M Tel | 8266.HK
China Puti Rating ChinaNot-rated Puti Step into the buoyant touch market Target Price
Current price HKD 0.23
From mobile data solution to touch panels 28 March 2012
M Tel is engaged in development and provision of mobile data solutions and related services. To seize new opportunities to take Susanna Chui ride on the growth of smart devices, the company has acquired 33% of a LCD and touch panel business in 2011 and moves towards [email protected] lamination services for capacitive glass-type touch panel. It has the (852) 2235 7131 right to increase stake to 51% over the acquired business. Trading data Profitability warranted by yield rate and order-on-hand Management views positively on margins of the LCD and touch 52-week range (HKD) 0.105/0.315 panel business, thanks to higher yield rate versus industry average. 3 mth avg daily vol (mn) 2.92 Besides, management is optimistic over shipment in 2012 as No of shares (m) 1,178.14 increasing popularity of low-end tablets in China will bring Market Cap (HKD mn) 270.97 overwhelming demand for mid-size touch panels. Assuming an Major shareholders (%) China Oil Resource industry average margin, its order-on-hand will be sufficient to meet (30.18%) the profit of HKD10mn guaranteed by the vendor of the acquisition. Auditors Ting Ho Kwan & Chan Synergy from new acquisition Result due FY12: Jun On 16 Mar, M Tel has announced to acquire 75% of ETC Technology, for a consideration of HKD39mn, with an option to Company description increase shareholdings to 100%. ETC Technology is engaged in Listed in 2003, M Tel is a mobile data solution and trading of parts in relation to display modules and touch panel related service developer and provider, operating modules, and providing professional solutions. Through acquisition, value-added services with network operators, and M Tel can obtain stable supply of parts and one-stop solutions to developing applications. The company is meet customized requirements of touch panels. ETC Technology exploring new opportunities from growth of smart enjoys guaranteed profit of HKD8mn for each of the three years from devices and has acquired a LCD and touch panel FY13 to FY15 ending Mar. business in 2011.
Touch panel market expected to sustain a strong growth Price chart Global touch panel market is expected to grow by 18% in 2012 on the back of the strong smartphone and tablet shipment growth, HK$ especially in China. Domestic handset vendors such as ZTE and 0.40 Huawei have set aggressive smartphone shipment targets. As for tablets, we also expect more and more low-end products to be 0.30 launched going forward in China. Together with rising panel size and 0.20 competition in specs, we believe touch panel demand will continue to be strong. 0.10
-
10 11
10 11
10 10 11 11
- -
- -
- - - -
Jun Jun
Sep Sep
Dec Dec Mar Mar
Page 1 of 1
From mobile data solution to touch panels
M Tel is a mobile data solution and related service developer and provider. The company 1) operates over 100 value-added services with over 30 mobile network operators in 15 countries, 2) develops iPhone, Android, BlackBerry, Qt, Bada, Windows Mobile and Java applications, and 3) delivers IT outsourcing and consultation services on web and mobile solutions.
Exhibit 1: M Tel’s mobile data solutions and related services
Source: Company Data, CIRL
Exhibit 2: M Tel’s partners and clients
Source: Company Data, CIRL
Page 2 of 2
Explore new opportunities from growth of smart devices Despite increasing popularity of smartphones, market of mobile value-added services and applications are getting increasingly challenging. Unlike feature phones in which software are pre-installed in turnkey chipsets, smartphones can run third party applications and induce more and more developers to swarm into the market.
Therefore, M Tel is exploring new opportunities from growth of smart devices. In Sep 2011, the company has entered into an agreement to acquire 33.3% of Jun Feng, a LCD and touch panel business for a consideration of HKD20mn, with an option to increase shareholdings to 51%. Jun Feng enjoys guaranteed profit at HKD10mn for the year ending 30 Sep 2012.
Exhibit 3: Jun Feng’s Hunan plant
Source: Company data, CIRL
Focus on touch panel lamination Due to commoditization and declining profitability of LCD panels, M Tel is focusing more on capacitive glass-type touch panel business.
Capacitive touch panels are panels, which detect touch location by calculating change of capacitance (a human finger touching panel), while resistive touch panels detect touch location by calculating voltage change (top layer contacting bottom layer). Capacitive touch panels are replacing resistive touch panels to become mainstream touch panel technology, thank to 1) better sensitivity, 2) rising adoption of multi-touch requirementss and 3) declining costs.
