China smartphone sector 2016 outlook 20160105

Technology│Hong Kong│Equity research│January 5, 2016
Sector Note │ Alpha series
IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT.
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CIMB Securities Limited has had an investment banking relationship with Cowell e Holdings Inc within the preceding 12 months.
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Technology - Handsets
Chinese vendors pursue quality over quantity
■ Hong Kong-listed components manufacturers with strong Chinese customer bases, such
as AAC Tech, Tongda Group and Sunny Optical, will be the clear winners, in our view.
■ Top-tier Chinese vendors should still gain market share in China and globally.
■ Huawei and Xiaomi will lead shipment growth in domestic brands, we forecast. We
estimate the top ten vendors’ shipments to increase 24% yoy to 703m units in 2016.
■ Gross margin should be protected by significant specification upgrades for smartphones.
■ Maintain sector Overweight. Top picks are AAC Tech, Tongda Group and Sunny Optical.
Components manufacturers are the key beneficiaries
We stay positive on Hong Kong-listed component manufacturers that have strong Chinese
customer bases, such as AAC Tech (2018 HK, Add), Tongda Group (698 HK, Add) and
Sunny Optical (2382 HK, Add). We believe that they will be the key beneficiaries of the new
round of hardware upgrade cycle due to 1) dominant supply chain status, 2) above industry-
average smartphone shipment growth from their customers, and 3) the ability to elevate the
value of their components, with stable gross margins.
Top-tier Chinese vendors continue gaining market share
Seven Chinese vendors tapped into the top 10 global smartphone market and captured
over 31% of the global smartphone market in 3Q15. In our view, the top-tier Chinese
brands will continue gaining market share in the next couple of years (2016 - 17) due to
their competitive affordable smartphone offerings for China and emerging markets.
Huawei and Xiaomi to lead growth in Chinese brands
We estimate smartphone shipments from the top 10 Chinese vendors will increase 24%
yoy to 703m units in 2016 led by Huawei’s (25% yoy) and Xiaomi’s (33% yoy) robust
shipment growth. Global market intelligence firm IDC expects global smartphone
shipments to grow c.5% yoy to approximately 1.5bn units in 2016.
Gross margin is protected
Thanks to the fierce competition in the Chinese market, domestic brands have widely
adopted high-end components such as metal casings, high-resolution cameras (with
added functions), high-quality speaker boxes, haptics and ‘phablet’ size screens in an
attempt to differentiate their smartphones. In our view, this trend should lead to a steady
rise in component value for the key suppliers.
Outperformance expected to continue
AAC Tech’s share price rose 24% while Sunny Optical’s advanced 35% and Tongda
Group’s went up 53% in 2015 due to strong earnings growth and the bright industry
outlook. We believe that the share price momentum will continue in 2016 as the latest
hardware upgrade cycle just took place, even in the sub-Rmb1,000 (US$150) segment.
Maintain Overweight on China smartphone sector
We stay Overweight on China’s smartphone sector; our top picks are AAC Tech,
Tongda Group and Sunny Optical. AAC Tech will benefit, in our view, from the new
product launches for Apple and strong sales growth prospects for the Chinese brands.
Tongda, in our view, is set to benefit from the rising metal casing demand from Huawei
and Xiaomi. Sunny Optical is moving up the value chain to being an upstream
smartphone and automotive optical components manufacturer.
[ X ]
Figure 1: Selected component manufacturers’ share price movements (2013 - 2015)
SOURCES: CIMB, BLOOMBERG
▎Hong Kong
Overweight (no change)
Highlighted companies
AAC Technologies
ADD, TP HK$65.00, HK$49.80 close
AAC Tech has a promising new product
pipeline for Apple (haptics and speaker box
upgrades) and strong sales growth prospects
for the Chinese brands (acoustics upgrades
and RF/mechanical project wins).
Sunny Optical Technology (Group)
Sunny Optical is a key beneficiary from
significant camera upgrades in Chinese
vendors. Rapid growth in handset lens sets
and vehicle lens sets help it move up to
become an upstream optical component
manufacturer.
Tongda Group Holdings Ltd
Tongda is a beneficiary of rising metal casing
penetration among leading Chinese brands,
especially Huawei, Xiaomi, Oppo and QiKU.
Summary valuation metrics
Analysts
Ray KWOK
T (852) 2532 1113
E ray.kwok@cimb.com
Bertram LAI
T (852) 2532 1111
E bertram.lai@cimb.com
Felix PAN
T (886) 2 8729 8386
E felix.pan@cimb.com
42%
51%
40%
13%
81% 81%
24%
35%
53%
0%
20%
40%
60%
80%
100%
AAC Tech Sunny Optical Tongda Group
Sharepricemovement(%)
2013 2014 2015
P/E (x) Dec-15F Dec-16F Dec-17F
AAC Technologies 16.73 13.67 11.98
Sunny Optical Technology (Group) 21.85 16.50 13.60
Tongda Group Holdings Ltd 10.43 8.07 6.68
P/BV (x) Dec-15F Dec-16F Dec-17F
AAC Technologies 4.90 4.07 3.43
Sunny Optical Technology (Group) 3.26 2.39 1.85
Tongda Group Holdings Ltd 1.78 1.50 1.31
Dividend Yield Dec-15F Dec-16F Dec-17F
AAC Technologies 2.49% 3.05% 3.48%
Sunny Optical Technology (Group) 1.34% 1.78% 2.15%
Tongda Group Holdings Ltd 2.88% 3.72% 4.49%

2
KEY CHARTS
Gross margin protected
Components manufacturers with high exposure to top-tier
Chinese vendors enjoy a stable gross margin outlook,
underpinned by product mix improvements, rising
automation and new product launches, thanks to the
ongoing specification upgrades in smartphones.
Apple supply chain gross margin will be protected, in our
view, by continuous specifications upgrades in each
generation of iPhones.
Top 10 Chinese brands’ share of global
smartphone market
Chinese handset vendors gained significant market share
in China and globally since 2014, thanks to their cost
advantage and capabilities in high performance
smartphone design and manufacturing. Huawei and
Xiaomi lead the way.
Export shipments support Chinese vendors’
growth
Although overall smartphone shipment growth is slowing
due to the high smartphone penetration rate in China and
developed countries, we expect the global smartphone
market to expand steadily at c.5% in 2016 and 2017,
underpinned by rapid growth of the smartphone-using
population in emerging markets such as India, Latin
America and South East Asia. Tier-1 Chinese vendors are
rapidly gaining market share in emerging markets due to
their high cost-to-performance quotient and affordable
smartphones.
Estimated shipments of top 10 Chinese
vendors in 2016
Total smartphone shipments by the top 10 Chinese
vendors are expected to rise 24% yoy to 703m units in
2016. We expect Huawei to post robust output growth of
25% yoy and Xiaomi 33% yoy in 2016.
SOURCE: CIMB RESEARCH, COMPANY REPORTS, COUNTERPOINT
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
AAC Cowell Sunny Tongda
2012 2013 2014 2015F 2016F
Stable
Stablised
Stablised
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
Globalmarketshare(%)
Top 10 Chinese vendors Apple Samsung
Top 10 - Huawei, Xiaomi, Lenovo, ZTE, Oppo, TCL-Alcatel, Vivo, Coolpad , Meizu, Tianyu
0%
20%
40%
60%
80%
100%
120%
140%
0
10
20
30
40
50
60
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
yoy%
Units(million)
Export shipments yoy % - RHS
+25%
+33%
+3% +23%
+12% +40%
+30%
+20%
+67%
+20%
0
20
40
60
80
100
120
140
Huawei
Xiaomi
Tianyu
Lenovo
ZTE
TCL-Alcatel
Coolpad
Oppo
Vivo
Meizu
Units(million)
2014 2015E 2016E

3
Figure 2: Peer comparison
SOURCE: CIMB RESEARCH, COMPANY DATA
Bloomberg Price Target Price Market Cap 3-year EPS P/BV (x) ROE (%) EV/EBITDA (x) Yield (%)
Company Ticker Recom. (local curr) (local curr) (US$ m) CY2015 CY2016 CY2017 CAGR (%) CY2016 CY2016 CY2016 CY2016
Handset vendors
Coolpad Group 2369 HK ADD 1.47 2.27 826 14.0 17.5 16.0 -8.2% 0.86 8.5% 4.0 0.0%
Lenovo Group 992 HK HOLD 7.46 7.90 10,693 56.5 15.7 9.8 -2.3% 2.82 5.0% 34.8 2.6%
TCL Communication 2618 HK HOLD 5.70 6.34 932 6.9 6.7 6.5 -1.4% 1.50 22.8% 5.2 6.1%
ZTE Corp - H 763 HK NOT RATED 16.94 n.a. 9,015 15.8 13.8 12.2 n.a. 1.71 12.4% 11.0 1.8%
LG Electronics 066570 KS ADD 52500 65000 7,327 21.5 8.3 6.2 52.2% 0.70 3.4% 3.5 1.3%
Samsung Electronic 005930 KS ADD 1205000 1800000 151,376 9.8 8.8 8.3 0.0% 1.12 12.1% 2.8 1.7%
Apple AAPL US NOT RATED 105.3 n.a. 586,859 11.2 10.6 9.7 7.4% 4.02 38.0% 5.3 2.1%
Blackberry BB CN NOT RATED 12.84 n.a. 4,844 n.a. n.a. n.a. n.a. 1.56 -5.9% 13.0 0.0%
Nokia NOKIA FH NOT RATED 6.54 n.a. 28,531 20.7 19.9 17.8 n.a. 2.45 12.3% 9.9 2.7%
Average (not including Blackberry) 19.0 12.2 10.4 -0.9% 2.01 16.5% 10.5 2.4%
Handset components - Acoustic
AAC Technologies 2018 HK ADD 49.80 65.00 7,891 16.7 13.6 11.9 20.9% 4.86 31.8% 12.2 2.5%
GoerTek Inc 002241 CH NOT RATED 31.38 n.a. 7,335 33.3 22.8 18.3 n.a. 4.17 18.3% 16.4 0.5%
Average 25.0 18.2 15.1 20.9% 4.52 25.0% 14.3 1.5%
Handset components - Opticals
Cowell e Holdings 1415 HK ADD 3.18 4.44 341 5.5 5.0 4.4 11.0% 1.15 25.3% 2.6 0.0%
Q Tech 1478 HK NOT RATED 1.49 n.a. 198 7.5 6.4 6.4 n.a. 0.91 14.1% 3.9 2.8%
Sunny Optical Tech 2382 HK ADD 17.70 21.40 2,505 21.6 16.4 13.5 25.0% 3.24 19.0% 13.2 1.3%
Zhejiang Crystal-Optech 002273 CH NOT RATED 36.54 n.a. 2,443 93.7 62.5 40.8 n.a. 5.62 9.0% n.a. 0.5%
Shenzhen O-film Tech 002456 CH NOT RATED 27.92 n.a. 4,406 42.5 28.6 23.8 n.a. 4.02 14.1% 19.6 0.5%
Largan Precision 3008 TT HOLD 2175 2600 8,885 11.8 10.9 9.2 17.0% 4.56 44.2% 7.8 2.3%
Liteon Tech 2301 TT HOLD 30.6 33.4 2,172 10.2 8.2 7.5 10.9% 0.93 9.4% 2.4 6.4%
LG Innotek 011070 KS ADD 95000 143000 1,918 10.3 7.3 n.a. n.a. 1.05 10.7% 2.9 0.3%
Partron 091700 KS NOT RATED 9970 n.a. 455 12.8 9.3 8.3 n.a. 1.40 15.0% 5.3 2.9%
SEMCO 009150 KS ADD 60300 82000 3,841 59.3 14.0 11.2 -8.8% 1.05 1.8% 4.1 1.2%
Average 32.8 19.6 13.9 11.0% 2.73 15.4% 6.9 1.9%
Handset components - Casings / EMS
BYD Electronic 285 HK NOT RATED 3.90 n.a. 1,134 6.6 5.2 5.1 n.a. 0.63 11.9% 2.1 1.3%
FIH Mobile Ltd 2038 HK NOT RATED 2.96 n.a. 3,014 10.9 9.3 8.1 20.9% 0.68 7.3% 0.9 2.9%
TK Group 2283 HK ADD 2.18 3.22 233 9.2 7.0 5.8 26.8% 2.75 33.0% 5.6 4.1%
Tongda Group 698 HK ADD 1.34 2.00 990 10.4 8.1 6.7 28.7% 1.78 18.8% 7.1 2.9%
Janus Dongguan precision 300083 CH NOT RATED 42.6 n.a. 2,321 n.a. 30.9 22.0 n.a. 7.92 25.6% 23.4 0.5%
Shenzhen Everwin 300115 CH NOT RATED 30.7 n.a. 2,610 33.4 23.0 17.5 n.a. 4.63 20.1% 15.0 0.7%
Catcher Technology 2474 TT ADD 272.5 455.0 6,394 8.3 7.0 6.2 21.0% 1.80 24.1% 4.3 2.2%
Foxconn Technology 2354 TT HOLD 68.0 83.0 2,889 7.2 8.2 8.7 2.4% 1.02 15.2% 2.5 3.7%
Hon Hai Precision 2317 TT ADD 79.0 100.0 37,625 8.3 7.9 7.0 5.6% 1.24 15.3% 3.7 4.8%
Wistron Corporation 3231 TT HOLD 18.2 17.0 1,413 22.0 11.8 9.4 9.8% 0.67 2.9% 3.2 6.6%
Jabil JBL US NOT RATED 23.3 n.a. 4,408 12.6 8.6 8.2 24.5% 1.72 19.9% 3.9 1.4%
Average 12.9 11.5 9.5 17.5% 2.26 17.7% 6.5 2.8%
Handset components - others
Truly International 732 HK NOT RATED 1.81 n.a. 679 6.8 6.2 6.1 n.a. 0.61 9.9% 4.4 4.8%
Silicon Works 108320 KS ADD 36550 34000 507 12.4 12.2 n.a. n.a. 1.92 15.8% 5.8 2.5%
Delta Electronics Inc 2308 TT HOLD 149.0 170.0 11,787 19.2 14.9 13.0 6.5% 3.47 18.5% 11.9 4.5%
Flexium Interconnect 6269 TT HOLD 78.5 107.0 664 7.7 7.3 6.6 27.5% 1.99 28.8% 4.3 3.2%
MediaTek Inc 2454 TT REDUCE 245 210 11,726 13.7 16.3 n.a. -20.1% 1.58 11.6% 8.4 5.3%
Pagetron 4938 TT ADD 70.8 130.0 5,613 6.8 5.9 5.3 30.6% 1.23 18.4% 3.1 5.7%
TPK Holding Co 3673 TT HOLD 80.5 96.0 862 na 8.8 8.3 74.0% 0.89 n.a. n.a. 0.6%
Zhen Ding Technology 4958 TT ADD 76.7 130.0 1,880 7.4 6.5 5.5 13.4% 1.81 24.1% 5.6 4.8%
Average 10.1 8.8 7.5 22.0% 1.70 18.1% 5.9 3.7%
Core P/E (x)

