Low earnings visibility; maintain HOLD. Comba reported a net loss of HKD202m for FY12 compared with a net profit of HKD659m for FY11. Management explained that the net loss was due to the tighter operator capex controls and the exceptional expense of HKD146m being the 2H12 inventory write-off. Given that the operators are looking for cost-effective solutions for network ro llout and optimization, Comba is changing its strategy to focus on cost effective network products which enhance capacity and extend coverage of the operators' wireless networks. Revenue from PRC telcos accounted for 82% of total revenues in FY12 and only China Mobile is raising its capex for 4G network development in FY13F so we believe the tougher capex environment to continue in FY13F-15F. Nevertheless, we believe management will still improve earnings with effective cost controls. We keep our HOLD rating unchanged with a new target price of HKD3.00, based on 11x FY14F PER, inline with peers' average.
Revenue growth unlikely to be inspiring. Since PRC telcos are experiencing low 3G network utilization and downward mobile ARPU trends, China Unicom plans to gradually develop the LTE network while China Mobile is looking for cost-effective solutions to develop the 4G TD LTE network. Therefore, we expect that China Mobile will support most of Comba’s revenue growth alone.
Net loss narrowed in 2H12. 2H12 net loss narrowed to HKD41m from HKD161m in 1H12 due to lower R&D expenses. Management demonstrated a cost effective small cell wireless network product during the analyst briefing and expressed confidence that such product would provide better capacity enhancement and coverage expansion solutions for the PRC telcos. Given that m anagement is changing its product strategy to provide stable revenue and gross profit margin, we anticipate a corresponding turnaround of earnings in FY13F. However, we do not expect higher operating leverage to be achieved in FY14F-15F since we expect GP margin to drop YoY.