2019 Technology Outlook

Global Information Technology 7 January 2019

A year of new leadership

 We see 2 milestones in 2019: 1) BigData/IoT overtaking MCD in revenue terms, 2) 5G kicking off, helping boost the new demand cycle  We expect compound-semiconductor makers to capture the most Rick Hsu incremental value from the 5G cellular upgrade (886) 2 8758 6261  We flag 4 secular themes for investment — bandwidth (5G/FO), HMI [email protected] (3D/multi-cam), AI and density — and 15 related stock picks Robert Hsu (886) 2 8758 6251 [email protected]

See important disclosures, including any required research certifications, beginning on page 115

Global Information Technology 7 January 2019

2019 Technology Outlook

A year of new leadership

What's new: 2018 was the Year of the Dog for many tech stocks in Asia, with Daiwa’s 2019 tech picks the sector hit by turbulence caused by trade tensions, crypto volatility and Stock Ticker Rating TP* iPhone weakness, on top of investors’ inflated expectations. With expectations Bandwidth since reset, valuations rationalised, inventory manageable, and demand MediaTek 2454 TT Buy 280 Inari INRI MK Buy 2.25 diversified, 2019 should be a “refresh” year for investment with new demand SEMCO 009150 KS Buy 172,000 leadership. We expect the secular demand transition to be completed in 2019, Delta 2308 TT Buy 159 and flag a tipping point for 5G to kick off and help accelerate expansion of the LMO 3081 TT Buy 335 Murata 6981 JP Outperform 25,000 BigData/Internet of Things (IoT) market. Advantest 6857 JP Outperform 3,000 HMI What's the impact: Welcome to BigData/IoT. We see 2 milestones for the WinSemi 3105 TT Buy 195 sector in 2019: 1) after 4 years of transition post the smartphone demand Globetronics GTB MK Buy 3.00 Sony 6758 JP Buy 7,000 slowdown, we expect the BigData/IoT market to overtake mobile the computing Largan 3008 TT Buy 4,000 device (MCD) market in revenue terms for the first time, with demand strength Sunny Optical 2382 HK Buy 115 from datacentres that have spurred bandwidth, compute and density upgrades, AI TSMC 2330 TT Buy 266 along with the rise of IoT devices, and 2) the kick-off of 5G migration to ASE 3711 TT Buy 95 upgrade wireless bandwidth, triggered by telcos’ new capex, where we expect Density SEC 005930 KS Buy 54,000 this build-up cycle to be milder but last longer (p.27-31). Source: Daiwa forecasts * Target prices in local currency 5G the next big thing. As outlined in our thematic report (Let’s talk about 5G), we expect 2019 to be a tipping point for mobile communication to migrate to Global IT industry: evolving trend 5G cellular technology, largely benefiting the tech sector thanks to a revolutionary upgrade for wide spectrum coverage. 5G’s phased-array antenna design should be both unit- and ASP-accretive, with a greater value proposition from infrastructure base-stations than terminal-device smartphones, allowing BigData compound-semiconductor makers to capture the most incremental value on frequency expansion, followed by other supply-chain players which should benefit from materials, baseband, fibre-optic (FO) and power system upgrades Mobile (p.32-36). Computing

Secular themes likely to shine. Since we believe we are in the BigData/IoT Mobile cycle for the data economy, we centre our 2019 investment picks on 4 secular Comm trends that we expect to benefit from new and replacement demand for growth: PC 1) Bandwidth: 5G for wireless and FO for wireline data transmission, 2) Human machine interface (HMI): 3D lasers and multiple cameras to enhance data access, 3) Artificial Intelligence (AI): high-performance computing No Capital Markets and Services Licence has been issued by the Malaysian Securities Commission to any member of Daiwa (HPC) for cloud and edge computing of datacentres and terminal devices, and Capital Markets and accordingly this report and any part of its 4) Density: memory devices to see a sustained upturn despite a likely mid- content may not be distributed or made available by any means within Malaysia. cycle correction (p.37-44).

What we recommend: We cherry-pick 15 stocks in Pan Asia which fit into our 4 themes. See table to the right for a quick summary and the content inside for details of our investment theses.

How we differ: We do not expect a downturn in the tech sector, based on our positive stance on the secular demand transition and 5G kicking off.

See important disclosures, including any required research certifications, beginning on page 115

2019 Technology Outlook: 7 January 2019

Sector stocks: key indicators

EPS (local curr.) Share Rating Target price (local curr.) FY1 FY2 Company Name Stock code Price New Prev. New Prev. % chg New Prev. % chg New Prev. % chg AAC Technologies 2018 HK 41.05 Hold Hold 60.00 60.00 0.0% 3.627 3.627 0.0% 4.036 4.036 0.0% Adlink Technology 6166 TT 31.35 Underperform Underperform 45.00 45.00 0.0% 1.771 1.771 0.0% 2.185 2.185 0.0% Advantech 2395 TT 214.00 Outperform Outperform 240.00 240.00 0.0% 9.009 9.009 0.0% 9.840 9.840 0.0% Airtac International Group 1590 TT 292.00 Hold Hold 260.00 260.00 0.0% 14.438 14.438 0.0% 16.354 16.354 0.0% ASE Technology Holding 3711 TT 56.00 Buy Buy 95.00 95.00 0.0% 3.731 3.731 0.0% 6.658 6.658 0.0% ASUSTeK Computer 2357 TT 204.00 Underperform Underperform 195.00 195.00 0.0% 12.751 12.751 0.0% 18.767 18.767 0.0% Casetek Holdings 5264 TT 43.00 Hold Hold 43.50 43.50 0.0% (4.380) (4.380) n.a. 4.139 4.139 0.0% Catcher Technology 2474 TT 215.00 Hold Hold 230.00 230.00 0.0% 38.182 38.182 0.0% 29.213 29.213 0.0% Delta Electronics 2308 TT 130.00 Buy Buy 159.00 159.00 0.0% 6.739 6.739 0.0% 8.064 8.064 0.0% Ennoconn 6414 TT 247.00 Buy Buy 428.00 428.00 0.0% 15.810 15.810 0.0% 20.174 20.174 0.0% FIH Mobile 2038 HK 0.82 Hold Hold 1.20 1.20 0.0% (0.072) (0.072) n.a. (0.029) (0.029) n.a. General Interface Solution 6456 TT 86.20 Hold Hold 108.00 108.00 0.0% 11.528 11.528 0.0% 11.247 11.247 0.0% Hiwin Technologies Corp 2049 TT 210.00 Underperform Underperform 178.00 178.00 0.0% 19.362 19.362 0.0% 12.401 12.401 0.0% Hon Hai Precision Industry 2317 TT 68.90 Hold Hold 81.70 81.70 0.0% 7.170 7.170 0.0% 8.931 8.931 0.0% HTC Corp 2498 TT 36.10 Sell Sell 38.00 38.00 0.0% 17.041 17.041 0.0% (8.777) (8.777) n.a. LandMark Optoelectronics 3081 TT 250.00 Buy Buy 335.00 345.00 (2.9%) 7.726 7.732 (0.1%) 12.388 13.462 (8.0%) Largan Precision 3008 TT 3,030.00 Buy Buy 4,000.00 4,000.00 0.0% 181.280 181.280 0.0% 222.002 222.002 0.0% Lenovo Group 992 HK 5.12 Hold Hold 5.60 5.60 0.0% 0.042 0.042 0.0% 0.055 0.055 0.0% LG Display 034220 KS 17,800 Outperform Outperform 20,000 20,000 0.0% (682) (682) n.a. (231) (231) n.a. LG Electronics 066570 KS 62,900 Buy Buy 90,000 90,000 0.0% 8,883 8,883 0.0% 9,869 9,869 0.0% LG Innotek 011070 KS 81,700 Outperform Outperform 158,000 158,000 0.0% 7,159 7,159 0.0% 12,564 12,564 0.0% MediaTek 2454 TT 223.50 Buy Buy 280.00 310.00 (9.7%) 13.421 13.699 (2.0%) 16.119 18.816 (14.3%) Novatek Microelectronics 3034 TT 134.00 Outperform Outperform 150.00 150.00 0.0% 10.020 10.020 0.0% 11.592 11.592 0.0% Pegatron Corp 4938 TT 49.60 Hold Hold 56.00 56.00 0.0% 5.206 5.206 0.0% 6.212 6.212 0.0% Quanta Computer 2382 TT 52.50 Hold Hold 52.00 52.00 0.0% 3.956 3.956 0.0% 4.153 4.153 0.0% Realtek Semiconductor 2379 TT 139.50 Underperform Underperform 115.00 115.00 0.0% 8.132 8.132 0.0% 8.719 8.719 0.0% Samsung Electro-Mechanics 009150 KS 94,000 Buy Buy 172,000 172,000 0.0% 8,881 8,881 0.0% 13,039 13,039 0.0% Samsung Electronics 005930 KS 37,600 Buy Buy 54,000 54,000 0.0% 7,487 7,487 0.0% 5,822 5,822 0.0% Samsung SDI 006400 KS 203,000 Buy Buy 355,000 355,000 0.0% 12,935 12,935 0.0% 18,985 18,985 0.0% Semiconductor Manufacturing Int'l Corp 981 HK 6.43 Hold Hold 6.55 6.55 0.0% 0.024 0.024 0.0% 0.011 0.011 0.0% SK Hynix 000660 KS 57,700 Buy Buy 90,000 90,000 0.0% 22,549 22,549 0.0% 16,603 16,603 0.0% Sunny Optical Technology 2382 HK 61.40 Buy Buy 115.00 115.00 0.0% 2.755 2.755 0.0% 4.002 4.002 0.0% Taiwan Semiconductor Manufacturing 2330 TT 215.50 Buy Buy 266.00 266.00 0.0% 13.482 13.482 0.0% 15.107 15.107 0.0% TPK 3673 TT 46.60 Sell Sell 43.00 43.00 0.0% 2.037 2.037 0.0% 1.942 1.942 0.0% TXC Corp 3042 TT 32.30 Hold Hold 33.00 33.00 0.0% 2.041 2.041 0.0% 2.640 2.640 0.0% United Microelectronics 2303 TT 10.90 Underperform Underperform 11.80 11.80 0.0% 0.788 0.788 0.0% 0.676 0.676 0.0% Voltronic Power Technology 6409 TT 534.00 Hold Hold 528.00 528.00 0.0% 22.066 22.066 0.0% 23.252 23.252 0.0% Win Semiconductors 3105 TT 114.00 Buy Buy 195.00 195.00 0.0% 6.673 6.729 (0.8%) 7.746 7.812 (0.8%) Source: Bloomberg, Daiwa forecasts, Prices as of 3 January, 2019.

2019 Technology Outlook: 7 January 2019

EPS (local curr.) Share Rating Target price (local curr.) FY1 FY2 Company name Stock code price New Prev. New Prev. % chg New Prev. % chg New Prev. % chg Hitachi 6501 JP 2935.50 Outperform Outperform 4500.00 4500.00 0.0% 435.000 435.000 0.0% 466.000 466.000 0.0% Toshiba 6502 JP 3100.00 Outperform Outperform 4400.00 4400.00 0.0% 2095.200 2095.200 0.0% 247.100 247.100 0.0% Mitsubishi Electric 6503 JP 1216.50 Outperform Outperform 1750.00 1750.00 0.0% 112.800 112.800 0.0% 125.900 125.900 0.0% Fuji Electric 6504 JP 3245.00 Outperform Outperform 4500.00 4500.00 0.0% 301.000 301.000 0.0% 318.500 318.500 0.0% Sinfonia Technology 6507 JP 1331.00 Hold Hold 2300.00 2300.00 0.0% 185.000 185.000 0.0% 205.200 205.200 0.0% Meidensha 6508 JP 1383.00 Outperform Outperform 2000.00 2000.00 0.0% 160.900 160.900 0.0% 174.100 174.100 0.0% Daihen 6622 JP 2211.00 Outperform Outperform 1000.00 1000.00 0.0% 60.500 60.500 0.0% 67.700 67.700 0.0% Omron 6645 JP 4000.00 Hold Hold 5100.00 5100.00 0.0% 281.000 281.000 0.0% 311.800 311.800 0.0% IDEC 6652 JP 1885.00 Outperform Outperform 3100.00 3100.00 0.0% 155.100 155.100 0.0% 180.900 180.900 0.0% Azbil 6845 JP 2170.00 Hold Hold 2500.00 2500.00 0.0% 130.600 130.600 0.0% 138.300 138.300 0.0% Ibiden 4062 JP 1548.00 Hold Hold 1750.00 1750.00 0.0% 93.000 93.000 0.0% 113.800 113.800 0.0% MinebeaMitsumi 6479 JP 1590.00 Outperform Outperform 2750.00 2750.00 0.0% 153.200 153.200 0.0% 166.200 166.200 0.0% Mabuchi Motor 6592 JP 3370.00 Hold Hold 5800.00 5800.00 0.0% 362.000 362.000 0.0% 268.200 268.200 0.0% Nidec 6594 JP 12475.00 Buy Buy 22000.00 22000.00 0.0% 547.700 547.700 0.0% 624.200 624.200 0.0% Sanken Electric 6707 JP 2053.00 Hold Hold 4250.00 4250.00 0.0% 169.200 169.200 0.0% 222.800 222.800 0.0% TDK 6762 JP 7720.00 Outperform Outperform 13000.00 13000.00 0.0% 663.600 663.600 0.0% 806.100 806.100 0.0% Alps Electric 6770 JP 2135.00 Outperform Outperform 3200.00 3200.00 0.0% 205.700 205.700 0.0% 250.100 250.100 0.0% Hirose Electric 6806 JP 10770.00 Hold Hold 15500.00 15500.00 0.0% 534.100 534.100 0.0% 564.200 564.200 0.0% Japan Aviation Electronics Industry 6807 JP 1272.00 Hold Hold 1650.00 1650.00 0.0% 156.200 156.200 0.0% 159.500 159.500 0.0% Iriso Electronics 6908 JP 4070.00 Outperform Outperform 7500.00 7500.00 0.0% 271.600 271.600 0.0% 318.200 318.200 0.0% Rohm 6963 JP 7040.00 Outperform Outperform 14200.00 14200.00 0.0% 470.800 470.800 0.0% 509.100 509.100 0.0% Kyocera 6971 JP 5508.00 Outperform Outperform 7200.00 7200.00 0.0% 415.500 415.500 0.0% 443.400 443.400 0.0% Taiyo Yuden 6976 JP 1636.00 Outperform Outperform 4000.00 4000.00 0.0% 178.700 178.700 0.0% 268.000 268.000 0.0% Murata Manufacturing 6981 JP 14955.00 Outperform Outperform 25000.00 25000.00 0.0% 1055.100 1055.100 0.0% 1315.300 1315.300 0.0% Nitto Denko 6988 JP 5543.00 Hold Hold 9000.00 9000.00 0.0% 491.000 491.000 0.0% 486.500 486.500 0.0% Elecom 6750 JP 2796.00 Hold Hold 2900.00 2900.00 0.0% 177.600 177.600 0.0% 189.600 189.600 0.0% Panasonic 6752 JP 990.60 Hold Hold 1200.00 1200.00 0.0% 101.600 101.600 0.0% 100.800 100.800 0.0% Sharp 6753 JP 1102.00 Hold Hold 2650.00 2650.00 0.0% 121.000 121.000 0.0% 146.800 146.800 0.0% Fujitsu General 6755 JP 1408.00 Hold Hold 1700.00 1700.00 0.0% 124.300 124.300 0.0% 126.600 126.600 0.0% Sony 6758 JP 5326.00 Buy Buy 7000.00 7000.00 0.0% 562.600 562.600 0.0% 419.700 419.700 0.0% Pioneer 6773 JP 64.00 Hold Hold 90.00 90.00 0.0% -38.200 -38.200 0.0% -18.800 -18.800 0.0% Funai Electric 6839 JP 527.00 Hold Hold 650.00 650.00 0.0% -20.500 -20.500 0.0% -11.700 -11.700 0.0% Casio Computer 6952 JP 1304.00 Outperform Outperform 2000.00 2000.00 0.0% 95.800 95.800 0.0% 99.900 99.900 0.0% Shimano 7309 JP 15520.00 Outperform Outperform 17500.00 17500.00 0.0% 568.500 568.500 0.0% 578.200 578.200 0.0% Citizen Watch 7762 JP 542.00 Hold Hold 625.00 625.00 0.0% 52.800 52.800 0.0% 51.200 51.200 0.0% Yamaha 7951 JP 4680.00 Outperform Outperform 6000.00 6000.00 0.0% 228.200 228.200 0.0% 249.700 249.700 0.0% Kokuyo 7984 JP 1605.00 Outperform Outperform 2200.00 2200.00 0.0% 125.100 125.100 0.0% 126.800 126.800 0.0% Okamura 7994 JP 1418.00 Buy Buy 2000.00 2000.00 0.0% 98.800 98.800 0.0% 107.300 107.300 0.0% Fujifilm Holdings 4901 JP 4270.00 Hold Hold 4800.00 4800.00 0.0% 323.400 323.400 0.0% 380.800 380.800 0.0% Konica Minolta 4902 JP 993.00 Hold Hold 1100.00 1100.00 0.0% 89.000 89.000 0.0% 82.900 82.900 0.0% Disco 6146 JP 12850.00 Buy Buy 26000.00 26000.00 0.0% 862.900 862.900 0.0% 946.400 946.400 0.0% Brother Industries 6448 JP 1631.00 Outperform Outperform 3300.00 3300.00 0.0% 219.500 219.500 0.0% 223.300 223.300 0.0% Renesas Electronics 6723 JP 500.00 Hold Hold 1300.00 1300.00 0.0% 36.000 36.000 0.0% 40.800 40.800 0.0% Seiko Epson 6724 JP 1548.00 Outperform Outperform 2500.00 2500.00 0.0% 170.300 170.300 0.0% 195.900 195.900 0.0% Advantest 6857 JP 2244.00 Outperform Outperform 3000.00 3000.00 0.0% 252.900 252.900 0.0% 221.900 221.900 0.0% Ushio 6925 JP 1167.00 Hold Hold 1400.00 1400.00 0.0% 90.100 90.100 0.0% 84.600 84.600 0.0% Shimadzu 7701 JP 2174.00 Outperform Outperform 3600.00 3600.00 0.0% 112.000 112.000 0.0% 115.400 115.400 0.0% Nikon 7731 JP 1635.00 Hold Hold 2100.00 2100.00 0.0% 138.800 138.800 0.0% 131.200 131.200 0.0% Screen Holdings 7735 JP 4605.00 Outperform Outperform 8700.00 8700.00 0.0% 664.500 664.500 0.0% 728.800 728.800 0.0% Hoya 7741 JP 6615.00 Outperform Outperform 6000.00 6000.00 0.0% 326.600 326.600 0.0% 358.200 358.200 0.0% Canon 7751 JP 3001.00 Hold Hold 3500.00 3500.00 0.0% 237.100 237.100 0.0% 240.800 240.800 0.0% Ricoh 7752 JP 1077.00 Hold Hold 1200.00 1200.00 0.0% 88.300 88.300 0.0% 107.600 107.600 0.0% Tokyo Electron 8035 JP 12515.00 Outperform Outperform 17000.00 17000.00 0.0% 1427.400 1427.400 0.0% 1177.300 1177.300 0.0% Hitachi High-Technologies 8036 JP 3455.00 Outperform Outperform 4500.00 4500.00 0.0% 341.700 341.700 0.0% 349.000 349.000 0.0% Globetronics Technology GTB MK 1.48 Buy Buy 3.00 3.00 0.0% 0.182 0.182 0.0% 0.216 0.216 0.0% Inari Amertron INRI MK 1.27 Buy Buy 2.25 2.25 0.0% 0.086 0.086 0.0% 0.106 0.106 0.0% MPI MPI MK 9.81 Hold Hold 11.35 11.35 0.0% 0.771 0.771 0.0% 0.851 0.851 0.0% KESM KESM MK 7.50 Hold Hold 10.15 10.15 0.0% 0.423 0.423 0.0% 0.838 0.838 0.0% Uchi Tech UCHI MK 2.49 Hold Hold 3.08 3.08 0.0% 0.181 0.181 0.0% 0.188 0.188 0.0% Unisem UNI MK 3.28 Hold Hold 3.30 3.30 0.0% 0.131 0.131 0.0% 0.139 0.139 0.0% Mi Equipment MI MK 2.15 Buy Buy 3.49 3.49 0.0% 0.175 0.175 0.0% 0.257 0.257 0.0% Source: Bloomberg, Daiwa forecasts. Japan stocks priced as of 28 December, 2018. Malaysian stocks are priced as of 3 January, 2019 and covered by Daiwa alliance partner Affin Hwang

2019 Technology Outlook: 7 January 2019

Table of contents

Daiwa’s tech valuation panel ...... 8 Stocks to act on ...... 9 A year of new leadership ...... 15 Recap of 2018 ...... 15 Outlook for 2019 ...... 20 Welcome to the BigData/IoT cycle ...... 27 5G the next big thing ...... 32 Other secular themes likely to shine ...... 37 Appendix 1: global chip inventory monitor ...... 45 Appendix 2: global chip revenue and guidance monitor ...... 46

Company Section MediaTek ...... 49 Inari Amertron ...... 53 Samsung Electro-Mechanics ...... 57 Delta Electronics ...... 61 LandMark Optoelectronics ...... 65 Murata Manufacturing ...... 69 Advantest...... 73 Win Semiconductors ...... 77 Globetronics Technology ...... 81 Sony ...... 85 Largan Precision ...... 89 Sunny Optical Technology ...... 93 Taiwan Semiconductor Manufacturing ...... 97 ASE Technology Holding ...... 101 Samsung Electronics ...... 105

2019 Technology Outlook: 7 January 2019

Daiwa’s Global Tech Team Taiwan TSMC (2330 TT) Novatek (3034 TT) Rick HSU UMC (2303 TT) Realtek (2379 TT) SMIC (981 HK) Tech head/Semiconductors ASE (3711 TT) (886) 2 8758 6261 Win Semiconductor (3105 TT) [email protected] LandMark Opto (3081 TT) MediaTek (2454 TT) ASUSTeK Computer (2357 TT) Advantech (2395 TT) Steven TSENG Lenovo Group (992 HK) Ennoconn (6414 TT) Pegatron Corp (4938 TT) Adlink (6166 TT) Computing & data centre Quanta Computer (2382 TT) Delta Electronics (2308 TT) (886) 2 8758 6252 Hiwin Technologies Corp (2049 TT) [email protected] Airtac International Group (1590 TT) Voltronic (6409 TT) AAC Technologies (2018 HK) Sunny Optical (2382 HK) Kylie HUANG FIH Mobile (2038 HK) GIS (6456 TT) HTC Corp (2498 TT) Catcher Technology (2474 TT) Smart device food chain Hon Hai Precision Industry (2317 TT) Casetek Holdings (5264 TT) (886) 2 8758 6248 Largan Precision (3008 TT) [email protected] TPK (3673 TT) TXC Corp (3042 TT)

Elsa CHENG

Research associate (886) 2 8758 6253 [email protected]

Steven YANG

Research associate (886) 2 8758 6245 [email protected]

Robert HSU

Research associate (886) 2 8758 6262 [email protected]

Korea Samsung Electronics (005930 KS) SK KIM SK Hynix (000660 KS) Samsung SDI (006400 KS) Semiconductor/Display & Hardware Samsung Electro-Mechanics (009150 KS) (82) 2787 9173 LG Innotek (011070 KS) [email protected] LG Display (034220 KS) LG Electronics (066570 KS) Soulbrain (036830 KS) Henny JUNG Hana Materials (166090 KS)

Research associate

(82) 2787 9182 [email protected]

2019 Technology Outlook: 7 January 2019

Daiwa’s Global Tech Team (continued) Japan Ibiden (4062 JP) Japan Aviation Electronics Industry (6807 JP) MinebeaMitsumi (6479 JP) Iriso Electronics (6908 JP) Takumi SADO Mabuchi Motor (6592 JP) Rohm (6963 JP) Electronic Components Nidec (6594 JP) Kyocera (6971 JP) Sanken Electric (6707 JP) Taiyo Yuden (6976 JP) (81) 3 5555 7085 TDK (6762 JP) Murata Manufacturing (6981 JP) [email protected] Alps Alpine (6770 JP) Nitto Denko (6988 JP) Hirose Electric (6806 JP) Fujifilm Holdings (4901 JP) Shimadzu (7701 JP) Konica Minolta (4902 JP) Nikon (7731 JP) Toru SUGIURA Disco (6146 JP) Screen Holdings (7735 JP) SPE & Precision Machinery Brother Industries (6448 JP) Hoya (7741 JP) Renesas Electronics (6723 JP) Canon (7751 JP) (81) 3 5555 7124 Seiko Epson (6724 JP) Ricoh (7752 JP) [email protected] Advantest (6857 JP) Tokyo Electron (8035 JP) Ushio (6925 JP) Hitachi High-Technologies (8036 JP) Hitachi (6501 JP) IDEC (6652 JP) Toshiba (6502 JP) Azbil (6845 JP) Kazuya NISHIMURA Mitsubishi Electric (6503 JP) Industrial Electronics Fuji Electric (6504 JP) Sinfonia Technology (6507 JP) (81) 3 5555 7161 Meidensha (6508 JP) [email protected] Daihen (6622 JP)

Omron (6645 JP) Elecom (6750 JP) Citizen Watch (7762 JP) Panasonic (6752 JP) Yamaha (7951 JP) Satoshi SAKAE Sharp (6753 JP) Kokuyo (7984 JP) Consumer Electronics Fujitsu General (6755 JP) Okamura (7994 JP) Sony (6758 JP) Shimano (7309 JP) (81) 3 5555 7139 Pioneer (6773 JP) [email protected] Funai Electric (6839 JP) Casio Computer (6952 JP)

Affin Hwang’s Tech Analyst Malaysia Globetronics (GTB MK) Kevin LOW Inari Amertron (INRI MK) MPI (MPI MK) Telco, Technology & Small Caps KESM (KESM MK) (603) 2146 7479 Uchi (UCHI MK) [email protected] Unisem (UNI MK) Mi (MI MK)

2019 Technology Outlook: 7 January 2019

Please also see:

Asia ex-Japan Tech Sector: 2016 Global Technology Outlook: Regional Optical Communications Sector: Big Data: the next big thing Heading for the light Initiation: head for the leading lights 2 January 2015 9 December 2015 17 February 2016 Rick Hsu (886) 2 8758 6261 Rick Hsu (886) 2 8758 6261 Rick Hsu (886) 2 8758 6261 ([email protected]) ([email protected]) ([email protected]) Olivia Hsu (886) 2 8758 6262 Olivia Hsu (886) 2 8758 6262 ([email protected]) ([email protected])

2017 Asian Technology Outlook: Asian Optical Sensing & Communication 2018 Global Technology Outlook: Multiple themes emerging to shine A whole new world Focus on themes that are set to shine 6 January 2017 28 June 2017 2 January 2018 Rick Hsu (886) 2 8758 6261 Rick Hsu (886) 2 8758 6261 Rick Hsu (886) 2 8758 6261 ([email protected]) ([email protected]) ([email protected]) Martin Lee (886) 2 8758 6262 Kevin Low (603) 2146 7479 Martin Lee (886) 2 8758 6262 ([email protected]) ([email protected]) ([email protected])

Asian Optical Sensing & Communication Asian Mobile Communication

Just an early-cycle correction Let’s talk about 5G 27 June 2018 3 December 2018 Rick Hsu (886) 2 8758 6261 Rick Hsu (886) 2 8758 6261 ([email protected]) ([email protected])

Martin Lee (886) 2 8758 6262 Robert Hsu (886) 2 8758 6262 ([email protected]) ([email protected])

2019 Technology Outlook: 7 January 2019

Daiwa’s tech valuation panel

Daiwa's tech stock valuation panel (Asia ex-Japan) MktCap Share price PER (x) PBR (x) ROE (%) EPS growth (%) Stock Ticker Rating (USDm) LC* 2018E 2019E 2020E 2018E 2019E 2020E 2018E 2019E 2020E 2018E 2019E 2020E Greater China TSMC 2330 TT Buy 180,897 215.50 16.0 14.3 12.6 3.3 3.0 2.7 21.7 22.0 22.8 1.9 12.0 13.4 Largan 3008 TT Buy 13,158 3,030.00 16.7 13.6 11.4 3.8 3.2 2.6 24.4 25.3 25.4 -6.4 22.5 20.2 MediaTek 2454 TT Buy 11,515 223.50 16.7 13.9 9.9 1.4 1.3 1.2 8.3 9.5 12.4 -12.8 20.1 39.5 Delta 2308 TT Buy 10,932 130.00 19.3 16.1 14.2 2.9 2.7 2.6 14.5 17.5 18.7 -4.8 19.7 13.7 Sunny Optical 2382 HK Buy 8,528 61.40 19.6 13.5 9.5 6.0 4.4 3.2 34.6 37.5 38.6 3.3 45.3 41.5 ASE 3711 TT Buy 7,833 56.00 15.0 8.4 6.1 1.3 1.2 1.0 8.0 14.8 18.2 72.8 78.5 38.1 WinSemi 3105 TT Buy 1,564 114.00 17.1 14.7 9.6 2.0 1.9 1.7 11.3 13.1 18.4 -28.5 16.1 52.9 LMO 3081 TT Buy 736 250.00 32.4 20.2 13.1 5.7 4.9 4.0 18.2 26.1 33.6 6.7 60.3 54.5 Ennoconn 6414 TT Buy 620 247.00 15.6 12.2 9.4 2.8 1.7 1.1 18.2 13.9 12.1 9.2 27.6 30.4 Advantech 2395 TT Outperform 4,832 214.00 23.8 21.8 19.0 5.6 5.3 4.8 23.6 24.2 25.3 2.1 9.2 14.3 Novatek 3034 TT Outperform 2,640 134.00 13.4 11.6 10.3 2.7 2.5 2.4 19.9 21.7 22.9 21.4 15.7 12.1 Hon Hai 2317 TT Hold 30,921 68.90 8.3 7.7 6.8 0.8 0.8 0.7 9.9 10.0 10.7 -17.0 7.5 12.9 Lenovo** 992 HK Hold 7,822 5.12 na 15.5 11.8 2.2 1.8 1.8 -5.4 11.9 14.9 na na 31.1 Quanta 2382 TT Hold 6,565 52.50 13.3 12.6 10.7 1.7 1.6 1.6 12.7 13.0 14.9 6.4 5.0 18.1 AAC 2018 HK Hold 6,405 41.05 9.9 8.9 7.3 2.1 1.8 1.6 21.7 20.6 21.2 -16.8 11.3 21.3 Catcher 2474 TT Hold 5,362 215.00 5.6 7.4 6.0 1.1 1.0 0.9 20.6 14.1 15.5 34.7 -23.5 22.1 Pegatron 4938 TT Hold 4,195 49.60 9.5 8.0 7.2 0.8 0.8 0.8 8.9 10.3 10.9 -7.4 19.3 10.3 SMIC 981 HK Hold 4,049 6.43 31.9 70.2 17.1 0.9 0.9 0.9 2.9 1.3 5.0 -47.0 -54.6 310.4 Airtac 1590 TT Hold 1,787 292.00 20.2 17.9 14.8 3.7 3.1 2.7 18.3 17.1 18.4 -17.3 13.3 20.9 Voltronic 6409 TT Hold 1,360 534.00 24.2 23.0 20.5 15.1 13.8 12.0 62.5 60.3 58.4 27.3 5.4 12.1 GIS 6456 TT Hold 947 86.20 7.5 7.7 8.7 1.2 1.1 1.0 15.4 13.8 11.4 -43.7 -2.4 -11.6 FIH Mobile 2038 HK Hold 820 0.82 na na 36.4 0.3 0.4 0.4 -21.6 -9.4 1.0 na na na Casetek 5264 TT Hold 586 43.00 na 10.4 6.8 0.6 0.5 0.5 -5.6 5.0 7.3 na na 51.5 TXC 3042 TT Hold 324 32.30 15.8 12.2 10.9 1.1 1.1 1.1 7.0 8.8 9.6 -34.1 29.4 11.8 AsusTek 2357 TT Underperform 4,905 204.00 16.0 10.9 10.4 0.9 0.9 0.9 5.6 8.2 8.4 -39.1 47.2 4.5 UMC 2303 TT Underperform 4,455 10.90 13.6 15.9 12.5 0.6 0.6 0.6 4.4 3.8 4.8 3.3 -14.2 26.8 Realtek 2379 TT Underperform 2,382 139.50 16.9 15.8 14.4 2.8 2.7 2.6 16.7 17.1 18.0 23.6 7.2 9.6 Hiwin 2049 TT Underperform 2,043 210.00 10.8 16.9 14.6 3.3 2.9 2.6 30.2 17.4 17.9 112.5 -35.9 16.2 Adlink 6166 TT Underperform 221 31.35 17.7 14.3 12.2 1.5 1.5 1.4 8.4 10.2 11.7 -1.0 23.4 17.9 HTC 2498 TT Sell 959 36.10 2.1 na na 0.6 0.7 0.9 29.3 -17.8 -19.3 na na na TPK 3673 TT Sell 613 46.60 22.9 24.0 28.2 0.5 0.5 0.5 2.3 2.1 1.8 -65.5 -4.7 -14.9 Korea SEC 005930 KS Buy 198,239 37,600 5.0 6.5 5.6 1.0 0.9 0.8 20.0 13.8 14.1 1.6 -22.2 14.6 SK Hynix 000660 KS Buy 36,127 57,700 2.6 3.6 3.3 1.0 0.8 0.6 36.2 21.5 19.3 49.6 -26.4 7.6 Samsung SDI 006400 KS Buy 11,779 203,000 16.5 11.2 9.2 1.1 1.0 0.9 6.7 9.2 10.1 37.9 46.8 22.8 LG Electronics 066570 KS Buy 9,129 62,900 7.1 6.4 5.1 0.7 0.6 0.6 10.0 9.9 11.0 -15.4 11.1 24.4 SEMCO 009150 KS Buy 6,227 94,000 10.6 7.2 6.5 1.4 1.2 1.0 14.9 18.6 17.3 326.1 46.8 10.7 LG Display 034220 KS Outperform 5,648 17,800 na na 16.5 0.5 0.5 0.5 -1.8 -0.6 2.8 na na na LG Innotek 011070 KS Outperform 1,715 81,700 11.4 6.5 5.4 0.9 0.8 0.7 7.9 12.1 12.8 -3.1 75.5 20.6 Malaysia Inari*** INRI MK Buy 970 1.27 15.0 13.3 11.3 3.0 2.6 2.4 23.9 24.8 27.2 9.6 12.9 18.0 Globetronics GTB MK Buy 239 1.48 12.5 9.9 8.5 2.5 2.4 2.3 27.3 33.4 37.4 54.6 26.2 16.6

Source: Daiwa forecasts, FactSet Note: *Local currency, based on share prices as of 3 January 2019; ** March year end for Lenovo; ***June year end for Inari (covered by Daiwa alliance partner Affin Hwang)

When a report covers six or more subject companies please access important disclosures for Daiwa Capital Markets Hong Kong Limited at http://www.hk.daiwacm.com/research_disclaimer.html or contact your investment representative or Daiwa Capital Markets Hong Kong Limited at Level 26, One Pacific Place, 88 Queensway, Hong Kong.

2019 Technology Outlook: 7 January 2019

Stocks to act on

A check on the 2017 appeared to be a good year for tech (investment), but 2018 was tough. This is the performance on Daiwa’s impression we got from our interactions with investors in 2018. In our view, it was a year in 2018 tech picks which capital-market participants reset their high expectations for tech fundamentals they had built in 2017. Although we saw turbulence in 2018, such as poor iPhone sales, cryptocurrency volatility and macro uncertainty on trade tension, fundamentals have not changed much as muted smartphone demand had been embedded as an industry norm.

The average return of the 18 stocks we picked for the year finished down 28% on an absolute basis and underperformed the local benchmark indices by 9% (from 29 December 2017 to 28 December 2018, mathematic calculation). This compares with our 2017 absolute return of 66% on average, which outperformed the benchmark indices by 24% (charts below). Among these stocks, the top performers in 2018 included Sony, SEMCO and Intel, which saw positive absolute returns, while the worst performers were AAC, Win Semiconductors (WinSemi), Ennoconn, LandMark Opto (LMO), LG Innotek (LGI) and LG Display, which all lost 40% or more in absolute value. Of our 18 chosen stocks, 11 underperformed their benchmark indices, while 7 outperformed, representing a hit rate of 39% (vs. 56% for 2017).

Moving into what we hope will be the Year of the “Golden Pig”, we expect 2019 to be an “investment refresh” year, with new leadership in the secular demand cycle, premised on the following 4 observations: 1) the turbulence of 2018 is largely behind us, except for the pending trade-war issue, 2) expectations in the capital market were reset, as evidenced by attractive valuations in general, 3) chip inventory looks to be manageable, and 4) non- smartphone demand appears resilient. We see 2 milestones this year: 1) 2019 should mark the first year where the BigData/IoT demand cycle, based on our definition, overtakes MCD in revenue terms, and ends the smartphone era after 4 years of industry transition, and 2) 2019 should mark the start of the 5G cellular migration, helping accelerate other new developments in the next few years, such as self-driving vehicles, smart-cities, industrial automation and many other IoT ecosystems (see Asian Mobile Communication: Let’s talk about 5G, 3 December 2018).

Introducing Daiwa’s 2019 These 2 milestones are leading our investment themes that are no longer smartphone- tech investment picks centric; our focus for 2019 is on: 5G, FO, 3D, multi-cam, HPC and memory – 6 key technologies which we believe will capitalise on the 4 secular trends we expect under the BigData/IoT cycle: bandwidth, HMI, AI and density (2018 Global Technology Outlook: Focus on themes that are set to shine, 2 January 2018). The table on the next page summarises Daiwa’s 2019 tech investment picks, in which we cherry-pick 15 stocks in the Pan-Asia region that we believe will outperform the benchmark indices on the back of our 4 secular trends outlined.

Daiwa’s 2018 tech picks’ performance (absolute return) Daiwa’s 2018 tech picks’ performance (relative return)* (70%) (60%) (50%) (40%) (30%) (20%) (10%) 0% 10% (60%) (40%) (20%) 0% 20% 40% AAC WinSemi WinSemi AAC Ennoconn LMO Ennoconn LG Innotek Nvidia LG Display LMO Globetronics LG Innotek Inari Amertron LG Display Nvidia Globetronics Sunny Optical Inari Amertron SEC MediaTek MediaTek SEC SK Hynix Sunny Optical Nidec TSMC SK Hynix Intel Intel SEMCO Nidec Sony TSMC Average (math) SEMCO Sony Average (math)

Source: TEJ, Bloomberg, Daiwa Source: TEJ, Bloomberg, Daiwa Note: * Stock returns relative to MSCI IT sector country indices of Taiwan, Japan, Hong Kong, Korea and Asia Pacific

2019 Technology Outlook: 7 January 2019

Daiwa's 2019 tech stock picks Price PER (x) PBR (x) ROE (%) Earnings growth (%)

Stock Ticker (LC)* Rating 2018E 2019E 2020E 2018E 2019E 2020E 2018E 2019E 2020E 2018E 2019E 2020E Add

Bandwidth: 5G/FO

MediaTek 2454 TT 223.50 Buy 16.7 13.9 9.9 1.4 1.3 1.2 8.3 9.5 12.4 -12.8 20.1 39.5 Inari*** INRI MK 1.27 Buy 15.0 13.3 11.3 3.0 2.6 2.4 23.9 24.8 27.2 9.6 12.9 18.0 SEMCO 009150 KS 94,000.00 Buy 10.6 7.2 6.5 1.4 1.2 1.0 14.9 18.6 17.3 326.1 46.8 10.7 Delta 2308 TT 130.00 Buy 19.3 16.1 14.2 2.9 2.7 2.6 14.5 17.5 18.7 -4.8 19.7 13.7 LMO 3081 TT 250.00 Buy 32.4 20.2 13.1 5.7 4.9 4.0 18.2 26.1 33.6 6.7 60.3 54.5 Murata** 6981 JP 14,955.00 Outperform 15.0 12.0 na 2.1 1.8 na 14.5 16.0 na 54.0 24.7 na Advantest** 6857 JP 2,244.00 Outperform 9.1 10.4 na 2.4 2.1 na 31.7 21.3 na 170.7 -12.2 na HMI: 3D/multi-cam

WinSemi 3105 TT 114.00 Buy 17.1 14.7 9.6 2.0 1.9 1.7 11.3 13.1 18.4 -28.5 16.1 52.9 Globetronics*** GTB MK 1.48 Buy 12.5 9.9 8.5 2.5 2.4 2.3 27.3 33.4 37.4 54.6 26.2 16.6 Sony** 6758 JP 5,326.00 Buy 9.5 12.7 12.4 1.9 1.6 1.5 21.6 13.7 12.5 45.5 -25.4 2.7 Largan 3008 TT 3,030.00 Buy 16.7 13.6 11.4 3.8 3.2 2.6 24.4 25.3 25.4 -6.4 22.5 20.2 Sunny Optical 2382 HK 61.40 Buy 19.6 13.5 9.5 6.0 4.4 3.2 34.6 37.5 38.6 3.3 45.3 41.5 AI: HPC

TSMC 2330 TT 215.50 Buy 16.0 14.3 12.6 3.3 3.0 2.7 21.7 22.0 22.8 1.9 12.0 13.4 ASE 3711 TT 56.00 Buy 15.0 8.4 6.1 1.3 1.2 1.0 8.0 14.8 18.2 72.8 78.5 38.1 Density: memory

SEC 005930 KS 37,600.00 Buy 5.0 6.5 5.6 1.0 0.9 0.8 20.0 13.8 14.1 1.6 -22.2 14.6 Avoid

HTC 2498 TT 36.10 Sell 2.1 na na 0.6 0.7 0.9 29.3 -17.8 -19.3 na na na TPK 3673 TT 46.60 Sell 22.9 24.0 28.2 0.5 0.5 0.5 2.3 2.1 1.8 -65.5 -4.7 -14.9 Realtek 2379 TT 139.50 Underperform 16.9 15.8 14.4 2.8 2.7 2.6 16.7 17.1 18.0 23.6 7.2 9.6 UMC 2303 TT 10.90 Underperform 13.6 15.9 12.5 0.6 0.6 0.6 4.4 3.8 4.8 3.3 -14.2 26.8 AsusTek 2357 TT 204.00 Underperform 16.0 10.9 10.4 0.9 0.9 0.9 5.6 8.2 8.4 -39.1 47.2 4.5

Source: Daiwa estimates & forecasts Note: * Local currency based on share price as of 3 January 2019, pricing as of 28 December, 2018 for Japan stocks, ** March year-end for Sony, Murata and Advantest, ***June year-end for Inari (covered by Daiwa alliance partner Affin Hwang)

5G WinSemi, Inari, SEMCO, We expect 5G cellular technology to be one of the 2 milestones for the 2019 tech space, TSMC, ASE, MTK, LMO, with the migration cycle starting to kick off, as evidenced by Asian telcos’ new capex cycle Delta, Murata and (see our 5G report, Let’s talk about 5G, 3 December 2018). We expect a 10-year build-up Advantest cycle to generate over USD65bn in average value per year at the system level. This time around, tech companies should capture the most incremental value at the electronics level, especially compound-semiconductor makers which offer radio frequency (RF) solutions to facilitate the revolutionary upgrade in 5G base-station (B/S) antennas, from discrete to phased-array, which should be both unit- and ASP-accretive.

Our conviction Buys in this space are WinSemi (RF power amplifier [PA] foundries) and Inari (RF filter testing); other stocks in our 5G picks include SEMCO (multi-layer ceramic capacitor [MLCC], printed circuit board [PCB]), Murata (MLCC, liquid crystal polymer [LCP]), TSMC (field programmable gate array [FPGA]/baseband foundries), ASE (FPGA/baseband packaging & testing), MediaTek (MTK) (application processors [AP]/baseband SoC), LMO (B/S fibre-optic [FO] interconnectivity), Delta Electronics (B/S power systems), and Advantest, which dominates the global tester market for FPGA and baseband processor testing.

Fibre optics (FO) LMO and Inari As opposed to 5G for wireless bandwidth upgrades, which have yet to take off, bandwidth upgrades at wireline data transmissions are ongoing, driven by China’s fibre-to-the-x-point (FTTX) build-out post the GFC, followed by bandwidth upgrades at datacom datacentres and telecom access points. While we expect datacentres to accelerate migration to 100/400G in 2019, and FTTX to accelerate migration to 10Gbps passive optical networks (PON) in China and to expand its product reach outside China in emerging markets, 5G should further add to FO demand from cellular B/S bandwidth upgrades, making the 3 pistons of demand drivers for FO transceivers fire on all cylinders: datacom, telecom and cellular interconnectivity. In this light, we continue to highlight LMO (the leading FO epiwafer supplier globally) and Inari (dedicated FO packaging & testing house for Broadcom).

2019 Technology Outlook: 7 January 2019

3D WinSemi, Inari and Initiated in 2017 thanks to Apple’s push for Face ID (iPhone X), 3D sensing based on Globetronics vertical cavity surface emitting laser (VCSEL) technology, or consumer lasers by our definition, has seen business volatility since early 2018 due to single-customer risk and supply-chain yield issues. However, this correction during a new technology’s initial ramp has not weighed on our positive stance on the structural outlook for the consumer laser market (see our 3D update report, Just an early-cycle correction, 27 June 2018). We expect this market to sustain its high-growth profile, backed by rising adoption by Android smartphone vendors to help diversify the single-customer risk and expand product reach, followed by the addressable market expanding into the automotive and surveillance segments. Our recommended 3D plays are WinSemi (VCSEL wafer foundries), Inari (VCSEL packaging & testing), and Globetronics (sensor module assembly).

Multi-cam Largan, Sony, Sunny and Consumers’ constant pursuit for image quality has led to camera makers in the mobile device SEMCO market outgrowing stagnant smartphone demand. With multiple years of spec upgrades from single to dual and now triple cameras, along with other enhanced features such as resolution, optical zoom, wide angles and form factors, the multi-cam upgrade-cycle is both unit- and ASP-accretive to the supply-chain players. We expect the rise of triple-cam adoption to sustain this multi-year upgrade-cycle (see our smartphone report, The more the merrier: multi-cameras are the next mega trend in smartphones (Part 4), 14 November 2018), and prefer the following stocks, each of which has a leading position in the food chain: Sony (CMOS image sensor [CIS] global leader), Largan (lens-set global leader), Sunny Optical (leader in automotive lens-set), and SEMCO (camera module assembly).

High-performance computing (HPC) TSMC, ASE and Thanks to the sustainability of Moore’s Law, chipmakers have constantly pushed the Advantest envelope of computing power over the years, reaching a milestone in 2017 with the commercialisation of HPC processors in different forms of xPU architecture to facilitate both cloud and edge computing for AI. We believe HPC processors are creating new demand for accelerators at datacentres to handle data training for cloud computing, and replacement demand for AP with neural processing engines from smartphones to handle data inference for edge computing, as well as new demand for edge computing from self- driving cars in the foreseeable future. Since AI HPC processors require state-of-the-art, cutting-edge process technologies, our stock picks are TSMC (advanced wafer foundries), ASE (advanced chip packaging & testing), and Advantest (advanced testers).

Memory SEC Mainly consisting of NAND and DRAM, the memory market has seen an almost 2-year upturn since 2H16, which has triggered market jitters over the sustainability of the rise. Yet we see this cycle as different from previous 2-year cycles, as there are multiple demand drivers this time rather than being single product driven as in the past. With sustained demand strength from datacentres for data storage (NAND) and in-memory compute (DRAM), plus continued density upgrades from smartphones, self-driving cars and new IoT devices, we expect the memory up-cycle to persist into 2019, despite the possibility of a mid-cycle correction. Samsung Electronics (SEC) continues to be our preference in this space; we suggest investors accumulate into weakness amid the likely mid-cycle correction.

Refer to the next page for a snapshot of our investment theses at the stock level, and the company section beginning on page 47 for the financial/valuation details of each stock in our top picks list.

