Technology│Hong Kong│Equity research│January 5, 2016 Sector Note │ Alpha series IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN THE UNITED STATES IT IS DISTRIBUTED BY CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH. CIMB Securities Limited has had an investment banking relationship with Cowell e Holdings Inc within the preceding 12 months. Powered by EFA Technology - Handsets Chinese vendors pursue quality over quantity ■ Hong Kong-listed components manufacturers with strong Chinese customer bases, such as AAC Tech, Tongda Group and Sunny Optical, will be the clear winners, in our view. ■ Top-tier Chinese vendors should still gain market share in China and globally. ■ Huawei and Xiaomi will lead shipment growth in domestic brands, we forecast. We estimate the top ten vendors’ shipments to increase 24% yoy to 703m units in 2016. ■ Gross margin should be protected by significant specification upgrades for smartphones. ■ Maintain sector Overweight. Top picks are AAC Tech, Tongda Group and Sunny Optical. Components manufacturers are the key beneficiaries We stay positive on Hong Kong-listed component manufacturers that have strong Chinese customer bases, such as AAC Tech (2018 HK, Add), Tongda Group (698 HK, Add) and Sunny Optical (2382 HK, Add). We believe that they will be the key beneficiaries of the new round of hardware upgrade cycle due to 1) dominant supply chain status, 2) above industry- average smartphone shipment growth from their customers, and 3) the ability to elevate the value of their components, with stable gross margins. Top-tier Chinese vendors continue gaining market share Seven Chinese vendors tapped into the top 10 global smartphone market and captured over 31% of the global smartphone market in 3Q15. In our view, the top-tier Chinese brands will continue gaining market share in the next couple of years (2016 - 17) due to their competitive affordable smartphone offerings for China and emerging markets. Huawei and Xiaomi to lead growth in Chinese brands We estimate smartphone shipments from the top 10 Chinese vendors will increase 24% yoy to 703m units in 2016 led by Huawei’s (25% yoy) and Xiaomi’s (33% yoy) robust shipment growth. Global market intelligence firm IDC expects global smartphone shipments to grow c.5% yoy to approximately 1.5bn units in 2016. Gross margin is protected Thanks to the fierce competition in the Chinese market, domestic brands have widely adopted high-end components such as metal casings, high-resolution cameras (with added functions), high-quality speaker boxes, haptics and ‘phablet’ size screens in an attempt to differentiate their smartphones. In our view, this trend should lead to a steady rise in component value for the key suppliers. Outperformance expected to continue AAC Tech’s share price rose 24% while Sunny Optical’s advanced 35% and Tongda Group’s went up 53% in 2015 due to strong earnings growth and the bright industry outlook. We believe that the share price momentum will continue in 2016 as the latest hardware upgrade cycle just took place, even in the sub-Rmb1,000 (US$150) segment. Maintain Overweight on China smartphone sector We stay Overweight on China’s smartphone sector; our top picks are AAC Tech, Tongda Group and Sunny Optical. AAC Tech will benefit, in our view, from the new product launches for Apple and strong sales growth prospects for the Chinese brands. Tongda, in our view, is set to benefit from the rising metal casing demand from Huawei and Xiaomi. Sunny Optical is moving up the value chain to being an upstream smartphone and automotive optical components manufacturer. [ X ] Figure 1: Selected component manufacturers’ share price movements (2013 - 2015) SOURCES: CIMB, BLOOMBERG ▎Hong Kong Overweight (no change) Highlighted companies AAC Technologies ADD, TP HK$65.00, HK$49.80 close AAC Tech has a promising new product pipeline for Apple (haptics and speaker box upgrades) and strong sales growth prospects for the Chinese brands (acoustics upgrades and RF/mechanical project wins). Sunny Optical Technology (Group) ADD, TP HK$21.40, HK$17.70 close Sunny Optical is a key beneficiary from significant camera upgrades in Chinese vendors. Rapid growth in handset lens sets and vehicle lens sets help it move up to become an upstream optical component manufacturer. Tongda Group Holdings Ltd ADD, TP HK$2.00, HK$1.34 close Tongda is a beneficiary of rising metal casing penetration among leading Chinese brands, especially Huawei, Xiaomi, Oppo and QiKU. Summary valuation metrics Analysts Ray KWOK T (852) 2532 1113 E [email protected]Bertram LAI T (852) 2532 1111 E [email protected]Felix PAN T (886) 2 8729 8386 E [email protected]42% 51% 40% 13% 81% 81% 24% 35% 53% 0% 20% 40% 60% 80% 100% AAC Tech Sunny Optical Tongda Group Share price movement (%) 2013 2014 2015 P/E (x) Dec-15F Dec-16F Dec-17F AAC Technologies 16.73 13.67 11.98 Sunny Optical Technology (Group) 21.85 16.50 13.60 Tongda Group Holdings Ltd 10.43 8.07 6.68 P/BV (x) Dec-15F Dec-16F Dec-17F AAC Technologies 4.90 4.07 3.43 Sunny Optical Technology (Group) 3.26 2.39 1.85 Tongda Group Holdings Ltd 1.78 1.50 1.31 Dividend Yield Dec-15F Dec-16F Dec-17F AAC Technologies 2.49% 3.05% 3.48% Sunny Optical Technology (Group) 1.34% 1.78% 2.15% Tongda Group Holdings Ltd 2.88% 3.72% 4.49%
IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN THE UNITED STATES IT IS DISTRIBUTED BY CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH. CIMB Securities Limited has had an investment banking relationship with Cowell e Holdings Inc within the preceding 12 months.
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Technology - Handsets Chinese vendors pursue quality over quantity
■ Hong Kong-listed components manufacturers with strong Chinese customer bases, such as AAC Tech, Tongda Group and Sunny Optical, will be the clear winners, in our view.
■ Top-tier Chinese vendors should still gain market share in China and globally.
■ Huawei and Xiaomi will lead shipment growth in domestic brands, we forecast. We estimate the top ten vendors’ shipments to increase 24% yoy to 703m units in 2016.
■ Gross margin should be protected by significant specification upgrades for smartphones.
■ Maintain sector Overweight. Top picks are AAC Tech, Tongda Group and Sunny Optical.
Components manufacturers are the key beneficiaries We stay positive on Hong Kong-listed component manufacturers that have strong Chinese customer bases, such as AAC Tech (2018 HK, Add), Tongda Group (698 HK, Add) and Sunny Optical (2382 HK, Add). We believe that they will be the key beneficiaries of the new round of hardware upgrade cycle due to 1) dominant supply chain status, 2) above industry-average smartphone shipment growth from their customers, and 3) the ability to elevate the value of their components, with stable gross margins.
Top-tier Chinese vendors continue gaining market share Seven Chinese vendors tapped into the top 10 global smartphone market and captured over 31% of the global smartphone market in 3Q15. In our view, the top-tier Chinese brands will continue gaining market share in the next couple of years (2016 - 17) due to their competitive affordable smartphone offerings for China and emerging markets.
Huawei and Xiaomi to lead growth in Chinese brands We estimate smartphone shipments from the top 10 Chinese vendors will increase 24% yoy to 703m units in 2016 led by Huawei’s (25% yoy) and Xiaomi’s (33% yoy) robust shipment growth. Global market intelligence firm IDC expects global smartphone shipments to grow c.5% yoy to approximately 1.5bn units in 2016.
Gross margin is protected Thanks to the fierce competition in the Chinese market, domestic brands have widely adopted high-end components such as metal casings, high-resolution cameras (with added functions), high-quality speaker boxes, haptics and ‘phablet’ size screens in an attempt to differentiate their smartphones. In our view, this trend should lead to a steady rise in component value for the key suppliers.
Outperformance expected to continue AAC Tech’s share price rose 24% while Sunny Optical’s advanced 35% and Tongda Group’s went up 53% in 2015 due to strong earnings growth and the bright industry outlook. We believe that the share price momentum will continue in 2016 as the latest hardware upgrade cycle just took place, even in the sub-Rmb1,000 (US$150) segment.
Maintain Overweight on China smartphone sector We stay Overweight on China’s smartphone sector; our top picks are AAC Tech, Tongda Group and Sunny Optical. AAC Tech will benefit, in our view, from the new product launches for Apple and strong sales growth prospects for the Chinese brands. Tongda, in our view, is set to benefit from the rising metal casing demand from Huawei and Xiaomi. Sunny Optical is moving up the value chain to being an upstream smartphone and automotive optical components manufacturer.
AAC Tech has a promising new product pipeline for Apple (haptics and speaker box upgrades) and strong sales growth prospects for the Chinese brands (acoustics upgrades and RF/mechanical project wins).
Sunny Optical Technology (Group) ADD, TP HK$21.40, HK$17.70 close
Sunny Optical is a key beneficiary from significant camera upgrades in Chinese vendors. Rapid growth in handset lens sets and vehicle lens sets help it move up to become an upstream optical component manufacturer.
Tongda Group Holdings Ltd ADD, TP HK$2.00, HK$1.34 close
Tongda is a beneficiary of rising metal casing penetration among leading Chinese brands, especially Huawei, Xiaomi, Oppo and QiKU.
Gross margin protected Components manufacturers with high exposure to top-tier Chinese vendors enjoy a stable gross margin outlook, underpinned by product mix improvements, rising automation and new product launches, thanks to the ongoing specification upgrades in smartphones.
Apple supply chain gross margin will be protected, in our view, by continuous specifications upgrades in each generation of iPhones.
Top 10 Chinese brands’ share of global smartphone market Chinese handset vendors gained significant market share in China and globally since 2014, thanks to their cost advantage and capabilities in high performance smartphone design and manufacturing. Huawei and Xiaomi lead the way.
Export shipments support Chinese vendors’ growth Although overall smartphone shipment growth is slowing due to the high smartphone penetration rate in China and developed countries, we expect the global smartphone market to expand steadily at c.5% in 2016 and 2017, underpinned by rapid growth of the smartphone-using population in emerging markets such as India, Latin America and South East Asia. Tier-1 Chinese vendors are rapidly gaining market share in emerging markets due to their high cost-to-performance quotient and affordable smartphones.
Estimated shipments of top 10 Chinese vendors in 2016 Total smartphone shipments by the top 10 Chinese vendors are expected to rise 24% yoy to 703m units in 2016. We expect Huawei to post robust output growth of 25% yoy and Xiaomi 33% yoy in 2016.
SOURCE: CIMB RESEARCH, COMPANY REPORTS, COUNTERPOINT
Hong Kong-listed components manufacturers are the key beneficiaries in the new round of hardware upgrade cycle
Stay positive on component manufacturers. We stay positive on Hong Kong-listed component manufacturers that have strong Chinese customer bases, such as AAC Tech (2018 HK, Add), Sunny Optical (2382 HK, Add) and Tongda Group (698 HK, Add). This is because we believe that they will be the key beneficiaries from their:
1) dominant supply chain status for tier-1 Chinese vendors,
2) above industry-average smartphone shipment growth from their customers, underpinned by market share gains in China and rapid expansion overseas, and
3) their ability to elevate the value of their components, with stable gross margins, due to significant specification upgrades in the new round of hardware upgrade cycle (high-resolution cameras, metal casings, speaker boxes and haptics) in the mid-range segment (sub Rmb2,000/US$320).
Another good year for component manufacturers in 2016. After strong share price runs in 2015 by AAC Tech (+24%), Sunny Optical (+35%) and Tongda Group (53%) due to strong earnings growth and the bright industry outlook, we believe that the share price momentum will continue in 2016 as the latest hardware upgrade cycle just took place, even in the sub-Rmb1,000 (US$150) segment.
Maintain Overweight on China smartphone sector. Our sector top picks for 2016 are AAC Tech, Tongda Group and Sunny Optical.
