11 July 2016 Asia Pacific Equity Research Semiconductor Devices

Asia Semiconductor Sector Research Analysts SUPPLY CHAIN RESEARCH Randy Abrams, CFA 886 2 2715 6366 [email protected] chain: Some lift from better Jerry Su volumes and new markets 886 2 2715 6361 [email protected] Figure 1: China also shifts to new applications to supplement Semiconductor market size (US$mn) Auto, IoT, VR and wearables Pauline Chen % of smartphone market 120,000 80% 886 2 2715 6323 105,000 75% [email protected] 90,000 70% 75,000 65% Sam Li 60,000 60% 852 2101 6775 45,000 55% [email protected] 30,000 50% 15,000 45% Derrick Yang 0 40% 886 2 2715 6367 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 [email protected] Smartphones Auto IoT Wearables Kyna Wong VR Broad IoT % of smartphone 852 2101 6950 Source: Company data, Credit Suisse research [email protected] We provide our bi-yearly update on China smartphone trends following MWC, Haas Liu CES Shanghai, and meetings across the chain. The market is healthier through 886 2 2715 6365 1H16 with unit demand up 10% YTD and supplemented by continuous content [email protected] gains and a push into IoT/connected home, auto, wearables and VR. ■ Key themes from our meetings: (1) China / Export mid-range smartphone demand healthy; (2) Processors see MediaTek take share but at aggressive ; (3) Smartphone platforms further upgrade camera, display, memory and processing; (4) China brands accelerate diversification into a diverse range of IoT products (wearables, home automation, drones and robots); and (5) VR proliferates across multiple Chinese platforms. ■ Chipset units offset by pricing. We project China-built smartphones reaccelerating from +8% YoY in 2015 to +14% YoY due to China subsidies and ramp from 30% 4G EM penetration. Chipset volumes are strong, but risks persist on pricing and overbooking, triggering a correction by 4Q16 with MediaTek units +35% YoY to a 540 mn annualised pace in 2Q16. ■ Display boosted by mid-end smartphones. Panels are seeing spot shortages and mid-range shift to FHD and high-end to WQHD or OLED. New technologies such as force touch, sensor, dual camera and quick charge are the main selling points for mid-end smartphone makers. ■ Stocks: Favour content / share gains at firm margins. Top picks include Egis (fingerprint gains into /China), Himax (small panel ramp and AR/VR), Largan (rising specs/dual camera), TSMC (strong share/ technology) and Win Semi (RF content gains). While MediaTek's build has been strong, we keep a Neutral stance on pricing and inventory correction risks. Our China top picks include AAC (acoustic upgrade), Tongda (metal casing) and Truly (fingerprint module/camera upgrade).

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11 July 2016 Focus charts and tables

Figure 2: China-built smartphones pacing +14% YoY in '16 Figure 3: China smartphones reaccelerate in 2H15 / 2016 China brand units (mn) 2013 2014 2015 2016E 2017E 2018E 15-18 CAGR China smartphones (mn) YTD YoY % 52.0 77.0 107.0 130.0 145.0 160.0 14% 11.0 30.0 40.0 75.0 90.0 100.0 36% 500 20% 18.7 61.1 72.5 68.0 71.0 75.0 1% 400 15% BBK/Vivo 11.2 30.0 36.0 60.0 70.0 80.0 30% 300 10% ZTE 40.0 48.0 50.0 54.8 58.4 63.2 8% 200 45.5 59.4 43.5 41.0 41.0 41.8 -1% 5% Lenovo's Moto 26.3 26.3 26.3 NM 100 TCL/Alcatel 17.5 39.6 40.8 40.8 45.7 52.7 9% - 0% 35.0 43.5 28.7 30.1 32.7 36.2 8% (100) 3.0 5.2 24.8 22.0 23.0 25.0 0% -5% (200) 11.4 16.0 12.8 27.0 32.0 36.0 41% -10% Tecno 2.0 4.0 7.5 8.0 9.0 10.0 10% (300) 8.3 11.7 6.0 5.0 4.0 4.0 -13% (400) -15% Tianyu / K-Touch 13.3 11.2 4.3 2.0 1.0 - -100% (500) -20% Bird 2.1 2.5 1.2 1.0 1.0 1.0 -6% Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec G-Five 2.0 5.0 0.5 - - - -100% Others 193.1 278.9 302.0 297.7 301.7 288.8 -1% 2014 2015 2016 China brand units (mn) 466.1 723.1 777.6 888.7 951.8 1,000.0 9% 2014 YTD YoY 2015 YTD YoY 2016 YTD YoY Growth (YoY) 96% 55% 8% 14% 7% 5% Source: Company data, Credit Suisse research Source: MIIT, Credit Suisse estimates

