Reiterating Buy on high exposure to Xiaomi, and margin upside
FIH has the highest sales/EPS exposure to Xiaomi in our coverage universe, set to benefit from Xiaomi’s strong growth. Xiaomi recently raised its 2014 smartphone shipment target from 40m to 60m (vs. 18m in 2013), owing to the huge success of the Hongmi series. Our industry study suggests that shipments could actually reach as high as 70m, and FIH could achieve 50-60% of order allocation (up from 40-50% in 2013). We estimate Xiaomi could account for 17-20% of FIH sales and 40-45% of FIH EPS in 2014. For Xiaomi business, FIH doesn’t book consigned components as sales. As such, the gross margin is higher but ASP is lower, compared to other businesses.
Other near-term catalysts – Amazon and Smartisan
Foreign media reported that Amazon will debut its first smartphone on 18 June. The phone, made by FIH, could feature a 3D display and multiple cameras to capture user gestures or take 3D images. Separately, Smartisan, a China-based Android ROM/UI developer, unveiled a T1 Android phone on 20 May. T1 offers a top notch hardware spec, at a deep discount to comparable devices from global brands. The technology background of Smartisan is similar to that of Xiaomi and Meizu. Their RD teams mainly focus on developing customized Android ROM/UI, leaving the hardware manufacturing to FIH. We estimate Amazon and Smartisan will account for ~7% and ~2% of FIH sales in 2H14.
Long-term growth drivers – internet companies and mobile operators
For the long run, we expect the market share winners of low-end smartphones will be companies that don’t want to make money from hardware – internet companies and mobile operators. Their business models treat the smartphone as a pure carrier to promote their services, so they can heavily subsidize the hardware and sell it at low price. Neither type of company has factories or hardware RD teams. As the leading global handset EMS/ODM company, FIH is in a good position to take a lion’s share in outsourcing orders from these firms.
Valuation and investment risks
We raise our 2014/15/16 EPS forecasts by 24%/14%/13% to reflect upsides from Xiaomi and other clients. We derive our target price of HKD5.8 using ROE-PB methodology (COE of 6.7%, ROE of 8.5%). Downside risks: USD depreciation, price cuts from competitors, and market share loss.