Key takeaways from results. Comba reported FY12 results on 22 March after market close.
Revenue came in 2.7% below consensus and a net loss of HKD216m represents HKD89m downside to consensus of a HKD127m net loss. FY12 revenue stayed flat as 30% y-o-y growth in network services revenue was offset by a 36% y-o-y decline in wireless enhancement business. Network service (43.5% of FY12 revenue) has replaced wireless enhancement as the largest revenue contributo r. The IB-WAS (Indoor Broadband- Wireless Access System) product has yet to generate a meaningful revenue contribution. Lack of operating leverage (i.e. flat revenue vs. 11% grow th in SGA) and loss of high-margin wireless enhancement revenue are key reasons for its FY12 loss, in our view.
Strategy & earnings outlook. Our previous call on Comba was wrong because we have been under-estimating the structural challenges associated with a changing product cycle/mix and over-estimated their competitive/technology advantage. Comba is very dependent on China – 82% of revenues from the big three telcos with 52% from China Mobile (941 HK, OW, TP HKD 100, current price: HKD81.85). Comba continues to report sharp declines in the core wireless enhancement business (revenues down 35% YoY), highlights a large number of exceptional cost items (HKD238m in FY12 vs HKD140m in FY11), and provides almost no guidance on when CM will actually invest in IB-VAS. Based on these results and guidance, we cut our FY13/14 revenue forecast by 10% and our FY13/14 EPS by c.30%. We are 10% below FY13e earnings consensus and see no structural catalyst in FY13.
Valuation & risks. We downgrade from OW(V) to Neutral (V), shift from a PE- to DCF-based valuation given the lack of earnings visibility and set a new TP of HKD3.2, equivalent to a price to sales of 0.55x. A key upside risk is a big contract announcement from CM on IB-WAS and the key downside risk is continued margin pressure