Initiating Coverage 14 June 2016

You should touch this Sector Biometrics

Substantiated by the rapid deployment of sensors in over the recent years, we find such sensors now also relevant and applicable for a broad range of new products and solutions for the Shares and recommendations future. In addition to continued growth from penetration, we view smart cards and various Internet of Things applications/gadgets as Company Ticker Currency Rec. Share price Target price Upside Fingerprint Cards FINGB SS SEK HOLD 89 97 9% the most imminent drivers for further demand, as cost of sensor production IDEX IDEX NO NOK BUY 8.1 13 61% has been marginalized on industrialization and new technologies. In sum, NEXT Biometrics NEXT NO NOK BUY 127 200 57% we expect an addressable fingerprint sensor market of USD ~5bn by 2020e, Source: Factset, Pareto Securities Equity Research and not reflected in current share prices. We initiate coverage of FING – HOLD, TP SEK 97, IDEX – BUY, TP NOK 13, and NEXT – BUY, TP NOK 200.

A market reaching 2.5bn sensors in 2020e

Market growth both for existing and new verticals Sensors (bn) When Apple introduced the TouchID functionality to its iOS in 2013, it proved 3 2.5 to be a catalyst for a vast deployment of fingerprint sensors in smartphones. On the emergence of new technologies and higher degree of industrialization 2.1 0.6 2 of the value-chain driving down costs, such sensors are becoming relevant 1.6 0.4 0.6 also for other mass-market applications such as smart cards and various 0.2 0.5 1.0 0.3 gadgets and IoT solutions. As such, we anticipate further growth driven by 1 0.6 0.1 higher penetration within smartphones, but the major growth going forward 1.3 0.3 1.1 1.2 likely being driven by these new verticals, lifting the addressable fingerprint 0.2 0.8 sensor market from USD ~1bn in 2016e to USD ~5bn by 2020e. 0 2014 2015 2016e 2017e 2018e 2019e 2020e Commercialization to trigger re-pricing of shares Smartphones ex. Apple Smartcards Other Source: Statista, IDC, IHS, Pareto Securities Equity Research In our view, the rapid deployment of fingerprint sensors in smartphones highlights the attractiveness of the concept, and the mass-market’s willingness to adopt the functionality. Becoming relevant also for smart cards and various gadgets/IoT solutions should enable a substantial market opportunity for NEXT and IDEX, triggering a re-pricing of the shares as the FPC revenues displaying fast sensor adoption commercial value proposition materializes. Revenues (SEKm) Apple launch Android 6.0 iPhone 6S with include native 1,600 2nd gen. Touch ID fingerprint Fingerprint Cards (FINGB SS) – HOLD, TP SEK 97 support Enjoying a first-mover advantage, Fingerprint Cards (FPC) has achieved tremendous growth over the past years, being able to offer a mass-market 1,200 Apple Samsung Samsung Apple launches launch launch solution to the rapidly growing market for fingerprint sensors in acquires iPhone 5S Galaxy S5 Galaxy S6 AuthenTec with swipe with touch 800 with smartphones. However, we see increasing competition, volume-growth for USD 356m TouchID sensor sensor driven by a price-sensitive entry-level smartphone segment, and existing customers seeking to multi-source sensors. We are in line with consensus on 400 EBIT for 2016-18e, and on challenging commercial trends diluting the growth potential, we find the share fairly priced at EV/EBIT’18e 6.3x. 0 IDEX (IDEX NO) – BUY, TP NOK 13 Q1'12 Q3'12 Q1'13 Q3'13 Q1'14 Q3'14 Q1'15 Q3'15 Q1'16 Source: Company data, Pareto Securities Equity Research Post warrant exercises by Invesco and Woodford, IDEX has a comfortable liquidity position ahead of the commercialization of its proprietary product offerings. Its solutions are largely ready for the mass-market, and the company already has secured participation in the recent LG smartphone launch, displaying its relevance as a multi-sourcing partner for OEMs. It has furthermore established a partnership with a global payment company. Becoming profitable in 2018e, we find the share to represent a fully-funded diversified bet on existing as well as emerging sensor verticals. Analysts NEXT Biometrics (NEXT NO) – BUY, TP NOK 200 Fredrik Steinslien As the smartphone fingerprint sensors have tended to become smaller, NEXT +47 24 13 21 54, [email protected] has turned its focus towards more of a pure-play smart card concentration. Espen Klette Its proprietary technology utilizing a thermal principle enables a significant +47 24 13 39 35, [email protected] cost advantage, however less prominent in competition with smaller sensors. As such, the sensors are likely to be more relevant for solutions requiring both security and convenience, and the fully ISO compliant card solutions should make the company a preferred sensor provider for a wide range of products in terms of access, ID, payment, governmental/military cards.

Please refer to important disclosures on the last 5 pages of this document Biometrics Initiating Coverage

Contents

Investment case ...... 3

Financially set for commercialization ...... 6

Several potential triggers for the shares ...... 7

We initiate coverage with BUY on IDEX/NEXT, HOLD on FINGB ...... 9

Pareto versus consensus ...... 11

Addressable market of USD ~5bn in 2020e ...... 13

Total fingerprint sensor market approaching USD 15bn in 2020 ...... 13

Intensifying capacitive competition ...... 16

Market share trajectory expectations ...... 16

Adoption set to increase for smartphones ...... 18

Three players have dominated the smartphone sensor market ...... 18

Slowing smartphone growth, but increasing ex-Apple market ...... 20

Mobile payments to drive adoption for fingerprint sensors ...... 21

Smart cards emerging as the next vertical ...... 23

Cost and technology propositions now viable for smart cards ...... 24

Appendix I: Peer table ...... 28

Appendix II: Ownership structures ...... 28

Appendix III: Competitive overview ...... 29

Fingerprint Cards ...... 30

IDEX ...... 43

NEXT Biometrics ...... 56

14 Jun 2016 Pareto Securities Research 2(70) Biometrics Initiating Coverage

Investment case

We initiate coverage with a We initiate coverage of the Nordic fingerprint sensing biometrics space, with a positive view on the fingerprint positive view on the sector, given the vast market opportunity, and proven sensor biometrics sector rapid deployment seen for smartphones when solutions become commercialized. Driven by companies such as Apple, Samsung and Microsoft, traditional PIN codes, passwords, ID cards, physical keys and other identification technologies are increasingly replaced by fingerprint technology. As displayed by the rapid growth for Fingerprint Cards (FPC), the concept has been broadly adopted across a wide range of players within the smartphone space. Through industrialization and new technologies, reduced costs have made fingerprint sensing technologies viable also for new mass-markets such as smart cards and various IoT applications and gadgets. In general, we do not find this substantial growth outlook reflected in the share prices, and we expect to see a re-pricing of the shares on materialization of the concepts commercial potential, particularly for IDEX and NEXT.

Industry development and technologies enabling new verticals We anticipate new verticals to Smartphone adoption growth has proven the end-market’s demand, represent the primary growth highlighting the attractiveness of the concept and the mass-market’s willingness driver longer-term to adopt the functionality. Importantly, as industrialization has happened along the value-chain, production costs have been marginalized making fingerprint sensing relevant for entry-level smartphones, but also new verticals such as smart cards and IoT applications/gadgets as new technologies have emerged. While smartphones are likely to represent the most sizable market in the short- term, we anticipate a primary growth driver by new verticals.

A competitive capacitive space necessitates distinctiveness Intensifying competition as several The competitive environment largely consists of 3 technologies: i) capacitive, ii) Chinese and Taiwanese players thermal and iii) ultrasonic. The technology most wide-spread today is the enter the market capacitive principle, included in more or less all smartphones with fingerprint functionality. While FPC had a readily available mass-market solution when fingerprint sensors gained momentum in smartphones, several Chinese and Taiwanese players have now entered the field, and the capacitive space has become fairly crowded. These players have typically developed touch screens utilizing the capacitive principle, and it seems as a relatively small leap to approach the fingerprint sensing market, in our view. This has led to a significant ASP contraction the latter years, and although driven by sensors becoming smaller, we anticipate ASP to steadily decline from today’s USD ~3/unit towards USD 1.8/unit in 2020e. An increasing competitive landscape coupled with smartphone OEMs pursuing a higher degree of multi-sourcing are the primary reasons to why we take more of a cautious stance on the FPC share. Although execution risk remain for IDEX and NEXT, we anticipate the proprietary nature of the concepts, approaching a commercial stage, to enable a niche angle towards smartphones, but, more importantly, opening up for new verticals.

Buy NEXT and IDEX, Hold FING Buy NEXT and IDEX, Hold FING FPC’s ambitious financial targets correspond to an EBIT’18e of SEK 4.2bn, implying ~6x EV/EBIT’18e at our target price. We are 17% below this ambition, and in line with consensus for 2016-18e. Our SEK 97 target price and corresponding Hold recommendation is based on EV/EBIT’18e 7x, in line with biometric and high-growth peers ranging EV/EBIT’18e 7-10x. Due to the earlier stage for IDEX and NEXT, we use EV/EBIT 10x and 8x respectively on 2020 estimates, discounted back to 2018 at 8% p.a., implying target prices of NOK 13 and NOK 200 respectively. We employ a higher multiple for IDEX than for NEXT, given its relatively stronger capitalization, as well as it today has a commercially available product relevant for a broader range of sensor verticals, in our view.

14 Jun 2016 Pareto Securities Research 3(70) Biometrics Initiating Coverage

Commercialization to trigger re-pricing of shares Entry-level segment smartphones While we see threats to FPC’s further growth potential, we highlight the and new verticals to drive volume position it has achieved as a significant proof of concept which will make it growth relevant for smartphone OEMs also in the years to come. Nonetheless, we anticipate the future growth of sensors to smartphones primarily to be driven by a highly price-competitive entry-level segment. Furthermore, in the recently launched LG Stylus 2 Plus, IDEX’s cardinal sensor was included, while FPC’s sensor has been employed previous models. For IDEX and NEXT, although possessing the burden-of-proof in terms of realizing a demanded and commercially viable solution, should be able to deploy its concepts given its proprietary technology, in our view. Importantly, it provides competitive edges that either will be relevant for the high-end smartphone market or emerging new verticals such as smart cards. With financing in place, we expect a re- pricing of the shares as the companies’ commercial potentials materialize.

Fingerprint Cards – multi-sourcing to dilute growth Multi-sourcing from smartphone Fingerprint Cards (FPC) has shown tremendous growth the past years, cornering OEMs to dilute FPC’s future more or less the whole smartphone sensor market excluding Apple and growth potential Samsung. With Apple introducing TouchID in its smartphone in 2013, FPC had the agile technology and organization to capitalize on the stream of OEMs pursuing fingerprint sensing in its smartphones, enjoying a substantial first- mover advantage. However, the relatively simple and non-proprietary nature of the sensors, which enabled such a swift mass-production response to the demand for fingerprint sensors, will likely see a marginalization of this first- mover advantage over time, in our view. With more fingerprint sensor offering entering the market, we expect mobile OEMs to increasingly pursue multi- sourcing, which we believe could significantly dilute the further growth potential for FPC. As such, although we anticipate a strong EBIT CAGR of 56% for 2015-18e, we find it fully reflected in today’s share price, and anticipate limited market growth for smartphone sensors beyond 2018e. Samsung utilizes dual-sourcing through and Egis Technology (Egistec), and LG chose IDEX in its recent smartphone launch, manifesting the multi-sourcing trend and competitive environment for securing incremental design wins. We are broadly in line with consensus on EBIT for 2016-18e, and we thus initiate coverage with a Hold recommendation and a target price of SEK 97 for FING.

IDEX – playing all the strings of fingerprint sensing IDEX represents a diversified bet While Fingerprint Cards as of now primarily targets the smartphone market and on fingerprint sensor markets NEXT mainly smart cards, an investment in the IDEX share represents an exposure to a product offering viable for the three main verticals: i) smartphones, ii) smart cards and iii) IoT/gadgets. Its traditional silicon sensor makes it a relevant competitor towards smartphone OEMs implementing fingerprint applications in its models and wanting to employ a multi-sourcing strategy. Technologically, its key competitive edge is the proprietary off-chip technology, which enables it to offer high-end products such as in-glass sensors to smartphones or polymer-based area sensors for flexibility and lower cost for smart cards. In our view, IDEX’ ongoing initiatives highlight the availability of a ready solution and validate it as a mass-market ready product. Post warrant exercises by Woodford and Invesco in H2’15, the company has available cash for developing and commercializing its offering, and we consider it a positive that key personnel from Authentec and Validity has joined IDEX, displaying confidence in the technology. Confirmed by already obtained partnerships for smartphones, payment cards and in a USB scanner gadget, we expect IDEX to be a highly relevant player in the fingerprint market sphere. We initiate coverage with a Buy recommendation and a target price of NOK 13 for IDEX.

14 Jun 2016 Pareto Securities Research 4(70) Biometrics Initiating Coverage

NEXT Biometrics – the smart card market bet NEXT likely a preferred provider Unlike Fingerprint Cards and IDEX, NEXT assigns low focus towards the for several smart card applications smartphone market, due to the trend of smartphone fingerprint sensors becoming smaller. Due to its proprietary technology concept utilizing the active thermal principle, the company is able to obtain lower cost of production than for same-sized silicon sensors by using a cheaper material. However, the cost advantage diminishes when the size of equivalent silicon-based sensors is reduced. Hence, this comparative advantage will be relevant for applications requiring both high security and convenience, i.e. where there is no back-up authentication option such as a password, prompting the higher usability a larger sensor offers. We consider the emergence of smart cards with fingerprint authentication, where the cost aspect will be crucial for mass-deployment, to offer a massive opportunity for NEXT. In our view, with a relevant cost proposition and fully ISO compliant solution, an investment in the NEXT share offers an attractive exposure to particularly the emerging smart card market potential. The company has secured funding for more than 12 months of operations post the private placement in May, and its concepts have been validated through Dell partnership and the NOK 12m sized recent smart card order. We initiate coverage with a Buy recommendation and a target price of NOK 200 for NEXT.

The market has proven willing to price up fingerprint commercialization

Market cap (USDbn) 5 4.1 4

3

2

1 0.5 0.2 0 FING.B-OME IDEX-OSL NEXT-OSL

Source: Company data, Pareto Securities Equity Research

Key risks to our case: Fingerprint sensing technologies not able to penetrate new verticals While the adoption of fingerprint sensors has happened rapidly for smartphones, the burden of proof still lies in terms of displaying a similar potential for smart cards, for instance. A key element in that regard will be linked to costs, but also the willingness among card manufacturers to include the functionality. Whereas new technologies seemingly should enable sensor usability in smart cards, timing of volume-initiatives is highly uncertain.

Competition pressuring prices On industrialization of the value-chain, sensor ASPs and costs have come significantly down. Lately, the decline has been further fuelled by sensor sizes declining. However, we see an increasingly competitive space within the capacitive sensors and, although we factor in ASP declines going forward, a larger intake of new players entering the market could lead to more competition. The same applies for new and potentially disruptive technologies.

14 Jun 2016 Pareto Securities Research 5(70) Biometrics Initiating Coverage

Financially set for commercialization

With recent placements and warrant issues by NEXT and IDEX respectively, both companies enjoy significant cash positions idle for pursuing mass-production the coming quarters. According to NEXT’s Q1’16 presentation, its cash position post the Q2’16 private placement should be sufficient to cover at least 12 months of operations at current burn rate – before a potential repair issue. We assume that, post a repair issue amounting to 200,000 new shares at NOK 133/share, current cash position should all else equal cover ~5 quarters. IDEX’s position, relative to current run-rate cash burn should support ~10 quarters of operations, in our view. We believe this offers sufficient time for the companies to gain the necessary traction to materialize its commercial potential. We anticipate IDEX to be fully-funded, and set to reach profitability in 2018e. For NEXT, we expect an additional ~5% share issue required to be fully funded as we expect the smart card vertical to gain growth momentum in 2018-20e.

Idle cash positions for pursuing commercialization

NOKm 800

~10x 600

400 683 ~5x

200 70 263 50 0 IDEX NEXT* Q1'16 cash position Quarterly cash burn run-rate * Including proceeds from placement and assumed repair issue in Q2’16 Source: Company data, Pareto Securities Equity Research

The economic importance of realizing mass-production and sales is best displayed by the quarterly revenue growth trajectory for FPC, being one of very few players with a product ready for the mass-market, thus reacting promptly when Apple pioneered the functionality in 2013. Over the past years, FPC has seen rapidly increasing earnings and gross margins reaching 40-43%, with an operating model requiring a low level of capital employed. As a consequence, the company initiated a share buy-back program as of 2016, given the significant SEK ~1bn net cash position at year-end 2015.

14 Jun 2016 Pareto Securities Research 6(70) Biometrics Initiating Coverage

Rapid growth for Fingerprint Cards driven by sensor adoption in smartphones

Revenues (SEKm) Apple launch Android 6.0 iPhone 6S with include native 1,600 2nd gen. Touch ID fingerprint support

1,200 Apple Samsung Samsung Apple launches launch launch acquires iPhone 5S Galaxy S5 Galaxy S6 AuthenTec with swipe with touch 800 with for USD 356m TouchID sensor sensor

400

0 Q1'12 Q3'12 Q1'13 Q3'13 Q1'14 Q3'14 Q1'15 Q3'15 Q1'16 Source: Company data, Pareto Securities Equity Research

At the same time as the growth pace has been impressive, it is worth noting that it has been even higher than expected throughout the past year. Examining the company’s 2015 revenue guidance, it was revised up several times. For instance, the actual revenues for 2015 of SEK 2.9bn was 32% higher than the guidance provided post the Q1’15 results in June 2015 of SEK 2.2bn. We expect that, on industrialization and proprietary technologies from players like NEXT and IDEX realizing cost advantages, fingerprint sensing will be relevant also for new verticals such as smart cards and IoT/gadget applications.

Growth has been even higher than mid-range expectations during the year

Revenue guidance 2015 (SEKm) 3.5 2.9 3.0 2.8 2.5 2.5 2.2 2.0

1.5

1.0

0.5

0.0 Q1'15 Q2'15 Q3'15 Actual

Source: Company data, Pareto Securities Equity Research

Several potential triggers for the shares We anticipate several potential positive triggers for IDEX and NEXT going forward, particularly driven by commercialization of the products, design wins, orders and further confirmation of the market potential within new verticals such as smart cards and IoT applications. For FPC, our general remark is that we see a weak risk/reward on incremental news-flow, with smartphone OEMs likely to increasingly pursue multi-sourcing, at the same time as the capacitive space becomes more competitively crowded, in our view.

14 Jun 2016 Pareto Securities Research 7(70) Biometrics Initiating Coverage

Fingerprint Cards:  Multi-sourcing does in our view represent a significant risk for the further growth of FPC. We consider this trend manifested by LG choosing an IDEX sensor in its latest smartphone utilizing fingerprint sensing functionality, whereas the previous models utilized FPC sensors. FPC has been able to ride a tremendous market momentum after Apple pioneered fingerprint sensing in 2013, but as multi-sourcing just now are becoming an actual option, we believe it could be dilutive on the growth pace further.  Multi-sourcing to upcoming Samsung models could potentially be a positive trigger for the FPC share. FPC has close to a 100% market share excluding Apple and Samsung, making it relevant in a multi-sourcing scenario. However, as of now, Samsung only has one model where it does not use a Synaptics sensor, but an EgisTec sensor. In our view, this highlights the more crowded nature of the capacitive space, as well as the increasing competitiveness for smartphone design wins.  The company is likely to also pursue smart cards, and we expect a significant effort in taking part in this market wave, through the partnerships including the one with Zwipe. While this could confirm some additional growth potential, our general remark is that traditional silicon sensors will have a hard time to prove viable for smart cards due to cost and sensor inflexibility causing risk of card breakage.

