16 April 2015 Asia Pacific/Taiwan Equity Research Semiconductor Equipment / Semiconductor Devices (Technology - Foundries CN (Asia)/Technology - Semiconductors CN (Asia)/Technology - IC Deisgn TW
Asia Semiconductor Sector Research Analysts SECTOR REVIEW Randy Abrams, CFA 886 2 2715 6366 (Asia)/Small Cap HK (Asia)) [email protected] 1Q15 Preview: Upstream outgrowth pauses
Nickie Yue Figure 1: Foundry sales having a sales deceleration through 2015 886 2 2715 6364 Foundry YoY (%) Backend YoY (%) [email protected] 100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% -20% -20% -40% -40%
-60% -60%
2Q15E
2Q03 4Q04 3Q14 1Q01 4Q01 3Q02 1Q04 3Q05 2Q06 1Q07 4Q07 3Q08 2Q09 1Q10 4Q10 3Q11 2Q12 1Q13 4Q13
Foundry YoY sales Backend YoY sales Source: Company data, Credit Suisse estimates, Bloomberg consensus We summarise key themes through the results season for our semiconductor coverage and preview each of our covered companies in this preview report. ■ Mixed earnings season for upstream. We expect a conservative results tone for Asian semis due to mixed consumer tech product cycles, with China smartphone exports impacted by slowing 3G and a strong USD, PCs and tablets decelerating back to a YoY decline, and TV being weaker post 4Q pull- ins and in the absence of major sports events. Foundry/back-end outperformed fabless and downstream in 1Q15 despite higher fabless inventory YoY. ■ TSMC may kick off conservative in the near term, but staying positive on future opportunities. TSMC may acknowledge a pause from a strong 2014 and 1Q15 due to mixed consumer tech, higher fabless inventory and 20nm impact from Samsung's in-house silicon, but turn focus on the development of 16nm and 10nm, as well as a more cost effective 16nm (FFC) to keep more low- to mid-end smartphone, consumer and IoT applications at TSMC. TSMC's 16nm will ramp steeply from mid-3Q15 with Apple's A10 processors also returning in 2H16. ■ Estimate revisions. We recently revised down TSMC, Vanguard and MediaTek 2Q15, and in this preview note revise WPG 1Q15 estimates to reflect China smartphone weakness and revise up Powertech 2015 estimates above street to reflect better DRAM/NAND and short-term shifts of commodity DRAM from ASE into Micron, with target price lifted from NT$55 to NT$56 based on 1.3x forward P/B. We also lift SMIC TP from HK$0.86 to HK$1.00 on multiple expansion for the Shanghai-HK connect. ■ Stock outlook. We maintain positive view on: (1) ASE for its SiP exposure and value to unlock with USI Shanghai, (2) SMIC for its exposure to China IC industry support and (3) Hua Hong – 8” foundry in China with supply outstripping demand and trading at a discount. We also see UMC/Powertech performing better than low expectations into results. We trim back on MediaTek due to 3G weakness and competition offsetting the 4G ramp and expectation for TSMC to weather some mixed trends near-term but improve into 2016. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
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16 April 2015 Focus table and charts
Figure 2: Asian Semis valuation metrics Market Cap Price Target Inv'ment Target P/E P/B ROE US$mn 15-Apr Local Curcy Rating upside 2014 2015 2014 2015 2014 2015 Foundry TSMC 118,633 143.0 145.0 NTRL 1.4% 14.1 11.8 3.5 3.0 28.1% 27.5% UMC 5,819 14.6 18.0 NTRL 23.7% 15.0 12.2 0.8 0.8 5.6% 6.5% SMIC 4,051 0.87 1.00 OPFM 14.9% 28.7 23.5 10.6 10.1 5.2% 5.7% Vanguard Semi 2,560 48.5 56.0 NTRL 15.5% 14.7 13.9 2.9 2.8 20.9% 20.5% Hua Hong Semi 1,372 11.60 14.00 OPFM 20.7% 13.7 16.8 6.8 8.0 7.4% 6.3% Total 131,063 14.3 12.0 4.0 3.5 26.1% 26.6% Packaging & testing ASE 10,829 42.0 47.0 OPFM 11.9% 14.2 12.7 2.2 2.1 17.3% 17.3% SPIL 5,008 50.0 60.0 OPFM 20.1% 13.4 12.2 2.2 2.1 17.4% 17.3% Powertech 1,325 54.2 56.0 NTRL 3.3% 12.8 11.4 1.3 1.3 10.6% 11.3% Amkor 2,042 8.6 9.0 NTRL 4.4% 9.9 9.6 1.8 1.5 20.0% 17.4% ASM Pacific 32,581 81.0 97.0 OPFM 19.8% 17.7 17.0 4.2 3.9 25.3% 23.9% Total 17,162 5.6 4.9 1.2 1.1 20.7% 21.2% IC design MediaTek Inc. 19,744 398.5 425.0 NTRL 6.6% 13.3 15.7 2.5 2.5 20.9% 15.8% Realtek Semiconductor 1,551 96.0 98.0 NTRL 2.1% 12.5 13.7 2.1 2.1 18.5% 15.4% WPG Holdings Ltd 2,132 40.3 43.0 NTRL 6.8% 11.5 10.5 1.5 1.4 13.8% 14.2% Total 23,427 13.1 14.8 3.2 2.9 23.0% 17.3% Source: Company data, Credit Suisse estimates
Figure 3: Fabless/foundry customers rising YoY Figure 4: Taiwan inventory depleted further for downstream than upstream Inventory Days Inventory days 110 110 100 100 90 90 80 80 70 70 60 60 50 40 50 30 40 20 30 10
-
3Q08 2Q91 1Q92 4Q92 3Q93 2Q94 1Q95 4Q95 3Q96 2Q97 1Q98 4Q98 3Q99 2Q00 1Q01 4Q01 3Q02 2Q03 1Q04 4Q04 3Q05 2Q06 1Q07 4Q07 2Q09 1Q10 4Q10 3Q11 2Q12 1Q13 4Q13 3Q14
2000/1C 2003/1C 2006/1C 1995/1C 1996/1C 1997/1C 1998/1C 1999/1C 2001/1C 2002/1C 2004/1C 2005/1C 2007/1C 2008/1C 2009/1C 2010/1C 2011/1C 2012/1C 2013/1C 2014/1C Fabless IC Total Downstream Total Taiwan Chain Fabless IDMs (hybrid) Foundry Customers Source: Company data, Credit Suisse estimates Source: MIIT
Figure 5: China 3G declining more than 4G pick-up Figure 6: Total LTE up 2% QoQ, 3G down 58% QoQ Shipments: mn Mkt share Qtrly Ship: mn 180 100% 70 100% 90% 160 90% 60 80% 140 80% 50 70% 120 70% 40 60% 60% 50% 100 30 50% 40% 80 30% 40% 20 60 20% 30% 10 10% 40 20%
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12 13 14 15
1Q15 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14
12 13 14 15
12 12 13 13 14 14
12 13 14
LTE % 2G 3G LTE Total LTE % 2G 3G LTE Total Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Asia Semiconductor Sector 2 16 April 2015 1Q15 preview: Upstream tech pauses from the outgrowth We expect a more mixed earnings season for the Asian semiconductor stocks coming up Foundry and backend the next two weeks as consumer tech decelerates from 2014 with the refresh of iPhone 6, outperformed downstream Apple and China share gains from Samsung, and reacceleration of PCs. The foundry in 1Q15, but now pausing sector and to a lesser extent back-end packaging sector outperformed fabless companies post the early builds due to and downstream in 1Q15—both sequentially and relative to consensus expectations sluggish consumer tech despite higher fabless inventory coming into this year as the supply chain reserved demand capacity ahead of the peak season. We expect TSMC to acknowledge a more mixed near- term and pause in sequential momentum from a strong 2014 and 1Q15, but turn focus toward the development of 16nm and 10nm, as well as a more cost-effective version for 28nm (HPC+) and 16nm (FFC) to keep more low- to mid-end smartphone, consumer and IoT applications at TSMC. Demand has remained sluggish across consumer tech, with China smartphone exports impacted by slowing 3G and a strong USD, PCs and tablets decelerating to a YoY decline, and TV sell-through weaker post 4Q pull-ins and in the absence of major sporting events. While the broad-based industrial, automotive and infrastructure related supply chains remain stable, our coverage and Taiwan tech has less leverage. We would also note the TWD is less of a tailwind for earnings upgrades, holding stable the past few months after 7% depreciation and 10-15% lift to earnings coming out of 4Q14. For 1Q15, results broadly tracked in-line for upstream, with foundry, back-end and IC We have already revised design all within 1% of consensus vs 3-7% light sales for downstream and components down TSMC, Vanguard and and a -21% QoQ decline for our Taiwan tech universe vs CS/Street expectations for -19% MediaTek 2Q15, and now QoQ. Upstream was one of the few areas meeting expectations due to early builds, with trim WPG to reflect lower hardware and components seeing deeper declines and falling short of consensus. We 1Q15 and slightly revise up have toned down our view on the sector, as foundry built early ahead of the peak season Powertech and MediaTek's ramp of 4G is offset by more competition and 3G weakness. Sales in 2Q15 will be led by Android builds, automation and LED, with back-end (+8-11% QoQ) and IC design (+10-15% QoQ) seeing mild growth from 1Q15 and foundries flattening out after building stronger than the rest of tech in 1Q15. For estimate revisions, we already revised down TSMC, Vanguard and MediaTek 2Q15 expectations in the past 3 weeks, and in this preview note, revise WPG 1Q15 estimates to reflect China smartphone weakness in the quarter and revise up Powertech 2015 estimates a bit above street to reflect better DRAM/NAND and short-term shifts of commodity DRAM from ASE into Micron, with target price lifted from NT$55 to NT$56 based on 1.3x forward P/B. We also lift TP from HK$0.86 to HK$1.00 for SMIC on the 20- 30% market multiple expansion for flows for the Hong Kong-Shanghai Stock Connect. For stocks, we maintain a positive view on: (1) ASE – favoured play on watch ramp, cheap Top picks include ASE, on sum-of-the-parts, factoring in USI Shanghai, which can now be monetised; (2) SMIC – SMIC and Hua Hong; good exposure to China policy stimulus; and (3) Hua Hong – 8” foundry in China, with lowered MediaTek on supply outstripping demand and the stock trading at a discount. We also believe UMC will continued 3G weakness and continue to perform above low expectations as it now ramps up 28nm at better yields with 4G mix/competition a broader customer base, allowing it to trade closer to 1x P/B (NT$18). We trim back our impacting margins view on MediaTek due to 3G weakness and competition offsetting the 4G ramp and expectation for TSMC to weather some mixed trends near-term but improve into 2016. We summarise some of the key themes that will play out through the results season for our semiconductor coverage, and have a preview and focus charts for each of our covered companies in the following sections of this note.
Asia Semiconductor Sector 3 16 April 2015
1Q15 Taiwan tech sluggish, with upstream outpacing downstream Taiwan tech had mixed 1Q15 sales, down 20% QoQ and up 9% YoY, and decelerating to only +2% YoY in Feb and +7% YoY in March. Taiwan upstream continued to outgrow downstream, with backend and foundry stronger as customers built ahead of the peak 1Q15 tech sales down 20% season. We believe the early build is now triggering some of the moderating outlook for QoQ, up 9% YoY; upstream upstream into 2Q15. Taiwan tech companies that reported a better 1Q15 mostly have direct more moderate in 2Q15 or indirect exposure to Apple, and in the meantime also gained share, increased ASPs, or brought on new projects, including Catcher, Wistron, Vanguard, ASE, and Powertech.
Figure 7: Most sectors missed 1Q15 expectations Figure 8: 2Q15 growth led by handsets, while upstream momentum reverses 1Q15 sales % of CS/Cons estimates 60.0% 48.1% 2Q15 CS QoQ vs. Cons QoQ 102.0% 100.0% 50.0% 100.0% 99.5% 98.6%97.9% 97.6% 97.0% 98.0% 97.1% 40.0% 96.0% 93.6% 94.0% 92.5% 30.0% 24.9% 24.3% 92.0% 90.0% 20.0% 15.2% 11.6% 88.0% 9.8% 9.4%
86.0% 10.0% 0.7%
LED Handsets
Packaging & testing & Packaging LCD TFT
Tech Components Components Tech
IC Design IC HardwareTech Automation Foundry 2.0%
0.0%
Handsets LED Backend
TFT LCD TFT Components
Automation Hardware
IC Design IC Foundry
Cons 2Q15 QoQ CS 2Q15 QoQ % of Cons Qtr % of CS Qtr Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates For 2Q15, we believe IC design will see low- to mid-teens rebound off low base in 1Q15 on ramp of LTE models. Expectations for hardware are for flat sales, with ODM shipments around +5% in 2Q15, lowered from prior expectations of 7% QoQ. Windows 10 is now expected to be announced by the end of the summer and Skylake to be out by the end of August, potentially lifting 2H15. For TFT, we see rising oversupply risk for the TFT panel industry in 2H15 as brands and panel makers seem to adjust their optimistic targets set at early 2015, while new capacity ramp-up remains on track. Back-end may outgrow foundry
Figure 9: Foundry sales swing more due to wafer bank Figure 10: Backend equipment orders rebounding builds/corrections than back-end tracking to units Foundry YoY (%) Backend YoY (%) 100% 100% 80% 80% 60% 60% Current Month Feb-15 Jan-15 MoM 40% 40% Current bookings $190 $148 28.1% 20% 20% Bookings vs. Hi/Lo/Avg Current Hi/Lo/Avg +/- 0% 0% Bookings vs. last trough $190 $101 88.0% -20% -20% Bookings vs. last peak $190 $298 -36.2% -40% -40% Bookings vs. post crisis avg $190 $205 -7.3%
-60% -60%
2Q15E
2Q03 4Q04 3Q14 1Q01 4Q01 3Q02 1Q04 3Q05 2Q06 1Q07 4Q07 3Q08 2Q09 1Q10 4Q10 3Q11 2Q12 1Q13 4Q13
Foundry YoY sales Backend YoY sales Source: Semi, Company data, Credit Suisse research Source: Semi, Company data, Credit Suisse research The back-end sector expectations are up mid-high single digits QoQ as their builds track 2Q15 backend +9% QoQ vs closer to end consumption by fabless chip companies, vs foundry, which grew wafers foundries +2% QoQ ahead of the supply chain in 1Q15 and now market expectations have come down to +2% QoQ for 2Q15. Back-end orders often track closer to semi unit demand, particularly in the low season when assembly and test utilisation is still relatively loose at 75-80%. The base
Asia Semiconductor Sector 4 16 April 2015 for the back-end is also lower in 1Q15 with ASE's IC ATM down low teens, and SPIL and King Yuan down 3-4% QoQ. ASE and SPIL may still grow mid-high single digits in 2Q15. Tech inventory lean, but fabless is higher and is triggering a mid-year pause
Figure 11: Overall tech inventory is reasonable … Figure 12: … but fabless/foundry customers rising YoY Inventory Days 90 110 100 80 Semis, 72.9 90 70 80 70 60 60 50 50 Days Days ofInventory Total Tech, 36.7 40 40 30
30 Supply Chain, 31.7
2000/1C 2003/1C 2006/1C 1995/1C 1996/1C 1997/1C 1998/1C 1999/1C 2001/1C 2002/1C 2004/1C 2005/1C 2007/1C 2008/1C 2009/1C 2010/1C 2011/1C 2012/1C 2013/1C 2014/1C
1Q'13
1Q'95 1Q'96 1Q'97 1Q'98 1Q'99 1Q'00 1Q'01 1Q'02 1Q'03 1Q'04 1Q'05 1Q'06 1Q'07 1Q'08 1Q'09 1Q'10 1Q'11 1Q'12 1Q'14 Total Tech Semis Supply Chain Fabless IDMs (hybrid) Foundry Customers Source: Thomson Reuters, Company Data, Credit Suisse Estimates Source: Thomson Reuters, Company Data, Credit Suisse Estimates Our inventory analysis of the tech supply chain shows overall inventory is lean for Overall tech inventory downstream tech hardware, normal for semiconductors and high for fabless. For the normal for overall tech, but broader supply chain, inventory decreased from 43 days to 37 days exiting 4Q14, versus high at foundry customers normal 3-day depletion and historical 38-day average levels in 4Q. Downstream supply chain inventory (ex-Taiwan ODMs) also decreased from 38 day to 32 days, versus the normal 3-day inventory depletion and average 34-day levels in 4Q. Inventory is more normal for overall semiconductors and also has one trouble spot, with fabless inventory not lean like last year. As fabless outsource everything and represent 80% of foundry/back-end sales, we expect a more mild restocking in 2Q15 relative to prior years. While inventory for the semiconductor industry, including IDMs depleted 5 days versus the normal 1.4 day depletion and 83 days in 4Q, fabless inventory declined 2.2 days to 65.8 days but is 11 days above the levels a year ago. The 11-day restocking in the past year added 3% to demand last year, but may reverse this year and mute the restocking this year.
Figure 13: Modelling a slower 1Q recovery than prior years Asian Upstream sales 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15E 2Q15E 3Q15E 4Q15E 2015 YoY Foundry $6,116 $7,016 $7,280 $6,650 $6,581 $7,971 $8,870 $9,132 $8,929 $9,145 $9,593 $9,497 $37,164 QoQ -0.5% 14.7% 3.8% -8.7% -1.0% 21.1% 11.3% 3.0% -2.2% 2.4% 4.9% -1.0% 14.2% Back-end $2,908 $3,299 $3,440 $3,431 $3,125 $3,561 $3,795 $3,803 $3,387 $3,722 $3,952 $3,973 $15,033 QoQ -8.5% 13.4% 4.3% -0.3% -8.9% 14.0% 6.6% 0.2% -10.9% 9.9% 6.2% 0.6% 5.2% Upstream sales (US$) 9,024 10,314 10,721 10,081 9,706 11,532 12,665 12,935 12,316 12,867 13,544 13,470 $52,197 QoQ -3.3% 14.3% 3.9% -6.0% -3.7% 18.8% 9.8% 2.1% -4.8% 4.5% 5.3% -0.5% 11.4% Semi Customer sales 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15E 2Q15E 3Q15E 4Q15E 2015 YoY Fabless/IDM Customers 11,009 11,358 12,104 12,034 11,505 12,023 12,768 12,832 12,267 12,819 13,614 13,682 $52,383 QoQ -4.5% 3.2% 6.6% -0.6% -4.4% 4.5% 6.2% 0.5% -4.4% 4.5% 6.2% 0.5% 6.6% Downstream units 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15E 2Q15E 3Q15E 4Q15E 2015 YoY Smartphone units 220.0 240.3 267.2 304.6 277.5 303.8 317.4 358.8 339.1 359.4 372.0 413.0 1,484 QoQ -1.1% 9.2% 11.2% 14.0% -8.9% 9.5% 4.5% 13.0% -5.5% 6.0% 3.5% 11.0% 18.0% TV units 48.3 49.8 50.8 55.8 47.5 49.8 52.8 60.7 51.6 54.2 57.5 66.1 229 QoQ -16.0% 3.0% 2.0% 10.0% -15.0% 5.0% 6.0% 15.0% -15.0% 5.0% 6.0% 15.0% 8.8% PC/Tablet units 107.6 110.3 122.3 158.7 132.8 133.5 139.5 126.8 109.0 103.6 111.9 120.2 445 QoQ -13.0% 2.5% 10.9% 29.8% -16.3% 0.5% 4.5% -9.1% -14.0% -5.0% 8.0% 7.5% -16.5% Handsets/PCs/TVs/Tablets 376.0 400.4 440.3 519.1 457.8 487.1 509.7 546.4 499.8 517.2 541.4 599.3 2,158 QoQ -6.8% 6.5% 10.0% 17.9% -11.8% 6.4% 4.6% 7.2% -8.5% 3.5% 4.7% 10.7% 7.8% Source: Company data, Credit Suisse estimates Taiwan downstream inventory depletion better than average, upstream depletion worse than normal Our database of 90 Taiwan corporates representing US$48 bn of inventory and a third of our global sample showed similar trends of better inventory depletion for downstream tech
Asia Semiconductor Sector 5 16 April 2015 than upstream tech. Taiwan downstream inventory declined 12 days QoQ to 35 days, better than the long-term average of -5 days QoQ, while upstream only declined 2 days to 59 days, 10 days above the 10-year average. Downstream depletion was from the Apple supply chain, including Hon Hai -22 days on strong iPhone sell-through and PC/Motherboards -15 days as PC customers still pulled through 4Q14. As a memory module house, ADATA also depleted inventory by 22 days to 57 days.
Figure 14: Taiwan inventory depleted further for Figure 15: TSMC inventory built in WIP through 2H14 downstream than upstream Inventory days Inventories Days 110 (NT$mn) 100 70 60 90 60 50 80 50 70 40 60 40 50 30 30 40 20 30 20 20 10 10 10
- 0 0
3Q08 1Q11 3Q13 2Q00 2Q01 2Q02 2Q03 2Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 1Q09 3Q09 1Q10 3Q10 3Q11 1Q12 3Q12 1Q13 1Q14 3Q14
3Q08 1Q92 4Q92 3Q93 2Q94 1Q95 4Q95 3Q96 2Q97 1Q98 4Q98 3Q99 2Q00 1Q01 4Q01 3Q02 2Q03 1Q04 4Q04 3Q05 2Q06 1Q07 4Q07 2Q09 1Q10 4Q10 3Q11 2Q12 1Q13 4Q13 3Q14 2Q91 Raw Material Work in Process Finished Goods Fabless IC Total Downstream Total Taiwan Chain Days of Raw Material Days of WIP Days of Finished Goods Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Within upstream, fabless inventory days grew 18 days YoY and foundries +9 days YoY. Taiwan inventory decreased TSMC built 20nm WIP inventory for Apple in 4Q14, which shipped out to some extent with 12 days to 35 days, in line the strong January sales and Vanguard's customers also requested that it carry some with 10-year average of inventory ahead of the high season. Taiwan fabless companies depleted inventory dollars 35 days 1% to NT$45 bn and down one day to 71 days, with MediaTek -5 days (but up 31 days YoY), Realtek +23 days, Elan +12 days and Focaltech +34 days post the Orise merger. Taiwan fabless inventory matches the global sample in being more elevated coming into 2015, also now triggering the more modest restocking into 2Q relative to prior years.
Figure 16: Taiwan inventory up—upstream at 4-year high, while downstream below recent seasonal Inventory Days 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 QoQ YoY 05-14 Avg +/- Avg Foundries 48 47 46 50 51 47 43 44 51 50 56 54 -2 9 45 9 Fabless IC 73 70 63 72 84 66 65 52 70 67 71 71 -1 18 67 3 Test & Packaging 54 50 54 46 52 51 52 47 54 53 54 52 -2 4 38 14 DRAM 71 75 74 73 103 88 80 70 81 78 76 76 0 6 60 16 Total Upstream 59 57 57 57 66 59 56 51 60 58 61 59 -2 8 50 9 PCs / Motherboards 47 47 49 44 52 55 49 44 46 52 56 42 -15 -2 41 1 Notebooks 31 36 38 29 38 35 37 29 35 36 39 33 -6 4 24 9 Networking 73 63 66 61 77 66 67 66 78 69 72 69 -3 4 55 14 Distributors 43 44 37 38 43 43 40 36 44 40 39 39 1 4 40 -1 Handset Related 48 42 43 41 65 46 51 44 56 44 53 40 -13 -4 37 3 Display 47 44 38 34 40 38 45 38 44 38 36 32 -4 -6 39 -7 Hon Hai 35 34 45 31 43 35 39 23 34 37 46 24 -22 1 33 -9 Components 52 50 48 42 50 51 49 43 52 49 52 45 -7 2 44 1 Total Downstream 40 41 43 35 45 41 43 32 41 41 45 33 -12 1 35 -2 Total Taiwan Chain 41 42 44 37 47 43 44 34 42 43 47 35 -12 1 36 -1 Source: Company data, Credit Suisse research TSMC to focus on advanced technology – with 16 FFC, and InFO in focus TSMC recently held its first of three regional US technology symposiums in San Jose on 8 16nm ramp on track to 10% April, showing the road map on track and its strategy to invest aggressively on advanced of sales in 4Q15 and 16nm capacity to sustain foundry leadership, offer lower-cost alternatives for competitive FFC for mass market in cost/performance in price sensitive emerging and consumer markets, and broaden 2016 specialty technology offerings to enable the IoT space providing processing, sensing and connectivity growing capabilities for the existing fab network. The following are key highlights management should address at the earnings conference for investors:
Asia Semiconductor Sector 6 16 April 2015
■ Steep 16nm ramp once it starts. TSMC maintained its timeline for a steep 16nm FF+ ramp once it starts, with volume from mid-year, implying revenue in latter part of 3Q15, ramp to about 40k WPM at end-2015 (capable of passing 10% of sales) and 100k WPM by end-2016 (capable of 25-30% of sales), with 50 tape-outs (consistent with 4Q14 comments) across application processor, graphics, network processor and automotive, and performance still offering 50% lower power at same performance over 20nm SoC. We expect some of the early wave customers will be Apple (some share this year and full share on A10 with InFO), QCOM (split initially with Samsung), NVIDIA (majority share with small share at Samsung), Xilinx, AMD (eventually split with GF due to its WSA), BRCM, MRVL, ORCL, MediaTek and Hi-Silicon.
