M Tel | 8266.HK China Puti Step into the buoyant touch market · iOS 5.1 Android 3.1 Android 3.1...

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28 March 2012

Susanna Chui

[email protected]

(852) 2235 7131

Trading data

52-week range (HKD)

3 mth avg daily vol (mn)

No of shares (m)

Market Cap (HKD mn)

Major shareholders (%)

Auditors

Result due

0.105/0.315

2.92

1,178.14

270.97

China Oil Resource

(30.18%)

Ting Ho Kwan

& Chan

FY12: Jun Company description

Listed in 2003, M Tel is a mobile data solution and

related service developer and provider, operating

value-added services with network operators, and

developing applications. The company is

exploring new opportunities from growth of smart

devices and has acquired a LCD and touch panel

business in 2011.

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Step into the buoyant touch market

Rating Not-rated

Target Price

Current price

HKD 0.23

From mobile data solution to touch panels

M Tel is engaged in development and provision of mobile data

solutions and related services. To seize new opportunities to take

ride on the growth of smart devices, the company has acquired 33%

of a LCD and touch panel business in 2011 and moves towards

lamination services for capacitive glass-type touch panel. It has the

right to increase stake to 51% over the acquired business.

Profitability warranted by yield rate and order-on-hand

Management views positively on margins of the LCD and touch

panel business, thanks to higher yield rate versus industry average.

Besides, management is optimistic over shipment in 2012 as

increasing popularity of low-end tablets in China will bring

overwhelming demand for mid-size touch panels. Assuming an

industry average margin, its order-on-hand will be sufficient to meet

the profit of HKD10mn guaranteed by the vendor of the acquisition.

Synergy from new acquisition

On 16 Mar, M Tel has announced to acquire 75% of ETC

Technology, for a consideration of HKD39mn, with an option to

increase shareholdings to 100%. ETC Technology is engaged in

trading of parts in relation to display modules and touch panel

modules, and providing professional solutions. Through acquisition,

M Tel can obtain stable supply of parts and one-stop solutions to

meet customized requirements of touch panels. ETC Technology

enjoys guaranteed profit of HKD8mn for each of the three years from

FY13 to FY15 ending Mar.

Touch panel market expected to sustain a strong growth

Global touch panel market is expected to grow by 18% in 2012 on

the back of the strong smartphone and tablet shipment growth,

especially in China. Domestic handset vendors such as ZTE and

Huawei have set aggressive smartphone shipment targets. As for

tablets, we also expect more and more low-end products to be

launched going forward in China. Together with rising panel size and

competition in specs, we believe touch panel demand will continue

to be strong.

M Tel | 8266.HK

China Puti

China Puti

of 2

From mobile data solution to touch panels

M Tel is a mobile data solution and related service developer and provider. The

company 1) operates over 100 value-added services with over 30 mobile network

operators in 15 countries, 2) develops iPhone, Android, BlackBerry, Qt, Bada, Windows

Mobile and Java applications, and 3) delivers IT outsourcing and consultation services

on web and mobile solutions.

Exhibit 1: M Tel’s mobile data solutions and related services

Source: Company Data, CIRL

Exhibit 2: M Tel’s partners and clients

Source: Company Data, CIRL

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Explore new opportunities from growth of smart devices

Despite increasing popularity of smartphones, market of mobile value-added services

and applications are getting increasingly challenging. Unlike feature phones in which

software are pre-installed in turnkey chipsets, smartphones can run third party

applications and induce more and more developers to swarm into the market.

Therefore, M Tel is exploring new opportunities from growth of smart devices. In Sep

2011, the company has entered into an agreement to acquire 33.3% of Jun Feng, a

LCD and touch panel business for a consideration of HKD20mn, with an option to

increase shareholdings to 51%. Jun Feng enjoys guaranteed profit at HKD10mn for the

year ending 30 Sep 2012.

Exhibit 3: Jun Feng’s Hunan plant

Source: Company data, CIRL

Focus on touch panel lamination

Due to commoditization and declining profitability of LCD panels, M Tel is focusing more

on capacitive glass-type touch panel business.

Capacitive touch panels are panels, which detect touch location by calculating change

of capacitance (a human finger touching panel), while resistive touch panels detect

touch location by calculating voltage change (top layer contacting bottom layer).

Capacitive touch panels are replacing resistive touch panels to become mainstream

touch panel technology, thank to 1) better sensitivity, 2) rising adoption of multi-touch

requirementss and 3) declining costs.

