20131008-美银美林-NBA_deal_positive_for_the_handset_biz__maintain_Buy_13页_691kb

ZTE Corporation: Strategic Moves and Financial Outlook

Core Content and Key Information

ZTE Corporation, a major telecom equipment vendor in China and a global player in over 140 countries, has made strategic moves in 2013 to enhance its market position and financial outlook. The company has entered into a partnership with the NBA Houston Rockets, becoming the sole smartphone partner for the team during the 2013/14 season. Additionally, ZTE launched two new smartphone models, the Grand S and Nubia 5, for the North American market. In the first half of 2013, ZTE sold 2.6 million smartphones in North America, ranking 4th in total handset sales and 3rd in the pre-paid market.

The company's financial forecasts have been revised upward due to the potential benefits of the NBA sponsorship and the expected growth in the 4G market. The new forecast for smartphone shipments in FY14 and FY15 has been increased from 40/45 million to 45/50 million units, reflecting more aggressive marketing and branding efforts. However, this is expected to result in higher marketing costs, estimated at RMB100-200 million per year.

In terms of financial performance, ZTE's net income for 2013 is expected to be RMB1,902 million, with an EPS of HK$0.682. The company's FY14 and FY15 EPS are expected to rise by 48.8% and 36.5%, respectively. The price objective has been raised from HK$16 to HK$18.3, based on a revised valuation model that reflects improved market sentiment and a higher P/E multiple. This new price objective is based on 18x FY14E P/E, which is aligned with the global average P/E for both the handset and carriers' equipment businesses.

Main Points and Key Views

• NBA Sponsorship: ZTE's partnership with the NBA Houston Rockets is expected to significantly enhance its brand recognition in both the US and China.
• Handset Business: The company has increased its shipment forecast for FY14 and FY15, with the expectation of improved revenue and market share due to the 4G trend and ZTE's competitive advantages in advanced engineering and cost competitiveness.
• 4G Deployment: China Mobile, China Telecom, and China Unicom are expected to increase their 4G investments, which will benefit ZTE's carriers' equipment business. However, a delay in FDD-LTE licenses could impact 4G spending in FY14.
• Financial Forecast: The company's financial performance has been revised, with higher revenue and net income expectations for FY14 and FY15, despite increased marketing expenses in the short term.
• Valuation: The new price objective of HK$18.3 reflects a more optimistic outlook and higher valuation multiples for the handset and carriers' equipment segments.

Investment Thesis and Risks

ZTE's investment thesis is positive, with the expectation that the company will recover from its bottom in 3Q12 and 4Q12. The delayed revenue in China is anticipated to be recognized in FY13, and the company is expected to benefit significantly from the large 4G TD-LTE deployment in China. The key risks include a slower global economic recovery and intensified competition for market share.

Financial Metrics and Performance

• Net Income (Adjusted): RMB2,060 million in 2011A, RMB1,902 million in 2013E, RMB2,830 million in 2014E, and RMB3,861 million in 2015E.
• EPS: HK$0.753 in 2011A, HK$0.682 in 2013E, HK$1.01 in 2014E, and HK$1.38 in 2015E.
• P/E Ratio: 22.8x in 2011A, 25.2x in 2013E, 16.9x in 2014E, and 12.4x in 2015E.
• EV/EBITDA: 9.36x in 2011A, 8.65x in 2013E, 7.14x in 2014E, and 5.70x in 2015E.
• Free Cash Flow Yield: -12.34% in 2011A, 0.729% in 2013E, 3.64% in 2014E, and 7.54% in 2015E.
• Return on Equity (ROE): 8.7% in 2011A, 8.5% in 2013E, 11.5% in 2014E, and 14.3% in 2015E.

Summary of Key Tables

Table 1: Model revision

• Handset Revenue: Revised up from 25,839 million to 27,219 million in 2013E, with expected growth of 5.3% in FY13, 18.3% in FY14, and 15.6% in FY15.
• Smartphone Shipments: Expected to increase from 35 million to 38 million in FY13, then to 45 million and 50 million in FY14 and FY15, respectively.

Table 2: Global smartphone vendor shipment

• ZTE's Global Market Share: Expected to increase from 1.4% in Q1'11 to 4.9% in Q2'13, with a forecast of 4.9% in Q2'13 and 5.2% in Q1'14.

Table 3: Smartphone shipment in North America

• ZTE's NA Market Share: Expected to increase from 2.7% in Q2'12 to 3.8% in Q2'13, with a forecast of 4.2% in Q1'13 and 3.8% in Q2'13.

Table 4: China smartphone shipment unit

• ZTE's Market Share in China: Expected to increase from 3% in 1Q11 to 8% in 1Q13, with a forecast of 8% in 1Q13 and 6.2% in 2Q13.

Table 5: 4G Deployment Forecast

• China Mobile: Expected to invest 200K 4G BTS in each of FY13, FY14, and FY15.
• China Telecom: Expected to deploy 60K 4G BTS in FY13, 100K in FY14, and 100K in FY15.
• China Unicom: Expected to deploy 30K 4G BTS in FY14 and 50K in FY15.

Conclusion

ZTE is optimistic about its future, with the NBA sponsorship and 4G deployment serving as key catalysts. The company is expected to improve its brand status and market share, leading to higher revenue and net income forecasts. Despite the increased marketing costs, the revised price objective reflects a more favorable valuation and improved financial outlook. The investment thesis remains positive, with the potential for recovery and growth in the coming years.