China Display Sector

27 February 2017 Asia Pacific/Hong Kong Equity Research Electronic Components & Connectors

China Display Sector Research Analysts INITIATION Kyna Wong 852 2101 6950 [email protected] Ambitions to lead displays Keon Han 82 2 3707 3740 [email protected] Figure 1: Share gain from China display makers with aggressive Jerry Su capacity expansion 886 2 2715 6361 30 (M sq. m) 35% [email protected] 30% Sam Li 25 25% 852 2101 6775 20 [email protected] 20% 15 15% 10 10%

5 5%

0 0% 2012 2013 2014 2015 2016E 2017E 2018E

WW capacity China capacity % China share

Source: Company data, Credit Suisse estimates

■ We initiate coverage on the China Display sector. We expect China display sector to outgrow global peers in 2017/18 (China: 17%/9% vs global 14%/3%), given growing demand from Chinese brands, the government policy on localisation and mid-term supply ease. China's display industry is underway to improve its profitability and sustainability with better utilisation and mix. ■ Mid-term supply ease extends into 2H17. We estimate global display panel demand-supply (in terms of display area) would remain healthy (5% vs 3%) in 2017, thanks to limited new capacity and size upgrade. We see potential risk of oversupply starting from 2H18, but need more visibility on capacity ramp and size migration from China players. ■ China ambitions in display sector. (1) China display makers continue to expand capacity for scale capabilities. We expect China capacity to grow at a 25% CAGR over 2016-18E and account for 33% of worldwide capacity in terms of display area by 2018. (2) China is also aggressively moving to OLED, surpassing Japan and Taiwan, due to abundant capital resources, government policies and ambition in technology leadership. ■ Stock calls. We initiate coverage on BOE with a NEUTRAL rating as we see mid-term upcycle already priced-in, but limited downside due to improving earnings and OLED theme. Our TP of Rmb3.28 is based on mid- to-up-cycle P/B of 1.4x and 2018 BPS. We maintain NEUTRAL on Truly, given that its delaying OLED ramp-up remains a near-term overhang. Our target price of HK$3.3 is based on 10.3x P/E and 2018E EPS. Among regional peers, we prefer AUO and Innolux on cyclical upcycle and Samsung on its OLED leadership. Key risks: slowing demand, pricing pressure, oversupply, policy change, OLED replacement, FX risks.

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.

27 February 2017

Focus charts and tables

Figure 2: Global display demand (area) to grow Figure 3: Overall, supply/demand will become 5%/3% in 2017/18 balanced/tight in 2H16-2017

250 (M sq. m) 15.0% 35%

200 30% 10.0% 25% 150 20%

100 15% 5.0% 10% 50 5% - 0.0% 0% 2014 2015 2016E 2017E 2018E 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E Mobile Phone Tablet NB Monitor Area demand growth Area capacity growth TV Others %YoY

Source: Credit Suisse estimates Source: Credit Suisse estimates

Figure 4: Global OLED capacity growth accelerating Figure 5: China is expanding display capacity…

14,000 (K m2) 30 (M sq. m) 35%

12,000 25 30%

10,000 25% 20 8,000 20% 15 6,000 15% 10 4,000 10% 5 5% 2,000 0 0% - 2012 2013 2014 2015 2016E 2017E 2018E 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Samsung LG Display Taiwan China Japan WW capacity China capacity % China share

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 6: Revenue share gain from China players Figure 7: BOE closing capex gap from global leader

100% 4500 (US$M) 4000 80% 3500 3000 60% 2500 40% 2000 1500 20% 1000 500 0% 2011 2012 2013 2014 2015 2016E 2017E 2018E 0 2011 2012 2013 2014 2015 2016E 2017E 2018E

AUO Innolux JDI SEC LGD BOE Tianma CSOT AUO Innolux JDI LGD BOE Tianma

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 8: China peers backed by government subsidy Figure 9: P/B vs ROE 2017

350.0 (US$M) 2.0 Tianma 1.8 300.0 1.6 BOE 250.0 1.4 Truly SEC 200.0 1.2

150.0 1.0 P/B 0.8 LGD 100.0 AUO 0.6 JDI 50.0 0.4 Innolux 0.0 0.2 2011 2012 2013 2014 2015 2016E 2017E 2018E 0.0 -10% -5% 0% 5% 10% 15% BOE Tianma ROE Source: Company data, IBES consensus estimates for Tianma, Credit Suisse estimates Source: Company data, IBES consensus estimates for Tianma, Credit Suisse estimates

China Display Sector 2 27 February 2017

Ambitions to lead displays We initiate coverage on the China Display sector, and on BOE Technology with a NEUTRAL rating; we also have a NEUTRAL rating on Truly. We expect the China display sector (BOE, Tianma, CSOT) to outgrow global peers in 2017/18 (China: 17%/9% vs global 14%/3%), given growing demand from China brands, government policy on localisation and mid-term supply ease. China's display industry is underway to improve its profitability and sustainability with better utilisation and mix. Mid-term supply ease extends into 2H17 We estimate global display panel demand-supply (in terms of display area) would remain healthy (5% vs 3%) in 2017, thanks to limited new capacity and size upgrade. We believe supply in 2017 will see a slow growth, as several large-sized new fabs from China will not ramp up until 2H17. In 2018, we believe several new LTPS fabs and large TFT LCD fabs will roll out, and we see potential risk of oversupply starting from 2H18, but need more visibility on capacity ramp-up and size migration from China players. China display panel production capacity has been aggressively expanding in the past few years backed by Chinese government subsidies and expanding domestic supply chain. We expect China capacity to post a 25% CAGR over 2016-18E, and account for 33% of worldwide capacity in terms of display area by 2018. China is also aggressively moving to OLED, surpassing Japan and Taiwan, due to: (1) capital resources from the government and the stock market, (2) policy support and (3) Chinese players' aim to surpass global peers in a particular area. Several panel makers have announced that they will accelerate their OLED capacity build-up plans, including BOE, Tianma and Truly. However, we believe domestic OLED supply chain is still small, which may not be competitive in the next three years. Quality improvement in progress Display panel manufacturing is a capex-intensive sector, we believe only a company with scale and technology could be dominant in leadership and sustainability. China's display panel players still lag behind global players in terms of scale and profitability. Their earnings are largely backed by government subsidy, which is always a concern for overseas investors. Yet, China's display players are progressing to improve their quality. BOE is likely to post a 24% CAGR in revenue over 2016-18E, driven by capacity expansion, spec upgrade and mid-term ASP stabilising. We expect BOE to post a 20% CAGR in net income over 2016-18E due to higher utilisation and better mix. BOE is also building up its technological capabilities such as IP applications, AMOLED investment and product diversification. More a cyclical valuation We initiate coverage on BOE with a NEUTRAL rating, as we see mid-term upcycle already priced-in, but limited downside due to improving earnings and the OLED theme. Our target price of Rmb3.28 is based on mid-to-up-cycle P/B of 1.4x and 2018 BPS. We maintain NEUTRAL on Truly, as its delaying OLED ramp remains a near-term overhang. Our TP of HK$3.3 is based on 10.3x P/E and 2018E EPS. Among regional peers, we prefer AUO and Innolux on cyclical upcycle, and Samsung on its OLED leadership. Key risks: better-/slower-than-expected display demand, rising competition and pricing pressure, oversupply, government policy change, OLED replacement and FX risks.

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Mid-term supply ease extends into 2H17 Despite slowing global smartphones' and consumer electronics' demand, CS display technology team estimates global display panel demand would grow 5%/3% in 2017/18 in terms of display area, thanks to screen size and technology upgrade. Chinese brands accounted for about 60%/40% of global smartphone/TV shipment, which remains an attractive market for display panel makers. In terms of supply, we believe 2017 will continue to see slow growth, given several multiple large-sized fabs will not ramp up until 2H17. Net-net, we believe panel makers will continue to enjoy a healthy market in 2017, given the ease in supply. In 2018, we believe several new LTPS fabs and large TFT LCD fabs would roll out, and we see potential risk of oversupply starting from 2H18, but need more visibility on capacity ramp-up and size migration in China players.

Figure 10: Global display demand (volume) to grow Figure 11: Global display demand (area) to grow 1%/1% in 2017/18 5%/3% in 2017/18

4,000 (mn) 6% 250 (M sq. m) 15.0%

4% 200 3,000 10.0% 2% 150 2,000 0% 100 5.0% 1,000 -2% 50

- -4% - 0.0% 2014 2015 2016E 2017E 2018E 2014 2015 2016E 2017E 2018E Mobile Phone Tablet NB Monitor Mobile Phone Tablet NB Monitor TV Others %YoY TV Others %YoY

Source: Credit Suisse estimates Source: Credit Suisse estimates

■ Small-to-medium-size displays: We estimate China market smartphone shipments' growth would decelerate to 4% in 2017 from 11% in 2016 (by MIIT) (link). Despite slowing shipment demand, the upgrade trend should continue, which will drive the display technology migrating into LTPS/AMOLED in 2017. We believe the tight supply will gradually release in 2017 due to: (1) slowing smartphone growth, (2) AMOLED smartphone pick-up in 2H17 and (3) new LTPS capacity rolling out. We expect continuous old-generation (G3/ G4) TFT LCD fabs to shut down and traditional amorphous (a-Si) TFT LCD panel supply to remain tight, but smartphone makers to gradually upgrade to LTPS LCD, given the upgrade moving to mid-end phones. We believe new panel fabs in China (including CSOT's Wuhan G6, BOE's Ordos, Tianma's Xiamen G6 etc.) could fully ramp up in 2017, which would support sufficient LTPS supply to the market. China panel makers with LTPS and OLED capability will likely see strong demand from domestic customers and be able to gain share from international peers.

■ Large-size displays: Despite low-single digit growth in TV set shipments, we expect panel makers to benefit from: (1) demand growth driven by screen size upgrade and (2) the closure of multiple large-sized fabs, while new fabs will not ramp up until 2H17. Large-sized panel makers such as AUO, Innolux and BOE are likely to continue to enjoy a healthy market environment with improving utilisation and ASP in 2017. Despite new large-size panel fabs from China suppliers (BOE and HKC) will gradually release capacity from 2H17, they cannot fulfil the 40-43" demand.

■ China panel makers moving to OLED: Besides LG, Sharp and JDI moving to OLED for Apple, Chinese panel makers will likely spend significant capex in 2017-19 to

China Display Sector 4 27 February 2017

expand OLED capacities, triggered by Apple's adoption of OLED panel along with a massive subsidy from the government. Several panel makers have announced that they would accelerate their OLED capacity build-up plans, including BOE, Tianma, EverDisplay (privately held), Truly, Visionox (privately held) and Royole (privately held).

Chinese brands driving end demand China accounted for about 60%/40% of global smartphone/TV shipment, which remains an attractive market for display panel makers. Despite slowing growth in China smartphones and low growth in TVs, we see several upgrade trends for displays: (1) resolution and tech upgrade in mobile displays and (2) screen size upgrade in TV display.

■ China smartphones: We believe China market shipments will likely see slow growth but upgrades would continue, which started from 2016. We see increasing content for OLED, glass casing, dual-cam, haptic and wireless charging in Chinese smartphones to copy (or front-run) iPhone 8, and essentially the China market is migrating to mid- to high-end phones. Total Chinese brands shipments (supply) could still grow 7%/11% YoY in 2017/18 (vs 17% in 2016), helped by exports. Chinese brands accounted for 63% of global smartphone shipments in 2016, which remains a major market. Chinese panels will likely benefit from: (1) continuous growing Chinese smartphone demand and (2) rising resolution (FHD) and tech upgrade (LTPS/OLED), driven by mid/high-end phones.

■ TV end demand improving: IHS Technology forecasts 2%/5% YoY shipment growth for 2017/18 from flat growth in 2016. Chinese brands accounted for about 40% of global TV set shipments and will likely continue its share gain in 2017/18. We expect Chinese brands' TV makers to extend growth momentum into 2017/18 at 8-9% YoY. Chinese panel makers will migrate from 32" to 40-43" in 2017/18, and 55" 4K will further pick up.

Figure 12: Chinese brands accounted for c.60% of Figure 13: Chinese brands accounted for c.40% of global smartphone shipment global TV (LCD and OLED) shipment

1800 (mn) 70% 300 (mn) 50% 1600 45% 60% 250 1400 40% 50% 1200 200 35% 1000 40% 30% 150 25% 800 30% 20% 600 20% 100 15% 400 10% 50 10% 200 5% 0 0% 0 0% 2013 2014 2015 2016E 2017E 2018E 2014 2015 2016E 2017E 2018

Chinese brands Others China brands % China brands Others China brands %

Source: Company data, Credit Suisse estimates Source: IHS Technology, Credit Suisse estimates

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China players expanding for share gain Display panel is one of the major components in 3C (Computer, Communication and Consumer) products. China display industry is backed by China National High Technology Research and Development Program and Made-in-China 2025 policy. China display panel production capacity has been aggressively expanding over the past few years. We expect China capacity will post a 25% CAGR over 2016-18E and account for 33% of worldwide capacity in terms of display area. China to add at least 16 panel fabs in 2017-19 We expect panel makers to continue to expand panel manufacturing capacities in China over 2017-19 with a focus on G6 LTPS/AMOLED for mobile displays and G8-11 a-Si/oxide for large-sized TV displays. There are at least 16 panel fabs under construction currently in China, and they will start production gradually in 2017-19. We believe the majority of capacity expansion will happen in China, while Korea will migrate existing TFT fabs into OLED, and Taiwan has limited capital resources.