4
Chinese vendors pursue quality
over quantity
INVESTMENT VIEW
Hong Kong-listed components manufacturers are the key
beneficiaries in the new round of hardware upgrade cycle
Stay positive on component manufacturers. We stay positive on Hong
Kong-listed component manufacturers that have strong Chinese customer
bases, such as AAC Tech (2018 HK, Add), Sunny Optical (2382 HK, Add) and
Tongda Group (698 HK, Add). This is because we believe that they will be the
key beneficiaries from their:
1) dominant supply chain status for tier-1 Chinese vendors,
2) above industry-average smartphone shipment growth from their customers,
underpinned by market share gains in China and rapid expansion overseas,
and
3) their ability to elevate the value of their components, with stable gross
margins, due to significant specification upgrades in the new round of hardware
upgrade cycle (high-resolution cameras, metal casings, speaker boxes and
haptics) in the mid-range segment (sub Rmb2,000/US$320).
Another good year for component manufacturers in 2016. After strong
share price runs in 2015 by AAC Tech (+24%), Sunny Optical (+35%) and
Tongda Group (53%) due to strong earnings growth and the bright industry
outlook, we believe that the share price momentum will continue in 2016 as the
latest hardware upgrade cycle just took place, even in the sub-Rmb1,000
(US$150) segment.
Figure 3: China smartphone players share price return (2013 - 2015)
42%
51%
40%
15%
38%
3%
13%
81% 81%
21%
11%
-7%
1%
24%
-24%
35%
53%
1%
-21%
-16%
-7%
-40%
-20%
0%
20%
40%
60%
80%
100%
AACTech
Cowell
Sunny
Tongda
Coolpad
Lenovo
TCLComm
HangSengIndex
2013 2014 2015
+228%

5
Maintain Overweight on China smartphone sector. Our sector top picks for
2016 are AAC Tech, Tongda Group and Sunny Optical.
 AAC Tech (2018 HK, Add) has a strong new product pipeline for Apple
(haptics and speaker box upgrades) and strong sales growth prospects
for Chinese brands (acoustics upgrades and RF/mechanical project wins).
 Tongda Group (698 HK, Add) is the likely key beneficiary of the low
metal casing penetration rate among Chinese vendors thanks to its
dominant position as a domestic supplier of smartphone casings (metal
casings and high-end precision plastic casings).
 We are also positive on Sunny Optical (2382 HK, Add), as we believe it
is moving up the value chain towards becoming an upstream optical
component manufacturer and will benefit from the continuous camera
upgrades among Chinese vendors.
What you need to know:
 Component manufacturers are key beneficiaries. Components
manufacturers with high exposure to top-tier Chinese brands such as
Huawei, Xiaomi, Oppo and Vivo, are key beneficiaries of the significant
hardware upgrade cycle due to their dominant supply chain status.
 Significant specification upgrades protect component manufacturers’
gross margins. Thanks to the fierce competition in China market, domestic
brands widely adopt high-end components such as metal casings, high-
resolution cameras, high-quality speaker boxes, haptics and ‘phablet’ size
screens in their flagship models, even in the sub-Rmb1,000 (US$150)
segment, in an attempt to differentiate their smartphones. It has driven a
consistent increase in component value for the key suppliers.
 Leading Chinese handset vendors are gaining market share. Seven
Chinese vendors tapped into the top 10 global smartphone market.
Together, they captured 31% of the global smartphone market in 3Q15
(26.5% in 4Q14, 18.6% in 4Q13). We believe that the top-tier Chinese
brands will continue gaining market share in the next couple of years (2016
– 17) due to their competitive and affordable smartphone offerings for China
and emerging markets.
 Chinese vendors are expanding rapidly into overseas markets. Export
shipments from the top seven Chinese vendors jumped 85% yoy in 9M15,
driven by market share gains in local vendors in those markets and tier-1
International brands, mainly in Latin America, India and South East Asia
markets.
 Chinese brands provide better growth rate via Samsung and Apple.
Total smartphone shipments from the top seven Chinese vendors reached
308m units in 9M15, i.e. 27% higher than Samsung’s and 96% higher than
Apple’s. The average growth rate of the top seven Chinese brands was
40% yoy in 9M15, which outpaced Samsung’s flat growth and Apple’s 33%
yoy growth rate.
 Global smartphone demand is still growing, albeit at a slower rate.
Market consensus expects global smartphone shipments to rise c.5% yoy to
approximately 1.5bn units in 2016. IDC forecast smartphone demand will
increase from 1.3bn units in 2014 to 1.6bn units in 2017, a CAGR of 7%.
 China remains the largest single smartphone market in the world.
China smartphone demand will be flattish at 433m units in 2015.
Nevertheless, China smartphone demand will resume 7% growth to 465m
units in 2016, underpinned by the restoration of handset subsidies by the
operators, abundant high-spec low-priced 4G smartphone launches and the
net addition of 131m smartphone users.
 Huawei, Xiaomi, Oppo, Vivo, ZTE and LeTV could lead growth in
Chinese brands in 2016. We estimate top 10 Chinese vendors’ shipments
could rise 24% yoy to 703m units in 2016, led by Huawei and Xiaomi. We
expect Huawei to post robust output growth of 25% yoy and Xiaomi 33%
yoy in 2016.

6
OUTLOOK
We need a high-performance smartphone
One device for everything. Smartphones have changed almost every aspect
of our lives: social communication, leisure, gaming, shopping, payments,
information, and work. Smartphones are starting to replace many of our
existing electronic devices, such as cameras, TVs, PCs, video recorders, CD
players, game consoles, books, calendars, clocks, wallets etc., making them
increasingly indispensable to us. It is natural, therefore, that the performance
requirements of smartphones will continue to rise, as consumers demand
higher performance from the one device that replaces every other device which
they used to own (Figure 4).
Figure 4: Smartphones can replace almost every other device we own
SOURCE: CIMB RESEARCH
Component manufacturers are the key beneficiaries of the
significant hardware upgrade cycle
Continuous specification upgrades in smartphones. Vendors have been
upgrading hardware specifications (cameras, haptics, acoustics, antennas,
display, fingerprint, battery, chipset), user interface (improved user experience,
based on Android O/S) and improving handset designs (slim and light, plastics
or metal casings, waterproof, small or phablet size) of their latest models. This
is in an effort to differentiate themselves and win market share in the
competitive smartphone market (especially in the Android-camp), as well as
fulfil the consumers’ pursuit of smartphones that are faster, thinner, lighter, with
longer battery life, better functionality and user experience. While this inevitably
increases vendors’ bill of materials (BOM) cost, the room for price hikes is
limited.
Top-tier Chinese brands tap into high-end segment. More importantly, top-
tier Chinese brands such as Huawei, Oppo and Xiaomi have launched many
high-spec mid-priced smartphones. They have successfully tapped into the
high-end smartphone segment (Rmb3,000/US$500) thanks to strong consumer
demand for their flagship models (Huawei Mate 7 and Oppo R7) in China and
overseas. According to Counterpoint, Oppo took up 11% market share in the
US$400-499 ASP segment in 3Q15 while Huawei managed 2% although the
Connect to
People
Connect to
Internet
Connect to
Things (in the future)

7
high-end smartphone segment is believed to be dominated by Apple and
Samsung (Figure 5).
We noticed more high-spec smartphone launches by Chinese brands in 2015,
while consumers increasingly bought Chinese brands’ high-end smartphones
due to their improved brand image and high-performance capability. This has
exerted pricing pressure on tier-1 international brands, especially in the Android
camp.
Figure 5: Market share breakdown - smartphones with US$400-499 ASP
SOURCES: CIMB, COUNTERPOINT
Stabilised smartphone ASP. According to Counterpoint, smartphone’s ASP
has stabilised since 3Q14 in China thanks to the launch of iPhone 6 and the
popularity of high-spec mid-priced smartphones. The ASP of smartphones in
China bottomed out at US$150 in 3Q14 and surged 40% to c.US$210 in 3Q15
(Figure 6).
Figure 6: Global Smartphone ASP by region
Smartphone component manufacturers are the clear winners. Competition
in the China smartphone market has become fiercer than that in overseas
markets given the slowdown in domestic demand growth and entry of many
vendors with Internet background. Even in the sub-Rmb1,000 (US$150)
segment, smartphones have already adopted high-end components like high
resolution cameras, metal casings, Hi-Fi sound speaker box, HFD screen and
fingerprint etc. While vendors are suffering from lower ASP and higher BOM
costs, component suppliers are enjoying sustainable ASP hikes and margin
Apple
35%
Samsung
31%
Oppo
11%
LG
9%
Sony
5%
Huaw ei
2%
Others
7%
$100
$150
$200
$250
$300
$350
$400
$450
$500
2012Q1
2012Q2
2012Q3
2012Q4
2013Q1
2013Q2
2013Q3
2013Q4
2014Q1
2014Q2
2014Q3
2014Q4
2015Q1
2015Q2
2015Q3
ASP(US$)
North America Latin America Europe Restof Asia
China Middle East Africa Global

