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July 18, 2011

INITIATION TCL Communication (2618.HK)

Neutral Equity Research

Rising risk of EPS peaking; initiate with a Neutral rating

Investment view

We initiate coverage on TCL Communication with a Neutral rating and 12-

m target price of HK$6.9. As a 2G feature phone OEM, we expect TCL

Comm’s business to see slowing growth due to limited potential upside

in both the total addressable market and TCL Comm’s own market share

expansion starting 2012. On the other hand, we do not expect TCL

Comm’s smartphone business to be a significant profit driver, despite

rising smartphone demand in emerging markets. We believe the stock

lacks strong fundamental catalysts and the current share price reflects the

company’s moderate shipment growth and flattish earnings in 2012.

Core drivers of growth

We expect TCL Comm’s EPS to peak this year with flattish to slight

earnings decline in 2012/13 due to: 1) Limited upside in feature phone:

We expect feature phone shipment growth to decelerate in emerging

markets starting 2012. TCL Comm could find it difficult to significantly

expand its market share due to increasing competition from other Chinese

handset OEMs; 2) High entry barriers and challenging smartphone

industry dynamics in emerging markets: The increasing design

complexity, longer lead time for operators’ validation or qualification, and

customization requirement increase the uncertainty over TCL Comm’s

smartphone business. The low margins in the smartphone business may

make it difficult for TCL Comm to achieve sustainable profit growth.

Risks to the investment case

Feature phone market share gain/loss; stronger/weaker smartphone business.

Valuation

Our 12-m TP is based on 2.0X NTM EV/GCI, implying around 8X NTM P/E.

Industry context

Rising smartphone demand in emerging markets with severe competition.

INVESTMENT LIST MEMBERSHIP

Neutral

Coverage View: Neutral

Robert Yen +886(2)2730-4196 [email protected] Goldman Sachs (Asia) L.L.C., Taipei Branch Goldman Sachs does and seeks to do business with companies

covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC see the end of the text. For other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

Iris Wu +886(2)2730-4186 [email protected] Goldman Sachs (Asia) L.L.C., Taipei Branch

The Goldman Sachs Group, Inc. Global Investment Research

Growth

Returns *

Multiple

Volatility Volatility

Multiple

Returns *

Growth

Investment Profile

Low High

Percentile 20th 40th 60th 80th 100th

* Returns = Return on Capital For a complete description of the

investment profile measures please refer to

the disclosure section of this document.

TCL Communication (2618.HK)

Asia Pacific Technology Peer Group Average

Key data Current

Price (HK$) 7.18

12 month price target (HK$) 6.90

Market cap (HK$ mn / US$ mn) 7,963.7 / 1,021.7

Foreign ownership (%) --

12/10 12/11E 12/12E 12/13E

EPS (HK$) 0.65 0.86 0.85 0.80

EPS growth (%) 2,476.5 32.5 (0.9) (5.3)

EPS (diluted) (HK$) 0.65 0.86 0.85 0.80

EPS (basic pre-ex) (HK$) 0.65 0.86 0.85 0.80

P/E (X) 11.1 8.4 8.5 8.9

P/B (X) 3.5 2.7 2.1 1.8

EV/EBITDA (X) 5.2 6.5 5.4 4.8

Dividend yield (%) 1.6 2.4 2.4 2.2

ROE (%) 42.4 36.5 27.9 21.7

CROCI (%) 101.1 47.0 45.7 42.0

Price performance chart

3

4

5

6

7

8

9

10

Jul-10 Oct-10 Jan-11 Apr-11

20,000

21,000

22,000

23,000

24,000

25,000

26,000

27,000

TCL Communication (L) Hang Seng Index (R)

Share price performance (%) 3 month 6 month 12 monthAbsolute (9.1) (8.2) 116.3

Rel. to Hang Seng Index (0.3) 1.9 100.3

Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 7/15/2011 close.

July 18, 2011 TCL Communication (2618.HK)

TCL Communication: Summary Financials

Analyst Contributors

Robert Yen

[email protected]

Iris Wu

[email protected]

Goldman Sachs Global Investment Research 2

Profit model (HK$ mn) 12/10 12/11E 12/12E 12/13E Balance sheet (HK$ mn) 12/10 12/11E 12/12E 12/13E

Total revenue 8,700.7 11,992.7 13,572.0 13,808.2 Cash & equivalents 7,546.3 7,643.4 8,414.7 9,309.2

Cost of goods sold (6,752.3) (9,339.0) (10,680.8) (10,956.7) Accounts receivable 2,573.7 3,488.9 3,840.5 3,863.2

SG&A (1,055.9) (1,376.3) (1,525.7) (1,547.1) Inventory 779.8 1,106.8 1,164.7 1,183.8

R&D (357.2) (438.5) (494.5) (503.2) Other current assets 719.3 798.7 789.5 790.4

Other operating profit/(expense) 0.0 0.0 0.0 0.0 Total current assets 11,619.1 13,037.8 14,209.3 15,146.6

ESO expense -- -- -- -- Net PP&E 309.1 480.5 597.1 679.6

EBITDA 705.7 1,050.2 1,123.9 1,082.2 Net intangibles 106.1 147.6 147.6 147.6

Depreciation & amortization (170.5) (211.3) (252.9) (281.0) Total investments 27.6 33.1 33.1 33.1

EBIT 535.2 838.9 871.0 801.2 Other long-term assets 191.8 210.3 240.0 280.8

Interest income 82.7 179.0 206.4 251.7 Total assets 12,253.6 13,909.3 15,227.1 16,287.7

Interest expense (63.0) (125.3) (135.8) (147.0)

Income/(loss) from uncons. subs. (0.3) (0.5) 0.0 0.0 Accounts payable 1,874.7 2,654.7 3,035.4 3,185.2

Others 190.2 120.3 72.2 61.3 Short-term debt 6,487.9 6,527.1 6,527.1 6,527.1

Pretax profits 744.9 1,012.4 1,013.8 967.2 Other current liabilities 1,651.3 1,712.4 1,894.5 2,089.9

