Asia Hardware Sector Research Analysts STRATEGY Thompson Wu 886 2 2715 6386 Thompson.Wu@Credit-Suisse.Com ODM/EMS Outlook: Cloud with a Side of Apple

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19 January 2015 Asia Pacific/Taiwan Equity Research IT Hardware (Technology - PC TW (Asia)/Technology - Hardware HK (Asia))

Asia Hardware Sector Research Analysts STRATEGY Thompson Wu 886 2 2715 6386 [email protected] ODM/EMS outlook: Cloud with a side of Apple

Figure 1: ODM 2015 sales exposure by Apple, PC, and Enterprise/Cloud % 2015 sales: Figure in column chart represents YoY sales change % of sales 100% --14% YoY +14% YoY +2% YoY 90% +14% YoY +12% YoY +64% YoY +2% YoY 80% -3%YoY 70% +1% YoY +15% YoY -2.5% YoY 60% +8% YoY 50% -1% YoY +0% YoY +0.4% YoY 40% 30% +35% YoY +5% YoY 20% +6% YoY 10% +141% YoY +404% YoY 0% Hon Hai Quanta (1) Pegatron (2) Compal Wistron (3) Apple NB/DT Enterprise/Cloud Other Note: (1) Enterprise/Cloud excludes tablets; (2) Apple sales excludes Casetek); (3) Apple sales excludes LCD assembly, which we included into other sales. Source: Credit Suisse estimates

■ Focus on enterprise stories as consumer product cycles slow. We believe the ODM direct (white-box) server and storage business is the most attractive longer-term profit pool for the ODM/EMS sector. ODM direct vendors have stripped from traditional OEMs >US$26 bn in sales during 2008-3Q14; 2014 growth is still topping 39% YoY. The sector plans to market its white-box solutions to large enterprises, but we expect traction to be slow. Windows Server 2003 support expiration is a growth sweetener. ■ Apple diversification an overhang, but PC demand stabilises. Apple is shifting its iPhone orders in 2015, but 215 mn units (+16% YoY) with better ASP can lift Apple sales for all suppliers. Our forecast for flattish PC units implies notebook ODMs will see their PC businesses stabilise. ■ Hon Hai (OUTPERFORM) is our ODM/EMS top pick. We believe the market is overly cautious on Apple's diversification and the resultant impact on Hon Hai and under-appreciates Hon Hai's data-center business. We see earnings risk at Quanta (UNDERPERFORM) due to overly hyped Cloud expectations. Pegatron's (NEUTRAL) share price already reflects a bullish outlook and we see limited scope for earning upgrades. We expect Compal (OUTPERFORM) to have a profitable ramp up of iPad Mini, although Wistron (NEUTRAL) has the most potential earnings upside, if it can ramp up iPhone efficiently.

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

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19 January 2015 Focus charts and tables

Figure 2: Hon Hai is our top Taiwan ODM/EMS pick; Lenovo is our top PC brand pick In local currency, unless otherwise stated

12mth Price TP 52 Week Market Net Cash DivYld 3mth His. 3YR P/E CS P/E (CY) Earning growth (CY) P/B ROE Company Ticker Analyst Rating Target 16-Jan upside high/low Cap Per Share Price Chg Low High 2014 2015 2014 2015 Trailing Fwd 12M Trailing Fwd 12M LC$ LC$ % LC$ US$m LC$ % % CS Cons CS Cons ODM/EMS Hon Hai Precision 2317.TW Thompson Wu OP 125.0 84.1 48.6% 71.8-102.0 39,208 11.72 2.1% -5.5% 7.9x 11.8x 9.8x 8.4x 18.1% 14.7% 16.9% 8.8% 1.3x 1.2x 13.8% 14.2% Quanta Computer 2382.TW Thompson Wu UP 61.0 75.6 -19.3% 71.1-89.2 9,258 9.42 5.0% 3.6% 7.9x 14.6x 15.3x 13.8x 2.5% 1.7% 10.4% 17.2% 2.2x 2.1x 14.7% 15.3% Compal Electronics 2324.TW Thompson Wu OP 26.0 22.9 13.8% 19.6-29.6 3,203 -1.19 4.4% 13.1% 6.8x 13.0x 19.8x 9.5x 101.6% 120.1% 109.0% 80.4% 1.0x 0.9x 5.4% 10.0% Wistron 3231.TW Thompson Wu N 30.0 30.1 -0.2% 24.1-35.0 2,391 -12.39 6.0% 0.8% 5.5x 13.3x 15.4x 12.0x -19.8% -20.1% 29.0% 49.4% 1.0x 1.0x 6.8% 8.3% Pegatron 4938.TW Thompson Wu N 74.0 76.0 -2.6% 38.1-76.3 5,717 20.14 3.7% 41.8% 8.1x 17.0x 12.6x 11.3x 49.9% 50.1% 19.8% 15.5% 1.5x 1.6x 11.9% 13.8% ODM/EMS 4.2% 10.8% 7.2x 13.9x 14.6x 11.0x 30.5% 33.3% 37.0% 34.3% 1.4x 1.4x 10.5% 12.3% Brands Acer Group 2353.TW Thompson Wu UP 14.0 20.3 -30.9% 17.0-25.1 1,988 8.77 0.0% 2.6% 9.4x 9675.0x 26.9x 19.1x 110.0% 107.8% 40.4% -1.9% 0.9x 0.9x 3.5% 4.7% Asustek 2357.TW Thompson Wu N 300.0 316.0 -5.1% 277.0-353.0 7,442 99.28 6.2% 8.4% 6.7x 11.4x 11.7x 10.4x -6.2% -5.6% 11.9% 7.4% 1.5x 1.4x 13.2% 13.9% Lenovo Group Ltd 0992.HK Thompson Wu OP 13.0 10.4 25.5% 7.7-12.6 14,847 0.36 2.3% -4.3% 10.1x 18.6x 20.1x 14.1x -10.0% -2.8% 42.8% 28.2% 4.6x 3.8x 23.6% 25.4% HTC Corp 2498.TW Pauline Chen UP 110.0 147.5 -25.4% 121.5-175.0 3,905 66.40 0.0% 14.3% 5.2x 2264.7x 83.8x 68.6x 210.3% 212.3% 22.2% 87.1% 1.5x 1.5x 1.9% 2.2% Apple Inc AAPL.OQ Kulbinder Garcha OP 130.0 106.8 21.7% 71.3-119.0 626,482 -1.34 0.0% 9.4% 8.2x 15.1x 16.6x 11.8x 6.0% 6.7% 29.3% 15.0% 5.6x 5.3x 39.4% 48.0% Hewlett Packard HPQ.N Kulbinder Garcha OP 50.0 38.2 30.9% 28.0-40.7 70,044 -2.02 1.5% 11.8% 3.4x 9.7x 10.2x 9.6x -2.0% 3.0% 4.2% 3.5% 2.6x 2.5x 26.2% 26.3% Samsung Electronics 005930.KS Keon Han OP 1,680,000 1,316,000 27.7% 1,083,000-1,470,000 180,188 157,565 1.1% 20.8% 5.5x 10.7x 7.8x 7.7x -18.6% -26.2% 1.4% -6.3% 1.1x 1.0x 14.1% 12.8% Brands 1.6% 9.0% 6.9x 13.1x 13.3x 10.7x 41.4% 42.2% 21.7% 19.0% 2.6x 2.4x 17.4% 19.0% Distribution Synnex Technology 2347.TW Thompson Wu N 44.0 45.1 -2.4% 41.2-54.6 2,269 -12.97 6.2% 9.2% 8.6x 13.4x 13.8x 11.1x -1.3% -0.2% 23.8% 14.5% 1.6x 1.5x 11.9% 13.9% Digital China 0861.HK Thompson Wu OP 10.0 7.3 37.6% 6.3-9.1 1,026 -4.29 2.4% 4.6% 5.3x 10.8x 9.6x 8.3x 192.1% 199.3% 15.0% 15.4% 0.9x 0.8x 9.9% 10.2% WPG Holdings Ltd 3702.TW Randy Abrams N 42.0 36.4 15.4% 34.5-43.2 1,911 -25.90 6.6% 3.3% 6.1x 11.4x 10.7x 10.0x 18.3% 21.1% 7.3% 10.2% 1.4x 1.4x 13.2% 13.6% Senao Intl* 2450.TW n.m. n.a. n.a. 50.3 n.a. 49.6-90.9 412 n.a. n.a. -10.2% 11.7x 27.6x n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. PChome Online* 8044.TWO n.m. n.a. n.a. 360.5 n.a. 187.6-370.5 992 52.52 1.2% 33.3% 19.1x 38.6x 46.9x 36.4x n.a. 34.7% n.a. 25.6% 14.4x 11.8x 33.4% 34.7% VST Holdings* 0856.HK n.m. n.a. n.a. 2.6 n.a. 1.6-3.0 506 n.a. n.a. -0.8% 2.4x 7.2x 6.5x 6.0x n.a. 16.7% n.a. 8.6% 1.0x n.a. n.a. 14.8% Tech Data* TECD.OQ n.m. n.a. n.a. 56.0 n.a. 50.8-69.6 2,143 6.82 0.0% 1.5% 7.2x 13.3x 11.0x 10.2x n.a. 12.8% n.a. 8.2% 1.0x 0.9x 7.9% 9.0% Ingram Micro* IM.N n.m. n.a. n.a. 25.2 n.a. 22.8-30.8 3,930 -2.01 0.0% 6.4% 7.6x 11.4x 9.8x 8.4x n.a. 9.3% n.a. 18.8% 0.9x 0.8x 9.1% 9.7% Distribution 2.7% 5.9% 8.5x 16.7x 15.5x 12.9x 69.7% 42.0% 15.4% 14.5% 3.0x 2.9x 14.2% 15.1% Index TAIWAN SE WEIGHTED INDEX.TWII 9,138 8,264-9,569 7.3% HANG SENG INDEX .HSI 24,104 21,182-25,318 4.7% SHANGHAI SE COMPOSITE.SSEC INDEX 3,376 1,991-3,374 44.2% Source: Company data, the BLOOMBERG PROFESSIONAL™ service, Reuters, Credit Suisse estimates for covered companies

