money talk buy hua hong semiconductor (1347...
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H O N G K O N G
Money Talk
HUA HONG SEMICONDUCTOR (1347 HK) An Undervalued Foundry Player
Hua Hong was the world’s second-largest pure-play 200mm foundry in 2013.
The company is well positioned to capture the opportunities brought by the
popularity of smart cards and energy-efficient products as it manufactures
semiconductors for specialty applications in eNVM and power discrete devices.
Valuations are undemanding at 12.1x 2016F PE and 0.88x 2016F P/B
respectively. Initiate coverage with a BUY and target price of HK$12.68.
• Hua Hong’s semiconductors are used in a wide range of products. Hua Hong could benefit from the high demand from end markets, such as consumer electronics and communications, which accounted for nearly 80% of the company’s total revenue in 2014.
• Supportive government policies. Under the State Council’s “National
Guidelines for Development and Promotion of the IC Industry, China’s integrated circuit (IC) industry should achieve a revenue CAGR of 20% from 2014 to 2020. The Ministry of Industry and Information Technology (MIIT) founded a National Integrated Circuit Industry Investment Fund and had already invested in Hong Kong-listed foundry, SMIC (981 HK).
• A good start in 1Q15. Revenue grew 12.5% yoy to US$166m and net profit grew 22.3% yoy to US$24.8m. This performance was better than peer, Vanguard (5347 TT), another pure-play 200mm foundry listed in Taiwan, which reported only a 16.2% yoy growth in revenue and a 1.9% yoy growth in net profit in 1Q15 due to the difference in end-market mix.
• Active cooperation with different parties. Hua Hong works with companies such as eMemory to develop technologies used in Internet of Things and power discrete markets, which allow Hua Hong to expand its product usage in more areas.
• Risks will come from: a) breakdown of production facilities, b) failure to meet expansion targets, c) slower-than-expected nationalisation of ICs, and d) sudden advancement in technology leading to a drop in demand for 200mm wafers
• Initiate coverage with a BUY and target price of HK$12.68, based on 1.01x 2016F P/B, a discount of 15% to SMIC’s due to the latter’s larger size and more advanced technology.
KEY FINANCIALS
Year to 31 Dec (US$m) 2013 2014 2015F 2016F Net turnover 588 665 724 787
EBITDA 178 205 229 259
Operating profit 90 133 150 159
Net profit (rep./act.) 65 93 113 123
Net profit (adj.) 65 93 113 123
EPS (cent) 6.3 9.0 10.9 11.9
PE (x) 22.6 15.8 13.0 11.9
P/B (x) 1.4 1.0 0.9 0.9
EV/EBITDA (x) 8.5 5.3 4.8 4.0
Dividend yield (%) 0 0 0 0
Net margin (%) 11.0 14.0 15.6 15.6
Net debt/(cash) to equity (%) 4.7 (26.1) (23.3) (26.3)
Interest cover (x) 5.5x 11.0x 17.9x 28.7x
ROE (%) 6.1% 6.4% 7.2% 7.3%
Consensus net profit - - 103 122
UOBKH/Consensus (x) - - 1.10 1.01 Source: Hua Hong, UOB Kay Hian
BUY
Share Price HK$11.12 Target Price HK$12.68 Upside 14.0% COMPANY DESCRIPTION
The company manufactures semiconductors on 200mm
wafers for specialty applications. The company’s products
are used in the consumer electronic, communication,
computing and industrial and automotive industries.
GICS sector Information Technology
Bloomberg ticker 1347 HK EQUITY
Shares issued (m): 1,034
Market cap (HK$m): 11,476
Market cap (US$m): 1,480
3-mth avg t’over (HK$m): 31.4
MAJOR SHAREHOLDERS
Shanghai Hua Hong 33.89%
Sino Alliance 22.97%
NEC Corp 9.58%
PRICE CHART
Source: Bloomberg
ANALYST
Jason Tsang
+852 2236 6757
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Company Background
According to IBS, an independent third-party market research firm that has been studying
the wafer foundry market for over 20 years, Hua Hong was the world’s second-largest pure-
play 200mm foundry in terms of revenue in 2013. Hua Hong was also the second-largest
pure-play foundry in terms of revenue in 2013 in China with a global market share of 1.4%.
Hua Hong’s top 10 customers include smart card IC solutions providers TMC and Huada,
and Nationz, a leader in security IC solutions.
Hua Hong manufactures semiconductors for specialty applications, such as embedded non-
volatile memories (eNVM) and power discrete devices. The semiconductors that Hua Hong
manufactures are used in a wide range of end-products, including consumer electronics,
communications and computing. Hua Hong operates three fabs in Shanghai with a total
capacity of 129,000 wafers per month as of end-Mar 15 and plans to expand the capacity to
146,000 wafers and 164,000 wafers per month in 2015 and 2016 respectively.
