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Company Update

Taiwan: Handsets 6 July, 2010 Action What’s new? Our view BUY (Upgrade) ► We upgrade
Taiwan: Handsets
6 July, 2010
Action
What’s new?
Our view
BUY (Upgrade)
► We upgrade HTC from Sell to
► Our channel checks indicate
BUY with a new TP of NT$595.
HTC’s shipment strength could
last into 2H10 as it has gained
TP upside (downside) 26.2%
► We raise our earnings forecasts
traction in the Android camp. Its
Close 5 July, 2010
by 34%, 77% and 100% for
progress in building brand
Price
NT$471.50
2010F, 2011F and 2012F to
awareness has been better than
12M Target
NT$595.00
reflect better-than-expected
Previous Target
NT$325.00
we had anticipated, helping HTC
recent sell-through strength.
TAIEX
7,440.0
stand out from the competition.
Company profile: HTC manufactures and markets Microsoft Windows based and Google Android based smartphones.
Share price performance relative to TAIEX
HTC (2498 TT)
514
-1
Share Price (NT$)
Performance relative to TAIEX (%)
-6
464
-11
Standing out from the crowd
-16
414
-21
Upgrade from Sell to BUY with a new TP of NT$595: We believe HTC
-26
364
has gained meaningful traction within the Android camp, and thus we
-31
-36
314
anticipate its recent solid sell-through will last into 2H10. We
-41
previously expected demand to peak in 2Q10, but now expect demand
264
-46
Jul-09
Oct-09
Jan-10
Apr-10
to be sustainable through 2H10. Despite our expectations of

Market cap

US$11,315.1 mn

6M avg. daily turnover

US$82.0 mn

Outstanding shares

773.9 mn

Free float

69.6%

FINI ownership

58.8%

 

Wei Chih

Major shareholders

Investment, 5.1%

Net debt/equity

Net cash

BVPS (2010F)

NT$90.97

P/B (2010F)

5.2x

Financial outlook (NT$ mn)

Year to

       

2009

2010F

2011F

2012F

 

Dec

       

Sales

144,881

219,791

271,843

329,078

Op.

profit

24,175

33,116

40,284

45,529

Net profit

22,609

30,111

36,719

41,367

EPS (NT$)

28.66

38.91

47.44

53.45

EPS growth

(20.6)

35.8

21.9

12.7

(%)

       

DPS (NT$)

26.01

27.23

33.21

37.41

P/E (X)

16.5

12.1

9.9

8.8

Div.

yield

       
 

5.5

5.8

7.0

7.9

(%)

       

ROE (%)

35.8

44.3

46.9

44.1

Primary Analyst:

 

Bonnie Chang

+852 3969 9904

bonnie.chang@yuanta.com

intensifying competition and commoditization in the smartphone

market, HTC has been able to build its brand awareness better than we

had anticipated, which will allow it to stand out from the competition

when the smartphone market matures.

Demand strength to last into 2H10: Support from operators for HTC

has not been diminished by the upcoming launch of Samsung’s

Galaxy S and Motorola’s Droid X models. We estimate HTC’s

shipments will increase further QoQ in 3Q10, backed by ongoing

strong demand, despite tight component supply (AMOLED).

Stable ASP trend: We believe HTC will be able to maintain stable ASP

and margin trends in the near term thanks to solid demand for its

high-end products and tight supply.

Implications of CDMA iPhone may not necessarily be negative:

Apple will likely roll out a CDMA iPhone with Verizon in 2011,

which may be negative to HTC. However, with the end of iPhone

exclusivity, AT&T may increase its support for Android phones.

Valuation: We raise our 2010/2011/2012 earnings forecasts by

34%/77%/100% to NT$38.91/47.44/53.45 to reflect better shipment,

ASP and margin trends. We also lift our TP to NT$595, derived from

the average of our P/E and DCF valuations and implying 26% upside.

With significant contribution from:

Wenchu Hsu

+886 2 3518 7943

wenchu.hsu@yuanta.com

ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES BEGIN ON PAGE 10.

