Asia Pacific Equity Research

27 October 2011

TCL Communication Technology Holdings Ltd.

3Q11 results slightly missed; Remains a valuation catch-up play
TCLC reported a decent set of 3Q11 results with sales of HK$2,862mn (up 33 % Y/Y; 2% below our estimate) and net profit of HK$215mn (up 7% Y/Y, 8% below our estimate). Management lowered shipment volume guidance from 50mn to 44mn after it rose by only 16% Y/Y in 3Q11. 3Q11 GPM at 20.9% vs. 22% in 1H11, in-line with our expectation that improving 3G smartphone sale would couple with continued margin squeeze, due to 1) lack of economies of scale for smartphone in the early stage of production; and 2) price competition from international players in the low-mid end smartphone segment and from ZTE/Huawei in the feature phone segment. ASP rose to US$33.4 from US$30.3 in 1H11, thanks to improving product mix and the continued success of the step-up strategy to high-end phones. The magnitude of ASP rise (up 10% Q/Q) was the key positive surprise in 3Q11 results, in our view. Earning estimates revisions: Sep shipment volume was a miss, coming in at 3.8mn, up 6% Y/Y, the lowest Y/Y growth compared to any previous months in 2011 thus far. We forecast 9% Y/Y growth for the remaining three months in 2011 and FY12. Therefore, we revise down our FY11E/ FY12E sales by 7%/ 22% to factor in 1) lower handset shipment volume assumptions (FY11E down from 47mn to 44mn; FY12E down from 63mn to 48mn); 2) weaker sales growth in EMEA regions; and 3) lower proportion of 3G smartphone sales (13% of sales/ 4% of shipment in FY11). We lower our FY11E/ FY12E NP by 8% and 14%, respectively, to factor in lack of economies of scale in early stage of smartphone production. Share price correction overdone. The share price of TCLC was up 22% yesterday after declining sharply (down 52%) in the past three months. Currently, the stock is trading at an undemanding 4.7x FY12E, 88% higher than the trough P/E of 2.5x in Mar-09 and 61% lower than the height of 12.1% in Apr-11. We maintain our Overweight rating and lower our Dec-12 PT from HK$7.5 to HK$6.0 (DCF-derived; g = 3%; beta = 1.5), representing 47% potential upside from current level, which is an attractive entry point, in our view. The key risks to our PT include a slower pace of migration from 2G to 3G and an unexpected increase in brand recognition of other domestic players in the low-end segment of the handset market.
TCL Communication Technology Holdings Ltd. (Reuters: 2618.HK, Bloomberg: 2618 HK) HK$ in mn, year-end Dec FY09A FY10A FY11E FY12E FY13E Revenue (HK$ mn) 4,361 8,701 10,981 12,359 13,358 Net Profit (HK$ mn) 23.0 701.7 868.2 995.6 1,116.5 EPS (HK$) 0.03 0.63 0.77 0.87 0.98 DPS (HK$) 0.04 0.24 0.23 0.26 0.29 Revenue growth (%) -3.9% 99.5% 26.2% 12.6% 8.1% EPS growth (%) -19.3% 2408.8% 21.5% 13.9% 12.2% ROCE 6.0% 14.5% 10.4% 9.9% 9.7% ROE 2.1% 42.4% 34.4% 31.4% 28.5% P/E (x) 162.9 6.5 5.3 4.7 4.2 P/BV (x) 3.4 2.0 1.6 1.3 1.0 EV/EBITDA (x) 5.0 1.7 1.8 1.6 1.3 Dividend Yield 1.0% 6.0% 5.6% 6.4% 7.2%
Source: Company data, Bloomberg, J.P. Morgan estimates.

Overweight
2618.HK, 2618 HK Price: HK$4.09

Price Target: HK$6.00

Previous: HK$7.50

China HK/China SMID Caps Andrew Hsu

AC

(852) 2800-8572 andrew.tj.hsu@jpmorgan.com

Leon Chik, CFA

(852) 2800-8590 leon.hk.chik@jpmorgan.com J.P. Morgan Securities (Asia Pacific) Limited
Price Performance
10 8 HK$ 6 4 2
Oct-10 Jan-11 Apr-11 Jul-11 Oct-11

Abs

YTD -56.4%

1m 8.4%

3m -51.4%

12m -48.9%

Company Data Shares O/S (mn) Market cap (HK$ mn) Market cap ($ mn) Price (HK$) Date Of Price Free float (%) 3mth Avg daily volume 3M - Avg daily Value (HK$ mn) 3M - Avg daily Value (USD) ($ mn) Index 1 Exchange Rate Fiscal Year End

1,112 4,550 585 4.09 27 Oct 11 40.6% 5,331,398.00 22.32 2.87 7.77 Dec

See page 11 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. www.morganmarkets.com

Andrew Hsu (852) 2800-8572 andrew.tj.hsu@jpmorgan.com

Asia Pacific Equity Research 27 October 2011

Company description

P&L sensitivity metrics (FY11E)

Chipset cost Impact of 5% increase (w. no change in ASPs % of smartphone Impact of 5% increase Impact of greater proportion of ODM sales Impact of 5% points inc GM Impact of each 100bps increase
Source: J.P. Morgan estimates.