8
expansion via continuous product mix improvements, thanks to the innovative
and tailor-made components to meet their customers’ needs.
Hong Kong-listed component manufacturers are our focus. We believe
Chinese vendors will continue to gain market share in their home market and
globally in the low-to mid-end segment (US$150 – US$300) in the next couple
of years (2016 – 2017) due to high specification and affordably priced
smartphones, while Apple will continue to dominate in the ultra-high-end
segment (>US$600) due to its innovative and technology- leading smartphones.
We, therefore, suggest investors consider the following Hong Kong-listed
smartphone component manufacturers: AAC Tech (2018 HK, Add), Sunny
Optical (2382 HK, Add), Tongda Group (698 HK, Add), and Cowell (1415 HK,
Add). In our view, these companies will benefit from upgrades in key
components such as cameras, metal casings, haptics and acoustics etc.,
among Chinese vendors and Apple, thanks to their dominant status in the
supply chain.
We highlight below four key components: Cameras, metal casings, force
touch (haptics) and acoustics are the key upgrade components in smartphones
manufactured by AAC Tech, Sunny Optical, Tongda Group and Cowell for
Chinese vendors and Apple.
 Cameras – Digital cameras have almost all been phased out on the back
of the high quality of pictures taken using a smartphone. Handset vendors
have consistently been upgrading the resolution and functions of both the
front-facing and rear-facing cameras, in a bit to meet consumer demand
for better image quality for their smartphone photographs and selfies. This
has created a huge demand for high-quality camera modules and as a
result, handset lens makers and camera module manufacturers are
benefiting from rising ASP due to constantly changing camera technology.
Apart from mega pixel migration in cameras, the functionality of cameras
has become a very important feature of the user experience. The major
camera function additions nowadays include optical image stabilisation
(OIS), dual-camera, phase detection auto focus (PDAF), iris recognition
and 4K video. Furthermore, vendors have also requested for smaller and
thinner sized camera modules for their handset designs. All these
additional functions and features require technology know-how and
increase the production cost due to difficulties in assembly.
As the largest camera modules supplier to Chinese brands and the
largest domestic handset lens sets manufacturer, Sunny Optical is set to
benefit from the significant camera upgrades cycle among Chinese
vendors. Cowell stands to benefit from the endless iPhone camera
upgrades due to its primary front-facing camera module status with Apple.
Figure 7: Oppo R7s (Rmb2,599)
Camera specification : 13MP, PDAF
Figure 8: Honor 6 plus (Rmb1,850)
Camera specification : 8MP dual-
camera, wide angle
Figure 9: Xiaomi Note (Rmb2,499)
Camera specification : 13MP, OIS, 4K
video
SOURCE: OPPO SOURCE: HUAWEI SOURCE: XIAOMI

9
 Metal casings – The adoption of metal casings for smartphones is the
latest trend among Chinese brands, following the lead set by Apple and
Samsung (in metallic high-end models). Leading Chinese vendors have
shifted to metal casing for their flagship models and started to adopt metal
casings in their low-to mid-range models (sub-Rmb1,000 – Rmb2,000 /
US$150 – US$320). On the back of low metal casing penetration rate
among leading Chinese vendors, we believe there is tremendous demand
potential for metal casings from Chinese brands due to their durability and
better appearance, underpinned by 1) sturdier support for the enlarged
screen size, 2) thinner and lighter handset designs, and 3) lower
production cost.
We have seen wide adoption of metal casings for flagship models
(Huawei P8 and Honor 5X, Xiaomi Mi4, OPPO R7, Meizu MX5 and Vivo
X5) among leading Chinese brands in 9M15 and this has even spread
into the sub-Rmb1,000 (US$150) segment in 4Q15. Recent new model
launches, such as QiKU Youth Edition (Rmb999) and Xiaomi Redmi
Note3 (Rmb899), also feature metal casings.
Cheaper metal casing solution. The new metal stamping technology,
which combines new molding technology and CNC processing, lowers the
cost of production without compromising on quality. Based on the metal
stamping method, production costs can be substantially reduced due to
the shorter time required for CNC processing (Figure 10).
Tongda set to benefit from this trend. Tongda is currently one of the
high-precision manufacturers to own this technology on the production of
metal casings, and also the key metal casings supplier to Chinese brands
such as Huawei, Xiaomi, Oppo, Vivo and QiKU.
Figure 10: Comparisons on metal casings manufacturing processing
Metal casing penetration rate remains low in China. Based on our
channel checks, the metal casing penetration rate among China brands
remains low (c.16% at the end-2015) vs. tier-1 international brands (100%
in Apple, 100% in Samsung’s high-end models and over 50% in
Samsung’s mid-range models). We estimate the penetration rate to jump
from an average of 16% in 2015 to c.30% in 2016 and c.40% in 2017,
thanks to the lower production costs and wide adoption of metal casings
CNC Unibody
Metal stamping (NMT Molding* / PMH# +
CNC Processing)
Internal components
Estimate CNC lead
time
20 to 30 minutes per unit
10 to 15 minutes per unit (50% of lead time
shorten)
Bill of material costs US$ 28 to 32 per unit
US$ 15 to 22 per unit (around 30% - 40%
cheaper than traditional method)
Design flexibility Limited Flexible
Models
iPhones, Samsung Galaxy serises, HTC M9, Xiaomi Mi4,
Huawei Mate 8, Vivo X5, OPPO R7 etc.,
Huawei P7 / P8, Huawei G7, Honor 5, Redmi Note 3,
QiKU Youth Edition etc.,
Manufacturers
Hon Hai Precision (2317 TT), Catcher Tech (2474 TT), FIH
(2038 HK), Tongda Group (698 HK), BYDE (285 HK),
Everwin (300115 CH)
Tongda Group (698 HK), BYDE (285 HK), Everwin (300115
CH)
* NMT Molding is the proprietary technology developed by Tongda which is a chemical adhesion technology for joining metal and plastics at Nano
level. # PHM is the proprietary technology developed by BYD Electronic which adopts plastics-and-metal hybrid technology.

10
in low-to mid-range smartphones (Rmb1,000 – Rmb2,000 / US$150 –
US$320) (Figure 11).
Figure 11: Estimated metal casing penetration rate for major Chinese vendors
SOURCES: CIMB RESEARCH
 Force touch/3D touch (haptics) – Huawei was the first vendor to
introduce force touch technology when it introduced its model “Mate S” in
Sep 15 (Figure 12), just two days ahead of the launch of Apple’s iPhone
6S. Apple introduced 3D touch in the iPhone 6S and 6S Plus while iWatch,
which was launched in April 2015, had already adopted haptics
technology but with a smaller haptic engine.
3D touch technology in iPhone 6S, using a haptic engine, senses how
much pressure you apply to the display. Apart from the traditional
feedback from tap, swipe and pinch gestures, Apple introduced peek and
pop, which allowed you to preview all kinds of content (email, photo
gallery, websites, etc.) without having to actually open it and weigh
objects by placing them on the phone’s screen (Figure 13).
AAC Tech currently manufactures the haptic engine, the key component
for the force touch module, for Apple’s iPhones and iWatch. Supported by
further function enhancement, led by Apple and the launch of new
applications, such as mobile games using 3D touch technology, we
believe the adoption of force touch in smartphones will gradually increase,
especially in Chinese brands.
Figure 12: Huawei Mate S – press the screen for a shortcut to
email, photo preview, website etc.,
Figure 13: iPhone 6S, peek and pop
SOURCES: CIMB, HUAWEI SOURCES: CIMB, APPLE
Estimated metal casing penetration rate Huawei Xaiomi Oppo Vivo Others Overall
2014E 4% 7% 0% 0% 1% 2%
2015F 25% 19% 30% 35% 9% 16%
2016F 50% 40% 55% 55% 15% 30%
2017F 60% 55% 65% 65% 20% 40%
Estimated metal casing volume Huawei Xaiomi Oppo Vivo Others Overall
2014E 3 4 - - 3 10
2015F 25 14 12 14 28 94
2016F 63 40 29 26 57 215
2017F 96 72 44 39 86 337

11
 Acoustics – Acoustic components include speakers, receivers and
microphones. AAC Tech is currently the leading global supplier of high-
end acoustic components, such as speaker boxes, to tier-1 international
brands (Apple, Samsung, LG Electronics, etc.) and top-tier Chinese
brands. The iPhone’s on-board speakers have excellent sound, thanks to
its high-quality speaker box provided by AAC Tech.
 Apple has made minor improvements with each generation of iPhone
(iPhone 4 to iPhone 6S). Nevertheless, the speaker box for the next
generation iPhone 7 (Sep 2016) could be waterproof, which will require
new technology in terms of design and assembly for the manufacturer.
AAC will be the key beneficiary of the upcoming speaker box upgrade.
 On the other hand, Chinese brands have been widely adopting high-end
speaker boxes and receivers in their flagship models, even those in the
sub-Rmb1,000 segment, in order to improve sound quality.
Figure 14: Vivo X5 Max, the world’s thinnest speaker box at
0.09 inch and Hi-Fi sound quality
Figure 15: Xiaomi Mi Note on-board speaker box (professional-
grade Hi-Fi system, studio-grade sound quality)
SOURCES: CIMB, VIVO SOURCES: CIMB, XIAOMI

12
Component makers’ gross margin is protected by
specification upgrades
There is fierce competition among domestic brands as they rollout flagship
models with high-end components such as metal casings, high-resolution
cameras (OIS / dual camera / PDAF/ 4K video), high-quality speaker boxes,
fingerprints, haptics and “phablet” size FHD screens in an attempt to
differentiate their smartphones. Hence, we believe that component
manufacturers’ gross margin would stay protected in the new round of
hardware upgrade cycle in the next couple of years. This is underpinned by 1)
improved product mix, i.e. higher contribution from high-margin components, 2)
increased automation boosting production yield, and 3) new product launches
raising ASP (Figure 16).
Figure 16: Measures of margin protection in component manufacturers
SOURCES: CIMB, COMPANY REPORTS
Figure 17: Component manufacturers’ gross margin trend
AAC Tech Cowell Sunny Optical Tongda Group
Products mix improvement
Benefits from the adoption of
haptics in iPhone 6S and the
widening adoption of speaker boxes
among Chinsese vendors.
Blended ASP rising on the back of
new iPhone launches. Started
shipping 8MP+ and 13MP+ COB
camera modules to LGE
Contribution from high-resolution
products continually rising in both
handset lens sets and HCM
divisions.
Rising contribution from high-margin
metal smartphone casings.
Economies of scale
Non-acoustics products achieved
significant economies of scale after
substantial ramp-up of products
such as RF/mechanical solutions.
Apple's products account for 77% of
Cowell's total sales.
Sunny commands over 50% market
share in the domestic handset
camera module supply chain.
Tongda is Huawei's primary
smartphone casings supplier and
Xiaomi's key smartphone casings
supplier. The two customers
account for over 40% of total sale.
Products yield
Switching its semi-auto production
lines to full automated lines. AAC
expected to achieve better
production yield in haptic
components vs. rivals.
High automation rate in its flip-chip
production facilities for Apple
products. Constantly achieving over
90% of production yield.
Significant production yield
improvement in its handset lens set
division due to better economies of
scale, thanks to surge in volume
output.
Has achieved above-industry-
average production yield in metal
casing manufacturing due to higher
automation rate and leadership in
technology know-how.
New products
Products that could be launched in
2016 include waterproof speaker
boxes for Android and new RF
mechanical solutions (plastic +
metal casing).
Rear-facing camera modules for
Apple's products. SiP products for
the next-generation of iPhones.
Started shipping 16MP handset
lens sets and commenced mass
production of 13MP (ultra-thin)
handset lens sets. Potentially
launching 23MP handset lens sets
in 2016. New products in HCM
include dual-cameras, OIS, iris
recognition modules, PDAF camera
modules etc.
Next generation of metal casings for
Chinese vendors. Precision rubber
parts (excellent sealing, waterproof
and insulating properties) for
smartphone protection.
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
AAC Cowell Sunny Tongda
2012 2013 2014 2015F 2016F
Stable
Stablised
Stablised

13
Figure 18: Operational comparison for component manufacturers
Company name AAC Technologies Cowell Sunny Opitcal Tongda Group
Code 2018 HK 1415 HK 2382 HK 698 HK
Revenue breakdow n by products
Handset dynamic components
(~55%), Microphones (~8%), Non
acoustics products (~35%)
Flip-chip camera module (~77%),
COB camera module (~22%),
Optical components (~1%)
Handset camera modules (~70%),
Handset and vehicle lens sets
(~25%),
Handset casing (~60%), home
applicances casing (~10%) and
PC casing(~11%) , Ironw are and
communication facilities (~19%)
Major customers in handset segment
Apple, Xiaomi, Samsung, Huaw ei
and Oppo etc.,
Apple, LG, Samsung
Huaw ei, Xiaomi, Coolpad,
Samsung, Lenovo, Oppo, Sony,
Sharp etc.,
Huaw ei, Xiaomi, Lenovo, Oppo,
Vivo, ZTE, Coolpad and TCLC etc.,
Market cap (US$m) 7,840 339 2,489 984
Revenue (US$m)
2013 1,303 814 938 465
2014 1,429 887 1,359 614
1H2015 759 460 750 369
2015F 1,877 956 1,634 799
2016F 2,272 1,091 1,951 961
Revenue (yoy %)
2014 9.7% 8.9% 45.0% 32.1%
1H2015 26.7% 31.0% 21.2% 37.1%
2015F 31.4% 7.9% 20.2% 30.1%
2016F 21.0% 14.1% 19.4% 20.3%
Net profit (US$m)
2013 373 51 71 46
2014 378 58 93 64
1H2015 200 30 50 38
2015F 500 63 121 92
2016F 605 68 160 121
Net profit (yoy %)
2014 1.3% 13.8% 31.2% 39.2%
1H2015 26.7% 171.8% 36.3% 31.8%
2015F 32.4% 9.2% 30.3% 42.7%
2016F 21.1% 7.5% 31.8% 31.5%
Gross profit margin (%)
2013 42.7% 12.7% 16.6% 22.0%
2014 41.4% 12.6% 15.3% 23.9%
1H2014 41.2% 10.8% 14.6% 23.0%
1H2015 41.5% 13.0% 15.5% 23.5%
2015F 41.8% 13.3% 16.5% 24.6%
2016F 42.0% 13.0% 16.8% 24.9%
Net profit margin (%)
2013 28.6% 6.2% 7.6% 9.9%
2014 26.4% 6.5% 6.9% 10.5%
1H2014 26.4% 3.9% 6.9% 7.9%
1H2015 26.4% 6.5% 6.7% 10.2%
2015F 26.6% 6.6% 7.4% 11.5%
2016F 26.7% 6.2% 8.2% 12.5%

