20140310-大和证券-Initiation__strong_earnings_growth_expected__Buy_20页_1mb

FIH Mobile Summary

Core Content

FIH Mobile is a leading player in the handset EMS/ODM industry, with a strong position in the mid-to-low end smartphone market. The company is expected to benefit from the industry's outsourcing trend, driven by the increasing demand for smartphones in this segment. The report initiates coverage with a Buy rating and a target price of HKD5.50, based on a 1.3x PBR for 2014E.

Main Points

• Strong Earnings Growth Expected:
  FIH is projected to deliver a 204% YoY net profit growth in 2014, with operating margin expansion to 3.4% (up from 1.8% in 2013E and -4.2% in 2012).

  • Revenue growth for 2014 is expected to be 29% YoY, driven by Sony, Xiaomi, and potential new customers such as Lenovo and Amazon.

• Customer Profile:

  • Sony is FIH's largest customer, contributing 33% of revenue in 2013E.
  • Xiaomi is expected to become FIH's second-largest customer, contributing 24% of revenue in 2014E (up from 8% in 2012 and 15% in 2013E).
  • Xiaomi is a fast-growing brand, aiming to double its shipments to 40m in 2014.
  • Chinese brands (including Huawei, Oppo, BBK) are expected to provide 45-50% of FIH's revenue in 2014E, up from 30-35% in 2013E and 20-25% in 2012.
  • Lenovo could be a new customer in 2014, contributing 6-9% of revenue in 2014-15.
  • Amazon could provide 10-29% earnings upside if it launches a smartphone in 2H14.

• Growth Drivers:

  • Outsourcing trend: Global smartphone OEMs are shifting towards mid-to-low end segments, increasing their reliance on EMS/ODM vendors like FIH.
  • Strong R&D and cost competitiveness: FIH has solid capabilities in both areas, which make it an attractive partner for brands looking to reduce costs and improve product development efficiency.
  • Economic scale and product mix improvement: These factors are expected to drive profitability and margin expansion.

• Valuation:

  • The stock currently trades at 1.1x 2014E PBR, which is considered attractive given the strong earnings outlook.
  • Target PBR is set at 1.3x, which is the average of its past 6-year trading range (0.5-4.5x).
  • The target price is HKD5.50, with an upside of 28.5% from the 10 Mar price (HKD4.28).

• Key Financial Projections (USDm):

  • Revenue (2014E): 7,080m
  • Operating profit (2014E): 237m
  • Net profit (2014E): 191m
  • Core EPS (2014E): 0.026
  • EPS change (2014E): 203.6% YoY
  • ROE (2014E): 5.2%
  • Net profit margin (2014E): 2.7%
  • Operating profit margin (2014E): 3.4%

• Cash Flow and Balance Sheet:

  • FIH has a clean balance sheet with USD2.3bn in net cash as of 2014.
  • Free cash flow is expected to be USD168m in 2014E, up from USD64m in 2013E.
  • Net debt to equity is negative, indicating strong liquidity and financial flexibility.

• Risks:

  • The main risk is worse-than-expected orders from major customers, particularly Sony and Xiaomi.

Key Information

• 2014E Forecast:

  • Revenue: USD7,080m (up 29% YoY)
  • Net profit: USD191m (up 204% YoY)
  • Operating margin: 3.4% (up from 1.8% in 2013E)
  • EPS (fully-diluted): USD0.026 (up 203.6% YoY)
  • PBR (2014E): 1.1x (vs. target PBR of 1.3x)
  • Valuation upside: 28.5% (from HKD4.28 to HKD5.50)

• Market Share and Trends:

  • Global smartphone shipments are expected to grow at a CAGR of 18% from 2013 to 2016.
  • Mid-to-low end segments are the main growth drivers, with 38% YoY growth expected for low-end and 27% YoY growth for mid-range.
  • High-end shipments are expected to grow at 12% YoY.
  • Xiaomi's shipment growth is expected to be 160% YoY from 2012 to 2013, and 101% YoY from 2013 to 2014.
  • Top-10 China smartphone players are expected to account for 61% of total shipments in 2014E.

• Competitive Position:

  • FIH is well-positioned to benefit from the outsourcing trend due to its strong R&D, cost competitiveness, and large customer base.
  • It is a major ODM/EMS partner for Xiaomi, Huawei, Oppo, and BBK.
  • Sony has increased its outsourcing, with FIH expected to be a key supplier for its Xperia M2 model.

Investment Rating

• Rating: Buy (Initiation)
• Target Price: HKD5.50
• Upside: 28.5%
• Outperform Rating: 2
• Hold Rating: 3
• Underperform Rating: 4
• Sell Rating: 5

Summary of Financials

Key Catalysts

• Xiaomi's growth: Expected to double its shipments to 40m in 2014, significantly boosting FIH's revenue.
• Sony's outsourcing strategy: Continued reliance on FIH for mid-range models like Xperia M2.
• Potential new customers: Lenovo and Amazon may bring additional revenue and earnings upside.
• Improved margins: Driven by economies of scale, product mix improvements, and cost reductions.

Conclusion

FIH Mobile is well-positioned to benefit from the global shift towards mid-to-low end smartphones and increased outsourcing by smartphone OEMs. With a strong customer profile, solid R&D, and cost competitiveness, the company is expected to deliver strong earnings growth in 2014. The target price of HKD5.50 reflects a positive outlook on its valuation and growth potential. The Buy rating is based on solid turnaround expectations and favorable industry trends.