Yuanta does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

HTC’s progress in building brand awareness has been better than we had anticipated Demand strength

HTC’s progress in building brand awareness has been better than we had anticipated

Demand strength looks sustainable

Our channel checks indicate HTC’s shipment strength could last into 2H10 as it has

gained traction within the Android camp thanks to its strong product cycle. This

suggests our previous expectations for short-lived sell-in strength may be too

conservative. We maintain our long-term negative view on the smartphone market

given intensifying competition and commoditization. However, we believe HTC’s

progress in building brand awareness has been better than we had anticipated. We

regard this as a positive that will help HTC stand out from the competition once the

smartphone market matures.

10-15% volume growth in 3Q10 followed by a mild decline in 4Q10

We do not believe support from operators for HTC has been affected by launches of

other Android phones by HTC’s key competitors; i.e. Samsung’s Galaxy S and

Motorola’s Droid X. HTC rolled out more new Android models in 1H10 and those

products (i.e. the Desire, Incredible and EVO) have been competitive, with positive

feedback and increased orders from operators. HTC will launch another wave of

models on the Android (with Android OS 2.2) and WinPhone 7 platforms, and we

expect this to sustain the company’s sales momentum in 2H10.

Our latest industry checks suggest HTC’s demand strength could hold up well into

3Q10 with volume up 10-15% QoQ to 5.5-6.0 mn units, followed by a mild decline

in 4Q10 given unclear visibility for now. Given that, we forecast HTC to achieve 20

mn units shipped in 2010, up 72% YoY.

We expect HTC to maintain stable ASP and gross margin trends in 2H10 thanks to solid demand for its high-end products and tight supply

Supply/demand dynamic favors HTC

HTC may have resolved the supply shortage of AMOLED display from Samsung

Mobile Display during 2Q10 when it added Sony’s IPS LCD display as an additional

source in July. We expect HTC to maintain stable ASP and gross margin trends in

2H10 thanks to solid demand for its high-end products and tight supply.

CDMA iPhone not necessarily negative for HTC

Our channel checks suggest Apple is likely to roll out a CDMA-standard iPhone with

Verizon in 2011, which could be a negative for HTC considering rising competition

within Verizon. However, this also means the end of iPhone exclusivity with AT&T,

which could result in AT&T increasing its support for Android phones.

We raise our earnings forecasts for 2010, 2011 and 2012 by 34%, 77% and 100% to NT$38.91, NT$47.44 and NT$53.45, respectively

Earnings revision

We raise our earnings forecasts for 2010, 2011 and 2012 by 34%, 77% and 100% to

NT$38.91, NT$47.44 and NT$53.45, respectively, to reflect our higher shipment,

ASP and margin assumptions. We now are expecting HTC to ship 20 mn units in

2010, 26 mn in 2011F (up 31% YoY) and 35 mn units in 2012 (up 34% YoY).

We expect the majority of shipments to be Android phones and high-end models.

As such, we raise our ASP assumptions to US$335 in 2010, US$321 in 2011 and

US$293 in 2012, vs. US$326, US$289 and US$255 previously. For gross margins,

we are anticipating a relatively stable trend of 30.9% in 2010F, 29.9% in 2011F and

29.4% in 2012F, vs. our previous forecasts of 30.0%, 28.8% and 29.3%, respectively.

In absolute terms, our operating expense assumptions are higher than our previous

forecasts but are smaller as a percentage of sales due to larger sales bases.

smaller as a percentage of sales due to larger sales bases. Yuanta Taiwan: Handsets 6 Jul,
smaller as a percentage of sales due to larger sales bases. Yuanta Taiwan: Handsets 6 Jul,

Yuanta

Taiwan: Handsets

6 Jul, 2010

HTC (2498 TT) Company Update

Page 2 of 12

Figure 1: Our earnings revisions for HTC, 2010-2012F

   

2010F

   

2011F

   

2012F

 
 

NT$ mn

                 
 

New

Old

Change

New

Old

Change

New

Old

Change

Revenue

219,791

174,387

26.0%

271,843

174,654

55.6%

329,078

176,315

86.6%

Gross Profit

67,936

52,396

29.7%

81,210

50,347

61.3%

96,865

51,591

87.8%

Operating Profit

33,116

24,612

34.6%

40,284

22,388

79.9%

45,529

22,323

104.0%

PBT

33,869

25,365

33.5%

41,060

23,164

77.3%

46,375

23,169

100.2%

PAT

30,111

22,541

33.6%

36,719

20,764

76.8%

41,367

20,713

99.7%

EPS (NT$)

