05 January 2016 Asia Pacific/China Equity Research Semiconductor Devices

China Smartphones Sector Research Analyst SECTOR FORECAST Randy Abrams, CFA 886 2 2715 6366 [email protected] 2016 mobile outlook: Growth slowdown Jerry Su 886 2 2715 6361 narrowing opportunities [email protected] Pauline Chen Figure 1: Lowering smartphone estimates – mid-single digit growth in 2016-17 886 2 2715 6323 2012 2013 2014 2015E 2016E 2017E [email protected] New Estimate 725,476 1,019,432 1,303,395 1,438,029 1,503,503 1,559,379 Thompson Wu YoY 47% 41% 28% 10% 5% 4% 886 2 2715 6386 Old Estimate 725,476 1,019,432 1,303,395 1,458,290 1,603,311 1,731,966 [email protected] YoY 47% 41% 28% 12% 10% 8% Derrick Yang Revision (%) 0.0% 0.0% 0.0% -1.4% -6.2% -10.0% 886 2 2715 6367 Source: Credit Suisse estimates [email protected] Haas Liu ■ 2016 smartphone deceleration continues. Our global hardware team, in its 886 2 2715 6365 annual wireless preview on 4 January, lowered its 2016/17 smartphone unit [email protected] forecasts by 6%/10% from 1,603mn/1,731mn to 1,503mn/1,559mn as China and EM mature and slow toward developed market rates. Smartphone units in 2016 are projected up 5% YoY with revenue down 2% YoY. Tablets have also slowed, down 12% YoY in 2015 and bottom's up points to -5% in 2016. ■ IoT offsets some of the slowdown. IoT is offsetting some of the decline in mobile, with IoT silicon projected to witness a 29% CAGR to US$44 bn by 2020, adding a couple points to annual chip industry growth. The Chinese brands and chipset vendors are adopting mobile processors for new applications (drones, home automation, GoPros, VR, wearables, robots). ■ Slowing mobile creates some risks. We stay cautious on the overall space having downgraded some of the Apple supply chain in early November and Mediatek/Panels in early 2015. We stay conservative on Mediatek as competition from QCOM/Spreadtrum and captive solutions pressures margins, Ibiden in view of the InFo-related risk and optimistic guidance for module substrates, Pegatron on iPhone share gain story peaking out and rising concerns over 2016 iPhone units, and Radiant on pricing/share competition. ■ Some opportunities still in Foundry, RF and display ICs. Despite a softer mobile outlook, we see opportunity in TSMC and upgraded the stock in December to OUTPERFORM on a more benign competition, broadening 16nm business with share gains, cyclical rebound and improving margins, RF foundries (Win Semi, VPEC) where content gains continue, driver IC chain as the inventory correction ends (Novatek, Chipbond, Vanguard) and initiate coverage on Egis (covered by Jerry Su) with an OUTPERFORM rating due to increased Android adoption of fingerprint.

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05 January 2016 Focus tables and charts Figure 2: Summary of Credit Suisse's smartphones estimates (in millions, unless otherwise stated) CS Global Model 2010 2011 2012 2013 2014 2015 2016 2017 15-17 CAGR 11-15 CAGR Smartphone subscribers 481 760 1,191 1,836 2,593 3,328 3,969 4,510 16.4% 44.6% % penetration 9.3% 13.2% 19.3% 28.1% 37.6% 46.1% 52.7% 57.4% 52.1% 28.9% Net additions 147 280 430 645 757 735 641 542 Replacements 157 215 295 374 547 703 862 1,018 20.3% 34.5% Replacement rate 2.1 2.2 2.6 3.2 3.4 3.7 3.9 3.9 Smartphone units 305 494 725 1,019 1,303 1,438 1,504 1,559 4.1% 30.6% YoY 75.8% 62.3% 46.7% 40.5% 27.9% 10.3% 4.6% 3.7% ASPs $363 $361 $329 $283 $249 $231 $216 $201 -6.7% -10.6% YoY 1.2% -0.6% -8.9% -14.0% -12.1% -7.2% -6.3% -7.1% Revenue $110.6 $178.4 $238.6 $288.4 $324.2 $332.1 $325.3 $313.5 -2.8% 16.8% Smartphone Revenue YoY 33.7% 20.9% 12.4% 2.4% -2.0% -3.6% Source: Credit Suisse estimates

Figure 3: Stabilising replacements needed to drive growth Figure 4: China subscriber penetration rates rising Subscriber base (mn) 3G + 4G penetration % Smartphone Replacement Years 900 80% $1,950 3.90 3.65 3.40 3.15 2.90 800 70% 700 60% 5.1% 1,559 1,626 1,704 1,794 1,900 600 50% 500 40% 6.5% 1,698 1,768 1,848 1,940 2,049 400 300 30% 7.5% 1,799 1,870 1,952 2,046 2,157 200 20% 100 10% 8.5% 1,901 1,973 2,056 2,152 2,265 0 0% 9.5% 2,002 2,075 2,160 2,258 2,372 Jul-10 Jul-11 Jul-13 Jul-14 Jul-15 Jul-12 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 10.5% 2,103 2,178 2,264 2,364 2,480 May-10 May-11 May-12 May-13 May-14 May-15

Penetration Pace Mobile subscribers Unicom subscribers Telecom subscribers 11.5% 2,204 2,280 2,368 2,469 2,588 Mobile penetration Unicom penetration Telecom penetration Source: Gartner Source: Credit Suisse estimates

Figure 5: Internet of Things Silicon remains a new driver Figure 6: 2015 Chinese chipsets shift over to LTE Sales (US$) YoY (%) 2016 to China brands EDGE WCDMA TD-SCDMA CDMA 2000 LTE $45,000 45% Mediatek 22.1 143.2 15.1 - 262.0 $40,000 40% Spreadtrum 35.0 128.4 16.6 - 35.0 $35,000 35% Leadcore - 2.2 3.3 - 16.5 $30,000 30% Hi-Silicon - 5.4 - 48.6 $25,000 25% Asian suppliers 57.1 279.2 35.0 0.0 362.1 $20,000 20% % of shipments 10% 51% 6% 0% 66% $15,000 15% $10,000 10% Share 100% 94% 100% 0% 68% $5,000 5% Qualcomm - 9.3 - 10.0 165.0 $0 0% Intel - 7.5 - - 7.5 Intel 0.0 16.8 0.0 10.0 172.5

2013 2014 Overseas suppliers 0% 8% 0% 5% 79% 2015E 2016E 2017E 2018E 2019E 2020E ASSP / FPGA Microcontroller Sensors Bluetooth % of shipments 0% 6% 0% 100% 32% Cellular Wi-Fi ZigBee Other Wireless Share 57.1 296.0 35.0 10.0 534.6 Wireline YoY Growth % of Chipsets 7% 39% 5% 1% 70% Source: Gartner Source: Company data, Credit Suisse estimates

Figure 7: Non-Apple fingerprint to reach 57% by 2018E Figure 8: Higher RF content for LTE models mn units Non-Apple smartphone fingerprint shipments Penetration (RHS) 18 900 60% 16 57% 800 14 50% 12 700 47% 10 600 40% US$ 8 500 30% 30% 6 400 4 300 20% 16% 2 200 10% 0 100 6% 2G 3G Typical LTE Global LTE - 0% Filters Switches Powr amplifiers Others 2014 2015E 2016E 2017E 2018E

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

China Smartphones Sector 2 05 January 2016 2016 mobile outlook: Growth slowdown narrowing opportunities In coordination with our global hardware team, we publish our annual smartphone and tablet outlook and reduce industry unit estimates as global replacement rates slow and penetration in emerging markets further matures. We also provide implications for the Asian supply chain. Revising smartphones lower Our global hardware team, in its annual wireless preview on 4 January, revised down its 2016/17 smartphone units 2016/17 smartphone unit forecasts by 6%/10% from 1,603mn/1,731mn to 1,503mn/1.559mn revised down by 6%/10% to (+5%/4% YoY) as China and emerging market smartphone demand slows and replacement 1,503mn/1,559mn (+5/+4% rates stretch on with more modest hardware innovations. Relative to developed markets at a YoY growth) 2% CAGR between 2015 and 2017, China will stay flat and developed markets will maintain 9% growth. The global tablet market was also weaker in 2015, declining 12% YoY to 243mn though we estimate the decline to moderate to 5% to 231mn units in 2016. IoT remains an incremental extension to help offset slowing mobile growth Industry projections remain upbeat on silicon into the Internet of Things, a broad growth IoT is a supplemental adder driver connecting all objects to the Internet and communicating with and controlling other that can offset some of the devices. Gartner projects silicon for IoT to maintain a robust 29% CAGR over 2013-20 impact of slowing mobile growth from US$7.2 bn to US$43.5 bn. The China manufacturers are aggressively expanding into these new product categories for new growth, developing connected appliances in the home (smart plugs, LED bulbs, home entertainment and speakers, temperature and humidity sensors, security systems and Ethernet gateways) and also tailoring Mediatek's IoT and mobile processors for new applications (drones, robots, VR, GoPros, wearables). Sector positioning: Foundry, RF and display ICs over processors and panels Within the smartphone space, we are conservative on the overall opportunity and see risk Cautious on the overall on components, having downgraded some of the Apple supply chain names in early opportunity but still see some November, Mediatek early last year along with the Taiwan panel sector. We still would selective opportunities position in Foundry, having recently upgraded TSMC, where market share trends are benign and margins benefiting from cyclical rebound in utilisation and currency, RF where content gains are increasing (prefer Win Semi and Visual Photonics) and in display/peripheral ICs (Driver ICs and Fingerprint IC) benefiting from more content. We are more cautious on components and mobile processors facing lower units and competition. Stay selective positioning in the Asian supply chain We are more cautious on the overall smartphone opportunity but would invest in Prefer foundry (TSMC, Win companies where content or market share gains are coming through and margins are Semi, VPEC), content gains protective through innovation or competitive advantage. We recently upgraded TSMC as (Egis, Catcher); risk in we believe the business outlook is improving, 16nm customer base is broadening, and mobile processors and competitive landscape is more benign, supporting margins. We also like the RF suppliers some components Win Semi and Visual Photonics seeing content upgrades. We also launch coverage on Egis with an OUTPERFORM rating on rising fingerprint penetration in Android smartphones. In components, we would have relative preference for unit/content share gainers including Catcher/Casetek, Alps/Murata, Sony, and Hon Hai on upgrades from a 4" iPhone, better iPad Pro sales, and from data center. We will revisit Largan/AAC, after expectations are reset in 1Q16. Top names to avoid are Ibiden in view of the InFo-related risk and optimistic guidance for module substrates, Pegatron on iPhone share gain story peaking out and rising concerns over 2016 iPhone units, and Radiant on pricing/share competition and vulnerable earnings if display technology shifts to AMOLED.

China Smartphones Sector 3 05 January 2016 Valuation summary Figure 9: CS Asia semiconductor valuation summary (in millions, unless otherwise stated) Market Cap Price Target Inv'ment Target P/E P/B ROE US$mn 5-Jan Local Curcy Rating upside 2015 2016 2015 2016 2015 2016 Asian semiconductor coverage Foundry TSMC 108,238 138.0 163.0 OPFM 18.1% 12.5 11.3 2.9 2.6 25.5% 24.5% UMC 4,448 11.8 13.5 NTRL 14.9% 12.6 13.1 0.7 0.6 5.2% 5.0% SMIC 4,270 0.77 0.97 OPFM 26.0% 15.4 20.2 1.2 1.1 8.3% 5.7% Vanguard Semi 2,094 41.9 50.0 OPFM 19.3% 17.1 16.1 2.5 2.5 14.8% 15.7% Hua Hong Semi 964 7.22 11.00 OPFM 52.4% 9.3 11.3 0.6 0.6 7.0% 5.4% Total 120,014 12.6 11.6 2.7 2.4 22.4% 21.7% Packaging & testing Powertech 1,511 65.0 78.0 NTRL 20.0% 12.6 10.8 1.5 1.4 12.1% 13.3% Amkor 1,433 6.0 5.5 OPFM -8.9% 19.3 13.3 1.2 1.1 6.4% 8.6% Total 11,405 14.5 12.1 1.5 1.4 10.7% 12.2% IC design MediaTek Inc. 11,466 242.5 250.0 NTRL 3.1% 13.7 15.4 1.5 1.5 11.1% 9.8% Realtek Semiconductor 1,191 78.0 73.5 NTRL -5.8% 16.4 14.9 2.0 1.9 11.4% 12.9% WPG Holdings Ltd 1,538 30.7 40.0 NTRL 30.3% 9.2 7.7 1.1 1.0 12.3% 14.0% Total 14,195 13.2 13.9 1.8 1.5 11.3% 10.5% Semiconductor equipment ASM Pacific 3,047 58.6 75.0 OPFM 28.1% 23.9 21.3 3.0 2.9 12.7% 13.7% Hermes 2,565 1,200.0 1,400.0 OPFM 16.7% 35.1 25.7 6.6 5.7 19.6% 23.8% Total 5,612 28.9 23.1 3.8 3.6 13.5% 16.0% China smartphone supply chain top picks Driver IC EgisTec 278 134.0 220.0 OPFM 64.2% n.m 22.8 6.9 5.3 -4.1% 25.7% Chipbond 906 46.2 60.0 OPFM 30.0% 13.4 10.1 1.4 1.3 9.9% 13.1% Novatek 2,310 125.5 140.0 OPFM 11.6% 12.2 11.8 3.4 3.2 24.8% 28.2% Total 3,494 13.7 11.7 2.4 2.2 17.0% 20.5% RF Semiconductor Win Semiconductor 933 51.9 62.0 OPFM 19.5% 11.4 10.3 1.8 1.7 16.5% 17.0% VPEC 358 48.0 49.0 OPFM 2.1% 19.9 18.1 3.3 3.3 16.7% 18.1% Total 1,291 15.8 14.2 2.9 2.7 16.5% 17.2% Components Hon Hai 36,893 79.1 108.0 OPFM 36.5% 8.5 8.1 1.2 1.1 14.8% 14.3% Catcher 6,175 265.0 430.0 OPFM 62.3% 8.4 8.7 1.9 1.6 23.9% 20.3% Casetek 1,403 136.5 196.0 OPFM 43.6% 9.1 8.6 1.7 1.5 18.1% 18.6% Alps 5,149 3,135.0 5,200.0 OPFM 65.9% 17.7 10.6 3.2 2.5 21.9% 28.1% Murata 29,962 16,890.0 22,000.0 OPFM 30.3% 21.3 16.3 3.2 2.9 16.1% 18.5% Sony 30,769 2,962.5 4,200.0 OPFM 41.8% n.m 19.4 1.5 1.5 -5.5% 8.3% Total 110,352 18.7 11.7 1.5 1.4 8.4% 12.4% Handset brands TCL 911 5.7 9.0 OPFM 57.3% 5.7 4.9 1.6 1.2 29.5% 28.6% Lenovo 10,539 7.4 11.0 OPFM 49.7% 12.3 n.m 2.5 3.2 23.4% -10.0% Total 11,450 10.1 19.7 2.5 2.3 26.4% 12.0% Source: Company data, Credit Suisse estimates

Figure 10: TSMC valuation below mid-cycle Figure 11: Mediatek trading in line with its average

NT$ Mediatek Taiwan GAAP PE Band (NT$) 3.5x 180 690 160 3.0x 610 140 2.5x 530 120 2.0x 450 100 20x 370 80 290 16x 60 210 40 10x 130 5x Jan Jan Jan Jan Jan Jan Jan May May May May May May 20 Sep Sep Sep Sep Sep Sep Sep 50 ------03 05 07 09 13 15 11 03 05 07 09 11 13 15 04 06 08 10 12 14 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

China Smartphones Sector 4 05 January 2016 Revising smartphones lower In our annual smartphone outlook, our global hardware team revised down its smartphone Revising down our global unit estimates as China and emerging market smartphone demand slows. We reduce our smartphone forecasts to estimates for 2016/2017 by 6%/10% from 1,603mn/1,731mn to 1,503mn/1,559mn, +5%/+4% for 2016/17 reflecting industry unit growth of +5%/4%, down from prior +10%/+8%.

Figure 12: Revising down our smartphone estimates from 2015-2017 (in millions, unless otherwise stated) 2010 2011 2012 2013 2014 2015E 2016E 2017E New Estimate 304,681 494,447 725,476 1,019,432 1,303,395 1,438,029 1,503,503 1,559,379 YoY 62% 47% 41% 28% 10% 5% 4% Old Estimate 304,681 494,447 725,476 1,019,432 1,303,395 1,458,290 1,603,311 1,731,966 YoY 62% 47% 41% 28% 12% 10% 8% Increase (%) 0.0% 0.0% 0.0% 0.0% 0.0% -1.4% -6.2% -10.0% Source: Company data, Credit Suisse estimates Alongside lower smartphones, total industry handset shipments including feature phones flattened to 0% in 2015 and may continue to witness negligible growth. The industry is facing a revenue decline as ASPs are coming down about 3% YoY from 2015-2017 with the mix shift to emerging markets. The total handset industry in 2015 is projected to flat YoY at US$338 bn and smartphone industry up 2% YoY to US$330bn in 2015.

Figure 13: Summary of Credit Suisse's handset and smartphone estimates (in millions, unless otherwise stated) Handset summary 2010 2011 2012 2013 2014 2015 2016 2017 CAGR 15-17 Global subscriptions 5,175 5,780 6,155 6,545 6,890 7,215 7,538 7,861 4% Global handset shipments 1,595 1,715 1,738 1,847 1,963 1,966 1,966 1,967 0% YoY 19% 8% 1% 6% 6% 0% 0% 0% Handset ASPs $138 $151 $166 $174 $173 $172 $168 $161 -3% YoY 0% 9% 10% 5% 0% 0% -3% -4% Handset revenue $220,473 $258,905 $288,934 $321,207 $339,727 $338,516 $330,127 $316,993 -3% YoY 19% 17% 12% 11% 6% 0% -2% -4% Smartphone summary 2010 2011 2012 2013 2014 2015 2016 2017 CAGR 15-17 Global smartphone subscribers 481 760 1,191 1,836 2,593 3,328 3,969 4,510 16% % of mobile subscribers 9% 13% 19% 28% 38% 46% 53% 57% New adds 147 280 430 645 757 735 641 542 -14% Replacements 157 215 295 374 547 703 862 1,018 20% Smartphone units 305 494 725 1,019 1,303 1,438 1,504 1,559 4% YoY 76% 62% 47% 41% 28% 10% 5% 4% Smartphone ASPs $363 $361 $329 $283 $249 $231 $216 $201 -7% YoY 1% -1% -9% -14% -12% -7% -6% -7% Smartphone revenue $110,596 $178,393 $238,557 $288,439 $324,174 $332,086 $325,333 $313,466 -3% YoY 78% 61% 34% 21% 12% 2% -2% -4% Source: Company data, Credit Suisse estimates Lower smartphone estimates are coming through from deceleration in new subscribers where over half of subscribers will own a smartphone in 2016 but already increasing penetration by 800 bp per year and slowing replacement rates which have decelerated steadily from 2 years to 3.5 years. We estimate smartphone demand in China only grew +4% YoY in 2015 and could decline 1%/2% in 2016/2017 on already high penetration and slowing replacements. Emerging market demand however is still holding up due to lower penetration rates of smartphones and unit is growing at a faster 8-10%. Our bottom's up model on Asian chipsets into the China brands is still up 8-9% in 2016-2017 factoring in some share gains in China brands and the higher growth from exports.