■ Cost effective 16nm FFC process to lower the Moore's Law barrier for FinFet. Another main goal for TSMC is keeping the process competitive for cost sensitive and 2nd wave applications, with 28nm lower-cost HPC+ process introduced for early 2016 products and a 16nm FFC compact low power and lower cost FinFet unveiled for low- to mid-end smartphones, consumer and wearables for 2H16 customer tape-outs. We believe the process saves 5-8 mask layers to lower cost structure to reduce some of the cost barrier for customers to move to FinFet. The high-end customers would afford the high-end FinFet plus but TSMC will use this lower-cost FinFet alternative to still draw some customers in the mass market to design to FinFet to take advantage of the power savings at a still reasonable cost structure.
■ Advanced 10nm development on schedule. For 10nm, the company maintained the Speciality still growing at target for 4Q15 risk production and end-2016 volume production offering 2.1x density 20% CAGR; InFO shrink, 20% speed gain or 40% power reduction (near prior metrics). The company will production for Apple a10 in break ground this quarter for Fab 15 phase 5 and break ground in 4Q15 on Fab 15 2Q16 phase 6, both of which would ramp for volume production for tool move-in in 2Q16 and mass production ramping throughout 2017.
■ Specialty process offerings broaden out. TSMC noted specialty process (high voltage, flash and MEMs) still has 20% CAGR and is now 31% of sales. The company has noted 10% of capex for 8" and back-end, which can add 8" clean room space to its Shanghai fab and back-end to support iPhone 7 in 2016.
■ TSMC's back-end InFO process to start penetration from 2Q16. TSMC noted good traction to its InFO (Integrated Fan Out) technology, with a few customers to ramp up in 2Q16 and will contribute a sizable amount of the total backend revenue, which is currently about 4-5% of total company sales. It is now building a small product line in a small site for high volume production in 2016. We believe Apple is the main customer for A10 on 16FF+. Management noted GMs will be lower but ROIC higher on this business.
Figure 17: TSMC's InFO already qualified for production Figure 18: InFO architecture
Source: TSMC, i-Micronews Source: TSMC, i-Micronews
Asia Semiconductor Sector 7 16 April 2015
Some direct and indirect competition in foundry We still view some degree of competition after a very benign landscape the past few years TSMC gets US$1 bn or with Samsung on 14nm and 2nd tier foundries starting from UMC now ramping some 3.7% impact from the business on 28nm after limited traction during the first couple of years of ramp. Samsung QCOM socket loss has demonstrated that it can be a larger supplier of its own silicon, with recent teardowns confirming TSMC’s top customer Qualcomm (21% of 2014 sales) losing the Galaxy S6 socket for processor and some of the baseband and RF/power IC allocation to Samsung's Exynos and Shannon subsystem. We estimate about US$1 bn TSMC impact (3.7%) from Samsung's internal sourcing, mainly impacting the 20nm volumes primarily used by Apple/QCOM. Our estimates for muted QoQ sales through the year also reflect dual sourcing on Apple's A9 between Samsung/TSMC, UMC finally ramping up 28nm (SPRD, MediaTek, QCOM, BRCM, MRVL, Realtek) and QCOM also moving its S820 (MSM8996) to Samsung in late 2015.
Figure 19: Samsung silicon in GS6 has a US$1 bn TSMC impact GS6 In-House Silicon Units (mn) Foundry content US$mn Application Processor 50 $12 $600 NFC 50 $1 $50 Baseband (70% share) 35 $8 $280 RF/Envelope (70% share) 35 $1 $35 Power mgmt (70% share) 35 $1 $35 TSMC sales impact from Samsung using its own silicon: $1,000 Source: Company data, Credit Suisse estimates We see Samsung still using capacity for some additional projects, including Qualcomm's next Snapdragon 800 series (MSM8994) on 14nm in 4Q15, and splitting Apple's A9 allocation with TSMC. NVIDIA also noted it uses Samsung's foundry in addition to TSMC in its annual filing, though we believe volumes are still small. The new capacity from Samsung is notable as it plans 40,000 wafer per month (WPM) capacity on 14nm for its project ramp this year, enough to reach US$2.8 bn annualised sales at 90% utilisation, while GlobalFoundries' 30,000 WPM capacity in 2016 could support a further US$2.1 bn, giving the combined alliance close to US$5 bn revenue power. If we add in UMC and SMIC's new capacity, the Tier-2 foundries could add US$6.2 bn in potential revenue, 31% over their existing base and 25% of TSMC's capacity.
Figure 20: Second tier foundries adding capacity to support over 30% more sales if it is effective Wafer Wafers Per 2014 Potential Additional Revenue Increase Node price Month Sales Comment Utilization Potential (US$mn) over base (US$) Added (US$mn) Samsung 14nm $6,500 40,000 90% $9,441 $2,808 30% Samsung planning 40k WPM on 14nm
GlobalFoundries 14nm $6,500 30,000 90% $4,200 $2,106 50% GlobalFoundries planning 30k WPM on 14nm UMC was running 6k of 12k on 28nm in 2014 and will reach UMC 28nm $3,500 20,000 90% $4,189 $756 18% 20k on 28nm in early 2015 and 24.5-29k by the end of 2015 SMIC planning 6K WPM in Shanghai and 10K WPM in its SMIC 28nm $3,000 16,000 90% $1,969 $518 26% Beijing JV fab by 4Q15 Tier 2 Capacity 106,000 $19,800 $6,188 31% TSMC $25,173 Tier 2 adds as % of TSMC: 25% Source: Company data, Credit Suisse estimates The 28nm technology node, a high-volume process that TSMC ramped starting 2012 at 28nm is now seeing some very high market share, is now maturing and is facing more foundries capable of ramp from UMC production as Tier-2 foundries ramp. The node remains very important at US$2 bn/quarter for TSMC, about one-third of its revenue and a node in which TSMC has held about 80% market share, ex-Apple, through 2014. The node remains a high-volume node as the last node that does not require the added complexity of multiple patterning on the lithography and high-k metal gates, and is still not a mandatory option on the LP process for cost sensitive products.
Asia Semiconductor Sector 8 16 April 2015
TSMC remains confident on its 28nm technology and noted at its last conference that it would grow capacity a further 19% YoY, with growth from 4G smartphone ramp and second- wave customers for RF, HDD, connectivity and consumer. TSMC still commands a premium and offers a better performing, as well as lower-cost versions of High-k metal gates. We expect UMC's 28nm 2Q15 sales will grow 7% QoQ vs street +5% QoQ, driven by Communications (AP, BB, Wifi) and Consumer, with more products ramping on 28nm as the company’s yields have finally improved for both High-K Metal Gate and Poly-SiON versions. We would acknowledge though that UMC is getting more competitive with good yields on both LP and HKMG versions of 28nm, a process that contributed high single digit sales in 1Q15, and the company targets to reach 15-20% of sales by 4Q15 on 28nm. GMs have improved with better yields (80%+ for HKMG and 90% for PolySion), but will still be a few points dilutive to the 12" average through 2015 (implying ramp to low 20% GMs).
Figure 21: 28nm capacity growing close to 20% YoY Figure 22: TSMC's 28nm capex keeps its share flat 28nm foundry capacity 2011 2012 2013 2014 2015 Capacity % of TSMC capacity share 3,500 60% TSMC 114.0 606.0 1206.0 1356.0 1611.0 3,000 50% UMC 0.0 108.0 141.0 141.0 267.0 2,500 40% SMIC 0.0 0.0 0.0 0.0 126.0 2,000 30% GlobalFoundries 210.0 435.0 663.0 720.0 720.0 1,500 20% Samsung 4.2 113.9 242.5 260.0 235.0 1,000 Grand Total 328.2 1262.9 2252.5 2477.0 2959.0 500 10% YoY 284.8% 78.4% 10.0% 19.5% 0 0% 2011 2012 2013 2014 2015 TSMC's Capacity Share 34.7% 48.0% 53.5% 54.7% 54.4% TSMC UMC SMIC GlobalFoundries Samsung TSMC's Capacity Share Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates UMC's 28nm capacity is expanding from 12k to 20-21k WPM by 2Q15, and we believe tool UMC is now yielding well on move-in is still planned for this May/June on Fab 12A Phases 5 and 6 in Tainan, Taiwan, 28nm to expand capacity further to 30k WPM by late 2015/early 2016—enough to annualise 20% of sales (US$1.1 bn), up from US$100 mn in 2014. UMC should ramp 28nm to similar 20% of sales it achieved on 40nm within 12-18 months, though FCF is only modestly positive on the higher capex.
Figure 23: UMC 28nm finally ramping Figure 24: SMIC 28nm starting to ramp in 2H15 Wafer Sales (NT$) 100% 2.5 years 2 years 2.5 years 3 years 4 years 90% 14,000 80% 12,000 70% 60% 10,000 50% 8,000 40% 30% 6,000 20% 4,000 10% 2,000 0%
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3Q10 4Q12 1Q10 2Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14
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3Q09 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q05 28nm 40nm 65nm 90nm 0.13um 0.25um 0.18um 0.13um 90nm 65nm 40nm 28nm Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates SMIC's ramp is progressing a bit slower. The company targets 28nm wafer starts with SMIC targeting 2H15 Qualcomm from 2Q15 and 3Q15 revenue and has other Chinese customers following on in production with Qualcomm 2016. SMIC is starting at a more gradual pace now, with 6k WPM in Shanghai, a level that though still needs to can contribute up to 10% of sales by year-end. The Beijing JV fab will have capacity ramping improve its yields in 4Q15 or 1Q16 as yields mature, giving the company a platform for additional Chinese and US customers later in 2016.
Asia Semiconductor Sector 9 16 April 2015
China policy support progressing more urgently to support the industry SMIC is trading off strong liquidity flows as the Hong Kong China Connect investment programme opens up China mutual funds and retail to invest in Hong Kong through the southbound programme, providing recent momentum to Hong Kong listed tech companies. While the magnitude and sustainability of the liquidity rush is uncertain, we would view SMIC and Hua Hong as good stocks to own in the Hong Kong tech space. China has progressively prioritised semiconductors in its 12th 5-year plan to support back- end and test, encourage consolidation and support of industry leaders, and step up investment to close the country's gap between production and consumption: 1) National fund. China established a Rmb120 bn national IC fund last year to be spent by 2020 and 60% tied to manufacturing as a hub for the local ecosystem of foundries, back-end, suppliers and design companies. The company's first major acquisition was JCET's purchase of #4 back-end supplier Stats Chippac to bring it to #3 position in the industry, with target now to reach #2. 2) Local funds. In addition to the national fund, the government is encouraging 5x more investment through local funds. The Shanghai IC fund has Rmb10 bn and made the first acquisition target of ISSI last week to bring more memory IP into China. The Beijing IC Fund has Rmb30 bn and has launched a bid for Omnivision, as well as co-worked on establishing SMIC's 28nm 12" JV fab. 3) Private VCs. VCs have also started investment. Shanghai PDSTI acquired set- top supplier Montage, and Tsinghua Unigroup invested in RDA/Spreadtrum and attracted Intel's investment to advance a local rival in mobile communications.
■ Substantial targets being set for China's semiconductor development. The National IC fund targets growing the China IC market by growing the industry at 20% sales CAGR over the US$65 bn market in 2014. By 2030, key China IC companies should become Tier 1 global players and should target leadership in their categories.
■ China looking to consolidate resources behind the leaders. The Chinese government is now encouraging industry consolidation and acquisitions and putting special emphasis on establishing SMIC as a future leader to drive the local ecosystem. The China IC fund recently took 11% equity stake in SMIC, and the retiring Chief Economist of the MIT joined SMIC as new chairman and executive director earlier this month to tighten the collaboration and the development of the foundry as a centrepiece. 8" capacity additions still limited, though demand is easing some capacity near-term We believe 8" capacity tightness has eased somewhat in recent months—as display driver 8" moving through a short- ICs procured inventory early in 1Q15—and has been impacted by slower panel demand and term soft patch as driver IC China smartphone weakness. We believe Vanguard is tracking to low-mid single digit growth builds slow in 2Q15 vs our original 8% QoQ expectation. The company has been prioritising power management over lower-margin small panel ICs, also prompting its customers to shift some business to Korean (Dongbu and Magnachip) and China foundries (SMIC and CSMC).
Asia Semiconductor Sector 10 16 April 2015
Figure 25: 8" ASPs still have held more stable Figure 26: 8" foundry sales on a growth track, but slowing in 2Q15 ASPs (US$) Revenue (US$mn) YoY Growth (8") $3,000 15,000 50% 13,500 40% $2,500 12,000 30% $2,000 10,500 20% 9,000 10% $1,500 7,500 0% $1,000 6,000 -10% 4,500 -20% $500 3,000 -30%
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2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 TSMC 12" ASPs UMC 12" ASPs GF 12" ASPs 2000 SMIC 12" ASPs Vanguard 8" ASPs 130nm+ YoY % Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Supply growth is still limited despite attempts by foundries to add capacity due to the lack of new tools built for the older wafer size, little desire to build expensive green field fabs for lower ASP legacy business and limited used memory fabs still available. Vanguard scrambled for about a year to secure Nanya's 8" used fab in Taiwan, and acknowledged few other good options to convert the existing space. Vanguard is also one of the few companies with a history of successfully shifting from DRAM manufacturing to logic manufacturing and twice converting DRAM fabs to logic, whereas others have not made the transition to logic. Based on the top seven foundries, 8" supply growth has stayed constrained at 0-5% consistently since the financial crisis and +4% supply growth in 2014 and 2015 versus 1-3% over 2009-13.
Figure 27: 8" wafer capacity growth staying modest Figure 28: 8" capacity has been getting tighter 8" Capacity (K) YoY (%) Kpcs Utilization (%) 20,000 80% 20,000 120%
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2014E 2015E TSMC UMC SMIC GlobalFoundries 2014E Wafer shipped/quarter (Kpcs) Total capacity/quarter Utilization (%) Vanguard Hua Hong Semi Samsung YoY (%) Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Taiwan dollar less of a tailwind The Taiwan upstream has a first order benefit from currency depreciation with selling prices The Taiwan dollar was in USD but over half the cost in TWD, so almost 1% translation boost to sales and a 40 bp stable through 1Q15, increase to GMs for foundry and a 30 bp increase to GMs to the back-end for each 1% providing less of an depreciation in the currency. The Taiwan currency depreciated 6-7% at the end of 4Q14 but incremental tailwind for has since appreciated 1-2% from the trough. We note that TSMC's earnings when it guided translation gains for this 1Q15 had NT$1.35 incremental boost from currency but have now given up NT$0.36 to fall results season back to NT$12.15 now that the TWD has appreciated a bit in the past few months.
Asia Semiconductor Sector 11 16 April 2015
Figure 29: NT depreciation now normalising 2014 2015 Flat NT$ 2015 CS 2015 NT$ Current P&L at 30.2 P&L at 30.2 P&L at 31.8 P&L at 31.4 Wafer Sales (US$) $23,431 $27,150 $27,150 $27,150 YoY Growth (US$) 15.9% 15.9% 15.9% NT$ 30.3 30.20 31.80 31.37 NT$ Sales $710,024 $819,922 $863,362 $851,688 Other Sales (NT$) $52,769 $59,623 $59,623 $59,623 Sales (NT$) $762,793 $879,545 $922,985 $911,311 YoY Sales (NT$) 15.3% 21.0% 19.5% GM% 49.5% 48.3% 50.4% 49.9% Gross Profit $377,583 $424,645 $465,184 $454,300 Operating Expense $81,831 $95,926 $95,926 $95,926 Operating Income 295,752 328,718 369,258 358,373 Op Margin % 41.7% 40.1% 42.8% 42.1% Non Op Income 6,208 5,232 5,232 5,232 Pretax Income 301,960 333,950 374,490 363,605 Tax Rate 12.7% 13.4% 13.4% 13.4% Net Income $263,660 $289,306 $324,426 $314,996 YoY Net Income 9.7% 23.0% 19.5% EPS $10.17 $11.16 $12.51 $12.15 Shares 25,930 25,930 25,930 25,930 Source: Company data, Credit Suisse estimates We also note a second order impact from currency on some impact on demand in emerging markets and Europe. Many of these countries import components in USD but have some margin squeeze selling in local currencies. 3G China exports to these markets have slowed due to the currency volatility. In IC design, 3G and export market weakness along with competition offsetting the 4G transition boost China smartphones have been weaker since the October holiday, particularly for 3G and MediaTek's 2Q15 rebound Apple gaining share from local brands' flagship models. Chinese operators are now off a lower 1Q15 is mild due unwilling to carry more 3G smartphones as it now has lower-cost 4G models and can to 3G slowdown and more entice users to 4G to accelerate data usage to offset declining voice and SMS traffic. of the LTE mix at the entry TSMC mentioned weaker demand from Android (non-Apple and non-Samsung), and level of the market MediaTek also sees slower 3G impacted by emerging market exports and fierce price competition from both Qualcomm on LTE and Spreadtrum on 3G. We also note Huawei is now using its in-house Hi-Silicon Kirin platform for the majority of its LTE smartphones, making more captive 10% of the made-in-China smartphone market. WPG noted the Apple business has been stronger than expected, offsetting sluggish orders from local Chinese vendors. It expects volume to pick up in 2Q15 as operators reaccelerate LTE orders in May.
Figure 30: Chipset space remains competitive Figure 31: Half of chipset units shifting over to LTE Chipsets to China brands 2013 2014 2015E 2016E 2017E 14-17 CAGR 2015 to China brands EDGE WCDMA TD-SCDMA CDMA 2000 LTE Mediatek 223.2 356.4 425.6 500.1 575.1 17% Mediatek 42.6 188.2 34.8 - 160.0 Mediatek share (%) 47% 50% 47% 47% 47% Spreadtrum 40.0 44.9 44.1 - 30.0 Spreadtrum 120.6 128.3 159.0 186.0 214.0 19% Leadcore - 0.8 24.3 - - Leadcore 12.0 16.0 25.0 30.0 35.0 30% Hi-Silicon - 5.0 10.0 35.0 Hi-Silicon 2.6 15.4 50.1 72.1 86.5 78% Asian suppliers 82.6 238.8 113.2 0.0 225.1 Asian suppliers 358.4 516.1 659.7 788.1 910.5 21% YoY Growth 144% 44% 28% 19% 16% % of shipments 16% 47% 22% 0% 44% Share 75% 72% 73% 74% 75% Share 100% 88% 93% 0% 59% Qualcomm 98.9 166.2 208.1 233.1 237.9 13% Qualcomm - 28.1 5.0 45.0 130.0 Intel - - 5.0 20.0 40.0 NM Broadcom - - - - - Broadcom 7.0 5.0 - - - -100% Marvell - 2.7 3.0 - 21.3 Marvell 13.0 25.0 27.0 28.5 30.0 6% Intel - 2.0 - - 3.0 ST-Ericsson 0.5 - - - - NM Overseas suppliers 0.0 32.8 8.0 45.0 154.3 Overseas suppliers 119.4 196.2 240.1 281.6 307.9 16% % of shipments 0% 17% 4% 23% 79% YoY Growth 16% 64% 22% 17% 9% Share 0% 12% 7% 100% 41% Share 25% 28% 27% 26% 25% Total 82.6 271.6 121.2 45.0 379.4 Total 477.8 712.3 899.7 1,069.7 1,218.4 20% YoY Growth 92% 49% 26% 19% 14% % of shipments 12% 38% 17% 6% 53% Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Asia Semiconductor Sector 12 16 April 2015
The China MIIT suggests 4G has yet to offset the significant 3G deceleration According to the MIIT, YTD 3G shipments are down 89% YoY to only 9mn. Total March mobile shipments were 37.5 mn, up 53% MoM off a low base in February, but still down 5% YoY, with 2G/3G/LTE up 14%/7%/80% MoM. YTD total smartphone shipments grew 8% YoY and LTE mix has remained near 80% of shipments over the past three months. YTD 273 new smartphone models have been introduced, down 41% YoY from the same period in 2014. Vendors are launching flagship models later than prior years in 2015, pushed out from before MWC to April/May, both on the strong Apple traction for the high•end and also as they await chipset refreshes.
Figure 32: China 3G declining more than 4G pick-up Figure 33: LTE models near 80% of mix now Shipments: mn Mkt share 100% 70 100% 90% 90% 60 80% 80% 70% 50 70% 60% 40 60% 50% 50% 30 40% 40% 20 30% 30% 20% 10 20% 10% 10%
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13 12 14 LTE % 2G 3G LTE Total 2G % 3G % LTE % Source: MIIT, Credit Suisse Source: MIIT, Credit Suisse 1Q15 China brand mix declined Mix of China brand smartphones dropped from 76% in 4Q14 to 53% in 1Q15, likely due to the continue traction of iPhones and also later introduction of new models by local vendors, suggesting hope for a rebound in May/June as operators start pulling in. Total 1Q15 shipments were 109mn, up 8% YoY, but declined 12% QoQ, as 2G declined 21% QoQ, 3G down 58% QoQ, while LTE only grew 2% QoQ. Total new models grew 13% QoQ, including 244 LTE and 34 3G.
Figure 34: Total LTE up 2% QoQ, 3G down 58% QoQ Figure 35: New models—LTE +25% QoQ, 3G -38% QoQ Qtrly Ship: mn New model 180 100% 1200 100% 160 90% 90% 1000 140 80% 80% 120 70% 800 70% 60% 60% 100 50% 600 50% 80 40% 40% 60 30% 400 30% 40 20% 200 20% 20 10% 10%
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1Q15 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15
TD-LTE % 2G 3G TD-LTE Total LTE % 2G 3G LTE Total Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Export market demand weaker on currency volatility and stricter local manufacturing requirements MediaTek is noting weakness in Chinese brands' 3G exports to other emerging markets (40% of its volume), with downside in a third of its markets suffering sharp currency depreciation, including Nigeria, the Middle East, Russia and Brazil. WPG also is noting incremental export weakness as India and Indonesia impose stricter import policies as the governments work to establish domestic manufacturing capability. For example, vendors used to ship the entire phone to Indonesia, but now can only ship the components as the assembly needs to be done locally. WPG expects demand to pick up in 2H15 for exports
Asia Semiconductor Sector 13 16 April 2015 as assembly lines are built up. At the same time, 3G is seeing impact from Spreadtrum with more competitive entry level quad core chipset, and depreciating currencies in emerging markets squeezing margins and pressuring USD chipset ASPs. MediaTek is pushing back its 3G chipset launches—MT6580 will shift back from end-April to June, and MT6570 is shifting from May further back to 3Q15, indicating that the company is still digesting 3G inventory. Despite 3G weakness, we recently raised our MediaTek 2015 LTE volume forecast from 150mn to 160mn as LTE gains are intact, but mix is worse, with more low-mid volumes (MT6735M) at US$8 ASP and lower margins and more modest higher-end LTE volumes after a few downward order revisions from customers and ASPs only at US$20-25 (MT6795).
