TCL Communication Technology

Transcription

China handset sector
Macquarie Research
TCL Communication
Technology
HONG KONG
Now it’s the late comers who benefit
The only EM play immune to PRC competitive risk
We initiate coverage on TCL Comm with an Outperform rating and a TP of
HK$11.02 with a +57% TSR. We view TCL Communication as one of the few
handset vendors in China’s handset space that has the privilege to ride on
multiple growth drivers in the near/mid/long-term while at the same time
remaining immune to the cut-throat domestic competition.
2618 HK
Price (at 07:59, 14 Jan 2015 GMT)
Valuation
Outperform
HK$7.23
HK$
11.02
- PER
12-month target
HK$
Upside/Downside
%
12-month TSR
%
Volatility Index
GICS sector
Technology Hardware & Equipment
Market cap
HK$m
Market cap
US$m
30-day avg turnover
US$m
Number shares on issue
m
11.02
+52.4
+56.6
High
8,826
1,126
2.5
1,221
Investment fundamentals
Year end 31 Dec
Revenue
EBIT
EBIT growth
Reported profit
Adjusted profit
EPS rep
EPS rep growth
EPS adj
EPS adj growth
PER rep
PER adj
Total DPS
Total div yield
ROA
ROE
EV/EBITDA
Net debt/equity
P/BV
2013A 2014E 2015E 2016E
m 19,362 30,503 40,870 42,462
m
405 1,185 1,624 1,800
%
nmf 192.7
37.0
10.9
m
313 1,032 1,435 1,598
m
313 1,032 1,435 1,598
HK$
0.27
0.83
1.16
1.29
%
nmf 206.4
39.1
11.4
HK$
0.26
0.84
1.16
1.29
%
nmf 220.4
39.0
11.4
x
26.5
8.7
6.2
5.6
x
27.7
8.7
6.2
5.6
HK$
0.10
0.22
0.30
0.34
%
1.4
3.0
4.2
4.7
%
2.9
6.5
6.7
6.1
%
12.0
30.1
31.9
28.4
x
7.8
4.7
4.0
4.2
%
94.2
95.9
96.5
96.7
x
2.9
2.3
1.8
1.4
Source: FactSet, Macquarie Research, January 2015
(all figures in HKD unless noted)
Analyst(s)
Laetitia Yu
+852 3922 4725
Danny Chu, CFA
+852 3922 4762
[email protected]
[email protected]
16 January 2015
Macquarie Capital Securities Limited
16 January 2015
We expect the company to continue its solid growth momentum for the next two
years as: 1) under-penetrated emerging markets’ late-cycle feature phone to
smartphone migration will continue to be the near/mid-term driver; 2) the early
wave of developed markets’ transition from 3G to 4G, as TCL has been making
good progress penetrating developed markets (US and Europe); 3) TCL has
great potential to leverage its high cost/performance ratio to expand EM market
share at the expense of Nokia, Sony and Korean/Japanese handset vendors; 4)
the late adoption of 4G in emerging markets, where TCL already has well
established operations, will be the mid/long-term driver; 5) TCL faces much
smaller competitive risk vs other PRC peers thanks to insignificant domestic
market exposure.
Where we are different from market view
Market view
Macquarie view
EM smartphone migration could slow down.
EM smartphone mkt still underpenetrated + potential
share gain from Samsung/Nokia/Sony in EM
Penetration of developed markets + 4G ramp-up will
provide future ASP and margin uplift.
Little geographical / product positioning overlap hence
limited impact.
OPM leverage could offset GPM pressure
Feature phone business acts as a cash cow for TCL.
Operator channel has better demand visibility, higher
entry barriers, lengthier qualification period, hence
less competition.
Entry-level strategy offers superior operational
leverage and faces smaller product erosion downside.
Weak overseas brand recognition and lack of IP rights
are major barriers.
There is little room left for further product mix uplift.
Loss of market share due to Samsung price cuts /
Lenovo+Moto merger
GPM could face further downside.
Slowdown in phasing out feature phone business.
Heavy operator exposure overseas leaves TCL
exposed to risk of operator terminal strategy
change.
Entry-level product strategy won't be as profitable
as peers.
Other Chinese makers keen to expand overseas
pose serious threat.
Source: Macquarie Research, January 2015
Catalysts:
1) 4Q14 results, which we expect to be strong due to high 4Q seasonal demand;
2) New carrier partnership wins (currently company is in talks with Verizon) or
entering new markets (ie Egypt, Pakistan, Iraq, etc); 3) Upcoming monthly
shipment statistics, with larger high-end smartphone sales mix further uplifting
blended ASP/margin.
Valuation:
The stock is trading at 6.2x FY15E P/E versus its historical multiple of 9.5x
during mid-cycles, 15x during up-cycles and 7x during down-cycles. Our target
price of HK$ 11.02 is based on 9.5x P/E and FY15F EPS.
33
Macquarie Research
Inside
Now it’s the late comers who benefit
Rules of the game have changed – now
Company profile
it’s the late comers who benefit
35
Where we differ from consensus view
37
Valuation and scenario analysis
44
Company profile
46
Detailed business analysis
49
§ TCL Comm was listed on the HKEx in September 2004. TCL Corp., a
Chinese multinational electronics company (000100 CH), is the ultimate
controlling shareholder with a stake of 51%. TCL Comm acquired Alcatel
Mobile in May 2005 and has been selling mobile and Internet products under
2 brands: TCL for the PRC market and ALCATEL ONE TOUCH overseas.
§ TCL Comm is ranked No.6 (market share 3.9%) for global mobile phone
shipments and No.8 for smartphone shipments (market share 3.4%) in 3Q14.
Though headquartered in the PRC, the company had only 8.2% sales
exposure to China and the rest overseas (51.5% sales to Americas, 34.3% to
EMEA, 6.0% to APAC ex PRC) as of 9M14.
Fig 1 Where we are different from consensus view
Market perception
Macquarie view
EM smartphone migration
could slow down hence
TCL growth prospects are
capped.
EM smartphone penetration and TCL’s own smartphone
shipment diffusion rate are still below industry average hence still
has a lot of room to grow. Company also has great potential to
gain share from Nokia/Sony and Korean/Japanese brands in EM
entry-level smartphone segment.
There is little room left for
further product mix uplift.
Penetration into developed markets and the rapid ramp-up of 4G
business will provide the next lift for ASP and margin.
TCL could face loss of
market share as Samsung
gets aggressive on pricing.
There is still a distinct pricing gap after Samsung’s price cuts,
which targets the APAC region and is not a key market for TCL.
TCL phones are sold via operator channel vs Samsung via open
market.
Lenovo + Moto will pose
serious threat due to big
geographical overlap.
Moto targets mid/high end segment via the open channel while
TCL targets the low end relying on the operator channel. Low end
phones sold under Lenovo brand will likely face a weak brand
recognition hurdle overseas.
GPM could face further
downside.
Company intends to strategically balance GPM and opex/sales
ratio. There is also operational leverage to be gained.
Company is not doing
enough to phase out
feature phone business.
2G only makes single digit revenue contribution, requires little
opex and carries same OPM as 3G products. Manufacturing 2G
can actually generate extra cash and enhance facility utilization
rate.
Heavy operator exposure
overseas is a concern.
Operator channel has better demand visibility, higher entry
barriers and lengthier qualification process, hence less
competitive.
Entry-level product strategy
won't be as profitable as
peers.
Entry-level strategy helps TCL to achieve superior cost structure,
less intensive R&D, better scalability and faster time-to-market,
while ASP and margin erosion happen at a much slower pace.
Other Chinese makers
keen to expand overseas
Weak brand recognition and lack of overseas patents are main
hurdles for domestic brands’ overseas expansion. Emerging PRC
vendors mainly target APAC region, not a focus market for TCL.
Fig 2 2618 HK rel HSI performance, & rec history
.
Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, January 2015
(all figures in HKD unless noted)
16 January 2015
34
Macquarie Research
Rules of the game have changed – now it’s
the late comers who benefit
A key beneficiary of EM handset upgrade cycle
We think TCL Communication is one of the few brands that has a well-diversified
geographical business exposure and will continue delivering solid growth driven by emerging
markets’ late adoption of smartphone/3G/4G. Even though smartphone sales growth in
developed markets and China has slowed down, non-China emerging markets, with a
smartphone penetration of 15~30%, are still underpenetrated compared with the world
average (50%) and developed markets (65%), hence still have room to grow from here.
Being a big player in non-China EM markets, TCL has significant potential to continue
harvesting the remaining fruits in the late smartphone cycle. Additionally, both Nokia and
Sony are likely to scale down their handset businesses in the next 1~2 years. And the
Koreans/Japanese have been suffering from declining market share with the price-sensitive
EMs now becoming the major growth drivers rather than developed markets. TCL is likely to
be able to step in and meet the unfilled demand and further expand its global presence.
Riding the early wave of 3G-to-4G migration
Due to lower subsidies by carriers in developed markets and rising 4G adoption in certain
emerging countries, we expect demand for low-cost 4G phones to rise and start to ramp up in
scale from 2015. TCL, with well-established EM carrier partnerships and expanding
developed markets penetration, will ride the early wave of 3G-to-4G migration.
Expanding in
developed markets.
Given its superior cost structure vs peers, we believe TCL will have a distinct cost advantage
in the 4G entry-level segment (currently TCL 4G products carry ASP ~US$120 and GPM
~25%, compared with the company’s blended ASP US$54 and gross margin 19%).The
introduction of more affordable 4G chipset solutions from Qualcomm and especially Mediatek
in 2H14/1H15 should further benefit mass market handset vendors such as TCL. We expect
4G products to have a positive impact on the company’s profitability starting from 2H15.
Concerns over competitive risks are overdone
Most of market
concerns are
misconceptions in
our view.
We do acknowledge that competition in the handset space overall is likely to intensify
following Samsung’s recent price cuts on its mass market products, Lenovo’s acquisition of
Motorola, and the attempts by a number of Chinese handset vendors to expand overseas.
However, TCL, in our view, will not see much threat from this, and will remain immune due to
its geographically diversified business (which will help smooth out specific markets’ ups and
downs), superior cost structure, appealing price-performance products (a distinct pricing gap
vs Samsung and Motorola products), and unique channel strategy (mainly relies on operator
channel rather than Samsung/Moto’s open channel). In regards to other PRC handset
makers’ potential overseas expansion, we believe this will prove to be a rather timeconsuming and costly process for them due to high entry-barriers, and don’t expect it to pose
any meaningful threat to TCL in the foreseeable future.
Macquarie estimates vs consensus
FY13
FY14E
FY15E
FY16E
Comment on Mac vs Cons
19,362
30,503
40,870
42,462
Rapid EM smartphone migration + expanding presence in
DMs + market share gain from Nokia/Sony
19,362
29,803
2.35%
36,584
11.71%
41,770
1.66%
313
313
1,032
1,076
-4.12%
1,435
1,311
9.41%
1,598
1,476
8.26%
18.97%
19.27%
18.94%
18.56%
Cons
18.97%
Diff (%)
Normalized Opex % of sales
Mac
16.87%
19.23%
0.04%
18.97%
-0.04%
18.78%
-0.21%
15.26%
14.96%
14.32%
Cons
15.57%
15.11%
14.94%
Revenue (HK$mn)
Mac
Cons
Diff (%)
Net profit (HK$mn)
Mac
Cons
Diff (%)
Gross margin
Mac
16.87%
Multiple revenue growth drivers + opex savings
Downside risk due to more rapid smartphone margin
erosion.
Operational leverage due to superior scalability, efficient
business structure & expense control.
Source: Bloomberg, Macquarie Research, January 2015
16 January 2015
35
Macquarie Research
Expect solid earnings momentum to continue
We think TCL’s unique geographical exposure and product positioning are not yet well
understood by the market. Many of the above-mentioned growth drivers are underappreciated
and, if anything, the stock is more overshadowed by various industry-wide, or PRC market
related concerns, rather than company-specific ones.
~30% ROE with
attractive valuation.
16 January 2015
We expect the company to report record growth for FY14E (Net profit +230% y-y) thanks to a
successful business turnaround, and robust earnings to continue going into 2015 and 2016
(Net profit +39% and +11% y-y respectively, from FY14’s high base), accompanied by an
attractive ROE (FY14E 30%, FY15E 32%, FY16E 28%). The stock is trading at 6.2x FY15E
P/E versus its historical multiple of 9.5x during mid-cycles, 15x during up-cycles and 7x during
down-cycles. Our target price of HK$ 11.02 is based on 9.5x P/E and FY15F EPS. With one
of the lowest PEs among global peers yet still yielding a ~30% ROE, we believe TCL is one of
the most attractive plays in China’s handset space.
36
Macquarie Research
Where we differ from consensus view
Fig 3 Where we differ from consensus view
Market perception
Macquarie view
EM smartphone migration could slow down hence
TCL growth prospects are capped.
EM smartphone penetration and TCL’s own smartphone shipment diffusion rate are still below
industry average hence still has a lot of room to grow. Company also has great potential to gain
share from Nokia/Sony and Korean/Japanese brands in EM entry-level smartphone segment.
There is little room left for further product mix uplift. Penetration into developed markets and the rapid ramp-up of 4G business will provide the next lift
for ASP and margin.
TCL could face loss of market share as Samsung
There is still a distinct pricing gap after Samsung’s price cuts, which targets the APAC region and
gets aggressive on pricing.
is not a key market for TCL. TCL phones are sold via operator channel vs Samsung via open
market.
Lenovo + Moto will pose serious threat due to big
Moto targets mid/high end segment via the open channel while TCL targets the low end relying on
geographical overlap.
the operator channel. Low end phones sold under Lenovo brand will likely face a weak brand
recognition hurdle overseas.
GPM could face further downside.
Company intends to strategically balance GPM and opex/sales ratio. There is also operational
leverage to be gained.
Company is not doing enough to phase out feature 2G only makes single digit revenue contribution, requires little opex and carries same OPM as 3G
phone business.
products. Manufacturing 2G can actually generate extra cash and enhance facility utilization rate.
Heavy operator exposure overseas is a concern.
Operator channel has better demand visibility, higher entry barriers and lengthier qualification
process, hence less competitive.
Entry-level product strategy won't be as profitable as Entry-level strategy helps TCL to achieve superior cost structure, less intensive R&D, better
peers.
scalability and faster time-to-market, while ASP and margin erosion happen at a much slower
pace.
Other Chinese makers keen to expand overseas
Weak brand recognition and lack of overseas patents are main hurdles for domestic brands’
overseas expansion. Emerging PRC vendors mainly target APAC region, not a focus market for
TCL.
Below, we examine each of these factors and explain why we differ from the
market view:
1. With feature to smartphone transition gradually reaching saturation point,
growth outlook for TCL doesn’t look encouraging
EM penetration
growth + market
share gain
Why we differ: We acknowledge that feature phone to smartphone transition has indeed
reached a mature/late cycle, and overall smartphone market growth is very likely to slow
down going into 2015 and beyond. That said, we think TCL, which has ~70% exposure to
emerging markets, where the transition is still underway, still has room to grow (EM
smartphone penetration is only 15%~30% vs the global average of 50%).
With a relatively lower smartphone contribution base (53% of total shipments) versus its
global peers (~70% of total shipments), we expect meaningful margin/ASP uplift to continue
as smartphone shipment mix further expands. Additionally, we believe the company has
significant potential to expand market share at the expense of Nokia and Sony (both of which
are likely to gradually phase out their handset businesses, along with various Korean and
Japanese brands.
2. Given the on-going smartphone ASP erosion, further product mix
improvement will become increasingly difficult.
4G drives future
product mix uplift
Why we differ: We think the growing contribution from 4G smartphone (carrying a 10%~20%
ASP premium and ~5% higher GPM to 3G smartphones) shipments will provide the next leg
of further blended margin and ASP uplift. The company plans to actively ramp up 4G
shipments in the coming few years and expects a 15% shipment contribution for 2015 (vs 7%
FY14) with uplift effect likely to materialize in 2H15 according to our estimates.
Adoption of MediaTek’s more affordable SoC platform in 1H15 could bring further cost
benefits, and hence speed up 4G shipment ramp-up. We could even see a rebound in
smartphone ASP and margin in 2H15 (currently on a steady downward trend due to industrywide price erosion) if the 4G business reaches scalability faster than expected.