AAC Tech (2018 HK, Add) has a strong new product pipeline for Apple (haptics and speaker box upgrades) and strong sales growth prospects for Chinese brands (acoustics upgrades and RF/mechanical project wins).
Tongda Group (698 HK, Add) is the likely key beneficiary of the low metal casing penetration rate among Chinese vendors thanks to its dominant position as a domestic supplier of smartphone casings (metal casings and high-end precision plastic casings).
We are also positive on Sunny Optical (2382 HK, Add), as we believe it is moving up the value chain towards becoming an upstream optical component manufacturer and will benefit from the continuous camera upgrades among Chinese vendors.
What you need to know:
Component manufacturers are key beneficiaries. Components manufacturers with high exposure to top-tier Chinese brands such as Huawei, Xiaomi, Oppo and Vivo, are key beneficiaries of the significant hardware upgrade cycle due to their dominant supply chain status.
Significant specification upgrades protect component manufacturers’ gross margins. Thanks to the fierce competition in China market, domestic brands widely adopt high-end components such as metal casings, high-resolution cameras, high-quality speaker boxes, haptics and ‘phablet’ size screens in their flagship models, even in the sub-Rmb1,000 (US$150) segment, in an attempt to differentiate their smartphones. It has driven a consistent increase in component value for the key suppliers.
Leading Chinese handset vendors are gaining market share. Seven Chinese vendors tapped into the top 10 global smartphone market. Together, they captured 31% of the global smartphone market in 3Q15 (26.5% in 4Q14, 18.6% in 4Q13). We believe that the top-tier Chinese brands will continue gaining market share in the next couple of years (2016 – 17) due to their competitive and affordable smartphone offerings for China and emerging markets.
Chinese vendors are expanding rapidly into overseas markets. Export shipments from the top seven Chinese vendors jumped 85% yoy in 9M15, driven by market share gains in local vendors in those markets and tier-1 International brands, mainly in Latin America, India and South East Asia markets.
Chinese brands provide better growth rate via Samsung and Apple. Total smartphone shipments from the top seven Chinese vendors reached 308m units in 9M15, i.e. 27% higher than Samsung’s and 96% higher than Apple’s. The average growth rate of the top seven Chinese brands was 40% yoy in 9M15, which outpaced Samsung’s flat growth and Apple’s 33% yoy growth rate.
Global smartphone demand is still growing, albeit at a slower rate. Market consensus expects global smartphone shipments to rise c.5% yoy to approximately 1.5bn units in 2016. IDC forecast smartphone demand will increase from 1.3bn units in 2014 to 1.6bn units in 2017, a CAGR of 7%.
China remains the largest single smartphone market in the world. China smartphone demand will be flattish at 433m units in 2015. Nevertheless, China smartphone demand will resume 7% growth to 465m units in 2016, underpinned by the restoration of handset subsidies by the operators, abundant high-spec low-priced 4G smartphone launches and the net addition of 131m smartphone users.
Huawei, Xiaomi, Oppo, Vivo, ZTE and LeTV could lead growth in Chinese brands in 2016. We estimate top 10 Chinese vendors’ shipments could rise 24% yoy to 703m units in 2016, led by Huawei and Xiaomi. We expect Huawei to post robust output growth of 25% yoy and Xiaomi 33% yoy in 2016.
One device for everything. Smartphones have changed almost every aspect of our lives: social communication, leisure, gaming, shopping, payments, information, and work. Smartphones are starting to replace many of our existing electronic devices, such as cameras, TVs, PCs, video recorders, CD players, game consoles, books, calendars, clocks, wallets etc., making them increasingly indispensable to us. It is natural, therefore, that the performance requirements of smartphones will continue to rise, as consumers demand higher performance from the one device that replaces every other device which they used to own (Figure 4).
Figure 4: Smartphones can replace almost every other device we own
SOURCE: CIMB RESEARCH
Component manufacturers are the key beneficiaries of the significant hardware upgrade cycle
Continuous specification upgrades in smartphones. Vendors have been upgrading hardware specifications (cameras, haptics, acoustics, antennas, display, fingerprint, battery, chipset), user interface (improved user experience, based on Android O/S) and improving handset designs (slim and light, plastics or metal casings, waterproof, small or phablet size) of their latest models. This is in an effort to differentiate themselves and win market share in the competitive smartphone market (especially in the Android-camp), as well as fulfil the consumers’ pursuit of smartphones that are faster, thinner, lighter, with longer battery life, better functionality and user experience. While this inevitably increases vendors’ bill of materials (BOM) cost, the room for price hikes is limited.
Top-tier Chinese brands tap into high-end segment. More importantly, top-tier Chinese brands such as Huawei, Oppo and Xiaomi have launched many high-spec mid-priced smartphones. They have successfully tapped into the high-end smartphone segment (Rmb3,000/US$500) thanks to strong consumer demand for their flagship models (Huawei Mate 7 and Oppo R7) in China and overseas. According to Counterpoint, Oppo took up 11% market share in the US$400-499 ASP segment in 3Q15 while Huawei managed 2% although the
high-end smartphone segment is believed to be dominated by Apple and Samsung (Figure 5).
We noticed more high-spec smartphone launches by Chinese brands in 2015, while consumers increasingly bought Chinese brands’ high-end smartphones due to their improved brand image and high-performance capability. This has exerted pricing pressure on tier-1 international brands, especially in the Android camp.
Figure 5: Market share breakdown - smartphones with US$400-499 ASP
SOURCES: CIMB, COUNTERPOINT
Stabilised smartphone ASP. According to Counterpoint, smartphone’s ASP has stabilised since 3Q14 in China thanks to the launch of iPhone 6 and the popularity of high-spec mid-priced smartphones. The ASP of smartphones in China bottomed out at US$150 in 3Q14 and surged 40% to c.US$210 in 3Q15 (Figure 6).
Figure 6: Global Smartphone ASP by region
SOURCES: CIMB, COUNTERPOINT
Smartphone component manufacturers are the clear winners. Competition in the China smartphone market has become fiercer than that in overseas markets given the slowdown in domestic demand growth and entry of many vendors with Internet background. Even in the sub-Rmb1,000 (US$150) segment, smartphones have already adopted high-end components like high resolution cameras, metal casings, Hi-Fi sound speaker box, HFD screen and fingerprint etc. While vendors are suffering from lower ASP and higher BOM costs, component suppliers are enjoying sustainable ASP hikes and margin
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Please fill in the values above to have them entered in your reportApple35%
Samsung31%
Oppo11%
LG9%
Sony5%
Huaw ei2%
Others7%
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expansion via continuous product mix improvements, thanks to the innovative and tailor-made components to meet their customers’ needs.
Hong Kong-listed component manufacturers are our focus. We believe Chinese vendors will continue to gain market share in their home market and globally in the low-to mid-end segment (US$150 – US$300) in the next couple of years (2016 – 2017) due to high specification and affordably priced smartphones, while Apple will continue to dominate in the ultra-high-end segment (>US$600) due to its innovative and technology- leading smartphones.
We, therefore, suggest investors consider the following Hong Kong-listed smartphone component manufacturers: AAC Tech (2018 HK, Add), Sunny Optical (2382 HK, Add), Tongda Group (698 HK, Add), and Cowell (1415 HK, Add). In our view, these companies will benefit from upgrades in key components such as cameras, metal casings, haptics and acoustics etc., among Chinese vendors and Apple, thanks to their dominant status in the supply chain.
We highlight below four key components: Cameras, metal casings, force touch (haptics) and acoustics are the key upgrade components in smartphones manufactured by AAC Tech, Sunny Optical, Tongda Group and Cowell for Chinese vendors and Apple.
Cameras – Digital cameras have almost all been phased out on the back of the high quality of pictures taken using a smartphone. Handset vendors have consistently been upgrading the resolution and functions of both the front-facing and rear-facing cameras, in a bit to meet consumer demand for better image quality for their smartphone photographs and selfies. This has created a huge demand for high-quality camera modules and as a result, handset lens makers and camera module manufacturers are benefiting from rising ASP due to constantly changing camera technology.
Apart from mega pixel migration in cameras, the functionality of cameras has become a very important feature of the user experience. The major camera function additions nowadays include optical image stabilisation (OIS), dual-camera, phase detection auto focus (PDAF), iris recognition and 4K video. Furthermore, vendors have also requested for smaller and thinner sized camera modules for their handset designs. All these additional functions and features require technology know-how and increase the production cost due to difficulties in assembly.
As the largest camera modules supplier to Chinese brands and the largest domestic handset lens sets manufacturer, Sunny Optical is set to benefit from the significant camera upgrades cycle among Chinese vendors. Cowell stands to benefit from the endless iPhone camera upgrades due to its primary front-facing camera module status with Apple.
Figure 7: Oppo R7s (Rmb2,599)
Camera specification : 13MP, PDAF
Figure 8: Honor 6 plus (Rmb1,850)
Camera specification : 8MP dual-camera, wide angle
Metal casings – The adoption of metal casings for smartphones is the latest trend among Chinese brands, following the lead set by Apple and Samsung (in metallic high-end models). Leading Chinese vendors have shifted to metal casing for their flagship models and started to adopt metal casings in their low-to mid-range models (sub-Rmb1,000 – Rmb2,000 / US$150 – US$320). On the back of low metal casing penetration rate among leading Chinese vendors, we believe there is tremendous demand potential for metal casings from Chinese brands due to their durability and better appearance, underpinned by 1) sturdier support for the enlarged screen size, 2) thinner and lighter handset designs, and 3) lower production cost.
We have seen wide adoption of metal casings for flagship models (Huawei P8 and Honor 5X, Xiaomi Mi4, OPPO R7, Meizu MX5 and Vivo X5) among leading Chinese brands in 9M15 and this has even spread into the sub-Rmb1,000 (US$150) segment in 4Q15. Recent new model launches, such as QiKU Youth Edition (Rmb999) and Xiaomi Redmi Note3 (Rmb899), also feature metal casings.
Cheaper metal casing solution. The new metal stamping technology, which combines new molding technology and CNC processing, lowers the cost of production without compromising on quality. Based on the metal stamping method, production costs can be substantially reduced due to the shorter time required for CNC processing (Figure 10).
Tongda set to benefit from this trend. Tongda is currently one of the high-precision manufacturers to own this technology on the production of metal casings, and also the key metal casings supplier to Chinese brands such as Huawei, Xiaomi, Oppo, Vivo and QiKU.
Figure 10: Comparisons on metal casings manufacturing processing
SOURCE: CIMB RESEARCH, COMPANY DATA
Metal casing penetration rate remains low in China. Based on our channel checks, the metal casing penetration rate among China brands remains low (c.16% at the end-2015) vs. tier-1 international brands (100% in Apple, 100% in Samsung’s high-end models and over 50% in Samsung’s mid-range models). We estimate the penetration rate to jump from an average of 16% in 2015 to c.30% in 2016 and c.40% in 2017, thanks to the lower production costs and wide adoption of metal casings
CNC UnibodyMetal stamping (NMT Molding* / PMH# +
CNC Processing)
Internal components
Estimate CNC lead
time20 to 30 minutes per unit
10 to 15 minutes per unit (50% of lead time
shorten)
Bill of material costs US$ 28 to 32 per unitUS$ 15 to 22 per unit (around 30% - 40%
Figure 11: Estimated metal casing penetration rate for major Chinese vendors
SOURCES: CIMB RESEARCH
Force touch/3D touch (haptics) – Huawei was the first vendor to introduce force touch technology when it introduced its model “Mate S” in Sep 15 (Figure 12), just two days ahead of the launch of Apple’s iPhone 6S. Apple introduced 3D touch in the iPhone 6S and 6S Plus while iWatch, which was launched in April 2015, had already adopted haptics technology but with a smaller haptic engine.
