carriers in overseas markets were successful. Hence, Huawei’s market share rose from 5.1% in 3Q14 to 7.5% in 3Q15, due to increasing market share in China and globally. The robust shipments growth was driven by its dual-brand (Huawei + Honor) strategy and the successful launches of mid-to high-end models such as Mate 7 (Rmb2,100) and G7 (Rmb1,800) which sold very well in China and overseas markets. Furthermore, Huawei launched Mate S (US$600) for overseas markets and Mate 8 Max / Mate 8 (Rmb4,100 / Rmb2,999, Figure 59, 60) in China. This is the first time Huawei prices its flagship model over US$600/Rmb4,000, directly competing with Apple’s iPhone and Samsung Galaxy S6 / S6 edge.
Shipments could reach 125m units in 2016. We believe that Huawei can easily beat its 2015 shipment target of 100m units (+33% yoy) as it shipped 75.4m smartphones in 9M15. In our view, Huawei’s smartphone shipments could outpace its rivals in 2016 and rise 25% yoy to c.125m, driven by its strong product development, in-house chipset production capability and increase in overseas market share.
Figure 57: Huawei's quarterly smartphone shipments Figure 58: Huawei's smartphone shipments (2011- 16F)
SOURCES: CIMB, COUNTERPOINT SOURCES: CIMB, COUNTERPOINT
Figure 59: Huawei Mate 8
Retail price: Rmb4,100/Rmb2,999
Specifications : Kirin 950 quad 2.3GHz, 6” screen (1920x1080), 8MP/16MP cameras (PDAF+CAF,OIS), force touch, fingerprint, metal casing 7.9mm
Figure 60: Huawei G7
Retail price: Rmb1,799
Specifications: Quad ARM Cortex A53-1.2GHz, 5.5” screen, 13MP back camera, metal casing slim body 7.6mm
SOURCE: CIMB RESEARCH, ZOL.com.cn SOURCE: CIMB RESEARCH, ZOL.com.cn
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Technology│Hong Kong│Equity research│January 5, 2016
32
Xiaomi’s smartphone shipments stayed flat in 3Q15. Xiaomi lost its top rank in China to Huawei in 3Q15 given the lack of new model launches in 2015 (Mi4 was launched in 3Q14) and keener competition from Meizu, LeTV and QiKU which are backed by companies with strong Internet background. Xiaomi only launched Mi 4i, Mi 4C and a few Redmi Note models in 2015. Xiaomi’s key volume drivers were the low-end version of Redmi (Rmb499) and Redmi Notes (Rmb899). Xiaomi's total shipments were flat yoy at 18m units in 3Q15, while 9M15 shipments remained resilient, advancing 19% yoy to 52.5m units. We believe that Xiaomi will miss its revised downward full-year target of 80m units in 2015 given it only shipped 52.5m units in 9M15. Therefore, we forecast that Xiaomi’s smartphone shipments would rise 23% yoy to 75m units in 2015. Shipments could reach 100m units in 2016. Nevertheless, along with the licensing agreement signed with Qualcomm in Dec 15, we believe that Xiaomi could launch its flagship model Mi5 soon (market speculation in Jan 2016) to regain market share in China and to expand overseas (including the US) as it has resolved some of the patent issues overseas. We expect Xiaomi’s smartphone shipments to rise 33% yoy to c.100m units in 2016 on the back of 1) the Mi5 launch, 2) Redmi Note 3 (Rmb899/US$145) launch, and 3) the increasing overseas shipments, especially in India and South East Asia (Figure 62).
Figure 61: Xiaomi's quarterly smartphone shipments Figure 62: Xiaomi's smartphone shipments (2011- 16F)
SOURCES: CIMB, COUNTERPOINT SOURCES: CIMB, COUNTERPOINT
Figure 63: Xiaomi Mi4
Retail price : Rmb1,799
Specifications : Qualcomm Snapdragon 801 2.5GHz, 5” screen, 13MP back camera, metal middle-frame + In-Mold Transfer plastic back cover
Figure 64: Redmi Note 3
Retail price: Rmb899
Specifications : MTK Helio X10 quad core, 5.5” screen (1920x1080), 13MP back camera, fingerprint, metal casing
SOURCE: CIMB RESEARCH, ZOL.com.cn SOURCE: CIMB RESEARCH, ZOL.com.cn
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Technology│Hong Kong│Equity research│January 5, 2016
33
Lenovo’s 9M15 performance was weak. Despite consolidating with Motorola, Lenovo's shipments were relatively weak in 2015, declining 2% in 3Q15 and slipping 3% yoy in 9M15. We think that this was due to 1) substantially fewer shipments in the operator channels in China, 2) a confusing branding strategy (it carried five different brands in 3Q15), and 3) a lack of popular model launches during the period.
Lenovo has consolidated from five brands to three brands (Lemon, ZUK and Motorola) after it launched Lemon X3 (Rmb2,499/US$400) which caters to the high-end segment. Lemon is aimed at the mid-to high-end segment (Rmb2,000/ US300), mainly in China. ZUK is Lenovo’s e-commerce brand while the Motorola brand will focus on overseas markets. Growth only to 76m units in 2016. We are certain that Lenovo will miss its 2015 shipment target of 100m units given it only shipped 44m units in 9M15 despite including Motorola. We expect Lenovo to ship around 73m smartphones in 2015, with over half of them to overseas markets. We believe that Lenovo will remain in consolidation mode in 2016 as it integrates the Motorola handset business and focuses on emerging markets such as Brazil, India and Russia. However, we stay cautious about Lenovo’s smartphone shipments in 2016 because its smartphones lack innovative features and poorly designed relative to its rivals. Hence, we expect its smartphone shipments to rise c.4% yoy to 76m units (Figure 66).
Figure 65: Lenovo's quarterly smartphone shipments Figure 66: Lenovo's smartphone shipment (2011 - 2016F)
SOURCES: CIMB, COUNTERPOINT SOURCES: CIMB, COUNTERPOINT
ZTE gained market share in the US. Given the substantially lower domestic sales due to subsidy cuts in Chinese operators, ZTE delivered outstanding shipment performance in 3Q15, with total smartphone shipments increasing 25% yoy to 14.3m units due to strong US sales. ZTE is No.4 in the US with 7.8% market share in 3Q15, thanks to significant market share gain in the US after the
successful model launch of "AXON 天机, (Rmb2,699/US$440)" which
tied-up with the NBA. ZTE’s shipments surged 50% yoy to 44.3m units in 9M15 (Figure 67). Shipments to reach 75m units in 2016. We expect ZTE to ship 61m smartphones in 2015, and estimate its smartphone shipments could rise to over 75m units in 2016 with around 22% growth p.a., mainly driven by the US, South East Asia and Latin America markets (Figure 68).
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Technology│Hong Kong│Equity research│January 5, 2016
34
Figure 67: ZTE's quarterly smartphone shipments Figure 68: ZTE's smartphone shipment (2011 - 2016F)
SOURCES: CIMB, COUNTERPOINT SOURCES: CIMB, COUNTERPOINT
Figure 69: Lenovo Lemon X3
Retail price : Rmb2,499
Specification : Qualcomm Snapdragon 808 1.8GHz, 5.5” screen (1920x1080), 21MP rear-facing camera (PDAF) and 8MP front-facing camera, metal casing
Figure 70: ZTE AXON
Retail price: Rmb2,699
Specification : Qualcomm Snapdragon 810 quad core, 5.5” screen (1920x1080), 13MP dual-camera, fingerprint, Iris recognition, metal casing
SOURCE: CIMB RESEARCH, ZOL.com.cn SOURCE: CIMB RESEARCH, ZOL.com.cn
TCL smartphone shipments rose 29% yoy in 9M15. TCL’s smartphone shipments were resilient in 3Q15 despite keen competition from other domestic brands in the global market, especially in Asia Pacific, and further price cutting from the tier-1 international brands. TCL’s 3Q15 sales rose 13% qoq or 15% yoy to 12.5m smart devices (including 1.3m tablets). In 9M15, smartphone shipments rose 29% yoy to 33.4m units. It met 64% of our smartphone shipment forecast but we expect strong 4Q shipments due to the peak season and promising new products in the pipeline. We believe that TCL’s smartphone shipments could rise 27% yoy to 52.6m in 2015 (Figure 71). We expect TCL’s smartphone shipments to rise 15% yoy to 56m units in 2016 on the back of new product launches in 2H15 including 1) Idol 3 for the US and Eurozone markets, 2) Onetouch Flash 2 for the Asia Pacific market, and 3) Go Play, a 3-proof handset tailor-made for the youth segment (Figure 72).
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Technology│Hong Kong│Equity research│January 5, 2016
35
Figure 71: TCL's quarterly smartphone shipments Figure 72: TCL's smartphone shipment (2011 - 2016F)
SOURCES: CIMB, COUNTERPOINT SOURCES: CIMB, COUNTERPOINT
Figure 73: Alcatel Idol 3
Retail price: USD220
Specification : Qualcomm Snapdragon 615 Octa-core 1GHz, 5.5” screen (1080x1920), 8MP/13MP cameras,
Figure 74: Alcatel One Touch Flash 2
Retail price: USD140
Specification : MTK MT6753 Octa-core 1.3 GHz, 5” screen (720x1280), 5MP/13MP cameras
SOURCE: CIMB RESEARCH, TCL SOURCE: CIMB RESEARCH, TCL
Oppo and Vivo were the fastest-growing vendors. Oppo and Vivo broke into the global top 10 in 2015 thanks to strong shipment growth in China and SEA markets. This stemmed from their high performance smartphones with unique features. Oppo and Vivo are focused on the mid-to high-range segment. They achieved the fastest growth rate among domestic brands in 9M15. In 9M15, Oppo’s shipments jumped 116% yoy to 30m units while Vivo surged 174% yoy to 28m units.
Oppo and Vivo have successfully established nationwide social channels, especially in the lower-tier cities. Their phones feature high-specs, excellent design and improved UI. Avoiding the stiff competition in the low-end segment has proved to be a successful strategy thus far. Its hottest models are Vivo’s X5 (Rmb2,298/US$370) and Oppo’s R7 (Rmb2,499/US$400) (Figures 77 and 78).
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Technology│Hong Kong│Equity research│January 5, 2016
36
Figure 75: Oppo's quarterly smartphone shipments Figure 76: Vivo's quarterly smartphone shipments
SOURCES: CIMB, COUNTERPOINT SOURCES: CIMB, COUNTERPOINT
Figure 77: Oppo R7
Retail price: Rmb2,499
Specification : Qualcomm MSM8939 cota-core, 5” screen, 13MP back camera, metal casing slim body 6.3mm
Figure 78: Vivo X5
Retail price: Rmb2,298
Specification : MTK MT6752 octa-core 1.7GHz, 5.2” screen, 13MP back camera, metal casing thinness 6.4mm
SOURCE: CIMB RESEARCH, ZOL.com.cn SOURCE: CIMB RESEARCH, ZOL.com.cn
LeTV and QiKU are the market disruptors. With the Internet background of the parent companies (LeTV and Qihoo360), LeTV and QiKU are the most significant new handset brands in China in 2015. They launched very competitively priced smartphones which successfully drew consumer interest. LeTV and QiKU sell their models at cost in order to increase their user base to establish their own ecosystems. According to Sino Research, LeTV’s Max consistently ranked no. 1 in Aug-Oct 2015 in the Sub-Rmb3,000 segment in China. During the 11 Nov Singles Day campaign, QiKU’s online sales was the fifth highest after Xiaomi, Huawei, Meizu and Apple. This impressed us, as Qiku’s smartphone was only launched a month ago.
Figure 79: LeTV Superphone 1S
Retail price : Rmb1,099
Specification : MTK Helio X10 octa-core 2.2GHz, 5.5” screen (1920x1080), 13MP back-end dual-camera (4K video), fingerprint, metal casing
Figure 80: QiKU Q1 (Youth edition)
Retail price: Rmb999
Specification : MTK MT6753 octa-core 1.3GHz, 5.5” screen (1920x1080), 13MP back camera (PDAF), fingerprint, metal casing
SOURCE: CIMB RESEARCH, ZOL.com.cn SOURCE: CIMB RESEARCH, ZOL.com.cn
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Technology│Hong Kong│Equity research│January 5, 2016
37
VALUATION AND RECOMMENDATION
Stay positive on component manufacturers
Component manufacturers were the star performers in 2015. At the beginning of 2015 we had compiled a report Xiaomi-driven hardware upcycle dated 2 January 2015, highlighted that the Chinese brands would outpace tier-1 International brands, especially in the Android camp, and components manufacturers for Chinese brands would be the key beneficiaries given they were freed from ASP pressure due to the significant hardware upcycle.
Hong Kong-listed component manufacturers that have high exposure to top-tier Chinese brands such as Huawei, Xiaomi, Oppo and Vivo have been outperforming the Hang Seng Index in 2015, as they also did in 2013 and 2014, reflecting strong earnings growth and the bright industry outlook (Figure 81).
Our sector top picks in 2015 were AAC Tech, Sunny Optical and Tongda Group. AAC Tech’s share price rose 24% while Sunny Optical’s share price advanced 35% and Tongda Group’s gained 53%. These stocks outperformed the Hang Seng Index by -7%.
Another good year for component manufacturers in 2016. We believe the share price momentum will continue in 2016 as the latest hardware upgrade cycle just took place, even in the sub-Rmb1,000 (US$150) segment.
Figure 81: China smartphone players share price return (2013 - 2015)
SOURCES: CIMB, BLOOMBERG
Buy component manufacturers, hold vendors. We stay positive on Hong Kong-listed component manufacturers that have a strong Chinese customer base, such as AAC Tech (2018 HK, Add), Sunny Optical (2382 HK, Add) and Tongda Group (698 HK, Add), as we believe they will be the key beneficiaries due to 1) dominant supply chain status, 2) above industry-average smartphone shipment growth from their customers, underpinned by market share gains in China and rapid expansion in overseas markets, and 3) their ability to sustainably elevate the value of their components, with stable gross margins, due to significant specification upgrades in the new round of hardware upgrade cycle (high-resolution cameras, metal casings, speaker boxes and haptics) in the midrange – sub Rmb2,000 segment (US$300 to US$400).
On the other hand, we suggest investors adopt a wait and see approach to Chinese handset vendors due to escalating BOM costs and declining ASP due to keen competition in China and the global smartphone markets. Even so, we expect handset shipment growth for Lenovo, TCL and Coolpad to remain resilient in 2016.
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Technology│Hong Kong│Equity research│January 5, 2016
38
AAC Tech, Tongda Group and Sunny Optical are top picks
We remain Overweight on the China smartphone sector. Our top sector picks are AAC Tech, Tongda Group and Sunny Optical.
AAC Tech (2018 HK, Add) has a promising new product pipeline for Apple (haptics and speaker box upgrades) and strong sales growth prospects for the Chinese brands (acoustics upgrades and RF/mechanical project wins).
Tongda Group (698 HK, Add) is the likely key beneficiary of the low metal casing penetration rate among Chinese vendors thanks to its dominant position as a domestic supplier of smartphone casings (metal casings and high-end precision plastic casings).
We also positive on Sunny Optical (2382 HK, Add), as we believe it is moving up the value chain to upstream. Sunny could also benefit from significant camera upgrades among Chinese vendors.
In the small cap space, we like Cowell (1415 HK, Add), as it is benefits from the continuing iPhone camera upgrades, as well as what we see as cheap valuation.
We also like TK Group (2283 HK, Add), as in our view it will benefit from the fast-growing wearable device segment, thanks to customers wins.
We maintain our Hold ratings on TCL Communication (2618 HK, Hold) and Lenovo (992 HK, Hold) on the back of considerable margin pressure in the handset segment.
We maintain our Add rating on Coolpad Group (2369 HK, Add), as we believe the group will benefit from the new handset subsidy programmes from the three Chinese operators and expect further cooperation between LeTV and Coolpad.