And what Jun Feng produces are capacitive glass-type touch panel. Transparency, sensitivity and strength of capacitive glass technology are better, though capacitive film is cheaper, thinner and lighter in weight with shorter development time. While new single glass solution of Wintek and TPK , which are industry leaders, also offer lighter weight and slimmer form factor at competitive price, we believe this technology will not mature soon.
Page 3 of 3
Out of three touch panel production process (cover glass production, touch sensor production and lamination), M Tel provides lamination services. The company will source several key materials and components (i.e. cover glass, controller ICs and touch sensors) from suppliers, and assemble sandwich-like layers by optical adhesives (i.e. OCA).
Exhibit 4: Jun Feng’s products
Touch components Produced by Jun Feng Produced by suppliers and clients
Touch panel module lamination LCD display
Touch panel lamination
End products
Source: TPK, CIRL
Page 4 of 4
Target at white box smart device vendors Management expresses the company currently has more than 20 customers, which include Ainol (a MP3 and MP4 digital player provider) and an OEM of a leading home electronics vendor in China. Both shipments are for 7-inch tablets.
Exhibit 5: Ainol ‘s Novo7 Paladin
Source: Company data, CIRL
Exhibit 6: Main tablets in the market
New iPad Galaxy Tab 10.1 Galaxy Tab 8.9 Galaxy Tab 7.7 Amazon Kindle Novo7 Paladin
Fire
Air interface LTE/3G/Wi-Fi 3G/Wi-Fi 3G/Wi-Fi 3G/Wi-Fi Wi-Fi Wi-Fi
Operating iOS 5.1 Android 3.1 Android 3.1 Android 3.2 Android 2.3 Android 4.0
system
CPU Dual-core A5X Dual core 1 GHz Dual Core 1 GHz Dual core 1.4 Dual core 1 GHz 1 GHz Processor
processor Processor GHz processor Cortex-A9
Memory 16GB/32GB/64G 16GB 16GB 16GB/32GB/64G 8GB 8GB
B B
RAM 1 GB 1 GB 1 GB 1 GB 512 MB 512 MB
Screen IPS TFT-LCD PLS TFT-LCD PLS TFT-LCD Super AMOLED IPS TFT-LCD TFT-LCD
technology (a-Si/oxide) Plus
Size 9.7 inch, 264 ppi 10.1 inch, 149 ppi 8.9 inch, 169 ppi 7.7 inch, 197 ppi 7.0 inch, 170 ppi 7 inch, 133 ppi
Price HKD3,888 HKD3,510 HKD4,222 HKD3,480 HKD1,820 HKD699
Source: Company data, price.com.hk, CIRL
Page 5 of 5
We notice that Amazon’s Kindle Fire has started to develop mid-end tablet market, since iPad and Samsung Galaxy Tab triggered explosive growth of tablet market. We believe more and more low-end tablets will be launched going forward, especially in emerging markets such as China. As the specs of low-end tablets, which are sold at competitive price, are actually not that low-end (i.e. 1GHz processor, 512MB of RAM and display with ~130ppi), we expect popularity of low-end tablets to increase and support demand of mid-size touch panel (diagonal size between 5" and 10").
Based on orders on hand and its capacity, management expects to ship 300k units of LCD/ touch panel module/ touch panel per month in 2012 with ASP of USD6-10, depending on feature and size of products. As such, we project revenue will be around HKD169-281mn in FY13. Given assuming 6% of NPM, which is industry average, net profit will be around HKD10.1mn-HKD16.8mn, implying guaranteed profit of HKD10mn is achievable.
Exhibit 7: Jun Feng’s targeted shipment and ASP Year to March FY13 Shipment (mn) 3.6 ASP (HKD) 46.8-78.0 Revenue (HKD mn) 168.5-280.8
Source: Company data, CIRL
Higher profitability due to higher yield rate Among touch panel production process (cover glass production, touch sensor production and lamination), the entry barrier of lamination is comparatively higher due to 1) high requirements of adhesive evenness; and 2) difficulties in preventing air bubbles and contamination.
The above two factors will affect yield rate and margins. Therefore, difficulties in getting through learning curve in fast pace to enhance production efficiency and yield rates usually bring challenge to newcomers. However, M Tel’s current yield rate has reached around 85% (industry: 75-90%), according to management. We believe such high yield rate may imply superior lamination capability and better profitability. Management expects GPM to be above 20%, versus 14% of industry average.