Figure 14: There are at least 16 panel fabs under construction and they will start production in 2017-19

Beijing Ordos BOE: BOE: G8.5 G5.5 G5

Zhengzhou Hon Hai: Kunshan G6 AUO: Xianyang OLED IRICO: G6 G8.6 Visionox/K&D: Hefei G5.5 BOE: G5.5 Chengdu G10.5 IVO: Shanghai BOE: Wuhan G8.5 G5 Tianma/AVIC: G6 Mianyang CSOT: G6 G5.5 G4.5 BOE: G6 G4.5 Tianma: G6 Tianma: G5 G4.5 G6 EDO: CEC-Panda G4.5 G4.5 G8.6 Nanjing G6 Panda: Suzhou Chongqing G8.5 Samsung BOE: G6 Display: G8.5 Guangzhou G8.5 HKC: LG Display: G8.5 G8.5 Foxconn/ Fuzhou Sharp: BOE: Guizhou Huizhou: G10.5 G8.5 HH/Century: Truly: G6 G4.5

Kunming: Xiamen HKC: Tianma: G11 Shenzhen CSOT: G6 G8.5 Shanwei G5.5 G8.5 Truly: G11 G5 Under production HH/Century: G2 Under construction G5 Planning

Source: IHS Technology, Company data, Credit Suisse estimates

China Display Sector 6 27 February 2017

Figure 15: Eight large-sized TFT fabs ramping up in 2017-19 Company 2015 2016 2017 2018 2019 BOE Hefei Gen 6 90K substrates/month -> 105K/month (10K: Oxide TFT) Beijing Gen 8.5 120K/month -> 135K/month

Hefei Gen 8.5 30K/month -> 70K/month (4K for white OLED) -> 100K/month

Gen 5.5 (LTPS & OLED) 30K/month -> 25K/month -> 58K/month

Chongqing Gen 8.5 60K/month - > 90K/month -> 120K/month

Fuqing Gen 8.5 50K -> 120K/month =>140K/mth

Hefei Gen 10.5 90K+30K/mth

CSOT Shenzhen Gen 8.5 120K substrates/month -> 145K/month

Shenzhen Gen 8.5 100K/month

Shenzhen Gen 11 140K/mth

CEC-Panda Nanjing Gen 6 83K/month

Nanjing Gen 8.5 30K/m -> 60K/m -> 90K/m -> 120K/m

Chengdu Gen 8.6 60K/month CEC-IRICO Xianyang Gen 8.6 120K/mth HKC Chengdu Gen 8.6 60K/month Yunnan Gen 11 90K/mth Samsung Suzhou Gen 8.5 65K/month -> 130K/month LGD Guanzhou Gen 8.5 90K/month -> 120K/month Hon Hai/SDP Guanzhou Gen 10.5 120K/mth AUO Gen 8.5 60K/month -> 85K/month (2Q16)

Innolux Gen 8.5/8.6 60K/month -> 105K/month (3Q17)

Gen 6 350K/month -> 400K/month

Source: Company data, Credit Suisse estimates

Figure 16: An example of better economic cut of G10.5 fab for 65" display size 2500mm 3370mm

685mm 55" W

1218mm

809mm 809mm

65" W 65" W

2200mm 2940mm 1439mm 1439mm

G8.5 G8.5

G10.5

Source: Credit Suisse estimates

China Display Sector 7 27 February 2017

The rationale behind China panel makers to build new G10-11 fabs is the economic cut of large TV displays. G8.5 is economical for 32", 49" and 55" screens, while G10.5 has better economic cut on 43", 65" and 75" panels. As illustrated in the above figure, G8.5 could not utilise its glass size for 65" panel, and Multi-Model Glass (MMG) hybrid production on G8.5 remains challenging for Chinese panel makers due to lower yield rate and the difficulty in finding customers for separated sizes. A better way for them is to build new fabs for larger screen sizes. International peers shutting down old fabs There were many G3-G4 TFT LCD fabs shutdowns over the past few years, resulting in small-sized LCD panels' shortage in 2016. There are several large-sized fabs shutting down in 2016-17, lifting TV prices up as well. Our display analyst expects panel capacity growth to slow down from 2H16 and will extend into 2017, given the closure of multiple large-sized fabs, while new fabs from China will not ramp up until mid-2017 (link).

Figure 17: Several large size fabs shutting down in Figure 18: Many G3-4 fabs closed over the past few 2016/17 lifting TV price up years, resulting in small-sized LCD panels' shortage Capacity Complete Capacity Complete Firm Fab Gen (K/M) Tech shutdown Firm Gen (K/M) Tech shutdown Samsung L5 5 174 a-Si 4Q15 Samsung 3.5 95 a-Si 2012 Panasonic Himeji 1 8 48 a-Si 3Q16 AUO 3.5 20 a-Si 2012 a-Si/ JDI 3.5 45 a-Si 2012 Samsung L7-1 7 150 Oxide 4Q16 Sharp 2.5 37 a-Si 2013 LGD P6 6 110 a-Si 1H17 Sharp 3.0 51 a-Si 2013 Samsung L6 5 120 a-Si 4Q17 LGD 2.0 110 a-Si 2013 JDI 3.0 22 a-Si 2014 E-ink 2.5 10 a-Si 2015 E-ink 3.5 35 a-Si 2015 JDI 3.0 39 a-Si 2015 AUO 3.5 n/a a-Si 2015 JDI 3.5 45 a-Si 2016 JDI 4.5 11 a-Si 2016 LGD 3.5 80 a-Si 2017 LGD 4.0 78 a-Si/Oxide 2017

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Supply/demand turning into balanced/tight situation in 2017 Our display analyst has addressed that the TFT supply/demand environment will swing from oversupply in 2H15-1H16 to a balanced/tight situation in 2H16-2017 on multiple fab shutdowns and improving TV demand (link). We have been seeing price rise trend in 2H16, and believe it is likely to extend into 2017. Although there will be two new fab ramp- ups by Chinese panel makers from 2H17, the new G8.5/8.6 fabs are not economical in cutting 40-43" sizes unless they adopt hybrid cut technology, while HKC has no experience in managing TFT production line. Our check with China panel makers also suggested the entry-level TV size will shift from 32" to 40-43" in 2017, and demand for larger-sized TVs (i.e., 55" and above) will also gradually take off. We believe the overall supply/demand situation might become balanced before turning into potential oversupply in 2018, after the three new G8.5/8.6 fabs ramp up from 2H17 and BOE's G10.5 line starts mass production.

China Display Sector 8 27 February 2017

Figure 20: Certain large sized panels might be in Figure 19: Overall, supply/demand will become shortage in 2H16-2017 as multiple fabs are balanced/tight in 2H16-2017 shutting down

35% 40% 35% 30% 30% 25% 25% 20% 20% 15% 15% 10% 10% 5% 5% 0% 0% 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E

Area demand growth Area capacity growth Area demand growth (large size) Area capacity growth (Gen 5.5+)

Source: Company data, IHS, Credit Suisse estimates Source: Company data, IHS, Credit Suisse estimates

China players gaining share We forecast China LCD capacity market share to increase to 33% by 4Q18 from 12% in 2012. Chinese LCD panel makers are maintaining high manufacturing targets backed by Chinese government's subsidies and expanding domestic supply chain. Among the top 8 panel makers, we anticipate China players (BOE, CSOT and Tianma) to account for 17%/18% of revenue share in 2017/18 from 7% in 2012. We believe the trend will continue over the next five years, driven by massive capital investment. BOE spends heavily (20-30% of sales) in capex and is getting close to Korea peers.

Figure 21: Increasing scale from Chinese makers… Figure 22: …and gaining share in revenue

40 US$bn 100% 35 80% 30 25 60% 20 15 40% 10 20% 5 0 0% 2011 2012 2013 2014 2015 2016E 2017E 2018E 2011 2012 2013 2014 2015 2016E 2017E 2018E

AUO Innolux JDI SEC LGD BOE Tianma CSOT AUO Innolux JDI SEC LGD BOE Tianma CSOT

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

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Figure 24: BOE's capex is getting close to global Figure 23: China is expanding display capacity… leaders

30 (M sq. m) 35% 4500 (US$M) 4000 25 30% 3500 25% 20 3000 20% 2500 15 15% 2000 10 1500 10% 1000 5 5% 500

0 0% 0 2012 2013 2014 2015 2016E 2017E 2018E 2011 2012 2013 2014 2015 2016E 2017E 2018E

WW capacity China capacity % China share AUO Innolux JDI LGD BOE Tianma

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates China moving to OLED We believe the next iPhone will adopt OLED display technology, despite the market still struggling over two possibilities that (1) only the premium model of the next iPhone will adopt OLED display or (2) Samsung has sufficient OLED panel capacity for all iPhone models. We see China smartphone makers are also eager to adopt OLED before Apple's new iPhone launch in 2H17. We believe the sentiment will become strong when Apple's final decision is unveiled in March-April. Increasing adoption driven by Samsung/Apple and narrowing price gap Our Korea research team forecasts the base case of 21%/26% OLED penetration in global smartphones market in 2017/18, mainly driven by Samsung and Apple. We also estimate 27/50 mn OLED smartphone shipment from China OEMs in 2017/18. From our China handset tracker, we already see c.20% of top 20 models featuring OLED panels. We expect the supply of OLED display to remain tight, given over 90% of the mobile OLED supply comes from Samsung, which prioritises supply to Apple and its own brand. We see difficulty for Chinese smartphone brands to secure allocation, especially in 2H17. We also believe the increase of OLED adoption is supported by the narrowing price gap between AMOLED and TFT LCD. OLED price has decreased from 3.0x of TFT LCD in 1Q14 to 2.2x in 3Q16.

Figure 25: OLED penetration in global smartphones Figure 26: OLED on the rise in China smartphones

(mn unit) 100% 1,800 35% 90% 1,750 30% 80% 1,700 25% 70% 1,650 60% 1,600 20% 50% 1,550 15% 40% 1,500 10% 30% 1,450 20% 5% 1,400 10% 1,350 0% 2016E 2017E 2018E 2019E 0% 11/27/2015 1/15/2016 4/19/2016 6/24/2016 8/5/2016 11/4/2016

Total units (lhs) OLED penetration rate TFT AMOLED LTPS Retina

Source: Credit Suisse estimates Source: JD, Tmall, Credit Suisse Research

China Display Sector 10 27 February 2017

Figure 27: OLED price has decreased from 3.0x of Figure 28: Narrowing ASP gap between AMOLED TFT LCD in 1Q14 to 2.2x in 3Q16 and TFT LCD for smartphone display (5 inch)

$60 $60 $50 $50 $40 $40 $30 $30 $20 $20 $10 $10 $0 $0 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16

AMOLED TFT LCD AMOLED TFT LCD

Source: IHS Technology Source: IHS Technology

China panel makers moving to OLED as No.2 player Besides LG, Sharp and JDI moving to OLED for Apple, Chinese panel makers will likely spend significant capex in 2017 to expand OLED capacities, triggered by Apple's adoption of the OLED panel along with a massive subsidy from the government. Several panel makers have announced that they would accelerate their OLED capacity build-up plans, including BOE, Tianma, EverDisplay (privately held), Truly, Visionox (privately held, invested company from Yeebo) and Royole (privately held). We see China aggressively moving towards OLED, surpassing Japan and Taiwan, due to: (1) Chinese panel makers being able to obtain capital resources from the government and the stock market, (2) OLED development being well supported by National high-tech policies and (3) Chinese players aiming to surpass global peers in a particular area.

Figure 29: Global OLED capacity growth accelerating Figure 30: Majority of OLED supply still from Korea

14,000 (K m2) 100%

90% 12,000 80%

10,000 70%

60% 8,000 50% 6,000 40%

4,000 30% 20% 2,000 10%

- 0% 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Samsung LG Display Taiwan China Japan Samsung LG Display Taiwan China Japan

Note: The data is in terms of total glass output area, includes both mobile and TV OLED Source: Company data, Credit Suisse estimates capacity. Source: Company data, Credit Suisse estimates Heavy capex and low yield drag profitability Chinese panel makers will likely set aside significant capex in 2017/18 to secure flexible OLED capacities, triggered by Apple's adoption of the OLED panel along with a massive subsidy from the government. Several panel makers have announced that they would

China Display Sector 11 27 February 2017

accelerate their OLED capacity build-up plans with provincial government support. We also see some local panel makers have started operations. Shanghai EverDisplay has started mass production of OLED panels for mobile applications since end-2014. Kunshan Visionox started production in end-2015. Tianma also started shipping OLED panels for China smartphone makers. Truly announced its OLED production line would start production in 4Q16. We see majority of projects are set-up with government parties and listed companies mainly hold a less than half of the stake; this could help lessen the financial burden on listed companies. BOE's Chengdu G6 flexible OLED production will likely start production in 2H17, and is expected to ramp up to 10K sheet/month by the end of 2017, which implies that it is the first China company to commercialise flexible OLED.

Figure 31: Over Rmb200 bn investment from China panel makers Company Fab Gen Type MP schedule Designed capacity Total investment (K/M) Rmb bn) BOE Ordos 5.5 LTPS/AMOLED 4Q14 4 22.00 Chengdu 6 Flexible AMOLED 3Q17 48 46.5 Mianyang 6 Flexible AMOLED 2019 48 46.50 Visionox Kunshan 5.5 Rigid AMOLED 3Q15 4 2.60 Kunshan 5.5 Partly flexible AMOLED 2017 11 3.40 Hebei 6 Rigid/flexible AMOLED 2H18 30 30.00 EverDisplay Shanghai Quarter 4.5 Rigid AMOLED 4Q14 21 7.50 Shanghai 6 5k flexible 2019 30 27.28 Tianma Shanghai 5.5 Rigid AMOLED 4Q15 4 1.00 Wuhan 6 Rigid AMOLED 3Q17 30 12.00 Truly Huizhou 4.5 Rigid AMOLED 4Q16 15 4.60 Huizhou 4.5 Rigid/flexible AMOLED TBC 15 TBC Royole Shenzhen 6 Rigid/flexible AMOLED 2H17 50mn module 10.00 CSOT Wuhan 6 Flexible AMOLED To kick off in 2017 TBC TBC Source: Company data, Credit Suisse estimates

China OLED supply chain remains small. Chinese panel makers still see limited supply from domestic vendors. A-share listed Sino Wealth and H-share listed Solomon Systech are two IC design houses shipping OLED driver ICs to domestic panel makers. Panel makers purchase equipment and materials from Korea and Japan vendors. We see a lack of local supply chain will likely prolong the cost reduction progress for panel makers. The quality of equipment and materials also affect the yield of production.

