China Fiber Optic | 3777.HK China Puti Building the ... · Fiber Optic, Sunsea (002313.CH),...

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2 May 2012

Susanna Chui

[email protected]

(852) 2235 7131

Trading data

52-Week Range (HK$)

3 Mth Avg Daily Vol (m)

No of Shares (m)

Market Cap (HK$m)

Major Shareholders (%)

Auditor

Result Due

0.5/1.61

15.23

1,217.3

1,424.2

Zhao Bing (43.22%)

Ernst & Young

1H12: Aug Company description

Founded in 1998, China Optic Fiber is the largest

manufacturer of fiber optic patch cord market in

China, accounting for 21.4% of total sales volume

in 2011. Currently major telecom network

operators in China are its key customers, to which

sales represents 59.5% of total revenue in FY11.

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Building the quality fiber cities

Rating Buy Initiation

Target Price HKD 2.21

Current price

HKD 1.17 Upside +89%

All three major telcom operators have issued 2012 capex guidance.

China’s industry-wide telecom capex is expected to increase 12.9% to

RMB347.1bn. We believe China Fiber Optic, the Chinese largest

manufacturer of fiber optic patch cords, of which products are widely used

in the whole fiber optic network, will be obviously a key beneficiary in this

capex boom.

A leading fiber optic patch cord manufacturer

China Optic Fiber is the largest manufacturer of fiber optic patch

cord market in China, accounting for 21.4% of total sales volume in

2011. We believe its leading market position is attributed to its

superior quality of products, time barrier for new entrants, large scale

production and strong relationship with key customers.

Capacity expansion for the robust demand

China Fiber Optic has been running at full capacity since 2009, even

with capacity growing at CAGR of 44.2% in FY08-FY11. Reasons

are being the expanding market size driven by operators’ capex, and

also increasing market share as customers prefer better quality

products. We believe supply tightness will persist, and China Fiber

Optic’s capacity expansion could support 15.0% revenue growth in

FY12E.

Operators say no to jerry-built projects

Fiber optic patch cord only accounts for around 1% of telecom

operators’ capex, but the operators have to pay high maintenance

cost on low quality products. The increasing awareness in quality

has led to fairly stable ASP of the company’s products. The

company is moving upstream to soft optical cable production. China

Optic Fiber’s GPM will rise to 32.3% in FY12E, we believe.

We initiate coverage on China Optic Fiber with BUY

The company is trading at 3.7x FY12E PER., which is 73.5% lower

than 14.0x of 3M (MMM.US), which has the lowest valuation

amongst peers. We initiate coverage on the stock with target price of

HK$2.21, based on 7.0x FY12E PE and 50% discount to 3M to

account for its smaller scale. Our valuation is well-justified by the

forecast of 13.6% CAGR in EPS over FY11-FY14E.

RMB million FY10A FY11A FY12E FY13E FY14E

Revenue 838 1,257 1,446 1,738 1,969

Operating profit 228 326 395 483 550

Net Profit 182 253 310 380 432

Consensus NP 326 405 469

EPS (RMB$) 0.20 0.24 0.26 0.31 0.35

P/E (x) 4.69 3.92 3.71 3.03 2.67

ROE (%) 26.8 20.8 20.3 19.9 18.4

ROA (%) 14.4 11.5 12.5 12.2 12.1

Sources: Bloomberg, CIRL estimates

China Fiber Optic | 3777.HK

China Puti

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A leading fiber optic patch cord manufacturer

China Optic Fiber is the largest manufacturer of fiber optic patch cords in China. Fiber

optic patch cords are the devices used to connect fiber optic cables and core

equipments, in the exchanges, central offices, cross connection cabinets, optical

distribution boxes, optical terminal boxes and engine rooms of fiber optic

communication systems.

Exhibit 1: Fiber optic network

Source: Company data, CIRL

Exchange/ Central office

Distribution / terminal box Cross connection cabinet Engine rooms

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Exhibit 2: Fiber optic patch cord


Besides, the company also produces connection and distribution products and

equipment room accessories, including optical distribution frames (ODF), digital

distribution frames (DDF), cross connection cabinet, and optical fiber cable

termination boxes, etc. However, these products are only sold with fiber optic patch

cords for customers’ requirements and accounts for 1.9% of the total revenue.