Figure 3: ODM direct sales outpace traditional OEMs and Figure 4: ODMs direct sales account for 10.4% of the the global markets in the past nine consecutive quarters global x86 server and storage revenues in 1Q-3Q14 YoY % sales % of sales chg 12.0% 120.0% 10.4% 100.0% 10.0% 8.4% 80.0% 8.0% 60.0% 5.5% 5.5% 40.0% 6.0% 4.1% 3.5% 20.0% 4.0% 2.2% 0.0% 2.0% -20.0% -40.0% 0.0% 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 2008 2009 2010 2011 2012 2013

ODM direct x86 server and storage revenues ODM direct x86 server revenues OEM x86 server and storage revenues ODM direct enterprise storage revenues Global x86 server and storage revenues ODM direct x86 server and storage revenues

Source: IDC Research Source: IDC Research

Figure 5: Apple's 2015 product roadmap and allocations Figure 6: CS forecasts 0.3% PC unit growth in 2015 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 000 units Hon Hai YoY % chg - iPhone 6 / 6 plus refresh 400,000 20.0% - iPhone 6 / 6 Plus - iPhone 5S 350,000 15.0% 2.98 - iPhone 5C 300,000 - iPad Air 10.0% - iPad Pro 250,000 - iPad mini 5.0% Pegatron 200,000 - iPhone 6 / 6 plus refresh 0.0% - iPhone 6 150,000 - iPhone 5C -5.0% - iPad Air 100,000 - iPad mini Compal 50,000 -10.0% - iPad mini

Wistron 0 -15.0%

2014E 2015E 2016E 2017E 2018E

2012 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2013 - lower-priced iPhone refresh - iPhone 5C - iPhone 5S Quanta PC shipments PC shipment change - MacBook Air refresh Source: Company data, Credit Suisse estimates Source: IDC Research, Credit Suisse estimates

Asia Hardware Sector 2 19 January 2015

Hyper-scale data-center growth remains strong; but uncertainty if large enterprises scale out directly The shift in spending by global hyper-scale operators to Taiwan's server and storage manufacturers is the most attractive growth trend for the Taiwan ODM/EMS sector, in our view. In 2015, Taiwan's ODM direct vendors will play to scale out their white-box solutions to large-enterprises. Although we remain very optimistic on ODM direct white-box to existing hyper-scale data-center customers (Google/Facebook), we are conservative on the adoption rate of large business (Fortune 500 companies) and discuss these concerns in the section. We view Hon Hai (OUTPERFORM, NT$125 TP) as the top-buy on this theme. It has several growth opportunities with its direct white-box business, its HP and 21Vianet joint-ventures, and server replacement from Windows Server 2003 support expiration. We would use Quanta (UNDPERFORM, NT$61 TP) as a source of funding. Significant impact of white-box server and storage (ODM direct) to the traditional OEM market ODM direct vendors include Hon Hai, Quanta, Wistron, Inventec, and MiTAC. ODM direct vendors generated US$20 bn in server and storage revenues (38% CAGR) during 2008- 2013. We believe ODM direct vendor sales growth has come from traditional server and storage OEMs such as HP, Dell, IBM, EMC, and NetApp. Their revenues increased only by 4% over the same period. ODM direct vendor server and storage sales continued to increase—39% YoY growth from 1Q-3Q14 versus traditional OEM sales growth of 3.2% YoY.

Figure 7: ODM direct server and storage vendors take Figure 8: ODM direct sales outpace traditional OEM and over US$20 bn in sales from OEMs in the past five years the global markets in the past nine consecutive quarters USD$ mn sales YoY % change in sales $40,000 120.0% $35,000 100.0% $30,000 80.0% $25,000 60.0% $20,000 40.0% $15,000 20.0% $10,000 0.0% $5,000 -20.0% $0 -40.0% 2009 2010 2011 2012 2013 1Q-3Q14 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14

ODM direct x86 server and storage revenues ODM direct x86 server and storage revenues OEM x86 server and storage revenues OEM x86 server and storage revenues Global x86 server and storage revenues Global x86 server and storage revenues

Source: IDC Research Source: IDC Research Hyper-scale data-center expansion will continue to drive Taiwan ODM direct sales growth in x86 server and enterprise storage Majority of the current hyper-scale data-center owners and operators are Google, Amazon (Amazon Web Services), Facebook, and Microsoft. These operators have been purchasing x86 server and storage hardware directly from ODM vendors since 2000. Spending picked up after the founding of the Open Compute network by Facebook. IDC estimates the number of hyper-scale data-centers to increase from 54 in 2015 to 218 globally and 28% during 2013-18E. The number of installed servers in these hyper-scale data-centers is forecast to increase by 25% compounded. This is the basis on which we expect Hon Hai, Quanta's QCT (click here), Wistron's Wiwynn (click here), Inventec, and MiTAC's Tyan (click here) to derive their cloud sales and data-center related sales growth.

