31 August 2016 Asia Pacific/Taiwan Equity Research Semiconductor Devices Asia Semiconductor Sector Research Analysts THEME Randy Abrams, CFA 886 2 2715 6366 [email protected] Samsung expands its foundry focus to China Keon Han 82 2 3707 3740 Figure 1: Samsung logic capacity between SMIC & UMC, trails TSMC [email protected] WPM capacity in 8" equivalents (K) Haas Liu 1,800 886 2 2715 6365 1,600 [email protected] 1,400 1,200 1,000 800 600 400 200 0 TSMC UMC Samsung SMIC 12" capacity 8" capacity Source: Company data, Credit Suisse estimates ■ Samsung Shanghai forum targets the high-growth China IC market. Samsung held its first China forum targeting its foundry service for Chinese customers. Samsung has low volume in China (GalaxyCore is leveraging its CIS). However, it is targeting a wide range of leading Chinese design houses to capitalise on China's target for 20% domestic IC growth and domestic fabless share gains now at US$10 bn sales (see our earlier China report). ■ Pitch spans advanced nodes, mainstream 12" and 8" legacy. Samsung is marketing several advantages: (1) technology leadership to rival TSMC on 14nm/10nm variations and goals to leapfrog in late 2018 with 7nm using EUV, (2) FD-SOI for 28nm IoT/Auto (STM and Sony are customers), (3) 8" service leveraging in-house capability for CMOS sensors, driver IC, embedded flash and power ICs, and (4) turnkey support using in-house IPs and back-end options (panel fan-out, flip chip, PoP, SiP, 2.5D and 3D-IC). ■ Samsung diversification to offset Apple/Qualcomm reliance. Samsung is looking to China, 8" and new customers to offset the impact from Apple's move back to TSMC and Qualcomm's multi-source strategy. Samsung LSI has maintained ~80-90% peak season utilisation with 50% of sales from foundry (Qualcomm, Cavium, Ambarella, AMD/NVIDIA, GalaxyCore and still some Apple), 20% application processors and 30% in-house chips though a mild 10% capacity ramp from 135k 12" and 90k 8" WPM in the next year suggests only modest shifts in the overall landscape. ■ TSMC and SMIC outlook intact, Samsung / Intel competition stays on the radar. Samsung is marketing 8" through advanced nodes aggressively although customer development takes time. We expect SMIC to retain local advantage with Chinese design houses and is on track to +30% YoY growth with a strong 2H16, although full capacity may prompt some diversification. We also see TSMC intact with Apple, Mediatek and Hi- Silicon on 10nm in 2017 and early 7nm in 2018 could maintain the first wave, though Samsung could challenge by late 2018 with 7nm using EUV; Intel remains a long-tail risk if it can capture Apple. We stay OUTPERFORM on TSMC and SMIC which should protect their incumbency in leading edge and China through 2017. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 31 August 2016 Focus charts Figure 2: Samsung targeting more China and 8" Figure 3: Manufacturers provide value—Only four business after Apple shifts back to TSMC16nm leading edge chip manufacturers vs. 22 at 130nm 16nm/14nm WPQ 12" shipments (K) 300 250 200 150 100 50 0 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16E 4Q16E TSMC Quarterly 16nm Samsung Quarterly 16nm Source: Company data, Credit Suisse Research Source: Samsung Figure 4: Samsung capacity expansion is modest Figure 5: 7nm ex-EUV—Less scaling/more masks Source: Samsung Source: Samsung Figure 6: Samsung offers a design ecosystem Figure 7: Samsung 10nm LPP IP ready in 4Q16 Source: Samsung Source: Samsung Figure 8: Samsung back-end packaging solutions Figure 9: Samsung in-house 8" capabilities Source: Samsung Source: Samsung Asia Semiconductor Sector 2 31 August 2016 Samsung expands its foundry focus to China We attended Samsung’s inaugural China foundry forum in Shanghai Tuesday featuring 16nm/14nm WPQ 12" shipments (K) 300 25-30 local Chinese design houses and additional business partners in the IP and EDA 250 ecosystem. The company featured presentations overviewing its foundry business, advanced technology offering, FD-SOI solution, back-end packaging solutions, design/IP 200 enablement and 8” foundry service. 150 100 Samsung pitching its Key takeaway is Samsung’s foundry service now offers the breadth to deliver an advanced advanced technologies, technology for leading edge customers, low power offering through FD-SOI for automotive 50 FD-SOI and 8" at its and IoT and 8” solutions leveraging its in-house capabilities in driver ICs, CMOS sensors, 0 Shanghai forum WPM capacity in 8" equivalents (K) 1Q15 2Q15 3Q15 4Q15 power1Q16 management2Q16 3Q16E 4Q16E 1,800and smart cards/embedded flash. Samsung can provide a good capacity source and 1,600alternative on the advanced nodes to TSMC and one more China TSMC Quarterly 16nm Samsung Quarterly 16nm1,400 support option with 1,200local foundry SMIC full on capacity and Hua Hong above 90% 1,000 utilisations. 