20160420-法国巴黎银行-TCL通讯-02618.HK-Margins_worse_than_expected_12页_619kb

TCL Communication Summary

Core Content

TCL Communication (2618 HK) reported a weak 1Q16 result, with net profit of HKD14m, significantly below expectations. The performance was impacted by an unfavourable product mix and gross margin pressure, leading to a 95% quarter-over-quarter and 92% year-over-year decline. The company's gross margin fell to 19.4% from 23.4% in 4Q16 due to a lower average selling price (ASP). Management anticipates a challenging 1H16 due to weak global demand and currency fluctuations.

Main Points

• Weak 1Q16 Performance:

  • Net profit: HKD14m (-95% q-q & -92% y-y)
  • Sales: HKD5,554m (-32.9% q-q)
  • Gross profit: HKD1,075m (-44.6% q-q)
  • Operating profit: HKD61m (-82.3% q-q)
  • Pretax profit: HKD16m (-94.7% q-q)
  • Net profit: HKD14m (-95.1% q-q)
  • EPS: HKD0.01 (-95.1% q-q)

• Market Challenges:

  • Emerging Markets: Accounted for just over 50% of revenue in 1Q16, but shipments remain slow due to currency volatility and weak demand.
  • China: Management aims to increase open channel exposure, but faces intense competition from local peers.
  • North America: Despite breakthroughs with telco operators like T-Mobile, growth is expected to slow to -1% y-y in 2016, not enough to offset other regional weaknesses.

• Earnings and Valuation:

  • Earnings Estimates:
    • 2016E: HKD500m
    • 2017E: HKD554m
    • 2016E EPS: HKD0.40
    • 2017E EPS: HKD0.44
  • Valuation:
    • Current P/E: 13x 2016E
    • Revised target price: HKD3.20 (down from HKD6.60), based on 8x 2016E EPS
    • Earnings are expected to fall by 53% y-y in 2016 due to shrinking economies of scale and margin pressure
  • Downgrade: From Hold to REDUCE, with a target price of HKD3.20

• Key Assumptions:

  • Gross Margin (GM): 19.5% for 2016E, 19.3% for 2017E
  • Operating Profit Margin (OPM): 2.5% for 2016E, 2.6% for 2017E
  • Net Margin (NM): 1.9% for 2016E, 2.2% for 2017E

• Earnings Sensitivity:

  • A 5% change in shipment growth changes EPS by 4% / 3%
  • A 1% change in OPM changes EPS by 50% / 45%

Key Information

• Revenue Trends:

  • 2015A: HKD28,558m
  • 2016E: HKD25,818m
  • 2017E: HKD25,577m
  • 2018E: HKD25,271m

• Net Profit Trends:

  • 2015A: HKD1,057m
  • 2016E: HKD500m
  • 2017E: HKD554m
  • 2018E: HKD581m

• EPS Trends:

  • 2015A: HKD0.85
  • 2016E: HKD0.40
  • 2017E: HKD0.44
  • 2018E: HKD0.47

• Valuation Metrics:

  • P/E: 12.7x for 2016E, 11.5x for 2017E
  • P/BV: 1.3x for 2016E, 1.2x for 2017E
  • EV/EBITDA: 3.1x for 2016E, 2.3x for 2017E
  • Price/Book: 1.5x for 2015, 1.3x for 2016E, 1.2x for 2017E
  • Dividend Yield: 2.4% for 2016E, 2.7% for 2017E

• Market Performance:

  • 1-month return: -6.1%
  • 3-month return: -12.4%
  • 12-month return: -44.1%
  • Relative to MSCI Hong Kong: -9.6% (1-month), -23.8% (3-month), -36.2% (12-month)

• Event Calendar:

  • May-16: Lenovo FY3Q16 results
  • July-16: TCLC 2Q16 results
  • Aug-16: Lenovo FY4Q16 results
  • Oct-16: TCLC 3Q16 results
  • Nov-16: Lenovo FY1Q17 results

• Key Risks:

  • Negative Catalysts: Rising competition, currency volatility, slow demand, shrinking scale and margin pressure
  • Upside/Downside Risks: Stronger/weaker-than-expected smartphone demand and shipments
  • Regional Risks: Less intensified competition in China and favourable FX movements elsewhere

• Company Background:

  • Part of TCL Corp
  • Manufactures mobile phones and accessories
  • Listed in Hong Kong in 2004
  • Joint venture with Alcatel, later acquired
  • Brands: TCL and ALCATEL ONETOUCH
  • Top ten global mobile handset shipper

• Major Shareholders:

  • TCL Corp: 65%

• Share Price Performance:

  • 12-month high/low: HKD9.54 / HKD4.97
  • 3-month historic volatility: 34.4%

• Market Cap:

  • USD833m

• Share Turnover:

  • 3m average daily turnover: USD1.0m

• Free Float:

  • 31%

• Issued Shares:

  • 1,269m

Investment Thesis

• TCLC's 1Q16 results were weak, with net profit significantly lower than estimates
• Management expects 1H16 to be challenging due to weak global demand and currency fluctuation
• Despite growth in North America, the company cannot offset weakness in emerging markets and China
• We cut our 2016/2017 earnings estimates by 51% / 48%
• Downgrade to REDUCE with a target price of HKD3.20, based on 8x 2016E EPS
• Current valuation of 13x 2016E P/E is considered too high given the expected earnings decline

Catalysts

• Negative share price catalysts include:
  • Rising competition
  • Currency volatility
  • Slow demand
  • Shrinking scale and margin pressure

Conclusion

TCL Communication faces significant challenges in 1Q16 and 1H16, driven by weak global demand, currency fluctuations, and unfavourable product mix. Despite growth in North America, the company's overall earnings outlook is muted, leading to a downgrade and a revised target price. The company's performance is expected to continue to trend downward, with a 53% y-y earnings decline in 2016. The investment thesis is based on the assumption that the company will not be able to offset weakness in key markets, and that its current valuation is unjustified.