38.91

29.13

33.6%

47.44

26.83

76.8%

53.45

26.76

99.7%

Wtd. avg. no. of shares

774

774

0.0%

774

774

0.0%

774

774

0.0%

Margin (%)

                 

Gross margin

30.9%

30.0%

 

29.9%

28.8%

 

29.4%

29.3%

 

Operating margin

15.1%

14.1%

 

14.8%

12.8%

 

13.8%

12.7%

 

Net margin

13.7%

12.9%

 

13.5%

11.9%

 

12.6%

11.7%

 

Key assumptions

                 

Shipment (mn units)

20

16

23.8%

26

19

42.0%

35

21

65.2%

ASP (US$)

335

326

2.6%

321

289

10.9%

293

255

14.6%

Source: Yuanta Research estimates

293 255 14.6% Source: Yuanta Research estimates Yuanta Taiwan: Handsets 6 Jul, 2010 HTC (2498 TT)
293 255 14.6% Source: Yuanta Research estimates Yuanta Taiwan: Handsets 6 Jul, 2010 HTC (2498 TT)

Yuanta

Taiwan: Handsets

6 Jul, 2010

HTC (2498 TT) Company Update

Page 3 of 12

Valuation We continue to use the average of our P/E and DCF valuations to derive

Valuation

We continue to use the average of our P/E and DCF valuations to derive our target

price of NT$595, which implies 26% upside potential.

Our target price of NT$595 is derived from the average of our P/E and DCF valuations

Forward P/E valuation – NT$617

We apply a target P/E multiple of 13x to our 2011F EPS to derive a target price of

NT$617 (vs. NT$336 previously). We switch from 2010 to 2011 EPS as we are

nearing the middle of 2010 and believe the market will soon factor in HTC’s 2011

earnings outlook. We raise our P/E multiple to 13x from the previous 12x as we

believe HTC has improved its brand awareness in the major smartphone markets,

Europe and the US. HTC’s increased brand awareness globally also justifies the

higher multiple, in our view. Our P/E multiple of 13x 2011F EPS is at the mid-to-

high end of HTC’s trading range of 5x-20x since 2006.

DCF valuation – NT$574

Our DCF target price is NT$574, vs. NT$310 previously. Our new value mainly

reflects our upward earnings revisions. We use a DCF methodology to reflect HTC’s

strong FCF-generating capability. The assumptions of our DCF valuation are

unchanged. We use a WACC of 10%, a perpetual earnings growth rate of -2% and a

risk-free rate of 2% to derive our DCF-driven target price. Please see Figure 2 for

more details.

We believe HTC is likely to maintain a high cash dividend payout policy in the near term

6% cash dividend yield

HTC will pay out a NT$26 cash dividend from its 2009 earnings in 2010,

representing a 6% yield rate based on the current share price. In view of the

company’s ample cash position and lack of reinvestment plans, we believe HTC is

likely to maintain a high cash dividend payout policy in the near term. We believe

the stable dividend yield offers share price support.

the stable dividend yield offers share price support. Yuanta Taiwan: Handsets 6 Jul, 2010 HTC (2498
the stable dividend yield offers share price support. Yuanta Taiwan: Handsets 6 Jul, 2010 HTC (2498

Yuanta

Taiwan: Handsets

6 Jul, 2010

HTC (2498 TT) Company Update

Page 4 of 12

Figure 2: DCF valuation for HTC’s core business

(NT$ mn)

2010F

2011F

2012F

2013F

2014F

2015F

2016F

2017F & beyond

EBITDA Less changes in working capital Less capex Less tax Free cash flow (FCF) Discount factor PV of FCF

33,764

40,975

46,263

47,419

48,605

49,820

51,065

 