Recommendations on component manufacturers:
AAC Technologies (2018 HK, Add) – AAC is the key beneficiary in the next round of product cycle upgrades, given the significant speaker box upgrades in the next generation iPhones and strong demand for speaker boxes among leading Chinese brands due to the wide adoption of high-end components. AAC is riding Apple’s strong new product pipeline (speaker box and haptic upgrades) as well as the strong sales growth prospects for Chinese brands (acoustic upgrades and RF/mechanical project wins). We believe AAC’s earnings growth will remain robust at 21% yoy in FY16 after an estimated 36% jump in FY15, thanks to a strong new product pipeline and ASP hikes for upgraded haptics and acoustic components. We forecast AAC delivering an EPS CAGR of 22% in FY14-17F, driven by revenue CAGR of 22% and a stable gross margin. We maintain an Add call on AAC with a higher target price of HK$65.0 as we roll over our valuation to FY16, based on a FY17 P/E of 15.2x (1 s.d. above its 5-year average).
Figure 82: AAC Tech's 12 month forward P/E
SOURCE: CIMB, BLOOMBERG
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Technology│Hong Kong│Equity research│January 5, 2016
39
Cowell e Holdings (1415 HK, Add) – Cowell is riding on iPhone’s endless cameras upgrades thanks to its primary front-facing camera modules supplier status. Apart from that, Cowell will start providing rear-facing cameras for iPhone’s legacy products in FY16. We are also positive on the potential upgrade (thinner, waterproof, functions add) in the front-facing camera in the next generation of iPhones. We project Cowell to deliver 8% net profit growth in FY16 as the next version of the iPhone is expected to be launched in Sep 16 and following stronger growth of 15% in FY17, thanks to full-year contribution of iPhones 7 sales. We maintain our Add rating on Cowell due to what we view as its compelling valuation and solid relationship with Apple. Our target price (HK$4.44) is based on a FY17 P.E of 6.0x, in line with the small-cap Apple component suppliers.
Figure 83: Cowell's 12 month forward P/E
SOURCE: CIMB, BLOOMBERG
Sunny Optical (2382 HK, Add) – We think that Sunny is a key beneficiary from the significant upgrades in camera resolutions and functional additions among Chinese vendors, thanks to its dominant market share in the domestic brands supply chain. Furthermore, we are positive on the rapid growth in handset lens sets and vehicle lens sets divisions which has led it up the value chain towards becoming an upstream optical components manufacturer. In our view, its gross margin will be protected by the sustainable image pixels migration in Chinese vendors and its high-margin optical components segment’s rapid growth. With 17% revenue CAGR, we forecast 27% EPS CAGR in FY14-17, underpinned by Sunny’s fast-growing high-margin divisions (handset lens sets and vehicle lens sets) and steady growth of the HCM manufacturing division. Maintain Add. Share price catalysts are robust growth in handset lens sets and vehicle lens sets divisions. We raise our target price to HK$21.40 as we roll over to FY16. Our target price (HK$ 21.40) is based on a FY17 P/E of 16x (its upcycle peak valuation).
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Technology│Hong Kong│Equity research│January 5, 2016
40
Figure 84: Sunny Optical's 12 month forward P/E
SOURCE: CIMB, BLOOMBERG
Tongda Group (698 HK, Add) –Tongda is one of the key beneficiaries of the wide adoption of metal casings among domestic brands on the back of a low metal casing penetration rate among Chinese vendors. Tongda’s metal casings customers include Huawei, Xiaomi, Oppo, Vivo and QiKU. Recent new model launches such as QiKU Youth Edition (Rmb999) and Xiaomi Redmi Note3 (Rmb899) are equipped with metal casings produced by Tongda. On the other hand, we expect the new precision rubber parts product launch for a new customer will bring a new revenue stream for the group in FY16. We reiterate our Add recommendation, with the strong growth of the handset division a potential catalyst. Our target price is raised to HK$2.00 as we roll over to FY16, based on a FY17 P/E of 11x, on par with its peers.
Figure 85: Tongda's 12 month forward P/E
SOURCE: CIMB, BLOOMBERG
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Technology│Hong Kong│Equity research│January 5, 2016
41
TK Group (2283 HK, Add) – We expect TK Group to maintain a c.20% topline growth in FY16, driven by new customers gain and new projects won in the mobile phone and wearable divisions and increased orders from Philips. On the other hand, we believe its gross profit margin will expand by 1% pts to c.28% in FY16 due to an improved utilisation rate in the automotive division and higher automation in plastic component manufacturing services. We maintain an Add recommendation on TK Group due to its cheap valuation and appealing earnings growth. Potential catalysts are continuous gains in new customers, rapid growth in high-main segments and a potentially higher dividend payout ratio. Our target price (HK$3.20) is raised as we roll it over to FY16, based on a FY17 P/E of 8.5x, on par with its peers (mould and plastic components manufacturers and handset component makers).
Figure 86: TK Group's 12 month forward P/E
SOURCE: CIMB, BLOOMBERG
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Technology│Hong Kong│Equity research│January 5, 2016
42
Recommendations on handset vendors:
Coolpad Group (2369 HK, Add) – We believe that Coolpad have gone through the most difficult period in 2015, in view of its market share loss and inflated marketing expenses for channels rebuilding due to significant reduction in handset subsidies among Chinese mobile operators. Nevertheless, we expect Coolpad’s operation to improve in 2016, underpinned by 1) stable smartphone sales, and 2) a balanced distribution network between online channel (Dazen/QiKU), open channel (ivvi) and operator channel (Coolpad).
We maintain our Add call on Coolpad in view of favourable policy changes in the China smartphone market. On the other hand, we expect further cooperation between LeTV and Coolpad. Our SOP target price (HK$2.27) is based on 20x FY16 earnings for its services income, 8x earnings for its smartphone sales and cash of HK$3.1bn. Further cooperation with its second largest shareholder LeTV (with a 17.93% stake) could act as another share price re-rating catalyst.
Figure 87: Coolpad's 12 month forward P/E
SOURCE: CIMB, BLOOMBERG
Lenovo (992 HK, Hold) - We remain cautious about Lenovo’s smartphone shipments in CY16 because its smartphones lack innovative features and are relatively poorly designed. Hence, we expect its smartphone shipments to rise by only 4.1% yoy to 76m units. It might take time for the company to reposition its brands so PC will still be the cash cow for Lenovo. We do not expect Lenovo to be able to turn around its smartphone business in the short term. Maintain Hold with target of HK$7.90, unless we see significant progress in turning around its smartphone business. Our target price is unchanged, still based on 12x FY17 P/E.
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Technology│Hong Kong│Equity research│January 5, 2016
43
Figure 88: Lenovo's 12 month forward P/E
SOURCE: CIMB, BLOOMBERG
TCL Communication (2618 HK, Hold) - TCL Communication (TCLC) experienced fast growth in smartphone shipments in 2013 and 2014, thanks to its successful transition from a vendor of feature phones to that of smartphones. TCLC stood at No. 9 in the global smartphone market in 3Q15 with a 3.4% share, underpinned by its well-established worldwide distribution network and strong brand name “TCL-Alcatel”. TCLC was also the largest Chinese vendor in export sales in 9M15 with over 30m units. We estimate TCLC to ship 56m smartphones (+15% yoy) in FY16 and 62m (+10% yoy) in FY17, driven by market share gains in North America, Middle East and Africa. On the back of c.10-15% smartphone shipment growth in FY16 and FY17 and a stabilized ASP and gross margin outlook, we believe TCLC’s profitability will remain healthy in FY16 and FY17, with earnings growth of 3-4% over that time frame. We maintain our Hold rating on TCLC with a target price of HK$6.34, based on a FY17 P/E of 7.5x, as we see a lack of short-term catalyst given margin and the ASP pressure.
Figure 89: TCLC's 12 month forward P/E
SOURCE: CIMB, BLOOMBERG
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Technology Components│Hong Kong│Equity research│January 5, 2016
Company Note
IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN THE UNITED STATES IT IS DISTRIBUTED BY CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH.
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AAC Technologies Winner of the new wave of product upgrades
■ AAC is well-positioned to capture the upgrades in next generation iPhones and huge growth demand for high-end acoustic components from Chinese brands.
■ Gross profit margin is protected by ASP hikes in haptics and strong demand for high-end speaker boxes.
■ Its 22% EPS CAGR (FY14-17) provided strong support for its premium valuation.
■ Maintain Add. Our target price is raised to HK$65.0.
Promising outlook AAC is the key beneficiary in the next round of product cycle upgrades, given the significant speaker box upgrades in the next generation iPhones and strong demand for speaker boxes among leading Chinese brands due to the wide adoption of high-end components. AAC is riding Apple’s strong new product pipeline (speaker box and haptic upgrades) as well as the strong sales growth prospects for Chinese brands (acoustic upgrades and RF/mechanical project wins).
Riding iPhone’s continuous upgrades AAC is set to benefit from the 3D Force Touch upgrade and waterproof function additions to the next generation iPhones, thanks to its innovative products and its status as a primary Apple supplier. More importantly, it has been maintaining a higher-than-rivals market share in both acoustic and haptic components for Apple, thanks to the high quality of its products and production yield.
Strong demand from domestic brands As competition in the China smartphone market heats up, even mid-range Chinese smartphones (priced at c.US$200) have joined flagship models in adopting high-end acoustic components (like speaker boxes). This creates a huge demand for AAC’s acoustic products. Also, AAC secured more than 20 RF/mechanical projects for 2016 (4-5 projects for 2015), thanks to the popularity of metal casings among Chinese brands.
Stable gross margin outlook We believe AAC’s gross margin will be stabilised at around 42% in FY16 (41.8% in FY15), underpinned by ASP hikes in haptics for Apple and the accelerated adoption of high-end speaker boxes among Chinese brands.
22% EPS CAGR over FY14-17 We believe AAC’s earnings growth will remain robust at 21% yoy in FY16 after an estimated 36% jump in FY15, thanks to a strong new product pipeline and ASP hikes for upgraded haptic and acoustic components. We forecast AAC delivering an EPS CAGR of 22% in FY14-17, driven by revenue CAGR of 22% and a stable gross margin.
Maintain Add We maintain an Add call on AAC with a higher target price of HK$65.0 as we roll over our valuation to FY16, based on 15.2x FY17 P/E (1 s.d. above its 5-year average).
▎Hong Kong
ADD (no change) Current price: HK$49.80
Target price: HK$65.00
Previous target: HK$61.90
Up/downside: 30.5% Reuters: 2018.HK
Bloomberg: 2018 HK
Market cap: US$7,890m
HK$61,154m
Average daily turnover: US$24.40m
HK$189.1m
Current shares o/s 1,228m
Free float: 24.4%
Key changes in this note
No change.
Source: Bloomberg
Price performance 1M 3M 12M
Absolute (%) -7.0 1.2 20.9
Relative (%) -2.9 2.0 31.5
Analysts
Ray KWOK
T (852) 2532 1113 E ray.kwok@cimb.com
Bertram LAI T (852) 2532 1111 E betram.lai@cimb.com
[ X ]
SOURCE: COMPANY DATA, CIMB FORECASTS
Financial Summary Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F
Revenue (Rmbm) 8,096 8,879 11,666 14,118 16,099
Net Profit (Rmbm) 2,578 2,318 3,081 3,773 4,306
Normalised EPS (Rmb) 1.88 1.91 2.51 3.07 3.51
Normalised EPS Growth 34.0% 1.3% 31.4% 22.6% 14.1%
FD Normalised P/E (x) 22.30 22.02 16.76 13.67 11.98
Price To Sales (x) 6.37 5.81 4.42 3.65 3.20
DPS (Rmb) 0.88 0.79 1.05 1.28 1.46
Dividend Yield 2.11% 1.87% 2.49% 3.05% 3.48%
EV/EBITDA (x) 17.32 16.97 12.62 10.31 8.85
P/FCFE (x) 31.7 160.7 69.7 20.5 16.7
Net Gearing (18.3%) (2.1%) 0.1% (6.3%) (13.3%)
P/BV (x) 6.55 5.64 4.90 4.07 3.43
ROE 33.1% 27.5% 31.3% 32.5% 31.1%
% Change In Normalised EPS Estimates 0% 0% 0%
Normalised EPS/consensus EPS (x) 1.00 1.03 1.02
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Price Close Relative to HSI (RHS)
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Technology Components│Hong Kong│Equity research│January 5, 2016
45
BY THE NUMBERS
Share price info
Share px perf. (%) 1M 3M 12M
Relative -2.9 2.0 31.5
Absolute -7.0 1.2 20.9
Major shareholders % held
Wu Chun Yuan 40.8
The Capital Group Companies, Inc. 18.0
JP Morgan Chase & Co. 16.8
SOURCE: CIMB RESEARCH, COMPANY DATA
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Rolling P/BV (x) (lhs) ROE (rhs)
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12-mth Fwd FD Normalised P/E vs FD Normalised EPS Growth
12-mth Fwd Rolling FD Normalised P/E (x) (lhs)
Diluted Normalised EPS Growth (rhs)
Profit & Loss
(Rmbm) Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F
Total Net Revenues 8,096 8,879 11,666 14,118 16,099
Gross Profit 3,459 3,678 4,852 5,948 6,834
Operating EBITDA 2,897 3,031 4,091 4,928 5,605
Depreciation And Amortisation (452) (525) (762) (881) (956)
Operating EBIT 2,445 2,506 3,329 4,046 4,649
Financial Income/(Expense) 6 10 (1) 4 4
Pretax Income/(Loss) from Assoc. 12 (1) (5) (4) (2)
Non-Operating Income/(Expense) 73 91 110 127 140
Profit Before Tax (pre-EI) 2,536 2,605 3,434 4,173 4,790
Exceptional Items 265 (24) 4 0 0
Pre-tax Profit 2,801 2,581 3,438 4,173 4,790
Taxation (229) (270) (363) (407) (489)
Exceptional Income - post-tax
Profit After Tax 2,571 2,310 3,075 3,766 4,301
Minority Interests 6 7 6 7 5
Preferred Dividends
FX Gain/(Loss) - post tax
Other Adjustments - post-tax
Preference Dividends (Australia)
Net Profit 2,578 2,318 3,081 3,773 4,306
Normalised Net Profit 2,306 2,335 3,071 3,766 4,301
Fully Diluted Normalised Profit 2,313 2,342 3,077 3,773 4,306
Cash Flow
(Rmbm) Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F
EBITDA 2,897 3,031 4,091 4,928 5,605
Cash Flow from Invt. & Assoc. (12) 1 5 4 2
Change In Working Capital (258) (940) (861) (771) (623)
(Incr)/Decr in Total Provisions
Other Non-Cash (Income)/Expense
Other Operating Cashflow 191 134 109 127 141
Net Interest (Paid)/Received (6) (10) 1 (4) (4)
Tax Paid (264) (248) (363) (407) (489)
Cashflow From Operations 2,548 1,967 2,982 3,877 4,633
Capex (707) (1,667) (2,000) (1,500) (1,500)
Disposals Of FAs/subsidiaries 0 0 0 0 0
Acq. Of Subsidiaries/investments (224) (508) 0 0 0
Other Investing Cashflow 30 21 13 15 16
Cash Flow From Investing (901) (2,153) (1,987) (1,485) (1,484)
Debt Raised/(repaid) (21) 507 (255) 127 (64)
Proceeds From Issue Of Shares 0 0 0 0 0
Shares Repurchased 0 0 0 0 0
Dividends Paid (740) (1,052) (1,179) (1,567) (1,919)
Preferred Dividends
Other Financing Cashflow (14) (23) (17) (14) (15)
Cash Flow From Financing (775) (569) (1,450) (1,454) (1,998)
Total Cash Generated 872 (755) (455) 938 1,151
Free Cashflow To Equity 1,626 321 740 2,519 3,085
Free Cashflow To Firm 1,635 (200) 978 2,378 3,134
Technology Components│Hong Kong│Equity research│January 5, 2016
46
BY THE NUMBERS
SOURCE: CIMB RESEARCH, COMPANY DATA
Balance Sheet
(Rmbm) Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F
Total Cash And Equivalents 2,357 1,607 1,155 2,093 3,244
Total Debtors 2,597 3,869 5,077 6,140 6,999
Inventories 832 1,267 1,660 1,991 2,257
Total Other Current Assets 17 8 8 8 8
Total Current Assets 5,802 6,750 7,900 10,231 12,508
Fixed Assets 3,969 5,285 6,538 7,171 7,728
Total Investments 369 380 380 380 380
Intangible Assets 212 173 173 173 173
Total Other Non-Current Assets 324 691 506 506 506
Total Non-current Assets 4,875 6,529 7,596 8,229 8,787
Short-term Debt 908 1,418 1,163 1,290 1,227
Current Portion of Long-Term Debt
Total Creditors 1,617 2,388 3,129 3,752 4,254
Other Current Liabilities 154 195 521 580 608
Total Current Liabilities 2,679 4,001 4,813 5,622 6,089
Total Long-term Debt 0 0 0 0 0
Hybrid Debt - Debt Component
Total Other Non-Current Liabilities 25 46 50 53 55
Total Non-current Liabilities 25 46 50 53 55
Total Provisions 42 40 40 40 40
Total Liabilities 2,745 4,088 4,903 5,715 6,185
Shareholders' Equity 7,876 9,138 10,534 12,680 15,039
Minority Interests 56 54 59 65 71
Total Equity 7,932 9,192 10,593 12,745 15,110
Key Ratios
Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F
Revenue Growth 28.9% 9.7% 31.4% 21.0% 14.0%
Operating EBITDA Growth 29.5% 4.6% 35.0% 20.5% 13.8%
Operating EBITDA Margin 35.8% 34.1% 35.1% 34.9% 34.8%
Net Cash Per Share (Rmb) 1.18 0.15 (0.01) 0.65 1.64
BVPS (Rmb) 6.41 7.44 8.58 10.33 12.25
Gross Interest Cover 213.2 183.0 199.5 295.5 306.0
Effective Tax Rate 8.2% 10.5% 10.6% 9.7% 10.2%
Net Dividend Payout Ratio 57.3% 50.3% 50.9% 50.9% 50.9%
Accounts Receivables Days 110.7 132.2 139.4 144.9 148.5
Inventory Days 70.41 73.64 78.40 81.77 83.67
Accounts Payables Days 125.6 140.5 147.8 154.1 157.7
ROIC (%) 32.5% 30.4% 28.7% 29.4% 29.9%
ROCE (%) 30.6% 25.9% 29.8% 31.4% 30.7%
Return On Average Assets 23.5% 19.4% 21.3% 22.2% 21.6%
Key Drivers
Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F
ASP Change (%, Main Product) 9.1% 8.0% 5.0% 5.0% 5.0%
Unit sales growth (%, main prod) 12.4% 7.0% 5.0% 5.0% 5.0%
No. Of Lines (main Product) N/A N/A N/A N/A N/A
Rev per line (US$, main prod) N/A N/A N/A N/A N/A
ASP chg (%, 2ndary prod) N/A N/A N/A N/A N/A
Unit sales grth (%, 2ndary prod) N/A N/A N/A N/A N/A
No. Of Lines (secondary Product) N/A N/A N/A N/A N/A
Rev per line (US$, 2ndary prod) N/A N/A N/A N/A N/A
Telco - Others│Hong Kong│Equity research│January 5, 2016
Company Note
IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN THE UNITED STATES IT IS DISTRIBUTED BY CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH.
