2618 JP Morgan Research Report 20111027

7/27/2019 2618 JP Morgan Research Report 20111027

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Asia Pacific Equity Research27 October 2011

TCL Communication TechnologyHoldings Ltd.

Overweight2618.HK, 2618 HK

3Q11 results slightly missed; Remains a valuationcatch-up play

▼

Price: HK$4.09

Price Target: HK$6.00Previous: HK$7.50

China

HK/China SMID Caps

Andrew Hsu AC

(852) 2800-8572

[email protected]

Leon Chik, CFA

(852) 2800-8590

[email protected]

J.P. Morgan Securities (Asia Pacific) Limite

YTD 1m 3m 12m Abs -56.4% 8.4% -51.4% -48.9%

TCL Communication Technology Holdings Ltd. (Reuters: 2618.HK, Bloomberg: 2618 HK)

HK$ in mn, year-end Dec FY09A FY10A FY11E FY12E FY13ERevenue (HK$ mn) 4,361 8,701 10,981 12,359 13,358Net Profit (HK$ mn) 23.0 701.7 868.2 995.6 1,116.5EPS (HK$) 0.03 0.63 0.77 0.87 0.98DPS (HK$) 0.04 0.24 0.23 0.26 0.29Revenue growth (%) -3.9% 99.5% 26.2% 12.6% 8.1%EPS growth (%) -19.3% 2408.8% 21.5% 13.9% 12.2%ROCE 6.0% 14.5% 10.4% 9.9% 9.7%ROE 2.1% 42.4% 34.4% 31.4% 28.5%P/E (x) 162.9 6.5 5.3 4.7 4.2P/BV (x) 3.4 2.0 1.6 1.3 1.0EV/EBITDA (x) 5.0 1.7 1.8 1.6 1.3Dividend Yield 1.0% 6.0% 5.6% 6.4% 7.2%Source: Company data, Bloomberg, J.P. Morgan estimates.

Company DataShares O/S (mn) 1,11Market cap (HK$ mn) 4,55Market cap ($ mn) 58Price (HK$) 4.0Date Of Price 27 Oct 1Free float (%) 40.63mth Avg daily volume 5,331,398.03M - Avg daily Value (HK$mn)

22.3

3M - Avg daily Value (USD)($ mn)

2.8

Index 1Exchange Rate 7.7Fiscal Year End De

See page 11 for analyst certification and important disclosures, including non-US analyst disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm mahave a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making theinvestment decision.

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HK$

Oct-10 Jan-11 Apr-11 Jul-11 Oct-11

Price Performance

TCLC reported a decent set of 3Q11 results with sales of HK$2,862mn(up 33 % Y/Y; 2% below our estimate) and net profit of HK$215mn (up 7%Y/Y, 8% below our estimate). Management lowered shipment volumeguidance from 50mn to 44mn after it rose by only 16% Y/Y in 3Q11.

3Q11 GPM at 20.9% vs. 22% in 1H11, in-line with our expectation thatimproving 3G smartphone sale would couple with continued marginsqueeze, due to 1) lack of economies of scale for smartphone in the earlystage of production; and 2) price competition from international players inthe low-mid end smartphone segment and from ZTE/Huawei in the feature

phone segment. ASP rose to US$33.4 from US$30.3 in 1H11, thanks toimproving product mix and the continued success of the step-up strategy tohigh-end phones. The magnitude of ASP rise (up 10% Q/Q) was the key

positive surprise in 3Q11 results, in our view. Earning estimates revisions: Sep shipment volume was a miss, coming in

at 3.8mn, up 6% Y/Y, the lowest Y/Y growth compared to any previousmonths in 2011 thus far. We forecast 9% Y/Y growth for the remainingthree months in 2011 and FY12. Therefore, we revise down our FY11E/FY12E sales by 7%/ 22% to factor in 1) lower handset shipment volumeassumptions (FY11E – down from 47mn to 44mn; FY12E – down from63mn to 48mn); 2) weaker sales growth in EMEA regions; and 3) lower

proportion of 3G smartphone sales (13% of sales/ 4% of shipment in FY11).We lower our FY11E/ FY12E NP by 8% and 14%, respectively, to factor inlack of economies of scale in early stage of smartphone production.