Income tax (43.1) (61.5) (71.7) (75.5) Total current liabilities 10,014.0 10,894.3 11,457.0 11,802.3

Minorities 0.1 (0.1) 0.0 0.0 Long-term debt 0.0 0.0 0.0 0.0

Net income pre-preferred dividends 701.9 950.8 942.1 891.7 Other long-term liabilities 17.5 16.7 18.0 20.0

Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 17.5 16.7 18.0 20.0

Net income (pre-exceptionals) 701.9 950.8 942.1 891.7 Total liabilities 10,031.5 10,911.0 11,475.1 11,822.3

Post-tax exceptionals 0.0 0.0 0.0 0.0

Net income 701.9 950.8 942.1 891.7 Preferred shares 0.0 0.0 0.0 0.0

Total common equity 2,218.4 2,994.5 3,748.2 4,461.6

EPS (basic, pre-except) (HK$) 0.65 0.86 0.85 0.80 Minority interest 3.7 3.8 3.8 3.8

EPS (basic, post-except) (HK$) 0.65 0.86 0.85 0.80

EPS (diluted, post-except) (HK$) 0.65 0.86 0.85 0.80 Total liabilities & equity 12,253.6 13,909.3 15,227.1 16,287.7

EPS excl. ESO expense (basic) (HK$) -- -- -- --

EPS excl. ESO expense (dil.) (HK$) -- -- -- -- BVPS (HK$) 2.04 2.70 3.38 4.02

DPS (HK$) 0.12 0.17 0.17 0.16

Dividend payout ratio (%) 17.8 20.0 20.0 20.0

Free cash flow yield (%) 12.2 4.7 14.0 15.6

Ratios 12/10 12/11E 12/12E 12/13E

Growth & margins (%) 12/10 12/11E 12/12E 12/13E CROCI (%) 101.1 47.0 45.7 42.0

Sales growth 99.5 37.8 13.2 1.7 ROE (%) 42.4 36.5 27.9 21.7

EBITDA growth 435.2 48.8 7.0 (3.7) ROA (%) 7.4 7.3 6.5 5.7

EBIT growth NM 56.7 3.8 (8.0) ROACE (%) 100.2 59.1 46.8 44.8

Net income growth NM 35.5 (0.9) (5.3) Inventory days 33.2 36.9 38.8 39.1

EPS growth 2,476.5 32.5 (0.9) (5.3) Receivables days 86.1 92.3 98.6 101.8

Gross margin 22.4 22.1 21.3 20.7 Payable days 85.8 88.5 97.2 103.6

EBITDA margin 8.1 8.8 8.3 7.8 Net debt/equity (%) (47.6) (37.2) (50.3) (62.3)

EBIT margin 6.2 7.0 6.4 5.8 Interest cover - EBIT (X) NM NM NM NM

Cash flow statement (HK$ mn) 12/10 12/11E 12/12E 12/13E Valuation 12/10 12/11E 12/12E 12/13E

Net income pre-preferred dividends 701.9 950.8 942.1 891.7

D&A add-back 170.5 211.3 252.9 281.0 P/E (analyst) (X) 11.1 8.4 8.5 8.9

Minorities interests add-back 0.0 0.0 0.0 0.0 P/B (X) 3.5 2.7 2.1 1.8

Net (inc)/dec working capital (796.2) (462.2) (28.7) 108.0 EV/EBITDA (X) 5.2 6.5 5.4 4.8

Other operating cash flow 666.0 (17.7) 191.3 194.5 EV/GCI (X) 2.0 2.5 2.0 1.7

Cash flow from operations 742.2 682.2 1,357.6 1,475.3 Dividend yield (%) 1.6 2.4 2.4 2.2

Capital expenditures (164.8) (304.8) (243.9) (231.7)

Acquisitions (171.8) (223.4) (155.3) (172.7)

Divestitures 0.0 37.8 0.0 0.0

Others 4,994.2 41.7 0.0 0.0

Cash flow from investments 4,657.7 (448.7) (399.2) (404.3)

Dividends paid (common & pref) (125.0) (190.2) (188.4) (178.3)

Inc/(dec) in debt 5,026.3 39.2 0.0 0.0

Common stock issuance (repurchase) 550.7 15.4 0.0 0.0

Other financing cash flows (5,662.7) (0.8) 1.3 2.0

Cash flow from financing (210.7) (136.4) (187.1) (176.4) Note: Last actual year may include reported and estimated data.

Total cash flow 5,189.2 97.1 771.3 894.5 Source: Company data, Goldman Sachs Research estimates.



Table of contents

Lacking the next leg of a significant growth driver; initiate with a Neutral rating 3

TCL/Alcatel: A success story so far; what’s the next step? 10

Valuation: Decelerating growth momentum in 2012 is priced in 11

Key risks: Market share, 3G Android smartphone, macro outlook, Android patent vulnerability 14

Financials: An improving balance sheet 15

Company profile 17

Prices in this report are based on the market close of July 13, 2011, unless otherwise stated.

Lacking the next leg of a significant growth driver; initiate with a

Neutral rating

We initiate coverage on TCL Comm with a Neutral rating. TCL Comm is a handset

OEM headquartered in China; it has a dual-brand (Alcatel and TCL) OEM business,

and an ODM service.

The company's handsets are sold to China and overseas emerging markets, with

2G feature phones accounting for the majority of its shipments. In 2010, TCL

Comm shipped 36m handsets (+125% yoy), 6% of which was to China. We expect

the company to ship 48m/58m units in 2011/2012 (+32% yoy/+21% yoy).

We attribute TCL Comm’s robust growth in 2010 to its strategy of offering

competitive cost/performance feature phones with MediaTek’s turnkey solutions

to improve time-to-market and Alcatel’s legacy brand preference in emerging

markets, where its major competitors Nokia/LGE/Motorola have been losing

market share.

However we expect TCL Comm to see only 21% shipment growth with earnings

down slightly in 2012E (GSe: -1% yoy) as we expect the growth rate of its major

feature phone business to decelerate while smartphone volumes are too small to

compensate.