14
Figure 19: Huawei smartphone components supply chain
Figure 20: Xiaomi smartphone components supply chain
Display - JDI, AUO,
Camera lens sets / module -
Largan, Lite-On, Sunny
Optical, Primax, SEMCO
Mechanical parts / Casings -
Tongda, FIH, BYDE, Zowee
Accoustic components, -
AAC Tech, Goertek,
Knowles,
Battery pack - SCUD,
Desay, Sunwoda
Memory - Samsung, SK
Hynix, Toshiba
Chipset - HiSilicon, MTK,
Panel makers - O Film, J-
Touch, Laibao
Assembled - BYDE,
FIH
RF solutions - Sunway,
Amphenol
Display - JDI, Sharp
Camera lens sets / module -
Largan, Lite-On, Sunny
Optical, Primax, SEMCO
Mechanical parts / Casings -
Tongda, FIH, BYDE
Accoustic components, -
AAC Tech, Knowles
Battery pack - SCUD,
Coslight, Desay,
Memory - Samsung, SK
Hynix
Chipset - MTK, Qualcomm
Panel makers - O Film,
Laibao, GoWorld
Assembled - Inventec,
FIH
RF solutions - AAC Tech,
Amphenol, Molex

15
Figure 21: Specification comparison of the flagship models
SOURCE: CIMB RESEARCH, zol.com.cn
Figure 22: Specification comparison of Sub-Rmb1,000
SOURCE: CIMB RESEARCH, zol.com.cn
Brand Apple Samsung Huawei Xiaomi ZTE Oppo Vivo LeTV QiKU
Model iPhone 6S
Galaxy S6
Edge
Mate 8 Mi Note Axon R7 Plus X6 Plus
Superphone 1
Pro
QiKU AK47
Retail price Rmb 4,999 Rmb 5,288 Rmb 4,100 Rmb 2,499 Rmb 3,888 Rmb 2,999 Rmb 3,198 Rmb 2,100 Rmb 3,599
Launch date In Sep 2015 In Mar 2015 In Nov 2015 In Jun 2015 In Jul 2015 In May 2015 In Dec 2015 In Jan 2015 In Aug 2015
CPU
Apple A9+M9
1.8GHz (dual
core)
Samsung
Exynos 7420
2.1/GHz (quad-
core)
Huawei Kirin
950 2.3GHz
(quad-core)
Qualcomm
Snapdragon 810
2.0GHz (quad-
core)
Qualcomm
Snapdragon 810
2.0GHz (quad-
core)
Qualcomm
Snapdragon 615
1.5GHz (octa-
core)
Qualcomm
Snapdragon 615
1.7GHz (octa-
core)
Qualcomm
Snapdragon 810
2.0GHz (octa-
core)
Qualcomm
Snapdragon 810
2.0GHz (octa-
core)
Display size / type 4.7 inch 5.1 inch 6.0 inch 5.7 inch 5.5 inch 6.0 inch 5.7 inch 5.5 inch 6.0 inch
Display resolution
1334 × 750 pixel
(326ppi, Retain HD)
2560 x 1440 (576
ppi, Amoled)
1920 x 1080 (367
ppi)
2560 x 1440 (515
ppi)
2560 x 1440 (534
ppi)
1920 x 1080 (367
ppi)
1920 x 1080 (386
ppi, Amoled)
2560 x 1440 (534
ppi)
2560 x 1440 (490
ppi)
Rear camera (mega pixel) 12MP
16MP(4K video,
OIS)
16MP(OIS, PDAF)
13MP(4K video,
OIS)
13MP+ 2MP(dual-
camera, 4K video)
13MP(RGBW) 13MP 13MP(OIS)
13MP+ 13MP(dual-
camera, 4K video)
Front camera (mega pixel) 5MP 5MP 8MP 4MP 8MP 8MP 8MP 4MP 8MP
RAM 2GB RAM 3GB RAM 4GB RAM 4GB RAM 4GB RAM 3GB RAM 4GB RAM 4GB RAM 4GB RAM
ROM 16GB/64GB/128GB 16GB/64GB 128GB 64GB 128GB 32GB 64GB 32GB/64GB 64GB
Battery capacity
Non-replaceable ,
1715mAh
Non-replaceable ,
2600mAh
Non-replaceable ,
4000mAh
Non-replaceable ,
3090mAh
Non-replaceable ,
3000mAh
Non-replaceable ,
4100mAh
Non-replaceable ,
4000mAh
Non-replaceable ,
3000mAh
Non-replaceable ,
3700mAh
Dimension (mm) 138.3 x 67.1 x 7.1 142.1 x 70.1 x 7 157.1 x 80.6 x 7.9 155.1 x 77.6 x 6.95 154.5 x 75.3 x 9.7 158 x 82.3 x 7.75 158.2 x 79.9 x 7.7 148.4 x 73.8 x 9.4 157.6 x 79.8 x 8.6
Casings metal casing metal casing metal casing metal casing metal casing metal casing metal casing metal casing metal casing
Brand Huawei Huawei Xiaomi Meizu QiKU LeTV Oppo Vivo One Plus
Model Honor 5X P8 Lite Redmi Note 3
Meizu M2
Note
Youth edition
Superphone
1S
A33 Y33 One Plus x
Retail price Rmb 1,399 Rmb 1,250 Rmb 899 Rmb 799 Rmb 999 Rmb 1,099 Rmb 1,399 Rmb 999 Rmb 1,599
Launch date In Oct 2015 In Oct 2015 In Nov 2015 In Jun 2015 In Aug 2015 In Oct 2015 In Oct 2015 In Jun 2015 In Oct 2015
CPU
Qualcomm
Snapdragon 616
1.5GHz (octa-
core)
Huawei Kirin
620 1.2GHz
(octa-core)
MTK Helio X10
2.0GHz (octa-
core)
MTK MT6753
1.3GHz (octa-
core)
MTK MT6753
1.3GHz (octa-
core)
MTK Helio X10
2.2GHz (octa-
core)
Qualcomm
Snapdragon 410
1.2GHz (quad-
core)
MTK MT6735
1.3GHz (quad-
core)
Qualcomm
Snapdragon 801
2.3GHz (quad-
core)
Display size / type 5.5 inch 5.0 inch 5.5 inch 5.5 inch 5.5 inch 5.5 inch 5.0 inch 4.7 inch 5.0 inch
Display resolution
1920 × 1080 pixel
(401ppi)
1280 x 720 pixel
(294 ppi)
1920 x 1080 (401
ppi)
1920 x 1080 (401
ppi)
1920 x 1080 (401
ppi)
1920 x 1080 (401
ppi)
960 x 540 (401 ppi)
1280 x 720 (312
ppi)
1920 x 1080 (441
ppi, Amoled)
Rear camera (mega pixel) 13MP 13MP 13MP(PDAF) 13MP 13MP(PDAF) 13MP(4K video) 8MP 13MP(PDAF) 8MP
Front camera (mega pixel) 5MP 5MP 5MP 5MP 8MP 5MP 5MP 8MP 5MP
RAM 3GB RAM 2GB RAM 2GB RAM 2GB RAM 2GB RAM 3GB 2GB RAM 3GB RAM 1GB
ROM 16GB 16GB 16GB 16GB/32GB 16GB 16GB/32GB 16GB 128GB 8GB
Battery capacity
Non-replaceable ,
3000mAh
Non-replaceable ,
2200mAh
Non-replaceable ,
4000mAh
Non-replaceable ,
3100mAh
Non-replaceable ,
3000mAh
Non-replaceable ,
3000mAh
Non-replaceable ,
2400mAh
2200mAh
Non-replaceable ,
2525mAh
Dimension (mm) 151.3 x 76.3 x 8.15 143 x 70.6 x 7.7 150 x 76 x 8.7 150.9 x 75.2 x 8.7 150.2 x 75.7 x 9 151.1 x 74.2 x 7.5 142.7 x 71.7 x 7.55 136.9 x 67.9 x 7.49 140 x 69 x 6.9
Casing Metal casing Plastic casing Metal casing Plastic casing Metal casing Metal casing Plastic casing Plastic casing Plastic casing

16
Leading Chinese handset vendors gaining market share
Market share gains have accelerated since 1Q14. Since 2014, Chinese
handset vendors have gained significant market share in China and globally,
underpinned by their cost advantage and capabilities in high performance
smartphone design and manufacturing. This was led by Huawei, Xiaomi, TCL,
Oppo and Vivo, thanks to their affordable 4G smartphone which has a user-
friendly user interface (UI) and appealing handset design.
The top ten Chinese handset vendors’ global market share increased by 16.9%
pts over the last nine quarters from 22.9% in 4Q13 to 39.7% in 3Q15,
according to Counterpoint (Figure 23).
Figure 23: Chinese brands’ share of global smartphone market
Figure 24: Top-tier Chinese brands gaining market share
Chinese brands are among the top 10 smartphone vendors. In 3Q15,
seven of the top 10 handset vendors were Chinese brands that collectively
captured 29% of the global smartphone market. Huawei (7.5%), Xiaomi (5.0%),
Lenovo (4.6%) were ranked No.3-5, after Samsung at No.1 (23.1%) and Apple
at No.2 (13.2%). ZTE was ranked No.7 (3.9%), while Oppo was ranked No.8
(3.6%), TCL at No. 9 (3.4%) and Vivo at No.10 (2.8%) (Figure 24).
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
2012Q1
2012Q2
2012Q3
2012Q4
2013Q1
2013Q2
2013Q3
2013Q4
2014Q1
2014Q2
2014Q3
2014Q4
2015Q1
2015Q2
2015Q3
Globalmarketshare(%)
Top 3 Chinese vendors Top 10 Chinese vendors Apple Samsung
Top 3 - Huawei, Xiaomi, Lenovo; Top 10 - Huawei, Xiaomi, Lenovo, ZTE, Oppo, TCL-Alcatel, Vivo, Coolpad, Meizu, Tianyu
Handset vendors Rank 2012Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3 2014Q4 2015Q1 2015Q2 2015Q3
Samsung 1 27.4% 29.1% 31.1% 27.6% 30.5% 30.0% 32.4% 28.7% 30.0% 24.2% 23.9% 19.4% 24.2% 21.3% 23.1%
Apple 2 21.7% 15.4% 14.4% 21.3% 16.5% 12.6% 12.4% 16.9% 14.8% 11.4% 11.9% 19.5% 17.8% 13.6% 13.2%
Huawei 3 2.9% 3.3% 4.1% 5.6% 4.4% 4.4% 4.7% 5.7% 4.6% 6.7% 5.1% 6.3% 5.1% 8.7% 7.5%
Xiaomi 4 0.7% 1.0% 1.1% 1.0% 1.4% 1.7% 1.8% 2.1% 3.7% 4.9% 5.5% 4.5% 4.4% 5.4% 5.0%
Lenovo 5 2.9% 3.9% 3.8% 4.0% 3.7% 4.3% 4.6% 4.6% 4.4% 5.1% 5.1% 3.7% 4.3% 3.7% 4.6%
LG 6 3.0% 3.4% 4.1% 3.5% 4.6% 4.9% 4.4% 4.4% 4.2% 4.7% 5.1% 4.1% 4.5% 4.0% 4.1%
ZTE 7 2.8% 4.2% 3.2% 3.2% 4.0% 4.6% 2.8% 2.8% 3.0% 3.0% 3.5% 3.9% 3.8% 4.9% 3.9%
Oppo 8 0.5% 0.5% 0.6% 0.6% 0.7% 0.8% 0.9% 0.9% 1.1% 1.2% 2.1% 2.1% 2.0% 2.8% 3.6%
TCL-Alcatel 9 0.4% 0.9% 1.1% 1.0% 0.6% 1.3% 1.9% 2.5% 2.1% 2.8% 3.3% 4.1% 2.8% 3.2% 3.4%
Vivo 10 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.7% 0.7% 1.8% 1.9% 2.4% 2.8% 2.8%
Coolpad 11 2.3% 2.5% 2.8% 2.6% 2.7% 3.3% 3.5% 2.8% 3.2% 3.5% 3.3% 2.5% 2.0% 1.7% 2.1%
Sony / Sony Ericsson 12 3.6% 4.5% 4.7% 3.9% 3.6% 3.9% 3.7% 3.5% 3.0% 3.0% 3.0% 3.1% 2.3% 2.1% 1.8%
Meizu 13 0.2% 0.3% 0.3% 0.3% 0.3% 0.2% 0.2% 0.2% 0.3% 0.4% 0.4% 0.6% 1.3% 1.3% 1.8%
Nokia 14 7.3% 6.1% 3.4% 2.9% 2.7% 3.0% 3.2% 2.7% 3.2% 3.2% 3.5% 3.1% 2.8% 2.5% 1.7%
Others 24.2% 25.1% 25.3% 22.5% 24.3% 24.9% 23.4% 22.1% 21.7% 25.3% 22.6% 21.2% 20.3% 22.1% 21.3%
Grand Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Top 10 Chinese brands 13.1% 17.0% 17.5% 18.9% 18.7% 21.7% 21.8% 22.9% 26.9% 33.1% 35.4% 34.0% 32.6% 39.9% 39.7%