EBIT impact (%) 4.5% 0.2% -3.8% 10.9%

EPS impact (%) 4.9% 0.2% -4.2% 11.9%

Founded in 1993, TCLC is a leading mobile handset manufacturer in China with two main brands, Alcatel and TCL. Headquartered in Shenzhen, the company has its production lines located in Huizhou and R&D centers in Shenzhen, Shanghai and Huizhou with more than 1,300 engineers. TCLC has over 90% of its shipment volume in overseas and officially launched the 3G smartphones in FY11.

Price target and valuation analysis Revenue mix (FY11E)

Smartphones 13%

ODM 14%

Our price target (changed due to earnings revision) is based upon DCF methodology. The nature of the industry leads us to apply a terminal growth of 3%.

Mid tier feature phones 44%

Source: J.P. Morgan estimates.

Low tier feature phones 29%

DCF assumptions

Risk free rate: Market risk premium: Beta: Cost of equity Terminal g:
Source: J.P. Morgan estimates

4.20% 6.00% 1.5 13.20% 3.00%

EPS: J.P. Morgan vs. consensus

HK$ FY11E FY12E FY13E J.P. Morgan 0.76 0.87 1.10 Consensus 0.78 0.92 1.10

Our PT (Dec-12, DCF-derived) of HK$6.0 implies a fwd P/BV (FY13E) of 3.0x and a fwd P/E (FY13E) of 7.8x. The key risks to our PT include a slower pace of migration from 2G to 3G and an unexpected increase in brand recognitions of other domestic players in the low-end segment of the handset market.

Source: Bloomberg, J.P. Morgan estimates.

Peer comparison
Companies TCLC (OW)* LENOVO (OW) HTC (N) CHINA WIRELESS (NR) ZTE (NR) Average Ticker 2618 HK 992 HK 2498 TT 2369 HK 763 HK Price, LC 4.09 (6) 5.53 (5.8) 691 (800) 1.42 22.25 MCAP US$MM 583.3 7,317 20,755 391 9,478 Vol US$MM 2.9 32.9 196.1 1.4 20.5 50.8 1W chg 33.2 10.8 1.5 22.4 14.0 16.4 3M chg (41.5) 7.4 (28.2) (18.4) (10.1) (18.2) 11E P/E (x) 5.3 16.5 8.0 10.9 18.2 11.8 12E P/E(x) 4.7 12.9 7.1 9.3 15.0 9.8 11E EV/ EBITDA 6.5 59.9 6.5 11.8 13.0 19.5 11E ROE (%) 34.4 24.3 69.0 19.6 13.5 32.2 11E P/B (x) 1.3 3.7 4.3 1.6 2.3 2.6 11E Yld (%) 7.2 2.5 5.1 2.0 1.4 3.6

Source: Company data, Bloomberg estimates for NR stocks, J.P. Morgan estimates for all others. Share prices are as of 27 Oct 2011.

Andrew Hsu (852) 2800-8572 andrew.tj.hsu@jpmorgan.com

Asia Pacific Equity Research 27 October 2011

3Q11 sales up 33% while NP up 7%

3Q11 results vs. JPM estimates
Year to Dec (HKDm) Turnover Gross profit GPM EBIT Net profit EPS (HKD)
Source: Company and J.P. Morgan estimates

3Q10A 2155.7 522.4 24.2% 239.0 201.6 0.18

3Q11A 2861.9 597.0 20.9% 263.3 214.9 0.19

Growth 32.8% 14.3% 10.2% 6.6% 3.6%

3Q11E 2924.2 636.1 21.8% 268.1 234.5 0.21

Variance -2.1% -6.2% -1.8% -8.4% -9.2%

TCLC reported a decent set of 3Q11 results with sales of HK$2,862mn (up 33 % Y/Y; 2% below our estimate) and net profit of HK$215mn (up 7% Y/Y, 8% below our estimate). 3Q11 GPM came in at 21% vs. 22% in 1H11. We had not anticipated a positive surprise in GPM given the predicted lack of economies of scale of 3G smartphone production in its first FY official sales. ASP rose to US$33.4 (3Q11) from US$30.3 (1H11), thanks to improving product mix and the continued success of the step-up strategy to high-end phones. As mentioned in our previous note 'Handset shipment growth intact; we await evidence of smartphone sales in 2H11, the swing factor published on 9 Aug, we expect that the ASP will improve further in 2H11 when more 3G smartphone models are unveiled; however, the magnitude of the ASP rise (up 10% Q/Q) came in as positive surprise, in our view.