China Smartphones Sector 5 05 January 2016

Figure 14: China smartphone brands and chipsets growth slowing down (in millions, unless otherwise stated) 2013 2014 2015E 2016E 2017E Top 8 traditional tier-one vendors 641 713 732 731 747 YoY Growth 21% 11% 3% 0% 2% Chinese smartphone vendors 379 590 706 773 812 YoY Growth 92% 56% 20% 9% 5% Smartphone vendors 1,019 1,303 1,438 1,504 1,559 YoY Growth 41% 28% 10% 5% 4% Mediatek units 223 356 387 442 500 Spreadtrum units 121 160 200 215 225 Leadcore units 12 16 19 22 25 Hi-Silicon units 3 15 47 54 60 Foreign vendors into Chinese brands 137 218 208 199 207 Asian chipsets into China phones 496 766 861 933 1,016 YoY Growth 99% 55% 12% 8% 9% Discount / overlap factor 10% 10% 10% 10% 10% Asian shipments after discount 446 689 775 840 915 Less Brands using Asian chipsets 67 99 69 67 103 Total based on chipset shipments 1,019 1,303 1,438 1,504 1,559 CS Smartphone Estimates 1,019 1,303 1,438 1,504 1,559 YoY Growth 41% 28% 10% 5% 4% Source: Company data, Credit Suisse estimates The lower unit forecasts are also consistent with a slowdown in unit growth for the Asian chipset suppliers. Though they are still gaining smartphone market share, the slowdown in feature phone units and weaker-than-expected smartphone demand led to only 3% unit growth in 2015 and is backing our estimates for +4% YoY growth in Asian chipsets including feature phones for both 2016 and 2017.

Figure 15: Asian chipset vendors' growth share now more moderate (in millions, unless otherwise stated) 2010 2011 2012 2013 2014E 2015E 2016E 2017E Mediatek units 500 540 502 577 656 644 684 704 MStar units 10 49 76 0 0 0 0 0 Spreadtrum units 89 199 269 361 400 450 475 500 RDA units 1 10 96 138 65 25 0 0 Leadcore units 3 5 12 16 19 22 25 Hi-Silicon units 0 0 3 15 47 54 60 Asian baseband shipments 601 801 947 1,091 1,153 1,185 1,235 1,289 YoY Growth 59% 33% 18% 15% 6% 3% 4% 4% % of industry 38% 47% 54% 59% 59% 60% 63% 66% CS Handset Estimates 1,595 1,715 1,738 1,847 1,963 1,966 1,966 1,967 YoY Growth 17% 8% 1% 6% 6% 0% 0% 0% CS Prior Estimates 1,652 1,852 1,919 1,941 1,990 2,056 2,119 2,166 YoY Growth 20% 12% 4% 1% 2% 3% 3% 2% Source: Company data, Credit Suisse estimates Growth rates subject to different assumptions on replacement rates While our baseline smartphone industry model projects a sharp slowdown to low single- digit revenue growth, higher penetration rates of smartphones in emerging markets outside China and from a reacceleration in global replacement rates would provide upside to our industry model. We would note that global smartphone units are disappointing now due to a deceleration in the replacement rate, stretching out steadily from just over two years in 2010 to 3.7 years in 2015. The mix shift to emerging markets, less innovation in high-end smartphones

China Smartphones Sector 6 05 January 2016 and purchase of refurbished models is slowing new smartphone sales. New subscriber penetration is also still a swing factor, with our global model now assuming new additions slowing from ~750mn in 2014-2015 to 641mn in 2016 and 542mn in 2017 from a higher base though could add 100-200mn units to the global estimate if emerging market 3G/4G subscriber growth remains healthy.

Figure 16: Mobile growth could stay higher with faster penetration/replacement cycles CS Global Model 2010 2011 2012 2013 2014 2015 2016 2017 15-17 CAGR Mobile subscribers 5,175 5,780 6,155 6,545 6,890 7,215 7,538 7,861 4.4% Smartphone subscribers 481 760 1,191 1,836 2,593 3,328 3,969 4,510 16.4% % penetration 9.3% 13.2% 19.3% 28.1% 37.6% 46.1% 52.7% 57.4% 52.1% Net additions 147 280 430 645 757 735 641 542 Replacements 157 215 295 374 547 703 862 1,018 20.3% Replacement rate 2.1 2.2 2.6 3.2 3.4 3.7 3.9 3.9 Smartphone units 305 494 725 1,019 1,303 1,438 1,504 1,559 4.1% YoY 75.8% 62.3% 46.7% 40.5% 27.9% 10.3% 4.6% 3.7% ASPs $363 $361 $329 $283 $249 $231 $216 $201 -6.7% YoY 1.2% -0.6% -8.9% -14.0% -12.1% -7.2% -6.3% -7.1% Revenue $110.6 $178.4 $238.6 $288.4 $324.2 $332.1 $325.3 $313.5 -2.8% Smartphone Revenue YoY 33.7% 20.9% 12.4% 2.4% -2.0% -3.6%

Upside Penetration 2010 2011 2012 2013 2014 2015 2016 2017 15-17 CAGR Mobile subscribers 5,175 5,780 6,155 6,545 6,890 7,215 7,538 7,861 4.4% Smartphone subscribers 481 760 1,191 1,836 2,593 3,328 4,117 4,962 22.1% % penetration 9.3% 13.2% 19.3% 28.1% 37.6% 46.1% 54.6% 63.1% 54.6% Net additions 147 280 430 645 757 735 790 845 Replacements 157 215 295 374 547 703 979 1,211 31.3% Replacement rate 2.1 2.2 2.6 3.2 3.4 3.7 3.4 3.4 Smartphone units 305 494 725 1,019 1,303 1,438 1,768 2,056 19.6% YoY 46.7% 40.5% 27.9% 10.3% 23.0% 16.2% ASPs $363 $361 $329 $283 $249 $231 $216 $201 -6.7% YoY 2.1% 2.1% -8.9% -14.0% -12.1% -7.2% -6.3% -7.1% Revenue $110.6 $178.4 $238.6 $288.4 $324.2 $332.0 $382.7 $413.3 11.6% YoY 33.7% 20.9% 12.4% 2.4% 15.3% 8.0% Source: Company data, Credit Suisse estimates We would note an upside scenario where penetration remains stable at the current 8.5% Stable penetration and per year rate and replacement rate remains stable at 3.4 years. This would raise the replacement rates would be smartphone 2015-17E shipments CAGR from 4.1% to 19.6% and increase the unit upside and lift unit growth to forecast from 1.56bn to 2.06bn, a substantial change in the industry profile and placing teen rates the next couple significant importance on innovation needed in smartphone functionality to drive upgrades. years

Figure 17: Smartphone unit CAGR at 19.6% if replacement Figure 18: Smartphone units could reach 1.95bn in 2017 and penetration maintain at current levels versus the baseline forecast of 1.56bn units Smartphone Replacement Years Smartphone Replacement Years $0 3.90 3.65 3.40 3.15 2.90 $1,950 3.90 3.65 3.40 3.15 2.90 5.1% 4.1% 6.4% 8.9% 11.7% 15.0% 5.1% 1,559 1,626 1,704 1,794 1,900 6.5% 8.7% 10.9% 13.4% 16.2% 19.4% 6.5% 1,698 1,768 1,848 1,940 2,049 7.5% 11.9% 14.1% 16.5% 19.3% 22.5% 7.5% 1,799 1,870 1,952 2,046 2,157 8.5% 15.0% 17.1% 19.6% 22.3% 25.5% 8.5% 1,901 1,973 2,056 2,152 2,265 9.5% 18.0% 20.1% 22.6% 25.3% 28.5% 9.5% 2,002 2,075 2,160 2,258 2,372 10.5% 20.9% 23.1% 25.5% 28.2% 31.3% 10.5% 2,103 2,178 2,264 2,364 2,480 Penetration Pace Penetration Pace 11.5% 23.8% 25.9% 28.3% 31.1% 34.2% 11.5% 2,204 2,280 2,368 2,469 2,588 Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

China Smartphones Sector 7 05 January 2016

China growth slows, emerging markets still growing The smartphone growth the past few years is now decelerating as China stalls and Emerging markets now emerging markets reach higher levels of penetration. Emerging markets approached 75% stabilising at 76% of global of industry shipments in 2015 but are now staying near that level as growth slows down units closer to the global average.

Figure 19: Emerging markets to approach 76% of the global smartphone market Emerging market smartphones (mn) % of industry 1,600 100% 1,400 90% 80% 1,200 70% 1,000 60% 800 50% 600 40% 30% 400 20% 200 10% 0 0% 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015E 2016E 2017E China Rest of Asia Pacific Latin America CEMA % of global market

Source: Gartner, Credit Suisse estimates Relative to developed markets at a 2% CAGR between 2015 and 2017, China will decline Forecasting a flat outlook for 1% YoY through 2017 to 425mn units although other emerging markets will still maintain a China and high single-digit 9% CAGR, owing to still rising penetration in India, the Middle East, Brazil and Africa. growth for other emerging Emerging markets that are key targets for Chinese brands exporting handsets should still markets grow faster, from 638mn in 2015 to 698mn in 2016, and 756mn by 2017.

Figure 20: Emerging markets continue to outpace developed markets and China 2010 2011 2012 2013E 2014E 2015E 2016E 2017E 15-17 CAGR China 36.1 90.6 214.2 350.6 419.8 435.9 432.2 424.5 -1% YoY 151% 136% 64% 20% 4% -1% -2% Rest of Asia Pacific 47.1 78.8 98.9 149.0 224.8 263.4 295.1 324.9 11% Latin America 18.7 32.0 53.5 97.8 135.6 142.5 153.3 162.3 7% CEMA 36.4 55.3 72.2 105.0 171.3 232.5 249.8 268.2 7% Other Emerging 102.2 166.0 224.6 351.8 531.7 638.4 698.2 755.5 9% YoY 62% 35% 57% 51% 20% 9% 8% Developed 166.3 237.9 286.7 317.1 351.9 363.7 373.1 379.5 2% YoY 43% 21% 11% 11% 3% 3% 2% Total industry 304.7 494.4 725.5 1,019.4 1,303.4 1,438.0 1,503.5 1,559.4 4% YoY 62% 47% 41% 28% 10% 5% 4% Source: Company data, Credit Suisse estimates China smartphone and tablet units now single digits The China-built smartphone market has seen a substantial deceleration this year as China itself shifts from penetration demand to replacement demand and emerging markets see some slowdown from a higher base. China-built smartphones based on baseband shipments are slowing to +7% to 771mn in 2015 and +8% in 2016 to 832mn sharply down from +55% growth in 2014 and even higher in the prior years.

China Smartphones Sector 8 05 January 2016

Figure 21: China smartphone and tablet projections—2011-2017E China built devices 2011 2012 2013 2014 2015E 2016E 2017E 15-17 CAGR Smartphones (mn units) 87.9 237.2 466.1 723.1 771.4 832.4 901.2 5% YoY growth 170% 96% 55% 7% 8% 8% Tablets (mn units) 12.0 50.0 100.0 120.0 105.0 95.0 90.0 -5% YoY growth 317% 100% 20% -13% -10% -5% Smartphone and tablets (mn) 99.9 287.2 566.1 843.1 876.4 927.4 991.2 4% YoY growth 188% 97% 49% 4% 6% 7% Source: Company data, Credit Suisse estimates China subscriber penetration of 3G and 4G is now much higher and leaves less room for growth from new smartphone subscribers. Following last year's surge in 4G additions for China Mobile, its 3G+4G penetration is now at 53% of its 820mn subscriber base, closely approaching 58% at China Unicom and 70% at China Telecom. The market LTE shipments have also now stabilised the past six months already at 90% of shipments, leaving less room now for 3G to 4G conversion of units in China.

Figure 22: China Mobile's 3G+4G approaching the others Figure 23: LTE smartphones now most of China's units Subscriber base (mn) 3G + 4G penetration % 100% 900 80% 90% 800 70% 80% 700 60% 70% 600 50% 500 60% 40% 400 50% 30% 300 40% 20% 200 30% 100 10% 20% 0 0% 10% Jan Jan Jan Jan Jul Jul Jul Jul Mar Mar Mar Mar Nov Nov Nov Nov Sep Sep Sep Sep 0% May May May May Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 May-10 May-11 May-12 May-13 May-14 May-15 ------12 13 14 15 ------12 13 14 15 13 14 12 15 12 13 14 15 12 13 14 15 Mobile subscribers Unicom subscribers Telecom subscribers 12 13 14 15 Mobile penetration Unicom penetration Telecom penetration 2G % 3G % LTE % Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates The China smartphone market is now more balanced between tier one suppliers, top China market still dominated Chinese brands and the smaller brands. Global brand share has remained stable at 20- by the top 20 local brands 25%, with Apple gaining from Samsung in 2015 but now seeing its gains flatten out.

Figure 24: China’s smartphone market to remain flattish through 2017E (in millions, unless otherwise stated) China Smartphone Market 2011 2012 2013 2014 2015E 2016E 2017E 15-17 CAGR Samsung 14.4 30.2 65.5 50.8 36.0 35.0 35.0 -1% Apple 7.7 19.4 23.1 34.3 53.0 60.0 65.0 11% Nokia/Microsoft 22.2 7.9 2.9 2.4 1.0 1.0 1.0 0% HTC 2.3 6.4 6.2 4.3 2.5 2.7 3.0 10% Motorola 4.7 4.3 0.8 0.3 0.0 0.0 0.0 NM Sony 3.0 2.3 1.5 2.2 0.8 1.0 1.0 12% BlackBerry 0.3 0.1 0.1 0.1 0.0 0.0 0.0 NM Traditional Tier One's 54.7 70.6 100.2 94.4 93.3 99.7 105.0 6% YoY Growth 29% 42% -6% -1% 7% 5% Share 60% 33% 29% 22% 21% 23% 25% Huawei 7.9 17.3 30.0 38.5 52.5 54.0 57.3 4% Xiaomi 0.4 7.2 18.1 55.0 65.3 76.5 80.8 11% Lenovo 1.7 21.5 40.5 35.6 36.0 33.8 36.0 0% ZTE 6.1 14.9 19.9 19.2 17.5 17.2 16.5 -3% Coolpad 3.4 15.5 30.8 35.6 36.7 41.0 45.0 11% Top 5 Chinese Brands 19.5 76.4 139.4 184.0 208.0 222.4 235.5 6% YoY Growth 292.5% 82.5% 32.0% 13.0% 6.9% 5.9% Share 21.5% 35.7% 39.7% 43.8% 47.7% 51.4% 55.5% Other brands/whitebox 16.4 67.2 111.1 141.5 134.6 110.2 83.9 -21% YoY Growth 310% 65% 27% -5% -18% -24% Share 18% 31% 32% 34% 31% 25% 20% China Smartphones 90.6 214.2 350.6 419.8 435.9 432.2 424.5 -1% YoY Growth 136% 64% 20% 4% -1% -2% Source: Company data, Credit Suisse estimates The top Chinese brands are still gaining some market share from whitebox, having grown 13% in 2015 vs. whitebox/smaller brands down 5%. We estimate the top brands to moderate to 7% growth in 2016 but whitebox units to decline 15-20% as units consolidate around larger players now also adopting more aggressive online strategies.

China Smartphones Sector 9 05 January 2016

Figure 25: Chinese brands leading the growth Figure 26: Whitebox is losing smartphone market share Units (000) Units (mn) /hina brand share (%) 140,000 250 100% 120,000 85% 100,000 200 80,000 70% 150 60,000 55% 40,000 100 40% 20,000 25% 0 50 10%

1Q04 3Q04 1Q05 3Q05 4Q06 2Q07 4Q07 2Q08 4Q08 2Q09 4Q09 2Q10 4Q10 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14 4Q14 2Q15 0 -5% 4Q15E Nokia Blackberry Motorola 2011 2012 2013 2014 2015E 2016E 2017E Apple Sony HTC Samsung LG Huawei/ZTE/Lenovo/Xiaomi Traditional Tier One's Top 5 Chinese Brands Others Other brands/whitebox Chinese brand share

Source: Gartner, Credit Suisse estimates Source: Company data, Credit Suisse estimates China brands growing 8-10% including exports While China smartphone brands growth is now slower in China, the export channel still has Emerging market some more penetration ahead. In China, smartphones are already 75% of device shipments smartphones at 66% of and reaching a more stable level, keeping the market flat around 432mn units in 2016. The shipments so still have export channel for China brands into other emerging markets, by contrast is still growing, some room for further with emerging market smartphones projected to increase from 62% to 66% of device conversion from feature shipments in 2016, driving a 9% increase in units to 698mn in export channels. The phones combined emerging market unit opportunity is growing 5% in 2016 and 4% in 2017.

Figure 27: Chinese penetration of devices faster than other emerging markets (in millions, unless otherwise stated) Penetration of devices 2011 2012 2013 2014 2015E 2016E 2017E 15-17 CAGR China handsets 457.7 510.5 548.2 563.8 583.9 569.5 559.1 -2% China smartphones 90.6 214.2 350.6 419.8 435.9 432.2 424.5 -1% % of devices 20% 42% 64% 74% 75% 76% 76% Emerging mkt handsets 896.8 955.8 959.5 986.1 1,025.8 1,065.7 1,099.3 4% Emerging mkt smartphones 166.0 224.6 351.8 531.7 638.4 698.2 755.5 9% % of devices 19% 23% 37% 54% 62% 66% 69% Global handsets 1,818.3 1,907.1 1,944.8 1,983.6 2,046.3 2,074.7 2,098.8 1% Global smartphones 494.4 725.5 1,019.4 1,303.4 1,438.0 1,503.5 1,559.4 4% % of devices 27% 38% 52% 66% 70% 72% 74% Source: Company data, Credit Suisse estimates We estimate the top China brands still have room for some share gains as they consolidate share from whitebox and gain in export channels. We estimate the brands up 8% again in 2016 and 2017, with Huawei, Xiaomi, TCL, Oppo, and Meizu outperforming.