IDEX:  Providing a cardinal silicon sensor, proven to be viable to the market by the recent inclusion in LG Stylus 2 Plus smartphone, a trigger for the share could relate to the general growth of the fingerprint market for smartphones. In our view, cannibalization will be enough for a solid potential for IDEX, as smartphone OEMs pursue multi-sourcing of sensors.  On further smartphone engagement, IDEX is currently under evaluation for potentially being qualified for another tier 1 OEM ‘mid-year’, according to the Q1’16 report. Additionally, its high-end in-glass solution is currently being reviewed, and will receive customer evaluation also ‘mid-year’.  IDEX is also working with a global provider for payment card solutions, with product trials during Q2 and pilot consumer trials during H2’16.  Beyond smartphones and cards, IDEX has delivered sensors to the BIO-key USB fingerprint reader for Windows devices, validating its product portfolio also for IoT/gadget solutions. Similar as for NEXT’s solutions, IDEX can provide a cost-efficient large-sized sensor, which is necessary in gadgets where there will be no 4-key passcode backup, and sensor usability must approach 100%

NEXT:  Today, most of NEXT’s shipments are related to the Dell order, amounting to some 1.2m sensors in total. A potential follow-up or upsizing of this order should be a positive trigger, as it would confirm the product’s relevance in a reputable tier-1 customer’s diligence.  The company has also received its first smart card volume order, with shipments commencing in Q3’16e. The first order was for NOK 12m (100- 300k sensors), and expected to increase to 650k units in 2017. With this serving as the first fully ISO-compliant smart card volume-order, we believe NEXT will be a relevant provider as smart card players pursue fingerprint sensing capabilities.  After enduring the due diligence process by Dell, we believe further triggers could relate to new orders within notebooks and tablets, as the penetration of fingerprint sensing in such devices increases.  Although we anticipate the shorter-term potential to be the largest within smart cards, we see longer-term potential for so-called NEXT-enabled markets, or IoT applications/gadgets. Importantly, such applications will typically not have a “plan b” such as a 4-key password in the event of a sensor not working properly. This is likely to require larger sensors, which increases the relative cost advantage of NEXT’s technology.

14 Jun 2016 Pareto Securities Research 8(70) Biometrics Initiating Coverage

 The trend so far for smartphones has been declining sensors. However, as we longer-term generally believe the phone to be used as an appliance for nearly everything from payment, ID, access, etc., the security issue must be addressed to a larger extent than with today’s relatively small sensors. In such a scenario, we believe NEXT’s solutions to be a relevant option. Such solutions could for instance comprise a larger sensor on the back of the phone.

We initiate coverage with BUY on IDEX/NEXT, HOLD on FINGB In determining a peer group, we look at biometric companies, but also companies from other parts of the value-chain and others that can be considered high-growth companies. Although multiples vary somewhat, they tend to average at around EV/EBIT ~7-10x on 2018 estimates (full peer table in appendix I on page 28). Consensus expectations on annual average revenue CAGR’16-18e for these peers range from 12%-21%. In comparison, we assume a ~16% CAGR for FPC for 2016-18e. For IDEX and NEXT, CAGR figures are not meaningful, as combined sales goes from NOK 214m in 2016e to NOK 1,741m in 2018e.

Various relevant peers trade at EV/EBIT’18e 7-10x 2016-18e sales CAGR range from 12-21%

EV/EBIT 2018e (x) Sales CAGR 2016-18e 12 25% 9.7 10.0 21% 10 20% 8 6.5 15% 13% 12% 6 10% 4

2 5%

0 0% Biometric High growth/other Large cap Biometric High growth/other Large cap Average Average Source: Factset, Pareto Securities Equity Research

FPC earlier in 2016 set out financial ambitions of 60% revenue CAGR for 2015- 18e and an operating margin of ~35%, equating to 2018 revenues of SEK 12.9bn and EBIT of SEK 4.2bn. However, as we see volume growth primarily driven by higher adoption within a relatively more price-sensitive entry-level segment and existing customers likely pursuing multi-sourcing partners, we include revenues of SEK 10.5bn and an EBIT of SEK 3.4bn for 2018e. This prices the share at EV/EBIT’18e 6.3x, which we consider fair. At the company’s ambition for 2018, our target price implies EV/EBIT ~6x, which we also struggle to see significant upside from the commercial trends we anticipate to dilute growth. In sum, we see limited growth potential in the total market for sensors to the smartphone segment post 2018e.

14 Jun 2016 Pareto Securities Research 9(70) Biometrics Initiating Coverage

Revenue and EBIT estimates – Fingerprint Cards

FINGB (SEKbn) 12 10.5 10 9.4 7.8 8

6 3.4 4 2.9 2.9 3.3

2 0.9 0.1 0.2 0 (0.0) (0.1) (2) 2013 2014 2015 2016e 2017e 2018e

Revenues EBIT Source: Company data, Pareto Securities Equity Research

We anticipate IDEX and NEXT to become profitable in 2018e, realizing 12% and 5% margins respectively. We expect growth to gain momentum through 2018- 19e, and assume a 2020e EBIT for IDEX of NOK 766m and NOK 450m for NEXT, implying margins of 28-29%, respectively. This is below FPC in 2018e at 33% in 2018e, even though the main bulk of sales are likely to be towards new and arguably less competitively crowded segments. On the other hand, a more mature fingerprint space should nonetheless, constrain margin growth even for new verticals, all else equal.

The key reason for the differing earnings trajectory between IDEX and NEXT is because IDEX per today has a product ready for commercialization, and for instance included in LG Stylus 2 Plus and potentially more smartphones in the immediate future, in addition to have a solution ready for high-end in-glass smartphones and smart cards. NEXT is more of a pure-play on the emerging market for fingerprint sensors in smart cards, and operationally farther from commercialization, as the viable ASIC and necessary coating machines are attained first during H1’17e.

IDEX and NEXT becoming EBIT positive in 2018e

IDEX (NOKm) NEXT (NOKm) 3,000 2,689 2,000 1,562 2,500 2,241 1,600 2,000 1,137 1,200 1,500 1,245 800 766 496 1,000 639 450 536 400 232 262 500 150 104 3 2 0 109 0 7 5 26 0 0 (65) (47) (38) (83) (122) (81) (500) (129) (226) (218) (400) (157) 2013 2014 2015 2016e 2017e 2018e 2019e 2020e 2013 2014 2015 2016e 2017e 2018e 2019e 2020e Revenues EBIT Revenues EBIT Source: Company data, Pareto Securities Equity Research

We employ an EV/EBIT’18e 7x for FPC when determining our target price, in the low-end of the range of which peers trade. This is because: i) multi-sourcing in our view increasingly becomes an available option for OEMs, with an emerging and crowded capacitive space, and ii) volume growth is likely to be driven by price sensitive entry-level smartphones, we consider the commercial trends to be dilutive on the growth potential. We anticipate limited market growth for

14 Jun 2016 Pareto Securities Research 10(70) Biometrics Initiating Coverage

the smartphone fingerprint sensor segment post 2018e, and thus consider current pricing fair.

As IDEX and NEXT are just approaching commercialization, we look at EBIT 2020e, discounted by 8% p.a. back to 2018. We use EV/EBIT 10x for IDEX, while 8x for NEXT, as IDEX is relatively stronger capitalized. Furthermore, IDEX is targeting a wider range of markets such as smartphones which already today is a sizeable market. NEXT is more of a pure-play on the emerging market for smart cards, in our view, and has a longer time to market with a commercial product.

Target price methodology

Valuation 2018e EBIT Multiple EV Net debt TP TP/share FINGB (SEKm) 3,448 7.0x 24,136 (7,064) 31,199 97 IDEX* (NOKm) 657 10.0x 6,568 (574) 7,142 13 NEXT* (NOKm) 386 8.0x 3,105 (40) 3,145 200 * EBIT 2020e discounted by 8% p.a. back to 2018 Source: Pareto Securities Equity Research

At 2018e, IDEX currently trades at EV/EBIT ~30x, whereas NEXT at ~80x as the smart card deployment momentum likely is still at an early stage at that point. Looking at 2018e*, i.e. 2020 estimates discounted back to 2018 at 8% p.a., which is the basis for our valuation, the shares trade at EV/EBIT 5-6x. The FPC share currently trades at EV/EBIT 2018e of 6.3x, which we consider fair. At the company’s ambitious 2018 targets of 2015-18 CAGR of 60% and operating margin of 35%, our target price implies ~6x, which we also struggle to see a significant upside from given our anticipation of a relatively limited smartphone vertical growth post 2018e.

We look to 2020 for IDEX and NEXT The FPC share trades at EV/EBIT’18e 6.3x

EV/EBIT (x) EV/EBIT (x) 30 10 26.0 8.9 25 8 7.2 20 6.3 6 15

10 4 5.9 5.1 5 2 76.0 0 IDEX NEXT 0 2016e 2017e 2018e 2018e 2018e* * EBIT 2020e discounted back to 2018 by 8% p.a. Source: Factset, Pareto Securities Equity Research

Pareto versus consensus Factset consensus on IDEX and NEXT comprise only 2 observations per today, which are fairly scattered in terms of EBIT estimates for 2016-18. We are in general somewhere in between these 2 estimates, but nevertheless consider the future share price momentum to be more news-flow driven. Our positive view of NEXT and IDEX are thus founded in us believing in the further commercialization for the companies to serve as positive triggers for the shares.

14 Jun 2016 Pareto Securities Research 11(70) Biometrics Initiating Coverage

Pareto versus consensus – IDEX Pareto versus consensus – NEXT

IDEX EBIT (NOKm) NEXT EBIT (NOKm) 1,000 300 230 774 800 200 600 100 37 26 42 400 315 0 200 150 50 (100) 0 (81) (122) (200) (47) (59) (200) (157) (148) (195) (218) (197) (218) (400) (300) 2016e 2017e 2018e 2016e 2017e 2018e Pareto Cons 1 Cons 2 Pareto Cons 1 Cons 2 Source: Factset, Pareto Securities Equity Research

Fingerprint Cards is covered by more analysts per today and we are more or less in line on EBIT estimates for 2016-18. We believe news-flow to be an important driver for the share pricing also for FPC. Our neutral stance on the share is due to the risk for negative news-flow on increasing competitiveness within the capacitive space, and potential smartphones OEMs pursuing multi-sourcing partners in new models, which will become visible at smartphone launches.

Pareto versus consensus – Fingerprint Cards

FING EBIT (NOKbn) 4.0 3.4 3.3 3.3 3.1 3.2 2.9 3.0

2.0

1.0

0.0 2016e 2017e 2018e

Pareto Consensus Source: Factset, Pareto Securities Equity Research

14 Jun 2016 Pareto Securities Research 12(70) Biometrics Initiating Coverage

Addressable market of USD ~5bn in 2020e

Apple pioneered smartphone Until 2013, the fingerprint sensor market was mainly limited to expensive fingerprint sensor adoption in optical sensors used by governments, typically at border controls and for 2013 with the launch of identification purposes. In 2012, Apple acquired AuthenTec, a mobile security iPhone 5S firm, for USD 356m and developed its own ‘Touch ID’ fingerprint identification solution. When Apple launched its iPhone 5S in 2013, it became one of the first smartphone manufacturers to integrate a touch sensor enabling users to unlock and purchase apps at smartphones by the use of . Apple effectively created demand for fingerprint sensors in smartphones for convenience purposes. In 2014, Samsung followed suit, first by launching Samsung Galaxy S5 with a swipe sensor, before taking after Apple and introducing a touch sensor in its next generation Samsung Galaxy S6. While most OEMs have included fingerprint sensors in its high-end smartphone today, as it has become a standard feature, there is significantly lower penetration in low- and mid- range smartphones. In our view, adoption will increase further as mass adoption occurs in low- and mid-range smartphones as a result of lower priced fingerprint sensors.

Total fingerprint sensor market approaching USD 15bn in 2020 A global market estimated to Market research firm Markets and Markets predict that the global fingerprint be worth USD 15bn in 2020 sensor market including all applications (i.e. mobile applications, government, defence and military, identification, banking, and finance) will grow at a CAGR of ~18% from 2014-2020f, reaching USD 15bn.

Fingerprint sensor market - CAGR of ~18% from 2014-2020f

USDbn 16 CAGR 2014-20f ~18% 12

8 15 12 10 9 4 8 6 6

0 2014 2015 2016 2017 2018 2019 2020 Source: Markets and Markets, Pareto Securities Equity Research

The chart above includes also the traditional optical fingerprint sensors, used at for instance airports. This market is likely to realize less growth than the market for sensors being included in smartphones, smart cards and other gadgets of IoT applications relevant for FPC, IDEX and NEXT. While smartphone adoption has driven growth so far, other applications will be increasingly important to further expand the total market for fingerprint sensors. Fingerprint sensors have mainly been integrated in the high-end segment of smartphones as it has been regarded as a premium feature and sensors have been relatively costly. However, as users have been accustomed to using fingerprint sensors it has to a larger extent become an expected feature. The function of fingerprint sensors have mainly been for convenience purposes to ease the unlocking process of mobile phones. However, as the production cost comes down and companies are able to design smaller and flexible sensors, applications in smart cards and

14 Jun 2016 Pareto Securities Research 13(70) Biometrics Initiating Coverage

‘Internet of Things’ (IoT) increase potential markets, in addition to becoming relevant also for entry-level smartphones.

In 2020e, we anticipate the global addressable market (excluding Apple, as sensors are provided in-house) in terms of number of shipments of sensors to smartphones, cards, and ‘other’ to amount to ~2.5bn, of which 1.3bn to smartphones.

Addressable market reaching 2.5bn units in 2020e

Sensors (bn) 3 2.5

2.1 0.6 2 1.6 0.4 0.6 0.2 0.5 1.0 0.3 1 0.6 0.1 1.3 0.3 1.1 1.2 0.2 0.8 0 2014 2015 2016e 2017e 2018e 2019e 2020e

Smartphones ex. Apple Smartcards Other * Excluding Apple Source: FPC, IDC, IHS, Pareto Securities Equity Research

We assume the sensor ASP to the smartphone vertical to be around USD 2.5 for 2016e, with the decline from 2015 driven primarily by declining average sensor sizes. On the market maturing further and a larger share of the growth being focused towards entry-level smartphones, we anticipate an annual ~10% decline in ASPs for 2016-20e. We make somewhat the same assumptions for ASPs for sensors to smart cards, only at a 2 year lag. Thus, we assume a USD 5.5/unit in 2016e, declining at 15-25% per year until 2020e in order to be applicable for mass-market penetration. For the ‘other’ vertical, we assume a ~20% lower ASP than for smart cards, primarily due to likely somewhat lower- sized sensors.

In sum, we anticipate a total market potential for these sensors of USD 4.8bn in 2020e. Given the total number of shipments of 2.5bn, this equates to a blended ASP of USD 1.9/unit corresponding to a market CAGR for 2015-20e of ~39%.

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Market reaching almost USD ~5bn in 2020e

USDbn USD/unit 5 8

6.0 4 5.7 5.5 6

3 5.5 4.1 5.0 4.4 3.3 4 2 2.6 3.3 2.2 3.3 2.6 2.1 1.8 2 1 2.5 2.3 2.0 1.9 1.8 0 0 2014 2015 2016e 2017e 2018e 2019e 2020e Total market (lhs) Smartphone Smartcards Other Source: Markets and Markets, Company data, Pareto Securities Equity Research

In sum, we anticipate the smartphone market to amount to USD 2.4bn in 2020e, only slightly up from 2018e on adoption of entry-level smartphones, arguably quite price-sensitive, as the primary volume driver. By 2020e, we expect the smart card market to reach USD 1.3bn and the ‘other’ vertical USD 1.1bn.

Market growth driven by smart cards and ‘other’

Market (USDbn) 4.8 5 4.3 3.7 1.1 4 0.8 0.6 1.3 3 2.4 1.2 0.8 2 1.7 0.3 0.9 0.9 2.4 1 2.2 2.3 1.5 1.8 0.8 0.8 0 2014 2015 2016e 2017e 2018e 2019e 2020e Smartphones ex. Apple Smartcards Other Source: Markets and Markets, Company data, Pareto Securities Equity Research

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Intensifying capacitive competition China- and Taiwan-based integrated circuit (IC) design houses have significantly increased efforts towards the fingerprint sensor market during 2015. Touch controller IC players that have been seeing declining profitability have turned to fingerprint sensor solutions. As a result, the competition has been intensifying as a result of larger number of suppliers, driving ASPs down, increasing demand for adoption by mid- and low end smartphones. Chinese and Taiwanese IC design houses have started to show design wins from OEMs in the region. Elan Microelectronics and Egis Technology (Egistec) started to ship some volumes in late 2015, which are expected to increase significantly in 2016. China-based Goodix and Silead are rolling out with orders from large Chinese smartphone OEMs in 2016. According to industry sources cited by Digitimes, Fingerprint Cards has responded by lowering price quotes to maintain its market share. Furthermore, Egistec, Elan and FocalTech have been sampling with OEMs including Samsung, which apparently already has completed validation some of these sensors, expected to ramp-up shipments in H2’16.

Chinese based smartphone OEMs could ship as much as 200-300m smartphones with fingerprint sensors in 2016, driven by the proliferation of fingerprint authentication in mobile payment. Total shipments in 2015 are estimated at ~80m units. Quotes for film-coated and glass-cover fingerprint sensor modules are currently USD 3.5-4.0/module and USD 5.0/module, respectively.

The table in appendix III on page 29 displays an overview of some of the key competitors in the capacitive fingerprint principle space. A key trend we have seen recently is traditional touch-screen players, typically also employing capacitive principle, have transitioned to include fingerprint sensors in its product spectrum.

Market share trajectory expectations Whereas we believe FPC will keep enjoying a first-mover advantage, thus continuing to realize strong growth rates and keep it relatively shielded from competitive concepts, we nonetheless see smartphone OEMs pursuing more of a multi-sourcing strategy a key risk. Additionally, with entry-level smartphones wanting to include the functionality to be the volume-growth driver, we foresee a more price-competitive marketplace, with several of the players listed above as relevant competitors. In sum, we expect FPC to be able to retrieve a strong market-leading position foreseeable, and only see slightly declining market share for 2016-18e.

For IDEX, such a multi-sourcing strategy represents an opportunity to enter the market with its Cardinal products. Furthermore, its off-chip solutions should be relevant in high-end smartphone sensor applications, such as in-glass, as well as for smart cards.

Based on our market assumptions going forward, we anticipate a revenue market share for FPC within the smartphone vertical of 63% in 2016-17e, declining slightly to 57% in 2018e. For IDEX, as a potential multi-sourcing partner and a provider of high-end in-glass solutions, we anticipate a market share reaching ~8% market share by 2020e.

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Smartphone market share development – FPC and IDEX

USDm USDm 1,400 63% 63% 70% 200 10% 57% 8% 1,200 60% 7% 8% 1,000 43% 50% 150 6% 800 40% 5% 100 3% 600 30% 4% 400 20% 50 2% 200 4% 10% 1% 344 930 1,127 1,262 63 103 172 191 0 34 0% 0 12 0% 2014 2015 2016e 2017e 2018e 2014 2015 2016e 2017e 2018e 2019e 2020e

FPC smartphone revenues Market share ex. Apple (rhs) IDEX smartphone revenues Market share ex. Apple (rhs) Source: Company data, IDC, IHS, Pareto Securities Equity Research

On the smart card sensor market emerging as a function of available technology and viable cost proposition, we assume IDEX and NEXT reaching market share of 10-12% by 2020e. Provided a fully ISO-compliant card solution, we anticipate NEXT to be able to target somewhat higher ASP markets, thus likely to realize a higher revenue market share than IDEX.

