TCL Communication Technology Holdings Limited BUY€¦ · TCL Communication Technology Holdings...

Initiation 10 Feb 2015

TCL Communication Technology Holdings Limited

BUY

2618.HK / 2618 HK

China

Mobile technology – Mobile devices

Kingsway Financial Services Group Limited Please see the important disclaimer and disclosures (if any) at the end of this report

Smartphones blasting out of China HK$7.20*

Target price: HK$10.30

Upside: 43%

We initiate coverage on TCL Comm with a BUY rating and a target price of HK$10.30. The company

primarily manufactures and sells feature phones, smartphones and tablets in emerging regions such

as Latin America (LATAM) and Europe, Middle East and Africa (EMEA). We believe TCL Comm will

experience strong and sustainable growth due to the following reasons:

► Strong shipment growth driven by LATAM and EMEA markets – Overseas shipment in

2014 reached 65.9m units, up 30.8% from 2013. Given low penetration rates of mobile devices

in LATAM and EMEA, we believe shipments in the aforesaid regions are expected to attain over

20% CAGR for the next 3 years.

► Migration to smartphones in key markets boost ASP – Currently, around 65% of shipments

are smartphone shipments. ASP of smartphones can reach US$80 compared to ~US$15 for

feature phones. We expect migration to smartphones will be the key growth driver in the next 2

years and up-trading will fuel subsequent growth.

► Superior margins compared to Chinese peers – TCL Comm consistently achieves a GPM of

~19% for the past 7 quarters. Compared to Chinese peers like Lenovo and Coolpad’s ~13%

GPM for the past year, TCL Comm has done a terrific job maintaining its GPM cutting costs,

strategically control customers’ spec expectations and exploring markets willing to pay higher

prices, i.e. the Americas. Our channel checks reveal that its ASP for smartphones is among the

lowest in China and India; and highest in North America.

► TP=HK$10.30, based on 10x 2015E P/E – We expect the company to generate a revenue of

HK$30.2b/39.4b/51.3b in 2014/15/16 respectively. Net profit for the next 3 years is expected to

be HK$933m/HK$1.24b/HK$1.58b. Our TP is based on 10x 2015E P/E, which is near TCL

Comm’s historical mean and current peer levels.

► Downside risks – 1) Price war with other smartphone brands. 2) Slower than expected network

rollouts by carriers. 3) Geopolitical events. 4) Capital controls and FX swings.

Earnings Forecasts & Valuation Summary

Year ended 31 Dec 2012A 2013A 2014E 2015E 2016E

Sales (HK$’m) 12,031 19,362 30,281 39,406 51,331

EBITDA (HK$’m) (72) 484 2,090 2,881 3,713

Net profit (HK$’m) (208) 313 933 1,236 1,575

EPS - Fully diluted (HK$ ) (0.185) 0.266 0.738 1.030 1.313

YoY change (%) N/A N/A 177.7 32.6 27.4

PER (x) 26.9 49.4 9.3 6.8 5.3

DPS (HK$) * N/A N/A 0.155 0.206 0.263

Yield (%) N/A N/A 2.1 3.0 3.8 ROE (%) -9.0 12.9 24.5 25.5 25.5 Net debt/equity (%) 218.3 113.2 130.8 107.6 64.7 Source: Company data, Sunwah Kingsway Research estimates

HSI: 24,521.00

*Closing price as at 9 Feb 2015

Share Data

52week Hi/Lo (HK$) 10.96/6.60

Avg. daily t/o (US$m) 3.582

Market Cap. (US$m) 1,137

Total issued shares (m) 1,224

Auditor E&Y

Public float (%) 33.95%

Major shareholder:

TCL Corporation 60.07%

Value Partners 5.98%

Source: HKEx & Bloomberg

Company Profile

TCL Comm manufactures and sells

mobile devices and internet products.

The company sells to over 120

countries worldwide including China,

the Americas and EMEA.

Share Price Chart

0

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Source: Bloomberg

Phelix Lee

(852) 2283 7618 [email protected]

www.kingswayresearch.com

TCL Communication | 10 Feb 2015 2

Valuation

We initiate coverage on TCL Comm with a “BUY” rating at a target price of HK$10.30. Our TP

implies a 10x 2015E P/E. We use P/E as our valuation basis.

The company has effectively only ONE operating segment, which is the manufacture and sale of

mobile devices. We derive our P/E of 10x 2015E P/E from the following factors: 1) Strong volume

growth prospects due to above-peer exposure to LATAM and EMEA regions; 2) ASP are rising due

to smartphones beginning to replace feature phones in emerging markets; 3) upside potential in the

Palm acquisition leading to North American shipment growth; 4) increasing availability of 3G and

4G connectivity in LATAM and EMEA, which may lead consumers to demand more higher-price

3G/4G handsets.