16 January 2015
37
Macquarie Research
Fig 4 Global handset maker smartphone shipment penetration
2Q14
Handset
shipments
(mn units)
Market Y-Y growth
share
rate
Smartphone
shipments
(mn units)
Market
share
Y-Y Smartphone
growth
shipment
rate penetration
Samsung
Nokia
95.3
50.3
22.5%
11.9%
-10.9%
-17.7%
74.5
23.5
25.3%
8.0%
-2.0%
-6.3%
78.2%
46.7%
Apple
35.2
8.3%
12.8%
35.2
11.9%
12.8%
100.0%
Huawei
20.6
4.9%
59.7%
20.1
6.8%
81.1%
97.6%
Lenovo
16.0
3.8%
40.4%
15.8
5.4%
39.8%
98.8%
Xiaomi
15.1
3.6%
268.3%
15.1
5.1%
268.3%
100.0%
LG
19.0
4.5%
6.7%
14.5
4.9%
19.8%
76.3%
Coolpad
13.0
3.1%
26.2%
13.0
4.4%
26.2%
100.0%
ZTE
13.6
3.2%
-22.7%
10.6
3.6%
-7.8%
77.9%
Sony
9.6
2.3%
-12.2%
9.4
3.2%
-2.1%
97.9%
16.3
3.8%
34.7%
8.7
2.9%
171.9%
53.4%
5.4
1.3%
4.2%
3.8
1.3%
60.7%
70.4%
423.5
100.0%
5.9%
295.0
100.0%
26.6%
69.7%
TCL-C
Motorola
Global total
Source: IDC, January 2015
3. Loss of market share post Samsung’s cut in ASP and shift to mass market
product segment
Why we differ: We conducted a detailed analysis comparing Samsung and TCL’s recently
launched low/mid-end products, their retail price, specifications, as well as target markets,
and found that:
Distinct channel and
pricing gap vs
Samsung.
1)
Even after price cuts, Samsung’s handsets are still priced at a distinct premium to
TCL/Alcatel ones, hence TCL still outperforms in terms of price-performance ratio;
2)
TCL has much fewer models than Samsung. A leaner product line in addition to its costefficient PRC based production facility could offer superior scale/cost benefits;
3)
The markets where Samsung have been getting aggressive on pricing are mostly
emerging APAC countries, where TCL has very little exposure (15%~18%) hence
shouldn’t feel much of an impact;
4)
In the EMEA and Americas regions where Samsung and TCL have meaningful overlap in
terms of market presence, Samsung mainly sells its products via open channel
distributors mostly targeting mid/high-end customers, while 80% of TCL’s products are
shipped to the operator channel with most positioned as entry-level handsets.
With a distinct gap in pricing, market positioning and channel strategy, we see very little
overlap between the two companies’ businesses hence believe the concern is overdone.
16 January 2015
38
Macquarie Research
Fig 5 TCL vs Samsung product comparison
TCL Alcatel
Hero 2
Hero 8
Idol 2S
Idol 2 Mini S
Pop 7S
Pop 8S
Pop 2
Network
2G + 3G + 4G
2G + 3G + 4G
2G + 3G + 4G
2G + 3G + 4G
2G + 3G + 4G
2G + 3G + 4G
2G + 3G + 4G
Announced 2014, September 2014, September 2014, February
2014, February
2014, January
2014, September 2014, September
1080 x 1920 pixels, 1200 x 1920 pixels, 720 x 1280 pixels, 540 x 960 pixels, 600 x 1024 pixels, 800 x 1280 pixels, 480 x 854 pixels,
Display
6.0 inches
8.0 inches
5.0 inches
4.5 inches
7.0 inches
8.0 inches
5.0 inches
Memory
ROM 16GB
ROM 8/16/32 GB ROM 8GB
ROM 4GB
ROM 4GB
ROM 8GB
ROM 8GB
RAM 2GB
RAM 2GB
RAM 1GB
RAM 1GB
RAM 1GB
RAM 1GB
RAM 1GB
Camera
Primary 13.1MP
Primary 5MP
Primary 8MP
Primary 8MP
3MP
Primary 5MP
Primary 5MP
Secondary 5MP
Secondary 2MP
Secondary 1.3MP Secondary 2MP
Secondary 3MP
Android OS, v4.4.2 Android OS, v4.4.2 Android OS, v4.3 Android OS, v4.3 Android OS, v4.4.2 Android OS, v4.4.2 Android OS, v5.0
OS
(KitKat)
(KitKat)
(Jelly Bean),
(Jelly Bean),
(KitKat)
(KitKat)
(Lollipop)
SoC Qualcomm
SoC Qualcomm
Qualcomm
Qualcomm
Qualcomm
SoC MediaTek
SoC Mediatek
Chipset
Snapdragon 400 Snapdragon 400 MSM8926
MSM8916
MSM8916
MT6592T
MT8392
MSM8926
MSM8926
Snapdragon 400 Snapdragon 410 Snapdragon 410
Octa-core 2.0 GHz Octa-core 2.0 GHz Quad-core 1.2 GHz Quad-core 1.2 GHz Quad-core 1.2 GHz Quad-core 1.2 GHz
CPU
Quad-core 1.2 GHz
Cortex-A7
Cortex-A7
Cortex-A7
Cortex-A7
Cortex-A7
Cortex-A53
Battery
3100 mAh
4060 mAh
2150 mAh
2000 mAh
3240 mAh
4100 mAh
2500mAh
Retail price US$451
US$297
US$241
US$190
US$155
US$170
US$50
Samsung
Network
Galaxy A5
Galaxy A3
Galaxy Ace 4 LTE Galaxy Avant
Galaxy Ace NXT
2G + 3G + 4G
2G + 3G + 4G
2G + 3G + 4G
2G + 3G
2G + 3G + 4G
Announced 2014, August
2014, August
June, 2014
1280x70 pixels, 5 960x540 pixels, 4.5 480x800 pixels, 4
Display
inches
inches
inches
Memory
ROM 16GB
ROM 8GB
ROM 4GB
RAM 2GB
RAM 1GB
RAM 1GB
Camera
Primary 13MP
Primary 8MP
5MP
Secondary 5MP
Secondary 5MP
0.3MP
OS
Android 4.4
Android 4.4
Android 4.4
Qualcomm
Qualcomm
Chipset
NA
MSM8916
MSM8916
Snapdragon 410 Snapdragon 410
Quad-core 1.2 GHz Quad-core 1.2 GHz Dual-core 1.2 GHz
CPU
Cortex-A53
Cortex-A53
Cortex-A7
Battery
2300mAh
1900mAh
1900mAh
July, 2014
July, 2014
960x540 pixels, 4.5 480x800 pixels, 4
inches
inches
ROM 16GB
ROM 4GB
RAM 1.5GB
RAM 0.8GB
Primary 5MP
3.15MP
Secondary 0.3MP NA
Android 4.4
Android 4.4
Qualcomm
NA
MSM8226
Snapdragon 400
Quad-core 1.2 GHz Single-core 1.2
ARM Cortex-A7
GHz Cortex-A7
2100mAh
1500mAh
Retail price US$420
US$230
US$ 315
US$265
US$120
Galaxy Core 2
Galaxy Young 2
3G WCDMA 900 /
2G + 3G
1900 / 2100
June, 2014
June, 2014
800x480 pixels, 4.5 320 x 480 pixels,
inches
3.5 inches
ROM 4GB
ROM 4GB
RAM 0.8GB
RAM 0.5MB
Primary 5MP
3.15MP
Secondary 0.3MP NA
Android 4.4
Android 4.4
NA
NA
Single-core 1 GHz
Cortex-A7
2000mAh
1300mAh
Jun US$195 / Sep Jun US$135 /
US$135 / Dec
September US$85
US$85
/ Dec US$ 65
Quad-core 1.2 GHz
Source: GSMArena, Macquarie Research, January 2015
4. Loss of market share post Lenovo-Motorola merger
Why we differ: Given Lenovo’s solid execution track record and management’s target to
have Moto business break even in the next 4~6 quarters, we don’t expect the company to get
aggressive on pricing, but rather adopt a cautious approach of balancing market share and
profitability, to roll out its Moto+Lenovo dual brand strategy.
Lenovo’s brand recognition is quite limited overseas, while Moto, which has a much wider
market recognition, mainly targets the mid-/high-end product segment and will continue to
focus on this segment post the consolidation (according to Lenovo management).
Additionally, like Samsung, Moto relies heavily on open channel sales (Lenovo is likely to
adopt the same channel strategy after entering those markets after Motorola consolidation is
completed) rather than the operator channel which is TCL’s focus, hence we don’t see any
meaningful overlap here either.
5.
An expanding mix of entry-level smartphones could further dilute GPM, which
already touched the 19% level in 3Q14
Why we differ: The company has set a 19% gross margin benchmark for the near/mid-term
and is aiming for a stable 85%/15% shipment breakdown for entry-level (17%~18%
GPM)/advanced smartphones (20% GPM). But note that GPM is not the only KPI the
company focuses on as OPM should also be taken into account.
16 January 2015
39
Macquarie Research
Fig 6
TCL Com gross margin and opex/sales trend
25.0%
20.0%
19.9%
19.6%
19.6%
19.5%
19.0%
19.4%
19.2%
19.2%
18.5%
18.3%
18.1%
18.5%
17.8%
17.5%
17.0%
16.8%
16.7%
16.7%
16.5%
16.4%
16.3%
16.0%
15.8%
15.6%
15.0%
10.0%
5.0%
0.0%
1Q14
2Q14
3Q14
4Q14F
1Q15F
2Q15F
Gross margin (%)
3Q15F
4Q15F
1Q16F
2Q16F
3Q16F
4Q16F
Opex % of sales (%)
Source: Company data, Macquarie Research, January 2015
Management plans to strategically manage the shipment mix of entry-level/advanced
smartphones rather than sticking strictly to the 85%/15% target. According to the company, if
it gets more operational leverage from shipping entry-level smartphones rather than
advanced ones (which carry high GPM but also a higher opex/sales ratio due to higher sales
and marketing, R&D expenses), it will shift the product mix towards more entry-level
smartphones. This might put some pressure on GPM but would contribute a flat or even
higher OPM and better economies of scale (as entry-level devices are normally shipped in
much higher volume than advanced models).
TCL will strategically
balance GPM and
OPM.
Fig 7 Improving product mix
800
700
681
619
645
643
624
587
600
500
469
609
605
550
502
461
457
417
409
407
468
591
479
460
554
571
493
459
400
300
200
170
168
190
162
126
180
159
120
154
151
171
114
100
0
1Q14
2Q14
3Q14
4Q14F
1Q15F
Blended ASP (HK$)
2Q15F
3Q15F
Smartphone ASP (HK$)
4Q15F
1Q16F
2Q16F
3Q16F
4Q16F
Feature phone ASP (HK$)
6.
Feature phone
business is TCL’s
cash cow.
The company is not doing much to phase out feature phones, which is margin
dilutive but still accounts for around ¼ of total shipments
Why we differ: Feature phones have ~20% weighting as a % of total shipment volume at this
stage, but only make a high single digit revenue contribution. Although feature phone margin
is lower than that of smartphones (16%, vs 17%~18% for entry-level smartphones and 20%
for advanced smartphones), they incur very little opex so the company can actually
manufacture feature phones as an ad-hoc to leverage any idle capacity and achieve a higher
utilization rate.
Regardless of the slightly lower GPM, feature phones actually carry the same OPM as
smartphones. With that plus a less competitive playing field and a more stable margin/ASP
outlook, management sees the feature phone segment as a cash generator and intends to
manage it strategically rather than actively phasing out this part of business.
16 January 2015
40
Macquarie Research
Fig 8 TCL smartphone vs feature phone revenue contribution
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14F1Q15F2Q15F3Q15F4Q15F1Q16F2Q16F3Q16F4Q16F
Smartphone revenue contribution (%)
Feature phone revenue contribution (%)
7. Potential concerns over high business exposure to operator channels
Well diversified
operator exposure.
Why we differ: TCL has ~80% of total handset shipments as well as ~70% of smartphone
shipments selling through the operator channel. Investors might have concerns on such a
high operator exposure, as recent headwinds in China’s smartphone market post operators’
subsidy cuts have made several operator channel handset vendors vulnerable. We’d like to
point out that TCL is more immune to such risk given:
1)
It has a much more diversified geographical exposure (In 3Q14, 51.7% revenue
came from the Americas, 35.6% from EMEA, 4.7% from APAC and only 8.06% from
China). As different markets have different upcycles / downcycles, having a welldiversified business can help to smooth out the cyclical elements of the industry, or
sudden policy changes in any specific market.
Fig 9 TCL's carrier/distributor partners across the globe
Source: Company data, January 2015
2)
16 January 2015
It has an average product life cycle of 9 months compared to 12-18 months for
leading international brands, which enables the company to respond more quickly to
changing demands and tastes of operators and consumers, and even shift business
focus from one market to another.
41
Macquarie Research
Superior scale in
operator channel.
3)
The company has consolidated its production lines and going forward will produce
almost all of its products in its new Huizhou facility (where labor supply is high and
monthly wage is as low as RMB2,000~4,000), which further relieves pressure from
labor costs and continues to provide consumers with relatively cheap products.
With the business focus more on profitability and cost control and less R&D driven,
we believe economies of scale play a key role in the company’s long-term business
planning. By targeting the operator channel (rather than open channel or ecommerce channel which cater more to niche market customers) it is much easier
and faster to achieve scalability, hence is the correct strategy for the company in our
view.
4)
The company recently acquired the Palm brand from HP. Though details of its Palm
project are yet to be unveiled, we believe it is likely that TCL will launch products
under “Palm” and sell through the e-commerce/open channel from late 2015
onwards. This could gradually diversify the company’s operator channel exposure in
the mid-/long-term in our view.
8. Entry-level vendors won’t be as profitable as mid/high end ones
Why we differ: The company positions itself as a fast-fashion, price-friendly brand. Its
products are often trendy looking, which is more likely to appeal to mass market customers,
rather than high specifications that only niche-market tech-savvy customers would tend to
appreciate. A less intensive R&D driven business model provides the company with a shorter
time-to-market cycle. Its quick-to-market products have an average product life cycle of 9
months compared to 12-18 months for leading international brands.
Entry-level offers
superior leverage.
A 1Q~3Q shorter lead-time normally provides meaningful savings on R&D, production,
personnel and inventory costs, at the same time gives the company a ~2% opex to sales
advantage over its peers according to our estimates. As a result, TCL can either enjoy a
higher net margin or launch products at more appealing prices to competitors. Additionally, a
shorter lead time also enables the company to respond more quickly to changing demands
and tastes of operators and consumers. We believe this unique advantage is underappreciated by investors.
9. Threats from domestic handset makers who are also keen to expand
overseas
Fig 10 Chinese handset vendors’ patent portfolios
30,000
25,000
20,000
15,000
10,000
Total no. of patents
Meizu
Gionee
Vivo
Xiaomi
Oppo
Coolpad
TCL
Lenovo
Huawei
0
ZTE
5,000
No. of patents recognized overseas
Source: State Intellectual Property Office of the PRC, January 2015
16 January 2015
42
Macquarie Research
Why we differ: Due to lower logistics hurdles, less IP rights concerns, and potentially fewer
cultural conflicts, it is generally easier for Chinese handset vendors to expand into other
emerging APAC countries, and many of them have already done so. TCL has always tended
to be cautious on its emerging APAC and PRC business, given the region’s intense
competition, low ASP and margin. The company’s business exposure to emerging
APAC+PRC is around 15%~18% hence it would not feel much impact if the competition
heats up.
High barriers in EMEA &
Americas markets.
Regarding the possibility of other Chinese handset makers penetrating EMEA or the
Americas, it has been attempted and proven costly, risky and time consuming. So far only
three Chinese vendors have meaningful EMEA and Americas business, namely TCL (post its
2005 acquisition of Alcatel), Huawei and ZTE (both of which have had established telecom
equipment businesses with overseas operators for over a decade). And now Lenovo intends
to join the trio, via its acquisition of Moto. But it will take Lenovo a few quarters to complete
the consolidation and then turn around the business according to Lenovo management. We
don’t expect a significant change in the competitive dynamics for TCL in the next 1~2 years.
In the longer term we expect the major Chinese handset vendors to co-exist in the overseas
markets and together take share from traditional international big brands on the back of
superior pricing and cost advantage.
Fig 11 TCL Comm's global presence
Business Unit
Location
Headquarter
Shenzhen
Global research facilities
Shanghai, Ningbo, Huizhou, Shenzhen and Chengdu
Global factory
Huizhou
Products sold
Over 160 countries globally
Repair centres
115 globally
Representative offices
100 globally
Staff headcount
14,000 globally
16 January 2015
43
Macquarie Research
Valuation and scenario analysis
The stock is trading at 6.2x FY15E P/E versus its historical multiple of 9.5x during mid-cycles,
15x during up-cycles and 7x during down-cycles. Our target price of HK$ 11.02 is based on
9.5x P/E and FY15F EPS.