800 600 Samsung's capacity is Based on Samsung's 400disclosed capacity of 190k WPM on 8" and 135 WPM on 12", we 200 between UMC and SMIC, believe its capacity is between0 UMC and SMIC though still well behind TSMC. Samsung though its 16nm/14nm TSMC UMC Samsung SMIC noted at the event its ability to leverage12" the capacity industry 8"leading capacity size of the memory business ramp now trails TSMC for process R&D and fab economies of scale. Samsung's 14nm ramp started ahead of with a broader customer TSMC with ramp of its own product, majority of Apple and some Qualcomm by late 2015 base although TSMC's recovery of Apple business this year and ramp of some 2nd wave graphics and mobile SoCs is allowing it to regain the shipment advantage on the advanced node. Figure 11: Samsung targeting more China and 8" Figure 10: Samsung logic capacity rivals UMC / SMIC business after Apple shifts back to TSMC16nm Source: Company data, Credit Suisse Research Source: Company data, Credit Suisse Research Samsung LSI will need to overcome the limitations as an IDM where its chip design division also develops similar products to its customers across most of its target verticals (application processor, connectivity, consumer, driver IC, image sensor, smart cards). Samsung is pitching these as an advantage by providing good intelligence on features needed in the market and supplemental in-house IPs to complement customer IPs. We expect that its value proposition and heightened focus on broadening its customer base and offering will allow some traction to supplement its existing customer base (largest customers include Qualcomm, Cavium, Ambarella, AMD, NVIDIA and still some Apple), though a modest capacity build-out plan still telegraphs limited shifts in the overall foundry landscape. We still believe SMIC has good access to high growth applications in China (fingerprint IC, power management, consumer IoT, CMOS sensors, connectivity) while TSMC is protecting its incumbent position at most of its key customers through next year (Apple, Mediatek, Hi-Silicon, NVIDIA, AMD’s game consoles, Xilinx) while it also should recover some Qualcomm designs including new projects in servers, VR and ADAS. Asia Semiconductor Sector 3 31 August 2016 We profile the key messages from Samsung’s marketing of its foundry solution to its customer base and ecosystem at the Shanghai forum: Samsung Technology leadership and Strategy Presenter: Ben Suh, Senior Vice President Samsung's foundry ■ China market offers huge potential and attention in the industry. Samsung business targeting believes that the China market offers the opportunity for chip industry growth but also China's high growth now more innovation, noting some areas the local supply chain leads, including (1) potential and rising smart wallet (AliPay), (2) drones, (3) electric car and (4) autonomous vehicles. innovation Samsung believes its technology, ecosystem and capacity puts it in a good position to meet the local IC design companies requirements. ■ Industry needs choices in foundry. Samsung highlighted how foundry revenue share relative to fabless and the industry has grown as manufacturing complexity has increased and the number of manufacturing companies has dropped (From 22 companies on 130nm to 4 companies on 16/14nm). As one of few remaining manufacturers, Samsung can provide an advanced capacity choice for customers. ■ Samsung capacity and R&D scale. The Samsung semiconductor group invested US$15bn capex in 2015 (21% of industry) giving logic leverage to the scale benefits of the memory investments, has 4,036 patents and leading R&D. Samsung cited its capabilities across manufacturing (Samsung mechatronics center), process technology (IBM Joint Development Alliance for the past decade), packaging, masks and also has an advanced institute of technology to incubate future technology nodes. The company plans mass production 10nm at year-end and EUV planned for its 7nm. Figure 12: Manufacturers provide value: Only 4 leading edge chip manufacturers vs. 22 at 130nm Figure 13: Samsung logic leverage memory IP/R&D Source: Samsung Source: Samsung ■ Pathfinding new materials to overcoming challenging physics limitations. Samsung cited several physics limitations to Moore’s Law scaling, citing that the contact to poly pitch below 60nm degrades the DC performance due to contact resistance, capacitance increase and lower abilities to stress silicon. The reduction in metal pitch is also coming up against higher sheet resistance. Samsung is looking at new materials, FIN structures, and materials compositions by pathfinding solutions in nanowire, tunneling FET, high mobility channel material, defect free EUV mask infrastructure and 2.5D interposers to solve some of these advanced technology challenges.