Figure 28: China smartphone brands shipments—unit growth moderates China brand units (mn) 2011 2012 2013 2014 2015E 2016E 2017E 15-17 CAGR Huawei 15.6 27.2 52.0 77.0 105.0 120.0 133.2 13% Lenovo 3.7 23.7 45.5 59.4 72.0 75.0 80.0 5% Xiaomi 0.4 7.2 18.7 61.1 72.5 85.0 95.0 14% ZTE 10.5 26.8 40.0 48.0 50.0 52.0 55.0 5% TCL/Alcatel 0.3 6.5 17.5 39.6 40.8 45.5 50.0 11% Oppo 0.1 3.1 11.0 30.0 40.0 50.0 55.0 17% Coolpad 3.9 16.1 35.0 43.5 38.0 45.0 49.0 14% BBK/Vivo 0.0 2.5 11.2 30.0 36.0 40.0 44.0 11% Tecno - 1.0 2.0 4.0 8.0 15.0 20.0 58% Meizu 1.0 2.0 3.0 5.2 24.0 28.0 32.0 15% Gionee 0.0 6.8 11.4 16.0 12.0 13.0 15.0 12% Tianyu / K-Touch 0.4 7.4 13.3 11.2 5.0 4.0 2.0 -37% Hisense 0.3 3.4 8.3 11.7 7.0 7.5 8.0 7% G-Five 0.0 0.0 2.0 5.0 5.0 5.0 5.0 0% Bird 0.0 0.3 2.1 2.5 1.5 1.5 1.5 0% Others 51.5 103.3 193.1 278.9 254.6 245.9 256.5 0% China brand units (mn) 87.9 237.2 466.1 723.1 771.4 832.4 901.2 8% Growth (YoY) 170% 96% 55% 7% 8% 8% Source: Company data, Credit Suisse estimates

China Smartphones Sector 10 05 January 2016

Mediatek's customer base still is driven as well off the top Chinese brands and regional Mediatek's customer base brands in some export markets. We estimate 8% of its shipments to International brands in starting to see some global 2016, 37% to the top 6 Chinese brands and about 55% to the #7-20 mid-sized players brands, but still dominated (Oppo, Meizu, BBK, Micromax, etc.) and the whitebox suppliers. by the local brands

Figure 29: Mediatek's customer base still led by the Chinese customers 2011 2012 2013 2014 2015E 2016E 2017E 15-17 CAGR15 % of sal Sony 0.0 1.0 1.9 6.0 10.2 11.8 12.9 12% 2.6% LG 0.2 0.8 1.9 5.9 7.7 10.8 16.2 45% 2.0% HTC 0.0 0.0 0.0 2.1 5.3 8.0 9.6 34% 1.4% Samsung 0.0 0.0 0.0 0.0 0.0 0.0 0.0 NM 0.0% Others 0.2 0.4 0.7 0.2 1.5 4.9 6.3 105% 0.4% International brands 0.4 2.2 4.5 14.3 24.7 35.4 45.0 35% 6.4% YoY growth 447% 103% 219% 74% 43% 27% International brands 4% 2% 2% 4% 6% 8% 9% Lenovo 2.6 21.3 31.9 41.6 43.2 45.0 48.0 5% 11.2% Huawei 1.6 9.5 15.6 27.0 31.5 32.4 33.3 3% 8.1% TCL/Alcatel 0.0 2.3 8.8 27.7 24.5 29.6 33.0 16% 6.3% Xiaomi 0.0 0.0 2.8 15.3 18.1 25.5 28.5 25% 4.7% ZTE 1.1 8.0 16.0 21.6 17.5 18.2 19.3 5% 4.5% Coolpad 0.8 4.8 10.5 13.1 11.4 13.5 14.7 14% 2.9% Chinese Tier One 6.0 46.0 85.5 146.2 146.2 164.2 176.8 10% 37.8% YoY growth 663% 86% 71% 0% 12% 8% Chinese Tier One 60% 42% 38% 41% 38% 37% 35% BBK/Vivo 0.0 2.0 8.9 24.0 28.8 32.0 35.2 11% 7.4% Oppo 0.0 2.3 7.7 21.0 28.0 32.5 35.8 13% 7.2% Meizu 0.7 1.4 2.1 3.6 19.2 21.0 24.0 12% 5.0% Micromax 0.0 1.2 5.6 10.8 14.6 19.7 26.6 35% 3.8% Gionee 0.0 4.7 8.0 11.2 9.6 11.1 10.5 5% 2.5% Hisense 0.2 2.5 5.8 8.2 4.9 4.9 5.2 3% 1.3% Tecno 0.0 0.7 1.4 2.8 6.0 12.0 12.0 41% 1.6% Tianyu / K-Touch 0.3 5.6 9.3 7.8 4.0 3.4 1.4 -41% 1.0% Karbonn 0.0 0.5 3.3 3.3 4.4 6.0 8.1 35% 1.1% Spice 0.1 0.1 0.4 1.1 1.4 1.9 2.6 35% 0.4% Others 2.2 40.7 80.7 102.1 94.7 98.4 116.6 11% 24.5% Chinese Tier Two 3.6 61.6 133.2 195.9 215.7 242.9 277.9 14% 55.8% YoY growth 1612% 116% 47% 10% 13% 14% Chinese Tier Two 36% 56% 60% 55% 56% 55% 56% Total 10.0 109.8 223.2 356.4 386.6 442.5 499.6 Source: Company data, Credit Suisse estimates The smaller Chinese smartphone brands and exporters are also converting their subscriber base over to LTE, with factory price premium now dropping to US$10. An emergence of Spreadtrum and Intel SoFIA solutions and third generation of Mediatek's LTE chipsets could further drop the entry price as competition rises by Spring 2016. Factory price has dropped to sub-$50 for an entry level 4G smartphone, with solutions ranging up to US$100-250 for high-end fully featured Full HD 5.5" smartphones with 3- 4GB DRAM, 32GB NAND, 13-21MP camera and high-end Mediatek and Qualcomm processors.

Figure 30: Chinese smartphone vendors improving in quality and specifications with lower cost LTE products Company TOPWELL Blackview Maysunm BLUBOO Elephone LEAGOO Elephone Model name 4451 ETA M5088 X6 P9000 C Elite 1 Vowney

Image Technology TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE TDD-LTE/FDD-LTETDD-LTE/FDD-LTETDD-LTE/FDD-LTETDD-LTE/FDD-LTETDD-LTE/FDD-LTE Operating System Android 5.1 Android 5.0 Android 5.1 Android 4.4 Android 6.0 Android 6.0 Android 6.0 Pixels 480*854 1280*720 1366*768 960*540 1920*1080 1920*1080 2560*1440 RAM 1GB 1GB 2GB 1GB 2GB 3GB 4GB ROM 8GB 8GB 16GB 8GB 16GB 32GB 32GB Display 4.5" 5.0" 5.0" 5.5" 5.5'' 5.5'' LTPS 5.5'' Camera 5MP + 8MP 5MP + 8MP 5MP + 13MP 5MP + 13MP 5MP + 13MP 13MP + 16MP 5MP + 21MP Battery 1800mAh 2400mAh 2200mAh 3000mAh 3000mAh 2400mAh 4000mAh CPU Speed 1.0GHz 1.0GHz 1.3GHz 1.3GHz 2.0GHz 2.0GHz 2.0GHz Processor Chip MT6735 MT6735 MT6735M MT6732 MT6755 (P10) MT6755 (P10) MT6795 (X10) Multi-core Quad Quad Quad Quad Octa Octa Octa Factory Price (USD) $47 $52 $80 $99 $109 $167 $250 Source: Company data, Credit Suisse Research

China Smartphones Sector 11 05 January 2016

Tablets fight commoditisation with segmentation The global tablet market was much weaker in 2015, declining 12% YoY to 243mn as Tablet market declined 12% shipments across Apple, Samsung, and the Chinese brands all stalled out due to long YoY in 2015; we are replacement rates, cannibalisation by larger smartphones and limited innovation in the modelling down 5% in 2016 form factor and even some return of notebooks into emerging markets. We are estimating the decline to moderate in 2016 but be still down 5% at 231mn units.

Figure 31: CS/IDC bottom's up tablets projected -12% in 2015, modelling -5% in 2016 (in millions, unless otherwise stated) Years CY2011 CY2012 CY2013 CY2014 CY2015E CY2016E CY2017E Apple 40,497 65,736 74,208 63,361 48,262 45,983 46,433 Samsung 5,711 16,490 39,731 39,792 36,438 35,000 35,700 Amazon 4,748 10,436 9,779 3,432 2,910 3,000 3,300 Asus 1,730 6,843 12,209 11,795 6,956 7,000 7,000 Lenovo 764 2,101 7,782 11,160 11,622 12,000 12,500 Acer 2,002 1,496 4,855 4,548 3,244 3,200 3,000 Microsoft 0 840 2,281 2,841 5,469 6,000 6,500 HPQ 935 64 1,985 2,624 1,597 1,500 1,400 Motorola (bought by Lenovo) 1,034 306 120 14 1 0 0 Dell 186 96 782 1,718 572 0 0 Blackberry 1,177 839 353 0 0 0 0 Barnes & Noble 3,344 1,911 1,306 447 0 0 0 RCA 0 0 1,190 5,199 5,792 6,000 6,250 Huawei 337 1,119 1,539 2,974 6,055 7,000 8,000 Verizon 0 0 16 3,199 1,555 1,500 1,300 Advan 0 93 580 2,488 3,067 3,500 4,000 HTC 362 62 16 223 182 150 150 TCL 0 0 0 1,964 4,543 5,000 5,500 Total branded tablets 62,828 108,431 158,734 157,778 138,267 136,833 141,033 Others (industry model) 13,299 35,698 61,044 72,298 68,593 65,697 71,413 Industry forecast 76,127 144,129 219,778 230,076 206,860 202,529 212,446 Additional Whitebox 0 14,302 38,956 47,702 36,407 29,303 18,587 Whitebox total 13,299 50,000 100,000 120,000 105,000 95,000 90,000 Grand Total 76,127 158,431 258,734 277,778 243,267 231,833 231,033 YoY % 108.1% 63.3% 7.4% -12.4% -4.7% -0.3% Source: Company data, Credit Suisse estimates, IDC The tablet market has been a disappointment for many of the vendors as pricing has collapsed and volumes squeezed out by smartphones and low cost 2-1s and notebooks. Many of the vendors supplying tablets have tried to diversify into smartphones, low cost notebooks and various IoT and wearable devices. Within tablets, pricing can now range from US$30 for an entry tablet up to US$100-150 for an advanced Windows 10 tablet using the new Intel Cherry Trail Atom chipset with full HD display or with Mediatek’s high- end LTE octa-core chipset.

Figure 32: Tablet specs have shown improvement and the price remains competitive

Ultra-low-end Mini Pad High-end 4G Mobile Ultra-high-end Intel Intel Intel Intel (2-1) Allwinner Mediatek Mediatek Mediatek HiSilicon Intel Intel Intel Intel Chipset A33 MT8735W MT8752T MT8735 Kirin930 Atom Bay Trail Cherry Trail Atom x3 Quad Core Quad core Octa core Quad core Octa core Quad core Quad core Quad core Quad core CPU 1.5GHz 1.2GHz 2.0GHz 1.3GHz 2.0GHz x86 x86 x86 x86 Graphics ARM Mali-400 ARM Mali-450 ARM Mali-720 ARM Mali-720 ARM Mali-628 Intel In-house GPU Intel In-house GPU Intel In-house GPU Mali-450 Screen Size 7" 7.85" 11.6" 10.1" 8" 7.0" 10.1" 8" 10.1" Resolution 800 x 480 1024 x 768 2048 x 1536 1024 x 600 1920 x 1200 1024 x 600 1280 x 800 1280 x 800 1280 x 800 Video NA NA NA NA NA 1080p 2160p 2160p 2160p DRAM / Flash 512MB DDR3/8GB 1GB DDR3 / 8GB 2GB / 16GB 1GB / 8GB 3G / 64GB 1GB / 16GB 2GB / 16GB 2GB / 16GB 2GB / 16GB Windows 10 + Windows 10 + OS Android 4.4 Android 4.4 Android 4.4 Android 4.4 Android 4.4 Windows 10 Android 5.0 Android 4.4 Android 4.4 Camera 0.3MP 0.3MP + 2MP 0.3MP + 5MP 0.3MP + 2MP 2MP + 8MP 0.3MP 2MP + 5MP 0.3MP + 2MP 2MP + 5MP 3G built-in NO NO NO YES NO YES NO NO NO Factory price $28 $52 $100 $80 $250 $50 $140 $99 $204 Source: Company data, Credit Suisse research

China Smartphones Sector 12 05 January 2016

Tablets have stalled out in their growth rates under 300mn units, below where feature phone markets ramped to by the late 1990s and smartphones from 2005 in their ramp-up towards 300-400 mn units in the first five years of their adoption. Mobile communications, rising functionality and larger display size of emerging market smartphones have capped the market around at around 200-250mn units.

Figure 33: China whitebox gains have stalled Figure 34: Tablet market penetration falls short of mobile 100% an (units) 2000 90% Whitebox Whitebox 80% Whitebox Whitebox Whitebox Whitebox Whitebox 1500 70% Asus Amazon 1000 60% Asus Samsung Amazon 50% Asus 500 Samsung Amazon 40% Asus Asus Asus Amazon AmazonAsus Amazon Amazon Samsung 0 30% Samsung Samsung Samsung Samsung Apple

20% Apple 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Apple 10% Apple Apple Apple Apple Tablets Feature phones (re-based from 1995) 0% Smartphones (re-based from 2005) CY2011 CY2012 CY2013 CY2014 2015E 2016E 2017E Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Despite slowing unit growth, the tablet chipset market is still divided after Apple, due to Entry tablet chipset players relatively lower barriers in ARM-based processors, allowing chipsets from Chinese Allwinner, Rockchip, Actions suppliers Allwinner, Rockchip and Actions to maintain the low-end WiFi-only entertainment still have sizeable units but devices, albeit in a commoditised space. Intel with its Atom and SoFIA push and MediaTek Intel and MediaTek now with communications/entertainment-geared tablet bundling connectivity have ramped into leading outside Apple the #2/#3 positions after Apple although both of their growth in this space is now slowing, shifting focus for all the vendors to new market opportunities in IoT and even back to entry level notebooks.

Figure 35: Tablet baseband market still fragmented Figure 36: Tablet chipset unit market share 100% Tablet Chipset Market Units (mn) Market Share (%) Other Other Other Other Other NVIDIA Tegra 2014 2015 2016 2014 2015 2016 90% TI OMAP NVIDIA Tegra NVIDIA Tegra Qualcomm TI OMAP Qualcomm Qualcomm NVIDIA Tegra Exynos Apple Ax 63.4 48.3 46.0 23% 20% 20% 80% Exynos Exynos NVIDIA Tegra Qualcomm Mediatek 41.3 48.4 49.8 15% 20% 21% Qualcomm 70% Exynos Allwinner Allwinner Allwinner Exynos Intel 40.0 30.0 30.0 14% 12% 13% 60% Allwinner Intel Allwinner Intel Intel Rockchip 35.0 30.0 28.0 13% 12% 12% Intel Intel 50% Mediatek Allwinner 35.0 30.0 28.0 13% 12% 12% Rockchip Mediatek Mediatek Mediatek 40% Mediatek Exynos 20.0 21.0 20.0 7% 9% 9% Rockchip Qualcomm 10.0 12.0 10.0 4% 5% 4% 30% Rockchip Rockchip Rockchip NVIDIA Tegra 5.0 1.0 1.0 2% 0% 0% 20% Apple Ax TI OMAP 0.0 0.0 0.0 0% 0% 0% Apple Ax 10% Apple Ax Apple Ax Apple Ax Actions 8.0 5.0 4.0 3% 2% 2%

0% RDA, AMLogic, Ingenic, Via 20.1 17.6 15.0 7% 7% 6% 2012 2013 2014 2015 2016 Total 277.8 243.3 231.8 100% 100% 100% Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Tablet makers shifting to focus on Entry-Level Windows Notebooks Several tablet OEMs are trying to escape the commoditisation of tablets by diversifying Tablet makers are exploring their business by introducing 2-in-1 Windows-based tablets, a potential disruptive force new opportunities as tablet against the established brands and Taiwan notebook ODMs as a reasonably good quality demand slows down Windows 10 solution is introduced at sub-US$200 factory prices. Vendors are building the notebooks using low cost US$8 Intel Bay Trail chipsets or the new US$15 Intel Cherry Trail chipsets and being offered free Windows license under 9” or US$15 Windows License in these entry level models. The low-priced Intel and Microsoft pricing looks like a way to regain some emerging market share from the Android and ARM ecosystem. Vendors indicate the new Cherry Trail is good enough for most designs, offering 20-30% performance improvement over Bay Trail, better graphics and longer battery life.

China Smartphones Sector 13 05 January 2016

The solution houses are now offering three main specifications of low cost notebooks: (1) Surface type – 10-13” ultrathin notebooks with HD and full HD displays and thin keyboards, (2) 360 degree hinge foldable Yoga notebooks spanning 11.6”-14” HD/FHD, and (3) 2-in-1 detachable notebooks in 8.9”, 10.6” and 11.6” configurations. As Windows-based tablets have higher specification requirements for panels (large size HD/FHD), we think this could help leading panel and driver IC makers like AUO and Novatek. Most of the notebooks also offer Huawei and Fibocom modules to add in 3G and 4G connectivity. The builders do have high-priced models built using Intel’s Core M or Skylake, but the solutions are not pitched aggressively to emerging market buyers due to higher chipsets prices over US$100 and factory prices for the notebook starting over US$300.