Figure 32: China OLED supply chain Materials Driver IC AMOLED Panel Touch module 3D glass casing Handset Jilin Optical (private) Sinowealth (300327.SZ) Tianma (000050.SZ) O-film (002456.SZ) Lens Tech (300433.SZ) OPPO (private) RuiYuan (private) Solomon Systech (2878.HK) BOE (000725.SZ) Truly (0732.HK) Biel Crystal (private) vivo (private) Truly (0732.HK) Laibo (002106.SZ) Tongda (0698.HK) Huawei (private) Visionox (Yeebo, 0259.HK) AAC (2018.HK) Meizu (private) EDO (private) ZTE (000063.SZ) TCL (000100.SZ) Lenovo (0992.HK) Gionee (private) LeEco (300104.SZ) Source: Company data, Credit Suisse Research Supply and technology constraints OLED is generally a much more difficult technology to master than TFT-LCD. Samsung has been both the pioneer and solo commercial producer for mobile OLED, in particular. Samsung has strictly controlled the supply chain, including building up its IP portfolio around production methods, equipment advancement and organic material science. Samsung acquired 5-10% of its critical equipment supplier and has discouraged product

China Display Sector 12 27 February 2017

sales to its competitors due to the co-development of products for Samsung-only use and to limit competitive threats. We see Chinese panel makers will continue to rely on overseas suppliers in consideration of the risks of production in terms of mature materials, proven equipment and IP concerns. One of the core processes in AMOLED manufacturing is the evaporation. Samsung has fully booked most of Canon Tokki's evaporation system capacity for the next two years. Other players such as JDI, LGD and other Chinese makers are using alternatives. Our check suggested Chinese panel makers are using SNU, SFA, ULVAC, etc., while BOE's Chengdu G6 fab is using Tokki evaporation system. We believe the evaporation process requires both a good evaporation system and an evaporation source. Tokki's system is quite stable with successful track record, but Samsung uses YAS or its own evaporation source. Even if Chinese panel makers can purchase sufficient evaporators from Tokki, it does not mean Chinese panel makers could duplicate as good a yield production as Samsung. They need their own R&D effort to extract the best performance for the process. Among Chinese OLED panel makers, we believe only EDO and Tianma successfully reached mass production for smartphone applications in 2016. EDO has started with non- smartphone applications such as smartwatches, industrial and other handheld devices, and has taken two years for the ramp-up. Tianma only shipped a small volume in 720p resolution. We see that both are struggling for yield improvement and cost reduction. We believe Chinese panel makers will still suffer from low yield (50% or below) in 2017/18 before mastering materials and process engineering of their production. Truly will also take time to ramp up for smartphone applications, likely some time in 2H17. We need more visibility to see if BOE could really produce flexible OLED by the end of this year.

Figure 33: Global OLED supply chain

PVA Film TAC Film Kuraray, Nippon Fuji Photo, Gohsei Konica minolta

Equipment Glass Other materials Driver IC Polarizer SFA, Wonik, Corning, Asahi Universasl Display, Silicon Works, BenQ Materials, Jusung, CSun, Glass, Nippon Merck, DSHM, SDI Novatek, Himax, Chimei Materials, Marketech. Electric Glass etc (Cheil), Doosan, Chipbind, LG Chem, Toray, KenMec, Samsung Fine chem, ChipMOS, etc Nitto Denko, etc ULVAC, SNU etc Everlight Chem

Panel maker Samsung, LG Display, Sharp, JDI, AUO, Innolux, BOE, CSOT, CEC Panda, Tianma, Truly etc.

Source: Company data, Credit Suisse estimates

China Display Sector 13 27 February 2017

Quality improvement in progress Display panel manufacturing is a capital-intensive sector, and we believe only the company with scale and technology could be dominant for leadership and sustainability. China's display panel players still lag behind global players in terms of scale and profitability. Their earnings are largely backed by government subsidy, which is always a concern for overseas investors. Yet, China's display players are progressing to improve their quality.

■ BOE is likely to post a 24% CAGR in revenue over for 2016-18E, driven by capacity expansion, spec upgrade and midterm ASP stabilising. We expect BOE to post a 19% CAGR in net income over 2016-18E, due to higher utilisation and better mix.

■ Tianma is suspended for trading due to the major asset acquisition of the Xiamen LTPS and Shanghai AMOLED fabs from its parent company. The listco will incorporate the financials of two new fabs likely from 2H17 or 1H18, which may provide revenue upside.

Figure 34: China display peers likely to post better Figure 35: Innolux and BOE may lead the growth growth than other pure play peers in 2017 driven by new capacity ramp-up among pure players

25 (US$bn) 50%

40% 20 30%

15 20%

10% 10 0% AUO Innolux JDI LGD BOE Tianma 5 -10%

-20% 0 AUO Innolux JDI LGD BOE Tianma -30%

2016E 2017E 2016E 2017E

Source: Company data, IBES consensus estimates for Tianma, Credit Suisse estimates Source: Company data, IBES consensus estimates for Tianma, Credit Suisse estimates

Figure 36: We see improving earnings for China Figure 37: BOE has net margin of 2-3% (including peers in 2017 subsidy)

1000(US$mn) 15%

800 10%

600 5%

400 0% 2011 2012 2013 2014 2015 2016E 2017E 2018E 200 -5%

0 -10% AUO Innolux JDI LGD BOE Tianma -200 -15% -400 -20% 2016E 2017E AUO Innolux JDI LGD BOE Tianma

Source: Company data, IBES consensus estimates for Tianma, Credit Suisse estimates Source: Company data, IBES consensus estimates for Tianma, Credit Suisse estimates

China Display Sector 14 27 February 2017

■ We see Chinese players adopting different periods for their depreciation method, hence it is more fair to benchmark EBITDA for the display sector. We see an upward trend of EBITDA margin for Chinese companies, as we believe they will set high utilisation targets and see an improvement in the production yield resulting in better margin.

■ Chinese companies are in progress of building R&D capabilities and expanding sales channels, we see a relatively high opex-to-sales ratio than regional peers. We see an upward trend of OPM for BOE and Tianma, but still in-line with the sector average of 3-6%. Figure 38: We see an upward trend of EBITDA Figure 39: We see an upward trend of OPM for BOE margin for Chinese companies and Tianma

30% 15% 10% 25% 5% 20% 0% 2011 2012 2013 2014 2015 2016E 2017E 2018E 15% -5%

10% -10% -15% 5% -20% 0% -25% 2011 2012 2013 2014 2015 2016E 2017E 2018E -5% -30%

AUO Innolux JDI LGD BOE Tianma AUO Innolux JDI LGD BOE Tianma

Source: Company data, IBES consensus estimates for Tianma, Credit Suisse estimates Source: Company data, IBES consensus estimates for Tianma, Credit Suisse estimates Subsidy-led industry in China but limited risks China display industry is backed by government policies and subsidies. We see this is always a concern from overseas investors for their sustainability. We believe BOE will receive a c.Rmb2 bn subsidy in 2016E on its G6 LTPS/AMOLED, G8.5 Fuzhou TFT LCD, G10.5 Hefei TFT LCD and R&D projects, especially for AMOLED. Looking forward to 2017/18, BOE is likely to improve its profitability when its new production lines ramp up with higher utilisation; overall pricing ease also helps. We see BOE will continue to receive government subsidy in 2017-18, given Hefei G10.5 and Mianyang are flexible AMOLED projects. Overall Chinese players will still benefit from government subsidy in 2016-20E on continuous investment in AMOLED expansion.

China Display Sector 15 27 February 2017

Figure 41: Subsidy backed by display projects for Figure 40: Continuous subsidy for China peers BOE

350.0 (US$M) 4000 (Rmb,mn) Chegndu Hefei G6 300.0 3000 G8.5 Fuzhou Chengdu Hefei G8.5 BJ 250.0 2000 G4.5 G6 G8.5 200.0 1000

150.0 0 -1000 100.0 Ordos Chongqing Hefei -2000 G5.5 G8.5 50.0 G10.5 Mianyang -3000 G6 0.0 2006 2008 2010 2012 2014 2016E 2018E 2011 2012 2013 2014 2015 2016E 2017E 2018E Gov subsidy NI BOE Tianma

Source: Company data, Credit Suisse estimates Source: Company data, IBES consensus estimates for Tianma, Credit Suisse estimates

China building up technological capabilities As of 1H16, BOE has applied for over 4,000 patents globally with over 1,400 patents filed in the US; CSOT has also filed over 1,500 patents in the US. We see Chinese players are aggressively expanding their patent profiles and building up their technological capabilities in the leading AMOLED, QLED displays. We also see a trend of increasing R&D expenses from China players, and BOE is ranked No.2 in terms of R&D expenses among top 6 players.

Figure 42: Increasing R&D expenses for technological development Figure 43: China catching up IP/patents profile

10.0% 6000 9.0% 8.0% 5000 7.0% 6.0% 4000 5.0% 4.0% 3000 3.0% 2000 2.0% 1.0% 1000 0.0% 2011 2012 2013 2014 2015 2016E 2017E 2018E 0 AUO Innolux JDI LGD BOE Tianma LGD AUO Innolux CSOT BOE JDI Tianma

Source: Company data, Credit Suisse estimates Source: United States Patent and Trademark Office, Credit Suisse Research

Improving and widening product mix With improving and widening product offerings, China display makers are gaining overseas customers. Besides bigger screens, we see China panel makers are looking into higher resolution, narrower border, in-cell technology, etc., to enrich their product portfolio. China large display makers, such as BOE and CSOT, build G10.5/11 fab in order to extend their large TV display products to 65" or above and compete with Korea peers for this segment. They are also developing 8K TV for future opportunities. In NB/PC applications, we see ultra slim, narrow border and FHD as major upgrade trends. In mobile applications, many China players are moving to OLED and surpass Taiwan and Japan in terms of new technology commercialisation. In-cell technology and LTPS deployment are also their focus.

China Display Sector 16 27 February 2017

Figure 44: China panel makers moving to 2K/4K TV Figure 45: …and FHD smartphone displays

25 (mn) 140 (mn)

120 20 100

15 80

60 10 40 5 20

0 0 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16

1366 x 768 1920 x 1080 3840 x 2160

Source: IHS Technology Source: IHS Technology

Figure 46: China panel makers moving from 32" toward non-32" Figure 47: BOE—narrow border as key spec for NB

25 (mn)

0 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17

<32" 32" 37-43" 46-49" 55" 65" or above

Source: IHS Technology Source: Company data

China Display Sector 17 27 February 2017

More a cyclical valuation Since mid-2016, the sector has been in an OPM upcycle. We see regional peers' OPMs have moved up by 5-10 pp. We believe the China display sector will follow a cyclical uptrend, driven by supply/pricing ease and spec upgrade. Despite the profitability of China panel makers still lagging behind regional peers, we see an earnings improvement from 2H16 and believe this recovery will extend to 3Q17. We also believe the reveal of Apple's adoption of AMOLED display in the next iPhone will be a positive sentiment to China panel makers. Currently, Tianma is suspended for trading due to the major asset acquisition of the Xiamen LTPS and Shanghai AMOLED fabs from its parent company. We see that both AUO (link) and Innolux (link) reported upbeat 4Q16 results, and their 1Q17 outlook was apparently above seasonal. We see peers also believe 2017 supply/demand would remain tight and expect longer lead times for new capacity to ramp up. With better mix in TVs and mobile phones, Taiwan peers could lead to better profitability in 2017. We believe Chinese companies would gradually recognise the benefit of supply ease into earnings delivery. Samsung's LCD business also showed full recovery with OPM expanding to 14% on large- sized LCD panel increase and continued yield improvements. The yields started to normalise beginning June 2016 and by 3Q16, profitability had rebounded in tandem with rising LCD panel prices. Incremental gains in OLED were not as dramatic, as capacity growth remains limited until the newly added lines in A3 fab begin production and improve yields in preparation to ship to Apple by mid-2017. Samsung's near-monopoly position suggests OLED earnings should accelerate from 2H17.

Figure 48: Most of panel makers returned to 2015 Figure 49: Panel makers have turned around their beginning level profitability since 3Q16

2 500USD mn 1.8 400 1.6 300 OLED theme in A-share 1.4 200 1.2 100 1 0.8 0 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 0.6 -100

0.4 -200 0.2 pricing rebound -300 0 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 -400

China Korea Taiwan Japan China Korea Taiwan Japan

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse Research

In a comparative landscape, AUO and Innolux are below the trend line with higher ROE, which suggests relatively attractive valuation. Our Taiwan display analysts rated AUO and Innolux as OUTPERFORM, driven by supply ease and margin expansion. We see AUO and Innolux have done well on their stock and are still well below book. Chinese peers are generally above the average on the book but have lower ROEs.

