罗曼公司财务分析英文版

DBTel Corporation

Table of Contents

Investment Thesis................................................................................................3 Key Points.........................................................................................................4 China Handset Market Outlook and Competitive Landscape...................................10 Valuation Comparison......................................................................................11 Recommendation............................................................................................. 12 Investment Risks................................................................................................15 Appendix ....................................................................................................... 16

Table of Figures

Figure 1: DBTel’s Handset Unit Shipment and Revenue Forecast................................ 3 Figure 2: GSM Shipment By Region in China.........................................................4 Figure 3: DBTel Sales, by Region, 2003E............................................................. 5 Figure 4: Sales Analysis, by Product Segment.........................................................6 Figure 5: Unit Shipment and ASP Assumptions........................................................8 Figure 6: DBTel’s P&L Model and Valuation Ratios...................................................8 Figure 7: GSM Handset Market Share in China, 2003...........................................9 Figure 8: Lehman Brothers’ China Handset Forecast.............................................. 10 Figure 9: Comparable P/E and P/B Ratios..........................................................11 Figure 10: DBTel Share Vs. China A-Share Index..................................................12 Figure 11: DBTel’s Historical One-Year Forward P/E Band.....................................13 Figure 12: DBTel’s Historical Forward P/S Band...................................................13 Figure 13: DBTel’s Historical Forward P/B Band.................................................. 14 Figure 14: Actual and Projected Balance Sheet....................................................16 Figure 15: Actual and Projected Cash Flow Statement...........................................17

April 19, 2004

DBTel Corporation

Investment Thesis

With 25 years of experience,

DBTel is competitive in design/development of telecom terminal equipment

DBTel is a fast-growing GSM handset vendor with aggressive expansion plans. In addition to China, with an estimated 85% of its sales in FY03 and growing brand value, DBTel is developing a presence in seven Asia Pacific countries including Thailand, Singapore, Indonesia, India, Malaysia, Philippines and Australia. Its growth is based on solid design innovation, customization, and competitive price-to-performance. The user interface of DBTel’s handsets are similar to that of Nokia (covered by Tim Luke and Stuart effrey). Since launching in the China market last year, DBTel has gained significant traction to become one of the top brands by November 2003, when its GSM market share tied for the No. 1 spot, with 11% for the month. Following its success in the China market, DBTel is re-launching its GSM models in the Asia Pacific region, and is targeting to launch CDMA1x handsets in China later this year. It has gained initial success in the AP region in Q1 with sales of close to 200k units, mostly derived from Thailand, Malaysia and India.

Initiating coverage with a 1-Overweight, price target of NT$67, or 12x FY04E P/E

We are initiating coverage of DBTel with a rating of 1-Overweight on the shares and a price target of NT$67. Our target is approximately 12x our FY04 EPS estimate of NT$5.53. We expect DBTel to grow its revenue 54% in FY04 and earnings 84% in FY04 based on the growth in its Asia Pacific region (forecast 2mn units), and midrange to high-end sales in China following the launch of 15 new models. We will consider it successful in China if its market share is kept. We expect further improvements in the operating margin, from 14.6% in 2003 to 18.1% in 2004, given increased operating leverage associated with manufacturing scale and return on R&D. We believe rewards overweigh risks.

April 19, 2004

DBTel Corporation

Key Points

DBTEL has stronger systems design expertise compared with local handset vendors as it keeps a 35% gross margin

Solid systems development expertise. DBTel is Taiwan’s oldest telecom terminal

equipment manufacturer, with 25 years of experience. It is also a low-cost manufacturer able to design handsets from the chipset level up. In 1999, as the only Taiwanese vendor with a GSM license to sell its own brand in China, DBTel has built a reputation on the mainland as a quality brand with attractive prices. In fact, we believe that its long-term terminals development experience as an ODM for Motorola enabled DBTel to gain expertise in developing quality handset better than many local Chinese handset venders (such as Bird, Konka, CEC), which had relied quite often on CKDs/SKDs from Korea and Taiwan in the past. Our discussion with its chipset suppliers and industry participants in the past year indicate DBTel’s strength in handset systems development and module integration, skills that are particularly relevant to high-end camera phones and sub-$100 models. Leveraging its low-cost manufacturing which is mostly based in China, DBTel is able to price products attractively, with ASPs 20%–30% cheaper than multinationals’ models of similar feature sets. Superior component sourcing, procurement and the increasing scale of the economy enable DBTel to reduce costs further. With simple and easy-to-use user interface, we believe it will remain highly competitive in quality/price vs. multinational vendors.