Page 6 of 6
Synergy from new acquisition
On 16 Mar, M Tel has announced to acquire 75% of ETC Techonology for an aggregate consideration of HKD39mn, with an option to increase shareholdings to 100%. ETC Techonology is engaged in trading of electronic parts (sourced by a leading provider of touchscreen and touchpad solutions) in relation to display modules and touch panel modules. Also, it provides professional solutions with engineering services to meet individual customer needs.
Exhibit 8: ETC Technology’s structure
Chan Wan Wong Chun M Tel Chan Wan Wong Chun Kim Wai Kim Wai
80% 20% 75% 20% 5%
ETC ETC Technology Technology
100% 100%
China China Bingo Bingo 100% 100%
Honma Honma Technology Technology Limited Limited Source: Company data, CIRL
Benefits from acquisition Ensure consistent supply of parts at competitive price: Currently the company is using electronic parts procured by ETC Technology in LCD and touch panel production. Therefore, the acquisition will ensure stable and consistent supply of electronic parts at competitive price.
Exhibit 9: ETC Technology provides electronic parts and one-stop solution Sto Jun Feng
Provided by ETC Technology Glass Electronic parts One stop solution Provided by Jun Feng
Provided by suppliers
Touch panel module lamination LCD display
Touch panel lamination
Source: Company data, CIRL
Page 7 of 7
Integrate professional resources with ETC Technology: One-stop solutions with engineering services to meet customized size and performance requirements of touch panels, provided by ETC technology will enhance the company’s competitiveness and bargaining power.
Acquisition detail The total consideration is HKD39mn, settled by cash, convertible bonds (conversion price: HK$0.25) and promissory notes (notes without any interest) in ratio of 27%, 60% and 13% respectively. The vendors have irrevocably warranted and guaranteed to M Tel that ETC Techonology’s net profits will not be less than HKD8mn for each of the three years from FY13 to FY15 ending March. If actual amount is less than guaranteed amount, the vendors will pay M Tel in cash for shortfall.
Exhibit 10: Guaranteed profit Apr 11 FY13-FY15 HKD mn (Year to March) FY10 FY11 - Jan 12 (Guaranteed) Turnover 288.6 363.3 311.2 N/A Net profit before taxation and 0.9 2.0 8.2 N/A extraordinary items Net profit after taxation and 0.7 1.7 5.1 8.0 per year extraordinary items
Source: Company data, CIRL
Exhibit 11: Effects of acquisition on shareholding structure After completion and After completion and assuming conversion of As at date of assuming conversion of CBs in full and none of announcement CBs and Option CBs in Option CBs having been full converted No of shares % No of shares % No of shares % China Oil Resources 355,571,722 30.18 355,571,722 27.96 355,571,722 24.15 Chan Wan Kim - - 74,880,000 5.89 235,520,000 15.99 (First vendor) Wong Chun Wai - - 18,720,000 1.47 58,880,000 4.00 (Second vendor) Vodatel Information 155,419,392 13.19 155,419,392 12.22 155,419,392 10.55 Public Shareholders 667,143,742 56.63 667,143,742 52.46 667,143,742 45.31 1,178,134,856 100.00 1,271,734,856 100.00 1,472,534,856 100.00
Source: Company data, CIRL
Page 8 of 8
Growth driven by smartphones and tablets
Global touch panel market is expected to sustain a strong growth (18% in 2012), thanks to the strong growth of smartphone and tablet shipment (31% and 54% in 2012), especially in emerging markets such as China.
Domestic handset vendors such as ZTE and Huawei have set aggressive smartphone shipment targets, in order to grab rising low-end market. As for tablets, Amazon’s Kindle Fire has started to develop mid-end tablet markets, since iPad and Samsung Galaxy Tab triggered explosive growth of tablet market. We believe more and more low-end tablets will be launched going forward in China.
Together with rising panel size and competition in specs, we believe touch panel demand will continue to be strong and benefit touch panel supply chain.
