HONG KONG TCL Communication 2618 HK Outperform Price 27 May 11 HK$5.61 Technology 12-month target HK$ 8.90 Upside/Downside % 58.6 Emerging market handset play Valuation HK$ 8.90 - PER Event GICS sector Technology Hardware & Equipment ƒ We initiate coverage on TCL with an Outperform rating. TCL produces Market cap HK$m 6,205 handsets under the TCL and Alcatel brands for the Chinese and overseas 30-day avg turnover US$m 3.0 markets, respectively. Our target price of HK$8.90/sh is based on our target Market cap US$m 797 multiple of 8x FY12E PER. We like TCL as an emerging market low-end 2G Number shares on issue m 1,106 handset manufacturer improving its product mix as it progressively introduces 3G smartphones. Investment fundamentals Impact Year end 31 Dec 2010A 2011E 2012E 2013E Revenue m 8,701 12,756 17,145 20,614 ƒ Improving ASP. In contrast to the trends seen at other handset vendors, we EBIT m 530 857 1,184 1,657 EBIT growth % nmf 61.8 38.1 40.0 expect ASP to improve by 6% in FY11. We see two major drivers for this; Reported profit m 702 941 1,245 1,694 firstly, TCL is introducing 3G into its handset mix for the first time this year EPS rep HK$ 0.63 0.84 1.11 1.50 EPS rep growth % 3,127.9 32.2 32.3 36.0 with our expectations for 3G to make up 10% of shipment volumes and in the PER rep x 8.9 6.7 5.1 3.7 ODM segment, secondly, TCL is moving away from super low-end production. Total DPS HK$ 0.25 0.28 0.36 0.50 Total div yield % 4.4 4.9 6.5 8.8 ƒ Margin expansion. We factor in 7% unit cost inflation in FY11 as product mix ROA % 5.6 6.6 8.0 9.9 ROE % 42.4 36.2 36.1 37.1 moves toward higher spec 3G smartphones, seeing gross margins decline by Net debt/equity % 231.4 173.8 128.2 83.2 60bp. However, due to the 40% uplift in volumes, we expect TCL to realise P/BV x 2.8 2.1 1.6 1.2 scale economies, resulting in 60bp in operating margins. 2618 HK rel HSI performance ƒ Handsets stack up well in the mass market segment. Compared with other handsets, we find TCL’s smartphones compare reasonably well, with similar or slightly better specs on OS, CPU, camera and screen size. ƒ Capacity expansion. Production capacity is currently 65m units and TCL intends to increase this by 15% this year and to double capacity to 130m over three years. We see capacity utilisation increasing to 67% in FY11 from 56% in FY10.

Earnings and target price revision Source: FactSet, Macquarie Research, May 2011 (all figures in HKD unless noted) ƒ Initiation of coverage.

Price catalyst

ƒ 12-month price target: HK$8.90 based on a PER methodology.

ƒ Catalyst: continued growth in monthly shipment volumes Action and recommendation ƒ Outperform. Our target price of HK$8.90 is based on 8x FY12E PER, an undemanding multiple that represents a discount relative to other handset vendors. We believe TCL will trade at a discount to other handset names until Lisa Soh, CFA successful execution of its strategy to move into the smartphone segment is +852 3922 1401 [email protected] Jason Zhou reflected not only in volumes but also in ASP and margins. We believe +86 21 2412 9062 [email protected] continued strong monthly shipment volumes, improving ASP and margins will

be positive catalysts for TCL, moving it toward our target price. 31 May 2011 Macquarie Capital Securities Limited

Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our website www.macquarie.com.au/disclosures.