17
Figure 25: Global market share (3Q14) Figure 26: Global market share (3Q15)
SOURCES: CIMB, COUNTERPOINT SOURCES: CIMB, COUNTERPOINT
Figure 27: Global smartphone market share in 3Q15
Market share gains in Chinese brands expected to continue. We believe
that Chinese handset vendors will continue to gain market share in China and
globally on the back of 1) the strong components supply chain support, and 2)
new product launches such as Huawei P8 (Nov 15), Xiaomi Redmi Note 3 (Nov
15), Xiaomi Mi5 (rumour Jan16), Oppo R7s (Nov 15) and Vivo X6 (Nov 15) etc.,
This would be supported by improved brand awareness, further channel
expansion in China and relationship establish with overseas carriers.
Title:
Source:
Please fill in the values above to have them entered in your report
Samsung
24%
Apple
12%
Huaw ei
5%
Xiaomi
6%
Lenovo
5%
LG
5%
ZTE
3%
Oppo
2%
TCL-Alcatel
3%
vivo
2%
others
33%
Samsung
23%
Apple
13%
Huaw ei
7%
Xiaomi
5%
Lenovo
5%
LG
4%
ZTE
4%
Oppo
4%
TCL-Alcatel
3%
vivo
3%
others
29%
Vendor Ranking Shipments (mil units) Market share % (3Q15)
Market share QoQ
change (% pt)
Market share YoY
change (% pt)
Samsung 1 84.0 23.1% 1.8% -0.8%
Apple 2 48.0 13.2% -0.4% 1.3%
Huawei 3 27.4 7.5% -1.2% 2.5%
Xiaomi 4 18.2 5.0% -0.4% -0.4%
Lenovo (included Motorola) 5 16.5 4.6% 0.9% -0.5%
LG 6 14.9 4.1% 0.1% -1.0%
ZTE 7 14.3 3.9% -0.9% 0.5%
Oppo 8 13.0 3.6% 0.8% 1.5%
TCL-Alcatel 9 12.5 3.4% 0.3% 0.1%
Vivo 10 10.2 2.8% 0.0% 1.0%
Others 104.2 28.7% -1.0% -4.1%
Total 363.3 100%

18
Chinese brands aggressively expanding into overseas markets
Although we believe that overall smartphone shipment growth is slowing due to
the relatively high smartphone penetration rate in developed countries, the size
of the global smartphone market is still expanding steadily, underpinned by
rapid growth of the smartphone-using population in emerging markets. We
expect smartphone demand in certain emerging markets such as India, Latin
America and Southeast Asia to remain robust, thanks to the sizeable 3G/4G
migration and consumers’ demand for high-performance smartphones.
According to the International Data Corporation (IDC), emerging markets,
including China and India, are expected to lead global smartphone shipment
growth in the next few years, driven by accelerated 3G/4G migration in India
and other emerging markets, as well as strong replacement demand from
China (Figure 28).
Figure 28: Global smartphone shipments forecast (2011-2020F)
SOURCES: CIMB, BI INTELLIGENCE, IDC
Chinese vendors expanding into overseas markets. As China’s smartphone
market is coming close to saturation, the Chinese vendors have been
aggressively expanding into overseas markets via network carrier and e-
commerce channels in the past few years, especially India, Southeast Asia and
Latin America. At this point, Huawei, TCL, Lenovo, ZTE, Xiaomi, Oppo and
Vivo have good presence in the Southeast Asia, India, Latin America, North
America, Russia and the Middle East markets.
ZTE, Huawei, Lenovo and TCL ranked top 5 in most regions. According to
Counterpoint, ZTE ranked no. 4 in the US market in 3Q15, thanks to its
sponsorship of the National Basketball Association (NBA) (Figure 29), while
Huawei grabbed 5% market share in Europe due to its strong relationships with
the local mobile network operators and improved awareness of its brand
(Figure 31). TCL has always had the highest export shipment ratio (c.95% in
2014 and 9M15) among the China handset vendors, riding on the well-known
international brand name Alcatel that ranked No. 3 (10% market share) in Latin
America and No. 4 in Europe (5% market share) in 3Q15 (Figure 30). In 2Q15,
Xiaomi launched the Mi 4i model that targets overseas markets, especially
India and Southeast Asia.
0
1
2
3
4
2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
No.ofunits(billion)
China India Rest of World

19
Figure 29: North America smartphone market share (3Q15) Figure 30: Latin America smartphone market share (3Q15)
Figure 31: Europe smartphone market share (3Q15) Figure 32: Asia Pacific region smartphone market share (3Q15)
Top seven vendors’ shipments jumped 85% yoy in 9M15. Supported by
their affordable high-performance 4G smartphones and established worldwide
distribution networks, the top seven Chinese vendors’ total export shipments
increased by 85% yoy to 130m units in 9M15 (+62% yoy in 3Q15), according to
Counterpoint (Figure 33, 34).
Title:
Source:
0%
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35%
Apple Samsung LG ZTE Motorola
(Lenovo)
Others
0%
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Samsung LG TCL-Alcatel Motorola
(Lenovo)
Apple Others
Title:
Source:
0%
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Samsung Apple Huawei TCL-Alcatel ZTE Others
0%
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Samsung Apple Sony Lenovo Asus Others

20
Figure 33: Top seven Chinese vendor's export shipments, by quarter
Figure 34: Smartphone overseas shipments (million units)
Overseas market expansion to continue. Given the high cost-to-
performance quotient and affordability of their 4G smartphones, we believe that
the tier-1 Chinese vendors will easily grab market share in countries with
relatively-weak consumption power and price-sensitive consumers. Therefore,
we believe that the Chinese brands will achieve robust overseas shipment
growth in the next couple of years, especially in emerging markets, thanks to
stronger relationships with local carriers and improved brand awareness.
India’s fast-growing smartphone market. India is the third largest
smartphone market in the world. We believe that India will be the fastest-
growing smartphone market over the next few years (2016-18) due to the low
smartphone penetration rate.
According to the International Data Corporation (IDC), India had around 1
billion mobile phone users in 2Q15 but only around 150m smartphone users.
The smartphone penetration rate was only c.15% (vs. 59% in China, 75% in
the US). India’s total smartphone demand was 80m units in 2014 and the IDC
forecasts that smartphone shipments will reach c.110m units in 2015 (+38%
yoy).
Smartphone demand hit 250m units in 2018. The smartphone penetration
rate in India is expected to reach c.36% by 2018, according to the IDC. Hence,
total smartphone users in India could reach 280m in 2018, with smartphone
demand of over 250m units p.a. This represents a CAGR of 31% over the next
three years (2015 – 2018) (Figure 35).
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140%
0
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3Q15
yoy%
Units(million)
Export shipments yoy % - RHS
Smartphone overseas shipments 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15
TCL-Alcatel 0.59 1.28 1.70 2.07 1.27 2.89 4.78 7.19 5.82 7.80 9.81 14.76 9.30 10.54 11.89
Lenovo 0.10 0.10 0.25 0.32 0.38 0.55 0.95 2.00 1.75 2.40 3.30 4.00 6.50 7.00 10.94
Huawei 1.85 2.30 3.00 4.59 3.00 3.55 4.85 7.50 5.70 8.72 7.24 12.30 6.30 13.90 10.10
ZTE 1.70 3.00 2.50 3.30 3.90 3.90 2.70 3.05 2.90 3.10 5.30 8.10 8.20 11.90 9.80
Xiaomi 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.50 0.70 1.30 1.50 1.30 1.90 2.00
Oppo 0.00 0.00 0.10 0.25 0.20 0.25 0.40 0.40 0.50 0.84 2.30 3.10 2.10 2.20 2.00
Vivo 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.15 0.15 0.25 0.50 0.40 1.00 1.10
Top 7 domestic vendors 4.24 6.68 7.55 10.53 8.75 11.14 13.68 20.14 17.32 23.71 29.50 44.26 34.10 48.44 47.83
% of total shipments in overseas
TCL-Alcatel 84% 86% 85% 90% 87% 89% 92% 94% 92% 89% 90% 95% 95% 95% 95%
Lenovo 2% 2% 4% 4% 5% 5% 8% 14% 14% 15% 20% 28% 44% 55% 66%
Huawei 39% 42% 39% 37% 30% 32% 38% 44% 42% 42% 43% 51% 36% 46% 37%
ZTE 38% 43% 42% 46% 43% 34% 36% 36% 32% 34% 46% 47% 54% 63% 54%
Xiaomi 0% 0% 0% 0% 0% 0% 0% 0% 5% 5% 7% 10% 8% 13% 13%
Oppo 0% 0% 9% 20% 13% 13% 17% 15% 16% 23% 33% 38% 30% 22% 15%
Vivo 0% 0% 0% 0% 0% 0% 0% 0% 7% 7% 4% 7% 5% 10% 11%
Top 7 domestic vendors 26% 29% 29% 31% 26% 26% 30% 36% 30% 31% 34% 44% 40% 44% 43%

21
Figure 35: India smartphone shipment (2011 - 2018F)
SOURCES: CIMB, IDC
Local Indian vendors dominate the low-end segment. Currently, local
Indian vendors still dominate the country’s mobile phone market but mainly, the
low-end segment (smartphone priced at US$50-80 per unit). The top three
largest domestic vendors in India are Micromax, Intex and Lava, with combined
India smartphone market share of around 35% market in 2Q15. Samsung
remains the largest vendor, with 23% India smartphone market share,
according to IDC (Figure 36).
Figure 36: India smartphone market share (2Q15)
SOURCES: CIMB, IDC
The next battlefield for Chinese vendors - India. Chinese vendors Huawei,
Xiaomi, Lenovo, Oppo, Vivo, Meizu and Coolpad have been selling
smartphones in India via online channels (flipkart.com, Mi India) and physical
stores since 2014. Xiaomi registered India sales of more than 3m units (mainly
Redmi) in 9M15, which is commendable given that its first shipment was in
4Q14 while Huawei sold about 2m units in 9M15. Xiaomi and Foxconn also
jointly set up a handset assembly factory in Andhra Pradesh state in Jul 2015
to avoid the 12.5% import tariff. Lenovo also established an assembly factory in
Chennai in 2H15 to increase its penetration into the India market.
We believe that the Chinese brands will successfully capture market share in
India from both foreign and local brands in the low-end segment (smartphone
priced at US$100 per unit), thanks to their high specifications, low prices and
high-performance smartphones. As such, we expect overseas markets,
including India, to become a key shipment growth driver for Chinese vendors.
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2011
2012
2013
2014
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2016F
2017F
2018F
yoy%
Units(million)
India smartphone shipment yoy % - RHS
Samsung
23%
Micromax
17%
Intex
11%
Lava
7%
Lenovo
6%
Others
36%

