1

Yum Cha 飲 茶 June 6, 2014

TALKING POINTS

CHART OF THE DAY— IMPLICATION ON WEAK SEABORNE IRON ORE PRICES

Source: Bloomberg

INDICES Closing DoD%

Hang Seng Index 23,109.7 (0.2)

HSCEI 10,364.6 0.5

Shanghai COMP 2,040.9 0.8

Shenzhen COMP 1,058.3 1.3

Gold 1,253.3 (0.0)

BDIY 977.0 1.9

Crude Oil, WTI(US$/BBL) 102.5 (0.0)

Crude Oil, BRENT(US$/BBL) 108.8 0.4

HIBOR, 3-M 0.4 (0.8)

SHIBOR, 3-M 4.8 (0.3)

RMB/USD 6.3 0.1

DAILY NOTES FOR THIS WEEK

Jun 07 Trade Balance

Jun 07 Exports YoY

Jun 07 Imports YoY

TRULY INTERNATIONAL [0732.HK, BUY] - The company recorded a monthly turnover of

HK$1.8bn for May 2014—the highest monthly turnover in 2014. On a year-to-year (YoY)

comparison the growth remains challenging at a decrease of 3.3%, although recovering from

down 7.1% YoY in April 2014. We believe the number for May is an encouraging sign

confirming the weak period is short-lived where backend-loaded orders related to 4G

smartphone are starting to pick-up gradually. Despite the stock has offered a total return

(share price gain plus dividend income) of +16% since our initiation on 14 May, it is still trading

at 7.1x PER FY14e with 6.0% dividend yield FY14e — a substantial discount to peers. We

reiterate BUY with a target price HK$6.25 (28% upside).

Spot price on 65% import iron ore

(Fe) at Tianjin port has lost 30% this

year, to US$94.60/t as of the latest

- falling below US$100/t decisively

first time since 2012. While industry

experts attributed the price decline

to inventory destocking and weak

demand on steel due to slowdown

in property construction activities,

there are more signs that global iron

ore market is in fact entering into an

early stage of structural oversupply,

echoing the comment made in May

by the head of Vale’s metals

division that supply is greater than

demand for the first time in 10

years. Iron ore imports grew

strongly by 20% to 305m tons for

the first four months of 2014, even

though total inventories at ports

have soared to record high. Near-

term outlook for iron ore prices is,

undoubtedly, pessimistic until a

more vigorous destocking cycle is

underway. Chinese steel mills have

been responding to the change in

cost curve, by cutting long term

contracts or even cancelling the shipment, and instead by purchasing inventories at the spot

market. Although it does alleviate some margin pressure, sluggish steel demand remains as

the biggest threat on steelmakers. Decline in iron ore would also put pressure on domestic

high-cost iron ore miners which will eventually be forced to shut down as seaborne price

continues to trade below their marginal cost. Hong Kong listed miners with iron ore exposure

(either in China or globally): China Vanadium (893 HK, pure play domestic high-cost iron ore

miner); IRC (1029 HK, pure play iron ore exposure in Russia); Citic Pacific (267 HK,

conglomerate with iron ore exposure in Australia).

Source: Bloomberg

2

June 6, 2014

Monthly Turnover Bottoming Out in May

Highest monthly turnover in FY14. Truly International [0732.HK] released its

monthly turnover for May 2014, recording HK$1,800 million—the highest monthly

turnover in 2014. On a year-to-year (YoY) comparison the growth remains

challenging at a decrease of 3.3%, although recovering from down 7.1% YoY in April

2014. Turnover on five-months-to-date grew 11.0% YoY.

New 4G orders start contributing. The increase in monthly turnover from

HK$1.57Bn in Apr 2014 to HK$1.86Bn in May 2014 is an encouraging sign

confirming the weak period is short-lived where backend-loaded orders related to 4G

smartphone are starting to pick-up gradually. We expect monthly turnover for June

will resume positive growth on YoY basis, opening the window of a much stronger

second half. We also notice that gross margin in 2Q14 will improve QoQ (1Q14:

12.5%) as production is starting to enjoy better operating efficiency at a monthly

turnover of HK$1.8bn or above.

Reiterate BUY on value & growth. Our investment thesis remains intact: Truly is

the deepest value counter within the component sector, and deserves a re-rating.

Revenue growth over the next three years will be lifted by: 1) Better product mix in

capacitive touch panels such as full lamination module; 2) strong demand on TFT

auto displays. Despite the stock has offered a total return (share price gain plus

dividend income) of +16% since our initiation on 14 May, it is still trading at 7.1x PER

FY14e with 6.0% dividend yield FY14e — a substantial discount to peers. We

reiterate BUY with a target price HK$6.25 (28% upside).

