20140326-高盛-A_break-out_year_in_sight_on_more_balanced_growth__reiterate_CL-Buy_11页_382kb

Coolpad Summary: A Break-out Year in Sight on More Balanced Growth

Core Content

Goldman Sachs reiterates its CL-Buy rating for Coolpad Group Ltd (2369.HK), despite recent share price pullbacks. The report highlights that market concerns over Coolpad's margin outlook are overdone, and the company is well-positioned to benefit from the new 4G technical requirements set by China Mobile (CM). The analysis focuses on the company's strong 2H13 results, 2014 guidance, and strategic advantages that could lead to a more balanced and sustainable growth model.

Main Points

• 2H13 Results and 2014 Guidance:

  • Coolpad expects 2014 GPM to be at least flat yoy (12.9% in 2013).
  • eCommerce business is expected to carry slightly higher OPM than the corporate average due to lower operating costs.
  • Reaffirmed 2014 smartphone shipment target of 60 mn (vs. GSe 56 mn), with a new assumption of 56.4 mn units due to the impact of 3G inventory clearance and executive recruitment.

• Market Concerns:

  • Market is overly focused on incremental risks (e.g., CM's 5-mode requirement, higher opex ratio, and potential price erosion).
  • However, the report argues that these concerns are misplaced and that Coolpad has strategic advantages over its competitors.

• Strategic Advantages:

  • Early mover advantage: Coolpad already has 5-mode smartphones in mass production, while many competitors are still adjusting their roadmaps.
  • Partnership with Qualcomm: Coolpad is a key strategic partner of Qualcomm, which provides time-to-market and cost advantages due to its mature 5-mode single-chip solution.
  • Diversified customer base: Coolpad's revenue from CM is expected to drop to 35% from 45% in 2013, as the company gains traction with China Unicom (CU) and China Telecom (CT).

• Valuation Update:

  • Goldman Sachs raises its FY14E-16E EPS estimates by 6-15%, mainly due to improved OPM.
  • The 12-month price target is raised to HK$6.60, implying a 11.8 NTM P/E on GSe.
  • The EV/EBITDA multiple is expected to decline from 11.7 to 5.4, reflecting improved profitability and lower valuation.

• Operating Efficiency:

  • The opex ratio increased to 10.4% in 2013 due to executive recruitment and inventory clearance, but is expected to normalize in 2014E.
  • The company's eCommerce business has shown strong growth, and its overseas expansion is expected to be cost-effective and account for 2-3% of total revenues.

Key Information

• Share price performance:

  • Coolpad's share price dropped 25% from its early March peak, while the Hang Seng China Enterprises Index (HSCEI) fell 3%.
  • The report suggests that the market has mispriced Coolpad shares due to overemphasis on margin risks.

• Revenue Growth:

  • 2014E revenue is expected to be HK$37,523.3 mn, up 91.2% from 2013.
  • 2015E revenue is expected to be HK$45,871.5 mn, with a 22.2% growth.
  • 2016E revenue is projected at HK$50,168.2 mn, with 9.4% growth.

• Profitability Metrics:

  • Gross margin is expected to remain stable at 12.9% in 2014, with a slight decline in subsequent years.
  • EBITDA margin is expected to rise to 3.7% in 2014, with 3.7% in 2015 and 3.4% in 2016.
  • Net margin is projected to increase from 2.5% in 2013 to 2.7% in 2014 and 2.2% in 2016.

• EPS and Dividend Yield:

  • EPS (basic) is expected to grow from HK$0.17 in 2013 to HK$0.47 in 2014, HK$0.58 in 2015, and HK$0.65 in 2016.
  • Dividend yield is expected to increase from 0.7% in 2013 to 3.3% in 2016.

• Key Risks:

  • Price erosion in the smartphone market.
  • Slower China handset end demand and 4G progress.

Investment Highlights

• Investment Lists:

  • Asia Pacific Buy List
  • Asia Pacific Conviction Buy List

• Analysts:

  • Robert Yen
  • Iris Wu
  • Bicky Lee

• Contact Details:

  • Robert Yen: +886(2)2730-4196, rob.yen@gs.com
  • Iris Wu: +886(2)2730-4186, iris.wu@gs.com
  • Bicky Lee: +886(2)2730-4195, ricky.lee@gs.com

Conclusion

Goldman Sachs believes that Coolpad's strong 4G capabilities, strategic partnerships, and diversified revenue streams position it well for sustainable growth and margin expansion. The report suggests that the market is overly cautious and that Coolpad's competitive advantages should lead to positive earnings surprises and long-term value creation.