Exhibit 3: Connection and distribution products and equipment room accessories


Market leader with multiple competitive edges

The fiber optic patch cord market in China is dominated by a few major players, China

Fiber Optic, Sunsea (002313.CH), Centuryman, Longxing and Taiping. Among five of

them, China Optic Fiber is the largest manufacturer in China, accounting for 21.4% of

the total sales volume in 2011. We believe the leading market position is supported by:

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Exhibit 4: Fiber optic patch cord market in China is dominated by a few major players

Source: CCID, CIRL

Superior quality resulting in less light loss

The insertion loss (measuring the loss of signal power resulting from the insertion of a

device) of China Optic Fiber’s main product is less than 0.2dB, while return loss

(measuring the loss of signal power resulting from the reflection) is more than 50dB,

versus below 0.35 dB and above 45 dB respectively of general requirements. The

above figure represents less light-loss and superior quality of the product.

Time barrier for new entrants

Inferior quality of fiber optic patch cord will result in slower speed, higher failure rate

and shortening life of the network. Concerning network quality and potential

maintenance costs, any new entrants will need 5 years to obtain network access

license and qualification from MIIT and operators respectively. The manufacturers

without the license or qualification can only be OEMs of the existing players, which are

running at full capacity.

Strong relationship with key customers

All three major telcom operators are China Optic Fiber’s major customers,

representing 59.5% of total revenue in FY11. The company began to sell to the major

telecom network operators in China since 2001, and established long-term

relationships with them. We believe the strong relationships with key customers can

enable the company to benefit from their increasing spending in upgrading and

expanding their networks.

China Fiber Optic, 21%

Sunsea, 9%

Centuryman, 5%

Longxing, 4%Taiping, 4%

Others, 57%

2011 China Fiber Optic’s market share in China

Marketshare of

thelaregest

two players

are increasing

China Fiber Optic, 19%

Sunsea, 8%

Centuryman, 6%

Longxing, 4%

Taiping, 4%

Others, 59%

2010 China Fiber Optic’s market share in China

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Exhibit 5: China Optic Fiber’s customer mix in FY11


Besides, Mr. Zhao Bing, the chairman and executive director, had worked at

Gaocheng Post and Telecommunications Bureau (now known as the Gaocheng

Branch of China Unicom (762.HK)) from 1994 to 1998. And Mr. Shi Cuiming, the

independent non-executive director, was the chairman of the board and the CEO of

China Telecom (Hong Kong) (now known as China Mobile (941.HK)) from 1997 to

1999, and the executive director and executive vice-president of CU from 2000 to

2004. Key management with years of industry experience enables the company to

gain understanding of the development patterns of the industry and clients as well as

competitiveness in technology.

Large scale of production

The telecom operators often demand manufactures to deliver large volume of fiber

optic patch cords with consistent quality on a timely basis. Scale of production is

thus one of the major consideration factors during telecom operators’ procurement.

Therefore, China Optic Fiber’s winning way is to expand rapidly in response to the

market growth. Its designed annual production capacity has grown from 4mn in 2008

to 12mn in FY11, and is expected to be 18mn in FY12E.

China Telecom34%

China Mobile13%China Unicom

13%

Broadcast and television network

operators6%

Other domestic customers

17%

Overseas17%

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Capacity expansion for the robust demand

China Fiber Optic has been running at full capacity since 2009, even with capacity

growing at CAGR of 44.2% in FY08-FY11. Reasons are being the expanding market

size driven by operators’ capex, and also its increasing market share as customers

prefer better quality products. We believe supply tightness will persist for the company

and therefore China Fiber Optic’s further capacity expansion could support

16.7%/15.0% of sales volume/revenue growth in FY12E.

Intact long-term industry growth potential

In 2011, China had about 127.5 mn 3G subscribers out of a total of 975.7 mn mobile

phone users. While it is more than double the penetration levels a year ago, the

penetration of 13.1% is still low, versus 45.3% in Europe, 29.5% in The Americas and

14.5% in Asia & Pacific. We expect the 3G penetration has a huge room for going up

and will probably increase to ~40% by 2015E, based on the past trend of developed

markets.