And what Jun Feng produces are capacitive glass-type touch panel. Transparency,

sensitivity and strength of capacitive glass technology are better, though capacitive film

is cheaper, thinner and lighter in weight with shorter development time. While new

single glass solution of Wintek and TPK , which are industry leaders, also offer lighter

weight and slimmer form factor at competitive price, we believe this technology will not

mature soon.

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Out of three touch panel production process (cover glass production, touch sensor

production and lamination), M Tel provides lamination services. The company will

source several key materials and components (i.e. cover glass, controller ICs and

touch sensors) from suppliers, and assemble sandwich-like layers by optical

adhesives (i.e. OCA).

Exhibit 4: Jun Feng’s products

Source: TPK, CIRL

Touch panel lamination

LCD display

Touch panel module lamination

End products

Touch components

Produced by Jun Feng

Produced by suppliers and clients

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Target at white box smart device vendors

Management expresses the company currently has more than 20 customers, which

include Ainol (a MP3 and MP4 digital player provider) and an OEM of a leading home

electronics vendor in China. Both shipments are for 7-inch tablets.

Exhibit 5: Ainol ‘s Novo7 Paladin


Exhibit 6: Main tablets in the market

New iPad Galaxy Tab 10.1 Galaxy Tab 8.9 Galaxy Tab 7.7 Amazon Kindle

Fire

Novo7 Paladin

Air interface LTE/3G/Wi-Fi 3G/Wi-Fi 3G/Wi-Fi 3G/Wi-Fi Wi-Fi Wi-Fi

Operating

system

iOS 5.1 Android 3.1 Android 3.1 Android 3.2 Android 2.3 Android 4.0

CPU Dual-core A5X Dual core 1 GHz

processor

Dual Core 1 GHz

Processor

Dual core 1.4

GHz processor

Dual core 1 GHz

Cortex-A9

1 GHz Processor

Memory 16GB/32GB/64G

B

16GB 16GB 16GB/32GB/64G

B

8GB 8GB

RAM 1 GB 1 GB 1 GB 1 GB 512 MB 512 MB

Screen

technology

IPS TFT-LCD

(a-Si/oxide)

PLS TFT-LCD PLS TFT-LCD Super AMOLED

Plus

IPS TFT-LCD TFT-LCD

Size 9.7 inch, 264 ppi 10.1 inch, 149 ppi 8.9 inch, 169 ppi 7.7 inch, 197 ppi 7.0 inch, 170 ppi 7 inch, 133 ppi

Price HKD3,888 HKD3,510 HKD4,222 HKD3,480 HKD1,820 HKD699

Source: Company data, price.com.hk, CIRL

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We notice that Amazon’s Kindle Fire has started to develop mid-end tablet market, since

iPad and Samsung Galaxy Tab triggered explosive growth of tablet market. We believe

more and more low-end tablets will be launched going forward, especially in emerging

markets such as China. As the specs of low-end tablets, which are sold at competitive

price, are actually not that low-end (i.e. 1GHz processor, 512MB of RAM and display

with ~130ppi), we expect popularity of low-end tablets to increase and support demand

of mid-size touch panel (diagonal size between 5" and 10").

Based on orders on hand and its capacity, management expects to ship 300k units of

LCD/ touch panel module/ touch panel per month in 2012 with ASP of USD6-10,

depending on feature and size of products. As such, we project revenue will be around

HKD169-281mn in FY13. Given assuming 6% of NPM, which is industry average, net

profit will be around HKD10.1mn-HKD16.8mn, implying guaranteed profit of HKD10mn is

achievable.

Exhibit 7: Jun Feng’s targeted shipment and ASP

Year to March FY13

Shipment (mn) 3.6

ASP (HKD) 46.8-78.0

Revenue (HKD mn) 168.5-280.8


Higher profitability due to higher yield rate

Among touch panel production process (cover glass production, touch sensor production

and lamination), the entry barrier of lamination is comparatively higher due to 1) high

requirements of adhesive evenness; and 2) difficulties in preventing air bubbles and

contamination.

The above two factors will affect yield rate and margins. Therefore, difficulties in getting

through learning curve in fast pace to enhance production efficiency and yield rates

usually bring challenge to newcomers. However, M Tel’s current yield rate has reached

around 85% (industry: 75-90%), according to management. We believe such high yield

rate may imply superior lamination capability and better profitability. Management

expects GPM to be above 20%, versus 14% of industry average.

