china smartphone, it hardware introduction (on req)

8/14/2019 China Smartphone, IT Hardware Introduction (On REQ)

1/52

China/Hong Kong | TECHNOLOGY

Please read the analyst certification and other important disclosures on last page

China Smartphone 7 August 2013

Marching forward

We initiate coverage on the China smartphone sector. Since

2012, China has been the largest smartphone market in the

world, in part because of increasing handset subsidies from

the top-three China telecom operators, rising demand for

mobile internet and competitive models from leading local

smartphone vendors. Among the smartphone component

suppliers, we prefer AAC Technologies (2018 HK) because of

its diverse customer portfolio, R&D capabilities and

market-leading position during a period of mass adoption of

smartphones and tablets. Within the Hong Kong and

China-listed smartphone space, we prefer ZTE (763 HK) and

TCL Communication (2618 HK) owing to their cost

competitiveness and superior in-house R&D capabilities.

Recent market volatility aside, we believe both companies are

well positioned for FY13F/14F.

Analysts

Ronnie Ho(852) 2533 [email protected]

Candy Tai(852) 2844 [email protected]


2/52


2

Table of Content

Marching forward ...................................................................................................................................... 3Investment summary ................................................................................................................................ 4China smartphone market in the fast lane ................................................................................................ 6Android OS and MTK solution lower entry barriers ................................................................................... 7Samsung and Apples differing fortunes in China ...................................................................................... 8Local players recording record-high market shares .................................................................................. 9Exports for local players the next growth driver ...................................................................................... 114G LTE the next big thing ....................................................................................................................... 12Chipsets, memory, displays are the big ticket items ................................................................................ 14Local component manufacturers are riding the mass adoption of smartphones ...................................... 15From off-line retail channel to on-line e-purchases ................................................................................. 16Hong Kong- and China-listed smartphone stocks price performance since 2012 .................................... 18TCL Communication (2618 HK) .............................................................................................................. 19China Wireless (2369 HK) ...................................................................................................................... 26Sunny Optical (2382 HK) ........................................................................................................................ 33ZTE Corporation (763 HK) ...................................................................................................................... 40AAC Technologies (2018 HK) ................................................................................................................. 43Lenovo Group (992 HK) ......................................................................................................................... 47


3/52


3

China Smartphone

Marching forward We initiate coverage on the China smartphone

sector. Since 2012, China has been the largest

smartphone market in the world, in part because of

increasing handset subsidies from the top-three

China telecom operators, rising demand for mobile

internet and competitive models from leading local

smartphone vendors. We expect China smartphone

unit shipments to grow 46%/21% in FY13F/14F and

unit sales to grow 46%/21% YoY to 310m/375m in

FY13F/14F, representing around 30% of the

worldwide market share.

Leading China smartphone brands gaining

market share. According to IDC, Lenovo and ZTE

were the number 4 and 5 smartphone brands in

2Q13, with unit sales of 11.3m units and 10.1m,

respectively, up 131% YoY and 58% YoY. Because of

their competitive pricing and appealing product

designs, Chinese brands have been gaining traction

in the global competitive smartphone arena, in the

process unseating Sony, Motorola, Blackberry, HTC

and Nokia from the top of the vendor list. Maturing

software, chipset and component technologies will be

the reason Chinese smartphone brands will gain

further global market share in FY13F/14F, in our view.

Mixed performance by smartphone component

manufacturers.Among the smartphone component

suppliers, we prefer AAC Technologies (2018 HK,

Outperform) because of its diverse customer portfolio,

R&D capabilities and market-leading position during a

period of mass adoption of smartphones and tablets.

In contrast, we are cautious on Sunny Optical

(2382 HK, Neutral) because of intense pricecompetition for 5MP/8MP camera modules from the

local manufacturers.

ZTE and TCL Communication our p referred plays.

Within the Hong Kong/China-listed smartphone

space, we prefer ZTE (763 HK, Outperform) and TCL

Communication (2618 HK, Outperform) owing to their

exposure to the rapidly growing smartphone market,

their cost competitiveness and superior in-house R&D

capabilities. Recent market volatility aside, we believe

both companies are well positioned for FY13F/14F.

China smartphone valuation matrix

Lenovo ZTE AAC

Sunny

Optical

TCL

Comm

China

Wireless

Share price (HK$) 7.31 13.60 35.95 8.34 3.33 2.59

Stock code (HK) 992 763 2018 2382 2618 2369

Rating* N O O N O O

TP (HK$) 7.6 20.0 42.8 8.7 4.5 3.4

Upside (%) 3.9 47.0 19.0 4.3 35.1 31.2

EPS, YoY (%)

FY13F 32.7 N/A 35.8 28.5 (78.8) 48.1

FY14F 7.7 25.6 14.2 25.9 N/A 25.8P/E (x)

FY13F 15.4 17.5 14.8 14.7 N/A 11.6

FY14F 14.3 13.6 12.6 11.5 8.9 9.2

Yield (%)

FY13F 1.9 1.4 2.7 2.0 0.0 2.6

FY14F 2.1 1.8 3.2 2.6 3.9 3.3

P/B (x)

FY13F 3.7 1.9 4.6 3.6 1.7 2.0

FY14F 3.2 1.7 3.7 3.1 1.4 1.7

ROE (%)

FY13F 23.7 8.5 31.4 19.7 (1.9) 17.3

FY14F 22.0 9.8 29.2 21.0 15.8 18.7

Closing price on 7 August 2013

* CCBIS ratings: O = Outperform; N = Neutral; U = Underperform

Source: CCBIS estimates


Candy Tai(852) 2844 3606

[email protected]
mailto:[email protected]:[email protected]:[email protected]:[email protected]


4/52


4

Investment summary

Since the introduction of the Apple iPhone by Steve Jobs in early 2007, followed by the

Android operating system (OS) by Google in 2008, we have witnessed a second handset

revolution characterized by the mass adoption of the smartphone in 2010-2012. These

three years brought stellar unit growth of 76%, 59% and 26%. But now, as the party

begins to wind down, we look for slower global smartphone growth in FY13F and FY14F,

including slower unit sales growth by leading brands like Samsung and Apple. The shining

exception is China, where smartphone unit sales growth looks set to buck the global trend,

with robust growth in FY13F and FY14F, possibly topping 46% and 21% unit sales growth,

respectively. It is almost certain that China will remain the largest smartphone market in

the world, with over 30% global market share by FY15F, in our view.

Samsung/App le/HTC YTD price performance Lenovo /ZTE/Coolpad/TCL price performance

650,000

750,000

850,000

950,000

1,050,000

1,150,000

1,250,000

1,350,000

1,450,000

1,550,000

100

200

300

400

500

600

700

800

900

1,000

1,100

1,200

1,300

Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13

Local currencyLocal currency

Apple (LHS) HTC(LHS) Samsung (RHS)

0

4

8

12

16

20

24

28

32

Jan-11 May-11 Sep-11 Feb-12 Jun-12 Nov-12 Mar-13 Aug-13

HK$

Lenovo ZTE China Wireless TCL Source: Bloomberg Source: Bloomberg

High-end smartphone unit growth decelerating. Samsung Electronics

(005930 KS, Not Rated), Apple (AAPL US, Not Rated), Nokia (NOK US, Not Rated),

HTC (2498 TT, Not Rated) and BlackBerry (BBRY US, Not Rated) were the top-five

smartphone vendors in 2011. Samsung and Apple have long held the number one

and two spots in the smartphone market by wide margins on the strength of their

impressive product designs and superior distribution channels and due to robust

demand in developed countries. However, we believe growth momentum for both

these leading brands will slow in FY13F and FY14F because of intense competition,

a slew of affordable new products produced by Chinese brands and product

saturation in developed markets.

China smartphone brands gaining traction. Despite the heavy competition within

Chinas smartphone market, Chinese smartphone brands have fared well againsttheir international rivals. ZTE and Lenovo unseated Blackberry and HTC from the

global top-five smartphone vendor list in part because of their competitive pricing

and better product designs. We strongly believe Chinese smartphone brands will

grab further market share in FY13F and FY14F. Turning their backs on the old days

of the low-margin US$100 low-end smartphone, Chinese brands of today are

stepping up efforts to penetrate the relatively lucrative mid-end smartphone

segment. Strong ties with domestic and overseas telecom operators, improving

economies of scale, better product designs and maturing operating systems (OS),

chipset and component technologies have helped leading local players. Among

listed Chinese smartphone names, we prefer Huawei, ZTE (763 HK, Outperform)

and TCL Communication (2618 HK, Outperform) owing to their improving

economies of scale and higher sales in overseas markets brought about by their

strong ties with leading overseas telecom operators.


5/52


5

Chinese component manufacturers like AAC Technologies and Sunny

Optical are benefiting from higher product specifications. Among

Hong Kong- and China-listed smartphone component suppliers, we prefer

AAC Technologies because of its (1) diverse customer portfolio, which includes

virtually all leading smartphone brands except LG; (2) its outstanding R&Dcapabilities for design-in projects; and (3) its market-leading position during a

period characterized by the mass adoption of smartphones and tablets. In

contrast, we are cautious on Chinas largest handset camera manufacturer,

Sunny Optical (2382 HK, Neutral), because of intense price competition for 5MP

camera modules from other local suppliers, notably Truly and O-film.

Risks:(1) Lower-than-expected mass adoption of smartphones in China, (2) intense

price competition from domestic and international smartphone brands, and (3) the

increasing cost of manufacturing in China.

