BYD Electronic | 285.HK

Rating Neutral Downgrade Watchout for Samsung orders Target Price HKD 9.85 From HK$9.09 Current price HKD 9.80 Upside +0%

Mixed FY14 results, GPM and net profit missed on production 1 April 2015 line shift and higher R&D

BYDE has reported a set of mixed results with revenue growth (up 23.5% Yoy) came in line with market consensus, while net profit and Hayman Chiu GPM were both below our estimates and market consensus. We [email protected] would contribute the miss to 1) 2H14 GPM was down 200bps to 9.7% (852) 2235 7677 due to the slow ramp up of Samsung’s order, and led to a lower utilization rate and and yield rate, and 2) Higher R&D expense which reflects BYDE’s sharp learning curve on metal casings for its clients. Trading data 52-Week Range (HK$) 10.76/4.15 Increasing metal/PMH casing adoption, GPM to ramp up 3 Mth Avg Daily Vol (m) 4.49 As mid and high-end phones are facing stiff competition from low-end No of Shares (m) 2,253.2 ones, using metal casing is one way for smartphone vendors to Market Cap (HK$m) 22,081.4 differentiate their more expensive/flagship products, this could be Major Shareholders (%) BYD (65%) seen from the increasing metal casing adoption from ~15% in 2013 to ~20% in 2014. As smartphone vendors (both international and Auditors Ernst & Young Chinese players) continue to adopt metal/PMH casings, the adoption Result Due 1H15E: Aug rate is still on its upward trajectory (~20% in 2014 to ~33% in 2016E), this would benefit BYDE’s metal casing segment revenue to grow at Company description ~27% CAGR in FY14-16E. Supported by its core competence in Nano-molding technology, the GPM of metal casing is ~2.0x of the Established in 2002, BYDE is a leading company average, through the rising meta/ PMH casing contribution, manufacturer of handset components and we expect BYDE’s GPM to climb to >12.0% in FY15E and FY16E. modules, such as plastic casing, metal casings, and keypads. It also provides assembly services Samsung’s order sustainability a concern in 2H15 for handsets. Its parent company, BYD (1211.HK) Our channel checks suggests that BYDE accounted for >50% of keeps some of handset components and order allocation in both Galaxy-A and S6, which would drive 1H15E modules, such as LCD displays, FPCs, and revenue and net profit to grow >20% Yoy according to market camera modules. Its customers include Samsung consensus. However, with BYDE has just only entered Samsung’s (005930 KS), (NOK.US), , BBK, supply chain, its ramp up pace and future metal casing adoption , Toshiba (6502.JP), Asus (2357.TT), HTC progress raise our concerns on it’s order sustainability in 2H15. While (2498.TT) and HP (HPQ.US). the potential roll out of iPhone 6S/6S+ in 3Q15E and increasing competition from Chinese vendors may also post a threat on Samsung’s sales, which would end up posting a drag on BYDE’s Price chart utilization rate and hence GPM. HK$ 12.0

Positives priced in, downgrade to Neutral with TP of HK$9.85 10.0

We revise up our FY15E/16E earnings by 17.7%/11.2%, mainly due 8.0 to acceleration of casings migration and more diversified customer 6.0 base. BYDE is trading at 12.0x FY15E PER, its valuation is near to peers like Catcher (2474.TT) and FIH (2038.HK). Though BYDE has 4.0 more diversified client mix including international players as well as 2.0

Chinese smartphone vendors, we believe the YTD ~30% rally in 0.0

13 12 14

12 14 13

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- - -

Oct Oct Oct

Apr Apr BYDE’s stock price has already factored in the positives. We Apr downgrade BYDE’s rating to Neutral with TP of HK$9.85, based on 12.0x FY15E PER.

