China Smartphone, IT Hardware Introduction (On REQ)

China/Hong Kong | TECHNOLOGY
China Smartphone
7 August 2013
Marching forward
We initiate coverage on the China smartphone sector. Since 2012, China has been the largest smartphone market in the world, in part because of increasing handset subsidies from the top-three China telecom operators, rising demand for mobile internet and competitive models from leading local smartphone vendors. Among the smartphone component suppliers, we prefer AAC Technologies (2018 HK) because of its diverse customer portfolio, R&D capabilities and market-leading position during a period of mass adoption of smartphones and tablets. Within the Hong Kong and China-listed smartphone space, we prefer ZTE (763 HK) and TCL Communication (2618 HK) owing to their cost competitiveness and superior in-house R&D capabilities. Recent market volatility aside, we believe both companies are well positioned for FY13F/14F.
Analysts
Ronnie Ho
(852) 2533 2486 ronnieho@ccbintl.com
Candy Tai
(852) 2844 3606 candytai@ccbintl.com
Please read the analyst certification and other important disclosures on last page
China Smartphone
7 August 2013
Table of Content
Marching forward ......................................................................................................................................3 Investment summary ................................................................................................................................4 China smartphone market in the fast lane ................................................................................................ 6 Android OS and MTK solution lower entry barriers ................................................................................... 7 Samsung and Apples differing fortunes in China ...................................................................................... 8 Local players recording record-high market shares .................................................................................. 9 Exports for local players the next growth driver ...................................................................................... 11 4G LTE the next big thing ....................................................................................................................... 12 Chipsets, memory, displays are the big ticket items ................................................................................ 14 Local component manufacturers are riding the mass adoption of smartphones ...................................... 15 From off-line retail channel to on-line e-purchases ................................................................................. 16 Hong Kong- and China-listed smartphone stocks price performance since 2012.................................... 18 TCL Communication (2618 HK) .............................................................................................................. 19 China Wireless (2369 HK) ...................................................................................................................... 26 Sunny Optical (2382 HK) ........................................................................................................................ 33 ZTE Corporation (763 HK) ...................................................................................................................... 40 AAC Technologies (2018 HK) ................................................................................................................. 43 Lenovo Group (992 HK) ......................................................................................................................... 47
China Smartphone
7 August 2013
China Smartphone
Marching forward
We initiate coverage on the China smartphone sector. Since 2012, China has been the largest smartphone market in the world, in part because of increasing handset subsidies from the top-three China telecom operators, rising demand for mobile internet and competitive models from leading local smartphone vendors. We expect China smartphone unit shipments to grow 46%/21% in FY13F/14F and unit sales to grow 46%/21% YoY to 310m/375m in FY13F/14F, representing around 30% of the worldwide market share. Leading China smartphone brands gaining market share. According to IDC, Lenovo and ZTE were the number 4 and 5 smartphone brands in 2Q13, with unit sales of 11.3m units and 10.1m, respectively, up 131% YoY and 58% YoY. Because of their competitive pricing and appealing product designs, Chinese brands have been gaining traction in the global competitive smartphone arena, in the process unseating Sony, Motorola, Blackberry, HTC and Nokia from the top of the vendor list. Maturing software, chipset and component technologies will be the reason Chinese smartphone brands will gain further global market share in FY13F/14F, in our view. Mixed performance by smartphone component manufacturers. Among the smartphone component suppliers, we prefer AAC Technologies (2018 HK, Outperform) because of its diverse customer portfolio, R&D capabilities and market-leading position during a period of mass adoption of smartphones and tablets. In contrast, we are cautious on Sunny Optical (2382 HK, Neutral) because of intense price competition for 5MP/8MP camera modules from the local manufacturers. ZTE and TCL Communication our preferred plays. Within the Hong Kong/China-listed smartphone space, we prefer ZTE (763 HK, Outperform) and TCL Communication (2618 HK, Outperform) owing to their exposure to the rapidly growing smartphone market, their cost competitiveness and superior in-house R&D capabilities. Recent market volatility aside, we believe both companies are well positioned for FY13F/14F.
China smartphone valuation matrix

Sunny Lenovo Share price (HK$) Stock code (HK) Rating* TP (HK$) Upside (%) EPS, YoY (%) FY13F FY14F P/E (x) FY13F FY14F Yield (%) FY13F FY14F P/B (x) FY13F FY14F ROE (%) FY13F FY14F
TCL Comm 3.33 2618 O 4.5 35.1 (78.8) N/A N/A 8.9 0.0 3.9 1.7 1.4 (1.9) 15.8
China Wireless 2.59 2369 O 3.4 31.2 48.1 25.8 11.6 9.2 2.6 3.3 2.0 1.7 17.3 18.7
ZTE 13.60 763 O 20.0 47.0 N/A 25.6 17.5 13.6 1.4 1.8 1.9 1.7 8.5 9.8
AAC 35.95 2018 O 42.8 19.0 35.8 14.2 14.8 12.6 2.7 3.2 4.6 3.7 31.4 29.2
Optical 8.34 2382 N 8.7 4.3 28.5 25.9 14.7 11.5 2.0 2.6 3.6 3.1 19.7 21.0
7.31 992 N 7.6 3.9 32.7 7.7 15.4 14.3 1.9 2.1 3.7 3.2 23.7 22.0
Closing price on 7 August 2013 * CCBIS ratings: O = Outperform; N = Neutral; U = Underperform Source: CCBIS estimates
Ronnie Ho
Candy Tai
China Smartphone
7 August 2013
Investment summary
Since the introduction of the Apple iPhone by Steve Jobs in early 2007, followed by the Android operating system (OS) by Google in 2008, we have witnessed a second handset revolution characterized by the mass adoption of the smartphone in 2010-2012. These three years brought stellar unit growth of 76%, 59% and 26%. But now, as the party begins to wind down, we look for slower global smartphone growth in FY13F and FY14F, including slower unit sales growth by leading brands like Samsung and Apple. The shining exception is China, where smartphone unit sales growth looks set to buck the global trend, with robust growth in FY13F and FY14F, possibly topping 46% and 21% unit sales growth, respectively. It is almost certain that China will remain the largest smartphone market in the world, with over 30% global market share by FY15F, in our view. Samsung/Apple/HTC YTD price performance
Local currency 1,300 1,200 1,100 1,000 900 800 700 600 500 400 300 200 100 Jan-11 Jun-11 Nov-11 Apple (LHS) Local currency 1,550,000 1,450,000 1,350,000 1,250,000 1,150,000 1,050,000 950,000 850,000 750,000 650,000 Feb-13 Jul-13 Apr-12 Sep-12 HTC (LHS) Samsung (RHS)
Lenovo/ZTE/Coolpad/TCL price performance

HK$ 32 28 24 20 16 12 8 4 0 Jan-11
May-11
Sep-11 Lenovo
Feb-12 ZTE
Jun-12 Nov-12 China Wireless
Mar-13 TCL
Aug-13
Source: Bloomberg
Source: Bloomberg
High-end smartphone unit growth decelerating. Samsung Electronics (005930 KS, Not Rated), Apple (AAPL US, Not Rated), Nokia (NOK US, Not Rated), HTC (2498 TT, Not Rated) and BlackBerry (BBRY US, Not Rated) were the top-five smartphone vendors in 2011. Samsung and Apple have long held the number one and two spots in the smartphone market by wide margins on the strength of their impressive product designs and superior distribution channels and due to robust demand in developed countries. However, we believe growth momentum for both these leading brands will slow in FY13F and FY14F because of intense competition, a slew of affordable new products produced by Chinese brands and product saturation in developed markets. China smartphone brands gaining traction. Despite the heavy competition within Chinas smartphone market, Chinese smartphone brands have fared well against their international rivals. ZTE and Lenovo unseated Blackberry and HTC from the global top-five smartphone vendor list in part because of their competitive pricing and better product designs. We strongly believe Chinese smartphone brands will grab further market share in FY13F and FY14F. Turning their backs on the old days of the low-margin US$100 low-end smartphone, Chinese brands of today are stepping up efforts to penetrate the relatively lucrative mid-end smartphone segment. Strong ties with domestic and overseas telecom operators, improving economies of scale, better product designs and maturing operating systems (OS), chipset and component technologies have helped leading local players. Among listed Chinese smartphone names, we prefer Huawei, ZTE (763 HK, Outperform) and TCL Communication (2618 HK, Outperform) owing to their improving economies of scale and higher sales in overseas markets brought about by their strong ties with leading overseas telecom operators.
China Smartphone
7 August 2013
Chinese component manufacturers like AAC Technologies and Sunny Optical are benefiting from higher product specifications. Among Hong Kong- and China-listed smartphone component suppliers, we prefer AAC Technologies because of its (1) diverse customer portfolio, which includes virtually all leading smartphone brands except LG; (2) its outstanding R&D capabilities for design-in projects; and (3) its market-leading position during a period characterized by the mass adoption of smartphones and tablets. In contrast, we are cautious on Chinas largest handset camera manufacturer, Sunny Optical (2382 HK, Neutral), because of intense price competition for 5MP camera modules from other local suppliers, notably Truly and O-film.
Risks: (1) Lower-than-expected mass adoption of smartphones in China, (2) intense price competition from domestic and international smartphone brands, and (3) the increasing cost of manufacturing in China. China technology sector valuation matrix
Company Stock code CCBIS rating Neutral Outperform Outperform Outperform Share price* (local currency) 7.31 13.60 2.59 3.33 Market cap (US$m) 9,763 7,964 701 489 CY13F 7.7 N/A 48.1 (78.8) EPS growth (%) CY14F CY15F 13.1 25.6 25.8 N/A 6.5 26.2 25.4 42.5 CY13F 14.3 17.5 11.6 N/A 14.5 P/E (x) CY14F 12.7 13.6 9.2 8.9 11.1 CY15F 11.9 10.8 7.3 6.2 9.1
China handset brands Lenovo 992 HK ZTE 763 HK China Wireless 2369 HK TCL 2618 HK Average Global handset brands Apple AAPL US Samsung 005930 KS Nokia NOK US LGE 066570 KS BlackBerry BBRY US HTC 2498 TT Average
Not Rated Not Rated Not Rated Not Rated Not Rated Not Rated
465.25 1,222,000.00 4.06 74,100.00 9.57 150.00
422,678 160,918 15,205 10,841 5,016 4,263
(12.5) 74.4 N/A (332.1) (52.8) (85.4)
8.0 7.9 313.6 74.5 35.6 185.3
8.3 5.4 (8.8) 12.7 (38.2) (1.4)
11.9 6.1 N/A 16.2 N/A 51.0 21.3
11.0 5.6 58.9 9.3 N/A 17.9 20.5
10.2 5.3 64.6 8.2 N/A 18.1 21.3
Handset components and others MediaTek 2454 TT Not Rated AAC 2018 HK Outperform Largan Precision 3008 TT Not Rated FIH 2038 HK Not Rated TPK Holding 3673 TT Not Rated Truly International 732 HK Not Rated Spreadtrum SPRD US Not Rated Unimicron Tech 3037 TT Not Rated BYD Electronic 285 HK Not Rated Sunny Optical 2382 HK Neutral Merry Electronics 2439 TT Not Rated Average * Price as at close on 7 August 2013 Source: Bloomberg, CCBIS estimates
350.00 35.95 1,020.00 4.09 302.50 4.05 29.80 23.75 4.07 8.34 68.50
15,754 5,674 4,564 3,921 3,301 1,464 1,453 1,219 1,179 1,072 402
43.7 35.8 57.4 (113.9) N/A 39.5 44.8 (24.9) 64.7 28.5 60.2
26.3 14.2 15.0 250.0 6.6 13.1 11.0 28.4 17.9 25.9 8.2
5.1 17.9 10.4 (71.4) (2.0) 33.3 2.0 2.6 13.0 16.7 (9.0)
18.9 14.8 15.6 N/A 6.2 11.3 10.3 14.1 11.9 14.7 15.6 13.3
14.9 12.6 13.5 25.1 5.9 10.0 9.3 10.9 10.1 11.5 14.4 12.6
14.2 10.7 12.3 N/A 6.0 7.5 9.1 10.7 8.9 9.7 15.9 10.5
China Smartphone
7 August 2013
China smartphone market in the fast lane

According to IDC, smartphone unit sales in China topped 213m in 2012. China has been the world's largest smartphone market since 2012. In part because of increasing subsidies for mobile devices from top-three China telecom operators, rising demand for mobile internet and competitive models from leading local smartphone vendors, we forecast total smartphone shipments will grow 46% YoY in FY13F and 21% YoY in FY14F to reach 310m units and 375m units, respectively. China has evolved into one of the most competitive smartphone markets in the world, with domestic smartphone brands accounting for over 50% of total smartphone unit sales in China and with Lenovo, Coolpad, ZTE and Huawei all finding spots atop Chinas smartphone top-sellers list, just behind industry leader Samsung. By the end of 2012, local players had unseated leading international smartphone brands, including Apple, Nokia and HTC. China smartphone unit growth (2010-2014F)
m unit 400 350 300 250 200 150 100 50 0 2010 2011 2012 China Smartphone unit sales 2013F 2014F China Smartphone unit growth 75% 55% 35% 15% 155% 135% 115% 95%
China smartphone market share (2012)

Motorolla 4% Ginoee 6% Xiaomi 4% Nokia 3% HTC 5% Huawei 10% ZTE 9% Coolpad 9% Other 9% Samsung 22%
Lenovo 11%
Apple 8%
Source: IDC, CCBIS estimates
Source: iiMedia Research
In our view, the open platform Android mobile OS has played a vital role in the success of Chinese local smartphone brands. That said, the winning formula for ZTE, Huawei, Lenovo and Coolpad came down to three major advantages: (1) strong ties with local operators; (2) customized solutions for local users; and (3) attractive exterior designs at competitive prices. Looking further into the future, we believe improving economies of scale, strong growth in local markets and upcoming 4G LTE opportunities in China will support growth for Chinas top-tier domestic smartphone players. We are seeing increasing demand for mobile internet connectivity, which accounts for the success of 4G LTE. This standard offers lightning-quick internet connectivity to mobile devices, with which end users will be able to download and stream music and videos while on the road even faster than they do at present. For example, a movie will now take just 10-15 minutes to download via a 4G network when once it took at least an hour. Faster connections appeal to mobile gamers who will be able to enjoy the richly detailed and complex online multiplayer games availed by the faster speeds of the new standard. There is now a high probability that 4G licenses will be granted in China late this year. Once the licenses are granted, a flood of opportunities will arise for Chinas leading Chinese handset makers in FY14 and FY15F.
China Smartphone
7 August 2013
Android OS and MTK solution lower entry barriers

The introduction of the open platform Android OS from Google presented a great opportunity for smartphone brands interested in entering Chinas highly competitive smartphone market leaving individual brands to focus on customized user interfaces, exterior designs, and sales and marketing. With component prices falling rapidly, ASPs for low-end smartphones have fallen as low as US$50-60. Because of the open platform solutions and the greater number of price competitive participants, the Android OS has dominated the China smartphone market. According to ZDCs survey on the China smartphone market, 43.1% of Android smartphone models available in May 2013 cost under RMB1,000, while 40.8% cost over RMB1,000 but below RMB2,000. Clearly feature phones are losing their price advantage as Android smartphones rapidly become more affordable. Price range of the Android smartphones in China market in May 2013
480 400 320 22.3% 240 160 80 0 20.9% 20% 15% 10.9% 39 1,000 or below 8.2% 11 8.3% 13 5,000 or above 10% 5% 438 35% 414 29.4% 30% 25%
MediaTeks Chipset
100
1,000-2,000 2,001-3,000 3,001-4,000 4,001-5,000 Unit (LHS) RMB User concern (RHS)
Source: ZDC
Source: MediaTek
Besides the Android OS, we believe the MediaTek (MTK) solution is also playing an important part in the mass low-end smartphone adoption taking place in China. MediaTek has been the largest mobile chipset solution provider for white-label handsets in China. It has helped fuel the sales growth of Chinas low-cost handsets by providing integrated, customized chipsets that significantly shorten the time and cost of marketing a new product. Traditionally, the typical cycle for handset manufacturers has been nine months. MediaTeks approach has reduced time-to-market on average to four-to-six months. It has delivered more sophisticated chipsets over the past year destined for entry-level smartphones produced in China. In December 2012, MediaTek launched the worlds first commercialized quad-core system on a chip (SoC) developed specifically for mid- to high-end smart devices. The quad-core SoC solution enables the mobile ecosystem to bring the performance and features associated with premium mobile devices to the mainstream market at affordable prices. It has also lowered barriers to entry thereby increasing competition and widening the purchase options of consumers. The MT6572 chip, designed for entry-level smartphones, is the companys first smartphone chip that integrates a four-in-one connectivity chip. It greatly reduces the bill-of-material (BOM) cost, simplifies product development and enhances time to market. We believe the latest quad-core MT6589, consisting of a power-efficient quad-core A7 ARM CPU, will shorten the product development cycle for local smartphone players in China while availing them of a cost-effective chipset solution.
China Smartphone
7 August 2013
Samsung and Apples differing fortunes in China

