Asia Semiconductor Sector

13 April 2017 Asia Pacific

Equity Research

Semiconductor Devices

Asia Semiconductor Sector

Research Analysts

SECTOR FORECAST

Randy Abrams, CFA

886 2 2715 6366 [email protected]

1Q17 preview: Choppy results season looms

Figure 1: Semiconductor revisions ahead of the 1Q17 results season: TSMC, UMC, SMIC, Vanguard, Powertech, Mediatek, Realtek and WPG

Haas Liu

886 2 2715 6365 [email protected]

2017 EPS Change
Target Price Change

Price

Target

Inv'ment Target

P/E

2018
P/B
2017 2018
ROE

2017 2018

12-Apr Local Curcy Rating

upside

2017

Foundry

TSMC

-2%

0% 0% -6% 0%
Maintain at NT$205 Maintain at NT$12 Maintain at HK$10.8 Lower to NT$53
191.0 12.0
205.0 12.0
OPFM NTRL NTRL NTRL OPFM
7.3% 0.0%
14.3 22.2 18.1 17.8 12.0
13.0 20.5 14.1 15.5 11.7
3.2 0.7 1.1 3.3 0.9
2.9 0.6 1.0 3.2 0.9
23.9% 23.5% 3.0% 3.2% 6.5% 7.7% 18.7% 20.9% 7.7% 7.5%
UMC

SMIC

9.36

10.80

53.0
15.4% -9.9% 5.6%
Vanguard Hua Hong

Packaging & testing

ASE
58.8

Maintain at HK$11

10.42

11.00

0% 0% 0%

Restricted

38.3

86.5 11.2
RSTR 102.0
9.5
RSTR OPFM NTRL

NA

12.5

11.8 14.9
12.0 10.8 13.2
1.8 1.8 1.7
1.7 1.7 1.5
14.5% 14.4% 15.4% 16.1% 12.2% 12.2%
Powertech Amkor
Maintain at NT$102 Maintain at US$9.5
17.9% -15.2%

IC design

MediaTek Realtek
-8% -3% -5%
Lower to NT$200 Lower to NT$130 Lower to NT$38
214.0 107.5 38.2
200.0 130.0 38.0
NTRL OPFM NTRL
-6.5% 20.9% -0.5%
16.1 13.2 10.1
13.0 12.0 9.1
1.3 2.3 1.2
1.2 3.8 1.1
8.5% 9.9% 17.7% 23.9%

12.5% 12.9%

WPG

Source: Company data, Credit Suisse research. Note estimates already revised in the past week for Realtek and Mediatek

We summarise key themes through the results season for our semiconductor coverage and preview each of our covered companies in this preview report,

including updates from TSMC’s recent technology symposium.

■ A sub-seasonal 1Q17 result dampened by the rising TWD. We expect a

conservative results season, with 1Q17 sales below seasonal and dampened by the slowdown in China smartphones, low season for iPhone components, some excess fabless inventory and a 5% YTD appreciation in the TWD. The foundries (TSMC and Vanguard), fabless (Mediatek) and distribution (WPG) only reached the low-end of guidance on these factors.

■ 2Q17 guidance could be light for several companies. We expect most of

the companies to see modest improvement in 2Q17 from a low base in 1Q17, though we would note the momentum will stay sub-seasonal on still muted demand for smartphone and PC and continued inventory correction in fabless. In 2Q17, we expect guidance below street across TSMC, SMIC, Vanguard, Mediatek and Powertech as the communications space is in a lull ahead of iPhone 8 and also depleting some excess chip inventory built up during the tight period in 2016. The overseas chip companies should be more constructive as the broad-based auto/industrial remained healthy.
■ Estimate revisions. We already revised down TSMC (fabless inventory,
China smartphone slowdown), Mediatek (China smartphone softness, some high-end share loss to Qualcomm) and Realtek (FX loss). In this report, we trim estimates on WPG (China smartphones) and Vanguard (push-out of fingerprint to 2H and slower small panel driver ICs). We also lowered 2Q17 for Powertech but keep full year intact after a better 1Q17 and potential rebound in 2H17 as iPhone NAND shipments ramp. We also see some risk to SMIC expectations into 2Q17 due to high exposure to China smartphones.

■ Wait for a better entry post results. We stay conservative on several

stocks in our coverage with a risk of shortfall relative to street, including TSMC, Vanguard, SMIC, Mediatek and Powertech, with a better set-up for 2H17 as the business should rebound. We still see catalyst post results as iPhone ramps for TSMC and Powertech and also see decent growth outlook continuing for Realtek as some new products contribute.

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE 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.

