Western Digital Corporation

The Company’s State is Solid

USA | TECHNOLOGY | INITIATION 22 July 2016

 Market Leader in HDD BUY (Initiating) rd  3 largest supplier of SSD CLOSING PRICE USD 51.65  Enterprise HDD and Cloud Storage on the rise FORECAST DIV USD 2.00  Large potential Synergies from acquisitions TARGET PRICE USD 62.88 25.6%  Initiate with “BUY” rating and TP of US$62.88 based on DCF TOTAL RETURN COMPANY DATA Snapshot O/S SHARES (M N) : 281 th Corporation (WDC) has concluded the SanDisk acquisition deal in 12 May M ARKET CAP (USD mn / SGD mn) : 14536 / 14536 2016. Prior to that, deal uncertainty arising from the Chinese Ministry of Commerce 52 - WK HI/LO (USD) : 88.46 / 34.99 (MOFCOM), coupled with falling demand for Hard Disk Drives (HDD), WDC’s main product, Average Daily T/O (mn) : 6.43 had caused the share price to tumble. WDC started the year at US$60.05 and fell to a low MAJOR SHAREHOLDERS (%) of about US$34.99 in early May. Subsequent to the favorable announcement, the stock has VANGUARD GROUP 7.08% recovered to a price of US$52.12. The Company will release its maiden quarterly earnings BLACKROCK 6.55% th as a combined company on 28 July 2016. T ROWE PRICE ASSOCIATES 5.89% FM R LLC 4.18% Investment merits STATE STREET CORP 3.55%  Dominant leader in HDD (a) Largest market share out of 3 main players at 43% of the market. PRICE PERFORMANCE (%) 1M T H 3 M T H 1Y R (b) Enterprise HDD up 18.8% yoy, running counter to general decline in the overall COM PANY 6.8 20.5 (31.9) HDD market, in combination with rise in Cloud storage needs makes compelling SPX RETURN 3.80 4.09 4.45 case that there is still some demand for HDD (c) Consumer electronics, WDC’s branded products, also grew 3.4% yoy, showing PRICE VS. SPX

demand for external data storage devices 100  SanDisk acquisition gives them large market share in SSD 80 (a) SanDisk was the 3rd largest player in SSD market, with close to 12% market share. The acquisition allowed WDC to procure NAND and current SSD technology as well 60 as access to next generation technology. It also granted access to strategic 40

partnership with 20 (b) Product diversification to cushion further decline in HDD market. The acquisition Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 WDC US EQUITY SPX index grew WDC’s SSD revenue contribution from 7% to 35% (c) SSD market is expected to grow at a 24% CAGR on increasing data storage needs Source: Bloomberg, PSR

as well as growth in devices such as smartphones and tablets, which make use of KEY FINANCIALS NAND technology U SD B N F Y 14 F Y 15 F Y 16 e F Y 17e

 Synergies from acquisition Revenue 15.4 15.1 14.6 12.3 EBITDA 4.4 4.4 4.2 3.4 (a) MOFCOM allowed WDC to begin its integration with HGST, which WDC had NPAT (adj.) 1.0 1.6 1.5 1.2 previously acquired. This allows WDC to start reaping significant annual run rate EPS (adj.) 4.07 6.88 6.31 3.24 cost savings. HGST would amount to close to US$800 mn a year in cost savings PER, x (adj.) 12.7 7.5 8.2 15.9 once integration is complete P/BV, x 1.6 1.4 1.3 1.3 DPS (USD) 1.0 1.3 1.8 2.0

(b) Due to similarities, SanDisk synergies would also allow WDC to have cost savings Div Yield, % 2% 2% 3% 4% of close to US$1.1 bn a year by 2020 and about US$500 mn within 18 month of ROE, % 13% 19% 16% 11%

the deal closing Source: Company Data, PSR est.

Investment action Ho Kang Wei (+65 62121855) We are positive on WDC despite the recent run up in share price and weakness in HDD [email protected] demand. The acquisition provides (i) new avenues for growth and (ii) cost savings opportunities, which could lead to significant upside. We initiate coverage on WDC with a “BUY” rating and a DCF-derived target price of US$62.88.