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Synergy from new acquisition

On 16 Mar, M Tel has announced to acquire 75% of ETC Techonology for an aggregate

consideration of HKD39mn, with an option to increase shareholdings to 100%. ETC

Techonology is engaged in trading of electronic parts (sourced by a leading provider of

touchscreen and touchpad solutions) in relation to display modules and touch panel

modules. Also, it provides professional solutions with engineering services to meet

individual customer needs.

Exhibit 8: ETC Technology’s structure


Benefits from acquisition

Ensure consistent supply of parts at competitive price: Currently the company

is using electronic parts procured by ETC Technology in LCD and touch panel

production. Therefore, the acquisition will ensure stable and consistent supply of

electronic parts at competitive price.

Exhibit 9: ETC Technology provides electronic parts and one-stop solution Sto Jun Feng


Chan Wan

Kim

Wong Chun

Wai

M Tel

ETC

Technology

Honma

Technology

Limited

China

Bingo

75% 20% 5%

100%

100%

100%

100%

80% 20%

Chan Wan

Kim

Wong Chun

Wai

ETC

Technology

Honma

Technology

Limited

China

Bingo

Glass Electronic parts

Touch panel module lamination

Touch panel lamination

One stop solution

LCD display

Provided by ETC Technology

Provided by Jun Feng

Provided by suppliers

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Integrate professional resources with ETC Technology: One-stop solutions

with engineering services to meet customized size and performance requirements

of touch panels, provided by ETC technology will enhance the company’s

competitiveness and bargaining power.

Acquisition detail

The total consideration is HKD39mn, settled by cash, convertible bonds (conversion

price: HK$0.25) and promissory notes (notes without any interest) in ratio of 27%, 60%

and 13% respectively. The vendors have irrevocably warranted and guaranteed to M

Tel that ETC Techonology’s net profits will not be less than HKD8mn for each of the

three years from FY13 to FY15 ending March. If actual amount is less than guaranteed

amount, the vendors will pay M Tel in cash for shortfall.

Exhibit 10: Guaranteed profit

HKD mn (Year to March) FY10 FY11

Apr 11

- Jan 12

FY13-FY15

(Guaranteed)

Turnover 288.6 363.3 311.2 N/A

Net profit before taxation and

extraordinary items 0.9 2.0 8.2 N/A

Net profit after taxation and

extraordinary items 0.7 1.7 5.1 8.0 per year


Exhibit 11: Effects of acquisition on shareholding structure

As at date of

announcement

After completion and

assuming conversion of

CBs in full and none of

Option CBs having been

converted

After completion and

assuming conversion of

CBs and Option CBs in

full

No of shares % No of shares % No of shares %

China Oil Resources 355,571,722 30.18 355,571,722 27.96 355,571,722 24.15

Chan Wan Kim

(First vendor) - - 74,880,000 5.89 235,520,000 15.99

Wong Chun Wai

(Second vendor) - - 18,720,000 1.47 58,880,000 4.00

Vodatel Information 155,419,392 13.19 155,419,392 12.22 155,419,392 10.55

Public Shareholders 667,143,742 56.63 667,143,742 52.46 667,143,742 45.31

1,178,134,856 100.00 1,271,734,856 100.00 1,472,534,856 100.00


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Growth driven by smartphones and tablets

Global touch panel market is expected to sustain a strong growth (18% in 2012),

thanks to the strong growth of smartphone and tablet shipment (31% and 54% in

2012), especially in emerging markets such as China.

Domestic handset vendors such as ZTE and Huawei have set aggressive smartphone

shipment targets, in order to grab rising low-end market. As for tablets, Amazon’s

Kindle Fire has started to develop mid-end tablet markets, since iPad and Samsung

Galaxy Tab triggered explosive growth of tablet market. We believe more and more

low-end tablets will be launched going forward in China.

Together with rising panel size and competition in specs, we believe touch panel

demand will continue to be strong and benefit touch panel supply chain.

