1H15 earnings guidance beat market expectation
Strength of Chinese customer base offsets weakness in international customers
Maintain Buy rating with a TP of HKD5.5 (from HKD5.4)
1H15 earnings guidance beat market expectations.FIH Mobile preannounced post market close today that its 1H15 earnings will grow 141-171% YoY to USD120-135mn. This is 2-14% /6-20%% higher than our and consensus estimates, respectively. The company indicates the upside in net profit is mainly derived from 1) higher sales, which will exceed USD3.75bn (up more than 64% YoY), 2) stable gross margin (c6% in 1H15 vs. 6.2% in 1H14), 3) less asset impairment loss (down 72% YoY to USD5mn in 1H15 after the completion of downsizing its India factory in 2014), and 4) lower income tax rate (which is expected to be lower than 25% in 1H15 vs. 44% in 1H14).
Strength of Chinese customer base offsets weakness in international customers.We believe the better than expected 1H15 earnings outlook is mainly due to stronger than expected shipment of FIH’s Chinese customers. According to Commercial Times news on on June 10th, Huawei's (not listed) smartphone shipment has exceeded 10mn units in May, higher than the average of 6-7mn units per month last year. In addition to Huawei, FIH Mobile also started to work with some fast growing Chinese brands Oppo (not listed) and Meizu (not listed) in late 4Q14. We expectFIH Mobile Chinese customers will grow 50% YoY to account for 47% of its sales in FY15 from 36% in FY14.
Valuation and risks.We revise up of FY15e/FY16e/FY17e EPS by 8%/2%/4% to factor in the better than expected 1H15 guidance and lower tax rates. Our target price of HKD5.5 (up from HKD5.4 on forecast revisions) is based on 1.3x FY15e BVPS, or 18x the average of FY15e and FY16e earnings. Downside risks include weaker-than-expected demand from existing customers and a cancellation of new projects.