Strong sales and channel marketing focus. We are encouraged by the

management’s strong focus in sales and brand building in China. Chairman Michael Mou spends much of his time in China and the company has been cultivating relationships with local channels. We note that DBTel tends to partner with a smaller set of distributors, hence more selective than its local peers, while granting higher sales commissions to its distributors in China. Going forward, we expect DBTel to focus more (and accordingly its dollar) on brand marketing and campaign. We believe DBTel thinks and acts like a local company and is highly focused in its sales and channel efforts. This has resulted in its initial success in late 2003. Nonetheless, DBTel has yet to develop strong relationships with the operators, key to success in

April 19, 2004

DBTel Corporation

CDMA and PHS handsets, though it currently sells only GSM handsets. We expect the China market to be highly competitive this year, particularly in light of the government’s new effort to cool the economy, thereby limiting its growth in China despite its launch of the new high-end series. We expect growth for DBTel in FY04 to come mainly from the AP region.

Expansion in Asia Pacific region may provide the real

upside to this year’s operating results

Expansion in developing Asia going well in Q1. DBTel’s entry in Asia Pacific

include (six offices) seven countries: Australia, Singapore, Indonesia, Malaysia, Thailand, Philippines and India. Led by an ex-Ericsson veteran, the Asia Pacific expansion of DBTel marks a giant step towards building DBTel as a global brand. The management believe it can replicate its 2003 China success in the AP region, estimated to be as large as the China market in potential handset market size. Nonetheless, we expect a gradual ramp in this market, somewhat slower than its China ramp, given the level of customization required for each countries as well as the differences in laws, regulations and channel strategy. Some markets, such as India, are highly price competitive due to the lower levels of general affordability of consumers. We are encouraged that the AP region is tracking well in Q1 with unit shipment of 180k–200k to Thailand, Malaysia and India, reaching 10% of the total shipment by DBTel, up from roughly 1% last year. Overall, we believe SE Asia is likely to experience strong growth in telecom sub adds in FY04/FY05 (see our report on “Interconnect to Indo-China”). In addition, DBTel has a solid market position in Taiwan and Hong Kong. We expect the launch of its CDMA1x models later this year to provide a positive boost for markets such as India and Indonesia with a growing CDMA user base (see Suresh Mahadevan’s report, “Interconnect to India”).

DBTEL is launching high-end models and expanding its product portfolio; We expect operating margins to benefit as a result and from volume

Product diversification and volume ramp enhance operating margins. DBTel has

one of the most attractive business models in the China handset industry. Its gross margin, at about 35%, is high compared with other local vendors (such as TCL) which have margins around 19%–21%. This is partially a result of its handset design and

April 19, 2004

DBTel Corporation

development value contribution, or “IP” value. For example, DBTel’s handset operating system is proprietary, versus the typical use of Symbian or Microsoft-based kernels. In addition, DBTel designs its own software stack and basic applications and is proficient at building from chipsets and reference designs. Furthermore, we believe it has mastered the expertise to lower the overall bill-of-material costs by its engineers. Going forward, we expect the mix shift to higher-end handsets with sophisticated multimedia features and functionalities to present more opportunities for it to improve its margins. We believe product diversification from its current low-end to midrange portfolio to be positive for margins. As volume ramp continues, DBTel is likely to achieve a stable operating margin of 18%–20% (up from 14.6% in 2003) based on 34%–35% gross margin. We estimate its breakeven revenue at around NT$10bn, or 3mn handsets. The company has strong operating leverage and is likely to benefit from the replacement cycle of 2.5G technology as multinationals. DBTel spends about 5%–6% in R&D. We believe its systems development capability is comparable to that of leading Korean and Taiwanese ODMs (i.e. BenQ, Curitel).