China Display Sector 18 27 February 2017

Figure 51: China peers were generally above Figure 50: Overall ROE for display peers below 10% average in P/B vs ROE in 2017 2.0 20% Tianma 15% 1.8 10% 1.6 BOE 5% 1.4 Truly SEC 0% 1.2 -5% 2011 2012 2013 2014 2015 2016E 2017E 2018E 1.0

-10% P/B 0.8 LGD -15% AUO -20% 0.6 JDI 0.4 -25% Innolux -30% 0.2 -35% 0.0 -10% -5% 0% 5% 10% 15% AUO Innolux JDI LGD BOE Tianma ROE

Source: Company data, IBES consensus estimates for Tianma, Credit Suisse estimates Source: Company data, IBES consensus estimates for Tianma, Credit Suisse estimates We rate BOE and Truly NEUTRAL We initiate coverage on BOE with a NEUTRAL rating as we see mid-term upcycle already priced in but limited downside due to the improving earnings and OLED theme. We maintain NEUTRAL on Truly, given that its delaying OLED ramp-up remains a near-term overhang. Among regional peers, we are positive on AUO and Innolux on cyclical upcycle and Samsung on its OLED leadership. We are positive on BOE's outlook, driven by: (1) mid-term supply/competition ease, (2) ASP upside on spec upgrade, (3) capacity expansion, (4) continuous share gain and (5) new smart businesses. Sentiment-wise, Chinese players moving to LTPS/AMOLED is a positive catalyst for the supply chain. However, we believe the mid-term upcycle is already priced-in, but there is limited downside due to improving earnings and OLED theme. We may revisit our investment view if its flexible AMOLED could successfully ramp up in 2018 with quality products, which may offset the potential risk of oversupply given higher ASP and strong end demand. We initiate coverage on BOE with a NEUTRAL rating and target price of Rmb3.28. Our TP is based on mid-to-up-cycle P/B of 1.4x and 2018 BPS. We still like Truly, given its long-term growth on automotive displays after 2018, but AMOLED progress and Huizhou JV burden remain near-term swing factors to our investment view. Truly has been building its own display panel production capabilities in order to fulfill its in-house demand and automotive display supply requests from customers. Its G4.5 TFT LCD and AMOLED have started production in 2H16 and will likely ramp up in 2017. Truly's G5 TFT LCD production facility recently topped out, and it will start equipment move-in soon. We maintain NEUTRAL on Truly, given its delaying OLED ramp-up remains a near-term overhang. Our target price of HK$3.30 is based on mid-to- up-cycle P/E of 10.3x and 2018E EPS. We base the TP on P/E valuation, given historically there has been more business in components than panels. For regional stock picks, our Taiwan display analyst expects the panel upcycle to sustain into 3Q17 and Innolux is the most leveraged play, while AUO should see EBITDA margin improvement in the next few quarters. We rate AUO OUTPERFORM with TP of NT$17.0 on 0.8x 12M P/B (15% discount vs peak). We rate Innolux OUTPERFORM with TP of NT$17.0, which is based on mid-cycle 0.65x 12M P/B. Our Korea display analyst has rated Samsung Electronics OUTPERFORM given our confidence on higher earnings and dividends led by faster 3D NAND/OLED penetration, strong DRAM profitability, smartphone recovery post the GN7 crisis and a more proactive shareholder return policy and value creation from the demerger. Our target price of

China Display Sector 19 27 February 2017

W2,650,000 is based on a split-up value into Opco/Holdco with a target P/E of 10x to Opco’s 2017 earnings, while applying a discount of 30% to Holdco’s NAV.

Figure 52: BOE—P/E chart Figure 53: BOE—NTM P/B vs ROE

160 6 12%

140 5 10%

120 4 8% 100 3 6% 80 +1 SD: 75.7X 2 4% 60 Average: 45.5X

40 1 2% -1 SD: 15.3X 20 0 0% Jan-11 Jul-13 Jan-16 Jul-18 0 Jan-11Jul-11Jan-12Jul-12Jan-13Jul-13Jan-14Jul-14Jan-15Jul-15Jan-16Jul-16Jan-17 P/B ROE (RHS)

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 54: Truly—P/E chart Figure 55: Truly—NTM P/B vs ROE

25 5.0 25.0%

20 4.0 21.0%

+1 SD: 14.3X 3.0 17.0% 15

2.0 13.0% 10 Average: 9.9X 1.0 9.0% 5 -1 SD: 5.6X 0.0 5.0% Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 0 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 P/B ROE (RHS)

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 56: Comp sheet Crnt Po. NI Growth (%) P/E(x) P/B(x) ROE(%) Div yld Mkt cap TP Company Ticker Rating price up/dow US$ bn (lc) 16E 17E 18E 16-18E 16E 17E 18E 17E 17E 17E (lc) n A-share BOE 000725.SZ N 16.6 3.3 3.4 -2% -28% 179% -14% 20% 100.4 35.9 41.7 1.5 4.2% 0.4% Tianma 000050.SZ NC 3.8 NM 18.8 NA 20% 37% 39% 32% 41.0 30.5 23.3 1.7 5.6% 0.5% Truly 0732.HK N 1.3 3.3 3.4 -3% -13% 9% 17% 3% 13.5 12.3 10.5 1.2 10.3% 2.8% Average -7% 75% 14% 18% 51.6 26.3 25.2 1.5 6.7% 1.2% Median -13% 37% 17% 20% 41.0 30.5 23.3 1.5 5.6% 0.5% Offshore AUO 2409.TW O 3.8 17.0 12.2 39% 59% 255% -71% 18% 15.0 4.2 14.4 0.6 14.3% 11.8% Innolux 3481.TW O 4.1 17.0 12.5 36% -83% 1713% -68% 0% 66.5 3.7 11.6 0.5 14.0% 6.8% JDI 6740.T N 1.5 220 278 -21% 159% -45% -153% -191% -5.3 -9.5 18.1 0.5 -5.0% 3.6% LGD 034220.KS N 8.8 27000 27650 -2% -14% 26% -28% -8% 12.1 9.7 13.4 0.8 8.4% 1.8% Average 30.4% 487.2% -79.9% -45.3% 22.1 2.0 14.4 0.6 7.9% 6.0% Median 22.4% 140.3% -69.5% -4.1% 13.6 3.9 13.9 0.5 11.2% 5.2% Source: IBES consensus for NC stocks, Company data, Credit Suisse estimates, price as of 24 Feb 2017

China Display Sector 20 27 February 2017

Investment risks We are cautious on the display sector, even though we see a mid-term upcycle. We also see a few swing factors, which are potential risks to our view.

■ Better-/lower-than-expected display demand: There is a risk of faster-/slower-than- expected demand on the overall LCD market. It is correlated to the end demand, including consumer electronics devices, automotive and industrial. Overall consumer electronics devices, including PC/notebook, tablet PC, TV and mobile phones, are entering a mature cycle such that the unit growth turns to single digit percentage point, including China smartphones. We still see the display upgrade as a trend for 2016-18, especially in TV and smartphones.

■ Oversupply: Our current forecasts suggest demand growth of 5%/3% YoY and supply growth of 3%/9% YoY in 2017/18E. We see a potential oversupply in 2018 that may increase pricing competition. More aggressive capital expenditure from China makers may worsen the overall financial status of LCD companies. We see China is tightening its industry financial support and targets to consolidate the production capacity to major key players.

■ Pricing pressure from fierce competition: There is a risk of fiercer-than-expected pricing competition, which would negatively impact the margins among LCD companies. Although Chinese LCD players benefit from lower cost and higher subsidy from the government, intense price wars may still hurt the industry's profitability. Scale and utilisation remain key to the cost structure, given heavy depreciation.

■ Government policy change: We see China display industry is backed by China National High Technology Research and Development Program and Made-in-China 2025 policy. The China government continues to support the local display industry through massive financial subsidies, incentives and resources to fund the new LTPS/OLED manufacturing capacity in recent years. We believe the risk is manageable as technology development is intact with the 13th Five Year Plan.

■ OLED replacement as disruptive technology: We believe the TFT LCD supply chain would be hurt if high-end smartphones and TV adopt AMOLED since it is self- emitting, and China doesn't get ready for AMOLED products yet.

■ Currency exchange rate risk: Most of LCD sales are priced in USD to overseas customers. Therefore, a depreciation of the RMB could be an upside risk to the top line of domestic company. However, as the raw materials such as glass substrate, polarizer and color filter are imported goods, which are counted in USD, RMB depreciation may also increase the risk of exchange loss to domestic LCD companies.

China Display Sector 21 27 February 2017

Asia Pacific/China Electronic Components & Connectors

BOE Technology Group Co. Ltd (000725.SZ /

000725 CH) Rating NEUTRAL Price (24-Feb-17, Rmb) 3.35 INITIATION Target price (Rmb) 3.28 Upside/downside (%) -2.1

Mkt cap (Rmb/US$ mn) 113,736 / 16,556 Fairly valued for mid-term upcycle with flexible Enterprise value (Rmb mn) 129,023 Number of shares (mn) 33,951 AMOLED as swing factor Free float (%) 60.7 52-wk price range (Rmb) 3.43-2.28 ■ Initiate with NEUTRAL. We initiate coverage on BOE Technology with a ADTO-6M (US$ mn) 144.0 NEUTRAL rating and TP of Rmb3.28 (-2.1% potential downside). BOE is the Target price is for 12 months. largest display panel maker in China and was ranked No.5 among global panel Research Analysts makers in 2015. We believe it will continue to benefit from growing domestic

Kyna Wong demand, policy of localisation, new capacity roll-out and better size mix. 852 2101 6950 [email protected] ■ Growth drivers: (1) Share gain – We expect BOE to continue its share gain Sam Li in IT/TV/smartphones applications. It accounted for 13%/19% of TV/ 852 2101 6775 smartphone display supply in 2015, which will further increase to 19%/21% in [email protected] 2017. (2) Spec upgrade – We see ASP improvement on display size upgrade, and believe 32" will last long as the mainstream TV panel but more 43"/55" ones rolling out in 2H17. Overall blended ASP to increase in 2017/18. (3) Smart businesses – BOE is developing smart system (18-20% of sales) and healthcare (1-2%) as its five-year growth strategy. We like its automotive solution under smart systems and smart healthcare businesses, but they will take a long time for monetisation. (4) Flexible AMOLED – BOE will likely start pilot production of flexible AMOLED from 3Q17, which supports higher ASP for smartphone displays in 2018, if they could successfully ramp up. ■ Catalysts: We believe near-term catalysts are: (1) continuous tight supply in 1H17, (2) rising/stablising ASP, (3) improving profitability, (4) on-track Fuzhou G8.5 fab ramp-up and (5) on-track pilot for flexible AMOLED in 2H17. ■ Valuation: We initiate coverage with NEUTRAL rating as we believe the mid- term upcycle is already priced-in, but there is limited downside due to improving earnings and OLED theme. We forecast 24%/20% CAGR for revenue/net income for 2016-18E. Our TP is based on mid-to-up-cycle P/B of 1.4x and 2018 BPS. Key risks: slowing display demand, rising competition and pricing pressure, delayed ramp for three new fabs, delayed AMOLED production, FX risks. Share price performance Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Revenue (Rmb mn) 48,623.7 66,137.4 84,611.1 93,573.9 EBITDA (Rmb mn) 11,722.3 10,527.4 15,801.4 16,782.3 EBIT (Rmb mn) 3,627.0 1,652.3 5,600.2 5,463.5 Net profit (Rmb mn) 1,636.3 1,173.2 3,275.8 2,821.9 EPS (CS adj.) (Rmb) 0.05 0.03 0.09 0.08 Change from previous EPS (%) n.a. - - - Consensus EPS (Rmb) n.a. 0.04 0.12 0.14 EPS growth (%) (47.1) (27.4) 179.2 (13.9) The price relative chart measures performance against the P/E (x) 72.8 100.4 35.9 41.7 Shanghai Shenzhen CSI300 index which closed at Dividend yield (%) 0.3 0.2 0.4 0.4 3,473.31 on 24/02/17. On 24/02/17 the spot exchange rate EV/EBITDA (x) 10.4 12.1 8.7 8.6 was Rmb6.87/US$1 P/B (x) 1.54 1.52 1.47 1.43

Performance 1M 3M 12M ROE (%) 2.1 1.5 4.2 3.5 Absolute (%) -1.5 20.5 39.6 Net debt/equity (%) 9.9 16.6 28.6 34.6

Relative (%) -4.4 21.9 20.6 Source: Company data, Thomson Reuters, Credit Suisse estimates

China Display Sector 22 27 February 2017

Focus charts and table

Figure 57: Increasing share in large display Figure 58: Dominating small/medium display share

30% 60%

25% 50%

20% 40%

15% 30%

10% 20%

5% 10%

0% 0% 2013 2014 2015 2016E 2017E 2018E 2013 2014 2015 2016E 2017E 2018E

TV Monitor NB PC Tablet (>10") Tablet (<10") Smartphone (HD or above) Smartphone (VGA)

Source: Company data, IHS Technology, Credit Suisse estimates Source: Company data, IHS Technology, Credit Suisse estimates

Figure 59: Began shipping 65" or above in 2016 Figure 60: HD+ smartphone displays as mainstream

100% 90.0 100% 8

80.0 90% 7 80% 70.0 80% 6 60.0 70% 60% 50.0 60% 5 40.0 40% 50% 4 30.0 40% 3 20% 20.0 30% 2 10.0 20% 0% 0.0 10% 1 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 0% 0 9.6"-12.0" 12.2"-13.3" 14.0"-18.0" 18.5"-19.5" 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 20.0"-22.0" 23.0"-27.0" 28.0"-29.0" 32.0" 37.0"-43.0" 46.0"-49.0" 55.0" 65.0" <3.5" below 3.5" 3.5" - 4.3" 98.0"-110.0" ASP (US$) 4.5" - 5.5" >7" ASP (US$)

Source: Company data, IHS Technology, Credit Suisse estimates Source: Company data, IHS Technology, Credit Suisse estimates

Figure 61: 18-20% of sales from smart businesses Figure 62: 20% NI CAGR for 2016-18

(Rmb,mn) 100 (Rmb,bn) 2000.0% 2500 1000.0% 80 1500 0.0% 60 -1000.0% 500 40 -2000.0% 2009 2010 2011 2012 2013 2014 2015 2016E2017E2018E 20 (500) -3000.0%

(1500) 0 -4000.0% 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E (2500) -5000.0%

Display devices (net) Smart systems products Smart health Others NI %YoY

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 63: High leverage and cash days Figure 64: Negative FCF for past 10 years 2017 AUO Innolux JDI LGD BOE 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E Cash and investments 78,598 56,671 24,270 2,363,634 31,211 0 Total debt 119,517 48,299 20,000 918,387 55,595 Net cash -40,919 8,372 4,270 1,445,248 -24,384 (10,000) Net cash/share (lcl) -4.3 0.8 7.1 4039.1 -0.7 Accounts receivable 49,275 57,943 124,441 2,083,285 16,630 (20,000) DSO 52.9 58.3 55.5 24.2 63.2 Inventory 32,213 30,097 93,131 2,472,735 9,776 (30,000) DIO 38.3 36.1 47.4 33.9 46.8 Accounts payable days 64,607 60,985 133,044 6,547,468 14,158 (40,000) Cash conversion days 14.8 19.8 40.9 -31.3 42.3 Debt/ Equity 55% 19% 6% 7% 65% Capex FCF Shareholders' equity 217,331 248,556 343,073 12,394,336 85,272 Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

