Samart I-Mobile

Samart I-Mobile
Investment thesis
Following the preview conference call, we expect SIM to deliver robust 3Q13 earnings, led by the greater smart phone sales volume and fatter margins. Our BUY rating stands, premised on sustained strong smart phone sales, 2H13-FY14, anticipation of a turnaround at the MVNO in FY14 and scope for upside from a digital news channel JV with Siam Sport Syndicate Plc (should the venture win a license).   
Anticipate robust 3Q13 earnings
We estimate a Bt220m net profit for 3Q13, up 525% YoY but down 14% QoQ. Stripping out an expected Bt2m FX loss to be booked to the quarter, core profit would be Bt222m, up 897% YoY but down 22% QoQ. The assumed core profit jump is attributable to significant rises in smart phone sales volume and average sales price and a fatter blended GM. The expected QoQ drop is due to seasonality (the rainy season) and slimmer GM (price cuts to clear inventory).
The firm said it sold about 870k units of handsets in 3Q13—410k units of smart phones (up by 138% YoY and 7% QoQ) and 460k units of feature phones (down by 45% YoY and 27% QoQ). Almost all the sales were branded i-mobile. We estimate the 3Q13 mean blended sales price at Bt2,884, up by 82% YoY and 18% QoQ, led by a greater proportion of smart phones in the sales mix. The mean i-mobile sales price is assumed at Bt2,887, up by 89% YoY and 20% QoQ. We model for blended GM of 24% in 3Q13, against 17.5% in 3Q12 and 27.6% in 2Q13. 
SIM sold eight smart phone and four feature phone models in 3Q13. There were 329k active MVNO subs at end-Sept, up 64% from 200k at end-June. We estimate that the MVNO incurred a Bt20m net loss for 3Q13, close to the 2Q13 number, due to heavier marketing spend.
Scope for Bt0.45/share upside from a digital news channel
Samart Multimedia Co Ltd, a wholly-owned subsidiary of SIM, and Siam Sport Syndicate Plc have a 50:50 JV under the name “I-Sport Media Co Ltd” to co-bid for a commercial digital news channel license at the NBTC’s upcoming auction. Assuming that the JV were to win a license, we estimate that it would add Bt0.9/share of equity value to the JV, or Bt0.45/share of equity value to SIM. 
We preliminarily assume project IRR of 12% from a digital news license, premised on an Bt18k/min mean ad rate in the first year, rising to Bt48k/min in the fifth year, and a weighted mean utilization rate of 5% in the first year, rising to 28% in the fifth year. The JV may generate Bt94m in revenue in the first year, rising to Bt1.3bn in the fifth year, according to our back-of-the-envelope calculations.