Macquarie Research TCL Communication Technology

Investment thesis ƒ We initiate coverage on TCL Communication (TCL) with an Outperform rating and target price of HK$8.90/sh. ƒ TCL is evolving from a legacy 2G low-end handset manufacturer to a 2G/3G smartphone manufacturer in the low to mid-end range. The vast majority of its volumes go overseas (over 90%), with only a small proportion remaining in China. TCL is increasing capacity, with current capacity of 65m units increasing to 75m by end 2011 (+15%) and plans underway for a new factory that will see this rise to 130m units. ƒ At MWC 2011, TCL introduced its new Alcatel One Touch brand that is designed for easy use with a variety of different features targeted at attractive pricing points. TCL markets this as “Alcatel One Touch makes access to today’s mobile lifestyle simple by offering colorful, easy-to-use devices equipped with the technology people need most at prices they can afford”. The new product line up is grouped into five different ranges (Get Apps, Just Add Friends, Keep In Touch, Simply You, Speed It Up). ƒ This is a change from the company’s legacy product focus that was 2G based (and an ODM operation that was also largely low end). The focus going forward is on introducing 3G handsets into the product mix and in the ODM business, trying to change the products manufactured to slightly less low-end handsets. We believe that TCL’s mix will remain dominated by 2G but the introduction of 3G into the mix within the Alcatel/TCL business and better (higher value) product in the ODM business will help TCL temper the extent of ASP erosion. Can a move to a 3G product strategy be successful? ƒ Other handset vendors that have adopted similar strategies (ie. trying to upsell product range from low- to mid-end) have had limited success in improving ASP to date due to the general price deflation trends in the handset business. A notable example is ZTE’s (763 HK, HK$26.7, UP, TP HK$27.00) terminal business that has also increased its smartphone mix but has yet to see an improvement in ASP. We believe ZTE and Huawei (unlisted) are competitors to TCL in the emerging market handset segment, however we see TCL succeeding in increasing its ASP where ZTE has failed, as we believe that in order for ZTE and Huawei to secure volumes in these markets where it lacks brand presence, these companies will have to necessarily price their white label handsets more aggressively. ƒ Our forecasts for TCL factor in ASP increases of 6% but a decline of 4% in FY11 and FY12, respectively. We believe ASP increases are likely, driven by: ⇒ Change in sales mix from no 3G handsets in 2010 to 5m in FY11E that should help blended ASP, with our forecast for 3G ASP at HK$750 (approx US$96). Our forecasts see a 17% decline in 2G ASP in FY11E. The uplift from 3G volumes (10% of total volumes) and ASP should offset the price decline on the 2G side. ⇒ Moving to low/mid-end ODM (from super low-end). Our forecasts see an average ASP for ODM units in FY11E of HK$85 (US$11) vs HK$70 (US$9) in FY10. This should also help PRC ASP.

31 May 2011 2 Macquarie Research TCL Communication Technology

Fig 1 ASP assumptions HK$ 2010 2011E 2012E

PRC 230.8 281.6 292.9 Overseas 240.8 252.8 240.2 Blended 240.2 255.1 244.9 US$ equivalent 30.9 32.8 31.4

% change PRC 31% 22.0% 4.0% % change Overseas -17% 5.0% -5.0% % change Blended -11% 6.2% -4.0% % change US$ equivalent -11% 6.0% -4.1%

ASP 3G na 750.0 625.0 ASP 2G 240.2 200.1 193.1

% change 3G na na -17% % change 2G -11% -17% -4%

ASP Alcatel/TCL 300.3 311.8 297.6 ASP ODM 70.0 85.0 87.0

% change Alcatel/TCL 4% -5% % change ODM 21% 2% Source: Company data, Macquarie Research, May 2011

ƒ We show examples of TCL’s product range in Fig 2 and Fig 3, below. As can be seen, the overwhelming majority of handsets are 2G, with the OT-890 the company’s first 3G handset.

Fig 2 Examples of TCL’s handset range OT -890 OT-808 OT-710

Range Get Apps Just Add Friends Keep in Touch Display 3.2” TFT resistive, 320x240 2.4” TFT, 320x240 2.8” TFT resistive, 320x240 OS Android 2.1 2G 2G CPU 420MHz None None Source: Company data, Macquarie Research, May 2011

Fig 3 Examples of TCL’s handset range OT-665 OT-880 OT-208

Range Simply You Display 1.8” TFT 128x160 2.4” TFT resistive, 320x240 1.45” CSTN, 128x128 OS 2G 2G 2G CPU None None None Together the OT-208, OT-808 and OT-880 accounted for 3.5m units in 2010 Source: Company data, Macquarie Research, May 2011

31 May 2011 3 Macquarie Research TCL Communication Technology

ƒ Compared with other handsets, we find that TCL’s smartphone handsets stack up reasonably well (in the absence of more pricing detail). For the upcoming launch of the OT-990, this appears to be very much targeted at the low-cost smartphone segment. Looking across other vendors with similar offerings, we find these handsets all run on Android 2.2 with the same CPU speed (600MHz) and same camera resolution (with Samsung Galaxy Mini lower resolution at 3MP) but TCL has a slightly larger screen at 3.5” vs 3.1-3.2” from other vendors.

Fig 4 Relative handset analysis

OT-990 Samsung Galaxy Mini S5570 Acer Liquid mini E310 HTC Gratia A6380

Display 3.5” TFT capacitive, 320x480 3.14” TFT capacitive, 240x320 3.2” TFT capacitive, 320x480 3.2” TFT capacitive, 320x480 OS Android 2.2 Android 2.2 Android 2.2 Android 2.2 CPU 600MHz 600MHz 600MHz 600MHz Camera 5MP 3MP 5MP 5MP Price May launch Not disclosed April launch Not disclosed Source: Company data, Macquarie Research, May 2011

Key markets ƒ TCL’s key markets are Latin America (now classified as “Americas”) and Europe (“EMEA”). Gartner forecasts LatAm shipments to grow by 9% and 6% in FY11 and FY12, respectively, with shipments to Europe growing by 6% over this time. ƒ Market share. We expect TCL to have ~10% and 6% market share in LatAm and EMEA, respectively, in FY11 based on our shipment volume forecasts.