DBTel’s inventory/sales ratio

is under control in Q1, despite a seasonally slow start for its China business

Inventory under control. While DBTel performance varies month to month, we believe

it is generally tracking on target so far this year. We estimate DBTel’s handset unit shipment in Q1 to be around 1.4mn in China and the actual sell-through around 1.1mn, which implies an excess channel inventory of 300k. We note that this is a normal level that is slightly better than other local handset manufacturers’ 40% ratio but clearly needs improvement. We believe DBTel will be challenged by the higher quality requirements of its high end models, which has already started to be rolled out. The return rate for high-end handsets is typically higher and therefore creates more challenges in customer service and troubleshooting. We believe DBTel’s low-end to midrange models remain attractive and competitive, while its high-end models are still being tested in the marketplace. We expect DBTel to improve its inventory nonetheless, given its systems expertise and ambitious goals for financial performance. We remain cautious on its execution this year given the increased challenges associated with

April 19, 2004

DBTel Corporation

rolling out high-performance handsets, along with growing business in a number of new markets. As the handset industry has relatively short lead time, its channel and factory inventory could be important factor in measuring its success.

Solid balance sheet and financial management. DBTel has strong cash flow and

will likely improve its balance sheet going forward. As its net profits improve, we expect its cash balance to benefit since the company has little debt and is relatively conservative in its financial management including capex spending. Its net cash, estimated at a healthy NT$4bn, is likely to grow along with working capital in FY04–FY05. The cash conversion cycle, which was high at 220 days in 2002, is expected to improve to 133 days in 2003 due to a inventory clearing in FY03 and sales ramp. DSO also improved in 2003 to around 43 days from 63 days, while inventory turns keep improving, to around 16x this year. We expect its ROE (currently at around 25%) to continue to improve as a result of improving operating leverage and profitability.

We believe greater

transparency and the listing of DBTel China would help improve investor participation

and the stock’s valuation

Transparency and the Listing of DBTel China would improve investor participation

and valuation. DBTel has been considering whether to list its China subsidiary on the Hong Kong exchange to improve its liquidity and expand investor base. The company was first listed in Taiwan in 1991 and since then has been known as an OEM/ODM supplier to Motorola and others. It currently still has a DECT product line mainly for the European market. Faced with an inventory buildup due to slowing demand as a result of the telecom recession in 2000–2001, the company took restructuring steps three years ago to transform itself as an own-brand manufacturer. Since 2002 its own-brand GSM business has become its primary business. We believe its past missteps and historical perception of DBTel’s management guidance by its local investors have partially contributed to its relatively low valuation and lack of investor enthusiasm in the past few years. Yet we are clearly seeing a transformation in its business, which looks quite different from the DBTel of a few years ago, given the growth of the brand business in China. We believe DBTel is underestimated by the market. We believe greater transparency and the listing of its China operation could help bring more investor participation, leading to better valuation.

ASP and unit shipment assumptions conservative. We are modeling in a relatively

conservative set of ASP and unit shipment assumptions for FY04–FY05. While the management believes it can ship at least 10mn units this year on the back of its China success, we are taking a more conservative view of unit sales including 5.4mn from China (or roughly 6% market share), 2mn from Asia Pacific, 700k from Taiwan and Hong Kong (or 9% market share), and 300k from others. We are assuming an ASP of approximately $100 in FY04, down 2% from $102 in FY03, taking into account of approximately 20% of high-end sales with ASPs close to $135 and 80% of low-end sales with ASPs close to $92. We believe this is relatively low compared with the management’s target which calls for a clearly improving ASP due to high-end model launches.