Share price correction overdone. The share price of TCLC was up 22%yesterday after declining sharply (down 52%) in the past three months.

Currently, the stock is trading at an undemanding 4.7x FY12E, 88% higherthan the trough P/E of 2.5x in Mar-09 and 61% lower than the height of12.1% in Apr-11. We maintain our Overweight rating and lower our Dec-12PT from HK$7.5 to HK$6.0 (DCF-derived; g = 3%; beta = 1.5),representing 47% potential upside from current level, which is an attractiveentry point, in our view. The key risks to our PT include a slower pace ofmigration from 2G to 3G and an unexpected increase in brand recognition ofother domestic players in the low-end segment of the handset market.


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Andrew Hsu(852) [email protected]

Company description P&L sensitivity metrics (FY11E) EBIT EPS

impact (%) impact (%)Founded in 1993, TCLC is a leading mobilehandset manufacturer in China with twomain brands, Alcatel and TCL.Headquartered in Shenzhen, the companyhas its production lines located in Huizhouand R&D centers in Shenzhen, Shanghaiand Huizhou with more than 1,300engineers. TCLC has over 90% of itsshipment volume in overseas and officiallylaunched the 3G smartphones in FY11.

Chipset cost

Impact of 5% increase (w. no change in ASPs 4.5% 4.9%

% of smartphone

Impact of 5% increase 0.2% 0.2%

Impact of greater proportion of ODM sales

Impact of 5% points inc -3.8% -4.2%

GM

Impact of each 100bps increase 10.9% 11.9%

Source: J.P. Morgan estimates.

Price target and valuation analysisOur price target (changed due to earnings revision) is based upon DCF

methodology. The nature of the industry leads us to apply a terminalgrowth of 3%.

Revenue mix (FY11E)

DCF assumptions

Risk free rate: 4.20%

Market risk premium: 6.00%

Beta: 1.5

Cost of equity 13.20%

Terminal “g”: 3.00%

Source: J.P. Morgan estimates. Source: J.P. Morgan estimates

Our PT (Dec-12, DCF-derived) of HK$6.0 implies a fwd P/BV(FY13E) of 3.0x and a fwd P/E (FY13E) of 7.8x. The key risks to ourPT include a slower pace of migration from 2G to 3G and anunexpected increase in brand recognitions of other domestic players inthe low-end segment of the handset market.

EPS: J.P. Morgan vs. consensus

HK$ J.P. Morgan Consensus

FY11E 0.76 0.78

FY12E 0.87 0.92

FY13E 1.10 1.10

Source: Bloomberg, J.P. Morgan estimates.

Peer comparison

Companies Ticker Price, LCMCAP

US$MMVol

US$MM1W

chg3M

chg11E

P/E (x)12E

P/E(x)11E EV/EBITDA

11E ROE(%)

11EP/B (x)

11E Yld(%)

TCLC (OW)* 2618 HK 4.09 (6) 583.3 2.9 33.2 (41.5) 5.3 4.7 6.5 34.4 1.3 7.2

LENOVO (OW) 992 HK 5.53 (5.8) 7,317 32.9 10.8 7.4 16.5 12.9 59.9 24.3 3.7 2.5HTC (N) 2498 TT 691 (800) 20,755 196.1 1.5 (28.2) 8.0 7.1 6.5 69.0 4.3 5.1CHINA WIRELESS (NR) 2369 HK 1.42 391 1.4 22.4 (18.4) 10.9 9.3 11.8 19.6 1.6 2.0ZTE (NR) 763 HK 22.25 9,478 20.5 14.0 (10.1) 18.2 15.0 13.0 13.5 2.3 1.4Average 50.8 16.4 (18.2) 11.8 9.8 19.5 32.2 2.6 3.6Source: Company data, Bloomberg estimates for NR stocks, J.P. Morgan estimates for all others. Share prices are as of 27 Oct 2011.