Exhibit 6: 3G penetration in China is still low


Exhibit 7: Active mobile broadband subscription penetration

2007 2008 2009 2010 2011E

Europe 13.1% 20.6% 27.6% 35.1% 45.3%

The Americas 8.9% 12.6% 18.3% 25.5% 29.5%

Asia & Pacific 8.3% 9.2% 9.5% 10.7% 14.5%

Africa 1.1% 2.8% 3.7% 5.6% 7.2%

Source: International Telecommunication Union, CIRL

7% 8% 8% 9% 9% 10%11%

12%12%

13% 14% 14% 15%

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2G sub base 3G sub base 3G sub base/ 2G + 3G sub base

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As for fixed line broadband, MIIT has targeted to 250 million broadband users by the

end of 12th Five-Year Plan, averagely covered with 20Mbps+ for urban households,

and 4Mbps+ for rural households. Based on 132.5mn broadband subscribers of CT

and CU in 2011, we expect broadband users to deliver a 17.2% CAGR over

2011-2015E. And operators will bring FTTx (Fiber To The x), which replaces part of

copper network with fiber optic network, to all cities for accelerating broadband speed.

In response to the growing 3G and fixed broadband demand, operators will continue

to increase investment in 3G/4G and mobile networks over the next few years.

Network operators raise capex budget for 2012

In 2012, all three major telcom operators have issued capex guidance. China’s

industry-wide telecom capex is expected to increase 12.9% to RMB347.1bn with

focus on the following areas:

1) CU’s WCDMA (3G) capex increases 66.0% to RMB35.5bn for catering to the

rising data traffic driven by higher penetration of low-end smartphones;

2) CM‘s TD capex surges 91.7% to RMB23.0bn for TD-LTE (4G) migration; and

3) Transmission capex is expected to increase, driven by investment from CM

(48.3% to RMB34.3bn) for preparing high data speed TD-LTE, and CU (66.1% to

RMB25.6bn) for explosive growth of data traffic.

Therefore, fiber optic patch cords, which are widely used in long distance backbone

network, metro level network, wireless access network, and fiber optic access network,

will be on the faster track of growth. CCID also predicts the market size for the fiber

optic patch cords to increase 22.7% to RMB4.48bn in 2012.

Exhibit 8: Telecom operators’ capex is expected to grow 12.9%


146.3 190.2

150.3 159.7 174.1

70.9

112.5

70.2 76.6 100.0

72.0

91.5

70.0 71.3 73.0

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2008 2009 2010 2011 2012E

RM

B b

n

China Mobile Total China Unicom Total

China Telecom Total YoY

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Exhibit 9: Focus of telecom operators’ capex