Key takeaways from analyst call

Management lowered shipment volume guidance from 50mn to 44mn. Shipment volume was up 16% Y/Y in 3Q11, with Jul/ Aug/ Sep up 24%/ 20%/6% respectively. The Sep shipment volume was a miss, coming in at 3.8mn units, the lowest Y/Y growth compared to any previous months this year. JPM view: We notice that the growth momentum weakened in 3Q11 due to a deteriorating macro environment and higher base. Despite the weakness in overseas markets, China shipment managed to record growth of 159% Y/Y on new model launches. We have lowered our FY11 shipment volume forecast from 47mn (which was at the lower end of the street estimates) to 44mn, representing a 22% Y/Y growth, assuming that TCLC will achieve 9% Y/Y shipment volume growth in the rest of the year.
Shipment volume vs. Y/Y growth (Jan -11 Dec 11)
6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 6% 22% 51% 42% 30% 29% 24% 64% 70% 60% 50% 40% 30% 20% 9% 9% 20% 9% 10% 0%

Shipment volume
Source: Company (Jan-11 Sep-11); J.P. Morgan estimates (Oct-11- Dec-11)

Y/Y growth

Andrew Hsu (852) 2800-8572 andrew.tj.hsu@jpmorgan.com

Asia Pacific Equity Research 27 October 2011

Alcatel license fee: Short-term pain, long term gain. TCLC has made a payment of USD40mn in 3Q11 utilizing its internal operating cash. Background of the Alcatel-Lucent deal: On 23 Sep, TCLC announced that it will pay USD 40mn, or HKD 312mn, to Alcatel-Lucent for the use of the Alcatel brand name from Jul 2011 to Dec 2024. From 2004 to 2010, TCLC paid 1% of the sales of Alcatel One Touch handset series as loyalty fee to Alcatel-Lucent. As in 2010, approximately 90% of the sales, or HKD 7.8bn, came from overseas (i.e. using the Alcatel brand). JPM view: Assuming that overseas sales remain constant, TCLC will pay HKD 78mn/year or HKD1.05bn over 13.5 years, more than three times the license fee of HKD 312bn. As such, we believe the Alcatel-Lucent deal is positive to TCLC and liquidity risk will remain low as TCLC can fully fund the fee with its ample cash (which amounted to a total of HKD1.5bn as of 3Q11). Smartphone shipment volume to account <5% of total shipment in FY11 Sep smartphone shipment volume accounted 198k units, up 38% M/M, bringing the total shipment to 653k this year. If TCLC achieves 40% M/M smartphone shipment volume growth in each of the three months in the rest of this year, its smartphone shipment volume will reach 1.9mn, which would only account for 4.3% of the total shipment volume (that is estimated to be 44 units), falling short of 8-10% guidance given by management earlier this year. We have lowered our assumption from 6% to 4%.

Net profits revised down by 8%/ 14% in FY11E/ FY12E

Year to Dec (HKDmn) Turnover Gross profit EBIT Net profit EPS (HKD) Assumptions Gross margin
Source: J.P. Morgan estimates.