Asia Hardware Sector 3 19 January 2015

Figure 9: IDC expects 218 hyper-scale data-centers to be operated by end 2015 and 393 by end 2018, which implies 28% compounded growth In millions, unless otherwise stated 2013 2014E 2015E 2016E 2017E 2018E 13-18E No. of new hyper-scale data-centers per year 45 51 54 57 60 59 Installed hyper-scale data-centers 113 164 218 275 335 393 28.3% Installed servers in hyper-scale data-centers 3,262 5,115 7,154 8,299 9,442 10,001 25.1% Avg no. of servers per hyper-scale data-center 28.9 31.2 32.8 30.2 28.2 25.4 -2.5% Source: IDC Research, Credit Suisse estimates Note: Hyper-scale data-centers range in size from 40,000- 70,000 square feet and have server densities 3-5x greater than high-end data-center ODM direct manufacturers targeting large enterprises for their white-box solutions—we are uncertain and cautious on this trend ODM direct vendor sales growth has largely come from hyper-scale data-center operators such as Google, Microsoft, Amazon, Facebook, and large telcos globally. Large enterprises are evaluating how they can benefit from these open standard platforms, including Open Compute Platform and OpenStack. ODM direct manufacturers have expanded their solutions for large enterprises as a result. We believe there are several obstacles for ODM direct manufacturers to do business with large enterprises including:

■ Large enterprises may not have the scale (i.e., volume) to purchase from ODM direct manufacturers

■ Existing proprietary applications in use at large enterprises may still require hardware solutions provided by traditional OEMs vendors

■ Large enterprises will likely continue to require support and maintenance services from traditional OEM providers. At this point of time, ODM direct manufacturers lack the services and maintenance footprint to provide global support to large enterprises' accounts. An option would be to partner with VAR/VAI such as Hyve Solutions, Rorke Solutions, AMAX, and Penguin Computing, to name a few.

Figure 10: Hyper-scale data-center growth transforms the server and storage value and supply chain Customers Original Equipment Manufacturer (OEM) Original Design Manufacturer (ODM)

End-users traditionaly purchase servers from OEMs locked to OEM product roadmaps and software/services OEMs outsources manufacturing to Taiwan ODMs

Solution Providers End customers and ODMs share cost/profits that would have traditionally been pocked by OEMs and breaks lthe ock-up to OEM product roadmaps and software/services

Solutions providers help Select end-customers work directly with Taiwan determine the right OCP ODMs to design/manufacture and can leverage technologies and also test, solution providers to help test, deploy, and services deploy and services the OCP solutions

Source: Company data, Credit Suisse Challenges for Taiwan's ODM direct manufacturers The key challenge Taiwan ODM direct manufacturers have faced while building direct for hyper-scale data center vendors is the direct competition from customers who are traditional x86 server and storage vendors. These traditional OEM vendors are responding to declines in their hardware business by designing their own white-box hyper-scale server and storage solutions and participating in the Open Compute Platform. In addition to this

Asia Hardware Sector 4 19 January 2015 key challenge, we expect Taiwan ODM direct manufacturers of server and storage to continue to face several new challenges as market matures, including:

■ The finite number of hyper-scale data-center accounts: Hyper-scale data-center operators are able to purchase directly from Taiwan ODM direct manufacturers because they buy in volume. Unfortunately, we believe there are a finite number of hyper-scale data-center operators that can purchase equipment in size. We believe these operators largely include Google, Facebook, Amazon, large telcos, and Chinese internet providers such as Baidu, Alibaba, and Tencent (i.e., BATS). Large enterprises are in the process of changing their server and storage supply chain, but the challenge they face is that their purchases (i.e., volumes) may not be large enough to engage ODM direct manufacturers based on their application needs.

■ Open-standards reducing need for customisation: There are two new open standard projects which focus on designing energy-efficient and scalable data-centers: The Open Compute Platform (click here) established in 2011 by Facebook and Project Scorpio (click here) established jointly by Baidu, Alibaba, and Tencent. ODM direct vendors are designing solutions to these open standards and fuelling their direct business. In time, we believe open standards will reduce the need for customisation. This enables traditional OEMs to participate in open standard platforms and provides opportunities for their solutions. Of course, these open standards also provide the blueprint for traditional OEM to delivery competing solutions with the advantage of stronger sales and service channels to ODM direct vendors in Taiwan. We believe this will be particularly helpful, should large enterprises begin to adopt highly dense, stripped down "white-box" type solutions.

■ OEM manufacturers fighting back: Traditional OEM manufacturers have begun to introduce their own line-up of hyper-scale data-center solutions based on open standard projects. In 2013, HP introduced the Moonshot systems designed for specific workloads and are capable of high-designed energy-efficient packages (click here). Last year, HP and Hon Hai entered into a joint-venture to design cloud-optimised servers which target cloud service providers. Dell's Data Center Solutions (DCS) division, a member of OCP, introduced its proof-of-conception solution for 64-bit ARM micro-servers and a G5 rack-chassis last year. Traditional OEM vendors in service business with large enterprises may have an advantage in selling their solutions, in our view. Windows Server 2003 extended support expiration in July 2015 drives slight pick-up in volumes Our conversations with the Taiwan x86 server manufacturers suggest server shipments have picked up in 2Q14, as evidenced in the chart below. We believe a key factor driving this increase may be driven by replacement from the expiration of Microsoft Windows Server 2003 in July 2015. Traditional server and storage vendors have begun to market and provide discounts to help drive a replacement cycle in anticipation of support expiration.

Asia Hardware Sector 5 19 January 2015

Figure 11: Dell starts promotions (US$250 off purchase) Figure 12: HP similarly begins promoting migration from ahead of migration from Windows Server 2003 Windows Server 2003

Source: Company data Source: Company data CS forecasts x86 server units to increase from 4.1% in 2014 to 4.4% in 2015 and to show a 3.3% CAGR from 2013-18E. The expected x86 server growth could be mitigated by: (1) Virtualisation and the number of virtual machines that fit into a single physical machine, (2) application updates, and (3) SaaS and Cloud displacement of low-end app servers.