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Coolpad Group Ltd Beneficiary of handset subsidy reinstatement
■ Operational environment to turn positive as handset subsidies will be restored in 2016.
■ Smartphone shipment to grow 7% to 29m units in 2016.
■ Coolpad is the key beneficiary of the new round of handset subsidies programme.
■ Maintain Add, with SOP target price of HK$2.27.
Bright outlook in 2016 We believe that Coolpad have gone through the most difficult period in 2015, in view of its market share loss and inflated marketing expenses for channels rebuilding due to significant reduction in handset subsidies among Chinese mobile operators. Nevertheless, we expect Coolpad’s operation to improve in 2016, underpinned by 1) stable smartphone sales, and 2) a balanced distribution network between online channel (Dazen/QiKU), open channel (ivvi) and operator channel (Coolpad).
Riding the partnership with LeTV and Qihoo 360 Coolpad and Qihoo have set up a JV to develop a new handset brand “QiKU”, to be sold via the e-commerce channel, and a new QiKU smartphone was launched in Oct 15. QiKU became a top 5 best seller in JD.com’s 11 Nov Singles Day campaign. Meanwhile, in Aug 2015, LeTV bought 17.93% stake in Coolpad from its Chairman Mr Guo Deying to become the its second-largest shareholder. We expect a further cooperation between Coolpad and LeTV in content and hardware in 2016.
Handset subsides to be restored in 2016 Both China Mobile and China Unicom have announced very aggressive subsidy plans for custom-made handsets and wholesalers and retailers to boost the number of 4G subscribers in 2016. China Mobile targets to distribute 330m 4G smartphones while China Unicom plans to sell 150m 4G smartphones to regain their 4G market shares.
Coolpad is the key beneficiary Coolpad was previously the largest custom-made handset (TD-LTE) maker for China Mobile and the key handset (FDD-LTE) supplier for China Unicom. Therefore, we believe that Coolpad will be the key beneficiary of the new round of handset subsidies.
Smartphone shipment to grow 7% in 2016 On the back of substantial decrease in handset sales via operators due to subsidy cut by the three Chinese operators, we estimate Coolpad’s smartphone shipment will drop by 40% yoy to 27m units in 2015 (45m in 2014). We forecast its smartphone shipment to grow 7% to 29m units in 2016, in line with China's smartphone demand growth, supported by its brands rebuilding vs. open and e-commerce channel sales.
Maintain Add We maintain our Add call on Coolpad in view of the favourable policy change in the China smartphone market. Our SOP target price is based on 20x FY16 earnings for its services income, 8x earnings for its smartphone sales and cash of HK$3.1bn. Further cooperation with its second largest shareholder LeTV (with a 17.93% stake) could act as another share price re-rating catalyst.
▎Hong Kong
ADD (no change) Current price: HK$1.47
Target price: HK$2.27
Previous target: HK$2.27
Up/downside: 54.4% Reuters: 2369.HK
Bloomberg: 2369 HK
Market cap: US$825.8m
HK$6,400m
Average daily turnover: US$2.18m
HK$16.89m
Current shares o/s 4,335m
Free float: 56.7%
Key changes in this note
No change.
Source: Bloomberg
Price performance 1M 3M 12M
Absolute (%) 2.1 -1.4 -3.3
Relative (%) 6.2 -0.6 7.3
Analysts
Ray KWOK
T (852) 2532 1113 E ray.kwok@cimb.com
Bertram LAI T (852) 2532 11131 E ray.kwok@cimb.com
[ X ]
SOURCE: COMPANY DATA, CIMB FORECASTS
Financial Summary Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F
Revenue (HK$m) 19,624 24,900 16,373 18,713 19,514
Operating EBITDA (HK$m) 647.4 802.4 754.3 750.6 781.9
Operating EBITDA Margin 3.30% 3.22% 4.61% 4.01% 4.01%
Net Profit (HK$m) 349 513 2,723 362 396
Normalised EPS (HK$) 0.10 0.12 0.09 0.08 0.09
Normalised EPS Growth 38.9% 17.8% (25.1%) (5.5%) 9.4%
FD Normalised P/E (x) 14.84 12.62 16.85 17.83 16.30
DPS (HK$) 0.020 0.010 - - -
Dividend Yield 1.36% 0.68% 0.00% 0.00% 0.00%
EV/EBITDA (x) 6.80 6.01 3.92 3.53 3.08
P/FCFE (x) 13.68 5.08 20.71 17.75 21.96
Net Gearing (62.5%) (42.8%) (45.1%) (45.5%) (45.1%)
ROE 16.5% 16.7% 7.2% 4.7% 4.8%
Normalised EPS/consensus EPS (x) 0.91 0.79 0.74
71
99
127
155
183
211
0.90
1.40
1.90
2.40
2.90
3.40
Price Close Relative to HSI (RHS)
200
400
600
Jan-15 Apr-15 Jul-15 Oct-15
Vo
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Telco - Others│Hong Kong│Equity research│January 5, 2016
48
BY THE NUMBERS
Share price info
Share px perf. (%) 1M 3M 12M
Relative 6.2 -0.6 7.3
Absolute 2.1 -1.4 -3.3
Major shareholders % held
Guo Deying 43.3
SOURCE: CIMB RESEARCH, COMPANY DATA
0.0%
5.7%
11.4%
17.1%
22.9%
28.6%
34.3%
40.0%
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
P/BV vs ROE
Rolling P/BV (x) (lhs) ROE (rhs)
-80%-64%-48%-32%-16%0%16%32%48%64%80%
0.05.0
10.015.020.025.030.035.040.045.050.0
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
12-mth Fwd FD Normalised P/E vs FD Normalised EPS Growth
12-mth Fwd Rolling FD Normalised P/E (x) (lhs)
Diluted Normalised EPS Growth (rhs)
Profit & Loss
(HK$m) Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F
Total Net Revenues 19,624 24,900 16,373 18,713 19,514
Gross Profit 2,530 3,015 2,097 2,296 2,373
Operating EBITDA 647 802 754 751 782
Depreciation And Amortisation (173) (204) (260) (281) (292)
Operating EBIT 475 599 495 470 490
Financial Income/(Expense) 40 7 46 37 48
Pretax Income/(Loss) from Assoc. (0) (1) (88) (76) (51)
Non-Operating Income/(Expense) 0 0 0 0 0
Profit Before Tax (pre-EI) 514 605 452 431 487
Exceptional Items (77) 2 2,340 0 0
Pre-tax Profit 437 607 2,792 431 487
Taxation (89) (93) (81) (78) (97)
Exceptional Income - post-tax
Profit After Tax 348 514 2,711 354 390
Minority Interests 0 (1) 12 8 6
Preferred Dividends
FX Gain/(Loss) - post tax
Other Adjustments - post-tax
Preference Dividends (Australia)
Net Profit 349 513 2,723 362 396
Normalised Net Profit 425 512 371 354 390
Fully Diluted Normalised Profit 425 511 383 362 396
Cash Flow
(HK$m) Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F
EBITDA 647 802 754 751 782
Cash Flow from Invt. & Assoc. 0 1 88 76 51
Change In Working Capital (148) (543) 1,158 119 39
(Incr)/Decr in Total Provisions
Other Non-Cash (Income)/Expense
Other Operating Cashflow 193 85 (2,685) 1 16
Net Interest (Paid)/Received 40 7 46 37 48
Tax Paid (86) (93) (81) (78) (97)
Cashflow From Operations 647 259 (720) 906 837
Capex (179) (350) (350) (350) (350)
Disposals Of FAs/subsidiaries 2 317 3,202 0 0
Acq. Of Subsidiaries/investments (125) (111) (77) (86) (90)
Other Investing Cashflow 59 (406) (128) (106) (104)
Cash Flow From Investing (242) (550) 2,647 (542) (543)
Debt Raised/(repaid) 56 1,560 (1,616) 0 0
Proceeds From Issue Of Shares 21 0 0 0 0
Shares Repurchased 0 0 0 0 0
Dividends Paid (105) (42) (43) 0 0
Preferred Dividends
Other Financing Cashflow (16) (87) (26) (57) (48)
Cash Flow From Financing (44) 1,431 (1,685) (57) (48)
Total Cash Generated 361 1,140 242 306 245
Free Cashflow To Equity 461 1,269 311 363 294
Free Cashflow To Firm 428 (204) 1,953 421 342
Telco - Others│Hong Kong│Equity research│January 5, 2016
49
BY THE NUMBERS
SOURCE: CIMB RESEARCH, COMPANY DATA
Balance Sheet
(HK$m) Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F
Total Cash And Equivalents 2,328 3,601 4,710 4,802 4,847
Total Debtors 3,888 4,820 2,149 2,456 2,561
Inventories 2,595 2,798 1,825 2,099 2,191
Total Other Current Assets 0 0 0 0 0
Total Current Assets 8,811 11,219 8,684 9,356 9,599
Fixed Assets 568 906 1,152 1,375 1,576
Total Investments 60 63 63 63 63
Intangible Assets 174 113 113 113 113
Total Other Non-Current Assets 450 543 4,755 4,955 5,155
Total Non-current Assets 1,251 1,626 6,084 6,506 6,907
Short-term Debt 603 548 0 0 0
Current Portion of Long-Term Debt
Total Creditors 6,560 7,151 4,664 5,364 5,600
Other Current Liabilities 80 81 1,294 1,284 1,281
Total Current Liabilities 7,243 7,780 5,958 6,648 6,881
Total Long-term Debt 0 1,616 1,415 1,200 1,000
Hybrid Debt - Debt Component
Total Other Non-Current Liabilities 10 34 22 26 27
Total Non-current Liabilities 10 1,650 1,437 1,226 1,027
Total Provisions 48 55 60 66 73
Total Liabilities 7,301 9,484 7,456 7,940 7,981
Shareholders' Equity 2,758 3,353 7,311 7,922 8,525
Minority Interests 3 7 1 1 1
Total Equity 2,761 3,360 7,312 7,923 8,526
Key Ratios
Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F
Revenue Growth 36.4% 26.9% (34.2%) 14.3% 4.3%
Operating EBITDA Growth 25.8% 23.9% (6.0%) (0.5%) 4.2%
Operating EBITDA Margin 3.30% 3.22% 4.61% 4.01% 4.01%
Net Cash Per Share (HK$) 0.41 0.33 0.77 0.84 0.90
BVPS (HK$) 0.65 0.78 1.70 1.84 1.98
Gross Interest Cover 20.52 6.86 18.89 8.23 10.12
Effective Tax Rate 20.4% 15.3% 2.9% 18.0% 20.0%
Net Dividend Payout Ratio 9.91% 8.40% NA NA NA
Accounts Receivables Days 50.35 44.10 48.65 28.20 29.38
Inventory Days 47.04 44.97 59.09 43.74 45.67
Accounts Payables Days 89.62 73.96 90.77 67.18 70.16
ROIC (%) 35.4% 43.4% 19.0% 8.7% 8.5%
ROCE (%) 16.7% 15.4% 7.9% 6.3% 6.2%
Return On Average Assets 4.35% 4.43% 2.44% 2.13% 2.19%
Technology Components│Hong Kong│Equity research│January 5, 2016
Company Note
IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN THE UNITED STATES IT IS DISTRIBUTED BY CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH. CIMB Securities Limited has had an investment banking relationship with Cowell e Holdings Inc within the preceding 12 months.
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Cowell e Holdings Inc Small products for Apple
■ Cowell is riding on iPhone’s endless cameras upgrades.
■ We are positive on potential camera upgrades in the next generation of iPhones.
■ Cowell is on track to deliver rear-facing cameras for Apple’s legacy products in 1Q16.
■ Our earnings forecasts are mainly driven by ASP hikes rather than by volume growth given our view that iPhone shipment growth will slow going forward.
■ We maintain our Add recommendation due to what we view as Cowell’s compelling valuation and solid relationship with Apple.
Riding on endless iPhone’s camera upgrades Cowell is riding on iPhone’s endless cameras upgrades thanks to its primary front-facing camera modules supplier status. Apart from that, Cowell will start providing rear-facing cameras for iPhone’s legacy products in FY16. We are also positive on the potential upgrade (thinner, waterproof, functions add) in the front-facing camera in the next generation of iPhones.
Adding capacity Cowell budgeted c.US$40m for upgrading its production facilities for the flip-chip and COB divisions in FY15. Capacity is slated to increase by 29% in 1H16. On the other hand, the group is well prepared for the technology change in camera modules such as system in package (SiP) for the next generation of Apple’s products.
Rear-facing camera for Apple We believe that Cowell is on the right track to deliver rear-facing camera modules for Apple’s products in 1Q16 while the new flip-chip machinery was installed at end-2015. We forecast Cowell to produce around 1m units/month of rear-facing camera modules for the legacy products with c.5% allocation (the third supplier) in the first year. The revenue from the new products will account for 15% of total revenue in FY16.
Stable gross margin outlook We believe that Cowell’s gross margin should stay stable at c.13% in FY16 (+0.6% pt in FY15), supported by the introduction of a rear-facing camera, resolution upgrades for iPhones 6/6S+ and improved product mix in COB camera modules.