New FY11E 10,981 2,324 1,008 868 0.765 21.2%

FY12E 12,359 2,609 1,137 996 0.871 21.1%

Old FY11E 11,801 2,567 1,082 946 0.834 21.8%

FY12E 15,749 3,360 1,310 1,157 1.013 21.3%

Change FY12E -7.0% -9.5% -6.8% -8.3% -8.3% -0.6%

FY12E -21.5% -22.4% -13.2% -14.0% -14.0% -0.2%

We are revising down our FY11E/ FY12E sales by 7%/ 22% to factor in 1) lower handset shipment volume assumptions (FY11E down from 47mn to 44mn; FY12E down from 63mn to 53mn); 2) weaker-than-expected sales growth in EMEA regions; and 3) lower proportion of 3G smartphone sales. We are lowering our FY11E/ FY12E NP by 8% and 14%, respectively, to factor in 1) the lack of economies of scale in the early stage of sales of 3G smartphone, which were only official launched this year; and 2) lower total sales. We assume that 4Q11 GPM will come in at 20.3%, lower than the 3Q/ 2Q/1Q11 GPMs of 20.9%/ 21.9%/ 22.3%, bringing our FY11 GPM assumption from 21.8% to 21.2%. We assumed that the FY11E GPMs for ODM/ low-tier feature phones/ midtier feature phone/ 3G smartphone are 16%/ 21%/ 22.8%/21.5%. We highlighted in our last note, 'Handset shipment growth intact; we await evidence of smartphone sales in 2H11, the swing factor published on 9 Aug, that 2H11 will represent a key testing time for TCLC and that investors shall stay focused on shipment volume and GPM of 3G smartphones. We believe higher 3G smartphone sales will couple with a continued margin squeeze in 4Q11 when seven new smartphone models are
4

Andrew Hsu (852) 2800-8572 andrew.tj.hsu@jpmorgan.com

Asia Pacific Equity Research 27 October 2011

unveiled vs. 2/2/4 new models introduced in 1Q/2Q/3Q11. We will also review: 1) the pricing pressures from high-end smartphone producers and domestic players; 2) the sustainability of shipment growth in Latin America and EMEA amid recent development in Europe; and 3) the early receptions of 3G smartphones and Facebook feature phone models. Higher ASP and favourable product mix do not result in higher GPM. TCLC uses chipsets produced by MediaTek (for feature phones) and Qualcomm (for smartphones). TCLC faces a higher cost structure for smartphones due to: 1) lack of economies of scale for smartphone production; and 2) price competition from Apple (a potential low-cost iPhone)/ Nokia (WP7) in the low-mid end smartphone segment and from ZTE/Huawei in the feature phone segment. Share price correction overdone. The share price of TCLC was up 22% yesterday after declining sharply (down 52%) in the past three months. Currently, the stock is trading at 4.7x FY12E, 88% higher than the trough P/E of 2.5x in Mar-09 and 61% lower than the height of 12.1% in Apr-11. We maintain our Overweight rating and lower our Dec-12 PT from HK$7.5 to HK$6.0 (DCF-derived; g = 3%; beta = 1.5), representing a 47% upside from the current level, which is an attractive entry point, in our view.
P/E band chart (Oct 08- Oct 11)

12 10 8 6 4 2 0
10/26/2008 4/26/2009 10/26/2009

Share price (HK$)

13x

10x 7x 4x 1x

4/26/2010

10/26/2010

4/26/2011

Price
Source: J.P. Morgan estimates. Bloomberg.

10

13

10/26/2011
5

Andrew Hsu (852) 2800-8572 andrew.tj.hsu@jpmorgan.com

Asia Pacific Equity Research 27 October 2011

Valuation and share price analysis

DCF valuation
Our Dec-12 price target is based on a DCF valuation that assumes a market risk premium of 6.0% and a risk-free rate of 4.2% (yield on 10-year government notes in China). We lift our beta from 1.2 to 1.5, reflecting the seasonality nature of the handset industry, giving a WACC of 13.2%. We estimate free cash flow until FY15 and assume a terminal growth rate of 3.0%. The terminal growth is based on the annual growth rate expected in FY15 (the final year of the estimate period), subject to a minimum of 1.5% and a maximum of 4.5%, depending on the nature of the industry and the level of maturity in China. We also analyze the DCF price sensitivity to WACC, and the terminal multiple.
Table 1: Base-case DCF analysis
HK$ MM Cash flow estimates Sales EBIT NOPAT Capex, net Depreciation Change in working capital Free CF DCF Parameters Liabilities as a % of EV WACC Enterprise NPV (10E-16E) + Net cash (debt), current - Minorities (Market value) +/- Other items = Equity value / Number of shares = Equity value per share (HK$)
Source Company data, J.P. Morgan estimates.

2007 4,971 77 37 (79) 153 (2,178) (2,067)

2008 4,538 40 141 (83) 138 (111) 86 0% 13.2% 5,878 731 (4) 0 6,605 1,097 6.0

2009 4,361 165 130 (26) 137 (97) 144

2010 8,701 813 339 (139) 170 (179) 191

2011E 10,981 1,008 950 (350) 241 (603) 238

2012E 12,359 1,137 1,069 (300) 305 64 1,138

2013E 13,358 1,268 1,192 (300) 350 (153) 1,088 3.0% 4.2% 6.0% 1.5 6.2% 3.0

2014E 15,018 1,516 1,425 (337) 400 (255) 1,233

2015E 16,220 1,542 1,450 (364) 446 (184) 1,347

Assumptions Terminal growth Risk-free rate Market risk Beta Cost of debt Implied exit P/E multiple (x)

