M Link Asia Corporation Plc.
(MLINK) reported a 2002 net profit growth of 258% to
Bt301mn, roughly in line with our forecast of Bt321mn. The
most impressive part of MLINK's performance was its ability
to maintain sales margins even during the stiff price
competition in the second half of 2002. MLINK produced
revenue growth of 14.17% to Bt5.6bn last year, while its
margins improved from 1.69% in 2001 to 5.38%. The main
reasons are 1) a higher volume discounts, 2) cash discounts,
3) lower handset price subsidies, 4) control of its
marketing budget, 5) a decreasing financial costs from both
an interest rate drop and principal repayment and 6) a
benefit from 5% tax cut.
The management admitted,
however, that the company's operating performance weakened
in the last quarter. MLINK's revenue soared 25.8% from 3Q02
to Bt1.2bn, but its gross margins contracted from an average
of 14.7% to 12.1% due to inventory clearance at cost.
MLINK reported spectacular
growth last year with its total number of handsets sold
rising 37.5% to 1.1 million units. But, the company still
lost market share from 18% in 2001 to 11% in 2002. With
handset prices bottoming out, MLINK aims to boost handset
sales by 36.4% to 1.5mn units this year. To achieve this
goal, MLINK is preparing to launch a new business platform
via its M Shop retail franchise. MLINK will offer support in
terms of operating systems, network connections, know-how
and marketing effort. The company plans to launch 200 shops
by the end of 2003 with the first shop expected to open in
May.
We believe the 1.5mn unit
sales target is too ambitious, given the drop in net new
subscribers for the leading mobile operators, the unlocking
of IMEIs and uncertainty regarding the size of the
replacement market. We originally projected MLINK to sell
one million handset units in 2003.
MLINK is trying to expand
into other telecom service and sales businesses. Initially,
MLINK's management was confident that its consortium would
win TOT's billing system-bidding project worth roughly Bt2bn
including hardware, software and call center system. The
winning bid is expected to be announced by this April.
However, MLINK is unlikely to book the total project value
of Bt2bn as revenue, but more likely to gain in the form of
agent or sponsor fees instead.
Meanwhile, the market is
interested for MLINK to announce its final dividend after
paying Bt1.5 per share from the company's 1H02 operations.
Assuming the same dividend pay out ratio, MLINK would pay
another Bt1.3 per share dividend, representing a 4.1%
dividend yield. We believe the board’s decision on the
dividends will partially depend on the result of MLINK’s
bid for a new TOT billing and M Shop projects. In
additional, we are skeptical that MLINK's ability to
maintain its dividend payout in the next couple years, as
future earnings potential for mobile handset distributors,
like MLINK, is still quite uncertain.
Excluding the new potential
project of TOT billing system and M Shop, MLINK’s shares
are worth Bt26.5 apiece based on our DCF model. Since the
current price is 37.7% over our fair value estimate and
offering a 4.1% yield on the second half dividend, we are
maintaining on TAKE PROFIT recommendation on MLINK.
