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FIH Mobile Summary

Core Information

• Company Name: FIH Mobile
• Stock Code: 2038 HK
• Share Price: HKD4.39
• Market Cap (USD): 4.4B
• Target Price (HKD): 6.00 (+37% upside)
• ADTV (USD): 7M
• Sector: Technology
• Investment Rating: BUY (unchanged)

Investment Thesis

• FIH Mobile is reiterating its BUY rating due to its solid position in Xiaomi's projects and its ability to benefit from the commoditization of smartphones.
• The company is positioned to benefit from rising smartphone demand in emerging markets, as its key customers (Xiaomi, Coolpad, Huawei) gain market share.
• It is a low-cost expert rather than a technology leader, which positions it well to take advantage of the smartphone commoditization trend.
• The company is expected to carry momentum into 2H14, with improved bottom line due to better product mix and economies of scale.
• Margin expansion and improved operating efficiency are expected to drive the company's performance.

Financial Highlights

• 1H14 Net Profit Estimate: USD55-60m vs previous estimate of USD56m (+211% YoY)
• 1H14 EPS (HKD): 0.21 (vs 0.22)
• 2H14 Net Profit Estimate: USD147m (vs USD147m), with EPS of HKD0.15
• 1H14 EPS Growth: +162% HoH
• 1H14 Net Margin: 3.4%
• 2H14 Net Margin Target: 4.1%
• ROIC Growth: From -12% in 2012 to 9.6% in 2013, and expected to reach 21% in 2014F and above 30% in 2015-16F
• Net Cash (USDm): Approximately 50% of market cap, providing downside protection
• ROAE (Return on Average Equity): Expected to increase from 2.2% in FY13A to 8.4% in FY14E
• ROAA (Return on Average Assets): Expected to increase from 1.5% in FY13A to 5.1% in FY14E

Valuation

• Target Price (HKD6.00): Based on fair valuation approach using ROIC/WACC and EV/IC
• Fair Value Multiple: 2x
• EV/EBITDA (2014F): 3.4x
• EV/EBITDA (2015F): 2.3x
• Core P/E (2014F): 21.1x
• Core P/E (2015F): 14.1x
• P/BV (2014F): 1.0x
• P/BV (2015F): 0.9x
• Free Cash Flow Yield (2014F): 7.4%
• Free Cash Flow Yield (2015F): 9.6%

Outlook

• 1H14 Sales: Expected to decrease by 5% HoH (-3% YoY) due to slowing demand from Sony
• 2H14 Sales: Expected to increase significantly, driven by strong demand from Chinese brands and potential iPhone 6 mechanical parts supply
• 2H14 Sales Growth: +50% HoH and +43% YoY
• 2H14 OPM (Operating Profit Margin): Expected to rise to 5.5%
• 2H14 Net Income: USD147m
• 2014F Net Income: USD204m
• 2015F Net Income: USD304m
• EPS Growth: 162.8% in FY14E, 49.0% in FY15E, and 21.5% in FY16E

Key Risks

• Weaker-than-expected handset demand, especially from Xiaomi and in the mid to low-end segment
• Severe ASP (Average Selling Price) erosion due to competition
• Market share loss of key customers

Customer Mix and Revenue Projections

Key Ratios and Metrics

Summary of Financial Models

• 1H14 Sales: USD2,395m (down 5% HoH)
• 2H14 Sales: USD3,592m (up 50% HoH)
• 2014F Sales: USD5,987m
• 2015F Sales: USD7,175m
• 2014F Net Income: USD204m
• 2015F Net Income: USD304m
• 2014F EPS (USD): 0.03
• 2015F EPS (USD): 0.04
• 2014F EPS (HKD): 0.21
• 2015F EPS (HKD): 0.31

Key Figures

• 52-week high/low (HKD): 5.50/3.63
• 3-month average turnover (USDm): 7.1
• Free float (%): 34.2
• Issued Shares (m): 7,764
• Market Capitalization (HKD): 34.1B
• Major Shareholders:
  • Hon Hai Precision Industry Co., Ltd.: 65.7%
  • Norges Bank Investment Management: 0.4%
  • Baring Asset Management (Asia) Ltd.: 0.4%

Conclusion

FIH Mobile is expected to benefit from the commoditization of smartphones and its cost leadership. The company's financial performance is projected to improve significantly, with a strong turnaround in 1H14 and continued growth in 2H14. The target price of HKD6.00 reflects the company's potential upside and fair valuation based on its improved ROIC and net cash position. However, the company faces risks from weaker demand, ASP erosion, and market share loss.