Fig 5 Latin America total shipment forecasts Fig 6 Europe total shipment forecasts

m % m % 200 40% 450 14% 180 400 30% 12% 160 350 10% 140 20% 300 120 8% 10% 250 100 6% 0% 200 80 4% 150 60 -10% 2% 40 100 -20% 20 50 0% 0 -30% 0 -2% 2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Units % growth Units % growth

Source: Gartner, Macquarie Research, May 2011 Source: Gartner, Macquarie Research, May 2011

31 May 2011 4 Macquarie Research TCL Communication Technology

Points of difference ƒ Design. The OT-818 won the 2011 Red Dot Design Award. In 2010, the OT-806 won the iF Industry Design award and the OT-808 the China Red Star Design Award.

Fig 7 OT-818 won the 2011 Red Dot design Award Fig 8 OT-806 won the 2010 iF Industry Design award

Source: Macquarie Research, May 2011, company data Source: Macquarie Research, May 2011, company data

ƒ Quality. TCL has a low fault/return rate of 0.3-0.4% versus industry average 1-2%. ƒ Embedded features. TCL has embedded features/functionality into its phones to enhance user experience. This is part of its product diversification and its five different handset ranges (Get Apps, Just Add Friends, Keep in Touch, Simply You, Speed It Up). For example, some phones shipped to China have QQ and Weibo pre-installed. ƒ Product strategy. TCL has a “Step-up” product strategy. This builds on its legacy history of entry level handsets and tries to lever this by focussing on design and innovation of mid-end products.

Fig 9 Step-up product strategy

Source: Company data, Macquarie Research, May 2011

31 May 2011 5 Macquarie Research TCL Communication Technology

Overseas handset manufacturer ƒ TCL’s shipments are predominantly destined for overseas (ex-PRC) markets, with particular strength in EMEA and Americas (including South America), a result of its legacy Alcatel JV. ƒ Growth was strongest in EMEA and Asia Pacific (APAC) in FY10, with Americas now accounting for over 50% of total shipments, driven by Latin America. ƒ We view TCL as an emerging market vendor given the dominance of 2G in its handset mix. ƒ As these markets are predominantly 2G markets, with the focus being low- and mid-end phones over high-end/smartphones, we believe these markets are slightly less competitive vs mature markets, which is a positive for ZTE.

Fig 10 Overseas volumes FY10A Fig 11 Overseas volumes FY09A

APAC 6%

EMEA 39%

Americas 55%

Source: Company data, Macquarie Research, May 2011 Source: Company data, Macquarie Research, May 2011

Margins ƒ Our forecasts have factored in 7% cost inflation for FY11. We believe cost of sales will increase for TCL as the company starts introducing 3G/smartphones into its handset mix.

Fig 12 Cost of sales sense check Estimated contribution to Estimated price change Component BOM FY11E

Chipset 30% 12% Touchpanel 20% 5% Battery 5% Memory 10% -20% Camera 5% Other 30.0% 6% Total 7.0% Does not include other costs including manufacturing, software development, shipping and distribution, packaging, miscellaneous accessories included with each phone; estimated change in cost for “other” includes all other components excluding chipset, touch panel and memory Source: Macquarie Research, May 2011

31 May 2011 6 Macquarie Research TCL Communication Technology

ƒ At the operating margin level, we see slight operating margin expansion (60bp in FY11E) due to scale benefits as TCL increases shipment volumes. We expect 38% volume growth in FY11E.

Fig 13 Volume forecasts by region Fig 14 Volume forecasts by technology

m m 80.0 80.0

70.0 70.0

60.0 60.0

50.0 50.0

40.0 40.0

30.0 30.0

20.0 20.0

10.0 10.0

0.0 0.0 2010 2011E 2012E 2010 2011E 2012E

PRC Overseas 3G units 2G units

Source: Company data, Macquarie Research, May 2011 Source: Company data, Macquarie Research, May 2011

ƒ Comparing TCL’s profitability with that of other handset vendors, we see that despite TCL operating in the 2G and low/mid-end segment, its gross margin is higher than ZTE and compares favourably to other vendors that target 3G/feature/high-end segments.