Figure 13: x86 server shipments start to see increase in Figure 14: CS forecasts x86 server shipments to increase volumes starting 2Q14 4.1%/4.4% in 2014/15E and show 3.3% CAGR from 2013-18E YoY x86 server shipment change YoY x86 server shipment change 30.0% 5.0% 4.3% 4.4% 4.5% 25.0% 4.1% 4.0% 3.6% 3.5% 20.0% 3.5%

15.0% 3.0% 2.5% 2.5% 2.2% 10.0% 2.0% 5.0% 1.5% 0.8% 0.0% 1.0% 0.5%

-5.0%

3Q12 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 0.0% 2011 2012 2013 2014E 2015E 2016E 2017E 2018E

x86 server shipments YoY % server shipment change

Source: IDC Research Source: IDC Research, Credit Suisse estimates More iPhones lift all Apple manufacturers in 2015 Wistron, Compal, and Pegatron will improve their market share of Apple in 2015. Hon Hai will remain Apple's primary assembly partner but its volume growth will slow. The retracing of Hon Hai's shares by 12% during 4Q14 suggests this dynamic has been priced into shares. Also, we argue slowing Apple growth can improve profitability and cash flows as in 2014 (click here). We feel the market is overly conservative about Apple's diversification, and argue Hon Hai's Apples sales can increase at least 6% YoY in 2015 on product mix (iPhone 6 and 6 Plus). We believe the market is too optimistic on Pegatron's iPhone share gain, as its capacity suggests limited scope for future iPhone earnings upgrade. We stand behind Hon Hai's position with Apple and prefer its risk/reward trade at a 24% P/E discount to Pegatron. CS US IT hardware team upgraded Apple to OUTPERFORM; raises iPhone volumes CS US IT Hardware team raised Apple's EPS estimates by 9%/22% for FY15/16E to $9.05/$9.79, given a solid and sustainable iPhone volume base, sizeable increase in scope for cash return, and EPS momentum. The team has raised their CY14/15E iPhone volume forecasts by 6%/15% to 189/215 mn. They now see an above consensus

Asia Hardware Sector 6 19 January 2015

US$10.06 EPS power in CY2016, which drives their upgrade to OUTPERFORM and upside to at least $130 AAPL (More iPhones, More Cash – Upgrade to OP).

Figure 15: Credit Suisse Apple product forecasts; raises iPhone volumes for 2015 Calendar year, shipments in 000's 4Q14E 1Q15E 2Q15E 3Q15E 4Q15E 2014E 2015E 2016E Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 iPhone * revised New estimate 71,082 54,378 44,454 45,417 71,305 189,276 215,553 213,268 Old estimate 60,872 49,306 39,445 43,626 54,532 179,066 186,909 NA % change 17% 10% 13% 4% 31% 6% 15% - Apple Watch 0 5,000 5,000 5,000 5,000 0 20,000 20,000 iPad 20,321 17,273 13,819 13,128 19,035 62,263 63,254 65,801 MacBook 4,784 3,581 3,460 4,261 4,784 16,264 16,086 16,729 iMac 850 819 804 760 791 3,439 3,173 2,983 Source: Company data, Credit Suisse estimates. Note: CS only revised iPhone forecasts on Jan 13 New manufacturers striving to gain market share Apple added Compal and Wistron to its manufacturing supply chain in 2014. Both have been tasked with making gen 1 and year-old products (i.e., iPad mini and iPhone 5C, respectively). The addition of these assemblers has resulted in order reallocation in 2015. The following section highlights our Apple forecast and respective allocation to assemblers:

■ Forecast of 215 mn iPhones (+14% YoY) for 2015: We estimate iPhone 6 allocation percentage to increase for Pegatron as it added capacity addition in 2H14 and its yields have pleased Apple. Although Hon Hai's iPhone allocation percentage has decreased as a result, we believe shipments will remain flattish. We expect Hon Hai to manufacture iPhone 6 and 6 Plus in 2015, Pegatron to manufacture only iPhone 6, and Wistron to eventually manufacture 100% of iPhone 5Cs, and ramp up a new low- cost iPhone in 2H15. Overall, we assume 62% of 2015 iPhone shipments to be manufactured by Hon Hai, 32% by Pegatron, and 6% by Wistron versus 73%, 25%, and 2%, respectively, in 2014.

■ Forecast of 63 mn iPads (+2% YoY) for 2015: We expect Compal to assume the manufacture of iPad mini from Pegatron in 1H15. We expect Hon Hai to continue to be the sole manufacturer of the 9.7" iPad Air 2, which was launched in November 2014. We expect Hon Hai to manufacture 100% of the large-sized iPads, which we expect to be launched in 2Q15. We assume 73% of the 2015 iPad shipments to be manufactured by Hon Hai and 27% by Compal.

■ Forecast of 20 mn Apple Watches for 2015: We expect Quanta to be the primary assembler of the Apple Watch. Apple indicated an early 2015 launch, which suggests Quanta will enter mass production in 1Q15. Its monthly sales are the best indicator of timing. Taiwan's supply chain corroborates CS' 20 mn units forecast for 2015.

■ Forecast of 20 mn Macs for 2015: We expect Quanta to remain the largest manufacturer (95%) of MacBooks and iMacs in 2015. Hon Hai will be used as a back- up. We expect Apple to refresh its 12" MacBook Air in 2Q15 with a complete industrial re-design. We expect Quanta to continue to manufacture this product.

Asia Hardware Sector 7 19 January 2015

Figure 16: Apple order allocations by assembler/product Figure 17: Apple's 2015 product roadmap % of shipments in millions, unless otherwise stated 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 100% Hon Hai 90% - iPhone 6 / 6 plus refresh - iPhone 6 / 6 Plus 80% - iPhone 5S 2.98 - iPhone 5C 70% - iPad Air 60% - iPad Pro - iPad mini 50% Pegatron 40% - iPhone 6 refresh - iPhone 6 30% - iPhone 5C - iPad Air 20% - iPad mini 10% Compal - iPad mini 0% Wistron iPhone 6 iPhone 6 iPhone iPhone iPad Air iPad Mini Apple MacBook iMac - low er-priced iPhone refresh Plus 5S 5C Watch - iPhone 5C - iPhone 5S Hon Hai Pegatron Wistron Compal Quanta Quanta - MacBook Air refresh Source: Credit Suisse estimates Source: Credit Suisse estimates

We lifted 2015E EPS for all Apple assemblers, owing to CS' iPhone upgrade Earlier this week, we adjusted our 2015 EPS estimates for Hon Hai, Compal, Wistron, and Quanta by 0-5% (click here). We raised Pegatron's EPS by 2015 EPS by 27%, increased its TP to NT$74 and maintained NEUTRAL (click here). Our revised estimates imply that in 2015 Pegatron has over 55% sales exposure to Apple, followed by Quanta with 54%, and Hon Hai with 43%. We expect the new assembly partners, Compal and Wistron, to see a meaningful increase in their Apple sales exposure to 18% and 15%, respectively.

Figure 18: Apple % sales contribution to its Taiwan manufacturers (2010-15) % of sales Hon Hai Quanta Pegatron (a) Wistron (b) Compal 2015E 43.0% 53.5% 55.2% 18.3% 14.9% 2014E 43.9% 46.9% 54.4% 4.3% 6.9% 2013A 49.9% 45.2% 42.1% 0.0% 0.0% 2012A 47.1% 40.9% 30.6% 0.0% 0.0% 2011A 38.5% 44.0% 14.2% 0.0% 0.0% 2010A 26.3% 41.8% 1.0% 0.0% 0.0% Source: Company data, Credit Suisse estimates. Note: (a) Apple's sales are a percentage of DMS sales and exclude Casetek (b) Includes iPhone assembly but excludes LCM assembly Subdued PC growth in 2015 We forecast Taiwan notebook ODMs viz., Quanta, Wistron, Compal, Pegatron, and Inventec to ship roughly 141 mn notebooks in 2015, which is flattish YoY. A key difference is that for 2015 the market has also flat notebook expectations at the start of the year, whereas in 2014, at the start, the market was expecting notebook PC shipment decline to accelerate to 5% and end up flattish. Our forecast suggests Taiwan ODMs to manufacture 79.7% of global notebook shipments versus 80.5% last year. We do not expect material changes in PC vendor allocation to respective notebooks (shown below). Among the Taiwan notebook ODMs, Compal and Quanta continue to have the largest revenue exposure to notebooks, i.e., 68.5%/61.4%, respectively, of our estimated 2015 sales.