Smart card market share development – IDEX and NEXT

USDm USDm 10% 140 10% 200 12% 14% 120 8% 12% 8% 100 150 9% 10% 5% 6% 7% 80 6% 8% 4% 100 5% 60 4% 6%

40 2% 50 4% 2% 20 2% 13 44 93 127 21 59 108 166 0 1 0% 0 2 0% 2014 2015 2016e 2017e 2018e 2019e 2020e 2014 2015 2016e 2017e 2018e 2019e 2020e

IDEX smart card revenues Market share (rhs) NEXT smart card revenues Market share (rhs) Source: Company data, IDC, IHS, Pareto Securities Equity Research

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Adoption set to increase for smartphones

On a high saturation of smartphones in developed markets, the total smartphone market growth is expected to slow somewhat going forward.

Global annual smartphone shipments – 2009-2020f

Shipments (m) 2,000 1,920 1,750 1,500 1,433 1,250 1,000 750 500 250 174 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: Statista, Pareto Securities Equity Research

Three players have dominated the smartphone sensor market Smartphone fingerprint sensor The rapid growth in shipment of fingerprint sensors has been driven by a wide market has been dominated adoption of sensors in high-end smartphones. Three players, namely Apple, by Apple, Synaptics and Synaptics and Fingerprint Cards have dominated the fingerprint sensor market Fingerprint Cards for smartphones. According to IHS, Apple, Synaptics and Fingerprint Cards had market shares of 60%, 35% and 4%, respectively, in 2014, as Apple served itself through its in-house division, Synaptics delivered to Samsung, while Fingerprint Cards delivered to the rest of the market. In 2015, although still dominated by Apple and Samsung, a wider OEM adoption increased the market and led FPC to increase its shipment market share to ~20%, while Goodix and others have got a foothold with market shares of ~3% and ~1%, respectively. Higher adoption of fingerprint sensors have increased the approachable market outside of Apple and Samsung, a trend we believe will continue for the coming years. Goode Intelligence estimates that 1.4bn mobile devices will have fingerprint technology in 2018, while Acuity Research estimates 3bn mobile devices with biometrics by 2020. Technavio forecasts that the global fingerprint biometrics market will grow at a CAGR of 22.45% over the period 2014-2019.

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Market shares within fingerprint sensors for mobile phones

100%

22% 35% 75%

4% 22% 50%

60% 25% 53%

0% 2014 2015 Apple FPC Synaptics Goodix Others

Source: IHS, Pareto Securities Equity Research

As other markets become increasingly important, there are other mega trends driving adoption of fingerprint sensors, including payment cards with fingerprint authentication (smart cards), key fobs, government ID, access control and applications related to ‘Internet of Things’. Until lately, adoption in low-cost applications has been limited as fingerprint sensors have been too costly. As prices are falling combined with better security and convenience levels, fingerprint sensors have become relevant for a broader set of applications.

Market opportunities split by devices - 2015 and 2019

2015 2019 1.8bn devices 2.7bn devices

Smartphones

Tablets

Notebook

Autos

Wearables

PC Peripherals

Source: Synaptics, Pareto Securities Equity Research

Adoption of fingerprint sensors is nonetheless still at a fairly low level, particularly for the entry-level smartphone segment, sustaining attractive growth prospects going forward. However, such smartphone OEMs are likely to be more price-sensitive, thus inclined to compromise on usability to lower costs. With this backdrop, and an increasingly crowded space for capacitive sensors, we believe the competitiveness of such a market to put significant pressure on ASPs. This is a key concern in terms of the future growth prospects for FPC, in addition to multi-sourcing by existing smartphone OEM partners.

In sum, we anticipate fingerprint adoption in smartphones to reach 80% over the coming few years, with the volumes growth primarily driven by the functionality also being included for entry-level phones.

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Fingerprint sensor adoption reaching 80% over the coming few years

Sensors shipments (bn) 1.4 100% 81% 1.2 75% 77% 80% 1.0 58% 60% 0.8 46%

0.6 40% 0.4 22% 13% 20% 0.2 0.1 0.2 0.6 0.8 1.1 1.2 1.3 0.0 0% 2014 2015 2016e 2017e 2018e 2019e 2020e Smartphone ex. Apple Ex Apple adoption (rhs)

Source: IHS, IDC, Pareto Securities Equity Research

Slowing smartphone growth, but increasing ex-Apple market According to IDC, ex-iOS (Apple) shipments is set to grow at a CAGR 2016-2020f of ~6.4%, above the total smartphone market at a 6% CAGR in the same period. iOS devices have seen a slowdown in shipment lately, and is forecast to grow at a 2016-20 CAGR of 3.9%. The growing market share of Android devices is as such positive for Fingerprint Cards which is only delivering fingerprint sensors to Android and Windows based devices. In 2020, IDC forecast that 86% of total smartphone shipments will be Android and devices based on other operating systems than iOS.

Annual smartphone shipments by OS – 2016-2020

Shipments (m) 1,920 2,000

1,750 1,519 269 1,500 231 1,250 1,000 750 1,624 1,255 500 250 0 2016f 2020f Android iOS Windows Phone Others

Source: IDC, Pareto Securities Equity Research

Tablets have to some degree adopted fingerprint sensors as of today. Although it represents a relevant market, we anticipate the attributes of the market to be similar to that of smartphones – fairly competitive and relatively price-sensitive. Furthermore, as smartphone sizes have increased, the tablet sales have slowed over the past years.

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Quarterly tablet shipments by vendor – Q1’13-Q1’16

Shipments (m) 100

79 76 80 66 56 60 49 48 39 50 48 49 44 44 47 45 41 40 40 21 23 34 25 26 21 26 26 31 26 23 20 16 21 20 15 14 13 12 13 16 11 10 10 9 8 9 14 11 9 10 11 9 8 8 9 0 6 Q1'13 Q3'13 Q1'14 Q3'14 Q1'15 Q3'15 Q1'16e Samsung Apple Other tablet vendors

Source: IDC, Pareto Securities Equity Research

Mobile payments to drive adoption for fingerprint sensors In sum, within this vertical, we anticipate increasing adoption, particularly within the entry-level smartphone segment to be the primary sensor volume driver. In our view, an important driver of adoption is likely to be related to mobile payments. For instance U.S. banks such as J.P. Morgan Chase and Bank of America Merril Lynch have added fingerprint support in its android banking apps, meaning that customers can use fingerprint verification to sign in to the app. Trendforce estimates global mobile payment transaction to exceed USD 1,000bn in 2019f.

Global mobile payment transactions

USDbn 38% 1,200 40%

1,000 26% 30% 800 19% 600 16% 20%

400 10% 200 450 620 780 930 1,080 0 0% 2015 2016f 2017f 2018f 2019f Revenue Growth y/y

Source: Trendforce, Pareto Securities Equity Research

According to Digitimes, citing Taiwan-based supply chain makers, Chinese smartphone vendors will ship 200-300m smartphones featuring fingerprint sensors in 2016. Increased adoption is partly driven by Chinese mobile payment services such as Alipay and Tenpay Pay (WeChat) and recently also Apple Pay, Samsung Pay and Pay, use fingerprint sensors for payment authentication. The adoption of mobile payment services have grown rapidly in

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China, where a large share of the population use smartphones for most financial services and online shopping.

GMV of Chinese mobile payment transactions Market shares Chinese mobile payment services 2015

USDbn Growth 11% 6,000 5,430 800% 700% 5,000 4,374 600% 4,000 3,368 500% 21% Alipay 3,000 2,415 400% Wechat Pay 300% 2,000 1,566 Others 966 200% 1,000 68% 100% 13 24 202 0 0% 2011 2012 2013 2014 2015 2016 2017 2018 2019 GMV (USDbn) Growth y/y

Source: iResearch China, Pareto Securities Equity Research

According to Alipay, mobile payment is more popular among China’s relatively underdeveloped demographic groups. We believe further increase in mobile payments in South-East Asia and China will rapidly drive adoption of fingerprint sensors into the mid- and low range smartphones segments.

Alipay payment process

Source: Alibaba, Pareto Securities Equity Research

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Smart cards emerging as the next vertical

On industrialization of the value-chain and new technologies, we anticipate the fingerprint sensing functionality also to become relevant for smart cards. Until now, the addressable fingerprint sensing market has been dominated by traditional capacitive silicon sensors, unable to offer a cost-effective solution for mass-production of smart cards. This is because of the large silicon footprint required to facilitate a sensor with the sufficient usability for a smart card. With the emergence of off-chip solutions from IDEX and Synaptics, and active thermal technology from NEXT, large-sized sensors can be manufactured at a substantially lower cost and silicon footprint. ABI Research anticipates the global shipments of payment cards to reach 3.7bn units in 2019, and card shipments for driving licenses, healthcare, national ID, passports, etc. to reach 0.8bn. In total, this opens up a potential market surpassing 4bn units in 2018e.

Global addressable card shipment market more than 4bn units in 2018e

Card shipments (bn) 5 4.5 4.6 4.1 3.8 0.8 4 0.8 3.4 0.7 3.0 0.6 3 0.5 2.4 0.5 0.5 2 3.8 3.4 3.7 2.9 3.2 2.5 1 2.0

0 2014 2015e 2016e 2017e 2018e 2019e 2020e Payment cards Other Source: ABI Research, First Annapolis, Frost and Sullivan, Pareto Securities Equity Research

With our assumption for smart card deployment with fingerprint sensors, this represents an adoption reaching 10% in 2019e and 13% in 2020e. On declining costs and the technology becoming commercially available throughout 2016e, we anticipate an increasing adoption for 2017-20e.

Fingerprint sensor adoption in smart cards to reach 10% in 2019e

Sensors (bn) 0.8 13% 15%

0.6 10% 10%

0.4 6%

5% 0.2 2%

0% 0% 0% 0.1 0.3 0.5 0.6 0.0 0% 2014 2015e 2016e 2017e 2018e 2019e 2020e

Fingerprint sensors Adoption (rhs)

Source: ABI Research, Company data, Pareto Securities Equity Research

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Cost and technology propositions now viable for smart cards While a traditional magnetic stripe payment card costs USD 0.25/unit, a chip card (EMV) typically cost USD ~2/unit. As such, in parts of the world where bank account penetration is high, the value proposition of a fingerprint sensor in a payment card is relatively lower, even as sensor ASPs decline towards USD 2.2 in 2020e. On the other hand, in parts of the world where cash usage is high and fraud and identity theft a bigger concern, the value proposition, through the security aspect a fingerprint sensor-based payment card offers, is higher. Thus, we see payment cards with fingerprint sensors firstly emerging as a viable option in emerging economies with low bank account penetration. In more industrialized regions, it is for the coming 5-year period likely to be more of a niche product for early adopters, but, in our view, clearly offering a security dimension transcending a 4-key pin code used today addressing fraud and identity theft concerns among the population. In a survey performed by SmartMetric in May 2016, 80% of those questioned are concerned about credit card and identity fraud and that 67% of users would be willing to pay for a biometrics secured credit card.

Worldwide banked population – 2011-2014 Number of payment cards per person - 2015f-2019f

Share of population with bank account (%) Number of cards per person 100 95 94 91 88 5

80 69 4

60 55 51 51 3 43 46 39 40 32 34 24 2 4.0 4.0 20 11 14 1 1.7 1.9 1.3 1.5 0 Euro area U.S. East Asia & Europe & Latin South Asia Sub-Saharan Middle East 0 Pacific Central Asia America & Africa Caribbean North America Asia Europe 2011 2014 2015f 2019f Source: IMF, ABI Research, Pareto Securities Equity Research

The card industry has proven willing to adopt new functionality historically, even if it meant increasing costs of production from USD 0.25/unit for a traditional magnetic stripe card to an EMV chip card at USD ~2/unit. In only a 1- year period from 2013 to 2014, the total number of EMV chip card shipments increased by 45% from 2.4bn to 3.4bn units, representing a strong global adoption growth.

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EMV chip card adoption has happened fast

EMV card adoption 100% 82% 84% 80% 60% 60% 54% 51% 39% 40% 40% 25% 24% 17% 20% 7% 0% 0% Canada and APAC Africa and Europe Europe U.S. LATAM Middle East Zone 1 Zone 2 2013 2014 Source: EMVCo, Pareto Securities Equity Research

An important driver for swiftly adopting innovating functionality within the card industry is the high churn of payment cards. First Annapolis estimates that approximately 88% of annual card issuances are driven by reissuance of existing cards. Splitting the card demand growth up for 2014, as much as 53% of the growth is because of expired cards, whereas 19% due to lost/stolen/fraud and 16% churn. In sum, only 12% of the annual issuances are related to underlying growth.

88% of annual demand driven by reissuance of existing cards

Card issuance split

12%

Expiration 16% Lost/stolen/fraud Churn 53% Growth

19%

Source: First Annapolis, Company data, Pareto Securities Equity Research

In sum, while we believe payment cards to be an important volume driver for fingerprint sensors long-term, we expect momentum first to be gained as sensor ASPs approach USD 2-3 for smart cards during 2018-20e. The payment card shipments with fingerprint sensing capabilities until then are likely driven by some adoption in emerging markets and early adopters in developed countries. Still, we see a sizeable market potential shorter-term also within other card applications than pure payment. This applies to cards including features such as ID, payment, healthcare, access etc. In some emerging economies, we have seen examples with smart cards used implemented for distribution of healthcare and social benefits. While smart card applications beyond payment cards are much smaller in number of potential shipments, ASPs are typically in the USD 20-25/unit range. Thus, we believe such smart

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cards with fingerprint sensors to represent a secure and viable application also in the shorter-term.

Fingerprint sensors viable for other smart card applications

Card shipments (bn) USD/unit 1.0 30 26 25 24 23 23 22 25 0.8 21 20 0.6 15 0.4 10 5.5 4.1 3.3 0.2 2.6 2.2 5

0.0 0 2014 2015e 2016e 2017e 2018e 2019e 2020e Other cards (lhs) ASP other cards ASP smartcard sensors

Source: ABI Research, Company data, Pareto Securities Equity Research

While the visibility on deployment of fingerprint sensors in smart cards with regards to volume and timing is highly uncertain, our ultimate remark is that we believe it to be a function of a viable price and technological availability. Given the relatively large sensor size required for being a viable smart card solution, traditional silicon sensors are unfeasible due to cost and the fact that silicon is an inflexible material, whereas a card is required to be flexible. On off-chip and active thermal concepts becoming commercialized, costs may substantially be reduced on lower silicon footprint. Furthermore, the sensor material employed will be of a flexible nature, thus viable in card solutions. Hence, once the technology is in place, we believe that declining ASPs for fingerprint sensors, coupled with attractive security and convenience attributes, to propose a feasible option for card manufacturers. As displayed by the rapid deployment of fingerprint sensors in smartphone over the past years, we believe there to be a significant demand for the functionality also for new verticals as the technology becomes available.

Due to the early stage of the viable technology, there are few sensor shipments to smart cards beyond some pilot programs and R&D. Some initiatives have, however, already been initiated:

 IDEX in July 2014 announced it has received an initial order for legacy swipe sensors to the Italian company Card Tech. In our assumptions, we do not believe to see significant volumes from the swipe technology in smart cards, given the arguably more viable solutions emerging since then.  In February 2016, IDEX announced a flexible fingerprint sensor for smart cards, in compliance with the form factor requirements of ISO ID-1, and that it was initiating a partnership with a ‘global payment company’.  FPC announced in February 2016 that it had entered into a partnership with Zwipe for biometric smart cards in the payment industry  NEXT announced in April 2016 that it had received a mass-production order of up to 650,000 of its ISO/IEC-compliant sensors, and that its flexible sensors are targeted to be ready for the market in H1’17.

14 Jun 2016 Pareto Securities Research 26(70) Biometrics Initiating Coverage

Various card concepts with integrated fingerprint sensor

Source: IDEX, CardTech, Zwipe

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Appendix I: Peer table

Various peers relevant for the biometrics space

EV/EBIT (x) EV/Sales (x) P/E (x) CAGR (%) High-growth/biometric companies Market cap (USDm) 2016e 2017e 2018e 2016e 2017e 2018e 2016e 2017e 2018e 2016-18e Biometric peers Fingerprint Cards AB Class B 4,123 8.4 7.7 6.8 3.3 2.7 2.2 12.9 13.3 13.1 13% IDEX ASA 520 6.3 41.4 6.9 1.7 8.5 368% Next Biometrics Group AS 227 12.8 15.2 4.7 2.0 15.3 170% Synaptics Incorporated 2,265 9.1 7.6 6.2 1.2 1.1 0.9 12.9 12.1 10.6 3% ELAN Microelectronics Corp. 434 10.9 9.3 1.5 1.4 16.1 14.0 15.4 2% Egis Technology, Inc. 322 20.8 5.7 4.1 4.1 1.6 1.2 25.9 7.3 5.6 83% FocalTech Systems Co., Ltd. 235 11.6 4.4 2.7 0.3 0.2 0.2 23.5 11.8 9.3 8%

High-growth/other peers Universal Display Corporation 3,204 32.9 22.1 14.7 12.6 9.7 7.4 59.7 41.7 29.8 24% Invensense, Inc. 582 3.4 1.6 1.2 0.6 50.2 18.3 9.2 23% Nordic Semiconductor ASA 768 20.1 12.9 8.6 3.2 2.4 1.9 30.9 19.6 13.6 25% u-blox Holding AG 1,390 21.6 17.6 13.8 3.2 2.6 2.2 29.9 24.7 20.1 19% Cavium, Inc. 2,682 29.6 18.5 12.5 5.7 4.6 3.3 34.9 22.8 18.2 21% CTS Corporation 590 12.3 10.4 1.6 1.4 1.3 17.4 15.4 15.7 4% Dialog Semiconductor plc 2,493 6.6 5.3 3.9 1.4 1.1 0.8 14.3 11.3 9.5 13% Cypress Semiconductor Corporation 3,292 19.8 12.3 10.8 2.2 2.0 1.8 21.3 12.8 11.7 5%

Large-cap high-growth/other peers (>USD 5bn) Harris Corporation 10,209 13.2 12.1 10.7 2.1 2.0 1.9 14.4 13.8 12.5 2% NXP Semiconductors NV 20,833 14.8 11.4 10.4 3.9 3.4 3.3 15.7 11.9 10.4 6% Facebook, Inc. Class A 325,797 20.7 14.9 11.3 11.4 8.2 6.1 32.0 24.7 19.6 30% Fortinet, Inc. 5,993 25.3 17.7 12.5 3.8 2.9 2.3 49.7 39.9 33.2 17% Lam Research Corporation 13,183 8.6 6.9 6.6 1.8 1.6 1.4 13.3 12.1 11.2 7% Skyworks Solutions, Inc. 12,447 8.8 7.5 5.8 3.3 2.9 2.3 11.9 10.6 9.5 10% Alibaba Group Holding Ltd. Sponsored ADR 187,400 28.8 19.6 12.6 8.0 5.9 4.4 23.9 18.6 14.7 27% Biometric 1,161 12.2 6.9 6.5 9.6 2.7 1.4 18.2 11.7 11.1 13% High-growth/other 1,875 20.4 14.2 9.7 3.9 3.1 2.4 32.3 20.8 16.0 12% Large-cap high-growth/other peers 82,266 17.2 12.9 10.0 4.9 3.8 3.1 23.0 18.8 15.9 21% Average total 27,227 17.1 11.8 8.8 6.0 3.2 2.4 25.5 17.8 14.4 20% Source: Factset, Pareto Securities Equity Research

Appendix II: Ownership structures

Ownership structures – FINGB SS, IDEX NO and NEXT NO

Top 15 shareholders as of 9 June 2016* (FINGB SS) Shares Percent Top 20 shareholders as of 6 June 2016 (IDEX NO) Shares Percent Top 20 shareholders as of 6 June 2016 (NEXT NO) Shares Percent 1 OPPENHEIMERFUNDS, INC 15,000,000 4.74% 1 THE NORTHERN TRUST COMPANY 81,369,029 15.30% 1 SKANDINAVISKA ENSKILDA BANKEN S.A. 2,768,533 18.77% 2 HANDELSBANKEN FONDER AB 12,666,000 4.00% 2 SUNDVALL HOLDING AS 62,668,417 11.78% 2 ECOMNEX HOLDING AS 1,295,484 8.78% 3 TNE VANGUARD GROUP, INC 4,541,000 1.43% 3 INVESCO PERP HIGH INCOME FUND 53,228,391 10.01% 3 EUROCLEAR BANK S.A./N.V. ('BA') 957,661 6.49% 4 NORGES BANK INVESTMENT MANAGEMENT 4,105,000 1.30% 4 CHARLES STREET INTERNATIONAL LTD 38,157,236 7.17% 4 AVANZA BANK AB 602,684 4.09% 5 ANDRA AP-FONDEN 3,549,000 1.12% 5 INVESCO PERPETUAL INCOME FUND 36,771,609 6.91% 5 SKANDINAVISKA ENSKILDA BANKEN AB 376,701 2.55% 6 DANSKE BANK A/S (INVT MGMT) 3,511,000 1.11% 6 THE NORTHERN TRUST COMPANY RE UKDP 29,827,688 5.61% 6 ENGELSBERG INVEST AS 352,407 2.39% 7 AMF FONDER AB 3,264,000 1.03% 7 EUROCLEAR BANK S.A./N.V. ('BA') 25,887,504 4.87% 7 OP-EUROPE EQUITY FUND 330,000 2.24% 8 TREDJE AP-FONDEN 2,770,000 0.87% 8 COLARGOL INVEST AS 15,875,318 2.98% 8 NOMURA INTERNATIONAL PLC 301,639 2.04% 9 STOREBRAND ASSET MANAGEMENT AS 2,072,000 0.65% 9 SMART RICHES LIMITED 13,613,617 2.56% 9 STOREBRAND VEKST 278,835 1.89% 10 SWEDBANK ROBUR FONDER AB 1,764,000 0.56% 10 STATOIL PENSJON 6,213,899 1.17% 10 SILVERCOIN INDUSTRIES AS 251,927 1.71% 11 NORDEA INVESTMENT MANAGEMENT AB 1,430,000 0.45% 11 SIX SIS AG 6,069,880 1.14% 11 STATOIL PENSJON 232,547 1.58% 12 BLACKROCK FUND ADVISORS 1,280,000 0.40% 12 COMMERZBANK AG 5,859,720 1.10% 12 GRENDAHL HOLDING AS 229,832 1.56% 13 SEB INVESTMENT MANAGEMENT AB 1,002,000 0.32% 13 KLP AKSJENORGE INDEKS 4,823,837 0.91% 13 EUROSTORES AS 210,664 1.43% 14 PICTET ASSET MANAGEMENT SA 950,000 0.30% 14 ALDEN AS 4,784,199 0.90% 14 SINMAX INVESTMENT AS 205,883 1.40% 15 TIAA-CREF INVESTMENT MANAGEMENT LLC 674,000 0.21% 15 MARC O POLO NORGE AS 4,613,148 0.87% 15 OPPENHEIMER GLOBAL OPP FD 202,500 1.37% Total top 15 58,578,000 18.50% 16 CITIBANK, N.A. 3,670,855 0.69% 16 NORDNET BANK AB 201,869 1.37% Other 258,117,680 81.50% 17 GIANT LEAP INTERNATIONAL LTD 3,383,802 0.64% 17 FKKG AS 175,000 1.19% Total 316,695,680 100.00% 18 VERDIPAPIRFONDET DNB SMB 3,269,526 0.61% 18 SVENSKA HANDELSBANKEN AB 167,821 1.14% * Retrieved from Factset 9 June 2016 19 RØNNE SVEN CHRISTIAN FLORUS 3,112,016 0.59% 19 VERDIPAPIRFONDET ALFRED BERG GAMBA 163,663 1.11% 20 BLUE OCEAN MARINE INVEST AS 3,000,000 0.56% 20 SÆTER HAAKON MORTEN 154,234 1.05% Total top 20 406,199,691 76.36% Total top 20 9,459,884 64.13% Other 125,747,225 23.64% Other 5,291,971 35.87% Total 531,946,916 100.00% Total 14,751,855 100.00% Source: Factset, Oslo Børs, Pareto Securities Equity Research

14 Jun 2016 Pareto Securities Research 28(70) Biometrics Initiating Coverage

Appendix III: Competitive overview

Overview of the competitive landscape

Company Country Brief description Synaptics acquired Validity for USD 250m, a supplier of swipe fingerprint sensors, in October 2013. Validity’s has an off-chip sensor approach Synaptics U.S. similar to IDEX’s solutions. Synaptics has mainly supplied fingerprint sensors to Samsung Mobile. Goodix (Shenzhen Huiding Technology Co Ltd) was mainly focused on touch controller IC, but started to develop fingerprint sensors when flagship modes began adoption around 2014. Goodix mainly focus on its glass- covered fingerprint sensor technology, named ‘Invisible Fingerprint Sensor’ (IFS), which enables integration of the sensor under the touch panel. Its Goodix China fingerprint sensors are used in more than ten mobile phones including among other LeEco Le 2 Pro, Meizu Pro 6, Meizu MX4 Pro, Xiaomi Hongmi Note 3, Vivo X6, ZTE A880. Goodix has a touch controller and fingerprint sensor bundle sales strategy. Delivers both touch IC and fingerprint sensors. EgisTec, a privately held Taiwanese company, has primarly been a supplier of swipe sensors to PCs and mobile phones, delivering sensors to one of Egis Technology (EgisTec) Taiwan Lenovo’s notebook series. Egistec, which is specialising in IC design, R&D as well as fingerprint sensors, has delivered capacitive sensors fingerprint sensors to Samsung’s Galaxy A-8 series smartphones in 2015.

IC design house Elean Microelectronics has obtained fingerprint sensor module orders from first-tier notebook firms with volume shipments set to start in H2’16. In addition, Elean started shipments to smartphone EOMS in Q1’16, followed by shipments for tablets in Q2’16. The company estimates Elean Microelectronics Taiwan that ~10% of total revenues in 2016 will come from its fingerprint sensors, which indicate USD ~20m based on revenues in 2015. According to the company, Elean expects to double shipments to 2m sensors in Q3’16, increasing to more than 3m sensors in Q4’16. FocalTech specializes in design and development of touchscreen controllers and LCD driver ICs. The company reported revenues of USD ~345m in 2015, shippinh almost 700m units. FocalTech introduced a new generation of high-performance fingerprint solutions at the end of 2015, which is expected to start mass production in H2’16. Initally, FocalTech FocalTech Systems Taiwan planned to source fingerprint sensors from third-parties, with its own algorithm, but deceided to decelop its own fingerprint sensor chip in H2’15, partnering with Precise Biomtetrics to license the firm’s algorithm. FocalTech plans to sample its sensors in H1’16 and have its sensor ready for volume shipments H2’16. Silead was founded in 2010 by GlaxyCore. The company delivers touch IC, styluses and fingerprint solutions. Silead licenses algorithms from Precise Silead China Biometrics. At present, Silead has shipped fingerprint sensors to Coolpad and ZTE smartphones. There are also other players entering the fingerprint sensor market, namely Qualcomm, Invensense and Sonovation which are developing ultrasound Other solutions, in addition to Vkansee, Holtek Semiconductor (mainly optical), SuperC Touch. Source: Company data, Pareto Securities Equity Research

14 Jun 2016 Pareto Securities Research 29(70) Fingerprint Cards AB Initiating Coverage 14 June 2016

Strong growth already priced in

We initiate coverage of Fingerprint Cards (FPC) with a Hold recommendation and a target price of SEK 97. While we applaud the tremendous growth it has achieved, and still expect significant growth also going forward, we find this fully reflected in today’s pricing of the share. Smartphone OEMs pursuing a multi-sourcing strategy dilutes the Target price (SEK) 97 future growth potential, and incremental market growth is likely driven by Share price (SEK) 89 the relatively competitive entry-level smartphone segment, in our view.

A first mover realizing remarkable growth

When Apple pioneered the fingerprint functionality in its iPhone 5S in 2013, FPC’s readily available solution enabled it to capitalize on the strong growth momentum of smartphone OEMs wanting to implement the feature. This has led the company to attain a market share ex. Apple and Samsung of close to 100% in 2015. However, we anticipate a more competitive space to induce multi-sourcing among smartphone OEMs and market growth is likely driven by the relatively price-sensitive entry-level smartphone segment.

Ticker FINGb.ST, FINGB SS We anticipate a 2015-18e revenue CAGR of 54% Sector Biometrics Whereas we anticipate the sensor market for smartphones to grow at a 41% Shares fully diluted (m) 322.7 CAGR for 2015-18e, we include 54% annual revenue growth for FPC in our Market cap (SEKm) 28,736 estimates, somewhat below the company’s own ambition of 60%. This is Net debt (SEKm) -2,519 due to the commercial trends we see emerge with regards to multi-sourcing Minority interests (SEKm) 0 among existing customers and entry-level driving incremental volume Enterprise value 16e (SEKm) 26,217 growth, which will dilute the company’s growth potential, in our view. Free float (%) 96

Multi-sourcing and competition diluting growth – HOLD, TP SEK 97 Performance

On our 2018 estimates, the share currently trades at EV/EBIT 6.3x, which we SEK consider fair. At our target price, the company’s ambition implies an 140 EV/EBIT’18e ~6x, which we struggle to see the significant upside from given the commercial trends we anticipate for the smartphone sensor market, 112 implying limited growth post 2018e. We initiate coverage of FING with a 84 Hold recommendation and a target price of SEK 97. 56

28

0 SEKm 2014 2015 2016e 2017e 2018e Jun-15 Aug-15 Nov-15 Jan-16 Mar-16 May-16 Revenues 234 2,901 7,750 9,391 10,518 FINGB OMX Stockholm (Rebased) EBITDA (84) 954 3,011 3,422 3,553 EBIT (145) 911 2,941 3,328 3,448 Source: Factset EPS (0.50) 2.55 7.11 8.05 8.33 EPS adj (0.50) 2.55 7.11 8.05 8.33 DPS - - - - -

EV/EBITDA - 38.1 8.7 7.0 6.1 EV/EBIT - 39.9 8.9 7.2 6.3 P/E adj - 46.3 12.5 11.1 10.7 Analysts P/B 6.75 32.59 8.19 4.71 3.27 Fredrik Steinslien +47 24 13 21 54, [email protected] ROE (%) - 110.3 98.6 54.0 36.1 Div yield (%) - - - - - Espen Klette +47 24 13 39 35, [email protected] Net debt (102) (1,031) (2,519) (4,777) (7,064)

Source: Pareto

Please refer to important disclosures on the last 5 pages of this document Fingerprint Cards AB Initiating Coverage

Investment case

We initiate coverage of FING with We initiate coverage of FINGB with a Hold recommendation and a target price Hold recommendation, of SEK 97. The company has demonstrated a strong growth, and although we TP SEK 97 estimate 54% annual revenue growth for 2015-18e, we find it already reflected in today’s pricing of the share. Our target price implies an EV/EBIT ~6x at the company’s ambitious financial targets for 2018, and we struggle to see a significant upside from that level, given challenging commercial trends and limited smartphone sensor market growth post 2018e.

Market leader within fingerprint sensors to smartphones Established market leader, with Fingerprint Cards is an established market leader in fingerprint sensors for deliveries to OEMs shipping ~20% smartphone integration, alongside Synaptics and Apple’s in-house designs. FPC of global smartphones grew its revenues from SEK 234m in 2014 to SEK 2,901m in 2015, a growth of 1,140% y/y and saw its share price increase ~1,600% y/y. FPC’s astonishing growth has been driven by the proliferation of fingerprint sensors in smartphones, following Apple’s introduction of its Touch ID in 2013. FPC has nearly had the entire market for fingerprint sensors to Chinese smartphone OEMs, e.g. Huawei, Xiaomi, and Vivo, which together shipped more than ~20% of the global smartphones in Q1’16.

Intensifying competition will drive further ASP decline for smartphone sensors Several Chinese and Taiwanese Despite its current position as a market leader, we believe the competition will fingerprint suppliers will start intensify and thus drive the ASP for fingerprint sensors towards shipping sensors in 2016 USD ~2.0/sensor in 2018e, from the current level of USD ~3.0/sensor. The decline so far has been a result of reduced sensor size. ASP decline from 2016 and onwards will mainly be a result of more intense competition from Chinese and Taiwanese fingerprint sensor suppliers entering the market in 2016. In 2015, FPC had a revenue market share of ~43%. While we estimate that FPC’s market share will grow to 63% in 2016, we see declining market share for 2017- 18e. As such, we believe that it will prove challenging to maintain its market share with a slowing market for high-end smartphones. The future growth will likely be within low- to mid-end smartphones likely to put pressure on gross margin, in our view.

Dual- and multi-sourcing to challenge FPC’s leading position Dual- and multi-sourcing to put We believe the first signs of smartphone OEMs diversifying its supply chains by pressure on FPC’s market share dual-sourcing fingerprint sensors already have been evident. Samsung integrated Egis Technology’s fingerprint sensors in its a-5 series of smartphones, IDEX announced a design win in LG’s Stylus 2 Plus, and Meizu launched its PRO 6 model with a sensor from Goodix, which are all previous and current customers of FPC. While it is expected that FPC will lose some designs, we expect to see this trend continue and thus affect both market share and ASPs adversely.

Introduced next generation FPC1268 ‘under glass’ sensor in Q1’16 First ‘under glass’ sensors In Q1’16 FPC introduced its newest sensor FPC 1268, a touch fingerprint sensor launched in smartphones in Q1’16 that can be mounted under a 300 micron thick sheet of glass. The company is working with its first customers and expects to have the new sensor integrated in smartphones launching in H2’16. FPC and TPK integrated FPC 1269 under display glass in a smartphone in Q1’16. Its first generation of under-glass sensors, FPC1245, has been mounted under a sheet of ceramics and integrated in smartphones from Xiaomi and Oppo, namely the models Mi5, R9 and R9+, respectively. Fingerprint Cards has increased the share of projects involving FPC1245 and FPC1235, with sensors mounted under a sheet of ceramics.

14 Jun 2016 Pareto Securities Research 31(70) Fingerprint Cards AB Initiating Coverage

Touch sensor market leader A strong growth story reaching the inflection point in early 2015 As a result of a shift from swipe to touch fingerprint sensors in the mobile market, following the launch of Apple’s Touch ID, FPC was awarded its first design win in a flagship model in December 2013. Later in 2014, Huawei launched the Ascend Mate 7, the world’s first Android smartphone with an embedded touch fingerprint sensor, using FPC’s sensor. During 2014, several major smartphones equipped with fingerprint sensors were deferred to H1’15. During H1’15, HTC, Huawei, Oppo, Newman, LeTV and Yulong had all launched smartphones with FPC’s touch sensors. In December 2015, FPC reportedly shipped 1m sensors every working day through the month, compared to 4m sensor shipments in total in 2014.

Revenues, EBIT & gross margin Q1’14-Q1’16 - FPC

SEKbn Gross margin (%) 46% 49% 1.6 45% 50% 1.4 1.2 36% 40% 32% 32% Thousands 1.0 30% 27% 30% 0.8 1.5 20% 1.4 0.6 1.0 20% 0.4 0.1 0.6 0.2 0.1 0.4 0.5 0.0 0.0 0.1 0.1 0.3 10% 0.0 0.0 0.0 0.0 0.0 0.0 -0.2 0% Q1'14 Q2'14 Q3'14 Q4'14 Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Revenues EBIT Gross margin

Source: Company data, Pareto Securities Equity Research

Good visibility through 2016 – uncertainty arises from 2017 In our view, the company is likely to continue growing, increasing its market share ex-Apple to from 43% in 2015 to 64% in 2016 on our estimates, in line with the company’s target of 50-70% of the ex-Apple market in 2016. We believe the company should have reasonably good visibility on volumes for the reminder of the year, as production forecasts are shared through the supply chain. However, we believe 2017-18e will prove tougher as several of its Chinese and Taiwanese competitors’ product offerings have had time to establish in the market. Hence we see FPC’s market share decline to 63% in 2017e and 57% in 2018e.

14 Jun 2016 Pareto Securities Research 32(70) Fingerprint Cards AB Initiating Coverage

26 mobile devices launched with FPC sensors in Q1’16 In Q1’16, 12 OEMs launched a total of 26 devices with FPC Chinese smartphone, which bring the accumulated amount of devices with FPC’s sensors to 83. Smartphone OEMs including Huawei, Xiaomi, Oppo, Vivo and Lenovo, launched 13 mobile devices using FPC’s sensors in the quarter. FPC is mainly doing business in Mainland China, and Huawei continues to be FPC’s largest customer. LG launched its flagship model G5 with FPC’s FPC1035 (rear mount) in the quarter, while HTC and Sony used FPC1145 and FPC1155, respectively.

An increasing number of devices launched with FPC’s sensor drive revenue growth. In Q4’15, the company’s customers launched 18 devices with FPC’s sensors, while number of devices increased by 26 in Q1’16. At the same time, revenues increased from SEK 1.35bn in Q4’15 to SEK1.49bn in Q1’16, a growth of 10% q/q (10.7x growth y/y).

Quarterly revenue and accumulated devices with FPC sensors – Q3’15-Q2-16e

SEKbn No. of devices 2.0 100 95

1.6 83 80

1.2 57 60

1.7 0.8 39 1.5 40 1.4 1.0 0.4 20

0.0 0 Q3'15 Q4'15 Q1'16 Q2'16e* Revenues Devices launched (accumulated)

*Including devices announced until 9 June 2016 Source: Company data, Pareto Securities Equity Research

14 Jun 2016 Pareto Securities Research 33(70) Fingerprint Cards AB Initiating Coverage

Financials and estimates We estimate revenues of SEK 10.5bn in 2018 In 2015, Fingerprint Cards reported revenues of SEK 2.9bn, up ~12x from 2014. As such FPC captured a market share (ex-Apple) of ~43% in 2015. The company estimates that it will be able to increase its market share to 50-70% in 2016. We estimate revenues of SEK 7.75bn, in the mid-range of the company guidance, increasing further to SEK 10.5bn in 2018e, implying a 2015-18e CAGR of 54%. We forecast that gross margins will somewhat and stabilize at 42-43% for 2017- 18e.

Smaller sensors have lifted gross margins to high 40s In 2015, chips with smaller surface areas contributed to lower production costs and thus improving gross margin to 43%, up from 31% in 2014. Through product development, surface area per sensor was reduced by ~70%, which enabled the company to increase the number of sensors per wafer. Hence, FPC estimates that its gross margin could be in the 40-45% range. The reduced costs per sensors have resulted in deterioration in sensor ASP, much driven by FPC itself.

Revenues, EBIT and gross margin 2012-2018e – FPC

SEKbn Gross margin 46% 12 43% 50% 41% 43% 42% 10 40% 8 31% 6 30% 10.5 9.4 4 7.8 20% 2 2.9 2.9 3.3 3.4 0.0 0.1 0.2 0.9 10% 0 0.0 0.0 -0.1 -2 0% 2012 2013 2014 2015 2016e 2017e 2018e

Revenues EBIT Gross margin Source: Company data, Pareto Securities Equity Research

FPC has a track record of outperforming guidance Through 2014-15, Fingerprint cards increased its guidance every quarter and ended up with revenues of SEK ~50m above the high-end of its FY15 guidance given in Q3’15. FPC has guided on revenues in the range of SEK 7.0-8.5bn for 2016, suggesting a growth of ~140-195% from 2015. Run-rate for the year as of Q1’16 was SEK 6bn. FPC has maintained its guidance for 2016, and has highlighted that it has visibility on shipments in 2016 based on forecasts from smartphone OEMs and other parts in the supply chain.