FIGURE 1: WAFERS MADE BY HUA HONG
Source: Hua Hong, UOB Kay Hian
FIGURE 2: REVENUE BY TECH PLATFORM FIGURE 3: REVENUE BY COUNTRY
Source: Hua Hong, UOB Kay Hian
Source: Hua Hong, UOB Kay Hian
In terms of technology platform, eNVM was the main revenue driver, followed by power
discrete, analog & PM, and logic & RF in 2014. In terms of end-market, consumer electronics
used up half of the company’s products in 2014, followed by communications (27%). China
accounted for more than half of Hua Hong’s revenue in 2014 and 56.5% in 1Q15. We
believe China will continue to drive the company’s revenue due to the high demand for
eNVM, power discrete devices and Internet of Things (IoT) products.
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The Board of Hua Hong consists of nine directors – two Executive Directors, four Non-
Executive Directors and three Independent Non-Executive Directors. The board members
have much experience in the industry and some even held positions in other companies,
which may add experience to the Board.
FIGURE 4: MANAGEMENT
Name Title Experience
Fu Wenbiao
Executive Director and Chairman
Mr Fu is primarily responsible for overall management, operations and the charting and reviewing of corporate directions and strategies of our Company. Mr Fu was the factory chief of Shanghai Electrical Appliance Plastics Factory, Shanghai Electrical Engineering Mechanics Factory, Shanghai Compressor Factory and Shanghai Cable Factory, and the general manager of Shanghai Wire and Cable Group Co., Ltd. Mr Fu was also the deputy director and director of Shanghai Municipal Commission of Informatisation and the director of the Shanghai Radio Administration Bureau from 2001 to 2008. Mr Fu received his bachelor’s degree in engineering from the University of Shanghai for Science and Technology (previously known as Shanghai Mechanical Engineering Institution) and a master’s degree in economics from Fudan University. He qualified as a senior engineer in industrial automations in 1993.
Wang Yu
Executive Director and President
As president, Mr Wang was instrumental in the successful merger and restructuring. From Jan 98 to Oct 03, he was the financial department manager and director of HHNEC. From Oct 03 to Mar 10, he was the vice president and chief financial officer of HHNEC, and contributed to the set-up from construction to production of the first 200mm wafer semiconductor production line in China. Mr Wang is an independent non-executive director of Xiao Nan Guo Restaurants Holding Ltd (3666 HK). Mr Wang holds a bachelor’s degree in international trade and a master’s degree in international finance from Shanghai University of Finance and Economic.
Wang Yu Cheng
Executive Vice President and CFO
Mr Wang worked at LSI Logic Corporation in Silicon Valley, U.S. from Aug 95 to Mar 01 as the division controller in the broadband entertainment division. Before joining LSI Logic Corporation, Mr Wang was employed by Franklin Templeton Investments in the US. Mr Wang obtained a bachelor’s of science degree in industrial engineering and operations research from College of Engineering, University of California, Berkeley, and a master’s of business administration in finance and banking from the University of San Francisco.
Wang Xiaojun Fu Rao
Joint Company Secretary Joint Company Secretary
Mr Wang was a managing director of CCB International (Holdings) Ltd. He was an independent non-executive director of Guangzhou Shipyard International Company Ltd (317 HK and 600685 SH) from 2005 to 2011. He also served as an independent non-executive director of OP Financial Investments Ltd (1140.HK), Yanzhou Coal Mining Company Ltd (1171 HK, 600188 SH and YZC), NORINCO International Company Ltd (000065 SZ), China Aerospace International Holdings Ltd (31 HK), and Livzon Pharmaceutical Group (1513 HK, 000513 SZ). Mr Wang obtained a bachelor’s degree in law from the Renmin University of China in 1983 and a master of law degree from the Chinese Academy of Social Sciences in 1986. Ms Fu joined Grace Shanghai in 2007 and held various positions, including manager of the legal department and senior legal counsel. Ms Fu graduated with a bachelor’s degree in economics from Jilin University of Finance and Economics (previously Changchun Taxation College) and obtained her Juris Master’s degree from Fudan University School of Law and a master of law degree from Columbia Law School, US.
