Disappointed interim result. Interim revenue increased 1.8% YoY but gross profit dropped by 25.6% YoY due to inflated material and labor costs and delay in revenue recognition of wireless enhancement projects for 1H12. As a result, a net loss of HKD161m was reported in 1H12 vs a gain of HKD317m in 1H11 or HKD342m in 2H11.
Management anticipated 2H12F earnings to turn around.
Management said the amount of inventories on site increased by 28% YoY to HKD1.4b (as a % of total sa les, the amount increased from 44% in 1H11 to 55% in 1H12). As they ta rgeted to convert more inventories on site into revenue for 2H12F, the management was confident to achieve a net profit in 2H12F vs. a net loss in 1H12.
Downsizing. Amid the global and PRC economic uncertainties, the management planned to cut the number of its staffs in 2H12F (most of the lay-off staffs would be assist ants). Therefore, the management is looking for OPEX impr ovement in FY13F.
Not too optimistic this time. We previously estimated Comba to regain its earnings growth momentum in FY12F after it reported 9% YoY drop in its FY11 net profit due to increased R&D and S&D expenses. As we see Comba’s revenue from China Mobile (its largest customer) retreated 6.9% YoY in 1H12 while gross profit margin dropped significantly and its R&D expense increased substantially, we became more cautious on its FY13F earnings outlook.
Cut TP to HKD2.40. We cut our earnings estimates for FY12F/13F on lower profit margin assumption and set our new target price at HKD2.40 based on 9.1x FY13F PER, which is in line with its peers, compared to our previous 11.6x PER. We believe recent share price strength has factored in the earnings turnaround prospect in 2H12F. However, its FY13F earnings outlook becomes gloomier because management planed downsizing. Catalyst: Sales growth regained on 4G service roll-out in China in 2H13F. Risk: Higher pr icing pressure from PRC telcos.