Macquarie Research China handset sector

HONG KONG TCL Communication Technology Now it’s the late comers who benefit The only EM play immune to PRC competitive risk We initiate coverage on TCL Comm with an Outperform rating and a TP of HK$11.02 with a +57% TSR. We view TCL Communication as one of the few handset vendors in China ’s handset space that has the privilege to ride on multiple growth drivers in the near/mid/long-term while at the same time remaining immune to the cut-throat domestic competition. We expect the company to continue its solid growth momentum for the next two

years as: 1) under-penetrated emerging markets ’ late-cycle feature phone to 2618 HK Outperform smartphone migration will continue to be the near/mid-term driver; 2) the early wave of developed markets ’ transition from 3G to 4G, as TCL has been making Price (at 07:59, 14 Jan 2015 GMT) HK$7.23

good progress penetrating developed markets (US and Europe); 3) TCL has Valuation HK$ 11.02 great potential to leverage its high cost/performance ratio to expand EM market - PER 12 -month target HK$ 11.02 share at the expense of Nokia, Sony and Korean/Japanese handset vendors; 4) Upside/Downside % +52.4 the late adoption of 4G in emerging markets, where TCL already has well 12 -month TSR % +56.6 established operations, will be the mid/long-term driver; 5) TCL faces much Volatility Index High smaller competitive risk vs other PRC peers thanks to insignificant domestic GICS sector market exposure. Technology Hardware & Equipment Market cap HK$m 8,826 Market cap US$m 1,126 Where we are different from market view 30 -day avg turnover US$m 2.5 Market view Macquarie view Number shares on issue m 1,221 EM smartphone migration could slow down. EM smartphone mkt still under penetrated + potential share gain from Samsung/Nokia/Sony in EM Investment fundamentals There is little room left for further product mix uplift. Penetration of developed markets + 4G ramp-up will Year end 31 Dec 2013A 2014E 2015E 2016E provide future ASP and margin uplift. Revenue m 19,362 30,503 40,870 42,462 Loss of market share due to Samsung price cuts / Little geographical / product positioning overlap hence EBIT m 405 1,185 1,624 1,800 Lenovo+Moto merger limited impact. EBIT growth % nmf 192.7 37.0 10.9 GPM could face further downside. OPM leverage could offset GPM pressure Reported profit m 313 1,032 1,435 1,598 Slowdown in phasing out feature phone business. Feature phone business acts as a cash cow for TCL. Adjusted profit m 313 1,032 1,435 1,598 Heavy operator exposure overseas leaves TCL Operator channel has better demand visibility, higher EPS rep HK$ 0.27 0.83 1.16 1.29 exposed to risk of operator ter minal strategy entry barrier s, lengthier qualification period, hence EPS rep growth % nmf 206.4 39.1 11.4 change. less competition. EPS adj HK$ 0.26 0.84 1.16 1.29 Entry-level product strategy won't be as profitable Entry-level strategy offers superior operational EPS adj growth % nmf 220.4 39.0 11.4 as peers. leverage and faces smaller product erosion downside. PER rep x 26.5 8.7 6.2 5.6 Other Chinese makers keen to expand overseas Weak overseas brand recognition and lack of IP rights PER adj x 27.7 8.7 6.2 5.6 pose serious threat. are major barriers. Total DPS HK$ 0.10 0.22 0.30 0.34 Source : Macquarie Research, January 2015 Total div yield % 1.4 3.0 4.2 4.7 ROA % 2.9 6.5 6.7 6.1 ROE % 12.0 30.1 31.9 28.4 EV/EBITDA x 7.8 4.7 4.0 4.2 Catalysts: Net debt/equity % 94.2 95.9 96.5 96.7 P/BV x 2.9 2.3 1.8 1.4 1) 4Q14 results, which we expect to be strong due to high 4Q seasonal demand;

Source: FactSet, Macquarie Research, January 2015 2) New carrier partnership wins (currently company is in talks with Verizon) or (all figures in HKD unless noted) entering new markets (ie Egypt, Pakistan, Iraq, etc); 3) Upcoming monthly shipment statistics, with larger high-end smartphone sales mix further uplifting

Analyst(s) blended ASP/margin. Laetitia Yu +852 3922 4725 [email protected] Valuation: Danny Chu, CFA +852 3922 4762 [email protected] The stock is trading at 6.2x FY15E P/E versus its historical multiple of 9.5x

during mid-cycles, 15x during up-cycles and 7x during down-cycles. Our target 16 January 2015 price of HK$ 11.02 is based on 9.5x P/E and FY15F EPS. Macquarie Capital Securities Limited

16 January 2015 33 Macquarie Research China handset sector

Inside Now it’s the late comers who benefit

Rules of the game have changed – now Company profile it’s the late comers who benefit 35 TCL Comm was listed on the HKEx in September 2004. TCL Corp., a Chinese multinational electronics company (000100 CH), is the ultimate Where we differ from consensus view 37 controlling shareholder with a stake of 51%. TCL Comm acquired Alcatel Valuation and sce nario analysis 44 Mobile in May 2005 and has been selling mobile and Internet products under Company profile 46 2 brands: TCL for the PRC market and ALCATEL ONE TOUCH overseas. Detailed business analysis 49 TCL Comm is ranked No.6 (market share 3.9%) for global mobile phone shipments and No.8 for smartphone shipments (market share 3.4%) in 3Q14. Though headquartered in the PRC, the company had only 8.2% sales exposure to China and the rest overseas (51.5% sales to Americas, 34.3% to EMEA, 6.0% to APAC ex PRC) as of 9M14.

Fig 1 Where we are different from consensus view

Market perception Macquarie view

EM smartphone migration EM smartphone penetration and TCL’s own smartphone could slow down hence shipment diffusion rate are still below industry average hence still TCL growth prospects are has a lot of room to grow. Company also has great potential to capped. gain share from Nokia/Sony and Korean/Japanese brands in EM entry-level smartphone segment. There is little room left for Penetration into developed markets and the rapid ramp -up of 4G further product mix uplift. business will provide the next lift for ASP and margin. TCL could face loss of There is still a distinct pricing gap after Samsung’s price cuts, market share as Samsung which target s the APAC region and is not a key market for TCL. gets aggressive on pricing. TCL phones are sold via operator channel vs Samsung via open market. Lenovo + Moto will pose Moto targe ts mid/high end segment via the open channel while serious threat due to big TCL targets the low end relying on the operator c hannel. Low end geographical overlap. phones sold under Lenovo brand will likely face a weak brand recognition hurdle overseas. GPM could face further Company intends to strategically balance GPM and opex/sales downside. ratio. There is also operational leverage to be gained. Company is not doing 2G only makes single digit revenue contribution, requires little enough to phase out opex and carries same OPM as 3G products. Manufacturing 2G feature phone business. can actually generate extra cash and enhance facility utilization rate. Heavy operator exposure Operator channel has better demand visibility, higher entry overseas is a concern. barrier s and lengthier qualification process, hence less competitive. Entry -level product strategy Entry -level strategy helps TCL to achieve superior cost structure, won't be as profitable as less intensive R&D, better scalability and faster time -to-market, peers. while ASP and margin erosion happen at a much slower pace. Other Chinese makers Weak brand recognition and lack of overseas patents are main keen to expand overseas hurdles for domestic brands’ overseas expansion. Emerging PRC pose serious threat. vendors mainly target APAC region, not a focus market for TCL. Source: Macquarie Research, January 2015

Fig 2 2618 HK rel HSI performance, & rec history



.

Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, January 2015 (all figures in HKD unless noted)

16 January 2015 34

Macquarie Research China handset sector

Rules of the game have changed – now it’s the late comers who benefit A key beneficiary of EM handset upgrade cycle We think TCL Communication is one of the few brands that has a well-diversified geographical business exposure and will continue delivering solid growth driven by emerging markets’ late adoption of smartphone/3G/4G. Even though smartphone sales growth in developed markets and China has slowed down, non-China emerging markets, with a smartphone penetration of 15~30%, are still underpenetrated compared with the world average (50%) and developed markets (65%), hence still have room to grow from here. Being a big player in non-China EM markets, TCL has significant potential to continue harvesting the remaining fruits in the late smartphone cycle. Additionally, both Nokia and Sony are likely to scale down their handset businesses in the next 1~2 years. And the Koreans/Japanese have been suffering from declining market share with the price-sensitive EMs now becoming the major growth drivers rather than developed markets. TCL is likely to be able to step in and meet the unfilled demand and further expand its global presence. Riding the early wave of 3G-to-4G migration Due to lower subsidies by carriers in developed markets and rising 4G adoption in certain emerging countries, we expect demand for low-cost 4G phones to rise and start to ramp up in scale from 2015. TCL, with well-established EM carrier partnerships and expanding developed markets penetration, will ride the early wave of 3G-to-4G migration. Expanding in Given its superior cost structure vs peers, we believe TCL will have a distinct cost advantage developed markets. in the 4G entry-level segment (currently TCL 4G products carry ASP ~US$120 and GPM ~25%, compared with the company’s blended ASP US$54 and gross m argin 19%).The introduction of more affordable 4G chipset solutions from Qualcomm and especially Mediatek in 2H14/1H15 should further benefit mass market handset vendors such as TCL. We expect 4G products to have a positive impact on the company’s profitability starting from 2H15. Concerns over competitive risks are overdone Most of market We do acknowledge that competition in the handset space overall is likely to intensify concerns are following Samsung’s recent price cuts on its mass market products, Lenovo’s acquisition of misconceptions in Motorola, and the attempts by a number of Chinese handset vendors to expand overseas. our view. However, TCL, in our view, will not see much threat from this, and will remain immune due to its geographically diversified business (which will help smooth out specific markets’ ups and downs), superior cost structure, appealing price-performance products (a distinct pricing gap vs Samsung and Motorola products), and unique channel strategy (mainly relies on operator channel rather than Samsung/Moto’s open channel). In regards to other PRC handset makers ’ potential overseas expansion, we believe this will prove to be a rather time- consuming and costly process for them due to high entry-barriers, and don ’t expect it to pose any meaningful threat to TCL in the foreseeable future.

Macquarie estimates vs consensus

FY13 FY14E FY15E FY16E Comment on Mac vs Cons

Revenue (HK$mn) Mac 19,362 30,503 40,870 42,462 Rapid EM smartphone migration + expanding presence in DMs + market share gain from Nokia/Sony Cons 19,362 29,803 36,584 41,770 Diff (%) 2.35% 11.71% 1.66% Net profit (HK$mn) Mac 313 1,032 1,435 1,598 Multiple revenue growth drivers + opex savings Cons 313 1,076 1,311 1,476 Diff (%) -4.12% 9.41% 8.26% Gross margin Mac 18.97% 19.27% 18.94% 18.56% Downside risk due to more rapid smartphone margin erosion. Cons 18.97% 19.23% 18.97% 18.78% Diff (%) 0.04% -0.04% -0.21% Normalized Opex % of sales Mac 16.87% 15.26% 14.96% 14.32% Operational leverage due to superior scalability, efficient business structure & expense control. Cons 16.87% 15.57% 15.11% 14.94% Source: Bloomberg, Macquarie Research, January 2015

16 January 2015 35 Macquarie Research China handset sector

Expect solid earnings momentum to continue We think TCL’s unique geographical exposure and product positioning are not yet well understood by the market. Many of the above-mentioned growth drivers are underappreciated and, if anything, the stock is more overshadowed by various industry-wide, or PRC market related concerns, rather than company-specific ones. ~30% ROE with We expect the company to report record growth for FY14E (Net profit +230% y-y) thanks to a attractive valuation. successful business turnaround, and robust earnings to continue going into 2015 and 2016 (Net profit +39% and +11% y-y respectively, from FY14’s high base), accompanied by an attractive ROE (FY14E 30%, FY15E 32%, FY16E 28%). The stock is trading at 6.2x FY15E P/E versus its historical multiple of 9.5x during mid-cycles, 15x during up-cycles and 7x during down-cycles. Our target price of HK$ 11.02 is based on 9.5x P/E and FY15F EPS. With one of the lowest PEs among global peers yet still yielding a ~30% ROE, we believe TCL is one of the most attractive plays in China ’s handset space.

16 January 2015 36 Macquarie Research China handset sector

Where we differ from consensus view

Fig 3 Where we differ from consensus view

Market perception Macquarie view

EM smartphone migration could slow down hence EM smartphone penetration and TCL’s own smartphone shipment diffusion rate are still below TCL growth prospects are capped. industry average hence still has a lot of room to grow. Company also has great potential to gain share from Nokia/Sony and Korean/Japanese brands in EM entry-level smartphone segment. There is little room left for further product mix uplift. Penetration into developed markets and the rapid ramp-up of 4G business will provide the next lift for ASP and margin. TCL could face loss of market share as Samsung There is still a distinct pricing gap after Samsung’s price cuts, which targets the APAC region and gets aggressive on pricing. is not a key market for TCL. TCL phones are sold via operator channel vs Samsung via open market. Lenovo + Moto will pose serious threat due to big Moto targets mid/high end segment via the open channel while TCL targets the low end relying on geographical overlap. the operator channel. Low end phones sold under Lenovo brand will likely face a weak brand recognition hurdle overseas. GPM could face further downside. Company intends to strategically balance GPM and opex/sales ratio. There is also operational leverage to be gained. Company is not doing enough to phase out feature 2G only makes single digit revenue contribution, requires little opex and carries same OPM as 3G phone business. products. Manufacturing 2G can actually generate extra cash and enhance facility utilization rate. Heavy operator exposure overseas is a concern. Operator channel has better demand visibility, higher entry barriers and lengthier qualification process, hence less competitive. Entry-level product strategy won't be as profitable as Entry-level strategy helps TCL to achieve superior cost structure, less intensive R&D, better peers. scalability and faster time -to-market, while ASP and margin erosion happen at a much slower pace. Other Chinese makers keen to expand overseas Weak brand recognition and lack of overseas patents are main hurdles for domestic brands’ pose serious threat. overseas expansion. Emerging PRC vendors mainly target APAC region, not a focus market for TCL. Source: Macquarie Research, January 2015

Below, we examine each of these factors and explain why we differ from the market view: 1. With feature to smartphone transition gradually reaching saturation point, growth outlook for TCL doesn’t look encouraging EM penetration Why we differ: We acknowledge that feature phone to smartphone transition has indeed growth + market reached a mature/late cycle, and overall smartphone market growth is very likely to slow share gain down going into 2015 and beyond. That said, we think TCL, which has ~70% exposure to emerging markets, where the transition is still underway, still has room to grow (EM smartphone penetration is only 15%~30% vs the global average of 50%). With a relatively lower smartphone contribution base (53% of total shipments) versus its global peers (~70% of total shipments), we expect meaningful margin/ASP uplift to continue as smartphone shipment mix further expands. Additionally, we believe the company has significant potential to expand market share at the expense of Nokia and Sony (both of which are likely to gradually phase out their handset businesses, along with various Korean and Japanese brands. 2. Given the on-going smartphone ASP erosion, further product mix improvement will become increasingly difficult. 4G drives future Why we differ: We think the growing contribution from 4G smartphone (carrying a 10%~20% product mix uplift ASP premium and ~5% higher GPM to 3G smartphones) shipments will provide the next leg of further blended margin and ASP uplift. The company plans to actively ramp up 4G shipments in the coming few years and expects a 15% shipment contribution for 2015 (vs 7% FY14) with uplift effect likely to materialize in 2H15 according to our estimates. Adoption of MediaTek ’s more affordable SoC platform in 1H15 could bring further cost benefits, and hence speed up 4G shipment ramp-up. We could even see a rebound in smartphone ASP and margin in 2H15 (currently on a steady downward trend due to industry- wide price erosion) if the 4G business reaches scalability faster than expected.