Figure 37: Intel and Microsoft pushing entry level 2-1, 360 degree and Surface notebooks under US$200 Company Emdoor Cheng Fong Cheng Fong Cheng Fong Cheng Fong Emdoor Cheng Fong Model name EM-C6011 (2-1) MQ1106I (360 degree) MQ1302I (360 degree) MQ1202 (Surface) MQ1103I (NB) EM-C5013 (NB) MQ1402I (NB)

Operating System Windows 10 Windows 10 Windows 10 Windows 10 Windows 10 Windows 10 Windows 10 Pixels 1920*1080 1366*768 1920*1080 1920*1080 1366*768 1920*1200 1366*768 RAM 2GB 2GB 2GB 2GB 2GB 2GB 2GB ROM 16GB 16GB 128GB 32GB 32GB 64GB 128GB Display 10.1'' 12.2" 13.3" 11.6" 11.6" 12.2" 14.4" Camera 2MP + 5MP 0.3MP + 2MP 0.3MP + 2MP 2MP + 5MP 0.3MP 0.3MP + 2MP 0.3MP + 2MP Battery 10000mAh 10000mAh 10000mAh 10000mAh 10000mAh 10000mAh 10000mAh CPU Speed 1.6GHz 1.6GHz 1.6GHz 1.6GHz 1.6GHz 1.6GHz 1.6GHz Processor Chip Intel Core-M Intel Cherry Trail Intel Cherry Trail Intel Cherry Trail Intel Bay Trail Intel Skylake Intel Cherry Trail Factory Price (USD) $120 $126 $132 $139 $100 $109 $116 Source: Company data, Credit Suisse research

China Smartphones Sector 14 05 January 2016 IoT remains an incremental extension to help offset slowing mobile growth Industry projections remain upbeat on silicon into the Internet of Things, a broad growth IoT silicon growth could stay driver connecting all objects to the internet and communicating with and controlling other strong with a 29% CAGR devices. The silicon enablers include low power microcontrollers to process the data, through 2020 sensors to gather input from the environment, and connectivity to communicate either MediaTek enabling low-cost through to the cellular or wireline network or across the local network. Gartner projects wearable products silicon for IoT to maintain a robust 29% CAGR over 2013-20 from US$7.2 bn to US$43.5 bn.

Figure 38: Internet of Things Silicon witnessing high growth Sales (US$) YoY (%) $45,000 45% $40,000 40% $35,000 35% $30,000 30% $25,000 25% $20,000 20% $15,000 15% $10,000 10% $5,000 5% $0 0% 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E ASSP / FPGA Microcontroller Sensors Bluetooth Cellular Wi-Fi ZigBee Other Wireless Wireline YoY Growth Source: Gartner IOT: wearables, home automation, drones, robots, GoPros The China manufacturers are also aggressively expanding beyond smartphones and tablets into new product categories to widen their product lines and escape commoditisation. Many solution providers are now developing connected appliances in the home (smart plugs, LED bulbs, home entertainment and speakers, temperature and humidity sensors, security systems and Ethernet gateways). Many of the appliances can use Google or Apple smartphones to control the devices remotely. Beyond the living room, a host of vendors are commoditising the Go Pro market with replica video cameras using Sunplus and Novatek and capable of 4k video recording and priced at US$40-80 factory prices. Vendors are also promoting a few more advanced products tailoring the smartphone quad and octacore processors. One is a mind reader from EEG Smart that has 8 sensors to New IoT products include observe brain activities (excitement, interest, attention, focus, relaxation and stress) and smart robots, smart mirrors, can also be programmed to control drones and gaming. Several vendors are introducing home automation systems robots, including Ubtech’s Alpha 1S and Alpha 2 Samsung Exynos 5260 Hexacore and a smart mind reader processor, 2GB of DRAM and 16 GB of NAND with 20 joints capable of dancing to Lady Gaga and having built-in voice chat capabilities. Another new product was CVTE’s Smart Mirror using Mediatek’s 8127 quad core chipset with 2GB of DRAM and capacitive touch panel with 23.6” full HD display for displaying Android apps, news and information and weight management with connectivity to the bathroom scale.

China Smartphones Sector 15 05 January 2016

Figure 39: Device makers are exploring new business areas in IoT appliances Company StarWorth StarWorth GoPro Blackview Blackview Ubtech 3 Glasses Yifang EEG Smart bulb Mind Reader Model name SW-125 SW-L6 HERO4 Hero 1 Pro Finder 2 Alpha 2 VR Headset SH 203 PT-S511

Windows/iOS/ Windows/iOS/ Windows/iOS/ Windows/iOS/ Operating System Android Android Windows NA NA Android Android Android Android Pixels 128*32 128*32 NA NA 960*240 800*480 1440*2560 NA NA RAM 16KB 16KB NA 512MB 512MB 2GB 8GB NA NA ROM 256KB 256KB 64GB 64GB 64GB 16GB NA NA NA Display 1.5" 0.66" 1.0" 2.0" 2.0" 4.0" NA NA NA Camera NA NA 13MP 16MP 16MP NA NA NA NA Battery 380mAh 180mAh 1160mAh 1050mAh NA 2200mAh NA NA NA Processor Chip Nordic nRF51822 NA AMBA A7LS75 NTK96650 Exynos 5260 Intel i5 NA NA FOB Price (USD) $10 $12 $500 $75 $50 $1,500 $230 $15-16 $199 Source: Company data The smart watch is also proliferating among multiple dozens of vendors now but quickly commoditising, with various options now ranging from US$15-55 factory prices to run a basic version of Android Wear and many simulating the interface of the Apple Watch. Most of the devices run versions of Mediatek’s Aster or dual core chipset if they offer 3G calling. A number of vendors now offer a wide array of products, although most are still reporting shipping small volumes.

Figure 40: Device makers are all now proliferating low cost smart watches Model name T1S SW-AW08 mini SW-M98 T3s SW-G2 T9 SW-GT08

Technology 2G 2G 2G 2G 2G 2G 2G Operating System Android Android Android Android Android Android Android Pixels 240*240 96*96 96*96 240*240 240*240 256*320 240*240 RAM 16KB 16KB 16KB 16KB 16KB 16KB 16KB ROM 256KB 256KB 256KB 256KB 256KB 256KB 256KB Display 1.54" 0.95" 0.95" 1.22" 0.91" 1.61" 1.5" Camera 0.3MP NA NA 0.3MP 2MP 0.3MP 0.3MP Battery 380mAh 190mAh 160mAh 300mAh 380mAh 270mAh 380mAh Processor Chip MT6261A MT6261A MT6261A MT2502C MT6261A MT2502C MT6261A FOB Price (USD) $15 $20 $20 $34 $36 $43 $53 Source: Company data Mediatek is the main supplier for many of these emerging IoT offerings in China although we would note that Qualcomm is also putting more effort on expanding its communication Qualcomm’s consumer platforms into IoE (Internet of Everything) channels. Qualcomm targets four new electronics division focused businesses: (1) wearables (smart glasses, smart watches, smart trackers, body sensors), on supplying its solutions (2) control and automation (home automation, energy management, security, appliances, into new home electronics lighting control), (3) consumer electronics (media and entertainment – video/audio channels streaming, content consumption and embedded), and (4) machine-to-machine and smart cities (energy and metering, industrial, building automation and transportation). Qualcomm also expects devices to improve their capability and move from connected appliances to smart appliances, taking advantage of an advanced OS (Windows, Android, Brillo) sophisticated user interface, voice recognition, display, camera, computer vision and context awareness. Future applications will expand from there to be autonomous and have machine learning. Qualcomm’s new consumer electronics group is focused on (1) video and gaming for the TV, set-tops, digital media access and virtual reality, (2) wireless docking and smart

China Smartphones Sector 16 05 January 2016 monitors, (3) sports and security cameras, (4) robotics (drones and robot cleaners), and (5) home hub (smart speaker with display, home tablet and digital photo frames). Qualcomm offers multiple components including CPU, GPU, memory bandwidth, connectivity, security, audio and software to address applications including Over the Top (OTT) and Digital Media Access (DMA) Boxes, gaming boxes, portable projectors, TV side bars, set-tops and projectors. The company also has a reference design three products for docking a smartphone to a big screen: (1) wireless dongle for 4k streaming, (2) wireless monitor, and (3) wireless dock. We expect to see an emerging range of whitebox and China-built products using the Asian supply chain. Baseband, RF and connectivity suppliers including MediaTek, Spreadtrum and Realtek could see an adjacent market emerge here, joining a broad base of overseas MCU, connectivity and sensor suppliers. Figure 41: The wearables/IoT supply chain in Asia Function Technology Reason Problem Solved Global Providers Asia ex Japan chain TSMC, UMC, SMIC, Contract manufacturers investing in specialty Huahong Semi, IDMs (STM, NXP, IC Mfg Foundry / Back-end technology (CIS, high voltage, MEMs, Low cost and low power IC components Vanguard, ASE, SPIL, Renasas, TXN) embedded memory, 2.5D/3D IC) KYEC, Xintec, Win Semi

In smaller devices with less battery power, FSL, MCHP, TXN, On board compute requires low active, Processor Low Power MCU/CPU minimizing the processing power requirement NXPI, SLAB, CY, Holtek, Elan, Mediatek standby and response to wake commands on-board is critical for product battery life ATML

Inotera, Nanya, Storage for pictures, music, and program IDMs (Samsung, Winbond, ChipMos, Memory DRAM, NAND Low power DDR memory and TLC NAND code Hynix, Micron) Powertech, Adata, Phison, SIMO

Memory on board provides fast cache of Cypress, Microchip, eMemory (NVM IPs), Flash in smart cards, Embedded flash is used for storage of code Embedded Flash important data and allows smaller form Sidense, Kilopass, Huahong Semi (eNVM MCUs, sensors and trimming circuit data factors Synopsys foundry)

Need low power wireless connection and BRCM, QCOM, Connectivity Bluetooth 4.0/LE sufficient data rate to offload to Wearable-to-smartphone data connection Mediatek, RDA, Realtek SLAB smartphones/cloud Higher data rate applications will benefit from Wearable-to-WiFi hotspot and smartphone BRCM, QCOM, Connectivity WiFi Mediatek, RDA, Realtek the throughput of 11n or 11ac WiFi connectionn NXPI, TXN

Wearable products will likely include location Wearable-to-WiFi hotspot and smartphone BRCM, QCOM, Connectivity GPS Mediatek, Mitac based features/functions, requiring GPS connectionn NXPI, TXN

Converting battery power into the correct Increasing the conversion efficiency lowers MXIM, TXN, SWKS, Richtek, Silergy, On- Power Mgmt DC-DC Conversion voltage/current is not without energy loss - the effective battery consumption ONNN Bright, GMT conversion is 80-95% efficient. Wearables will be used to measure activity Wearables will be used for a host of health ASE, Elan, Motion, Environmental, ADI, INVN, STM, levels, distance traveled, vital statistics, etc. to and fitness functions, requiring FocalTech/Orise, Sensors and Body Monitors TXN, SLAB, be processed and/or communicated to other sensing/monitoring and tracking of changes ChipMOS, Xintec, Sensors Freescale, NXPI devices/the cloud in measured inputs EgisTech Clothing, Watches, Samsung, LG, Acer, Connected gear that improves interaction with Devices that can better capture and enhance Sony, Samsung, Hardware Glasses, Medical Asus, HTC, Huawei, our environment and others our life experiences Apple, Google, Nike devices Xiaomi Hon Hai, Pegatron, Asian EMS providers have relationships with Ability to reach high volume manufacturing at Manufacturing Low cost EMS Flextronics, Jabil Inventec, Mitac, USI key OEMs low cost (ASE) Limited form factor of mobile devices requires Increased function and operating use time, BYD, Simplo, Battery Battery Composition increasing energy density of battery - size eliminate battery rigidity, reduce lithium Sony, Samsung Dynapack growth not likely hazard

Himax Display, Truly, E- Wearable display needs to be portable with LCOS displays can project an image in front Displays LCOS, E-Ink, OLED Sony Ink, Samsung, LGD, high resolution of the user at good resolution and low power Orise/FocalTech

Largan, Lite-On Tech, CMOS image sensors, Cameras can provide real time image capture Wearable image capture, Sports DV a OVTI, On Semi, Sunny Optical, Cameras Lens, Camera Modules in glasses and watches popular product for Chicony Sony Chicony, Himax, GalaxyCore Wearables with displays will likely be enabled O-Film, Elan, TPK, Wearables with large enough displays will with touch. The ability to have touch function SYNA, BRCM, CY, Wintek, Youngfast, J- Interface Touch Display need a user interface. But smaller low power independent of powering the display could ATML Touch, Truly, displays needed to conserve power help reduce battery life Focaltech, GIS Wearable products may not have physical Contact-less control of wireless devices will Interface Voice inputs, directing by voice activation or use of likely be voice driven. Isolating voice relative ADNC, CRUS AAC, Goertek, Merry MEMs microphone to ambient noise will be important Unimicron, Compeq, Component Any layer HDI Putting more circuits in a smaller/thinner PCB Can fit into the limited room in wearables Ibiden, SEMCO Unitech Connecting components or act as the Nippon Mektron, ZDT, Flexium, Career Component FPC Save the limited room for other components substrate for ICs Fujikura Tech, Ichia Epson Toyocom, Component Crystal component Provide frequencies to synchronize operations Need to be small in the form factor TXC NDK, KDS, Kyocera

Source: Company data, Credit Suisse estimates

China Smartphones Sector 17 05 January 2016

We profile the opportunity for wearables and the broader Internet of Things connecting Wearables could add up to every device which spans several major categories: 10% sales for TSMC by ■ Silicon. Key IC devices include the main processor (a low power Microcontroller or 2017E integrated mobile processor), connectivity (Wi-Fi, GPS, Bluetooth Smart, NFC, Zigbee), memory, and sensors. Lead suppliers would be the foundries (TSMC for leading edge, Hua Hong and Vanguard for 8"), IC design (MediaTek, Elan, Holtek, Egis), IP (eMemory) and analog (Richtek, Silergy, On-Bright, GMT).

■ Hardware. The Asian brands (Samsung, LG, Huawei, Xiaomi) are all looking to participate and contract manufacturers (Hon Hai, Quanta, USI) should benefit.

■ Display. Wearable displays that are portable and high resolution support Himax with its LCOS, touch supply chain players TPK, Elan, O-Film and FocalTech, and the display suppliers (Samsung, LGD, AUO, Innolux, Truly).

■ Camera. The camera lens (Largan), module (Sunny Optical), module makers (Chicony), packaging (Xintec) and image sensors (Sony, Omnivision, GalaxyCore).

■ Components. Key components include PCBs, Flexible PCB IC substrate, and crystal components in small form factor devices.

Figure 42: Wearables could add 8% to TSMC's sales by 2017E 2015 2016 2017 Smartphone subscribers 3,327.7 3,327.7 3,327.7 3,968.8 3,968.8 3,968.8 4,510.4 4,510.4 4,510.4 Penetration 3.0% 5.0% 7.0% 7.0% 10.0% 13.0% 12.0% 15.0% 18.0% Units 99.8 166.4 232.9 277.8 396.9 515.9 541.3 676.6 811.9 ASP ($) $75 $150 $250 $75 $150 $250 $75 $150 $250 TAM ($m) $7,487 $24,958 $58,235 $20,836 $59,532 $128,985 $40,594 $101,485 $202,969 COGS (35% GM) $4,867 $16,223 $37,853 $13,543 $38,696 $83,840 $26,386 $65,965 $131,930 Semi Content (20% of COGS) $973 $3,245 $7,571 $2,709 $7,739 $16,768 $5,277 $13,193 $26,386 Foundry (35% of Semi content) $341 $1,136 $2,650 $948 $2,709 $5,869 $1,847 $4,618 $9,235 TSMC (50% market share) $170 $568 $1,325 $474 $1,354 $2,934 $924 $2,309 $4,618 TSMC % of sales 0.7% 2.2% 5.2% 1.7% 4.9% 10.7% 3.1% 7.8% 15.6% Connectivity $324 $1,298 $2,019 $903 $3,096 $4,471 $1,759 $5,277 $7,036 CPU $162 $519 $2,524 $451 $1,238 $5,589 $880 $2,111 $8,795 Power $162 $346 $757 $451 $826 $1,677 $880 $1,407 $2,639 Sensor $162 $433 $1,262 $451 $1,032 $2,795 $880 $1,759 $4,398 GPS $0 $216 $505 $0 $516 $1,118 $0 $880 $1,759 Misc $162 $433 $505 $451 $1,032 $1,118 $880 $1,759 $1,759 Source: Company data, Credit Suisse estimates

China Smartphones Sector 18 05 January 2016 Sector positioning: Foundry, RF and display ICs over processors and panels Within the smartphone space, we are conservative on the overall opportunity and see risk on components, having downgraded some of the Apple supply chain names in early November, Mediatek early last year along with the Taiwan panel sector. We still would position in Foundry where market share trends are benign and margins benefiting from cyclical rebound in utilisation and currency, RF where content gains are increasing and in display/peripheral ICs (Driver ICs and Fingerprint IC) benefiting from more content. Foundry support from TSMC and SMIC/Hua Hong We expect a better outlook for the Asian foundry sector following a weak 2015 where sales were impacted by slowing trends across major consumer end markets, with smartphones, tablets, PCs and TVs all disappointing and also driving up fabless inventory to record levels by mid-year. In 2016, we expect the slowdown in demand to moderate and inventory liquidation to reverse to mild restocking, allowing for sequential growth rates off a low in 1Q16. We also see improving trends for the foundry sector as competitive pressures from Samsung moderate and GlobalFoundries faces slowing funding from its Abu Dhabi parent after the collapse in oil prices. We take a more constructive view on the stocks and have upgraded TSMC recently. We favour TSMC due to cyclical rebound in sales from improvement in the inventory cycle and broadening 16nm business as its traditional customer migrate and from share gains into Apple. We also expect GM improvement from maturing 16nm and rising utilisation, improving profitability and supporting another dividend increase. We also like the Chinese foundries, including SMIC with catalysts from continuing efforts by China to enhance its semiconductor supply chain, Hua Hong Semi for its capex light model on 8” and also Vanguard which is improving product mix and offers an attractive cash yield. TSMC: Revenue growth to rebound in 2016 We recently upgraded TSMC from Neutral to OUTPERFORM due to (1) improving revenue drivers as inventory destocking reverses to restocking, (2) 16nm customer base broadens and includes share gains into Apple, (3) competitive impact from Samsung moderates and second tier foundry share is holding stable, and (4) GMs improve from rising 16nm scale, depreciating NTD, easing fab depreciation burden and rising utilisation. Competitive landscape more manageable in 2016 Our concerns into this past year was the rising challenge from Samsung on 14nm which Key concerns in 2015 were was taking share from TSMC's customers through better internal modem and processor from 14nm competition from capability and also some foundry share with move back into dual sourcing on Apple and Samsung and 28nm share gains at Qualcomm. We also were concerned on the emergence of the tier-two competition from second tier foundries on 28nm, with GlobalFoundries having high volume 28nm at three important foundries TSMC customers (Qualcomm, Mediatek and AMD), SMIC getting large support from Qualcomm to bring up 28nm in a Beijing JV fab and UMC improving yields on 28nm including the higher-end high-k metal gate process. The reality of the past year is Samsung impact was felt by TSMC as Samsung secured all Samsung did take notable of its internal high-end Samsung smartphones with its own Exynos and sizeable portion of share with its internal chip Shannon modem and peripheral connectivity along with 60% market share on Apple's and some foundry business, iPhone 6S refresh. The success of the smaller foundries was more limited than expected although the other foundries' due to the smartphone deceleration impacting second sources GlobalFoundries and UMC gains were limited more severely and SMIC having a very slow progress ramping 28nm. Intel did well in its traditional server and computing markets but had limited traction on foundry beyond

China Smartphones Sector 19 05 January 2016

Altera, mobile was largely limited to the 3G Rockchip partnership on SoFIA and tablets declined in line with the market. Share gains on the a10 processor bolster slowing iPhone momentum and Qualcomm share loss TSMC's position with Apple is moving back toward full strength in share gains in 2016, TSMC will gain share at cushioning on-going diversification from Qualcomm, keeping contribution from its top two Apple with InFO, cushioning customers near 30% of sales, in line with the past few years but a flip-flop of mix with QCOM’s diversification Apple becoming TSMC's largest customer in 2016. We still believe Apple is back at TSMC at least for the a10 for iPhone using the InFO process where TSMC has been procuring tools for 100k+ of InFO capacity, a ratio that corresponds to about 50k front-end capacity since InFO wafer panels need spacing around the dies for the molding compound and interconnect.

