20130809-美银美林-1H13_preview__Recovery_in_margin__bright_outlook__Buy_13页_479kb

1H13 Preview: FIH Mobile Limited Summary

Core Content

FIH Mobile Limited (FXCNF) is a key subsidiary of Hon Hai, with a focus on providing casings, components, and full-system assembly services. The company is expected to report its 1H13 results on 12 August, with the market anticipating a break-even performance, driven by margin recovery.

Main Points

1H13 Earnings Outlook

• Gross Profit Margin (GPM): Expected to improve to 4.4%, up from 1.3% in 2H12.
• Operating Profit Margin (OPM): Expected to improve from a loss of 2.2% / 6.3% in 2H/1H12, due to production relocation to Langfang, which offers lower labor costs and more-efficient production equipment.

2H13 Outlook

• GPM/OPM: Projected to continue improving to 6.8% / 1.3%.
• New Business Strategy: FIH is actively expanding its customer base to include Chinese smartphone brands (e.g., Xiaomi, Meizu, Huawei) and emerging market smartphone makers.
• Role Change: The company now designs, develops, and manufactures smartphones for smaller-scale brand customers rather than just manufacturing for global-tier brands.

Investment Thesis

• Buy Rating: Given the following reasons:
  1. Promising Amazon tablet/smartphone sales expected to drive earnings growth in 2H13 and 2014.
  2. Whitebox smartphones as long-term catalysts.
  3. Resource leverage from parent company Hon Hai, including equipment and facilities.

Financial Forecast (2013E-2015E)

*For full definitions of iQ method measures, see page 10.

Key Financial Metrics (2011A-2015E)

Valuation Metrics (Dec)

*For full definitions of iQ method measures, see page 10.

Key Risks and Upsides

Upside Risks

• Better-than-expected demand for Amazon smartphones.
• More order allocation from Chinese whitebox makers in 2013E.

Downside Risks

• Slower-than-expected Amazon smartphone launch.
• Weak demand for new products.
• Slower-than-expected growth in Chinese whitebox smartphones.
• Fiercer price competition in the China whitebox segment, which could drag down ASP (Average Selling Price).

Price Objective

• Price Objective: HK$5.10
• Basis: Based on 1.2x BVPS for 2014E, representing the mean of its handset ODM/EMS peers' trading range for 2013.

Company Description

FIH Mobile Limited provides:

• Casings (metal and plastic)
• Electronic modules
• Full-system assembly and verification services

It is a key subsidiary of Hon Hai, with 70% ownership by the parent company. Major customers include Sony, Motorola, Nokia, Amazon, and other Chinese whitebox makers. The primary production site is in Langfang, Hebei Province.

Strategic Changes

• Business Strategy Reforms: The company has redefined its position, moving away from global-tier brands and focusing on mid-end segments.
• Management Team: A well-organized management team has been established, and roles and responsibilities have been clarified.
• Company Renaming: The company has been renamed to clear confusion and negative impacts from previous news.

Competitive Advantages

• Production Scale: The only ODM/EMS with plants in both Southern and Northern China.
• Production Quality: Accumulated experience with global-tier brands like Motorola, Nokia, and Sony.
• Time-to-Market: Strong capability in delivering products quickly.
• Bargaining Power: Better negotiation power in the material supply chain.

Stock Data

Conclusion

FIH Mobile Limited is expected to benefit from margin recovery and strategic shifts, leading to improved profitability in 2H13. The company's new business strategy, combined with its strong resource leverage from Hon Hai, positions it well for growth in the Chinese and emerging market smartphone segments. Despite the high volatility risk, the Buy rating reflects confidence in its future performance.