China Display Sector 23 27 February 2017

Fairly valued for mid-term upcycle with flexible AMOLED as swing factor We initiate coverage on BOE Technology with a NEUTRAL rating and TP of Rmb3.28. The company is the largest display panel maker in China with 10.4% market share (in terms of area capacity of TFT panel production) by 2015, ranked No. 5 in global panel supply. We believe BOE will further increase its capacity to 12.7% by 4Q17 and surpass AUO as the No.4 global panel supplier. We believe BOE will continue to benefit from growing domestic demand, policy of localisation, new capacity roll-out and better size mix. Growth by spec upgrade and share gain BOE has been increasing its shipment/share in both large and small-to-medium sized displays, including LCD monitor, notebook PC, tablet PC, TV and mobile phones. BOE accounted for 16%/12%/23%/15% of global monitor/NB/tablet/TV displays by 3Q16, and we believe its share gain would continue. BOE shipped c.300 mn units of smartphone displays in 2015, which accounted for 19% of global shipment. We expect BOE to increase its share to 21%/24% of global smartphone shipment in 2017/18. We also see ASP improvement on display size upgrade, and we believe 32" will last long as the mainstream product, but more 49-55" products would roll out when Fuzhou 8.5G production ramps in 2017-18. ASP will likely stabilise in 1H17 for large displays, as supply remains tight, but 32" will be the first to release pressure due to new capacity rolling out in 2H17. On mobile display, BOE will likely start pilot production of flexible AMOLED from 3Q17 at its Chengdu G6 fab. ASP of flexible AMOLED display can be more than 3x of rigid AMOLED, which supports higher ASP for smartphone displays in 2018 if they could successfully ramp up. We see AMOLED remains challenging for BOE to commercialise, given IP/yield issues. Smart businesses to take time for monetisation BOE is moving to new businesses, which we think are in two extremes—smart system and healthcare as its five-year growth strategy. Display remains the major business segment, but BOE aims to extend for better sustainability and profitability. With scale and technology leadership in the display industry, BOE will focus on profitability improvement and risk management, as well as investor return. For the two new business platforms, we like its automotive and smart healthcare businesses but they will take a long time for monetisation. Fairly valued with AMOLED as swing factor We anticipate revenue growth of 36%/28%/11% YoY in 2016/17/18, driven by (1) expanding capacity/share gain, (2) pricing ease in 2016/17 and (3) smart businesses. We expect net income to decline 28% YoY to Rmb1.2 bn in 2016 due to weak demand and pricing pressure in 1H16, but rebound to Rmb3.3 bn in 2017 on supply ease and stabilising ASP. We believe BOE would see some pressure in 2018 due to oversupply in the market and net income will likely decline 14% YoY to Rmb2.8 bn. We are positive on BOE's outlook, driven by: (1) mid-term supply/competition ease, (2) ASP upside on spec upgrade, (3) capacity expansion, (4) continuous share gain and (5) new smart businesses. Sentiment-wise, Chinese players moving to LTPS/AMOLED is a positive catalyst for the supply chain. However, we believe the mid-term upcycle is already priced-in, but there is limited downside due to improving earnings and OLED theme. We initiate coverage on BOE with a NEUTRAL rating and target price of Rmb3.28. Our TP is based on mid-to-up-cycle P/B of 1.4x and 2018 BPS. Key risks: slowing display demand, rising competition and pricing pressure, delayed ramp for three new fabs, delayed AMOLED production, FX risks.

China Display Sector 24 27 February 2017

BOE Technology Group Co. Ltd (000725.SZ / 000725 CH) Price (24 Feb 2017): Rmb3.35; Rating: NEUTRAL; Target Price: Rmb3.28; Analyst: Kyna Wong Earnings Drivers 12/15A 12/16E 12/17E 12/18E Per share 12/15A 12/16E 12/17E 12/18E Smart systems 8,781 12,118 15,753 18,904 Shares (wtd avg.) (mn) 35,571 35,153 35,153 35,153 Smart health 826.3 950.3 1,140 1,482 EPS (Credit Suisse) 0.05 0.03 0.09 0.08 Others -4480.07 -5949.89 -8025.84 -9830.95 (Rmb)DPS (Rmb) 0.01 0.01 0.01 0.01 Panel or modules 43,496 59,019 75,743 83,019 BVPS (Rmb) 2.18 2.20 2.28 2.34 - - - - Operating CFPS (Rmb) 0.29 (0.39) 0.29 0.37 Income Statement (Rmb mn) 12/15A 12/16E 12/17E 12/18E Valuation (x) 12/15A 12/16E 12/17E 12/18E Sales revenue 48,624 66,137 84,611 93,574 P/E 72.8 100.4 35.9 41.7 Cost of goods sold 38,755 56,630 69,362 77,519 P/B 1.54 1.52 1.47 1.43 SG & A 6,242 7,856 9,649 10,592 Dividend yield (%) 0.3 0.2 0.4 0.4 Other operating exp./(inc.) (8,095) (8,875) (10,201) (11,319) P/CF 11.4 (8.5) 11.7 9.0 EBITDA 11,722 10,527 15,801 16,782 EV/sales 2.5 1.9 1.6 1.5 Depreciation & amortisation 8,095 8,875 10,201 11,319 EV/EBITDA 10.4 12.1 8.7 8.6 EBIT 3,627 1,652 5,600 5,463 EV/EBIT 33.5 77.1 24.7 26.4 Net interest expense/(inc.) 626 505 561 882 Earnings 12/15A 12/16E 12/17E 12/18E Non-operating inc./(exp.) (993) 324 (787) (871) Growth (%) Associates/JV 5 (19) (19) (19) Sales revenue 32.1 36.0 27.9 10.6 Recurring PBT 2,013 1,452 4,234 3,692 EBIT 9.3 (54.4) 238.9 (2.4) Exceptionals/extraordinaries 0 0 0 0 Net profit (36.1) (28.3) 179.2 (13.9) Taxes 375 173 604 516 EPS (47.1) (27.4) 179.2 (13.9) Profit after tax 1,638 1,279 3,630 3,176 Margins (%) Other after tax income 0 0 0 0 EBITDA 24.1 15.9 18.7 17.9 Minority interests 2 106 354 354 EBIT 7.5 2.5 6.6 5.8 Preferred dividends 0 0 0 0 Pre-tax profit 4.1 2.2 5.0 3.9 Reported net profit 1,636 1,173 3,276 2,822 Net profit 3.4 1.8 3.9 3.0 Analyst adjustments 0 0 0 0 Net profit (Credit Suisse) 1,636 1,173 3,276 2,822 ROE analysis (%) 12/15A 12/16E 12/17E 12/18E ROE 2.1 1.5 4.2 3.5 Balance Sheet (Rmb mn) 12/15A 12/16E 12/17E 12/18E ROIC 3.7 1.6 4.7 4.1 Cash & cash equivalents 38,867 41,919 31,225 25,081 Asset turnover (x) 0.3 0.4 0.5 0.5 Current receivables 8,555 12,640 16,634 18,396 Interest burden (x) 0.6 0.9 0.8 0.7 Inventories 6,609 8,004 9,776 10,812 Tax burden (x) 0.8 0.9 0.9 0.9 Other current assets 9,726 10,830 11,261 11,330 Financial leverage (x) 1.9 2.1 2.1 2.1 Current assets 63,757 73,393 68,896 65,619 Credit ratios 12/15A 12/16E 12/17E 12/18E Property, plant & equip. 82,211 87,632 98,224 105,848 Investments 2,941 3,767 3,956 4,188 Net debt/equity (%) 9.9 16.6 28.6 34.6 Intangibles 2,877 2,929 2,678 2,450 Net debt/EBITDA (x) 0.66 1.30 1.54 1.82 Interest cover (x) 5.79 3.27 9.99 6.20 Other non-current assets 806 5,416 5,416 5,416 Total assets 152,593 173,138 179,171 183,521 Accounts payable 9,850 11,561 14,160 15,826 12MF P/E multiple Short-term debt 7,719 5,656 5,656 5,656 Current provisions 0 0 0 0 Other current liabilities 11,303 13,893 14,189 14,121 Current liabilities 28,871 31,110 34,005 35,602 Long-term debt 38,867 49,939 49,939 49,939 Non-current provisions 0 0 0 0 Other non-current liabilities 6,504 9,908 9,908 9,908 Total liabilities 74,242 90,957 93,853 95,450 Shareholders' equity 77,485 77,228 80,013 82,411 Minority interests 866 4,952 5,306 5,660 Total liabilities & equity 152,593 173,138 179,171 183,521 Cash Flow (Rmb mn) 12/15A 12/16E 12/17E 12/18E EBIT 3,627 1,652 5,600 5,463 Net interest 0 0 0 0 Tax paid (375) (173) (604) (516) 12MF P/B multiple Working capital (725) (3,769) (3,167) (1,132) Other cash & non-cash items 7,967 (11,538) 8,214 9,247 Operating cash flow 10,493 (13,828) 10,043 13,062 Capex (18,607) (19,522) (20,542) (18,715) Free cash flow to the firm (8,114) (33,350) (10,499) (5,653) Disposals of fixed assets 0 0 0 0 Acquisitions (405) 0 0 0 Divestments 0 0 0 0 Associate investments 0 0 0 0 Other investment/(outflows) (582) (2,452) 0 0 Investing cash flow (19,594) (21,974) (20,542) (18,715) Equity raised 0 3,008 0 0 Dividends paid 0 (352) (196) (491) Net borrowings 6,876 10,959 0 0 Other financing cash flow 1,252 (2,477) 0 0 Financing cash flow 8,129 11,139 (196) (491) Source: Credit Suisse, Thomson Reuters Total cash flow (972) (24,663) (10,694) (6,144) Adjustments 650 549 0 0 Net change in cash (322) (24,114) (10,694) (6,144)

Source: Company data, Credit Suisse estimates

China Display Sector 25 27 February 2017

Growth by spec upgrade and share gain BOE is the largest display panel maker in China with 13 panel fabs across China's different provinces in operation or under construction. Given expanding capacities, we see BOE's market share (in terms of area capacity of TFT panel production) increased from 6% by 2013 to 10.4% by 2015, and we expect its share will further increase to 12.7% in 2017, surpassing AUO from 2H17 to become the No.4 global display manufacturer. Growing shipment for share gain BOE has been increasing its shipment/share in both large and small-to-medium size displays, including LCD monitor, notebook PC, tablet PC, TV and mobile phones.

■ In PC/NB, we see its customers are Dell, Lenovo, AOC, HP, TPV, Quanta and HP, and recently it has also started supplying to Apple for Macbook displays. BOE was ranked No.2 for monitor and No.4 for notebook displays in 2Q16 in terms of unit shipment. In TV, its customers include major domestic TV brands, as well as Panasonic, LG, Sony, etc. BOE also supplies TV panels to Samsung Visual Display (VD) with initially 20% allocation in 2017, which could imply c.30% of BOE's TV shipment. Currently, BOE has accounted for 16%/12%/23%/15% of global monitor/NB/tablet/TV displays by 3Q16, and we believe its share gain would continue.

■ For smartphones, BOE shipped c.300 mn units of smartphone displays in 2015, which accounted for 19% of global shipment. We expect BOE to increase its share to 21%/24% of global smartphone shipment in 2017/18. BOE's in-cell smartphone technology has been adopted by Samsung.

Figure 66: Market share—small/medium-sized unit Figure 65: Market share—large-sized unit shipment shipment

30% 60%

25% 50%

20% 40%

15% 30%

10% 20%

5% 10%

0% 0% 2013 2014 2015 2016E 2017E 2018E 2013 2014 2015 2016E 2017E 2018E

TV Monitor NB PC Tablet (>10") Tablet (<10") Smartphone (HD or above) Smartphone (VGA)

Source: Company data, IHS Technology, Credit Suisse estimates Source: Company data, IHS Technology, Credit Suisse estimates

Bigger screen, higher ASP

■ The primary display size for BOE's TV shipments is still 32" but BOE is migrating to 43"/55" or above. Despite the company believing that 32" will migrate to higher resolution, we believe 32" will last long as the mainstream product, but more 43"/55" products would rolling out when Fuzhou 8.5G production ramps in 2017-18. For mobile display, we see 4.5"-5.5" continues to be mainstream for smartphone applications, while technology will move from a-Si TFT to LTPS TFT.

China Display Sector 26 27 February 2017

■ ASP will likely stabilise in 1H17 for large display as supply remains tight, but 32" will be the first to release pressure due to new capacity rolling out in 2H17.

■ On mobile display, BOE will likely start pilot production of flexible AMOLED from 3Q17 at its Chengdu G6 fab. The ASP of flexible AMOLED display can be more than 3x of rigid AMOLED, which supports higher ASP for smartphone displays in 2018 if they could successfully ramp up. We see AMOLED remains challenging for BOE to commercialise, given IP/yield issues.

Figure 68: HD or above smartphone displays as Figure 67: Began shipping 65" or above in 2016 mainstream

100% 90.0 100% 8

Source: Company data, IHS Technology, Credit Suisse estimates Source: Company data, IHS Technology, Credit Suisse estimates

China Display Sector 27 27 February 2017

Smart businesses to take time for monetisation BOE is moving to new businesses, which we think are in two extreme—smart system and healthcare as its five-year growth strategy. Display remains the major business segment, but BOE aims to extend for better sustainability and profitability. With scale and technology leadership in the display industry, BOE will focus on profitability improvement and risk management, as well as investor return. For the two new business platforms, we like its automotive and smart healthcare businesses but they will take a long time for monetisation.