16 January 2015 37 Macquarie Research China handset sector

Fig 4 Global handset maker smartphone shipment penetration

Handset Smartphone Y-Y Smartphone shipment s Market Y-Y growth shipment s Market growth shipment 2Q14 (mn units) share rate (mn units) share rate penetration

Samsung 95.3 22.5% -10.9% 74.5 25.3% -2.0% 78.2% Nokia 50.3 11.9% -17.7% 23.5 8.0% -6.3% 46.7% Apple 35.2 8.3% 12.8% 35.2 11.9% 12.8% 100.0% Huawei 20.6 4.9% 59.7% 20.1 6.8% 81.1% 97.6% Lenovo 16.0 3.8% 40.4% 15.8 5.4% 39.8% 98.8% Xiaomi 15.1 3.6% 268.3% 15.1 5.1% 268.3% 100.0% LG 19.0 4.5% 6.7% 14.5 4.9% 19.8% 76.3% Coolpad 13.0 3.1% 26.2% 13.0 4.4% 26.2% 100.0% ZTE 13.6 3.2% -22.7% 10.6 3.6% -7.8% 77.9% Sony 9.6 2.3% -12.2% 9.4 3.2% -2.1% 97.9% TCL -C 16.3 3.8% 34.7% 8.7 2.9% 171.9% 53.4% Motorola 5.4 1.3% 4.2% 3.8 1.3% 60.7% 70.4% Global total 423.5 100.0% 5.9% 295.0 100.0% 26.6% 69.7% Source: IDC, January 2015

3. Loss of market share post Samsung’s cut in ASP and shift to mass market product segment Why we differ: We conducted a detailed analysis comparing Samsung and TCL ’s recently launched low/mid-end products, their retail price, specifications, as well as target markets, and found that: Distinct channel and 1) Ev en after price cuts, Samsung’s handsets are still priced at a distinct premium to pricing gap vs TCL/Alcatel ones, hence TCL still outperforms in terms of price-performance ratio; Samsung. 2) TCL has much fewer models than Samsung. A leaner product line in addition to its cost- efficient PRC based production facility could offer superior scale/cost benefits; 3) The markets where Samsung have been getting aggressive on pricing are mostly emerging APAC countries, where TCL has very little exposure (15%~18%) hence shouldn ’t feel much of an impact; 4) In the EMEA and Americas regions where Samsung and TCL have meaningful overlap in terms of market presence, Samsung mainly sells its products via open channel distributors mostly targeting mid/high-end customers, while 80% of TCL’s products are shipped to the operator channel with most positioned as entry-level handsets. With a distinct gap in pricing, market positioning and channel strategy, we see very little overlap between the two companies’ business es hence believe the concern is overdone.

16 January 2015 38 Macquarie Research China handset sector

Fig 5 TCL vs Samsung product comparison

TCL Alcatel

Hero 2 Hero 8 Idol 2S Idol 2 Mini S Pop 7S Pop 8S Pop 2 Network 2G + 3G + 4G 2G + 3G + 4G 2G + 3G + 4G 2G + 3G + 4G 2G + 3G + 4G 2G + 3G + 4G 2G + 3G + 4G Announced 2014, September 2014, September 2014, February 2014, February 2014, January 2014, September 2014, September 1080 x 1920 pixels, 1200 x 1920 pixels, 720 x 1280 pixels, 540 x 960 pixels, 600 x 1024 pixels, 800 x 1280 pixels, 480 x 854 pixels, Display 6.0 inches 8.0 inches 5.0 inches 4.5 inches 7.0 inches 8.0 inches 5.0 inches Memory ROM 16GB ROM 8/16/32 GB ROM 8GB ROM 4GB ROM 4GB ROM 8GB ROM 8GB RAM 2GB RAM 2GB RAM 1GB RAM 1GB RAM 1GB RAM 1GB RAM 1GB Camera Primary 13.1MP Primary 5MP Primary 8MP Primary 8MP 3MP Primary 5MP Primary 5MP Secondary 5MP Secondary 2MP Secondary 1.3MP Secondary 2MP Secondary 3MP Android OS, v4.4.2 Android OS, v4.4.2 Android OS, v4.3 Android OS, v4.3 Android OS, v4.4.2 Android OS, v4.4.2 Android OS, v5.0 OS (KitKat) (KitKat) (Jelly Bean), (Jelly Bean), (KitKat) (KitKat) (Lollipop) SoC Qualcomm SoC Qualcomm Qualcomm Qualcomm Qualcomm SoC MediaTek SoC Mediatek Chipset Snapdragon 400 Snapdragon 400 MSM8926 MSM8916 MSM8916 MT6592T MT8392 MSM8926 MSM8926 Snapdragon 400 Snapdragon 410 Snapdragon 410 Octa-core 2.0 GHz Octa-core 2.0 GHz Quad-core 1.2 GHz Quad-core 1.2 GHz Quad-core 1.2 GHz Quad-core 1.2 GHz CPU Quad -core 1.2 GHz Cortex-A7 Cortex-A7 Cortex-A7 Cortex-A7 Cortex-A7 Cortex-A53 Battery 3100 mAh 4060 mAh 2150 mAh 2000 mAh 3240 mAh 4100 mAh 2500mAh Retail price US$451 US$297 US$241 US$190 US$155 US$170 US$50 Samsung

Galaxy A5 Galaxy A3 Galaxy Ace 4 LTE Galaxy Avant Galaxy Ace NXT Galaxy Core 2 Galaxy Young 2 3G WCDMA 900 / Network 2G + 3G + 4G 2G + 3G + 4G 2G + 3G + 4G 2G + 3G + 4G 2G + 3G 2G + 3G 1900 / 2100 Announced 2014, August 2014, August June, 2014 July, 2014 July, 2014 June, 2014 June, 2014 1280x70 pixels, 5 960x540 pixels, 4.5 480x800 pixels, 4 960x540 pixels, 4.5 480x800 pixels, 4 800x480 pixels, 4.5 320 x 480 pixels, Display inches inches inches inches inches inches 3.5 inches Memory ROM 16GB ROM 8GB ROM 4GB ROM 16GB ROM 4GB ROM 4GB ROM 4GB RAM 2GB RAM 1GB RAM 1GB RAM 1.5GB RAM 0.8GB RAM 0.8GB RAM 0.5MB Camera Primary 13MP Primary 8MP 5MP Primary 5MP 3.15MP Primary 5MP 3.15MP Secondary 5MP Secondary 5MP 0.3MP Secondary 0.3MP NA Secondary 0.3MP NA OS Android 4.4 Android 4.4 Android 4.4 Android 4.4 Android 4.4 Android 4.4 Android 4.4 Qualcomm Qualcomm Qualcomm Chipset MSM8916 MSM8916 NA MSM8226 NA NA NA Snapdragon 410 Snapdragon 410 Snapdragon 400 Quad-core 1.2 GHz Quad-core 1.2 GHz Dual-core 1.2 GHz Quad-core 1.2 GHz Single-core 1.2 Single-core 1 GHz CPU Quad -core 1.2 GHz Cortex-A53 Cortex-A53 Cortex-A7 ARM Cortex-A7 GHz Cortex-A7 Cortex-A7 Battery 2300mAh 1900mAh 1900mAh 2100mAh 1500mAh 2000mAh 1300mAh Jun US$195 / Sep Jun US$135 / Retail price US$420 US$ 315 US$265 US$230 US$120 US$135 / Dec September US$85 US$85 / Dec US$ 65 Source : GSMArena, Macquarie Research, January 2015

4. Loss of market share post Lenovo-Motorola merger Why we differ: Given Lenovo ’s solid execution track record and management’s target to have Moto business break even in the next 4~6 quarters, we don’t expect the company to get aggressive on pricing, but rather adopt a cautious approach of balancing market share and profitability, to roll out its Moto+Lenovo dual brand strategy. Lenovo’s brand recognition is quite limited overseas, while Moto, which has a much wider market recognition, mainly targets the mid-/high-end product segment and will continue to focus on this segment post the consolidation (according to Lenovo management). Additionally, like Samsung, Moto relies heavily on open channel sales (Lenovo is likely to adopt the same channel strategy after entering those markets after Motorola consolidation is completed) rather than the operator channel which is TCL’s focus, hence we don’t see any meaningful overlap here either. 5. An expanding mix of entry-level smartphones could further dilute GPM, which already touched the 19% level in 3Q14 Why we differ: The company has set a 19% gross margin benchmark for the near/mid-term and is aiming for a stable 85%/15% shipment breakdown for entry-level (17%~18% GPM)/advanced smartphones (20% GPM). But note that GPM is not the only KPI the company focuses on as OPM should also be taken into account.

16 January 2015 39 Macquarie Research China handset sector

Fig 6 TCL Com gross margin and opex/sales trend

25.0%

19.6% 19.4% 19.0% 19.2% 19.9% 19.5% 19.6% 19.2% 20.0% 18.5% 17.5% 18.5% 18.3% 17.8% 18.1% 16.7% 17.0% 16.8% 16.7% 16.5% 16.4% 16.3% 16.0% 15.8% 15.6% 15.0%

10.0%

5.0%

0.0% 1Q14 2Q14 3Q14 4Q14F 1Q15F 2Q15F 3Q15F 4Q15F 1Q16F 2Q16F 3Q16F 4Q16F

Gross margin (%) Opex % of sales (%)

Source: Company data, Macquarie Research, January 2015

TCL will strategically Management plans to strategically manage the shipment mix of entry-level/advanced balance GPM and smartphones rather than sticking strictly to the 85%/15% target. According to the company, if OPM. it gets more operational leverage from shipping entry-level smartphones rather than advanced ones (which carry high GPM but also a higher opex/sales ratio due to higher sales and marketing, R&D expenses), it will shift the product mix towards more entry-level smartphones. This might put some pressure on GPM but would contribute a flat or even higher OPM and better economies of scale (as entry-level devices are normally shipped in much higher volume than advanced models).

Fig 7 Improving product mix

800 681 700 645 619 624 643 587 591 609 605 600 550 554 571 502 479 493 500 469 468 457 461 460 459 407 409 417 400

300 190 180 200 170 168 162 159 154 151 171 126 120 114 100

0 1Q14 2Q14 3Q14 4Q14F 1Q15F 2Q15F 3Q15F 4Q15F 1Q16F 2Q16F 3Q16F 4Q16F

Blended ASP (HK$) Smartphone ASP (HK$) Feature phone ASP (HK$)

Source: Company data, Macquarie Research, January 2015

6. The company is not doing much to phase out feature phones, which is margin dilutive but still accounts for around ¼ of total shipments Feature phone Why we differ: Feature phones have ~20% weighting as a % of total shipment volume at this business is TCL ’s stage, but only make a high single digit revenue contribution. Although feature phone margin cash cow. is lower than that of smartphones (16%, vs 17%~18% for entry-level smartphones and 20% for advanced smartphones), they incur very little opex so the company can actually manufacture feature phones as an ad-hoc to leverage any idle capacity and achieve a higher utilization rate. Regardless of the slightly lower GPM, feature phones actually carry the same OPM as smartphones. With that plus a less competitive playing field and a more stable margin/ASP outlook, management sees the feature phone segment as a cash generator and intends to manage it strategically rather than actively phasing out this part of business. 16 January 2015 40 Macquarie Research China handset sector

Fig 8 TCL smartphone vs feature phone revenue contribution

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14F 1Q15F 2Q15F 3Q15F 4Q15F 1Q16F 2Q16F 3Q16F 4Q16F

Smartphone revenue contribution (%) Feature phone revenue contribution (%)

Source: Company data, Macquarie Research, January 2015

7. Potential concerns over high business exposure to operator channels Well diversified Why we differ: TCL has ~80% of total handset shipments as well as ~70% of smartphone operator exposure. shipments selling through the operator channel. Investors might have concerns on such a high operator exposure, as recent headwinds in China ’s smartphone market post operators ’ subsidy cuts have made several operator channel handset vendors vulnerable. We’d like to point out that TCL is more immune to such risk given: 1) It has a much more diversified geographical exposure (In 3Q14, 51.7% revenue came from the Americas, 35.6% from EMEA, 4.7% from APAC and only 8.06% from China). As different markets have different upcycles / downcycles, having a well- diversified business can help to smooth out the cyclical elements of the industry, or sudden policy changes in any specific market. Fig 9 TCL's carrier/distributor partners across the globe

Source: Company data, January 2015

2) It has an average product life cycle of 9 months compared to 12-18 months for leading international brands, which enables the company to respond more quickly to changing demands and tastes of operators and consumers, and even shift business focus from one market to another.

16 January 2015 41 Macquarie Research China handset sector

Superior scale in 3) The company has consolidated its production lines and going forward will produce operator channel. almost all of its products in its new Huizhou facility (where labor supply is high and monthly wage is as low as RMB2,000~4,000), which further relieves pressure from labor costs and continues to provide consumers with relatively cheap products. With the business focus more on profitability and cost control and less R&D driven, we believe economies of scale play a key role in the company ’s long-term business planning. By targeting the operator channel (rather than open channel or e- commerce channel which cater more to niche market customers) it is much easier and faster to achieve scalability, hence is the correct strategy for the company in our view. 4) The company recently acquired the Palm brand from HP. Though details of its Palm project are yet to be unveiled, we believe it is likely that TCL will launch products under “Palm” and sell through the e-commerce/open channel from late 2015 onwards. This could gradually diversify the co mpany’s operator channel exposure in the mid-/long-term in our view. 8. Entry-level vendors won’t be as profitable as mid/high end ones Why we differ: The company positions itself as a fast-fashion, price-friendly brand. Its products are often trendy looking, which is more likely to appeal to mass market customers, rather than high specifications that only niche-market tech-savvy customers would tend to appreciate. A less intensive R&D driven business model provides the company with a shorter time-to-market cycle. Its quick-to-market products have an average product life cycle of 9 months compared to 12-18 months for leading international brands. Entry -level offers A 1Q~3Q shorter lead-time normally provides meaningful savings on R&D, production, superior leverage. personnel and inventory costs, at the same time gives the company a ~2% opex to sales advantage over its peers according to our estimates. As a result, TCL can either enjoy a higher net margin or launch products at more appealing prices to competitors. Additionally, a shorter lead time also enables the company to respond more quickly to changing demands and tastes of operators and consumers. We believe this unique advantage is under- appreciated by investors. 9. Threats from domestic handset makers who are also keen to expand overseas

Fig 10 Chinese handset vendors ’ patent portfolios

30,000

25,000

20,000

15,000

10,000

5,000

0 ZTE TCL Vivo Oppo Meizu Xiaomi Gionee Huawei Lenovo Coolpad Total no. of patents No. of patents recognized overseas

Source: State Intellectual Property Office of the PRC, January 2015

16 January 2015 42 Macquarie Research China handset sector

Why we differ: Due to lower logistics hurdles, less IP rights concerns, and potentially fewer cultural conflicts, it is generally easier for Chinese handset vendors to expand into other emerging APAC countries, and many of them have already done so. TCL has always tended to be cautious on its emerging APAC and PRC business, given the region’s intense competition, low ASP and margin. The company ’s business exposure to emerging APAC+PRC is around 15%~18% hence it would not feel much impact if the competition heats up. High barrier s in EMEA & Regarding the possibility of other Chinese handset makers penetrating EMEA or the Americas marke ts. Americas, it has been attempted and proven costly, risky and time consuming. So far only three Chinese vendors have meaningful EMEA and Americas business, namely TCL (post its 2005 acquisition of Alcatel), Huawei and ZTE (both of which have had established telecom equipment businesses with overseas operators for over a decade). And now Lenovo intends to join the trio, via its acquisition of Moto. But it will take Lenovo a few quarters to complete the consolidation and then turn around the business according to Lenovo management. We don’t expect a significant change in the competitive dynamics for TCL in the next 1~2 years. In the longer term we expect the major Chinese handset vendors to co-exist in the overseas markets and together take share from traditional international big brands on the back of superior pricing and cost advantage.

Fig 11 TCL Comm's global presence

Business Unit Location

Headquarter Shenzhen Global research facilities Shanghai, Ningbo, Huizhou, Shenzhen and Chengdu Global factory Huizhou Products sold Over 160 countries globally Repair centres 115 globally Representative offices 100 globally Staff headcount 14,000 globally Source: Company data, January 2015

16 January 2015 43 Macquarie Research China handset sector

Valuation and scenario analysis The stock is trading at 6.2x FY15E P/E versus its historical multiple of 9.5x during mid-cycles, 15x during up-cycles and 7x during down-cycles. Our target price of HK$ 11.02 is based on 9.5x P/E and FY15F EPS. Among the Emerging Leaders, we like to stretch out our scenarios to reflect potential outcomes and look at three-year rather than one-year outcomes. We view TCL as an Emerging Leader that could potentially generate a 100% return over 3 years. On the downside, economic uncertainties as well as currency volatility in the EM region might raise market concerns for the coming two years. Even though the company has been running a well-established overseas business with well-diversified business exposure and well hedged currency exposure for over a decade, overall shipments, ASP and gross margin could come under pressure in case of an EM downturn. The stock trading multiple might also come under pressure due to market concerns over EMs. In our bear case scenario analysis we lower our sales estimates from base case levels by 23%~32% for the period FY15~FY17 and apply a 7x trading multiple (based on FY15E EPS), which was where the stock was trading during the previous EU debt crisis. This implies a HK$6.50 target price, or 10.1% to downside the current share price.

