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2618 HK) % Upside 76% Share Price Correction Overdone Pan Asia Research www.equities.htisec.com Target Price HK$9.70 Distributed by Societe Generale and its affiliates Current Price HK$5.50 TCL Communication Technology Holdings (2618 HK) % Upside 76% Share Price Correction Overdone Technology Hardware Lowering Earnings and Target Price Hong Kong Summary: We believe TCL Communication Technology Holdings’ (TCLC’s) recent share 7 Aug 2015 price weakness has more than factored in market concerns about a smartphone demand slowdown in overseas emerging markets as well as the possibility of the company falling short of its guided 30% YoY sales growth in FY15 and perhaps needing to revise down this guidance. With a forward PER of just 5x on our reduced forecasts and 5x on consensus BUY forecasts, and a forward dividend yield of 8–9%, we believe TCLC has emerged as one of Target: HK$9.70 the best dividend plays in the Hong Kong-listed technology hardware space. We reiterate % Upside: 76% our BUY rating given TCLC’s strong exposure to overseas emerging-markets, where we believe smartphone growth should continue to outpace that in China over the next couple of years. We also think the company’s non-hardware business could emerge as a 52wk Low HK$5.50 52wk High HK$5.50 (0%) 06 Aug 2015 HK$10.52 (91%) new earnings driver in the next 2–3 years. Potential cooperation and alliances with Unchanged leading Chinese Internet companies could help boost the stock’s valuation in the medium term, although the earnings contributions from such initiatives may come later. Target Price and Catalyst: We have lowered our FY15–17 earnings forecasts by 7–12% Basic Share Information and have cut our target price from HK$11.00 to HK$9.70 based on a fair PER of 9x a Market cap HK$6.93b / US$0.89b blend of our FY15–16 EPS forecasts (we previously saw fair value at 12x our prior FY15 Daily volume (3mth) US$3.75m EPS estimate). Near-term positive catalysts for the share price include stronger Shares outstanding 1,193m smartphone shipment growth in H2 FY15 than we currently expect. Free float 33.32% Net debt-to-equity 27.1% Earnings: We believe Q2 FY15 sales increased 22% YoY to HK$8.1bn thanks to the 1 yr high HK$10.52 continued migration from feature phones to smartphones. Our sales forecast for Q2 is in 1 yr low HK$5.50 line with the consensus estimate. We forecast Q2 gross margin was similar to that in Q1 Major shareholding 62% despite continued price pressure as we believe TCLC has been able to adjust its product Last HTI contact w/ Co 10 Jul 15 mix to mitigate this pressure to some extent. Our Q2 gross margin estimate is higher NoteL Share price and market data as of 6 August 2015. than the consensus figure of 18.9%. We also think operating leverage increased in Q2, leading to a further reduction in operating costs as a percentage of sales QoQ. Overall, Price/Volume we project Q2 NP rose 7% YoY to HK$271mn, slightly ahead of the consensus estimate. Price Close Rel. to Hang Seng Index (rhs) For full-FY15, we forecast sales growth of 23% YoY, followed by increases of 13% YoY in 10.9 110.0 9.9 100.0 FY16 and 10% YoY in FY17, as the continued migration to smartphones drives both 8.9 90.0 7.9 80.0 volumes and blended selling prices upward. We see net margin slipping from 3.6% in 6.9 70.0 5.9 60.0 FY14 to 3.2% in FY15–16 and to 3.1% in FY17. 4.9 50.0 40 30 20 Valuation: Our target price of HK$9.70 is based on 9x the average of our FY15 and FY16 10 Volume m Volume EPS estimates. We forecast a CAGR for earnings of 9.0% for FY16–17, which translates Aug-14 Nov-14 Feb-15 May-15 into a PEG ratio of 1x. Our target PER of 9x is in line with TCLC’s historical trading mean. Source: Bloomberg We expect TCLC to maintain a dividend-payout ratio above 40% through FY17. 