An over-sold high-quality name
FIH's shares have underperformed the market by 22% over the past threemonths, due to concerns over Sony likely cutting ODM orders and weakness inthe China smartphone market. Sony smartphones losing share is welldocumented. Sony cutting orders should have been built into analysts'earnings models. The China slowdown is indeed worse than we expected.However, we think it has been priced in, as FIH is trading at sub-9x P/E, withnet cash taking up 67% of market cap. Retaining Buy.
2H15 preview: results dampened by weak sales of Xiaomi high-end phones
We trim our FIH 2H15 net profit estimate by 18% to USD139mn (+17% YoY;+7% HoH) and sales estimate by 7% to USD4.1bn (-9% YoY; +8% HoH), toreflect slowing growth from Chinese smartphone brands (especially Xiaomi).Xiaomi accounts for 15%-20% of FIH sales but ~50% of its EPS. Our industrycheck indicates Xiaomi’s smartphone shipment could only reach ~35mn in2H15, flat HoH (vs. the market expectation of 40mn-45mn). Sales of Mi series(Xaiomi’s high-end phones) are particularly weak, due to competition (fromHuawei, Oppo and vivo) and the delay of Mi5 launch (from 2H15 to 1Q16).FIH’s EPS is very sensitive to Mi phones, as it is the sole source for Mi phones’metal casings (USD30+ ASP). Order flows from Huawei and other Chineseclients have slowed down too, due to inventory adjustment or demand issues.
1H16 outlook: reviving Mi phone, metal casing, and India to offset weak Sony
1H tends to be the industry’s slow season, and Sony orders could continue tosink. However, we expect FIH to post 10% HoH EPS growth in 1H16, due to 1)reviving Mi phone momentum – Xiaomi could launch two high-end phones(Mi5/Mi Note 2) in 1H16, vs. only one model (Mi Note) in the whole of 2015, 2)a rising contribution from metal casings – all new Mi phones will continue toadopt unibody metal casings (made by FIH Mobile) and other Chinese clientscould launch more metal casing models too, 3) China smartphone shipment islikely to slightly recover (with inventory digestion coming to an end), and 4)rising smartphone assembly (for Chinese and Indian clients) business in India(which helps clients save the hefty import tax).
Valuation and investment risks
We trim our 2015-17 EPS forecasts by 10%-12%, to reflect Sony market shareloss and decelerated China smartphone growth. We accordingly trim our TPfrom HKD5.2 to HKD4.6, based on 12x 2016 EPS (in line with regional peers).Downside risks include USD depreciation, a price war, and market share loss.