RMB mn FY12A FY13A FY14A FY15E FY16E

Revenue 14,091 16,062 19,832 23,760 26,289 Net Profit 379 648 902 1,462 1,651 Consensus NP 1,495 1,811 EPS (RMB) 0.17 0.29 0.40 0.65 0.74

P/E (x) 45.9 26.9 1934 11.9 10.6 Sources: Bloomberg, CIRL estimates

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Exhibit 1: Revising up earnings forecast

FY15 (new) FY15 (old) Diff FY16 (new) FY16 (old) Diff

Revenue 23,760 22,003 8.0% 26,289 24,627 6.7%

Net Profit 1,462 1,281 14.1% 1,651 1,571 5.1%

EPS (RMB) 0.65 0.56 17.7% 0.74 0.66 11.2%

Source: Company data, CIRL

Exhibit 2: Financial statement

Income statement Cash flow Year to Dec (RMB mn) FY12A FY13A FY14A FY15E FY16E Year to Dec (RMB mn) FY12A FY13A FY14A FY15E FY16E Revenue 14,091 16,062 19,832 23,760 26,289 Pre-tax profit 430 752 1,012 1,641 1,854 Gross profit (reported) 1,190 1,679 2,105 2,950 3,345 Taxes paid -38 -97 -105 -77 -179 EBITDA 1,124 1,390 1,921 2,655 2,866 Depreciation 558 631 903 1,008 1,006 Depreciation -691 -631 -903 -1,008 -1,006 Associates 0 0 0 0 0 EBIT 433 759 1,018 1,647 1,859 CFO bef. WC change 950 1,286 1,811 2,572 2,681 Net interest income (exp.) -3 -7 -6 -6 -6 Change in working cap -322 326 536 -282 -89 Associates 0 0 0 0 0 Cashflow from operation 628 1,611 2,347 2,290 2,592 Exceptionals/others 0 0 0 0 0 CAPEX -912 -927 -1,391 -1,000 -1,000 Profit before tax 430 752 1,012 1,641 1,854 Free cash flow -284 685 956 1,290 1,592 Tax expenses -51 -103 -111 -179 -202 Dividends 0 65 0 146 0 Minority interest 0 0 0 0 0 Balance sheet adj. 321 -82 0 0 0 Net profit 379 648 902 1,462 1,651 Sharse issued -116 0 -217 0 0 Others 0 -134 146 146 -146 Balance sheet Net cash flow -79 534 886 1,583 1,446 Year to Dec (RMB mn) FY12A FY13A FY14A FY15E FY16E Net cash (debt) start 2,207 2,128 2,662 3,548 5,131 Cash & equiv 2,128 2,662 3,548 5,131 6,576 Net cash (debt) at year-end 2,128 2,662 3,548 5,131 6,576 Trade receivables 2,751 3,437 4,285 5,183 5,790 Other receivables 0 0 0 0 0 Ratios Inventories 1,739 1,862 2,286 2,673 2,936 Year to Dec FY12A FY13A FY14A FY15E FY16E Other current assets 562 828 828 828 828 Growth rate (%) Fixed assets 3,914 4,210 4,697 4,689 4,683 Revenue (11.20) 14.0 23.5 19.8 10.65 Intangible assets 8 9 9 9 9 EBITDA (17.01) 23.6 38.3 38.2 7.94 Investment, associates etc 787 868 868 868 868 EBIT (35.84) 75.3 34.1 61.8 12.90 Total assets 11,889 13,877 16,521 19,381 21,690 Net profit (37.14) 71.1 39.1 62.2 12.95 EPS (37.04) 70.6 39.1 62.2 12.95 Account payables 2,691 3,834 4,857 5,860 6,640 Margins (%) Other payables 0 0 0 0 0 Gross margin 8.4 10.5 10.6 12.4 12.7 Short-term debt 0 0 0 0 0 EBITDA 8.0 8.7 9.7 11.2 10.9 Other current liabs 944 1,208 1,999 2,101 2,125 EBIT 3.1 4.7 5.1 6.9 7.1 Long-term debts 0 0 0 0 0 Net margin 2.7 4.0 4.5 6.2 6.3 Deferred tax and others 0 0 0 0 0 Other ratios Other long-term liabs 0 0 0 0 0 ROE (%) 4.6 7.3 9.3 12.8 12.8 Total liabilities 3,634 5,042 6,856 7,961 8,765 ROA (%) 3.2 4.7 5.5 7.5 7.6 Net gearing (%) (25.8) (30.1) (36.7) (44.9) (50.9) Share capital 217 217 0 0 0 Interest coverage (x) 171.8 104.7 184.0 297.8 336.2 Reserves 8,037 8,617 9,665 11,420 12,925 Receivables days 71.3 78.1 78.9 79.6 80.4 Shareholders' equity 8,254 8,834 9,665 11,420 12,925 Payables days 76.1 97.3 100.0 102.8 105.6 Minorities 0 0 0 0 0 Inventory days 49.2 47.3 47.1 46.9 46.7 Total equity 8,254 8,834 9,665 11,420 12,925 Effective tax rate (%) 11.9 13.7 10.9 10.9 10.9 Net cash (debt) 2,128 2,662 3,548 5,131 6,576 Source: Company data, CIRL