Promising earnings growth outlook We project Cowell to deliver 8% net profit growth in FY16 as the next version of the iPhone is expected to be launched in Sep 16 and following stronger growth of 15% in FY17, thanks to full-year contribution of iPhones 7 sales.
Maintain Add We maintain our Add rating on Cowell due to what we view as its compelling valuation and solid relationship with Apple. We maintain our target price as we roll over to FY16 but have lowered our target P/E multiple to 6.0x for FY17, in line with the small-cap Apple component suppliers. Potential share price catalysts include new product launches for Apple and a stable iPhones sales outlook.
▎Hong Kong
ADD (no change) Current price: HK$3.18
Target price: HK$4.44
Previous target: HK$4.44
Up/downside: 39.6% Reuters: 1415.HK
Bloomberg: 1415 HK
Market cap: US$341.2m
HK$2,644m
Average daily turnover: US$1.20m
HK$9.34m
Current shares o/s 831.5m
Free float: 28.8%
Key changes in this note
No change.
Source: Bloomberg
Price performance 1M 3M 12M
Absolute (%) -25.5 -20.1
Relative (%) -21.4 -19.3
Analysts
Ray KWOK
T (852) 2532 1113 E ray.kwok@cimb.com
Bertram LAI T (852) 2532 1111 E bertram.lai@cimb.com
[ X ]
SOURCE: COMPANY DATA, CIMB FORECASTS
Financial Summary Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F
Revenue (US$m) 814 886 956 1,091 1,194
Net Profit (US$m) 50.24 53.24 59.53 67.68 77.63
Normalised EPS (US$) 0.061 0.069 0.075 0.081 0.093
Normalised EPS Growth 285% 14% 9% 8% 15%
FD Normalised P/E (x) 6.73 5.91 5.44 5.04 4.39
Price To Sales (x) 0.42 0.38 0.36 0.31 0.29
DPS (US$) - - - 0.008 0.009
Dividend Yield 0.00% 0.00% 0.00% 1.98% 2.28%
EV/EBITDA (x) 4.88 3.85 2.57 2.53 1.55
P/FCFE (x) 31.43 9.71 9.19 NA 3.71
Net Gearing 36.0% (4.9%) (30.0%) (15.5%) (32.1%)
P/BV (x) 2.44 1.77 1.15 0.96 0.80
ROE 44.8% 34.7% 25.6% 20.7% 19.9%
% Change In Normalised EPS Estimates 0% 0% 0%
Normalised EPS/consensus EPS (x) 0.94 0.88 0.84
71
111
151
191
2.5
4.5
6.5
8.5
Price Close Relative to HSI (RHS)
20
40
60
Mar-15 Jun-15 Aug-15 Oct-15
Vo
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Technology Components│Hong Kong│Equity research│January 5, 2016
51
BY THE NUMBERS
Share price info
Share px perf. (%) 1M 3M 12M
Relative -21.4 -19.3
Absolute -25.5 -20.1
Major shareholders % held
Kwak Joung Hwan 45.0
Hahn & Co 26.2
SOURCE: CIMB RESEARCH, COMPANY DATA
0.0%
6.3%
12.5%
18.8%
25.0%
31.3%
37.5%
43.8%
50.0%
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
P/BV vs ROE
Rolling P/BV (x) (lhs) ROE (rhs)
-50%
0%
50%
100%
150%
200%
250%
300%
350%
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
12-mth Fwd FD Normalised P/E vs FD Normalised EPS Growth
12-mth Fwd Rolling FD Normalised P/E (x) (lhs)
Diluted Normalised EPS Growth (rhs)
Profit & Loss
(US$m) Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F
Total Net Revenues 814 886 956 1,091 1,194
Gross Profit 103 112 127 142 157
Operating EBITDA 80 86 98 113 132
Depreciation And Amortisation (11) (13) (16) (25) (31)
Operating EBIT 69 73 82 88 101
Financial Income/(Expense) (5) (3) (3) (3) (3)
Pretax Income/(Loss) from Assoc. 0 0 0 0 0
Non-Operating Income/(Expense) (0) 2 0 1 1
Profit Before Tax (pre-EI) 64 72 80 87 100
Exceptional Items (0) (4) (3) 0 0
Pre-tax Profit 64 68 76 87 100
Taxation (14) (14) (17) (19) (22)
Exceptional Income - post-tax
Profit After Tax 50 53 60 68 78
Minority Interests 0 0 0 0 0
Preferred Dividends
FX Gain/(Loss) - post tax
Other Adjustments - post-tax
Preference Dividends (Australia)
Net Profit 50 53 60 68 78
Normalised Net Profit 51 58 63 68 78
Fully Diluted Normalised Profit 51 58 63 68 78
Cash Flow
(US$m) Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F
EBITDA 80.3 86.1 98.2 113.1 132.5
Cash Flow from Invt. & Assoc.
Change In Working Capital (28.8) 21.3 6.3 5.4 9.9
(Incr)/Decr in Total Provisions
Other Non-Cash (Income)/Expense
Other Operating Cashflow 6.2 1.2 0.6 4.7 4.7
Net Interest (Paid)/Received (5.8) (3.4) (3.4) (3.6) (3.6)
Tax Paid (5.1) (17.6) (16.9) (19.1) (21.9)
Cashflow From Operations 46.8 87.6 84.8 100.5 121.6
Capex (15.8) (22.9) (48.0) (125.0) (30.0)
Disposals Of FAs/subsidiaries 0.4 0.0 0.0 0.0 0.0
Acq. Of Subsidiaries/investments (1.0) 0.0 0.0 0.0 0.0
Other Investing Cashflow 0.6 0.3 0.3 0.4 0.4
Cash Flow From Investing (15.8) (22.6) (47.7) (124.6) (29.6)
Debt Raised/(repaid) (20.1) (29.9) 0.0 0.0 0.0
Proceeds From Issue Of Shares 0.0 0.0 45.7 0.0 0.0
Shares Repurchased 0.0 0.0 0.0 0.0 0.0
Dividends Paid 0.0 0.0 0.0 (6.8) (7.8)
Preferred Dividends
Other Financing Cashflow 20.7 2.0 0.6 (1.4) (1.7)
Cash Flow From Financing 0.6 (27.9) 46.3 (8.2) (9.5)
Total Cash Generated 31.5 37.1 83.4 (32.3) 82.5
Free Cashflow To Equity 10.9 35.1 37.1 (24.1) 92.0
Free Cashflow To Firm 36.2 68.1 40.2 (20.9) 95.2
Technology Components│Hong Kong│Equity research│January 5, 2016
52
BY THE NUMBERS
SOURCE: CIMB RESEARCH, COMPANY DATA
Balance Sheet
(US$m) Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F
Total Cash And Equivalents 71.5 101.3 182.5 149.8 231.7
Total Debtors 167.4 221.0 196.5 209.2 212.6
Inventories 55.0 66.0 70.7 80.9 88.4
Total Other Current Assets 0.0 1.4 1.4 1.4 1.4
Total Current Assets 293.9 389.8 451.1 441.4 534.1
Fixed Assets 95.9 103.3 135.4 235.7 234.5
Total Investments 3.7 3.4 3.4 3.4 3.4
Intangible Assets 1.4 2.6 2.6 2.6 2.6
Total Other Non-Current Assets 5.3 6.8 6.8 6.8 6.8
Total Non-current Assets 106.3 116.1 148.2 248.6 247.3
Short-term Debt 121.8 91.9 93.4 94.7 95.6
Current Portion of Long-Term Debt
Total Creditors 123.1 209.7 196.2 224.6 245.3
Other Current Liabilities 14.6 10.2 10.8 12.7 14.4
Total Current Liabilities 259.5 311.9 300.4 332.0 355.2
Total Long-term Debt 0.0 0.0 0.0 0.0 0.0
Hybrid Debt - Debt Component
Total Other Non-Current Liabilities 0.9 1.5 1.6 1.7 1.8
Total Non-current Liabilities 0.9 1.5 1.6 1.7 1.8
Total Provisions 0.0 0.0 0.0 0.0 0.0
Total Liabilities 260.4 313.4 301.9 333.7 357.0
Shareholders' Equity 139.9 192.4 297.4 356.3 424.4
Minority Interests 0.0 0.0 0.0 0.0 0.0
Total Equity 139.9 192.4 297.4 356.3 424.4
Key Ratios
Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F
Revenue Growth 54.3% 8.9% 7.9% 14.1% 9.4%
Operating EBITDA Growth 236% 7% 14% 15% 17%
Operating EBITDA Margin 9.9% 9.7% 10.3% 10.4% 11.1%
Net Cash Per Share (US$) (0.06) 0.01 0.11 0.07 0.16
BVPS (US$) 0.17 0.23 0.36 0.43 0.51
Gross Interest Cover 13.37 23.37 26.38 27.89 31.49
Effective Tax Rate 21.3% 21.2% 22.1% 22.0% 22.0%
Net Dividend Payout Ratio NA NA NA 10.00% 10.00%
Accounts Receivables Days 72.87 79.96 79.68 68.05 64.49
Inventory Days 29.08 28.53 30.08 29.22 29.80
Accounts Payables Days 68.73 78.45 89.35 81.13 82.72
ROIC (%) 32.5% 29.2% 34.1% 32.1% 25.4%
ROCE (%) 28.5% 26.8% 24.5% 21.1% 20.9%
Return On Average Assets 13.9% 13.2% 11.7% 10.8% 10.8%
Key Drivers
Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F
ASP Change (%, Main Product) 15.9% 11.3% 5.8% 7.5% 6.0%
Unit sales growth (%, main prod) 34.6% -2.1% 2.0% 6.2% 3.3%
No. Of Lines (main Product) N/A N/A N/A N/A N/A
Rev per line (US$, main prod) N/A N/A N/A N/A N/A
ASP chg (%, 2ndary prod) N/A N/A N/A N/A N/A
Unit sales grth (%, 2ndary prod) N/A N/A N/A N/A N/A
No. Of Lines (secondary Product) N/A N/A N/A N/A N/A
Rev per line (US$, 2ndary prod) N/A N/A N/A N/A N/A
Technology - PC hardware│Hong Kong│Equity research│January 5, 2016
Company Note
IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN THE UNITED STATES IT IS DISTRIBUTED BY CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH.
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Lenovo Group Long way ahead from PC to smartphone
■ While we acknowledge Lenovo’s market share expansion in the PC space, its ability to turn around its smartphone business in the short term remains a major concern.
■ Streamlining models and repositioning brands might halt its market share erosion. But turning profitable requires high-end exposure.
■ Maintain Hold, unless we see significant progress in turning around its smartphone business. Our target price is unchanged, still based on 12x FY17 P/E.
Market share contraction in China According to Counterpoint, Lenovo’s smartphone market share in China has dropped to 4.6% in 3Q15 from 7.6% in 1Q15 (and 13.3% in 2014). The weakness stems from (1) a shrinking subsidised market, (2) fierce competition in China, (3) lack of popular models, and (4) a confusing branding strategy (it carried five different brands in 3Q15).
A ‘U-turn’ in its channel strategy Lenovo’s smartphones business suffered in China due to a shrinking subsidised market and rising online market. However, after a few quarters of investment in its online sales channel, Lenovo has changed its strategy to refocus on its traditional channels and retailers in China. We believe the growth for online sales will not stop but Lenovo does not have advantages for the online sales channel given its late entry.
Exposure to high-end smartphones is essential If we look at the market share by price band, most of Lenovo’s shipment are still below US$100 in China. Despite consolidating Motorola, its global exposure to smartphones above US$300 is still quite limited compared to Huawei, Xiaomi and Oppo who all have meaningful exposure for smartphones above US$300. A presence in the mid-to-high end space will not only improve profitability but is essential for brand awareness globally.
Streamlining models and brands Lenovo has consolidated its brands from five to three (Lemon, ZUK and Motorola) after it launched Lemon X3. Lemon is aimed at the mid- to high-end segment, mainly in China while the Motorola brand will focus on the overseas markets. It might take time for the company to reposition its brands so PC will still be the cash cow for Lenovo. We do not expect Lenovo to be able to turn around its smartphone business in the short term.
Watch for progress in non-PC business We expect Lenovo to ship around 73m smartphones (includes Motorola) in CY15, with over half of them overseas. We remain cautious about Lenovo’s smartphone shipments in CY16 because its smartphones lack innovative features and are relatively poorly designed. Hence, we expect its smartphone shipments to rise by only 4.1% yoy to 76m units. Profitability for its smartphone business rather than market share expansion will be the focus for Lenovo in CY16.
▎Hong Kong
HOLD (no change) Current price: HK$7.46
Target price: HK$7.90
Previous target: HK$7.90
Up/downside: 5.9% Reuters: 0992.HK
Bloomberg: 992 HK
Market cap: US$10,692m
HK$82,871m
Average daily turnover: US$42.50m
HK$329.4m
Current shares o/s 11,109m
Free float: 58.5%
Key changes in this note
No change.
