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DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®
Client-Driven Solutions, Insights, and Access
07 January 2016
Asia Pacific/China
Equity Research
Electronics Manufacturing Services
FIH Mobile
(2038.HK / 2038 HK) INITIATION
A journey to the west
■ Initiate with OUTPERFORM. We initiate coverage on FIH Mobile, a global
leading smartphone OEM manufacturer, with an OUTPERFORM rating and
a HK$3.7 target price, implying 28% potential upside. Post the client mix
transition in 2015, we see FIH has become a key beneficiary of the two
major trends of China smartphone: upgrade and export, while having built a
great first-mover advantage in the next key market, India.
■ Beneficiary of two major trends. We believe FIH has switched its business
engines to growing China smartphone brands such as Huawei, Xiaomi, and
OPPO in 2015. Therefore we expect FIH to be a very good proxy to the two
major trends for China-made smartphones: first on model upgrades
including metal casing component, second on export for EM demands,
supported by its mid/high-end manufacturing position and early capacity
layouts in India. We see the 2H15 operational weakness has been largely
reflected in the recent share correction. Although share performance may
take some time, we expect the stock to outperform from a long-term angle.
■ Catalysts: (1) Model launches at major Chinese clients like Huawei, Xiaomi,
OPPO with further specs upgrades in 1H16, which lead to higher value for
FIH. (2) Recovery or at least stabilisation at Sony, Moto, or Nokia in 2016. 3)
New announcements of strategic plans from key clients in India markets.
■ Valuation: We forecast 38%/23%/16% EPS growth for 2015-17E, driven by
client and product mix improvements on revenue and margins. TP of HK$3.7
target price is based on 11x sector +0.5STD P/E and 2017E EPS of
HK$0.34, supported by its strong NI CAGR (25.8%), attractive EV/EBITDA
(1.8x), and trough P/B (0.7x).
Share price performance
60
80
100
120
140
2
3
4
5
6
Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15
Price (LHS) Rebased Rel (RHS)
The price relative chart measures performance against the
HANG SENG INDEX which closed at 20980.81 on 26/11/15
On 26/11/15 the spot exchange rate was HK$7.75/US$1
Performance over 1M 3M 12M Absolute (%) -15.2 -17.8 -13.0 — Relative (%) -9.7 -11.7 -2.3 —
Financial and valuation metrics
Year 12/14A 12/15E 12/16E 12/17E Revenue (US$ mn) 6,829.9 8,159.8 9,271.0 9,850.0 EBITDA (US$ mn) 470.4 492.7 614.1 713.8 EBIT (US$ mn) 326.5 345.6 439.2 503.4 Net profit (US$ mn) 169.5 236.2 290.8 337.6 EPS (CS adj.) (US$) 0.02 0.03 0.04 0.04 Change from previous EPS (%) n.a. Consensus EPS (US$) n.a. 0.04 0.04 0.05 EPS growth (%) 112.1 37.6 23.1 16.1 P/E (x) 17.0 12.3 10.0 8.6 Dividend yield (%) 6.8 2.0 2.0 2.3 EV/EBITDA (x) 2.7 2.1 1.1 0.4 P/B (x) 0.73 0.71 0.67 0.63 ROE (%) 4.4 5.9 6.9 7.6 Net debt/equity (%) Net cash Net cash Net cash Net cash
Source: Company data, Thomson Reuters, Credit Suisse estimates.
Rating OUTPERFORM* Price (06 Jan 16, HK$) 2.90 Target price (HK$) 3.70¹ Upside/downside (%) 27.6 Mkt cap (HK$ mn) 22,892 (US$ 2,953) Enterprise value (US$ mn) 1,027 Number of shares (mn) 7,893.70 Free float (%) 35.4 52-week price range 4.77 - 2.75 ADTO - 6M (US$ mn) 3.7
*Stock ratings are relative to the coverage universe in each
analyst's or each team's respective sector.
¹Target price is for 12 months.
Research Analysts
Sam Li
852 2101 6775
Thompson Wu
886 2 2715 6386
Kyna Wong
852 2101 6950
07 January 2016
FIH Mobile
(2038.HK / 2038 HK) 2
Focus charts and tables Figure 1: Global EMS industry at 5.2% 2014-2019 CAGR Figure 2: New big four gaining market share
-15.0%
-7.5%
0.0%
7.5%
15.0%
22.5%
30.0%
0
100
200
300
400
500
600
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
US$ bn
Global EMS Sector Global ODM Sector Total YoY
24% 26%31% 33%
36% 39% 41% 43%40%
48% 47%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
13Q1 13Q2 13Q3 13Q4 14Q1 14Q2 14Q3 14Q4 15Q1 15Q2 15Q3
Huawei XiaomiOPPO vivoOther China brands New Big Four %
Source: IDC Source: IDC
Figure 3: Increasing contribution from metal casing Figure 4: Metal casing also drives up overall GM
6%
14%
20% 26%
0
2,000
4,000
6,000
8,000
10,000
2011 2012 2013 2014 2015E 2016E 2017E
US$ mn
Assembly Plastic casing Metal casing
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
2011 2012 2013 2014 2015E 2016E 2017E
Casing Assembly Overall
Source: Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 5: Revenue breakdown by customer Figure 6: FIH to gain shares to 2.2% by 2017E
0
2,000
4,000
6,000
8,000
10,000
2011 2012 2013 2014 2015E 2016E 2017E
US$ mn
Huawei Others Xiaomi Sony Moto Nokia Blackberry
0%
1%
2%
3%
4%
5%
0%
20%
40%
60%
80%
100%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Others Hon Hai PegatronQuanta Compal FlextronicsFIH FIH shares
Source: Company data, Credit Suisse estimates Source: IDC, IBES, Credit Suisse estimates
Figure 7: FIH Comp sheet – lower P/B and higher growth