Among the Emerging Leaders, we like to stretch out our scenarios to reflect potential
outcomes and look at three-year rather than one-year outcomes. We view TCL as an
Emerging Leader that could potentially generate a 100% return over 3 years.
On the downside, economic uncertainties as well as currency volatility in the EM region might
raise market concerns for the coming two years. Even though the company has been running
a well-established overseas business with well-diversified business exposure and well
hedged currency exposure for over a decade, overall shipments, ASP and gross margin could
come under pressure in case of an EM downturn. The stock trading multiple might also come
under pressure due to market concerns over EMs. In our bear case scenario analysis we
lower our sales estimates from base case levels by 23%~32% for the period FY15~FY17 and
apply a 7x trading multiple (based on FY15E EPS), which was where the stock was trading
during the previous EU debt crisis. This implies a HK$6.50 target price, or 10.1% to downside
the current share price.
Fig 12 Bear case scenario analysis
FY13
FY14E
FY15E
FY16E
FY17E
Base case revenue (HK$ mn)
Base case EPS (HK$ cents)
EPS y-y growth (%)
TP (9.5x FY15E EPS, HK$)
Current price (HK$)
Upside/Downside (%)
19,362
26
30,503
84
223%
40,870
116
38%
42,462
129
11%
49,099
146
14%
Bear case revenue (HK$ mn)
Bear case EPS (HK$ cents)
EPS y-y growth (%)
TP (7x FY15E EPS)
Current price (HK$)
Upside/Downside (%)
19,362
27
30,503
84
214%
32,265
93
11%
32,222
101
8%
39,765
118
17%
11.02
7.13
54.6%
6.50
7.13
-10.1%
On the upside, we are slightly more conservative than street consensus in our base case
gross margin forecasts. It is possible that gross margin erosion happens slower than our
expectation. In this case we slightly revise up our gross margin estimates, and estimates for
FY15E~FY17E EPS rise by 9%~25%. With 9.5x FY15E EPS, we get a target price of
HK$12.05, implying 66.7% upside to the current share price.
Fig 13 Bull case scenario analysis - better growth margin prospect
FY13
FY14E
FY15E
FY16E
FY17E
Base case gross margin (%)
EPS y-y growth (%)
Current price (HK$)
Upside/Downside (%)
19.0%
26
19.3%
84
223%
18.9%
116
38%
18.6%
129
11%
18.3%
146
13%
Bull case gross margin (%)
Bull case EPS (HK$ cents)
EPS y-y growth (%)
Current price (HK$)
Upside/Downside (%)
19.0%
27
19.3%
84
214%
19.3%
127
52%
18.9%
156
23%
18.6%
182
17%
11.02
7.13
54.6%
12.05
7.13
66.7%
16 January 2015
44
Macquarie Research
Additionally, we believe it is possible that TCL could gain market share in emerging markets
and expand its presence in developed markets more rapidly than our base case expectation.
Applying a higher shipment growth projection, we get 12%~53% higher EPS estimates for
FY15E~FY17E. With 9.5x FY15E EPS, we get a target price of HK$12.33, implying 70.5%
upside to the current share price.
Fig 14 Bull case scenario analysis - better shipment prospects
FY13
FY14E
FY15E
FY16E
FY17E
Base case revenue (HK$ mn)
EPS y-y growth (%)
Current price (HK$)
Upside/Downside (%)
19,362
26
30,503
84
223%
40,870
116
38%
42,462
129
11%
49,099
146
14%
Bull case revenue (HK$ mn)
Bull case EPS (HK$ cents)
EPS y-y growth (%)
Current price (HK$)
Upside/Downside (%)
19,362
27
30,572
84
215%
49,118
130
55%
72,311
188
45%
91,321
223
19%
11.02
7.13
54.6%
12.33
7.13
70.5%
In both bull case scenarios, sales and profitability could more than double by FY17E from the
FY14E level according to our estimates, making TCL one of the Emerging Leaders with a
potential to generate 100% return over 3 years.
Fig 15 TCL target price scenario analysis
HK$
14.00
12.00
0.28
1.03
10.00
4.52
8.00
6.00
4.00
11.02
12.05
12.33
Bull case slower GPM
erosion
Bull case better
shipment
growth
6.50
2.00
0.00
Bear case lower PE
multiple
Base case 9.5x FY15E
EPS
16 January 2015
45
Macquarie Research
Company profile
TCL Corp holds 51%
stake.
TCL Comm was listed on the HKEx in September 2004. TCL Corp., a Chinese multinational
electronics company (000100 CH), is the ultimate controlling shareholder with a stake of 51%.
TCL Comm acquired Alcatel Mobile (JV between TCL and Alcatel) in May 2005 and has been
selling mobile and Internet products under 2 brands: TCL for the PRC market and ALCATEL
ONE TOUCH overseas.
TCL Comm was ranked No.6 (market share 3.9%) in terms of global mobile phone shipments
and No.8 in terms of smartphone shipments (market share 3.4%) in 3Q14. Though
headquartered in the PRC, the company only has 8.2% sales exposure to China and the rest
overseas (51.5% sales to Americas, 34.3% to EMEA, 6.0% to APAC ex PRC) as of 9M14.
Fig 16 TCL Communications Business Strategy
Source: Company data, Macquarie Research, January 2015.
TCL Communication is one of the few companies in Hong Kong or China that owns or licenses
2G, 2.5G, 2.75G, 3G and 4G patented technologies. It is also able to independently develop
products and solutions for GSM, GPRS, EDGE, CDMA, WCDMA, TDSCDMA and LTE.
Fig 17
TCL organizational structure
Huizhou Municipal City
Investment Holdings
8.79%
Li Dongsheng (Chairman)
Public shareholders
6.75%
84.46%
TCL Corp (000100 CH)
62.40%
TCL Multimedia (1070
HK)
73.69%
Highly Information
Industry
51.14%
TCL Com (2618 HK)
84.41%
50.3%
China Star
Optoelectronics
Tonly Electronics (1249
HK)
Home Appliances Unit
System Technology Unit
Emerging Business Unit
Other business
investment
55%
Techne Corporation
16 January 2015
46
Macquarie Research
Fig 18 TCL Com management profile
Age
Combined
Years with Years with
years with
TCL Com
Alcatel
the firm
Name
Title
Dong Sheng LI
Aiping GUO
Chairman / Founder
CEO
56
51
16
14
na
na
16
14
Jiyang WAMG
COO
44
14
na
14
Yuk Tung LIU
CFO, SVP
51
10
na
10
Kwok Chung WONG
EVP, GM of APAC
42
10
na
10
Xiaobin LV
SVP, GM of manufacturing
43
13
na
13
Nicolas ZIBELL
SVP, GP of America
46
11
2
13
Yves MOREL
SVP, GP of EMEA
53
11
4
15
Alain LEJEUNE
SVP, GM of handsets
50
3
14
17
Dan Dery
CMO, VP of marketing & products
42
3
6
9
Vittorio DI MAURO
VP, GM of smartphone
48
11
1
12
Laurent LABEE
VP, GM of customer care
51
11
8
19
Eric VALLET
VP, Account management
51
8
7
15
Fig 19 Management's interests in TCL Com and its associated companies
Management team
Interest in TCL Com Interest in TCL Corp
(2618 HK)
(000100 CH)
Interest in TCL
Multimedia (1070
HK)
Interest in Tonly
Electronics (1249
HK)
2.28%
0.00%
Dong Sheng LI
Aiping GUO
4.28%
0.91%
6.75%
0.00%
3.53%
0.00%
Jiyang WANG
0.66%
0.01%
0.30%
0.00%
Xubin HUANG
0.08%
0.04%
0.06%
0.003%
Xiaolin YAN
0.03%
0.02%
0.02%
0.00%
Fang XU
0.22%
0.01%
0.09%
0.005%
Siu Ki LAU
0.05%
0.00%
0.00%
0.00%
Andrew LOOK
0.01%
0.00%
0.00%
0.00%
Hoi Sing KWOK
0.04%
0.00%
0.00%
0.00%
Note: TCL Corporation (“TCL Corp.”) is a multimedia conglomerate with a vertically integrated business model
from upstream panel production to downstream consumer appliance sales, the ultimate controlling shareholder
of the Company. TCL Multimedia is a subsidiary of TCL Corp involved in TV manufacturing business. Tonly
Electronics is a subsidiary of TCL Corp involved in audio & video products ODM business.
Source: Company data, HKEx, January 2015
Parent company has
been increasing
stake in TCL Comm.
16 January 2015
TCL Com’s parent company TCL Corp has been continuously and frequently raising its stake
in TCL Com in recent months, which we believe is a good indicator of the parentco’s
confidence in TCL Com, reinforcing our positive view on TCL Com’s growth prospects.
47
Macquarie Research
Fig 20 TCL change of substantial shareholders' interest
No. of shares bought/ sold/
involved
TCL Corporation
2,050,000(L)
5,478,000(L)
2,000,000(L)
3,087,000(L)
3,500,000(L)
5,000,000(L)
3,800,000(L)
16,077,000(L)
2,661,000(L)
3,323,000(L)
BNP Paribas Jersey Trust
1,239,000(L)
383,000(L)
1,933,000(L)
2,866,000(L)
59,731,000(L)
Value Partners
1,239,000(L)
383,000(L)
1,933,000(L)
2,866,000(L)
4,626,000(L)
Average price
per share
Numbers of
shares held
% of issued
share capital
Date of relevant
event
HKD 7.431
HKD 7.555
HKD 7.917
HKD 7.997
HKD 7.852
HKD 7.699
HKD 7.237
HKD 7.451
HKD 9.323
HKD 9.547
720,348,000(L)
708,685,000(L)
697,347,000(L)
686,123,000(L)
672,578,000(L)
661,078,000(L)
645,078,000(L)
637,869,000(L)
621,792,000(L)
608,729,000(L)
59.02(L)
58.07(L)
57.15(L)
56.24(L)
55.14(L)
54.21(L)
53.04(L)
52.45(L)
51.14(L)
50.20(L)
9/12/2014
3/12/2014
25/11/2014
13/11/2014
6/11/2014
3/11/2014
28/10/2014
24/10/2014
30/09/2014
10/09/2014
HKD 7.448
HKD 7.666
HKD 8.696
HKD 7.976
85,830,000(L)
84,978,000(L)
84,275,000(L)
73,770,000(L)
59,731,000(L)
7.03(L)
6.98(L)
7.03(L)
6.15(L)
5.01(L)
11/12/2014
22/10/2014
30/05/2014
26/05/2014
12/05/2014
HKD 7.448
HKD 7.666
HKD 8.696
HKD 7.976
HKD 8.629
85,830,000(L)
84,978,000(L)
84,275,000(L)
73,770,000(L)
59,731,000(L)
7.03(L)
6.98(L)
7.03(L)
6.15(L)
5.01(L)
11/12/2014
22/10/2014
30/05/2014
26/05/2014
2/05/2014
Source: Hong Kong Stock Exchange, Macquarie Research, January 2015
16 January 2015
48
Macquarie Research
Detailed business analysis
Superior geographical diversification: less cyclical than peers
Unlike other Chinese brands, TCL is geographically well diversified and immune to intense
competition domestically or cyclical telecommunication development in any particular market,
hence the business volatility is much smaller than peers in our view. Additionally, its global
presence exposes it to multiple growth opportunities. The company can leverage both 2G-to3G transition in emerging markets (such as Latin America) and 3G-to-4G transition in
developed markets (such as the US, where TCL has been making strong progress winning
new carrier partnerships, with Sprint being the newest carrier partner). A geographically
diversified customer base gives TCL better economies of scale and efficiency as well as less
volatility, hence it has a less cyclical profitability profile than its peers.
Less cyclical than
peers.
Fig 21 Geographic revenue breakdown
Sales exposure
100%
18%
90%
80%
7%
70%
60%
45%
50%
40%
30%
20%
31%
10%
0%
1Q12
17%
17%
13%
11%
9%
10%
8%
9%
7%
8%
6%
6%
7%
9%
43%
39%
40%
45%
42%
37%
45%
32%
35%
37%
41%
44%
42%
40%
2Q12
3Q12
4Q12
1Q13
2Q13
Europe, the Middle East and Africa
3Q13
Americas
4Q13
6%
8%
8%
7%
8%
6%
58%
51%
52%
29%
34%
34%
1Q14
2Q14
3Q14
Asia Pacific
China
Where is the potential upside?
Revenue growth drivers: 1) penetrating new markets (we expect to contribute 15%~20% of
future growth); 2) market share expansion in existing markets via new carrier/distributor
partnerships (10%~15% of growth); 3) winning more contracts from existing carrier partners
(20%~25% of growth); 3) new non-handset areas such as tablets, wearables, smart-home,
cloud, etc (5%~10% of growth); 4) ASP and margin uplift driven by 2G-3G, 3G-4G upgrade,
feature phone to smartphone migration (30%~35% of growth); 5) potential brand/market
share/ASP/margin uplift from the Palm acquisition.
Multiple growth
drivers in both EMs
and DMs.
Fig 22
TCL monthly shipments
9
8
7
6
5
4
3
2
1
0
70%
60%
50%
40%
30%
20%
10%
0%
Total monthly shipment (mn)
Monthly shipment of smartphones (mn)
Monthly shipment of feature phones (mn)
Smartphone shipment mix (%)
16 January 2015
49
Macquarie Research
Smartphone mix has
further room to grow.
Note that smartphone shipments accounted for 53% of TCL total handset shipments as of
1H14. We forecast this to reach 65% in FY15F and 70% in FY16F, compared with the
handset industry average of 70% (smartphones as % of total shipments), and Samsung
(78%), Chinese peers Huawei (98%), Lenovo (99%), Xiaomi (100%), Coolpad (100%) and
ZTE (78%). We think TCL is far from reaching smartphone shipment saturation point hence it
has much more room to expand the smartphone mix from the current level.
Fig 23 Global handset maker smartphone shipment penetration
Handset
shipments
(mn units)
2Q14
Market Y-Y growth
share
rate
Smartphone
shipments
(mn units)
Market
share
Y-Y Smartphone
growth
shipment
rate penetration
Samsung
Nokia
95.3
50.3
22.5%
11.9%
-10.9%
-17.7%
74.5
23.5
25.3%
8.0%
-2.0%
-6.3%
78.2%
46.7%
Apple
35.2
8.3%
12.8%
35.2
11.9%
12.8%
100.0%
Huawei
20.6
4.9%
59.7%
20.1
6.8%
81.1%
97.6%
Lenovo
16.0
3.8%
40.4%
15.8
5.4%
39.8%
98.8%
Xiaomi
15.1
3.6%
268.3%
15.1
5.1%
268.3%
100.0%
LG
19.0
4.5%
6.7%
14.5
4.9%
19.8%
76.3%
Coolpad
13.0
3.1%
26.2%
13.0
4.4%
26.2%
100.0%
ZTE
13.6
3.2%
-22.7%
10.6
3.6%
-7.8%
77.9%
Sony
9.6
2.3%
-12.2%
9.4
3.2%
-2.1%
97.9%
16.3
3.8%
34.7%
8.7
2.9%
171.9%
53.4%
5.4
1.3%
4.2%
3.8
1.3%
60.7%
70.4%
423.5
100.0%
5.9%
295.0
100.0%
26.6%
69.7%
TCL-C
Motorola
Global total
Source: Gartner, January 2015
Fig 24 Ranking of Chinese handset vendors global / PRC shipments
Ranking
Unit: mn
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
Global
1
2
Lenovo+Moto
14.2
16.0
15.8
16.1
13.9
16.2
17.9
18.5
17.3
19.3
Huawei
10.8
10.9
11.9
13.7
11.1
11.3
13.6
17.3
14.6
3
TCL Com
18.2
7.4
9.4
9.3
11.1
8.5
10.1
13.3
17.6
12.0
4
ZTE
13.9
17.4
17.2
16.6
16.2
14.6
15.3
13.7
16.3
13.8
5
12.6
Xiaomi
0.5
0.9
0.6
0.9
1.8
2.4
3.6
5.6
9.6
12.5
6
Coolpad
3.1
4.0
5.2
6.2
7.5
7.9
8.8
8.4
9.5
10.3
7
BBK Com
1.3
1.1
1.6
1.8
2.3
2.5
4.3
3.5
4.7
4.8
8
OPPO
1.6
1.4
1.7
1.9
2.4
2.9
3.4
3.2
5.0
4.5
9
Tianyu
1.7
2.1
2.5
2.7
3.3
3.7
4.1
2.7
2.5
2.4
PRC
1
Unit: mn
Xiaomi
0.5
0.9
0.6
0.9
1.8
2.4
3.6
5.6
9.3
11.9
2
Lenovo+Moto
7.0
7.9
8.5
9.1
8.4
11.0
12.4
12.0
11.4
11.3
3
Coolpad
3.0
3.8
4.9
5.8
7.0
7.4
8.2
8.3
9.5
10.2
4
Huawei
6.0
5.4
5.6
5.9
7.2
6.5
7.8
9.3
8.2
9.9
5
BBK Com
1.3
1.1
1.6
1.8
2.3
2.5
4.3
3.5
4.7
4.7
6
ZTE
6.2
6.4
5.3
5.4
5.7
6.2
5.3
3.6
4.1
4.7
7
OPPO
1.6
1.4
1.7
1.9
2.4
2.9
3.4
3.2
4.6
4.2
8
Tianyu
1.7
2.1
2.5
2.7
3.3
3.7
4.1
2.7
2.5
2.4
9
TCL Com
1.4
1.6
1.6
1.5
1.1
1.2
1.2
1.2
1.2
1.4
16 January 2015
50
Macquarie Research
Branding strategy
Dual brand strategy +
simple product lineup
The company offers 3 major product lines, represented by 2 mid/high-end lines namely “Hero”
and “Idol”, as well as 1 entry-level brand “Pop”. In general, the retail price of Hero (more focus
on high specification) & Idol (more focus on superior hardware design) handsets is around
US$120~US&200 while Pop is at US$60~$100 (a trendy look with good value-for-money).