Asia Hardware Sector 8 19 January 2015

Figure 19: CS forecasts flattish notebook ODM shipments in 2015 000's units 2011 2012 2013 2014 2015E 2016E 2017E 2018E

Compal 39,200 37,300 38,700 43,000 42,500 42,800 43,200 43,200 Quanta 55,800 53,800 43,100 48,500 48,781 49,893 50,393 50,393 Wistron 31,350 31,450 24,100 21,100 21,000 21,500 22,000 22,000 Pegatron 14,275 16,850 13,880 9,775 10,000 10,000 10,000 10,000 Inventec 16,000 16,850 20,800 18,600 18,500 18,550 18,500 18,250 Total shipments 156,625 156,250 140,580 140,975 140,781 142,743 144,093 143,843

YoY % NB shipments Compal -18.5% -4.8% 3.8% 11.1% -1.2% 0.7% 0.9% 0.0% Quanta 7.1% -3.6% -19.9% 12.5% 0.6% 2.3% 1.0% 0.0% Wistron 14.0% 0.3% -23.4% -12.4% -0.5% 2.4% 2.3% 0.0% Pegatron -7.3% 18.0% -17.6% -29.6% 2.3% 0.0% 0.0% 0.0% Inventec -3.3% 5.3% 23.4% -10.6% -0.5% 0.3% -0.3% -1.4% Total shipments -1.9% -0.2% -10.0% 0.3% -0.1% 1.4% 0.9% -0.2% Source: Company data, Credit Suisse estimates

Figure 20 Notebook OEMs' allocation of orders to Figure 21: Notebook ODMs' mix by notebook OEM brands notebook ODMs in 2015 in 2015 HP Dell Lenovo Acer Asus Apple HP Dell Lenovo Acer Asus Apple Total Quanta 50% 0% 5% 30% 40% 95% Quanta 33% 0% 4% 11% 20% 32% 100% Compal 15% 55% 40% 35% 10% 0% Compal 12% 28% 39% 16% 6% 0% 100% Wistron 2% 30% 20% 15% 15% 0% Wistron 3% 29% 37% 13% 17% 0% 100% Pegatron 0% 0% 0% 5% 35% 0% Pegatron 0% 0% 0% 10% 90% 0% 100% Inventec 30% 0% 0% 15% 0% 0% Inventec 78% 0% 0% 22% 0% 0% Hon Hai 0% 0% 0% 0% 0% 5% 100% Others 3% 15% 35% 0% 0% 0% Hon Hai 0% 0% 0% 0% 0% 100% 100% Total 100% 100% 100% 100% 100% 100% Others 5% 17% 77% 0% 0% 0% 100% Source: Credit Suisse estimates Source: Credit Suisse estimates 4Q14 notebook ODMs' units decline 1.6%; guide 1Q15 decline of 10-15% QoQ Quanta, Compal, and Wistron guided their notebook volumes to decline by 5-10% QoQ. Pegatron and Inventec were the exceptions, given their lower bases due to the loss of Toshiba orders from 1Q-3Q14. Ultimately, notebook ODM shipments tracked better than guided and CS' forecasts. 4Q14 shipments declined 1.6% versus our forecast of 3.5% decline. Our conversations with the ODMs suggest Chromebooks and traditional notebooks on Intel Core M processors were the reason for higher volumes. In addition, ODMs are building inventory ahead of Chinese New Year and there could be the potential impact of labour shortages which often hurt production in February, in addition to the labour required by Quanta for the ramp up for Apple Watch during 1Q15. Notebook ODMs have set a tentative guidance of 10-15% QoQ decline in 1Q15

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Figure 22: Seasonal trend suggests notebook ODM units to decline 10-15% QoQ in 1Q15 QoQ notebook ODM shipment change 15.0% 10.8% 9.7% 10.0% 7.5% 6.2% 6.2% 6.8% 5.4% 4.3% 5.0% 4.0% 3.9% 4.1% 3.2% 2.3% 2.8% 3.0% 1.5%

0.0% 0.0% -1.6% -5.0%

-10.0% -8.9% -11.7% -15.0% -12.6% -13.8%

-17.2% -18.0% -20.0% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15E 2Q15E 3Q15E 4Q15E

Notebook ODM Trailing 3YR average

Source: Company data, Credit Suisse estimates Intel and Windows product launches in 2015 Intel and Microsoft drive PC technology innovation each year. These innovations are typically introduced at CES in January with products shipping to market shortly after Computex in June. PC vendors design, manufacture, and roll out products based on Intel and Microsoft roadmaps. Intel launched its fifth-generation core series Broadwell CPU in 2H14 with products coming to the market now. The following are the updates on Intel CPU launch and Microsoft's Windows 10 launch for 2015:

■ Intel will launch its sixth-generation Core processor codenamed Skylake: Intel expects to introduce several 14 nm processors to replace Broadwell. Skylake is said to be a full architecture refresh with new features including: (1) New instruction sets (AVX, MPX and ADX), (2) GPU enhancements (DirectX 1), and (3) support for DDR4. We expect, at the very least, products on Skylake to trickle in by 2H15. It is possible Skylake products will not actually reach the market until early 2016, given the late launch of Broadwell in 2015.

Figure 23: Intel's PC computing roadmap (Intel Nov 2014 Figure 24: Intel Broadwell CPU compared with previous Analyst Day) generation Intel core i5 series Haswell CPU

Source: Company data Source: Company data

■ Windows 10 "One O/S, one platform, all devices": Microsoft previewed its Windows 10 O/S in October 2014. Windows 10 is expected to run across a broad set of devices including IoT, servers, and 4" to 80" screen sized devices. Further, the O/S will

Asia Hardware Sector 10 19 January 2015

become a singular platform for developers to build games or enterprise-related applications. There will also be one single store to access these applications. One key feature expected is the return of the start-menu, which will be split as shown below. Other features include: (1) Snap enhancement—ability to run four screens at the same time, (2) task view button—quick switching between open files and access to the desktop, (3) multiple desktops, and (4) new file explorer—easy access to frequently visited folders. Windows 10 will continue to enable touch features.

Figure 25: Windows 10 expected to be ubiquitous across Figure 26: Return of the menu with split screen tiles all devices and form-factors

Source: Microsoft Source: Microsoft Notebook ODMs preparing for Type-C USB Over the past three years, Microsoft and Intel have been increasing the launch of new design and features to help boost PC demand. Two years ago, Intel launched Ultrabooks followed by Microsoft's re-design of Windows 7, with tile-based touch user interface along with traditional UI. This year, although we believe Type C USB will start to find its way into notebooks and desktops, mainstream adoption would be a few years later, in our view. Notebook ODMs believe this feature can provide for more design input on their part to PC OEMs, and potentially help reduce component costs. Type C USB has significant advantages to legacy USB technologies USB Type-C was discussed at Intel's Developer Conference in November 2014. Type C will continue to charge and connect devices but at greater transfer speeds using USB 3.1 (10 Gbps; 5 Gbps in USB 3.0). It will now be possible to power desktop and notebooks as well (up to 100 W of power), which could eliminate the need for a power port. Removing the power port will free up valuable room from the back of the notebook and create thinner devices. They will be symmetrical as well, with no up/down orientation as found in Type A and B.