Source: Bloomberg
Price performance 1M 3M 12M
Absolute (%) -11.5 11.5 -27.0
Relative (%) -7.4 12.3 -16.4
Analysts
Bertram LAI
T (852) 2532 1111 E bertram.lai@cimb.com
Felix PAN T (886) 2 8729 8386 E felix.pan@cimb.com
James TAN T (886) 2 8729 8378 E jamescj.tan@cimb.com
[ X ]
SOURCE: COMPANY DATA, CIMB FORECASTS
Financial Summary Mar-13A Mar-14A Mar-15A Mar-16F Mar-17F
Revenue (US$m) 33,873 38,707 46,296 47,754 49,664
Operating EBITDA (US$m) 1,010 1,387 1,716 (106) 1,164
Net Profit (US$m) 635.1 817.2 828.7 (133.1) 945.3
Core EPS (US$) 0.07 0.10 0.11 (0.01) 0.09
Core EPS Growth 32% 48% 1% (111%) NA
FD Core P/E (x) 13.59 9.21 9.12 NA 11.31
DPS (US$) 0.011 0.019 0.026 0.024 -
Dividend Yield 1.15% 1.97% 2.66% 2.53% 0.00%
EV/EBITDA (x) 6.75 4.71 6.26 NA 10.25
P/FCFE (x) 910.6 12.1 NA NA 26.3
Net Gearing (115%) (116%) 1% 45% 26%
P/BV (x) 3.71 3.33 2.62 2.89 2.30
ROE 29.0% 38.3% 33.1% (3.4%) 22.7%
CIMB/consensus EPS (x) (0.11) 0.71
63.0
78.6
94.1
109.7
125.2
5.3
7.3
9.3
11.3
13.3
Price Close Relative to HSI (RHS)
50
100
150
200
Jan-15 Apr-15 Jul-15 Oct-15
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Technology - PC hardware│Hong Kong│Equity research│January 5, 2016
54
BY THE NUMBERS
Share price info
Share px perf. (%) 1M 3M 12M
Relative -7.4 12.3 -16.4
Absolute -11.5 11.5 -27.0
Major shareholders % held
Legend Holdings Ltd 30.6
Sureinvest Holdings Ltd 5.5
Google International 4.7
SOURCE: CIMB RESEARCH, COMPANY DATA
-10.0%-4.5%1.0%6.5%12.0%17.5%23.0%28.5%34.0%39.5%45.0%
0.000.501.001.502.002.503.003.504.004.505.00
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
P/BV vs ROE
Rolling P/BV (x) (lhs) ROE (rhs)
-150%
-94%
-38%
19%
75%
131%
188%
244%
300%
0
50
100
150
200
250
300
350
400
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
12-mth Fwd FD Core P/E vs FD Core EPS Growth
12-mth Fwd Rolling FD Core P/E (x) (lhs)
FD Core EPS Growth (rhs)
Profit & Loss
(US$m) Mar-13A Mar-14A Mar-15A Mar-16F Mar-17F
Total Net Revenues 33,873 38,707 46,296 47,754 49,664
Gross Profit 4,074 5,064 6,682 7,054 7,587
Operating EBITDA 1,010 1,387 1,716 (106) 1,164
Depreciation And Amortisation (210) (335) (608) 0 0
Operating EBIT 800 1,052 1,109 (106) 1,164
Financial Income/(Expense) 2 (47) (155) (96) (24)
Pretax Income/(Loss) from Assoc. (1) 9 17 (2) 0
Non-Operating Income/(Expense) 0 0 0 6 44
Profit Before Tax (pre-EI) 920 1,350 1,370 (198) 1,184
Exceptional Items
Pre-tax Profit 801 1,014 971 (198) 1,184
Taxation (170) (197) (134) 59 (233)
Exceptional Income - post-tax
Profit After Tax 632 817 837 (138) 951
Minority Interests 4 (0) (8) 5 (6)
Preferred Dividends
FX Gain/(Loss) - post tax
Other Adjustments - post-tax
Net Profit 635 817 829 (133) 945
Recurring Net Profit 728 1,088 1,173 (133) 945
Fully Diluted Recurring Net Profit 728 1,088 1,173 (133) 945
Cash Flow
(US$m) Mar-13A Mar-14A Mar-15A Mar-16F Mar-17F
EBITDA 1,010 1,387 1,716 (106) 1,164
Cash Flow from Invt. & Assoc. (1) 9 17 (2) 0
Change In Working Capital (823) 297 (744) 313 484
(Incr)/Decr in Total Provisions
Other Non-Cash (Income)/Expense 11 0 0 0 0
Other Operating Cashflow (2) (18) (454) (208) (188)
Net Interest (Paid)/Received 2 (47) (155) (96) (24)
Tax Paid (170) (197) (134) 59 (233)
Cashflow From Operations 27 1,432 246 (39) 1,203
Capex (381) (557) (597) (600) (300)
Disposals Of FAs/subsidiaries
Acq. Of Subsidiaries/investments (63) (118) (375) (262) (44)
Other Investing Cashflow 199 91 (2,310) (491) (453)
Cash Flow From Investing (245) (584) (3,282) (1,353) (797)
Debt Raised/(repaid) 229 (23) 2,599 0 0
Proceeds From Issue Of Shares 0 0 0 0
Shares Repurchased (45)
Dividends Paid (195) (267) (327) (253) 0
Preferred Dividends
Other Financing Cashflow (59) (95) (129) 0 0
Cash Flow From Financing (24) (430) 2,143 (253) 0
Total Cash Generated (242) 419 (893) (1,645) 406
Free Cashflow To Equity 11 825 (437) (1,392) 406
Free Cashflow To Firm (176) 930 (2,850) (1,260) 466
Technology - PC hardware│Hong Kong│Equity research│January 5, 2016
55
BY THE NUMBERS
SOURCE: CIMB RESEARCH, COMPANY DATA
Balance Sheet
(US$m) Mar-13A Mar-14A Mar-15A Mar-16F Mar-17F
Total Cash And Equivalents 3,571 3,953 3,026 1,392 1,836
Total Debtors 5,586 3,619 5,513 3,907 4,257
Inventories 1,965 2,701 2,995 2,580 3,184
Total Other Current Assets 1,268 3,128 3,893 3,893 3,893
Total Current Assets 12,390 13,401 15,428 11,773 13,170
Fixed Assets 664 1,019 1,808 2,408 2,708
Total Investments 0 0 0 261 305
Intangible Assets 0 0 0 0 0
Total Other Non-Current Assets 3,828 3,937 9,845 9,944 10,043
Total Non-current Assets 4,492 4,957 11,654 12,613 13,056
Short-term Debt 176 445 1,168 1,168 1,168
Current Portion of Long-Term Debt 0 0 0 0 0
Total Creditors 7,431 11,518 13,900 12,192 13,630
Other Current Liabilities 4,484 1,499 2,093 1,884 1,695
Total Current Liabilities 12,091 13,462 17,161 15,244 16,494
Total Long-term Debt 303 10 1,886 1,886 1,886
Hybrid Debt - Debt Component
Total Other Non-Current Liabilities 1,807 1,860 3,928 3,535 3,182
Total Non-current Liabilities 2,110 1,870 5,814 5,421 5,067
Total Provisions 0 0 0 0 0
Total Liabilities 14,202 15,332 22,975 20,665 21,561
Shareholders' Equity 2,667 3,010 4,084 3,697 4,643
Minority Interests 14 15 22 22 22
Total Equity 2,680 3,025 4,106 3,720 4,665
Key Ratios
Mar-13A Mar-14A Mar-15A Mar-16F Mar-17F
Revenue Growth 14.5% 14.3% 19.6% 3.1% 4.0%
Operating EBITDA Growth 33% 37% 24% (106%) NA
Operating EBITDA Margin 2.98% 3.58% 3.71% (0.22%) 2.34%
Net Cash Per Share (US$) 0.30 0.34 (0.00) (0.15) (0.11)
BVPS (US$) 0.26 0.29 0.37 0.33 0.42
Gross Interest Cover 21.42 17.13 8.13 (0.80) 19.40
Effective Tax Rate 21.2% 19.4% 13.8% 0.0% 19.7%
Net Dividend Payout Ratio 25.8% 23.1% 26.6% NA NA
Accounts Receivables Days 59.39 43.40 36.00 36.10 30.00
Inventory Days 19.50 25.31 26.24 25.07 25.00
Accounts Payables Days 92.2 102.8 117.1 117.3 112.0
ROIC (%) (1263%) 80% 94% (1%) 11%
ROCE (%) 34.0% 42.8% 28.9% (1.0%) 16.6%
Return On Average Assets 4.57% 6.76% 6.03% (0.28%) 3.83%
Key Drivers
Mar-13A Mar-14A Mar-15A Mar-16F Mar-17F
ASP (% chg, main prod./serv.) N/A N/A N/A N/A N/A
Unit sales grth (%, main prod./serv.) 11.2% 5.6% 12.6% 1.4% 1.9%
Util. rate (%, main prod./serv.) N/A N/A N/A N/A N/A
ASP (% chg, 2ndary prod./serv.) N/A N/A N/A N/A N/A
Unit sales grth (%,2ndary prod/serv) 8.8% 4.1% 2.4% -9.6% 1.3%
Util. rate (%, 2ndary prod/serv) N/A N/A N/A N/A N/A
Unit raw mat ASP (%chg,main) N/A N/A N/A N/A N/A
Unit raw mat ASP (%chg,2ndary) N/A N/A N/A N/A N/A
Total Export Sales Growth (%) N/A N/A N/A N/A N/A
Export Sales/total Sales (%) N/A N/A N/A N/A N/A
Technology Components│Hong Kong│Equity research│January 5, 2016
Company Note
IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN THE UNITED STATES IT IS DISTRIBUTED BY CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH.
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Sunny Optical Technology (Group) Bright outlook for FY16
■ Sunny Optical (Sunny) is quickly moving up the value chain towards becoming an upstream optical components manufacturer.
■ The HCM division’s shrinking margin is mitigated by Chinese vendors’ migration to mega pixels.
■ The premium valuation is well supported by its two fast-growing high-margin divisions, i.e. handset lens sets and vehicle lens sets.
■ We maintain Add with a higher target price of HK$21.40 as we roll over to FY16.
Moving up towards upstream optical components We think that Sunny is a key beneficiary from the significant upgrades in camera resolutions and functional additions among Chinese vendors, thanks to its dominant market share in the domestic brands supply chain. Furthermore, we are positive on the rapid growth in handset lens sets and vehicle lens sets divisions which has led it up the value chain towards becoming an upstream optical components manufacturer.
Steady growth of handset camera modules (HCM) We expect its HCM segment’s revenue to increase c.15% yoy in FY16 (c.10% in FY15), driven by continuous mega pixel migration and functional additions such as OIS, dual-camera, Iris recognition and PDAF. Given the keen competition in low mega pixel products, we believe that the ongoing smartphone camera upgrades should support its falling GPM in this division.
Optical components lead earnings growth We believe that optical components manufacturing should lead earnings growth in FY16-17 thanks to its high margin. We expect revenue in handset lens sets division to reach c.30% yoy in FY16 after advancing c.150% yoy in FY15, underpinned by increased capacity (40m units/month by end-2015) and stable ASP (bigger contribution from high resolution products). We estimate vehicle lens sets division’s revenue could rise c.20% in FY16 (c.30% yoy in FY15), reflecting new customer gains.
High-margin segment protected the profitability In our view, its gross margin will be protected by the sustainable image pixels migration in Chinese vendors and its high-margin optical components segment’s rapid growth. Thus, we expect blended GPM to stabilise at 16.5-17% in FY15-17. With 17% revenue CAGR, we forecast 27% EPS CAGR in FY14-17, underpinned by Sunny’s fast-growing high-margin divisions (handset lens sets and vehicle lens sets) and steady growth of the HCM manufacturing division.
Maintain Add Maintain Add. Share price catalysts are robust growth in handset lens sets and vehicle lens sets divisions. We raise our target price as we roll over to FY16. Our target price is based on 16x FY17 P/E (its upcycle peak valuation).
▎Hong Kong
ADD (no change) Current price: HK$17.70
Target price: HK$21.40
Previous target: HK$18.74
Up/downside: 20.9% Reuters: 2382.HK
Bloomberg: 2382 HK
Market cap: US$2,505m
HK$19,417m
Average daily turnover: US$7.88m
HK$61.10m
Current shares o/s 1,097m
Free float: 45.4%
Key changes in this note
No change.
Source: Bloomberg
Price performance 1M 3M 12M
Absolute (%) -3.9 11.6 34.1
Relative (%) 0.2 12.4 44.7
Analysts
Ray KWOK
T (852) 2532 1113 E ray.kwok@cimb.com
Bertram LAI T (852) 2532 1111 E bertram.lai@cimb.com
[ X ]
SOURCE: COMPANY DATA, CIMB FORECASTS
Financial Summary Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F
Revenue (Rmbm) 5,813 8,426 10,133 12,095 13,351
Net Profit (Rmbm) 440 566 749 993 1,204
Normalised EPS (Rmb) 0.44 0.54 0.69 0.90 1.10
Normalised EPS Growth 21.5% 22.0% 27.1% 31.8% 21.3%
FD Normalised P/E (x) 34.32 27.90 21.94 16.64 13.72
Price To Sales (x) 2.55 1.89 1.62 1.35 1.23
DPS (Rmb) 0.12 0.16 0.20 0.27 0.32
Dividend Yield 0.81% 1.04% 1.34% 1.78% 2.15%
EV/EBITDA (x) 22.18 19.61 13.69 10.09 7.66
P/FCFE (x) 1,004 838 12 10 8
Net Gearing (46.7%) (11.8%) (33.7%) (45.9%) (55.2%)
P/BV (x) 5.51 4.83 3.26 2.39 1.85
ROE 18.4% 18.9% 18.7% 17.4% 16.0%
% Change In Normalised EPS Estimates 0% 0% 0%
Normalised EPS/consensus EPS (x) 0.99 1.00 0.99
67
105
142
9.4
14.4
19.4
Price Close Relative to HSI (RHS)
10
20
30
40
Jan-15 Apr-15 Jul-15 Oct-15
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Technology Components│Hong Kong│Equity research│January 5, 2016
57
BY THE NUMBERS
Share price info
Share px perf. (%) 1M 3M 12M
Relative 0.2 12.4 44.7
Absolute -3.9 11.6 34.1
Major shareholders % held
Ye Liaoning 42.4
JPMorgan Chase & Co. 7.2
Value Partners Group 5.0
SOURCE: CIMB RESEARCH, COMPANY DATA
0.00%
2.78%
5.56%
8.33%
11.11%
13.89%
16.67%
19.44%
22.22%
25.00%
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
P/BV vs ROE
Rolling P/BV (x) (lhs) ROE (rhs)
0.0%7.0%14.0%21.0%28.0%35.0%42.0%49.0%56.0%63.0%70.0%
0.02.04.06.08.0
10.012.014.016.018.020.0
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
12-mth Fwd FD Normalised P/E vs FD Normalised EPS Growth
12-mth Fwd Rolling FD Normalised P/E (x) (lhs)
Diluted Normalised EPS Growth (rhs)
Profit & Loss
(Rmbm) Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F
Total Net Revenues 5,813 8,426 10,133 12,095 13,351
Gross Profit 967 1,289 1,671 2,030 2,301
Operating EBITDA 609 792 1,073 1,317 1,517
Depreciation And Amortisation (147) (215) (280) (284) (288)
Operating EBIT 462 577 794 1,033 1,229
Financial Income/(Expense) 11 36 20 43 81
Pretax Income/(Loss) from Assoc. (1) 1 (1) 0 0
Non-Operating Income/(Expense) 32 32 36 43 47
Profit Before Tax (pre-EI) 504 646 849 1,119 1,357
Exceptional Items 0 (12) (3) 0 0
Pre-tax Profit 504 634 845 1,119 1,357
Taxation (64) (73) (93) (123) (149)
Exceptional Income - post-tax
Profit After Tax 441 561 752 996 1,208
Minority Interests (0) 5 (3) (3) (4)
Preferred Dividends
FX Gain/(Loss) - post tax
Other Adjustments - post-tax
Preference Dividends (Australia)
Net Profit 440 566 749 993 1,204
Normalised Net Profit 440 573 756 996 1,208
Fully Diluted Normalised Profit 440 578 753 993 1,204
Cash Flow
(Rmbm) Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F
EBITDA 609 792 1,073 1,317 1,517
Cash Flow from Invt. & Assoc.
Change In Working Capital (17) (940) (326) (366) (239)
(Incr)/Decr in Total Provisions
Other Non-Cash (Income)/Expense
Other Operating Cashflow 134 70 88 100 105
Net Interest (Paid)/Received (5) (12) 20 43 81
Tax Paid (52) (90) (93) (123) (149)
Cashflow From Operations 669 (181) 762 972 1,316
Capex (244) (392) (300) (300) (300)
Disposals Of FAs/subsidiaries (74) (81) (81) (81) (81)
Acq. Of Subsidiaries/investments 0 (402) 0 0 0
Other Investing Cashflow (722) 1,043 1,043 1,043 1,043
Cash Flow From Investing (1,041) 168 662 662 662
Debt Raised/(repaid) 386 33 0 0 0
Proceeds From Issue Of Shares 608 0 0 0 0
Shares Repurchased (53) (79) 0 0 0
Dividends Paid (105) (133) (170) (220) (291)
Preferred Dividends
Other Financing Cashflow 115 (100) (15) (16) (18)
Cash Flow From Financing 951 (279) (185) (236) (309)
Total Cash Generated 580 (293) 1,239 1,397 1,668
Free Cashflow To Equity 15 19 1,424 1,633 1,977
Free Cashflow To Firm (365) 1 1,439 1,650 1,995
Technology Components│Hong Kong│Equity research│January 5, 2016
58
BY THE NUMBERS
SOURCE: CIMB RESEARCH, COMPANY DATA
Balance Sheet
(Rmbm) Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F
Total Cash And Equivalents 1,826 904 2,196 3,649 5,350
Total Debtors 1,172 2,388 2,872 3,428 3,784
Inventories 768 896 1,062 1,263 1,387
Total Other Current Assets 1 16 0 0 0
Total Current Assets 3,766 4,204 6,130 8,340 10,521
Fixed Assets 807 1,151 1,172 1,187 1,199
Total Investments 0 63 63 63 63
Intangible Assets 0 0 0 0 0
Total Other Non-Current Assets 91 176 176 176 176
Total Non-current Assets 899 1,389 1,410 1,425 1,437
Short-term Debt 489 522 574 630 663
Current Portion of Long-Term Debt
Total Creditors 1,257 1,744 2,068 2,460 2,701
Other Current Liabilities 36 31 32 35 38
Total Current Liabilities 1,782 2,297 2,675 3,124 3,402
Total Long-term Debt 0 0 0 0 0
Hybrid Debt - Debt Component
Total Other Non-Current Liabilities 18 36 43 51 57
Total Non-current Liabilities 18 36 43 51 57
Total Provisions 6 11 11 11 11
Total Liabilities 1,805 2,343 2,728 3,186 3,469
Shareholders' Equity 2,850 3,248 4,808 6,576 8,486
Minority Interests 10 3 3 3 3
Total Equity 2,860 3,251 4,811 6,579 8,489
Key Ratios
Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F
Revenue Growth 45.9% 45.0% 20.2% 19.4% 10.4%
Operating EBITDA Growth 29.0% 30.0% 35.6% 22.7% 15.2%
Operating EBITDA Margin 10.5% 9.4% 10.6% 10.9% 11.4%
Net Cash Per Share (Rmb) 1.27 0.36 1.54 2.87 4.46
BVPS (Rmb) 2.71 3.09 4.57 6.25 8.07
Gross Interest Cover 70.04 41.28 53.22 62.88 68.21
Effective Tax Rate 12.6% 11.5% 11.0% 11.0% 11.0%
Net Dividend Payout Ratio 30.2% 29.4% 29.2% 29.3% 29.3%
Accounts Receivables Days 65.08 77.11 94.75 95.33 98.59
Inventory Days 57.08 42.54 42.22 42.28 43.76
Accounts Payables Days 82.69 76.75 82.23 82.34 85.24
ROIC (%) 24.1% 28.0% 20.9% 24.3% 25.9%
ROCE (%) 17.8% 17.6% 18.0% 17.3% 16.2%
Return On Average Assets 11.3% 10.6% 11.3% 11.1% 10.6%
Key Drivers
Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F
ASP Change (%, Main Product) -22.2% 11.5% 1.1% 2.3% 2.2%
Unit sales growth (%, main prod) -21.6% 117.1% 155.0% 30.0% 15.0%
No. Of Lines (main Product) - - - - -
Rev per line (US$, main prod) N/A N/A N/A N/A N/A
ASP chg (%, 2ndary prod) 0.0% -9.8% -11.1% -10.0% -11.1%
Unit sales grth (%, 2ndary prod) 0.0% 50.0% 45.0% 35.0% 30.0%
No. Of Lines (secondary Product) N/A N/A N/A N/A N/A
Rev per line (US$, 2ndary prod) N/A N/A N/A N/A N/A
Telco - Others│Hong Kong│Equity research│January 5, 2016
Company Note
IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN THE UNITED STATES IT IS DISTRIBUTED BY CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH.