Source: Hua Hong, UOB Kay Hian
Industry
According to IBS, the global foundry industry will grow at a revenue CAGR of 7.4% from
2013 to 2020 as integrated device manufacturers (IDM) are outsourcing their wafer
manufacturing process. IBS expects the global 200mm foundry market to shrink at a CAGR
of 1.2% from 2013 to 2020. However, a CAGR of 5.2% is expected in China due to
technological advancement there, but the situation in China is different. IBS estimates
China’s 200mm foundry market to grow at a CAGR of 5.2% from 2013 to 2020 due to the
consumption growth in China’s IC industry. The robust growth in China’s foundry market is
expected to be brought about by the geographical advantage enjoyed by Chinese foundries
as many end-users (such as mobile manufactures and bank IC card manufacturers) are
located in China and this could enable foundries to interact with their customers more closely.
eNVM
eNVM products include microcontrollers (MCU) used in remote controllers, home appliances,
smart meters and smart cards, such as SIM cards, social security cards, national cards and
bank IC cards. The growth of MCUs is due to the adoption of IoT and the popularity of smart
appliances.
POWER DISCRETE DEVICES
Power discrete products include MOSFET, SJNFET and IGBT silicon chips which could be
used in home appliances, computers and automobile products. The usage of discrete
products includes overvoltage protection and improving energy efficiency.
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ANALOG & PM
Products include audio amplifier ICs for mobile products, AC-DC converter ICs for home
appliances and controller ICs for LED lighting bulbs. The LED lighting IC market is expected
to record a CAGR of 11.8% from 2013 to 2020, according to IBS.
LOGIC & RF
Logic products include memory card (SD) controllers and RF products include bluetooth
devices and electronic toll collection.
Many of Hua Hong’s peers such as SMIC and TSMC (2330 TT) are developing more
advanced technology nodes (28/22nm) while Hua Hong’s most advanced technology node is
only 90nm. Moreover, Hua Hong does not have plans to build its own 300mm capacity fabs.
We view this as a disadvantage to Hua Hong in terms of technology advancement but it
does not mean Hua Hong does not have any competitive advantage.
As Hua Hong specialises in manufacturing semiconductors used in eNVM products and
eNVM products need to be modified frequently and less mask layers are required in
production, it is more cost effective for such ICs to be manufactured using 200mm wafers.
Due to the high demand for 200mm wafers in China and Hua Hong is the largest pure-play
8-inch foundry in China, Hua Hong can enjoy geographical advantage over Vanguard (5347
TT), a Taiwan foundry. Moreover, Hua Hong has a 17.72% stake in Huali, a foundry
producing 300mm wafers with advanced technology nodes. Hua Hong may buy Huali if there
is a sudden shift in demand for 300mm wafers or more advanced technology nodes.
Currently, management has no plans to raise its stake in Huali.
On the demand side, the lifespan of 200mm wafers is expected to last at least another five
years. According to IBS, the 200mm wafer market would still be growing at a positive rate,
meaning the market does not expect a near-term fading out of 200mm wafers. With the wide
usage of 200mm wafers on eNVM products, we also do not expect a near-term fading out.
The 150mm wafers faded out in the 2000s when production of the 300mm wafers started.
The fading out of 200mm wafers will likely come from a transition of 300mm wafers to
450mm wafers, looking at the experience of 150mm wafers. Industry players do not yet have
an exact date of the transition due to the costly investment needed to produce 450mm
wafers. Even though the 150mm wafers have faded out, some foundries are still producing
150mm wafers. It may be too early to assess the negative effect if the 200mm wafers were
to fade out.
On the supply side, although equipment suppliers no longer manufacture certain equipment
for 200mm wafers, the manufacturers will work with foundries to extend the life of the
equipment for another 10 to 15 years.
As Hua Hong is the world’s second-largest pure-play 200mm foundry, the negative effect
from both the demand and supply sides should be lesser. Together with its sufficient cash on
hand, Hua Hong should be able to cope with changes in the industry.
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Investment Highlights
Hua Hong’s semiconductors are use in a wide range of products.
a) Consumer Electronics: Microcontrollers, motor drives, touch control devices, power
management, battery management and LED displays.
b) Communications: SIM cards, mobile payment devices, RF frontend, power
management, battery management, displays and MEMS and magnetic sensors.
c) Computing: PC peripherals, power supplies, adapters, power management, battery
management, LED backlights.
d) Industrial and automobile: Smart grids, motor drives, high-speed trains, bank cards,
RFID cards, microcontrollers, engine control units, safety devices, infotainment
systems, battery management, oil pump system and machine-to-machine.
