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FIH Mobile (2038 HK) Taiwan Information Technology 6 March 2019 FIH Mobile (2038 HK) Target price: HKD1.06 (from HKD1.20) Share price (6 Mar): HKD0.98 | Up/downside: +8.2% Worst likely over; wait for better visibility before revisit Kylie Huang (886) 2 8758 6248 2H18 results poor but expected; 1H19 likely a loss but improving YoY [email protected] Positive on the scale-down in Nokia; stiff competition still a concern Steven Yang (886) 2 8758 6245 Maintaining Hold (3) rating; lowering TP to HKD1.06 [email protected] What's new: FIH Mobile’s 2H18 results were poor but in line with its earlier Forecast revisions (%) profit warning (see memo). We are positive on the company’s decision to Year to 31 Dec 18E 19E 20E scale down the loss-making Nokia business; however, the visibility on its Revenue change (7.8) (24.2) (28.4) Net profit change n.a. n.a. 231.1 earnings recovery remains low, likely due to the intense industry Core EPS (FD) change n.a. n.a. 231.1 competition. We maintain our Hold (3) rating and lower our TP to HKD1.06. Source: Daiwa forecasts What's the impact: 2H18 results review. FIH posted 2H18 revenue of Share price performance USD8.4bn (+27% HoH; +9% YoY), lower than our forecast by 13%. Due to (HKD) (%) pricing pressure and unfavourable mix, the gross margin arrived at -0.6%, 2.2 105 lower than our estimate of -0.3%. FIH saw a non-operating loss of 1.8 86 USD138m due mainly to impairment and forex losses. The 2H18 net loss 1.4 68 1.0 49 came in at USD508m (vs. a net loss of USD349m in 1H18 and USD329m 0.6 30 in 2H17), roughly in line with the expected net loss of c.USD521m stated in Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 the profit warning issued on 22 February. FIH Mobile (LHS) Relative to HSI (RHS) 1H19 still tough but improving YoY. FIH decided to be more selective on 12-month range 0.66-2.19 the ODM project from Nokia and discontinue the distribution business of Market cap (USDbn) 0.98 Nokia products from end-2018. FIH expects this to reduce its opex and also 3m avg daily turnover (USDm) 0.57 expects its operating loss to be reduced YoY in 1H19, despite the market Shares outstanding (m) 7,830 Major shareholder Hon Hai group (62.8%) conditions remaining tough. On the scale-back of the loss-making Nokia business, we estimate FIH to post a loss of USD133m in 1H19, which is Financial summary (USD) still loss-making but improving from a loss of USD349m in 1H18. Year to 31 Dec 18E 19E 20E Revenue (m) 14,930 14,700 15,920 Worst likely over on the strategy change in Nokia business, but Operating profit (m) (606) (134) 83 visibility on earnings recovery remains limited. We have been worried Net profit (m) (857) (138) 78 Core EPS (fully-diluted) (0.109) (0.018) 0.010 the Nokia business would be an earning drag for FIH (see downgrade EPS change (%) n.a. n.a. n.a. report, May 2016). We view the strategy change in its Nokia business as Daiwa vs Cons. EPS (%) n.m. n.m. n.m. the right move for FIH to improve its profitability in the long term. But, the PER (x) n.a. n.a. 12.5 Dividend yield (%) 0.0 0.0 0.0 benefits from this change could take time and the industry competition in DPS 0.000 0.000 0.000 smartphone EMS/ODM and casing could remain tough on muted volume PBR (x) 0.4 0.4 0.4 growth, which should result in high uncertainty on FIH’s earning recovery, EV/EBITDA (x) n.a. 25.5 2.7 in our view. In all, we expect 2019 to be a loss-making year for FIH. ROE (%) n.a. n.a. 3.5 Source: FactSet, Daiwa forecasts What we recommend: Factoring the cost savings on the scale-down in its Nokia business, we forecast a net loss of USD138m for 2019 and net profit of USD78m for 2020 (from net loss of USD224m for 2019E and net profit of USD24m for 2020E). We maintain our Hold (3) rating and cut our 12-month TP to HKD1.06 (from HKD1.2), still based on a PBR of 0.5x on our 2019E BVPS (from average 2018-19E BVPS). Key downside/upside risks: higher- /lower-than-expected