■ Smart system: The company has established the smart system business since 2010, and the business segment has accounted for 18-20% of total revenue. We see smart system is a low-margin business but provides total solutions for its customers by leveraging its scale and in-house resources. This could provide additional revenue from its customers or attract new customer due to it being a one-stop solution. With the recent 53.82% equity investment in Varitronix, BOE aims to develop automotive display solutions and leverage Varitronix's solid customer base. We believe the automotive display business may take longer for ramping up, as normally the development cycle takes three years.

■ Healthcare: This is a new business platform that BOE aims to develop for its long-term growth. BOE owned an international hospital in Beijing and invested to build a digital hospital in Hefei. The company aims to develop a big data system for healthcare services in collaboration with IBM. The Hefei digital hospital has just started construction for the phase one in 2H16 and is expected to start operation by the end of 2018. There will be a phase two plan to start planning from 2019. The phase one and phase two investment will cost about Rmb2.2 bn and Rmb1 bn, respectively, with capital support from the Hefei government. The current healthcare revenue is still limited and 1-2% of the total revenue.

Figure 69: Revenue breakdown

100 (Rmb,bn)

0 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E

Display devices (net) Smart systems products Smart health Others

Source: Company data, Credit Suisse estimates

China Display Sector 28 27 February 2017

Fairly valued with AMOLED as swing factor We anticipate revenue growth of 36%/28%/11% YoY in 2016/17/18, driven by: (1) share gain, (2) expanding capacity, (3) pricing ease in 2016/17 and (4) increasing contribution from smart businesses.

■ We forecast revenue to reach Rmb66/85/94 bn (up 36%/28%/11% YoY) in 2016/17/18. Domestic customers accounted for 54% of revenue in 1H16, which we believe would continue driven by growing China brands.

■ Display business (net) accounted for 80% of the total revenue in 2015, and we expect this segment to grow at 36%/28%/10% YoY in 2016/17/18.

■ Smart system business accounted for 18% of total revenue in 2015, and we expect this segment grow at 38%/30%/20% YoY in 2016/17/18.

■ Smart healthcare is still at an early stage and the income booked in this segment is mainly contributed by rental income. We forecast smart healthcare business to post a 22% CAGR for 2016-18E, but higher growth beyond 2018 after Hefei Digital Hospital starts operation.

■ We forecast 20% net income CAGR for 2016-18. We expect net income to decline 28% YoY to Rmb1.2 bn in 2016, due to weak demand and pricing pressure in 1H16, but rebound to Rmb3.3 bn in 2017 on supply ease and stabilising ASP. We believe BOE would see some pressure in 2018 due to oversupply in the market and net income will likely decline 14% YoY to Rmb2.8 bn.

Figure 70: 24% revenue CAGR for 2016-18 Figure 71: 20% NI CAGR for 2016-18

100 (Rmb,bn) 120.0% 4000 (Rmb,mn) 2000.0%

90 100.0% 3000 1000.0% 80 80.0% 70 2000 0.0% 60 60.0% 1000 -1000.0% 50 40.0%

40 20.0% 0 -2000.0% 2008 2010 2012 2014 2016E 2018E 30 0.0% (1000) -3000.0% 20 -20.0% 10 (2000) -4000.0% 0 -40.0% 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E (3000) -5000.0%

Revenue %YoY NI %YoY

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

China Display Sector 29 27 February 2017

Figure 72: P&L summary 4Q15 1Q216 2Q16 3Q16 4Q16E 1Q17E 2016E 2017E 2018E Revenue 12203 12298 14151 19394 20295 15728 66137 84611 93574 COGS (10369) (11523) (12464) (15830) (16812) (13439) (56630) (69362) (77519) GP 1834 775 1686 3564 3483 2289 9508 15249 16055 GPM(%) 15.0% 6.3% 11.9% 18.4% 17.2% 14.6% 14.4% 18.0% 17.2%

SG&A (1648) (1554) (1546) (2079) (2676) (1914) (7856) (9649) (10592) OP 186 (779) 140 1484 807 375 1652 5600 5463 OPM(%) 1.5% -6.3% 1.0% 7.7% 4.0% 2.4% 2.5% 6.6% 5.8%

Non-op (586) 997 (210) (472) (384) (76) (200) (1367) (1771) Tax 120 (14) (43) (64) (53) (39) (173) (604) (516) NI (285) 210 (47) 860 281 172 1173 3276 2822 NM(%) -2.3% 1.7% -0.3% 4.4% 1.4% 1.1% 1.8% 3.9% 3.0% Source: Company data, Credit Suisse estimates High leverage and negative cash flow a concern

■ In our forecast, BOE has the highest leverage and a longer cash conversion cycle among display peers. The company cited no placement plan in the near term, but still has a phase two company bond to issue in the future. We believe the leverage may further increase in 2017/18. BOE recorded negative cash flow during 2009-15, and we believe this trend would continue due to heavy capex.

Figure 73: BOE has the highest leverage and longer cash days among display peers in 2017 Figure 74: Negative FCF for past 10 years 2017 AUO Innolux JDI LGD BOE 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E Cash and investments 79,068 65,198 24,270 2,363,634 31,225 0 Total debt 123,510 48,942 20,000 918,387 55,595 Net cash -44,442 16,256 4,270 1,445,248 -24,370 (10,000) Net cash/share (lcl) -4.6 1.6 7.1 4039.1 -0.7 Accounts receivable 51,308 58,704 124,441 2,083,285 16,634 (20,000) DSO 50.2 57.1 55.5 24.2 63.1 Inventory 32,620 30,173 93,131 2,472,735 9,776 (30,000) DIO 36.5 35.3 47.4 33.9 46.8 Accounts payable days 66,381 61,945 133,044 6,547,468 14,160 (40,000) Cash conversion days 10.2 18.8 40.9 -31.3 42.2 Debt/ Equity 55% 19% 6% 7% 65% Capex FCF Shareholders' equity 223,345 259,655 343,073 12,394,336 85,318

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

■ Some investors may be concerned about the government subsidy, which may not be sustainable. We see BOE has engaged in several capacity expansion projects with the provincial government, which will secure the government subsidy in at least three years. We see several production lines to come in operation in 2018/19 including Hefei G10.5, Mianyang G6 and Chengdu G6 (flexible AMOLED).

China Display Sector 30 27 February 2017

Figure 76: Net income ex. subsidy is tracking global Figure 75: Continuous subsidy to book in 2017/18 demand and supply trend

4000 (Rmb,mn) Chegndu 2500 (Rmb,mn) 10% Hefei G6 2000 3000 G8.5 Fuzhou 5% Chengdu Hefei G8.5 1500 2000 G4.5 G6 BJ 1000 G8.5 0% 1000 500 0 -5% 0 -500 2007 2009 2011 2013 2015 2017E -10% -1000 -1000 Ordos Chongqing Hefei -1500 -2000 G5.5 G8.5 G10.5 -15% Mianyang -2000 -3000 G6 2006 2008 2010 2012 2014 2016E 2018E -2500 -20%

Gov subsidy NI Ni ex. Subsidy Net D-S

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Initiate with NEUTRAL rating We are positive on BOE's outlook, driven by: (1) mid-term supply/competition ease, (2) ASP upside on spec upgrade, (3) capacity expansion, (4) continuous share gain and (5) new smart businesses. Sentiment-wise, Chinese players moving to LTPS/AMOLED is a positive catalyst for the supply chain. However, we believe the mid-term upcycle is already priced-in, but there is limited downside due to improving earnings and OLED theme. We may revisit our investment view if its flexible AMOLED could successfully ramp up in 2018 with quality products, which may offset the potential risk of oversupply given higher ASP and strong end demand. We initiate coverage on BOE with a NEUTRAL rating and target price of Rmb3.28. Our TP is based on mid-to-up-cycle P/B of 1.4x and 2018 BPS.

Figure 77: BOE—P/E chart Figure 78: BOE—NTM P/B vs ROE

160 6 12%

140 5 10%

120 4 8% 100 3 6% 80 +1 SD: 75.7X 2 4% 60 Average: 45.5X

40 1 2% -1 SD: 15.3X 20 0 0% Jan-11 Jul-13 Jan-16 Jul-18 0 Jan-11Jul-11Jan-12Jul-12Jan-13Jul-13Jan-14Jul-14Jan-15Jul-15Jan-16Jul-16Jan-17 P/B ROE (RHS)

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Our 2016-18E EPS is 5-44% below consensus for these reasons: (1) we believe A-shares' consensus estimates are always too optimistic; and (2) we factor in the oversupply impact on margins for 2018 with 10 pp below-consensus GM estimates.

China Display Sector 31 27 February 2017

Figure 79: Our 2016-18E EPS is 5-39% below consensus Items CS IBES Var (%) 2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E EPS, Rmb 0.03 0.09 0.08 0.04 0.12 0.14 -7% -21% -44% Revenue, Rmb bn 66,137 84,611 93,574 62,407 73,357 83,352 6% 15% 12% Source: Company data, IBES estimates, Credit Suisse estimates

Figure 80: Comp sheet Crnt Po. NI growth (%) P/E(x) P/B(x) ROE(%) Div yld Mkt cap TP Company Ticker Rating price up/do US$ bn (lc) 16E 17E 18E 16-18E 16E 17E 18E 17E 17E 17E (lc) wn A-share BOE 000725.SZ N 16.6 3.3 3.4 -2% -28% 179% -14% 20% 100.4 35.9 41.7 1.5 4.2% 0.4% Tianma 000050.SZ NC 3.8 NM 18.8 NA 20% 37% 39% 32% 41.0 30.5 23.3 1.7 5.6% 0.5% Truly 0732.HK N 1.3 3.3 3.4 -3% -13% 9% 17% 3% 13.5 12.3 10.5 1.2 10.3% 2.8% Average -7% 75% 14% 18% 51.6 26.3 25.2 1.5 6.7% 1.2% Median -13% 37% 17% 20% 41.0 30.5 23.3 1.5 5.6% 0.5% Offshore 11.8 AUO 2409.TW O 3.8 17.0 12.2 39% 59% 255% -71% 18% 15.0 4.2 14.4 0.6 14.3% % Innolux 3481.TW O 4.1 17.0 12.5 36% -83% 1713% -68% 0% 66.5 3.7 11.6 0.5 14.0% 6.8% JDI 6740.T N 1.5 220 278 -21% 159% -45% -153% -191% -5.3 -9.5 18.1 0.5 -5.0% 3.6% LGD 034220.KS N 8.8 27000 27650 -2% -14% 26% -28% -8% 12.1 9.7 13.4 0.8 8.4% 1.8% Average 30.4% 487.2% -79.9% -45.3% 22.1 2.0 14.4 0.6 7.9% 6.0% Median 22.4% 140.3% -69.5% -4.1% 13.6 3.9 13.9 0.5 11.2% 5.2% Source: IBES consensus for NC stocks, Company data, Credit Suisse estimates, price as of 24 Feb 2017

China Display Sector 32 27 February 2017

Investment risks We note below upside and downside risks to our investment view on BOE Technology, and will continue to closely monitor the stock.

■ Better-/lower-than-expected display demand: There is a risk of faster-/slower-than- expected demand on overall LCD market. It is correlated to the end demand, including consumer electronics devices—PC/notebook, tablet PC, TV, mobile phones, etc.—as well as other applications such as automotive and industrial.

■ Oversupply: We see a risk of resumption of capacity expansion out of the overly bullish view on outlook. More aggressive capital expenditure may worsen the financial status of LCD companies. We see China is tightening its industry financial support and targets to consolidate the production capacity to major key players.

■ Pricing pressure from fierce competition: There is a risk of fiercer-than-expected pricing competition, which would negatively impact margins. We have assumed a continuous pricing decline in our model from 2018, while 2017 ASP trends upwards due to screen size upgrade.

■ Government subsidy: The China government has continued to support the local display industry through massive financial subsidies, incentives and resources to fund the new LTPS/OLED manufacturing capacity in recent years. We believe the impact to BOE is positive, as the company will continue to receive government subsidy and co- investment on its new production plant at the provincial level.

■ OLED replacement as disruptive technology: We believe the TFT LCD supply chain would be hurt if high-end smartphones and TV adopt AMOLED, since it is self- emitting, and China is not ready for AMOLED products yet.

■ Currency exchange rate risk: Overseas sales account for c.50% of BOE's total revenue, and the ratio may decline due to the growing number of domestic customers. Most of these sales are priced in USD. Therefore, a depreciation of the RMB could be an upside risk to the top line. On the cost side, we believe 60% of COGS and 75% of capex is paid in USD, such that RMB depreciation will also increase the cost for BOE. Net-net, we estimate limited impact for BOE if 50% of sales come from overseas.

