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Cowell e Holdings [1415.HK]

Cowell e Holdings (Cowell) is camera modules manufacturer with a 5% global

market share. Cowell should deliver solid earnings growth of 18%/16%/17% in

2015E/2016E/2017E driven by: a) market share gain, b) launching of new prod-

ucts and c) expanding customer base. Securing orders from Apple for supplying

rear camera modules, as well as orders from Chinese handset makers, along

with strong operating performance and increasing market attention are share

price catalysts. Despite recent share price performance, we believe the current

valuation of 9.8x 2015E offers a good entry point. Initiate with BUY for a target

price of HK$7.87 (based on 12x 2015E PER, in line with its peers).

Leading player gaining global market share. Cowell is a major supplier of

camera modules for mobile devices. The group primarily engages in the design, development, manufacture and sales, on an OEM basis, of a variety of camera modules that serve as critical components for smartphones, multimedia tablets

and other mobile devices with camera functions. The group is world No.6 largest camera modules maker with a 5% global market share in 2013. The group mainly supplies its products to Apple, LG Electronics and Samsung Electronics.

Multiple growth drivers. Cowell’s turnover growth will be supported by: a) mar-

ket share gain , b) penetration into Apple’s rear camera module, c) system-in-package (SIP) and d) orders from Chinese handset makers. Cowell started a trial production of rear camera modules and we believe that there is high chance for Cowell to secure orders of supplying rear camera modules to Apple for legacy models. Cowell also agrees to supply LG Electronics with high-end 13 mega pixel camera modules starting in Q3 2015. Cowell’s top line is expected to grow at a CAGR of 16.7% in 2013-2017.

High stickiness with customers. Due to high R&D requirement and strin-

gent requirement by customers, the entry barrier is high for FC camera module segment. Cowell has 360 engineers which help shorten new product launch cy-cles. We forecast that Cowell’s gross margin will expand by 0.4% ppt from 12.6% in FY14 to 13.0% in FY17.

Risks: (1) increasing competition, (2) slower than expected development of new

products and (3) lower than expected yield rate achieved.

Mark Po, CFA — Senior Analyst

(852) 3698-6318

markpo@chinastock.com.hk

Wong Chi Man, CFA —Head of Research

(852) 3698-6317

cmwong@chinastock.com.hk

TMT Sector

A leading handset camera module supplier. Initiate with BUY

BUY

Close: HK$6.41 (May 7, 2015)

Target Price: HK$7.87 (+23%)

Share Price Performance

Market Cap US$687m

Shares Outstanding 832m

Auditor KPMG

Free Float 28.8%

52W range HK$3.54-6.68

3M average daily T/O US$7.6m

Major Shareholding Chairman (45%)

Hahn & Co. (26%)

May 8, 2015

Key Financials

(in USDm)2013 2014 2015F 2016E 2017E

Rev enue 813.9 886.5 1,023.2 1,206.1 1,410.3

Change (YoY %) 53.3 8.9 15.4 17.9 16.9

Gross Prof it 103.2 112.1 134.2 156.9 183.4

Gross Margin % 12.7 12.6 13.1 13.0 13.0

Net Prof it 50.2 53.2 69.9 81.0 94.5

Net Margin % 6.2 6.0 6.8 6.7 6.7

EPS (Basic) 0.07 0.07 0.08 0.10 0.11

Change (YoY %) 200.9 6.0 18.3 15.8 16.8

DPS $0.000 $0.000 $0.013 $0.019 $0.023

ROE (%) 44.4 32.0 28.2 23.9 21.2

Div idend Yield (%) - - 1.54 2.37 2.77

PER (x) 12.3 11.6 9.8 8.4 7.2

PBR (x) 4.4 3.2 2.2 1.8 1.3

FCF Yield (%) 1.17% 2.72% -0.61% 0.26% 2.59%

Capex (m) (15.8) (21.5) (49.0) (90.0) (25.5)

Free cash f low per share 0.0 0.1 (0.0) 0.0 0.1

Net Gearing (%) 54.8 5.0 Net Cash 3.4 Net Cash

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1) A leading player in a growing market

A major supplier of camera modules for mobile devices, Cowell e Holdings (Cowell) primarily engages in the design, development, manufacture and sales, on an OEM basis, of a variety of camera modules that serves as critical components for smartphones, multimedia tablets and other mobile devices with camera functions.

Cowell’s camera modules are manufactured utilized either “flip-chip” (FC) technology and chip-on-board (COB) technology. According to International Business Strategies (IBS), Cowell’s share of global camera modules market in terms of sales was 1.6% in 2010, 2.6% in 2011, 3.5% in 2012 and 5.0% in 2013, making the group the sixth world largest supplier of camera modules in 2013.

A camera module is a device that converts an optical image into electronic video sig-nals. These electronic signals are then converted into digital data on the display of a digital imaging device for users to store as a digital image. Booming demand for mo-bile phones, smartphones, multimedia tablets and other mobile devices drives de-mand for camera modules, which are the core components for built-in digital cameras and have become one of the key differentiating factors for such devices. Camera module applications have expanded beyond their use traditionally as a component of digital still camera to a wide range of markets in automotive devices, security, medi-cal and other areas, due to the cost and performance advantages of camera mod-ules.

According to IBS, global camera modules market grew from 2.1bn units in 2010 to 3.8bn units in 2013, representing a CAGR of 22.8%, and is expected to grow further to 7.3bn units in 2020 representing a CAGR of 9.5% over 2013 to 2020. In terms of revenue, according to the IBS, the global camera modules market grew from US$10.0bn in 2010 to US$16.4bn in 2012, representing a CAGR of 17.8% and is expected to further grow to US$34.4bn in 2020, representing a CAGR of 11.2% over 2013 to 2020.

Rear-end camera are driving enhancement in camera modules for higher pixel count while front-end camera modules are at a lower pixel count based on fixed focus tech-nology. According to IBS, sales volume of rear-end camera modules, which grew from 1,315m units in 2010 to 2,065m units in 2013, is expected to increase further to 3,040m units in 2020, representing a CAGR of 5.7%. Front-end camera modules sales grew faster from 405m units in 2010 to 1,317m units in 2013, representing a CAGR of 48.2%. They are expected to grow further to 2,778m units in 2020, repre-senting a CAGR of 11.3%. Rear-end and front-end camera modules represented 61.6% and 38.9% of total camera modules sales volume in 2013, respectively. By 2020 rear-end and front-end camera modules are expected to represent 52.3% and 47.7% of total camera module sales volume, respectively. Rear-end camera modules have reached pixel counts of over 16 megapixels, but there is a large market for 5 megapixels and 8 megapixels. Front-end camera modules are typically two megapix-els in pixel count. Overall camera module technology will be driven by the need to support a wide range of image resolution levels.