Figure 43: Apple volumes projected flat, but TSMC still growing due to share gains Apple volumes (mn units) 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 2013 2014 2015 2016 iPad 12.6 10.9 9.9 14.8 11.9 10.1 9.1 15.0 74.2 63.4 48.3 46.0 iPhone 61.2 47.5 48.0 78.3 54.8 45.0 46.2 76.2 153.5 192.7 235.1 222.2 iPods 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 9.4 3.8 0.0 0.0 iWatch 2.5 3.0 6.5 4.9 5.7 5.3 9.2 12.0 25.1 Apple TV set-top units 0.3 0.3 1.3 2.2 1.2 1.2 1.2 1.3 2.2 1.8 4.0 4.9 Total units (mn) 74.1 61.2 62.2 101.9 72.7 61.9 61.8 101.7 239.3 261.6 299.4 298.1 QoQ / YoY -23% -17% 2% 64% -29% -15% 0% 65% 9% 14% 0%

Apple mfg potential (mn units) 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 2013 2014 2015 2016 Blended die size 95 93 92 99 99 98 98 98 110 102 95 98 Die per wafer 476 482 489 456 454 461 461 461 411 442 476 459 Wafer per quarter (thousands) 156 127 127 223 160 134 134 221 584 587 633 649 Wafer per month demand 51.9 42.3 42.4 74.4 53.3 44.8 44.7 73.5 194.6 195.8 211.0 216.4

TSMC potential 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 2013 2014 2015 2016 Wafer demand (thousands) 156 127 127 223 160 134 134 221 584 587 633 649 Revenue per 12" wafer, US$ 7,591 7,401 8,141 7,938 7,739 7,546 9,300 9,021 5,662 8,061 7,786 8,457 Apple Processor Sales (US$ mn) $1,182 $939 $1,035 $1,772 $1,238 $1,015 $1,247 $1,990 $3,306 $4,734 $4,928 $5,489 TSMC share: 80% 80% 55% 55% 55% 70% 85% 85% 0% 45% 66% 75% TSMC Apple assumption: $945 $751 $569 $974 $681 $710 $1,060 $1,691 $0 $2,118 $3,241 $4,142 Apple % of TSMC 13.4% 11.3% 8.5% 15.3% 11.1% 10.6% 14.4% 22.1% 0.0% 8.4% 12.1% 14.9% Rest of TSMC $6,096 $5,910 $6,096 $5,411 $5,449 $5,991 $6,312 $5,975 $20,111 $23,054 $23,513 $23,727 QoQ / YoY 2.6% -3.0% 3.1% -11.2% 0.7% 10.0% 5.4% -5.3% 14.6% 2.0% 0.9% TSMC sales (US$ mn) $7,041 $6,661 $6,665 $6,385 $6,130 $6,701 $7,371 $7,666 $20,111 $25,173 $26,754 $27,869 QoQ / YoY -2.6% -5.4% 0.1% -4.2% -4.0% 9.3% 10.0% 4.0% 25.2% 6.3% 4.2% Source: Company data, Credit Suisse estimates For Qualcomm we still expect it to ramp up second-source foundries and estimate its QCOM will ramp second allocation to TSMC slipping from 63% in 2014 and 21% of TSMC sales to 50% and 11% of source foundries, taking TSMC's sales by 2016 as it shifts its modem and high-end Snapdragon 820 and follow-on TSMC’s allocation down to Snapdragon 830 to Samsung and ramps up 28nm at UMC and SMIC. TSMC will still 50% retain mid-high-end 28nm HPM/HPC Snapdragon 400/600 as well as 28nm/55nm RF products. GlobalFoundries may also lose some share as Qualcomm shifts some from 28nm LP to 28nm HPM/HPC where GlobalFoundries did not invest in capacity.

Figure 44: Factoring in some decline of TSMC's share at Figure 45: TSMC 2016 growth sensitivity to Qualcomm QCOM/Apple—65% QCOM and 66% Apple in 2015 and Apple share 2012 2013 2014 2015 2016 2017 TSMC's Qualcomm allocation Qualcomm Production $5,146 $7,005 $7,958 $6,803 $6,312 $6,754 $0 20% 30% 40% 50% 60% 70% Qualcomm TSMC $2,934 $4,309 $4,972 $4,286 $3,156 $3,377 0% -18.5% -16.2% -13.8% -11.4% -9.1% -6.7% TSMC Share of QCOM 57% 62% 62% 63% 50% 50% Apple Production $3,099 $3,306 $4,734 $4,928 $5,531 $5,978 25% -13.3% -11.0% -8.6% -6.2% -3.9% -1.5% Apple TSMC $0 $0 $2,118 $3,241 $4,174 $4,782 40% -10.2% -7.9% -5.5% -3.1% -0.8% 1.6% TSMC Share of Apple 0% 0% 45% 66% 75% 80% 55% -7.1% -4.8% -2.4% 0.0% 2.3% 4.7% Rest of TSMC $14,203 $15,802 $18,082 $19,227 $20,539 $21,414 65% -5.1% -2.7% -0.4% 2.1% 4.4% 6.7% YoY Growth 13.6% 11.3% 14.4% 6.3% 6.8% 4.3%

Allocation 75% -2.9% -0.6% 1.8% 4.2% 6.5% 8.9% Total TSMC $17,137 $20,111 $25,173 $26,754 $27,869 $29,573 TSMC's Apple -0.9% 1.4% 10.9% YoY Growth 17.8% 17.4% 25.2% 6.3% 4.2% 6.1% 85% 3.8% 6.2% 8.5% 100% 2.2% 4.5% 6.9% 9.3% 11.6% 14.0% Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

China Smartphones Sector 20 05 January 2016

Utilisation starting to recover in 1H16 With sales tracking better for fabless and slowdown in wafer orders now in the third TSMC will see utilisation quarter, we are seeing utilisation start to recover in 1Q16. Our Japan team which rebound through 1H16 estimates utilisation based on supplier inputs saw a trough in early 4Q15 around 65% and is now back to 85%. In our TSMC estimates, utilisation should trough on a shipment vs. capacity basis at 80% in 1Q16 as iPhone components come down in 1Q16 and rebound toward 85-90% in 2Q16. The supply chain has seen incremental orders from China smartphone and display for seasonal products and better builds following the more modest Apple launch. We would note also that TSMC's stock has had a longer-term outperformance since 2011 TSMC’s stock has seen a but also still exhibits cyclical behaviour, with a bottoming quickly after the steepest order rebound ahead and through cuts (this year in July-August) and rebound ahead but also through the trough, a the utilisation troughs supportive factor for a further leg up for share appreciation as utilisation recovers in 1H16.

Figure 46: TSMC's stock rebounds as utilization recovers TSMC Stock Price Utilization 110% 160.0

100% 140.0 90% 120.0 80% 100.0 70% 80.0 60% 60.0 Utilization(%) 50% 40.0

40% TSMC Stock Price (NT$)

30% 20.0

20% - Jul/04 Jul/05 Oct/11 Apr/99 Oct/99 Apr/12 Oct/12 Apr/13 Oct/13 Apr/14 Jan/04 Jan/05 Jun/06 Jun/07 Mar/00 Mar/01 Mar/02 Mar/15 Mar/16 Feb/03 Nov/09 Nov/10 Dec/05 Dec/06 Dec/07 Nov/08 Sep/00 Sep/01 Aug/02 Aug/03 Sep/14 Sep/15 Aug/16 May/10 May/11 May/08 May/09 Source: Company data, Credit Suisse estimates LTE a two-fold driver for RF component growth 70% of the cellular device shipments to be LTE-enabled in 2017 RF is poised to benefit as smartphones continue to convert from 3G to 4G and each 4G 70% of the mobile device smartphone is continuing to add bands and move toward higher carrier aggregation tiers shipments will be LTE- that promote more RF content. According to Navian, around 50% of the mobile device enabled in 2017 vs 50% in shipments (mostly handsets) were LTE-enabled in 2015 and it forecasts the portion to 2015 further increase to 70% in 2017, representing a 29% CAGR in the LTE-enabled device shipments over 2015-17 vs a 9% CAGR for overall mobile devices. Much higher RF content for LTE models We see higher RF content in LTE-enabled devices (US$6-15 vs ~US$3 for 3G and

China Smartphones Sector 21 05 January 2016

Under the MMPA architecture, the quantity of power amplifiers might distort the magnitude US$6-15 RF dollar content of the incremental demand for RF components from LTE smartphones and RF dollar in LTE smartphones vs content should be a better indicator. According to Qorvo's estimate, a typical GSM/CDMA ~US$3 for UMTS and smartphone only needs

Figure 47: Higher RF content for LTE models Figure 48: More power amplifiers needed in LTE models 18 16 14 4-6 12 10 3-4 US$ 8 6 2 4 2 0 2G 3G Typical LTE Global LTE 2G 3G LTE

Filters Switches Powr amplifiers Others # of PA per handset

Source: Qorvo, Credit Suisse Source: Company data, Credit Suisse estimates 12% CAGR in RF revenues from mobile devices Based on the assumption of mid single-digit annual global mobile device shipments, increasing LTE penetration, higher RF content in LTE devices, we forecast the RF component revenues to see a 12% CAGR over 2015-17 in the mobile application to reach US$9.7 bn in 2017.

Figure 49: 12% revenue CAGR from the mobile application over 2015-17 12,000

10,000

8,000

6,000 US$mn

4,000

2,000

0 2013 2014 2015 2016E 2017E

Source: Qorvo, Skyworks, Credit Suisse estimates WiFi spec upgrade and IoT enlarging the TAM 802.11ac-enabled WiFi devices tend to adopt more RF components because of more 802.11ac devices need frequency band support and the more spatial streams. Despite the fact that 802.11ac only more RF component to operates at the 5.0 GHz frequency band, most devices also support the 2.4 GHz band to support dual bands and be backward compatible with older generation 802.11a/b/g/n. These dual-band WiFi more spatial streams devices usually need to double the RF content. In addition, as 802.11ac supports up to 8 spatial streams simultaneously, proportionally more RF components will be needed in these devices.

China Smartphones Sector 22 05 January 2016

Figure 50: More mid- to low-end smartphones will support 802.11ac WiFi 2013 2014 2015 High end models (>US$400) 802.11ac HTC M7, Samsung GS4, Apple iPhone 6, HTC M8, Samsung Apple iPhone 6S, HTC M9, Samsung Sony Xperia Z1, LG G2 GS 5, Sony Xperia Z2/3, LG G3, GS6, Sony Xperia Z4/5, LG G4, LG Xiaomi Mi4, OPPO Find 7, Nexus 5X, Huawei Nexus 6P, Huawei ZTE Nubia Z7 Honor 7, ZTE Grand S3, LeTV One 802.11a/b/g/n Apple iPhone 5S, Huawei Ascend P6 Huawei Honor 6, Huawei Ascend P7 Huawei Mate S Mid to low end models (Redmi Note 2, Xiaomi Mi 4c, ZTE Blade S6 802.11a/b/g/n HTC Desire 600, HTC Desire 820, HTC Desire 816G, Samsung Galaxy Samsung Galaxy Grand 2 Samsung Galaxy A3, Sony Xperia C3 J7, Xiaomi Redmi 2, Sony Xperia C4, LG G4c, TCL Idol 3 Source: Company data, Credit Suisse Internet of Things (IoT) expanding the addressable market for WiFi According to Gartner, global IoT unit shipments will be growing at a 39% CAGR over 2015-20 across various sectors including automotive, consumer, automation, energy, manufacturing, government, etc. This will drive the IoT installed base to be boosted from 4.9bn units in 2015 to over 25bn units in 2020. As the concept of the IoT has been to share information between devices, wireless (and wired, to a lesser extent) communication has been the key part in connecting all these individual devices. 22% CAGR for WiFi RF revenues in 2015-17; 13% CAGR for overall RF revenues in 2015-17 Based on the assumption of a 10% CAGR in WiFi device shipments and the 802.11ac penetration rising to 43% in 2017 from 27% in 2015, we expect the RF component revenues from the WiFi application to see a 22% CAGR in 2015-17. Along with our forecast in other major applications, we expect to see 13% overall RF component revenue CAGR in 2015-17.

Figure 51: RF revenues from WiFi to see 22% CAGR in Figure 52: Overall RF component revenues to see 13% 2015-17 CAGR in 2015-17 5,000 18,000 30% 4,500 16,000 25% 4,000 14,000 3,500 12,000 20% 3,000 10,000 15%

2,500 US$mn 8,000 US$mn 2,000 6,000 10% 4,000 1,500 5% 1,000 2,000 0 0% 500 2013 2014 2015 2016E 2017E 0 2013 2014 2015 2016E 2017E Mobile WiFi Infrastructure Others Growth (YoY)

Source: Richwave, Skyworks, Credit Suisse estimates Source: Qorvo, Skyworks, Richwave, Credit Suisse estimates Competitive pressure persists in mobile processors The chipset landscape in emerging market smartphones has remained competitive between Mediatek and Qualcomm on 4G and with Spreadtrum on 3G. China smartphone vendors are accelerating the transition to 4G, with price premium for a similar 3G and 4G model down to US$10 and models with advanced specs now at lower factory prices. MediaTek is defending share at the expense of margin Mediatek’s platforms now span entry level 4G phones under US$50 factory price and Helio P10 series with high-end specs (full HD display, 2GB DRAM +32GB NAND, and 5MP + 13MP camera) for as low as US$109 and also spanning up to US$250 for a phone

China Smartphones Sector 23 05 January 2016 with Mediatek’s flagship Helio x10, QHD display with 5 + 21 MP camera and 4GB DRAM + 32GB NAND. We do note majority of the Chinese models have migrated to the mainstream quad core (US$7-10 chipset) and octa core (US$15-18) which can meet most vendor requirements at better price points versus the flagship Helio staying in the high-end.

Figure 53: Mediatek smartphone roadmap

Source: Company data, Credit Suisse research Qualcomm's high-end and mass market innovation keeps the pressure on Mediatek. Qualcomm's chipset Despite Mediatek's strong execution on its product roadmap, Qualcomm has matched up positioning keeps well with it and looks to be more competitive in 2016. Qualcomm's Snapdragon 820 raises competition high in each tier the bar again on modem and processor performance and higher-end carrier aggregation of the mobile market should keep it in most of the non-Apple flagship smartphones and high-end Chinese models. In the mainstream, Qualcomm has cut 15% of its cost to streamline but the event shows no retrenchment and another refresh bringing down carrier aggregation, octa-core and advanced imaging into a lower-end stack to stay aggressive competing for share with Mediatek in the mass market. Qualcomm also improves its reference design including Global Pass to speed time to market gap and a comprehensive online database of qualified suppliers. Qualcomm’s traction remains much higher at the branded Chinese companies ZTE, Coolpad, TCL and Xiaomi but remains smaller at the smaller Chinese brands and whitebox, where Mediatek retains majority share. Qualcomm is looking to regain traction with a refresh of chipsets in 2H15 and another refresh in 1H16.

China Smartphones Sector 24 05 January 2016

Figure 54: Qualcomm smartphone roadmap advancing in 2H15 and 1H16

Source: Company data, Credit Suisse estimates Qualcomm is now supplying a Snapdragon 200 series (S215 / MSM 8909) into the entry tier and plans a launch of new Snapdragon 400 series (S412/S430) and Snapdragon 600 series (S617/S618/S620). The new chipsets bring down carrier aggregation, octa-core and advanced imaging into a lower-end stack to stay aggressive competing for share with Mediatek in the mass market. Intel 3G SoFIA in volume, 4G SoFIA coming later Intel has used the ecosystem customers it secured last year with Bay Trail for low-end Intel's tablet business also tablets to now allow these to expand into smartphones with its 3G dual core SoFIA and slowed in 2015, focus in 3G-R joint quad core solution with Rockchip, both still manufactured on TSMC’s 28nm 2016 will shift to trying to process. The chipset has much lower cost structure than Bay Trail, so many customers penetrate Apple with the are shifting to SoFIA for 7” tablets and now widely adopting it for 4-6” low cost modem and 4G SoFIA smartphones spanning US$30-55 factory prices. Figure 55: Intel mobile road map for the premium tier Figure 56: Intel mobile road map in the value tier

Source: Intel Source: Intel Intel is proliferating to several dozen customers although we believe is below its initial aspirational 30mn unit target to China brands this year as the market is shifting quickly to 4G, though still up from negligible amounts last year.