Figure 27: Intel launches USB Type C at its Developer Figure 28: Type C USB (LEFT) with symmetrical port vs Conference in Shenzhen China in April 2014 Type A USB (RIGHT) with up/down orientation USB 1x and 2.0 USB 3.0 USB 3.1 Current (mA / Amps) 500 mA 900 mA 2A 5A Voltage (V) 5V 5V 5V, 12V, 20V Power (W) 2.5 W 4.5 W 10W, 60W, 100W USB Charging 0.5-1.5 A USB Type A USB Type B Micro USB A/B USB Type C

Source: Computerworld.com, Credit Suisse Source: Computerworld.com

Asia Hardware Sector 11 19 January 2015

Subdued PC growth in 2015 Credit Suisse's Asia Technology team assumes responsibility for Credit Suisse's Global PC forecasts effective 2015. Our forecast carries forward the key considerations made by our US team, including corporate and consumer PC markets, and their respective install- bases and replacement cycles based on average age, along with penetration rates in emerging and mature markets. This is the basis for our 2014-18E PC forecasts. We layer in quarterly forecasts in the current year (2015) based on guidance and historical seasonality groundwork provided by Taiwan's notebook ODM and motherboard manufacturers. We fine-tuned Credit Suisse's global PC shipment forecast to 312/315 mn shipments (excluding tablets) in 2015/16E with implied changes of 0.3% increase/0.8% increase, from 298/295 mn, or 1.1%/1.3% decline previously. Seven factor driving PC growth Seven factors that we expect to drive PC growth in 2015 are: (1) The China PC market stabilising and retracing to positive growth by 2H, (2) the boost from Windows XP support expiration in April 2014 to slowly fade, (3) return of netbook 2.0, boosted by Microsoft subsidies, (4) continued Chromebook adoption, (5) proliferation of 2:1 hybrid devices in larger-sized form-factors, (6) share gains becoming tougher; and (7) potentially more aggressive ASP pressure due to product mix and vendor strategy.

Figure 29: CS forecasts PC shipments to show 0.3% decline/0.8% increase in 2015/16E Units in 000's, Sales in US$ billions, PC ASP in US$ Units in 000's 2013 2014E 2015E 2016E 2017E 2018E 1Q14 2Q14 3Q14 4Q14E 1Q15E 2Q15E 3Q15E 4Q15E Sales in US$ bn Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Global PC units 315,121 311,394 312,435 314,922 315,248 315,316 73,354 74,959 79,540 83,542 72,912 75,138 81,529 82,856 YoY % change -9.8% -1.2% 0.3% 0.8% 0.1% 0.0% -4.5% -0.9% -0.5% -2.4% -0.6% 0.2% 2.5% 2.5% QoQ % change -14.4% 1.1% 12.8% 1.6% -9.8% 2.0% 10.0% 1.6%

Global PC ASP $642 $652 $651 $651 $653 $658 $673 $649 $647 $664 $657 $657 $648 $642 YoY % change 0.5% 1.6% -0.3% 0.1% 0.3% 0.7% 6.0% 4.5% 0.0% -1.5% -2.0% 1.0% 0.0% -3.3% QoQ % change 3.0% -3.6% -0.2% 2.5% -1.0% 0.0% -1.4% -0.8%

Global revenues $202.3 $203.1 $203.3 $205.1 $206.0 $207.4 $49.4 $48.6 $51.5 $53.6 $47.9 $49.4 $52.8 $53.2 YoY % change -9.4% 0.4% 0.1% 0.9% 0.4% 0.7% -0.2% 3.2% -0.3% -0.8% -3.0% 1.5% 2.5% -0.7% QoQ % change -8.7% -1.5% 5.9% 4.1% -10.7% 3.1% 7.0% 0.8% Source: IDC, Credit Suisse estimates Stock picks: Buy Hon Hai, take profit from Quanta In the Taiwan ODM/EMS sector, Hon Hai (OUTPERFORM) remains our top buy in 2015. We would take profit from Quanta (UNDERPERFORM). Pegatron (NEUTRAL) has surprised with its iPhone execution, but its share price performance in 4Q14 reflects a bullish outlook for 2015 for which we see risks. We currently prefer Compal (OUTPERFORM) to Wistron (NEUTRAL), as a new Apple assembler, largely based on valuation.

■ Hon Hai (OUTPERFORM, NT$125 TP): We believe investors are overly cautious on Hon Hai's Apple business in 2015 and under-appreciate the recovery in its traditional data-center business and growth prospects from its cloud business (HP and 21Vianet). Our US team believes iPhones can meaningfully grow 14% YoY. We argue Hon Hai's Apple sales can increase on a mix of higher Apple ASP devices. On the enterprise side, we expect Hon Hai to benefit from the Windows Server 2003 support expiration (HP is a key customer) and start to see sales from its HP and 21Vianet ventures. Quanta's and Hon Hai's cloud businesses relatively constitute the same percentages of their sales (15-25%) and operating profits (25%-30%). Despite six quarters of material earnings shortfall, Quanta trades at a 44% P/E premium to Hon

Asia Hardware Sector 12 19 January 2015

Hai. Lastly, we see scope for an increase in cash dividend (shifting the 10% stock dividend to cash), which would generate over NT$139 bn in 2015 FCF, a yield of 11%.

■ Quanta (UNDERPERFORM, NT$61 TP): Quanta's QCT has the early mover advantage and strong market positions in the ODM direct/cloud business with extensive hyper-scale data-center customers. In 2015, we see several obstacles emerging, including: (1) Competition in the ODM direct/cloud business and tablets, (2) adoption rate of rack-level solutions to large enterprises, which is a key push for them in 2015, and (3) the scalability of the rack-level business. Overall, we believe, in the back-drop of high expectations set by the market and Quanta in its Cloud business, that there is earnings risk to consensus. Our 2015E EPS is 4% below. The size and variability of non-op income (48%/46% of our and consensus's 2015 net profit) and valuation (13.5x Consensus 2015 EPS versus 7.9-14.6x historically) continue to be risks, in our view.

■ Pegatron (NEUTRAL, NT$74 TP): We underestimated Pegatron's ramp up for iPhone 6. We estimate they can ship 68 mn iPhones in 2015, representing a 45% YoY increase, assuming the maximum utilisation of its higher capacity this year. We believe its iPhone growth has been factored in with a 28% share price appreciation in 4Q14. We stay NEUTRAL, as we believe there is limited scope for iPhone upside based on capacity view (6-7 mn per month). Our forecast suggests that Apple sales will rise to 55.2% of Pegatron's 2015 DMS revenues. We believe this may be an invisible bar long term, which caps greater Apple allocation, in our view. We also highlight that iPad mini orders are shifting to Compal and there are risks to its strategic investments in Kinsus and market expectations on Casetek. We see Pegatron sales fairly valued at NT$74, which is based on a near three-year peak P/E multiple of 11x our 2015 EPS.

■ Accumulate Compal (OUTPERFORM, NT$26 TP); Wistron (NEUTRAL, NT$30 TP): Compal and Wistron are the new Apple assemblers and we position our view accordingly. Wistron arguably has the potentially higher volume generation business with iPhone 5C and upcoming refresh of the low-cost iPhone. However, there is also higher execution and over-expansion risks with capacity. There is another angle Wistron has in relation to iPhone, which is the LCM assembly for JDI, and hence our NEUTRAL rating. Compal has iPad mini, steadier and easier to manufacture business in our view. iPad mini volumes might be lower to the low-cost iPhone potential—the volumes are enough to allow Compal to be profitable. Beyond Apple, Compal and Wistron have relatively the same-sized notebook and desktop businesses (70%/50% of sales), and both are scaling up their server business. Wistron appears to have some traction with its white-box storage solution with hyper-scale data center customers.

