Key company data: See page 2 for company data and detailed price/index chart.

TCL Communication Tech 2618.HK 2618 HK

TECHNOLOGY

EQUITY RESEARCH

Maintain Neutral; TP up to HKD7.8 

What has been priced in, and what has not?

November 13, 2013

Rating Remains

Neutral

Target price Increased from 2.40 HKD 7.80

Closing price November 12, 2013 HKD 7.09

Potential upside +10%

Action: Raise TP up to HKD7.8; maintain Neutral Along with the Street, we were surprised by TCL’s strong recovery in feature phone and smartphone sales in 3Q13. However, even after building in higher volumes and margins, we maintain our Neutral as we think the current share price already reflects the market’s expectation that TCL’s smartphone market share can recover to its feature phone market share in key markets, eg, Latin America (12%), Eastern Europe (3%) and Middle East (4%). TCL’s next potential catalyst may include new smartphone/tablet launches in early 2014 (CES, MWC) and major contract wins from US operators.

Good product + channel drives earnings recovery from 2Q13 We think TCL’s most valuable asset is its global mobile phone distribution network, inherited from its Alcatel acquisition. TCL’s earnings recovered quickly after it resolved its weakness in the smartphone portfolio.

US and tablets to drive growth in 2014F, but we remain sceptical now To sustain its earnings growth beyond the earnings recovery, we think TCL needs to expand its sales channels into new markets (eg, the US) and new product line (eg, tablets). We remain sceptical on both points because of the intense competition in the US smartphone market (vs ZTE, HTC, LGE, etc) and difference of tablets’ sales channel vs smartphone.

Revised TP of HKD7.8 based on 11x of FY14F EPS of HKD0.72 Our new TP is based on 11x FY14F EPS. The P/E multiple is 10% above China Technology average FY14F P/E of 10x, reflecting TCL’s faster earnings growth. We change our valuation method from 1x 2013F BVPS of HKD2.36 as TCL is no longer loss-making; we think it is more appropriate to value it based on positive earnings.

31 Dec FY12 FY13F FY14F FY15F

Currency (HKD) Actual Old New Old New Old New

Revenue (mn) 12,031 14,522 18,385 18,148 22,136 23,676

Reported net profit (mn) -220 74 241 262 817 894

Normalised net profit (mn) -220 74 241 262 817 894

FD normalised EPS -19.50c 6.49c 21.17c 22.99c 71.63c 80.40c

FD norm. EPS growth (%) -127.2 na na 254.1 238.4 12.2

FD normalised P/E (x) na N/A 33.5 N/A 9.9 N/A 8.8

EV/EBITDA (x) 38.7 N/A 13.9 N/A 7.1 N/A 6.4

Price/book (x) 3.4 N/A 3.1 N/A 2.5 N/A 2.1

Dividend yield (%) na N/A na N/A 3.1 N/A 3.4

ROE (%) -8.8 2.9 9.9 9.7 28.7 25.9

Net debt/equity (%) 36.5 50.9 56.5 55.3 39.2 12.9

Source: Company data, Nomura estimates

Anchor themes

TCL is leveraging its overseas distribution network to make a comeback in smartphones. We remain sceptical on TCL's growth potential on top of its smartphone recovery.

Nomura vs consensus

We are in line with consensus on TCL's strong earnings rebound in 2014, but we are 21% below consensus on its growth in 2015 due to the ceiling of its existing channel.