Table 2: Sensitivity analysis based on WACC and perpetual terminal growth rate
5.0 11.7% 12.2% 12.7% 13.2% 13.7% 14.2% 14.7% 1.5% 6.2 6.0 5.8 5.7 5.5 5.4 5.2 2.0% 6.4 6.1 6.0 5.8 5.6 5.5 5.3 2.5% 6.5 6.3 6.1 5.9 5.7 5.6 5.4 Terminal growth rate 3.0% 3.5% 6.7 6.9 6.4 6.6 6.2 6.4 6.0 6.2 5.8 6.0 5.7 5.8 5.5 5.6 4.0% 7.1 6.8 6.6 6.3 6.1 5.9 5.7 4.5% 7.4 7.1 6.8 6.5 6.3 6.0 5.8

Source: J.P. Morgan estimates.

WACC

Andrew Hsu (852) 2800-8572 andrew.tj.hsu@jpmorgan.com

Asia Pacific Equity Research 27 October 2011

Table 6: Key assumptions

Year-end Dec % of total sales ODM Low tier Mid tier High tier
Source: Company data, J.P. Morgan estimates.

FY09 10% 80% 10% 0%

FY10 25% 55% 20% 0%

FY11E 14% 29% 44% 13%

FY12E 13% 23% 38% 25%

Table 7: P&L statement

HK$ MM, year-end Dec Total Revenues YoY change (%) Cost of Goods Sold YoY change (%) Gross Profit YoY change (%) Gross Margin SGA YoY change (%) Other Income/(Expenses) Operating profit EBITDA EBITDA margin Depreciation & Amortization YoY change (%) EBIT EBIT margin Net Interest Expense Exceptional item Associates Gains/losses Net Income Before Taxes YoY change (%) Tax Effective Tax rate Minority Interests Net Income YoY change (%) Net margin
Source: Company data, J.P. Morgan estimates.

FY09 4,361 -3.9%

(3,412)

FY10 8,701 99.5%

(6,752)

FY11E 10,981 26.2%

(8,657)

FY12E 12,359 12.6%

(9,750)

FY13E 13,358 8.1%

(10,515)

-8.4% 949 16.9% 21.8% (954) -8.7% 170 165 302 6.9% (137) -1.1% 165 3.8% (39) (26) (1) 0 34 -6.0% (11) 32.5% 0 23 -19.3% 0.6%

97.9% 1,948 105.4% 22.4% (1,413) 48.2% 278 813 984 11.3% (170) 24.7% 813 9.3% (63) (5) (0) 0 745 2086% (43) 5.8% (0) 702 2950% 8.1%

28.2% 2,324 19.3% 21.2% (1,834) 29.8% 518 1,008 1,249 11.4% (241) 41.4% 1,008 9.2% (67) (17) (0) 0 924 24.0% (55) 6.0% (0) 868 23.7% 7.9%

12.6% 2,609 12.3% 21.1% (2,064) 12.6% 592 1,137 1,442 11.7% (305) 26.5% 1,137 9.2% (69) (9) (0) 0 1,059 14.7% (63) 6.0% (0) 996 14.7% 8.1%

7.8% 2,843 9.0% 21.3% (2,230) 8.1% 655 1,268 1,617 12.1% (350) 14.6% 1,268 9.5% (70) (10) (0) 0 1,188 12.1% (71) 6.0% (0) 1,117 12.1% 8.4%

Table 8: Interim estimates

HK$ MM, year-end Dec Total Revenues Gross Profit EBIT Net Income Before Taxes Net Income Diluted EPS (HK$) Ratios Revenue split GPM EBIT margin NPM YoY Revenue GP EBIT NP
Source: Company data, J.P. Morgan estimates.

