Investment highlights
Comba (2342.HK) released FY 12 results and recorded a huge loss of HK$202.4M (vs. net profit of HK$659.1M in 2011) on revenue decline of 0.3% YoY. The loss was mainly due to 1) a significant decline of GPM by 11.1ppt to 25.5%, due to revenue mix changes2) an increase in opex by 10% YoY. In 2H12, the loss was narrowed down to HK$41.4M (vs. loss of 161.0M in 1H12), due to stringent cost control but still worse than market consensus even after its profit warning, due to sluggish top-line growth (1.8% YoY in 1H12 vs. -1.8% in 2H12) and worsening GPM (27.8% in 1H12 vs. 24.0% in 2H12).
Sluggish revenue growth & GPM decline mainly due to CM’s large cut on GSM: Revenue from CM declined by 7.5%YoYhigh-GPM wireless enhancement revenue declined by 35.6% YoY. CM’s shifted capex focus from GSM to TD-SCDMA in FY12this has largely affected Comba’s wireless enhancement business. This together with intensified market competition on other business led to a slash in GPM. Opex ratios declined by 10.7ppt HoH and 1.7%ppt YoY in 2H12, showing gradual improvement on efficiency. The mgmt expect a continuation of the cost-saving program to improve efficiency and new products developments to bolster margins. Meanwhile, with the opportunities from new initiatives, we believe the company would have to investment on R&D and marketing promotions.
Cautiously optimistic 13 outlooks: Overall, we expect a mild recovery of GPM with the increase in wireless enhancement and potential ramp-up of new businessbut pressure is still likely to persist and we expect GPM to stay below 30% during 2013-14. The upcoming TD-LTE opportunity would benefit its antennas business, but margin contribution is quite limited as this is mature business with high competition & pricing pressurewireless enhancement is expected to see mild recovery with the accelerating 3G migration and growing data trafficIB-WAS is expected to see more meaningful contribution since late 13, but IB-WAS is also likely to see fierce competition in the future and we will watch close with the development.
2013-15 earnings forecasts are HK$0.15/0.20/0.25. The company’s currently trading at 18x 13PEmarket may have factored in its weak FY12 earnings and shifted focus on IB WAS opportunities and benefits from TD-LTE investment, which we relatively conservative on the effects on Comba’s earnings recovery. We maintain Neutral rating. TP is slightly cut from HK$2.5 to HK$2.3. Catalyst: Faster-than-expected ramp-up of IB-WAS businessearlier-than-expected issuance of 4G license.
Risks: further slowdown in demand of wireless enhancementstagnant progress of IB-WAS deploymentfierce competition