April 19, 2004

DBTel Corporation

Figure 5: Unit Shipment and ASP Assumptions

FYE 2003E

Q1E Mar-04

Q2E Jun-04

Q3E Sep-04

Q4E Dec-04

FYE 2004E

Q1E Mar-05

Q2E Jun-05

Q3E Sep-05

Q4E Dec-05

FYE 2005E

Units ASPs 4,9201021,8701001,870972,150982,4731038,3621002,2251002,337982,687963,2259810,474

98

Source: Lehman Brothers estimates

Figure 6: DBTel’s P&L Model and Valuation Ratios

DBTel

P&L AND RATIO SUMMARY (NT$ MM)Fiscal Year Ends: 12/31Revenue COGSGross Profit

Gross Profit (w/ Unearned Related Sale) Operating ExpensesOperating ProfitNon-Operating ProfitNon-Operating LossPretax Profit Income Tax

Net Profit Before ExtraordinariesMinority InterestsNet Profit EPSShares O/SCash DividendMargins Gross Margin EBITDA Margin Operating Margin Pretax Margin Net MarginY/Y Growth Rate Revenue Gross Profit Operating Profit Pretax Profit Net Profit EPSValuation EV/Sales EV/EBITDA EV/EBIT P/E P/B

3.426.847.0126.74.6

1.79.511.316.64.3

1.05.25.79.03.2

0.83.94.37.22.4

-46%-46%15%

94%140%518%1787%748%748%

-47%-50%-109%-98%-97%-97%

58%191%-691%642%481%481%

105%94%320%549%664%664%

54%52%90%104%84%84%

23%23%22%24%25%25%

3.9%17.3%

21.4%0.0%11.5%18.2%17.1%

20.1%6.3%-1.9%0.8%0.8%

37.0%10.8%7.2%4.0%3.0%

35.0%7.2%14.6%12.5%11.2%

34.5%5.9%18.1%16.6%13.4%

34.5%6.6%17.9%16.7%13.6%

[***********]06(4)2110.32667

1,0351,2061,1924921,906(66)1,9721781,7932.69667

19995,4014,467935

200010,4908,2492,240

20015,5284,4191,1101,1101,215(106)3231714782(36)(81)450.07667

20028,7135,4863,2273,2272,[***********]219(44)2620.39667

LEHMAN BROTHERS HOLDINGSAlex Mou 852.2869.3738

2003E 17,88711,6276,2606,2603,6422,618364142,2402242,016122,0043.00667

2004E 27,55718,0509,5079,5074,5294,977

04004,5786873,8912003,6915.53667

2005E 33,89722,21911,67811,6785,6096,069

04005,6698504,8192004,6196.92667

Source: Company data, Lehman Brothers estimates

PT of NT$67 assumes a DCF WACC of 12% and terminal

growth rate of 2% at a FY04E EV/EBITDA of 6.5x

and P/E of12x

We are initiating coverage of DBTel with a 1-Overweight rating and a price

target of NT$67. Our target is based on our discounted cash flow model (DCF) with a WACC of 12% and terminal growth rate of 2%, at 6.5x FY04E EV/EBITDA and 12x P/E based on EPS of NT$5.53. Though we see the potential for upside to our earnings forecast if DBTel executes on target this year, we remain cautiously optimistic and believe that the company will have attained a level of success if it can maintain its solid market share gained in China late last year, due to the highly competitive dynamics in the handset industry and a potential slowdown of demand in the China market this year. We note that our price target is conservative to the degree that it has factored in slowness in DBTel’s China business in mid-2004. If the company executes on the management’s target, which calls for at least 10mn units shipped (barring an inventory buildup), then its shares would move higher to reflect nearly 100% year-over-year growth in sales. We believe the worst is over for DBTel (back in 2001) on top of a secular recovery in the global telecom industry (see Tim Luke’s upgrade of the wireless handset sector). We believe DBTel’s momentum will take its industry peers by surprise

April 19, 2004

DBTel Corporation

and reward investors. At 8x our FY04 EPS estimate, the stock is inexpensive versus its Asian peer average of 15x P/E, and can improve over time as transparency, liquidity and coverage improve. We recommend buying.