1H09 1,327 197 -13 -104 -104 -0.114 30.4% 14.9% -1.0% -7.9% -43.3% -55.0% -137.9% -193%

2H09 3,033 751 178 138 127 2.624 69.6% 24.8% 5.9% 4.2% 38.0% 101.1% 2693% -253%

1H10 3,452 724 303 279 250 0.225 39.7% 21.0% 8.8% 7.2% 160.0% 267.1% -2454% -339%

2H10 5,249 1,224 511 466 451 0.406 60.3% 23.3% 9.7% 8.6% 73.0% 62.9% 187.1% 254%

1H11 4,600 1,014 460 422 396 0.349 41.9% 22.0% 10.0% 8.6% 33.3% 40.0% 52.1% 58.5%

2H11E 6,381 1,310 548 502 472 0.416 58.1% 20.5% 8.6% 7.4% 21.6% 7.0% 7.2% 4.5%

Andrew Hsu (852) 2800-8572 andrew.tj.hsu@jpmorgan.com

Asia Pacific Equity Research 27 October 2011

Table 9: Balance sheet

HK$ MM, year-end Dec Cash and Cash Equivalents Inventories Accounts receivable Other Current Assets Total Current Assets Intangible Assets Property and Equipment, Net Other Assets Non-Current assets Total Assets Accounts Payable Other Accrued Expenses Taxes Payable ST and current LT debts Total Current Liabilities Long-term Debt Other Noncurrent Liability Noncurrent liabilities Total Liabilities Share capital Reserves and Surplus Total Shareholders' Equity Minority Interest Total Shareholders' Equity Total Liabilities and Equity
Source: Company data, J.P. Morgan estimates.

FY09 2,357 448 1,304 3,356 6,278 55 220 66 488 6,766 1,074 0 0 1,461 5,310 0 361 361 5,671 715 369 1,095 0 1,095 6,766

FY10 7,545 780 2,535 6,959 11,619 106 309 72 635 12,254 1,843 0 0 6,488 10,014 0 0 0 10,031 1,098 946 2,218 4 2,222 12,254

FY11E 8,172 984 3,200 7,071 13,227 134 562 91 787 15,703 2,327 0 0 7,786 12,873 0 0 0 12,873 1,098 1,554 2,826 4 2,830 15,703

FY12E 9,163 1,108 3,601 7,139 14,811 151 719 103 972 18,326 2,619 0 0 8,763 14,799 0 0 0 14,799 1,098 2,251 3,523 4 3,527 18,326

FY13E 10,068 1,197 3,893 7,188 16,146 163 844 111 1,118 20,304 2,830 0 0 9,471 15,995 0 0 0 15,995 1,098 3,032 4,305 4 4,309 20,304

Table 10: Cash flow statement

HK$ MM, year-end Dec EBIT Depreciation and Amortization Working Capital Changes Tax Paid Cash Flow From Operations Capital expenditures Investments and others Net Interest Cash Flow from Investing Free Cash Flow Dividends Common issue Debt Other Financing Cash Flow from financing Change in cash Cash beginning Foreign exchange changes Cash at end
Source: Company data, J.P. Morgan estimates.