3D touch technology in iPhone 6S, using a haptic engine, senses how much pressure you apply to the display. Apart from the traditional feedback from tap, swipe and pinch gestures, Apple introduced peek and pop, which allowed you to preview all kinds of content (email, photo gallery, websites, etc.) without having to actually open it and weigh objects by placing them on the phone’s screen (Figure 13).
AAC Tech currently manufactures the haptic engine, the key component for the force touch module, for Apple’s iPhones and iWatch. Supported by further function enhancement, led by Apple and the launch of new applications, such as mobile games using 3D touch technology, we believe the adoption of force touch in smartphones will gradually increase, especially in Chinese brands.
Figure 12: Huawei Mate S – press the screen for a shortcut to email, photo preview, website etc.,
Figure 13: iPhone 6S, peek and pop
SOURCES: CIMB, HUAWEI SOURCES: CIMB, APPLE
Estimated metal casing penetration rate Huawei Xaiomi Oppo Vivo Others Overall
2014E 4% 7% 0% 0% 1% 2%
2015F 25% 19% 30% 35% 9% 16%
2016F 50% 40% 55% 55% 15% 30%
2017F 60% 55% 65% 65% 20% 40%
Estimated metal casing volume Huawei Xaiomi Oppo Vivo Others Overall
Acoustics – Acoustic components include speakers, receivers and microphones. AAC Tech is currently the leading global supplier of high-end acoustic components, such as speaker boxes, to tier-1 international brands (Apple, Samsung, LG Electronics, etc.) and top-tier Chinese brands. The iPhone’s on-board speakers have excellent sound, thanks to its high-quality speaker box provided by AAC Tech.
Apple has made minor improvements with each generation of iPhone (iPhone 4 to iPhone 6S). Nevertheless, the speaker box for the next generation iPhone 7 (Sep 2016) could be waterproof, which will require new technology in terms of design and assembly for the manufacturer. AAC will be the key beneficiary of the upcoming speaker box upgrade.
On the other hand, Chinese brands have been widely adopting high-end speaker boxes and receivers in their flagship models, even those in the sub-Rmb1,000 segment, in order to improve sound quality.
Figure 14: Vivo X5 Max, the world’s thinnest speaker box at 0.09 inch and Hi-Fi sound quality
Component makers’ gross margin is protected by specification upgrades
There is fierce competition among domestic brands as they rollout flagship models with high-end components such as metal casings, high-resolution cameras (OIS / dual camera / PDAF/ 4K video), high-quality speaker boxes, fingerprints, haptics and “phablet” size FHD screens in an attempt to differentiate their smartphones. Hence, we believe that component manufacturers’ gross margin would stay protected in the new round of hardware upgrade cycle in the next couple of years. This is underpinned by 1) improved product mix, i.e. higher contribution from high-margin components, 2) increased automation boosting production yield, and 3) new product launches raising ASP (Figure 16).
Figure 16: Measures of margin protection in component manufacturers
ROM 16GB/64GB/128GB 16GB/64GB 128GB 64GB 128GB 32GB 64GB 32GB/64GB 64GB
Battery capacityNon-replaceable ,
1715mAh
Non-replaceable ,
2600mAh
Non-replaceable ,
4000mAh
Non-replaceable ,
3090mAh
Non-replaceable ,
3000mAh
Non-replaceable ,
4100mAh
Non-replaceable ,
4000mAh
Non-replaceable ,
3000mAh
Non-replaceable ,
3700mAh
Dimension (mm) 138.3 x 67.1 x 7.1 142.1 x 70.1 x 7 157.1 x 80.6 x 7.9 155.1 x 77.6 x 6.95 154.5 x 75.3 x 9.7 158 x 82.3 x 7.75 158.2 x 79.9 x 7.7 148.4 x 73.8 x 9.4 157.6 x 79.8 x 8.6
Casings metal casing metal casing metal casing metal casing metal casing metal casing metal casing metal casing metal casing
Brand Huawei Huawei Xiaomi Meizu QiKU LeTV Oppo Vivo One Plus
ROM 16GB 16GB 16GB 16GB/32GB 16GB 16GB/32GB 16GB 128GB 8GB
Battery capacityNon-replaceable ,
3000mAh
Non-replaceable ,
2200mAh
Non-replaceable ,
4000mAh
Non-replaceable ,
3100mAh
Non-replaceable ,
3000mAh
Non-replaceable ,
3000mAh
Non-replaceable ,
2400mAh2200mAh
Non-replaceable ,
2525mAh
Dimension (mm) 151.3 x 76.3 x 8.15 143 x 70.6 x 7.7 150 x 76 x 8.7 150.9 x 75.2 x 8.7 150.2 x 75.7 x 9 151.1 x 74.2 x 7.5 142.7 x 71.7 x 7.55 136.9 x 67.9 x 7.49 140 x 69 x 6.9
Casing Metal casing Plastic casing Metal casing Plastic casing Metal casing Metal casing Plastic casing Plastic casing Plastic casing
Leading Chinese handset vendors gaining market share
Market share gains have accelerated since 1Q14. Since 2014, Chinese handset vendors have gained significant market share in China and globally, underpinned by their cost advantage and capabilities in high performance smartphone design and manufacturing. This was led by Huawei, Xiaomi, TCL, Oppo and Vivo, thanks to their affordable 4G smartphone which has a user-friendly user interface (UI) and appealing handset design.
The top ten Chinese handset vendors’ global market share increased by 16.9% pts over the last nine quarters from 22.9% in 4Q13 to 39.7% in 3Q15, according to Counterpoint (Figure 23).
Figure 23: Chinese brands’ share of global smartphone market
SOURCES: CIMB, COUNTERPOINT
Figure 24: Top-tier Chinese brands gaining market share
SOURCES: CIMB, COUNTERPOINT
Chinese brands are among the top 10 smartphone vendors. In 3Q15, seven of the top 10 handset vendors were Chinese brands that collectively captured 29% of the global smartphone market. Huawei (7.5%), Xiaomi (5.0%), Lenovo (4.6%) were ranked No.3-5, after Samsung at No.1 (23.1%) and Apple at No.2 (13.2%). ZTE was ranked No.7 (3.9%), while Oppo was ranked No.8 (3.6%), TCL at No. 9 (3.4%) and Vivo at No.10 (2.8%) (Figure 24).
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0%
5%
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30%
35%
40%
45%
2012Q
1
2012Q
2
2012Q
3
2012Q
4
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1
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Top 3 Chinese vendors Top 10 Chinese vendors Apple Samsung
Top 3 - Huawei, Xiaomi, Lenovo; Top 10 - Huawei, Xiaomi, Lenovo, ZTE, Oppo, TCL-Alcatel, Vivo, Coolpad, Meizu, Tianyu
Market share gains in Chinese brands expected to continue. We believe that Chinese handset vendors will continue to gain market share in China and globally on the back of 1) the strong components supply chain support, and 2) new product launches such as Huawei P8 (Nov 15), Xiaomi Redmi Note 3 (Nov 15), Xiaomi Mi5 (rumour Jan16), Oppo R7s (Nov 15) and Vivo X6 (Nov 15) etc., This would be supported by improved brand awareness, further channel expansion in China and relationship establish with overseas carriers.
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Samsung24%
Apple12%
Huaw ei5%
Xiaomi6%
Lenovo5%
LG5%
ZTE3%
Oppo2%
TCL-Alcatel3%
vivo2%
others33%
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Chinese brands aggressively expanding into overseas markets
Although we believe that overall smartphone shipment growth is slowing due to the relatively high smartphone penetration rate in developed countries, the size of the global smartphone market is still expanding steadily, underpinned by rapid growth of the smartphone-using population in emerging markets. We expect smartphone demand in certain emerging markets such as India, Latin America and Southeast Asia to remain robust, thanks to the sizeable 3G/4G migration and consumers’ demand for high-performance smartphones.
According to the International Data Corporation (IDC), emerging markets, including China and India, are expected to lead global smartphone shipment growth in the next few years, driven by accelerated 3G/4G migration in India and other emerging markets, as well as strong replacement demand from China (Figure 28).
Figure 28: Global smartphone shipments forecast (2011-2020F)
SOURCES: CIMB, BI INTELLIGENCE, IDC
Chinese vendors expanding into overseas markets. As China’s smartphone market is coming close to saturation, the Chinese vendors have been aggressively expanding into overseas markets via network carrier and e-commerce channels in the past few years, especially India, Southeast Asia and Latin America. At this point, Huawei, TCL, Lenovo, ZTE, Xiaomi, Oppo and Vivo have good presence in the Southeast Asia, India, Latin America, North America, Russia and the Middle East markets.
ZTE, Huawei, Lenovo and TCL ranked top 5 in most regions. According to Counterpoint, ZTE ranked no. 4 in the US market in 3Q15, thanks to its sponsorship of the National Basketball Association (NBA) (Figure 29), while Huawei grabbed 5% market share in Europe due to its strong relationships with the local mobile network operators and improved awareness of its brand (Figure 31). TCL has always had the highest export shipment ratio (c.95% in 2014 and 9M15) among the China handset vendors, riding on the well-known international brand name Alcatel that ranked No. 3 (10% market share) in Latin America and No. 4 in Europe (5% market share) in 3Q15 (Figure 30). In 2Q15, Xiaomi launched the Mi 4i model that targets overseas markets, especially India and Southeast Asia.
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Top seven vendors’ shipments jumped 85% yoy in 9M15. Supported by their affordable high-performance 4G smartphones and established worldwide distribution networks, the top seven Chinese vendors’ total export shipments increased by 85% yoy to 130m units in 9M15 (+62% yoy in 3Q15), according to Counterpoint (Figure 33, 34).
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Overseas market expansion to continue. Given the high cost-to-performance quotient and affordability of their 4G smartphones, we believe that the tier-1 Chinese vendors will easily grab market share in countries with relatively-weak consumption power and price-sensitive consumers. Therefore, we believe that the Chinese brands will achieve robust overseas shipment growth in the next couple of years, especially in emerging markets, thanks to stronger relationships with local carriers and improved brand awareness.
India’s fast-growing smartphone market. India is the third largest smartphone market in the world. We believe that India will be the fastest-growing smartphone market over the next few years (2016-18) due to the low smartphone penetration rate.
According to the International Data Corporation (IDC), India had around 1 billion mobile phone users in 2Q15 but only around 150m smartphone users. The smartphone penetration rate was only c.15% (vs. 59% in China, 75% in the US). India’s total smartphone demand was 80m units in 2014 and the IDC forecasts that smartphone shipments will reach c.110m units in 2015 (+38% yoy).
Smartphone demand hit 250m units in 2018. The smartphone penetration rate in India is expected to reach c.36% by 2018, according to the IDC. Hence, total smartphone users in India could reach 280m in 2018, with smartphone demand of over 250m units p.a. This represents a CAGR of 31% over the next three years (2015 – 2018) (Figure 35).
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Figure 35: India smartphone shipment (2011 - 2018F)
SOURCES: CIMB, IDC
Local Indian vendors dominate the low-end segment. Currently, local Indian vendors still dominate the country’s mobile phone market but mainly, the low-end segment (smartphone priced at US$50-80 per unit). The top three largest domestic vendors in India are Micromax, Intex and Lava, with combined India smartphone market share of around 35% market in 2Q15. Samsung remains the largest vendor, with 23% India smartphone market share, according to IDC (Figure 36).