Research analysts

China Technology

Leping Huang, PhD - NIHK leping.huang@nomura.com +852 2252 1598

David Hao - NIHK david.hao@nomura.com +852 2252 2153

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Nomura | TCL Communication Tech November 13, 2013

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Key data on TCL Communication Tech Income statement (HKDmn) Year-end 31 Dec FY11 FY12 FY13F FY14F FY15FRevenue 10,653 12,031 18,385 22,136 23,676Cost of goods sold -8,325 -9,935 -15,000 -17,786 -19,025Gross profit 2,328 2,096 3,385 4,349 4,651SG&A -1,910 -2,660 -3,374 -3,689 -3,931Employee share expense

Operating profit 418 -564 11 661 720

EBITDA 693 225 671 1,281 1,310Depreciation -275 -789 -660 -620 -590Amortisation

EBIT 418 -564 11 661 720Net interest expense -140 -200 -200 -200 -200Associates & JCEs

Other income 506 576 475 503 534Earnings before tax 783 -188 286 964 1,054Income tax 17 -32 -45 -147 -160Net profit after tax 801 -220 241 817 894Minority interests 0 0 0 0

Other items

Preferred dividends

Normalised NPAT 801 -220 241 817 894Extraordinary items

Reported NPAT 801 -220 241 817 894Dividends -312 0 0 -245 -268Transfer to reserves 489 -220 241 572 626

Valuation and ratio analysis

Reported P/E (x) 9.6 na 32.6 9.6 8.8Normalised P/E (x) 9.6 -35.4 32.6 9.6 8.8FD normalised P/E (x) 9.9 na 33.5 9.9 8.8FD normalised P/E at price target (x) 9.7 na 33.1 9.8 8.7Dividend yield (%) 4.1 na na 3.1 3.4Price/cashflow (x) 64.9 35.7 119.9 7.2 4.3Price/book (x) 2.9 3.4 3.1 2.5 2.1EV/EBITDA (x) 11.3 38.7 13.9 7.1 6.4EV/EBIT (x) 18.7 na 819.1 13.8 11.6Gross margin (%) 21.9 17.4 18.4 19.6 19.6EBITDA margin (%) 6.5 1.9 3.7 5.8 5.5EBIT margin (%) 3.9 -4.7 0.1 3.0 3.0Net margin (%) 7.5 -1.8 1.3 3.7 3.8Effective tax rate (%) -2.2 na 15.7 15.2 15.2Dividend payout (%) 39.0 na 0.0 30.0 30.0Capex to sales (%) 9.5 10.7 3.8 3.2 3.0Capex to depreciation (x) 3.7 1.6 1.1 1.1 1.2ROE (%) 32.8 -8.8 9.9 28.7 25.9ROA (pretax %) 7.3 -7.6 0.1 6.3 6.5

Growth (%)

Revenue 22.4 12.9 52.8 20.4 7.0EBITDA -1.1 -67.5 198.4 90.8 2.3EBIT -21.3 -235.0 na 5,713.2 8.9Normalised EPS 15.3 -127.1 na 238.4 9.4Normalised FDEPS 15.3 -127.2 na 238.4 12.2

Per share

Reported EPS (HKD) 73.77c -20.02c 21.73c 73.53c 80.40cNorm EPS (HKD) 73.77c -20.02c 21.73c 73.53c 80.40cFully diluted norm EPS (HKD) 71.82c -19.50c 21.17c 71.63c 80.40cBook value per share (HKD) 2.46 2.09 2.31 2.82 3.38DPS (HKD) 0.29 0.00 0.00 0.22 0.24Source: Company data, Nomura estimates

Relative performance chart (one year)

Source: ThomsonReuters, Nomura research  

(%) 1M 3M 12M

Absolute (HKD) 14.2 100.3 193.0

Absolute (USD) 14.2 100.3 192.9

Relative to MSCI China 15.5 95.2 188.0

Market cap (USDmn) 1,014.3

Estimated free float (%) 36.6

52-week range (HKD) 7.69/2.18

3-mth avg daily turnover (USDmn)

4.41

Major shareholders (%)

TCL Corp 56.4

Leung (Lai Bing) 6.1

Source: Thomson Reuters, Nomura research

Notes

 

