Stmicroelectronics 1St February 2017 3D Sensing, an Opportunity Yet to Be Priced in TMT Fair Value EUR13.7 (Price EUR12.20) BUY

INDEPENDENT RESEARCH UPDATE STMicroelectronics 1st February 2017 3D Sensing, an opportunity yet to be priced in TMT Fair Value EUR13.7 (price EUR12.20) BUY

Bloomberg STM FP At the STMicroelectronics earnings publication on Thursday 26th Reuters STM.FR January, the group communicated information that added weight to 12-month High / Low (EUR) 12.5 / 4.6 our idea that it has won a positioning in the next generation iPhone Market capitalisation (EURm) 11,110 Enterprise Value (BG estimates EURm) 10,881 with its Time-of-Flight technology (ToF, 3D Sensing). The Avg. 6m daily volume ('000 shares) 2,209 accumulation of factors converging around this idea has therefore Free Float 70.3% prompted us to include the assumption in our model. Given the 3y EPS CAGR 52.5% Gearing (12/16) -11% significant leverage to margins, pricing in this opportunity prompts us Dividend yield (12/17e) 2.40% to raise our EPS estimates by 37% on average over three years. We are reiterating our FV of EUR13.7 and our Buy recommendation adopted YE December 12/16 12/17e 12/18e 12/19e on 30th January. Revenue (USDm) 6,972 7,748 8,321 8,744 EBITA USDm) 307.0 690.3 977.7 1,065  Converging information adds weight to our assumption of a Op.Margin (%) 4.4 8.9 11.8 12.2 design-in for the next generation iPhone. The first news item that Diluted EPS (USD) 0.29 0.63 0.92 1.02 suggested a design-in at Apple dates back to July 2016 when the EV/Sales 1.65x 1.52x 1.36x 1.24x EV/EBITDA 11.5x 9.1x 6.1x 6.0x Dauphiné unveiled that Apple had just opened an R&D centre in EV/EBITA 37.4x 17.0x 11.6x 10.2x Grenoble, STMicroelectronics' stomping ground. During our research on P/E 46.0x 20.9x 14.4x 13.0x Soitec, we then noted the interest that Apple could have in leveraging ROCE 6.2 12.1 17.7 19.3 ST's proprietary technologies (ToF, mirco-mirrors, FD-SOI…) and its expertise in imaging, to develop a 3D sensor and offer the iPhone the 12.3 devices necessary to offer a convincing augmented reality experience. 11.3

10.3 These assumptions were backed in November 2016 by magazine

9.3 Challenges, which revealed that ST was going to work for Apple in image 8.3 sensors (without providing further details). Finally, during the conference 7.3 call on 26th January, ST provided several elements that added weight to 6.3

5.3 our assumption. Among these was the acceleration in investment

4.3 31/07/15 31/10/15 31/01/16 30/04/16 31/07/16 31/10/16 31/01/17 spending in fabs, justified by the prospect of a sizeable opportunity as of STMICROELECTRONICS (PAR) SXX EUROPE 600 H2 2017...

 A share price that does not fully reflect the incremental opportunity. Despite the share's healthy performance in 2016, we believe that it is still an investment opportunity worth seizing. The incremental opportunity prompted by ToF sensors does not seem to be fully reflected in consensus figures or the share price. As such, on the basis of 1/ buoyant momentum in the short term, 2/ further improvement in the group's fundamentals and 3/ average EPS growth over three years of 52.5% after integrating additional volumes in ToF sensors as of H2 2017, and which point to a 2017e PEG of 0.4x (2017e P/E of 19.4x), we are reiterating our Buy recommendation adopted on 30th January.

Analyst: Sector Analyst Team: Dorian Terral Richard-Maxime Beaudoux 33(0) 1.56.68.75.92 Thomas Coudry [email protected] Gregory Ramirez

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STMicroelectronics

Simplified Profit & Loss Account (USDm) 31/12/14 31/12/15 31/12/16 31/12/17e 31/12/18e 31/12/19e Revenues 7,404 6,897 6,972 7,748 8,321 8,744 Change (%) -8.4% -6.8% 1.1% 11.1% 7.4% 5.1% EBITDA 1,070 910 1,003 1,295 1,843 1,817 Depreciation & amortisation 812 736 696 604 865 752 Adjusted EBIT 258 174 307 690 978 1,065 EBIT 168 109 214 615 978 1,065 Change (%) -% -35.0% 96.3% 188% 58.9% 9.0% Financial results (19.2) (22.0) (21.0) (19.4) (20.8) (21.9) Pre-Tax profits 196 154 293 679 965 1,052 Tax 23.0 16.0 (33.0) (122) (165) (165) Profits from associates (43.0) 2.0 7.0 7.8 8.4 8.8 Minority interests (0.60) (6.0) (6.0) 0.0 0.0 0.0 Net profit 128 104 165 485 813 888 Restated net profit 218 164 254 557 800 888 Change (%) -% -24.7% 54.9% 119% 43.7% 10.9% Cash Flow Statement (USDm) Operating cash flows 791 722 977 1,090 1,679 1,640 Change in working capital (76.0) 120 63.0 (74.9) (132) (97.9) Capex, net (496) (467) (625) (1000) (749) (743) Financial investments, net (288) (49.0) 0.0 0.0 0.0 0.0 Dividends (357) (356) (251) (280) (349) (349) Issuance of shares 1.0 0.0 0.0 0.0 0.0 0.0 Issuance (repayment) of debt 774 (200) 0.0 0.0 0.0 0.0 Other (156) 0.0 (22.0) 0.0 0.0 0.0 Net debt (546) (494) (513) (248) (696) (1,145) Free Cash flow 219 375 415 14.6 798 798 Balance Sheet (USDm) Tangible fixed assets 2,647 2,321 2,287 2,683 2,566 2,557 Intangibles assets & goodwill 275 242 311 311 311 311 Investments 649 516 491 491 491 491 Company description Deferred tax assets 386 436 437 437 437 437 STMicroelectronics is a Franco-Italian Current assets 2,700 2,570 2,518 2,690 2,882 3,024 manufacturer of semiconductors. The Cash & equivalents 2,351 2,106 1,964 1,699 2,147 2,596 group has a broad product portfolio Total assets 9,008 8,191 8,008 8,311 8,834 9,416 that spans from power management Shareholders' equity 5,055 4,693 4,596 4,801 5,265 5,804 Provisions 661 606 540 540 540 540 components to integrated circuits for Deferred tax liabilities 10.0 14.0 9.0 9.0 9.0 9.0 industrial sector, automotive and L & ST Debt 1,805 1,612 1,451 1,451 1,451 1,451 consumer applications. Declining for Current liabilities 1,477 1,266 1,412 1,509 1,569 1,613 several years, the group currently Total Liabilities 9,008 8,191 8,008 8,311 8,834 9,416 Capital employed 4,509 4,199 4,083 4,554 4,569 4,659 executes a transformation plan to restore growth and positive margins. Ratios Operating margin 3.48 2.52 4.40 8.91 11.75 12.19 Tax rate NM NM 11.26 17.95 17.07 15.67 Net margin 2.94 2.38 3.64 7.19 9.62 10.15 ROE (after tax) 2.54 2.22 3.59 10.11 15.45 15.29 ROCE (after tax) 6.60 4.91 6.23 12.06 17.71 19.26 Gearing (10.80) (10.53) (11.16) (5.16) (13.22) (19.73) Pay out ratio 287 342 152 57.71 42.94 39.36 Number of shares, diluted 890 881 886 884 873 873 Data per Share (USD) EPS 0.14 0.12 0.19 0.55 0.93 1.02 Restated EPS 0.24 0.19 0.29 0.63 0.92 1.02 % change -% -23.9% 53.9% 120% 45.4% 10.9% EPS bef. GDW NM NM NM NM NM NM BVPS 5.68 5.33 5.19 5.43 6.03 6.65 Operating cash flows 0.89 0.82 1.10 1.23 1.92 1.88 FCF 0.25 0.43 0.47 0.02 0.91 0.91 Net dividend 0.40 0.40 0.28 0.32 0.40 0.40

Source: Company Data; Bryan, Garnier & Co ests.

STMicroelectronics

Table of content

1. 2017, the year of augmented reality...... 4 1.1. A fundamental trend ...... 4 1.2. The situation heading into 2017 ...... 5 1.3. Indications from Apple thanks to the patents filed by the group ...... 6 1.4. Google is also very active ...... 8 1.5. Baidu already has projects in production ...... 9 2. … and Time-of-Flight sensors ...... 10 2.1. Proximity sensors, existing technologies ...... 10 2.2. Time-of-Flight is clearly capable of measuring the distance between two points ...... 11 2.3. An application range not limited to augmented reality ...... 16 3. Significant impacts for ST ...... 18

3.1. Factors adding weight to our view that ST is set to benefit from this technology alongside Apple ..... 18 3.2. A sizeable sales opportunity ...... 19 3.3. A significant impact on the group's margins ...... 20 3.4. Breakdown of our model (as of 30th January) ...... 21 4. Valuation ...... 23 4.1. SOTP ...... 23 4.2. DCF ...... 24 4.1. Sensitivity of our FV to the ToF sensor ASP ...... 25 4.2. We reiterate our Buy recommendation ...... 25 Bryan Garnier stock rating system ...... 27

STMicroelectronics

1. 2017, the year of augmented reality... 1.1. A fundamental trend Today's smartphones are ever more performant, carrying out ever more daily tasks that make them vital objects in the eyes of all their users. However, for several quarters now, we have noticed a slowdown in this market segment due to a degree of saturation and also a lack of fundamentally new factors. And in terms of innovation, two new concepts indeed spring to mind: 1/ foldable screens Today, the rare examples that transform the smartphone into a tablet and 2/ a significant improvement in smartphone capacity of augmented reality (AR) to carry out augmented reality by using specific sensors. Today, the rare examples of augmented that exist are the result of reality (AR) that exist are the result of a somewhat unconvincing development, given the lack a somewhat unconvincing of financial means available to developers. Indeed, smartphones are incapable of seeing the world development, given the in 3D and AR applications therefore have to make do with only gyroscopes, accelerometers and GPS lack of financial means systems to function. available to developers. Despite everything, the interest in these technologies is very tangible. The best example remains the success of the Pokémon Go game, which attempts to insert virtual creatures into the real world. The mobile game application has nevertheless revealed two major problems: 1/ a somewhat unconvincing rendering in the majority of situations (see Fig 1.), and 2/ a high level of energy consumption due to the need to have complex algorithms working permanently.

Fig. 1: The best example of AR today is Pokémon Go, a success despite a still hazardous and unconvincing rendering Expected rendering Actual rendering of Pokémon Go

A sticker in the middle of the camera view, not aware off and unable to interact with elements of the real world.

Source : Niantic

To resolve these To resolve these problems, we believe the use of Time of Flight (ToF) sensors could be the problems, we believe the solution. These sensors are the only ones capable of measuring distances and hence enabling use of Time of Flight smartphones to perceive the environment in 3D, a prerequisite for obtaining convincing augmented (ToF) sensors could be reality. the solution. We can then go on to imagine a large number of applications ranging from ordering tailor-made suits via a mobile application to the integration of armchairs in a sitting room via a furniture sales application, and obviously including games on mobile handsets.

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1.2. The situation heading into 2017 Whereas augmented Whereas augmented reality (AR) was clearly wiped out by virtual reality (VR) barely a year reality (AR) was clearly ago, more and more applications prove that the market opportunity of AR is far higher. wiped out by virtual reality (VR) barely a year Note that during the 2016 Mobile World Congress, numerous appliances dedicated to virtual reality ago, more and more were presented. Among others were the Gear VRs by Samsung, the commercial version of Vive by applications prove that the market opportunity of HTC and the 360 VR by LG. And to welcome these, Mark Zuckerberg made an astounding entrance AR is far higher. to the congress, taking to the stage while all members of the audience were wearing a pair of VR glasses.

Fig. 2: VR honoured at the 2016 MWC

Source: Mobile World Congress

During the second half of 2016, the focus gradually moved towards augmented reality. Whereas VR plunges the user into a virtual world, augmented reality aims more at improving our perception of the real world.

So far, the most famous application of augmented reality is the mobile game Pokémon Go, which uses various sensors (gyroscope, accelerometer, camera, and GPS…) to make Pokémon creatures appear virtually in everyday places. Although very popular, the Pokémon application is fairly limited relative to the opportunities offered by the AR technology. In addition, a number of major groups have clearly shown their interest in this technology, like Apple, which in contrast has remained very discreet about virtual reality.

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1.3. Indications from Apple thanks to the patents filed by the group In November 2013, Apple In November 2013, Apple unveiled its interest in augmented reality by acquiring an Israeli unveiled its interest in fabless group specialised in 3D processing, PrimeSense. The name of the company probably augmented reality by means little to the majority of people, but the start-up company was at the root of the technology acquiring an Israeli fabless used in a well-known consumer device, namely the X Box Kinect by Microsoft. In its first version, group specialised in 3D which embedded the Prime Sense technology, the Kinect used a complex triangulation system processing, PrimeSense. implying a traditional camera, an infrared camera, an infrared projector as well as a complex algorithm. Apple spent around USD360m on this acquisition, which has so far not given rise to an embedded technology in an Apple device, whereas many observers were predicting that the PrimeSense technology would be embedded in the iPhone 6.

Between 2014 and 2016, Between 2014 and 2016, the publication of the PrimeSense/Apple patent showed that the the publication of the Cupertino group was continuing to work on device control technologies using movement PrimeSense/Apple patent detection. In addition, as we have already mentioned, the PrimeSense technology is based on analysis showed that the of a 3D scan of the object's environment. However, this technology and the associated material is Cupertino group was perfectly well suited to augmented reality. continuing to work on device control technologies using In August 2016, Apple CEO Tim Cook started to discuss the core dimension of augmented reality in movement detection. the group's vision. Mr Cook estimates that AR could be an "enormous phenomenon", thereby suggesting that it could represent a significant evolution in Apple products, as were multipoint capacitive touchscreens and inertial navigation units (gyroscopes and accelerometers) for the emergence of the smartphone.

During the same event, Apple's CEO stated that the group was investing significant amounts in this technology and indicated an investment in R&D over more than five years.

For Apple's chairman, the AR technology is far more easily accepted by consumers than virtual reality, which still requires 1/ financial means, bearing in mind that the VR headsets required are sold for around USD500, 2/ acceptance by consumers, which is not yet guaranteed given the headsets' lack of discretion and the need for powerful calculation tools (PC or console) to do more once users want more than a rapidly boring roller-coaster demo, and 3/ consumer applications, since while video games are the first candidates for adoption by VR, they remain an activity destined for a specific type of user and other applications fall rapidly into the professional domain, thereby limiting volumes by as much and hence the interest for developers to invest in this technology.

Things are different for AR since the applications are easier to develop, as shown for example by cartography systems or casual games, since the implementation of AR in games is widely simplified relative to VR and requires fewer resources.

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In November 2016, the In November 2016, the specialised news website, Appleinsider, also published an article specialised news website, highlighting the publication of a US patent filed by Apple concerning the use of AR for its Appleinsider, also cartography application and Plan guidance. This detailed the schemes showing how an evolved published an article guidance system works, with various information inserted into a view of the real world filmed in real highlighting the time by the smartphone's camera. publication of a US patent filed by Apple concerning the use of AR for its Fig. 3: Virtual reality schematised and patented by Apple cartography application and Plan guidance.

Source: Appleinsider, via the US Patent and Trademark Office

" AR I think is going to become really big. [… It] gonna take a little while, because there’s some really hard technology challenges there. But it will happen. It will happen in a big way. And we will wonder, when it does [happen], how we lived without it. Kind of how we wonder how we lived without our [smartphones] today." - Tim Cook, Apple CEO

Whereas expectations are In all, AR seems to be a natural technology for Apple, as touchscreens have become for smartphones. now for Apple to deliver Whereas expectations are now for Apple to deliver on subjects that are not gadget-based, AR on subjects that are not could be a solution that would help the group to stand out again. gadget-based, AR could be a solution that would It is general knowledge that Apple is particularly patient when it comes to integrating a new help the group to stand out again. technology into its products. Apple would above all like use of these new technologies to be natural (capacitive touchscreen, Siri, inertial scrolling etc). For this reason, we are not surprised to see the implementation of AR in Apple's products.

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1.4. Google is also very active Beyond Apple, which Beyond Apple, which always develops its projects in a very secretive manner, Google is always develops its pursuing its AR project, named Tango, started in 2014. The project aims to roll out a platform projects in a very secretive aimed at grouping together all of the artificial vision applications (computer assisted vision). manner, Google is pursuing its AR project, In concrete terms for Google, this is an Android integrated software brick that is capable of making named Tango, started in 2014. the most of a range of sensors including movement sensors and above all Time-of-Flight sensors, that enable the generation of a 3D cartography of the smartphone environment.

Via its dedicated website, Google gives two examples of how its technology can be used. The first illustrates the possibility of precisely measuring and integrating virtual elements into a real environment (a bed selected from the catalogue of a furniture reseller and then projected into a room in order to see how it would look). The second example focuses on a more fun usage with the creation of games interacting with the real world (virtual dominos laid on a real table, interacting with other real-world objects).

Fig. 4: Measuring surrounding space to integrate contents in real time

Source : Google

In early 2017, this In early 2017, this initiative remains limited since only two devices available to consumers initiative remains limited integrate the material necessary to ensure compatibility with Tango. These are the Lenovo since only two devices Phab 2 Pro launched in August 2016 and the Asus ZenFone AR presented at the 2017 CES. available to consumers integrate the material For the momentum, no teardown (an in-depth study by components suppliers) has been made public, necessary to ensure compatibility with Tango. such that doubts remain over the supplier of depth sensors for these two devices.

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1.5. Baidu already has projects in production The Chinese internet The Chinese internet research giant started to work on AR more than two years ago, but only research giant started to very recently built a centre dedicated to the development of services for education, health and work on AR more than tourism, or even marketing. two years ago “There is an appetite for this technology; we are seeing rapid adoption by our partners in a range of industries.” - Andrew Ng, Chief Scientist of Baidu and Head of Baidu Research

Baidu has indicated it is In this respect, Baidu has indicated it is already in close collaboration with several major groups already in close such as Yum! (Taco Bell, KFC, Pizza Hut…), Lancôme, L’Oreal and BMW. In the case of collaboration with several L’Oréal, an application stemming from the collaboration enables users to play with AR and the major groups such as bottles produced by L'Oréal in order to obtain promotional offers for example. For Yum!, a concrete Yum! (Taco Bell, KFC, example of this joint work was presented at the end of December 2016, namely a smart order column Pizza Hut…), Lancôme, L’Oreal and BMW. destined for Chinese KFC restaurants that can analyse the consumer's face in order to suggest products, or even a full menu. The smart unit is capable of analysing various factors such as age, type and facial expression, and then integrate suggestions into an AR video flow sent to the user. To facilitate acceptance of this technology by customers, the smart units include augmented reality games including the generation of photos modified by stickers. At present, the games units have been installed in 300 restaurants in China, but only one test restaurant has the version of the unit where facial recognition is activated.

Fig. 5: Baidu and KFC are developing a new "intimate" virtual host concept

Source: TechCrunch

Still using a Baidu application, Beijing metro users can see a slightly modified version of the city in order to show the city's historical doors, only the relics of which remain today.