ODM14%

Low tierfeaturephones

29%

Mid tierfeaturephones

44%

Smartphones13%



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3Q11 sales up 33% while NP up 7%

3Q11 results vs. JPM estimates

Year to Dec (HKDm) 3Q10A 3Q11A Growth 3Q11E VarianceTurnover 2155.7 2861.9 32.8 2924.2 -2.1%Gross profit 522.4 597.0 14.3 636.1 -6.2%GPM 24.2% 20.9% 21.8%EBIT 239.0 263.3 10.2 268.1 -1.8%Net profit 201.6 214.9 6.6 234.5 -8.4%EPS (HKD) 0.18 0.19 3.6 0.21 -9.2%

Source: Company and J.P. Morgan estimates

TCLC reported a decent set of 3Q11 results with sales of HK$2,862mn (up 33 %

Y/Y; 2% below our estimate) and net profit of HK$215mn (up 7% Y/Y, 8% below

our estimate). 3Q11 GPM came in at 21% vs. 22% in 1H11. We had not

anticipated a positive surprise in GPM given the predicted lack of economies of scale

of 3G smartphone production in its first FY official sales. ASP rose to US$33.4

(3Q11) from US$30.3 (1H11), thanks to improving product mix and the continued

success of the step-up strategy to high-end phones. As mentioned in our previousnote 'Handset shipment growth intact; we await evidence of smartphone sales in

2H11, the swing factor’ published on 9 Aug , we expect that the ASP will improve

further in 2H11 when more 3G smartphone models are unveiled; however, the

magnitude of the ASP rise (up 10% Q/Q) came in as positive surprise, in our view.

Key takeaways from analyst callManagement lowered shipment volume guidance from 50mn to 44mn. Shipment

volume was up 16% Y/Y in 3Q11, with Jul/ Aug/ Sep up 24%/ 20%/6% respectively.

The Sep shipment volume was a miss, coming in at 3.8mn units, the lowest Y/Y

growth compared to any previous months this year.

JPM view: We notice that the growth momentum weakened in 3Q11 due to a

deteriorating macro environment and higher base. Despite the weakness in overseas

markets, China shipment managed to record growth of 159% Y/Y on new model

launches. We have lowered our FY11 shipment volume forecast from 47mn (which

was at the lower end of the street estimates) to 44mn, representing a 22% Y/Y

growth, assuming that TCLC will achieve 9% Y/Y shipment volume growth in the

rest of the year.

Shipment volume vs. Y/Y growth (Jan -11 – Dec 11)

Source: Company (Jan-11 – Sep-11); J.P. Morgan estimates (Oct-11- Dec-11)

51%

64%

42%

22%

30% 29%24%

20%

6%9% 9% 9%

0%

10%

20%

30%

40%

50%

60%

70%

-

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

Shipment volume Y/Y growth



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Alcatel license fee: Short-term pain, long term gain. TCLC has made a payment

of USD40mn in 3Q11 utilizing its internal operating cash.

Background of the Alcatel-Lucent deal : On 23 Sep, TCLC announced that it will payUSD 40mn, or HKD 312mn, to Alcatel-Lucent for the use of the Alcatel brand namefrom Jul 2011 to Dec 2024. From 2004 to 2010, TCLC paid 1% of the sales ofAlcatel One Touch handset series as loyalty fee to Alcatel-Lucent. As in 2010,approximately 90% of the sales, or HKD 7.8bn, came from overseas (i.e. using theAlcatel brand).

JPM view: Assuming that overseas sales remain constant, TCLC will pay HKD78mn/year or HKD1.05bn over 13.5 years, more than three times the license fee ofHKD 312bn. As such, we believe the Alcatel-Lucent deal is positive to TCLC andliquidity risk will remain low as TCLC can fully fund the fee with its ample cash(which amounted to a total of HKD1.5bn as of 3Q11).

Smartphone shipment volume to account <5% of total shipment in FY11

Sep smartphone shipment volume accounted 198k units, up 38% M/M, bringing the

total shipment to 653k this year. If TCLC achieves 40% M/M smartphone shipment

volume growth in each of the three months in the rest of this year, its smartphone

shipment volume will reach 1.9mn, which would only account for 4.3% of the total

shipment volume (that is estimated to be 44 units), falling short of 8-10% guidance

given by management earlier this year. We have lowered our assumption from 6% to

4%.