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Exhibit 3: Peer comparison

bloomberg Year Mkt Cap Price Share Price Movement (%) PER (x) Yield (%) code End (HKD mn) (HKD) 1M 1YR YTD FY13 FY14 FY15E FY16E FY13 FY14E FY15E FY16E

HK Listed Peers AAC TECHNOLOGIES 2018 HK 12/2014 58,760 47.85 (6.8) 19.2 15.2 20.1 20.1 15.9 13.7 2.0% 2.0% 2.3% 2.7% SUNNY OPTICAL 2382 HK 12/2014 15,468 14.10 10.0 86.8 5.4 21.2 21.2 15.5 12.8 1.1% 1.4% 1.8% 2.3% TCL COMM TECH HL 2618 HK 12/2014 9,675 7.82 6.4 (14.1) 8.5 8.5 8.5 7.2 6.5 0.6% 5.0% 5.0% 5.5% 2369 HK 12/2014 5,799 1.35 (7.5) (29.1) (11.8) 11.3 11.3 11.1 9.9 1.4% 0.7% 1.3% 1.3% SIM TECH GROUP 2000 HK 12/2014 1,023 0.40 (2.4) 6.7 11.1 44.4 44.4 - - 0.0% 0.0% 0.0% 0.0% FIH MOBILE LTD 2038 HK 12/2014 32,015 4.11 12.0 (4.0) 17.8 23.7 23.7 17.8 15.5 0.0% 1.0% 1.5% 1.6% TRULY INTL HLDGS 732 HK 12/2014 10,495 3.61 14.2 (30.8) 16.1 9.4 9.4 7.8 7.1 6.1% 4.2% 3.9% 4.4% GROUP 992 HK 03/2014 125,750 11.32 (5.4) 32.1 11.0 18.5 18.5 17.9 14.8 1.4% 2.1% 2.1% 2.2% JU TENG INTL HDG 3336 HK 12/2014 5,205 4.52 (1.3) (17.7) 18.3 6.9 6.9 6.0 5.4 3.0% 3.3% 3.5% 4.0% PANASIALUM HOLDI 2078 HK 09/2013 1,032 0.86 0.0 (51.1) 0.0 4.5 4.5 5.4 6.6 5.5% 23.3% 1.9% 1.5% TONGDA GROUP HLD 698 HK 12/2014 6,454 1.18 8.3 8.3 28.3 12.5 12.5 9.7 7.8 1.9% 2.5% 3.2% 4.1% SAS DRAGON HLDG 1184 HK 12/2014 1,136 1.82 (8.5) (35.4) 7.1 7.5 7.5 - - 0.0% 7.3% 0.0% 0.0% Q TECHNOLOGY GRO 1478 HK 12/2014 2,100 2.10 6.6 N/A (4.5) 5.2 5.2 7.3 6.7 0.0% 0.0% 2.7% 3.0% KA SHUI INTL HLD 822 HK 12/2014 885 0.99 (10.8) (39.6) (10.0) 11.5 11.5 - - 11.1% 10.0% 0.0% 0.0% SCUD GROUP LTD 1399 HK 12/2013 1,134 1.04 (5.5) 67.7 18.2 22.2 22.2 4.9 4.0 0.0% 1.0% 4.6% 6.0% Average 19,033 3.7 4.9 8.9 15.2 15.2 10.5 9.2 3.4% 4.9% 2.8% 3.2%