Figure 36: MediaTek 2015 road map
Source: Company data, Credit Suisse estimates
Asia Semiconductor Sector 14 16 April 2015
Asia Pacific / Taiwan Semiconductor Devices (Technology - Foundries TW (Asia))
Taiwan Semiconductor
Manufacturing (2330.TW / 2330 TT / ADR:TSM) Rating NEUTRAL*
Price (15 Apr 15, NT$) 143.00 Target price (NT$) 145.00¹ Technology strength continues, but a near- Upside/downside (%) 1.4 Mkt cap (NT$ mn) 3,708,032 (US$118,634mn) term pause from the early builds Enterprise value (NT$ mn) 3,478,667 Number of shares (mn) 25,930.30 ■ 1Q15 sales light of the midpoint on less favourable forex. 1Q15 sales Free float (%) 87.3 were NT$222 bn, slightly light of the midpoint of NT$221-224 bn as the 52-week price range 154.5 - 117.0 TWD depreciated less than guidance, impacting NT$1.8 bn or 0.8% of ADTO - 6M (US$ mn) 192.3
*Stock ratings are relative to the coverage universe in each sales. We expect GMs/OpM at 49.7%/39.7%, near the midpoint and analyst's or each team's respective sector. recently trimmed EPS on slightly lower sales from NT$3.13 to NT$3.07 vs ¹Target price is for 12 months. street's NT$3.02.
Research Analysts ■ 2Q15 flattish. We trimmed 2Q15 from +7% to flat in late March, with Randy Abrams, CFA GM/OpM down slightly to 49/38%. The near-term reflects mixed consumer 886 2 2715 6366 [email protected] demand and impact from Samsung's internal sourcing—about US$1 bn TSMC (3.7%) mainly to 20nm primarily used by Apple/QCOM. We expect a Nickie Yue 886 2 2715 6364 modest 2H15, factoring in dual source on Apple's A9, UMC ramping some [email protected] 28nm and QCOM moving S820 (MSM8996) to Samsung in late 2015.
■ Technology optimism and 16nm FFC a focus. Management should discuss 16nm FFC, a lower-cost FinFet version that lowers wafer price for low- to mid- end smartphones and consumer. Broader 16nm will have a steep ramp from mid-3Q15, with ~40k WPM by end-2015 (capable of over 10% of sales) and 100k WPM by end-2016 (capable of 25-30% of sales). Our 2015 capex is US$11.4 bn vs US$11.5-12 bn previously to reflect tool re-use from 20nm to 16nm, with 10nm equipment for two new lines more in 2016 with 2Q16 move- in. We view TSMC share with Apple at 55% in 2H15 with some A9 for iPhone 6S, 4" iPhone, existing iPhone 6, iPad Mini refresh, iPad Pro and Apple TV, with full share in 2H16 for A10 for iPhone 7 using InFO packaging. ■ Near-term outlook mixed, but better catalysts into 2016. We maintain NEUTRAL at NT$145 TP and 2015E EPS (ex-ASML gain) at NT$12.15 vs street's NT$12.45, as sales flatten from high base into 2Q15 on mixed tech demand and indirect Samsung 14nm competition. We believe the stock may get more attractive into late year reacceleration into 2016, as TSMC’s situation on FinFet is strengthening as share with Apple expands with the A10 chipset and InFO packaging and some customers migrate to 16nm. Share price performance Financial and valuation metrics
Year 12/14A 12/15E 12/16E 12/17E Price (LHS) Rebased Rel (RHS) Revenue (NT$ mn) 762,806.4 911,380.2 1,003,291.3 1,096,403.7 160 120 EBITDA (NT$ mn) 494,669.3 590,653.4 667,879.5 741,857.7 140 110 EBIT (NT$ mn) 295,890.3 358,407.8 392,195.5 412,846.2 120 100 Net profit (NT$ mn) 263,703.2 315,026.4 344,687.9 362,817.0 100 90 EPS (CS adj.) (NT$) 10.17 12.15 13.29 13.99 80 80 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Change from previous EPS (%) n.a. 0 0 0 Consensus EPS (NT$) n.a. 12.4 12.9 13.9 The price relative chart measures performance against the EPS growth (%) 40.2 19.5 9.4 5.3 TAIWAN SE WEIGHTED INDEX, which closed at 9540.06 on P/E (x) 14.1 11.8 10.8 10.2 15/04/15. Dividend yield (%) 2.1 3.1 4.2 4.9 On 15/04/15, the spot exchange rate was NT$31.26/US$1. EV/EBITDA (x) 7.1 5.9 5.1 4.5 Performance over 1M 3M 12M P/B (x) 3.5 3.0 2.6 2.3 Absolute (%) -2.1 8.7 16.7 — ROE (%) 27.9 27.5 25.8 23.8
Relative (%) -2.3 4.7 9.7 — Net debt/equity (%) net cash net cash net cash net cash
Source: Company data, Credit Suisse estimates
Asia Semiconductor Sector 15 16 April 2015
Focus tables and charts: TSMC
Figure 37: CS 1Q15-3Q15 and 2015-16 estimates vs street 1Q15 2Q15 3Q15 2015 2016 (NT$ mn) CS Street Guidance CS Street CS Street CS Street CS Street Sales 222,034 222,231 NT$221-224bn 221,726 225,844 233,810 233,701 911,380 908,978 1,003,291 998,043 Chg (%) -0.2 -0.1 +/- 0.7% QoQ -0.1 1.6 5.5 3.5 19.5 19.7 10.1 9.8 GM (%) 49.7 49.7 48.5-50.5% 49.0 49.6 49.9 49.9 49.9 49.1 49.6 48.4 OpM (%) 39.7 39.2 38.5-40.5% 38.2 39.4 39.4 39.8 39.3 39.0 39.1 39.4 Net Inc. 79,503 78,144 FX NT$31.80 68,043 82,136 83,194 84,474 315,026 322,319 344,688 338,731 PF EPS (NT$) 3.07 3.02 2.62 3.17 3.21 3.26 12.15 12.43 13.29 13.12 GAAP EPS (NT$) 3.07 3.24 3.34 12.89 13.29 Source: the BLOOMBERG PROFESSIONAL™ service, Company data, Credit Suisse estimates Figure 38: TSMC Apple position bottoming around 55% before coming in with A10 + InFO in 2016 TSMC potential 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 2013 2014 2015 2016 Wafer demand (thousands) 147 120 114 206 151 131 131 226 162 134 135 225 584 587 639 656 Revenue per 12" wafer, US$ 8,400 8,190 7,985 7,786 7,591 7,401 8,141 7,938 7,739 7,546 9,300 9,021 5,662 8,061 7,788 8,461 Apple Processor Sales (US$ mn)$1,237 $980 $910 $1,606 $1,143 $972 $1,070 $1,791 $1,251 $1,014 $1,258 $2,027 $3,306 $4,734 $4,977 $5,549 TSMC share: 0% 20% 70% 80% 80% 80% 55% 55% 55% 70% 80% 85% 0% 45% 66% 74% TSMC Apple assumption: $0 $196 $637 $1,285 $914 $778 $589 $985 $688 $710 $1,006 $1,723 $0 $2,118 $3,266 $4,127 Apple % of TSMC 0.0% 3.2% 9.1% 17.8% 13.0% 11.0% 7.9% 13.2% 9.5% 9.2% 11.8% 20.2% 0.0% 8.4% 11.2% 12.9% Rest of TSMC $4,900 $5,880 $6,331 $5,943 $6,112 $6,306 $6,881 $6,485 $6,560 $7,042 $7,521 $6,804 $20,111 $23,054 $25,784 $27,927 QoQ / YoY -0.7% 20.0% 7.7% -6.1% 2.8% 3.2% 9.1% -5.8% 1.2% 7.4% 6.8% -9.5% 14.6% 11.8% 8.3% TSMC sales (US$ mn) $4,900 $6,076 $6,968 $7,228 $7,026 $7,084 $7,470 $7,470 $7,248 $7,752 $8,527 $8,527 $20,111 $25,173 $29,050 $32,054 QoQ / YoY -0.7% 24.0% 14.7% 3.7% -2.8% 0.8% 5.5% 0.0% -3.0% 6.9% 10.0% 0.0% 25.2% 15.4% 10.3% Source: the BLOOMBERG PROFESSIONAL™ service, Company data, Credit Suisse estimates Figure 39: Samsung internal silicon in GS6 has a US$1 bn Figure 40: TSMC's light 1Q15 sales was an anomaly—only TSMC impact missed midpoint 5 times over the past 53 quarters
8.0% 7.0% 6.0% GS6 In-House Silicon Units (mn) Foundry content US$mn Post Crisis Average: 5.0% 1.7% beat Application Processor 50 $12 $600 4.0% NFC 50 $1 $50 3.0% Baseband (70% share) 35 $8 $280 2.0% RF/Envelope (70% share) 35 $1 $35 1.0% Power mgmt (70% share) 35 $1 $35 0.0% -1.0% TSMC sales impact from Samsung using its own silicon: $1,000 -2.0% -3.0%
-4.0%
4Q08 1Q02 4Q02 3Q03 2Q04 1Q05 4Q05 3Q06 2Q07 1Q08 3Q09 2Q10 1Q11 4Q11 3Q12 2Q13 1Q14 4Q14
Sales difference Source: TEJ, Company data, Credit Suisse estimates Source: TEJ, Company data, Credit Suisse estimates
Figure 41: FCF yields set to rebound sharply Figure 42: Cash flows can support rising dividends Capex and FCF (NT$mn) FCF Yield (%) Dividend FCF and Dividends 600,000 8% Yield per Share 10.0% $10.00 500,000 6% 8.0% $8.00 400,000 6.0% $6.00 300,000 4% 4.0% $4.00 200,000 2% 2.0% $2.00 100,000 0.0% $0.00
0 0%
CY07 CY03 CY04 CY05 CY06 CY08 CY09 CY11 CY12 CY13
CY14E CY10A CY15E CY16E
CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13
CY15E CY14E
Operating cash flow Capital spending FCF Yield (%) Dividend Yield (%) (lhs) FCF / Share (rhs) Dividend / Share (rhs)
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Asia Semiconductor Sector 16 16 April 2015
Asia Pacific / Taiwan Semiconductor Devices
United Microelectronics
(2303.TW / 2303 TT) Rating NEUTRAL*
Price (15 Apr 15, NT$) 14.55 Target price (NT$) 18.00¹ Upside/downside (%) 23.7 1Q15 in-line; 28nm finally ramping well Mkt cap (NT$ mn) 185,298 (US$5,928mn) ■ 1Q15 sales in-line. UMC 1Q15 sales reached NT$39.7 bn, +1.2% QoQ, Enterprise value (NT$ mn) 144,576 Number of shares (mn) 12,735.23 near in-line with CS/Street at 1.4%/1.6% QoQ. The company had growth Free float (%) 89.9 from communications (wireless and wireline), while consumer and 52-week price range 16.5 - 12.0 computing stayed flattish. UMC is ramping up 28nm for key customers ADTO - 6M (US$ mn) 28.2 including SPRD, MediaTek, QCOM, BRCM, MRVL and Realtek. Foundry *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. GMs should also be in the mid-20% range. UMC is also narrowing new ¹Target price is for 12 months. business losses by 70% to NT$170 mn.
Research Analysts ■ 2Q15 growth driven by 28nm continuing to ramp. We estimate 2Q15 Randy Abrams, CFA sales to grow mid-single digits QoQ, driven by Communications (AP, BB, 886 2 2715 6366 [email protected] Wifi) and Consumer, with more products ramping on 28nm. 28nm Nickie Yue contributed high single digit sales in 1Q15 and the company targets to reach 886 2 2715 6364 15-20% of sales by 4Q15 on 28nm. It noted GMs have improved with better [email protected] yields (80%+ for HKMG and 90% for PolySion), but will still be a few points dilutive to the 12" average through 2015 (implying ramp to low 20% GMs). ■ UMC capex to regain its share on 28nm. UMC's 2015 capex is US$1.8 bn in 2015 and confirmed that its 28nm capacity is expanding from 12k to 20•21k WPM by 2Q15 and can expand capacity further to 30k WPM by late 2015/early 2016—enough to annualise 20% of sales (US$1.1 bn). UMC also recently broke ground on its China JV fab in Xiamen and expects 9 months to complete construction for tool move-in in April 2016 for initial 6K WPM on 40nm starting up by the end of 2016. ■ UMC’s 28nm ramp offsetting some broader sector headwinds. We keep 2015/16E EPS at NT$1.20/NT$1.28 vs street's NT$1.22/NT$1.28, reflecting the company’s ramp of 28nm, offsetting mixed consumer tech demand. Our target price of NT$18 is based on 1x P/B as its FCF is now slightly positive and earnings rebounding. While the positive trade could continue, we stay Neutral balancing rising competition, with TSMC battling Samsung and GlobalFoundries and SMIC also working to start 28nm production in 2H15, keeping ROEs in the single digits. Share price performance Financial and valuation metrics
Year 12/13A 12/14E 12/15E 12/16E Price (LHS) Rebased Rel (RHS) Revenue (NT$ mn) 123,811.6 140,011.8 157,717.3 166,631.4 18 140 EBITDA (NT$ mn) 42,464.4 50,732.6 62,517.7 66,791.9 16 120 EBIT (NT$ mn) 4,032.1 10,075.6 15,097.3 16,336.2 14 100 Net profit (NT$ mn) 12,630.2 12,140.8 14,954.6 15,977.1 12 EPS (CS adj.) (NT$) 1.01 0.97 1.20 1.28 10 80 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Change from previous EPS (%) n.a. 0 0 0 Consensus EPS (NT$) n.a. 0.96 1.22 1.28 EPS growth (%) 106.4 -3.8 23.0 6.8 The price relative chart measures performance against the P/E (x) 14.4 15.0 12.2 11.4 TAIWAN SE WEIGHTED INDEX which closed at 9540.06 on Dividend yield (%) 3.4 4.0 4.5 4.8 15/04/15 EV/EBITDA (x) 3.5 2.8 2.4 2.2 On 15/04/15 the spot exchange rate was NT$31.26/US$1 P/B (x) 0.86 0.81 0.78 0.76
Performance Over 1M 3M 12M ROE (%) 6.1 5.6 6.5 6.8 Net debt/equity (%) net cash net cash net cash net cash Absolute (%) -7.0 -3.3 12.4 —
Relative (%) -7.3 -7.4 5.4 — Source: Company data, Credit Suisse estimates
Asia Semiconductor Sector 17 16 April 2015
Focus tables and charts: UMC
Figure 43: Maintaining UMC estimates after in-line 1Q15 results, 2015/16 in-line with street NT$ 1Q15 2Q15 3Q15 2014 2015 2016 (mn) CS Street Guidance CS Street CS Street Actual Street CS Street CS Street Sales 37,758 37,742 Ship +2-3% 40,499 39,507 41,239 40,293 140,012 139,275 157,717 156,355 166,631 164,440 Chg (%) 1.4 5.2 ASPs +3% 7.3 4.6 1.8 2.0 13.1 20.4 12.6 12.3 5.7 5.2 GM (%) 25.0 23.9 Mid-20% F. GM 25.2 24.4 24.8 24.8 22.8 21.7 23.8 24.3 23.9 23.9 OpM (%) 10.4 9.3 90% Util. 11.4 10.0 11.0 10.5 7.2 6.5 9.6 9.9 9.8 10.5 Net Inc. 3,776 3,408 4,355 3,948 4,721 4,480 12,141 11,088 14,955 15,321 15,977 16,322 EPS 0.30 0.27 0.35 0.31 0.38 0.35 0.97 0.89 1.20 1.22 1.28 1.28 Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service consensus
Figure 44: UMC 28nm finally ramping Figure 45: 28nm ramp helps load the advanced capacity Wafer Sales (NT$) Revenue (US$mn) % from 40nm and below 2.5 years 2 years 2.5 years 3 years 4 years $1,000 50% 14,000 40% 12,000 $800 30% 10,000 $600 8,000 20% 6,000 $400 10% 4,000 0% $200 2,000 -10% -
$0 -20%
3Q09 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15
4Q11 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 0.25um 0.18um 0.13um 90nm 65nm and above 40nm 65nm 40nm 28nm 28nm 40nm and below as % of sales 40nm and below YoY growth Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 46: UMC staying near break-even FCF Figure 47: UMC revenue growth more moderate
Cash flow/Capex NT$mn FCF Yield (%) Revenue (US$mn) YoY Growth 80,000 25% 1,200 60% 60,000 20% 1,000 40% 15% 800 40,000 20% 10% 600 20,000 0% 5% 400 0 -20% 0% 200 -40% -20,000 -5% - -60%
-40,000 -10%
3Q13 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 1Q14 3Q14 1Q15 3Q15
2002 2007 2000 2001 2003 2004 2005 2006 2008 2009 2010 2011 2012
2013E 2014E 2015E Operating Cash Flow Capex FCF Yield UMC sales SMIC sales UMC YoY SMIC YoY TSMC YoY
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 48: UMC operating metrics NT$mn 1Q14 2Q14 3Q14 4Q14 1Q15E 2Q15E 3Q15E 4Q15E 2012 2013E 2014E 2015E 2016E Capacity (8" equivalent WPM) 1,563 1,597 1,586 1,577 1,583 1,668 1,680 1,680 5,513 6,106 6,322 6,612 7,145 Sequential change (%) 0% 2% -1% -1% 0% 5% 1% 0% 4% 11% 4% 5% 8% Shipment (8" equivalent WPM) 1,258 1,426 1,462 1,431 1,462 1,577 1,622 1,535 4,306 4,998 5,576 6,196 6,673 Sequential change (%) 2% 13% 3% -2% 2% 8% 3% -5% 2% 16% 12% 11% 8% Utilization rate (%) 80% 89% 92% 91% 92% 95% 96% 91% 78% 82% 88% 94% 93% ASP (US$) 749 758 761 758 779 776 778 760 833 783 757 773 764 Sequential change (%) -4% 1% 0% 0% 3% 0% 0% -2% -3% -6% -3% 2% -1% FX rate 30.5 30.1 30.1 30.6 31.4 31.4 31.4 31.4 29.6 29.9 30.3 31.4 31.4 Other Revenue 2,999 3,324 1,722 2,522 2,005 2,065 1,652 1,603 - 7,044 10,567 7,325 6,613 Total Revenue (NT$mn) 31,694 35,869 35,214 37,235 37,758 40,499 41,239 38,221 105,998 123,972 140,012 157,717 166,631 Revenue % of 90nm&below 58% 59% 60% 59% 63% 63% 67% 67% 59% 58% 65% 55% 0% Capex (US$mn) 206 262 427 530 447 510 494 350 1,718 1,101 1,425 1,800 1,800 Capex/revenue (%) 20% 22% 37% 44% 37% 40% 38% 29% 48% 27% 31% 36% 34% Revenue (NT$mn) 31,694 35,869 35,214 37,235 37,758 40,499 41,239 38,221 115,675 123,812 140,012 157,717 166,631 EPS (NT$) 0.09 0.28 0.23 0.36 0.30 0.35 0.38 0.17 0.49 1.01 0.97 1.20 1.28 Gross margin (%) 19% 23% 21% 27% 25% 25% 25% 20% 17% 19% 23% 24% 24% Operating margin (%) 3% 8% 5% 12% 10% 11% 11% 5% 1% 3% 7% 10% 10% Source: Company data, Credit Suisse estimates
Asia Semiconductor Sector 18 16 April 2015
Asia Pacific / China Semiconductor Equipment
Semiconductor Manufacturing
International Corp. (0981.HK / 981 HK) Rating OUTPERFORM* INCREASE TARGET PRICE Price (15 Apr 15, HK$) 0.87 Target price (HK$) (from 0.86) 1.00¹ Upside/downside (%) 14.9 Investing in 28nm for the next growth leg Mkt cap (HK$ mn) 31,259 (US$ 4,033) ■ Near-term on track. SMIC is on track to 1Q15 sales up low-mid single Enterprise value (US$ mn) 3,837 Number of shares (mn) 35,929.90 digits and 27-29% GMs with mild growth in 2Q15. Utilisation has increased Free float (%) 66.0 from 93% in 4Q14 to completely full on a wafer-in basis in 2Q15. The 52-week price range 0.93 - 0.60 company plans to ramp 28nm in Shanghai to 6k capacity on 28nm this year, ADTO - 6M (US$ mn) 25.0
*Stock ratings are relative to the coverage universe in each with the Beijing JV fab’s 10k WPM capacity either in 4Q15 or 1Q16. analyst's or each team's respective sector. ■ Some impacts in 2H15 from new 8”/28nm capacity. The company ¹Target price is for 12 months. maintains high GMs in 1H15 with 27-29% in 1Q15 and higher utilisation in Research Analysts 2Q15. 2H15 GMs will have some impact from: (1) Shanghai 28nm ramp at Randy Abrams, CFA lower yields, (2) Shenzhen 8” ramp and (3) Beijing start-up costs, so 886 2 2715 6366 [email protected] important to factor in but a signal of 28nm ramping up for further growth. Nickie Yue ■ 28nm to have a mild ramp, process improvement still on-going. SMIC 886 2 2715 6364 targets 28nm ramp-up with QCOM from 2Q15 starts and 3Q15 production [email protected] and other Chinese customers following on a couple quarters after. The company says it still needs to improve yields to get to mass production but would start from 6k WPM in Shanghai, which would contribute up to 10% of sales. Beijing would start after and ramp through 2016. ■ 8” nodes full with more specialty process. SMIC is growing volumes on fingerprint sensors, power management, BSI CMOS sensors, bank cards on 0.13um as the flash memory is more proven on 8”. 8” still has opportunity to replace 6”, but MEMs, sensors, analog and packaging can stay on 8” and capacity is tight due to limited supply of used equipment. ■ Raising TP to reflect China investment boost. We raise our target price from HK$0.86 to HK$1.00 based on 1.5x forward P/B, highs reached in 2010, 2011 and 2014 as the stock should remain a target for China investors as a beneficiary of China's support for its industry. The National Government fund took 11% equity stake in SMIC recently as a strategic investment to improve the ecosystem and earn a return on the equity. Funding is coming from: (1) R&D grants from the China 5-year plan, (2) National IC fund views that strengthening SMIC would help the ecosystem. Share price performance Financial and valuation metrics
Year 12/13A 12/14E 12/15E 12/16E Price (LHS) Rebased Rel (RHS) Revenue (US$ mn) 2,069.0 1,970.0 2,198.9 2,414.6 2 180 EBITDA (US$ mn) 672.5 679.7 738.0 903.7 1.5 EBIT (US$ mn) 125.6 130.2 170.4 221.9 1 130 Net profit (US$ mn) 111.5 140.5 175.2 220.2 0.5 EPS (CS adj.) (US$) 0.00 0.00 0.00 0.01 0 80 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Change from previous EPS (%) n.a. 0 0 0 Consensus EPS (US$) n.a. 0.000 0.000 0.010 EPS growth (%) 510.8 14.6 21.9 25.7 The price relative chart measures performance against the P/E (x) 32.8 28.6 23.5 18.7 MSCI CHINA F IDX which closed at 8387.27 on 15/04/15 Dividend yield (%) 0 0 0 0 On 15/04/15 the spot exchange rate was HK$7.75/US$1 EV/EBITDA (x) 6.5 5.6 5.8 4.8 P/B (x) 1.5 1.4 1.3 1.2
Performance Over 1M 3M 12M ROE (%) 4.7 5.2 5.7 6.7
Absolute (%) 26.1 20.8 45.0 — Net debt/equity (%) 12.4 net cash 5.9 6.6
Relative (%) 25.8 16.7 38.0 — Source: Company data, Credit Suisse estimates
Asia Semiconductor Sector 19 16 April 2015
