Action
We upgrade our rating of FIH Mobile from BUY to Conviction BUY.
Reasoning
Positive earnings alert. On June 24, FIH Mobile announced a profit alert with 1H15 NP expected to be US$120~135mn, representing growth of 141%~171% YoY (1H14: US$49.84mn).
Upside from Huawei & Meizu’s high-end momentum. FIH
Mobile’s higher-than-expected earnings mainly reflect stronger component sales (mostly driven by metal casing) from Chinese smartphone OEMs. FIH Mobile should expand margins further ontop of moderate sales growth due to product mix upgrade through higher value content in metal casings. Its broadening clientele should also offset the shortfall from global smartphone OEMs and domestic OEMs which are losing market share.
Huawei is key growth driver in 2015e. Huawei managed to gain share in the smartphone market thanks to its improving brand awareness and upgraded product offerings supported by in-house chipsets and its new channel strategy . Huawei was the only Chinese OEM to enlarge its share in the >US$500 segment in 1Q15. FIH Mobile had been increasing its metal casing share in Huawei since 4Q14, and we estimate Huawei will account for around 15%/18% of FIH Mobile’s revenue in 2015/16e.
Earnings forecast and valuation
We raise 2015e net profit/EPS by 15.3% to US$256mn/US$0.033due to the reduction of income tax. Thinking of metal casings as a near-term earnings driver and India manufacturing as a medium-term sustainable opportunity , we upgrade from BUY to Conviction BUY and maintain our TP of HK$6.22, based on 1.45x/1.43x of 2015/16e BVPS
Risks
Share loss at its major customers