In 2012, among foreign companies, only Samsung and Apple managed to capture more than a 5% share of the China smartphone market. Samsung led the China smartphone market in 2012 with 30m smartphones shipped. According to Strategy Analytics, Samsungs leading position in the domestic market extended into 1Q13 with 12.5m smartphones shipped, representing a market share of 18.5%. Second through fifth place went to Chinese brands, including second-place Huawei and third-place Lenovo, which sold 8.1m and 7.9m smartphones, respectively. Fourth and fifth place went to Coolpad and ZTE, which managed to deliver 7.0m and 6.4m units, respectively. Apple landed in sixth place with 6.1m iPhones sold in 1Q13. In our view, Samsung is in better position than Apple to take advantage of surging demand for low- to mid-end smartphones in China, because Samsung offers a broader range of smartphone models, including the Galaxy Grand which goes for RMB2,700, the Galaxy Style which sells for RMB1,700 and the relatively cheap Galaxy Trend at RMB900. Apple iPhone 5 Samsung Galaxy Mega
Source: Apple
Source: Samsung
Apple has had little success in China. One of Apples most successful products, the iPhone, was first unveiled in January 2007. The launch of the iPhone instantly raised the bar of the entire smartphone industry. Released to the public in June 2007, the first generation iPhone utilized a 2G GSM network data service and was equipped with a multi-touch screen that allowed users to input information in the same way they would using a traditional physical keyboard. The first iPhone was initially only available in the US and certain western European markets. Apples latest iPhone product, the iPhone 5, was introduced in 4Q12. Apple is still the second-largest smartphone player in the world, though only the sixth-largest in China. We put the failure of Apple in China down to its single-product strategy and lack of TD-SCDMA solution to cater the largest local telecom operator, China Mobile. Samsung still the most powerful player in the field. Samsung was the best-selling smartphone brand in the world with unit sales topping 72.4m units in 2Q13, representing a 44% YoY increase according to IDC. Samsung unseated Apple as the top-selling brand in 3Q11 and, since then, has maintained its position at the top from 1Q12 to 2Q13, six conservative quarters. The success of Samsung was largely due to its much-faster-than-peer model roll-out schedule and better exterior designs. With an over 30% global market share, Samsung is number one within the global smartphone space by a long shot. Significantly, Samsung was also the number-one smartphone brand in China. Yet despite its impressive track record, Samsung now faces the prospect of decelerating growth momentum within the high-end smartphone market and intense competition from emerging Chinese smartphone brands.
China Smartphone
7 August 2013
Local players recording record-high market shares

Thanks to (1) improving R&D capabilities and economies of scale; (2) competitive pricing; (3) the low smartphone penetration rate in China; and (4) subsidies from top-three operators, domestic smartphone makers dominate Chinas smartphone market. Local smartphone brands accounted for over 50% of total smartphone unit sales in China in 1Q13.
Improving R&D capabilities and economies of scale

In order to benefit from increasing demand for smartphones, domestic smartphone markers have continued to strengthen their R&D capabilities and scale of production. Take Huawei, the largest China smartphone vendor, as an example: Huawei prides itself on its investment in research and development, with 70,000 of its 150,000 employees in R&D. And the results speak for themselves: Huaweis high-end product, the Ascend P6, is billed as the world's slimmest 4G LTE smartphones. The scale of Huaweis worldwide smartphone shipments is expected to surge from 32m units in 2012 to 50m-60m units in 2013F.
Competitive pricing
Improving economies of scale have meant that domestic smartphone vendors have been able to keep production costs low and offer their smartphones at very low prices, affordable enough for low- and middle-class Chinese consumers. The average income of Chinese consumers is not high, which tends to restrict them to purchasing low-cost smartphones. It follows that Chinese smartphone makers selling smartphones for RMB2,000 or below have an advantage over their more expensive foreign rivals. The iPhone, for example, sells for about RMB5,000 in China and, accordingly, its marketing targets upper-middle-class professionals. In 2012, about 77% of Chinas smartphones sold at RMB2,000 or below, while 14.6% were sold in the RMB2,000 to RMB3,000 range. 2012 China smartphone market by price
RMB4,000 or above 3% RMB3,000-4,000 5% RMB2,000-3,000 15% RMB1,000 or below 35%
China smartphone penetration rate

60% 55% 50% 45% 40% 35% 30% 25% 20% 15.2% 8.3% 2010 2011 2012F 2013F 25.8% 55.0%
RMB1,000-2,000 42%
15% 10% 5%
Source: iiMedia
Source: EnfoDesk
China Smartphone
7 August 2013
Chinas low smartphone penetration rate

Chinas increasing urbanization and rising demand for mobile services have resulted in it having the largest population of mobile phone users in the world, roughly 1.1b by the end of 2012. Despite strong GDP growth, the wealth effect from rising wages, and improving 3G coverage, Chinas 3G mobile penetration rate was still at the relatively low level of 27.6% by the end of 1H13, partly due to the late issuance of 3G licenses relative to developed countries. As smartphone prices continue to fall and thanks to the efforts of Chinas telecom operators, the smartphone penetration rate in China is likely to reach 55% by 2013F, in our view. Competitive pricing and stronger business relationships with leading China telecom operators are likely to enable domestic smartphone makers to maintain their dominance over Chinas smartphone market.
Subsidies from the top-three operators

The top-three telecom operators, China Mobile, China Unicom and China Telecom are benefiting greatly from Chinas smartphone revolution, as rising smartphone penetration accelerates uptake of their respective 3G services, generating higher revenue than 2G services. Since the number of 3G subscribers is still relatively small, the operators are desperate to expand subscriber numbers by offering generous handset subsidies. China Unicom sets aside about 40% of its 3G revenue to underwrite purchases of smartphones. However, it is China Mobile that is the most generous operator doling out handset subsidies and investing in terms of absolute dollars. 3G net add subscribers per month January 2012 to June 2013
m subscribers 10 9 8 7 6 27% 19% 11% 3% Jan-11 5 4 3 2 1 0
Percentage of 3G subscribers for CM/CU/CT

51% 43% 35%
Mar-12
Feb-12
Feb-13
Mar-13
Jul-12
Oct-12
Apr-12
Nov-12
Aug-12
Sep-12
Dec-12
Jan-12
Jun-12
Jan-13
Apr-13
May-12
May-11 Sep-11 CU 3G subscribers
Jan-12 Jun-12 Oct-12 Feb-13 Jun-13 CT 3G subscribers CM 3G subscribers
China Unicom
China Telecom
China Mobile
Source: Company data
China Mobile. By June 2013, China mobile had 137.8m 3G subscribers, representing 18.6% of its total mobile subscribers. The company now plans to spend RMB27b on handset subsidies in 2013, up from RMB23.8b in 2012. China Telecom had 87.3m 3G subscribers by June 2013, representing 50% of its total mobile subscribers. It spent RMB21.8b on handset subsidies in 2012 and plans to spend more in 2013. China Unicom had 100m 3G subscribers by June 2013, representing 38.2% of its total mobile subscribers. The company spent RMB6.1b on handset subsidies and will increase its handset subsidies in 2013.
10
May-13
Jun-13
China Smartphone
7 August 2013
Exports for local players the next growth driver

With the saturation of the smartphone market in developed countries, the battleground for smartphone customers is shifting quickly to emerging markets including Brazil, Russia and India. Chinese smartphone makers are eying lucrative export opportunities in 2013. According to IDC, worldwide smartphone shipments will grow 32.7% YoY in 2013 to reach 958.8m units, up from 722.5m units in 2012. IDC also predicts global smartphone shipments in 2013 will surpass those of feature phones for the first time, with smartphones expected to account for 52.2% of worldwide handset shipments. Emerging markets are likely to account for 64.8% of all smartphones shipped in 2013 and these markets are on track to achieve a 45% rise in shipment volume. Smartphones have become increasingly popular in the emerging markets even though average personal income in these markets is still far less than in developed markets. Smartphone vendors have made deep forays into the low- to mid-end markets in the developing world. As this trend continues, smartphone blended ASPs are expected to drop 8.6% YoY to US$372 in 2013 and subsequently fall as low as US$309 by 2017, with emerging market demand the main catalyst for this change. By competing at the low- to mid-end of the market, major Chinese smartphone makers like Huawei, Lenovo, ZTE, Coolpad, TCL and Xiaomi have gained a considerable leg up on their high-end rivals. 2013F worldwide smartphone forecasts by market
US$ 500 45.4% 400 32.7% 50% 45% 40% 35% 30% 200 25% 20% 14.3% Emerging ASP (LHS) Developed Total 15% 10%
Emerging markets 65% Developed markets 35%
2013F worldwide smartphone share by market
300
100
YoY shipment growth (RHS)
Source: IDC
Source: IDC
Often, Chinese smartphone makers collaborate with local telecom operators, distributors and retail chains, to distribute their phones within foreign markets. For example, Coolpad began selling its Quattro 4G in the United States through MetroPCS, a mobile network operator. Coolpads smartphone was sold for less than US$100 under some promotions. Huawei also has big ambitions within the international market. In June 2013, it introduced a phone called the Ascend P6 in London through multiple mobile operators, including O2, Three and EE. Huawei planned to sell the phone in 100 different countries, including China and many European markets. Ascend P6 costs much less than an iPhone 5 or Galaxy S4, though it comes equipped with the quad-core 1.5GHz processor, an 8MP camera and a 4.7 screen. It is quite light too, weighing only 120g.
11
China Smartphone
7 August 2013
4G LTE the next big thing

Utilization of 3G networks is still low among the top-three telecom operators, especially the home-grown TD-S 3G service providers. It is also no secret that China Mobile, because of incompetence delivering 3G services and a lack of variety in smart-devices is now looking to fast forward its home-grown TD-LTE 4G network commercialization schedule. The head of Chinas Ministry of Industry and Information Technology (MIIT) Mr. Miao Wei, stated that China is going to issue 4G licenses for TD-LTE networks by 4Q13, which is earlier than previously announced. We expect this to accelerate the deployment of Chinas high-speed network. Shortly after the Mr. Miao Weis speech, MIIT allocated Band 41 (2500MHz-2690MHz) for TD-LTE usage as of October 2012. Not surprisingly, the earlier-than-expected TD-LTE roll-out timeline was followed by non-stop lobbying for 4G licenses over the last two years by China Mobile, which still had fresh in its memory the rapid loss of market share in the mobile market due to its use of the homegrown TD-SCDMA mobile standard for its 3G mobile network. We believe the realization by MIIT that China was falling behind the rest of the world in 4G mobile data services, must have put pressure on the telecom regulator to accelerate its 4G timetable. China Mobile has been running trials of its 4G services using technology based on a standard called TD-LTE that was the natural successor to its homegrown 3G standard. China Mobile accelerated TD-LTE scale deployment
Source: China Mobile
China Mobile is currently the only telecom operator in China that employs TD-LTE technology, and it is now leading the way in establishing a 4G LTE network in China in the same way that it aggressively laid the groundwork for mass TD-LTE adoption. The company tested its TD-LTE network in 2012 by running trials on over 20,000 base stations across 13 cities. It announced in December 2012 that it would procure through an open tender for 70,000 LTE terminal devices, up from 34,000 devices previously planned. China Mobile plans to expand its TD-LTE network trial to 100 cities by 2013 using 200,000 base stations, which will be either new stations or stations upgraded from existing TD-SCDMA base stations. By 2014, China Mobile intends to own 350,000 TD-LTE base stations in China, with all of them required to support Band 41. The companys purchase volume of TD-LTE terminals in 2013 represents a tenfold increase from 2012. In addition to the TD-LTE standard, China Mobiles terminals are also expected to support FDD-LTE, GSM, TD-SCDMA and WCDMA networks. In order to encourage the take-up of dual-mode, multi-band terminals, the company has adopted a dual-path technology strategy that focuses not only on TD-LTE, but also on the FDD-LTE network. In December 2012, China Mobile set up a dual TD/FDD network in Hong Kong using frequency bands of 2,330-2,360MHz for TD-LTE and 2,555-2,570MHz and 2,675-2,690MHz for FDD-LTE operation. On the mobile-device side, China Mobile will launch LTE handset trials in 2H13. The company will distribute trial LTE handsets in 3Q13 and begin commercial trials in 4Q13.
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China Smartphone
7 August 2013
Both China Unicom, the only WCDMA operator in China, and China Telecom, the only CDMA2000 operator in China, are likely to adopt FDD-LTE as their 4G mobile telecom standard. It is no surprise that both companies believe that FDD-LTE technology, having been adopted by most leading telecom operators around the world, is a more mature technology than TD-LTE and, as such, represents a more straight-forward path for both companies to migrate to 4G at the least cost. China Unicom may employ 1,940-1,955MHz and 2,130-2,145MHz, the frequency bands currently used for WCDMA operations, while China Telecom may use 1,920-1,935MHz and 2,110-2,125MHz, currently used for CDMA 2000, for their respective upgrades to 4G. However, it is still too early to speculate on the exact schedule for the issuance of 4G licenses for China Unicom and China Telecom because the government is intent on ensuring the success of the home-grown TD-LTE standard given the earlier failure of 3G TD-SCDMA.
Mobile devices about to take off

4G offers lightning-quick internet connectivity for mobile devices. This means end users will be able to download and stream music and videos much more easily and rapidly while on the road. With superior download speeds, a standard definition movie will take just 10-15 minutes to download via 4G whereas before it could take an hour or more. Though 4G mass adoption is still two-to-three years away, we believe leading China smartphone makers like Huawei, ZTE, Lenovo, Coolpad, TCL and Xiaomi will benefit greatly because of their more appealing product designs and comprehensive distribution channels.
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China Smartphone
7 August 2013
Chipsets, memory, displays are the big ticket items

Todays smartphone combines the functions of a personal computer, mobile phone, camera, personal media player and recorder. Some of the functions now considered basic for smartphones include the ability to surf the internet, play multimedia games, touch-screen capability, the ability to take high-quality digital photos, GPS navigation capability and the ability to connect with other devices (e.g., Auto, Tablet, PC, etc.). Of course, todays smartphones must allow users to seamlessly communicate across a wide range of network technologies (3G, 4G) and frequencies across the globe. To allow for such an incredible range of functionality smartphones must rely on numerous different components. We list some of these components below, along with the functionality they allow. Chipsets. The chipset controls the logic and communications functionality of the smartphone. The chipset typically contributes 10-15% of bill of materials (BOM) costs. Key chipsets include the application processor (AP) and the baseband processor (BB). It is the CPU or brain of the smartphone that delivers the high-intensity media and graphics most users are accustomed to seeing. The speed and performance of this chipset is a major differentiating factor in modern smartphones. Memory. The growing complexity behind modern smartphone functionality has forced manufacturers to rely on ever more sophisticated memory to support that functionality. Memory takes up 10-15% of BOM costs. There are two types of memory in a smartphone: (1) volatile memory, which allows the device to run multiple applications at the same time, and (2) non-volatile memory, which is the data storage hub of the smartphone, where memory is retained even after the device is powered off. Touch displays. It typically consists of the display and the touch screen, which in aggregate comprise 20-25% of the smartphone BOM cost. The display is the screen that allows us to read text messages and E-mail, watch videos and surf the web. The key differentiator for smartphones is the size and pixel resolution of the display. Most smartphones today use liquid crystal displays (LCD), either the thin film transistor (TFT) variety or in-plane switching LCDs (IPS-LCD), with the latter offering better viewing angles and lower battery consumption. Touch screens allow users to interact directly with the phones interface for data input. Recently, capacitive touch has been gaining in popularity since it allows for multi-touch interfaces. Other components. Modern smartphones include many other components that support the logic, communications, memory and user interface of the phone. Collectively these components can contribute anywhere from 30 to 40% of a smartphones BOM; however, no component on its own can be said to make up a large part of vendor/manufacturers BOM cost. Also, while there are varying degrees of differentiation between different manufacturers, overall, these are commoditized parts. Key components included in this category include: Passive ICs. Semiconductors and chips used for power management, noise cancellation, voice recognition, accelerometers, etc. Mechanical components. The physical form of the phone as well as other key hardware like speakers, camera, buttons, the key pad etc.
14
China Smartphone
7 August 2013
Local component manufacturers are riding the mass adoption of smartphones

We expect handset component suppliers to benefit from increasing shipment volume and continuous product specification upgrades by Chinas smartphone makers. Compared with feature phones, smartphones must adhere to much more stringent specifications. Changes in specifications mean new orders for parts which supports the blended ASPs of Chinas leading component suppliers of acoustic parts (required to produce better sound quality), camera modules (denser megapixels) and LCDs (better resolution screens with touch capabilities).
Acoustic players benefit from better sound quality requirements

AAC (2018 HK, Outperform) is one of the worlds foremost vertically integrated manufacturers of miniature components. It designs, manufactures and distributes a comprehensive suite of acoustic and non-acoustic products, including receivers, speakers, microphones and antennas. The ASP increment through upgrades in product specification and wide ranging products offered by the company is expected to keep driving AACs growth in 2013F. In 2012, AAC has obtained 259 additional acoustic and non-acoustic patents, bringing its total portfolio to 908 patents. Goertek (002241 CH, Not Rated) is principally engaged in the manufacture and distribution of electronic components including micro electro-acoustic components and consuming electro-acoustic products. The company will benefit from industry-wide acoustic upgrades. Goertek is now courting large smartphone companies in a bid to expand its already impressive list of customers that includes Samsung, Apple, LG, Sony and other major Chinese smartphone customers (e.g. Huawei). With this momentum behind it, Goertek can look forward to another high growth year in 2013F.
Cameras players benefit from higher pixel migration requirement