RMB billion 2008 2009 2010 2011 2012E Contribution 2012E YoY

China Mobile Listco - GSM

Infrastructural networks 79.1 55.6 54.7 73.2 54.1 31.1% -26.2%

Transmission 24.5 29.8 28.6 23.1 34.3 19.7% 48.3%

Plant & infrastructure 10.9 11.6 11.2 11.6 21.1 12.1% 82.5%

Support systems 9.5 10.4 8.7 7.7 10.6 6.1% 36.9%

New technologies & new

businesses 8.2 15.5 16.2 7.7 7.9 4.5% 2.6%

Others 4.1 6.5 5.0 5.1 4.0 2.3% -23.0%

China Mobile Parentco

TD 9.0 58.8 23.0 12.0 23.0 13.2% 91.7%

Railcom 1.0 2.0 3.0 19.2 19.2 11.0% 0.0%

China Mobile Total 146.3 190.2 150.3 159.7 174.1 100.0% 9.0%

China Unicom Listco

Mobile Networks- 3G 36.4 15.7 21.4 35.5 35.5% 66.0%

Mobile Networks - 2G 33.1 20.6 7.5 4.6 3.2 3.2% -30.4%

Broadband & Data 9.1 18.8 22.5 25.7 25.8 25.8% 0.5%

Transmission 18.3 25 17.0 15.4 25.6 25.6% 66.1%

IT & Others 10.4 11.7 7.6 9.5 9.9 9.9% 4.1%

China Unicom Total 70.9 112.5 70.2 76.6 100.0 100.0% 30.6%

China Telecom Listco

Broadband & Internet 22.0 20.6 27.6 33.1 37.8 51.8% 14.2%

Others 26.4 17.5 15.4 16.5 16.2 22.2% -1.5%

China Telecom Parentco

CDMA 23.6 53.5 27.0 21.7 19.0 26.0% -12.4%

China Telecom Total 72.0 91.5 70.0 71.3 73.0 100.0% 2.5%

Total 289.2 394.2 290.5 307.5 347.1 12.9%


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Exhibit 10: Fiber optic patch cord market in China

Source: CCID, CIRL

Large players achieve above industry average growth

Fiber optic patch cords account for a small proportion of value chain, but significantly

influence the whole fiber optic network. It is reported some districts have encountered

network problems, because of low price fiber optic products.

Exhibit 11: News reports concern the quality of fiber optic products

Source: Sina, Sohu, CIRL

1.6

2.3 2.8

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0%

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24%

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2008 2009 2010 2011 2012E 2013E 2014E

RM

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China market size China (YoY)

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The usage life of networks will be much shorter than expected 25-30 years. As a result,

the operators have to pay high maintenance cost on low quality products. And even

after being fixed by replacing inferior devices with quality ones, fiber optic network

have been misunderstood to be unreliable compared with copper network.

Therefore, the telecom operators are getting serious about those problems. We

believe they will probably revisit procurement practices to put more emphasis on the

quality. The large players providing quality products will keep on gaining market share.

China Fiber Optic’s market share in China is also surging (2011: 21.4% versus 2010:

18.6%).

Increase capacity for demand growth

China Fiber Optic is running at full capacity however (18mn sets of sales volume

versus 12mn sets of capacity in FY11). On the back of market growth and gaining

market share, the supply tightness will persist among strong players. The company

originally plans to increase capacity from 12mn to 18mn sets in FY12E. However, the

management has recently expressed concern about the recruitment difficulties in

Shijiazhuang Industrial Park. We expect the actual annual capacity will probably only

rise to 14-15mn in FY12E.

Exhibit 12: China Optic Fiber’s large scale production


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Exhibit 13: Production capacity and sales volume

Source: Company data, CIRL (The designed annual production capacity is based on the assumption of operating three 8-hour shifts per day and 22 days per month. The utilization rates exceed 100% because the number of actual production days have exceeded the assumed number of production days)

The new capacity will be taken up by not only telecom operators and cable-TV

broadcasting companies in China, but also customers from overseas. China Fiber

Optic is selling products in New Zealand and Ireland currently and targeting to

penetrate into one new international market each year. We expect further capacity

expansion to support 16.7%/15.0% of sales volume/revenue growth to

21mn/RMB1,445.6mn in FY12E.

Though the competitors are also facing production bottleneck and expanding capacity,

CCID expects its four major competitors’ capacity in 2012 to increase 18.0%, which is

slower than the industry sales growth. Therefore, we believe supply tightness will

persist, providing a favorable market environment for China Fiber Optic to ramp up its

planned new capacity.

4

9 9

12

18

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25

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43%

107%120%

149%

116% 116% 116%

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120%

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FY08 FY09 FY10 FY11 FY12E FY13E FY14E

mn

se

ts

Production capacity Sales Volume Sales volume/ capacity (%)

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Stable ASP and potential margin growth

Fiber optic patch cord only accounts for around 1% of telecom operators’ capex, but

the operators have to pay high maintenance cost on low quality products. The

increasing awareness in quality has led to fairly stable ASP of the company’s products.

The company is moving upstream to soft optical cable production. China Optic Fiber’s

GPM will rise to 32.3% in FY12E, we estimate.

Stable ASP

China Optic Fiber’ ASP of fiber optic patch cords is fairly stable for the last four years,

with oversea model staying at USD55.0 per set and domestic model even rising from

RMB47.6 to RMB58.6 per set. The price difference between domestic and oversea

models is mainly attributed to higher specifications required (i.e. using glass optical

fibers instead of plastic ones).