Fig 15 Gross margin comparison

45.0% 42.1% 40.0% 35.0% 33.0% 30.2% 28.8% 30.0% 24.9% 25.0% 22.4% 20.3% 20.0% 15.0% 10.0% 5.0% 0.0% RIM TCL HTC ZTE Sony mobility NOKIA service) Ericsson Motorola terminals (device &

FY10A Source: Company data, Macquarie Research, May 2011

31 May 2011 7 Macquarie Research TCL Communication Technology

Increasing production capacity ƒ The company has plans to double existing production capacity (65m). This will be done in phases, with capacity to increase to 75m by end FY11E (+15%), 100m by FY12E and 130m by FY13E/early 2014 at a total cost of HK$900m. ƒ TCL has been increasing shipment volumes significantly, with 1Q11 volumes up 51% on 1Q10.

Fig 16 Shipment volumes

Millions 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jan-08 Jan-09 Jan-10 Jan-11 Mar-08 Mar-09 Mar-10 Mar-11 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 May-07 May-08 May-09 May-10 May-11

Source: Company data, Macquarie Research, May 2011

Fig 17 Shipments by year

Millions 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Jul Apr Oct Jun Jan Mar Feb Nov Aug Sep Dec May

2008 2009 2010 2011

Source: Company data, Macquarie Research, May 2011

TDR issue delayed ƒ In December 2010, the Board of TCL approved a proposed TDR issue of up to 20% new shares. The Board believes that the TDR is the most appropriate method of raising additional funds for future business development and intends to use the proceeds to increase production capacity. This makes sense in light of TCL’s high gearing (see below) however we believe this has now been delayed and our forecasts do not incorporate this.

31 May 2011 8 Macquarie Research TCL Communication Technology

Balance sheet ƒ TCL is highly geared with ND/E of 230% (ND/share HK$4.69). The company geared up significantly in 2010 (approx. additional HK$5bn) through secured bank borrowings (secured against time deposits). The interest rate on these varied between 0.86-3.51%. Approximately HK$2.36bn is denominated in Rmb, with the remainder in US$. ƒ We forecast TCL will be FCF positive in FY11 (FCF HK$100m). FX risk ƒ As more than 90% of TCL’s shipments are overseas (ex China), the company is exposed to foreign exchange fluctuations (mainly £, € and Rmb). The company manages this through FX hedging instruments.

Fig 18 Macquarie FX assumptions 2010 2011E 2012E

USD/CNY (per end) 6.59 6.20 5.90 HKD/EUR (per end) 0.10 0.09 0.09

% chg USD/CNY -4% -6% -5% % chg HKD/EUR 7% -5% 0% Source: Macquarie Research, May 2011

Forecasts ƒ Our forecasts are shown below.

Fig 19 Macquarie forecasts HK$m 2011 2012 2013

Revenue 12,756.4 17,144.9 20,613.6 Growth 47% 34% 20% Cost of sales 9,973.0 13,543.3 16,193.9 Gross profit 2,783.5 3,601.6 4,419.7 Growth 43% 29% 23% Margin 21.8% 21.0% 21.4%

EBIT 857.3 1,184.2 1,657.5 Growth 62% 38% 40% Margin 6.7% 6.9% 8.0%

Tax 65.4 86.6 117.8 Effective rate 6.5% 6.5% 6.5%

NPAT to shareholders 941.1 1,245.3 1,694.0

EPS basic 0.86 1.13 1.54 EPS diluted 0.84 1.11 1.50

DPS 0.28 0.36 0.50 Payout 33% 33% 33%

RMBHKD 1.26 1.32 1.32

Total shipments 50.0 70.0 90.0 Blended ASP 255.1 244.9 229.0 Blended ASP (US$) 32.8 31.4 29.4 Source: Macquarie Research, May 2011

31 May 2011 9 Macquarie Research TCL Communication Technology

Valuation ƒ Our target price is based on our target multiple of 8x based on FY12E earnings. This is an undemanding target multiple compared with other handset vendors that trade between 8-20x given TCL’s 30% CAGR over FY11-12E and compares with TCL’s historical PER multiple of around 8x.

