Company profile:
Sprocomm Intel (Wo Miao Technology) is an ODM mobile phone supplier based in China and focused on emerging markets. According to the cautionary report, the company ranks fifth among Chinese ODM handset suppliers by 2018 shipments, with a market share of about 3.3 per cent.
The company's customers include mobile phone suppliers, telecom operators and trading companies in India, Thailand, China and other Asian countries and around the world, of which nearly 60% of the revenue comes from India by the end of fiscal year 2018. The company established a Luzhou plant with four chip lines and put it into production in April 2018 with an annual production capacity of 2.5 million pieces of printed circuit boards. The total number of smartphone printed circuit board assemblies consumed in fiscal 2018 was 8.6 million, including printed circuit board assemblies sold as stand-alone products and embedded in smartphones.
Sino-Thai point of view:
China's mobile phone ODM market is highly competitive: shipments of mobile phones made in China's ODM increased from 560 million in 2014 to 610 million in 2018, and are expected to reach 650 million in 2023, with a compound annual growth rate of 1.2 per cent between 2018 and 2023, according to the report. China's mobile phone ODM market is expected to be more concentrated. In terms of mobile phone shipments, the top 10 market participants account for 58.3% of the total market share of China's mobile phone ODM market. Wentai Technology (600745 SH), Huaqin Communications and Longqi Technology have been the leading ODM for many years, and in the future, the leading enterprises will increase their market share and consolidate their dominant position, gradually opening the gap with other ODM. In addition, in March 19, Sprocomm Intel signed a framework agreement with Ant Financial Services Group on product inspection and provision of BABA (BABA US) sales terminal (POS) equipment with face recognition function. In only 3 months, the company generated 40.3 million yuan of revenue for Ant Financial Services Group's Internet of things products, and the company may achieve rapid growth from the Internet of things business in the future.
In terms of operating performance: in the fiscal year 2016-2018 and as of April 30, 2019, the company's operating income was 2.17 billion yuan, 2.89 billion yuan, 2.94 billion yuan and 740 million yuan respectively, of which the five major customers accounted for 82.7%, 77.5%, 62.8% and 72.6% of the total revenue respectively. The main markets of the products are concentrated in emerging Asian countries, especially India. The gross profit margin is 7.6%, 8.3%, 8.9% and 9.1%, respectively. The gross profit margin is rising due to the increased demand for higher specification smartphones in some emerging countries, while the prices of related series of smartphones are higher. The company's capital expenditure on plant and machinery, rental property decoration and recruitment of workers is subsidized by the government, and the other income recognized by the government subsidy is 7 million, 9.1 million, 16.8 million and 8.2 million, respectively. However, the company plans to terminate an investment agreement related to the operation of the Guizhou R & D center ahead of schedule, and may have to return the subsidies previously collected. The net interest rate is 2.0%, 1.1%, 1.5% and 1.9% respectively. Because the net interest rate is low, any adverse changes in the cost of sales, sales price and sales volume will have a negative impact on the net interest rate.
Valuation: based on 1 billion shares after the global public offering, the company's market capitalization is HK $500 million to HK $600 million, which is lower than that of its Hong Kong counterparts. The 18-year price-to-earnings ratio of the company is about 9.8-11.8 times, which is lower than the industry average; the 18-year price-to-book ratio is about 1.72-1.94 times, which is in the industry average level. In terms of profitability, the 18-year ROE and ROA were 26.8% and 3.7% respectively, higher than the industry average. Considering that the company is small and belongs to the technology hardware industry that investors like to focus on, the stock price is more likely to rise on the first day, so it is recommended to apply cautiously. Taking into account the company's industry status, performance and valuation, we give it 60 points, rated as "purchase".
Risk tips: (1) inter-industry competition risk, (2) price fluctuation of raw materials and components