25 February 2016 Asia Pacific Equity Research Electronic Equipment & Instruments (Technology Hardware & Equipment) Asian Handset Supply Chain Research Analysts SECTOR REVIEW Randy Abrams, CFA 886 2 2715 6366 [email protected] Mobile World Congress 2016: A long-term Jerry Su evolution in hardware 886 2 2715 6361 [email protected] Figure 1: Mediatek’s share price performance—historical trend around MWC Pauline Chen vs sales YoY 886 2 2715 6323 Mediatek stock performance entering/exiting MWC (T-30 as benchmark) [email protected] 20% 60% 10% 30% Keon Han 0% 0% 82 2 3707 3740 -10% -30% [email protected] -20% -60% Thompson Wu 2010 2011 2012 2013 2014 2015 2016 T-5 T+5 T+30 Sales YoY (%) 886 2 2715 6386 [email protected] Source. Company data, Bloomberg consensus, Credit Suisse estimates Mobile World Congress (MWC), the wireless industry’s largest annual event, took Sam Li place this week in Barcelona. Our team met chipset, component and device 852 2101 6775 [email protected] companies, spanning tier 1, branded Chinese, and whitebox vendors. In this note, we profile Samsung, Lenovo, Asustek and Mediatek, and their implications for the Derrick Yang 886 2 2715 6367 Asian supply chain. The following are the key summary points: [email protected] ■ Flagships led by Samsung’s fresh new look. Samsung’s unpacked event Kyna Wong set the tone for the MWC where peripherals (VR, 360 Degree Cameras) 852 2101 6950 shifted some focus from only modest upgrades to the flagship smartphone. [email protected] Samsung forecasts higher sale volume compared to the GS6, and with Haas Liu similar components could realise efficiencies to maintain its 10% 886 2 2715 6365 smartphone OPM target. VR drew substantial attention, though it remains [email protected] niche until the interface and applications improve and price points drop. ■ A Mediatek-Qualcomm duopoly, but still competitive. The merchant 4G baseband market is a duopoly in 1H16 with BRCM/MRVL having exited, Spreadtrum only gaining traction on 4G low end, and Intel SoFIA 4G pushing out to 4Q16. QCOM's high-end design wins have recovered, leaving Mediatek supplying more of its mid- to high-end over its flagship x20. We see Mediatek stabilising near term, helped by strong China 4G adds and more Helio mix. ■ RF content story intact, fingerprint continues to proliferate. The RF content story highlighted in our GaAs foundry initiation in Nov 2015 continues to play out, with more models shifting to 802.11ac. China’s smartphones are growing content from US$3 to US$5-7 migrating from 3-mode to 6-mode. In fingerprint, penetration for non-Apple smartphone devices should reach 30% in 2016E (vs 16% in 2015), thanks to the push by Samsung and Chinese brands ■ Asian stock outlook. We stay selective on the mobile supply chain with preference on TSMC gaining share with Apple and benefiting from leaner inventory and better China trends, RF content increase with Win Semi, metal casing share gains with Catcher and Casetek, and Himax with improving core driver IC business and optionality on VR/AR with its LCOS, wafer level optics and OLED drivers. While dual camera is seeing small volumes with an LG model, we remain concerned about yield rates limited take-up and margins relative to bullish expectations. Our top pick in hardware is Lenovo, which is improving its offering in mobile and taking out cost to drive break-even. 