Exhibit 12: Global smartphone and tablet shipment forecasts
Global smartphone and tablet shipment growth forecasts 700 629 600 482 500 400 303 Smartphones 300 Tablets 200 106 units in millions in units 69 100 19 - 2010 2011 2012E
Source: IDC, CIRL
Exhibit 13: Global touch panel shipment forecasts
Touch panel shipment
2500 35% 1,914 30% 2000 1,735 1,538 25% 1500 1,341 1,161 20% 987 1000 15% Shipment (mnunits) 607 10% YoY 500 5%
0 0%
2009
2013E 2011E 2012E 2014E 2015E 2016E
Source: Displaysearch, CIRL
Page 9 of 9
Financial overview
In FY11, M Tel’s net loss widened to HKD5.2mn, but with revenue growth of 34.7% to HKD24.4mn. Increase in revenue mainly related to apps development business. Also, the company managed to improve GPM from 46.2% to 57.1%. However, employment cost was up 91.6% to HKD11.2mn as apps development was labour intensive, resulting in a bigger loss compared to HKD0.7mn in FY10.
However, based on orders on hand, capacity of touch panel business and industry average margin, we believe guaranteed profit of HKD10mn is achievable in FY13 and will likely turn M Tel into profits.
Risks
Weaker-than-expected demand on tablet PCs and smartphones as they are two major growth drivers for touch panels; Weaker-than-expected orders from customers, as competition in low-end markets are intensifying; Increasing capacity supply could lead to more intense pricing competition of touch panels than expectation; and Potential technology challenges includes continuous improvement of film-type solutions in transparency and sensitivity. And there is new single glass solution of Wintek and TPK, which are the industry leader, offering lighter weight and slimmer form factor at competitive price. But we believe this technology will not mature soon.
Exhibit 14: Peer comparison
Price Market cap PE (x) PB (x) Dividend yield (%) Ticker (HKD) (HKD mn) FY10A FY11E FY12E FY10A FY11E FY12E FY10A FY11E FY12E Tpk Holding Co L 3673 TT 127.17 29,920 - 9.7 9.0 - 4.2 3.0 0.0% 1.1% 2.4% Wintek Corp 2384 TT 6.33 10,434 16.9 234.5 33.9 1.2 1.1 1.1 3.7% 1.8% 1.1% Chimei Innolux C 3481 TT 3.57 26,132 -6.3 -1.8 -3.7 0.4 0.5 0.6 0.0% 0.0% 0.0% Young Fast Opto 3622 TT 20.76 3,110 4.5 18.3 13.2 1.1 1.2 1.1 6.2% 3.2% 3.1% J Touch Corp 3584 TT 12.09 1,301 13.0 -42.7 -65.7 1.8 1.9 1.9 1.4% 0.0% 0.0% Digitech Systems 091690 KS 71.56 981 8.6 - - 1.3 - - 0.0% 1.0% 1.0% Iljin Display Co 020760 KS 84.91 2,303 32.0 - - 6.2 - - 0.0% 0.2% 0.2% Gunze Ltd 3002 JT 24.01 5,040 67.2 28.6 29.7 0.5 0.4 0.4 3.2% 2.8% 2.8% Melfas Inc 096640 KS 154.08 2,641 10.1 - - 2.8 - - 1.5% 0.0% 0.0% S-Mac Co Ltd 097780 KS 93.82 1,539 15.1 8.4 6.0 4.7 - 2.1 0.5% 0.0% 0.0% Elk Corp 094190 KS 90.73 1,229 8.1 9.5 5.7 1.8 - - 0.7% 2.4% 0.9% Synopex Inc 025320 KS 19.21 1,002 -3.6 - - 1.3 - - 0.0% 0.0% 0.0% Lg Innotek Co Lt 011070 KS 708.75 14,352 9.8 -26.6 120.9 1.4 1.5 1.6 0.3% 0.3% 0.3% Truly Intl Hldgs 732 HK 1.43 3,958 12.5 8.9 6.7 1.0 0.9 0.9 2.9% 4.5% 6.0% World Wide Touch 1282 HK 0.21 606 2.1 4.9 5.2 0.6 0.6 0.8 0.0% 6.8% 6.3% Average 16.7 40.4 25.6 1.9 1.4 1.3 2.3% 2.4% 2.4%
Mobile Network 8266 HK 0.23 271 -231.4 -31.8 - 5.7 2.4 - 0.0% 0.0% - Source: Bloomberg, CIRL (Gunze and M Tel’s financial year end is 31 March of each year)
Page 10 of 10
Exhibit 15: Financial statement