13 April 2017

Focus charts and tables

Figure 2: Asian Semis valuation metrics

Market Cap Price

Target

Inv'ment Target

52 Week

high/low
P/E
2018
P/B
2017 2018
ROE

US$mn

12-Apr Local Curcy Rating

upside

2017

2018

Foundry

TSMC

162,078

4,837
191.0 12.0
205.0 12.0
OPFM NTRL NTRL NTRL OPFM
7.3% 0.0%
144.0-195.0
11.2-13.0
14.3 22.2 18.1 17.8 12.0

14.9

13.0 20.5 14.1 15.5 11.7

14.6

3.2 0.7 1.1 3.3 0.9

2.7

2.9 0.6 1.0 3.2 0.9

2.4

23.9% 23.5% 3.0% 3.2% 6.5% 7.7% 18.7% 20.9% 7.7% 7.5%

19.4% 19.4%

UMC

SMIC

5,173

9.36

10.80

53.0
15.4% -9.9% 5.6%
5.90-12.18

49.1-67.1

Vanguard Semi

Hua Hong Semi

Total

3,181

58.8

1,394

10.42

11.00

6.49-11.20

175,270
Packaging & testing

ASE

9,651

2,205 2,676

19,574

38.3 86.5 11.2
RSTR 102.0
9.5
RSTR OPFM NTRL

NA

28.5-39.9

63.0-93.5 5.4-12.3
12.5 11.8 14.9

14.5

12.0 10.8 13.2

13.3

1.8 1.8 1.7

1.7

1.7 1.7 1.5

1.7

14.5% 14.4% 15.4% 16.1% 12.2% 12.2%

13.4% 13.6%

Powertech Amkor
17.9% -15.2%

Total IC design

MediaTek Inc. Realtek Semiconductor WPG Holdings Ltd

Total

10,950 1,776
214.0 107.5 38.2
200.0 130.0 38.0
NTRL OPFM NTRL
-6.5% 20.9% -0.5%
192.0-256.5 85.5-130.0 33.4-41.0
16.1 13.2 10.1

14.6

13.0 12.0 9.1
1.3 2.3 1.2

1.3

1.2 3.8 1.1

1.3

8.5% 9.9% 17.7% 23.9% 12.5% 12.9%

9.7% 11.1%

2,097

14,824

14.4

Semiconductor equipment

ASM Pacific

Total

5,603

107.0

127.0

OPFM

18.7%

52.1-108.0

21.2

18.5

4.5

4.0

22.7% 23.2%

5,603

21.2

18.5

4.5

4.0

22.7% 23.2%

Source: Company data, Credit Suisse

Figure 3: China smartphone will tougher compares

Figure 4: NTD appreciated against USD by 6% YTD

NTD/USD

China smartphones (mn)

YTD YoY %

35

550

440

25%

20%

34

33

32

31 30 29 28 27 26

25

330 220
15% 10%

110

5%

-

0%

-5%

(110)

(220) (330) (440) (550)
-10% -15% -20% -25%
Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec

2014 2017 2016 YTD YoY
2015 2014 YTD YoY 2017 YTD YoY
2016 2015 YTD YoY

NTD/USD

Figure 5: TSMC’s 1H17 is soft but will rebound in 3Q

Figure 6: TSMC +1SD P/E despite softer 1H17

(X)

2330.TW P/E

Sales (NT$)

$300,000

QoQ Change

30%

20.0

$250,000 $200,000 $150,000 $100,000
$50,000

$0

25% 20% 15% 10% 5%

18.0 16.0 14.0

12.0 10.0

8.0

0%

-$50,000
-$100,000
-5% -10%

Forward PE

Average

+1std

-1std

+2std

-2std

Revenue

QoQ Growth

2

13 April 2017

1Q17 preview: Choppy results loom

Stocks are holding up despite a soft outlook for the group through 1H17 as China smartphones and a rising TWD weigh

The stocks have been resilient through 1Q17 despite a mixed outlook due to relatively high fabless inventory, slowdown in China smartphone demand from the strength in 2016 and also an incremental headwind from the 5% TWD appreciation, which impacts the Taiwan exporters’ translated sales and margins. TSMC kicks off results on Thursday and should maintain a conservative tone on 1H17 business due to these factors and also a weaker 10nm launch from its customer Mediatek and some Qualcomm chips still moving to 14nm Samsung. We expect the company to guide a modest decline in 2Q17 (vs street’s -0-1% QoQ) following a sub-seasonal 1Q17, putting the street’s full-year earnings estimates at risk for a modest downward revision. 1Q17 sales was already below seasonal down 9% QoQ in USD and down 11% QoQ in TWD due to low season for Apple and the China smartphone slowdown and should stay soft through 2Q17 as fabless deplete inventory and respond to slower China smartphone volumes. Apple orders will also trough out in 2Q17 before a sharp 2H17 ramp.

We do expect TSMC’s risk on the shares to stay modest though with a more notable

iPhone refresh in 2H17 and continued optimism from the company on its technology position. The company's technology updates at its recent tech symposium profiled in the report shows a broadening of its platform offerings to address its new target markets (high performance computing, automotive, IoT) and still aggressive roadmap with 28nm shrink to 22nm, 16nm shrink to 12nm and a fast migration through 10nm and 7nm for the first wave customers to address high-end mobile, graphics, data center acceleration and potentially some intensive ADAS computing requirements.

