Results in the second half of 2015 are in line with the forecast
In the second half of 2015, net profit was US $100 million, down 16.6% from a year earlier, in line with China International Capital Corporation's forecast (US $98 million) and Fuzhikang Group's forecast (US $86 million-US $106 million). The gross profit margin was 4.41%, lower than the 5.3% predicted by China International Capital Corporation, but the net profit margin remained at 2.8%, and operating expenses improved. We believe that the main reason for the decline in net profit and profit margins is the transformation of XIAOMI's high-end smartphones, as XIAOMI 4 and XIAOMI Note sales began to decline, but XIAOMI 5 was delayed due to Qualcomm Inc Snapdragon 820 chipset. In addition, the effective tax rate in the second half of 2015 was 21.7% (20.8% in the first half), which was one of the reasons for the decline in net profit compared with the same period last year.
Trend of development
The Indian business began to contribute revenue. India's revenue contribution is expected to reach $1 billion in 2016 (less than $300m in 2015), mainly due to the local brand assembly business and the expansion of Chinese OEM manufacturers into India. In addition, the gross profit margin of India's assembly business is higher than that of China because of lower labour costs in India. Fuzhikang will continue to expand its capacity in India and will also expand its metal shell business, which is expected to support growth beyond 2017.
Recovery lies ahead. Fuzhikang expects Huawei's business to show positive growth, mainly because of Huawei's increased outsourcing and market share. In addition, with XIAOMI 5 starting mass production at the end of the fourth quarter of 2015, Fuzhikang Group expects XIAOMI's business growth momentum to recover in the first half of 2016 (mainly benefiting from XIAOMI 5 and XIAOMI Note 2). Looking forward, with XIAOMI adding high-end products and developing open channels in China, XIAOMI's growth momentum is expected to be stronger in 2016, and Fuzhikang Group is expected to benefit.
Profit forecast adjustment
Maintain the 17-year EPS forecast in 2016.
Valuation and suggestion
Maintain the recommended rating with a target price of HK $3.50 (0.83 times 2016 net market ratio).
Risk
The growth of the smartphone market is slowing; the volume of India's business is slowing.