China Smartphones Sector 25 05 January 2016

Figure 57: Intel SoFIA 3G designs getting traction among whitebox at only US$30-60 factory price Model name SF6150 MQ706l MQ801l MQ1031l SW-I05E-M07 SW-S05B-M08

Technology WCDMA WCDMA WCDMA WCDMA WCDMA WCDMA Operating System Android 5.1 Android 5.1 Android 5.1 Android 5.0 Android 5.1 Android 5.1 Pixels 480*854 1024*600 1280*800 1280*800 540*960 540*960 RAM 512MB 1GB 1GB 1GB 512MB 512MB ROM 4GB 8GB 8GB 8GB 4GB 4GB Display 5" 7" 8" 10.1" 5" 5" Camera 0.3/2MP + 2/5MP 0.3MP + 2MP 0.3MP + 2MP 0.3MP + 2MP 2MP + 5/8MP 0.3/2MP + 2/5MP Battery 1850mAh 2800mAh 3500mAh 6000mAh 2000mAh 2000mAh CPU Speed 1.0GHz 1.0GHz 1.0GHz 1.0GHz 1.2GHz 1.2GHz Processor Chip Intel SoFIA 3G Intel SoFIA 3G Intel SoFIA 3G Intel SoFIA 3G XM631 Intel SoFIA 3G Multi-core Dual Quad Quad Quad Dual Dual Factory Price (USD) NA $40 NA $33 $51 $56 Source: Company data, Credit Suisse research Intel’s 4G platform has pushed out a bit but is now expected by customers in late 1Q16. Intel’s 4G SoFIA now The company will introduce SoFIA LTE with Spreadtrum at that time and plans SoFIA 2 expected in late 1Q16 with CAT 6 carrier aggregation later in the year with potential at that time to bring the chip into Intel fabs if it achieves its schedule. Figure 58: Intel rebranding its SoFIA chipsets for China smartphones as the Atom x3

Source: Intel Spreadtrum continues to take share and keep 3G competitive, 4G not quite shipping Spreadtrum continues to make inroads in WCDMA entry level channels with its quad core Spreadtrum has gained on WCDMA SC7731 built on TSMC’s 28nm. Most whitebox suppliers offer the Spreadtrum low-end 3G; 4G still awaiting solution as a stable offering at US$1-2 cheaper than comparable Mediatek solutions, high volume China reaching a low US$20-40 factory price for entry 3G smartphones. We believe pricing for shipments the quad core chipset is now under US$5, undercutting Mediatek’s MT6580 by US$1-2. Spreadtrum’s CEO Leo Li recently commented at a Taiwan forum that it targeted 500mn shipments in 2015, up over 10% from 2014, with about half being smartphones. The company has now reached US$1.45 bn run rate, up 20%+ YoY and up to 4,000 engineers, about 1/3 the size of Mediatek’s workforce.

China Smartphones Sector 26 05 January 2016

Figure 59: Spreadtrum’s 3G design wins in fall 2015 Company StarWorth Cheng Fong StarWorth Longan Yi Sheng Maysun Protech Model name SW-R35A-M02 PQ502S SW-S04B-M06 X6 E2 M5016 PT-S511

Image Technology WCDMA/GSM WCDMA/GSM WCDMA/GSM WCDMA/GSM WCDMA/GSM WCDMA/GSM WCDMA/GSM Operating System Android 4.4 Android 4.4 Android 4.4 Android 4.4 Android 4.4 Android 4.4 Android 4.4 Pixels 480*320 854*480 800*480 854*480 854*480 854*480 854*480 RAM 512MB 512MB 512MB 512MB 1GB 512MB 512MB ROM 256MB 4GB 4GB 4GB 8GB 8GB 4GB Display 3.5" 5.0" 4.0" 5.0" 4.5" 5.0" 5.0" Camera 0.3MP + 0.3MP 0.3MP + 2MP 0.3MP + 5MP 0.3MP + 2MP 2MP + 5MP 2MP + 5MP 0.3MP + 5MP Battery 1000mAh 2000mAh 1000mAh 1700mAh 1800mAh 1800mAh 2000mAh CPU Speed 1.0Ghz 1.0Ghz 1.2Ghz 1.0Ghz 1.3Ghz 1.3Ghz 1.2Ghz Processor Chip SC7715 SC7731 SC7731 SC7731 SC7731G SC7731 SC7731 Multi-core Single Quad Quad Quad Quad Quad Quad FOB Price (USD) $23 NA $31 $30 $41 $40 NA Source: Company data, Credit Suisse research Spreadtrum 4G still not reaching smaller brands – meaningful ramp may take at least six more months. Spreadtrum announced in 1H15 that it was shipping its 4G 9830A integrating quad core Spreadtrum’s 4G chipsets ARM Cortex A7 running at 1.5GHz and supporting 5 mode LTE and dual SIM capability not expected by the smaller and up to 13MP camera. Despite some branded wins, the smaller Chinese brands suggest China brands for another they will only have boards with the Spreadtrum 4G chipset in December. Spreadtrum is two months; Spreadtrum still now planning to compete in the higher tier against Mediatek’s Helio family with a 16nm targeting an octa-core on octa-core chipset called Whale 2 built on TSMC’s 16nm process for launch in 2Q16. The 16nm by 2Q16 chipset would be timed closely to Mediatek’s Helio x30 chipset also coming out on 16nm around MWC though we still need to see delivery since the LTE solutions from Spreadtrum to date have not appeared in the China mass market reference designs. Figure 60: Spreadtrum roadmap is driving a shift toward 4G solutions Spreadtrum Spreadtrum Spreadtrum Spreadtrum Spreadtrum Spreadtrum Spreadtrum Chipset SC9620 modem Shark (2 chip) SC8831G SC7731G SC9830A Whale Whale 2 Technology 40nm 40nm SMIC 28nm HPM 28nm 28nm 16nm/14nm 16nm Multi-core Quad Quad Quad Quad Quad Octa Octa Cortex A53 CPU Modem Cortex A7 Cortex A7 Cortex A7 Cortex A7 NA 64 bit TD/FDD-LTE TD- TD- TD/FDD-LTE Network 2-chip LTE 1-chip LTE 1-chip LTE W/TD-SCDMA SCDMA/GSM SCDMA/GSM W/TD-SCDMA Frequency 1.0GHz 1.2GHz 1.4GHz 1.5GHz 1.5GHz 1.5GHz NA GPU Mali-400 Mali-400 Mali-400 Mali-400 MP2 Mali-400 NA NA Sampling 3Q14 Jan-14 3Q14 2015 NA 2016 4Q15 Ramp 4Q14 Jul-14 2015 2015 NA 2016 2016 Source: Company data, Credit Suisse research Captive chipsets also carving out some market share The improving competitiveness of captive chipsets from Huawei, Samsung and Leadcore Samsung, Leadcore, and has also taken a piece of business from the merchant market. Samsung's major gains last HiSilicon have improved year were mainly in its flagship smartphones shipping its own Exynos modem and their competitiveness to take Shannon modem and replacing Qualcomm's Snapdragon 810. This year, it will integrate some share at their parent its modem and processor into a high-end Exynos code-named Mongoose that will split the companies high-end Samsung flagships with Qualcomm Snapdragon 820 but it also opens the door for Samsung to take more share of its mid-tier models currently supplied by Qualcomm, Marvell and Spreadtrum. CS analyst Keon Han estimates about 70-80mn mid-tier models or 30% of allocation could move to the internal chipset. A shift by Samsung to internalise more models would only put more competitive pressure on the merchant players at the Chinese smartphone brands. Competition from merchant solutions is also rising in the China brands with Huawei now giving 40% of its allocation to HiSilicon on its mid-high-end 4G smartphones. HiSilicon is competitive with CAT 10 modem and octa-core processor built on TSMC's new 16nm FinFet process so capable of meeting specifications for Huawei's flagship smartphones.

China Smartphones Sector 27 05 January 2016

We also believe Leadcore, invested by Xiaomi, is also growing more capable with its offerings. The company has been shipping in an entry-level quad core processor into Xiaomi smartphones but will launch an upgraded quad core and octa-core with CAT 6 LTE modem in 1H16 and plans a move to 14nm FinFet for a high-end LTE-Advanced chipset in 2017. The company's new high-end chipsets plan to support augmented and virtual reality.

Figure 61: Captive chipsets improving in performance and integration HiSilicon HiSilicon HiSilicon HiSilicon HiSilicon Samsung Samsung Samsung Leadcore LTE chipsets Kirin 620 Kirin 930 Kirin 935 Kirin 940 Kirin 950 Exynos 7420 Exynos 7580 Exynos 8890 LC1860 Technology 28nm 28nm HPC 28nm HPC 16nm 16nm 14nm LPE 28nm 14nm LPP 28nm Multi-core Octa core Octa core Octa core Octa core Octa core Octa core Octa core Octa core Hexa core 4 Cortex A53 + 4 Cortex A53 + 4 Cortex A53 + Mongoose + CPU 8 Cortex A53 8 Cortex A53 8 Cortex A53 8 Cortex A53 6 Cortex A7 4 Cortex A72 4 Cortex A72 4 Cortex A57 A53 TD/FDD-LTE TD/FDD-LTE TD/FDD-LTE TD/FDD-LTE TD/FDD-LTE TD/FDD-LTE TD/FDD-LTE TD/FDD-LTE Network 2-chip LTE W/TD-SCDMA W/TD-SCDMA W/TD-SCDMA W/TD-SCDMA W/TD-SCDMA W/TD-SCDMA W/TD-SCDMA W/TD-SCDMA

Frequency 1.2GHz 1.8GHz 1.8GHz 2.2GHz 2.4GHz 2.1GHz 1.6GHz 2.3GHz 2GHz GPU Mali 450 Mali T628 Mali T628 Mali T860 Mali T880 Mali T760 Mali T720 Mali T880 Mali T628 Ramp 2Q15 2Q15 2Q15 3Q15 4Q15 2Q15 2Q15 1Q16 2Q15 Source: Company data, Credit Suisse research Market share relatively stable, but pricing still under pressure While pricing among the suppliers remains competitive, market share is relatively stable. Mediatek's share staying We estimate Mediatek’s share in the China built smartphone market is still 45-50%. We around 45-50% of the China now estimate 25mn units for both Intel and Leadcore, and 55mn for Hi-Silicon, taking out brands 14% of the market to these emerging players, up from 5% from these players last year. Mediatek will need to continue driving into more of the traditional tier-one’s (now 5-10% of its mix) and pushing both local customers and these brands into more developed market units, where its customers still have very low share of a 437mn unit market. Figure 62: Chipsets by vendor—Mediatek shareholding relatively stable Chipsets to China brands 2011 2012 2013 2014 2015E 2016E 2017E 15-17 CAGR Mediatek 10.0 109.8 223.2 356.4 386.6 442.5 499.6 14% Mediatek share (%) 11% 44% 45% 47% 45% 47% 49% Spreadtrum 0.2 32.0 120.6 160.0 200.0 215.0 225.0 6% Leadcore 3.0 5.0 12.0 16.0 19.0 22.0 25.0 15% Hi-Silicon 2.6 15.4 47.3 54.0 59.9 13% Asian suppliers 13.2 146.8 358.4 547.8 652.9 733.5 809.6 11% YoY Growth 1010% 144% 53% 19% 12% 10% Share 15% 59% 72% 72% 76% 79% 80% Qualcomm 53.5 81.6 116.7 187.9 183.5 184.3 186.6 1% Intel - - 10.0 15.0 20.0 NM Broadcom 1.5 2.5 7.0 5.0 - - - NM Marvell 12.0 15.0 13.0 25.0 15.0 - - NM ST-Ericsson 8.0 3.5 0.5 - - - - NM Overseas suppliers 75.0 102.6 137.2 217.9 208.5 199.3 206.6 0% YoY Growth 37% 34% 59% -4% -4% 4% Share 85% 41% 28% 28% 24% 21% 20% Chipset incl MTK/SPRD tier-1 88.3 249.4 495.6 765.7 861.3 932.8 1,016.2 9% YoY Growth 183% 99% 55% 12% 8% 9% Mediatek tier-one's 0.4 2.2 4.5 14.3 30.9 35.4 45.0 21% Spreadtrum tier-one's (Samsung) - 10.0 25.0 28.3 59.0 65.0 70.0 9% Chipset total to China brands 87.9 237.2 466.1 723.1 771.4 832.4 901.2 8% YoY Growth 170% 96% 55% 7% 8% 8% Source: Company data, Credit Suisse estimates Display components more favoured than panels Display is still the key component for differentiation The Chinese smartphone OEMs continue to view display as one of the key component for More HD and FHD adopted product differentiation, besides camera module upgrade, more memory/storage content, for 4G smartphones and adding biometric identification sensors. We have highlighted before that the display

China Smartphones Sector 28 05 January 2016 size shift has reached a limit (capped at ~6”) and our recent checks validated our view. However, the resolution migration of display remains on track and is accelerating, given the falling panel pricing on oversupply, yield improvement, and catch up of Chinese panel makers such as Tianma, BOE, and Truly, while AMOLED from non-Samsung suppliers are still minor. HD resolution has become the mainstream for Chinese branded and OEM/export mid-end smartphones with FHD mix continuing to increase given the sharp decline in panel pricing, as well as the cost reduction of other components. Several OEMs we met have also launched 2K (WQHD, 2560 x 1440) models with display panels from JDI and AUO. With more LTPS capacity coming on-line in Taiwan and China from 2016 and beyond, we believe FHD resolution panels could become the mainstream, which should be positive for leading driver IC suppliers like Novatek and Himax, given there is less competition in the high-end market. The higher resolution trend will also help driver IC backend providers like Chipbond given the longer testing time and more wafer consumption.

Figure 63: Smartphone panel pricing still declining—5" Figure 64: Ten new LTPS fabs coming on-line in 2016-18 FHD LTPS panel ASP dropped 50% since Jan 2014 will further drive the resolution shift Company 2014 2015 2016 2017 2018 BOE 5" FHD LTPS Gen 5.5 (LTPS & OLED) 30K/month -> 25K/month -> 35K/month 34 Chengdu Gen 6 (LTPS) 30K/month CSOT 32 Wuhan Gen 6 (LTPS) 30K/month AUO 30 Kunshan Gen 6 (LTPS) 25K/month 28 Innolux / Kaohsiung Gen 6 (LTPS) 24K/month 26 Foxconn Zhengzhou Gen 6 (LTPS) 24 Tianma Xiamen Gen 5.5 (LTPS) 15K/month LTPS + 15K/month OLED US$ 22 Shanghai Gen 5.5 (LTPS) 15K/month (30K in 2017?) 20 Xiamen Gen 6 (LTPS) 30K/mth

18 Wuhan Gen 6 (LTPS) 30K/mth

16 Truly Huizhou Gen 4 (LTPS) 25K/month 14 Visionnox Kunshan Gen 5.5 (LTPS) 8K/month 12 EDO Gen 4 (LTPS) 15K/month Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 JDI Hakusan Gen 6 (LTPS) 25K/month Source: DisplaySearch Source: Company data, Credit Suisse estimates

Figure 65: HD720 now becomes the mainstream for mid-end smartphone Company Blackview Malata Maysun Bluboo Blackview Elephone Quality Malata Bluboo DOOGEE Huateng Model name ETA V511 M5088 X6 Alife P1 Pro P9000 C QT-815 L508 X6 Plus F5 D1

Image Size 5.0" 5.0" 5.0" 5.5" 5.5" 5.5'' 5.5" 5.0" 5.5" 5.5" 5.0"/4.7" E-ink Technology TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE Pixels 1280*720 1280*720 1366*768 1280*720 1280*720 1920*1080 1280*720 1280*720 1920*1080 1920*1080 1280*720 PPI 293 293 313 267 267 400 267 293 400 400 293 Touch Capacitive On-cell G/F Capacitive G/F/F Capacitive Capacitive G/F/F Capacitive Capacitive Capacitive Fingerprint ID No No No Area (front) Area (front) No Area (back) Area (front) Area (front) Area (back) No RAM 1GB 1GB 2GB 1GB 2GB 2GB 1GB 1GB 3GB 3GB 2GB ROM 8GB 8GB 16GB 8GB 16GB 16GB 8GB 8GB 16GB 16GB 16GB Camera 5MP + 8MP 5MP + 8MP 5MP + 13MP 2MP + 8MP 5MP + 13MP 5MP + 13MP 2MP + 5MP 5MP + 13MP 5MP + 13MP 5MP + 13MP 2MP + 8MP Battery 2400mAh 2050mAh 2200mAh 3000mAh 2600mAh 3000mAh 2900mAh 2400mAh 3000mAh 2660mAh 2100mAh Processor Chip MT6735 MT6735P MT6735M MT6735 MT6735 MT6755 (P10) MT6735 MT6735 MT6753 MT6753 MT6735A Multi-core Quad Quad Quad Quad Quad Octa Quad Quad Octa Octa Quad Factory Price (USD) $52 $70 $80 $85 $99 $109 $110 $120 $125 $130 $145 Source: Company data We also saw other interesting changes on the display features including 2.5D cover glass and dual screen. There are multiple smartphone OEMs that have adopted the 2.5D display with Corning's Gorilla Glass. The 2.5D design makes the edge of the glass smoother with a more premium looking design. There are also more whitebox makers introducing dual screen smartphones with a TFT-LCD panel as the main screen and an E-ink e-paper at the back of the phone for reading purposes. Although the design looks similar to Yotaphone, we think the user experience on the e-paper display still has room for further improvement.