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2. … and Time-of-Flight sensors While augmented reality While augmented reality applications are likely to take off soon, pushed by the sector giants applications are likely to as already discussed, technical limitations to their success still exist. For augmented reality to take off soon, pushed by be convincing, it is important that smartphones can analyse (sense) the surrounding 3D environment. the sector giants as already The technologies available at present are restrictive since they are based on complex algorithms discussed, technical (including high energy consumption) and very limited proximity sensors. However, the Time-of-Flight limitations to their success still exist, especially the technology opens numerous possibilities and seems to provide exactly the right answer. lack of dedicated and adapted components. 2.1. Proximity sensors, existing technologies

2.1.1. Functioning of current proximity sensors Technologies that enable the generation of a 3D view already exist, with the Microsoft Kinect the best example of this. At present, these technologies are based on an infrared (IR) sensor/emitter, which combined with an algorithm, helps rebuild a 3D scene.

Similarly, numerous mobile telephones have long embedded proximity sensors that de-activate the screen when the device is close to the users face in order to avoid accidentally hanging up during the call.

Current proximity sensors While these partly respond to a need, the sensors are nevertheless very limited. They function on the are made up of an infrared principle of light intensity of an infrared wavelength. As such, a current proximity sensor is made (IR) emitter, and a up of an infrared emitter, and a receptor which is responsible for measuring the emitter's receptor which is light return in real time. If an object is sufficiently close to the emitter, then it automatically reflects responsible for measuring the light ray, which is returned to the sensor. As such, if the sensor detects a sufficiently powerful the emitter's light return in real time. radiation, this means that an object is fairly close. As of a certain threshold of light intensity, the receptor will therefore trigger an action (turning off the phone screen for example). The technology embedded in the Kinect uses a more complex triangulation system, based on several sensors and which requires substantial calculation power.

Fig. 6: Current proximity sensors use the amplitude of a signal

Source: STMicroelectronics

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2.1.2. Limitations of IR sensors Paradoxically, with the Paradoxically, with the most simple proximity sensors such as those generally embedded in most simple proximity smartphones, measuring distance is impossible. Since these sensors use the amplitude (power) of sensors such as those a light signal, the reflection of the object located opposite the sensor will have a significant impact on generally embedded in the result. For example, a mirror placed a few metres away will trigger a sensor more rapidly than a smartphones, measuring mat black surface just a few centimetres away. This is why, according to ST, that some people with distance is impossible. very dark hair often have problems of accidental hanging-up during the call. Indeed, the reverberation from black hair is so low that once the smartphone is positioned close to the ear, the sensor located near the hair detects an overly low light signal and therefore considers there is no obstacle nearby. In addition, current distance sensors are also very sensitive to ambient light.

2.2. Time-of-Flight is clearly capable of measuring the distance between two points

2.2.1. Functioning of ToF sensors Like traditional proximity Like traditional proximity sensors, ToF sensors are made up of two elements, the first being a sensors, ToF sensors are light source (laser), the second a receptor (sensor). The resemblance stops there since the ToF made up of two elements, sensor uses the time it takes for the photons to travel to calculate the distance with the first object the the first being a light laser encounters. source (laser), the second a receptor (sensor). Fig. 7: ToF sensors measure the time taken by a photon to travel a distance between the emitter and the sensor

Source: STMicroelectronics

Compared to IR The first advantage of this method is that it is not sensitive to the reflectance of the target. The proximity sensors, ToF second advantage is that it helps provide a precise measure of the distance. Indeed, the simple sensors are not sensitive division by two of the time taken by the photon to travel between the laser and the receptor, to the reflectance of the multiplied by the speed of light, helps deduce the distance. target and are able to provide a precise measure of the distance

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Fig. 8: An efficient means of measuring distance

Sources: CERN, STMicroelectronics

The receptor of a ToF The receptor of a ToF sensor is made up of one or more photodiodes called Single Photon sensor is made up of one Avalanche Diodes or SPADs. These can be produced on Complementary Metal Oxyde or more photodiodes Semiconductors or CMOS wafers (the traditional manufacturing process for digital chips) and called Single Photon therefore be juxtaposed with the digital circuit which is responsible for counting the photons and Avalanche Diodes or measuring the arrival time, followed by the digital output, i.e. comprehensible for a processor. SPADs. Fig. 9: SPAD architecture

Source : CERN

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In order to improve the performance of ToF sensors and especially their resolution, it is possible to multiply the number of diodes in order to create a SPAD grid.

Fig. 10: The multiplication of SPADs helps improve the performance of the sensors 32x32 SPAD array

Source : CERN

2.2.2. Limitations of current ToF sensors While the use of SPADs is practical in terms of integration since it implies a CMOS construction (and hence a smaller sized chip and lower production costs), it still presents certain limits. The first is the very construction of the diode: once the diode is triggered by a photon, it requires time to return to its original state. This is dead time during which the diode is no longer active, and if other photons arrive they cannot be counted (high loss rate). In addition, the multiplication of SPADs requires a degree of uniformity in the dead time in order to ensure a correct performance of the component.

Fig. 11: SPAD, dead time to control

SPADs suffer of a dead time to be controlled in order to enhance the performance of sensors.

Source : CERN, STMicroelectronics

SPADs cannot store Since SPADs are dynamic units, a digital impulse is automatically generated when a photon is photocharges detected. In fact, SPADs cannot store photocharges proportional to the number of photons proportional to the received as charge-couple devices – more complex and costly to produces - (CDDs) can. ToF number of photons and hence the distance must therefore be calculated immediately via an associated digital circuit. This received as charge-couple is a manageable problem as long as the number of pixels is not too high, but becomes problematic as devices – more complex and costly to produces - the number of SPADs increases (in order to improve the definition of the sensor). Indeed, one of the (CDDs) can. methods of traditional reading used to read CMOS image sensors, Random Access Readout, rapidly becomes inefficient for ToF sensors since the system has the main default that it can only read

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information from one pixel at a time (before moving to the next one) and the information from the other pixels is therefore lost. Since the functioning of ToF sensors is based on the measure of the speed of light and a perfect synchronisation with the emitter (laser), the results generated by this processing method rapidly become incoherent.

Fig. 12: The Random Access Readout method used for CMOS image sensors is not optimal for ToF sensors

Random Access Readout method Need for parallel Time to Digital Converter architecture

Source : CERN

While CMOS RAR sensors are fairly simple and hence cheaper to produce, they have the disadvantage of deforming images or measurements during motion, or in the case of a ToF sensor, during synchronisation with the laser.

Fig. 13: Rolling Shutter vs. Global Shutter – Example with a photo Global Shutter (CCD) Rolling Shutter (CMOS)

Source: QImaging

In these conditions, several other methods have been developed but none currently enables the creation of a high resolution, high frequency Time of Flight sensor. It is in this backdrop that we believe STMicroelectronics has a portfolio of technologies capable of resolving some of the sticking points and thereby offering a sensor 1/ of an acceptable size to be integrated into a smartphone, 2/ at an acceptable price, using well-mastered production procedures, and 3/ that is energy efficient in order not to penalise the autonomy of smartphones.