Powered by EFA
TCL Communication Growth in a highly competitive market
■ Shipment growth should remain stable over 2016-2017, underpinned by TCL’s best-in-class smartphone and well-established worldwide distribution network.
■ We forecast yoy smartphone shipment growth of 15% to 56m units in 2016 and 10% to 62m units in 2017, thanks to market share gains in N. America, Middle East and Africa.
■ We adjust our earnings forecasts to reflect stable smartphone shipment growth in FY16 and FY17 but we lower our FY16 figure slightly to reflect an ASP decline.
■ Maintain Hold rating given the lack of short-term catalysts.
Market share gains in challenge smartphone market TCL Communication (TCLC) experienced fast growth in smartphone shipments in 2013 and 2014, thanks to its successful transition from a vendor of feature phones to that of smartphones. TCLC stood at no. 9 in the global smartphone market in 3Q15 with a 3.4% share, underpinned by its well-established worldwide distribution network and strong brand name “TCL-Alcatel”. TCLC was also the largest Chinese vendor in export sales in 9M15 with over 30m units.
Strong international growth Despite keen competition from tier-1 international brands and increasing competition from other Chinese vendors that are aggressively expanding their footprints to overseas markets, especially Huawei, ZTE and Lenovo, TCL achieved particularly strong growth in North America and the Middle East markets in 9M15.
Strong products in the pipeline TCLC launched Idol 3, targeting the Europe and US markets, and Onetouch Flash 2,
targeting the Asia Pacific market, which have received strong customer feedback so far. In view of the fierce competition in the low-end smartphone market (US$100-150), the group has been switching its focus to the mid-range segment (US$150-300) in order to lift ASP and maintain margins. In addition, the group introduced a new generation of tablets (Xess) and smartwatches (Go Watch) to further enrich its product portfolio.
Profitability to be maintained We estimate TCLC will ship 56m smartphones (+15% yoy) in FY16 and 62m (+10% yoy) in FY17, driven by market share gains in North America, Middle East and Africa. On the back of c.10-15% smartphone shipment growth in FY16 and FY17 and a stabilised ASP and gross margin outlook, we believe TCLC’s profitability will remain healthy in FY16 and FY17, with earnings growth of 3-4% over that time frame.
Maintain Hold TCLC is trading at 7x FY16 P/E with a dividend yield of 6.3% and we see a lack of short-term catalysts given margin and ASP pressure, no thanks to keen competition in overseas markets. We maintain our Hold rating on TCLC and believe the group can maintain its profitability despite strong headwinds for the global smartphone market, thanks to its strong brand name and well-established worldwide distribution network. We roll over our target price to FY16, based on FY17 P/E of 7.5x.
▎Hong Kong
HOLD (no change) Current price: HK$5.70
Target price: HK$6.34
Previous target: HK$6.28
Up/downside: 11.2% Reuters: 2618.HK
Bloomberg: 2618 HK
Market cap: US$932.4m
HK$7,226m
Average daily turnover: US$0.82m
HK$6.36m
Current shares o/s 1,259m
Free float: 37.6%
Key changes in this note
FY15 EPS decreased by 4%
FY16 and FY17 EPS increased by 4%.
Source: Bloomberg
Price performance 1M 3M 12M
Absolute (%) -0.4 2.0 -20.1
Relative (%) 3.7 2.8 -9.5
Analysts
Ray KWOK
T (852) 2532 1113 E ray.kwok@cimb.com
Bertram LAI T (852) 2532 1111 E bertram.lai@cimb.com
[ X ]
SOURCE: COMPANY DATA, CIMB FORECASTS
Financial Summary Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F
Revenue (HK$m) 19,362 30,691 30,099 32,245 33,928
Operating EBITDA (HK$m) 482 1,414 1,581 1,682 1,732
Operating EBITDA Margin 2.49% 4.61% 5.25% 5.22% 5.11%
Net Profit (HK$m) 313 1,093 1,011 1,065 1,102
Normalised EPS (HK$) 0.27 0.91 0.82 0.85 0.88
Normalised EPS Growth NA 233% (10%) 3% 4%
FD Normalised P/E (x) 21.52 6.47 7.17 6.98 6.74
DPS (HK$) 0.10 0.39 0.35 0.36 0.37
Dividend Yield 1.75% 6.81% 6.14% 6.29% 6.51%
EV/EBITDA (x) 14.63 5.94 5.09 4.58 4.07
P/FCFE (x) NA 7.60 6.24 6.51 5.80
Net Gearing 19.3% 37.2% 21.2% 9.0% (2.5%)
ROE 12.0% 31.2% 22.8% 20.8% 18.9%
% Change In Normalised EPS Estimates (4.44%) 4.06% 4.28%
Normalised EPS/consensus EPS (x) 0.93 0.96 0.93
66.0
89.3
112.7
136.0
4.4
6.4
8.4
10.4
Price Close Relative to HSI (RHS)
10
20
30
40
Jan-15 Apr-15 Jul-15 Oct-15
Vol m
Telco - Others│Hong Kong│Equity research│January 5, 2016
60
BY THE NUMBERS
Share price info
Share px perf. (%) 1M 3M 12M
Relative 3.7 2.8 -9.5
Absolute -0.4 2.0 -20.1
Major shareholders % held
TCL Corporation 62.4
SOURCE: CIMB RESEARCH, COMPANY DATA
-20.0%
-12.2%
-4.4%
3.3%
11.1%
18.9%
26.7%
34.4%
42.2%
50.0%
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
P/BV vs ROE
Rolling P/BV (x) (lhs) ROE (rhs)
-500%
143%
786%
1,429%
2,071%
2,714%
3,357%
4,000%
0
100
200
300
400
500
600
700
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
12-mth Fwd FD Normalised P/E vs FD Normalised EPS Growth
12-mth Fwd Rolling FD Normalised P/E (x) (lhs)
Diluted Normalised EPS Growth (rhs)
Profit & Loss
(HK$m) Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F
Total Net Revenues 19,362 30,691 30,099 32,245 33,928
Gross Profit 3,672 5,918 5,748 6,123 6,407
Operating EBITDA 482 1,414 1,581 1,682 1,732
Depreciation And Amortisation (191) (235) (360) (372) (372)
Operating EBIT 291 1,178 1,221 1,310 1,360
Financial Income/(Expense) 8 (31) (92) (98) (104)
Pretax Income/(Loss) from Assoc. (2) (0) (6) 0 0
Non-Operating Income/(Expense) 0 0 0 0 0
Profit Before Tax (pre-EI) 298 1,147 1,124 1,212 1,256
Exceptional Items 1 2 2 0 0
Pre-tax Profit 298 1,149 1,126 1,212 1,256
Taxation 18 (41) (113) (145) (151)
Exceptional Income - post-tax
Profit After Tax 316 1,108 1,013 1,067 1,105
Minority Interests (3) (15) (2) (2) (3)
Preferred Dividends
FX Gain/(Loss) - post tax
Other Adjustments - post-tax
Preference Dividends (Australia)
Net Profit 313 1,093 1,011 1,065 1,102
Normalised Net Profit 315 1,106 1,011 1,067 1,105
Fully Diluted Normalised Profit 313 1,091 1,009 1,065 1,102
Cash Flow
(HK$m) Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F
EBITDA 482 1,414 1,581 1,682 1,732
Cash Flow from Invt. & Assoc. 2 0 6 0 0
Change In Working Capital (762) (271) (43) (179) (137)
(Incr)/Decr in Total Provisions
Other Non-Cash (Income)/Expense 54 57 60 63 66
Other Operating Cashflow 1,104 101 160 170 176
Net Interest (Paid)/Received (105) (100) (163) (170) (176)
Tax Paid (16) (41) (113) (145) (151)
Cashflow From Operations 759 1,160 1,488 1,420 1,510
Capex (484) (300) (400) (350) (300)
Disposals Of FAs/subsidiaries 85 0 0 0 0
Acq. Of Subsidiaries/investments (1,005) 0 0 0 0
Other Investing Cashflow 141 69 72 71 71
Cash Flow From Investing (1,263) (231) (328) (279) (229)
Debt Raised/(repaid) (3,519) 0 0 0 0
Proceeds From Issue Of Shares 78 0 0 0 0
Shares Repurchased 0 0 0 0 0
Dividends Paid 0 (116) (474) (441) (451)
Preferred Dividends
Other Financing Cashflow 3,793 130 334 (170) (176)
Cash Flow From Financing 352 14 (140) (610) (627)
Total Cash Generated (152) 943 1,019 532 655
Free Cashflow To Equity (4,023) 929 1,159 1,142 1,282
Free Cashflow To Firm (399) 1,028 1,323 1,311 1,458
Telco - Others│Hong Kong│Equity research│January 5, 2016
61
BY THE NUMBERS
SOURCE: CIMB RESEARCH, COMPANY DATA
Balance Sheet
(HK$m) Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F
Total Cash And Equivalents 1,840 2,388 3,060 3,742 4,547
Total Debtors 7,221 9,832 10,776 11,544 12,147
Inventories 2,649 3,293 4,112 4,411 4,647
Total Other Current Assets 156 493 482 482 482
Total Current Assets 11,866 16,006 18,430 20,178 21,822
Fixed Assets 1,070 1,555 1,644 1,670 1,646
Total Investments 82 324 324 324 324
Intangible Assets 1,210 1,514 1,514 1,514 1,514
Total Other Non-Current Assets 195 298 292 313 329
Total Non-current Assets 2,557 3,691 3,773 3,821 3,813
Short-term Debt 2,205 3,941 4,091 4,241 4,391
Current Portion of Long-Term Debt
Total Creditors 7,508 10,492 12,211 13,099 13,801
Other Current Liabilities 1,508 976 926 998 1,030
Total Current Liabilities 11,221 15,408 17,228 18,338 19,222
Total Long-term Debt 196 0 0 0 0
Hybrid Debt - Debt Component
Total Other Non-Current Liabilities 8 7 7 7 8
Total Non-current Liabilities 204 7 7 7 8
Total Provisions 85 102 100 107 113
Total Liabilities 11,510 15,517 17,335 18,452 19,343
Shareholders' Equity 2,909 4,089 4,777 5,457 6,203
Minority Interests 4 90 90 90 90
Total Equity 2,913 4,179 4,868 5,547 6,293
Key Ratios
Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F
Revenue Growth 60.9% 58.5% (1.9%) 7.1% 5.2%
Operating EBITDA Growth NA 193% 12% 6% 3%
Operating EBITDA Margin 2.49% 4.61% 5.25% 5.22% 5.11%
Net Cash Per Share (HK$) (0.48) (1.27) (0.82) (0.40) 0.12
BVPS (HK$) 2.50 3.35 3.80 4.34 4.93
Gross Interest Cover 2.77 11.84 7.48 7.73 7.74
Effective Tax Rate 0.0% 3.6% 10.0% 12.0% 12.0%
Net Dividend Payout Ratio 37.2% 43.4% 43.7% 42.4% 42.4%
Accounts Receivables Days 79.1 79.8 100.1 101.4 102.0
Inventory Days 45.51 43.78 55.50 59.71 60.07
Accounts Payables Days 73.32 66.61 83.79 87.32 87.85
ROIC (%) 6.8% 25.4% 16.6% 17.3% 17.5%
ROCE (%) 5.8% 18.3% 15.0% 14.6% 13.8%
Return On Average Assets 2.23% 6.62% 5.16% 4.94% 4.77%
Ind Goods & Services│Hong Kong│Equity research│January 5, 2016
Company Note
IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN THE UNITED STATES IT IS DISTRIBUTED BY CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH.
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TK Group (Holdings) Limited Solid mould drives growth
■ TK Group is one of the leading one-stop plastic solution providers in China, set to benefit from the fast-growing wearable devices industry.
■ The top five largest customers are Polycom, Apple, Philips, Fitbit and SanDisk and could provide c.20% topline growth in FY16.
■ The key growth drivers are wearable devices and medical and healthcare segments.
■ EPS CAGR of 27% in FY14-17.
■ Maintain Add. Target price raised to HK$3.22, based on 8.5x FY17 P/E.
Accelerated earnings growth in FY16 We expect TK Group to maintain a c.20% topline growth in FY16, driven by new customers gained and new projects won in the mobile phone and wearable divisions and increased orders from Philips. On the other hand, we believe its gross profit margin will expand by 1% pts to c.28% in FY16 due to an improved utilisation rate in the automotive division and higher automation in plastic component manufacturing services.
Top five customers TK Group has a well-diversified customer base in various industries. Most of them are renowned tier-1 international brands in their industries. The top five customers are Polycom, Apple, Philips, Fitbit and SanDisk. They are collectively expected to account for around 40% of total revenue in FY15. On the back of the rising allocation from key customers, we forecast that they could contribute around 20% of topline growth in FY16.
Growth drivers We expect wearable devices (38% revenue CAGR in FY14-17) and the medical and healthcare (57% CAGR) segments to be the key growth drivers, thanks to continuous gains in new customers, such as Fitbit, Jawbone, GoPro and 3D Robotics, over the past few years and new order wins from Philips.
Gross margin rebounds in FY16 With the new fully automatic high precision mould fabrication facilities commencing operation, higher automation in plastic component manufacturer services and improved utilisation rates in the automotive parts mould fabrication division, we believe that TK Group’s blended GPM will rebound from c.27% in FY15 to c.28% in FY16.
Decent earnings growth in FY14-17 We revised downward our FY15-17 EPS forecasts by 1-4% due to reduced GPM assumptions. We forecast TK Group to deliver a 27% EPS CAGR in FY14-17, driven by rapid growth of wearable devices and healthcare divisions and GPM expansion.
Maintain Add We maintain an Add on TK Group due to its cheap valuation at 7x FY16 P/E and an attractive dividend yield of 5.4%. Potential catalysts are continuous gains in new customers, rapid growth in high-main segments and a potentially higher dividend payout ratio. Our target price is raised as we roll it over to FY16, based on 8.5x FY17 P/E, at parity with its peers (mould and plastic components manufacturers and handset component makers).
