07 January 2014 Asia Pacific/China Equity Research Semiconductor Devices

China Smartphone Sector Research Analyst SECTOR FORECAST Randy Abrams, CFA (Semiconductors) 886 2 2715 6366 [email protected] 2014 outlook: Opportunities from the smartphone shift to emerging markets Kulbinder Garcha (Global Communication Technology) +1 212 325 4795 Figure 1: Smartphones can grow in emerging markets through 2017E [email protected] Penetration of devices 2012 2013E 2014E 2015E 2016E 2017E 13-17 CAGR China handsets 510.5 548.2 563.8 583.9 604.5 619.1 3% China smartphones 195.8 353.4 443.3 498.3 562.4 602.7 14% Pauline Chen % of devices 38% 64% 79% 85% 93% 97% (Components, Handsets) Emerging mkt handsets 955.8 959.5 986.1 1,025.8 1,065.7 1,099.3 3% Emerging mkt smartphones 229.9 354.3 470.5 606.0 736.6 860.3 25% +886 2 2715 6323 % of devices 24% 37% 48% 59% 69% 78% [email protected] Source: Credit Suisse estimates

Thompson Wu (PC Hardware) ■ Raising smartphone industry units on emerging market growth. Our +886 2 2715 6386 global hardware team, in a comprehensive wireless slide deck on 6 January, [email protected] raised 2013/14 smartphone unit forecasts from 976 mn/1,219 mn to 1,032 mn/1,257 mn—6%/3% above our earlier estimates, factoring in faster ramp up Jerry Su of Chinese smartphone brands supplied by Asian chipset vendors. Our (Display) estimates are higher than IDC's 1,010 mn/1,207 mn, but still suggest a notable +886 2 2715 6361 [email protected] slowdown in overall units, with only LTE and emerging markets driving growth. ■ Emerging market exports, tablets and wearables should drive Colin McCallum additional growth. China drove unit growth in 2013 and still has legs—we (Head of Asian Telecoms Research) +852 2101 6514 expect it to grow from 353 mn to 443 mn in 2014, but at 80% of 2014 device [email protected] sales, focus shift to the larger emerging market channel, where we expect smartphones to account for 470 mn of the 986 mn handset sales, a less penetrated but larger addressable market. Beyond exports, Asian suppliers are ramping up in China tablets, growing from 100 mn to 130 mn in 2014E and a new class of wearables, where customers are adopting Mediatek's dual core for Android watches. Consistent with Colin McCallum's report today (7 January), LTE is a late 2014 story, in our view. ■ Beneficiaries across the Asian ecosystem. We prefer to own the smartphones space through the manufacturers with unit growth and good pricing (TSMC, ASE, SPIL); Mediatek, due to its market leadership and mix opportunities from multi-core and LTE; and Lenovo, as it supplements its China and corporate exposure with improving handset scale. ■ Raising estimates for Mediatek and WPG. We raise Mediatek estimates on 4Q13 smartphone upside (+2% QoQ vs the initial 0% to -5% QoQ) and improving mix in 2014, taking 2014E EPS from NT$24 to NT$25. We maintain OUTPERFORM and increase our TP from NT$480 to NT$500, based on the same 20x EPS. We also raise 2014 estimates for WPG, from NT$3.20 to NT$3.30, on tablet/smartphone unit strength upside and PC rebound taking 4Q13 slightly up vs initial guidance down 7-12% (and raise TP from NT$38.50 to NT$39.50) but stay NEUTRAL as the mobile mix shift dampens margins. We also upgrade Unimicron from Neutral to OUTPERFORM, on its new order wins at both HDI and IC substrates. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access

07 January 2014 Focus table and charts Figure 2: Summary of Credit Suisse's smartphone estimates (in millions, unless otherwise stated) Smartphone summary 2010 2011 2012 2013 2014 2015 2016 2017 CAGR 12-17 Global smartphone subscribers 490 763 1,185 1,755 2,339 2,930 3,530 4,103 28% % of mobile subscribers 12% 17% 25% 35% 45% 53% 61% 68% New adds 169 273 422 569 584 591 600 573 6% Replacements 130 199 298 463 674 884 1,089 1,292 34% Smartphone units 299 473 720 1,032 1,258 1,475 1,689 1,866 21% YoY 73% 58% 52% 43% 22% 17% 14% 10% Smartphone ASPs $331 $336 $310 $271 $244 $220 $198 $178 -10% YoY 0% 1% -8% -12% -10% -10% -10% -10% Smartphone revenue $99,015 $158,726 $223,002 $279,765 $306,763 $323,897 $333,642 $331,744 8% YoY 73% 60% 40% 25% 10% 6% 3% -1% Source: Credit Suisse estimates

Figure 3: Emerging markets to reach 80% of smartphones Figure 4: Smartphone penetration still low at only 27%

Source: Credit Suisse estimates Source: Credit Suisse estimates

Figure 5: Samsung and Tier 2 brands lead growth in China Figure 6: LTE shipments to triple to 876 mn by 2017E 50% 1,000 45% 45% 900 876 775 40% 40% 800 667 35% 35% 700 537 30% 30% 600 25% 25% 500 20% 20% 400

LTE Volumes LTE 277 15% 15% 300 10% 10% 200 105

5% 100 5% % of total handsets shipped 9 0% 0 0% 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 2011 2012 2013E 2014E 2015E 2016E 2017E Asia Pacific North America Western Europe Samsung Apple Nokia Africa CEE Latin America HTC Top 4 Chinese Tier 2 Chinese Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 7: Multi-core lifts Mediatek's blended pricing Figure 8: TSMC high-end still grows due to Apple in 2014 Units (mn) ASPs (US$) (Unit: NT$) 100.0 35.0 $4,500 18% 90.0 30.0 $4,000 16% 80.0 $3,500 14% 70.0 25.0 60.0 20.0 $3,000 12% 50.0 $2,500 10% 40.0 15.0 30.0 10.0 $2,000 8% 20.0 5.0 $1,500 6% 10.0 0.0 0.0 $1,000 4% $500 2%

3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 $0 0% 1Q14E 2Q14E 4Q13E 3Q14E 4Q14E Single Units Dual Units Quad Units 2010 2011 2012E 2013E 2014E 2015E Octa Units Single ASPs Dual ASPs TSMC high-end Non-Apple TSMC high-end Apple Quad ASPs Octa ASPs Blended ASPs High-end smartphone % of TSMC Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

China Smartphone Sector 2 07 January 2014 Opportunities from the smartphone shift to emerging markets In coordination with our global hardware team, we raise our industry smartphone unit estimates to factor in continued upside from China smartphone brands in China and into export markets over the next few years. Also, we provide an outlook for the Asian supply chain. Raising global smartphone units on China exports Our global hardware team in a comprehensive wireless slide deck on 6 January raised Smartphone unit estimates smartphone unit estimates for 2013 by 6% to 1,032 mn (+43% YoY) and for 2014 by 3% to raised by 6%/3% to 1,032 1,257 mn (+22% YoY), 6% and 3% above our prior estimates and IDC estimates of 1,010 mn for 2013 (+43 YoY) and mn and 1,207 mn, respectively, due to upside from emerging markets—now approaching 1,257 mn (+22% YoY) for 70% of smartphone shipments. Our industry forecasts from 2013 to 2017 still notably 2014 slows to a 4.4% revenue CAGR, assuming decelerating subscriber penetration and replacement rates, although a scenario of steady penetration/replacement rates keeps the revenue CAGR at 8.9%. Only LTE and emerging markets are now driving the growth. We project Asian chipset vendors will gain share, with Mediatek doubling shipments to 220 mn in 2013 and reaching 316 mn in 2014. Emerging markets, tablets and wearables fuel growth We expect China to grow at 14% CAGR and other emerging markets at 25% CAGR Chinese smartphones through 2017, lifting emerging market smartphones from 69% of shipments in 2013 to 78% growing from 485 mn units by 2017. We project China will grow from 353 mn units in 2013 to 443 mn in 2014 and 600 in 2013 to 661 mn in 2014E mn units by 2017, and emerging markets from 354 mn in 2013 to 471 mn in 2014 and 860 mn by 2017. The market is increasingly being supplied by Chinese vendors, with Tier 1 share falling from 70% to 28% in China over the past two years. We see meaningful LTE only from late 2014/2015 in China, consistent with Credit Suisse telecoms analyst Colin McCallum's views in a separate report today (7 January). Of the 661 mn units shipped by China handset makers, we project almost 40% WCDMA, 30% TD-SCDMA, 20% EDGE, 5- 10% CDMA 2000 and 5% for LTE. The low-cost tablets add an additional driver, adding 100 mn units to our 155 mn branded tablet estimate for 2013 and 130 mn to our 189 mn branded tablet estimate for 2014. Beyond tablets, we are seeing the emergence of whitebox wearables, starting with Android sports watches. Mediatek leading the Asian chipset suppliers in EM Our bottom-up smartphone chipset estimate for Asia-built smartphones (excluding the Korean Asia-built smartphones could vendors) show a near doubling, from 249 mn to 485 mn units, in 2013, and we project 36% reach 1.2 bn units by 2017, YoY growth to 661 mn units in 2014. We ultimately project penetration reaching 1.2 bn units by with Mediatek and 2017, passing the 800 mn peak of China-branded feature phones as the smartphone market Qualcomm leading will unlikely be capped as feature phone's was by the higher functionalities of smartphones. We expect Mediatek to continue leading the market, ramping up from 110 mn units in 2012 to 220 mn in 2013 and 447 mn by 2015. We expect Qualcomm to be the most material overseas competitor with dominant initial position on LTE as it ramps up. Stocks to invest for the next leg of growth With developed market smartphones maturing, we focus on companies benefiting from We prefer TSMC, ASE, emerging markets or having opportunities for pricing or margin support. We prefer to own the SPIL, Mediatek and Lenovo; smartphones space through the manufacturers with unit growth and good pricing (TSMC, and, raise estimates and ASE, SPIL); Mediatek, due to its market leadership and mix opportunities from multi-core target prices for Mediatek and LTE; and Lenovo, as it supplements its China and corporate exposure with improving and WPG handset scale. On upside volume strength and blended pricing support for Mediatek, we raise our 2014E EPS from NT$24 to NT$25, and stay OUTPERFORM and lift TP from NT$480 to NT$500. We also raise our 2014E EPS for WPG from NT$3.20 to NT$3.30 and lift TP from NT$38.50 to NT$39.50 but stay NEUTRAL as the mobile mix shift dampens GMs.

China Smartphone Sector 3 07 January 2014 Valuation summary Figure 9: CS Asian semiconductor valuation summary (in millions, unless otherwise stated) Market Cap Price Target Inv'ment Target P/E P/B ROE US$mn 3-Jan Local Curcy Rating upside 2013 2014 2013 2014 2012 2013 2014 Foundry TSMC 88,739 102.5 116.0 OPFM 13.2% 14.4 12.8 3.1 2.7 24.7% 23.6% 22.8% UMC 5,114 12.3 13.0 NTRL 6.1% 13.5 34.9 0.7 0.7 2.1% 5.5% 2.1% SMIC 2,623 0.63 0.68 NTRL 7.9% n.m n.m 1.1 1.0 0.7% 4.9% 4.7% Vanguard Semi 1,919 35.9 35.0 NTRL -2.5% 13.2 11.4 2.4 2.2 11.3% 19.2% 19.8% Total 98,394 14.4 13.4 2.5 2.3 19.2% 21.0% 20.2% Packaging & testing ASE 6,889 27.1 31.5 OPFM 16.2% 13.9 12.9 1.7 1.6 12.4% 12.9% 12.9% SPIL 3,753 36.2 42.0 OPFM 16.0% 18.1 14.5 1.8 1.8 9.5% 10.2% 12.3% Powertech 1,197 46.9 56.0 NTRL 19.4% 17.7 15.6 1.0 1.0 10.0% 5.7% 6.5% Total 11,839 15.3 13.6 1.6 1.5 11.6% 11.2% 11.8% IC design MediaTek Inc. 19,543 435.5 500.0 OPFM NA 21.4 17.4 3.0 3.3 10.6% 14.8% 19.3% Realtek Semiconductor 1,366 81.5 75.0 NTRL -8.0% 14.4 13.6 2.2 2.1 12.7% 15.5% 16.1% RDA 863 17.9 17.5 OPFM -2.1% 18.0 16.2 9.0 6.8 98.3% 60.5% 48.0% Spreadtrum 1,732 30.9 31.0 NTRL 0.2% 10.2 10.3 3.1 2.6 37.9% 38.9% 28.2% WPG Holdings Ltd 1,896 34.3 39.5 NTRL 15.2% 11.4 10.4 1.4 1.4 12.2% 13.0% 13.7% Total 25,400 15.5 14.1 2.4 2.6 16.2% 19.5% 18.1% Source: Company data, Credit Suisse estimates

Figure 10: TSMC near its average historical P/E Figure 11: TSMC trading near its mid-cycle P/B (NT$) (NT$) 130 17x 130 3.5x 120 120 15x 3.1x 110 110 2.7x 100 100 13x 90 90 10.5x 80 80 2x 70 70 60 60 50 50 40 40 30 30 20 20 Jan-03 Apr-04 Jul-05 Oct-06 Jan-08 Apr-09 Jul-10 Oct-11 Jan-13 Jan-03 Apr-04 Jul-05 Oct-06 Jan-08 Apr-09 Jul-10 Oct-11 Jan-13 Source: TEJ, Company data, Credit Suisse estimates Source: TEJ, Company data, Credit Suisse estimates

Figure 12: SMIC’s rebound could drive a return to 1x P/B Figure 13: UMC approaching its post-crisis average HK$ SMIC PB Band (NT$) 2.5 30

2 25 1.4x

1.5 20 1x 1 1.5x 15 0.8x 1.2x 0.5 10 0.7x 0.6x 0.4x 0 5 Mar 04 Mar 05 Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Jan/03 Apr/04 Jul/05 Oct/06 Jan/08 Apr/09 Jul/10 Oct/11 Jan/13

Source: TEJ, Company data, Credit Suisse estimates Source: TEJ, Company data, Credit Suisse estimates

China Smartphone Sector 4 07 January 2014 Raising global smartphone units on China exports to emerging markets Our global hardware team raised smartphone unit estimates due to the faster adoption pace of Reducing our handset lower-cost Android smartphones in China and emerging markets. We raise our smartphone forecasts to 1.94 bn units for unit estimates for 2013/2014 by 6%/3% from 976 mn/1,219 mn to 1,032 mn/1,257 mn—above 2013 and 2 bn for 2014, 7% IDC's forecasts of 1,010 mn/1,207 mn (factoring in additional shipments of smartphones to below our prior estimates China from the Asian IC suppliers), a figure which is often undercounted in some industry Raising smartphone models. Our new estimates suggest industry unit growth slowing from +43% YoY in 2013 to a forecasts to 1,032 mn units still reasonably healthy +22% in 2014 and +17% in 2015. for 2013 and 1,258 mn for Figure 14: Revising our smartphone estimates upwards 2014 (in millions, unless otherwise stated) 2010 2011 2012E 2013E 2014E 2015E New Estimate 298,847 472,891 721,258 1,032,231 1,257,603 1,475,385 YoY 58% 53% 43% 22% 17% Old Estimate 298,847 472,891 719,258 976,024 1,219,378 1,425,557 YoY 58% 52% 36% 25% 17% Increase (%) 0% 0% 0% 6% 3% 3% Source: Company data, Credit Suisse estimates The smartphone estimates were revised up sharply last January to account for the significant volume ramp up at the Asian chipset vendors and are now getting lifted again as shipment momentum is increasing into other emerging markets outside China. We estimate that MediaTek and Spreadtrum together grew smartphone IC shipments from 142 mn in 2012 to 362 mn in 2013 and we project they could reach 490 mn in 2014. Even assuming a 10% discount to these volumes, we estimate that smartphones powered by these chips will account for 31%/35% of global smartphone volumes in 2013/14.

Figure 15: CS smartphone estimates slightly higher, factoring in Asian chipsets (in millions, unless otherwise stated) 2011 2012 2013E 2014E Top 8 vendors 413 511 627 729 Asian smartphone vendors 60 169 335 407 Smartphone vendors 473 680 962 1,136

Mediatek units 10 110 220 315 Spreadtrum units 0 32 141 175 Asian chipset shipments 10 142 362 490 Discount / overlap factor 15% 15% 10% 10% Asian shipments after discount 9 121 325 441

Less Brands using Asian chipsets 9 74 246 304 Total based on chipset shipments 473 727 1,042 1,273

CS Smartphone Estimates 473 720 1,032 1,258

IDC Estimates 473 725 1,010 1,208 Source: Company data, Credit Suisse estimates Penetration still has room to move higher The acceleration in demand from the Asian chipset vendors is coming from still-low smartphone penetration, particularly in emerging markets where we expect penetration from affordability perspective to increase from 35% in 2013 to 83% by 2017 (Figure 16). This level of penetration would imply smartphone subscribers of 4.1 bn by 2017. Our estimates imply by 2017, smartphone penetration will reach: (i) 52% of the global mobile subscriber base (Figure 17); (ii) 57% of the global population; and (iii) 86% of overall handsets shipped.

China Smartphone Sector 5 07 January 2014

Figure 16: Global smartphone penetration still low at 35% Figure 17: Smartphones account for 27% of mobile subs Effective smartphone penetration (based on affordability) over time Smartphone subs base as percentage of mobile subscriptions 120% 100% 100% 80% ) (as % of 80% 60% market tration 60%

subs% of astotal 40% 40%

mobile subs base 20% addressable 20% Smartphone

Smartphone pene 0% 0% North Western Japan APAC (ex CEE MEA Latam Global North Western Japan APAC (ex CEE MEA Latam Global America Europe Japan) America Europe Japan) 2012E 2013E 2014E 2015E 2016E 2017E 2012E 2013E 2014E 2015E 2016E 2017E

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Handset estimates revised down slightly despite higher smartphone forecasts Despite higher smartphone forecasts, the feature phone market for Tier 1 vendors has collapsed at an accelerating pace as low-end smartphones built for below US$30 factory prices cannibalise the smart feature phone market. Alongside the smartphone estimate upgrade, our global hardware team has trimmed estimates for the overall handset market to factor this cannibalisation and slowing overall growth in industry units. We reduce our 2012/13/14 handset estimates by 3%/7%/7% from 1.98 bn/2.09 bn/2.15 bn to 1.92 bn/1.94 bn/1.99 bn, giving the handset market only 1% growth in 2013 and 3% growth in 2014. Combined with smartphones, our forecasts project total handset industry revenue growth in 2014 at 10% YoY for smartphones to US$307 bn and 3% YoY for all handsets to US$335 bn.

Figure 18: Summary of Credit Suisse's handset and smartphone estimates (in millions, unless otherwise stated) Handset summary 2010 2011 2012 2013 2014 2015 2016 2017 CAGR 12-17 Global subscriptions 3,958 4,418 4,697 4,978 5,239 5,491 5,741 5,991 5% Global handset shipments 1,652 1,852 1,919 1,941 1,990 2,056 2,119 2,166 2% YoY 21% 12% 4% 1% 2% 3% 3% 2% Handset ASPs $135 $147 $159 $168 $168 $167 $163 $157 0% YoY 1% 9% 8% 6% 0% -1% -2% -4% Handset revenue $222,892 $272,606 $305,182 $326,159 $334,912 $342,636 $346,143 $339,659 2% YoY 22% 22% 12% 7% 3% 2% 1% -2% Smartphone summary 2010 2011 2012 2013 2014 2015 2016 2017 CAGR 12-17 Global smartphone subscribers 490 763 1,185 1,755 2,339 2,930 3,530 4,103 28% % of mobile subscribers 12% 17% 25% 35% 45% 53% 61% 68% New adds 169 273 422 569 584 591 600 573 6% Replacements 130 199 298 463 674 884 1,089 1,292 34% Smartphone units 299 473 720 1,032 1,258 1,475 1,689 1,866 21% YoY 73% 58% 52% 43% 22% 17% 14% 10% Smartphone ASPs $331 $336 $310 $271 $244 $220 $198 $178 -10% YoY 0% 1% -8% -12% -10% -10% -10% -10% Smartphone revenue $99,015 $158,726 $223,002 $279,765 $306,763 $323,897 $333,642 $331,744 8% YoY 73% 60% 40% 25% 10% 6% 3% -1% Source: Company data, Credit Suisse estimates The lower unit forecasts come despite higher shipments from Asian baseband suppliers which are growing unit share with the Chinese smartphone brands. We project Asian chipset vendors grew units from 942 mn in 2012 to 1,022 mn in 2013 and will grow to 1,096 mn in 2014, representing 55% of the total industry chipset shipments.

China Smartphone Sector 6 07 January 2014

Figure 19: Asian chipset vendors growing their share of industry shipments (in millions, unless otherwise stated) 2010 2011 2012 2013E 2014E 2015E Mediatek units 500 540 502 549 599 680 MStar units 10 49 76 0 0 0 Spreadtrum units 89 199 269 335 351 375 RDA units 1 10 96 138 146 143 Asian baseband shipments 601 798 942 1,022 1,096 1,198 YoY Growth 59% 33% 18% 8% 7% 9% % of industry 36% 43% 49% 53% 55% 58% CS Handset Estimates 1,652 1,852 1,919 1,941 1,990 2,056 YoY Growth 21% 12% 4% 1% 2% 3% CS Prior Estimates 1,616 1,852 1,975 2,086 2,149 2,209 YoY Growth 17% 15% 7% 6% 3% 3% Source: Company data, Credit Suisse estimates Emerging market penetration and replacements could extend industry growth longer

A notable concern is the mobile opportunity is reaching the late innings and slowing down, Smartphones penetration in with developed markets already saturated. We see potential for smartphones repeating 2013 of 27% is similar to the case of handsets in the post-bubble slowdown in 2001-02, when emerging markets 2003 handset penetration and new drivers (colour screens, cameras, RAZR thin phones/clamshells) reaccelerated levels penetration and replacement rates. Our base smartphone model slows to a 4.4% revenue CAGR for 2013-17, although we note this model also has penetration rates slowing from the 7.5% penetration added in 2013 to an average of 6.3% from 2014-17 and replacement rates decelerating from 2.56 years to 2.7 years.

Figure 20: Mobile growth could stay higher with faster penetration/replacement cycles CS Global Model 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 13-17 CAGR Mobile subscribers 3,866 4,495 5,175 5,780 6,155 6,545 6,890 7,215 7,538 7,861 4.7% Smartphone subscribers 242 321 490 763 1,185 1,755 2,339 2,930 3,530 4,103 23.7% % penetration 6.3% 7.1% 9.5% 13.2% 19.3% 26.8% 33.9% 40.6% 46.8% 52.2% 6.3% Net additions 63 79 169 273 422 569 584 591 600 573 Replacements 76 93 130 199 298 463 674 884 1,089 1,292 29.3% Replacement rate 2.5 2.6 2.5 2.5 2.6 2.6 2.6 2.6 2.7 2.7 Smartphone units 139 172 299 473 720 1,032 1,258 1,475 1,689 1,866 15.9% YoY 52.3% 43.3% 21.8% 17.3% 14.5% 10.5% ASPs $316 $333 $331 $336 $310 $271 $244 $220 $198 $178 -10.0% YoY 2.1% 2.1% 2.1% 2.1% -7.8% -12.5% -10.0% -10.0% -10.0% -10.0% Revenue $44.0 $57.4 $99.0 $158.7 $223.0 $279.8 $306.8 $323.9 $333.6 $331.7 4.4% Smartphone Revenue YoY 40.5% 25.5% 9.7% 5.6% 3.0% -0.6%

Upside Penetration 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 13-17 CAGR Mobile subscribers 3,866 4,495 5,175 5,780 6,155 6,545 6,890 7,215 7,538 7,861 4.7% Smartphone subscribers 242 321 490 763 1,185 1,755 2,368 3,024 3,729 4,482 26.4% % penetration 6.3% 7.1% 9.5% 13.2% 19.3% 26.8% 34.4% 41.9% 49.5% 57.0% 7.6% Net additions 63 79 169 273 422 569 613 656 705 754 Replacements 76 93 130 199 298 463 685 925 1,181 1,456 33.2% Replacement rate 2.5 2.5 2.5 2.5 2.6 2.6 2.6 2.6 2.6 2.6 Smartphone units 139 172 299 473 720 1,032 1,298 1,581 1,886 2,210 21.0% YoY 52.3% 43.3% 25.8% 21.8% 19.3% 17.2% ASPs $316 $333 $331 $336 $310 $271 $244 $220 $198 $178 -10.0% YoY 2.1% 2.1% 2.1% 2.1% -7.8% -12.5% -10.0% -10.0% -10.0% -10.0% Revenue $44.0 $57.4 $99.0 $158.7 $223.0 $279.8 $316.7 $347.1 $372.6 $392.9 8.9% YoY 40.5% 25.5% 13.2% 9.6% 7.3% 5.5% Source: Company data, Credit Suisse estimates We would note an upside scenario where the penetration is stable at the current 7.6% rate and the replacement rate remains stable at 2.56 years—this would raise the 2013-17E CAGR from 4% to 9% and keep smartphones growing 6% in 2017E.

China Smartphone Sector 7 07 January 2014

Figure 21: Smartphone CAGR should stay over 10% at a Figure 22: Smartphone units could reach over 2 bn in faster replacement/penetration rate 2017 vs the baseline forecast of 1.7 bn units Smartphone Replacement Years Smartphone Replacement Years $2,210 2.76 2.66 2.56 2.46 2.36 $0 2.76 2.66 2.56 2.46 2.36 6.2% 1,866 1,912 1,962 2,016 2,075 6.2% 4.4% 5.0% 5.7% 6.4% 7.2% 6.6% 1,934 1,982 2,033 2,089 2,149 6.6% 5.3% 5.9% 6.6% 7.3% 8.1% 7.1% 2,019 2,068 2,121 2,179 2,241 7.1% 6.4% 7.1% 7.8% 8.5% 9.2% 7.6% 2,104 2,155 2,210 2,269 2,333 7.6% 7.5% 8.2% 8.9% 9.6% 10.4% 8.1% 2,189 2,242 2,298 2,359 2,425 8.1% 8.6% 9.3% 9.9% 10.7% 11.4% 8.6% 2,274 2,328 2,386 2,449 2,517 8.6% 9.7% 10.3% 11.0% 11.7% 12.5% Penetration Pace Penetration 9.1% 2,360 2,415 2,475 2,539 2,609 Pace Penetration 9.1% 10.7% 11.3% 12.0% 12.7% 13.5% Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Smartphones have now penetrated 27% of the mobile subscriber base in 2013, similar to penetration rates for handsets in 2003, implying far more penetration in emerging markets still lie ahead, with developed market growth still possible if a good replacement driver emerges to re-accelerate growth at the high end.

Figure 23: Smartphone penetration in 2013 at 27%, where handsets were in 2003 (in millions, unless otherwise stated) Subscribers (mn) Penetration (%) 7,000 100% 90% 6,000 80% 5,000 70% 4,000 60% 50% 3,000 40% 2,000 30% 20% 1,000 10% 0 0% 1998/2008 1999/2009 2000/2010 2001/2011 2002/2012 2003/2013 2004/2014 2005/2015 2006/2016 2007/2017 2008/2018 2009/2019 2010/2020 2011/2021 2012/2022 2013/2023 Handset subscribers Smartphone subscribers Handset penetration Smartphone penetration

Source: Company data, Credit Suisse estimates The key drivers for rapid smartphone market growth in emerging markets include improving affordability, availability of lower-cost smartphones enabled by lower BOM costs and chip vendors’ reference design programmes, and cannibalisation by smartphones of other consumer electronic device categories (including PNDs, digital cameras and portable music players and gaming devices). Indeed, as seen below, similar to the global trend, smartphone penetration in emerging markets is already higher than what handset penetration was at the same point in its lifecycle ten years ago.

