Yum Cha 飲 茶 September 18, 2014

TALKING POINTS

CHART OF THE DAY—PREPARING FOR GOLDEN WEEK CASH SHORTAGE, NOT STIMULUS

Source: Bloomberg

INDICES Closing DoD%

Hang Seng Index 24,376.4 1.0

HSCEI 10,893.0 1.6

Shanghai COMP 2,307.9 0.5

Shenzhen COMP 1,271.3 0.7

Gold 1,218.8 (0.4)

BDIY 1,124.0 (2.3)

Crude Oil, WTI(US$/BBL) 94.0 (0.5)

Crude Oil, BRENT(US$/BBL) 99.0 (0.1)

HIBOR, 3-M 0.4 0.8

SHIBOR, 3-M 4.6 (0.1)

RMB/USD 6.1 (0.1)

DAILY NOTES FOR THIS WEEK

n.a.

TCL MULTIMEDIA TECHNOLOGY HOLDINGS LTD. [1070.HK; HK$2.93 Not Rated] - Still

one of China and the world’s biggest television manufacturers, TCLM is rapidly transforming to

embrace new technology, including smart TV, online gaming platform and generally to develop

an online-to-offline (O2O) platform. The fall in traditional/legacyTV sales in China is being offset

by exports, on the one hand, and by rapid growth in smart TVs in China. As of August 2014

TCLM had a cumulative total of 5.8m smart TV users, and 1.37m daily active users. The

strategy is defined as “double+”, meaning “intelligence + internet” and “products + services”,

and summarises the evolution from hardware to software + services. We believe TCLM is a

turnaround play and new business opportunities are expected to trigger a re-rating, with

consensus PER falling from 13.2x 2014E to 9..6x 2015E.

The US market was relieved at the “steady as she goes” comments from US Federal Reserve

Board Chair Janet Yellen after the Federal Open Market Committee meeting overnight, and

interest rates will be kept near zero for “considerable time”. In China, the market is still slightly

puzzled by the leak regarding the activation of the standing lending facility (SLF) and, in our

view, the incorrect assumption that RMB500bn will immediately be injected into the system. In

January, when the SLF was last used extensively, rates ranged from 5% for overnight to 8% for

14-day funds. For banks with substantial liquidity, i.e. low loan-deposit ratios (LDRs) it makes

no sense to borrow at these rates when the average cost of funds from depositors is at below

2%, which is the case for banks such as Industrial & Commercial Bank of China (ICBC)

[1398.HK] or Agricultural Bank of China (ABC) [1288.HK]. The fact that the SLF initiative has

not been officially confirmed suggests the SLF measure may be used in the event that liquidity

tightens around the National Day holiday in the first week of October, which is a traditional

travel and shopping period, with heavy cash demands on the system. This does not look like

an aggressive stimulus, as implied by comments that RMB500bn is equivalent to a 50 basis

point cut in LDR. This is not the same thing, and yesterday’s rally may be short-lived.

RATES FROM BOND MARKET (TOP

LEFT) TO INTERBANK REPOS (TOP

RIGHT) DO NOT SUGGEST LIQUIDI-

TY IS TIGHT.

RMB DIPPED AHEAD OF US FED

MEETING

COMPANY NEWS

Analyst: John Mulcahy

TCL Multimedia Technology Holdings Limited [1070.HK; HK$2.93 Not Rated] -

Transforming from pure hardware play to global entertainment technology enterprise.

Market Cap: US$504m; Free Float: 33.8%; 3-months Average Daily Turnover: US$0.86m

The Company. TCL Multimedia Technology Holdings Limited

(TCLM) is a global television (TV) manufacturer and distributor,

and its products are sold worldwide. TCLM is the world’s 5th

largest LCD TV manufacturer with a market share of 5.4% in 1Q

2014. TCLM is China’s third largest TV manufacturer, with market

share of 16% in 1Q 2014. TCLM is transforming from a pure TV

manufacturer to a global entertainment technology enterprise by

focusing on the software & services segment.

Reducing reliance on hardware. Near-term outlook for China’s TV market is challenging, given the withdrawal of the energy-saving home appliance subsidy policy and new market entrants such as internet companies LeTv and BestTv. According to management, TCLM adopts a new user-oriented business model that focuses primarily on a “double+” strategy which includes “intelligence + internet” and “products + services” as the main direction, striving to become a global entertainment technology enterprise that provides integrated entertainment solutions to customers. TCLM is implementing a smart TV strategy to offer content and services to its online platform .

Sizable Smart TV subscriber base. TCLM recently announced a growing number of activated smart TV users from TCL’s group’s Huan.Tv, with 174,188 new users for Aug 2014; 1,574,685 for Jan-Aug 2014; and a cumulative total of 5,847,024 users as at Aug 2014. Daily active users stood at 1,366,065. TCLM has a sizable subscriber base compared with peers such as LeTV. However, TCLM’s activation rate is lower than LeTV. We believe TCLM will put more resources into boosting its activation rate. The group plans to raise average revenue per user (ARPU) through increasing services offered such as games, education and videos.

TCLM is creating a platform for online gaming business partners such as GameLoft, and will share profit from these partners. TCLM launched the platform in 2Q 2014 and the contribution from smart TV games will be minimal. TCLM will also introduce more services/content to its online platform by cooperation with its parent. We expect the group to introduce education and entertainment content to its online platform in the near future.

Leveraging on parent’s resources. Huan.Tv was formed in Dec 2012 by TCL Group (34.55% stake), Changhong and China Broadband Capital. Huan.Tv is a leading internet content provider in China with all-inclusive channels focusing on cultural and technological services, and is serving millions of smart TV users. Compared with peers, TCLM can leverage on Huan.Tv’s existing platform to raise ARPU and achieve higher activation rate. TCL group also has exposure to internet/online business, and we believe TCLM will leverage on its parent’s existing resources to build the online platform.

