China Tracker - Details for Funtalk China Holdings (FTLK)


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 WARNING: Form 15 filed with the SEC!
 Funtalk China Holdings
 Analyst Coverage
2011-08-25Rodman & RenshawDowngradeTerminatedn/a
 

Effective immediately, we are terminating coverage on Funtalk China Holdings (Nasdaq: FTLK) due to the closing of the company's going private transaction that was announced on August 25, 2011. As a result, Funtalk China became a private company wholly owned by a consortium of investors backed by a private equity firm. Our last rating for the company was Market Outperform with a price target of $10.00.

2011-07-26Roth CapitalDowngradeNeutral$7.20
 

FTLK will host a shareholder meeting on August 22, 2011 to vote for its privatization agreement. As the principle shareholders and management own 77.1% of the outstanding shares, more than the two-thirds needed to approve the transaction, we expect shareholders will approve the privatization. We are downgrading FTLK to NEUTRAL as current share price reflects limited upside to the take-out price.

2011-05-31Rodman & RenshawReiterationOutperform$10.00
 

At current levels FTLK is trading at P/E multiples of ~6.1x to our calendarized CY2011 earnings estimates. This compares to industry averages of ~12.7x to CY2011 consensus earnings for similar players listed in the US, and ~15.2x for peers listed in China. We believe FTLK should be trading closer to industry averages given the growth opportunity associated with it. We are comfortable maintaining a $10.00 price target for FTLK, which translates into P/E multiple of ~9.2x to our EPS estimate for CY2011, bringing it in line with comparable companies listed in China and the US. We believe this is a reasonable multiple for a company that has substantial growth opportunities ahead, a strong market position and a healthy balance sheet.

2011-03-28Bank of AmericaDowngradeSuspendedn/a
2011-03-25Rodman & RenshawReiterationOutperform$10.00
 

In our opinion the two key hurdles in going private would be the exchange's dislike for the 'going dark' effort and the current proposed price. In our opinion, if this Consortium is serious about this proposal the offered price should be above its all time high of ~$9.50 levels. We believe a $10.00 per share offer would provide a serious premium of 40%-50% to the current levels and yet would be in line with P/E multiples of 8x to 10x that management has been paying for its own acquisitions of private phone retailers in China. We believe an outcome on these lines would have a higher probability to be supported by all the parties concerned and leave room for the Consortium to unlock value.

2011-03-24Rodman & RenshawReiterationOutperform$10.00
 

We are revising our estimates according to the updated guidance. Now we are projecting 4Q revenue and net income of $297.9 MM and $12.6 MM, with diluted EPS of $0.21. Our gross margin and EBIT margin expectations are in line with guidance, at 16% and 7.1%, respectively. Our full year projections are $1.1 BB in revenue and $44.6 MM in earnings with $0.80 in diluted EPS. For FY12, we are expecting revenue, net income, and diluted EPS of $1.56 BB, $70.9 MM, and $1.15, respectively.

2011-03-14Bank of AmericaReiterationBuy$7.50
2010-12-14JefferiesInitiationHoldn/a
2010-12-13Bank of AmericaInitiationBuy$7.50
2010-12-06Roth CapitalReiterationBuy$8.00
2010-12-01Rodman & RenshawReiterationOutperform$10.00
 

FTLK announced its 2Q FY11 results (period ended on September 30, 2010) of $260.4 MM in revenues and $9.8 MM in net income, with diluted EPS of $0.18 compared to our estimated revenue, net income and EPS of $246.3 MM, $9.3 MM, and $0.18, respectively.

Margins Improved: Overall gross profit for the quarter was $45.1 MM, or 17.3% in gross margin, higher than 13.5% in 2Q FY10 and 14.5% in 1Q FY11. By segments, retail and distribution segments delivered 20% and 14.2% in gross margin, compared to 13.4% margin in retail and 13.5% in wholesale distribution in 2Q FY10. The higher gross margin in retail business was mainly driven by a one-time sales of an exclusive handset model for Samsung (005930-KRX, Not Rated), which carried a much higher margin. Operating income grew by 72.6% Y-o-Y to $21.3 MM, indicating an 8.2% of EBIT margin, compared to $12.4 MM or 6.0% EBIT margin in 2Q FY10.

Near-Term Drivers: We believe that in the near term the company's growth should still be largely driven by the expansion of its retail chain. Currently the company has a total of 662 retail outlets in China, covering 109 cities and 14 provinces, and is expected to operate ~942 stores by the year end FY11, and eventually reach ~2000 stores by the end of FY13. This will be completed via organic store openings, acquisitions, and co-branded operation with Big 3 carriers. Near-term growth drivers should include (1) Continued execution on retail expansion (2) Securing external debt financing (3) Potential cooperation with top tier big box retailers (4) Faster-than-expected growth in China's 3G subscribers.