Truly International [0732.HK; TP 6.25]

Price Performance

Market Cap US$1,827m

Shares Outstanding 2,915m

Auditor Deloitte

Free Float 47%

52W range HK$3.40-5.82

3M average daily T/O US$1.41m

Major Shareholding Lam, Wai Wah (44%)

Chan, Kin Sun (7%)

Source: Company, Bloomberg

Samuel Chan, CFA—Senior Analyst

(852) 3698-6391

samuelchan@chinastock.com.hk

John Mulcahy—Head of Research

(852) 3698-6889

johnmul@chinastock.com.hk

BUY

Close: HK$4.86 (June 5, 2014)

Target Price: HK$6.25 (+28%)

China Technology Sector

Source: Company, CGIHK Research

Key Financials (HK$m) FY2012 FY2013 FY2014e FY2015e FY2016e

Revenue 12,374.4 20,680.8 24,990.1 29,400.7 32,989.9

Change (yoy %) 18% 67% 21% 18% 12%

Gross Profit 1,556.9 2,891.9 3,513.5 4,238.4 4,834.4

Change (yoy %) 19% 86% 21% 21% 14%

Net Profit 716.0 1,768.3 2,187.2 2,605.3 2,974.5

Change (yoy %) 88% 147% 24% 19% 14%

EPS $0.257 $0.574 $0.686 $0.817 $0.933

DPS $0.110 $0.190 $0.226 $0.270 $0.308

ROE (%) 15.0% 28.6% 27.2% 26.4% 25.0%

Payout Ratio (%) 43% 33% 33% 33% 33%

PER (x) 18.93 8.46 7.08 5.95 5.21

PBR (x) 0.78 1.55 1.32 1.10 0.92

Dividend Yield (%) 7.8% 5.0% 6.0% 7.1% 8.1%

FCF Yield (%) 11.88% 13.78% -3.31% 0.02% 2.85%

Net Gearing (%) 36.7% 15.6% 17.3% 14.3% 9.4%

0

100

200

300

400

500

600

3

3.5

4

4.5

5

5.5

6

(HK$ million)(HK$)

Turnover (RHS) Price (LHS)

3

Figure 3: Peers Comparison

Source: Bloomberg estimates, CGIHK Research

Figure 1: Monthly Unaudited Turnover

Source: Company data, CGIHK Research

Figure 2: More Share Buyback After 1Q14 Result

Source: Bloomberg

PBR (x)

Company Ticker Rating Price

Market

cap

(US$m)

2013 2014E 2015E 2013 2013 2014E 2015E 2013 2014E 2015E

HK Listed

Truly International 732 HK Equity BUY 4.86 1,752 8.5 7.1 5.9 1.6 5.0 6.0 7.1 123.7 19.5 19.1 16.5

AAC Technologies 2018 HK Equity NR 47.15 7,468 18.1 17.5 14.9 5.9 2.3 2.1 2.5 46.3 3.4 17.3 25.2

FIH Mobile 2038 HK Equity NR 4.49 4,398 55.7 21.4 17.0 1.2 n.a. - - (124) 159.6 25.9 7.7

BYD Electronics 285 HK Equity NR 5.55 1,613 15.4 11.3 9.8 1.1 0.6 1.0 1.5 70.6 36.2 15.7 23.1

Sunny Optical 2382 HK Equity NR 9.71 1,374 17.7 14.2 11.5 3.0 1.6 2.0 2.5 23.2 24.2 23.8 28.8

Tongda Group 698 HK Equity NR 1.06 747 14.2 11.3 9.0 2.1 2.4 2.8 3.6 17.3 25.8 25.5 103.8

SAS Dragon 1184 HK Equity NR 3.07 247 9.4 n.a. n.a. 2.1 4.3 n.a. n.a. 87.6 n.a. n.a. 70.0

Varitronix 710 HK Equity NR 7.79 329 10.4 n.a. n.a. 1.6 6.4 n.a. n.a. 41.7 n.a. n.a. (6.0)

Average 17.3 12.7 10.4 2.3 3.2 2.1 2.6 35.8 43.8 21.6 24.7

Others

TPK HOLDING CO L 3673 TT Equity NR 235.5 2,595 15.2 16.5 12.2 1.4 2.1 4.5 3.2 (3.2) (29.8) 26.1 34.9

SHENZHEN O-FIL-A 002456 CH Equity NR 24.17 2,273 31.1 21.5 16.2 5.8 0.4 0.9 1.3 49.7 57.4 32.5 (12.0)

Average 23.1 19.0 14.2 3.6 1.3 2.7 2.2 23.3 13.8 29.3 11.5

HK Listed & Others Average 19.6 15.1 12.1 2.6 2.8 2.4 2.7 33.3 37.0 23.2 29.2

EPS Growth (%yoy)PER (x) Dividend yield (%)YTD

Perf

(%)

4

Key Financials

Source: Company Data, CGIHK Research

Income Statement (HK$m) FY2012 FY2013 FY2014e FY2015e Cash Flow Statement (RMBm) FY2012 FY2013 FY2014e FY2015e