Figure 24: Smartphone penetration three years faster than Figure 25: Emerging market smartphones also at a three- handsets ten years ago year faster pace versus emerging market handsets Units (mn) Units (mn) 2,000 1,800 4 years 1,800 1,600 4 years (fin. crisis) 1,600 1,400 1,400 (fin. crisis) 1,200 1,200 3 years 1,000 3 years 1,000 800 3 years 800 3 years 600 600 400 400 200 200 - - 98/08 99/09 00/10 01/11 02/12 03/13 04/14 05/15 06/16 07/17 08/18 09/19 10/20 11/21 97/07 98/08 99/09 00/10 01/11 02/12 03/13 04/14 05/15 06/16 07/17 08/18 09/19 10/20 11/21 Emerging Mkt Handsets (Actual) Emerging Mkt Smartphones (CS) Handsets (Actual) Smartphones (CS)

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

China Smartphone Sector 8 07 January 2014 Emerging markets, tablets and wearables fuel additional growth With developed markets now maturing to single-digit growth, emerging markets will now Emerging markets should drive the unit growth in smartphones, with tablets and wearables additional addressable be over 78% of smartphone markets for baseband, processing, connectivity and sensors. Emerging markets still have devices shipped by 2017E further legs in smartphones for the next few years. Relative to developed markets growing at a 6% CAGR between 2013 and 2017, we project China growing at a 14% CAGR and other emerging markets at 25% CAGR owing to rising penetration in India, Middle East, Brazil and Africa. The faster growth from these areas will likely lift emerging market smartphones from 69% of global smartphone shipments in 2013 to 78% by 2017.

Figure 26: Emerging markets to approach 80% of the global smartphone market Emerging market smartphones (mn) % of industry 1500 100%

1200 80%

900 60%

600 40%

300 20%

0 0% 2012A 2006A 2007A 2008A 2009A 2010A 2011A 2013E 2014E 2015E 2016E 2017E China India Rest of Asia Middle East and Africa E Europe Mexico Rest of LatAm Brazil Russia

Source: Gartner, Credit Suisse estimates The two main areas of focus for unit growth in the next few years will be China, which we project will grow from 353 mn units in 2013 to 443 mn in 2014 and ultimately reach 600 mn units by 2017 and emerging markets that are key targets for Chinese brands exporting handsets, growing from 354 mn in 2013 to 471 mn in 2014 and 860 mn by 2017.

Figure 27: China and emerging markets outpacing developed markets 2011 2012 2013E 2014E 2015E 2016E 2017E 13-17 China 77.7 195.8 353.4 443.3 498.3 562.4 602.7 14% YoY 179% 152% 81% 25% 12% 13% 7% India 13.1 21.0 42.6 65.0 93.6 129.8 170.2 41% Other APAC 48.7 69.1 98.3 127.2 158.4 190.8 218.2 22% Brazil 9.3 18.9 33.5 44.7 52.6 60.1 65.6 18% Mexico 9.3 15.4 21.2 23.2 24.3 26.1 27.5 7% Other LatAm 15.0 24.3 41.5 48.0 57.3 68.4 75.8 16% Russia 8.3 17.0 23.2 28.5 33.9 37.7 40.6 15% E. Europe 11.7 18.8 27.2 34.6 43.3 50.2 57.4 20% Middle East/Africa 29.9 45.3 66.6 99.3 142.6 173.5 204.9 32% Other Emerging 145.5 229.9 354.3 470.5 606.0 736.6 860.3 25% YoY 66% 58% 54% 33% 29% 22% 17% Developed 249.6 295.6 324.6 343.8 371.1 389.7 402.6 6% YoY 36% 18% 10% 6% 8% 5% 3% Total industry 472.9 721.3 1,032.2 1,257.6 1,475.4 1,688.6 1,865.6 16% YoY 58% 53% 43% 22% 17% 14% 10% Source: Company data, Credit Suisse estimates

China Smartphone Sector 9 07 January 2014

China market still has further growth ahead The Chinese market is a critical market for the local branded Chinese smartphone brands, Chinese Tier 2 handset whitebox and chipset suppliers into that channel. Overall market growth is poised to brands and Samsung continue, driven by a significant step-up in subsidies of sub-Rmb1,000 smartphones from powering the industry Chinese brands and much better low-cost handset availability and quality. China Mobile growth still has upside on penetration as it is lagging the two smaller carriers on 3G penetration of its 750 mn subscriber base (63% of China’s 1.2 bn mobile subscribers). Penetration for China Mobile is still only 25%, lagging the 45% penetration for China Unicom and 55% for China Telecom, putting the total market at only 33% exiting 2013.

Figure 28: China Mobile 3G only 25% of its 750 mn subs, lagging the smaller carriers Subscriber base (mn) 3G penetration % 900 60% 800 50% 700 600 40% 500 30% 400 300 20% 200 10% 100 0 0% Jul-10 Jul-11 Jul-12 Jul-13 Jan-11 Jan-12 Jan-13 Mar-11 Mar-12 Mar-13 Nov-10 Nov-11 Nov-12 Nov-13 Sep-10 Sep-11 Sep-12 Sep-13 May-10 May-13 May-11 May-12 Mobile subscribers Unicom subscribers Telecom subscribers Mobile penetration Unicom penetration Telecom penetration

Source: Company data, Credit Suisse estimates The market is also a key market not dominated by the traditional Tier 1 brands due to the presence of strong local brands that emerged during the feature phone era originally powered by Mediatek’s reference design but improving on quality, branding and R&D at competitive pricing to compete across different emerging markets. The initial ramp up of smartphones in China was dominated by the global Tier 1s at 70% share in 2011.

Figure 29: China smartphone market growing from 353 mn in 2013 to 603 mn by 2017E (in millions, unless otherwise stated) China Smartphone Market 2011 2012 2013E 2014E 2015E 2016E 2017E 13-17 CAGR Samsung 14.4 30.2 60.0 80.0 93.0 102.0 110.0 16% Apple 7.7 19.4 25.0 33.0 37.0 42.0 45.0 16% Nokia 22.2 7.9 4.0 4.7 5.2 5.7 6.0 11% HTC 2.3 6.4 4.0 6.5 7.0 7.3 7.5 17% Motorola 4.7 4.3 2.0 1.3 1.5 1.7 2.0 0% Sony Mobile Communications 3.0 2.3 3.4 3.2 3.5 3.7 4.0 4% BlackBerry 0.3 0.1 0.1 0.1 0.1 0.1 0.1 0% Traditional Tier One's 54.7 70.6 98.5 128.8 147.3 162.5 174.6 15% YoY Growth 29% 40% 31% 14% 10% 7% Share 70% 36% 28% 29% 30% 29% 29% Huawei Technologies 7.9 17.3 29.0 39.0 45.4 51.8 57.0 18% Lenovo 1.7 21.5 42.1 55.3 61.5 68.0 75.0 16% ZTE 6.1 14.9 22.0 24.8 27.0 29.2 33.4 11% Coolpad 3.4 15.5 31.2 34.0 38.4 40.3 48.4 12% Top 4 Chinese Brands 19.1 69.2 124.3 153.0 172.3 189.3 213.8 15% YoY Growth 262.7% 79.7% 23.1% 12.6% 9.9% 13.0% Share 24.5% 35.3% 35.2% 34.5% 34.6% 33.7% 35.5% Other brands/whitebox 3.9 56.0 130.6 161.5 178.7 210.5 214.2 13% YoY Growth 1330% 133% 24% 11% 18% 2% Share 5% 29% 37% 36% 36% 37% 36% China Smartphones 77.7 195.8 353.4 443.3 498.3 562.4 602.7 14% YoY Growth 152% 81% 25% 12% 13% 7% Source: Company data, Credit Suisse estimates

China Smartphone Sector 10 07 January 2014

In the past two years, however, the China market made a marked turn and is now only 28% supplied by Tier 1s, 35% by the top four Chinese brands (Huawei, ZTE, Lenovo and Coolpad), and 37% by an emerging tier of Chinese brands such as Oppo, TCL, Xiaomi, BBK and Gionee and dozens of smaller whitebox and branded companies. The key shift was a substantial lowering of entry barriers due to higher-quality chipset reference designs, better availability of components (panels, touch, image sensors, low-cost mobile DRAM), and a stable Android platform.

Figure 30: Chinese smartphone vendors improving in quality and specifications Company Lenovo Lenovo TCL Huaw e i Huaw e i Oppo Micro max Coolpad Coolpad Mo de l name Vi be X S960 S5000 Y910 G610 G700 R819 Canvas Doodle 2 SII 8750 9970

Image Technology HSDPA HSDPA WCDMA WCDMA WCDMA TD-WCDMA WCDMA TD-WCDMA CDMA Operating System Android 4.2 Android 4.2 Android 4.2 Android 4.2 Android 4.2 Android 4.2 Android 4.2 Android 4.2 Android 4.2 Pixels 1920 x 1080 1280 x 800 1920 x 1080 960 x 540 1280 x 720 1280 x 720 1280 x 720 1920 x 1080 1920 x 1080 RAM 2GB 1GB 2GB 1GB 2GB 1GB 1GB 1GB 2GB RO M 16GB 16GB 32GB 4GB 8GB 16GB 16GB 16GB 16GB Display 5.0" 7.0" 6.0" 5.0" 5.0" 4.7" 5.7" 5.5" 5.9" Came ra 13MP+5MP 5MP+1.6MP 13MP+2.1MP 5MP+0.3MP 8MP+1.3MP 8MP+2MP 5MP+12NP 8MP+2MP 13mp Battery 2,000mAh 3,450mAh 3,400mAh 2,150mAh 2,150mAh 2,000mAh 2,600mAh 2,500mAh 3,000mAh CPU Speed 1.5GHz 1.2GHz 1.5GHz 1.2GHz 1.2GHz 1.2GHz 1.2GHz 1.2GHz 1.8GHz Processor Chip MT6589T MT8389 MT6589T MT6589M MT6589 MT6589 MT6589 Marvell PXA1088 Nvidia Tegra 4 Price NA $260 NA $232 $330 2,298Rmb $315 1,999Rmb NA Source: Company data, Credit Suisse We also expect Tier 1s to continue to under-grow relative to local Chinese brands. Only Samsung has held its own on market share in China at about 18%, with other traditional Tier 1s losing market share the past two years. As a group, Tier 1 shipments only grew from 70 mn to 99 mn in 2013 while the top four in China grew from 69 mn to 124 mn and the smaller Chinese brands from 56 mn to 131 mn units.

Figure 31: Samsung and Chinese Tier 2 lead the growth Figure 32: Traditional Tier 1 brands lose share in China 50% Units (mn) China brand share 45% 200 120% 40% 180 160 100% 35% 140 80% 30% 120 25% 100 60% 20% 80 40% 15% 60 40 10% 20% 20 5% 0 0% 0% 2011 2012 2013E 2014E 2015E 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 Samsung Apple Nokia Traditional Tier One's Top 4 Chinese Brands HTC Top 4 Chinese Tier 2 Chinese Other brands/whitebox

Source: Gartner Source: Company data, Credit Suisse estimates We note that the whitebox and other brands are expanding as Tier 2 brands (Hisense, BBK, Oppo, Gionee, Tianyu/K-Touch, TCL, Xiaomi) and becoming household names in China and emerging markets as the quality and volumes grow. Our bottom-up analysis of Asia-built smartphones shows the top Chinese brands in the long-term accounting for 60% of the market for Asian-built smartphones, with whitebox brands commanding the other 40% of volumes, a similar mix to feature phones.

China Smartphone Sector 11 07 January 2014

Figure 33: Chinese suppliers continue to ramp up their volumes China brand units (mn) 2012 2013E 2014E 2015E 2016E 2017E 13-17 CAGR Huawei 27.2 45.0 60.0 72.0 86.4 103.7 23% ZTE 26.8 37.0 45.0 54.0 64.8 77.8 20% Lenovo 21.7 50.0 65.0 75.0 85.0 100.0 19% Coolpad 16.1 32.0 40.0 48.0 57.6 69.1 21% Gionee 6.8 12.0 18.0 25.0 32.0 40.0 35% Oppo 3.1 12.0 20.0 27.0 35.0 40.0 35% TCL/Alcatel 6.5 18.0 25.0 35.0 45.0 55.0 32% Hisense 3.4 8.0 10.0 12.0 15.0 18.0 22% Xiaomi 7.2 20.0 40.0 55.0 70.0 85.0 44% Tianyu 8.0 15.0 22.0 30.0 35.0 40.0 28% G-Five 0.0 5.0 10.0 12.0 12.0 12.0 24% Bird 0.3 2.5 7.0 12.0 15.0 18.0 64% BBK 2.5 12.0 18.0 24.0 30.0 36.0 32% Others 119.9 216.9 281.2 412.8 461.4 484.7 22% China brand units (mn) 249.4 485.4 661.2 893.8 1,044.2 1,179.3 25% Growth (YoY) 183% 95% 36% 35% 17% 13% Source: Company data, Credit Suisse estimates Export channel to drive the next leg of growth Smartphones' rising mix of device sales drove emerging markets in 2013, as smartphones rose from 38% of device sales in 2012 to 64% in 2013 and we project the pace to reach 80% of device sales in 2014. We see China still growing from 353 mn units in 2013 to 603 mn by 2017. The export channel for China brands into other emerging markets will be a bigger growth driver with more potential as smartphones are a smaller percentage of a much larger handset base. Emerging market smartphones were only 37% of 960 mn units in 2013 vs 64% of 548 mn device sales now for China but could rise to 78% or 860 mn units by 2017.

Figure 34: China penetration of devices faster than other emerging markets (in millions, unless otherwise stated) Penetration of devices 2011 2012 2013E 2014E 2015E 2016E 2017E 13-17 CAGR China handsets 457.7 510.5 548.2 563.8 583.9 604.5 619.1 3% China smartphones 77.7 195.8 353.4 443.3 498.3 562.4 602.7 14% % of devices 17% 38% 64% 79% 85% 93% 97% Emerging mkt handsets 896.8 955.8 959.5 986.1 1,025.8 1,065.7 1,099.3 3% Emerging mkt smartphones 145.5 229.9 354.3 470.5 606.0 736.6 860.3 25% % of devices 16% 24% 37% 48% 59% 69% 78% Source: Company data, Credit Suisse estimates

Figure 35: Smartphone penetration of China population Figure 36: Smartphone penetration much lower in emerging Asian markets 60.0% 90.0%

50.0% 80.0% 70.0%

40.0% 60.0% 50.0% 30.0% 40.0% 30.0% 20.0% 20.0% 10.0% 10.0% 0.0% Singapore Hong Australia Korea Taiwan Thailand Indonesia China Philippines India Kong 0.0% 2009 2010 2011 2012 2013 2014 2015

Smartphone penetration of population (%) 2013 2016

Source: Credit Suisse estimates Source: SmarTone Asian chipsets may pass the feature phone peak The market opportunity for Asian chipsets supplying into China handsets peaked at 800 Asian feature phones mn units in 2011 out of a 1.4 bn global feature phone market. In smartphones, we believe reached 800 mn units the figure could be even higher, as mobile penetration rates are still rising in emerging before saturating markets, functionalities of smartphones are much higher than feature phones and local

China Smartphone Sector 12 07 January 2014 brands and chipsets with the help of a standardised Android OS, and a more developed supply chain could improve on their penetration rates achieved in feature phones. At the time of the feature phone market peak in 2011, Asian chipset suppliers had secured about 50% market share of the chipset market. As Tier 1 chipset and handset suppliers pulled out of the 2G market, Asian chipset suppliers have grown to 80% of the market share. We believe Asian chipsets are now at 35% market share in smartphones and could grow to 45-50% in 2015 due to the rising mix of emerging markets in total industry device sales. Smartphones do not need to peak at the 800 mn units capped for feature phones, as that upside after 2011 was curtailed as smartphones began replacing feature phones. In this case, Asian chipsets can ultimately target a ramp up into the total 2 bn handset industry shipment base as they convert into smartphones.

Figure 37: Asian feature phone shipments peaked at 800 Figure 38: Asian chip suppliers now rapidly penetrating mn in 2011 smartphones Chipset units (mn) Asian share (%) Chipset units (mn) Asian share (%) 2,000 100% 2,000 90% 1,800 90% 1,800 1,600 80% 1,600 75% 1,400 70% 1,400 60% 1,200 60% 1,200 1,000 50% 1,000 45% 800 40% 800 600 30% 600 30% 400 20% 400 15% 200 10% 200 - 0% - 0% 2005 2006 2007 2008 2009 2010 2011 2012 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2013E 2014E 2015E Asian chipsets Feature phones incl. whitebrands Asian chipsets Smart phones Asian share (%) Asian share incl. whitebrands (%) Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates We also look at the success of the China brands in gaining market share for potential upside. In the China market, local brands still have some upside to reach their feature phone share, having now passed the 70% smartphone market share but still shy of the 80- 90% range they have held of the China market since 2011. In the global market, upside for the China brands is still higher, with market share now reaching 40% of global smartphone shipments but still short of the 50% market share held in the past three years in feature phones.

Figure 39: Chinese smartphone brands' share at 70% in Figure 40: Chinese smartphone brands' share near 40% of China, still shy of the 80-90% reached in feature phones global smartphones, still below the 50% in feature phones 100% 60% 90% 80% 50% 70% 40% 60% 50% 30% 40% 30% 20% 20% 10% 10%

0% 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 0% 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13

Chinese brand smartphone share Chinese brand FF share Chinese brand smartphone share Chinese brand FF share

Source: Gartner Source: Gartner The penetration of Asian smartphone units so far continues to have a faster pace than feature phone units at a similar penetration rate back in 2007. Quarterly shipments have accelerated from less than 10 mn units to over 100 mn units, two years faster than the feature phone pace. The rate of feature phone adoption would see 800 mn units reached by 2016E, but we could see that run-rate pull into 2H14.

China Smartphone Sector 13 07 January 2014

Figure 41: Smartphones' ramp up faster than feature phones Figure 42: Tier 2 China brands still taking share locally Qtrly shipments (mn) Asian share (mn) 50% 300 50% 45% 45% 250 40% 40% 35% 200 35% 30% 150 25% 30% 20% 25% 100 15% 20% 50 10% 5% 15% 0 0% 10% 5% 0% 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 3Q11/1Q05 1Q12/3Q05 3Q12/1Q06 1Q13/3Q06 3Q13/1Q07 1Q14/3Q07 3Q14/1Q08 1Q15/3Q08 3Q15/1Q09 1Q16/3Q09 3Q16/1Q10 1Q17/3Q10 3Q17/1Q11 1Q18/3Q11 Asian Feature phone units Asian Smartphone units FF Asian share (%) Samsung Apple HTC Top 4 Chinese Tier 2 Chinese

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Low-end smartphones compress the mid-to-high-end The availability of better-quality low-cost smartphones with more advanced specs is The mid-tier of the market is compressing the mid-high tier of the smartphones market. We project sub-US$200 compressing from 40% to smartphones to grow from 20% of 2012 volumes to 50% of 2015 volumes, while US$200- 20% of volumes by 2015E 400 devices and US$400-plus devices both compress during that time from 40% to 20% of industry volumes.

Figure 43: Mid-end of smartphone market to represent below 25% of total units by 2015E Percentage of global smartphone volumes broken down by price point over time 100%

90% $500+

80% $400 - $500 70%

60% $300 - $400 50%

40% $200 - $300

30% $100 - $200 20%

10% <= $100

0% 2010 2011 2012E 2013E 2014E 2015E

Source: Company data, Credit Suisse estimates The mid-range in particular is seeing a squeeze as the low-cost Chinese brands and Sub-US$200 smartphones whitebox produce expand capabilities using larger screens, quad- and octa-core chipsets, are growing at a 39% CAGR and a large channel of Chinese branded companies and whitebox that operate on lower by 2015E to over 700 mn GMs, R&D, manufacturing and component costs and an open channel that sells in units emerging markets at thinner marketing and retail margins. The local vendors are increasingly sourcing from a supply chain of smaller Chinese manufacturers.

China Smartphone Sector 14 07 January 2014

Figure 44: China component supply chain getting more developed

Base band chip RF IC Application Processor Wireless Connectivity IC Power Management MTK, SPRD, RDA, Hisense, RDA, Rockchip, Allwinner, Amlogic, RDA, Bekencorp, Maxscend, Awinic, SG Micro, BYD Leadcore Vanchip Actions, Vimicro Quinticcorp Key Chip

Panel Driver IC Touch Screen IC Sensor IC IC Image Sensor Galaxycore, Solomon, TI Semi, Goodix, Sileadinc, MEMSIC, MEMS, Epticore, Gcoreinc, Superix, Chiponeic, Yunyinggu Awinic, Chiponeic QST, Menhow, Senodia BYD

Component Memory Display Panel Touch Panel Lens Antenna Battery Acoustic Gigadevice Boe, Tianma, IVO, Ofilm, Trulysemi, Sunny optical, Sunway, Desay, Sunwonda, ATL, Goertek, Szcsot Laibao, Token, Bmseiko AAC Speed BYD, Lishen, Scud, L&S AAC, Gettop

Quartz PCB FPC Casing Connector Passive Component Founder, Fasprint, Danbond, EWPT, Janus, BYD, Deren, Luxshare, Sunlord, Sunyue, Zhenhua, Goworld Softi DFLC, Victory Anjie Changjiang

Design Manufacturing Mobile Phone Manufacturing and Assembly and Assembly BYD, Baike, Longcheer, Wingtech, Zowee

Downstream Brand Mobile Phone Brand Huawei, ZTE, China Wireless, Lenovo, TCL. Xiaomi, Oppo, Ginoee, Vivo

Source: Huaqiang institute, Credit Suisse At the low-end (sub-US$200 devices), our team forecasts rapid volume growth, driven by an emerging tier of smaller tier branded companies in China and India. The past year has seen a rising tier of entry-level single- and dual-core smartphones at US$25-50 factory prices with decent 3.5-4.0" displays. Mediatek’s quad core is allowing customers to bring a mainstream 4.7" smartphone to the market with solid specifications at US$125 retail, a sizeable savings against high-end flagship smartphone models.

Figure 45: BOM costs; Mediatek vs. High-end Samsung Samsung Galaxy S4 (LTE version) Teardown BOM estimates (US$) Mediatek 4.7" Quad core smartphone Component Specs US$ Component Specs US$ 5" 1920x1080 Super AMOLED (441ppi), w/ 4.7" 1280x720 HD panel 320ppi + Display & Touchscreen $75.00 Display & Touchscreen $30.00 Gorilla Glass3 by Corning touch Qualcomm Snapdragon 600 (APQ8064T) - AP, Baseband, RF, Mediatek MT6589T + Application Processor $20.00 $14.00 Quad-core Connectivity BT+FM+WiFi+GPS Wireless Modem - LTE MDM9615 + WTR1605L $20.00 Baseband, RF WLAN / BT / FM / GPS Qualcomm Atheros WCN3680 $5.75 Memory (NAND Flash + Memory (NAND Flash + 16GB eMMC + 2GB LPDDR3 $28.00 4GB TLC NAND + 1GB LPDDR2 $12.00 DRAM) DRAM) Power amplifier Multi-band PA $7.00 Power amplifier 3G + 2G PA $1.50 Accelerometer, RGB light, e-compass, Gyro, User Interface & Sensors Barometer, Temperature & Humidity, IR $16.00 User Interface and Sensors Accelerometer, Gyro $2.50 Gesture PMICs (most integrated in the Analog Qualcomm PMICs and other analog content $9.50 Analog 1.5 AP+BB) Cameras 13MP+2MP $20.00 Cameras 8MP + 1.3MP $9.00 Battery 3.8V, 2600mAh w/ NFC Antenna $5.60 Battery 2000mAh $3.80 PCB HDI PCB $5.00 PCB Low-end HDI $2.20 Charger $3.00 Charger $0.90 Acoustics Antenna, Speaker, Mic $6.00 Acoustics Antenna, Speaker, Mic $3.20 Casing Polycarbonate $6.00 Casing Plastic $1.10 Box Contents $6.00 Box Contents $1.00 Total BOM cost $232.85 Total BOM cost $82.70 Manufacturing $17.00 Manufacturing $5.00 IP licensing (7% - QCOM, ARM, Imagination, Nokia etc) $16.30 IP licensing (7% - QCOM, ARM, Imagination, Nokia etc) $5.79 BOM + Manufacturing + $266.15 BOM + Manufacturing + IP $93.49 IP Samsung Mark-Up (40% $443.58 Vendor GM (10%) $103.88 GM) Retail & Distribution Retail & Distribution Mark- $554.48 $122.21 Mark-Up (20%) Up (15%) Source: iSuppli, Chipworks, Company data, Credit Suisse estimates With smartphones reaching lower price points, we raise our estimate for sub-US$200 smartphones by 100 mn units by 2015 to over 700 mn from 139 mn units in 2012, growing from 19% of smartphones in 2012 to 49% by 2015.

China Smartphone Sector 15 07 January 2014

Figure 46: Sub-US$200 smartphones gaining share of the market (Unit: mn) 2010 2011 2012 2013E 2014E 2015E < $50 - - - 12.4 25.0 40.9 $50 - $100 1.5 5.2 7.7 61.4 93.4 130.6 $100 - $200 66.3 82.3 131.4 299.7 424.1 545.9 Total Sub US$200 67.7 87.5 139.2 373.5 542.5 717.4 YoY 29% 59% 168% 45% 32% % of industry 23% 19% 19% 36% 43% 49% Source: Company data, Credit Suisse estimates While low-end smartphones would grow quickly, the market opportunity could be far 350 mn more feature greater as costs drop for the lowest-priced Android smartphones. A look at the feature phones could be phone market in 2014 still shows 750 mn units, with 400 mn under US$50 and 350 mn cannibalised in the next two more between US$50 and US$150 that could still be cannibalized by entry-level years smartphones.

Figure 47: Sub US$200 smartphones to hit 50% of volumes Figure 48: 350 mn $500 Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates We expect the 400 mn sub-US$50 handset market to still survive due to very low pricing Our industry smartphone on the entry-level voice-only basic phones at US$10-15 for rural emerging market forecast would have 200 mn subscribers. If the entire US$50-200 market converts into smartphones by 2015, our unit upside if the rest of the estimate for the smartphone market would still prove conservative by another 200 mn units. US$50-plus feature phones converted into smartphones Industry growth increasingly driven by Samsung and the Chinese brands

Figure 49: Samsung and China brands driving volumes Figure 50: China brands gaining more share in China Units (000) Thousand (units) Local brand share (% 140,000 70,000 80% 120,000 60,000 70% 100,000 60% 80,000 50,000 50% 60,000 40,000 40% 40,000 30,000 20,000 30% 20,000 0 20% 10,000 10% Q104 Q304 Q105 Q305 Q106 Q306 Q107 Q307 Q108 Q308 Q109 Q309 Q110 Q310 Q111 Q311 Q112 Q312 Q113 Q313

Q114E Q314E 0 0% Nokia Research in Motion Motorola 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 Apple Sony Ericsson / Sony Mobile HTC Tier 2 brands Huawei/ZTE/Lenovo/Coolpad Samsung LG Huawei + ZTE Tier one's Mediatek Smartphone Units China / Others China brand share Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Industry growth is being powered now by Samsung and the China brands, with Apple now a lagging distant third. Chinese smartphone vendors have seen momentum build with Chinese brands growing their share in China to over 70%, powered in large part by a

China Smartphone Sector 16 07 January 2014

Mediatek, Qualcomm or Spreadtrum chipset, with some additional volumes from Broadcom, Marvell and Leadcore with the presence of reference designs and a rising supply chain of localised component makers in China propelling growth for these brands. Low-cost tablets create an additional opportunity for unit growth and chipsets The global tablet market saw an acceleration in the past two years in the ramp up of China-built tablets for emerging markets and private label tablet brands in developed markets. A combination of low-cost chipsets from Chinese chipset suppliers such as Allwinner, Rockchip, Actions, Ingenic and AMLogic along with entry from Mediatek for a 3G connected platform has created a new category of entry level tablets.