Cowell is major supplier of camera modules

Front-end camera segment is growing faster

Investment positives

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According to IBS, volume of the global smartphone market is expected to increase from 970m units in 2013 to 2.1bn units in 2020, representing a CAGR of 11.6%, and will be a key driver for the camera modules through 2020. While growth from non-China smartphone vendors is lower than that of Chinese smartphones vendors, tech-nology requirements of camera modules in the non-China market are typically higher, which leads to higher selling prices for camera modules. Volume of smartphones sold in non-China region is expected to increase from 624m units in 2013 to 895m units in 2020, representing a CAGR of 5.3%. According to IBS, Samsung Electronics was the largest smartphone vendor in terms of sales volume with 33.1% global market share in 2013. Apple and Huawei were the 2nd and 3rd largest smartphone vendors with market shares of 15.8% and 5.4% respectively in 2013.

Camera modules are also gaining popularity with increased demand as components for multimedia tablets. As is the case for smartphones, front and rear cameras have become of the key specifications for tablets. According IBS, volume of the global tab-let market is expected to increase from 276m units in 2013 to 815m units in 2020, representing a CAGR of 16.7%. Growth of mobile internet usage serves as a main driver for increasing sales of tablets on global basis. Tablet market is expected to continuously experience strong growth despite increasing overlap with large-scale display smartphones and the low-end notebook computer market. Volume of tablets sold in the non-China region is expected to increase from 112m units in 2013 to 267m units in 2020, representing a CAGR of 13.2%.

According to IBS, Apple was the largest vendor of tablets in terms of sales volume in 2013 with a market share of 26.9%. Samsung Electronics and Asus were the 2nd and 3rd largest vendors of tablets with market share of 14.6% and 4.4% respectively in 2013.

Image resolution for camera modules is measured by the pixel count, a key metric of camera module performance. Demand for higher pixel count camera modules contin-ues to grow, driven by large end user demand for high quality pictures.

According to IBS, global shipments of mid to high resolution camera modules, char-acterized by a pixel count of 5 megapixels and above, amounted to 725m units in 2013. They are projected to jump to 5,182m units in 2020, representing a CAGR of 32.4%. Camera modules with high resolution, characterized by a pixel count of 8 megapixels, 12 megapixels, 16 megapixels and above, recorded unit volume of 342m in 2013. They are expected to increase to 3,931m units in 2020, representing a CAGR of 41.7% and reflecting increasing demand for high resolution cameras in smartphones, multimedia tablets and other applications, including the automotive sector.

Increasing popularity of cam-era modules in tablets

Migration to higher pixel count

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Figure 2: Global camera modules market by revenue

Sources: IBS, CGIHK Research

Figure 1: Global camera modules market by volume

Sources: IBS, CGIHK Research

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Non-smartphone: CAGR of 7.9% in 2010-2020

Smartphone: CAGR of 21.2% in 2010-2020

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Non-smartphone: CAGR of 8.0% in 2010-2020

Smartphone: CAGR of 19.9% in 2010-2020

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Figure 4: Global tablet shipment

Sources: IBS, CGIHK Research

Figure 3: Global smartphone shipment

Sources: IBS, CGIHK Research

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Cowell is gaining global market share

Figure 5: Global market share of camera module producers

Sources: IBS, CGIHK Research

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Figure 6: Global camera modules market volume by pixel count

Sources: IBS, CGIHK Research

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2) Close relationship with leading players

Cowell has well-established relationships with three of the largest global mobile device brands. Apple is the largest customer to Cowell which accounted for 77% of turnover in 2014. FC camera modules products that Cowell supplies to Apple as front cameras on iPhone/iPad, which offer thinner in size and lighter in weight compared to the COB designs. The group’s major customers for the optical components include Optis, Sam-sung, LG and Hitachi.

Cowell’s three largest customers including Apple, Samsung and LG commanded 53.8% of global smartphone shipments in 2013, according to IBS. Cowell has been the key supplier of fixed-focus front-facing camera modules for Apple’s mobile devices. Apple was the group’s largest customer in 2014, accounting for approximately 77% of total revenue. Cowell began supplying COB camera modules directly to Apple in 2009. In 2009, Cowell, together with Vista Point Technology and Primax, was the supplier of Apple’s front cameras. In 2010, Cowell and Foxconn became suppliers of the compo-nent, but Cowell was the major supplier with over 50% order allocation. Since 2012, Apple shifted its camera technology to FC, and applied it to iPhone 5 and later models. At that time, Sony was introduced as a new supplier and Foxconn was dropped from the supplier list. Given high ASP, Apple is the only smartphone brand using FC camer-as globally and there are only a few suppliers including Sharp, LG Innotek, Sony and Cowell supplying FC camera modules to Apple. Sharp and LG Innotek supply rear cameras while Sony and Cowell offer front cameras.

LG Electronics (LGE): Cowell has a long business relationship with LGE, supplying camera modules since 2002. Revenue from LGE was around 19% of total revenue in 2014. Samsung Electronics (SEC) is the third-largest customer. Cowell began to sup-ply fixed-focus front-facing COB camera modules to SEC in Oct 2013. Revenue contri-bution from Samsung was below 2% in 2014.

Apple imposed stringent requirements and standards for product design and produc-tion efficiency, product quality, costs, delivery and services on its suppliers including Cowell. Successful relationships with leading mobile device companies especially Ap-ple provide important validation of its technology and process capabilities for potential new customers who may consider integrating Cowell’s camera module solutions into their mobile device products.

Entry barrier is high for new comers given Apple’s high standard of requirement, long certification process and high R&D capability. Cowell has partnered with Apple for front cameras on iPhone/iPad since 2009 and is now the senior camera module sup-plier for Apple. The group has over 360 engineers with an average of 8 years of expe-rience based in Dongguan. Besides manufacturing and packaging processes, Cowell also participates in an early stage of product design and conducts frequent communi-cations with Apple to improve product efficiency and solve potential production prob-lems. Management believes Cowell has high R&D capability, which makes it more competitive over its peers.