We believe the current share price reflects TCL Comm’s decelerating growth. Our

2012E/2013E EPS is 20%-40% below Reuters consensus.

Our views on TCL Comm’s own brand feature phone (around 72% of sales in

2011E):

Feature phone volume expansion in emerging markets is slowing down,

suggesting limited upside for TCL Comm’s total addressable market.

Even though the Chinese and Indian markets could potentially represent

meaningful upside for TCL Comm’s feature phone shipments as its market

share in these two regions is currently low, we believe the competitive

dynamics in China/India are not in TCL Comm’s favor.

We believe any further significant market share expansion for TCL Comm in

non-Asia emerging markets could be difficult as other Chinese handset

vendors (many of whom also use MediaTek’s solution and have a decent

relationship with operators, as TCL Comm does) have been gradually

extending their footprints into these regions.



Our views on TCL Comm’s own brand smartphone (around 16% of sales in

2011E):

3G smartphone’s higher design complexity and longer lead time for operator

qualification or validation are unfavorable factors for TCL Comm, which is a

relatively new entrant in the smartphone industry.

Despite higher ASP vs. the feature phone, the smartphone’s higher cost

structure and smaller shipment scale could be margin dilutive for TCL Comm.

We believe major global vendors are likely to launch mid-to-low-end models

(Nokia’s WP7 and Apple’s potential launch of a low-cost iPhone) in emerging

markets, which suggests a potentially competitive environment for TCL

Comm in 2012 and onwards.

Continuing growth of feature phones but at a decelerating pace

We expect the feature phone demand growth in emerging markets to peak this

year. Currently the majority of TCL Comm’s handset shipments are sold under

the Alcatel brand, and these products have seen decent sell-through in non-Asia

markets such as Latin America, Eastern Europe, the Middle East, and Africa.

Exhibit 1: We expect feature phone demand from emerging markets to slow down

starting 2012 Emerging market feature phone market size

Source: Gartner, Global Mobile, World Bank, Goldman Sachs Research estimates.

Even though China and India could represent upside potential for TCL Comm’s

feature phone shipments in the next 1-2 years on currently low market share, the

competitive dynamics in these markets are not in TCL Comm’s favor, in our view.

Thus, we are cautious on TCL’s ability to expand its market share aggressively in

these regions. The Chinese and Indian markets are much more fragmented than

14%14%

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0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2007 2008 2009 2010 2011E 2012E 2013E

India

China

Emerging markets (excluding China & India)

Emerging markets (excluding China & India) - yoy

Feature phone (mn units)



other regions, and are occupied by global big players and smaller handset OEMs

(exhibit 2). This leads to a more price-competitive environment, suggesting it

could be difficult for TCL Comm to capture demand without sacrificing ASP or

margins.

Exhibit 2: The Chinese and Indian markets are relatively more fragmented, suggesting more severe price competition Handset OEM unit market share in China, India, Eastern Europe, Latin America, Middle East & Africa

Source: Gartner, Goldman Sachs Research.

As we stated above, we believe TCL Comm’s strategy of taking share from tier-1

vendors by leveraging its well-received Alcatel brand and price difference has

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Markets that are

more competitive

Markets that are

less competitive



worked well in markets with less competition/ASP pressure and high OEM

concentration. However, we believe TCL Comm could find it difficult to expand

share meaningfully in these markets, as Chinese/Indian local handset OEMs have

been gradually extending their footprint to regions outside their home markets.

Some of these vendors are leveraging the same cost-competitive MediaTek 2G

feature phone solution and decent relationships with operators, suggesting

increasing competition for TCL Comm, which could cap its potential market share

upside.

Exhibit 3: Chinese and Indian handset OEMs have been expanding to regions outside of Asia, implying increasing

competition for TCL Comm in overseas markets

Source: Goldman Sachs Research.

We therefore project decelerating shipment growth for TCL Comm into 2012/2013

to reflect our view of slowing feature phone demand growth and the more

challenging competitive dynamics TCL Comm is likely to face in the medium to

long term.

China & India

Handset OEMs



Exhibit 4: While we expect to see continuing shipment and market share growth of TCL

Comm, the pace will be slower, in our view TCL Comm’s own brand feature phone unit market share in emerging markets (China & India

markets excluded)

Source: Gartner, Global Mobile, World Bank, Goldman Sachs Research estimates.

High entry barriers and competitive landscape increase uncertainty

over TCL’s smartphone upside

TCL launched its first Android smartphone in late 2010. However, we believe TCL

Comm is less likely to see a strong product cycle for its smartphones. Ever since

HTC launched the 1st Android smartphone in 2008, many OEMs have entered this

market by leveraging this cost-free open platform. However, the market is still

dominated by less than a handful of companies with the top 5 vendors

accounting for 80%+ market share; we believe this suggests much higher entry

barriers for smartphones vs. feature phones.

11 12 13

25

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5.8%

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7.0%

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2007 2008 2009 2010 2011E 2012E 2013E

TCL Comm's own brand feature phone shipment (mn units; China shipment excluded; L)

TCL Comm's unit market share (emerging markets excluding China & India; R)



Exhibit 5: The Android smartphone market is dominated by a few vendors, which suggests high entry barriers in

delivering a differentiated, good quality product Android smartphone unit market share by vendor

Source: Gartner, Goldman Sachs Research.

Although we see a business opportunity in the rising smartphone demand in emerging

markets, we think mid-to-low-end smartphones would be the mainstream segment as: (1)

first-time demand accounts for the majority of shipments; and (2) consumers in emerging

markets have higher price elasticity, especially first-time smartphone buyers.

Exhibit 6: We do not expect smartphones to be a volume or profit driver for TCL Comm in the near to medium term TCL Comm’s shipment (LHS) & revenues (RHS) breakdown by product

Source: Company data, Goldman Sachs Research estimates.

