hat’s new: Yesterday, Comba Telecom (2342.HK) released profit warning that the company is expected to record a loss for 2012. The company also stated that it may not be able to fulfill two of the financial covenants under Facility Agreement and has applied to the Lenders for the relevant waivers.
Profit warning & high GPM pressure in-line with expectation: We estimate the company will post a loss of HKD 30M on sluggish revenue growth of 1.6% YoY. Comba has attributed the loss to a GPM contraction (due to inflation, increased competition and disappointing sales for new products), a surge in opex (global market expansion), and an inventory write-off and other asset impairment. We believe it will take some time for the company to implement stringent cost controls and downsizing as new businesses still need R&D and marketing investment.
The company also announced that it may not be able to fulfill two financial covenants in relation to a USD 210M loan facility. It has applied to the lenders for the relevant waivers and does not expect this mean any material negative effects, even if the lenders demand immediate repayment of the outstanding amount and related interests.2013 Outlook: We expect a moderate recovery in its wireless enhancement business on the back of its 3G business and a gradual pick-up in IB-WAS. This should lead to a mild recovery in GPM over the long term, although we expect margin pressure to persist into 1H13. The potential acceleration in LTE deployment may also benefit the company’s antenna business. Overall, we believe its business is on track and forecast revenue growth of 10.7% YoY in 2013.
We maintain our 2012/13/14 EPS forecasts of HKD -0.20/0.17/0.24 and TP of HK$2.50. The company is currently trading at 16.5x 13E PE. We believe weak 2012 earnings as well as a possible earnings recovery and favorable IB-WAS development have been largely priced in. We maintain our Neutral rating.
Short-term catalyst: We expect capex guidance from telecos, especially CM, to surprise on the upside, which is likely to boost market sentiment.