Close relationship with leading handset brands

One of few key camera module suppliers to Apple

Supplier to Samsung & LG

High barrier to Apple supply chain

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In addition, FC cameras require advanced semiconductor packaging technology and large initial investment. However, the number of clients is limited. Thus, it is difficult and risky for newcomers to enter this market. It is risky for Apple to replace Cowell’s position. Cowell has been supplying cameras to Apple since 2009 and has a proven track record of producing FC camera modules since 2012. We be-lieve Apple’s high order allocation to Cowell and its inclusion of the latter in its rear-camera supply chain illustrate Cowell’s technological leadership in this mar-ket. Replacing Cowell would pose tremendous risk to Apple in the near term.

Figure 7: Market share of global handset brand in 2013 Sources: IBS, CGIHK Research

Company Sales (m units) Market share (%)

Samsung Electronics 321.2 33.1%

Apple 153.4 15.8%

Hauwei 52 5.4%

Microsoft/Nokia 51.8 5.3%

LG Electronics 47.6 4.9%

Lenovo 42.9 4.4%

ZTE 40 4.1%

Sony 38.4 4.0%

Coolpad 36.7 3.8%

Xiaomi 18.7 1.9%

Blackberry 18.4 1.9%

TCL 17.6 1.8%

HTC 16.1 1.7%

Google/Motorola 12.5 1.3%

Others 102.6 10.6%

Total 969.9 100.0%

Figure 8: Market share of global tablet brand in 2013 Sources: IBS, CGIHK Research

Sales (m units) Market share (%)

Apple 74.20 26.9%

Samsung Electronics 40.40 14.6%

Asus 12.10 4.4%

Amazon 10.20 3.7%

Lenovo 7.90 2.9%

Others 131.20 47.5%

Total 276.00 100.0%

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Figure 9: Long development cycle with Apple Sources: IBS, CGIHK Research

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Figure 10: Supply of camera modules to key products of Apple Sources: IBS, CGIHK Research

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3) New products development

Cowell has been enhancing its FC and COB technologies as well as manufactur-

ing capabilities to expand its product range on a variety of high-end camera mod-

ules to serve the diverse needs of its existing customers. Leveraging its packaging

technology and proprietary knowledge to make smaller and thinner components

for mobile devices, Cowell is developing system-in-package (SiP) technology in

which several chips are packaged together as a “system”, thus harnessing semi-

conductor packaging technology to enhance camera module assembly.

A system in package (SiP) or system-in-a-package, also known as a Chip Stack

Multi-Chip-Module. A number of integrated circuits enclosed in a single module

(package), SiP performs all or most of the functions of an electronic system typi-

cally used inside a mobile phone, digital music player, etc. Dies containing inte-

grated circuits may be stacked vertically on a substrate. They are internally con-

nected by fine wires that are bonded to the package. Alternatively, with a flip chip

technology, solder bumps are used to join stacked chips together. SiP dies can be

stacked vertically or tiled horizontally, unlike slightly less dense multi-chip mod-

ules, which place dies horizontally on a carrier. SiP connects the dies with stand-

ard off-chip wire bonds or solder bumps, unlike slightly denser three-dimensional

integrated circuits which connect stacked silicon dies with conductors running

through the die. For example, SiP can contain several chips—such as a special-

ized processor, DRAM, flash memory, combined with passive components such as

resistors and capacitors — all mounted on the same substrate. This means that a

complete functional unit can be built in a multi-chip package, so that few external

components are needed to make it work. This is particularly valuable in space con-

strained environments like MP3 players and mobile phones as it reduces the com-

plexity of printed circuit board and overall design. Despite its benefits, this tech-

nique decreases the yield of fabrication since any defective chip in the package

will result in a non-functional packaged integrated circuit, even if all other modules

in that same package are functional.

Cowell applies its SiP technology to produce FC cameras, and intends to apply to other smart device applications, which may include high-end cameras, wearable devices, finger print reading, etc. Target date for launching its new SiP products is 2H16. Successful penetration into other product ranges should diversify business risks and drive earnings growth in future. Given their smaller size and lighter weight but increased functionalities, the new products are targeted at high-end camera modules and wearable devices for Apple.

Cowell has been a provider of 8MP cameras to LG since August 2014. The com-pany is expected to start supplying 13MP rear cameras to the Korean phone-maker in Q3 2015. Migration to high-resolution products can boost ASP and sup-port its COB product margin.

Breaking into SiP product

Higher entry barrier

Higher end COB products to LG

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Figure 11: SiP structure

Sources: www.renesas.com, CGIHK Research

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4) Capacity expansion to offer upside for margin

Cowell uses its own equipment to produce COB camera modules and optical com-

ponents for its customers. A certain portion of Cowell’s FC production equipment is

loaned by Apple to Cowell without any payment requirement. The Apple-owned

equipment is installed in Cowell’s production facilities in Huanan, Dongguan. Cow-

ell is not required to make any payments to Apple for the use of such equipment.

However, Apple imposes restrictions on its use for other customers, and retains

the right to require Cowell to return such equipment on request. Such equipment is

not accounted for as Cowell’s assets nor included in financial statements.

Cowell always reserves certain manufacturing capacity for Apple's requirements.

Therefore, utilization of its camera module manufacturing was relatively low in

2011-2014 which is ranging from 63% to 67% in 2011-2013. The arrangement with

Apple also cap upside for margin improvement A major portion of the IPO pro-

ceeds will be used for capacity expansion and Cowell will have high flexibility in

making production schedule. About 79% of the IPO proceeds will be used for en-

hancement and expansion of production capacity, which should have positive ef-

fect on group’s profitability.

Self-own capacity to offer up-side to margin

13

Cowell's products

FC cameras. The term “flip-chip” refers to an assembly technology whereby a semicon-ductor processor chip, generally referred to as a die, is mounted directly onto a sub-strate (which is an HTCC board in the case of FC camera modules) in a “face-down” manner. Electrical connection is achieved through conductive bumps built on the sur-face of the die, which allows mounting process to be face-down.