FIGURE 5: REVENUE BY END MARKET
Source: Hua Hong, UOB Kay Hian
According to IBS, the growth of the 200mm foundry market in China will outpace overall
growth due to the increase in demand in the following markets:
a) Smart cards: This market includes ICs used in SIM cards, bank cards, mobile
payment devices, ID cards and social security cards. The IBS estimated the smart
card IC market to grow at a CAGR of 10.6% from 2013 to 2020, with China to
record a CAGR of 16% over the same period.
b) MCU: This market will be driven by growing demand from smart appliances, the
automobile segment and the global adoption of IoT. IBS expects the MCU market
to record a CAGR of 5.5% from 2013 to 2020 while the IoT market to record a
CAGR of 13.4%.
c) Automobile: IBS expects the automobile IC market to chalk up a CAGR of 9.3%
from 2013 to 2020, driven by the need for higher fuel efficiency and improvement in
safety.
d) RF: Products include Wi-Fi, Bluetooth, and 3G and 4G amplifiers. According to IBS,
this market is expected to grow at a CAGR of 11.7% from 2013 to 2020
e) LED lighting: IBS expects this market to grow at a CAGR of 11.8% from 2013 to
2020.
According to IBS, most of the 200mm wafer foundry fabrication plants globally are operating
at nearly full capacity. We expect Hua Hong’s top-line to grow as fast as capacity expansion,
given the strong demand for 200mm wafers.
The consumer electronics and communications market is becoming Hua Hong’s most
important source of income. Due to China’s advocate of “Internet+”, IoT will become more
popular and the increase in demand of related devices (mainly microcontroller in smart
devices) may benefit Hua Hong. Moreover, contactless payment and non-cash payment will
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also drive demand for Hua Hong’s products (mainly SIM cards and mobile payment devices).
Demand for power discrete products is also rising due to the importance of energy efficiency.
Hua Hong is also well positioned to capture the fast growing smart card market in China as it
shipped nearly half of the global market share for chips used in SIM cards in 2014. The
transition of magnetic-strip bank cards to IC cards could also bring opportunities for the
company.
According to management, the company’s technology development plan is on track. The
90nm process technology for eNVM and logic platforms, which will be used in smart cards
and consumer products, will start production in 2H15. Hua Hong will continue to enhance the
Super Junction technology capability in order to provide clients with low-cost and high-
performance solutions.
Supportive government policies. The semiconductor industry had been identified as one
of the key strategic industries in the 12th Five-Year Plan. As the 13th Five-Year Plan will
start in 2016, the semiconductor industry may receive further support from the government.
In Jun 14, the State Council published the “National Guidelines for Development and
Promotion of the IC Industry” to support the growth of the IC industry in China. The guideline
aims for the IC industry is to achieve a CAGR of 20% for 2014-20. This is an aggressive
target as the CAGR was only 26.5% from 2001 to 2013.
In Sep 14, the Ministry of Industry and Information Technology (MIIT) started a National
Integrated Circuit Industry Investment Fund, which could reach Rmb120b, to support the IC
industry in China. The fund invested in SMIC in Feb 15, a China-based foundry, and the fifth-
largest foundry globally in 2013. This proved the government is supportive of the industry in
both words and action. More supportive policies may come in the future, which will lead to
high demand for China-made semiconductors, hence benefiting Hua Hong. Moreover, being
the second-largest foundry in China, Hua Hong may receive investment from the fund.
The concepts of “Made in China 2025” and “Internet+” may also benefit Hua Hong. “Made in
China 2025” is a plan to transform China from being the “world’s factory” into a
manufacturing powerhouse. Some 9-10 tasks and 10 key industries have been identified and
the plan aims to use innovation to improve the competitiveness of China’s manufacturing
industry. These key industries may be a new source of demand for semiconductors.
“Internet+” is also benefiting Hua Hong as more and more devices are connected to the
internet and Hua Hong is focusing on IoT as one of its key markets.
In 2011, the government had made plans to replace magnetic-strip bank cards with financial
IC cards with the issuance of “Opinions Regarding The Promotion Of Financial Smart Card”《中國人民銀行關於推進金融 IC卡應用工作的意見. From 2015, banks in China should only
issue IC cards instead of magnetic-strip cards. The People’s Bank of China (PBOC)
announced in 1Q15 there were around 5b bank cards in China, of which 4.54b were debit
cards and 424m were credit cards. On average, each person owns only 0.31 credit cards.
According to creditcards.com, the mean number of credit cards owned per person was 3.7 in
the US in 2014. The figure in China suggests the credit card penetration rate is still very low
and the market potential is still huge. Moreover, the government encourages the use of local
ICs due to national security reasons. Bank IC cards are now preparing to use domestic ICs
rather than imported ones. Currently, over 90% of the ICs in the bank IC cards are provided
by a Holland semiconductor NXP. As Hua Hong has the technology to provide chips for
China’s IC card makers, Hua Hong should be able to capture market share from NXP.
