Samart I-Mobile

Investment thesis

3Q14 earnings will prove to be the bottom for the year and a bounce will follow in 4Q14, led by a big-lot handset sale to DTAC, greater DTV-enabled smart phone sales and distribution margin for sales of digital set-top boxes and antennae for Samart Engineering (SE). In the future, SIM might also make big-lot sales to other mobile operators and the firm will enter Myanmar in FY15 (it is currently in talks with Myanmar mobile operators). Our BUY rating stands.  

Insights into 3Q14—an earnings tumble

We estimate a Bt154m net profit for 3Q14, down by 31% YoY and 47% QoQ. Stripping out extra items—an Bt13m FX gain and a Bt3m gain from selling securities—core earnings would be Bt138m, down by 34% YoY and 51% QoQ. The plunge is attributable to weak consumption spending and heavier marketing expenses in an increasingly competitive handset sales environment. We estimate GM at 22.5% in 3Q14, down from 22.8% in 3Q13 and 22.9% in 2Q14.  

SIM sold about 1m units of handsets during the quarter, up 15% YoY (but down 23% QoQ, with the slump most pronounced in the provinces). Of the 1m units sold in 3Q14, about 715k were smart phones, up 75% YoY but down 16% QoQ. Smart phones comprised 72% of total handset sales volume. We assume a mean sales price of Bt2,711, down 5% YoY (flattish QoQ), due to increased sales of lower-priced smart phones. The firm launched 10 new handset models in 3Q14—five smart phones and five digital TV-enabled handsets. It sold 308k DTV-enabled units during the quarter, up 43% QoQ. 

FY14-15 earnings forecast downgrades

We have cut our net profit forecasts by 18% for FY14 to Bt905m and by 15% for FY15 to Bt1.09bn to factor in a diminished expectation for 3Q14 earnings, heightened price-led competition for handset sales and weak consumption spending. Hence, our GM assumptions fall from 23.6% to 21.9% for FY14 and from 23% to 21.7% for FY15. Furthermore, we have trimmed our PEG-based YE15 target price from Bt5.5 to Bt5.0.  

Bottom in 3Q14; bounce in 4Q14

The firm sold a 500k big-lot handset order worth Bt967m to DTAC in Oct. We expect unit sales to total 1.4m units in 4Q14, up by 44% YoY and 46% QoQ, led by the big-lot sale, greater DTV-enabled sales in tandem with increased DTV coverage and viewership and a nascent consumption recovery. SE will distribute about 30% of its allocation of digital set-top boxes and antennae through SIM, using its modern trade channels. SIM should sell 700k units of digital set-top boxes and 500k units of antennae in 4Q14, for which it should earn a Bt24-30m profit, assuming that a 4-5% distribution margin is paid by SE. We forecast a Bt265m net profit for 4Q14, up by 74% YoY and 73% QoQ.