2019 Technology Outlook: 7 January 2019

Daiwa's 2019 tech picks: investment theses Stock Ticker Investment thesis Sony 6758 JP  We see high profit growth prospects for Sony in the image sensor market, capitalising on our multi-cam theme. We expect its CMOS image sensor (CIS) business to grow on: 1) increased adoption of dual-cam/triple-cam in smartphones, which has been an ongoing process, and 2) growing demand for time-of-flight (ToF) configured 3D laser sensors where Sony should start to see contribution in 2019.  We rate the stock Buy (1) with a 12-month TP of JPY7,000, derived by our SOTP valuation approach. Murata 6981 JP  As the world’s largest passive component maker, Murata looks well prepared for the smartphone demand slowdown, with its MLCC products diversifying into high-end, ultra-reliable automotive applications which should see MLCC per vehicle increasing on the rising degree of autonomous driving.  5G should add to business upside with Murata’s new product MetroCirc, which is a liquid crystal polymer-based multi-layer substrate designed to reduce signal loss with a unique structure supporting multi-layer and boundless range of form factors suitable for high-frequency requirements of 5G smartphones and other devices. SEC 005930  2019, we believe SEC would benefit from 1) rebound of memory demand from 2H19 driven with a recovery in datacenter demand amid limited supply growth 2) further KS earnings improvement from expanding adoption of flexible OLED in high-end smartphones 3) increased 5G penetration from 2H19 with the subsequent smartphone memory content growth.  We have a Buy (1) rating on SEC with a SOTP-based 12-month TP of KRW 54,000. SEMCO 009150  We see SEMCO continuing to record solid earnings growth in 2019E driven by 1) increased penetration of 5G and electric vehicles, both of which result in content KS growth of MLCCs, 2) increased adoption of SLPs for 5G-based smartphones, 3) trend of more cameras per device.  We have a Buy (1) call on SEMCO with a 12-month TP of KRW 172,000 based on 13.2x PER (average of MLCC peers) applied to its 2019E EPS. TSMC 2330 TT  We position TSMC as the best AI play, becoming everyone’s foundry in applications that require state-of-the-art, cutting-edge technologies with its unparalleled CMOS process technology offerings that handle HPC processors in different form factors for cloud and edge computing.  Against the backdrop of diverse 7nm demand, we are contrarian on TSMC’s near-term business outlook despite recent headwinds from the iPhone order cut and cryptocurrency overhang. We forecast its 1Q19 revenue to contract 5% QoQ, vs. the street’s expectation of a low-teens percentage decline. LMO 3081 TT  With its business recovering in 2H18 post China’s FTTH inventory glut and a major SiPh customer’s product transition, LMO should sustain its business recovery with growth likely to accelerate into 2019, with demand strength to be driven by SiPh, 10G PON and 5G cellular migration.  Despite this, we trim our forecasts to bring us more in sync with management’s conservative expectation, we expect bottom-line to grow faster than top-line over 2019- 20, thanks to opex normalisation for margin expansion. WinSemi 3105 TT  Despite the near-term hiccup of 3D order cuts on poor iPhone sell-through, we continue to believe 3D laser sensing will become a secular demand driver for earnings growth at WinSemi. Rising 3D laser sensing adoption from the Android platform this year should help diversify single-customer risk in the iOS platform.  On top of rising 3D potential, 5G should be another driver to lift WinSemi’s earnings growth higher. This is because we expect WinSemi to capture the most incremental value from the 5G migration cycle with its RF PA offering to serve antenna upgrades for wide bandwidth, which should enjoy both unit- and ASP-accretion. Largan 3008 TT  Given Largan’s industry leading position in high-end lens sets, we view it as well-positioned to benefit from the booming adoption of triple-cam from 2019, in addition to ASP upsides from on-going spec upgrades such as 7P lens, MP migration, wide-angle, larger aperture, periscope design, and etc.  We expect Largan to resume 20-22% YoY earnings growth for 2019-20E, from a 6% YoY decline for 2018E, driven by the rising adoption of triple-cams and accelerating spec upgrades with new project wins. Sunny Optical 2382 HK  We view Sunny as a major beneficiary of triple-cam boom in smartphones from 2019 given its major supplier position in HLS (handset lens set) and leading position in HCM (handset camera module) for all the top tier Android smartphone brands. We also see Sunny well-positioned to benefit from multi-cam trend in vehicles on rising demand for ADAS on back of its leading position in VLS (vehicle lens sets).  Driven by the benefits from solid multi-cam trend in both smartphones and smart vehicles with likely on-going spec upgrades in smartphones, we are forecasting Sunny to resume strong earnings growth of 41-45% in 2019-20, from the muted 2018E (up 3% YoY). Delta 2308 TT  We expect telecom power, data centre and EV related businesses to be brighter spots for Delta in 2019. Also, we expect Delta to enjoy a better operating margin trajectory, given its favourable product mix and stabilised gross margin of its legacy IT power business.  We forecast Delta’s EPS to resume growth in 2019, following a YoY decline in 2018E. We have a Buy (1) rating and 12-month TP of TWD159, based on a target PER of 20x applied to our 1-year forward EPS. Advantest 6857 JP  Despite its leadership in the memory tester market, Advantest also commands high market share in the tester market for GPU, FPGA and modem chips. Therefore, we position Advantest as one of the key beneficiaries of the 5G migration cycle with radio-unit and baseband-unit upgrades from both base-stations and smartphones.  In addition to the logic chip testing, we expect Advantest to benefit from DRAM upgrades for the 5G smartphones, from LPDDR4 to LPDDR5, on longer testing times to drive its memory tester business. Inari INRI MK  We expect the revenue contribution from Osram for the sensor business to accelerate in FY19, underpinned by new product design wins. Mass adoption for these sensors across the entire product range for these major smartphone manufacturers would be a key catalyst, in our view.  We believe the ongoing capacity expansion for the RF segment is potentially signalling that 5G is round the corner. We expect a multiple-fold increase in RF filters once the transition takes place, benefiting this largest RF test house in the region, in our view. Globetronics GTB MK  We expect the sensor business to remain the key driver of Globe's revenue and earnings growth. Already in the engineering design stage for the next-generation products with its key Austrian customer, the recent capacity expansion drive will likely be beneficial for the company.  Apart from growing its sensor product portfolio, Globe is simultaneously acquiring new customers. In the long term, we expect the automotive laser headlamp segment to be a significant player while diversifying product risk away from the sensor business. ASE 3711 TT  ASE’s leading position at the backend of the SCM food chain should bode well for it to capitalise on the BigData/IoT demand cycle with diverse business exposure across multiple demand verticals including bandwidth and AI. We expect the BigData/IoT cycle to overtake MCD in revenue terms this year in the global IT industry.  With business synergies bearing fruit post China’s conditional approval of its merger deal, ASE should regain share structurally in the OSAT market, thanks to enhanced economies of scale post the merger to increase pricing power and decrease opex per unit. MTK 2454 TT  We see MTK’s business transformation as paying off, evidenced by its growth-platform (GP) products rising to exceed 30% of revenue and helping diversify smartphone competition against its mobile platform. We expect the GP business to drive business growth in 2019, with 5G to sustain the growth into 2020.  Although we have cut our forecasts to factor in the muted smartphone demand and competition from Qualcomm in the near term, we believe its business transformation remains intact to help MTK diversify the smartphone risk and embrace the next BigData/IoT demand cycle. We suggest investors accumulate on any share-price weakness.

Source: Daiwa forecasts

2019 Technology Outlook: 7 January 2019

2018: recap of key highlights in tech

2018 began with disappointing iPhone X sell-through, after strong sell-in builds in the supply chain upon Apple's high expectation. This resulted in Apple's all-time-high inventory post the GFC, and hurt its Asian supply-chain players in different ways. Poor iPhone X sell-through While Daiwa cut iPhone X shipment estimates 3 times, the most pain was felt by 3D sensor makers that saw inventory glut further inflated by poor production yields in the supply chain.

Strong rally in cryptocurrency prices early in the year heated up market sentiment, inflated demand and mitigated impact on some chipmakers from the iPhone inventory overbuild. Cryptocurrency volatility Yet the double-edged sword of cryptocurrency prices induced high demand volatility, resulting in sub-seasonal quarters first seen in the foundries, followed by graphics and card makers.

In April, ZTE was sanctioned by the US authority again, causing demand volatility in telecom equipment supply chain as its peers aimed to take advantage of this for market-share gains.

ZTE/Huawei and trade war Meanwhile, the trade tension between China and the US blew up, lifting market concerns on Asia's tech sector from company to national level, further adding to stock volatility. In November, Huawei's top executive was arrested, raising concerns on the tech supply chain.

Market jitters rose on concerns over commodity cycles peaking out after a good 2017, starting from the memory chips, followed by silicon wafers and passive components.

Jittery commodity cycles We have dismissed the jittery concerns on the memory cycle as we expect a long-lived upturn, owing to sustained and multiple demand drivers under the BigData/IoT cycle, and constrained supply on technology migration.

In light of the poor iPhone X sell-through, we saw the street, including Apple, being less active than a year ago on 2018 new iPhone build, gauged by key component builds in the supply chain, such as A12, modem, RF, lens, casing and module assembly. Pricey new iPhones After the September launch, we cut our production forecast for 2018 to 76m, from 95m, on our concern over the highly priced iPhone XS/XS Max (revised market consensus: 75-80m).

Source: Daiwa

2019 Technology Outlook: 7 January 2019

2019: our view of the key themes in tech

We expect the tech industry to exit 2018 with excessive but manageable inventory at the chip level, which dismisses bears' talk of a downturn in the chip cycle. We see just a mild correction due to muted smartphone demand and crypto volatility. A downturn or correction? While the muted smartphone demand was well known, non-smartphone demand such as datacentres has been robust, contributing to the overall demand resilience of the chip cycle. This is bringing us to the next demand cycle of the BigData/IoT, post the smartphone era.

Our answer is yes or no. iPhone shipment has peaked since 2015. Although Apple aimed to leverage its premium-pricing strategy to sustain revenue, it did not seem to be working well, as a result of the recent order cuts in its Asian supply chain. Apple out of favour? We therefore dislike volume players like Hon Hai in Asia, but prefer companies that are able to gain order shares or diversify into Android for content growth from spec upgrades.

We beleive the global IT industry, after 4 years of demand transition, should see 2019 as a milestone for the BigData/IoT cycle to overtake MCD and claim a new demand leadership.

Welcome to the BigData cycle Against the backdrop of our BigData economy matrix analysis, we continue to flag 4 secular trends for investment under this new demand cycle: HMI, AI, bandwidth and density. We like companies that are able to offer cross-platform solutions to capitalise on these trends.

Despite being developed for years, we expect the 5G cellular technology to kick off in 2019, judged by telcos majors' new capex cycle in Asia, with a likely 10-year build-up cycle. 5G the next big thing We see the tech sector as one of the key beneficiaries of the 5G build-out cycle, wherein compound-semiconductor makers should perhaps catpure the most incremental value due to 5G's revolutionary antenna upgrades that are both unit- and ASP-accretive.

Besides 5G, we see 5 other themes that continue to shine for investment, including FO for wireline bandwidth upgrade, 3D laser sensing and multi-cam for HMI upgrade, HPC for AI compute, and memory devices for density upgrade. Secular themes that shine Our stock picks: MTK, Inari, SEMCO, Delta, LMO, Murata, Advantest (bandwidth), WinSemi, Globe, Sony, Sunny, Largan (HMI), TSMC, ASE (AI), SEC (density).

Source: Daiwa

2019 Technology Outlook: 7 January 2019

A year of new leadership

We see 2019 as a refresh If 2017 was a year of overheated expectations for the tech sector, we believe 2018 was a year for tech investment year of expectations being reset and 2019 will be an investment “refresh” year upon new because … demand leadership post the smartphone era. From a big-picture perspective, tech fundamentals have not changed much in the past year; rather it was capital-market participants’ volatile expectations for fundamentals that caused a big swing in valuations during the period. These volatile expectations were further amplified by some fundamental turbulence in 2018, such as poor iPhone sell-through, cryptocurrency volatility, commodity jitters and the trade-war issue.

… expectations have The dust has settled, in our view, with expectations reset, valuations having rationalised, been reset, valuations and inventory at manageable levels. More importantly, overall demand in 2019 looks intact have rationalised, (barring any risk from trade tensions), against the backdrop of a successful industry inventory is manageable transition from MCD to the BigData/IoT demand cycle. We see these factors leading to a and demand looks intact refresh for tech investment in 2019. As such, we reiterate our Positive stance on the sector and continue to argue for a selective approach:

Focus on companies that outgrow the sector average by capitalising on structural themes that are set to shine post the smartphone era, since the chip cycle is less relevant to investment than in the past under the new BigData/IoT cycle. High tides no longer lift all boats.

In our 2018 Tech Outlook report (Focus on themes that are set to shine, 2 January 2018), we highlighted 2 growth themes and 4 structural trends that served as the basis for our stock picks. The 2 growth themes were multiple cameras (multi-cam) and organic light emitting diode displays (OLED) in the smartphone space for spec-upgrades, and the 4 structural trends were bandwidth, HMI, AI and density for data storage in the BigData/IoT space post the smartphone era for capitalising on the rising data economy.

Focus on structural The 4 BigData-driven themes remain our key focus for investment, as we believe these themes for growth: demand trends are structural in nature given constantly rising demand for data, especially bandwidth, HMI, AI and in 2019 when we expect to see a tipping point for the 5G cellular migration cycle, helping density accelerate growth in the new demand cycle to build the global data economy. That said, despite growth tapering off in the MCD cycle, we continue to like the multi-cam story since we believe multi-cam will remain a viable HMI theme, and the spec-upgrade cycle will last for a number of years in the smartphone market to drive content growth per unit.

Recap of 2018 Poor iPhone X sell-through 2018 started with poor Investors’ bullish expectations for a “super cycle” year in 2017 to celebrate the iPhone’s 10th iPhone X sell-through; anniversary ended up being a miss, in our opinion, as 2018 began with disappointing a “super-cycle”? iPhone X sell-through, resulting in a series of forecast cuts by the street due to the steep Maybe not inventory correction after the strong sell-in build of parts and components in the supply chain. With demand dampened by high pricing points, Daiwa cut its iPhone X production forecasts 3 times to 55m units from 95m for the life cycle of the model (which we expected to run from 3Q17 to 3Q18). This represents perhaps one of the shortest iPhone shelf lives in history (iPhone X: More order cuts, 19 January 2018).

Apple saw its end-2Q18 inventory hit an all-time high post the GFC, while its supply chain in Asia suffered from the worst-ever seasonal correction post the GFC, as evidenced by a 38% QoQ tumble in aggregate revenue for 1Q18 from the major “Apple plays” with meaningful revenue exposure to Apple’s devices (see charts, next page). Although total iPhone shipments for 2017 reached 216m on a production basis, up 1% YoY and not far off our original forecast of 220m, it was older models that helped make up for the shortfall of the iPhone X.

2019 Technology Outlook: 7 January 2019

Apple: quarterly inventory trend* Aggregate revenue trend of major Apply plays in Asia* Day TWDbn 20 2,500 50% 18 40% 16 2,000 30% 14 1,500 20% 12 10 1,000 10% 8 0% 500 6 (10%) 4 0 (20%) 2

0 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 Aggregate revenue (LHS) Growth (YoY)

1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 Source: Company Source: Company Note: * Calculated as COGS divided by average inventory Note: * Sample includes Hon Hai, Largan, Catcher, AAC, Pegatron, Casetek, GIS and TPK

Aggregate revenue growth of major Apple plays in Asia* Revenue correlation between Apple and major plays in Asia QoQ growth TWDbn USDm 60% 2,500 100,000

40% 2,000 80,000 20% 1,500 60,000 0% 1,000 40,000 -20% 500 20,000 Average = -26% -40% 0 0 -60% 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18

1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 Total Asian Apple plays Apple (RHS)

Source: Company Source: Company Note: * Sample includes Hon Hai, Largan, Catcher, AAC, Pegatron, Casetek, GIS and TPK Note: * Sample includes Hon Hai, Largan, Catcher, AAC, Pegatron, Casetek, GIS and TPK

3D laser camera makers Even worse was the business condition of 3D laser makers and module assemblers that felt perhaps the most made it into the supply chain for the iPhone X’s TrueDepth camera (ie, Face ID). With the pain poor sell-through further amplified by inflated demand due to poor supply-chain yields in the initial product cycle, 3D laser camera makers suffered perhaps the most, among other parts of the supply chain, from the inventory glut at both vertical cavity surface emitting laser (VCSEL) and module assembly ends. Capturing the lion’s share of VCSEL chip supply (over 90% on our estimate for 2017), WinSemi’s optical revenue surged by around 4x QoQ in 4Q17 to TWD1.4bn (USD46m) but tumbled by some 40% QoQ in 1Q18 and 30% QoQ in 3Q18 before recovering in 4Q18, on our estimates.

Yet this early-cycle We published an update in June (Asian Optical Sensing & Communication: Just an early- correction did not weigh cycle correction, 27 June 2018) as a follow-up to our first report addressing the new 3D on our positive stance laser sensing & imaging market to factor in this iPhone X-driven inventory correction and on the structural outlook revise our consumer laser market forecasting model. Recall that we lifted our 2017 market for the 3D VCSEL market estimate in dollar value by 13% but cut our 2018 estimate by 8% to reflect the demand inflation/deflation caused by the iPhone X. We remain bullish on the 3D VCSEL market’s high-growth profile, since we forecast the market to see an over 80% CAGR over 2017-20. In our view, 2018 demand volatility was a reflection of an early-cycle correction caused by single-customer risk, which does not impact our structural stance on this market.

Stock performance-wise, the consumer laser food chain went from being a “market darling” in 2017 as it emerged as a side-beneficiary of the iPhone X’s push on 3D sensing to “one to steer clear of” in 2018, with leading players in Asia under Daiwa’s coverage such as WinSemi, Globetronics and LG Innotek (LGI) experiencing share-price drops of 40-70% from peak to trough.

2019 Technology Outlook: 7 January 2019

Stock performance of 3D majors in Asia* WinSemi: optical revenue trend USDm USDm TWDm 5,000 600 1,600 300% 1,400 250% 500 4,000 1,200 200% 400 3,000 1,000 150% 300 800 100% 2,000 200 600 50% 400 0% 1,000 100 200 (50%) 0 0 0 (100%) 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 Jul-17 Jul-18 Jan-17 Jan-18 Mar-17 Mar-18 Sep-17 Nov-17 Sep-18 Nov-18 May-17 May-18 4Q18E 1Q19E 2Q19E 3Q19E 4Q19E WinSemi LGI Globe (RHS) Optical revenue Growth

Source: Bloomberg Source: Company, Daiwa estimates & forecasts Note: * In terms of market cap; LGI = LG Innotek; Globe = Globetronics Note: * Optical revenue includes mainly VCSEL accounting for c.10%/15-16% of 2017/18E revenue

Cryptocurrency volatility Surging Bitcoin prices As shown in the chart below, Bitcoin prices surged nearly 6x to over USD15,000 as of early inflated demand and 2018 over a period of 6 months, raising market sentiment and inflating demand, although induced business this helped mitigate the impact on some chipmakers from the iPhone inventory issue. volatility in related tech Thanks to heightened demand for cryptocurrency mining devices on active trades of companies Bitcoin and other cryptocurrencies such as Ethereum, related graphics-card companies in Asia, such as Gigabyte, Micro-Star International (MSI) and Technology Unlimited (TUL), enjoyed above-seasonal revenue growth in 1Q18, with aggregate revenue rising by 18% QoQ (+43% YoY), vs. roughly flat QoQ growth on a typical seasonality post the GFC.

GPU makers like Nvidia and AMD also enjoyed counter-seasonal business in the March 2018 quarter, which subsequently benefited their key foundry partner, TSMC. Yet big swings in cryptocurrency prices turned out to be a double-edged sword, inducing high demand volatility and resulting in sub-seasonal quarters first for the foundries and then for graphics card vendors and chipmakers. Bitcoin prices are down some 80% from their peak over the past year, and are trading at around the USD3,200 level as of December 2018.

TSMC raised its 2018 revenue growth guidance at its 4Q17 results conference to up 10- 15% YoY, but then cut its guidance 2 times during the following quarterly results to up by a high-single-digit percentage YoY. The 2 GPU makers (Nvidia and AMD) reported below- seasonal revenue for 2 quarters in a row (June 2018 and September 2018 quarter), and guided for another sub-seasonal revenue growth for the December 2018 quarter, where Nvidia flagged some USD600m of excess GPU inventory need to be corrected in its distribution channels due to the cryptocurrency headwinds (see our Nvidia note: Channel inventory high, cutting shipments materially, 15 November 2018). Aggregate revenues of the 3 card makers (Gigabyte, MSI and TUL) fell by 20% QoQ in 2Q18, followed by another sub-seasonal decline in 3Q18, where the cryptocurrency-heavy TUL saw revenue tumble by an average of 60% QoQ for 2 quarters in a row, after growing by 78% QoQ in 1Q18.

Cryptocurrency pricing trend Revenue volatility of cryptocurrency-related companies in Asia USD USD TWDm 1,000 20,000 60,000 40% 800 50,000 30% 15,000 40,000 20% 600 10% 10,000 30,000 0% 400 20,000 (10%) 5,000 200 (20%) 10,000 (30%) 0 0 0 (40%) Jul-16 Jul-17 Jul-18 Jan-16 Jan-17 Jan-18 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 Mar-16 Mar-17 Mar-18 Sep-16 Nov-16 Sep-17 Nov-17 Sep-18 Nov-18 May-16 May-17 May-18 Ethereum Litecoin Bitcoin (RHS) Gigabyte MSI TUL Growth (YoY)

Source: Bloomberg Source: Company Note: * Sample includes Gigabyte, MSI and TUL

2019 Technology Outlook: 7 January 2019

ZTE/Huawei and China-US trade war Although tensions Trade tensions between China and the US arose after the 2018 Lunar New Year, related to the ZTE issue coinciding with the reinvestigation of ZTE by the US Department of Commerce’s Bureau of have eased, trade Industry and Security (BIS), inducing market fears of déjà vu after it was first sanctioned in tensions plus the 2016. In April 2018, ZTE was sanctioned for a second time, causing demand volatility in Huawei issue remain an the telecom component and equipment supply chain, such as in gigabit passive optical overhang networks (GPON), as ZTE’s peers in China aimed to take advantage of the BIS’s action and realise market-share gains. In the same month, the US Trade Representative (USTR) office came up with a list of product items on which it proposed a 25% tariff when imported from China (Potential trade-war impact on Asian tech: we say limited, 12 April 2018).

Although the ZTE issue was alleviated later in 2018 when the company settled with the US, market concerns over the trade war’s impact on the sector appeared to be heightened by the arrest of a member of Huawei’s senior management in November 2018, potentially lifting the impact from a company to a national level and further adding to stock volatility on business uncertainty. The proposed list of extra tariffs has been amended a few times, with a broader scope on selected product items, which represents an overhang into 2019. We have not yet seen any meaningful relocation of production sites out of China, but the overhang has already interrupted supply-chain management in the tech food chain, on our observation, and prolonged FX volatility in Asia (see the risk section on page 44).

Jittery commodity cycles We dismissed jittery After a good year for commodities in the tech space in 2017, 2018 brought increased concerns over the market jitters on concerns over cyclical peaks, as history suggests that a tech commodity memory cycle cycle, such as memory chips, typically lasts for no more than 2 years. These concerns began with memory and spread to silicon wafers and passive components, and even the chip sector as a whole, where some brokers cut investment ratings in 2018. We do not have the same concerns, for 2 reasons: 1) structurally robust and diverse demand thanks to heightened density requirements from mobile devices for data storage, as well as from datacentres for enterprise solid-state drives (SSD) and in-memory compute within servers, and 2) supply constraints on mounting difficulties in making technological advances, including 1x/1ynm migration in DRAM and 9x-layer migration in 3D NAND (Slowdown in technology migration likely to drive another good year, 31 August 2018).

NAND and DRAM prices peaked in mid-2017/late-3Q17 in spot markets, which did not concern us much due to lean trading sizes that mean spot pricing trends are no longer representative of the broader market, in our opinion. Indeed, DRAM contract prices held up well before declining recently by 12% from their peak (as of December 2018), while NAND contract prices, after holding at c.USD3.7 on average per 64Gb for nearly 1 year, fell by only 12% from their peak and traded at USD3.25 as of December, suggesting healthy price erosion. That said, we see further downside for contract prices due to likely a mid-cycle correction as a result of muted smartphone sell-through and over-restocking in 1H18.

DRAM pricing trend: spot vs. contract* NAND pricing trend: spot vs. contract* USD USD 12 5.5 10 5.0 4.5 8 4.0 6 3.5 4 3.0 2.5 2 2.0 0 1.5 1.0 Jul-16 Jul-17 Jul-18 Jan-16 Jan-17 Jan-18 Mar-16 Mar-17 Mar-18 Sep-16 Nov-16 Sep-17 Nov-17 Sep-18 Nov-18 May-16 May-17 May-18 Jul-16 Jul-17 Jul-18 Jan-16 Jan-17 Jan-18 Mar-16 Mar-17 Mar-18 Nov-16 Nov-17 Nov-18 Sep-16 Sep-17 Sep-18

Spot Contract May-16 May-17 May-18

Source: DRAM eXchange Source: DRAM eXchange Note: * 8Gb (1Gx8) 2133/2400MHz DDR4 Note: * 64Gb (8G x 8) MLC

2019 Technology Outlook: 7 January 2019

Silicon wafer sector We have seen a similar situation in the silicon wafer sector, despite supply being locked in looks healthy, while we via long-term contracts with customers to limit room for further price hikes. This is because suggest being selective it takes time for the silicon wafer vendors to build a green field from ground-breaking to on MLCC product qualification (over 2 years), while demand remains resilient given the healthy chip cycles in both logic and memory, in our opinion (see next section for details). Our market research suggests limited supply addition from 2 vendors aiming to build green fields: Globalwafers and Sumco. As for passive components, the supply/demand picture should remain positive for advanced multi-layer ceramic capacitors (MLCC) for automotive and 5G applications, though the commodity types of IT MLCC could see supply risk given low entry barriers (SEMCO: Strong MLCC-driven earnings; further upside likely, 6 September 2018).

Pricey new iPhones The pricey iPhone XS/XS On 12 September, Apple introduced its new 2018 iPhone XR, XS and XS Max, with spec Max models could upgrades, such as full-screen design with Face ID across all models and better camera discourage purchases performance with faster A12 Bionic AI processors, all broadly in line with our expectations except for pricing for its OLED models (New iPhones: specs in line but rising risks on shipments due to higher pricing, 13 September 2018). While the LCD-configured XR model, priced at USD749-899, did not differ much from our expectation, the XS and XS Max models were priced at USD999-1,349 and USD1,099-1,449, respectively, or some USD60 higher than our estimates, on average.

These pricing ranges were even higher than those for the iPhone X in 2017, raising our concern that pricing could discourage consumer traction, and subsequently prompting us to cut our production estimates for the new iPhones to 76m units, from 95m (New iPhones: lukewarm demand; first round of order cuts in the supply chain, 6 November 2018). Nevertheless, we also saw the street, and Apple itself, being less active than in 2017 on the 2018 new iPhone build, gauged by key component builds in the supply chain, such as the A12 application processor (AP), front-end radio frequency (RF) power amplifiers (PA), backend Gb-LTE modem, lens, metal casing and module assembly. Therefore, we believe the street has corrected expectations to 75-80m units, from 80-90m, for the new 2018 iPhones; we are at the low end of this range.

On an annual basis, we estimate Apple recorded roughly flat YoY production volume for 2018, or 214m total iPhones. Despite our revisions, new iPhone shipments remained backend-loaded, for which we estimate volume of 72-73m for 4Q18, up by some 55% QoQ (-6% YoY), before dropping by likely a 35% QoQ in 1Q19. Related supply-chain players should follow suit given this typical “Apple seasonality”.

The iPhone XS, XS Max and XR iPhone production breakdown and YoY growth m units 100 50%

50 0%

0 (50%) 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18E 1Q19E iPhone 4/4S iPhone 5/5C/5S/SE/SE2 iPhone 6/6+ iPhone 6S/6S+ iPhone 7/7+ iPhone 8/8+ iPhone X iPhone XR/XS/XS Max Growth (YoY) Source: Company Source: Daiwa estimates & forecasts

2019 Technology Outlook: 7 January 2019

Outlook for 2019 Where are we in the “Where are we in the cycle?” is a question commonly asked by tech investors, despite our cycle? belief that we will soon complete the MCD-to-BigData/IoT transition. This should make the chip cycle less relevant to investment as high tides no longer lift all boats (and vice versa) in the new world with multiple demand verticals. As usual, we begin our discussion of the 2019 tech outlook with fabless chip inventory – a barometer we use to monitor the general health of the tech industry.

Inventory is manageable We believe inventory After peaking in 1Q17 at 87 days, global fabless chip inventory normalised at end-2017 was manageable exiting after a demand snapback on the easing of component shortages, and hovered around the 2018, with a chance of 75-day level for most of 2018 — above the normal seasonal range of 60-70 days by normalisation in 1Q19 historical experience post the Y2K. Inventory fell by 3 days to 72 days at end-3Q18, with the excess driven primarily by cryptocurrency volatility, in our opinion, where Nvidia contributed most of the incremental increase as it aimed to clear some USD600m of channel inventory during 4Q18. Smartphone chip-majors such as Qualcomm and MediaTek (MTK), on the other hand, saw inventory declines on cautious restocking as a result of muted smartphone demand.

We looked at the growth differential among the front-end foundries, back-end outsourced semiconductor assembly and test (OSAT) vendors and fabless chipmakers as a precursor to gauge the near-term inventory dynamics. We conclude that fabless chip inventory was likely still hovering around the 75-day level at end-2018, with a chance of normalisation in 1Q19. During its 3Q18 results conference (Strong 7nm ramp-up reinforces our AI thesis, 18 October 2018), TSMC projected its customers’ aggregate inventory would exit 2018 “a few days above the seasonal level”, tallying with our view. Although our assessment suggests that inventory will likely remain excessive in the near term, it should be manageable, in our opinion, suggesting a low risk of inventory overbuild to drive any meaningful industry downturn.

Major fabless chip inventory trend* September-quarter fabless chip inventory breakdown* Day Cirrus Logic Dialog Semi 90 Novatek Silicon Lab 2% 2% 3% 1% Sunplus Himax 80 1% Realtek 2% 3% 70 Xilinx Qualcomm 4% Marvell 25% 60 6%

50 AMD 40 11% NVidia

1Q00 4Q00 3Q01 2Q02 1Q03 4Q03 3Q04 2Q05 1Q06 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11 1Q12 4Q12 3Q13 2Q14 1Q15 4Q15 3Q16 2Q17 1Q18 21%

4Q18E Mediatek Fabless inventory Average 19% Source: Company, Daiwa estimates & forecasts Source: Company, Daiwa estimates Note: * 13 fabless majors monitored by Daiwa that equal c.70% of global fabless chip revenue Note: * In dollar terms; 13 fabless majors monitored excluding BRCM and ALTR due to M&As

2019 Technology Outlook: 7 January 2019

Major fabless aggregate revenue trend* Major fabless revenue growth guidance for December-quarter* USDm QoQ 18,000 40% 20% 16,000 30% 15% 14,000 10% 12,000 20% 5% 10,000 10% 0% 8,000 (5%) 6,000 0% 4,000 (10%) -10% 2,000 (15%) 0 -20% (20%) AMD Xilinx 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 Himax NVidia 4Q18E Realtek Marvell Novatek MediaTek Aggregate Qualcomm Fabless aggregate revenue Growth (YoY) SiliconLab CirrusLogic DialogSemi Source: Company, Daiwa estimates Source: Company, Daiwa forecasts Note: * Excluding Broadcom, Altera, PMC Sierra and Q-Logic who were taken over Note: *Mid-point of guidance range; Realtek not available

Foundry/OSAT/fabless revenue growth differential (4Q18) Major SCM revenue growth guidance for December-quarter* QoQ QoQ 8% 15% 6% 10% 4% 2% 5% 0% 0% (2%) (5%) (4%) (6%) (10%) (8%) (15%)

(10%) VIS UMC SMIC JCET TSMC Amkor (12%) OSAT Foundry Foundry* Foundry ex-A12 OSAT** Fabless HHSemi

ASE Holding Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts Note: * Dedicated foundries only, excluding part-time IDMs such as SEC and Intel; ** Dedicated Note: * Mid-point of guidance range; ASE on OSAT business only; JCET not available OSAT makers only, excluding part-time IDMs

Fabless revenue likely to Looking into the industry dynamics in more detail, we conclude that: 1) the aggregate contract by a low-teens revenue of the fabless majors we monitor likely contracted by a low-teen percentage QoQ percentage … in the December 2018 quarter, posting negative YoY growth for the first time since the 2015 correction. Fabless majors’ aggregate revenue is a proxy for sell-in demand in the near term, which appears to be sub-seasonal, considering the seasonal pattern of flat to up by a low-single digit QoQ, and 2) at the other end of the equation, we estimate aggregate revenue of the foundries rose by a mid-single digit percentage QoQ for the same quarter, while the OSAT makers saw their revenue drop by a mid-single digit QoQ.

… but to be offset If we exclude the A12 AP contribution at TSMC since Apple is not on our inventory-monitor largely by reduced list, aggregate foundry revenue likely fell by a low single-digit percentage QoQ for 4Q18, production activity in resulting in a high single-digit percentage contraction in semiconductor contract SCM manufacturing (SCM) production activities, which should help offset the fabless revenue decline to a large extent and only add a few days to inventory (likely up 2-3 days to 74-75 at end-2018), suggesting a still excessive but manageable inventory run-rate.

A further look into the December 2018 quarter demand dynamics among the fabless majors suggests that muted Android smartphone demand and headwinds from the cryptocurrency demand overhang appear to have contributed most of the weakness, as evidenced by Qualcomm, which expected its revenue to fall by 9-22% QoQ (mid-point: -16%), MTK (down 4-12% QoQ), Nvidia (down 13-17% QoQ) and AMD (down 9-15% QoQ). The 4 companies in aggregate account for nearly 80% of the total revenue of the fabless majors we monitor. Cirrus Logic issued a mid-quarter update in December cutting its revenue guidance, signalling weaker-than-expected demand from iPhones and supporting our view that the high pricing points could hinder new iPhone sales.

2019 Technology Outlook: 7 January 2019

Xilinx and Himax, on the other hand, saw low single-digit percentage QoQ growth for the December 2018 quarter, attributable to demand strength from datacentres and 3D laser sensing/touch-with-display-driver-integration (TDDi) penetration in smartphone displays. Regardless of the crypto-volatility, both Nvidia and AMD saw resilient demand from datacentres, and this strength was echoed by Intel, which raised its 2018 revenue guidance despite a muted PC business caused by the CPU shortage. Xilinx also raised its 2018 revenue guidance against the backdrop of the datacentre strength.

Demand appears to be a Our assessment of these company specifics suggests a mixed set of demand dynamics in mixed bag the near term: continued strength from datacentre-related demand but weakness from Android smartphone-related demand, with the crypto-headwinds and iPhone order cuts adding to the business swing. Indeed, if we strip out the smartphone and crypto impact, aggregate fabless revenue would have been flat or down slightly QoQ — still on par with seasonality to a large extent.

Non-smartphone demand appears resilient Muted smartphone Muted smartphone demand is indeed nothing new to us and should be embedded in the demand but growing industry’s supply chain management, in our opinion, as evidenced by chipset giants chip revenue — where Qualcomm and MTK managing down their inventory to healthy levels at end-3Q18. We has the delta come have been forecasting subdued demand growth for global smartphones ever since growth from? tapered off in 2016, due to already-high 4G penetration which should reach a plateau of 75-80% in 2018-19E (see charts below). Actual shipments were 1.15bn units for the first 3 quarters of 2018, up 1.6% YoY and reaching 73% of our annual estimate of 1.57bn (up 2% YoY) for an intact run-rate.

Non-smartphone We expect muted smartphone demand over the next few years, with incremental growth to demand such as be driven by replacement demand, though the rise of the 5G cellular cycle should help datacentre, automotive recover dollar-content-per-box on technological upgrades. We forecast 2019 smartphone and IoT shipments to grow by another low single-digit percentage YoY for a low-single digit CAGR over 2018-20; 2018 may even see a YoY contraction in value terms due to price erosion. Elsewhere, PC demand has been muted, as has tablet demand; but we expect global chip revenue to expand by 13% YoY for 2018 (6% YoY growth ex-memory), after the 22% YoY growth in 2017 (10% YoY growth ex-memory). So what has driven this growth in the past 2 years if the 2 big-ticket demand items of smartphone and PCs have been muted?

This leads to our discussion in the next section — Welcome to the BigData/IoT cycle (page 27) — as we believe that apart from robust demand for memory chips, non-smartphone applications such as datacentres, automotive/electric vehicle (EV), and many other new IoT devices are together becoming new demand drivers to offset muted smartphone growth. Some of the demand has been driven by infrastructure build such as bandwidth upgrades in the networking & communication space, and thus is “invisible” to consumers.

Global smartphone demand forecasts 4G penetration in global mobile handset market m units m units 1,800 60% 2,000 90% 1,600 80% 50% 1,400 1,500 70% 1,200 40% 60% 1,000 50% 30% 1,000 800 40% 600 20% 30% 400 500 20% 10% 200 10% 0 0% 0 0% 2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2018E 2019E 2020E Smartphone Growth (RHS) 2/2.5G 3G 4G 5G 4G penetration (RHS)

Source: IDC, Daiwa estimates & forecasts Source: IDC, Daiwa estimates & forecasts

2019 Technology Outlook: 7 January 2019

Global PC demand forecasts* Global tablet PC forecasts m units m units 400 20% 250 100% 350 15% 80% 300 200 10% 60% 250 5% 150 40% 200 0% 20% 150 100 100 (5%) 0% 50 50 (10%) (20%) 0 (15%) 0 (40%) 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2018E 2019E 2020E Desktop Notebook Growth (RHS) Tablet Growth (RHS)

Source: Dataquest, Daiwa estimates & forecasts Source: Dataquest, Daiwa estimates & forecasts Note: * Excluding tablet PCs

Global chip revenue growth forecast (annual) Global chip revenue growth forecast (quarterly)* USDbn USDbn 400 40% 90 60% 350 30% 80 50% 300 70 20% 40% 250 60 10% 50 30% 200 0% 40 20% 150 30 -10% 10% 100 20 50 -20% 10 0% 0 -30% 0 -10% 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018E 2020E 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 1Q19E 3Q19E Semiconductor* Growth (RHS) Semiconductor* Growth (YoY)

Source: WSTS, Daiwa estimates & forecasts Source: WSTS, Daiwa estimates & forecasts Note: * Excluding memory chips such as DRAM and NAND Note: * Excluding memory chips such as DRAM and NAND

After robust growth in 2017 and 2018 thanks to strong demand across high-end logic, analogue and discrete devices, we forecast the global semiconductor market ex-memory to expand by 3% YoY in 2019 to c.USD315bn for a 5% CAGR over 2018-20 in revenue. However, we expect the market to see negative YoY growth in the low single digits each quarter over 4Q18-2Q19, due to a high base, as well as the aforementioned fundamental turbulence including crypto volatility, muted smartphone demand and chipmakers’ cautious supply-chain management to cope with any business uncertainties caused by trade tensions.

We see a modest mid- Nevertheless, we consider this to be a modest mid-cycle correction similar to those in cycle correction, not a 1H12 and 1H16. This does not weigh on our view calling for a structural upturn which cyclical downturn should last for quite a few years since the rise of the BigData/IoT cycle is making the chip cycle different from the past, as a result of multiple demand drivers rather than being single product driven. Again, we dismiss bearish down-cycle talk for 2019 for the global chip industry and expect just a mild mid-cycle correction, with a trough likely in 1H19, which should make now a good time for investment.

SCM to resume As for the SCM market, we expect revenue to expand by 9% YoY in 2019 to USD87bn for outgrowth vs the chip a 9% CAGR over 2018-20, with the foundries leading the pack thanks to TSMC’s average in 2019-20 dominance in advanced process technologies where we expect double-digit growth pa in 2019-20. The SCM sector structurally outgrew the global chip average in revenue terms over the past 2 decades, thanks to structural market-share gains by the foundries and OSAT makers as a result of fabless chipmakers gaining shares against their integrated device manufacturer (IDM) counterparts, in addition to logic IDMs’ business conversion into fab-lite/fabless models. Although the SCM sector’s outgrowth took a pause in 2017-18 due to analogue and discrete devices that outgrew logic devices but were largely produced in- house by IDM, we expect the SCM sector again to outgrow the chip average over 2019-20.

2019 Technology Outlook: 7 January 2019

Global SCM revenue forecasts* Revenue growth comparison: SCM vs. chip average* USDbn 60% 120 50% 40% 100 40% 30% 80 20% 20% 10% 60 0% 0% 40 (10%) (20%) (20%) 20 (40%) (30%) 0 (40%) (60%) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2018E 2019E 2020E

Foundry revenue OSAT revenue Growth (RHS) Chip revenue growth* SCM revenue growth

Source: Company, Daiwa estimates & forecasts Source: Company, Daiwa estimates & forecasts Note: * Dedicated foundries and OSAT makers only, excluding part-time IDMs Note: * Excluding memory chips

Are Apple plays out of favour? Yes or no depending on The answer could be yes or no, in our view. “Apple plays” have been an area of investment whether volume players focus in Asia for years, especially during 2010-15 when Apple enjoyed robust growth from or order-share gainers its iPhone gear (see charts below), prompting investors to dig into the company’s supply chain in Asia for stock ideas (see chart on the next page, iPhone XS teardown). However, even Apple is not immune to the general slowdown in the smartphone market, as iPhone shipments have peaked out since 2015. Although Apple aims to leverage its premium pricing strategy to cope with stalled volume growth and sustain its revenue from hardware sales, this strategy does not seem to be working well, given the recent order cuts in the Asian supply chain for iPhone XR and XS production (New iPhones: lukewarm demand; first round of order cuts in the supply chain, 6 November 2018). On 2 January 2019, Apple issued a mid-quarter update cutting revenue guidance, which echoed our view.

Our preferred Apple play According to our market research, the Apple supply chain produced around 215m iPhones is Largan each year in 2017 and 2018, after an 8% YoY contraction in 2016. We stay conservative on iPhone demand in 2019, and expect further muted growth in production terms from the Asian supply chain (likely flat to up slightly YoY). We suggest investors avoid volume- centric Apple plays such as Hon Hai in Asia. However, companies that can gain order share or diversify into the Android platform for content growth from spec upgrades such as multi-cam should still benefit. In this group we include Largan (smartphone lens-set industry leader, with diverse business exposure), Sunny Optical (automotive lens leader, plus major supplier of lenses and modules for Android smartphones), and Sony (CMOS image sensor industry leader, with diverse business exposure from iOS to Android, plus 3D camera sensor modules).

Apple: revenue trend iPhone: production trend USDm m units 300,000 70% 250 120% 60% 100% 250,000 200 50% 80% 200,000 40% 150 60% 30% 150,000 20% 100 40% 100,000 10% 20% 0% 50 50,000 0% (10%) 0 (20%) 0 (20%) 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 iPhone revenue Other revenue Growth (RHS) iPhone production Growth (RHS)

Source: Company, Daiwa estimates Source: Company, Daiwa estimates

2019 Technology Outlook: 7 January 2019

iPhone XS teardown by key supply-chain vendors

Silicon SiP Component Assembly

A12 Bionic AP Hon Hai AMOLED TSMC Pegatron (XS Max SEC only) Modem Force Touch INTC AVGO (chip) (SCM partners: Nissha (sensor) TSMC, UMC, ASE, GIS, TPK Acoustic Amkor) (lamination) AAC, Goertek, Merry

Connectivity MEMS sensor AVGO, NXP InvenSense/TDK Haptics (SCM partners: (chip) AAC, Nidec, Alps, TSMC, ASE, Amkor) ASE (SiP) Luxshare

VCM/OIS Cellular PA Metal frame Alps, AVGO, QRVO, Hon Hai, Foxconn MinebeaMitsumi SWKS Tech, Jabil (SCM partners: WinSemi, AWSC) Laser sensor module Glass cover LGI, Globetronics, Wifi PA Lens Technology Sharp, O-Film, Murata Biel Crystal Hon Hai (SCM partner: WinSemi) MLCC Murata, SEMCO, Wireless charging Camera module Taiyo Yuden, AVGO LGI, Sharp, Cowell, Kyocera O-film, Hon Hai

CIS Camera lens Sony Largan, Kantatsu, Genius Optical 3D laser sensor LITE, ams, FNSR FPCB (SCM partners: IQE, ZDT, NOK, Flexium, WinSemi) Fujikura, Sumitomo, Career, Interflex, PMIC MFLEX, Murata Dialog Semi (SCM partners: TSMC, VIS, ASE) Battery cell LG Chemical, Samsung SDI, Memory TDK/ATL, Tianjin SEC, Toshiba, SK Lishen Hynix, Micron

Source: Daiwa

3Q18 global smartphone market share* Global smartphone market share dynamics* 50% Others 45% 26% Samsung 19% 40% 35% 30% 25% Lenovo 20% Huawei 3% 15% 13% 10% LG Electronics 5% 3% 0% Vivo Apple 7% 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 Oppo 12% Xiaomi Apple China brands Samsung 8% 9% LG Sony Nokia

HTC BlackBerry Others Source: Gartner, “Market Share: PCs, Ultramobiles and Mobile Phones, All Countries, 3Q18 Source: Gartner, “Market Share: PCs, Ultramobiles and Mobile Phones, All Countries, 3Q18 Update", by Mikako Kitagawa, Roberta Cozza, Ranjit Atwal, David Glenn, Kanae Maita, Update", by Mikako Kitagawa, Roberta Cozza, Ranjit Atwal, David Glenn, Kanae Maita, Meike Escherich, Annette Jump, Lillian Tay, Tuong Nguyen, Bruno Lakehal, Annette Meike Escherich, Annette Jump, Lillian Tay, Tuong Nguyen, Bruno Lakehal, Annette Zimmermann, Anshul Gupta ,CK Lu and Angie Wang published on 27 November 2018 Zimmermann, Anshul Gupta ,CK Lu and Angie Wang published on 27 November 2018 Note: * In unit shipment terms Note: * In unit shipment terms

2019 Technology Outlook: 7 January 2019

China brands have As flagged in our 2018 Technology Outlook, in light of demand saturation, we see the gained the most market smartphone market consolidating into 2 segments: economy and premium, with Apple, share in the smartphone SEC and Huawei dominating the premium segment, and other brands from China and market, led by Huawei, emerging markets (EM) controlling the economy segment. Apple’s market share has been Xiaomi, Oppo and Vivo seasonally volatile since 2011 and gradually trending down from a mid-teen to low-teen percentage, while SEC’s market share has been hovering around the 20% level after rising to 30% over 2012-14.

Impressively, China vendors saw their market share rise steadily from less than 10% in 2011 to nearly 45% as of 3Q18, led by Huawei, Xiaomi, Oppo and Vivo. Indeed, Huawei has overtaken Apple to become the top-2 smartphone vendor in the world since 2Q18.

Apple plays and revenue exposure Sales contribution from Apple Company Ticker Rating 2017E 2018E 2019E WinSemi 3105 TT Buy 20-30% 20-30% 20-30% ASE 3711 TT Buy 20-25% 20-25% 20-25% TSMC 2330 TT Buy 15-20% 15-20% 15-20% Largan 3008 TT Buy 45-50% 45-50% 45-50% Catcher 2474 TT Hold 70-75% 75-80% 75-80% AAC 2018 HK Hold 45-50% 45-50% 45-50% Hon Hai 2317 TT Hold 50-55% 50-55% 50-55% GIS 6456 TT Hold ~90% ~90% ~90% Casetek 5264 TT Hold 85-90% 85-90% 85-90% Pegatron 4938 TT Hold 65-70% 65-70% 70-75% TPK 3673 TT Sell 50-60% 50-60% 50-60%

Source: Daiwa estimates & forecasts

Downgrading Asian smartphone sector to Neutral Cutting smartphone We expect 2019 to be another challenging year for smartphone vendors, given the rising sector to Neutral on uncertainty in the global macro environment as a result of trade tensions, mounting risks muted growth and for smartphone demand in EM on likely prolonged FX volatilities, and already-high intense competition smartphone penetration globally. While we forecast 2019 smartphone shipments to grow by a low single-digit percentage YoY (refer to page 22), we could see downside risk if the macro environment deteriorates. In addition to the weak iPhone sales due to Apple’s high pricing points, we also expect competition among Android brands to intensify in 2019 on muted volume growth. As a result, we expect the smartphone supply chain in Asia to suffer not only from limited shipment growth but also from increased pricing pressure. Therefore, we downgrade the sector from Positive to Neutral.

In the smartphone Despite the downgrade to our sector view, we take a selective approach at the company space, we like Largan level. We suggest investors focus on component leaders with strong spec upgrades or and Sunny, but would market-share wins, and avoid volume players or component makers with limited spec avoid Hon Hai, FIH upgrades. In the smartphone space, camera component leaders Largan (major beneficiary Mobile, AAC, GIS, TPK of the triple-cam boom; see our Upgrade report, Upgrading: time to buy on triple-cam and HTC boom in 2019-20E, 7 December 2018) and Sunny Optical (well positioned to benefit from the rising multi-cam trend; see Favourable trends intact despite near-term headwinds, 11 October 2018) are our top picks, against the backdrop of the solid multi-cam trend and a likely acceleration in triple-cams from 2019 (see The more the merrier – multi-cameras are the next mega trend in smartphones (Part 4), 14 November 2018).

We would avoid volume players like Hon Hai (major assembler for iPhones, with margin risks) and FIH Mobile (major EMS for China smartphones, with pricing pressure from intensified competition), and component names such as AAC (likely market-share loss in new iPhones, with rising pricing pressure), touch vendors such as GIS and TPK (likely unfavourable technology changes in iPhones from 2019), and tier-2 smartphone brand HTC.

2019 Technology Outlook: 7 January 2019

Welcome to the BigData/IoT cycle We believe 2019 will mark As highlighted in the previous section, the smartphone market likely saw a YoY decline in a milestone for value terms for 2018, with PC/tablet demand remaining subdued. However, chip revenue BigData/IoT to become a likely expanded by 13% YoY, with a strong incremental growth contribution from non- new demand leader… smartphone demand, particularly demand from datacentres, including high-performance computing (HPC) processors for computing upgrades, fibre-optic (FO) connectivity solutions for bandwidth upgrades and memory devices for storage density upgrades, as well as demand from high-end power analogue for automotive/EV and with new IoT devices on the horizon. This leads us to believe that:

After a 4-year transition from MCD following the smartphone demand slowdown, BigData/IoT demand will overtake MCD in revenue terms in 2019 for the first time to claim leadership in global IT demand – a milestone we expect for the 2019 tech sector.

Similar to when the MCD demand cycle overtook PCs in 2012, with around a 3-year transition (see chart below), we forecast the BigData/IoT market to exceed USD400bn in 2019, up 26% YoY for a CAGR of 22% over 2018-20, vs. USD335bn for MCD, down 1% YoY for a -1% CAGR over the same period.

Global chip revenue breakdown by device YoY growth Global chip market breakdown by device revenue 80% USDbn 140 60% 120 40% 100 20% 80 0% 60

(20%) 40 20 (40%) 0 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18

MOS logic MOS memory 4Q18E MOS logic MOS memory Analog Discrete, opto, sensor & others Analog, discrete, sensor & others Total semiconductor Source: WSTS, Daiwa estimates Source: WSTS, Daiwa estimates

Crossover between PC and MCD demand market Crossover between MCD and BigData/IoT market USDbn USDbn 400 700 350 PC-to-MCD transition 600 300 500 MCD-to-IoT transition 250 400 200 300 150 200 100 100 50 0 0 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 PC* MCD** MCD* IoT

Source: Company, Daiwa estimates Source: Company, Daiwa estimates Note: * PC excluding tablets; ** MCD includes smartphones and tablets Note: * MCD includes smartphones and tablets; IoT includes wearables, smart TV/home appliances, smart car, IIoT and all other new IoT devices ex-MCD

2019 Technology Outlook: 7 January 2019

… though the crossover Recall in January 2015, we highlighted a likely paradigm shift in the global IT industry is likely to take 2 years given a slowdown in the smartphone demand. Daiwa’s tech team initiated a thematic longer than we first report, Big Data: the next big thing, addressing the secular demand transition post the forecast smartphone era, where we expected the BigData/IoT demand cycle to overtake MCD in 2017. Although we followed up this structural thesis of a paradigm shift in demand with updates in 2017 (Multiple themes emerging to shine) and 2018 (Focus on themes that are set to shine), pushing out our forecast crossover of the 2 cycles by 2 years to 2019, we now reiterate our forecast for the crossover to happen in 2019. We believe the global IT industry will formally enter the BigData/IoT cycle this year, with its market value likely to accelerate in 2020 against the backdrop of the 5G ramp-up to help bridge any bandwidth mismatch between the wireline and wireless data transmission.

By our definition, the BigData/IoT cycle differs from the previous PC and MCD cycles primarily due to the multiple demand verticals involved, shifting the demand drivers to “concerto” from “solo” — the previous cycles were all single-product-driven. We envision “5+1” demand verticals to drive the BigData/IoT cycle, where the 5 different verticals of smart-connected devices – consumer IoT, smart-car IoT, smart-home IoT, healthcare IoT and industrial IoT devices – in many form factors other than just smartphones and tablets, should mount at ground level to drive a surge in data consumption, while the plus-one vertical of cloud compute should help facilitate the BigData ecosystem through infrastructure upgrades of compute, bandwidth and storage to build out the global data economy.