Company Ticker Current P/E P/B ROE NI Div
Rating Mkt cap TP Price Po. up/ 15E 16E 17E 15E 16E 17E 15E 16E 17E CAGR yld
US$ bn (lc) (lc) down 15-17E 15E
FIH 2038.HK O 3.0 3.7 2.90 28% 12.3 10.0 8.6 0.7 0.7 0.6 5.9% 6.9% 7.6% 25.8% 2.0%
Hon Hai 2317.TW O 37.2 108.0 79.00 37% 8.4 8.1 7.5 1.2 1.1 1.0 14.8% 14.3% 14.3% 8.2% 5.3%
Inventec 2356.TW O 2.3 25.0 21.05 19% 12.5 11.0 10.3 1.3 1.3 1.2 10.5% 11.8% 12.2% 1.1% 6.8%
Compal 2324.TW N 2.3 21.0 17.30 21% 8.5 7.8 6.7 0.7 0.7 0.7 8.6% 9.0% 9.9% 16.5% 6.5%
BYDE 0285.HK N 1.1 4.9 3.90 26% 9.5 7.0 6.3 0.7 0.7 0.6 7.8% 9.8% 10.0% 9.5% 1.1%
Pegatron 4938.TW N 5.3 85.0 67.90 25% 7.0 7.2 7.3 1.1 1.1 1.1 17.4% 15.5% 14.7% 17.9% 8.6%
Wistron 3231.TW N 1.3 17.0 17.45 -3% 16.9 12.1 10.5 0.6 0.6 0.6 3.5% 4.9% 5.5% 3.2% 4.7%
Quanta 2382.TW U 5.8 46.0 49.75 -8% 11.0 11.0 10.1 1.4 1.4 1.4 13.2% 13.0% 13.8% 0.6% 7.3%
Flextronics FLEX.OQ NR 6.2 NA 11.15 NM 10.3 10.3 9.3 2.7 2.2 1.9 25.8% 21.6% 20.0% 5.1% NM
Sanmina-SCI SANM.OQ NR 1.6 NA 19.98 NM 9.0 8.5 8.1 NA 1.0 0.9 NA 11.3% 10.9% 6.7% NM
Average 10.5 9.3 8.5 1.2 1.1 1.0 11.9% 11.8% 11.9% 9.5% 5.3%
Median 9.9 9.3 8.4 1.1 1.0 1.0 10.5% 11.6% 11.6% 7.4% 5.9%
Source: IBES consensus for NR stocks, Credit Suisse estimates
07 January 2016
FIH Mobile
(2038.HK / 2038 HK) 3
A journey to the west We initiate coverage on FIH Mobile with an OUTPERFORM rating and a HK$3.7 target
price, implying 28% potential upside. FIH Mobile is a global top 10 smartphone OEM
manufacturer and 65% owned by Hon Hai (2317.TW, covered by Thompson Wu). Post the
business transition in 2015, we see FIH has become a key beneficiary of the two major
trends of China smartphone: upgrade and export, while it has already built up a great first-
mover advantage in the next key market, India. We see the 2H15 operational weakness
has been largely reflected in the recent share correction. Although share performance may
take some time, we expect the stock to outperform from a long term angle.
Key beneficiary of China smartphone upgrades
2015 was a key transition year for FIH Mobile. It has switched business engines from
share losers to gainers in the global smartphone market, i.e. from legacy players like Sony
and Motorola to growing China smartphone brands such as Huawei and Xiaomi and
OPPO. We estimate Huawei and Xiaomi will become the top two clients with revenue
contributions of 22%/28% and 19%/16% in 2015/16E, while FIH is also increasing share in
other China brands such as OPPO, Coolpad etc.
As a key proxy to the China smartphone camp, especially leading brands, FIH is firstly
benefiting from upgrade demand in China's market in two ways: (1) Chinese brands see
spec upgrades as key strategy in order to enhance user-interaction experience and sales.
While we believe FIH could be key beneficiary of better share allocation and higher
ODM/EMS prices, as it is mainly serving in quality and high spec models in the range of
Rmb1500-3000. (2) Continuously rising adoption of metal casing in 2016, which could
support FIH's earnings in 2015-17E, especially on overall GMs. With 25-33% revenue
contributed by casing business, we see over half of that are metal casings this year and
expect it to be 70-80% in 2016-17E.
Leading layout in India: New hub to EM demands
Secondly, we also see FIH as a beneficiary of the long term emerging markets demands.
FIH has resumed its production in India and the production line is ready in 2H15. We think
they have started manufacturing for and shipping Xiaomi to India in 2H. With newly
imposed import tax for mobile devices in India, FIH should see growing demand from its
existing (China smartphone to export) and new customers (local brands such as those in
India). Currently majority of its business is buy-sell assembly in India, which contributes
higher revenue but lower margin than consignment, but we believe the favourable tax
structure could boost margin structure in India in the long run.
Initiate at OUTPERFORM for the LT story
We forecast 38%/23%/16% EPS growth for 2015-17E, driven by client and product mix
improvements on revenue and margins. Our 2015 EPS estimate is 13% below Bloomberg
consensus given lower GPM for India's initial shipment and slow shipment from Xiaomi in
2H15. However, we believe the 2H15 operational weakness has been largely reflected in
the recent share correction. Although share performance may take some time, we expect
the stock to outperform from a long term angle. Our 2016/17 EPS CAGR of 20% is well
above consensus of 16% on share gain upside and casing upgrade.
We initiate coverage on FIH Mobile with an OUTPERFORM rating and a HK$3.7 target
price, which is based on 11x sector +0.5STD P/E and 2017E EPS of HK$0.34, supported
by its strong NI CAGR (25.8%), attractive EV/EBITDA (1.8x), and trough P/B (0.7x).
Investment risks: A further weakening in top customers' demands, rising competition and
pricing pressure, slower-than-expected upgrade cycle, and forex risk.
Good proxy to the upgrade
and export trends of China
smartphone. Initiate at
OUTPERFORM with TP of
HK$3.7.
