20130917-DBS_Group-Trigiant_Group_The_best_4G_proxy_26页_793kb

Summary of DBS Group Research on Trigiant

Core Content

This report initiates coverage of Trigiant, a leading manufacturer of RF coaxial cables in China, with a BUY recommendation and a 12-month price target of HK$5.30. The report highlights Trigiant's strong market position, growth potential, and undervaluation relative to other telecom infrastructure stocks.

Main Points

• Company Overview:

  • Trigiant is the largest RF coaxial cable manufacturer in China with a 25%+ market share.
  • Founded in 2007 and listed on the HKEx in March 2012.
  • Key customers include China Mobile (CM), China Unicom (CU), and China Telecom (CT).
  • Management has 20+ years of industry experience and a well-established distribution network.

• Product Portfolio:

  • RF coaxial cable is the core product, used in base stations and indoor coverage.
  • Flame-retardant flexible cable is a new product, contributing to revenue and offering long-term growth in other sectors like utility and oil and gas.

• Growth Drivers:

  • 4G base station construction: CM plans to build 180k TD-LTE base stations by the end of FY13, a major catalyst for Trigiant.
  • Indoor coverage expansion: Expected to grow by 10% in FY13 and 20% in FY14 and FY15.
  • Replacement demand: Trigiant expects 10-20% of existing base stations to require replacement annually.
  • Overseas expansion: The company is targeting markets in Russia, India, and Brazil, with current overseas revenue at 3% of total.

• Financial Performance:

  • Revenue in 1H13 grew by 16% to Rmb1,266m, with net profit up 29% to Rmb165m.
  • Gross margin for RF coaxial cable fell slightly to 23.5%, while flame-retardant flexible cable contributed to significant revenue growth.
  • EPS is expected to grow by 34.7% in FY13 and 28.1% in FY14, with Diluted EPS also showing similar growth.

• Valuation and Recommendation:

  • Trigiant currently trades at 7.2x FY13 PE and 5.7x FY14 PE, which is discounted compared to other telecom infrastructure stocks.
  • The stock offers a forward dividend yield of 4%+, making it attractive for income-focused investors.
  • The price target of HK$5.30 is based on a 10x FY14 PE, in line with the historical average of telecom equipment stocks.
  • The report believes the capex upcycle over the next two years will support a re-rating of the stock.

Key Information

• Market Share: Trigiant holds 25%+ of the Chinese RF coaxial cable market, with the next three competitors holding around 10-15% each.
• Revenue Mix: 95% of Trigiant's revenue is tied to domestic capex, compared to 23%, 82%, and 36% for ZTE, Comba, and CCS respectively.
• Production Capacity: Trigiant plans to increase its annual production capacity from 200k km to 300k km by the end of FY14.
• Cost Structure: Copper is the major raw material, accounting for ~75% of COGS. The cost-plus pricing model protects gross margins from copper price fluctuations.
• Segmental Revenue Growth: Flame-retardant flexible cable is expected to grow by ~40% annually in FY13 and FY14.
• Competitive Advantage:
  • High product quality and strong R&D.
  • Established relationships with major telecom operators.
  • Efficient production and delivery due to large scale and short lead times.

Risks

• Uncertainty around 4G license issuance and the timing of network rollout.
• Slow mobile capex after the peak of infrastructure investment.
• High working capital requirements due to long accounts receivable periods.
• Dependence on telecom operators' procurement mechanisms.

Conclusion

Trigiant is positioned as the best 4G proxy in the Chinese market due to its early involvement and strong market share. With faster sales volume growth than the industry's capex increase and undemanding valuation, the report recommends a BUY with a target price of HK$5.30. The company's diversified product portfolio and overseas expansion plans further support its long-term growth prospects.