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					                                     Corporate Flash                                                                         Tue, 3 0 Apr 2002

                                                                                                                             Raymond Jook, CFA
                                                                                                                                 (852) 2533 3715
                                                                                                                     raymondjook@softbank.com.hk

Nanjing Panda: on its own feet
Recommendation: SELL (unchanged)                                                                                        China Electronics
Price                        HK$2.325        Year to Net profit EPS          EPS      PE      P/B    EV/EBITDA Yield          ROE ROCE Gearing
Target price          HK$2.00 (-14%)           Dec      HK$m        HK$      ∆%
                                                                            ∆%         x       x          x           %        %        %        %
12 mth range            HK$1.29-4.05           00A      178.5      0.270    125x      9.2     2.27       33.3         -       28.3     1.8      131.9
Market cap.                US$195.2m           01A       246.9     0.377     39.6     6.5     1.72       53.5          -      29.8     0.8       64.0
Daily t/o, 3 mth              US$1.5m          02F       154.5     0.236 (37.4) 10.4          1.46       56.7          -      15.2     1.0       51.1
Free float %                    36.9%          03F       165.0     0.252 6.8     9.7          1.27       54.5          -      14.0     1.0       42.5
Ticker                0553.HK/553 HK           04F       183.9     0.281     11.4     8.7     1.11       52.2          -      13.6     1.0       34.7
                                           Relative to MSCI Chin a Free (1 mth, 3 mth, 12 mth): -29.6%, -33.4%, +8.7%
                                           Actual price changes (1 mth, 3 mth, 12 mth): -25.0%, - 25.6%, -15.5%
                                           Previous forecasts (01F-03F): RMB247 m (RMB0.377), RMB244 m (RMB0.372), RMB2 51 m (RMB0. 383)
Key points:
Ø    Ericsson pulled out from its mobile handset JV with Panda.
Ø    The loss of Ericsson will cast cloud over Panda’s handset business.
Ø    The withdrawal implies Panda is not as competitive as Putian, Ericsson’s another handset partner.
Ø    Only a few players will be able to make any profit from the highly competitive handset market.
Ø    We have s lashed our profit forecasts by 37%, 32% and 27% for FY02 to FY04.
Ø    Our new target price is HK$2.00 (9x FY02 PE), down from HK$2.7.


Ericsson pulling out from handset JV. Ericsson announced it will end the mobile handset marriage with Panda
and focus its resources in Beijing Ericsson, a JV with China Putian in Beijing, the largest telecommunication
equipment producer in China. According to the Hong Kong Economic Times, a new partner Microcell, Finland
will acquire the 65% interest in EPC (the mobile handset JV) from Ericsson. At the same time, Panda will buy
some minority interests in Beijing Ericsson whereas Putian will also acquire a small stake in ENC (the base
station JV) from Panda in return . Going forward, Panda will no longer carry the Ericsson brand.
Very competitive handset market. Without the Ericsson brand name, Panda has to make extra effort to market
its own brand. Of the 3.3m units of handsets sold in 2001, Panda handsets only accounted for 15.1% or 0.5m
units. Note that last year’s sales of Panda brand handsets were actually 29% short of the budgeted 0.7m units.
The new JV partner Microcell is supposed to provide new technology and technical support. Management aims
to become one of the top three domestic brands in China within three years. We keep our fingers cross now as we
believe cut-throat competition will be inevitable with the aggressive expansion of Haier-CCT, TCL, Konka,
Legend, Kejian, etc. We believe only a few will be able to make any profit.
Implications of the withdrawal. Ericsson has been having its own problems of late. It reported a 1Q loss of
3.7b kronor on April 22 and ind icated a second straight annual loss is on the cards. In addition, it announced to
cut a fifth of its workforce (17,000 jobs) and to raise 30b kronor from shareholders. Ericsson expects a 10% fall
in the worldwide sales of base stations, switches and servers this year. We think the withdrawal from the Panda
JV is part of the restructuring exercise to reduce costs. The real implications to Panda would be 1) Panda ’s
management and business operation are not as efficient and competitive as Putian; 2) China’s handset market has
become increas ing ly difficult to make profile and a consolidation is necessary to boost Ericsson market position.
Slashing e arnings forecasts. Together with the 77% fall in 1Q02 earnings, we have decided to slash our
earnings forecasts by 37%, 32% and 27% for FY02 to FY04. Our new target price is HK$2.0, based on 9x FY02
PE. SELL.




The information and opinions in this report were prepared by SBI E2-Capital Securities Limited. SBI E2 - Capital Securities Limited does not undertake to
advise you of changes in its opinion or information. SBI E2 - Capital Securities Limited and others associated with it may have positions in and effect
transactions in securities of companies mentioned and may also perform or seek to perform investment banking services for those companies. This
memorandum is based on information available to the public . No representation is made that it is accurate or complete. This memorandum is not an
offer to buy or sell the securities mentioned.
SBI E2 -Capital Securities                                                                           Corporate Flash


Table 1: earnings model
Year to 31 Dec (RMBm)                              2000A              2001A          2002F         2003F       2004F
Turnover                                         1,223.6              860.9          979.0        1,113.3     1,225.7
% chg                                                 (13.9)          (29.6)          13.7          13.7        10.1


EBITDA                                                 76.3            40.9           38.0          39.2        40.3
Depreciation                                          (50.8)          (28.3)         (22.8)        (22.1)      (21.5)


EBIT                                                   25.4            12.7           15.3          17.1        18.8
Interest income                                         6.6             4.4            3.0            3.7         4.3
Operating profit                                       32.1            17.1           18.3          20.8        23.1


Provision for impairment of assets                         -          (41.0)              -             -           -
Interest expenses                                     (59.9)          (49.0)         (36.8)        (38.5)      (39.1)
Associates                                            238.3           344.9          212.7         225.5       246.2


Pre-tax profit                                        210.4           272.0          194.2         207.8       230.3
Tax                                                   (26.3)          (24.3)         (36.9)        (40.4)      (44.0)
After-tax profit                                      184.2           247.7          157.3         167.4       186.2
Minority interests                                     (5.7)           (0.7)          (2.8)         (2.4)       (2.3)
Net profit                                            178.5           246.9          154.5         165.0       183.9
% chg                                            1,610.0               38.4          (37.4)           6.8        11.4
Source: SBI E2 - Capital




Table 2: associated contribution
Year to 31 Dec (RMBm)                                     2000A         2001A         2002F         2003F      2004F
Nanjing Ericsson Panda Communication - 43% owned
Pre -tax profit                                            570.6         761.8        457.1          502.8     553.1
Tax                                                        (53.6)        (83.8)       (50.3)         (55.3)    (60.8)
Net profit                                                 458.7         678.0        406.8          447.5     492.2


Attributable profit                                        197.1         291.5        174.9          192.4     211.7
% chg                                                                     47.9        (40.0)          10.0      10.0


Nanjing Ericsson Panda Mobile Terminals - 35% owned
Pre -tax profit                                                62.1       66.0         46.2           32.3      29.1
Tax                                                               -              -            -       (5.7)     (5.1)
Net profit                                                     62.1       66.0         46.2           26.7      24.0


Attributable profit                                            21.7       23.1         16.2            9.3        8.4
% chg                                                                          6.3    (30.0)         (42.3)    (10.0)
Source: SBI E2 - Capital




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posted:11/2/2009
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