Nomura | TCL Communication Tech November 13, 2013

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Cashflow (HKDmn) Year-end 31 Dec FY11 FY12 FY13F FY14F FY15FEBITDA 693 225 671 1,281 1,310Change in working capital -335 -259 -834 -320 350Other operating cashflow -237 258 230 157 174Cashflow from operations 122 224 67 1,117 1,834Capital expenditure -1,009 -1,288 -700 -700 -700Free cashflow -887 -1,064 -633 417 1,134Reduction in investments 20 0 0 0 0Net acquisitions

Reduction in other LT assets -267 -18 0 0 -21Addition in other LT liabilities 21 44 17 66 -112Adjustments 269 210 31 -277 -25Cashflow after investing acts -844 -828 -585 206 976Cash dividends -336 -202 0 0 -245Equity issue 0 0 0 0 0Debt issue 734 -1,185 1,000 0 0Convertible debt issue

Others 180 2,027 -53 12 12Cashflow from financial acts 577 640 947 12 -233Net cashflow -267 -188 362 218 742Beginning cash 7,546 7,279 5,191 5,553 5,772Ending cash 7,279 7,091 5,553 5,772 6,514Ending net debt -57 845 1,447 1,228 486Source: Company data, Nomura estimates

Balance sheet (HKDmn) As at 31 Dec FY11 FY12 FY13F FY14F FY15FCash & equivalents 7,279 5,191 5,553 5,772 6,514Marketable securities 0 0 0 0

Accounts receivable 3,845 4,612 5,980 6,590 6,400Inventories 981 1,263 1,700 2,010 2,150Other current assets 149 146 146 146 146Total current assets 12,254 11,212 13,379 14,518 15,210LT investments 0 0 0 0 0Fixed assets 1,453 1,771 1,800 1,900 2,000Goodwill 0 0 0 0 0Other intangible assets 0 0 0 0 0Other LT assets 320 338 338 338 359Total assets 14,027 13,321 15,517 16,756 17,569Short-term debt 7,222 5,726 6,700 6,700 6,700Accounts payable 1,952 2,429 3,400 4,000 4,300Other current liabilities 2,141 2,451 2,451 2,451 2,451Total current liabilities 11,315 10,606 12,551 13,151 13,451Long-term debt 0 310 300 300 300Convertible debt

Other LT liabilities 39 83 100 166 54Total liabilities 11,354 10,999 12,951 13,617 13,805Minority interest 4 4 4 4 4Preferred stock 0 0 0 0 0Common stock 2,669 2,321 2,562 3,135 3,760Retained earnings

Proposed dividends

Other equity and reserves -3

Total shareholders' equity 2,669 2,318 2,562 3,135 3,760Total equity & liabilities 14,026 13,321 15,517 16,756 17,569

Liquidity (x)

Current ratio 1.08 1.06 1.07 1.10 1.13Interest cover 3.0 -2.8 0.1 3.3 3.6

Leverage

Net debt/EBITDA (x) net cash 3.76 2.15 0.96 0.37Net debt/equity (%) net cash 36.5 56.5 39.2 12.9

Activity (days)

Days receivable 119.3 128.6 105.1 103.6 100.1Days inventory 38.6 41.3 36.0 38.1 39.9Days payable 83.2 80.7 70.9 75.9 79.6Cash cycle 74.8 89.3 70.3 65.8 60.4Source: Company data, Nomura estimates

 Notes

Notes

Nomura | TCL Communication Tech November 13, 2013

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Channel is TCL’s key asset As highlighted in our anchor report Anchor Report: China smartphones - Metamorphosis, we think the global sales and distribution network (to both operator and retailers) is TCL com’s major asset. Fig. 1: Strong distribution network outside China Strong customer base inherited from ex-Alcatel

Source: Company data

TCL was suffering from quarterly losses from 3Q12 to 1Q13, in our view, because it lacked a solid smartphone portfolio. The company’s profitability quickly turned around driven by the launch of popular entry-level to high-end smartphone models; some of the high-end models are demonstrated in the chart below. Fig. 2: TCL’s new smartphone models launched in CES