pricing pressure. How we differ: We are more positive than the market on FIH’s profitability in 2019-20E, likely due to its strategy change in the Nokia business. See important disclosures, including any required research certifications, beginning on page 5 FIH Mobile (2038 HK): 6 March 2019 FIH: revisions to revenue and earnings forecasts Revised forecasts Previous forecasts Change USDm 2018E 2019E 2020E 2018E 2019E 2020E 2018E 2019E 2020E Revenues 14,930 14,700 15,920 16,200 19,400 22,250 -7.8% -24.2% -28.4% Gross profit -84 221 382 -65 233 490 n.a. -5.3% -21.9% Operating profit -606 -134 83 -509 -221 27 n.a. n.a. 210.1% Pre-tax profit -840 -138 78 -564 -224 24 n.a. n.a. 231.1% Net profit -857 -138 78 -564 -224 24 n.a. n.a. 231.1% EPS (USD) -0.109 -0.018 0.010 -0.072 -0.029 0.003 n.a. n.a. 231.1% Margins (%) Gross margin -0.6% 1.5% 2.4% -0.4% 1.2% 2.2% Operating margin -4.1% -0.9% 0.5% -3.1% -1.1% 0.1% Pre-tax margin -5.6% -0.9% 0.5% -3.5% -1.2% 0.1% -5.7% -0.9% 0.5% -3.5% -1.2% 0.1% Net margin Source: Daiwa forecasts FIH: semi-annual and annual P&L statement 2018 2019E 2018E 2019E 2020E USDm 1H 2H 1HE 2HE Sales 6,563 8,367 6,906 7,794 14,930 14,700 15,920 COGS 6,598 8,416 6,862 7,617 15,014 14,480 15,538 Gross profits -35 -49 44 177 -84 221 382 Other operating incomes 96 -4 45 55 92 100 100 Operating expense 313 300 220 234 613 454 399 Operating profits -253 -353 -131 -2 -606 -134 83 Non-operating income -97 -138 -1 -2 -234 -3 -3 Pretax income -349 -491 -133 -5 -840 -138 78 Net profit -349 -508 -133 -5 -857 -138 78 EPS (USD) -0.045 -0.065 -0.017 -0.001 -0.109 -0.018 0.010 Margin Analysis (%) Gross margin -0.5% -0.6% 0.6% 2.3% -0.6% 1.5% 2.4% Operating margin -3.8% -4.2% -1.9% 0.0% -4.1% -0.9% 0.5% Pretax margin -5.3% -5.9% -1.9% -0.1% -5.6% -0.9% 0.5% Net margin -5.3% -6.1% -1.9% -0.1% -5.7% -0.9% 0.5% YoY % Sales 50% 9% 5% -7% 24% -2% 8% Gross profits n.a. n.a. n.a. n.a. n.a. n.a. 73% Operating income n.a. n.a. n.a. n.a. n.a. n.a. n.a. Pretax income n.a. n.a. n.a. n.a. n.a. n.a. n.a. Net income n.a. n.a. n.a. n.a. n.a. n.a. n.a. HoH % -15% 27% -17% 13% Sales Gross profits n.a. n.a. n.a. 304% Operating income n.a. n.a. n.a. n.a. Pretax income n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Net income Source: Company, Daiwa forecasts FIH: 1-year-forward PER FIH: 1-year-forward PBR 20 (HKD) 7 (HKD) 6 10 5 0 4 (10) 3 2 (20) 1 (30) 0 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-17 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-18 Mar-19 Sep-13 Sep-11 Sep-12 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Sep-17 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-18 Share price 7x 17x 27x 37x Share price 0.5x 0.8x 1.1x 1.4.0x Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts 2 FIH Mobile (2038 HK): 6 March 2019 Financial summary Key assumptions Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Average Selling Price (USD) 64.0 43.3 36.2 26.3 43.7 52.2 52.0 56.3 EMS handset shipment (m) 33.5 46.9 65.3 59.6 123.3 149.1 149.3 151.3 ODM smartphone shipment (m) 16.7 50.4 60.8 74.6 101.7 109.8 110.8 111.6 Profit and loss (USDm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Handsets Set Revenues 3,209 4,217 4,564 3,525 9,828 13,513 13,525 14,813 Components/Modules Revenues 1,000 1,516 1,823 1,859 1,849 1,207 1,033 1,011 Other Revenue 788 1,097 1,064 849 404 210 142 96 Total Revenue 4,997 6,830 7,451 6,233 12,080 14,930 14,700 15,920 Other income 0 0 0 0 0 0 0 0 COGS (4,773) (6,407) (7,065) (5,892) (11,950) (15,014) (14,480) (15,538) SG&A (210) (213) (206) (222) (459) (339) (230) (195) Other op.expenses 115 117 133 101 (145) (183) (124) (105) Operating profit 129 326 312 221 (473) (606) (134) 83 Net-interest inc./(exp.) (6) (10) (6) (1) 11 (4) (4) (5) Assoc/forex/extraord./others (22) (48) (16) (3) (34) (230) 0 0 Pre-tax profit 101 268 290 217 (496) (840) (138) 78 Tax (24) (99) (62) (81) (30) (17) 0 0 Min.
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