14 Jun 2016 Pareto Securities Research 34(70) Fingerprint Cards AB Initiating Coverage

Guidance and actual revenues Q4-14-Q1-16 – FPC

Revenues (SEKbn) FY2015 guidance FY2016 guidance 10 8.5 8.5 8 7.0 7.0 6

4 2.9 2.5 2.9 1.5 2 1.0 2.8

0 Q4'14 Q1'15 Q2'15 Q3'15 Actual '15 Q4'15 Q1'16 Range (low-high)

Source: Company data, Pareto Securities Equity Research

Increasing capacity constraints will allow building WC Despite the rapid growth in sales, FPC has not built substantial working capital. It increased its net working capital with SEK 234m q/q in Q1’16, after a very modest increase as its rapid growth has not enabled the company to build inventory. As the company has increased capacity and are now growing at a somewhat slower rate, we believe the company will use its strong financial position to build inventory, thus being able to guarantee readily available sensor deliveries.

Net working capital and NWC/revenues Q1’14-Q1’16 - FPC

SEKm 300 50 %

250 40 % 200 30 % 150 261 20 % 100 165 111 108 6 % 10 % 50 83 32 52 44 0 20 0 % Q1'14 Q2'14 Q3'14 Q4'14 Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Net working capital NWC/12m rolling reveneus Source: Company data, Pareto Securities Equity Research

14 Jun 2016 Pareto Securities Research 35(70) Fingerprint Cards AB Initiating Coverage

Net cash of SEK 1.3bn at the end of Q1’16 With a net cash position of SEK 1.3bn, an operational cash flow of SEK 250m, the company resolved to start a share buy-back program at its annual general meeting in May 2016. The Board of Directors have been authorized to acquire up to 10% of the outstanding shares until the 2017 AGM. We anticipate limited capex requirements going forward, with only SEK 112m in investments over the past 2 years.

Net cash position and operating cash flow Q1’14 – Q1’16 – FPC

SEKbn 1.4 1.2 1.0 0.8 0.6 1.3 1.0 0.4 0.5 0.5 0.2 0.3 0.3 0.2 0.2 0.10.0 0.20.0 0.2 0.0 0.1 0.0 0.0 0.0 -0.1 -0.2 Q1'14 Q2'14 Q3'14 Q4'14 Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Net cash Operating cash flow

Source: Company data, Pareto Securities Equity Research

Fingerprint Cards mainly pursues organic growth Fingerprint Cards strategy involves to grow mainly organically, but also through complementary acquisitions, across multiple dimensions. FPC has a very strong existing position within the smartphone/tablet markets. The company believes there is potential to capitalize on its economies of scale to expand into new markets. FPC assesses the market for smart cards to be the next opportunity. Further, it also sees potential within automotive, access cards, the health care sector and the ‘Internet of Things’, including wearable devices, in the coming years. The company will continue to develop new solutions to be able to enter new markets with new products, and will evaluate potential complementary acquisitions able to expand its product offerings.

FPC’s growth strategy

Source: Company data

14 Jun 2016 Pareto Securities Research 36(70) Fingerprint Cards AB Initiating Coverage

Significant presence in China

Launched with 9 of the top 10 FPC has established a strong position in China, and has by year-end 2015 in total OEMs launched more than 42 phones with Chinese customers. The company has focused on the top 10 OEMs, and has launched with 9 of 10 top players. Huawei is FPC’s largest customer and has launched several phones with FPC sensors. Huawei was an early adopter of touch fingerprint sensors, and introduced features such as navigation, taking pictures and browsing by using the fingerprint sensors.

Smartphones from Chinese OEMs with FPC sensor – YE 2015

Smartphones with FPC sensor (x) 14

12

10

8

6 12 10 4 5 2 3 3 3 2 2 1 1 0 Huawei Lenovo Xiaomi ZTE Oppo Coolpad Vivo Gionee Meizu Others Source: Company data, Pareto Securities Equity Research

Penetration in Chinese OEMs smartphones expected to be 30-35% in 2016 While fingerprint sensor modules make up a significant share of OEMs production costs in smartphones priced in the USD ~100-150 range, it has become a standard feature in high-end models and way of differentiate more affordable models. Lately, among Chinese smartphones OEMs, it has almost become a necessity. According to IHS, the fingerprint sensor penetration among the top 10 Chinese smartphone brands was 14-15% in 2015, and expected to grow to 30-35% in 2016. In 2015, IDC forecast that FPC’s top customers, Xiaomi, Huawei, Oppo and Vivo, which all ship mainly domestic, had a market share of ~45% of shipments. Except from Huawei, which increased shipments worldwide and recognized as a premium brand in China, Xiaomi, Oppo and Vivo still have limited volumes outside China and some are virtually unknown.

Shipments in China by smartphone OEMs – 2015 Smartphone OEMs’ market shares in China – 2011-2015

Shipments (m) Market share (%) 200 16%

12% 150

8% 100 178 4% 50 65 63 58 0% 35 35 2011 2012 2013 2014 2015 0 Apple Huawei Xiaomi Oppo Vivo Xiaomi Huawei Apple Oppo Vivo Others Source: IDC, Pareto Securities Equity Research

14 Jun 2016 Pareto Securities Research 37(70) Fingerprint Cards AB Initiating Coverage

Fingerprint Cards technology

Integrated sensor design and proprietary algorithms Fingerprint Cards has developed a proprietary biometric solution consisting of an integrated silicon sensor and its own software (algorithms) for reading fingerprints. The solution includes biometric silicon sensors, processors, algorithms and modules that can be used separately or combined.

Long experience from fingerprint sensor design Fingerprint Cards has long experience from developing fingerprint sensor technology and has been working on fingerprint sensors since 1998. The company had a fingerprint prototype in an Ericsson phone already in 1999. Experience from 18 years of development has led to sensors with high image quality, with a 3D representation of fingerprints. Higher image quality enables FPC to reduce the sensor size while preserving accuracy by registering enough features in the images of the fingerprints. The combination of high image quality and an optimized algorithm allows FPC to reduce sensor size without compromising on its security (FAR).

Works across the entire sensor system FPC has divided its development and research into four teams: ASIC, Packaging, Algorithms and Systems and Software. The company has a business model with a full system capability giving it a broad know-how of the entire system. The ASIC team is responsible for creating the silicon sensors with a CMOS technology as the core of the sensor. The algorithm team System and software is responsible for the drivers and secure integration into the smartphones’ processors, in addition to demonstrating applications. System and software ensures that sensors work well as complete systems.

FPC’s biometric system solution FPC’s silicon sensor is primarily manufactured at the Chinese company Semiconductor Manufacturing International Corporation (SMIC). The ASIC is a core part of the fingerprint sensors, which is an integrated silicon chip with a matrix of pixels on top that has image capture capabilities with high contrast and resolution. The capacitive sensor reads a three-dimensional image of the fingerprints. The pixel array is designed with analog CMOS technology, similar to what is used in processors in computers, or image sensors in cameras. As there are several semiconductor factories that can produce the CMOS sensors, it has been possible to ramp up production rapidly at established production lines. Fingerprint Cards’ 3D sensor technology

Source: Company data, Pareto Securities Equity Research

14 Jun 2016 Pareto Securities Research 38(70) Fingerprint Cards AB Initiating Coverage

Proprietary algorithm allows for smaller sensors FPC has developed its own proprietary algorithm system, which optimizes the image of the fingerprints from the sensor and performs the image processing to match the fingerprints. The algorithms have been developed continually to compensate for the declining size of the sensors, reduce demand for processing power to lower power consumption and requirements for memory as well as to minimize time for matching. FPC algorithm operate with a combination of high security (false acceptance rate of 1/50-100k) and high convenience (false rejection rate of <2%) to ensure that two different people are not mistaken for the same person, while not rejecting authorized fingerprints.

FPC’s biometric system is approved for Android 6.0 including the mobile payment systems Android Pay, PayPal and Alipay.

FPC’s proprietary algorithm

Source: Company data

14 Jun 2016 Pareto Securities Research 39(70) Fingerprint Cards AB Initiating Coverage

Ensuring sufficient delivery capacity

FPC is a ‘fabless’ semiconductor company, meaning that all hardware manufacturing is performed by partners. However, the company owns all the essential links of R&D, marketing and sales as well as production management in its supply chain. FPC use forecasts and information from customers and distributors to manage its production level.

Silicon chips manufactured at large semiconductors FPC’s chips are mainly being manufactured at Semiconductor Manufacturing International Corporation (SMIC), one of the largest semiconductor manufacturers in the world. SMICs expanded its capacity in 2015, but to ensure sufficient delivery capacity FPC has engaged an additional manufacturing partner. It uses forecasts when ordering silicon chips to ensure its delivery capacity. The company’s scale has given it an advantage by being a priority customer that enables manufacturing partners to utilize full production line capacity.

Working closely with smartphone OEMs FPC’s business model is focused on the OEMs, who decide which sensor to use in its smartphone models, although the module makers typically will deliver a complete fingerprint sensor module to the OEMs. As such, the company focuses its sales force and promotion from its engineers on the OEMs to get design wins. Field application engineers work closely with the OEMs throughout the projects when launching new models, to implement both the hardware and software.

FPC’s global ecosystem

Source: Company data, Pareto Securities Equity Research

Cooperating with several module houses FPC work with almost ten module houses, including the largest such as O-Film and CrucialTec, as every smartphone OEM has its favourite supplier of modules. The smartphone OEMs have established relationships with different module houses when purchasing camera modules and now the same companies sell fingerprint sensor modules to the OEMs. As such, FPC collaborates with module houses after getting design wins. In addition, it ships its wafers through distributors, which handle warehousing and financial risks, before providing the wafers to the module houses, while the software is sold directly to smartphone OEMs. Module houses handle packaging and modular production to create a module ready to connect into a smartphone.

14 Jun 2016 Pareto Securities Research 40(70) Bio metrics Initiating Coverage

PROFIT & LOSS (fiscal year) (SEKm) 2011 2012 2013 2014 2015 2016e 2017e 2018e Revenues - 10 95 234 2,901 7,750 9,391 10,518 EBITDA - (28) (22) (84) 954 3,011 3,422 3,553 Depreciation & amortisation - (11) (13) (62) (43) (69) (94) (105) EBIT - (39) (34) (145) 911 2,941 3,328 3,448 Net interest - 1 1 2 (0) 0 - - Other financial items ------Profit before taxes - (38) (33) (144) 910 2,942 3,328 3,448 Taxes - - - (1) (112) (647) (732) (759) Minority interest ------Net profit - (38) (33) (144) 799 2,294 2,596 2,689 EPS reported (0.17) (0.12) (0.50) 2.55 7.11 8.05 8.33 EPS adjusted (0.17) (0.12) (0.50) 2.55 7.11 8.05 8.33 DPS ------

BALANCE SHEET (SEKm) 2011 2012 2013 2014 2015 2016e 2017e 2018e Tangible non current assets - 5 5 19 21 23 16 4 Other non-current assets - 29 54 70 51 66 59 46 Other current assets - 21 61 234 808 2,765 3,344 4,112 Cash & equivalents - 61 212 102 1,031 2,519 4,777 7,064 Total assets - 115 332 425 1,910 5,373 8,196 11,225 Total equity - 102 290 301 1,147 3,508 6,104 8,794 Interest-bearing non-current debt ------Interest-bearing current debt ------Other Debt - 13 43 124 763 1,865 2,092 2,432 Total liabilites & equity - 115 333 425 1,910 5,373 8,196 11,225

CASH FLOW (SEKm) 2011 2012 2013 2014 2015 2016e 2017e 2018e Cash earnings - (28) (20) (82) 951 2,381 2,690 2,795 Change in working capital - 43 (8) (92) (43) (748) (164) (218) Cash flow from investments - (11) (38) (91) (26) (87) (80) (80) Cash flow from financing - 32 218 155 47 11 - - Net cash flow - 37 151 (110) 929 1,557 2,446 2,497

CAPITALIZATION & VALUATION (SEKm) 2011 2012 2013 2014 2015 2016e 2017e 2018e Share price (SEK end) 1.86 2.47 10.9 7.0 118.2 89.1 89.1 89.1 Number of shares end period - 239 271 292 316 323 323 323 Net interest bearing debt - (61) (212) (102) (1,031) (2,519) (4,777) (7,064) Enterprise value - 530 2,727 1,931 36,343 26,217 23,959 21,672 EV/Sales - - 28.6 8.3 12.5 3.4 2.6 2.1 EV/EBITDA - - - - 38.1 8.7 7.0 6.1 EV/EBIT - - - - 39.9 8.9 7.2 6.3 P/E reported - - - 46.3 12.5 11.1 10.7 P/E adjusted - - - 46.3 12.5 11.1 10.7 P/B 5.8 10.1 6.8 32.6 8.2 4.7 3.3

FINANCIAL ANALYSIS & CREDIT METRICS 2011 2012 2013 2014 2015 2016e 2017e 2018e ROE adjusted (%) - - - - 110.3 98.6 54.0 36.1 Dividend yield (%) ------EBITDA margin (%) - - - - 32.9 38.8 36.4 33.8 EBIT margin (%) - - - - 31.4 38.0 35.4 32.8 NIBD/EBITDA - 2.16 9.85 1.22 (1.08) (0.84) (1.40) (1.99) EBITDA/Net interest - 46.83 17.92 49.18 - - - -

14 Jun 2016 Pareto Securities Research 41(70) Bio metrics Initiating Coverage

PROFIT & LOSS (fiscal year) (SEKm) 1Q'15 2Q'15 3Q'15 4Q'15 1Q'16 2Q'16e 3Q'16e 4Q'16e Revenues 140 445 964 1,352 1,491 1,700 2,200 2,359 EBITDA (7) 75 356 530 596 672 847 896 Depreciation & amortisation (12) (9) (10) (12) (7) (17) (22) (24) EBIT (19) 66 346 518 589 655 825 873 Net interest - - (0) - 0 - - - Other financial items ------Profit before taxes (19) 66 346 518 589 655 825 873 Taxes - - 2 (113) (130) (144) (182) (192) Minority interest ------Net profit (19) 66 347 404 460 511 644 681 EPS reported (0.06) 0.22 1.15 1.29 1.44 1.58 1.99 2.11 EPS adjusted (0.06) 0.22 1.15 1.29 1.44 1.58 1.99 2.11 DPS ------

BALANCE SHEET (SEKm) 1Q'15 2Q'15 3Q'15 4Q'15 1Q'16 2Q'16e 3Q'16e 4Q'16e Tangible non current assets 18 20 20 21 24 26 25 23 Other non-current assets 60 54 47 51 67 68 67 66 Other current assets 281 374 578 808 952 1,586 2,410 2,765 Cash & equivalents 121 166 499 1,031 1,321 1,615 1,983 2,519 Total assets 481 613 1,144 1,910 2,364 3,295 4,485 5,373 Total equity 282 348 732 1,147 1,673 2,184 2,827 3,508 Interest-bearing non-current debt ------Interest-bearing current debt ------Other Debt 199 266 412 763 691 1,111 1,658 1,865 Total liabilites & equity 481 613 1,144 1,910 2,364 3,295 4,485 5,373

CASH FLOW (SEKm) 1Q'15 2Q'15 3Q'15 4Q'15 1Q'16 2Q'16e 3Q'16e 4Q'16e Cash earnings (7) 75 358 525 483 528 666 704 Change in working capital 28 (25) (58) 12 (234) (180) (234) (101) Cash flow from investments (2) (4) (4) (16) (27) (20) (20) (20) Cash flow from financing (0) (0) 36 11 11 - - - Net cash flow 19 45 333 533 234 328 412 584

CAPITALIZATION & VALUATION (SEKm) 1Q'15 2Q'15 3Q'15 4Q'15 1Q'16 2Q'16e 3Q'16e 4Q'16e Share price (SEK end) 10.7 35.7 61.8 118.2 94.4 89.1 89.1 89.1 Number of shares end period 292 292 310 316 323 323 323 323 Net interest bearing debt (121) (166) (499) (1,031) (1,321) (1,615) (1,983) (2,519) Enterprise value 3,262 11,122 19,042 36,343 29,148 27,121 26,753 26,217 EV/Sales 9.2 14.7 11.5 12.5 6.9 4.9 4.0 3.4 EV/EBITDA (48.0) 358.8 46.7 38.1 18.7 12.6 10.1 8.7 EV/EBIT (23.7) (411.9) 52.5 39.9 19.2 12.9 10.3 8.9 P/E reported (22.3) (371.1) 51.0 45.4 23.0 16.3 14.1 12.5 P/E adjusted (22.3) (371.1) 51.0 45.4 23.0 16.3 14.1 12.5 P/B 11.1 30.0 26.2 32.6 18.2 13.2 10.2 8.2

FINANCIAL ANALYSIS & CREDIT METRICS 1Q'15 2Q'15 3Q'15 4Q'15 1Q'16 2Q'16e 3Q'16e 4Q'16e Dividend yield (%) ------EBITDA margin (%) - 16.8 36.9 39.2 40.0 39.5 38.5 38.0 EBIT margin (%) - 14.7 35.9 38.3 39.5 38.5 37.5 37.0 NIBD/EBITDA 2.40 (4.68) (0.54) (0.48) (0.48) (0.52) (0.56) (0.62) EBITDA/Net interest 61.82 ------

14 Jun 2016 Pareto Securities Research 42(70) IDEX Initiating Coverage 14 June 2016

A diversified fingerprint sensor bet

We initiate coverage on IDEX with a Buy recommendation and a target price of NOK 13. With a broad product offering largely in place for mass- production, we find the share to offer an attractively priced diversified bet on the fingerprint market potential. We believe IDEX will be relevant both for smartphone OEMs transition to multi-sourcing of sensors, but Target price (NOK) 13.00 particularly by being able to offer cost-effective high-end smartphone and Share price (NOK) 8.06 smart cards solutions with its proprietary off-chip technology.

Proprietary technology making IDEX relevant for a number of solutions

Shorter-term, by providing a traditional capacitive product, we anticipate IDEX to be a relevant multi-sourcing partner for smartphone OEMs. However, longer-term we see large potential through its off-chip technology enabling a cost-effective solution for high-end in-glass solutions and smart cards. Operationally, the company has its product portfolio in place, and conceptually, we find its solutions validated by winning the recent LG Stylus

2 Plus design, demonstrating a multi-sourcing approach by LG, in our view. Ticker IDEX.OL, IDEX NO Sector Biometrics Fully capitalized for reaching profitability in 2018e Shares fully diluted (m) 531.9 Post warrant issues in H2’15, the cash position at the end of Q1’16 was Market cap (NOKm) 4,287 NOK 683m. At current run-rate quarterly cash burn of NOK ~70m, the Net debt (NOKm) -492 company is well capitalized for further commercializing its technology, and Minority interests (NOKm) 0 we anticipate the company to reach profitability in 2018e. In the near-term, Enterprise value 16e (NOKm) 3,985 primarily as a multi-sourcing partner for smartphone OEMs, as well as Free float (%) 67 becoming relevant for the emerging smart card market in the longer-term.

Performance Commercialization to trigger re-pricing – BUY, TP NOK 13 NOK Although priced higher than NEXT, we consider it to be supported by 11 offering a broader product portfolio, and that it is already approaching mass-production. Validated by the design win for LG Stylus 2 Plus, IDEX can 10 be a viable multi-sourcing partner for OEMs. Furthermore, we see a solid earnings potential in its technology, the breadth and high-end solutions it 8 enables. We initiate coverage with a Buy recommendation and a target price of NOK 13 of IDEX. 7

5 NOKm 2016e 2017e 2018e 2019e 2020e Jun-15 Aug-15 Nov-15 Jan-16 Mar-16 May-16 Revenues 109 639 1,245 2,241 2,689 IDEX OSEBX (Rebased) EBITDA (210) (39) 158 544 774 EBIT (218) (47) 150 536 766 Source: Factset EPS (0.39) (0.09) 0.21 0.73 1.04 EPS adj (0.39) (0.09) 0.21 0.73 1.04 DPS - - - - -

EV/EBITDA - - 24.7 6.4 3.5 EV/EBIT - - 26.0 6.5 3.6 P/E adj - - 39.1 11.0 7.7 Analysts P/B 8.32 7.66 6.41 4.06 2.66 Fredrik Steinslien +47 24 13 21 54, [email protected] ROE (%) - - 17.8 45.0 41.6 Div yield (%) - - - - - Espen Klette +47 24 13 39 35, [email protected] Net debt (492) (482) (574) (1,015) (1,743)

Source: Pareto

Please refer to important disclosures on the last 5 pages of this document IDEX Initiating Coverage

Investment case

BUY, TP NOK 13 – 61% upside We initiate coverage of IDEX with a Buy recommendation and a target price of NOK 13, representing 61% upside at present. We anticipate further commercialization of its fingerprint sensors driven by increasing adoption of fingerprint authentication solutions in smartphones as well as for increasing smart cards and ‘Internet of Things’ volumes. From an EBIT loss of NOK 226m in 2015, we estimate that IDEX’s will become profitable in 2018e and reach an EBIT of NOK 766m in 2020e. We consider the IDEX share to provide an attractive exposure to a sizable market potential from smartphone OEMs pursuing a multi-sourcing strategy, as well as its technology will enable the emergence of the smart card vertical.