5 fundamental As illustrated in the BigData/IoT matrix chart below, we envision 5 fundamental technologies to offer technologies to serve as the core, cross-platform requirement to facilitate the rising data cross-platform solutions economy post the MCD cycle: data access, data process, data transmission, data storage, and benefits… and data security, respectively leading to the 5 fundamental hardware solutions of sensor, processor, connectivity, density and power management. Thanks to cloud infrastructure builds by hyper-scale datacentre operators ahead of the cycle to facilitate surging data consumption, demand for data transmission bandwidth and storage density is accelerating, as is demand for computing, which is further leading to an artificial intelligence (AI) trend against the backdrop of continued advances of Moore’s Law. While CIS was a widely adopted human-machine interface (HMI) for data access during the MCD cycle, 3D laser sensing & imaging technology is redefining the way people interact with machines, further enhancing HMI, thanks to Apple’s push in Face ID solutions.

Rising structural trends under the BigData/IoT demand cycle from hardware perspective HMI AI Bandwidth Density

Source: Daiwa

2019 Technology Outlook: 7 January 2019

… leading to our focus Again, we believe tech companies in the supply chain than can offer 1 or more of these on 3D, multi-cam, HPC, fundamental technologies with cross-platform solutions to cover the 5+1 multiple demand 5G, FO and memory verticals will likely stand out. Against the backdrop of the 4 secular trends we have flagged since 2018 — HMI, AI, bandwidth and density — we further present 6 investment themes in this report under the BigData/IoT cycle: 3D, multi-cam, HPC, 5G, FO and memory. We elaborate on these themes in the following section.

HMI A human-machine interface (HMI) mainly handles data access for machines from human instruction. As opposed to the “old world” where users used keyboards and then touch controllers for data access, we believe HMI in the new world will use laser technologies to change the way we interact with machines from 2D to 3D format, multiplying the amount of data consumption in the future since 3D sensing technologies handle not only human-to- machine (H2M) interaction but machine-to-machine (M2M) interaction, such as self-driving, industrial automation (IA) and smart-home/smart-city applications (see our 3D laser report: A whole new world, 28 June 2017).

Many technologies Despite being utilised for years in the MCD cycle as one way of accessing data in video involved in HMI, such as images, still or motion, the multi-cam market should continue to grow, in our view, thanks to TDDi, VAD, CIS and continued spec upgrades from dual to triple cameras and constant upgrades in other VCSEL… features like resolution, aperture, optical zoom, wide angle and form factor. Please see our report, The more the merrier: multi-cameras are the next mega trend in smartphones (Part 4), 14 November 2018, for more details.

In addition, touch solutions for machines to access human data input through display panels are evolving into a trend of integration between touch controllers and display drivers (D/D), or so called TDDi, benefiting companies that can offer products to capitalise on this trend, such as Synaptics, FocalTech, Novatek and Himax. But we view this as a minority market which will not lead to a mega-trend.

… our focus is 3D and Similarly, voice assistance devices (VAD) have been developed as another method for multi-cam machines to access data through human voice recognition for data encryption, with end- products such as Amazon’s Echo, Google’s Home and Apple’s HomePod. Yet this represents another minority market, in our opinion, with bundled solutions offered by giants like MTK, TI and Marvell, as well as in-house systems from Apple itself, to dilute the discrete solution providers. Therefore in the HMI theme, our focus remains on 3D and multi-cam from the perspective of a structural mega-trend with volume potential.

HMI investment themes: 3D and multi-cam

Source: Daiwa

2019 Technology Outlook: 7 January 2019

Growth of transistor count vs. Moore's Law*

t/mm2

10nm  100.0 100.8

● Apple A12 Bionic (82m/7nm)

● Huawei Kirin 980 (69m/7nm) 14nm ● Huawei Kirin 970 (55m/10nm)  37.5 ● Apple A11 Bionic (49m/10nm) ● AMD Epyc (32-core) (29m/14nm) ● Apple A10 Fusion (26.4m/16nm) ● NVDA Tegra Xavier (23.3m/16nm) 22nm ● Apple A9 Twister (21.4m/14&16nm)  15.3 ● Apple A8 (22.5m/20nm) ● Intel Xeon Broadwell E5 (15.8m/14nm) 10.0 ● Intel Core i7 Broadwell (14.3m/14nm) 32nm ● Apple A7 (9.8m/28nm)  7.5 ● Intel Core i7 Ivy Bridge (7.3m/22nm) ● Intel Core i7 (5.4m/32nm) 45nm ● AMD Trinity (5.3m/32nm)  3.3 ● SunMicro SPARC T3 (2.7m/40nm) ● AMD K10 (2.9m/45nm) 1.0 ● Intel Core 2 Duo Wolfdale (2.8m/45nm) 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2020 2022

Source: Company, Daiwa Note: * Above line represents Intel’s baseline of theoretical transistor count for each node under Moore’s Law evolution; below line indicates physical transistor count produced by actual chips at different nodes

AI AI requires HPC Artificial intelligence (AI) by our definition is a machine capable of self-learning with the processors, making help of HPC processors to handle a comprehensive set of data process through data TSMC the ultimate training with parallel-compute and data inference with serial-compute to mimic the deep- winner… learning intelligence of a biological brain (see pages 26-30 of our 2018 Technology Outlook). These HPC processors can be presented in many types of xPU architecture such as graphics processing units (GPU), central processing units (CPU), tensor processing units (TPU: developed by Google), field programmable gate array (FPGA) and application- specific IC (ASIC) tailor-made for specific applications. AI’s HPC architecture design requires state-of-the-art, cutting-edge process technologies of complementary metal oxide semiconductors (CMOS) to build these mission-critical chips, making TSMC the ultimate winner given its dominance in this space, in our opinion.

… as rivals Intel and SEC In our view, TSMC has led Intel in keeping physical chip performance, gauged by transistor appear to be lagging count per mm2 silicon property (t/mm2), closest to Moore’s Law, despite a widening gap behind over time which appears to be an industry-wide issue involving physical constraints. 50m t/mm2 appears to be a benchmark for a HPC processor to be AI-capable, as evidenced by 2 APs in 2017 boasting “neutral process” engines (Apple’s A11 Bionic and Huawei’s Kirin 970), both using TSMC’s 10nm. In 2018, TSMC further raised the bar to over 80m t/mm2 with its 7nm process node, which is used by Apple’s A12 Bionic in the iPhone XR/XS/Max. We expect TSMC’s next-generation 5nm/EUV to lift the bar to the 100m t/mm2 milestone, further enhancing AI capabilities and securing the company’s dominance in this cutting- edge foundry market. Intel, on the other hand, is scheduled to commercialise its first 10nm CPU in 2019, while the commercial roadmap for SEC’s 7nm/EUV remains unclear.

Bandwidth Bandwidth handles data transmission for the heightened data consumption under the BigData/IoT cycle, with many new form factors of IoT devices other than smartphones and tablets, such as wearables, drones, smart speakers, shared bikes, consumer/industrial robots, self-driving cars and many other emerging gears upon innovation. As addressed in our 2016 FO and 2018 5G thematic reports, bandwidth upgrades are needed for wireline and wireless data transmissions to complete the global networking & communication (N&C) ecosystem and to help shape the data economy.

2019 Technology Outlook: 7 January 2019

FO and 5G are our focus FO has been the most viable solution for wireline bandwidth upgrades for both datacom for the bandwidth- (such as datacentres) and telecom (such as FTTX) application markets, as well as cellular upgrade cycles interconnectivity, and the bandwidth upgrades in these application markets are ongoing. On the other hand, 5G cellular technology should be the most viable solution for the wireless bandwidth upgrades, in our view. Although yet to take off, 5G should soon kick off its build-up cycle starting from 2019, making FO and 5G our focus markets for investment under this bandwidth-upgrade trend.

Bandwidth investment themes: 5G and FO

Source: Daiwa

Density Diverse demand and Memory density takes charge of data storage, either permanent or temporary, after the constrained supply data is accessed and processed, with memory chips including NAND and DRAM being the should help prolong the 2 most viable solutions, respectively. Although the memory cycle has persisted for nearly 2 memory market upturn, years since its 2H16 upturn, spurring market jitters calling for an end in the cycle based on despite a likely mid-cycle historical experience, we continue to dismiss the bear argument for 2 reasons: 1) rising correction difficulty in technology migration to 1x/1y nm at DRAM and 9x-layer vertical stacks at NAND which will constrain supply, and 2) diverse demand applications from in-memory compute for servers and solid-state drives (SSD) for data storage, respectively, thanks to the BigData/IoT cycle which is no longer a single-application-driven cycle for memory demand. That said, we see a likely mid-cycle correction in the near term as a result of muted smartphone sell-through and over-restocking in 1H18.

Density investment themes: NAND and DRAM

Source: Daiwa

2019 Technology Outlook: 7 January 2019

5G the next big thing Lack of 5G has created In addition to the milestone of the BigData/IoT cycle overtaking MCD in revenue terms, bandwidth mismatch another milestone we expect to see in 2019 is the 5G cellular technology migration in and hindered global mobile communications, which will help bandwidth upgrades for wireless data BigData/IoT progress transmissions. As discussed in our 5G thematic report, Let’s talk about 5G, published 3 December 2018, the N&C ecosystem has witnessed bandwidth upgrades at the wireline infrastructure of datacentres, telecommunication backhauls and last miles — but not for wireless cellular communications. In the cellular communication ecosystem, the penetration of the 4G/LTE technology has reached a plateau, creating a bottleneck in the overall ecosystem with a bandwidth mismatch between the wireless and wireline data transmissions, in our opinion. This bottleneck hinders BigData/IoT developments that require high bandwidth, such as self-driving vehicles and industrial automation.

We expect 2019 to be a Telcos majors in Asia will likely soon initiate a new capex cycle, per Daiwa’s research, tipping point for 5G which leads us to believe that 2019 is likely to be a tipping point for 5G cellular network migration cycle, migration. In our view, the spending cycle this time will be milder than the ones for 3G/4G, triggered by telcos’ new but will last longer. South Korea and Japan are likely to lead the way in technology capex build advances, given government support and the Tokyo Olympics in 2020, followed by China, the US and the EU ramping up global scale from 2020 onwards. China should be the most crucial factor in determining the scale and timing of the 5G ramp-up, in our opinion, considering its status as the biggest contributor to the global telcos spending.

China’s spectrum Currently, 16 cities in China are testing 5G network interconnectivity, and the government allocation on 7 aims to commercialise 5G services by 2020 through close cooperation with domestic December cemented our telecom equipment makers like Huawei and ZTE — only about a year behind Japan and confidence in the timing Korea. Indeed, based on our market research, Chinese smartphone majors Huawei, of the 5G build-up Xiaomi, Oppo and Vivo will likely roll out 5G phones in 2019 to support the country’s 5G migration from the terminal-device end. The Ministry of Industry and Information Technology (MIIT) released 3 parcels of spectrum on 7 December 2018 for 5G developments – 2.6GHz, 3.5GHz and 4.9GHz – to the 3 telcos majors in China (China Telecoms: 5G spectrum allocation done; what’s next? 7 December 2018). This move cements our confidence on the 5G build-up timeframe, despite the recent US investigation of Huawei’s senior management, which could add to political uncertainties and prolong the build-up trajectory – the key risk we flagged in our 5G report (Let’s talk about 5G, 3 December 2018, page 22, trade tensions).

Evolution of the mobile cellular communication network into 5G

5 2015 5 2016 2017 5 2018 5 2019 52020

2.9 GHz 90-95 GHz available bandwidth 10 GHz 70-85 GHz available bandwidth 4 GHz 38 GHz available bandwidth 2 GHz 28 GHz available bandwidth Macro base station Densification Massive MIMO & mmWave digital beamforming • Increasing frequency • Small cells • Up to 6GHz beyond 2.7GHz to 6GHz • Ultra-wide bandwidth • DAS • Array antenna • Ultra-wide throughput • Increasing bandwidth • LTE-U • Increasing efficiency

Source: Company, Daiwa

2019 Technology Outlook: 7 January 2019

2019 likely to be a tipping point We expect Asian telcos Daiwa expects the telcos majors, after under-spending over 2016-18, to kick off a new majors to spend an round of capex cycle for the 5G build-up from 2019. Taking the major telcos of 3 countries average USD73bn/year in Asia under our telcos team’s coverage (China, Japan and South Korea) as a proxy, we for the 5G build-up — 9% forecast their aggregate capex to end 3 consecutive years of contraction in 2018, with 6% below that of 4G YoY growth in 2019 and 6% YoY growth in 2020. On the same basis, we look for a 3% CAGR over 2018-25 to exceed USD75bn in 2025. Our teams expect this spending cycle to last until perhaps 2030, at least double that of the 4G cycle in duration, for around a 10- year build-up. This implies that on a cumulative basis, aggregate capex may total USD880bn over the 5G build-up cycle, averaging USD73bn/year — down 9% from the average spending of c.USD80bn by the 3 countries for the 4G cycle.

Note: we believe that our monitoring of the 3 countries’ capex is a useful proxy for global 5G spending, as together these countries accounted for 45% of global telcos’ spending in the 4G cycle.

Capex cycle of telcos majors in China, Japan and Korea* USDbn 4G build 5G build 100 3G build 40% 30% 80 2G build 20% 60 10%

40 0% (10%) 20 (20%) 0 (30%) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E China top-3 Korea top-3 Japan top-3 Growth (YoY)

Source: Company, Daiwa estimates & forecasts Note: * China top-3: China Mobile, China Telecom, China Unicom; Korea top-3: SK Telecom, KT, LG Uplus; Japan top-3: NTT Docomo, KDDI, SoftBank

Tech likely to capture the most value Tech sector will likely For the 5G build-up cycle, we expect the tech supply chain with business geared towards capture the most value base-station (B/S) build at the infrastructure end to be a major winner, as the most value on hardware upgrades should go to electronics content on an incremental basis, based on our research of the 5G B/S bill of materials (BoM). This is because 5G’s high radio frequency (RF) bandwidth requirements demand several technological upgrades in the likes of antennas, radio units and baseband units, making silicon content (especially compound semiconductors) within the overall electronics perhaps capturing the most incremental value throughout the 5G build-up cycle.

B/S deployment within cellular network infrastructure is a complicated 3D mixture consisting of macro cells, micro cells and small cells installed in different layers of the network handling different RF and power depending on data transmission bandwidth and distance (refer to the previous page for the mobile cellular communication network evolution chart). To simplify the real world, we use the 4G B/S configured with 3 discrete antennas as a proxy for our calculation, and assume the 5G B/S is upgraded to a 4x4 phased-array antennas system as a proxy to handle millimetre-wave (mmWave) technologies with beam-forming for massive multiple input/multiple output (MIMO) to facilitate enhanced mobile broadband (eMBB) and ultra-reliable low-latency communication (uRLLC) requirements for data transmission.

2019 Technology Outlook: 7 January 2019

Illustration of macro cell and small cell B/S B/S BoM at the system level: 4G vs. 5G USD 20,000

14,800 15,000 10,400 10,000

5,000

0 4G 5G Baseband control unit Radio unit Power control unit Fibre optics unit Other control units Other components*

Ericsson RBS3106 (100x65x45cm) Ericsson 6501: 12x27x30cm

Source: Company, Daiwa Source: Company, Daiwa Note: * Including battery, software, etc.

Focus largely on RU for As shown in the chart above, a B/S typically consists of 4 controlling units: baseband unit- and ASP-accretion control unit (BCU), radio unit (RU), power control unit (PCU) and fibre-optic unit (FOU). We see RU and BCU, accounting for 50% and 24% of a 5G B/S BoM, respectively, as likely to capture the most value from an incremental perspective amid the 4G-to-5G migration cycle, due to the antenna upgrade from discrete to phased-array type for mmWave/beamforming technology requirements. This makes RU and BCU both unit- and ASP-accretive as a result of increased PA/filter count and FPGA count per box, according to our market research.

We forecast an average BoM of USD14,800 for a typical 5G B/S, a 42% hike from its 4G counterpart. Assuming a 1.5x mark-up as a function of the 35% margin required by the telecom equipment vendors at the gross level, this 5G B/S configured with 4x4 phased- array antennas could be priced at c.USD22k/unit, or USD25k bundled with a power system (excluding the tower system, which is normally leased by telcos from a tower company). Thereafter, we try to calculate the number of B/S units that could be built throughout the 5G cycle.

We expect 5G B/S count For this, we have investigated technologies and carried out a field survey of industry to increase by nearly 4x participants. Based on this, we forecast c.24m units of 5G B/S to be built cumulatively by relative to 4G 20 telcos we monitor across China, Korea, Japan, the US and the EU, compared with a c.5.8m B/S build during the 4G cycle. We believe this surge in incremental build will be spurred by the deployment of mmWave technologies. We see 28GHz as likely to become one mainstream RF defined by the 3rd Generation Partnership Project (3GPP), as opposed to the sub-6GHz spectrum used in the 4G. In theory, higher RF covers wider bandwidth for data transmission, but travels a shorter distance and hence requires more B/S to reach the same density as their counterparts with lower RF. We believe the B/S count will likely increase by 3-10x from 4G to 5G, depending on countries/geographies with varying densities of coverage. We assume an average increase of c.4x in our calculations.

We see a TAM of over Together with our USD25k ASP forecast, we project a total addressable market (TAM) of USD650bn at the system USD490bn for the 5G B/S build-out at the system level, USD260bn at the electronics level, level for this 5G-enabled USD127bn at the silicon level and USD2bn at the materials level, all on an incremental and build-out cycle cumulative basis (ie, after deducting the 4G spending) for the 5G build-out cycle that may last 10 years. This means that the average per-year TAM throughout this build-up cycle could amount to USD49bn at the system level, USD26bn at the electronics level, USD13bn at the silicon level, and USD0.2bn at the materials level (see chart, next page). Along with our forecast of USD180bn incremental value contributed by 5G smartphones, we project the total 5G-enabled TAM, from the infrastructure to terminal-device end, to exceed USD650bn at the system level on a cumulative basis over the 5G cycle.

2019 Technology Outlook: 7 January 2019

Cumulative base-station build-out for 5G cycle* 5G base-station average TAM per year at different levels USDbn $600bn 60 49 50

24m $25k $19k 30 26 $110bn 20 5.8m 13 10 0.2 5G 4G 0 B/S count ASP TAM System Electronics Silicon Materials

Source: Daiwa estimates & forecasts Source: Daiwa estimates & forecasts Note: * B/S build-out by a total of 20 global telcos majors Daiwa monitors across China, Japan, Korea, the US and the EU

Global smartphone market forecasts Global 5G smartphone shipment and penetration m units m units 2,000 70% 1,000 60% 60% 800 50% 1,500 50% 40% 40% 600 1,000 30% 30% 400 20% 500 20% 200 10% 10% 0 0% 0 0% 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Smartphone shipment Growth (RHS) 5G smartphone shipment 5G penetration

Source: IDC, Daiwa estimates & forecasts Source: Daiwa forecasts

Key beneficiaries 5G conviction Buys: The chart on the next page depicts the 5G supply chain from a tech hardware perspective, WinSemi and Inari categorised into 4 segments: key materials, semiconductors, devices & assembly, and system equipment. Our conviction Buys are the compound-semiconductor players WinSemi and Inari, which we believe will benefit the most from RF PA/filter upgrades considering the phased-array antenna design, given the former’s global leadership in compound-semiconductor RF PA foundries for both infrastructure B/S and terminal devices like smartphones, and the latter’s Asian leadership in RF filter testing.

Elsewhere in the food chain, there are many players we can identify as 5G beneficiaries, from upstream to downstream. But the incremental benefits may not be homogeneous, depending on a company’s pure business exposure, as well as entry barriers and the competitive landscape. In the key materials segment, we think IQE (IQE LN, not rated) could benefit the most given its dominance of the global communication-epiwafer market (ie, RF and FO), with it capitalising on the rising demand for gallium-nitride (GaN) on silicon-carbide (SiC) to handle 5G B/S’ high temperature-resistance requirement. We believe other key players, including Sumitomo Chemical (through Sumika) and VPEC (2455 TT, not rated), could become a viable second source for IQE.

Other beneficiaries are Also, we expect other materials, including IC substrates, substrate-like PCB (SLP) and likely to be Sumitomo flexible PCB (FPCB), to benefit from the 5G upgrades; names we think are worth watching Chemical, Murata, are SEMCO and Ibiden, as well as Sumitomo Chemical and Murata for basic-materials SEMCO, LMO… changes inside the FPCB, from polyimide to liquid crystal polymer (LCP), plus rising passive component count per smartphone. LMO, IQE and Sumika should also benefit from FO bandwidth upgrades for 5G B/S interconnectivity to handle widened RF coverage.

2019 Technology Outlook: 7 January 2019

Global 5G cellular technology food chain

Key materials Semiconductors Devices & assembly System equipment

Epiwafer merchant RF PA/filter EMS Telecom equipment IQE, Sumika, VPEC, LMO, Broadcom, Qorvo, Skyworks, Murata, Hon Hai, Flex, Jabil, Creation Tech, Plexus, Ericsson, Huawei, Nokia, ZTE, IntelliEPI, WinSemi (in-house) HiSilicon, Ericsson, Nokia, Cree, NXP, Fabrinet, Benchmark Electronics, Venture, SEC ADI, Qualcomm Sanmina IC substrate/PCB Smartphone/IoT ZDT, Nippon Mektron, TTMT, FPGA/baseband Antenna system SEC, Apple, Huawei, Xiaomi, Unimicron, SEMCO, Sumitomo Xilinx, Intel (Altera), Microsemi Kathrein-Werke, Comba Telecom Systems, Oppo, Vivo, Lenovo, LG, ZTE, Chemical, Fujikara, Shinko, (Microchip), Lattice, Qualcomm, CommScope, Huawei Tech, MOBI, Radio Sony, TCL, HTC, Google, Ibiden, Meiko Electronics, AT&S, MediaTek, HiSilicon, SEC, Unigroup* Frequency Systems (Nokia), Amphenal, Tongyu Microsoft, AWS, etc. Nanya PCB, LG Innotek, Communication, Ace Tech, Fiberhome Simmtech, Kinsus, SCC, Career Foundry/OSAT Tech, Symtek, ASE Materials (in- WinSemi, AWSC, GCS, Wavetek, San'an Power system house), DAP, Murata, Kuraray, Opto, TSMC, SEC, Inari, ShunSin, PCL, ABB, Delta, Huawei Tech, Eaton, AEG Power Daicel, Ube Industries, Dupont, ASE, Amkor, Venture Solutions, Emerson Network Power, Schneider etc. FO connectivity Tower system Broadcom, Qorvo, Finisar, Lumentum, China Tower, Indus Towers, Reliance Infratel,

Source: Daiwa; Note: * Unigroup = Spreadtrum + RDA

… as well as MTK, In the semiconductor segment, we believe the primary focus will be on RF PA/filter and TSMC, ASE, Delta and FPGA vendors due to the phased-array antenna upgrades, wherein we see WinSemi Advantest benefiting the most, as discussed above, given its RF PA foundry work for global vendors such as Broadcom, Qorvo, Murata, HiSilicon, Ericsson, Nokia and Qualcomm. We think Inari stands to benefit through testing work for Broadcom’s filter solutions, while TSMC and ASE should benefit from SCM service offerings to FPGA makers (such as Xilinx) at the infrastructure end of B/S and AP/modem SoC makers (such as Qualcomm, HiSilicon and MTK) at the terminal-device end of smartphones and IoT devices. Advantest, which dominates the global tester market for FPGA and baseband processor testing, should likewise benefit.

In the devices & assembly segment, we believe the value proposition should lie in the antenna and power systems to capitalise on 5G’s technological upgrades in antennas and power supply to handle higher RF spectrum and temperature. As we only cover power- system vendors, our top pick is Delta Electronics, which is arguably the largest telecom power-supply vendor in the world. Our recent research suggests that Delta may have begun to see order allocation for its telecom power system due to the US investigation of Huawei’s senior management. Last but not least, though we do not cover the telecom equipment space, we see Ericsson, Huawei, Nokia, ZTE and SEC as likely to benefit from the B/S upgrades, which are both unit- and ASP-accretive.

2019 Technology Outlook: 7 January 2019

Daiwa’s 2019 investment themes for the tech sector

Source: Daiwa

Other secular themes likely to shine 5G, FO, 3D, multi-cam, Since our 2017 Technology Outlook report, we have pinpointed several growth themes and HPC, memory structural trends, including FO for bandwidth upgrade, 3D laser for HMI enhancement, HPC processors for AI, memory devices for data storage density expansion, and multi-cam and OLED for smartphone spec upgrades. We believe the 5 themes of 3D, FO, HPC, memory and multi-cam will continue to shine from an investment perspective, with the addition of the 5G build-up to help accelerate growth of these demand verticals, expanding their product reach to transform the global IT industry to a broad-based data economy.

3D Leveraging on their core technologies of compound semiconductors, laser players are expanding their footprint from communication lasers into consumer lasers to handle 3D sensing & imaging for consumer electronics devices in a form of VCSEL – a type of light- emitting technology (see our Asian OSC report: A whole new world, 28 June 2017). As mentioned, we expect 3D VCSEL to substantially enhance HMI, with smartphones seen as the first leg driving phase-1 growth, automotive applications such as laser headlights and light detection and ranging (LiDAR) driving phase-2 growth, and other IoT applications such as AI surveillance adding to the demand upside.

Our revised forecasts While we followed our 2017 3D laser report with another update (Just an early-cycle call for the 3D VCSEL correction, 27 June 2018) and cut forecasts at both market and company levels to reflect market to expand at an the VCSEL inventory glut on poor iPhone X sell-through and inflated demand due to the 80% CAGR over 2018-20 supply-chain yield issues, we are further reducing our forecasts for the consumer laser market by 20% to USD2.4bn for 2018 to factor in the single-customer risk associated with Apple, the primary promoter of the 3D laser sensing technology in the smartphone space, as sell-through across iPhone XR/XS/Max does not appear to have unfolded well. Accordingly, against the backdrop of a lower penetration trajectory, where we cut the 3D smartphone penetration by 6-20pp over 2018-20E, we lower our market forecast by 17- 20% for the same period in dollar terms (see charts, next page).

Nevertheless, we still see these revisions as an early-cycle correction which does not weigh on our positive stance on the 3D VCSEL market’s high-growth profile. We now forecast the consumer laser market to expand at an 80% CAGR over 2018-20 to reach USD8bn on the rising adoption by Android smartphone vendors, where we forecast 3D penetration to exceed 20% in 2020, from 7% in 2018 and a mid-to-high-teen level in 2019. We forecast this market to exceed USD30bn in 2025 for a CAGR of 45% over 2018-25, when automotive LiDAR ramps up to overtake smartphones as the second leg of the demand growth.

2019 Technology Outlook: 7 January 2019

Global consumer laser market forecasts* 3D VCSEL penetration in smartphones* USDm 100% 40,000 400% 35,000 350% 80% 30,000 300% 25,000 250% 60% 20,000 200% 40% 15,000 150% 10,000 100% 20% 5,000 50% 0 0% 0% 2016 2017 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Smartphone Automotive Others** Growth (RHS) Current Previous (June 2018)

Source: Daiwa estimates & forecasts Source: Daiwa estimates & forecasts Note: * Values at the final module level; ** Others include AI surveillance, gaming, IIoT and Note: * Using depth cameras as a proxy other IoT applications

Global laser sensing and imaging food chain (consumer laser)

Epiwafer growing Chip fabrication Optical subassembly Module assembly

Merchant Foundry OSAT Subcontractor IQE, Sumika, VPEC, IntelliEPI, WinSemi, HLJ, AWSC, GCS eLASER, Inari LG Innotek, Globetronics, Sharp, LMO O-Film, Q-Tech, Sunny Opotech IDM IDM IDM Lumentum, II-VI (Finisar), ams Lumentum, II-VI (Finisar), ams IDM Lumentum, II-VI (Finisar), HLJ, (Princeton), Philips Photonics, (Heptagon), Philips Photonics, Lumentum (LGI, Sharp), ams WinSemi, Sumitomo Sumitomo, Osram (Vixar) Sumitomo, Osram (Globetronics), Philips Photonics

Source: Daiwa Key beneficiaries In the 3D laser space, we For the 3D theme, our focus stocks for investment remain: 1) WinSemi for its 6” wafer- recommend WinSemi, capacity leadership in the gallium-arsenide (GaAs) VCSEL foundry market, and strategic LGI and Globetronics business relationship with Lumentum (LITE US, not rated), 2) Globetronics for its close business ties with ams (we believe both will excel in the consumer laser space), and 3) LGI for its strategic role as part of the Lumentum supply chain offering laser camera module assembly. IQE should benefit from this fast-growing consumer laser demand, given its largest share position in the global communication-epiwafer market, in our view. As the consumer laser market is still at a very early stage, newcomers are worth watching for potential business opportunities, such as VPEC, HLJ and II-VI (which is acquiring Finisar), as well as Osram, which acquired the VCSEL designer Vixar in 2018 and is working with Inari for VCSEL back-end packaging and testing with a view to tapping into the supply chain of a Korea-based smartphone vendor, according to our market research. Also, we expect LMO and Sony to be potential beneficiaries in this space as we believe they are working together on ToF solutions for a major smartphone vendor.

FO Bandwidth upgrades for In our optical communication (OC) initiation report (Head for the leading lights, 17 February datacom, telecom and 2016), we concluded that in global IT demand evolution, although it takes time for the 5G interconnectivity BigData/IoT cycle to ramp up in scale and bridge the transitional gap with the MCD cycle, the OC sector should ramp up ahead of the pack due to its infrastructure position in the IT industry handling bandwidth upgrades in wireline communication infrastructure for both telecom and datacom. As discussed previously, in the wireless data communication, we expect the 5G cellular cycle to kick off from 2019 to help ease the bandwidth mismatch and complete the entire data transmission ecosystem. This should add to demand upside for high-bandwidth FO transceivers to handle the 5G B/S interconnectivity.

2019 Technology Outlook: 7 January 2019

Global OC market forecasts (communication laser) Global SiPh market forecasts USDm USDm 120,000 30% 8,000 200% 7,000 100,000 20% 6,000 150% 80,000 10% 5,000 60,000 4,000 100% 0% 40,000 3,000 2,000 50% 20,000 (10%) 1,000 0 (20%) 0 0% 2011 2012 2013 2014 2015 2016 2017 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Datacentre FTTX MSA infrastructure Growth (RHS) Current forecasts Previous forecasts (June 18) Growth (RHS)

Source: PTIDA, Daiwa estimates & forecasts Source: Daiwa estimates & forecasts

We forecast the OC Comprising 3 demand segments of FTTX (telecom), datacentre (datacom) and MSA market to pass its trough infrastructure (cellular connectivity & others), we believe the global OC market is still intact and grow at a 13% CAGR post the 2017 inventory correction in China’s FTTX market, with demand being driven by over 2018-20 10G PON upgrades at China’s access points and continued bandwidth expansion at datacentres, from 10/40G to 25/100G and even 400G. We therefore leave our forecasts unchanged (see our OSC update, Just an early-cycle correction, 27 June 2018), and expect the OC market to reach USD69bn in 2020 with a CAGR of 13% over 2018-20E. We estimate the market rebounded by 23% YoY in 2018 to USD54bn, post the 2017 inventory correction.

One variance, however, was on silicon-photonics (SiPh) demand, which ended up taking a pause in 2018 after strong 155% YoY growth, on our estimates, due to Intel’s product transition from 100G to 400G. We cut our SiPh market forecast by 3-17% in dollar terms over our forecast period to factor in this product transition. But we expect SiPh demand to resume its high-growth profile in 2019 on share gains against the pure compound- semiconductor incumbents in the datacentre market, as this product transition is complete (see our LMO note, Roadblock removed; recovery likely to resume, 30 July 2018). We now forecast the SiPh market to expand by 80% YoY in 2019, with its size reaching USD2.4bn in 2020 on a CAGR of 66% over 2018-20E.

Key beneficiaries LMO and Inari are our As depicted in the chart on the next page for the OC food chain, we believe the biggest focus in the OC space value proposition lies in fully integrated device manufacturers (IDM) such as Broadcom (AVGO US, USD230.96, Buy [1]), Lumentum and Finisar (FNSR US, NR) (now in the process of being acquired by II-VI), as well as upstream epiwafer makers due to their high technology entry barriers relative to downstream optical subassembly (OSA) makers and module assemblers. In the epiwafer-growing segment of the chain, our investment focus remains on LMO – one of the global leaders in the merchant market for optical contract manufacturers, in addition to IQE. VPEC looks to be another name to watch, given its expanded footprint in the OC epiwafer supply.

Elsewhere in the OC food chain, Inari stands to benefit given its strategic position in the Broadcom food chain. We also see PCL Tech as one to watch in the Broadcom food chain. WinSemi is likely to gain potential in the communication laser business with its ambitions of penetrating high-value epiwafer growing and chip foundries, on top of its leadership in 3D VCSEL foundries. We think Accelink is also worth watching in view of its leadership in China’s OC industry.

2019 Technology Outlook: 7 January 2019

Global FO transceiver food chain

Epiwafer growing Chip fabrication Optical subassembly Module assembly

Merchant Foundry OSAT Subcontractor LMO, IQE, Sumika, VPEC, GCS, Emcore, 44 Institute, PCL Tech, eLASER, ShunSin, PCL Tech, Sercomm, SGEC, etc IntelliEPI WinSemi, Inari Amertron Inari, ASE, Amkor, Venture IDM IDM IDM IDM Broadcom, Sumitomo, Broadcom, Sumitomo, Broadcom, Sumitomo, Broadcom, Sumitomo, Lumentum (Oclaro), II-VI Lumentum (Oclaro), II-VI Lumentum (Oclaro), II-VI Lumentum (Oclaro), II-VI (Finisar), AAOI, Qorvo (TriQuint), (Finisar), AAOI, Qorvo (TriQuint), (Finisar), Qorvo (TriQuint), AAOI, (Finisar), AAOI, Qorvo (TriQuint), NeoPhotonics, Source Photonics NeoPhotonics, Source NeoPhotonics, Source NeoPhotonics, Source , Oplink, IPG Photonics, Philips Photonics, Oplink, IPG Photonics, IPG Photonics, Photonics, Oplink, IPG Photonics, Accelink, InnoLight, Photonics, Philips Photonics, Oplink, Philips Photonics, Photonics, Philips Photonics, MACOM, MELCO, Ezconn WinSemi Accelink, InnoLight, TrueLight, Accelink, InnoLight, TrueLight, LuxNet, MACOM, MELCO, LuxNet, MACOM, MELCO, Ezconn Ezconn

Source: Daiwa

HPC We expect the AI HPC As mentioned, we believe HPC processors in different form factors of xPU, FPGA and market to see a 30% ASIC should be the key product focus in this domain to implement AI across the CAGR over 2018-20 BigData/IoT ecosystem, from the cloud to edge computing. We forecast the global HPC market to reach USD38bn in 2020 from USD22bn in 2018 (+37% YoY) at a CAGR of 30%, which is 6% higher than our previous forecasts in January 2018 (see 2018 Technology Outlook, 2 January 2018, page 28), despite weaker-than-expected smartphone demand, thanks to stronger demand from datacentres. We note Nvidia’s datacentre-related sales totalled USD2.25bn for 9M18, up 70% YoY, while Intel’s datacentre group (DCG) sales came in at nearly USD17bn for the same period, up 26% YoY. Our US-based analyst Louis Miscioscia forecasts Nvidia’s datacentre revenue to reach USD5.6bn in FY21 at a CAGR of 32%, from USD3.2bn in FY19 (+65% YoY) (see report, For today and the future of massive computing, 10 October 2018).

Against the backdrop of still low AI penetration in the global datacentre market, in terms of accelerators attached for data training and inference, we reiterate our high-growth profile for the HPC market. We forecast AI penetration in datacentres to approach 20% in 2020 vs. 14% in 2018, whereas the attach rate of accelerators for data training will reach only 3% in 2020 vs. 1.4% in 2018 and 0.8% in 2017, suggesting ample room for growth of HPC processors that handle data training. HPC processors for datacentres and autonomous driving should be our growth focus in the next few years as they are new demand, as opposed to the AI processors used in smartphones, which are replacement demand.

Global AI HPC processor market forecasts AI HPC processor penetration in datacentres USDm 35% 80,000 100% 30% 70,000 80% 60,000 25% 50,000 60% 20% 40,000 30,000 40% 15% 20,000 20% 10% 10,000 0 0% 5% 0% 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2016 2017

AI smartphone AI datacentre ADAS 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E IIoT & others* Growth (RHS) Total AI penetration Data training Data inference

Source: Daiwa estimates & forecasts Source: Company, Daiwa forecasts Note: * Others include supercomputer accelerators, AIaaS cloud, etc.

2019 Technology Outlook: 7 January 2019

Global HPC supply chain*

Processor design Chip fabrication Chip packaging & testing End-market application

Fabless / system Foundry OSAT Datacentre Nvidia, AMD, Xilinx, Huawei TSMC, SEC (foundry division), ASE Technology Holding, JCET, hyper-scale Internet operators of (HiSilicon), Google, Qualcomm, Amkor, KYEC, CHPT (probe FAAMG and BAT MediaTek, IBM materials) IDM ADAS Intel, SEC IDM System makers such as Delphi, IDM Intel, SEC, TSMC (2.5/3D IC Bosch, Autoliv, Denso, etc. Intel, SEC packaging captive) Smartphone Apple, SEC, Huawei, etc.

IIoT & others Embedded computing system makers such as Advantech, Adlink, Ennoconn, etc.

Source: Daiwa Note: * FAAMG = Facebook, Amazon, Apple, Microsoft and Google; BAT = Baidu, Alibaba and Tencent

Key beneficiaries We see xPU vendors focusing on AI accelerators for datacentres’ cloud computing (data training) and AI processors for self-driving cars’ edge computing (data inference) as perhaps capturing the most value of the HPC supply chain, given these are new demand and not replacement demand. Nvidia has so far dominated in this domain, while challengers such as AMD, Xilinx, Qualcomm and MTK are emerging to fight for business in the 2 market segments; also, incumbents like Intel have tried to defend their positions through a slew of acquisitions.

In Asia, key beneficiaries Furthermore, ever since Google came up with its own datacentre solution named TPU are TSMC, MTK, ASE and handling AI, we note a trend of some hyper-scale datacentre operators such as Amazon, Advantest together with some system vendors like Huawei, working on their own ASIC as a substitute for merchant suppliers’ solutions. While this trend is likely to dilute the business potential of these merchant suppliers, we expect TSMC to be immune from this trend and benefit the most, as with the exceptions of SEC and Intel, all the HPC processor makers (merchants, datacentre operators or system vendors) are fabless and use TSMC as their primary foundry thanks to TSMC’s dominance in the cutting-edge process technologies best suited to these HPC processors.

In addition, we believe ASE stands to benefit in the OSAT space from its offerings of advanced back-end semiconductor services such as fan-out (FO) and other 2.5/3D IC packaging technologies to these customers, as they seek diversification to lessen their dependence on TSMC. Elsewhere, we see Chunghwa Precision Test Tech (CHPT) as another potential back-end beneficiary with its offerings of integrated wafer-probe products for these advanced HPC processors. Advantest, offering advanced logic testers, here also stands to benefit, in our view.

Multi-cam We lift our 2019-20 multi- Since compact CMOS image sensor (CIS) cameras became an efficient HMI riding on the cam penetration forecast smartphone cycle for data access, consumers have started pursuing higher picture quality, by 5-8pp to factor in resulting in constant spec upgrades in optical HMI, such as resolution, optical zoom, form rising triple-cam factor, and, more importantly, the number of cameras per smartphone. We note that 2018 adoption was a milestone year in which the industry started pushing for triple-cam solutions, leading to 80% YoY growth for multi-cam-configured smartphones in volume terms with c.30% penetration of the total smartphone market, up from 17% a year ago. In value terms, we estimate the total smartphone camera market at USD18.8bn in 2018, up 10% YoY, with the rear-cam segment growing by 16% YoY to USD13bn (see charts, next page).

2019 Technology Outlook: 7 January 2019

Multi-cam penetration in the smartphone market Smartphone camera market forecasts: front vs. rear m units USDm 1,800 60% 30,000 50% 1,600 50% 25,000 1,400 40% 1,200 40% 20,000 30% 1,000 30% 15,000 800 20% 600 20% 10,000 400 10% 10% 5,000 200 0 0% 0 0% 2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2018E 2019E 2020E Multi-cam Single-cam Multi-cam penetration Rear-cam Front-cam Rear-cam growth Total-cam growth

Source: Daiwa estimates & forecasts Source: Daiwa estimates & forecasts

We lift our forecast trajectory of multi-cam penetration within the smartphone market by 5- 8pp to 44% for 2019 and 56% for 2020, resulting in a 43% CAGR over 2018-20E for multi- cam-configured smartphones in volume terms, or a 27% CAGR for the rear-cam segment in value terms, considering a high single-digit percentage price erosion pa. The multi-cam spec upgrade remains our preferred multi-year growth theme in the muted smartphone space, with further growth to be driven by the rise of triple-cam adoption where iPhones could play a key role in terms of incremental growth in 2019 (The more the merrier: multi- cameras are the next mega trend in smartphones (Part 4), 14 November 2018). We expect triple-cam penetration to accelerate to 11% in 2019 and 21% in 2020, from 1% in 2018.

Key beneficiaries Our multi-cam picks are In the multi-cam supply chain, we continue to prefer industry leaders in segments of Sony, Largan, Sunny upstream CIS and downstream components. We like Sony for its global leadership in the Optical and SEMCO CIS chip supply, with exposure to both the iOS and Android platforms and further diversification into automotive and 3D sensing applications. Largan is our preference in Taiwan for its global leadership in camera lens-set supply, which, similar to Sony, has seen Largan riding multi-cam upgrades from both the iOS and Android platforms. Sunny Optical is our preference in Hong Kong for its global leadership in the automotive lens-set market, as well as share gains in the Android smartphone camera module market, with 3D sensing adding to the business upside. Elsewhere, we like SEMCO and LGI at the module end of the Korean food chain.

Smartphone camera module chain

CIS wafer fabrication CIS chip packaging & test Key component manufacture Camera module assembly

IDM XinTec Lens set Lite-On Tech Sony, SEC, Canon, OnSemi, Kingpak Largan, Kantatsu, SEMCO, Sunny Optical Toshiba, STMicro, Nikon Terrasem Co Sunny Optical, Genius, Glorytek, SEMCO Lite-On Sekonix, Kolen, Diostech, AAC LG Innotek Fabless Tong Hsing Primax OVTi, Aptina, GalaxyCore, VCM/OIS Cowell PixArt, Novatek Alps, Mitsumi, TDK O-Film Truly Foundry Qtech TSMC, SMIC (LFoundry), Sharp Vanguard, UMC Hon Hai

Source: Daiwa

2019 Technology Outlook: 7 January 2019

Memory We think the upturn in Similar to bandwidth upgrades for data transmissions and computing upgrades for data memory could last processes, memory devices have been benefiting from the BigData/IoT cycle for nearly 2 longer, though we don’t years through density upgrades for data storage, permanently or temporarily, after data is rule out possibility of a processed and transmitted. Specifically, NAND flash has been benefiting from rising mid-cycle correction demand for enterprise SSD at datacentres for data storage, while DRAM has seen rising demand from servers for in-memory compute. Both factors come on top of the rising demand for memory density from smartphones due to spec upgrades such as multi-cam and 3D sensing that spur data consumption.

The upturn in the memory market has lasted for nearly 2 years since it recovered in 2H16, raising concerns about oversupply from the capital markets as this sector’s upcycles have historically run for 2 years on average. But, despite the oversupply concerns, we disagree with these market jitters and expect the memory market to remain healthy into 2019, thanks to the diversified demand verticals under the BigData/IoT cycle. That said, we do not rule out the possibility of a mid-cycle correction in 1H19 due to poor smartphone sell- through and over-restocking in 1H18 from datacentres.

According to Daiwa’s Korean tech team (Korea Memory: Slowdown in technology migration likely to drive another good year in 2019, 31 August 2018), DRAM supply should remain tight in 2019 despite some easing in 1H19, due to supply constraints on slow 1x/1ynm tech migration. As for NAND, favourable supply/demand (S/D) conditions look to have reversed in 2H18 due to yield improvements for 64-layer 3D NAND, but within a manageable range, in our opinion, which points to a limited risk of large price swings that would impact suppliers’ structural profitability. We forecast the S/D ratio to improve in 2H19 on continued robust demand plus limited supply from slow 9x-layer 3D NAND migration.

Key beneficiaries In the memory space, we Supply constraints have been an issue in the memory space due to delays in technology like SEC and SK Hynix migration, yield ramp-up and capex discipline, in our view. For DRAM, migration from 2xnm to 1x/1y nm has been bumpy, while migration to 9x-layer 3D NAND has deterred volume ramp-up due to capacity and yield losses during the conversion. All of these developments at the supply end, combined with robust demand at the other end of the equation, thanks to the BigData/IoT cycle driving diverse applications, mean SEC and SK Hynix remain our preferred stocks for investment in the Asian memory space.

Global DRAM supply/demand forecasts Global NAND supply/demand forecasts m units (1Gb equ.) m units (16Gb equ.) 40,000 2% 45,000 2% 35,000 40,000 1% 1% 30,000 35,000 30,000 25,000 0% 0% 25,000 20,000 20,000 15,000 (1%) (1%) 15,000 10,000 (2%) 10,000 (2%) 5,000 5,000 0 (3%) 0 (3%) 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18E 1Q19E 2Q19E 3Q19E 4Q19E 4Q18E 1Q19E 2Q19E 3Q19E 4Q19E Demand Supply S/D sufficiency (RHS) Demand Supply S/D sufficiency (RHS)

Source: Daiwa forecasts Source: Daiwa forecasts

Technology migration roadmap comparison: DRAM 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18E 1Q19E 2Q19E 3Q19E 4Q19E

SEC 20nm 1xnm 1ynm SK Hynix 25nm 21nm 1xnm 1ynm 2xnm 20nm 1xnm 1ynm Micron Source: Company, Daiwa forecasts

2019 Technology Outlook: 7 January 2019

Technology migration roadmap comparison: NAND 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18E 1Q19E 2Q19E 3Q19E 4Q19E

SEC 16nm 1znm V-NAND V24/V32 V48 V64 V9x Toshiba 1Z 1z+nm V-NAND N/A V48 V64 V96 Micron 16nm 1znm V-NAND N/A V32/48 V64 V96 SK Hynix 16nm 1znm N/A V36 V48 V72 V-NAND Source: Company, Daiwa forecasts

Risks to our sector view Trade tensions are the The trade tensions between China and the US that blew up in 2018 appear to be the main primary risk to our call risk to our call on tech, as the issue has begun to interrupt supply-chain management and prolonged FX fluctuations in Asia, though a massive relocation of production sites remains to be seen. A rise in these tensions could add to macro headwinds and weigh on our bullish stance on incremental demand from the non-smartphone BigData/IoT cycle.

5G cellular migration Meanwhile, the US investigation of Huawei’s senior management has raised investor concerns over the company’s supply chain in Asia, and could impact telecom equipment sales in the possible absence of key component supply from US vendors. Accordingly, this could prolong the 5G build-up cycle and have a domino effect as other demand verticals under the BigData/IoT cycle may not ramp up without 5G, such as self-driving cars.

3D sensing We view 3D laser sensing & imaging as a disruptive technology in HMI that will change the way humans interact with machines, with broad applications first from smartphones followed by automotive. If this trend fails to materialise as a secular trend, perhaps due to unresolved technological bottlenecks that keep costs high, our forecasts for leading players in this supply chain could see meaningful downside risk.

Datacentre upgrade Surging data consumption has spurred demand for datacentre upgrades, including data transmission bandwidth, processing power and storage space, leading to our investment themes of FO, AI HPC and density upgrades. Any slowdown in this datacentre demand trend could weigh on leading players exposed to these themes, as well as their related SCM partners and food-chain suppliers.