During the mounting, the die is flipped on the substrate with the bumps being precisely positioned at their target locations. Because flipped dies do not require wire-bonding, the resulting modules are typically thinner than those produced in a different mounting technology, such as COB technology. Camera modules utilizing the FC technology are structurally different from other modules assembled with traditional packaging technol-ogy, and therefore require additional assembly steps and specialized equipment, mak-ing production more time-consuming and expensive. Cowell began producing FC cam-era modules in 2012.

Cowell’s FC camera modules are produced with a wide range of resolutions from 1.3MP to 5.3MP. FC camera modules accounted for 42.8%/72.3%/73% of Cowell’s turnover in 2012-14, respectively.

COB module. The term “chip-on-board,” also known as “direct chip attachment,” refers to an assembly technology whereby a die is directly mounted on and electrically inter-connected to a substrate (which is a PCB in the case of COB camera modules) by using metallic wires. As the process involves only three major steps, namely die at-tachment, wire-bonding and encapsulation of the die and wires, it is a popular produc-tion method for camera modules due to its relative simplicity.

However, due to the encapsulation necessary to protect the die surface and the bond-ed wires, the resulting modules are slightly thicker than modules produced utilizing FC technology. Cowell’s COB camera modules are produced with a wide range of resolu-tions from 0.3MP to 8MP available with auto-focus or fixed-focus functions. These modules accounted for 94.9%, 54.8%, 26.3% and 25.7% of Cowell’s revenue in 2011, 2012, 2013 and 2014, respectively.

Optical components. Main optical components currently produced by Cowell include glass plates, lenses and prisms, which are primarily used in CD, DVD and Blu-ray disc players and computer CD and DVD drives. However, in part due to the recent global trend of utilizing digital data storage methods (such as flash drives) rather than CD/ DVD/ Blu-ray discs, as well as the diversifying means of multimedia content delivery, we expect the growth in the total market size for optical components to be limited in the near future. We also expect the revenue of optical components to remain small com-pared to that of camera modules.

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Figure 12: Cowell’s turnover breakdown in 2014

Sources: Cowell, CGIHK Research

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Sources: CCID, CGIHK Research

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Steady turnover growth in 2015E-2017E.

Better turnover mix

Stable gross margin

Earnings forecast

Cowell is projected to deliver earnings growth of 18.3%/15.8%/16.8% in

2015E/ 2016E/ 2017E, supported by steady turnover growth and margin im-

provement.

We expect Cowell to report turnover growth of 15.4% YoY, 17.9% YoY and 16.9%

YoY respectively in 2015E, 2016E and 2017E mainly driven by: a) market share

gain, b) launching of new products and c) expanding customer base. The 2015

top line is expected to jump by 15.4% to US$1,023m in 2015, driven by a 10%

volume growth and a 5.0% increase in ASP for camera module manufacturing.

We forecast a stable topline growth of 17.9% in 2016 and 16.9% in 2017, support-

ed by a 15.0% volume growth in camera modules in 2016 and 2017. Underpinned

by the model upgrades for Apple and megapixel migration for LGE, we believe

that our stable ASP assumptions are achievable.

Cowell’s blended gross margin and net profit margin are expected to improve from

12.6% and 6.0% in 2014, to 13.0% and 6.7% in 2017. We forecast that Cowell’s

gross margin will expand from 12.6% in FY14 to 13.0% in FY17, driven by rising

contribution from the FC camera module segment, increased automation and bet-

ter efficiency on COB module manufacturing. Selling and marketing expenses-to-

sales ratio stayed low at 0.7-0.8% in FY12-14 given its business as an OEM man-

ufacturer. After taking into account the low SG&A expenses, which should stay at

around 4.9% to 4.5% in FY15 to FY17, we forecast that net profit margin to im-

prove from 6.0% in 2014 to 6.7% in 2017.

SG&A expenses remained stable at around 4.2-4.9% in FY12-14, thanks to excel-

lent cost control. The improving SG&A-to-sales ratio is driven by the excellent

control of administrative expenses.

The increase in capex to US$51m in 2012 was mainly due to increased invest-

ment for the establishment of a new production facility in Huanan for the FC cam-

era module for Apple. The group incurred approximately US$23m in capital ex-

penditure in 2014 for the purchase of additional equipment to produce advanced

FC camera modules. Including the net proceeds of US$46m from its IPO in Mar

2015, cash position was further strengthened. Overall capex in the next three

years is expected to be huge due to two new product facilities to be built for the

FC rear-facing camera modules and SiP products.

16

Figure 14: Key Assumptions for Cowell Sources: Company, CGIHK Research

2011 2012 2013 2014 2015F 2016F 2017F

Turnover (USDm)

Flip-chip 0 225.0 588.5 646.8 748.2 860.4 1,034.6

COB 306.8 289.5 214.3 227.6 261.7 301.0 301.0

Optical components 16.4 13.0 11.1 12.1 13.3 14.6 14.6

SiP Products 1.1 3.5 0 0 0 30.0 60.0

Total 323.1 527.5 813.9 886.5 1,023.2 1,206.1 1,410.3

YoY Change (%)

Flip-chip 161.6 9.9 15.7 15.0 20.2

COB (5.6) (26.0) 6.2 15.0 15.0 0

Optical components (14.4) 9.0 10.0 10.0 0

SiP Products 100.0

Total 63.3 54.3 8.9 15.4 17.9 16.9

Gross margin (%)

Flip-chip 6.0 13.5 13.8 14.3 14.3 14.3

COB 9.9 8.5 9.2 9.0 9.0 9.0 9.0

Optical components 33.2 34.2 37.2 19.9 27.5 27.5 27.5

0 0 0 0 0 9.0 15.0

Net margin (%) 5.9 3.1 6.2 6.0 6.8 6.7 6.7

Cost (USDm)

S,G&A (14.3) (25.9) (34.4) (43.7) (46.0) (54.2) (63.4)

Financial Expenses (1.0) (4.4) (5.2) (3.1) (3.6) (4.2) (4.9)

YoY Change (%)

S,G&A 80.5 33.0 27.0 5.3 17.9 16.9

Financial Expenses 363.9 17.9 (40.4) 15.4 17.9 16.9

CAPEX (USDm) 8.7 50.7 15.8 21.5 49.0 90.0 25.5

Net Gearing (%) 50.7 148.8 54.8 5.0 Net Cash 3.4 Net Cash

Sales volume (m units) 105.3 146.8 197.6 193.4 212.7 244.7 281.3

ASP (US$) 2.9 3.5 4.1 4.5 4.7 4.7 4.7

YoY Change (%)