Fig 20 Peer comparison Price Target px PER Div yield EPS Growth Rec Ticker lcy lcy 2011E 2012E 2011E 2012E 2011E2012E

Vtion OP V33 GR 4.10 8.40 8.7 8.4 2.5 3.0 -62.3 3.5 Nokia OP NOK1V FH 5.78 9.50 10.7 9.2 6.9 6.9 -11.3 16.1 China Wireless UP 2369 HK 1.93 2.25 10.3 9.9 1.9 2.0 -15.7 4.6 ZTE UP 763 HK 26.60 27.00 18.2 15.1 1.3 1.3 68.7 21.0 HTC OP 2498 TT 1,1701,500 11.9 9.5 7.1 5.2 106.424.8 Pricing as at 24 May 2011, Vtion and Nokia are covered by Nicolas Patrick Von, HTC is covered by Daniel Chang Source: FactSet, Macquarie Research, May 2011

Fig 21 TCL PER band chart 12.0 10x 10.0

8x 8.0

6.0 6x

4.0 4x

2.0

0.0 Jul-10 Apr-10 Apr-11 Oct-10 Jun-10 Jan-11 Mar-10 Mar-11 Feb-11 Nov-10 Aug-10 Sep-10 Dec-10 May-10 May-11 Source: Bloomberg, Macquarie Research, May 2011

ƒ TCL’s share price appears to be most correlated to monthly shipment volumes over revenue or volume growth. Volumes fall sharply in 1Q of each year due to normal seasonality (January shipment volumes are typically down on a sequential basis), however have been increasing on a YoY basis.

Fig 22 Share price appears most correlated with monthly shipment volumes… Fig 23 …over volume growth

5.0 10.0 300% 10.0 4.5 9.0 250% 9.0

Millions 4.0 8.0 8.0 200% 3.5 7.0 7.0 3.0 6.0 150% 6.0 2.5 5.0 100% 5.0 2.0 4.0 50% 4.0 1.5 3.0 3.0 0% 1.0 2.0 2.0 0.5 1.0 -50% 1.0 0.0 0.0 -100% 0.0 Jun-08 Jun-09 Jun-10 Jun-11 Mar-09 Mar-10 Mar-11 Jun-08 Jun-09 Jun-10 Jun-11 Sep-08 Dec-08 Sep-09 Dec-09 Sep-10 Dec-10 Sep-11 Dec-11 Mar-09 Mar-10 Mar-11 Sep-08 Dec-08 Sep-09 Dec-09 Sep-10 Dec-10 Sep-11 Dec-11 Volume (LHS) Shr price (HK$, RHS) Volume growth (LHS) Shr price (HK$, RHS)

Source: Bloomberg, company data, Macquarie Research, May 2011 Source: Bloomberg, company data, Macquarie Research, May 2011

31 May 2011 10 Macquarie Research TCL Communication Technology

Fig 24 …or revenue growth Fig 25 Historical share price drivers

200% 10.0 HK$/sh 9.0 10.0 Positive profit alert IPO 150% 8.0 9.0 7.0 8.0 deterioration in China 100% 6.0 7.0 handset market Positive profit alert 50% 5.0 6.0 Positive 2010 guidance 4.0 5.0 0% FY04 loss Positive 2007 3.0 4.0 guidance Reset convertible bond price -50% 2.0 3.0 1.0 2.0

-100% 0.0 1.0 Guided to make profit in 2006 0.0 1H06 2H06 1H07 2H07 1H08 2H08 1H09 2H09 1H10 2H10 1H11E 2H11E

Revenue growth (YoY, LHS) Shr price (HK$, RHS) Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10

Source: Bloomberg, company data, Macquarie Research, May 2011 Source: Bloomberg, company data, Macquarie Research, May 2011

Company profile Strong Global Presence TCL Communication (“TCL” or “the company”) is the handset arm of TCL Corporation (with 47% ownership), one of China’s largest electronics producers. TCL is a handset manufacturer. The majority of its products are shipped overseas, with a focus on Latin America and EMEA. The company operates under two brand names, TCL (PRC market) and Alcatel (overseas market). Headquartered in Shenzhen, TCL has its manufacturing facility located in Huizhou. It also runs 65 repair centers and over 50 offices worldwide. TCL has set up R&D centers in Huizhou, Shanghai and Shenzhen. The company spends about 4% of sales in R&D, however, this number is relatively low compared to other handset manufacturers such as Nokia (12% on average), and its major competitor ZTE (10% on average). This is likely to be a product of its legacy strength in producing 2G handsets. The focus has changed recently, with TCL now delivering GSM, GPRS, EDGE, CDMA to WCDMA and TD-SCDMA. It now owns 2G, 2.5G, 2.75G and 3G patents. Expansion in the mid- and high-end segments Historically, TCL was a player in the entry- to mid-level handset market. The focus is now shifting to the mid- to high-end market (smartphones). The Alcatel One Touch brand was introduced at MWC 2011. Within this new brand, there are five ranges of smartphones: ⇒ Get Apps: pre-embedded with ready to use apps (Android) ⇒ Just Add Friends: for active messaging and social networking, these handsets have a full keyboard ⇒ Keep in Touch: a shortcut to social networks with widgets for updates ⇒ Simply You: for talk/text ⇒ Speed it Up: with internet keys for connectivity.