China technolog y sector valuation matrix

Stock CCBIS Share price* Market cap EPS growth (%) P/E (x)Company code rating (local cur rency) (US$m) CY13F CY14F CY15F CY13F CY14F CY15F

China handset brands

Lenovo 992 HK Neutral 7.31 9,763 7.7 13.1 6.5 14.3 12.7 11.9

ZTE 763 HK Outperform 13.60 7,964 N/A 25.6 26.2 17.5 13.6 10.8

China Wireless 2369 HK Outperform 2.59 701 48.1 25.8 25.4 11.6 9.2 7.3

TCL 2618 HK Outperform 3.33 489 (78.8) N/A 42.5 N/A 8.9 6.2

Averag e 14.5 11.1 9.1

Global handset brands

Apple AAPL US Not Rated 465.25 422,678 (12.5) 8.0 8.3 11.9 11.0 10.2

Samsung 005930 KS Not Rated 1,222,000.00 160,918 74.4 7.9 5.4 6.1 5.6 5.3

Nokia NOK US Not Rated 4.06 15,205 N/A 313.6 (8.8) N/A 58.9 64.6

LGE 066570 KS Not Rated 74,100.00 10,841 (332.1) 74.5 12.7 16.2 9.3 8.2

BlackBerry BBRY US Not Rated 9.57 5,016 (52.8) 35.6 (38.2) N/A N/A N/A

HTC 2498 TT Not Rated 150.00 4,263 (85.4) 185.3 (1.4) 51.0 17.9 18.1

Averag e 21.3 20.5 21.3

Handset components and others

MediaTek 2454 TT Not Rated 350.00 15,754 43.7 26.3 5.1 18.9 14.9 14.2

AAC 2018 HK Outperform 35.95 5,674 35.8 14.2 17.9 14.8 12.6 10.7

Largan Precision 3008 TT Not Rated 1,020.00 4,564 57.4 15.0 10.4 15.6 13.5 12.3

FIH 2038 HK Not Rated 4.09 3,921 (113.9) 250.0 (71.4) N/A 25.1 N/A

TPK Holding 3673 TT Not Rated 302.50 3,301 N/A 6.6 (2.0) 6.2 5.9 6.0

Truly International 732 HK Not Rated 4.05 1,464 39.5 13.1 33.3 11.3 10.0 7.5

Spreadtrum SPRD US Not Rated 29.80 1,453 44.8 11.0 2.0 10.3 9.3 9.1Unimicron Tech 3037 TT Not Rated 23.75 1,219 (24.9) 28.4 2.6 14.1 10.9 10.7

BYD Electronic 285 HK Not Rated 4.07 1,179 64.7 17.9 13.0 11.9 10.1 8.9

Sunny Optical 2382 HK Neutral 8.34 1,072 28.5 25.9 16.7 14.7 11.5 9.7

Merry Electronics 2439 TT Not Rated 68.50 402 60.2 8.2 (9.0) 15.6 14.4 15.9

Averag e 13.3 12.6 10.5

* Price as at close on 7 August 2013

Source: Bloomberg, CCBIS estimates


6/52


6

China smartphone market in the fast lane

According to IDC, smartphone unit sales in China topped 213m in 2012. China has

been the world's largest smartphone market since 2012. In part because of increasing

subsidies for mobile devices from top-three China telecom operators, rising demandfor mobile internet and competitive models from leading local smartphone vendors,

we forecast total smartphone shipments will grow 46% YoY in FY13F and 21% YoY in

FY14F to reach 310m units and 375m units, respectively. China has evolved into one

of the most competitive smartphone markets in the world, with domestic smartphone

brands accounting for over 50% of total smartphone unit sales in China and with

Lenovo, Coolpad, ZTE and Huawei all finding spots atop Chinas smartphone

top-sellers list, just behind industry leader Samsung. By the end of 2012, local players

had unseated leading international smartphone brands, including Apple, Nokia and

HTC.

China smartphone unit growth (2010-2014F) China smartphone market share (2012)

15%

35%

55%

75%

95%

115%

135%

155%

0

50

100

150

200

250

300

350

400

2010 2011 2012 2013F 2014F

m uni t

China Smartphone unit sales China Smartphone unit growth

Samsung

22%

Lenovo

11%

Apple

8%

Coolpad

9%

ZTE

9%

Huawei

10%

HTC

5%

Nokia

3%

Xiaomi

4%

Ginoee

6%

Motorolla

4%

Other

9%

Source: IDC, CCBIS estimates Source: iiMedia Research

In our view, the open platform Android mobile OS has played a vital role in the

success of Chinese local smartphone brands. That said, the winning formula for ZTE,

Huawei, Lenovo and Coolpad came down to three major advantages: (1) strong ties

with local operators; (2) customized solutions for local users; and (3) attractive

exterior designs at competitive prices. Looking further into the future, we believe

improving economies of scale, strong growth in local markets and upcoming 4G LTE

opportunities in China will support growth for Chinas top-tier domestic smartphone

players.

We are seeing increasing demand for mobile internet connectivity, which accounts for

the success of 4G LTE. This standard offers lightning-quick internet connectivity to

mobile devices, with which end users will be able to download and stream music and

videos while on the road even faster than they do at present. For example, a movie

will now take just 10-15 minutes to download via a 4G network when once it took at

least an hour. Faster connections appeal to mobile gamers who will be able to enjoy

the richly detailed and complex online multiplayer games availed by the faster speeds

of the new standard. There is now a high probability that 4G licenses will be granted in

China late this year. Once the licenses are granted, a flood of opportunities will arise

for Chinas leading Chinese handset makers in FY14 and FY15F.
http://www.techinasia.com/domestic-brands-amount-60-chinas-smartphone-market/http://www.techinasia.com/domestic-brands-amount-60-chinas-smartphone-market/


7/52


7

Android OS and MTK solution lower entry barr iers

The introduction of the open platform Android OS from Google presented a great

opportunity for smartphone brands interested in entering Chinas highly competitive

smartphone market leaving individual brands to focus on customized user interfaces,

exterior designs, and sales and marketing. With component prices falling rapidly,

ASPs for low-end smartphones have fallen as low as US$50-60.

Because of the open platform solutions and the greater number of price competitive

participants, the Android OS has dominated the China smartphone market. According

to ZDCs survey on the China smartphone market, 43.1% of Android smartphone

models available in May 2013 cost under RMB1,000, while 40.8% cost over

RMB1,000 but below RMB2,000. Clearly feature phones are losing their price

advantage as Android smartphones rapidly become more affordable.

Price range of the Android smartphones in China market

in May 2013 MediaTeks Chipset

438414

100

3911 13

20.9%

29.4%

22.3%

10.9%

8.2% 8.3%

5%

10%

15%

20%

25%

30%

35%

0

80

160

240

320

400

480

1,000 or

below

1,000-2,000 2,001-3,000 3,001-4,000 4,001-5,000 5,000 or

aboveRMB

Unit (LHS) User concern (RHS)

Source: ZDC Source: MediaTek

Besides the Android OS, we believe the MediaTek (MTK) solution is also playing an

important part in the mass low-end smartphone adoption taking place in China.

MediaTek has been the largest mobile chipset solution provider for white-label

handsets in China. It has helped fuel the sales growth of Chinas low-cost handsets by

providing integrated, customized chipsets that significantly shorten the time and cost

of marketing a new product. Traditionally, the typical cycle for handset manufacturers

has been nine months. MediaTeks approach has reduced time-to-market on average

to four-to-six months. It has delivered more sophisticated chipsets over the past year

destined for entry-level smartphones produced in China.

In December 2012, MediaTek launched the worlds first commercialized quad-core

system on a chip (SoC) developed specifically for mid- to high-end smart devices. The

quad-core SoC solution enables the mobile ecosystem to bring the performance and

features associated with premium mobile devices to the mainstream market at

affordable prices. It has also lowered barriers to entry thereby increasing competition

and widening the purchase options of consumers. The MT6572 chip, designed for

entry-level smartphones, is the companys first smartphone chip that integrates a

four-in-one connectivity chip. It greatly reduces the bill-of-material (BOM) cost,

simplifies product development and enhances time to market. We believe the latest

quad-core MT6589, consisting of a power-efficient quad-core A7 ARM CPU, will

shorten the product development cycle for local smartphone players in China while

availing them of a cost-effective chipset solution.


8/52


8

Samsung and Apples differing fortunes in China

In 2012, among foreign companies, only Samsung and Apple managed to capture more

than a 5% share of the China smartphone market. Samsung led the China smartphone

market in 2012 with 30m smartphones shipped. According to Strategy Analytics,

Samsungs leading position in the domestic market extended into 1Q13 with 12.5m

smartphones shipped, representing a market share of 18.5%. Second through fifth

place went to Chinese brands, including second-place Huawei and third-place Lenovo,

which sold 8.1m and 7.9m smartphones, respectively. Fourth and fifth place went to

Coolpad and ZTE, which managed to deliver 7.0m and 6.4m units, respectively. Apple

landed in sixth place with 6.1m iPhones sold in 1Q13. In our view, Samsung is in better

position than Apple to take advantage of surging demand for low- to mid-end

smartphones in China, because Samsung offers a broader range of smartphone models,

including the Galaxy Grand which goes for RMB2,700, the Galaxy Style which sells for

RMB1,700 and the relatively cheap Galaxy Trend at RMB900.

Apple iPhone 5 Samsung Galaxy Mega

Source: Apple Source: Samsung

Apple has had li tt le success in China.One of Apples most successful products, the

iPhone, was first unveiled in January 2007. The launch of the iPhone instantly raised the

bar of the entire smartphone industry. Released to the public in June 2007, the first

generation iPhone utilized a 2G GSM network data service and was equipped with a

multi-touch screen that allowed users to input information in the same way they would

using a traditional physical keyboard. The first iPhone was initially only available in the

US and certain western European markets. Apples latest iPhone product, the iPhone 5,

was introduced in 4Q12. Apple is still the second-largest smartphone player in the world,

though only the sixth-largest in China. We put the failure of Apple in China down to its

single-product strategy and lack of TD-SCDMA solution to cater the largest localtelecom operator, China Mobile.