Income statement Cash flow Year to Mar (HKD mn) FY10A FY11A Year to Mar (HKD mn) FY10A FY11A Revenue 18 24 Pre-tax profit (1) (5) Gross profit (reported) 8 14 Taxes paid (0) (0) EBITDA (1) (6) Depreciation 0 0 Depreciation 0 0 Associates (1) (1) EBIT (1) (6) CFO bef. WC change (1) (5) Net interest income (exp.) 0 0 Change in working cap (9) 10 Associates 1 1 Cashflow from operation (10) 4 Exceptionals/others 0 0 CAPEX (0) (1) Profit before tax (1) (5) Free cash flow (10) 4 Tax expenses (0) (0) Dividends 0 0 Minority interest 0 (0) Balance sheet adj. (1) (10) Net profit (1) (5) Sharse issued 0 21 Dividends 0 0 Others 0 0 Net cash flow (10) 14 Balance sheet Net cash (debt) start 20 10 Year to Mar (HKD mn) FY10A FY11A Net cash (debt) at year-end 10 25 Cash & equiv 10 25 Trade receivables 4 4 Ratios Other receivables 0 0 Year to Mar (HKD mn) FY10A FY11A Inventories 0 0 Growth rate (%) Other current assets 8 0 Revenue (10.8) 34.7 Fixed assets 0 1 EBITDA 1795.7 326.5 Intangible assets 0 0 EBIT 1795.7 326.5 Investment, associates etc 9 19 Net profit (190.8) 664.8 Total assets 31 49 Fully diluted EPS (190.7) 609.4 Margins (%) Account payables 4 7 Gross margin (reported) 46.2 57.1 Other payables 0 0 EBITDA (7.3) (23.2) Short-term debt 0 0 EBIT (7.3) (23.2) Other current liabs 0 0 Net margin (3.7) (21.3) Long-term debts 0 0 Other ratios Deferred tax and others 0 0 ROE (%) (2.5) (12.3) Other long-term liabs 0 0 ROA (%) (2.2) (10.6) Total liabilities 4 7 Net gearing (%) (32.4) (57.4) Interest coverage (x) NA NA Share capital 37 46 Receivables days 75.6 66.3 Reserves (10) (4) Payables days 159.6 228.7 Shareholders' equity 27 42 Inventory days 0.0 0.0 Minorities 0 0 Effective tax rate (%) (1.2) (1.4) Total equity 27 42 Net cash (debt) 10 25 Source: Company data, CIRL
Page 11 of 11
Rating Policy
Rating Definition Buy Outperform HSI by 15% Stock Rating Neutral Between -15% ~ 15% of the HSI Sell Underperform HSI by -15% Accumulate Outperform HSI by 10% Sector Rating Neutral Between -10% ~ 10% of the HSI Reduce Underperform HSI by -10%
Analysts List
Antony Cheng Research Director (852) 2235 7127 [email protected] Hayman Chiu Senior Research Analyst (852) 2235 7677 [email protected] Kenneth Li Senior Research Analyst (852) 2235 7619 [email protected] Lewis Pang Research Analyst (852) 2235 7847 [email protected] Susanna Chui Research Analyst (852) 2235 7131 [email protected]
Analyst Certification
I, Susanna Chui hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was / were, is / are or will be directly or indirectly, related to the specific recommendations or views expressed in this report / note.
Disclosure
Cinda International Capital Limited, subsidiary of Cinda International Holdings Limited, is currently acting as the Independent Financial Advisor of M Tel.
Disclaimer
This report has been prepared by the Cinda International Research Limited. Although the information and opinions contained in this report have been compiled or arrived at from sources believed to be reliable, Cinda International cannot and does not warrant the accuracy or completeness of any such information and analysis. The report should not be regarded by recipients as a substitute for the exercise of their own judgment. Recipients should understand and comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers prior to any investment decision. The report may contain some forward-looking estimates and forecasts derived from the assumptions of the future political and economic conditions with inherently unpredictable and mutable situation, so uncertainty may contain. Any opinions expressed in this report are subject to change without notice. The report is published solely for information purposes, it does not constitute any advertisement and should not be construed as an offer to buy or sell securities. Cinda International will not accept any liability whatsoever for any direct or consequential loss arising from any use of the materials contained in this report. This document is for the use of intended recipients only, the whole or a part of this report should not be reproduced to others.
Page 12 of 12