Figure 51: Low-cost white-box tablets—Product line-up

Ultra-low-end Mini Pad High-end 3G Mobile Ultra-high-end Intel Allwinner Rockchip Allwinner Mediatek Rockchip Intel Chipset A13 RK3188 A31S MT8382W RK3188 Bay Trail M2810 Single-core Dual-core Quad-Core Dual-core Quad-Core Quad-Core ARM CPU Cortex-A8 Cortex-A7 Cortex-A7 Cortex-A7 Cortex-A7 Cortex-A7 Graphics ARM Mali-400 Vivante GC1000 Vivante GC1000 PowerVR SGX540 Vivante GC1000 Vivante GC1000 Screen Size 7" 7.85" 10.1" 7" 9.7" Retina 10.1" Resolution 800x400 1024x768 1280x800 1024x768 2048x1536 1366x768 Video 1080p 1080p 2160P 1080p 2160P 2160P DRAM / Flash 512MB DDR3 1GB DDR3 / 8GB 1GB / 8GB 1GB DDR3 / 8GB 2GB DDR3 / 16GB 2GB DDR3 / 64GB OS Android 4.1 Android 4.2 Android 4.1 Android 4.2 Android 4.2 Android 4.2 Camera 0.3MP + 0.3MP 2MP + 2MP 0.3MP + 2MP 0.3MP + 5MP 2MP + 5MP 0.3MP 3G built-in NO NO NO YES NO YES Factory price US$38 US$96 US$110 US$115 US$162 US$242 Source: Company data, Credit Suisse In the past year, the low-cost tablets have rapidly improved in functionality in the US$40- China brands could ship 100 200 price range. Demand is led by Chinese makers exporting to emerging markets with mn units in 2013 and 130 low PC penetration, with usage mainly for entertainment (games, movies and music). The mn units in 2014 product line-up in the table above ranges from entry-level 7" tablets under US$40 factory price with a basic single core processor, low resolution but capable of taking basic pictures and running Android 4.1. The popular mid-tier is a Mini-Pad spec similar to the iPad mini with 7.85" IPS display, quad-core processor and about US$100 factory price. At the more advanced levels, Mediatek is now supplying its platform into a range of 3G mobile dual- and quad-core tablets for US$100-$150 that also bundle 4:1 connectivity and the Chinese chipsets supply a range of higher-end 10" tablets with retina 2048x1536 displays at over US$150. With Intel's Bay Trail, we are also witnessing Intel finally more actively engage the local supply chain with its reference design for dual Android + Windows tablets. More suppliers are bringing these 10" tablets to market, although factory price still is a different class at US$200-$300 for a device that could better span multiple OS to offer consumption plus productivity. We believe the diversity and breadth of suppliers into the whitebox market and better quality from these devices at an attractive price range has enabled the space to add 50 mn units in 2012, 100 mn units in 2013 and could grow to 130 mn units in 2014. Factoring in the whitebox, the industry could grow +25% YoY to 319 mn units in 2014.

China Smartphone Sector 17 07 January 2014

Figure 52: Bottom-up tablet market growing at 25% YoY to 319 mn units in 2014 (in millions, unless otherwise stated) 2011 2012 2013 2013 2014 CY2011 CY2012 Mar-13 Jun-13 Sep-13 Dec-13 CY2013 CY2014E Apple 40,497 65,736 19,477 14,617 14,079 21,822 69,995 71,054 Samsung 4,550 14,391 8,800 8,800 10,500 11,900 40,000 65,000 Amazon 5,000 7,981 1,750 2,250 5,000 7,000 16,000 20,000 Asus 1,750 6,000 3,000 2,000 3,500 3,500 12,000 12,000 Lenovo 520 1,752 590 1,500 2,300 3,310 7,700 9,900 Acer 675 1,800 100 1,350 1,450 1,100 4,000 6,000 Microsoft 0 1,800 750 450 900 1,200 3,300 4,000 HPQ 50 0 100 125 150 150 525 650 Motorola 990 1,250 200 100 100 100 500 600 Dell 50 100 25 25 35 50 135 165 RIM 850 1,040 150 100 0 0 250 0 Barnes & Noble 3,080 2,605 250 200 100 0 550 0 HTC 555 1,650 25 25 25 25 100 0 Total branded tablets 58,567 106,105 35,217 31,542 38,139 50,157 155,055 189,369 Others (industry model) 7,111 8,676 3,655 5,996 7,752 13,032 30,435 44,486 Industry forecast 65,678 114,781 33,872 39,038 47,391 65,190 185,491 233,855 Additional Whitebox 5,889 41,324 18,845 14,004 19,748 16,968 69,565 85,514 Whitebox total 13,000 50,000 22,500 20,000 27,500 30,000 100,000 130,000 Grand Total 71,567 156,105 57,717 51,542 65,639 80,157 255,055 319,369 YoY % 118.1% 147.3% 50.7% 53.3% 43.8% 63.4% 25.2% QoQ % 3.6% -10.7% 27.4% 22.1% Source: Company data, Credit Suisse estimates With a long-term view, tablets are pacing the very early stage of the feature phone market in the late 1990s and smartphone market starting from 2005 in their ramp up toward 300- 400 mn units. Mobile communications and rising functionality and display size of the emerging market smartphones into the phablet category could ultimately cap the market around 400 mn units as handsets did when they temporarily matured at those levels during 2000-02.

Figure 53: Whitebox/smaller brands have taken share Figure 54: Tablet market early in its penetration

100% Other Other Other Mn (units) 1800 White label White label 1600 80% White label 1400 1200 Amazon 1000 60% Samsung Google 800 Amazon Google 600 Samsung Amazon 400 40% Samsung 200 0 Apple 20% Apple 2010 2011 2012 2013 2014 2015 2016 2018 2019 2020 2021 2017 Apple Tablets 0% Feature phones (re-based from 1995) 2011 2012 2013E Smartphones (re-based from 2005) Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Wearables including Android sports watches adding another potential driver More and more vendors (2G Pax, GBD) are creatively adopting Mediatek’s dual-core processor and connectivity bundle (MT6572 and MT6577) to develop smart watches. The solutions offer a compact Android smartphone experience in a watch for a broad span of prices ranging from US$30 to US$250 and include 3G calling, Bluetooth connectivity for headsets, email/ browsing, and watch and calendar functions.

China Smartphone Sector 18 07 January 2014

Figure 55: Mediatek now supplying a range of China smart watches at varying prices Company Andalong Andalong Andalong Omate Andalong Model name MQ888 S5 Silver TrueSmart MQ998

Image Technology GSM/Wifi GSM/Wifi GSM/Wifi GSM/Wifi GSM/Wifi Operating System Android 4.0 Android 4.0 Android 4.0 Android 4.2 Android 4.0 Pixels 240 x 240 240 x 240 240 x 240 240 x 240 240 x 240 RAM 512MB 512GB 512MB 512MB 512MB ROM 1GB 4GB 1GB 1GB 1GB Display 1.44" 1.55" 1.54" 1.54" 1.5" Camera 1.3MP 2MP 2MP 5MP 1.3MP Battery 450mAh 500mAh 650mAh Li-ion 600mAH li-ion 450mAh CPU Speed 1GHz 1GHz 1GHz 1.3GHz 1GHz Processor Chip MT6577 MT6577 MT6577 MT6572 MT6577 Price US$30 US$125 US$128 US$200 US$32 Source: Company data, Credit Suisse estimates The wearable space is still in its infancy but we expect to see an emerging range of whitebox and China built products using the Asian supply chain. Baseband, RF and connectivity suppliers including Mediatek, RDA, Spreadtrum and Realtek could see an adjacent market emerge here, joining a broad base of overseas MCU, connectivity and sensor manufacturers. Rockchip also announced in October it will offer solutions for wearables in 2014, helping seeds its wide array of partners with reference designs. Figure 56: The wearables supply chain in Asia Function Technology Reason Problem Solved Global Providers Asia ex Japan chain Clothing, Watches, Samsung, LG, Acer, Connected gear that improves interaction with our Devices that can better capture and enhance our Sony, Samsung, Hardware Glasses, Medical Asus, HTC, Huawei, environment and others life experiences Apple, Google, Nike devices Xiaomi Asian EMS providers have relationships with key Ability to reach high volume manufacturing at low Hon Hai, Pegatron, Manufacturing Low cost EMS Flextronics, Jabil OEMs cost Inventec, Mitac Contract manufacturers investing in specialty IDMs (STM, NXP, TSMC, UMC, SMIC, IC Mfg Foundry / Back-end technology (CIS, high voltage, MEMs, embedded Low cost and low power IC components Renasas, TXN) ASE, SPIL, KYEC memory, 2.5D/3D IC) Limited form factor of mobile devices requires Increased function and operating use time, BYD, Simplo, Battery Battery Composition increasing energy density of battery - size growth Sony, Samsung eliminate battery rigidity, reduce lithium hazard Dynapack not likely Himax Display, Wearable display needs to be portable with high LCOS displays can project an image in front of Displays LCOS, E-Ink, OLED Google Truly, E-Ink, resolution the user at good resolution and low power Samsung, LGD Largan, Lite-On Cameras can provide real time image capture in Wearable image capture, Sports DV a popular OVTI, Aptina, Micron, Cameras CMOS image sensors Tech, Sunny glasses and watches product for Chicony Sony Optical, Chicony In smaller devices with less battery power, FSL, MCHP, TXN, On board compute requires low active, standby Processing Low Power MCU/CPU minimizing the processing power requirement on- NXPI, SLAB, CY, Holtek, Elan and response to wake commands board is critical for product battery life ATML Need low power wireless connection and Mediatek, RDA, Connectivity Bluetooth 4.0/LE sufficient data rate to offload to Wearable-to-smartphone data connection BRCM, CSR Realtek smartphones/cloud Higher data rate applications will benefit from the Wearable-to-WiFi hotspot and smartphone BRCM, CSR, NXPI, Mediatek, RDA, Connectivity WiFi throughput of 11n or 11ac WiFi connectionn TXN Realtek Wearable products will likely include location Wearable-to-WiFi hotspot and smartphone BRCM, CSR, NXPI, Connectivity GPS Mediatek, Mitac based features/functions, requiring GPS connectionn TXN Converting battery power into the correct Increasing the conversion efficiency lowers the MXIM, TXN, SWKS, Power Mgmt DC-DC Conversion voltage/current is not without energy loss - Richtek effective battery consumption ONNN conversion is 80-95% efficient. Wearables will be used to measure activity levels, Motion, Environmental, Wearables will be used for a host of health and ADI, INVN, STM, distance traveled, vital statistics, etc. to be Sensors and Body Monitors fitness functions, requiring sensing/monitoring TXN, SLAB, processed and/or communicated to other Sensors and tracking of changes in measured inputs Freescale, NXPI devices/the cloud Wearables with displays will likely be enabled with Wearables with large enough displays will need a O-Film, Elan, TPK, touch. The ability to have touch function SYNA, BRCM, CY, Interface Touch Display user interface. But smaller low power displays Wintek, Youngfast, J- independent of powering the display could help ATML needed to conserve power Touch, Truly reduce battery life Wearable products may not have physical inputs, Contact-less control of wireless devices will likely Interface Voice directing by voice activation or use of MEMs be voice driven. Isolating voice relative to ADNC, CRUS AAC, Goertek microphone ambient noise will be important Source: Company data, Credit Suisse estimates

China Smartphone Sector 19 07 January 2014

The wearable market opens up a potential large market profiled by our tech team (Pitzer/Garcha): a potential US$43 bn addressable opportunity at 15% penetration of the smartphone subscriber base, at US$100 device ASP, opening up US$1.9 bn in additional foundry manufacturing content and 4% of incremental sales for TSMC by 2015E at 50% manufacturing share. Figure 57: Wearables could add 5% to TSMC's sales by 2015E 2013 2014 2015 Smartphone subscribers 1,690.6 1,690.6 1,690.6 2,263.7 2,263.7 2,263.7 2,837.4 2,837.4 2,837.4 Penetration 3.0% 5.0% 7.0% 7.0% 10.0% 13.0% 12.0% 15.0% 18.0% Units 50.7 84.5 118.3 158.5 226.4 294.3 340.5 425.6 510.7 ASP ($) $50 $100 $200 $50 $100 $200 $50 $100 $200 TAM ($m) $2,536 $8,453 $23,668 $7,923 $22,637 $58,856 $17,025 $42,562 $102,148 COGS (35% GM) $1,648 $5,494 $15,384 $5,150 $14,714 $38,256 $11,066 $27,665 $66,396 Semi Content (20% of COGS) $330 $1,099 $3,077 $1,030 $2,943 $7,651 $2,213 $5,533 $13,279 Foundry (35% of Semi content) $115 $385 $1,077 $360 $1,030 $2,678 $775 $1,937 $4,648 TSMC (50% market share) $58 $192 $538 $180 $515 $1,339 $387 $968 $2,324 TSMC % of sales 0.3% 1.0% 2.7% 0.8% 2.2% 5.8% 1.5% 3.8% 9.0% Connectivity $110 $440 $820 $343 $1,177 $2,040 $738 $2,213 $3,541 CPU $55 $176 $1,026 $172 $471 $2,550 $369 $885 $4,426 Power $55 $117 $308 $172 $314 $765 $369 $590 $1,328 Sensor $55 $147 $513 $172 $392 $1,275 $369 $738 $2,213 GPS $0 $73 $205 $0 $196 $510 $0 $369 $885 Misc $55 $147 $205 $172 $392 $510 $369 $738 $885 Source: Company data, Credit Suisse estimates

China Smartphone Sector 20 07 January 2014 Mediatek leading the Asian chipset suppliers in emerging markets The Asian chipset companies are benefiting while enabling the ramp up of Chinese Mediatek leads with smartphone brands and whitebox vendors. The underlying ARM processor and Android competitive specs, service, OS have created a low-cost smartphone platform to build apps; this has enabled a new support, derivative products wave of higher-quality chipsets from Mediatek and Spreadtrum, and the more recent and faster time-to-market entrant RDA to begin sampling its first platform chipset. Mediatek has regained the leadership position it held in emerging market feature phones through a combination of benefits that scale beyond the raw chipset specifications:

Figure 58: Mediatek has competitive specs but layers on service, support, derivative products and faster time-to-market Quad core LTE

MediaTek Marvell Broadcom MediaTek Marvell NVIDIA MT6589, 28nm, PXA1088, 28nm, BCM23550, 1.2 GHz, MT6290, 28nm, PXA1088 LTE, Tegra 4, 28nm HPL, 1 GHz, 4 A7, 1.0 GHz, 4 A7, 4-A7, TD/HSPA+ 1.4 GHz, 4 A7, Mali 28nm, 1.2 GHz, 4 A15, LTE Cat 4 Mali 400, TD/HSPA+ TD/HSPA+ 400, LTE Cat 3 4 A7, LTE

MediaTek Qualcomm Leadcore Qualcomm Intel Hisilicon MT6588, 28nm HPM MSM8266, 28nm, LC1813, 40nm, MSM8926, 28nm, XMM7160, 28nm, Balong 710, 28nm 1.7 GHz, 4 A7 1.5 GHz, 4 A7, 4-A7, TD 1.2-1.4 GHz, 4 A7, 1.3 GHz, 4 A7, 1.5 GHz, 4 A9, Mali 450, TD/HSPA+ HSPA+ LTE Cat 4 LTE/HSPA+ Cat 3 LTE Cat 4

Broadcom BCM21892, 40nm LTE Cat 4 modem

Single core Dual core

MediaTek Spreadtrum MediaTek Marvell Broadcom MT6575, 40nm SC6820/8820, MT6572, 28nm, PXA986(TD)/988(W), BCM28145, 1.2 GHz 1 GHz, 1 A9, 40nm, 1 GHz, 1 A5, 1-1.5 GHz, 2 A7, 1.2 GHz, 2 A9, 2 A9, HSPA+ HSPA/EDGE TD/EDGE Power VR, TD + W Vivante GC1000

Qualcomm RDA MediaTek Qualcomm Spreadtrum MSM7227A, 45nm, RDA8810, 55nm MT6582, 28nm, MSM8210, 28nm, SC6825/8825, 40nm 1 GHz, 1 A5, 1 GHz, 1 A5, EDGE 1.3 GHz, 2 A7, 1.2 GHz, 2 A7, 1.2 GHz, 2 A5, HSPA/EDGE Power VR, TD + W TD + W TD/EDGE

MediaTek MT6571, 28nm, 1.0 GHz, 2 A7, Power VR, TD + W

Octa core

MediaTek MT6592, 28nm HPM 1.7-2.0 GHz, 8 A7, TD/HSPA+ Source: Company data, Credit Suisse estimates

■ Turnkey support. Mediatek’s turnkey solutions include manufacturing-ready reference design kits and software support, with over 1,000 field applications engineers in China supporting customers in various key locations (Shenzhen, Shanghai and Beijing). The turnkey support Mediatek provides addresses whitebox handset makers’ needs, lowers the entry barrier for suppliers, and vastly shortens

China Smartphone Sector 21 07 January 2014

time-to-market. Despite the aggressive push by overseas vendors led by Qualcomm, Mediatek is still leading in its understanding of the market and relationships with the customers after working closely with them for seven to eight years.

■ High level of integration. Mediatek is enabling its customers to cut down costs faster Mediatek’s model for through integrating external components on chip. The company’s MT6572 integrates turnkey support still leads an internal 32K clock, a SAW-less filter, and single antenna to also reduce external competitor efforts, BOM costs and allows for simplified four-layer PCB. The company has also created a integration, fast refreshes high degree of flexibility for customers to source local low-cost suppliers, support and now aggressive leading multiple mobile DRAM suppliers and scale up pixel count on photos to advertise a edge push steps up its higher megapixel count for the phone. We believe Mediatek has been able to gain competitiveness share with its low-cost MT6572 into the entry-level 3.5-4.0" smartphones previously supplied by Spreadtrum’s single-core SC6820 and also reach new categories with the low-cost and low-powered chipsets, including smart watches noted earlier and sub- US$100 7.85" tablets with 3G calling functions + 4:1 connectivity.

■ Fast product refreshes. Mediatek is quick in providing new software patches and optimised chips to improve customers’ competitiveness. For example, MT6589T is an optimised turbo version of the 6589, enabling its customers to improve clock speed performance and the MT6589M and MT6582 represent two lower-cost chipsets which strip out redundant non-core features, thus lowering prices. At the same time, the company has pushed performance and a new slant on marketing with the first octa- core integrated baseband and application processor, a category enabling it to command 2-3x ASPs due to limited competition in that segment. Mediatek’s leadership extends to the mid-high end of the emerging market smartphone space. Within a quarter of launch of a new chipset, the company has design wins spanning the major top tier vendors in China and most of the whitebox suppliers. Octa-core chipsets ramping into phablets The Chinese brands are now proliferating a wide array of 5-6.5" phablet models for US$180-220 FOB prices with advanced specifications including Android 4.2 support, full HD (1920x1080 resolution), 13 megapixel rear camera + 5 MP front camera and good memory content (2GB DRAM and 16GB NAND). Most of these solutions originally used Mediatek’s MT6589 but the company provided a pin-for-pin compatible option between the new quad- and octa-core MT6592 for fast roll-out of new models on the new chipset.

Figure 59: Mediatek octa-core design wins into Chinese tier ones and whitebox Company TCL Lenovo Huawei Coolpad Carpad GT Mobile Honesty Model name Idol X+ S939 G750 9976C T69 MAX A23 S2092

Image Technology TD / WCDMA TD / WCDMA WCDMA WCDMA TD WCDMA WCDMA Operating System Android 4.2 Android 4.2 Android 4.2 Android 4.2 Android 4.2 Android 4.2 Android 4.2 Pixels 1920 x 1080 1280 x 720 1280 x 720 1920 x 1200 1920 x 1200 1280 x 960 1920 x 1080 RAM 2GB 1GB 2GB 2GB 2GB 2GB 2GB ROM 16GB 8GB 8GB 8GB 16GB 16GB 16GB Display 5.0" 6.0" 5.5" 7.0" 6.95" 6.0" 6.5" Camera 2MP + 13MP 1.6MP + 8MP 5MP + 13MP 5MP + 13MP 2MP + 8MP 2MP + 8MP 5MP + 13MP Battery 2,500mAh 3,000mAh 3,000mAh 4,000mAh 4,200mAh 3,500mAh 3,150mAh CPU Speed 2.0GHz 1.7GHz 1.7GHz 1.7GHz 1.7GHz 1.7GHz 1.7GHz Processor Chip MT6592 MT6592 MT6592 MT6592 MT6592 MT6592 MT6592 Price $330 $350 NA NA $250 $170 $180 Source: Company data, Credit Suisse estimates Octa-core led by Mediatek’s solution is now driving the large full HD phablets in 2014. While dual-core was still the largest volume in 2013, quad-core and octa-core will likely

China Smartphone Sector 22 07 January 2014 expand in the mix in 2014. Since late December, we have seen a significant increase in designs based on octa-core, spanning branded Chinese TCL, Lenovo, Huawei and Coolpad to lesser known whitebox brands (Honesty, GT Mobile, Carpad).

Figure 60: Mediatek’s Octocore enables advanced tasks Figure 61: Octocore could improve power/performance

Source: Company data, Credit Suisse research Source: Company data, Credit Suisse estimates Mediatek market share growing towards 50% Based on Mediatek ramping up from 110 mn units to 220 mn units in 2013, we believe it Mediatek approaching 447 increased share from 44% to 45%, leading Asian suppliers Spreadtrum, RDA and mn or 50% of the Asian Leadcore and overseas vendors Qualcomm, Broadcom and Marvell. With the dual-core smartphone share in 2015 ramp up in 2H13 into the entry tier and octa-core towards year-end, we expect Mediatek's share to approach 50% in 2014-15, growing to 316 mn units in 2014 and 447 mn in 2015.

Figure 62: Smartphone chipsets into Asian smartphones ramping up to 960 mn units (in millions, unless otherwise stated) Smartphone chipsets 2012 2013E 2014E 2015E 2016E 2017E 13-17 CAGR Mediatek 109.8 220.4 315.5 447.0 516.4 564.0 26% Mediatek share (%) 44% 45% 48% 50% 49% 48% Spreadtrum 32.0 141.1 174.6 230.0 268.5 296.8 20% RDA - 0.5 13.0 28.0 45.0 70.0 NM Leadcore 5.0 12.0 18.0 22.0 25.0 30.0 26% Asian suppliers 146.8 374.0 521.0 727.0 855.0 960.7 27% YoY Growth 1009% 155% 39% 40% 18% 12% Share 59% 77% 79% 81% 82% 81% Qualcomm 81.6 90.9 118.2 140.8 159.3 182.5 19% Broadcom 2.5 7.0 10.0 13.0 15.0 18.0 27% Marvell 15.0 13.0 12.0 13.0 15.0 18.0 8% ST-Ericsson 3.5 0.5 - - - - NM Overseas suppliers 102.6 111.4 140.2 166.8 189.3 218.5 18% YoY Growth 37% 9% 26% 19% 13% 15% Share 41% 23% 21% 19% 18% 19% Total 249.4 485.4 661.2 893.8 1,044.2 1,179.3 25% YoY Growth 183% 95% 36% 35% 17% 13% Source: Company data, Credit Suisse estimates LTE to emerge in 2014 at the China brands, with Qualcomm the most competitive at launch We see LTE as the next big driver, with handsets doubling to 537 mn units in 2014 and LTE to start from 2014 in 875 mn by 2017. We see penetration rising in North America (57% of handsets) and Asia- emerging markets and Pacific (16% of handsets), with rollouts also commencing across Western Europe and China emerging markets, such as Brazil and China. The percentage of the population covered by LTE is projected by Ericsson to rise from 10% in 2013 to 60% in 2019.

China Smartphone Sector 23 07 January 2014

Figure 63: LTE shipments to triple to 876 mn by 2017 Figure 64: LTE to reach 60% of global subs by 2018 100% 1,000 45% >90% 900 876 90% 85% >85% >85% 775 40% 800 80% 667 35% 700 70% 537 30% ~60% 600 >55% 25% 60% 500 50% 20% 400 35%

LTE Volumes LTE 277 40% 15% 300 30% 200 10% 105 20%

100 5% % of total handsets shipped ~10% 9 10% 2% 0 0% 2011 2012 2013E 2014E 2015E 2016E 2017E 0% Asia Pacific North America Western Europe GSM/EDGE WCDMA/HSPA LTE Africa CEE Latin America 2010 2012 2019

Source: Company data, Credit Suisse estimates Source: Ericsson, Credit Suisse estimates China finally moving ahead on LTE—although more a late 2014/15 ramp up It is becoming increasingly clear that China Mobile has ambitious plans with respect to LTE pick-up in emerging transitioning towards the TD-LTE (4G) wireless standard. After obtaining TD-LTE licenses, market and China only more China Mobile is now launching limited network services and moving ahead with roll-out of meaningful in late 2014 and its initial 200,000 base stations, with plans to get to 700,000 base stations by 2017. Our 2015 CS Asian telecoms analyst Colin McCallum in a separate report today (7 January) concludes the network works and offers a much better service with much faster download speeds, although caveats that completion and maturation of TD-LTE coverage even in Tier 1 cities and development of the handset ecosystem will take time, pushing LTE monetisation and ramp up to late 2014 and 2015. In the report, McCallum's team tests China Mobile’s 4G (TD-LTE) network in Shenzhen and shows that it does “work” for mobile Internet applications, including multimedia, in sharp contrast to its 3G (TD-SCDMA) network. As he noted in the report, speed tests for their Shenzhen trial suggest 24.6 Mbps on average over TD-LTE versus 1.0 Mbps over TD-SCDMA and only three seconds to upload a photo and less than three to launch a Youku video. Clearly subscribers are far more likely to access multimedia content with these sorts of response times than on TD-SCDMA 3G (which took 60 seconds and over 10 seconds, respectively).

Figure 65: China Mobile’s 4G network undoubtedly works Figure 66: but the coverage is very patchy 30.0 24.6 25.0

20.0

15.0

10.0 6.1 5.0 1.0 0.1 - Download (Mbps) Upload (Mbps)

China Mobile 3G Ching Mobile 4G

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates While TD-LTE speeds also exceeded Unicom’s ‘3.75G’ HSPA+ network, the time differential in performing regular multimedia tasks (photos and videos) was not overly material. We therefore view China Mobile’s 4G TD-LTE network as ‘catching up’ with Unicom’s service rather than accelerating past it, although we believe that China Telecom

China Smartphone Sector 24 07 January 2014 has more to fear (and therefore will accelerate its own hybrid TD-LTE FDD-LTE rollout). Even this ‘catch-up’ will take time, however, as: (1) China Mobile’s network coverage is still extremely patchy and (2) the handset eco-system is at embryonic stages. We conclude that there should be a positive impact from TD-LTE on China Mobile’s data monetisation, revenue growth and market share loss but that it should only be evident in 4Q14 and FY15. The other major bottleneck in the TD-LTE ecosystem is the handsets, given the China Mobile's network aforementioned lack of global scale. While China Mobile has stated that over 30 TD-LTE coverage still patchy and the handset models will be available within 2013, and 100 models within 2014, at present only handset eco-system is still five models are available for sale in Shenzhen, as shown below, and the price points are at its early stage relatively high. Importantly, these smartphones are all relatively high-end devices. A very wide range of W-CDMA/HSPA devices is now available (i.e., hundreds of models) with price points ranging from Rmb600 to Rmb8,000.