The PBOC had established a PBOC 3.0 standard for bank IC cards in 2013 due to the
popularity of contactless payments in China. According to management, Hua Hong is the
only foundry which meets the PBOC 3.0 standard. As it takes time for foreign ICs to migrate
to local ICs which includes the testing of products, management expects to grab 10-15% of
the market share of bank ICs in 2015 and to become the dominant player from 2016.
Moreover, the State Council announced that foreign-bank card operators including Visa and
Master can apply for a bank card clearing licence starting 1 Jun 15. This could allow global
players to gain market share from UnionPay and further encourage the growth of credit
cards in China, which is beneficial to Hua Hong.
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A good start in 2015. Revenue of Hua Hong grew 12.5% yoy to US$166m. Gross margin
improved 140bp qoq and 500bp yoy to 30.5% due to strong demand and higher utilisation of
production facilities. Net profit increased 22.3% yoy to US$24.8m. Utilisation rate improved
to 96.1% in 1Q15 (4Q14: 93.3%, 1Q14: 86.3%). Management guided a 2% growth in
revenue in 2Q15 and gross margin to maintain at current level. Hua Hong’s performance is
better than Vanguard’s, another pure-play 200mm foundry listed in Taiwan, which recorded
only a 16.2% yoy growth in revenue and a 1.9% yoy growth in net profit due to the difference
in end-market mix. Around 40% of the semiconductors that Vanguard produces are used in
the slow growing computer industry while Hua Hong’s end-users are in relatively fast-
growing industries, such as smart cards.
FIGURE 6: REVENUE AND UTILISATION RATE (HUA HONG) FIGURE 7: REVENUE AND UTILISATION RATE (VANGUARD)
Source: Hua Hong, UOB Kay Hian Source: Company report, UOB Kay Hian
Active cooperation with different parties. Although Hua Hong does not own state-of-the-
art technology, it joins other parties to develop technological know-how in fast-growing end
markets.
Hua Hong is cooperating with eMemory Technology (3529 TT), a leading manufacturer of
eNVM, to develop MCU to capture the rapid growing IoT market. Hua Hong also cooperates
with iMQ Technology, a Taiwan company producing MCU products, to enter China’s white
home-appliances and smart meter markets. Hua Hong also collaborated with Lexvu, an
electronic component supplier specialised in the design and manufacturing of MEMS
sensors. Lexvu launched the world’s smallest barometer in Mar 15.
The above strategic co-operations allow Hua Hong to improve on its technological know-how
and to gain experience in developing products which suit various usage, further enhancing
its competitive advantage.
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Earnings
We expect Hua Hong’s revenue growth in 2015 and 2016 to be driven by: a) high demand in
key segments which will drive up utilisation rate and gross margin, b) capacity expansion
which allows Hua Hong to receive more orders, and c) potential M&As as Hua Hong has a
large cash hoard boosted by its IPO proceeds.
FIGURE 8: ASP OF WAFERS
Source: Hua Hong, UOB Kay Hian
Revenue is mainly driven by the amount of shipments. As management did not give out
guidance on the number of shipments for 2015 and 2016, we assume revenue will grow as
fast as capacity growth. Management guided fabs capacity will expand to 146,000 and
164,000 wafers per month in 2015 and 2016, up 13.2% yoy and 12.3% yoy respectively.
This would result in shipments of 1.58m and 1.78m in 2015 and 2016 respectively. The ASP
of wafers had dropping steadily from 2011 to 2014. We assume the ASP will continue to
drop by around 3% each in 2015 and 2016, which is the average decline in the last three
years. Hence, we forecast revenue of US$723m and US$787m in 2015 and 2016
respectively. We expect gross margin to drop from 30.5% in 1Q15 to 30% in 2015 and
29.5% in 2016, due to the increase in depreciation after the completion of its expansion.
FIGURE 9: COST BREAKDOWN
Source: Hua Hong, UOB Kay Hian
Administration expense is the main cost item for Hua Hong. With the absence of one-off
listing expenses, we expect administration cost to drop in 2015 and 2016. We expect the
company will not borrow new money as it could fund its expansion by using the IPO
proceeds and it does not have any other new plans yet. This will lead to a drop in finance
cost as it pays down debts.
For 2015 and 2016, management expects capital expenditure at US$229m and less than
US$200m, and depreciation at US$79m and US$100m respectively.
We expect Hua Hong’s net profit to rise 14.7% yoy and 14.1% yoy to US$106m and
US$121m in 2015 and 2016 respectively. Net margin should improve to 15.6% (1Q15:
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14.9%, 2014: 14%), mainly due to relatively smaller depreciation in terms of revenue. A
higher average utilisation rate will further raise revenue, gross margin and net margin.