Net profits revised down by 8%/ 14% in FY11E/ FY12E

New Old Change Year to Dec (HKDmn FY11E FY12E FY11E FY12E FY12E FY12ETurnover 10,981 12,359 11,801 15,749 -7.0% -21.5%

Gross profit 2,324 2,609 2,567 3,360 -9.5% -22.4%EBIT 1,008 1,137 1,082 1,310 -6.8% -13.2%Net profit 868 996 946 1,157 -8.3% -14.0%EPS (HKD) 0.765 0.871 0.834 1.013 -8.3% -14.0%AssumptionsGross margin 21.2% 21.1% 21.8% 21.3% -0.6% -0.2%


We are revising down our FY11E/ FY12E sales by 7%/ 22% to factor in 1) lower

handset shipment volume assumptions (FY11E– down from 47mn to 44mn; FY12E

– down from 63mn to 53mn); 2) weaker-than-expected sales growth in EMEA

regions; and 3) lower proportion of 3G smartphone sales.

We are lowering our FY11E/ FY12E NP by 8% and 14%, respectively, to factor in

1) the lack of economies of scale in the early stage of sales of 3G smartphone, whichwere only official launched this year; and 2) lower total sales.

We assume that 4Q11 GPM will come in at 20.3%, lower than the 3Q/ 2Q/1Q11

GPMs of 20.9%/ 21.9%/ 22.3%, bringing our FY11 GPM assumption from 21.8% to

21.2%. We assumed that the FY11E GPMs for ODM/ low-tier feature phones/ mid-

tier feature phone/ 3G smartphone are 16%/ 21%/ 22.8%/21.5%. We highlighted in

our last note, 'Handset shipment growth intact; we await evidence of smartphone

sales in 2H11, the swing factor’ published on 9 Aug, that 2H11 will represent a key

testing time for TCLC and that investors shall stay focused on shipment volume and

GPM of 3G smartphones. We believe higher 3G smartphone sales will couple

with a continued margin squeeze in 4Q11 when seven new smartphone models are



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unveiled vs. 2/2/4 new models introduced in 1Q/2Q/3Q11. We will also review: 1)

the pricing pressures from high-end smartphone producers and domestic players; 2)

the sustainability of shipment growth in Latin America and EMEA amid recent

development in Europe; and 3) the early receptions of 3G smartphones and Facebookfeature phone models.

Higher ASP and favourable product mix do not result in higher GPM. TCLC

uses chipsets produced by MediaTek (for feature phones) and Qualcomm (for

smartphones). TCLC faces a higher cost structure for smartphones due to: 1) lack of

economies of scale for smartphone production; and 2) price competition from Apple

(a potential low-cost iPhone)/ Nokia (WP7) in the low-mid end smartphone segment

and from ZTE/Huawei in the feature phone segment.

Share price correction overdone. The share price of TCLC was up 22% yesterday

after declining sharply (down 52%) in the past three months. Currently, the stock is

trading at 4.7x FY12E, 88% higher than the trough P/E of 2.5x in Mar-09 and 61%

lower than the height of 12.1% in Apr-11. We maintain our Overweight rating and

lower our Dec-12 PT from HK$7.5 to HK$6.0 (DCF-derived; g = 3%; beta = 1.5),

representing a 47% upside from the current level, which is an attractive entry point,

in our view.

P/E band chart (Oct 08- Oct 11)

Source: J.P. Morgan estimates. Bloomberg.

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Valuation and share price analysis

DCF valuationOur Dec-12 price target is based on a DCF valuation that assumes a market risk

premium of 6.0% and a risk-free rate of 4.2% (yield on 10-year government notes in

China). We lift our beta from 1.2 to 1.5, reflecting the seasonality nature of the

handset industry, giving a WACC of 13.2%. We estimate free cash flow until FY15

and assume a terminal growth rate of 3.0%. The terminal growth is based on the

annual growth rate expected in FY15 (the final year of the estimate period), subject

to a minimum of 1.5% and a maximum of 4.5%, depending on the nature of the

industry and the level of maturity in China.

