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
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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
TCL Communication | 10 Feb 2015 3
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
TCL Communication | 10 Feb 2015 4
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
Source: Carriers, Census data, Sunwah Kingsway Research
Middle East 3G/4G carrier availability summary
Source: Carriers, Census data, Sunwah Kingsway Research
TCL Communication | 10 Feb 2015 5
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
Source: GSM Association, Sunwah Kingsway Research estimates
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.
TCL Communication | 10 Feb 2015 6
The below table summarizes mobile user numbers and penetration in LATAM.
LATAM mobile user & penetration summary 2013-2018F
Source: GSM Association, Sunwah Kingsway Research estimates
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
Source: GSM Association, Sunwah Kingsway Research estimates
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.
TCL Communication | 10 Feb 2015 7
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
Source: GSM Association, Sunwah Kingsway Research estimates
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
Source: GSM Association, Sunwah Kingsway Research estimates
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
TCL Communication | 10 Feb 2015 8
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
TCL Communication | 10 Feb 2015 9
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
Source: Company, Sunwah Kingsway Research
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
Source: Company, Sunwah Kingsway Research
TCL Communication | 10 Feb 2015 10
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%.
TCL Communication | 10 Feb 2015 11
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.
TCL Communication | 10 Feb 2015 12
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.
Source: Company, Sunwah Kingsway Research
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
Source: Company, Sunwah Kingsway Research
TCL Communication | 10 Feb 2015 13
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
Source:Company data, Sunwah Kingsway Research estimates
ASP trend projections 2014-2016
Source: Company, Sunwah Kingsway Research
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.
TCL Communication | 10 Feb 2015 14
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
Source:Company data, Sunwah Kingsway Research 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.
TCL Communication | 10 Feb 2015 15
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
Source:Company data, Sunwah Kingsway Research Estimates
TCL Communication | 10 Feb 2015 16
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
Source:Company data, Sunwah Kingsway Research Estimates
TCL Communication | 10 Feb 2015 17
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
(Non-executive Director)
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
(Non-executive Director)
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
(Independent Non-executive
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
(Independent Non-executive
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
TCL Communication | 10 Feb 2015 18
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 Communication | 10 Feb 2015 19
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
TCL Communication | 10 Feb 2015 20
Disclaimer
This document is not an offer to sell or the solicitation of an offer to buy or subscribe for any securities. The securities referred to in this document
may not be eligible for sale in some jurisdiction. Neither this document nor any portion hereof may be taken distributed or transmitted directly or
indirectly into such jurisdiction nor to any resident thereof. Any failure to comply with this restriction may constitute a violation of the applicable laws
and regulations and persons into whose possession this document comes should inform themselves about, and observe, any such restrictions. This
document has been produced for private circulation and may not be copied, photocopied, duplicated, or redistributed without prior written consent of
Kingsway Financial Services Group Limited (“KFS”) and its affiliated companies (collectively, “Kingsway Group”).
This report is distributed in Hong Kong Special Administrative Region of the People’s Republic of China (“Hong Kong”) by KFS which is registered as
a licensed corporation under the Securities and Futures Ordinance (Cap.571 of The Laws of Hong Kong) with the Securities and Futures
Commission of Hong Kong (“SFC”) and its SFC CE number is ADF346.
The information contained in this report has been taken from sources believed to be reliable but no representation or warranty expressed or implied
is made as to their accuracy or correctness. This report is published for the assistance of recipients but is not to be relied upon as authoritative or
taken in substitution for the exercise of judgment by any recipient. It is not to be construed as an offer, invitation or solicitation to buy or sell any
securities of the company or companies covered herein. Any recommendation contained in this report does not have regard to the specific
investment objectives, financial situation and the particular needs of any specific addressee. All opinions and estimates reflect our judgment on the
date of this report and are subject to change without notice.
KFS, including its parent, subsidiaries and/or affiliates, may act as lead or co-manager in an offering of the securities of any issuer discussed herein,
may from time to time perform financial services or other advisory services for, or solicit financial services or other business from, any issuer.
Within the past year, KFS, including its parent, subsidiaries and/or affiliates, may have acted as market maker or traded on a principal basis in the
financial instruments of any issuer discussed herein and may act as underwriter, placement agent, advisor or lender to such issuer.
KFS, including its parent, subsidiaries, affiliates, shareholders, officers, directors, and employees may have long or short positions in, and buy or sell,
the securities, commodities or derivatives (including options) or any other financial instruments thereof, of any issuers.
An employee of KFS, including its parent, subsidiaries and/or affiliates, may act as director, or be represented on the boards of directors, of any such
entities or issuers.
Additional information is available upon request.
Copyright 2015 Kingsway Group. All rights reserved.
Head Office Affiliated & Overseas Offices Hong Kong
Kingsway Financial Services Group Limited
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89 Queensway, Hong Kong
Tel: 852-2877-1830
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Canada
Kingsway Capital of Canada Inc.,
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Toronto, Ontario,
Canada M5C 1C3
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Fax: 416-861-9027
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Kingsway Financial Services Group Limited
Beijing Representative Office
Beijing Kingsway Financial Consultancy Limited
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