Valuation
Hua Hong is trading at 12.1x 2016F PE and 0.88x 2016F P/B, a discount of 32.9% and 26%
respectively to Hong Kong-listed SMIC.
We value Hua Hong at a discount of 15% to SMIC’s 2016F P/B due to its smaller size and its
technology know-how is also not as advanced as SMIC’s. Applying a 1.01x 2016F P/B for
Hua Hong, we arrive at our target price of HK$12.68.
FIGURE 10: PEER COMPARISON Company
Market Cap (US$m)
2015F PE (x)
2016F PE (x)
2015F P/B (x)
2016F P/B (x)
TSMC (2330 TT) 119,730 11.93 11.19 2.97 2.54
UMC (2303 TT) 5,390.3 10.87 10.80 0.72 0.69
Vanguard (5347 TT) 2,558.1 14.99 12.81 2.67 2.51
SMIC (981 HK)
Average
4,520.2 18.49
14.07
18.49
13.32
1.25
1.90
1.19
1.73 Source: Bloomberg, UOB Kay Hian (HK)
Risks
a) Breakdown in production facilities.
b) Failure to meet expansion target.
c) Slower-than-expected nationalisation of ICs.
d) Sudden advancement in technology leading to a drop in demand for 200mm wafers.
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PROFIT & LOSS
Year to 31 Dec (US$’000) 2012 2013 2014 2015F 2016F
Revenue, net 571,480 587,719 664,586 723,544 786,622
Operating expenses (486,880) (497,427) (531,638) (573,713) (627,793)
EBIT 84,600 90,292 132,948 149,831 158,829
Net interest income/(expense) (16,928) (16,479) (12,136) (8,382) (5,540)
Pre-tax profit 67,672 73,813 120,812 141,449 153,290
Tax (7,993) (8,964) (27,722) (28,290) (30,658)
Net profit(rep./act.) 59,679 64,849 93,090 113,159 122,632
Net profit(adj.) 59,679 64,849 93,090 113,159 122,632
Deprec. & amort. 125,320 87,514 71,613 79,000 100,000
EBITDA 209,920 177,806 204,561 228,831 258,829
Per share data (US$ cent) EPS - diluted 0.06 0.06 0.09 0.11 0.12
Reported EPS - diluted 0.07 0.08 0.11 0.11 0.12
Book value per shares (BVPS) 0.93 1.02 1.42 1.52 1.62
Dividend per share (DPS) 0 0 0 0 0
BALANCE SHEET
Year to 31 Dec (US$’000) 2012 2013 2014 2015F 2016F
Cash/Near cash equiv. 218,170 317,045 646,773 549,101 561,263
Accounts receivable/debtors 105,158 105,525 107,509 115,767 125,860
Other current assets 203,106 181,216 146,756 150,297 154,127
Current assets 526,434 603,786 901,038 815,165 841,250
Fixed assets 798,780 770,402 760,159 861,659 884,159
Other non-current tangible assets 282,760 273,429 328,872 343,461 343,960
Total non-current assets 1,081,540 1,043,831 1,089,031 1,205,120 1,228,119
Total assets 1,607,974 1,647,617 1,990,069 2,020,285 2,069,369
Accounts payable/creditors 57,299 60,227 63,532 66,709 70,044
Short-term debt/borrowings 99,750 101,513 81,690 62,079 60,000
Other current liabilities 157,234 162,119 184,349 188,541 191,495
Current liabilities 314,283 323,859 329,571 317,329 321,539
Long-term debt 317,981 265,012 183,031 120,952 60,952
Other non-current liabilities 11,953 2,527 11,988 11,988 11,988
Total non-current liabilities 329,934 267,539 195,019 132,940 72,940
Total liabilities 644,217 591,398 524,590 450,269 394,479
Minority interest - accumulated 0 0 0 0 0
Shareholders' equity 963,757 1,056,219 1,465,479 1,570,016 1,674,890
Liabilities and shareholders' funds 1,607,974 1,647,617 1,990,069 2,020,285 2,069,369
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CASH FLOW
Year to 31 Dec (US$’000) 2012 2013 2014 2015F 2016F
Operating cashflows 168,932 184,234 221,740 221,901 251,280
Pre-tax profit 67,672 70,813 120,812 141,449 153,290
Tax (4,547) (8,302) (8,100) (28,100) (30,460)
Deprec. & amort. 125,320 87,514 71,613 79,000 100,000
Working capital changes (42,843) 12,871 19,312 21,706 23,599
Others 23,330 24,338 18,103 7,846 4,851
Cash from investing activities (149,560) (16,754) (96,930) (228,500) (170,500)
Capex (59,400) (34,800) (80,200) (233,000) (175,000)
Others (90,160) 18,046 (16,730) 4,500 4,500
Cash from financing activities (130,644) (72,059) 206,731 (90,073) (67,619)
Dividend payments 0 0 0 0 0
Issue of shares 0 0 331,730 0 0
Proceeds from borrowings (44,479) (55,580) (101,301) (81,690) (62,079)
Others/interest paid (86,165) (16,479) (23,698) (8,383) (5,540)
Net increase/(decrease) in cash (111,272) 95,421 331,541 (96,671) 13,162
Beginning cash 329,738 218,170 317,045 646,773 549,102
Changes due to forex impact 296 3,454 (1,813) (1,000) (1,000)
End cash 218,170 317,045 646,773 549,102 561,263
KEY METRICS
Year to 31 Dec (%) 2012 2013 2014 2015F 2016F
Growth Turnover (6.3%) 2.8% 13.1% 8.9% 8.7%
EBITDA (18.6%) (15.3%) 15.0% 11.8% 13.1%
Pre-tax profit (36.5%) 9.1% 63.7% 17.1% 8.4%
Net profit (37.6%) 8.7% 43.5% 21.6% 8.4%
Net profit (adj.) (37.6%) 8.7% 43.5% 21.6% 8.4%
EPS (37.6%) 8.7% 43.5% 21.6% 8.4%
Profitability EBITDA margin 36.7% 30.3% 30.8% 31.6% 32.9%
EBIT margin 14.8% 15.4% 20.0% 20.7% 20.2%
Gross margin 20.6% 21.9% 29.8% 30.0% 29.5%
Pre-tax margin 11.8% 12.6% 18.2% 19.5% 19.5%
Net margin 10.4% 11.0% 14.0% 15.6% 15.6%
ROE 6.2% 6.1% 6.4% 7.2% 7.3%
ROA 3.7% 3.9% 4.7% 5.6% 5.9%