Figure 36: India smartphone market share (2Q15)
SOURCES: CIMB, IDC
The next battlefield for Chinese vendors - India. Chinese vendors Huawei, Xiaomi, Lenovo, Oppo, Vivo, Meizu and Coolpad have been selling smartphones in India via online channels (flipkart.com, Mi India) and physical stores since 2014. Xiaomi registered India sales of more than 3m units (mainly Redmi) in 9M15, which is commendable given that its first shipment was in 4Q14 while Huawei sold about 2m units in 9M15. Xiaomi and Foxconn also jointly set up a handset assembly factory in Andhra Pradesh state in Jul 2015 to avoid the 12.5% import tariff. Lenovo also established an assembly factory in Chennai in 2H15 to increase its penetration into the India market.
We believe that the Chinese brands will successfully capture market share in India from both foreign and local brands in the low-end segment (smartphone priced at US$100 per unit), thanks to their high specifications, low prices and high-performance smartphones. As such, we expect overseas markets, including India, to become a key shipment growth driver for Chinese vendors.
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During 2016-17, we expect tier-1 Chinese vendors to provide better volume growth than Samsung and Apple thanks to their continuous market share expansion in China and globally.
According to Counterpoint, the top seven Chinese brands’ market share exceeded Samsung’s and Apple’s in 3Q15. Shipments from the top seven Chinese vendors amounted to 112m units in 3Q15, i.e. 31% of the global smartphone market. In 9M15, their collective output reached 308m units which was 27% higher than Samsung’s and 96% higher than Apple’s (Figure 37). The average growth rate of the top seven Chinese brands was 40% yoy in 9M15 (29% yoy in 3Q15) which outpaced Samsung’s flat growth and Apple's 33% yoy growth rate (Figure 38).
As the Hong Kong-listed components manufacturers dominate the supply chain for tier-1 Chinese brands, we believe that they can benefit from the latter’s growth rate overtaking Apple’s and Samsung’s.
Figure 37: Total smartphone shipment in 9M15 – Chinese vendors vs. Samsung and Apple
Figure 38: Volume growth in 9M15 - Chinese vendors vs. Samsung and Apple
iPhone shipments should decline yoy in 1H16. After strong growth over the past eight years, Our analyst (Felix PAN) expects to see the first-ever yoy shipment decline for the iPhone in 1H16. Despite expecting a strong rebound in 2H16 on the back of iPhone 7’s launch in Sep 2016, he does not expect a repeat of the hypergrowth of yesteryear, as demand is saturated (Figure 41).
iPhone demand is still growing. Our analyst expects iPhone unit shipments to rise 20.3% yoy to c.232m units in 2015, increase 5.7% to 245m units in 2016 and go up 8.2% yoy to 265m units in 2017, driven by replacement demand from existing iPhone fans and market share gains from other brands (Figure 42).
Figure 41: iPhone shipment volume, by quarter yoy% (3Q09-4Q17F)
SOURCES: CIMB RESEARCH, COMPANY DATA
Figure 42: iPhone shipment volume (2012 - 2017F)
SOURCES: CIMB RESEARCH, COMPANY DATA
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Global smartphone demand is still growing, albeit at a slower rate
Global smartphone shipments increased 13% yoy in 9M15. Global smartphone demand rose at a moderate rate of c.10-15% yoy in the first three quarters of 2015, with total smartphone shipments amounting to 1.06bn units. We expect a mere 1% yoy growth in 4Q15 off a high base in 4Q14 which would bring FY15 smartphone shipments to 1.46bn units, i.e. an 11% yoy increase (Figure 43).
China remains the largest single smartphone market in the world, with a 30% share, while the Asia Pacific region accounts for 22%. The developed markets of North America and Europe make up 12% and 15%, respectively (Figure 44). Nevertheless, China posted a slower shipment growth of 3% yoy in 9M15 due to its high smartphone penetrate rate. The Asia Pacific region achieved a 15% yoy shipment growth. North America and Europe registered decent growth of 15% yoy and 9% yoy, respectively. The Middle East/Africa region recorded the highest growth rate of 54% yoy due to strong 2G/3G migration (Figure 45).
Figure 43: Global smartphone demand by units (1Q12 to 4Q15F)
SOURCES: CIMB, COUNTERPOINT
Figure 44: Global smartphone shipments by region (9M15) Figure 45: Global smartphone shipments growth rate by regions (9M15 vs. 9M14, % yoy)
Global smartphone shipments expected to rise c.5% yoy to 1.5bn units in 2016. IDC expects global smartphone shipments to rise c.5% yoy to approximately 1.52bn units in 2016 and to maintain a moderate pace until 2018. This is underpinned by replacement demand for high-performance smartphones from North America, Europe and China as well as 2G/3G/4G migration demand from emerging markets such as India, Latin America, South East Asia, Eastern Europe, Africa and the Middle East. According to IDC’s forecast, global smartphone demand could reach 1.6bn units by 2017 and 7% CAGR in 2014-17, driven by the rising smartphone penetration rate in emerging markets such as India and Africa, and the stable smartphone migration demand from China, the US and Europe (Figure 46).
Figure 46: Global smartphone shipments forecast (2011 to 2017F)
SOURCES: CIMB RESEARCH, IDC
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China remains the largest smartphone market in the world
China accounts for over 31% of global smartphone shipments. China is the single largest smartphone market in the world, accounting for 31% of the total smartphone market, by volume, in 9M15. Strong performance in the China market would enable a vendor to increase its brand awareness and lower production costs in order to raise profitability through economies of scale.
China smartphone demand increased steadily in 9M15. China smartphone shipments rose 3% yoy to 323m units in 9M15 (4% yoy in 1Q, 0% in 2Q and 7% in 3Q15), driven by strong replacement demand for high-specification 4G smartphones and ongoing 3G/4G migration.
Figure 47: China smartphone shipments, by quarter
SOURCES: CIMB, COUNTERPOINT
Huawei clinched the top spot in China in 3Q15. Huawei replaced Xiaomi as the top-ranking handset vendor in 3Q15, with 15.6% market share (+0.3% pt qoq, +6.4% pts yoy), thanks to its many new product launches via e-commerce and social channels. In contrast, Xiaomi lacked innovative models and suffered keen competition from newcomers in the e-commerce channel, including LeTV QiKU and Meizu. Xiaomi fell to No.2 in 3Q15, with 14.6% market share (-1.2% pts qoq, -1.4% pts yoy). Apple’s market share increased slightly to 12.4% in 3Q15 (+0.2% pt qoq, +6.5% pts yoy) to stay at No.3, although the new iPhone 6S was only shipped out at end-Sep 2015. OPPO climbed to No.4 in 3Q15, with 9.9% market share (+2.9% pts qoq, +5.4% yoy) thanks to the excellent design and high performance of its smartphones, as well its well-established social channel. Vivo ranked No.5 in 3Q15, with 8.2% market share (flat qoq, +2.8% pts yoy), thanks to the Hi-Fi speaker box in its flagship model. Samsung's ranking fell to No.6 in 3Q15, as its market share shrank to 7.7% (-0.1% pt qoq, -4.0% pts yoy) due to keen competition from Chinese brands, given Samsung’s lack of product differentiation (Figure 48, 49).
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Meizu, Vivo and Oppo were the best performers in 9M15. In 9M15, the best performers among the domestic vendors in terms of China sales were Meizu (+330% yoy), Vivo (+140%), Oppo (+122%), and Huawei (+42%). The worst performers in 9M15 were Lenovo (-48% yoy) and Coolpad (-32%). Xiaomi faced keen competition from Huawei’s Honor, Meizu, LeTV and QiKU in the e-commerce channel and thus, it posted relatively slow domestic sales growth of 14% yoy in 9M15, although it maintained market share of 14.7% in 9M15 (+17.0% in 9M14) (Figure 50).
Figure 50: China top 10 vendors’ smartphone shipments in China, by brand (9M15 vs. 9M14)
SOURCES: CIMB, COUNTERPOINT
3G/4G migration and replacement demand lead the volume growth. According to the Ministry of Industry and Information Technology (MIIT), the overall smartphone penetration rate was 59% at end-Nov 2015, on the back of around 780m smartphone users (3G/4G) and around 530m feature phone (2G) users.
Handset subsides to be restored in 2016. China Mobile and China Unicom both announced aggressive subsidy plans in 2016 to boost their number of 4G subscribers. China Mobile revealed that it will allocate Rmb100bn for subsidies (including handset subsidies and channels subsidies for wholesalers and retailers) in 2016 (estimated Rmb20bn in 2015) in order to boost the number of 4G subscribers to 500m (c.300m at end-2015). China Unicom will spend approximately Rmb55bn for subsidies in 2016 (c.Rmb6bn in 2015) given the
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significant subscriber outflows in 2015 (average outflow of c.1m 3G/4G subscribers per month).
Smartphone penetration rate to hit 68% in 2016. We believe that the penetration rate will reach around 60% in 2015 and rise further to hit 68% by 2016, representing an increase in the number of new smartphone users by 131m in 2016, driven by lower 4G tariffs, the abundance of affordable high-performance 4G smartphones and enhanced 4G promotions by the three Chinese operators.
We estimate that China smartphone shipments will merely inch up 1% to 433m units in 2015 due to reduced handset subsidies and the weak economy. Nevertheless, we believe that China smartphone demand will achieve 7% growth in 2016 to 465m units, underpinned by the restoration of handset subsidies by the operators, abundant high-spec low-priced 4G smartphone launches and net addition of 131m smartphone users (Figure 51,52,53).
Figure 51: Estimated China mobile subs and smartphone demand
SOURCES: CIMB, COMPANY REPORTS
Figure 52: Estimated no. of mobile subscribers and 3G/4G penetration rate
SOURCES: CIMB, COMPANY REPORTS
China mobile market metrics 2011 2012 2013 2014 2015F 2016F
No. of mobile subscribers (million) 976 1,110 1,233 1,291 1,308 1,330
No. of mobile subscribers (yoy %) 16% 14% 11% 5% 1% 2%
Leading Chinese brands gained market share in China. Although overall smartphone demand rose slowly in 2015, leading domestic vendors gained market share from white-box and foreign brands due to the high specifications, low prices and high performance of their smartphones, rising sales through the e-commerce channel, and strong penetration in low-tier cities via physical stores.
According to Counterpoint, the combined market share of the top seven Chinese vendors increased from 39% in 3Q13 to 65% in 3Q15 (Figure 54), while the foreign brands’ market share dropped from above 30% in 3Q13 to less than 20% in 3Q15.
Figure 54: Top seven Chinese vendors continue gaining market share in home market
SOURCES: CIMB, COUNTERPOINT
Leading brands’ market share gain in home markets is expected to continue. We expect the consolidation in the China smartphone market to continue due to fierce competition, especially in the low-to mid-end segment (Rmb1,000 – Rmb2,000 / US$150 – US$320). Therefore, we expect the leading Chinese handset vendors to continue gaining market share in the home market moving forward due to: 1) their strong domestic components supply chain, and 2) diversified distribution channels, comprising both physical stores and online platforms.
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Top 7 Chinese v endors in China: Huawei, Xiaomi, Oppo, Vivo, Coolpad, Lenovo, Meizu
Huawei, Xiaomi, Oppo, Vivo, ZTE and LeTV to lead growth in Chinese brands in 2016
Top 10 Chinese handset vendors to post estimated 24% yoy shipment growth in 2016. We remain positive on the tier-1 Chinese handset vendors’ smartphone shipment growth outlook for 2016 on the back of strong support from the domestic components supply chain, improving brand awareness in China and globally, the high specifications, low prices and high performance of their smartphones, as well as the many distribution channels comprising mobile network operators (domestic and overseas), online platforms (domestic and overseas) and physical stores (in top-tier cities to low-tier cities in China).