-925

-1,359

-1,727

-1,744

-1,762

-1,779

-1,797

-900

-900

-900

-909

-918

-927

-937

-3,759

-4,341

-5,008

-5,236

-5,367

-5,501

-5,639

PV of FCF beyond 2017

28,180

34,375

38,627

39,530

40,558

41,612

42,693

351,292

0.91

0.83

0.75

0.69

0.62

0.57

0.52

0.52

25,639

28,455

29,093

27,088

25,286

23,604

22,034

181,304

Growth to perpetuity (%)

-2%

 

Corporate value Debt & Preferred Stock Excess Cash Minority interest Equity value

362,504

             

0

82,082

0

444,586

Value per share (NT$)

574.0

             

Shares outstanding

774

             

WACC calculations

               

Market cap (NT$ mn) Latest gross debt in b/s (NT$ mn) Equity + debt Risk free rate Beta Risk premium Cost of equity Actual interest rate on debt Tax rate Cost of debt WACC

364,911

             

0

364,911

2.0%

1.13

7.0%

9.9%

1.0%

-11.3%

1.1%

9.9%

Source: Yuanta Research estimates

Figure 3: HTC- target price derivation and upside

Target price derived from DCF valuation (NT$)

574

Target price derived from our P/E based valuation (NT$)

617

Final target price based on average of DCF and P/E valuation (NT$)

595

Target price upside/downside %

26.2%

Source: Yuanta Research estimates

upside/downside % 26.2% Source: Yuanta Research estimates Yuanta Taiwan: Handsets 6 Jul, 2010 HTC (2498 TT)
upside/downside % 26.2% Source: Yuanta Research estimates Yuanta Taiwan: Handsets 6 Jul, 2010 HTC (2498 TT)

Yuanta

Taiwan: Handsets

6 Jul, 2010

HTC (2498 TT) Company Update

Page 5 of 12

Figure 4: Peer valuation comparison table

         

EPS

   

PER (x)

 

EPS growth (%)

       

Share

Company

Ticker

Rating

TP

price

               
     

2009

2010F

2011F

2009

2010F

2011F

2009

2010F

2011F

HTC

2498 TT

BUY

595

NT$471.5

28.7

38.9

47.4

16.5

12.1

9.9

-20.6%

35.8%

21.9%

Global peers

                       

Nokia*

NOK1V FH

Not rated

N.A.

€7.11

0.2

0.5

0.7

29.6

14.5

10.4

-77.6%

104.6%

38.9%

Motorola *

MOT US

Not rated

N.A.

US$7.11

0.0

0.3

0.5

N.M.

28.4

15.7

N.M.

N.M.

80.8%

RIM*

RIM CN

Not rated

N.A.

CAD63.19

4.8

5.5

6.2

13.1

11.4

10.2

30.8%

14.2%

11.6%

Palm*

PALM US

Not rated

N.A.

US$5.7

-6.1

-1.9

-2.0

N.M.

N.M.

N.M.

N.M.

N.M.

N.M.

Average

     

21.3

18.1

12.1

-23.4%

59.4%

43.8%

Local peers

                         

Compal Comm.

8078

TT

SELL

23

NT$27.45

1.3

1.4

1.6

21.2

19.2

16.9

-42.1%

10.8%

13.1%

Inventec Appliances

3367

TT

Not rated

N.A.

NT$23.8

0.8

3.2

2.3

30.1

7.4

10.4

-80.7%

308.9%

-29.1%

Average

     

25.7

13.3

13.7

-61.4%

159.8%

-8.0%

Source: Company data, Yuanta Research estimates, Bloomberg

 

Notes: Price, EPS, and BVPS figures are denominated in local currency.

 

Notes: RIM fiscal year ends on Feb 28; Palm fiscal year ends on May 31; HTC, Nokia, Motorola, FIH year ends on Dec 31.