22
Chinese vendors provide better growth potential
During 2016-17, we expect tier-1 Chinese vendors to provide better volume
growth than Samsung and Apple thanks to their continuous market share
expansion in China and globally.
According to Counterpoint, the top seven Chinese brands’ market share
exceeded Samsung’s and Apple’s in 3Q15. Shipments from the top seven
Chinese vendors amounted to 112m units in 3Q15, i.e. 31% of the global
smartphone market. In 9M15, their collective output reached 308m units which
was 27% higher than Samsung’s and 96% higher than Apple’s (Figure 37). The
average growth rate of the top seven Chinese brands was 40% yoy in 9M15
(29% yoy in 3Q15) which outpaced Samsung’s flat growth and Apple's 33%
yoy growth rate (Figure 38).
As the Hong Kong-listed components manufacturers dominate the supply chain
for tier-1 Chinese brands, we believe that they can benefit from the latter’s
growth rate overtaking Apple’s and Samsung’s.
Figure 37: Total smartphone shipment in 9M15 – Chinese
vendors vs. Samsung and Apple
Figure 38: Volume growth in 9M15 - Chinese vendors vs.
Samsung and Apple
Figure 39: Top 10 handset vendors shipment (volume) in 9M15 Figure 40: Top 10 handset vendors shipment growth (yoy%) in
9M15
Title:
Source:
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Samsung Apple Top 7 Chinese brands
units(million)
-5%
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Samsung Apple Top 7 Chinese brands
yoy%
Title:
Source:
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Huawei
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ZTE
Oppo
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Vivo
units(million)
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Samsung
Apple
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LG
ZTE
Oppo
TCL-Alcatel
Vivo
yoy%

23
iPhone shipments should decline yoy in 1H16. After strong growth over the
past eight years, Our analyst (Felix PAN) expects to see the first-ever yoy
shipment decline for the iPhone in 1H16. Despite expecting a strong rebound in
2H16 on the back of iPhone 7’s launch in Sep 2016, he does not expect a
repeat of the hypergrowth of yesteryear, as demand is saturated (Figure 41).
iPhone demand is still growing. Our analyst expects iPhone unit shipments
to rise 20.3% yoy to c.232m units in 2015, increase 5.7% to 245m units in 2016
and go up 8.2% yoy to 265m units in 2017, driven by replacement demand
from existing iPhone fans and market share gains from other brands (Figure
42).
Figure 41: iPhone shipment volume, by quarter yoy% (3Q09-4Q17F)
SOURCES: CIMB RESEARCH, COMPANY DATA
Figure 42: iPhone shipment volume (2012 - 2017F)
SOURCES: CIMB RESEARCH, COMPANY DATA
-20%
0%
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60%
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100%
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160%
3Q09 3Q10 3Q11 3Q12 3Q13 3Q14 3Q15 3Q16F 3Q17F
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yoy%
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iPhone shipment - units iPhone shipment - yoy % (RHS)

24
Global smartphone demand is still growing, albeit at a slower
rate
Global smartphone shipments increased 13% yoy in 9M15. Global
smartphone demand rose at a moderate rate of c.10-15% yoy in the first three
quarters of 2015, with total smartphone shipments amounting to 1.06bn units.
We expect a mere 1% yoy growth in 4Q15 off a high base in 4Q14 which would
bring FY15 smartphone shipments to 1.46bn units, i.e. an 11% yoy increase
(Figure 43).
China remains the largest single smartphone market in the world, with a 30%
share, while the Asia Pacific region accounts for 22%. The developed markets
of North America and Europe make up 12% and 15%, respectively (Figure 44).
Nevertheless, China posted a slower shipment growth of 3% yoy in 9M15 due
to its high smartphone penetrate rate. The Asia Pacific region achieved a 15%
yoy shipment growth. North America and Europe registered decent growth of
15% yoy and 9% yoy, respectively. The Middle East/Africa region recorded the
highest growth rate of 54% yoy due to strong 2G/3G migration (Figure 45).
Figure 43: Global smartphone demand by units (1Q12 to 4Q15F)
Figure 44: Global smartphone shipments by region (9M15) Figure 45: Global smartphone shipments growth rate by
regions (9M15 vs. 9M14, % yoy)
0%
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50%
0
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1Q12
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4Q15F
yoy%
Units(million)
Total shipment by volume yoy %
Title:
Source:
China
30%
Rest of Asia
22%
Europe
15%
North America
12%
Latin America
11%
Middle East /
Africa
10%
3%
15%
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15%
16% 54%
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No.ofunits(million)
9M14 9M15 yoy %

25
Global smartphone shipments expected to rise c.5% yoy to 1.5bn units in
2016. IDC expects global smartphone shipments to rise c.5% yoy to
approximately 1.52bn units in 2016 and to maintain a moderate pace until 2018.
This is underpinned by replacement demand for high-performance
smartphones from North America, Europe and China as well as 2G/3G/4G
migration demand from emerging markets such as India, Latin America, South
East Asia, Eastern Europe, Africa and the Middle East. According to IDC’s
forecast, global smartphone demand could reach 1.6bn units by 2017 and 7%
CAGR in 2014-17, driven by the rising smartphone penetration rate in
emerging markets such as India and Africa, and the stable smartphone
migration demand from China, the US and Europe (Figure 46).
Figure 46: Global smartphone shipments forecast (2011 to 2017F)
SOURCES: CIMB RESEARCH, IDC
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Shipment - volume Shipment - yoy % - RHS

26
China remains the largest smartphone market in the world
China accounts for over 31% of global smartphone shipments. China is
the single largest smartphone market in the world, accounting for 31% of the
total smartphone market, by volume, in 9M15. Strong performance in the China
market would enable a vendor to increase its brand awareness and lower
production costs in order to raise profitability through economies of scale.
China smartphone demand increased steadily in 9M15. China smartphone
shipments rose 3% yoy to 323m units in 9M15 (4% yoy in 1Q, 0% in 2Q and
7% in 3Q15), driven by strong replacement demand for high-specification 4G
smartphones and ongoing 3G/4G migration.
Figure 47: China smartphone shipments, by quarter
Huawei clinched the top spot in China in 3Q15. Huawei replaced Xiaomi as
the top-ranking handset vendor in 3Q15, with 15.6% market share (+0.3% pt
qoq, +6.4% pts yoy), thanks to its many new product launches via e-commerce
and social channels. In contrast, Xiaomi lacked innovative models and suffered
keen competition from newcomers in the e-commerce channel, including LeTV
QiKU and Meizu. Xiaomi fell to No.2 in 3Q15, with 14.6% market share (-1.2%
pts qoq, -1.4% pts yoy). Apple’s market share increased slightly to 12.4% in
3Q15 (+0.2% pt qoq, +6.5% pts yoy) to stay at No.3, although the new iPhone
6S was only shipped out at end-Sep 2015. OPPO climbed to No.4 in 3Q15,
with 9.9% market share (+2.9% pts qoq, +5.4% yoy) thanks to the excellent
design and high performance of its smartphones, as well its well-established
social channel. Vivo ranked No.5 in 3Q15, with 8.2% market share (flat qoq,
+2.8% pts yoy), thanks to the Hi-Fi speaker box in its flagship model.
Samsung's ranking fell to No.6 in 3Q15, as its market share shrank to 7.7% (-
0.1% pt qoq, -4.0% pts yoy) due to keen competition from Chinese brands,
given Samsung’s lack of product differentiation (Figure 48, 49).
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yoy%
Units(million)
China smartphone shipment yoy % - RHS

27
Figure 48: Top 10 China smartphone brands (3Q14) Figure 49: Top 10 China smartphone brands (3Q15)
Meizu, Vivo and Oppo were the best performers in 9M15. In 9M15, the best
performers among the domestic vendors in terms of China sales were Meizu
(+330% yoy), Vivo (+140%), Oppo (+122%), and Huawei (+42%). The worst
performers in 9M15 were Lenovo (-48% yoy) and Coolpad (-32%). Xiaomi
faced keen competition from Huawei’s Honor, Meizu, LeTV and QiKU in the e-
commerce channel and thus, it posted relatively slow domestic sales growth of
14% yoy in 9M15, although it maintained market share of 14.7% in 9M15
(+17.0% in 9M14) (Figure 50).
Figure 50: China top 10 vendors’ smartphone shipments in China, by brand (9M15
vs. 9M14)
3G/4G migration and replacement demand lead the volume growth.
According to the Ministry of Industry and Information Technology (MIIT), the
overall smartphone penetration rate was 59% at end-Nov 2015, on the back of
around 780m smartphone users (3G/4G) and around 530m feature phone (2G)
users.
Handset subsides to be restored in 2016. China Mobile and China Unicom
both announced aggressive subsidy plans in 2016 to boost their number of 4G
subscribers. China Mobile revealed that it will allocate Rmb100bn for subsidies
(including handset subsidies and channels subsidies for wholesalers and
retailers) in 2016 (estimated Rmb20bn in 2015) in order to boost the number of
4G subscribers to 500m (c.300m at end-2015). China Unicom will spend
approximately Rmb55bn for subsidies in 2016 (c.Rmb6bn in 2015) given the
Title:
Source:
Xiaomi
16%
Lenovo +
Motorola
13%
Samsung
12%
Coolpad
10%
Huaw ei
9%
Apple
6%
ZTE
6%
Vivo
5%
Oppo
4%
Meizu
1%
others
18%
Huaw ei
16%
Xiaomi
15%
Apple
12%
Oppo
10%
Vivo
8%
Samsung
8%
Coolpad
6%
Lenovo +
Motorola
5%
Meizu
5%
ZTE
4%
others
11%
+17%
+22% +42%
-40%
+140%
+122%
-32%
-48%
-25% +330%
-100%
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0
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50
Xiaomi Apple Huawei Samsung Vivo Oppo Coolpad Lenovo +
Motorola
ZTE Meizu
Units(million)
9M14 9M15 Series3

28
significant subscriber outflows in 2015 (average outflow of c.1m 3G/4G
subscribers per month).
Smartphone penetration rate to hit 68% in 2016. We believe that the
penetration rate will reach around 60% in 2015 and rise further to hit 68% by
2016, representing an increase in the number of new smartphone users by
131m in 2016, driven by lower 4G tariffs, the abundance of affordable high-
performance 4G smartphones and enhanced 4G promotions by the three
Chinese operators.
We estimate that China smartphone shipments will merely inch up 1% to 433m
units in 2015 due to reduced handset subsidies and the weak economy.
Nevertheless, we believe that China smartphone demand will achieve 7%
growth in 2016 to 465m units, underpinned by the restoration of handset
subsidies by the operators, abundant high-spec low-priced 4G smartphone
launches and net addition of 131m smartphone users (Figure 51,52,53).
Figure 51: Estimated China mobile subs and smartphone demand
Figure 52: Estimated no. of mobile subscribers and 3G/4G penetration rate
China mobile market metrics 2011 2012 2013 2014 2015F 2016F
No. of mobile subscribers (million) 976 1,110 1,233 1,291 1,308 1,330
No. of mobile subscribers (yoy %) 16% 14% 11% 5% 1% 2%
No. of 2G subscribers 848 877 816 688 529 419
No. of 3G subscribers 128 233 417 513 446 227
No. of 4G subscribers - - - 90 333 683
Total 3G/4G subscribers 128 233 417 604 779 910
Total 3G/4G subscribers (yoy %) 171% 83% 79% 45% 29% 17%
2G penetration rate (%) 87% 79% 66% 53% 40% 32%
3G penetration rate (%) 13% 21% 34% 40% 34% 17%
4G penetration rate (%) - - - 7% 25% 51%
Total 3G/4G penetration rate (%) 13% 21% 34% 47% 60% 68%
2G net adds (million) 53 29 (61) (128) (159) (110)
3G net adds (million) 80 106 184 96 (67) (219)
4G net adds (million) - - - 90 243 350
3G/4G net adds (million) 80 106 184 187 176 131
Estimated smartphone demand (million) 105 202 353 430 433 465
Estimated smartphone demand (yoy %) 163% 93% 74% 22% 1% 7%
New 3G/4G users (million) 80 106 184 187 176 131
Replacement demand (million) 25 96 169 244 257 334
128
233
417
513
446
227
1%
6%
13%
21%
34%
47%
60%
68%
0%
10%
20%
30%
40%
50%
60%
70%
80%
0
200
400
600
800
1000
1200
1400
2009A 2010A 2011A 2012A 2013A 2014 2015 2016F
penetrationrate(%)
Subscrobers(million)
4G Subs 3G subs 2G subs 3G/4G penetration rate (RHS)
333
688
90