Valuation comparison

The closest peers of TCL Comm are Coolpad and HTC, which have their own brand(s),

manufacture mobile devices and related accessories. Other major peers include Samsung

Electronics, LG Electronics, Apple who produce mobile devices and other consumer electronics.

Peer Valuation Table

Source：Bloomberg, closing price @, 9 Feb 2015 Sunwah Kingsway Research


Company description

The only smartphone maker in China with 2-end strategy

TCL Comm manufactures and sells mobile devices and internet products. The company sells to

over 120 countries worldwide including China, the Americas and EMEA. The company sells mobile

devices by leveraging its parent company’s ‘TCL’ brand in China and ‘Alcatel’ brand overseas

(including Hong Kong). In 4Q14 alone, TCL Corporation has acquired an additional 42.85m shares

or 5.97% of TCL Comm at an average price of HK$7.55 per share.

Shareholder structure

Source: HKEx, Company data

Company milestones

Year Milestone

2004

TCL Comm was established as the holding company of Huizhou TCL Mobile

Listed on HKEx

Established Alcatel Mobile via a 55% JV with Alcatel Lucent

2005 Acquired the remaining 45% stake from Alcatel Lucent, Alcatel Mobile became wholly-owned subsidiary

of TCL Comm

2007

Announced new strategy called “The Creative Life”

Re-launched Alcatel brand in China

Extended Alcatel brand license to 2024

Cooperated with RIM Company (now Blackberry Ltd.) to introduce Blackberry 8700 to China

2008 T-Mobile became a customer of TCL Comm

2010

Launched first 3G Android smartphone

Named ‘fastest growing major mobile vendor in the world’ by Strategy Analytics and exceeded 4m

monthly shipment in November

2011

Opened Chengdu R&D centre

Manufactured for Vodafone the Vodafone 555 Blue, first handset with Facebook pre-installed

Launched first tablet, i.e. the TCL Pad16/Alcatel One Touch T60

2012 Launched liquid repellent smartphones –TCLS800 and TCLS600

2013

Launched the slimmest smartphone at the time, i.e. TCLS850/Alcatel One Touch Idol Ultra at 6.45mm

Commenced production of new manufacturing facility in Huizhou

Partnered with Hong Kong Applied Science and Technology Research Institute to develop 4G

applications and research 5G wireless technology

2014 TCL Corporation, TCL Comm and TCL Multimedia (1070 HK) formed JV for smart home initiative

Partnered with Cisco to set up Enterprise Cloud Services Platform

2015 TCL Comm acquired ‘Palm’ brand from Hewlett-Packard, Inc.

Source：Company data


Industry Overview

3G/4G network overview

Emerging regions including Sub-Saharan Africa (SSA), Latin America (LATAM) and Middle East

and North Africa (MENA) represent huge growth opportunities for TCL Comm due to their low

smartphone penetration, rising income levels and increasingly available 3G/4G network services

offered by national and regional carriers. The following tables summarize carrier availability of

3G/4G services of LATAM, Africa and Middle East respectively.

LATAM 3G/4G carrier availability summary

Source: Carriers, Census data, Sunwah Kingsway Research

As of early Jan 2015, out of the 44 countries/regions in LATAM, only 4 nations have to provide

3G/4G connection, representing just about 1% of total population of the continent. There are 21

countries offering 4G services at the moment and 12 more planning to do so within the next 2-3

years. We believe carriers have incentives to promote low-end smartphones in order to increase

their own revenues via data tariff and other value-added services. In turn, TCL Comm will benefit

immensely from its good relations with carriers in the region, and sell many more low-end

smartphones.

LATAM sales account for 51.5% of TCL Comm’s revenue for 9M14. At the moment, TCL Comm

has working relationships with América Móvil, which in turns owns major carriers like Claro, TelCel

and TelMex; as well as Telefónica, Tigo and Digicel. The four major telecom companies are

estimated to have over 80% market share in LATAM, which translates into a formidable distribution

channel for TCL Comm.

Africa 3G/4G carrier availability summary


Middle East 3G/4G carrier availability summary



For Middle East and Africa (including SSA and MENA), out of the 70 countries, only 27 has a carrier

providing 4G services, but widening the scope to 3G services, the figure jumps to 51. With 18

countries planning 4G services, we believe carriers will replicate their LATAM peers and bundle

low-end smartphones with 3G/4G data plans. A caveat is that Middle Eastern and African countries

on average are less stable than other parts of the world, which may significantly delay network

development and user adoption.