Positioned for commercialization during 2016-17e IDEX is positioned to start IDEX targets smartphone, smart card and ‘Internet of Things’ (IoT) applications ramping up production in with a product portfolio containing conventional silicon based sensors, 2016 patented polymer ‘off-chip’ technology in addition to completing late-stage development of its ‘in-glass’ fingerprint sensors. IDEX has already received production volume orders for its ‘off-chip’ Eagle and conventional Cardinal silicon sensors in various market segments, while the ‘off-chip’ ‘in-glass’ solution is expected to start sampling to lead customers in Q2’16. We expect to see further commercialization in H2’16, following the recent launch of the LG Stylus 2 Plus employing an IDEX Cardinal sensor, as IDEX qualifies for delivery to further smartphone OEMs. Furthermore, we argue that IDEX is well-positioned to get significant volumes from OEMs looking to multi-source supply of fingerprint sensors. While IDEX has been promoting its products to customers since summer 2015, initial volume shipments for its first OEM deal started in Q1’16, in our view serving as an important milestone and reference design win for the company going forward.

Proprietary low-cost ‘off-chip’ technology Proprietary ‘off-chip’ IDEX’s Eagle and ‘in-glass’ sensors offer a proprietary ‘off-chip’ technology, technology enables IDEX to allowing the company to reduce the use of silicon by separating the ASIC from offer fingerprint sensors at low the sensor array, thus reducing the overall costs of the sensor. Compared to price points traditional sensors, IDEX is able to use significant less silicon, as only the ASIC has to be made of silicon. Cypress Semiconductor, which contributed in the development of the ASIC, licenses IDEX’s IP and currently manufactures the ‘off- chip’ technology ASIC for IDEX.

Experienced team with track record from the fingerprint industry Attracting key talent from the IDEX had a total of 70 employees and 30 contractors at the end of Q1’16, of fingerprint sensor industry whom a significant number with experience from pioneering companies in the fingerprint sensor industry, namely Validity (acquired by Synaptics) and AuthenTec (acquired by Apple). We believe the track record of IDEX’s team increases the probability for a successful commercialization of its portfolio, and it is positive to see that IDEX is able to attract such personnel from the industry, adding credibility to the technology.

Strong balance sheet with net cash of NOK 683m Strong balance sheet with IDEX has a strong balance sheet with a net cash position of NOK 683m at the net cash of NOK 683m end of Q1’16, sufficient for approximately 3 years of operation at run-rate cash burn. IDEX has received funding from the large institutional shareholders Woodford Investment Management LLP and Invesco Asset Management, raising gross NOK 771m in 2015.

14 Jun 2016 Pareto Securities Research 44(70) IDEX Initiating Coverage

Financials and estimates Reaching profitability in 2018e As a result of the on-going commercialisation of its technology, we expect IDEX to get a significant uplift in sensor shipments in 2016-2020e. IDEX started the first volume shipments of its Cardinal and Eagle shipments in Q1’16, and we expect these orders to increase shipments through 2016. Driven by relating to the recently announced LG Stylus 2 Plus design win, we expect to shipments to reach ~4m sensors in 2016e. From 2016, supported by further design wins, we forecast shipments to increase to ~160m sensors in 2020e. We estimate an ASP of USD ~3/sensor in 2016, declining by 8-11% per year to USD ~2 /sensor in 2020, driven by increased competition and lower costs. In sum, we estimate revenues for 2016 at NOK 109m. In 2020e, we anticipate revenues to reach NOK 2.7bn.

Sensor shipments and ASP 2016-2020e - IDEX Revenues 2013-2020e - IDEX

Annual shipments (m) USD/unit Revenues (NOKm) 200 4.0 3

3.0 2.8 150 2.5 3.0 2.3 2.0 2 100 2.0 160 2.7 120 2.2 50 1.0 1 60 1.2 4 28 0 0.0 0.6 0.0 0.0 0.0 0.1 2016e 2017e 2018e 2019e 2020e 0 Shipments ASP (USD) 2013 2014 2015 2016e 2017e 2018e 2019e 2020e

Source: Company data, Pareto Securities Equity Research

Gross margins of 40% should lift EBIT to NOK 766m in 2020e IDEX’s increased volume shipments should in addition to increasing gross margins, lift EBIT to NOK 0.8bn in 2020e. We forecast gross margins improving from 27% in 2016e to 40% in 2020e, at the same time as we factor in a 33% decline in fingerprint sensor ASPs as the company realise economies of scale and improved yields through increased volume production. Current capacity is communicated at ~60m, but an increase should be readily available as IDEX’s manufacturing partners have ample capacity.

Gross and EBIT margins 2016-20e – IDEX EBIT 2013-20e - IDEX

Margins (%) 40% EBIT (NOKm) 38% 40% 35% 35% 1,000

27% 28% 30% 24% 750

20% 500 12% 766 10% 250 536

0% 150 -7% 0 -65 -129 -226 -218 -47 -10% 2016e 2017e 2018e 2019e 2020e -250 Gross margin EBIT margin 2013 2014 2015 2016e 2017e 2018e 2019e 2020e

Source: Company data, Pareto Securities Equity Research

14 Jun 2016 Pareto Securities Research 45(70) IDEX Initiating Coverage

OPEX driven by expanding organization and R&D spending From an organization with 8 employees at the end of Q1’13, IDEX has expanded its organization to 70 employees, in addition to 30 consultants, at the end of Q1’16. Coupled with increasing R&D spending, total OPEX amounted to NOK 53m in Q1’16.

OPEX and number of employees – Q1’13-Q1’16 - IDEX

OPEX (NOKm) No. of employees 70 80

60 60 50

40 40 30 65 53 47 48 52 20 43 20 30 25 29 10 19 24 11 13 0 0 Q1'13 Q3'13 Q1'14 Q3'14 Q1'15 Q3'15 Q1'16 OPEX No. of employees

Source: Company data, Pareto Securities Equity Research

Strong balance with NOK 683m net cash IDEX had net cash of NOK 683 at the end of Q1’16. The company has no interest-bearing debt (IDEX has been funded solely from equity since 2010), and further strengthened its balance sheet in December 2015 when funds managed Woodford Investment Management LLP, a UK-based investment management company, exercised 26.3m warrants in IDEX ASA at NOK 8.5/share. The warrants were issued in Q2’15, when the Woodford funds acquired 52.5m shares in IDEX, investing NOK 297 (USD 37m) at that time. The liquidity ensures that IDEX can commercialize its product portfolio, as the current cash burn will give the company headroom for the next ~3 years. Additionally, as of Q1’16, there were 23.5m subscription rights outstanding, at a weighted average strike price of NOK 4.06/share, which we include in our valuation of IDEX.

Cash position Q1’13-Q1’16 – IDEX

NOKm 800 764 683

600

431 382 400 343 295 261 228 181 200

60 46 14 37 0 Q1'13 Q3'13 Q1'14 Q3'14 Q1'15 Q3'15 Q1'16

Source: Company data, Pareto Securities Equity Research

14 Jun 2016 Pareto Securities Research 46(70) IDEX Initiating Coverage

Milestone design win in LG smartphone

In June 2016, IDEX announced that its Cardinal Q sensor was integrated in LG’s Stylus 2 Plus smartphone, which was announced in May and released in June. The phone was first released in Taiwan with a price of USD ~340. LG reported shipments of 57.8m smartphones over the last 12 months, as such holding a market share of ~4% of the global smartphone market in the period. We expect the design win will generate some million shipments for IDEX in 2016, as the phone is launched in key markets in Asia, South America, Europe, and North America in the coming weeks. However, most importantly IDEX has achieved a milestone design win, which will be important to demonstrate its technology and its ability to handle deliveries to tier 1 OEMs supply chains, serving as a proof of concept to new customers, in our view.

IDEX’s Cardinal Q sensor in LG Stylus 2 Plus

Source: LG, IDEX, Pareto Securities Equity Research

Fingerprint sensor on the list of new features Among other upgrades from the orignial launched LG Stylus 2, including better performance, display and camera, fingerprint sensor is highlighted as one of the upgraded features of the new generation. In our view, this illustrates the trend with increased adoption into mid- and low-end smarthphones. Furthermore, as OEMs launch upgraded generations, fingerprint sensors is one of the features that will be added. For feature driven markets, OEMs will look to multi-source what is becoming standard silicon touch sensors.

When LG announced its flagship smartphone model G5 at the Mobile World Congress in February 2016, it featured FPC’s fingerprint sensor FPC1035. Previously, LG has also used FPC1035 in its V10 model launched in October 2015.

14 Jun 2016 Pareto Securities Research 47(70) IDEX Initiating Coverage

Proprietary ‘off-chip’ technology IDEX’s ‘off-chip’ technology increases flexibility ‘Off-chip’ technology enables a IDEX’s ‘off-chip’ sensing concept involves separating the passive finger interface variety of sensor array (the sensor array) from the electronic fingerprint measurement circuit (ASIC). materials This enables IDEX to use a variety of robust and low cost materials for the sensor array while reducing the size of the silicon measurement circuit. Thus, IDEX can make custom sensor designs from any solid material. As such, the separation of the sensing array and ASIC ease integration, reduce costs, and enables customized form factors.

Technology based on widely used active capacitive principle IDEX’s technology is based on a widely used principle named ‘alternating current/radio frequency’ (AC/RF) capacitive coupling scheme, also used by Apple, Synaptics (delivering mainly to Samsung), Fingerprint Cards and Taiwanese and Chinese producers. The technology is already proven and integrated in a wide range of smartphones today, both in fingerprint sensors and in touch screens. The principle utilizes differences in the response signal between ridges and valleys in the fingerprint to reconstruct a two-dimensional image based on voltage transmitted through the finger.

Capacitive principle used by IDEX

Source: NEXT Biometrics, Pareto Securities Equity Research

‘Off-chip’ technology lowers sensor costs Low-cost sensor technology The key characteristic of IDEX’s proprietary ‘off-chip’ technology is the possibility to split the fingerprint sensor into two components: the sensor array and the Application Specific Integrated Circuit (ASIC) providing digital signal processing. This allows IDEX to use any conductive material, including low cost materials such as polymer, glass and ceramic, for the sensor array, while the ASIC still has to be made of silicon. As silicon is a relatively expensive material, reducing the amount of silicon enables IDEX to offer fingerprint sensors at lower price points. In addition, the ‘off-chip’ technology allows for flexibility in regards to form factors as there is no need to develop new ASICs when alternating the shape of the arrays. Hence, the same ASIC can be used for several form factors.

Flexible form factors with the same ASIC

Source: Company data, Pareto Securities Equity Research

14 Jun 2016 Pareto Securities Research 48(70) IDEX Initiating Coverage

IDEX’s ‘off-chip’ technology lowers costs significantly for larger sensors A typical silicon touch sensor has a sensor array of 8x8mm, which requires a silicon integrated circuit (IC) of 80mm2. In IDEX’s conventional silicon sensor (Cardinal) the silicon cost is USD ~3/unit for the silicon, while other costs amount to USD ~1/unit, including packaging and assembly. In IDEX’s ‘off-chip’ sensor, as the sensor array is made of a polymer material, the silicon IC can be reduced to a size of less than 15mm2, which lowers costs by ~30%. In an ‘off- chip’ sensor, the silicon cost is USD ~0.6/unit in addition to other costs of USD ~1.5/unit. The ‘off-chip’ sensor has however slightly higher other costs as the manufacturing process is more complex.

IDEX’s ‘off-chip’ sensors vs. traditional touch sensors

Source: IDEX, Pareto Securities Equity Research

For IDEX’s in-glass sensor there is no need for thinning the cover glass. ‘In-glass’ creates a sensor which is made of glass itself and is ‘dropped into’ the glass. As it is not necessary to thin the glass, there is no loss of glass’ durability. In addition, image quality is not compromised by sensing through thick glass. As such, there is no need to thin cover glass neither to integrate the sensor to the back of the glass, which reduced the total cost of the sensor integration as there is minimal need for customization.

Sensors designed for mass-production IDEX ‘off-chip’ sensors are already in mass-production at its supply chain partners, which reportedly are delivering high-yield and thus products at low cost points. IDEX has optimised its sensor designs for mass production by adapting designs to standard manufacturing processes to leverage the installed base, i.e. standard products. There are currently no scalable ‘in-glass’ or ‘under- glass’ solutions that meet the OEMs’ cost requirements for volume production. IDEX is in the process of reliability testing of its ‘in-glass’ solution, and the company hopes to start evaluation of the product with customers in the next months.

14 Jun 2016 Pareto Securities Research 49(70) IDEX Initiating Coverage

Complete product offering to all markets

Silicon Cardinal and polymer IDEX has products to offer across smartphone segments, targeting both high- Eagle sensors in production end performance driven segments as well as mid-/entry level cost driven segments. In high-end applications, market leaders Apple, Samsung and Huawei drive the development based on features and performance, while lower tier Chinese OEMs focus on smaller, low-cost sensors for mobile payment. IDEX is able to serve both segments with its conventional silicon Cardinal sensor and the more advanced polymer Eagle sensor utilizing the off-chip technology.

Offering a wide range of sensor solutions Eagle touch sensor Eagle sensor targets Eagle is IDEX’s next generation touch fingerprint sensor, based on its ‘off-chip’ performance driven technology. The design enables IDEX to offer better performance and applications customized sensor shapes at lower cost. Eagle is polymer based and requires only ~25% of the silicon area required by traditional sensors, lowering cost by ~30% depending on size of the sensor. The sensor is based on IP acquired from PicoField Technologies in 2013. The two-part sensor opens for flexible adaption of both shape and size. In addition, the sensor offers technology to eliminate common mode noise, improve signal-to-noise ratio, and provide a large active sensing area with high image quality. The Eagle sensor has been developed in cooperation with Cypress Semiconductor, which also manufactures the ASIC. Cypress has also been promoting the sensor to its customers since late 2015, however this has so far not resulted in any announced design wins, and IDEX is in the process of ramping up its direct sales efforts.

Cardinal touch sensor Cardinal sensor targets The Cardinal sensor is a conventional silicon-based touch sensor (i.e. not based cost driven applications on the ‘off-chip’ technology) developed in partnership with CanvasBio (subsidiary of CrucialTec), similar to the solutions delivered by several other fingerprint companies. IDEX co-developed the Cardinal sensor to get a product to the market. IDEX sampled Cardinal sensors before the summer of 2014, which resulted in a design win from an Asian second-tier OEM, although later deferred. IDEX recently announced that the Cardinal sensor is launched on the LG Stylus 2Plus smartphone, making IDEX one of few vendors with a design win from a Tier-1 OEM.

IDEX fingerprint sensors

Source: IDEX, Pareto Securities Equity Research

Touch ‘in-glass’ sensor technology Proprietary ‘in-glass’ solution IDEX is developing touch ‘in-glass’ technology to enable direct integration of the fingerprint sensor into the display screens. Thus, IDEX will be able to offer a button-less solutions, in which the sensor array becomes an integral part of the mobile device’s cover glass. Contrary to other ‘under-the-glass’ solutions which requires sensing through the cover glass, IDEX’s IP and patents enables sensing in a range of materials. While IDEX’s ‘off-chip’ solution integrates the sensing into the glass itself, other ‘under-the-glass’ require thinner glass to deliver

14 Jun 2016 Pareto Securities Research 50(70) IDEX Initiating Coverage

satisfactory performance. Currently, mobile devices will not fulfil the physical requirements to smartphone OEMs with front glass thinner than 400 microns. As illustrated by the figure below, the glass serves as a barrier for sensors sensing through the front glass. IDEX has demonstrated its ‘in-glass’ sensing with 550-700 micron cover glass thickness, which is the actual thickness used for smartphone cover glasses.

Illustration of the ‘in-glass’ solutions vs. competing ‘under glass’ solutions

Source: IDEX, Pareto Securities Equity Research

Design-friendly solution demanded from smart phone OEMs Today, fingerprint sensors are typically integrated in a button on the front side of the mobile phones. This approach requires physical customization of the front glass. Smartphone OEMs are demanding solutions which do not put such restrictions on design flexibility, but instead can be hidden behind the cover glass. However, the thickness of the cover glass, 400-700 microns required for structural stability, negatively affects fingerprint image quality.

IDEX glass sensor in the non-active area of the phone

Source: IDEX, Pareto Securities Equity Research

14 Jun 2016 Pareto Securities Research 51(70) IDEX Initiating Coverage

Smart card partnership with global payment provider Flexible smart card solution suitable for mass production Showcased fully functioning After announcing to successfully have completed the development of a flexible fingerprint sensor integrated in polymer touch sensor designed for smart card applications, IDEX targets to start a payment card at Q1’16 initial volume shipments towards the end of 2016. The sensor is compliant with presentation ISO ID-1 form factor requirements, which entail cards to be both flexible and durable. The industry standard payment cards have a thickness of 0.76mm. IDEX is able to produce the required performance in terms of image sensing quality and low power consumption while utilizing a secure low-resource algorithm. For payment EMV (Europay, MasterCard and Visa) cards or ‘chip’ cards’, it is necessary to have an algorithm that is able to run from the EMV- chip, without compromising on security standards, something IDEX reportedly has accomplished. As a result of IDEX’s flexible polymer sensors, existing manufacturing processes can be utilized to mass produce cards.

IDEX’s flexible smart card solution

Source: IDEX, Pareto Securities Equity Research

Compliant with payment, smart card and ID card ecosystems IDEX has developed a mass As smart cards lack the processing power, power source and protection producible smart card solution provided by smartphones, it requires the fingerprint sensors to be different. Most importantly, the solution developed by IDEX can be efficiently industrialised and mass produced in high volumes. Sensors are currently being functionally tested under realistic use conditions. IDEX’s ability to separate the sensor surface from the ASIC enables the chip to be integrated into the existing EMV-chip in the card to reduce costs and complexity, while maintaining security.

IDEX set to commence pilot production and consumer trials in H2’16 IDEX will start a card product trial with its undisclosed global payments partner, expected to begin in late Q2’16, followed by further consumer pilots in H2’16. IDEX targets to start initial volume shipments at the end of 2016. In June 2015, the company announced that it had entered into a strategic partnership with a global payment provider for a worldwide biometric payment card program.

14 Jun 2016 Pareto Securities Research 52(70) IDEX Initiating Coverage

Complete product offering with swipe, touch and ‘off-chip’ IDEX has a complete product portfolio which includes solutions to cover the three large market segments: smart phones, smart cards and ‘Internet of Things’ (IoT)/gadgets.