29
Figure 53: Estimated China smartphone demand
Leading Chinese brands gained market share in China. Although overall
smartphone demand rose slowly in 2015, leading domestic vendors gained
market share from white-box and foreign brands due to the high specifications,
low prices and high performance of their smartphones, rising sales through the
e-commerce channel, and strong penetration in low-tier cities via physical
stores.
According to Counterpoint, the combined market share of the top seven
Chinese vendors increased from 39% in 3Q13 to 65% in 3Q15 (Figure 54),
while the foreign brands’ market share dropped from above 30% in 3Q13 to
less than 20% in 3Q15.
Figure 54: Top seven Chinese vendors continue gaining market share in home
market
Leading brands’ market share gain in home markets is expected to
continue. We expect the consolidation in the China smartphone market to
continue due to fierce competition, especially in the low-to mid-end segment
(Rmb1,000 – Rmb2,000 / US$150 – US$320). Therefore, we expect the
leading Chinese handset vendors to continue gaining market share in the home
market moving forward due to: 1) their strong domestic components supply
chain, and 2) diversified distribution channels, comprising both physical stores
and online platforms.
40 105
202
353
430 433
465
128
233
417
604
779
910
-
100
200
300
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500
600
700
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1,000
2010 2011 2012 2013 2014 2015F 2016F
Smartphonedemand/3G4Gsubscribers(million)
Smartphone demand 3G/4G subscribers
0%
10%
20%
30%
40%
50%
60%
70%
80%
0
10
20
30
40
50
60
70
80
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
Chinesevendors'MarketshareinChina
Units(million)
Top 7 smartphone shipment in China Top 7 Chinese vendors' market share in China - RHS
Top 7 Chinese vendors in China: Huawei, Xiaomi,Oppo, Vivo, Coolpad,Lenovo, Meizu

30
Huawei, Xiaomi, Oppo, Vivo, ZTE and LeTV to lead growth in
Chinese brands in 2016
Top 10 Chinese handset vendors to post estimated 24% yoy shipment
growth in 2016. We remain positive on the tier-1 Chinese handset vendors’
smartphone shipment growth outlook for 2016 on the back of strong support
from the domestic components supply chain, improving brand awareness in
China and globally, the high specifications, low prices and high performance of
their smartphones, as well as the many distribution channels comprising mobile
network operators (domestic and overseas), online platforms (domestic and
overseas) and physical stores (in top-tier cities to low-tier cities in China).
Top 10 vendors’ shipments reach 703m units in 2016. With the exception of
Lenovo, we expect all top 10 Chinese vendors to beat the industry growth rate
in 2016. We estimate that total smartphone shipment by the top 10 Chinese
vendors will reach 703m units in 2016, an increase of 24% yoy from
approximately 570m units (+27% yoy) in 2015 (Figure 55). We believe that
Huawei and Xiaomi will continue to post robust output growth of 25% and 33%
yoy, respectively, in 2016 due to their strong new product pipelines (Huawei:
P8, Mate 8. Xiaomi: Redmi Note 3 and Mi 5). We also expect Oppo and Vivo to
maintain strong output growth of 30% and 20% yoy respectively, in 2016
thanks to their market share gains in the mid-end smartphone segment in
China and Southeast Asia (Figure 56).
Figure 55: Estimated total smartphone output of top 10 Chinese handset vendors
(2011 to 2016F)
Figure 56: Estimated shipments of top 10 Chinese vendors (2014 - 2016F)
0%
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0
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2011
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2016E
yoy%
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+25%
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+3% +23%
+12% +40%
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+67%
+20%
0
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Huawei
Xiaomi
Tianyu
Lenovo
ZTE
TCL-Alcatel
Coolpad
Oppo
Vivo
Meizu
Units(million)
2014 2015E 2016E

31
 Huawei’s smartphone shipments jumped 63% yoy in 3Q15.
Huawei’s shipments surged 63% yoy in 3Q15 to 27.4m units (+48%
yoy in 9M15 with 75.4m units) driven by both China and overseas
markets due to improved brand awareness and high cost-to-
performance quotient smartphones (Huawei’s P7 (Rmb1,200), G7
(Rmb1,799) and Mate 7 (Rmb2,999)). Furthermore, Huawei’s flagship
models launches in the US$300-500 range for both China and
overseas markets, and marketing strategy via e-commerce in the
domestic market and carriers in overseas markets were successful.
Hence, Huawei’s market share rose from 5.1% in 3Q14 to 7.5% in
3Q15, due to increasing market share in China and globally.
The robust shipments growth was driven by its dual-brand (Huawei +
Honor) strategy and the successful launches of mid-to high-end models
such as Mate 7 (Rmb2,100) and G7 (Rmb1,800) which sold very well
in China and overseas markets. Furthermore, Huawei launched Mate S
(US$600) for overseas markets and Mate 8 Max / Mate 8 (Rmb4,100 /
Rmb2,999, Figure 59, 60) in China. This is the first time Huawei prices
its flagship model over US$600/Rmb4,000, directly competing with
Apple’s iPhone and Samsung Galaxy S6 / S6 edge.
Shipments could reach 125m units in 2016. We believe that Huawei
can easily beat its 2015 shipment target of 100m units (+33% yoy) as it
shipped 75.4m smartphones in 9M15. In our view, Huawei’s
smartphone shipments could outpace its rivals in 2016 and rise 25%
yoy to c.125m, driven by its strong product development, in-house
chipset production capability and increase in overseas market share.
Figure 57: Huawei's quarterly smartphone shipments Figure 58: Huawei's smartphone shipments (2011- 16F)
Figure 59: Huawei Mate 8
Retail price: Rmb4,100/Rmb2,999
Specifications : Kirin 950 quad 2.3GHz, 6” screen (1920x1080), 8MP/16MP
cameras (PDAF+CAF,OIS), force touch, fingerprint, metal casing 7.9mm
Figure 60: Huawei G7
Retail price: Rmb1,799
Specifications: Quad ARM Cortex A53-1.2GHz, 5.5” screen, 13MP back
camera, metal casing slim body 7.6mm
SOURCE: CIMB RESEARCH, ZOL.com.cn SOURCE: CIMB RESEARCH, ZOL.com.cn
Title:
Source:
0%
20%
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120%
0
5
10
15
20
25
30
35
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yoy%
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smartphone shipment yoy % - RHS

32
 Xiaomi’s smartphone shipments stayed flat in 3Q15. Xiaomi lost its
top rank in China to Huawei in 3Q15 given the lack of new model
launches in 2015 (Mi4 was launched in 3Q14) and keener competition
from Meizu, LeTV and QiKU which are backed by companies with
strong Internet background. Xiaomi only launched Mi 4i, Mi 4C and a
few Redmi Note models in 2015.
Xiaomi’s key volume drivers were the low-end version of Redmi
(Rmb499) and Redmi Notes (Rmb899). Xiaomi's total shipments were
flat yoy at 18m units in 3Q15, while 9M15 shipments remained resilient,
advancing 19% yoy to 52.5m units. We believe that Xiaomi will miss its
revised downward full-year target of 80m units in 2015 given it only
shipped 52.5m units in 9M15. Therefore, we forecast that Xiaomi’s
smartphone shipments would rise 23% yoy to 75m units in 2015.
Shipments could reach 100m units in 2016. Nevertheless, along with
the licensing agreement signed with Qualcomm in Dec 15, we believe
that Xiaomi could launch its flagship model Mi5 soon (market speculation
in Jan 2016) to regain market share in China and to expand overseas
(including the US) as it has resolved some of the patent issues overseas.
We expect Xiaomi’s smartphone shipments to rise 33% yoy to c.100m
units in 2016 on the back of 1) the Mi5 launch, 2) Redmi Note 3
(Rmb899/US$145) launch, and 3) the increasing overseas shipments,
especially in India and South East Asia (Figure 62).
Figure 61: Xiaomi's quarterly smartphone shipments Figure 62: Xiaomi's smartphone shipments (2011- 16F)
Figure 63: Xiaomi Mi4
Retail price : Rmb1,799
Specifications : Qualcomm Snapdragon 801 2.5GHz, 5” screen, 13MP back
camera, metal middle-frame + In-Mold Transfer plastic back cover
Figure 64: Redmi Note 3
Retail price: Rmb899
Specifications : MTK Helio X10 quad core, 5.5” screen (1920x1080), 13MP
back camera, fingerprint, metal casing
Title:
Source:
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2011
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2016F
yoy%
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33
 Lenovo’s 9M15 performance was weak. Despite consolidating with
Motorola, Lenovo's shipments were relatively weak in 2015, declining
2% in 3Q15 and slipping 3% yoy in 9M15. We think that this was due to
1) substantially fewer shipments in the operator channels in China, 2) a
confusing branding strategy (it carried five different brands in 3Q15),
and 3) a lack of popular model launches during the period.
Lenovo has consolidated from five brands to three brands (Lemon,
ZUK and Motorola) after it launched Lemon X3 (Rmb2,499/US$400)
which caters to the high-end segment. Lemon is aimed at the mid-to
high-end segment (Rmb2,000/ US300), mainly in China. ZUK is
Lenovo’s e-commerce brand while the Motorola brand will focus on
overseas markets.
Growth only to 76m units in 2016. We are certain that Lenovo will
miss its 2015 shipment target of 100m units given it only shipped 44m
units in 9M15 despite including Motorola. We expect Lenovo to ship
around 73m smartphones in 2015, with over half of them to overseas
markets. We believe that Lenovo will remain in consolidation mode in
2016 as it integrates the Motorola handset business and focuses on
emerging markets such as Brazil, India and Russia. However, we stay
cautious about Lenovo’s smartphone shipments in 2016 because its
smartphones lack innovative features and poorly designed relative to
its rivals. Hence, we expect its smartphone shipments to rise c.4% yoy
to 76m units (Figure 66).
Figure 65: Lenovo's quarterly smartphone shipments Figure 66: Lenovo's smartphone shipment (2011 - 2016F)
 ZTE gained market share in the US. Given the substantially lower
domestic sales due to subsidy cuts in Chinese operators, ZTE
delivered outstanding shipment performance in 3Q15, with total
smartphone shipments increasing 25% yoy to 14.3m units due to
strong US sales. ZTE is No.4 in the US with 7.8% market share in
3Q15, thanks to significant market share gain in the US after the
successful model launch of "AXON 天机, (Rmb2,699/US$440)" which
tied-up with the NBA. ZTE’s shipments surged 50% yoy to 44.3m units
in 9M15 (Figure 67).
Shipments to reach 75m units in 2016. We expect ZTE to ship 61m
smartphones in 2015, and estimate its smartphone shipments could
rise to over 75m units in 2016 with around 22% growth p.a., mainly
driven by the US, South East Asia and Latin America markets (Figure
68).
Title:
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34
Figure 67: ZTE's quarterly smartphone shipments Figure 68: ZTE's smartphone shipment (2011 - 2016F)
Figure 69: Lenovo Lemon X3
Specification : Qualcomm Snapdragon 808 1.8GHz, 5.5” screen (1920x1080),
21MP rear-facing camera (PDAF) and 8MP front-facing camera, metal casing
Figure 70: ZTE AXON
Specification : Qualcomm Snapdragon 810 quad core, 5.5” screen
(1920x1080), 13MP dual-camera, fingerprint, Iris recognition, metal casing
 TCL smartphone shipments rose 29% yoy in 9M15. TCL’s smartphone
shipments were resilient in 3Q15 despite keen competition from other
domestic brands in the global market, especially in Asia Pacific, and further
price cutting from the tier-1 international brands. TCL’s 3Q15 sales rose
13% qoq or 15% yoy to 12.5m smart devices (including 1.3m tablets). In
9M15, smartphone shipments rose 29% yoy to 33.4m units. It met 64% of
our smartphone shipment forecast but we expect strong 4Q shipments due
to the peak season and promising new products in the pipeline. We believe
that TCL’s smartphone shipments could rise 27% yoy to 52.6m in 2015
(Figure 71).
We expect TCL’s smartphone shipments to rise 15% yoy to 56m units in
2016 on the back of new product launches in 2H15 including 1) Idol 3 for
the US and Eurozone markets, 2) Onetouch Flash 2 for the Asia Pacific
market, and 3) Go Play, a 3-proof handset tailor-made for the youth
segment (Figure 72).
Title:
Source:
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120%
0
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2011
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yoy%
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35
Figure 71: TCL's quarterly smartphone shipments Figure 72: TCL's smartphone shipment (2011 - 2016F)
Figure 73: Alcatel Idol 3
Retail price: USD220
Specification : Qualcomm Snapdragon 615 Octa-core 1GHz, 5.5” screen
(1080x1920), 8MP/13MP cameras,
Figure 74: Alcatel One Touch Flash 2
Retail price: USD140
Specification : MTK MT6753 Octa-core 1.3 GHz, 5” screen (720x1280),
5MP/13MP cameras
SOURCE: CIMB RESEARCH, TCL SOURCE: CIMB RESEARCH, TCL
 Oppo and Vivo were the fastest-growing vendors. Oppo and Vivo
broke into the global top 10 in 2015 thanks to strong shipment growth
in China and SEA markets. This stemmed from their high performance
smartphones with unique features. Oppo and Vivo are focused on the
mid-to high-range segment. They achieved the fastest growth rate
among domestic brands in 9M15. In 9M15, Oppo’s shipments jumped
116% yoy to 30m units while Vivo surged 174% yoy to 28m units.
Oppo and Vivo have successfully established nationwide social
channels, especially in the lower-tier cities. Their phones feature high-
specs, excellent design and improved UI. Avoiding the stiff competition
in the low-end segment has proved to be a successful strategy thus far.
Its hottest models are Vivo’s X5 (Rmb2,298/US$370) and Oppo’s R7
(Rmb2,499/US$400) (Figures 77 and 78).
Title:
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Smartphone shipment yoy % - RHS