China Display Sector 33 27 February 2017

Appendix Company background Founded in April 1993 and listed in 1997, BOE Technology Group Co., Ltd., is the largest provider of TFT-LCD display solution in China. The company entered into the TFT-LCD business since 2003 and engaged in the R&D, manufacture and sales of thin-film transistor-liquid crystal displays (TFT-LCDs), which are used in many applications such as mobile phones, tablet, notebook, monitor, TV and other consumer electronics. It has established smart system businesses since 2010 to provide system-level assembly service and finished goods such as LCD monitors and LCD TV sets. BOE also stepped into smart healthcare solutions in 2014 and kicked off its plans to develop smart hospitals in China. The company signed an MOU with Dignity Health to develop hospital management system. It also established a joint development agreement with IBM to develop a smart healthcare platform. BOE kicked off its Hefei hospital project in December 2015 in order to build an ecosystem of healthcare and hospital system with total investment of Rmb3.2 bn. BOE's TFT-LCD development

Figure 81: BOE's milestone in TFT-LCD business Period Milestone 2003 BOE acquired Hyundai’s TFT-LCD business. Beijing BOE Optoelectronics Technology Co., Ltd. was founded to produce TFT-LCD panels and modules. BOE acquired 26.36 percent of AOC shares, making it the single largest shareholder of AOC. BOE Beijing Gen 5 TFT-LCD production line launched. 2005 Beijing BOE CHATANI Electronics Co., Ltd. was founded to produce display backlight products. BOE Beijing Gen 5 TFT-LCD production line started mass-production. 2006 BOE (Hebei) Mobile Display Technology Co., Ltd. was established to produce TFT-LCD modules for mobile products. 2007 Chengdu BOE Optoelectronics Technology Co., Ltd. was founded to produce TFT-LCD panels and modules for mobile products. 2008 BOE Chengdu Gen 4.5 TFT-LCD production line launched. Hefei BOE Optoelectronics Technology Co., Ltd. was established to produce TFT-LCD panels and modules for IT and television. 2009 BOE Hefei Gen 6 TFT-LCD production line was launched. BOE Beijing Gen 8.5 TFT-LCD production line was launched. BOE Chengdu Gen 4.5 TFT-LCD production line in Chengdu started mass-production. 2010 The National Engineering Laboratory for TFT-LCD Process and Technology started operation. BOE acquired JEAN’s monitor and television business as well as related assets. BOE Hefei Gen 6 TFT-LCD production line started mass-production. 2011 BOE Ordos Gen 5.5 AMOLED production line was launched. BOE Beijing Gen 8.5 TFT-LCD production line started mass-production. 2012 BOE Hefei Gen 8.5 TFT-LCD production line was launched. 2013 BOE Chongqing Gen 8.5 TFT-LCD production line was launched. 2014 BOE Hefei Gen 8.5 TFT-LCD production line started mass-production. BOE Ordos Gen 5.5 AMOLED Line started mass-production. 2015 BOE Chongqing Gen 8.5 TFT-LCD production line started mass-production. BOE Chengdu Gen 6 LTPS/AMOLED production line was launched. BOE Fuzhou Gen 8.5 TFT-LCD production line launched. 2016 BOE Chengdu Gen 6 project was revisited and changed to flexible AMOLED production. 2017 BOE Mianyang Gen 6 flexible AMOLED production line was kicked off Source: Company data, Credit Suisse Research

BOE has seven production lines in operation, including a Gen 5 TFT-LCD line and a Gen 8.5 TFT-LCD line in Beijing, a Gen 4.5 TFT-LCD line in Chengdu, a Gen 6 TFT-LCD line and a Gen 8.5 TFT-LCD line in Hefei, a Gen 5.5 AMOLED line in Ordos, and a Gen 8.5 TFT-LCD line in Chongqing. There is another Gen 6 AMOLED line in Chengdu, a Gen 8.5

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TFT-LCD line under construction in Fuzhou and the world's highest generation line Hefei Gen 10.5 TFT-LCD line under construction.

Figure 82: BOE's major display production lines Gen City Progress Capital invested (Rmb bn) Time of production Capacity (k per month) 10.5 Hefei Construction 40 2018 90 8.5 Beijing Production 28 2011 120 8.5 Hefei Production 28.5 2013 90 8.5 Fuzhou Construction 30 2017 120 8.5 Chongqing Production 32.8 2015 90 8.5 Mianyang Construction 46.5 2019 48 6 Hefei Production 17.5 2010 90 6 Chengdu Construction 46.5 2017 48 5.5 Ordos Production 22 2013 54 5 Beijing Production 7.8 2005 100 4.5 Chengdu Production 3.1 2009 45 Source: Company data, Credit Suisse Research Holding structure BOE is a state-owned enterprise in which c.30% of stake is held by state-owned corporations. SASAC ultimately owns 13.9% of BOE's shareholding through Beijing State- owned Capital Management Center; Beijing BOE Investment & Development Co., Ltd.; and Beijing Electronics Holdings Co., Ltd.

Figure 83: Holding structure

State-owned Assets Supervision & Administration Wang Dongsheng 20%, Jiang Yukun 10%, Liang Xinqing 10%, Commission of Beijing People’s Government Zhao Caiyong 6.667%, Shi Dong 6.667%, Chen Yanshun 6.667%, Song Ying 6.667%, Han Guojian 6.667%, Gong Xiaoqing 3.333%, 100% Wang Yanjun 3.333%, Wang Jiaheng 3.333%, Liu Xiaodong 3.333%, Ren Jianchang 1.667%, Sun Jiping 1.667%, Zhang Peng Beijing State-owned Capital Management 1.667%, Wang Ai’zhen 1.667%, Mu Chengyuan 1.667%, Xu Yan Administrative Center 1.667%, Hua Yulun 1.667%, Zhong Huifeng 1.667%

100% 100% Beijing Electronics Holdings Co., Ltd Beijing Intelligent Kechuang Technology Development Co., Ltd

66.25% 33.75% Beijing BOE Investment & Development Co., Ltd.

2.34% 11.56% 0.78% BOE Technology Group Co., Ltd.

Source: Company data, Credit Suisse Research

Of the top ten shareholders of BOE, seven are state-owned or national corporations and three are local investment funds. Shares held by domestically listed foreign investors accounted for c.3.4%.

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Figure 84: BOE's top 10 shareholders as of 3Q16 Holder Type % stake Beijing State-owned Capital Management Center State-owned 11.56% Chongqing Capital Photoelectricity Investment Co., Ltd. State-owned 8.53% Hefei Jianxiang Investment Co., Ltd. State-owned 8.13% Hua An Fund – ICBC – Zhongrong International Trust Other 4.45% China Securities Finance Corporation Limited Other 2.74% Beijing BOE Investment & Development Co., Ltd. State-owned 2.34% Beijing Economic-Technological Investment & Development Corp. State-owned 1.93% Hefei Raycom Projects Investment Co., Ltd State-owned 1.92% Beijing BDA Technological Investment Development Co., Ltd. Other 1.60% Beijing Electronics Holdings Co., Ltd. National 0.78% Source: Company data, Credit Suisse Research Placement history BOE issued 21.8 bn new shares in 2014 as part of its aggressive capacity expansion plan. On 24 December 2013, CSRC approved BOE's application of non-public new shares. The total shares of BOE were increased from 13.5 bn shares to 35.3 bn shares. The net proceeds reached about Rmb44.9 bn for Hefei 8.5G TFT-LCD, Ordos 5.5G AMOLED and Chongqing 8.5G production lines.

Figure 85: Recent placement history Date New shares (mn) Price (Rmb) Net proceeds (Rmb mn) Projects Apr'14 21,768 2.1 44,885 Hefei 8.5G TFT-LCD/touch, Ordos 5.5G AMOLED, Chongqing 8.5G and working capital Dec'10 2,985 3.0 8,944 Beijing 8.5G project Jun'09 5,000 2.4 11,783 Hefei 6G TFT-LCD project Jul'08 411 5.5 2,242 Chengdu 4.5G TFT-LCD project Source: Company data, Credit Suisse Research

BOE also recently announced to issue Rmb10 bn corporate bonds in January. Then it executed the public offering of the corporate bonds (phase 1) in March 2016, which is about Rmb5 bn with the final nominal interest rate of 3.15% and a five-years term. Management profile

Figure 86: BOE Management team Name Title Mr WANG Dongsheng Chairman Mr CHEN Yanshun Vice Chairman and President Mr LIU Xiaodong Executive Vice President and Chief Operating Officer Ms DONG Youmei Executive Vice President and Chief Technology Officer Ms SUN Yun Executive Vice President and Chief Finance Officer Mr YAO Xiangjun Senior Vice President Mr LI Xuezheng Senior Vice President Mr YUE Zhanqiu Senior Vice President and Chief Information Officer Ms FENG Liqiong Senior Vice President and Chief Counsel Mr XIE Zhongdong Senior Vice President, Chief Risk Control Officer, and General Auditor Mr LIU Hongfeng Vice President and Secretary of the Board Source: Company data, Credit Suisse Research

Mr WANG Dongsheng, Chairman Mr Wang Dongsheng is the founder and chairman of BOE Technology Group Co., Ltd. He also serves as Vice President of China Electronics Chamber of Commerce (CECC), President of Beijing Electronic Chamber of Commerce (BECC), Vice President of China Optics and Optoelectronics Manufactures Association and President of Liquid Crystal

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Branch (CODA). Mr Wang is also a financial and systems engineering expert. He holds a master’s degree in engineering. Mr CHEN Yanshun, Vice Chairman and President Mr Chen Yanshun is the vice chairman and president of BOE Technology Group Co., Ltd., and he joined in BOE in 1993. He also serves as chairman of Beijing BOE Optoelectronics Technology Co., Ltd., Hefei BOE Optoelectronics Technology Co., Ltd., Beijing BOE Multimedia Technology Co., Ltd., Ordos Yuansheng Optoelectronics Technology Co., Ltd., Hefei Xinsheng Optoelectronics Technology Co., Ltd., and Chongqing BOE Optoelectronics Technology Co., Ltd.. Previously, Mr Chen also served as secretary of the board, vice president, and senior vice president of the Group. Mr Chen is a senior accountant holding a master’s degree in economics from Beijing Technology and Business University and has a strong background in both academic research and business operations. Ms SUN Yun, Executive Vice President and Chief Finance Officer Ms Sun Yun is the executive vice president and chief finance officer of BOE Technology Group Co., Ltd.. She is also a board member of Beijing BOE Land Co., Ltd., board member of Beijing Yinghe Century Land Co., Ltd., board member of Ordos Yuansheng Optoelectronics Technology Co., Ltd., and supervisor of Beijing BOE Oriental Vacuum Electric Co., Ltd.. Prior to her current roles, Ms Sun Yun was the deputy senior manager, senior manager of the finance department, comptroller, director of the finance department, and senior vice president of the Group. Ms Sun is a senior accountant, and holds a master’s degree in commerce from the University of New South Wales, Australia. Mr LIU Hongfeng, Vice President and Secretary of the Board Mr Liu Hongfeng is the vice president of BOE Technology Group Co., Ltd. and secretary of the board of the Group. He is also a board member of Beijing Nissin Electronics Precision Component Co., Ltd. Previously, Mr Liu was the deputy senior manager of the planning and finance department of the Group. He also served as deputy director, director of the board secretariat, and securities affairs representative. Mr Liu holds a master’s degree from Beijing University of Aeronautics and Astronautics.

China Display Sector 37 27 February 2017

Asia Pacific/Hong Kong Electronic Components & Connectors

Truly International (0732.HK / 732 HK) Rating NEUTRAL [V] Price (24-Feb-17, HK$) 3.40 Target price (HK$) 3.30 Upside/downside (%) -2.9

Mkt cap (HK$/US$ mn) 9,884 / 1,274 Awaiting AMOLED ramp in 2H17 Enterprise value (HK$ mn) 15,857 Number of shares (mn) 2,907 ■ Building panel capabilities. Truly has been building its own display panel Free float (%) 46.8 production capabilities in order to fulfill its in-house demand and automotive 52-wk price range (HK$) 4.48-1.79 ADTO-6M (US$ mn) 4.1 display supply requests from customers. Its G4.5 TFT LCD and AMOLED Target price is for 12 months. started production in 2H16, and will likely ramp up in 2017. Truly's G5 TFT [V] = Stock Considered Volatile (see Disclosure Appendix) LCD production facility was recently topping out and will start equipment

Research Analysts move-in and other setup.

Kyna Wong ■ Awaiting AMOLED ramp-up. Truly's AMOLED line entered MP for non- 852 2101 6950 [email protected] smartphone products while MP for smartphones may take some time before Sam Li customers' qualification/design win, likely in 2Q/3Q17 vs our prior expectation 852 2101 6775 of 1Q17. Furthermore, we see the Huizhou JV loss likely persists, but [email protected] management expects 2H17 to reach cash cost breakeven.

■ Catalysts: We see strong YoY monthly sales in Jan/Feb as positive catalysts to the share price, but loss from Huizhou JV and slow AMOLED ramp remain near term overhangs. ■ Maintain NEUTRAL: Our TP of HK$3.30 is based on mid-to-upcycle P/E of 10.3x and 2018E EPS. We still like the fundamentals, given its long-term growth on automotive displays after 2018 but AMOLED progress and Huizhou JV burden remain near-term swing factors to our investment view. Key risks: volatility of China smartphones, losing share to in-cell/on-cell TFT- LCD-based TP, fierce competition in TP/HCM, ramping-up schedule in AMOLED panels, dual-camera yield improvement. Share price performance Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Revenue (HK$ mn) 19,427.1 21,600.4 24,364.6 26,521.9 EBITDA (HK$ mn) 2,202.6 2,950.1 3,379.0 3,615.7 EBIT (HK$ mn) 1,278.7 1,531.6 1,753.5 1,962.2 Net profit (HK$ mn) 845.4 732.7 800.7 937.1 EPS (CS adj.) (HK$) 0.29 0.25 0.28 0.32 Change from previous EPS (%) n.a. 0.0 0.0 0.0 Consensus EPS (HK$) n.a. 0.28 0.33 0.35 EPS growth (%) (24.3) (13.3) 9.3 17.0 The price relative chart measures performance against the P/E (x) 11.7 13.5 12.3 10.5 MSCI CHINA F IDX which closed at 6,706.56 on 24/02/17. Dividend yield (%) 2.9 2.8 2.8 3.3 On 24/02/17 the spot exchange rate was HK$7.76/US$1 EV/EBITDA (x) 5.8 5.4 4.8 4.2

Performance 1M 3M 12M P/B (x) 1.39 1.31 1.23 1.14 Absolute (%) 6.3 10.7 91.0 ROE (%) 11.9 10.0 10.3 11.2 Relative (%) 0.8 2.8 60.6 Net debt/equity (%) 37.2 72.5 70.8 55.3

