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.