36
Figure 75: Oppo's quarterly smartphone shipments Figure 76: Vivo's quarterly smartphone shipments
Figure 77: Oppo R7
Specification : Qualcomm MSM8939 cota-core, 5” screen, 13MP back
camera, metal casing slim body 6.3mm
Figure 78: Vivo X5
Specification : MTK MT6752 octa-core 1.7GHz, 5.2” screen, 13MP back
camera, metal casing thinness 6.4mm
 LeTV and QiKU are the market disruptors. With the Internet background
of the parent companies (LeTV and Qihoo360), LeTV and QiKU are the
most significant new handset brands in China in 2015. They launched very
competitively priced smartphones which successfully drew consumer
interest. LeTV and QiKU sell their models at cost in order to increase their
user base to establish their own ecosystems. According to Sino Research,
LeTV’s Max consistently ranked no. 1 in Aug-Oct 2015 in the Sub-
Rmb3,000 segment in China. During the 11 Nov Singles Day campaign,
QiKU’s online sales was the fifth highest after Xiaomi, Huawei, Meizu and
Apple. This impressed us, as Qiku’s smartphone was only launched a
month ago.
Figure 79: LeTV Superphone 1S
Specification : MTK Helio X10 octa-core 2.2GHz, 5.5” screen (1920x1080),
13MP back-end dual-camera (4K video), fingerprint, metal casing
Figure 80: QiKU Q1 (Youth edition)
Retail price: Rmb999
Specification : MTK MT6753 octa-core 1.3GHz, 5.5” screen (1920x1080),
13MP back camera (PDAF), fingerprint, metal casing
Title:
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Units(million)

37
VALUATION AND RECOMMENDATION
Stay positive on component manufacturers
Component manufacturers were the star performers in 2015. At the
beginning of 2015 we had compiled a report Xiaomi-driven hardware upcycle
dated 2 January 2015, highlighted that the Chinese brands would outpace tier-
1 International brands, especially in the Android camp, and components
manufacturers for Chinese brands would be the key beneficiaries given they
were freed from ASP pressure due to the significant hardware upcycle.
Hong Kong-listed component manufacturers that have high exposure to top-tier
Chinese brands such as Huawei, Xiaomi, Oppo and Vivo have been
outperforming the Hang Seng Index in 2015, as they also did in 2013 and 2014,
reflecting strong earnings growth and the bright industry outlook (Figure 81).
Our sector top picks in 2015 were AAC Tech, Sunny Optical and Tongda
Group. AAC Tech’s share price rose 24% while Sunny Optical’s share price
advanced 35% and Tongda Group’s gained 53%. These stocks outperformed
the Hang Seng Index by -7%.
Another good year for component manufacturers in 2016. We believe the
share price momentum will continue in 2016 as the latest hardware upgrade
cycle just took place, even in the sub-Rmb1,000 (US$150) segment.
Figure 81: China smartphone players share price return (2013 - 2015)
Buy component manufacturers, hold vendors. We stay positive on Hong
Kong-listed component manufacturers that have a strong Chinese customer
base, such as AAC Tech (2018 HK, Add), Sunny Optical (2382 HK, Add) and
Tongda Group (698 HK, Add), as we believe they will be the key beneficiaries
due to 1) dominant supply chain status, 2) above industry-average smartphone
shipment growth from their customers, underpinned by market share gains in
China and rapid expansion in overseas markets, and 3) their ability to
sustainably elevate the value of their components, with stable gross margins,
due to significant specification upgrades in the new round of hardware upgrade
cycle (high-resolution cameras, metal casings, speaker boxes and haptics) in
the midrange – sub Rmb2,000 segment (US$300 to US$400).
On the other hand, we suggest investors adopt a wait and see approach to
Chinese handset vendors due to escalating BOM costs and declining ASP due
to keen competition in China and the global smartphone markets. Even so, we
expect handset shipment growth for Lenovo, TCL and Coolpad to remain
resilient in 2016.
42%
51%
40%
15%
38%
3%
13%
81% 81%
21%
11%
-7%
1%
24%
-24%
35%
53%
1%
-21%
-16%
-7%
-40%
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0%
20%
40%
60%
80%
100%
AACTech
Cowell
Sunny
Tongda
Coolpad
Lenovo
TCLComm
HangSengIndex
2013 2014 2015
+228%

38
AAC Tech, Tongda Group and Sunny Optical are top picks
We remain Overweight on the China smartphone sector. Our top sector
picks are AAC Tech, Tongda Group and Sunny Optical.
 AAC Tech (2018 HK, Add) has a promising new product pipeline for Apple
(haptics and speaker box upgrades) and strong sales growth prospects for
the Chinese brands (acoustics upgrades and RF/mechanical project wins).
 Tongda Group (698 HK, Add) is the likely key beneficiary of the low metal
casing penetration rate among Chinese vendors thanks to its dominant
position as a domestic supplier of smartphone casings (metal casings and
high-end precision plastic casings).
 We also positive on Sunny Optical (2382 HK, Add), as we believe it is
moving up the value chain to upstream. Sunny could also benefit from
significant camera upgrades among Chinese vendors.
 In the small cap space, we like Cowell (1415 HK, Add), as it is benefits from
the continuing iPhone camera upgrades, as well as what we see as cheap
valuation.
 We also like TK Group (2283 HK, Add), as in our view it will benefit from the
fast-growing wearable device segment, thanks to customers wins.
 We maintain our Hold ratings on TCL Communication (2618 HK, Hold) and
Lenovo (992 HK, Hold) on the back of considerable margin pressure in the
handset segment.
 We maintain our Add rating on Coolpad Group (2369 HK, Add), as we
believe the group will benefit from the new handset subsidy programmes
from the three Chinese operators and expect further cooperation between
LeTV and Coolpad.
Recommendations on component manufacturers:
 AAC Technologies (2018 HK, Add) – AAC is the key beneficiary in the
next round of product cycle upgrades, given the significant speaker box
upgrades in the next generation iPhones and strong demand for speaker
boxes among leading Chinese brands due to the wide adoption of high-end
components. AAC is riding Apple’s strong new product pipeline (speaker
box and haptic upgrades) as well as the strong sales growth prospects for
Chinese brands (acoustic upgrades and RF/mechanical project wins).
We believe AAC’s earnings growth will remain robust at 21% yoy in FY16
after an estimated 36% jump in FY15, thanks to a strong new product
pipeline and ASP hikes for upgraded haptics and acoustic components. We
forecast AAC delivering an EPS CAGR of 22% in FY14-17F, driven by
revenue CAGR of 22% and a stable gross margin. We maintain an Add call
on AAC with a higher target price of HK$65.0 as we roll over our valuation
to FY16, based on a FY17 P/E of 15.2x (1 s.d. above its 5-year average).
Figure 82: AAC Tech's 12 month forward P/E
SOURCE: CIMB, BLOOMBERG
8 x
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39
 Cowell e Holdings (1415 HK, Add) – Cowell is riding on iPhone’s endless
cameras upgrades thanks to its primary front-facing camera modules
supplier status. Apart from that, Cowell will start providing rear-facing
cameras for iPhone’s legacy products in FY16. We are also positive on the
potential upgrade (thinner, waterproof, functions add) in the front-facing
camera in the next generation of iPhones.
We project Cowell to deliver 8% net profit growth in FY16 as the next
version of the iPhone is expected to be launched in Sep 16 and following
stronger growth of 15% in FY17, thanks to full-year contribution of iPhones
7 sales. We maintain our Add rating on Cowell due to what we view as its
compelling valuation and solid relationship with Apple. Our target price
(HK$4.44) is based on a FY17 P.E of 6.0x, in line with the small-cap Apple
component suppliers.
Figure 83: Cowell's 12 month forward P/E
 Sunny Optical (2382 HK, Add) – We think that Sunny is a key
beneficiary from the significant upgrades in camera resolutions and
functional additions among Chinese vendors, thanks to its dominant
market share in the domestic brands supply chain. Furthermore, we are
positive on the rapid growth in handset lens sets and vehicle lens sets
divisions which has led it up the value chain towards becoming an
upstream optical components manufacturer.
In our view, its gross margin will be protected by the sustainable image
pixels migration in Chinese vendors and its high-margin optical
components segment’s rapid growth. With 17% revenue CAGR, we
forecast 27% EPS CAGR in FY14-17, underpinned by Sunny’s fast-
growing high-margin divisions (handset lens sets and vehicle lens sets)
and steady growth of the HCM manufacturing division. Maintain Add.
Share price catalysts are robust growth in handset lens sets and vehicle
lens sets divisions. We raise our target price to HK$21.40 as we roll over
to FY16. Our target price (HK$ 21.40) is based on a FY17 P/E of 16x (its
upcycle peak valuation).
2 x
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40
Figure 84: Sunny Optical's 12 month forward P/E
 Tongda Group (698 HK, Add) –Tongda is one of the key beneficiaries of
the wide adoption of metal casings among domestic brands on the back of a
low metal casing penetration rate among Chinese vendors. Tongda’s metal
casings customers include Huawei, Xiaomi, Oppo, Vivo and QiKU. Recent
new model launches such as QiKU Youth Edition (Rmb999) and Xiaomi
Redmi Note3 (Rmb899) are equipped with metal casings produced by
Tongda. On the other hand, we expect the new precision rubber parts
product launch for a new customer will bring a new revenue stream for the
group in FY16.
We reiterate our Add recommendation, with the strong growth of the
handset division a potential catalyst. Our target price is raised to HK$2.00
as we roll over to FY16, based on a FY17 P/E of 11x, on par with its peers.
Figure 85: Tongda's 12 month forward P/E
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41
 TK Group (2283 HK, Add) – We expect TK Group to maintain a c.20%
topline growth in FY16, driven by new customers gain and new projects won
in the mobile phone and wearable divisions and increased orders from
Philips. On the other hand, we believe its gross profit margin will expand by
1% pts to c.28% in FY16 due to an improved utilisation rate in the
automotive division and higher automation in plastic component
manufacturing services.
We maintain an Add recommendation on TK Group due to its cheap
valuation and appealing earnings growth. Potential catalysts are continuous
gains in new customers, rapid growth in high-main segments and a
potentially higher dividend payout ratio. Our target price (HK$3.20) is raised
as we roll it over to FY16, based on a FY17 P/E of 8.5x, on par with its
peers (mould and plastic components manufacturers and handset
component makers).
Figure 86: TK Group's 12 month forward P/E
4 x
5 x
6 x
7 x
8 x
9 x
10 x
11 x
12 x
Jan-14
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42
Recommendations on handset vendors:
 Coolpad Group (2369 HK, Add) – We believe that Coolpad have gone
through the most difficult period in 2015, in view of its market share loss and
inflated marketing expenses for channels rebuilding due to significant
reduction in handset subsidies among Chinese mobile operators.
Nevertheless, we expect Coolpad’s operation to improve in 2016,
underpinned by 1) stable smartphone sales, and 2) a balanced distribution
network between online channel (Dazen/QiKU), open channel (ivvi) and
operator channel (Coolpad).
We maintain our Add call on Coolpad in view of favourable policy changes
in the China smartphone market. On the other hand, we expect further
cooperation between LeTV and Coolpad. Our SOP target price (HK$2.27) is
based on 20x FY16 earnings for its services income, 8x earnings for its
smartphone sales and cash of HK$3.1bn. Further cooperation with its
second largest shareholder LeTV (with a 17.93% stake) could act as
another share price re-rating catalyst.
Figure 87: Coolpad's 12 month forward P/E
 Lenovo (992 HK, Hold) - We remain cautious about Lenovo’s smartphone
shipments in CY16 because its smartphones lack innovative features and
are relatively poorly designed. Hence, we expect its smartphone shipments
to rise by only 4.1% yoy to 76m units. It might take time for the company to
reposition its brands so PC will still be the cash cow for Lenovo. We do not
expect Lenovo to be able to turn around its smartphone business in the
short term.
Maintain Hold with target of HK$7.90, unless we see significant progress in
turning around its smartphone business. Our target price is unchanged, still
based on 12x FY17 P/E.
6 x
8 x
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12 x
14 x
16 x
18 x
20 x
Jan-13
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China smartphone sector 2016 outlook 20160105

China smartphone sector 2016 outlook 20160105

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