Sector

Rating

Price targetHK$1.31

52wk H-L (HK$) 1.81-1.02

Market cap (HK$) 3,169.4m

Shrs outstanding 2,419.4m

Main ownership

12/16A 12/17A 12/18E 12/19E

EPS(HKD) 0.06 0.01 0.02 0.02

P/B(x) 0.9 0.8 0.7 0.6

P/E(x) 20.8 115.8 80.6 59.9

EV/EBITDA 7.9 13.2 12.2 10.7

Div. yield(%) 0.6 n.a n.a n.a

ROE(%) 4.3% 0.8% 3.8% 3.3%

ROA(%) 1.6% 0.3% 1.4% 1.4%Sources: Company data, Bloomberg, Anli research estimates

Sources: Bloomberg as of 27 Aug, 2018

Fig.1: Valuation comps

P/B(x)

2017A 2018E 2019E 2017A

2342 HK COMBA TELECOM SY 404 1.31 115.8 80.6 59.9 0.8 0.3 0.8 4.0 15.9 -12.7

763 HK ZTE-H 10,695.00 14.82 11.8 n.a 12.2 1.7 3.6 15.7 7.1 -26.6 -49.5

947 HK MOBI DEVELOPMENT 88 0.84 n.a n.a n.a 0.5 -2.2 -4.1 5.0 -27.0 -43.6

1155 HK CENTRON TELECOM 31 0.29 1.5 n.a n.a 0.1 4.5 7.4 0.0 -44.2 -38.3

552 HK CHINA COMM SER-H 1,294 5.85 13.0 11.8 10.5 1.2 4.1 9.9 -0.2 39.6 12.2

Average 35.5 46.2 27.5 0.9 2.1 5.9 n.a n.a n.a

002792 CH TONGYU COMMUNI-A 964 29.20 59.6 34.0 24.0 3.5 3.9 5.9 8.6 -18.3 -17.9

300597 CH JILIN JLU COMMUN 519 14.75 81.9 n.a n.a 4.9 5.4 7.3 3.4 -11.3 -29.3

002194 CH WUHAN FING -A 331 4.00 n.a n.a n.a 1.6 -20.0 -25.8 5.0 -54.4 -61.2

300050 CH DINGLI COMMUNI-A 462 5.67 32.7 14.9 11.0 1.1 3.1 3.7 3.3 -45.9 -28.0

300310 CH GUANGDONG EAST-A 749 5.72 21.6 15.8 12.0 1.4 6.3 7.8 1.1 -54.6 -50.6

Average 49.0 21.6 15.7 2.5 -0.3 -0.2 n.a n.a n.a

CSCO US CISCO SYSTEMS 217,838 46.32 20.4 15.5 14.2 5.0 0.1 0.2 0.0 47.3 20.9

JNPR US JUNIPER NETWORKS 9,854 28.58 22.7 16.2 14.1 2.3 1.8 3.5 0.0 3.8 0.3

IBM US IBM 133,301 146.04 10.3 10.6 10.4 7.2 4.8 31.2 0.0 1.6 -4.8

Average 17.8 14.1 12.9 4.6 2.2 11.6 n.a n.a n.a

Source: Bloomberg as of 27 Aug 2018, Anli research

Px % chg.

YTDROA (%) ROE (%)

P/E(x)

A share TMT

International TMT

Px % chg.

WTD

Px % chg.

1 yr

H share TMT

Ticker Company name Mkt Cap (US$m) Last Price

HK$1.40

TUNG LING FOK (32.79%)

Kimmy Tong/+852 23235118/kimmytong@anli.com.hk

Price performance

Research Analyst

Key indicator forecast

Price (HK$/shr) as of 27 Aug, 2018

August 27, 2018

Comba Telecom (2342.HK); FY2018E result looks challenging; HOLD

Key data

TMT

HOLD

FY1H18 earnings missed. Comba Telecom’s net profit was -77.5% YoY to HK$21m in FY1H18.Gross profit margins remain flat while operating and net margins were dropped significantly from5.5%/3.4% to 1%/0.8%, respectively. The bottom line performance was even worse than the topline, given: 1) Higher SG&A and R&D expenses for 5G development; 2) Higher finance cost; 3)No profit contribution from JV & an associate. Revenue generated from clients also declined by8.3% YoY though overseas customers and China Mobile’s revenue increased. These positiveeffects were not enough offsetting negative impacts from huge operating expenses. At such, werevised down our full year growth target from 8.1% YoY to 6% YoY. No interim DPS was declared.