Sales volume 39.4 34.6 (2.1) 10.0 15.0 15.0

ASP 20.4 15.9 11.3 5.0 0 0

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Figure 15: Earnings projection

Sources: Company, CGIHK Research

Income Statement (USDm) FY2013 FY2014 FY2015F FY2016F FY2017F Cash Flow Statement (USDm) FY2013 FY2014 FY2015F FY2016F FY2017F

Revenue 814 887 1,023 1,206 1,410 Net Income 68 70 90 105 121

Growth yoy% 53.3% 8.9% 15.4% 17.9% 16.9% Depreciation & Amort. 11 13 16 22 24

Gross Profit 103 112 134 157 183 Change in Working Capital (27) 22 (78) (28) (31)

Growth yoy% 124.3% 8.6% 19.7% 16.9% 16.9% Cash from Ops. 52 105 28 99 114

Selling General & Admin Exp. (34) (44) (46) (54) (63) Capital Expenditure (16) (22) (49) (90) (25)

Others Operating Expenses/Items (0) 2 2 2 1 Sale of Property, Plant, and Equipment - - - - -

Operating Income 68 70 90 105 121 Change in Investing Acitivities (1) (1) 28 7 76

Growth yoy% n.a. n.a. n.a. n.a. n.a. Cash from Investing (16) (23) (21) (83) 51

Interest Expense (5.2) (3.1) (3.6) (4.2) (4.9) Net increase in bank borrowings (20) (30) 14 19 21

Interest and Invest. Income 0.6 0.3 1.2 1.1 2.5

Income/(Loss) from Affiliates 0 0 0 0 0 Issuance of Common Stock 0 0 41 0 0

Other Non-Operating Inc. (Exp.) 0 0 0 0 0 Common Dividends Paid 0 0 0 (10) (16)

Impairment of Goodwill - - - - - Special Dividend Paid - - - - -

Gain (Loss) On Sale Of Invest. - - - - - Other Financing Activities (10) (20) (24) (28) (32)

Gain (Loss) On Sale Of Assets - - - - - Cash from Financing (30) (50) 31 (20) (27)

Income Tax Expense (14) (14) (18) (21) (24)

Minority Int. in Earnings 0 0 0 0 0 Net Change in Cash 6 32 38 (3) 137

Net Income 50 53 70 81 95

Growth yoy% 200.9% 6.0% 31.5% 15.8% 16.8%

Balance Sheet (USDm) FY2013 FY2014 FY2015F FY2016F FY2017F Ratios FY2013 FY2014 FY2015F FY2016F FY2017F

ASSETS Profitability

Cash And Equivalents 45 82 118 112 248 Return on Assets % 12.9% 11.7% 11.9% 11.1% 10.4%

Receivables 167 221 321 379 443 Return on Capital % 22.6% 20.6% 21.2% 18.7% 17.1%

Inventory 55 66 76 90 105 Return on Equity % 44.4% 32.0% 28.2% 23.9% 21.2%

Other Current Assets 26 21 0 0 0

Total Current Assets 294 390 515 581 796 Margin Analysis

Net Property, Plant & Equipment 96 103 136 204 206 Gross Margin % 12.7% 12.6% 13.1% 13.0% 13.0%

Long-term Investments - - - - - SG&A Margin % 4.2% 4.9% 4.5% 4.5% 4.5%

Other Intangibles - - - - - EBIT Margin % 8.5% 8.0% 8.9% 8.8% 8.8%

Deferred Tax Assets, LT - - - - - EBITDA Margin % 10.0% 9.6% 10.7% 10.8% 10.6%

Other Long-Term Assets 10 13 13 14 11 Net Income Margin % 6.2% 6.0% 6.8% 6.7% 6.7%

Goodwill - - - - -

Accounts Receivable Long-Term - - - - - Asset Turnover

Total Long Term Assets 106 116 149 218 217 Total Asset Turnover 2.0x 1.8x 1.5x 1.5x 1.4x

Total Assets 400 506 665 799 1,012 Fixed Asset Turnover 7.7x 7.6x 6.8x 5.5x 6.5x

Accounts Receivable Turnover 5.0x 4.6x 3.8x 3.4x 3.4x

LIABILITIES & EQUITY Inventory Turnover 14.8x 13.4x 13.4x 13.4x 13.4x

Accounts Payable 123 210 242 285 334

Accrued Exp. - - - - - Liquidity

Short-term Borrowings 122 92 106 125 146 Current Ratio 1.1x 1.2x 1.4x 1.4x 1.6x

Curr. Port. of LT Debt - - - - - Quick Ratio 0.9x 1.0x 1.2x 1.2x 1.4x

Curr. Income Taxes Payable - - - - - Avg. Days Sales Out. 75.1 91.0 114.6 114.6 114.6

Unearned Revenue, Current - - - - - Avg. Days Inventory Out. 24.7 27.2 27.2 27.2 27.2

Other Current Liabilities 15 10 11 12 14 Avg. Days Payable Out. 68.7 78.4 92.8 91.7 92.1

Total Current Liabilities 260 312 359 423 494 Avg. Cash Conversion Cycle 48.1 35.7 59.6 59.5 59.5

Long-Term Debt 0 0 0 0 0 Net Debt to Equity 55% 5% 3%

Def. Tax Liability, Non-Curr. 0 1 1 1 1

Other Non-Current Liabilities 1 1 1 1 1 Growth Over Prior Year

Total Liabilities 260 313 361 425 495 Total Revenue 53.3% 8.9% 15.4% 17.9% 16.9%

Common Stock 3 3 3 3 87 Net Income 200.9% 6.0% 31.5% 15.8% 16.8%

Additional Paid In Capital - - - - - Payout Ratio % 0.0% 0.0% 15.0% 20.0% 20.0%

Retained Earnings 137 189 300 371 430

Treasury Stock

Comprehensive Inc. and Other - - - - -

Minority Interest 0 0 0 0 0

Total Equity 140 192 304 374 517

Total Liabilities And Equity 400 506 665 799 1,012

18

Trading at a discount to listed peers

Valuation

Cowell is trading at 9.8x 2015E PER, a discount to the average of HK-listed & A-share

listed peers. Cowell was only listed in Mar 2015 and there is no historical PER range

for reference. Close relationship with its customers enables Cowell to deliver solid

growth in coming years given continuous upgrading of camera modules by handset

brands. Underpinned by its camera module production capability on both FC and COB

technologies, Cowell built a long-term growth platform that would allow it to expand the

business to new products and customers.