Fig 12 Bear case scenario analysis

FY13 FY14E FY15E FY16E FY17E

Base case revenue (HK$ mn) 19,362 30,503 40,870 42,462 49,099 Base case EPS (HK$ cents) 26 84 116 129 146 EPS y-y growth (%) 223% 38% 11% 14% TP (9.5x FY15E EPS, HK$) 11.02 Current price (HK$) 7.13 Upside/Downside (%) 54.6%

Bear case revenue (HK$ mn) 19,362 30,503 32,265 32,222 39,765 Bear case EPS (HK$ cents) 27 84 93 101 118 EPS y-y growth (%) 214% 11% 8% 17% TP (7x FY15E EPS) 6.50 Current price (HK$) 7.13 Upside/Downside (%) -10.1% Source: Company data, Macquarie Research, January 2015

On the upside, we are slightly more conservative than street consensus in our base case gross margin forecasts. It is possible that gross margin erosion happens slower than our expectation. In this case we slightly revise up our gross margin estimates, and estimates for FY15E~FY17E EPS rise by 9%~25%. With 9.5x FY15E EPS, we get a target price of HK$12.05, implying 66.7% upside to the current share price.

Fig 13 Bull case scenario analysis - better growth margin prospect

FY13 FY14E FY15E FY16E FY17E

Base case gross margin (%) 19.0% 19.3% 18.9% 18.6% 18.3% Base case EPS (HK$ cents) 26 84 116 129 146 EPS y-y growth (%) 223% 38% 11% 13% TP (9.5x FY15E EPS, HK$) 11.02 Current price (HK$) 7.13 Upside/Downside (%) 54.6%

Bull case gross margin (%) 19.0% 19.3% 19.3% 18.9% 18.6% Bull case EPS (HK$ cents) 27 84 127 156 182 EPS y-y growth (%) 214% 52% 23% 17% TP (9.5x FY15E EPS, HK$) 12.05 Current price (HK$) 7.13 Upside/Downside (%) 66.7% Source: Company data, Macquarie Research, January 2015

16 January 2015 44 Macquarie Research China handset sector

Additionally, we believe it is possible that TCL could gain market share in emerging markets and expand its presence in developed markets more rapidly than our base case expectation. Applying a higher shipment growth projection, we get 12%~53% higher EPS estimates for FY15E~FY17E. With 9.5x FY15E EPS, we get a target price of HK$12.33, implying 70.5% upside to the current share price.

Fig 14 Bull case scenario analysis - better shipment prospects

FY13 FY14E FY15E FY16E FY17E

Base case revenue (HK$ mn) 19,362 30,503 40,870 42,462 49,099 Base case EPS (HK$ cents) 26 84 116 129 146 EPS y-y growth (%) 223% 38% 11% 14% TP (9.5x FY15E EPS, HK$) 11.02 Current price (HK$) 7.13 Upside/Downside (%) 54.6%

Bull case revenue (HK$ mn) 19,362 30,572 49,118 72,311 91,321 Bull case EPS (HK$ cents) 27 84 130 188 223 EPS y-y growth (%) 215% 55% 45% 19% TP (9.5x FY15E EPS, HK$) 12.33 Current price (HK$) 7.13 Upside/Downside (%) 70.5% Source: Company data, Macquarie Research, January 2015

In both bull case scenarios, sales and profitability could more than double by FY17E from the FY14E level according to our estimates, making TCL one of the Emerging Leaders with a potential to generate 100% return over 3 years.

Fig 15 TCL target price scenario analysis

HK$ 14.00

12.00 0.28 1.03 10.00 4.52 8.00

6.00 12.05 12.33 11.02 4.00 6.50 2.00

0.00 Bear case - Base case - Bull case - Bull case - lower PE 9.5x FY15E slower GPM better multiple EPS erosion shipment growth

Source: Macquarie Research, January 2015

16 January 2015 45 Macquarie Research China handset sector

Company profile TCL Corp holds 51% TCL Comm was listed on the HKEx in September 2004. TCL Corp., a Chinese multinational stake. electronics company (000100 CH), is the ultimate controlling shareholder with a stake of 51%. TCL Comm acquired Alcatel Mobile (JV between TCL and Alcatel) in May 2005 and has been selling mobile and Internet products under 2 brands: TCL for the PRC market and ALCATEL ONE TOUCH overseas. TCL Comm was ranked No.6 (market share 3.9%) in terms of global mobile phone shipments and No.8 in terms of smartphone shipments (market share 3.4%) in 3Q14. Though headquartered in the PRC, the company only has 8.2% sales exposure to China and the rest overseas (51.5% sales to Americas, 34.3% to EMEA, 6.0% to APAC ex PRC) as of 9M14.

Fig 16 TCL Communications Business Strategy

Source: Company data, Macquarie Research, January 2015.

TCL Communication is one of the few companies in Hong Kong or China that owns or licenses 2G, 2.5G, 2.75G, 3G and 4G patented technologies. It is also able to independently develop products and solutions for GSM, GPRS, EDGE, CDMA, WCDMA, TDSCDMA and LTE.

Fig 17 TCL organizational structure

Huizhou Municipal City Li Dongsheng (Chairman) Public shareholders Investment Holdings

8.79% 6.75% 84.46%

TCL Corp (000100 CH)

62.40% 51.14% 84.41% 50.3%

TCL Multimedia (1070 China Star Tonly Electronics (1249 TCL Com (2618 HK) Home Appliances Unit HK) Optoelectronics HK)

73.69% 55%

Highly Information Other business Techne Corporation System Technology Unit Emerging Business Unit Industry investment

Source: Company data, Macquarie Research, January 2015

16 January 2015 46 Macquarie Research China handset sector

Fig 18 TCL Com management profile

Combined Years with Years with Name Title Age years with TCL Com Alca tel the firm

Dong Sheng LI Chairman / Founder 56 16 na 16 Aiping GUO CEO 51 14 na 14 Jiyang WAMG COO 44 14 na 14 Yuk Tung LIU CFO, SVP 51 10 na 10 Kwok Chung WONG EVP, GM of APAC 42 10 na 10 Xiaobin LV SVP, GM of manufacturing 43 13 na 13 Nicolas ZIBELL SVP, GP of America 46 11 2 13 Yves MOREL SVP, GP of EMEA 53 11 4 15 Alain LEJEUNE SVP, GM of handsets 50 3 14 17 Dan Dery CMO, VP of marketing & products 42 3 6 9 Vittorio DI MAURO VP, GM of smartphone 48 11 1 12 Laurent LABEE VP, GM of customer care 51 11 8 19 Eric VALLET VP, Account management 51 8 7 15 Source: Company data, Macquarie Research, January 2015

Fig 19 Management's interests in TCL Com and its associated companies

Interest in TCL Interest in Tonly Interest in TCL Com Interest in TCL Corp Multimedia (1070 Electronics (1249 Management team (2618 HK) (000100 CH) HK) HK)

Dong Sheng LI 4.28% 6.75% 3.53% 2.28% Aiping GUO 0.91% 0.00% 0.00% 0.00% Jiyang WANG 0.66% 0.01% 0.30% 0.00% Xubin HUANG 0.08% 0.04% 0.06% 0.003% Xiaolin YAN 0.03% 0.02% 0.02% 0.00% Fang XU 0.22% 0.01% 0.09% 0.005% Siu Ki LAU 0.05% 0.00% 0.00% 0.00% Andrew LOOK 0.01% 0.00% 0.00% 0.00% Hoi Sing KWOK 0.04% 0.00% 0.00% 0.00% Note: TCL Corporation (“TCL Corp.”) is a multimedia conglomerate with a vertically integrated business model from upstream panel production to downstream consumer appliance sales, the ultimate controlling shareholder of the Company. TCL Multimedia is a subsidiary of TCL Corp involved in TV manufacturing business. Tonly Electronics is a subsidiary of TCL Corp involved in audio & video products ODM business.

Source: Company data, HKEx, January 2015

Parent company has TCL Com’s parent company TCL Corp has been continuously and frequently raising its stake been increasing in TCL Com in recent months, which we believe is a good indicator of the parentco’s stake in TCL Comm. confidence in TCL Com, reinforcing our positive view on TCL Com’s growth prospects.

16 January 2015 47 Macquarie Research China handset sector

Fig 20 TCL change of substantial shareholders' interest

No. of shares bought/ sold/ Average price Numbers of % of issued Date of relevant involved per share shares held share capital event

TCL Corporation 2,050,000(L) HKD 7.431 720,348,000(L) 59.02(L) 9/12/2014 5,478,000(L) HKD 7.555 708,685,000(L) 58.07(L) 3/12/2014 2,000,000(L) HKD 7.917 697,347,000(L) 57.15(L) 25/11/2014 3,087,000(L) HKD 7.997 686,123,000(L) 56.24(L) 13/11/2014 3,500,000(L) HKD 7.852 672,578,000(L) 55.14(L) 6/11/2014 5,000,000(L) HKD 7.699 661,078,000(L) 54.21(L) 3/11/2014 3,800,000(L) HKD 7.237 645,078,000(L) 53.04(L) 28/10/2014 16,077,000(L) HKD 7.451 637,869,000(L) 52.45(L) 24/10/2014 2,661,000(L) HKD 9.323 621,792,000(L) 51.14(L) 30/09/2014 3,323,000(L) HKD 9.547 608,729,000(L) 50.20(L) 10/09/2014 BNP Paribas Jersey Trust 1,239,000(L) HKD 7.448 85,830,000(L) 7.03(L) 11/12/2014 383,000(L) HKD 7.666 84,978,000(L) 6.98(L) 22/10/2014 1,933,000(L) HKD 8.696 84,275,000(L) 7.03(L) 30/05/2014 2,866,000(L) HKD 7.976 73,770,000(L) 6.15(L) 26/05/2014 59,731,000(L) 59,731,000(L) 5.01(L) 12/05/2014 Value Partners 1,239,000(L) HKD 7.448 85,830,000(L) 7.03(L) 11/12/2014 383,000(L) HKD 7.666 84,978,000(L) 6.98(L) 22/10/2014 1,933,000(L) HKD 8.696 84,275,000(L) 7.03(L) 30/05/2014 2,866,000(L) HKD 7.976 73,770,000(L) 6.15(L) 26/05/2014 4,626,000(L) HKD 8.629 59,731,000(L) 5.01(L) 2/05/2014 Source: Hong Kong Stock Exchange, Macquarie Research, January 2015

16 January 2015 48 Macquarie Research China handset sector

Detailed business analysis Superior geographical diversification: less cyclical than peers Less cyclical than Unlike other Chinese brands, TCL is geographically well diversified and immune to intense peers. competition domestically or cyclical telecommunication development in any particular market, hence the business volatility is much smaller than peers in our view. Additionally, its global presence exposes it to multiple growth opportunities. The company can leverage both 2G-to- 3G transition in emerging markets (such as Latin America) and 3G-to-4G transition in developed markets (such as the US, where TCL has been making strong progress winning new carrier partnerships, with Sprint being the newest carrier partner). A geographically diversified customer base gives TCL better economies of scale and efficiency as well as less volatility, hence it has a less cyclical profitability profile than its peers.

Fig 21 Geographic revenue breakdown

Sales exposure 100% 9% 8% 7% 6% 8% 8% 18% 17% 17% 13% 11% 90% 9% 8% 8% 7% 6% 7% 9% 10% 80% 7% 6% 6% 70% 37% 40% 45% 60% 43% 39% 51% 52% 45% 42% 58% 50% 45% 40% 30% 44% 20% 37% 41% 42% 40% 31% 32% 35% 29% 34% 34% 10% 0% 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14

Europe, the Middle East and Africa Americas Asia Pacific China

Source: Company data, January 2015

Where is the potential upside? Multipl e growth Revenue growth drivers: 1) penetrating new markets (we expect to contribute 15%~20% of drivers in both EM s future growth); 2) market share expansion in existing markets via new carrier/distributor and DMs. partnerships (10%~15% of growth); 3) winning more contracts from existing carrier partners (20%~25% of growth); 3) new non-handset areas such as tablets, wearables, smart-home, cloud, etc (5%~10% of growth); 4) ASP and margin uplift driven by 2G-3G, 3G-4G upgrade, feature phone to smartphone migration (30%~35% of growth); 5) potential brand/market share/ASP/margin uplift from the Palm acquisition.

Fig 22 TCL monthly shipments

9 70% 8 60% 7 50% 6 5 40% 4 30% 3 20% 2 1 10% 0 0%

Total monthly shipment (mn) Monthly shipment of smartphones (mn) Monthly shipment of feature phones (mn) Smartphone shipment mix (%)

Source: Company data, January 2015 16 January 2015 49 Macquarie Research China handset sector

Smartphone mix has Note that smartphone shipments accounted for 53% of TCL total handset shipments as of further room to grow. 1H14. We forecast this to reach 65% in FY15F and 70% in FY16F, compared with the handset industry average of 70% (smartphones as % of total shipments), and Samsung (78%), Chinese peers Huawei (98%), Lenovo (99%), Xiaomi (100%), Coolpad (100%) and ZTE (78%). We think TCL is far from reaching smartphone shipment saturation point hence it has much more room to expand the smartphone mix from the current level.

Fig 23 Global handset maker smartphone shipment penetration

Handset Smartphone Y-Y Smartphone Market Y-Y growth Market 2Q14 shipment s shipment s growth shipment share rate share (mn units) (mn units) rate penetration

Samsung 95.3 22.5% -10.9% 74.5 25.3% -2.0% 78.2% Nokia 50.3 11.9% -17.7% 23.5 8.0% -6.3% 46.7% Apple 35.2 8.3% 12.8% 35.2 11.9% 12.8% 100.0% Huawei 20.6 4.9% 59.7% 20.1 6.8% 81.1% 97.6% Lenovo 16.0 3.8% 40.4% 15.8 5.4% 39.8% 98.8% Xiaomi 15.1 3.6% 268.3% 15.1 5.1% 268.3% 100.0% LG 19.0 4.5% 6.7% 14.5 4.9% 19.8% 76.3% Coolpad 13.0 3.1% 26.2% 13.0 4.4% 26.2% 100.0% ZTE 13.6 3.2% -22.7% 10.6 3.6% -7.8% 77.9% Sony 9.6 2.3% -12.2% 9.4 3.2% -2.1% 97.9% TCL-C 16.3 3.8% 34.7% 8.7 2.9% 171.9% 53.4% Motorola 5.4 1.3% 4.2% 3.8 1.3% 60.7% 70.4% Global total 423.5 100.0% 5.9% 295.0 100.0% 26.6% 69.7% Source: Gartner, January 2015

Fig 24 Ranking of Chinese handset vendors global / PRC shipments

Ranking Unit: mn 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14

Global 1 Lenovo+Moto 14.2 16.0 15.8 16.1 13.9 16.2 17.9 18.5 17.3 19.3 2 Huawei 10.8 10.9 11.9 13.7 11.1 11.3 13.6 17.3 14.6 18.2 3 TCL Com 7.4 9.4 9.3 11.1 8.5 10.1 13.3 17.6 12.0 13.9 4 ZTE 17.4 17.2 16.6 16.2 14.6 15.3 13.7 16.3 13.8 12.6 5 Xiaomi 0.5 0.9 0.6 0.9 1.8 2.4 3.6 5.6 9.6 12.5 6 Coolpad 3.1 4.0 5.2 6.2 7.5 7.9 8.8 8.4 9.5 10.3 7 BBK Com 1.3 1.1 1.6 1.8 2.3 2.5 4.3 3.5 4.7 4.8 8 OPPO 1.6 1.4 1.7 1.9 2.4 2.9 3.4 3.2 5.0 4.5 9 Tianyu 1.7 2.1 2.5 2.7 3.3 3.7 4.1 2.7 2.5 2.4 PRC Unit: mn 1 Xiaomi 0.5 0.9 0.6 0.9 1.8 2.4 3.6 5.6 9.3 11.9 2 Lenovo+Moto 7.0 7.9 8.5 9.1 8.4 11.0 12.4 12.0 11.4 11.3 3 Coolpad 3.0 3.8 4.9 5.8 7.0 7.4 8.2 8.3 9.5 10.2 4 Huawei 6.0 5.4 5.6 5.9 7.2 6.5 7.8 9.3 8.2 9.9 5 BBK Com 1.3 1.1 1.6 1.8 2.3 2.5 4.3 3.5 4.7 4.7 6 ZTE 6.2 6.4 5.3 5.4 5.7 6.2 5.3 3.6 4.1 4.7 7 OPPO 1.6 1.4 1.7 1.9 2.4 2.9 3.4 3.2 4.6 4.2 8 Tianyu 1.7 2.1 2.5 2.7 3.3 3.7 4.1 2.7 2.5 2.4 9 TCL Com 1.4 1.6 1.6 1.5 1.1 1.2 1.2 1.2 1.2 1.4 Source: Gartner, January 2015