Focus tables and charts: SMIC
Figure 49: SMIC CS 1Q15-3Q15 and 2015-16 estimate revisions vs Street 1Q15 2Q15 3Q15 2015 2016 (US$ mn) CS Street Guidance CS Street CS Street CS Street CS Street Net sales $505 $502 $496-510mn $546 $533 $573 $573 $2,199 $2,207 $2,415 $2,503 Change 4.0% -3.9% up 2-5% QoQ 8.0% 5.5% 5.0% 7.4% 11.6% 11.5% 9.8% 13.4% GM % 28.1% 27.8% 27-29% 29.0% 27.6% 27.9% 26.5% 28.0% 26.2% 28.0% 26.4% OpM % 5.6% 5.4% Opex $123-128mn 7.7% 6.2% 9.2% 8.3% 7.8% 6.9% 9.2% 8.5% Net income 31 27 43 36 54 48 175 170 220 215 EPS (US$) $0.001 $0.001 $0.001 $0.001 $0.001 $0.001 $0.005 $0.007 $0.006 $0.007 ADR EPS (US$) $0.04 $0.05 $0.06 $0.05 $0.07 $0.05 $0.24 $0.35 $0.30 $0.35 HK EPS (HK$) $0.007 $0.008 $0.009 $0.01 $0.011 $0.01 $0.037 $0.05 $0.047 $0.05 Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service consensus
Figure 50: SMIC still driven by Consumer and Comms Figure 51: 28nm starting to ramp in 2H15 if yields improve Revenue 100% (US$mn) 90% 300 80% 250 70% 60% 200 50% 150 40% 30% 100 20% 50 10% 0%
0
3Q10 4Q12 1Q10 2Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14
1Q15E 2Q15E 3Q15E 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E
1Q03 4Q03 3Q04 2Q05 1Q06 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11 1Q12 4Q12 3Q13 2Q14
4Q15E 1Q15E Computer Communication 28nm 40nm 65nm 90nm 0.13um Consumer Other/Industrial
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 52: SMIC target at 1.5x P/B, high-end of its range Figure 53: SMIC margins on a slowly improving trend (X) 0981.HK P/B Sales (US$) Utilization and Margins (%) $2,500 100% 1.4 $2,000 80% 1.2 $1,500 60% 1.0 0.8 $1,000 40% 0.6 $500 20% 0.4 $0 0%
0.2 -$500 -20%
- -$1,000 -40%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Jul-13 Jul-09 Jul-10 Jul-11 Jul-12 Jul-14
Apr-10 Oct-10 Oct-14 Apr-09 Oct-09 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Apr-15
Jan-12 Jan-10 Jan-11 Jan-13 Jan-14 Jan-15 Jan-09 Revenue Utilization GM % OpM % Forward PB Average +1std -1std +2std -2std
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 54: SMIC operating metrics 1Q14 2Q14 3Q14 4Q14 1Q15E 2Q15E 3Q15E 4Q15E 2013 2014E 2015E 2016E 2017E Capacity (8" equivalent) 731 743 743 743 749 803 803 818 2,726 2,958 3,174 3,698 4,061 Sequential Change (%) 4% 2% 0% 0% 1% 7% 0% 2% 13% 8% 7% 16% 10% Shipment (8" equivalent) 582 649 669 660 692 757 788 792 2,568 2,559 3,028 3,377 3,834 Sequential Change (%) -3% 12% 3% -1% 5% 9% 4% 1% 16% 0% 18% 12% 14% Utilization (Shipments/Capacity) 80% 87% 90% 89% 92% 94% 98% 97% 94% 87% 95% 91% 94% Logic ASP $724 $752 $738 $701 $695 $686 $693 $691 $760 $729 $691 $681 $667 Sequential Change (%) -5% 4% -2% -5% -1% -1% 1% 0% 5% -4% -5% -2% -2% Simple ASP (Revenue/Shipments) $776 $788 $780 $736 $730 $721 $728 $726 $760 $729 $691 $681 $667 Sequential Change (%) -5% 2% -1% -6% -1% -1% 1% 0% 5% -4% -5% -2% -2% Capex (US$mn) (Management) $108 $142 $282 $482 $375 $375 $375 $375 $770 $1,014 $1,500 $1,400 $1,500 Capex (US$mn) (Cash Flows) $119 $109 $212 $214 $375 $375 $375 $375 $650 $653 $1,500 $1,400 $1,500 Capex/revenue (%) 28% 22% 43% 46% 78% 72% 69% 69% 33% 35% 72% 61% 59% Revenue $451 $511 $522 $486 $505 $546 $573 $575 $2,069 $1,970 $2,199 $2,415 $2,686 EPS $0.03 $0.08 $0.06 $0.04 $0.04 $0.06 $0.07 $0.10 $0.16 $0.21 $0.27 $0.33 $0.37 Gross Margin (%) 21% 28% 26% 23% 28% 29% 28% 27% 21% 25% 28% 28% 28% Operating Margin (%) 7% 11% 8% 0% 6% 8% 9% 8% 6% 7% 8% 9% 9% Depreciation/Wafer $191 $164 $162 $167 $162 $153 $151 $154 Non Depreciation/Wafer $418 $401 $415 $398 $358 $355 $369 $372 Source: Company data, Credit Suisse estimates
Asia Semiconductor Sector 20 16 April 2015
Asia Pacific / Taiwan Semiconductor Devices
Vanguard International
Semiconductor (5347.TWO / 5347 TT) Rating NEUTRAL*
Price (15 Apr 15, NT$) 48.50 Target price (NT$) 56.00¹ Softer outlook as driver ICs built early in 1Q15 Upside/downside (%) 15.5 Mkt cap (NT$ mn) 79,414 (US$ 2,541) ■ 1Q15 reaches CS at the high-end of sales. 1Q15 sales were in-line at Enterprise value (NT$ mn) 79,414 NT$6.4 bn, -0.3% QoQ, above implied guidance for down 2-6% QoQ. Number of shares (mn) 1,637.41 Free float (%) 40.4 Vanguard had a rebound in power management following 4Q destocking 52-week price range 57.3 - 40.6 and saw small panel orders hold up on concerns about capacity tightness, ADTO - 6M (US$ mn) 10.1 but offset by weakness from large panel customers. We model GMs down *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. 90 bp to 34.1% due to Fab 3 maintenance costs and less favourable forex. ¹Target price is for 12 months. ■ 2Q15 outlook more conservative due to mixed demand and foundry
Research Analysts diversification. Vanguard is seeing less aggressive builds due to PC, TV Randy Abrams, CFA and smartphone demand. Power mgmt. is still growing but dampened a bit 886 2 2715 6366 from the original +30% YoY target. We trim 2Q15 sales from +8% QoQ to [email protected] +3.5% QoQ vs street +7.6% QoQ. Panel and driver IC makers (AUO, Nickie Yue 886 2 2715 6364 Novatek, Himax) have reported worse 1Q15 sales as panel demand has [email protected] been weak post CNY and some customers have diversified to other China and Korea foundries to offset Vanguard's tight supply and prioritisation on power mgmt. ICs over lower margin small panel driver ICs. We trim 2Q15 GMs from 35.9% to 34.1% on a slight bump in depreciation in 2Q and forex. ■ Steady capacity expansion still slated for 2015. Vanguard targets to grow capacity +17% YoY to 180k in 2015 as it expands the Fab 3 purchased from Nanya, with capacity +5% in 2Q15 to 177k. Fab 3 can expand from 27k to 35k by year end and eventually reach 45k. The company guided 2015 capex down 30% YoY to NT$2.2 bn, keeping depreciation manageable at NT$2.4 bn, +17% YoY but flat at 9% of sales. ■ Stock getting more reasonable as the market resets expectations. We maintain our TP at NT$56 based on 3.1x P/B, implying 14x forward EPS. We see better support for the stock as the market resets expectations. Beyond the near-term pause, the company's medium-term drivers remain intact from improving product mix, with ramp of power management and tight 8" industry supply on new IoT drivers and 6" to 8" migration for analog. The company's capex-light model also generates high free cash flow and rising 5%+ dividend yields. Share price performance Financial and valuation metrics
Year 12/13A 12/14E 12/15E 12/16E Price (LHS) Rebased Rel (RHS) Revenue (NT$ mn) 21,135.1 23,931.4 27,031.3 29,446.6 60 160 EBITDA (NT$ mn) 7,114.4 8,285.4 9,066.5 10,127.3 50 140 EBIT (NT$ mn) 4,837.2 6,204.4 6,673.1 7,631.0 40 120 Net profit (NT$ mn) 4,371.0 5,438.2 5,789.6 6,616.5 30 100 EPS (CS adj.) (NT$) 2.71 3.30 3.50 4.00 20 80 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Change from previous EPS (%) n.a. 0 0 0 Consensus EPS (NT$) n.a. 3.30 3.63 3.96 EPS growth (%) 83.6 21.5 6.1 14.3 The price relative chart measures performance against the P/E (x) 17.9 14.7 13.9 12.1 TAIWAN SE WEIGHTED INDEX which closed at 9540.06 on Dividend yield (%) 3.6 5.4 5.7 6.5 15/04/15. On 15/04/15 the spot exchange rate was EV/EBITDA (x) 11.2 9.6 8.8 7.8 NT$31.26/US$1 P/B (x) 3.2 2.9 2.8 2.6 Performance Over 1M 3M 12M ROE (%) 19.2 20.9 20.5 22.0 Absolute (%) -10.5 -8.1 15.3 — Net debt/equity (%) — — — —
Relative (%) -10.8 -12.2 8.3 — Source: Company data, Credit Suisse estimates
Asia Semiconductor Sector 21 16 April 2015
Focus tables and charts: Vanguard
Figure 55: Vanguard 1Q15-3Q15 and 2015-2016 CS estimates and revisions vs street 1Q15 2Q15 3Q15 2015 2016 (NT$ mn) CS Street Guidance CS Street CS Street CS Street CS Street Sales 6,398 6,237 Ship -1-3% 6,622 6,711 6,953 7,099 27,031 27,246 29,447 28,939 QoQ (%) -0.3% 0.8% ASPs -1-3% 3.5% 4.9% 5.0% 5.8% 13.0% 14.7% 8.9% 6.2% GM (%) 34.1% 34.1% 33-35% 34.1% 34.7% 35.3% 35.7% 34.7% 35.1% 35.6% 36.3% OpM (%) 23.7% 24.0% 23.7% 24.6% 25.2% 25.9% 24.7% 25.5% 25.9% 27.4% Net Inc: 1,319 1,321 1,366 1,412 1,522 1,602 5,790 6,034 6,616 6,759 EPS (NT$) 0.80 0.80 0.83 0.85 0.92 0.97 3.50 3.67 4.00 4.04 Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service
Figure 56: Power management a consistent growth driver Figure 57: GMs at higher levels post the Nanya buy Quarterly sales (NT$mn) Utilization (%) GM (%) $2,800 100% 50% $2,400 $2,000 80% 40%
$1,600 60% 30% $1,200 $800 40% 20% $400 20% 10% $0
0% 0%
1Q10 4Q12 3Q09 4Q09 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14
3Q15E 1Q15E 2Q15E 4Q15E
1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 3Q15E Driver IC (Large) Driver IC (Small) 1Q15E Analog+Power management Others Utilization GM %
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 58: 8" ASPs helped by better mix and tight supply Figure 59: Vanguard’s rising FCF is lifting the dividend Shipments (8" WPM) US$ ASP OP CF / Capex (NT$mn) Dividend / FCF Yield (%) 600 $720 12,000 20%
500 $660 10,000 15%
400 $600 8,000 10%
300 $540 6,000 5%
200 $480 4,000 0% 2,000 -5% 100 $420 0 -10%
0 $360
CY09 CY11 CY13 CY15 CY04 CY05 CY06 CY07 CY08 CY10 CY12 CY14
1Q10 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 3Q15E 1Q15E Op Cash Flow Capex FCF Yield Shipments ASPs (US$) Dividend Yield Linear (FCF Yield)
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 60: Vanguard operating metrics 1Q14 2Q14 3Q14 4Q14 1Q15E 2Q15E 3Q15E 4Q15E 2011 2012 2013E 2014E 2015E 2016E Capacity (8" equivalent) 411 444 483 498 507 531 543 543 1,551 1,686 1,626 1,836 2,124 2,217 Sequential Change 1% 8% 9% 3% 2% 5% 2% 0% 11% 9% -4% 13% 16% 4% Shipment (8" equivalent) 428 449 479 488 481 504 529 536 1,156 1,328 1,632 1,844 2,050 2,247 Sequential Change 4% 5% 7% 2% -2% 5% 5% 1% 0% 15% 23% 13% 11% 10% Utilization rate 104% 101% 99% 98% 95% 95% 97% 99% 75% 79% 100% 100% 96% 101% ASP $427 $434 $432 $430 $423 $421 $421 $422 $448 $437 $436 $431 $422 $420 Sequential Change -4% 2% -1% 0% -2% 0% 0% 0% 2% -2% 0% -1% -2% 0% Wafer Revenue (US$mn) 183 195 207 210 203 212 223 226 518 580 711 794 864 944 FX rate 30.1 29.9 29.9 30.6 31.5 31.2 31.2 31.2 31.0 29.6 29.7 30.1 31.3 31.2 Other Revenue ------Total Revenue (NT$mn) 5,507 5,822 6,185 6,418 6,398 6,622 6,953 7,058 15,191 17,174 21,134 23,932 27,031 29,447 Capex (US$mn) $15 $12 $58 $18 $17 $18 $18 $18 $90 $46 $32 $103 $70 $71 Capex/revenue 8% 6% 28% 9% 9% 8% 8% 8% 18% 8% 5% 13% 8% 7%
Revenue 5,507 5,822 6,185 6,418 6,398 6,622 6,953 7,058 15,190 17,175 21,135 23,931 27,031 29,447 EPS 0.82 0.80 0.80 0.88 0.80 0.83 0.92 0.96 0.53 1.48 2.71 3.30 3.50 4.00 Gross Margin 37.3% 37.9% 34.1% 35.0% 34.1% 34.1% 35.3% 35.4% 14.8% 23.7% 32.5% 36.0% 34.7% 35.6% Operating Margin 27% 28% 24% 25% 24% 24% 25% 26% 6% 14% 23% 26% 25% 26% Source: Company data, Credit Suisse estimates
Asia Semiconductor Sector 22 16 April 2015
Asia Pacific / China Semiconductor Devices
Hua Hong Semiconductor
Limited (1347.HK / 1347 HK) Rating OUTPERFORM* [V]
Price (15 Apr 15, HK$) 11.60 Target price (HK$) 14.00¹ Outlook intact at still reasonable valuation Upside/downside (%) 20.7 Mkt cap (HK$ mn) 11,993 (US$1,547 mn) ■ 1Q15 flat for sales and margins. Hua Hong guided sales and GMs flat Enterprise value (US$ mn) 1,046 Number of shares (mn) 1,033.87 QoQ as embedded flash and discrete orders held up through the low season Free float (%) 25.0 on tight capacity and still good demand, keeping utilisation near full. We 52-week price range 11.60 - 7.77 estimate sales at $167 mn, GMs at 29% and net income of $19.8 mn, driving ADTO - 6M (US$ mn) 2.6
*Stock ratings are relative to the coverage universe in each HK$0.14 EPS. analyst's or each team's respective sector. ¹Target price is for 12 months. ■ 2Q15 mild growth due to still some supply constraints. We model 6% [V] = Stock considered volatile (see Disclosure Appendix). QoQ in 2Q15 on more working days and less maintenance, with GMs up
Research Analysts slightly to 29.7% on higher utilisation. Mix should continue to improve toward Randy Abrams, CFA eNVM (43% of sales) and 0.13 micron (42% of sales). The company expects 886 2 2715 6366 revenue from 110nm embedded flash with RF for MCU and the IoT market [email protected] in 1H15 and 90nm for smart cards and consumer products in 2H15. Nickie Yue 886 2 2715 6364 ■ Capex for further growth. The company guided $200 mn capex for 2015, [email protected] to grow capacity +8% YoY to 139k WPM in 2015 and a further +18% YoY to 164k WPM in 2016 for smart card, SIM card, MCU and analog and migrate more products to advanced 130/110/90nm. Depreciation is rising into the investment cycle, up from $80 mn in 2014 to $100 mn in 2015 and toward US$150 mn in 2016 or 2017. FCF is still pretty strong, with about US$170 mn in 2014, near break-even in 2015 during the peak investment year and back to US$150 mn by 2016 allowing potential for dividends long-term. ■ Valuation still reasonable post the rally. Hua Hong is trading at 1.04x B/V, reasonable against SMIC at 1.3x. We rate Hua Hong OUTPERFORM with HK$14 target price representing 1.2x P/B. Hua Hong offers investors an option on China growth through legacy 8" capacity that allows for steady growth and margins, positive long-term FCF allowing for dividend payout and less technology risk than 12". While ROE's are 7% on our baseline model, its target model at US$1 bn sales achieves 10% ROE.
Share price performance Financial and valuation metrics
Year 12/13A 12/14E 12/15E 12/16E Price (LHS) Rebased Rel (RHS) Revenue (US$ mn) 584.7 664.6 738.0 829.5 14 120 EBITDA (US$ mn) 135.9 174.4 218.6 280.8 12 100 EBIT (US$ mn) 48.4 91.6 109.1 123.0 10 80 Net profit (US$ mn) 61.8 93.0 95.4 106.4 8 EPS (CS adjusted) (US$) 0.08 0.11 0.09 0.10 6 60 Oct-14 Feb-15 Change from previous EPS (%) n.a. 0 0 0 Consensus EPS (US$) n.a. 0.12 0.10 0.12 The price relative chart measures performance against the EPS growth (%) 8.1 41.8 -18.4 10.6 MSCI CHINA F IDX which closed at 8387.27 on 15/04/15 P/E (x) 19.5 13.7 16.8 15.2 On 15/04/15 the spot exchange rate was HK$7.75/US$1 Dividend yield (%) 0 0 0 0
EV/EBITDA (x) 10.4 6.0 6.4 4.5 Performance over 1M 3M 12M P/B (x) 1.1 0.9 1.0 1.0 Absolute (%) 40.9 18.4 — — ROE (%) 6.1 7.4 6.3 6.6
Relative (%) 40.7 14.3 — — Net debt/equity (%) 4.7 net cash net cash net cash
Source: Company data, Credit Suisse estimates
Asia Semiconductor Sector 23 16 April 2015
Focus tables and charts: Hua Hong Semiconductor
Figure 61: Hua Hong Semiconductor—overview of its fabs and key products 8" WPM capacity (000) Sep-14 2014E 2015E 2016E 2017E CAGR ('11-17) Start: Applications Fab 1 - 0.13um and above 50.0 50.0 57.0 62.0 65.0 4.5% 1999 Smart cards, analog, PMIC, Power discretes, Sensors Fab 2 - 0.35um and above 39.0 39.0 42.0 45.0 50.0 7.7% 2007 Power discretes Fab 3 - 90nm and above 40.0 40.0 40.0 57.0 60.0 8.4% 2003 MCUs, smart cards, MP3, BT, FM, USB, PC peripherals, Sensors WPM capacity 129.0 129.0 139.0 164.0 175.0 6.6% YoY Growth 4.0% 7.8% 18.0% 6.7% Reported Utilization 96.1% Source: Company data, Credit Suisse
Figure 62: Internet of Things Silicon seeing high growth Figure 63: Hua Hong's valuation at a discount to its peers Sales (US$) YoY (%) Price Mkt Cap P/E Multiple (x) P/B Multiple (x) ROE (%) Trough/Peak (EV/Sales) $45,000 45% Company Ticker 4/14/2015 (US$mn) 2013 2014 2015 2013 2014 2015 2013 2014 2015 $40,000 40% Select foundry peers $35,000 35% Hua Hong 1347.HK $11.50 $1,265 19.3 15.5 17.3 1.1 0.8 1.0 5.9 5.5 5.7 $30,000 30% SMIC 0981.HK $0.92 $4,265 34.7 30.3 24.9 1.6 1.4 1.4 4.5 4.8 5.6 $25,000 25% Vanguard 5347.TWO $51.00 $2,673 18.8 15.5 14.6 3.4 3.1 2.9 17.9 19.8 19.9 $20,000 20% UMC 2303.TW $15.10 $6,156 15.0 15.5 12.6 0.9 0.8 0.8 5.9 5.4 6.4 $15,000 15% Peer Mean 21.9 19.2 17.3 1.7 1.5 1.5 8.5 8.8 9.4 $10,000 10% $5,000 5% Other upstream peers $0 0% TSMC 2330.TW $144.00 $119,529 19.8 14.2 11.9 4.4 3.6 3.0 22.2 25.2 25.3
ASE 2311.TW 43.15 10,807 21.2 14.6 13.1 2.7 2.3 2.2 12.8 15.7 16.6 2014
2013 SPIL 2325.TW 52.1 5,197 23.9 13.9 12.7 2.6 2.3 2.2 12.3 16.3 16.9
2016E 2017E 2018E 2019E 2020E 2015E ASSP / FPGA Microcontroller Sensors Bluetooth Cellular Wi-Fi ZigBee Other Wireless Wireline YoY Growth Source: Gartner Source: Company Data, Credit Suisse Estimates
Figure 64: 8" wafer capacity growth staying modest Figure 65: Hua Hong mix shifting to eNVM (embedded flash) 8" Capacity (K) YoY (%) 20,000 80% Revenue by node (US$K) Mar-15E Dec-14 QoQ % of sales Mar-15E Dec-13 YoY 0.13um and below $69.3 $67.6 2.5% 42% $69.3 $55.6 24.7% 16,000 60% 0.15um/0.18um $31.3 $30.7 1.9% 19% $31.3 $34.9 -10.3% 0.25um $3.3 $1.0 234.3% 2% $3.3 $1.6 109.8% 0.35um and above $62.7 $66.8 -6.2% 38% $62.7 $52.3 19.9% 12,000 40% Total $166.6 $166.1 0.3% 100% $166.6 $144.4 15.4% Revenue by technology (US$K) Mar-15E Dec-14 QoQ % of sales Mar-15E Dec-13 YoY eNVM $71.5 $70.6 1.2% 43% $71.5 $56.3 27.0% 8,000 20% Logic & RF $20.9 $20.8 0.8% 13% $20.9 $31.2 -32.9% Discrete $32.2 $32.1 0.3% 19% $32.2 $24.8 29.5% 4,000 0% Analog & PM $24.6 $24.4 0.6% 15% $24.6 $16.5 49.3% Standalone NVM $14.8 $15.6 -5.0% 9% $14.8 $14.0 5.9% Others $2.6 $2.7 -0.3% 2% $2.6 $1.6 66.8%
- -20% Total $166.6 $166.1 0.3% 100% $166.6 $144.4 15.4%
1997 1995 1996 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
2014E 2015E TSMC UMC SMIC GlobalFoundries Vanguard Hua Hong Semi Samsung YoY (%) Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 66: Hua Hong historical sales and margins Figure 67: Hua Hong CS1Q15-2Q15 estimates Sales (US$) Utilization and Margins (%) Huahong Semi Mar-15E Jun-15E 2013 2014 2015E 2016E $275 100% CS Guidance CS Actual Actual CS CS $250 90% Revenue $166.6 Flat QoQ $177.0 $584.7 $664.6 $738.0 $829.5 $225 80% % Q/Q chng 0.3% 6.3% $200 70% % Y/Y chng 12.9% 0.1% 2.3% 13.7% 11.1% 12.4% $175 60% $150 Gross Margin 29.1% Flat QoQ 29.7% 21.5% 29.6% 29.6% 28.3% 50% $125 Op. Expenses $26.5 $27.1 $77.1 $105.4 $109.1 $111.8 40% $100 Op Margin 13.3% 14.4% 8.3% 13.8% 14.8% 14.8% $75 30% $50 20% Operating Income $22.1 $25.4 $48.4 $91.6 $109.1 $123.0 $25 10% Pretax Margin 15.2% 16.2% 12.1% 18.2% 16.6% 16.4% $0 0% Net Income $19.8 $22.4 $61.8 $93.0 $95.4 $106.4 Net Margin 11.9% 12.7% 10.6% 14.0% 12.9% 12.8%
Jun-14 GAAP EPS (US$) $0.02 $0.02 $0.08 $0.11 $0.09 $0.10
Mar-14
Dec-14
Sep-14
Jun-15E Jun-16E Jun-17E
Mar-17E Mar-15E Mar-16E
Sep-15E Dec-15E Sep-16E Dec-16E Sep-17E Dec-17E
2011 Avg 2011 Avg 2013 2012 Avg 2012 GAAP EPS (HK$) $0.14 $0.16 $0.60 $0.84 $0.69 $0.76 Revenue Utilization GM % OpM % Diluted shares 1,069.8 1,072.0 805.2 853.2 1,073.0 1,081.6 ROE (%) 5.9% 6.3% 6.1% 6.4% Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Asia Semiconductor Sector 24 16 April 2015
Asia Pacific / Taiwan Semiconductor Devices
Advanced Semicon. Engr.