Top 10 vendors’ shipments reach 703m units in 2016. With the exception of Lenovo, we expect all top 10 Chinese vendors to beat the industry growth rate in 2016. We estimate that total smartphone shipment by the top 10 Chinese vendors will reach 703m units in 2016, an increase of 24% yoy from approximately 570m units (+27% yoy) in 2015 (Figure 55). We believe that Huawei and Xiaomi will continue to post robust output growth of 25% and 33% yoy, respectively, in 2016 due to their strong new product pipelines (Huawei: P8, Mate 8. Xiaomi: Redmi Note 3 and Mi 5). We also expect Oppo and Vivo to maintain strong output growth of 30% and 20% yoy respectively, in 2016 thanks to their market share gains in the mid-end smartphone segment in China and Southeast Asia (Figure 56).
Figure 55: Estimated total smartphone output of top 10 Chinese handset vendors (2011 to 2016F)
SOURCES: CIMB RESEARCH
Figure 56: Estimated shipments of top 10 Chinese vendors (2014 - 2016F)
SOURCES: CIMB RESEARCH
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Huawei’s smartphone shipments jumped 63% yoy in 3Q15. Huawei’s shipments surged 63% yoy in 3Q15 to 27.4m units (+48% yoy in 9M15 with 75.4m units) driven by both China and overseas markets due to improved brand awareness and high cost-to-performance quotient smartphones (Huawei’s P7 (Rmb1,200), G7 (Rmb1,799) and Mate 7 (Rmb2,999)). Furthermore, Huawei’s flagship models launches in the US$300-500 range for both China and overseas markets, and marketing strategy via e-commerce in the domestic market and carriers in overseas markets were successful. Hence, Huawei’s market share rose from 5.1% in 3Q14 to 7.5% in 3Q15, due to increasing market share in China and globally. The robust shipments growth was driven by its dual-brand (Huawei + Honor) strategy and the successful launches of mid-to high-end models such as Mate 7 (Rmb2,100) and G7 (Rmb1,800) which sold very well in China and overseas markets. Furthermore, Huawei launched Mate S (US$600) for overseas markets and Mate 8 Max / Mate 8 (Rmb4,100 / Rmb2,999, Figure 59, 60) in China. This is the first time Huawei prices its flagship model over US$600/Rmb4,000, directly competing with Apple’s iPhone and Samsung Galaxy S6 / S6 edge.
Shipments could reach 125m units in 2016. We believe that Huawei can easily beat its 2015 shipment target of 100m units (+33% yoy) as it shipped 75.4m smartphones in 9M15. In our view, Huawei’s smartphone shipments could outpace its rivals in 2016 and rise 25% yoy to c.125m, driven by its strong product development, in-house chipset production capability and increase in overseas market share.
Xiaomi’s smartphone shipments stayed flat in 3Q15. Xiaomi lost its top rank in China to Huawei in 3Q15 given the lack of new model launches in 2015 (Mi4 was launched in 3Q14) and keener competition from Meizu, LeTV and QiKU which are backed by companies with strong Internet background. Xiaomi only launched Mi 4i, Mi 4C and a few Redmi Note models in 2015. Xiaomi’s key volume drivers were the low-end version of Redmi (Rmb499) and Redmi Notes (Rmb899). Xiaomi's total shipments were flat yoy at 18m units in 3Q15, while 9M15 shipments remained resilient, advancing 19% yoy to 52.5m units. We believe that Xiaomi will miss its revised downward full-year target of 80m units in 2015 given it only shipped 52.5m units in 9M15. Therefore, we forecast that Xiaomi’s smartphone shipments would rise 23% yoy to 75m units in 2015. Shipments could reach 100m units in 2016. Nevertheless, along with the licensing agreement signed with Qualcomm in Dec 15, we believe that Xiaomi could launch its flagship model Mi5 soon (market speculation in Jan 2016) to regain market share in China and to expand overseas (including the US) as it has resolved some of the patent issues overseas. We expect Xiaomi’s smartphone shipments to rise 33% yoy to c.100m units in 2016 on the back of 1) the Mi5 launch, 2) Redmi Note 3 (Rmb899/US$145) launch, and 3) the increasing overseas shipments, especially in India and South East Asia (Figure 62).
Lenovo’s 9M15 performance was weak. Despite consolidating with Motorola, Lenovo's shipments were relatively weak in 2015, declining 2% in 3Q15 and slipping 3% yoy in 9M15. We think that this was due to 1) substantially fewer shipments in the operator channels in China, 2) a confusing branding strategy (it carried five different brands in 3Q15), and 3) a lack of popular model launches during the period.
Lenovo has consolidated from five brands to three brands (Lemon, ZUK and Motorola) after it launched Lemon X3 (Rmb2,499/US$400) which caters to the high-end segment. Lemon is aimed at the mid-to high-end segment (Rmb2,000/ US300), mainly in China. ZUK is Lenovo’s e-commerce brand while the Motorola brand will focus on overseas markets. Growth only to 76m units in 2016. We are certain that Lenovo will miss its 2015 shipment target of 100m units given it only shipped 44m units in 9M15 despite including Motorola. We expect Lenovo to ship around 73m smartphones in 2015, with over half of them to overseas markets. We believe that Lenovo will remain in consolidation mode in 2016 as it integrates the Motorola handset business and focuses on emerging markets such as Brazil, India and Russia. However, we stay cautious about Lenovo’s smartphone shipments in 2016 because its smartphones lack innovative features and poorly designed relative to its rivals. Hence, we expect its smartphone shipments to rise c.4% yoy to 76m units (Figure 66).
ZTE gained market share in the US. Given the substantially lower domestic sales due to subsidy cuts in Chinese operators, ZTE delivered outstanding shipment performance in 3Q15, with total smartphone shipments increasing 25% yoy to 14.3m units due to strong US sales. ZTE is No.4 in the US with 7.8% market share in 3Q15, thanks to significant market share gain in the US after the
successful model launch of "AXON 天机, (Rmb2,699/US$440)" which
tied-up with the NBA. ZTE’s shipments surged 50% yoy to 44.3m units in 9M15 (Figure 67). Shipments to reach 75m units in 2016. We expect ZTE to ship 61m smartphones in 2015, and estimate its smartphone shipments could rise to over 75m units in 2016 with around 22% growth p.a., mainly driven by the US, South East Asia and Latin America markets (Figure 68).
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TCL smartphone shipments rose 29% yoy in 9M15. TCL’s smartphone shipments were resilient in 3Q15 despite keen competition from other domestic brands in the global market, especially in Asia Pacific, and further price cutting from the tier-1 international brands. TCL’s 3Q15 sales rose 13% qoq or 15% yoy to 12.5m smart devices (including 1.3m tablets). In 9M15, smartphone shipments rose 29% yoy to 33.4m units. It met 64% of our smartphone shipment forecast but we expect strong 4Q shipments due to the peak season and promising new products in the pipeline. We believe that TCL’s smartphone shipments could rise 27% yoy to 52.6m in 2015 (Figure 71). We expect TCL’s smartphone shipments to rise 15% yoy to 56m units in 2016 on the back of new product launches in 2H15 including 1) Idol 3 for the US and Eurozone markets, 2) Onetouch Flash 2 for the Asia Pacific market, and 3) Go Play, a 3-proof handset tailor-made for the youth segment (Figure 72).
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Oppo and Vivo were the fastest-growing vendors. Oppo and Vivo broke into the global top 10 in 2015 thanks to strong shipment growth in China and SEA markets. This stemmed from their high performance smartphones with unique features. Oppo and Vivo are focused on the mid-to high-range segment. They achieved the fastest growth rate among domestic brands in 9M15. In 9M15, Oppo’s shipments jumped 116% yoy to 30m units while Vivo surged 174% yoy to 28m units.
Oppo and Vivo have successfully established nationwide social channels, especially in the lower-tier cities. Their phones feature high-specs, excellent design and improved UI. Avoiding the stiff competition in the low-end segment has proved to be a successful strategy thus far. Its hottest models are Vivo’s X5 (Rmb2,298/US$370) and Oppo’s R7 (Rmb2,499/US$400) (Figures 77 and 78).
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LeTV and QiKU are the market disruptors. With the Internet background of the parent companies (LeTV and Qihoo360), LeTV and QiKU are the most significant new handset brands in China in 2015. They launched very competitively priced smartphones which successfully drew consumer interest. LeTV and QiKU sell their models at cost in order to increase their user base to establish their own ecosystems. According to Sino Research, LeTV’s Max consistently ranked no. 1 in Aug-Oct 2015 in the Sub-Rmb3,000 segment in China. During the 11 Nov Singles Day campaign, QiKU’s online sales was the fifth highest after Xiaomi, Huawei, Meizu and Apple. This impressed us, as Qiku’s smartphone was only launched a month ago.
Component manufacturers were the star performers in 2015. At the beginning of 2015 we had compiled a report Xiaomi-driven hardware upcycle dated 2 January 2015, highlighted that the Chinese brands would outpace tier-1 International brands, especially in the Android camp, and components manufacturers for Chinese brands would be the key beneficiaries given they were freed from ASP pressure due to the significant hardware upcycle.
Hong Kong-listed component manufacturers that have high exposure to top-tier Chinese brands such as Huawei, Xiaomi, Oppo and Vivo have been outperforming the Hang Seng Index in 2015, as they also did in 2013 and 2014, reflecting strong earnings growth and the bright industry outlook (Figure 81).
Our sector top picks in 2015 were AAC Tech, Sunny Optical and Tongda Group. AAC Tech’s share price rose 24% while Sunny Optical’s share price advanced 35% and Tongda Group’s gained 53%. These stocks outperformed the Hang Seng Index by -7%.
Another good year for component manufacturers in 2016. We believe the share price momentum will continue in 2016 as the latest hardware upgrade cycle just took place, even in the sub-Rmb1,000 (US$150) segment.
Buy component manufacturers, hold vendors. We stay positive on Hong Kong-listed component manufacturers that have a strong Chinese customer base, such as AAC Tech (2018 HK, Add), Sunny Optical (2382 HK, Add) and Tongda Group (698 HK, Add), as we believe they will be the key beneficiaries due to 1) dominant supply chain status, 2) above industry-average smartphone shipment growth from their customers, underpinned by market share gains in China and rapid expansion in overseas markets, and 3) their ability to sustainably elevate the value of their components, with stable gross margins, due to significant specification upgrades in the new round of hardware upgrade cycle (high-resolution cameras, metal casings, speaker boxes and haptics) in the midrange – sub Rmb2,000 segment (US$300 to US$400).
On the other hand, we suggest investors adopt a wait and see approach to Chinese handset vendors due to escalating BOM costs and declining ASP due to keen competition in China and the global smartphone markets. Even so, we expect handset shipment growth for Lenovo, TCL and Coolpad to remain resilient in 2016.
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AAC Tech, Tongda Group and Sunny Optical are top picks
We remain Overweight on the China smartphone sector. Our top sector picks are AAC Tech, Tongda Group and Sunny Optical.
AAC Tech (2018 HK, Add) has a promising new product pipeline for Apple (haptics and speaker box upgrades) and strong sales growth prospects for the Chinese brands (acoustics upgrades and RF/mechanical project wins).
Tongda Group (698 HK, Add) is the likely key beneficiary of the low metal casing penetration rate among Chinese vendors thanks to its dominant position as a domestic supplier of smartphone casings (metal casings and high-end precision plastic casings).
We also positive on Sunny Optical (2382 HK, Add), as we believe it is moving up the value chain to upstream. Sunny could also benefit from significant camera upgrades among Chinese vendors.
In the small cap space, we like Cowell (1415 HK, Add), as it is benefits from the continuing iPhone camera upgrades, as well as what we see as cheap valuation.
We also like TK Group (2283 HK, Add), as in our view it will benefit from the fast-growing wearable device segment, thanks to customers wins.
We maintain our Hold ratings on TCL Communication (2618 HK, Hold) and Lenovo (992 HK, Hold) on the back of considerable margin pressure in the handset segment.