16 January 2015 50 Macquarie Research China handset sector

Branding strategy Dual brand strategy + The company offers 3 major product lines, represented by 2 mid/high-end lines namely “Hero” simple product line - and “Idol” , as well as 1 entry-level brand “Pop”. In general, the retail price of Hero (more focus up on high specification) & Idol (more focus on superior hardware design) handsets is around US$120~US&200 while Pop is at US$60~$100 (a trendy look with good value-for-money). We are particularly fond of TCL ’s well diversified yet simple and straightforward branding strategy (compared to many of its peers who we believe overcomplicate their product line-up. This not only confuses consumers but also has a high risk of sales cannibalization), as it can help the company to achieve better economies of scale and hence superior efficiency. The different price points allow TCL Comm to adapt its product offering, with the right specifications at the right price, for operators around the world. Most recently the company acquired the Palm brand from HP. Although details regarding this transaction and business plans for this business initiative haven’t been released yet, we believe it will bring a meaningful brand premium to the company’s existing dual -brand strategy (TCL for PRC and Alcatel for overseas) and expect market share gains and ASP/margin uplift in the mid-/long-term. Margin outlook We take a slightly conservative view on TCL’s future margin profile, expecting GPM to stabilize at around/or slightly below the 19% level in 2015 and soften to 18.6% in 2016 (compared with consensus FY16 GPM estimate of 18.8%) given the intense competition in the global handset space. Flat GPM but That said, with a well-diversified customer base, along with further synergy/cross-selling optimistic on OPM opportunities to be extracted from the partnership with parentco TCL Corp, and sister leverage . company TCL Multimedia (in areas such as distribution, sales and marketing, research and development, manufacturing, and collaboration in terms of new business initiatives such as cloud, content streaming, smart-home, etc) we expect better operational leverage from TCL Com vs other handset makers.

Fig 25 Chinese handset makers PRC vs overseas shipment exposure comparison

% of total shipment 7% 4% 1% 1% 0% 100% 90% 80% 45% 38% 70% 67% 60% 90% 50% 93% 96% 99% 99% 100% 40% 30% 55% 62% 20% 33% 10% 0% 10% ZTE OPPO Tianyu Xiaomi Huawei Coolpad TCL Com TCL BBK Com BBK Lenovo+Moto PRC shipment exposure Overseas shipment exposure

Source: Gartner, January 2015

Overseas sales carr y We’ve compared the top Chinese handset vendors’ overall as well as their PRC shipments. higher GPM. As noted in the charts above, some of the Chinese vendors have a meaningful overseas business, with TCL Com topping the chart with 90% overseas shipment contribution, followed by ZTE which also has a heavy overseas exposure (67% shipment exposure). Huawei takes a more balanced approach, with 45% weighting overseas and 55% domestic. Lenovo, post its Moto acquisition, now ranks No.1 in terms of total handset shipments among all Chinese vendors and no.4 in terms of overseas shipment exposure at 38%.

16 January 2015 51 Macquarie Research China handset sector

We believe the overseas business carries high teens to even 20%+ gross profit margin (17% ~ 22%), compared with domestic handset business in the low teens (11% ~ 13%). We benchmarked TCL Com and Coolpad’s quarterly gross profit margin during the course of 1Q12 ~ 2Q15. Note that TCL historically has had 85% ~ 90% overseas exposure and Coolpad 0%~2%. Indeed, their gross margin gap could be as wide as high single digit. TCL management also indicated that overseas gross margin is normally a few percentage points higher than domestic. W e estimate more than 95% of the company’s profit is contributed by the overseas market while domestically it only generates low single digit profit (as a % of the company’s total profit).

Fig 26 TCL Coolpad gross margin comparison

Gross profit margin 25% (%)

20%

4%~8% 15%

10%

5%

0% 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14

TCL Coolpad

Source: Company data, Macquarie Research, January 2015

Business development by region High correlation with With over 90% business exposure overseas, the company ’s performance has historically global economy. been closely correlation with global economic conditions (hence consumer demand for electronics products) as well as the competitive landscape of the handset market in each region. During the latest quarterly results, management noted that the global economic outlook remained cloudy, with the Eurozone suffering from stagnation and deflation on one side, and the United States’ economy recovering modestly on the other. Emerging markets are gradually picking up and becoming a crutch for the growth of global consumption, and are generally expected to continue serving as the world’s economic growth engine. FY14 sales guidance Regardless of the intense competition in the handset market globally, the company has lifted in 3Q14. managed to grow faster than the market with a continuously expanding market share, capitalizing on the on-going shift from feature phones to smartphones in various emerging markets and low-end customer segment in developed markets, as well as the strong demand for functional yet affordable smartphones. The company’s FY14 revenue guidance of 35% was initially given at the FY13 full year results announcement, and was revised up to 45% at the 1Q14 results announcement and up again to 50% at the 3Q14 results announcement.

Fig 27 TCL partnership with carriers / distributors globally

Region Regional o perator / distributor partners

AT&T, T -Mobile, Sprint (Sep, 20 14), Verizon (1H15E), TracFone, Walmart, Best Buy, Bell, North America MetroPCS, etc. Latin America Telefonica, America Movil, Digicel Group, Comcel, Telcel, Claro, Tigo, etc. Orange, Vodafone, MTC, AirTel, Wind, Hutchison 3, MTN, TIM, Telefonica, O2, Bouygues, T EMEA Mobile, Telenor, VimpelCom, Virgin Mobile, Maroc Telecom, etc. APAC Broadway, Smart, Reliance, Sun, IDea, Wilson, Fortress, Citilink, Wilson, etc. China Mobile, China Unicom, China Telecom, Sunning, HDH, D Phone, Aisidi, Potevio, PRC Coowin Telecom, etc. Source: Company data, January 2015

16 January 2015 52 Macquarie Research China handset sector

For the first nine months of 2014, 51.5% of TCL-C’s sales came from the Americas (specifically 20% contributed by the US and the rest from Latin America), and EMEA accounted for 34.3% (with Europe / Middle East and Africa each contributing around 17%). APAC region contributes 6% and PRC contributes 8%.

Fig 28 TCL 9M14 revenue breakdown by region

9M14 revenue breakdown by region

Asia Pacific (ex China) China 6% 8% Europe 17%

US Middle East 20% and Africa 17%

LATAM 32%

Source: Company data, January 2015

Fig 29 Y-Y revenue growth contribution by region (%)

120% 100% 103% 80% 84% 72% 67% 60% 62% 63% 55% 40% 41% 33% 31% 19% 25% 26% 20% 19% 8% 5% 7% 15% 9% 0% 5% 2% 2% 1% -2% -4% -2% -20% -19% -27% -40% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14

EMEA (%) Americas (%) Asia Pacific (%) China (%)

Source: Company data, Macquarie Research, January 2015

PRC business Cautious on PRC due The company has formed partnerships with three Chinese carriers (CM, CU, CT) as well as to competition risk some of the key consumer electronics retailers such as Sunning, Dixintong, Aisidi, Potevio, etc. Additionally, TCL has its own online shopping website (http://shop.tcl.com/) where customers can purchase value-for-money products, similar to Xiaomi (http://www.mi.com/) Huawei (http://www.vmall.com/) and Coolpad (http://www.coolpad.com/). What’s different is that TCL’s e -commerce platform is in collaboration with TCL Multimedia and TCL Corp where there is cross-selling potential. In other words, customers who initially intend to buy TCL home appliances might end up buying an extra handset after visiting the e- commerce platform. There is also great potential in collaboration with TCL Corp and TCL Multimedia, in areas such as cloud computing, wearables, and smart home appliances in the long-term , which hasn’t yet been baked into our model. .

16 January 2015 53 Macquarie Research China handset sector

Fig 30 PRC quarterly revenue y-y growth trend

100.0% 78.3% 80.0% 68.3% 60.0%

40.0% 15.6% 20.0%

0.0%

-20.0% -12.6% -24.9% -27.9% -40.0% -33.0% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14

PRC quarterly revenue y -y growth trend

Source: Company data, January 2015

Although the PRC market hasn’t been a meaningful revenue contributor over the past two years (less than 10% of TCL ’s total revenue, and TCL’s market share in the region has been quite stable over the past two years at the 1% ~ 1.3% level ). The company’s performance in the PRC market has demonstrated a healthy rebound after its FY13 downturn, thanks to its consolidation of the sales force, enhanced operational efficiency, strengthened relationships with telecom operators, electronic product distributors and e-commerce platforms, as well as the launch of its own online-to-offline sales platform. In the meantime, the company’s “customer -friendly” pricing strategy has led to the TCL brand gaining more market recognition, and will likely continue doing so as 4G adoption gradually expands from the high end to mid/low end customer segment, a segment where TCL/Alcatel brands have a strong presence. .

Fig 31 TCL ’s 4G product line-up for the PRC market

P688L P520 S838M P301M P631M P728M (CM 4G)

Dimension 152.1x76.2x7.95mm 146x72.5x9.9mm 136.5x69.7x7.45mm 123.5x64x10.9mm 166x83.6x8.6mm 152.1×76.2×8mm Screen (inch) 5.5 5.0 5.0 4.0 6.0 5.5 Display 960x540 pixels 854x480 pixels 1280x720 pixels 800x480 pixels 1280x720 pixels 1280x720 pixels 8MP Rear + 2MP 5MP Rear + 0.3MP 8MP Rear + 1.3MP 8MP Rear + 2MP 13MP Rear + 5MP Camera 2MP Front Front Front Front Front CDMA2000 GSM GSM GSM GSM Network CDMA:800MHz 1X/EVDO Rev.A 900/1800/1900MHz 900/1800/1900MHz 900/1800/1900MHz 900/1800/1900MHz 800MHz GSM: GSM TD-SCDMA: TD-SCDMA: TD-SCDMA: TD-SCDMA:

900/1800/1900MHz 900/1800/1900MHz 1900/2100MHz 1900/2100MHz 1900/2100MHz 1900/2100MHz TD-LTE: TD-LTE TD-LTE TD-LTE FDD:1800/2100MHz FDD 1800/2100MHz 1900/2300/2600MHz 1900/2300/2600MHz 1900/2300/2600MHz 1900/2300/2600MHz TDD 㸸2600MHz TDD 2600MH Single SIM dual Dual SIM Trio

standby Standby OS Android 4.3 Android 4.4 Android 4.3 Android 4.4 Android 4.3 Android 4.4 Qualcomm MSM Qualcomm Qualcomm MSM MediaTek MT6582M Marvell PXA1920 MediaTek MT6592M CPU 8926 Quad -Core MSM8916 Quad - 8926 Quad -Core Quad -Core 1.3GHz Quad -Core 1.2GHz Octa -Core 1.4GHz 1.2GHz Core 1.2GHz 1.2GHz Storage ROM: 4GB ROM: 5GB ROM: 4GB ROM: 4GB ROM: 8GB ROM: 8GB RAM: 1GB RAM: 512MB RAM: 1GB RAM: 512MB RAM: 1GB RAM: 1GB Battery 3300mAh 2000mAh 2150mAh 1500mAh 3000mAh 3300mAh Announced Aug, 2014 Oct, 2014 May, 2014 Jun, 2014 Sep, 2014 Jul, 2014 Retail price (RMB) 899 699 1299 399 1699 899 Source: GSMArena, company data, Macquarie Research, January 2015

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Expect PRC to grow We expect the PRC market to continue to grow going into 2015 as the FDD commercial from low base. license is expected to be issued in the first half of the year, and China Telecom and China Unicom will join China Mobile to push for mass adoption of 4G. That said, TCL management,

who value profitability more than market share expansion, have always tended to take a cautious approach towards the PRC given the intense competition from both domestic and foreign brands, which results in a slightly lower margin compared to overseas. We don't expect the competitive intensity in the PRC to ease any time soon, and think management will continue executing its prudent “profitability first” strategy, hence FY15 PRC business growth is likely to be a result of overall market 3G-to-4G migration, rather than TCL’s market share expansion alone. And PRC’s contribution to the company’s total revenue should stay at the high single digit level for the next 1~2 years in our view. For the first three quarters in 2014, the company managed to expand its PRC market share from 0.9% (1Q14) to 1.3% (3Q14), and we expect this momentum to continue as the company steadily grows its PRC business from a small base.

Fig 32 Market share trend of top 15 handset brands in China

PRC handset market share 1Q14 2Q14 3Q14 Q-Q change in market share 2Q14 3Q14

Lenovo 12.0% 12.9% 13.9% Lenovo 0.8% 1.1% Xiaomi 6.8% 9.1% 11.5% Xiaomi 2.3% 2.5% Samsung 13.8% 11.3% 10.2% Samsung -2.5% -1.1% Huawei 6.0% 7.5% 7.0% Huawei 1.5% -0.5% Apple 9.0% 7.5% 6.7% Apple -1.5% -0.8% Coolpad 6.9% 7.7% 6.5% Coolpad 0.8% -1.2% Vivo 3.4% 3.6% 4.2% Vivo 0.2% 0.6% OPPO 3.4% 3.2% 4.0% OPPO -0.2% 0.8% ZTE 3.0% 3.6% 3.9% ZTE 0.6% 0.3% Gionee 2.2% 2.1% 1.9% Gionee -0.1% -0.2% Tianyu 1.8% 1.8% 1.5% Tianyu 0.0% -0.3% Hisense 1.8% 1.6% 1.4% Hisense -0.2% -0.3% Nokia 2.0% 1.0% 1.4% Nokia -0.9% 0.3% TCL Communication 0.9% 1.0% 1.3% TCL Communication 0.2% 0.2% HTC 0.5% 0.9% 1.0% HTC 0.3% 0.1% Source: Gartner, Macquarie Research, January 2015

Americas business The Americas market has delivered tremendous growth so far this year, posting triple-digit y-y growth each quarter and contributing more than half of the company’s total revenue growth over the past 5 quarters in a row, thanks to the strong demand for value-for-money entry level smartphones, whose sales volume this year has grown almost 3-fold accompanied by an expanding market share. Americas is the major The company’s Alcatel OneTouch brand has gained wider market recognition and was growth driver. ranked the third and largest brands in Latin America (ex-Brazil), and Central America, Pacific Islands and the Caribbean overall. The company has also penetrated into new markets and established partnerships with new carriers (shipments to Sprint already started in September 2014. We expect a partnership with Verizon to come to fruition in 1H15). The United States and Colombia in particular have stood out, posting 57% and 170% y-y revenue growth respectively for the latest 3Q14 results.

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TCL recently announced that it would acquire the Palm brand from HP for an undisclosed sum. The acquisition is only intended for Palm trademarks but will not include any intellectual property as we understand. Although the company hasn't announced detailed plans for this Palm project, we believe it is likely that TCL would leverage the widely known Palm brand to penetrate the North American mid-/high-end segments targeting the e-commerce/open channel, contrasting with TCL’s current strategy of selling low -end phones under the Alcatel brand via the operator channel. Brand recognition is one of the major hurdles for Chinese vendors penetrating overseas markets, and we believe acquiring an already widely-known brand name makes strategic sense. The consideration for the transaction, which is reported to be tens of millions (US$), is not demanding in our view, compared to standard advertising spending by tech companies. We haven’t factored in forecasts for TCL’s Palm projects due to limited information disclosed by the company, but expect potential market share gains as well as ASP/margin uplift, in North America in particular, from 2016 onwards driven by the Palm project.