The online-to-offline (O2O) strategy adopted by TCLM will enhance overall profitability as the group streamlines the distribution and

September 18, 2014

Source: Bloomberg, Company Data.

[TCL Multimedia Technology Holdings Limited]

sales network. The reduction in SG&A expenses will improve profitability.

Rerating potential. TCLM’s new business segments including its smart TV game platform, new content on its platform and new services are expected to make a contribution in future through an expanding subscriber base and raising ARPU. We also believe TCLM is a turnaround play and new business opportunities are expected to trigger a re-rating for TCLM.

Catalysts: Potential M&A opportunities such as buying online businesses, more disclosure on its online business and a turnaround in the hardware business.

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Sep13 Nov13 Jan14 Mar14 May14 Jul14 Sep14

(HK$ million)(HK$)

Turnover (RHS) Price (LHS)

Key Financials

(in HK$ m)2012 2013 2014E 2015E

Revenue 36,025.0 39,494.7 38,113.4 40,643.8

Gross Profit 6,144.9 5,414.0 5,818.8 6,211.6

Gross Margin % 17.1 13.7 15.3 15.3

Net Profit 910.9 (48.1) 315.0 405.6

Net Margin % 2.5 (0.1) 0.8 1.0

EPS (Basic) 0.70 (0.04) 0.22 0.30

ROE (%) 22.0 (1.1) 6.9 8.1

Dividend Yield (%) 8.46 9.89 2.53 3.38

PER (x) 4.21 (81.16) 13.20 9.64

PBR (x) 0.81 0.90 0.81 0.77

Capex (m) (597.8) (577.7) (393.8) (426.8)

Free cash flow (m) 1,324.2 616.6 154.0 43.6

Net cash/(net debt) (mn)(4,755.6) (4,475.8) 931.0 969.3

TCLM’s 1H 2014 turnover was HK$15.2bn, down 15.9% year-on-year (YoY). Net

profit in 1H2014 was HK$169m, down 13.8% YoY. The group booked gains of

about HK$159m from the closure of some subsidiaries. TV shipments were

7.56m units in 1H 2014, down 2% YoY, with average selling price (ASP) down

14% YoY. In the China market, TCLM sold 3.26m TVs, down 21.7% YoY.

Overseas TV shipments totalled 4m units, up 26.1% YoY due to 109.1% YoY

increase in original equipment manufacture (OEM) sales. Blended gross margin

was 18.5% in 2Q 2014 (China market achieved gross margin of 24.0% in 2Q

2014), improving by 5.5ppt quarter-on-quarter (QoQ). The pick-up in gross

margin was partly due to launching of new products. In the China market new

products accounted for 54% of total shipments in 2Q 2014 vs. 8% in 1Q 2014.

TCLM announced that the group’s Aug 2014 sales volume of LCD TV in China

market reported YoY decline of 13.9% to 752,816 sets. Sales volume of smart

TVs in China market was 247,055 sets, up 38.1% YoY. The YoY decline in TV

shipments in Aug 2014 shouldn’t create concerns about the group’s

performance. Recall that TCLM cleared up inventory in 3Q 2013 and 4Q 2013

after the end of the subsidy programme in May 2013. TLCM’s gross margin for

its China operation dropped to 15.8% in 3Q 2013 and 4Q 2013. The group has

adjusted its product mix in 2Q 2014 and sold more larger-size and high-definition

TVs, which offer higher margins. Gross margin for TCLM’s China operations

rebounded to 16.8% and 24.0% in 1Q 2014 and 2Q 2014 respectively. Despite a

YoY decline in China TV shipments, we believe TCLM is on the right track to turn

around in 3Q 2014 and 4Q 2014 vs. a net loss in 3Q 2013 and 4Q 2013.

TCLM’s Aug 2014 overseas LCD TV volume increased 35.3% YoY to 783,804

sets. Of these, the group’s LCD TV sales volume in emerging markets increased

by 21.9% YoY to 440,359 sets while its LCD TV sales volumes in North

American markets and strategic OEM business were strong, with increases of

43.0% and 97.9% YoY, respectively.

TCL Group created an O2O platform (Kuyu) from the integration of resources in

Kuyu electronic commerce, Speed Distribution, Koyoo Service and TCL

experience stores and specialty stores. TCLM now owns a 16% stake in Kuyu.

The O2O strategy adopted by TCLM will enhance overall profitability as the

group streamlining the distribution and sales network. TCLM targets to improve

operating margin through cutting down the number of layers in the distribution

channels.

Recap on 1H 2014 results…

Shift in product mix should enhance profita-

bility despite decline in domestic shipments

Benefit from pick-up in overseas demand.

O2O strategy to enhance profitability…

TCL MULTIMEDIA TECHNOLOGY HOLDINGS (TCLM) [1070.HK]

Figure 1: Framework For Development of New Business

Source: Company Data

Figure 3: Gross Margin Trend

Source: Company Data

Figure 2: Developing New Business With Partners

Source: Company Data

Figure 4: ASPs Trend

Figure 5: TCLM LCD TV Market Share

Source: Company Data

Figure 6: Shareholding Structure

Source: Company Data

Source: Company Data

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Gross margin (China Market) Gross margin (blended)

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1Q2011 3Q2011 1Q2012 3Q2012 1Q2013 3Q2013 1Q2014

LCD TV ASPs (China Market)

LCD TV ASPs (blended)

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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 :