Exhibit 14: Stable ASP of fiber optic patch cords


We believe the stable ASP is attributed to network operators’ relatively low price

sensitivity to the products. Fiber optic patch cord market size only accounts for around

1% of telecom operators’ capex. As we have mentioned above, the operators have to

pay high maintenance cost on low quality products. Taking the potential cost of

replacement and reputation damage due to inferior quality into consideration, telecom

operators are concerned more about the quality of fiber optic patch cords than the

price. Therefore, largest players, which are already running at full capacity, can enjoy

stable ASP.

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RM

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Domestic Oversea Model #1 Oversea Model #2

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Exhibit 15: Fiber optic patch cord market is small to telecom operators’ capex

Source: CCID, CIRL

Vertical integration enhances margins

Exhibit 16: Cost of key raw materials


Raw material accounts above 90% of China Optic Fiber’s COGS. The principal raw

materials are ceramic ferrules and soft optical cables. The cost of former is stable at

RMB2.1 per unit for domestic model, except rising to RMB2.6 due to Japan

earthquake in FY11. But as for the latter, the cost is fluctuating from RMB0.9 to RMB

1.2 per meter.

1.6

2.3 2.8

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1.2%1.3%

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0.8%

1.0%

1.2%

1.4%

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

2008 2009 2010 2011 2012E

RM

B b

n

Fiber optic patch cord market size

Fiber optic patch cord market size/ telecom operator's capex

2.1 2.1 2.1

2.6

1.2 1.2

0.9 1

0.0

0.5

1.0

1.5

2.0

2.5

3.0

FY08 FY09 FY10 FY11

RM

B

Ceramic ferrules (per unit) Soft optical cables (per meter)

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In order to better manage raw material cost, the company has added 4 production

lines of soft optical cables to increase capacity by 400% from 13,000km to 65,000km

per annum in FY11, and plan to add 5 production lines to increase capacity by 100%

to 130,000km per annum in FY12E, bringing the self sufficiency ratio to be 30%. The

management expects GPM to improve by 1 percentage point. We believe continuous

stable ASP, together with vertically integrating to soft optical cable production, will

push up the overall GPM to 32.3% in FY12E

Exhibit 17: China Optic Fiber’s GPM


22.5%26.8% 25.3% 26.2% 27.1% 27.9% 27.9%

59.6%

52.8% 53.9%57.9% 58.8% 59.6% 59.6%

47.6%

31.0% 32.0% 31.8% 32.3% 32.8% 33.0%

0%

10%

20%

30%

40%

50%

60%

70%


Domestic Overseas Overall

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Financial analysis and valuation

We forecast revenue to grow by 15.0%/20.2%/13.3% for FY12E/FY13E/FY14E,

mainly driven by 1) network operators’ continuous investment drives the industry

growth; 2) gaining market share due to increasing concern on quality of low price

products; 3) capacity expansion to solve capacity bottleneck.

China Optic Fiber’s GPM will go up to 32.3%/32.8%/33.0% in

FY12E/FY13E/FY14E from 31.8% in FY11, thanks to continuous stable ASP and

vertically integrating to soft optical cable production. Despite of setting up new office to

expand market coverage and constructing a new R&D center, SG&A expense relative

to sales will drop from 5.8% in FY11 to 5.0% in FY12E/FY13E/FY14E because of THE

absence of listing expenses. Net profit will rise 22.6%/22.5%/13.5% to RMB310.4mn/

RMB380.1mn/ RMB431.5mn in FY12E/FY13E/FY14E.

