20140605-Maybank_KERPL-Xiaomi+iPhone6,_double_happiness__15页_711kb

FIH Mobile Summary

Core Content

FIH Mobile (2038 HK) is a leading manufacturer and services provider for smart devices, with a current share price of HKD4.49 and a market capitalization of HKD34.7B. The company is currently valued at a target price of HKD6.10, representing a 36% increase from the current share price. The analysis highlights FIH's strong growth potential and improved financial performance, driven by its role in the emerging markets and potential supply to Apple's iPhone 6.

Main Points

• Buy Rating: FIH is recommended as a "BUY" based on its strong growth trajectory and operational improvements.
• Sales Growth: Sales are projected to grow by 26% in 2014F and 20% in 2015F, mainly due to the rising demand for smartphones in emerging markets and the potential iPhone 6 mechanical parts supply.
• Key Customers: Xiaomi, Coolpad, Huawei, and Apple are key customers. Xiaomi is expected to become FIH's largest customer in 2014F, with a projected sales contribution of 30%, compared to 4% in 2013. Apple's contribution is expected to increase from 2% in 2013 to 5% in 2014F and 12% in 2015F.
• Margin Expansion: Operating margin is projected to rise from 4.5% in 2014F to 5.5% in 2015F, driven by increased sales scale, improved production efficiency, and a better product mix.
• ROIC Improvement: ROIC is expected to expand significantly from -10% in FY12 to 30% from FY15 onward, supported by strong emerging market demand, margin expansion, and potential iPhone 6 orders.
• Valuation: The target price of HKD6.10 is based on a fair valuation approach using ROIC/WACC and EV/IC, considering the company's net cash position, which accounts for approximately 50% of its market cap.

Key Information

• Market Cap: HKD34.7B
• Share Price: HKD4.49
• Target Price: HKD6.10 (+36%)
• Net Cash: 50% of current market cap
• ROIC: Improved from -10% in FY12 to 10% in FY13, expected to reach 30% in FY15-16
• Operating Margin: Expected to increase from 4.5% in 2014F to 5.5% in 2015F
• Earnings Growth: Core EPS is projected to increase by 170% in FY14F and 70% in FY15F

Financial Highlights

Risks

• Weaker Demand: If smartphone demand, especially from Xiaomi, does not meet expectations.
• ASP Erosion: Severe price competition may lead to reduced average selling prices.
• Market Share Loss: Key customers may lose market share, affecting FIH's performance.

Competitive Advantages

• Integrated Business Model: Offers a one-stop shop for design, manufacturing, and logistics.
• Strong Execution: Capable of fast time-to-market and strong after-sales support.
• Global Footprint: Operations span Europe, Asia, and the Americas, providing a broad market reach.
• Parent Company Support: As a major subsidiary of Hon Hai, FIH benefits from the group's resources and efficiency optimization.

Conclusion

FIH Mobile is well-positioned for growth, driven by its strategic partnerships with leading smartphone brands and its operational improvements. The company's ability to supply mechanical parts for the upcoming iPhone 6 is a key growth driver, along with its expanding role in the emerging markets. With a strong ROIC trajectory and a solid net cash position, the target price of HKD6.10 seems justified, although it is important to monitor key risks such as demand fluctuations and competition.