Largan (3008 TT, Not Rated) is one of the leading manufacturers of handset lenses. Given its superior technology in high-end camera lenses, Largan will benefit from rapid growth in China smartphone demand and the industrys aggressive pixel migration towards high-pixel resolution lenses. The companys customers include Apple, HTC, Motorola, Nokia, Samsung, and leading China handset brands. Sunny Optical (2382 HK, Neutral), the major optical component supplier to Chinese smartphone makers, will benefit from the smartphone boom in China and the ongoing upgrade to faster camera resolutions in 2013F. Sunny Optical focuses on the development of high-end products. Having ramped up its in-house 5MP and 8MP handset lens capacity, we believe it is now in position to enjoy ASP and earnings growth underpinned by the industry's recent mass adoption of 8MP.
Display players benefit from bigger screen requirements

Truly (732 HK, Not Rated) produces flat panel display products. We expect Truly to enjoy higher ASPs as demand grows in China for larger smartphone panel sizes. IDC forecasts that the market share of smartphones with 5-inch and above screen sizes in China will exceed 20% by the end of 2013. As a result, smartphone makers have responded quickly with the release of a large number of smartphones with 5-inch and above screens. IDC data indicates that, as of 1Q13, the market share of 5-inch and above smartphones in China reached 7.5%, up 74% QoQ. Tianma (000050 CH, Not Rated) specializes in the design, manufacture and supply of high-quality LCD and LCM products. Increasing demand for higher smartphone panel resolution and larger panel sizes will support growth at Tianma in 2013F.
15
China Smartphone
7 August 2013
From off-line retail channel to on-line e-purchases

Mobile internet and e-commerce in China has enjoyed robust growth driven by increasing broadband coverage and the popularity of smart devices such as smartphones and tablets. Sales channels for smartphones are shifting from off-line retail channels to on-line. One benefit of online retailers is that they tend to offer a wider range of payment options including credit or debit cards. Some also accept payments with PayPal and/or TenPal. Online channels offer an easy way to browse smartphones from different vendors using various OS. Some sites also offer comparison facilities. According to ZDCs survey based on questionnaires from 1,400 internet users, 71.7% of respondents had purchased handsets through on-line retailers. The percentage rose 14.5% from the 57.2% level in 2011. Results from another survey, this time by iiMedia, revealed that 38.1% of respondents plan to purchase their next smartphone through the online channel. We believe the trend of making e-purchases will continue to gain popularity leading to rapid growth of the smart device market and mobile internet. Online handset purchase experience
70% 60% 50% 40% 30% 20% 10% 0% 36.9% 59.8%
Smartphone purchase plan by channel

50% 45% 40% 35% 30% 25% 30.7% 24.2% 33.4% 38.1% 46.1%
22.4% 12.9%
20.3% 12.0%
20.4% 15.4%
20% 15% 10% 5% 9.6%
6.9% 3.1%
7.5%
Both handset and handset component
None of them 2011
Only handset 2013
Only handset component
0%
Chain Megastore Sales Telecom Speciality Parallel Online From Other electronic counter operators stores imports purchase other stores countries
Source: ZDC
Source: iiMedia
Xiaomi received mass media coverage since the launch of its flagship Phone, a low-cost smartphone in September 2011. Xiaomi also developed MIUI, custom firmware for mobile phones based on the Android OS. Xiaomi sells most of its smartphones online in small quantities. However, the company is now pinning its success on a combination high-quality and low-priced products. Xiaomi sold 7.2m smartphones in 2012, with 70% of sales through the online channel. Leveraging its good brand recognition, the company launched 2A/2S early this year and more recently, its Red Rice product. It will launch its next-generation 4G LTE smartphone shortly, for now called the MI-3. Xiaomi can be best thought of as Chinas answer to Apple based on its track record of innovation and superior product design. We believe the company will deliver 15-20m units in FY13F, which would be an increase of over 100% YoY. TCL Communication has regained a lot of momentum this year. It launched a variety of smartphones, such as the giant screen quad-core Y900, as well as the ultra-thin dual-core S850 among others. In June 2003, TCL Communication and the E-retailer Jingdong Mall jointly launched Idol X (S950), a candy bar touch screen smartphone aimed at fashion-conscious consumers. TCLs Idol X is equipped with a 5-inch large touch screen with a resolution of 1,080p full HD. It is TCLs first 1080p screen smartphone and comes equipped with a quad-core processor and a 13MP pixel camera. It retails for a reasonable RMB1,699.
16
China Smartphone
7 August 2013
China smartphone model comparison

International brand Price (RMB) Operating system CPU Networks Screen size (inch) Rear camera quality (MP) Front camera quality (MP) Weight (g) Dimensions Storage (GB) Samsung Galaxy S4 iPhone 5 HTC One LG Optimus G Pro 2,950 Android OS Quad-Core 4G/3G/2G 5.5 13.2 2.3 160 139 x 70 x 10mm support microSD, up to 64 GB TCL idol X 1,699 Android OS Quad-Core 3G / 2G 5 13.1 2 120 140.4 x 67.5 x 6.99mm 16GB Sony Xperia Z 3,510 Android OS Quad-Core 4G/3G/2G 5.0 13 2.2 146 139 x 71 x 7.9mm support microSD, up to 32 GB Coolpad 9960 2,650 Android OS Quad-Core 3G / 2G 4.7 13 1.3 158.5 131 x 66 x 8.8mm support microSD, up to 32 GB Coolpad 7295 900 Android OS Quad-Core 3G/2G 5 5 0.3 133 140 x 73 x 9.9mm support microSD, up to 32 GB BlackBerry Z10 3,200 BlackBerry OS 7 Dual-Core 4G/3G/2G 4.2 8 N/A 135 130 x 65.6 x 9mm 16GB, support microSD Xiaomi M2 2,599 MIUI OS Quad-Core 3G / 2G 4.3 8 2 145 126 x 62 x 10.2mm 32GB 5,799 6,088 3,900 Android OS iOS 6 Android OS Quad-Core Dual-Core Quad-Core 4G/3G/2G 4G/3G/2G 4G/3G/2G 5.0 4.0 4.7 13 8 4 2 1.2 2.1 130 112 143 136.6 x 69.8 x 7.9mm 123.8 x 58.6 x 7.6mm 137.4 x 68.2 x 9.3mm support microSD, 32GB 32GB up to 64 GB Lenovo K900 3,499 Android OS Dual-Core 3G / 2G 5.5 13 2 162 157 x 78 x 6.9mm 32 GB ZTE Grand S 3,399 Android OS Quad-Core 3G / 2G 5 13 2 110 142 x 70 x 6.9mm support microSD, up to 32 GB ZTE U956 910 Android OS Quad-Core 3G/2G 5 8 1 138 132 x 65 x 9.8mm support microSD, up to 32 GB Huawei Ascend D2 2,750 Android OS Quad-Core 3G / 2G 5 13 1.3 170 140 x 71 x 9.4 mm 32GB
Domestic brand high end models Price (RMB) Operating system CPU Networks Screen size (inch) Rear camera quality (MP) Front camera quality (MP) Weight (g) Dimensions Storage (GB)
Domestic brand low end models Price (RMB) Operating system CPU Networks Screen size (inch) Rear camera quality (MP) Front camera quality (MP) Weight (g) Dimensions Storage (GB) Source: www.ZOL.com
Lenovo A820 770 Android OS Quad-Core 3G/2G 4.5 8 N/A 144 135 x 68.2 x 9.9mm support microSD, up to 32 GB
Huawei G520 820 Android OS Quad-Core 3G/2G 4.5 5 0.3 150 134 x 66.8 x 9.9mm support microSD, up to 32 GB
TCL S900 800 Android OS Dual-Core 3G/2G 4.5 5 2 141 132 x 70 x 9.5mm support microSD, up to 32 GB
Xiaomi Red Rice 799 MIUI OS Quad-Core 3G/2G 4.7 8 1.3 158 137 x 69 x 9.9mm support microSD, up to 32 GB
17
China Smartphone
7 August 2013
Hong Kong- and China-listed smartphone stocks price performance since 2012
Lenovo price performance since 2012
HK$ 9.2 8.5 7.8 7.1 10,300 6.4 5.7 5.0 Jan-12 9,800 9,300 8,800 Aug-13 12,300 11,800 11,300 10,800
ZTE price performance since 2012

HK$ 25 23 21 19 17 15 13 11 9 Jan-12 Apr-12 Aug-12 ZTE (LHS) Dec-12 Apr-13 HSCEI (RHS) 10,300 9,800 9,300 8,800 Aug-13 12,300 11,800 11,300 10,800
Apr-12
Aug-12 Lenovo (LHS)
Dec-12 Apr-13 HSCEI (RHS)
Source: Bloomberg
Source: Bloomberg
AAC price performance since 2012

HK$ 48 44 40 36 32 28 24 20 16 Jan-12 Apr-12 Aug-12 AAC (LHS) Dec-12 Apr-13 10,300 9,800 9,300 8,800 Aug-13 12,300 11,800 11,300 10,800
Sunny Optical price performance since 2012

HK$ 12 11 10 9 8 7 6 5 4 3 2 1 Jan-12 Apr-12 Aug-12 Dec-12 Apr-13 Sunny Optical (LHS) HSCEI (RHS) 12,300 11,800 11,300 10,800 10,300 9,800 9,300 8,800 Aug-13
HSCEI (RHS)
Source: Bloomberg
Source: Bloomberg
TCL Communication price performance since 2012

HK$ 4.5 4.0 3.5 3.0 10,300 2.5 2.0 1.5 Jan-12 9,800 9,300 8,800 Aug-13 12,300 11,800 11,300 10,800
China Wireless price performance since 2012

HK$ 4.0 3.5 3.0 2.5 10,300 2.0 1.5 1.0 Jan-12 9,800 9,300 8,800 Aug-13 12,300 11,800 11,300 10,800
Apr-12
Aug-12 TCL (LHS)
Dec-12 Apr-13 HSCEI (RHS)
Apr-12
Aug-12 Dec-12 China Wireless (LHS)
Apr-13 HSCEI
Source: Bloomberg
Source: Bloomberg
18
TCL Communication (2618 HK)
7 August 2013

A turnaround story
Company Rating: Outperform

(initiation)
Initiate with Outperform and HK$4.50 target price. We initiate coverage on TCL Communication (2618 HK) with an Outperform rating and target price of HK$4.50, based on 12x FY14F P/E. We like TCL's overseas exposure, its fast-fashion product development strategy and its improving smartphone model line-up. Fast-fashion the key to future success. Following the return of Chief Marketing Officer, Mr. Dan Dery, TCL Communication adopted a fast-fashion approach to design with the trendy and colorful One Touch series the Idol Ultra and Idol X launched this year. These products were well received by the market and we believe the company is now on track to regain smartphone sales momentum in FY13F and FY14F. Alcatel brand vital to overseas penetration. While the TCL brand mainly targets the domestic market, the Alcatel brand acquired in 2005 is aimed at the overseas market. Unlike local rivals Lenovo, Coolpad. Huawei and ZTE, we believe TCLs dual-brand strategy holds the key to its success in overseas markets because of the companys better brand recognition and effective distribution channels. Strong smartphone sales to support margin recovery. TCL Communication was slow in new product development during the early stages of smartphone adoption in FY11 and FY12, but it recently stepped up efforts to improve the design of its products beginning with the popular One Touch series mid-end smartphone. With its dual-brand strategy, we believe smartphone unit sales will top 15m/25m in FY13F/14F, with a much higher blended ASP/GPM.
2011 2012 12,031 (208) (0.18) N/A 3.01 0.9 N/A 1.6 (8.9) 2013F 17,925 (43) (0.04) (78.8) 0.00 0.0 N/A 1.7 (1.9) 2014F 24,700 422 0.37 N/A 13.09 3.9 8.9 1.4 15.8 2015F 30,225 602 0.53 42.5 18.66 5.6 6.2 1.2 19.2
Price: Target:
HK$3.33 HK$4.50
(initiation)
Trading data
52-week range Market capitalization (m) Shares outstanding (m) Free float (%) 3M average daily T/O (m share) 3M average daily T/O (US$m) Expected return (%) 1 year Price as at close on 7 August 2013 HK$1.60-4.51 HK$3,829/US$489 1,150 43.0 5.4 2.3 35.1
Stock price vs. HSCEI

HK$ 10 9 8 7 6 5 4
3 2 1 Jan-10 Sep-10 Jun-11 TCL Feb-12 HSCEI (rebased) Nov-12 Aug-13
Source: Bloomberg
Forecasts and valuation

Year to 31 December Revenue (HK$m) 10,653 Net profit (HK$m) 800 EPS (HK$) 0.70 YoY change (%) 11.8 DPS (HKD cents) 29.20 Dividend yield (%) 8.8 P/E (x) 4.7 P/B (x) 1.4 ROE (%) 29.9 Source: Company data, CCBIS estimates
Ronnie Ho
Candy Tai
19
7 August 2013
TCL Communication financial summary

Income statement
FYE 31 December (HK$m) Revenue Cost of revenue Gross profit Other income and gains Selling and distribution expenses Administrative expenses R&D costs Other expenses Operating profit Net interest income Share of result of jointly controlled entities/associates Other Profit before tax Tax expense Minority interest Profit to shareholders EPS (HK$) Handset shipments (m unit) 2011 10,653 (8,325) 2,328 313 (866) (558) (459) (28) 729 55 (1) 0 783 17 (1) 800 0.70 43.6 2012 2013F 2014F 2015F 12,031 17,925 24,700 30,225 (9,935) (14,743) (19,982) (24,452) 4,718 5,773 2,097 3,182 329 (1,154) (658) (740) (109) (234) 47 (2) 0 (188) (32) 12 (208) (0.18) 42.6 366 (1,613) (896) (1,076) (18) (55) 10 (2) 0 (47) 3 1 (43) (0.04) 50.0 473 (2,174) (1,235) (1,309) (25) 448 10 0 0 458 (27) (9) 422 0.37 55.0 557 (2,630) (1,511) (1,511) (30) 648 5 0 0 653 (39) (12) 602 0.53 57.5
Balance sheet
FYE 31 December (HK$m) 2011 2012 2013F 2014F 2015F Cash and bank balances 1,187 970 1,146 796 1,174 Pledged bank deposits 6,092 4,221 3,666 3,666 3,166 Trade and bills receivables 2,638 2,882 3,496 4,795 5,855 Prepayments, deposits and other assets 870 1,246 1,857 2,559 3,131 Inventories 981 1,263 2,020 2,737 3,350 630 459 459 459 Other current assets 485 Current assets 12,254 11,212 12,644 15,013 17,136 Property, plant and equipment Goodwill Prepaid lease payments Intangible assets Investment in jointly controlled entities/ associates Other non-current assets Total non-current assets Accounts and bills payable Other payables and accruals Short-term bank loans Other current liabilities Total current liabilities Long-term bank loans Other non-current liabilities Total non-current liabilities Shareholders equity Minority interest Total equity 497 254 185 702 2 132 1,773 597 254 177 921 4 157 2,109 829 254 176 662 2 157 2,081 938 254 176 749 2 157 2,277 1,030 254 176 820 2 157 2,439
1,952 2,429 3,231 4,380 5,359 1,431 1,620 2,414 3,327 4,071 7,222 5,726 5,726 5,726 5,726 830 638 711 806 710 11,315 10,606 12,010 14,144 15,963 0 39 39 2,669 4 2,673 194 199 393 2,321 2 2,323 388 82 471 2,244 1 2,245 388 82 471 2,666 9 2,675 388 82 471 3,120 22 3,142
Cash flow
FYE 31 December (HK$m) Profit before tax Depreciation and amortization Change in working capital Other Operating cash flow Capex Other Investment cash flow Change in borrowings Other Financing cash flow 2011 783 107 (722) (47) 122 (232) (734) (966) 735 (99) 637 2012 (188) 142 (102) 373 224 (246) (805) (1,052) (1,302) 1,942 640 2013F (47) 175 (524) 316 (80) (350) (110) (460) 194 521 715 2014F 458 215 (585) (72) 15 (250) (115) (365) 0 0 0 (350) 0 1,146 796 2015F 653 247 (425) (79) 396 (250) (120) (370) 0 352 352 378 0 796 1,174
Financial ratios
FYE 31 December (%) Profitability Gross margin Operating margin Net margin ROE Growth Sales revenue growth Operating income growth Net profit growth EPS growth Liquidity Net debt/equity (%) 2011 21.9 6.8 7.5 29.9 22.4 19.5 14.0 11.8 Net cash 2012 17.4 (1.9) (1.7) (8.9) 12.9 (9.9) N/A N/A 31.4 2013F 17.8 (0.3) (0.2) (1.9) 49.0 51.8 N/A (78.8) 58.0 2014F 19.1 1.8 1.7 15.8 37.8 48.3 N/A N/A 61.7 2015F 19.1 2.1 2.0 19.2 22.4 22.4 42.5 42.5 56.5
Change in cash (207) (187) 176 Exchange losses on cash and 49 (30) 0 cash equivalents Cash, beginning 1,345 1,187 970 Cash, ending 1,187 970 1,146 Source: Historical data from the Company, forecasts by CCBIS
20
7 August 2013
Initiate with Outperform and HK$4.50 target price