FY09 165 137 (97) 1 206 (26) 3 (39) (62) 141 38 358 (606) 1,741 351 495 684 (10) 1,170

FY10 813 170 (179) (11) 794 (139) (216) (63) (419) 591 272 0 (361) 0 (211) 164 1,170 11 1,345

FY11E 1,008 241 (603) (43) 603 (350) (19) (67) (437) 186 260 0 200 0 460 627 1,345 0 1,972

FY12E 1,137 305 64 (55) 1,451 (300) (12) (69) (380) 1,082 (280) 0 200 0 (80) 991 1,972 0 2,963

FY13E 1,268 350 (153) (63) 1,330 (300) (9) (70) (317) 1,030 (317) 0 200 0 (117) 905 2,963 0 3,868

Andrew Hsu (852) 2800-8572 andrew.tj.hsu@jpmorgan.com

Asia Pacific Equity Research 27 October 2011

TCL Communication Technology Holdings Ltd.: Summary of Financials

Profit and Loss Statement HK$ in millions, year end Dec FY08 FY09 Revenues 4,538 4,361 Cost of goods sold 3,727 3,412 Gross Profit 812 949 R&D expenses SG&A expenses Operating profit (EBIT) 40 165 EBITDA 308 455 Interest income 24 39 Interest expense -28 -39 Investment income (Exp.) -5 0 Non-operating income (Exp.) Earnings before tax 36 34 Tax -8 -11 Net income (reported) 28.5 23.0 Net income (adjusted) 30 49 EPS (reported) 0.03 0.03 EPS (adjusted) 0.03 0.05 BVPS 1.16 1.19 DPS 0.00 0.04 Shares outstanding 915 917 Balance sheet HK$ in millions, year end Dec FY08 FY09 Cash and cash equivalents 684 2,357 Accounts receivable 837 1,304 Inventories 230 448 Others 2,285 2,169 Current assets 4,037 6,278 LT investments 70 66 Net fixed assets 262 220 Others Total Assets 4,564 6,766 Liabilities ST Loans 1,867 1,461 Payables 591 1,074 Others 0 0 Total current liabilities 3,349 5,310 Long-term debt Other liabilities 142 0 Total Liabilities 3,500 5,671 Shareholders' equity 1,065 1,095 Source: Company reports and J.P. Morgan estimates. Ratio Analysis FY10 FY11E FY12E HK$ in millions, year end Dec 8,701 10,981 12,359 Gross margin 6,752 8,657 9,750 EBITDA margin 1,948 2,324 2,609 Operating margin - Net margin - R&D/sales 813 1,008 1,137 SG&A/Sales 1,212 1,537 1,766 83 151 163 Sales growth -63 -67 -69 Operating profit growth 20 84 95 Net profit growth - EPS (reported) growth 745 924 1,059 -43 -55 -63 Interest coverage (x) 701.7 868.2 995.6 Net debt to total capital 707 885 1,004 Net debt to equity 0.63 0.77 0.87 Asset turnover 0.63 0.78 0.88 Working capital turns (x) 2.02 2.56 3.19 ROE 0.24 0.23 0.26 ROIC 1,114 1,135 1,143 ROIC (net of cash) Cash flow statement FY10 FY11E FY12E HK$ in millions, year end Dec 7,545 8,172 9,163 Net income 2,535 3,200 3,601 Depr. & amortization 780 984 1,108 Change in working capital 759 871 939 Other 11,619 13,227 14,811 Cash flow from operations 72 91 103 Capex 309 562 719 Disposal/(purchase) - Cash flow from investing 12,254 15,703 18,326 Free cash flow Equity raised/(repaid) 6,488 7,786 8,763 Debt raised/(repaid) 1,843 2,327 2,619 Other 0 0 0 Dividends paid 10,014 12,873 14,799 Cash flow from financing 0 0 0 0 Net change in cash 10,031 12,873 14,799 Beginning cash 2,218 2,826 3,523 Ending cash FY08 17.9% 6.8% 0.9% 0.6% FY09 21.8% 10.4% 3.8% 0.5% FY10 FY11E FY12E 22.4% 21.2% 21.1% 13.9% 14.0% 14.3% 9.4% 9.2% 9.2% 8.1% 7.9% 8.1% 99.5% 392.7% 2950.0% 2408.8% 26.2% 23.9% 23.7% 21.5% 12.6% 12.8% 14.7% 13.9%

(8.7%) (3.9%) -47.6% 309.5% -13.8% -19.3% (20.5%) (19.3%) 67.50 40.3% 111.0% 1.02 2.7% FY08 28.5 267 -111 40 -83 -62 -43 -59 808 -12 0 -76 709 684 -35.1% -81.9% 0.77 2.1% FY09 23.0 290 -97 166 -26 -23 141 358 -606 1,741 38 351 684 1,170

-12.1% -3.7% -3.3% -47.7% -13.7% -11.4% 0.91 0.79 0.73 42.4% 34.4% 31.4% FY10 FY11E FY12E 701.7 868.2 995.6 398 529 629 -179 -603 64 731 536 1,382 -139 -350 -300 -356 -369 -312 591 186 1,082 -361 200 200 272 260 -280 -211 460 -80 1,170 1,345 1,345 1,972 1,972 2,963

Andrew Hsu (852) 2800-8572 andrew.tj.hsu@jpmorgan.com

Asia Pacific Equity Research 27 October 2011

JPM Q-Profile
TCL Communication Technology Holdings Ltd. (HONG KONG / Information Technology)
As Of: 21-Oct-2011 Quant_Strategy@jpmorgan.com

Local Share Price

10.00 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 Sep/96 Sep/97 Sep/98 Sep/99 Sep/00 Sep/01 Sep/02 Sep/03 Sep/04 Sep/05 Sep/06 Sep/07

Current:

3.07

12 Mth Forward EPS

1.40 1.20 1.00 0.80 0.60 0.40 0.20

Current:

0.89

Sep/08

Sep/09

Sep/10

Sep/11

0.00 Sep/96 Sep/97 Sep/98 Sep/99 Sep/00 Sep/01 Sep/02 Sep/03 Sep/04 Sep/05 Sep/06 Sep/07 Sep/08 Sep/09 Sep/10 Sep/10 Sep/10 Sep/10 Sep/11

Earnings Yield (& local bond Yield)

35% 30% 25% 20% 15% 10% 5% 0% Sep/96 Sep/97 Sep/98 Sep/99 Sep/00 Sep/01 Sep/02 Sep/03 Sep/04 Sep/05 Sep/06 Sep/07
12Mth fwd EY Hong Kong BY Proxy

Current:

29%

Implied Value Of Growth*

2.00 1.00 0.00 -1.00 -2.00 -3.00

Current:

-353.89%

Sep/08

Sep/09

Sep/10

Sep/11

-4.00 Sep/96 Sep/97 Sep/98 Sep/99 Sep/00 Sep/01 Sep/02 Sep/03 Sep/04 Sep/05 Sep/06 Sep/07 Sep/08 Sep/09 Sep/11