 

Figure 5: Peer valuation comparison table (continued)

 
 

Cash dividend yield (%)

 

ROE (%)

   

BVPS

   

PBR (x)

 
   

Company

Ticker

                       
 

2009

2010F

2011F

2009

2010F

2011F

2009

2010F

2011F

2009

2010F

2011F

HTC

2498 TT

5.5%

5.8%

7.0%

35.8%

44.3%

46.9%

83.2

91.0

111.2

5.7

5.2

4.2

Global peers

                       

Nokia*

NOK1V FH

5.6%

5.7%

5.9%

6.5%

15.1%

18.1%

3.5

3.7

3.9

2.0

1.9

1.8

Motorola *

MOT US

0.7%

0.0%

0.0%

-0.5%

7.4%

9.7%

4.2

4.6

5.0

1.7

1.6

1.4

RIM*

RIM CN

0.0%

0.0%

0.0%

36.5%

32.8%

26.9%

14.4

19.6

25.8

4.4

3.2

2.4

Palm*

PALM US

0.0%

0.0%

0.0%

-74.0%

156.6%

94.7%

-1.7

-1.7

-4.2

-3.4

-3.3

-1.4

Average

1.6%

1.4%

1.5%

-7.9%

53.0%

37.3%

1.2

0.9

1.1

Local peers

                       

Compal Comm.

8078

TT

3.6%

4.0%

4.5%

7.0%

7.6%

8.4%

18.5

19.0

19.5

1.5

1.4

1.4

Inventec Appliances

3367

TT

6.6%

10.6%

8.1%

3.3%

18.2%

N.A.

22.6

30.9

N.A.

1.1

0.8

N.A.

Average

 

5.1%

7.3%

6.3%

5.2%

12.9%

8.4%

1.3

1.1

1.4

Source: Company data, Yuanta Research estimates, Bloomberg

Source: Company data, Yuanta Research estimates, Bloomberg Yuanta Taiwan: Handsets 6 Jul, 2010 HTC (2498 TT)
Source: Company data, Yuanta Research estimates, Bloomberg Yuanta Taiwan: Handsets 6 Jul, 2010 HTC (2498 TT)

Yuanta

Taiwan: Handsets

6 Jul, 2010

HTC (2498 TT) Company Update

Page 6 of 12

Figure 6: Quarterly highlights (consolidated basis)

(NT$ mn)

1Q2010A

2Q2010F

3Q2010F

4Q2010F

FY2010F

1Q2011F

2Q2011F

3Q2011F

4Q2011F

FY2011F

Sales

37,697

55,864

63,688

62,542

219,791

53,636

64,682

73,885

79,640

271,843

COGS

(26,291)

(38,502)

(43,778)

(43,283)

(151,855)

(38,372)

(45,584)

(51,340)

(55,337)

(190,633)

Gross profit

11,406

17,361

19,910

19,259

67,936

15,264

19,099

22,545

24,303

81,210

Opex

5,895

8,603

10,190

10,132

(34,820)

8,421

10,090

10,787

11,627

(40,926)

Operating profit

5,511

8,758

9,720

9,127

33,116

6,843

9,008

11,758

12,675

40,284

Non-operating profit

209

178

181

185

753

188

192

196

200

776

Pre-tax profit

5,721

8,936

9,901

9,312

33,869

7,031

9,200

11,954

12,875

41,060

Minority interest

0

0

0

0

0

0

0

0

0

0

Income tax

(722)

(963)

(1,069)

(1,004)

(3,759)

(753)

(901)

(1,293)

(1,394)

(4,341)

Net income

4,998

7,973

8,832

8,308

30,111

6,278

8,299

10,660

11,481

36,719

FD WA EPS (NT$)

6.46

10.30

11.41

10.73

38.91

8.11

10.72

13.77

14.83

47.44

Wtd. avg. no. of shares

774

774

774

774

774

774

774

774

774

774

Margin analysis

                   

Gross margin

30.3%

31.1%

31.3%

30.8%

30.9%

28.5%

29.5%

30.5%

30.5%

29.9%

Operating margin

14.6%

15.7%

15.3%

14.6%

15.1%

12.8%

13.9%

15.9%

15.9%

14.8%

Pre-tax margin

15.2%

16.0%

15.5%

14.9%

15.4%

13.1%

14.2%

16.2%

16.2%

15.1%

Effective tax rate

12.6%

10.8%

10.8%

10.8%

11.1%

10.7%

9.8%

10.8%

10.8%

10.6%

Growth (% QoQ)

                   

Sales

(8.2%)

48.2%

14.0%

(1.8%)

51.7%

(14.2%)