Source: Company data, Nomura research

TCL smartphones Y910 (Hero N3) S950 (idol X) Y900 S530T

Screen Size (inch) 6 5 5 4.3Resolution 1920 * 1080 1920 * 1080 1280 * 720 854 * 480Core Quad-core Quad-core Quad-core Dual-coreProcessor Speed 1.5GHz 1.5GHz 1.2GHz 1.3GHzRear Camera (MP) 13.0 13.1 8.0 5.0Front Camera (MP) 5.0 2.0 1.3 VGAOperating System Android 4.2 Android 4.2 Android 4.1 Android 4.2Battery (mAh) 3400 2000 2500 1700Price (CNY) 1999 (USD325) 1699 (USD276) 1899 (USD309) n/a

Nomura | TCL Communication Tech November 13, 2013

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Current share price reflects market share recovery in Latin America, Middle East and Eastern Europe Fig 4 shows TCL’s feature phone market share by region since 1Q12. Latin America, Middle East, and Eastern Europe are the three key markets for TCL. TCL owns 3% market share in Eastern Europe, 12.5% market share in Latin America, and 3.9% market share in Middle East in average. Fig. 3: TCL’s channel capacity by region (feature phone market share)

Source: Gartner, Nomura estimates

However, TCL’s smartphone market share in Eastern Europe, Latin America and Middle East was much lower than for feature phone until recently because it lacked a solid smartphone portfolio. Fig. 4: TCL’s smartphone market share by region

Source: Gartner, Nomura estimates

Thanks to its improved smartphone portfolio, TCL is quickly ramping up its smartphone shipments in those regions. Our analysis below shows TCL’s current channel support TCL to 28.7mn units of smartphones per year in those regions if TCL’s smartphone market share can recover to that of the level of feature phone. 28.7mn is close to our current FY14 smartphone shipment forecast of 25mn units. Fig. 5: TCL’s smartphone shipment potential in 2014F

Source: Gartner, Nomura estimates

TCL feature phone market share by region1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 Average

APAC 1.0% 1.0% 1.0% 1.1% 0.8% 1.1% 1.0%Eastern Europe 2.5% 3.6% 2.9% 2.9% 3.2% 2.9% 3.0%Latin America 10.7% 12.2% 11.3% 14.1% 13.5% 13.3% 12.5%Middle East 2.1% 3.3% 3.9% 4.5% 5.2% 4.6% 3.9%North America 0.1% 1.3% 2.9% 0.0% 0.0% 6.1% 1.7%Western Europe 2.9% 3.1% 1.5% 1.1% 1.2% 1.3% 1.8%

TCL smartphone market share by region1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 Average

APAC 0.6% 1.0% 0.8% 0.5% 0.5% 0.6% 0.7%Eastern Europe 0.2% 0.3% 1.2% 2.3% 2.1% 2.6% 1.4%Latin America 1.6% 1.9% 1.9% 2.6% 1.6% 3.8% 2.2%Middle East 0.2% 0.3% 1.0% 2.3% 2.2% 2.5% 1.4%North America 0.0% 0.0% 0.0% 0.6% 0.7% 0.2% 0.2%Western Europe 0.5% 0.8% 1.4% 1.4% 1.3% 1.3% 1.1%

(mn units) 2014F TCL Share TCL ShipmentAPAC 651.5 1.0% 6.7 Eastern Europe 54.6 3.0% 1.7 Latin America 95.9 12.5% 12.0 Middle East 76.7 3.9% 3.0 North America 151.5 1.7% 2.6 Western Europe 148.9 1.8% 2.7

Total 1,179.1 28.7 Model forecast 25.0 Discount 13%

Nomura | TCL Communication Tech November 13, 2013

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US and tablets may provide upside potential, but we remain sceptical We think TCL needs to expand its product portfolio and sales channel in order to sustain its earnings growth after a strong rebound since 2H13. Both are unlikely to be easy, in our view.