31 May 2011 11 Macquarie Research TCL Communication Technology

Fig 26 Alcatel OT-980 Android-based handset Fig 27 Alcatel OT-880 Touch Screen QWERTY handset

Source: Company data, Macquarie Research, May 2011 Source: Company data, Macquarie Research, May 2011

Fig 28 Alcatel OT-708 “One Touch Mini” handset Fig 29 Alcatel OT-808/TCL Q3 “GEM” handset

Source: Company data, Macquarie Research, May 2011 Source: Company data, Macquarie Research, May 2011

Alcatel brand name through legacy JV with Alcatel In 2004, TCL set up a Joint-Venture with Alcatel under the name “TCL & Alcatel Mobile Phones” (TAMP), which absorbed the mobile phone business of Alcatel. Initially, TCL owned 55% of the equity stake and Alcatel owned the remaining 45%. One year later, TCL bought the stake from Alcatel. This gives TCL the right to use the Alcatel brand names for manufacturing, distributing and sales via TAMP for 20 years. TCL also acquired the 2G/2.5G patents of Alcatel through the acquisition.

Fig 30 Historical developments of TCL 1999 TCL Mobile was founded 2000 Launched PDA phone and the first Chinese WAP handset 2001 Approved of producing CDMA handset 2002 Signed handset technology cooperative agreement with Ericsson on 2.5G mobile phone technologic platform 2003 Launched handset with color display and built-in camera Ranked No.8 in the global mobile phone market 2004 Established TCL Communication, listed on the Hong Kong Stock Exchange JV with Alcatel 2005 Fully acquired the JV with Alcatel 2006 Ranked No.8 in global mobile market 2007 Launched the first Alcatel 3G handset First dual sim handset 2008 Signed ODM business agreement with T-Mobile Business restructuring: operated under TCL brand and Alcatel brand 2009 First touch screen handset First QWERTY handset 2010 Ranked No.7 in global mobile market Launched first Android OS Alcatel handset and 3G TCL handset in China Source: Company data, Macquarie Research, May 2011

31 May 2011 12 Macquarie Research TCL Communication Technology

Fig 31 Development of TCL products

2010 Android OS handset 2009 TCL 3G handset Touch screen handset 2007 QWERTY handset Dual sim handset 2003 Alcatel 3G handset Color-display Built-in camera 2001 2001 CDMA handset PDA phone WAP handset

Source: Company data, Macquarie Research, May 2011

31 May 2011 13 Macquarie Research TCL Communication Technology

Management Profile

Fig 32 TCL ownership structure as of end-2010

Public and others Aiping Guo 50.1% 0.5%

Dongsheng Li 2.5%

TCL Corporation 47.0%

Source: Company data, Macquarie Research, May 2011

TCL Corporation owns the largest stake of 47% in TCL. Mr. Dongsheng Li, chairman of the company and TCL Corporation, owns 2.5% of the shares as the fourth-largest shareholder. Mr. Aiping Guo, CEO of the company, holds 0.5% of the company shares. Mr. Dongsheng Li, aged 54, is the founder and chairman of the company. He is also the co-founder, chairman and CEO of TCL Corporation. Li graduated from South China University of Technology with a Bachelor’s Degree in Science. Li has rich experience in the industry. He began his career as an engineer at the former company of TCL and then worked as general manager at TCL Communication Equipment in 1980s, deputy general manager of Huizhou Electronics Communication Corporation and general manager of TCL Electronics Group in the 1990s. Starting 1996 to present, Li acts as the CEO and chairman of the current TCL Corporation. Under his management, TCL acquired Thomson’s TV business and Alcatel’s mobile phone business and is becoming a global key payer. Mr. Aiping Guo, aged 48, is the CEO of TCL and Vice President of TCL Corporation since January 2010. Guo graduated from Stanford University with a Doctorate in Management Science and Engineering. Before joining TCL, he worked as manager at SB Global, Project Coordinator at IBM and Senior Business Consultant in Arthur Andersen. He also held the CTO position at Zhaodaola Internet Company. Guo joined TCL in 2001 and has held management positions since then. Mr. Yuk Tung Liu, aged 48, Senior Vice President and CFO of the company. He has an MBA degree from the University of New South Wales, Australia and more than 20 years of experience in the area of audit, finance and business. Mr. Kwok Chung Wong, aged 39, is an Executive Vice President and General Manager – Sales & Marketing (APAC) of the Company. He worked as engineer, CIO, CEO and COO in the computer and electronics industry for over 12 years. Mr. Yves Morel, aged 50, was a Sales Area Director for Alcatel mobile phones before he was appointed as Senior Vice President of the company and responsible for company business in EMEA. He has 25 years of experience in sales and marketing, mainly in the telecom industry. Mr. Jiyang Wang, aged 41, Senior Vice President and General Manager of GSM/WCDMA production line and responsible for R&D. Wang has a Doctorate in Electrocircuit & System and has over 18 years experience of R&D in electronics industry. Mr. Wan Quan Huang, aged 45, is a Senior Vice President of the Company, responsible for overall domestic operations since November 2009. Huang has an EMBA degree from South Polytechnic University and has been working in sales, marketing and business management since 1990.

