20130823-美银美林-Business_ramping_up_from_2H13E__keep_Buy___HK_5.6_PO_14页_798kb

Summary of FIH Mobile Limited Research Report (23 August 2013)

Core Content

This report from Bank of America Merrill Lynch (BAML) reiterates a Buy rating for FIH Mobile Limited with a Price Objective (PO) of HK$5.6. The analysis focuses on the company's business strategy, growth potential, and financial performance for the second half of 2013 and beyond.

Main Points and Key Information

Business Strategy and Growth

• New Strategy: FIH Mobile has shifted its strategy to focus on mid-end smartphone brand makers in China and overseas emerging markets, moving away from reliance on Apple.
• Ramping Up: The company is expected to see significant earnings growth in 2H13, with sales growing by 65% and Gross Profit Margin (GPM) expanding from 4.1% to 7%.
• Customer Expansion: FIH is expected to expand its customer base to include other tier-1 and tier-2 domestic brands in China (e.g., Xiaomi, Huawei, Meizu) and emerging market local kings.
• Production Shift: The relocation from Shenzhen to Langfang is expected to reduce labor costs and labor turnover due to the nature of inland cities.

Financial Highlights

• Sales Forecast:
  • 2013E: US$6,551 million
  • 2014E: US$8,874 million
  • 2015E: US$10,039 million
• Gross Profit:
  • 2013E: US$384 million
  • 2014E: US$747 million
  • 2015E: US$927 million
• Operating Profit:
  • 2013E: US$128 million
  • 2014E: US$451 million
  • 2015E: US$612 million
• Net Income (Adjusted):
  • 2013E: US$112 million
  • 2014E: US$451 million
  • 2015E: US$517 million
• EPS:
  • 2013E: US$0.015
  • 2014E: US$0.062
  • 2015E: US$0.071
• EPS Growth:
  • 2014E: 302.2% YoY
  • 2015E: 14.6% YoY

Valuation Metrics

• P/E Ratio:
  • 2013E: 35x
  • 2014E: 9x
  • 2015E: 8x
• EV/EBITDA:
  • 2013E: 5.10x
  • 2014E: 2.75x
  • 2015E: 2.28x
• Free Cash Flow Yield:
  • 2013E: 2.28%
  • 2014E: 12.53%
  • 2015E: 18.46%

Key Strengths

• Production Scale: FIH Mobile is the only ODM/EMS with plants in both Southern and Northern China, giving it a competitive advantage.
• Vertical Integration: Offers services from components to full-system assembly, enhancing its ability to control costs and quality.
• Cost Efficiency: Better bargaining power with raw material suppliers due to its parent company Hon Hai's scale.
• Quality and Time-to-Market: Accumulated experience from working with global-tier brands (Sony, Motorola, Nokia) leads to reliable quality and faster delivery.

Investment Thesis

• Buy Rating: Based on:
  1. Promising Amazon products expected to drive earnings growth in 2H13 and 2014.
  2. Whitebox smartphones as long-term catalysts.
  3. Resource leverage from Hon Hai, which includes equipment and facilities.

Risks

• Upside Risks: Better-than-expected Amazon smartphone demand, more order allocation from China whitebox makers.
• Downside Risks: Slower-than-expected Amazon smartphone launch, weak demand for new products, slower growth in China whitebox smartphones, and fiercer price competition that may drag down Average Selling Price (ASP).

Strategic Positioning

• FIH Mobile has redefined its position beyond global-tier brands, becoming a leader in the mid-end segment due to its better time-to-market, reliable quality, and cost advantages.

Management and Operational Improvements

• The management team is well-organized.
• Business roles and responsibilities are clearer in the group.
• The company renamed to eliminate confusion from negative news.

Market and Customer Trends

• Mid-end smartphones (quality hardware with affordable ASP) are an emerging product segment for 2H13 and 2014.
• The EMS/ODM outsourcing trend is expected to continue, with FIH Mobile being a preferred option for tier-2 brand makers due to its unique value proposition.

Financial Performance

• Net Debt is expected to decrease in 2013E and 2014E, indicating improved financial health.
• Free Cash Flow is projected to increase significantly in 2014E and 2015E, suggesting better cash generation.

Key Financial Tables and Charts

• Chart 1 & 2: Sales contribution by customers in 2013 and 2014, showing increased focus on non-Apple customers.
• Chart 3: FIH's share price movement.
• Chart 4: InFocus smartphone models designed and manufactured by FIH.
• Chart 5, 6, 7: Smartphone models for Xiaomi, Meizu, and Sony, highlighting FIH's role in their production.
• Chart 8: Production facilities of Hon Hai and FIH in China.

Important Disclosures

• The report is general information and not a recommendation.
• Analyst Certification: Allen Chang certifies the views expressed in the report reflect his personal opinions.
• Investment Restrictions: Foreign investment in Taiwan securities is regulated and restricted, with specific channels available.
• Tax Considerations: Dividends and interest earned by foreign investors are subject to 20% withholding tax.
• Conflicts of Interest: BAML may have a conflict of interest due to business relationships with covered companies.

Conclusion

FIH Mobile Limited is positioned to benefit from new business strategies, trends in ODM/EMS outsourcing, and expansion into mid-end and emerging market segments. The company's financial performance is expected to improve significantly, driven by increased sales, better margins, and strategic customer expansion. The Buy rating is based on the potential for earnings growth and strong value proposition in the market.