1mth 3mth 12mth Absolute -12.2% -31.7% -46.3% Absolute USD -12.2% -31.7% -46.3% Dec-13A Dec-14A Dec-15E Dec-16E Dec-17E Trend Relative to HSI -8.8% -19.9% -45.4% Total turnover (HK$m) 19,362 30,691 37,750 42,657 46,923 Operating profit (HK$m) 50 772 944 1,066 1,173 Pre-tax profit (HK$m) 298 1,149 1,334 1,467 1,584 Jones Ku Net income to ord equity (HK$m) 313 1,093 1,226 1,349 1,458 Haitong International Research Ltd Net profit growth na 248.6% 12.2% 10.1% 8.0% [email protected] P/E (x) 20.00 6.01 5.35 4.86 4.50 Lily Xu Adj EV/EBITDA (x) 5.53 3.48 2.85 2.32 1.86 P/B (x) 2.15 1.60 1.37 1.18 1.03 Haitong International Research Ltd ROE 12.0% 31.2% 27.6% 26.1% 24.5% [email protected] Dividend yield 1.9% 7.2% 8.1% 8.9% 9.6% EPS HTI New (HK$) 0.28 0.92 1.03 1.13 1.22 Local Knowledge, Global Reach Consensus EPS (HK$) 0.25 0.89 1.01 1.10 1.19 Tokyo Office (81) 3 6402 7620 HTI EPS vs Consensus 11.4% 2.9% 1.9% 3.0% 2.6% London Office (44) 20 7397 2700 Source: Company data, Bloomberg, HTI estimates Click here to download the working model Hong Kong Office (852) 2899 7090 This research is the product of Haitong International Research Limited (“HTIRL”), which is authorized and regulated by the Securities and Futures Commission (“SFC”) of Hong Kong. It is issued by HTIRL and distributed by Société Générale (“SG”) and its affiliates in their respective jurisdictions. See the Appendix at the end of this document for the HTIRL analyst certification and non-US HTIRL analyst disclosure, Important Disclosures and Disclaimers regarding HTIRL and SG and DistributionThis document and Regional was forwardedNotices which by include JONES SG’s KU EU (HAITONGregulators in theINTERNATIONAL) “Notice to UK Investors”. and is currently being read by LILY XU (HaitongPowered by International) EFA Platform TCL Communication Technology Holdings (2618 HK) Buy Valuation P/E (x) vs EPS Growth 800 10,000% 700 8,500% Investment Thesis 600 7,000% 500 5,500% 400 4,000% 300 2,500% 200 1,000% Buy 100 -500% 0 -2,000% We believe TCLC’s recent share price weakness has more than factored in market Jul-12 Jul-13 Jul-14 Jul-15 Jan-13 Jan-14 Jan-15 Jan-12 concerns about a smartphone demand slowdown in overseas emerging markets, as Rolling P/E (x) (lhs) EPS growth (rhs) Source: Company data, Bloomberg, HTI estimates well as the possibility of the company falling short of its guided 30% YoY sales growth Earnings Trends in FY15 and perhaps needing to revise down this guidance. 2,000% With a forward PER of just 5x on our reduced forecasts and 5x on consensus estimates 1,500% 1,000% as well as a forward dividend yield of 8–9%, we believe TCLC has emerged as one of 500% the best dividend plays in the Hong Kong-listed technology hardware space. 0% We expect TCLC to continue to benefit from its strong exposure to overseas emerging- Dec-15E Dec-13A Dec-14A Revenue growth Operating profit growth markets, where we believe smartphone growth should continue to outpace that in Net profit growth EPS growth China over the next couple of years. Source: Company data, Bloomberg, HTI estimates The company’s non-hardware business could emerge as a new earnings driver should Earnings: HTI vs Consensus it start to bear fruit over the next 2–3 years. 0% 1% 1% 2% 2% 3% Potential cooperation and alliances with leading Chinese Internet companies could HTI EPS HTI vs Consensus help boost the stock’s valuation over the medium term, although the earnings (top) contributions from such initiatives may come later. Consensus EPS Vivek Misra of Societe Generale noted in his Asia Equity Compass, published on 21 0.99 1 1.01 1.02 1.03 -2% -2% -1% -1% 0% July 2015, that Hong Kong-listed Chinese shares had not rallied as much as onshore listed stocks during the past year's run-up, and he expects that they might now HTI P/E outperform their mainland peers. We believe such a trend could help TCLC's stock HTI P/E at Target outperform the market. HTI vs Consensus Consensus P/E (top) 0 2 4 6 8 10 Source: Company data, Bloomberg, HTI estimates FY15 Sales Breakdown Company Snapshot TCL Communication Technology Holdings (TCLC) was founded in 2004 as a subsidiary of TCL Industrial Holdings (unlisted) and listed on the Hong Kong Stock Exchange in 2004. The company is a global mobile communications vendor that manufactures and markets feature phones and smartphones. TCLC produces handsets under the brands TCL and Source: HTI estimates Alcatel OneTouch, distributes mobile phone components, and manufactures fixed-line telephone products. It also develops software for mobile handsets. TCLC derives most of its sales from overseas markets, which accounted for 90% of its total sales in FY14. 7 Aug 2015 2 This document was forwarded by JONES KU (HAITONG INTERNATIONAL) and is currently being read by LILY XU (Haitong International) TCL Communication Technology Holdings (2618 HK) Buy Key Investment Metrics Revenue Growth We forecast sales growth of 23% YoY in FY15, 13% YoY in FY16, and 10% YoY in FY17, mainly as the continued migration to smartphones drives up volume and blended selling prices.
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