China Smartphones Sector 29 05 January 2016

Chinese panel makers also catching up on higher resolution smartphone panels For the Chinese panel makers, our checks suggest BOE's Gen 5.5 LTPS fab in Ordos Tianma is supplying LTPS- have improved its production yield and it has ramped its HD smartphone panel shipments. based FHD panel to It is also developing in-cell touch solution (5.2" FHD) and for end customers (we think it Xiaomi… includes Huawei) verification in 2H15. Moreover, BOE has been sampling with Xiaomi and could potentially become a supplier in 2016. For Tianma, it has ramped its Xiamen Gen 5.5 fab since 2014 and has been shipping to local brands and some overseas smartphone makers. It ramped its FHD LTPS TFT shipment to 4.6mn in 2Q15, up 200% YoY, and we believe it has been added to Xiaomi's Hongmi Note 2 panel supply chain, gaining share from Sharp and AUO. Tianma has also showcased a 5.2" UHD in-cell touch display at SID 2015 in June, and introduced WQHD models (5.2", 5.5", 6.0") in 2H15. OLED could be the next theme Samsung Display has been selling more AMOLED panels to Chinese smartphone brands More AMOLED adoption for such as Oppo, Vivo, Gionee, Meizu, and whitebox-makers and the AMOLED adoption rate smartphones in 2016 will further increase in 2016. Taiwanese and Chinese panel makers are also expanding their LTPS capacity, and could add additional tools for the OLED process if demand picks up. Nevertheless, technology, yield, and patent are still the issues that they will need to overcome. There are also more activities on AMOLED R&D for future iPhone from the supply chain and could become the new display technology for iPhone by 2018. We believe this will become an overhang for iPhone BLM-makers, Radiant and Minebea, although there is no change on the display technology for iPhone 7, which will be launched in 2H16. 7-10” tablet demand remains muted but larger size and 2-in-1 designs taking off The tablet market has been weak in 2H15 on phablet cannibalisation and several tablet Tablet makers are exploring OEMs are trying to diversify their businesses by entering the smartphone market or new opportunities introducing 2-in-1 Windows-based tablets. With the launch of over 12" tablets for educational and commercial applications by Microsoft and Apple, several tablet OEMs we met also introduced similar 2-in-1 or larger size tablets with Intel CPU, but with much lower pricing. As larger size screen generally requires higher resolution (HD or FHD) and these tablet/2-in-1s are 100% touch embedded, we think it could benefit leading driver IC makers (Novatek and Himax), as well as touch supplier controller IC supplier like Elan.

Figure 66: Larger size tablet could be the next growing segment for tablet OEMs in 2016 Microsoft Microsoft Microsoft Apple Apple Microsoft Apple

Surface Pro 4 Surface Pro 3 Surface 3 iPad Pro iPad Air 2 Surface Book Macbook Pro (13.3") Size (mm) 292.10 x 201.42 x 8.45 292.1 x 201.4 x 9.1 267 x 187 x 8.7 305.7 x 220.6 x 6.9 240 x 169.5 x 6.1 232.1 x 312.3 x 22.8 314 x 219 x 18 Weight (g) 766g / 786g 800g 622g 713g 437g 1576g 1580g Operating system Windows 10 Pro Windows 10 Pro Windows 10 iOS 9 iOS 9 Windows 10 Pro OS X El Capitan Screen size 12.3" 12" 10.8" 12.9" 9.7" 13.5" 13.3" Resolution 2736 x 1824 2160 x 1440 1920 x 1280 2732 x 2048 2048 x 1536 3000 x 2000 2560 x 1600 DRAM 4GB / 8GB / 16GB 4GB / 8GB 2GB / 4GB 4GB 2GB 8GB / 16GB 8GB / 16GB Storage 128GB /256GB/512GB / 1TB 64GB / 128GB / 256GB 64GB / 128GB 32GB / 128GB 16GB / 64GB / 128GB 128GB / 256GB / 512GB 128GB / 256GB / 512GB CPU Intel Core m3 / i5 / i7 Intel Core i3 / i5 / i7 Intel Atom x7-Z8700 A9X A8X Intel Core i5 / i7 Intel Core i5 / i7 Camera 8MP / 5MP 5MP / 5MP 8MP / 3.5Mp 8MP / 1.2MP 8MP / 1.2MP 8MP / 5MP 720p HD Source: Company data Fingerprint proliferation still at the early stage According to Statista, the global mobile payment transaction is expected to reach US$721 Fingerprint identification bn by 2017, ~30% CAGR over 2015-17E. It also forecasts that the global mobile wallet becomes a new feature POS payments, which are the transactions at Point-of-Sale that are processed via smartphone applications (i.e., mobile wallets), to see a 100% CAGR over 2015-2020E. We believe this is mainly driven by the launch of mobile payment platforms by Samsung, Apple, and others (ZTE Pay, Alipay, WeChat Pay, etc.) and change in consumer behaviour. We also think the support by FIDO (Fast IDentity Online) Alliance to further accelerate the mobile payment via NFC in the next few years will also support the

China Smartphones Sector 30 05 January 2016 fingerprint proliferation. With the more mature ecosystem and lower component costs, we believe fingerprint will become the mainstream authentication method for these payments, replacing pin or password, as fingerprint identification is faster and more secure.

Figure 67: Global mobile payment transaction to grow at Figure 68: Global mobile wallet POS payments to see ~30% CAGR in 2015-17E faster growth at 100% CAGR in 2015-2020E US$ bn Annual transaction volume YoY (RHS) US$ bn Mobile wallet POS payments YoY 800 100% 800 400% 700 90% 700 350% 80% 600 600 300% 70% 500 60% 500 250% 400 50% 400 200% 300 40% 300 150% 30% 200 200 100% 20% 100 10% 100 50% 0 0% 0 0% 2010 2011 2012 2013 2014 2015 2016 2017 2014 2015 2016 2017 2018 2019 2020

Source: Statista Source: Statista

Figure 69: Adoption and transaction value for global Figure 70: China's non-cash payment seeing a significant mobile wallet POS payment will also see strong growth change from 1Q15 mn User Avg transaction value per user every year (RHS) US$ On-line Mobile/POS/Other ATM Telephone Others 500 1,800 100% 450 1,600 90% 400 80% 1,400 1.2% 4.8% 70% 350 1,200 300 60% 0.2% 0.6% 14.9% 1,000 13.4% 250 50% 800 200 40% 600 76% 73% 150 30% 64% 66% 400 54% 50% 100 20% 200 50 10% 0 0 0% 2014 2015 2016 2017 2018 2019 2020 2012 2013 2014 1Q15 2Q15 3Q15

Source: Statista Source: PBOC 30% penetration for non-Apple smartphone in 2016E We estimate the penetration for smartphone with fingerprint sensors of 29% in 2015E and 60% CAGR for non-Apple will increase to 40% in 2016E with ~100% of iPhone being equipped with fingerprint fingerprint shipments in sensors. For the non-Apple smartphone devices, we estimate its fingerprint penetration 2015-18E only reached 16% in 2015E but should increase to 30% in 2016E, thanks to the push by Samsung and Chinese brands. We estimate the fingerprint sensor adoption rate for non- Apple will further increase to 47% in 2017 and 56% by 2018, with 60% CAGR for fingerprint sensor shipment growth in 2015-2018E vs 4% CAGR for non-Apple smartphone unit growth in the same period. For Samsung, it currently adopts fingerprint sensors on its flagship models such as Galaxy S6, Galaxy S6 edge, and Galaxy Note 5, as well as some mid- to high-end models. We believe Samsung will extend the fingerprint adoption to its mid-range A-series model in 2016 and long term will also expand it to the entry level J series and make fingerprint sensor a standard feature for its smartphones.

China Smartphones Sector 31 05 January 2016

Figure 71: Global smartphone fingerprint penetration to Figure 72: Non-Apple smartphone fingerprint penetration reach 67% by 2018E to reach 57% by 2018E mn units Global smartphone fingerprint shipments Penetration (RHS) mn units Non-Apple smartphone fingerprint shipments Penetration (RHS) 1,200 80% 900 60% 57% 70% 800 1,000 67% 50% 60% 700 47% 800 55% 600 40% 50% 500 600 40% 40% 30% 30% 400 30% 400 29% 300 20% 20% 16% 19% 200 200 10% 10% 100 6% - 0% - 0% 2014 2015E 2016E 2017E 2018E 2014 2015E 2016E 2017E 2018E

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates We also think other non-Chinese Android smartphone makers in North Asia, such as Whitebox is also adopting Asus, LG, HTC, Sony, Panasonic, etc., will introduce more fingerprint-enabled fingerprint on their mid- to smartphones in 2016. For the Chinese smartphone makers, Huawei, Meizu, Oppo, Vivo, high-end devices etc., have announced their fingerprint-enabled smartphones since 2014 and we have also seen other brands like LeTV, Xiaomi, Lenovo, ZTE, Gionee, etc., launch their products in 2015. Our supply chain visit in October 2015 also suggests whitebox makers such as Elephone, Malata, Leagoo, etc., are now adopting fingerprint onto their mid- to high-end devices.

Figure 73: Global smartphone fingerprint shipment estimates: Non-Apple to grow at 60% CAGR in 2015-18E mn units 2014 2015E 2016E 2017E 2018E 15-18E CAGR Total Smartphone 1,303 1,438 1,504 1,559 1,614 3.9% YoY (RHS) 28% 10% 5% 4% 4% iPhone shipments 193 235 222 235 245 1.4% Fingerprint penetration 91% 98% 100% 100% 100% iPhone fingerprint shipments 175 230 222 235 245 2.1%

Samsung shipments 318 330 340 345 350 2.0% Fingerprint penetration 14% 27% 39% 54% 65% Samsung fingerprint shipments 45 89 133 186 228 36.9%

China and other smartphone shipments 793 873 941 979 1,019 5.3% Fingerprint penetration 3% 11% 27% 44% 54% China and other smartphone fingerprint shipments 26 99 251 435 545 76.8%

Global smartphone fingerprint shipments 246 418 607 856 1,082 37.3% Non-Apple smartphone fingerprint shipments 71 188 385 621 774 60.3%

Global smartphone fingerprint penetration 19% 29% 40% 55% 67% Non-Apple smartphone fingerprint penetration 6% 16% 30% 47% 57% Source: Company data, Credit Suisse estimates However, some of the fingerprint devices announced in 2015 (for example, Sony Z5, ZTE Not all fingerprint-enabled Blade A1, LeTV Max, Oppo R7, etc.), only support unlock function, not for the payment devices support payment authentication. Nevertheless, we believe the native support by Android 6.0, maturing ecosystems, and cheaper components cost will be the main push for the fingerprint authentication for mobile payments among the Chinese smartphone makers.

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Figure 74: Selective branded smartphones with fingerprint enabled Brand Coolpad Dove Google Huawei LeTV LeTV LG Meizu Samsung Model name Dazen Note 3 L5 Pro Nexux 6P Honor 7 1S Max V10 MX5 A5

Fingerprint sensor FPC Goodix FPC FPC Goodix FPC FPC FPC Synaptics/Egis Algorithm Precise Biometric Goodix Precise Biometric Precise Biometric Goodix Precise Biometric Precise Biometric Precise Biometric Samsung/Egis Location Back Front Back Back Back Back Back Back Front

Brand Meizu Nubia OnePlus Oppo Samsung ZTE ZTE Lenovo Samsung Model name Pro 5 Z9 Max OnePlus 2 R7+ Galaxy S6 Blade S7 Axon ZUK Z1 A7

Fingerprint sensor FPC Egis FPC FPC Synaptics Goodix FPC FPC Synaptics/Egis Algorithm Precise Biometric Egis Precise Biometric Precise Biometric Egis Goodix Precise Biometric Precise Biometric Samsung/Egis Location Front Side Front Back Front Front Back Front Front Source: Company data

Figure 75: Increasing numbers of whitebox smartphones adopting fingerprint solutions Company Bluboo Blackview Quality Malata Bluboo DOOGEE Maysun Malata LEAGOO Elephone Elephone 8Smobile Model name X6 Alife P1 Pro QT-815 L508 X6 Plus F5 M5530L M1 Elite 1 P9000 Vowney 8S5631

Image Size 5.5" 5.5" 5.5" 5.0" 5.5" 5.5" 5.5'' 5.2'' 5.5'' 5.5'' 5.5'' 5.5'' Technology TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE Pixels 1280*720 1280*720 1280*720 1280*720 1920*1080 1920*1080 1920*1080 1920*1080 1920*1080 1920*1080 2560*1440 2560*1440 PPI 267 267 267 293 400 400 400 423 400 400 534 534 Touch Capacitive G/F/F Capacitive G/F/F Capacitive Capacitive G/F/F G/F/F Capacitive Capacitive Capacitive Capacitive Fingerprint ID Area (front) Area (front) Area (back) Area (front) Area (front) Area (back) Area (back) Area (back) Area (front) Area (side) Area (back) Area (back) RAM 1GB 2GB 1GB 1GB 3GB 3GB 3GB 3GB 3GB 4GB 4GB 3GB ROM 8GB 16GB 8GB 8GB 16GB 16GB 16GB 16GB 32GB 32GB 32GB 32GB Camera 2MP + 8MP 5MP + 13MP 2MP + 5MP 5MP + 13MP 5MP + 13MP 5MP + 13MP 5MP + 13MP 8MP + 21MP 13MP + 16MP 8MP + 21MP 5MP + 21MP 8MP + 21MP Battery 3000mAh 2600mAh 2900mAh 2400mAh 3000mAh 2660mAh 4000mAh 2300mAh 2400mAh 4000mAh 4000mAh Processor Chip MT6735 MT6735 MT6735 MT6735 MT6753 MT6753 MT6753 MT6755 MT6755 (P10) MT6755 MT6795 (X10) MT6795 (X10) Multi-core Quad Quad Quad Quad Octa Octa Octa Octa Octa Octa Octa Octa Factory Price (USD) $85 $99 $110 $120 $125 $130 $154 $160 $167 $240 $250 $270 Source: Company data Embedded touch (on-cell/in-cell) gaining more attention OGS and GFF are the mainstream for smartphone touch among Chinese smartphone TDDI in-cell take off is more brands and OEMs, with full lamination a must for mid to high-end products for thinner likely a 2H16 story design and better optical performance. Embedded touch proliferation has picked up after a slower-than-expected proliferation in 2H14-1H15. Several OEMS have adopted JDI's hybrid in-cell and on-cell from Innolux/Hannstar, but TDDI full in-cell has not taken off yet. We note driver IC makers like Synaptics, FocalTech, and Himax's TDDI solutions are based on a self-capacitance structure and ready to support a-Si HD resolution panels, while their FHD and WQHD products are still sampling. Novatek has started R&D on in- cell TDDI. As in-cell touch's biggest selling point to consumers is slimmer design, we believe it makes more sense for in-cell to be adopted on higher-end FHD-above models. Therefore, we expect the take-off of TDDI for in-cell touch to take more share from 2H16, after chip and panel makers pass the qualification and obtain design-wins for 1H16 models.

Figure 76: TDDI for in-cell take off is now more a 2016 story Panel maker TDDI partner Mass production schedule Japan Display (Hybrid) Synaptics, Novatek, Goodix 2014 LG Display Synaptics, Himax, Novatek, FocalTech 2H14 AUO Synaptics, FocalTech, Novatek 1H15 INX Synaptics, FocalTech, Novatek 2H15 BOE FocalTech, Himax 2H15 Tianma FocalTech, Himax 2H15 Source: Company data, Credit Suisse estimates

China Smartphones Sector 33 05 January 2016 Stay selective positioning in the Asian supply chain In the Asian tech coverage, we are more cautious on the overall smartphone opportunity but would invest in companies where content or market share gains are still coming through and margins are protective through innovation or competitive advantage. We highlight implications for the major subsectors.

■ Foundry – TSMC to recover in full strength in 2016, SMIC opportunities in front TSMC recovering in 2016, of it. We recently upgraded TSMC to OUTPERFORM with a target price of NT$163 as SMIC to benefit from China we believe the company’s business outlook is improving, with inventory destocking policy support throughout 2015 reversing to restocking in 1H16, 16nm customer base broadening with Apple and its traditional customers, and competitive landscape being more benign. With rising 16nm scale, depreciating NTD, easing fab depreciation burden and rising utilisation, we expect TSMC’s GM to return to multi-year high. TSMC's own process technology and rising cash flows and yields also provide support to the share price. SMIC is our emerging market pick as a Chinese foundry with opportunity to benefit from China's semiconductor stimulus measures for its ecosystem and its differentiated processes which are allowing for broader base of power management, CMOS sensor, connectivity and fingerprint IC customers to its mature processes. Key risk on SMIC though is lower margins in 2016 as it brings up expensive 12" 28nm capacity. ■ IC Design: Neutral on MediaTek - Defending share at the expense of margin. IC design remains a competitive space with global players Qualcomm, and Intel competing against Asian suppliers MediaTek and Spreadtrum and semi-captive Asian suppliers HiSilicon, Samsung and Leadcore. Mediatek may continue its push for share at the expense of margin as Qualcomm defends 4G, Spreadtrum penetrates 3G and Huawei and Xiaomi use more internal sources. The company acknowledged its aggressive push will continue, though keeping risk on with competitors taking measures to defend share. We maintain our conservative outlook and remain NEUTRAL with a target price NT$250 as the company doesn't yet control its destiny on pricing and margins due to fierce competition. ■ Back-end: Stay Neutral due to modest demand and some competitive challenges, opportunity would come with consolidation. The major back-end suppliers all saw revenue declines in the core package and test business in 2015 due to the slowdown in consumer tech demand, share losses at top customer Qualcomm and excess inventory. We expect a modest rebound in 2016 as the inventory correction runs its course, tracks closer to still modestly positive mobility demand and the sector adds content through more system in package modules. Key risk in the sector is from rising China competition and some inroads from foundry in wafer level packaging including TSMC's InFO packaging with Apple in 2016, but opportunity could come through from more consolidation.

■ IC distribution: sacrificing gross margins and opex to drive growth. WPG has assembled a string of acquisitions to achieve 18% growth from 2009-2014 to double its Asian distribution share from 12% to 26% since the financial crisis. The company has lifted smartphone/tablet exposure from 15% to 50% over the past few years. WPG offers decent unit growth from its EM exposure and maintains its 7% dividend yield (75% payout ratio), we stay NEUTRAL on the stock as it continues to strategically grow sales but sacrifice gross margin.

■ Devices: TCL Comm and Lenovo. We continue to favour TCLC on higher exposure to the export market. We believe TCLC has a complete product portfolio (feature phone, smartphone, tablet, etc.) and is well positioned to capture the 4G proliferation in the European, US, and Latin American markets, as well as the feature phone to

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smartphone migration in emerging countries. Moreover, TCLC's solid relationship with operators and reliable quality have also helped it to secure more slots to drive its growth in 2016-17. We remain constructive on Lenovo as we expect the faster growth will be triggered by the PC/Server businesses and their synergies, which we believe the market continues to under-appreciate. Also, we believe the market is overly focused on smartphone and not accessing its restructuring plan, which eliminates at US$1.35 bn in cost the next 12 months. Growth for Lenovo should come through from: (1) share gains in the traditional x86 server market from HP/Dell and growth from hyper-converged solutions (i.e., Baidu, Alibaba, and Tencent); (2) PC share gains against Taiwan and Japanese PC brands; (3) non-China open channel smartphone markets delivers faster growth and profit result; and (4) Brazil turnaround.