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. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access 25 February 2016 Focus charts and tables Figure 2: Mediatek’s share price performance around MWC Figure 3: Mediatek expanding its Helio family Mediatek stock performance entering/exiting MWC (T-30 as benchmark) 20% 70% 15% 60% 50% 10% 40% 5% 30% 0% 20% -5% 10% 0% -10% -10% -15% -20% -20% -30% 2010 2011 2012 2013 2014 2015 2016 T-5 T+5 T+30 Sales YoY (%) Source: Company data Source: Company data Figure 4: New flagship LTE smartphones from global tier 1s at the MWC Company Samsung Samsung TCL TCL LG HP Sony Model name Galaxy S7 Galaxy S7 Edge IDOL 4 IDOL 4S G5 Elite X3 Xperia X Technology LTE LTE LTE LTE LTE LTE LTE Operating System Android 6.0 Android 6.0 Android 6.0 Android 6.0 Android 6.0 Microsoft Windows 10 Android 6.0 Pixels 1440 x 2560 1440 x 2560 1920 x 1080 1920 x 1080 1440 x 2560 1440 x 2560 1920 x 1080 RAM 4GB 4GB 2/3GB 3GB 4GB 4GB 3GB ROM 32/64GB 32/64GB Up to 200GB Up to 200GB 32GB 64GB 32/64GB Display 5.1" 5.5" 5.2" 5.5" 5.3" 5.96" 5.0" Camera 12MP +5MP 12MP +5MP 13MP + 8MP 16MP + 8MP 16MP +8MP 16MP + 8MP 23MP + 13MP Battery 3000mAh 3600mAh 2610mAh 3000mAh 2800mAh 4150mAh 2620mAh CPU Speed 2.3GHz 2.3GHz 1.7GHz 1.8GHz 2.3GHz 2.15GHz 1.8GHz Processor Chip Snapdragon 820 Snapdragon 820 Snapdragon 617 Snapdragon 652 Snapdragon 820 Snapdragon 820 Snapdragon 650 Retail Price (USD) TBD TBD TBD TBD TBD TBD TBD Availability March March 2Q16 2Q16 April 2Q16 2Q16 Source: Company data, Credit Suisse research Figure 5: 4G merchant chipsets a duopoly, although Qualcomm is holding share pretty well this year Mediatek Qualcomm Helio P10 Helio X10 Helio X20 Snapdragon 600x Sanpdragon 808 Snapdragon 810 Snapdragon 820 LEAGOO Elite 1 HTC One M9+ Smartcong Flagship Vivo X6SPlus Xiaomi 4C ZTE Axon Samsung Galaxy S7 Sony Xperia XA Meizu MX5 ZOPO Speed 8 NuAns NEO LG G4 Sony Xperia Z5 Xiaomi mi5 Lenovo K5 Note OPPO R7 Plus Meizu MX6 HTC One A9 LG V10 LeTV 1S Pro HTC M10 Elephone M3 Letv 1S Elephone P 9000 Lenovo Lemon 3 LG Nexus 5X OnePlus Two LG G5 Gionee W909 Sony Xperia M5 LeEco L2 Lenovo Vibo K5 Qiku Flagship Huawei Nexus 6P LeEco Le Max Pro Gionee S8 Gionee E8 Elephone P 9000 TCL IDOL 4/4S Microsoft Lumix 950 Microsoft Lumia 950 XL Oppo Find 9 Archos Diamond 2+ Xiaomi Redmi Note3 Sony Xperia X Motorola Moto X Style ZTE nubia Z9 Vivo Xplay 5 Xiaomi Redmi Note2 Lenovo Vibe X3 Xiaomi Note HP Elite x3 Meitu V4 Acer Jade Primo Motorola Moto X Sony Xperia X Perf. HTC One E9+ Blackberry Vienna Gigaset ME pro HTC One ME Samsung Galaxy N5 edge Motorola Droid Turbo 2 PPTV PP King 7s Sony Xperia W+ Samsung Galaxy S6 Active Sony Xperia Z4 Compact LG Angler HTC Butterfly 3 Elephone Vowney Acer Jade 2 Vivo Xshot 3s HTC One X9 Sharp AQUOS ZETA Source: Company data, Credit Suisse estimates Asian Handset Supply Chain 2 25 February 2016 Figure 6: Valuation comparison Market Cap Price Target Inv'ment Target P/E P/E