PE (1Yr Forward)
18.0x 16.0x 14.0x 12.0x 10.0x 8.0x 6.0x 4.0x 2.0x 0.0x Sep/96 Sep/97 Sep/98 Sep/99 Sep/00 Sep/01 Sep/02 Sep/03 Sep/04 Sep/05 Sep/06 Sep/07

Current:

3.4x

Price/Book Value
25.0x 20.0x 15.0x 10.0x 5.0x 0.0x -5.0x Sep/96 Sep/97 Sep/98 Sep/99 Sep/00 Sep/01 Sep/02 Sep/03 Sep/04 Sep/05 Sep/06 Sep/07
PBV hist PBV Forward

Current:

1.4x

Sep/08

Sep/09

Sep/10

Sep/11

Sep/08

Sep/09

ROE (Trailing)
150.00 100.00 50.00 0.00 -50.00 -100.00 -150.00 -200.00 -250.00 Sep/96 Sep/97 Sep/98 Sep/99 Sep/00 Sep/01 Sep/02 Sep/03 Sep/04 Sep/05 Sep/06 Sep/07

Current:

39.78

Dividend Yield (Trailing)

10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Sep/96 Sep/97 Sep/98 Sep/99 Sep/00 Sep/01 Sep/02 Sep/03 Sep/04 Sep/05 Sep/06 Sep/07

Current:

9.39

Sep/08

Sep/09

Sep/08

Sep/09

Sep/10

Summary
TCL Communication Technology Holdings Ltd. 437.68 HONG KONG 2.964592 SEDOL B02Y690 Information Technology Communications Equipment Latest Min Max 12mth Forward PE 3.41 15.67 3.45x P/BV (Trailing) 0.33 21.75 1.36x Dividend Yield (Trailing) 0.00 9.39 9.39 ROE (Trailing) -200.71 119.77 39.78 Implied Value of Growth -3.54 0.09 -353.9% Source: Bloomberg, Reuters Global Fundamentals, IBES CONSENSUS, J.P. Morgan Calcs As Of: Local Price: EPS: % to Max % to Med 355% 155% 1501% 46% 0% -100% 201% -71% 102% 85% 21-Oct-11 3.07 0.89 % to Avg 150% 79% -92% -86% 75%

Median 8.80 1.99 0.00 11.50 -0.53

Sep/11

Average 8.63 2.43 0.71 5.66 -0.89

2 S.D.+ 14.84 8.44 4.25 147.81 1.17

2 S.D. 2.41 -3.57 -2.84 -136.48 -2.95

% to Min -1% -75% -100% -605% 0%

* Implied Value Of Growth = (1 - EY/Cost of equity) where cost of equity =Bond Yield + 5.0% (ERP)

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Sep/11

Sep/11

Andrew Hsu (852) 2800-8572 andrew.tj.hsu@jpmorgan.com

Asia Pacific Equity Research 27 October 2011

Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.

Important Disclosures

Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: TCL Communication Technology Holdings Ltd..
TCL Communication Technology Holdings Ltd. (2618.HK) Price Chart

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OW HK$7.5 12 Price(HK$) OW HK$8

Date 14-Jun-11

Rating Share Price (HK$) OW OW 5.93 5.75

Price Target (HK$) 8.00 7.50

10-Aug-11

0 Sep 10 Oct 10 Dec 10 Feb 11 Apr 11 Jun 11 Jul 11 Sep 11

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Jun 14, 2011.

The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings: OW = Overweight, N= Neutral, UW = Underweight Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] In our Asia (ex-Australia) and UK small- and mid-cap equity research, each stocks expected total return is compared to the expected total return of a benchmark country market index, not to those analysts coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analysts coverage universe can be found on J.P. Morgans research website, www.morganmarkets.com. Coverage Universe: Hsu, Andrew Tak Jun: TCL Communication Technology Holdings Ltd. (2618.HK), TCL Multimedia (1070.HK)

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Andrew Hsu (852) 2800-8572 andrew.tj.hsu@jpmorgan.com

Asia Pacific Equity Research 27 October 2011

J.P. Morgan Equity Research Ratings Distribution, as of September 30, 2011

Overweight (buy) 47% 51% 45% 70% Neutral (hold) 42% 44% 47% 60% Underweight (sell) 11% 33% 7% 52%

J.P. Morgan Global Equity Research Coverage IB clients* JPMS Equity Research Coverage IB clients*

*Percentage of investment banking clients in each rating category. For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.

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Asia Pacific Equity Research 27 October 2011

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