2019 Technology Outlook: 7 January 2019

Appendix 1: global chip inventory monitor

Global chip inventory monitor (quarterly)* Day Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Fabless (13) XLNX 105 97 101 102 103 106 105 106 111 107 107 97 QCOM 49 56 50 52 65 82 75 69 67 75 66 56 NVDA 63 67 69 67 77 94 82 73 68 64 75 91 Cirrus Logic 70 109 102 66 54 90 106 88 74 121 133 79 MRVL 77 72 63 64 69 70 67 67 65 68 102 83 MTK 70 67 59 63 72 88 93 85 76 89 86 83 Realtek 64 60 62 61 70 73 85 90 86 78 82 90 Sunplus 103 106 92 89 81 93 88 88 96 109 91 106 Novatek 49 55 57 51 53 56 57 60 59 65 55 51 Himax 116 121 113 100 89 114 117 86 89 102 95 91 Siliconlab 73 71 72 73 72 75 76 78 81 84 87 79 Dialog Semi 58 98 102 69 57 62 80 82 64 79 81 64 AMD 97 110 91 55 92 111 93 69 72 63 61 68 Fabless aggregate 73 72 65 60 71 87 83 75 71 75 75 72 IDM (13) Intel 87 89 95 91 83 92 98 99 101 102 101 99 Cypress 78 73 70 66 74 84 81 73 68 68 66 64 IFX 106 103 104 102 106 101 100 100 102 102 102 106 STM 103 108 104 99 95 95 95 91 83 94 101 94 TXN 119 135 133 120 128 132 131 120 135 136 135 132 ADI 128 137 122 104 101 91 80 91 105 106 101 104 Skyworks 55 71 93 96 86 93 95 92 84 93 100 90 Agilent 102 103 100 94 100 98 98 96 100 98 102 98 NXP 122 93 94 82 82 91 95 93 92 103 106 100 On Semi 122 127 121 134 110 100 109 107 112 119 120 116 Broadcom 66 78 83 75 79 77 75 73 66 68 67 61 Qorvo 94 108 95 74 74 93 102 85 79 99 97 84 Maxim 118 98 96 95 99 102 107 111 108 108 118 122 IDM aggregate 100 97 99 92 91 96 97 95 95 98 99 96 IDM aggregate ex-Intel 108 101 102 92 96 98 97 92 92 96 97 95 Total aggregate inventory 91 89 89 83 85 93 93 89 88 93 93 90 Total aggregate inventory ex-Intel 92 89 86 80 86 93 91 86 84 90 90 86

Source: Company, Daiwa estimates Note: * Q-Logic was acquired by Cavium which was then acquired by MRVL; ALTR acquired by Intel; BRCM acquired by AVGO; Richtek acquired by MTK; Freescale acquired by NXP: Fairchild acquired by On Semi; PMC Sierra acquired by Microsemi which was then acquired by Microchip; OVTi was privatised; RFMD and TriQuint merged into Qorvo

2019 Technology Outlook: 7 January 2019

Appendix 2: global chip revenue and guidance monitor

Global chip revenue and guidance monitor (quarterly) Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 December-quarter guidance QoQ growth USDm mid hi low mid hi low Fabless XLNX 615 620 631 673 684 746 770 780 760 3% 5% 2% QCOM 5,371 5,905 6,068 5,261 5,599 5,803 4,900 5,300 4,500 -16% -9% -22% NVDA 2,230 2,636 2,911 3,207 3,123 3,181 2,700 2,754 2,646 -15% -13% -17% MRVL 605 616 615 605 665 851 810 830 790 -5% -2% -7% Cirrus Logic 321 426 483 303 254 366 320 340 300 -13% -7% -18% MTK 1,917 2,101 2,007 1,695 2,036 2,183 2,008 2,094 1,922 -8% -4% -12% Realtek 328 361 359 363 375 394 394 396 392 0% 1% 0% Sunplus 60 61 55 49 61 50 48 48 48 -5% -5% -5% Novatek 390 409 397 357 447 513 482 489 476 -6% -5% -7% Himax 152 197 181 163 181 188 193 198 188 3% 5% 0% Silicon Lab 190 199 201 205 217 230 224 227 221 -3% -1% -4% Dialog Semi 256 363 464 332 296 384 450 470 430 17% 23% 12% AMD 1,222 1,643 1,480 1,647 1,756 1,653 1,450 1,500 1,400 -12% -9% -15% Total fabless 13,657 15,536 15,852 14,859 15,695 16,543 14,749 15,426 14,073 -11% -7% -15% IDM Intel 14,763 16,149 17,053 16,066 16,962 19,163 19,000 19,000 19,000 -1% -1% -1% Cypress 594 605 598 582 624 673 600 615 585 -11% -9% -13% Infineon 2,014 2,002 1,953 2,020 2,135 2,252 2,162 2,207 2,117 -4% -2% -6% STM 1,923 2,136 2,466 2,226 2,269 2,522 2,398 2,478 2,319 6% 9% 2% TXN 3,693 4,116 3,750 3,789 4,017 4,261 3,750 3,900 3,600 -12% -8% -16% Skyworks 901 985 1,052 913 894 1,008 1,010 1,020 1,000 0% 1% -1% ADI 1,434 1,541 1,519 1,513 1,573 1,597 1,510 1,560 1,460 -5% -2% -9% Agilent 1,114 1,189 1,211 1,206 1,203 1,294 1,273 1,280 1,265 -2% -1% -2% NXP 2,202 2,387 2,456 2,269 2,290 2,445 2,390 2,465 2,315 -2% 1% -5% On Semi 1,338 1,391 1,378 1,378 1,456 1,542 1,505 1,530 1,480 -2% -1% -4% Maxim 602 576 623 649 633 638 590 610 570 -8% -4% -11% Broadcom* 4,463 4,844 5,327 5,014 5,063 5,444 na na na na na na Qorvo 641 822 846 665 693 884 890 900 880 1% 2% -1% Total IDM 35,681 38,742 40,230 38,290 39,812 43,723 na na na na na na Total sales 49,338 54,278 56,082 53,149 55,507 60,267 na na na na na na Growth (QoQ) Total 4% 10% 3% -5% 4% 9% Fabless 9% 14% 2% -6% 6% 5% IDM 3% 9% 4% -5% 4% 10% Growth (YoY) Total 8% 7% 10% 13% 13% 11% Fabless 1% 3% 9% 18% 15% 6% IDM 11% 8% 11% 10% 12% 13% Mix Fabless 28% 29% 28% 28% 28% 27% IDM 72% 71% 72% 72% 72% 73%

Source: Company, Daiwa estimates Note: * Broadcom no longer offers quarterly guidance

2019 Technology Outlook: 7 January 2019

Company Section

Taiwan Information Technology 7 January 2019

MediaTek (2454 TT) Medi aTek

Target price: TWD280.00 (from TWD310.00) Share price (3 Jan): TWD223.50 | Up/downside: +25.3%

Business transformation paying off Rick Hsu (886) 2 8758 6261  Growth platform is bearing fruit and driving a recovery [email protected]  5G will likely follow suit to sustain business growth Robert Hsu (886) 2 8758 6251  Reiterating our Buy (1) rating; cutting our TP to TWD280 [email protected]

What's new: We see the business transformation at MediaTek (MTK) as Forecast revisions (%) paying off, as evidenced by its growth-platform (GP) products exceeding Year to 31 Dec 18E 19E 20E 30% of revenue and helping diversify its smartphone competition risks. Revenue change (1.5) (5.9) (5.9) Despite its continued tangle with Qualcomm over market share, MTK’s GP Net profit change (2.0) (14.3) (8.2) should continue to drive business growth in 2019, with 5G migration seen Core EPS (FD) change (2.0) (14.3) (8.2) sustaining this growth into 2020. Despite our forecast cuts on muted Source: Daiwa forecasts smartphone demand in the near term, we reiterate our Buy (1) call with a Share price performance new TP of TWD280. MTK remains our preferred fabless exposure in Asia. (TWD) (%) 365 120

What's the impact: 4Q18 preview. MTK’s October-November cumulative 324 109 revenue of TWD39.5bn finished at 62% of our previous estimate, 283 98 suggesting a subdued run-rate, likely on intense competition amid muted 241 86 smartphone demand. We lower our 4Q18 revenue estimate by 6% to 200 75 TWD60bn, and cut our 2018-20E EPS by 2-14% on a lower trajectory of Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Mediatek (LHS) smartphone market-share gains and ASP assumptions. We now expect Relative to TWSE Index (RHS) MTK to earn TWD2.76/share for 4Q, vs. the consensus estimate of TWD3.12. MTK aims to sustain its margin recovery in 2019 on an improved 12-month range 202.00-362.00 product mix across/within its 3 product platforms, plus synergies in its TV Market cap (USDbn) 11.52 SoC business from the MStar merger; we concur. 3m avg daily turnover (USDm) 34.85 Shares outstanding (m) 1,592

Major shareholder BLACKROCK (5.3%) GP to drive growth. In our upgrade note, Diversification efforts paying off, we highlighted that MTK had completed its business transformation from Financial summary (TWD) smartphone-centric and embraced the BigData/IoT demand cycle, as Year to 31 Dec 18E 19E 20E evidenced by its GP revenue outgrowing the corporate average and lifting Revenue (m) 237,585 260,378 307,814 this revenue contribution to over 30%. We maintain this view and expect its Operating profit (m) 16,639 26,130 37,876 Net profit (m) 21,359 25,654 35,778 GP business to outgrow further in 2019, lifting the revenue contribution to Core EPS (fully-diluted) 13.421 16.119 22.481 >35% by 4Q19E, thanks to commercialisation of its datacentre ASIC, on EPS change (%) (12.8) 20.1 39.5 top of its existing integrated solutions for IoT/NB-IoT, gaming and Daiwa vs Cons. EPS (%) 0.1 9.2 24.8 blockchain applications. PER (x) 16.7 13.9 9.9 Dividend yield (%) 4.5 4.5 5.1 DPS 10.0 10.0 11.5 5G to sustain growth. Earlier than we expected, MTK introduced its first PBR (x) 1.4 1.3 1.2 5G discrete modem chip, Helio M70, in December 2018 for operators’ EV/EBITDA (x) 10.6 6.9 4.9 connectivity tests in China to accommodate base-station upgrades. ROE (%) 8.2 9.7 12.8 Although volume might not be meaningful during the initial stage, we Source: FactSet, Daiwa forecasts expect MTK to roll out its SoC solution (AP + modem) in 2020, which should help revenue ramp meaningfully, with the volume increase to be amplified by higher ASP as the 5G SoC will likely be priced >2x higher than the 4G counterpart, though gross margins may not necessarily rise.

What we recommend: Despite our forecast cuts, we reiterate our Buy (1) rating with a revised 12-month TP to TWD280 (from TWD310), based on an unchanged 4-quarter forward PER of 17x. Key downside risks: worse- than-expected smartphone competition or GP business ramp-up.

How we differ: Our 2019-20E EPS are 9-25% above the consensus, likely due to our more positive view on the GP and 5G business ramp-up.

See important disclosures, including any required research certifications, beginning on page 115

MediaTek (2454 TT): 7 January 2019

Financial summary Key assumptions Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Smartphone chipset ASP (US$) 11.37 10.35 8.20 9.05 8.32 7.81 7.19 7.00 Smartphone shipset shipment ('000) 198 357 402 513 418 370 412 525 Total handset market share (%) 24.9 34.4 35.4 38.8 31.3 27.4 29.3 34.0

Profit and loss (TWDm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Optical Storage Revenue 15,925 15,150 15,823 18,615 16,195 15,443 14,921 14,376 Digital Home Revenue 14,648 42,748 46,400 51,807 46,349 46,459 46,974 45,760 Other Revenue 105,483 155,165 151,032 205,090 175,672 175,683 198,483 247,678 Total Revenue 136,056 213,063 213,255 275,512 238,216 237,585 260,378 307,814 Other income 0 0 0 0 0 0 0 0 COGS (76,250) (109,194) (121,076) (177,322) (153,330) (146,223) (159,713) (187,668) SG&A (8,108) (13,290) (16,743) (19,429) (17,896) (17,743) (18,049) (20,707) Other op.expenses (26,454) (43,337) (49,529) (55,685) (57,171) (56,979) (56,485) (61,563) Operating profit 25,244 47,241 25,908 23,076 9,819 16,639 26,130 37,876 Net-interest inc./(exp.) 1,609 2,647 2,272 1,959 1,714 1,661 2,032 2,250 Assoc/forex/extraord./others 2,694 2,462 1,189 2,178 15,705 6,248 1,715 1,720 Pre-tax profit 29,547 52,350 29,368 27,213 27,237 24,548 29,877 41,846 Tax (2,062) (5,951) (3,599) (3,182) (3,167) (3,095) (4,074) (5,858) Min. int./pref. div./others 30 (1) 190 (330) 263 (95) (149) (209) Net profit (reported) 27,515 46,398 25,959 23,701 24,333 21,359 25,654 35,778 Net profit (adjusted) 27,515 46,398 25,959 23,701 24,333 21,359 25,654 35,778 EPS (reported)(TWD) 20.508 30.039 16.600 15.156 15.557 13.421 16.119 22.481 EPS (adjusted)(TWD) 20.508 30.039 16.600 15.156 15.557 13.421 16.119 22.481 EPS (adjusted fully-diluted)(TWD) 20.391 29.526 16.518 14.981 15.391 13.421 16.119 22.481 DPS (TWD) 9.000 15.181 22.000 11.000 9.534 10.000 10.000 11.500 EBIT 25,244 47,241 25,908 23,076 9,819 16,639 26,130 37,876 EBITDA 26,971 50,007 31,042 29,972 17,029 23,953 34,116 47,259

Cash flow (TWDm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Profit before tax 29,547 52,350 29,368 27,213 27,237 24,548 29,877 41,846 Depreciation and amortisation 1,727 2,766 5,134 6,896 7,210 7,313 7,986 9,383 Tax paid (2,062) (5,951) (3,599) (3,182) (3,167) (3,095) (4,074) (5,858) Change in working capital 5,374 (14,258) (3,881) (5,604) 9,923 (11,000) 7,000 (16,000) Other operational CF items 4,987 9,423 (3,646) 7,225 (19,855) (95) (149) (209) Cash flow from operations 39,573 44,330 23,376 32,548 21,348 17,672 40,639 29,162 Capex (1,629) (9,828) (9,368) (6,671) (4,053) (4,752) (5,208) (6,156) Net (acquisitions)/disposals (369) (4,741) (6,438) (6,832) (7,636) 0 0 0 Other investing CF items (216) 32,370 (16,975) (2,966) 3,042 0 0 0 Cash flow from investing (2,214) 17,802 (32,781) (16,470) (8,647) (4,752) (5,208) (6,156) Change in debt 20,145 17,084 2,927 5,763 11,472 (5,057) (5,049) (5,041) Net share issues/(repurchases) 0 0 0 0 0 0 0 0 Dividends paid (12,074) (23,448) (34,403) (17,202) (14,912) (15,915) (15,915) (18,302) Other financing CF items (23) 207 (534) (13,372) (344) 0 0 0 Cash flow from financing 8,048 (6,157) (32,010) (24,810) (3,784) (20,972) (20,964) (23,344) Forex effect/others 1,724 3,825 1,897 (3,198) (4,140) 0 0 0 Change in cash 47,131 59,800 (39,518) (11,931) 4,778 (8,052) 14,468 (338) Free cash flow 37,944 34,502 14,008 25,876 17,295 12,921 35,432 23,005 Source: FactSet, Daiwa forecasts

MediaTek (2454 TT): 7 January 2019

Financial summary continued … Balance sheet (TWDm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Cash & short-term investment 139,219 205,294 166,898 154,254 170,120 162,068 176,536 176,198 Inventory 9,347 22,341 24,130 33,923 26,540 31,540 31,040 42,040 Accounts receivable 7,628 12,552 16,195 20,481 16,895 22,395 20,895 28,895 Other current assets 5,547 8,367 7,650 11,620 25,109 15,000 15,000 15,000 Total current assets 161,741 248,555 214,873 220,278 238,664 231,003 243,471 262,133 Fixed assets 11,312 23,295 34,390 36,858 36,939 38,553 39,368 40,364 Goodwill & intangibles 15,509 60,758 75,431 72,015 76,029 75,500 74,000 73,000 Other non-current assets 70,075 18,511 26,556 41,562 43,182 43,206 43,306 43,356 Total assets 258,637 351,119 351,250 370,712 394,814 388,263 400,146 418,853 Short-term debt 29,052 46,161 49,123 54,524 64,316 59,316 54,316 49,316 Accounts payable 10,944 36,735 34,566 46,044 44,110 44,084 49,584 53,084 Other current liabilities 21,389 18,724 17,577 18,779 18,832 18,857 18,849 19,541 Total current liabilities 61,385 101,620 101,266 119,347 127,257 122,257 122,749 121,942 Long-term debt 87 54 0 419 382 325 276 235 Other non-current liabilities 1,812 1,839 2,896 4,283 5,976 6,000 6,500 7,000 Total liabilities 63,283 103,513 104,163 124,049 133,615 128,582 129,525 129,176 Share capital 13,495 15,714 15,716 15,821 15,814 15,814 15,814 15,814 Reserves/R.E./others 181,821 231,454 224,712 228,958 243,998 242,573 253,664 272,929 Shareholders' equity 195,315 247,168 240,428 244,779 259,812 258,387 269,478 288,743 Minority interests 38 438 6,659 1,884 1,387 1,293 1,143 934 Total equity & liabilities 258,637 351,119 351,250 370,712 394,814 388,263 400,146 418,853 EV 245,658 197,058 244,585 258,274 251,665 254,565 234,899 229,987 Net debt/(cash) (110,081) (159,080) (117,774) (99,311) (105,422) (102,428) (121,945) (126,648) BVPS (TWD) 145.577 160.024 153.748 156.529 166.105 162.355 169.323 181.428

Key ratios (%) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Sales (YoY) 37.1 56.6 0.1 29.2 (13.5) (0.3) 9.6 18.2 EBITDA (YoY) 66.5 85.4 (37.9) (3.4) (43.2) 40.7 42.4 38.5 Operating profit (YoY) 101.9 87.1 (45.2) (10.9) (57.4) 69.5 57.0 45.0 Net profit (YoY) 75.4 68.6 (44.1) (8.7) 2.7 (12.2) 20.1 39.5 Core EPS (fully-diluted) (YoY) 58.1 44.8 (44.1) (9.3) 2.7 (12.8) 20.1 39.5 Gross-profit margin 44.0 48.8 43.2 35.6 35.6 38.5 38.7 39.0 EBITDA margin 19.8 23.5 14.6 10.9 7.1 10.1 13.1 15.4 Operating-profit margin 18.6 22.2 12.1 8.4 4.1 7.0 10.0 12.3 Net profit margin 20.2 21.8 12.2 8.6 10.2 9.0 9.9 11.6 ROAE 14.8 21.0 10.6 9.8 9.6 8.2 9.7 12.8 ROAA 11.7 15.2 7.4 6.6 6.4 5.5 6.5 8.7 ROCE 12.3 18.2 8.8 7.7 3.1 5.2 8.1 11.4 ROIC 26.1 48.2 20.9 14.7 5.7 9.3 14.8 20.9 Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Effective tax rate 7.0 11.4 12.3 11.7 11.6 12.6 13.6 14.0 Accounts receivable (days) 19.1 17.3 24.6 24.3 28.6 30.2 30.3 29.5 Current ratio (x) 2.6 2.4 2.1 1.8 1.9 1.9 2.0 2.1 Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Net dividend payout 43.9 50.5 132.5 72.6 61.3 74.5 62.0 51.2 Free cash flow yield 10.7 9.7 3.9 7.3 4.9 3.6 10.0 6.5 Source: FactSet, Daiwa forecasts

Company profile

MediaTek (MTK) was the largest fabless chipmaker in Asia and the third-largest in the world in terms of 2017 revenue, with product offerings across optical storage, digital home, smartphone, automotive and other IoT applications. It has successfully captured the industry demand cycles from optical disk drives to feature phones to smartphones, and now faced another transition to the next demand cycle of the BigData/IoT.

MediaTek (2454 TT): 7 January 2019

MTK: quarterly P&L forecasts TWDm 1Q18 2Q18 3Q18 4Q18E 1Q19E 2Q19E 3Q19E 4Q19E 2017 2018E 2019E 2020E Growth platform 15,103 18,302 21,943 18,825 18,223 21,125 25,416 26,316 51,108 74,173 91,079 116,482 Mobile platform 18,757 25,827 25,287 22,665 20,180 22,897 27,687 27,579 113,926 92,536 98,343 122,371 Legacy platform 15,793 16,352 19,800 18,930 16,904 17,260 18,683 18,110 73,182 70,875 70,956 68,961 Total revenue 49,654 60,481 67,030 60,420 55,306 61,281 71,786 72,004 238,216 237,585 260,378 307,814 COGS -30,569 -37,369 -41,206 -37,080 -34,252 -37,649 -43,918 -43,894 -153,330 -146,223 -159,713 -187,668 Gross profit 19,085 23,113 25,825 23,340 21,054 23,632 27,868 28,111 84,886 91,362 100,665 120,146 Opex -17,155 -19,020 -19,515 -19,032 -17,256 -18,384 -19,598 -19,297 -75,067 -74,722 -74,535 -82,270 Operating profit 1,929 4,092 6,310 4,308 3,799 5,248 8,270 8,813 9,819 16,639 26,130 37,876 EBITDA 3,703 5,931 8,157 6,162 5,511 7,130 10,466 11,008 17,029 23,953 34,116 47,259 Non-op gain/loss 1,183 4,665 1,342 719 950 885 935 977 17,418 7,909 3,747 3,970 Pretax profit 3,113 8,757 7,652 5,027 4,749 6,133 9,205 9,790 27,237 24,548 29,877 41,846 Income taxes -452 -1,260 -779 -603 -617 -797 -1,289 -1,371 -3,167 -3,095 -4,074 -5,858 Net profit 2,645 7,438 6,877 4,398 4,108 5,305 7,871 8,371 24,333 21,359 25,654 35,778 FD O/S (m) 1,581 1,579 1,580 1,592 1,592 1,592 1,592 1,592 1,581 1,592 1,592 1,592 FD EPS (TWD) 1.67 4.71 4.35 2.76 2.58 3.33 4.95 5.26 15.39 13.42 16.12 22.48 Margin Gross 38% 38% 39% 39% 38% 39% 39% 39% 36% 38% 39% 39% Operating 4% 7% 9% 7% 7% 9% 12% 12% 4% 7% 10% 12% EBITDA 7% 10% 12% 10% 10% 12% 15% 15% 7% 10% 13% 15% Net 5% 12% 10% 7% 7% 9% 11% 12% 10% 9% 10% 12% Revenue mix Growth platform 30% 30% 33% 31% 33% 34% 35% 37% 21% 31% 35% 38% Mobile platform 38% 43% 38% 38% 36% 37% 39% 38% 48% 39% 38% 40% Legacy platform 32% 27% 30% 31% 31% 28% 26% 25% 31% 30% 27% 22% Growth (QoQ) Total revenue -18% 22% 11% -10% -8% 11% 17% 0% Gross profit -15% 21% 12% -10% -10% 12% 18% 1% Operating profit 50% 112% 54% -32% -12% 38% 58% 7% EBITDA 17% 60% 38% -24% -11% 29% 47% 5% Net profit -74% 181% -8% -36% -7% 29% 48% 6% FD EPS -74% 182% -8% -37% -7% 29% 48% 6% Growth (YoY) Total revenue -11% 4% 5% 0% 11% 1% 7% 19% -14% 0% 10% 18% Gross profit 2% 14% 11% 3% 10% 2% 8% 20% -14% 8% 10% 19% Operating profit 59% 74% 27% 234% 97% 28% 31% 105% -57% 69% 57% 45% EBITDA 26% 43% 20% 95% 49% 20% 28% 79% -43% 41% 42% 39% Net profit -61% 214% 35% -57% 55% -29% 14% 90% 3% -12% 20% 39% FD EPS -61% 215% 35% -57% 54% -29% 14% 90% 3% -13% 20% 39%

Source: Company, Daiwa estimates & forecasts

MTK: revenue mix trend* MTK: 4-quarter forward PER bands TWD 100% 700 80% 600 500 60% 400 40% 300 20% 200 100 0% 0 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 1Q19E 3Q19E 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 Jul-16 Jul-17 Jul-18

Growth platform Mobile platform Legacy platform Share price 5x 10x 15x 20x 25x

Source: Company, Daiwa estimates & forecasts Source: Company, TEJ, Daiwa forecasts Note: * MP includes smartphone and tablet, GP includes IoT, PMIC, ASIC and STB, LP includes digital home, feature phone & optical storage

Malaysia Information Technology 7 January 2019

Inari Amertron (INRI MK) AAC Technol ogies

Target price: MYR2.25 Share price (3 Jan): MYR1.27 | Up/downside: +77%

Next growth wave

 New sensor products likely to contribute from 1Q19 Kevin Low (603) 2146 7479  RF in preparation for next ramp-up [email protected]  Reiterating BUY rating and 12-month TP of MYR2.25

What’s new: New year, new sensors. Joining the IRIS IR sensor, Inari will Forecast revisions (%) have a whole suite of sensors being placed in multiple smartphone brands, Year to 30 Jun 19E 20E 21E Revenue change - - - moving into 1Q-2Q19. The suite includes a 2D facial recognition chip, a 3D Net-profit change - - - Core EPS (FD) change - - - VCSEL chip and a health sensor. Inari has been running small builds for some of these products, although full commercialisation would likely only Source: Affin Hwang forecasts be achieved by early 2019 to cater to the new model launches. Share price performance

Speedy ramp-up of mini-LED product. The mini-LED product has (MYR) (%) 2.6 110 potential for upside. Manufactured ultimately for the largest US billboard 2.2 95 company, production is currently noted at 15m units per month. 1.9 80 Management says it sees scope for a multi-fold increase as current 1.5 65 1.2 50 demand from customers is nearly 500m units per month. Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Inari Amer (LHS) Preparing for the 5G wave. In anticipation of stronger RF testing demand Relative to FBMKLCI (RHS) ahead, we anticipate a c.25% increase in the number of RF testers (as at 12-month range 1.27-2.53 end FYE6/19) from 850 testers as at end FYE6/18. We believe the key Market cap (USDm) 970.3 driving force behind this ramp-up will be the transition from 4G to 5G, which 3m average daily turnover (USDm) 5.17 would likely see not only longer testing cycles, but also a manifold increase Shares outstanding (m) 3,166.6 Major shareholder Insas Bhd (18.4%) in RF components in mobile devices. Source: Bloomberg

What’s the impact: Stronger earnings growth trajectory. While Inari’s Financial summary (MYR) earnings from the RF segment are currently going through a lean patch due Year to 30 Jun 19E 20E 21E Revenue (m) 1,434.8 1,625.1 1,822.8 to weak demand, we anticipate stronger growth once the contribution from Operating profit (m) 382.3 456.7 515.6 the sensors suite starts to kick in from 2Q19E. We also expect better Net profit (m) 274.6 329.2 383.0 utilisation for RF testing in 2H19 as the 5G cycle begins to kick in. Core EPS (fully-diluted) 0.086 0.106 0.123 EPS change (%) 0.7 23.6 16.4 Daiwa vs Cons. EPS (%) 4.1 4.0 0.0 What we recommend: In our view, the recent pullback in the share PER (x) 14.9 12.0 10.3 price provides a good opportunity to accumulate shares at attractive Dividend yield (%) 4.9 5.8 6.8 DPS 0.062 0.074 0.086 levels and ahead of better earnings in quarters ahead. We forecast a 3- PBR (x) 3.4 3.2 2.9 year forward core earnings CAGR of 13%, underpinned by demand from its EV/EBITDA (x) 9.0 7.4 6.4 ROE (%) 24.7 27.4 29.3 customers for premium RF filters, and its sensor business. We reaffirm our BUY rating and 12-month TP of MYR2.25 based on 24x CY19E EPS. Key Source: Company, Affin Hwang forecasts downside risks: single-customer concentration and a sharp appreciation of the MYR against the USD.

How we differ: Our FY19E EPS is 4% above the market, likely as we remain upbeat on Inari’s RF expansion and the contribution from its new products.

See important disclosures, including any required research certifications, beginning on page 115

Inari Amertron (INRI MK): 7 January 2019

Financial summary Profit & Loss Statement (MYRm) FYE Jun 2017 2018 2019E 2020E 2021E Total revenue 1,176.3 1,376.0 1,434.8 1,625.1 1,822.8 Operating expenses -908.1 -1,004.1 -1,052.4 -1,168.4 -1,307.2 EBITDA 268.2 372.0 382.3 456.7 515.6 Depreciation (65.6) (79.9) (93.7) (100.1) (100.1) Amortisation 0.0 0.0 0.0 0.0 1.0 EBIT 202.5 292.0 288.7 356.6 416.6 Net interest income/(expense) 3.6 7.9 8.2 9.1 10.0 Associates' contribution 0.0 0.0 0.0 0.0 0.0 Others 0.0 0.0 0.0 0.0 0.0 Pretax profit 206.1 299.9 296.9 365.7 426.6 Tax (12.4) (35.3) (30.5) (36.6) (42.6) Minority interest (0.9) (0.1) 0.0 0.0 0.0 Net profit 227.8 260.1 274.6 329.2 383.0 Core net profit 192.9 264.5 266.4 329.2 384.0

Quarterly Profit & Loss (MYRm) FYE Jun 1Q FY18 2Q FY18 3Q FY18 4Q FY18 1Q FY19 Revenue 373.1 376.0 325.8 301.2 325.7 Operating expenses -274.3 -267.4 -231.4 -230.8 -248.7 EBITDA 98.8 108.6 94.5 70.3 77.0 Depreciation -23.2 -21.3 -22.2 -13.5 -22.5 EBIT 75.6 87.3 72.2 56.9 54.6 Net int income/(expense) 1.5 1.4 2.2 2.9 2.1 Associates' contribution Exceptional Items -3.4 -10.8 -11.9 21.7 8.2 Pretax profit 73.7 77.9 62.5 81.4 64.9 Tax -5.0 -8.8 -7.0 -14.4 -4.8 Minority interest -0.3 -0.5 -0.3 1.0 0.0 Net profit 68.4 68.6 55.2 68.1 60.2 Core net profit 71.8 79.4 67.1 46.4 52.0 Margins (%) EBITDA 26.5 28.9 29.0 23.4 23.7 PBT 19.7 20.7 19.2 27.0 19.9 Net profit 18.3 18.2 16.9 22.6 18.5

Cash flow (MYRm) FYE Jun 2017 2018 2019E 2020E 2021E EBIT 202.5 292.0 288.7 356.6 416.6 Depreciation & amortisation 65.6 79.9 93.7 100.1 100.1 Working capital changes 31.5 -53.8 -35.2 -34.4 -35.8 Cash tax paid -12.4 -35.3 -30.5 -36.6 -42.6 Others 17.1 -12.9 16.4 9.1 9.0 Cashflow from operations 304.4 270.0 333.1 394.8 447.3 Capex -119.6 -154.2 -120.0 -100.0 -100.0 Disposal/(purchases) 65.8 51.9 0.0 0.0 0.0 Others 0.0 0.0 0.0 0.0 0.0 Cash flow from investing -53.8 -102.3 -120.0 -100.0 -100.0 Debt raised/(repaid) -279.4 -52.4 0.0 0.0 0.0 Equity raised/(repaid) 363.0 149.1 0.0 0.0 0.0 Net int. income/(expense) 3.6 7.9 8.2 9.1 10.0 Dividends paid -91.1 -184.3 -192.2 -230.4 -268.1 Others -3.6 -7.9 -8.2 -9.1 -10.0 Cash flow from financing -7.5 -87.6 -192.2 -230.4 -268.1 Net change in CF 243.0 80.1 20.9 64.4 79.2 Free Cash Flow 250.5 167.6 213.1 294.8 347.3

Source: Company, Affin Hwang forecasts

Inari Amertron (INRI MK): 7 January 2019

Financial summary continued … Balance sheet (MYRm) FYE Jun 2017 2018 2019E 2020E 2021E Fixed assets 330.6 400.4 426.7 426.6 426.6 Other long-term assets 15.4 7.3 7.3 7.3 7.3 Total non-current assets 346.0 407.6 434.0 433.9 433.8 Cash and equivalents 197.6 530.0 550.8 615.2 694.5 Stocks 169.0 160.5 239.8 271.6 304.6 Debtors 232.1 234.9 239.8 271.6 304.6 Other current assets 258.6 0.7 0.7 0.7 0.7 Total current assets 857.4 926.1 1,031.1 1,159.1 1,304.4 Creditors 230.7 171.1 220.1 249.3 279.7 Short-term borrowings 16.1 9.0 9.0 9.0 9.0 Other current liabilities 51.7 59.2 59.2 59.2 59.2 Total current liabilities 298.5 239.4 288.3 317.5 347.9 Long-term borrowings 28.2 17.1 17.1 17.1 17.1 Other long-term liabilities 3.4 6.4 6.4 6.4 6.4 Total long-term liabilities 31.5 23.5 23.5 23.5 23.5 Shareholders' Funds 873.3 1,070.8 1,153.2 1,251.9 1,366.8

Key ratios (%) FYE Jun 2017 2018 2019E 2020E 2021E Growth (YoY) Revenue (%) 12.8 17.0 4.3 13.3 12.2 EBITDA (%) 33.9 38.7 2.8 19.4 12.9 Core net profit (%) 32.3 37.1 0.7 23.6 16.4 Profitability EBITDA margin (%) 22.8 27.0 26.6 28.1 28.3 PBT margin (%) 20.5 21.5 21.3 22.5 23.3 Net profit margin (%) 19.4 18.9 19.1 20.3 21.0 Effective tax rate (%) 5.1 12.0 10.0 10.0 10.0 ROA (%) 18.9 19.5 18.7 20.7 22.0 Core ROE (%) 24.8 27.2 24.0 27.4 29.3 ROCE (%) 24.9 29.1 25.4 29.1 31.2 Dividend payout ratio (%) 40.0 70.9 70.0 70.0 70.0 Liquidity Current ratio (x) 2.9 3.9 3.6 3.7 3.7 Operating cash flows (MYRm) 304.4 270.0 333.1 394.8 447.3 Free cash flows (MYRm) 184.8 115.8 213.1 294.8 347.3 FCF/share (sen) 5.9 3.7 6.8 9.5 11.1 Asset management Debtors turnover (days) 72.0 60.0 61.0 61.0 61.0 Stock turnover (days) 52.4 60.0 61.0 61.0 61.0 Creditors turnover (days) 71.6 55.0 56.0 56.0 56.0 Capital structure Net Gearing (%) (47.4) (47.3) (45.7) (47.3) (49.1) Interest Cover (x) 123.4 241.4 231.9 277.0 312.7

Source: Company, Affin Hwang forecasts

Company profile

Inari Amertron Berhad is an investment holding company with wholly-owned subsidiaries involved in the OSAT & electronics manufacturing services (EMS) industries. It currently has seven wholly-owned direct subsidiaries: Inari Technology Sdn Bhd, Inari Semiconductor Labs Sdn Bhd, Inari Integrated Systems Sdn Bhd, Inari South Keytech Sdn Bhd, Inari Global Limited, Simfoni Bistari Sdn Bhd, and Inari International Limited. Inari Amertron Berhad also has a 51% subsidiary, Ceedtec Sdn Bhd.

Inari Amertron (INRI MK): 7 January 2019

Korea Information Technology 7 January 2019

Samsung Electro-Mechanics (009150 KS) Samsung El ectro-M echanics

Target price: KRW172,000 (from KRW172,000) Share price (3 Jan): KRW94,000 | Up/downside: +83.0%

Rising opportunities from increase in 5G/EV penetration SK Kim (82) 2 787 9173  Expect solid earnings growth in 2019E driven by MLCCs/multi-cams [email protected]  5G/EVs to drive growth momentum for MLCC/substrate business Henny Jung (82) 2 787 9182  Reiterating Buy (1) call with an unchanged TP of KRW172,000 [email protected]

What's new: We expect SEMCO to post solid earnings growth in 2019, Forecast revisions (%) driven by increased demand for MLCCs and multi-cam modules. On the Year to 31 Dec 18E 19E 20E back of growing 5G penetration, we look for content growth (ie, growth in Revenue change --- number of MLCCs per device) in high-end IT MLCCs and increased Net profit change --- Core EPS (FD) change - - - adoption of substrate-like PCBs (SLPs) from 2H19. Source: Daiwa forecasts

What's the impact: Solid earnings momentum likely to continue in Share price performance 2019E. Although SEMCO’s earnings growth is likely to slow in 2019 after (KRW) (%) the solid growth of 2018E, we forecast a rather soft landing. We expect the 165,000 180 company to post revenue and operating growth of 19% and 38% YoY, 143,750 158 respectively, in 2019 (vs. 21%/250% in 2018). We still see room for 122,500 135 101,250 113 operating-margin improvement (15% in 2019E vs. 13%/5% in 2018E/2017) 80,000 90 driven by MLCC and RF-PCBs. Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Samsung EM (LHS) Relative to KOSPI (RHS) Solid MLCCs earnings likely to continue driven by increase in 5G/EV penetration. As 5G-based devices require higher performance across 12-month range 89,000-163,000 various specifications, we expect content growth in IT MLCCs. We assume Market cap (USDbn) 6.23 that 5G-based smartphones will generally use 30% more MLCCs than LTE- 3m avg daily turnover (USDm) 193.34 based smartphones. For industrial MLCCs, we expect a meaningful rise in Shares outstanding (m) 75 Major shareholder Samsung Electronics (23.7%) MLCC demand for 5G network equipment from 2H19. In addition to electrification of cars, we expect an increase in sales of EVs to boost Financial summary (KRW) demand for auto MLCCs. Compared with 3-4K MLCCs per conventional Year to 31 Dec 18E 19E 20E car, EVs use 10-15K MLCCs. We assume auto MLCCs will contribute Revenue (bn) 8,267 9,821 10,681 around 15% of MLCC revenue for SEMCO in 2019. Operating profit (bn) 1,072 1,477 1,630 Net profit (bn) 689 1,012 1,120 Core EPS (fully-diluted) 8,881 13,039 14,433 Smartphones to adopt more SLPs for 5G communication. As 5G-based EPS change (%) 326.1 46.8 10.7 smartphones will have more components, current smartphone Daiwa vs Cons. EPS (%) (5.9) (5.1) (5.7) PER (x) 10.6 7.2 6.5 motherboards will need to be replaced with smaller versions to drive Dividend yield (%) 0.9 0.9 1.0 penetration of SLPs. As SLPs use semiconductor package technology, this DPS 800 850 900 enables a smaller size and greater efficiency than previous high-density PBR (x) 1.4 1.2 1.0 EV/EBITDA (x) 4.3 3.1 2.6 interconnection (HDI). Samsung Electronics (005930 KS, KRW37,600, Buy ROE (%) 14.9 18.6 17.3 [1]) began adoption of SLPs in the Galaxy S9 in 2018, and we expect Source: FactSet, Daiwa forecasts increased SLP penetration from 2019.

What we recommend: We reiterate our Buy (1) call with an unchanged target price of KRW172,000. Our target price is based on an unchanged target PER of 13.2x (average of MLCC peers) applied to our 2019E EPS. Key risk: a sharp fall in high-end smartphone demand.

How we differ: Our 2018-20E EPS forecasts are 5-6% lower than the Bloomberg consensus, which is presumably due to our more conservative view on component demand driven by China smartphones.

See important disclosures, including any required research certifications, beginning on page 115

Samsung Electro-Mechanics (009150 KS): 7 January 2019

Financial summary Key assumptions Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E MLCC ASP (%) (3.2) (7.1) 3.0 (9.3) 5.9 28.6 14.5 1.8 MLCC volume (%) (0.7) 4.9 3.4 4.2 22.2 26.9 8.7 10.1 Camera module ASP (%) (4.6) 12.3 1.4 (6.8) (5.2) 6.8 19.4 1.5 Camera module volume (%) 35.8 (31.3) 11.6 26.0 21.3 (6.1) 5.0 4.1

Profit and loss (KRWbn) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E ACI (Advanced Circuit Interconnection) 1,864 1,631 1,518 1,320 1,446 1,500 1,634 1,681 LCR (Linkage of magnetic Flux coil, 1,915 1,883 2,028 1,923 2,337 3,691 4,561 5,086 Capacitor, Resistor) Other Revenue 4,477 2,586 2,631 2,790 3,055 3,076 3,626 3,914 Total Revenue 8,257 6,100 6,176 6,033 6,838 8,267 9,821 10,681 Other income (2) 772 0 0 0 0 0 0 COGS (6,709) (5,065) (4,865) (5,006) (5,430) (5,919) (7,018) (7,610) SG&A (1,083) (971) (1,010) (1,002) (1,102) (1,277) (1,326) (1,442) Other op.expenses 0 (0) 0 0 0 0 0 0 Operating profit 462 837 301 24 306 1,072 1,477 1,630 Net-interest inc./(exp.) (29) (28) (18) (31) (55) (77) (59) (50) Assoc/forex/extraord./others 3 783 84 39 2 5 14 19 Pre-tax profit 436 1,592 367 32 254 999 1,432 1,599 Tax (90) (127) (45) (9) (76) (280) (390) (448) Min. int./pref. div./others (15) (186) (9) (8) (16) (30) (31) (31) Net profit (reported) 330 1,279 313 15 162 689 1,012 1,120 Net profit (adjusted) 330 1,279 313 15 162 689 1,012 1,120 EPS (reported)(KRW) 4,443 8,230 4,031 190 2,084 8,881 13,039 14,433 EPS (adjusted)(KRW) 4,443 8,230 4,031 190 2,084 8,881 13,039 14,433 EPS (adjusted fully-diluted)(KRW) 4,443 8,230 4,031 190 2,084 8,881 13,039 14,433 DPS (KRW) 750 750 500 500 750 800 850 900 EBIT 462 837 301 24 306 1,072 1,477 1,630 EBITDA 1,082 1,497 795 633 937 1,830 2,361 2,597

Cash flow (KRWbn) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Profit before tax 436 1,592 367 32 254 999 1,432 1,599 Depreciation and amortisation 619 660 494 608 631 758 883 968 Tax paid (90) (127) (45) (9) (76) (280) (390) (448) Change in working capital (84) (51) 180 32 (299) 68 (317) (152) Other operational CF items 24 (1,702) (459) 16 208 242 252 251 Cash flow from operations 904 373 537 680 718 1,787 1,861 2,218 Capex (961) (860) (1,196) (1,052) (1,476) (1,109) (1,070) (1,280) Net (acquisitions)/disposals 20 15 186 68 92 28 20 20 Other investing CF items 126 473 789 (202) 152 595 (130) (280) Cash flow from investing (815) (372) (221) (1,186) (1,232) (486) (1,180) (1,540) Change in debt 85 107 328 402 125 (87) (7) 88 Net share issues/(repurchases) 0 (0) 0 0 0 0 0 0 Dividends paid (79) (58) (63) (41) (48) (61) (67) 0 Other financing CF items (44) (129) (298) (121) 71 31 0 0 Cash flow from financing (38) (80) (33) 240 148 (117) (74) 88 Forex effect/others 0 0 0 0 0 0 0 0 Change in cash 52 (80) 283 (266) (366) 1,184 607 766 Free cash flow (57) (487) (659) (372) (759) 677 791 938 Source: FactSet, Daiwa forecasts

Samsung Electro-Mechanics (009150 KS): 7 January 2019

Financial summary continued … Balance sheet (KRWbn) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Cash & short-term investment 769 1,477 1,124 1,105 567 1,713 2,210 3,016 Inventory 888 841 679 827 919 819 973 1,055 Accounts receivable 724 900 684 648 829 1,075 1,277 1,389 Other current assets 270 336 243 233 164 199 204 204 Total current assets 2,651 3,554 2,730 2,812 2,479 3,805 4,663 5,664 Fixed assets 2,950 2,926 3,298 3,714 4,155 4,590 4,785 5,104 Goodwill & intangibles 225 104 91 92 149 166 159 154 Other non-current assets 1,360 1,135 1,150 1,044 984 450 390 325 Total assets 7,185 7,719 7,269 7,663 7,767 9,012 9,997 11,248 Short-term debt 897 1,116 1,025 1,166 1,671 1,578 1,641 1,793 Accounts payable 393 391 272 396 281 259 330 367 Other current liabilities 497 643 471 481 501 773 745 751 Total current liabilities 1,787 2,151 1,768 2,043 2,454 2,610 2,716 2,912 Long-term debt 709 597 1,017 1,278 898 904 834 769 Other non-current liabilities 431 328 169 4 84 343 392 392 Total liabilities 2,927 3,076 2,954 3,325 3,436 3,857 3,941 4,073 Share capital 388 388 388 388 388 388 388 388 Reserves/R.E./others 3,786 4,165 3,834 3,852 3,844 4,629 5,529 6,649 Shareholders' equity 4,174 4,553 4,222 4,240 4,232 5,017 5,917 7,037 Minority interests 84 89 93 97 100 138 138 138 Total equity & liabilities 7,185 7,719 7,269 7,663 7,767 9,012 9,997 11,248 EV 7,942 7,347 8,032 8,457 9,123 7,928 7,424 6,706 Net debt/(cash) 837 236 917 1,339 2,002 769 265 (454) BVPS (KRW) 54,871 59,829 55,610 55,896 55,818 66,437 78,032 92,466

Key ratios (%) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Sales (YoY) 4.3 (26.1) 1.2 (2.3) 13.4 20.9 18.8 8.8 EBITDA (YoY) (4.0) 38.4 (46.9) (20.5) 48.1 95.3 29.0 10.0 Operating profit (YoY) (23.9) 80.9 (64.0) (91.9) 1,155.0 250.0 37.9 10.3 Net profit (YoY) (20.3) 287.2 (75.5) (95.3) 999.7 326.1 46.8 10.7 Core EPS (fully-diluted) (YoY) (14.3) 85.3 (51.0) (95.3) 999.7 326.1 46.8 10.7 Gross-profit margin 18.7 17.0 21.2 17.0 20.6 28.4 28.5 28.8 EBITDA margin 13.1 24.5 12.9 10.5 13.7 22.1 24.0 24.3 Operating-profit margin 5.6 13.7 4.9 0.4 4.5 13.0 15.0 15.3 Net profit margin 4.0 21.0 5.1 0.2 2.4 8.3 10.3 10.5 ROAE 8.2 29.4 7.2 0.3 3.8 14.9 18.6 17.3 ROAA 4.7 17.2 4.2 0.2 2.1 8.2 10.6 10.5 ROCE 8.1 13.7 4.7 0.4 4.5 14.7 18.3 17.8 ROIC 7.4 15.4 5.2 0.3 3.6 12.6 17.6 18.0 Net debt to equity 20.1 5.2 21.7 0.0 0.0 0.0 0.0 net cash Effective tax rate 20.7 8.0 12.1 28.6 30.1 28.1 27.2 28.0 Accounts receivable (days) 36.6 48.6 46.8 40.3 39.4 42.0 43.7 45.5 Current ratio (x) 1.5 1.7 1.5 1.4 1.0 1.5 1.7 1.9 Net interest cover (x) 15.8 30.3 16.3 0.8 5.6 13.9 25.2 32.7 Net dividend payout 16.9 9.1 12.4 263.8 36.0 9.0 6.5 6.2 Free cash flow yield n.a. n.a. n.a. n.a. n.a. 9.6 11.3 13.4 Source: FactSet, Daiwa forecasts

Company profile

Samsung Electro-Mechanics (SEMCO) is the largest electronics-component manufacturer in Korea in terms of market cap. The company's core products are MLCCs, handset PCBs, IC-packaging substrates, and camera modules. Its major customers include Samsung Electronics mainly for mobile, and a number of Chinese smartphone makers.

Samsung Electro-Mechanics (009150 KS): 7 January 2019

Taiwan Information Technology 7 January 2019

Delta Electronics (2308 TT) Delta El ectr onics

Target price: TWD159.00 (from TWD159.00) Share price (3 Jan): TWD130.00 | Up/downside: +22.3%

We see multiple catalysts ahead Steven Tseng (886) 2 8758 6252  Telecom, data centre, EV-related areas the bright spots [email protected]  Operating-margin trajectory improves on better product mix Elsa Cheng (886) 2 8758 6253  Reiterating Buy (1), with TP unchanged at TWD159 [email protected]

What's new: We expect Delta to post stronger earnings growth in 2019E Forecast revisions (%) (vs. a 5% YoY decline in 2018E) with a favourable product-mix shift and Year to 31 Dec 18E 19E 20E improving operating-margin trajectory. Telecom power, data centre, and Revenue change --- EV-related businesses could be the bright spots in 2019E, in our view. Net profit change --- Core EPS (FD) change - - -

Source: Daiwa forecasts What's the impact: Multiple catalysts ahead. We see the following few bright spots for Delta in the upcoming year. 1) Telecom power (12-13% of Share price performance 2019E revenue). In addition to existing orders from key US clients, 5G (TWD) (%) demand should be another driver from 2019. Also, we see Delta as likely to 150 110 gain share in the telecom power market, given the stagnation of Huawei, 135 100 one of its main competitors. 2) Data centre (14-15%, including 120 90 105 80 power/cooling solutions, networking switches). Despite investor concerns 90 70 on a likely slower hyperscaling demand, Delta anticipates sustained order Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 flows on share gains. Growing demand for edge computing (from telcos) is Delta Ele (LHS) Relative to TWSE Index (RHS) another driver, in our opinion. 3) EV (3-4%, including charging solutions, power units, motors). After years of engagement with multiple automakers, 12-month range 98.90-149.00 Delta’s EV revenue almost doubled YoY in 2018E, with clear order visibility Market cap (USDbn) 10.93 for the next 3 years. Delta now expects its EV business to break even in 3m avg daily turnover (USDm) 31.54 2019E and likely turn profitable in 2020E — an encouraging sign to us. Shares outstanding (m) 2,598 Major shareholder Hsiang Ta International (10.3%)

As for other products, growth in passive components (13-14%) should Financial summary (TWD) remain solid and is likely to benefit from the increasing content needed per Year to 31 Dec 18E 19E 20E unit for its key smartphone client’s new models. Industrial automation Revenue (m) 236,822 257,714 279,288 (c.12%) has been slowing since mid-2018 as the US-China trade war has Operating profit (m) 18,465 24,339 28,043 Net profit (m) 17,504 20,946 23,818 hurt demand in China. However, order wins from the US and a steady Core EPS (fully-diluted) 6.739 8.064 9.169 building automation business (c.4%) should help mitigate the impact. EPS change (%) (4.8) 19.7 13.7 Daiwa vs Cons. EPS (%) 2.9 7.2 6.4 PER (x) 19.3 16.1 14.2 Improving margin trajectory. We expect Delta’s favourable product mix Dividend yield (%) 3.8 3.8 4.2 and stabilised gross margin of its legacy IT power business to bode well for DPS 5.0 5.0 5.5 the operating margin, which, in fact, clearly recovered in 3Q18 (9.4% vs. PBR (x) 2.9 2.7 2.6 EV/EBITDA (x) 10.7 8.9 7.9 5.4-6.1% in 1H18). Also, the upcoming break-even in the EV business and ROE (%) 14.5 17.5 18.7 Delta’s internal automation efforts (reducing 90% of direct labour by end- Source: FactSet, Daiwa forecasts 2021) also appear to be favourable drivers of its future margin expansion.

What we recommend: We reiterate our Buy (1) rating and 12-month TP of TWD159, based on an unchanged target PER of 20x (near the mid-point of its past-3-year range of 14-25x) applied to our 1-year forward EPS. We expect Delta’s EPS to resume growth in 2019E (ie, 19.7% YoY, in our forecast) following a 4.8% decline in 2018E. Key downside risk: a worse- than-expected impact from the US-China trade war.

How we differ: Our 2018-20E EPS is 3-7% above the consensus, likely due to our more positive view on Delta’s profit margin trends.