We initiate coverage on TCL Communication with an Outperform rating and target price of HK$4.50 based on 12x FY14F P/E. We like TCLs overseas exposure, renewed fast-fashion product development strategy, and improving smartphone model line-up. TCL Communication YTD price performance versus Hang Seng Index
HK$ 4.5 4.0 3.5 3.0 10,300 2.5 2.0 1.5 Jan-12 9,800 9,300 8,800 Aug-13 12,300 11,800 11,300 10,800
TCL Communication 5-year forward P/B bands

4.0x 3.6x 3.2x 2.8x 2.4x 2.0x 1.6x 1.2x 0.8x 0.4x 0.0x Jul-08 Mar-09 Dec-09 Sep-10 May-11 Feb-12 Nov-12 -1s.d. Mean +1s.d. +2s.d.
Apr-12
Aug-12 TCL (LHS)
Apr-13 Dec-12 HSCEI (RHS)
Aug-13
Source: Bloomberg
Source: Bloomberg
Fast-fashion design and better overseas exposure vital for turnaround. Following the return of Chief Marketing Officer, Mr. Dan Dery, TCL Communication adopted a fast-fashion design approach to its business, beginning with the launch of the trendy One Touch Series, including the new products, Idol Ultra and Idol X. These were well-received by consumers and have put the company on track to regain smartphone sales momentum in FY13F and FY14F. Unlike domestic rivals, Lenovo, Coolpad, Huawei and ZTE, which rely on a single brand to market their goods, TCL Communication adheres to a duel-brand strategy, with the TCL brand used to market the companys products in the domestic market and the Alcatel brand used to tackle the overseas market. Alcatel was formerly a French brand until it was acquired in by TCL Communication in 2005. We believe the TCL/Alcatel dual-brand strategy will be a big plus for TCL Communications success in its overseas markets because Alcatel is already a well-known brand in Europe and North America; moreover, TCL Communication can avail itself of Alcatels existing distribution channels. In our view, TCL Communications duel-brand strategy puts it on track to regain smartphone sales momentum in FY13F and FY14F. Higher smartphone sales to support margin recovery. In its early stages, TCL Communication had been slow in new product development. Lately, however, it has stepped up efforts with a new model roll-out which included the introduction of a few trendy and colorful mid-end smartphones, the One Touch Idol Series. We believe the latest new model line-up (Idol Ultra and Idol X) along with the effective dual-brand (Alcatel & TCL) strategy will support 15m/25m unit sales in FY13F/14F. With improving blended ASP from stronger mid-end smartphone sales and better economies of scale, we expect gross profit margin for the company to reach 19.1% in FY14F versus 17.4% in FY12.
Risks: (1) Intense price competition from other local rivals, (2) increasing cost from R&D/marketing expenses, and (3) slower-than-expected sales recovery from overseas markets.
21
7 August 2013
Company background
TCL Communication Technology Holdings Limited (TCL) is a member company of TCL Corporation. It listed on the Hong Kong Stock Exchange in 2004. TCL is a China-based, international handset vendor that designs, manufactures and markets its portfolio of products under two separate brand names: TCL and Alcatel, the brand associated with the One Touch suite of smartphones. The former targets the domestic market and the latter is TCL Communications overseas brand. The company launched its first 3G Android smartphone, the OT-980, in September 2010. Nearly 90% of its handsets are shipped overseas. In 2004, TCL Communication established TCL & Alcatel Mobile Phones Limited (T&A), a joint venture with Alcatel. In 2005, TCL Communication acquired from Alcatel the remaining stake in T&A, with the new entity becoming a wholly owned subsidiary of TCL Communication. TCL Communication later signed a license agreement with Alcatel Lucent in 2004 to use the Alcatel brand for an initial term of ten years. In September 2011, an amended license agreement was signed between TCL Communication and the Alcatel Lucent that extended their range of products to include not only mobile handsets but also tablets. The revised term for the amended license agreement is from July 2011 to December 2024.
Shareholding structure
TCL Corporation, the largest shareholder in TCL Communication, owned a 50.2% stake in the company, while public shareholders own approximately 43%. TCL Communication shareholding structure
Other 43.0%
TCL Corp 50.2%
LI Dong Sheng & LEUNG Lai Bing 6.9%
R&D investment and production plan

Headquartered in Shenzhen, the production facilities and R&D centers of the Group is located in Huizhou and various provinces of China respectively with over 2,000 experienced research engineers, and various technological patents. This has enabled TCL to consolidate its leadership in the low-end handset market, further penetrate the mid-to-high end market and optimize its product mix with its Step-up product strategy.
22
7 August 2013
In 2012, TCL successfully carried out a product transition from feature phones to smartphones while consolidating its product portfolio, paving the way for further expansion and long-term success. The company achieved several breakthroughs in the development of new smartphone products and made good progress increasing overall smartphone sales volume in 2012. In 1H13, a new wave of advanced smartphones was launched with features including 4.5-5.0 displays, quad-core, and ultra-slim designs. TCLs Idol X, one of the companys flagship products in 2013, was snatched up by customers on its presale in China on 18 June this year. TCL will be moving into a new production plant in Huizhou in September 2013, in the process adding an extra 30m units of capacity. Production costs are expected to decline with the increase in production scale, leading to higher margins. TCL Communications new production plant in Huizhou, China
Source: Company
TCL has developed a comprehensive distribution network covering over 40 telecom operators and distributors worldwide. Its products are selling in over 120 countries throughout the Americas, Europe, the Middle East, Africa and Asia Pacific. TCL will continue expanding its global customer base and distribution network by strengthening its partnerships with major telecommunication operators worldwide. TCLs partnerships with worldwide telecommunication operators
Source: Company
23
7 August 2013
Financial summary
On the back of TCLs stronger smartphone design capabilities which have led to a new model roll-out that includes the mid-end smartphone, we forecast a slight net loss of HK$43.3m for FY13F, improving from the net loss of HK$207.8m in FY12. We attribute the improvement to better blended ASP and gross profit margin. TCL Communication financial summary
HK$m 32,000 28,000 24,000 20,000 16,000 12,000 8,000 4,000 0 FY11 Sales (LHS) FY12 FY13F FY14F Gross profit margin (RHS) Operating margin (RHS) FY15F Net profit margin (RHS) 8% 4% 0% (4)% 24% 20% 16% 12%
Source: Company data, CCBIS estimates
Impressive sales growth. We forecast sales revenue will grow 49.0% YoY in FY13F and 37.8% YoY in FY14F thanks to the companys new smartphone model line-up and deeper penetration into overseas markets. The first wave of mid-range smartphones was launched in China and overseas in 1QFY13 and 2QFY13 respectively as planned. Meanwhile, TCL has already kicked off the R&D projects for its second wave of smartphones, with more advanced products featuring full HD displays and LTEs, which will be launched in 2H FY13 as an extension of the first-wave of products. Improving gross profit margin. We estimate gross profit margin will climb steadily from 17.4% in FY12 to 17.8%/19.1% in FY13F/14F, thanks to the companys Step-up strategy of moving from low-end smartphones towards mid- to high-end smartphones. This strategy will support higher blended ASP and gross margin. Better economies of scale and tighter cost-controls are also likely to improve gross margins. Falling opex/sales ratio. We expect the operating expense-over-sales ratio to decline slightly, from 22.1% in FY12 to 20.1%/19.2% in FY13F/14F, driven by the companys improving R&D process for smartphones. In addition, TCL has plans to optimize its organizational structure and business processes in order to improve overall operational efficiency. ROE and net debt position. We believe TCL will be one of the fastest growing smartphone vendors in the industry with a favorable ROE of 15.8% in FY14F, though the company is likely to be in a net debt position in both FY13F and FY14F, in our view. Expanded production capacity. Upon moving to its new production plant in September 2013, TCLs production capacity will reach 100m-120m units per year.
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7 August 2013
TCL Communication income statement

FYE 31 December (HK$m) Revenue Cost of revenue Gross profit Gross profit margin Other income and gains Selling and distribution expense Administrative expense R&D costs Other expenses Operating profit Operating margin Net interest income Share of result of jointly controlled entities/associates Other Profit before tax Tax expense Minority interest Profit to shareholders Net profit margin EPS (HK$) 2011 10,653 (8,325) 2,328 21.9 313 (866) (558) (459) (28) 729 6.8 55 (1) 0 783 17 (1) 800 7.5 0.70 2012 12,031 (9,935) 2,097 17.4 329 (1,154) (658) (740) (109) (234) (1.9) 47 (2) 0 (188) (32) 12 (208) (1.7) (0.18) N/A 17.4 (1.9) (1.7) (8.9) 31.4 2013F 17,925 (14,743) 3,182 17.8 366 (1,613) (896) (1,076) (18) (55) (0.3) 10 (2) 0 (47) 3 1 (43) (0.2) (0.04) (78.8) 17.8 (0.3) (0.2) (1.9) 58.0 2014F 24,700 (19,982) 4,718 19.1 473 (2,174) (1,235) (1,309) (25) 448 1.8 10 0 0 458 (27) (9) 422 1.7 0.37 N/A 19.1 1.8 1.7 15.8 61.7 2015F 30,225 (24,452) 5,773 19.1 557 (2,630) (1,511) (1,511) (30) 648 2.1 5 0 0 653 (39) (12) 602 2.0 0.53 42.5 19.1 2.1 2.0 19.2 56.5 1Q13 2,449 (2,046) 402 16.4 56 (289) (188) (224) (5) (247) (10.1) 6 (0) 0 (241) (6) 1 (246) (10.1) (0.22) (641.8) 16.4 (10.1) (10.1) 2Q13F 4,030 (3,325) 705 17.5 80 (363) (202) (242) (4) (25) (0.6) 5 (1) 0 (20) 1 0 (19) (0.5) (0.02) (124.3) 17.5 (0.6) (0.5) 3Q13F 5,148 (4,222) 927 18.0 90 (463) (257) (257) (5) 33 0.6 0 (1) 0 33 (2) (1) 30 0.6 0.03 (135.5) 18.0 0.6 0.6 4Q13F 6,298 (5,150) 1,147 18.2 140 (498) (250) (352) (4) 183 2.9 (1) (1) 0 182 10 (0) 191 3.0 0.17 (179.3) 18.2 2.9 3.0
EPS growth (%) 11.8 Gross profit margin (%) 21.9 Operating profit margin (%) 6.8 Net profit margin (%) 7.5 ROE (%) 29.9 Net debt/equity (%) Net cash Source: Historical data from the Company, forecasts by CCBIS
25
China Wireless (2369 HK)
7 August 2013

In the sweet spot

(initiation)
Initiate with Outperform and HK$3.40 target price. We initiate coverage on China Wireless (2369 HK) with a target price of HK$3.40 based on 12x FY14F P/E. We like China Wireless because of its (1) strong ties with local operators, (2) improving economies of scale, and (3) good traction with overseas telecom operators. Strong ties with leading Chinese telecom operators a big plus. Over 90% of Coolpad-brand smartphone sales were to top-three Chinese telecom operators in FY11/12. China Wireless has strong ties with local telecom operators and improving product development capabilities. The company is well positioned to benefit from increasing handset subsidies from both China Mobile and China Telecom as well as from surging 4G handset demand. Overseas market expansion in the works. The Coolpad brand has been doing well on home soil thanks to its strong ties with China telecom operators. It has recently beefed up efforts to court telecom operators in developed markets. In light of its improving product development capabilities and experience dealing with overseas telecom operators, we look for China Wireless to deliver 2.0m/4.0m smartphones to US and EU telecom operators in FY13F and FY14F, equivalent to 11.3% and 15.5%, respectively, of total sales revenue. Solid sales growth with stable profit margin. Taking advantage of opportunities at home and traction overseas, we forecast 52% unit sales growth in FY13F and 25% in FY14F. We remain confident that the improving sales mix towards 4G smartphones together with greater overseas exposure will support stable gross profit margin of 12% for FY13F and FY14F.
2011 2012 14,359 326 0.15 24.4 2.92 1.1 17.1 2.3 13.5 2013F 20,640 482 0.22 48.1 6.72 2.6 11.6 2.0 17.3 2014F 26,832 607 0.28 25.8 8.45 3.3 9.2 1.7 18.7 2015F 33,540 761 0.35 25.4 10.60 4.1 7.3 1.5 20.0
Price: Target:
HK$2.59 HK$3.40
(initiation)
Trading data
52-week range Market capitalization (m) Shares outstanding (m) Free float (%) 3M average daily T/O (m share) 3M average daily T/O (US$m) Expected return (%) 1 year Price as at close on 7 August 2013 HK$1.17-3.92 HK$5,576/US$701 2,153 60.5 17.6 5.8 31.2

HK$ 6.0x 5.5x 5.0x 4.5x 4.0x 3.5x 3.0x 2.5x 2.0x 1.5x 1.0x 0.5x Jan-10 Sep-10 Jun-11 China Wireless Feb-12 Nov-12 HSCEI (rebased) Aug-13
Source: Bloomberg

Year to 31 December Revenue (HK$m) 7,340 Net profit (HK$m) 271 EPS (HK$) 0.12 YoY change (%) (45.3) DPS (HKD cents) 2.89 Dividend yield (%) 1.1 P/E (x) 21.3 P/B (x) 2.6 ROE (%) 12.4 Source: Company data, CCBIS estimates
Ronnie Ho
Candy Tai
26
7 August 2013
China Wireless financial summary

Income statement
FYE 31 December (HK$m)
Revenue Cost of revenue Gross profit Other income and gains Selling and distribution expenses Administrative expenses Other expenses Operating profit Net interest income Share of result of associates Share of result of jointly controlled entities Profit before tax Tax expense Minority interest Profit to shareholders EPS (HK$)
Balance sheet
2011 2012 2013F 2014F 2015F FYE 31 December (HK$m)
Cash and bank balances Pledged time deposits Trade and bills receivables Prepayments, deposits and other assets Inventories Other current assets Current assets Property, plant and equipment Investment properties Prepaid land lease payments Intangible assets Investment in jointly controlled entities Investment in associates Available-for-sale investments Other non-current assets Total non-current assets Accounts and bills payable Other payables and accruals Interest-bearing bank borrowings Other current liabilities Total current liabilities Total non-current liabilities Shareholders equity Minority interest Total equity
2011 1,059 1,080 2,257 314 1,669 1 6,380 527 335 110 112 0 35 11 21 1,152 2,993 982 1,190 33 5,198 143 2,185 5 2,190
2012 1,274 710 2,416 648 1,811 0 6,859 537 310 125 161 7 53 24 28 1,244 3,823 1,170 536 63 5,592 99 2,410 3 2,413
2013F 2014F
2015F
7,340 14,359 20,640 26,832 33,540 (6,259) (12,639) (18,163) (23,612) (29,515) 1,081 1,720 2,477 3,220 4,025 289 (466) (559) (5) 340 (15) (0) 0 324 (53) 0 271 0.12 259 (870) (674) (18) 418 6 1 (7) 418 (94) 1 326 0.15 250 (1,259) (888) (21) 560 6 1 0 567 (85) 1 482 0.22 250 (1,610) (1,127) (27) 706 6 1 0 713 (107) 1 607 0.28 250 (1,979) (1,375) (34) 887 6 1 0 894 (134) 1 761 0.35
1,444 1,732 2,164 710 710 710 3,473 4,515 5,644 778 934 1,121 2,603 3,384 4,230 0 0 0 9,007 11,274 13,868 688 310 125 142 7 53 24 28 1,377 5,494 1,404 536 63 7,497 99 2,786 3 2,788 826 310 125 116 7 53 24 28 1,490 951 310 125 85 7 53 24 28 1,583
7,143 8,928 1,685 2,022 536 536 63 63 9,427 11,549 99 3,236 2 3,239 99 3,801 2 3,803
Cash flow
FYE 31 December (HK$m)
Profit before tax Depreciation and amortization Change in working capital Other Operating cash flow Capex Other Investment cash flow Change in borrowings Other Financing cash flow Change in cash Exchange losses on cash and cash equivalents Cash, beginning Cash, ending
Financial ratios
2011 324 73 (366) (2) 29 (78) (374) (452) 491 313 805 382 35 2012 418 115 322 57 912 (109) 299 190 (702) (184) (886) 216 (2) 2013F 567 128 (73) (92) 530 (200) 2 (198) 0 (161) (161) 170 0 2014F 713 147 (49) (114) 697 (200) 2 (198) 0 (211) (211) 288 0 1,444 1,732 2015F 894 167 (39) (141) 881 (200) 2 (198) 0 (251) (251) 432 0 1,732 2,164 FYE 31 December (%)
Profitability Gross margin Operating margin Net margin ROE Growth Sales revenue growth Operating income growth Net profit growth EPS growth Liquidity Net debt/equity (%)
2011 14.7 4.6 3.7 12.4 59.8 (37.5) (43.5) (45.3) Net cash
2012 12.0 2.9 2.3 13.5 95.6 23.0 20.0 24.4 Net cash
2013F 12.0 2.7 2.3 17.3 43.7 33.9 48.1 48.1 Net cash
2014F 12.0 2.6 2.3 18.7 30.0 26.2 25.8 25.8 Net cash
2015F 12.0 2.6 2.3 20.0 25.0 25.6 25.4 25.4 Net cash
642 1,059 1,274 1,059 1,274 1,444 Source: Historical data from the Company, forecasts by CCBIS
27
7 August 2013
Initiated with Outperform and HK$3.40 target price