(2311.TW / 2311 TT) Rating OUTPERFORM*
Price (15 Apr 15, NT$) 42.00 Target price (NT$) 47.00¹ Upside/downside (%) 11.9 Business on track, with more SiP in 2H15 Mkt cap (NT$ mn) 328,617 (US$ 10,514) ■ IC back-end in-line; USI better. IC ATM 1Q15 sales reached NT$38.6 bn, Enterprise value (NT$ mn) 366,953 Number of shares (mn) 7,824.22 -12%, in-line with CS and guidance for down 10-15% QoQ. ASE noted better Free float (%) 70.5 1Q15 sales were mainly driven by a mild inventory restocking, though still 52-week price range 47.8 - 33.5 saw decline across communications, computing, and consumer. USI only ADTO - 6M (US$ mn) 36.7 declined 20.5% QoQ vs guidance -25% QoQ. Consolidated sales were *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. NT$64.7 bn, -15.6% QoQ, between CS -17% QoQ and street -15% QoQ. ¹Target price is for 12 months. ■ 1Q15 margins should track in-line. ASE guided capacity and blended Research Analysts ASPs flat and IC ATM utilisation down 10-15% QoQ. Consolidated margins Randy Abrams, CFA were guided back to 1Q14 levels, implying 19% GMs and 9.3% OpM on the 886 2 2715 6366 [email protected] drop in SiP plus costs flowing in ahead of the smartwatch ramp-up. Nickie Yue ■ 2Q15 will still be seasonally up. The company noted its Korean OEM 886 2 2715 6364 [email protected] customer has been stronger recently and expects some more restocking from its Chinese OEM customers in 2Q15, while 2H15 should be mainly
driven by US customers. ASE sees stable business to continue through May and noted that 2Q IC ATM is normally up double digits. We estimate 2Q15 IC ATM +10% QoQ and USI +15% QoQ, taking consolidated up 14% QoQ. ■ Apple Watch a key project, but additional ones for 2H15. The watch supply chain is building about 2mn/month despite assembly units closer to 1 mn/month. Component expectations now range from as low as 12-15 mn to 20 mn units. Supplementing this project, ASE still expects more than one additional SiP project for 2H15 potentially expanding to camera and communications boards. For ASE, the project is key to driving SiP from 18% of 4Q14 to 28% of 2015. ASE expects to keep consolidating OpM similar to 2014’s 11.5% even with the SiP margin only ramping in-line with USI. ■ Maintain OUTPERFORM. ASE has momentum from SiP projects, including Wi-Fi modules, fingerprint, watch motherboard and more ramping up in 2H15. Factoring in the value of ASE's 82% stake in USI Shanghai (US$5.5 bn), the IC ATM valuation is attractive at only 8.3x 2015E P/E and 3.8x EV/EBITDA. Our TP of NT$47 is based on 2.4x forward P/B and 15x P/E. Share price performance Financial and valuation metrics
Year 12/13A 12/14E 12/15E 12/16E Price (LHS) Rebased Rel (RHS) Revenue (NT$ mn) 219,862.0 256,591.0 303,285.7 331,731.2 60 160 EBITDA (NT$ mn) 46,295.2 54,953.7 62,908.9 66,673.1 50 140 EBIT (NT$ mn) 22,042.0 29,571.0 34,713.4 37,672.8 40 120 Net profit (NT$ mn) 15,689.0 23,593.0 27,039.8 29,483.8 30 100 EPS (CS adj.) (NT$) 2.03 2.95 3.30 3.60 20 80 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Change from previous EPS (%) n.a. 0 0 0 Consensus EPS (NT$) n.a. 2.95 3.32 3.70 The price relative chart measures performance against the EPS growth (%) 16.7 45.0 11.9 9.0 TAIWAN SE WEIGHTED INDEX which closed at 9540.06 on P/E (x) 20.7 14.2 12.7 11.7 15/04/15On 15/04/15 the spot exchange rate was Dividend yield (%) 2.4 3.0 4.2 5.1 NT$31.26/US$1
EV/EBITDA (x) 8.2 6.7 5.7 5.4 Performance Over 1M 3M 12M P/B (x) 2.6 2.2 2.1 2.0 Absolute (%) -4.3 11.4 25.4 — ROE (%) 13.5 17.3 17.3 17.5
Net debt/equity (%) 40.5 24.2 16.2 15.4 Relative (%) -4.6 7.3 18.4 — Source: Company data, Credit Suisse estimates
Asia Semiconductor Sector 25 16 April 2015
Focus tables and charts: ASE
Figure 68: ASE CS 4Q14-2Q15 estimate revisions vs Street 1Q15 2Q15 2015 2016 ATM USI CS Street Guidance ATM USI CS Street ATM USI CS Street ATM USI CS Street Sales 38,618 27,171 63,289 65,064 Down 10-15% QoQ 42,480 31,246 72,226 70,180 172,004 142,782 303,286 300,653 184,004 158,727 331,731 342,211 Chg (%) -12.0 -27.0 -17.4 -15.1 UT -10-15% 10.0 15.0 14.1 7.9 7.7 34.9 18.2 17.2 7.0 11.2 9.4 13.8 GM (%) 25.1 8.5 18.9 18.8 ~19% 28.1 8.9 20.3 20.4 27.8 8.8 19.9 20.1 27.9 8.6 19.6 19.7 OpM (%) 12.9 2.8 9.1 9.4 ~9.3% 16.9 3.7 11.6 11.2 16.8 4.1 11.4 11.2 16.9 4.1 11.4 11.2 Net Inc. 4,341 673 4,341 4,772 6,497 1,006 6,497 6,198 27,040 5,035 27,040 26,628 29,484 5,522 29,484 29,972 EPS (NT$) 0.53 0.08 0.53 0.60 0.79 0.12 0.79 0.77 3.30 0.61 3.30 3.33 3.60 0.67 3.60 3.70 Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service consensus
Figure 69: SiP ramping up to 20% of consolidated sales in 2015 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 2012 2013 2014 2015 2016 Wifi Module Sales (US$) $58 $47 $98 $282 $67 $54 $107 $271 Wifi Module Sales (US$) $389 $424 $485 $499 $503 WiFi Module % of USI Sales 8.2% 6.8% 11.0% 23.3% 7.8% 5.4% 9.0% 18.2% WiFi Module % of USI Sales 18.2% 16.0% 13.9% 11.0% 10.0% Fingerprint Module Sales (US$ mn) $130 $127 $238 $449 $248 $308 $309 $509 Fingerprint Module Sales (US$ mn) $0 $318 $944 $1,374 $1,385 Watch Module Sales (US$mn) $0 $0 $0 $0 $42 $165 $254 $285 Watch Module Sales (US$mn) $0 $0 $0 $745 $1,112 Total SiP Sales (US$mn) $130 $127 $238 $449 $290 $472 $563 $794 Total SiP Sales (US$mn) $0 $318 $944 $2,119 $2,497 NT$ $30.2 $30.1 $30.1 $30.7 $31.7 $31.5 $31.5 $31.5 NT$ $29.4 $29.6 $30.3 $31.6 $31.5 SiP Sales (NT$mn) $3,928 $3,813 $7,176 $13,768 $9,204 $14,882 $17,733 $25,000 SiP Sales (NT$mn) $0 $9,409 $28,684 $66,819 $78,656 Consolidated Sales (NT$) $54,700 $58,615 $66,632 $76,644 $63,289 $72,226 $80,449 $87,323 Consolidated Sales (NT$) $193,972 $219,862 $256,591 $303,286 $331,731 SiP % of Consolidated sales 7.2% 6.5% 10.8% 18.0% 14.5% 20.6% 22.0% 28.6% SiP % of Consolidated sales 0.0% 4.3% 11.2% 22.0% 23.7% SiP % of USI Sales 18.4% 18.6% 26.8% 37.0% 33.9% 47.6% 47.3% 53.3% SiP % of USI Sales 0.0% 12.0% 27.1% 46.8% 49.6% SiP % of ATM Sales 3.0% 3.0% 5.6% 12.0% 6.5% 3.5% 5.5% 11.0% SiP % of ATM Sales 0.0% 1.9% 6.1% 6.7% 6.0% Source: Company data, Credit Suisse estimates
Figure 70: ASE margins back near pre-crisis levels Figure 71: ASE FCF has improved the past couple years Utilization % GM% Capex (US$ mn) FCF (US$mn) 100% 35% $2,000 1,200
90% 30% $1,750 1,000 $1,500 800 80% 25% $1,250 600 70% 20% $1,000 400 $750 200 60% 15% $500 - 50% 10% $250 -200
40% 5% $0 -400
2004 1997 1998 1999 2000 2001 2002 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013
1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15
2014E 2015E Assembly utilization Gross margin Operating CF Capex FCF
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 72: ASE operating metrics NT$ mn 1Q14 2Q14 3Q14E 4Q14E 1Q15E 2Q15E 3Q15E 4Q15E 2011 2012 2013 2014E 2015E 2016E 2017E Revenue 34,351 39,266 42,211 43,884 38,618 42,480 45,453 45,453 127,623 130,007 143,322 159,712 172,004 184,004 198,173 QoQ/YoY % -9% 14% 8% 4% -12% 10% 7% 0% 2% 2% 10% 11% 8% 7% 8% Gross profit 8,243 10,588 12,073 13,754 9,684 11,917 13,267 13,019 28,737 28,664 35,037 44,658 47,887 51,306 55,471 Gross Margin 24.0% 27.0% 28.6% 31.3% 25.1% 28.1% 29.2% 28.6% 22.5% 22.0% 24.4% 28.0% 27.8% 27.9% 28.0% Operating profit 4,210 5,973 7,348 8,905 4,981 7,191 8,456 8,184 15,326 14,363 19,009 26,436 28,812 31,184 33,881 Operating Margin 12.3% 15.2% 17.4% 20.3% 12.9% 16.9% 18.6% 18.0% 12.0% 11.0% 13.3% 16.6% 16.8% 16.9% 17.1% Capacity (000 bonders) Wirebonder 15,375 15,762 15,994 15,792 15,803 15,963 16,423 16,482 13,846 15,549 15,692 15,792 16,482 17,778 18,647 Tester 3,265 3,354 3,295 3,267 3,297 3,377 3,457 3,487 2,585 2,905 3,227 3,267 3,487 3,847 4,402 Copper % of wirebond 65.0% 66.0% 68.0% 66.0% 66.0% 66.0% 66.0% 66.0% 31.8% 57.4% 63.1% 81.4% 85.1% 85.9% 88.5% Capex (US$mn) 117 360 430 148 176 250 310 165 789 1,075 668 1,055 900 1,050 1,150 Capex/Sales 10.3% 27.6% 30.7% 10.3% 14.4% 18.5% 21.4% 11.4% 18.1% 24.3% 13.8% 19.6% 15.5% 16.9% 17.2% Depreciation (US$mn) 193 195 201 210 210 207 215 223 692 705 779 799 856 883 884 Depr/Sales 17.0% 15.0% 14.3% 14.7% 17.3% 15.3% 14.9% 15.5% 15.9% 15.9% 16.1% 57.9% -14.7% 16.7% 9.5% Utilization Packaging 81% 85% 85% 78% 68% 74% 75% 71% 86% 80% 80% 82% 72% 73% 74% Testing 71% 79% 82% 74% 62% 68% 71% 71% 80% 80% 79% 77% 68% 70% 69% IDM % of mix 36% 37% 33% 31% 32% 32% 33% 33% 36% 34% 34% 34% 32% 34% 36% Flip chip % of mix 27% 26% 29% 30% 29% 30% 32% 35% 19% 24% 29% 28% 32% 33% 35% Source: Company data, Credit Suisse estimates
Asia Semiconductor Sector 26 16 April 2015
Asia Pacific / Taiwan Semiconductor Devices
Siliconware Precision
(2325.TW / 2325 TT) Rating OUTPERFORM*
Price (15 Apr 15, NT$) 49.95 Target price (NT$) 60.00¹ Upside/downside (%) 20.1 Solid margins – but growth moderates toward Mkt cap (NT$ mn) 155,662 (US$4,980 mn) Enterprise value (NT$ mn) 159,837 2H Number of shares (mn) 3,116.36 ■ 1Q15 sales above the midpoint. SPIL 1Q15 sales came in at NT$20.8 bn, - Free float (%) 90.6 2.9% QoQ, vs CS -3.8% QoQ, slightly above midpoint of guidance for down 52-week price range 56.2 - 39.0 ADTO - 6M (US$ mn) 19.8 1-7% QoQ. We expect margins to be in-line with guidance for GMs 24-26%
*Stock ratings are relative to the coverage universe in each and OP at 14-16%. The company believes flip chip utilisation is improving analyst's or each team's respective sector. ¹Target price is for 12 months. and bumping capacity is tight due to China, the US and Taiwan baseband growth for bump and flip chip. Research Analysts ■ 2Q15 estimated up 9% QoQ. We model 2Q15 sales up 9% off the slightly Randy Abrams, CFA 886 2 2715 6366 higher 1Q15 base though could see some modest revisions to that outlook [email protected] due to the weakness in China smartphones. Back-end units still track closer Nickie Yue to fabless sales which should still post mild growth. Margins should expand 886 2 2715 6364 as the company has a 45% GM leverage with each incremental 1% gain on [email protected] sales. The company views demand as solid with utilisation at high levels to
keep pricing stable and in line with cost down activity. Margins are 30%+ on advanced capacity so is giving a lift as advanced capacity runs faster. ■ Capex unchanged. The company’s capex plan remains at NT$14.5 bn (vs NT$19.5 bn in 2014 or NT$15 bn ex-Promos) will have 80% for 8/12” bumping, FC CSP, WL CSP and high-end testing to grow capacity 20-30% on advanced capacity. The company is adding a flip chip line in Suzhou this year and will add bumping next year. The company’s new facility purchased from Promos will be for advanced capacity development, including bumping, WL CSP, testing and potentially 2.5D/3D packaging in the future. The flip chip will still stay outside in Taichung. ■ Monitor a moderation into 2H15. We maintain our NT$60 target price (at that level a 5% cash yield, 2.5x P/B and 14.6x 2015 P/E). The stock is still reasonable at 13x 2015 EPS, 7.5% cash yield and 6% dividend yield based on NT$3.00 cash payout this year. We view the company supported on ramp of LTE smartphones and 2nd wave of China telecom infrastructure, seasonal pick-up across consumer and ramp of TV controllers and game console. We would monitor 2H slowdown risk as the company is more leveraged to China and consumer products that ramp. Share price performance Financial and valuation metrics
Year 12/13A 12/14E 12/15E 12/16E Price (LHS) Rebased Rel (RHS) Revenue (NT$ mn) 69,356.2 83,071.4 90,918.9 97,865.2 60 160 EBITDA (NT$ mn) 18,970.0 26,243.7 29,587.8 31,663.3 50 140 EBIT (NT$ mn) 7,936.3 13,807.9 15,212.5 16,739.0 40 120 Net profit (NT$ mn) 7,684.3 11,731.2 12,803.1 14,051.5 30 100 EPS (CS adj.) (NT$) 2.18 3.74 4.10 4.50 20 80 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Change from previous EPS (%) n.a. 0 0 0 Consensus EPS (NT$) n.a. 3.74 4.17 4.53 The price relative chart measures performance against the EPS growth (%) 19.8 71.6 9.8 9.8 TAIWAN SE WEIGHTED INDEX which closed at 9540.06 on P/E (x) 22.9 13.4 12.2 11.1 15/04/15 Dividend yield (%) 3.3 6.6 6.0 7.2 On 15/04/15 the spot exchange rate was NT$31.26/US$1 EV/EBITDA (x) 8.4 6.1 5.4 5.0
Performance over 1M 3M 12M P/B (x) 2.5 2.2 2.1 2.0 Absolute (%) -8.7 4.1 18.1 — ROE (%) 12.6 17.4 17.3 18.3
Relative (%) -29.3 -15.9 -19.7 — Net debt/equity (%) 6.5 5.8 3.9 2.4
Source: Company data, Credit Suisse estimates Asia Semiconductor Sector 27 16 April 2015
Focus tables and charts: SPIL
Figure 73: SPIL 4Q14-2Q15 CS estimates vs street 1Q15 2Q15 3Q15 2015 2016 (NT$ mn) CS Street Guidance CS Street CS Street CS Street CS Street Net sales 20,617 20,774 NT$20.0-21.2bn 22,678 22,959 23,812 24,431 90,919 91,207 97,865 98,156 QoQ (%) -3.8% -3.1% -1 to -7% QoQ 10.0% 10.5% 5.0% 6.4% 9.4% 10.7% 7.6% 7.6% GM (%) 25.0% 25.3% 24-26% 26.4% 26.3% 26.7% 26.8% 25.9% 26.1% 26.0% 26.1% OpM (%) 15.0% 15.8% 14-16% 16.8% 17.2% 18.0% 18.1% 16.7% 16.9% 17.1% 17.0% Net income 2,612 2,747 3,202 3,335 3,603 3,753 12,803 13,021 14,052 14,102 EPS (NT$) 0.84 0.88 1.03 1.06 1.16 1.19 4.10 4.17 4.50 4.50 Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service consensus
Figure 74: SPIL margins still on a rebounding trend Figure 75: Emerging market LTE a driver in 2015 Utilization % Gross margin NT$mn 105% 35% 14,000
95% 30% 12,000
85% 25% 10,000
75% 20% 8,000
65% 15% 6,000
55% 10% 4,000
45% 5% 2,000
35% 0% -
1Q05 3Q07 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 3Q05 1Q06 3Q06 1Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14
2Q00 3Q08 1Q01 4Q01 3Q02 2Q03 1Q04 4Q04 3Q05 2Q06 1Q07 4Q07 2Q09 1Q10 4Q10 3Q11 2Q12 1Q13 4Q13 3Q14 2Q15 Computing Communication Consumer Memory Assembly utilization Gross margin Linear (Test utilization) Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 76: Expect SPIL capex/sales to drop in 2015 Figure 77: SPIL FCF set to rebound in 2015 NT$ mn Capex / Sales Capex (US$ FCF (US$mn) (%) mn) $25,000 40 $1,000 500
$20,000 32 $800 380
$15,000 24 $600 260 $10,000 16 $400 140 $5,000 8 $200 20 $0 0
$0 -100
2004 2000 2001 2002 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
2015E
2013 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2014 SPIL Capex Capex / Revenue % Depreciation / Revenue % 2015E Operating CF Capex FCF Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 78: SPIL operating metrics NT$ mn 1Q14 2Q14 3Q14 4Q14 1Q15E 2Q15E 3Q15E 4Q15E 2011 2012 2013 2014 2015E 2016E Revenue 18,060 21,928 21,652 21,431 20,617 22,678 23,812 23,812 61,237 64,655 69,356 83,071 90,919 97,865 QoQ/YoY % -4% 21% -1% -1% -4% 10% 5% 0% -4% 6% 7% 20% 9% 8% Gross profit 3,993 5,667 5,549 5,773 5,163 5,976 6,364 6,088 9,490 11,777 14,429 20,981 23,591 25,493 Gross Margin 22.1% 25.8% 25.6% 26.9% 25.0% 26.4% 26.7% 25.6% 15.5% 18.2% 20.8% 25.3% 25.9% 26.0% Operating profit 2,392 3,939 3,624 3,853 3,083 3,806 4,295 4,029 5,090 6,446 7,937 13,808 15,212 16,739 Operating Margin 13.2% 18.0% 16.7% 18.0% 15.0% 16.8% 18.0% 16.9% 8.3% 10.0% 11.4% 16.6% 16.7% 17.1% Capacity (0000 bonders) Wirebonders 7,544 7,432 7,390 7,384 7,372 7,360 7,363 7,351 6,405 7,805 7,805 7,544 7,372 7,314 Testers 431 461 483 501 513 515 518 523 334 407 417 501 523 607 Copper % of wirebond 75.1% 75.6% 76.1% 76.6% 77.1% 77.6% 78.1% 78.6% 26.7% 49.9% 70.6% 75.9% 77.9% 78.4% Capex (US$mn) 99 116 146 281 121 82 155 106 374 512 503 645 463 500 Capex/Revenue 16.7% 15.9% 20.3% 40.4% 18.3% 11.3% 20.4% 13.9% 17.9% 23.4% 21.6% 23.5% 16.0% 16.0% Depreciation (US$mn) 94 98 103 102 105 110 113 116 318 330 358 396 443 460 Depr/Sales 15.8% 13.4% 14.2% 14.6% 15.9% 15.2% 14.8% 15.2% 15.2% 15.1% 15.4% 14.5% 15.3% 14.7% Utilisation Packaging 74% 95% 88% 83% 80% 88% 92% 93% 90% 96% 88% 85% 88% 88% Testing 86% 84% 78% 78% 76% 82% 86% 86% 71% 77% 83% 81% 82% 81% IDM % of mix 5% 6% 5% 5% 5% 5% 5% 5% 13% 10% 6% 4% 4% 4% Bumping & FCBGA 39% 41% 39% 40% 41% 42% 42% 43% 20% 24% 31% 40% 42% 45% Source: Company data, Credit Suisse estimates
Asia Semiconductor Sector 28 16 April 2015
Asia Pacific / Taiwan Semiconductor Devices
Powertech Technology
(6239.TW / 6239 TT) Rating NEUTRAL* INCREASE TARGET PRICE Price (15 Apr 15, NT$) 54.20 Target price (NT$) (from 55.00) 56.00¹ Upside/downside (%) 3.3 Sales better also on near-term share gains Mkt cap (NT$ mn) 41,417 (US$ 1,325) ■ 1Q15 sales better. Powertech 1Q15 sales reached NT$9.4 bn, -3.5% QoQ, Enterprise value (NT$ mn) 46,083 Number of shares (mn) 764.15 above guidance for down mid-single-digit and also between CS -5% QoQ Free float (%) 77.6 and street -3.3% QoQ. Powertech noted that both DRAM and NAND 52-week price range 57.9 - 44.7 declined less than expected and Greatek's mature logic also had a notable ADTO - 6M (US$ mn) 6.9 rebound in March. Powertech noted good progress from its advanced logic *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. for wafer level packaging projects for Wifi. ¹Target price is for 12 months. ■ 2Q15 growth continuing, lifted by temporary share gains from ASE. The Research Analysts company expects to achieve double-digit growth in 2Q15, on seasonal Randy Abrams, CFA rebound across DRAM, NAND and logic. We believe the company also 886 2 2715 6366 [email protected] recently gained some orders for commodity DRAM from ASE due to a short- Nickie Yue term issue in the materials division. Powertech is targeting mid-single digit 886 2 2715 6364 growth YoY in 2015, in line with the semi industry, with advanced logic sales [email protected] growing from 5% to 10% by end of 2015 on opportunities into more high-end flip chip and bump projects. 2015 capex is targeted at NT$7.6 bn, with priorities for flip chip for logic, memory expansion, and 20-30% of capex for its Xian operation alongside Micron. ■ Xian assembly to ramp in 2016, though test may come down. Powertech is investing US$210 mn capex to build up the Xian fab for revenue in 1Q16 for Micron. We estimate the volume initially at 30 mn pieces/month at US$0.20-0.30 ASP, translating to 5% of total sales. The multi-year strategic agreement could help Powertech grow its DRAM from 32% of mix currently, at positive earnings and at least neutral to margins. ■ Raising estimates and target. We raise 2015/16E EPS from NT$4.00/NT$4.50 to NT$4.75/NT$5.10 to factor in better DRAM/NAND growth and short-term gains in commodity. We lift our TP from NT$55 to NT$56, on 1.3x forward P/B, midpoint of its post crisis range. The stock is protected by 60% payout ratio, implying a 5% yield, also providing some downside protection for the stock, with lift into 2016 for the Xian assembly.