Figure 67: China Mobile 4G's handsets—Available at Guangdong Mobile as of Jan 2, 2014 Samsung N7108D Huawei G716 Sony M35t Coolpad 8736 HTC 8088

Retail price (Rmb) 4,588 2,888 2,999 2,999 5,299 Screen 5.5" 5" 4.6" 5" 5.9" OS Android 4.1 Android 4.2 Android 4.1 Android 4.2 Android 4.3 Processor Quacomm Quacomm Quacomm Marvell Quacomm Snapdragon Snapdragon Snapdragon Snapdragon CPU speed 1946 MHz 1228 MHz 1741 MHz 1536MHz 1741 MHz Internal RAM 2GB RAM 1GB RAM 1GB RAM 1GB RAM 2GB RAM Battery 3199mAh 2150mAh 2370mAh 3000mAh 3300mAh Camera 8MP 8MP 8MP 8MP 4MP Storage 16GB ROM 4GB ROM 16GB ROM 4GB ROM 32GB ROM Source: China Mobile, zol.com.cn Our telecoms analyst's view on pick-up in late 2014 and 2015 is consistent with our view on emerging markets and China, which will still be driven by 3G for at least another year and even extending into 2015 due to wider breadth of smartphones at lower price points and still spotty coverage on 3G. Qualcomm the LTE leader, but still time for other players to catch up emerging markets Qualcomm has been the strongest of the global chipset suppliers in emerging markets, QCOM leads in LTE but with shipments at Chinese brands reaching 100 mn units based on its comments on sales Mediatek, BRCM, Intel, surpassing US$1 bn run rates, only trailing Mediatek and Spreadtrum in unit shipments. MRVL are also catching up The company has laid the ground work with its Qualcomm reference design on 3G to establish a footprint with customers as they launch LTE smartphones. The company counts over 30 Snapdragon 400 LTE designs in China and over 25 Snapdragon 800 high- end designs from a broad base of customers including Lenovo, ZTE, Huawei, BBK, Yulong, Hisense, Tianyu, Gionee, Xiaomi, Oppo and Coolpad. Qualcomm has had over 1,000-plus LTE devices accepted or in design at carriers, with volumes now launching on its third-generation modem while most competitors are getting to market with first-generation solutions. The company will also push a fourth-generation modem in late 2014 (MDM9x35) which will double speeds with LTE Advanced to 300 Mbps and migrate the technology to TSMC's 20nm.

China Smartphone Sector 25 07 January 2014

Figure 68: QCOM SoC integration pulls in connectivity Figure 69: Qualcomm LTE features continue to advance

Source: Qualcomm Source: Qualcomm Notably, Qualcomm is the chipset designed into four of the five LTE smartphones (Samsung, Huawei, Sony and Coolpad) available in Shenzhen. Qualcomm also believes it has competitive advantage with RF360, a PA solution that claims better RF performance, power efficiency, multi-mode integration and better packaging and already designed into 50 designs across 15 OEMs. We expect Qualcomm to retain advantage through the coming year as it still has far more of the connectivity and 4G modem building blocks already integrated and is also now on its fourth-generation LTE qualified across all the carriers with launched service, an advantage over other chipsets.

Figure 70: LTE roadmap for key products by vendor—Qualcomm has the broadest LTE portfolio 2011 2012 2013 2014

8974, 28nm, 2GHz, Krait Quad, MDM9x35, LTE, 8960, 28nm, 1.5-1.7GHz, Adreno 320, LTE Cat 4 CAT6, CAT4, CAT3 2 Krait, Adreno 225/320, LTE 3 8930, 28nm, 1.2 GHz, 2 Krait, 8962, 28nm LP, 1.5GHz, Krait, MDM9x00, Adreno 305, LTE 3,TD, HSA+ Adreno 315, LTE CAT 4 Qualcomm Multimode 8230, 28nm, 1.2GHz, 2 Krait, 8926, 28nm LP, 1.2-1.4GHz, LTE, LTE Cat3 MDM9x15, Multimode Adreno 305, LTE 3 Adreno 305, LTE CAT 4 LTE, LTE Cat3, TDSCDMA MDM9x25, Multimode LTE, MDM9625, Multimode LTE, LTE Cat4, TDSCDMA, carrier aggr LTE Cat4, TDSCDMA, carrier aggr

Renesas Sakura, LTE SP2531/2531S, SP2531S, SP2541 MP6530 Quad core (now BRCM) single mode multimode, LTE Cat 3 multimode, LTE voice multimode, LTE Cat 4 LTE Cat 4, FDD/TDD

BCSM 500, LTE BCM21892 2G/3G/ BCM21892, single mode, BB/RF Broadcom TDS/LTE Cat 4+CA 3G/4G/LTE single chip

I500, 2G/3G/LTE-FDTD LTE, ICERA 410, 2G/3G/ NVIDIA Cat4 SDR Modem 4G/LTE, Cat 14

XMM7160, multimode LTE, XMM7260, 2G/3G/LTE/TDS/ Intel BB/PMIC single chip LTE-FDTD, LTE Cat 4

MT6290, MT629x, MT7618, multimode MT7208, 2G/3GTDS/ 2G/3GTDS/ LTE SoC, Mediatek LTE, Cat 3. LTE-FDTD LTE Cat 4. LTE-FDTD 4/8 LTE Cat 4. core AP

SC 9610 – TD-LTE SC9610, TDD-LTE, SC9620, FD/TDD-LTE/W/ Spreadtrum TDS/2G, 40nm TDS/2G, 40nm SharkFG: AP + SC9620 LTE modem, 40nm

Source: TSR

China Smartphone Sector 26 07 January 2014

Qualcomm is leading the early China solutions with its 8,926 28nm solution which offers LTE Category 4, support for HSPA+ and TD-SCDMA and good performance including HD video at 30 FPS and support for LP DDR 3. With the market emerging gradually in 2014 and 4G being more a 2015 event, other solutions have time to catch-up. Mediatek will be showing its two-chip MT6290 paired with quad- and octa-core applications processors at CES and plans its first integrated LTE SoC in 2H14. We note several vendors have already placed Mediatek's LTE-enabled smartphones into their 1H14 product line-up if the chipset samples well. Spreadtrum will also have its Shark AP + quad core and plans an integrated chipset by 2H14 called Whale. The products from Qualcomm, Mediatek and Spreadtrum all are being targeted to bring emerging market LTE retail prices below US$200 to drive more rapid adoption. The other global suppliers Broadcom, Intel, NVIDIA and Marvell also have LTE solutions that have been in tests over the past year:

■ Broadcom accelerates its slow LTE start with the Renasas acquisition. Broadcom enhanced its position in LTE by acquiring Renasas LTE team, a modem team that originated from Nokia and has been working on modem technology since the 1990s and was part of the team that developed the modem used in TI's successful products for years and ST-Ericsson's U8500 core. Broadcom noted at its December analyst day that it will have 28nm dual-core LTE SoC sales in early 1Q14 (M320 at 1.2 GHz) and follow-on M320+ at 1.5GHz, will sample its 28nm quad-core LTE SoC (M340) in 1H14 and sample its LTE-Advanced thin modem by mid-2014, targeting "meaningful revenue". Broadcom also cited qualifications already passed at AT&T, NTT, Softbank, Vodafone, and Orange. The company has fifth-generation turnkey solutions supporting Android KitKat, LTE and wireless connectivity and has added pin-for-pin compatibility between its dual- and quad-core modems. The company claims its LTE offers 20-30% lower power, 25-30% lower die size, and capability to support phones from US$100 to US$300. Its new series of SoC also claims 3x image processing, 5-10x graphics improvement, ultra HD video up to 120 frames per second and support for H.265 video compression and can bundle with its leading connectivity family. The company also pledged it would move beyond quad-core in the coming year.

Figure 71: Broadcom rolling out dual- and quad-core LTE Figure 72: Broadcom now has available its fifth- solutions through 2014 generation turnkey platform for China supporting LTE

Source: Intel Source: Intel ■ Intel now pushing integration—although low-end LTE chipset not until 2015. Intel at its November analyst day showed more concrete measures of accelerating its mobile push around integration of baseband, application processor and connectivity, working to catch-up to Qualcomm and Mediatek with well-developed roadmaps of integrated solutions. Most of its chips will be for the performance and mainstream markets, with a series of chips in 2014 (Merrifield, Cherry Trail) and Broxton as its first performance modem + application processor in 2015 on 14nm paired with the Atom Goldmont chipset. For emerging markets, Intel plans to introduce its first mass-market LTE application processor and baseband combination, based on its SoFIA architecture running at TSMC in 2015 and brought into Intel's fabs late in 2015. Intel’s

China Smartphone Sector 27 07 January 2014

chipset will be about two years behind Qualcomm’s integrated MSM8926 which was launched in late 2013 and a year behind Mediatek’s planned LTE SoC launch in 2H14.

Figure 73: Intel's 2014 roadmap still only targets a 3G Figure 74: Intel 2015 roadmap—4G LTE and low-end integrated solution around its SoFIA chipset integrated solution at TSMC

Source: Intel Source: Intel ■ Marvell—early LTE qualification on China Mobile's network. Marvell has had a long presence with its baseband business in China originally securing numerous O- Phone design wins with China Mobile. The company has certified its PXA1088LTE Category 4 LTE modem family with China Mobile and secured design wins in Coolpad's 8736 smartphone and in China Mobile's own branded wireless hotspot. Marvell's LTE chipset features advanced specifications including 1.5 GHz quad-core CPU, 1080p HD video, 5 mode support (TDD-LTE, FDD-LTE, HSPA+, TD-SCDMA and GSM/EDGE) and simplified RF design. The chipset also offers support for Circuit Switched Fallback (CSFB) for voice, Voice over LTE and connectivity with its 802.11ac or 802.11n, Bluetooth 4.0 and FM on single chip.

■ NVIDIA—limited push yet in emerging market smartphones. NVIDIA announced NVIDIA not focusing its its first integrated LTE Tegra processor (Tegra 4i) early in the year featuring its quad Phoenix smartphone core + low power core, 60 core GPU and Phoenix reference design blueprint to get reference design on entry customers to market quickly. The company has not yet secured many emerging level brands market reference 3G designs with its emphasis on a premium graphics experience but will continue to roll out new platforms pushing higher graphics and multimedia performance. NVIDIA is also promoting a tablet platform called Tegra Note which pledges lower cost for emerging market tablets. The platform still features advanced specifications (Tegra 4 processor up to 1.8GHz quad A15, 72 core GPU, 1080p video decode, 7" HD display, 5 MP camera, and 4:1 connectivity. The company has not yet introduced this platform for smartphones or to support 3G (Wi-Fi only now) but ultimately could evolve this for an LTE tablet/smartphone turnkey design for emerging markets.

Figure 75: NVIDIA Phoenix reference design platform Figure 76: NVIDIA Tegra 4i integrated chipset

Source: NVIDIA Source: NVIDIA

China Smartphone Sector 28 07 January 2014

64-bit to extend to emerging market phones by 2H14 We are now seeing vendors more aggressively work on 64-bit computing solutions following Apple's iPhone 5S with 64-bit processor. While 64-bit processing is ahead of software development and capability to support the wider data path on mobile devices, the feature will serve as an additional marketing feature and the new ARM 64-bit v.8 architecture (A53/A57) also has other architectural enhancements for better performance and lower power (ARM noting 130mW power consumption on 28nm HPM). Figure 77: ARM 64-bit processors benchmarking at higher performance than 32-bit All cores running at 1.2GHz DMIPS CoreMark SPECint2000 ARM Cortex A5 1,920 - 350 ARM Cortex A7 2,280 3,840 420 ARM Cortex A9 r4p1 - - 468 ARM Cortex A53 (64-bit) 2,760 4,440 600 Source: Anandtech Qualcomm announced it would offer its Snapdragon 410 based on the 64-bit ARM Quad Cortex A53 integrating LTE modem and running at 1.2-1.4GHz built on 28nm LP for shipment in 2H14. Mediatek is also planning a 64-bit solution with the smaller A53 core in 2H14 and then big.LITTLE variation with that A53+A57 core on 16nm FinFet in 2015. We expect the landscape to make next migration towards 64-bit by 2H14, providing a catalyst for some replacement demand as new products launch with the added capability. Emerging markets led by 3G for another year While the attention will be high on suppliers' ability to bring LTE solutions to market, most We project LTE at only 5% of the smartphones will still largely be on EDGE and 3G through 2014, with only modest of China brands shipments 40-50 mn units from LTE in China in 2014 and still spotty coverage in other emerging in 2014 markets. In 2013, chipset demand into the China brands was split across TD-SCDMA (165 mn units), WCDMA (163 mn), EDGE (117 mn) and CDMA 2000 (52 mn), with only 2 mn from LTE. The EDGE market served a good niche of entry level smartphones particularly in some emerging markets but slowed in China as more advanced dual- and quad-core smartphones for China Unicom came out and China Mobile pushed a wider range of TD- SCDMA smartphones.

Figure 78: 2013 units split across TD, WCDMA and EDGE Figure 79: 2014 growth led by WCDMA, with LTE starting 2013 technology EDGE WCDMA TD-SCDMA CDMA 2000 LTE 2014 technology EDGE WCDMA TD-SCDMA CDMA 2000 LTE Mediatek 55.1 110.2 55.1 - - Mediatek 63.1 163.6 83.8 - 5.0 Spreadtrum 66.3 5.3 69.6 - - Spreadtrum 55.1 40.5 76.8 - 2.1 RDA 0.5 - - - - RDA 10.0 3.0 - - - Leadcore - 0.4 11.6 - - Leadcore - 0.5 17.5 - - Asian suppliers 121.9 115.8 136.3 0.0 0.0 Asian suppliers 128.2 207.6 178.0 0.0 7.1 % of shipments 33% 31% 36% 0% 0% % of shipments 25% 40% 34% 0% 1% Share 100% 74% 90% 0% 0% Share 100% 80% 92% 0% 22% Qualcomm - 31.9 5.0 52.0 2.0 Qualcomm - 38.2 10.0 50.0 20.0 Broadcom - 7.0 - - - Broadcom - 10.0 - - - Marvell - 2.6 10.4 - - Marvell - 2.4 4.8 - 4.8 ST-Ericsson - 0.2 0.4 - - ST-Ericsson - - - - - Overseas suppliers 0.0 41.6 15.8 52.0 2.0 Overseas suppliers 0.0 50.6 14.8 50.0 24.8 % of shipments 0% 37% 14% 47% 2% % of shipments 0% 36% 11% 36% 18% Share 0% 26% 10% 100% 100% Share 0% 20% 8% 100% 78% Total 121.9 157.5 152.0 52.0 2.0 Total 128.2 258.2 192.8 50.0 31.9 % of shipments 25% 32% 31% 11% 0% % of shipments 19% 39% 29% 8% 5% Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates For 2014, we project EDGE smartphones only growing modestly from 117 mn to 128 mn, still largely supplied by Mediatek and Spreadtrum, with RDA potentially entering for some shipments. We project WCDMA close to doubling to 258 mn units with the lift in export markets while TD-SCDMA unit growth slows from about 150 mn in 2013 to about 180 mn in 2014 as LTE also may top 30 mn at China brands. Smartphones shipping with LTE inside including phones from Tier 1 vendors could ultimately reach 100 mn as China

China Smartphone Sector 29 07 January 2014

Mobile's chairman recently pronounced, but a number may not have service turned on initially due to still very low coverage. Global players also work to improve 3G offerings The global players including Qualcomm, Broadcom, Marvell and Intel continue to target the emerging Asian brands to capture the large fast-growing unit opportunity and also break into a customer base it can migrate to more advanced 4G solutions. Focus on this space is on offering competitive chip pricing and overall lower BOM cost through integration and supply chain sourcing, time to market, reference design support, rapid product introductions pushing both more competitive cost and new features:

Figure 80: Integrated baseband and application processor competitive landscape 2011 2012 2013 2014

MSM8930, Krait dual CPU Multimode MSM8960/8260A Krait dual MSM8962, Krait mode LTE Cat 3 Adreno 305 MSM8x60, Scorpion dual 1.5GHz Multimode/LTE quad LTE Cat 4 HSPA+ Adreno 220 modem Adreno 225 MSM 8974 Krait quad Mulitmode LTE Snapdragon 410 , MSM7230/8255 Scorpion MSM8225 – CA5 dual Cat4+CA Adreno 330 3G/LTE, Adreno 306 Qualcomm HSPA Adreno 220 modem Adreno203 MSM8225Q, C-A5 quad 8926, 28nm, 1.2-1.4GHz, MSM7225/27A C-A5 MSM8227 Krait dual HSPA modem Adreno Adreno 305. LTE Cat 4 800MHz HSPA modem HSPA+/TDS Adreno 200 Adreno305 28mn MSM8226 C-A7 dual 8x10/x12, 28nm, 1.2GHz 2/4 A7, HSPA/TDS Adreno305 HSPA+/TD

Tegra T30 C-A9 Quad Tegra 4i C-A9r quad GeForce NVIDIA GeForce GPU GPU 2G/3G/LTE Cat 4

MT6589 C-A7 quad MT6592 C-A7 Octa-core MT6575/6515 C-A9 1GHz HSPA+modem SGX544 HSPA+/TDHSPA HSPA/TD-HSPA SGX535 MT6582 C-A7 quad HSPA+/ MT6573, ARM11 MT6571 – Dual core Mediatek TDHSPA 650MHz HSPA A7 HSPA+ MT6577 C-A9 dual HSPA + modem SGX535 MT6572 – Dual Core HSPA+

Merrifield, LTE Advanced, Moorefield, Cherry Tail – Intel Atom Airmont, 14nm SoFIA – 3G, HSPA+, Atom Airmont

Source: Company data, Credit Suisse estimates

■ Qualcomm still the largest global supplier after Mediatek into China. Qualcomm Qualcomm launching its has been most aggressive with its Qualcomm Reference Design (QRD) programme, 8x10/8x12 chipsets to making steady improvements with an aggressive roadmap of new chipsets. Key focus compete with a lower cost products for the 3G market will be a new launch of 28nm dual-core (8x10) and quad- dual/quad core in 1H14 core (8x12) Cortex A7 TD-SCDMA + HSPA chipsets in 1Q14 to go along with its more advanced 8226 quad core chipset launched in late 3Q13. Qualcomm has well established its QRD program to fuel a number of designs for China and emerging markets across the top 20 Chinese handset brands and smaller players to reach over US$1 bn sales from this programme in FY13. We estimate Qualcomm will grow units from 90 mn to 120 mn for this segment in 2014.

■ Marvell looking to advance its quad core platform. Marvell has centered its 3G platforms around three variants of smartphones: dual-core TD-SCDMA, dual-core WCDMA, quad-core TD-SCDMA/WCDMA. The PXA986/988 is a single platform with software and pin compatibility for dual-core WCDMA/TD-SCDMA (RF833/838 for WCDMA/TD-SCDMA, respectively). Marvell also launched its PXA1088 quad-core

China Smartphone Sector 30 07 January 2014

unified TD-SCDMA+WCDMA solution at mid-year and now has the LTE variation discussed earlier. With a new RF (Sparrow 2), Marvell offers a “world phone” that works in all both TD-SCDMA and WCDMA simultaneously.

Figure 81: Marvell’s chipset platforms for multi-core TD-SCDMA + WCDMA TD-SCDMA TD-SCDMA

Marvell Marvell Marvell Marvell PXA 988 RF838 PXA 1088 RF838 World phone Dual-core Cortex-A9 Quad-core Cortex-A7

Marvell Sparrow PXA 1088 2 WCDMA WCDMA

Quad-core Cortex-A7 Marvell Marvell Marvell Marvell PXA 986 RF833 PXA 1088 RF833

Single platform development : Dual-core Cortex-A9 Quad-core Cortex-A7 Software / Pin compatible Source: Company data

■ Broadcom solutions now span single through quad core. Broadcom (BRCM) continues to target the China market with turnkey design support for single-core, dual- core and quad-core solutions and integrated cellular baseband, PMU and RFIC with its market leading wireless connectivity (Wi-Fi/GPS/Bluetooth/FM/NFC). Broadcom indicated it has grown its handset designs in the past year from 44 different handsets to over 100 from diverse vendors such as K-Touch, G-Five, Karbonn and Micromax. Volumes to date have been modest though in China and we estimate are still running about 10 mn/year.

Figure 82: Broadcom highlighting a growing pool of Chinese design wins

Source: Broadcom

Figure 83: Broadcom’s 3G chipset family now spans single- through quad-core Chipset BCM21654G BCM21664T BCM28145/55 BCM23550 Cores Single-core Dual-core Double dual-core Quad Core CPU ARM Cortex A9 ARM Cortex A9 ARM Cortex A9 Cortex A7 CPU speed 1.0 GHz 1.2 GHz 1.2 GHz 1.2 GHz Modem HSPA HSPA+ HSPA+ HSPA+ VPU VideoCore 4 VideoCore VideoCore 4 VideoCore 4 ISP 8MP 12MP 20MP 12MP Video 720p 1080p 720p/1080p 1080p Source: Company data

■ Intel targets SoFIA for entry-level smartphones. Intel will target SoFIA as its first integrated baseband and application processor on 3G for emerging markets launching in late 2014. The company is swapping out Infineon’s ARM core for an x86 core and will position this against Mediatek and Qualcomm in mass market smartphones. The company left the design at TSMC to pull in the schedule, as qualifying internal fabs would have delayed the project. The company will add its LTE modem in 2015 to SoFIA and pull it into Intel fabs late in the year. We believe Intel has engaged with Thundersoft, a platform developer in China to bring new reference designs to market

China Smartphone Sector 31 07 January 2014

for smartphones as it has already done with BayTrail tablets. Intel is putting much more resources into understanding and engaging the local ecosystem and could begin securing designs with SoFIA though is still playing catch-up to the incumbents Mediatek and Qualcomm.

■ Spreadtrum also looking to catch up to Mediatek. Spreadtrum had strong traction through 2012 and 1H13 with its single-core chipset for entry-level EDGE and TD- SCDMA smartphones but cooled after due to excess inventory and an expanding market for dual- and quad-core solutions. The company's roadmap is catching up with dual-core solution launched at mid-year and quad-core SC8735S supporting TD- SCDMA and WCDMA shipping from late 4Q13. The company is in the process of being privatised by state-controlled Tsinghua Unigroup, which should keep it engaged in receiving China government support through R&D and wafer cost subsidies and potential help in supplying the local China LTE market. We believe the company still needs to work more time to market with new chipsets, support, and software development to broaden out its customer base relative to Mediatek although has secured a good supplier relationship with Samsung along with its Chinese branded customers.

■ RDA entering with a low-cost solution, may combine with Spreadtrum long-term. RDA targeting to move up RDA struggled through 2H13 on export slowdown in feature phones and some share from EDGE into 3G/4G with loss as competitors bundled their own connectivity and RF solutions. The company is new solutions in 2014 also being privatised by Tsinghua Unigroup and just starting initial shipments of its EDGE single core smartphone platform. The company has aggressive plans to roll out dual- and quad-core solutions for 3G/4G over the next 12-18 months and now has time and potentially more patience operating as a privatized company. Post the privatisation, we expect some more cooperation between Spreadtrum and RDA, with an immediate synergy combining RDA's low cost RF and connectivity with Spreadtrum's smartphone processor. In the long term, we expect the product roadmap and management to align with Spreadtrum's and ultimately form one more formidable competitor in China.

Figure 84: RDA targeting 3G/4G solutions using dual/quad core processors in 2014

Source: Company data, Credit Suisse estimates Greater Chinese IC design leading tablet momentum The fabless in China and Taiwan are leading in the low-cost tablets due to their close ties Asian fabless powering to the Shenzhen manufacturing and design base. ARM has lowered the entry barrier with most of the components in its dual and quad core Cortex A-series processors, with domestic Chinese fabless low cost tablets Allwinner, Rockchip, Actions, and AMLogic all out with quad core solutions. For higher-end tablets, Mediatek is supplying its quad core and big.LITTLE products bundled with 3G and Wifi+GPS+Bluetooth+FM. For other components, CMOS sensors are led by Galaxycore,

China Smartphone Sector 32 07 January 2014 touch controller by Goodix, FocalTech, Elan, and Pixcir, connectivity by Realtek and RDA, driver ICs by Novatek, Himax, Orise, and Silicon Works, audio codec by Richtek and crystal by TXC. Figure 85: White-box tablet semiconductor supply chain map

Note: Trademarked icons used. Source: Credit Suisse research Chinese tablet suppliers adapting their solutions for performance, cost and 4G connectivity Allwinner, Rockchip, Am Logic and Actions have adjusted their offerings to stay competitive on price/performance due to more competition from Mediatek, Intel and Samsung and also from branded OEMs (Amazon, Acer, Asus, Lenovo, HP) putting pressure on local brands. Notably, Rockchip is focusing on integrating its quad-core with LTE module from Sequans and Altair for a 4G add on card for about US$40, upgrading from 3G add-on modules currently from Huawei/Hi-Silicon. AM Logic is focused on a higher end solution with quad core CPU + 8 core graphics manufactured on TSMC’s 28nm HPM process. Allwinner, Rockchip and Actions are also all introducing lower-cost dual-core solutions, with Allwinner introducing an A23 (lower cost than A20), Rockchip RK3026 (lower cost than RK3066/RK3188) and Actions and ATM 7021 (lower cost than ATM 7023).

Figure 86: China whitebox quad-core chipsets Figure 87: China whitebox dual-core chipsets Allwinner Allwinner Rockchip Rockchip Actions Allwinner Allwinner Rockchip Actions A31 A31s RK3188 RK3066 ATM7039 A23 A20 RK3026 ATM7021 Technology 40nm 40nm 28HKMG 40nm NA Technology 40nm 40nm 40nm NA Quad-core Quad-core Dual-core CPU Quad-core A9 Quad-core A9 Quad-core A9 CPU Dual-core Dual-core A9 Dual-core A9 Cortex A7 Cortex A7 Cortex A7 Frequency 1.3GHz 1.2GHz 1.6GHz 1.6GHz 1.6GHz Frequency 1.5GHz 1.2GHz 1.0GHz 1.3GHz GPU SGX544MP2 SGX544MP2 Mali-400 MP4 Mali-400 MP4 PowerVR GPU Mali400MP2 Mali400MP2 Mali-400 MP2 PowerVR Video Playback 4Kx2K 2160p 1080p NA 4Kx2K Video Playback 1080p 2160p NA 1080p H.264 HP H.264 HP H.264 HP H.264 HP HVEC/H.265 H.264 HP Video capture 1080p@30fps NA Video capture 1080p@30fps NA HVEC/H.265 1080p@60fps 1080p@60fps video 1080p@60fps 720p@60fps 720p@60fps Tablet Tablet Applications Phablet Tablet Tablet Tablet Applications Tablet Tablet Entry-level tablet Smart TV Smart TV Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research Mediatek differentiating with 3G connectivity Mediatek has created an extension of its popular MT6589 quad-core for smartphone chipset with its MT8125/MT8389/MT8382 for tablets. The tablet chipset offers 1.5 GHz speed, 1080p video playback, up to 13MP support and DTV video technology and also is

China Smartphone Sector 33 07 January 2014 bundled with 3G HSPA+ modem and 4-in-1 connectivity (Wi-Fi, Bluetooth 4.0, GPS, FM) for a voice and always connected data tablet. The product has secured designs with Asus for its Memo Pad HD7, Acer Iconia family, Lenovo A-series and recently introduced Lenovo YogaPad 8" and 10" models. The company also introduced its big.LITTLE chipset combining dual ARM Cortex A15 and Mediatek has ramped up a dual Cortex A7 with Imagination PowerVR Series 6 graphics optimised by Mediatek’s number of China branded internal GPU team to allow branded tablet customers to be more competitive with multi- tablets through 2013 with core GPUs. We project Mediatek has grown share from less than 5% in 2012 to 20% ability to bundle 3G and share in 2013 and model doubling to 40 mn units and 25-30% market share in 2014, with connectivity potential for further upside as it rolls out lower cost dual/quad core chipsets and higher end solutions using its octa-core and LTE connectivity.