IDEX product portfolio overview

Ciris: ‘off-chip’ swipe Cardinal: Touch sensor Eagle: Touch sensor Future in-glass sensor sensor

Status: Production Status: Production Status: Production Status: Under development Target: n.a Size: 5.6mm x 4.4mm Size: Customizable Size: Customizable Resolution: n.a Resolution: 508 dpi Resolution: Resolution: n.a. Applications: Applications: Applications: Applications:  Mobile  Mobile  Mobile  Mobile  Smart cards  Peripherals  Smart cards  Peripherals  Internet of Things  Security  Healthcare and banking  Embedded biometric  Healthcare systems  Wearables Features: Features: Features: Features:  High accuracy  First major design win  Polymer sensor  Integral part of cover  Flexible and thin in Q4’15  Reduced use of silicon glass  ISO smart card compliant  Low power  Separates sensor and consumption ASIC’  Ready for  In glass rather under modularisation glass Source: IDEX, Pareto Securitites Equity Research

14 Jun 2016 Pareto Securities Research 53(70) Biometrics Initiating Coverage

PROFIT & LOSS (fiscal year) (NOKm) 2013 2014 2015 2016e 2017e 2018e 2019e 2020e Revenues 3 2 0 109 639 1,245 2,241 2,689 EBITDA (64) (127) (220) (210) (39) 158 544 774 Depreciation & amortisation (1) (2) (7) (8) (8) (8) (8) (8) EBIT (65) (129) (226) (218) (47) 150 536 766 Net interest 0 5 3 3 2 3 4 7 Other financial items (0) 0 (5) 0 - - - - Profit before taxes (65) (123) (228) (215) (45) 153 540 773 Taxes - (1) (1) (0) (3) (38) (135) (193) Minority interest ------Net profit (65) (124) (229) (215) (48) 114 405 580 EPS reported (0.18) (0.28) (0.44) (0.39) (0.09) 0.21 0.73 1.04 EPS adjusted (0.17) (0.28) (0.43) (0.39) (0.09) 0.21 0.73 1.04 DPS ------

BALANCE SHEET (NOKm) 2013 2014 2015 2016e 2017e 2018e 2019e 2020e Tangible non current assets 1 6 7 8 15 21 28 35 Other non-current assets 24 52 49 42 35 28 22 15 Other current assets 5 14 9 40 80 105 110 80 Cash & equivalents 46 228 764 492 482 574 1,015 1,743 Total assets 76 299 828 582 612 729 1,175 1,873 Total equity 50 243 750 538 584 699 1,104 1,684 Interest-bearing non-current debt ------Interest-bearing current debt ------Other Debt 26 56 79 44 28 30 71 189 Total liabilites & equity 76 299 828 582 612 729 1,175 1,873

CASH FLOW (NOKm) 2013 2014 2015 2016e 2017e 2018e 2019e 2020e Cash earnings (56) (114) (213) (205) (40) 122 413 588 Change in working capital 18 9 20 (65) (58) (61) (100) (45) Cash flow from investments (24) (29) (1) (1) (6) (5) (4) (1) Cash flow from financing 88 315 724 1 94 - - - Net cash flow 26 181 531 (270) (10) 56 309 542

CAPITALIZATION & VALUATION (NOKm) 2013 2014 2015 2016e 2017e 2018e 2019e 2020e Share price (NOK end) 6.1 2.77 10.6 8.1 8.1 8.1 8.1 8.1 Number of shares end period 370 440 553 555 555 555 555 555 Net interest bearing debt (46) (228) (764) (492) (482) (574) (1,015) (1,743) Enterprise value 2,228 991 5,073 3,985 3,995 3,903 3,462 2,734 EV/Sales - - - 36.4 6.3 3.1 1.5 1.0 EV/EBITDA - - - - - 24.7 6.4 3.5 EV/EBIT - - - - - 26.0 6.5 3.6 P/E reported - - - - - 39.1 11.0 7.7 P/E adjusted - - - - - 39.1 11.0 7.7 P/B 45.6 5.0 7.8 8.3 7.7 6.4 4.1 2.7

FINANCIAL ANALYSIS & CREDIT METRICS 2013 2014 2015 2016e 2017e 2018e 2019e 2020e ROE adjusted (%) - - - - - 17.8 45.0 41.6 Dividend yield (%) ------EBITDA margin (%) - - - - - 12.7 24.3 28.8 EBIT margin (%) - - - - - 12.0 23.9 28.5 NIBD/EBITDA 0.73 1.80 3.48 2.34 12.28 (3.63) (1.86) (2.25) EBITDA/Net interest - 23.17 78.16 - 17.14 - - -

14 Jun 2016 Pareto Securities Research 54(70) Biometrics Initiating Coverage

PROFIT & LOSS (fiscal year) (NOKm) 1Q'15 2Q'15 3Q'15 4Q'15 1Q'16 2Q'16e 3Q'16e 4Q'16e Revenues 0 0 0 0 4 12 31 62 EBITDA (47) (48) (51) (73) (53) (58) (54) (45) Depreciation & amortisation (2) (2) (2) (2) (2) (2) (2) (2) EBIT (49) (50) (53) (75) (55) (60) (56) (47) Net interest 1 1 1 0 0 1 1 1 Other financial items (1) (1) (2) (1) 0 - - - Profit before taxes (50) (49) (54) (75) (54) (59) (55) (47) Taxes (0) (0) (0) (0) (0) - - - Minority interest ------Net profit (50) (50) (54) (75) (55) (59) (55) (47) EPS reported (0.11) (0.11) (0.11) (0.14) (0.10) (0.11) (0.10) (0.08) EPS adjusted (0.11) (0.10) (0.11) (0.13) (0.10) (0.11) (0.10) (0.08) DPS ------

BALANCE SHEET (NOKm) 1Q'15 2Q'15 3Q'15 4Q'15 1Q'16 2Q'16e 3Q'16e 4Q'16e Tangible non current assets 6 6 7 7 6 6 7 8 Other non-current assets 51 51 50 49 47 46 44 42 Other current assets 13 15 16 9 15 16 25 40 Cash & equivalents 181 431 382 764 683 630 590 492 Total assets 251 503 454 828 751 698 666 582 Total equity 203 434 401 750 699 640 585 538 Interest-bearing non-current debt ------Interest-bearing current debt ------Other Debt 49 69 54 79 52 58 82 44 Total liabilites & equity 251 503 454 828 751 698 666 582

CASH FLOW (NOKm) 1Q'15 2Q'15 3Q'15 4Q'15 1Q'16 2Q'16e 3Q'16e 4Q'16e Cash earnings (45) (46) (50) (72) (50) (57) (53) (45) Change in working capital (10) 17 (20) 33 (32) 5 15 (53) Cash flow from investments (0) (0) (0) 0 0 (0) (0) (0) Cash flow from financing 7 278 19 420 1 - - - Net cash flow (49) 249 (51) 381 (81) (52) (39) (98)

CAPITALIZATION & VALUATION (NOKm) 1Q'15 2Q'15 3Q'15 4Q'15 1Q'16 2Q'16e 3Q'16e 4Q'16e Share price (NOK end) 6.5 6.9 6.8 10.6 9.0 8.1 8.1 8.1 Number of shares end period 443 494 497 553 555 555 555 555 Net interest bearing debt (181) (431) (382) (764) (683) (630) (590) (492) Enterprise value 3,437 3,397 3,380 5,073 4,305 3,847 3,887 3,985 EV/Sales 2343.0 2273.9 2412.6 14535.4 1115.0 236.3 82.1 36.4 EV/EBITDA (23.9) (20.3) (17.8) (23.1) (19.1) (16.4) (16.4) (19.0) EV/EBIT (23.3) (19.8) (17.3) (22.4) (18.5) (15.9) (15.8) (18.3) P/E reported (20.3) (18.4) (16.0) (22.4) (19.7) (17.6) (18.0) (20.8) P/E adjusted (20.5) (18.6) (16.3) (23.6) (20.6) (18.4) (18.7) (20.7) P/B 14.3 7.9 8.4 7.8 7.1 7.0 7.7 8.3

FINANCIAL ANALYSIS & CREDIT METRICS 1Q'15 2Q'15 3Q'15 4Q'15 1Q'16 2Q'16e 3Q'16e 4Q'16e Dividend yield (%) ------EBITDA margin (%) ------EBIT margin (%) ------NIBD/EBITDA 1.67 1.65 1.61 2.00 2.51 2.62 2.81 2.85 EBITDA/Net interest 26.28 35.37 52.63 75.35 - - - -

14 Jun 2016 Pareto Securities Research 55(70) NEXT Biometrics Initiating Coverage 14 June 2016

Upside from smart cards

We initiate coverage of NEXT with a Buy recommendation and a target price of NOK 200. The share offers an attractive exposure to the emerging smartcards market, likely to be the next vertical of fingerprint sensing, in our view. Its proprietary and patented technology, facilitating a fully ISO- compliant card solution, should enable the company to provide a cost- Target price (NOK) 200 effective sensor solution, making it a relevant provider to smartcard Share price (NOK) 127 manufacturers.

Proprietary and patented solution to secure entry to smartcard

With its low-temperature polycrystalline silicon sensor, NEXT’s solution is able to offer a large-sized sensor at lower cost. Supported by the Madrid study, sensor usability increases with size, making its sensors most competitive where a large sensor is required. This applies to concepts where there are no “plan b” such as on a 4-key password on a smartphone, and where the dimension of security is at least equally important as mere convenience.

Ticker NEXT.OL, NEXT NO Reaching profitability in 2018e Sector Biometrics Taking deliveries of coating machines and attaining an organization for Shares fully diluted (m) 14.8 large-scale production over the coming 12 months, we believe NEXT to be Market cap (NOKm) 1,873 able to realize volumes to become EBIT positive in 2018e. Largely driven by Net debt (NOKm) -68 broader smartcard adoption, and a new ASIC enabling price points Minority interests (NOKm) 0 applicable for payment cards to a larger part of the world, we see revenues Enterprise value 16e (NOKm) 1,831 and EBIT reaching NOK 1.6bn and NOK 0.5bn in 2020e, respectively. Free float (%) 50

Commercialization to trigger re-pricing – BUY, TP NOK 200 Performance

Securing the design win to Dell for 1.2m sensors has in our view confirmed NOK NEXT’s relevance in the sensor market, and while follow-up orders and 180 potential new orders could serve as triggers in the short-term, we believe that the longer-term largest potential is within smartcards. Post the recent 148 placement establishing a robust financial position for at least 1 year of 116 operations, we find the company well positioned to approach commercialization over the coming 12 months, which we believe should 84 trigger a re-pricing of the share. 52

20 NOKm 2016e 2017e 2018e 2019e 2020e Jun-15 Aug-15 Nov-15 Jan-16 Mar-16 May-16 Revenues 104 232 496 1,137 1,562 NEXT OSEBX (Rebased) EBITDA (153) (77) 30 266 454 EBIT (157) (81) 26 262 450 Source: Factset EPS (10.48) (5.09) 1.28 12.86 22.14 EPS adj (10.48) (5.09) 1.28 12.86 22.14 DPS - - - - -

EV/EBITDA - - - 6.9 3.5 EV/EBIT - - - 7.0 3.5 P/E adj - - - 9.9 5.7 Analysts P/B 9.32 8.95 8.21 4.48 2.52 Fredrik Steinslien +47 24 13 21 54, [email protected] ROE (%) - - 8.6 58.7 56.2 Espen Klette Div yield (%) - - - - - +47 24 13 39 35, [email protected] Net debt (68) (42) (40) (153) (429)

Source: Pareto

Please refer to important disclosures on the last 5 pages of this document NEXT Biometrics Initiating Coverage

Investment case

BUY, TP NOK 200 – 57% We initiate coverage of NEXT with a Buy recommendation and a target price of upside NOK 200, representing 57% upside at present. Providing a cost-efficient and viable product for fingerprint sensing in smart cards, we consider NEXT an attractive bet on this emerging fingerprint sensor vertical.

Positioned for the next wave of fingerprint sensor applications NEXT is positioned for an In our view, NEXT is well positioned for an increasingly growing market for emerging smart card fingerprint sensors in smart card applications. Near-term, we believe fingerprint opportunity sensors mainly will be implemented in high ASP applications such as access cards, premium payment cards as well as ID cards for governmental use in emerging markets. Similar to what has been observed in the smartphone market, we believe that smart card volumes will increase substantially from 2017-2020e. In addition, as volume shipments lower costs, adoption will increase in low ASP applications, such as standard payment cards. This is supported by an increasing market for e-documents as well as for EMV contactless payment cards (NFC). In our view, NEXT’s sensors have the potential to become a cost leader for security focused applications requiring large-sized sensors. For industry-wide adoption of fingerprint sensors in standard payment and credit cards in the developed world, we believe that the value proposition needs to become more attractive. Thus, NEXT will need to further lower costs by scaling volumes to mass production, as well as completing development of its more cost-efficient ASIC. Hence, we believe NEXT’s technology is well-suited to deliver large volumes to security focused applications at an attractive price point.

Scalable proprietary thermal based technology The ‘Active Thermal principle’ In our view, NEXT’s ‘Active Thermal’ principle has an inherent cost advantage as allows for low-cost production it can be mass produced at standard low-temperature polysilicon (LTPS) in standard LTPS factories production facilities. The simplicity of the design allows for production of NEXT’s sensors in the same production lines as high-end displays used in smartphones, tablets and PCs. Polysilicon components has significantly lower cost per area than sensors made from standard silicon processes.

Dell key-reference deal support further design wins Milestone deal with Dell In April 2016, NEXT had sales of NOK 8.5m mainly from shipments of sensors to serves as a key reference Dell, compared to sales of NOK 5.2m in Q1’16 and NOK 4.6m in 2015. Volume shipments to Dell are as such ramping-up with NEXT’s sensors included in several notebook models. However, the importance of the Dell deal is mainly as a reference and ‘stamp-of-approval’ from a tier-1 OEM as the economics of the deal itself is not profitable. Hence, losses have been increasing as the volume has been picking up the last month. As such, further growth into other security focused applications will be accretive to gross margin.

Passed several milestones, set for further commercialisation Several important milestones In 2015-16, NEXT Biometrics passed several important milestones to move passed in 2015-16, financed to closer to commercialization of its technology. NEXT has secured funding by 2017 raising a total of NOK ~285m in gross proceeds in two private placements. In December 2015, NEXT’s shares were transferred to Oslo Stock Exchange’s main list. In addition, the prior royalty agreement with the inventor was settled through a one-time payment. Going forward, we believe NEXT should be well- positioned for early high-ASP applications within smart cards, and as the market for smart cards matures, the company should be able to lift shipment volume from 2017-20e significantly. The first smart card deal has already been signed, and when NEXT finish its cost reduction program for its ASIC, its new flexible fingerprint sensor design should secure the company further design wins.

14 Jun 2016 Pareto Securities Research 57(70) NEXT Biometrics Initiating Coverage

Financials and estimates

Estimated shipments of ~76m sensors in 2020e While NEXT Biometrics until recently had very limited sensor shipments and revenues, the company started to ship in volumes to Dell in Q4’15. Production increased further through Q1’16 with revenues increased to NOK 5.3m. We believe volumes will continue to ramp-up through 2016, as Dell has implemented NEXT’s sensors in 9 notebooks and tablets as well as the company start deliveries to other applications. We estimate an ASP of USD ~4/sensor for 2016e, declining to USD 2.5/sensor in 2020e. As NEXT offers sensors at typical size of 12x17mm, compared to an iPhone (Touch ID) fingerprint sensor of ~7x7mm and other sensors at ~8x8mm, NEXT should be able to become a preferred supplier for applications requiring larger sensors, in our view. By delivering larger sensors NEXT should also be able to realize a somewhat higher ASP as silicon based sensors are less competitive at such sizes. For NEXT, the forecasted decline in ASP is thus more a result of scaling production and to facilitate entry into more price-sensitive markets.

Increasing gross margin to ~35% by 2020e NEXT does not disclose its gross margins as of now, as the low volumes do not reflect a steady-state margin according to the company. However, we understand that sensors shipped to Dell are delivered at a discount. Hence, shipments to other applications and customers will be accretive for NEXT’s gross margin. We estimate a gross margin of 8% in 2016, increasing to 35% in 2020e as sensors are shipped in large volumes.

Shipments and ASP 2013-20e – NEXT Revenues and gross margin 2013-20e - NEXT

Sensors (m) 6.0 ASP (USD) NOKm Gross margin (%) 80 6 2,000 36% 40% 34%

5 1,600 29% 60 4.0 30% 3.5 4 3.0 1,200 2.8 2.5 40 3 17% 20% 800 1,562 76 2 1,137 20 10% 50 400 1 3% 20 496 0 0 0 3 8 0 7 5 104 232 0 0 0 0% 2013 2014 2015 2016e 2017e 2018e 2019e 2020e 2013 2014 2015 2016e 2017e 2018e 2019e 2020e Source: Pareto Securities Equity Research

Mass production should lift 2020e EBIT to NOK 450m We forecast that NEXT will turn EBIT break-even in 2018e, further increasing EBIT to NOK 450m in 2020e. Thus, we estimate that NEXT will achieve an EBIT margin of 29% on revenues of NOK 1.6bn in 2020e.

14 Jun 2016 Pareto Securities Research 58(70) NEXT Biometrics Initiating Coverage

EBIT 2013-20e - NEXT

EBIT adj. (NOKm) 500

400

300 450 200 262 100 26 0 -38 -80 -109 -81 -100 -156

-200 2013 2014 2015 2016e 2017e 2018e 2019e 2020e

Source: Company data, Pareto Securities Equity Research

We assume equity raise of NOK 100m at NOK 130/share in 2017e NEXT’s technology is scalable for mass production, with no material bottlenecks than coating machine capacity at INNOLUX and packaging at module houses, and we believe the on-going cost reduction program for its ASIC design should contribute to lift gross margins. Thus, we assume that NEXT will have to invest in coating capacity and its ASIC projects to get to ~76m shipments in 2020e. As such, we assume that NEXT will have to raise another NOK 100m in H2’17e to fund investments in capacity and continue its sensor development. From 2017e, we forecast that NEXT will have a positive operating cash flow.

Net cash position and operating cash flow (OCF) 2013-20e - NEXT

NOKm 500 400 280 300 429 200 118 100 129 130 42 153 70 68 1 0 40 -100 -30 -74 -110 -200 -112 -220 -300 2013 2014 2015 2016e 2017e 2018e 2019e 2020e Net cash OCF

Source: Company data, Pareto Securities Equity Research

14 Jun 2016 Pareto Securities Research 59(70) NEXT Biometrics Initiating Coverage

Sensors with a cost advantage

NEXT Biometrics’ sensors are NEXT Biometrics’ proprietary technology known as the ‘Active Thermal ~70% cheaper than same sized Principle’, patented and owned by NEXT, is based on transfer of heat from competing technologies sensors into the finger ridges and valleys. As the simplicity of the ‘Active Thermal Principle’ allows for mass production at standard high quality display factories, costs of production are significantly lower than competing technologies produced at silicon foundries. According to NEXT, its production cost is ~70% lower than equal sized silicon area sensors. Hence, the company does not need to reduce the size of its sensors to stay price-competitive. Through a third-party study initiated by NEXT but conducted at the University of Madrid, it was proved that fingerprint sensor accuracy is directly linked to the size of the sensors. NEXT’s value proposition is to offer an affordable sensor which is large enough to deliver the reliability needed for applications with no alternative access method. While smartphones primarily offer fingerprint login as a matter of convenience, smart cards, key fobs, ‘IoT’ applications and gadgets typically rely solely on the security of the fingerprint sensor’s ability to not falsely accept unauthorized persons (false acceptance rate) and neither wrongfully reject authorized persons (false rejection rate).

NEXT’s Active Thermal principle

Source: NEXT

Scaling deliveries to Dell and targeting mass-production in 2017 Signature deal with Dell In November 2014, NEXT Biometrics signed a deal with an at the time announced in October 2015 undisclosed Tier 1 customer within ‘notebooks and/or tablets and/or smartphones’. At 27 October 2015, NEXT disclosed that its customer was Dell, which was launching with NEXT sensors in multiple products in Q4’15. During preparations, 15,000 sensors were delivered and NEXT passed all tests necessary to qualify as a supplier for Dell. Dell conducted a thorough due diligence process including technical and organisational qualification of NEXT’s organization.