We initiate coverage on China Wireless (2369 HK, Outperform) with a target price of HK$3.40, based on 12x FY14F P/E. Despite intense competition within the China smartphone space, we like China Wireless and its smartphone brand, Coolpad, because of (1) its strong ties with leading China telecom operators, (2) robust unit sales growth with improving economies of scale, and (3) its progress penetrating leading telecom operators in the US and the EU. China Wireless YTD price performance vs. HSI
HK$ 4.0 3.5 3.0 2.5 10,300 2.0 1.5 1.0 Jan-12 9,800 9,300 8,800 Aug-13 12,300 11,800 11,300 10,800
China Wireless 5-year forward P/E bands

44x 40x 36x 32x 28x 24x 20x 16x 12x 8x 4x 0x Jul-08 Feb-09 Oct-09 May-10 Jan-11 Sep-11 Apr-12 Dec-12 +1s.d. Jul-13 Mean -1s.d. +2s.d.
Apr-12
Aug-12 Dec-12 China Wireless (LHS)
Apr-13 HSCEI
Source: Bloomberg
Source: Bloomberg
Benefiting from increasing handset subsidies from leading China telecom operators. Over the years, over 90% of Coolpad brand smartphone sales were made in China because of China Wireless strong ties with leading Chinese telecom operators together with its outstanding product development capabilities. With increasing handset subsidies from both China Mobile (941 HK, Not Rated) and China Telecom (728 HK, Not Rated) and surging 4G smartphone demand, we believe China Wireless will enjoy robust unit sales growth of 48.5%/20.0 for FY13F/14F, given the companys home-court advantage. On-track overseas market expansion. China Wireless has been performing well in its backyard owing to its strong ties with Chinese telecom operators. The company is now pursuing business opportunities with leading telecom operators in developed countries. In light of its improving R&D capabilities and experience dealing with overseas telecom operators, we anticipate China Wireless will ship 2.0m/4.0m smartphones to US and EU telecom operators in FY13F/14F, representing 11.3%/15.5% of the companys total sales revenue. Although sales contribution from overseas markets is still relatively small, we believe higher blended ASP and better overall margins will be positive to the companys profit growth in FY14F/15F. Risks: (1) Intense price competition from the China smartphone OEMs, (2) the increasing cost of manufacturing, (3) slower-than-expected 4G adoption in China.
28
7 August 2013
Company background
China Wireless Technologies Limited (China Wireless) was incorporated in 2002 and listed on the Hong Kong Stock Exchange in 2004. Yulong Computer Telecommunication Scientific (Shenzhen) Company Limited (Yulong) is a wholly owned subsidiary of China Wireless, mainly engaged in the development and manufacture of Coolpad smartphone sets, the mobile data platform system, and value-added business operations in China. The key product of the company is its 3G smartphone launched under its CoolPad brand. The sales of CoolPad 3G smartphones covered regions across China and has already expanded into overseas markets including India, Taiwan and Indonesia. As a local brand in China, the company not only sells smartphones through its carriers channels, but it is also forging relationships with its e-commerce partners as a way to reap the benefits offered by the various e-commerce channels. According to a SINO-MR report, Coolpad smartphones had the fourth-largest market share of the China 3G smartphone market in 2012. Meanwhile, China Wireless has succeeded in breaking into the global telecommunications market by leveraging its growing brand recognition within the global smartphone market. Apart from its existing markets in India and Taiwan, China Wireless also penetrated the North American 4G smartphone market in 2012. China Wireless plans to enter the European market in 2013.
Mr. Guo Deying, the executive director of the company, and his spouse, Ms. Yang Xiao, the non-executive director, co-own 39.5% of China Wireless. Public shareholders own approximately 60.5% of the company. China Wireless shareholding structure
Mr. Guo Deying & Ms. Yang Xiao 39.5% Other 60.5%
29
7 August 2013
R&D capability and product development

In 2007, China Wireless received a national award from Chinas State Council for its double network technology, which simultaneously connects cell phones to both the CDMA and GSM networks. Some models of Coolpad phones also have settings for heightened privacy protection. As a result, Coolpad phones are favored by, and are purchased as, gifts for businessmen and government officials in China. In 2012, China Wireless launched a full range of Coolpad smartphones from high-end to mid-end and low-end versions, offering users better quality and better radio performance. The company also successfully rolled out products covering 3G and 4G network smartphones. For EVDO-based smartphones, the Group launched 18 new models. For TD-SCDMA-based smartphones, the Group launched 17 new models. For WCDMA-based smartphones, the Group launched 13 new models. The company also started to launch 4G FDD-LTE smartphones, which were exported to the North American market. By differentiating the functions and features of the Android operating system, and by providing the special Coollife UI4.1 user interface on the new models, the Coolpad smartphones became more competitive and more attractive. The company upgraded to the latest Android operating system version, the so-called Jelly Bean, running on the famous Coolpad DNA, entailing dual-mode, dual-standby technology combining two disparate radio technologies, private mode guaranteeing the security of the users private data, and Chinese-language handwriting recognition software allowing users to input more conveniently. The Coolcloud platform was also upgraded to the latest Coolcloud 3.0 version, which made data synchronization of smartphones work faster and more effectively once users switched to the new Coolpad smartphones. Apart from the synchronization function, Coolpad users could also use the anti-theft, antivirus and other features of the phone. Security features come with Coolcloud to ensure data is not leaked. China Wireless manufactures all its Coolpad smartphones in-house. It has six R&D facilities worldwide. Global R&D centers
Source: Company
30
7 August 2013
Financial summary
We forecast net income of China Wireless will rise 48.1%/25.8% YoY to HK$482m/HK$606.6m in FY13F/14F, thanks to the companys strong ties with Chinese telecom operators and due to the encouraging progress of its overseas expansion. China Wireless financial summary
HK$m 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 15% 14% 13% 12% 11% 10% 9% 8% 7% 6% 5% 4% 3% FY11 Sales (LHS) FY12 Gross profit margin (RHS) FY13F FY14F Operating margin (RHS) FY15F Net profit margin (RHS) 2%
Impressive sales growth. We expect the companys sales revenue to rise 43.7% YoY in FY13F and 30.0% YoY in FY14F, driven by the flourishing 3G mobile market in China and the 4G mobile market in overseas. Improving gross profit margin. Despite stiff competition within the smartphone market in China, we believe China Wireless will be capable of maintaining its gross profit margin at 12% in FY13F/14F based on its improving product mix with a higher proportion of 4G smartphones contributing 10%/25% of total smartphone unit shipments in FY13F/14F, up from merely 4.8% in FY12. Falling opex/sales ratio. We expect the operating expenses-over-sales ratio to improve from 10.9% in FY12 to 10.5%/10.3% in FY13F/14F, as the company benefits from improving economies of scale and tight cost controls. ROE and net cash position. We see strong growth momentum for China Wireless and expect favorable ROE of 17.3%/18.7% and, ultimtely, a net cash position in FY13F/14F. Expanding production capacity. China Wireless Dongguan production plant has annual production capacity of 30m units. With the companys annual sales target of approximately 32m units in FY13F, the production plant will soon reach full utilization. China Wireless plans to expand its annual production capacity to 35m units by the end of FY13 with capex of HK$200m.
31
7 August 2013
China Wireless income statement

FYE 31 December (HK$m) Revenue Cost of revenue Gross profit Gross profit margin Other income and gains Selling and distribution expense Administrative expense Other expenses Operating profit Operating margin Net interest income Share of result of associates Share of result of jointly controlled entities Profit before tax Tax expense Minority interest Profit to shareholders Net profit margin EPS (HK$) 2011 7,340 (6,259) 1,081 14.7 289 (466) (559) (5) 340 4.6 (15) (0) 0 324 (53) 0 271 3.7 0.12 2012 14,359 (12,639) 1,720 12.0 259 (870) (674) (18) 418 2.9 6 1 (7) 418 (94) 1 326 2.3 0.15 2013F 20,640 (18,163) 2,477 12.0 250 (1,259) (888) (21) 560 2.7 6 1 0 567 (85) 1 482 2.3 0.22 48.1 12.0 2.7 2.3 17.3 Net cash 2014F 26,832 (23,612) 3,220 12.0 250 (1,610) (1,127) (27) 706 2.6 6 1 0 713 (107) 1 607 2.3 0.28 25.8 12.0 2.6 2.3 18.7 Net cash 2015F 33,540 (29,515) 4,025 12.0 250 (1,979) (1,375) (34) 887 2.6 6 1 0 894 (134) 1 761 2.3 0.35 25.4 12.0 2.6 2.3 20.0 Net cash 1H12 6,218 (5,474) 744 12.0 73 (254) (372) (5) 186 3.0 (8) 0 0 178 (26) 0 153 2.5 0.07 35.1 12.0 3.0 2.5 2H12 8,141 (7,165) 976 12.0 187 (615) (302) (13) 232 2.9 14 0 (7) 240 (68) 1 173 2.1 0.08 20.7 12.0 2.9 2.1 1H13F 8,772 (7,719) 1,053 12.0 100 (535) (360) (9) 249 2.8 (10) 0 0 239 (36) 0 204 2.3 0.09 34.8 12.0 2.8 2.3 2H13F 11,868 (10,444) 1,424 12.0 150 (724) (528) (12) 310 2.6 16 1 0 327 (49) 0 278 2.3 0.13 60.8 12.0 2.6 2.3
EPS growth (%) (45.3) 24.4 Gross profit margin (%) 14.7 12.0 Operating profit margin (%) 4.6 2.9 Net profit margin (%) 3.7 2.3 ROE (%) 12.4 13.5 Net debt/equity (%) Net cash Net cash Source: Historical data from the Company, forecasts by CCBIS
32
Sunny Optical (2382 HK)
7 August 2013

Benefiting from camera pixel migration
Company Rating: Neutral

(initiation)
Initiate with Neutral and HK$8.70 target price. We initiate coverage on Sunny Optical (2382 HK) with a Neutral rating and HK$8.70 target price based on 12x FY14F P/E. Sunny Optical is well positioned to take advantage of the current handset camera pixel migration. We also like its dominant market share among the leading China smartphone brands. That said, we believe the stocks year-to-date price performance already reflects these positives. To benefit from smartphone camera pixel migration. Sunny Optical is one of Chinas leading handset camera module manufacturers with over 50% market share of Chinese smartphone brands. Camera pixel migration from 5MP to 8MP/13MP and robust unit sales growth in China will hold the company in good stead. We forecast handset camera-related sales will grow 71.3% in FY13F and 47.1% YoY in FY14F. Vehicle lenses the wild card. Besides the companys conventional handset-related camera business, lucrative revenue opportunities from automobile cameras exist owing to the rapid adoption of rear and front parking cameras. Although we forecast sales contribution of merely 4% in FY13F and FY14F, sales growth will top 40% with above-company-average gross profit margin of 40%. Impressive sales growth but gross profit under pressure. We estimate sales revenue growth will top 47.4%/36.3% YoY in FY13F/14F owing to the impressive performance of the handset division. Blended gross profit margin will decline 120bp/70bp to 17.4%/16.7% in FY13F/14F on a higher sales mix toward lower margin handset camera modules and intense price competition from local rivals.
2011 2012
3,984 346 0.35 60.1 10.73 1.6 19.3 4.2 17.9
Price: Target:
HK$8.34 HK$8.70
(initiation)
Trading data
52-week range Market capitalization (m) Shares outstanding (m) Free float (%) 3M average daily T/O (m share) 3M average daily T/O (US$m) Expected return (%) 1 year Price as at close on 7 August 2013 HK$2.99-11.78 HK$8,160/US$1,072 978 57.9 9.5 10.2 4.3

HK$ 12 10 8 6 4 2 0 Jan-10
Sep-10
Jun-11 Sunny Optical
Feb-12 Nov-12 HSCEI (rebased)
Aug-13
Source: Bloomberg

Year to 31 December 2013F
5,872 446 0.45 28.5 13.64 2.0 14.7 3.6 19.7
2014F
8,004 564 0.57 25.9 17.18 2.6 11.5 3.1 21.0
2015F
9,740 660 0.67 16.7 20.04 3.1 9.7 2.6 20.9
Revenue (RMB m) 2,499 Net profit (RMB m) 215 EPS (RMB) 0.22 YoY change (%) 51.0 DPS (RMB cents) 7.29 Dividend yield (%) 1.0 P/E (x) 31.7 P/B (x) 4.8 ROE (%) 12.8 Source: Company data, CCBIS estimates
Ronnie Ho (852) 2533 2486

ronnieho@ccbintl.com
Candy Tai
33
7 August 2013
Sunny Optical financial summary

Income statement
FYE 31 December (RMB m)
Revenue Cost of revenue Gross profit Other income and gains Selling and distribution expense R&D expense Administrative expense Operating profit Net interest income Share of result of associates Other Profit before tax Tax expense Minority interest Profit to shareholders EPS (RMB) EPS (HK$)
Balance sheet
2011
2,499 (1,976) 523 54 (59) (131) (123) 264 6 (4) (26) 240 (38) 14 215 0.22 0.26
2012
3,984 (3,243) 741 36 (64) (163) (150) 399 7 (4) (5) 397 (58) 7 346 0.35 0.43
2013F
5,872 (4,850) 1,022 50 (95) (241) (221) 515 5 (5) 0 515 (77) 9 446 0.45 0.57
2014F
8,004 (6,668) 1,337 50 (120) (320) (296) 650 5 (5) 0 650 (98) 11 564 0.57 0.72
2015F
9,740 (8,133) 1,607 50 (146) (390) (360) 761 5 (5) 0 761

Cash and bank balances Trade & bills receivables Prepayments, deposits and other assets Inventories Other current assets Current assets Property, plant and equipment Prepaid lease payments Intangible assets Investment in associates Other non-current assets Total non-current assets Accounts & bills payable
2011
252 570 57 472 471 1,822 489 18 0 14 32 553 471 128 62 9 671 24 1,661 20 1,681
2012
243 742 159 748 375 2,267 646 23 0 1 65 735 774 164 103 11 1,052 18 1,922 10 1,932
2013F 2014F
130 1,107 234 1,129 375 2,976 808 23 (0) (4) 65 892 1,129 242 203 11 1,585 18 2,263 1 2,264 45 1,487 319 1,553 375 3,779 940 23 (1) (9) 65 1,018 1,553 330 203 11 2,096 18 2,693 (10) 2,683
2015F
120 1,796 389 1,894 375 4,573 1,042 23 (1) (14) 65 1,115 1,894 401 203 11 2,509 18 3,184 (23) 3,161
(114) 13 660 0.67 0.86
Other payables and accruals Interest-bearing bank borrowings Other current liabilities Total current liabilities Total non-current liabilities Shareholders equity Minority interest Total equity
Cash flow
Profit before tax Depreciation and amortization Change in working capital Other Operating cash flow Capex Other Investment cash flow Change in borrowings Other Financing cash flow Change in cash Exchange losses on cash and cash equivalents Cash, beginning Cash, ending 188 252 252 243 243 130 130 45 45 120
Financial ratios
2011
240 92 (228) (31) 72 (197) 284 87 (31) (66) (97) 63 0
2012
397 109 (200) (49) 257 (293) 113 (180) 23 (109) (86) (8) 0
2013F
515 138 (389) (77) 187 (300) 10 (290) 100 (110) (10) (113) 0
2014F
650 168 (377) (98) 344 (300) 10 (290) 0 (139) (139) (85) 0
2015F
761 198 (307) (114) 539 (300) 10 (290) 0 (174) (174) 74 0
FYE 31 December (%)

Profitability Gross margin Operating margin Net margin ROE Growth Sales revenue growth Operating income growth Net profit growth EPS growth Liquidity Net debt/equity (%)
2011
20.9 10.6 8.6 12.8
2012
18.6 10.0 8.7 17.9
2013F
17.4 8.8 7.6 19.7
2014F
16.7 8.1 7.0 21.0
2015F
16.5 7.8 6.8 20.9
37.4 52.1 49.7 51.0
59.5 51.1 60.8 60.1
47.4 28.9 28.9 28.5
36.3 26.3 26.3 25.9
21.7 17.0 17.0 16.7
Net cash
Net cash
3.2
5.9
2.6
Source: Historical data from the Company, forecasts by CCBIS
34
7 August 2013
Initiate with Neutral and target price of HK$8.70

We initiate coverage on Sunny Optical (2382 HK) with a Neutral rating and target price of HK$8.70, based on 12x FY14F P/E or two standard deviations above the forward mid-cycle P/E valuation. In our view, Sunny is in pole position to benefit from the migration of smartphone cameras from 5MP to 8MP/13MP by virtue of its impressive market share and unit growth vis--vis Chinese smartphone OEMs. However, following strong year-to-date price performance, we believe the positives have largely been priced in, and we see limited upside at this level.
Sunny Optical YTD price performance versus Hang Seng Index
HK$ 12 11 10 9 8 7 6 5 4 3 2 1 Jan-12 Apr-12 Aug-12 Dec-12 Apr-13 Sunny Optical (LHS) HSCEI (RHS) 12,300 11,800 11,300 10,800 10,300 9,800 9,300 8,800 Aug-13
Sunny Optical 5-year forward P/E bands