Figure 88: Mediatek branded tablets launching Company Asus Acer Acer Lenovo Lenovo Lenovo Lenovo (NEW) MeMo Pad Iconia Tab Model name Iconia B1 A71 IdeaTab A1000 IdeaTab A3000 IdeaTab S6000 Yoga Tablet HD7 A1-810

Processor MT8125 MT8125 MT8317 MT8317 MT8125 MT8125 MT8125 Retail price US$129 US$200 US$150 US$160 US$229 US$255 US$249 / $299 Display size 7.0" 7.9" 7.0" 7.0" 7.0" 10.1" 8.0" / 10.0" Display resolution 1280 x 800 768 x 1024 1024 x 600 1024 x 600 1024 x 600 1280 x 800 1280 x 800 OS Android 4.2 Android 4.2 Android 4.1 Android 4.1 Android 4.2 Android 4.1 Android 4.2.2 Camera 5MP + 1.2MP 5MP +0.2MP 0.3MP NA + 0.3MP 5MP + 0.3MP 5MP + 0.3MP 5MP + 1.6MP CPU speed 1.2GHz 1.2GHz 1.2GHz 1.2GHz 1.2GHz 1.2GHz 1.2GHz Battery 4,720mAh 3,240mAh 2,710mAh 8hrs 8hrs 9hrs 16-18hrs Source: Company data, Credit Suisse estimates Most leveraged sales contributions to the ramp up in low-cost tablets are from other component suppliers including 10-15% of sales for SMIC and WPG, 5-10% for Realtek and Mediatek and 5% for TXC, Chipbond, Novatek, and Himax.

Figure 89: Semiconductor suppliers benefiting from low-cost tablet adoption Segments Listed companies Private companies Foundries TSMC, SMIC, UMC Back-end ASE, SPIL Apps processors Mediatek, Ingenic, Actions Allwinner, Rockchip, Nufront, AMLogic CMOS image sensor Omnivision GalaxyCore Touch screen controllers Elan, Goodix (Mediatek subsidiary) FocalTech, Pixcir Wireless Realtek, RDA Huawei/Hisilicon Driver ICs Novatek, Himax, Orise Audio Realtek Silicon IP ARM, Imaginations technologies Vivante Source: Company data, Credit Suisse estimates Intel engaging local tablet suppliers more closely Intel is putting more energy on penetrating the low-cost tablet market and now has reference models from design houses such as Emdoor and smaller branded companies including Ramos and Vido. The company is offering a thin and light reference design based on Clover Trail now with Bay Trail rolling out in the next three months. Factory price for 10" with keyboard ranges from US$250 to US$300 for Android and US$300-350 for Android + Wintel. 7.85" tablets are from Intel are now available at US$150 factory price, the high end of the US$50-135 range for tablets, based on Mediatek or the Chinese chipset suppliers.

China Smartphone Sector 34 07 January 2014

Figure 90: Intel Atom Z2580 design wins Company Ramos Ramos Ramos Ramos Breaconton Lenovo ZTE Model name i8 i9 i10 i12 Breaconton K900 Geek

Image Technology Wifi Wifi WCDMA + Wifi WCDMA + Wifi WCDMA + TD WCDMA WCDMA Operating System Android 4.2.2 Android 4.2.2 Android 4.2.2 Android 4.2.2 Windows 8 Android 4.2 Android 4.2 Pixels 1280 x 800 1920 x 1200 1920 x 1200 1920 x 1080 1440 x 990 1920 x 1080 1280 x 720 RAM 1GB 2GB 2GB 2GB 2GB 2GB 2GB ROM 16GB 16GB 16GB 16GB 32GB 16GB 8GB Display 8.0" 8.9" 10.1" 11.6" 11.6" 5.5" 5.0" Camera 2MP + 5MP 2MP + 5MP 2MP + 5MP 2MP + 5MP 1.3MP + 5MP 2MP + 13MP 1MP + 8MP Battery 4500mAh 6500mAh 8000mAh 10,000mAh 8400mAh 2500mAh 2300mAh CPU Speed 2 GHz 2 GHz 2 GHz 2 GHz 1.1-1.8GHz 2048MHz 2048MHz Processor Chip Atom Z2580 Atom Z2580 Atom Z2580 Atom Z2580 Atom Z2580 Atom Z2580 Atom Z2580 Price $147 $176 $209 $222 $300 RMB 2328 RMB 1600 Source: Company data, Credit Suisse estimates Samsung has also used its octa-core CPU in its Exynos 5410 to secure design wins with tablet makers including Skyworth, Meizu, ASA, Migo, Allfine, GBD and design house Emdoor among others. We would note a number of vendors are also previewing Mediatek solutions with its octa-core MT6592, although traction is higher among its smartphone customer base looking to migrate up to full HD phablets from 5.7-7.0", with tablets mostly addressed by Mediatek’s dual- and quad-core and offering voice calling and Bluetooth, Wi- Fi, GPS and FM connectivity. Allwinner also is previewing that it will have its A80 octa-core solution in 2014, although none of its customers is yet previewing designs. Figure 91: Samsung octa-core Exynos 5410 design wins Company Meizu ZDX Teamgee Seabright Conncetme Tomato Model name MX3 ZDX X6 TG Seabright Conncetme T2

Image Technology WCDMA WCDMA / LTE WCDMA WCDMA WCDMA WCDMA Operating System Android 4.2.2 Android 4.2.2 Android 4.2 Android 4.2 Android 4.0 Android 4.2 Pixels 1800 x 1080 1920 x 1080 1280 x 800 1280 x 800 1280 x 800 1024 x 768 RAM 2GB 2GB 2GB 2GB 2GB 2GB ROM 16GB 16GB 16GB 16GB 16GB 8GB Display 5.1" 5.85" 8.0" 8.0" 8.0" 9.0" Camera 2MP + 8 MP 2MP + 13 MP 2MP + 8 MP 2MP + 8 MP 2MP + 5 MP 2MP + 5 MP Battery 2400mAh 3200mAh 4400mAh 4400mAh 4000mAh 4800mAh CPU Speed 1638MHz 1.6GHz 1.8GHz 1638MHz 1.8GHz 1.6GHz Processor Chip Exynos 5410 Exynos 5410 Exynos 5410 Exynos 5410 Exynos 5410 Exynos 5410 Price RMB 2499 $300 $500 $249 NA $316 Source: Company data, Credit Suisse estimates

China Smartphone Sector 35 07 January 2014 Stocks to invest for the next leg of growth In the Asian tech coverage, we would invest in companies positioned to take advantage of the rising emerging market penetration that can still protect margins through innovation or competitive advantage. We highlight several key areas to invest in the Asian supply chain.

■ IC Design: Mediatek. IC design is a competitive space with global players Qualcomm, IC design companies will be Intel, NVIDIA, Broadcom and Marvell competing against local suppliers Mediatek, a competitive space, but we Spreadtrum and RDA. We believe Mediatek can continue to lead in emerging markets believe Mediatek can through its proven turnkey support model and stepped up pace on both innovation and maintain its emerging solution cost. The company has another year of strong opportunity on 3G and TD- market leadership SCDMA and the relationships to pull those customers along into LTE as it rolls out in emerging markets starting from 2015. With RDA and Spreadtrum now being privatised by Tsinghua Unigroup, those options are no longer investable opportunities and we believe both companies will need more product development to move up market into the sweet spot of the WCDMA and LTE markets.

■ Foundry: TSMC and SMIC. The foundries benefit from emerging market unit growth Maintaining TSMC as the but and have firm pricing as manufacturing barriers rise and grows more complex and technology pick with SMIC capital intensive. We remain positive on TSMC as share gains into Apple extend its also benefiting from China high-end opportunity for another year and emerging market suppliers are pushing the volumes next node for competitive power/performance. TSMC maintains its independent foundry status competing against IDMs on design with its most attractive potential customers and Tier 2 foundries lagging on technology and scale. SMIC is our emerging market pick as a Chinese foundry with better execution and favourable opportunity to benefit from the emerging Chinese fabless and a good position with overseas leaders Qualcomm and Broadcom. We downgraded to NEUTRAL last summer as valuation has caught up to the fundamental improvement in the business.

■ Back-end: ASE and SPIL. We maintain our positive view on the back-end suppliers ASE and SPIL to benefit ASE and SPIL which are good unit plays on mobile growth at over 50% of sales. The from unit growth in the test and packaging sector is seeing a good expansion moving from feature phone to space and better supply smartphones as it can slow bonder investments and capture higher margin flip chip discipline business. The sector has also stayed conservative on supply the past year and now seeing some tailwinds from falling gold price and depreciating NT$. We also view opportunity for ASE to get past its recent pollution issues and set up some rebound and improving news flow by 2Q14 as it begins to target additional system in package projects and assembly and test for Apple.

Figure 92: Key Asian low cost component suppliers (in millions, unless otherwise stated) Supply chain Key suppliers Foundry: TSMC, SMIC, UMC Back-end: ASE, SPIL Asian fabless: Mediatek Overseas fabless and IP: Qualcomm, Broadcom, Marvell, ARM, Omnivision Components: TXC (Quartz), Silicon Motion (eMMC) Semiconductor Distribution: WPG PCBs: Kinsus, Unimicron Optical Lens: Largan, Sunny Optical, Lite-On Tech Acoustics: AAC Acoustics Devices: Lenovo, Samsung Display/Touch components: TPK, AUO, O-Film, Novatek, Himax, Ilitek, Orise Carriers: China Unicom, China Mobile, China Telecom Source: Credit Suisse estimates

China Smartphone Sector 36 07 January 2014

■ IC distribution: WPG. WPG is the leading semiconductor distributor in Asia and has WPG a distribution leader assembled a string of acquisitions to achieve 20% growth during 2009-2012 to double with sales upside although its Asian distribution share from 12% to 25% since the financial crisis. Its margins have stagnated at semiconductor distribution business is tied into the greater China electronics supply lower levels chain for consumer, communications and PC applications (80% of sales), allowing it to tap into growth drivers from low cost smartphones, Apple related products, low-cost tablets, and emerging market digital set-tops. The company has lifted smartphone/tablet exposure from 15% to 45% over the past few years and may top 50% this year, giving it good unit leverage. We have stayed NEUTRAL as the mix shift to low-cost mobile products has driven a gradual erosion in margins to offset some of the growth.

■ Devices: Lenovo. Lenovo has used its well established channel built through its Asian brands Lenovo should China leading PC business to launch a fast-growing smartphone and tablet outgrow the industry with businesses. Lenovo has grown to be the #2 smartphone supplier in China at 13% emerging markets share and brought its business to a small profit. Lenovo is on track to 50 mn smartphones in FY14 and our hardware analyst Thompson Wu projects 60 mn in FY15, with focus now shifting to expansion of exports outside China and a bigger move to mid-to-high tier smartphones using support from Qualcomm and Intel.

■ Driver ICs: Novatek, Himax, Orise, Ilitek. We expect China smartphones to continue to adopt higher-resolution panels with high resolution (qHD, HD720, FHD) rising from Novatek, Himax, Orise and 20-25% of the market in 2013 to 40-50% in 2014. Offsetting this trend, we believe the Ilitek keep the space market will look to lower cost through ramless ICs at half the price and smaller die size competitive and pricing for shorter test time. We are also seeing rising competition as Ilitek and Himax are under pressure now growing more competitive and aggressive on pricing.

■ Components: TXC, AAC, Kinsus, Unimicron. We also see several component TXC, AAC, Kinsus and suppliers ramping up volumes from the China market. In IC substrate, Kinsus is Unimicron are key Taiwan currently the primary supplier to Mediatek (10% of sales) although it will likely see component suppliers into inroads from Unimicron on 2014. We are upgrading Unimicron from Neutral to the space OUTPERFORM, as we are getting more confident on its new order wins at both HDI and IC substrates. In crystal components, TXC generates 15-20% of sales from Mediatek reference designs. In the optical image supply chain, Largan remains one of the top 2 lens suppliers for China smartphones, given its premium quality, and LOT still holds its share in the high-end camera module space. Finally, AAC is seeing rising volumes at China brands, with 40-50% market share and 15% of sales from Chinese vendors. Content rises with shift from a feature phone at US$2 to smartphones with US$3-6 per device.

China Smartphone Sector 37 07 January 2014 IC design: Emerging market smartphones the driver Mediatek: Product leadership in a high-growth product cycle The addressable market off our global model has emerging market smartphones scaling to Our estimates imply 1,104 mn units by 2015 and sub-$250 smartphones reaching 922 mn units in a similar Mediatek has 48% share of time frame, growing from 19% of global smartphones in 2012 to 62% in 2015. Our revised the sub-US$250 estimates factor in a scenario of Mediatek reaching 43% of emerging market smartphones smartphone market by 2015 and 48% of the sub-US$250 smartphone market, with additional units from tablets.

Figure 93: MTK penetration in emerging market phones Figure 94: Mediatek penetration in low-cost phones Emerging mkt smartphones YoY Growth US$50-250 smartphones Mediatek share (%) 1200 80% 1000 80% 1100 70% 900 70% 1000 800 900 60% 60% 700 800 50% 50% 700 600 600 40% 500 40% 500 400 30% 30% 400 300 300 20% 20% 200 200 10% 100 10% 100 0 0% 0 0% 2007 2008 2009 2010 2011 2012 2013F 2014F 2015F 2008 2009 2010 2011 2012 2013E 2014E 2015E Emerging market smartphones Mediatek smartphones Mediatek share $50 - $100 $100 - $150 $150 - $200 $200 - $250 Mediatek share

Source: Company data, Credit Suisse estimates Source: Credit Suisse estimates The company's gains have helped enable and come in parallel with the Chinese Tier 1 and 2 brands taking market share in the local market and now ramping up into the export channel. Local Chinese brands now command 70% of the Chinese market and have passed 25% global market share, a ramp in step with Mediatek's ramp up since early 2011.

Figure 95: Mediatek taking share with local brands in Figure 96: Mediatek/China share gains into global markets China Thousand (units) Local brand share (%) Units (thousands) Share % / MTK units (mn 70,000 80% 80,000 30% 70% 70,000 60,000 25% 60% 50,000 60,000 50% 20% 40,000 50,000 40% 40,000 15% 30,000 30% 30,000 20,000 10% 20% 20,000 10,000 10% 5% 10,000 0 0% 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 0 0% Tier 2 brands Huawei/ZTE/Lenovo/Coolpad 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 Tier one's Mediatek Smartphone Units Chinese brands Mediatek Smartphone Units Chinese brand global share China brand share Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Smartphones now dominate the revenue picture Mediatek’s revenues through 2010-11 were dragged down by the rapid compression in Feature phones will fall to feature phone pricing coupled with market share loss as new entrants (Spreadtrum, MStar 7% of sales after the MStar and RDA) eroded Mediatek’s unique turnkey local chipset, service and support model in closure in 2014 feature phones. Sales compressed from peak run rate at NT$25 bn at the end of 2010 to less NT$8 bn in 1Q12. The feature phone business has now dropped from 70% of 3Q11

China Smartphone Sector 38 07 January 2014 sales to <15% of 2013 sales while smartphones have increased to 50%, passing the point that feature phones materially impact the business. Following the acquisition of MStar, which is expected to close by early February, Mediatek's sales will be driven by smartphones plus tablets at 51% of sales and digital home products at 24% of sales, with maturing products like PC optical and feature phones only 14% of sales and another 10% for Wi-Fi and set-tops.

Figure 97: Smartphone sales now lead the revenue Figure 98: Mediatek/China share gains into global markets picture NT$mn % of MTK sales 35,000 90% Wifi Set-tops Other 30,000 8% 2% 1% 75% PC DTV & 25,000 60% Optical / Monitors 20,000 DVD 45% 24% 15,000 7% 30% 10,000 Feature 5,000 15% phones 0 0% 7% Smart 1Q08 3Q08 1Q09 3Q09 1Q10 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 phones

1Q14E 3Q14E 1Q15E 3Q15E Tablets 45% Feature phone sales Smartphone sales 6% Feature phone % of sales Smartphone % of sales Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Gross margins and operating profitability have turned the corner on profitability with shift to smartphones. GMs have rebounded from 41% to 44% since the feature phone trough and with revenue scale has lifted operating margins from a trough of 11% back to 20%. The company has good support for margins from new products with cost competitive quad- core (MT6582) seeing broad adoption in 4Q13 a lower-cost dual-core (MT6571) in 2Q14 and some positive mix benefit from octa-core (MT6592), with initial LTE volumes for 1H14 with 2 chip solution and SoC by year-end.

Figure 99: Margins were under attack in feature phones Figure 100: ASP pressure is a given in this segment Revenue Mediatek GM Chipset units (mn) ASPs (US$) (NT$mn) (%) 280 $21 30,000 240 $18 60% 25,000 200 $15 50% 20,000 160 $12 40% 120 $9 15,000 30% 80 $6 10,000 20% 40 $3 5,000 10% 0 $0 0 0% 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13E 1Q14E 3Q14E 1Q15E 3Q15E

1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 Feature phone units Smartphones units Feature phone sales Smartphone sales Feat. Phone1Q14E GM%3Q14E Feature phone ASPs Smartphone ASPs Smartphone GM% Total GM% Source: IDC, 2009 April Source: IDC, 2009 April We remain positive on Mediatek's growth opportunity in 2014 with strong market Octa-core supporting expansion and product innovation opportunities including shift to more cores (quad/octa) blended ASPs as it and higher performance GPUs to support the larger and higher resolution displays and launches at prices 3x above more advanced cameras and multimedia. A broad range of products from ultra-low-cost the smartphone average sub US$30 prices up to US$200-250 6.5" phablets are allowing the Chinese handset makers to gain share of global units. Mediatek's ability to shift up to new categories including octa-core should provide good protection on blended pricing to allow the market unit growth in the market to drop more directly to sales and profit growth. Mediatek's roadmap offers multiple areas for innovation

China Smartphone Sector 39 07 January 2014 including: (1) modem and connectivity (802.11ac, LTE), (2) power and performance pushing leading geometries (28nm HPM in 4Q13 and 20nm in 2H14), (3) more advanced cores (octa-core, big.LITTLE), (4) higher clock rates for CPU and GPU with turbo versions for better multimedia and graphics, and (5) improve modem and connectivity (802.11ac, LTE).

Figure 101: Mediatek multi-core chipsets ramping Figure 102: Blended ASPs supported by improving mix Units (mn) ASPs (US$) Units (mn) ASPs (US$) 100.0 35.0 100% $32 90.0 30.0 90% $29 80.0 80% $26 70.0 25.0 70% $23 60.0 $20 20.0 60% 50.0 $17 15.0 50% 40.0 $14 40% 30.0 10.0 $11 20.0 30% 5.0 $8 10.0 20% $5 0.0 0.0 10% $2 0% -$1 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13

4Q13E 1Q14E 2Q14E 3Q14E 4Q14E 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14E 3Q14E Single Units Dual Units Quad Units Single Units Dual Units Quad Units Octa Units Single ASPs Dual ASPs Octa Units Single ASPs Dual ASPs Quad ASPs Octa ASPs Blended ASPs Quad ASPs Octa ASPs Blended ASPs

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates LTE launching in 1H14, with single chip out in 2H14 Mediatek’s first LTE modem (MT6590) is sampling in 1H14 to support both versions of LTE, TD-SCDMA, WCDMA and TD-SCDMA. The company will also plan an integrated solution pairing its LTE baseband to both its quad-core and octa-core for sampling in 2Q14/3Q14 and launching by year-end.

Figure 103: Mediatek has a broad product line rolling out in the coming quarters MT6592 MT6589 MT6588 MT6582 MT6572 MT6571 Status NEW in 4Q13 Available (1Q13) NEW in 4Q13 NEW in 4Q13 Available (2Q13) New in 2Q14 Multi-core Octa-core Quad-core Quad-core Dual-core Dual-core Dual-core CPU ARM Cortex-A7 ARM Cortex-A7 ARM Cortex-A7 ARM Cortex-A7 ARM Cortex-A7 ARM Cortex-A7 Clock speed 1.7-2.0GHz 1.2GHz 1.7GHz 1.3GHz 1.3GHz 1.0GHz ARM Mali-450 ARM Mali-400 ARM Mali-450 ARM Mali-400 ARM Mali-400 Graphics ARM Mali-400 700MHz 500MHz 600MHz 500MHz 500MHz

32-bit 400Mbps LP- LPDDR2 533MHz LPDDR2 533MHz Memory DDR / 32-bit 1066 LPDDR2 533MHz LPDDR2 266MHz LPDDR2 266MHz LPDDR3 666MHz LPDDR3 666MHz Mbps LP-DDR2

Camera 13MP 13MP 13MP 13MP 5MP 5MP 1080p 30fps 1080p 30fps 1080p 30fps Video Decode 720p 30fps 1080p 30fps 720p 30fps 720p 30fps HEVC/VPS HEVC/VP9 HEVC/VPS Video Encode 1080p 30fps 1080p 30fps 1080p 30fps 1080p 30fps 720p 30fps 720p 30fps HD1080 HD1080 HD1080 Display HD720 1280x720 qHD 960 x 540 qHD 960 x 540 1920 x 1080 1920 x 1080 1920 x 1080

HSPA+ Rel. 8 HSPA+ Rel. 8 HSPA+ Rel. 8 HSPA+ Rel. 8 HSPA+ Rel. 8 HSPA+ Rel. 8 Modem 21Mbps/5.76Mbps 21Mbps/5.76Mbps 21Mbps/5.76Mbps 21Mbps/5.76Mbps 21Mbps/5.76Mbps 21Mbps/5.76Mbps

Integrated Wifi Integrated Wifi Integrated Wifi Integrated Wifi Integrated Wifi Integrated Wifi Connectivity abgn/BT/FM/GPS bgn/BT/FM/GPS abgn/BT/FM/GPS bgn/BT/FM/GPS bgn/BT/FM/GPS bgn/BT/FM/GPS Process node 28nm HPM 28nm 28nm HPM 28nm 28nm 28nm Foundry TSMC TSMC TSMC TSMC TSMC GlobalFoundries Source: Company data, Credit Suisse estimates

China Smartphone Sector 40 07 January 2014

Tablets adding an incremental driver Mediatek has created an extension of smartphone chipsets by now supplying its bundled solution of baseband, processor and connectivity into tablets. We project Mediatek has grown share from less than 5% in 2012 to 20% share in 2013 and model doubling to 40 mn units and 25-30% market share in 2014, with potential for further upside as it rolls out lower cost dual/quad core chipsets and higher end solutions using its octa-core and LTE connectivity. 4Q13 tracked to upside, 2014 estimates intact We raise our 4Q13 sales from -2.4% QoQ to +2% QoQ, above the company's flat-to-down Raising 4Q13 to +2% QoQ, 5% QoQ guidance owing to smartphone upside. The company's strength is coming from above flat to down 5% stronger shipments of its dual-core chipset, growing traction at the smaller Chinese guidance branded companies and ramp of exports. We also believe GMs will reach the upper half of 43-45% guidance.

Figure 104: Mediatek operating assumptions: Raising 4Q13 and blended pricing (in millions, unless otherwise stated) Quarters Years NT$mn unless noted 1Q13 2Q13 3Q13 4Q13E 2011 2012 2013F Prior 2014F Prior 2015F Feature phones (mn) 72.2 81.5 92.0 82.8 530.2 391.9 328.5 328.5 283.3 283.3 232.5 ASPs (US$) $1.95 $1.91 $1.87 $1.84 $3.58 $2.26 $1.89 $1.89 $1.66 $1.66 $1.41 Smartphones (mn) 35.0 52.6 66.5 70.5 10.0 109.8 224.6 220.4 315.5 315.5 447.0 ASPs (US$) $9.71 $10.00 $9.75 $9.75 $13.33 $10.82 $9.81 $9.75 $9.38 $9.06 $8.33 Tablets (mn) 2.0 6.0 7.5 7.5 0.0 0.0 23.0 23.0 40.2 40.2 61.4 ASPs (US$) $14.00 $12.60 $12.10 $11.85 $0.00 $0.00 $12.33 $12.29 $10.74 $10.23 $9.50 Handset/Tablet Sales 15,003 22,501 27,163 27,569 59,512 61,419 92,236 90,612 115,046 111,466 138,193 DTV 3,435 4,087 4,646 4,789 10,722 13,490 16,957 16,957 42,272 42,272 41,653 PC Optical 2,403 2,701 2,790 2,628 10,596 11,489 10,523 10,523 8,719 8,719 6,994 Consumer DVD 782 888 995 877 4,160 3,515 3,542 3,542 3,181 3,181 2,944 WLAN (Ralink) 2,363 3,100 3,414 3,835 1,867 9,365 12,712 12,712 16,840 16,840 17,626 Total Sales 23,986 33,276 39,008 39,698 86,858 99,278 135,969 134,345 194,521 190,942 216,828 GM % 42.1% 43.2% 43.7% 44.3% 45.3% 41.4% 43.5% 43.4% 44.8% 44.7% 45.2% Op M% 12.9% 17.7% 20.2% 20.4% 14.2% 12.5% 18.3% 18.0% 20.7% 20.2% 21.5% EPS $2.79 $5.01 $6.28 $6.40 $12.52 $12.85 $20.39 $19.44 $25.00 $23.98 $28.45 Source: Company data, Credit Suisse estimates Management noted that 1Q14 normally declines 15-20% QoQ, although 2006-12 (ex. crisis) was down 5-10% QoQ on average. This year we would acknowledge higher base after strong upside throughout 2013. We estimate Mediatek including two months of MStar for 1Q14 to grow 1.0% QoQ although excluding the MStar sales imply Mediatek standalone down 12.6% QoQ.

Figure 105: Modeling 1Q14 down 12.6% QoQ ex-MStar Mediatek sales ex. MStar (NT$mn) 2Q13 3Q13 4Q13 1Q14 Mediatek + MStar $33,276 $39,008 $39,698 $40,091 QoQ 17.2% 1.8% 1.0% Mediatek ex. Mstar $33,276 $39,008 $39,698 $34,681 QoQ 17.2% 1.8% -12.6% MTK DTV volume (mn) 19.1 22.0 23.1 22.4 MTK DTV ASP $7.19 $7.08 $6.98 $6.91 FX $29.7 $29.8 $29.7 $29.8 MTK DTV sales $4,087 $4,646 $4,789 $4,614 Total DTV $4,087 $4,646 $4,789 $8,476 MStar DTV sales $0 $0 $0 $3,862 MStar LCD Monitor $0 $0 $0 $448 MStar STB $0 $0 $0 $764 MStar Other $0 $0 $0 $335 MStar contribution $0 $0 $0 $5,410 Source: Company data, Credit Suisse estimates

China Smartphone Sector 41 07 January 2014

Maintain OUTPERFORM We raise our 2013/14E EPS from NT$19.44/NT$23.98 to NT$20.39/NT$25.00 to reflect the 4Q13 upside to smartphone shipments and an expectation for more resilient ASPs in 2014 as octa-core ramps up at US$30 starting price versus US$10 blended price, providing support as it ramps into customers higher-end solutions. We maintain our OUTPERFORM on Mediatek and raise our target price from NT$480 to NT$500 using same 20x 2014E multiple off our revised NT$25 (from NT$24) EPS based on: (1) a strong product cycle in emerging market smartphone and tablets, (2) market leadership continuing to sustain in the face of tough competition due to fast product innovation both on lower cost and higher performance solutions, and (3) additional drivers from China brands ramping up export markets and push to more advanced processors, tablets and TD-SCDMA and LTE over the next few years.

Figure 106: Increasing estimates to reflect stronger 4Q13 and an ASP lift from multi-core products 4Q13 1Q14 2013 2014 2015 (NT$ mn) CS CS(old) Street Guidance CS CS(old) Street CS CS(old) Street CS CS(old) Street CS Street Sales $39,698 $38,074 $37,665 NT$37.1-$39.0bn $40,091 $39,720 $35,796 $135,956 $134,332 $133,896 $194,521 $190,942 $174,300 $216,828 $190,363 Chg 1.8% -2.4% -3.4% Flat to -5% 1.0% 4.3% -9.8% 37.0% 35.3% 34.9% 43.1% 42.1% 30.2% 11.5% 9.2% GM% 44.3% 44.1% 44.2% 43-45% 44.3% 44.2% 43.9% 43.6% 43.5% 43.5% 44.8% 44.7% 44.1% 45.2% 44.2% R&D 7,252 7,216 22.5-26.5% Opex 7,317 7,347 26,334 26,299 35,504 35,609 39,215 SG&A 2,254 2,178 2,559 2,500 7,947 7,870 11,470 11,195 12,232 OpM% 20.4% 19.4% 19.4% 16.5-22.5% 19.7% 19.4% 18.8% 18.3% 18.0% 18.2% 20.7% 20.2% 20.8% 21.5% 22.6% Net Inc. 8,586 7,934 7,917 7,835 7,665 7,136 27,346 26,070 26,849 38,593 37,015 36,689 44,423 40,609 EPS (NT$) $6.40 $5.91 $5.97 $5.26 $5.15 $5.15 $20.39 $19.44 $20.12 $25.00 $23.98 $25.85 $28.45 $28.77 Source: Company data, the BLOOMBERG PROFESSIONAL™ service consensus estimates, Credit Suisse estimates IC distribution: Smartphones/tablets driving growth WPG: Leading Asian IC distributor We remain positive on the medium term growth outlook for WPG as it expands organically WPG has doubled its as a large IC distributor for Greater China and also from stringing together acquisitions of distribution share from 12% smaller distributors. The company has doubled its Asian distribution share from 12% to to 25% since 2008 25% since the financial crisis through this combination.