Diversified client base. More profit from oversea clients & core equipment manufactures –segment revenue contribution jumped 48.3% YoY to HK$945m, accounting for 37.9% of Comba’srevenue in FY1H18, vs. 23.4% in FY1H17. A robust growth was thanks to variety new products tooffer oversea customers and strengthening strategic cooperation with leading internationalequipment manufacturing. At the same time, the revenue contribution from China top threeoperators has been slowed down due to deferred rollout of projects.

Business unaffected by US-China trade war. Management mentions that any potential US-China trade war conflicts had not been affected, nor will it affect the Co.’s business structure asmost of its chips not only come from US but also in Taiwan through third-party agents.

We changed our rating from BUY to HOLD and revised down a TP from HK$1.60/shr toHK$1.40/shr, implying a 6.8% upside. We think Comba Telecom full year result lookschallenging, given higher capex for 5G development and slowed down of client’s revenuecontributions. However, we believe that Comba Telecom has a steadily progressed along the pathto 5G, but current valuation is demanding. Key risks; Longer than expected transitional phase to5G solutions, delayed tender bidding schedules for wireless network equipment; large volatility inforeign currency prices.

00.20.40.60.811.21.41.61.82

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HK$/shrPtsHangseng Index (LHS)

Comba (2342 HK) (RHS)

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Source: Company data, Anli research estimates Source: Company data, Anli research estimates

Source: Company data, Anli research Source: Company data, Anli research

Source: Company data, Anli research Source: Company data, Anli research

Source: Company data, Anli research Source: Company data, Anli research

August 27, 2018

Fig.2: We revised down the revenue growth in 2018E given

disappointed interim result Fig.3: We forecast net margins remain flat in this year

Fig.4: Revenue dropped 8.4% YoY in FY1H18 at HK$2,493.7m

Fig.5: Company's interim margins slowed down given higher

operating and R&D expenses

Fig.8: Cost structure measurement was controllable in prior

year

Fig.9: R&D expenses tick up in preparation for China's 5G

development

Fig.6: Revenue contribution from overseas clients increased

while China top three operators declined

Fig.7: Antennas dominates and remains company main

revenue contribution segment

6,733.2

6,770.9

5,954.3 5,563.7

5,894.8

6,602.2

-20%

-10%

0%

10%

20%

0

2,000

4,000

6,000

8,000

FY14 FY15 FY16 FY17 FY18E FY19E

HK$mCompany revenue by full year

26.1%28.3% 29.0%

25.8% 24.7% 26.1%

3.0%4.9% 4.2%

0.9% 1.3% 1.5%

2.2% 3.1% 2.6%0.5% 0.7%

0.8%0%

10%

20%

30%

40%

FY14 FY15 FY16 FY17 FY18E FY19E

Margins analysis

Gross margin(%) Operating margin(%) Net margin(%)

3,023.6 3,345.3

3,099.0

2,721.9 2,493.7

-20%

-10%

0%

10%

20%

0

1,000

2,000

3,000

4,000

FY1H14 FY1H15 FY1H16 FY1H17 FY1H18

HK$m Company revenue by interim

28.2% 29.1% 30.1%28.3% 28.4%

3.7%5.5% 5.5% 5.5%

1.0%2.5% 3.4% 3.7% 3.4%

0.8%0%

10%

20%

30%

40%

FY1H14 FY1H15 FY1H16 FY1H17 FY1H18

Margins analysisGross margin(%) Operating margin(%) Net margin(%)

15% 8%

31%

16%

25%

27%

4%

6%

7%

23%38%

0%

20%

40%

60%

80%

100%

FY1H17 FY1H18

Revenue breakdown by customers

China Unicom China Telecom China Mobile ETL Enterprise Int'l

46%53%

27%23%

4%24%

16%

4% 3%

0%

20%

40%

60%

80%

100%

F1HY17 FY1H18

Revenue breakdown by business

Antennas Services Operator Business Network System Others

R&D, 4.40%

S&G, 9.60%

Admin, 9%

Finance cost, 0.80%

Others, 0.80%Tax, 2.10%

Cost structure mix by FY1H17

As % of total

R&D, 5.70%

S&G, 10.20%

Admin, 12.30%

Finance cost, 1.20%

Others, 0.80% Tax, 0.70%

Cost structure mix by FY1H18

As % of totalrev. 30.9%

2

FY16 FY17 FY18E FY19E FY16 FY17 FY18E FY19E

5,954.3 5563.7 5,894.8 6,602.2 PP&E 538.0 1106.9 1,217.6 1,339.3

(4,225.9) (4,126.7) (4,437.2) (4,881.0) Goodwill & intangibles assets 237.9 1101.5 1,186.4 1,279.7