Samsung still the most powerful player in the field.Samsung was the best-selling

smartphone brand in the world with unit sales topping 72.4m units in 2Q13, representing

a 44% YoY increase according to IDC. Samsung unseated Apple as the top-selling

brand in 3Q11 and, since then, has maintained its position at the top from 1Q12 to 2Q13,

six conservative quarters. The success of Samsung was largely due to its

much-faster-than-peer model roll-out schedule and better exterior designs. With an over

30% global market share, Samsung is number one within the global smartphone space

by a long shot. Significantly, Samsung was also the number-one smartphone brand in

China. Yet despite its impressive track record, Samsung now faces the prospect of

decelerating growth momentum within the high-end smartphone market and intense

competition from emerging Chinese smartphone brands.


9/52


9

Local players recording record-high market shares

Thanks to (1) improving R&D capabilities and economies of scale; (2) competitive

pricing; (3) the low smartphone penetration rate in China; and (4) subsidies from

top-three operators, domestic smartphone makers dominate Chinas smartphonemarket. Local smartphone brands accounted for over 50% of total smartphone unit

sales in China in 1Q13.

Improving R&D capabilities and economies of scale

In order to benefit from increasing demand for smartphones, domestic smartphone

markers have continued to strengthen their R&D capabilities and scale of production.

Take Huawei, the largest China smartphone vendor, as an example: Huawei prides

itself on its investment in research and development, with 70,000 of its 150,000

employees in R&D. And the results speak for themselves: Huaweis high-end product,

the Ascend P6, is billed as the world's slimmest 4G LTE smartphones. The scale of

Huaweis worldwide smartphone shipments is expected to surge from 32m units in

2012 to 50m-60m units in 2013F.

Competitive pricing

Improving economies of scale have meant that domestic smartphone vendors have

been able to keep production costs low and offer their smartphones at very low prices,

affordable enough for low- and middle-class Chinese consumers. The average

income of Chinese consumers is not high, which tends to restrict them to purchasing

low-cost smartphones. It follows that Chinese smartphone makers selling

smartphones for RMB2,000 or below have an advantage over their more expensive

foreign rivals. The iPhone, for example, sells for about RMB5,000 in China and,

accordingly, its marketing targets upper-middle-class professionals. In 2012, about

77% of Chinas smartphones sold at RMB2,000 or below, while 14.6% were sold inthe RMB2,000 to RMB3,000 range.

2012 China smartphone market by price China smartphone penetration rate

RMB1,000

or below35%

RMB1,000-2,000

42%

RMB2,000-3,000

15%

RMB3,000-4,000

5%

RMB4,000

or above3%

8.3%

15.2%

25.8%

55.0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

2010 2011 2012F 2013F Source: iiMedia Source: EnfoDesk


10/52


10

Chinas low smartphone penetration rate

Chinas increasing urbanization and rising demand for mobile services have resulted

in it having the largest population of mobile phone users in the world, roughly 1.1b by

the end of 2012. Despite strong GDP growth, the wealth effect from rising wages, andimproving 3G coverage, Chinas 3G mobile penetration rate was still at the relatively

low level of 27.6% by the end of 1H13, partly due to the late issuance of 3G licenses

relative to developed countries. As smartphone prices continue to fall and thanks to

the efforts of Chinas telecom operators, the smartphone penetration rate in China is

likely to reach 55% by 2013F, in our view. Competitive pricing and stronger business

relationships with leading China telecom operators are likely to enable domestic

smartphone makers to maintain their dominance over Chinas smartphone market.

Subsidies from the top-three operators

The top-three telecom operators, China Mobile, China Unicom and China Telecom are

benefiting greatly from Chinas smartphone revolution, as rising smartphone

penetration accelerates uptake of their respective 3G services, generating higherrevenue than 2G services. Since the number of 3G subscribers is still relatively small,

the operators are desperate to expand subscriber numbers by offering generous

handset subsidies. China Unicom sets aside about 40% of its 3G revenue to

underwrite purchases of smartphones. However, it is China Mobile that is the most

generous operator doling out handset subsidies and investing in terms of absolute

dollars.

Percentage of 3G subscr ibers for CM/CU/CT

3G net add subscribers per month January 2012 to

June 2013

3%

11%

19%

27%

35%

43%

51%

Jan-11 May-11 Sep-11 Jan-12 Jun-12 Oct-12 Feb-13 Jun-13

CU 3G subscribers CT 3G subscribers CM 3G subscribers

0

1

2

3

4

5

6

7

8

9

10

Jan-1

2

Fe

b-1

2

Mar-

12

Apr-

12

May-1

2

Jun-1

2

Ju

l-12

Aug-1

2

Sep-1

2

Oc

t-12

Nov-1

2

Dec-1

2

Jan-1

3

Fe

b-1

3

Mar-

13

Apr-

13

May-1

3

Jun-1

3

m subscribers

China Unicom China Telecom China Mobile

Source: Company data Source: Company data

China Mobile. By June 2013, China mobile had 137.8m 3G subscribers, representing

18.6% of its total mobile subscribers. The company now plans to spend RMB27b on

handset subsidies in 2013, up from RMB23.8b in 2012.

China Telecom had 87.3m 3G subscribers by June 2013, representing 50% of its

total mobile subscribers. It spent RMB21.8b on handset subsidies in 2012 and plans

to spend more in 2013.

China Unicom had 100m 3G subscribers by June 2013, representing 38.2% of its

total mobile subscribers. The company spent RMB6.1b on handset subsidies and will

increase its handset subsidies in 2013.


11/52


11

Exports for local players the next growth driver

With the saturation of the smartphone market in developed countries, the battleground

for smartphone customers is shifting quickly to emerging markets including Brazil,

Russia and India. Chinese smartphone makers are eying lucrative exportopportunities in 2013.

According to IDC, worldwide smartphone shipments will grow 32.7% YoY in 2013 to

reach 958.8m units, up from 722.5m units in 2012. IDC also predicts global

smartphone shipments in 2013 will surpass those of feature phones for the first time,

with smartphones expected to account for 52.2% of worldwide handset shipments.

Emerging markets are likely to account for 64.8% of all smartphones shipped in 2013

and these markets are on track to achieve a 45% rise in shipment volume.

Smartphones have become increasingly popular in the emerging markets even

though average personal income in these markets is still far less than in developed

markets. Smartphone vendors have made deep forays into the low- to mid-end

markets in the developing world. As this trend continues, smartphone blended ASPs

are expected to drop 8.6% YoY to US$372 in 2013 and subsequently fall as low as

US$309 by 2017, with emerging market demand the main catalyst for this change. By

competing at the low- to mid-end of the market, major Chinese smartphone makers

like Huawei, Lenovo, ZTE, Coolpad, TCL and Xiaomi have gained a considerable leg

up on their high-end rivals.

2013F worldw ide smartphone forecasts by market 2013F worldw ide smartphone share by market

45.4%

14.3%

32.7%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0

100

200

300

400

500

Emerging Developed Total

US$

ASP (LHS) YoY shipment growth (RHS)

Emerging

markets65%

Developed

markets35%

Source: IDC Source: IDC

Often, Chinese smartphone makers collaborate with local telecom operators,distributors and retail chains, to distribute their phones within foreign markets. For

example, Coolpad began selling its Quattro 4G in the United States through

MetroPCS, a mobile network operator. Coolpads smartphone was sold for less than

US$100 under some promotions. Huawei also has big ambitions within the

international market. In June 2013, it introduced a phone called the Ascend P6 in

London through multiple mobile operators, including O2, Three and EE. Huawei

planned to sell the phone in 100 different countries, including China and many

European markets. Ascend P6 costs much less than an iPhone 5 or Galaxy S4,

though it comes equipped with the quad-core 1.5GHz processor, an 8MP camera and

a 4.7 screen. It is quite light too, weighing only 120g.


12/52


12

4G LTE the next big thing

Utilization of 3G networks is still low among the top-three telecom operators, especially

the home-grown TD-S 3G service providers. It is also no secret that China Mobile,

because of incompetence delivering 3G services and a lack of variety in smart-devices

is now looking to fast forward its home-grown TD-LTE 4G network commercialization

schedule. The head of Chinas Ministry of Industry and Information Technology (MIIT)

Mr. Miao Wei, stated that China is going to issue 4G licenses for TD-LTE networks by

4Q13, which is earlier than previously announced. We expect this to accelerate the

deployment of Chinas high-speed network. Shortly after the Mr. Miao Weis speech,

MIIT allocated Band 41 (2500MHz-2690MHz) for TD-LTE usage as of October 2012.

Not surprisingly, the earlier-than-expected TD-LTE roll-out timeline was followed by

non-stop lobbying for 4G licenses over the last two years by China Mobile, which still

had fresh in its memory the rapid loss of market share in the mobile market due to its

use of the homegrown TD-SCDMA mobile standard for its 3G mobile network. We

believe the realization by MIIT that China was falling behind the rest of the world in 4G

mobile data services, must have put pressure on the telecom regulator to accelerate its

4G timetable. China Mobile has been running trials of its 4G services using technology

based on a standard called TD-LTE that was the natural successor to its homegrown 3G

standard.

