Blog reopened!!

Long Cheer Holdings by DBS

Strong headwinds ahead
• Weak sell through and smartphone
cannibalisation, this trend to last for three
quarters.
• Expect losses in FY11 on lower sales and severe
margin erosion.
• Downgrade to Sell; >20% downside to TP of
S$0.49.
Weak demand and severe margin compression in India.
Our channel checks indicated that in Nov/Dec, the India
handset market was plagued with a severe stock pile in the
feature phone segment (Longcheer’s key products) due to: 1)
weak sell through during Deepavali; and 2) smartphone’s
cannibalisation of the low to mid range feature phones. As a
result, handset makers aggressively cut ASP to clear stock. As
there is still inventory in the channel, we believe this trend of
low volume and low margin will last for three more quarters.
As India accounts for 40% of group sales and almost 50% of
shipments, we expect a significant adverse impact on
Longcheer’s performance in the quarters ahead.
3G rising in China but mobile lottery yet to materialize.
With 3G penetration in China gaining momentum, we
believe Longcheer’s shipments to China Telecom are growing
in line with expectations. However, Longcheer’s 3G volume is
still small and will not offset the weakness from feature
phones. Meanwhile, we have not seen signs of mobile lottery
contributing in 1Q11 and believe it will take a much longer
time to create user awareness and become a significant
contributor.
Downgrade to Sell. Following a16%/20% cut in shipment
volume for FY11F/12F, 10% drop in ASP and a 4-4.7%
decline in gross margins, we forecast a loss of S$12m in
FY11 and S$12.7m profit in FY12. In view of the drastic
change in operating prospects and our expectation of losses
in FY11F, we have re-pegged our target price to historical
mean P/B of 1.3x FY11, thus yielding a revised TP of S$0.49.
Downgrade to Sell on weakening outlook and >20%
downside to TP. Historically, Longcheer has traded to –1SD
of 0.81x P/B (S$0.30).