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FIH MOBILE LIMITED ALERT(2038.HK):STRONG RESULTS POSITIVE OUTLOOK AND EMERGING OPPORTUNITIES FROM INDIA

德意志银行股份有限公司2015-08-13
Solid 1H15 results, in line with our Street-high estimate
FIH reported 1H15 net profit of USD130mn (+160% YoY; +9% HoH) andoperating profit of USD178mn (+59% YoY; -17% HoH) on sales of USD3.8 bn(+68% YoY;-16% HoH). Net profit and sales are largely in line with our Streethighestimate, but beat Bloomberg consensus by 10%/12% respectively. FIHMobile attributed stellar results to strong orders from Chinese clients (Xiaomi,Huawei, Meizu, Oppo, etc) and rising adoption of metal casings.
Strong HoH growth for 2H15, driven by Chinese clients
FIH expects 2H15 sales to post single digit YoY growth (i.e. 20%+ HoHgrowth), largely driven by Chinese clients. FIH Mobile expects Sonysmartphone (25%-30% of sales) could increase slightly HoH, due to new modellaunch (we expect to be Xperia M4 Aqua, a mid-end model), while Motorolasmartphone (~15% of sales) could decline slightly HoH, given the agingportfolio (FIH makes low-end models for Motorola). Slowing momentum forChina smartphone is well documented, due to market saturation and highchannel inventory. Despite so, FIH Mobile expect to see meaningful HoH salesgrowth from Chinese clients, due to 1) its key clients are gaining market shares,2) metal casing adoption continue to rise in China, and 3) FIH is winning morenew projects from Xiaomi, Huawei, Oppo, Meizu, and etc. FIH Mobile expects2H15 GPM to fall in 6.0%-6.2%, up slightly from 5.9% in 1H15, due to betterproduct mix and better production scale.
Overseas expansion and increasing capex
FIH is positive on the India expansion plan in long run. FIH is the firstsmartphone EMS/ODM firm that set up multiple plants in India to provide localproduction service (that helps clients to save tariff). FIH has secured ordersfrom several clients (Xiaomi, Infocus, Micromax, etc) and its India plants willstart mass production in 2H15. Sales contribution could be small (~3%) initially,but will gradually trend up in coming years. FIH expects capex to reachUSD180mn, up 28% YoY. 30%/70% of capex is for capacity maintenance/newexpansion. Most of new expansion will concentrate on CNC machine and otherequipment for metal casings.
Valuation, catalysts and investment risks
We maintain our EPS forecasts and TP unchanged, given 1H15 result and2H15 outlook are largely in line with our estimates. Our TP of HKD5.2 isderived from ROE-PB (ROE of 7.7%, COE of 6.6%, perpetual growth of 2%).Key share price catalysts include rising metal casing contribution andcontinued market share margin expansion in 2014. Key downside risks includeUSD depreciation, price war, and market share loss.

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