The company generates roughly 10-15% 9M14 sales from Middle East and Africa. TCL Comm has

partnerships with major carriers like MTN, Orange, Airtel, Vodafone and Telefónica in Middle East

and Africa; which constituted an estimated 60% market share in the region. Again, this shows TCL

Comm is facing a growing market and has the necessary distribution channels to capture the

opportunity.

Smartphone penetration overview

SSA and LATAM are regions with lowest smartphone penetration in the world. The below table

summarizes current and projected figures of SSA mobile phone users and mobile penetration rates.

SSA mobile user & penetration summary 2013-2018F

Source: GSM Association, Sunwah Kingsway Research estimates

Country-wise, more affluent nations such as Mauritius, Seychelles and South Africa have higher

mobile penetration rates averaging over 70%; as opposed to world’s poorest nations like Burundi,

Niger and war-torn Central African Republic averaging less than 25% in 2013. We believe current

low adoption rates, rising income and high youth population could propel smartphone growth in the

continent, giving plenty of growth space for TCL Comm and other smartphone makers.

In terms of market size, we assume the replacement cycle of SSA phones to be 2.5 years. Using

GSM Association’s numbers, we estimate the addressable market of TCL Comm for the next few

years as follows:

SSA mobile phone market size estimates 2014F-2018F


The addressable market in SSA for TCL Comm is estimated to be about HK$88.3b/101b/120b for

2015/16/17 respectively. If TCL Comm can maintain an estimated 6% market share in these

regions, it may generate revenue of HK$5.30b/6.08b/7.20b in the region for 2015-2017,

representing 17.3% 3-year CAGR from 2014’s estimated HK$4.46b. By these projections, the

region will contribute 13.4%/11.8%/11.0% of TCL Comm’s revenue from 2015-17.


The below table summarizes mobile user numbers and penetration in LATAM.

LATAM mobile user & penetration summary 2013-2018F


Although Brazil leads the way in terms of unique subscribers due to its large populace, the nation

ranked only 2nd in the region in smartphone adoption rates at 32.4% in 3Q14, falling behind

Venezuela’s 45.1%. The continent’s overall smartphone adoption rate is about 28.6% as of 3Q14,

and is projected to reach 59% (496m units) by the end of 2018 and 68% by the end of 2020. We

believe 283m units of new smartphone demand will bring about HK$170b sales from 2015-2018.

Again we estimate TCL Comm’s addressable market in LATAM using a similar approach as SSA.

The table below shows estimates of the LATAM market.

LATAM mobile phone market size estimates 2014F-2018F


The addressable market in LATAM for TCL Comm is estimated at HK$112b/129b/152b for

2015/16/17 respectively. From TCL Comm’s shipment figures and GSM’s industry predictions, we

estimate TCL Comm’s has 17% market share in LATAM’s mobile market. If TCL Comm can grow to

22% market share by 2017, it may generate revenue of HK$20.4b/26.7b/34.0b in the region for

2015-2017, representing a 29.7% 3-year CAGR from 2014’s estimated HK$15.6b. By these

projections, the region will contribute 51.8%/52.0%/52.2% of TCL Comm’s revenue from 2015-17.


Moreover, Middle East and North Africa (MENA) is also experiencing strong growth. GSM

Association estimates 3-year CAGR to reach 14.5% from 2015-2017. The below table summarizes

current and projected figures of MENA mobile phone and mobile penetration rates.

MENA mobile user & penetration summary 2013-2018F


We replicate our market size estimate approaches as in SSA and LATAM. We estimate the

addressable market of TCL Comm for the next few years as follows:

MENA mobile phone market size estimates 2014F-2018F


The addressable market in MENA for TCL Comm is estimated at HK$65.8b/74.0b/84.4b for

2015/16/17 respectively. If TCL Comm can maintain its estimated 6% market share until 2017, it

may generate a revenue of HK$4.25b/5.41b/6.76b from this region for 2015-2017, representing a

22.1% 3-year CAGR from 2014’s estimated HK$3.71b. By these projections, the region will

contribute 10.9%/10.5%/10.4% of TCL Comm’s revenue from 2015-17.

Competition intense globally, even more so in China

The competitive landscape of the smartphone market is intense since 2010. TCL Comm faces

fierce competition in all regions. We outline TCL Comm’s primary competitors in different

geographic regions in the following table.

