20131031-招商证券_香港_-Solid_smartphone_momentum_has_just_begun__raise_TP_to_HK_8.52_11页_1mb

TCL Communication (2618 HK) Summary

Core Content and Main Points

TCL Communication (2618 HK) has shown strong growth momentum in its smartphone segment, leading to an upward revision of its target price to HK$8.52, which implies a 11.2x 2014E P/E ratio. The company is positioned as a key beneficiary of smartphone commoditization in emerging markets, with a strategic focus on the mid-end segment and a fast fashion product model that enables it to capture market share effectively.

Key Highlights

• Strong Shipment Growth:
  • 3Q13 smartphone shipments reached 5.192 million units, up 45.9% YoY.
  • The proportion of smartphones in total shipments increased to 33.7% in 3Q13 from 17.1% in 1Q13.
• Revenue Growth:
  • 3Q13 revenue reached HK$5,454 million, up 78.6% YoY and 37.8% QoQ.
  • Revenue guidance for 2013 was revised upward to 40% growth.
• Margin Expansion:
  • Gross margin expanded to 19.6% in 3Q13, up 120bps from 2Q13.
  • Operating margin returned to pre-transition levels, reaching 4.4%.
• Product Strategy:
  • TCL Comm focuses on mass-market smartphones with a fast fashion model.
  • It has launched mid-end flagship models like the IdolX and Hero, and plans to expand its 4G-LTE product pipeline in 2014.
• Global Presence:
  • Ships to over 160 countries, avoiding price wars in the domestic market.
  • Has a broad patent portfolio and strong operator partnerships, which support its market expansion.
• Production and R&D:
  • The new production base in Huizhou is expected to become the largest in China, with doubled capacity.
  • R&D investment is increasing, supporting product innovation and faster time-to-market.

Financial Forecast

Earnings Revisions

• The 2013-15E EPS forecast was raised by 507%/132%/102%, reflecting improved volume, higher ASP, and better margins.
• The 2013-15E revenue estimates were increased by 20%/39%/36%, based on higher smartphone shipment and ASP.

Valuation and Market Position

• Target Price: HK$8.52 (11.2x 2014E P/E).
• Current Price: HK$6.60.
• Valuation: Trading at 8.7x 2014E P/E, the valuation is seen as attractive compared to peers.
• Catalysts: New product launches and monthly shipment data.
• Downside Risks: Component shortages and potential delays in 4G-LTE product launches.

Peers Comparison

Key Takeaways from Management NDR

• Management confirmed the sustainability of 3Q profitability, attributing it to improved product mix and scaling.
• The company is leveraging its global sales network and brand equity to capture market share.
• TCL Comm is expected to benefit from the replacement demand in developed markets and low-end volume ramp in emerging markets.
• The company's new production base in Huizhou and R&D investments are enhancing its operational efficiency and time-to-market capabilities.

Sensitivity Analysis

• Smartphone Volume Impact:
  • A 4% increase in smartphone volume leads to a 6% increase in EPS forecast for 2013E.
  • A 4% decrease in smartphone volume results in a 58% drop in EPS forecast for 2013E.
• Gross Margin Impact:
  • A 1ppt increase in gross margin leads to a 58% increase in 2013E EPS.
  • A 1ppt decrease in gross margin results in a 49% drop in 2013E EPS.

Conclusion

TCL Communication is well-positioned for continued growth in the smartphone market, supported by its strong product pipeline, global sales network, and strategic focus on mid-end devices. The company's financial performance has shown significant improvement, with rising revenues and margins. Despite challenges like component shortages and potential delays in 4G-LTE product launches, the stock is seen as an attractive investment with a BUY rating and a revised target price of HK$8.52.