Figure 4: Spreadtrum launching a 16nm TSMC chip in 2H16, planning an -based chip in 1H17 Spreadtrum Spreadtrum Spreadtrum Spreadtrum Spreadtrum Spreadtrum Spreadtrum Chipset SC9620 2-chip Shark SC8831G SC7731G SC9832 SC9860 SC98xx Technology 40nm SMIC 40nm SMIC 28nm TSMC 28nm TSMC 28nm TSMC 16nm TSMC 14nm Intel Multi-core Quad Quad Quad Quad Quad Octa Octa CPU Modem Only A7 A7 A7 A7 A53 x86 Network 4G 4G 4G 3G 4G 4G 4G Frequency 1.0GHz 1.2GHz 1.4GHz 1.5GHz 1.5GHz >2.0GHz >2.0GHz GPU Mali-400 Mali-400 Mali-400 Mali-400 MP2 Mali-400 Mali-T880 TBD Sampling 3Q14 1Q14 3Q14 1Q15 4Q15 3Q16 1Q17 Ramp 4Q14 2Q15 1Q15 2Q15 2Q16 4Q16 2Q17 Source: Company data, Credit Suisse estimates

Figure 5: Samsung would add ~10% to MediaTek's EPS Figure 6: OLED growing display share at China brands

Samsung potential for Mediatek in 2017 2016 2015

Samsung A/J Series (mn) 200 TCL ASP (US$) $9.50 Xiaomi Mediatek share 20% Coolpad Mediatek revenue (NT$ mn) $12,274 ZTE GM% (35%) $4,296 Huawei Incremental Opex (10%) $1,227 Lenovo Op Profit (NT$ mn) $3,069 Meizu Tax (NT$mn) $435 Gionee Net Income (NT$mn) $2,634 vivo Shares 1,545 OPPO

Incremental EPS in 2017: $1.71 0% 10% 20% 30% 40% 50% Upside to 2017 Earnings: 10.7% Source: Company data, Credit Suisse research Source: MIIT, Credit Suisse estimates

Figure 7: IoT semis could reach US$35 bn by 2020 Figure 8: Auto/IoT/VR/Wearables rising vs smartphones Sales (US$mn) YoY (%) Semiconductor market size (US$mn) Auto, IoT, VR and wearble $40,000 45% % of smartphone market 40% $35,000 120,000 80% 35% $30,000 105,000 75% 30% $25,000 90,000 70% 25% $20,000 75,000 65% 20% $15,000 60,000 60% 15% 45,000 55% $10,000 10% $5,000 5% 30,000 50% $0 0% 15,000 45% 0 40%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

2013 2014

2015E 2016E 2018E 2019E 2020E 2017E Smartphones VR ASSP / FPGA Microcontroller Sensors Cellular Wi-Fi ZigBee Other Wireless Auto IoT Wireline YoY Growth Wearables Auto/IoT/VR/Wearable % of smartphone Source: Gartner Source: Gartner, IDC, Credit Suisse estimates

Asia Semiconductor Sector 2 11 July 2016 China smartphone chain: Some lift from better volumes and new markets We provide our latest update on the China smartphone supply chain following updates from Mobile World Congress Shanghai, CES Shanghai, and meetings across the chain. We summarise themes including: (1) China/Export mid-range smartphone demand healthy; (2) Processors see MediaTek take share but at aggressive pricing; (3) Smartphone platforms further upgrade camera, display, memory and processing; (4) China brands accelerate diversification into a diverse range of IoT products (wearables, home automation, drones, and robots); and (5) VR proliferates across multiple Chinese platforms. China smartphone demand solid through 1H16 The China smartphone market has improved YTD, with IDC reporting China brands +7% YoY, Chinese tier-ones +9% YoY and MIIT reporting even more robust growth at +11% YTD and LTE +18% YTD. Factoring in export growth, we project China-built smartphones reaccelerating from +8% YoY in 2015 to +14% YoY, supported by the three China carriers subsidising LTE and 3G to 4G upgrades accelerating in emerging markets from only 30% penetration. Builds are very strong but we would monitor the risk of an inventory correction by 4Q16. Content upgrades also continue with MP count rising to 20% YoY to 10-11MP and several dual cameras launching from China brands in 2H, core migration up from 4 to 5.5-6 YoY, NAND up 50% to 22GB and display shifting to HD/FHD. Chipset units offset by pricing, mid-end lifts display Chipsets are not seeing meaningful benefits from consolidation and better unit growth, with and MediaTek in a fierce battle and Spreadtrum discounting 3G aggressively. MediaTek is gaining LTE share though has not cracked the flagships. Qualcomm targets refreshed high-end MSM8997/MSM8998 toward year-end on Samsung’s 10nm and its Snapdragon 600 back from 14nm to 28nm HPM to save cost. Spreadtrum continues to lag but targets 16nm octa-core SC9832 for 2H16 and follow-on 14nm Intel chip for 1H17. Our display and component checks suggest mid-end smartphones (HD resolution) are seeing strongest demand, with some panel shortage/tightness. Most mid- to high-end models have shifted to FHD and flagship smartphones now use WQHD TFT or OLED screen. New technologies such as force touch, fingerprint sensor, dual camera and quick charge are also the main selling points for mid-end smartphone makers. Chinese brands accelerating into VR, Auto and IoT Chinese brands are increasingly shifting in a land rush to product IoT (connected home, wearables, robots), automotive after-market and VR all-in-one and head mounted devices. Whitebox VR is proliferating including simple US$5-10 phone based goggles, US$50-200 All-in-One VRs based on MTK/Intel/Rockship reference designs, and some high-end AR/VR goggles. We expect high interest in Daydream reference designs for 2017, which the chain is hopeful could spur a round of innovation, upgrades and replacements. Stocks: Favour content / share gains at firm margins The China smartphone supply chain is seeing some investable opportunities from decent unit growth this year (builds up 10-15% YoY) and spec upgrades (3G to 4G, camera, fingerprint and display) that can still control margins well. Our top picks include Egis (fingerprint gains into Samsung and China brands), Himax (China small panel ramp and AR/VR content), Largan (rising spec upgrades and start of dual camera), TSMC (strong share and technology position with leverage to VR, IoT and auto) and Win Semi (rising RF content in smartphones and Wifi). While MediaTek is benefiting on units, we stay Neutral balancing pricing /margin pressure and risk of a correction from strong builds (+35% YoY). Our China top picks include AAC (acoustic upgrade), Tongda (metal casing) and Truly (fingerprint module/camera upgrade).