Source: Companies, Sunwah Kingsway Research

To add, APAC market is relatively fragmented with numerous homegrown brands. Examples are

Micromax and Karbonn in India, Smartfren in Indonesia, Q Mobile in Pakistan, Ninetology in

Malaysia, I-Mobile in Thailand and Cherry Mobile in the Philippines.

China APAC ex China North

America

LATAM Europe Middle East

& Africa

1st Xiaomi Samsung Apple Samsung

2nd

Samsung Lenovo Samsung Lenovo Apple Huawei

3rd

Lenovo Micromax LG Huawei Lenovo

4th Huawei Karbonn Lenovo ZTE

5th Coolpad Smartfren HTC LG


Business Overview

Non-China focus handset play

According to Gartner, mobile phone sales were essentially flat in 3Q14 compared to 3Q13,

standing at about 456m units. During the period, EMEA excluding Western Europe achieved over

50% YoY increase, while the US achieved 18.9% growth and Western Europe shipments declined

by 5.2%.

Gartner’s claims were supported by TCL Comm’s numbers. For TCL Comm, mobile phone

shipments for 9M14 in the Americas and EMEA grew 46% and 27% YoY respectively, far lower

than contemporary smartphone growth figures of 295% and 122% respectively.

TCL Comm’s mobile shipment numbers since 1Q13

Source: Company, Sunwah Kingsway Research

TCL Comm’s smartphone shipment numbers since 1Q13 (exc. 4Q13)

Source: Company, Sunwah Kingsway Research estimates


ASP supported by migration to smartphones

TCL Comm’s top-line growth does not only come from shipment growth, but also ASP

improvements through smartphone replacing feature phone as their source of revenue. The

company generated 86.9% of its revenue or HK$6.76b from smart devices, primarily smartphones

in 3Q14, as compared to 49.5% in 1Q13. The following chart shows the revenue contribution and

sales figures by smart devices since 1Q13.

Smart device revenue data since 1Q13


Although ASP for smart devices came down from HK$834 in 1Q13 to HK$621 in 3Q14, blended

ASP increased from HK$289 to HK$417 in the same period thanks to smartphone shipment

proportion grew from 17% in 1Q13 to 58% in 3Q2014. For reference, smartphone shipment

proportion of TCL Comm exceeded 63% as of Dec 2014. The following charts show the trend of

smartphone shipment proportion and ASP of TCL Comm.

ASP and smartphone shipment proportion trend since 1Q13



ASP trends since 1Q13

Source: Company, Sunwah Kingsway Research estimates

Looking forward, we believe smartphone ASP will find strong support at current levels in 2015 and

2016. TCL Comm’s 1H14 blended ASP stood at ~HK$408. However, we opine that there is more

upside in TCL Comm’s blended ASP as the company is still achieving 35% non-smartphone

shipment ratio. The blended ASP can further increase in case more emerging region carriers,

especially in LATAM and EMEA introduce 3G/4G services and consumers who are gradually more

affluent are convinced of the benefits of 3G/4G smartphones.

Beyond 2016, we believe smartphone upgrades will drive both top-line growth and GPM

improvement. At the moment, smartphone ASP is dropping because growth is focused on

low/mid-tier smartphones in LATAM and EMEA, as well as intense competition in APAC such as

against Xiaomi in China and Micromax in India. We base our belief of EMEA and LATAM to

outgrow other region because of their proven GDP growth from 2009 to 2013, according to World

Bank, low and middle income countries grew by 5.32% per year on average as opposed to the

world average of 1.86% and high income region average of 0.82%.


Undercutting giants with competitive products

TCL Comm offers aesthetic and competitive products at attractive prices, usually undercutting

giants like Samsung. Below is a comparison of TCL Comm’s Alcatel Hero 2 versus Samsung’s

Galaxy A7

Alcatel Hero 2 Samsung A7

Source: Companies, Sunwah Kingsway Research estimates

We view TCL Comm’s offering to be more competitive although Samsung’s A7 weighs less,

possesses a more powerful chipset and a more up-do-date OS because the Hero 2 offers a larger

screen, superior camera, sells for a lower price and the fact the handset was released nearly 2

quarters ahead the Samsung A7. We believe if TCL Comm can continue to offer value-for-money

handsets swiftly, it could eventually steal market share from Samsung and other global giants.


Unparalleled carrier distribution channels

TCL Comm has distribution agreements with major LATAM telecom companies such as Claro,

Telcel, Digicel and Tigo; as well as AT&T and T Mobile in the US; Vodafone, Telefonica, MTN and

Orange in EMEA; and all 3 major carriers in China, forming a far-reaching distribution network

globally. A caveat is that TCL Comm is relatively weak in APAC, with most distribution channels

situated in Hong Kong. The illustration below shows the approximate geographic distribution of TCL

Comm’s partner carriers globally.