16x 14x 12x 10x 8x 6x 4x 2x Jul-08 +1s.d. +2s.d.
-1s.d.
Mean
-2s.d. Feb-09 Oct-09 May-10 Jan-11 Sep-11 Apr-12 Dec-12 Jul-13
Source: Bloomberg
Source: Bloomberg
Benefiting from smartphone camera pixel migration. Sunny optical is one of the leading handset camera module manufacturers in China with over 50% market share of Chinese smartphone OEMs. In light of the camera pixel migration from 5MP to 8MP/13MP and robust unit sales growth of its China customers, we believe the company is advantageously positioned to benefit from surging mid- to high-end smartphone camera demand. We forecast its handset camera-related sales revenue will grow 71.3%/47.1% YoY, respectively, in FY13F/14F. Robust vehicle lens growth positive to overall profitability. We see good revenue opportunities from automobile cameras due to increasing adoption in vehicle rear and front parking cameras. Although we see less than 5% sales contribution in FY13F/14F, sales growth will top 40% with above-company-average gross profit margin. Intense price competition from local rivals the biggest overhang. We estimate sales revenue growth will top 47.4%/36.3% YoY, respectively, in FY13F/14F owing to the impressive performance of the handset division. However, blended gross profit margin will decline 120bp/70bp to 17.4%/16.7% in FY13F/14F on the shift in the sales mix towards lower-margin handset camera modules. We consider price competition from local rivals to be the biggest overhang for the company in FY14F. Risks: (1) Intense price competition from local rivals like O-file, Truly and BYDE, (2) the increasing cost of manufacturing, and (3) slower-than-expected smartphone unit sales growth from key China smartphone OEMs.
35
7 August 2013
Company background
Established in 1984, Sunny Optical Technology Group (Sunny Optical) is engaged in the business of designing, researching and developing, and the manufacturing and selling of optical and optical-related products and scientific instruments. It was listed on the Hong Kong Stock Exchange in 2007. The company operates in three segments: optical components, optoelectronic products and optical instruments, accounting for approximately 32.9%, 62.5% and 4.6% of Sunny Opticals FY12 revenue, respectively. Its products consist of optical components, such as glass spherical and spherical lenses, plane products, prisms, handset lens sets, vehicle lens sets and other lens sets; optoelectronic products, such as handset camera modules, security cameras and other optoelectronic modules, and optical instruments, such as microscopes, optical measuring instruments and various optical analytical instruments.
Mr. Wang Wenjian, the honorary chairman of the board and non-executive director of Sunny Optical, together with Sunny Employee Trust, hold the entire issued share capital of Sun Xu Limited. Sun Xu Limited owns a 42.15% stake in Sunny Optical, while public shareholders collectively own a 57.85% stake. Shareholding structure
Source: Company
R&D capabilities
Sunny Optical possesses five production bases in China, located in Xinyang, Zhejiang, Zhongshan, Shanghai and Tianjin. It has also established R&D centers in China, Singapore, and South Korea, among other locales. In 2012, the new production base in Xinyang, Henan Province completed the construction of certain factories where the production lines of some of its digital camera-related products were transferred. Sunny Optical also conducted R&D upgrades of existing products, enhanced processing techniques, pushed forward automation-based innovation and further consolidated technological advantages for its existing products.
36
7 August 2013
With regard to the optical components business segment, 8MP handset lens sets commenced mass production this year while 10MP and above handset lens sets were in the processes of active R&D and trial production. Besides the mobile phone-related business, vehicle lens sets, industrial lenses, and infrared lens sets have been the main areas of focus. For the optoelectronic products business segment, the mass production of 8MP and 13MP handset camera modules began in 2011/2012. Sunny Optical has138 patents, with 68 patents pending approval. Sunny Optical production bases in China
Source: Company
37
7 August 2013
Financial summary
We look for net income growth of 28.9%/26.3% YoY for Sunny Optical in FY13F/14F, to reach RMB446.3m/RMB563.8m on handset camera pixel migration within the China smartphone market. China Wireless financial summary
RMB m 10,000 22% 20% 8,000 18% 16% 14% 4,000 12% 10% 8% 0 FY11 Sales (LHS) FY12 FY13F FY14F Gross profit margin (RHS) Operating margin (RHS) FY15F Net profit margin (RHS) 6%
6,000
2,000
Encouraging sales growth. We look for a revenue growth of 47.4%/36.3% YoY, respectively, in FY13F/14F, owing to impressive performance from the handset division, underpinned by the camera pixel migration from 5MP to 8MP/13MP in the China smartphone market. On the other hand, increasing adoption in rear/front parking cameras is expected to boost the revenue of Sunny Opticals vehicle lens division in FY13F/14F. In addition, the company expects there to be breakthroughs in security surveillance lens sets and new optical instruments in FY13. Tumbling gross profit margin. Despite the impressive revenue growth, we expect from Sunny Optical, we see its blended gross profit margin declining 120bp/70bp YoY to 17.4%/16.7% in FY13F/14F due to the shift in the sales mix towards lower-margin handset camera modules and severe price competition from local rivals. Stable opex/sales ratio. We expect the operating expense-over-sales ratio to hold steady at 9.5%/9.2% in FY13F/14F, similar to the 9.5% achieved in FY12. Focusing on automation will help Sunny Optical maintain a stable opex/sales ratio. ROE and low gearing ratio. With its leading position in Chinas handset camera module market, we expect Sunny Optical to produce favorable ROE of 19.7%/21.0% and maintain a low-single-digit gearing ratio in FY13F/14F. Capex. A stable level of capex amounting to approximately RMB300m is expected for FY13F/14F, to be put towards the purchase of property, plant, equipment and other tangible assets.
38
7 August 2013
Sunny Optical income statement

FYE 31 December (RMB m) Revenue Cost of revenue Gross profit Gross profit margin Other income and gains Selling and distribution expense R&D expense Administrative expense Operating profit Operating margin Net interest income Share of result of associates Other Profit before tax Tax expense Minority interest Profit to shareholders Net profit margin EPS (RMB) EPS (HK$) 2011 2,499 (1,976) 523 20.9 54 (59) (131) (123) 264 10.6 6 (4) (26) 240 (38) 14 215 8.6 0.22 0.26 2012 3,984 (3,243) 741 18.6 36 (64) (163) (150) 399 10.0 7 (4) (5) 397 (58) 7 346 8.7 0.35 0.43 60.1 18.6 10.0 8.7 17.9 Net cash 2013F 5,872 (4,850) 1,022 17.4 50 (95) (241) (221) 515 8.8 5 (5) 0 515 (77) 9 446 7.6 0.45 0.57 28.5 17.4 8.8 7.6 19.7 3.2 2014F 8,004 (6,668) 1,337 16.7 50 (120) (320) (296) 650 8.1 5 (5) 0 650 (98) 11 564 7.0 0.57 0.72 25.9 16.7 8.1 7.0 21.0 5.9 2015F 9,740 (8,133) 1,607 16.5 50 (146) (390) (360) 761 7.8 5 (5) 0 761 (114) 13 660 6.8 0.67 0.86 16.7 16.5 7.8 6.8 20.9 2.6 1H12 1,770 (1,430) 340 19.2 24 (32) (68) (75) 189 10.7 2 (3) (1) 188 (32) 1 157 8.8 0.16 0.20 70.9 19.2 10.7 8.8 2H12 2,215 (1,814) 401 18.1 12 (33) (95) (75) 210 9.5 4 (2) (3) 210 (26) 6 190 8.6 0.19 0.24 52.7 18.1 9.5 8.6 1H13 2,620 (2,184) 435 16.6 25 (45) (105) (105) 206 7.9 3 (3) 0 207 (31) 4 179 6.8 0.18 0.23 13.7 16.6 7.9 6.8 2H13F 3,252 (2,666) 586 18.0 25 (50) (136) (116) 309 9.5 2 (3) 0 308 (46) 5 267 8.2 0.27 0.34 40.3 18.0 9.5 8.2
EPS growth (%) 51.0 Gross profit margin (%) 20.9 Operating profit margin (%) 10.6 Net profit margin (%) 8.6 ROE (%) 12.8 Net debt/equity (%) Net cash Source: Historical data from the Company, forecasts by CCBIS
39
ZTE Corporation (763 HK)
7 August 2013

On the right track
Maintain Outperform with higher target price of HK$20.00. We maintain our Outperform rating on ZTE and keep our earnings forecasts for the company unchanged. We raise our target price from HK$15.00 to HK$20.00 based on a higher target multiple of 20x FY14 P/E, in line with the average 3-year mid-cycle P/E valuation during the previous 3G telecom capex cycle. Better cost controls, higher telecom equipment spending and robust smartphone unit growth should justify our positive outlook for ZTE. Now a meaningful smartphone player. According to IDC, ZTE was the fifth-largest smartphone manufacturer in the world in 2Q13 with 10.1m units shipped. We forecast the company will ship 40m smartphones in FY13F resulting in gross profit margin of 16.5% for the mobile terminal division. ZTE is shifting focus to higher ASP smartphones and the overseas market. Rising mobile equipment orders from Chinese telecom operators. Telecom equipment orders from China Mobile fell short of expectations in 1H13. However, TD-LTE tenders from China Mobile should be out in 2H13F, boosting sales and profits for leading China telecom equipment vendors. Besides China Mobile, China Telecom appears set to move up the date of its 4G trials, a positive development for ZTE, in our view. Looking forward to a better 2014F. ZTE has already announced preliminary 1H13 results, including a 23.5% YoY increase in net income to RMB302.3m. 1H13 was a mixed bag that included a higher forex loss in 1H13. On a more positive note, GPM is improving and operating expenses are coming under control. Increasing 4G capex from leading telecom operators and robust smartphone sales growth will support a profitable 2013F and 26% earnings growth for 2014F, in our view.
2011 2012 84,219 (2,841) N/A (0.8) N/A 0.0 0.0 (13.5) 2.1 (12.5) 2013F 96,270 2,128 (22.4) 0.6 N/A 15.5 1.4 17.5 1.9 8.5 2014F 106,531 2,672 (5.7) 0.8 25.6 19.5 1.8 13.6 1.7 9.8 2015F 117,615 3,372 5.3 1.0 26.2 24.6 2.3 10.8 1.5 11.2

(maintained)
Price: Target:
HK$13.60 HK$20.00
(up from HK$15.00)
Trading data
52-week range Market capitalization (m) Shares outstanding (m) Free float (%) 3M average daily T/O (m share) 3M average daily T/O (US$m) Expected return (%) 1 year Closing price on 7 August 2013 HK$9.23 15.6 HK$60,870/US$7,964 3,440 69.2 5.4 9.5 47.0

HK$ 33 28 23 18 13 8 Jan-10
Sep-10
Jun-11 ZTE
Feb-12 HSCEI (rebased)
Nov-12
Aug-13
Source: Bloomberg

Year to 31 December Revenue (RMB m) 86,254 Net profit (RMB m) 2,060 Revision (%) N/A EPS (RMB) 0.6 YoY change (%) (36.6) DPS (RMB cent) 20.2 Dividend yield (%) 1.8 P/E (x) 18.9 P/B (x) 1.8 ROE (%) 7.8 Source: Company data, CCBIS estimates
Ronnie Ho (852) 2533 2486

Candy Tai
40
7 August 2013
ZTE financial summary

Income statement
FYE 31 December (RMB m) Revenue Carrier networks Terminals Telecommunication software systems, services & other products Cost of revenue Gross profit Other income & gains Sell & distribution costs G&A expenses R&D expenses Other operating expenses Operating profit Net interest income Associate income Profit before tax Tax expense Minority interest Profit to shareholders EPS (RMB) EPS (HK$) 2011 2012 2013F 2014F 2015F 86,254 84,219 96,270 106,531 117,615 46,522 41,603 44,714 47,307 26,934 25,839 33,100 38,000 12,799 16,778 18,456 21,224 50,208 43,000 24,408
Balance sheet
FYE 31 December (RMB m) Cash & bank balances Trade & bills receivable Prepayment & other receivables Inventories Other current assets Current assets PPT Intangible assets Interests in associates Investment in JCE Other non-current assets Total non-current assets Trade & bill payable Other payables & accruals Short-term borrowings Other current liabilities Total current liabilities Total non-current liabilities (392) (621) (183) (236) 2,060 (2,841) 0.61 0.72 (0.83) (1.01) (450) (148) 2,128 0.62 0.78 (565) (186) 2,672 0.78 1.00 (713) (234) 3,372 0.98 1.26 Shareholders equity Minority interest Total equity 2011 20,662 30,720 5,029 14,988 15,513 86,912 8,646 2,240 468 46 9,472 20,872 32,692 13,408 15,666 4,124 65,891 15,605 24,232 2,057 26,289 2012 22,660 30,516 5,227 11,442 15,259 85,104 8,011 2,625 409 47 13,716 24,808 29,594 14,834 22,599 8,398 75,424 11,849 21,502 1,136 22,639 2013F 2014F 2015F 17,770 18,354 13,530 33,595 37,146 40,990 5,975 6,612 7,300 17,792 19,780 21,921 17,214 18,879 20,678 92,347 100,771 104,419 8,300 2,659 484 47 14,463 25,954 37,562 16,330 23,016 4,728 81,636 11,750 23,630 1,284 24,914 8,422 2,543 559 47 15,100 26,671 41,758 18,155 23,474 11,262 94,649 5,553 25,771 1,470 27,241 8,375 2,377 634 47 15,788 27,221 46,278 20,120 23,979 5,612 95,988 5,472 28,475 1,704 30,179
(62,086) (65,546) (72,158) (80,219) (88,902) 24,168 18,674 24,112 26,312 28,713 3,381 4,359 3,706 4,347 5,127 (11,112) (11,341) (11,745) (12,784) (14,114) (2,606) (2,449) (2,696) (2,876) (3,176) (8,493) (8,829) (8,664) (9,481) (10,350) (1,684) (706) (963) (1,065) (1,176) 3,654 (292) 3,750 4,453 5,024 (1,091) (1,739) (1,100) (1,105) 71 48 75 75 2,635 (1,983) 2,725 3,423 (780) 75 4,319
Cash flow
FYE 31 December (RMB m) Profit before tax Depreciation & amortization Change in working capital Other Operating cash flow Capex Other Investment cash flow Change in borrowings Other Financing cash flow 2011 2012F 2013F 2014F 2015F 2,635 (1,983) 2,725 3,423 4,319 1,407 1,549 1,777 1,995 2,212 (6,118) 2,793 (2,650) (1,573) (1,712) (1,580) (486) (525) (1,172) (1,456) (3,655) 1,873 1,328 2,673 3,364 (2,548) (1,678) (1,500) (1,500) (1,500) (1,062) (2,699) (600) (500) (500) (3,610) (4,377) (2,100) (2,000) (2,000) 13,428 7 13,435 603 (99) 3,899 (4,018) 4,502 (4,117) (89) (80) 0 (6,108) (89) (6,188)
Financial ratios
FYE 31 December (%) Profitability Gross margin Operating margin Net margin ROE Growth Sales revenue growth Operating income growth Net profit growth EPS growth Liquidity Net debt/equity 2011 28.0 4.2 2.4 7.8 2012 22.2 (0.3) (3.4) (12.5) 2013F 25.0 3.9 2.2 8.5 2014F 24.7 4.2 2.5 9.8 2015F 24.4 4.3 2.9 11.2
23.4 (26.1) (36.6) (36.6)
(2.4) N/A N/A N/A
14.3 N/A N/A N/A
10.7 18.7 25.6 25.6
10.4 12.8 26.2 26.2
34.9
60.1
59.4
53.5
45.5
Change in cash 6,169 1,998 (4,890) 584 (4,824) Effect of foreign ex. rate change (412) 0 0 0 0 Cash, beginning 14,905 20,662 22,660 17,770 18,354 Cash, ending 20,662 22,660 17,770 18,354 13,530 Source: Company historical data, CCBIS forecasts
41
7 August 2013
ZTE income statement