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WESTERN DIGITAL CORPORATION INITIATION

Company Summary WDC’s main product and revenue driver is the HDD. HDD are data storage devices used for storing and retrieving digital information. It is done by using one or more rapidly spinning disks coated in magnetic material and actuator arms with magnetic heads are used to read and write data on these disk. The data can be retained even when powered off. WDC manufactures and distributes HDDs to be used in Notebooks, Personal Computers, Servers or as external units. It is the market leader of HDD, accounting for about 43% market share as compared to Seagate’s 42% and Toshiba’s 15%. HDD became the dominant method for digital storage since 1960s, on the back of its capacity and performance – able to store large quantities of data in a small (with respect to the past) size. The Total HDD Units Shipped in 2015 was 469mn, compared to 564.1mn in the previous year, representing a 17% decline. However, while unit sales of HDD are Source: Company declining, it is important to note that demand for HDD storage has not. The total capacity

shipped in 2015 by WDC was 250.1 Exabyte (EB) vs 202 EB in 2013. Seagate also had similar statistics, shipping 222 EB in 2015 vs 194 EB in 2013. The HDD Market has been facing significant decline due to emergence of new technology, namely the Solid State Drive (SSD). (i) Unlike the HDD, SSD has no moving mechanical components. As such, they are more resistant to physical shock, more efficient as it can access data a lot faster with lower latency and can run silently. (ii) SSDs are also more reliable – since there are no moving parts, it is less likely to fail due to wear and tear. (iii) The power consumption for SSDs are also significantly less than HDDs, to as little as half to a third the power usage of HDD. (iv) However, the cost per capacity for SSDs can be up to 8 times that of HDDS, at US$0.37 per GB vs US$0.05 per GB. With its acquisition of SanDisk, which was the 3rd largest player in terms of market share for SSD, WDC has positioned itself to capture the growing SSD market and mitigate the decline of HDD.

Investment Thesis 1. Dominant HDD Leader

WDC pre-merger was already a strong company, despite the slowing HDD industry. It is the market leader with 43% market share, slightly ahead of its closest competitor, Seagate (STX), at 42%. As the market leader, WDC was able to achieve a gross margin of 29% in 2015 and has averaged a gross margin of 28.8% in the past 4 years. Figure 1:

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While total revenue has been on the decline, down to US$14.5 bn in 2015 from US$15.13bn in 2014, there are still some bright spots in the HDD market for WDC. (a) Enterprise HDD The decline in unit sales can be blamed primarily on the decline in the PC market. Sales from Enterprise HDD, on the contrary, has bucked the trend and is increasing. It increased 18.8% yoy to US$2.67 bn in 2015 from US$2.25 bn in 2014. Enterprise class HDDs are a different beast compared to the more retail HDDs. They are usually not shipped in huge quantities and are sold for large premiums as they are usually specially designed. With (i) Cloud computing on the rise, and (ii) the sizable amount of data large corporations have to store and process, sale of Enterprise HDDs are likely to remain high. Additionally, many data centres continue to use these HDDs despite the advent of SSDs due to high cost of substitution. My Cloud™ Business Series DL4100 Source: Company Figure 2: The Enterprise HDD segment only started in FY11 and looks to be stabilising around the US$2.6 bn area.

Source: Company (b) Other branded products Besides Enterprise HDDs, WDC has also been successful in selling its branded products, growing the revenue 3.4% in 2015 to US$ 1.5 bn. Demand for external storage is growing as many notebooks are unable to house more than one hard drive. Similarly, WDC’s consumer electronics segment has also seen improvement in its revenue, growing 3.4% in 2015 to US$2.22 bn. Thanks to the success of ’s PlayStation 4, which recently reported it had reached 40 mn units sold, WDC has had the opportunity to sell hard drives to millions of new consumers. While the prospect for HDD industry seems cloudy, it is unlikely for SSDs to completely replace HDDs in short term. Rather, hybrid HDD (combination of SSD and HDD) or wireless HDD could be the solution to the industry.

2. Direct access to large SSD market share via SanDisk acquisition (a) Access to expert knowledge, technology and market share Prior to the SanDisk acquisition, WDC has had negligible presence in the SSD market. SanDisk had the 3rd largest market share. The acquisition of SanDisk, not only helped WDC to become market leader, it also gained the expert knowledge and technology to manufacture the traditional SSD and the next generation of NAND . SSD currently makes use of 2-D NAND flash memory. The new 3-D Flash memory will allow manufacturers to achieve higher densities at a lower cost per bit, which could translate to a lower SSD price, making replacement of HDDs more affordable. CloudSpeed SATA SSD Source: Company Notwithstanding its scale and dominance, SanDisk is a market leader in terms of NAND flash technology. It announced the world’s first 256 Gb X3 48-layer 3D NAND chip in

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August 2015. They have since also started development in ReRam Technology, which SanDisk believed have the potential to be a future alternative to NAND. Besides SanDisk’s own operations, it also had an existing SSD joint venture with Toshiba, allowing the sharing of technology and resources. Toshiba and WDC had recently announced the opening of a new flash memory fabrication facility in Japan. This relationship between Toshiba and WDC might further benefit WDC in the event of further shrinkage in the HDD market and if Toshiba seeks to exit the HDD market completely. Further consolidation here will lead STX to lose out in market share compared to WDC. Figure 3:

Source: Company (b) Product diversification to cushion the adverse impact from softening HDD demand By Acquiring SanDisk, WDC’s revenue contribution from SSD/NAND would increase from its current 7% to 35%. This puts them in the position to take advantage of future growth in the SSD market, and to cover themselves in light of the declining HDD market. WDC estimates that Data storage demand will continue to increase at a rate of 20% CAGR, with Enterprise Storage growing significantly in the next 5 years. In Q1 2016, SSDs shipment grew 32% yoy from 23.19 mn to 30.77mn, while HDDs shipments fell 20% yoy comparatively. Figure 4:

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Figure 5:

Source: Company (c) Expanding customer base (existing and potential) The Total Addressable Market (TAM) is estimated to at least double over the next five years through 2020. The Cloud revenues represent Cloud revenue of , , Oracle, and Salesforce. Cloud providers currently primarily still use HDD for most of their data centres, however if SSDs cost were to decrease significantly, they could look to replace HDDs with SSDs. Embedded NAND in devices like smartphones and tablets are also potential growth segments that WDC could ride on via the purchase of SanDisk. Figure 6:

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Figure 7: Cloud Storage Petabye Growth

3. Synergies in Acquisitions (a) Integration with HGST starts now Besides SanDisk, WDC has also acquired Global Storage Technologies (HGST) on March 2012. Previously, MOFCOM, the Chinese trade regulator, has been holding up the integration of WDC and HGST. This prevented WDC from realizing the cost saving synergies from the acquisition. However, in Oct 2015, MOFCOM relaxed their stand and allowed WDC to begin the integration process with HGST, but the two and sales forces must maintain separated for two more years. Nonetheless, due to the similarities in their businesses, WDC can integrate substantial portions of its operations and share technology, saving millions of operating expenses. WDC estimates that it will start reaping part of the benefits of these synergies by Q2FY17 – close to US$400 mn in cost savings by end Q2FY17, and annual savings of US$800 mn by end Q2FY18. (b) Advantages from SanDisk deal is not just topline growth With the acquisition of SanDisk, WDC also estimates close to US$1.1 bn in cost synergies by 2020. About US$500 mn annual run rate cost synergies is expected to be generated within 18 months from the completion of the deal. The acquisition allowed WDC to save an estimated US$200 mn over 18 months and US$750 mn by 2020, on cost of acquiring NAND technology used for SSDs. Since acquiring SanDisk, SSD revenue contribution to WDC overall revenue is expected to increase to about 32%. The similarities between WDC and SanDisk also allows WDC to reduce $180 mn in operating expenses over the next 18 months and US$225 mn by 2020. In particular, R&D cost would be reduced by close to US$70 mn and selling and distribution cost would be reduced by US$55 mn. The added synergies would mean WDC would be able to have annualized run rate savings of close to about US$1 bn by end FY18 and close to US$ 2bn by 2020. This would help to grow WDC’s free cash flow significantly in the long run.

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Figure 8: SanDisk synergy overview (US$ mn)

Source: Company 4. WDC Leverage In order to finance the acquisition, WDC has taken on a concerning amount of debt. The deal with SanDisk amounted to US$67.50 and 0.2387 shares of WDC for every share of SanDisk. This amounted to a total of c.US$14 bn in cash and slightly under a quarter of a WDC share for every SanDisk share. In order to finance this deal, WDC had raised new debt financing through a mix of different secured notes and new loans. WDC raised US$1.875 bn in senior secured notes due 2023, and US$3.35 bn due 2024. They also raised US$4.125 bn in term loan A, US$3.75 bn in term loan B, and a €885 million Euro-denominated term loan B (equivalent to c.US$1 bn). A US$1 bn revolving credit line and a US$3 bn additional bridge facility was raised as well. This added to a total of about US$19.1 bn. The various interest rates would give a blended average of about 5.6% p.a. Figure 9: Summary of Debt

Debt Amount(US$ bn) Maturity Senior Secured Note 1.88 2023 Senior Secured Note 3.35 2024 Term Loan A 4.13 2021 Term Loan B 3.75 2023 Term Loan B € 0.89 2023 Revolving Bridge 1.00 2021 Bridging Facility 3.00 2016 Total 19.10 Source: Company While this amount of debt does seem immense, WDC has structured it in a way that most of the debt would only be paid after 2020. In other words, it is only required to pay off its debt after the completion of integration with SanDisk, when it can start reaping the benefits. Of the US$19.1 bn, WDC's priority is to pay the bridging facility, which they will likely do with the US$4 bn cash reserve that SanDisk has. Subsequently, with the cost savings from SanDisk achieved and the growth from the new SSD business, WDC should have sufficient funds to cover the remaining debt. Even with their current cash on hand and the remaining funds from the debt raised, WDC has enough to cover a significant portion of the debt.

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Valuation Discounted Free Cash Flow (DCF) model was used to derive a valuation of WDC intrinsic value. The following assumptions were made for the model:  Headwinds in HDD demand leading to decline in revenue from HDD segment  Growth in SSD demand to compensate the decline in HDD  Continued growth in Enterprise and Cloud storage demand  Synergies are able to be achieved at WDC estimated level We initiate coverage for WDC with a "BUY" rating with a target price of US$62.88, derived from our DCF estimates. Figure 10: Discounted Cash Flow Model WACC Debt to Total Capitalization 21.00% Equity to Total Capitalization 79.00% Debt to Equity Ratio 26.00%

Cost of Equity Risk-free rate 1.84% Market risk Premium 6.50% Levered Beta 1.45 Cost of Equity 11.27%

Cost of Debt Cost of Debt 5.6% Taxes 25.5% After Tax Cost of Debt 4.2%

WACC 9.8% Terminal growth rate 0.5%

Y/E Jun, USD mn FY16e FY17e FY18e FY19e FY20e

Forecasted Free Cash Flows to Firm(US$) 773.8 1,483.8 1,924.3 2,455.6 2,967.9 PV of FCF (US$) 738.6 1,290.1 1,524.1 1,771.7 1,950.6 Terminal value (US$) 32,156.8 PV of Terminal Value (US$) 20,171.9 Price Target (US$) 62.88 WACC 9.8% Assumptions Market Cap (US$ bn) 12.0 Shares outstanding (mn) 290.0 Total Debt (US$) 23,643.0 Cash and cash equivalent (US$) 14,431.7 Terminal growth rate 0.5% Source: Phi l l ip Securi ties Research (Singapore) Peer Comparisons WDC, STX and Toshiba are essentially the 3 companies that manufacture and supply the HDD market. However, we excluded Toshiba in the peer comparison due to (i) its size as a minor player compared to STX, and (ii) it being a Japanese listed company. On the other hand, Inc (MU) was chosen as they are close to SanDisk

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share of the SSD market. Of note, is the leading company in the SSD market with a market share of 44%. However, we excluded the company from peer comparison due to (i) it not being listed on the US stock exchanges, and (ii) has many portfolios that do not overlap with WDC. WDC has a much lower PER compared to STX, almost half the PE multiple. This implies that WDC is more undervalued compared to STX. However, WDC's dividend yield is much lower than STX, 3.91% compared to STX's 8.40%. STX has yet to make headway in the SSD market and as of now has not made any move to expand their SSD capabilities. WDC’s PER is also much lower than MU’s, which does not pay out a dividend. Figure 11: Peer Comparison Mkt. Cap. (US$ bn) Price (US$) P/E Div Yield Western Digital 14.60 51.65 9.50 3.87% 9.31 31.22 21.96 8.07% Micron Technology 13.69 13.18 43.41 N/A Source: Bloomberg At US$51.65, WDC is currently trading at 14.47x Trailing PER, above its 5-year PE average of 10.81x. However, WDC has been beaten down on fears of HDD decline, and we think that the positives from the synergies with HGST and SanDisk has yet to be priced in. Figure 12: Historical PER

