Earnings rebound ahead after weak 4Q

Earnings in 4Q02 were 17% below forecasts due to delays in shipment of CDMA handsets and a cut-back in printer orders from Hewlett Packard (HP). As a result, CCET saw flat growth in both sales and earnings in 2002.

We expect CCET’s earnings to rebound this year due to the opening of its CDMA handset plant in China in 2Q03 and stable inkjet printer prices following steep price cuts of 15-20% in 2002. CCET remains one of the three major vendors to HP and it expects to ship 7.2mn printers this year versus 7mn in 2002. In the first quarter the company is expected to ship about Bt400mn of CDMA handsets to China that were delayed due to a shortage of imported components in 4Q02.

Even though we have trimmed our earnings forecast by 5% this year, CCET is still projected to post an impressive 17% increase in EPS to Bt6.2/share. At yesterday’s closing price, CCET is trading on an attractive 2003 PER of 5x and EV/EBITDA of 4.7x. We expect CCET’s dividend payout ratio to rise to 60% this year, resulting in a very generous dividend of 12%. Accordingly, we are maintaining our BUY recommendation as well as our price target of Bt42 a share.

Disappointing earnings in 4Q02

Earnings in 4Q02 fell 25% yoy to Bt301mn due to weak printer sales and delays in shipments of CDMA handsets to China following a shortage of imported components. This was 17% below our forecast of Bt362mn. Sales fell 28% yoy and 12% qoq to Bt7.13bn while operating margins narrowed from 4.7% in 4Q01 and 3Q02 to 4.2% in 4Q02.

Table 2: Quarterly income statement

Net profit for 2002 dipped just 1.1%, however, to Bt1.60bn, supported by a 62% plunge in interest expenses to Bt80mn. CCET’s debt halved to Bt2.5bn while the company also benefitted from a 150 basis points cut in its average borrowing rate. CCET also recorded extra gains of Bt20mn from a reversal of investment and forex losses.

2003 earnings forecasts trimmed 5% to Bt1.86bn

We have revised down our earnings forecast 2003-2004 by 5% and 3% to Bt1.86bn and Bt2.23bn respectively. Despite healthy sales growth, margins will be weaker than originally projected following recent price cuts on inkjet printers and telecom products. The bottom line will also be hurt slightly by a rise in interest expenses due to CCET’s need to boost its working capital for its new mobile phone plant in China. Nonetheless, we expect earnings growth of about 18% during 2003-2004 due to additional sales of handsets.

Table 3: Profit forecasts revision

Handset sales to drive earnings growth in 2003-2004

We believe CCET’s earnings hit their cyclical bottom in 4Q02, and should recover over the course of this year. In the first quarter the company is expected to ship about Bt400mn of CDMA handsets to China that were delayed due to a shortage of imported components in 4Q02. The company also expects a recovery in printer shipments after Hewlett-Packard’s (HP) inventory build-up in 2H02 led to a cut-back in orders. CCET remains one of the three major vendors to HP and it expects to ship 7.2mn printers this year versus 7mn in 2002. It also believes printer prices will stabilise in 2003 after plunging 15-20% last year.

Figure 1: CCET’s quarterly normalized profits during 2000-2002

CCET assembled CDMA and TDMA mobile phone handsets at its Thai plants last year, which it exported to China, South Korea, Japan and South America. The company is using technology developed at its 14%-owned South Korean affiliate, Wired Telecom.

In 2Q03, CCET will open its US$10mn factory in the Su Zhou coastal region of China to assemble CDMA and TDMA cellular phones. About 80% of the factory’s output will be sold in China, with the remainder exported to Latin American countries. CCET’s combined annual capacity for its plants in Thailand and China will be about 900,000 CDMA and 700,000 TDMA handsets, with projected utilisation this year of 40%.

China has about 190mn mobile phone subscribers, with 25% of them using CDMA handsets – a system whose subscription base is rising faster than that of GSM networks. CCET is projecting monthly revenues from the China plant of US$10-15mn over the next two years. We expect handset sales to account for 16% and 24% of CCET’s total sales during 2003-2004. This will reduce contributions from printer sales to 47% and 40% for the same period compared with 63% last year.

The company is also confident of winning bigger orders this year for other telecom products, especially from Panasonic. Management expects the portion of sales to Japanese clients to grow from 5% in 2001-2002 to 15-20% in 2003-2004. CCET is producing cordless phones for Panasonic and has been selling web cameras to Japanese consumer electronic companies over the past year. CCET also plans to enter the fast-growing market for Personal Data Accessory (PDA) devices.

Generous dividend yield

Since its peak period of printer production during 3Q00-4Q01, CCET has cut its working capital requirements from Bt6.5bn to less than Bt5bn in 2002. This reduction has made us more confident on the company’s medium-term prospects given its position as a contract manufacturer, whose earnings depend heavily on efficient purchasing, collection and inventory controls.

In 4Q02, CCET secured long-term financing through the issue of 3-year convertible debentures (CDs) worth Bt2.09bn at a coupon rate of 2%.

Table 4: Brief financial ratios

The company generated about Bt3.9bn free cash flow in 2001-2002 and paid out 40% and 33% of its profits in dividends in those years. The company recently announced a Bt1.5 dividend for 2H02 operations, the same amount as for its first half performance. In 2003-2004 we expect its dividend payout ratio to rise to 60%, resulting in very generous dividend yields of 12% and 14% respectively.