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 $331,744 8% YoY 73% 60% 40% 25% 10% 6% 3% -1% Source: Credit Suisse estimates Figure 3: Emerging markets to reach 80% of smartphones Figure 4: Smartphone penetration still low at only 27% Source: Credit Suisse estimates Source: Credit Suisse estimates Figure 5: Samsung and Tier 2 brands lead growth in China Figure 6: LTE shipments to triple to 876 mn by 2017E 50% 1,000 45% 45% 900 876 775 40% 40% 800 667 35% 35% 700 537 30% 30% 600 25% 25% 500 20% 20% 400 LTE Volumes LTE 277 15% 15% 300 10% 10% 200 105 5% 100 5% % of total handsets shipped 9 0% 0 0% 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 2011 2012 2013E 2014E 2015E 2016E 2017E Asia Pacific North America Western Europe Samsung Apple Nokia Africa CEE Latin America HTC Top 4 Chinese Tier 2 Chinese Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 7: Multi-core lifts Mediatek's blended pricing Figure 8: TSMC high-end still grows due to Apple in 2014 (Unit: NT$) Units (mn) ASPs (US$) 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.