April 19, 2004

DBTel Corporation

China Handset Market Outlook and Competitive Landscape

We believe China’s handset market will grow 10%–15%; L-T fundamentals remain attractive while the govt’s new austerity measures may slow demand a bit in

the short term

We expect the overall handset market demand (measured as sell-through) in China to increase 10%–15% to 82mn units in 2004, driven by higher replacement sales and operator initiatives (see our report of January 20, 2003, Eco-System Implications). A potential mid-year slowdown due to a short-term liquidity squeeze caused by the credit tightening of the central government could cast a shadow on these estimates. We see a potential consolidation in the distribution system in China, which could result in a near-term correction in mid-2004. However, the long-term outlook for the handset market remains robust. We note that replacement sales have increased to around 40%–50% of total handset sales and are likely to move higher going forward.

Figure 8: Lehman Brothers’ China Handset Forecast Total Handset DemandGSM/GPRS DemandCDMA Demand

SubTotal EstimatesPrevious Estimates

Estimate Replacement DemandPAS Demand

Source: Lehman Brothers research, January 2004

2004E 67,240 14,445 81,685 71,053 26,965 23,482

2005E

69,243 15,354 84,597 72,897 41,456 24,030

DBTel competes with all major GSM handset manufacturers, including domestic brands such as Bird, TCL, Konka and Amoi, and international favorites Nokia, Motorola, Sony-Ericsson, Siemens, Alcatel, NEC, Samsung and LGE. We believe DBTel has been very competitive in its offerings and will stay as a meaningful player.

April 19, 2004

DBTel Corporation

Valuation Comparison

In terms of valuation, we believe DBTEL is attractive compared with its global and local peers. Its current forward P/E of 9x is low compared with its peers (average forward P/E at 15x–16x). In light of its growth (EPS growth of 84% and revenue growth of 54% expected in FY04), the valuation appears very attractive. We note that on a P/B (3.2x in FY04) and P/S (1.2x in FY04) basis, DBTel’s valuation appear in-line with its peer group, yet the business model has significant differences compared with its Asian peers given its higher margins (18% operating margin target vs. average around 6%) and profitability. We believe DBTel’s ROE of roughly 25% can move higher into the 30s. For FY05 and after, we are projecting a more moderate top-line growth of 22%–25%, driven by new product launches and market share penetration in other countries. On a historical basis, DBTel’s valuation may have improved but have not reached its fair value, in our view, as its turnaround story is still unfolding and likely to continue this year. The market has clearly not factored in significant growth for this year. We believe the risk/reward favor the upside as DBTel is tracking well in Q1.

April 19, 2004

DBTel Corporation

Recommendation

Target price NT$67,

attractive valuation multiples, recommend BUY in light of reward overweighing risks

We are initiating coverage of DBTel with a 1-Overweight rating and price target of NT$67 per share, which is at approximately 6.5x EV/EBITDA and 12x P/E based on our FY04 earnings estimate of NT$5.53. We believe DBTel is underestimated by its competitors and the market, and its turnaround story is still unfolding. Valuation considerations will depend on 1) handset shipment trends in China and Asia Pacific region, 2) gross and operating margins trends, 3) channel inventory levels, and 4) competition from other Taiwanese vendors entering the China market (i.e. BenQ) this year. Our target price of NT$67 is based on our discounted cash flow model, which applies a weighted average cost of capital of 12% and terminal growth rate of 2%. Although shares have appreciated and then tapered off in recent months due to its monthly shipment numbers, we believe DBTel’s Q1 sales have been tracking well and it could remain as an aggressive share taker for the rest of this year, particularly in light of its expanding handset portfolio. Though management’s guidance may be viewed as too aggressive at times, we see potential upside to our estimates, which took a conservative view due to the level of competition in China this year. If DBTel executes on target as its management planned, then we believe the shares are quite undervalued. However, we remain cautiously optimistic and would consider it a success if DBTel can maintain its market share gained last fall in China. We see the management team committed and would recommend investors to buy.