ROIC 6.3% 7.2% 9.4% 9.9% 10.2%
RONTA 5.9% 6.2% 7.0% 8.3% 8.7%
Leverage Interest cover (x) 5x 5.5x 11.0x 17.9x 28.7x
Debt to total capital 35.5 33.1 24.2 15.1 9.7
Debt to equity 43.3 34.7 18.1 11.7 7.2
Net debt/(cash) to equity 20.7 4.7 (26.1) (23.3) (26.3)
Current ratio (x) 1.68x 1.86x 2.73x 2.57x 2.62x
Source: Hua Hong, UOB Kay Hian
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Disclosures/Disclaimers
This report is prepared and/or distributed by UOB Kay Hian (Hong Kong) Limited (“UOBKHHK”), which is a licensed corporation providing securities brokerage and securities advisory services in Hong Kong. This report is provided for information only and is not an offer or a solicitation to deal in securities or to enter into any legal relations, nor an advice or a recommendation with respect to such securities. This report is prepared for general circulation. It does not have regard to the specific investment objectives, financial situation and the particular needs of any recipient hereof. Advice should be sought from a financial adviser regarding the suitability of the investment product, taking into account the specific investment objectives, financial situation or particular needs of any person in receipt of the recommendation, before the person makes a commitment to purchase the investment product. This report is confidential. This report may not be published, circulated, reproduced or distributed in whole or in part by any recipient of this report to any other person without the prior written consent of UOBKHHK. This report is not intended for distribution, publication to or use by any person in any jurisdiction outside Hong Kong or any other jurisdiction as UOBKHHK may determine in its absolute discretion, where the distribution, publication or use of this report would be contrary to applicable law or would subject UOBKHHK and its associate (as defined in the Securities and Futures Ordinance, Chapter 571 of Hong Kong) to any registration, licensing or other requirements within such jurisdiction. The information or views in the report (“Information”) has been obtained or derived from sources believed by UOBKHHK to be reliable. However, UOBKHHK makes no representation as to the accuracy or completeness of such sources or the Information and UOBKHHK accepts no liability whatsoever for any loss or damage arising from the use of or reliance on the Information. UOBKHHK and its associate may have issued other reports expressing views different from the Information and all views expressed in all reports of UOBKHHK and its associate are subject to change without notice. UOBKHHK reserves the right to act upon or use the Information at any time, including before its publication herein. Except as otherwise indicated below, (1) UOBKHHK, its associate and its officers, employees and representatives may, to the extent permitted by law, transact with, perform or provide broking, underwriting, corporate finance-related or other services for or solicit business from, the subject corporation(s) referred to in this report; (2) UOBKHHK, its associate and its officers, employees and representatives may also, to the extent permitted by law, transact with, perform or provide broking or other services for or solicit business from, other persons in respect of dealings in the securities referred to in this report or other investments related thereto; (3) the officers, employees and representatives of UOBKHHK may also serve on the board of directors or in trustee positions with the subject corporation(s) referred to in this report. (All of the foregoing is hereafter referred to as the “Subject Business”); and (4) UOBKHHK may otherwise have an interest (including a proprietary interest) in the subject corporation(s) referred to in this report. As of the date of this report, no analyst responsible for any of the content in this report have any proprietary position or material interest in the securities of the corporation(s) which are referred to in the content they respectively author or are otherwise responsible for. Each research analyst of UOBKHHK who produced this report hereby certifies that (1) the views expressed in this report in any event accurately reflect his/her personal views about all of the subject corporation(s) and securities in this report; (2) the report was produced independently by him/her; (3) he/she does not carry out, whether for himself/herself or on behalf of UOBKHHK or any other person, any of the Subject Business involving any of the subject corporation(s) or securities referred to in this report; and (4) he/she has not received and will not receive any compensation that is directly or indirectly related or linked to the recommendations or views expressed in this report or