P/B ROE Div Yld US$mn 25-Feb Local Curcy Rating upside 2014 2015 2016 2015 2016 2015 2016 Asian semiconductor coverage Foundry TSMC 117,339 150.5 163.0 OPFM 8.3% 14.8 13.6 12.5 3.2 2.8 25.6% 24.2% UMC 4,979 13.3 13.5 NTRL 1.9% 13.6 12.3 14.8 0.7 0.7 5.9% 4.9% SMIC 3,742 0.67 0.93 OPFM 38.8% 18.5 13.0 15.8 1.0 1.0 8.5% 6.4% Vanguard Semi 2,542 50.9 52.0 OPFM 2.2% 15.4 20.3 16.4 3.1 3.0 15.1% 18.4% Hua Hong Semi 942 7.06 11.00 OPFM 55.8% 8.3 8.4 10.3 0.6 0.6 7.6% 5.9% Total 129,544 14.9 13.5 12.6 2.9 2.5 22.7% 21.3% Packaging & testing Powertech 1,679 72.3 78.0 NTRL 7.9% 17.0 13.5 12.1 1.6 1.6 12.6% 13.3% Amkor 1,181 5.0 5.5 OPFM 10.4% 5.7 20.5 51.0 1.0 1.0 5.0% 1.9% Tianshui Huatian 1,774 14.1 18.5 OPFM 30.8% 33.1 35.2 25.6 2.5 2.3 9.4% 9.4% Nantong Fujitsu 1,516 13.2 15.0 NTRL 13.3% 71.2 69.4 43.4 2.7 2.5 4.7% 5.9% Total 14,803 13.9 17.8 15.7 1.7 1.6 10.2% 10.6% IC design MediaTek Inc. 10,847 234.5 230.0 NTRL -1.9% 7.9 14.1 15.1 1.5 1.4 10.5% 9.4% Realtek Semiconductor 1,243 81.9 76.0 NTRL -7.2% 13.4 17.0 15.2 1.9 1.9 11.2% 12.5% WPG Holdings Ltd 1,660 33.4 37.0 NTRL 10.9% 9.5 10.1 9.0 1.2 1.1 11.9% 12.4% Total 13,751 8.4 13.6 14.4 1.8 1.5 10.6% 9.8% Semiconductor equipment ASM Pacific 3,198 61.6 75.0 OPFM 21.9% 13.4 24.2 22.2 3.2 3.0 13.2% 13.9% Hermes 1,761 825.0 1,250.0 OPFM 51.5% 18.1 25.2 19.8 4.6 4.1 19.0% 21.9% Total 4,959 16.3 25.8 21.3 3.5 3.3 13.6% 15.9% China smartphone supply chain top picks Driver IC EgisTec 342 166.0 220.0 OPFM 32.5% n.m n.m 28.2 7.5 5.8 -3.9% 25.7% Chipbond 1,011 51.8 56.0 OPFM 8.1% 13.2 16.1 13.0 1.4 1.4 8.9% 10.7% Novatek 2,497 136.5 148.0 OPFM 8.4% 11.5 13.0 12.4 2.9 2.8 22.6% 22.9% Total 3,850 13.4 15.2 13.2 2.7 2.4 15.8% 17.4% RF Semiconductor Win Semiconductor 953 53.3 63.0 OPFM 18.2% 16.1 11.8 10.6 1.9 1.7 16.3% 16.8% VPEC 380 51.2 54.0 NTRL 5.5% 26.9 20.4 17.6 3.5 3.4 17.3% 19.6% Total 1,333 22.6 16.5 14.9 3.0 2.8 16.5% 17.3% Components Hon Hai 36,479 78.5 103.0 OPFM 31.2% 8.9 8.2 8.4 1.3 1.2 15.5% 14.5% Catcher 5,826 251.5 330.0 OPFM 31.2% 10.8 8.0 8.5 1.7 1.5 22.7% 18.3% Casetek 1,813 177.5 200.0 OPFM 12.7% 12.2 10.7 10.4 1.9 1.8 18.8% 17.6% Alps 3,146 1,807.0 3,250.0 OPFM 79.9% 24.8 10.2 7.9 1.8 1.4 21.9% 20.8% Murata 24,800 13,180.0 20,900.0 OPFM 58.6% 29.9 16.6 12.8 2.5 2.2 16.1% 18.3% Sony 26,525 2,383.0 3,500.0 OPFM 46.9% n.m n.m 17.9 1.2 1.2 -5.5% 7.2% AAC 9,954 53.0 48.8 NTRL -7.8% 28.1 21.4 19.2 5.9 5.0 30.3% 28.3% Sunny Optical 2,961 17.8 20.4 OPFM 14.7% 33.9 26.4 19.5 5.1 4.2 20.7% 23.7% Goertek 6,942 29.7 39.1 OPFM 31.6% 27.3 33.8 26.2 4.8 4.1 15.0% 16.8% FIH 2,727 2.7 3.6 OPFM 32.4% 15.9 12.1 9.8 5.2 4.9 5.6% 6.6% Total 121,173 24.1 18.1 12.2 1.6 1.4 8.9% 12.3% Handset brands TCL 854 5.4 9.0 OPFM 67.6% 5.9 5.3 4.6 1.5 1.2 29.5% 28.6% Lenovo 9,338 6.5 10.5 OPFM 60.6% 10.8 10.9 n.m 2.2 3.0 23.4% -3.2% Total 10,192 9.7 8.9 14.0 2.2 2.1 26.4% 15.1% Source: Company data, Credit Suisse estimates Asian Handset Supply Chain 3 25 February 2016 Mobile World Congress 2016: A long-term evolution in hardware Mobile World Congress (MWC) 2016, the mobile industry’s largest annual event, featuring over 94,000 attendees and 2,200 exhibitors, took place this week in Barcelona.