We also analyze the DCF price sensitivity to WACC, and the terminal multiple.

Table 1: Base-case DCF analysisHK$ MM 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Cash flow estimatesSales 4,971 4,538 4,361 8,701 10,981 12,359 13,358 15,018 16,220EBIT 77 40 165 813 1,008 1,137 1,268 1,516 1,542NOPAT 37 141 130 339 950 1,069 1,192 1,425 1,450Capex, net (79) (83) (26) (139) (350) (300) (300) (337) (364)Depreciation 153 138 137 170 241 305 350 400 446Change in working capital (2,178) (111) (97) (179) (603) 64 (153) (255) (184)Free CF (2,067) 86 144 191 238 1,138 1,088 1,233 1,347

DCF Parameters AssumptionsLiabilities as a % of EV 0% Terminal growth 3.0%WACC 13.2% Risk- ree rate 4.2%

Market risk 6.0%Enterprise NPV (10E-16E) 5,878 Beta 1.5

+ Net cash (debt), current 731 Cost of debt 6.2%- Minorities (Market value) (4)+/- Other items 0 Implied exit P/E multiple (x) 3.0= Equity value 6,605/ Number of shares 1,097

= Equity value per share (HK$) 6.0

Source Company data, J.P. Morgan estimates.

Table 2: Sensitivity analysis based on WACC and perpetual terminal growth rate

Terminal growth rate

5.0 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5%

W A C C

11.7% 6.2 6.4 6.5 6.7 6.9 7.1 7.412.2% 6.0 6.1 6.3 6.4 6.6 6.8 7.112.7% 5.8 6.0 6.1 6.2 6.4 6.6 6.813.2% 5.7 5.8 5.9 6.0 6.2 6.3 6.5

13.7% 5.5 5.6 5.7 5.8 6.0 6.1 6.314.2% 5.4 5.5 5.6 5.7 5.8 5.9 6.014.7% 5.2 5.3 5.4 5.5 5.6 5.7 5.8




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Table 6: Key assumptions

Year-end Dec FY09 FY10 FY11E FY12E

% of total salesODM 10% 25% 14% 13%Low tier 80% 55% 29% 23%Mid tier 10% 20% 44% 38%High tier 0% 0 13% 25%

Source: Company data, J.P. Morgan estimates.

Table 7: P&L statement

HK$ MM, year-end Dec FY09 FY10 FY11E FY12E FY13E

Total Revenues 4,361 8,701 10,981 12,359 13,358YoY change (%) -3.9 99.5% 26.2% 12.6% 8.1%Cost of Goods Sold (3,412) (6,752) (8,657) (9,750) (10,515)YoY change (%) -8.4 97.9% 28.2% 12.6% 7.8%Gross Profit 949 1,948 2,324 2,609 2,843YoY change (%) 16.9 105.4% 19.3% 12.3% 9.0%Gross Margin 21.8 22.4% 21.2% 21.1% 21.3%SGA (954) (1,413) (1,834) (2,064) (2,230)YoY change (%) -8.7 48.2% 29.8% 12.6% 8.1%Other Income/(Expenses) 170 278 518 592 655Operating profit 165 813 1,008 1,137 1,268

EBITDA 302 984 1,249 1,442 1,617EBITDA margin 6.9 11.3% 11.4% 11.7% 12.1%Depreciation & Amortization (137) (170) (241) (305) (350)YoY change (%) -1.1 24.7% 41.4% 26.5% 14.6%EBIT 165 813 1,008 1,137 1,268EBIT margin 3.8 9.3% 9.2% 9.2% 9.5%Net Interest Expense (39) (63) (67) (69) (70)Exceptional item (26) (5) (17) (9) (10) Associates (1) (0) (0) (0) (0)Gains/losses 0 0 0 0 0Net Income Before Taxes 34 745 924 1,059 1,188