Exhibit 12: Global smartphone and tablet shipment forecasts

Source: IDC, CIRL

Exhibit 13: Global touch panel shipment forecasts

Source: Displaysearch, CIRL

303

482

629

19 69

106

-

100

200

300

400

500

600

700

2010 2011 2012E

un

its

in m

illio

ns

Global smartphone and tablet shipment growth forecasts

Smartphones

Tablets

607

9871,161

1,3411,538

1,7351,914

0%

5%

10%

15%

20%

25%

30%

35%

0

500

1000

1500

2000

2500

20

09

20

11

E

20

12

E

20

13

E

20

14

E

20

15

E

20

16

E

(mn

un

its)

Touch panel shipment

Shipment

YoY

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Financial overview

In FY11, M Tel’s net loss widened to HKD5.2mn, but with revenue growth of 34.7% to

HKD24.4mn. Increase in revenue mainly related to apps development business. Also, the

company managed to improve GPM from 46.2% to 57.1%. However, employment cost was up

91.6% to HKD11.2mn as apps development was labour intensive, resulting in a bigger loss

compared to HKD0.7mn in FY10.

However, based on orders on hand, capacity of touch panel business and industry average

margin, we believe guaranteed profit of HKD10mn is achievable in FY13 and will likely turn M

Tel into profits.

Risks

Weaker-than-expected demand on tablet PCs and smartphones as they are

two major growth drivers for touch panels;

Weaker-than-expected orders from customers, as competition in low-end

markets are intensifying;

Increasing capacity supply could lead to more intense pricing competition of

touch panels than expectation; and

Potential technology challenges includes continuous improvement of film-type

solutions in transparency and sensitivity. And there is new single glass solution of

Wintek and TPK, which are the industry leader, offering lighter weight and slimmer

form factor at competitive price. But we believe this technology will not mature

soon.

Exhibit 14: Peer comparison

Source: Bloomberg, CIRL (Gunze and M Tel’s financial year end is 31 March of each year)

Price Market cap PE (x) PB (x) Dividend yield (%)

Ticker (HKD) (HKD mn) FY10A FY11E FY12E FY10A FY11E FY12E FY10A FY11E FY12E

Tpk Holding Co L 3673 TT 127.17 29,920 - 9.7 9.0 - 4.2 3.0 0.0% 1.1% 2.4%

Wintek Corp 2384 TT 6.33 10,434 16.9 234.5 33.9 1.2 1.1 1.1 3.7% 1.8% 1.1%

Chimei Innolux C 3481 TT 3.57 26,132 -6.3 -1.8 -3.7 0.4 0.5 0.6 0.0% 0.0% 0.0%

Young Fast Opto 3622 TT 20.76 3,110 4.5 18.3 13.2 1.1 1.2 1.1 6.2% 3.2% 3.1%

J Touch Corp 3584 TT 12.09 1,301 13.0 -42.7 -65.7 1.8 1.9 1.9 1.4% 0.0% 0.0%

Digitech Systems 091690 KS 71.56 981 8.6 - - 1.3 - - 0.0% 1.0% 1.0%

Iljin Display Co 020760 KS 84.91 2,303 32.0 - - 6.2 - - 0.0% 0.2% 0.2%

Gunze Ltd 3002 JT 24.01 5,040 67.2 28.6 29.7 0.5 0.4 0.4 3.2% 2.8% 2.8%

Melfas Inc 096640 KS 154.08 2,641 10.1 - - 2.8 - - 1.5% 0.0% 0.0%

S-Mac Co Ltd 097780 KS 93.82 1,539 15.1 8.4 6.0 4.7 - 2.1 0.5% 0.0% 0.0%

Elk Corp 094190 KS 90.73 1,229 8.1 9.5 5.7 1.8 - - 0.7% 2.4% 0.9%

Synopex Inc 025320 KS 19.21 1,002 -3.6 - - 1.3 - - 0.0% 0.0% 0.0%

Lg Innotek Co Lt 011070 KS 708.75 14,352 9.8 -26.6 120.9 1.4 1.5 1.6 0.3% 0.3% 0.3%

Truly Intl Hldgs 732 HK 1.43 3,958 12.5 8.9 6.7 1.0 0.9 0.9 2.9% 4.5% 6.0%

World Wide Touch 1282 HK 0.21 606 2.1 4.9 5.2 0.6 0.6 0.8 0.0% 6.8% 6.3%

Average 16.7 40.4 25.6 1.9 1.4 1.3 2.3% 2.4% 2.4%

Mobile Network 8266 HK 0.23 271 -231.4 -31.8 - 5.7 2.4 - 0.0% 0.0% -

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Exhibit 15: Financial statement


Income statement Cash flow

Year to Mar (HKD mn) FY10A FY11A Year to Mar (HKD mn) FY10A FY11A

Revenue 18 24 Pre-tax profit (1) (5)

Gross profit (reported) 8 14 Taxes paid (0) (0)