Exhibit 18: Key assumption

2010 2011 2012E 2013E 2014E

Fiber optic patch cords

Sales Volume (mn) - domestic 10.2 17.3 20.1 24.5 27.5

Sales Volume (mn) - oversea 0.6 0.6 0.8 1.1 1.5

ASP - domestic 57.6 58.6 58.6 58.6 58.6

ASP - oversea 347.2 347.2 302.7 247.7 207.7

Revenue 785.3 1,233.5 1,416.8 1,704.1 1,929.6

Other products

Revenue 52.8 23.5 28.8 33.9 39.0

Total

Revenue 838.1 1,257.0 1,445.6 1,738.0 1,968.5

GPM

Fiber optic patch cords - domestic 25.3% 26.2% 27.1% 27.9% 27.9%

Fiber optic patch cords - oversea 53.9% 57.9% 58.8% 59.6% 59.6%

Other product 25.1% 26.3% 27.2% 27.9% 27.9%

Overall 32.0% 31.8% 32.3% 32.8% 33.0%


We initiate coverage on China Optic Fiber with BUY. The company is trading at

3.7x FY12E PER., 73.5% lower than 14.0x of 3M (MMM.US), which has the lowest

valuation amongst peers. We initiate coverage on the stock with target price of

HK$2.21, based on 7.0x FY12 PE and 50% discount to 3M to account for its smaller

scale. Our valuation is well-justified by the forecast of 13.6% CAGR in EPS over

FY11-FY14E.

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Risk factors

Downside risks include 1) failure to implement expansion plans; 2) lower-than

-expected demand for fiber optic patch cords; 3) more intense competition than

expected from other fiber optic patch cord manufacturers, leading to reduced prices,

gross profit and market share.

Exhibit 19: Financial statements


Exhibit 20: Peer comparison

Source: Bloomberg, CIRL

Income statement Cash flow

Year to Dec (RMB mn) FY10A FY11A FY12E FY13E FY14E Year to Dec (RMB mn) FY10A FY11A FY12E FY13E FY14E

Revenue 838 1,257 1,446 1,738 1,969 Pre-tax profit 212 299 366 449 509

Gross profit (reported) 268 400 467 570 649 Taxes paid (1) (6) (84) (56) (68)

EBITDA 256 366 440 537 611 Depreciation 29 39 45 54 62

Depreciation (29) (39) (45) (54) (62) Associates 0 0 0 0 0

EBIT 228 326 395 483 550 CFO bef. WC change 240 333 328 447 502

Net interest income (exp.) (16) (27) (29) (34) (41) Change in working cap (154) (27) (82) (208) (21)

Associates 0 0 0 0 0 Cashflow from operation 86 306 246 239 482

Exceptionals/others 0 0 0 0 0 CAPEX (105) (233) (100) (161) (125)

Profit before tax 212 299 366 449 509 Free cash flow (19) 73 146 79 356

Tax expenses (30) (46) (56) (68) (78) Dividends (1,155) (51) 0 0 0Minority interest 0 0 0 0 0 Balance sheet adj. (24) (82) 0 0 0

Net profit 182 253 310 380 432 Sharse issued 1,153 289 0 0 0

Dividends -1,206 0 0 0 0 Others 0 0 0 0 0

Net cash flow (45) 229 146 79 356

Balance sheet Net cash (debt) start (100) (145) 84 230 308

Year to Dec (RMB mn) FY10A FY11A FY12E FY13E FY14E Net cash (debt) at year-end -145 84 230 308 664

Cash & equiv 129 582 799 1,010 1,470

Trade receivables 564 751 761 1,057 1,002 Ratios

Other receivables 0 0 0 0 0 Year to Dec (RMB mn) FY10A FY11A FY12E FY13E FY14E

Inventories 25 28 33 40 42 Growth rate (%)

Other current assets 11 23 23 23 23 Revenue 29.8 50.0 15.0 20.2 13.3Fixed assets 472 665 720 826 890 EBITDA 31.7 42.5 20.4 22.0 13.8Intangible assets 16 16 16 16 16 EBIT 33.7 43.3 21.1 22.2 13.9Investment, associates etc 51 133 133 133 133 Net profit 30.8 39.2 22.6 22.5 13.5

Total assets 1,266 2,198 2,485 3,105 3,576 Fully diluted EPS NA 19.6 5.5 22.5 13.5

Margins (%)

Account payables 20 105 37 133 59 Gross margin 32.0 31.8 32.3 32.8 33.0Other payables 0 0 0 0 0 EBITDA 30.6 29.1 30.5 30.9 31.1Short-term debt 274 498 570 702 806 EBIT 27.2 26.0 27.3 27.8 27.9Other current liabs 288 364 336 349 358 Net margin 21.7 20.1 21.5 21.9 21.9