We maintain our Add rating on Coolpad Group (2369 HK, Add), as we believe the group will benefit from the new handset subsidy programmes from the three Chinese operators and expect further cooperation between LeTV and Coolpad.
Recommendations on component manufacturers:
AAC Technologies (2018 HK, Add) – AAC is the key beneficiary in the next round of product cycle upgrades, given the significant speaker box upgrades in the next generation iPhones and strong demand for speaker boxes among leading Chinese brands due to the wide adoption of high-end components. AAC is riding Apple’s strong new product pipeline (speaker box and haptic upgrades) as well as the strong sales growth prospects for Chinese brands (acoustic upgrades and RF/mechanical project wins). We believe AAC’s earnings growth will remain robust at 21% yoy in FY16 after an estimated 36% jump in FY15, thanks to a strong new product pipeline and ASP hikes for upgraded haptics and acoustic components. We forecast AAC delivering an EPS CAGR of 22% in FY14-17F, driven by revenue CAGR of 22% and a stable gross margin. We maintain an Add call on AAC with a higher target price of HK$65.0 as we roll over our valuation to FY16, based on a FY17 P/E of 15.2x (1 s.d. above its 5-year average).
Cowell e Holdings (1415 HK, Add) – Cowell is riding on iPhone’s endless cameras upgrades thanks to its primary front-facing camera modules supplier status. Apart from that, Cowell will start providing rear-facing cameras for iPhone’s legacy products in FY16. We are also positive on the potential upgrade (thinner, waterproof, functions add) in the front-facing camera in the next generation of iPhones. We project Cowell to deliver 8% net profit growth in FY16 as the next version of the iPhone is expected to be launched in Sep 16 and following stronger growth of 15% in FY17, thanks to full-year contribution of iPhones 7 sales. We maintain our Add rating on Cowell due to what we view as its compelling valuation and solid relationship with Apple. Our target price (HK$4.44) is based on a FY17 P.E of 6.0x, in line with the small-cap Apple component suppliers.
Figure 83: Cowell's 12 month forward P/E
SOURCE: CIMB, BLOOMBERG
Sunny Optical (2382 HK, Add) – We think that Sunny is a key beneficiary from the significant upgrades in camera resolutions and functional additions among Chinese vendors, thanks to its dominant market share in the domestic brands supply chain. Furthermore, we are positive on the rapid growth in handset lens sets and vehicle lens sets divisions which has led it up the value chain towards becoming an upstream optical components manufacturer. In our view, its gross margin will be protected by the sustainable image pixels migration in Chinese vendors and its high-margin optical components segment’s rapid growth. With 17% revenue CAGR, we forecast 27% EPS CAGR in FY14-17, underpinned by Sunny’s fast-growing high-margin divisions (handset lens sets and vehicle lens sets) and steady growth of the HCM manufacturing division. Maintain Add. Share price catalysts are robust growth in handset lens sets and vehicle lens sets divisions. We raise our target price to HK$21.40 as we roll over to FY16. Our target price (HK$ 21.40) is based on a FY17 P/E of 16x (its upcycle peak valuation).
Tongda Group (698 HK, Add) –Tongda is one of the key beneficiaries of the wide adoption of metal casings among domestic brands on the back of a low metal casing penetration rate among Chinese vendors. Tongda’s metal casings customers include Huawei, Xiaomi, Oppo, Vivo and QiKU. Recent new model launches such as QiKU Youth Edition (Rmb999) and Xiaomi Redmi Note3 (Rmb899) are equipped with metal casings produced by Tongda. On the other hand, we expect the new precision rubber parts product launch for a new customer will bring a new revenue stream for the group in FY16. We reiterate our Add recommendation, with the strong growth of the handset division a potential catalyst. Our target price is raised to HK$2.00 as we roll over to FY16, based on a FY17 P/E of 11x, on par with its peers.
TK Group (2283 HK, Add) – We expect TK Group to maintain a c.20% topline growth in FY16, driven by new customers gain and new projects won in the mobile phone and wearable divisions and increased orders from Philips. On the other hand, we believe its gross profit margin will expand by 1% pts to c.28% in FY16 due to an improved utilisation rate in the automotive division and higher automation in plastic component manufacturing services. We maintain an Add recommendation on TK Group due to its cheap valuation and appealing earnings growth. Potential catalysts are continuous gains in new customers, rapid growth in high-main segments and a potentially higher dividend payout ratio. Our target price (HK$3.20) is raised as we roll it over to FY16, based on a FY17 P/E of 8.5x, on par with its peers (mould and plastic components manufacturers and handset component makers).
Coolpad Group (2369 HK, Add) – We believe that Coolpad have gone through the most difficult period in 2015, in view of its market share loss and inflated marketing expenses for channels rebuilding due to significant reduction in handset subsidies among Chinese mobile operators. Nevertheless, we expect Coolpad’s operation to improve in 2016, underpinned by 1) stable smartphone sales, and 2) a balanced distribution network between online channel (Dazen/QiKU), open channel (ivvi) and operator channel (Coolpad).
We maintain our Add call on Coolpad in view of favourable policy changes in the China smartphone market. On the other hand, we expect further cooperation between LeTV and Coolpad. Our SOP target price (HK$2.27) is based on 20x FY16 earnings for its services income, 8x earnings for its smartphone sales and cash of HK$3.1bn. Further cooperation with its second largest shareholder LeTV (with a 17.93% stake) could act as another share price re-rating catalyst.
Figure 87: Coolpad's 12 month forward P/E
SOURCE: CIMB, BLOOMBERG
Lenovo (992 HK, Hold) - We remain cautious about Lenovo’s smartphone shipments in CY16 because its smartphones lack innovative features and are relatively poorly designed. Hence, we expect its smartphone shipments to rise by only 4.1% yoy to 76m units. It might take time for the company to reposition its brands so PC will still be the cash cow for Lenovo. We do not expect Lenovo to be able to turn around its smartphone business in the short term. Maintain Hold with target of HK$7.90, unless we see significant progress in turning around its smartphone business. Our target price is unchanged, still based on 12x FY17 P/E.
TCL Communication (2618 HK, Hold) - TCL Communication (TCLC) experienced fast growth in smartphone shipments in 2013 and 2014, thanks to its successful transition from a vendor of feature phones to that of smartphones. TCLC stood at No. 9 in the global smartphone market in 3Q15 with a 3.4% share, underpinned by its well-established worldwide distribution network and strong brand name “TCL-Alcatel”. TCLC was also the largest Chinese vendor in export sales in 9M15 with over 30m units. We estimate TCLC to ship 56m smartphones (+15% yoy) in FY16 and 62m (+10% yoy) in FY17, driven by market share gains in North America, Middle East and Africa. On the back of c.10-15% smartphone shipment growth in FY16 and FY17 and a stabilized ASP and gross margin outlook, we believe TCLC’s profitability will remain healthy in FY16 and FY17, with earnings growth of 3-4% over that time frame. We maintain our Hold rating on TCLC with a target price of HK$6.34, based on a FY17 P/E of 7.5x, as we see a lack of short-term catalyst given margin and the ASP pressure.
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AAC Technologies Winner of the new wave of product upgrades
■ AAC is well-positioned to capture the upgrades in next generation iPhones and huge growth demand for high-end acoustic components from Chinese brands.
■ Gross profit margin is protected by ASP hikes in haptics and strong demand for high-end speaker boxes.
■ Its 22% EPS CAGR (FY14-17) provided strong support for its premium valuation.
■ Maintain Add. Our target price is raised to HK$65.0.
Promising outlook AAC is the key beneficiary in the next round of product cycle upgrades, given the significant speaker box upgrades in the next generation iPhones and strong demand for speaker boxes among leading Chinese brands due to the wide adoption of high-end components. AAC is riding Apple’s strong new product pipeline (speaker box and haptic upgrades) as well as the strong sales growth prospects for Chinese brands (acoustic upgrades and RF/mechanical project wins).
Riding iPhone’s continuous upgrades AAC is set to benefit from the 3D Force Touch upgrade and waterproof function additions to the next generation iPhones, thanks to its innovative products and its status as a primary Apple supplier. More importantly, it has been maintaining a higher-than-rivals market share in both acoustic and haptic components for Apple, thanks to the high quality of its products and production yield.
Strong demand from domestic brands As competition in the China smartphone market heats up, even mid-range Chinese smartphones (priced at c.US$200) have joined flagship models in adopting high-end acoustic components (like speaker boxes). This creates a huge demand for AAC’s acoustic products. Also, AAC secured more than 20 RF/mechanical projects for 2016 (4-5 projects for 2015), thanks to the popularity of metal casings among Chinese brands.
Stable gross margin outlook We believe AAC’s gross margin will be stabilised at around 42% in FY16 (41.8% in FY15), underpinned by ASP hikes in haptics for Apple and the accelerated adoption of high-end speaker boxes among Chinese brands.
22% EPS CAGR over FY14-17 We believe AAC’s earnings growth will remain robust at 21% yoy in FY16 after an estimated 36% jump in FY15, thanks to a strong new product pipeline and ASP hikes for upgraded haptic and acoustic components. We forecast AAC delivering an EPS CAGR of 22% in FY14-17, driven by revenue CAGR of 22% and a stable gross margin.
Maintain Add We maintain an Add call on AAC with a higher target price of HK$65.0 as we roll over our valuation to FY16, based on 15.2x FY17 P/E (1 s.d. above its 5-year average).
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Coolpad Group Ltd Beneficiary of handset subsidy reinstatement
■ Operational environment to turn positive as handset subsidies will be restored in 2016.
■ Smartphone shipment to grow 7% to 29m units in 2016.
■ Coolpad is the key beneficiary of the new round of handset subsidies programme.
■ Maintain Add, with SOP target price of HK$2.27.
Bright outlook in 2016 We believe that Coolpad have gone through the most difficult period in 2015, in view of its market share loss and inflated marketing expenses for channels rebuilding due to significant reduction in handset subsidies among Chinese mobile operators. Nevertheless, we expect Coolpad’s operation to improve in 2016, underpinned by 1) stable smartphone sales, and 2) a balanced distribution network between online channel (Dazen/QiKU), open channel (ivvi) and operator channel (Coolpad).
Riding the partnership with LeTV and Qihoo 360 Coolpad and Qihoo have set up a JV to develop a new handset brand “QiKU”, to be sold via the e-commerce channel, and a new QiKU smartphone was launched in Oct 15. QiKU became a top 5 best seller in JD.com’s 11 Nov Singles Day campaign. Meanwhile, in Aug 2015, LeTV bought 17.93% stake in Coolpad from its Chairman Mr Guo Deying to become the its second-largest shareholder. We expect a further cooperation between Coolpad and LeTV in content and hardware in 2016.
Handset subsides to be restored in 2016 Both China Mobile and China Unicom have announced very aggressive subsidy plans for custom-made handsets and wholesalers and retailers to boost the number of 4G subscribers in 2016. China Mobile targets to distribute 330m 4G smartphones while China Unicom plans to sell 150m 4G smartphones to regain their 4G market shares.
Coolpad is the key beneficiary Coolpad was previously the largest custom-made handset (TD-LTE) maker for China Mobile and the key handset (FDD-LTE) supplier for China Unicom. Therefore, we believe that Coolpad will be the key beneficiary of the new round of handset subsidies.
Smartphone shipment to grow 7% in 2016 On the back of substantial decrease in handset sales via operators due to subsidy cut by the three Chinese operators, we estimate Coolpad’s smartphone shipment will drop by 40% yoy to 27m units in 2015 (45m in 2014). We forecast its smartphone shipment to grow 7% to 29m units in 2016, in line with China's smartphone demand growth, supported by its brands rebuilding vs. open and e-commerce channel sales.