BYD ELECTRONIC 285 HK 12/2014 22,081 9.80 13.2 115.9 30.7 26.9 19.4 11.9 10.6 0.4% 0.0% 0.8% 0.0%

Casing peers

FOXCONN TECHNOLO 2354 TT 12/2014 28,659 20.82 4.0 22.8 (1.5) 15.5 11.9 11.7 11.7 1.1% 1.5% 1.6% 1.6% CATCHER TECH 2474 TT 12/2014 62,380 81.29 14.3 48.8 33.1 16.9 13.5 12.0 10.8 2.1% 2.1% 2.9% 3.3% CASETEK HOLDINGS 5264 TT 12/2014 14,228 41.88 (2.0) 1.8 (5.8) 8.9 11.3 9.9 8.1 2.7% 4.1% 4.1% 4.8% COXON PRECISE IN 3607 TT 12/2014 2,196 18.44 4.5 37.8 30.8 19.8 11.9 10.8 - 0.0% 0.0% 0.0% 0.0% COMPAL ELECTRON 2324 TT 12/2014 28,556 6.46 6.8 22.8 17.3 43.4 15.5 10.3 9.2 2.9% 3.6% 5.4% 6.4% QUANTA COMPUTER 2382 TT 12/2014 72,368 18.74 (4.8) (7.8) (4.5) 14.8 14.9 13.5 12.0 5.0% 5.0% 5.3% 6.1% WISTRON CORP 3231 TT 12/2014 16,271 6.59 (10.3) 8.3 (7.3) 10.3 17.2 11.0 9.1 5.2% 5.3% 4.9% 6.5% PEGATRON CORP 4938 TT 12/2014 52,801 20.99 (1.7) 86.8 16.0 19.3 13.1 10.3 9.3 2.3% 4.1% 5.4% 6.5% INVENTEC CORP 2356 TT 12/2014 20,137 5.61 (6.0) (24.5) 6.1 10.9 11.1 10.6 11.3 5.6% 6.4% 6.2% 6.8% JU TENG INTL HDG 3336 HK 12/2014 5,205 4.52 (1.3) (17.7) 18.3 6.8 6.9 6.0 5.4 3.0% 3.6% 3.5% 4.0% Average 30,460 (0.1) 17.4 11.5 16.7 12.7 10.6 8.7 3.6% 4.3% 4.7% 5.6%

BYD ELECTRONIC 285 HK 12/2014 22,081 9.80 13.2 115.9 30.7 26.9 19.4 11.9 10.6 0.4% 0.0% 0.8% 0.0%

Source: Bloomberg, CIRL

Exhibit 10: BYDE 12 month forward P/E Ratio Exhibit 1:

Pork 12 mths Forward P/E Ratio 25 avg. -1std. products

20 sold in

supermark 15 a

et counters +1std.

10 -

-1std. 5

0 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14

Source: Bloomberg, CIRL

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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 Associate Director (852) 2235 7677 [email protected] Kenneth Li Senior Research Analyst (852) 2235 7619 [email protected] Lewis Pang Senior Research Analyst (852) 2235 7847 [email protected]

Johnny Yum Research Assistant (852) 2235 7617 [email protected]

Analyst Certification

I, Hayman Chiu, 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.

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.

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