Share price performance Financial and valuation metrics
Year 12/13A 12/14E 12/15E 12/16E Price (LHS) Rebased Rel (RHS) Revenue (NT$ mn) 37,605.0 40,039.9 41,920.3 44,663.9 60 120 EBITDA (NT$ mn) 13,193.2 13,337.9 13,582.6 13,962.9 55 100 EBIT (NT$ mn) 2,911.8 4,232.2 5,165.4 5,440.0 50 80 Net profit (NT$ mn) 1,954.8 3,239.4 3,631.0 3,894.2 45 EPS (CS adj.) (NT$) 2.55 4.24 4.75 5.10 40 60 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Change from previous EPS (%) n.a. 0 18.7 13.2 Consensus EPS (NT$) n.a. 4.22 4.55 4.84 The price relative chart measures performance against the EPS growth (%) -44.9 66.0 12.0 7.3 TAIWAN SE WEIGHTED INDEX which closed at 9540.06 on P/E (x) 21.2 12.8 11.4 10.6 15/04/15 Dividend yield (%) 5.5 0 5.2 5.8 On 15/04/15 the spot exchange rate was NT$31.26/US$1 EV/EBITDA (x) 3.0 3.5 2.9 2.7
Performance Over 1M 3M 12M P/B (x) 1.4 1.3 1.3 1.2 Absolute (%) — 3.4 18.9 — ROE (%) 5.9 10.6 11.3 11.6 Net debt/equity (%) net cash 11.8 net cash net cash
Relative (%) -20.6 -16.5 -18.9 — Source: Company data, Credit Suisse estimates
Asia Semiconductor Sector 29 16 April 2015
Focus tables and charts: Powertech
Figure 79: Powertech 4Q14-2Q15 and 2014-16 estimates—upcoming risk to 1Q15 estimates 1Q15 2Q15 2015 2016 (NT$ mn) CS CS(old) Street CS CS(old) Street CS CS(old) Diff Street CS CS(old) Diff Street Sales 9,431 9,285 9,454 10,563 10,399 10,597 41,920 40,825 3% 42,736 44,664 43,226 3% 46,086 Chg (%) -3.5 -5.0 -3.3 12.0 12.0 12.1 4.7 2.0 5.9 6.5 5.9 7.8 GM (%) 16.8 15.2 15.9 18.4 18.3 17.9 17.9 16.9 17.6 17.8 17.2 17.8 OpM (%) 11.0 9.2 9.6 13.0 12.8 11.9 12.3 11.1 11.6 12.2 11.4 12.3 Net Inc. 667 507 659 984 947 903 3,631 3,060 19% 3,637 3,894 3,439 13% 3,873 EPS (NT$) 0.87 0.66 0.82 1.29 1.24 1.14 4.75 4.00 19% 4.58 5.10 4.50 13% 4.83 Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service consensus
Figure 80: Commodity DRAM has declined over time Figure 81: Mix shifts away from commodity DRAM Quarterly sales (NT$mn) 100% $7,000 90% $6,000 80% 70% $5,000 60% $4,000 50% $3,000 40% 30% $2,000 20% $1,000 10%
0%
3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11
$0 1Q09
1Q09 3Q09 1Q10 2Q10 3Q10 4Q10 2Q11 4Q11 1Q12 2Q12 3Q12 1Q13 3Q13 1Q14 2Q14 3Q14 2Q09 4Q09 1Q11 3Q11 4Q12 2Q13 4Q13 Commodity DRAM Mobile DRAM NAND Advanced Logic Greatek NAND Mobile DRAM Commodity DRAM Greatek Advanced Logic Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 82: Valuation near the midpoint of its range Figure 83: FCF remains volatile Powertech historical PB band Op CF / Capex (NT$mn) Dividend / FCF Yield (%) NT$ 20,000 40% 105 16,000 30% 85 2x 12,000 20% 65 1.6x 8,000 10% 1.3x 45 1x 4,000 0% 25 0 -10%
5
Oct/05 Oct/10
Feb/04 Jun/07 Feb/09 Jun/12 Feb/14
Dec/04 Dec/09 Dec/14
Aug/06 Aug/11
Apr/08 Apr/03 Apr/13
CY05 CY07 CY08 CY10 CY11 CY13 CY14 CY06 CY09 CY12 CY15 Op Cash Flow Capex FCF Yield Dividend Yield Linear (FCF Yield) Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 84: Micron & Toshiba using multiple sources Figure 85: Powertech GMs staying at lower levels Micron: 2013 2014 2015 Share Description Revenue (NT$mn) Micron in-house $1,200 $1,350 $1,425 62% In-house test, 70-80% NAND, NOR GM / OpM (%) ChipMos $97 $105 $119 5% 25% of assembly $14,000 40% Powertech $439 $400 $447 19% Mobile DRAM / Elpida Walton $148 $173 $202 9% Mobile DRAM / Elpida $12,000 35% ASE $48 $143 $106 5% Commodity $10,000 30% Total: $1,931 $2,172 $2,300 100% 100% 25% $8,000 20% $6,000 Toshiba Mix 2013 2014 2015 Share 15% Powertech $376 $440 $461 44% $4,000 10% Amkor $325 $390 $429 41% $2,000 5% SPIL+ChipMos $0 $10 $50 5% $0 0%
Walton $74 $86 $100 10%
1Q04 1Q09 3Q11 1Q14 3Q02 1Q03 3Q03 3Q04 1Q05 3Q05 1Q06 3Q07 1Q08 3Q08 3Q09 1Q10 3Q10 1Q11 1Q12 3Q12 1Q13 3Q13 3Q14 1Q15 3Q15 3Q06 Total: $775 $927 $1,040 100% 1Q07 Revenue Gross Margin Operating Margin Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Asia Semiconductor Sector 30 16 April 2015
Americas / United States Semiconductor Equipment (Semiconductor Equipment (US))
Amkor Technology Inc.
(AMKR.OQ) Rating NEUTRAL*
Price (15 Apr 15, US$) 8.62 Target price (US$) 9.00¹ 52-week price range 12.21 - 5.97 Investments in advanced capacity bear fruit Market cap. (US$ m) 2,046.09 ■ 1Q15 guided down off the higher base. 1Q15 sales were guided down 10- *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. 16% QoQ to US$715-765 mn, a midpoint of $740 mn. We expect C1Q15 to ¹Target price is for 12 months. decline 13% QoQ vs street -14.5% QoQ. The seasonally lower outlook is
Research Analysts more similar to ASE's -14% due to similar higher Apple exposure vs. small Randy Abrams, CFA declines at SPIL and KYEC. On lower sales, GMs are following normal 886 2 2715 6366 leverage to return back to 16-19% and EPS back to $0.04-$0.14. [email protected] ■ Amkor targets to slightly outgrow the industry, but some risk with Nickie Yue 886 2 2715 6364 high-end QCOM exposure. Amkor's 2014 sales grew 6% YoY on the late [email protected] acceleration. The company saw good growth from advanced packaging +34% YoY but also had some growth from other areas including NAND packaging, fingerprint ICs/sensors, automotive and a doubling off a low base in greater China to about 2-3% of sales. Amkor continues to stabilise its market share and targets additional projects in 2015 to restore growth to in- line to above industry average. We model 2Q15 +10% QoQ rebound vs street +8.4% QoQ though could see modest risk due to top customer Qualcomm's high-end socket losses to Samsung. ■ Targeting another mild growth year and capex control. Amkor achieved solid +6% YoY sales growth and 130 bp GM/OpM expansion and targets good growth in 2015 through: (1) expanding WL CSP in mobile (18% of sales), (2) maintaining high-end mobile including at the flagship brand, (3) growing in China/Taiwan +60% YoY to 4-5% of sales, (4) and expand automotive which is >10% of sales (20% with J-Devices). Equipment capex is disciplined, down from US$643 mn to US$450 mn, consistent with peers down 12% YoY. ■ Maintain NEUTRAL. We keep our 2015/2016E EPS at $0.90/$0.93 based on similar +6% sales growth and slight GM expansion. Our industry view is more muted due to higher fabless inventory and moderation from the higher base as comms momentum slows. We keep NEUTRAL and our TP at $9, reflecting 10x 2015 ESP and 1.6x forward P/B. Share price performance Financial and valuation metrics
Daily Apr 15, 2014 - Apr 14, 2015, 4/15/14 = US$6.88 Year 12/13A 12/14E 12/15E 12/16E 13 EPS - (Excl. ESO) (US$) 0.53 0.87 0.90 0.93 11 EPS (CS adj.) (US$) 0.53 0.87 0.90 0.93 9 Prev. EPS (CS adj.) (US$) — — — — 7 P/E (CS adj., x) 16.3 9.9 9.6 9.3 5 P/E rel. (CS adj., %) 91.2 55.7 61.4 66.5 Apr-14 Jul-14 Oct-14 Jan-15 Price Indexed S&P 500 INDEX Revenue (US$ m) 2,956.4 3,129.4 3,318.9 4,634.5 EBITDA (US$ m) 652.5 761.2 862.4 1,095.0 On 04/14/15 the S&P 500 INDEX closed at 2095.84 Net debt (US$ m) 1,040 1,078 966 875 OCFPS (US$) 2.41 2.59 3.01 3.34 P/OCF (x) 2.5 3.3 2.9 2.6
Number of shares (m) 237.37 Price/sales(x) 0.65 Quarterly EPS Q1 Q2 Q3 Q4 BV/share (Next Qtr., US$) 4.5 P/BVPS (x) 1.7 2013A 0.07 0.14 0.15 0.17 Net debt (Next Qtr., US$ m) 1,021.3 Dividend (current, US$) 1.0 2014E 0.09 0.21 0.20 0.38
Dividend yield (%) 11.6 2015E 0.11 0.21 0.28 0.29
Source: Company data, Credit Suisse estimates
Asia Semiconductor Sector 31 16 April 2015
Focus tables and charts: Amkor
Figure 86: Amkor 4Q14 may reach higher-end of guidance consistent with peers AMKR Mar-15 Jun-15 Sep-15 F2015E F2016E CS Cons Guidance CS Cons CS Cons CS Cons CS Cons Total Revenue $742.2 $780.3 $715-765mn $816.4 $740.0 $873.6 $814.5 $3,318.9 $3,281.0 $4,634.5 $4,026.0 % Q/Q chng -13.0% -8.5% -10% to -16% 10.0% -0.3% 7.0% 10.1% % Y/Y chng 6.6% 12.1% 6.4% -3.6% 7.5% 0.2% 6.1% 7.3% 39.6% 22.7% Total GM* 18.0% 18.5% 16-19% 20.6% 17.8% 21.9% 19.7% 20.8% 20.5% 19.1% 21.3% Operating Exp.* $80.1 ~$80mn $82.5 $85.0 $333.8 $446.9 Operating Mgin* 7.2% 8.2% 10.4% 7.0% 12.2% 9.1% 10.7% 10.4% 9.4% 10.1% Net Income* $26.7 $30.5 $10-34mn $50.6 $21.1 $66.5 $38.8 $212.8 $193.3 $220.0 $225.3 Net Margin* 0.0% 3.9% 6.2% 2.9% 7.6% 4.8% 6.4% 5.9% 4.7% 5.6% EPS* $0.11 $0.14 $0.04-$0.14 $0.21 $0.10 $0.28 $0.18 $0.90 $0.79 $0.93 $0.96 Fully diluted shares 236.9 236.9 236.9 236.9 236.9 Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service consensus
Figure 87: Amkor stock peaks slightly ahead of bookings Figure 88: Amkor FCF to turn positive in 2015 Stock Price Equipment Capex (US$ mn) Bookings (US$ mn) FCF (US$mn) 150 450 $800 400
125 375 $600 300 $400 200 100 300 $200 100 75 225 $0 - 50 150 -$200 -100 25 75 -$400 -200
0 0 -$600 -300
F1998 F1999 F2000 F2001 F2002 F2003 F2004 F2005 F2006 F2007 F2008 F2009 F2010 F2011 F2012 F2013
Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15
Sep-01 Sep-03 Sep-05 Sep-07 Sep-09 Sep-11 Sep-13
F2014E F2015E
May-02 May-04 May-06 May-08 May-10 May-12 May-14 Operating CF Capex FCF BE Bookings ASM Pacific Stock Price
Source: Company data, Credit Suisse estimates, SEMI Source: Company data, Credit Suisse estimates
Figure 89: GMs pulling back seasonally in 1Q15 Figure 90: Amkor stemming its market share loss US$K GM (%) $900,000 30.0% ASE % of US$ mn Sales industry $750,000 25.0% $4,000 50% $3,600 45% $600,000 20.0% $3,200 40% $2,800 $450,000 15.0% $2,400 35% $2,000 30% $300,000 10.0% $1,600 25% $1,200 $150,000 5.0% 20% $800 $0 0.0% $400 15% $0 10%
-$150,000 -5.0%
1Q09 3Q14 1Q99 3Q99 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14
1Q15E 3Q15E
Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14
Mar-10 Mar-09 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15
Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14
Sep-14 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13
Revenue GM% OpM% SiP SPIL Amkor Stats AMKR % of industry
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 91: Amkor valuation reasonable vs peers Price Mkt Cap EV/Sales (x) EV/EBITDA (x) P/E Multiple (x) P/B Multiple (x) ROE Trough/Peak (EV/Sales) Company Ticker 4/14/2015 (US$mn) 2014 2015 2016 2014 2015 2016 2014 2015 2016 2014 2015 2016 2014 2015 2016 Select backend peers Amkor AMKR $8.79 $2,086 1.0 0.9 0.6 4.2 3.5 2.7 10.0 9.8 9.5 1.8 1.6 1.3 18.6 16.0 14.2 ASE 2311.TW $43.15 $10,807 1.4 1.2 1.1 6.6 5.9 5.5 14.6 13.1 12.0 2.3 2.2 2.0 15.7 16.6 16.9 SPIL 2325.TW $52.10 $5,197 1.9 1.8 1.7 6.2 5.7 5.2 13.9 12.7 11.6 2.3 2.2 2.1 16.3 16.9 17.9 Chipbond 6147.TWO $61.80 $1,284 2.5 2.3 2.0 7.5 6.5 5.5 15.7 11.6 10.2 1.7 1.6 1.5 11.1 14.0 15.0 ChipMOS 8150.TW $45.65 $1,263 1.5 1.5 1.3 5.0 4.6 4.0 11.8 12.5 11.6 2.2 2.0 1.9 18.2 16.4 16.5 Powertech 6239.TW $54.30 $1,328 1.1 1.0 0.9 3.4 3.2 2.9 12.8 13.6 12.1 1.3 1.3 1.2 10.3 9.5 10.2 Median 1.5 1.4 1.2 5.6 5.1 4.6 13.4 12.6 11.6 2.0 1.8 1.7 16.0 16.2 15.7 Mean 1.6 1.5 1.3 5.5 4.9 4.3 13.2 12.2 11.1 1.9 1.8 1.7 15.0 14.9 15.1 Source: Company data, Credit Suisse estimates
Asia Semiconductor Sector 32 16 April 2015
Asia Pacific / Hong Kong Small Cap Companies
ASM Pacific Tech.
(0522.HK / 522 HK) Rating OUTPERFORM*
Price (15 Apr 15, HK$) 81.00 Target price (HK$) 97.00¹ High base from the strong 2014 sets up a Upside/downside (%) 19.8 Mkt cap (HK$ mn) 32,604 (US$4,206 mn) milder 2015 Enterprise value (HK$ mn) 32,342 Number of shares (mn) 402.52 ■ 1Q15 down seasonally QoQ. We model 15% QoQ sales decline in 1Q15 Free float (%) 50.0 52-week price range 91.2 - 70.0 following the pullback in backlog and bookings in 4Q. Despite weaker billings, ADTO - 6M (US$ mn) 6.2 ASM is seeing a seasonal bookings recovery post CNY and double digit
*Stock ratings are relative to the coverage universe in each QoQ bookings growth in 1Q15. ASM expects stronger order momentum analyst's or each team's respective sector. ¹Target price is for 12 months. from backend customers in 1H15 with SMT added as a second driver, though full year growth may be more moderate than 2014 off a high base. Research Analysts
Randy Abrams, CFA ■ Similar broader end market drivers for the business. In 2014, top drivers 886 2 2715 6366 were automotive orders, industrial, and strong orders for a high-end [email protected] smartphone (normally orders for a 2-year cycle so may slow in 2015) and Nickie Yue emerging market smartphone. For 2015, the company is looking at a similar 886 2 2715 6364 [email protected] set of growth drivers as auto/industrial has long product cycles and mobile investment continues. The company believes the SMT market will grow from US$3.5 bn to US$3.8 bn and targets modest share gains. ASM Pacific has crossed 20%, up from 11% share when it entered the business, with US$600- 700 mn annual sales. It expects to pass Panasonic’s 24% share by 2016. ■ SMT and advanced packaging growing at improving margins. ASM targets its SMT business to be the #1 player and will work to improve SMT margins to backend levels, keeping both around 40%. It will also expand in advanced packaging (SiP, fan-out, RDL, 2.5D/3D), now at 40% of sales, up from 20% in 2010. Other growth drivers for ASM include IC/discrete, LED lighting, automotive, power management and CMOS image sensor. ■ Maintain OUTPERFORM ahead of bookings recovery. We maintain our target price at HK$97, reflecting 4.4x/4.1x 2015/2016E book value (in-line with its 3-7x range) and 20.4x/18.3x 2015/2016 EPS. We maintain 2015/2016E EPS at HK$4.75/$5.30, slightly below prior street at HK$4.94/HK$5.47. 2015 should still have moderate growth off strong 2014, with upcoming catalyst ahead of further growth in industry bookings as order momentum seasonally accelerates into 2Q15/3Q15. Share price performance Financial and valuation metrics
Year 12/13A 12/14E 12/15E 12/16E Price (LHS) Rebased Rel (RHS) Revenue (HK$ mn) 10,841.2 14,229.2 15,425.6 16,631.8 100 140 EBITDA (HK$ mn) 1,104.9 2,621.0 2,945.6 3,242.1 90 120 EBIT (HK$ mn) 691.6 2,149.0 2,488.0 2,761.6 80 100 Net profit (HK$ mn) 663.1 1,843.0 1,913.7 2,132.7 70 80 EPS (CS adj.) (HK$) 1.66 4.58 4.75 5.30 60 60 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Change from previous EPS (%) n.a. 0 0 0 Consensus EPS (HK$) n.a. 3.98 4.97 5.46 EPS growth (%) -4.6 176.7 3.7 11.4 The price relative chart measures performance against the P/E (x) 48.9 17.7 17.0 15.3 HANG SENG INDEX which closed at 27618.82 on 15/04/15 On 15/04/15 the spot exchange rate was HK$7.75/US$1 Dividend yield (%) 1.0 2.6 3.9 4.4 EV/EBITDA (x) 28.7 12.3 11.0 9.7 P/B (x) 4.7 4.2 3.9 3.6 Performance over 1M 3M 12M ROE (%) 10.0 25.3 23.9 24.6 Absolute (%) 5.8 13.5 -0.7 — Net debt/equity (%) net cash net cash net cash net cash Relative (%) 5.1 8.3 -14.4 —
Source: Company data, Credit Suisse estimates
Asia Semiconductor Sector 33 16 April 2015
Focus tables and charts: ASM Pacific
Figure 92: ASM’s stock normally peaks with bookings Figure 93: ASM bookings tracks closely with the industry Stock Price Equipment Semi capital industry bookings (US$mn) ASM bookings (US$mn) Bookings (US$ mn) 1,200 700 150 450 600 125 375 1,000 500 100 300 800 400 75 225 600 300 50 150 400 200 25 75 200 100 0 0
0 0
Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15
Sep-01 Sep-03 Sep-05 Sep-07 Sep-09 Sep-11 Sep-13
May-02 May-04 May-06 May-08 May-10 May-12 May-14
3Q09 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 BE Bookings ASM Pacific Stock Price ASM Bookings Semi capital industry Bookings Source: Company data, Credit Suisse estimates, Semi Source: Company data, Credit Suisse estimates, Semi
Figure 94: ASM book-to-bill down from 0.85 in 3Q to 0.77 Figure 95: ASM book-to-bill drops back down in 4Q14 Bookings / Billings (US$mn) Book to Bill Ratio $700 1.80 Bookings (US$) Dec-14 Sep-14 QoQ YoY $600 1.60 Back-end $137.8 $257.8 -46.5% 2.9% 1.40 $500 Lead-frame $54.8 $58.6 -6.5% -0.6% 1.20 $400 1.00 SMT $149.7 $217.0 -31.0% 44.3% $300 0.80 0.60 Total Bookings $342.3 $533.0 -35.8% 16.9% $200 Total Billings $444.0 $626.1 -29.1% 24.5% 0.40 $100 0.20 B:Bill 0.77 0.85 -0.08 -0.05 $0 0.00
Backlog $361.8 $451.6 -19.9% 40.9%
Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14
Mar-10 Mar-07 Mar-08 Mar-09 Mar-11 Mar-12 Mar-13 Mar-14
Dec-12 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-13 Dec-14
Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Bookings Billings B:Bill Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 96: Backlog as an early indicator of forward sales Figure 97: Bookings and forward sales track closely Backlog / Forward Sales (US$mn) Backlog as % of forward sales Bookings / Forward Sales (US$mn) Bookings as % of forward sales $650 180% $675 180% $575 160% $600 160% $500 140% $525 140% $425 120% $450 120% $350 Average: 95% 100% $375 100% $275 80% $300 Average: 98% 80% $200 60% $225 60% $125 40% $150 40% $50 20% $75 20%
-$25 0% $0 0%
Jun-13 Jun-14 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12
Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14
Dec-13 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-14
Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14
Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14
Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14
Sep-07 Dec-07 Sep-08 Dec-08 Sep-09 Dec-09 Sep-10 Dec-10 Sep-11 Dec-11 Sep-12 Dec-12 Sep-13 Dec-13 Sep-14 Dec-14 Bookings Following Qtr Sales Backlog Forward Qtr Sales Backlog % of forward qtr sales Bookings % of forward qtr sales Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 98: ASM Pacific 4Q14-2Q15 and 2014-2016 CS estimates vs Street ASM Pacific Mar-15E Jun-15E Sep-15E 2015E 2016E CS Cons Guidance CS Cons CS Cons CS Cons CS Cons Revenue $2,923.6 $3,065.5 Billings up moderate $3,722.7 $3,973.3 $4,877.5 $4,523.3 $15,425.6 $15,316.7 $16,631.8 $16,412.3 % Q/Q chng -15.2% -11.0% to low Dbl Digit YoY 27.3% 35.9% 31.0% 21.5% % Y/Y chng 17.3% 4.7% (up high teens YoY) 8.3% 39.4% 0.5% 45.8% 8.4% 5.5% 7.8% 7.2% Gross Margin 35.8% 35.3% 36.7% 37.8% 37.3% 39.7% 36.3% 36.6% 36.5% 36.9% Op Margin 10.9% 12.6% 15.9% 17.1% 20.0% 20.2% 16.1% 16.4% 16.6% 17.2% Net Income (PF) $231.0 $290.7 $451.8 $525.0 $768.0 $710.7 $1,913.7 $1,992.1 $2,132.7 $2,216.5 Net Margin 7.9% 9.5% 12.1% 13.2% 15.7% 15.7% 12.4% 13.0% 12.8% 13.5% GAAP EPS $0.57 $0.72 $1.12 $1.30 $1.91 $1.77 $4.75 $4.94 $5.30 $5.47 Pro Forma EPS $0.57 $0.72 $1.12 $1.30 $1.91 $1.77 $4.75 $4.94 $5.30 $5.47 Diluted shares 402.6 402.6 402.6 402.6 402.6 Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service consensus
Asia Semiconductor Sector 34 16 April 2015
Asia Pacific / Taiwan Semiconductor Devices
MediaTek Inc.