See important disclosures, including any required research certifications, beginning on page 115

Delta Electronics (2308 TT): 7 January 2019

Financial summary Key assumptions Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Automation revenue growth (YoY) 6 7 4 11 21 14 10 13 Passive Components revenue growth 16 38 15 2 15 17 14 15 (YoY) Advanced Power Solutions revenue 8 39 8 (6) (4) 8 10 9 growth (YoY)

Profit and loss (TWDm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Power Electronics 102,933 114,480 109,889 111,690 118,121 120,257 129,025 136,878 Automation 21,140 21,944 24,323 27,242 32,995 37,582 41,247 46,752 Other Revenue 52,980 54,211 69,239 75,423 72,462 78,984 87,442 95,657 Total Revenue 177,053 190,635 203,452 214,356 223,578 236,822 257,714 279,288 Other income 0 0 0 0 0 0 0 0 COGS (132,033) (139,141) (148,083) (154,862) (162,809) (173,712) (186,387) (201,117) SG&A (14,237) (16,235) (20,405) (23,181) (24,287) (26,154) (28,316) (30,288) Other op.expenses (11,274) (12,441) (14,465) (15,487) (16,707) (18,492) (18,673) (19,840) Operating profit 19,508 22,819 20,499 20,826 19,774 18,465 24,339 28,043 Net-interest inc./(exp.) 548 785 178 240 253 248 248 247 Assoc/forex/extraord./others 2,440 2,918 4,097 3,725 3,771 3,835 3,109 3,115 Pre-tax profit 22,497 26,522 24,775 24,790 23,798 22,548 27,696 31,406 Tax (3,582) (4,203) (4,892) (5,530) (5,041) (4,530) (6,216) (7,051) Min. int./pref. div./others (1,258) (1,615) (1,168) (462) (376) (513) (534) (536) Net profit (reported) 17,657 20,704 18,715 18,798 18,381 17,504 20,946 23,818 Net profit (adjusted) 17,657 20,704 18,715 18,798 18,381 17,504 20,946 23,818 EPS (reported)(TWD) 7.244 8.494 7.205 7.237 7.076 6.739 8.064 9.169 EPS (adjusted)(TWD) 7.244 8.494 7.205 7.237 7.076 6.739 8.064 9.169 EPS (adjusted fully-diluted)(TWD) 7.244 8.494 7.205 7.237 7.076 6.739 8.064 9.169 DPS (TWD) 5.305 5.800 7.930 5.000 5.000 5.000 5.000 5.500 EBIT 19,508 22,819 20,499 20,826 19,774 18,465 24,339 28,043 EBITDA 27,850 30,455 28,894 29,958 29,931 29,434 35,454 39,348

Cash flow (TWDm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Profit before tax 22,497 26,522 24,775 24,790 23,798 22,548 27,696 31,406 Depreciation and amortisation 8,342 7,636 8,395 9,133 10,157 10,969 11,115 11,305 Tax paid (3,582) (4,203) (4,892) (5,530) (5,041) (4,530) (6,216) (7,051) Change in working capital (3,022) (5,044) (4,052) (2,118) (7,433) 1,122 (4,323) (4,369) Other operational CF items 1,877 2,924 6,834 4,625 5,488 (2,012) (1,310) (1,321) Cash flow from operations 26,112 27,835 31,059 30,900 26,969 28,097 26,963 29,968 Capex (8,824) (5,532) (7,974) (8,078) (12,879) (11,841) (12,370) (12,847) Net (acquisitions)/disposals 1 (350) 0 0 0 0 0 0 Other investing CF items 361 (882) (746) 922 67 287 0 0 Cash flow from investing (8,461) (6,764) (8,720) (7,156) (12,812) (11,554) (12,370) (12,847) Change in debt 1,868 8,852 (17,163) 5,942 7,631 (1,658) 0 0 Net share issues/(repurchases) 0 0 0 0 0 0 0 0 Dividends paid (12,843) (14,138) (19,330) (12,988) (12,988) (12,988) (12,988) (14,286) Other financing CF items (222) (2,172) (18,159) (1,158) (874) 0 0 0 Cash flow from financing (11,197) (7,458) (54,652) (8,204) (6,231) (14,645) (12,988) (14,286) Forex effect/others 2,770 3,469 970 (3,026) (3,617) 0 0 0 Change in cash 9,223 17,082 (31,342) 12,514 4,309 1,897 1,605 2,835 Free cash flow 17,288 22,303 23,085 22,822 14,091 16,255 14,593 17,121 Source: FactSet, Daiwa forecasts

Delta Electronics (2308 TT): 7 January 2019

Financial summary continued … Balance sheet (TWDm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Cash & short-term investment 59,806 74,188 51,811 56,313 58,630 59,921 61,215 63,912 Inventory 18,042 21,572 23,912 25,953 30,825 30,290 32,501 35,069 Accounts receivable 44,305 46,696 50,639 52,564 55,498 57,231 62,280 67,494 Other current assets 4,349 5,376 5,791 3,572 2,750 2,762 2,762 2,762 Total current assets 126,503 147,832 132,153 138,402 147,704 150,205 158,758 169,237 Fixed assets 37,195 36,815 41,891 40,558 44,339 43,447 42,952 42,692 Goodwill & intangibles 10,858 11,706 25,425 30,919 33,834 33,317 33,317 33,317 Other non-current assets 22,741 24,080 26,806 25,236 24,662 26,982 28,603 30,062 Total assets 197,296 220,433 226,276 235,115 250,539 253,952 263,630 275,308 Short-term debt 4,562 5,801 11,110 12,539 17,464 13,876 13,876 13,876 Accounts payable 32,816 33,749 35,882 37,514 37,925 40,246 43,182 46,595 Other current liabilities 21,990 25,074 29,360 31,210 33,833 43,269 43,269 43,269 Total current liabilities 59,368 64,624 76,352 81,264 89,221 97,391 100,327 103,740 Long-term debt 18,828 26,468 3,994 8,514 11,219 13,149 13,149 13,149 Other non-current liabilities 11,306 13,672 16,377 16,328 16,325 16,429 16,429 16,429 Total liabilities 89,501 104,764 96,723 106,106 116,765 126,969 129,905 133,318 Share capital 24,375 24,375 25,975 25,975 25,975 25,975 25,975 25,975 Reserves/R.E./others 69,193 78,546 98,395 98,139 98,582 90,508 97,250 105,515 Shareholders' equity 93,568 102,921 124,370 124,114 124,557 116,483 123,225 131,491 Minority interests 14,227 12,747 5,183 4,894 9,217 10,500 10,500 10,500 Total equity & liabilities 197,296 220,433 226,276 235,115 250,539 253,952 263,630 275,308 EV 315,490 308,509 306,156 307,316 316,949 315,284 313,990 311,293 Net debt/(cash) (36,417) (41,918) (36,708) (35,259) (29,948) (32,896) (34,190) (36,887) BVPS (TWD) 38.386 42.223 47.880 47.781 47.952 44.844 47.439 50.621

Key ratios (%) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Sales (YoY) 0.7 7.7 6.7 5.4 4.3 5.9 8.8 8.4 EBITDA (YoY) 16.1 9.4 (5.1) 3.7 (0.1) (1.7) 20.5 11.0 Operating profit (YoY) 22.3 17.0 (10.2) 1.6 (5.1) (6.6) 31.8 15.2 Net profit (YoY) 9.6 17.3 (9.6) 0.4 (2.2) (4.8) 19.7 13.7 Core EPS (fully-diluted) (YoY) 8.9 17.3 (15.2) 0.4 (2.2) (4.8) 19.7 13.7 Gross-profit margin 25.4 27.0 27.2 27.8 27.2 26.6 27.7 28.0 EBITDA margin 15.7 16.0 14.2 14.0 13.4 12.4 13.8 14.1 Operating-profit margin 11.0 12.0 10.1 9.7 8.8 7.8 9.4 10.0 Net profit margin 10.0 10.9 9.2 8.8 8.2 7.4 8.1 8.5 ROAE 19.9 21.1 16.5 15.1 14.8 14.5 17.5 18.7 ROAA 9.3 9.9 8.4 8.1 7.6 6.9 8.1 8.8 ROCE 15.5 16.4 14.0 14.1 12.7 11.7 15.5 17.0 ROIC 23.5 26.5 19.7 17.3 15.8 14.9 19.5 21.3 Net debt to equity net cash net cash net cash net cash net cash net cash net cash net cash Effective tax rate 15.9 15.8 19.7 22.3 21.2 20.1 22.4 22.5 Accounts receivable (days) 85.0 87.1 87.3 87.9 88.2 86.9 84.6 84.8 Current ratio (x) 2.1 2.3 1.7 1.7 1.7 1.5 1.6 1.6 Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Net dividend payout 79.7 80.1 93.4 69.4 69.1 70.7 74.2 68.2 Free cash flow yield 5.1 6.6 6.8 6.8 4.2 4.8 4.3 5.1 Source: FactSet, Daiwa forecasts

Company profile

Founded in 1971, Delta Electronics has been the global leader in switching power supply solutions since 2002 and DC brushless fans since 2006. Its business covers 3 key areas: power electronics (eg, power supplies, thermal management products and passive components), automation (eg, controllers, robot arms and building management systems), and infrastructure (eg, datacenter infrastructure, networking and EV charging).

Delta Electronics (2308 TT): 7 January 2019

Delta: quarterly and annual P&L statement 2018E 2019E (TWDm) 1Q 2Q 3Q 4QE 1QE 2QE 3QE 4QE 2017 2018E 2019E Net revenue 50,870 57,897 63,617 64,438 55,576 61,783 69,709 70,645 223,578 236,822 257,714 COGS (37,856) (43,393) (45,843) (46,621) (39,936) (44,395) (50,466) (51,590) (162,809) (173,712) (186,387) Gross profit 13,014 14,504 17,774 17,818 15,641 17,388 19,244 19,055 60,768 63,110 71,327 Operating expenses (10,243) (10,999) (11,804) (11,599) (10,504) (11,554) (12,548) (12,383) (40,994) (44,645) (46,988) Operating profit 2,771 3,505 5,970 6,219 5,137 5,835 6,696 6,671 19,774 18,465 24,339 Non-operating profit 971 904 1,386 823 816 851 858 832 4,024 4,083 3,357 Pretax profit 3,742 4,409 7,355 7,041 5,953 6,685 7,554 7,504 23,798 22,548 27,696 Income taxes (862) (994) (1,125) (1,549) (1,369) (1,538) (1,662) (1,648) (5,041) (4,530) (6,216) Net profit 2,781 3,277 6,090 5,356 4,455 5,012 5,757 5,722 18,381 17,504 20,946 Net EPS (TWD) 1.07 1.26 2.34 2.06 1.72 1.93 2.22 2.20 7.08 6.74 8.06

Operating Ratios Gross margin 25.6% 25.1% 27.9% 27.7% 28.1% 28.1% 27.6% 27.0% 27.2% 26.6% 27.7% Operating margin 5.4% 6.1% 9.4% 9.7% 9.2% 9.4% 9.6% 9.4% 8.8% 7.8% 9.4% Pre-tax margin 7.4% 7.6% 11.6% 10.9% 10.7% 10.8% 10.8% 10.6% 10.6% 9.5% 10.7% Net margin 5.5% 5.7% 9.6% 8.3% 8.0% 8.1% 8.3% 8.1% 8.2% 7.4% 8.1%

YoY (%) Net revenue 4% 8% 6% 5% 9% 7% 10% 10% 4% 6% 9% Gross profit -2% -1% 10% 8% 20% 20% 8% 7% 2% 4% 13% Operating profit -30% -23% 9% 7% 85% 66% 12% 7% -5% -7% 32% Pretax profit -25% -19% 6% 10% 59% 52% 3% 7% -4% -5% 23% Net profit -29% -23% 11% 12% 60% 53% -5% 7% -2% -5% 20%

QoQ (%) Net revenue -17% 14% 10% 1% -14% 11% 13% 1% Gross profit -21% 11% 23% 0% -12% 11% 11% -1% Operating profit -52% 27% 70% 4% -17% 14% 15% 0% Pretax profit -42% 18% 67% -4% -15% 12% 13% -1% Net profit -42% 18% 86% -12% -17% 12% 15% -1% Source: Company, Daiwa forecasts

Delta: major business segments, revenue contribution, and growth outlook Revenue mix YoY growth Segments Sub-segments Major products 2017 2018E 2019E 2017 2018E 2019E AC adapters for notebooks, game consoles; industrial power; medical powers; display Merchant & mobile power 21% 19% 18% -5% -4% Slightly up products Embedded power Power supplies for desktop, server, switches, home/industrial applications 9% 8% 8% -3% -6% Slightly up Power Components Power chokes, power modules, optical transceivers, resistors, RF modules 12% 13% 14% +14% +17% +10-15% Electronics Fans & thermal Cooling fans for PC, servers, storage devices, vehicles, industrials; cooling solutions for 10% 10% 10% +4% + 3% +3-5% management datacentres; ventilations; vapor chambers; heat pipes Automotive electronics Powertrain solutions; power management <1% ~1% 1% + ~100% Strong

Industrial automation Controllers, inverters, servo motor/drive, PLC, HMI, CNC, robotic arms 12% 12% 12% +13% +9% +5-10% Automation Building management system, controllers, lighting systems, HVAC systems, surveillance Building automation 3% 4% 4% +65% +32% +15-20% systems ICT infrastructure Telecom power, networking, datacentre infrastructure 27% 27% 27% +2% +7% ~10% Infrastructure Energy infrastructure EV charging, renewable energy, energy storage, medium voltage drives 5% 6% 6% +8% +21% +10-15%

Source: Company, Daiwa forecasts

Delta: 1-year forward PER band Delta: sales mix by segment 100% (TWD) 1% 1% 1% 1% 240 80% 32% 32% 33% 33%

190 60% 13% 15% 16% 16%

140 40%

55% 53% 51% 50% 90 20%

40 0% Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 2016 2017 2018E 2019E Share price 10x 14x 25x 29x Power Electronics Automation Infrastructure Other

Source: TEJ, Daiwa forecasts Source: Company, Daiwa forecasts

Taiwan Information Technology 7 January 2019

(3081 TT) LandMark Optoelectronics LandMar k Optoel ectronics

Target price: TWD335.00 (from TWD345.00) Share price (3 Jan): TWD250.00 | Up/downside: +34.0%

Recovery to accelerate with margin expansion Rick Hsu (886) 2 8758 6261  SiPh to be key growth driver, followed by 10G and 5G [email protected]  Bottom-line growth could outpace top-line growth in 2019 Robert Hsu (886) 2 8758 6251  Reiterating our Buy (1) call despite cutting forecasts, TP [email protected]

What's new: We expect LandMark Opto’s (LMO) business growth to Forecast revisions (%) accelerate into 2019, after recovering in 2H18 following China’s inventory Year to 31 Dec 18E 19E 20E correction and a major customer’s product transition. Bottom-line growth Revenue change (0.1) (8.5) (14.9) Net profit change (0.1) (8.0) (13.6) should outpace top-line growth thanks to opex normalisation. Silicon- Core EPS (FD) change (0.1) (8.0) (13.6) photonics (SiPh) should be the key growth driver, followed by 10G and 5G. Source: Daiwa forecasts We align our forecasts to LMO’s conservative expectations, leaving any upside to be driven by new products such as 25G, 3D, light detection and Share price performance ranging (LiDAR) and laser cutting. We reaffirm our Buy (1) call with a (TWD) (%) revised TP of TWD335. 430 110 360 95 What's the impact: SiPh is key growth driver. As flagged in our Postcard 290 80 from Daiwa Taiwan Corporate Day in Tokyo, LMO’s major SiPh customer 220 65 150 50 expects orders to grow 50% YoY in 2019, which management sees as Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 reasonable. We concur and forecast LMO’s SiPh revenue to grow 66% YoY Land Mark (LHS) and account for nearly half of total revenue, despite our downward revision Relative to TWSE Index (RHS) from a previous 80% growth forecast, to better align with LMO’s 12-month range 188.50-429.00 conservativeness. Yet, our higher growth forecast is based on order ramp- Market cap (USDbn) 0.74 ups from 2 new customers, on top of this major customer’s order strength. 3m avg daily turnover (USDm) 9.43 Shares outstanding (m) 91 10G/5G to be secondary drivers. Demand for 10G passive optical Major shareholder Tainet Communication System (9.0%) networking (PON) has grown steadily after China’s FTTH inventory glut, driving PON-content growth in the country for a new bandwidth-upgrade Financial summary (TWD) cycle. Demand for other 10G products also looks resilient in 1Q19, despite Year to 31 Dec 18E 19E 20E Revenue (m) 2,362 3,199 4,466 it being slow season. Bandwidth-upgrade cycle from 5G base-station fibre- Operating profit (m) 848 1,394 2,161 optic interconnectivity should kick off in 2019 (Let’s talk about 5G), adding Net profit (m) 703 1,127 1,742 to business upside where management sees some 30% YoY growth. All Core EPS (fully-diluted) 7.726 12.388 19.142 together, we forecast LMO’s telecom revenue to rise 11% YoY this year. EPS change (%) 6.7 60.3 54.5 Daiwa vs Cons. EPS (%) (0.2) 17.0 34.3 PER (x) 32.4 20.2 13.1 Upside potential from 25G/3D/LiDAR. While LMO did not quantify the Dividend yield (%) 2.0 2.2 2.8 revenue contribution from the 3 new products, we see upside potential to DPS 5.0 5.5 7.0 its 2019 expectation, especially from 25G, where we see demand strength PBR (x) 5.7 4.9 4.0 EV/EBITDA (x) 17.1 10.9 7.6 from one of China’s leading datacentre transceiver vendors through a ROE (%) 18.2 26.1 33.6 Taiwan-based customer. 3D epiwafers are likely to be mass-produced in Source: FactSet, Daiwa forecasts 2H19 for Android, followed by time-of-flight (ToF) solutions for iOS in 2020. LiDAR is more a story for 2020-21, when 5G eases bandwidth bottlenecks.

What we recommend: We cut our 2019-20E EPS by 8-14% to better align with LMO’s expectations; yet we still look for its earnings growth accelerate in 2019 due to normalised opex expanding its operating margin. We trim our 12-month TP to TWD335 (previous: TWD345), on an unchanged ROE- adjusted PBR of 6.6x. We reaffirm Buy (1). Downside risk: SiPh failing to grow as much as expected.

How we differ: We are 17-34% above the consensus on 2019-20E EPS, likely due to our more positive view on SiPh and margin expansion.

See important disclosures, including any required research certifications, beginning on page 115

LandMark Optoelectronics (3081 TT): 7 January 2019

Financial summary Key assumptions Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Wafer shipment ('000) n.a. 34 41 41 43 53 69 97 Capacity utilization (%) n.a. 100 96 71 64 67 76 78 Blended ASP (USD) n.a. 1,263 1,545 1,594 1,546 1,482 1,513 1,507

Profit and loss (TWDm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E PON 0 850 1,352 1,286 671 1,011 1,026 1,279 SiPhotonics 0 363 287 468 978 972 1,618 2,396 Other Revenue 715 95 389 357 390 379 556 791 Total Revenue 715 1,307 2,028 2,110 2,039 2,362 3,199 4,466 Other income 0 0 0 0 0 0 0 0 COGS (312) (507) (691) (852) (936) (1,089) (1,404) (1,864) SG&A (59) (66) (90) (102) (132) (148) (166) (210) Other op.expenses (17) (26) (77) (108) (177) (277) (235) (232) Operating profit 326 708 1,169 1,048 794 848 1,394 2,161 Net-interest inc./(exp.) 3 4 8 11 11 14 15 16 Assoc/forex/extraord./others 3 29 16 (1) (13) 24 0 0 Pre-tax profit 332 741 1,193 1,058 791 887 1,409 2,177 Tax (62) (127) (204) (182) (136) (184) (282) (435) Min. int./pref. div./others 0 0 0 0 0 0 0 0 Net profit (reported) 270 614 989 875 656 703 1,127 1,742 Net profit (adjusted) 270 614 989 875 656 703 1,127 1,742 EPS (reported)(TWD) 6.022 11.189 14.892 9.642 7.265 7.726 12.388 19.142 EPS (adjusted)(TWD) 6.022 11.189 14.892 9.642 7.265 7.726 12.388 19.142 EPS (adjusted fully-diluted)(TWD) 3.990 7.261 10.881 9.578 7.238 7.726 12.388 19.142 DPS (TWD) 0.000 3.000 7.000 9.000 8.000 5.000 5.501 6.999 EBIT 326 708 1,169 1,048 794 848 1,394 2,161 EBITDA 378 788 1,309 1,260 1,070 1,214 1,880 2,675

Cash flow (TWDm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Profit before tax 332 741 1,193 1,058 791 887 1,409 2,177 Depreciation and amortisation 52 80 140 211 276 366 486 515 Tax paid (62) (127) (204) (182) (136) (184) (282) (435) Change in working capital (12) (126) (308) 316 (201) (80) (315) (290) Other operational CF items 20 74 138 (51) 15 (0) 0 0 Cash flow from operations 330 643 958 1,352 746 988 1,298 1,966 Capex (225) (239) (437) (251) (319) (590) (448) (470) Net (acquisitions)/disposals 0 0 0 0 0 0 0 0 Other investing CF items 1 (2) (29) (10) (213) 0 0 (700) Cash flow from investing (224) (241) (466) (260) (532) (590) (448) (1,170) Change in debt 0 0 0 0 0 0 0 0 Net share issues/(repurchases) 0 0 1,541 0 0 0 0 0 Dividends paid (73) (136) (426) (629) (725) (453) (500) (637) Other financing CF items 0 0 0 (127) (3) 0 0 0 Cash flow from financing (73) (136) 1,115 (756) (728) (453) (500) (637) Forex effect/others 0 2 (0) 0 0 0 0 0 Change in cash 33 269 1,607 336 (514) (54) 349 160 Free cash flow 106 404 521 1,101 427 398 850 1,497 Source: FactSet, Daiwa forecasts

LandMark Optoelectronics (3081 TT): 7 January 2019

Financial summary continued … Balance sheet (TWDm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Cash & short-term investment 346 614 2,221 2,557 2,043 1,989 2,338 2,498 Inventory 97 117 142 184 218 248 353 443 Accounts receivable 168 326 603 252 415 495 735 985 Other current assets 49 55 12 18 39 50 50 50 Total current assets 660 1,111 2,978 3,011 2,715 2,781 3,476 3,976 Fixed assets 474 660 935 1,046 1,112 1,573 1,558 2,249 Goodwill & intangibles 0 0 0 0 0 0 0 0 Other non-current assets 9 12 80 21 224 50 50 50 Total assets 1,143 1,784 3,993 4,079 4,050 4,405 5,084 6,275 Short-term debt 0 0 0 0 0 0 0 0 Accounts payable 34 86 80 87 83 113 143 193 Other current liabilities 118 207 319 255 242 285 305 335 Total current liabilities 152 293 399 342 325 398 448 528 Long-term debt 0 0 0 0 0 0 0 0 Other non-current liabilities 1 5 5 5 3 5 5 7 Total liabilities 153 298 404 347 329 403 453 535 Share capital 452 553 699 913 906 906 906 906 Reserves/R.E./others 537 933 2,890 2,819 2,815 3,096 3,726 4,834 Shareholders' equity 990 1,486 3,589 3,731 3,721 4,002 4,631 5,740 Minority interests 0 0 0 0 0 0 0 0 Total equity & liabilities 1,143 1,784 3,993 4,079 4,050 4,405 5,084 6,275 EV 22,399 22,131 20,524 20,188 20,702 20,756 20,407 20,247 Net debt/(cash) (346) (614) (2,221) (2,557) (2,043) (1,989) (2,338) (2,498) BVPS (TWD) 22.085 27.088 54.045 41.097 41.240 43.985 50.905 63.091

Key ratios (%) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Sales (YoY) 19.0 82.9 55.1 4.1 (3.4) 15.9 35.4 39.6 EBITDA (YoY) 19.0 108.7 66.1 (3.8) (15.1) 13.5 54.9 42.3 Operating profit (YoY) 14.9 117.1 65.2 (10.3) (24.3) 6.9 64.3 55.0 Net profit (YoY) 17.3 127.4 61.1 (11.5) (25.1) 7.2 60.3 54.5 Core EPS (fully-diluted) (YoY) (5.0) 82.0 49.9 (12.0) (24.4) 6.7 60.3 54.5 Gross-profit margin 56.3 61.2 65.9 59.6 54.1 53.9 56.1 58.3 EBITDA margin 52.8 60.3 64.6 59.7 52.5 51.4 58.8 59.9 Operating-profit margin 45.6 54.1 57.7 49.7 38.9 35.9 43.6 48.4 Net profit margin 37.8 47.0 48.8 41.5 32.2 29.8 35.2 39.0 ROAE 30.7 49.6 39.0 23.9 17.6 18.2 26.1 33.6 ROAA 26.6 41.9 34.2 21.7 16.1 16.6 23.8 30.7 ROCE 37.1 57.2 46.1 28.6 21.3 22.0 32.3 41.7 ROIC 48.3 77.4 86.5 68.3 46.1 36.4 51.8 62.5 Net debt to equity 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Effective tax rate 18.8 17.1 17.1 17.2 17.2 20.7 20.0 20.0 Accounts receivable (days) 85.4 68.9 83.6 73.9 59.7 70.3 70.1 70.3 Current ratio (x) 4.3 3.8 7.5 8.8 8.3 7.0 7.8 7.5 Net interest cover (x) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Net dividend payout 0.0 41.3 64.3 94.0 110.5 64.7 44.4 36.6 Free cash flow yield 0.5 1.8 2.3 4.8 1.9 1.8 3.7 6.6 Source: FactSet, Daiwa forecasts

Company profile

Founded in June 1997, LandMark Optoelectronics Corporation (LMO) is a dedicated compound semiconductor epiwafer supplier for optical communication (OC), with end-applications focusing primarily on telecom and datacom, including passive optical network (PON), datacentre and cellular infrastructure, as well as industrial and consumer electronics. LMO is the largest pure OC epiwafer supplier globally by revenue.

LandMark Optoelectronics (3081 TT): 7 January 2019

LMO: quarterly P&L forecasts TWDm 1Q18 2Q18 3Q18 4Q18E 1Q19E 2Q19E 3Q19E 4Q19E 2017 2018E 2019E 2020E Revenue 578 503 605 677 644 743 882 930 2,039 2,362 3,199 4,466 COGS 262 245 276 306 306 336 379 383 936 1,089 1,404 1,864 Gross profit 316 257 329 371 338 407 503 547 1,103 1,273 1,795 2,603 Opex 85 87 145 108 95 100 105 100 310 425 401 442 Operating profit 231 171 184 262 243 307 398 447 794 848 1,394 2,161 Pretax profit 224 200 193 271 246 310 402 451 791 887 1,409 2,177 Income taxes 42 54 39 49 49 62 80 90 136 184 282 435 Net profit 181 146 154 222 197 248 321 361 656 703 1,127 1,742 EPS (TWD, basic) 2.01 1.62 1.71 2.44 2.16 2.73 3.53 3.97 7.27 7.73 12.39 19.14 EPS (TWD, fully diluted) 2.00 1.61 1.70 2.44 2.16 2.73 3.53 3.97 7.24 7.73 12.39 19.14 Margin Gross 55% 51% 54% 55% 52% 55% 57% 59% 54% 54% 56% 58% Operating 40% 34% 30% 39% 38% 41% 45% 48% 39% 36% 44% 48% Net 31% 29% 25% 33% 31% 33% 36% 39% 32% 30% 35% 39% Growth (QoQ) Revenue -8% -13% 20% 12% -5% 15% 19% 5% Gross profit -12% -19% 28% 13% -9% 20% 24% 9% Operating profit -12% -26% 8% 43% -7% 26% 30% 12% Net profit -20% -20% 6% 44% -11% 26% 30% 12% EPS (basic) -20% -20% 6% 43% -11% 26% 30% 12% EPS (FD) -20% -20% 6% 43% -11% 26% 30% 12% Growth (YoY) Revenue 54% 5% 9% 8% 11% 48% 46% 37% -3% 16% 35% 40% Gross profit 76% 6% 3% 3% 7% 58% 53% 48% -12% 15% 41% 45% Operating profit 90% -2% -22% 0% 5% 80% 116% 70% -24% 7% 64% 55% Net profit 108% 0% -22% -2% 9% 70% 109% 63% -25% 7% 60% 55% EPS (basic) 108% 0% -22% -2% 8% 69% 107% 63% -25% 6% 60% 55% EPS (FD) 108% 0% -22% -2% 8% 69% 108% 63% -24% 7% 60% 55% Source: Company, Daiwa estimates & forecasts

LMO: 4Q18 results preview and 1Q19 outlook comparison 4Q18E 1Q19E TWDm Daiwa Consensus Variance Daiwa Consensus Variance Revenue 677 678 0% 644 623 3% Gross profit 371 338 Operating profit 262 243 Pretax profit 271 246 Net profit 222 219 1% 197 198 -1% Adjusted EPS (TWD) 2.44 2.41 1% 2.16 2.17 -1% Margin Gross 54.8% 52.5% Operating 38.8% 37.7% Net 32.8% 30.5% Revenue mix * Telecom 40% 39% Datacom 55% 50% Industrial & others 5% 11%

Source: Bloomberg, Daiwa estimates & forecasts Note: * Telecom includes PON and cellular interconnectivity, Datacom includes SiPh and datacentre connectivity

LMO: SiPh revenue contribution LMO: PBR trend

TWDm X 12 500 60% 10.8x 10.4x 11 400 50% 10 9 40% 300 8 7 7.6x 30% 6 200 6.5x 5.5x 20% 5 4 4.8x 100 10% 3 0 0% Jul-15 Jul-16 Jul-17 Jul-18 Jan-16 Jan-17 Jan-18 Jan-19 Mar-16 Mar-17 Mar-18 Mar-19 Sep-15 Nov-15 Sep-16 Nov-16 Sep-17 Nov-17 Sep-18 Nov-18 May-16 May-17 May-18 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18E 1Q19E 2Q19E 3Q19E 4Q19E P/BV Mean Mean + s SiPh revenue Revenue contribution (RHS) Mean - s Mean + 2s Mean - 2s

Source: Company, Daiwa estimates & forecasts Source: Company, TEJ, Daiwa forecasts

Japan Electric appliances 7 January 2019 Japanese report: 7 January 2019

Murata Manufacturing (6981 JP)

Target price: JPY25,000 (as of 19 Jul) Outperform Share price (28 Dec): JPY14,955 | Up/downside: +67.2% (not reviewed)

Ready for a smartphone market slowdown Takumi Sado  Automotive MLCC sales growing on added value from ultra-high reliability 81-3-5555-7085 [email protected]  5G potential: profit with MetroCirc, pickup in filters/wireless modules

 New growth driver lined up after some birthing pains in FY17 Daiwa Securities Co. Ltd.

What's new: The world’s largest maker of passive electronic components, Share Price Chart (Y) Relative to TOPIX Murata Manufacturing has a product line-up that includes multilayer ceramic 21,000 110 capacitors (MLCC), high-frequency components, and communication modules. It appears ready for a slower smartphone market, with mainstay 18,000 100 MLCC products enjoying brisk sales, particularly in automotive applications. 15,000 90

12,000 80 What's the impact: The number of capacitors per vehicle has risen as automobiles see increased electrical content with more electrically driven 9,000 70 1/16 8/16 3/17 10/17 5/18 12/18 systems and the spread of ADAS and self-driving. Components have to be Source: Compiled by Daiwa. more reliable than ever before, given the need to perform super-computer- like calculations in extremely harsh conditions (high temperatures/pressure). Market data To meet these challenges, Murata is mass producing MLCCs with ultra-high 12-month range (JPY) 13,080-20,255 reliability for automotive applications. This is ushering in a completely new Market cap (JPYm; 28 Dec) 3,189,259 source of added value. Sales of automotive MLCC products, which have Shares outstanding (000; 12/18) 213,257 grown steadily at a CAGR of 16% for FY03-17, are gaining further Foreign ownership (%; 9/18) 41.3 momentum and are likely to rise at nearly 40% in FY18 with the gains in high-added-value products. While demand for highly reliable MLCCs for Investment Indicators automotive applications is likely to keep growing, there are few firms that can 3/18 3/19 E 3/20 E mass produce such products, and the barriers to entry are extremely high. P/E (X) 21.8 14.2 11.4 EV/EBITDA (X) 9.8 7.4 5.9 We also see potential for growth in the run-up to the start of 5G networks in P/B (X) 2.19 1.94 1.72 2019. The firm’s new product in this area, MetroCirc (liquid polymer-based, Dividend yield (%) 1.74 1.87 2.01 multi-layer substrate), boasts limited signal loss and a unique structure that ROE (%) 10.4 14.5 16.0 supports multiple layers and a boundless range of form factors. It is a crucial Net debt/equity (X) -0.1 -0.1 -0.1 technology for 5G handsets and devices, which will often use high-frequency Income Summary

spectrum with a risk of signal loss. Although birthing pains pushed this (SEC; JPYm) 3/18 3/19 E 3/20 E business deep into the red in FY17, earnings have normalized in FY18, with Sales 1,371,842 1,621,000 1,818,000 the company converting a struggling business into a potential earnings driver. Op profit 163,254 295,000 372,000 SAW filter and communication module businesses have recently struggled Pretax income 167,801 300,000 374,000 due to slowdown of Chinese smartphone market, but they could get back on Net income 146,086 225,000 280,500 a growth trajectory from 2H FY19 with the start of 5G. EPS (JPY) 685.9 1,055.1 1,315.3

DPS (JPY) 260.00 280.00 300.00 What we recommend: We assign the stock an Outperform (2) rating. Market penetration by smartphones, a chief driver of Murata’s earnings to date, See end of report for notes concerning indicators. appears to have run its course. However, the company seems set to see new added value in the growth areas of automotive and 5G applications in the wake of its earnings slump and turnaround efforts in FY16-17. Indeed, operating profit in FY19 is likely to surpass the previous record by a wide margin and we believe there is potential for strong growth over the medium term. The shares are trading at 11x our FY19 EPS estimate, roughly even with the average for major electronic component makers. We see substantial upside from current trading levels in light of the firm’s growth prospects, profitability, and competitive advantages. Risks to our investment opinion include meaningful yen appreciation and a more-prolonged-than- expected slump in the smartphone market and/or battery business.

See important disclosures, including any required research certifications, beginning on page 115

Murata Manufacturing (6981 JP): 7 January 2019

Murata Manufacturing (6981): Income Summary (SEC; JPYm; YoY %)

Year to Sales Op profit Pretax income Net income EPS (Y) DPS (Y) 3/16 1,210,841 (16) 275,406 (28) 279,173 (17) 203,776 (22) 962.6 210.00 3/17 1,135,524 (-6) 201,215 (-27) 200,418 (-28) 156,060 (-23) 733.9 220.00 3/18 1,371,842 (21) 163,254 (-19) 167,801 (-16) 146,086 (-6) 685.9 260.00 3/19 E 1,621,000 (18) 295,000 (81) 300,000 (79) 225,000 (54) 1,055.1 280.00 3/20 E 1,818,000 (12) 372,000 (26) 374,000 (25) 280,500 (25) 1,315.3 300.00 3/19 CP 1,620,000 (18) 275,000 (68) 280,000 (67) 210,000 (44) 984.8 280.00 E: Daiwa estimates. CP: Company projections.

Murata Manufacturing (6981): Earnings by Product (JPYm; YoY %) FY17 18 CP 18 E 19 E 1H 2H 2H 1H 2H E 1H 2H Sales by product (h/h %) Capacitors 209,040 240,761 449,801 (21.7) *(13) *(29) 273,670 299,330 573,000 (27.4) 325,000 350,000 675,000 (17.8) Piezoelectric components 78,524 73,492 152,016 (-10.6) *(-9) *(-4) 76,552 72,448 149,000 (-2.0) 83,500 89,500 173,000 (16.1) Other components 127,660 194,672 322,332 (45.0) *(3) *(27) 202,051 208,949 411,000 (27.5) 214,000 224,000 438,000 (6.6) Components 415,224 508,925 924,149 (21.3) 552,273 580,727 1,133,000 (22.6) 622,500 663,500 1,286,000 (13.5) Communication modules 178,340 216,663 395,003 (21.3) *(5) *(10) 212,298 230,702 443,000 (12.2) 220,000 267,000 487,000 (9.9) Other modules 24,619 24,232 48,851 (8.3) *(-13) *(-14) 22,343 19,657 42,000 (-14.0) 21,000 21,000 42,000 (0.0) Modules 202,959 240,895 443,854 (19.7) 234,641 250,359 485,000 (9.3) 241,000 288,000 529,000 (9.1) Sales by application AV 30,918 35,726 66,644 (44.1) *(-2) *(10) 36,987 39,013 76,000 (14.0) 40,000 42,000 82,000 (7.9) Communications 326,670 392,937 719,607 (13.5) *(7) *(13) 392,849 420,951 813,800 (13.1) 430,000 490,000 920,000 (13.0) Computers & peripherals 98,333 104,065 202,398 (19.0) *(-6) *(17) 121,754 130,046 251,800 (24.4) 135,000 145,000 280,000 (11.2) Automotive electronics 92,133 108,018 200,151 (18.6) *(16) *(32) 122,640 141,960 264,600 (32.2) 150,000 165,000 315,000 (19.0) Home appliances/other 70,129 109,074 179,203 (57.9) *(3) *(27) 112,684 99,116 211,800 (18.2) 108,500 109,500 218,000 (2.9) Operating profit by product Components 100,915 - - 150,016 163,984 314,000 (-) 188,000 188,000 376,000 (19.7) Modules 21,012 - - 16,455 19,045 35,500 (-) 20,500 30,500 51,000 (43.7) Other 4,506 - - 6,310 5,990 12,300 (-) 5,500 5,500 11,000 (-10.6) Eliminations/unallocated -25,936 - - -33,342 -33,458 -66,800 (-) -33,000 -33,000 -66,000 (-) Earnings Sales 619,622 752,220 1,371,842 (20.8) 831,606 1,620,000 (18.1) 788,394 832,606 1,621,000 (18.2) 865,000 953,000 1,818,000 (12.2) Operating profit 100,497 62,757 163,254 (-18.9) 135,561 275,000 (68.4) 139,439 155,561 295,000 (80.7) 181,000 191,000 372,000 (26.1) Pretax income 109,804 57,997 167,801 (-16.3) 137,229 280,000 (66.9) 142,771 157,229 300,000 (78.8) 182,000 192,000 374,000 (24.7) Net income 91,073 55,013 146,086 (-6.4) 101,697 210,000 (43.8) 108,303 116,697 225,000 (54.0) 136,500 144,000 280,500 (24.7) EPS (Y) 685.86 984.76 1,055.06 1,315.31 Inventories 282,436 - 290,257 - - 316,656 - - - - - Capex 132,821 173,787 306,608 (93.3) 183,553 340,000 (10.9) 156,447 183,553 340,000 (10.9) 150,000 150,000 300,000 (-11.8) Depreciation 60,523 81,102 141,625 (24.8) 68,617 126,000 (-11.0) 57,383 68,617 126,000 (-11.0) 69,000 84,000 153,000 (21.4) R&D 44,467 - - 49,698 100,000 (-) 50,302 49,698 100,000 (-) 55,000 55,000 110,000 (10.0) Cash flow (depreciation + net income) 151,596 136,115 287,711 (6.7) 170,314 336,000 (16.8) 165,686 185,314 351,000 (22.0) 205,500 228,000 433,500 (23.5) Free cash flow (cash flow – capex) 18,775 -37,672 -18,897 (-) -13,239 -4,000 (-) 9,239 1,761 11,000 (-) 55,500 78,000 133,500 (12.1X) EBITDA (depreciation + op profit) 161,020 143,859 304,879 (-3.1) 204,178 401,000 (31.5) 196,822 224,178 421,000 (38.1) 250,000 275,000 525,000 (24.7) Source: Company materials; compiled by Daiwa. * Approximately. Note: Depreciation methodology changed from declining-balance method to straight-line method from FY18. E: Daiwa estimates. CP: Company projections.

Murata Manufacturing (6981 JP): 7 January 2019

Financial Statements

(JPYm) 3/16 3/17 3/18 3/19 E 3/20 E Income statement Sales / Revenue 1,210,841 1,135,524 1,371,842 1,621,000 1,818,000 Operating profit 275,406 201,215 163,254 295,000 372,000 EBITDA 374,511 314,738 304,879 421,000 525,000 Pretax income 279,173 200,418 167,801 300,000 374,000 Net income 203,776 156,060 146,086 225,000 280,500 Balance sheet Liquidity on hand 370,043 397,373 220,439 97,822 109,726 Fixed assets / Non-current assets 682,415 763,568 986,753 1,200,753 1,347,753 Total assets 1,517,784 1,634,999 1,797,013 1,988,584 2,217,685 Interest-bearing debt 9,747 46,663 14,242 14,242 14,242 Total liabilities 273,805 279,665 339,797 347,549 357,995 Total net assets / Total equity 1,243,979 1,355,334 1,457,216 1,641,035 1,859,690 Shareholders' equity 1,229,159 1,354,819 1,456,600 1,640,419 1,859,074 Cash flow statement Cash flows from operating activities 252,451 243,920 225,249 274,962 373,748 Net income 203,776 156,060 146,086 225,000 280,500 Depreciation and amortization 99,105 113,523 141,625 126,000 153,000 Cash flows from investing activities -205,316 -202,697 -194,165 -340,000 -300,000 Free cash flow 47,135 41,223 31,084 -65,038 73,748 Cash flows from financing activities -56,614 -11,729 -83,585 -57,579 -61,845 Increase (decrease) in cash and cash equivalents -366 26,614 -51,274 -122,617 11,903

Accounting standards SEC SEC SEC SEC SEC

Financial indicators Growth Sales / Revenue (y/y %) 16.0 -6.2 20.8 18.2 12.2 Operating profit (y/y %) 28.4 -26.9 -18.9 80.7 26.1 Profitability Operating profit margin (%) 22.7 17.7 11.9 18.2 20.5 EBITDA margin (%) 30.9 27.7 22.2 26.0 28.9 ROE (%) 17.3 12.1 10.4 14.5 16.0 ROA (%) 13.8 9.9 8.5 11.9 13.3 Financial leverage/dividend policy Net debt-to-equity ratio (X) -0.3 -0.3 -0.1 -0.1 -0.1 Equity-to-assets ratio (%) 81.0 82.9 81.1 82.5 83.8 Total dividends / shareholders' equity (%) 3.6 3.5 3.8 3.6 3.4 Dividend payout ratio (%) 21.8 30.0 37.9 26.5 22.8 Per-share data EPS (Y) 962.6 733.9 685.9 1,055.1 1,315.3 DPS (Y) 210.00 220.00 260.00 280.00 300.00 Book value per share (Y) 5,806.1 6,368.5 6,830.5 7,692.2 8,717.5 Valuations Share price: Y14,955; market cap: Y3,189,259mn (28 Dec 2018) P/E (X) 15.5 20.4 21.8 14.2 11.4 EV/EBITDA (X) 7.6 9.0 9.8 7.4 5.9 P/B (X) 2.58 2.35 2.19 1.94 1.72 Dividend yield (%) 1.40 1.47 1.74 1.87 2.01

Source: Company materials; compiled by Daiwa. E: Daiwa estimates.

Company Outline

Murata Manufacturing is the world’s leading manufacturer of passive components. Its main products include capacitors, high-frequency components, and noise suppression products. More than half of its products are for use in smartphones/tablets, but the firm also has a large share in the automotive field. The firm is promoting the use of module technologies as a means to increase market share. It is also focusing on sensor operations.

Murata Manufacturing (6981 JP): 7 January 2019

Japan Electric appliances 7 January 2019 Japanese report: 7 January 2019

Advantest (6857 JP)

Target price: JPY3,000 (as of 6 Jul) Outperform Share price (28 Dec): JPY2,244 | Up/downside: +33.7% (not reviewed)

Business opportunities for both handsets, base stations Toru Sugiura  See higher tester demand on advancements in modem chips, DRAM 81-3-5555-7124 [email protected]  High market share of testers for both modem chips, DRAM

 Strong prospects for medium-term growth from 5G-related tester demand Daiwa Securities Co. Ltd.

What's new: Advantest is a major semiconductor testing equipment Share Price Chart (Y) Relative to TOPIX manufacturer. The firm’s strengths lie in memory chip testers, but it also 3,000 250 commands a high market share of testers for graphics processing units 2,400 210 (GPU), field programmable gate arrays (FPGA), and modem chips. 1,800 170

Outlook: We believe the firm will benefit from the accelerated release 1,200 130 of 5G devices in the following key areas: (1) modem chip 600 90 development, (2) increased DRAM content per device, and (3) greater 1/16 8/16 3/17 10/17 5/18 12/18 demand for GPU/FPGA as a result of investment in 5G base stations. Source: Compiled by Daiwa. Chip makers (Qualcomm, Intel, MediaTek, etc) have been focusing on the Market data development of 5G modem chips, with plans to launch in 2019. We 12-month range (JPY) 1,788-2,826 envisage longer testing periods (ie, new tester demand) for 5G modem Market cap (JPYm; 28 Dec) 434,814 chips, as the technology will use wider frequency bands. The firm would Shares outstanding (000; 12/18) 193,767 benefit meaningfully from this, given that it boasts almost 100% of the Foreign ownership (%; 9/18) 33.5 market share for modem chip testers. Investment Indicators We expect that 5G smartphones will need to be capable of quickly 3/18 3/19 E 3/20 E processing larger quantities of data, resulting in a shift from LPDDR4 to P/E (X) 22.0 8.9 10.1 LPDDR5 DRAM chips. It is likely that a transition to more advanced EV/EBITDA (X) 12.2 5.3 5.0 DRAMs will create new demand for testing equipment. As Advantest P/B (X) 3.22 2.35 1.99 apparently commands around 70% of the back-end tester market, such a Dividend yield (%) 1.43 3.65 3.30 shift would be a big business opportunity for the firm, in our view. When ROE (%) 15.5 31.7 21.3 compared with that from the handset market the impact may seem minor, Net debt/equity (X) -0.6 -0.6 -0.6 but Advantest would likely also benefit from increased investments in 5G Income Summary

base stations. We envisage an increase in the installation of small cell (IFRS; JPYm) 3/18 3/19 E 3/20 E systems (ie, base stations) to support 5G technology, with each base Sales 207,223 267,000 262,000 station likely to contain high-performance chips (FPGA, etc). The firm also Op profit 24,487 57,000 54,000 has high market share of testing equipment for such products, and is thus Pretax income 24,282 59,000 54,000 poised to benefit from an increase in base station investments. Net income 18,103 49,000 43,000 EPS (JPY) 101.9 252.9 221.9 What we recommend: Demand for display driver IC testers and AI chip DPS (JPY) 32.00 82.00 74.00

testers has recently been on the rise. In the lead-up to 2020, we also See end of report for notes concerning indicators. expect greater demand for testers for 5G-related products, likely providing the firm with significant business opportunities over the medium term. In the semiconductor manufacturing process, testing has been seen as an area that needs cost reductions. For smartphones and other devices, however, testing is becoming a necessity as such products become increasingly sophisticated. Trends on this front warrant attention, in our view.

See important disclosures, including any required research certifications, beginning on page 115

Advantest (6857 JP): 7 January 2019

Advantest (6857): Income Summary (IFRS; JPYm; YoY %)

Year to Sales Op profit Pretax income Net income EPS (Y) DPS (Y) 3/16 162,111 (-1) 12,597 (-25) 11,767 (-43) 6,694 (-60) 38.4 20.00 3/17 155,916 (-4) 13,905 (10) 15,022 (28) 14,201 (112) 81.1 25.00 3/18 207,223 (33) 24,487 (76) 24,282 (62) 18,103 (27) 101.9 32.00 3/19 E 267,000 (29) 57,000 (133) 59,000 (143) 49,000 (171) 252.9 82.00 3/20 E 262,000 (-2) 54,000 (-5) 54,000 (-8) 43,000 (-12) 221.9 74.00 3/19 CP 265,000 (28) 53,000 (116) 54,500 (124) 46,000 (154) - 75.00 E: Daiwa estimates. CP: Company projections.

Advantest (6857): Earnings (JPYm) SEC IFRS FY10 11 12 13 14 15 16 17 18 E 19 E 18 CP Revenue 99,634 141,048 132,903 111,878 163,803 162,111 155,916 207,223 267,000 262,000 265,000 Semiconductor & component test systems 69,333 105,608 101,119 73,017 108,686 100,762 101,266 140,930 192,000 184,000 191,000 Memory testers 30,000 25,900 17,800 23,400 22,100 25,600 27,200 53,000 67,000 54,000 68,000 SoC testers 39,300 79,700 83,300 49,600 86,600 75,200 74,100 87,900 124,000 131,000 123,000 Mechatronics systems 18,515 20,616 13,653 14,984 28,461 31,482 25,192 35,893 41,000 42,000 42,000 Services, support & other 14,166 18,807 20,077 24,151 26,746 29,923 29,496 30,466 35,000 35,000 32,000 Eliminations -2,380 -3,983 -1,946 -274 -90 -56 -38 -66 0 0 - Operating profit 6,111 837 80 -36,369 16,858 12,597 13,905 24,487 57,000 54,000 53,000 Semiconductor & component test systems 9,857 9,845 10,956 -26,724 15,955 10,514 16,652 28,917 56,000 52,000 - Mechatronics systems -251 -1,324 -4,616 -5,063 4,288 2,599 -1,529 -2,738 500 900 - Services, support & other 2,133 1,614 775 3,012 3,452 4,944 4,817 4,197 6,600 7,000 - Other/eliminations -5,628 -9,298 -7,035 -6,311 -6,837 -5,460 -5,353 -5,804 -6,100 -5,900 - Pretax income 5,551 -3,442 -1,293 -35,501 20,767 11,767 15,022 24,282 59,000 54,000 54,500 Net income 3,163 -2,195 -3,821 -35,540 16,753 6,694 14,201 18,103 49,000 43,000 46,000 Y/y % Revenue 87 42 -6 -16 - -1 -4 33 29 -2 28 Operating profit Profit -86 -90 Loss - -25 10 76 133 -5 116 Pretax income Profit Loss Loss Loss - -43 28 62 143 -8 124 Net income Profit Loss Loss Loss - -60 112 27 171 -12 154 EPS (Y) 18.0 -12.7 -22.0 -204.1 96.2 38.4 81.1 101.9 252.9 221.9 - DPS (Y) 10.0 15.0 20.0 15.0 15.0 20.0 25.0 32.0 82.0 74.0 75.0 Book value per share (Y) 797.2 759.2 812.7 667.4 583.3 536.3 619.3 696.0 954.8 1,125.1 - ROE (%) 2.2 - - - - 6.9 14.0 15.5 31.7 21.3 - Depreciation 4,209 6,838 8,063 8,268 4,730 4,965 5,158 5,024 5,400 5,700 5,500 Capex 3,793 6,984 12,592 5,626 - 4,000 4,800 5,400 6,500 6,000 7,000 R&D 21,197 30,303 33,062 32,670 - 31,298 31,170 33,540 35,700 37,000 35,000 Source: Company materials; compiled by Daiwa. Note: Figures for FY10-13 on SEC basis. FY14-15 figures retroactively adjusted to reflect adoption of IFRS from FY16. E: Daiwa estimates. CP: Company projections.

Advantest (6857): Quarterly Earnings (JPYm) FY15 16 17 18 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q Revenue 40,166 46,181 29,885 45,879 40,669 35,526 31,376 48,345 40,697 47,715 50,876 67,935 70,931 72,646 Semiconductor & component test systems 24,668 26,304 18,122 31,668 28,687 22,651 18,788 31,140 26,657 31,005 33,741 49,527 50,979 54,150 Memory testers 5,100 11,400 4,400 4,700 2,800 6,200 5,400 12,800 10,500 12,200 12,700 17,600 19,400 19,400 SoC testers 19,600 14,900 13,700 27,000 25,900 16,400 13,400 18,400 16,200 18,800 21,000 31,900 31,600 34,700 Mechatronics systems 8,701 11,457 4,576 6,748 5,157 5,734 5,314 8,987 7,188 9,657 9,063 9,985 11,078 10,678 Services, support & other 6,803 8,438 7,203 7,479 6,863 7,141 7,274 8,218 6,852 7,079 8,072 8,463 8,874 7,818 Eliminations -6 -18 -16 -16 -38 0 0 0 0 -26 0 -40 0 0 Operating profit 2,475 4,202 -219 6,139 5,738 2,580 973 4,614 2,226 5,186 3,233 13,842 15,818 17,945 Semiconductor & component test systems 1,436 1,338 -199 7,939 8,039 3,468 741 4,404 2,558 5,129 6,410 14,820 15,497 16,751 Mechatronics systems 1,568 2,660 -465 -1,164 -985 -425 -780 661 -80 731 -3,236 -153 441 105 Services, support & other 786 1,630 1,626 902 634 960 2,148 1,075 704 429 1,800 1,264 1,902 1,745 Other/eliminations -1,315 -1,426 -1,181 -1,538 -1,950 -1,248 -874 -1,281 -956 -1,103 -1,720 -2,025 -1,958 -656 Pretax income 2,530 3,548 340 5,349 6,179 2,936 631 5,276 1,567 4,805 3,399 14,511 16,537 18,560 Net income 1,755 1,222 -306 4,023 4,975 2,286 112 6,828 991 3,935 2,547 10,630 13,892 16,257 Y/y % Revenue - - - - 1 -23 5 5 0 34 62 41 74 52 Operating profit - - - - 132 -39 Profit -25 -61 101 232 200 611 246 Pretax income - - - - 144 -17 86 -1 -75 64 439 175 955 286 Net income - - - - 183 87 Profit 70 -80 72 2,174 56 1,302 313 Source: Company materials; compiled by Daiwa. Note: FY15 figures retroactively adjusted to reflect adoption of IFRS from FY16.