We are particularly fond of TCL’s well diversified yet simple and straightforward branding
strategy (compared to many of its peers who we believe overcomplicate their product line-up.
This not only confuses consumers but also has a high risk of sales cannibalization), as it can
help the company to achieve better economies of scale and hence superior efficiency. The
different price points allow TCL Comm to adapt its product offering, with the right
specifications at the right price, for operators around the world.
Most recently the company acquired the Palm brand from HP. Although details regarding this
transaction and business plans for this business initiative haven’t been released yet, we
believe it will bring a meaningful brand premium to the company’s existing dual-brand
strategy (TCL for PRC and Alcatel for overseas) and expect market share gains and
ASP/margin uplift in the mid-/long-term.
Margin outlook
We take a slightly conservative view on TCL’s future margin profile, expecting GPM to
stabilize at around/or slightly below the 19% level in 2015 and soften to 18.6% in 2016
(compared with consensus FY16 GPM estimate of 18.8%) given the intense competition in
the global handset space.
Flat GPM but
optimistic on OPM
leverage.
That said, with a well-diversified customer base, along with further synergy/cross-selling
opportunities to be extracted from the partnership with parentco TCL Corp, and sister
company TCL Multimedia (in areas such as distribution, sales and marketing, research and
development, manufacturing, and collaboration in terms of new business initiatives such as
cloud, content streaming, smart-home, etc) we expect better operational leverage from TCL
Com vs other handset makers.
7%
4%
1%
1%
0%
93%
96%
99%
99%
100%
Xiaomi
BBK Com
Coolpad
Tianyu
38%
55%
62%
Lenovo+Moto
45%
Huawei
ZTE
TCL Com
% of total shipment
100%
90%
80%
70%
67%
60%
90%
50%
40%
30%
20%
33%
10%
10%
0%
OPPO
Fig 25 Chinese handset makers PRC vs overseas shipment exposure
comparison
PRC shipment exposure
Overseas shipment exposure
Overseas sales carry
higher GPM.
16 January 2015
We’ve compared the top Chinese handset vendors’ overall as well as their PRC shipments.
As noted in the charts above, some of the Chinese vendors have a meaningful overseas
business, with TCL Com topping the chart with 90% overseas shipment contribution, followed
by ZTE which also has a heavy overseas exposure (67% shipment exposure). Huawei takes
a more balanced approach, with 45% weighting overseas and 55% domestic. Lenovo, post its
Moto acquisition, now ranks No.1 in terms of total handset shipments among all Chinese
vendors and no.4 in terms of overseas shipment exposure at 38%.
51
Macquarie Research
We believe the overseas business carries high teens to even 20%+ gross profit margin (17%
~ 22%), compared with domestic handset business in the low teens (11% ~ 13%). We
benchmarked TCL Com and Coolpad’s quarterly gross profit margin during the course of
1Q12 ~ 2Q15. Note that TCL historically has had 85% ~ 90% overseas exposure and
Coolpad 0%~2%. Indeed, their gross margin gap could be as wide as high single digit. TCL
management also indicated that overseas gross margin is normally a few percentage points
higher than domestic. We estimate more than 95% of the company’s profit is contributed by
the overseas market while domestically it only generates low single digit profit (as a % of the
company’s total profit).
Fig 26 TCL Coolpad gross margin comparison
Gross profit margin
(%)
25%
20%
4%~8%
15%
10%
5%
0%
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
TCL
3Q13
4Q13
1Q14
2Q14
3Q14
Coolpad
Business development by region
High correlation with
global economy.
With over 90% business exposure overseas, the company’s performance has historically
been closely correlation with global economic conditions (hence consumer demand for
electronics products) as well as the competitive landscape of the handset market in each
region. During the latest quarterly results, management noted that the global economic
outlook remained cloudy, with the Eurozone suffering from stagnation and deflation on one
side, and the United States’ economy recovering modestly on the other. Emerging markets
are gradually picking up and becoming a crutch for the growth of global consumption, and are
generally expected to continue serving as the world’s economic growth engine.
FY14 sales guidance
lifted in 3Q14.
Regardless of the intense competition in the handset market globally, the company has
managed to grow faster than the market with a continuously expanding market share,
capitalizing on the on-going shift from feature phones to smartphones in various emerging
markets and low-end customer segment in developed markets, as well as the strong demand
for functional yet affordable smartphones. The company’s FY14 revenue guidance of 35%
was initially given at the FY13 full year results announcement, and was revised up to 45% at
the 1Q14 results announcement and up again to 50% at the 3Q14 results announcement.
Fig 27 TCL partnership with carriers / distributors globally
Region
North America
Latin America
EMEA
APAC
PRC
Regional operator / distributor partners
AT&T, T-Mobile, Sprint (Sep, 2014), Verizon (1H15E), TracFone, Walmart, Best Buy, Bell,
MetroPCS, etc.
Telefonica, America Movil, Digicel Group, Comcel, Telcel, Claro, Tigo, etc.
Orange, Vodafone, MTC, AirTel, Wind, Hutchison 3, MTN, TIM, Telefonica, O2, Bouygues, T
Mobile, Telenor, VimpelCom, Virgin Mobile, Maroc Telecom, etc.
Broadway, Smart, Reliance, Sun, IDea, Wilson, Fortress, Citilink, Wilson, etc.
China Mobile, China Unicom, China Telecom, Sunning, HDH, D Phone, Aisidi, Potevio,
Coowin Telecom, etc.
16 January 2015
52
Macquarie Research
For the first nine months of 2014, 51.5% of TCL-C’s sales came from the Americas
(specifically 20% contributed by the US and the rest from Latin America), and EMEA
accounted for 34.3% (with Europe / Middle East and Africa each contributing around 17%).
APAC region contributes 6% and PRC contributes 8%.
Fig 28 TCL 9M14 revenue breakdown by region
9M14 revenue breakdown by region
Asia Pacific (ex
China)
6%
China
8%
Europe
17%
US
20%
Middle East
and Africa
17%
LATAM
32%
Fig 29 Y-Y revenue growth contribution by region (%)
120%
100%
103%
84%
80%
60%
40%
20%
0%
33%
19%
5%
-20%
-27%
-40%
1Q13
2%
-19%
2Q13
EMEA (%)
62%
55%
41%
31%
5%
2%
8%
-4%
3Q13
4Q13
Americas (%)
72%
63%
67%
19%
7%
25%
26%
15%
1%
-2%
9%
-2%
1Q14
Asia Pacific (%)
2Q14
3Q14
China (%)
PRC business
Cautious on PRC due
to competition risk
The company has formed partnerships with three Chinese carriers (CM, CU, CT) as well as
some of the key consumer electronics retailers such as Sunning, Dixintong, Aisidi, Potevio,
etc. Additionally, TCL has its own online shopping website (http://shop.tcl.com/) where
customers can purchase value-for-money products, similar to Xiaomi (http://www.mi.com/)
Huawei (http://www.vmall.com/) and Coolpad (http://www.coolpad.com/).
What’s different is that TCL’s e-commerce platform is in collaboration with TCL Multimedia
and TCL Corp where there is cross-selling potential. In other words, customers who initially
intend to buy TCL home appliances might end up buying an extra handset after visiting the ecommerce platform. There is also great potential in collaboration with TCL Corp and TCL
Multimedia, in areas such as cloud computing, wearables, and smart home appliances in the
long-term, which hasn’t yet been baked into our model. .
16 January 2015
53
Macquarie Research
Fig 30
PRC quarterly revenue y-y growth trend
100.0%
78.3%
80.0%
68.3%
60.0%
40.0%
15.6%
20.0%
0.0%
-20.0%
-40.0%
-24.9%
1Q13
-12.6%
-27.9%
-33.0%
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
PRC quarterly revenue y-y growth trend
Although the PRC market hasn’t been a meaningful revenue contributor over the past two
years (less than 10% of TCL’s total revenue, and TCL’s market share in the region has been
quite stable over the past two years at the 1% ~ 1.3% level). The company’s performance in
the PRC market has demonstrated a healthy rebound after its FY13 downturn, thanks to its
consolidation of the sales force, enhanced operational efficiency, strengthened relationships
with telecom operators, electronic product distributors and e-commerce platforms, as well as
the launch of its own online-to-offline sales platform. In the meantime, the company’s
“customer-friendly” pricing strategy has led to the TCL brand gaining more market
recognition, and will likely continue doing so as 4G adoption gradually expands from the high
end to mid/low end customer segment, a segment where TCL/Alcatel brands have a strong
presence. .
Fig 31
TCL’s 4G product line-up for the PRC market
P688L
Dimension
Screen (inch)
Display
Camera
Network
OS
CPU
Storage
Battery
Announced
Retail price (RMB)
152.1x76.2x7.95mm
5.5
960x540 pixels
8MP Rear + 2MP
Front
P520
146x72.5x9.9mm
5.0
854x480 pixels
5MP Rear + 0.3MP
Front
CDMA2000
CDMA:800MHz
1X/EVDO Rev.A
800MHz
GSM:
GSM
900/1800/1900MHz 900/1800/1900MHz
S838M
136.5x69.7x7.45mm
5.0
1280x720 pixels
8MP Rear + 1.3MP
Front
P301M
123.5x64x10.9mm
4.0
800x480 pixels
2MP
P631M
166x83.6x8.6mm
6.0
1280x720 pixels
8MP Rear + 2MP
Front
P728M (CM 4G)
152.1×76.2×8mm
5.5
1280x720 pixels
13MP Rear + 5MP
Front
GSM
GSM
GSM
GSM
900/1800/1900MHz 900/1800/1900MHz 900/1800/1900MHz 900/1800/1900MHz
TD-SCDMA:
1900/2100MHz
TD-LTE:
FDD:1800/2100MHz FDD 1800/2100MHz
1900/2300/2600MHz
TDD 2600MH
TDD㸸2600MHz
Single SIM dual
Dual SIM Trio
standby
Standby
Android 4.3
Android 4.4
Android 4.3
Qualcomm MSM
Qualcomm
Qualcomm MSM
8926 Quad-Core
MSM8916 Quad8926 Quad-Core
Core 1.2GHz
1.2GHz
1.2GHz
ROM: 4GB
ROM: 5GB
ROM: 4GB
RAM: 1GB
RAM: 512MB
RAM: 1GB
3300mAh
2000mAh
2150mAh
Aug, 2014
Oct, 2014
May, 2014
899
699
1299
TD-SCDMA:
1900/2100MHz
TD-LTE
1900/2300/2600MHz
TD-SCDMA:
1900/2100MHz
TD-LTE
1900/2300/2600MHz
TD-SCDMA:
1900/2100MHz
TD-LTE
1900/2300/2600MHz
Android 4.4
Android 4.3
Android 4.4
MediaTek MT6582M Marvell PXA1920
Quad-Core 1.3GHz Quad-Core 1.2GHz
MediaTek MT6592M
Octa-Core 1.4GHz
ROM: 4GB
RAM: 512MB
1500mAh
Jun, 2014
399
ROM: 8GB
RAM: 1GB
3300mAh
Jul, 2014
899
ROM: 8GB
RAM: 1GB
3000mAh
Sep, 2014
1699
Source: GSMArena, company data, Macquarie Research, January 2015
16 January 2015
54
Macquarie Research
Expect PRC to grow
from low base.
We expect the PRC market to continue to grow going into 2015 as the FDD commercial
license is expected to be issued in the first half of the year, and China Telecom and China
Unicom will join China Mobile to push for mass adoption of 4G. That said, TCL management,
who value profitability more than market share expansion, have always tended to take a
cautious approach towards the PRC given the intense competition from both domestic and
foreign brands, which results in a slightly lower margin compared to overseas.
We don't expect the competitive intensity in the PRC to ease any time soon, and think
management will continue executing its prudent “profitability first” strategy, hence FY15 PRC
business growth is likely to be a result of overall market 3G-to-4G migration, rather than
TCL’s market share expansion alone. And PRC’s contribution to the company’s total revenue
should stay at the high single digit level for the next 1~2 years in our view. For the first three
quarters in 2014, the company managed to expand its PRC market share from 0.9% (1Q14)
to 1.3% (3Q14), and we expect this momentum to continue as the company steadily grows its
PRC business from a small base.
Fig 32 Market share trend of top 15 handset brands in China
PRC handset market share
Lenovo
Xiaomi
Samsung
Huawei
Apple
Coolpad
Vivo
OPPO
ZTE
Gionee
Tianyu
Hisense
Nokia
TCL Communication
HTC
1Q14
2Q14
3Q14 Q-Q change in market share
12.0% 12.9% 13.9% Lenovo
6.8% 9.1% 11.5% Xiaomi
13.8% 11.3% 10.2% Samsung
6.0% 7.5% 7.0% Huawei
9.0% 7.5% 6.7% Apple
6.9% 7.7% 6.5% Coolpad
3.4% 3.6% 4.2% Vivo
3.4% 3.2% 4.0% OPPO
3.0% 3.6% 3.9% ZTE
2.2% 2.1% 1.9% Gionee
1.8% 1.8% 1.5% Tianyu
1.8% 1.6% 1.4% Hisense
2.0% 1.0% 1.4% Nokia
0.9% 1.0% 1.3% TCL Communication
0.5% 0.9% 1.0% HTC
2Q14 3Q14
0.8%
2.3%
-2.5%
1.5%
-1.5%
0.8%
0.2%
-0.2%
0.6%
-0.1%
0.0%
-0.2%
-0.9%
0.2%
0.3%
1.1%
2.5%
-1.1%
-0.5%
-0.8%
-1.2%
0.6%
0.8%
0.3%
-0.2%
-0.3%
-0.3%
0.3%
0.2%
0.1%
Source: Gartner, Macquarie Research, January 2015
Americas business
The Americas market has delivered tremendous growth so far this year, posting triple-digit y-y
growth each quarter and contributing more than half of the company’s total revenue growth
over the past 5 quarters in a row, thanks to the strong demand for value-for-money entry level
smartphones, whose sales volume this year has grown almost 3-fold accompanied by an
expanding market share.
Americas is the major
growth driver.
16 January 2015
The company’s Alcatel OneTouch brand has gained wider market recognition and was
ranked the third and largest brands in Latin America (ex-Brazil), and Central America, Pacific
Islands and the Caribbean overall. The company has also penetrated into new markets and
established partnerships with new carriers (shipments to Sprint already started in September
2014. We expect a partnership with Verizon to come to fruition in 1H15). The United States
and Colombia in particular have stood out, posting 57% and 170% y-y revenue growth
respectively for the latest 3Q14 results.
55
Macquarie Research
TCL recently announced that it would acquire the Palm brand from HP for an undisclosed
sum. The acquisition is only intended for Palm trademarks but will not include any intellectual
property as we understand. Although the company hasn't announced detailed plans for this
Palm project, we believe it is likely that TCL would leverage the widely known Palm brand to
penetrate the North American mid-/high-end segments targeting the e-commerce/open
channel, contrasting with TCL’s current strategy of selling low-end phones under the Alcatel
brand via the operator channel. Brand recognition is one of the major hurdles for Chinese
vendors penetrating overseas markets, and we believe acquiring an already widely-known
brand name makes strategic sense. The consideration for the transaction, which is reported
to be tens of millions (US$), is not demanding in our view, compared to standard advertising
spending by tech companies. We haven’t factored in forecasts for TCL’s Palm projects due
to limited information disclosed by the company, but expect potential market share gains as
well as ASP/margin uplift, in North America in particular, from 2016 onwards driven by the
Palm project.