(2454.TW / 2454 TT) Rating NEUTRAL*
Price (15 Apr 15, NT$) 398.50 Target price (NT$) 425.00¹ 1Q15 reaches the midpoint, but the outlook Upside/downside (%) 6.6 Mkt cap (NT$ mn) 714,381 (US$ 22,856) stays muted due to competition/3G weakness Enterprise value (NT$ mn) 540,308 Number of shares (mn) 1,792.68 ■ 1Q15 at the midpoint. 1Q15 sales reached NT$47.5 bn, -14.3% QoQ, near Free float (%) 89.1 the midpoint of guidance for down 10-18% QoQ. The company’s full quarter 52-week price range 535.0 - 398.5 ADTO - 6M (US$ mn) 92.7 implied shipments around 85 mn with orders rebounding in March after the
*Stock ratings are relative to the coverage universe in each sharp slowdown around CNY, though April will be down following the pull-ins. analyst's or each team's respective sector. ¹Target price is for 12 months. ■ 2Q15 only mild due to export weakness and competition. We estimate 2Q15 up 14% QoQ vs street 21% QoQ, with China LTE ramping up but Research Analysts exports to emerging markets sluggish due to US$ strength and Spreadtrum Randy Abrams, CFA 886 2 2715 6366 competition keeping units short of 100 mn at 90-95 mn. We estimate 2Q15 [email protected] margins will drop by 170 bp QoQ to 45.5% due to more pricing competition Nickie Yue from both exports 3G from Spreadtrum and China LTE from Qualcomm. 886 2 2715 6364 2015 should only reach the low end of the company’s 10-20% YoY sales [email protected] target and opex still track to grow 20% YoY as it is committed to invest.
■ Smartphone guidance downside on a smaller TAM. We already trimmed our smartphone shipments expectation from 300 mn to 265 mn. We believe MediaTek’s high-end 3G market has declined, with ASPs -50% YoY to $10 and the company has delayed new 3G MT6580/6570 to clear older product inventory. MediaTek’s 4G traction is rising at China brands outside the top 5 and into global Tier 2 brands HTC, Sony and LG, allowing us to recently lift LTE estimates from 150 mn to 160 mn. We believe mix is skewed initially to lower GM 6735/M entry platform at $8 where competition with QCOM is fierce and forecasts from brands for high-end 6795 at $20-25 have dropped. ■ Maintain NEUTRAL: Street estimates likely too high. We recently downgraded MediaTek to NEUTRAL due to pressure on 3G, weaker LTE mix and need to maintain high investments will dampen margins and earnings power. We keep our 2015/2016E EPS at NT$25.30/NT$28.16 below street NT$29.57/NT$33.49 factoring lower 3G units, ASPs and lower GMs, with stock requiring street cuts to see support into a less profitable than hoped LTE ramp. Our NT$425 TP reflects 15x 2016E EPS of NT$28.16. Share price performance Financial and valuation metrics
Year 12/13A 12/14E 12/15E 12/16E Price (LHS) Rebased Rel (RHS) Revenue (NT$ mn) 136,056.0 213,063.2 234,001.1 256,873.1 600 140 EBITDA (NT$ mn) 26,971.6 49,897.2 42,652.6 47,608.5 500 120 EBIT (NT$ mn) 25,244.7 47,241.4 40,000.0 44,967.1 400 100 Net profit (NT$ mn) 27,001.2 46,217.6 39,548.2 44,013.6 300 EPS (CS adj.) (NT$) 20.13 29.96 25.30 28.16 200 80 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Change from previous EPS (%) n.a. 0 0 0 Consensus EPS (NT$) n.a. 30.0 29.7 34.0 EPS growth (%) 57.1 48.8 -15.5 11.3 The price relative chart measures performance against the P/E (x) 19.8 13.3 15.7 14.2 TAIWAN SE WEIGHTED INDEX which closed at 9540.06 on Dividend yield (%) 2.3 3.8 5.6 4.8 15/04/15. On 15/04/15 the spot exchange rate was EV/EBITDA (x) 19.9 10.8 12.4 10.8 NT$31.26/US$1 P/B (x) 2.7 2.5 2.5 2.3 Performance Over 1M 3M 12M ROE (%) 14.6 20.9 15.8 16.9 Absolute (%) -7.8 -18.0 -12.7 —
Net debt/equity (%) net cash net cash net cash net cash
Relative (%) -8.0 -22.1 -19.7 — Source: Company data, Credit Suisse estimates
Asia Semiconductor Sector 35 16 April 2015
Focus tables and charts: MediaTek
Figure 99: MediaTek having a slower 1H15, with GMs still dipping into 2Q15 in millions, unless otherwise stated 1Q15 2Q15 3Q15 2015 2016 2017 (NT$ mn) CS Street Guidance CS Street CS Street CS Street CS Street Sales $47,015 $47,981 NT$45.5-49.9bn $54,206 $57,588 $65,790 $67,966 $234,001 $240,359 $256,873 $267,258 Chg -15.2% -13.5% 10% to -18% 15.3% 20.0% 21.4% 18.0% 9.8% 12.7% 9.8% 11.2% GM% 47.2% 47.0% 46-48% 45.5% 46.8% 45.5% 47.5% 46.0% 47.2% 46.4% 46.9% OpM% 14.2% 16.1% 12-18% 15.3% 18.9% 18.6% 21.3% 17.1% 19.8% 17.5% 20.5% Net Inc. 6,999 7,738 NT$31.5 8,158 10,627 11,893 14,034 39,548 46,313 44,014 52,453 EPS (NT$) $4.48 $4.96 $5.22 $6.75 $7.61 $8.97 $25.30 $29.57 $28.16 $33.49 Source: the BLOOMBERG PROFESSIONAL™ service consensus, Company data, Credit Suisse estimates
Figure 100: MediaTek 2G/3G/LTE units vs ASPs Figure 101: MediaTek 2G/3G/LTE sales vs margins Units (mn) ASPs (US$) Sales (NT$mn) GM (%) 150 $25 32,500 65% 30,000 60% 27,500 55% 120 $20 25,000 50% 22,500 45% 90 $15 20,000 40% 17,500 35% 15,000 30% 60 $10 12,500 25% 10,000 20% 30 $5 7,500 15% 5,000 10% 2,500 5%
0 $0 0 0%
1Q07 3Q13 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 1Q14 3Q14
1Q13 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 3Q13 1Q14 3Q14
1Q15E 3Q15E 1Q16E 3Q16E
1Q15E 3Q15E 2G units 3G (WCDMA+TD) units LTE units 2G sales 3G (WCDMA+TD) sales LTE sales 2G ASPs 3G ASPs LTE ASPs 2G GM % 3G GM % LTE GM % Blended ASPs Corporate GM % Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 102: MediaTek revenue driver shifting to LTE Figure 103: MediaTek handset assumptions for 2012-17F Revenue by Technology (US$mn) NT$mn unless noted 2012 2013 2014 2015F 2016F 2017F 1,600 3G Smartphones (mn) 109.8 223.2 324.5 265.6 239.7 204.4 1,400 4G Smartphones (mn) 0.0 0.0 31.8 160.0 260.3 370.7 1,200 Smartphones (mn) 109.8 223.2 356.4 425.6 500.1 575.1 1,000 ASPs (US$) $10.82 $9.93 $10.25 $9.77 $9.53 $9.40 800 Tablets (mn) 0.0 21.9 41.3 50.5 68.8 73.4 ASPs (US$) $0.00 $12.28 $10.94 $9.93 $9.18 $8.48 600 Handset/Tablet Sales 61,419 93,424 138,934 159,532 181,443 198,852 400 Total Sales 99,278 135,968 213,062 234,001 256,873 276,947 200 GM % 41.4% 44.0% 48.8% 46.0% 46.4% 46.8% 0 Op M% 12.5% 18.6% 22.2% 17.1% 17.5% 18.4%
EPS $12.81 $20.13 $29.96 $25.30 $28.16 $31.64
1Q07 1Q10 1Q13 3Q04 1Q05 3Q05 1Q06 3Q06 3Q07 1Q08 3Q08 1Q09 3Q09 3Q10 1Q11 3Q11 1Q12 3Q12 3Q13 1Q14 3Q14
1Q04 EPS growth 2.3% 57.1% 48.8% -15.5% 11.3% 12.4%
1Q16E 3Q15E 3Q16E 1Q15E 2.5G TD-SCDMA WCDMA LTE Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 104: Stabilizing the GM a key to the share price Figure 105: Slowdown in export ramp moderates growth PX (NT$) GM (%) Smartphone %/ QoQ / 700 70% Units: mn export ratio 90 80% 600 60% 75 500 50% 60% 60 400 40% 40% 300 30% 45 20% 200 20% 30
100 10% 15 0% 0 0%
0 -20%
2Q12 3Q15 1Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 4Q15
3Q04 1Q10 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 3Q15E Share price Corporate GM % 1Q15E China smartphones Export smartphones Export % China QoQ Export QoQ Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research
Asia Semiconductor Sector 36 16 April 2015
Asia Pacific / Taiwan Semiconductor Devices
Realtek Semiconductor
(2379.TW / 2379 TT) Rating NEUTRAL*
Price (15 Apr 15, NT$) 96.00 Target price (NT$) 98.00¹ Upside/downside (%) 2.1 1Q15 missed on weak PC demand Mkt cap (NT$ mn) 48,475 (US$ 1,551) ■ 1Q15 sales below guidance and expectations. Realtek 1Q15 sales came Enterprise value (NT$ mn) 28,493 Number of shares (mn) 504.95 in at NT$7.4 bn, -1.5% QoQ, below company guidance for moderate growth Free float (%) 73.7 QoQ and CS/street +4.3%/+3% QoQ, due to a correction in TV controller 52-week price range 119.5 - 84.3 orders following pre-CNY builds and weakness in the PC and tablet market. ADTO - 6M (US$ mn) 9.9
*Stock ratings are relative to the coverage universe in each ■ SSD controller IC launch in 2H15. Realtek sees the SSD controller IC analyst's or each team's respective sector. ¹Target price is for 12 months. demand growing in the PC market, as it allows PCs to have instant on/off, taking adoption rate up from 20%. Realtek noted that it will have a few Research Analysts leading Asian customers to start, including Asus, Acer, Lenovo and more Randy Abrams, CFA 886 2 2715 6366 meaningful revenue contribution in 2016. The company recognises that it is [email protected] a latecomer in the market following leading players Silicon Motion and Nickie Yue Phison, but it remains confident that it can share with its NB relationships. 886 2 2715 6364 [email protected] ■ 2015 drivers. The company has several areas it targets to maintain +10% YoY growth, including: (1) Wifi 11ac adoption continues to increase: they expect 11ac & 11n mix will be 50%/50% this year, a positive trend for margins; (2) TV SoC: continues to gain share in China; (3) upcoming SSD controller: will launch in 2H15 for more revenue contribution in 2016; (4) PC share gain: while the industry stays flat, it expects 10-30% YoY unit growth as competitors de-emphasise products in these more mature segments.
■ Maintain NEUTRAL with the stock reasonable for a mild outlook. While Realtek has made progress on gaining share on mature PC/networking products and ramp into TVs, we stay NEUTRAL with NT$98 target price (14x 2015E EPS), as the stock is fairly valued, in-line with global peers at 14.3x P/E but growth and margins staying modest due to sluggish end markets in PCs and tablets. We maintain our 2015/2016E EPS estimates at NT$7.00/NT$7.50.
Share price performance Financial and valuation metrics
Year 12/13A 12/14E 12/15E 12/16E Price (LHS) Rebased Rel (RHS) Revenue (NT$ mn) 28,180.0 31,263.0 34,390.4 36,906.8 120 140 EBITDA (NT$ mn) 3,655.3 3,943.4 4,582.0 4,912.0 100 120 EBIT (NT$ mn) 2,511.1 2,815.6 3,457.6 3,787.4 80 100 Net profit (NT$ mn) 3,035.4 3,892.7 3,532.5 3,788.9 EPS (CS adj.) (NT$) 6.05 7.71 7.00 7.50 60 80 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Change from previous EPS (%) n.a. 0 0 0 Consensus EPS (NT$) n.a. 7.46 7.07 7.29 The price relative chart measures performance against the EPS growth (%) 33.0 27.4 -9.3 7.3 TAIWAN SE WEIGHTED INDEX which closed at 9540.06 on P/E (x) 15.9 12.5 13.7 12.8 15/04/15 Dividend yield (%) 3.5 5.2 6.0 5.5 On 15/04/15 the spot exchange rate was NT$31.26/US$1 EV/EBITDA (x) 9.4 7.2 6.2 5.6
Performance Over 1M 3M 12M P/B (x) 2.5 2.1 2.1 2.0 Absolute (%) -7.2 -3.2 8.7 — ROE (%) 16.1 18.5 15.4 16.0
Relative (%) -7.5 -7.3 1.7 — Net debt/equity (%) net cash net cash net cash net cash
Source: Company data, Credit Suisse estimates
Asia Semiconductor Sector 37 16 April 2015
Focus tables and charts: Realtek
Figure 106: Realtek 1Q15 below; 2Q15-3Q15 CS estimates roughly in-line with Street 1Q15 2Q15 3Q15 2015 2016 (NT$ mn) CS Street Guidance CS Street CS Street CS Street CS Street Sales $7,886 $7,761 Up $8,575 $8,496 $9,187 $9,011 $34,390 $33,815 $36,907 $35,040 QoQ 4.3% -6.5% 8.7% 7.7% 7.1% 6.1% 10.0% 7.8% 7.3% 3.6% GM (%) 42.9% 43.0% Up 43.4% 43.4% 43.6% 43.3% 43.3% 43.5% 43.0% 43.4% OpM (%) 7.3% 8.8% 9.8% 10.0% 11.3% 10.7% 10.1% 10.0% 10.3% 9.9% Net Inc. 624 766 860 913 1,042 1,009 3,533 3,526 3,789 3,744 PF EPS (NT$) $1.24 $1.49 $1.70 $1.78 $2.06 $1.97 $7.00 $6.85 $7.50 $7.42 $1.24 $1.49 $1.70 $1.80 $2.06 $1.97 $7.00 $6.91 $7.50 $7.43 GAAP EPS (NT$) Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service consensus
Figure 107: Realtek seeing steady sales growth and stable Figure 108: Realtek communications (GbE, audio codec, margins PC peripheral) the largest segment Revenue Realtek GM (NT$mn) (%) 9,800 55 Multimedia 8,400 19% 50 7,000 Communica 5,600 45 tions PC 4,200 62% 40 peripheral 2,800 35 19% 1,400
0 30
1Q06 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14
1Q15E 3Q15E Revenue GM (excluding bonus)
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 109: Realtek approaching its historical average P/E Figure 110: Realtek has a diversified product mix NT$ Realtek US GAAP PE Band Digital media 10/100 180 processor Ethernet Gb Ethernet 22x LCD monitor 150 and TV Client
120 16x
90 10x 60 Peripheral IC WLAN Client Audio codec 6x 30
0
Jul/01 Jul/02 Jul/03 Jul/04 Jul/05 Jul/06 Jul/07 Jul/08 Jul/09 Jul/10 Jul/11 Jul/12 Jul/13 Jul/14
Jan/03 Jan/04 Jan/05 Jan/06 Jan/07 Jan/08 Jan/09 Jan/10 Jan/11 Jan/12 Jan/13 Jan/14 Jan/15 Jan/02 Switch and router ADSL Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 111: Realtek P/E valuation in-line with its peers Price Mkt Cap EV/Sales (x) EV/EBITDA (x) P/E Multiple (x) P/B Multiple (x) ROE Trough/Peak (EV/Sales) Company 4/14/2015 (US$mn) 2014 2015 2016 2014 2015 2016 2014 2015 2016 2014 2015 2016 2014 2015 2016 Realtek $97.50 $1,576 0.9 0.8 0.8 7.4 6.3 5.8 12.6 13.9 13.0 2.2 2.1 2.0 17.3 15.2 15.6 Mediatek $415.00 $743,961 2.7 2.4 2.1 11.4 10.9 9.4 13.9 16.4 14.7 2.6 2.6 2.4 18.7 15.6 16.5 Novatek $157.00 $3,058 1.5 1.3 1.2 10.0 8.3 7.7 13.3 11.6 11.3 3.4 3.1 2.9 25.5 26.6 25.6 Qualcomm $68.73 $113,374 4.0 4.1 4.1 11.2 11.9 11.7 13.0 13.6 12.1 3.0 3.3 3.5 23.1 24.4 29.1 PMCS $9.18 $1,828 3.2 3.0 2.7 15.8 15.8 9.9 23.0 18.8 15.9 2.9 2.8 2.3 n.a. 13.6 14.2 Broadcom $44.54 $26,677 3.1 2.9 2.6 15.7 12.6 10.6 15.0 13.7 13.0 2.9 2.6 2.3 20.5 19.7 18.2 Marvell $15.26 $7,859 2.0 1.8 1.7 15.1 12.0 13.7 14.7 13.3 16.9 1.7 1.6 1.6 11.5 11.9 9.3 Skyworks $98.58 $18,832 7.9 5.7 5.1 23.0 14.9 13.3 30.4 20.1 17.7 7.4 6.1 5.0 26.9 29.9 27.7 Median 3.1 2.9 2.6 15.1 12.0 10.6 14.3 13.8 13.9 2.9 2.7 2.4 20.5 17.7 17.3 Mean 3.3 2.9 2.7 14.0 11.4 10.5 17.0 15.2 14.3 3.3 3.0 2.8 20.5 19.6 19.5 Source: Company data, Credit Suisse estimates
Asia Semiconductor Sector 38 16 April 2015
Asia Pacific / Taiwan Technology Distribution
WPG Holdings Ltd
(3702.TW / 3702 TT) Rating NEUTRAL*
Price (15 Apr 15, NT$) 40.25 Target price (NT$) 43.00¹ Upside/downside (%) 6.8 1Q15 at the low end on weak Communications Mkt cap (NT$ mn) 66,642 (US$ 2,132) ■ 1Q15 sales at the low end of guidance. WPG 1Q15 sales came in down - Enterprise value (NT$ mn) 119,671 Number of shares (mn) 1,655.71 7.8% QoQ, at the low end of guidance for down 4-8% QoQ, mainly due to Free float (%) 79.0 weaker China smartphones, as local brands introduced new LTE models 52-week price range 43.2 - 34.4 later this year and Apple demand cuts into the local players high-end ADTO - 6M (US$ mn) 5.6
*Stock ratings are relative to the coverage universe in each business. WPG expects China smartphone to start picking up in May for analyst's or each team's respective sector. operator orders and export market demand to reaccelerate in 2H15. WPG ¹Target price is for 12 months. noted tablet remains very slow and PCs muted, but does not see much Research Analysts impact from volatile forex as most semi products are already settled in USD. Randy Abrams, CFA 886 2 2715 6366 ■ Improving operating margin the main target. Despite lighter sales, 1Q15 [email protected] GMs should still track in-line to 4.4-4.7% guidance as mix shifts a bit away Nickie Yue from lower margin smartphone core components, keeping OpM in the range 886 2 2715 6364 of 1.6-1.8% guidance. The company has focused on improving operating [email protected] efficiency, listing revenue per head 20% the past few years to
$2.25 mn/head and targeting to reduce opex/sales from 2.8% to 2.5-2.6%. ■ 2Q15 and 2015 still targeted up over 10%. WPG expects smartphone sales to rebound with China operators bidding in May for LTE models taking 2Q15 to grow over 10% QoQ and in-line with CS +12% QoQ. Management still sees Communication as a major driver for 2015, with its position in China already firmed and exports potentially rebounding in 2H15. Auto/Industrial now accounts for 10% of sales and the company will work to grow this area by 10% YoY to 15% of total sales in the next 2-3 years, driven by IoT-related opportunities. The company again targets +10-12% YoY growth after reaching that goal in 2014. ■ Maintain Neutral following mixed 1H15 sales. We trim 1Q15 following the weaker 1Q15 sales but keep our 2015/2016E EPS at NT$3.85/NT$4.15 in a more back-end loaded year. We maintain NEUTRAL and our TP of NT$43 based on 11x 2015E EPS, in-line with Synnex but premium to overseas peers at 9x. WPG offers emerging market unit exposure and 6-7% dividend yield based on NT$2.62 payout. Share price performance Financial and valuation metrics
Year 12/13A 12/14E 12/15E 12/16E Price (LHS) Rebased Rel (RHS) Revenue (NT$ mn) 406,256.0 452,567.2 481,593.3 519,757.8 60 120 EBITDA (NT$ mn) 6,600.2 8,248.5 8,957.4 9,671.1 50 110 EBIT (NT$ mn) 6,289.4 7,937.7 8,646.5 9,360.3 40 100 Net profit (NT$ mn) 4,756.3 5,791.3 6,368.2 6,863.5 30 90 EPS (CS adj.) (NT$) 2.87 3.50 3.85 4.15 20 80 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Change from previous EPS (%) n.a. 0 -0.1 -0.1 Consensus EPS (NT$) n.a. 3.39 3.89 4.11 The price relative chart measures performance against the EPS growth (%) 4.4 21.8 10.0 7.8 TAIWAN SE WEIGHTED INDEX which closed at 9540.06 on P/E (x) 14.0 11.5 10.5 9.7 15/04/15 Dividend yield (%) 6.0 5.7 6.5 7.2 On 15/04/15 the spot exchange rate was NT$31.26/US$1
EV/EBITDA (x) 16.0 14.5 13.1 12.6 Performance Over 1M 3M 12M P/B (x) 1.7 1.5 1.4 1.4 Absolute (%) 1.3 9.2 9.7 — ROE (%) 12.2 13.6 14.0 14.6 Relative (%) 1.0 5.1 2.7 —
Net debt/equity (%) 97.1 117.6 109.4 115.7 Source: Company data, Credit Suisse estimates
Asia Semiconductor Sector 39 16 April 2015
Focus tables and charts: WPG
Figure 112: 1Q15 sales at the low end of guidance 1Q15 2Q15 2015 2016 (NT$ mn) CS CS(old) Street Guidance CS CS(old) Street CS CS(old) Diff Street CS CS(old) Diff Street Sales $108,010 $110,726 $111,195 NT$108-113bn $120,971 $124,013 $123,319 $481,593 $489,383 -2% $489,107 $519,758 $528,201 -2% $517,208 Chg -7.8% -5.5% -6.8% Down 3.6%-7.8% 12.0% 12.0% 14.2% 6.4% 8.1% 8.7% 7.9% 7.9% 5.7% GM (%) 4.55% 4.48% 4.56% 4.4-4.7% 4.55% 4.48% 4.53% 4.48% 4.41% 4.48% 4.49% 4.42% NA Op.M(%) 1.66% 1.66% 1.70% 1.6-1.8% 1.89% 1.89% 1.83% 1.80% 1.77% 1.82% 1.80% 1.77% 1.82% Net Inc. 1,275 1,313 1,359 1,707 1,748 1,676 6,368 6,373 6,514 6,863 6,868 6,970 EPS (NT$) $0.77 0.79 $0.83 $1.03 1.06 $0.99 $3.85 $3.85 0% $3.92 $4.15 $4.15 0% $4.12 Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service consensus
Figure 113: WPG margins stabilising Figure 114: WPG inventory days have held constant
WPG Revenue WPG GM and Op Inventory (NT$mn) Inventory Days (NT$mn) Margin (%) 60,000 60 140,000 7.0 50,000 50 120,000 6.0
100,000 5.0 40,000 40
80,000 4.0 30,000 30 60,000 3.0 20,000 20 40,000 2.0 10,000 10 20,000 1.0
0 0.0 0 0
3Q06 1Q07 2Q14 4Q14 1Q06 2Q06 4Q06 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 3Q14 1Q15 2Q15 3Q15 4Q15
1Q07 2Q08 3Q09 4Q10 1Q12 2Q13 3Q14 1Q06 2Q06 3Q06 4Q06 2Q07 3Q07 4Q07 1Q08 3Q08 4Q08 1Q09 2Q09 4Q09 1Q10 2Q10 3Q10 1Q11 2Q11 3Q11 4Q11 2Q12 3Q12 4Q12 1Q13 3Q13 4Q13 1Q14 2Q14 4Q14 Sales GM (%) OpM (%) Inventory Inventory Days Linear (GM (%)) Linear (OpM (%)) Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 115: WPG revenue mix keeping stable Figure 116: WPG mix driven by 3Cs (PC, Cons., Comms) (%) 100 (%) 90 100 80 90 70 80 60 70 50 60 40 50 40 30 30 20 20 10 10 0
-
1Q11 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15
1Q07 3Q07 1Q13 3Q13 1Q06 3Q06 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q14 3Q14 1Q15 3Q15 CoreComponent Analog & Mixed Signal Logic Discrete & Logic Memory Passive PC Communication Consumer Industrial Automotive Others PEMCO Optical Others Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 117: WPG’s multiple de-rated as growth slowed Figure 118: WPG trading in-line with its peer group WPG US GAAP PE Band NT$ 70 60 Price Mkt Cap EV/Sales (x) P/E Multiple (x) P/B Multiple (x) 15x Company Ticker 4/15/2015 (US$mn) 2013 2014 2015 2013 2014 2015 2013 2014 2015 50 WPG 3702.TW 40.25 2,132 0.3 0.3 0.2 14.0 11.5 10.5 1.7 1.5 1.4 12x WT Micro 3036.TW 47.4 617 0.1 0.1 0.1 13.3 9.2 8.9 1.4 1.3 1.2 40 Synnex 2347.TW 41.4 2,102 0.3 0.3 0.3 12.5 13.1 10.9 1.5 1.5 1.4 Arrow ARW 61.03 5,840 0.4 0.3 0.3 12.2 10.3 9.8 1.5 1.4 1.3 9x 30 Avnet AVT 44.34 6,047 0.3 0.3 0.3 12.8 10.5 9.7 1.4 1.2 1.2 Median 0.3 0.3 0.3 12.8 10.5 9.8 1.5 1.4 1.3 20 Mean 0.3 0.2 0.2 12.9 10.9 10.0 1.5 1.4 1.3 4x 10
0
Jul/06 Jul/07 Jul/08 Jul/09 Jul/10 Jul/11 Jul/12 Jul/13 Jul/14
Jan/14 Jan/07 Jan/08 Jan/09 Jan/10 Jan/11 Jan/12 Jan/13 Jan/15 Jan/06 Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Asia Semiconductor Sector 40 16 April 2015
Companies Mentioned (Price as of 15-Apr-2015) ASM Pacific Tech. (0522.HK, HK$81.0, OUTPERFORM, TP HK$97.0) Advanced Micro Devices, Inc. (AMD.OQ, $2.67) Advanced Semicon. Engr. (2311.TW, NT$42.0, OUTPERFORM, TP NT$47.0) Amkor Technology Inc. (AMKR.OQ, $8.62, NEUTRAL, TP $9.0) Apple Inc (AAPL.OQ, $126.3) Broadcom Corp. (BRCM.OQ, $44.125) FocalTech Corporation, Ltd. (3545.TW, NT$35.0) Freescale Semiconductor Inc. (FSL.N, $39.97) HTC Corp (2498.TW, NT$130.5) Hua Hong Semiconductor Limited (1347.HK, HK$11.6, OUTPERFORM[V], TP HK$14.0) Infineon Technologies AG (IFXGn.DE, €11.735) Intel Corp. (INTC.OQ, $31.49) LG Electronics Inc (066570.KS, W60,000) Marvell Technology Group Ltd. (MRVL.OQ, $15.15) MediaTek Inc. (2454.TW, NT$398.5, NEUTRAL, TP NT$425.0) Micron Technology Inc. (MU.OQ, $27.72) Powertech Technology (6239.TW, NT$54.2, NEUTRAL, TP NT$56.0) QUALCOMM Inc. (QCOM.OQ, $68.97) Realtek Semiconductor (2379.TW, NT$96.0, NEUTRAL, TP NT$98.0) STATS (STTS.SI, S$0.505) Samsung Electronics (005930.KS, W1,446,000) Semiconductor Manufacturing International Corp. (0981.HK, HK$0.87, OUTPERFORM, TP HK$1.0) Siliconware Precision (2325.TW, NT$49.95, OUTPERFORM, TP NT$60.0) Sony (6758.T, ¥3,780) Taiwan Semiconductor Manufacturing (2330.TW, NT$143.0, NEUTRAL, TP NT$145.0) Texas Instruments Inc. (TXN.OQ, $56.75) Toshiba (6502.T, ¥482) USISH (601231.SS, Rmb39.87) United Microelectronics (2303.TW, NT$14.55, NEUTRAL, TP NT$18.0) Vanguard International Semiconductor (5347.TWO, NT$48.5, NEUTRAL, TP NT$56.0) WPG Holdings Ltd (3702.TW, NT$40.25, NEUTRAL, TP NT$43.0)
Disclosure Appendix
Important Global Disclosures I, Randy Abrams, CFA, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for ASM Pacific Tech. (0522.HK)
0522.HK Closing Price Target Price Date (HK$) (HK$) Rating 25-Apr-12 103.10 89.50 N 27-Jul-12 101.10 77.50 U 22-Aug-12 85.05 73.50 26-Oct-12 86.70 67.50 07-Mar-13 101.60 93.00 N 24-Apr-13 78.80 72.50 26-Jul-13 86.20 75.50 04-Nov-13 68.05 55.20 U 27-Feb-14 70.25 78.00 O
13-Mar-14 67.50 * NEUTRAL 24-Apr-14 82.80 97.00 O UNDERPERFORM OUTPERFORM * Asterisk signifies initiation or assumption of coverage.