Advantest (6857 JP): 7 January 2019

Financial Statements

(JPYm) 3/16 3/17 3/18 3/19 E 3/20 E Income statement Sales / Revenue 162,111 155,916 207,223 267,000 262,000 Operating profit 12,597 13,905 24,487 57,000 54,000 EBITDA 17,562 19,063 29,511 62,400 59,700 Pretax income 11,767 15,022 24,282 59,000 54,000 Net income 6,694 14,201 18,103 49,000 43,000 Balance sheet Liquidity on hand 85,430 95,324 103,973 104,000 135,000 Fixed assets / Non-current assets 60,055 60,464 57,416 63,000 63,000 Total assets 210,451 231,603 254,559 280,000 309,000 Interest-bearing debt 44,618 44,745 29,872 0 0 Total liabilities 116,832 122,086 129,949 95,000 94,000 Total net assets / Total equity 93,619 109,517 124,610 185,000 215,000 Shareholders' equity 93,619 109,517 124,610 185,000 218,000 Cash flow statement Cash flows from operating activities 7,728 15,833 28,254 48,000 50,000 Net income 6,694 14,201 18,103 49,000 43,000 Depreciation and amortization 4,965 5,158 5,024 5,400 5,700 Cash flows from investing activities -2,395 -3,521 -2,329 -6,500 -6,000 Free cash flow 5,333 12,312 25,925 41,500 44,000 Cash flows from financing activities -13,531 -1,002 -15,237 -44,000 -13,000 Increase (decrease) in cash and cash equivalents -12,144 9,894 8,649 10 31,000

Accounting standards IFRS IFRS IFRS IFRS IFRS

Financial indicators Growth Sales / Revenue (y/y %) -1.0 -3.8 32.9 28.8 -1.9 Operating profit (y/y %) -25.3 10.4 76.1 132.8 -5.3 Profitability Operating profit margin (%) 7.8 8.9 11.8 21.3 20.6 EBITDA margin (%) 10.8 12.2 14.2 23.4 22.8 ROE (%) 6.9 14.0 15.5 31.7 21.3 ROA (%) 3.0 6.4 7.4 18.3 14.6 Financial leverage/dividend policy Net debt-to-equity ratio (X) -0.4 -0.5 -0.6 -0.6 -0.6 Equity-to-assets ratio (%) 44.5 47.3 49.0 66.1 70.6 Total dividends / shareholders' equity (%) 3.7 4.0 4.6 8.6 6.6 Dividend payout ratio (%) 52.2 30.8 31.4 32.4 33.3 Per-share data EPS (Y) 38.4 81.1 101.9 252.9 221.9 DPS (Y) 20.00 25.00 32.00 82.00 74.00 Book value per share (Y) 536.3 619.3 696.0 954.8 1,125.1 Valuations Share price: Y2,244; market cap: Y434,814mn (28 Dec 2018) P/E (X) 58.5 27.7 22.0 8.9 10.1 EV/EBITDA (X) 22.4 20.2 12.2 5.3 5.0 P/B (X) 4.18 3.62 3.22 2.35 1.99 Dividend yield (%) 0.89 1.11 1.43 3.65 3.30

Source: Company materials; compiled by Daiwa. Note: FY15 figures retroactively adjusted to reflect adoption of IFRS from FY16. E: Daiwa estimates.

Company Outline

Advantest commands a roughly 40% share of the market for semiconductor testing equipment. The firm has successfully captured demand for testers for semiconductors used in smartphones thanks to the acquisition of US Verigy and its V93000 test platform in 2011. In contrast, sales of conventional products have been slowing due to a stagnant memory chip tester market. The firm aims for further growth by increasing sales of nanotech products, such as scanning-electron microscopes and direct-write lithography systems.

Advantest (6857 JP): 7 January 2019

Taiwan Information Technology 7 January 2019

(3105 TT) Win Semiconductors Win Semiconductors

Target price: TWD195.00 (from TWD195.00) Share price (3 Jan): TWD114.00 | Up/downside: +71.1%

Turning over a new leaf in 2019 Rick Hsu (886) 2 8758 6261  5G migration likely to drive new secular growth for RF PA [email protected]  Rising 3D laser adoption should diversify single-customer risk Robert Hsu (886) 2 8758 6251  Reiterating Buy (1) despite forecast revisions [email protected]

What's new: We are fine-tuning our forecasts for Win Semiconductors Forecast revisions (%) (WinSemi) to reflect the recent 3D order cut, but maintain our positive Year to 31 Dec 18E 19E 20E stance on its structural business outlook, as we expect WinSemi to capture Revenue change (0.2) 0.5 1.4 the most incremental value from 5G migration, in addition to its 3D laser- Net profit change (0.8) (0.8) (0.1) Core EPS (FD) change (0.8) (0.8) (0.1) sensing business, where the high-growth profile remains viable, in our view. Source: Daiwa forecasts WinSemi is our conviction Buy (1) in the Asian compound semiconductor industry. Our 12-month TP is unchanged at TWD195. Share price performance

(TWD) (%) What's the impact: 4Q18 preview. We trim our 4Q18E EPS for WinSemi 335 110 by 5% to reflect a likely order cut from its key 3D laser customer, which 264 90 appeared to start hitting WinSemi in December, rather than in 1Q19 (see 193 70 page 25 of our 5G report). Thus, our 4Q18/1Q19E EPS are 15/22% below 121 50 50 30 the consensus (table on page 80). Yet, we believe this order cut, likely due Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 to poor iPhone sell-through, will not weigh on our positive stance on Win Semico (LHS) WinSemi’s structural business, in which the 2 demand drivers, 5G cellular Relative to TWOTCI (RHS) and 3D laser, both have high-growth profiles. 12-month range 88.00-331.00 5G likely to drive new PA growth. As shown in our 5G report, we expect Market cap (USDbn) 1.56 3m avg daily turnover (USDm) 46.88 WinSemi to capture the most incremental value during the 5G migration Shares outstanding (m) 424 cycle, thanks to meaningful increases in RF PA per box at infrastructure Major shareholder Tien He Enterprise (5.1%) base stations (B/S) and terminal-device smartphones, with changes in epiwafer materials to handle high temperatures at B/S making the 5G cycle Financial summary (TWD) both unit- and ASP-accretive for WinSemi. Although the shift from silicon to Year to 31 Dec 18E 19E 20E Revenue (m) 17,311 19,216 23,810 gallium-nitride compound may not be margin-accretive due to the materials Operating profit (m) 2,961 3,939 6,089 cost pass-through, we project 5G to contribute 7-22% of WinSemi’s RF PA Net profit (m) 2,828 3,283 5,021 revenue over 2019-21, for a 35% CAGR for its infrastructure PA sales. Core EPS (fully-diluted) 6.673 7.746 11.847 EPS change (%) (28.5) 16.1 52.9 Rising 3D adoption should diversify risk. WinSemi had a tough year in Daiwa vs Cons. EPS (%) (1.2) 10.4 33.0 PER (x) 17.1 14.7 9.6 the 3D laser space in 2018 due to an initial ramp-up for a single customer Dividend yield (%) 6.1 4.4 5.3 that was hampered by uneven supply-chain yields and inventory issues. DPS 7.0 5.0 6.0 However, we believe the single-customer risk will be mitigated, helped PBR (x) 2.0 1.9 1.7 EV/EBITDA (x) 7.3 6.0 4.3 along by active adoption of Android smartphone vendors aiming to ROE (%) 11.3 13.1 18.4 commercialise their 3D laser solutions in 2019, as well as broadened Source: FactSet, Daiwa forecasts applications into non-smartphone areas such as surveillance and automotive. Although we are more conservative than the street on the near- term business outlook due to order cuts in the iPhone supply chain, our positive view on 3D lasers’ robust growth profile is unchanged.

What we recommend: We expect WinSemi to rebuild growth momentum from 3Q19 onwards for a 33% EPS CAGR over 2018-20E. We reiterate our Buy (1) call with an unchanged 12-month TP of TWD195 on a 1-year forward PER of 25x. Key risk: prolonged PA/3D inventory correction.

How we differ: We are 10-33% above the consensus on 2019-20E EPS, likely due to our more bullish business assumptions for 3D and 5G.

See important disclosures, including any required research certifications, beginning on page 115

Win Semiconductors (3105 TT): 7 January 2019

Financial summary Key assumptions Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Wafer shipment (6" equ) 206,078 343,196 248,904 284,589 354,835 343,196 372,876 438,848 Utilisation rate (%) 73 79 86 87 92 79 80 82 Blended wafer ASP (USD) 1,705 1,578 1,519 1,465 1,470 1,520 1,507 1,546

Profit and loss (TWDm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Cellular & WiFi 8,870 7,801 9,953 11,379 12,209 11,153 11,124 12,134 Infrastructure 1,610 2,108 2,063 2,079 2,784 3,078 3,901 5,638 Other Revenue 1 1 (0) 165 2,093 3,080 4,192 6,038 Total Revenue 10,481 9,910 12,016 13,623 17,086 17,311 19,216 23,810 Other income 0 0 0 0 0 0 0 0 COGS (7,249) (6,400) (7,255) (8,634) (10,758) (12,202) (13,220) (15,224) SG&A (627) (633) (678) (888) (1,066) (1,217) (1,099) (1,343) Other op.expenses (495) (562) (572) (606) (693) (930) (958) (1,153) Operating profit 2,110 2,315 3,510 3,495 4,569 2,961 3,939 6,089 Net-interest inc./(exp.) (64) (31) 6 (9) (29) 12 9 20 Assoc/forex/extraord./others 167 145 (83) 402 (12) 446 60 60 Pre-tax profit 2,212 2,429 3,434 3,888 4,529 3,419 4,008 6,169 Tax (401) (465) (762) (791) (813) (623) (725) (1,148) Min. int./pref. div./others 0 0 0 16 49 32 0 0 Net profit (reported) 1,812 1,963 2,672 3,113 3,764 2,828 3,283 5,021 Net profit (adjusted) 1,812 1,963 2,672 3,113 3,764 2,828 3,283 5,021 EPS (reported)(TWD) 2.402 2.649 3.970 6.038 9.335 6.673 7.746 11.847 EPS (adjusted)(TWD) 2.402 2.649 3.970 6.038 9.335 6.673 7.746 11.847 EPS (adjusted fully-diluted)(TWD) 2.369 2.623 4.478 7.636 9.335 6.673 7.746 11.847 DPS (TWD) 1.507 1.498 0.221 0.579 4.494 7.000 5.000 6.000 EBIT 2,110 2,315 3,510 3,495 4,569 2,961 3,939 6,089 EBITDA 3,932 4,196 5,433 5,866 7,131 6,128 7,163 9,816

Cash flow (TWDm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Profit before tax 2,212 2,429 3,434 3,888 4,529 3,419 4,008 6,169 Depreciation and amortisation 1,822 1,882 1,923 2,372 2,562 3,167 3,224 3,727 Tax paid (401) (465) (762) (791) (813) (623) (725) (1,148) Change in working capital 887 (118) (601) (959) (777) (210) (120) (950) Other operational CF items 478 103 899 (722) 393 32 0 0 Cash flow from operations 4,998 3,830 4,893 3,787 5,894 5,785 6,386 7,798 Capex (2,815) (738) (3,493) (3,226) (3,994) (4,135) (2,650) (4,500) Net (acquisitions)/disposals 0 0 0 0 0 0 0 0 Other investing CF items 1,233 (535) (126) 1,392 (1,153) 0 0 0 Cash flow from investing (1,583) (1,272) (3,619) (1,834) (5,147) (4,135) (2,650) (4,500) Change in debt (2,942) (783) (520) 1,650 1,644 (2,362) (886) (664) Net share issues/(repurchases) (515) 0 (1,487) (1,790) 5,540 0 0 0 Dividends paid (1,136) (1,110) (149) (298) (1,812) (2,967) (2,119) (2,543) Other financing CF items 112 25 64 (976) (617) 100 100 100 Cash flow from financing (4,481) (1,867) (2,092) (1,414) 4,754 (5,229) (2,905) (3,107) Forex effect/others 6 20 10 (20) (41) 0 0 0 Change in cash (1,059) 710 (808) 518 5,461 (3,578) 832 191 Free cash flow 2,183 3,092 1,400 561 1,900 1,650 3,736 3,298 Source: FactSet, Daiwa forecasts

Win Semiconductors (3105 TT): 7 January 2019

Financial summary continued … Balance sheet (TWDm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Cash & short-term investment 3,714 4,676 3,514 3,581 10,812 7,234 8,065 8,256 Inventory 1,127 1,500 2,471 2,727 3,745 3,925 4,045 4,695 Accounts receivable 650 690 700 1,069 1,551 1,331 1,831 2,081 Other current assets 198 259 299 442 679 300 300 300 Total current assets 5,689 7,125 6,984 7,819 16,787 12,790 14,241 15,332 Fixed assets 12,636 11,653 11,623 13,349 14,468 15,920 15,143 16,102 Goodwill & intangibles 624 345 2,332 1,740 2,124 2,250 2,100 2,080 Other non-current assets 2,162 2,694 3,172 3,502 3,648 3,648 3,648 3,648 Total assets 21,112 21,816 24,111 26,411 37,027 34,608 35,133 37,163 Short-term debt 0 0 24 0 0 0 0 0 Accounts payable 635 930 1,310 975 1,698 1,448 1,948 1,898 Other current liabilities 1,692 1,819 3,272 3,219 3,379 4,792 3,986 4,064 Total current liabilities 2,327 2,749 4,606 4,194 5,077 6,241 5,934 5,963 Long-term debt 3,721 2,938 2,099 3,674 5,905 3,543 2,657 1,993 Other non-current liabilities 171 189 198 225 240 250 300 350 Total liabilities 6,220 5,876 6,902 8,093 11,223 10,034 8,892 8,306 Share capital 7,393 7,422 5,966 4,077 4,227 4,227 4,227 4,227 Reserves/R.E./others 7,499 8,517 11,243 13,550 21,343 20,097 21,714 24,280 Shareholders' equity 14,892 15,940 17,209 17,626 25,569 24,324 25,941 28,507 Minority interests 0 0 0 691 236 250 300 350 Total equity & liabilities 21,112 21,816 24,111 26,411 37,027 34,608 35,133 37,163 EV 48,322 46,577 46,923 49,098 43,643 44,874 43,207 42,401 Net debt/(cash) 8 (1,737) (1,392) 93 (4,907) (3,690) (5,408) (6,263) BVPS (TWD) 19.746 21.508 25.572 34.191 63.414 57.394 61.209 67.263

Key ratios (%) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Sales (YoY) (6.7) (5.5) 21.2 13.4 25.4 1.3 11.0 23.9 EBITDA (YoY) 4.4 6.7 29.5 8.0 21.6 (14.1) 16.9 37.0 Operating profit (YoY) (14.1) 9.7 51.7 (0.4) 30.8 (35.2) 33.0 54.6 Net profit (YoY) 10.0 8.4 36.1 16.5 20.9 (24.9) 16.1 52.9 Core EPS (fully-diluted) (YoY) (1.4) 10.7 70.7 70.5 22.3 (28.5) 16.1 52.9 Gross-profit margin 30.8 35.4 39.6 36.6 37.0 29.5 31.2 36.1 EBITDA margin 37.5 42.3 45.2 43.1 41.7 35.4 37.3 41.2 Operating-profit margin 20.1 23.4 29.2 25.7 26.7 17.1 20.5 25.6 Net profit margin 17.3 19.8 22.2 22.8 22.0 16.3 17.1 21.1 ROAE 12.4 12.7 16.1 17.9 17.4 11.3 13.1 18.4 ROAA 8.1 9.1 11.6 12.3 11.9 7.9 9.4 13.9 ROCE 10.9 12.3 18.4 16.9 17.0 9.9 13.8 20.4 ROIC 11.6 12.9 18.2 16.3 19.1 11.6 15.5 22.8 Net debt to equity 0.1 n.a. n.a. 0.5 n.a. n.a. n.a. n.a. Effective tax rate 18.1 19.2 22.2 20.4 18.0 18.2 18.1 18.6 Accounts receivable (days) 29.6 24.7 21.1 23.7 28.0 30.4 30.0 30.0 Current ratio (x) 2.4 2.6 1.5 1.9 3.3 2.0 2.4 2.6 Net interest cover (x) 33.0 74.3 n.a. 383.3 158.5 n.a. n.a. n.a. Net dividend payout 62.7 56.5 5.6 9.6 48.1 104.9 64.5 50.6 Free cash flow yield 4.5 6.4 2.9 1.2 3.9 3.4 7.7 6.8 Source: FactSet, Daiwa forecasts

Company profile

Founded in 1999, Win Semiconductors Corp (WinSemi) is the world’s largest compound semiconductor foundry, focusing on gallium-arsenide (GaAs) foundry services for customers in both wireless and wire-line communication markets and infrastructure applications. It has a diverse

technology portfolio of processes that supports microwave frequency requirements from 50MHz to 100GHz, with applications including smartphones, tablet PCs, cellular base-stations, very small aperture terminal (VSAT), fibre optics, etc. It has started penetrating into vertical cavity surface emitting laser (VCSEL) foundries since 2017 for consumer laser applications such as 3D laser sensors and cameras.

Win Semiconductors (3105 TT): 7 January 2019

WinSemi: quarterly P&L forecasts TWDm 1Q18 2Q18 3Q18 4Q18E 1Q19E 2Q19E 3Q19E 4Q19E 2017 2018E 2019E 2020E Total revenue 4,464 4,567 4,066 4,214 3,829 4,445 5,391 5,550 17,087 17,311 19,216 23,810 COGS -2,943 -3,088 -3,025 -3,147 -2,888 -3,186 -3,558 -3,588 -10,758 -12,202 -13,220 -15,224 Gross profit 1,521 1,479 1,041 1,067 941 1,259 1,833 1,963 6,328 5,108 5,996 8,585 Opex -480 -533 -611 -523 -448 -471 -561 -577 -1,759 -2,148 -2,057 -2,497 Operating profit 1,041 946 429 545 493 788 1,272 1,385 4,569 2,961 3,939 6,089 EBITDA 1,799 1,733 1,251 1,345 1,215 1,566 2,105 2,276 7,131 6,128 7,163 9,816 Pretax profit 909 1,157 808 545 507 805 1,290 1,405 4,529 3,419 4,008 6,169 Income taxes -179 -252 -110 -82 -101 -177 -194 -253 -813 -623 -725 -1,148 Net profit 736 911 718 463 406 628 1,097 1,152 3,764 2,828 3,283 5,021 FD O/S (m) 423 423 424 424 424 424 424 424 403 424 424 424 FD EPS (TWD) 1.74 2.16 1.69 1.09 0.96 1.48 2.59 2.72 9.34 6.67 7.75 11.85 Margin Gross 34% 32% 26% 25% 25% 28% 34% 35% 37% 30% 31% 36% Operating 23% 21% 11% 13% 13% 18% 24% 25% 27% 17% 20% 26% EBITDA 40% 38% 31% 32% 32% 35% 39% 41% 42% 35% 37% 41% Net 16% 20% 18% 11% 11% 14% 20% 21% 22% 16% 17% 21% Growth (QoQ) Total revenue -20% 2% -11% 4% -9% 16% 21% 3% Gross profit -29% -3% -30% 3% -12% 34% 46% 7% Operating profit -36% -9% -55% 27% -9% 60% 61% 9% EBITDA -23% -4% -28% 8% -10% 29% 34% 8% Net profit -45% 24% -21% -35% -12% 55% 75% 5% FD EPS -48% 24% -21% -35% -12% 55% 75% 5% Growth (YoY) Total revenue 36% 20% -8% -24% -14% -3% 33% 32% 25% 1% 11% 24% Gross profit 38% 4% -37% -50% -38% -15% 76% 84% 27% -19% 17% 43% Operating profit 42% -5% -65% -66% -53% -17% 196% 154% 31% -35% 33% 55% EBITDA 37% 10% -34% -43% -32% -10% 68% 69% 22% -14% 17% 37% Net profit 48% 22% -39% -65% -45% -31% 53% 149% 21% -25% 16% 53% FD EPS 41% 16% -42% -67% -45% -31% 53% 149% 22% -29% 16% 53%

Source: Company, Daiwa estimates & forecasts

WinSemi: 4Q18 preview and 1Q19 outlook comparison 4Q18E 1Q19E TWDm Daiwa Consensus Variance Daiwa Consensus Variance Revenue 4,214 4,314 -2% 3,829 4,068 -6% Gross profit 1,067 941 Operating profit 545 493 Pretax profit 545 507 Net profit 463 543 -15% 406 518 -22% Adjusted EPS (TWD) 1.09 1.28 -15% 0.96 1.22 -22% Margin Gross 25.3% 24.6% Operating 12.9% 12.9% Net 11.0% 10.6% Operation Utilization* 74% 72% Revenue mix Cellular 34% 35% Infrastructure 21% 20% WiFi 25% 28% VCSEL & other** 20% 17%

Source: Bloomberg, Daiwa estimates & forecasts Note: * Calculated as wafer shipment / capacity; ** Including optics and other sales

WinSemi: revenue trend by product segment WinSemi: 1-year forward PER bands TWDm TWD 9,000 80% 400 8,000 60% 7,000 300 6,000 40% 5,000 200 20% 4,000 100 3,000 0% 2,000 (20%) 0 1,000 0 (40%) Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 Dec-11 Aug-12 Dec-12 Aug-13 Dec-13 Aug-14 Dec-14 Aug-15 Dec-15 Aug-16 Dec-16 Aug-17 Dec-17 Aug-18 Dec-18

1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 Share price 5x 10x 4Q18E 1Q19E 2Q19E 3Q19E 4Q19E 1Q20E 2Q20E 3Q20E 4Q20E 1Q21E 2Q21E 3Q21E 4Q21E 15x 20x 25x RF PA Optics Others Growth 30x Source: Company, Daiwa estimates & forecasts Source: Company, TEJ, Daiwa forecasts

Malaysia Information Technology 7 January 2019

Globetronics Technology (GTB MK) AAC Technol ogies

Target price: MYR3.00 (from MYR3.00) Share price (3 Jan): MYR1.48 | Up/downside: +102%

Niche sensor play

 Sensor business is driving growth Kevin Low (603) 2146 7479  Favourable shift in product mix to lead to margin improvement [email protected]  Reaffirming our BUY rating and 12-month TP of MYR3.0

What’s new: Strong 3Q18 results reaffirm our conviction. Globe’s Forecast revisions (%) 3Q18 earnings surged by 169% QoQ and 62% YoY after the company saw Year to 31 Dec 18E 19E 20E Revenue change - - - a sharp ramp-up in production of its light and gesture sensors. Net-profit change - - - Core EPS (FD) change - - - Management expects the sensor division to account for 52% of revenue for 2018, up from 36% for 2017. The division continues to be the key driver of Source: Affin Hwang forecasts growth. We forecast EPS growth of 50% YoY for 2018E after registering 107% YoY growth for 2017, but off a low base. Share price performance (MYR) (%) Reduced earnings volatility. The company is co-developing the next 3.0 105 2.6 91 generation of gesture, imaging, motion and light sensors, which: 1) reduces 2.2 78 the risk of earnings volatility, and 2) is predominantly VCSEL-based and, as 1.8 64 such, offers further opportunities for growth as VCSEL-based products 1.4 50 expand from the industrial and commercial space into the larger consumer Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Globetroni (LHS) market. Relative to FBMKLCI (RHS)

Moving beyond Austrian customer. Globe continues to work on a number of new sensors for its Austrian as well as other potential 12-month range 1.48-3.00 Market cap (USDm) 233.0 customers. No longer new to this business, Globe sees scope for 3m average daily turnover (USDm) 0.93 expansion. The maiden earnings contribution from its automotive laser Shares outstanding (m) 669.03 Major shareholder EPF (10.6%) headlamp should also see Globe moving beyond its Austrian customer and Source: Bloomberg also the smart devices segment, while providing better earnings quality over the long term. Financial summary (MYR) Year to 31 Dec 18E 19E 20E What’s the impact: Having established itself as a niche sensor player, Revenue (m) 361.0 425.8 463.3 Operating profit (m) 85.1 112.0 130.6 Globe is progressively expanding its customer base, which should improve Net profit (m) 79.1 99.8 116.4 its earnings quality ahead. Diversification into the automotive headlamp Core EPS (fully-diluted) 0.119 0.15 0.175 business also reduces earnings volatility and exposure to the smartphone EPS change (%) 50.2 26.2 16.6 Daiwa vs Cons. EPS (%) 6.0 10.0 14.0 space. PER (x) 12.5 9.9 8.5 Dividend yield (%) 7.2 9.1 10.6 What we recommend: We forecast EPS growth of 26% YoY for 2019 and DPS 0.107 0.135 0.157 PBR (x) 3.4 3.3 3.2 17% YoY for 2020 for a 2017-20E EPS CAGR of 30%. We reiterate our EV/EBITDA (x) 7.6 6.1 5.4 ROE (%) 27.7 33.9 38.2 BUY rating and 12-month TP of MYR3.0 (based on 20x 2019E EPS). Key downside risks: loss of key customers and sharp currency appreciation. Source: Company, Affin Hwang forecasts

How we differ: We remain upbeat on Globe’s sensor business and contribution from the new automotive laser headlamp division. As such, our 2018-19E EPS are around 6-10% above those of the market.

See important disclosures, including any required research certifications, beginning on page 115

Globetronics Technology (GTB MK): 7 January 2019

Financial summary Profit & Loss Statement (MYRm) FYE Dec 2016 2017 2018E 2019E 2020E Total revenue 215.3 304.6 361.0 425.8 463.3 Operating expenses -164.2 -221.5 -238.3 -275.6 -298.5 EBITDA 51.2 83.1 122.7 150.2 164.7 Depreciation -20.3 -28.7 -37.6 -38.2 -34.1 Amortisation - - - - - EBIT 30.9 54.3 85.1 112.0 130.6 Net interest income/(expense) 2.3 3.2 2.4 1.6 1.7 Associates' contribution 0.0 (0.1) (0.1) (0.1) (0.1) Others - - - - - Pretax profit 33.2 57.4 87.4 113.5 132.3 Tax -7.7 -4.7 -8.3 -13.6 -15.9 Minority interest - - - - - Net profit 25.7 51.1 79.1 99.8 116.4 Core net profit 25.5 52.6 79.1 99.8 116.4

Quarterly Profit & Loss (MYRm) FYE Dec 3Q17 4Q17 1Q18 2Q18 3Q18 Revenue 87 105 86 72 88 Operating expenses -63 -68 -61 -56 -54 EBITDA 24 37 26 15 33 Depreciation -9 -12 -8 -6 -9 EBIT 16 25 17 10 24 Net int income/(expense) 0 0 0 0 0 Associates' contribution 0 0 0 0 0 Exceptional Items 0 0 -1 1 0 Pretax profit 16 25 17 11 25 Tax -2 0 -2 -2 -1 Minority interest Net profit 14 25 15 9 24 Core net profit 14 25 16 9 23 Margins (%) EBITDA 27.8 35.1 29.8 21.3 38.2 PBT 18.5 24.0 19.4 15.2 28.4 Net profit 16.5 23.9 17.6 13.1 26.9

Cash flow (MYRm) FYE Dec 2016 2017 2018E 2019E 2020E EBIT 30.9 54.3 85.1 112.0 130.6 Depreciation & amortisation 20.3 28.7 37.6 38.2 34.1 Working capital changes 14.8 -37.1 22.1 -6.3 -4.3 Cash tax paid -7.7 -4.7 -8.3 -13.6 -15.9 Others -0.2 -3.8 0.0 0.0 0.0 Cashflow from operations 58.3 35.8 136.4 130.2 144.4 Capex -8.9 -106.6 -85.0 -15.0 -15.0 Disposal/(purchases) 3.8 5.4 3.4 2.6 2.7 Others 0.0 0.0 0.0 0.0 0.0 Cash flow from investing -5.2 -101.2 -81.6 -12.4 -12.3 Debt raised/(repaid) -11.0 31.0 0.0 0.0 0.0 Equity raised/(repaid) 0.7 38.0 0.0 0.0 0.0 Net int income/(expense) 2.3 3.2 2.4 1.6 1.7 Dividends paid -64.8 -45.6 -71.2 -89.9 -104.7 Others 6.9 -8.6 -3.4 -2.6 -2.7 Cash flow from financing -66.0 17.9 -72.2 -90.9 -105.8 Net change in CF -12.8 -47.5 -17.4 26.9 26.4 Free Cash Flow 49.4 -70.8 51.4 115.2 129.4

Source: Company, Affin Hwang forecasts

Globetronics Technology (GTB MK): 7 January 2019

Financial summary continued … Balance sheet (MYRm) FYE Dec 2016 2017 2018E 2019E 2020E Fixed assets 72.6 150.1 197.5 174.2 155.2 Other long term assets 22.4 22.3 22.3 22.3 22.3 Total non-current assets 95.0 172.4 219.8 196.5 177.5 Cash and equivalents 165.6 116.4 99.0 125.9 152.2 Stocks 9.0 13.5 18.8 23.3 26.7 Debtors 40.4 94.7 59.3 71.2 78.7 Other current assets 0.3 0.2 0.2 0.2 0.2 Total current assets 215.4 224.7 177.3 220.5 257.7 Creditors 35.8 57.4 49.5 59.5 66.0 Short-term borrowings - 31.0 31.0 31.0 31.0 Other current liabilities 1.3 0.4 0.4 0.4 0.4 Total current liabilities 37.0 88.9 80.9 91.0 97.5 Long-term borrowings - 20.3 20.3 20.3 20.3 Other long-term liabilities 9.2 6.6 6.6 6.6 6.6 Total long-term liabilities 9.2 26.9 26.9 26.9 26.9 Shareholders' Funds 264.1 281.3 289.3 299.2 310.9

Key ratios (%) FYE Dec 2016 2017 2018E 2019E 2020E Growth (YoY) Revenue (%) -37.3 41.4 18.5 18.0 8.8 EBITDA (%) -41.1 62.3 47.7 22.4 9.6 Core net profit (%) -57.8 106.7 50.2 26.2 16.6 Profitability EBITDA margin (%) 23.8 27.3 34.0 35.3 35.6 PBT margin (%) 15.5 18.3 24.2 26.6 28.5 Net profit margin (%) 11.9 16.8 21.9 23.4 25.1 Effective tax rate (%) 23.1 8.5 9.5 12.0 12.0 ROA (%) 8.3 12.9 19.9 23.9 26.7 Core ROE (%) 9.0 19.3 27.7 33.9 38.2 ROCE (%) 10.8 18.2 25.3 32.4 36.7 Dividend payout ratio (%) 252.1 89.2 90.0 90.0 90.0 Liquidity Current ratio (x) 5.8 2.5 2.2 2.4 2.6 Operating cash flows (MYRm) 58.3 35.8 136.4 130.2 144.4 Free cash flows (MYRm) 49.4 -70.8 51.4 115.2 129.4 FCF/share (sen) 7.4 -10.6 7.7 17.3 19.4 Asset management Debtors turnover (days) 68.5 113.5 60.0 61.0 62.0 Stock turnover (days) 15.2 16.1 19.0 20.0 21.0 Creditors turnover (days) 60.7 68.8 50.0 51.0 52.0 Capital structure Net Gearing (%) -62.7 -23.1 -16.5 -24.9 -32.4 Interest Cover (x) nm nm nm nm nm

Source: Company, Affin Hwang forecasts

Company profile

Globetronics Technology Bhd is an investment holding company. It started off as an OSAT for Intel back in the 1990s and was publicly listed in 1997. Globetronics gradually moved away from the IC segment after 2003, diversifying into the assembly of quartz crystal timing devices, LED and in 2012, the sensor segment.

Globetronics Technology (GTB MK): 7 January 2019

Japan Electric appliances 7 January 2019 Japanese report: 7 January 2019

Sony (6758 JP)

Target price: JPY7,000 (as of 19 Nov) Buy Share price (28 Dec): JPY5,326 | Up/downside: +31.4% (not reviewed)

Higher sales, profit margins for semiconductors likely Satoshi Sakae  Smartphone image sensors to drive growth for now 81-3-5555-7139 [email protected]  Look for emerging contributions from ToF sensors in 2019

 Issuing a Buy [1] rating and 12-month TP of JPY7,000 Daiwa Securities Co. Ltd.

What's new: At Sony, we see high prospects for profit growth in the sensor Share Price Chart (Y) Relative to TOPIX and content spheres (music, movies), and expect sustained growth in 7,300 200 the image sensors segment, particularly for smartphones, from 2019. 5,900 170

What's the impact: Image sensors for smartphones are creating added 4,500 140 value amid trends such as pixel sizes becoming smaller; more devices 3,100 110 being equipped with multiple cameras; and lens apertures getting wider. 1,700 80 The smaller pixel sizes (higher resolution sensors) allow for more 1/16 8/16 3/17 10/17 5/18 12/18 cameras; we believe technological advances in this area would Source: Compiled by Daiwa. continue until 2022-23 (see our discussion on multiple cameras on Market data page 41). Sony appears to have received many inquiries from potential 12-month range (JPY) 4,959-6,973 customers for the IMX586 stacked CMOS image sensor (CIS) for Market cap (JPYm; 28 Dec) 6,760,223 smartphone cameras, which it unveiled in the summer of 2018. The product Shares outstanding (000; 12/18) 1,269,287 has a pixel size of 0.8μm and features 48 effective megapixels. Adopting a Foreign ownership (%; 9/18) 59.1 Quad Bayer color filter array, the sensor delivers high sensitivity and high resolution. It also has a wide dynamic range and offers real-time output. Investment Indicators 3/18 3/19 E 3/20 E Apart from the smartphone CIS, we look for emerging contributions P/E (X) 13.7 9.5 12.7 from time-of-flight (ToF) sensors in 2019. Sony has been working to EV/EBITDA (X) 4.9 3.9 4.0 boost the demand for ToF sensors by directly approaching end-product- P/B (X) 2.27 1.86 1.63 makers. It is targeting steady growth in the automotive space and is Dividend yield (%) 0.52 0.56 0.56 apparently aiming for sales of image sensors for autos match around a ROE (%) 18.0 21.6 13.7 Net debt/equity (X) -0.5 -0.5 -0.5 tenth of those for smartphones by 2025.

Income Summary

Outlook: Our forecasts call for operating profit to come in at JPY889bn (up (SEC; JPYm) 3/18 3/19 E 3/20 E 21% YoY) in FY18, JPY805.6bn (down 9%) in FY19, JPY826.7bn (up 3%) Sales 8,543,982 8,861,400 8,645,000 in FY20, JPY861.5bn (up 4%) in FY21, and JPY946.1bn (up 10%) in FY22. Op profit 734,860 889,000 805,600 Over the next three months or so, we expect profit growth to be driven by Pretax income 699,049 995,600 810,600 sales expansion in the semiconductors and music segments and wider Net income 490,794 714,100 532,700 profit margins for the pictures segment. Our forecast of a brief drop in EPS (JPY) 388.3 562.6 419.7 operating profit in FY19 largely reflects: 1) the absence of one-off profits DPS (JPY) 27.50 30.00 30.00

associated with an acquisition booked in FY18, and 2) expectations for a See end of report for notes concerning indicators. decline in sales and profits in the game and network services segment due to the console cycle.

What we recommend: We have a Buy (1) rating on the stock and a 12- month target price of JPY7,000. To arrive at our price objective, we use a sum-of-the-parts valuation model.

See important disclosures, including any required research certifications, beginning on page 115

Sony (6758 JP): 7 January 2019

Sony (6758): Income Summary (SEC; JPYm; YoY %)

Year to Sales Op profit Pretax income Net income EPS (JPY) DPS (JPY) 3/16 8,105,712 (-1) 294,197 (329) 304,504 (666) 147,791 (profit) 119.4 20.00 3/17 7,603,250 (-6) 288,702 (-2) 251,619 (-17) 73,289 (-50) 58.1 20.00 3/18 8,543,982 (12) 734,860 (155) 699,049 (178) 490,794 (570) 388.3 27.50 3/19 E 8,861,400 (4) 889,000 (21) 995,600 (42) 714,100 (45) 562.6 30.00 3/20 E 8,645,000 (-2) 805,600 (-9) 810,600 (-19) 532,700 (-25) 419.7 30.00 3/21 E 8,816,600 (2) 826,700 (3) 831,700 (3) 547,200 (3) 431.1 30.00 3/22 E 9,143,800 (4) 861,500 (4) 866,500 (4) 572,600 (5) 451.1 30.00 3/23 E 9,396,200 (3) 946,100 (10) 951,100 (10) 634,300 (11) 499.7 30.00 3/19 CP 8,700,000 (2) 870,000 (18) 975,000 (39) 705,000 (44) - - E: Daiwa estimates. CP: Company projections.

Sony (6758 JP): 7 January 2019

Financial Statements

(JPYm) 3/18 3/19 E 3/20 E 3/21 E 3/22 E 3/23 E Income statement Sales / Revenue 8,543,982 8,861,400 8,645,000 8,816,600 9,143,800 9,396,200 Operating profit 734,860 889,000 805,600 826,700 861,500 946,100 EBITDA 1,096,304 1,249,000 1,197,600 1,228,700 1,273,500 1,368,100 Pretax income 699,049 995,600 810,600 831,700 866,500 951,100 Net income 490,794 714,100 532,700 547,200 572,600 634,300 Balance sheet Liquidity on hand 2,762,930 3,285,400 3,685,300 4,015,400 4,499,600 5,056,000 Fixed assets / Non-current assets 13,889,442 14,873,800 15,794,300 16,744,900 17,544,900 18,344,900 Total assets 19,065,538 20,391,500 21,669,000 22,983,700 24,333,100 25,739,800 Interest-bearing debt 1,345,066 1,445,100 1,745,100 2,045,100 2,345,100 2,645,100 Total liabilities 15,409,171 16,068,200 16,850,900 17,656,400 18,471,100 19,281,400 Total net assets / Total equity 3,647,157 4,323,300 4,818,100 5,327,300 5,862,000 6,458,400 Shareholders' equity 2,967,366 3,643,500 4,138,300 4,647,500 5,182,200 5,778,600 Cash flow statement Cash flows from operating activities 1,254,972 1,497,100 1,333,400 1,303,500 1,317,100 1,399,300 Net income 490,794 714,100 532,700 547,200 572,600 634,300 Depreciation and amortization 361,444 360,000 392,000 402,000 412,000 422,000 Cash flows from investing activities -822,197 -1,036,700 -1,195,500 -1,235,500 -1,095,000 -1,105,000 Free cash flow 432,775 460,400 137,900 68,000 222,100 294,300 Cash flows from financing activities 246,456 62,000 262,000 262,000 262,000 262,000 Increase (decrease) in cash and cash equivalents 626,187 522,400 399,900 330,000 484,100 556,300

Accounting standards SEC SEC SEC SEC SEC SEC

Financial indicators Growth Sales / Revenue (y/y %) 12.4 3.7 -2.4 2.0 3.7 2.8 Operating profit (y/y %) 154.5 21.0 -9.4 2.6 4.2 9.8 Profitability Operating profit margin (%) 8.6 10.0 9.3 9.4 9.4 10.1 EBITDA margin (%) 12.8 14.1 13.9 13.9 13.9 14.6 ROE (%) 18.0 21.6 13.7 12.5 11.7 11.6 ROA (%) 2.7 3.6 2.5 2.5 2.4 2.5 Financial leverage/dividend policy Net debt-to-equity ratio (X) -0.5 -0.5 -0.5 -0.4 -0.4 -0.4 Equity-to-assets ratio (%) 15.6 17.9 19.1 20.2 21.3 22.5 Total dividends / shareholders' equity (%) 1.2 1.0 0.9 0.8 0.7 0.7 Dividend payout ratio (%) 7.1 5.3 7.1 7.0 6.7 6.0 Per-share data EPS (Y) 388.3 562.6 419.7 431.1 451.1 499.7 DPS (Y) 27.50 30.00 30.00 30.00 30.00 30.00 Book value per share (Y) 2,345.0 2,870.5 3,260.3 3,661.5 4,082.8 4,552.6 Valuations Share price: Y5,326; market cap: Y6,760,223mn (28 Dec 2018) P/E (X) 13.7 9.5 12.7 12.4 11.8 10.7 EV/EBITDA (X) 4.9 3.9 4.0 3.9 3.6 3.2 P/B (X) 2.27 1.86 1.63 1.45 1.30 1.17 Dividend yield (%) 0.52 0.56 0.56 0.56 0.56 0.56

Source: Company materials; compiled by Daiwa. E: Daiwa estimates.

Company Outline

Sony once boasted an overwhelmingly strong presence in the consumer electronics market, with runaway hits like its Trinitron CRT displays and the Walkman. It remains competitive in such fields as CMOS sensors, video games, and professional broadcasting equipment, but is implementing restructuring programs for struggling LCD TV and smartphone operations. Acquisitions of CBS Records and Columbia Pictures in the late 1980s helped it become a major global player in the music and movie industries. It initially entered the financial industry through a JV with Prudential, with domestic life insurance still a mainstay business on this front.

Sony (6758 JP): 7 January 2019

Taiwan Information Technology 7 January 2019

Largan Precision (3008 TT) Largan Precisi on

Target price: TWD4,000.00 (from TWD4,000.00) Share price (3 Jan): TWD3,030.00 | Up/downside: +32.0%

Well-positioned to benefit from triple-cam adoption Kylie Huang (886) 2 8758 6248  Major beneficiary of the likely triple-cam boom in 2019-20E [email protected]  EPS growth of >20% YoY in 2019-20E on favourable industry trends Steven Yang (886) 2 8758 6245  Reiterate Buy (1) and TP of TWD4,000; one of our top sector picks [email protected]

What's new: We believe Largan is well placed to benefit from the booming Forecast revisions (%) adoption of triple-cams, along with other spec upgrades (7P lens, MP Year to 31 Dec 18E 19E 20E migration, wide-angle, periscope design) in smartphones from 2019 (see Revenue change --- The more the merrier: multi-cameras are the next mega trend in Net profit change --- Core EPS (FD) change - - - smartphones (Part 4), 14 November 2018) given its industry-leading Source: Daiwa forecasts position in high-end lens sets. We reiterate our Buy (1) rating and 12-month TP of TWD4,000, and view recent share price pull-backs, due to likely Share price performance muted 4Q18 results, as good opportunities to accumulate the shares (see (TWD) (%) Upgrading: time to buy on triple-cam boom in 2019-20E, 7 December 5,500 130 2018). Largan is one of our top sector picks. 4,750 115 4,000 100 3,250 85 What's the impact: Major beneficiary of likely triple-cam boom. We 2,500 70 note rising interest from smartphone vendors in adopting triple-cams to Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 provide a better imaging experience for consumers, and forecast the Largan (LHS) Relative to TWSE Index (RHS) volume of triple-cam smartphones to rise to 180m for 2019 and 353m for

2020 from 18m for 2018. We expect all top-tier Android brands (Huawei, 12-month range 3,000.00-5,270.00 Samsung, Xiaomi, Oppo, Vivo) to adopt triple-cams in their flagship or high- Market cap (USDbn) 13.16 end models in 2019. Our research also suggests that Apple will make a 3m avg daily turnover (USDm) 91.26 major camera upgrade to its new iPhones in 2H19, adopting triple-cams for Shares outstanding (m) 134 Major shareholder Ch'en Shih Ch'ing (5.0%) 2 AMOLED models and dual-cams for 1 LCD model. Largan, a major high- end lens supplier, stands to benefit from this trend, in our view. Financial summary (TWD) Year to 31 Dec 18E 19E 20E Favourable industry trends over 2019-20E. On top of the multi-cam trend Revenue (m) 50,030 59,080 70,050 (dual-cams/triple-cams), we expect other spec upgrades (adoption of 7P Operating profit (m) 29,508 35,950 43,221 Net profit (m) 24,317 29,779 35,794 lens, MP migration, wide-angle, larger aperture, periscope design) to Core EPS (fully-diluted) 181.280 222.002 266.842 accelerate from 2019, which should provide both volume and ASP upside EPS change (%) (6.4) 22.5 20.2 for Largan’s earnings growth in 2019-20E, in our opinion. Our research Daiwa vs Cons. EPS (%) (2.9) 1.6 6.6 PER (x) 16.7 13.6 11.4 indicates that Huawei will be the first to adopt a periscope design in its Dividend yield (%) 2.4 2.1 2.6 flagships in 2019. If this trend takes off, we believe Largan is well placed to DPS 72.5 63.4 77.7 benefit; we have not factored this in our forecasts. PBR (x) 3.8 3.2 2.6 EV/EBITDA (x) 11.1 8.5 6.4

ROE (%) 24.4 25.3 25.4 Strong earnings growth likely to resume over 2019-20E. Driven by Source: FactSet, Daiwa forecasts rising adoption of triple-cams, accelerating spec upgrades (MP migration, wide-angle, 7P, periscope design) and new project wins for the forthcoming Galaxy S10 (front cams), we expect Largan to resume 20-22% YoY earnings growth for 2019-20, from a 6% YoY decline for 2018E.

What we recommend: We reiterate our Buy (1) rating and 12- month TP of TWD4,000, still based on a 18x PER on our 1-year forward EPS (vs. its past-3-year trading range of 10-36x). Key risk: weaker smartphone sales.

How we differ: Our 2019-20E EPS are 2-7% above the consensus, likely due to our more upbeat view on the benefits from the multi-cam trend.

See important disclosures, including any required research certifications, beginning on page 115

Largan Precision (3008 TT): 7 January 2019

Financial summary Key assumptions Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E

Mobile phone lens shipment ('000 units) 539,156 869,054 998,771 868,579 944,963 816,802 915,268 1,036,686

Blended ASP of handset lens (USD) 1.35 1.47 1.47 1.60 1.84 1.97 2.07 2.17 Gross margin of VCM assembly (%) 6.0 7.4 8.4 7.5 7.5 7.5 7.5 7.5

Profit and loss (TWDm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Mobile Phone Lens Revenues 21,615 38,140 45,970 44,061 52,417 49,838 58,823 69,794 VCM Aseembly Revenue 5,268 7,370 9,781 4,055 438 44 0 0 Other Revenue 550 301 118 236 272 148 257 256 Total Revenue 27,433 45,810 55,869 48,352 53,128 50,030 59,080 70,050 Other income 0 0 0 0 0 0 0 0 COGS (14,472) (21,291) (23,812) (15,931) (16,272) (15,809) (17,783) (20,791) SG&A (887) (1,349) (1,817) (1,711) (1,485) (1,469) (1,667) (1,883) Other op.expenses (1,293) (2,103) (2,585) (2,796) (3,278) (3,243) (3,680) (4,156) Operating profit 10,781 21,067 27,655 27,914 32,093 29,508 35,950 43,221 Net-interest inc./(exp.) 122 250 349 386 656 692 787 1,012 Assoc/forex/extraord./others 598 1,646 1,156 (48) (790) 388 487 510 Pre-tax profit 11,501 22,963 29,160 28,251 31,960 30,587 37,224 44,743 Tax (1,891) (3,525) (5,003) (5,518) (5,984) (6,270) (7,445) (8,949) Min. int./pref. div./others 0 0 0 0 0 0 0 0 Net profit (reported) 9,610 19,438 24,157 22,733 25,976 24,317 29,779 35,794 Net profit (adjusted) 9,610 19,438 24,157 22,733 25,976 24,317 29,779 35,794 EPS (reported)(TWD) 71.640 144.909 180.084 169.472 193.645 181.280 222.002 266.842 EPS (adjusted)(TWD) 71.640 144.909 180.084 169.472 193.645 181.280 222.002 266.842 EPS (adjusted fully-diluted)(TWD) 71.640 144.909 180.084 169.472 193.645 181.280 222.002 266.842 DPS (TWD) 17.000 28.500 51.000 63.500 63.500 72.500 63.448 77.701 EBIT 10,781 21,067 27,655 27,914 32,093 29,508 35,950 43,221 EBITDA 12,229 22,728 29,495 27,914 32,093 29,508 35,951 43,221

Cash flow (TWDm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Profit before tax 11,501 22,963 29,160 28,251 31,960 30,587 37,224 44,743 Depreciation and amortisation 1,448 1,661 1,841 2,099 2,301 2,614 3,265 3,790 Tax paid (1,891) (3,525) (5,003) (5,518) (5,984) (6,270) (7,445) (8,949) Change in working capital (363) (920) 7,411 (2,748) 2,792 (788) 766 899 Other operational CF items 51 (32) 6 (14) 40 (8) (7) (10) Cash flow from operations 10,746 20,147 33,414 22,069 31,108 26,135 33,804 40,473 Capex (1,504) (5,568) (8,213) (2,204) (6,885) (6,200) (2,278) (1,824) Net (acquisitions)/disposals 9 194 (0) 28 (109) (10) (10) (10) Other investing CF items (1,593) (695) 125 (153) (381) (757) (500) (500) Cash flow from investing (3,088) (6,069) (8,089) (2,329) (7,374) (6,967) (2,788) (2,334) Change in debt 12 108 (32) (102) 362 (340) 0 0 Net share issues/(repurchases) 0 0 0 0 0 0 0 0 Dividends paid (2,280) (3,823) (6,841) (8,518) (8,518) (9,725) (8,511) (10,423) Other financing CF items 51 138 (127) 0 0 0 0 0 Cash flow from financing (2,217) (3,577) (7,000) (8,620) (8,156) (10,065) (8,511) (10,423) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash 5,440 10,501 18,325 11,120 15,578 9,102 22,505 27,716 Free cash flow 9,242 14,579 25,201 19,865 24,224 19,935 31,526 38,649 Source: FactSet, Daiwa forecasts

Largan Precision (3008 TT): 7 January 2019

Financial summary continued … Balance sheet (TWDm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Cash & short-term investment 17,045 27,546 45,871 56,231 69,907 79,009 101,514 129,230 Inventory 2,693 3,538 3,730 2,585 2,577 2,726 3,066 3,585 Accounts receivable 6,823 13,338 11,537 15,167 15,168 14,392 16,996 20,151 Other current assets 248 388 363 360 485 455 537 637 Total current assets 26,809 44,809 61,500 74,343 88,136 96,581 122,112 153,603 Fixed assets 9,800 13,722 20,115 20,247 24,861 28,448 27,461 25,495 Goodwill & intangibles 0 0 0 0 0 0 0 0 Other non-current assets 2,004 2,523 2,372 2,485 2,903 3,679 4,196 4,715 Total assets 38,614 61,054 83,987 97,074 115,901 128,708 153,769 183,813 Short-term debt 83 190 157 38 396 100 100 100 Accounts payable 2,507 4,999 2,864 1,883 2,174 1,949 2,192 2,563 Other current liabilities 5,507 9,594 17,506 18,220 20,840 19,620 23,169 27,471 Total current liabilities 8,097 14,783 20,527 20,141 23,410 21,669 25,461 30,134 Long-term debt 0 0 0 0 0 0 0 0 Other non-current liabilities 71 72 73 91 94 50 50 50 Total liabilities 8,168 14,855 20,600 20,232 23,504 21,719 25,511 30,184 Share capital 1,341 1,341 1,341 1,341 1,341 1,341 1,341 1,341 Reserves/R.E./others 29,104 44,857 62,045 75,501 91,056 105,648 126,916 152,288 Shareholders' equity 30,445 46,198 63,386 76,843 92,397 106,989 128,257 153,629 Minority interests 0 0 0 0 0 0 0 0 Total equity & liabilities 38,614 61,054 83,987 97,074 115,901 128,708 153,769 183,813 EV 389,482 379,089 360,731 350,251 336,934 327,536 305,031 277,315 Net debt/(cash) (16,962) (27,356) (45,713) (56,194) (69,511) (78,909) (101,414) (129,130) BVPS (TWD) 226.965 344.402 472.538 572.852 688.811 797.591 956.145 1,145.286

Key ratios (%) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Sales (YoY) 36.7 67.0 22.0 (13.5) 9.9 (5.8) 18.1 18.6 EBITDA (YoY) 52.8 85.9 29.8 (5.4) 15.0 (8.1) 21.8 20.2 Operating profit (YoY) 58.6 95.4 31.3 0.9 15.0 (8.1) 21.8 20.2 Net profit (YoY) 72.3 102.3 24.3 (5.9) 14.3 (6.4) 22.5 20.2 Core EPS (fully-diluted) (YoY) 72.3 102.3 24.3 (5.9) 14.3 (6.4) 22.5 20.2 Gross-profit margin 47.2 53.5 57.4 67.1 69.4 68.4 69.9 70.3 EBITDA margin 44.6 49.6 52.8 57.7 60.4 59.0 60.9 61.7 Operating-profit margin 39.3 46.0 49.5 57.7 60.4 59.0 60.9 61.7 Net profit margin 35.0 42.4 43.2 47.0 48.9 48.6 50.4 51.1 ROAE 35.9 50.7 44.1 32.4 30.7 24.4 25.3 25.4 ROAA 27.5 39.0 33.3 25.1 24.4 19.9 21.1 21.2 ROCE 40.2 54.8 50.3 39.8 37.8 29.5 30.5 30.6 ROIC 72.0 110.3 125.5 117.2 119.8 92.1 104.7 134.7 Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Effective tax rate 16.4 15.4 17.2 19.5 18.7 20.5 20.0 20.0 Accounts receivable (days) 89.2 80.3 81.3 100.8 104.2 107.8 97.0 96.8 Current ratio (x) 3.3 3.0 3.0 3.7 3.8 4.5 4.8 5.1 Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Net dividend payout 23.7 19.7 28.3 37.5 32.8 40.0 28.6 29.1 Free cash flow yield 2.3 3.6 6.2 4.9 6.0 4.9 7.8 9.5 Source: FactSet, Daiwa forecasts

Company profile

In Asia ex-Japan, Largan Precision is the leading lens manufacturer for mobile handsets. Nokia, Motorola, Sony Ericsson, Apple, HTC, and Blackberry are the company’s major customers. It currently has about a 28% share of the global handset-lens market.