▎Hong Kong
ADD (no change) Current price: HK$2.18
Target price: HK$3.22
Previous target: HK$3.18
Up/downside: 47.7% Reuters: 2283.HK
Bloomberg: 2283 HK
Market cap: US$232.5m
HK$1,802m
Average daily turnover: US$0.20m
HK$1.59m
Current shares o/s 826.6m
Free float: 25.8%
Key changes in this note
FY15-17 EPS cut by 1-4%.
Source: Bloomberg
Price performance 1M 3M 12M
Absolute (%) 2.3 -8.0 34.6
Relative (%) 6.4 -7.2 45.2
Analysts
Ray KWOK
T (852) 2532 1113 E ray.kwok@cimb.com
Bertram LAI T (852) 2532 1111 E bertram.lai@cimb.com
[ X ]
SOURCE: COMPANY DATA, CIMB FORECASTS
Financial Summary Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F
Revenue (HK$m) 1,198 1,339 1,699 2,036 2,400
Operating EBITDA (HK$m) 214.7 220.6 280.5 354.8 414.0
Net Profit (HK$m) 121.3 153.9 195.3 259.1 312.9
Normalised EPS (HK$) 0.17 0.19 0.24 0.31 0.38
Normalised EPS Growth 2.7% 10.5% 27.2% 32.7% 20.7%
FD Normalised P/E (x) 12.96 11.74 9.23 6.95 5.76
DPS (HK$) 0.02 0.07 0.09 0.12 0.14
Dividend Yield 0.83% 3.21% 4.07% 5.41% 6.53%
EV/EBITDA (x) 7.63 7.56 5.62 4.03 3.01
P/FCFE (x) 6.91 NA 10.12 7.42 5.99
Net Gearing (44.1%) (25.7%) (34.5%) (43.9%) (52.1%)
P/BV (x) 4.87 3.42 2.75 2.13 1.69
ROE 43.0% 34.2% 33.0% 34.5% 32.8%
% Change In Normalised EPS Estimates (3.86%) (1.54%) (1.42%)
Normalised EPS/consensus EPS (x) 1.03 1.09 1.09
90
115
140
165
1.40
1.90
2.40
2.90
Price Close Relative to HSI (RHS)
2
4
6
8
Jan-15 Apr-15 Jul-15 Oct-15
Vo
l m
Ind Goods & Services│Hong Kong│Equity research│January 5, 2016
63
BY THE NUMBERS
Share price info
Share px perf. (%) 1M 3M 12M
Relative 6.4 -7.2 45.2
Absolute 2.3 -8.0 34.6
Major shareholders % held
Chairman & Executive Directors 74.2
Value Partners 8.0
SOURCE: CIMB RESEARCH, COMPANY DATA
0.0%
7.5%
15.0%
22.5%
30.0%
37.5%
45.0%
52.5%
60.0%
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
P/BV vs ROE
Rolling P/BV (x) (lhs) ROE (rhs)
-10.0%-2.0%6.0%14.0%22.0%30.0%38.0%46.0%54.0%62.0%70.0%
0.001.002.003.004.005.006.007.008.009.00
10.00
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
12-mth Fwd FD Normalised P/E vs FD Normalised EPS Growth
12-mth Fwd Rolling FD Normalised P/E (x) (lhs)
Diluted Normalised EPS Growth (rhs)
Profit & Loss
(HK$m) Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F
Total Net Revenues 1,198 1,339 1,699 2,036 2,400
Gross Profit 332 365 454 565 665
Operating EBITDA 215 221 280 355 414
Depreciation And Amortisation (52) (52) (73) (78) (83)
Operating EBIT 162 169 208 277 331
Financial Income/(Expense) (6) (1) 4 2 5
Pretax Income/(Loss) from Assoc. 0 0 0 0 0
Non-Operating Income/(Expense) 28 19 24 28 33
Profit Before Tax (pre-EI) 187 190 235 307 370
Exceptional Items (15) 4 0 0 0
Pre-tax Profit 169 190 235 307 370
Taxation (48) (37) (40) (48) (57)
Exceptional Income - post-tax
Profit After Tax 121 154 195 259 313
Minority Interests 0 0 0 0 0
Preferred Dividends
FX Gain/(Loss) - post tax
Other Adjustments - post-tax
Preference Dividends (Australia)
Net Profit 121 154 195 259 313
Normalised Net Profit 139 154 195 259 313
Fully Diluted Normalised Profit 139 154 195 259 313
Cash Flow
(HK$m) Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F
EBITDA 214.7 220.6 280.5 354.8 414.0
Cash Flow from Invt. & Assoc.
Change In Working Capital (2.7) (65.2) (22.3) (26.8) (24.6)
(Incr)/Decr in Total Provisions
Other Non-Cash (Income)/Expense
Other Operating Cashflow 16.3 41.7 36.0 40.3 50.3
Net Interest (Paid)/Received (7.0) (9.3) (12.3) (11.9) (16.9)
Tax Paid (38.6) (32.7) (36.5) (40.0) (47.5)
Cashflow From Operations 182.7 155.1 245.3 316.4 375.3
Capex (97.6) (184.8) (100.0) (100.0) (100.0)
Disposals Of FAs/subsidiaries 0.9 3.4 0.0 0.0 0.0
Acq. Of Subsidiaries/investments (2.0) (7.8) 0.0 0.0 0.0
Other Investing Cashflow 7.6 3.2 8.0 6.8 11.1
Cash Flow From Investing (91.0) (186.0) (92.0) (93.2) (88.9)
Debt Raised/(repaid) 169.2 (24.7) 24.8 19.5 14.4
Proceeds From Issue Of Shares 237.5 32.4 0.0 0.0 0.0
Shares Repurchased 0.0 0.0 0.0 0.0 0.0
Dividends Paid (226.6) (31.4) (57.7) (73.4) (97.4)
Preferred Dividends
Other Financing Cashflow (80.9) (10.8) (4.3) (5.1) (5.8)
Cash Flow From Financing 99.1 (34.5) (37.2) (59.0) (88.7)
Total Cash Generated 190.8 (65.4) 116.1 164.2 197.7
Free Cashflow To Equity 260.8 (55.6) 178.1 242.7 300.9
Free Cashflow To Firm 98.1 (25.8) 157.6 228.3 292.2
Ind Goods & Services│Hong Kong│Equity research│January 5, 2016
64
BY THE NUMBERS
SOURCE: CIMB RESEARCH, COMPANY DATA
Balance Sheet
(HK$m) Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F
Total Cash And Equivalents 333 267 383 547 745
Total Debtors 229 295 375 449 529
Inventories 184 239 306 361 426
Total Other Current Assets 0 0 0 0 0
Total Current Assets 745 801 1,063 1,357 1,700
Fixed Assets 201 325 334 356 373
Total Investments 0 0 0 0 0
Intangible Assets 4 10 10 10 10
Total Other Non-Current Assets 6 2 2 2 2
Total Non-current Assets 210 337 346 368 385
Short-term Debt 116 85 96 106 115
Current Portion of Long-Term Debt
Total Creditors 379 444 568 671 791
Other Current Liabilities 32 31 24 26 31
Total Current Liabilities 527 560 688 802 937
Total Long-term Debt 53 47 60 70 75
Hybrid Debt - Debt Component
Total Other Non-Current Liabilities 0 0 0 0 0
Total Non-current Liabilities 53 47 60 70 75
Total Provisions 5 4 6 7 8
Total Liabilities 585 611 753 879 1,020
Shareholders' Equity 370 527 656 845 1,065
Minority Interests 0 0 0 0 0
Total Equity 370 527 656 845 1,065
Key Ratios
Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F
Revenue Growth 9.3% 11.8% 26.9% 19.8% 17.9%
Operating EBITDA Growth (3.8%) 2.8% 27.1% 26.5% 16.7%
Operating EBITDA Margin 17.9% 16.5% 16.5% 17.4% 17.3%
Net Cash Per Share (HK$) 0.20 0.16 0.27 0.45 0.67
BVPS (HK$) 0.45 0.64 0.79 1.02 1.29
Gross Interest Cover 25.50 33.65 48.25 54.01 57.52
Effective Tax Rate 28.3% 19.2% 17.0% 15.5% 15.5%
Net Dividend Payout Ratio 174% 38% 38% 38% 38%
Accounts Receivables Days 65.42 71.41 71.93 74.02 74.36
Inventory Days 70.40 79.31 79.87 83.01 82.83
Accounts Payables Days 151.9 154.3 148.3 154.1 153.8
ROIC (%) 45.1% 81.4% 52.5% 63.6% 68.9%
ROCE (%) 31.5% 29.3% 29.2% 30.7% 29.9%
Return On Average Assets 15.2% 14.8% 15.0% 16.4% 16.1%
Key Drivers
Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F
ASP (% chg, main prod./serv.) N/A N/A N/A N/A N/A
Unit sales grth (%, main prod./serv.) 33.6% 13.5% 15.0% 16.0% 14.0%
Util. rate (%, main prod./serv.) N/A N/A N/A N/A N/A
ASP (% chg, 2ndary prod./serv.) N/A N/A N/A N/A N/A
Unit sales grth (%,2ndary prod/serv) -2.4% 10.6% 35.0% 22.0% 20.0%
Util. rate (%, 2ndary prod/serv) N/A N/A N/A N/A N/A
Unit raw mat ASP (%chg,main) N/A N/A N/A N/A N/A
Unit raw mat ASP (%chg,2ndary) N/A N/A N/A N/A N/A
Ind Goods & Services│Hong Kong│Equity research│January 5, 2016
Company Note
IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN THE UNITED STATES IT IS DISTRIBUTED BY CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH.
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Tongda Group Holdings Ltd Smartphone casing run faster
■ Tongda’s metal casings customers include Huawei, Xiaomi, Oppo, Vivo and QiKU.
■ Tongda is one of the key beneficiaries of the faster-than-expected metal casings penetration among Chinese vendors, especially Huawei and Xiaomi.
■ New products for the tier-1 international brand should bring a new revenue stream.
■ EPS CAGR of 25%, driven by 23% topline growth and stable GPM outlook.
■ Maintain Add. Target price raised to HK$2.00, based on FY17 P/E of 11x.
Metal casings penetrating the sub-Rmb1,000 segment Tongda is one of the key beneficiaries of the wide adoption of metal casings among domestic brands on the back of a low metal casing penetration rate among Chinese vendors. Recent new model launches such as QiKU Youth Edition (Rmb999) and Xiaomi Redmi Note3 (Rmb899) are equipped with metal casings produced by Tongda.
Riding on the two fast-growing vendors, Huawei and Xiaomi Huawei and Xiaomi, which posted 48% yoy and 19% yoy shipment growth in 9M15, respectively, remained the largest customers for Tongda and combined formed more than 40% of total revenue in 9M15. In addition to other domestic customers such as Oppo, Vivo, QiKU and Meizu etc., Tongda is one of the key beneficiaries of the wide adoption of metal casings among domestic brands.
Gross margin in an uptrend We believe that Tongda’s gross profit margin (GPM) will be protected by the rising metal casing contribution. We expect Tongda to produce 11m metal casings (c.18% of 60m smartphone casings output) in FY15 and rise to 22m metal casings (c.30% of 72m output) which will support its GPM to stand above 24% in the next couple of years given higher GPM in metal casings.
New products to be launched in 2016 Tongda revealed plans to launch new products for a new customer (non-Chinese vendor). The products, precision rubber parts, have excellent sealing, waterproofing and insulating functions for the next generation of smartphone protection. Tongda expects to ship these in 2H16 and for it to become the new revenue stream for the group in FY16 as it will allow the group to tap into the tier-1 international brands supply chain.
High earnings visibility Leveraging its position as primary casings (both metals and high-precision plastics) supplier for Huawei and Xiaomi, Tongda should benefit from the stable volume growth and rising contribution from metal casings given the wider adoption of metal casings in low-to mid-range smartphones (sub-Rmb1,000). We forecast Tongda’s FY15 earnings to grow by 42% to HK$715m, driven by 30% topline growth and 0.7% pt of gross margin expansion. We estimate that it could achieve an EPS CAGR of 25% (FY14–17).
Maintain Add We reiterate our Add recommendation, with the strong growth of the handset division a potential catalyst. We raise our target price to HK$2.00 as we roll over to FY16, based on a FY17 P/E of 11x, on par with its peers.
▎Hong Kong
ADD (no change) Current price: HK$1.34
Target price: HK$2.00
Previous target: HK$1.81
Up/downside: 49.3% Reuters: 0698.HK
Bloomberg: 698 HK
Market cap: US$989.9m
HK$7,672m
Average daily turnover: US$2.26m
HK$17.55m
Current shares o/s 5,659m
Free float: 58.8%
Key changes in this note
No change.