With leading China
smartphone brands become
top clients, FIH is benefiting
from the upgrade trend in
two ways
The leading layout in India
makes FIH a perfect proxy
to China smartphone export
and the EM demands
2H15 weakness mostly
factored in, buy for the long-
term story
07 January 2016
FIH Mobile
(2038.HK / 2038 HK) 4
FIH Mobile 2038.HK / 2038 HK Price (06 Jan 16): HK$2.90, Rating:: OUTPERFORM, Target Price: HK$3.70, Analyst: Sam Li
Target price scenario
Scenario TP %Up/Dwn Assumptions
Upside Central Case 3.70 27.59 Downside
Key earnings drivers 12/14A 12/15E 12/16E 12/17E
Sony 1,887 1,321 1,057 898 Huawei 829 1,758 2,637 3,164 Moto 1,146 917 825 743 Other Clients 2,967 4,164 4,752 5,045 — — — —
Income statement (US$ mn) 12/14A 12/15E 12/16E 12/17E
Sales revenue 6,830 8,160 9,271 9,850 Cost of goods sold 6,407 7,692 8,708 9,220 SG&A 356.1 379.0 415.1 435.7 Other operating exp./(inc.) (403.4) (403.5) (466.3) (519.9) EBITDA 470.4 492.7 614.1 713.8 Depreciation & amortisation 143.9 147.2 175.0 210.4 EBIT 326.5 345.6 439.2 503.4 Net interest expense/(inc.) (51.5) (40.5) (44.2) (42.4) Non-operating inc./(exp.) (101.6) (77.2) (92.2) (92.2) Associates/JV (8.2) (4.7) (4.9) (4.6) Recurring PBT 268.2 304.2 386.2 448.9 Exceptionals/extraordinaries — — — — Taxes 98.8 69.1 96.6 112.2 Profit after tax 169.4 235.0 289.7 336.7 Other after tax income — — — — Minority interests (0.1) (1.2) (1.1) (1.0) Preferred dividends — — — — Reported net profit 169.5 236.2 290.8 337.6 Analyst adjustments — — — — Net profit (Credit Suisse) 169.5 236.2 290.8 337.6
Cash flow (US$ mn) 12/14A 12/15E 12/16E 12/17E
EBIT 326.5 345.6 439.2 503.4 Net interest — — — — Tax paid (98.8) (69.1) (96.6) (112.2) Working capital (227.7) 189.2 89.2 104.2 Other cash & non-cash items 252.1 110.5 126.9 160.6 Operating cash flow 252.1 576.1 558.8 656.0 Capex (139.3) (122.4) (166.9) (177.3) Free cash flow to the firm 112.8 453.7 391.9 478.7 Disposals of fixed assets — — — — Acquisitions (34.5) — — — Divestments — — — — Associate investments — — — — Other investment/(outflows) (396.3) — — — Investing cash flow (570.1) (122.4) (166.9) (177.3) Equity raised 36.0 — — — Dividends paid — (192.4) (59.1) (58.2) Net borrowings 42.1 — — — Other financing cash flow — — — — Financing cash flow 78.1 (192.4) (59.1) (58.2) Total cash flow (239.9) 261.3 332.8 420.5 Adjustments (40.0) — — — Net change in cash (279.9) 261.3 332.8 420.5
Balance sheet (US$ mn) 12/14A 12/15E 12/16E 12/17E
Cash & cash equivalents 1,844 2,105 2,438 2,859 Current receivables 2,445 2,418 2,697 2,811 Inventories 595.6 429.9 439.0 439.6 Other current assets 823.1 823.1 823.1 823.1 Current assets 5,708 5,777 6,397 6,933 Property, plant & equip. 907.7 882.9 874.8 841.7 Investments 65.0 60.3 55.4 50.8 Intangibles — — — — Other non-current assets 141.8 141.8 141.8 141.8 Total assets 6,822 6,862 7,469 7,967 Accounts payable 2,494 2,491 2,868 3,087 Short-term debt 178.7 178.7 178.7 178.7 Current provisions — — — — Other current liabilities 188.9 55.6 54.7 64.1 Current liabilities 2,862 2,725 3,101 3,330 Long-term debt — — — — Non-current provisions — — — — Other non-current liab. 30.9 30.9 30.9 30.9 Total liabilities 2,893 2,756 3,132 3,361 Shareholders' equity 3,921 4,098 4,330 4,601 Minority interests 9.2 8.0 6.9 5.9 Total liabilities & equity 6,822 6,862 7,469 7,967
Per share data 12/14A 12/15E 12/16E 12/17E
Shares (wtd avg.) (mn) 7,689 7,789 7,789 7,789 EPS (Credit Suisse) (US$)
0.02 0.03 0.04 0.04 DPS (US$) 0.03 0.01 0.01 0.01 BVPS (US$) 0.51 0.53 0.56 0.59 Operating CFPS (US$) 0.03 0.07 0.07 0.08
Key ratios and valuation 12/14A 12/15E 12/16E 12/17E
Growth(%) Sales revenue 36.7 19.5 13.6 6.2 EBIT 153 6 27 15 Net profit 118 39 23 16 EPS 112 38 23 16 Margins (%) EBITDA 6.89 6.04 6.62 7.25 EBIT 4.78 4.23 4.74 5.11 Pre-tax profit 3.93 3.73 4.17 4.56 Net profit 2.48 2.90 3.14 3.43 Valuation metrics (x) P/E 17.0 12.3 10.0 8.6 P/B 0.73 0.71 0.67 0.63 Dividend yield (%) 6.81 2.03 2.00 2.32 P/CF 11.4 5.1 5.2 4.4 EV/sales 0.19 0.13 0.07 0.03 EV/EBITDA 2.74 2.08 1.13 0.38 EV/EBIT 3.94 2.97 1.58 0.54 ROE analysis (%) ROE 4.45 5.89 6.90 7.56 ROIC 10.3 12.0 15.5 18.9 Asset turnover (x) 1.00 1.19 1.24 1.24 Interest burden (x) 0.82 0.88 0.88 0.89 Tax burden (x) 0.63 0.77 0.75 0.75 Financial leverage (x) 1.74 1.67 1.72 1.73 Credit ratios Net debt/equity (%) (42.4) (46.9) (52.1) (58.2) Net debt/EBITDA (x) (3.54) (3.91) (3.68) (3.75) Interest cover (x) (6.3) (8.5) (9.9) (11.9)
Source: Company data, Thomson Reuters, Credit Suisse estimates.
0
20
40
60
80
100
120
2011 2012 2013 2014 2015 2016
12MF P/E multiple
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
2011 2012 2013 2014 2015 2016
12MF P/B multiple
Source: IBES
07 January 2016
FIH Mobile
(2038.HK / 2038 HK) 5
Key beneficiary of China smartphone upgrades 2015 was a key transition year for FIH Mobile. It has switched business engines from
share losers to gainers in the global smartphone market, i.e., from legacy players such as
Sony and Motorola to growing China smartphone brands such as Huawei, Xiaomi and
OPPO. We estimate Huawei and Xiaomi will become the top two clients with revenue
contributions of 22%/28% and 19%/16% in 2015/16E, while FIH is also increasing its
share in other Chinese brands such as OPPO, Coolpad among others.
