News
On Jan 31 after the market close, Comba issued a profit warning of a netloss for FY13, below our expectation of a slight profit (HK$14mn). Combaattributed the loss to a GM drop on cost inflation/competition/low newproduct sales, surging sales expenses, and inventory write-offs/assetimpairment. Comba also announced it might fail to fulfill two financialcovenants which would constitute a default on a US$210mn loan. Thecompany has applied to its lenders for the relevant waivers.
Analysis
Overall we don’t see the loss itself as too surprising considering mutedcapex in 2H12 and its high operational leverage. We believe the marketfocus may have shifted to opportunities in 2013 in the upcomingLTE cycle, on which we hold a conservative view. 1) We expect amild GM recovery for 2013 after cost control and write-offs in FY12.However, we expect GM to decline again in 2014E/15E, even further fromits pre-2012 range of 35%-40%, as we do not expect improvement, if any, inthe DMS/WLAN and service sectors (39.4% of total revenues in 1H12) tooffset pressure in the enhancement/antenna sectors (60.6%). 2) Althoughwe believe some business lines (some of enhancement, and DMS/WLAN)could benefit from LTE capex, we don’t expect it to happen in 2013 asindoor coverage is normally a late cycle focus and will be 6-18 month laterthan the main network builds. Antenna could be an exception, but themargin contribution would be very limited due to fierce competition. 3) Foranother market focus, Femtocell, we still don’t expect 2013 to be amilestone year due to a lack of business models. 4) For the loan default,Comba doesn’t expect material impact on its financial position even if thelenders ask for immediate repayment. We will watch for developments onthe issue.
Implications
We place our TP and estimates under review pending more details fromthe company.
INVESTMENT LIST MEMBERSHIP
Neutral