China Mobile accelerated TD-LTE scale deployment

Source: China Mobile

China Mobile is currently the only telecom operator in China that employs TD-LTE

technology, and it is now leading the way in establishing a 4G LTE network in China in

the same way that it aggressively laid the groundwork for mass TD-LTE adoption. The

company tested its TD-LTE network in 2012 by running trials on over 20,000 base

stations across 13 cities. It announced in December 2012 that it would procure through

an open tender for 70,000 LTE terminal devices, up from 34,000 devices previously

planned. China Mobile plans to expand its TD-LTE network trial to 100 cities by 2013using 200,000 base stations, which will be either new stations or stations upgraded from

existing TD-SCDMA base stations. By 2014, China Mobile intends to own 350,000

TD-LTE base stations in China, with all of them required to support Band 41. The

companys purchase volume of TD-LTE terminals in 2013 represents a tenfold increase

from 2012. In addition to the TD-LTE standard, China Mobiles terminals are also

expected to support FDD-LTE, GSM, TD-SCDMA and WCDMA networks. In order to

encourage the take-up of dual-mode, multi-band terminals, the company has adopted a

dual-path technology strategy that focuses not only on TD-LTE, but also on the

FDD-LTE network. In December 2012, China Mobile set up a dual TD/FDD network in

Hong Kong using frequency bands of 2,330-2,360MHz for TD-LTE and 2,555-2,570MHz

and 2,675-2,690MHz for FDD-LTE operation. On the mobile-device side, China Mobile

will launch LTE handset trials in 2H13. The company will distribute trial LTE handsets in

3Q13 and begin commercial trials in 4Q13.


13/52


14/52


14

Chipsets, memory, displays are the big ticket items

Todays smartphone combines the functions of a personal computer, mobile phone,

camera, personal media player and recorder. Some of the functions now considered

basic for smartphones include the ability to surf the internet, play multimedia games,touch-screen capability, the ability to take high-quality digital photos, GPS navigation

capability and the ability to connect with other devices (e.g., Auto, Tablet, PC, etc.). Of

course, todays smartphones must allow users to seamlessly communicate across a

wide range of network technologies (3G, 4G) and frequencies across the globe. To

allow for such an incredible range of functionality smartphones must rely on numerous

different components. We list some of these components below, along with the

functionality they allow.

Chipsets. The chipset controls the logic and communications functionality of the

smartphone. The chipset typically contributes 10-15% of bill of materials (BOM) costs.

Key chipsets include the application processor (AP) and the baseband processor (BB).

It is the CPU or brain of the smartphone that delivers the high-intensity media and

graphics most users are accustomed to seeing. The speed and performance of this

chipset is a major differentiating factor in modern smartphones.

Memory. The growing complexity behind modern smartphone functionality has forced

manufacturers to rely on ever more sophisticated memory to support that functionality.

Memory takes up 10-15% of BOM costs. There are two types of memory in a

smartphone: (1) volatile memory, which allows the device to run multiple applications

at the same time, and (2) non-volatile memory,which is the data storage hub of the

smartphone, where memory is retained even after the device is powered off.

Touch displays. It typically consists of the display and the touch screen, which in

aggregate comprise 20-25% of the smartphone BOM cost. The displayis the screen

that allows us to read text messages and E-mail, watch videos and surf the web. Thekey differentiator for smartphones is the size and pixel resolution of the display. Most

smartphones today use liquid crystal displays (LCD), either the thin film transistor

(TFT) variety or in-plane switching LCDs (IPS-LCD), with the latter offering better

viewing angles and lower battery consumption. Touch screensallow users to interact

directly with the phones interface for data input. Recently, capacitive touch has been

gaining in popularity since it allows for multi-touch interfaces.

Other components. Modern smartphones include many other components that support

the logic, communications, memory and user interface of the phone. Collectively these

components can contribute anywhere from 30 to 40% of a smartphones BOM; however,

no component on its own can be said to make up a large part of vendor/manufacturers

BOM cost. Also, while there are varying degrees of differentiation between different

manufacturers, overall, these are commoditized parts. Key components included in this

category include:

Passive ICs. Semiconductors and chips used for power management, noise

cancellation, voice recognition, accelerometers, etc.

Mechanical components. The physical form of the phone as well as other key

hardware like speakers, camera, buttons, the key pad etc.


15/52


15

Local component manufacturers are riding the massadoption of smartphones

We expect handset component suppliers to benefit from increasing shipment volume

and continuous product specification upgrades by Chinas smartphone makers.

Compared with feature phones, smartphones must adhere to much more stringent

specifications. Changes in specifications mean new orders for parts which supports the

blended ASPs of Chinas leading component suppliers of acoustic parts (required to

produce better sound quality), camera modules (denser megapixels) and LCDs (better

resolution screens with touch capabilities).

Acoust ic players benefi t f rom bet ter sound qual ity requi rements

AAC (2018 HK, Outperform) is one of the worlds foremost vertically integrated

manufacturers of miniature components. It designs, manufactures and distributes a

comprehensive suite of acoustic and non-acoustic products, including receivers,

speakers, microphones and antennas. The ASP increment through upgrades in product

specification and wide ranging products offered by the company is expected to keepdriving AACs growth in 2013F. In 2012, AAC has obtained 259 additional acoustic and

non-acoustic patents, bringing its total portfolio to 908 patents.

Goertek (002241 CH, Not Rated) is principally engaged in the manufacture and

distribution of electronic components including micro electro-acoustic components and

consuming electro-acoustic products. The company will benefit from industry-wide

acoustic upgrades. Goertek is now courting large smartphone companies in a bid to

expand its already impressive list of customers that includes Samsung, Apple, LG, Sony

and other major Chinese smartphone customers (e.g. Huawei). With this momentum

behind it, Goertek can look forward to another high growth year in 2013F.

Cameras players benefit from higher pixel migration requirement

Largan (3008 TT, Not Rated) is one of the leading manufacturers of handset lenses.

Given its superior technology in high-end camera lenses, Largan will benefit from rapid

growth in China smartphone demand and the industrys aggressive pixel migration

towards high-pixel resolution lenses. The companys customers include Apple, HTC,

Motorola, Nokia, Samsung, and leading China handset brands.

Sunny Optical (2382 HK, Neutral), the major optical component supplier to Chinese

smartphone makers, will benefit from the smartphone boom in China and the ongoing

upgrade to faster camera resolutions in 2013F. Sunny Optical focuses on the

development of high-end products. Having ramped up its in-house 5MP and 8MP

handset lens capacity, we believe it is now in position to enjoy ASP and earnings growth

underpinned by the industry's recent mass adoption of 8MP.

Display players benefit from bigger screen requirements

Truly(732 HK, Not Rated) produces flat panel display products. We expect Truly to

enjoy higher ASPs as demand grows in China for larger smartphone panel sizes. IDC

forecasts that the market share of smartphones with 5-inch and above screen sizes in

China will exceed 20% by the end of 2013. As a result, smartphone makers have

responded quickly with the release of a large number of smartphones with 5-inch and

above screens. IDC data indicates that, as of 1Q13, the market share of 5-inch and

above smartphones in China reached 7.5%, up 74% QoQ.

Tianma(000050 CH, Not Rated) specializes in the design, manufacture and supply of

high-quality LCD and LCM products. Increasing demand for higher smartphone panel

resolution and larger panel sizes will support growth at Tianma in 2013F.


16/52


17/52


17

China smartphone model comparison

Internatio nal brand Samsung Galaxy S4 iPhone 5 HTC One LG Optimu s G Pro Sony Xperia Z BlackB erry Z10

Price (RMB) 5,799 6,088 3,900 2,950 3,510 3,200

Operating system Android OS iOS 6 Android OS Android OS Android OS BlackBerry OS 7

CPU Quad-Core Dual-Core Quad-Core Quad-Core Quad-Core Dual-Core

Networks 4G/3G/2G 4G/3G/2G 4G/3G/2G 4G/3G/2G 4G/3G/2G 4G/3G/2G

Screen size (inch) 5.0 4.0 4.7 5.5 5.0 4.2

Rear camera quality (MP) 13 8 4 13.2 13 8

Front camera quality (MP) 2 1.2 2.1 2.3 2.2 N/A

Weight (g) 130 112 143 160 146 135

Dimensions 136.6 x 69.8 x 7.9mm123.8 x 58.6 x 7.6mm 137.4 x 68.2 x 9.3mm 139 x 70 x 10mm 139 x 71 x 7.9mm 130 x 65.6 x 9mm

Storage (GB) support microSD,

up to 64 GB

32GB 32GB support microSD,

up to 64 GB

support microSD,

up to 32 GB

16GB, support

microSD

Domestic brand high end models Lenovo K900 ZTE Grand S Huawei Ascend D2 TCL idol X Coolpad 9960 Xiaomi M2

Price (RMB) 3,499 3,399 2,750 1,699 2,650 2,599

Operating system Android OS Android OS Android OS Android OS Android OS MIUI OSCPU Dual-Core Quad-Core Quad-Core Quad-Core Quad-Core Quad-Core

Networks 3G / 2G 3G / 2G 3G / 2G 3G / 2G 3G / 2G 3G / 2G

Screen size (inch) 5.5 5 5 5 4.7 4.3

Rear camera quality (MP) 13 13 13 13.1 13 8

Front camera quality (MP) 2 2 1.3 2 1.3 2

Weight (g) 162 110 170 120 158.5 145

Dimensions 157 x 78 x 6.9mm 142 x 70 x 6.9mm 140 x 71 x 9.4 mm 140.4 x 67.5 x

6.99mm

131 x 66 x 8.8mm 126 x 62 x 10.2mm

Storage (GB) 32 GB support microSD,

up to 32 GB

32GB 16GB support microSD,

up to 32 GB

32GB

Domestic brand low end models Lenovo A820 ZTE U956 Huawei G520 TCL S900 Coolpad 7295 Xiaomi Red Rice