Fig 33 TCL regional growth contribution - Americas

250% 233%

200% 169%

150% 115% 100% 70% 67% 55% 62% 72% 63% 50% 39% 2% 5% 2% 2% 0% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14

Americas quarterly revenue y -y growth trend Americas contribution to the company's total revenue growth (%)

Source: Company data, Macquarie Research, January 2015

In Latin America, TCL has been gradually expanding its market share in the past two years, largely driven by the region ’s late-cycle feature phone to entry-level smartphone migration, as well as the growing brand recognition of Alcatel in the region. By the end of 2013 LATAM smartphone penetration was 19%, and 23% by the end of 3Q14 (vs the global average of ~50%). Significant potential We see significant upside for handset shipments in this particular market due to a much in Brazil, Mexico and lower-than-global-average mobile as well as smartphone penetration. In relatively more Argentina. developed telecom markets such as Brazil, Mexico and Argentina, smartphone penetration was around 20%~25% at the end of 2013 while other countries in the region are well below this level. We believe low-end smartphones priced around US$60~US$80 are more appealing to customers in these markets, as they tend to be more price sensitive. We expect strong shipment growth from this region, but the uplift effect for blended ASP might be capped as most of those products are sold at the lower end of the price spectrum (pricing range of US$60~US$80, compared with TCL’s current blended ASP of US$5 4 and smartphone ASP of US$81).

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Fig 34 LATAM smartphone / 3G penetration by country

FY13 smartphone penetration FY13 3G penetration

Brazil 21.4% 50.0% Uruguay 21.8% 42.0% Venezuela 20.9% 38.5% Argentina 23.0% 41.0% Chile 27.3% 37.0% Mexico 21.0% 30.0% Peru 16.7% 27.0% Ecuador 19.8% 20.0% Colombia 16.1% 17.0% Paraguay 12.4% 11.0% Bolivia 10.1% 15.0% Source: GSMA Intelligence, Macquarie Research, January 2015

Expect mark et share The company was ranked No.3 in 2Q14 in terms of overall handset shipments to LATAM. gain in Brazil. Note that Brazil, which is the largest country in LATAM with the biggest population, GDP and number of SIM connections, only contributes a very small amount to TCL’s LATAM shipment s (1~2% of total LATAM shipments for 2014) given the company had only managed to penetrate that market in 2H13. The company achieved strong momentum in 3Q14, tripling its shipment volume to Brazil from 82k units (2Q14) to 259k units (3Q14), with market share expanding from 0.5% (2Q14) to 1.6% (3Q14). We think this particular market offers very promising growth prospects, and expect the company’s Brazil business to ramp up going into 2015, gaining market share likely at the expense of Nokia, Sony and Samsung.

Fig 35 TCL's market share expansion in Brazil

Shipment volume Shipment market share (k units) 1Q14 2Q14 3Q14 (%) 1Q14 2Q14 3Q14

Samsung 6,035 6,115 5,653 Samsung 39.8% 37.0% 34.6% LG Electronics 2,886 3,534 3,569 LG Electronics 19.0% 21.4% 21.9% Nokia 2,089 2,403 2,245 Nokia 13.8% 14.5% 13.8% Motorola 850 961 998 Motorola 5.6% 5.8% 6.1% Apple 651 730 662 Apple 4.3% 4.4% 4.1% Lenovo 161 330 488 Lenovo 1.1% 2.0% 3.0% Huawei 459 543 405 Huawei 3.0% 3.3% 2.5% ZTE 774 466 378 ZTE 5.1% 2.8% 2.3% TCL Communication 66 82 259 TCL Communication 0.4% 0.5% 1.6% Sony 146 165 168 Sony 1.0% 1.0% 1.0% Other vendors 1,054 1,194 1,496 Other vendors 6.9% 7.2% 9.2% Grand Total 15,172 16,524 16,320 Grand Total 100.0% 100.0% 100.0% Source: Macquarie Research, January 2015

TCL is gradually For the LATAM market overall, the company has been ranked 3 rd for 3 quarters in a row and catching up with has been expanding market share while the top two players (Samsung and Nokia) both Samsung and Nokia. recorded a decline in 3Q14. We believe the late cycle feature phone to smartphone migration in LATAM will continue to be the major growth driver for TCL.

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Fig 36 TCL’s market share expansion in LATAM

LATAM shipment (k LATAM shipment units) 1Q14 2Q14 3Q14 market share 1Q14 2Q14 3Q14

Samsung 13,639 13,649 12,259 Samsung 30.4% 28.1% 24.8% Nokia 6,483 7,543 7,256 Nokia 14.4% 15.5% 14.7% TCL Communication 5,063 6,340 7,015 TCL Communication 11.3% 13.0% 14.2% LG Electronics 4,976 6,200 7,010 LG Electronics 11.1% 12.7% 14.2% Motorola 2,238 2,529 2,731 Motorola 5.0% 5.2% 5.5% ZTE 3,871 2,331 2,455 ZTE 8.6% 4.8% 5.0% Apple 1,862 2,080 2,098 Apple 4.1% 4.3% 4.2% Huawei 1,731 2,047 1,866 Huawei 3.9% 4.2% 3.8% Sony 711 792 803 Sony 1.6% 1.6% 1.6% Lenovo 258 488 733 Lenovo 0.6% 1.0% 1.5% Other vendors 4,059 4,655 5,253 Other vendors 9.0% 9.6% 10.6% Grand Total 44,891 48,653 49,479 Grand Total 100.0% 100.0% 100.0% Source: Gartner, January 2015

Expect more operator In regards to North America, the company only penetrated the region in 2012, gained wins in North significant traction during the course of 2013 and has been making meaningful progress in America. gaining more carrier partners (has already formed partnerships with AT&T, T-Mobile and Sprint, currently in talks with Verizon, which is expected to come to fruition in 1H15). As US operators are getting more conservative on giving handset subsidies, value-for-money smartphones (such as the ones sold by TCL) could gain more traction as a result. We expect Chinese handset vendors to expand their market in the next 1~2 years. TCL, whose Alcatel brand is more widely recognized than other Chinese brands such as Huawei or ZTE, will benefit more in our view.

Fig 37 TCL’s market share expansion in North America

North America 1Q14 2Q14 3Q14 North America shipment 1Q14 2Q14 3Q14 shipment (k units) market share

Apple 18,536 18,821 20,415 Apple 34.3% 32.0% 32.8% Samsung 15,014 17,573 15,608 Samsung 27.8% 29.9% 25.1% LG Electronics 3,735 5,337 5,401 LG Electronics 6.9% 9.1% 8.7% ZTE 3,132 3,031 3,668 ZTE 5.8% 5.2% 5.9% Motorola 1,421 1,637 1,821 Motorola 2.6% 2.8% 2.9% Kyocera 1,484 1,517 1,800 Kyocera 2.7% 2.6% 2.9% TCL Communication 1,743 1,034 1,653 TCL Communication 3.2% 1.8% 2.7% Nokia 1,196 1,284 1,477 Nokia 2.2% 2.2% 2.4% HTC 923 1,217 1,434 HTC 1.7% 2.1% 2.3% Amazon 953 880 1,075 Amazon 1.8% 1.5% 1.7% Acer Group 505 733 875 Acer Group 0.9% 1.2% 1.4% Huawei 629 674 776 Huawei 1.2% 1.1% 1.2% Asus 717 656 691 Asus 1.3% 1.1% 1.1% Lenovo 415 543 672 Lenovo 0.8% 0.9% 1.1% BlackBerry 384 450 646 BlackBerry 0.7% 0.8% 1.0% Grand Total 54,042 58,856 62,291 Grand Total 100.0% 100.0% 100.0% Source: Gartner, January 2015

EMEA business EMEA growth has EMEA has historically been the major growth driver of the company, contributing over 1/3 of moderated in recent total shipments. This year the growth of the region decelerated a bit, outpaced by the years. Americas, partially due to the prolonged stagnation in the Eurozone and the unstable political situation in Eastern Europe. Within the region, Western Europe is the biggest market with over 50% of EMEA shipments, and the rest is evenly distributed between Eastern Europe and the Middle East & Africa. We expect Eastern Europe and the Middle East & Africa to become the major growth drivers for EMEA going forward thanks to their still early stage of feature phone-to-smartphone migration and a greater appetite for functionality and affordability rather than brand.

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Fig 38 TCL's shipments and market share in Western Europe

Western Europe Western Europe shipment (k units) 1Q14 2Q14 3Q14 shipment market share 1Q14 2Q14 3Q14

Samsung 20,832 14,263 14,703 Samsung 40.5% 33.5% 32.5% Apple 11,069 8,149 10,070 Apple 21.5% 19.2% 22.3% Nokia 4,057 3,511 3,707 Nokia 7.9% 8.3% 8.2% Sony 2,726 2,815 2,665 Sony 5.3% 6.6% 5.9% LG Electronics 1,745 1,806 1,587 LG Electronics 3.4% 4.2% 3.5% HTC 1,126 1,112 1,221 HTC 2.2% 2.6% 2.7% TCL Communication 888 1,221 1,004 TCL Communication 1.7% 2.9% 2.2% Asus 834 716 935 Asus 1.6% 1.7% 2.1% Huawei 943 1,333 910 Huawei 1.8% 3.1% 2.0% Acer Group 520 685 862 Acer Group 1.0% 1.6% 1.9% Lenovo 466 541 694 Lenovo 0.9% 1.3% 1.5% BlackBerry 543 602 533 BlackBerry 1.1% 1.4% 1.2% HP 181 461 400 HP 0.4% 1.1% 0.9% Motorola 282 377 378 Motorola 0.5% 0.9% 0.8% ZTE 259 304 376 ZTE 0.5% 0.7% 0.8% Other vendors 5,006 4,660 5,161 Other vendors 9.7% 11.0% 11.4% Grand Total 51,477 42,555 45,205 Grand Total 100.0% 100.0% 100.0% Source:Gartner, January 2015

Fig 39 TCL's shipment and market share in Eastern Europe

Eastern Europe Eastern Europe shipment shipment (k units) 1Q14 2Q14 3Q14 market share 1Q14 2Q14 3Q14

Samsung 5,076 4,475 5,287 Samsung 43.4% 37.4% 38.6% Nokia 1,609 1,478 1,730 Nokia 13.8% 12.4% 12.6% TCL Communication 394 641 671 TCL Communication 3.4% 5.4% 4.9% Apple 369 496 613 Apple 3.2% 4.1% 4.5% Sony 403 419 430 Sony 3.4% 3.5% 3.1% LG Electronics 234 304 419 LG Electronics 2.0% 2.5% 3.1% Lenovo 152 244 377 Lenovo 1.3% 2.0% 2.8% Huawei 295 462 324 Huawei 2.5% 3.9% 2.4% ZTE 112 194 267 ZTE 1.0% 1.6% 2.0% Orange 180 197 215 Orange 1.5% 1.6% 1.6% Other vendors 2,864 3,053 3,358 Other vendors 24.5% 25.5% 24.5% Grand Total 11,689 11,962 13,691 Grand Total 100.0% 100.0% 100.0% Source: Gartner, January 2015

Fig 40 TCL's shipment and market share in Middle East and Africa

Middle East and Africa Middle East and Africa shipment (k units) 1Q14 2Q14 3Q14 shipment market share 1Q14 2Q14 3Q14

Samsung 7,639 7,134 8,108 Samsung 29.8% 26.7% 29.8% Nokia 6,056 5,073 4,681 Nokia 23.6% 19.0% 17.2% Huawei 660 1,085 914 Huawei 2.6% 4.1% 3.4% TCL Communication 699 1,040 860 TCL Communication 2.7% 3.9% 3.2% Lenovo 402 720 806 Lenovo 1.6% 2.7% 3.0% Apple 1,293 1,163 766 Apple 5.0% 4.3% 2.8% LG Electronics 601 699 652 LG Electronics 2.3% 2.6% 2.4% Tecno Telecom 443 522 553 Tecno Telecom 1.7% 2.0% 2.0% BlackBerry 254 300 498 BlackBerry 1.0% 1.1% 1.8% ZTE 490 530 471 ZTE 1.9% 2.0% 1.7% Other vendors 7,138 8,488 8,945 Other vendors 27.8% 31.7% 32.8% Grand Total 25,675 26,755 27,254 Grand Total 100.0% 100.0% 100.0% Source: Gartner, January 2015

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Fig 41 Regional contribution to TCL revenue growth - EMEA

120.0% 103% 100.0% 84% 76.6% 80.0% 71.4% 73.1% 59.6% 54.9% 60.0% 44.7% 41% 37.2% 40.0% 31% 25% 26% 19% 20.0%

0.0% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14

EMEA quarterly revenue y -y growth trend EMEA contribution to the company's total revenue growth (%)

Source: Company data, Macquarie Research, January 2015

Although the European economy has remained weak due to the prolonged stagnation in the Eurozone and the unstable political situation in Eastern Europe, demand for the Group’s smart devices in the region has remained strong and is expected to outperform the market in the near term. During 2014 the company further enhanced and strengthened its sales in the open market channel an d via telecom operators. More specifically, TCL’s sales in South Africa, Algeria and Tanzania grew significantly via the telecom operator channels. The Group also extended its market reach to Finland with a local telecom operator and said it received positive feedback. 4G equipped entry-level smartphones are expected to be the next growth driver. The company’s newly launched tablets have also been well received in EMEA market according to the management. APAC business (ex PRC) APAC not a focus Due to limited carrier partnerships and severe competition from both local handset makers as due to competition. well as other Chinese peers, we do not expect TCL to be aggressive in this market. Going into FY15, the company intends to focus on sales and marketing of entry-level smartphones in India, the Philippines, Malaysia and Thailand.

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Fig 42 Chinese vendors' presence in emerging APAC region

Emerging APAC Emerging APAC shipment (k units) 1Q14 2Q14 3Q14 shipment market share 1Q14 2Q14 3Q14

Samsung 21,683 16,717 16,870 Samsung 17.5% 14.0% 13.3% Nokia 16,768 14,408 13,872 Nokia 13.5% 12.1% 11.0% Micromax 7,582 8,288 9,858 Micromax 6.1% 6.9% 7.8% Karbonn Mobiles 6,473 6,831 7,702 Karbonn Mobiles 5.2% 5.7% 6.1% Nexian 5,423 4,778 5,185 Nexian 4.4% 4.0% 4.1% Lava International 4,054 4,454 4,885 Lava International 3.3% 3.7% 3.9% Intex Technologies 3,262 3,368 3,977 Intex Technologies 2.6% 2.8% 3.1% Spice Mobility 2,604 3,042 3,384 Spice Mobility 2.1% 2.5% 2.7% Maxx Mobile Maxx Mobile Communications 1,682 2,156 2,276 Communications 1.4% 1.8% 1.8% i-mobile 1,736 1,887 1,986 i-mobile 1.4% 1.6% 1.6% Lenovo 1,366 1,598 1,852 Lenovo 1.1% 1.3% 1.5% Zen Mobile 770 1,392 1,557 Zen Mobile 0.6% 1.2% 1.2% Asus 210 502 1,553 Asus 0.2% 0.4% 1.2% Wellcom 1,275 1,338 1,476 Wellcom 1.0% 1.1% 1.2% Motorola 52 826 1,432 Motorola 0.0% 0.7% 1.1% CSL 1,274 1,335 1,308 CSL 1.0% 1.1% 1.0% Sony 1,062 1,189 1,066 Sony 0.9% 1.0% 0.8% Apple 1,888 1,373 992 Apple 1.5% 1.1% 0.8% LG Electronics 692 754 865 LG Electronics 0.6% 0.6% 0.7% Videocon 645 673 648 Videocon 0.5% 0.6% 0.5% HTC 376 539 636 HTC 0.3% 0.5% 0.5% iBall 363 432 520 iBall 0.3% 0.4% 0.4% Huawei 672 613 500 Huawei 0.5% 0.5% 0.4% TCL Communication 532 547 495 TCL Communication 0.4% 0.5% 0.4% Acer Group 186 265 405 Acer Group 0.2% 0.2% 0.3% Wynncom 245 347 386 Wynncom 0.2% 0.3% 0.3% ZTE 936 416 378 ZTE 0.8% 0.3% 0.3% BlackBerry 90 150 267 BlackBerry 0.1% 0.1% 0.2% OPPO 306 215 241 OPPO 0.2% 0.2% 0.2% Gionee 490 191 230 Gionee 0.4% 0.2% 0.2% Fly Mobile 173 246 226 Fly Mobile 0.1% 0.2% 0.2% HP 147 373 214 HP 0.1% 0.3% 0.2% Xiaomi 8 187 Xiaomi 0.0% 0.0% 0.1% Byond Tech 107 158 167 Byond Tech 0.1% 0.1% 0.1% Gfive 137 140 160 Gfive 0.1% 0.1% 0.1% Panasonic 59 83 102 Panasonic 0.0% 0.1% 0.1% Vivo 87 97 Vivo 0.0% 0.1% 0.1% Dell 7 55 90 Dell 0.0% 0.0% 0.1% Onida 69 64 82 Onida 0.1% 0.1% 0.1% Coolpad 54 68 73 Coolpad 0.0% 0.1% 0.1% Other vendors 38,339 37,629 38,320 Other vendors 31.0% 31.5% 30.3% Grand Total 123,791 119,535 126,520 Grand Total 100.0% 100.0% 100.0% Source: Macquarie Research, January 2015

Conservative For sales channel development, TCL has continued to work on both telecom operators and prospects for APAC open channels, including partnerships with major chain stores in Thailand, and signing region. distribution agreements with major distributors in India and Vietnam in the third quarter of 2014. That said, competition in APAC-ex PRC has been relatively more intense than other regions, as both Chinese handset vendors as well as local handset vendors in their respective markets all focus on the mass-market product segment and have been quite aggressive on pricing. Management said it will adopt a similar strategy as in the PRC, which is to expand strategically and cautiously, with profitability being a priority rather than market share. We expect this region to post solid growth in the next 1~2 years but the contribution to the total revenue / profitability won’t be signifi cant any time soon.