31 May 2011 14 Macquarie Research TCL Communication Technology

TCL Communication Technology (2618 HK, Outperform, Target Price: HK$8.90) Interim Results 2H/10A 1H/11E 2H/11E 1H/12E Profit & Loss 2010A 2011E 2012E 2013E

Revenue m 5,2494,605 8,1525,252 Revenue m 8,701 12,75617,145 20,614 Gross Profit m 1,224 1,035 1,748 1,119 Gross Profit m 1,948 2,783 3,602 4,420 Cost of Goods Sold m 4,025 3,569 6,404 4,133 Cost of Goods Sold m 6,752 9,973 13,543 16,194 EBITDA m 371294 563331 EBITDA m 530 8571,184 1,657 Depreciation m 0 0 0 0 Depreciation m 0 0 0 0 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 371294 563331 EBIT m 530 8571,184 1,657 Net Interest Income m 16 -24 -26 -24 Net Interest Income m 20 -50 -51 -45 Associates m -1-1 -0-0 Associates m -0 -1-1 -1 Exceptionals m 0 0 00 Exceptionals m 0 00 0 Forex Gains / Losses m 0 0 0 0 Forex Gains / Losses m 0 0 0 0 Other Pre-Tax Income m 79 79 121 121 Other Pre-Tax Income m 196 200 200 200 Pre-Tax Profit m 466 349 658 428 Pre-Tax Profit m 745 1,007 1,332 1,812 Tax Expense m -14 -33 -32 -41 Tax Expense m -43 -65 -87 -118 Net Profit m 452 316 625 387 Net Profit m 702 941 1,245 1,694 Minority Interests m 0 0 0 0 Minority Interests m 0 0 0 0

Reported Earnings m 452 316 625 387 Reported Earnings m 702 941 1,245 1,694 Adjusted Earnings m 452 316 625 387 Adjusted Earnings m 702 941 1,245 1,694

EPS (rep) 0.40 0.28 0.56 0.34 EPS (rep) 0.63 0.84 1.11 1.50 EPS (adj) 0.40 0.28 0.56 0.34 EPS (adj) 0.63 0.84 1.11 1.50 EPS Growth yoy (adj) % 145.6 22.9 38.1 22.6 EPS Growth (adj) % 1,171.6 32.6 32.3 36.0 PE (rep) x 8.9 6.7 5.1 3.7 PE (adj) x 8.9 6.7 5.1 3.7

EBITDA Margin % 7.1 6.4 6.9 6.3 Total DPS 0.25 0.28 0.36 0.50 EBIT Margin % 7.1 6.4 6.9 6.3 Total Div Yield % 4.4 4.9 6.5 8.8 Earnings Split % 64.4 33.5 66.5 31.1 Weighted Average Shares m 1,111 1,127 1,127 1,127 Revenue Growth % 73.0 33.4 55.3 14.1 Period End Shares m 1,091 1,098 1,098 1,098 EBIT Growth % 211.1 85.3 51.7 12.7

Profit and Loss Ratios 2010A 2011E 2012E 2013E Cashflow Analysis 2010A 2011E 2012E 2013E

Revenue Growth % 99.5 46.6 34.4 20.2 EBITDA m 700 1,0871,493 2,029 EBITDA Growth % nmf 61.8 38.1 40.0 Tax Paid m -32 -49 -65 -88 EBIT Growth % nmf 61.8 38.1 40.0 Chgs in Working Cap m -793 -686 -742 -587 Gross Profit Margin % 22.4 21.8 21.0 21.4 Net Interest Paid m 20 -50 -51 -45 EBITDA Margin % 6.1 6.7 6.9 8.0 Other m 836 198 198 198 EBIT Margin % 6.1 6.7 6.9 8.0 Operating Cashflow m 731 500 832 1,507 Net Profit Margin % 8.1 7.4 7.3 8.2 Acquisitions m 0 0 0 0 Payout Ratio % 39.4 33.0 33.0 33.0 Capex m -132 -201 -231 -264 EV/EBITDA x 21.313.2 9.66.8 Asset Sales m 0 00 0 EV/EBIT x 21.313.2 9.66.8 Other m -224 -150-150 -150 Investing Cashflow m -356 -351 -381 -414 Balance Sheet Ratios Dividend (Ordinary) m -125 -184-302 -400 ROE % 42.436.2 36.137.1 Equity Raised m 382 00 0 ROA % 5.66.6 8.09.9 Debt Movements m 5,026 00 0 ROIC % 36.010.9 13.617.3 Other m -5,494 00 0 Net Debt/Equity % 231.4 173.8 128.2 83.2 Financing Cashflow m -211 -184 -302 -400 Interest Cover x nmf 17.2 23.1 37.1 Price/Book x 2.82.1 1.61.2 Net Chg in Cash/Debt m 176 -35 149 692 Book Value per Share 2.0 2.7 3.6 4.7 Free Cashflow m 599 299 601 1,243