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 PER 14.92 4.73 14.42 5.46 10.36 6.03 18.01 14.21 Source: Bloomberg Conclusion WDC had previously been beaten down due to fears of HDD market decline as well as paying a hefty price to acquire SanDisk. However, in recent weeks, the stock has recovered somewhat as investors seem to have calm down over the fear that WDC had overpaid for SanDisk. With the acquisition of SanDisk and its captive NAND market, WDC is in a good position to take advantage of growth in SSD market. This allows them to cover themselves from future decline in the HDD market. Being a market leader in HDD, they are also well positioned to capture growth in Enterprise and Cloud data storage demands, the latter of which is likely to grow at an accelerated rate in the coming years. While WDC has taken on significant debt to finance their acquisitions, they have managed to structure it in a way that allows them to reap the benefits of their acquisition before needing to repay that debt. Even with the recent run-up in share price, our conservative estimates for WDC still show an upside of 21.75%. We also think that it is lower valuation against its peers are unwarranted considering its growth potential. As such, we initiate with a "BUY" rating on WDC with a Target Price of US$62.88 per share.

Investment Risks Slowdown in demand for data storage. Most of WDC's growth potential comes from increasing demand from Enterprise and Cloud data storage. Should the demand or needs from Enterprises or Cloud providers fall, a major component of WDC's future growth would

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be negatively impacted. Falling cost of SSD. WDC's acquisition of SanDisk was in a bid to capture the SSD market. However, as technology improves, cost of SSDs may start falling. WDC might end up having to develop and sell higher capacity SSDs at lower prices and margins. New Technology. Should a new form of data storage technology be developed in the next 10 years that WDC does not have a hand in through the SanDisk acquisition, WDC risk being displaced as a market leader in the data storage industry and also overpaying for SanDisk. Failure to achieve synergies. While this unfavorable scenario is unlikely to occur due to the similarities in the businesses between WDC and SanDisk, if WDC failed to achieve their estimated synergies, then the value proposition of the SanDisk acquisition would be severely diminished. WDC would have overpaid for SanDisk.

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Appendix Financials As the SanDisk acquisition was only completed in May 2016, WDC has yet to release financial statements on the combined company. Below is the unaudited pro forma condensed combined statements for the financial year ended July 3, 2015.

Income Statement (Unaudited Pro Forma FY15) Y/E Jun USD Mn WDC SDK Reclassification Adjustments Combined Revenue, net 14,572.0 6,051.0 — -10.0 20,613.0 Cost of revenue 10,351.0 3,350.0 115.0 261.0 14,077.0 Amortization of acquisition-related intangible assets 0.0 115.0 -115.0 0.0 0.0 Gross profit 4,221 2,586 0.0 -271.0 6,536.0 Research and development 1,646.0 891.0 0.0 30.0 2,567.0 Selling, general and administrative 773.0 624.0 51.0 88.0 1,536.0 Charges related to arbitration award 15.0 0.0 0.0 0.0 15.0 Amortization of acquisition-related intangible assets 0.0 51.0 -51.0 0.0 0.0 Impairment of acquisition-related intangible assets 0.0 61.0 0.0 0.0 61.0 Restructuring and other 0.0 83.0 -83.0 0.0 0.0 Employee terminations, asset impairment and other charges 176.0 0.0 83.0 0.0 259.0 Total operating expenses 2,610.0 1,710.0 0.0 118.0 4,438.0 Operating income 1,611.0 876.0 0.0 -389.0 2,098.0 Interest and other income 15.0 42.0 5.0 -40.0 22.0 Gain (loss) on investments — 4.0 -4.0 0.0 — Interest and other expense -49.0 -122.0 -1.0 -789.0 -961.0 Total other expense, net -34.0 -76.0 0.0 -829.0 -939.0 Income before income taxes 1,577.0 800.0 0.0 -1,218.0 1,159.0 Income tax provision 112.0 217.0 0.0 -149.0 180.0

