20131011-Maybank_KERPL-TCL_Communication_Better_Days_Ahead_14页_417kb

TCL Communication Summary

Core Content

TCL Communication (TCL), based in Shenzhen, China, is a global manufacturer and distributor of telecommunications equipment and mobile phones under the Alcatel and TCL brands. The company operates under a fully integrated business model, featuring five R&D centers, global sales and marketing in over 160 countries, and a workforce of over 11,000 employees. The summary outlines the transfer of coverage to Warren Lau and Kieran Luk, with a revised target price of HKD8.00, which is above the Street consensus.

Key Financials

• Stock Information:

  • Ticker: 2618 HK
  • Shares Issued: 1,144.4m
  • Market Cap: USD816.6m
  • 3-mth Avg Daily Turnover: USD2.1m
  • HSI: 22,951.3
  • Free Float: 40.8%

• Major Shareholders:

  • TCL Corporation: 51.71%
  • Management & Board: 7.41%
  • MAG Investment: 1.75%

• Key Indicators (FY2014F):

  • ROE: 23.4%
  • ROIC: 10.5%
  • NTA/shr (HKD): 3.68
  • Net gearing: Net cash

Performance Overview

• 52-week High/Low: HKD5.95 / HKD2.12
• Performance (%):
  • 1-mth: 22.9
  • 3-mth: 46.3
  • 6-mth: 137.3
  • 1-yr: 100.4
  • YTD: 128.5
• Relative Performance (%):
  • 1-mth: 23.0
  • 3-mth: 36.5
  • 6-mth: 133.1
  • 1-yr: 90.7
  • YTD: 127.2

Main Points

Smartphone Growth

• TCL's smartphone business is rapidly scaling, with shipments increasing from 500,000 units/month in 1Q13 to over 2m units/month in 4Q13F.
• The company is expected to surpass key competitors like HTC, Nokia, and Blackberry in 4Q13, potentially becoming a top-10 smartphone vendor.
• By 2014F, TCL's smartphone shipments are projected to reach 30m units, increasing its global market share to 2.5-3.0%.
• The smartphone mix includes both mass-market models (e.g., One Touch Pop C1, C3, C5, C7) and higher-end models (e.g., One Touch Idol S, X, Alpha, Hero), with a focus on cost-effective MediaTek chipsets.

Feature Phone Market

• With the acquisition of Nokia by Microsoft, the feature phone market may shrink, but TCL is well-positioned to gain market share.
• TCL is expected to ship 35m units of feature phones in 2013F, representing 4-5% of the global market.
• Feature phones still generate strong margins (22-25%), with stable ASPs and minimal IP fees.

Earnings and Profitability

• TCL's core business is expected to turn profitable in 3Q13F, with a forecasted net profit of HKD187m in FY13F and HKD908m in FY14F.
• The company is targeting a 20-25% GM and 2-3% OPM in 2014F, significantly improving from previous quarters.
• Non-operating income, including VAT refunds and government subsidies, is expected to contribute meaningfully to net profit, with estimates of HKD90-100m for 2014F.

Valuation

• The target price of HKD8.00 is based on a 10x 2014 PER, suggesting strong future growth.
• TCL's ROE is expected to rise from 8% in 2013F to 20-25% in 2014F, reflecting improved profitability.
• The company is projected to report a higher EPS in 2014F, with a potential dividend payout of 30-40%.

Corporate Strategy and R&D

• TCL has a strong R&D capability, with 2,200 engineers across five centers, focusing on MediaTek solutions.
• The company is leveraging MediaTek's cost-effective chipsets and high-end technology to enhance product quality and market share.
• TCL's global distribution networks and the Alcatel brand provide a competitive advantage in penetrating international markets.

Manufacturing and Future Outlook

• TCL has launched a new global manufacturing headquarters in Huizhou, increasing production capacity to 60m units annually in Phase 1.
• The company aims to become a top-five handset brand globally within 3-5 years.
• The company is expected to benefit from scale economies, improved product mix, and global distribution, leading to higher profitability and earnings.

Key Risks

• Intense competition in the smartphone market.
• Challenges in inventory management.
• FX risks in emerging markets.

Product Portfolio

• One Touch Idol X:

  • Availability: Jul 2013
  • Screen: 5", 1080 x 1920, 367 ppi
  • Chipset: MT6589T, quad-core 1.5 GHz
  • Retail price: USD375

• One Touch Hero:

  • Availability: Nov 2013
  • Screen: 6", 1080 x 1920, 367 ppi
  • Chipset: MT6589T, quad-core 1.5 GHz
  • Retail price: USD400

• One Touch Idol Alpha:

  • Availability: Nov 2013
  • Screen: 4.7", 720 x 1280, 312 ppi
  • Chipset: MT6589, quad-core 1.2 GHz
  • Retail price: USD320

• One Touch Idol S:

  • Availability: Oct 2013
  • Screen: 4.7", 720 x 1280, 312 ppi
  • Chipset: Qualcomm Snapdragon S400
  • Retail price: USD250

• One Touch Pop C3:

  • Availability: Nov 2013
  • Screen: 4", 480 x 800, 233 ppi
  • Chipset: MT6572
  • Retail price: USD130

• One Touch Pop C5:

  • Availability: Nov 2013
  • Screen: 4.5", 480 x 854, 218 ppi
  • Chipset: MT6572
  • Retail price: USD150

• One Touch Pop C7:

  • Availability: Nov 2013
  • Screen: 5", 480 x 854, 196 ppi
  • Chipset: MT6582
  • Retail price: USD250

Conclusion

TCL Communication is positioned for strong growth in both smartphone and feature phone markets. With a robust R&D strategy, global distribution, and cost-effective manufacturing, the company is expected to significantly improve its profitability and earnings in 2014F. The target price of HKD8.00 reflects the potential for a 10x 2014 PER and the company's strong fundamentals. However, risks such as competition, inventory management, and FX exposure must be considered.