Handset output growth sparks warning on TCL
Sun Hung Kai Financial Group has told investors to hang up on TCL International Holdings, which has become a favourite play on China's hot handset sector.
The brokerage warned that overcapacity and margin compression problems loomed.
Sun Hung Kai's warning was backed up by the Ministry of Information Industry, which suggested that the expansion of handset production capacity could outpace growth of demand in the domestic market.
China's handset makers, including Ningbo Bird, Eastcom and TCL, planned to double their capacity to offset already declining profit margins, said Sun Hung Kai, citing recent news reports.
That would outpace the rapid growth in demand for handsets which was projected at about 30 per cent a year.
The house also pointed out that Nokia had kept the unit cost for low-end models down at US$70 at a mainland joint venture while TCL had higher costs of $100.
'TCL is not very cost-effective compared to Nokia,' analysts Florence Cheung and Niki Chu said.
TCL, which closed unchanged at HK$2.475 yesterday, had been the subject of a favourable call from ABN Amro on Wednesday.
'The key is for the company not to shy away from competition, but to stay ahead of the game,' said ABN Amro, raising its target price to $3 from $2.79.