1,728.4 1,437.0 1,457.6 1,721.2 Others 691.9 368.9 426.1 466.9

173.7 123.0 135.3 148.9 Non-current asset 1,467.8 2577.3 2,830.1 3,085.9

(227.6) (331.3) (347.9) (417.5) Inventories & trade receivables 5,200.4 5883.1 6,471.3 7,118.4

(1,253.7) (1,086.2) (1,075.3) (1,239.8) Others 688.3 1020.4 919.6 1011.6

Other expenses (119.1) (41.5) (41.0) (49.2) Restricted bank deposits 178.2 234.8 281.7 309.9

Share of results of JV (0.1) (0.9) - - Cash 1,420.2 1176.1 1,058.5 1,164.4

Share of results of an associate (2.3) (1.5) - - Current asset 7,487.1 8314.4 8,731.1 9,604.3

Finance cost (47.0) (47.9) (54.1) (64.9) Total assets 8,954.9 10,891.7 11,561.2 12,690.2

PBT 252.2 50.7 74.6 98.7 Trade & other payables 3,999.1 4745.5 4,557.2 5,012.9

Income tax (99.7) (29.2) (35.0) (45.3) Current tax payable 11.2 - - -

Minority interest (0.1) 5.7 (0.2) (0.4) Short-term loans 693.7 1088.5 1,197.3 1,317.1

Net Profit 152.4 27.2 39.4 53.0 Others 70.5 69.9 83.9 83.9

Current liabilities 4,774.5 5903.9 5,838.4 6,413.9 Earning growth

drivers FY16 FY17 FY18E FY19E Long-term loans 673.2 493.9 543.3 597.6

YoY growth Deferred tax liabilities 14.2 162.5 178.7 178.7

Revenue -12.1% -6.6% 6.0% 12.0% Total liabilities 5,461.9 6,560.3 6,560.4 7,190.2

Gross profit -9.7% -16.9% 1.4% 18.1% Total equity 3,493.0 4,331.4 5,000.8 5,500.0

Operating profit -23.3% -79.9% 47.1% 32.3% Minority interest (55.5) (565.2) (565.2) (565.2)

Net profit -28.5% -82.1% 44.9% 34.5% Shareholders capital 3,437.5 3,766.2 4,435.6 4,934.8

Margin analysis

Gross margin(%) 29.0% 25.8% 24.7% 26.1% Cash flow (HK$m) FY16 FY17 FY18E FY19E

Operating margin(%) 4.2% 0.9% 1.3% 1.5% Profit before tax 252.2 50.7 74.6 98.7

Net margin(%) 2.6% 0.5% 0.7% 0.8% Depreciation 76.6 108.3 119.1 131.0

COGS/sales(%) 71.0% 74.2% 75.3% 73.9% Amortization 65.7 111.7 122.9 135.2

SG&A/sales(%) 21.1% 19.5% 18.2% 18.8% Interest income (7.9) (11.7) (12.9) (14.1)

R&D/sales(%) 3.8% 6.0% 5.9% 6.3% Working capital changes 25.6 107.5 161.3 177.5

Others 127.1 55.2 86.0 91.7

Ratios FY16 FY17 FY18E FY19E CFO 539.3 421.7 551.0 620.0

Net gearing(%) net cash 11.0% 15.0% 15.0% Income tax paid (127.6) (99.4) (109.4) (109.4)

Current ratio(x) 1.6 1.4 1.5 1.5 NCFO 411.7 322.3 441.6 510.6

ROE(%) 4.3% 0.8% 3.8% 3.3% CAPEX (52.5) (114.6) (137.6) (151.3)

ROA(%) 1.6% 0.3% 1.4% 1.4% Others (483.3) (578.3) (46.9) (38.8)

Inventories days 133 120 123 135 CFI (535.8) (692.9) (184.5) (190.1)

Receivable days 239 274 302 332 Dividends paid (70.2) (19.7) - -

Payable days 266 291 279 307 Increase in debt 9.5 67.9 224.2 246.6

Source: Company data, Anli research estimates Others (46.7) 31.2 170.1 181.7

CFF (107.4) 11.5 170.1 181.7

Net change of cash (231.5) (359.1) 427.2 502.2

FCF 359.2 207.7 304.0 359.3

Company description

SG&A expenses

Research and development costs

COGS

Gross profit

Other income and gains

August 27, 2018

Balance Sheet (HK$m)

Comba Telecom: financial summary

Profit and Loss (HK$m)

Revenue

Comba Telecom (2342.HK) primarily serves as a wireless solutions provider to its customers in the PRC through its national sales and servicesnetwork. The company also offers antennas and subsystems, wireless access, and wireless enhancement to customer worldwide, and has its ownR&D facilities, manufacturing base, and sales and services teams.

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August 27, 2018

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