Figure 10: DBTel Share Vs. China A-Share Index

Source: Bloomberg , Lehman Brothers research

April 19, 2004

DBTel Corporation

April 19, 2004

DBTel Corporation

Investment Risks

The primary risk for DBTel is any loss in its GSM own-brand handset business due to adverse circumstances and the lack of product execution. In our view, inventory buildup as a result of a slowdown in demand – a repeat of the 2000–2001 cycle – would hurt DBTel’s earnings. The cycle may be due to the recent cooling of the Chinese economy by the government. However, we believe the company is more competitive now in R&D and manufacturing capabilities, more prepared to react to such an event given its turnaround experience, and more diversified in products and geographic footprint.

Other risks include:

Heavy competition from both local Chinese and multinational handset vendors from

TCL and Bird to Motorola and Nokia (covered by Tim Luke and Stuart Jeffrey). The competition keeps pressures on pricing, margins, unit and revenues.

Limited brand recognition in global markets, which is certain to slow its growth targets

overseas (in the Asia Pacific region).

The lack of a strong relationship with operators remains a disadvantage for DBTel,

particularly in CDMA.

The potential entry of other Taiwanese handset brand names such as BenQ could put

negative pressure on DBTel as another technically competent “local” handset vendor enters the race.

As one of the Taiwanese manufacturers most exposed to the China market, the

tension between two sides of the strait places more risks on DBTel than others.

April 19, 2004

DBTel Corporation

Appendix

Figure 14: Actual and Projected Balance Sheet

DBTel

BALANCE SHEET (NT$ MM)Year-End: Dec 31ASSETS

Cash & Cash Equivalents Accounts Recievables Inventories, net Other Current Assets Current Assets

Property and Equipment, net Long-term Investments & AssociatesOther Assets Total Assets

LIABILITIES AND EQUITYShort-Term LoanAccounts PayableOther Current Liabilities Current LiabilitiesLong-term DebtOther LT LiabilitiesMiniority Interest Total LiabilitiesCommon StockReserves Retained EarningsTresuary StockStockholder's Equity Book Per Share

Total Liabilities and EquityBalance Sheet Metrics Net Cash

Net Working Capital Debt/Assets Debt/Equity Book Per Share Cash Per Share

3,5593,2380.4%0.4%10.85.7

4,0273,2460.2%0.2%10.95.9

3,8273,5662.3%2.8%11.55.9

4,7536,2121.7%2.1%15.77.6

6,7019,5801.3%1.5%21.110.8

5542,3504333,[1**********],7245,5562351,335(86)7,18310.810,907

394,7283435,[1**********],4246,591192663(314)7,27410.912,698

395,2286435,[1**********]06,6246,701192471(314)7,67811.514,302

2395,7288436,[1**********]07,6446,7511923,232(314)10,48915.718,132

4396,2281,0437,[1**********]08,6246,8011926,756(314)14,06221.122,686

3,8357111,0719586,5753,[1**********],907

3,9141,5052,3995378,3563,[1**********],698

3,9142,1052,8995579,4764,354169

304

14,302

5,0403,0054,39957713,0214,654169

289

18,132

7,1884,2055,29959717,2894,954169

274

22,686

2001

2002

2003E

2004E

2005E

LEHMAN BROTHERS HOLDINGS

Source: Company Data , Lehman Brothers research

April 19, 2004

DBTel Corporation

April 19, 2004

DBTel Corporation

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Reuters Ticker 1070.HK UTSI.O 000063.SZ MOT NOK ERICY 005930.KS 066570.KS

Price(17/04/04) (HK$ 2.98) (US$ 27.63) (RMB 27.10) (US$ 8.00) (US$ 14.59) (US$ 7.01)

(W 594,000.00) (W 73,500.00)

Rating

1 - Overweight 2 - Equal weight 1 - Overweight 2 - Equal weight 2 - Equal weight 1 - Overweight 1 - Overweight 1 - Overweight

April 19, 2004

DBTel Corporation

Rating and Price Target Chart: DBTel

Not Available

April 19, 2004

HK-2043