Net income 1,465.0 583.0 0.0 -1,069.0 979.0 Source: Company

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Balance Sheet (Unaudited Pro Forma as of 1 Jan 2016) Y/E Jun USD Mn WDC SDK Reclassification Adjustments Combined ASSETS Cash and cash equivalents 5,363.0 1,479.0 — -3,023.0 3,819.0 Short-term investments 497.0 2,527.0 — -2,521.0 503.0 Accounts receivable, net 1,650.0 618.0 — — 2,268.0 Inventories 1,238.0 809.0 — 191.0 2,238.0 Other current assets 200.0 227.0 — 37.0 464.0 Total current assets 8,948.0 5,660.0 — -5,316.0 9,292.0 Long-term marketable securities — 117.0 -117.0 — — Property, plant & equipment, net 2,801.0 817.0 — 359.0 3,977.0 Notes receivable and investments in Flash Ventures — 1,010.0 — — 1,010.0 Deferred taxes — 325.0 -325.0 — — Goodwill 2,766.0 831.0 — 6,006.0 9,603.0 Other intangible assets, net 292.0 297.0 — 6,463.0 7,052.0 Other non-current assets 659.0 174.0 442.0 -160.0 1,115.0 Total assets 15,466.0 9,231.0 — 7,352.0 32,049.0

LIABILITIES Accounts payable 1,806.0 323.0 — — 2,129.0 Accounts payable to related parties — 178.0 — — 178.0 Accrued arbitration award 32.0 — — — 32.0 Convertible short-term debt — 913.0 — -913.0 — Other current accrued liabilities — 353.0 -353.0 — — Deferred income on shipments to distributors and retailers and deferred revenue — 236.0 -236.0 — — Accrued expenses 505.0 — 431.0 -102.0 834.0 Accrued compensation 315.0 — 139.0 — 454.0 Accrued warranty 144.0 — 19.0 — 163.0 Revolving credit facility 255.0 — — 45.0 300.0 Current portion of long-term debt 188.0 — — -140.0 48.0 Total current liabilities 3,245.0 2,003.0 — -1,110.0 4,138.0 Long-term debt 2,062.0 — — 11,819.0 13,881.0 Convertible long-term debt — 1,238.0 — -1,238.0 — Other liabilities 602.0 171.0 — 1,146.0 1,919.0 Total liabilities 5,909.0 3,412.0 — 10,728.0 20,049.0

EQUITY Convertible short-term debt conversion obligation — 80.0 — -80.0 — Total shareholders’ equity 9,557.0 5,739.0 — -3,185.0 12,111.0 Total liabilities, convertible short-term debt conversion obligation and equity 15,466.0 9,231.0 — 7,352.0 32,049.0

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WESTERN DIGITAL CORPORATION INITIATION