Price (RMB) 770 910 820 800 900 799

Operating system Android OS Android OS Android OS Android OS Android OS MIUI OS

CPU Quad-Core Quad-Core Quad-Core Dual-Core Quad-Core Quad-Core

Networks 3G/2G 3G/2G 3G/2G 3G/2G 3G/2G 3G/2G

Screen size (inch) 4.5 5 4.5 4.5 5 4.7

Rear camera quality (MP) 8 8 5 5 5 8

Front camera quality (MP) N/A 1 0.3 2 0.3 1.3

Weight (g) 144 138 150 141 133 158

Dimensions 135 x 68.2 x 9.9mm 132 x 65 x 9.8mm 134 x 66.8 x 9.9mm 132 x 70 x 9.5mm 140 x 73 x 9.9mm 137 x 69 x 9.9mm

Storage (GB) support microSD,

up to 32 GB

support microSD,

up to 32 GB

support microSD,

up to 32 GB

support microSD,

up to 32 GB

support microSD,

up to 32 GB

support microSD,

up to 32 GB

Source: www.ZOL.com


18/52


18

Hong Kong- and China-listed smartphone stocks price performance since 2012

Lenovo price performance since 2012 ZTE price performance since 2012

8,800

9,300

9,800

10,300

10,800

11,300

11,800

12,300

5.0

5.7

6.4

7.1

7.8

8.5

9.2

Jan-12 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13

HK$

Lenovo (LHS) HSCEI (RHS)

8,800

9,300

9,800

10,300

10,800

11,300

11,800

12,300

9

11

13

15

17

19

21

23

25


HK$

ZTE (LHS) HSCEI (RHS) Source: Bloomberg Source: Bloomberg

AAC pr ice per formance since 2012 Sunny Opt ical p rice performance since 2012

8,800

9,300

9,800

10,300

10,800

11,300

11,800

12,300

16

20

24

28

32

36

40

44

48


HK$

AAC(LHS) HSCEI (RHS)

8,800

9,300

9,800

10,300

10,800

11,300

11,800

12,300

1

2

3

4

5

6

7

8

9

10

11

12


HK$

Sunny Optical (LHS) HSCEI (RHS) Source: Bloomberg Source: Bloomberg

TCL Commun ication price performance since 2012 China Wireless price performance since 2012

8,800

9,300

9,800

10,300

10,800

11,300

11,800

12,300

1.5

2.0

2.5

3.0

3.5

4.0

4.5


HK$

TCL (LHS) HSCEI (RHS)

8,800

9,300

9,800

10,300

10,800

11,300

11,800

12,300

1.0

1.5

2.0

2.5

3.0

3.5

4.0


HK$

China Wireless (LHS) HSCEI

Source: Bloomberg Source: Bloomberg


19/52

TCL Communication (2618 HK) 7 August 2013

19

TCL Communication (2618 HK)

A turnaround story Company Rating: Outperform(initiation)

Initiate with Outperform and HK$4.50 target price.

We initiate coverage on TCL Communication (2618 HK)

with an Outperform rating and target price of HK$4.50,

based on 12x FY14F P/E. We like TCL's overseas

exposure, its fast-fashion product development strategy

and its improving smartphone model line-up.

Fast-fashion the key to future success.Following the

return of Chief Marketing Officer, Mr. Dan Dery, TCL

Communication adopted a fast-fashion approach todesign with the trendy and colorful One Touch series

the Idol Ultra and Idol X launched this year. These

products were well received by the market and we

believe the company is now on track to regain

smartphone sales momentum in FY13F and FY14F.

Alcatel brand vital to overseas penetrat ion.While the

TCL brand mainly targets the domestic market, the

Alcatel brand acquired in 2005 is aimed at the

overseas market. Unlike local rivals Lenovo, Coolpad.

Huawei and ZTE, we believe TCLs dual-brand strategy

holds the key to its success in overseas marketsbecause of the companys better brand recognition and

effective distribution channels.

Strong smartphone sales to support margin

recovery.TCL Communication was slow in new product

development during the early stages of smartphone

adoption in FY11 and FY12, but it recently stepped up

efforts to improve the design of its products beginning

with the popular One Touch series mid-end smartphone.

With its dual-brand strategy, we believe smartphone unit

sales will top 15m/25m in FY13F/14F, with a much

higher blended ASP/GPM.Forecasts and valuation

Year to 31 Decemb er 2011 2012 2013F 2014F 2015F

Revenue (HK$m) 10,653 12,031 17,925 24,700 30,225

Net profit (HK$m) 800 (208) (43) 422 602

EPS (HK$) 0.70 (0.18) (0.04) 0.37 0.53

YoY change (%) 11.8 N/A (78.8) N/A 42.5

DPS (HKD cents) 29.20 3.01 0.00 13.09 18.66

Dividend yield (%) 8.8 0.9 0.0 3.9 5.6

P/E (x) 4.7 N/A N/A 8.9 6.2

P/B (x) 1.4 1.6 1.7 1.4 1.2

ROE (%) 29.9 (8.9) (1.9) 15.8 19.2

Source: Company data, CCBIS estimates

Price: HK$3.33

Target: HK$4.50

(initiation)

Trading data

52-week range HK$1.60-4.51

Market capitalization (m) HK$3,829/US$489

Shares outstanding (m) 1,150Free float (%) 43.0

3M average daily T/O (m share) 5.4

3M average daily T/O (US$m) 2.3

Expected return (%) 1 year 35.1

Price as at close on 7 August 2013

Stock p rice vs . HSCEI

1

2

3

4

5

6

7

8

9

10

Jan-10 Sep-10 Jun-11 Feb-12 Nov-12 Aug-13

HK$

TCL HSCEI (rebased) Source: Bloomberg


Candy Tai(852) 2844 3606

[email protected]


20/52


20

TCL Communication financial summary

Income statement Balance sheet

FYE 31 Decemb er (HK$m) 2011 2012 2013F 2014F 2015F

Revenue 10,653 12,031 17,925 24,700 30,225

Cost of revenue (8,325) (9,935) (14,743) (19,982) (24,452)

Gros s pro fi t 2,328 2,097 3,182 4,718 5,773

Other income and gains 313 329 366 473 557

Selling and distribution expenses (866) (1,154) (1,613) (2,174) (2,630)

Administrative expenses (558) (658) (896) (1,235) (1,511)

R&D costs (459) (740) (1,076) (1,309) (1,511)

Other expenses (28) (109) (18) (25) (30)

Operating profi t 729 (234) (55) 448 648

Net interest income 55 47 10 10 5

Share of result of jointly

controlled entities/associates

(1) (2) (2) 0 0

Other 0 0 0 0 0

Profit before tax 783 (188) (47) 458 653

Tax expense 17 (32) 3 (27) (39)

Minority interest (1) 12 1 (9) (12)

Profit to shareholders 800 (208) (43) 422 602

EPS (HK$) 0.70 (0.18) (0.04) 0.37 0.53

Handset shipments (m unit) 43.6 42.6 50.0 55.0 57.5


Cash and bank balances 1,187 970 1,146 796 1,174Pledged bank deposits 6,092 4,221 3,666 3,666 3,166

Trade and bills receivables 2,638 2,882 3,496 4,795 5,855

Prepayments, deposits and other assets 870 1,246 1,857 2,559 3,131

Inventories 981 1,263 2,020 2,737 3,350

Other current assets 485 630 459 459 459

Current assets 12,254 11,212 12,644 15,013 17,136

Property, plant and equipment 497 597 829 938 1,030

Goodwill 254 254 254 254 254

Prepaid lease payments 185 177 176 176 176

Intangible assets 702 921 662 749 820

Investment in jointly controlled entities/

associates

2 4 2 2 2

Other non-current assets 132 157 157 157 157

Total non-current assets 1,773 2,109 2,081 2,277 2,439

Accounts and bills payable 1,952 2,429 3,231 4,380 5,359

Other payables and accruals 1,431 1,620 2,414 3,327 4,071

Short-term bank loans 7,222 5,726 5,726 5,726 5,726

Other current liabilities 710 830 638 711 806

Total cu rrent liabilities 11,315 10,606 12,010 14,144 15,963

Long-term bank loans 0 194 388 388 388

Other non-current liabilities 39 199 82 82 82

Total non-current l iabilities 39 393 471 471 471

Shareholders equity 2,669 2,321 2,244 2,666 3,120

Minority interest 4 2 1 9 22

Total equity 2,673 2,323 2,245 2,675 3,142

Cash flow Financial ratios


Profit before tax 783 (188) (47) 458 653

Depreciation and amortization 107 142 175 215 247

Change in working capital (722) (102) (524) (585) (425)

Other (47) 373 316 (72) (79)

Operating cash flow 122 224 (80) 15 396

Capex (232) (246) (350) (250) (250)

Other (734) (805) (110) (115) (120)

Investm ent cash flow (966) (1,052) (460) (365) (370)

Change in borrowings 735 (1,302) 194 0 0

Other (99) 1,942 521 0 352

Financing cash flow 637 640 715 0 352

Change in cash (207) (187) 176 (350) 378

Exchange losses on cash and

cash equivalents

49 (30) 0 0 0

Cash, beginning 1,345 1,187 970 1,146 796

Cash, ending 1,187 970 1,146 796 1,174

FYE 31 Decemb er (%) 2011 2012 2013F 2014F 2015F

Profitability

Gross margin 21.9 17.4 17.8 19.1 19.1

Operating margin 6.8 (1.9) (0.3) 1.8 2.1

Net margin 7.5 (1.7) (0.2) 1.7 2.0

ROE 29.9 (8.9) (1.9) 15.8 19.2

Growth

Sales revenue growth 22.4 12.9 49.0 37.8 22.4

Operating income growth 19.5 (9.9) 51.8 48.3 22.4

Net profit growth 14.0 N/A N/A N/A 42.5

EPS growth 11.8 N/A (78.8) N/A 42.5

Liquidity

Net debt/equity (%) Net cash 31.4 58.0 61.7 56.5

Source: Historical data from the Company, forecasts by CCBIS


21/52


21

Initiate with Outperform and HK$4.50 target pr ice

We initiate coverage on TCL Communication with an Outperform rating and target price

of HK$4.50 based on 12x FY14F P/E. We like TCLs overseas exposure, renewed

fast-fashion product development strategy, and improving smartphone model line-up.

