From an EMS to a total solution provider
China smartphone weakness is well anticipated, but FIH is confident ofdelivering high double-digit YoY EPS growth in 2015 in view of: 1) its strongclient portfolio, 2) rising metal casing adoption in high-end China smartphones,and 3) strong demand for made-in-India devices (due to import tariff hike).Reiterate Buy.
Doing the right thing at the right time
FIH targets to see a high doubt-digit YoY earnings increase in 2015, thanks to1) robust metal casing/assembling orders from Huawei and Xiaomi, 2)persistent casing orders win from premium Chinese brands (example OPPO,Meizu, and Meitu), and 3) initial take-off of its India business. Despite aslowing China smartphone demand, FIH expects the company to outgrow theindustry, as its key Chinese clients are market-share winners with highcost/performance devices. It estimates handset components will account for25-30% of 2015 revenue, while the majority of contribution will come frommetal casing. As such, FIH is embarking on an aggressive metal casingcapacity expansion drive (70% of 2015 capex will be spent on machineprocurement), riding on the positive trend of the accelerating metal casingadoption in China.
Discovering new continent
The Indian government lifted import tariff tax from 6.5% to 12.5% earlier thisyear. We view FIH as a major beneficiary of this policy change. The hike intariff could increase handset BOM cost by 8-10%. Smartphone brands areseeking help from global EMS firms with a local presence. FIH has been inIndia for years (the Chennai plant for Nokia) and enjoys first-mover advantages.It was able to set up a new assembly plant with three months to cater to newclients (Asustek/Xiaomi in our view) and shipment began in July. Monthlycapacity is ~1mn units now. Management estimates sales from India willaccount for 5-10% of total revenue in 2H15. The Indian smartphone market isdominated by low-end models (sub-USD100 phones account for 50%+ ofmarket share), but FIH anticipates a strong replacement cycle ahead for midendphones in the years ahead. FIH believes its client list in India will expandrapidly, so it will keep expanding its assembly lines in India.
Valuation, catalysts and investment risks
Our target price of HKD5.2 is derived from ROE-PB (ROE of 7.7%, COE of 6.6%,perpetual growth of 2%). Key downside risks include USD depreciation, pricewar, and market share loss.