Source: Company data, Thomson Reuters, Credit Suisse estimates

China Display Sector 38 27 February 2017

Truly International (0732.HK / 732 HK) Price (24 Feb 2017): HK$3.40; Rating: NEUTRAL [V]; Target Price: HK$3.30; Analyst: Kyna Wong Earnings Drivers 12/15A 12/16E 12/17E 12/18E Per share 12/15A 12/16E 12/17E 12/18E LCD 16,068 16,714 17,474 18,389 Shares (wtd avg.) (mn) 2,907 2,907 2,907 2,907 Consumer electronics products 3,359 4,886 6,890 8,133 EPS (Credit Suisse) 0.29 0.25 0.28 0.32 - - - - (HK$)DPS (HK$) 0.10 0.10 0.10 0.11 - - - - BVPS (HK$) 2.44 2.59 2.77 2.98 - - - - Operating CFPS (HK$) 0.82 0.45 1.23 0.96 Income Statement (HK$ mn) 12/15A 12/16E 12/17E 12/18E Valuation (x) 12/15A 12/16E 12/17E 12/18E Sales revenue 19,427 21,600 24,365 26,522 P/E 11.7 13.5 12.3 10.5 Cost of goods sold 17,305 19,174 21,610 23,468 P/B 1.39 1.31 1.23 1.14 SG & A 843 895 1,001 1,091 Dividend yield (%) 2.9 2.8 2.8 3.3 Other operating exp./(inc.) (924) (1,418) (1,625) (1,654) P/CF 4.1 7.6 2.8 3.5 EBITDA 2,203 2,950 3,379 3,616 EV/sales 0.7 0.7 0.7 0.6 Depreciation & amortisation 924 1,418 1,625 1,654 EV/EBITDA 5.8 5.4 4.8 4.2 EBIT 1,279 1,532 1,754 1,962 EV/EBIT 9.9 10.3 9.2 7.8 Net interest expense/(inc.) 73 165 231 282 Earnings 12/15A 12/16E 12/17E 12/18E Non-operating inc./(exp.) (45) (45) (7) (14) Growth (%) Associates/JV (37) (258) (306) (243) Sales revenue (9.3) 11.2 12.8 8.9 Recurring PBT 1,123 1,062 1,209 1,423 EBIT (23.0) 19.8 14.5 11.9 Exceptionals/extraordinaries 0 0 0 0 Net profit (24.4) (13.3) 9.3 17.0 Taxes 195 213 242 285 EPS (24.3) (13.3) 9.3 17.0 Profit after tax 929 850 967 1,138 Margins (%) Other after tax income 0 0 0 0 EBITDA 11.3 13.7 13.9 13.6 Minority interests 83 117 167 201 EBIT 6.6 7.1 7.2 7.4 Preferred dividends 0 0 0 0 Pre-tax profit 5.8 4.9 5.0 5.4 Reported net profit 845 733 801 937 Net profit 4.4 3.4 3.3 3.5 Analyst adjustments 0 0 0 0 Net profit (Credit Suisse) 845 733 801 937 ROE analysis (%) 12/15A 12/16E 12/17E 12/18E ROE 11.9 10.0 10.3 11.2 Balance Sheet (HK$ mn) 12/15A 12/16E 12/17E 12/18E ROIC 10.7 10.0 9.6 10.4 Cash & cash equivalents 2,055 2,126 3,974 3,905 Asset turnover (x) 1.1 0.9 0.9 1.0 Current receivables 5,004 6,155 6,608 7,194 Interest burden (x) 0.9 0.7 0.7 0.7 Inventories 1,776 2,784 2,250 2,250 Tax burden (x) 0.8 0.8 0.8 0.8 Other current assets 895 895 895 895 Financial leverage (x) 2.4 2.8 3.0 2.7 Current assets 9,730 11,960 13,728 14,244 Credit ratios 12/15A 12/16E 12/17E 12/18E Property, plant & equip. 7,013 9,678 11,644 11,518 Investments 1,300 1,042 736 492 Net debt/equity (%) 37.2 72.5 70.8 55.3 Intangibles 0 0 0 0 Net debt/EBITDA (x) 1.28 2.01 1.86 1.48 Interest cover (x) 17.54 9.26 7.58 6.97 Other non-current assets 190 190 190 190 Total assets 18,234 22,870 26,298 26,445 Accounts payable 5,652 6,566 7,105 7,394 12MF P/E multiple Short-term debt 2,883 2,883 2,883 2,883 Current provisions 0 0 0 0 Other current liabilities 44 32 34 81 Current liabilities 8,579 9,481 10,021 10,358 Long-term debt 2,000 5,163 7,363 6,363 Non-current provisions 0 0 0 0 Other non-current liabilities 60 60 60 60 Total liabilities 10,639 14,703 17,444 16,781 Shareholders' equity 7,086 7,540 8,060 8,669 Minority interests 510 627 794 995 Total liabilities & equity 18,234 22,870 26,298 26,445 Cash Flow (HK$ mn) 12/15A 12/16E 12/17E 12/18E EBIT 1,279 1,532 1,754 1,962 Net interest 0 0 0 0 Tax paid (195) (213) (242) (285) 12MF P/B multiple Working capital 304 (1,245) 619 (296) Other cash & non-cash items 1,001 1,228 1,451 1,421 Operating cash flow 2,389 1,303 3,582 2,803 Capex (1,439) (4,104) (3,655) (1,591) Free cash flow to the firm 950 (2,801) (73) 1,211 Disposals of fixed assets 0 0 0 0 Acquisitions (22) 0 0 0 Divestments 0 0 0 0 Associate investments (592) 0 0 0 Other investment/(outflows) (820) 0 0 0 Investing cash flow (2,873) (4,104) (3,655) (1,591) Equity raised 0 0 0 0 Dividends paid (436) (291) (278) (280) Net borrowings (543) 3,163 2,200 (1,000) Other financing cash flow (44) 0 0 0 Financing cash flow (1,023) 2,872 1,922 (1,280) Source: Credit Suisse, Thomson Reuters Total cash flow (1,506) 70 1,849 (69) Adjustments (66) 0 0 0 Net change in cash (1,572) 70 1,849 (69)

Source: Company data, Credit Suisse estimates

China Display Sector 39 27 February 2017

Companies Mentioned (Price as of 24-Feb-2017) AU Optronics (2409.TW, NT$12.2, OUTPERFORM, TP NT$17.0) BOE Technology Group Co. Ltd (000725.SZ, Rmb3.35, NEUTRAL, TP Rmb3.28) Innolux Corporation (3481.TW, NT$12.5, OUTPERFORM, TP NT$17.0) Japan Display (6740.T, ¥278) LG Display Co Ltd. (034220.KS, W27,650) Samsung Electronics (005930.KS, W1,911,000, OUTPERFORM, TP W2,650,000) Tianma Microelectronics Co. Ltd (000050.SZ, Rmb18.82) Truly International (0732.HK, HK$3.4, NEUTRAL[V], TP HK$3.3)

Disclosure Appendix Analyst Certification Kyna Wong, Keon Han, Jerry Su and Sam Li each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for AU Optronics (2409.TW)

2409.TW Closing Price Target Price Date (NT$) (NT$) Rating 08-Apr-14 11.60 14.40 O 30-Apr-14 11.40 15.10 10-Jul-14 13.20 15.50 31-Jul-14 13.65 16.00 16-Oct-14 11.80 12.30 N 15-Jan-15 18.15 16.10 29-Jan-15 18.45 15.80 13-Apr-15 15.35 15.70 29-Jun-15 13.25 15.00 28-Jul-15 11.45 10.80 OUTPERFORM NEUTRAL 31-Aug-15 10.50 10.70 25-Jan-16 8.87 10.20 29-Jun-16 10.25 13.00 O 27-Jul-16 12.65 15.50 27-Oct-16 12.85 16.00 06-Jan-17 12.55 16.50 14-Feb-17 11.80 17.00 * Asterisk signifies initiation or assumption of coverage.

China Display Sector 40 27 February 2017

3-Year Price and Rating History for Innolux Corporation (3481.TW)

3481.TW Closing Price Target Price Date (NT$) (NT$) Rating 09-Apr-14 11.33 10.83 N 06-May-14 10.83 12.00 10-Jul-14 14.58 15.17 28-Jul-14 15.15 15.60 16-Oct-14 12.35 11.50 29-Oct-14 13.50 12.00 15-Jan-15 16.60 15.20 13-Apr-15 15.70 14.90 05-May-15 16.10 17.00 30-Jul-15 11.30 13.00 NEUTRAL OUTPERFORM 31-Aug-15 11.50 12.30 30-Oct-15 10.95 12.00 25-Jan-16 9.38 10.50 02-Feb-16 9.65 10.30 13-May-16 9.23 10.10 29-Jun-16 10.50 14.00 O 29-Jul-16 11.80 14.50 28-Oct-16 10.85 15.00 10-Jan-17 12.80 16.20 10-Feb-17 13.00 17.00 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Samsung Electronics (005930.KS)

005930.KS Closing Price Target Price Date (W) (W) Rating 06-May-14 1,346,000 1,760,000 O 07-Jul-14 1,292,000 1,740,000 08-Jul-14 1,295,000 1,720,000 28-Aug-14 1,242,000 1,700,000 07-Oct-14 1,162,000 1,680,000 03-Sep-15 1,122,000 1,630,000 29-Oct-15 1,325,000 1,785,000 11-Jan-16 1,152,000 1,690,000 28-Jan-16 1,145,000 1,550,000 OUTPERFORM 01-Jun-16 1,333,000 1,702,000 28-Jul-16 1,507,000 1,790,000 15-Dec-16 1,759,000 2,400,000 24-Jan-17 1,908,000 2,650,000 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Truly International (0732.HK)

0732.HK Closing Price Target Price Date (HK$) (HK$) Rating 12-May-16 2.91 3.70 O * 02-Jun-16 3.50 4.10 27-Jun-16 3.54 4.20 28-Jul-16 4.28 5.40 18-Aug-16 4.13 5.00 23-Sep-16 3.49 4.70 17-Nov-16 3.02 4.60 12-Dec-16 2.78 3.30 N

* Asterisk signifies initiation or assumption of coverage. OUTPERFORM NEUTRAL

China Display Sector 41 27 February 2017

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 1 2-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in ope ration from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors. Credit Suisse's distribution of stock ratings (and banking clients) is:

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Target Price and Rating Valuation Methodology and Risks: (12 months) for AU Optronics (2409.TW) Method: Our target price of NT$17 for AU Optronics is based on 0.8x 12 months forward price to book value, which is the 15% discount vs peak- cycle multiple for the stock in 2014-15. We use 12-month forward book value to reflect more accurately the company's earnings potential. We rate AUO OUTPERFORM as we think the slower capacity growth will help panel pricing to recover and let panel makers generate better FCF to invest in new technologies and paid down their debts. China Display Sector 42 27 February 2017

Risk: Risks to our AU Optronics target price of NT$17 and OUTPERFORM rating include the following industry risks: (1) Better/weaker-than- expected TV, IT and handset demand; (2) market share gain/loss to competitors; (3) significant ASP increase/decline; and (4) greater/lower losses from solar operation. Target Price and Rating Valuation Methodology and Risks: (12 months) for BOE Technology Group Co. Ltd (000725.SZ) Method: Our target price of Rmb3.28 is based on mid-to-up-cycle P/B of 1.4x and 2018 BPS. We rate NEUTRAL on the stock as we see midterm upcycle already price-in but limited downside due to improving earnings and OLED theme. Risk: Key risks to our target price of Rmb3.28 and NEUTRAL rating include: slowing display demand, rising competition and pricing pressure, delayed production ramp, OLED replacement, FX risks. Target Price and Rating Valuation Methodology and Risks: (12 months) for Innolux Corporation (3481.TW) Method: Our 12-month target price of NT$17.0 for Innolux Corporation (INX) is based on a 0.65x 12M forward book value per share (BVPS), the mid-cycle average of since 2011. We rate INX OUTPERFORM aas we think the slower capacity growth will help panel pricing to recover and let panel makers generate better FCF to invest in new technologies and paid down their debts. Risk: Downside risks to our target price of NT$17.0 and OUTPERFORM rating for Innolux Corporation (INX) include: (1) panel price decline, (2) weaker TV demand, (3) failure to gain share in NB and smartphone areas, and (4) potential fund raising. Upside risks are: (1) panel price recovery, (2) better TV demand, and (3) potential industry consolidation. Target Price and Rating Valuation Methodology and Risks: (12 months) for Samsung Electronics (005930.KS) Method: Our 12-month target price of W2,650,000 for Samsung Electronics is based on a split-up value into Opco/Holdco. We attribute a target P/E of 10x to Opco’s 2017 earnings while applying a discount of 30% to Holdco’s NAV. The dividend yield should rise for the next few years, driving P/E multiple expansion as Samsung’s yield approaches the global tech average of about 2.5%. We assign an OUTPERFORM rating given our confidence on higher earnings and dividends led by faster 3D NAND/OLED penetration, strong DRAM profitability, smartphone recovery post the GN7 crisis and a more proactive shareholder return policy and value creation from the demerger. Risk: Risks that may impede the achievement of our 12-month target price of W2,650,000 and our OUTPERFORM rating for Samsung Electronics include: (1) the demerger process not starting in 2017, (2) heavy earnings dependence on the strength of its smartphone products and its margin sustainability given intensifying competition, (3) an earlier China entrance into 3D NAND, and (4) mis-execution in W10 tn in OLED investment for a once core additional customer. Target Price and Rating Valuation Methodology and Risks: (12 months) for Truly International (0732.HK) Method: Our target price of HK$3.3 for Truly International is based on 10.3x 2018E P/E (price-to-earnings) which is based on mid-to-up-cycle P/E. Our NEUTRAL rating is based on low visibility to Huizhou JV breakeven and lack of near term catalysts. We still like the stock given its long term growth on automotive displays after 2018 but AMOLED progress remains a near term swing factor to our investment view. Risk: Risks to our HK$3.3 target price and NEUTRAL rating for Truly International include: volatility of China smartphones, losing share to in- cell/on-cell TFT-LCD-based TP, fierce competition in TP/HCM, ramping schedule in AMOLED panels, dual cam yield improvement.

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China Display Sector 44 27 February 2017

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