Faster-than-peers product cycle

TCL Comm positions itself as “fast fashion follower” similar to Zara and H&M in the apparel

market. It tends to focus on quick to market products at an affordable price to leverage its close

working relationship with local mobile operators. The company expects on average a 9-month

product life cycle compared to 12-18 months for leading international brands, which allows TCL

Comm to respond quickly to changing demands and tastes of operators and consumers.

TCL Comm’s positioning strategy relative to fashion brands



Financial analysis

Revenue posed to grow 38.4% CAGR from 2014-16

TCL Comm attained revenue of HK$19.4b revenue in 2013; we estimate 2014-16 revenues to be

approximately HK$30.3b/39.4b/51.3b respectively driven by both ASP improvement and shipment

growth. We project shipment growth to be 35%/30% in 2015 and 2016 from 2014’s 73.5m units.

Our blended ASP assumption is HK$412.1/461.6/491.3 for 2014-16 respectively; relevant

assumptions are listed in the table below.

Assumption table

Source：Company data, Sunwah Kingsway Research estimates

Revenue breakdown


ASP trend projections 2014-2016


We model TCL Comm’s smartphone and non-smartphone ASP at a moderate decline due to 1) intensifying competitive landscape in China as the company expressed its intention to focus more on China in 2015 and beyond to pursue smart home integration strategy together with TCL Corp; 2) carrier competition in EMEA and LATAM lead to demands for deeper subsidies in handset sales; 3) very low-end smartphones (at ~US$50 retail price range) dominating emerging market smartphone growth.

Nonetheless, we believe the fall in individual ASP will not harm blended ASP due to smartphone migration. We estimate smartphone shipment ratio for TCL Comm to be 68% and 75% in 2015 and 2016 respectively. Smartphone adoption is stimulated by recent availability in 4G networks in LATAM and EMEA. For example, Argentina has only its first 4G network offered by Movistar (owned by Telefónica) and Personal (owned by Telecom Argentina) as recent as December 2014. Carriers in Kenya and Ghana offered 4G services in 2014. We believe it takes at least 3 years, as in the case of China in order to have 4G services match the prevalence of 3G users, which could to a certain extent, secure growth potential for TCL Comm.


GPM stable at 18-19% by FY16

Gross profit margin of TCL Comm stabilized at around 19% from 1Q13 onwards. TCL Comm’s

19.6% trailing 12 months GPM is superior to Coolpad’s 13.2% and comparable to HTC’s 21.1%.

However, HTC is more exposed in the mid/high-end smartphone markets, which lead us to

estimate that TCL Comm has the best GPM in mid/low-end smartphones. Our gross profit forecasts

for 2014-16 are HK$5.80b/7.45b/9.65b respectively. GPM is forecasted at 19.1%/18.9%/18.8% for

2014-16 respectively.

The graph below shows our estimates for gross profit and GPM.

Gross profit and gross profit margin estimates


We believe TCL Comm can maintain its GPM at our forecasted levels for the next 3 years due to

the following reasons:

1) Exploiting production automation to reduce unit costs. An increase in volume enables the

company capture economies of scale in form of lower depreciation, amortization, direct labor

and factory overheads per unit sold. We believe TCL Comm’s efforts can also mitigate the

effects of minimum wage hikes in the foreseeable future.

2) Marketing itself as a fast fashion brand like Zara and H&M in the apparel sector. This

differentiates Alcatel’s phones from other smartphone brands like Lenovo and Huawei which

relies on top-notch hardware to win customers. The company emphasizes on design factor in

order to justify a slight premium to appeal to fashion wannabes. Its fast product cycle adds to

the company’s ability of responding to different fashion tastes in various locales.

3) Leveraging the newly acquired ‘Palm’ brand to strengthen foothold in North America by offering

mid/high-end phones. Mid/high-end products command higher margins due to customer

demand and technology sophistication. With its incumbent relationships with AT&T, Sprint and

T-Mobile, the company can distribute its new brand to quickly tap the market.

4) Retaining customers through its 2 JVs. The first JV with other TCL group companies aims to

keep customers sticky by offering smart home solutions. The second JV with Cisco aims to

attract corporate users with teleconferencing infrastructure. We believe this differentiates TCL

Comm’s smartphone offering from its competitors and possibly command a higher margin than

peers.


Scale economies to drive up net margin

We foresee TCL Comm to maintain stringent cost control in operating expenses in 2014-16, and

lower its OPEX to revenue ratio will drop from 2013’s 19.5% to 2016’s 16.1%.