Fig 33 TCL regional growth contribution - Americas
233%
250%
200%
169%
150%
115%
100%
39%
50%
2%
5%
2%
55%
70%
62%
72%
63%
67%
2%
0%
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
Americas quarterly revenue y-y growth trend
Americas contribution to the company's total revenue growth (%)
In Latin America, TCL has been gradually expanding its market share in the past two years,
largely driven by the region’s late-cycle feature phone to entry-level smartphone migration, as
well as the growing brand recognition of Alcatel in the region. By the end of 2013 LATAM
smartphone penetration was 19%, and 23% by the end of 3Q14 (vs the global average of
~50%).
Significant potential
in Brazil, Mexico and
Argentina.
We see significant upside for handset shipments in this particular market due to a much
lower-than-global-average mobile as well as smartphone penetration. In relatively more
developed telecom markets such as Brazil, Mexico and Argentina, smartphone penetration
was around 20%~25% at the end of 2013 while other countries in the region are well below
this level. We believe low-end smartphones priced around US$60~US$80 are more
appealing to customers in these markets, as they tend to be more price sensitive.
We expect strong shipment growth from this region, but the uplift effect for blended ASP
might be capped as most of those products are sold at the lower end of the price spectrum
(pricing range of US$60~US$80, compared with TCL’s current blended ASP of US$54 and
smartphone ASP of US$81).
16 January 2015
56
Macquarie Research
Fig 34 LATAM smartphone / 3G penetration by country
FY13 smartphone penetration
FY13 3G penetration
Brazil
Uruguay
21.4%
21.8%
50.0%
42.0%
Venezuela
20.9%
38.5%
Argentina
23.0%
41.0%
Chile
27.3%
37.0%
Mexico
21.0%
30.0%
Peru
16.7%
27.0%
Ecuador
19.8%
20.0%
Colombia
16.1%
17.0%
Paraguay
12.4%
11.0%
Bolivia
10.1%
15.0%
Source: GSMA Intelligence, Macquarie Research, January 2015
Expect market share
gain in Brazil.
The company was ranked No.3 in 2Q14 in terms of overall handset shipments to LATAM.
Note that Brazil, which is the largest country in LATAM with the biggest population, GDP and
number of SIM connections, only contributes a very small amount to TCL’s LATAM shipments
(1~2% of total LATAM shipments for 2014) given the company had only managed to
penetrate that market in 2H13. The company achieved strong momentum in 3Q14, tripling its
shipment volume to Brazil from 82k units (2Q14) to 259k units (3Q14), with market share
expanding from 0.5% (2Q14) to 1.6% (3Q14). We think this particular market offers very
promising growth prospects, and expect the company’s Brazil business to ramp up going into
2015, gaining market share likely at the expense of Nokia, Sony and Samsung.
Fig 35 TCL's market share expansion in Brazil
Shipment volume
(k units)
Samsung
LG Electronics
Nokia
Motorola
Apple
Lenovo
Huawei
ZTE
TCL Communication
Sony
Other vendors
Grand Total
1Q14
2Q14
6,035
2,886
2,089
850
651
161
459
774
66
146
1,054
15,172
6,115
3,534
2,403
961
730
330
543
466
82
165
1,194
16,524
Shipment market share
3Q14 (%)
5,653
3,569
2,245
998
662
488
405
378
259
168
1,496
16,320
Samsung
LG Electronics
Nokia
Motorola
Apple
Lenovo
Huawei
ZTE
TCL Communication
Sony
Other vendors
Grand Total
1Q14
39.8%
19.0%
13.8%
5.6%
4.3%
1.1%
3.0%
5.1%
0.4%
1.0%
6.9%
100.0%
2Q14
3Q14
37.0% 34.6%
21.4% 21.9%
14.5% 13.8%
5.8%
6.1%
4.4%
4.1%
2.0%
3.0%
3.3%
2.5%
2.8%
2.3%
0.5%
1.6%
1.0%
1.0%
7.2%
9.2%
100.0% 100.0%
TCL is gradually
catching up with
Samsung and Nokia.
16 January 2015
For the LATAM market overall, the company has been ranked 3rd for 3 quarters in a row and
has been expanding market share while the top two players (Samsung and Nokia) both
recorded a decline in 3Q14. We believe the late cycle feature phone to smartphone migration
in LATAM will continue to be the major growth driver for TCL.
57
Macquarie Research
Fig 36 TCL’s market share expansion in LATAM
LATAM shipment (k
units)
1Q14
2Q14
Samsung
Nokia
TCL Communication
LG Electronics
Motorola
ZTE
Apple
Huawei
Sony
Lenovo
Other vendors
Grand Total
13,639
6,483
5,063
4,976
2,238
3,871
1,862
1,731
711
258
4,059
44,891
13,649
7,543
6,340
6,200
2,529
2,331
2,080
2,047
792
488
4,655
48,653
LATAM shipment
3Q14 market share
12,259
7,256
7,015
7,010
2,731
2,455
2,098
1,866
803
733
5,253
49,479
Samsung
Nokia
TCL Communication
LG Electronics
Motorola
ZTE
Apple
Huawei
Sony
Lenovo
Other vendors
Grand Total
1Q14
2Q14
3Q14
30.4%
14.4%
11.3%
11.1%
5.0%
8.6%
4.1%
3.9%
1.6%
0.6%
9.0%
100.0%
28.1%
15.5%
13.0%
12.7%
5.2%
4.8%
4.3%
4.2%
1.6%
1.0%
9.6%
100.0%
24.8%
14.7%
14.2%
14.2%
5.5%
5.0%
4.2%
3.8%
1.6%
1.5%
10.6%
100.0%
Expect more operator
wins in North
America.
In regards to North America, the company only penetrated the region in 2012, gained
significant traction during the course of 2013 and has been making meaningful progress in
gaining more carrier partners (has already formed partnerships with AT&T, T-Mobile and
Sprint, currently in talks with Verizon, which is expected to come to fruition in 1H15). As US
operators are getting more conservative on giving handset subsidies, value-for-money
smartphones (such as the ones sold by TCL) could gain more traction as a result. We expect
Chinese handset vendors to expand their market in the next 1~2 years. TCL, whose Alcatel
brand is more widely recognized than other Chinese brands such as Huawei or ZTE, will
benefit more in our view.
Fig 37 TCL’s market share expansion in North America
North America
shipment (k units)
1Q14
2Q14
Apple
Samsung
LG Electronics
ZTE
Motorola
Kyocera
TCL Communication
Nokia
HTC
Amazon
Acer Group
Huawei
Asus
Lenovo
BlackBerry
Grand Total
18,536
15,014
3,735
3,132
1,421
1,484
1,743
1,196
923
953
505
629
717
415
384
54,042
18,821
17,573
5,337
3,031
1,637
1,517
1,034
1,284
1,217
880
733
674
656
543
450
58,856
3Q14 North America shipment
market share
20,415 Apple
15,608 Samsung
5,401 LG Electronics
3,668 ZTE
1,821 Motorola
1,800 Kyocera
1,653 TCL Communication
1,477 Nokia
1,434 HTC
1,075 Amazon
875 Acer Group
776 Huawei
691 Asus
672 Lenovo
646 BlackBerry
62,291 Grand Total
1Q14
2Q14
3Q14
34.3% 32.0% 32.8%
27.8% 29.9% 25.1%
6.9%
9.1%
8.7%
5.8%
5.2%
5.9%
2.6%
2.8%
2.9%
2.7%
2.6%
2.9%
3.2%
1.8%
2.7%
2.2%
2.2%
2.4%
1.7%
2.1%
2.3%
1.8%
1.5%
1.7%
0.9%
1.2%
1.4%
1.2%
1.1%
1.2%
1.3%
1.1%
1.1%
0.8%
0.9%
1.1%
0.7%
0.8%
1.0%
100.0% 100.0% 100.0%
EMEA business
EMEA growth has
moderated in recent
years.
EMEA has historically been the major growth driver of the company, contributing over 1/3 of
total shipments. This year the growth of the region decelerated a bit, outpaced by the
Americas, partially due to the prolonged stagnation in the Eurozone and the unstable political
situation in Eastern Europe.
Within the region, Western Europe is the biggest market with over 50% of EMEA shipments,
and the rest is evenly distributed between Eastern Europe and the Middle East & Africa. We
expect Eastern Europe and the Middle East & Africa to become the major growth drivers for
EMEA going forward thanks to their still early stage of feature phone-to-smartphone migration
and a greater appetite for functionality and affordability rather than brand.
16 January 2015
58
Macquarie Research
Fig 38 TCL's shipments and market share in Western Europe
Western Europe
shipment (k units)
Samsung
Apple
Nokia
Sony
LG Electronics
HTC
TCL Communication
Asus
Huawei
Acer Group
Lenovo
BlackBerry
HP
Motorola
ZTE
Other vendors
Grand Total
1Q14
2Q14
20,832
11,069
4,057
2,726
1,745
1,126
888
834
943
520
466
543
181
282
259
5,006
51,477
14,263
8,149
3,511
2,815
1,806
1,112
1,221
716
1,333
685
541
602
461
377
304
4,660
42,555
Western Europe
3Q14 shipment market share
14,703
10,070
3,707
2,665
1,587
1,221
1,004
935
910
862
694
533
400
378
376
5,161
45,205
Samsung
Apple
Nokia
Sony
LG Electronics
HTC
TCL Communication
Asus
Huawei
Acer Group
Lenovo
BlackBerry
HP
Motorola
ZTE
Other vendors
Grand Total
1Q14
40.5%
21.5%
7.9%
5.3%
3.4%
2.2%
1.7%
1.6%
1.8%
1.0%
0.9%
1.1%
0.4%
0.5%
0.5%
9.7%
100.0%
2Q14
3Q14
33.5% 32.5%
19.2% 22.3%
8.3%
8.2%
6.6%
5.9%
4.2%
3.5%
2.6%
2.7%
2.9%
2.2%
1.7%
2.1%
3.1%
2.0%
1.6%
1.9%
1.3%
1.5%
1.4%
1.2%
1.1%
0.9%
0.9%
0.8%
0.7%
0.8%
11.0% 11.4%
100.0% 100.0%
Source:Gartner, January 2015
Fig 39 TCL's shipment and market share in Eastern Europe
Eastern Europe
shipment (k units)
Samsung
Nokia
TCL Communication
Apple
Sony
LG Electronics
Lenovo
Huawei
ZTE
Orange
Other vendors
Grand Total
1Q14
2Q14
5,076
1,609
394
369
403
234
152
295
112
180
2,864
11,689
4,475
1,478
641
496
419
304
244
462
194
197
3,053
11,962
Eastern Europe shipment
3Q14 market share
5,287
1,730
671
613
430
419
377
324
267
215
3,358
13,691
Samsung
Nokia
TCL Communication
Apple
Sony
LG Electronics
Lenovo
Huawei
ZTE
Orange
Other vendors
Grand Total
1Q14
43.4%
13.8%
3.4%
3.2%
3.4%
2.0%
1.3%
2.5%
1.0%
1.5%
24.5%
100.0%
2Q14
3Q14
37.4% 38.6%
12.4% 12.6%
5.4%
4.9%
4.1%
4.5%
3.5%
3.1%
2.5%
3.1%
2.0%
2.8%
3.9%
2.4%
1.6%
2.0%
1.6%
1.6%
25.5% 24.5%
100.0% 100.0%
Fig 40 TCL's shipment and market share in Middle East and Africa
Middle East and Africa
shipment (k units)
Samsung
Nokia
Huawei
TCL Communication
Lenovo
Apple
LG Electronics
Tecno Telecom
BlackBerry
ZTE
Other vendors
Grand Total
1Q14
2Q14
7,639
6,056
660
699
402
1,293
601
443
254
490
7,138
25,675
7,134
5,073
1,085
1,040
720
1,163
699
522
300
530
8,488
26,755
Middle East and Africa
8,108
4,681
914
860
806
766
652
553
498
471
8,945
27,254
Samsung
Nokia
Huawei
TCL Communication
Lenovo
Apple
LG Electronics
Tecno Telecom
BlackBerry
ZTE
Other vendors
Grand Total
1Q14
29.8%
23.6%
2.6%
2.7%
1.6%
5.0%
2.3%
1.7%
1.0%
1.9%
27.8%
100.0%
2Q14
3Q14
26.7% 29.8%
19.0% 17.2%
4.1%
3.4%
3.9%
3.2%
2.7%
3.0%
4.3%
2.8%
2.6%
2.4%
2.0%
2.0%
1.1%
1.8%
2.0%
1.7%
31.7% 32.8%
100.0% 100.0%
16 January 2015
59
Macquarie Research
Fig 41 Regional contribution to TCL revenue growth - EMEA
120.0%
103%
100.0%
84%
71.4%
80.0%
60.0%
76.6%
73.1%
59.6%
54.9%
44.7%
41%
31%
40.0%
25%
19%
20.0%
37.2%
26%
0.0%
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
EMEA quarterly revenue y-y growth trend
EMEA contribution to the company's total revenue growth (%)
Although the European economy has remained weak due to the prolonged stagnation in the
Eurozone and the unstable political situation in Eastern Europe, demand for the Group’s
smart devices in the region has remained strong and is expected to outperform the market in
the near term.
During 2014 the company further enhanced and strengthened its sales in the open market
channel and via telecom operators. More specifically, TCL’s sales in South Africa, Algeria and
Tanzania grew significantly via the telecom operator channels. The Group also extended its
market reach to Finland with a local telecom operator and said it received positive feedback.
4G equipped entry-level smartphones are expected to be the next growth driver. The
company’s newly launched tablets have also been well received in EMEA market according
to the management.
APAC business (ex PRC)
APAC not a focus
due to competition.
16 January 2015
Due to limited carrier partnerships and severe competition from both local handset makers as
well as other Chinese peers, we do not expect TCL to be aggressive in this market. Going
into FY15, the company intends to focus on sales and marketing of entry-level smartphones
in India, the Philippines, Malaysia and Thailand.
60
Macquarie Research
Fig 42 Chinese vendors' presence in emerging APAC region
Emerging APAC
shipment (k units)
Samsung
Nokia
Micromax
Karbonn Mobiles
Nexian
Lava International
Intex Technologies
Spice Mobility
Maxx Mobile
Communications
i-mobile
Lenovo
Zen Mobile
Asus
Wellcom
Motorola
CSL
Sony
Apple
LG Electronics
Videocon
HTC
iBall
Huawei
TCL Communication
Acer Group
Wynncom
ZTE
BlackBerry
OPPO
Gionee
Fly Mobile
HP
Xiaomi
Byond Tech
Gfive
Panasonic
Vivo
Dell
Onida
Coolpad
Other vendors
Grand Total
1Q14
2Q14
21,683
16,768
7,582
6,473
5,423
4,054
3,262
2,604
16,717
14,408
8,288
6,831
4,778
4,454
3,368
3,042
1,682
1,736
1,366
770
210
1,275
52
1,274
1,062
1,888
692
645
376
363
672
532
186
245
936
90
306
490
173
147
107
137
59
7
69
54
38,339
123,791
Emerging APAC
16,870
13,872
9,858
7,702
5,185
4,885
3,977
3,384
2,156
2,276
1,887
1,986
1,598
1,852
1,392
1,557
502
1,553
1,338
1,476
826
1,432
1,335
1,308
1,189
1,066
1,373
992
754
865
673
648
539
636
432
520
613
500
547
495
265
405
347
386
416
378
150
267
215
241
191
230
246
226
373
214
8
187
158
167
140
160
83
102
87
97
55
90
64
82
68
73
37,629 38,320
119,535 126,520
Samsung
Nokia
Micromax
Karbonn Mobiles
Nexian
Lava International
Intex Technologies
Spice Mobility
Maxx Mobile
Communications
i-mobile
Lenovo
Zen Mobile
Asus
Wellcom
Motorola
CSL
Sony
Apple
LG Electronics
Videocon
HTC
iBall
Huawei
TCL Communication
Acer Group
Wynncom
ZTE
BlackBerry
OPPO
Gionee
Fly Mobile
HP
Xiaomi
Byond Tech
Gfive
Panasonic
Vivo
Dell
Onida
Coolpad
Other vendors
Grand Total
1Q14
2Q14
3Q14
17.5%
13.5%
6.1%
5.2%
4.4%
3.3%
2.6%
2.1%
14.0%
12.1%
6.9%
5.7%
4.0%
3.7%
2.8%
2.5%
13.3%
11.0%
7.8%
6.1%
4.1%
3.9%
3.1%
2.7%
1.4%
1.4%
1.1%
0.6%
0.2%
1.0%
0.0%
1.0%
0.9%
1.5%
0.6%
0.5%
0.3%
0.3%
0.5%
0.4%
0.2%
0.2%
0.8%
0.1%
0.2%
0.4%
0.1%
0.1%
0.0%
0.1%
0.1%
0.0%
0.0%
0.0%
0.1%
0.0%
31.0%
100.0%
1.8%
1.8%
1.6%
1.6%
1.3%
1.5%
1.2%
1.2%
0.4%
1.2%
1.1%
1.2%
0.7%
1.1%
1.1%
1.0%
1.0%
0.8%
1.1%
0.8%
0.6%
0.7%
0.6%
0.5%
0.5%
0.5%
0.4%
0.4%
0.5%
0.4%
0.5%
0.4%
0.2%
0.3%
0.3%
0.3%
0.3%
0.3%
0.1%
0.2%
0.2%
0.2%
0.2%
0.2%
0.2%
0.2%
0.3%
0.2%
0.0%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.0%
0.1%
0.1%
0.1%
0.1%
0.1%
31.5% 30.3%
100.0% 100.0%
Conservative
prospects for APAC
region.