TCL Comm uses MediaTek’s chipset solution for its feature phones. The turnkey

solution provided by MediaTek reduces the design complexity for OEMs and

significantly improves the time-to-market capability. The Android smartphone is

TCL Comm’s first attempt to use Qualcomm’s chipset solution, which requires

more design effort, leading to uncertainty around TCL Comm’s product

performance and lead time for new model development.

The higher cost structure for smartphones vs. feature phones and lack of

economic scale in the early stages could weaken TCL Comm’s cost

competitiveness, in our view. Price competition in the mid-to-low-end segment,

especially from Apple and Nokia starting 2012, could make it difficult for TCL to

capture market share.

HTC

Samsung

Motorola

Others

4Q09 Android smartphone unit market share by vendor

HTC

Samsung

Motorola

Sony

Ericsson

LG Electronics

Others

1Q11 Android smartphone unit market share by vendor

14 16

27

38

48

57

2

4

4

1

9

7

6

5

-

10

20

30

40

50

60

70

2008 2009 2010 2011E 2012E 2013E

ODM shipment Smartphone shipment Feature phone shipment

mn units TCL Communication (2618.HK) - Shipment breakdown

4,538 4,234

6,824

8,6809,757

10,332

1,975

2,8642,719

1,876

1,338

951757

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2008 2009 2010 2011E 2012E 2013E

ODM revenues Smartphone revenues Feature phone revenues

HK$mn TCL Communication (2618.HK) - Revenues breakdown



TCL Comm will also be facing competition from global major smartphone makers,

in our view. As we highlighted in our Compal Comm note “Nokia’s woes, CCI’s

turnaround opportunity; up to Buy, on CL”, dated June 27, 2011, ever since Nokia

announced it was adopting WP7 as its major smartphone platform, it has

continued to emphasize its desire to drive down WP7 pricing points to the mid-

low end, in an effort to revive its sliding smartphone unit market share.

The likely launch of low-cost iPhones could be another threat for all vendors, in

our view. Tier-1 vendors’ intention to launch products with decent specifications

and lower pricing could narrow the opportunities for TCL Comm, which lacks

scale, leading technology expertise, and a smartphone product track record

among both consumers and operators.

We therefore project TCL Comm will ship 2 mn units of smartphones this year

mostly driven by the sell-in demand from telecom operators. Due to high

uncertainty over TCL Comm’s smartphone sell through, we estimate a moderate

ramp-up of the company’s smartphone shipments with 3.6/3.9 mn units in

2012/2013, respectively.

Exhibit 7: We see severe competition in mid-to-low-end smartphones in emerging markets

Source: Goldman Sachs Research.

ODM business, a decreasing contribution

The ODM business was one of the volume drivers for TCL Comm in 2009/2010.

According to our supply chain checks, Motorola Mobility Holdings (MMI) has

been the major ODM customer for TCL Comm, apart from telecom operators.

Based on our MMI analyst Simona Jankowski’s forecast, we expect MMI’s feature

phone shipments to fall, suggesting a shrinking ODM business opportunity for

TCL Comm.

High-end smartphone

Apple, HTC

US$250

Mid-to-low end smartphone

HTC/Samsung/LGE/Huawei

US$100

Mid-to-low end feature phone

Nokia/TCL Communication

US$30

Ultra low-cost feature phone (China/India)

China/India handset OEMs

?

EMERGING MARKETS

High industry entry barrier

Competition



We have been bearish on the handset EMS/ODM industry on limited outsourcing

orders, and competition from other major EMS/ODM companies such as FIH and

Arima Comma suggests TCL Comm is in an unfavorable position to capture new

business opportunity.

TCL/Alcatel: A success story so far; what’s the next step?

Brand conflict in its home market, China

After it acquired Alcatel’s mobile division, TCL Comm gained the right to use the

“Alcatel” brand and has extended the right to 2024.

The Alcatel brand is known to consumers, especially in markets such as Eastern

Europe and Latin America. In markets outside China, TCL Comm offers Alcatel

branded handsets, which are price competitive.

This strategy works well in regions with higher OEM concentration. TCL Comm’s

impressive performance in 2010 was driven by its strategy of positioning Alcatel

brand handsets in a less crowded market.

The Alcatel brand will continue to be TCL Comm’s key marketing focus,

according to the company, and TCL Comm has been promoting the concept of a

user-friendly, mobile-internet-capable smartphone device under the name

“Alcatel One Touch”.

The Chinese market, where TCL Comm sells handsets under the TCL brand,

seems to represent an opportunity for shipment upside; however we believe TCL

needs to build its TCL brand to establish the brand awareness and preference

within this competitive market.

We are relatively negative on TCL Comm’s dual brand business model in the

current scenario, with TCL Comm promoting its TCL brand products in China

while at the same time some of the Alcatel-branded handsets are also sold to

China market (smuggled handsets or through on-line selling). Hence, we see

risk/reward uncertainty on TCL Comm’s investments in its TCL brand due to such

brand conflicts.

HTC case study – Unified global branding seems a more

sustainable business model

HTC, a smartphone OEM, had adopted a dual-brand business model in China

market for its products before 2010. HTC’s smartphones are sold in China under

the brand name “Dopod”, a China-based company that was responsible for HTC

handsets’ sales and distribution in China market.

This business model came to an end as HTC made several announcements on its

new smartphone models with its “HTC” brand in China in July 2010. We believe

the increasing importance of the China market to HTC’s business could be one of

the reasons for such a change in strategy.

In addition, HTC has witnessed decent improvement of its brand awareness in

American or European markets in 2009/2010; thus HTC could leverage its “HTC”

branding in other markets when pushing its smartphone into China.

We view such strategy works well on HTC’s strong shipment growth for China

market in 2010 and the company’s optimistic outlook of its China business. This



suggests to us that a unified global branding could be a more sustainable

business model for handset OEMs.

As Alcatel has stronger brand awareness globally – and thus a great brand asset

for TCL Comm to leverage – we believe a unified branding could potentially be a

better strategy for TCL Comm in terms of marketing resource efficiency.