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Fig 43 Regional revenue to TCL growth contribution - APAC ex PRC

160.0% 134.4% 140.0% 110.6% 120.0% 103.0% 100.0% 80.7% 80.0% 60.0% 42.9% 33% 40.0% 19% 23.2% 9.3% 20.0% 8% 2% 7% 0.0% -20.0% -2% -2% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14

APAC quarterly revenue y -y growth trend APAC contribution to the company's total revenue growth (%)

Source: Company data, Macquarie Research, January 2015

Competitive landscape Threat from other Chinese handset vendors keen to expand overseas Cut -throat Intensifying competition in the domestic market has made it more challenging for handset competition in PRC makers to achieve profitability, or breakeven in down-cycles. The increasingly crowded market. market, ever-changing competitive landscape, uncertainties on the regulators’ / operators’ front, and the unforeseen supply chain components / inventory / working capital risks make the PRC, regardless of being the market with the largest population and the fastest growing demand, a particularly difficult one for handset vendors to survive in. The relatively “friendlier” overseas markets, which offer higher margins, provide a very good incentive for Chinese handset vendors to look beyond the PRC and explore opportunities elsewhere. IT companies that have meaningful international businesses have always faced a higher risk of legal disputes, with patent related issues being one of the major concerns. Having a strong patent portfolio allows an IT company to enjoy lower royalty costs while conducting business operations overseas, and they run a much lower risk of running into patent lawsuits when extending their international footprints. High risk of IPR This is particularly the case in developed markets where there is more awareness of IP rights disputes overseas. and the IP related regulatory and legal systems are more advanced. For the Chinese vendors who are keen to expand their overseas businesses, but have relatively weak international patent portfolios, this means higher licensing costs (10% of overseas revenue is required to settle licensing fees, compared with domestically only low single digits) and higher patent infringement risk in international markets, especially in the more developed regions such as the US and Europe.

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Fig 44 Smartphone patent war since 2009 2009

2009, Oct 22: Nokia sues Apple over 10 patents. 2009, Dec 11: Apple countersues Nokia over 13 patents. 2009, Dec 29: Nokia countersues Apple over 7 more patents. 2010 2010, Jan 15: Apple sues Nokia over 9 patents. 2010, Sep 30: Nokia sues Apple over 4 patents. 2010, Mar 02: Apple sues HTC over 10 patents. 2010, Oct 01: Microsoft sues Motorola over 9 patents. 2010, May 7: Nokia sues Apple over 5 patents. 2010, Oct 06: Motorola sues Apple over 18 patents 2010, May 12: HTC sues Apple over 5 patents. 2010, Oct 29: Apple sues Motorola over 6 patents. 2010, Nov 10: Motorola sues Microsoft over 16 2010, May 28: S3 Graphics sues Apple over 4 patents. patents. 2010, Jun 28: Apple sues Nokia over 7 patents. 2010, Nov 22: Motorola sues Microsoft over 5 patents. 2010, Jul 06: HTC sues Apple over 3 patents. 2010, Dec 01: Apple sues Motorola over 12 patents. 2010, Aug 12: Oracle sues Google over 7 patents. 2010, Dec 03: Nokia sues Apple over 6 patents. 2010, Dec 03: Apple sues Nokia over 1 patent and 2 2010, Sep 17: Nokia sues Apple over 2 patents. utility models. 2010, Sep 27: Apple sues Nokia over 9 patents. 2010, Dec 23: Motorola sues Microsoft over 3 patents. 2010, Dec 23: Microsoft sues Motorola over 7 patents. 2011 2011, Feb 14: Motorola sues Microsoft over 2 patents. 2011, Jul 11: Apple sues HTC over 5 patents. 2011, Mar 29: Nokia sues Apple over 7 patents. 2011, Aug 02: Apple sues Samsung over 10 patents. 2011, Apr 15: Apple sues Samsung over 19 patents. 2011, Aug 23: Microsoft sues Motorola over 7 patents. 2011, Apr 22: Samsung sues Apple over 10 patents. 2011, Sep 07: HTC sues Apple over nine patents. 2011, Jun 28: Samsung sues Apple over 5 patents. 2011, Sep 12: Samsung sues Apple over 3 patents. 2011, Jul 05: Apple sues Samsung over 7 patents. 2011, Sep 12: Apple sues Samsung over 4 patents. 2011, Sep 17: Samsung sues Apple over 7 patents. 2012 2012, Mar 7: Samsung sues Apple over 3 patents. 2012, Jun 10: Apple sues Samsung over auto-correct patent. 2012, Jul 2: Nokia sues Google over Nexus 7 patents infringement. 2012, Nov 28: Ericsson sues Samsung over mobile infrastructure patent infringement. 2013 2013, June: ITC rules iPads infringe on Samsung patents. 2013, August: ITC blocks older Samsung phones for violating two Apple patents. 2013, Oct 31: Rockstar Consortium, a consortium owned by companies including Apple and Microsoft, starts legal action against Google, Huawei and Samsung, and other makers of Android phones including Asustek, HTC, LG Electronics, Pantech, and ZTE. 2013, December 23: Google initiates legal action against Rockstar Consortium with a countersuit. 2014 2014, February: HTC and Nokia settled all their patent suits with HTC paying an undisclosed amount to Nokia. 2014, March: The $929 million judgement from the US trial Apple vs. Samsung becomes official. Samsung files a formal appeal. Source: Macquarie Research, January 2015

TCL more immune to We think TCL’s 2005 acquisition of Alcatel has granted the company a meaningful number of IPR risk than peers. patents (2G in particular). That , plus the company’s over one decade experience of overseas development, has helped it accumulate a significant number of international patents, hence it faces a smaller risk of patent lawsuits and much lower licensing costs. Other Chinese vendors which have historically been conducting business mainly in the PRC market may also hold solid patent portfolios, but those patents are more likely than not intended for the PRC market only and are not applicable overseas. Patent conflicts with international vendors could become more likely, and could be quite costly to resolve once their overseas businesses grow in scale.

16 January 2015 63 Macquarie Research China handset sector

Fig 45 Chinese handset makers' overseas exposure/margin comparison

100% 10% 90% 9% 9% 80% 8% 8% 8% 70% 7% 7% 7% 60% 6% 50% 5% 40% 4% 30% 3% 3% 3% 3% 20% 2% 2% 10% 1% 0% 0% ZTE OPPO Tianyu Xiaomi Huawei Coolpad TCL Com TCL BBK Com BBK Lenovo+Moto Overseas shipment exposure (LHS) FY14F EBITDA margin (RHS)

Source: IDC, Gartner, Macquarie Research, January 2015

APAC low barrier but Due to lower logistics hurdles, fewer IP rights concern, and potentially fewer cultural conflicts, more competition it is generally easier for Chinese handset vendors to expand into other emerging APAC countries, and many of them have already done so. But the region also has intense competition and relatively low margins compared with EMEA and Americas, as noted by a number of handset vendors we’ve spoken to. Regarding the poss ibility of penetrating into EMEA or Americas, it has been attempted and proven costly, risky and time consuming. So far only three Chinese vendors have meaning EMEA and Americas businesses, namely TCL (post its 2005 acquisition of Alcatel which helped it inherit Alcatel’s overseas customer base, operator/distributor channel relationships as well as premium brand name), Huawei and ZTE (both of which have established telecom equipment businesses with overseas operators for over a decade, with Huawei having a strong presence in EMEA while ZTE is in the US). And now Lenovo intends to join the trio, via its acquisition of Moto. But it will take 4~6 quarters to complete the consolidation and likely another year to stabilize the business. Hence we expect the entry barriers, especially in the EMEA and Americas markets, for those Chinese vendors are quite high and don’t foresee in the next few quarters an other Chinese handset brand making any significant overseas progress and posing a meaningful threat to TCL, Huawei, ZTE and the like. Rather, we expect Chinese handset brands will co-exist in the international market and jointly take share from legacy international tier-1 brands such as Samsung, Sony, Nokia, HTC, etc, as price-sensitive emerging markets, have taken over and become the major smartphone shipment drivers for the next few years. Threat from Lenovo Moto merger Lenovo acquired IP p Another company keen to extend its international footprint is Lenovo, which recently acquired ortfolio from Moto. Motorola Mobile and IBM ’s low-end server business. Out of the total consideration of US$5.2bn for the two deals, around 50% was for trademarks, technology patents and customer relations (as Moto enjoy higher brand recognition globally). Post the acquisition of Motorola Mobile, Lenovo acquired 2,000+ international IP and cross licenses with Google which could reduce Lenovo’s royalty fees while alleviating the risk of facing patent lawsuits from international peers. That said, Lenovo will need to absorb a huge amount of losses at the initial stage of the Moto consolidation (FY15 ~US$150mn and FY16 ~US$200mn, according to the management guidance). Given the company’s solid execution track record and the management’s target to break even in the next 4~6 quarters, we don’t think the company will get aggressi ve on pricing, but rather adopt a cautious approach of balancing market share and profitability, to roll out its Moto+Lenovo dual brand strategy. Lenovo’s brand recognition is quite limited overseas, while Moto, which has much wider market recognition, targets the high-end product segment and will continue to focus on this area post the consolidation (according to Lenovo management). Additionally, like Samsung, Moto relies heavily on open channel sales (Lenovo likely to adopt the same channel strategy after entering those markets in the mid to long term) rather than the operator channel which is TCL’s focus, hence we don’t see any meaningful overlap here either. 16 January 2015 64 Macquarie Research China handset sector

Fig 46 TCL vs Lenovo+Moto APAC business overlap

APAC Shipment s (k) 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2

Lenovo 7,767 10,698 12,542 12,712 12,441 12,602 Moto 1,252 839 633 496 1,806 2,026 TCL 1,522 2,033 2,083 2,070 1,806 2,026 China Shipment s (k) Lenovo 7,490 10,437 12,033 11,729 11,264 11,211 Moto 901 557 342 226 128 59 TCL 1,099 1,178 1,190 1,200 1,214 1,385 India Shipment s (k) Lenovo 59 54 62 153 138 234 Moto 7 3 2 4 379 956 TCL 48 81 92 90 77 85 Rest of Asia Shipment s (k) Lenovo 216 207 446 830 1,040 1,157 Moto 344 280 288 267 51 140 TCL 376 774 800 779 515 556 Source: Gartner, Macquarie Research, January 2015

Lenovo+Moto Lenovo’s management expects to complete the Motorola business consolidation and achieve consolidation will a turnaround in 4~6 quarters. Management plans to continue growing both the take time. Lenovo/Motorola market share in global markets through re-launching the Motorola brand in China and growing the business in emerging markets including India and Latin America with Motorola selling in the high-end segment and Lenovo addressing the mid-range and lower-tier segments. Currently Moto has ~50% market overlap with TCL. That said, we believe it will take time for Lenovo to consolidate the combined business, then ramp up production, followed by commercial launch, hence think it won’t pose a meaningful risk in the near term (FY15). Judging from Moto ’s (standalone) positioning in the past, we think there is a gap between Moto handsets and TCL/Alcatel in terms of both price and branding. We do acknowledge that the geographical overlap between TCL/Alcatel and Lenovo/Moto is significant (~50%) and could expand from here (as Lenovo intends to further expand its global presence), albeit the customer segments they target are likely to be different (TCL/Alcatel focuses on entry level to mass market, while Lenovo/Moto targets mass market to mid-end), hence the threat from Lenovo/Moto shouldn't be as high as the market fears.

16 January 2015 65 Macquarie Research China handset sector

Fig 47 TCL vs Lenovo+Moto EMEA business overlap

EMEA Shipment s (k) 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14

Lenovo 12 105 250 681 581 1,042 Moto 283 183 110 65 284 387 TCL 3,117 3,069 4,310 6,556 3,344 4,522 Russia (k) Lenovo 12 105 250 681 581 1,042 Moto ------TCL 203 291 351 463 387 440 Rest of Eastern Europe (k) Lenovo - 10 87 267 201 313 Moto 55 48 44 - - - TCL 480 392 518 1,020 565 904 Western Europe (k) Lenovo ------Moto 194 110 45 65 284 377 - France 59 40 13 17 19 29 - Germany 55 32 11 15 35 93 - Italy 7 4 1 1 4 21 - Rest of Western Europe 33 15 13 5 12 8 - Spain 14 7 2 2 5 12 - United Kingdom 25 12 5 25 210 214 TCL 502 521 693 1,188 888 1,221 - France 144 145 206 265 231 303 - Germany 56 70 93 118 110 186 - Italy 52 62 106 172 130 220 - Rest of Western Europe 44 36 45 271 74 142 - Spain 43 48 57 100 84 130 - United Kingdom 163 160 186 262 259 240 Middle East and Africa (k) Lenovo - 20 68 141 179 284 Moto 34 25 21 - - 10 TCL 1,932 1,864 2,748 3,885 1,504 1,957 Source: Gartner, Macquarie Research, January 2015

Fig 48 TCL vs Lenovo+Moto Americas business overlap

Americas Shipment (k) 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14

Lenovo 7,779 10,955 13,000 13,551 13,165 13,822 Moto 6,145 5,224 4,889 4,920 4,129 5,444 TCL 8,517 10,136 13,311 17,574 11,956 13,922 Latin America (k) Lenovo - 152 208 158 143 178 - Brazil - 152 208 155 103 155 - Mexico - - - 2 0 - - Rest of Latin America - - - 2 40 23 Moto 3,156 3,030 3,091 3,152 2,238 2,529 - Brazil 1,484 1,424 1,453 1,482 850 961 - Mexico 931 894 912 930 627 708 - Rest of Latin America 742 712 726 741 761 860 TCL 3,667 4,395 4,835 6,886 5,062 6,340 - Brazil - - - 89 66 82 - Mexico 770 923 1,692 2,410 1,772 2,219 - Rest of Latin America 2,897 3,472 3,142 4,386 3,225 4,039 North America (k) Lenovo ------Moto 1,421 1,159 1,050 1,204 1,421 1,637 TCL 211 639 2,084 2,062 1,743 1,034 Source: Gartner, Macquarie Research, January 2015

16 January 2015 66 Macquarie Research China handset sector

Competition from Samsung entering mass-market product segment Regardless of Samsung’s price cuts (as noted in the following table), TCL products still offer a better price-performance. We conducted a detailed analysis comparing Samsung’s recently launched products, their retail price, specifications, as well as target markets, and found that: 1) even af ter price cuts, Samsung’s handsets are still priced at a distinct premium compared with TCL/Alcatel ’s, hence TCL still outperforms in terms of price-performance; Distinct pricing gap 2) TCL has much fewer models compared with Samsung, that in addition to its PRC based between production facility could offer superior scale/cost benefits; Samsung/TCL. 3) the markets where Samsung has been getting aggressive on pricing are mostly emerging APAC countries (PRC in particular), while TCL has very little exposure to those markets (15%~18%) hence shouldn ’t feel much of an impact; 4) in the EMEA and Americas regions where Samsung and TCL have meaningful overlap in terms of market presence, Samsung mainly sells its products via open channel distributors most of which target mid/high-end customers, while TCL has 80% of products shipped to the operator channel where they are mostly positioned as entry-level/mass- market handsets. With a distinct gap in pricing, market positioning and channel strategy, we see very little ov erlap between the two companies’ business es hence believe that concern is overdone.