Shift engines to leading China brands
As we stated in previous sector reports, despite the slowing down of China smartphone
shipment growth, we see the new big four brands taking share from the traditional operator
brands and white-box players. The new big four brands (Huawei, Xiaomi, OPPO and Vivo)
captured over 47% in 3Q15 from 24% in 1Q13. And we believe this trend could continue.
Leveraging its established client base, FIH would be one of the beneficiaries of the
landscape change and grow with its key clients.
Figure 8: China smartphone shipment growth flattens Figure 9: New big four gaining market share
170%
89%
49%
18%
16% 13% 0%
30%
60%
90%
120%
150%
180%
0
200
400
600
800
1,000
1,200
2011 2012 2013 2014 2015E 2016E 2017E
Units mn
China smartphone shipment YoY
24% 26%31% 33%
36% 39% 41% 43%40%
48% 47%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
13Q1 13Q2 13Q3 13Q4 14Q1 14Q2 14Q3 14Q4 15Q1 15Q2 15Q3
Huawei XiaomiOPPO vivoOther China brands New Big Four %
Source: Credit Suisse estimates Source: IDC
We estimate Huawei, Xiaomi, and others (including all other Chinese clients) in total as %
of revenue could rise to 79% by 2017E from 46% in 2014. At the same time, we estimate
Sony and Moto, which were top two customers in 2014 with 28% and 17% revenue
contributions, would decline to 16%/11% and 12%/9% in 2015/16E given the fierce
competition in the smartphone market.
FIH has shifted its business
engines to leading Chinese
brands from share losers by
2015.
We estimate China
smartphone clients'
contributions in total
revenue will raise to 79% by
2017E from 46% in 2014.
07 January 2016
FIH Mobile
(2038.HK / 2038 HK) 6
Figure 10: Revenue breakdown by customer Figure 11: Increasing contribution from Chinese clients
0
2,000
4,000
6,000
8,000
10,000
2011 2012 2013 2014 2015E 2016E 2017E
US$ mn
Huawei Others Xiaomi Sony Moto Nokia Blackberry
0%
20%
40%
60%
80%
100%
2011 2012 2013 2014 2015E 2016E 2017E
Huawei XiaomiOther Chinese OverseasChinese clients total %
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Historically, FIH had been losing share all the way after the financial crisis in 2008, due to
its heavy exposure to international brands such as Sony, Nokia, Motorola, and Blackberry,
which were losing share in the global smartphone market. Its market share started to rise
from 2014, which was mainly due to Motorola's recovery and good sales in EM, while
Chinese smartphone clients such as Huawei ramped up. With the client mix transition in
2015, we estimate its share in global ODM/EMS market would rise to 2.2% by 2017E from
1.7% in 2014, driven by the strong growth in China's smartphone clients.
Figure 12: Global EMS industry at 5.2% 2014-2019 CAGR Figure 13: FIH to gain share to 2.2% by 2017E
-15.0%
-7.5%
0.0%
7.5%
15.0%
22.5%
30.0%
0
100
200
300
400
500
600
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
US$ bn
Global EMS Sector Global ODM Sector Total YoY
0%
1%
2%
3%
4%
5%
0%
20%
40%
60%
80%
100%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Others Hon Hai PegatronQuanta Compal FlextronicsFIH FIH shares
Source: IDC Source: IDC, IBES, Credit Suisse estimates
Benefit from China smartphone upgrade trend
The smartphone industry is in a slow cycle, and we more focus on specs upgrades as a
trend in the China smartphone supply chains, which also lifted the smartphone sale prices.
We see Chinese brands are using spec upgrades as key strategy to enhance user-
interaction experience and sales, while differentiations on OS and software is still an
unconquered area.
As a key proxy to the China smartphone camp, especially leading brands, FIH is benefiting
from upgrade demand in China market in two ways. First, we believe FIH will be key
FIH would benefit from the
upgrades of China
smartphone for its mid-to-
high-end market positioning.
07 January 2016
FIH Mobile
(2038.HK / 2038 HK) 7
beneficiary of better share allocation and higher ODM/EMS prices, as it is mainly serving
in quality and high spec models in the range of Rmb1500-3000. FIH could gain share in
Huawei/Xiaomi's mid/high-end models. We believe Huawei will stick with its brand image
lift strategy and increase mid/high-end models as a proportion of total shipment, which is
clearly a driver for FIH. For Xiaomi, we see it is currently focusing on low-end models to
boost volume growth, which might be mainly made by other assemblers. But we see
Xiaomi's incoming high-end models and exports to India should benefit FIH. Xiaomi posted
strong growth in 1H15 but slowed in 2H due to rising competition and delayed product
launch. Net-net, we forecast business from Huawei and Xiaomi to grow 112%/50% and
80%/0% in 2015/16E.
For other China smartphone brands, we expect them to follow the success path of
Huawei, OPPO, and Vivo on specs upgrades, which in turn would also be positive to FIH
as a mid/high-end manufacturer partner.
Figure 14: China smartphone ASP is rising Figure 15: China smartphone upgrade is taking place
100
110
120
130
140
150
160
170
180
1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15
US$
0.00
0.20
0.40
0.60
0.80
1.00
2011 2012 2013 2014 2015E 2016E 2017E
Units bn
<$150 $150~$300 $300 or above
Source: IDC Source: IDC, Credit Suisse estimates
Metal casing another driver
Along with the overall specs and demand upgrades, we also see FIH to benefit on a key
component business. We see the continuously rising adoption of metal casing in 2016,
which could support FIH's earnings in 2015-17E on both top line and margins.
We see the Chinese smartphone camp is moving towards low cost metal casing solutions
for mid/low-end models in 2016. We started to see the metal casing China smartphones
since end - 2014/ early 2015, which are mainly high-end smartphones. As pure-CNC metal
casing solutions such as Unibody are still at high cost (Rmb150-200), China smartphone
players are looking for substitute solutions when they introduce metal casing into mid/low-
end phones. Low cost solutions used like stamping and die casting, with a little bit CNC
processing could benefit from the new metal casing trend.
Metal casing component
business is another driver to
top line and margin.