Asia Semiconductor Sector 41 16 April 2015
3-Year Price and Rating History for Advanced Semicon. Engr. (2311.TW)
2311.TW Closing Price Target Price Date (NT$) (NT$) Rating 23-Apr-12 25.40 31.58 O 26-Jul-12 19.48 27.20 26-Apr-13 25.85 31.00 16-Jul-13 25.35 R 29-Aug-13 25.45 31.00 O 09-Oct-13 29.00 34.00 20-Dec-13 27.25 31.50 10-Feb-14 29.15 32.50 08-Apr-14 33.45 40.00 28-Apr-14 34.75 42.00 OUTPERFORM REST RICT ED 08-Jul-14 39.90 47.00 15-Oct-14 35.05 R 28-Nov-14 37.55 47.00 O * Asterisk signifies initiation or assumption of coverage.
3-Year Price and Rating History for Amkor Technology Inc. (AMKR.OQ)
AMKR.OQ Closing Price Target Price Date (US$) (US$) Rating 27-Apr-12 5.53 8.00 O 26-Jul-12 4.91 6.00 25-Apr-13 3.86 5.50 26-Jul-13 4.34 * 30-Jul-13 4.28 5.50 O 29-Apr-14 7.80 8.40 29-Jul-14 9.43 10.20 N * 28-Oct-14 6.33 8.00 11-Feb-15 8.69 9.00 * Asterisk signifies initiation or assumption of coverage. OUTPERFORM NEUTRAL
3-Year Price and Rating History for Hua Hong Semiconductor Limited (1347.HK)
1347.HK Closing Price Target Price Date (HK$) (HK$) Rating 14-Oct-14 14.00 O * * Asterisk signifies initiation or assumption of coverage.
OUTPERFORM
Asia Semiconductor Sector 42 16 April 2015
3-Year Price and Rating History for MediaTek Inc. (2454.TW)
2454.TW Closing Price Target Price Date (NT$) (NT$) Rating 18-Apr-12 277.50 300.00 N 30-Apr-12 253.00 260.00 25-Jun-12 280.50 300.00 29-Jun-12 273.00 R 27-Jun-13 328.00 400.00 O 09-Sep-13 370.00 440.00 01-Nov-13 404.50 480.00 06-Jan-14 431.50 500.00 08-Apr-14 460.00 540.00
01-May-14 472.00 570.00 NEUTRAL 07-Oct-14 455.50 540.00 REST RICT ED OUTPERFORM 10-Feb-15 454.00 520.00 29-Mar-15 419.00 425.00 N * Asterisk signifies initiation or assumption of coverage.
3-Year Price and Rating History for Powertech Technology (6239.TW)
6239.TW Closing Price Target Price Date (NT$) (NT$) Rating 18-Apr-12 54.90 57.00 N 02-May-12 51.60 60.00 31-Jul-12 60.50 56.00 01-Nov-12 42.25 47.00 30-Apr-13 52.80 49.00 31-Jul-13 57.50 62.00 31-Oct-13 53.00 56.00 29-Apr-14 46.25 59.00 O 07-Jul-14 54.60 63.00 16-Oct-14 50.60 60.00 NEUTRAL OUTPERFORM 26-Jan-15 52.60 55.00 N * Asterisk signifies initiation or assumption of coverage.
3-Year Price and Rating History for Realtek Semiconductor (2379.TW)
2379.TW Closing Price Target Price Date (NT$) (NT$) Rating 18-Apr-12 56.17 58.82 N 11-May-12 62.35 68.62 01-Aug-12 51.96 59.80 01-Feb-13 66.04 70.79 29-Apr-13 80.00 84.16 10-Jun-13 70.99 74.26 01-Nov-13 69.60 75.00 23-Jan-14 90.00 84.00 07-Aug-14 98.80 98.00 * Asterisk signifies initiation or assumption of coverage. NEUTRAL
Asia Semiconductor Sector 43 16 April 2015
3-Year Price and Rating History for Semiconductor Manufacturing International Corp. (0981.HK)
0981.HK Closing Price Target Price Date (HK$) (HK$) Rating 18-Apr-12 0.40 0.41 N 07-Jan-13 0.42 0.57 O 25-Apr-13 0.54 0.68 10-Jun-13 0.62 0.68 N 30-Apr-14 0.63 0.73 21-Jul-14 0.77 0.80 23-Mar-15 0.68 0.86 O * Asterisk signifies initiation or assumption of coverage.
NEUTRAL OUTPERFORM
3-Year Price and Rating History for Siliconware Precision (2325.TW)
2325.TW Closing Price Target Price Date (NT$) (NT$) Rating 18-Apr-12 34.90 39.00 O 24-Apr-12 33.20 41.00 26-Jul-12 28.65 36.00 30-Apr-13 35.00 40.00 01-Nov-13 35.10 42.00 07-Apr-14 41.45 50.00 02-May-14 45.00 54.00 03-Jul-14 51.20 56.00 30-Jul-14 44.60 50.00 N 05-Jan-15 48.20 56.50 O OUTPERFORM NEUTRAL 28-Jan-15 52.50 60.00 * Asterisk signifies initiation or assumption of coverage.
3-Year Price and Rating History for Taiwan Semiconductor Manufacturing (2330.TW)
2330.TW Closing Price Target Price Date (NT$) (NT$) Rating 18-Apr-12 85.00 90.00 O 27-Apr-12 86.00 95.00 19-Jul-12 77.50 87.00 08-Oct-12 89.10 95.00 N 06-Dec-12 96.60 109.00 O 19-Apr-13 106.50 116.00 19-Feb-14 108.00 122.00 12-Mar-14 113.00 130.00 18-Apr-14 123.00 137.00 10-Jul-14 134.50 150.00 OUTPERFORM NEUTRAL 17-Jul-14 124.50 145.00 08-Jan-15 138.00 145.00 N * Asterisk signifies initiation or assumption of coverage.
Asia Semiconductor Sector 44 16 April 2015
3-Year Price and Rating History for United Microelectronics (2303.TW)
2303.TW Closing Price Target Price Date (NT$) (NT$) Rating 18-Apr-12 14.15 17.50 O 25-Jul-12 12.10 17.00 07-Sep-12 11.80 R 10-Sep-12 12.10 17.00 O 31-Oct-12 10.85 14.00 07-Jan-13 12.20 14.00 N 07-Feb-13 11.35 12.00 10-Jul-13 13.90 13.00 02-May-14 13.15 14.00
30-Oct-14 13.20 14.50 OUTPERFORM 26-Jan-15 15.50 16.00 REST RICT ED NEUTRAL 28-Jan-15 15.65 18.00 * Asterisk signifies initiation or assumption of coverage.
3-Year Price and Rating History for Vanguard International Semiconductor (5347.TWO)
5347.TWO Closing Price Target Price Date (NT$) (NT$) Rating 18-Apr-12 13.60 12.00 N 01-May-12 13.95 16.00 29-Oct-12 18.95 23.00 O 25-Jan-13 20.60 23.00 N 06-May-13 34.00 34.00 05-Nov-13 32.30 35.00 17-Feb-14 42.50 44.00 17-Mar-14 46.75 50.00 26-Jan-15 54.50 56.00 * Asterisk signifies initiation or assumption of coverage. NEUTRAL OUTPERFORM
3-Year Price and Rating History for WPG Holdings Ltd (3702.TW)
3702.TW Closing Price Target Price Date (NT$) (NT$) Rating 18-Apr-12 40.20 41.00 N 23-May-12 35.40 38.50 06-Aug-12 32.80 37.50 02-Nov-12 34.85 36.50 01-Feb-13 39.95 36.00 03-May-13 36.65 39.00 23-Jul-13 38.00 40.00 01-Nov-13 34.50 38.50 06-Jan-14 34.20 39.50 13-May-14 39.60 41.00 NEUTRAL 05-Aug-14 41.30 43.00 31-Oct-14 37.00 42.00 04-Feb-15 40.20 43.00 * Asterisk signifies initiation or assumption of coverage. 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.
Asia Semiconductor Sector 45 16 April 2015
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 attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European rati ngs 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 relat ive attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10- 15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings w ere based on a stock’s total return relative to the average total return of the relevant country or regional benchmark. 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.
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.
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Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 44% (53% banking clients) Neutral/Hold* 38% (51% banking clients) Underperform/Sell* 16% (43% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individ ual factors.
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Price Target: (12 months) for Powertech Technology (6239.TW) Method: Our NT$56.00 target price for Powertech Technology is based on a 1.3x forward P/B, midpoint of its post crisis range. The stock is protected by 60% payout ratio, implying a 5% yield, also providing some downside protection for the stock, with lift into 2016 for the Xian assembly. Risk: The risks that may impede achievement of our NT$56.00 target price for Powertech are: (1) The strong strategic partnerships with Kingston, Toshiba, and Elpida limit its ability to supply the rest of the industry, and also create a concentrated customer risk with close to 80% of sales coming from the Japan memory sector; (2) Price competition from its peers is more severe than expected; (3) Powertech, like its peers, would be affected by an unexpected slowdown in the global economy; (4) Cost control is not as good as expected; and (5) There is a more severe drop in DRAM pricing than expected, leading to higher pricing pressure and a decline in ASPs. Price Target: (12 months) for Taiwan Semiconductor Manufacturing (2330.TW)
Method: Our NT$145 target price for TSMC is based on mid-cycle 3x forward P/B (versus 2.5-3.5x range). Slowing sequential growth momentum and rising competition keeps fair value at the midpoint of its historical range and caps multiple expansion.
Asia Semiconductor Sector 46 16 April 2015
Risk: Risks that could cause the share price to diverge from our NT$145 target price for TSMC would include: evidence of competitor execution stumbles continuing, new growth/customer drivers emerging or evidence of TSMC's position strengthening even in the face of stronger competitive challenges as we approach 2016/17. Price Target: (12 months) for WPG Holdings Ltd (3702.TW)
Method: WPG's target price of NT$43 is based on 11x our 2015E EPS, in-line with Synnex but premium to overseas peers at 9x. WPG offers emerging market unit exposure and 6-7% dividend yield based on NT$2.62 payout Risk: The major risks to our 12-month target price of NT$43 for WPG (3702.TW) include: 1) Outlook of WPG's semiconductor distribution business is tied to the overall semiconductor demand. 2) Relationship with IC suppliers 3) Risk of excess component inventory and cash flow management 4) Financial costs and availability of bank credits. Price Target: (12 months) for Vanguard International Semiconductor (5347.TWO)
Method: Our target price for Vanguard International Semiconductor of NT$56 is based on current level 3.1x P/B, high-end of its 0.8-3.3x range, also implying 14x 2016E EPS of NT$4.00. Risk: The risks that may impede achievement of our NT$56 target price for Vanguard International Semiconductor include the following: (1) other memory companies convert 200mm to logic, (2) memory pricing impacts the foundry revenue from Winbond, (3) process transition hiccups. (4) Price competition from peers is more severe than expected. (5) Vanguard, like its peers would be affected by an unexpected slowdown in the global economy. Price Target: (12 months) for Advanced Semicon. Engr. (2311.TW)
Method: Our NT$47 target price for ASE is based on 2.4x forward P/B (price-to-book), back to the levels it reached during the prior 2000, 2002, 2004 and 2007 upturns. We maintain our positive view on the company with its industry leading back-end business and also incremental growth from SiP modules. The company is also reasonable on sum-of-the-parts basis. Risk: Risks that could impede achievement of our NT$47 target price for ASE include: (1) The global semiconductor up-cycle not as strong as expected; being an upstream company, ASE tends to be more cyclical than other tech plays. (2) Price competition from peers more severe than expected. (3) ASE, like its peers, would be affected by an unexpected slowdown of the global economy. (4) Cost control not as good as expected. (5) 2H14 inventory correction. Price Target: (12 months) for Amkor Technology Inc. (AMKR.OQ) Method: We are using 1.6x 12-month forward P/B to come up with our target price of $9.0 for Amkor, which also reflects a 10x 2015E EPS of $0.87. Risk: The following are risks to our $9.0 price target for AMKR. We think there is a risk that sub-con group multiples could expand as a result of a re-rating in the sector due to better capital discipline this cycle. A worse-than-expected inventory correction or macro demand weakness could result in pricing, margin, estimate and multiple risk for the group. Price Target: (12 months) for MediaTek Inc. (2454.TW) Method: Our target price of NT$425 for Mediatek is based on 15x 2016E EPS (earnings per share), down from prior 16x on less profitable LTE ramp. Risk: Risks that could impede achievement of our NT$425 target price for Mediatek include the impact of competitive products and pricing, timely design acceptance by its customers, timely introduction of new technologies, ability to ramp new products into volume, industry- wide shifts in supply and demand for semiconductor products, industry overcapacity, availability of manufacturing capacity, and financial stability in end markets. Price Target: (12 months) for ASM Pacific Tech. (0522.HK) Method: Our target price of HK$97.00 for ASM Pacific reflects4.4x/4.1x 2015/2016 book value and 20.4x/18.3x 2015/2016 EPS. In prior industry cycles from 2001-12, ASM's share price bottomed at a 3x trough cycle P/B and peaked at 7x upcycle P/B. With a cyclical upturn, we value ASM with an up-cycle valuation of 5x 2015E P/B. Risk: Risks to our HK$97.00 target price for ASM Pacific include: (1) a shorter-than-expected recovery in semiconductor equipment investment, which would have a direct negative impact on ASM's backend equipment business. (2) The cyclical nature of the semiconductor industry and a short order leadtime are the major risks in terms of the accuracy of earnings forecasts, which form the basis of our target price derivation.
Asia Semiconductor Sector 47 16 April 2015
Price Target: (12 months) for Hua Hong Semiconductor Limited (1347.HK) Method: Our target price of HK$14 for Hua Hong Semiconductor Limited is based on 1.2x P/B (price-to-book), in line with peer SMIC. Hua Hong offers stable and profitable low teens growth, mid-teens pretax margins and positive FCF as an 8" China foundry targeting specialty semiconductors using legacy capacity and also receiving China gov't support on R&D and Manufacturing. Risk: Hua Hong has several risks that could impact the business outlook and our HK$14 target price: (1) 8" applications could migrate to 12". (2) Hua Hong's access to the Huali 12" fab is not assured. (3) China support could wane – private forces sometimes prevail. (4) The company will stay closely held and government backed post the IPO. Price Target: (12 months) for Semiconductor Manufacturing International Corp. (0981.HK) Method: Our HK$1.00 target price for Semiconductor Manufacturing International Corp. is based on 1.5x forward P/B (price-to-book), highs reached in 2010, 2011 and 2014, as the stock should remain a target for China investors as a beneficiary of China's support for its industry. Risk: Risks that could impede achievement of our HK$1.00 target price for SMIC include: (1) the global semiconductor up-cycle is not as strong as market expected, being an upstream company, SMIC tends to be more cyclical than other tech plays. (2) Price competition from peers are more severe than expected. (3) SMIC, like its peers will be affected by unexpected slow down of global economy. (4) The advanced technology products do not come out as the company scheduled to. Price Target: (12 months) for United Microelectronics (2303.TW)
Method: On better profitability, our NT$18 target price for United Microelectronics is based on 1x P/B (vs. 0.6-0.9x range), implying and 15x 2015 P/E. Risk: Risks to our NT$18 target price for United Microelectronics include: While the positive trade could continue, we stay Neutral balancing rising competition with TSMC battling Samsung and GlobalFoundries and SMIC also working to start 28nm production in 2H15, keeping ROEs in the single digits. Price Target: (12 months) for Siliconware Precision (2325.TW)
Method: Our NT$60 target price for SPIL is based on 2.5x P/B, implying 14.6x 2015E EPS of NT$4.10. We view the company well supported on ramp of LTE smartphones and 2nd wave of China LTE infrastructure, seasonal pick-up across consumer and ramp of TV controllers, game console and PC and end of inventory correction coming out of 1Q15. Risk: Risks that could impede achievement of our NT$60 target price for SPIL include: (1) Continued inventory correction or weaker restocking; (2) price competition from peers that is more severe than expected; (3) SPIL, like its peers, would be affected by an unexpected slowdown of the global economy; and (4) cost control and/or material costs are not as good as the company expects. Price Target: (12 months) for Realtek Semiconductor (2379.TW) Method: Our target price of NT$98 is based on 14x 2015E EPS, in-line with its peers. Realtek has concentrated exposure to competitive PC products seeing maturing growth and price erosion, overshadowing contribution from consumer, wireless and digital home applications with more potential. Risk: The major risk to Realtek achieving our NT$98 target price is the company's business concentration on the PC industry. Realtek derives 66% of its sales supplying products into the PC industry, a sector known for standardization and focus on continuous cost reduction. Due to the large size and standard nature of the architecture, many of Realtek's products face competition and commoditization, placing risks on pricing and margins. The segment is also at risk of slowdown as the consumer purchasing shifts to tablets or other media consumption devices where Realtek may have less silicon designed in. Other risks include: 1) its capability to gain market share in key products; 2) its margins trends, and 3) foundry manufacturing risks, 4) inventory cycle risks to sales when channel inventories are at high levels.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names The subject company (2330.TW, AMKR.OQ, 2454.TW, 3545.TW) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (3545.TW) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (3545.TW) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (6239.TW, 5347.TWO, AMKR.OQ, 2454.TW, 0522.HK, 3545.TW) within the next 3 months.
Asia Semiconductor Sector 48 16 April 2015
As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (6239.TW, 2330.TW, 3702.TW, 2311.TW, 2454.TW, 2303.TW, 2325.TW, 2379.TW). Credit Suisse has a material conflict of interest with the subject company (2330.TW) . Credit Suisse is acting as the financial advisor to Motech Industries Inc in relation to the share subscription by Taiwan Semiconductor Manufacturing Co., Ltd. Credit Suisse has a material conflict of interest with the subject company (0981.HK) . Credit Suisse USA LLC is acting as an advisor to Atmel Corp on the potential transaction with Microchip Technology and On Semiconductor.
For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683. Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (6239.TW, 2330.TW, 3702.TW, 5347.TWO, 2311.TW, AMKR.OQ, 2454.TW, 0522.HK, 1347.HK, 0981.HK, 2303.TW, 2325.TW, 2379.TW, 3545.TW) within the past 12 months Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit- suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (2311.TW, AMKR.OQ) within the past 3 years. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. Taiwanese Disclosures: This research report is for reference only. Investors should carefully consider their own investment risk. Investment results are the responsibility of the individual investor. Reports may not be reprinted without permission of CS. Reports written by Taiwan based analysts on non-Taiwan listed companies are not considered recommendations to buy or sell securities under Taiwan Stock Exchange Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse AG, Taipei Securities Branch ...... Nickie Yue ; Randy Abrams, CFA
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Asia Semiconductor Sector 49 16 April 2015
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TC2121 Asia Semiconductor Sector 50