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AV Concept (595 HK) Summary

Core Content

AV Concept is a leading semiconductor distributor in China and Asia, with a history dating back to 1980 and a listing on the Hong Kong Stock Exchange since 1996. The company benefits significantly from the growth of the mobile internet and smartphone markets, which are expected to drive substantial revenue and earnings growth over the next few years. It also engages in consumer electronic product and mobile internet businesses.

Main Points

• Market Position: AV Concept is a key player in the semiconductor distribution sector in China, India, and Korea. It is an exclusive distributor for Samsung CIS in China and also distributes MCP and AP for Samsung, which are widely used in smartphones and tablets.

• Smartphone Boom: The global smartphone market has seen strong demand, with sales surpassing feature phones in 2013. The growth of mobile internet users is expected to continue, with the penetration rate projected to reach 40% by 2016.

• Consumer Electronic Business: The SOUL headphone business is expected to remain loss-making in FY14 due to lack of scale but is anticipated to turnaround in FY15 with new product launches and geographical expansion.

• Mobile Internet Business: While currently small, AV Concept's mobile internet business, including its 23% stake in Me2on and its wholly-owned Koocell, is expected to grow significantly in the future, potentially becoming a key growth driver.

• Earnings Outlook: The company is expected to enjoy steady revenue growth over the next few years, with a projected CAGR of 7.7% for 2013-16E. Net profit is expected to grow at a CAGR of 113%, with a significant jump in FY14E and FY15E.

• Valuation: The company is currently trading at HK$0.70 with a target price of HK$0.84, representing a 20% upside potential. The target price is based on a conservative valuation of 0.8x 2014E PB or 4-year average forward PB.

• Financial Performance: In FY14E, AV Concept's semiconductor distribution business saw a revenue growth of 17.7% to HK$1,363.1m, driven by the growth of the smartphone market. The consumer electronic product business, however, continues to be loss-making.

• Key Risks:

  • Reliance on major suppliers, with the top 5 suppliers accounting for 87% of total purchases in FY13.
  • Intense competition in the electronic component distribution sector.
  • Frequent changes in consumer preferences and rapid technological shifts in the mobile internet and gaming industries.

Key Information

Financial Highlights (FY12–FY16E)

Investment Summary

• Target Price: HK$0.84
• Upside Potential: 20%
• Valuation Metrics:
  • P/B (2014E): 0.67
  • Forward P/E: 8.8
  • 4-year average forward P/B: 0.8x

Key Shareholders

Performance

Valuation Comparison (1-year forward)

Conclusion

AV Concept is positioned to benefit significantly from the growing demand for smartphones and mobile internet, driven by the expansion of mobile broadband services and the increasing adoption of mobile internet. The company's semiconductor distribution business is expected to see substantial growth, especially in Samsung products. While the consumer electronics segment is currently loss-making, it is anticipated to turn around in FY15. The company's mobile internet business, though small now, holds considerable growth potential. Given the positive earnings outlook and the valuation metrics, the company is recommended for a Buy rating.