07 January 2016
FIH Mobile
(2038.HK / 2038 HK) 8
Figure 16: Four key specs upgrade trends—metal casing adoption to rise quickly
0.0%
12.5%
25.0%
37.5%
50.0%
0
2
4
6
8
2011 2012 2013 2014 2015E 2016E 2017E
US$
iPhone haptic ASP iPhone acoustic content
8MP+ camera % of Sunny's HCM(RHS) Metal casing adoption in China SP (RHS)
Haptics content X3 in iPhone6S
Metal casing into mid/low end
Acoustic resumes upgrade
Camera 8M for front,16/20M for back
Source: Company data, Credit Suisse estimates
Figure 17: A collection of China smartphone flagship models with metal casings or rims
Company Xiaomi Xiaomi Huawei Huawei OPPO vivo Lenovo ZTE Meizu LeTV
Model name Redmi Note 3 Mi 4 Mate 8 Mate S R7S X6 Lemon K3 AXON Pro Pro5 Le Max
Image
Date of release Nov,2015 Jan,2015 Nov,2015 Nov,2015 Oct,2015 Dec,2015 Nov,2015 Aug,2015 Sep, 2015 Jul,2015
Operating System Android 5.0 Android 4.4 Android 6.0 Android 5.1 Android 5.1 Android 5.1 Android 5.0 Android 5.1 Android 5.1 Android 5.0
Pixels 1920x1080 1920x1080 1920x1080 1920x1080 1920x1080 1920x1080 1920x1080 2560x1440 1920x1080 2560x1440
RAM 2GB 3GB 4GB 3GB 4GB 4GB 3GB 4GB 3GB 4GB
Storage 16GB 16GB 32GB 32GB 32GB 32GB 32GB 32GB 32GB 32GB
Display 5.5" 5.7'' 6'' 5.5'' 5.5'' 5.2'' 5.5'' 6.0'' 5.7“ 6.33"
Camera 13MP+5MP 13MP+4MP 16MP+5MP 13MP+8MP 13MP+8MP 13MP+8MP 21MP+8MP 13MP+5MP 21MP+5MP 21MP+4MP
Battery 4000mAh 3000mAh 4000mAh 2700mAh 3070mAh 2400mAh 3600mAh 3200mAh 3050mAh 3400mAh
CPU Speed 2.0GHz 2.3GHz 2.3GHz 2.2GHz 1.5GHz 1.7GHz 1.8GHz 2.3GHz 2.1GHz 2.0GHz
Processor Chip MT6795 801 Kirin 950 Kirin 935 MSM8939 MT6752 MSM8992 801 Exynos 7420 810
Multi-core Octa Quad Octa Octa Octa Octa 1.8GHz Quad Octa Octa
Dual SIM Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Metal casing/Rim Yes/Yes No/Yes Yes/Yes Yes/Yes Yes/Yes Yes/Yes Yes/Yes Yes/Yes Yes/Yes Yes/Yes
Fingerprint Yes No Yes Yes No Yes Yes Yes Yes Yes
Flash Charging No Yes No Yes Yes Yes Yes Yes Yes Yes
Sale Price 899 1,999 3,699 3,599 2,599 2,498 2,499 2,998 2,799 2,999
Source: Company data
We see rapid pace of metal casing upgrade in FIH during 2015-17 which would benefit
both top line and margin. With 25-33% revenue contributed by the casing business, we
see over half of that are metal casings this year and expect even 70-80% in 2016-17.
Metal casing business will see 174%/68%/38% growth for 2015/16/17E.
07 January 2016
FIH Mobile
(2038.HK / 2038 HK) 9
Figure 18: Increasing contribution from metal casing Figure 19: Metal contribution in casing
6%
14%
20% 26%
0
2,000
4,000
6,000
8,000
10,000
2011 2012 2013 2014 2015E 2016E 2017E
US$ mn
Assembly Plastic casing Metal casing
0% 0% 0%
30%
55%
70%
80%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
2011 2012 2013 2014 2015E 2016E 2017E
Metal casing
Source: Credit Suisse estimates Source: Credit Suisse estimates
Figure 20: Metal casing also drives up overall GM Figure 21: Still room for GMs to lift vs casing peers
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
2011 2012 2013 2014 2015E 2016E 2017E
Casing Assembly Overall
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
FIH
BY
DE
Cat
cher
Cas
etek
Tong
da
Eve
rwin
FIH
Hon
Hai
Peg
atro
n
Qua
nta
Com
pal
Flex
troni
cs
Casing EMS Ov erall
2015E 2016E 2017E
Source: Company data, Credit Suisse estimates Source: IBES Consensus, Company data, Credit Suisse estimates
07 January 2016
FIH Mobile
(2038.HK / 2038 HK) 10
Leading layout in India: New hub to EM demands Secondly, we also see FIH as a beneficiary of the long term emerging markets demands.
FIH has resumed its production in India and the production line is ready in 2H15. We
believe it has started manufacturing for and shipping Xiaomi to India in 2H. With newly
imposed import tax of mobile device in India, FIH should see growing demand from its
existing (China smartphone to export) and new customers (local brands such as those in
India). Currently, majority of its business is buy-sell assembly in India, which contributes
higher revenue but lower margin than consignment, but we believe the favourable tax
structure could boost margin structure in India in the long run.
Favourable "Made-in-India" policy
India's government aims to push "Made-in-India" and so changed the duty structures on
mobile phones and tablets in order to promote domestic manufacturing. It will impose a
12.5% VAT on smartphones and tablets compared to the prior duty of 6.5%. Local
manufacturers can claim duty benefits on VAT paid on purchase of various input materials.
The increase in VAT credit will give benefit to domestic manufacturers against those
importing such items.
Figure 22: Asia Pacific is the fastest growing region Figure 23: India to outperform Asia Pacific region
0%
5%
10%
15%
20%
25%
30%
35%
2015E 2016 2017
Shipment YoY
Rest of Asia Pacific Latin America CEMA China Developed markets
150%
84%
50%
172%
99%
33%
0%
30%
60%
90%
120%
150%
180%
0
50
100
150
200
250
300
2010 2011 2012 2013 2014 2015E 2019E
Units mn
India market shipment YoY
Source: Credit Suisse estimates Source: IDC
In 2014, India shipped 81.7mn smartphones (99% YoY) which accounted for 6.3% of the
global smartphone share. The market has reached 96% CAGR during 2010-2014 and IDC
forecasts 23.3% growth during 2015-19 (vs 0.4% CAGR in China,). We see the
penetration of smartphones (31% in 2014) will continue to increase and generate high
growth demand in the market vs low growth mature smartphone market in China.