We identify the main reason for OPEX to revenue ratio drop to be scale economies from increased

in handset shipments. R&D is correlated to quantity, expected product life cycle and technical

sophistication of new products instead of shipments. The amount of SG&A expenses depends on

geographic reach, customers’ concentration and company network.

Net profit and Net profit margin estimates

Source：Company data, Sunwah Kingsway Research Estimates

We expect TCL Comm to record net profit of HK$932m/1.24b/1.58b for 2014-2016 respectively.

With largely stable GPM and lower OPEX ratio to revenue, we expect NPM to be 3.1% for all 3

years.

Net profit and Net profit margin estimates



Financial position

TCL Comm retains a net debt of nearly HK$1b as of 30 Sept 2014, representing net debt to equity

ratio of 26.1%. We estimate with the increase of revenue brought by higher ASP and shipment

volumes. Operating cash flow is expected to increase to HK$1.41b/3.68b in 2015 and 2016, which

we believe is sufficient to finance its HK$4-5b CAPEX needs for these 2 years. TCL Comm can also

factor more of its receivables at the expense of profitability in case of dire liquidity needs.

Cash conversion cycle

TCL Comm’s inventory turnover days is expected to increase to around 60-65 days due to more

inventories needed to prepare for larger shipments. Besides, smartphone adoption will drive the

value of year-end inventory higher, especially when more smartphones are shipped in 2H of each

calendar year.

The AR turnover days fell from 80 days in 2012 to 73 days in 2013. We expect receivables turnover

to fluctuate between 70-80 days depending on carrier agreements, amount of receivables being

factored by TCL Comm in accordance to geopolitical situations in its primary markets, as well as its

own business and liquidity needs. We consider the company’s AR days is reasonable as it lies in

the 90 days credit range normal to industry.

Our 2014-2016 cash conversion cycle estimate is around 56-63 days. We believe after ramping up

demand in LATAM and EMEA will allow the company to shorten cash conversion cycle by better

expecting models and quantity demanded in respective markets. We believe the company has

sufficient working capital to cover its short-term liquidity needs.

Year 2012A 2013A 2014E 2015E 2016E

AR T/O (days) 82 79 75 77 72

AP T/O (days) 80 73 76 76 76

Inventory T/O (days) 41 46 64 62 60

Cash Conversion cycle (days) 43 51 63 63 56



Management profile

Director Description

Mr. LI Dongsheng

(Chairman and Executive

Director)

Founding CEO of TCL Corporation (000100 CH)

Over 30 years experience in consumer electronics industry

Delegate of 16th

Party Congress, representative of 10-12th

National People’s Congress

Independent Non-Executive Director of Tencent Holdings Limited, Non-Executive Director of Fantasia

Holdings Group, Independent Director of Legrand

Graduated from South China University of Technology

Mr. GUO Aiping

(CEO and Executive

Director)

Senior Vice President of TCL Corp

Previously worked at IBM, Arthur Andersen and Zhaodaola Internet Company

Holds Doctor’s degree in Management Science and Master’s degree in Engineering Economics and

System from Stanford University

Mr. WANG Jiyang

(COO and Executive

Director)

Vice President of TCL Corp

Over 20 years of experience in electronics industry

Graduated with a PhD in Electrocircuit & System from University of Electronic Science and Technology

of China and an MBA degree from China Europe International Business School.

Mr. HUANG Xubin

(Non-executive Director)

CFO of TCL Corp

Previously worked at China Construction Bank, Guotai Junan Securities, China Cinda Asset

Management

Holds an EMBA degree from China Europe International Business School.

Mr. YAN Xiaolin


Chief Technology Officer of TCL Corp, Executive Director of TCL Multimedia (1070 HK)

Chairman of China 3D Industry Association

Graduated from the Institute of Plasma Physics of Chinese Academy of Science with Doctoral Degree

and worked as post-doctoral fellow in the Chinese Academy of Science

Ms. XU Fang


Vice President and HR Director of TCL Corp, Executive Director of TCL Multimedia

Part-time lecturer at Shenzhen Graduate School of Peking University, a distinguished professor at

Shantou University and a distinguished research fellow at Sun Yat-Sen University

Graduated from Nanjing Normal University in English Linguistics, and an MBA from New York Institute

of Technology

Mr. LAU Siu Ki

(Independent Non-executive

Director)

Over 30 years of experience in corporate finance, financial advisory and management, accounting and

auditing

Independent Non-Executive Director of COL Capital Limited, Comba Telecom Systems Holdings