Valuation: Decelerating growth momentum in 2012 is priced in

We rate TCL Communication Neutral with a 12-m TP of HK$6.9. Our target price is

based on 2.0X NTM EV/GCI, implying 8X NTM P/E and 2.2X NTM P/B. We use

historical median EV/GCI vs. CROCI as our valuation methodology due to TCL’s

loss-making record in 2004/2005 and break-even/slim profits in 2006-2009.

Exhibit 8: TCL Comm’s flattish CROCI performance in the

next 12 months suggests lack of share price catalysts

Exhibit 9: We do not use PB-ROE as our valuation

methodology, due to TCL’s historical losses

Source: Datastream, company data, Goldman Sachs Research estimates.


We see limited share price potential for TCL Comm currently despite strong

growth in 2010/2011, as we believe the current share price reflects the company’s

2012 growth/earnings profile. We expect the company’s shipment momentum to

slow down, resulting in lack of strong fundamental catalysts for its share price.

-15%

5%

25%

45%

65%

85%

105%

125%

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10 Apr-11 Jan-12

EV/GCI (L) Median EV/GCI (L) CROCI (R) Median CROCI (R)

TCL Comm (2618.HK) EV/GCI vs. CROCIEV/GCI (X)

Current: 2.2X

Median: 27%

Median: 1.3X

CROCI

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Jan-06 Aug-06 Mar-07 Oct-07 May-08 Dec-08 Jul-09 Feb-10 Sep-10 Apr-11 Nov-11

Fwd P/B (L) Median P/B (L) ROE (R) Median ROE (R)

TCL Comm (2618.HK) P/B vs. ROEP/B (X)

Median: 1.6X

Median: 4%

Current: 2.3X



Exhibit 10: We expect moderate shipment growth of TCL

Comm and flattish earnings in 2012... TCL Comm’s market cap (LHS) vs. quarterly shipment (RHS)

Exhibit 11: ...suggesting lack of strong fundamental

catalysts for the share price TCL Comm’s market cap (LHS) vs. quarterly earnings (RHS)



We believe current consensus is overly positive on TCL Comm’s longer term

growth. Compared with consensus, we are more conservative in terms of the

company’s feature phone market share gain potential, resulting in our below

consensus sales and earnings forecasts for 2012/13.

We are also relatively conservative vs. consensus on TCL Comm’s Android

smartphone business, which is reflected in our growth rate assumption in

2012/13. We do not expect smartphones to become a major volume or profit

driver for TCL Comm due to the severe smartphone competition in emerging

markets.

Our concerns over the competitive landscape for TCL Comm’s feature phone and

smartphone businesses in the longer term leads to our lower-than-consensus

ASP (due to our lower mix of higher-ASP smartphones) and margins.

-

2

4

6

8

10

12

14

16

18

20

0

200

400

600

800

1,000

1,200

1,400

Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12

TCL shipments (mn units, R)

TCL market cap (US$mn; L)

(150)

(100)

(50)

-

50

100

150

200

250

300

350

400

0

200

400

600

800

1,000

1,200

1,400

Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12

TCL earnings (HK$mn, R)

TCL market cap (US$mn; L)



Exhibit 12: Summary of Street view vs. GS view on TCL Comm

Source: Bloomberg, Goldman Sachs Research.

Exhibit 13: Valuation comparison

* Conviction List; for important disclosures, please go to http://www.gs.com/research/hedge.html.


Market view GS viewShipment

Smartphone

China

Feature phone

ASP

Blended ASP

Margins

GM

Expect ASP to be sustainable driven by the improving

product mix

Sustainable ASP in 2011 driven by smartphone sell-in

demand. Higher ASP pressure into 2012 due to the

competition of both mid-end smartphone and feature

phone in emerging markets

Relatively stable GM due to product mix and stable

ASP

GM is likely to trend down gradually on ASP pressure

and higher cost structure of smartphone

Expect to see a meaningful shipment ramp up of

smartphone

Smartphone competition in emerging markets could

be severe. TCL might see some sell-in demand in 2011

while growth momentum into 2012/2013 could be

very limited

Expect TCL to see a meaningful improvement of its

China business

China handset market dynamic is not in TCL's favor,

upside potential from China business could be limited

Continuing market share gain Continuing market share gain while the magnitude

could be much more moderate vs. 2010

Current Mkt capTicker Company Rating Ccy price USD mn CY11E CY12E CY11E CY12E CY11E CY12E CY11E CY12E CY10 CY11E CY12E

China handset/Consumer electronics companies2369.HK China Wireless Technologies Neutral HKD 1.8 501 0.15 0.18 -34% 22% 11.8x 9.6x 1.7x 1.5x 42% 18% 16%

0992.HK Lenovo Group Buy HKD 4.8 6,277 0.29 0.36 51% 22% 16.3x 13.3x 3.0x 2.6x 14% 19% 20%

0763.HK ZTE Corporation (H) Neutral HKD 27.0 2,182 1.41 1.67 20% 19% 19.1x 16.1x 2.9x 2.6x 16% 16% 17%

1169.HK Haier Electronics Group Neutral HKD 9.5 2,853 0.65 0.85 16% 31% 14.6x 11.2x 4.7x 3.3x 48% 39% 35%

2618.HK TCL Communication Neutral HKD 7.2 1,025 0.86 0.85 33% -1% 8.4x 8.5x 2.7x 2.1x 42% 36% 28%

Median 18% 22% 15.5x 12.3x 3.0x 2.6x 29% 18% 18%

Global branded handset makers2498.TW HTC Corp. Buy* NTD 929.0 26,304 89.98 118.50 84% 32% 10.3x 7.8x 5.8x 3.7x 56% 71% 57%

AAPL Apple Inc. Buy* USD 358.0 331,080 26.69 31.35 51% 17% 13.4x 11.4x 4.1x 3.0x 37% 37% 31%

RIMM Research In Motion Ltd. Sell USD 28.2 14,754 5.46 5.42 -9% -1% 5.2x 5.2x 1.3x 1.0x 41% 29% 22%