YoY change (%) -6.0 2086% 24.0% 14.7% 12.1%Tax (11) (43) (55) (63) (71)Effective Tax rate 32.5 5.8% 6.0% 6.0% 6.0%Minority Interests 0 (0) (0) (0) (0)Net Income 23 702 868 996 1,117YoY change (%) -19.3 2950% 23.7% 14.7% 12.1%Net margin 0.6 8.1% 7.9% 8.1% 8.4%


Table 8: Interim estimates

HK$ MM, year-end Dec 1H09 2H09 1H10 2H10 1H11 2H11E

Total Revenues 1,327 3,033 3,452 5,249 4,600 6,381Gross Profit 197 751 724 1,224 1,014 1,310EBIT -13 178 303 511 460 548Net Income Before Taxes -104 138 279 466 422 502Net Income -104 127 250 451 396 472Diluted EPS (HK$) -0.114 2.624 0.225 0.406 0.349 0.416RatiosRevenue split 30.4% 69.6% 39.7% 60.3 41.9% 58.1%GPM 14.9% 24.8% 21.0% 23.3 22.0% 20.5%EBIT margin -1.0% 5.9% 8.8% 9.7 10.0% 8.6%NPM -7.9% 4.2% 7.2% 8.6 8.6% 7.4% YoYRevenue -43.3% 38.0% 160.0% 73.0 33.3% 21.6%GP -55.0% 101.1% 267.1% 62.9 40.0% 7.0%EBIT -137.9% 2693% -2454% 187.1 52.1% 7.2%NP -193% -253% -339% 254 58.5% 4.5%




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Table 9: Balance sheet


Cash and Cash Equivalents 2,357 7,545 8,172 9,163 10,068Inventories 448 780 984 1,108 1,197

Accounts receivable 1,304 2,535 3,200 3,601 3,893Other Current Assets 3,356 6,959 7,071 7,139 7,188

Total Current Assets 6,278 11,619 13,227 14,811 16,146

Intangible Assets 55 106 134 151 163Property and Equipment, Net 220 309 562 719 844Other Assets 66 72 91 103 111

Non-Current assets 488 635 787 972 1,118Total Assets 6,766 12,254 15,703 18,326 20,304

Accounts Payable 1,074 1,843 2,327 2,619 2,830Other Accrued Expenses 0 0 0 0 0Taxes Payable 0 0 0 0 0

ST and current LT debts 1,461 6,488 7,786 8,763 9,471Total Current Liabilities 5,310 10,014 12,873 14,799 15,995

Long- erm Debt 0 0 0 0 0Other Noncurrent Liability 361 0 0 0 0Noncurrent liabilities 361 0 0 0 0

Total Liabilities 5,671 10,031 12,873 14,799 15,995

Share capital 715 1,098 1,098 1,098 1,098Reserves and Surplus 369 946 1,554 2,251 3,032

Total Shareholders' Equity 1,095 2,218 2,826 3,523 4,305Minority Interest 0 4 4 4 4Total Shareholders' Equity 1,095 2,222 2,830 3,527 4,309Total Liabilities and Equity 6,766 12,254 15,703 18,326 20,304


Table 10: Cash flow statement


EBIT 165 813 1,008 1,137 1,268Depreciation and Amortization 137 170 241 305 350Working Capital Changes (97) (179) (603) 64 (153)Tax Paid 1 (11) (43) (55) (63)Cash Flow From Operations 206 794 603 1,451 1,330

Capital expenditures (26) (139) (350) (300) (300)Investments and others 3 (216) (19) (12) (9)Net Interest (39) (63) (67) (69) (70)Cash Flow from Investing (62) (419) (437) (380) (317)

Free Cash Flow 141 591 186 1,082 1,030

Dividends 38 272 260 (280) (317)Common issue 358 0 0 0 0Debt (606) (361) 200 200 200Other Financing 1,741 0 0 0 0Cash Flow from financing 351 (211) 460 (80) (117)

Change in cash 495 164 627 991 905Cash beginning 684 1,170 1,345 1,972 2,963Foreign exchange changes (10) 11 0 0 0Cash at end 1,170 1,345 1,972 2,963 3,868