3Q & Full Year FY11 Guidance: For 3Q FY11, FTLK is guiding for revenue and net income of $260 MM~$280 MM and $9.0 MM~$11.0 MM. Gross margin and EBIT margin are expected to be 15.0%~16.0% and 6.5%~7.5% in 3Q FY11. On a full year basis, the company reiterated the guidance on revenue and net income of $1.0 BB~$1.2 BB and $40 MM~$45 MM, with full year gross margin and EBIT margin expectations of 15.5%~16.5% and 7.5%~8.5%. Management expects 55% of total FY11 revenue to be generated from Retail segment and the remainder from Wholesale Distribution segment.

Our Estimates: For 3Q FY11, we are now projecting revenue and net income of $279.2 MM and $10.9 MM, with diluted EPS of $0.18. Our full year FY11 estimates are $1.13 BB, $45.2 MM, and $0.81, respectively.

Valuation: At current levels FTLK is trading at P/E multiples of ~6.5x to our calendarized CY2011 earnings estimates. This compares to industry averages of ~13.4x to CY2011 consensus earnings for similar players listed in the US, and ~18.9x for peers listed in China. We believe FTLK should be trading closer to industry averages given the growth opportunity associated with it. We are comfortable maintaining a $10.00 price target for FTLK, which translates into P/E multiple of ~11.1x to our EPS estimate for CY2011.

2010-11-24Roth CapitalInitiationBuy$8.00
 

We are initiating research coverage on Funtalk China Holdings Limited (FTLK) - a wholesale and retail distribution network for mobile phone devices and accessories in China. Since FY09, FTLK's retail business has experienced robust growth through acquisitions. Going forward, we believe the company will continue to rely on execution of its retail expansion strategy. We think the company is well-positioned to capture and maintain market share and create competitive advantages based on its access to capital, strategic partnership with telecom carriers and its proven acquisition track record with effective integration platform and process. Further, we expect FTLK's retail network will obtain stronger bargaining power with carriers in collaborating business relationships, providing more favorable business terms and improving profitability.

Positive trends in China's mobile market for the retail segment – We believe opportunities in China's mobile handset market will foster the development of the retail segment based on: 1) High growth of mobile communications in China supported by surging 3G mobile users, increasing penetration, and high mobile phone replacement due to short product lifecycles. 2) Increasing competition between carriers in 3G penetration emphasizes the importance in retaining customers. 3) Mobile phone manufacturers are striving to reach end users through direct sales for more competitive prices.

Growth outlook - We believe the growth will come from store acquisitions, 20% organic store base expansion (post-acquisition) and significant increases in carrier-owned stores. We estimate retail stores will grow at a CAGR of 47% over the next two years to 1,319 stores from 612 stores currently. We project the retail segment will contribute 57% ($617mm) of total revenue in FY11 and 65% ($868mm) in FY12 with growth of 41% y/y for both periods.

BUY rating and $8.00 PT - Our $8.00 price target is based on an 11.1x multiple applied to our FY11 estimate of $0.72, a discount to peers in the U.S (25.1x) and China (23.9x). Our price target represents a 1.1x PEG, a fair valuation to peers.

2010-11-17Rodman & RenshawReiterationOutperform$10.00
 

Public Offering: On October 29, 2010 FTLK announced closing its public offering of 7 MM common stock at $7.00 per share. Net proceeds after underwriting cost were $46.6 MM, mainly to be directed towards acquiring and building new retail chains across China. As of August 31, 2010, FTLK operated approximately 612 retail stores, with a total space of 190,000 square meters in 108 cities, 13 provinces in China. Before the public offering, the company had $27.0 MM in cash with $18.8 MM of notes payable and $154.6 MM short-term borrowing as of June 30, 2010.

Key Takeaway: With the new capital in place, we believe FTLK is well positioned to execute on its retail expansion strategy for 2011. The company plans to open 500 new stores each year in 2011 and 2012 and eventually reach 3,000 stores in China. With the retail expansion playing a key role in both top-line growth and margin enhancement, FTLK's story should be expected to gain more traction from investors.

Lowering EPS Estimates Based On New Share Count: We are adjusting our financial model to account for the new 7 MM shares of common stock. We currently maintain our estimates for revenue and net income of ~$1.1 BB and $43.8 MM for FY11. With the new diluted share count of ~59.9 MM effective from 3Q FY11, we are lowering our diluted EPS estimates for 3Q FY11 and 4Q FY11 to $0.21 and $0.21, from $0.24 and $0.23. This leads to a full year diluted EPS of $0.78, down from our previous estimate of $0.83.