EBITDA (1) (6) Depreciation 0 0

Depreciation 0 0 Associates (1) (1)

EBIT (1) (6) CFO bef. WC change (1) (5)

Net interest income (exp.) 0 0 Change in working cap (9) 10

Associates 1 1 Cashflow from operation (10) 4

Exceptionals/others 0 0 CAPEX (0) (1)

Profit before tax (1) (5) Free cash flow (10) 4

Tax expenses (0) (0) Dividends 0 0

Minority interest 0 (0) Balance sheet adj. (1) (10)

Net profit (1) (5) Sharse issued 0 21

Dividends 0 0 Others 0 0

Net cash flow (10) 14

Balance sheet Net cash (debt) start 20 10

Year to Mar (HKD mn) FY10A FY11A Net cash (debt) at year-end 10 25

Cash & equiv 10 25

Trade receivables 4 4 Ratios

Other receivables 0 0 Year to Mar (HKD mn) FY10A FY11A

Inventories 0 0 Growth rate (%)

Other current assets 8 0 Revenue (10.8) 34.7

Fixed assets 0 1 EBITDA 1795.7 326.5

Intangible assets 0 0 EBIT 1795.7 326.5

Investment, associates etc 9 19 Net profit (190.8) 664.8

Total assets 31 49 Fully diluted EPS (190.7) 609.4

Margins (%)

Account payables 4 7 Gross margin (reported) 46.2 57.1

Other payables 0 0 EBITDA (7.3) (23.2)

Short-term debt 0 0 EBIT (7.3) (23.2)

Other current liabs 0 0 Net margin (3.7) (21.3)

Long-term debts 0 0 Other ratios

Deferred tax and others 0 0 ROE (%) (2.5) (12.3)

Other long-term liabs 0 0 ROA (%) (2.2) (10.6)

Total liabilities 4 7 Net gearing (%) (32.4) (57.4)

Interest coverage (x) NA NA

Share capital 37 46 Receivables days 75.6 66.3

Reserves (10) (4) Payables days 159.6 228.7

Shareholders' equity 27 42 Inventory days 0.0 0.0

Minorities 0 0 Effective tax rate (%) (1.2) (1.4)

Total equity 27 42

Net cash (debt) 10 25

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Rating Policy

Rating Definition

Stock Rating Buy Outperform HSI by 15%

Neutral Between -15% ~ 15% of the HSI

Sell Underperform HSI by -15%

Sector Rating Accumulate Outperform HSI by 10%

Neutral Between -10% ~ 10% of the HSI

Reduce Underperform HSI by -10%

Analysts List

Antony Cheng Research Director (852) 2235 7127 [email protected]

Hayman Chiu Senior Research Analyst (852) 2235 7677 [email protected]

Kenneth Li Senior Research Analyst (852) 2235 7619 [email protected]

Lewis Pang Research Analyst (852) 2235 7847 [email protected]

Susanna Chui Research Analyst (852) 2235 7131 [email protected]

Analyst Certification

I, Susanna Chui hereby certify that all of the views expressed in this report accurately reflect my personal views about

the subject company or companies and its or their securities. I also certify that no part of my compensation was / were,

is / are or will be directly or indirectly, related to the specific recommendations or views expressed in this report / note.

Disclosure

Cinda International Capital Limited, subsidiary of Cinda International Holdings Limited, is currently acting as the

Independent Financial Advisor of M Tel.

Disclaimer

This report has been prepared by the Cinda International Research Limited. Although the information and opinions

contained in this report have been compiled or arrived at from sources believed to be reliable, Cinda International

cannot and does not warrant the accuracy or completeness of any such information and analysis. The report should not

be regarded by recipients as a substitute for the exercise of their own judgment. Recipients should understand and

comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers

prior to any investment decision. The report may contain some forward-looking estimates and forecasts derived from

the assumptions of the future political and economic conditions with inherently unpredictable and mutable situation, so

uncertainty may contain. Any opinions expressed in this report are subject to change without notice. The report is

published solely for information purposes, it does not constitute any advertisement and should not be construed as an

offer to buy or sell securities. Cinda International will not accept any liability whatsoever for any direct or consequential

loss arising from any use of the materials contained in this report. This document is for the use of intended recipients

only, the whole or a part of this report should not be reproduced to others.

M Tel | 8266.HK China Puti Step into the buoyant touch market · iOS 5.1 Android 3.1 Android 3.1...

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