Largan Precision (3008 TT): 7 January 2019

Global triple-cam penetration in smartphones Global multi-cam penetration in smartphones (mn units) (mn units) 2,000 100% 2,000 100% 90% 90% 80% 80% 1,500 1,500 70% 70% 60% 60% 1,000 50% 1,000 50% 40% 40% 30% 30% 500 500 20% 20% 10% 10% 0 0% 0 0% 2016 2017 2018E 2019E 2020E 2016 2017 2018E 2019E 2020E Total smartphone Total triple-cam smartphone Penetration rate Total smartphone Total multi-cam smartphone Penetration rate

Source: Companies, Daiwa forecasts Source: Companies, Daiwa forecasts

Largan: quarterly and annual P&L statements 2018E 2019E 2018E 2019E 2020E (TWDm) 1Q 2Q 3Q 4QE 1QE 2QE 3QE 4QE Net sales 8,877 12,296 16,334 12,523 8,182 12,366 18,524 20,008 50,030 59,080 70,050 Gross profit 5,622 8,437 11,653 8,509 5,318 8,532 13,152 14,294 34,221 41,297 49,259 Operating costs 934 1,139 1,435 1,206 909 1,123 1,577 1,738 4,713 5,347 6,038 Operating profit 4,689 7,298 10,218 7,303 4,409 7,410 11,575 12,557 29,508 35,950 43,221 Pre-tax income 4,800 8,159 10,193 7,434 4,728 7,728 11,893 12,875 30,587 37,224 44,743 Net income 4,019 5,501 8,371 6,425 3,924 5,410 9,871 10,574 24,317 29,779 35,794 EPS (TWD) 30.0 41.0 62.4 47.9 29.3 40.3 73.6 78.8 181.3 222.0 266.8

Operating ratios Gross margin 63.3% 68.6% 71.3% 67.9% 65.0% 69.0% 71.0% 71.4% 68.4% 69.9% 70.3% Operating margin 52.8% 59.4% 62.6% 58.3% 53.9% 59.9% 62.5% 62.8% 59.0% 60.9% 61.7% Pre-tax margin 54.1% 66.4% 62.4% 59.4% 57.8% 62.5% 64.2% 64.3% 61.1% 63.0% 63.9% Net margin 45.3% 44.7% 51.3% 51.3% 48.0% 43.7% 53.3% 52.8% 48.6% 50.4% 51.1%

YoY (%) Net revenue -18% 9% 9% -22% -8% 1% 13% 60% -6% 18% 19% Gross profit -27% 12% 15% -26% -5% 1% 13% 68% -7% 21% 19% Operating income -30% 11% 16% -27% -6% 2% 13% 72% -8% 22% 20% Net income -18% 17% 8% -25% -2% -2% 18% 65% -6% 22% 20%

QoQ (%) Net revenue -45% 39% 33% -23% -35% 51% 50% 8% Gross profit -51% 50% 38% -27% -37% 60% 54% 9% Operating income -53% 56% 40% -29% -40% 68% 56% 8% Net income -53% 37% 52% -23% -39% 38% 82% 7%

Source: Company, Daiwa forecasts

Largan: 1-year forward PER Largan: 1-year forward PBR (TWD) (TWD) 8,000 8,000 7,000 7,000 6,000 6,000 5,000 5,000 4,000 4,000 3,000 3,000 2,000 2,000 1,000 1,000 0 0 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Largan 2x 4x 6x 8x Largan 8x 16x 24x 32x

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

China Information Technology 7 January 2019

Sunny Optical Technology (2382 HK) Sunny Optical T echnolog y

Target price: HKD115.00 (from HKD115.00) Share price (3 Jan): HKD61.40 | Up/downside: +87.3%

Key beneficiary of the triple-cam boom Kylie Huang (886) 2 8758 6248  Set to benefit from the triple-cam boom with spec upgrades from 2019E [email protected]  Strong earnings growth of >40% YoY in 2019-20E on favourable trends Steven Yang (886) 2 8758 6245  Reiterating Buy (1) and TP of HKD115; one of our top sector picks [email protected]

What's new: We believe Sunny Optical (Sunny) will be a major beneficiary Forecast revisions (%) of the accelerated multi-cam trend, driven by the booming adoption of Year to 31 Dec 18E 19E 20E triple-cams (see The more the merrier: multi-cameras are the next mega Revenue change --- trend in smartphones (Part 4), 14 November 2018), on top of ongoing Net profit change --- Core EPS (FD) change - - - camera spec upgrades in smartphones. Sunny is one of our top picks in the Source: Daiwa forecasts Greater China smartphone space.

Share price performance What's the impact: Key beneficiary of accelerated multi-cam trend on (HKD) (%) booming triple-cam adoption. After the initial success of Huawei’s P20 175 160

Pro, the first triple-cam smartphone (launched in March 2018), we have 146 135 seen rising interest among major brands in adopting triple-cams in order to 118 110 provide a better imaging experience for consumers, and forecast the 89 85 60 60 volume of triple-cam smartphones to rise to 180m for 2019 and 353m for Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 2020 from 18m for 2018. We expect all top-tier Android brands (Huawei, Sunny Opti (LHS) Relative to HSI (RHS) Samsung, Xiaomi, Oppo, Vivo) to adopt triple-cams in their flagship or high- end models in 2019. In addition to rising triple-cam adoption, we forecast broadening adoption of dual-cams with spec upgrades in mid- to low-end 12-month range 61.40-173.00 Market cap (USDbn) 8.53 models, and project the number of multi-cam (dual-cam/triple-cam) 3m avg daily turnover (USDm) 93.24 smartphones to grow to 710m in 2019 and 936m in 2020 from 461m in Shares outstanding (m) 1,088 2018E. We believe Sunny is well-positioned to benefit from this trend given Major shareholder Sun Xu Ltd (35.5%) its major supplier position in handset lens sets (HLS) and leading position in handset camera modules (HCM) for all top-tier Android smartphone Financial summary (CNY) brands. Year to 31 Dec 18E 19E 20E Revenue (m) 27,200 35,880 46,050 Operating profit (m) 3,514 4,951 6,954 Solid long-term driver: vehicle lens sets (VLS). We view Sunny’s Net profit (m) 2,996 4,353 6,159 leading position in VLS as a key positive and expect the company to benefit Core EPS (fully-diluted) 2.755 4.002 5.662 EPS change (%) 3.3 45.3 41.5 from the multi-cam trend in vehicles on rising demand for ADAS, despite Daiwa vs Cons. EPS (%) (2.4) 1.0 10.0 near-term headwinds due to macro-economic uncertainty stemming from PER (x) 19.6 13.5 9.5 the US-China trade dispute (see Favourable trends intact despite near-term Dividend yield (%) 1.2 1.3 1.9 headwinds, 11 October 2018). DPS 0.661 0.689 1.000 PBR (x) 6.0 4.4 3.2 EV/EBITDA (x) 13.9 9.2 6.3 Strong earnings outlook for 2019-20 on intact favourable trends. ROE (%) 34.6 37.5 38.6 Driven by the benefits from the solid multi-cam trend in smartphones and Source: FactSet, Daiwa forecasts smart vehicles, along with ongoing spec upgrades in smartphones (adoption of 7P lens, MP migration, wide-angle, larger aperture, periscope design), we forecast Sunny to resume strong earnings growth of 42-45% YoY in 2019-20 vs. muted 2018E (+3% YoY).

What we recommend: We reiterate our Buy (1) rating and 12-month TP of HKD115, still based on a 30x PER on our 2018-19E EPS (vs. its past-3- year trading range of 10-36x). Key risk: weaker smartphone sales.

How we differ: Our 2019-20E EPS are 1-10% above the consensus, likely as we are more upbeat on the benefits from multi-cam adoption in smartphones.

See important disclosures, including any required research certifications, beginning on page 115

Sunny Optical Technology (2382 HK): 7 January 2019

Financial summary Key assumptions Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Handset CCM shipment (m units) 133 187 228 270 325 390 448 511 Vehicle lens shipment (m units) 8 11 17 23 32 40 52 71 Handset lens shipment (m units) 26 75 302 379 608 894 1,175 1,430

Profit and loss (CNYm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Handset CCM Revenues 4,157 6,576 7,785 11,055 17,274 20,066 26,134 33,559 Vehicle Lens Revenues 291 421 651 935 1,348 1,708 2,283 3,172 Other Revenue 1,365 1,429 2,260 2,622 3,745 5,426 7,463 9,319 Total Revenue 5,813 8,426 10,696 14,612 22,366 27,200 35,880 46,050 Other income 0 0 0 0 0 0 0 0 COGS (4,846) (7,137) (8,933) (11,932) (17,563) (21,651) (28,238) (35,689) SG&A (254) (320) (352) (485) (594) (651) (834) (1,022) Other op.expenses (251) (392) (502) (694) (1,168) (1,384) (1,857) (2,385) Operating profit 462 577 909 1,501 3,041 3,514 4,951 6,954 Net-interest inc./(exp.) (7) (14) (16) (16) (49) (77) (114) (74) Assoc/forex/extraord./others 49 71 (31) (38) 326 (30) 110 120 Pre-tax profit 504 634 862 1,446 3,318 3,407 4,947 7,000 Tax (64) (73) (99) (175) (404) (409) (594) (840) Min. int./pref. div./others (0) 5 (2) (1) (13) (2) (1) (1) Net profit (reported) 440 566 762 1,271 2,902 2,996 4,353 6,159 Net profit (adjusted) 440 566 762 1,271 2,902 2,996 4,353 6,159 EPS (reported)(CNY) 0.443 0.529 0.709 1.176 2.668 2.755 4.002 5.662 EPS (adjusted)(CNY) 0.443 0.529 0.709 1.176 2.668 2.755 4.002 5.662 EPS (adjusted fully-diluted)(CNY) 0.443 0.529 0.709 1.176 2.668 2.755 4.002 5.662 DPS (CNY) 0.102 0.112 0.154 0.207 0.288 0.661 0.689 1.000 EBIT 462 577 909 1,501 3,041 3,514 4,951 6,954 EBITDA 609 792 1,155 1,817 3,532 4,199 6,026 8,178

Cash flow (CNYm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Profit before tax 504 634 862 1,446 3,318 3,407 4,947 7,000 Depreciation and amortisation 147 215 246 317 491 685 1,075 1,225 Tax paid (64) (73) (99) (175) (404) (409) (594) (840) Change in working capital 55 (898) 609 (32) (990) (1,409) (1,162) (1,402) Other operational CF items 0 0 0 0 0 0 0 (0) Cash flow from operations 643 (122) 1,618 1,556 2,415 2,274 4,266 5,982 Capex (286) (465) (351) (969) (1,284) (2,600) (1,000) (1,000) Net (acquisitions)/disposals 1 (62) (64) 11 (64) 0 0 0 Other investing CF items (26) (178) (60) (58) (916) 0 0 0 Cash flow from investing (311) (705) (475) (1,016) (2,263) (2,600) (1,000) (1,000) Change in debt 392 56 167 234 880 3,661 0 0 Net share issues/(repurchases) 0 0 0 0 0 0 0 0 Dividends paid (101) (120) (166) (223) (313) (719) (749) (1,088) Other financing CF items 589 (55) (2) 21 18 0 0 0 Cash flow from financing 879 (120) (0) 32 585 2,942 (749) (1,088) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash 1,212 (947) 1,143 572 737 2,615 2,517 3,894 Free cash flow 357 (587) 1,267 587 1,132 (326) 3,266 4,982 Source: FactSet, Daiwa forecasts

Sunny Optical Technology (2382 HK): 7 January 2019

Financial summary continued … Balance sheet (CNYm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Cash & short-term investment 1,826 884 2,025 2,595 3,320 5,933 8,449 12,342 Inventory 768 896 897 2,828 2,622 3,331 4,344 5,491 Accounts receivable 1,172 2,388 3,003 3,716 5,666 6,707 8,847 11,355 Other current assets 1 36 93 178 28 36 48 61 Total current assets 3,766 4,204 6,017 9,318 11,635 16,007 21,688 29,249 Fixed assets 785 1,035 1,141 1,794 2,586 4,501 4,427 4,202 Goodwill & intangibles 0 0 0 0 0 0 0 0 Other non-current assets 114 354 478 525 1,505 1,505 1,505 1,505 Total assets 4,665 5,594 7,636 11,637 15,726 22,013 27,619 34,956 Short-term debt 489 522 683 904 1,348 1,540 1,540 1,540 Accounts payable 1,257 1,744 2,914 5,573 6,183 6,525 8,510 10,756 Other current liabilities 36 31 142 181 175 181 199 219 Total current liabilities 1,782 2,297 3,739 6,658 7,705 8,246 10,249 12,515 Long-term debt 0 0 0 0 0 3,960 3,960 3,960 Other non-current liabilities 23 46 52 65 502 10 10 10 Total liabilities 1,805 2,343 3,791 6,723 8,207 12,216 14,219 16,485 Share capital 105 105 105 105 105 105 105 105 Reserves/R.E./others 2,755 3,145 3,740 4,808 7,414 9,691 13,295 18,366 Shareholders' equity 2,860 3,251 3,845 4,913 7,519 9,797 13,400 18,471 Minority interests 0 0 0 0 0 0 0 0 Total equity & liabilities 4,665 5,594 7,636 11,637 15,726 22,013 27,619 34,956 EV 57,265 58,239 57,260 56,911 56,630 58,169 55,653 51,760 Net debt/(cash) (1,337) (362) (1,341) (1,691) (1,972) (433) (2,949) (6,842) BVPS (CNY) 2.876 3.038 3.579 4.547 6.913 9.007 12.320 16.981

Key ratios (%) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Sales (YoY) 45.9 45.0 26.9 36.6 53.1 21.6 31.9 28.3 EBITDA (YoY) 29.1 30.0 45.9 57.3 94.3 18.9 43.5 35.7 Operating profit (YoY) 27.1 24.9 57.6 65.0 102.6 15.6 40.9 40.4 Net profit (YoY) 27.2 28.5 34.5 66.8 128.3 3.3 45.3 41.5 Core EPS (fully-diluted) (YoY) 23.1 19.4 34.0 65.9 126.8 3.3 45.3 41.5 Gross-profit margin 16.6 15.3 16.5 18.3 21.5 20.4 21.3 22.5 EBITDA margin 10.5 9.4 10.8 12.4 15.8 15.4 16.8 17.8 Operating-profit margin 7.9 6.8 8.5 10.3 13.6 12.9 13.8 15.1 Net profit margin 7.6 6.7 7.1 8.7 13.0 11.0 12.1 13.4 ROAE 18.4 18.5 21.5 29.0 46.7 34.6 37.5 38.6 ROAA 11.5 11.0 11.5 13.2 21.2 15.9 17.5 19.7 ROCE 17.2 16.2 21.9 29.0 41.4 29.1 29.0 32.4 ROIC 27.4 23.2 29.9 46.1 60.9 41.5 44.0 55.4 Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Effective tax rate 12.6 11.5 11.5 12.1 12.2 12.0 12.0 12.0 Accounts receivable (days) 65.1 77.1 92.0 83.9 76.6 83.0 79.1 80.1 Current ratio (x) 2.1 1.8 1.6 1.4 1.5 1.9 2.1 2.3 Net interest cover (x) 70.0 41.3 56.8 92.7 62.3 45.6 43.4 94.2 Net dividend payout 22.9 21.3 21.8 17.6 10.8 24.0 17.2 17.7 Free cash flow yield 0.6 n.a. 2.2 1.0 1.9 n.a. 5.6 8.5 Source: FactSet, Daiwa forecasts

Company profile

Founded in 1984, Sunny Optical is the leading optical component manufacturer in the China technology supply chain. It develops and provides optical-related products with various applications, including instruments, components and opto-electronic modules. The company's major customers include leading China smartphone brand name makers Huawei, Lenovo and OPPO.

Sunny Optical Technology (2382 HK): 7 January 2019

Global triple-cam penetration in smartphones Global multi-cam penetration in smartphones (m units) (m units) 2,000 100% 2,000 100% 90% 90% 80% 80% 1,500 1,500 70% 70% 60% 60% 1,000 50% 1,000 50% 40% 40% 30% 30% 500 500 20% 20% 10% 10% 0 0% 0 0% 2016 2017 2018E 2019E 2020E 2016 2017 2018E 2019E 2020E Total smartphone Total triple-cam smartphone Penetration rate Total smartphone Total multi-cam smartphone Penetration rate

Source: Companies, Daiwa forecasts Source: Companies, Daiwa forecasts

Sunny Optical: semi-annual and annual P&L statements 2018E 2019E 2018E 2019E 2020E (CNYm) 1H 2HE 1HE 2HE

Net sales 11,976 15,224 14,991 20,889 27,200 35,880 46,050

Gross profit 2,320 3,229 3,028 4,614 5,549 7,642 10,361

Operating costs 824 1,211 1,211 1,480 2,035 2,691 3,408

Operating profit 1,496 2,018 1,817 3,134 3,514 4,951 6,954

Net income 1,180 1,817 1,546 2,807 2,996 4,353 6,159

EPS (CNY) 1.08 1.67 1.42 2.58 2.75 4.00 5.66

Operating ratios

Gross margin 19.4% 21.2% 20.2% 22.1% 20.4% 21.3% 22.5%

Operating margin 12.5% 13.3% 12.1% 15.0% 12.9% 13.8% 15.1%

Pre-tax margin 11.8% 13.1% 12.0% 15.1% 12.5% 13.8% 15.2%

Net margin 9.9% 11.9% 10.3% 13.4% 11.0% 12.1% 13.4%

YoY (%)

Net revenue 19% 23% 25% 37% 22% 32% 28%

Gross profit 12% 18% 16% 31% 16% 38% 36%

Operating income 20% 13% 16% 21% 16% 41% 40%

Net income 2% 4% 3% 31% 3% 45% 41%

HoH (%)

Net revenue -3% 27% -2% 39%

Gross profit -15% 39% -6% 52%

Pre-tax income -17% 35% -10% 72%

Net income -32% 54% -15% 82%

Source: Company, Daiwa forecasts

Sunny Optical: 1-year forward PER Sunny Optical: 1-year forward PBR (HKD) (HKD) 250 250

200 200

150 150

100 100

50 50

0 0 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Sunny 16x 24x 32x 40x Sunny 4x 8x 12x 16x

Source: Bloomberg, Daiwa forecasts Source: Bloomberg, Daiwa forecasts

Taiwan Information Technology 7 January 2019

Taiwan Semiconductor Manufacturing (2330 TT) Tai wan Semiconductor M anufacturing

Target price: TWD266.00 (from TWD266.00) Share price (3 Jan): TWD215.50 | Up/downside: +23.4%

Diverse 7nm demand to mitigate headwinds Rick Hsu (886) 2 8758 6261  AI to drive secular growth in the next demand cycle [email protected]  5G to add to business upside on AP/modem upgrades Robert Hsu (886) 2 8758 6251  Reiterating Buy (1) and 12-month TP of TWD266 [email protected]

What's new: We believe TSMC should capture the lion’s share of multiple Forecast revisions (%) demand verticals in the BigData/IoT market, becoming everyone’s foundry Year to 31 Dec 18E 19E 20E for applications requiring state-of-the-art, cutting-edge CMOS process Revenue change --- technologies. We position TSMC as our best play on the AI trend, with 5G Net profit change --- migration adding to business upside. We reiterate our Buy (1) call and TP Core EPS (FD) change - - - of TWD266; we expect TSMC to offer 1Q19 guidance above the street’s Source: Daiwa forecasts expectation, which could catalyse share-price upside. Share price performance What's the impact: Resilient 7nm demand. We have a contrarian view (TWD) (%) vs. the street on TSMC’s 1Q19 business outlook, as we expect its 7nm 270 115 255 109 node to remain resilient and help mitigate the headwinds from the iPhone 240 103 order cut and cryptocurrency overhang. We see diverse customers in 225 96 mobile and datacentre high-performance computing (HPC) applications 210 90 ramping up orders, and expect the 7/7+nm to be a strong node for TSMC in Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 TSMC (LHS) 2019-20. We forecast its 1Q19 revenue to contract by only 5% QoQ — Relative to TWSE Index (RHS) better than the consensus expectation of a low-teen percentage drop. 12-month range 212.00-266.00 AI the key growth driver. Since we flagged the advent of AI for computing Market cap (USDbn) 180.90 upgrades to handle the surge in data computation (2018 Tech Outlook), 3m avg daily turnover (USDm) 254.24 Shares outstanding (m) 25,930 TSMC has been a major AI play to benefit from this secular trend, thanks to Major shareholder National Development Fund (6.4%) its unparalleled technology offerings to facilitate both cloud and edge computing on various xPU architectures (GPU, CPU, TPU, FPGA, ASIC) Financial summary (TWD) tailor-made for customers. We expect TSMC’s AI business to outgrow the Year to 31 Dec 18E 19E 20E corporate average, approaching 40% of revenue by 2020, comparable to Revenue (m) 1,032,460 1,171,155 1,303,906 mobile applications. This should help drive its 7nm-and-below tech nodes Operating profit (m) 384,643 441,119 502,268 Net profit (m) 349,598 391,719 444,291 to 30% of revenue by 2019, mitigating muted smartphone growth. Core EPS (fully-diluted) 13.482 15.107 17.134 EPS change (%) 1.9 12.0 13.4 5G adding to upside. Despite some overlap with AI on smartphone Daiwa vs Cons. EPS (%) (0.1) 3.8 6.2 processor upgrades for edge computing, we believe 5G will add to TSMC’s PER (x) 16.0 14.3 12.6 Dividend yield (%) 3.7 4.2 4.6 business upside, given a rising FPGA count per base station to facilitate DPS 8.0 9.0 10.0 data decoding of wider bandwidth coverage. FPGA is TSMC’s technology PBR (x) 3.3 3.0 2.7 driver and we view Xilinx as its key customer. Smartphone chipmakers’ 5G EV/EBITDA (x) 7.4 6.6 5.7 upgrades should keep TSMC’s mobile business resilient, and we expect 3 ROE (%) 21.7 22.0 22.8 customers, MediaTek, Qualcomm and HiSilicon, to have 5G SoC Source: FactSet, Daiwa forecasts (AP+modem) ready in 2019-20 for operator testing and commercial ramp- up. Qualcomm launched its SD855 SoC in December, supporting up to mmWave bandwidth, which we see as manufactured at TSMC’s 7nm.

What we recommend: Given our contrarian view for 1Q19 and an attractive valuation, we reaffirm Buy (1) on TSMC with an unchanged 12- month TP of TWD266, based on an ROE-adjusted PBR of 3.7x. Key risk: competition from SEC’s (005930 KS, KRW37,600, Buy [1]) EUV offering.

How we differ: We are 4-6% above the consensus on 2019-20E EPS, likely due to our more positive stance on AI and 5G demand.

See important disclosures, including any required research certifications, beginning on page 115

Taiwan Semiconductor Manufacturing (2330 TT): 7 January 2019

Financial summary Key assumptions Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Capacity utilization (%) 94 100 94 95 93 93 96 99 Blended ASP (USD) 1,269 1,340 1,339 1,347 1,338 1,355 1,350 1,365 Wafer shipment (8" equ., '000) 15,666 18,591 19,717 21,612 23,510 24,672 27,471 30,251

Profit and loss (TWDm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Wafer Foundry Revenue 590,144 754,708 837,024 937,475 956,941 1,006,767 1,131,323 1,259,558 Sub & Other Revenue 6,880 8,099 6,473 10,463 20,506 25,693 39,833 44,348 Other Revenue 0 0 0 (0) 0 0 0 0 Total Revenue 597,024 762,806 843,497 947,938 977,447 1,032,460 1,171,155 1,303,906 Other income 0 0 0 0 0 0 0 0 COGS (316,079) (385,072) (433,102) (473,106) (482,621) (533,160) (603,883) (662,542) SG&A (23,398) (25,020) (24,803) (25,667) (28,535) (29,190) (32,461) (34,783) Other op.expenses (48,118) (56,824) (65,545) (71,208) (80,732) (85,467) (93,692) (104,312) Operating profit 209,429 295,890 320,048 377,957 385,559 384,643 441,119 502,268 Net-interest inc./(exp.) (811) (506) 939 3,011 6,134 8,958 8,882 10,375 Assoc/forex/extraord./others 6,869 6,713 29,442 4,990 4,439 3,509 3,671 3,428 Pre-tax profit 215,487 302,098 350,429 385,959 396,133 397,110 453,673 516,070 Tax (27,468) (38,317) (43,873) (51,621) (52,986) (47,424) (61,500) (71,264) Min. int./pref. div./others 128 118 18 (91) (35) (88) (454) (516) Net profit (reported) 188,147 263,899 306,574 334,247 343,111 349,598 391,719 444,291 Net profit (adjusted) 188,147 263,899 306,574 334,247 343,111 349,598 391,719 444,291 EPS (reported)(TWD) 7.257 10.178 11.823 12.890 13.232 13.482 15.107 17.134 EPS (adjusted)(TWD) 7.257 10.178 11.823 12.890 13.232 13.482 15.107 17.134 EPS (adjusted fully-diluted)(TWD) 7.256 10.177 11.823 12.890 13.232 13.482 15.107 17.134 DPS (TWD) 3.000 3.000 4.500 6.000 7.000 8.000 9.000 10.000 EBIT 209,429 295,890 320,048 377,957 385,559 384,643 441,119 502,268 EBITDA 365,612 496,143 542,554 601,785 645,702 680,258 765,062 859,290

Cash flow (TWDm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Profit before tax 215,487 302,098 350,429 385,959 396,133 397,110 453,673 516,070 Depreciation and amortisation 156,182 200,252 222,507 223,828 260,143 295,615 323,943 357,023 Tax paid (27,468) (38,317) (43,873) (51,621) (52,986) (47,424) (61,500) (71,264) Change in working capital (18,393) (64,937) 25,123 (17,770) (15,466) 5,000 (41,000) 0 Other operational CF items 21,575 22,428 (24,306) (561) (2,505) (2,683) (3,065) (3,175) Cash flow from operations 347,384 421,524 529,879 539,835 585,318 647,618 672,051 798,655 Capex (287,595) (288,540) (257,523) (328,045) (330,588) (340,236) (407,175) (408,700) Net (acquisitions)/disposals 5,644 4,069 49,874 (76,691) (16,258) 5,967 0 0 Other investing CF items 897 2,050 (9,596) 9,296 10,681 0 0 0 Cash flow from investing (281,054) (282,421) (217,246) (395,440) (336,165) (334,270) (407,175) (408,700) Change in debt 109,388 26 (810) (9) (38,131) (93,401) (22,950) (6,770) Net share issues/(repurchases) 0 0 0 0 0 0 0 0 Dividends paid (77,773) (77,786) (116,683) (155,582) (181,513) (207,440) (233,370) (259,300) Other financing CF items 491 33,978 5,702 (5,252) (23,180) 0 0 0 Cash flow from financing 32,106 (43,782) (111,791) (160,843) (242,824) (300,841) (256,320) (266,070) Forex effect/others 850 0 0 0 0 0 0 0 Change in cash 99,285 95,322 200,843 (16,448) 6,329 12,507 8,556 123,885 Free cash flow 59,789 132,984 272,356 211,790 254,730 307,381 264,876 389,955 Source: FactSet, Daiwa forecasts

Taiwan Semiconductor Manufacturing (2330 TT): 7 January 2019

Financial summary continued … Balance sheet (TWDm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Cash & short-term investment 245,343 437,006 586,163 632,109 649,358 655,899 664,455 788,339 Inventory 37,495 66,338 67,052 48,682 73,881 61,881 86,881 74,881 Accounts receivable 71,942 115,048 85,565 129,305 122,317 132,317 154,317 169,317 Other current assets 3,708 8,175 7,964 7,633 11,647 8,800 8,800 8,800 Total current assets 358,487 626,567 746,744 817,729 857,203 858,897 914,453 1,041,337 Fixed assets 792,666 818,199 853,470 997,778 1,062,542 1,089,372 1,188,237 1,260,622 Goodwill & intangibles 22,719 20,227 22,310 24,795 30,547 27,000 25,500 25,000 Other non-current assets 89,184 30,056 34,994 46,154 41,569 41,569 41,569 41,569 Total assets 1,263,055 1,495,049 1,657,518 1,886,455 1,991,862 2,016,837 2,169,759 2,368,528 Short-term debt 15,645 36,159 62,992 96,068 122,168 86,717 70,537 69,183 Accounts payable 16,359 23,370 19,725 27,325 30,069 33,069 39,069 42,069 Other current liabilities 157,774 141,485 129,512 194,847 206,470 140,222 150,372 164,498 Total current liabilities 189,778 201,014 212,229 318,239 358,707 260,008 259,978 275,750 Long-term debt 211,584 214,516 191,998 153,115 91,800 33,850 27,080 21,664 Other non-current liabilities 13,918 33,191 30,658 25,050 18,595 21,000 22,000 25,000 Total liabilities 415,280 448,721 434,884 496,404 469,102 314,858 309,058 322,414 Share capital 259,286 259,297 259,304 259,304 259,304 259,304 259,304 259,304 Reserves/R.E./others 588,222 786,904 962,368 1,129,944 1,262,754 1,441,886 1,600,154 1,785,051 Shareholders' equity 847,508 1,046,201 1,221,672 1,389,248 1,522,058 1,701,190 1,859,458 2,044,355 Minority interests 267 127 963 803 702 790 1,243 1,759 Total equity & liabilities 1,263,055 1,495,049 1,657,518 1,886,455 1,991,862 2,016,837 2,169,759 2,368,528 EV 5,570,068 5,401,711 5,257,704 5,205,792 5,153,227 5,053,373 5,022,321 4,892,182 Net debt/(cash) (18,114) (186,331) (331,173) (382,926) (435,390) (535,332) (566,838) (697,492) BVPS (TWD) 32.686 40.348 47.114 53.577 58.699 65.607 71.711 78.841

Key ratios (%) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Sales (YoY) 17.9 27.8 10.6 12.4 3.1 5.6 13.4 11.3 EBITDA (YoY) 17.0 35.7 9.4 10.9 7.3 5.4 12.5 12.3 Operating profit (YoY) 15.7 41.3 8.2 18.1 2.0 (0.2) 14.7 13.9 Net profit (YoY) 13.2 40.3 16.2 9.0 2.7 1.9 12.0 13.4 Core EPS (fully-diluted) (YoY) 13.2 40.3 16.2 9.0 2.7 1.9 12.0 13.4 Gross-profit margin 47.1 49.5 48.7 50.1 50.6 48.4 48.4 49.2 EBITDA margin 61.2 65.0 64.3 63.5 66.1 65.9 65.3 65.9 Operating-profit margin 35.1 38.8 37.9 39.9 39.4 37.3 37.7 38.5 Net profit margin 31.5 34.6 36.3 35.3 35.1 33.9 33.4 34.1 ROAE 24.0 27.9 27.0 25.6 23.6 21.7 22.0 22.8 ROAA 17.0 19.1 19.4 18.9 17.7 17.4 18.7 19.6 ROCE 21.8 24.9 23.1 24.3 22.8 21.6 23.3 24.5 ROIC 24.0 30.6 32.0 34.5 31.9 30.1 31.0 32.8 Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Effective tax rate 12.7 12.7 12.5 13.4 13.4 11.9 13.6 13.8 Accounts receivable (days) 37.9 44.7 43.4 41.4 47.0 45.0 44.7 45.3 Current ratio (x) 1.9 3.1 3.5 2.6 2.4 3.3 3.5 3.8 Net interest cover (x) 258.3 585.1 n.a. n.a. n.a. n.a. n.a. n.a. Net dividend payout 41.3 29.5 38.1 46.5 52.9 59.3 59.6 58.4 Free cash flow yield 1.1 2.4 4.9 3.8 4.6 5.5 4.7 7.0 Source: FactSet, Daiwa forecasts

Company profile

Incorporated in Taiwan in 1987, Taiwan Semiconductor Manufacturing Co. (TSMC) is the world’s largest semiconductor foundry in revenue terms. TSMC offers foundry services such as wafer masking, fabrication, probing and testing, to a high variety of customers including fabless chipmakers and IDMs. Its manufacturing fabs are located in Taiwan, China, the US and Singapore.

Taiwan Semiconductor Manufacturing (2330 TT): 7 January 2019

TSMC: quarterly P&L forecasts TWDbn 1Q18 2Q18 3Q18 4Q18E 1Q19E 2Q19E 3Q19E 4Q19E 2017 2018E 2019E 2020E Total revenue 248 233 260 291 276 288 305 302 977 1,032 1,171 1,304 COGS -123 -122 -137 -151 -144 -148 -156 -157 -483 -533 -604 -663 Gross profit 125 112 123 140 132 141 148 146 495 499 567 641 Opex -28 -27 -28 -31 -30 -31 -33 -32 -109 -115 -126 -139 Operating profit 97 84 95 108 102 110 116 114 386 385 441 502 EBITDA 168 156 169 187 181 189 198 198 646 680 765 859 Pretax profit 100 88 99 111 105 112 120 117 396 397 454 516 Income taxes -10 -15 -10 -12 -10 -19 -16 -16 -53 -47 -62 -71 Net profit 90 72 89 98 94 93 104 101 343 350 392 444 FD O/S (m) 26 26 26 26 26 26 26 26 26 26 26 26 FD EPS (TWD) 3.46 2.79 3.44 3.80 3.63 3.59 4.01 3.88 13.23 13.48 15.11 17.13 Margin Gross 50% 48% 47% 48% 48% 49% 49% 48% 51% 48% 48% 49% Operating 39% 36% 37% 37% 37% 38% 38% 38% 39% 37% 38% 39% EBITDA 68% 67% 65% 64% 66% 65% 65% 65% 66% 66% 65% 66% Net 36% 31% 34% 34% 34% 32% 34% 33% 35% 34% 33% 34% Growth (QoQ) Total revenue -11% -6% 12% 12% -5% 4% 6% -1% Gross profit -10% -11% 11% 13% -5% 6% 5% -2% Operating profit -11% -13% 13% 14% -6% 7% 6% -2% EBITDA -6% -7% 8% 11% -3% 4% 5% 0% Net profit -10% -19% 23% 11% -4% -1% 12% -3% FD EPS -10% -19% 23% 11% -4% -1% 12% -3% Growth (YoY) Total revenue 6% 9% 3% 5% 11% 24% 17% 4% 3% 6% 13% 11% Gross profit 3% 3% -2% 1% 6% 26% 20% 5% 4% 1% 14% 13% Operating profit 2% 1% -3% -1% 5% 30% 22% 5% 2% 0% 15% 14% EBITDA 8% 10% 0% 4% 8% 21% 17% 5% 7% 5% 12% 12% Net profit 2% 9% -1% -1% 5% 29% 17% 2% 3% 2% 12% 13% FD EPS 2% 9% -1% -1% 5% 29% 17% 2% 3% 2% 12% 13% Source: Company, Daiwa forecasts

TSMC: 4Q18 results preview and 1Q19 outlook comparison 4Q18E 1Q19E TWDm Daiwa Consensus Variance Daiwa Consensus Variance Revenue 290,756 289,320 0% 275,898 255,202 8% Gross profit 139,545 132,189 Operating profit 108,143 102,116 Pretax profit 110,682 104,652 Net profit 98,451 99,523 -1% 94,082 86,647 9% Adjusted EPS (TWD) 3.80 3.84 -1% 3.63 3.34 9% Margin Gross 48.0% 47.9% Operating 37.2% 37.0% Net 33.9% 34.1% Operation Shipment ('000, 12" equ.wafers) 2,899 2,841 Utilization* 96% 94% <=10nm sales contribution 22% 27%

Source: Bloomberg, Daiwa estimates & forecasts Note: * Calculated as wafer shipment / capacity

TSMC: revenue mix by application* TSMC: PBR trend 100% X 6 80% 5 4.2 4.0 3.7 3.5 60% 4 3 40% 2.5 2 2.0 20% 1

0% 0 2011 2012 2013 2014 2015 2016 2017 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 2018E 2019E 2020E Mobile HPC (AI) IoT Automotive & others P/BV Mean Mean + s Mean - s

Source: Company, Daiwa estimates & forecasts Source: Company, TEJ, Daiwa forecasts Note: * HPC = high-performance computing; IoT = Internet of things

100

Taiwan Information Technology 7 January 2019

ASE Technology Holding (3711 TT) ASE T echnolog y H ol ding

Target price: TWD95.00 (from TWD95.00) Share price (3 Jan): TWD56.00 | Up/downside: +69.6%

Diverse exposure across multiple demand verticals Rick Hsu (886) 2 8758 6261  ASE stands to benefit from 5G and AI, with its leading position [email protected]  Market-share recovery on business scale and synergies Robert Hsu (886) 2 8758 6251  Reiterating our Buy (1) rating with an unchanged TP of TWD95 [email protected]

What's new: In our view, ASE’s leading position at the back end of the Forecast revisions (%) semiconductor contract manufacturing (SCM) food chain bodes well for it to Year to 31 Dec 18E 19E 20E capitalise on the BigData/IoT cycle, with its diverse exposure across Revenue change --- multiple demand verticals such as bandwidth and AI. With its business Net profit change --- Core EPS (FD) change - - - synergies bearing fruit post China’s conditional approval of the merger Source: Daiwa forecasts deal, we expect ASE to regain market share structurally on economies of scale. We reiterate our Buy (1) rating and TP of TWD95. Share price performance

(TWD) (%) What's the impact: Diverse exposure to benefit. Similar to TSMC 95 120 leading at the front end of the SCM food chain, ASE looks well placed at 85 110 the back end of the chain with its global leadership to capture multiple 75 100 demand verticals by leveraging on its scale post the merger. In the coming 65 90 55 80 5G migration cycle, we expect ASE to benefit from silicon upgrades at both Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 the infrastructure end of base stations and terminal end of smartphones ASE Techno (LHS) and IoT devices, including FPGA, RF PA/filters, baseband processors and Relative to TWSE Index (RHS)

AP SoC. In the AI migration cycle, ASE stands to benefit from advanced 12-month range 56.00-91.00 semiconductor assembly & test (SAT) offerings for AI processors like xPU, Market cap (USDbn) 7.83 FPGA and ASIC, for applications across cloud computing at datacentres 3m avg daily turnover (USDm) 15.48 and edge computing at smartphones and self-driving vehicles, in our view. Shares outstanding (m) 4,321 Major shareholder ASE Enterprises Ltd. (15.9%)

Share gains on synergies and scale. As assessed in our re-initiation Financial summary (TWD) report, reborn stronger, we expect the holding company’s acquisition of Year to 31 Dec 18E 19E 20E ASE and SPIL to be both scale- and ROE-accretive, on the back of a share Revenue (m) 401,741 465,008 544,705 recovery in the outsourced SAT market with enhanced pricing power, plus Operating profit (m) 26,798 39,944 54,233 Net profit (m) 16,121 28,769 39,724 opex savings on business synergies. Progress post the deal completion Core EPS (fully-diluted) 3.731 6.658 9.193 has unfolded well, as evidenced by ASE regaining market share since EPS change (%) 72.8 78.5 38.1 2H18 (see chart, page 104). EMS, its other business unit, should add extra Daiwa vs Cons. EPS (%) (3.2) 24.1 43.9 PER (x) 15.0 8.4 6.1 growth, given ASE’s limited footprint in the global EMS market with its Dividend yield (%) 6.8 5.4 5.9 expanded customer base to help gain share, on top of its existing wearable DPS 3.8 3.0 3.3 and security system-in-package (SiP) products for a major customer. PBR (x) 1.3 1.2 1.0 EV/EBITDA (x) 5.4 4.4 3.8 ROE (%) 8.0 14.8 18.2 4Q18 unfolding as expected. QTD revenue reached 65%/67% of Source: FactSet, Daiwa forecasts our/consensus 4Q18 estimates, implying that ASE would need to post TWD41bn/38bn to reach our/consensus estimate, which we see as achievable. We expect net profit of TWD5.6bn for 4Q18 (vs. consensus: TWD6.1bn), followed by a 14% QoQ revenue decline in 1Q19 on seasonality.

What we recommend: We reaffirm our Buy (1) call and 12-month TP of TWD95, on an ROE-adjusted PBR of 1.9x. ASE is our preferred OSAT exposure in Asia. Key risk: business synergies not meeting expectations.

How we differ: Our 2019-20E EPS are 24-44% above the consensus, likely due to our more positive assumption on ASE’s business synergies.

See important disclosures, including any required research certifications, beginning on page 115

ASE Technology Holding (3711 TT): 7 January 2019

Financial summary Key assumptions Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Packaging utilisation (%) n.a. n.a. n.a. n.a. 79.9 79.8 83.0 91.8 Testing utilisation (%) n.a. n.a. n.a. n.a. 74.3 73.5 77.4 83.3 FC & bumping utilisation (%) n.a. n.a. n.a. n.a. 73.0 70.0 75.2 81.7

Profit and loss (TWDm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E SAT sales n.a. n.a. n.a. n.a. 240,046 245,425 283,475 333,417 EMS sales n.a. n.a. n.a. n.a. 133,948 156,316 181,532 211,288 Other Revenue n.a. n.a. n.a. n.a. 0 0 0 0 Total Revenue n.a. n.a. n.a. n.a. 373,994 401,741 465,008 544,705 Other income n.a. n.a. n.a. n.a. 0 0 0 0 COGS n.a. n.a. n.a. n.a. (309,259) (337,101) (383,219) (442,050) SG&A n.a. n.a. n.a. n.a. (20,064) (20,080) (22,041) (25,705) Other op.expenses n.a. n.a. n.a. n.a. (16,524) (17,762) (19,804) (22,717) Operating profit n.a. n.a. n.a. n.a. 28,147 26,798 39,944 54,233 Net-interest inc./(exp.) n.a. n.a. n.a. n.a. (1,936) (2,376) (3,191) (3,026) Assoc/forex/extraord./others n.a. n.a. n.a. n.a. 6,877 (550) 1,200 1,200 Pre-tax profit n.a. n.a. n.a. n.a. 33,087 23,872 37,953 52,407 Tax n.a. n.a. n.a. n.a. (8,063) (6,608) (7,591) (10,481) Min. int./pref. div./others n.a. n.a. n.a. n.a. (1,680) (1,143) (1,594) (2,201) Net profit (reported) n.a. n.a. n.a. n.a. 23,345 16,121 28,769 39,724 Net profit (adjusted) n.a. n.a. n.a. n.a. 23,345 16,121 28,769 39,724 EPS (reported)(TWD) n.a. n.a. n.a. n.a. 2.159 3.731 6.658 9.193 EPS (adjusted)(TWD) n.a. n.a. n.a. n.a. 2.159 3.731 6.658 9.193 EPS (adjusted fully-diluted)(TWD) n.a. n.a. n.a. n.a. 2.159 3.731 6.658 9.193 DPS (TWD) n.a. n.a. n.a. n.a. 3.130 3.800 3.000 3.300 EBIT n.a. n.a. n.a. n.a. 28,147 26,798 39,944 54,233 EBITDA n.a. n.a. n.a. n.a. 71,977 72,658 85,647 99,935

Cash flow (TWDm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Profit before tax n.a. n.a. n.a. n.a. 33,087 23,872 37,953 52,407 Depreciation and amortisation n.a. n.a. n.a. n.a. 43,830 45,860 45,702 45,702 Tax paid n.a. n.a. n.a. n.a. (8,063) (6,608) (7,591) (10,481) Change in working capital n.a. n.a. n.a. n.a. 13,497 (19,500) (4,500) (26,000) Other operational CF items n.a. n.a. n.a. n.a. (15,525) 8,857 (1,594) (2,201) Cash flow from operations n.a. n.a. n.a. n.a. 66,826 52,481 69,971 59,427 Capex n.a. n.a. n.a. n.a. (37,632) (47,200) (43,225) (45,053) Net (acquisitions)/disposals n.a. n.a. n.a. n.a. 7,550 (105,579) 0 0 Other investing CF items n.a. n.a. n.a. n.a. 1,631 1,500 1,500 1,500 Cash flow from investing n.a. n.a. n.a. n.a. (28,451) (151,279) (41,725) (43,553) Change in debt n.a. n.a. n.a. n.a. (23,646) 72,404 (19,503) (20,602) Net share issues/(repurchases) n.a. n.a. n.a. n.a. 10,290 0 0 0 Dividends paid n.a. n.a. n.a. n.a. (16,668) (11,362) (12,963) (14,259) Other financing CF items n.a. n.a. n.a. n.a. 3,767 0 0 0 Cash flow from financing n.a. n.a. n.a. n.a. (26,256) 61,042 (32,466) (34,862) Forex effect/others n.a. n.a. n.a. n.a. (4,466) 0 0 0 Change in cash n.a. n.a. n.a. n.a. 7,653 (37,757) (4,220) (18,988) Free cash flow n.a. n.a. n.a. n.a. 29,194 5,281 26,746 14,374 Source: FactSet, Daiwa forecasts

102

ASE Technology Holding (3711 TT): 7 January 2019

Financial summary continued … Balance sheet (TWDm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Cash & short-term investment n.a. n.a. n.a. n.a. 75,834 36,765 32,546 13,558 Inventory n.a. n.a. n.a. n.a. 40,204 55,704 54,704 73,704 Accounts receivable n.a. n.a. n.a. n.a. 72,078 74,578 95,078 106,078 Other current assets n.a. n.a. n.a. n.a. 5,888 21,391 36,500 36,500 Total current assets n.a. n.a. n.a. n.a. 194,004 188,439 218,827 229,840 Fixed assets n.a. n.a. n.a. n.a. 197,566 215,873 228,565 233,053 Goodwill & intangibles n.a. n.a. n.a. n.a. 22,061 38,100 36,000 30,000 Other non-current assets n.a. n.a. n.a. n.a. 33,277 35,063 35,063 35,063 Total assets n.a. n.a. n.a. n.a. 446,909 477,475 518,456 527,955 Short-term debt n.a. n.a. n.a. n.a. 21,385 21,385 21,385 21,385 Accounts payable n.a. n.a. n.a. n.a. 49,129 47,629 62,629 66,629 Other current liabilities n.a. n.a. n.a. n.a. 61,301 53,279 73,003 71,102 Total current liabilities n.a. n.a. n.a. n.a. 131,816 122,293 157,017 159,116 Long-term debt n.a. n.a. n.a. n.a. 68,808 147,515 128,012 107,410 Other non-current liabilities n.a. n.a. n.a. n.a. 11,799 9,500 11,500 12,000 Total liabilities n.a. n.a. n.a. n.a. 212,423 279,308 296,529 278,526 Share capital n.a. n.a. n.a. n.a. 108,126 43,620 43,620 43,620 Reserves/R.E./others n.a. n.a. n.a. n.a. 113,160 139,550 161,715 187,016 Shareholders' equity n.a. n.a. n.a. n.a. 221,285 183,170 205,335 230,636 Minority interests n.a. n.a. n.a. n.a. 13,200 14,998 16,592 18,793 Total equity & liabilities n.a. n.a. n.a. n.a. 446,909 477,475 518,456 527,955 EV n.a. n.a. n.a. n.a. 269,535 389,108 375,419 376,006 Net debt/(cash) n.a. n.a. n.a. n.a. 14,359 132,134 116,851 115,237 BVPS (TWD) n.a. n.a. n.a. n.a. 20.466 42.391 47.520 53.376

Key ratios (%) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Sales (YoY) n.a. n.a. n.a. n.a. n.a. 7.4 15.7 17.1 EBITDA (YoY) n.a. n.a. n.a. n.a. n.a. 0.9 17.9 16.7 Operating profit (YoY) n.a. n.a. n.a. n.a. n.a. (4.8) 49.1 35.8 Net profit (YoY) n.a. n.a. n.a. n.a. n.a. (30.9) 78.5 38.1 Core EPS (fully-diluted) (YoY) n.a. n.a. n.a. n.a. n.a. 72.8 78.5 38.1 Gross-profit margin n.a. n.a. n.a. n.a. 17.3 16.1 17.6 18.8 EBITDA margin n.a. n.a. n.a. n.a. 19.2 18.1 18.4 18.3 Operating-profit margin n.a. n.a. n.a. n.a. 7.5 6.7 8.6 10.0 Net profit margin n.a. n.a. n.a. n.a. 6.2 4.0 6.2 7.3 ROAE n.a. n.a. n.a. n.a. 21.1 8.0 14.8 18.2 ROAA n.a. n.a. n.a. n.a. 10.4 3.5 5.8 7.6 ROCE n.a. n.a. n.a. n.a. 17.3 7.7 10.8 14.5 ROIC n.a. n.a. n.a. n.a. 8.6 6.7 9.6 12.3 Net debt to equity n.a. n.a. n.a. n.a. 6.5 72.1 56.9 50.0 Effective tax rate n.a. n.a. n.a. n.a. 24.4 27.7 20.0 20.0 Accounts receivable (days) n.a. n.a. n.a. n.a. 35.2 66.6 66.6 67.4 Current ratio (x) n.a. n.a. n.a. n.a. 1.5 1.5 1.4 1.4 Net interest cover (x) n.a. n.a. n.a. n.a. 14.5 11.3 12.5 17.9 Net dividend payout n.a. n.a. n.a. n.a. 145.0 101.9 45.1 35.9 Free cash flow yield n.a. n.a. n.a. n.a. 12.1 2.2 11.1 5.9 Source: FactSet, Daiwa forecasts

Company profile

Established in April 2018, ASE Technology Holding Co (HoldCo) is a holding company which privatized ASE and SPIL fully on 30 April 2018 through equity and cash swap, respectively, and listed on the same day with senior management assigned mainly by ASE. HoldCo has become the strong No.1 OSAT maker in the world, offering a comprehensive product portfolio to its customers from wirebonding, flip-chip & bumping, system-in-package (SiP) to broad-based electronics manufacturing services (EMS).