20.6%

14.2%

7.8%

23.7%

Operating profit

(9.9%)

58.9%

11.0%

(6.1%)

37.0%

(25.0%)

31.6%

30.5%

7.8%

21.6%

Net income

(9.7%)

59.5%

10.8%

(5.9%)

33.2%

(24.4%)

32.2%

28.4%

7.7%

21.9%

FD WA EPS

(7.9%)

59.5%

10.8%

(5.9%)

35.8%

(24.4%)

32.2%

28.4%

7.7%

21.9%

Sales breakdown (NT$ mn)

                   
 

PDA

1,700

1,700

1,400

1,500

6,300

1,530

1,530

1,260

1,350

5,670

PDA phones

32,000

47,103

54,168

53,085

186,357

45,313

54,920

63,158

68,084

231,475

Smartphone

3,997

7,061

8,120

7,957

27,135

6,792

8,232

9,467

10,206

34,698

ODM projects

0

0

0

0

0

0

0

0

0

0

=

total phone

35,997

54,164

62,288

61,042

213,491

52,106

63,152

72,625

78,290

266,173

 

Total

37,697

55,864

63,688

62,542

219,791

53,636

64,682

73,885

79,640

271,843

Sales breakdown (%)

                   
 

PDA

4.5%

3.0%

2.2%

2.4%

2.9%

2.9%

2.4%

1.7%

1.7%

2.1%

PDA phones

84.9%

84.3%

85.1%

84.9%

84.8%

84.5%

84.9%

85.5%

85.5%

85.2%

Smartphone

10.6%

12.6%

12.7%

12.7%

12.3%

12.7%

12.7%

12.8%

12.8%

12.8%

ODM projects

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

=

total phone

95.5%

97.0%

97.8%

97.6%

97.1%

97.1%

97.6%

98.3%

98.3%

97.9%

 

Total

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

Source: Company data, Yuanta Research estimates

Note: A represents historical data reconciled by Yuanta

Note: A represents historical data reconciled by Yuanta Yuanta Taiwan: Handsets 6 Jul, 2010 HTC (2498
Note: A represents historical data reconciled by Yuanta Yuanta Taiwan: Handsets 6 Jul, 2010 HTC (2498

Yuanta

Taiwan: Handsets

6 Jul, 2010

HTC (2498 TT) Company Update

Page 7 of 12

Figure 7: 12-month forward looking P/E band chart NT$ 898 20.6x P/E 798 16.6x P/E
Figure 7: 12-month forward looking P/E band chart
NT$
898
20.6x P/E
798
16.6x P/E
698
598
12.6x P/E
498
398
8.5x P/E
298
198
4.5x P/E
98
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Source: Company data, Yuanta Figure 8: 12-month forward looking P/B band chart NT$ 996 9.6x
Source: Company data, Yuanta
Figure 8: 12-month forward looking P/B band chart
NT$
996
9.6x P/B
896
796
7.8x P/B
696
6.1x P/B
596
496
4.3x P/B
396
296
2.5x P/B
196
96
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10

Source: Company data, Yuanta

Figure 9: Related equities – Yuanta-issued warrants

Underlying

Stock code

Stock price

Warrant

Listing

Expiration

Issued

Execution

Warrant

Conversion rate

Implied

   

code

date

date

lots

 

equity

           

price

price

 