STMicroelectronics

2.2.3. STMicroelectronics: ToF + globalShutter + micro-mirrors, a possible winning combination to exceed these limits Current ST’s ToF devices STMicroelectronics has already developed a ToF sensor available since H2 2014. However, in allow only measurement the current state of play, this sensor does not enable reconstruction of a 3D scene, but simply of the distance between the measurement of the distance between two points. A version of this sensor is actually two points currently in use in the iPhone 7 as a simple proximity sensor, positioned on the front face close to the front camera (it manages the screen shutdown when the phone is held by the ear.

Fig. 14: STMicroelectronics VL53L0, simple ToF sensor already used in the iPhone 7

Source : Chipworks

The group is not the only According to the group, this simple version of the ToF VL53L0 sensor is currently used by 70 one mastering ToF smartphone models. In addition, it is important to note that STMicroelectronics is not the only player technology has an edge to have developed a ToF sensor (max 12 measurement points) but we believe the group has an over its rivals thanks to edge over its rivals thanks to differentiating technologies. Among the competitors that have a ToF differentiating technology, we have identified the small German company PMD Tec, and Heptagon, recently technologies acquired by ams (note available here).

To get over the limits described previously, we believe STMicroelectronics is working on a number of innovations both for the receptor and the laser.

Firstly, concerning the receptor (SPAD), we believe ST is looking at a material improvement in performances. Under this framework, the fact that the group masters the SOI technology could well be a factor that sets the group apart. The use of SOI wafers notably helps produce charge-coupled devices (CCD) or very high-performance CMOS simply on the same die (piece of silicon), capable of sensing instantaneously all of the pixels in the sensor or rather from the ToF sensor, i.e GlobalShutter (vs. RollingShutter for traditional CMOS sensors, see Fig. 13). Studies undertaken in laboratories (IEEE) have shown the interest and potential of using FD-SOI wafers for developing CCD image sensors juxtaposed with a CMOS circuit. For ToF sensors, this means a perfect synchronisation between the emitter and the sensor and hence improved precision and resolution.

Finally, it is also coherent to think that STMicroelectronics is looking to leverage its micro-mirrors technology. This is a miniature mirror (Micro-Electro-Mechanical Systems - MEMS) capable of reflecting several thousand movements a second. They can be used to direct the laser's light rays in order to generate a grid pattern necessary for the generation of a 3D view of the scene filmed.

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2.3. An application range not limited to augmented reality Beyond augmented reality, other applications could rapidly emerge for ToF sensors, some being more direct such as their use in improving the smartphone cameras, while others usages such as in the medical field are likely to require more time before becoming tangible market opportunities.

2.3.1. An improvement in smartphone cameras with bokeh However, we believe that multiple applications exist for this sensor. The one that makes the most sense in the short term is use of the ToF technology to add a notion of depth of field in images generated by a smartphone photo sensor. Indeed, these photo sensors often suffer from an association with very compact optics, limiting the reduction of depth of field in order to highlight a subject.

Fig. 15: Notion of depth of field and bokeh Wide Narrow (e.g. a smartphone shot) (e.g. a DSLR shot)

Source: QImaging

Thanks to improved ToF sensors juxtaposed with image sensors, smartphones should be able to capture the various levels of depth in a scene. It would then be possible to precisely apply an out-of- focus (bokeh) effect to the background area while keeping the subject perfectly clear.

STMicroelectronics

2.3.2. Gesture recognition We also note potential in movement recognition which would help control a smartphone only by movements for example, with no contact with the screen.

However, to make sense, the sensor needs to be positioned at the front of the phone to be used for this type of application.

Fig. 16: ST provides examples of possible applications in gesture recognition

Source : STMicroelectronics

2.3.3. Numerous other applications in auto and medical Beyond smartphones, we see a huge field of possibilities for ToF sensor usage. Indeed, these sensors could quite easily be used in cars in order to control the driver's state of fatigue or the attention they pay to the road. Thereafter, in a second stage, they could be used to improve the performance of Lidars (distance sensors) over short distances during parking for example. Finally, other applications exist in the biomedical field or even in man-machine interface since these sensors could help efficiently control a computer by using gestures.

STMicroelectronics

3. Significant impacts for ST 3.1. Factors adding weight to our view that ST is set to benefit from this technology alongside Apple ST provided indications On 26th January, STMicroelectronics reported it Q4 results and used the opportunity to that added weight to our provide a few indications that added weight to our view that the group is set to benefit view during Q4 earnings significantly from these innovations. call To try and understand the reality hidden behind the few items communicated to the market by ST, we need to look back at the various announcements made since July 2016. The first item we noted was the setting up of an R&D centre and a white room by Apple in Grenoble, just next to STMicroelectronics (our note is available here). Rumours at the time stated that this R&D centre would be dedicated to imaging without providing more details. We pointed out that Apple and STMicroelectronics had already teamed up in the past, in particular for inertial systems (gyroscopes + accelerometers) for iPhone, although ST was then ousted firstly by Invensense and then by Bosch. The groups are still in partnership, in particular for the inertial unit in the Apple Watch. Elsewhere, we also underscored the fact that a collaboration in imaging with ST would make sense since the Franco-Italian group boasts strong expertise in this field.

Then, at the end of November 2016, we discussed another rumour stemming from the French magazine Challenges, stating that ST would handle production of the future image sensors (photo sensors) for Apple (note available here). The magazine even stated that production would be handled at Crolles 300mm. The question remaining hanging and to which the rumour did not reply concerned the interest Apple had in joining forces with STMicroelectronics for its image sensors.

Before Q4 results, we In the meantime, our research published two days later (available here) on a specific Soitec already highlighted the product, the imager-SOI wafer, led us to state that STMicroelectronics and Apple could work possible co-development together on improved image sensors that would be able to leverage on ST’s proprietary technologies of such a product. in order to combine the Time-of-Flight technology with a classic image sensor, in order to obtain a detailed 3D representation of filmed or photographed scenes.

Finally, these uncertainties took shape during the STMicroelectronics publication on 26th January. Indeed, management stated that it intended to step up investments in production tools, with capex guidance set at USD1bn to USD1.1bn for FY 2017e. This is virtually double the group's normal level of capex. The group then simply stated that these investments were destined to strengthen front-end production tools, especially for its Crolles 300mm plant, and also back-end activities. As During the conference such, the aim is to strengthen production for digital products since these are produced in 300mm and call, the group said that probably products that require specific attention during packaging since otherwise the group would capex acceleration is due not have stated that some of this rise in capex was destined for the back-end. And ToF sensors are to a strong opportunity to indeed produced in 300mm and have a complex packaging. materialise in H2 (usual major period for Apple In addition, still according to the group, this acceleration in investments should help meet "an suppliers) and that . investments will target opportunity" that could materialise as of H2 This corresponds exactly to the major period for 300mm manufacturing all Apple suppliers since the new iPhones are presented in September and their production generally sites, i.e. the sites used for starts slightly before their presentation conference. As an example, Dialog (80% of sales with Apple) ToF devices production. reported growth of 46% in H2 2016 relative to H1.