Maintain Add We maintain our Add call on Coolpad in view of the favourable policy change in the China smartphone market. Our SOP target price is based on 20x FY16 earnings for its services income, 8x earnings for its smartphone sales and cash of HK$3.1bn. Further cooperation with its second largest shareholder LeTV (with a 17.93% stake) could act as another share price re-rating catalyst.
IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN THE UNITED STATES IT IS DISTRIBUTED BY CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH. CIMB Securities Limited has had an investment banking relationship with Cowell e Holdings Inc within the preceding 12 months.
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Cowell e Holdings Inc Small products for Apple
■ Cowell is riding on iPhone’s endless cameras upgrades.
■ We are positive on potential camera upgrades in the next generation of iPhones.
■ Cowell is on track to deliver rear-facing cameras for Apple’s legacy products in 1Q16.
■ Our earnings forecasts are mainly driven by ASP hikes rather than by volume growth given our view that iPhone shipment growth will slow going forward.
■ We maintain our Add recommendation due to what we view as Cowell’s compelling valuation and solid relationship with Apple.
Riding on endless iPhone’s camera upgrades Cowell is riding on iPhone’s endless cameras upgrades thanks to its primary front-facing camera modules supplier status. Apart from that, Cowell will start providing rear-facing cameras for iPhone’s legacy products in FY16. We are also positive on the potential upgrade (thinner, waterproof, functions add) in the front-facing camera in the next generation of iPhones.
Adding capacity Cowell budgeted c.US$40m for upgrading its production facilities for the flip-chip and COB divisions in FY15. Capacity is slated to increase by 29% in 1H16. On the other hand, the group is well prepared for the technology change in camera modules such as system in package (SiP) for the next generation of Apple’s products.
Rear-facing camera for Apple We believe that Cowell is on the right track to deliver rear-facing camera modules for Apple’s products in 1Q16 while the new flip-chip machinery was installed at end-2015. We forecast Cowell to produce around 1m units/month of rear-facing camera modules for the legacy products with c.5% allocation (the third supplier) in the first year. The revenue from the new products will account for 15% of total revenue in FY16.
Stable gross margin outlook We believe that Cowell’s gross margin should stay stable at c.13% in FY16 (+0.6% pt in FY15), supported by the introduction of a rear-facing camera, resolution upgrades for iPhones 6/6S+ and improved product mix in COB camera modules.
Promising earnings growth outlook We project Cowell to deliver 8% net profit growth in FY16 as the next version of the iPhone is expected to be launched in Sep 16 and following stronger growth of 15% in FY17, thanks to full-year contribution of iPhones 7 sales.
Maintain Add We maintain our Add rating on Cowell due to what we view as its compelling valuation and solid relationship with Apple. We maintain our target price as we roll over to FY16 but have lowered our target P/E multiple to 6.0x for FY17, in line with the small-cap Apple component suppliers. Potential share price catalysts include new product launches for Apple and a stable iPhones sales outlook.
No. Of Lines (secondary Product) N/A N/A N/A N/A N/A
Rev per line (US$, 2ndary prod) N/A N/A N/A N/A N/A
Technology - PC hardware│Hong Kong│Equity research│January 5, 2016
Company Note
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Lenovo Group Long way ahead from PC to smartphone
■ While we acknowledge Lenovo’s market share expansion in the PC space, its ability to turn around its smartphone business in the short term remains a major concern.
■ Streamlining models and repositioning brands might halt its market share erosion. But turning profitable requires high-end exposure.
■ Maintain Hold, unless we see significant progress in turning around its smartphone business. Our target price is unchanged, still based on 12x FY17 P/E.
Market share contraction in China According to Counterpoint, Lenovo’s smartphone market share in China has dropped to 4.6% in 3Q15 from 7.6% in 1Q15 (and 13.3% in 2014). The weakness stems from (1) a shrinking subsidised market, (2) fierce competition in China, (3) lack of popular models, and (4) a confusing branding strategy (it carried five different brands in 3Q15).
A ‘U-turn’ in its channel strategy Lenovo’s smartphones business suffered in China due to a shrinking subsidised market and rising online market. However, after a few quarters of investment in its online sales channel, Lenovo has changed its strategy to refocus on its traditional channels and retailers in China. We believe the growth for online sales will not stop but Lenovo does not have advantages for the online sales channel given its late entry.
Exposure to high-end smartphones is essential If we look at the market share by price band, most of Lenovo’s shipment are still below US$100 in China. Despite consolidating Motorola, its global exposure to smartphones above US$300 is still quite limited compared to Huawei, Xiaomi and Oppo who all have meaningful exposure for smartphones above US$300. A presence in the mid-to-high end space will not only improve profitability but is essential for brand awareness globally.
Streamlining models and brands Lenovo has consolidated its brands from five to three (Lemon, ZUK and Motorola) after it launched Lemon X3. Lemon is aimed at the mid- to high-end segment, mainly in China while the Motorola brand will focus on the overseas markets. It might take time for the company to reposition its brands so PC will still be the cash cow for Lenovo. We do not expect Lenovo to be able to turn around its smartphone business in the short term.
Watch for progress in non-PC business We expect Lenovo to ship around 73m smartphones (includes Motorola) in CY15, with over half of them overseas. We remain cautious about Lenovo’s smartphone shipments in CY16 because its smartphones lack innovative features and are relatively poorly designed. Hence, we expect its smartphone shipments to rise by only 4.1% yoy to 76m units. Profitability for its smartphone business rather than market share expansion will be the focus for Lenovo in CY16.
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Sunny Optical Technology (Group) Bright outlook for FY16
■ Sunny Optical (Sunny) is quickly moving up the value chain towards becoming an upstream optical components manufacturer.
■ The HCM division’s shrinking margin is mitigated by Chinese vendors’ migration to mega pixels.
■ The premium valuation is well supported by its two fast-growing high-margin divisions, i.e. handset lens sets and vehicle lens sets.
■ We maintain Add with a higher target price of HK$21.40 as we roll over to FY16.
Moving up towards upstream optical components We think that Sunny is a key beneficiary from the significant upgrades in camera resolutions and functional additions among Chinese vendors, thanks to its dominant market share in the domestic brands supply chain. Furthermore, we are positive on the rapid growth in handset lens sets and vehicle lens sets divisions which has led it up the value chain towards becoming an upstream optical components manufacturer.
Steady growth of handset camera modules (HCM) We expect its HCM segment’s revenue to increase c.15% yoy in FY16 (c.10% in FY15), driven by continuous mega pixel migration and functional additions such as OIS, dual-camera, Iris recognition and PDAF. Given the keen competition in low mega pixel products, we believe that the ongoing smartphone camera upgrades should support its falling GPM in this division.
Optical components lead earnings growth We believe that optical components manufacturing should lead earnings growth in FY16-17 thanks to its high margin. We expect revenue in handset lens sets division to reach c.30% yoy in FY16 after advancing c.150% yoy in FY15, underpinned by increased capacity (40m units/month by end-2015) and stable ASP (bigger contribution from high resolution products). We estimate vehicle lens sets division’s revenue could rise c.20% in FY16 (c.30% yoy in FY15), reflecting new customer gains.
High-margin segment protected the profitability In our view, its gross margin will be protected by the sustainable image pixels migration in Chinese vendors and its high-margin optical components segment’s rapid growth. Thus, we expect blended GPM to stabilise at 16.5-17% in FY15-17. With 17% revenue CAGR, we forecast 27% EPS CAGR in FY14-17, underpinned by Sunny’s fast-growing high-margin divisions (handset lens sets and vehicle lens sets) and steady growth of the HCM manufacturing division.
Maintain Add Maintain Add. Share price catalysts are robust growth in handset lens sets and vehicle lens sets divisions. We raise our target price as we roll over to FY16. Our target price is based on 16x FY17 P/E (its upcycle peak valuation).
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TCL Communication Growth in a highly competitive market
■ Shipment growth should remain stable over 2016-2017, underpinned by TCL’s best-in-class smartphone and well-established worldwide distribution network.
■ We forecast yoy smartphone shipment growth of 15% to 56m units in 2016 and 10% to 62m units in 2017, thanks to market share gains in N. America, Middle East and Africa.
■ We adjust our earnings forecasts to reflect stable smartphone shipment growth in FY16 and FY17 but we lower our FY16 figure slightly to reflect an ASP decline.
■ Maintain Hold rating given the lack of short-term catalysts.
Market share gains in challenge smartphone market TCL Communication (TCLC) experienced fast growth in smartphone shipments in 2013 and 2014, thanks to its successful transition from a vendor of feature phones to that of smartphones. TCLC stood at no. 9 in the global smartphone market in 3Q15 with a 3.4% share, underpinned by its well-established worldwide distribution network and strong brand name “TCL-Alcatel”. TCLC was also the largest Chinese vendor in export sales in 9M15 with over 30m units.
Strong international growth Despite keen competition from tier-1 international brands and increasing competition from other Chinese vendors that are aggressively expanding their footprints to overseas markets, especially Huawei, ZTE and Lenovo, TCL achieved particularly strong growth in North America and the Middle East markets in 9M15.
Strong products in the pipeline TCLC launched Idol 3, targeting the Europe and US markets, and Onetouch Flash 2,
targeting the Asia Pacific market, which have received strong customer feedback so far. In view of the fierce competition in the low-end smartphone market (US$100-150), the group has been switching its focus to the mid-range segment (US$150-300) in order to lift ASP and maintain margins. In addition, the group introduced a new generation of tablets (Xess) and smartwatches (Go Watch) to further enrich its product portfolio.
Profitability to be maintained We estimate TCLC will ship 56m smartphones (+15% yoy) in FY16 and 62m (+10% yoy) in FY17, driven by market share gains in North America, Middle East and Africa. On the back of c.10-15% smartphone shipment growth in FY16 and FY17 and a stabilised ASP and gross margin outlook, we believe TCLC’s profitability will remain healthy in FY16 and FY17, with earnings growth of 3-4% over that time frame.
Maintain Hold TCLC is trading at 7x FY16 P/E with a dividend yield of 6.3% and we see a lack of short-term catalysts given margin and ASP pressure, no thanks to keen competition in overseas markets. We maintain our Hold rating on TCLC and believe the group can maintain its profitability despite strong headwinds for the global smartphone market, thanks to its strong brand name and well-established worldwide distribution network. We roll over our target price to FY16, based on FY17 P/E of 7.5x.
Net Cash Per Share (HK$) (0.48) (1.27) (0.82) (0.40) 0.12
BVPS (HK$) 2.50 3.35 3.80 4.34 4.93
Gross Interest Cover 2.77 11.84 7.48 7.73 7.74
Effective Tax Rate 0.0% 3.6% 10.0% 12.0% 12.0%
Net Dividend Payout Ratio 37.2% 43.4% 43.7% 42.4% 42.4%
Accounts Receivables Days 79.1 79.8 100.1 101.4 102.0
Inventory Days 45.51 43.78 55.50 59.71 60.07
Accounts Payables Days 73.32 66.61 83.79 87.32 87.85
ROIC (%) 6.8% 25.4% 16.6% 17.3% 17.5%
ROCE (%) 5.8% 18.3% 15.0% 14.6% 13.8%
Return On Average Assets 2.23% 6.62% 5.16% 4.94% 4.77%
Ind Goods & Services│Hong Kong│Equity research│January 5, 2016
Company Note
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TK Group (Holdings) Limited Solid mould drives growth
■ TK Group is one of the leading one-stop plastic solution providers in China, set to benefit from the fast-growing wearable devices industry.
■ The top five largest customers are Polycom, Apple, Philips, Fitbit and SanDisk and could provide c.20% topline growth in FY16.
■ The key growth drivers are wearable devices and medical and healthcare segments.