Asia Hardware Sector 13 19 January 2015

Companies Mentioned (Price as of 16-Jan-2015) 21 Vianet Group Inc (VNET.OQ, $16.87) Acer Group (2353.TW, NT$20.25) Amazon com Inc. (AMZN.OQ, $286.95) Apple Inc (AAPL.OQ, $106.82) Asustek (2357.TW, NT$316.0) Baidu Inc (BIDU.OQ, $215.97) Compal Electronics (2324.TW, NT$22.85, OUTPERFORM, TP NT$26.0) Digital China Holdings Limited (0861.HK, HK$7.27) EMC Corp (EMC.N, $27.81) Facebook Inc. (FB.OQ, $74.05) Google, Inc. (GOOGL.OQ, $504.01) HTC Corp (2498.TW, NT$147.5) Hewlett Packard (HPQ.N, $38.19) Hon Hai Precision (2317.TW, NT$84.1, OUTPERFORM, TP NT$125.0) Ingram Micro (IM.N, $25.2) International Business Machines Corp. (IBM.N, $154.57) Inventec Co Ltd (2356.TW, NT$23.25) Japan Display (6740.T, ¥382) Lenovo Group Ltd (0992.HK, HK$10.36) MHC (3706.TW, NT$23.9) Microsoft Corporation (MSFT.OQ, $45.48) NetApp (NTAP.OQ, $38.46) Oracle Corporation (ORCL.N, $42.63) PChome online (8044.TWO, NT$360.5) Pegatron (4938.TW, NT$76.0, NEUTRAL, TP NT$74.0) Quanta Computer (2382.TW, NT$75.6, UNDERPERFORM, TP NT$61.0) Rackspace Hosting Inc. (RAX.N, $45.43) Samsung Electronics (005930.KS, W1,316,000) Senao Intl (2450.TW, NT$50.3) Synnex Technology International Corp (2347.TW, NT$45.1) Tech Data (TECD.OQ, $56.03) Tencent Holdings (0700.HK, HK$121.9) VST Holdings (0856.HK, HK$2.57) WPG Holdings Ltd (3702.TW, NT$36.4) Wistron (3231.TW, NT$30.05, NEUTRAL, TP NT$30.0)

Disclosure Appendix

Important Global Disclosures I, Thompson Wu, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my 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 Compal Electronics (2324.TW)

2324.TW Closing Price Target Price Date (NT$) (NT$) Rating 02-Apr-12 33.70 38.00 N 01-May-12 33.60 35.00 24-Jun-12 27.60 31.00 03-Sep-12 25.05 29.00 26-Oct-12 19.25 20.00 11-Oct-13 23.30 23.00 13-Nov-13 20.90 27.00 O 10-Jun-14 25.40 30.00 21-Jul-14 28.80 33.00 17-Nov-14 19.60 26.00 NEUTRAL OUTPERFORM * Asterisk signifies initiation or assumption of coverage.

Asia Hardware Sector 14 19 January 2015

3-Year Price and Rating History for Hon Hai Precision (2317.TW)

2317.TW Closing Price Target Price Date (NT$) (NT$) Rating 06-Feb-12 69.36 73.79 N 22-May-12 64.34 70.84 18-Oct-12 71.02 77.11 14-Nov-12 72.89 81.17 21-Feb-13 67.53 76.30 15-Apr-13 62.58 69.81 24-Apr-13 63.39 67.37 16-May-13 63.88 60.07 24-Jul-13 64.12 61.69 14-Aug-13 64.20 74.11 NEUTRAL OUTPERFORM 21-Nov-13 66.96 90.18 O 13-Jan-14 73.04 96.43 15-May-14 79.11 98.21 17-Jul-14 95.09 126.00 14-Nov-14 96.80 125.00 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Pegatron (4938.TW)

4938.TW Closing Price Target Price Date (NT$) (NT$) Rating 06-Feb-12 36.60 42.00 N 10-Apr-12 43.65 48.00 11-May-12 42.80 51.00 O 24-Aug-12 37.00 46.00 06-Mar-13 41.25 49.00 09-May-13 48.05 57.00 13-Aug-13 48.30 50.00 N 14-Oct-13 39.35 45.00 12-Nov-13 37.50 34.00 24-Mar-14 43.00 40.00 NEUTRAL OUTPERFORM 11-Jun-14 57.50 53.00 21-Jul-14 60.10 55.00 11-Aug-14 58.00 58.00 14-Jan-15 74.40 74.00 * Asterisk signifies initiation or assumption of coverage.

Asia Hardware Sector 15 19 January 2015

3-Year Price and Rating History for Quanta Computer (2382.TW)

2382.TW Closing Price Target Price Date (NT$) (NT$) Rating 06-Feb-12 66.20 75.00 O 29-Mar-12 72.30 80.00 30-Apr-12 76.80 85.00 31-Jul-12 78.40 79.00 N 15-Oct-12 68.40 73.00 21-Feb-13 66.40 70.00 24-Apr-13 59.60 63.00 04-Jul-13 65.00 60.00 24-Jul-13 69.40 64.00

14-Nov-13 65.40 58.00 OUTPERFORM 14-Jan-14 74.70 65.00 NEUTRAL UNDERPERFORM 13-Mar-14 82.50 71.00 28-Mar-14 85.90 72.00 21-Jul-14 86.60 75.00 15-Aug-14 82.40 73.00 22-Sep-14 78.90 75.00 12-Nov-14 74.10 61.00 U * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Wistron (3231.TW)

3231.TW Closing Price Target Price Date (NT$) (NT$) Rating 08-Feb-12 43.71 48.91 O 30-Apr-12 38.99 44.46 23-Jul-12 31.03 35.57 27-Aug-12 31.19 35.48 31-Oct-12 26.19 31.75 17-Jan-13 31.28 35.48 26-Mar-13 31.84 32.68 N 14-May-13 27.31 30.81 04-Jul-13 26.05 28.01

12-Aug-13 24.22 20.59 OUTPERFORM 23-Oct-13 27.55 20.59 U NEUTRAL UNDERPERFORM 26-Mar-14 24.31 17.65 08-Jul-14 29.41 21.57 13-Aug-14 31.45 30.00 N * Asterisk signifies initiation or assumption of coverage. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiv eness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10- 15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.