STMicroelectronics

3.2. A sizeable sales opportunity While this adds weight to the idea that STMicroelectronics is currently working with Apple on the development of a new generation of Time-of-Flight sensors, the role that ST could play still needs defining. And the role that ST has in this innovation is a key factor for the sensor's price (ASP) and hence the size of the opportunity.

At present, the public price (available at a retailer) of a ToF VL6180X sensor, presented in 2014, is USD2.65 per unit for orders of more than 5,000 units (minimum volume enabling the lowest price possible).

As explained previously, we believe the sensor developed for Apple is a far more sophisticated product and even if the volumes potentially ordered by Apple could be very high, it seems reasonable to estimate that the ASP would not be lower than USD3.5. On the other hand, Apple pays around USD12-15 for the photo sensor modules behind the iPhone 7, including the image sensor but also the optical stabilisation and autofocus. While ToF sensors, in a more sophisticated version, could be similar to a photo sensor, we do not expect their prices to reach this level.

In our view, it is As such, we are assuming that the components that ST supplies Apple will be billed at between reasonable to estimate USD3.5 and USD10. This is a significant price gap and for this reason, pending additional details that the ASP would be in that would enable us to fine-tune our estimates and which could be made available shortly, the range of USD3.5 to we have assumed a low-end ASP, i.e. USD3.5. USD10.

Based on virtually stable iPhone volumes in 2017 relative to 2016, i.e. close to 215m units, the

Pending additional details incremental opportunity of a prospective contract for STMicroelectronics works out to USD750m on that would enable us to an annual basis. fine-tune our estimates we have assumed a low-end More precisely, we recently adjusted our model (note published on 30th January available here) to ASP, i.e. USD3.5. include 60m units sold in Q3 and 50m units in Q4. In addition, we also take account of 70 smartphone models that currently embed this technology which represents an average contribution of close to USD50m per quarter.

STMicroelectronics

3.3. A significant impact on the group's margins The additional sales prompted by ToF sensors in our model has an automatic impact on the group's margin. We understand that that the sensors are to be produced partly in Crolles 300mm, namely the plant which is currently the least loaded (around 75% load) and which has a significant impact on STMicroelectronics’ gross margin.

A significant impact on In 2016, these unused costs had a negative impact of 50 basis points on the group's gross margin. We the group's margins have therefore changed our gross margin estimates for 2017 and the following years in order to take thanks to the significant account of: 1/ the significant cut in unused costs on the group level, 2/ the positive leverage of cut in unused costs on the a significant volume contribution. Indeed, STMicroelectronics is an IDM, namely it operates its group level and the production plants itself unlike fabless players (Dialog, Melexis, u-blox…), which outsource positive leverage of a significant volume production to one or more foundries (TSMC, GlobalFoundries, Samsung, UMC, SMIC…). We have contribution. therefore lifted our gross margin estimate for 2017e from 36.7% to 37.3%.

Since the R&D for these ToF sensors has already been widely financed, we have no reason to believe that the group will have to step up its R&D investments during 2017. In addition, management pointed this out during the conference on 26th January. As such, we have maintained an average level of operating expenses of USD550m for 2017e, pointing to an adjusted EBIT margin of 8.9% vs. 8% previously. For the following years, we expect operating expenses to rise at a similar level to sales growth.

Fig. 17: Operating margin to benefit from these additional volumes

14.0% 1200 Adj. EBIT - Prev. Estimates 12.0% Adj. EBIT - New estimates 1000 Adj. EBIT margin - Prev. estimates 10.0% Adj. EBIT margin - New estimates 800

8.0% 600 6.0%

400

4.0% Adjusted EBIT (in USDm)

Ajdusted EBITmargin % (in of sales) 200 2.0%

0.0% 0 2014 2015 2016 2017e 2018e 2019e

Source: Bryan, Garnier & Co. ests.

STMicroelectronics

3.4. Breakdown of our model (as of 30th January)

Fig. 18: P&L – Average EPS growth of 52.5%

[in USDm] 2016 1Q17e 2Q17e 3Q17e 4Q17e 2017e 2018e 2019e CAGR 16/19e Sales 6972 1819 1876 2062 1991 7748 8321 8744 7.8% Seq. growth 1.1% -2.2% 3.2% 9.9% -3.4% 11.1% 7.4% 5.1% Gross profit 2456 675 683 776 756 2890 3320 3533 Gross margin 35.2% 37.1% 36.4% 37.7% 37.9% 37.3% 39.9% 40.4% SG&A -912 -231 -234 -230 -227 -922 -1021 -1082 R&D -1336 -333 -335 -335 -345 -1348 -1395 -1458 Other exceptional gains 99 19 19 17 16 71 74 74 Adjusted EBIT 307 130 133 228 199 690 978 1065 EBIT margin 4.4% 7.1% 7.1% 11.1% 10.0% 8.9% 11.8% 12.2% D&A 696 155 155 151 143 604 865 752 Adjusted EBITDA 1003 285 288 379 342 1295 1843 1817 Cost of net debt -21 -4 -5 -5 -5 -19 -21 -22 Profit from associates 7 0 0 0 8 8 8 9 Gain from investments 0 0 0 0 0 0 0 0 Adj. pre-tax profit 293 126 128 223 201 679 965 1052 Adjusted tax -33 -24 -24 -39 -35 -122 -165 -165 Tax rate -11.3% -19.0% -18.9% -17.2% -17.5% -17.9% -17.1% -15.7% Non-control. interest -6 0 0 0 0 0 0 0 Adj. net profit 254 102 104 185 166 557 800 888 % of revenue 3.6% 5.6% 5.5% 9.0% 8.3% 7.2% 9.6% 10.2% Adj. EPS (in USD) 0.29 0.12 0.12 0.21 0.19 0.63 0.92 1.02 52.5% Seq. growth 53.9% -25.3% +2.3% +77.7% -10.1% 120% 45% 11%

Sources: Bryan, Garnier & Co. ests.

STMicroelectronics

Fig. 19: A visible acceleration in investments in 2017e

[in USDm] 2016 1Q17e 2Q17e 3Q17e 4Q17e 2017e 2018e 2019e EBITDA 1003 285 288 379 342 1295 1843 1817 Change in WCR 63 23 -33 -105 40 -75 -132 -98 Other -26 -47 -49 -65 -45 -205 -164 -178 Cash flow from operating 1040 260 207 210 338 1015 1546 1542 activities Capex -625 -350 -350 -150 -150 -1000 -749 -743 Free cash flow 415 -90 -143 60 188 15 798 798 Acquisitions 0 0 0 0 0 0 0 0 Other 0 0 0 0 0 0 0 0 Cash flow used for investing -625 -350 -350 -150 -150 -1000 -749 -743 activities Proceeds of LT & ST debt 0 0 0 0 0 0 0 0 Repayment of LT & ST debt 0 0 0 0 0 0 0 0 Dividend payment -251 -70 -70 -70 -70 -280 -349 -349 Other -22 0 0 0 0 0 0 0 Cash flow from financing -273 -70 -70 -70 -70 -280 -349 -349 activities Total cash flow 142 -160 -213 -10 118 -265 448 449 CTA (cumulative translation -18 0 0 0 0 0 0 0 adj.) Net increase in cash 124 -160 -213 -10 118 -265 448 449 Cash at beginning of period 1771 1629 1469 1256 1246 1629 1364 1812 Cash at end of period 1895 1469 1256 1246 1364 1364 1812 2261

Sources: Bryan, Garnier & Co. ests.

Fig. 20: Debt

[in USDm] 2016 1Q17e 2Q17e 3Q17e 4Q17e 2017e 2018e 2019e Cash and cash equivalents 1629 1469 1256 1246 1364 1364 1812 2261 Inventories, net 1173 1148 1184 1301 1256 1256 1349 1418 Trade accounts receivable, net 939 919 948 1041 1006 1006 1080 1135 Other 741 734 744 775 763 763 788 806 Total current assets 4482 4270 4132 4363 4389 4389 5029 5620 Property, plant and equipment, net 2287 2482 2677 2676 2683 2683 2566 2557 Long-term deferred tax assets 437 437 437 437 437 437 437 437 Other 802 802 802 802 802 802 802 802 Total non-current assets 3526 3721 3916 3915 3922 3922 3805 3796 Total assets 8008 7991 8048 8278 8311 8311 8834 9416 Trade accounts payable 620 607 626 688 664 664 664 664 ST debt 117 117 117 117 117 117 117 117 Accrued income tax 42 42 42 42 42 42 42 42 Other 809 793 816 891 862 862 922 966 Total current liabilities 1588 1558 1601 1737 1685 1685 1745 1789 Long-term debt 1334 1334 1334 1334 1334 1334 1334 1334 Reserve for pension 347 347 347 347 347 347 347 347 Other 143 143 143 143 143 143 143 143 Total non-current liabilities 1824 1824 1824 1824 1824 1824 1824 1824 Total equity 4596 4609 4623 4717 4801 4801 5265 5804 Total liabilities and Equity 8008 7991 8048 8278 8311 8311 8834 9416

Sources: Bryan, Garnier & Co. ests.

STMicroelectronics

4. Valuation Our valuation of Until now, we valued STMicroelectronics using an equi-weighted average of three methods: DCF, STMicroelectronics is the SOTP and historical multiples. In view of the significant fundamental changes recently made by the equi-weighted average of group, a valuation using historical multiples now seems less relevant. As such, our valuation of two methods, DCF and STMicroelectronics is now the equi-weighted average of the first two methods, DCF and SOTP. SOTP.

Fig. 21: Valuation of EUR13.7 per share Method Weight FV (in EUR) Upside Valuation of EUR13.7 per DCF 50% 11.8 -3% share SOTP 50% 15.6 29% Average valuation 13.7 12%

Source: Bryan, Garnier & Co ests. 4.1. SOTP Fig. 22: Peers taken into account by division

Division Pairs ADG Infineon, NXP, Texas Instruments, ON Semiconductor, Renesas AMG Analog Devices, Broadcom, Infineon, NXP, Texas Instruments MDG Analog Devices, Broadcom, Infineon, Microchip, NXP, ON Semi, Renesas, Texas Instruments Others ams, ON Semiconductor

Source: Bryan, Garnier & Co ests.

Fig. 23: SOTP valuation

Sales EBIT Multiples Multiples Valuation Valuation Average $/Share 2017e 2017e VE/Sales VE/EBIT VE/Sales VE/EBIT Valuation (A) Division ADG 3026 315 3.08x 13.20x 9323 4155 6739 7.6 AMG 1603 67 4.90x 13.90x 7859 936 4398 5.0 MDG 2479 121 3.79x 13.45x 9396 1634 5515 6.2 Others 640 187 3.20x 11.70x 2051 2185 2118 2.4 Total 7748 690 21.2 (B) Net Debt + Restatement Net cash 513 0.6 (A)+(B) Discount (due to management transition in May 2017 and ongoing restructuring of STB business) 25% Fair Value (USD) 16.4 Fair Value (EUR) 15.6 Source: Bryan, Garnier & Co ests.

This method values ST at EUR15.6 per share, an upside potential of 25%.

STMicroelectronics

4.2. DCF Fig. 24: WACC of 11.1%

WACC European risk-free interest rate 1.6% Equity risk premium 7.0% Beta 1.4 Return expected on equity 11.1% Interest rate on debt 2.5% Market capitalisation (USDm) 11,664 Net debt on 31/12/16 (USDm) -513 Enterprise value (USDm) 11,151 WACC 11.1%

Source: Bryan, Garnier & Co ests.

Fig. 25: DCF valuation and sensitivity table iUSDm (FYE 31/12) 2017e 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e Revenues 7748 8,321 8,744 9,653 10,555 11,430 12,256 13,012 13,678 14,233 Change (%) 11% 7% 5% 10% 9% 8% 7% 6% 5% 4% Adjusted EBIT 690 978 1065 1369 1,440 1,498 1,540 1,564 1,570 1,557 Operating margin 9% 12% 12% 14% 14% 13% 13% 12% 11% 11% Tax -122 -165 -165 -215 -226 -235 -241 -245 -246 -244 Tax rate 17.9% 17.1% 15.7% 15.7% 15.7% 15.7% 15.7% 15.7% 15.7% 15.7% Net operating income after tax 569 813 901 1155 1215 1,263 1,299 1,319 1,324 1,313 Capex, net -1000 -749 -743 -821 -897 -972 -1042 -1106 -1163 -1210 As a % of sales 12.9% 9.0% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% Depreciation & amortisation 604 865 752 821 897 972 1042 1106 1163 1210 As a % of sales 7.8% 10.4% 8.6% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% WCR 1122 1254 1352 1448 1583 1714 1838 1952 2052 2135 As a % of sales 14.5% 15.1% 15.5% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% Change in working capital -75 -132 -98 -96 -135 -131 -124 -113 -100 -83 Free cash flows 98 797 811 1059 1079 1,132 1,175 1,206 1,225 1,230 Discounted free cash flows 89 652 598 702 645 609 569 526 481 435 Total discounted FCF - 2017e-2026e 5,306 Discounted Terminal value - 2027e+ 5,114 Enterprise value 10,419 WACC - Net debt on 31/12/2016 -513 [in EUR] 10.1% 10.6% 11.1% 11.6% 12.1% Equity value 10,932 8% 11.7 11.0 10.4 9.8 9.3

Nbr of diluted shares (m) 883.745 9% 12.6 11.8 11.1 10.4 9.9 Valuation per share (USD) 12.4 10% 13.5 12.6 11.8 11.1 10.5 11% 14.3 13.3 12.5 11.7 11.1 Valuation per share (EUR) 11.8 Op. margin Upside vs. current share price -3% 12% 15.2 14.1 13.2 12.4 11.7 Source: Bryan, Garnier & Co ests.

This method values ST at EUR11.8 per share, or a downside potential of 3%.

STMicroelectronics

4.1. Sensitivity of our FV to the ToF sensor ASP In order to assess the sensitivity of our FV to average selling prices for the ToF sensor, we have drawn up six additional scenarios. To build our base case, we have included in our model the incremental volumes associated with the design-in for the next generation of iPhones with an average ToF sensor price of USD3.5, which corresponds to the low end of our ASP estimates range (between USD3.5 and USD10). This price range is relatively wide since it depends on ST's contribution to co- development of the product (see section 3.2), while the impact of changes in ASP assumptions on our FV can be significant.

Today, our base case is For this measure of sensitivity, we have adopted a methodology that consists of maintaining gross built using an ASP of margin levels and opex investment values similar to our central scenario since gross margins at IDMs USD3.5 per ToF sensor. are not affected by ASPs but by volumes. In addition, while a higher ASP can offer more flexibility to increase R&D spending, note that the operating spending levels at ST are among the highest in the However, our sensitivity industry, especially R&D investments (R&D of 19.2% of sales over FY16 vs. 11.9% pour Infineon). analysis points to upside of 29% in the case of an As such, we believe that it is coherent to say that management should favour an improvement in ASP at USD10. margins relative to an acceleration in R&D spending and other operating spending.

This sensitivity analysis points to upside of 29% in the case of an ASP at USD10.

Fig. 1: Minimum upside of 5% and 29% in the case of ASP of USD10

Base Bear case Bull case case ASP (in USD) 1.0 1.5 2.5 3.5 6.0 8.0 10.0 Change vs. our base case -71% -57% -29% 0% 71% 129% 186% FV (in EUR) 12.8 13.0 13.3 13.7 14.4 15.1 15.7 Change vs. our base case -7% -5% -3% 0% 5% 10% 15% Upside vs. current share price +5% +7% +9% +12% +18% +24% +29%

Source: Bryan, Garnier & Co. ests.

4.2. We reiterate our Buy recommendation In the second half of 2016, the STMicroelectronics share benefited from a significant rerating driven mainly by external factors of which: 1/ a valuation under particular pressure at the start of 2016 since the share was trading at just 5x 12m forward EBITDA due to uncertainty concerning the STB division (vs. 9.2x today), 2/ the advantageous change in the EUR/USD exchange rate (a 1% decline in the exchange rate has a near 2% positive impact on our FV), 3/ a gradual improvement in fundamentals (2015 EBIT margin at 2.5% vs. 4.4% in 2016), 4/ a constant improvement in the semiconductors market environment and 5/ robust M&A activity in the sector, which has driven the EPS growth over three valuation upwards. Despite everything, we believe the group is still an investment opportunity years of 52.5% after since the additional opportunity prompted by ToF sensors does not seem to be reflected in either integrating additional consensus figures or in the share price. As such, based on 1/ buoyant momentum in the short volumes in ToF sensors term, 2/ the ongoing improvement in the group's fundamentals, and 3/ average EPS growth as of H2 2017 points to a over three years of 52.5% after integrating additional volumes in ToF sensors as of H2 2017, 2017e PEG of 0.4x and which points to a 2017e PEG of 0.4x (2017e P/E of 19.4x), we reiterate our Buy recommendation adopted on 30th January.

STMicroelectronics

Price Chart and Rating History

STMicroelectronics

13.3

12.3

11.3

10.3

9.3

8.3

7.3

6.3

5.3

4.3 31/07/15 31/10/15 31/01/16 30/04/16 31/07/16 31/10/16 31/01/1

STMICROELECTRONICS (PAR) Fair Value Achat Neutre Vente

Ratings Date Ratings Price 30/01/2017 BUY EUR12,055 28/01/2016 NEUTRAL EUR6,28 30/10/2015 SELL EUR6,2 26/02/2015 NEUTRAL EUR7,86

Target Price Date Target price 30/01/2017 EUR13,7 06/01/2017 EUR9,3 28/10/2016 EUR7,3 22/07/2016 EUR6,5 05/04/2016 EUR6,3 28/01/2016 EUR7 30/10/2015 EUR6,8 24/07/2015 EUR7,2 04/05/2015 EUR7,8 24/03/2015 EUR9 04/03/2015 EUR8 26/02/2015 EUR7,6

STMicroelectronics

Bryan Garnier stock rating system For the purposes of this Report, the Bryan Garnier stock rating system is defined as follows: Stock rating Positive opinion for a stock where we expect a favourable performance in absolute terms over a period of 6 months from the publication of a BUY recommendation. This opinion is based not only on the FV (the potential upside based on valuation), but also takes into account a number of elements that could include a SWOT analysis, momentum, technical aspects or the sector backdrop. Every subsequent published update on the stock will feature an introduction outlining the key reasons behind the opinion. Opinion recommending not to trade in a stock short-term, neither as a BUYER or a SELLER, due to a specific set of factors. This view is intended to NEUTRAL be temporary. It may reflect different situations, but in particular those where a fair value shows no significant potential or where an upcoming binary event constitutes a high-risk that is difficult to quantify. Every subsequent published update on the stock will feature an introduction outlining the key reasons behind the opinion. Negative opinion for a stock where we expect an unfavourable performance in absolute terms over a period of 6 months from the publication of a SELL recommendation. This opinion is based not only on the FV (the potential downside based on valuation), but also takes into account a number of elements that could include a SWOT analysis, momentum, technical aspects or the sector backdrop. Every subsequent published update on the stock will feature an introduction outlining the key reasons behind the opinion. Distribution of stock ratings

BUY ratings 51.2% NEUTRAL ratings 34% SELL ratings 14.8%

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