■ EPS CAGR of 27% in FY14-17.
■ Maintain Add. Target price raised to HK$3.22, based on 8.5x FY17 P/E.
Accelerated earnings growth in FY16 We expect TK Group to maintain a c.20% topline growth in FY16, driven by new customers gained and new projects won in the mobile phone and wearable divisions and increased orders from Philips. On the other hand, we believe its gross profit margin will expand by 1% pts to c.28% in FY16 due to an improved utilisation rate in the automotive division and higher automation in plastic component manufacturing services.
Top five customers TK Group has a well-diversified customer base in various industries. Most of them are renowned tier-1 international brands in their industries. The top five customers are Polycom, Apple, Philips, Fitbit and SanDisk. They are collectively expected to account for around 40% of total revenue in FY15. On the back of the rising allocation from key customers, we forecast that they could contribute around 20% of topline growth in FY16.
Growth drivers We expect wearable devices (38% revenue CAGR in FY14-17) and the medical and healthcare (57% CAGR) segments to be the key growth drivers, thanks to continuous gains in new customers, such as Fitbit, Jawbone, GoPro and 3D Robotics, over the past few years and new order wins from Philips.
Gross margin rebounds in FY16 With the new fully automatic high precision mould fabrication facilities commencing operation, higher automation in plastic component manufacturer services and improved utilisation rates in the automotive parts mould fabrication division, we believe that TK Group’s blended GPM will rebound from c.27% in FY15 to c.28% in FY16.
Decent earnings growth in FY14-17 We revised downward our FY15-17 EPS forecasts by 1-4% due to reduced GPM assumptions. We forecast TK Group to deliver a 27% EPS CAGR in FY14-17, driven by rapid growth of wearable devices and healthcare divisions and GPM expansion.
Maintain Add We maintain an Add on TK Group due to its cheap valuation at 7x FY16 P/E and an attractive dividend yield of 5.4%. Potential catalysts are continuous gains in new customers, rapid growth in high-main segments and a potentially higher dividend payout ratio. Our target price is raised as we roll it over to FY16, based on 8.5x FY17 P/E, at parity with its peers (mould and plastic components manufacturers and handset component makers).
Unit raw mat ASP (%chg,2ndary) N/A N/A N/A N/A N/A
Ind Goods & Services│Hong Kong│Equity research│January 5, 2016
Company Note
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Tongda Group Holdings Ltd Smartphone casing run faster
■ Tongda’s metal casings customers include Huawei, Xiaomi, Oppo, Vivo and QiKU.
■ Tongda is one of the key beneficiaries of the faster-than-expected metal casings penetration among Chinese vendors, especially Huawei and Xiaomi.
■ New products for the tier-1 international brand should bring a new revenue stream.
■ EPS CAGR of 25%, driven by 23% topline growth and stable GPM outlook.
■ Maintain Add. Target price raised to HK$2.00, based on FY17 P/E of 11x.
Metal casings penetrating the sub-Rmb1,000 segment Tongda is one of the key beneficiaries of the wide adoption of metal casings among domestic brands on the back of a low metal casing penetration rate among Chinese vendors. Recent new model launches such as QiKU Youth Edition (Rmb999) and Xiaomi Redmi Note3 (Rmb899) are equipped with metal casings produced by Tongda.
Riding on the two fast-growing vendors, Huawei and Xiaomi Huawei and Xiaomi, which posted 48% yoy and 19% yoy shipment growth in 9M15, respectively, remained the largest customers for Tongda and combined formed more than 40% of total revenue in 9M15. In addition to other domestic customers such as Oppo, Vivo, QiKU and Meizu etc., Tongda is one of the key beneficiaries of the wide adoption of metal casings among domestic brands.
Gross margin in an uptrend We believe that Tongda’s gross profit margin (GPM) will be protected by the rising metal casing contribution. We expect Tongda to produce 11m metal casings (c.18% of 60m smartphone casings output) in FY15 and rise to 22m metal casings (c.30% of 72m output) which will support its GPM to stand above 24% in the next couple of years given higher GPM in metal casings.
New products to be launched in 2016 Tongda revealed plans to launch new products for a new customer (non-Chinese vendor). The products, precision rubber parts, have excellent sealing, waterproofing and insulating functions for the next generation of smartphone protection. Tongda expects to ship these in 2H16 and for it to become the new revenue stream for the group in FY16 as it will allow the group to tap into the tier-1 international brands supply chain.
High earnings visibility Leveraging its position as primary casings (both metals and high-precision plastics) supplier for Huawei and Xiaomi, Tongda should benefit from the stable volume growth and rising contribution from metal casings given the wider adoption of metal casings in low-to mid-range smartphones (sub-Rmb1,000). We forecast Tongda’s FY15 earnings to grow by 42% to HK$715m, driven by 30% topline growth and 0.7% pt of gross margin expansion. We estimate that it could achieve an EPS CAGR of 25% (FY14–17).
Maintain Add We reiterate our Add recommendation, with the strong growth of the handset division a potential catalyst. We raise our target price to HK$2.00 as we roll over to FY16, based on a FY17 P/E of 11x, on par with its peers.
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Rating Distribution (%) Investment Banking clients (%)
Add 58.1% 6.0%
Hold 30.4% 3.5%
Reduce 10.9% 1.0%
Distribution of stock ratings and investment banking clients for quarter ended on 30 September 2015
1528 companies under coverage for quarter ended on 30 September 2015
Corporate Governance Report of Thai Listed Companies (CGR). CG Rating by the Thai Institute of Directors Association (Thai IOD) in 2015, Anti-Corruption Progress Indicator 2015.
AAV – Very Good, 3B, ADVANC – Excellent, 3A, AEONTS – Good, 1, AMATA – Very Good, 2, ANAN – Very Good, 3A, AOT – Very Good, 2, AP - Good, 3A, ASK – Very Good, 3B, ASP – Very Good, 4, BANPU – Very Good, 4, BAY – Very Good, 4, BBL – Very Good, 4, BCH – not available, no progress, BCP - Excellent, 5, BDMS – Very Good, 3B, BEAUTY – Good, 2, BEC - Good, 3B, BECL – Very Good, 3B, BH - Good, 2, BIGC - Excellent, 3A, BJC – Good, 1, BLA – Very Good, 4, BMCL - Very Good, 1, BTS - Excellent, 3A, CBG – Good, 1, CCET – not available, 1, CENTEL – Very Good, 3A, CHG – Good, 3B, CK – Excellent, 3B, COL – Very Good, 3A, CPALL – Good, 3A, CPF – Very Good, 3A, CPN - Excellent, 5, DELTA - Very Good, 3A, DEMCO – Very Good, 3A, DTAC – Excellent, 3A, EA – not available, 3A, ECL – Good, 4, EGCO - Excellent, 4, EPG – not available, 3B, GFPT - Very Good, 3A, GLOBAL – Very Good, 2, GLOW - Good, 3A, GRAMMY - Excellent, 3B, GUNKUL – Very Good, 1, HANA - Excellent, 4, HEMRAJ – Very Good, 2, HMPRO - Excellent, 3A, ICHI – Very Good, 3A, INTUCH - Excellent, 4, ITD – Good, 1, IVL - Excellent, 4, JAS – not available, 3A, JASIF – not available, no progress, JUBILE – Good, 3A, KAMART – not available, no progress, KBANK - Excellent, 4, KCE - Excellent, 4, KGI – Good, 4, KKP – Excellent, 4, KSL – Very Good, 2, KTB - Excellent, 4, KTC – Very Good, 3A, LH - Very Good, 3B, LPN – Excellent, 3A, M - Good, 2, MAJOR - Good, 1, MAKRO – Good, 3A, MBKET – Good, 2, MC – Very Good, 3A, MCOT – Excellent, 3A, MEGA – Very Good, 2, MINT - Excellent, 3A, MTLS – Good, 2, NYT – Good, no progress, OISHI – Very Good, 3B, PLANB – Good, 3B, PS – Excellent, 3A, PSL - Excellent, 4, PTT - Excellent, 5, PTTEP - Excellent, 4, PTTGC - Excellent, 5, QH – Very Good, 2, RATCH – Excellent, 3A, ROBINS – Excellent, 3A, RS – Very Good, 1, SAMART - Excellent, 3B, SAPPE - Good, 3B, SAT – Excellent, 5, SAWAD – Good, 1, SC – Excellent, 3B, SCB - Excellent, 4, SCBLIF – not available, no progress, SCC – Excellent, 5, SCCC - Good, 3A, SIM - Excellent, 3B, SIRI - Good, 1, SPALI - Excellent, 3A, STA – Very Good, 1, STEC – Very Good, 3B, SVI – Very Good, 3A, TASCO – Very Good, 3A, TCAP – Very Good, 4, THAI – Very Good, 3A, THANI – Very Good, 5, THCOM – Excellent, 4, THRE – Very Good, 3A, THREL – Very Good, 3A, TICON – Very Good, 3A, TISCO - Excellent, 4, TK – Very Good, 3B, TMB - Excellent, 4, TPCH – Good, 3B, TOP - Excellent, 5, TRUE – Very Good, 2, TTW – Very Good, 2, TU – Very Good, 3A, VGI – Excellent, 3A, WORK – not available, no progress.
Comprises level 1 to 5 as follows:
Level 1: Committed
Level 2: Declared
Level 3: Established (3A: Established by Declaration of Intent, 3B: Established by Internal Commitment and Policy)
Level 4: Certified
Level 5: Extended.
CIMB Recommendation Framework
Stock Ratings Definition:
Add The stock’s total return is expected to exceed 10% over the next 12 months.
Hold The stock’s total return is expected to be between 0% and positive 10% over the next 12 months.
Reduce The stock’s total return is expected to fall below 0% or more over the next 12 months.
The total expected return of a stock is defined as the sum of the: (i) percentage difference between the target price and the current price and (ii) the forward net dividend yields of the stock. Stock price targets have an investment horizon of 12 months.
Sector Ratings Definition:
Overweight An Overweight rating means stocks in the sector have, on a market cap-weighted basis, a positive absolute recommendation.
Neutral A Neutral rating means stocks in the sector have, on a market cap-weighted basis, a neutral absolute recommendation.
Underweight An Underweight rating means stocks in the sector have, on a market cap-weighted basis, a negative absolute recommendation.
Country Ratings Definition:
Overweight An Overweight rating means investors should be positioned with an above-market weight in this country relative to benchmark.
Neutral A Neutral rating means investors should be positioned with a neutral weight in this country relative to benchmark.
Underweight An Underweight rating means investors should be positioned with a below-market weight in this country relative to benchmark.
*Prior to December 2013 CIMB recommendation framework for stocks listed on the Singapore Stock Exchange, Bursa Malaysia, Stock Exchange of Thailand, Jakarta Stock Exchange, Australian Securities Exchange, Taiwan Stock Exchange and National Stock Exchange of India/Bombay Stock Exchange were based on a stock’s total return relative to the relevant benchmarks total return. Outperform: expected to exceed by 5% or more over the next 12 months. Neutral: expected to be within +/-5% over the next 12 months. Underperform: expected to be below by 5% or more over the next 12 months. Trading Buy: expected to exceed by 3% or more over the next 3 months. Trading Sell: expected to be below by 3% or more over the next 3 months. For stocks listed on Korea Exchange, Hong Kong Stock Exchange and China listings on the Singapore Stock Exchange. Outperform: Expected positive total returns of 10% or more over the next 12 months. Neutral: Expected total returns of between -10% and +10% over the next 12 months. Underperform: Expected negative total returns of 10% or more over the next 12 months. Trading Buy: Expected positive total returns of 10% or more over the next 3 months. Trading Sell: Expected negative total returns of 10% or more over the next 3 months.
