Following our NDR with mgmt this week, we stick to our positive view on TCL Comm’s growth outlook, given its strong shipment momentum, continued GM/ASP expansion, expanding global sales network and well-planned product pipeline, including 4G-LTE models. We believe the stock is the best proxy for emerging market smartphones amid product commodization. We raise our 2013-15E EPS by 507%/132%/102% for 3Q results, better ASP/GM and higher smartphone volumes. We reiterate BUY rating with new TP of HK$8.52, implying 11.2x 14E P/E.

Impressive margin expansion and operating leverage in 3Q Stronger gross margins due to improving mix and cost optimization, as well as scaling benefits helped to support better-than-expected profitability improvement in 3Q. We expect both GM and net profit in 4Q to reach pre-transition level in 4Q11-1Q12. We lift our 2013-15E smartphone shipment forecast to 17mn/33mn/46mn and gross margin to 19.0%/20.1%/20.5% for 3Q results and stronger shipment volume.

Key beneficiary of smartphone commodization. We expect TCL Comm’s strong smartphone momentum in 3Q to continue into 2014, supported by recent launches of mid-end flagship smartphones (IdolX / Hero) and 4G-LTE product pipeline in 2014. Given its extensive overseas network, strong brand equity and narrowing hardware gap with global high-end brands, we believe TCL Comm will be the key Chinese brand to benefit from low-end volume ramp in emerging markets and replacement demand in developed market.

Stronger products, enhanced scale, and solid execution. By focusing on fast-fashion product strategy targeting mass market, TCL Comm is winning consumers globally, especially in emerging markets with huge upgrade demand and low smartphone penetration. We believe the new world-class production base in Huizhou and high R&D commitment could improve time-to-market and operational efficiency, accelerating share gains from global peers like Nokia, Sony and LG.

Promising earnings growth outlook; lift TP to HK$8.52. We raise our 2013-15E EPS forecast by 507%/132%/102% to reflect higher volume, rising ASP and improving margins. Despite 86% rally since our initiation two month ago, we think current valuation (8.7x 14E PE) is still attractive, given its promising growth prospect and strengthening market position. We reiterate our BUY rating with new TP of HK$8.52, based on peers average of 11.2x 14E PE. Catalysts include new product releases and monthly shipmen data. Downside risks include component shortage and delayed 4G product launches.

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