to any sales, trading, dealing or corporate finance advisory services or transaction in respect of the securities in this report. However, the compensation received by each such research analyst is based upon various factors, including UOBKHHK’s total revenues, a portion of which are generated from UOBKHHK’s business of dealing in securities. IMPORTANT DISCLOSURES FOR INCLUDED RESEARCH ANALYSES OR REPORTS OF FOREIGN RESEARCH HOUSES Where the report is distributed in Hong Kong and contains research analyses or reports from a foreign research house, please note: (i) recipients of the analyses or reports are to contact UOBKHHK (and not the relevant foreign research house) in Hong Kong in respect of any matters arising from, or in connection with, the analysis or report; and (ii) to the extent that the analyses or reports are delivered to and intended to be received by any person in Hong Kong who is not an accredited investor, expert investor or institutional investor, UOBKHHK accepts legal responsibility for the contents of the analyses or reports DISCLOSURE OF INTEREST: Analyst trading and financial interests: Neither the analyst(s) preparing this report nor his associate has trading and financial interest and relevant relationship specified under Para. 16.4 of Code of Conduct in the listed corporation covered in this report. Firm financial interests and business relationship: UOBKHHK does not have financial interests and business relationship specified under Para. 16.5 of Code of Conduct with the listed corporation covered in this report.
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IMPORTANT DISCLOSURES FOR U.S. PERSONS This research report was prepared by UOBKHHK, a company authorized, as noted above, to engage in securities activities in Hong Kong. UOBKHHK is not a registered broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This research report is provided for distribution by UOBKHHK (whether directly or through its US registered broker dealer affiliate named below) to “major U.S. institutional investors” in reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”). All US persons that receive this document by way of distribution from or which they regard as being from UOBKHHK by their acceptance thereof represent and agree that they are a major institutional investor and understand the risks involved in executing transactions in securities. Any U.S. recipient of this research report wishing to effect any transaction to buy or sell securities or related financial instruments based on the information provided in this research report should do so only through UOB Kay Hian (U.S.) Inc (“UOBKHUS”), a registered broker dealer in the United States. Under no circumstances should any recipient of this research report effect any transaction to buy or sell securities or related financial instruments through UOBKHHK. UOBKHUS accepts responsibility for the contents of this research report, subject to the terms set out below, to the extent that it is delivered to and intended to be received by a U.S. person other than a major U.S. institutional investor. The analyst whose name appears in this research report is not registered or qualified as a research analyst with the Financial Industry Regulatory Authority (“FINRA”) and may not be an associated person of UOBKHUS and, therefore, may not be subject to applicable restrictions under FINRA Rules on communications with a subject company, public appearances and trading securities held by a research analyst account. Analyst Certification/Regulation AC As noted above, each research analyst of UOBKHHK who produced this report hereby certifies that (1) the views expressed in this report accurately reflect his/her personal views about all of the subject corporation(s) and securities in this report; (2) the report was produced independently by him/her; (3) he/she does not carry out, whether for himself/herself or on behalf of UOBKHHK or any other person, any of the Subject Business involving any of the subject corporation(s) or securities referred to in this report; and (4) he/she has not received and will not receive any compensation that is directly or indirectly related or linked to the recommendations or views expressed in this report or to any sales, trading, dealing or corporate finance advisory services or transaction in respect of the securities in this report. However, the compensation received by each such research analyst is based upon various factors, including UOBKHHK’s total revenues, a portion of which are generated from UOBKHHK’s business of dealing in securities. Copyright 2015, UOB Kay Hian (Hong Kong) Ltd. All rights reserved. http://www.utrade.com.hk/ RCB Regn. No. 197000447W
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