volatility

HTC

2498

471.5

03150P

2010/6/23

2010/12/22

20,000

370

0.78

0.05

45.55%

HTC

2498

471.5

030708

2010/6/14

2010/12/13

20,000

420

1.67

0.02

44.83%

HTC

2498

471.5

030319

2010/5/28

2010/11/29

10,000

490

2.16

0.05

42.15%

HTC

2498

471.5

030186

2010/5/21

2010/11/22

20,000

465

2.66

0.05

42.51%

HTC

2498

471.5

03024P

2010/5/21

2010/11/22

20,000

400

1.02

0.05

45.29%

HTC

2498

471.5

04204

2010/4/8

2010/10/7

30,000

390

1.88

0.02

46.04%

HTC

2498

471.5

04143P

2010/4/2

2010/10/1

20,000

335

0.12

0.05

45.68%

HTC

2498

471.5

03974

2010/3/24

2010/9/23

10,000

365

5.5

0.05

39.07%

HTC

2498

471.5

03856

2010/3/16

2010/9/15

10,000

322

7

0.05

0.00%

HTC

2498

471.5

03500

2010/2/23

2010/8/23

10,000

300

8.4

0.05

0.00%

HTC

2498

471.5

03107

2010/1/27

2010/7/26

10,000

440

3.81

0.1

41.15%

Source: Yuanta

10,000 440 3.81 0.1 41.15% Source: Yuanta Yuanta Taiwan: Handsets 6 Jul, 2010 HTC (2498 TT)
10,000 440 3.81 0.1 41.15% Source: Yuanta Yuanta Taiwan: Handsets 6 Jul, 2010 HTC (2498 TT)

Yuanta

Taiwan: Handsets

6 Jul, 2010

HTC (2498 TT) Company Update

Page 8 of 12

Balance Sheet

2008

2009

2010F

2011F

2012F

Year as of Dec (NT$ mn)

       

Cash & ST investment

61,827

64,192

84,598

106,267

133,305

Inventories

7,418

4,739

7,593

9,532

11,611

Accounts receivable

29,799

27,571

41,760

51,650

62,525

Others

2,228

4,524

4,524

4,524

4,524

Current assets

101,272

101,025

138,475

171,972

211,964

LT investments

5,161

6,506

6,958

7,411

7,863

Net fixed assets

7,376

8,314

8,567

8,777

8,943

Others

1,418

3,298

3,298

3,298

3,298

Other assets

13,954

18,118

18,823

19,485

20,104

Total assets

115,226

119,143

157,298

191,457

232,069

Accounts payable

27,907

24,882

41,001

51,471

62,697

ST borrowings

0

0

0

0

0

Others

26,651

28,619

45,895

53,942

67,664

Current liabilities

54,558

53,502

86,895

105,413

130,361

Long-term debts

0

0

0

0

0

Others

6

1

1

1

1

Long-term liabilities

6

1

1

1

1

Total liabilities

54,565

53,503

86,897

105,414

130,362

Paid-in capital

7,554

7,889

7,889

7,889

7,889

Capital surplus

4,418

9,100

9,100

9,100

9,100

Retained earnings

52,036

48,638

58,231

73,872

89,536

Capital adjustment

(3,346)

13

(4,819)

(4,819)

(4,819)

Shareholders' equity

60,661

65,640

70,401

86,043

101,706

Source: Company data, Yuanta

 

Cash Flow

2008

2009

2010F

2011F

2012F

Year to Dec (NT$ mn)

         

Net profit

28,635

22,609

30,111

36,719

41,367

Depr & amortization

604

674

647

690

733

Change in working cap.

(5,727)

1,883

(925)

(1,359)

(1,727)

Others

14,082

2,376

16,823

7,596

13,269

Operating cash flow

37,594

27,542

46,656

43,646

53,642

Capex

(4,264)

(1,612)

(900)

(900)

(900)

Change in LT inv.

(2,109)

(1,164)

0

0

0

Change in other assets

(330)

(2,378)

0

0

0

Investment cash flow

(6,702)

(5,154)

(900)

(900)

(900)

Change in share capital

(3,410)

(2,407)

(4,832)

0

0

Net change in debt

0

0

0

0

0

Other adjustments

(20,691)

(20,131)

(20,518)

(21,077)

(25,703)

Financing cash flow

(24,101)

(22,538)

(25,350)

(21,077)

(25,703)

Net cash flow

6,791

(150)

20,406

21,669

27,039

Free cash flow

20,869

25,120

31,939

38,716

43,635

Source: Company data, Yuanta

Profit and Loss

 

2008

2009

2010F

2011F

2012F

Year to Dec (NT$ mn)

           

Sales

152,559

144,881

219,791

271,843

329,078

Cost of goods sold

(101,876)

(98,992)

(151,855)

(190,633) (232,212)

Gross profit

50,683

45,888

67,936

81,210

96,865

Operating expenses

(20,426)

(21,713)

(34,820)

(40,926)

(51,336)