NOK1V.HE Nokia Neutral EUR 4.1 21,458 0.12 -0.01 -80% NM 33.3x NM 1.2x 1.3x 13% -7% -5%

MMI Motorola Mobility Holdings Inc. Buy USD 21.5 6,327 0.01 1.45 NM 12071% 1,799.1x 14.8x 1.2x 1.1x -5% 0% 8%

005930.KS Samsung Electronics Buy* KRW 843,000 117,084 87,806 112,713 -5% 28% 9.6x 7.5x 1.5x 1.2x 21% 16% 18%

066570.KS LG Electronics Neutral KRW 81,000 11,048 5,809 9,945 -26% 71% 13.9x 8.1x 1.0x 0.9x 3% 7% 11%

Median -7% 30% 13.4x 7.8x 1.3x 1.2x 21% 16% 18%

Global handset ODM/EMS companies2038.HK Foxconn International Holdings Sell HKD 3.5 3,235 -0.20 -0.16 NM NM NM NM 0.9x 1.0x -6% -5% -4%

0285.HK BYD Electronic Neutral HKD 3.1 882 0.37 0.34 -29% -9% 8.3x 9.1x 0.8x 0.7x 15% 9% 8%

8078.TW Compal Communications Buy* NTD 34.6 728 -0.65 1.86 NM NM NM 18.6x 2.2x 1.9x -3% -4% 11%

FLEX Flextronics International LTD. Sell USD 6.4 4,736 0.87 1.00 21% 15% 7.3x 6.4x 1.8x 1.4x 28% 27% 25%

JBL Jabil Circuit, Inc. Buy USD 20.2 4,418 2.13 2.57 50% 20% 9.5x 7.9x 2.1x 1.7x 19% 24% 24%

Median 21% 15% 8.3x 8.5x 1.8x 1.4x 15% 9% 11%

EPS (GAAP) EPS growth P/E P/B ROE (GAAP)



Key risks: Market share, 3G Android smartphone, macro outlook,

Android patent vulnerability

MediaTek’s 3G Android chipset: We believe MediaTek’s 2G chipset solution,

which is cost competitive with decent performance, is the major reason for

Chinese and Indian handset OEMs’ strong performance in emerging markets. In

the 3G smartphone era, Qualcomm has dominated the main chipset market while

MediaTek hasn't officially launched its product for 3G smartphone.

If MediaTek’s 3G smartphone chipset solution launches successfully in terms of

performance and cost competitiveness, Chinese and Indian handset OEMs could

leverage MediaTek’s efforts to drive down cost and potentially even repeat the

product cycle of their 2G feature phones.

However, we believe such a scenario is less likely to materialize in the near term

due to the higher design complexity of 3G smartphones and the requirement of

qualification/validation or product customization by operators, suggesting a

longer lead time for product launches.

Feature phone market share in emerging markets: Our current 2012 estimate

for TCL Comm’s own-brand feature phone shipments implies 3.2% volume share

in emerging markets (China and India included) vs. 2.9% in 2011. Our sensitivity

analysis suggests every 1% market share gain/loss implies 22% upside/downside

to our current 2012E EPS, with other assumptions remaining unchanged.

Exhibit 14: Our sensitivity test suggests potential 22% EPS upside or downside for every 1ppt feature phone market

share gain or loss of TCL Comm in emerging markets Sensitivity test on TCL Comm’s market share gain/loss in emerging markets

Source: Goldman Sachs Research estimates.

Smartphone business: Higher-than-expected shipment of smartphones by TCL

Comm could boost its revenues as smartphones have much higher ASP (around

US$100) than feature phones (around US$25-30). Our sensitivity analysis

suggests that every 1m unit increase/decrease of smartphone shipments implies

6% upside/ downside to our 2012E EPS, other assumptions remaining unchanged.

However, we see higher potential variability in TCL Comm’s smartphone margins

vs. feature phones due to smartphones’ higher cost structure; thus the shipment

upside is likely to be offset by lower margins/ASPs.

2012E Base TCL Comm's 2012E EPS (HK$)Emerging market feature phone shipment (m units) 1489 TCL's feature phone market share TCL Comm unit market share 3.2% 1.04 1% 2% 3% 4% 5%TCL Comm shipment (own brand feature phone) 48 5% 0.34 0.47 0.60 0.74 0.87

6% 0.40 0.57 0.73 0.89 1.05

Key assumptions Bull case 7% 0.47 0.66 0.85 1.04 1.23

TCL Comm unit market share 4.2% 8% 0.54 0.76 0.97 1.19 1.40

TCL Comm shipment (own brand feature phone; m units ) 63 9% 0.61 0.85 1.09 1.34 1.58

ASP (US$) 26

Difference to GSe 2012E EPS (HK$ m) TCL's feature phone market share

Revenues from own brand feature phone 12,769 0.00 1% 2% 3% 4% 5%Others revenues 3,815 5% -60% -45% -29% -13% 3%

Total revenues 16,584 6% -52% -33% -14% 5% 24%

NPM 6.9% 7% -44% -22% 0% 22% 44%

EPS (HK$) 1.04 8% -36% -11% 14% 40% 65%

Difference vs. GSE 22% 9% -28% 0% 29% 57% 86%

NP

M

NP

M



Exhibit 15: Our sensitivity test suggests 6% upside/downside to 2012E EPS if TCL Comm sees 1m increase/decrease in

smartphone shipments in 2012 Sensitivity test on TCL Comm’s smartphone shipments

Source: Goldman Sachs Research estimates.

Competition and macro-economic outlook: The competitive dynamics of the

handset market could lead to upside or downside risks to our margin projections

for TCL Comm. On the other hand, the macro-economic outlook for 2H or 2012 is

also a critical factor in the overall handset/smartphone end demand.