From the perspective of channel expansion, we think US should be the next growth area for TCL. Based on Nomura’s handset forecasts, the US is the largest smartphone region for TCL in terms of revenue, and the second-largest smartphone market (next to China) in terms of shipment volume. In the US, operators are controlling most of the handset distribution currently.

Gartner data show TCL starting to ship feature phones in the US since 2Q13. We believe TCL’s current feature phone customers includes AT&T and T-Mobile. However, TCL may face more intensive competition on the smartphone side from both Chinese OEMs (eg, ZTE) and some international smartphone OEMs (eg, LGE and HTC).

If TCL can break into the US operators’ smartphone supplier chain, and gain, eg, 1% market share, this will create another 1.5mn units of smartphones (equivalent to 6% of TCL’s FY14F smartphone shipments).

In addition to its smartphone business, we believe tablets may become another upside potential for TCL. We expect TCL to improve its tablet pipeline in 2014F by launching a series of new models based on MediaTek chipsets. However, TCL may face difficulty in gaining meaningful market share in tablets since international operators have less influence in tablet distribution vs. smartphone. Fig. 6: TCL’s sales by regions (2Q13)

Source: Gartner, Nomura research

Fig. 7: Alcatel OneTouch EVO7 HD 7-inch modular tablet

Source: Company data

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Nomura | TCL Communication Tech November 13, 2013

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2013F and 2014F earnings revisions We revise upwards our FY13F and FY14F revenue forecasts by 27% and 22%, respectively, to reflect stronger-than-expected feature phone and smartphone sales.

• On the feature phone, we expect TCL to maintain stable shipment volume regardless of an above 10% forecast decline in the global feature phone market for 2013/14. We think TCL’s share gain will be achieved thanks to other mobile phone vendors’ retreat from this market. As a result, we have revised up feature phone revenue by 30%/38% in FY13/14.

• On the smartphone side, we have revised upwards our 2013F shipment volume target by 6% to reflect growth in mid-end smartphones (eg, idol X). At the same time, we have revised up smartphone revenue by 25%/16% to reflect higher-than-expected ASP.

We revise upwards our FY13/14 GPM forecasts by 1.5pp/2.5pp, respectively, to reflect the rising mix of high margin mid-end smartphones.

We also revised upwards our 2013-2014F net profit forecasts to reflect TCL’s expected strong revenue growth, gross margin expansion and operating leverage. Fig. 8: TCL: Earnings revisions

Source: Company data, Nomura estimates

(HKD mn) 1Q13 2Q13 3Q13 4Q13F 2012 2013E 2014E 2015E 2013E 2014E 2013E 2014EA A A (NOM) (A) (NOM) (NOM) (NOM) (OLD) (OLD)

Turnover 2,449 3,958 5,454 6,525 12,031 18,385 22,136 23,676 14,522 18,148 27% 22%% chg yoy 16% 32% 79% 68% 13% 53% 20% 7% 21% 25%

Feature phone 1,249 1,458 2,054 1,941 6,831 6,701 6,594 6,891 5,162 4,763 30% 38%Smartphone 1,200 2,500 3,400 4,584 5,200 11,684 15,542 16,785 9,360 13,385 25% 16%

COGS (2,046) (3,232) (4,383) (5,339) (9,935) (15,000) (17,786) (19,025) (12,065) (15,042) Gross Profit 402 726 1,071 1,186 2,096 3,385 4,349 4,651 2,456 3,106 38% 40%OPEX (706) (838) (830) (1,000) (2,660) (3,374) (3,689) (3,931) (2,583) (2,994) 31% 23%EBIT (304) (112) 241 186 (564) 11 661 720 (126) 112 -109% 490%