Figure 107: WPG has doubled its share of the APAC distribution market (in millions, unless otherwise stated) (US$ bn) 2005 2006 2007 2008 2009 2010 2011 2012 WW Semiconductor TAM 238.0 262.0 270.0 249.0 231.0 298.0 300.0 292.0 WW Semiconductor TAM in APAC 119.0 140.0 148.0 124.0 119.0 160.0 164.0 163.0 30% Distributor TAM in APAC 36.0 42.0 44.0 37.0 36.0 48.0 49.2 48.9 WPG’s sales 3.6 3.6 4.3 4.5 6.0 8.2 11.5 12.2 WPG’s market share in APAC (%) 10.0 8.6 9.8 12.3 16.6 17.0 23.5 25.0 Source: Company data Scale in distribution has had a positive effect in attracting working capital, broadening product lines, improving field support and growing customer bases. WPG's semiconductor distribution is largely tied into the greater China electronics supply chain allowing it to tap into growth drivers from low cost smartphones and tablets, Apple related products, computing and consumer products.

Figure 108: WPG has substantial revenue and profit market share in China (US$ bn) 2006 2007 2008 2009 2010 2011 2012 Revenue Share 30% 31% 31% 39% 41% 53% 57% Profit Share 29% 36% 49% 52% 53% 56% 65% Source: Company data

China Smartphone Sector 42 07 January 2014

WPG reported segment mix is 36% PCs (including tablet), 30% communications, 16% WPG tracking to generate consumer, and 18% industrial/other. Within that, however, traditional PC components are more than 50% of sales now about 15% of sales and smartphone and tablet have reached 45% of sales and from smartphones and should pass 50% this year. WPG has a good position both into China low cost tablets and tablets in 2014 Apple iPhone and iPad (15% of sales) and would also benefit if Intel has success engaging the local China supply chain with its Atom designs.

Figure 109: WPG product mix—PC segment is 35% but includes tablets; smartphone and tablets now 45% of sales (%) 100 90 80 70 60 50 40 30 20 10 - 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14

PC Communication Consumer Industrial Automotive Others

Source: Company data, Credit Suisse estimates 4Q13 sales upside, but GMs still lag a bit 4Q13 tracking potentially above guidance, but GMs We believe WPG sales grew ~+2% in 4Q13, better than its -7% to -12% QoQ guidance gradually impacted by mix and recent seasonal high-single-digit decline, as orders traditionally fall after China's shift to mobile October holiday. This year benefited from PC orders better than very low expectations coming in, above seasonal low cost smartphone builds and a rebound in whitebox tablets from the earlier inventory correction. Broad-based industry also saw stable growth but more in line with expectations. On the sales strength, we lift our estimate from -9% QoQ to +2% QoQ.

Figure 110: Raising WPG estimates to factor 4Q13 sales strength 4Q13 1Q14 2013 2014 2015 (NT$ mn) CS CS(old) Street Guidance CS CS(old) Street Actual CS(old) Street CS CS(old) Street CS CS(old) Street Sales $110,127 $98,059 $97,763 NT$95-100bn $101,317 $96,098 $98,884 $405,098 $393,030 $393,876 $452,557 $429,831 $429,297 $489,801 $464,909 $458,347 Chg 2.2% -9.0% -9.3% Down 7.2-11.8% -8.0% -2.0% -10.2% 12.3% 9.0% 9.2% 11.7% 9.4% 9.0% 8.2% 8.2% 6.8% GM (%) 4.4% 4.6% 4.7% 4.5-4.7% 4.4% 4.6% 4.6% 4.7% 4.7% 4.7% 4.4% 4.6% 4.6% 4.4% 4.6% 4.6% Op.M(%) 1.5% 1.5% 1.9% 1.35-1.55% 1.4% 1.5% 1.4% 1.6% 1.6% 1.6% 1.7% 1.7% 1.7% 1.7% 1.7% 1.8% Net Inc. 1,224 1,028 1,446 NT$29.55 to US$1 1,035 1,018 1,034 4,975 4,779 4,841 5,465 5,299 5,447 6,121 5,802 6,142 EPS (NT$) $0.74 $0.62 $0.88 $0.63 $0.61 $0.63 $3.00 $2.90 $2.92 $3.30 $3.20 $3.27 $3.70 $3.50 $3.65 Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service consensus estimates

Despite better sales, GMs remain under gradual pressure as mix shifts to smartphone and tablets where the company distributes core components and panels carrying a lower margin. We expect GMs to only reach the low end of 4.5-4.7% guidance. The company targets dropping opex ratio from over 3% to 2.7-2.8% by consolidating its seven holding companies and into four smaller ones through 100% share swap, with no impact on its equity base. AECO will become a fully-owned subsidiary of WPI and Pernas will be fully owned by SAC. YOSUN had a solid base in PC but lacked mobile business and will hold RichPower, which was smaller but had good relationships with Realtek and other chipset companies to realise synergies. As China's growth (50% of 3Q13 sales) slows down, WPG

China Smartphone Sector 43 07 January 2014 now targets South Asia, Middle East, and North Africa to grow from 9% to 15% of sales as it captures growth in smartphones from even lower penetration levels than China.

Figure 111: WPG margins seeing a gradual decline Figure 112: Revolving credit funding working capital WPG Revenue WPG GM and Op NT$mn (NT$mn) Margin (%) 80,000 140,000 7.0 60,000 120,000 6.0 40,000 100,000 5.0

80,000 4.0 20,000

60,000 3.0 0

40,000 2.0 -20,000

20,000 1.0 -40,000

0 0.0 -60,000 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13

Sales GM (%) OpM (%) Cash and investments Net working capital Net debt Linear (GM (%)) Linear (OpM (%)) Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates On better sales but slightly lower margins, we raise 2013E EPS from NT$2.90 to NT$3.00 and 2014 from NT$3.20 to NT$3.30, both above street at NT$2.92/NT$3.27. The stock is trading at 9.8x 2014E EPS, in line with US peers Arrow and Avnet at 9.9x and 10.4x, respectively. Synnex remains higher at 11.5x due to its tied into China consumption versus WPG which distributes semiconductors that ship into products globally. We raise our target price from NT$38.5 to NT$39.5, using the same 12x 2014 EPS off our revised NT$3.30 (from NT$3.20).

Figure 113: WPG in-line with its peer group Price Mkt Cap EV/Sales (x) P/E Multiple (x) P/B Multiple (x) Company Ticker 1/3/2014 (US$mn) 2012 2013 2014 2012 2013 2014 2012 2013 2014 WPG 3702.TW 34.3 2,044 0.3 0.2 0.2 10.7 11.2 9.8 1.5 1.5 1.5 Synnex 2347.TW 47.75 2,513 0.3 0.3 0.2 13.4 13.1 11.6 1.8 1.7 1.6 Arrow ARW 52.69 5,012 0.3 0.3 0.3 12.0 11.2 9.8 1.4 1.3 1.2 Avnet AVT 42.68 5,823 0.3 0.3 0.3 10.5 12.3 10.2 1.6 1.4 1.2 Median 0.3 0.3 0.2 11.3 11.8 10.0 1.5 1.5 1.3 Mean 0.3 0.3 0.3 11.6 12.0 10.3 1.6 1.5 1.4 Source: Company data, Credit Suisse estimates

Foundries: Mobility gains drive growth The foundries have seen a big value expansion the past few years from move from feature Foundries see a significant phone (US$1.50 content) to low cost smartphone (US$4 content) to high-end smartphones content expansion from (US$10 manufacturing content) due to more advanced processor, connectivity, RF, CMOS feature phones even to low sensor, display driver and peripheral components (touch, flash controller, sensors). The cost smartphones foundries growth is being led by semiconductor companies licensing the ARM processor core, which is a low cost and low power chipset licensed into a number of high volume devices including tablets, smartphones, microcontrollers, set-tops, TV controllers, and digital cameras and starting to be adapted into higher-end computing, networking and servers as it moves up from 32-bit to 64-bit processing.

China Smartphone Sector 44 07 January 2014

Figure 114: TSMC sales track ARM shipments Figure 115: TSMC ASP held up by decent customer ASPs TSMC wafer ASP QCOM ASP (US$) Arm Sales/TSMC Shipments (ARM lagged one quarter) (US$) 6.0 1,200 35.0

5.0 1,150 30.0 25.0 4.0 1,100 20.0 3.0 1,050 15.0 2.0 1,000 10.0 1.0 950 5.0 - 4Q13E 3Q10 4Q10 1Q11 900 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 0.0 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13E 1Q14E 2Q14E

Arm sales (lagged one quarter) TSMC shipments TSMC wafer blended ASP QCOM blended MSM ASP QCOM CDMA ASP QCOM WCDMA ASP QCOM LTE ASP Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates ARM has experienced steady revenue growth as its license business model and low TSMC's communication power system-on-chip enables the creation of low cost and low power computing devices. sales still growing with ramp Many of the ARM licensees with the exception of Samsung also run an asset light up of Apple at the high end business model so license the core, focus on chip design and then manufacture at the and good exposure to low- foundries. ARM has had a high correlation to TSMC's sales historically with growth the cost mobile units past few years led by communications, with TSMC communication sales reaching 55% of revenue, up from 40% before the financial crisis. Competition is driving vendors to stay competitive on performance and power and push to the most advanced technology node. A look at the 28nm ramp up for TSMC and expected 20nm ramp up in 2014 shows higher revenue ramp ups on these nodes despite widespread industry talk of slowing Moore’s Law. Moore's Law is driving fewer customers and products to the advanced node but high volume products in mobile and computing are still making that push.

Figure 116: Mobile growth still growing double digits Figure 117: TSMC contribution from mobile rising US$mn YoY Growth US$mn % of TSMC sales 20,000 (%) 70% 14,000 60% 17,500 60% 12,000 50% 15,000 50% 10,000 12,500 40% 40% 8,000 10,000 30% 30% 7,500 20% 6,000 20% 5,000 10% 4,000 2,500 0% 2,000 10% 0 -10% 0 0% 2010 2011E 2012E 2013E 2014E 2010 2011E 2012E 2013E 2014E Tablets Smartphones Tablets Smartphones Feature phones Notebooks Feature phones Notebooks Netbooks YoY smartphones/tablets Netbooks % from smartphone/tablet YoY nbs/netbooks/feature phones YoY Growth Mobile % from notebook/netbook/feature phones % from mobile

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates We believe TSMC retains good share across the mobile spectrum. In high-end smartphones, its customers remain strong in Samsung despite internal system LSI threats, including Spreadtrum in entry level devices, Broadcom in the mid-tier and Qualcomm still having LTE baseband and good AP share in the high-end. Apple has been weak for the overall supply chain although we believe the company will still retain good content even ahead of the AP ramp up in 2014 with baseband, fingerprint sensor, power management, driver IC, front image sensor, and connectivity. Intel is making inroads, but we estimate Intel has just 1-2% smartphone application processor share and in tablets, just 4% Android share and 11% overall tablet share.

China Smartphone Sector 45 07 January 2014

Figure 118: Communications continues to accelerate Figure 119: 28nm set seeing the sharpest ramp of any node NT$mn Revenue (NT$) 100,000 60,000 90,000 80,000 50,000 70,000 40,000 60,000 50,000 30,000 40,000 30,000 20,000 20,000 10,000 10,000 - - 1Q99 4Q99 3Q00 2Q01 1Q02 4Q02 3Q03 2Q04 1Q05 4Q05 3Q06 2Q07 1Q08 4Q08 3Q09 2Q10 1Q11 4Q11 3Q12 2Q13 1Q14 4Q14 1Q99 3Q99 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 Computer Communication 0.5um+ 0.25/0.35um 0.15/0.18um 0.13um 90nm Consumer Other/Industrial Memory Linear (Communication) 65nm 40nm 28nm 20nm Linear (Communication) Source: Company data, our estimates Source: Company data, our estimates Advanced manufacturing remains important. A look at the 28nm ramp for TSMC shows one of the sharpest ramps despite the fears of slowing Moore’s Law as mobile application processors and graphics make a fast switch to deal with higher data rates, more advanced applications and operating systems and to drive graphics and multimedia to higher resolution displays. We expect the advanced nodes to keep support through 20nm with the Apple ramp and 16nm as mobile customers that skipped 20nm will use 16nm FinFet to take advantage of its lower power. Apple extends high end growth for another year A material concern for smartphones plays is the slowdown in the US$400 and above TSMC will ramp 20nm to category, an area with rich semiconductor manufacturing content often with separate LTE 10% of sales with high baseband, application processor, high megapixel image sensor, multiple sensors and share and retain 75% share advanced connectivity including 802.11ac Wi-Fi. Our global handset analyst Kulbinder on 28nm Garcha forecasts single-digit growth in US$400-plus smartphones, raising concerns that this high-end category stalls. TSMC however will still benefit from share gains even with flat high-end smartphone units as it ramps up the Apple processor manufacturing. We project content growing from US$7-8 per iPhone to ~US$20, growing TSMC’s high-end smartphone mix 80%-plus YoY and taking that segment from 11% to 17% of sales (total smartphones are 30-35% of sales).

Figure 120: High-end smartphone plays seeing growth Figure 121: TSMC’s high-end smartphone share still stall grows Unit: mn YoY (%) (Unit: NT$) 1200 100% $4,500 18% $4,000 16% 1000 80% $3,500 14% 800 $3,000 12% 60% $2,500 10% 600 $2,000 8% 40% 400 $1,500 6%

20% $1,000 4% 200 $500 2% 0 0% $0 0% 2010 2011 2012E 2013E 2014E 2015E 2010 2011 2012E 2013E 2014E 2015E Sub $400 phones $400+ smartphones TSMC high-end Non-Apple TSMC high-end Apple Sub $400 YoY Growth (%) $400+ YoY Growth (%) High-end smartphone % of TSMC Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates We expect Apple to retain both TSMC and Samsung as foundry partners in the next few We project TSMC securing years due to large size of business and risk in a single foundry for both parties. A scenario 40% of Apple's business by of Apple ramping up to 25% of volume in 2014 and 40% of volume in 2015 would allow it 2015 to become a new 10% customer over the next two years.

China Smartphone Sector 46 07 January 2014

Figure 122: Modeling TSMC ramping Apple to a 10% customer even with dual sourcing (in millions, unless otherwise stated) TSMC potential 2009 2010 2011 2012 2013 2014 2015 Wafer per year (thousands) 57 107 327 672 567 701 803 US$ Revenue per 12" wafer 5,200 5,200 5,500 5,500 6,000 8,000 7,440 Apple Processor Sales (US$ mn) $295 $556 $1,800 $3,695 $3,405 $5,608 $5,973 TSMC share: 0% 0% 0% 0% 0% 25% 40% TSMC Apple potential: $0 $0 $0 $0 $0 $1,402 $2,389 TSMC sales (US$ mn, CS estimate) $8,098 $12,223 $13,342 $15,691 $18,627 $21,967 $24,406 % of TSMC 0.0% 0.0% 0.0% 0.0% 0.0% 6.4% 9.8% Source: Company data, Credit Suisse estimates Asian IC suppliers largely supplied by TSMC TSMC should maintain its position with China/Taiwan IC providers driving a new leg of growth for the company from the emerging market units. TSMC has good application processor share with tablet IC suppliers including Allwinner, Actions, AMLogic and Mediatek, with only Rockchip a traditional customer for GlobalFoundries.

Figure 123: Quad-core tablet processors: China-made tablets dominated by Chinese / Taiwanese fabless companies Company Samsung Nvidia Allwinner Rockchip Actions Mediatek Tablet processor Exynos 4 Tegra 4 A31 RK3188 ATM7029 MT8389 Multi-core Quad-core Quad-core Quad-core Quad-core Quad-core Quad-core CPU ARM Cortex-A9 ARM Cortex-A15 ARM Cortex-A7 ARM Cortex-A9 ARM Cortex-A5 ARM Cortex-A7 Clock speed 1.4/1.6 GHz 1.6GHz 1.5 GHz 1.6GHz 1.2GHz 1.2GHz PowerVR Graphics ARM Mali GeForce ARM Mali-400 Vivante GC1000 ARM Mali-400 SGX544MP2 Process node 32nm 40nm 40nm 28nm 40nm 28nm Foundry Samsung TSMC TSMC GlobalFoundries TSMC TSMC Availability 3Q12 2H13 4Q12 4Q12 4Q12 1Q13 Source: Company data, Credit Suisse research 2014 will remain a strong year for the leading edge with Chinese customers migrating to 28nm and Apple filling TSMC 20nm capacity along with a few designs from its existing graphics, networking, PLD and mobile customers. TSMC also retains good content at Apple on the lagging edge with baseband, fingerprint sensor, power management, driver IC, and connectivity.

Figure 124: TSMC has a wide range of customers ramping Figure 125: TSMC share higher on advanced nodes its advanced process nodes Industry revenue by node (US$mn) TSMC Market Share % $10,000 80%

$8,000 60% $6,000 40% $4,000 20% $2,000

$0 0% 1Q00 4Q00 3Q01 2Q02 1Q03 4Q03 3Q04 2Q05 1Q06 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11 1Q12 4Q12 3Q13 250nm+ 150/180nm 130nm 90nm 65nm 40nm 28nm 20nm TSMC 130nm+ share TSMC 90nm/65nm share TSMC 40nm and below share Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Valuation: Reasonable near the Taiwan tech average We believe TSMC at 13x 2014E EPS of NT$8 is reasonable, in-line with Taiwan tech and still keep our NT$116 target at 14.5x EPS, similar to its recent range and range from 2003- 2007. The stock would maintain slightly over 3x P/B as it has through those periods,

China Smartphone Sector 47 07 January 2014 though we acknowledge re-rating above our target could be difficult due to overhang from Intel and Samsung’s strategy to compete in foundry and with internal silicon for mobile.

Figure 126: TSMC near its average historical P/E Figure 127: TSMC trading near its mid-cycle P/B (NT$) (NT$) 130 17x 130 3.5x 120 120 15x 3.1x 110 110 2.7x 100 100 13x 90 90 10.5x 80 80 2x 70 70 60 60 50 50 40 40 30 30 20 20 Jan-03 Apr-04 Jul-05 Oct-06 Jan-08 Apr-09 Jul-10 Oct-11 Jan-13 Jan-03 Apr-04 Jul-05 Oct-06 Jan-08 Apr-09 Jul-10 Oct-11 Jan-13 Source: TEJ, Company data, Credit Suisse estimates Source: TEJ, Company data, Credit Suisse estimates We expect a solid year in 2014 due to its high 20nm/28nm HPM share maintaining pricing TSMC valuation near the and profitability growth in 2014, gains into Apple which keeps high-end growing for another Taiwan tech average year, good low cost smartphone exposure and better resilience relative to Taiwan tech. TSMC also has good demand drivers for its specialty technology and shift from debt issuance to return of free cash flow as capital intensity peaked in 2013.

Figure 128: Credit Suisse estimates below street for TSMC 1Q14 (in millions, unless otherwise stated) 4Q13 1Q14 2013 2014 2015 (NT$ mn) CS Street Guidance CS Street CS Street CS Street CS Street Sales 145,903 145,652 NT$144-147bn 140,067 141,838 597,121 596,958 687,802 682,909 780,993 779,107 Chg (%) -10.3 -10.5 -9.6-11.4% QoQ -4.0 -2.6 17.8 17.8 15.2 14.4 13.5 14.1 GM (%) 45.2 44.9 44-46% 43.1 43.9 47.2 47.2 46.6 46.8 46.3 46.2 OpM (%) 33.0 32.5 32-34% 30.2 31.5 35.1 35.1 34.9 35.2 34.5 35.7 Net Inc. 41,608 41,630 36,574 38,650 184,735 183,701 207,357 207,909 233,389 234,265 EPS (NT$) 1.60 1.60 1.41 1.49 7.12 7.13 8.00 8.02 9.00 9.05 ADR EPS 0.27 0.27 0.24 0.25 1.20 1.20 1.36 1.34 1.53 1.52 Source: Company data, Credit Suisse estimate SMIC: Specialty and 40nm ramp up driving continued growth in 2014E SMIC is the leading IC foundry in China and has engineered a good turnaround as its new 40nm to generate 15% of management has focused on growing its local Chinese customer base and adding more sales in 2014E and specialty specialty applications including power management, CMOS image sensors and smart card technology to account for IC solutions. The company generates 30% of sales from these differentiated smart card 30% ICs and targets continued growth above corporate average. At the same time, n-1 technology progress continues, with 40nm reaching 15% of sales and continuing to grow in 2014 as breadth expands beyond the initial Chinese (HiSilicon, Spreadtrum, RDA) and overseas customers (Broadcom, Qualcomm). The company is still seeing mild decline in 4Q13 and is not yet providing initial clarity on 1Q14 (we model flat QoQ) but remains optimistic on 2014 outgrowing low teens foundry growth propelled by smart cards, CMOS sensors and some growth from 40nm.

China Smartphone Sector 48 07 January 2014

Figure 129: SMIC driven by communication/consumer (low cost smartphone/tablet market) (in millions, unless otherwise stated) Revenue (US$mn) 350 300 250 200 150 100 50 0 1Q06 4Q06 3Q07 2Q08 1Q09 1Q03 4Q03 3Q04 2Q05 4Q09 3Q10 2Q11 1Q12 4Q12 3Q13 2Q14 Computer Communication Consumer Other/Industrial

Source: Company data, Credit Suisse estimates The company’s revenue is being driven by communications and consumer as a good source of cost effective capacity in the fast expanding low-cost smartphone and tablet market and in specialty applications including power IC, CMOS sensors and smart cards. Business mix should see transition further to communications (46% of sales) and specialty applications (30% of sales), with commodity logic down over time. Key communications and consumer segment customers that are now driving SMIC’s outlook includes Qualcomm, Broadcom, and emerging Chinese fabless including Spreadtrum, RDA Microelectronics, Shanghai Fudan, Giga Device, Hisilicon and Galaxy Core. Chinese customer contribution continues to grow SMIC is a beneficiary of China fabless industry growth, with 42% revenue contribution SMIC a key beneficiary as from China. The company is benefitting from Chinese fabless ramping up baseband, more China fabless switch CMOS image sensors, NOR flash and smart card ICs. over from foreign foundries

Figure 130: 40nm/65nm reaching over 40% of sales Figure 131: China fabless companies driving SMIC growth 100% US$mn $350 90% 80% $300 70% 60% $250 50% $200 40% 30% $150 20% $100 10% 0% $50

$0 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13E 1Q14E 2Q14E 3Q14E 4Q14E 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13

40nm 65nm 90nm 0.13um 0.15um 0.18um 0.25um 0.35um 4Q13E 1Q14E 2Q14E 3Q14E 4Q14E North America China Eurasia Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates SMIC is providing better support to Chinese fabless companies. With better local support, availability of advanced technologies (now 40nm, and soon on 28nm) versus TSMC/UMC capped at 110nm in China, and lower prices, we are likely to see SMIC gaining market share as Chinese fabless companies switch over from overseas foundries.

China Smartphone Sector 49 07 January 2014

Figure 132: SMIC serving most of the major Chinese fabless semiconductor companies (Revenue in US$ mn) 2011 2012 2010 2011 2012 YoY 2012 China rank rank Companies revenue revenue revenue growth share Major product 1 1 Shenzhen HiSilicon Technologies 453 704 727 3% 23% Networking/Set-tops 2 2 Spreadtrum Communications 346 674 725 8% 22% Wireless ASSP 3 3 RDA Microelectronics 191 289 391 35% 12% Wireless ASSP 1 4 Hangzhou Silan Microelectronics NA 238 203 -15% 15% Comm. ASIC 4 5 Galaxycore 124 190 201 6% 6% Image Sensor 14 6 Allwinner Technology NA 50 168 236% 5% Tablet/audio processors 4 7 Elec-Tech International NA 141 163 16% 12% Industrial 2 8 Jilin Sino-Microelectronics NA 164 161 -2% 12% Comm. / Wireless 5 9 BCD Semiconductor Manufacturing NA 139 142 2% 10% Analog Ics 3 10 Wuxi China Resources Semico NA 144 125 -13% 9% Comm. / Wireless 5 11 CEC Huada Electronic Design 74 128 123 -4% 4% Smart card 6 12 Foshan Nationstar Optoelectronics NA 129 110 -15% 8% Consumer ASSP 10 13 Fuzhou Rockchip Electronics 58 82 108 32% 3% Tablet/audio processors 6 14 Leadcore Technology 117 128 103 -20% 3% Mobile products 8 15 Shanghai Fudan Microelectronics 75 88 100 14% 7% Smart card 11 16 GigaDevice Semiconductor NA 75 97 29% 3% NOR Flash Memory 7 17 Suzhou Good-Ark Electronics NA 105 96 -9% 7% Automotive 7 18 Shanghai Huahong Integrated Circuit 101 94 90 -4% 3% Smart card 8 19 Datang Microelectronics Technology 74 91 84 -8% 3% Smart card 13 20 Vimicro 91 64 76 19% 2% Consumer Ics Total 2,017 3,717 3,993 7% Source: Gartner SMIC now serves a broad base of Chinese fabless companies, including mobile basebands (Spreadtrum, RDA Micro), DTV and Set-Top-Box chipsets (Hisilicon), wireless connectivity (RDA Micro), CMOS image sensors (GalaxyCore), tablet apps processors (Rockchip, Allwinner), NOR flash (GigaDevice), smart card ICs (CEC Huada, Shanghai Fudan Microelectronics, Tongfang Microelectronics, and Datang Microelectronics ). Specialty platforms support the legacy capacity Approximately 55% of SMIC’s wafer capacity is in mature process nodes (130nm and Specialty applications above), allowing it to target more cost-sensitive applications that do not require the most keeping the legacy nodes advanced high performance node and also mixed signal and RF on legacy nodes. The profitable majority of Chinese fabless companies are still using mature technology nodes (greater than 110nm) for analog and mixed signal products. This keeps a sizable long-term revenue for SMIC’s legacy 6” and 8” wafer fabs as long as the company has high-quality specialty processes for the Chinese market. The mix of n-1 and n-2 projects and specialty platform on mature process allows the company to target customers for their more cost sensitive applications for the emerging market supply chain. Existing specialty process technologies SMIC offers and its key customers for each in the following table.

Figure 133: SMIC avoiding mature process commoditisation with specialty platforms Specialty process Process node focus Key customers CMOS Image Sensor (CIS) 130nm-180nm GalaxyCore NOR Flash 65nm-180nm GigaDevice Micro-controller Unit (MCU) 65nm-180nm Various Power MOSFET 180nm-300nm Various BCD Technology 180nm-350nm Various Power Management IC (PMIC) 130nm Qualcomm Smart Card IC 110nm-130nm HED, Datang, Fudan Source: Company data SMIC tracking in line for 4Q13, may guide down 1Q14 We believe SMIC is tracking in line to its 4Q guidance for sales down 4.5-9% including SMIC tracking in-line for Wuhan, implying US$486-510 mn sales. SMIC’s conservative outlook is consistent with 4Q13 though may guide the foundry industry trend as customers clean up inventory. We expect the company to down 1Q14 also guide for a single digit decline in 1Q14 due to seasonality and continued inventory

China Smartphone Sector 50 07 January 2014 reductions, worse than original CS flat and street down 1% QoQ. GMs should fall slightly with utilization dropping into 1Q14, although we expect a good rebound coming into 2Q14.