For sales channel development, TCL has continued to work on both telecom operators and
open channels, including partnerships with major chain stores in Thailand, and signing
distribution agreements with major distributors in India and Vietnam in the third quarter of
2014. That said, competition in APAC-ex PRC has been relatively more intense than other
regions, as both Chinese handset vendors as well as local handset vendors in their
respective markets all focus on the mass-market product segment and have been quite
aggressive on pricing. Management said it will adopt a similar strategy as in the PRC, which
is to expand strategically and cautiously, with profitability being a priority rather than market
share.
We expect this region to post solid growth in the next 1~2 years but the contribution to the
total revenue / profitability won’t be significant any time soon.
16 January 2015
61
Macquarie Research
Fig 43 Regional revenue to TCL growth contribution - APAC ex PRC
160.0%
140.0%
120.0%
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%
-20.0%
134.4%
110.6%
103.0%
80.7%
42.9%
33%
19%
1Q13
23.2%
8%
2Q13
3Q13
2%
4Q13
9.3%
7%
1Q14
-2%
2Q14
-2%
3Q14
APAC quarterly revenue y-y growth trend
APAC contribution to the company's total revenue growth (%)
Competitive landscape
Threat from other Chinese handset vendors keen to expand overseas
Cut-throat
competition in PRC
market.
Intensifying competition in the domestic market has made it more challenging for handset
makers to achieve profitability, or breakeven in down-cycles. The increasingly crowded
market, ever-changing competitive landscape, uncertainties on the regulators’ / operators’
front, and the unforeseen supply chain components / inventory / working capital risks make
the PRC, regardless of being the market with the largest population and the fastest growing
demand, a particularly difficult one for handset vendors to survive in. The relatively “friendlier”
overseas markets, which offer higher margins, provide a very good incentive for Chinese
handset vendors to look beyond the PRC and explore opportunities elsewhere.
IT companies that have meaningful international businesses have always faced a higher risk
of legal disputes, with patent related issues being one of the major concerns. Having a strong
patent portfolio allows an IT company to enjoy lower royalty costs while conducting business
operations overseas, and they run a much lower risk of running into patent lawsuits when
extending their international footprints.
High risk of IPR
disputes overseas.
16 January 2015
This is particularly the case in developed markets where there is more awareness of IP rights
and the IP related regulatory and legal systems are more advanced. For the Chinese vendors
who are keen to expand their overseas businesses, but have relatively weak international
patent portfolios, this means higher licensing costs (10% of overseas revenue is required to
settle licensing fees, compared with domestically only low single digits) and higher patent
infringement risk in international markets, especially in the more developed regions such as
the US and Europe.
62
Macquarie Research
Fig 44
Smartphone patent war since 2009
2009
2009, Oct 22: Nokia sues Apple over 10 patents.
2009, Dec 11: Apple countersues Nokia over 13 patents.
2009, Dec 29: Nokia countersues Apple over 7 more patents.
2010
2010, Jan 15: Apple sues Nokia over 9 patents.
2010, Mar 02: Apple sues HTC over 10 patents.
2010, May 7: Nokia sues Apple over 5 patents.
2010, May 12: HTC sues Apple over 5 patents.
2010, Sep 30: Nokia sues Apple over 4 patents.
2010, Oct 01: Microsoft sues Motorola over 9 patents.
2010, Oct 06: Motorola sues Apple over 18 patents
2010, Oct 29: Apple sues Motorola over 6 patents.
2010, Nov 10: Motorola sues Microsoft over 16
2010, May 28: S3 Graphics sues Apple over 4 patents. patents.
2010, Jun 28: Apple sues Nokia over 7 patents.
2010, Nov 22: Motorola sues Microsoft over 5 patents.
2010, Jul 06: HTC sues Apple over 3 patents.
2010, Dec 01: Apple sues Motorola over 12 patents.
2010, Aug 12: Oracle sues Google over 7 patents.
2010, Dec 03: Nokia sues Apple over 6 patents.
2010, Dec 03: Apple sues Nokia over 1 patent and 2
2010, Sep 17: Nokia sues Apple over 2 patents.
utility models.
2010, Sep 27: Apple sues Nokia over 9 patents.
2010, Dec 23: Motorola sues Microsoft over 3 patents.
2010, Dec 23: Microsoft sues Motorola over 7 patents.
2011
2011, Feb 14: Motorola sues Microsoft over 2 patents.
2011, Mar 29: Nokia sues Apple over 7 patents.
2011, Apr 15: Apple sues Samsung over 19 patents.
2011, Apr 22: Samsung sues Apple over 10 patents.
2011, Jun 28: Samsung sues Apple over 5 patents.
2011, Jul 05: Apple sues Samsung over 7 patents.
2011, Jul 11: Apple sues HTC over 5 patents.
2011, Aug 02: Apple sues Samsung over 10 patents.
2011, Aug 23: Microsoft sues Motorola over 7 patents.
2011, Sep 07: HTC sues Apple over nine patents.
2011, Sep 12: Samsung sues Apple over 3 patents.
2011, Sep 12: Apple sues Samsung over 4 patents.
2011, Sep 17: Samsung sues Apple over 7 patents.
2012
2012, Mar 7: Samsung sues Apple over 3 patents.
2012, Jun 10: Apple sues Samsung over auto-correct patent.
2012, Jul 2: Nokia sues Google over Nexus 7 patents infringement.
2012, Nov 28: Ericsson sues Samsung over mobile infrastructure patent infringement.
2013
2013, June: ITC rules iPads infringe on Samsung patents.
2013, August: ITC blocks older Samsung phones for violating two Apple patents.
2013, Oct 31: Rockstar Consortium, a consortium owned by companies including Apple and Microsoft, starts
legal action against Google, Huawei and Samsung, and other makers of Android phones including Asustek,
HTC, LG Electronics, Pantech, and ZTE.
2013, December 23: Google initiates legal action against Rockstar Consortium with a countersuit.
2014
2014, February: HTC and Nokia settled all their patent suits with HTC paying an undisclosed amount to Nokia.
2014, March: The $929 million judgement from the US trial Apple vs. Samsung becomes official. Samsung files
a formal appeal.
TCL more immune to
IPR risk than peers.
16 January 2015
We think TCL’s 2005 acquisition of Alcatel has granted the company a meaningful number of
patents (2G in particular). That, plus the company’s over one decade experience of overseas
development, has helped it accumulate a significant number of international patents, hence it
faces a smaller risk of patent lawsuits and much lower licensing costs. Other Chinese
vendors which have historically been conducting business mainly in the PRC market may
also hold solid patent portfolios, but those patents are more likely than not intended for the
PRC market only and are not applicable overseas. Patent conflicts with international vendors
could become more likely, and could be quite costly to resolve once their overseas
businesses grow in scale.
63
Macquarie Research
Fig 45 Chinese handset makers' overseas exposure/margin comparison
9%
8%
8%
7%
7%
Overseas shipment exposure (LHS)
Coolpad
BBK Com
Tianyu
3%
3%
Xiaomi
OPPO
Lenovo+Moto
Huawei
ZTE
3%
TCL Com
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
10%
9%
8%
7%
6%
5%
4%
3%
2% 2%
1%
0%
FY14F EBITDA margin (RHS)
Source: IDC, Gartner, Macquarie Research, January 2015
APAC low barrier but
more competition
Due to lower logistics hurdles, fewer IP rights concern, and potentially fewer cultural conflicts,
it is generally easier for Chinese handset vendors to expand into other emerging APAC
countries, and many of them have already done so. But the region also has intense
competition and relatively low margins compared with EMEA and Americas, as noted by a
number of handset vendors we’ve spoken to. Regarding the possibility of penetrating into
EMEA or Americas, it has been attempted and proven costly, risky and time consuming.
So far only three Chinese vendors have meaning EMEA and Americas businesses, namely
TCL (post its 2005 acquisition of Alcatel which helped it inherit Alcatel’s overseas customer
base, operator/distributor channel relationships as well as premium brand name), Huawei and
ZTE (both of which have established telecom equipment businesses with overseas operators
for over a decade, with Huawei having a strong presence in EMEA while ZTE is in the US).
And now Lenovo intends to join the trio, via its acquisition of Moto. But it will take 4~6
quarters to complete the consolidation and likely another year to stabilize the business.
Hence we expect the entry barriers, especially in the EMEA and Americas markets, for those
Chinese vendors are quite high and don’t foresee in the next few quarters another Chinese
handset brand making any significant overseas progress and posing a meaningful threat to
TCL, Huawei, ZTE and the like. Rather, we expect Chinese handset brands will co-exist in the
international market and jointly take share from legacy international tier-1 brands such as
Samsung, Sony, Nokia, HTC, etc, as price-sensitive emerging markets, have taken over and
become the major smartphone shipment drivers for the next few years.
Threat from Lenovo Moto merger
Lenovo acquired IP p
ortfolio from Moto.
Another company keen to extend its international footprint is Lenovo, which recently acquired
Motorola Mobile and IBM’s low-end server business. Out of the total consideration of
US$5.2bn for the two deals, around 50% was for trademarks, technology patents and
customer relations (as Moto enjoy higher brand recognition globally). Post the acquisition of
Motorola Mobile, Lenovo acquired 2,000+ international IP and cross licenses with Google
which could reduce Lenovo’s royalty fees while alleviating the risk of facing patent lawsuits
from international peers.
That said, Lenovo will need to absorb a huge amount of losses at the initial stage of the Moto
consolidation (FY15 ~US$150mn and FY16 ~US$200mn, according to the management
guidance). Given the company’s solid execution track record and the management’s target to
break even in the next 4~6 quarters, we don’t think the company will get aggressive on
pricing, but rather adopt a cautious approach of balancing market share and profitability, to
roll out its Moto+Lenovo dual brand strategy.
Lenovo’s brand recognition is quite limited overseas, while Moto, which has much wider
market recognition, targets the high-end product segment and will continue to focus on this
area post the consolidation (according to Lenovo management). Additionally, like Samsung,
Moto relies heavily on open channel sales (Lenovo likely to adopt the same channel strategy
after entering those markets in the mid to long term) rather than the operator channel which is
TCL’s focus, hence we don’t see any meaningful overlap here either.
16 January 2015
64
Macquarie Research
Fig 46 TCL vs Lenovo+Moto APAC business overlap
APAC Shipments (k)
Lenovo
Moto
TCL
China Shipments (k)
Lenovo
Moto
TCL
India Shipments (k)
Lenovo
Moto
TCL
Rest of Asia Shipments (k)
Lenovo
Moto
TCL
2013 Q1
2013 Q2
2013 Q3
2013 Q4
2014 Q1
2014 Q2
7,767
1,252
1,522
10,698
839
2,033
12,542
633
2,083
12,712
496
2,070
12,441
1,806
1,806
12,602
2,026
2,026
7,490
901
1,099
10,437
557
1,178
12,033
342
1,190
11,729
226
1,200
11,264
128
1,214
11,211
59
1,385
59
7
48
54
3
81
62
2
92
153
4
90
138
379
77
234
956
85
216
344
376
207
280
774
446
288
800
830
267
779
1,040
51
515
1,157
140
556
Lenovo+Moto
consolidation will
take time.
Lenovo’s management expects to complete the Motorola business consolidation and achieve
a turnaround in 4~6 quarters. Management plans to continue growing both the
Lenovo/Motorola market share in global markets through re-launching the Motorola brand in
China and growing the business in emerging markets including India and Latin America with
Motorola selling in the high-end segment and Lenovo addressing the mid-range and lower-tier
segments.
Currently Moto has ~50% market overlap with TCL. That said, we believe it will take time for
Lenovo to consolidate the combined business, then ramp up production, followed by
commercial launch, hence think it won’t pose a meaningful risk in the near term (FY15).
Judging from Moto’s (standalone) positioning in the past, we think there is a gap between
Moto handsets and TCL/Alcatel in terms of both price and branding.
We do acknowledge that the geographical overlap between TCL/Alcatel and Lenovo/Moto is
significant (~50%) and could expand from here (as Lenovo intends to further expand its
global presence), albeit the customer segments they target are likely to be different
(TCL/Alcatel focuses on entry level to mass market, while Lenovo/Moto targets mass market
to mid-end), hence the threat from Lenovo/Moto shouldn't be as high as the market fears.
16 January 2015
65
Macquarie Research
Fig 47 TCL vs Lenovo+Moto EMEA business overlap
EMEA Shipments (k)
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
Lenovo
Moto
TCL
Russia (k)
Lenovo
Moto
TCL
Rest of Eastern Europe (k)
Lenovo
Moto
TCL
Western Europe (k)
Lenovo
Moto
France
Germany
Italy
Rest of Western Europe
Spain
United Kingdom
TCL
France
Germany
Italy
Rest of Western Europe
Spain
United Kingdom
Middle East and Africa (k)
Lenovo
Moto
TCL
12
283
3,117
105
183
3,069
250
110
4,310
681
65
6,556
581
284
3,344
1,042
387
4,522
12
203
105
291
250
351
681
463
581
387
1,042
440
55
480
10
48
392
87
44
518
267
1,020
201
565
313
904
194
59
55
7
33
14
25
502
144
56
52
44
43
163
110
40
32
4
15
7
12
521
145
70
62
36
48
160
45
13
11
1
13
2
5
693
206
93
106
45
57
186
65
17
15
1
5
2
25
1,188
265
118
172
271
100
262
284
19
35
4
12
5
210
888
231
110
130
74
84
259
377
29
93
21
8
12
214
1,221
303
186
220
142
130
240
34
1,932
20
25
1,864
68
21
2,748
141
3,885
179
1,504
284
10
1,957
Fig 48 TCL vs Lenovo+Moto Americas business overlap
Americas Shipment (k)
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
Lenovo
Moto
TCL
Latin America (k)
Lenovo
Brazil
Mexico
Rest of Latin America
Moto
Brazil
Mexico
TCL
Brazil
Mexico
North America (k)
Lenovo
Moto
TCL
7,779
6,145
8,517
10,955
5,224
10,136
13,000
4,889
13,311
13,551
4,920
17,574
13,165
4,129
11,956
13,822
5,444
13,922
3,156
1,484
931
742
3,667
770
2,897
152
152
3,030
1,424
894
712
4,395
923
3,472
208
208
3,091
1,453
912
726
4,835
1,692
3,142
158
155
2
2
3,152
1,482
930
741
6,886
89
2,410
4,386
143
103
0
40
2,238
850
627
761
5,062
66
1,772
3,225
178
155
23
2,529
961
708
860
6,340
82
2,219
4,039
1,421
211
1,159
639
1,050
2,084
1,204
2,062
1,421
1,743
1,637
1,034
16 January 2015
66
Macquarie Research
Competition from Samsung entering mass-market product segment
Regardless of Samsung’s price cuts (as noted in the following table), TCL products still offer a
better price-performance. We conducted a detailed analysis comparing Samsung’s recently
launched products, their retail price, specifications, as well as target markets, and found that:
Distinct pricing gap
between
Samsung/TCL.
Fig 49
1)
even after price cuts, Samsung’s handsets are still priced at a distinct premium compared
with TCL/Alcatel’s, hence TCL still outperforms in terms of price-performance;
2)
TCL has much fewer models compared with Samsung, that in addition to its PRC based
production facility could offer superior scale/cost benefits;
3)
the markets where Samsung has been getting aggressive on pricing are mostly emerging
APAC countries (PRC in particular), while TCL has very little exposure to those markets
(15%~18%) hence shouldn’t feel much of an impact;
4)
in the EMEA and Americas regions where Samsung and TCL have meaningful overlap in
terms of market presence, Samsung mainly sells its products via open channel
distributors most of which target mid/high-end customers, while TCL has 80% of products
shipped to the operator channel where they are mostly positioned as entry-level/massmarket handsets. With a distinct gap in pricing, market positioning and channel strategy,
we see very little overlap between the two companies’ businesses hence believe that
concern is overdone.