Revenue 12,374 20,681 24,990 29,401 Profit (loss) after tax 710 1,768 2,187 2,605

Growth yoy% 17.8% 67.1% 20.8% 17.6% Depreciation & Amort. 562 619 828 1,077

Gross Profit 1,557 2,892 3,514 4,238 Change in Working Capital (209) 15 (356) (557)

Gross Margin % 12.6% 14.0% 14.1% 14.4% Cash from Operation 1,067 2,403 2,659 3,125

Adminsitrative Expenses (365) (480) (565) (706) Capital Expenditure (810) (1,244) (2,490) (2,462)

Distribution and Selling Expenses (206) (326) (340) (412) Sale of PP&E 13 0 0 0

Operating Profit 986 2,087 2,609 3,121 Cash Acquisitions - - - -

OP Margin % 8.0% 10.1% 10.4% 10.6% Divestitures - 0 0 0

Non-Operating Income (Loss) 71 107 79 79 Change in Other Investing Activities 0 (111) 0 0

Interest Expenses (73) (79) (21) (23) Cash from Investing (651) (1,355) (2,490) (2,462)

Income Tax Expense (268) (346) (480) (572) Debt Issuance / Repayment 0 729 0 0

Net Profit 716 1,768 2,187 2,605 Issuance / Repurchase of Comm Stock (4) 3 0 0

Net Income Margin % 5.8% 8.6% 8.8% 8.9% Dividends Paid (194) (304) (536) (661)

Net Profit Attributable to Shareholders 710 1,620 2,003 2,386 Other Financing Activities 114 (79) 0 0

Cash from Financing 40 348 (536) (661)

Balance Sheet (HK$m) FY2012 FY2013 FY2014e FY2015e Foreign Exchange Rate Adj. 7 79 0 0

Net Change in Cash 462 1,475 (366) 2

ASSETS

Cash And Equivalents 1,331 2,806 2,440 2,442 Ratios FY2012 FY2013 FY2014e FY2015e

Accounts Receivable 3,778 5,385 6,372 7,497

Other Receivables 231 524 524 524 Profitability

Inventory 1,016 1,489 1,999 2,352 Return on Assets % 7% 13% 12% 13%

Other Current Assets 7 7 7 7 Return on Equity % 15% 29% 27% 26%

Total Current Assets 6,471 10,210 11,342 12,821 Return on Common Equity % 15% 27% 26% 26%

Net Property, Plant & Equipment 4,893 5,517 7,179 8,564

Long Term Investments 48 332 332 332 Margin Analysis

Goodwill 0 0 0 0 Gross Margin % 12.6% 14.0% 14.1% 14.4%

Other Intangibles 155 155 155 155 Operating Margin % 0.0% 7.5% 7.5% 7.4%

Deferred Tax Assets, LT 9 9 9 9 Net Income Margin % 5.8% 8.6% 8.8% 8.9%

Other Long-Term Assets 11 57 57 57

Total Long Term Assets 5,116 6,071 7,732 9,118 Asset Turnover

Total Assets 11,587 16,281 19,074 21,939 Total Asset Turnover 1.1x 1.5x 1.4x 1.4x

Fixed Asset Turnover 2.6x 4.0x 3.9x 3.7x

LIABILITIES & EQUITY Accounts Receivable Turnover 3.6x 4.5x 4.3x 4.2x

Accounts Payable 2,460 4,203 5,345 6,266

Short-term Borrowings 1,375 2,949 2,949 2,949 Liquidity

Curr. Income Taxes Payable 164 84 84 84 Current Ratio 1.2x 1.3x 1.2x 1.3x

Other Current Liabilities 292 826 826 826 Cash Conversion Cycle 65.5 40.0 36.3 34.6

Total Current Liabilities 5,505 8,062 9,204 10,124 Total Liabilities/Total Assets 27.2% 23.9% 20.4% 17.7%

Long-Term Debt 906 935 935 935

Def. Tax Liability, Non-Curr. 36 57 57 57 Growth Over Prior Year

Total Liabilities 6,447 9,054 10,196 11,117 Total Revenue 18% 67% 21% 18%

Common Stock 55 58 58 58 Gross Profit 19% 86% 21% 21%

Additional Paid In Capital 546 2,792 2,792 2,792 Operating Profit 20% 112% 25% 20%

Retained Earnings 2,738 4,053 5,521 7,246 Net Income 88% 147% 24% 19%

Minority Interest 163 323 506 725 Payout Ratio % 43% 33% 33% 33%

Total Equity 5,140 7,227 8,878 10,822

Total Liabilities And Equity 11,587 16,281 19,074 21,939

5

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BUY share price will increase by >20% within 12 months in absolute terms :

SELL share price will decrease by >20% within 12 months in absolute terms :

HOLD no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL :