20131003-美银美林-NBA_deal_positive_for_the_handset_biz__maintain_Buy_13页_674kb

ZTE Corporation Summary

Core Content

ZTE Corporation is a major telecommunications equipment vendor in China and a global player in over 140 countries. The company is noted for its presence in both wireless equipment and handset shipments, ranking 5th and 2nd globally, respectively. The report discusses ZTE's strategic partnership with the NBA Houston Rockets, its performance in the North American market, and its 4G deployment progress in China.

Main Points

• NBA Partnership: ZTE signed a strategic agreement with the Houston Rockets to become the sole smartphone partner for the 2013/14 season. This is expected to enhance brand recognition in both the US and China.
• North America Sales: ZTE launched two new smartphone models, Grand S and Nubia 5, in the North American retail market. It sold 2.6 million smartphones in the first half of 2013, ranking 4th in total handsets and 3rd in the pre-paid market.
• Handset Forecast Revision: The company revised its smartphone shipment forecast from 40/45 million units to 45/50 million units for FY14 and FY15 due to increased marketing and branding efforts.
• Marketing Costs: The NBA sponsorship is expected to increase marketing costs by RMB100–200 million annually, which may impact short-term financial performance.
• 4G Deployment: China Mobile, China Telecom, and China Unicom are expected to deploy 4G networks with significant capital expenditures. The report suggests that 4G rollout will benefit ZTE, especially in the mid-to-high-end market.
• Investment Thesis: The report maintains a "Buy" rating and raises the price objective from HK$16 to HK$18.3, based on improved market sentiment and higher valuation multiples. The updated price objective reflects 18x FY14E P/E, aligning with global sector averages.
• Financial Performance: ZTE's financial forecasts have been adjusted, with revised revenue and profit estimates for FY13, FY14, and FY15. The report highlights the potential for growth in the handset business and the impact of marketing costs.

Key Information

Handset Business

• Revenue Growth: Handset revenue is expected to increase by 5.3% in FY13, 18.3% in FY14, and 15.6% in FY15.
• Unit Sales: Handset unit sales are forecasted to be 68 million in FY13, 65 million in FY14, and 65 million in FY15.
• ASP (Average Selling Price): The average selling price for smartphones is projected to increase, indicating a shift towards higher-end models.
• Market Share: ZTE's global market share in smartphones is expected to grow from 1.4% in Q1 2011 to 4.9% in Q2 2013. In North America, ZTE's market share is estimated to be around 2.7% to 3.8% in FY13.

4G Progress

• China Mobile: Finalizing 4G contracts worth ~RMB20 billion for 2013, with ZTE securing the largest market share (28%).
• China Telecom: Started a 4G tender at the end of August, with 60K BTS included, valued over RMB10 billion.
• China Unicom: Initiated a 4G technical tender in late September.
• License Expectations: 4G licenses are expected to be issued in late November after the CPC economic meeting, with the winners to be announced afterward.

Financial Forecasts

• EPS Adjustments: The report cut FY13/14 EPS by 21% / 5% but raised FY15 EPS by 5.4%.
• Valuation: The new price objective of HK$18.3 is based on a 18x FY14E P/E, which is in line with global averages.
• Revenue Estimates:
  • Total Revenue: Increased by 5% in FY14 and 9% in FY15.
  • Carrier Business Revenue: Revised up by 4.5% / 5% for FY14/15.
  • Software & Services Revenue: Reduced growth forecast for FY13 from 18% to 0%, due to lower-than-expected performance in 1H13.

Risk Factors

• Delayed 4G Licenses: A potential delay in the issuance of FDD-LTE licenses could lead to lower 4G spending in FY14.
• Global Competition: Intensified competition could affect ZTE's ability to maintain its market position.
• NBA Sponsorship Impact: The company may not fully monetize the NBA sponsorship, which could affect the expected benefits.

Summary Table

Investment Recommendation

• Investment Opinion: Maintain "Buy" rating.
• Price Objective: Raised from HK$16 to HK$18.3.
• Valuation: Based on 18x FY14E P/E, aligning with global sector averages.
• Dividend Yield: Expected to increase from 1.3% to 2.7% by FY15.
• ROE: Projected to rise from 8.5% in FY13 to 14.3% in FY15.

Conclusion

ZTE is expected to benefit from its NBA sponsorship and 4G deployment in China. The company's financial forecasts have been revised upward, with a higher price objective and improved valuation multiples. Despite the potential increase in marketing costs and the risk of delayed 4G licenses, the investment thesis remains positive.