Figure 134: SMIC tracking in-line for 4Q13, though may see a decline in 1Q14 (in millions, unless otherwise stated) 4Q13 1Q14 2013 2014 2015 (US$ mn) CS Street Guidance CS Street CS Street CS Street CS Street Net sales $509 $501 $486-$510 $509 $495 $2,086 $2,087 $2,357 $2,322 $2,663 $2,560 Change -4.8% -6.5% -4.5 - 9% 0.0% -1.2% 22.6% 22.7% 13.0% 11.3% 13.0% 10.2% GM % 21.4% 20.9% 18.5%-21.5% 20.8% 20.6% 21.8% 21.9% 21.7% 23.5% 21.7% 24.5% OpM % 5.4% 5.2% Opex $80-84mn 4.6% 5.0% 7.0% 8.2% 6.9% 8.1% 7.2% 8.9% Net income 18 20 15 16 116 174 121 164 148 191 $0.001 $0.001 $0.000 $0.000 $0.004 $0.005 $0.004 $0.004 $0.005 $0.006 EPS (US$) Source: Company data, Credit Suisse estimates We maintain NEUTRAL on SMIC with HK$0.68 target price through the slowdown and Stock now reasonably investment cycle to ramp up a new Beijing JV fab. SMIC’s results and guidance should stay valued in line and the stock already reflects the progress for the company to return the business to mild profitability driven by better traction on specialty and advanced technology, so needs an additional catalysts from further growth and margin expansion to lift the stock further. Our target price remains unchanged at HK$0.68, based on 1.2x average 2013-14E BV as the company has returned to profitability and has improved its growth outlook. The stock trades at 1.1x 2013-14E P/B, the upper end of its five-year range.

Figure 135: SMIC re-rating upside limited HK$ SMIC PB Band 2.5

2

1.5

1 1.5x 1.2x 0.5 0.7x 0.4x 0 Mar 04 Mar 05 Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13

Source: Company data, Credit Suisse estimates Back-end: ASE and SPIL margins expand as capex gets more conservative The Taiwan back-end saw a rebound in growth in 2013 that should continue in 2014. The Mobile represents 50% of sector’s revenue growth through 2010-2012 was deflated by conversion of gold wirebond sales for the back-end to copper wirebond at lower cost but also lower price. That transition is maturing and sector replaced with a positive sales driver from conversion of smartphones from wirebond to flip chip at higher ASPs. At the same time, ASE and SPIL are gaining market share, with ASE adding fingerprint IC module assembly in 2H13 and one of Apple’s 3 processor back-end suppliers in 2014 and SPIL seeing two year penetration into a major flip chip customer and having high of sales to China/Taiwan fabless in low cost smartphones and tablets.

China Smartphone Sector 51 07 January 2014

Figure 136: Back-end sales driven by communications Figure 137: Back-end back to positive sales growth End Markets US$ mn YoY Growth US$mn $3,500 100% $2,100 $3,000 80% $1,800 $2,500 60% $1,500 40% $2,000 $1,200 20% $1,500 $900 0% $1,000 -20% $600 $500 -40% $300 $0 -60% $0 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q99 3Q99 1Q00 3Q00 1Q01 3Q01 1Q02 1Q14E 3Q14E 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14E 3Q14E ASE SPIL Amkor Stats YoY Growth Communications Computer Consumer Memory Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates We expect high-single-digit decline for SPIL in 1Q14 and 15% QoQ for ASE due to impact from its K7 shut-down and additional seasonality following strong shipments of its SiP module for Apple in 4Q13. The seasonal decline should be followed by restocking and builds for smartphones and tablets along with some recovery from the IDM customer base. Disciplined capex and margin tailwinds lift GMs Overall industry equipment bookings have retreated from peak levels, a sign of disciplined Back-end capex has been supply again into 2014. Equipment bookings, which reflect orders for new test and coming down packaging equipment are down 56% from the May 2012 peak and 41% below the post financial crisis peak set in July 2010. The much lower level for equipment orders in 2H13 implies very limited capacity additions through the low season and another period of tightening supply by 2Q14. Of note, SPIL targets reducing capex from NT$15 bn to under NT$9.6 bn YoY, King Yuan may cut their budget from NT$5 bn to NT$4 bn and ASE may stay stable around US$700-750 mn. We believe many IDMs are also not spending materially so expect more outsourcing in 2014. Capex/sales for the sector is falling back to 15-16%, in-line with 2005-2008 when the group re-rated for its capex discipline.

Figure 138: Bonder capacity additions have slowed Figure 139: Capex pointing down again in 2014 (in millions, unless otherwise stated) (in millions, unless otherwise stated) Wirebonders Utilization (%) Sales & Capex Capex/Sales (%) (US$ mn) 30,000 100% $13,500 40% 90% $12,000 35% 25,000 80% $10,500 30% 70% 20,000 $9,000 60% 25% 15,000 50% $7,500 20% 40% $6,000 15% 10,000 30% $4,500 10% 5,000 20% $3,000 10% $1,500 5% - 0% $0 0% 4Q99 2Q00 4Q00 2Q01 4Q01 2Q02 4Q02 2Q03 4Q03 2Q04 4Q04 2Q05 4Q05 2Q06 4Q06 2Q07 4Q07 2Q08 4Q08 2Q09 4Q09 2Q10 4Q10 2Q11 4Q11 2Q12 4Q12 2Q13 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 4Q13E 2Q14E 4Q14E 2013E 2014E ASE SPIL Stats Wirebonder YoY Utilization Sales Capex Capex/Sales

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates The back-end has moved past its challenges with rising material costs from the increase in GM has improved as gold gold price. SPIL saw the most notable drag since 2007 from the rise in gold price, but has costs drop been progressively ramping up copper to over 70% of sales, with ASE over 60% due to larger base of IDM business that are in less cost sensitive applications.

China Smartphone Sector 52 07 January 2014

Figure 140: ASE margins back to 2010 levels Figure 141: SPIL margins also on a rebounding trend Utilization % Gross margin 105% 35% 95% 30% 85% 25% 75% 20% 65% 15% 55% 10% 45% 5% 35% 0% 2Q00 1Q01 4Q01 3Q02 2Q03 1Q04 4Q04 3Q05 2Q06 1Q07 4Q07 3Q08 2Q09 1Q10 4Q10 3Q11 2Q12 1Q13 4Q13 Assembly utilization Gross margin Linear (Test utilization)

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates SPIL in particular has eased its burden from gold cost, reducing gold wire from 19% to 4% of sales since early 2010. We expect some tailwinds to margins to continue from migration from wirebond to flip chip on smartphones, less drag from gold price and supply control keeping utilization at relatively full levels.

Figure 142: NT$ and gold have supported profitability Figure 143: Gold purchases have dropped significantly Gold bought (NT$mn) GM % NT$ Gold $/ounce $3,000 25% USD stronger 36  2,000 $2,500 35 1,800 20% 34 1,600 $2,000 15% 33 1,400 1,200 $1,500 32 10% 31 1,000 $1,000 800 30 5% 600 $500 29 TWD stronger 400 28 $0 0% 200 01 02 03 04 05 06 07 08 09 10 11 12 13

02 03 04 05 06 07 08 09 10 11 12 13 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 Gold $'s bought (NT$mn) Gold % of sales GM %

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates ASE upside in 4Q13, shut-down to impact 1Q14 but impact looks manageable ASE's stock has pulled back following a pollution violation in early October that led to the Factoring in 4% negative December shut-down of wafer bumping operations at K7, a business than impacts about impact and a 14.5% QoQ 4% of sales after factoring in production that can move. We expect the impact to be decline for IC ATM in 1Q14 manageable as ASE is installing an additional wastewater treatment tank to increase due to the K7 environmental pollution control capacity at the facility and now working with regulators to restore shut-down operations. The facility was impacted during the slow season so should be able to contain the impact but as precaution, we have taken the full 4% out of 1Q14 sales and now model down 14.5% QoQ. ASE still does not have an official estimate of when its K7 will resume operations, but they ASE 4Q13 ATM GMs could are in progress of allocating orders to other factories and transferring to other facilities. We surprise higher, sales believe ASE will see a small hit from customers as they reallocate a bit of business to tracking to the high-end of other suppliers as a precautionary measure to avoid additional supply chain disruptions. guidance We still believe long term impact can be contained as ASE has built 30-year track record as reliable supplier and still retains largest capacity in the industry and represents a critical supply source for customers to maintain competitive packaging cost structure and diversified supply base. Despite the weakness in 1Q14, we still see 4Q13 results already tracking better than expected. We believe ASE's IC ATM will reach the high end of flat to -3% QoQ guidance and EMS will grow potentially 40% QoQ vs. guidance for +25% QoQ growth on stronger than expected SiP business ramp, while China low to mid-end smartphones and tablets

China Smartphone Sector 53 07 January 2014 demand remains in-line. The better NT$, lower gold price and SiP value add contribution should help keep IC ATM GMs moving higher than 25.5% in 3Q13 and above our 25%. We still expect consolidated GMs to be in the 18-19% range as the EMS business will have a high amount of pass through sales associated with the SiP business.

Figure 144: Maintaining CS estimates for ASE for 2013-14 (NT$ in mn, unless otherwise stated) 4Q13 1Q14 2013 2014 ATM USI CS Street Guidance ATM USI CS Street ATM USI CS Street ATM USI CS Street Sales 37,054 26,003 63,057 56,230 ATM: 0 to -3% 31,681 19,502 51,183 60,146 142,476 59,740 218,755 215,379 148,251 87,820 236,072 243,525 Chg (%) -2.0 33.0 11.1 16.7 EMS: >+25% QoQ -14.5 -25.0 -18.8 7.0 9.6 -4.4 12.8 11.0 4.1 47.0 7.9 13.1 GM (%) 25.0 9.1 18.4 20.1 ATM GMs: 25.5% 20.2 9.9 16.3 18.8 23.8 9.8 19.2 19.3 24.1 9.7 18.7 19.4 R&D 1,972 500 2,472 USI GMs 10.5-10.8% 1,982 505 2,486 7,311 1,449 9,137 8,249 2,075 10,324 SG&A 2,313 823 3,136 2,324 831 3,155 8,704 2,181 11,669 9,674 3,418 13,092 OpM (%) 13.4 4.0 9.6 10.6 6.6 3.1 5.3 9.6 12.5 3.8 9.7 9.7 12.0 3.5 8.8 10.0 Net Inc. 4,400 867 4,400 4,444 Cons. GMs 18-19% 1,970 498 1,970 4,394 14,881 1,940 14,881 14,946 16,058 2,513 16,058 18,505 EPS (NT$) 0.58 0.13 0.58 0.58 0.26 0.07 0.26 0.57 1.95 0.39 1.95 1.95 2.10 0.38 2.10 2.41 Source: Bloomberg, Company data, Credit Suisse estimates We recently revised estimates for 2013/2014 EPS at NT$1.95/NT$2.10, slightly below ASE view remains positive street at NT$1.95/NT$2.41. Our positive longer-term view is based on the broader sector longer-term on ramp of SiP, seeing capex control, improving margins from lower material costs. ASE also has growth Apple and rebound of IDM opportunities including the fingerprint and other system in package (SiP projects), start of business Apple packaging and test in 2014 for its Ax processor, ramp of DRAM memory packaging, and recovery of IDM business, which often rebounds if macro remains stable. We believe SPIL's performance is also holding up well, with 4Q13 only declining 2% QoQ, SPIL keeping capex down in above its guidance for -3.6-8% QoQ. On the stronger sales, GMs decline only slightly to 2014 but still seeing good 22-23% range, exceeding our 20.7% and street at 21% with pricing staying firm and gold growth as it ramps a major price and NT$ falling. We model a 6% QoQ decline in 1Q14 and healthy 10% QoQ growth overseas flip chip customer in 2014 as we expect SPIL to benefit from good mobile unit growth in emerging markets and ramp of its overseas flip chip customer to become a new 10-15% customer, up from 5-7% of sales now.

Figure 145: SPIL’s 4Q13 and 4Q13 guidance near in-line with CS, slightly below the street 4Q13 1Q14 2013 2014 2015 (NT$ mn) CS Street Guidance CS Street CS Street CS Street CS Street Net sales 18,022 18,125 NT$17.6-18.4bn 16,968 16,879 68,535 68,632 75,221 76,051 81,618 81,518 QoQ (%) -5.6% -4.6% -3.6-8.0% QoQ -5.8% -6.9% 6.0% 6.2% 9.8% 10.8% 8.5% 7.2% GM (%) 20.7% 21.0% Incr GM 45% 18.8% 19.1% 20.2% 20.2% 22.1% 21.1% 22.4% 21.1% OpM (%) 11.4% 12.4% 8.8% 9.5% 10.7% 10.9% 12.8% 12.2% 13.0% 13.0% Net income 1,672 1,918 1,220 1,413 6,201 5,688 7,806 7,912 8,591 8,509 EPS (NT$) 0.53 0.61 0.39 0.44 2.00 1.80 2.50 2.54 2.75 2.72 Source: Company data, Credit Suisse estimates, Bloomberg consensus We maintain our positive view as we believe the sector is improving from ability to cut costs from the switch to copper wirebonding, revenue drivers from low cost smartphones, share gains for the Taiwan back-end and lift from outsourcing and capex control. We still see 15-20% upside for the stocks to return to 2.2x P/B seen during prior upturns.

China Smartphone Sector 54 07 January 2014

Figure 146: ASE trading at a discount on a P/B basis Figure 147: SPIL still trading below mid-cycle levels NT$ ASE Historical PB Band NT$ SPIL Historical PB Band 60

65 50 3x 3x 40 2.2x 50 2.2x 30 1.4x 35 1.7x 20 0.8x 1.2x 10 20

0 5 Jan/05 Jan/01 Jan/03 Jan/07 Jan/09 Jan/11 Jan/13 Sep/03 Sep/05 Sep/99 Sep/01 Sep/07 Sep/09 Sep/11 Sep/13 May/00 May/02 May/04 May/06 May/08 May/10 May/12 Jan/96 Jan/97 Jan/98 Jan/99 Jan/00 Jan/01 Jan/02 Jan/03 Jan/04 Jan/05 Jan/06 Jan/07 Jan/08 Jan/09 Jan/10 Jan/11 Jan/12 Jan/13 Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Smartphone driver IC: More competition in 2014 We expect China smartphone will continue to adopt higher resolution panels in 2014 as Taiwanese panel makers start to mass product high-resolution panels with a-Si capacity. We expect mainstream smartphone sizes will shift toward 4.5"+ and the display resolution should continue to increase. For 2014, we forecast qHD and above (qHD, HD720, FHD) will account for 40-50% of the market, vs 20-25% in 2013.

Figure 148: Smartphone resolution vs display size Pixel per inch (PPI) 3.5" 4.0" 4.5" 5.0" 5.5" 6.0" WVGA (800 x 480) 266 233 207 186 169 155 qHD (960 x 540) 314 275 244 220 200 183 HD720 (1280 x 720) 367 326 293 267 244 FHD (1920 x 1080) 440 400 367 Source: Company data, Credit Suisse estimates Pricing has become the main concern for Chinese smartphone brands and display Ramless driver IC to makers, and we expect ramless driver IC will account for 70-80% of the China smartphone become mainstream in 2014 market as ramless is around half of the price of full-ram driver IC. Such trend will be negative for driver IC brands as the competition will become more severe given lower entry barrier. For driver IC backend suppliers, ramless driver IC has smaller die size and requires shorter testing time, which might be a burden to Chipbond as it has excess 8" bumping capacity and expanded its chip probing capacity in 2013. For Novatek, we think it might face more challenges in the China smartphone market in Novatek might face more 2014 as its competitor Himax turns more aggressive for market share competition, as well competitive challenges in as Ilitek is qualifying its qHD and HD720 driver IC products and likely to start mass the China smartphone production by late 1Q14. Given Ilitek's aggressive pricing strategy, we estimate there market could be another 20-30% price erosion for ramless HD720 driver IC in 2014, which could drag down Novatek's overall GM and profitability.

China Smartphone Sector 55 07 January 2014

Figure 149: Smartphone driver IC GM under pressure as Figure 150: Orise and Ilitek catching up on small/medium tier two makers ramping up shipments driver IC Novatek Himax Orise Ilitek Gross Margin US$ mn Novatek - S/M Himax - S/M Orise Ilitek 30% 140 28% 120 26% 24% 100 22% 80 20% 18% 60 16% 40 14% 12% 20

10% - 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 Source: Company data Source: Company data, Credit Suisse estimates Smartphone components: China players catching up, except for substrates and optical components We expect international brands to adopt different pricing/supply chain strategy, versus Chinese brands. Given that high-end smartphone growth is decelerating, we expect international brands to move down to mid-to-low end price segments, which may lead to increasing outsourcing opportunity. On the other hand, Chinese domestic brands will try to move up to mid-to-high-end price segments, which may lead to more M&A activities and more components insourcing. Spec-wise, we expect smartphone brands to continue focusing on bigger-size/higher resolution screen, longer battery life (through better component design and battery power management), and better sound/picture quality i.e. instant shooting, gesture detection, etc. Industrial design and connectivity between different devices are also getting more important. The trend should increase the entry barrier for components design, and should favour technology leaders in our view.

China Smartphone Sector 56 07 January 2014

Figure 151: Specifications for flagship models from top 10 smartphone brands Brand Samsung Apple Lenovo LG Huawei Model Galaxy S4 iPhone 5S Vibe Z K910 G Flex Ascend P6

Dimension (mm) 136.6*69.8*7.9 123.8*58.6*7.6 7.9mm thick 160.5*81.6*8.7 132.7*65.5*6.2 Samsung Exynos Apple A7 QCOM QCOM Huawei CPU quad core 1.6GHz dual core 1.3GHz quad core 2.2GHz quad core 2.2GHz quad core 1.5GHz Screen size 5.0" 4.0" 5.5" 6.0" 4.7" Resolution 1920*1080 1136*640 1920*1080 1280*720 1280*720 Camera 13MP/2MP 8MP/1.2MP 13MP/5MP 13MP/2.1MP 8MP/5MP Brand Sony ZTE Nokia Coolpad HTC Model Xperia Z1 Grand S Lumia 1520 Grand 4 One

Dimension (mm) 144*74*8.5 6.9mm thick 162.8*85.4*8.7 157*81.6*7.9 137.4*68.2*9.3 QCOM QCOM QCOM Nvidia QCOM CPU quad core 2.2GHz quad core 1.7GHZ quad core 2.2GHz quad core 1.8GHz quad core 1.7GHz Screen size 5.0" 5.0" 6.0" 5.9" 4.7" Resolution 1920*1080 1920*1080 1920*1080 1920*1080 1920*1080 Camera 20.7MP/2MP 13MP/2MP 20MP/1.2MP 13MP/2MP 4MP/2.1MP Source: Company data, Credit Suisse estimates We believe that the continuous focus on AP performance will lead to more complexity in substrates and HDI design, which should favour Unimicron and Kinsus. We recently upgraded Unimicron from Neutral to OUTPERFORM, as we are getting more confident on its new order wins at both HDI and IC substrates. On the other hand, better image quality should remain the key focus for China smartphones. This should favour technology leaders such as Largan (for optical lens) and LOT (for camera modules).

Figure 152: FC-CSP supply chain FC-CSP AP company Kinsus SEMCO Ibiden UMTC Nanya PCB LG Innotek Shinko

QCOM ● ● ○ ● ●

TI ● ● ●

Nvidia ○ ● ●

Samsung/Apple ● ● ● ○

TSMC/Apple ○ ● ● ○

Broadcom ● ●

Intel ● ●

IFX ● ●

MTK ● ○ ○

Source: Company data, Credit Suisse estimates

China Smartphone Sector 57 07 January 2014 Mobile devices: Asian brands gain share Lenovo: Accelerating MIDH profit growth Lenovo's smartphone shipments increased 109% YoY in 1H FY14. It is the second largest smartphone vendor in China with 13.1% market share in the Sep-13 quarter, and number three globally with 5.1% market share. Lenovo has lifted China MIDH (including smartphone) profit to US$9 mn profit in FY2Q14 (Sep-13) from US$37 mn loss in the year ago quarter. It is doubling its efforts and plans to accelerate smartphone profit growth in FY14-15E. Lenovo shipped 12.3 mn (11.2 mn into China) smartphones in the Sep-13 quarter, and we Lenovo on track to ship believe Lenovo is on track to ship 50/60 mn smartphones in FY14/15. We believe 50/60mn smartphones in Lenovo's smartphone focus is to accelerate profitability growth, by focusing on country FY14/15 expansion outside of China and making a significant move into mid-to-high end smartphone price-bands.

Figure 153: Lenovo keeps solid smartphone units in Figure 154: Strong #2 China smartphone vendor Calendar quarter; % china smartphone market share China Calendar quarter, units in thousands 000s 3Q12 4Q12 1Q13 2Q13 3Q13 2011 2012 1-3Q13 100,000 Samsung 16.5% 15.9% 17.7% 18.6% 17.7% 18.8% 17.4% 18.0% 90,000 Lenovo 14.6% 13.6% 10.2% 12.9% 13.1% 2.1% 12.1% 12.2% 80,000 Yulong 9.7% 10.0% 9.8% 9.4% 9.0% 4.4% 8.7% 9.3% Huaw ei 10.5% 9.4% 10.1% 8.2% 8.2% 10.2% 9.8% 8.7% 70,000 Apple 8.0% 8.7% 9.7% 7.3% 6.4% 9.9% 10.9% 7.7% 60,000 ZTE 8.5% 8.2% 7.4% 7.8% 5.7% 7.8% 8.4% 6.9% 50,000 Tianyu 0.8% 4.1% 4.3% 4.6% 4.4% 0.6% 2.0% 4.4% 40,000 BBK 1.8% 2.1% 2.4% 2.6% 4.4% 0.0% 1.4% 3.2% 30,000 Xiaomi 1.2% 1.5% 2.6% 3.0% 4.0% 0.5% 1.6% 3.2% 20,000 OPPO 2.2% 2.4% 2.8% 3.3% 3.5% 0.1% 1.7% 3.2% 10,000 Gionee 4.6% 4.8% 4.0% 3.0% 3.1% 0.0% 3.8% 3.4% Hisense 2.1% 2.1% 2.2% 2.2% 2.2% 0.3% 1.9% 2.2% 0 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 HTC 4.4% 3.2% 2.3% 1.7% 1.3% 3.0% 3.6% 1.7% Others 15.1% 14.0% 14.5% 15.5% 16.9% 42.3% 16.7% 15.7% China smartphone Lenovo China smartphone Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Source: Gartner, Company data, Credit Suisse Source: Gartner, Credit Suisse Rapid deployment of mid-to-high-end devices accelerates profit expansion Credit Suisse recently visited Lenovo headquarters in Beijing, China and met with Shao Tao, VP of Lenovo Business Group in China to speak on Lenovo's smartphone strategy (click here for our daily). Lenovo's key message to us and investors is its focus on accelerating operating profits in MIDH. One key strategic shift is from volume driven by entry-level pricing to higher ASP devices. In its key market China, it aims to move a significant push in the >RMB2,000 price-band. This price-band is ~50% of the country’s smartphone value per SINO research. Lenovo launched three devices in the >RMB2,000 price band: Vibe Z, Vibe X and S898t towards the end of 2013. Including its earlier flagship model, K900, Lenovo has four devices in the >Rmb2,000 price-band. We expect the number of models in said price band to accelerate in coming months, and we believe CES 2014 is a key catalyst for these product launches.

China Smartphone Sector 58 07 January 2014

Figure 155: Mid-to high-end smartphone offering grows rapidly Manufacturer Lenovo Lenovo Lenovo Lenovo

Model K900 VIBE X S960 S898t V IBE Z K910 Announce date Jan-13 IFA 2013 3Q13 Nov-13 Ship date May-13 Oct-13 4Q13 Dec-13

Features Display size (in) 5.5 5.0 5.3 5.5 Resolution 1080 x 1920 1920 x 1080 1280 x 720 1920 x 1080 Height x Width x Depth (mm) 157 x 78 x 6.9 144 x 74 x 6.9 147 x 75.6 x 7.9 77 x 149 x 7.9 Weight 162g 121g 140g 147g Processor Intel Atom Z2580 2.0GHz MT6589W 1.5GHz Quad Core 1.5GHz Quad Core Qualcomm Snapdragon 800 Memor y 2GB 2GB 1GB 2GB Operating system Android JB 4.2 Android 4.2 Android 4.2 Android 4.2 Storage type/capacity (GB) 16/32 GB ROM 16GB ROM 8GB ROM 16GB ROM Rear-camera (MP) 13M 13M 13M 13M Front-camera (MP) 2M 5M 2M 5M

Re tail Pr ice ($USD) $496 $479 $380 $549

Source: Company data, Credit Suisse The price-band is currently dominated by Samsung (>50%) and Apple (28%) with 75-80% share. We believe Lenovo can compete with these two vendors, particularly in China, given quickening product development and manufacturing times afforded by its Wuhan facility can refresh a richer and fuller product portfolio covering a wider birth of open distribution channels faster than its competitors. We listed additional advantages of its smartphone business in the section below. Lenovo's smartphone advantage—why it can generate a profit in smartphones We believe the success in Lenovo's smartphone business is the result of a well laid out strategy based on the strengths of its core market China, brand, distribution, and PC supply chain. Last year, Lenovo has added a new advantage through the establishment of its new R&D, sales & operations and product facility in Wuhan, China on 19 Dec 2013. We believe the following are the advantages of Lenovo's smartphone business vis-à-vis both branded and white-box competitors, and particularly in China:

■ Use strong China foothold to fund growth and profit into new countries: China is Lenovo executing on a five- Lenovo’s core market generating 41% of revenues and 72% of operating profits in 1H point strategy in FY14. Lenovo is leveraging its China PC position (33% PC share in 1-3Q13), localized smartphones manufacturing, supply chain advantages, distribution, brand, and operational experience in the country a testing ground for its smartphone strategy and new products, and funds entry into new markets. Lenovo shipped smartphones into more than ten countries outside China as of Nov 2013, including Indonesia, India, Russia, and Vietnam, and has plans to enter at least 20 more markets in the "next couple of quarters." Lenovo generated smartphone profits with 12.7% market share in Indonesia after four quarters of smartphone shipments. We believe Lenovo is targeting countries where it has a strong PC market share position and strong open-channel 3C distribution networks.

■ Leverage China distribution advantage: Lenovo has reached a healthy level of scale in China – 11-12 mn quarterly shipments—and has developed carrier relationship with China Mobile, China Telecom, and China Unicom. Lenovo continues to shift its distribution focus onto its open-channel networks, which can yield 3x better gross margins vs. operator channels according to Lenovo. To date, we estimate about 65% of Lenovo’s smartphones sold have been through operators.

China Smartphone Sector 59 07 January 2014

■ Shifting design and manufacturing in-house accelerates product leadership: Lenovo's Wuhan R&D and sales and manufacturing facility for smartphones, tablets and other mobile devices came online in Dec 2013. The facility strengthens its R&D, enhances its supply chain by improving its end-to-end product capability, and accelerates production cycles and product portfolio. We believe these provide a key time-to-market and product portfolio advantage in the increasingly competitive smartphone market, particularly in China.

■ China App Store is a distinct advantage: Launched in May 2010, Lenovo operates a Google based App store, Lenovo Store, for its smartphone and tablet users in China. The apps store had over 400,000 applications as of September 2013; download volumes from the store exceeded 3 bn, and average daily downloads were 20 mn; and had 70 mn users. Although many of the apps available overlap with Google’s App store, Lenovo app store for its China users is formatted locally and in simplified Mandarin. We believe this to be a distinct advantage to Lenovo versus competition local brands, particular white-box vendors.