Operating profit

30,256

24,175

33,116

40,284

45,529

Interest income

1,368

349

266

324

394

Interest expense

0

0

0

0

0

Net interest

1,369

349

266

324

394

Net Invst.Inc/(loss)

(57)

277

452

452

452

Net oth non-op.Inc/(loss)

23

412

34

0

0

Net extraordinaries

0

0

0

0

0

Pretax income

31,590

25,212

33,869

41,060

46,375

Income taxes

(2,955)

(2,604)

(3,759)

(4,341)

(5,008)

Net profit

28,635

22,609

30,111

36,719

41,367

EBITDA

30,861

24,849

33,764

40,975

46,263

EPS (NT$)

36.10

28.66

38.91

47.44

53.45

EPS (NT$) Bonus Adj.

36.10

28.66

38.91

47.44

53.45

Source: Company data, Yuanta

 

Key Ratios

Year to Dec

 

2008

2009

2010F

2011F

2012F

Growth (% YoY)

Sales

28.7

(5.0)

51.7

23.7

21.1

Op profit

(0.9)

(20.1)

37.0

21.6

13.0

EBITDA

(0.7)

(19.5)

35.9

21.4

12.9

Net profit

(1.0)

(21.0)

33.2

21.9

12.7

EPS

(2.4)

(20.6)

35.8

21.9

12.7

Profitability (%)

Gross margin

33.2

31.7

30.9

29.9

29.4

Operating margin

19.8

16.7

15.1

14.8

13.8

EBITDA margin

20.2

17.2

15.4

15.1

14.1

Net profit margin

18.8

15.6

13.7

13.5

12.6

ROA

27.8

19.3

21.8

21.1

19.5

ROE

49.1

35.8

44.3

46.9

44.1

Stability

Gross debt/equity (%)

0.0

0.0

0.0

0.0

0.0

Net cash (debt)/equity (%)

101.9

97.8

120.2 123.5

131.1

Int. coverage (X)

(136,164.

(192,460. (498,075.7 (603,826.

(681,983.

Int. & ST debt cover (X)

(136,164.

(192,460. (498,075.7 (603,826.

(681,983.

Cash flow int. cover (X)

(162,043.

(210,241. (686,111.0 (641,856.

(788,852.

Cash flow/int. & ST debt (X)

(162,0

(210,241. (686,111.0 (641,856.

(788,852.

Current ratio (X)

1.9

1.9

1.6

1.6

1.6

Quick ratio (X)

1.7

1.8

1.5

1.5

1.5

Net debt (NT$ mn)

(61,826.9 (64,192.0) (84,597.7) (106,266.

(133,305.

BVPS (NT$)

76.48

83.20

90.97 111.18

131.41

Valuation Metrics (x)

P/E

13.1

16.5

12.1

9.9

8.8

P/FCF

17.9

14.8

11.4

9.4

8.4

P/B

6.2

5.7

5.2

4.2

3.6

P/EBITDA

12.1

15.0

10.8

8.9

7.9

P/S

2.5

2.6

1.7

1.3

1.1

Source: Company data, Yuanta

2.5 2.6 1.7 1.3 1.1 Source: Company data, Yuanta Yuanta Taiwan: Handsets 6 Jul, 2010 HTC
2.5 2.6 1.7 1.3 1.1 Source: Company data, Yuanta Yuanta Taiwan: Handsets 6 Jul, 2010 HTC

Yuanta

Taiwan: Handsets

6 Jul, 2010

HTC (2498 TT) Company Update

Page 9 of 12

Appendix A: Important Disclosures Analyst Certification Each research analyst primarily responsible for the content of

Appendix A: Important Disclosures

Analyst Certification Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report.

HTC (2498 TT) Three-year recommendation and target price history

685

635

585

535

485

435

385

335

285

235

5 6 3 4 7 2 9 1 8 10
5
6
3
4
7
2
9
1
8
10

Share Price NT$

12 13 17 14 15 18 11 16
12 13
17
14
15
18
11
16

685

635

585

535

485

435

385

335

285

235

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10

   

Closing Price (A)

Target Price (B)

Adjusted Target Price

Rating

 

No.

 

Date

(C)

Analyst

1:

30

Jul 07

349.39

860.00

484.64