TCL Communication YTD price performance versus

Hang Seng Index TCL Communication 5-year forward P/B bands

8,800

9,300

9,800

10,300

10,800

11,300

11,800

12,300

1.5

2.0

2.5

3.0

3.5

4.0

4.5


HK$

TCL (LHS) HSCEI (RHS)

Mean

+1s.d.

-1s.d.

+2s.d.

0.0x

0.4x

0.8x

1.2x

1.6x

2.0x

2.4x

2.8x

3.2x

3.6x

4.0x

Jul-08 Mar-09 Dec-09 Sep-10 May-11 Feb-12 Nov-12 Aug-13 Source: Bloomberg Source: Bloomberg

Fast-fashion design and better overseas exposure vital for turnaround.

Following the return of Chief Marketing Officer, Mr. Dan Dery, TCL

Communication adopted a fast-fashion design approach to its business,

beginning with the launch of the trendy One Touch Series, including the new

products, Idol Ultra and Idol X. These were well-received by consumers and

have put the company on track to regain smartphone sales momentum in FY13Fand FY14F. Unlike domestic rivals, Lenovo, Coolpad, Huawei and ZTE, which rely

on a single brand to market their goods, TCL Communication adheres to a

duel-brand strategy, with the TCL brand used to market the companys products in

the domestic market and the Alcatel brand used to tackle the overseas market.

Alcatel was formerly a French brand until it was acquired in by TCL

Communication in 2005. We believe the TCL/Alcatel dual-brand strategy will be a

big plus for TCL Communications success in its overseas markets because

Alcatel is already a well-known brand in Europe and North America; moreover,

TCL Communication can avail itself of Alcatels existing distribution channels. In

our view, TCL Communications duel-brand strategy puts it on track to regain

smartphone sales momentum in FY13F and FY14F.

Higher smartphone sales to support margin recovery.In its early stages, TCL

Communication had been slow in new product development. Lately, however, it

has stepped up efforts with a new model roll-out which included the introduction of

a few trendy and colorful mid-end smartphones, the One Touch Idol Series. We

believe the latest new model line-up (Idol Ultra and Idol X) along with the effective

dual-brand (Alcatel & TCL) strategy will support 15m/25m unit sales in FY13F/14F.

With improving blended ASP from stronger mid-end smartphone sales and better

economies of scale, we expect gross profit margin for the company to reach

19.1% in FY14F versus 17.4% in FY12.

Risks: (1) Intense price competition from other local rivals, (2) increasing cost from

R&D/marketing expenses, and (3) slower-than-expected sales recovery from overseas

markets.


22/52


22

Company background

TCL Communication Technology Holdings Limited (TCL) is a member company of

TCL Corporation. It listed on the Hong Kong Stock Exchange in 2004. TCL is a

China-based, international handset vendor that designs, manufactures and marketsits portfolio of products under two separate brand names: TCL and Alcatel, the

brand associated with the One Touch suite of smartphones. The former targets the

domestic market and the latter is TCL Communications overseas brand. The

company launched its first 3G Android smartphone, the OT-980, in September 2010.

Nearly 90% of its handsets are shipped overseas.

In 2004, TCL Communication established TCL & Alcatel Mobile Phones Limited

(T&A), a joint venture with Alcatel. In 2005, TCL Communication acquired from

Alcatel the remaining stake in T&A, with the new entity becoming a wholly owned

subsidiary of TCL Communication. TCL Communication later signed a license

agreement with Alcatel Lucent in 2004 to use the Alcatel brand for an initial term of ten

years. In September 2011, an amended license agreement was signed between TCL

Communication and the Alcatel Lucent that extended their range of products to

include not only mobile handsets but also tablets. The revised term for the amended

license agreement is from July 2011 to December 2024.

Shareholding structure

TCL Corporation, the largest shareholder in TCL Communication, owned a 50.2%

stake in the company, while public shareholders own approximately 43%.

TCL Communication shareholding st ructure

TCL Corp

50.2%

LI Dong Sheng &

LEUNG Lai Bing

6.9%

Other

43.0%

Source: Company data

R&D investment and production plan

Headquartered in Shenzhen, the production facilities and R&D centers of the Group is

located in Huizhou and various provinces of China respectively with over 2,000

experienced research engineers, and various technological patents. This has enabled

TCL to consolidate its leadership in the low-end handset market, further penetrate the

mid-to-high end market and optimize its product mix with its Step-up product

strategy.


23/52


23

In 2012, TCL successfully carried out a product transition from feature phones to

smartphones while consolidating its product portfolio, paving the way for further

expansion and long-term success. The company achieved several breakthroughs in

the development of new smartphone products and made good progress increasing

overall smartphone sales volume in 2012. In 1H13, a new wave of advancedsmartphones was launched with features including 4.5-5.0 displays, quad-core, and

ultra-slim designs. TCLs Idol X, one of the companys flagship products in 2013, was

snatched up by customers on its presale in China on 18 June this year.

TCL will be moving into a new production plant in Huizhou in September 2013, in the

process adding an extra 30m units of capacity. Production costs are expected to

decline with the increase in production scale, leading to higher margins.

TCL Communications new production plant in Huizhou, China

Source: Company

TCL has developed a comprehensive distribution network covering over 40 telecom

operators and distributors worldwide. Its products are selling in over 120 countries

throughout the Americas, Europe, the Middle East, Africa and Asia Pacific. TCL will

continue expanding its global customer base and distribution network by

strengthening its partnerships with major telecommunication operators worldwide.

TCLs partnerships w ith worldwide telecommunication operators

Source: Company


24/52


24

Financial summary

On the back of TCLs stronger smartphone design capabilities which have led to a

new model roll-out that includes the mid-end smartphone, we forecast a slight net loss

of HK$43.3m for FY13F, improving from the net loss of HK$207.8m in FY12. Weattribute the improvement to better blended ASP and gross profit margin.

TCL Communication financial summary

(4)%

0%

4%

8%

12%

16%

20%

24%

0

4,000

8,000

12,000

16,000

20,000

24,000

28,000

32,000

FY11 FY12 FY13F FY14F FY15F

HK$m

Sales (LHS) Gross profit margin (RHS) Operating margin (RHS) Net profit margin (RHS) Source: Company data, CCBIS estimates

Impressive sales growth.We forecast sales revenue will grow 49.0% YoY in FY13F

and 37.8% YoY in FY14F thanks to the companys new smartphone model line-up and

deeper penetration into overseas markets. The first wave of mid-range smartphones

was launched in China and overseas in 1QFY13 and 2QFY13 respectively as planned.

Meanwhile, TCL has already kicked off the R&D projects for its second wave ofsmartphones, with more advanced products featuring full HD displays and LTEs,

which will be launched in 2H FY13 as an extension of the first-wave of products.

Improving gross profit margin.We estimate gross profit margin will climb steadily

from 17.4% in FY12 to 17.8%/19.1% in FY13F/14F, thanks to the companys

Step-up strategy of moving from low-end smartphones towards mid- to high-end

smartphones. This strategy will support higher blended ASP and gross margin. Better

economies of scale and tighter cost-controls are also likely to improve gross margins.

Falling opex/sales ratio. We expect the operating expense-over-sales ratio to

decline slightly, from 22.1% in FY12 to 20.1%/19.2% in FY13F/14F, driven by the

companys improving R&D process for smartphones. In addition, TCL has plans tooptimize its organizational structure and business processes in order to improve

overall operational efficiency.

ROE and net debt position. We believe TCL will be one of the fastest growing

smartphone vendors in the industry with a favorable ROE of 15.8% in FY14F, though

the company is likely to be in a net debt position in both FY13F and FY14F, in our

view.

Expanded production capacity. Upon moving to its new production plant in

September 2013, TCLs production capacity will reach 100m-120m units per year.