Valuation: At current levels FTLK is trading at P/E multiples of ~8.4x to our revised CY11 earnings estimates. This compares to industry averages of ~13x to CY11 consensus earnings for similar players listed in the US, and ~19x for peers listed in China. We believe FTLK should be trading closer to industry averages given the growth opportunity associated with it. We are comfortable maintaining a $10.00 price target for FTLK, which translates into P/E multiple of ~12.6x to our EPS estimate for CY11, bringing it in line with comparable companies listed in China and the US. We believe this is a reasonable multiple for a company that has substantial growth opportunities ahead, a strong market position and a healthy balance sheet. 

2010-11-10OppenheimerInitiationPerformn/a
2010-08-31Rodman & RenshawReiterationOutperform$10.00
 

For 2Q FY11, we are now projecting revenue and net income of $246.3 MM and $9.3 MM, with diluted EPS of $0.18. Our full year FY11 estimates are $1.07 BB, $43.8 MM, and $0.83, respectively. At current levels FTLK is trading at P/E multiples of ~8.6x to our calendarized CY2011 earnings estimates. This compares to industry averages of ~10x to CY2011 consensus earnings for similar players listed in the US, and ~20x for peers listed in China. We are comfortable maintaining a $10.00 price target for FTLK, which translates into P/E multiple of ~10.8x to our EPS estimate for CY2011.

2010-08-04Rodman & RenshawReiterationOutperform$10.00
 

According to FTLK's retail expansion plan for FY11 and FY12, we believe capital is required in the near / mid-term for the company to execute and consolidate. During its 4QFY10 conference call, the company stated that it plans to open 500 new stores per year in FY11 and FY12, and eventually to achieve the goal of operating a total of 3,000 retail stores in China. We maintain that some form of capital injection should be expected in order for the company to execute on its growth plans.

2010-07-06Rodman & RenshawReiterationOutperform$10.00
 

At current levels FTLK is trading at P/E multiples of ~8.8x to our calendarized CY2011 earnings estimates. This compares to industry averages of ~11x to CY2011 consensus earnings for similar players listed in the US, and ~17x for peers listed in China. We believe FTLK should be trading at a minimum in line with industry averages given the growth opportunity associated with it. We are comfortable maintaining a $10.00 price target for FTLK, which translates into P/E multiple of ~15x to our EPS estimate for CY2011, bringing it in line with comparable companies listed in China and the US. We believe this is a reasonable multiple for a company that has substantial growth opportunities ahead, a strong market position and a healthy balance sheet.

2010-06-15Rodman & RenshawReiterationOutperform$10.00
 

At current levels FTLK is trading at P/E multiples of ~8.1x to our calendarized CY2011 earnings estimates. This compares to industry averages of ~12x to CY2011 consensus earnings for similar players listed in the US, and ~18x for peers listed in China. We are comfortable maintaining a $10.00 price target for FTLK, which translates into P/E multiple of ~15x to our EPS estimate for CY2011, bringing it in line with comparable companies listed in China and the US.

2010-04-05Rodman & RenshawReiterationOutperform$10.00
 

We are comfortable maintaining a $10.00 price target for FTLK, which translates into P/E multiple of ~19x and ~15x to our estimates for CY2010 and CY2011, bringing it in line with comparable companies listed in Shanghai and the US. We believe this is a reasonable multiple for a company that has substantial growth opportunities ahead, a strong market position and a healthy balance sheet.

2010-03-15Rodman & RenshawInitiationOutperform$10.00
FTLK
Telecommunications

COVERAGE SUSPENDED OR TERMINATED
 
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SAFETY/RISK SCORE
MODERATE RISK
DETAILS: Safety/Risk Model for FTLK
Current Price:  $7.20
F10k Day (2009-11-13): -20.00%$9.00
2009 Close: 7.62%$6.69
2010 Close: 26.98%$5.67
High (2010-10-15): -11.01%$8.09
Low (2011-02-25): 50.00%$4.80
Exchange: PRIVATE
Market Capitalization: 423.74 mill
Total Shares: 58.85 mill
Float: n/a
Avg Volume: 102.20 k
Short Interest: 1.30 mill
Short Ratio: 4.88%12.7 d
Last Quarter: 2010-12-31
Revenue (MRQ): 300.23 mill
Net Income (MRQ): 12.67 mill
all financial data provided without warranty