% chg yoy 160% -355% -238% -159% -235% -102% 5713% 9% -78% -189%Pretax income (241) 14 220 294 (188) 286 964 1,054 80 317 258% 204%

% chg yoy -900% -83% -371% -234% -124% -252% 236% 9% -143% 296% Taxes 6 24 (3) (72) (32) (45) (147) (160) (6) (55) Net income (247) 39 226 224 (208) 241 817 894 74 262 226% 212%

% chg yoy -1063% -49% -359% -200% -126% -216% 238% 9% -136% 254%Gross margin 16.4% 18.3% 19.6% 18.2% 17.4% 18.4% 19.6% 19.6% 16.9% 17.1% 1.5pp 2.5ppSG&A / revenue 28.8% 21.2% 15.2% 15.3% 22.1% 18.3% 16.7% 16.6% 17.8% 16.5% 0.6pp 0.2ppOperating Profit margin -12.4% -2.8% 4.4% 2.9% -4.7% 0.1% 3.0% 3.0% -0.9% 0.6% 0.9pp 2.4ppPretax income/revenue -9.9% 0.4% 4.0% 4.5% -1.6% 1.6% 4.4% 4.5% 0.6% 1.7% 1.0pp 2.6ppTax rates -2.5% 171.4% -1.5% -24.4% 17.0% -15.7% -15.2% -15.2% -7.5% -17.4% -8.2pp 2.1ppNet Income margin -10.1% 1.0% 4.1% 3.4% -1.7% 1.3% 3.7% 3.8% 0.5% 1.4% 0.8pp 2.2ppVolume (mn units) 8.5 12.1 15.4 16.0 42.6 52.0 58.4 61.7 40.6 46.6 28% 25%

% chg yoy 8% 13% 46% 19% -2% 22% 12% 6% -5% 15%Feature phone 7.0 8.9 10.2 9.0 36.1 35.1 33.4 31.7 24.6 21.6 43% 55%Smartphone 1.5 3.2 5.2 7.0 6.5 16.9 25.0 30.0 16.0 25.0 6% 0%

ASP (US$) 37.2 41.8 45.4 52.3 36.4 45.5 48.9 49.5 46.1 50.3 -1% -3%% chg yoy 8% 17% 22% 40% 16% 25% 7% 1% 27% 9%

Diff

Nomura | TCL Communication Tech November 13, 2013

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Fig. 9: Peer comparison valuations

Source: Bloomberg, Nomura estimates

We are 14% above and 21% below the consensus estimate on FY14/15F EPS, reflecting our cautious view towards TCL’s potential growth on top of its smartphone recovery, in particular its tablet and market expansion strategies. Fig. 10: Nomura vs consensus

Source: Bloomberg consensus, Nomura estimates

Fig. 11: TCL: P/E bands

Source: Bloomberg, Nomura research

Fig. 12: TCL: P/B bands

Source: Bloomberg, Nomura research

Valuation

We derived our new TP of HKD7.8 based on 11x of FY14 EPS of HKD0.72. The P/E multiple is 10% above China Technology average FY14F P/E, reflecting TCL Com’s expected faster earnings growth. We change our valuation method from 1x 2013F BVPS of HKD2.36 as TCL Com is no longer loss-making; we believe it is more appropriate to value the company based on positive earnings.

Code Company Trading Account Price Target M/Caps Nomura ROE Dividend EPS Grow th EPS Grow th

Curncy Curncy 12-Nov Price USD mn Rating FY13F FY14F FY13F FY14F FY13F Yield(%) FY13F FY14F