Fig 49 Handset comparison of Samsung and TCL Alcatel

TCL Alcatel OneTouch Hero: Premium Alcatel OneTouch Idol: Cutting - Alcatel OneTouch Pop: Value -for -money user experience edge design

Hero 2 Hero 8 Idol 2S Idol 2 Mini S Pop 7S Pop 8S Pop 2

Network 2G GSM 850 / 900 2G GSM 850 / 900 2G GSM 850 / 900 2G GSM 850 / 900 2G GSM 850 / 900 2G GSM 850 / 900 2G GSM 850 / 900 / 1800 / 1900 / 1800 / 1900 / 1800 / 1800 / 1900 / 1800 / 1900 / 1800 / 1900 / 1800 / 1900 3G HSDPA 850 / 3G HSDPA 850 / 3G HSDPA 850 / 3G HSDPA 850 / 3G HSDPA 900 / 3G HSDPA 850 / 3G WCDMA 850 / 900 / 1900 / 2100 900 / 1900 / 2100 900 / 2100 900 / 1900 / 2100 2100 900 / 1900 / 2100 900 / 1900 / 2100 4G LTE 700 / 1700 4G LTE 800 / 900 / LTE 800 / 900 / 4G LTE 700 / 1700 4G LTE 800 / 900 / 4G LTE 800 / 900 / 4G FDD-LTE 800 / / 1900 / 2100 / 1800 / 2100 / 2600 1800 / 2100 / 2600 / 1900 / 2100 / 1800 / 2100 / 2600 1800 / 2100 / 2600 900 / 1800 / 2100 / 2600 / 1800 2600 2600 4G LTE 800 / 900 / LTE 700 / 1700 / 4G LTE 700 / 800 / 4G LTE 700 / 850 / 1800 / 2100 / 2600 1900 / 2100 / 2600 900 / 1800 / 2100 / 1700 / 1900 / 2100 2600 / 2600 LTE 800 / 850 / 4G LTE 800 / 900 / 900 / 1800 / 2100 / 1800 / 2100 / 2600 2600 Announced 2014, September 2014, September 2014, February 2014, February 2014, January 2014, September 2014, September Dimensions 160.5 x 81.6 x 7.9 209 x 122 x 7.3 136.5 x 69.7 x 7.5 129.5 x 63.5 x 8.5 192 x 113 x 9 mm 209 x 128 x 7.2 141 x 71.5 x 9.7 mm mm mm mm mm mm Weight 175 g 310 g 126 g 116g 279 g 327 g 170g Display 1080 x 1920 1200 x 1920 720 x 1280 pixels, 540 x 960 pixels, 600 x 1024 pixels, 800 x 1280 pixels, 480 x 854 pixels, pixels, 6.0 inches pixels, 8.0 inches 5.0 inches 4.5 inches 7.0 inches 8.0 inches 5.0 inches Memory ROM 16GB ROM 8/16/32 GB ROM 8GB ROM 4GB ROM 4GB ROM 8GB ROM 8GB RAM 2GB RAM 2GB RAM 1GB RAM 1GB RAM 1GB RAM 1GB RAM 1GB Camera Primary 13.1MP Primary 5MP Primary 8MP Primary 8MP 3MP Primary 5MP Primary 5MP Geo-tagging, touch Geo-tagging, touch Geo-tagging, touch Geo-tagging, touch focus, face/smile focus, face focus, panorama, focus, face/smile detection, High detection High Dynamic detection, Dynamic Range, Range panorama, High panorama Dynamic Range Secondary 5MP Secondary 2MP Secondary 1.3MP Secondary 2MP Secondary 3MP OS Android OS, v4.4.2 Android OS, v4.4.2 Android OS, v4.3 Android OS, v4.3 Android OS, v4.4.2 Android OS, v4.4.2 Android OS, v5.0 (KitKat) (KitKat) (Jelly Bean), (Jelly Bean), (KitKat) (KitKat) (Lollipop) Chipset SoC MediaTek SoC Mediatek SoC Qualcomm SoC Qualcomm Qualcomm Qualcomm Qualcomm MT6592T MT8392 Snapdragon 400 Snapdragon 400 MSM8926 MSM8916 MSM8916 MSM8926 MSM8926 Snapdragon 400 Snapdragon 410 Snapdragon 410 CPU Octa-core 2.0 GHz Octa-core 2.0 GHz Quad-core 1.2 Quad-core 1.2 Quad-core 1.2 Quad-core 1.2 Quad-core 1.2 Cortex-A7 Cortex-A7 GHz Cortex-A7 GHz Cortex-A7 GHz Cortex-A7 GHz Cortex-A53 GHz Battery 3100 mAh 4060 mAh 2150 mAh 2000 mAh 3240 mAh 4100 mAh 2500mAh Retail price US$451 US$297 US$241 US$190 US$155 US$170 US$50

16 January 2015 67 Macquarie Research China handset sector

Fig 49 Handset comparison of Samsung and TCL Alcatel Samsung Galaxy A5 Galaxy A3 Galaxy Ace 4 LTE Galaxy Avant Galaxy Ace NXT Galaxy Core 2 Galaxy Young 2

Network 4G LTE 800 / 900 / 4G LTE 800 / 900 / 2G GSM 850 / 900 4G FDD LTE 850 / 3G WCDMA 900 / 3G WCDMA 900 / 3G WCDMA 900 / 1800 / 2100 / 2600 1800 / 2100 / 2600 / 1800 / 1900 1700 / 2100 2100 1900 / 2100 2100 3G TD-SCDMA 3G TD-SCDMA 3G WCDMA 850 / 3G WCDMA 850 / 2G GSM 850 / 900 2G GSM 850 / 900 2G GSM 850 / 900 1880 / 2010 1880 / 2010 900 / 2100 1700 / 2100 / 1800 / 1900 / 1800 / 1900 / 1800 / 1900 2G GSM900 / 2G 900 / 1800 4G FDD-LTE 800 / 2G GSM 850 / 900 Dual SIM Dual Dual SIM Dual 1800 900 / 1800 / 2600 / 1800 / 1900 Standby Standby Dual SIM Dual Dual SIM Dual Standby Standby Announced 2014, August 2014, August June, 2014 July, 2014 July, 2014 June, 2014 June, 2014 Dimensions 139.3x69.7x6.7mm 130.1x65.5x6.9mm 121.4 x 62.9 x 11 132.8 x 66 x 9.9 121.4 x 62.9 x 10.7 130.3 x 68 x 9.8 109.8 x 59.9 x 11.8 mm mm mm mm mm Weight 123g 110.3g 130g 137g 123g 138g 108g Display 1280x70 pixels, 5 960x540 pixels, 480x800 pixels, 4 960x540 pixels, 480x800 pixels, 4 800x480 pixels, 320 x 480 pixels, inches 4.5 inches inches 4.5 inches inches 4.5 inches 3.5 inches Memory ROM 16GB ROM 8GB ROM 4GB ROM 16GB ROM 4GB ROM 4GB ROM 4GB RAM 2GB RAM 1GB RAM 1GB RAM 1.5GB RAM 0.8GB RAM 0.8GB RAM 0.5MB Camera Primary 13MP Primary 8MP 5MP Primary 5MP 3.15MP Primary 5MP 3.15MP Secondary 5MP Secondary 5MP 0.3MP Secondary 0.3MP NA Secondary 0.3MP NA OS Android 4.4 Android 4.4 Android 4.4 Android 4.4 Android 4.4 Android 4.4 Android 4.4 Chipset Qualcomm Qualcomm NA Qualcomm NA NA NA MSM8916 MSM8916 MSM8226 Snapdragon 410 Snapdragon 410 Snapdragon 400 CPU Quad-core 1.2 Quad-core 1.2 Dual-core 1.2 GHz Quad-core 1.2 Single-core 1.2 Quad-core 1.2 Single-core 1 GHz GHz Cortex -A53 GHz Cortex -A53 Cortex -A7 GHz ARM Cortex- GHz Cortex -A7 GHz Cortex -A7 A7 Battery 2300mAh 1900mAh 1900mAh 2100mAh 1500mAh 2000mAh 1300mAh Retail price RMB2,599 / RMB1,950 / US$ US$265 US$230 US$120 Jun US$195 / Sep Jun US$135 / US$420 315 US$135 / Dec September US$85 US$85 / Dec US$ 65 Source : Company data, Macquarie Research, January 2015

TCL product step-up strategy

Fig 50 ”Step -up” product strategy

Source: Company data, January 2015

16 January 2015 68 Macquarie Research China handset sector

Step -up strategy TCL has been executing its “step -up” strategy since 2013, introducing three new series of driving up product smartphones targeting different customer groups: HERO is equipped with premium hardware mix. specifications, IDOL features cutting-edge designs and POP targets mass market with its fast-fashion, value-for-money phones. ~65% of the whole product portfolio launched in 2014 supports LTE mode including both TDD-LTE and FDD-LTE. The successful execution of its step-strategy has significantly improved the company’s profitability. Currently TCL ’s high-end smartphones carry a gross margin of 20-22%, entry- level smartphones 17-18% and feature phones 16%. The company ’s blended gross profit margin bottomed out after reaching economies of scale in 1Q13 and has been delivering a healthy trend since then, peaking at 19.6% at the end of 2013/beginning of 2014 and now moderating at the 19% level for 3Q14. With competitive pressure unlikely to ease any time soon, we take a conservative approach and estimate gross margin will soften to 18.9% for 2015 and 18.6% for 2016.

Fig 51 Gross margin trend

20.5% 19.9% 20.0% 19.6% 19.5% 19.6% 19.4% 19.5% 19.2% 19.0% 19.2% 19.0% 18.5% 18.5% 18.3% 18.1% 18.0% 17.8% 17.5% 17.0% 16.5% 1Q14 2Q14 3Q14 4Q14F 1Q15F 2Q15F 3Q15F 4Q15F 1Q16F 2Q16F 3Q16F 4Q16F

Gross margin (%)

Source: Company data , Macquarie Research, January 2015

Fig 52 Operating margin trend

6.0% 5.3% 5.4% 4.8% 5.0% 4.6% 4.4% 4.2% 3.8% 4.0% 3.7% 3.6% 3.7% 3.3% 3.3% 3.0%

2.0%

1.0%

0.0% 1Q14 2Q14 3Q14 4Q14F 1Q15F 2Q15F 3Q15F 4Q15F 1Q16F 2Q16F 3Q16F 4Q16F

Operating margin

Source: Company data, Macquarie Research, January 2015

16 January 2015 69 Macquarie Research China handset sector

Fig 53 Net margin trend

6.0% 4.9% 4.9% 5.0% 4.2% 4.4% 4.0% 3.7% 3.6% 3.3% 3.4% 3.2% 3.4% 2.9% 3.0% 3.0%

2.0%

1.0%

0.0% 1Q14 2Q14 3Q14 4Q14F 1Q15F 2Q15F 3Q15F 4Q15F 1Q16F 2Q16F 3Q16F 4Q16F

Net margin

Source: Company data, Macquarie Research, January 2015

Fig 54 TCL Com dividend payout track record

Date Announced Details Financial year end Payment date

14/08/2014 Int Div HKD 0.128 31/12/2014 17/09/2014 24/02/2014 Fin Div HKD 0.10 31/12/2013 22/05/2014 15/08/2013 No Int Div 31/12/2013 na 26/02/2013 No Fin Div 31/12/2012 na 09/08/2012 Int Div HKD 0.03 31/12/2012 31/10/2012 27/02/2012 Fin Div HKD 0.15 31/12/2011 25/05/2012 08/08/2011 Int Div HKD 0.138 31/12/2011 16/09/2011 25/02/2011 Fin Div HKD 0.168 31/12/2010 31/05/2011 26/08/2010 Sp Div HKD 0.08 31/12/2010 06/10/2010 10/03/2010 Fin Div HKD 0.035 31/12/2009 na 03/11/2009 Rts 1 for 2 @HKD 1.00 payable by 2009/12/28 na na 18/08/2009 No Int Div 31/12/2009 na 25/03/2009 No Fin Div 31/12/2008 na Source: Hong Kong Stock Exchange, January 2015

Expect further 2013 gross profit reached 19%, a 1.6% y-y margin expansion, while R&D as a % of sales operational leverage. declined to 5.5% (+0.6% operational leverage), with S&M as a % of sales down to 8.3% (+1.3% operational leverage) and G&A as a % of sales down to 4.9% (+0.6% operational leverage). Entering 2014 with smartphone shipments gradually reaching critical mass and GP margin stabilizing at 19% for the first three quarters of the year (9M14 19.3%), leverage from operating expenses showed no signs of stopping (R&D as a % of sales 4.3%, S&M as a % of sales 8.2% and G&A as a % of sales 4.2%, for the first three quarters of 2014, all came down compared to the same period in the previous year). We expect the opex/sales ratio to gradually trend down thanks to operational leverage generated from enhanced scalability and savings on the R&D and Admin fronts. Note that we take a conservative approach hence have not priced in the potential synergy from collaboration with TCL Multimedia and TCL Corp ( in terms of new product launch, cloud, sales force consolidation etc), which could provide upside in 2~3 years’ time.

16 January 2015 70 Macquarie Research China handset sector

Late cycle feature phone to smartphone migration driving the first leg of growth Expect solid growth The company has recorded rapid smartphone shipment growth since the second quarter of to continue. 2013. Sales volume of smartphones and other smart devices for the year surged 169% to 17.6 million units, accounting for 32% of the Group’s total shipments (2012: 15%). The overall average selling price increased from US$36.2 in 2012 to US$45.0 in 2013, up by 24% year- on-year. Driven by growth in shipments as well as ASP , the Group’s 2013 total revenue increased by 61% y-o-y to HK$19.4 billion, and revenue contributed by smartphones and other smart devices reached 63% of the Group’s total revenue (2012: 43%). Thanks to an improving product mix, blended ASP has been trending up for the past three years. Currently smartphone ASP is around US$75 while feature phone ASP US$25 according to our estimates. We expect smartphone ASP might face further competitive pressure as some tier-one brands have been cutting their ASP trying to enter the mass market segment and forecast smartphone ASP to drop to US$70 by 2014 year end, US$62 by 2015 and US$58 by 2016. Decelerating ASP On the other hand, feature phone price has pretty much bottomed out hence we expect it to growth due to stabilize at US$20. We believe TCL will be able to continue optimizing its product mix, with competition. smartphone shipments accounting for 55%, 65% and 70% of 2014, 2015 and 2016 total shipments, and smartphone revenue accounting for 83%, 90% and 93% of 2014, 2015 and 2016 total rev enue. We expect the company’s blended ASP to reach US$53 for 2014, US$55 for 2015 and US$56 for 2016. The second wave of 4G/LTE replacement providing the next leg of growth The company sees 4G demand surging in regions such as the Americas, EMEA and PRC. Aside from the late-cycle feature phone to smartphone migration currently going on in emerging markets as well as in the mid-to-low end segments of developed markets, 4G smartphone adoption should provide the next leg of growth. Mass market smart devices in particular will benefit the most given 1) the performance gap between premium brands ’ devices and mass market devices have been narrowing; Entry -level 4G driving 2) carriers across the globe have become more conservative in terms of giving subsidies, as the next leg of a result a number of customers are very likely to shift from mid/high-end devices to mass- growth. market products due to better affordability and higher cost-performance value; 3) the rapid development of 4G chipset solutions pioneered by MediaTek/Qualcomm has also accelerated the development and mass adoption of entry-level 4G devices. We expect 4G related products to make a meaningful contribution to TCL ’s shipments and revenue from 2H15. TCL well prepared for The company has already prepared itself for such an opportunity. Some 65% of TCLC’s 4G adoption. current product portfolio supports the LTE mode, varying from mid-end (US$450) to low end devices (US$155), from smartphones, phablets to tablets, targeting both the PRC (under TCL brand) as well as overseas markets (under Alcatel OneTouch brand). Given that 4G only accounted for 10% of the company ’s shipment mix in 2014, we expect ASP as well as margin (4G products carries 20%~25% gross margin, vs the company ’s current blended margin of 19%) uplift effect to materialize in 2H15 as 4G products grow from a low base and gradually ramp up in scale, providing the next leg of growth as well as the profitability driver after 3G shipments moderate.