We initiate coverage on Cowell with a BUY rating and a target price of HK$7.87 based

on 12x 2015E PER. Our target PER is in line with its peers’ (including Hong Kong-

listed handset components makers and handsets makers) average of 2015 PER of

12.4x. Share price catalysts come from more news flow on new products development,

and strong operating performance.

19

Figure 16: Peer Comparison

Sources: Bloomberg, Company, CGIHK Research estimates for covered stocks

Ticker Company

Price Market Cap 2015F 2016F 2017F 2015F 2016F 2017F 2014 2015F 2014 2015F 2014 2015F 2014 2015F

Lcy US$m x x x x x x x x % % % % % %

1415 HK Cowell E Holdings Inc 6.41 687.5 9.8 8.4 7.2 6.1 5.4 3.9 3.2 2.2 32.0 28.2 11.7 11.9 0.0 1.5

2382 HK Sunny Optical Tech 17.9 2530.0 19.3 15.7 13.1 14.1 11.5 9.5 4.8 4.0 18.5 21.9 11.0 12.5 1.1 1.5

2018 HK Aac Technologies Holdings In 42.4 6715.9 14.2 12.6 10.9 11.3 9.9 8.6 4.6 3.7 36.9 28.3 19.3 20.6 2.3 2.5

732 HK Truly International Holdings 3.2 1214.9 7.0 6.4 5.6 4.6 4.1 3.9 1.3 1.1 27.3 16.8 6.4 7.1 4.6 4.3

1478 HK Q Technology Group Co Ltd 3.0 389.4 10.4 9.6 8.0 8.3 6.9 5.9 2.1 1.8 88.2 18.7 9.6 8.4 1.7 1.9

698 HK Tongda Group Holdings Ltd 1.3 910.0 10.6 8.4 6.8 7.2 6.0 5.1 2.0 1.7 15.8 17.6 9.1 10.0 2.3 3.0

285 HK Byd Electronic Intl Co Ltd 11.4 3301.6 13.7 11.3 9.8 7.1 6.1 5.4 2.1 1.9 7.6 13.8 5.9 8.2 0.0 0.7

2038 HK Fih Mobile Ltd 4.0 3988.8 16.5 13.5 11.6 2.9 2.6 2.4 1.0 1.0 2.2 5.7 2.7 4.2 1.1 1.6

633 HK China All Access Holdings 2.6 571.2 12.4 10.0 8.4 n.a. n.a. n.a. 1.4 1.2 13.6 7.1 2.4 2.6 3.0 3.3

285 HK Byd Electronic Intl Co Ltd 11.4 3301.6 13.7 11.3 9.8 7.1 6.1 5.4 2.1 1.9 7.6 13.8 5.9 8.2 0.0 0.7

3336 HK Ju Teng International Hldgs 4.8 716.0 6.4 5.8 5.4 4.8 4.4 3.7 0.9 0.7 13.1 12.1 5.0 5.6 3.1 3.3

Average 12.4 10.4 8.9 7.5 6.4 5.5 2.2 1.9 23.1 15.6 7.7 8.7 1.9 2.3

763 HK Zte Corp-H 23.6 14476.5 19.1 16.6 14.6 18.0 15.9 16.3 2.6 2.3 6.2 12.6 2.5 2.7 1.1 1.3

2618 HK Tcl Communication Tech Hldgs 7.8 1254.8 7.3 6.6 6.2 5.9 5.6 5.0 2.3 1.9 12.0 28.2 6.4 6.4 5.0 5.0

992 HK Lenovo Group Ltd 12.8 18283.1 20.3 17.0 12.6 11.8 10.2 8.0 4.4 4.3 25.3 22.7 3.6 4.1 1.9 1.8

2369 HK Coolpad Group Ltd 2.7 1489.1 21.9 19.5 16.4 16.2 13.9 11.1 3.4 3.1 13.5 14.3 4.5 4.1 0.4 0.6

2000 HK Sim Technology Group Ltd 0.5 155.0 n.a. n.a. n.a. n.a. n.a. n.a. 0.6 n.a. -12.1 n.a. -3.6 n.a. 0.0 n.a.

Average 17.1 14.9 12.4 13.0 11.4 10.1 2.7 2.9 9.0 19.5 2.7 4.3 1.7 2.2

002456 CH Shenzhen O-Film Tech Co-A 30.0 4981.8 25.3 20.8 14.9 20.5 15.7 12.3 5.2 4.9 25.0 19.6 4.8 n.a. n.a. 0.7

002189 CH Lida Optical & Electronic -A 33.2 1065.8 33.9 23.5 n.a. n.a. n.a. n.a. 13.0 n.a. 2.1 n.a. 2.2 n.a. n.a. n.a.

002273 CH Zhejiang Crystal-Optech -A 31.4 1939.8 50.6 36.9 30.2 32.3 24.5 20.6 8.3 7.6 10.5 15.1 9.9 n.a. n.a. n.a.

600071 CH Phenix Optical Co Ltd-A 21.0 803.5 n.a. n.a. n.a. n.a. n.a. n.a. 10.2 n.a. -4.6 n.a. -8.2 n.a. n.a. n.a.

Average 36.6 27.1 22.6 26.4 20.1 16.5 9.2 6.3 8.3 17.4 2.2 n.a. n.a. 0.7

011070 KS Lg Innotek Co Ltd 97200.0 2104.1 11.6 8.7 7.3 4.1 3.9 3.9 1.4 1.2 1.2 11.0 2.5 n.a. n.a. 0.3

091700 KS Partron Co Ltd 11800.0 584.5 8.2 7.2 6.7 4.7 4.3 4.7 2.0 1.7 44.2 22.2 9.0 n.a. n.a. 2.4

009150 KS Samsung Electro-Mechanics Co 63700.0 4351.8 21.1 17.8 16.0 5.2 4.8 4.5 1.0 1.0 7.9 4.9 6.7 n.a. n.a. 1.1

2301 TT Lite-On Technology Corp 38.4 2921.7 11.0 10.0 8.6 4.1 3.8 3.5 1.2 1.1 12.3 10.4 3.0 n.a. n.a. 5.9

4915 TT Primax Electronics Ltd 40.4 575.4 9.3 7.9 6.3 4.6 3.8 3.4 1.9 1.7 9.1 21.2 5.9 n.a. n.a. 5.0

6753 JP Sharp Corp 257.0 3663.0 n.a. 47.1 32.1 7.3 6.9 7.0 1.8 2.3 -145.3 -14.9 -0.6 n.a. n.a. 0.0

3008 TT Largan Precision Co Ltd 3105.0 13523.3 18.5 15.8 13.2 13.4 11.5 9.6 9.0 6.9 36.0 41.8 39.0 n.a. n.a. 2.1

3406 TT Genius Electronic Optical Co 87.9 284.7 231.3 122.9 n.a. 8.1 7.4 n.a. 1.1 1.0 -4.7 0.0 -4.7 n.a. n.a. 0.3

106520 KS Digital Optics Co Ltd 10750.0 56.6 n.a. n.a. n.a. n.a. n.a. n.a. 1.1 n.a. 33.1 n.a. -4.0 n.a. 0.0 n.a.

053450 KS Sekonix Co Ltd 17650.0 125.8 6.9 6.1 n.a. 4.6 4.3 n.a. 1.1 1.0 20.8 15.5 6.8 n.a. n.a. 0.8

4901 JP Fujif ilm Holdings Corp 4481.0 19320.0 18.1 16.7 14.4 6.8 6.5 6.2 1.0 1.0 3.0 5.5 3.5 n.a. n.a. 1.5

Average 37.3 26.0 13.1 6.3 5.7 5.3 2.1 1.9 1.6 11.8 6.1 n.a. 0.0 2.0

PE EV/EBITDA P/B ROE ROA Div yield

20

Major risk factors

Heavy reliance on Apple. This key client alone contributed 78% of the company’s

revenue in 2014, and we expect the ratio to climb further in future. This implies the

company’s earnings are highly susceptible to the sales of Apple’s products. In addi-

tion, if Apple lowers Cowell’s front camera order allocation, the company’s earnings

would also be severely hurt.