China Technology

992 HK Lenovo HKD USD 8.9 10.4 11,868 Buy 18.5 15.6 4.8 4.2 24% 1.5 32% 18%

1211 HK BYD HKD CNY 37.0 50.0 13,030 Buy 88.9 33.0 3.2 3.1 4% na 850% 170%

763 HK ZTE HKD CNY 16.6 20.0 8,260 Buy 20.2 16.2 2.1 2.0 10% na na 25%

552 HK CCS HKD CNY 4.7 6.30 4,190 Buy 9.2 7.9 1.2 1.1 13% 3.8 14% 16%

2382 HK Sunny Optical HKD CNY 6.6 10.0 938 Buy 12.2 8.7 2.6 1.8 18% 2.1 19% 40%

285 HK BYD Electronics HKD CNY 3.6 4.0 1,040 Buy 12.4 10.2 0.8 0.7 6% na 35% 21%

861 HK Digital China HKD HKD 10.0 9.0 1,416 Reduce 8.0 8.8 1.5 1.4 18% na 8% -9%

819 HK Tianneng HKD CNY 2.9 6.5 414 Buy 4.2 3.2 0.8 0.7 18% 8.5 -16% 31%

2369 HK China Wireless HKD HKD 2.8 2.4 767 Neutral 13.0 10.0 2.4 2.1 17% 1.4 39% 30%

2342 HK Comba HKD HKD 2.5 3.8 486 Buy 9.7 7.3 0.9 0.9 9% na na 32%

2618 HK TCL Com HKD HKD 7.1 7.8 ↑ 1,014 Neutral 33.5 9.9 3.1 2.5 10% na na 254%

China Tech Median 12.4 9.9 2.1 1.8 13% 2.1 0.3 30%

P/E (x) P/BV (x)

(HKD) FY2012 FY2013 FY2014 FY2015(NOM) (CON) diff (NOM) (CON) diff (NOM) (CON) diff

Revenue 12,031 18,385 18,006 2% 22,136 26,421 -16% 23,676 32,376 -27%OperatingProfit (564) 11 301 -96% 661 907 -27% 720 1,313 -45%Pretax Profit (188) 286 257 11% 964 871 11% 1,054 1,190 -11%Net Profit (220) 241 259 -7% 817 806 1% 894 1,023 -13%EPS (0.20) 0.22 0.20 9% 0.74 0.65 14% 0.80 1.01 -21%

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Nomura | TCL Communication Tech November 13, 2013

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Risks

Potential downside risk includes further margin erosion in the high-end feature-phone market and slower than expected growth in smartphone shipments. Potential upside risk includes the faster-than-expected take off of tablet sales, which could make significant contribution to operating profit.

Nomura | TCL Communication Tech November 13, 2013

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Appendix A-1

Analyst Certification

I, Leping Huang, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

Issuer Specific Regulatory Disclosures The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries, and may refer to one or more Nomura Group companies.

Materially mentioned issuers Issuer Ticker Price Price date Stock rating Sector rating Disclosures TCL Communication Tech 2618 HK HKD 7.09 12-Nov-2013 Neutral N/A

TCL Communication Tech (2618 HK) HKD 7.09 (12-Nov-2013) Rating and target price chart (three year history)

Neutral (Sector rating: N/A)

Date Rating Target price Closing price 20-Feb-13 2.40 2.39 14-Aug-12 Neutral 1.65 14-Aug-12 1.80 1.65 29-May-12 4.70 2.67 01-Mar-12 6.00 4.18 12-Oct-11 8.00 3.02 25-Feb-11 12.00 8.25 24-Jan-11 Buy 7.92 24-Jan-11 11.00 7.92

For explanation of ratings refer to the stock rating keys located after chart(s)

Valuation Methodology We derived our TP of HKD7.8 based on 11x of FY14 EPS of HKD0.72. The PE multiple is 10% above China Technology average FY14F P/E, reflecting TCL Com’s faster earnings growth. We changed the valuation method from 1x BVPS because TCL Com is no longer loss making, and we believe it is appropriate to value the company based on positive earnings. The benchmark index for this stock is MSCI China. Risks that may impede the achievement of the target price Downside risk includes further margin erosion in the high-end feature-phone market. Upside risk includes faster-than-expected transition to smartphones.

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