Net profit 182% YoY lower than expectation
FIH Mobile reported 1H14 net profit of US$50mn (182% YoY) on sales of US$2.28bn (-7.8% YoY). We believe the results support our view of the company's fundamental turnaround. But we recognize the degree of growth missed our estimates/Street expectations, owing to weak Sony ODM orders. Despite strong Xiaomi orders, the top line missed CICC/Bloomberg consensus by 14%/7%, due to order cuts from Sony (the largest client, 39% of 2013 sales), while bottom-line missed by 36%/19%, due to high fixed costs/expenses.
Trends to watch
We estimate higher sales with increasing OPM in 2H14 due to greater demand for Chinese 4G smartphones. Strong demand from Chinese brands such as Xiaomi and Huawei, and a better product mix towards mechanical parts will help FIH increase sales in 2H14.
Xiaomi should remain the major growth driver through 2015. We expect FIH Mobile to maintain its dominant position in Xiaomi's order allocation. We assume Xiaomi's contribution to be around 40mn and 64mn units in 2014e/15e (or around 55~60% order allocation from Xiaomi) for both assembly and casing businesses.
Margin upside to continue. We expect to see further upside in ASP and gross margin from Chinese customers, due to strong casing demand for different materials and surface treatment technologies.
Expansion into other EMs is slower than our expectation, and contribution from Amazon and Blackberry should remain minimal.
Earnings revisions
We revise down our 2014 sales by 12.8%, but raise our gross margin forecast from 5.2% to 6.3% for better customer mix, more revenue contribution from high margin casing/mechanic components.
Valuation and recommendation
We slightly cut our TP from HK$6.36 to HK$6.22, taking into consideration lower revenue and higher margin, the new TP is based on 1.53x P/B multiple. Risks: Pricing pressure from end customers; unstable tier-2 customer orders.