During Q1’16, NEXT focused on scaling production volumes to Dell further after delivering initial volumes in Q4’15. Currently, NEXT expects that volumes in 2016 will exceed the previous estimate of minimum 1.2m units as NEXT’s sensors are now integrated in 9 different Dell notebooks and tablets. Sensors for the Dell models are mainly fully sized 12x17mm sensors, and started shipping in volumes in April 2016.

14 Jun 2016 Pareto Securities Research 60(70) NEXT Biometrics Initiating Coverage

NEXT Biometrics’ sensor integrated in a Dell notebook

Source: Company data, Pareto Securities Equity Research

Madrid reports concludes that size is dominant factor for performance The Madrid study suggests The key findings in the Madrid report were that the ‘Active Thermal Principle’ that size is closely tied to performs in line with more expensive capacitive sensors of similar size. sensor performance for According to the results in the study, sensor size proved to be the dominant applications requiring a high factor for determining sensor performance, and at acceptable false acceptance level of security rates (under 1%) reducing size significantly increased false rejection rates (rejection of genuine users).

A larger sized sensor captures more features which increase performance

Source: Company data, Pareto Securities Equity Research

Flexible sensors compliant with ISO smart card standards Received first volume order for smart cards First volume order for smart NEXT has emphasized its competitive advantages within fingerprint sensors for cards in April 2016 smart cards, as the requirements and competition have made the smartphone segment less of a priority at present. In April 2016 NEXT signed its first smart card deal with an undisclosed customer. Volumes are expected to increase to 650,000 sensors in H1’17, while shipments of the first rigid sensors are scheduled to start in Q3’16. The initial order was for 100k-300k sensors and had a value of USD 1.5m, which indicates an ASP of USD ~5-15 per sensor. However, the exact quantities have not been disclosed but the company highlights that the deal has potential for further extension. The customer has completed a prototype card using existing rigid sensor and ASIC.

Fully ISO compliant smart card solution NEXT has the only fingerprint According to NEXT, the company is the first fingerprint sensor supplier to fulfil sensor compliant with all the recently published ISO/IEC 17839 standard and as such comply with all ISO smart card ISO requirements smart card requirements. IDEX has also developed a flexible sensor in accordance with ISO ID-1 card requirements. The ‘Active Thermal’ principle is well-suited to produce flexible sensors.

14 Jun 2016 Pareto Securities Research 61(70) NEXT Biometrics Initiating Coverage

NEXT’s fully flexible and scalable fingerprint sensor

Source: Company data, Pareto Securities Equity Research

In security focused applications that NEXT targets, size become of larger importance as there is no backup authentication solution. Smart cards, USB tokens and key fobs are examples of such market with no backup solution.

According to NEXT, the following are the minimum requirements for security focused markets:  False acceptance rate (FAR) of 1/10 00 to 1/100 000 (Apple Pay use 1/50 000)  False Rejection Rate (FRR) < 1%  Sufficient durability  Working in all conditions (i.e. inside, outside, dry, humid) and for ~98% of any population

Production processes scalable for large volumes Each sensor sheet consists of 840 sensors (1) which are coated and cut into individual sensors. Each individual sensor consists of 45,000 small cells. The simplicity of these sensors is what enables production at display factories and thus lowers costs compared to producing at silicon factories. NEXT’s sensors are produced at INNOLUX Corporation. NEXT coats most its sensors at INNOLUX’s facilities using the company’s own coating machine (2). Coating applies a hard and durable protective layer to the sensor sheets. An ASIC is an integrated circuit (IC) specifically made and mandatory for every sensor unit. The ASIC’s task is to digitalize the analogue signals from the sensor and forward the signals to third party controllers or microprocessor, i.e. computers and mobile processors.

NEXT’s ASIC (3) is custom designed for its sensor and production process. NEXT use X-FAB and TSMC to produce its ASICs, and are readily available to scale production. Currently, NEXT is conducting a program to further reduce production costs. The ASIC project has completed its design phase, and is in tape-out for the first test production. The company targets high volume shipment in Q1’17, but, if the silicon proves satisfactory in tape-outs in H2’16, it could be ready by YE2016.

NEXT’s products are normally delivered in modules consisting of the sensor, ASIC as well as some other components (4). Module makers handle the assembly of the sensor and ASIC, with components, on a PCB or FPC. Modules are delivered in formats as requested by application level and can to some extent be customized for high volume customers.

14 Jun 2016 Pareto Securities Research 62(70) NEXT Biometrics Initiating Coverage

Production process for NEXT sensors

i.

Source: Company data, Pareto Securities Equity Research

IP protected by trade secrets and patents Limited high quality LTPS As NEXT’s sensors are manufactured at high quality LTPS factories, which all are factories reduce unauthorized owned by major Japanese, Korean and Taiwanese display manufacturers, the manufacturing probability of patent infringement or unauthorized manufacturing is reduced due to the limited availability of manufacturer sources. In addition, the company has trade secrets covering sensor design, ASIC design, sensor coating and module systems.

The inventor, Ngoc Minh Dinh, transferred two key patents relating to the ‘Active Thermal’ principle to the company in 2005 and 2008. All other patents are held by the company, except certain patents held by CEO Tore Etholm- Idsoe, however these patents are not considered to be of key importance. As of late 2015, NEXT had been granted patents in eight patent families and the trademark ‘NEXT Active Thermal™ Sensing Principle. At the time, the company had two patent applications and one trademark application pending. The key patents protecting the company’s core technology are: the ‘Active Thermal Principle’ (expired in April 2016), ‘Resistor Pixel’ (expiring 2025) and ‘Didde- Resistor’ pixel patent family (expiring 2026).

14 Jun 2016 Pareto Securities Research 63(70) Biometrics Initiating Coverage

PROFIT & LOSS (fiscal year) (NOKm) 2013 2014 2015 2016e 2017e 2018e 2019e 2020e Revenues 0 7 5 104 232 496 1,137 1,562 EBITDA (37) (82) (120) (153) (77) 30 266 454 Depreciation & amortisation (1) (1) (2) (4) (4) (4) (4) (4) EBIT (38) (83) (122) (157) (81) 26 262 450 Net interest (1) 3 5 1 0 0 1 3 Other financial items (0) 0 (5) - - - - - Profit before taxes (39) (80) (122) (157) (80) 26 263 453 Taxes - - - - - (6) (61) (104) Minority interest ------Net profit (39) (80) (122) (157) (80) 20 203 349 EPS reported (4.77) (7.09) (9.80) (10.48) (5.09) 1.28 12.86 22.14 EPS adjusted (4.75) (7.10) (9.06) (10.48) (5.09) 1.28 12.86 22.14 DPS ------

BALANCE SHEET (NOKm) 2013 2014 2015 2016e 2017e 2018e 2019e 2020e Tangible non current assets 0 2 19 45 93 93 93 93 Other non-current assets 8 7 7 7 7 7 7 7 Other current assets 2 40 37 103 101 124 213 285 Cash & equivalents 70 129 130 68 42 40 153 429 Total assets 80 179 193 224 244 264 466 815 Total equity 63 162 173 204 223 244 446 795 Interest-bearing non-current debt ------Interest-bearing current debt ------Other Debt 17 17 20 20 20 20 20 20 Total liabilites & equity 80 179 193 224 243 263 466 815

CASH FLOW (NOKm) 2013 2014 2015 2016e 2017e 2018e 2019e 2020e Cash earnings (33) (75) (116) (154) (76) 24 207 353 Change in working capital 3 (37) 6 (66) 3 (23) (89) (72) Cash flow from investments (0) (2) (18) (31) (52) (4) (4) (4) Cash flow from financing 100 174 129 186 100 - - - Net cash flow 69 60 1 (64) (26) (3) 114 276

CAPITALIZATION & VALUATION (NOKm) 2013 2014 2015 2016e 2017e 2018e 2019e 2020e Share price (NOK end) 75.0 49.5 108.0 127.0 127.0 127.0 127.0 127.0 Number of shares end period 9 11 13 15 16 16 16 16 Net interest bearing debt (70) (129) (130) (68) (42) (40) (153) (429) Enterprise value 589 431 1,325 1,831 1,958 1,961 1,847 1,571 EV/Sales - - - 17.5 8.5 4.0 1.6 1.0 EV/EBITDA ------6.9 3.5 EV/EBIT ------7.0 3.5 P/E reported ------9.9 5.7 P/E adjusted ------9.9 5.7 P/B 10.4 3.5 8.4 9.3 9.0 8.2 4.5 2.5

FINANCIAL ANALYSIS & CREDIT METRICS 2013 2014 2015 2016e 2017e 2018e 2019e 2020e ROE adjusted (%) - - - - - 8.6 58.7 56.2 Dividend yield (%) ------EBITDA margin (%) - - - - - 6.0 23.4 29.1 EBIT margin (%) - - - - - 5.2 23.1 28.8 NIBD/EBITDA 1.88 1.58 1.09 0.45 0.55 (1.33) (0.57) (0.95) EBITDA/Net interest - 30.74 22.77 - - - - -

14 Jun 2016 Pareto Securities Research 64(70) Biometrics Initiating Coverage

PROFIT & LOSS (fiscal year) (NOKm) 1Q'15 2Q'15 3Q'15 4Q'15 1Q'16 2Q'16e 3Q'16e 4Q'16e Revenues 2 0 0 2 5 26 33 40 EBITDA (22) (24) (30) (45) (48) (39) (33) (33) Depreciation & amortisation (0) (0) (1) (1) (1) (1) (1) (1) EBIT (22) (24) (30) (45) (49) (40) (34) (34) Net interest 3 3 (1) 0 (0) 0 0 0 Other financial items (0) (3) 1 (3) - - - - Profit before taxes (20) (25) (30) (48) (49) (40) (33) (34) Taxes ------Minority interest ------Net profit (20) (25) (30) (48) (49) (40) (33) (34) EPS reported (1.73) (2.17) (2.64) (3.84) (3.66) (2.82) (2.23) (2.26) EPS adjusted (1.73) (1.87) (2.74) (3.27) (3.66) (2.82) (2.23) (2.26) DPS ------

BALANCE SHEET (NOKm) 1Q'15 2Q'15 3Q'15 4Q'15 1Q'16 2Q'16e 3Q'16e 4Q'16e Tangible non current assets 3 19 19 19 17 17 21 45 Other non-current assets 7 7 7 7 7 7 7 7 Other current assets 48 33 35 37 44 70 86 103 Cash & equivalents 99 76 45 130 77 197 143 68 Total assets 157 135 106 193 145 291 258 224 Total equity 142 119 90 173 125 271 237 204 Interest-bearing non-current debt ------Interest-bearing current debt ------Other Debt 15 16 16 20 20 20 20 20 Total liabilites & equity 157 135 106 193 145 291 257 224

CASH FLOW (NOKm) 1Q'15 2Q'15 3Q'15 4Q'15 1Q'16 2Q'16e 3Q'16e 4Q'16e Cash earnings (19) (23) (28) (46) (49) (39) (32) (33) Change in working capital (10) 16 (2) 2 (7) (26) (16) (17) Cash flow from investments (1) (16) (1) (1) (0) (1) (5) (25) Cash flow from financing - - - 129 0 186 - - Net cash flow (30) (23) (31) 85 (56) 120 (53) (75)

CAPITALIZATION & VALUATION (NOKm) 1Q'15 2Q'15 3Q'15 4Q'15 1Q'16 2Q'16e 3Q'16e 4Q'16e Share price (NOK end) 48.8 41.5 48.0 108.0 105.5 127.0 127.0 127.0 Number of shares end period 11 11 11 13 14 15 15 15 Net interest bearing debt (99) (76) (45) (130) (77) (197) (143) (68) Enterprise value 559 483 601 1,325 1,501 1,702 1,756 1,831 EV/Sales 61.6 55.7 83.0 289.8 203.1 50.7 26.4 17.5 EV/EBITDA (6.3) (5.1) (5.4) (11.0) (10.3) (10.5) (10.6) (11.9) EV/EBIT (6.2) (5.0) (5.4) (10.9) (10.1) (10.3) (10.4) (11.6) P/E reported (6.3) (5.1) (5.1) (10.4) (8.6) (9.8) (10.1) (11.6) P/E adjusted (6.3) (5.3) (5.2) (11.2) (9.1) (10.2) (10.6) (11.6) P/B 3.9 4.0 6.0 8.4 11.4 7.0 8.0 9.3

FINANCIAL ANALYSIS & CREDIT METRICS 1Q'15 2Q'15 3Q'15 4Q'15 1Q'16 2Q'16e 3Q'16e 4Q'16e Dividend yield (%) ------EBITDA margin (%) ------EBIT margin (%) ------NIBD/EBITDA 1.63 1.22 0.79 0.73 0.56 0.69 0.83 0.79 EBITDA/Net interest 16.88 11.82 15.35 22.77 70.25 - - -

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Appendix A

Disclosure requirements pursuant to the Norwegian Securities Trading Regulations section 3-10 (2) and section 3-11 (1), letters a-b

Pareto Securities AS does not alone or - together with affiliated companies or persons – owns a portion of the shares exceeding 5 % of the total share capital in any company where a recommendation has been produced or distributed by Pareto Securities AS.

Pareto Securities AS or its affiliates own as determined in accordance with Section 13(d) of the Exchange Act, 1 % or more of the equity securities of Equinox Offshore Accommodation Ltd

Pareto Securities AS may hold financial instruments in companies where a recommendation has been produced or distributed by P areto Securities AS in connection with rendering investment services, including Market Making.

Please find below an overview of material interests in shares held by employees in Pareto Securities AS, in companies where a recommendation has been produced or distributed by Pareto Securities AS. "By material interest" means holdings exceeding a value of NOK 50 000.

C o mp any Analyst holdings Total holdings C o mp any Analyst holdings Total holdings

AF Gruppen - 1,675 Odfjell Drilling - 81,242 AINM T - 39,500 Opera Software - 2,000

AKVA Group - 1,000 Orkla - 20,659 American Shipping Company - 2,500 Pareto Bank - 1,385,480

Austevoll Seafood - 14,850 Pareto Eiendomsinvest Nordic - 190,234 Avance Gas Holding Ltd. - 2,117 Pareto Growth Invest - 9,000

Axactor - 505,800 Petroleum Geo-Services - 23,184

B2Holding - 350,790 Prosafe - 20,810 Bonheur - 60,287 Protector Forsikring - 504,000

BW LPG Ltd. - 2,169 Questerre Energy - 110,275 DNB - 36,884 REC Silicon - 438,087

DNO International - 107,607 SalM ar - 300

DOF - 193,500 Sandnes Sparebank - 15,001

Farstad Shipping - 16,700 Scatec Solar - 7,865 Fred Olsen Energy - 21,200 Seadrill - 9,500

Frontline - 4,803 Selvaag Bolig - 50,000 Gjensidige Forsikring - 7,751 Solstad Offshore - 10,000

Golden Ocean Group - 10,314 Sparebank 1 Nord-Norge - 115,251 Havfisk - 6,000 Sparebank 1 SM N - 35,690

Helgeland Sparebank - 2,000 Sparebank 1 SR-Bank - 45,957 Hexagon - 6,000 Sparebanken M øre - 9,264

Höegh LNG - 1,368 Sparebanken Sør - 38,190 Jæren Sparebank - 1,000 Sparebanken Vest - 48,326

Komplett Bank - 56,350 Statoil - 9,219

Kongsberg Gruppen - 3,700 Stolt-Nielsen - 2,635

Lerøy Seafood Group - 12,940 Storebrand - 4,677

M arine Harvest Group - 800 Subsea 7 - 12,406

M onobank - 3,713,000 Tanker Investments - 6,881

Nordic Semiconductor - 4,700 Telenor - 1,349 Norsk Hydro - 101,708 TGS-NOPEC - 2,050

Norske Skogindustrier - 30,040 Vardia Insurance Group - 462,638 Norwegian Air Shuttle - 5,869 XXL - 6,222

Norwegian Finans Holding - 2,720 Yara International - 9,891 Norwegian Property - 150,000 Zenterio - 188,168

Ocean Yield - 27,568

This overview is updat ed mont hly (last updat ed 31.05.2016)

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Appendix B

Disclosure requirements pursuant to the Norwegian Securities Trading ST Regulation § 3-11, letters d-f, ref the Securities Trading Act Section 3-10

Overview over issuers of financial instruments where Pareto Securities AS have prepared or distributed investment recommendation, where Pareto Securities AS have been lead manager/co-lead manager or have rendered publicly known not immaterial investment banking services over the previous 12 months:

Advanzia Bank Golar LNG Philly Tankers

AINMT Goodt ech Pioneer Marine Aker ASA Harkand Finance Prosaf e

Arendal Havnegården Protector Forsikring Atlantic Offshore Hexicon Sandnes Sparebank

Atlantic Petroleum Höegh LNG Scana Industrier Axis Of f shore KNOT Of f shore Sea Trucks Group

BI7 Kont or Kolon Wat er & Energy Seaf arms Group Blue Ocean Drilling Komplett Bank Selvaag Bolig

Boa Kongsberg Gruppen Septem Offshore BoDo Constructor Liberty Bulkers Sevan Marine

Deep Drilling Magseis Solør Bioenergi Denison Mines Marine Harvest Group Sparebanken Sør

Det Norske Oljeselskap Monobank Sterling Resources DigiPlex Navigazione Montanari Technip

DNO International Nordisk Company TiZir EnergyOptimal Nort h Energy TRD Campus

Exmar Ocean Rig UDW Inc. Tryg Faroe Petroleum OSA Goliat h TTS Group

Fornebu Gat eway Oslo Helsebygg Vardia Insurance Group Front line PA Resources West ern Bulk

Genel Energy Pareto Bank West f al Larsen & Co Gener8 Maritime Paret o Eiendomsf elleskap II World Wide Supply

General Exploration Partners ParJack Ya Bank

This overview is updated monthly (this overview is for the period 30.04.2015 – 30.04.2016).

Appendix C Disclosure requirements pursuant to the Norwegian Securities Trading ST Regulation § 3-11 (4)

Distribution of recommendations

Recommendation % distribution

Buy 52% Hold 37%

Sell 11%

Distribution of recommendations (transactions*)

Recommendation % distribution

Buy 61%

Hold 33%

Sell 6%

* Companies under coverage with which Pareto Securities Group has on-going or completed public investment banking services in the previous 12 months This overview is updated monthly (last updated 30.04.2016).

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Appendix D

This section applies to research reports prepared by Pareto Securities AB.

Disclosure of positions in financial instruments The beneficial holding of the Pareto Group is 1 % or more of the total share capital of the following companies included in P areto Securities AB’s research coverage universe: Rusforest

The Pareto Group has material holdings of other financial instruments than shares issued by the following companies included in Pareto Securities AB’s research coverage universe: None

Disclosure of assignments and mandates Overview over issuers of financial instruments where Pareto Securities AB has prepared or distributed investment recommendation, where Pareto Securities AB has been lead manager or co -lead manager or has rendered publicly known not immaterial investment banking services over the previous twelve months:

Lehto Group NGEx Resources M agnolia Bostad SciBase Holding

Nobina AB Stillfront Group

Members of the Pareto Group provide market making or other liquidity providing services to the following companies included in Pareto Securities AB’s research coverage universe:

Africa Oil Kallebäck Property Invest OrganoClick Tethys Oil

Byggmästare Anders J Ahlström Lundin Gold Rusforest Tribona Cavotec M agnolia Bostad Saltängen Property Invest Trigon Agri

DDM Holding NAXS SciBase Holding Delarka Holding Nexstim ShaM aran Petroleum

Episurf NGEx Resources Stillfront Group Members of the Pareto Group have entered into agreements concerning the inclusion of the company in question in Pareto Securities AB’s research coverage universe with the following companies: None This overview is updated monthly (last updated 15.05.2016).

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