Asia Hardware Sector 16 19 January 2015

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Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

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Price Target: (12 months) for Hon Hai Precision (2317.TW) Method: Our NT$125 target price for Hon Hai Precision is based on 13x our 2015 earnings per share (EPS) vs. its last 3YR P/E range of 8-12x. We believe a 13x multiple is appropriate as we expect data-canter growth can accelerate earnings growth in 2015 (+18% YoY) and improve margins and ROEs. Risk: Risks to our NT$125 target price for Hon Hai Precision include: (1) the impact from rising China labour costs is larger than expected; (2) the potential of key clients cutting orders due to the labour events, or the potential and orders are stronger than expected due to PC product cycles and devices including tablets and smartphones; and (3) change in Hon Hai's relationship with Apple, its largest customer in revenue contribution terms. Price Target: (12 months) for Compal Electronics (2324.TW) Method: Our NT$26 target price for Compal is about 11x 2015 EPS. We apply the high-end of its historical range P/E of 11x as over the next 12M we are optimistic it can generate at least industry margins and gain share in servers. Risk: The risks to our NT$26 12-month target price for Compal include the following: (1) further end-demand weakness in both notebooks and tablets for Compal's primary customer, Acer, leading to downward revisions to our estimates, and (2) end-demand for LCD TV is worse than we expect, particularly for Compal's primary customer, Toshiba. Price Target: (12 months) for Quanta Computer (2382.TW) Method: We apply 11x to 2015 EPS (earnings per share) to derive our NT$61 price target for Quanta Computer. The 10x multiple is at the mid- point of Quanta's historical P/E range of 7-13x. Risk: Risks to our NT$61 12-month target price for Quanta include the following: (1) If demand for MacBooks slows and is not as strong as our US IT hardware team expects, this would be a risk. (2) The market has given Quanta a pass on operating margin pressure in the past two quarters given top-line performance from its exposure to Apple. Should margins come under incremental pressure with rising contributions

Asia Hardware Sector 17 19 January 2015

from Apple, we would expect the market's sentiment to change and perhaps no longer afford Quanta this benefit. (3) Quanta's relationship with Apple has provided support for its premium valuation. For this reason, we would expect incremental risk for Quanta should its relationship with Apple change. For example, if Apple were to qualify another ODM for its MacBook business, then we could expect volatility in Quanta 's shares. Price Target: (12 months) for Wistron (3231.TW) Method: Our 12M target price of NT$30 for Wistron is based on 12x 2015 EPS (earnings per share), versus its historical P/E (price-to-earnings) range of 7-13x. Risk: Risks to our NT$30, 12-month target price for Wistron include the following: 1) Commercial PC refreshment slows, creating risks for Wistron's notebook PC business. Missteps by Wistron's key customers, Dell and Lenovo, could also heighten risks in its notebook business, 2) The LCD TV business continues to suffer from customer concentration at Sony and the inability of Wistron to diversify its customer base further, 3) The evolving server-ODM model into a direct sales model disrupts existing server ODM business. A weakness in its relationships with its key OEM customers here could seep into other areas, including PCs and storage, and 4) Further dilution through financing activities (i.e. convertible bonds) to raise capital could disrupt shareholder confidence. Price Target: (12 months) for Pegatron (4938.TW)

Method: Our NT$74 target price for Pegatron is derived by applying a multiple of 11x on 2015 EPS (earnings per share). We use a P/E (price-to- eanings) multiple that is in line with that of its peers (9-12x). Risk: Risks to our NT$74 12-month target price for Pegatron include the following: (1) As key customers for Pegatron, end-demand for ASUS and Apple products that pass through Pegatron will be critical, and depending on orders. (2) Pegatron continues to expand its reach beyond PC into other segments including consumer electronics and broadband and networking. In consumer electronics, we believe that Pegatron is a key partner with a leading video game console brand; thus any volatility with orders could be a risk. (3) Pegatron's LCD TV business is a distant third behind that of Compal and Wistron. We believe the company's current volumes in LCD TVs, compounded by the significant capital requirements needed to expand, is making this business venture lose money for now.

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 (2317.TW, 2324.TW, 3231.TW, 4938.TW, AAPL.OQ, 2353.TW, 2357.TW, 0992.HK, 2498.TW, HPQ.N, 005930.KS, 0861.HK, GOOGL.OQ, FB.OQ, IBM.N, EMC.N, NTAP.OQ, MSFT.OQ, ORCL.N, 0700.HK, RAX.N, BIDU.OQ) 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 (2317.TW, AAPL.OQ, 0992.HK, HPQ.N, 005930.KS, 0861.HK, GOOGL.OQ, FB.OQ, IBM.N, EMC.N, MSFT.OQ, ORCL.N, 0700.HK, BIDU.OQ) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (IBM.N, MSFT.OQ, 0700.HK) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (AAPL.OQ, 0992.HK, GOOGL.OQ, IBM.N, 0700.HK) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (2317.TW, AAPL.OQ, 0992.HK, HPQ.N, 005930.KS, 0861.HK, GOOGL.OQ, FB.OQ, IBM.N, EMC.N, MSFT.OQ, ORCL.N, 0700.HK, BIDU.OQ) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (2317.TW, 2324.TW, 3231.TW, 4938.TW, AAPL.OQ, 2353.TW, 2357.TW, 0992.HK, 2498.TW, HPQ.N, 005930.KS, 0861.HK, GOOGL.OQ, FB.OQ, VNET.OQ, IBM.N, EMC.N, NTAP.OQ, AMZN.OQ, MSFT.OQ, ORCL.N, 0700.HK, RAX.N, BIDU.OQ, 6740.T) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (IBM.N, MSFT.OQ, 0700.HK) within the past 12 months As of the date of this report, Credit Suisse makes a market in the following subject companies (AAPL.OQ, HPQ.N, GOOGL.OQ, FB.OQ, VNET.OQ, IBM.N, EMC.N, NTAP.OQ, AMZN.OQ, MSFT.OQ, ORCL.N, RAX.N, BIDU.OQ). As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (2317.TW, 2324.TW, 2382.TW, 3231.TW, 4938.TW, AAPL.OQ, 2353.TW, 2357.TW, 2498.TW, 2347.TW, 3702.TW). 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. 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 (FB.OQ) . Credit Suisse has been named as a defendant in various putative shareholder class-action lawsuits relating to Facebook, Inc.’s May 2012 initial public offering. Credit Suisse’s practice is not to comment in

Asia Hardware Sector 18 19 January 2015 research reports on pending litigations to which it is a party. Nothing in this report should be construed as an opinion on the merits or potential outcome of the lawsuits. 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. 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 (ORCL.N). As of the date of this report, an analyst involved in the preparation of this report, Sitikantha Panigrahi, has following material conflicts of interest with the subject company. The analyst or a member of the analyst's household has a long position in call options of Oracle Corporation (ORCL.N).

For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683. Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (2317.TW, 2324.TW, 2382.TW, 3231.TW, 4938.TW, AAPL.OQ, 2353.TW, 2357.TW, 0992.HK, 2498.TW, HPQ.N, 005930.KS, 2347.TW, 0861.HK, 3702.TW, GOOGL.OQ, FB.OQ, VNET.OQ, IBM.N, EMC.N, NTAP.OQ, AMZN.OQ, MSFT.OQ, ORCL.N, ORCL.N, 0700.HK, RAX.N, BIDU.OQ, 6740.T) within the past 12 months An analyst involved in the preparation of this report has visited certain material operations of the subject company (AAPL.OQ) within the past 12 months The travel expenses of the analyst in connection with such visits were not paid or reimbursed by the subject company, other than de minimus local travel expenses. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml. An analyst involved in the preparation of this report received third party benefits in connection with this research report from the subject company (HPQ.N) Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (AAPL.OQ, 0992.HK, HPQ.N, 0861.HK, GOOGL.OQ, FB.OQ, IBM.N, EMC.N, MSFT.OQ, 0700.HK) within the past 3 years. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. Taiwanese Disclosures: This research report is for reference only. Investors should carefully consider their own investment risk. Investment results are the responsibility of the individual investor. Reports may not be reprinted without permission of CS. Reports 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 ...... Thompson Wu

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Asia Hardware Sector 19 19 January 2015

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TC2088 Asia Hardware Sector 20