Figure 7: 1Q17 sales tracked toward the mid-to-lower end of expectations

1Q-17

CS

1Q-17

CS
233,914 262,227 37,418 38,306

4Q-16 1Q17 Actual 1Q17 CS 1Q17 Street

2Q17 QoQ 2Q17 QoQ

1Q-17 Guide

Tracking Guidance

Actual CS original original

Actual

QoQ

-10.8% -2.3% -5.0% -9.6% -11.7% -13.7% -7.3%
QoQ
-10.8% -2.3% -5.1% -9.6% -11.0% -13.6% -7.2%
QoQ -8.6% -3.3% -3.5% -7.6% N/A
(CS) -5.1% 4.4% 0.2% -3.7% 8.2% 5.9% 2.3% 5.5%
(Street)
0.8% 0.8% 9.0% 1.0% N/A 4.1% 7.7% 5.0% 19.9% 5.5% 18.3% 13.4% 5.4%
TSMC UMC Vanguard Foundries ASE IC ATM
233,914 37,418 6,263
277,595 38,385
237,012 36,858 6,471
280,341 38,682 66,601 12,285 99,356 57,312 9,899
98.7% 101.5% 96.8% 99.0% 99.2% 99.9% 103.1% 99.4% 97.9% 100.9% 93.9% 95.5% 97.9%
Down 9% to 10% QoQ Down 4% QoQ in NT$ Down 0.7% to 5.2% QoQ Tracking to low-end
Tracking to low-end Slightly below Slightly above

6,263

6,596

277,595 307,129 38,385 43,463 66,551 77,129 12,660 13,650 98,762 112,956 56,083 68,675

Down low teens QoQ

On track

On track Slightly above On track

ASE Consol. 66,551

-14.1%

3.7%

Powertech

Back-end Mediatek Realtek WPG
12,660 98,762 56,083 9,983
119,100 185,166 561,523
Down less than 11% QoQ
-12.6% -18.3%
1.9%
-11.7% -18.3%
1.9%
-13.4% -17.3%
1.2%
Down 14-22% QoQ Mild QoQ growth Down 9-10% QoQ
Tracking to mid-end 12.6%

9,983

9,801

Slightly above

Below
Tracking to low-end Tracking to low-end
5.7% 16.3% 14.6% 3.9%
126,775 193,986 573,683
119,100 139,311 185,166 217,787 561,523 637,873
-14.5% -15.0% -12.0%
-14.5% -15.0% -11.8%
-5.3% -12.8% -9.9%
IC Design Total

Source: Company data, Credit Suisse estimates

2Q17 guidance could be below street for TSMC,
SMIC, Vanguard,

The broader semiconductor coverage is also progressing through a slower 1H17. In 1Q17, TSMC, Vanguard and WPG were light, with currency having an impact on each, and China

smartphones impacting Vanguard’s small panel driver IC shipments and WPG’s distribution

business. In 2Q17, we expect guidance below street across TSMC, SMIC, Vanguard, Mediatek and Powertech as the communications space is in a lull ahead of iPhone 8 and also depleting some excess chip inventory built up during the tight period in 2016. The overseas chip companies should be more constructive as the broad-based auto/industrial remained healthy and notebook builds tracked better than feared down mid-teens vs earlier down 20% QoQ expectations on HP and Dell strength and Acer restocking.

Mediatek and Powertech

Downward revisions for 1H17 estimates continues before a 2H17 pick up

For earnings revisions, we already revised down TSMC estimates in late February (fabless inventory, China smartphone slowdown), Mediatek in early March (China smartphone softness, some high-end share loss to Qualcomm) and Realtek in the past week (FX loss and modest PC slowdown). In this report, we also trim our estimates on WPG (China smartphones) and Vanguard (push-out of fingerprint to 2H and slower small panel driver ICs due to Android slowdown). We also lowered our 2Q17 estimate for Powertech with memory

3

13 April 2017

units slow into PCs and smartphones but keep full year intact after a better 1Q17 and potential rebound in 2H17 as iPhone NAND shipments ramp. We also see some risk to SMIC expectations into 2Q17 as its business remains slowed by high exposure (30% of sales) China smartphones.

Stay conservative on
TSMC, Vanguard, SMIC and Mediatek into results, although potentially setting up a better entry

We have the following stock calls into results.

1) TSMC results may weigh but 2H17 iPhone catalyst still looms. TSMC's 1H17

business is impacted by the smartphone slowdown and TWD appreciation, keeping 1Q17 sales and profitability tracking to the low-end. We already trimmed 2Q17 estimates reflecting smartphone adjustments and less 10nm in February. The stock has been a range trade for three quarters following its earlier re-rating, and so could finally get another leg up following the 1H17 slowdown as the business will at least see a good ramp in 2H17 as iPhone orders grow and retain a good technology position with half node enhancements for its 28nm and 16nm nodes and a fast migration through 10nm to 7nm ahead of its peers.