■ PC business supportive of smartphone profits: Unlike its Asia competitor HTC, Lenovo has a strong PC business to help scale-out and fund growth of its smartphone business. Specifically, this can help improve procurement costs, and leverage R&D design costs, distribution channels and market expenses. In F2Q14 Sep-13 quarter, Lenovo shipped 14.1 mn PCs, 12.3 mn smartphones, and 2.3 mn tablets.

Figure 156: Lenovo's combined shipments for smartphone and tablet exceeded its PC volumes 000s 18,000

16,000

14,000

12,000

10,000

8,000

6,000

4,000

2,000

0 F1Q12 F2Q12 F3Q12 F4Q12 F1Q13 F2Q13 F3Q13 F4Q13 F1Q14 F2Q14 F3Q14E F4Q14E

Smartphone + Tablet shipment Total PC shipments

Source: Company data, Credit Suisse estimates PC market decline bottoming in 2013 with pockets of growth in 2014; easing headwinds in Lenovo's profit engine Our US IT Hardware team trimmed 2014 PC shipment forecasts by 0.3% overnight, and CS projects global PC maintained 2015 forecast. The team now expects PC volumes of 305/300 mn in 2014/15E, volumes at 305/300mn in or -5%/-2% YoY. Despite the minor revisions, our 2014 forecasts suggest the PC market 2014/15E, -5%/-2% YoY. decline will decelerate from 2013, which is expect to decline 9% YoY. Into 2014, we see We forecast Lenovo to gain growth pockets including global corporate PCs and desktop AIOs; we also expect an share and grow +4%/2% inflection point in China PC demand as PC declines decelerate through 2014. In each of these markets, Lenovo retains #1 market share. Overall, we expect PC industry pressures

China Smartphone Sector 60 07 January 2014 to ease in 2014 and for Lenovo PC shipments to outpace the overall market. We forecast Lenovo PC shipments to increase 4%/2% in CY14/15E.

Figure 157: Ample opportunity to gain share in consumer Asia-Pac ex. China, North America and Latin America 2010 2011 2012 1-3Q13 #1 #2 #3 Commercial market share% China 32.2% 34.0% 38.5% 37.8% Lenovo (37.8%) Dell (8.2%) HP (7.4%) APAC ex China 8.1% 9.8% 11.6% 9.6% HP (21.6%) Dell (12.6%) Lenovo (9.6%) Japan 7.7% 19.0% 28.4% 26.9% Lenovo (26.9%) Fujitsu (21.9%) Dell (14.6%) EMEA 6.3% 8.1% 9.7% 11.9% HP (21.6%) Lenovo (11.9%) Dell (11.3%) North America 8.5% 11.0% 11.6% 13.0% Dell (26.4%) HP (24.5%) Lenovo (13.0%) Latin America 8.1% 9.7% 12.0% 18.8% Lenovo (18.8%) HP (14.6%) Dell (9.5%) Worldwide 12.6% 15.2% 17.7% 18.6% Lenovo (18.6%) HP (18.3%) Dell (14.1%)

Consumer market share% China 21.0% 25.6% 28.0% 27.9% Lenovo (27.9%) Dell (9.1%) ASUS (8.2%) APAC ex China 4.7% 5.6% 7.6% 10.0% Acer Group (13.8%) HP (11.7%) Samsung (11.3%) Japan 4.5% 12.8% 21.9% 22.9% Lenovo (22.9%) Toshiba (13.4%) Fujitsu (12.9%) EMEA 3.8% 4.1% 9.6% 14.0% HP (15.0%) Lenovo (14.0%) Acer Group (11.0%) North America 2.0% 2.7% 5.1% 6.9% HP (26.5%) Dell (16.4%) Apple (13.7%) Latin America 1.7% 2.6% 2.5% 3.9% Samsung (12.8%) HP (11.7%) Positivo Informatica (10.1%) Worldwide 6.2% 8.4% 11.8% 14.0% Lenovo (14.0%) HP (13.8%) Acer Group (9.0%) Source: Gartner, Credit Suisse Valuation Despite soft China PC demand, Lenovo has evidenced it can still achieve similar Lenovo is trading at 13x profitability in the region, and should trade at a historical 15x. Further, its profitability in FY15E EPS regions outside China grows strong as it scales up. Overall, we do not believe a 15x P/E multiple is expensive based on our earnings growth expectation of 25%/19% in FY14/15E. Lenovo is trading at 13x our FY15E EPS (9.5x ex-cash).

Figure 158: Lenovo forward P/E and ex-cash P/E 30.0x

Mid-09 to present Avg 25.0x Ex-cash P/E: 9.3x P/E: 17.8x 20.0x

15.0x 14.1x

10.0x 10.0x

5.0x

0.0x Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Jun-10 Jun-11 Jun-12 Jun-13 Feb-10 Feb-11 Feb-12 Feb-13 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Aug-09 Aug-10 Aug-11 Aug-12 Aug-13

Lenovo ex-cash forward P/E Lenovo forward P/E

Source: Company data, the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates

China Smartphone Sector 61

07 January 2014

Companies Mentioned (Price as of 04-Jan-2014) ARM Holdings (ARM.L, 1087.0p) AU Optronics (2409.TW, NT$9.56) Actions (ACTS.OQ, $2.93) Advanced Semicon. Engr. (2311.TW, NT$27.1, OUTPERFORM, TP NT$31.5) Apple Inc (AAPL.OQ, $540.98) Arrow Electronics, Inc. (ARW.N, $52.69) Avnet Inc. (AVT.N, $42.68) Broadcom Corp. (BRCM.OQ, $28.97) China Mobile Limited (0941.HK, HK$78.6) China Telecom (0728.HK, HK$3.76) China Unicom Hong Kong Ltd (0762.HK, HK$11.3) China Wireless (2369.HK, HK$2.41) FocalTech Corporation, Ltd. (5280.TW, NT$237.0) Google, Inc. (GOOG.OQ, $1105.0) Himax Technologies (HIMX.OQ, $14.63) ILI Tech (3598.TW, NT$59.8) Intel Corp. (INTC.OQ, $25.78) Kinsus Interconnect Tech (3189.TW, NT$98.8) Largan Precision (3008.TW, NT$1215.0) Lenovo Group Ltd (0992.HK, HK$9.29, OUTPERFORM, TP HK$10.3) Lite-On Technology (2301.TW, NT$46.65) Marvell Technology Group Ltd. (MRVL.OQ, $14.16) MediaTek Inc. (2454.TW, NT$435.5, OUTPERFORM, TP NT$500.0) Microsoft Corporation (MSFT.OQ, $36.91) Motorola Solutions (MSI.N, $66.2) NVIDIA (NVDA.OQ, $15.67) Nokia (NOK1V.HE, €5.91) Novatek Microelectronics Corp Ltd (3034.TW, NT$123.5) OmniVision Techs (OVTI.OQ, $16.73) Orisetech (3545.TW, NT$46.75) QUALCOMM Inc. (QCOM.OQ, $72.89) RDA Microelectronics (RDA.OQ, $17.88) Realtek Semiconductor (2379.TW, NT$81.5) Samsung Electronics (005930.KS, W1,296,000) Semiconductor Manufacturing International Corp. (0981.HK, HK$0.63) Siliconware Precision (2325.TW, NT$36.2, OUTPERFORM, TP NT$42.0) Sony (6758.T, ¥1,826) Sunny Optical Technology Group Co., Limited (2382.HK, HK$8.0) Synnex Technology International Corp (2347.TW, NT$47.75) TCL Comm (2618.HK, HK$8.23) TPK Holdings (3673.TW, NT$183.5) TXC Corp. (3042.TW, NT$37.05) Taiwan Semiconductor Manufacturing (2330.TW, NT$102.5, OUTPERFORM, TP NT$116.0) Unimicron Technology Corp (3037.TW, NT$22.35, OUTPERFORM, TP NT$29.0) United Microelectronics (2303.TW, NT$12.25) WPG Holdings Ltd (3702.TW, NT$34.3, NEUTRAL, TP NT$39.5)

Disclosure Appendix Important Global Disclosures I, Randy Abrams, CFA, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for Advanced Semicon. Engr. (2311.TW)

2311.TW Closing Price Target Price Target Price Closing Price 2311.TW Date (NT$) (NT$) Rating 35 07-Jan-11 25.14 27.86 N 31-Jan-11 28.80 30.69 30 08-Jul-11 25.57 28.33 10-Aug-11 23.06 28.33 O 25 31-Oct-11 23.64 29.83 23-Apr-12 25.40 31.58 20 26-Jul-12 19.48 27.20 26-Apr-13 25.85 31.00 15 16-Jul-13 25.35 R 1- Jan- 11 1- Jan- 12 1- Jan- 13 1- Jan- 14 29-Aug-13 25.45 31.00 O NEUTRAL 09-Oct-13 29.00 34.00 OUTPERFORM REST RICT ED 20-Dec-13 27.25 31.50 * Asterisk signifies initiation or assumption of coverage.

China Smartphone Sector 62

07 January 2014

3-Year Price and Rating History for Lenovo Group Ltd (0992.HK)

0992.HK Closing Price Target Price Target Price Closing Price 0992.HK Date (HK$) (HK$) Rating 11 17-Jan-11 4.89 5.91 O 27-Jan-11 4.65 R 9 13-Sep-11 4.99 6.50 O 14-Sep-11 5.07 * 7 02-Nov-11 5.60 6.30 O 10-Jan-12 5.89 6.95 5 09-Feb-12 6.49 7.15 23-Apr-12 7.29 8.30 3 24-May-12 6.73 7.70 1- Jan- 11 1- Jan- 12 1- Jan- 13 1- Jan- 14 04-Sep-12 6.62 7.50 OUTPERFORM REST RICT ED 05-Sep-12 6.12 R 06-Sep-12 6.36 7.50 O 18-Dec-12 7.27 8.30 08-Jan-13 7.42 8.40 31-Jan-13 8.07 10.00 24-May-13 7.66 9.30 31-May-13 7.99 R 26-Jun-13 7.01 9.30 O 08-Nov-13 8.53 10.30 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for MediaTek Inc. (2454.TW)

2454.TW Closing Price Target Price Target Price Closing Price 2454.TW Date (NT$) (NT$) Rating 500 08-Mar-11 341.00 315.00 U 19-Apr-11 309.00 295.00 02-May-11 316.50 315.00 N 400 23-May-11 310.00 300.00 07-Jun-11 313.50 280.00 U 300 28-Jul-11 266.00 255.00 07-Sep-11 282.50 260.00 31-Oct-11 318.00 306.00 200 06-Jan-12 278.50 270.00 1- Jul- 11 1- Jan- 12 1- Jul- 12 1- Jan- 13 1- Jul- 13 1- Jan- 14 04-Apr-12 277.00 300.00 N UNDERPERFORM 30-Apr-12 253.00 260.00 NEUTRAL REST RICT ED 25-Jun-12 280.50 300.00 OUTPERFORM 29-Jun-12 273.00 R 27-Jun-13 328.00 400.00 O 09-Sep-13 370.00 440.00 01-Nov-13 404.50 480.00 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Siliconware Precision (2325.TW)

2325.TW Closing Price Target Price Target Price Closing Price 2325.TW Date (NT$) (NT$) Rating 45 27-Jan-11 40.60 36.00 N 28-Jul-11 29.70 33.00 40 10-Aug-11 26.00 33.00 O 35 17-Oct-11 31.70 36.00 31-Jan-12 34.00 39.00 30 24-Apr-12 33.20 41.00 25 26-Jul-12 28.65 36.00 30-Apr-13 35.00 40.00 20 01-Nov-13 35.10 42.00 1- Jul- 11 1- Jan- 12 1- Jul- 12 1- Jan- 13 1- Jul- 13 1- Jan- 14 NEUTRAL * Asterisk signifies initiation or assumption of coverage. OUTPERFORM

China Smartphone Sector 63

07 January 2014

3-Year Price and Rating History for Taiwan Semiconductor Manufacturing (2330.TW)

2330.TW Closing Price Target Price Target Price Closing Price 2330.TW Date (NT$) (NT$) Rating 120 11-Jan-11 74.50 83.00 O 28-Jan-11 76.30 87.00 15-Apr-11 69.20 84.00 100 29-Apr-11 73.20 86.00 04-Jul-11 73.50 83.00 80 03-Oct-11 68.60 77.00 27-Oct-11 71.90 79.00 19-Mar-12 83.70 90.00 60 27-Apr-12 86.00 95.00 1- Jan- 11 1- Jan- 12 1- Jan- 13 1- Jan- 14 19-Jul-12 77.50 87.00 OUTPERFORM NEUTRAL 08-Oct-12 89.10 95.00 N 06-Dec-12 96.60 109.00 O 19-Apr-13 106.50 116.00 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Unimicron Technology Corp (3037.TW)

3037.TW Closing Price Target Price Target Price Closing Price 3037.TW Date (NT$) (NT$) Rating 70 31-Jan-11 60.50 70.00 O 29-Mar-11 46.40 62.00 29-Apr-11 47.15 58.00 50 29-Jul-11 51.30 58.00 N 03-Oct-11 42.25 47.00 30 27-Oct-11 39.50 43.00 29-Nov-11 33.95 40.00 12-Jul-12 33.20 38.00 10 18-Oct-12 31.80 37.00 1- Jul- 11 1- Jan- 12 1- Jul- 12 1- Jan- 13 1- Jul- 13 1- Jan- 14 30-Oct-12 30.30 35.00 OUTPERFORM NEUTRAL 18-Feb-13 28.30 32.00 30-Apr-13 31.10 33.50 10-Jul-13 28.50 33.00 31-Jul-13 27.55 32.00 24-Oct-13 24.10 29.00 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for WPG Holdings Ltd (3702.TW)

3702.TW Closing Price Target Price Target Price Closing Price 3702.TW Date (NT$) (NT$) Rating 60 31-Jan-11 52.48 55.05 N 12-Jul-11 43.07 50.46 50 01-Aug-11 47.25 53.21 O 08-Sep-11 41.60 50.00 40 31-Oct-11 36.70 44.00 09-Jan-12 36.10 38.50 N 30 03-Feb-12 40.65 41.00 23-May-12 35.40 38.50 20 06-Aug-12 32.80 37.50 1- Jul- 11 1- Jan- 12 1- Jul- 12 1- Jan- 13 1- Jul- 13 1- Jan- 14 02-Nov-12 34.85 36.50 NEUTRAL OUTPERFORM 01-Feb-13 39.95 36.00 03-May-13 36.65 39.00 23-Jul-13 38.00 40.00 01-Nov-13 34.50 38.50 * Asterisk signifies initiation or assumption of coverage.

China Smartphone Sector 64

07 January 2014

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; Australia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 43% (53% banking clients) Neutral/Hold* 40% (50% banking clients) Underperform/Sell* 15% (42% banking clients) Restricted 2% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Price Target: (12 months) for MediaTek Inc. (2454.TW) Method: Our target price of NT$500 is based on 20x 2014 EPS NT$25 based on 1) a strong product cycle in emerging market smartphone and tablets, 2) market leadership continuing to sustain in the face of tough competition due to fast product innovation both on lower cost and higher performance solutions, and 3) additional drivers from China brands ramping export markets and push to more advanced processors, tablets and TD-SCDMA and LTE over the next few years.

China Smartphone Sector 65

07 January 2014

Risk: Risks that could impede achievement of our NT$500 target price for Mediatek include: (1) share price volatility and potential downside from inventory and demand swings at its emerging market customer base; (2) competition pressuring pricing and margins more than expected; and (3) local news and market commentary swinging sentiment, typical for a stock with high retail interest in the Taiwan market. Price Target: (12 months) for Taiwan Semiconductor Manufacturing (2330.TW) Method: Our NT$116 target price for TSMC is reflective of 14.5x of our average 2014E EPS, as the company retains pricing and profitability through its high 28nm HPM and 20nm share, demand drivers for specialty technology and return of cash flows as capital intensity peaks in 2013 and debt issuance is now largely complete. Risk: The risks that may impede achievement of our NT$116 target price for TSMC are: 1) low free cash flows, which we believe will rebound starting in 2014, 2) inventory correction risk which is already running its course through 4Q13, 3) slowdown in smartphone and tablets, mitigated by Apple’s ramp next year and a push up in specs by the China brands, and 4) Apple shifting business to other foundries after 20nm though we believe TSMC can grow this customer in 2014 and 2015 even if it only ramps to 40% allocation.

Price Target: (12 months) for Siliconware Precision (2325.TW) Method: Our NT$42 target price for SPIL is based on 2.2x 2013 BVPS, versus the historical trading range of 1.2-2.4x P/B. Risk: The risks that may impede achievement of our NT$42 target price for SPIL are: (1) The 2H13 tech correction. (2) Price competition from peers is more severe than expected. (3) SPIL, like its peers, would be affected by an unexpected slowdown of the global economy. (4) Cost control is not as good as the company expects. Price Target: (12 months) for Advanced Semicon. Engr. (2311.TW) Method: Our NT$31.5 target price for ASE is based on 1.9x BVPS and 15x P/E 2014E. We stay positive due to good control on capex, improving margins from lower material cost and incremental sales drivers for ASE. Risk: The risks that may impede achievement of our NT$31.5 target price for ASE include: (1) The global semiconductor up-cycle not as strong as expected; being an upstream company, ASE tends to be more cyclical than other tech plays. (2) Price competition from peers more severe than expected. (3) ASE, like its peers, would be affected by an unexpected slowdown of the global economy. (4) Cost control not as good as expected.

Price Target: (12 months) for WPG Holdings Ltd (3702.TW) Method: WPG's target price of NT$39.5 is based on 12x our 2014E EPS, in-line with the midpoint of its ex-Lehman 9-15x range from 2006-10. Risk: The major risks to our 12-month target price of NT$39.5 for WPG (3702.TW) include: 1) Outlook of WPG's semiconductor distribution business is tied to the overall semiconductor demand. 2) Relationship with IC suppliers 3) Risk of excess component inventory and cash flow management 4) Financial costs and availability of bank credits. Price Target: (12 months) for Lenovo Group Ltd (0992.HK) Method: Our HK$10.3 target price for Lenovo is based on 15x FY15E earnings per share (EPS). This price/earnings (P/E) multiple is at the mid point of its historical trading range and a premium to the group average of of 10x. We believe Lenovo should trade at a premium on the back of its ability to leverage the corporate PC cycle, a net share gainer from disruption at HP and Acer, its defensible position in China, which also provides further growth oppurtunity. We believe achievements in these areas will expand operating margins to levels it has unable to reach in the past.

Risk: The key risks to our target of HK$10.3 for Lenovo include: (1) China demand is weaker than expected, (2) the corporate rebound is slower than expected and (3) Lenovo is unable to gain share in PC markets outside of China. All these factors may restrict operating margin expansion, which would be another key risk.

Price Target: (12 months) for Unimicron Technology Corp (3037.TW) Method: Our target price of NT$29 for Unimicron is based on 0.9x P/B (price-to-book), justified by a slower growth outlook and cycle-average ROE (return on equity) of 3.5%.

Risk: Risk factors to our target price of NT$29 for Unimicron are 1) weaker demand for handsets, consumer electronic products, and NB PCs, 2) bigger-than-expected margin erosion, given increased competition, weaker demand for high-end handsets, rising raw material prices (copper and gold), and unfavourable currency movement, 3) aggressive expansion from its substrate peers may lead to over-supply and unfavourable pricing environment for entry-level HDI PCBs, and 4) slower/faster than expected penetration into new FC BGA substrate customer.

China Smartphone Sector 66

07 January 2014

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names The subject company (2454.TW, 2330.TW, 2311.TW, 0992.HK, 3037.TW, 3034.TW, QCOM.OQ, INTC.OQ, BRCM.OQ, MRVL.OQ, 005930.KS, RDA.OQ, 6758.T, MSFT.OQ, GOOG.OQ, AAPL.OQ, NOK1V.HE, HIMX.OQ, 0728.HK) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (2311.TW, 0992.HK, QCOM.OQ, INTC.OQ, MRVL.OQ, 005930.KS, RDA.OQ, MSFT.OQ, GOOG.OQ, NOK1V.HE, HIMX.OQ) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (0992.HK, INTC.OQ, BRCM.OQ, 005930.KS, 6758.T, MSFT.OQ, AAPL.OQ, NOK1V.HE) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (2311.TW, RDA.OQ, MSFT.OQ, HIMX.OQ) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (2311.TW, 0992.HK, QCOM.OQ, INTC.OQ, MRVL.OQ, 005930.KS, RDA.OQ, MSFT.OQ, GOOG.OQ, NOK1V.HE, HIMX.OQ) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (2454.TW, 2311.TW, 0992.HK, 3037.TW, 3034.TW, QCOM.OQ, INTC.OQ, BRCM.OQ, MRVL.OQ, 005930.KS, RDA.OQ, MSFT.OQ, GOOG.OQ, AAPL.OQ, NOK1V.HE, 3008.TW, 2301.TW, 3673.TW, HIMX.OQ, 0728.HK) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (0992.HK, INTC.OQ, BRCM.OQ, 005930.KS, 6758.T, MSFT.OQ, AAPL.OQ, NOK1V.HE) within the past 12 months As of the date of this report, Credit Suisse makes a market in the following subject companies (QCOM.OQ, INTC.OQ, BRCM.OQ, MRVL.OQ, RDA.OQ, 6758.T, MSFT.OQ, GOOG.OQ, AAPL.OQ, MSI.N, HIMX.OQ). As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (2454.TW, 2330.TW, 2325.TW, 2311.TW, 3702.TW, 3037.TW, 2303.TW, 3034.TW, MRVL.OQ, NOK1V.HE, 2379.TW, 3042.TW, 3008.TW, 2301.TW, 3673.TW, 2409.TW, 0728.HK, 3189.TW, 2347.TW, ARM.L). Credit Suisse has a material conflict of interest with the subject company (2330.TW) . Credit Suisse is acting as the financial advisor to Motech Industries Inc in relation to the share subscription by Taiwan Semiconductor Manufacturing Co., Ltd. Credit Suisse has a material conflict of interest with the subject company (0981.HK) . Credit Suisse USA LLC is acting as an advisor to Atmel Corp on the potential transaction with Microchip Technology and On Semiconductor. As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject company (AAPL.OQ). A Credit Suisse analyst involved in the preparation of this report has a long position in the common stock of AAPL. Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (2454.TW, 2330.TW, 2325.TW, 2311.TW, 3702.TW, 0992.HK, 3037.TW, 2303.TW, 0981.HK, 3034.TW, QCOM.OQ, INTC.OQ, BRCM.OQ, MRVL.OQ, 005930.KS, 5280.TW, RDA.OQ, 6758.T, MSFT.OQ, GOOG.OQ, AAPL.OQ, NOK1V.HE, MSI.N, 2379.TW, 3042.TW, 3008.TW, 2301.TW, 3673.TW, 2409.TW, 0762.HK, 0941.HK, 0728.HK, 3189.TW, 2347.TW, ARM.L) within the past 12 months An analyst involved in the preparation of this report has visited certain material operations of the subject company (AAPL.OQ) within the past 12 months The travel expenses of the analyst in connection with such visits were not paid or reimbursed by the subject company, other than de minimus local travel expenses. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml. The following disclosed European company/ies have estimates that comply with IFRS: (NOK1V.HE). Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (2311.TW, 0992.HK, 3034.TW, INTC.OQ, RDA.OQ, MSFT.OQ, GOOG.OQ, NOK1V.HE, MSI.N, HIMX.OQ) within the past 3 years. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable.

China Smartphone Sector 67

07 January 2014

Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. Taiwanese Disclosures: This research report is for reference only. Investors should carefully consider their own investment risk. Investment results are the responsibility of the individual investor. Reports may not be reprinted without permission of CS. Reports written by Taiwan based analysts on non-Taiwan listed companies are not considered recommendations to buy or sell securities under Taiwan Stock Exchange Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse AG, Taipei Securities Branch ...... Randy Abrams, CFA

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683.

China Smartphone Sector 68

07 January 2014

References in this report to Credit Suisse include all of the subsidiaries and affiliates of Credit Suisse operating under its investment banking division. For more information on our structure, please use the following link: https://www.credit-suisse.com/who_we_are/en/This report may contain material that is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse AG or its affiliates ("CS") to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates. The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. CS does not advise on the tax consequences of investments and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy or completeness. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this report. Those communications reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other communications are brought to the attention of any recipient of this report. CS may, to the extent permitted by law, participate or invest in financing transactions with the issuer(s) of the securities referred to in this report, perform services for or solicit business from such issuers, and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto. In addition, it may make markets in the securities mentioned in the material presented in this report. CS may have, within the last three years, served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the previous 12 months, significant advice or investment services in relation to the investment concerned or a related investment. Additional information is, subject to duties of confidentiality, available on request. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an associate of CS or CS may be the only market maker in such investments. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR's, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS's own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CS's website shall be at your own risk. This report is issued and distributed in Europe (except Switzerland) by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is authorised by the Prudential Regulation Authority ("PRA") and regulated by the Financial Conduct Authority ("FCA") and the PRA. This report is being distributed in Germany by Credit Suisse Securities (Europe) Limited Niederlassung Frankfurt am Main regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). This report is being distributed in the United States and Canada by Credit Suisse Securities (USA) LLC; in Switzerland by Credit Suisse AG; in Brazil by Banco de Investimentos Credit Suisse (Brasil) S.A or its affiliates; in Mexico by Banco Credit Suisse (México), S.A. (transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); in Japan by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-General of Kanto Local Finance Bureau (Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Firms Association; elsewhere in Asia/ Pacific by whichever of the following is the appropriately authorised entity in the relevant jurisdiction: Credit Suisse (Hong Kong) Limited, Credit Suisse Equities (Australia) Limited, Credit Suisse Securities (Thailand) Limited, having registered address at 990 Abdulrahim Place, 27 Floor, Unit 2701, Rama IV Road, Silom, Bangrak, Bangkok 10500, Thailand, Tel. +66 2614 6000, Credit Suisse Securities (Malaysia) Sdn Bhd, Credit Suisse AG, Singapore Branch, Credit Suisse Securities (India) Private Limited regulated by the Securities and Exchange Board of India (registration Nos. INB230970637; INF230970637; INB010970631; INF010970631), having registered address at 9th Floor, Ceejay House, Dr.A.B. Road, Worli, Mumbai - 18, India, T- +91-22 6777 3777, Credit Suisse Securities (Europe) Limited, Seoul Branch, Credit Suisse AG, Taipei Securities Branch, PT Credit Suisse Securities Indonesia, Credit Suisse Securities (Philippines ) Inc., and elsewhere in the world by the relevant authorised affiliate of the above. Research on Taiwanese securities produced by Credit Suisse AG, Taipei Securities Branch has been prepared by a registered Senior Business Person. Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on +603 2723 2020. This report has been prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (each as defined under the Financial Advisers Regulations) only, and is also distributed by Credit Suisse AG, Singapore branch to overseas investors (as defined under the Financial Advisers Regulations). By virtue of your status as an institutional investor, accredited investor, expert investor or overseas investor, Credit Suisse AG, Singapore branch is exempted from complying with certain compliance requirements under the Financial Advisers Act, Chapter 110 of Singapore (the "FAA"), the Financial Advisers Regulations and the relevant Notices and Guidelines issued thereunder, in respect of any financial advisory service which Credit Suisse AG, Singapore branch may provide to you. This research may not conform to Canadian disclosure requirements. In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-U.S. customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. U.S. customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the U.S. Please note that this research was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not authorised by the PRA and regulated by the FCA and the PRA or in respect of which the protections of the PRA and FCA for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Any services CS provides to municipalities are not viewed as "advice" within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related information solely on an arm's length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such services, there is no agreement, direct or indirect, between any municipality (including the officials, management, employees or agents thereof) and CS for CS to provide advice to the municipality. Municipalities should consult with their financial, accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. Copyright © 2014 CREDIT SUISSE AG and/or its affiliates. All rights reserved. Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.

TC1941 China Smartphone Sector 69