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TCL Communication Technology Holdings Ltd.: Summary of

FinancialsProfit and Loss Statement Ratio AnalysisHK$ in millions, year end Dec FY08 FY09 FY10 FY11E FY12E HK$ in millions, year end Dec FY08 FY09 FY10 FY11E FY12E

Revenues 4,538 4,361 8,701 10,981 12,359 Gross margin 17.9% 21.8% 22.4% 21.2% 21.1%Cost of goods sold 3,727 3,412 6,752 8,657 9,750 EBITDA margin 6.8% 10.4% 13.9% 14.0% 14.3%

Gross Profit 812 949 1,948 2,324 2,609 Operating margin 0.9% 3.8% 9.4% 9.2% 9.2%R&D expenses - - - - - Net margin 0.6% 0.5% 8.1% 7.9% 8.1%

SG&A expenses - - - - - R&D/sales - - - - -Operating profit (EBIT) 40 165 813 1,008 1,137 SG&A/Sales - - - - -

EBITDA 308 455 1,212 1,537 1,766Interest income 24 39 83 151 163 Sales growth (8.7%) (3.9%) 99.5% 26.2% 12.6%

Interest expense -28 -39 -63 -67 -69 Operating profit growth -47.6% 309.5% 392.7% 23.9% 12.8%Investment income (Exp.) -5 0 20 84 95 Net profit growth -13.8% -19.3% 2950.0% 23.7% 14.7%

Non-operating income (Exp.) - - - - - EPS (reported) growth (20.5%) (19.3%) 2408.8% 21.5% 13.9%

Earnings before tax 36 34 745 924 1,059Tax -8 -11 -43 -55 -63 Interest coverage (x) 67.50 - - - -

Net income (reported) 28.5 23.0 701.7 868.2 995.6 Net debt to total capital 40.3% -35.1% -12.1% -3.7% -3.3%Net income (adjusted) 30 49 707 885 1,004 Net debt to equity 111.0% -81.9% -47.7% -13.7% -11.4%

EPS (reported) 0.03 0.03 0.63 0.77 0.87 Asset turnover 1.02 0.77 0.91 0.79 0.73

EPS (adjusted) 0.03 0.05 0.63 0.78 0.88 Working capital turns (x) - - - - -

BVPS 1.16 1.19 2.02 2.56 3.19 ROE 2.7% 2.1% 42.4% 34.4% 31.4%DPS 0.00 0.04 0.24 0.23 0.26 ROIC - - - - -

Shares outstanding 915 917 1,114 1,135 1,143 ROIC (net of cash) - - - - -

Balance sheet Cash flow statementHK$ in millions, year end Dec FY08 FY09 FY10 FY11E FY12E HK$ in millions, year end Dec FY08 FY09 FY10 FY11E FY12E

Cash and cash equivalents 684 2,357 7,545 8,172 9,163 Net income 28.5 23.0 701.7 868.2 995.6

Accounts receivable 837 1,304 2,535 3,200 3,601 Depr. & amortization 267 290 398 529 629

Inventories 230 448 780 984 1,108 Change in working capital -111 -97 -179 -603 64Others 2,285 2,169 759 871 939 Other - - - - -

Current assets 4,037 6,278 11,619 13,227 14,811 Cash flow from operations 40 166 731 536 1,382LT investments 70 66 72 91 103 Capex -83 -26 -139 -350 -300

Net fixed assets 262 220 309 562 719 Disposal/(purchase) - - - - -

Others - - - - - Cash flow from investing -62 -23 -356 -369 -312Total Assets 4,564 6,766 12,254 15,703 18,326 Free cash flow -43 141 591 186 1,082

Liabilities Equity raised/(repaid) -59 358 - - -ST Loans 1,867 1,461 6,488 7,786 8,763 Debt raised/(repaid) 808 -606 -361 200 200

Payables 591 1,074 1,843 2,327 2,619 Other -12 1,741 - - -Others 0 0 0 0 0 Dividends paid 0 38 272 260 -280

Total current liabilities 3,349 5,310 10,014 12,873 14,799 Cash flow from financing -76 351 -211 460 -80Long- erm debt - - 0 - -

Other liabilities 142 0 0 0 0 Net change in cash - - - - -Total Liabilities 3,500 5,671 10,031 12,873 14,799 Beginning cash 709 684 1,170 1,345 1,972

Shareholders' equity 1,065 1,095 2,218 2,826 3,523 Ending cash 684 1,170 1,345 1,972 2,963

Source: Company reports and J.P. Morgan estimates.



10



JPM Q-ProfileTCL Communication Technology Holdings Ltd. (HONG KONG / Information Technology)As Of: 21-Oct-2011 [email protected]

Local Share Price Current: 3.07 12 Mth Forward EPS Current: 0.89

Earnings Yield (& local bond Yield) Current: 29% Implied Value Of Growth* Current: -353.89%

PE (1Yr Forward) Current: 3.4x Price/Book Value Current: 1.4x

ROE (Trailing) Current: 39.78 Dividend Yield (Trailing) Current: 9.39

Summary

TCL Communication Technology Holdings Ltd. 437.68 As Of:

HONG KONG 2.964592 SEDOL B02Y690 Local Price: 3.07

Information Technology Communications Equipment EPS: 0.89

Latest Min Max Median Average 2 S.D.+ 2 S.D. - % to Min % to Max % to Med % to Avg

12mth Forward PE 3.45x 3.41 15.67 8.80 8.63 14.84 2.41 -1% 355% 155% 150%

P/BV (Trailing) 1.36x 0.33 21.75 1.99 2.43 8.44 -3.57 -75% 1501% 46% 79%

Dividend Yield (Trailing) 9.39 0.00 9.39 0.00 0.71 4.25 -2.84 -100% 0% -100% -92%

ROE (Trailing) 39.78 -200.71 119.77 11.50 5.66 147.81 -136.48 -605% 201% -71% -86%

Implied Value of Growth -353.9% -3.54 0.09 -0.53 -0.89 1.17 -2.95 0% 102% 85% 75%

Source: Bloomberg, Reuters Global Fundamentals, IBES CONSENSUS, J.P. Morgan Calcs * Implied Value Of Growth = (1 - EY/Cost of equity) where cost of equity =Bond Yield + 5.0% (ERP)

21-Oct-11

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11



Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple researchanalysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document

individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the viewsexpressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part ofany of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or viewsexpressed by the research analyst(s) in this report.

Important Disclosures

Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: TCL Communication

Technology Holdings Ltd..

Date Rating Share Price(HK$)

Price Target(HK$)

14-Jun-11 OW 5.93 8.00

10-Aug-11 OW 5.75 7.50

The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period.J.P. Morgan ratings: OW = Overweight, N= Neutral, UW = Underweight

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe:J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform theaverage total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Neutral [Over the next six to twelve months,we expect this stock will perform in line with the average total return of the stocks in the analyst's (or the analyst's team's) coverageuniverse.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocksin the analyst's (or the analyst's team's) coverage universe.] In our Asia (ex-Australia) and UK small- and mid-cap equity research, eachstock’s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts’coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst’s coverage universe can

be found on J.P. Morgan’s research website, www.morganmarkets.com.

Coverage Universe: Hsu, Andrew Tak Jun: TCL Communication Technology Holdings Ltd. (2618.HK), TCL Multimedia (1070.HK)

0

6

12

18

Price(HK$)

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11

TCL Communication Technology Holdings Ltd. (2618.HK) Price Chart

OW HK$7.5

OW HK$8

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.

Initiated coverage Jun 14, 2011.



12



J.P. Morgan Equity Research Ratings Distribution, as of September 30, 2011

Overweight(buy)

Neutral(hold)

Underweight(sell)

J.P. Morgan Global Equity Research Coverage 47% 42% 11%

IB clients* 51% 44% 33%

JPMS Equity Research Coverage 45% 47% 7%

IB clients* 70% 60% 52%

*Percentage of investment banking clients in each rating category.

For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a holdrating category; and our Underweight rating falls into a sell rating category.

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2618 JP Morgan Research Report 20111027