Android patent vulnerability: We believe the Android OS could potentially

become no longer free of charge from the handset OEMs’ standpoint, due to

likely licensing payments to non-Google companies. Microsoft has filed a patent

infringement lawsuit against Motorola and its Android line-up; HTC has obtained

a licensing agreement by paying royalty fees to Microsoft; and according to Maeil

Business Newspaper, Samsung has reached an agreement to pay Microsoft $15

per smartphone (around 4% of ASP).

Financials: An improving balance sheet

TCL Comm has seen meaningful improvement of its balance sheet on its strong

financial performance in 2010. As of 1Q11, TCL Comm has net cash of HK$1 bn or

42% of its total equity.

In terms of capex and capacity plan, TCL has targeted 65m units of capacity by

end-2011 from its current monthly run rate of 5m units. For its future capacity

expansion, TCL plans to build a new factory next to its existing fab in Huizhou.

The total capex budget for this year would be around HK$350 mn, of which

HK$200m will be for the new factory.

Considering TCL’s current cash on hand, we view its cash position as sufficient

for the company’s further expansion without additional funding.

2012E Base TCL Comm's 2012E EPS (HK$)TCL Comm smartphone shipment (mn units) 3.6 TCL Comm smartphone shipment (mn units)TCL Comm smartphone ASP (US$) 101.5 0.90 1.6 2.6 3.6 4.6 5.6

5% 0.53 0.57 0.60 0.64 0.68

TCL Comm total shipment (mn units) 57.7 6% 0.64 0.68 0.73 0.77 0.81

TCL Comm belended ASP (US$) 30.2 7% 0.75 0.80 0.85 0.90 0.95

8% 0.86 0.92 0.97 1.03 1.08

NPM 6.9% 9% 0.97 1.03 1.09 1.16 1.22

Key assumptions Bull case Difference to GSe 2012E EPS TCL Comm smartphone shipment (mn units) 4.6 TCL Comm smartphone shipment (mn units)TCL Comm feature phone shipment (mn units) 48 0.00 1.6 2.6 3.6 4.6 5.6TCL Comm ODM shipment (mn units) 5.8 5% -37% -33% -29% -25% -21%

TCL Comm total shipment (mn units) 58.7 6% -24% -19% -14% -9% -4%

TCL Comm belended ASP (US$) 31.5 7% -12% -6% 0% 6% 12%

Diff vs. Gse 4% 8% 1% 8% 14% 21% 28%

9% 14% 21% 29% 36% 44%

(HK$ m)

Revenues from feature phone 9,757

Revenues from smartphone 3,654

Other revenues 951

Total revenues 14,362

NPM 6.9%

EPS (HK$) 0.90Difference vs. GSE 6%

NP

M

NP

M



Exhibit 16: TCL Communication quarterly profit model (HK$mn)

Source: Company data, Goldman Sachs Research estimates.

Summary Income Statement 1Q2011 2Q2011E 3Q2011E 4Q2011E 1Q2012E 2Q2012E 3Q2012E 4Q2012E 2010 2011E 2012E 2013E

Net sales 2,124 2,532 3,219 4,118 2,897 3,145 3,470 4,060 8,701 11,993 13,572 13,808 Cost of good sold (COGS) (1,651) (1,957) (2,505) (3,225) (2,288) (2,481) (2,721) (3,190) (6,752) (9,339) (10,681) (10,957)

Gross profits 473 575 713 892 609 664 748 870 1,948 2,654 2,891 2,852 Operating expenses (369) (404) (476) (565) (457) (484) (513) (566) (1,413) (1,815) (2,020) (2,050) SG&A (280) (307) (363) (427) (345) (368) (389) (424) (1,056) (1,376) (1,526) (1,547) R&D (90) (97) (114) (138) (112) (116) (123) (143) (357) (439) (494) (503)

Operating profits 104 171 237 327 152 180 236 303 535 839 871 801 Non-operating income/(loss) 79 28 31 35 32 35 37 40 210 174 143 166

Earnings before tax (EBT) 183 199 268 362 184 215 272 343 745 1,012 1,014 967 Income tax credit/(expense) (3) (15) (21) (24) (4) (18) (24) (26) (43) (62) (72) (75) Extraordinary gain/(loss) - - - - - - - - - - - - Minority Interests (0) - - - - - - - 0 (0) - -

Earnings after tax (EAT) 180 184 248 339 180 197 248 317 702 951 942 892

EPS (HK$) 0.16 0.17 0.22 0.31 0.16 0.18 0.22 0.29 0.65 0.86 0.85 0.80 EPS (fully diluted, HK$) 0.16 0.17 0.22 0.31 0.16 0.18 0.22 0.29 0.65 0.86 0.85 0.80

Ratio analysis and assumptions

As % of salesGross margin 22.3% 22.7% 22.2% 21.7% 21.0% 21.1% 21.6% 21.4% 22.4% 22.1% 21.3% 20.7%Operating expense ratio -17.4% -16.0% -14.8% -13.7% -15.8% -15.4% -14.8% -14.0% -16.2% -15.1% -14.9% -14.8%Operating margin 4.9% 6.8% 7.4% 7.9% 5.2% 5.7% 6.8% 7.5% 6.2% 7.0% 6.4% 5.8%Pre-tax margin 8.6% 7.9% 8.3% 8.8% 6.3% 6.8% 7.9% 8.4% 8.6% 8.4% 7.5% 7.0%Tax rate (as % of EBT) 1.5% 7.3% 7.7% 6.5% 2.1% 8.4% 8.8% 7.5% 5.8% 6.1% 7.1% 7.8%Net margin 8.5% 7.3% 7.7% 8.2% 6.2% 6.2% 7.2% 7.8% 8.1% 7.9% 6.9% 6.5%

QoQ growth (%)Sales -31.3% 19.2% 27.1% 27.9% -29.6% 8.6% 10.3% 17.0%Gross profits -32.6% 21.6% 24.1% 25.1% -31.7% 9.0% 12.7% 16.2%Operating profits -37.8% 65.0% 38.7% 38.0% -53.6% 18.6% 31.0% 28.5%Non-operating profits -4.3% -64.9% 12.4% 11.5% -9.0% 8.7% 5.8% 9.1%Pre-tax profits -26.6% 8.7% 35.0% 34.9% -49.3% 16.9% 26.9% 25.9%Net profits -28.0% 2.3% 34.5% 36.6% -46.9% 9.3% 26.4% 27.8%EPS (weighted averaged) -29.6% 2.3% 34.5% 36.6% -46.9% 9.3% 26.4% 27.8%