FYE 31 December (RMB m) Revenue Carrier networks Terminals Telecommunication software systems, services and other products Cost of revenue Gross profit Gross profit margin Other income and gains Sell and distribution costs G&A expenses R&D expenses Other operating expenses Operating profit Operating margin Net interest income Associate income Profit before tax Tax expense Minority interest Profit to shareholders Net profit margin EPS (RMB) EPS (HK$) EPS growth (%) Gross profit margin (%) Operating profit margin (%) Net profit margin (%) ROE (%) Net debt/equity (%) Source: Company data, CCBIS estimates 2011 86,254 46,522 26,934 12,799 2012 84,219 41,603 25,839 16,778 2013F 96,270 44,714 33,100 18,456 2014F 106,531 47,307 38,000 21,224 2015F 117,615 50,208 43,000 24,408 1H11 37,013 2H11 49,241 1H12 42,642 2H12 41,578
(62,086) 24,168 28.0 3,381 (11,112) (2,606) (8,493) (1,684) 3,654 4.2 (1,091) 71 2,635 (392) (183) 2,060 2.4 0.6 0.7 (36.6) 28.0 4.2 2.4 7.8 34.9
(65,546) 18,674 22.2 4,359 (11,341) (2,449) (8,829) (706) (292) (0.3) (1,739) 48 (1,983) (621) (236) (2,841) (3.4) (0.8) (1.0) N/A 22.2 (0.3) (3.4) (12.5) 60.1
(72,158) 24,112 25.0 3,706 (11,745) (2,696) (8,664) (963) 3,750 3.9 (1,100) 75 2,725 (450) (148) 2,128 2.2 0.6 0.8 N/A 25.0 3.9 2.2 8.5 59.4
(80,219) 26,312 24.7 4,347 (12,784) (2,876) (9,481) (1,065) 4,453 4.2 (1,105) 75 3,423 (565) (186) 2,672 2.5 0.8 1.0 25.6 24.7 4.2 2.5 9.8 53.5
(88,902) 28,713 24.4 5,127 (14,114) (3,176) (10,350) (1,176) 5,024 4.3 (780) 75 4,319 (713) (234) 3,372 2.9 1.0 1.3 26.2 24.4 4.3 2.9 11.2 45.5
(26,901) 10,112 27.3 2,065 (4,984) (1,260) (3,664) (547) 1,721 4.6 (458) 9 1,273 (436) (67) 769 2.1 0.2 0.3 (14.3) 27.3 4.6 2.1
(35,186) 14,056 28.5 1,316 (6,129) (1,345) (4,828) (1,137) 1,933 3.9 (633) 62 1,362 44 (116) 1,291 2.6 0.4 0.4 (46.2) 28.5 3.9 2.6
(32,141) 10,501 24.6 1,646 (5,402) (1,153) (4,025) (409) 1,157 2.7 (494) (8) 656 (264) (147) 245 0.6 0.1 0.1 (68.2) 24.6 2.7 0.6
(33,405) 8,173 19.7 2,714 (5,939) (1,296) (4,804) (297) (1,449) (3.5) (1,246) 56 (2,639) (358) (89) (3,086) (7.4) (0.9) (1.1) N/A 19.7 (3.5) (7.4)
42
AAC Technologies (2018 HK)
7 August 2013

Still a good bargain
24 July 2013
(upgrade from Neutral)
Upgrade to Outperform with HK$42.80 target price. We like AAC's leadership in acoustic components, its penetration of leading smartphone and tablet OEMs and its strong design-in capabilities. We see weakness ACC exhibited in 2Q13 and concerns over slowing high-end smartphone growth reflected in the recent 25% price correction from its peak. We upgrade our rating on AAC from Neutral to Outperform and raise our target price from HK$36.50 to HK$42.80. We cut our FY14 earnings forecast by 4.7% and roll over to a FY14F P/E valuation. Our new target price is based on 15x FY14F P/E. 2Q13 results underwhelming. AAC Technologies will report 2Q13 results on 16 August. We expect AACs sales revenue and net income to grow 40.4% and 34.2% YoY to RMB1.96b and RMB545m, in keeping with the markets lower expectations for the company. Despite slightly slower-than-expected 2Q13 sales momentum, AAC's penetration of Samsung Electronics (005930 KS, Not Rated) and leading China smartphone customers will underpin solid future performance. Still comfortable with our 37.3% sales growth forecast for FY13F. We look for sales growth of 37.3% YoY in FY13F driven by higher sales revenue from Samsung and leading China smartphone customers. We expect the wide- scale launch of new products from Apple (AAPL US, Not Rated) in late 3Q13F to benefit AAC in FY13F. In position to ride tablet adoption. AAC can take advantage of the mass adoption of tablets given its leading position in design-in acoustic solutions. Good traction penetrating leading tablet OEMs along with robust tablet unit growth will support sales growth at AAC in FY14F.
2011 2012 6,283 1,763 N/A 1.44 70.1 57.5 2.0 20.3 5.8 28.8 2013F 8,625 2,394 0.0 1.95 35.8 78.0 2.7 14.6 4.6 31.4 2014F 10,307 2,734 (4.7) 2.23 14.2 89.0 3.2 12.5 3.6 29.2 2015F 12,160 3,223 (4.7) 2.62 17.9 105.0 3.8 10.6 3.0 28.3
Price: Target:
HK$35.55 HK$42.80
(up from HK$36.50)
Trading data
52-week range Market capitalization (m) Shares outstanding (m) Free float (%) 3M average daily T/O (m share) 3M average daily T/O (US$m) Expected return (%) 1 year Price as at close on 24 July 2013 HK$20.10 47.95 HK$43,712/US$5,626 1,228 56.5 6.5 29.9 20.4

HK$ 48 44 40 36 32 28 24 20 16 12 8 Jan-10 Aug-10 Mar-11 AAC Oct-11 May-12 HSCEI (rebased) Dec-12 Jul-13
Source: Bloomberg

Year to 31 December Revenue (RMB m) 4,060 Net profit (RMB m) 1,036 Revision (%) N/A EPS (RMB) 0.84 YoY change (%) 5.0 DPS (RMB cents) 33.9 Dividend yield (%) 1.1 P/E (x) 35.4 P/B (x) 7.6 ROE (%) 21.5 Source: Company data, CCBIS estimates
Ronnie Ho (852) 2533 2486

Candy Tai
43
7 August 2013
AAC Technologies financial summary

Income statement
FYE 31 December (RMB m) Revenue Cost of revenue Gross profit Other income & gains Sell & distribution costs G&A expenses R&D expenses Operating profit Net interest income Associate Income Foreign exchange difference Disposal gain on associate Profit before tax Tax expense Minority interest Profit to shareholders EPS (RMB) EPS (HK$) 2011 2012 2013F 2014F 2015F 4,060 6,283 8,625 10,307 12,160 (2,275) (3,509) (4,818) (5,865) (6,919) 1,784 2,774 3,807 4,442 5,241 35 (137) (153) (358) 1,171 22 (19) (33) 0 1,142 (109) 3 1,036 0.84 1.00 57 (186) (277) (462) 1,905 4 26 45 35 2,016 (259) 6 1,763 1.44 1.75 45 (259) (371) (578) 2,644 5 55 31 0 2,735 (342) 1 2,394 1.95 2.44 50 (309) (443) (691) 3,049 10 65 0 0 3,124 (391) 0 2,734 2.23 2.85 55 (365) (523) (815) 3,594 15 75 0 0 3,684 (460) 0 3,223 2.62 3.37
Balance sheet
FYE 31 December (RMB m) Cash and bank balances Trade & bills receivable Prepayments & other receivables Inventories Other current assets Current assets PPT Intangible assets Interests in associates Other non-current assets Total non-current assets Trade and bills payable Other payables & accruals Short-term borrowings Other current liabilities Total current liabilities Total non-current liabilities Shareholders equity Minority interest Total equity 2011 1,374 1,219 268 559 5 3,425 2,697 162 182 248 3,289 636 262 891 97 1,887 16 4,750 61 4,811 2012 1,314 1,908 421 958 6 4,607 3,624 144 242 308 4,319 1,128 447 1,035 141 2,751 44 6,078 52 6,130 2013F 1,676 2,599 531 1,320 6 6,133 4,071 128 297 308 4,803 1,518 564 1,035 141 3,258 44 7,584 51 7,635 2014F 2,755 3,106 669 1,607 6 8,143 4,211 111 362 308 4,991 1,848 710 1,035 141 3,734 44 9,306 51 9,357 2015F 4,144 3,665 843 1,896 6 10,554 4,311 94 437 308 5,149 2,180 895 1,035 141 4,251 44 11,357 51 11,408
Cash flow
FYE 31 December (RMB m) Profit before tax Depreciation & amortization Change in working capital Other Operating cash flow Capex Other Investment cash flow Change in borrowings Other Financing cash flow 2011 1,142 259 (403) (53) 945 2012 2013F 2014F 2015F 2,016 343 (646) (177) 1,535 2,735 420 (657) (402) 2,096 (850) 20 (830) 3,124 477 (455) (466) 2,680 (600) 25 (575) 3,684 517 (504) (550) 3,146 (600) 30 (570)
Financial ratios
FYE 31 December (%) Profitability Gross margin Operating margin Net margin ROE Growth Sales revenue growth Operating income growth Net profit growth EPS growth Liquidity Net debt/equity 2011 44.0 28.8 25.5 21.5 2012 44.2 30.3 28.1 28.8 2013F 44.1 30.7 27.8 31.4 2014F 43.1 29.6 26.5 29.2 2015F 43.1 29.6 26.5 28.3
(1,040) (1,159) (279) (180) (1,319) (1,339) 427 (406) 21 191 (443) (251)
0 0 0 (903) (1,027) (1,187) (903) (1,027) (1,187) 1,078 0 1,676 2,755 1,389 0 2,755 4,144
21.2 8.1 5.0 5.0
54.8 62.7 70.1 70.1
37.3 38.8 35.8 35.8
19.5 15.3 14.2 14.2
18.0 17.9 17.9 17.9
Net cash Net cash Net cash Net cash Net cash
Change in cash (353) (56) 363 Effect of foreign exchange rate changes (8) (5) 0 Cash, beginning 1,735 1,374 1,314 Cash, ending 1,374 1,314 1,676 Source: Historical data from the company, CCBIS estimates
44
7 August 2013
AAC Technologies earnings revisions

Profit and loss (RMB m) Revenue Gross profit Opex Operating profit Net profit (%) Gross margin OPEX to sales OPM Net margin Source: CCBIS estimates 2013F 8,625 3,807 (1,208) 2,644 2,394 New 2014F 10,307 4,442 (1,443) 3,049 2,734 2015F 12,160 5,241 (1,702) 3,594 3,223 2013F 8,625 3,807 (1,208) 2,644 2,394 Previous 2014F 10,515 4,621 (1,462) 3,205 2,870 2015F 12,435 5,458 (1,728) 3,775 3,382 2013F 0.0 0.0 0.0 0.0 0.0 Change (%) 2014F (2.0) (3.9) (1.3) (4.9) (4.7) 2015F (2.2) (4.0) (1.5) (4.8) (4.7)
44.1 (14.0) 30.7 27.8
43.1 (14.0) 29.6 26.5
43.1 (14.0) 29.6 26.5
44.1 (14.0) 30.7 27.8
44.0 (13.9) 30.5 27.3
43.9 (13.9) 30.4 27.2
Greater China handset valuation matrix

Company Handset brands Lenovo ZTE HTC China Wireless TCL Average Stock code 992 HK 763 HK 2498 TT 2369 HK 2618 HK CCBIS rating Neutral Outperform Not Rated Not Rated Not Rated Share price* (HK$) 7.04 13.42 167.5 2.62 3.49 Market cap (US$m) 9,549 8,195 4,764 701 517 CY13F 6.9 N/A -50.8 40.4 N/A EPS growth (%) CY14F CY15F 18.4 25.6 46.5 26.9 612.8 N/A 26.2 7.6 55.1 71.3 CY13F 13.9 17.2 16.9 12.1 N/A 15.0 P/E (x) CY14F 11.7 13.4 11.5 9.6 10.4 11.3 CY15F N/A 10.7 10.7 6.2 6.1 8.4
Handset components and others MediaTek 2454 TT AAC 2018 HK Largan Precision 3008 TT FIH 2038 HK Unimicron Tech 3037 TT Spreadtrum SPRD US Truly International 732 HK Sunny Optical 2382 HK Merry Electronics 2439 TT Average * Price as at close on 24 July 2013 Source: Bloomberg, CCBIS estimates
Not Rated Outperform Not Rated Not Rated Not Rated Not Rated Not Rated Not Rated Not Rated
353.5 35.55 909 4.3 28.9 29.82 3.83 8.2 64.3
15,922 5,769 4,070 4,056 1,484 1,454 1,337 1,041 378
43.9 35.8 41.2 N/A 8.8 36.7 39.5 41.2 54.4
25.8 14.2 16.4 N/A 16.1 12.8 13.1 31.1 12.3
5.9 17.9 NA NA 5.6 4.9 33.3 31.7 N/A
19.0 14.6 15.5 N/A 11.8 10.9 10.7 13.2 15.2 13.9
15.1 12.5 13.3 N/A 10.2 9.7 9.5 10.1 13.6 11.7
14.3 10.6 NA NA 9.6 9.2 7.1 7.7 N/A 9.7
45
7 August 2013
AAC income statement

FYE 31 December (RMB m) Revenue Dynamic components Microphones Headsets Other Cost of revenue Gross profit Gross profit margin Other income & gains Sell and distribution costs G&A expenses R&D expenses Operating profit Operating margin Net interest income Associate income Foreign exchange difference Disposal gain on associate PBT Tax expense MI Profit to shareholders Net profit margin EPS (RMB) EPS (HK$) 2011 4,060 3,228 459 119 253 (2,275) 1,784 44.0 35 (137) (153) (358) 1,171 28.8 22 (19) (33) 0 1,142 (109) 3 1,036 25.5 0.84 1.00 2012 6,283 5,052 774 70 387 (3,509) 2,774 44.2 57 (186) (277) (462) 1,905 30.3 4 26 45 35 2,016 (259) 6 1,763 28.1 1.44 1.75 70.1 44.2 30.3 28.1 28.8 Net cash 2013F 8,625 6,720 1,199 98 608 (4,818) 3,807 44.1 45 (259) (371) (578) 2,644 30.7 5 55 31 0 2,735 (342) 1 2,394 27.8 1.95 2.44 35.8 44.1 30.7 27.8 31.4 Net cash 2014F 10,307 7,834 1,439 117 916 (5,865) 4,442 43.1 50 (309) (443) (691) 3,049 29.6 10 65 0 0 3,124 (391) 0 2,734 26.5 2.23 2.85 14.2 43.1 29.6 26.5 29.2 Net cash 2015F 12,160 9,181 1,655 141 1,183 (6,919) 5,241 43.1 55 (365) (523) (815) 3,594 29.6 15 75 0 0 3,684 (460) 0 3,223 26.5 2.62 3.37 17.9 43.1 29.6 26.5 28.3 Net cash (1,090) 814 42.7 16 (51) (82) (148) 549 28.8 (3) 10 31 0 587 (54) 1 534 28.0 0.43 0.54 69.9 42.7 28.8 28.0 (1,101) 861 43.9 10 (59) (69) (137) 606 30.9 3 10 0 0 619 (74) 0 545 27.8 0.44 0.55 34.2 43.9 30.9 27.8 (1,234) 973 44.1 10 (66) (84) (148) 685 31.1 3 10 0 0 698 (84) 0 615 27.8 0.50 0.63 29.9 44.1 31.1 27.8 (1,394) 1,158 45.4 9 (82) (137) (145) 804 31.5 2 25 0 0 830 (130) (0) 701 27.5 0.57 0.71 23.1 45.4 31.5 27.5 1Q13 1,905 2Q13F 1,962 3Q13F 2,207 4Q13F 2,552
EPS growth (%) 5.0 GPM (%) 44.0 OPM (%) 28.8 NPM (%) 25.5 ROE (%) 21.5 Net debt/equity (%) Net cash Source: Company data, CCBIS estimates
46
Lenovo Group (992 HK)
7 August 2013

Wait for a better entry point
2 July 2013
Company Rating: Neutral
(maintained)
Expect a solid 1QFY14. Lenovo will report 1QFY14 results in mid-August. We look for sales revenue of US$8.2b and net income of US$160m, up 2.1% and 12.9% YoY, respectively, and slightly below the Bloomberg consensus estimates. We expect its 1QFY14 OPM will show a 20bp increase from last year to 2.5% on improving smartphone profitability in China and better economies of scale from the PC division. Weak PC demand still the biggest overhang. Lenovos PC division did well in last year. The company has grown rapidly and is now the second-largest PC vendor globally. Despite this success, lackluster PC industry growth in 2013F and 2014F will weigh on the company's overall performance, in our view. For this reason we remain cautious on the stock and expect modest 2.4% PC shipment growth in FY14F. Encouraging traction in smart devices but not good enough. Lenovo has invested heavily in the Mobile Internet and Digital Home Business Group (MIDH) that develops smart-devices. MIDH smartphone and tablet shipments were up 3.7x or 74% YoY to 29.0m smartphone units and 2.2m tablet units in FY13. We expect the MIDH division to break even in FY14F, with 43.0m smartphone shipments and 8.0m tablet shipments. Maintain Neutral. We remain cautious on the overall PC market in view of faster-than-expected tablet cannibalization and slower replacement demand. We maintain our Neutral rating and HK$7.60 target price on Lenovo, still based on 15x forward P/E. We keep our FY14F/15F earnings estimates largely unchanged.
2012 2013 33,873 635 6.07 32.7 1.82 2.0 14.8 3.5 23.7 2014F 35,839 684 0.7 6.54 7.7 1.94 2.2 13.7 3.0 22.0 2015F 38,014 774 (3.8) 7.39 13.1 2.23 2.5 12.1 2.6 21.5 2016F 39,032 823 N/A 7.87 6.5 2.33 2.6 11.4 2.3 20.0
Price: Target:
HK$7.00 HK$7.60
(maintained)
Trading data
52-week range Market capitalization (m) Shares outstanding (m) Free float (%) 3M average daily T/O (m share) 3M average daily T/O (US$m) Expected return (%) 1 year Closing price on 2 July 2013 HK$5.35 9.07 HK$73,242/US$9,217 10,463 55.3 56.1 50.4 8.5