Long-term debts 0 0 0 0 0 Other ratios

Deferred tax and others 8 11 11 11 11 ROE (%) 26.8 20.8 20.3 19.9 18.4Other long-term liabs 0 0 0 0 0 ROA (%) 14.4 11.5 12.5 12.2 12.1

Total liabilities 589 978 954 1,194 1,234 Net gearing (%) 21.4 (6.9) (15.0) (16.1) (28.4)

Interest coverage (x) 14.4 11.9 13.7 14.1 13.5Share capital 0 8 8 8 8 Receivables days 245.5 218.1 192.1 222.0 185.8Reserves 677 1,212 1,523 1,903 2,334 Payables days 12.5 44.8 13.9 41.5 16.4

Shareholders' equity 677 1,220 1,530 1,911 2,342 Inventory days 10.9 8.3 8.2 8.4 7.8

Minorities 0 0 0 0 0 Effective tax rate (%) 14.2 15.2 15.2 15.2 15.2

Total equity 677 1,220 1,530 1,911 2,342

Net cash (debt) -145 84 230 308 664

Price Market cap PE (x) PB (x) Dividend yield (%)

Ticker (HKD) (HKD mn) FY11A FY12E FY13E FY11A FY12E FY13E FY11A FY12E FY13E

China Fiber Optic Patch Cord ManufacturersSunsea-A 002313 CH 29.38 5,876 33.6 24.4 19.0 4.6 3.9 3.2 0.6% 1.2% 1.0%Suzhou New Sea-A 002089 CH 13.62 4,805 22.2 16.6 13.9 3.9 3.3 2.7 0.9% 1.8% 2.3%Jiangsu Wutong-A 300292 CH 19.89 1,327 - 23.2 17.3 - 2.4 2.2 0.0% 0.6% 1.5%Average 18.6 21.4 16.7 2.8 3.2 2.7 0.0 0.0 0.0

Global Fiber Optic Patch Cord ManufacturersAmphenol Corp-A APH US 455.28 74,363 18.9 17.5 15.7 4.4 3.8 3.2 0.1% 0.7% 0.7%3M Co MMM US 693.32 481,077 14.7 14.0 12.8 4.0 3.6 3.2 2.5% 2.6% 2.8%Sumitomo Chem Co 4005 JT 32.03 53,029 23.7 821.4 10.9 1.1 1.1 1.0 2.6% 2.8% 3.1%Tyco Intl Ltd TYC US 446.67 206,747 15.7 15.7 13.8 1.9 1.9 1.8 1.7% 1.8% 2.0%Average 18.3 217.1 13.3 2.8 2.6 2.3 0.0 0.0 0.0

Ch Fiber Optic 3777 HK 1.17 1,424 3.9 3.7 3.0 0.9 0.8 0.6 0.0% 0.0% 0.0%

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Rating Policy

Rating Definition

Stock Rating Buy Outperform HSI by 15%

Neutral Between -15% ~ 15% of the HSI

Sell Underperform HSI by -15%

Sector Rating Accumulate Outperform HSI by 10%

Neutral Between -10% ~ 10% of the HSI

Reduce Underperform HSI by -10%

Analysts List

Antony Cheng Research Director (852) 2235 7127 [email protected]

Hayman Chiu Senior Research Analyst (852) 2235 7677 [email protected]

Kenneth Li Senior Research Analyst (852) 2235 7619 [email protected]

Lewis Pang Research Analyst (852) 2235 7847 [email protected]

Susanna Chui Research Analyst (852) 2235 7131 [email protected]

Analyst Certification

I, Susanna Chui hereby certify that all of the views expressed in this report accurately reflect my personal views about

the subject company or companies and its or their securities. I also certify that no part of my compensation was / were,

is / are or will be directly or indirectly, related to the specific recommendations or views expressed in this report / note.

Disclaimer

This report has been prepared by the Cinda International Research Limited. Although the information and opinions

contained in this report have been compiled or arrived at from sources believed to be reliable, Cinda International

cannot and does not warrant the accuracy or completeness of any such information and analysis. The report should not

be regarded by recipients as a substitute for the exercise of their own judgment. Recipients should understand and

comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers

prior to any investment decision. The report may contain some forward-looking estimates and forecasts derived from

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