Yoy growth (%)Sales 44.1% 28.1% 49.3% 33.1% 36.4% 24.2% 7.8% -1.4% 99.5% 37.8% 13.2% 1.7%Gross profits 61.8% 33.1% 36.6% 27.2% 28.8% 15.5% 4.9% -2.5% 105.4% 36.2% 8.9% -1.4%Operating profits 117.3% 51.3% 13.9% 96.5% 46.6% 5.3% -0.5% -7.4% NM 56.7% 3.8% -8.0%Non-operating profits 213.2% -70.0% 266.8% -57.8% -59.9% 24.0% 16.7% 14.2% 438.2% -17.2% -17.7% 16.3%Pre-tax profits 150.6% -3.4% 23.9% 45.2% 0.4% 7.9% 1.5% -5.3% 2085.7% 35.9% 0.1% -4.6%Net profits 159.0% 2.0% 22.9% 35.4% -0.2% 6.7% 0.2% -6.3% 2951.0% 35.5% -0.9% -5.3%EPS 148.2% -1.3% 19.5% 32.4% -0.2% 6.7% 0.2% -6.3% 2476.5% 32.5% -0.9% -5.3%

Dividend policiesCash dividends (HK$ per share) 0.12 0.17 0.17 0.16 Payout ratio (%) 17.8% 20.0% 20.0% 20.0%



Company profile

Exhibit 17: TCL Comm’s key business structure

Source: Company data.

TCL Communication Technology Holdings Limited (TCL Communication) is a

subsidiary of TCL Corporation (47% of holdings). TCL Comm’s shares listed on

the Hong Kong Stock Exchange in 2004.

Headquartered in China, TCL Comm is a handset OEM company with dual brand

names (TCL and Alcatel). The company also provides ODM services for OEM

companies or telecom operators.

In 2004, TCL Comm set up a joint venture “TCL & Alcatel Mobile Phones Limited

(T&A)” with Alcatel. In 2005, T&A became a wholly owned subsidiary of TCL

Comm.

In 2008, TCL Comm announced its business restructuring plan and indicated that

its businesses will operate under two brands: Alcatel and TCL.

TCL Comm’s largest selling product is its 2G feature phone. The company started

its smartphone business in late 2010. In 2010, TCL Comm shipped 36mn handset

units (own brand & ODM), accounting for 2.5% of the global handset market. For

2011, currently the company’s official shipment target is 50mn units.

TCL Communication (2618.HK)

ODM

The Board of Directors TCL Group General Shareholders

47% of holdings3 % 50%



Reg AC

I, Robert Yen, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or

companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific

recommendations or views expressed in this report.

Investment Profile

The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and

market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites

of several methodologies to determine the stocks percentile ranking within the region's coverage universe.

The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows:

Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate

of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend

yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends.

Quantum

Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for

in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets.

GS SUSTAIN

GS SUSTAIN is a global investment strategy aimed at long-term, long-only performance with a low turnover of ideas. The GS SUSTAIN focus list

includes leaders our analysis shows to be well positioned to deliver long term outperformance through sustained competitive advantage and

superior returns on capital relative to their global industry peers. Leaders are identified based on quantifiable analysis of three aspects of corporate

performance: cash return on cash invested, industry positioning and management quality (the effectiveness of companies' management of the

environmental, social and governance issues facing their industry).

Disclosure Appendix

Coverage group(s) of stocks by primary analyst(s)

Robert Yen: Asia Pacific Technology.

Asia Pacific Technology: AAC Acoustic, Acer, Advanced Semiconductor, Advanced Semiconductor (ADR), ASUSTeK Computer, AU Optronics, BYD

Electronic, Catcher Technology, Cheng Uei Precision (Foxlink), Chimei Innolux, China Wireless Technologies, Chipbond Technology Corp., Compal

Communications, Compal Electronics, Coretronic, Delta Electronics, E Ink Holdings Inc, Epistar, Everlight Electronics, Foxconn Int'l Holdings,

Foxconn Technology, Hon Hai Precision, HTC Corp., Largan Precision, Lenovo Group, Lite-On Technology, Nan Ya PCB, Novatek Microelectronics,

Pegatron, Powertech Technology, Quanta Computer, Radiant Opto-Electronics, Siliconware Precision, Siliconware Precision (ADR), Silitech

Technology, SK C&C, TCL Communication, TPK Holding, TPV Technology, Tripod Technology, Unimicron, Wintek, Wistron, Young Fast

Optoelectronics.

Company-specific regulatory disclosures

The following disclosures relate to relationships between The Goldman Sachs Group, Inc. (with its affiliates, "Goldman Sachs") and companies

covered by the Global Investment Research Division of Goldman Sachs and referred to in this research.

Goldman Sachs has received compensation for non-investment banking services during the past 12 months: TCL Communication (HK$7.18)

Goldman Sachs had a non-securities services client relationship during the past 12 months with: TCL Communication (HK$7.18)

Distribution of ratings/investment banking relationships

Goldman Sachs Investment Research global coverage universe

Rating Distribution Investment Banking Relationships

Buy Hold Sell Buy Hold Sell

Global 32% 54% 14% 52% 41% 37%



As of July 1, 2011, Goldman Sachs Global Investment Research had investment ratings on 3,167 equity securities. Goldman Sachs assigns stocks as

Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for

the purposes of the above disclosure required by NASD/NYSE rules. See 'Ratings, Coverage groups and views and related definitions' below.

Regulatory disclosures

Disclosures required by United States laws and regulations

See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager

or co-manager in a pending transaction; 1% or other ownership; compensation for certain services; types of client relationships; managed/co-

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