Excerpts from analyst's report

UOB Kay Hian analyst: Tan Shou Han 

• Maintain BUY with a target price of S$0.21. We continue to value the stock based on a P/B ratio of 1.3x (a 30% discount to peer average) and will wait for further visibility on the size of orders and more definite signs of earnings growth before raising our target price. 

• Smartflex announced on Wednesday that it will partner with a leading global smart card manufacturer to launch their eco.SIM product in India. According to Smartflex, their customer is the “third largest mobile operator in India”. We think that there is a high likelihood that this company is Idea Cellular, an Aditla Birya Group company (and also counts Axiata Group Berhad as a major shareholder).

The partnership will allow Smartflex to access Idea’s customer base of approximately 130m subscribers and 16% of the market share in India, a smart card market which has been growing at a rate of 10-12% CAGR over the past few years.

smartflex_570@ Smartflex's factory in Ubi: The company's executive chairman, Tan Tong Guan, shows NextInsight around the high-tech cleanroom which has 11 production lines.
NextInsight file photo.

• An ideal partner. We see Smartflex’s partnership with Idea Cellular as a good choice, as the telco is also a “disrupter”, having grown its market share over the past few years from 10% to 16% by challenging Bharti and Vodafone. Out of an estimated 1.5-2b units of smart card shipments sold in India in 2014, we expect Idea’s yearly smart card demand to be approximately 200m-300m modules.

We predict that Idea will gradually shift contract orders to Smartflex as eco.SIM cards are priced at least 10% below all its competitors. At an estimated US$0.12 per module, this would translate to over US$3m in savings for Idea each year. In our opinion, Smartflex’s target of 50m unit sales in India by 2016 is achievable.
Smartflex plans to enter new markets in Indonesia, Myanmar and Mexico. To recall, the company has obtained patents for eco.SIM for most regions around the world. In 2015, it will partner with select distributors to expand into new areas of growth and aims to achieve module sales of 100m by 2016.
• We continue to favour Smartflex and view this as a positive development in the company’s strategy to grow sales of eco.SIM. India is predominantly a prepaid market with high monthly smart card churn rate of 6% and a huge demand for low-end SIM cards, which will fit perfectly with Smartflex’s plans to disrupt the market by underpricing its competition using the low-cost eco.SIM card. Going forward, we expect more announcements of partnerships in the next few months as eco.SIM gains acceptance in various markets around the world. 

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