Limited, FIH Mobile Limited, Samson Holding Limited, Embry Holdings Limited and Binhai Investment

Company Limited

Mr. LOOK Andrew


Director)

Over 20 years of experience in equity investment analysis of Hong Kong and China stock markets

Chief Investment Officer and Managing Director of Look’s Asset Management Limited

Independent Non-Executive Director of Ka Shui International Holdings Limited

Holds a Bachelor of Commerce degree from the University of Toronto

Prof. KWOK Hoi Sing


Director)

Chair Professor of the Hong Kong University of Science and Technology

Fellow of the Optical Society of America, Institute of Electrical and Electronics Engineers and SID

Holds Bachelor of Science degree in Electrical Engineering from Northwestern University in the US and

MSc and PhD degrees in Applied Physics from Harvard University

Source：Company data


Risk factors

Price war with other smartphone brands – The company relies on volume growth to drive its

revenue and profits. If other major players expand their LATAM and EMEA foothold by lowering

prices aggressively, TCL Comm may be forced to follow suit despite its production differentiation

attempts.

Slower-than-expected 3G/4G rollout in emerging regions – While carriers in various developing

countries have plans to rollout 3G/4G services within the next 2 years, bureaucracy, business

concerns and geopolitical events may materially delay network rollouts. Such delays would lead to

substantial misses in our forecasted revenues and shipments.

Geopolitical risks – Wars, terrorism, coups and other geopolitical events may severely impair the

ability of TCL Comm’s ability to collect receivables. The issue is especially pronounced in the West

and Central Africa where warlords pose a constant threat.

Capital controls in LATAM – Tightening or re-introduction of capital controls will hurt TCL Comm’s

ability to collect receivables and/or expatriate profits. Brazil introduced a foreign investment tax in

2009 and cancelled the policy in 2013. Venezuela currently requires an importer to apply for USD in

order to pay for purchases through CENCOEX (National Center for Exterior Commerce). Argentina

denied residents to buy USD for saving purposes until Jan 2014.


TCL Comm (2618)

Year ended 31 Dec 2012 2013 2014F 2015F 2016F Year ended 31 Dec 2012 2013 2014F 2015F 2016F

Income Statement (HK$m) Ratios

Turnover 12,031 19,362 30,281 39,406 51,331 Gross margin (%) 21.4 19.0 19.1 18.9 18.8

YoY% 8.3 60.9 56.4 30.1 30.3 Operating margin (%) -0.2 2.1 4.0 4.1 3.9

COGS (9,935) (15,690) (24,485) (31,958) (41,681) Net margin (%) 8.8 1.6 3.1 3.1 3.1

Gross profit 2,097 3,672 5,796 7,448 9,650 Selling & dist'n exp/Sales (%) 2.4 8.3 8.1 7.8 7.8

Gross margin 21.40% 18.97% 19.14% 18.90% 18.80% Admin exp/Sales (%) 6.2 4.9 4.2 4.1 4.0

Other income 543 513 544 576 611 Payout ratio (%) 31.4 28.3 19.7 19.7 19.7

R&D (740) (1,064) (1,211) (1,497) (1,899) Effective tax (%) 16.8 6.0 18.0 18.1 18.0

Selling & distribution (1,154) (1,611) (2,453) (3,074) (4,004)

Admin (658) (946) (1,272) (1,616) (2,053) Total debt/equity (%) 260.1 119.0 144.5 123.6 80.9

Other opex (109) (158) (182) (236) (308) Net debt/equity (%) 218.3 113.2 130.8 107.6 64.7

Total opex (2,117) (3,267) (4,574) (5,847) (7,654) Current ratio (x) 1.1 1.0 1.0 1.1 1.1

Operating profit (EBIT) (21) 405 1,222 1,601 1,997 Quick ratio (x) 0.9 0.8 0.7 0.8 0.7

Operating margin -0.17% 2.09% 4.03% 4.06% 3.89%

Provisions 0 0 0 0 0 Inventory T/O (days) 41 46 64 62 60

Finance costs (166) (105) (83) (90) (75) AR T/O (days) 82 79 75 77 72

Profit after f inancing costs (187) 300 1,139 1,511 1,922 AP T/O (days) 80 73 76 76 76

Associated companies & JVs (2) (2) 0 1 0 Cash conversion cycle (days) 43 51 63 63 56