HK$ 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 Jan-10
Nov-10
Lenovo
Oct-11
Aug-12 HSCEI (rebased)
Jul-13
Source: Bloomberg

Year to 31 March Revenue (US$m) 29,574 Net profit (US$m) 473 Revision (%) EPS (US cent) 4.57 YoY change (%) 67.5 DPS (US cent) 1.31 Dividend yield (%) 1.5 P/E (x) 19.6 P/B (x) 3.9 ROE (%) 19.3 Source: Company data, CCBIS estimates
Ronnie Ho (852) 2533 2486

Candy Tai
47
7 August 2013
Lenovo Group financial summary

Income statement
FYE 31 March (US$m) Revenue Cost of revenue Gross profit Other income & gains Sell & distribution costs G&A expenses R&D expenses Other operating income/expenses Operating profit Net finance cost Associate Income Profit before tax Tax expense Minority interest Profit to shareholders EPS (US cent) EPS (HK cent) 2013 2014F 2015F 2016F 33,873 35,839 38,014 39,032 (29,800) (31,422) (33,262) (34,153) 4,074 4,417 4,752 4,879 20 (1,888) (847) (624) 65 800 2 (1) 801 (170) 4 635 6.07 47.35 0 (1,992) (897) (675) 20 872 8 0 880 (197) 0 684 6.54 50.97 0 (2,129) (950) (646) 0 1,026 5 0 1,031 (258) 0 774 7.39 57.66 0 (2,186) (976) (625) 0 1,093 5 0 1,098 (274) 0 823 7.87 61.38
Balance sheet
FYE 31 March (US$m) Cash & bank balances Trade & bill receivables Prepayment & other receivables Inventory Other current assets Current assets Property, plant & equipment Intangible assets Interests in associates Other non-current assets Total non-current assets Trade & bill payable Other payables & accruals Short-term borrowings Other current liabilities Total current liabilities Total non-current liabilities Shareholders equity Minority interest Total equity 2013 3,454 3,458 3,235 1,965 277 12,390 480 3,326 3 683 4,492 3,724 7,629 176 563 12,091 2,110 2,667 14 2,680 2014F 3,979 3,552 3,423 2,066 281 13,301 477 3,206 3 783 4,470 3,979 8,044 176 584 12,783 1,881 3,093 14 3,106 2015F 4,756 3,767 3,631 2,278 285 14,717 464 3,086 3 783 4,337 4,212 8,515 176 608 13,512 1,937 3,591 14 3,605 2016F 5,530 3,868 3,728 2,339 286 15,752 442 2,966 3 783 4,194 4,325 8,744 176 620 13,864 1,964 4,105 14 4,118
Cash flow
FYE 31 March (US$m) Profit before tax Depreciation & amortization Change in working capital Other Operating cash flow Capex Other Investment cash flow Change in borrowings Other Financing cash flow 2013 801 287 (823) (246) 20 (106) (139) (245) 229 (297) (68) 2014F 880 243 379 (248) 1,254 (100) (69) (169) (303) (258) (561) 2015F 1,031 253 146 (308) 1,122 (100) 30 (70) 0 (275) (275) 777 0 3,979 4,756 2016F 1,098 263 118 (324) 1,154 (100) 30 (70) 0 (310) (310) 774 0 4,756 5,530
Financial ratios
FYE 31 March (%) Profitability Gross margin Operating margin Net margin ROE Growth Sales revenue growth Operating income growth Net profit growth EPS growth Liquidity Net debt/equity (%) 2013 12.0 2.4 1.9 23.7 2014F 12.3 2.4 1.9 22.0 2015F 12.5 2.7 2.0 21.5 2016F 12.5 2.8 2.1 20.0
14.5 37.0 34.3 32.7
5.8 9.1 7.7 7.7
6.1 17.6 13.1 13.1
2.7 6.5 6.5 6.5
Net cash
Net cash
Net cash
Net cash
Change in cash (294) 525 Effect of foreign exchange rate changes (10) 0 Cash, beginning 3,758 3,454 Cash, ending 3,454 3,979 Source: Historical data from the company, forecasts by CCBIS
48
7 August 2013
Lenovo Group earnings revisions

US$m Revenue Gross profit Opex Operating profit Net profit 2014F 35,839 4,417 (3,565) 872 684 New 2015F 38,014 4,752 (3,725) 1,026 774 2016F 39,032 4,879 (3,786) 1,093 823 2014F 39,386 4,707 (3,781) 926 679 Previous 2015F 44,593 5,329 (4,236) 1,093 804 2016F N/A N/A N/A N/A N/A 2014F (9.0) (6.2) (5.7) (5.7) 0.7 % change 2015F (14.8) (10.8) (12.1) (6.1) (3.8) 2016F N/A N/A N/A N/A N/A
(%) Gross margin 12.3 OPEX to sales (9.9) Operating profit margin 2.4 Net margin 1.9 Source: Bloomberg, CCBIS estimate
12.5 (9.8) 2.7 2.0
12.5 (9.7) 2.8 2.1
12.0 (9.6) 2.4 1.7
12.0 (9.5) 2.5 1.8
N/A N/A N/A N/A
Lenovos record WW market share in 4QFY13: c.15.3%

16.5% 15.5% 14.5% 13.5% 12.5% 11.5% 10.5% 9.5% 8.5% 7.5%
Lenovos sales mix by product

US$m 10,500 9,000 7,500 6,000 4,500 3,000 1,500 0 55% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
1QFY12
2QFY12
3QFY12
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14F
2QFY14F
3QFY14F
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
2QFY11
3QFY11
4QFY11
1QFY12
2QFY12
3QFY12
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
Desktop
Notebook
Other
MIDH
Lenovo sales YoY
Source: IDC
Source: Company, CCBIS estimates
Lenovos latest smartphone K900
Lenovos latest notebook X1 Carbon
Source: Company
Source: Company
49
4QFY14F
7 August 2013
Technology company valuation matrix

Company PC brands Apple Hewlett-Packard Dell Lenovo Group Asustek Computer Acer Inc Average Notebook & related Hon Hai Precision Industry Quanta Computer Compal Electronics Pegatron Wistron Average Stock code AAPL US HPQ US DELL US 992 HK 2357 TT 2353 TT CCBIS rating Not Rated Not Rated Not Rated Neutral Not Rated Not Rated Share price* (local currency) 418.49 25.02 13.38 7.00 255.00 22.60 Market cap (US$m) 392,815 48,252 23,496 9,217 6,383 2,130 CY13F (11.4) N/A (25.9) 7.7 (0.4) NA EPS growth (%) CY14F CY15F 10.7 3.0 15.5 13.1 (1.1) 53.1 9.9 (2.5) (8.5) 6.5 3.6 18.6 CY13F 10.6 7.0 13.3 13.7 8.6 32.6 14.3 P/E (x) CY14F 9.6 6.8 11.5 12.1 8.7 21.3 11.7 CY15F 8.7 7.0 12.6 11.4 8.4 18.0 11.0
2317 TT 2382 TT 2324 TT 4938 TT 3231 TT
Not Rated Not Rated Not Rated Not Rated Not Rated
73.20 63.50 19.20 52.00 28.00
28,811 8,127 2,817 3,960 2,047
(2.2) (8.8) 15.5 67.5 6.2
12.0 10.4 13.1 23.3 8.9
4.3 7.4 11.0 14.9 15.1
9.3 11.6 11.3 11.5 8.6 10.5
8.3 10.5 10.0 9.3 7.9 9.2
8.0 9.8 9.0 8.1 6.9 8.3
Handset & related HTC 2498 TT ZTE 763 HK AAC Technologies 2018 HK Largan Precision 3008 TT Foxconn International 2038 HK Unimicron Technology 3037 TT China Wireless Tech 2369 HK TCL Communication Tech 2618 HK Average * Closing price as of 2 July 2013 Source: Bloomberg, CCBIS estimates
Not Rated Outperform Neutral Not Rated Not Rated Not Rated Not Rated Not Rated
207.50 12.58 43.75 953.00 4.18 29.00 2.90 3.65
5,879 7,200 6,756 4,251 3,959 1,484 739 540
(31.5) N/A 35.8 38.9 N/A 12.3 42.9 N/A
44.6 3.4 19.9 15.8 320.0 19.2 27.3 605.0
11.8 13.0 17.8 7.4 (66.7) 7.7 52.9 73.0
15.0 12.5 18.0 16.5 N/A 11.5 13.2 N/A 14.4
10.4 11.9 14.6 14.2 25.6 9.6 10.4 12.9 13.7
9.3 10.5 12.4 13.3 N/A 8.9 6.8 7.5 9.8
Risks: (1) Slower-than-expected PC sales in China; (2) intense price competition in developed and developing countries; and (3) larger-than-expected investment in the MIDH division.
50
7 August 2013
Lenovo Group income statement

FYE 31 March (US$m) Revenue Cost of revenue Gross profit Gross profit margin Other income & gains Sell & distribution costs G&A expenses R&D expenses Other operating income/expenses Operating profit Operating margin Net finance cost Associate income Profit before tax Tax expense Minority interest Profit to shareholders Net profit margin EPS (US cents) EPS (HK cents) 2012 29,574 (26,128) 3,446 11.7 1 (1,691) (730) (453) 11 584 2.0 (1) (1) 582 (107) (2) 473 1.6 4.6 35.7 2013 33,873 (29,800) 4,074 12.0 20 (1,888) (847) (624) 65 800 2.4 2 (1) 801 (170) 4 635 1.9 6.1 47.3 2014F 35,839 (31,422) 4,417 12.3 0 (1,992) (897) (675) 20 872 2.4 8 0 880 (197) 0 684 1.9 6.5 51.0 7.7 12.3 2.4 1.9 22.0 Net cash 2015F 38,014 (33,262) 4,752 12.5 0 (2,129) (950) (646) 0 1,026 2.7 5 0 1,031 (258) 0 774 2.0 7.4 57.7 13.1 12.5 2.7 2.0 21.5 Net cash 2016F 39,032 (34,153) 4,879 12.5 0 (2,186) (976) (625) 0 1,093 2.8 5 0 1,098 (274) 0 823 2.1 7.9 61.4 6.5 12.5 2.8 2.1 20.0 Net cash 1Q14F 8,181 (7,175) 1,006 12.3 0 (455) (198) (155) 5 203 2.5 2 0 205 (45) 0 160 2.0 1.52 11.89 14.7 12.3 2.5 2.0 2Q14F 9,103 (8,002) 1,101 12.1 0 (510) (208) (160) 5 228 2.5 2 0 230 (51) 0 179 2.0 1.71 13.37 10.5 12.1 2.5 2.0 3Q14F 10,053 (8,806) 1,247 12.4 0 (568) (244) (181) 5 259 2.6 2 0 261 (55) 0 206 2.0 1.97 15.35 0.6 12.4 2.6 2.0 4Q14F 8,502 (7,439) 1,063 12.5 0 (459) (247) (179) 5 183 2.2 2 0 185 (46) 0 139 1.6 1.33 10.36 9.5 12.5 2.2 1.6
EPS growth (%) 67.5 32.7 Gross profit margin (%) 11.7 12.0 Operating profit margin (%) 2.0 2.4 Net profit margin (%) 1.6 1.9 ROE (%) 19.3 23.7 Net debt/equity (%) Net cash Net cash Source: Historical data from the company, forecasts by CCBIS
51
China Smartphone
7 August 2013
Rating definitions
Outperform (O) expected return > 10% over the next twelve months Neutral (N) expected return between -10% and 10% over the next twelve months Underperform (U) expected return < -10% over the next twelve months
Analyst certification:
The authors of this report, hereby declare that: (i) all of the views expressed in this report accurately reflect their personal views about any and all of the subject securities or issuers; and (ii) no part of any of their compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this report; and (iii) they receive no insider information/non-public price-sensitive information in relation to the subject securities or issuers which may influence the recommendations made by them. The authors of this report further confirm that (i) neither they nor their respective associate(s) (as defined in the Code of Conduct issued by the Hong Kong Securities and Futures Commission) has dealt in or traded in the securities covered in this research report within 30 calendar days prior to the date of issue of the report; (ii) neither they nor their respective associate(s) serves as an officer of any of the Hong Kong listed companies covered in this report; and (iii) neither they nor their respective associate(s) has any financial interests in the securities covered in this report.
Disclaimers:
This report is prepared by CCB International Securities Limited. CCB International Securities Limited is a wholly owned subsidiary of CCB International (Holdings) Limited (CCBIH) and China Construction Bank Corporation (CCB). Information herein has been obtained from sources believed to be reliable but CCB International Securities Limited, its affiliates and/or subsidiaries (collectively CCBIS) do not warrant its completeness or accuracy or appropriateness for any purpose or any person whatsoever. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Investment involves risk and past performance is not indicative of future results. Information in this report is not intended to constitute or be construed as legal, financial, business, tax or any professional advice for any prospective investors and should not be relied upon in that regard. This report is for informational purposes only and should not be treated as an offer or solicitation for the purchase or sale of any products, investments, securities, trading strategies or financial instruments of any kind. Neither CCBIS nor any other persons accept any liability whatsoever for any loss arising from any use of this report or its contents or otherwise arising in connection therewith. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. The opinions and recommendations herein do not take into account prospective investors circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to any prospective investors. The recipients of this report shall be solely responsible for making their own independent investigation of the business, financial condition and prospects of companies referred to in this report. Readers are cautioned that actual results may differ materially from those set forth in any forward-looking statements herein. While all reasonable care has been taken to ensure that the facts stated herein are accurate and that the forward-looking statements, opinions and expectations contained herein are based on fair and reasonable assumptions, CCBIS has not been able to verify independently such facts or assumptions and CCBIS shall not be liable for the accuracy, completeness or correctness thereof and no representation or warranty is made, express or implied, in this regard. The recipients must make their own assessments of the relevance, accuracy and adequacy of the information contained in this report and make such independent investigation as they may consider necessary or appropriate for such purpose. 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The information contained herein may differ or be contrary to opinions expressed by other associates of CCBIS or other members of the CCBIH group of companies. CCBI has investment banking relationship with ZTE Corporation (763 HK) within the past 12 months. This report is for distribution only under such circumstances as may be permitted by applicable law. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. This report is not directed at you if CCBIS is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to you. You should satisfy yourself before reading it that CCBIS is permitted to provide research material concerning investments to you under relevant legislation and regulations. 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China/Hong Kong | TECHNOLOGY

China smartphone valuation matrix

Lenovo/ZTE/Coolpad/TCL price performance

Jun-12 Nov-12 China Wireless

465.25 1,222,000.00 4.06 74,100.00 9.57 150.00

422,678 160,918 15,205 10,841 5,016 4,263

(12.5) 74.4 N/A (332.1) (52.8) (85.4)

8.0 7.9 313.6 74.5 35.6 185.3

8.3 5.4 (8.8) 12.7 (38.2) (1.4)

11.9 6.1 N/A 16.2 N/A 51.0 21.3

11.0 5.6 58.9 9.3 N/A 17.9 20.5

10.2 5.3 64.6 8.2 N/A 18.1 21.3

China smartphone market in the fast lane

China smartphone market share (2012)

Source: IDC, CCBIS estimates

Source: iiMedia Research

Android OS and MTK solution lower entry barriers

Samsung and Apples differing fortunes in China

Local players recording record-high market shares

Improving R&D capabilities and economies of scale

China smartphone penetration rate

Chinas low smartphone penetration rate

Subsidies from the top-three operators

Percentage of 3G subscribers for CM/CU/CT

May-11 Sep-11 CU 3G subscribers

Jan-12 Jun-12 Oct-12 Feb-13 Jun-13 CT 3G subscribers CM 3G subscribers

Source: Company data

Source: Company data

Exports for local players the next growth driver

2013F worldwide smartphone share by market

YoY shipment growth (RHS)

4G LTE the next big thing

Source: China Mobile

Mobile devices about to take off

Chipsets, memory, displays are the big ticket items

Local component manufacturers are riding the mass adoption of smartphones

Acoustic players benefit from better sound quality requirements

Cameras players benefit from higher pixel migration requirement

Display players benefit from bigger screen requirements

From off-line retail channel to on-line e-purchases

Smartphone purchase plan by channel

20% 15% 10% 5% 9.6%

Both handset and handset component

None of them 2011

Only handset 2013

Only handset component

China smartphone model comparison

ZTE price performance since 2012

Aug-12 Lenovo (LHS)

Dec-12 Apr-13 HSCEI (RHS)

AAC price performance since 2012

Sunny Optical price performance since 2012

TCL Communication price performance since 2012

China Wireless price performance since 2012

Aug-12 TCL (LHS)

Dec-12 Apr-13 HSCEI (RHS)

Aug-12 Dec-12 China Wireless (LHS)

TCL Communication (2618 HK)

TCL Communication (2618 HK)

Company Rating: Outperform

Stock price vs. HSCEI

3 2 1 Jan-10 Sep-10 Jun-11 TCL Feb-12 HSCEI (rebased) Nov-12 Aug-13

Forecasts and valuation

TCL Communication (2618 HK)