Handset comparison of Samsung and TCL Alcatel
TCL
Network
Announced
Dimensions
Weight
Display
Memory
Camera
OS
Chipset
CPU
Battery
Retail price
Alcatel OneTouch Hero: Premium
user experience
Alcatel OneTouch Idol: Cuttingedge design
Alcatel OneTouch Pop: Value-for-money
Hero 2
Idol 2S
Pop 7S
Hero 8
Idol 2 Mini S
Pop 8S
Pop 2
2G GSM 850 / 900 2G GSM 850 / 900 2G GSM 850 / 900
/ 1800 / 1900
/ 1800 / 1900
/ 1800
3G HSDPA 850 / 3G HSDPA 850 / 3G HSDPA 850 /
900 / 1900 / 2100 900 / 1900 / 2100 900 / 2100
4G LTE 700 / 1700 4G LTE 800 / 900 / LTE 800 / 900 /
/ 1900 / 2100 /
1800 / 2100 / 2600 1800 / 2100 / 2600
2600 / 1800
4G LTE 800 / 900 /
LTE 700 / 1700 /
1800 / 2100 / 2600
1900 / 2100 / 2600
2G GSM 850 / 900 2G GSM 850 / 900 2G GSM 850 / 900 2G GSM 850 / 900
/ 1800 / 1900
/ 1800 / 1900
/ 1800 / 1900
/ 1800 / 1900
3G HSDPA 850 / 3G HSDPA 900 / 3G HSDPA 850 / 3G WCDMA 850 /
900 / 1900 / 2100 2100
900 / 1900 / 2100 900 / 1900 / 2100
4G LTE 700 / 1700 4G LTE 800 / 900 / 4G LTE 800 / 900 / 4G FDD-LTE 800 /
/ 1900 / 2100 /
1800 / 2100 / 2600 1800 / 2100 / 2600 900 / 1800 / 2100 /
2600
2600
4G LTE 700 / 800 / 4G LTE 700 / 850 /
900 / 1800 / 2100 / 1700 / 1900 / 2100
2600
/ 2600
LTE 800 / 850 /
4G LTE 800 / 900 /
900 / 1800 / 2100 / 1800 / 2100 / 2600
2600
2014, September 2014, September 2014, February
2014, February
2014, January
2014, September 2014, September
160.5 x 81.6 x 7.9 209 x 122 x 7.3
136.5 x 69.7 x 7.5 129.5 x 63.5 x 8.5 192 x 113 x 9 mm 209 x 128 x 7.2
141 x 71.5 x 9.7
mm
mm
mm
mm
mm
mm
175 g
310 g
126 g
116g
279 g
327 g
170g
1080 x 1920
1200 x 1920
720 x 1280 pixels, 540 x 960 pixels, 600 x 1024 pixels, 800 x 1280 pixels, 480 x 854 pixels,
pixels, 6.0 inches pixels, 8.0 inches 5.0 inches
4.5 inches
7.0 inches
8.0 inches
5.0 inches
ROM 16GB
ROM 8/16/32 GB ROM 8GB
ROM 4GB
ROM 4GB
ROM 8GB
ROM 8GB
RAM 2GB
RAM 2GB
RAM 1GB
RAM 1GB
RAM 1GB
RAM 1GB
RAM 1GB
Primary 13.1MP
Primary 5MP
Primary 8MP
Primary 8MP
3MP
Primary 5MP
Primary 5MP
Geo-tagging, touch Geo-tagging, touch Geo-tagging, touch Geo-tagging, touch
focus, face/smile focus, face
focus, panorama, focus, face/smile
detection, High
detection
High Dynamic
detection,
Dynamic Range,
Range
panorama, High
panorama
Dynamic Range
Secondary 5MP
Secondary 2MP
Secondary 1.3MP Secondary 2MP
Secondary 3MP
Android OS, v4.4.2 Android OS, v4.4.2 Android OS, v4.3 Android OS, v4.3 Android OS, v4.4.2 Android OS, v4.4.2 Android OS, v5.0
(KitKat)
(KitKat)
(Jelly Bean),
(Jelly Bean),
(KitKat)
(KitKat)
(Lollipop)
SoC MediaTek
SoC Mediatek
SoC Qualcomm
SoC Qualcomm
Qualcomm
Qualcomm
Qualcomm
MT6592T
MT8392
Snapdragon 400 Snapdragon 400 MSM8926
MSM8916
MSM8916
MSM8926
MSM8926
Snapdragon 400 Snapdragon 410 Snapdragon 410
Octa-core 2.0 GHz Octa-core 2.0 GHz Quad-core 1.2
Quad-core 1.2
Quad-core 1.2
Quad-core 1.2
Quad-core 1.2
Cortex-A7
Cortex-A7
GHz Cortex-A7
GHz Cortex-A7
GHz Cortex-A7
GHz Cortex-A53 GHz
3100 mAh
4060 mAh
2150 mAh
2000 mAh
3240 mAh
4100 mAh
2500mAh
US$451
US$297
US$241
US$190
US$155
US$170
US$50
16 January 2015
67
Macquarie Research
Fig 49
Handset comparison of Samsung and TCL Alcatel
Samsung
Galaxy A5
Network
4G LTE 800 / 900 / 4G LTE 800 / 900 / 2G GSM 850 / 900
1800 / 2100 / 2600 1800 / 2100 / 2600 / 1800 / 1900
3G TD-SCDMA
3G TD-SCDMA
3G WCDMA 850 /
1880 / 2010
1880 / 2010
900 / 2100
2G GSM900 /
2G 900 / 1800
4G FDD-LTE 800 /
1800
900 / 1800 / 2600
Dual SIM Dual
Dual SIM Dual
Standby
Standby
2014, August
2014, August
June, 2014
139.3x69.7x6.7mm 130.1x65.5x6.9mm 121.4 x 62.9 x 11
mm
123g
110.3g
130g
1280x70 pixels, 5 960x540 pixels,
480x800 pixels, 4
inches
4.5 inches
inches
ROM 16GB
ROM 8GB
ROM 4GB
RAM 2GB
RAM 1GB
RAM 1GB
Primary 13MP
Primary 8MP
5MP
Secondary 5MP
Secondary 5MP
0.3MP
Android 4.4
Android 4.4
Android 4.4
Qualcomm
Qualcomm
NA
MSM8916
MSM8916
Snapdragon 410 Snapdragon 410
Quad-core 1.2
Quad-core 1.2
Dual-core 1.2 GHz
GHz Cortex-A53 GHz Cortex-A53 Cortex-A7
Announced
Dimensions
Weight
Display
Memory
Camera
OS
Chipset
CPU
Battery
Retail price
2300mAh
RMB2,599 /
US$420
Galaxy A3
1900mAh
RMB1,950 / US$
315
Galaxy Ace 4 LTE Galaxy Avant
1900mAh
US$265
Galaxy Ace NXT Galaxy Core 2
Galaxy Young 2
4G FDD LTE 850 /
1700 / 2100
3G WCDMA 850 /
1700 / 2100
2G GSM 850 / 900
/ 1800 / 1900
3G WCDMA 900 /
2100
2G GSM 850 / 900
/ 1800 / 1900
Dual SIM Dual
Standby
3G WCDMA 900 /
2100
2G GSM 850 / 900
/ 1800 / 1900
Dual SIM Dual
Standby
July, 2014
132.8 x 66 x 9.9
mm
137g
960x540 pixels,
4.5 inches
ROM 16GB
RAM 1.5GB
Primary 5MP
Secondary 0.3MP
Android 4.4
Qualcomm
MSM8226
Snapdragon 400
Quad-core 1.2
GHz ARM CortexA7
2100mAh
US$230
July, 2014
June, 2014
121.4 x 62.9 x 10.7 130.3 x 68 x 9.8
mm
mm
123g
138g
480x800 pixels, 4 800x480 pixels,
inches
4.5 inches
ROM 4GB
ROM 4GB
RAM 0.8GB
RAM 0.8GB
3.15MP
Primary 5MP
NA
Secondary 0.3MP
Android 4.4
Android 4.4
NA
NA
June, 2014
109.8 x 59.9 x 11.8
mm
108g
320 x 480 pixels,
3.5 inches
ROM 4GB
RAM 0.5MB
3.15MP
NA
Android 4.4
NA
Single-core 1.2
GHz Cortex-A7
Quad-core 1.2
GHz
Single-core 1 GHz
Cortex-A7
1500mAh
US$120
2000mAh
Jun US$195 / Sep
US$135 / Dec
US$85
1300mAh
Jun US$135 /
September US$85
/ Dec US$ 65
3G WCDMA 900 /
1900 / 2100
2G GSM 850 / 900
/ 1800 / 1900
TCL product step-up strategy
Fig 50 ”Step-up” product strategy
16 January 2015
68
Macquarie Research
Step-up strategy
driving up product
mix.
TCL has been executing its “step-up” strategy since 2013, introducing three new series of
smartphones targeting different customer groups: HERO is equipped with premium hardware
specifications, IDOL features cutting-edge designs and POP targets mass market with its
fast-fashion, value-for-money phones. ~65% of the whole product portfolio launched in 2014
supports LTE mode including both TDD-LTE and FDD-LTE.
The successful execution of its step-strategy has significantly improved the company’s
profitability. Currently TCL’s high-end smartphones carry a gross margin of 20-22%, entrylevel smartphones 17-18% and feature phones 16%. The company’s blended gross profit
margin bottomed out after reaching economies of scale in 1Q13 and has been delivering a
healthy trend since then, peaking at 19.6% at the end of 2013/beginning of 2014 and now
moderating at the 19% level for 3Q14. With competitive pressure unlikely to ease any time
soon, we take a conservative approach and estimate gross margin will soften to 18.9% for
2015 and 18.6% for 2016.
Fig 51 Gross margin trend
20.5%
20.0%
19.9%
19.6%
19.5%
19.6%
19.5%
19.4%
19.0%
19.2%
19.2%
19.0%
18.5%
18.3%
18.5%
18.1%
17.8%
18.0%
17.5%
17.0%
16.5%
1Q14
2Q14
3Q14 4Q14F 1Q15F 2Q15F 3Q15F 4Q15F 1Q16F 2Q16F 3Q16F 4Q16F
Gross margin (%)
Fig 52 Operating margin trend
6.0%
4.0%
5.4%
5.3%
5.0%
4.4%
3.8%
4.8%
4.6%
4.2%
3.7%
3.3%
3.3%
3.6%
3.7%
3.0%
2.0%
1.0%
0.0%
1Q14
2Q14
Operating margin
16 January 2015
69
Macquarie Research
Fig 53 Net margin trend
6.0%
4.9%
4.9%
5.0%
4.4%
4.2%
3.7%
4.0%
3.3%
3.6%
3.4%
2.9%
3.0%
3.0%
3.2%
3.4%
2.0%
1.0%
0.0%
1Q14
2Q14
Net margin
Fig 54 TCL Com dividend payout track record
Date Announced Details
Financial year end
Payment date
14/08/2014
24/02/2014
Int Div HKD 0.128
Fin Div HKD 0.10
31/12/2014
31/12/2013
17/09/2014
22/05/2014
15/08/2013
No Int Div
31/12/2013
na
26/02/2013
No Fin Div
31/12/2012
na
09/08/2012
Int Div HKD 0.03
31/12/2012
31/10/2012
27/02/2012
Fin Div HKD 0.15
31/12/2011
25/05/2012
08/08/2011
Int Div HKD 0.138
31/12/2011
16/09/2011
25/02/2011
Fin Div HKD 0.168
31/12/2010
31/05/2011
26/08/2010
Sp Div HKD 0.08
31/12/2010
06/10/2010
10/03/2010
Fin Div HKD 0.035
31/12/2009
na
03/11/2009
Rts 1 for 2 @HKD 1.00 payable by 2009/12/28
na
na
18/08/2009
No Int Div
31/12/2009
na
25/03/2009
No Fin Div
31/12/2008
na
Source: Hong Kong Stock Exchange, January 2015
Expect further
operational leverage.
2013 gross profit reached 19%, a 1.6% y-y margin expansion, while R&D as a % of sales
declined to 5.5% (+0.6% operational leverage), with S&M as a % of sales down to 8.3%
(+1.3% operational leverage) and G&A as a % of sales down to 4.9% (+0.6% operational
leverage). Entering 2014 with smartphone shipments gradually reaching critical mass and GP
margin stabilizing at 19% for the first three quarters of the year (9M14 19.3%), leverage from
operating expenses showed no signs of stopping (R&D as a % of sales 4.3%, S&M as a % of
sales 8.2% and G&A as a % of sales 4.2%, for the first three quarters of 2014, all came down
compared to the same period in the previous year).
We expect the opex/sales ratio to gradually trend down thanks to operational leverage
generated from enhanced scalability and savings on the R&D and Admin fronts. Note that we
take a conservative approach hence have not priced in the potential synergy from
collaboration with TCL Multimedia and TCL Corp ( in terms of new product launch, cloud,
sales force consolidation etc), which could provide upside in 2~3 years’ time.
16 January 2015
70
Macquarie Research
Late cycle feature phone to smartphone migration driving the first leg of growth
Expect solid growth
to continue.
The company has recorded rapid smartphone shipment growth since the second quarter of
2013. Sales volume of smartphones and other smart devices for the year surged 169% to
17.6 million units, accounting for 32% of the Group’s total shipments (2012: 15%). The overall
average selling price increased from US$36.2 in 2012 to US$45.0 in 2013, up by 24% yearon-year. Driven by growth in shipments as well as ASP, the Group’s 2013 total revenue
increased by 61% y-o-y to HK$19.4 billion, and revenue contributed by smartphones and
other smart devices reached 63% of the Group’s total revenue (2012: 43%).
Thanks to an improving product mix, blended ASP has been trending up for the past three
years. Currently smartphone ASP is around US$75 while feature phone ASP US$25
according to our estimates. We expect smartphone ASP might face further competitive
pressure as some tier-one brands have been cutting their ASP trying to enter the mass
market segment and forecast smartphone ASP to drop to US$70 by 2014 year end, US$62
by 2015 and US$58 by 2016.
Decelerating ASP
growth due to
competition.
On the other hand, feature phone price has pretty much bottomed out hence we expect it to
stabilize at US$20. We believe TCL will be able to continue optimizing its product mix, with
smartphone shipments accounting for 55%, 65% and 70% of 2014, 2015 and 2016 total
shipments, and smartphone revenue accounting for 83%, 90% and 93% of 2014, 2015 and
2016 total revenue. We expect the company’s blended ASP to reach US$53 for 2014, US$55
for 2015 and US$56 for 2016.
The second wave of 4G/LTE replacement providing the next leg of growth
The company sees 4G demand surging in regions such as the Americas, EMEA and PRC.
Aside from the late-cycle feature phone to smartphone migration currently going on in
emerging markets as well as in the mid-to-low end segments of developed markets, 4G
smartphone adoption should provide the next leg of growth. Mass market smart devices in
particular will benefit the most given
Entry-level 4G driving
the next leg of
growth.
TCL well prepared for
4G adoption.
16 January 2015
1)
the performance gap between premium brands’ devices and mass market devices have
been narrowing;
2)
carriers across the globe have become more conservative in terms of giving subsidies, as
a result a number of customers are very likely to shift from mid/high-end devices to massmarket products due to better affordability and higher cost-performance value;
3)
the rapid development of 4G chipset solutions pioneered by MediaTek/Qualcomm has
also accelerated the development and mass adoption of entry-level 4G devices. We
expect 4G related products to make a meaningful contribution to TCL’s shipments and
revenue from 2H15.
The company has already prepared itself for such an opportunity. Some 65% of TCLC’s
current product portfolio supports the LTE mode, varying from mid-end (US$450) to low end
devices (US$155), from smartphones, phablets to tablets, targeting both the PRC (under TCL
brand) as well as overseas markets (under Alcatel OneTouch brand). Given that 4G only
accounted for 10% of the company’s shipment mix in 2014, we expect ASP as well as margin
(4G products carries 20%~25% gross margin, vs the company’s current blended margin of
19%) uplift effect to materialize in 2H15 as 4G products grow from a low base and gradually
ramp up in scale, providing the next leg of growth as well as the profitability driver after 3G
shipments moderate.