Financials

Income Statement Balance Sheet Y/E Jun USD bn FY13 FY14 FY15 FY16e FY17e Y/E Jun USD bn FY13 FY14 FY15 FY16e FY17e Gross revenue 15.4 15.1 14.6 12.3 18.3 ASSETS Cost of sales -11.0 -10.8 -10.4 -9.0 -12.2 PPE 3.7 3.3 3.0 2.4 1.8 Gross Profit 4.4 4.4 4.2 3.4 6.1 Intangibles 0.6 0.5 0.3 0.3 0.3 R&D,S&GA Exp -2.3 -2.4 -2.4 -2.2 -3.7 Goodwill 2.0 2.6 2.8 2.8 2.8 Other Expenses -.9 -.2 -.2 .0 .0 Others NCA 0.2 0.5 0.6 0.7 0.9 Synergies .5 Total non-current assets 6.4 6.8 6.7 6.2 5.8 Profit Before Tax 1.2 1.8 1.6 1.1 2.9 Accounts receivables 1.8 2.0 1.5 1.3 1.1 Interest Exp -1.0 CCE 4.3 5.1 5.3 7.3 9.2 Taxation -.2 -.1 -.1 .0 -.4 Inventory 1.2 1.2 1.4 1.4 1.4 Profit After Tax 1.0 1.6 1.5 1.2 1.4 Others CA 0.3 0.4 0.3 0.3 0.3 Total current assets 7.6 8.7 8.5 10.4 12.1 Total Assets 14.0 15.5 15.2 16.6 17.9 Per share data (Cents) Y/E Jun FY13 FY14 FY15 FY16e FY17e LIABILITIES Basic EPS (USD) 4.1 6.9 6.3 3.2 2.7 Accounts payables 2.0 2.0 1.9 1.5 1.2 net DPS - (USD) 1.0 1.3 1.8 2.0 2.0 Short term loans 0.2 0.1 0.4 0.4 0.3 BVPS (USD) 33.3 37.8 40.1 38.8 38.4 Others CL 1.8 1.7 1.0 0.9 0.9 Total current liabilities 4.0 3.8 3.2 2.8 2.5 Long term loans 1.7 2.3 2.2 2.5 2.7 Cash Flow Others NCL 0.4 0.5 0.6 0.5 0.4 Y/E Jun USD bn FY13 FY14 FY15 FY16e FY17e Total non-current liabilities 2.2 2.8 2.7 2.9 3.1 CFO Total Liabilities 6.1 6.7 6.0 5.7 5.5 Net Income 1.0 1.6 1.5 1.1 1.4 Adjustments 1.2 1.2 1.1 1.1 1.0 EQUITY WC changes 0.7 -0.2 -0.6 -0.7 -0.1 Retained Earnings 6.7 8.1 9.1 10.7 12.2 Others 0.2 0.2 0.3 0.2 0.2 Others Equity 1.1 0.8 0.1 0.1 0.1 Cashflow from ops 3.1 2.8 2.2 1.7 2.5 Shareholder Equity 7.9 8.8 9.2 10.9 12.4 CFI CAPEX, net -1.0 -0.6 -0.6 -0.5 -0.5 Others 0.2 0.2 0.3 0.2 0.2 Cashflow from investments -1.0 -1.9 -1.0 -0.4 -1.4 Valuation Ratios CFF Y/E Jun FY13 FY14 FY15 FY16e FY17e Share issuance, net -0.7 -0.6 -0.8 0.6 0.6 P/E (X), adj. 12.7 7.5 8.2 16.0 19.2 Loans, net of repayments -0.2 0.5 0.1 0.0 0.0 P/B (X) 1.6 1.4 1.3 1.3 1.4 Dividends -0.2 -0.3 -0.4 -0.5 -0.5 EV/EBITDA (X), adj. 8.8 6.1 6.8 9.6 3.8 Others 0.2 0.2 0.3 0.2 0.2 Dividend Yield (%) 1.9% 2.4% 3.5% 3.9% 3.9% Cashflow from financing -1.0 -0.4 -1.1 0.8 0.8 Growth & Margins (%) Net change in cash 1.1 0.5 0.2 2.1 1.9 Growth CCE, end 3.2 4.3 4.8 5.0 7.1 Gross revenue 23.0% -1.4% -3.7% -15.3% 48.0% EBIT -30.4% 43.4% -10.0% -28.9% 155.7% Profit After Tax -39.2% 65.0% -9.4% -21.2% 18.9% Margins Operating margin 8.0% 11.6% 10.8% 9.1% 15.7% Gross margin 28.4% 28.8% 29.0% 27.2% 33.2% Net Profit Margin 6.4% 10.7% 10.1% 9.3% 7.5% Key Ratios ROE (%) 12.6% 19.3% 16.2% 11.5% 11.8% ROA (%) 6.9% 10.9% 9.6% 7.3% 8.0%

Source: Company, Phillip Securities Research (Singapore) Estimates *Forward multiples & yields based on current market price; historical multiples & yields based on historical market price.

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WESTERN DIGITAL CORPORATION INITIATION

Ratings History

120 Market Price Target Price 100 80 60 40

20 Source: Bloomberg, PSR

0

Dec-14 Mar-15 Sep-15 Dec-15 Mar-16 Sep-16 Dec-16 Jun-15 Jun-16

1 2 3 4 5

PSR Rating System Total Returns Recommendation Rating > +20% Buy 1 +5% to +20% Accumulate 2 -5% to +5% Neutral 3 -5% to -20% Reduce 4 <-20% Sell 5 Remarks We do not base our recommendations entirely on the above quantitative return bands. We consider qualitative factors like (but not limited to) a stock's risk reward profile, market sentiment, recent rate of share price appreciation, presence or absence of stock price catalysts, and speculative undertones

surrounding the stock, before making our final recommendation

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