■ Display-related ICs: Novatek, Chipbond and Egis. In the display-related IC space, we prefer Novatek and Chipbond, as we think they are better positioned to benefit from the resolution migration, compared to panel makers, who should suffer from the oversupply in 2016. For Novatek, we think its technology leadership and the higher exposure to high-end panels should support its growth amid the resolution migration trend. For Chipbond, the duopoly in the driver IC backend space should lead to a more stable competitive landscape and the in-cell TDDI trend will benefit DDI backend as the integration of touch and driver IC still adopts their gold bumping packaging process but with larger chip size (more wafers) and longer testing time. For the overall driver IC supply chain, the capacity ramp among Chinese panel makers in 2016-17 should be a positive to the Taiwanese players, as Chinese players are less competitive in terms of scale and technology. We also like Egis as the fingerprint sensor solution provider, as we think it will ride the fingerprint sensor proliferation in the next few years, with its proprietary algorithm for payment (proven by Samsung) and lower cost structure leading to share gains and high earnings growth in 2016-17E

■ Compound Semi: Win Semi and VPEC. In the Taiwan compound semiconductor space, we think Win Semi is well positioned to grow with the RF component sector with its strong customer relationship, technology independence and product mix shift towards higher margin WiFi and infrastructure applications. We also prefer VPEC (2455.TW) as the second largest epiwafer supplier in the world, on its diversified customer base, the expansion into optical communication and the high dividend payout supported by its solid balance sheet/free cash flows. We rate ASWC (8086.TWO) NEUTRAL. Though we believe it is a quality name, its heavy reliance on Skyworks could be a mixed blessing, as the benefit of the close relationship could be coupled with higher business volatility. Despite AWSC having higher ROEs, we believe the stock is fairly valued at the current levels, taking into account the potential single client risk.

■ Components – content gainers better off, but not immune to downgrades. Relatively, we still like unit/content share gainers, but they are not immune to earnings downgrades from Apple's weakness and a slowing smartphone space. We would still have relative preference on unit/content share gainers including Catcher/Casetek (by P. Chen), Alps/Murata (by A. Kanemoto), Sony (by M. Nishimura), and Hon Hai (by T. Wu) on potential upgrades from a 4" iPhone, better iPad Pro sales, and from data center. We will revisit Largan/AAC (the stocks, not numbers), after expectations are reset in 1Q16. Top names to avoid are Ibiden (by A. Kanemoto) in view of the InFo- related risk and optimistic guidance for module substrates, Pegatron (by T. Wu) on iPhone share gain story peaking out and rising concerns over 2016 iPhone units, and Radiant (by J. Su) on pricing/share competition and vulnerable earnings if display technology shifts to AMOLED.

China Smartphones Sector 35 05 January 2016

Figure 77: Key Asian suppliers in smartphones (in millions, unless otherwise stated) Supply chain Key suppliers Foundry: TSMC, SMIC, Win Semi, Visual Photonics, AWSC Back-end: Chipbond Asian fabless: MediaTek, Silicon Motion Overseas fabless and IP: eMemory, Skyworks Components: TXC Semiconductor Distribution: WPG PCBs: Kinsus, Unimicron Optical Lens: Largan, Sunny Optical Acoustics/Haptics: AAC Acoustics, Goertek, Alps, Murata Devices: Lenovo, Samsung, ZTE, TCL Display/Touch components: TPK, O-Film, AUO, Novatek, Himax, FocalTech Carriers: China Unicom, China Mobile, China Telecom Source: Credit Suisse estimates

China Smartphones Sector 36 05 January 2016

Companies Mentioned (Price as of 05-Jan-2016) AAC Technologies Holdings Inc (2018.HK, HK$49.5) ASM Pacific Tech. (0522.HK, HK$58.55) AU Optronics (2409.TW, NT$9.2) Advanced Wireless Semiconductor Company (8086.TWO, NT$87.9) Alcatel-Lucent (ALUA.PA, €3.61) Alibaba Group Holding Limited (BABA.N, $76.69) Alps Electric (6770.T, ¥3,135) Amkor Technology Inc. (AMKR.OQ, $6.04) Apple Inc (AAPL.OQ, $105.35) Baidu Inc (BIDU.OQ, $184.03) BlackBerry (BBRY.OQ, $9.14) Casetek Holdings Limited (5264.TW, NT$136.5) Catcher Technology (2474.TW, NT$265.0) China Mobile Limited (0941.HK, HK$82.9) China Telecom (0728.HK, HK$3.51) China Unicom Hong Kong Ltd (0762.HK, HK$9.1) Chipbond (6147.TWO, NT$46.15) Coolpad Group Limited (2369.HK, HK$1.5) Egis Technology Inc. (6462.TWO, NT$134.0) FocalTech Corporation, Ltd. (3545.TW, NT$34.05) Google (GOOAV.OQ, $568.67) HTC Corp (2498.TW, NT$77.8) Hermes Microvision, Inc. (3658.TWO, NT$1200.0) Hi Silicon (Unlisted) Himax Technologies, Inc. (HIMX.OQ, $8.59) Hon Hai Precision (2317.TW, NT$79.1) Hua Hong Semiconductor Limited (1347.HK, HK$7.22) Innolux Corporation (3481.TW, NT$9.52) Intel Corp. (INTC.OQ, $33.99) Kinsus Interconnect Tech (3189.TW, NT$64.8) LG Display Co Ltd. (034220.KS, W23,800) Largan Precision (3008.TW, NT$2110.0) Leadcore (Unlisted) Lenovo Group Ltd (0992.HK, HK$7.35) MediaTek Inc. (2454.TW, NT$242.5, NEUTRAL, TP NT$250.0) Micromax (Unlisted) Microsoft Corporation (MSFT.OQ, $54.8) Motorola Solutions (MSI.N, $67.13) Murata Manufacturing (6981.T, ¥16,890) NVIDIA (NVDA.OQ, $32.37) Nokia (NOK.N, $7.18) Novatek Microelectronics Corp Ltd (3034.TW, NT$125.5) Pegatron (4938.TW, NT$72.0) Powertech Technology (6239.TW, NT$65.0) QUALCOMM Inc. (QCOM.OQ, $50.12) RDA Microelectronics (RDA.OQ^G14, $18.45) RDA Microelectronics (RDA.OQ^G14, $18.45) RDA Microelectronics (RDA.OQ^G14, $18.45) RDA Microelectronics (RDA.OQ^G14, $18.45) Radiant Opto-Electronics (6176.TW, NT$71.7) Realtek Semiconductor (2379.TW, NT$78.0) Samsung Electronics (005930.KS, W1,208,000) Semiconductor Manufacturing International Corp. (0981.HK, HK$0.77) Simon Property Group, Inc. (SPG.N, $192.34) Sony (6758.T, ¥2,962) Spreadtrum Communication (SPRD.OQ^L13, $30.93) Spreadtrum Communication (SPRD.OQ^L13, $30.93) Spreadtrum Communication (SPRD.OQ^L13, $30.93) Spreadtrum Communication (SPRD.OQ^L13, $30.93) Spreadtrum Communication (SPRD.OQ^L13, $30.93) TCL Communication Technology Holdings Limited (2618.HK, HK$5.72) Taiwan Semiconductor Manufacturing (2330.TW, NT$138.0, OUTPERFORM, TP NT$163.0) Tencent Holdings (0700.HK, HK$147.4) Unimicron Technology Corp (3037.TW, NT$13.7) United Microelectronics (2303.TW, NT$11.75) Vanguard International Semiconductor (5347.TWO, NT$41.9, OUTPERFORM, TP NT$50.0) Visual Photonics Epitaxy Co., Ltd (2455.TW, NT$48.0, OUTPERFORM, TP NT$49.0) WPG Holdings Ltd (3702.TW, NT$30.7) Win Semiconductors Corp (3105.TWO, NT$51.9) Xiaomi (Unlisted) ZTE Corporation (0763.HK, HK$16.18) eMemory (3529.TWO, NT$353.5)

Disclosure Appendix

China Smartphones Sector 37 05 January 2016

Important Global Disclosures Randy Abrams, CFA, Jerry Su, Pauline Chen, Thompson Wu and Derrick Yang each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

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

2454.TW Closing Price Target Price Target Price Closing Price 2454.TW Date (NT$) (NT$) Rating 600 27-Jun-13 328.00 400.00 O 09-Sep-13 370.00 440.00 500 01-Nov-13 404.50 480.00 06-Jan-14 431.50 500.00 400 08-Apr-14 460.00 540.00 01-May-14 472.00 570.00 300 07-Oct-14 455.50 540.00 10-Feb-15 454.00 520.00 200 29-Mar-15 419.00 425.00 N 1- Jul- 13 1- Jan- 14 1- Jul- 14 1- Jan- 15 1- Jul- 15 1- Jan- 16 27-Apr-15 410.50 405.00 OUTPERFORM NEUTRAL 15-Jun-15 409.00 430.00 03-Aug-15 299.00 300.00 02-Nov-15 270.00 250.00 * Asterisk signifies initiation or assumption of coverage.

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

2330.TW Closing Price Target Price Target Price Closing Price 2330.TW Date (NT$) (NT$) Rating 170 17-Jan-13 99.30 109.00 O 19-Apr-13 106.50 116.00 150 19-Feb-14 108.00 122.00 12-Mar-14 113.00 130.00 130 18-Apr-14 123.00 137.00 10-Jul-14 134.50 150.00 110 17-Jul-14 124.50 145.00 08-Jan-15 138.00 145.00 N 90 17-Jul-15 140.00 150.00 1- Jan- 13 1- Jan- 14 1- Jan- 15 1- Jan- 16 16-Oct-15 137.50 156.00 OUTPERFORM NEUTRAL 11-Dec-15 139.50 163.00 O * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Vanguard International Semiconductor (5347.TWO)

5347.TWO Closing Price Target Price Target Price Closing Price 5347.TWO Date (NT$) (NT$) Rating 60 25-Jan-13 20.60 23.00 N 06-May-13 34.00 34.00 50 05-Nov-13 32.30 35.00 17-Feb-14 42.50 44.00 40 17-Mar-14 46.75 50.00 26-Jan-15 54.50 56.00 30 04-May-15 44.25 56.00 O 10-Jul-15 40.80 54.00 20 04-Aug-15 34.30 50.00 1- Jul- 13 1- Jan- 14 1- Jul- 14 1- Jan- 15 1- Jul- 15 1- Jan- 16 * Asterisk signifies initiation or assumption of coverage. NEUTRAL OUTPERFORM

China Smartphones Sector 38 05 January 2016

3-Year Price and Rating History for Visual Photonics Epitaxy Co., Ltd (2455.TW)

2455.TW Closing Price Target Price Target Price Closing Price 2455.TW Date (NT$) (NT$) Rating 50 11-Nov-15 37.20 47.00 O * 03-Dec-15 44.90 49.00 45 * Asterisk signifies initiation or assumption of coverage. 40

35

30 15- Nov- 15 30- Nov- 15 15- Dec- 15 30- Dec- 15 OUTPERFORM

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China Smartphones Sector 39 05 January 2016

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Target Price and Rating Valuation Methodology and Risks: (12 months) for MediaTek Inc. (2454.TW) Method: Our target price of NT$250 for Mediatek is based on 16x 2016E EPS, in-line with global peers. We maintain our conservative outlook as the company does yet control its destiny on pricing and margins due to fierce competition and thus maintain Neutral on Mediatek. Risk: Risks that could cause the share price to diverge from our NT$250 target price and cause us to change our rating for Mediatek include the impact of competitive products and pricing, timely design acceptance by its customers, timely introduction of new technologies, ability to ramp new products into volume, industry-wide shifts in supply and demand for semiconductor products, industry overcapacity, availability of manufacturing capacity, and financial stability in end markets. Target Price and Rating Valuation Methodology and Risks: (12 months) for Taiwan Semiconductor Manufacturing (2330.TW) Method: Our NT$163 target price for TSMC is based on 13x average 2016E EPS (earnings per share), implying 3x P/B (price-to-book), near the midpoint of its average 11-15x and 2.5-3.5x range. We are seeing business outlook improving and technology leadership should keep market share and profitability intact and dividends will likely rise again as capex moderates and maintain Outperform. Risk: Risks that could impede achievement of our NT$163 target price and cause us to lower our rating for TSMC would include: fierce competition, demand failing to pick up or Apple orders not being as strong as expected. Target Price and Rating Valuation Methodology and Risks: (12 months) for Vanguard International Semiconductor (5347.TWO) Method: Our target on Vanguard at NT$50 is based on 3x forward P/B and 14x ex-cash 2016 P/E as it would still offer 7% cash yield at that level supported by US$700mn cash that could be returned in buybacks (38% of its market cap) and 8-10% FCF yield. While ROE looks modest at 15%, RONA (return on net assets) excluding the cash is a healthy 32%. We maintain Outperform on Vanguard. Risk: The risks that may impede achievement of our NT$50 target price and cause us to change our rating for Vanguard International Semiconductor include the following: (1) other memory companies convert 200mm to logic, (2) memory pricing impacts the foundry revenue from Winbond, (3) process transition hiccups. (4) Price competition from peers is more severe than expected. (5) Vanguard, like its peers would be affected by an unexpected slowdown in the global economy. Target Price and Rating Valuation Methodology and Risks: (12 months) for Visual Photonics Epitaxy Co., Ltd (2455.TW) Method: Our target price of NT$49 for VPEC is based on 18x 2016E EPS (earnings per share), vs the historical average of 18-19x and the range of 4-30x 12M forward P/E (price-to-earnings). We rate VPEC OUTPERFORM due to its diversified customer base, superior profitability, strong balance, and high dividend yield

Risk: Risks that could impede achievement of our target price of NT$49 for VPEC include: (1) weaker growth in the RF component space, (2) slower traction in the optical communication expansion, (3) higher-than-expected adoption of the silicon-based RF components impacting the total addressable market.

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

See the Companies Mentioned section for full company names The subject company (2330.TW, 2454.TW, QCOM.OQ, AAPL.OQ, 2303.TW, AMKR.OQ, 3658.TWO, 005930.KS, MSFT.OQ, 3481.TW, 034220.KS, BABA.N, BIDU.OQ, 0700.HK, 3037.TW, HIMX.OQ, 3545.TW, SPG.N, INTC.OQ, NOK.N, ALUA.PA, 0763.HK, 0992.HK, 2317.TW, 2498.TW, 4938.TW, 5264.TW, 3034.TW, 3105.TWO) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (AAPL.OQ, 2303.TW, MSFT.OQ, BABA.N, 0700.HK, SPG.N, INTC.OQ, NOK.N, ALUA.PA, 0992.HK, 3034.TW) within the past 12 months.

China Smartphones Sector 40 05 January 2016

Credit Suisse provided non-investment banking services to the subject company (SPG.N, INTC.OQ) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (AAPL.OQ, 2303.TW, 0700.HK, 0992.HK) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (AAPL.OQ, 2303.TW, MSFT.OQ, BABA.N, 0700.HK, SPG.N, INTC.OQ, NOK.N, ALUA.PA, 0992.HK, 3034.TW) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (2454.TW, 5347.TWO, QCOM.OQ, AAPL.OQ, 2303.TW, AMKR.OQ, 3658.TWO, 0728.HK, 0762.HK, 005930.KS, MSFT.OQ, 3481.TW, 034220.KS, BABA.N, BIDU.OQ, 0700.HK, 3037.TW, HIMX.OQ, 3545.TW, SPG.N, INTC.OQ, NOK.N, ALUA.PA, 0522.HK, 0992.HK, 2317.TW, 2474.TW, 2498.TW, 2618.HK, 3008.TW, 4938.TW, 5264.TW, 6239.TW, 6981.T, 3034.TW, 3105.TWO) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (SPG.N, INTC.OQ) within the past 12 months As of the date of this report, Credit Suisse makes a market in the following subject companies (QCOM.OQ, AAPL.OQ, MSFT.OQ, MSI.N, INTC.OQ, 6758.T). As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (2454.TW, 2455.TW, 6176.TW, 2303.TW, 2379.TW, 3702.TW, 3658.TWO, 0728.HK, 2409.TW, 3481.TW, 3189.TW, ALUA.PA, 0763.HK, 2317.TW, 2474.TW, 2498.TW, 4938.TW, 6239.TW, 6462.TWO, 3034.TW). Credit Suisse has a material conflict of interest with the subject company (2330.TW) . Credit Suisse is acting as the financial advisor to Motech Industries Inc in relation to the share subscription by Taiwan Semiconductor Manufacturing Co., Ltd. Credit Suisse has a material conflict of interest with the subject company (005930.KS) . Credit Suisse is acting as exclusive financial advisor to Samsung Electronics and Samsung Fine Chemicals in relation to the proposed sale of their ownership stakes in the semiconductor wafer joint ventures with SunEdison, SMP Ltd and MEMC Korea Company Ltd, to SunEdison. Credit Suisse has a material conflict of interest with the subject company (BABA.N) . Credit Suisse acted as the exclusive financial advisor to Alibaba Group in relation to its investment in Snapdeal.com. Credit Suisse has a material conflict of interest with the subject company (INTC.OQ) . Credit Suisse Securities (USA) LLC is acting as financial advisor to Intel Corp (INTL) on its announced proposed acquisition of LSI’s Axxia Networking Business from Avago Technologies Limited (AVGO). Credit Suisse has a material conflict of interest with the subject company (0981.HK) . Credit Suisse USA LLC is acting as an advisor to Atmel Corp on the potential transaction with Microchip Technology and On Semiconductor. Credit Suisse has a material conflict of interest with the subject company (0992.HK) . Credit Suisse is acting as financial advisor to Lenovo Group Limited for its proposed acquisition of Motorola Mobility Group from Google. As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject company (AAPL.OQ). A Credit Suisse analyst involved in the preparation of this report has a long position in the common stock of AAPL.

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China Smartphones Sector 41 05 January 2016 written by Taiwan based analysts on non-Taiwan listed companies are not considered recommendations to buy or sell securities under Taiwan Stock Exchange Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse AG, Taipei Securities Branch ...... Randy Abrams, CFA ; Jerry Su ; Pauline Chen ; Thompson Wu ; Derrick Yang ; Haas Liu

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China Smartphones Sector 42 05 January 2016

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TC2241 China Smartphones Sector 43