Pre-tax profit (188) 298 1,139 1,512 1,922

Tax (32) 18 (206) (274) (345) Asset turnover (x) 0.90 1.34 1.41 1.65 1.78

Minority interests (12) 3 1 1 2 Financial leverage (x) 5.74 5.95 5.66 4.92 4.66

Net profit (208) 313 933 1,236 1,575 EBIT margin (%) -0.2 2.1 4.0 4.1 3.9

YoY% 19.8 (250.8) 197.6 32.6 27.4 Interest burden (x) N/A 0.74 0.93 0.94 0.96

Net margin -1.73% 1.62% 3.08% 3.14% 3.07% Tax burden (x) 1.10 1.05 0.82 0.82 0.82

EBITDA (72) 484 2,090 2,881 3,713 Return on equity (%) -9.0% 12.9% 24.5% 25.5% 25.5%

EBITDA margin -0.60% 2.50% 6.90% 7.31% 7.23% ROIC (%) -13.2% 8.0% 21.6% 23.0% 23.7%

EPS (HK Cents) -18.5 27.5 77.7 103.0 131.3

YoY% 21.1 -248.7 182.7 32.6 27.4

DPS (HK Cents) 3.0 10.0 15.3 20.3 25.8

Year ended 31 Dec 2012 2013 2014F 2015F 2016F Year ended 31 Dec 2012 2013 2014F 2015F 2016F

Cash Flow (HK$m) Balance Sheet (HK$m)

EBITDA (72) 484 2,090 2,881 3,713 Fixed assets 774 1,070 1,574 1,539 1,509

Chg in w orking cap (102) (762) (7) 832 1,134 Intangible assets 1,174 1,210 1,469 1,469 1,469

Others 730 1,301 (1,333) (1,865) (646) Associated companies & JVs 4 5 8 8 8

Operating cash 556 1,023 750 1,848 4,201 Long-term investments 131 195 217 217 217

Interests paid (52) (16) (105) (83) (90) Other non-current assets 26 77 204 204 204

Interests income (213) (113) (67) (78) (86) Non-current assets 2,109 2,557 3,472 3,436 3,406

Tax (177) (119) (206) (274) (345)

Net cash from operations 113 775 372 1,413 3,680 Inventories 1,263 2,649 5,937 4,920 8,784

AR 2,842 5,551 6,893 9,733 10,519

Capex + Investments (1,290) (1,543) (3,566) (2,008) (2,508) Prepayments & deposits 1,246 1,151 1,482 1,482 1,482

Interest + Dividends received 210 196 195 195 195 Pledged deposits 4,221 1,698 1,758 1,758 1,758

Change of non-cash equiv. deposits 1 0 0 0 0 Other current assets 669 675 1,458 1,774 1,861

Sales of assets 30 85 85 84 84 Cash 970 142 523 777 1,001

Investing cash (1,050) (1,263) (3,286) (1,728) (2,228) Current assets 11,212 11,866 18,052 20,442 25,404

AP 2,429 3,875 6,322 6,987 10,371

FCF (937) (488) (2914) (315) 1451 Tax 1 13 16 16 16

Issue of shares 26 78 161 0 0 Accruals & other payables 1,620 3,148 3,781 3,462 4,406

Buy-back 0 0 0 0 0 Bank loans 5,726 2,690 5,500 6,000 5,000

Minority interests 9 0 0 0 0 Factored advances 432 485 766 1,081 1,169

Dividends paid (202) 0 (187) (247) (315) Derivatives 96 92 38 38 38

Net change in bank loans (1,302) (3,519) 3,099 500 (1,000) Other current liabilities 301 1,403 1,094 1,238 1,426

Others 2,109 3,211 222 315 87 Current liabilities 10,606 11,706 17,517 18,822 22,425

Financing cash 640 (230) 3,295 568 (1,228) Bank loans 194 196 0 0 0

381 253 224 Other loans/f inancing 116 0 0 0 0

Net change in cash (217) (828) 381 253 224 Deferred tax 77 85 94 94 94

Adj 0 0 0 0 0 Other non-current liabilities 6 8 8 8 8

Opening cash 1,187 970 142 523 777 MI 2 4 100 100 100

Closing cash 970 142 523 777 1001 Non-current liabilities 394 293 201 201 201

CFPS (HK$) (0.193) (0.736) 0.318 0.211 0.187

Net assets/Net Equity 2,321 2,425 3,805 4,855 6,183

Share capital 1,128 1,162 1,221 1,221 1,221

Reserves 1,193 1,747 2,584 3,634 4,963

Book NAV (HK$) 4,642 5,334 7,610 9,710 12,367

Total debts 6,036 2,886 5,500 6,000 5,000

Net cash/(debts) (5,067) (2,744) (4,977) (5,223) (3,999) Source: Company, Sunwah Kingsway Research Estimates

Financial Statements


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