25/52


25

TCL Communication i ncome s tatement

FYE 31 Decemb er (HK$m) 2011 2012 2013F 2014F 2015F 1Q13 2Q13F 3Q13F 4Q13F

Revenue 10,653 12,031 17,925 24,700 30,225 2,449 4,030 5,148 6,298

Cost of revenue (8,325) (9,935) (14,743) (19,982) (24,452) (2,046) (3,325) (4,222) (5,150)

Gros s pro fit 2,328 2,097 3,182 4,718 5,773 402 705 927 1,147

Gross profit margin 21.9 17.4 17.8 19.1 19.1 16.4 17.5 18.0 18.2

Other income and gains 313 329 366 473 557 56 80 90 140

Selling and distribution expense (866) (1,154) (1,613) (2,174) (2,630) (289) (363) (463) (498)

Administrative expense (558) (658) (896) (1,235) (1,511) (188) (202) (257) (250)

R&D costs (459) (740) (1,076) (1,309) (1,511) (224) (242) (257) (352)

Other expenses (28) (109) (18) (25) (30) (5) (4) (5) (4)

Operat ing pro fit 729 (234) (55) 448 648 (247) (25) 33 183

Operating margin 6.8 (1.9) (0.3) 1.8 2.1 (10.1) (0.6) 0.6 2.9

Net interest income 55 47 10 10 5 6 5 0 (1)

Share of result of jointly controlled entities/associates (1) (2) (2) 0 0 (0) (1) (1) (1)Other 0 0 0 0 0 0 0 0 0

Prof it befo re tax 783 (188) (47) 458 653 (241) (20) 33 182

Tax expense 17 (32) 3 (27) (39) (6) 1 (2) 10

Minority interest (1) 12 1 (9) (12) 1 0 (1) (0)

Prof it to shar eholders 800 (208) (43) 422 602 (246) (19) 30 191

Net profit margin 7.5 (1.7) (0.2) 1.7 2.0 (10.1) (0.5) 0.6 3.0

EPS (HK$) 0.70 (0.18) (0.04) 0.37 0.53 (0.22) (0.02) 0.03 0.17

EPS growth (%) 11.8 N/A (78.8) N/A 42.5 (641.8) (124.3) (135.5) (179.3)

Gross profit margin (%) 21.9 17.4 17.8 19.1 19.1 16.4 17.5 18.0 18.2

Operating profit margin (%) 6.8 (1.9) (0.3) 1.8 2.1 (10.1) (0.6) 0.6 2.9

Net profit margin (%) 7.5 (1.7) (0.2) 1.7 2.0 (10.1) (0.5) 0.6 3.0

ROE (%) 29.9 (8.9) (1.9) 15.8 19.2

Net debt/equity (%) Net cash 31.4 58.0 61.7 56.5



26/52


27/52

China Wireless (2369 HK) 7 August 2013

27

China Wireless financial summary



Revenue 7,340 14,359 20,640 26,832 33,540

Cost of revenue (6,259) (12,639) (18,163) (23,612) (29,515)

Gross profit 1,081 1,720 2,477 3,220 4,025


Selling and distribution expenses (466) (870) (1,259) (1,610) (1,979)

Administrative expenses (559) (674) (888) (1,127) (1,375)

Other expenses (5) (18) (21) (27) (34)

Operating profit 340 418 560 706 887

Net interest income (15) 6 6 6 6

Share of result of associates (0) 1 1 1 1

Share of result of jointly controlled

entities

0 (7) 0 0 0

Profit before tax 324 418 567 713 894

Tax expense (53) (94) (85) (107) (134)


Profit to shareholders 271 326 482 607 761

EPS (HK$) 0.12 0.15 0.22 0.28 0.35


Cash and bank balances 1,059 1,274 1,444 1,732 2,164

Pledged time deposits 1,080 710 710 710 710

Trade and bills receivables 2,257 2,416 3,473 4,515 5,644

Prepayments, deposits and other assets 314 648 778 934 1,121

Inventories 1,669 1,811 2,603 3,384 4,230

Other current assets 1 0 0 0 0

Current assets 6,380 6,859 9,007 11,274 13,868

Property, plant and equipment 527 537 688 826 951

Investment properties 335 310 310 310 310

Prepaid land lease payments 110 125 125 125 125

Intangible assets 112 161 142 116 85

Investment in jointly controlled entities 0 7 7 7 7

Investment in associates 35 53 53 53 53

Available-for-sale investments 11 24 24 24 24

Other non-current assets 21 28 28 28 28

Total non-current assets 1,152 1,244 1,377 1,490 1,583

Accounts and bills payable 2,993 3,823 5,494 7,143 8,928

Other payables and accruals 982 1,170 1,404 1,685 2,022

Interest-bearing bank borrowings 1,190 536 536 536 536

Other current liabilities 33 63 63 63 63

Total current liabil ities 5,198 5,592 7,497 9,427 11,549

Total non -current liabilities 143 99 99 99 99

Shareholders equity 2,185 2,410 2,786 3,236 3,801


Total equi ty 2,190 2,413 2,788 3,239 3,803

Cash flow Financial ratios


Profit before tax 324 418 567 713 894

Depreciation and amortization 73 115 128 147 167

Change in working capital (366) 322 (73) (49) (39)

Other (2) 57 (92) (114) (141)

Operating cash flow 29 912 530 697 881

Capex (78) (109) (200) (200) (200)

Other (374) 299 2 2 2

Investment cash flow (452) 190 (198) (198) (198)

Change in borrowings 491 (702) 0 0 0

Other 313 (184) (161) (211) (251)

Financing cash flow 805 (886) (161) (211) (251)

Change in cash 382 216 170 288 432

Exchange losses on cash and

cash equivalents

35 (2) 0 0 0

Cash, beginning 642 1,059 1,274 1,444 1,732

Cash, ending 1,059 1,274 1,444 1,732 2,164

FYE 31 Decemb er (%) 2011 2012 2013F 2014F 2015F

Profitability

Gross margin 14.7 12.0 12.0 12.0 12.0

Operating margin 4.6 2.9 2.7 2.6 2.6

Net margin 3.7 2.3 2.3 2.3 2.3

ROE 12.4 13.5 17.3 18.7 20.0

Growth

Sales revenue growth 59.8 95.6 43.7 30.0 25.0

Operating income growth (37.5) 23.0 33.9 26.2 25.6

Net profit growth (43.5) 20.0 48.1 25.8 25.4

EPS growth (45.3) 24.4 48.1 25.8 25.4

Liquidity

Net debt/equity (%) Net cash Net cash Net cash Net cash Net cash



28/52


28

Initiated with Outperform and HK$3.40 target price

We initiate coverage on China Wireless (2369 HK, Outperform) with a target price of

HK$3.40, based on 12x FY14F P/E. Despite intense competition within the China

smartphone space, we like China Wireless and its smartphone brand, Coolpad,because of (1) its strong ties with leading China telecom operators, (2) robust unit

sales growth with improving economies of scale, and (3) its progress penetrating

leading telecom operators in the US and the EU.

China Wireless YTD price performance vs. HSI China Wireless 5-year forw ard P/E bands

8,800

9,300

9,800

10,300

10,800

11,300

11,800

12,300

1.0

1.5

2.0

2.5

3.0

3.5

4.0


HK$

China Wireless (LHS) HSCEI

Mean

+1s.d.

-1s.d.

+2s.d.

0x

4x

8x

12x

16x

20x

24x

28x

32x

36x

40x

44x

Jul-08 Feb-09 Oct-09 May-10 Jan-11 Sep-11 Apr-12 Dec-12 Jul-13

Source: Bloomberg Source: Bloomberg

Benefiting from increasing handset subsidies from leading China telecom

operators. Over the years, over 90% of Coolpad brand smartphone sales were

made in China because of China Wireless strong ties with leading Chinese telecomoperators together with its outstanding product development capabilities. With

increasing handset subsidies from both China Mobile (941 HK, Not Rated) and China

Telecom (728 HK, Not Rated) and surging 4G smartphone demand, we believe China

Wireless will enjoy robust unit sales growth of 48.5%/20.0 for FY13F/14F, given the

companys home-court advantage.

On-track overseas market expansion.China Wireless has been performing well in

its backyard owing to its strong ties with Chinese telecom operators. The company is

now pursuing business opportunities with leading telecom operators in developed

countries. In light of its improving R&D capabilities and experience dealing with

overseas telecom operators, we anticipate China Wireless will ship 2.0m/4.0m

smartphones to US and EU telecom operators in FY13F/14F, representing11.3%/15.5% of the companys total sales revenue. Although sales contribution from

overseas markets is still relatively small, we believe higher blended ASP and better

overall margins will be positive to the companys profit growth in FY14F/15F.

Risks: (1) Intense price competition from the China smartphone OEMs, (2) the

increasing cost of manufacturing, (3) slower-than-expected 4G adoption in China.


29/52


29

Company background

China Wireless Technologies Limited (China Wireless) was incorporated in 2002

and listed on the Hong Kong Stock Exchange in 2004. Yulong Computer

Telecommunication Scientific (Shenzhen) Company Limited (Yulong) is a whollyowned subsidiary of China Wireless, mainly engaged in the development and

manufacture of Coolpad smartphone sets, the mobile data platform system, and

value-added business operations in China. The key product of the company is its 3G

smartphone launched under its CoolPad brand. The sales of CoolPad 3G

smartphones covered regions across China and has already expanded into overseas

markets including India, Taiwan and Indonesia.

As a local brand in China, the company not only sells smartphones through its

carriers channels, but it is also forging relationships with its e-commerce partners as

a way to reap the benefits offered by the various e-commerce channels. According to

a SINO-MR report, Coolpad smartphones had the fourth-largest market share of the

China 3G smartphone market in 2012.

Meanwhile, China Wireless has succeeded in breaking into the global

telecommunications market by leveraging its growing brand recognition within the

global smartphone market. Apart from its existing markets in India and Taiwan, China

Wireless also penetrated the North American 4G smartphone market in 2012. China

Wireless plans to enter the European market in 2013.

Shareholding structure

Mr. Guo Deying, the executive director of the company, and his spouse, Ms. Yang

Xiao, the non-executive director, co-own 39.5% of China Wireless. Public

shareholders own approximately 60.5% of the company.

China Wireless shareholding structu re

Mr. Guo Deying &

Ms. Yang Xiao39.5%

Other

60.5%

Source: Company data


30/52


30

R&D capability and product development

In 2007, China Wireless received a national award from Chinas State Council for its

double network technology, which simultaneously connects cell phones to both the

CDMA and GSM networks. Some models of Coolpad phones also have settings forheightened privacy protection. As a result, Coolpad phones are favored by, and are

purchased as, gifts for businessmen and government officials in China.