103

ASE Technology Holding (3711 TT): 7 January 2019

ASE: quarterly P&L forecasts TWDm 1Q18 2Q18 3Q18 4Q18E 1Q19E 2Q19E 3Q19E 4Q19E 2017 2018E 2019E 2020E SAT revenue 55,193 61,285 65,601 63,346 61,428 68,464 76,549 77,035 240,046 245,425 283,475 333,417 EMS revenue 28,686 30,472 41,996 55,162 41,063 41,040 47,399 52,030 133,948 156,316 181,532 211,288 Total revenue 83,879 91,757 107,597 118,508 102,491 109,504 123,948 129,065 373,994 401,741 465,008 544,705 SAT COGS -45,715 -49,418 -51,371 -49,460 -49,098 -53,515 -58,291 -59,347 -188,955 -195,964 -220,250 -252,948 EMS COGS -25,986 -27,604 -37,846 -49,701 -36,751 -36,731 -42,659 -46,827 -120,304 -141,137 -162,968 -189,102 Total COGS -71,701 -77,022 -89,217 -99,161 -85,849 -90,246 -100,950 -106,174 -309,259 -337,101 -383,219 -442,050 SAT GP 9,478 11,867 14,231 13,886 12,330 14,949 18,258 17,688 51,091 49,461 63,225 80,469 EMS GP 2,700 2,868 4,150 5,461 4,312 4,309 4,740 5,203 13,644 15,179 18,564 22,185 Total gross profit (GP) 12,178 14,735 18,381 19,347 16,642 19,258 22,997 22,891 64,735 64,640 81,789 102,655 SG&A -4,192 -4,977 -5,341 -5,570 -5,022 -5,256 -5,826 -5,937 -20,064 -20,080 -22,041 -25,705 R&D -3,704 -3,818 -4,419 -4,853 -4,202 -4,490 -4,958 -5,163 -15,589 -16,793 -18,812 -21,909 PPA amortisation* -229 -244 -248 -248 -248 -248 -248 -248 -936 -969 -991 -808 Operating profit 4,054 5,696 8,372 8,676 7,170 9,265 11,966 11,544 28,147 26,798 39,944 54,233 Net interest income (expense) -460 -411 -760 -745 -790 -820 -810 -771 -1,936 -2,376 -3,191 -3,026 Other non-op gains (losses) -1,007 -293 505 245 300 300 300 300 6,877 -550 1,200 1,200 Pretax profit 2,587 4,992 8,117 8,176 6,680 8,745 11,456 11,073 33,087 23,872 37,953 52,407 Income tax -1,591 -1,500 -1,554 -1,963 -1,336 -1,749 -2,291 -2,215 -8,063 -6,608 -7,591 -10,481 Minority interest & others -260 0 -306 -577 -281 -367 -481 -465 -1,680 -1,143 -1,594 -2,201 Net profit 736 3,492 6,257 5,636 5,063 6,628 8,684 8,393 23,345 16,121 28,769 39,724 EPS 0.17 0.81 1.45 1.30 1.17 1.53 2.01 1.94 2.16 3.73 6.66 9.19 O/S (m) 4,362 4,319 4,320 4,321 4,321 4,321 4,321 4,321 10,813 4,321 4,321 4,321 EBITDA 15,247 16,963 19,786 19,882 17,959 20,198 23,156 23,533 71,310 71,878 84,847 99,135 Margin SAT GM 17% 19% 22% 22% 20% 22% 24% 23% 21% 20% 22% 24% EMS GM 9% 9% 10% 10% 11% 11% 10% 10% 10% 10% 10% 11% Total gross margin (GM) 15% 16% 17% 16% 16% 18% 19% 18% 17% 16% 18% 19% Operating 5% 6% 8% 7% 7% 8% 10% 9% 8% 7% 9% 10% Net 1% 4% 6% 5% 5% 6% 7% 7% 6% 4% 6% 7% Growth (QoQ) SAT revenue -11% 11% 7% -3% -3% 11% 12% 1%

EMS revenue -34% 6% 38% 31% -26% 0% 15% 10% Total revenue -21% 9% 17% 10% -14% 7% 13% 4%

Gross profit -33% 21% 25% 5% -14% 16% 19% 0%

Operating profit -53% 41% 47% 4% -17% 29% 29% -4%

Net profit -88% 374% 79% -10% -10% 31% 31% -3%

EPS -71% 379% 79% -10% -10% 31% 31% -3%

Growth (YoY) SAT revenue -3% 5% 5% 2% 11% 12% 17% 22% -2% 2% 16% 18% EMS revenue -2% 8% 27% 27% 43% 35% 13% -6% 16% 17% 16% 16% Total revenue -3% 6% 12% 12% 22% 19% 15% 9% 4% 7% 16% 17% Gross profit -16% 0% 5% 7% 37% 31% 25% 18% -11% 0% 27% 26% Operating profit -27% 0% 0% 1% 77% 63% 43% 33% -25% -5% 49% 36% Net profit -65% -55% -12% -10% 588% 90% 39% 49% -26% -31% 78% 38% EPS -14% 12% 119% 124% 595% 90% 39% 49% -32% 73% 78% 38% Source: Company, Daiwa estimates & forecasts Note: * Purchase price allocated associated with SPIL acquisition

Global OSAT market share dynamics ASE: PBR trend

35% X 2.0 30% 1.8 25% 1.6 20% 15% 1.4 10% 1.2 5% 1.0 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 Jul-18 Apr-18 Oct-18 Apr-19 Jun-18 Jan-19 1Q19E 3Q19E 1Q20E 3Q20E Mar-19 Feb-19 Aug-18 Sep-18 Nov-18 Dec-18 May-18 May-19 ASE Tech Holding* JCET** P/BV Mean Mean + s Amkor China top-3*** Mean - s Mean + 2s Mean - 2s Source: Company, Daiwa estimates & forecasts Source: Company, TEJ, Daiwa estimates & forecasts Note: * ASE Tech Holding = ASE + SPIL excluding ASE’s EMS business; ** JCET started consolidating STATS-ChipPAC in 3Q15; Amkor started consolidating J-Devices in 1Q16; *** China top-3 includes JCET, TSHT and TFME

104

Korea Information Technology 7 January 2019

Samsung Electronics (005930 KS) Samsung El ectronics

Target price: KRW54,000 (from KRW54,000) Share price (3 Jan): KRW37,600 | Up/downside: +43.6%

Key beneficiary of the BigData/5G cycle SK Kim (82) 2 787 9173  Expect earnings to rebound in 2H19E driven by memory/OLED [email protected]  5G opportunities for network equipment, smartphone, memory Henny Jung (82) 2 787 9182  Reaffirming our Buy (1) call and TP of KRW54,000 [email protected]

What's new: We expect Samsung Electronics (SEC) to benefit from rising Forecast revisions (%) BigData/5G penetration. Although its overall earnings growth likely peaked Year to 31 Dec 18E 19E 20E in 2018 due to slow memory demand in 4Q18/1Q19, we expect earnings to Revenue change --- rebound from 2H19, driven by a recovery in datacentre demand and the 5G Net profit change --- Core EPS (FD) change - - - opportunity. Source: Daiwa forecasts

What's the impact: Expect earnings to rebound in 2H19E. Due to Share price performance weaker-than-expected memory demand with low seasonality, we expect (KRW) (%) SEC’s overall earnings to remain weak in 1H19. However, we look for 55,000 105 earnings for the memory business to rebound in 2H19, driven by a recovery 50,250 101 in datacentre demand amid limited supply growth. For datacentre demand, 45,500 98 40,750 94 after inventory adjustments in 4Q18-1Q19, we expect a rebound with the 36,000 90 launch of a new CPU platform in 2Q19. For display, we expect a further Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 earnings improvement from expanding adoption of flexible OLED in high- Samsng Ele (LHS) Relative to KOSPI (RHS) end smartphones. For mobile, while higher-than-expected new specs for the GS10 are positive, we expect the company’s high bill of materials 12-month range 37,600-53,000 (BoM) cost burden from spec upgrades and weak smartphone demand to Market cap (USDbn) 198.24 continue to put pressure on its earnings. 3m avg daily turnover (USDm) 418.27 Shares outstanding (m) 5,945 Major shareholder National Pension Service (8.0%) Opportunities from rising 5G penetration: network equipment, smartphone, memory content growth. We assume SEC will benefit from Financial summary (KRW) increased 5G penetration from 2H19, which would drive the replacement Year to 31 Dec 18E 19E 20E cycle for premium smartphones, network equipment and semiconductors. Revenue (bn) 246,452 239,778 258,097 We expect SEC to gain market share from Huawei, which has recently Operating profit (bn) 60,740 47,124 51,852 Net profit (bn) 44,659 34,685 39,431 suffered from a decline in orders due to the US-China trade war. We Core EPS (fully-diluted) 7,487 5,822 6,672 assume 5G communications will require spec upgrades and advanced EPS change (%) 1.6 (22.2) 14.6 components. In order to support such performance, we expect 5G-based Daiwa vs Cons. EPS (%) 10.9 (1.0) 3.5 PER (x) 5.0 6.5 5.6 smartphones to drive memory content growth, especially in mobile DRAM. Dividend yield (%) 3.8 3.8 3.8 DPS 1,416 1,416 1,416 What we recommend: We reaffirm our Buy (1) call with an unchanged PBR (x) 1.0 0.9 0.8 EV/EBITDA (x) 1.7 1.6 1.2 SOTP-based 12-month target price of KRW54,000. The stock is trading ROE (%) 20.0 13.8 14.1 currently at a 6.5x PER on our 2019E EPS, which we believe is Source: FactSet, Daiwa forecasts substantially undervalued. Key risk: a further decline in memory demand.

How we differ: Our 2019E EPS is mostly in line with consensus, while our 2020 EPS forecast is 3.5% higher, likely as we are more positive on the company’s memory/OLED business for 2020E.

See important disclosures, including any required research certifications, beginning on page 115

Samsung Electronics (005930 KS): 7 January 2019

Financial summary Key assumptions Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E DRAM bit growth (%) 23.1 57.1 30.9 35.6 14.1 16.5 15.2 25.4 DRAM ASP (%) (5.7) (8.1) (15.3) (26.8) 44.8 19.6 (24.6) (10.2) NAND bit growth (%) 55.5 45.1 57.7 67.7 27.2 36.1 25.5 33.9 NAND ASP (%) (24.8) (26.9) (29.3) (26.0) 23.0 (17.2) (37.8) (7.8) LCD Area (%) (6.2) 17.1 (3.6) (3.1) (5.3) (10.2) 0.7 1.8 LCD Area ASP (%) (22.2) (18.2) (7.8) (29.5) 5.0 (19.4) (3.9) (11.3) OLED Unit (%) 40.1 (10.7) 24.4 41.1 34.5 (4.2) 30.4 24.5 OLED ASP (%) (3.1) (13.1) (1.0) (11.6) 11.3 19.7 (9.7) (4.7)

Profit and loss (KRWbn) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Semiconductor 37,437 39,730 47,587 51,160 74,260 88,229 78,043 89,512 IT & Mobile Communication 138,817 111,764 103,557 100,310 106,670 100,865 98,581 100,155 Other Revenue 52,439 54,712 49,510 50,397 58,645 57,358 63,154 68,430 Total Revenue 228,693 206,206 200,653 201,867 239,575 246,452 239,778 258,097 Other income 16,445 18,053 20,931 20,713 22,117 26,493 27,998 28,467 COGS (137,696) (128,279) (123,482) (120,278) (129,291) (132,478) (135,671) (149,513) SG&A (39,892) (38,517) (37,052) (38,237) (40,284) (35,793) (40,264) (41,448) Other op.expenses (30,765) (32,439) (34,637) (34,824) (38,473) (43,935) (44,716) (43,751) Operating profit 36,785 25,025 26,413 29,241 53,645 60,740 47,124 51,852 Net-interest inc./(exp.) 842 1,240 985 916 959 1,455 1,615 2,312 Assoc/forex/extraord./others 737 1,610 (1,437) 556 1,592 (22) (545) 513 Pre-tax profit 38,364 27,875 25,961 30,714 56,196 62,172 48,194 54,677 Tax (7,890) (4,481) (6,901) (7,988) (14,009) (17,052) (12,821) (14,560) Min. int./pref. div./others (654) (312) (366) (310) (842) (462) (688) (686) Net profit (reported) 29,821 23,083 18,695 22,416 41,345 44,659 34,685 39,431 Net profit (adjusted) 29,821 23,083 18,695 22,416 41,345 44,659 34,685 39,431 EPS (reported)(KRW) 4,049 3,134 2,722 3,585 7,370 7,487 5,822 6,672 EPS (adjusted)(KRW) 4,049 3,134 2,722 3,585 7,370 7,487 5,822 6,672 EPS (adjusted fully-diluted)(KRW) 4,049 3,134 2,722 3,585 7,370 7,487 5,822 6,672 DPS (KRW) 286 400 420 550 850 1,416 1,416 1,416 EBIT 36,785 25,025 26,413 29,241 53,645 60,740 47,124 51,852 EBITDA 53,230 43,078 47,344 49,954 75,762 87,232 75,122 80,319

Cash flow (KRWbn) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Profit before tax 38,364 27,875 25,961 30,714 56,196 62,172 48,194 54,677 Depreciation and amortisation 16,445 18,053 20,931 20,713 22,117 26,493 27,998 28,467 Tax paid (7,890) (4,481) (6,901) (7,988) (14,009) (17,052) (12,821) (14,560) Change in working capital (1,483) 2,690 (3,073) 1,673 (146) (10,962) 873 (4,445) Other operational CF items 1,270 (7,163) 3,144 2,274 (1,996) 5,848 (5,328) (6,930) Cash flow from operations 46,707 36,975 40,062 47,386 62,162 66,499 58,915 57,209 Capex (23,158) (22,043) (25,880) (24,143) (42,792) (31,816) (30,000) (34,000) Net (acquisitions)/disposals 377 386 357 271 308 494 450 496 Other investing CF items (21,967) (11,149) (1,645) (5,787) (6,901) (16,103) (8,796) (6,996) Cash flow from investing (44,747) (32,806) (27,168) (29,659) (49,385) (47,425) (38,347) (40,501) Change in debt (3,735) 105 1,608 2,408 3,532 3,025 659 (4,173) Net share issues/(repurchases) 0 (1,125) (5,015) (7,708) (8,350) (875) 0 0 Dividends paid (1,250) (2,234) (3,130) (3,115) (6,804) (10,158) (9,624) (9,619) Other financing CF items 847 197 (37) (255) (938) 846 8,623 4,528 Cash flow from financing (4,137) (3,057) (6,574) (8,670) (12,561) (7,162) (341) (9,265) Forex effect/others 330 250 510 180 (9) 839 340 (1,073) Change in cash (1,846) 1,362 6,830 9,237 207 12,751 20,567 6,371 Free cash flow 23,550 14,932 14,182 23,243 19,370 34,683 28,915 23,209 Source: FactSet, Daiwa forecasts

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Samsung Electronics (005930 KS): 7 January 2019

Financial summary continued … Balance sheet (KRWbn) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Cash & short-term investment 54,496 61,817 71,493 88,182 83,184 98,526 125,118 143,315 Inventory 19,135 17,318 18,812 18,354 24,983 27,899 28,572 31,487 Accounts receivable 25,256 24,695 25,168 24,279 27,696 34,902 33,956 36,551 Other current assets 11,873 11,317 9,342 10,615 11,119 15,186 14,825 14,765 Total current assets 110,760 115,146 124,815 141,430 146,982 176,513 202,471 226,118 Fixed assets 75,496 80,873 86,477 91,473 111,666 119,376 122,112 128,058 Goodwill & intangibles 3,981 4,785 5,396 5,344 14,760 13,971 10,857 8,170 Other non-current assets 23,838 29,619 25,491 23,928 28,343 31,368 32,672 34,681 Total assets 214,075 230,423 242,180 262,174 301,752 341,228 368,112 397,027 Short-term debt 8,864 9,808 11,377 13,980 16,046 20,832 21,678 17,657 Accounts payable 8,437 7,915 6,187 6,485 9,084 10,085 10,328 11,382 Other current liabilities 34,014 34,291 32,939 34,239 42,045 44,270 44,266 44,217 Total current liabilities 51,315 52,014 50,503 54,704 67,175 75,187 76,272 73,255 Long-term debt 2,296 1,458 1,497 1,303 2,768 1,007 820 668 Other non-current liabilities 10,447 8,863 11,120 13,204 17,318 18,394 18,669 18,726 Total liabilities 64,059 62,335 63,120 69,211 87,261 94,588 95,761 92,650 Share capital 898 898 898 898 898 898 898 898 Reserves/R.E./others 143,545 161,284 171,979 185,527 206,316 238,267 263,328 293,140 Shareholders' equity 144,443 162,182 172,877 186,424 207,213 239,165 264,226 294,037 Minority interests 5,573 5,906 6,183 6,539 7,278 7,475 8,124 10,340 Total equity & liabilities 214,075 230,423 242,180 262,174 301,752 341,228 368,112 397,027 EV 179,349 173,656 165,821 151,335 159,639 147,181 120,827 98,717 Net debt/(cash) (43,335) (50,552) (58,619) (72,900) (64,370) (76,687) (102,620) (124,991) BVPS (KRW) 17,635 19,760 24,538 27,446 31,405 36,449 40,113 45,681

Key ratios (%) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Sales (YoY) 13.7 (9.8) (2.7) 0.6 18.7 2.9 (2.7) 7.6 EBITDA (YoY) 19.2 (19.1) 9.9 5.5 51.7 15.1 (13.9) 6.9 Operating profit (YoY) 26.6 (32.0) 5.5 10.7 83.5 13.2 (22.4) 10.0 Net profit (YoY) 28.6 (22.6) (19.0) 19.9 84.4 8.0 (22.3) 13.7 Core EPS (fully-diluted) (YoY) 28.6 (22.6) (13.1) 31.7 105.6 1.6 (22.2) 14.6 Gross-profit margin 39.8 37.8 38.5 40.4 46.0 46.2 43.4 42.1 EBITDA margin 23.3 20.9 23.6 24.7 31.6 35.4 31.3 31.1 Operating-profit margin 16.1 12.1 13.2 14.5 22.4 24.6 19.7 20.1 Net profit margin 13.0 11.2 9.3 11.1 17.3 18.1 14.5 15.3 ROAE 22.8 15.1 11.2 12.5 21.0 20.0 13.8 14.1 ROAA 15.1 10.4 7.9 8.9 14.7 13.9 9.8 10.3 ROCE 24.7 14.7 14.2 14.6 24.3 24.2 16.7 16.8 ROIC 28.4 18.7 16.3 18.0 29.8 27.5 20.4 21.8 Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Effective tax rate 20.6 16.1 26.6 26.0 24.9 27.4 26.6 26.6 Accounts receivable (days) 39.2 44.2 45.4 44.7 39.6 46.4 52.4 49.9 Current ratio (x) 2.2 2.2 2.5 2.6 2.2 2.3 2.7 3.1 Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Net dividend payout 7.1 12.8 15.4 15.3 11.5 18.9 24.3 21.2 Free cash flow yield 10.5 6.7 6.3 10.4 8.7 15.5 12.9 10.4 Source: FactSet, Daiwa forecasts

Company profile

Samsung Electronics Co., Ltd. manufactures a range of consumer and industrial electronic equipment and products, such as semiconductors, display panels, handsets, personal computers, and peripherals. The company had global market shares of 45% in DRAM (2017), 15% in large-size display panels (2017).

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Daiwa’s Asia Pacific Research Directory

HONG KONG SOUTH KOREA Takashi FUJIKURA (852) 2848 4051 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Regional Research Head Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Jiro IOKIBE (852) 2773 8702 [email protected] Shipbuilding; Machinery Co-head of Asia Pacific Research Mike OH (82) 2 787 9179 [email protected] John HETHERINGTON (852) 2773 8787 [email protected] Banking; Capital Goods (Construction and Defence); Utilities; Steel Co-head of Asia Pacific Research Josh RHEE (82) 2 787 9124 [email protected] Craig CORK (852) 2848 4463 [email protected] Chemicals Regional Head of Asia Pacific Product Management Iris PARK (82) 2 787 9165 [email protected] Paul M. KITNEY (852) 2848 4947 [email protected] Consumer/Retail Chief Strategist for Asia Pacific; Strategy (Regional) SK KIM (82) 2 787 9173 [email protected] Kevin LAI (852) 2848 4926 [email protected] IT/Electronics – Semiconductor/Display and Tech Hardware Chief Economist for Asia ex-Japan; Macro Economics (Regional) Henny JUNG (82) 2 787 9182 [email protected] Kelvin LAU (852) 2848 4467 [email protected] IT/Electronics – Semiconductor/Display and Tech Hardware (Small/Mid Cap) Head of Automobiles; Transportation and Industrial (Hong Kong/China) Thomas Y KWON (82) 2 787 9181 [email protected] Fiona LIANG (852) 2532 4341 [email protected] Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Games Industrials (Hong Kong/China) Jay LU (852) 2848 4970 [email protected] TAIWAN Automobiles and Components (Hong Kong/China) Rick HSU (886) 2 8758 6261 [email protected] Janice ZHANG (852) 2773 8842 [email protected] Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design (Regional) Transportation (Hong Kong/China) Nora HOU (886) 2 8758 6249 [email protected] Leon QI (852) 2532 4381 [email protected] Banking; Diversified financials; Insurance; Strategy Regional Head of Financials; Banking; Diversified financials; Insurance (Hong Kong/China) Steven TSENG (886) 2 8758 6252 [email protected] Kevin JIANG (852) 2532 4383 [email protected] IT/Technology Hardware (Automation & PC Hardware) Banking (China) Kylie HUANG (886) 2 8758 6248 [email protected] Anson CHAN (852) 2532 4350 [email protected] IT/Technology Hardware (Handsets and Components) Consumer (Hong Kong/China) Helen CHIEN (886) 2 8758 6254 [email protected] Adrian CHAN (852) 2848 4427 [email protected] Small/Mid Cap Consumer (Hong Kong/China) Andrew CHUNG (852) 2773 8529 [email protected] INDIA Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Head of Gaming (Hong Kong/China) Head of India Research; Strategy; Banking/Finance John CHOI (852) 2773 8730 [email protected] Saurabh MEHTA (91) 22 6622 1009 [email protected] Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap Capital Goods; Utilities Carlton LAI (852) 2532 4349 [email protected]

Small/Mid Cap (Hong Kong/China) SINGAPORE Dennis IP (852) 2848 4068 [email protected] Ramakrishna MARUVADA (65) 6228 6742 [email protected] Regional Head of Power, Utilities, Renewable and Environment (PURE); PURE (Hong Kong/China) Head of Singapore Research; Telecommunications (China/ASEAN/India) Don LAU (852) 2848 4469 [email protected] David LUM (65) 6228 6740 [email protected] Power, Utilities, Renewable and Environment (PURE) – Utilities (Hong Kong); Gas (China) Banking; Property and REITs Anna LU (852) 2848 4465 [email protected] Royston TAN (65) 6228 6745 [email protected] Power, Utilities, Renewable and Environment (PURE) – IPP, Wind & Nuclear (China) Oil and Gas; Capital Goods Jonas KAN (852) 2848 4439 [email protected] Jame OSMAN (65) 6228 6744 [email protected] Head of Hong Kong and China Property Transportation – Road and Rail; Pharmaceuticals and Healthcare; Consumer Cynthia CHAN (852) 2773 8243 [email protected] Property (China) JAPAN Bryan CHIK (852) 2773 8741 [email protected] Yukino YAMADA (81) 3 5555 7295 [email protected] Strategy (Regional) Custom Products Group Selwyn CHENG (852) 2773 8716 [email protected] Custom Products Group Jack CHAN (852) 2773 8731 [email protected] Custom Products Group

PHILIPPINES Renzo CANDANO (63) 2 737 3022 [email protected] Consumer Micaela ABAQUITA (63) 2 737 3021 [email protected] Property Gregg ILAG (63) 2 737 3023 [email protected] Utilities; Energy

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Daiwa’s Offices Office / Branch / Affiliate Address Tel Fax DAIWA SECURITIES GROUP INC HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753 (81) 3 5555 3111 (81) 3 5555 0661 Daiwa Securities Trust Company One Evertrust Plaza, Jersey City, NJ 07302, U.S.A. (1) 201 333 7300 (1) 201 333 7726 Daiwa Securities Trust and Banking (Europe) PLC (Head Office) 5 King William Street, London EC4N 7JB, United Kingdom (44) 207 320 8000 (44) 207 410 0129 Daiwa Europe Trustees (Ireland) Ltd Level 3, Block 5, Harcourt Centre, Harcourt Road, Dublin 2, Ireland (353) 1 603 9900 (353) 1 478 3469

Daiwa Capital Markets America Inc. New York Head Office Financial Square, 32 Old Slip, New York, NY10005, U.S.A. (1) 212 612 7000 (1) 212 612 7100 Daiwa Capital Markets America Inc. San Francisco Branch 555 California Street, Suite 4325, San Francisco, CA 94104, U.S.A. (1) 415 955 8100 (1) 415 956 1935 Daiwa Capital Markets Europe Limited, London Head Office 5 King William Street, London EC4N 7AX, United Kingdom (44) 20 7597 8000 (44) 20 7597 8600 Daiwa Capital Markets Europe Limited, Frankfurt Branch Neue Mainzer Str. 1, 60311 Frankfurt/Main, Germany (49) 69 717 080 (49) 69 723 340 Daiwa Capital Markets Europe Limited, Paris Representative Office 17, rue de Surène 75008 Paris, France (33) 1 56 262 200 (33) 1 47 550 808 Daiwa Capital Markets Europe Limited, Geneva Branch 50 rue du Rhône, P.O.Box 3198, 1211 Geneva 3, Switzerland (41) 22 818 7400 (41) 22 818 7441 Daiwa Capital Markets Europe Limited, Midland Plaza 7th Floor, 10 Arbat Street, Moscow 119002, (7) 495 641 3416 (7) 495 775 6238 Moscow Representative Office Russian Federation Daiwa Capital Markets Europe Limited, Bahrain Branch 7th Floor, The Tower, Bahrain Commercial Complex, P.O. Box 30069, (973) 17 534 452 (973) 17 535 113 Manama, Bahrain Daiwa Capital Markets Hong Kong Limited Level 28, One Pacific Place, 88 Queensway, Hong Kong (852) 2525 0121 (852) 2845 1621 Daiwa Capital Markets Singapore Limited 7 Straits View, Marina One East Tower, #16-05 & #16-06, (65) 6387 8888 (65) 6282 8030 Singapore 018936, Republic of Singapore Daiwa Capital Markets Australia Limited Level 34, Rialto North Tower, 525 Collins Street, Melbourne, (61) 3 9916 1300 (61) 3 9916 1330 Victoria 3000, Australia DBP-Daiwa Capital Markets Philippines, Inc 18th Floor, Citibank Tower, 8741 Paseo de Roxas, Salcedo Village, (632) 813 7344 (632) 848 0105 Makati City, Republic of the Philippines Daiwa-Cathay Capital Markets Co Ltd 14/F, 200, Keelung Road, Sec 1, Taipei, Taiwan, R.O.C. (886) 2 2723 9698 (886) 2 2345 3638 Daiwa Securities Capital Markets Korea Co., Ltd. 20 Fl.& 21Fl. One IFC, 10 Gukjegeumyung-Ro, Yeongdeungpo-gu, (82) 2 787 9100 (82) 2 787 9191 Seoul, Korea Daiwa Securities Co. Ltd., Beijing Representative Office Room 301/302，Kerry Center，1 Guanghua Road，Chaoyang District， (86) 10 6500 6688 (86) 10 6500 3594 Beijing 100020, People’s Republic of China Daiwa (Shanghai) Corporate Strategic Advisory Co. Ltd. 44/F, Hang Seng Bank Tower, 1000 Lujiazui Ring Road, Pudong, (86) 21 3858 2000 (86) 21 3858 2111 Shanghai China 200120 , People’s Republic of China Daiwa Securities Co. Ltd., Bangkok Representative Office 18th Floor, M Thai Tower, All Seasons Place, 87 Wireless Road, (66) 2 252 5650 (66) 2 252 5665 Lumpini, Pathumwan, Bangkok 10330, Thailand Daiwa Capital Markets India Private Ltd 10th Floor, 3 North Avenue, Maker Maxity, Bandra Kurla Complex, (91) 22 6622 1000 (91) 22 6622 1019 Bandra East, Mumbai – 400051, India Daiwa Securities Co. Ltd., Hanoi Representative Office Suite 405, Pacific Palace Building, 83B, Ly Thuong Kiet Street, (84) 4 3946 0460 (84) 4 3946 0461 Hoan Kiem Dist. Hanoi, Vietnam

DAIWA INSTITUTE OF RESEARCH LTD HEAD OFFICE 15-6, Fuyuki, Koto-ku, Tokyo, 135-8460, Japan (81) 3 5620 5100 (81) 3 5620 5603 MARUNOUCHI OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6756 (81) 3 5555 7011 (81) 3 5202 2021

New York Research Center 11th Floor, Financial Square, 32 Old Slip, NY, NY 10005-3504, U.S.A. (1) 212 612 6100 (1) 212 612 8417 London Research Centre 3/F, 5 King William Street, London, EC4N 7AX, United Kingdom (44) 207 597 8000 (44) 207 597 8550

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SK Hynix: share price and Daiwa recommendation trend Date Target Price Rating Date Target price Rating Date Target price Rating 06/04/16 39,000 Buy 04/07/17 77,000 Buy 24/04/18 127,000 Buy 05/09/16 46,000 Buy 25/07/17 87,000 Buy 16/07/18 130,000 Buy 10/10/16 50,000 Buy 09/10/17 100,000 Buy 31/08/18 135,000 Buy 03/01/17 54,000 Buy 24/11/17 118,000 Buy 25/10/18 120,000 Buy 31/01/17 64,000 Buy 25/01/18 122,000 Buy 31/12/18 90,000 Buy

25/04/17 68,000 Buy 27/03/18 125,000 Buy 140,000 135,000 127,000 130,000 122,000 125,000 120,000 118,000 120,000

100,000 100,000

87,000 90,000 80,000 77,000 68,000 64,000 60,000 54,000 50,000 43,000 46,000 40,000 40,000 39,000

20,000 Jul-16 Jul-17 Jul-18 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 Jan-16 Jun-16 Jan-17 Jun-17 Jan-18 Jun-18 Jan-19 Feb-16 Mar-16 Feb-17 Mar-17 Feb-18 Mar-18 Aug-16 Sep-16 Nov-16 Dec-16 Aug-17 Sep-17 Nov-17 Dec-17 Aug-18 Sep-18 Nov-18 Dec-18 May-16 May-17 May-18

Target price (KRW) Closing Price (KRW)

Source: Daiwa Note: where appropriate, historical target prices have been adjusted to reflect the current share count

LG Display: share price and Daiwa recommendation trend Date Target Price Rating Date Target price Rating Date Target price Rating 18/11/16 36,000 Buy 26/07/17 44,000 Buy 12/07/18 24,000 Buy 17/01/17 39,000 Buy 17/10/17 39,000 Buy 28/11/18 20,000 Outperform 21/04/17 41,000 Buy 13/03/18 34,000 Buy

07/07/17 49,000 Buy 25/04/18 30,000 Buy 50,000 49,000

45,000 44,000 41,000 40,000 39,000 39,000 36,000 35,000 34,000

30,000 30,000

26,000 25,000 24,000

20,000 20,000

15,000 Jul-16 Jul-17 Jul-18 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 Jan-16 Jun-16 Jan-17 Jun-17 Jan-18 Jun-18 Jan-19 Feb-16 Mar-16 Feb-17 Mar-17 Feb-18 Mar-18 Aug-16 Sep-16 Nov-16 Dec-16 Aug-17 Sep-17 Nov-17 Dec-17 Aug-18 Sep-18 Nov-18 Dec-18 May-16 May-17 May-18

Target price (KRW) Closing Price (KRW)

Source: Daiwa Note: where appropriate, historical target prices have been adjusted to reflect the current share count

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2019 Technology Outlook: 7 January 2019

Samsung Electronics: share price and Daiwa recommendation trend Date Target Price Rating Date Target price Rating Date Target price Rating 24/06/16 34,200 Buy 30/12/16 44,000 Buy 31/10/17 82,000 Buy 28/07/16 34,800 Buy 24/01/17 47,000 Buy 03/01/18 80,000 Buy 09/08/16 38,800 Buy 23/03/17 54,000 Buy 28/06/18 72,000 Buy 07/10/16 39,200 Buy 27/04/17 57,800 Buy 28/09/18 70,000 Buy 27/10/16 38,600 Buy 28/06/17 64,000 Buy 31/10/18 63,000 Buy

29/11/16 39,600 Buy 09/10/17 70,000 Buy 24/12/18 54,000 Buy 90,000

82,000 80,000 80,000

72,000 70,000 70,000 70,000 64,000 63,000 60,000 57,800 54,000 54,000 50,000 47,000 44,000 40,000 38,800 39,20038,60039,600 34,20034,800 30,000 31,600 30,200

Target price (KRW) Closing Price (KRW)

Source: Daiwa Note: where appropriate, historical target prices have been adjusted to reflect the current share count

Samsung SDI: share price and Daiwa recommendation trend Date Target Price Rating Date Target price Rating Date Target price Rating 19/02/16 110,000 Outperform 13/04/17 152,000 Outperform 17/04/18 252,000 Buy 03/05/16 127,000 Outperform 06/06/17 176,000 Outperform 20/06/18 273,000 Buy 29/07/16 120,000 Outperform 18/07/17 200,000 Outperform 30/07/18 281,000 Buy 28/10/16 105,000 Outperform 25/10/17 219,000 Outperform 12/10/18 320,000 Buy

18/01/17 125,000 Outperform 18/01/18 260,000 Buy 20/11/18 355,000 Buy 400,000

350,000 355,000 320,000 300,000 273,000281,000 260,000 250,000 252,000 219,000 200,000 200,000 176,000 150,000 150,000 152,000 127,000 120,000 125,000 110,000 100,000 105,000

50,000 Jul-16 Jul-17 Jul-18 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 Jan-16 Jun-16 Jan-17 Jun-17 Jan-18 Jun-18 Jan-19 Feb-16 Mar-16 Feb-17 Mar-17 Feb-18 Mar-18 Aug-16 Sep-16 Nov-16 Dec-16 Aug-17 Sep-17 Nov-17 Dec-17 Aug-18 Sep-18 Nov-18 Dec-18 May-16 May-17 May-18

Target price (KRW) Closing Price (KRW)

Source: Daiwa Note: where appropriate, historical target prices have been adjusted to reflect the current share count

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LG Electronics: share price and Daiwa recommendation trend Date Target Price Rating Date Target price Rating Date Target price Rating 30/05/16 61,000 Outperform 18/04/17 80,000 Outperform 26/01/18 115,000 Outperform 29/09/16 56,000 Outperform 16/06/17 95,000 Outperform 04/04/18 121,000 Outperform 14/11/16 53,000 Outperform 28/07/17 77,000 Outperform 03/07/18 112,000 Buy 25/01/17 60,000 Outperform 11/10/17 95,000 Outperform 03/10/18 101,000 Buy

09/03/17 70,000 Outperform 03/11/17 105,000 Outperform 03/01/19 90,000 Buy 130,000

120,000 121,000 115,000 110,000 112,000 105,000 100,000 101,000 95,000 95,000 90,000 90,000

80,000 80,000 77,000 70,000 70,000

60,000 62,000 61,000 60,000 56,000 53,000 50,000

40,000 Jul-16 Jul-17 Jul-18 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 Jan-16 Jun-16 Jan-17 Jun-17 Jan-18 Jun-18 Jan-19 Feb-16 Mar-16 Feb-17 Mar-17 Feb-18 Mar-18 Aug-16 Sep-16 Nov-16 Dec-16 Aug-17 Sep-17 Nov-17 Dec-17 Aug-18 Sep-18 Nov-18 Dec-18 May-16 May-17 May-18

Target price (KRW) Closing Price (KRW)

Source: Daiwa Note: where appropriate, historical target prices have been adjusted to reflect the current share count

LG Innotek: share price and Daiwa recommendation trend Date Target Price Rating Date Target price Rating Date Target price Rating 08/09/17 240,000 Buy 22/03/18 172,000 Buy 11/09/18 158,000 Outperform 19/10/17 220,000 Buy 27/04/18 138,000 Buy

23/01/18 190,000 Buy 25/06/18 161,000 Outperform 240,000 240,000

220,000 220,000

200,000 190,000 180,000 172,000 160,000 161,000 158,000

140,000 138,000 120,000

100,000

80,000 83,000

60,000 Jul-16 Jul-17 Jul-18 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 Jan-16 Jun-16 Jan-17 Jun-17 Jan-18 Jun-18 Jan-19 Feb-16 Mar-16 Feb-17 Mar-17 Feb-18 Mar-18 Aug-16 Sep-16 Nov-16 Dec-16 Aug-17 Sep-17 Nov-17 Dec-17 Aug-18 Sep-18 Nov-18 Dec-18 May-16 May-17 May-18

Target price (KRW) Closing Price (KRW)

Source: Daiwa Note: where appropriate, historical target prices have been adjusted to reflect the current share count

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2019 Technology Outlook: 7 January 2019

Samsung Electro-Mechanics: share price and Daiwa recommendation trend Date Target Price Rating Date Target price Rating Date Target price Rating 04/07/16 74,000 Buy 22/06/17 125,000 Buy 18/07/18 190,000 Buy 19/10/16 64,000 Buy 14/11/17 132,000 Buy 06/09/18 220,000 Buy 20/01/17 66,000 Buy 01/02/18 126,000 Buy 01/11/18 200,000 Buy 17/02/17 69,000 Buy 11/04/18 145,000 Buy 31/12/18 172,000 Buy

17/04/17 82,000 Buy 22/05/18 160,000 Buy 220,000 220,000

200,000 200,000 190,000 180,000 172,000 160,000 160,000

140,000 145,000 132,000 126,000 120,000 125,000

100,000

80,000 79,000 82,000 76,000 74,000 66,00069,000 60,000 64,000

Target price (KRW) Closing Price (KRW)

Source: Daiwa Note: where appropriate, historical target prices have been adjusted to reflect the current share count

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Portions of this publication are prepared by Affin Hwang Investment Bank Berhad (“Affin Hwang”) and reviewed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates (collectively, “Daiwa”), and is distributed and/or originated from outside Malaysia by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. The role of Daiwa Securities Group Inc. and/or its non-U.S. affiliates in connection with this publication is solely limited to the review and distribution of this publication ; and Daiwa Securities Group Inc. and/or its non-U.S. affiliates are not involved in the preparation of this publication in any other way. This research is for Daiwa clients only and the publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Other than disclosures relating to Daiwa, this research is based on current public information that Affin Hwang and Daiwa consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such.

The analysts named in this report may have from time to time discussed with clients, including Daiwa’s salespersons and traders, or may discuss in this report, trading strategies that reference catalysts or events that may have a near-term impact on the market price of the equity securities discussed in this report, which impact may be directionally counter to the analysts' published price target expectations for such stocks. Any such trading strategies are distinct from and do not affect the analysts' fundamental equity rating for such stocks, which rating reflects a stock's return potential relative to its coverage group as described herein.

Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction where such an offer or solicitation would be illegal nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication constitutes the views of the analyst(s) named herein and does not necessarily reflect those of Daiwa Securities Group Inc. and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments. Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Investors should review current options disclosure documents in relation to such investments.

Japan Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc. Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc. Investment Banking Relationship Within the preceding 12 months, the subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Cromwell European REIT (CERT SP), Beijing Enterprises Water Group Ltd (371 HK), Mirae Asset Daewoo Co Ltd (006800 KS). *Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd.

Disclosure of Interest of Affin Hwang Investment Bank Investment Banking Relationship Within the preceding 12 months, Affin Hwang Investment Bank has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Tenaga Nasional Berhad (TNB MK), Mi Equipment Holdings Bhd (MI_MK), Malakoff Corporation Berhad (MLK MK).

Hong Kong This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司) (“DHK”) which is regulated by the Hong Kong Securities and Futures Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research.

Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage.

Korea The developing analyst of this research and analysis material hereby states and confirms that the contents of this material correctly reflect the analyst’s views and opinions and that the analyst has not been placed under inappropriate pressure or interruption by an external party.

Name of Analyst : SK Kim, Henny Jung

Disclosure of Analysts’ Interests If an analyst engaging in or a person who exercises influences on the preparation or publication of a Research Report containing recommendations for general investors to trade financial investment instruments with regard to which the analyst or the influential person has personal interests and if the recommendations contained in the Report may have impacts on the personal interests, Daiwa Securities Capital Markets Korea Co., Ltd.(“Daiwa Securities Korea”)shall ensure that the Analyst or the influential person notifies that he/she has personal interests with regard to:

1. The equity, the equity-linked bonds and the instruments with the subscription right to the equity issued by the legal entity covered in the Research Report (or the legal entity subject to the investment recommendations); 2. The stock option granted by the legal entity covered in the Research Report (or the legal entity subject to the investment recommendations); or

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3. The equity futures, the equity options and the equity-linked warrants backed by the equity prescribed in the preceding Paragraph 1 as the underlying assets.

Legal Entities subject to Research Report Coverage Restrictions Daiwa Securities Korea hereby states and confirms that Daiwa Securities Korea has no conflicts of interests with the legal entity covered in this Research Report:

1. In that Daiwa Securities Korea does NOT offer direct or indirect payment guarantee for the legal entity by means of, for instance, guarantee, endorsement, provision of collaterals or the acquisition of debts; 2. In that Daiwa Securities Korea does NOT own one-hundredth (or 1/100) or more of the total number of outstanding equities issued by the legal entity; 3. In that The legal entity is NOT an affiliated company of Daiwa Securities Korea pursuant to Sub-paragraph 3, Article 2 of the Monopoly Regulation and Fair Trade Act of Korea; 4. In that, although Daiwa Securities Korea offers advisory services for the legal entity with regard to an M&A deal, the size of the M&A deal does NOT exceed five-hundredths (or 5/100) of the total asset size or the total number of equities issued and outstanding of the legal entity; 5. In that, although Daiwa Securities Korea acted in the capacity of a Lead Underwriter for the initial public offering of the legal entity, more than one-year has passed since the IPO date; 6. In that Daiwa Securities Korea is NOT designated by the legal entity as the ‘tender offer agent’ pursuant to the Paragraph 2, Article 133 of the Financial Services and Capital Market Act or the legal entity is NOT the issuer of the equity subject to the proposed tender offer; this requirement, however applies until the maturity of the tender offer period; or 7. In that Daiwa Securities Korea does NOT have significant or material interests with regard to the legal entity.

Disclosure of Prior Distribution to Third Party This report has not been distributed to the third party in advance prior to public release.

The following explains the rating system in the report as compared to KOSPI, based on the beliefs of the author(s) of this report.

"1": the security could outperform the KOSPI by more than 15% over the next 12 months, unless otherwise stated. "2": the security is expected to outperform the KOSPI by 5-15% over the next 12 months, unless otherwise stated. "3": the security is expected to perform within 5% of the KOSPI (better or worse) over the next 12 months, unless otherwise stated. "4": the security is expected to underperform the KOSPI by 5-15% over the next 12 months, unless otherwise stated. "5": the security could underperform the KOSPI by more than 15% over the next 12 months, unless otherwise stated.

“Positive” means that the analyst expects the sector to outperform the KOSPI over the next 12 months, unless otherwise stated. “Neutral” means that the analyst expects the sector to be in-line with the KOSPI over the next 12 months, unless otherwise stated. “Negative” means that the analyst expects the sector to underperform the KOSPI over the next 12 months, unless otherwise stated.

Additional information may be available upon request.

Singapore This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore Limited in respect of any matter arising from or in connection with the research.

Australia This research is distributed in Australia by Daiwa Capital Markets Australia Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research.

India This research is distributed in India to Institutional Clients only by Daiwa Capital Markets India Private Limited (Daiwa India) which is an intermediary registered with Securities & Exchange Board of India as a Stock Broker, Merchant Bank and Research Analyst. Daiwa India, its Research Analyst and their family members and its associates do not have any financial interest save as disclosed or other undisclosed material conflict of interest in the securities or derivatives of any companies under coverage. Daiwa India and its associates, may have received compensation for any products other than Investment Banking (as disclosed)or brokerage services from the subject company in this report or from any third party during the past 12 months. Daiwa India and its associates may have debt holdings in the subject company. For information on ownership of equity, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

There is no material disciplinary action against Daiwa India by any regulatory authority impacting equity research analysis activities as of the date of this report.

Associates of Daiwa India, registered with Indian regulators, include Daiwa Capital Markets Singapore Limited and Daiwa Portfolio Advisory (India) Private Limited.

Taiwan This research is solely for reference and not intended to provide tailored investment recommendations. This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd. and it may only be distributed in Taiwan to specific customers who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd. and non-customers including (i) professional institutional investors, (ii) TWSE or TPEx listed companies, upstream and downstream vendors, and specialists that offer or seek advice, and (iii) potential customers with an actual need for business development in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research including non-customer recipients of this research shall not provide it to others or engage in any activities in connection with this research which may involve conflicts of interests. Neither Daiwa-Cathay Capital Markets Co., Ltd. nor its personnel who writes or reviews the research report has any conflict of interest in this research. Since Daiwa-Cathay Capital Markets Co., Ltd. does not operate brokerage trading business in foreign markets, this research is prepared on a “without recommendation” to any foreign securities basis and Daiwa-Cathay Capital Markets Co., Ltd. does not accept orders from customers to trade in such foreign securities. Recipients of this research shall carefully judge their own investment risk and take full responsibility for the results of any resulting investments in the companies and/or sectors featured in this research. Without the prior written permission of Daiwa-Cathay Capital Markets Co., Ltd., recipients of this research are prohibited from disclosing the research to the media, reprinting the research, or quoting from the research to other parties. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd. in respect of any matter arising from or in connection with the research.

Philippines This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities. For relevant securities and trading rules please visit SEC and PSE links at http://www.sec.gov.ph and http://www.pse.com.ph/ respectively.

Thailand This research is distributed to only institutional investors in Thailand primarily by Thanachart Securities Public Company Limited (“TNS”). This report is prepared by analysts who are employed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates. This report is provided to you for informational purposes only and it is not, and is not to be construed as, an offer or an invitation to make an offer to sell or buy any securities. Neither TNS, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees accept any liability whatsoever for any direct or consequential loss arising from any use of this research or its contents. The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable. However, TNS, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees make no representation or warranty, express or implied, as to their accuracy or completeness. Expressions of opinion herein are subject to change without notice. The use of any information, forecasts and opinions contained in this report shall be at the sole discretion and risk of the user. TNS, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates, their respective directors, officers, servants and employees may have positions and financial interest in securities mentioned in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this research. Therefore, investors should be aware of conflict of interest that may affect the objectivity of this research.

United Kingdom This research report is produced by Daiwa Securities Co. Ltd. and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange and Eurex. This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

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Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory.

Germany This document is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany.

Bahrain This research material is distributed in Bahrain by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113

United States This research is distributed into the United States directly by Daiwa Capital Markets Hong Kong Limited and indirectly by Daiwa Capital Markets America Inc. (DCMA), a U.S. Securities and Exchange Commission registered broker-dealer and FINRA member firm, exclusively to “major U.S. institutional investors”, as defined under Rule 15a-6 promulgated under the U.S. Securities Exchange Act of 1934, as amended, and as interpreted by the staff of the U.S. Securities and Exchange Commission (SEC). This report is not an offer to sell or the solicitation of any offer to buy securities. U.S. customers wishing to effect transactions in any designated investment discussed in this report should do so through a qualified salesperson of DCMA. Non-U.S. customers wishing to effect transactions in any designated investment discussed in this report should contact a Daiwa entity in their local jurisdiction. The securities or other investment products discussed in this report may not be eligible for sale in some jurisdictions.

Analysts employed outside the U.S., as specifically indicated elsewhere in this report, are not registered as research analysts with FINRA. These analysts may not be associated persons of DCMA, and therefore may not be subject to FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

ADDITIONAL IMPORTANT DISCLOSURES CAN BE FOUND AT: https://daiwa3.bluematrix.com/sellside/Disclosures.action

Ownership of Securities: For “Ownership of Securities” information please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Investment Banking Relationships: For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

DCMA Market Making: For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Research Analyst Conflicts: For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.

Research Analyst Certification: For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analyst is named on the report); and no part of the compensation of such analyst (or no part of the compensation of the firm if no individual analyst is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months.

Disclosure of investment ratings Rating Percentage of total Buy* 70.8% Hold** 19.8% Sell*** 9.4% Source: Daiwa Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 31 December 2018. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings.

Additional information may be available upon request.

For stocks and sectors in Malaysia covered by Affin Hwang, the following rating system is in effect: Stocks: BUY: Total return is expected to exceed +10% over a 12-month period HOLD: Total return is expected to be between -5% and +10% over a 12-month period SELL: Total return is expected to be below -5% over a 12-month period NOT RATED: Affin Hwang Investment Bank Berhad does not provide research coverage or rating for this company. Report is intended as information only and not as a recommendation

Sectors: OVERWEIGHT: Industry, as defined by the analyst’s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months NEUTRAL: Industry, as defined by the analyst’s coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months UNDERWEIGHT: Industry, as defined by the analyst’s coverage universe is expected to under-perform the KLCI benchmark over the next 12 months

Conflict of Interest Disclosure: Affin Hwang

Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Investment Banking Relationships For “Investment Banking Relationship”, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Relevant Relationships Affin Hwang may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage.

Affin Hwang market making Affin Hwang may from time to time make a market in securities covered by this research.

Japan - Additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable to where report is distributed by Daiwa Securities Co. Ltd.)

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If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items.  In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.  In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.  For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.  There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.  There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.  Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants.  The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association

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