Balance Sheet 2010A 2011E 2012E 2013E

Cash m 1,345 1,3101,459 2,151 Receivables m 2,535 3,7174,996 6,007 Inventories m 780 1,1431,537 1,848 Investments m 0 00 0 Fixed Assets m 309 383 442 501 Intangibles m 0 00 0 Other Assets m 7,284 7,333 7,347 7,333 Total Assets m 12,254 13,886 15,781 17,839 Payables m 1,843 2,7033,633 4,368 Short Term Debt m 6,488 6,488 6,488 6,488 Long Term Debt m 0 0 0 0 Provisions m 0 00 0 Other Liabilities m 1,700 1,717 1,738 1,768 Total Liabilities m 10,031 10,907 11,859 12,624 Shareholders' Funds m 2,218 2,975 3,918 5,212 Minority Interests m 4 4 4 4 Other m 0 00 0 Total S/H Equity m 2,222 2,979 3,922 5,216 Total Liab & S/H Funds m 12,254 13,886 15,781 17,839

All figures in HKD unless noted. Source: Company data, Macquarie Research, May 2011

31 May 2011 15 Macquarie Research TCL Communication Technology

Important disclosures: Recommendation definitions Volatility index definition* Financial definitions Macquarie - Australia/New Zealand This is calculated from the volatility of historical All "Adjusted" data items have had the following Outperform – return >3% in excess of benchmark return price movements. adjustments made: Neutral – return within 3% of benchmark return Added back: goodwill amortisation, provision for Underperform – return >3% below benchmark return Very high–highest risk – Stock should be catastrophe reserves, IFRS derivatives & hedging, expected to move up or down 60–100% in a year IFRS impairments & IFRS interest expense Benchmark return is determined by long term nominal – investors should be aware this stock is highly Excluded: non recurring items, asset revals, property GDP growth plus 12 month forward market dividend speculative. revals, appraisal value uplift, preference dividends & yield minority interests Macquarie – Asia/Europe High – stock should be expected to move up or Outperform – expected return >+10% down at least 40–60% in a year – investors should EPS = adjusted net profit / efpowa* Neutral – expected return from -10% to +10% be aware this stock could be speculative. ROA = adjusted ebit / average total assets Underperform – expected return <-10% ROA Banks/Insurance = adjusted net profit /average Medium – stock should be expected to move up total assets Macquarie First South - South Africa or down at least 30–40% in a year. ROE = adjusted net profit / average shareholders funds Outperform – expected return >+10% Gross cashflow = adjusted net profit + depreciation Neutral – expected return from -10% to +10% Low–medium – stock should be expected to *equivalent fully paid ordinary weighted average Underperform – expected return <-10% move up or down at least 25–30% in a year. number of shares Macquarie - Canada Outperform – return >5% in excess of benchmark return Low – stock should be expected to move up or All Reported numbers for Australian/NZ listed stocks Neutral – return within 5% of benchmark return down at least 15–25% in a year. are modelled under IFRS (International Financial Underperform – return >5% below benchmark return * Applicable to Australian/NZ/Canada stocks only Reporting Standards).

Macquarie - USA Recommendations – 12 months Outperform (Buy) – return >5% in excess of Russell Note: Quant recommendations may differ from 3000 index return Fundamental Analyst recommendations Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return

Recommendation proportions – For quarter ending 31 March 2011 AU/NZ Asia RSA USA CA EUR Outperform 45.65% 65.72% 59.70% 43.02% 68.91% 51.16% (for US coverage by MCUSA, 14.36% of stocks covered are investment banking clients) Neutral 39.49% 19.00% 29.85% 53.09% 26.43% 35.73% (for US coverage by MCUSA, 17.55% of stocks covered are investment banking clients) Underperform 14.86% 15.28% 10.45% 3.89% 4.66% 13.11% (for US coverage by MCUSA, 0.00% of stocks covered are investment banking clients)

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