In 2012, China Wireless launched a full range of Coolpad smartphones from high-end

to mid-end and low-end versions, offering users better quality and better radio

performance. The company also successfully rolled out products covering 3G and 4G

network smartphones. For EVDO-based smartphones, the Group launched 18 new

models. For TD-SCDMA-based smartphones, the Group launched 17 new models.

For WCDMA-based smartphones, the Group launched 13 new models. The company

also started to launch 4G FDD-LTE smartphones, which were exported to the North

American market.

By differentiating the functions and features of the Android operating system, and by

providing the special Coollife UI4.1 user interface on the new models, the Coolpad

smartphones became more competitive and more attractive. The company upgraded

to the latest Android operating system version, the so-called Jelly Bean, running on

the famous Coolpad DNA, entailing dual-mode, dual-standby technology combining

two disparate radio technologies, private mode guaranteeing the security of the users

private data, and Chinese-language handwriting recognition software allowing users

to input more conveniently. The Coolcloud platform was also upgraded to the latest

Coolcloud 3.0 version, which made data synchronization of smartphones work faster

and more effectively once users switched to the new Coolpad smartphones. Apart

from the synchronization function, Coolpad users could also use the anti-theft,

antivirus and other features of the phone. Security features come with Coolcloud to

ensure data is not leaked.

China Wireless manufactures all its Coolpad smartphones in-house. It has six R&D

facilities worldwide.

Global R&D centers

Source: Company


31/52


31

Financial summary

We forecast net income of China Wireless will rise 48.1%/25.8% YoY to

HK$482m/HK$606.6m in FY13F/14F, thanks to the companys strong ties with

Chinese telecom operators and due to the encouraging progress of its overseasexpansion.

China Wireless financial summary

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

15%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

FY11 FY12 FY13F FY14F FY15F

HK$m

Sales (LHS) Gross profit margin (RHS) Operating margin (RHS) Net profit margin (RHS) Source: Company data, CCBIS estimates

Impressive sales growth. We expect the companys sales revenue to rise

43.7% YoY in FY13F and 30.0% YoY in FY14F, driven by the flourishing 3G mobile

market in China and the 4G mobile market in overseas.

Improving gross profit margin. Despite stiff competition within the smartphonemarket in China, we believe China Wireless will be capable of maintaining its gross

profit margin at 12% in FY13F/14F based on its improving product mix with a higher

proportion of 4G smartphones contributing 10%/25% of total smartphone unit

shipments in FY13F/14F, up from merely 4.8% in FY12.

Falling opex/sales ratio. We expect the operating expenses-over-sales ratio to

improve from 10.9% in FY12 to 10.5%/10.3% in FY13F/14F, as the company benefits

from improving economies of scale and tight cost controls.

ROE and net cash position.We see strong growth momentum for China Wireless

and expect favorable ROE of 17.3%/18.7% and, ultimtely, a net cash position in

FY13F/14F.

Expanding production capacity. China Wireless Dongguan production plant has

annual production capacity of 30m units. With the companys annual sales target of

approximately 32m units in FY13F, the production plant will soon reach full utilization.

China Wireless plans to expand its annual production capacity to 35m units by the

end of FY13 with capex of HK$200m.


32/52


32

China Wireless income statement

FYE 31 Decemb er (HK$m) 2011 2012 2013F 2014F 2015F 1H12 2H12 1H13F 2H13F

Revenue 7,340 14,359 20,640 26,832 33,540 6,218 8,141 8,772 11,868

Cost of revenue (6,259) (12,639) (18,163) (23,612) (29,515) (5,474) (7,165) (7,719) (10,444)

Gros s pro fit 1,081 1,720 2,477 3,220 4,025 744 976 1,053 1,424

Gross profit margin 14.7 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0

Other income and gains 289 259 250 250 250 73 187 100 150

Selling and distribution expense (466) (870) (1,259) (1,610) (1,979) (254) (615) (535) (724)

Administrative expense (559) (674) (888) (1,127) (1,375) (372) (302) (360) (528)

Other expenses (5) (18) (21) (27) (34) (5) (13) (9) (12)

Operat ing pro fit 340 418 560 706 887 186 232 249 310

Operating margin 4.6 2.9 2.7 2.6 2.6 3.0 2.9 2.8 2.6

Net interest income (15) 6 6 6 6 (8) 14 (10) 16

Share of result of associates (0) 1 1 1 1 0 0 0 1

Share of result of jointly controlled entities 0 (7) 0 0 0 0 (7) 0 0Prof it befo re tax 324 418 567 713 894 178 240 239 327

Tax expense (53) (94) (85) (107) (134) (26) (68) (36) (49)

Minority interest 0 1 1 1 1 0 1 0 0

Profit to shareholders 271 326 482 607 761 153 173 204 278

Net profit margin 3.7 2.3 2.3 2.3 2.3 2.5 2.1 2.3 2.3

EPS (HK$) 0.12 0.15 0.22 0.28 0.35 0.07 0.08 0.09 0.13

EPS growth (%) (45.3) 24.4 48.1 25.8 25.4 35.1 20.7 34.8 60.8

Gross profit margin (%) 14.7 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0

Operating profit margin (%) 4.6 2.9 2.7 2.6 2.6 3.0 2.9 2.8 2.6

Net profit margin (%) 3.7 2.3 2.3 2.3 2.3 2.5 2.1 2.3 2.3

ROE (%) 12.4 13.5 17.3 18.7 20.0

Net debt/equity (%) Net cash Net cash Net cash Net cash Net cash



33/52

Sunny Optical (2382 HK) 7 August 2013

33

Sunny Optical (2382 HK)

Benefiting from camera pixel migration Company Rating: Neutral(initiation)

Initiate with Neutral and HK$8.70 target price. We

initiate coverage on Sunny Optical (2382 HK) with a

Neutral rating and HK$8.70 target price based on 12x

FY14F P/E. Sunny Optical is well positioned to take

advantage of the current handset camera pixel

migration. We also like its dominant market share

among the leading China smartphone brands. That said,

we believe the stocks year-to-date price performance

already reflects these positives.

To benefit from smartphone camera pixel migration.Sunny Optical is one of Chinas leading handset camera

module manufacturers with over 50% market share of

Chinese smartphone brands. Camera pixel migration

from 5MP to 8MP/13MP and robust unit sales growth in

China will hold the company in good stead. We forecast

handset camera-related sales will grow 71.3% in FY13F

and 47.1% YoY in FY14F.

Vehicle lenses the wild card.Besides the companys

conventional handset-related camera business,

lucrative revenue opportunities from automobile

cameras exist owing to the rapid adoption of rear and

front parking cameras. Although we forecast sales

contribution of merely 4% in FY13F and FY14F, sales

growth will top 40% with above-company-average gross

profit margin of 40%.

Impressive sales growth but gross profit under

pressure. We estimate sales revenue growth will top

47.4%/36.3% YoY in FY13F/14F owing to the

impressive performance of the handset division.

Blended gross profit margin will decline 120bp/70bp to

17.4%/16.7% in FY13F/14F on a higher sales mix

toward lower margin handset camera modules and

intense price competition from local rivals.

Forecasts and valuation

Year to 31 Decemb er 2011 2012 2013F 2014F 2015F

Revenue (RMB m) 2,499 3,984 5,872 8,004 9,740

Net profit (RMB m) 215 346 446 564 660

EPS (RMB) 0.22 0.35 0.45 0.57 0.67

YoY change (%) 51.0 60.1 28.5 25.9 16.7

DPS (RMB cents) 7.29 10.73 13.64 17.18 20.04

Dividend yield (%) 1.0 1.6 2.0 2.6 3.1

P/E (x) 31.7 19.3 14.7 11.5 9.7

P/B (x) 4.8 4.2 3.6 3.1 2.6

ROE (%) 12.8 17.9 19.7 21.0 20.9

Source: Company data, CCBIS estimates

Price: HK$8.34

Target: HK$8.70

(initiation)

Trading data

52-week range HK$2.99-11.78

Market capitalization (m) HK$8,160/US$1,072

Shares outstanding (m) 978Free float (%) 57.9

3M average daily T/O (m share) 9.5

3M average daily T/O (US$m) 10.2

Expected return (%) 1 year 4.3

Price as at close on 7 August 2013

Stock p rice vs . HSCEI

0

2

4

6

8

10

12

Jan-10 Sep-10 Jun-11 Feb-12 Nov-12 Aug-13

HK$

Sunny Optical HSCEI (rebased) Source: Bloomberg


Candy Tai(852) 2844 3606

[email protected]


34/52

Sunny Optical (2382 HK) 7 August 2013

34

Sunny Optical financial summary


FYE 31 Decemb er (RMB m) 2011 2012 2013F 2014F 2015F

Revenue 2,499 3,984 5,872 8,004 9,740

Cost of revenue (1,976) (3,243) (4,850) (6,668) (8,133)

Gross prof it 523 741 1,022 1,337 1,607


Selling and distribution expense (59) (64) (95) (120) (146)

R&D expense (131) (163) (241) (320) (390)

Administrative expense (123) (150) (221) (296) (360)

Operating prof it 264 399 515 650 761

Net interest income 6 7 5 5 5

Share of result of associates (4) (4) (5) (5) (5)

Other (26) (5) 0 0 0

Profi t before tax 240 397 515 650 761

Tax expense (38) (58) (77) (98) (114)


Profi t to sharehol ders 215 346 446 564 660

china smartphone, it hardware introduction (on req)

Documents