Competing with other camera module suppliers. Major competitors of Cowell in

the camera module industry currently include LG Innotek, SEMCO, Sharp and Partron

etc., which have a similar customer base and provide similar products, especially

COB camera modules. Cowell is currently falling behind its rivals on products offering,

in view of the fact that both LG Innotek and Sharp are major rear-facing camera mod-

ule suppliers for Apple while their rear-facing cameras are using higher-resolution

image sensors. It is expected Cowell would maintain its senior status in the Apple

supply chain due to its more competitive cost structure and well-established long-term

relationship. Furthermore, Cowell does not only compete with its rivals purely on price

but also in terms of product quality and production capability. We believe that Cowell

enjoys cost advantages over its rivals due to the fact that its production facilities are

located in China, where there is abundant skilled labour at relatively cheap wages

compared with the other countries such as South Korea.

21

Company background

History of Cowell dated back to 2001 when Mr. Kwak, the current chairman, executive officer and controlling shareholder of the group, began to acquire an equity interest in Cowell Korea. Mr. Kwak invested KRW 750m in Cowell Korea in 2001 to subscribe for and acquire in aggregate about 22.47% of the then total issued share capital of Cowell Korea. After subsequent purchases of additional shares, Mr Kwak became the single largest shareholder of Cowell Korea holding about 77.53% of its then total issued share capital by Oct 03. Cowell expanded and diversified business to include the man-ufacture and sales of camera modules after the group began business relations with LG Electronics in 2002.

In 2001, Mr. Kwak invested in Cowell Korea and became its shareholder with about 22.47% of then total issued share capital of Cowell Korea.

In 2002, Cowell Hong Kong and Cowell China were established. The group expanded and diversified business to include the manufacture of camera modules after the group began business relations with LG Electronics.

In 2003, Mr Kwak became the single largest shareholder of Cowell Korea holding about 77.53% of its then total issued share capital by Oct 03. Cowell transferred the manufacturing equipment from the factory located in Korea to factory located in Hengkeng, Dongguan. Cowell received ISO9001:2008 certification for quality manage-ment system for the manufacture of optical and optic-electronic products. Cowell be-gan the business relations with Samsung Electronics.

In 2004, Cowell received ISO 14000 certification for its environment management sys-tem for the manufacture of optical and optic-electronic products.

In 2006, Cowell became the holding company of Cowell Chia, Cowell Hong Kong and Cowell Korea.

In 2007, Cowell received TS16949 certification for its quality management system for the manufacture of optical and optic-electronic products.

In 2008, Cowell was listed on the KOSDAQ on 29 Jan 08.

In 2011, Cowell was delisted from the KOSDAQ on 26 Nov 2011.

In 2012 Cowell began to manufacture FC camera modules at the new factory located in Huanan, Dongguan. Cowell received ISO9001:2008 certification for its quality man-agement system for the manufacture of optical and optic-electronic products. Cowell also received ISO:14001:2004 + Cof1:2009 certification for its environment manage-ment system for the manufacture of optical and optic-electronic products.

In 2013, Cowell subsidiary in China was awarded the highest performance (AA) grade for its customs practice by Huangpu Customs.

In 2014, Cowell’s China subsidiary was branded as a Model Enterprise for Transfor-mation and Upgrading of Processing Trade by People’s Government of Dongguan.

Cowell was listed in Mar15 and raised about HK$320m by issuing 82.3m shares. Pro-ceeds will be mainly (about 79%) used for enhancement and expansion of production capacity. The rest will be used for repayment of bank loans and general working capi-tal.

22

Cowell principally manufactures camera modules on OEM basis. It purchases key components for production from third-party suppliers. Main components include CMOS image sensors, PCBs, lenses (including lens holders) and HTCC boards, which ac-counted for approximately 89% of total cost of sales in 2014 (87% in 2013). In 2014, Cowell obtained the components from 38 independent suppliers, 23 of which were designated by its three largest customers. Top five suppliers accounted for 48.9% (55.2% in 2013) of the cost of sales while the largest supplier represented approxi-mately 19.9% (26.4% in 2013) of the total cost of sales in 2014.