India's smartphone market is led by Samsung, Micromax and Intex. Samsung has two
factories locally which make 90% of the handsets it sells in India. Micromax and Intex are
leveraging China whitebox smartphones and chipset vendor solution (MediaTek). They
may see increase of cost when they import smartphones from China. For tablet, local
brands such as iBall, Datawind and Micromax also source their tablet products from China
that will increase the cost after additional tax imposed. Net-net, we believe both global
brands and leading China brands would consider leveraging FIH to enter the Indian
market and through India to other emerging markets (SEA or EMEA etc.).
The early layout in India
provides a great exposure to
the EM demands and
therefore long-term growth.
07 January 2016
FIH Mobile
(2038.HK / 2038 HK) 11
Figure 24: Smartphone vendor share in India (2Q15) Figure 25: Tablet vendor share in India (2Q15)
Samsung23%
Micromax17%
Intex11%
Lenovo6%
Lava7%
Others36%
iBall15%
Samsung14%
Datawind13%
Micromax12%
Xiaomi10%
Others36%
Source: IDC Source: IDC
Building mobile internet ecosystem
We see FIH Mobile strategically build a mobile Internet platform for emerging markets. The
company just announced last month to invest in an India mobile marketing company,
MoMagic for 10% equity stake, to seek cooperation in mobile networks and penetration
into Indian smartphone market. MoMagic has also received investment from MediaTek
previously. FIH also announced to invest $200 mn in India-based Jasper Infotech in
September this year, which runs a leading online marketplace in India. FIH also invested
in Migme Ltd. (mig33) a year ago, which is a social media company focused on emerging
markets. By offering value-added mobile services, FIH should be able to duplicate its
eCMMS model in India and enable online sales and service channels to the market.
Figure 26: Recent strategic M&A
Announced date Target Value ($mn) Status Business nature
Nov-15 MoMagic 10% of equity Pending Mobile marketing firm in India
Nov-15 Tink Labs N/A Pending Handy travel smartphone
Sep-15 Jasper Infotech Pvt Ltd 200 Pending Online shopping site in India
Aug-15 Lemonade Lab Inc 5.8 Completed Sport devices (wearable)
Jul-15 Lightco Inc 25 Completed Developer on miniature camera
Sep-14 CExchange LLC 10.5 Completed Retail trade-in and recycling services
Jul-14 MigMe Ltd (Mig33) 7.49 Completed Social media platform
Source: Company data, Credit Suisse estimates
07 January 2016
FIH Mobile
(2038.HK / 2038 HK) 12
Initiate with OUTPERFORM for the long-term story We expect 19%/14%/6% YoY revenue growth for 2015-17E, driven by strong demand
from Chinese smartphone customers and metal-casing upgrade.
■ We forecast assembly revenue will be US$6.1/6.6/6.6bn in 2015-17E, up 12%/8%/0%
YoY; casing revenue will be US$2.0/2.7/3.3bn in 2015/16/17, up 49%/32%/21%
respectively.
■ For major customers, Sony business (28% of sales in 2014) will likely decline to
16%/11%/9% of sales in 2015/16/17. Huawei business (12% of sales in 2014) will
possibly increase to 22%/28%/32% share. Xiaomi business (12% of sales in 2014) will
likely stay at 19%/16%/13% share, respectively.
■ Our 2015 EPS estimates of US$0.030 is 13% below Bloomberg consensus given
lower GPM on initial shipment to India and slow shipment from Xiaomi in 2H15. But
our 2016/17 EPS CAGR of 20% is well above consensus of 16% on share gain upside
and casing upgrade.
Figure 27: P&L summary (Updated)
(US$ mn) 1H14 2H14 1H15 2H15E 1H16E 2H16E 2014 2015E 2016E 2017E
Revenue 2,284 4,546 3,829 4,331 4,234 5,037 6,830 8,160 9,271 9,850
COGS (2,142) (4,264) (3,603) (4,089) (3,975) (4,733) (6,407) (7,692) (8,708) (9,220)
Gross Profit 141 282 226 242 259 304 423 468 563 630
GPM (%) 6.2% 6.2% 5.9% 5.6% 6.1% 6.0% 6.2% 5.7% 6.1% 6.4%
SG&A (155) (201) (169) (210) (179) (236) (356) (379) (415) (436)
Operating Profit 112 214 178 167 212 227 327 346 439 503
OPM (%) 4.9% 4.7% 4.7% 3.9% 5.0% 4.5% 4.8% 4.2% 4.7% 5.1%
Non-op (23) (35) (16) (26) (27) (26) (58) (41) (53) (54)
Tax (39) (60) (34) (35) (46) (50) (99) (69) (97) (112)
Net Income 50 120 130 106 141 150 170 236 291 338
NM (%) 2.2% 2.6% 3.4% 2.5% 3.3% 3.0% 2.5% 2.9% 3.1% 3.4%
Source: Company data, Credit Suisse estimates
We believe the rising weight of high-end models and metal casing components should
improve gross margins and offset the margin decline in existing assembly customers. We
anticipate overall gross margins to reach 5.7%/ 6.1%/ 6.4% in 2015-17E and net margin to
reach 2.9%/3.1%/3.4% in 2015-17E from 2.5% in 2014.
For the first time, the company first time announced a cash dividend of $0.025 per share
($192mn) in March 2015, which represented a 113% payout ratio of its 2014 net profit and
1.9% of dividend yield. We believe the dividend payout should be maintained at 20-25%
as a sustainable level and the overall yield rate should stay at 2% or above.
We forecast 45%/28%/14%
EPS growth for 2015-17E,
driven by client and product
mix improvements.
07 January 2016
FIH Mobile
(2038.HK / 2038 HK) 13
Figure 28: FIH revenue forecast Figure 29: FIH net income forecast
-30%
-10%
10%
30%
50%
0
3,000
6,000
9,000
12,000
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E2016E2017E
US$ mn
Revenue YoY
-600
-300
0
300
600
900
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E
US$ mn
Net income
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Although the stock is trading at 8.6x 2017E P/E, in line with regional peer group average;
we believe the market underestimates its early pace in India's market and high earnings
growth (25.8% CAGR). We initiate coverage with an OUTPERFORM rating and a HK$3.7
target price, based on 11x (+0.5STD vs. sector average P/E) and 2017E EPS of HK$0.34.
The stock has been trading at 11-13x forward P/E in 2H15. The target P/E is also
supported by higher net income CAGR (25.8%), attractive EV/EBITDA (1.8x for 2016E)
and lower P/B (0.7x) vs. peer group (at 9.5%, 4.7x, and 1.1x). Besides, we also notice that
the P/B valuation (0.7/0.6x for 16/17E) is close to its historical trough of 0.5x, which also
provides downside protection, in our view.
Figure 30: FIH P/E band Figure 31: P/B vs ROE trend
0
10
20
30
40
50
60
Nov-12 May-14 Nov-15
Average: 24.0X
-1 SD: 4.0X
+1 SD: 44.0.X
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
0
1
2
3
4
5
6
7
8
Feb-05 Feb-07 Feb-09 Feb-11 Feb-13 Feb-15 Feb-17
P/B ROE (RHS)
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
07 January 2016
FIH Mobile
(2038.HK / 2038 HK) 14
Figure 32: FIH Comp sheet – lower P/B and higher growth
Company Ticker Current P/E P/B ROE NI Div
Rating Mkt cap TP Price Po. up/ 15E 16E 17E 15E 16E 17E 15E 16E 17E CAGR yld
US$ bn (lc) (lc) down 15-17E 15E
FIH 2038.HK O 3.0 3.7 2.90 28% 12.3 10.0 8.6 0.7 0.7 0.6 5.9% 6.9% 7.6% 25.8% 2.0%
Hon Hai 2317.TW O 37.2 108.0 79.00 37% 8.4 8.1 7.5 1.2 1.1 1.0 14.8% 14.3% 14.3% 8.2% 5.3%
Inventec 2356.TW O 2.3 25.0 21.05 19% 12.5 11.0 10.3 1.3 1.3 1.2 10.5% 11.8% 12.2% 1.1% 6.8%
Compal 2324.TW N 2.3 21.0 17.30 21% 8.5 7.8 6.7 0.7 0.7 0.7 8.6% 9.0% 9.9% 16.5% 6.5%
BYDE 0285.HK N 1.1 4.9 3.90 26% 9.5 7.0 6.3 0.7 0.7 0.6 7.8% 9.8% 10.0% 9.5% 1.1%
Pegatron 4938.TW N 5.3 85.0 67.90 25% 7.0 7.2 7.3 1.1 1.1 1.1 17.4% 15.5% 14.7% 17.9% 8.6%
Wistron 3231.TW N 1.3 17.0 17.45 -3% 16.9 12.1 10.5 0.6 0.6 0.6 3.5% 4.9% 5.5% 3.2% 4.7%
Quanta 2382.TW U 5.8 46.0 49.75 -8% 11.0 11.0 10.1 1.4 1.4 1.4 13.2% 13.0% 13.8% 0.6% 7.3%
Flextronics FLEX.OQ NR 6.2 NA 11.15 NM 10.3 10.3 9.3 2.7 2.2 1.9 25.8% 21.6% 20.0% 5.1% NM
Sanmina-SCI SANM.OQ NR 1.6 NA 19.98 NM 9.0 8.5 8.1 NA 1.0 0.9 NA 11.3% 10.9% 6.7% NM
Average 10.5 9.3 8.5 1.2 1.1 1.0 11.9% 11.8% 11.9% 9.5% 5.3%
Median 9.9 9.3 8.4 1.1 1.0 1.0 10.5% 11.6% 11.6% 7.4% 5.9%
Source: IBES consensus for NR stocks, Credit Suisse estimates
Figure 33: 2014 Global top 10 EMS vendors - FIH leads in EV/EBITDA and Net D/E ratio
Revenue EV/EBITDA Net D/E Div.
US$ bn GM OPM NPM ROE P/E (x) (x) (%) yield
Company Ticker 2014 2015E 2016E 2-yr CAGR 2016E 2016E 2016E 2016E 2016E 2016E 2016E 16E
Hon Hai 2317.TW 139.0 132.9 135.8 -1.1% 7.6% 3.9% 3.5% 14.3% 8.1 3.5 -34.0% 6.2%
Pegatron 4938.TW 36.9 35.1 35.3 -2.2% 6.4% 3.3% 2.1% 15.5% 7.2 1.8 -41.4% 8.4%
Quanta 2382.TW 31.8 34.1 34.0 3.4% 4.3% 1.7% 1.6% 13.0% 11.0 10.0 45.0% 7.3%
Compal 2324.TW 26.2 25.9 28.5 4.3% 3.9% 1.4% 1.1% 9.0% 7.8 4.6 3.1% 7.0%
Flextronics FLEX.OQ 26.1 24.4 25.3 -1.6% 6.4% 3.0% 2.5% 21.6% 10.3 5.6 0.0% 0.0%
Wistron 3231.TW 19.4 21.8 22.2 7.0% 4.8% 0.6% 15.7% 4.9% 12.1 5.7 51.1% 6.6%
Jabil Circuit JBL.N 17.9 19.8 21.2 8.7% 8.8% 4.0% 2.5% 20.7% 8.5 3.6 0.0% 1.4%
Inventec 2356.TW 12.3 12.6 12.8 1.9% 5.8% 1.8% 1.7% 11.8% 11.0 5.5 -11.7% 7.8%
FIH 2038.HK 8.2 9.3 9.9 9.9% 6.1% 4.7% 3.4% 6.9% 10.0 1.8 -42.1% 2.0%
Sanmina-SCI SANM.OQ 6.4 6.5 6.7 2.9% 8.0% 3.9% 3.0% 11.3% 8.5 4.7 0.0% 0.0%
Average 3.3% 6.2% 2.8% 3.7% 12.9% 9.5 4.7 -3.0% 4.7%
Median 3.1% 6.2% 3.2% 2.5% 12.4% 9.3 4.6 0.0% 6.4%
Source: IBES consensus for uncovered stocks, Credit Suisse estimates
07 January 2016
FIH Mobile
(2038.HK / 2038 HK) 15
Investment risks We see below factors as potential risks to our company view and therefore will keep a
close watch on them:
■ A further weakening in top customers: The growth of global smartphone market
has flattened, and the industry is facing a few headwinds including lack of star
products, dual-SIM phones and penetration saturation in key regions. If demand from
FIH's top customers (Sony, Huawei, Xiaomi, Moto etc.) further weakens, it might
negatively affect the growth.
■ Slower-than-expected upgrade cycle: A major change in the design of key
smartphone models or any delay in launching them could drag down the pace of an
upgrade trend and suppress the overall industry demand for the affected component.
■ Rising competition and pricing pressure: Competition may further increase when
local competitors enter the metal casing business, with many incumbent players. The
company needs to protect its share and margin with its total solution service, but might
still not enjoy the margin expansion as expected.
■ FX risk: As a sector deeply involved in global supply chain, most of the companies'
overseas sales are recognised in USD. The USD/CNY forex changes could possibly
affect both top line and competencies. Overall a depreciation of RMB is positive for
supply chain companies with meaningful overseas sales, as their pricing is locked
against USD for a certain period, and the depreciation could bring higher competency
vs. other regions' suppliers.
07 January 2016
FIH Mobile
(2038.HK / 2038 HK) 16
Appendix Company background
Established in 2003, FIH Mobile provides a comprehensive array of manufacturing
services for handset and wireless communications customers, which include product
development and design, manufacturing and assembly, after-sales services and repairs. It
aims to ensure high quality execution and rapid delivery by remaining customer-focused
and employing highly integrated approaches.
FIH is a subsidiary of Hon Hai. FIH employs over 110,000 people throughout its operations
and subsidiaries spanning Europe, Asia and the Americas. It continues to enhance its
vertical integration of key components (eCMMs) and integration of mechanical and
electrical engineering expertise, also strengthening its global manufacturing and services
platform in order to meet the customer needs.
eCMMS business model
eCMMS stands for e-enabled Components, Modules, Moves and Services. Hon Hai/
Foxconn has successfully transformed its business model from OEM to ODM, to EMS and
eCMMS. eCMMS is the vertical integrated one stop shopping business model by
integrating mechanical, electrical and optical capabilities altogether. It covers solutions
ranging from moulding, tooling, mechanical parts, components, modules, system
assembly, design, manufacturing, maintenance, logistics ... etc.
Shareholders
Hon Hai (2317.TT) deemed to own 65.23% of FIH stakes as Foxconn (Far East) Ltd is a
direct wholly-owned subsidiary of Hon Hai. So the free float of FIH Mobile is about 34.8%.
Invesco is the second major shareholder who owns 1.59% of the stakes. FIH Mobile is
fully consolidated into Hon Hai financials.
Figure 34: FIH's shareholders
Hon Hai
Foxconn (Far East) Limited
FIH Mobile Limited
Public shareholders
100%
65.23% 34.77%
Source: Company data
Recent strategic investment
We see FIH's recent investment in line with its strategic approach of IoT/wearable,
Internet+, India business, eCMMs etc. The company aims to develop an e-commerce
business model in India as a hub between EMEA and China. The latest target of MoMagic
is a mobile marketing company which helps app developers and content firms reach
consumers through various means, in mobile internet services. Another target of Jasper
Infotech is an online shopping site. It owns and operates the website namely
www.snapdeal.com, a leading online marketplace in India. FIH would hold about 4.27% of
Jasper Infotech after the deal.
07 January 2016
FIH Mobile
(2038.HK / 2038 HK) 17
Companies Mentioned (Price as of 06-Jan-2016)
BYD Electronic (International) Company Limited (0285.HK, HK$3.9) BlackBerry (BBRY.OQ, $8.86) Compal Electronics (2324.TW, NT$17.3) Coolpad Group Limited (2369.HK, HK$1.54) FIH Mobile (2038.HK, HK$2.9, OUTPERFORM, TP HK$3.7) Flextronics International (FLEX.OQ, $11.15) Hon Hai Precision (2317.TW, NT$79.0) Inventec Co Ltd (2356.TW, NT$21.05) Leshi (300104.SZ, Rmb58.8) MediaTek Inc. (2454.TW, NT$227.0) Meizu (Unlisted) Micromax (Unlisted) Motorola Solutions (MSI.N, $66.39) Nokia (NOKIA.HE, €6.68) Pegatron (4938.TW, NT$67.9) Quanta Computer (2382.TW, NT$49.75) Samsung Electronics (005930.KS, W1,175,000) Sanmina-SCI Corp (SANM.OQ, $19.98) Sony (6758.T, ¥2,898) Wistron (3231.TW, NT$17.45) Xiaomi (Unlisted) ZTE Corporation (0763.HK, HK$15.92)
Disclosure Appendix
Important Global Disclosures
Sam Li, Kyna Wong and Thompson Wu each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows:
Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.
Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.
Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.
*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities . As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 1 2-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011.
Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:
Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.
Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.
Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.
*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple se ctors.
07 January 2016
FIH Mobile
(2038.HK / 2038 HK) 18
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Rating Versus universe (%) Of which banking clients (%)
Outperform/Buy* 58% (31% banking clients)
Neutral/Hold* 29% (31% banking clients)
Underperform/Sell* 12% (25% banking clients)
Restricted 1%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other i ndividual factors.
Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.
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Target Price and Rating Valuation Methodology and Risks: (12 months) for FIH Mobile (2038.HK)
Method: Our target price of HK$3.7 is based on 11x sector +0.5STD P/E and 2017E EPS of HK$0.34. Our OUTPERFORM rating is based on FIH's improving client mix, key beneficiary of China smartphone's model upgrades and metal casing trends as well as early layout in EM markets like India.
Risk: Key investment risks to our OUTPERFORM rating and target price of HK$3.7 include: A further weakening in top customers' demands, rising competition and pricing pressure, slower than expected upgrade cycle and forex risk.
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07 January 2016
FIH Mobile
(2038.HK / 2038 HK) 19
Credit Suisse (Hong Kong) Limited .......................................................................................................................................... Sam Li ; Kyna Wong
Credit Suisse AG, Taipei Securities Branch ...................................................................................................................................... Thompson Wu
For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.
07 January 2016
FIH Mobile
(2038.HK / 2038 HK) TC2243.doc
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