16 January 2015 71 Macquarie Research China handset sector

Fig 55 TCL AlcatelOneTouch product line-up

Alcatel OneTouch Alcatel OneTouch Alcatel OneTouch Hero: Premium user Idol: Cutting -edge Pop: Value -for- experience design money

Hero 2 Hero 8 Idol 2S Idol 2 Mini S Pop 7S Pop 8S

2G GSM 850 / 900 / 2G GSM 850 / 900 / 2G GSM 850 / 900 / 2G GSM 850 / 900 / 2G GSM 850 / 900 / 2G GSM 850 / 900 / Network 1800 / 1900 1800 / 1900 1800 1800 / 1900 1800 / 1900 1800 / 1900

3G HSDPA 850 / 900 / 3G HSDPA 850 / 900 / 3G HSDPA 850 / 900 / 3G HSDPA 850 / 900 / 3G HSDPA 850 / 900 / 3G HSDPA 900 / 2100 1900 / 2100 1900 / 2100 2100 1900 / 2100 1900 / 2100 4G LTE 700 / 1700 / 4G LTE 800 / 900 / LTE 800 / 900 / 1800 / 4G LTE 700 / 1700 / 4G LTE 800 / 900 / 4G LTE 800 / 900 / 1900 / 2100 / 2600 / 1800 / 2100 / 2600 2100 / 2600 1900 / 2100 / 2600 1800 / 2100 / 2600 1800 / 2100 / 2600 1800 4G LTE 700 / 800 / 4G LTE 700 / 850 / 4G LTE 800 / 900 / LTE 700 / 1700 / 1900 900 / 1800 / 2100 / 1700 / 1900 / 2100 / 1800 / 2100 / 2600 / 2100 / 2600 2600 2600 LTE 800 / 850 / 900 / 4G LTE 800 / 900 /

1800 / 2100 / 2600 1800 / 2100 / 2600 Announced 2014, September 2014, September 2014, February 2014, February 2014, January 2014, September Dimensions 160.5 x 81.6 x 7.9 mm 209 x 122 x 7.3 mm 136.5 x 69.7 x 7.5 mm 129.5 x 63.5 x 8.5 mm 192 x 113 x 9 mm 209 x 128 x 7.2 mm Weight 175 g 310 g 126 g 116g 279 g 327 g 1080 x 1920 pixels, 1200 x 1920 pixels, 720 x 1280 pixels, 5.0 540 x 960 pixels, 4.5 600 x 1024 pixels, 7.0 800 x 1280 pixels, 8.0 Display 6.0 inches 8.0 inches inches inches inches inches Memory ROM 16GB ROM 8/16/32 GB ROM 8GB ROM 4GB ROM 4GB ROM 8GB RAM 2GB RAM 2GB RAM 1GB RAM 1GB RAM 1GB RAM 1GB Camera Primary 13.1MP Primary 5MP Primary 8MP Primary 8MP 3MP Primary 5MP Geo-tagging, touch Geo -tagging, touch focus, face/smile Geo -tagging, touch Geo -tagging, touch focus, face/smile detection, High focus, panorama, High focus, face detection detection, panorama, Dynamic Range, Dynamic Range High Dynamic Range panorama Secondary 5MP Secondary 2MP Secondary 1.3MP Secondary 2MP Secondary 3MP Android OS, v4.4.2 Android OS, v4.4.2 Android OS, v4.3 Android OS, v4.3 Android OS, v4.4.2 Android OS, v4.4.2 OS (KitKat) (KitKat) (Jelly Bean), (Jelly Bean), (KitKat) (KitKat) SoC Qualcomm SoC Qualcomm SoC MediaTek SoC Mediatek Qualcomm MSM8926 Qualcomm MSM8916 Chipset Snapdragon 400 Snapdragon 400 MT6592T MT8392 Snapdragon 400 Snapdragon 410 MSM8926 MSM8926 Octa-core 2.0 GHz Octa-core 2.0 GHz Quad-core 1.2 GHz Quad-core 1.2 GHz Quad-core 1.2 GHz Quad-core 1.2 GHz CPU Cortex-A7 Cortex-A7 Cortex-A7 Cortex-A7 Cortex-A7 Cortex-A53 Battery 3100 mAh 4060 mAh 2150 mAh 2000 mAh 3240 mAh 4100 mAh Retail price US$451 US$297 US$241 US$190 US$155 US$170 Source: Company data, Macquarie Research, January 2015

New manufacturing facility Production capacity The company set up a new global manufacturing facility in Huizhou, Guangdong Province in expanded. 2013 to meet the growing demand. The new facility, which is situated on a site of 120,000 square meters, supports the Group’s global operations and commenced production in September 2013. Construction of phase II was completed with operations started in June 2014. The company expects its total annual production capacity will increase from 65 million units to a maximum of 120 million units after the entire manufacturing facility is put into operation. It will become the largest single-location mobile phone manufacturing facility in China, with upgraded capacity and more advanced efficiency.

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3Q14 business review and 4Q14, FY15 outlook. 3Q14 smart device ASP was down 5% YoY of US$80.5 (largely due to higher mix of entry- level smartphones) but stabilized on a QoQ basis up by 1%, while the feature phone ASP of US$16.2 was down 25% QoQ and 37% YoY. The sharp decline in feature phone ASP is likely to be triggered by proliferation of entry-level smartphones in our view. Blended ASP per handset sales increased to US$53.4, from 3Q13’s US$45.4 and 2Q14’s US$52.4, thanks to higher contribution from smartphones. Management expects a strong 4Q thanks to seasonality and strong sales momentum from Americas. FY14 revenue growth target was raised from 45% y-y to 50% y-y. Full year handset shipments rose 33% y-y to 73.5mn units, of which smartphone shipments grew 136% y-y to 41.5mn units, on the high end of street expectations. Expect strong 4Q14 More carrier wins (most recently formed partnership with Sprint with shipments starting in Sep due to peak season. 2014, and the company is currently in talks with Verizon where we expect it to achieve meaningful progress in 1H15) are also expected in the near term. The recently acquired “Palm” brand will likely further enhance TCL’s brand recognition and market share in North America. We expect the company’s first Palm device to be released in late 2015 via the e- commerce channel and open market, and expect the Palm business unit to be a mid-term growth driver. Further market share gains in LATAM (Brazil, for instance, the largest telecom market in LATAM but currently only contributes mid-single-digit shipments. We expect this to reach high single-digits by 2015 and low-teens by 2016) offers another growth driver. We forecast a 42% growth in smartphone shipments going into 2015, driving topline growth of 31% and bottom line growth of 28%. Currently 10% ~ 15% of total shipments are contributed by two premium product lines (Hero and Idol) which carry higher ASP (US$100~US$150, vs company’s smartphone ASP of US$80 and blended handset ASP of US$50) and gross margin (20%~23% vs company blended margin of 19.2%). The rest of shipments (85%~90%) are from the “Pop” brand, which mainly features value-for-money devices with ASP of US$60~US$100 and margin of 16%~17%. We expect “Pop” products to be the company’s main shipment growth driver in the process of feature phone to entry-level smartphone migration in emerging markets, but the relatively lower margin could cap the company’s margin expansion potential. Conservative on The company also noted that it plans to expand into the tablet business but we are only tablet shipment projecting 3.5mn units of shipments for 2015 (vs FY15E 52mn total smart devices shipment) growth. and don’t expect it to make a significant contribution to the company’s topline / earnings next year. Sales momentum for the entire tablet market is slowing down attributed to cannibalization from the larger-panel screen smartphone and weaker demand from the US and Europe. EM could still see some growth due to the large population base and low penetration, but we expect intense competition from existing tablet/PC makers such as Asustek, Lenovo and Acer, hence near-term it could be difficult to achieve scalability in the tablet space.

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Fig 56 Corporate action

Time Corporate action

2012 Launched its first Windows based phone TCL S606 2011 Launched its first tablet, TCL Pad16 / ALCATEL ONE TOUCH T60. 2007 Extension of Alcatel brand licensing for 10 more years to year 2024. 2006 Formation of finance JV with TCL Corp and The Bank of East Asia to improve cost efficiency in finance and treasury activities 2006 Acquisition of an additional stake in JRDC, a R&D JV, aiming to strengthen product development capabilities. 2006 Completion of the open offer with an additional of approximately 3 billion shares issued. 2005 Proposed open offer of new shares to shareholders to raise approximately HK$600 million. 2005 TCL Comm (2618.HK) acquired Alcatel's 45% stake in the mobile phone JV for a consideration of US$8.1 mn of its shares. 2005 Issued convertible notes to strengthen the Group’s financial position. 2004 Listed on th e Main Board of The Stock Exchange of Hong Kong Limited (“HKSE”). T&A commenced operations. 2003~2004 TCL Corp merged TCL Telecom Equipment (formerly 000542.SZ) and was listed on Shenzhen Stock Exchange on 30 Jan 2004 (ticker 000100.SZ). TCL Telecom Equip ment (formerly 000542.SZ) was delisted. TCL Corp's HK listed subsidiary TCL Int'l (1070.HK) spun off its 40.8% stake in TCL Communication; the latter was then listed in HK on 27 Sep 2004 (ticker 2618.HK). TCL Int'l was renamed as TCL Multimedia (1070.HK). 2004 TCL Corp and Alcatel announced the creation of a 55%:45% mobile phone manufacturing JV, Alcatel Mobile Phones. 2003 TCL Corp and Thomson SA of France announced the creation of a 67%:33% JV to produce TVs and DVD players. TVs made by TCL-Thomson would be marketed under the TCL brand in Asia and the Thomson and RCA brands in Europe and North America. 1999 TCL Corp's TV subsidiary TCL International Holdings (1070.HK) raised ~HK$1 bn in its HK IPO. 1993 TCL Telecom Equipment (formerly 000542.SZ) was listed on the Shenzhen Stock Exchange. 1992 TCL Corp started to design and develop colour TVs. 1985 TCL Corp set up a JV called TCL Telecommunication Equipment Company with a HK enterprise to manufacture telephones. 1981 TCL Corp was founded in Huizhou, producing recording tapes. Source: Company data, Macquarie Research, January 2015

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TCL Communication Technology (2618 HK, Outperform, Target Price: HK$11.02) Quarterly Results 3Q/14A 4Q/14E 1Q/15E 2Q/15E Profit & Loss 2013A 2014E 2015E 2016E

Revenue m 7,779 10,507 7,461 9,156 Revenue m 19,362 30,503 40,870 42,462 Gross Profit m 1,481 2,017 1,486 1,788 Gross Profit m 3,672 5,879 7,739 7,882 Cost of Goods Sold m 6,297 8,490 5,975 7,368 Cost of Goods Sold m 15,690 24,625 33,131 34,580 EBITDA m 671 756 692 791 EBITDA m 1,543 2,642 3,138 2,952 Depreciation m 364 364 298 366 Depreciation m 1,138 1,457 1,514 1,152 Amortisation of Goodwill m 0 0 0 0 Amortisation of Goodwill m 0 0 0 0 Other Amortisation m 0 0 0 0 Other Amortisation m 0 0 0 0 EBIT m 306 391 394 425 EBIT m 405 1,185 1,624 1,800 Net Interest Income m -21 -28 -20 -24 Net Interest Income m -105 -91 -108 -112 Associates m 0 0 0 0 Associates m 2 1 0 0 Exceptionals m 0 0 0 0 Exceptionals m 0 0 0 0 Forex Gains / Losses m 0 0 0 0 Forex Gains / Losses m 0 0 0 0 Other Pre-Tax Income m 0 -0 -0 0 Other Pre-Tax Income m -3 -1 0 -0 Pre-Tax Profit m 286 364 374 400 Pre-Tax Profit m 298 1,095 1,516 1,688 Tax Expense m -7 -11 -11 -12 Tax Expense m 18 -38 -46 -51 Net Profit m 279 352 363 388 Net Profit m 316 1,056 1,470 1,637 Minority Interests m -7 -8 -9 -9 Minority Interests m -3 -25 -35 -39

Reported Earnings m 273 344 354 379 Reported Earnings m 313 1,032 1,435 1,598 Adjusted Earnings m 273 344 354 379 Adjusted Earnings m 313 1,032 1,435 1,598

EPS (rep) 0.22 0.28 0.29 0.31 EPS (rep) 0.27 0.83 1.16 1.29 EPS (adj) 0.22 0.28 0.29 0.31 EPS (adj) 0.26 0.84 1.16 1.29 EPS Growth yoy (adj) % 13.5 11.5 101.5 58.1 EPS Growth (adj) % nmf 220.4 39.0 11.4 PE (rep) x 26.5 8.7 6.2 5.6 PE (adj) x 27.7 8.7 6.2 5.6

EBITDA Margin % 8.6 7.2 9.3 8.6 Total DPS 0.10 0.22 0.30 0.34 EBIT Margin % 3.9 3.7 5.3 4.6 Total Div Yield % 1.4 3.0 4.2 4.7 Earnings Split % 26.4 33.4 24.7 26.4 Basic Shares Outstanding m 1,180 1,236 1,236 1,236 Revenue Growth % 42.6 40.1 34.7 37.1 Diluted Shares Outstanding m 1,150 1,236 1,236 1,236 EBIT Growth % 27.1 18.5 85.3 54.3

Profit and Loss Ratios 2013A 2014E 2015E 2016E Cashflow Analysis 2013A 2014E 2015E 2016E

Revenue Growth % 60.9 57.5 34.0 3.9 EBITDA m 1,543 2,642 3,138 2,952 EBITDA Growth % 99.9 71.2 18.7 -5.9 Tax Paid m 18 -38 -46 -51 EBIT Growth % nmf 192.7 37.0 10.9 Chgs in Working Cap m -58 -553 -1,260 -1,418 Gross Profit Margin % 19.0 19.3 18.9 18.6 Net Interest Paid m -105 -91 -108 -112 EBITDA Margin % 8.0 8.7 7.7 7.0 Other m 2,740 -649 -790 -887 EBIT Margin % 2.1 3.9 4.0 4.2 Operating Cashflow m 4,138 1,311 934 483 Net Profit Margin % 1.6 3.4 3.5 3.8 Acquisitions m 0 0 0 0 Payout Ratio % 38.4 26.2 26.0 26.0 Capex m -1,434 -1,961 -1,400 -1,000 EV/EBITDA x 7.8 4.7 4.0 4.2 Asset Sales m 0 0 0 0 EV/EBIT x 29.5 10.5 7.6 6.9 Other m 139 232 -127 -142 Investing Cashflow m -1,295 -1,729 -1,527 -1,142 Balance Sheet Ratios Dividend (Ordinary) m -114 -258 -359 -399 ROE % 12.0 30.1 31.9 28.4 Equity Raised m 0 0 0 0 ROA % 2.9 6.5 6.7 6.1 Debt Movements m -3,583 1,906 1,273 1,417 ROIC % 5.5 20.2 19.8 17.3 Other m 26 -468 -108 -112 Net Debt/Equity % 94.2 95.9 96.5 96.7 Financing Cashflow m -3,671 1,180 806 905 Interest Cover x 3.9 13.1 15.0 16.1 Price/Book x 2.9 2.3 1.8 1.4 Net Chg in Cash/Debt m -828 763 212 247 Book Value per Share 2.5 3.2 4.1 5.0 Free Cashflow m 2,704 -650 -466 -517

Balance Sheet 2013A 2014E 2015E 2016E

Cash m 142 905 1,117 1,364 Receivables m 6,070 7,914 10,016 12,356 Inventories m 2,649 5,845 7,397 9,126 Investments m 0 0 0 0 Fixed Assets m 1,070 1,574 1,460 1,309 Intangibles m 1,410 1,692 1,692 1,692 Other Assets m 3,082 4,039 5,058 6,192 Total Assets m 14,423 21,969 26,740 32,038 Payables m 3,875 7,213 9,129 11,262 Short Term Debt m 2,690 4,792 6,064 7,481 Long Term Debt m 196 0 0 0 Provisions m 4,656 5,804 6,283 6,801 Other Liabilities m 93 107 136 168 Total Liabilities m 11,510 17,917 21,612 25,712 Shareholders' Funds m 2,909 3,955 5,031 6,229 Minority Interests m 4 97 97 97 Other m 0 0 0 0 Total S/H Equity m 2,913 4,052 5,128 6,327 Total Liab & S/H Funds m 14,423 21,969 26,740 32,038

All figures in HKD unless noted. Source: Company data, Macquarie Research, January 2015

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