Cowell operates two production facilities located in Hengkeng and Huanan in Dongguan, Guangdong province, China. As of Oct 2014, monthly production capacity was 14.8m FC camera modules, 14.5m COB camera modules and 33.1m optical com-ponents. The Hengkeng plant started operations in February 2002 and mainly produc-es COB camera modules and optical components. The Huanan factory started to pro-duce FC camera modules in May 2012 .

The group employs a total of around 7,000 employees, mainly based in China. As the manufacturing process for FC camera modules is much more complex, more time-consuming and more labour-intensive compared with COB camera modules, more than 4,000 workers staff the Huanan FC factory. Around 1,000 workers are located at the Hengkeng COB factory.

Commenced

camera modules

business with LG

Listed on KOSDAQ

Became Apple’s

approved supplier

for camera modules

Received

investment by Hahn

& Co. Eye and

delisted from

KOSDAQ

Received

consignment from

Apple and

commenced

manufacturing flip-

chip camera modules

Commenced

volume shipment of

camera modules to

Samsung

2002 2009 2011 2012 2013

New sales of blue

filters commenced

commercial

production

2015

Listed on HKEx

Figure 17: Milestones of Cowell’ history

Sources: Cowell, CGIHK Research

23

Cowell was incorporated in the Cayman Islands on 28 Nov 2006 as an exempted com-pany with limited liability under the Cayman Companies Law. After the internal restruc-turing exercise on 15 Dec 2006, Cowell became the holding company. Cowell was listed on the KOSDAQ from 29 Jan 2008 until 26 Nov 2011 when the group was delist-ed pursuant to a privatization exercise.

Mr. Kwak, who holds 45% of Cowell, is the chairman, executive director and chief ex-ecutive office of Cowell. Hahn & Co., which owns 26% of the group, is a company in-corporated in Korea on 15 Jul 2011. Hahn & Co. is a private equity fund operating in the Asia Pacific region.

24

Appendix: Selected Management Profile

Mr. KWAK Joung Hwan, Chairman, executive director and CEO of Cowell. Mr Kwak is responsible for managing the overall business operations and strategic planning of Cowell Group. He has over 13 years of experience in the industry of manufacturing and sale of optical components for cameras and is the founder of Cowell Group. Prior to starting his toy manufacturing business venture in 1992, Mr Kwak worked at the former Daewoo International Corporation, a company listed on the Korea Exchange and engaging in trade and commerce, as an assistant manager from January 1988 to July 1992. In June 2001, he decided to diversify his business portfolio by investing in Cowell Korea. He has been appointed a director and the CEO of Cowell Hong Kong since Mar02. Mr Kwak was appointed a director on 24 Oc-t11, and subsequently re-designated as an executive director on 14 Apr14. He was appointed the chair-man and CEO of Cowell Company on 24 Mar14. Mr Kwak received a bachelor’s degree in economics from Yonsei University in Korea in February 1988.

Mr. KIM Kab Cheol, Executive director of Cowell. Mr Kim is responsible for assisting the chairman in the business operations and for the day-to-day management of Cowell Group. Prior to joining Cowell Group in May04 as a plant manager at Cowell Korea’s factory, he worked at the production, research and devel-opment and quality management department of LG Chem Ltd (LG Chem) as an assistant manager. Mr Kim has been a director and CEO of Cowell China since Jun05 and Jun11, respectively. He served as CEO and a director of Cowell Korea between Oct08 and May11. Mr Kim was appointed a director on 27 Mar09 and subsequently re-designated as an executive director on 14 Apr14. He has also been a direc-tor of Cowell Hong Kong since Sep11. For his education, he received a bachelor’s degree in chemical engineering from Inha University in Korea in Feb88.

Mr. SEONG Seok Hoon, executive director and CFO of Cowell. Mr Seong is responsible for supervising

the financial operation of Cowell Group. Prior to joining the group in May03 as CEO of Cowell Korea, he

worked at the planning department at LG Chem as an assistant manager between Jan89 and De94.

From Aug07 to Sep08, he served as a director of Cowell Korea. From May03 to Sep08, Mr Seong served

as CEO of Cowell Korea. He was appointed CFO of Cowell China in May12 and a director of Cowell

Hong Kong in Dec12. Mr Seong was made a director on 17 Dec12, re-designated as an executive direc-

tor on 14 Apr14, and appointed CFO of Cowell Company in Oct14. He received a bachelor’s degree in

accounting from Kyungpook National University in Korea in Feb89.

Mr. Ryu Ho Yong, has been a director and the director of research and development department of

Cowell China since Mar10. Mr Ryu is responsible for supervising the research and development activities

of Cowell China. Prior to joining Cowell, Mr. Ryu worked at the product development team at Samsung

Electronics as a senior engineer between Jan85 and Nov03 and served as a general director of Three A

Solution in Korea, which makes software solution for cameras, form Jan04 to Dec07. Mr Ryu received a

bachelor's degree in electronic engineering from Kyungpook National University in Korea in Feb85.

Mr. Cho Kyu Beom, has been the chief executive officer of Cowell Kore since Apr12. Mr. Cho is re-

sponsible for supervising the daily operation of Cowell Korea. Prior to joining Cowell, Mr. Cho worked at

LG Chem as an assistant manager from Jul89 to Apr96 and at LG Siltron Incorporated, a private compa-

ny based in Korea engaged in the manufacture and sales of semiconductor materials such as wafer, as a

senior manager from May96 to Jul02. In Dec08, Mr. Cho was promoted to be a chief executive officer of

Cowell China and remained in that position until Apr11. Mr. Cho has been a director of Cowell Korea

since Mar09. Between May11 and Mar12, Mr. Cho served as an executive vice president of Cowell Ko-

rea and since Apr12, he has been the chief executive officer of Cowell Korea.

25

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Room 3501-3507, 35/F, Cosco Tower, Grand Millennium Plaza, 183 Queen’s Road Central, Sheung Wan, Hong Kong. General line: 3698-6888.

BUY share price will increase by >20% within 12 months in absolute terms :

SELL share price will decrease by >20% within 12 months in absolute terms :

HOLD no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL :