Samart I-Mobile

Investment thesis

Disappointing 4Q14 earnings expectations have prompted us to downgrade our FY14 earnings projection due to the sustained weak spending environment and a squeeze in margins. We have also cut our FY15 earnings forecast further (to factor in greater price-led competition in the handset-sales industry and a lower GM expectation) and our YE15 target price by 28% (to Bt3.6). We have downgraded our rating for SIM from BUY to HOLD, in anticipation of the greater price-led competition ahead in the handset industry environment, which will lead to difficulty in maintaining the same level of GM as in FY14.

Insights into 4Q14—an earnings tumble

We estimate a Bt75m net profit for 4Q14, down 51% both YoY and QoQ. Stripping out extra items—a Bt2m FX gain and a Bt1m gain from an asset sale—core earnings would be Bt72m, down 62% YoY and 47% QoQ. The earnings tumble is attributable to weak consumption spending, the squeezed GM due to the price-cutting to clear inventory and heavier marketing and sales promotions to boost sales and branding image in the highly competitive mobile handset industry. The expected results are very disappointing despite the recognition of the 500k big-lot sale to DTAC in 4Q14. We assume that the GM will plunge to 17.7% in 4Q14, down from 24.1% in 4Q13 and 22.6% in 3Q13.

SIM sold 1.33m handset units in 4Q14, including a big lot to DTAC, up 32% YoY and 33% QoQ. Of the 1.33m units sold in 4Q14, 1.23m were smartphones, up 119% YoY and 72% QoQ. We assume its 4Q14 mean sales price of Bt2,340, down 11% YoY and 14% QoQ, pressured by the lower prices on units within the big-lot sale to DTAC, at about Bt2,000. Content revenue is estimated at Bt177m in 4Q14, down 25% YoY and 1% QoQ, regarded as still weak. We estimate the company will have 614k MVNO subscribers at YE14, up 41% YoY and 1% QoQ. Despite greater net MVNO subscribers, its MVNO business should have posted a Bt20m 4Q14 net loss, 36% shallower YoY but 54% deeper QoQ.

FY14-15 earnings forecast downgrades

We have cut our net profit forecasts 21% for FY14 (to Bt714m) to factor in a diminished expectation for 4Q14 earnings (led by a squeezed GM and higher SG&A expenses) and 27% for FY15 (to Bt800m) to reflect the diminished assumptions for handset sales volume and the blended GM for FY15 (due to heightened price-led competition for handset sales and sustained weak consumption spending in 1Q15). 

We have trimmed our FY15 handset sales volume forecast from 5.3m to 5.1m, which is more conservative than the firm’s FY15 guidance of 5.5m and cut our GM assumptions from 21.9% to 20.5% for FY14 and from 21.7% to 20.6% for FY15. We assume its MVNO business to reach break-even in FY15 (against its Bt67m FY14 net loss and the firm’s target of its MVNO being profitable in FY15).