71
Macquarie Research
Fig 55
TCL AlcatelOneTouch product line-up
Alcatel OneTouch
Hero: Premium user
experience
Network
Alcatel OneTouch
Idol: Cutting-edge
design
Alcatel OneTouch
Pop: Value-formoney
Hero 2
Hero 8
Idol 2S
Idol 2 Mini S
Pop 7S
Pop 8S
2G GSM 850 / 900 /
1800 / 1900
2G GSM 850 / 900 /
1800 / 1900
2G GSM 850 / 900 /
1800
2G GSM 850 / 900 /
1800 / 1900
2G GSM 850 / 900 /
1800 / 1900
2G GSM 850 / 900 /
1800 / 1900
3G HSDPA 850 / 900 / 3G HSDPA 850 / 900 / 3G HSDPA 850 / 900 / 3G HSDPA 850 / 900 /
3G HSDPA 850 / 900 /
3G HSDPA 900 / 2100
1900 / 2100
1900 / 2100
2100
1900 / 2100
1900 / 2100
4G LTE 700 / 1700 /
1900 / 2100 / 2600 /
1800
4G LTE 800 / 900 /
1800 / 2100 / 2600
4G LTE 800 / 900 /
1800 / 2100 / 2600
LTE 800 / 900 / 1800 / 4G LTE 700 / 1700 /
2100 / 2600
1900 / 2100 / 2600
4G LTE 800 / 900 /
1800 / 2100 / 2600
4G LTE 700 / 800 /
LTE 700 / 1700 / 1900
900 / 1800 / 2100 /
/ 2100 / 2600
2600
4G LTE 700 / 850 /
1700 / 1900 / 2100 /
2600
4G LTE 800 / 900 /
1800 / 2100 / 2600
LTE 800 / 850 / 900 / 4G LTE 800 / 900 /
1800 / 2100 / 2600
1800 / 2100 / 2600
Announced 2014, September
Dimensions 160.5 x 81.6 x 7.9 mm
Weight
175 g
1080 x 1920 pixels,
Display
6.0 inches
Memory
ROM 16GB
RAM 2GB
Camera
Primary 13.1MP
Geo-tagging, touch
focus, face/smile
detection, High
Dynamic Range,
panorama
Secondary 5MP
Android OS, v4.4.2
OS
(KitKat)
Chipset
SoC MediaTek
MT6592T
Octa-core 2.0 GHz
Cortex-A7
Battery
3100 mAh
Retail price US$451
CPU
2014, September
209 x 122 x 7.3 mm
310 g
1200 x 1920 pixels,
8.0 inches
ROM 8/16/32 GB
RAM 2GB
Primary 5MP
2014, February
136.5 x 69.7 x 7.5 mm
126 g
720 x 1280 pixels, 5.0
inches
ROM 8GB
RAM 1GB
Primary 8MP
Geo-tagging, touch
focus, face detection
Geo-tagging, touch
Geo-tagging, touch
focus, face/smile
focus, panorama, High
detection, panorama,
Dynamic Range
High Dynamic Range
Secondary 2MP
Android OS, v4.4.2
(KitKat)
SoC Mediatek
MT8392
Octa-core 2.0 GHz
Cortex-A7
4060 mAh
US$297
Secondary 1.3MP
Android OS, v4.3
(Jelly Bean),
SoC Qualcomm
Snapdragon 400
MSM8926
Quad-core 1.2 GHz
Cortex-A7
2150 mAh
US$241
2014, February
129.5 x 63.5 x 8.5 mm
116g
540 x 960 pixels, 4.5
inches
ROM 4GB
RAM 1GB
Primary 8MP
Secondary 2MP
Android OS, v4.3
(Jelly Bean),
SoC Qualcomm
Snapdragon 400
MSM8926
Quad-core 1.2 GHz
Cortex-A7
2000 mAh
US$190
2014, January
192 x 113 x 9 mm
279 g
600 x 1024 pixels, 7.0
inches
ROM 4GB
RAM 1GB
3MP
2014, September
209 x 128 x 7.2 mm
327 g
800 x 1280 pixels, 8.0
inches
ROM 8GB
RAM 1GB
Primary 5MP
Android OS, v4.4.2
(KitKat)
Secondary 3MP
Android OS, v4.4.2
(KitKat)
Qualcomm MSM8926 Qualcomm MSM8916
Snapdragon 400
Snapdragon 410
Quad-core 1.2 GHz
Cortex-A7
3240 mAh
US$155
Quad-core 1.2 GHz
Cortex-A53
4100 mAh
US$170
New manufacturing facility
Production capacity
expanded.
16 January 2015
The company set up a new global manufacturing facility in Huizhou, Guangdong Province in
2013 to meet the growing demand. The new facility, which is situated on a site of 120,000
square meters, supports the Group’s global operations and commenced production in
September 2013. Construction of phase II was completed with operations started in June
2014. The company expects its total annual production capacity will increase from 65 million
units to a maximum of 120 million units after the entire manufacturing facility is put into
operation. It will become the largest single-location mobile phone manufacturing facility in
China, with upgraded capacity and more advanced efficiency.
72
Macquarie Research
3Q14 business review and 4Q14, FY15 outlook.
3Q14 smart device ASP was down 5% YoY of US$80.5 (largely due to higher mix of entrylevel smartphones) but stabilized on a QoQ basis up by 1%, while the feature phone ASP of
US$16.2 was down 25% QoQ and 37% YoY. The sharp decline in feature phone ASP is likely
to be triggered by proliferation of entry-level smartphones in our view. Blended ASP per
handset sales increased to US$53.4, from 3Q13’s US$45.4 and 2Q14’s US$52.4, thanks to
higher contribution from smartphones.
Management expects a strong 4Q thanks to seasonality and strong sales momentum from
Americas. FY14 revenue growth target was raised from 45% y-y to 50% y-y. Full year
handset shipments rose 33% y-y to 73.5mn units, of which smartphone shipments grew
136% y-y to 41.5mn units, on the high end of street expectations.
Expect strong 4Q14
due to peak season.
More carrier wins (most recently formed partnership with Sprint with shipments starting in Sep
2014, and the company is currently in talks with Verizon where we expect it to achieve
meaningful progress in 1H15) are also expected in the near term. The recently acquired
“Palm” brand will likely further enhance TCL’s brand recognition and market share in North
America. We expect the company’s first Palm device to be released in late 2015 via the ecommerce channel and open market, and expect the Palm business unit to be a mid-term
growth driver.
Further market share gains in LATAM (Brazil, for instance, the largest telecom market in
LATAM but currently only contributes mid-single-digit shipments. We expect this to reach high
single-digits by 2015 and low-teens by 2016) offers another growth driver. We forecast a 42%
growth in smartphone shipments going into 2015, driving topline growth of 31% and bottom
line growth of 28%.
Currently 10% ~ 15% of total shipments are contributed by two premium product lines (Hero
and Idol) which carry higher ASP (US$100~US$150, vs company’s smartphone ASP of
US$80 and blended handset ASP of US$50) and gross margin (20%~23% vs company
blended margin of 19.2%). The rest of shipments (85%~90%) are from the “Pop” brand,
which mainly features value-for-money devices with ASP of US$60~US$100 and margin of
16%~17%. We expect “Pop” products to be the company’s main shipment growth driver in
the process of feature phone to entry-level smartphone migration in emerging markets, but
the relatively lower margin could cap the company’s margin expansion potential.
Conservative on
tablet shipment
growth.
16 January 2015
The company also noted that it plans to expand into the tablet business but we are only
projecting 3.5mn units of shipments for 2015 (vs FY15E 52mn total smart devices shipment)
and don’t expect it to make a significant contribution to the company’s topline / earnings next
year. Sales momentum for the entire tablet market is slowing down attributed to
cannibalization from the larger-panel screen smartphone and weaker demand from the US
and Europe. EM could still see some growth due to the large population base and low
penetration, but we expect intense competition from existing tablet/PC makers such as
Asustek, Lenovo and Acer, hence near-term it could be difficult to achieve scalability in the
tablet space.
73
Macquarie Research
Fig 56
Corporate action
Time
Corporate action
2012
Launched its first Windows based phone TCL S606
2011
Launched its first tablet, TCL Pad16 / ALCATEL ONE TOUCH T60.
2007
Extension of Alcatel brand licensing for 10 more years to year 2024.
2006
2006
Formation of finance JV with TCL Corp and The Bank of East Asia to improve cost efficiency in finance and treasury activities
Acquisition of an additional stake in JRDC, a R&D JV, aiming to strengthen product development capabilities.
2006
Completion of the open offer with an additional of approximately 3 billion shares issued.
2005
Proposed open offer of new shares to shareholders to raise approximately HK$600 million.
2005
TCL Comm (2618.HK) acquired Alcatel's 45% stake in the mobile phone JV for a consideration of US$8.1 mn of its shares.
2005
Issued convertible notes to strengthen the Group’s financial position.
2004
Listed on the Main Board of The Stock Exchange of Hong Kong Limited (“HKSE”). T&A commenced operations.
2003~2004
TCL Corp merged TCL Telecom Equipment (formerly 000542.SZ) and was listed on Shenzhen Stock Exchange on 30 Jan 2004 (ticker
000100.SZ). TCL Telecom Equipment (formerly 000542.SZ) was delisted. TCL Corp's HK listed subsidiary TCL Int'l (1070.HK) spun off
its 40.8% stake in TCL Communication; the latter was then listed in HK on 27 Sep 2004 (ticker 2618.HK). TCL Int'l was renamed as TCL
Multimedia (1070.HK).
2004
TCL Corp and Alcatel announced the creation of a 55%:45% mobile phone manufacturing JV, Alcatel Mobile Phones.
2003
TCL Corp and Thomson SA of France announced the creation of a 67%:33% JV to produce TVs and DVD players. TVs made
by TCL-Thomson would be marketed under the TCL brand in Asia and the Thomson and RCA brands in Europe and North America.
1999
TCL Corp's TV subsidiary TCL International Holdings (1070.HK) raised ~HK$1 bn in its HK IPO.
1993
TCL Telecom Equipment (formerly 000542.SZ) was listed on the Shenzhen Stock Exchange.
1992
TCL Corp started to design and develop colour TVs.
1985
TCL Corp set up a JV called TCL Telecommunication Equipment Company with a HK enterprise to manufacture telephones.
1981
TCL Corp was founded in Huizhou, producing recording tapes.
16 January 2015
74
Macquarie Research
TCL Communication Technology (2618 HK, Outperform, Target Price: HK$11.02)
Quarterly Results
3Q/14A
4Q/14E
1Q/15E
2Q/15E
Revenue
Gross Profit
Cost of Goods Sold
EBITDA
Depreciation
Amortisation of Goodwill
Other Amortisation
EBIT
Net Interest Income
Associates
Exceptionals
Forex Gains / Losses
Other Pre-Tax Income
Pre-Tax Profit
Tax Expense
Net Profit
Minority Interests
m
m
m
m
m
m
m
m
m
m
m
m
m
m
m
m
m
7,779
1,481
6,297
671
364
0
0
306
-21
0
0
0
0
286
-7
279
-7
10,507
2,017
8,490
756
364
0
0
391
-28
0
0
0
-0
364
-11
352
-8
7,461
1,486
5,975
692
298
0
0
394
-20
0
0
0
-0
374
-11
363
-9
9,156
1,788
7,368
791
366
0
0
425
-24
0
0
0
0
400
-12
388
-9
Reported Earnings
Adjusted Earnings
m
m
273
273
344
344
354
354
EPS (rep)
EPS (adj)
EPS Growth yoy (adj)
%
0.22
0.22
13.5
0.28
0.28
11.5
EBITDA Margin
EBIT Margin
Earnings Split
Revenue Growth
EBIT Growth
%
%
%
%
%
8.6
3.9
26.4
42.6
27.1
Profit and Loss Ratios
Profit & Loss
2013A
2014E
2015E
2016E
Revenue
Gross Profit
Cost of Goods Sold
EBITDA
Depreciation
Amortisation of Goodwill
Other Amortisation
EBIT
Net Interest Income
Associates
Exceptionals
Forex Gains / Losses
Other Pre-Tax Income
Pre-Tax Profit
Tax Expense
Net Profit
Minority Interests
m
m
m
m
m
m
m
m
m
m
m
m
m
m
m
m
m
19,362
3,672
15,690
1,543
1,138
0
0
405
-105
2
0
0
-3
298
18
316
-3
30,503
5,879
24,625
2,642
1,457
0
0
1,185
-91
1
0
0
-1
1,095
-38
1,056
-25
40,870
7,739
33,131
3,138
1,514
0
0
1,624
-108
0
0
0
0
1,516
-46
1,470
-35
42,462
7,882
34,580
2,952
1,152
0
0
1,800
-112
0
0
0
-0
1,688
-51
1,637
-39
379
379
Reported Earnings
Adjusted Earnings
m
m
313
313
1,032
1,032
1,435
1,435
1,598
1,598
0.29
0.29
101.5
0.31
0.31
58.1
EPS (rep)
EPS (adj)
EPS Growth (adj)
PE (rep)
PE (adj)
%
x
x
0.27
0.26
nmf
26.5
27.7
0.83
0.84
220.4
8.7
8.7
1.16
1.16
39.0
6.2
6.2
1.29
1.29
11.4
5.6
5.6
7.2
3.7
33.4
40.1
18.5
9.3
5.3
24.7
34.7
85.3
8.6
4.6
26.4
37.1
54.3
Total DPS
Total Div Yield
Basic Shares Outstanding
Diluted Shares Outstanding
%
m
m
0.10
1.4
1,180
1,150
0.22
3.0
1,236
1,236
0.30
4.2
1,236
1,236
0.34
4.7
1,236
1,236
2013A
2014E
2015E
2016E
Revenue Growth
EBITDA Growth
EBIT Growth
Gross Profit Margin
EBITDA Margin
EBIT Margin
Net Profit Margin
Payout Ratio
EV/EBITDA
EV/EBIT
%
%
%
%
%
%
%
%
x
x
60.9
99.9
nmf
19.0
8.0
2.1
1.6
38.4
7.8
29.5
57.5
71.2
192.7
19.3
8.7
3.9
3.4
26.2
4.7
10.5
34.0
18.7
37.0
18.9
7.7
4.0
3.5
26.0
4.0
7.6
3.9
-5.9
10.9
18.6
7.0
4.2
3.8
26.0
4.2
6.9
Balance Sheet Ratios
ROE
ROA
ROIC
Net Debt/Equity
Interest Cover
Price/Book
Book Value per Share
%
%
%
%
x
x
12.0
2.9
5.5
94.2
3.9
2.9
2.5
30.1
6.5
20.2
95.9
13.1
2.3
3.2
31.9
6.7
19.8
96.5
15.0
1.8
4.1
28.4
6.1
17.3
96.7
16.1
1.4
5.0
Cashflow Analysis
2013A
2014E
2015E
2016E
EBITDA
Tax Paid
Chgs in Working Cap
Net Interest Paid
Other
Operating Cashflow
Acquisitions
Capex
Asset Sales
Other
Investing Cashflow
Dividend (Ordinary)
Equity Raised
Debt Movements
Other
Financing Cashflow
m
m
m
m
m
m
m
m
m
m
m
m
m
m
m
m
1,543
18
-58
-105
2,740
4,138
0
-1,434
0
139
-1,295
-114
0
-3,583
26
-3,671
2,642
-38
-553
-91
-649
1,311
0
-1,961
0
232
-1,729
-258
0
1,906
-468
1,180
3,138
-46
-1,260
-108
-790
934
0
-1,400
0
-127
-1,527
-359
0
1,273
-108
806
2,952
-51
-1,418
-112
-887
483
0
-1,000
0
-142
-1,142
-399
0
1,417
-112
905
Net Chg in Cash/Debt
m
-828
763
212
247
Free Cashflow
m
Balance Sheet
Cash
Receivables
Inventories
Investments
Fixed Assets
Intangibles
Other Assets
Total Assets
Payables
Short Term Debt
Long Term Debt
Provisions
Other Liabilities
Total Liabilities
Shareholders' Funds
Minority Interests
Other
Total S/H Equity
Total Liab & S/H Funds
m
m
m
m
m
m
m
m
m
m
m
m
m
m
m
m
m
m
m
2,704
-650
-466
-517
2013A
2014E
2015E
2016E
142
6,070
2,649
0
1,070
1,410
3,082
14,423
3,875
2,690
196
4,656
93
11,510
2,909
4
0
2,913
14,423
905
7,914
5,845
0
1,574
1,692
4,039
21,969
7,213
4,792
0
5,804
107
17,917
3,955
97
0
4,052
21,969
1,117
10,016
7,397
0
1,460
1,692
5,058
26,740
9,129
6,064
0
6,283
136
21,612
5,031
97
0
5,128
26,740
1,364
12,356
9,126
0
1,309
1,692
6,192
32,038
11,262
7,481
0
6,801
168
25,712
6,229
97
0
6,327
32,038
All figures in HKD unless noted.
16 January 2015
75

TCL Communication Technology

Transcription

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