Source: Bloomberg
Price performance 1M 3M 12M
Absolute (%) -1.5 -3.6 52.3
Relative (%) 2.6 -2.8 62.9
Analysts
Ray KWOK
T (852) 2532 1113 E ray.kwok@cimb.com
Bertram LAI T (852) 2532 1111 E bertram.lai@cimb.com
[ X ]
SOURCE: COMPANY DATA, CIMB FORECASTS
Financial Summary Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F
Revenue (HK$m) 3,627 4,791 6,231 7,495 9,016
Operating EBITDA (HK$m) 576 854 1,178 1,438 1,728
Net Profit (HK$m) 360 502 715 940 1,136
Normalised EPS (HK$) 0.07 0.09 0.13 0.17 0.20
Normalised EPS Growth 17.2% 26.3% 36.3% 29.3% 20.8%
FD Normalised P/E (x) 18.22 14.43 11.70 9.03 7.48
DPS (HK$) 0.025 0.030 0.039 0.050 0.060
Dividend Yield 1.87% 2.24% 2.88% 3.72% 4.49%
EV/EBITDA (x) 12.48 9.25 7.00 5.80 4.78
P/FCFE (x) 56.87 NA NA 22.00 16.14
Net Gearing 26.4% 17.0% 18.0% 14.5% 11.0%
P/BV (x) 2.65 2.11 1.78 1.50 1.31
ROE 15.8% 16.9% 18.8% 20.8% 21.7%
% Change In Normalised EPS Estimates 0% 0% 0%
Normalised EPS/consensus EPS (x) 1.01 1.04 1.07
90
110
130
150
170
190
0.80
1.00
1.20
1.40
1.60
1.80
Price Close Relative to HSI (RHS)
50
100
150
Jan-15 Apr-15 Jul-15 Oct-15
Vo
l m
Ind Goods & Services│Hong Kong│Equity research│January 5, 2016
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BY THE NUMBERS
Share price info
Share px perf. (%) 1M 3M 12M
Relative 2.6 -2.8 62.9
Absolute -1.5 -3.6 52.3
Major shareholders % held
Wang Ya Nan 41.2
PA Macro Opportunity VIII Ltd 7.6
SOURCE: CIMB RESEARCH, COMPANY DATA
0.0%
4.2%
8.3%
12.5%
16.7%
20.8%
25.0%
0.00
0.50
1.00
1.50
2.00
2.50
3.00
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
P/BV vs ROE
Rolling P/BV (x) (lhs) ROE (rhs)
0.0%
11.4%
22.9%
34.3%
45.7%
57.1%
68.6%
80.0%
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
12-mth Fwd FD Normalised P/E vs FD Normalised EPS Growth
12-mth Fwd Rolling FD Normalised P/E (x) (lhs)
Diluted Normalised EPS Growth (rhs)
Profit & Loss
(HK$m) Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F
Total Net Revenues 3,627 4,791 6,231 7,495 9,016
Gross Profit 798 1,144 1,532 1,867 2,225
Operating EBITDA 576 854 1,178 1,438 1,728
Depreciation And Amortisation (155) (179) (249) (274) (324)
Operating EBIT 420 675 929 1,164 1,404
Financial Income/(Expense) (49) (52) (53) (44) (52)
Pretax Income/(Loss) from Assoc. (0) (2) 0 0 0
Non-Operating Income/(Expense) 43 21 24 24 24
Profit Before Tax (pre-EI) 415 642 900 1,144 1,377
Exceptional Items 0 1 0 0 0
Pre-tax Profit 415 642 900 1,144 1,377
Taxation (46) (94) (153) (194) (234)
Exceptional Income - post-tax
Profit After Tax 369 548 747 949 1,143
Minority Interests (9) (47) (32) (9) (7)
Preferred Dividends
FX Gain/(Loss) - post tax
Other Adjustments - post-tax
Preference Dividends (Australia)
Net Profit 360 502 715 940 1,136
Normalised Net Profit 369 547 747 949 1,143
Fully Diluted Normalised Profit 360 501 715 940 1,136
Cash Flow
(HK$m) Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F
EBITDA 576 854 1,178 1,438 1,728
Cash Flow from Invt. & Assoc. 0 2 0 0 0
Change In Working Capital (493) (491) (571) (573) (687)
(Incr)/Decr in Total Provisions
Other Non-Cash (Income)/Expense
Other Operating Cashflow 113 121 76 68 76
Net Interest (Paid)/Received (49) (52) (53) (44) (52)
Tax Paid (45) (106) (153) (194) (234)
Cashflow From Operations 103 328 478 695 831
Capex (187) (570) (500) (400) (400)
Disposals Of FAs/subsidiaries 0 0 0 0 0
Acq. Of Subsidiaries/investments 0 23 (275) 0 0
Other Investing Cashflow 3 41 4 8 9
Cash Flow From Investing (184) (506) (771) (392) (391)
Debt Raised/(repaid) 197 130 (280) 83 86
Proceeds From Issue Of Shares 27 662 1,125 0 0
Shares Repurchased 0 0 0 0 0
Dividends Paid (102) (142) (142) (218) (282)
Preferred Dividends
Other Financing Cashflow (105) (289) (56) (53) (61)
Cash Flow From Financing 16 361 647 (188) (257)
Total Cash Generated (65) 184 353 115 183
Free Cashflow To Equity 115 (47) (574) 386 526
Free Cashflow To Firm (29) (121) (238) 356 502
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BY THE NUMBERS
SOURCE: CIMB RESEARCH, COMPANY DATA
Balance Sheet
(HK$m) Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F
Total Cash And Equivalents 178 360 830 946 1,129
Total Debtors 1,718 2,371 3,083 3,708 4,460
Inventories 1,088 1,401 1,803 2,159 2,605
Total Other Current Assets 65 134 10 10 10
Total Current Assets 3,048 4,266 5,725 6,822 8,204
Fixed Assets 1,362 1,819 2,073 2,477 2,557
Total Investments 95 58 58 58 58
Intangible Assets 6 0 138 138 138
Total Other Non-Current Assets 146 225 225 225 225
Total Non-current Assets 1,609 2,101 2,493 2,897 2,977
Short-term Debt 592 629 400 433 469
Current Portion of Long-Term Debt
Total Creditors 1,035 1,525 2,068 2,476 2,988
Other Current Liabilities 188 177 362 588 747
Total Current Liabilities 1,814 2,332 2,830 3,498 4,204
Total Long-term Debt 258 351 300 350 400
Hybrid Debt - Debt Component
Total Other Non-Current Liabilities 0 0 880 880 880
Total Non-current Liabilities 258 351 1,180 1,230 1,280
Total Provisions 36 48 48 48 48
Total Liabilities 2,108 2,731 4,058 4,776 5,533
Shareholders' Equity 2,455 3,477 4,123 4,898 5,593
Minority Interests 94 159 38 46 55
Total Equity 2,549 3,636 4,161 4,944 5,648
Key Ratios
Dec-13A Dec-14A Dec-15F Dec-16F Dec-17F
Revenue Growth 6.4% 32.1% 30.1% 20.3% 20.3%
Operating EBITDA Growth 1.5% 48.3% 37.9% 22.1% 20.2%
Operating EBITDA Margin 15.9% 17.8% 18.9% 19.2% 19.2%
Net Cash Per Share (HK$) (0.14) (0.11) (0.14) (0.13) (0.11)
BVPS (HK$) 0.51 0.64 0.75 0.90 1.02
Gross Interest Cover 8.11 11.86 16.54 22.08 23.00
Effective Tax Rate 11.1% 14.7% 17.0% 17.0% 17.0%
Net Dividend Payout Ratio 28.4% 28.4% 30.5% 30.0% 30.0%
Accounts Receivables Days 153.0 142.9 145.9 151.5 151.1
Inventory Days 121.9 124.5 124.4 128.8 128.0
Accounts Payables Days 123.1 111.3 121.6 128.8 128.0
ROIC (%) 12.2% 16.0% 16.4% 17.8% 18.6%
ROCE (%) 13.4% 16.8% 17.8% 18.8% 20.1%
Return On Average Assets 9.1% 10.6% 10.8% 11.0% 11.3%
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AAV, ADVANC, AMATA, ANAN, AOT, AP, ASP, BA, BANPU, BBL, BCH, BCP, BDMS, BEAUTY, BEC, BECL, BH, BJCHI, BLAND, BMCL, BTS, CBG, CENTEL, CK, CPALL, CPF, CPN, DELTA, DEMCO, DTAC, EARTH, EGCO, ERW, GFPT, GLOBAL, GLOW, GUNKUL, HANA, HMPRO, ICHI, INTUCH, IRPC, ITD, IVL, JAS, KBANK, KCE, KKP, KTB, KTC, LH, LHBANK, LOXLEY, LPN, M, MAJOR, MC, MINT, MONO, NOK, PACE, PS, PSL, PTT, PTTEP, PTTGC, QH, RATCH, RCL, ROBINS, RS, S, SAMART, SAPPE, SAWAD, SCB, SCC, SF, SGP, SIRI, SOLAR, SPALI, SPCG, STEC, STPI, SVI, TCAP, THAI, THCOM, TICON, TISCO, TMB, TOP, TPIPL, TRC, TRUE, TTA, TTCL, TTW, TUF, U, UNIQ, UV, VGI, WHA
Corporate Governance Report:
The disclosure of the survey result of the Thai Institute of Directors Association (“IOD”) regarding corporate governance is made pursuant to the policy of the Office of the Securities and Exchange Commission. The survey of the IOD is based on the information of a company listed on the Stock Exchange of Thailand and the Market for Alternative Investment disclosed to the public and able to be accessed by a general public investor. The result, therefore, is from the perspective of a third party. It is not an evaluation of operation and is not based on inside information.
The survey result is as of the date appearing in the Corporate Governance Report of Thai Listed Companies. As a result, the survey result may be changed after that date. CIMBS does not confirm nor certify the accuracy of such survey result.
Score Range: 90 - 100 80 - 89 70 - 79 Below 70 or No Survey Result
Description: Excellent Very Good Good N/A
United Arab Emirates: The distributor of this report has not been approved or licensed by the UAE Central Bank or any other relevant licensing authorities or governmental agencies in the United Arab Emirates. This report is strictly private and confidential and has not been reviewed by, deposited or registered with UAE Central Bank or any other licensing authority or governmental agencies in the United Arab Emirates. This report is being issued outside the United Arab Emirates to a limited number of institutional investors and must not be provided to any person other than the original recipient and may not be reproduced or used for any other purpose. Further, the information contained in this report is not intended to
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lead to the sale of investments under any subscription agreement or the conclusion of any other contract of whatsoever nature within the territory of the United Arab Emirates.
United Kingdom: In the United Kingdom and European Economic Area, this report is being disseminated by CIMB Securities (UK) Limited (“CIMB UK”). CIMB UK is authorized and regulated by the Financial Conduct Authority and its registered office is at 27 Knightsbridge, London, SW1X7YB. This report is for distribution only to, and is solely directed at, selected persons on the basis that those persons: (a) are eligible counterparties and professional clients of CIMB UK; (b) have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended, the “Order”), (c) fall within Article 49(2)(a) to (d) (“high net worth companies, unincorporated associations etc”) of the Order; (d) are outside the United Kingdom, or (e) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000) in connection with any investments to which this report relates may otherwise lawfully be communicated or caused to be communicated (all such persons together being referred to as “relevant persons”). This report is directed only at relevant persons and must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this report relates is available only to relevant persons and will be engaged in only with relevant persons.
Where this report is labelled as non-independent, it does not provide an impartial or objective assessment of the subject matter and does not constitute independent “investment research” under the applicable rules of the Financial Conduct Authority in the UK. Consequently, any such non-independent report will not have been prepared in accordance with legal requirements designed to promote the independence of investment research and will not subject to any prohibition on dealing ahead of the dissemination of investment research. Any such non-independent report must be considered as a marketing communication.
United States: This research report is distributed in the United States of America by CIMB Securities (USA) Inc, a U.S. registered broker-dealer and a related company of CIMB Research Pte Ltd, CIMB Investment Bank Berhad, PT CIMB Securities Indonesia, CIMB Securities (Thailand) Co. Ltd, CIMB Securities Limited, CIMB Securities (India) Private Limited, and is distributed solely to persons who qualify as “U.S. Institutional Investors” as defined in Rule 15a-6 under the Securities and Exchange Act of 1934. This communication is only for Institutional Investors whose ordinary business activities involve investing in shares, bonds, and associated securities and/or derivative securities and who have professional experience in such investments. Any person who is not a U.S. Institutional Investor or Major Institutional Investor must not rely on this communication. The delivery of this research report to any person in the United States of America is not a recommendation to effect any transactions in the securities discussed herein, or an endorsement of any opinion expressed herein. CIMB Securities (USA) Inc, is a FINRA/SIPC member and takes responsibility for the content of this report. For further information or to place an order in any of the above-mentioned securities please contact a registered representative of CIMB Securities (USA) Inc.
CIMB Securities (USA) Inc does not make a market on the securities mentioned in the report.
Other jurisdictions: In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is only for distribution to professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.
Rating Distribution (%) Investment Banking clients (%)
Add 58.1% 6.0%
Hold 30.4% 3.5%
Reduce 10.9% 1.0%
Distribution of stock ratings and investment banking clients for quarter ended on 30 September 2015
1528 companies under coverage for quarter ended on 30 September 2015
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Corporate Governance Report of Thai Listed Companies (CGR). CG Rating by the Thai Institute of Directors Association (Thai IOD) in 2015, Anti-Corruption Progress Indicator 2015.
AAV – Very Good, 3B, ADVANC – Excellent, 3A, AEONTS – Good, 1, AMATA – Very Good, 2, ANAN – Very Good, 3A, AOT – Very Good, 2, AP - Good, 3A, ASK – Very Good, 3B, ASP – Very Good, 4, BANPU – Very Good, 4, BAY – Very Good, 4, BBL – Very Good, 4, BCH – not available, no progress, BCP - Excellent, 5, BDMS – Very Good, 3B, BEAUTY – Good, 2, BEC - Good, 3B, BECL – Very Good, 3B, BH - Good, 2, BIGC - Excellent, 3A, BJC – Good, 1, BLA – Very Good, 4, BMCL - Very Good, 1, BTS - Excellent, 3A, CBG – Good, 1, CCET – not available, 1, CENTEL – Very Good, 3A, CHG – Good, 3B, CK – Excellent, 3B, COL – Very Good, 3A, CPALL – Good, 3A, CPF – Very Good, 3A, CPN - Excellent, 5, DELTA - Very Good, 3A, DEMCO – Very Good, 3A, DTAC – Excellent, 3A, EA – not available, 3A, ECL – Good, 4, EGCO - Excellent, 4, EPG – not available, 3B, GFPT - Very Good, 3A, GLOBAL – Very Good, 2, GLOW - Good, 3A, GRAMMY - Excellent, 3B, GUNKUL – Very Good, 1, HANA - Excellent, 4, HEMRAJ – Very Good, 2, HMPRO - Excellent, 3A, ICHI – Very Good, 3A, INTUCH - Excellent, 4, ITD – Good, 1, IVL - Excellent, 4, JAS – not available, 3A, JASIF – not available, no progress, JUBILE – Good, 3A, KAMART – not available, no progress, KBANK - Excellent, 4, KCE - Excellent, 4, KGI – Good, 4, KKP – Excellent, 4, KSL – Very Good, 2, KTB - Excellent, 4, KTC – Very Good, 3A, LH - Very Good, 3B, LPN – Excellent, 3A, M - Good, 2, MAJOR - Good, 1, MAKRO – Good, 3A, MBKET – Good, 2, MC – Very Good, 3A, MCOT – Excellent, 3A, MEGA – Very Good, 2, MINT - Excellent, 3A, MTLS – Good, 2, NYT – Good, no progress, OISHI – Very Good, 3B, PLANB – Good, 3B, PS – Excellent, 3A, PSL - Excellent, 4, PTT - Excellent, 5, PTTEP - Excellent, 4, PTTGC - Excellent, 5, QH – Very Good, 2, RATCH – Excellent, 3A, ROBINS – Excellent, 3A, RS – Very Good, 1, SAMART - Excellent, 3B, SAPPE - Good, 3B, SAT – Excellent, 5, SAWAD – Good, 1, SC – Excellent, 3B, SCB - Excellent, 4, SCBLIF – not available, no progress, SCC – Excellent, 5, SCCC - Good, 3A, SIM - Excellent, 3B, SIRI - Good, 1, SPALI - Excellent, 3A, STA – Very Good, 1, STEC – Very Good, 3B, SVI – Very Good, 3A, TASCO – Very Good, 3A, TCAP – Very Good, 4, THAI – Very Good, 3A, THANI – Very Good, 5, THCOM – Excellent, 4, THRE – Very Good, 3A, THREL – Very Good, 3A, TICON – Very Good, 3A, TISCO - Excellent, 4, TK – Very Good, 3B, TMB - Excellent, 4, TPCH – Good, 3B, TOP - Excellent, 5, TRUE – Very Good, 2, TTW – Very Good, 2, TU – Very Good, 3A, VGI – Excellent, 3A, WORK – not available, no progress.
Comprises level 1 to 5 as follows:
Level 1: Committed
Level 2: Declared
Level 3: Established (3A: Established by Declaration of Intent, 3B: Established by Internal Commitment and Policy)
Level 4: Certified
Level 5: Extended.
CIMB Recommendation Framework
Stock Ratings Definition:
Add The stock’s total return is expected to exceed 10% over the next 12 months.
Hold The stock’s total return is expected to be between 0% and positive 10% over the next 12 months.
Reduce The stock’s total return is expected to fall below 0% or more over the next 12 months.
The total expected return of a stock is defined as the sum of the: (i) percentage difference between the target price and the current price and (ii) the forward net dividend yields of the stock. Stock price targets have an investment horizon of 12 months.
Sector Ratings Definition:
Overweight An Overweight rating means stocks in the sector have, on a market cap-weighted basis, a positive absolute recommendation.
Neutral A Neutral rating means stocks in the sector have, on a market cap-weighted basis, a neutral absolute recommendation.
Underweight An Underweight rating means stocks in the sector have, on a market cap-weighted basis, a negative absolute recommendation.
Country Ratings Definition:
Overweight An Overweight rating means investors should be positioned with an above-market weight in this country relative to benchmark.
Neutral A Neutral rating means investors should be positioned with a neutral weight in this country relative to benchmark.
Underweight An Underweight rating means investors should be positioned with a below-market weight in this country relative to benchmark.
*Prior to December 2013 CIMB recommendation framework for stocks listed on the Singapore Stock Exchange, Bursa Malaysia, Stock Exchange of Thailand, Jakarta Stock Exchange, Australian Securities Exchange, Taiwan Stock Exchange and National Stock Exchange of India/Bombay Stock Exchange were based on a stock’s total return relative to the relevant benchmarks total return. Outperform: expected to exceed by 5% or more over the next 12 months. Neutral: expected to be within +/-5% over the next 12 months. Underperform: expected to be below by 5% or more over the next 12 months. Trading Buy: expected to exceed by 3% or more over the next 3 months. Trading Sell: expected to be below by 3% or more over the next 3 months. For stocks listed on Korea Exchange, Hong Kong Stock Exchange and China listings on the Singapore Stock Exchange. Outperform: Expected positive total returns of 10% or more over the next 12 months. Neutral: Expected total returns of between -10% and +10% over the next 12 months. Underperform: Expected negative total returns of 10% or more over the next 12 months. Trading Buy: Expected positive total returns of 10% or more over the next 3 months. Trading Sell: Expected negative total returns of 10% or more over the next 3 months.
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