Asia Semiconductor Sector 3 11 July 2016 Valuation summary Figure 9: China smartphone supply chain valuation summary Price Mkt Cap EV/Sales (x) P/E Multiple (x) P/B Multiple (x) ROE Trough/Peak (EV/Sales) Company Ticker 7/7/2016 (US$mn) 2015 2016 2017 2015 2016 2017 2015 2016 2017 2015 2016 2017 Fabless MediaTek 2454.TW $237.00 $11,511 1.1 0.9 0.8 14.2 15.8 14.8 1.5 1.5 1.4 10.8 9.3 9.5 Qualcomm QCOM $52.37 $76,927 3.2 3.8 3.6 11.2 12.6 10.4 2.7 2.9 2.8 24.3 23.4 27.3 Realtek 2379.TW $97.90 $1,528 -0.5 -0.5 -0.5 20.4 15.1 13.6 2.2 2.2 2.1 10.9 14.7 15.5 Novatek 3034.TW $118.00 $2,219 -0.3 -0.3 -0.3 11.2 12.9 11.5 2.5 2.5 2.4 22.6 19.5 20.8 Focaltech 3545.TW $25.95 $236 0.0 -0.3 -0.3 32.2 14.3 8.3 0.7 0.6 0.6 2.1 4.5 7.3 Sitronix 8016.TW $104.50 $385 -0.2 -0.2 -0.2 15.0 12.7 11.7 3.0 2.7 2.5 20.5 22.8 22.3 Himax HIMX $7.93 $1,363 2.0 1.7 1.5 54.2 20.1 14.8 3.0 2.8 2.6 5.6 14.0 17.6 Elan 2458.TW $36.25 $494 -0.1 -0.2 -0.3 19.4 19.4 16.7 2.2 2.3 2.2 11.2 11.6 13.0 Egistec 6462.TWO $147.00 $312 -1.2 -0.3 -0.1 NA 22.8 6.8 7.5 5.6 3.3 -6.7 24.6 48.4 Synaptics SYNA $48.39 $1,783 1.0 1.0 1.0 8.5 10.2 9.8 2.3 2.3 1.9 29.5 18.5 19.2 Foundry TSMC 2330.TW $161.50 $129,425 -0.2 -0.2 -0.2 14.6 13.3 12.2 3.4 3.0 2.7 23.5 22.9 22.1 UMC 2303.TW $12.35 $4,818 0.8 0.9 0.9 11.5 16.3 14.5 0.7 0.7 0.7 5.9 4.1 4.5 SMIC 0981.HK $0.62 $3,369 1.4 1.5 1.3 12.1 14.1 13.4 0.9 0.9 0.9 7.6 6.6 6.5 Hua Hong 1347.HK $7.12 $948 1.0 0.7 0.5 8.5 10.1 9.2 0.6 0.6 0.5 7.5 5.8 6.0 Win Semi 3105.TWO $61.90 $1,122 3.0 2.6 2.1 13.8 11.8 10.4 2.1 2.0 1.8 15.5 16.9 17.7 AWSC 8086.TWO $55.60 $241 0.1 0.1 0.1 7.4 9.0 5.9 2.4 2.2 1.9 40.2 28.6 34.2 IDM Intel INTC $32.97 $155,684 2.7 2.8 2.6 14.1 13.7 12.2 2.5 2.4 2.1 18.4 18.0 17.5 Samsung 005930.KS $1,421,000 $175,372 1.0 0.9 0.8 10.8 9.0 7.9 1.1 1.0 0.9 10.0 10.7 11.1 Qorvo QRVO $53 $6,719 4.1 2.7 2.5 11.1 12.3 10.7 1.3 1.3 1.3 12.8 12.9 9.6 Skyworks SWKS $59 $11,254 -0.2 -0.2 -0.2 11.2 10.8 9.6 3.6 3.0 2.5 36.1 29.9 27.3 Back-end packaging Amkor AMKR $5.60 $1,329 0.8 0.7 0.6 23.1 35.0 11.3 1.1 1.0 1.0 4.8 3.0 8.5 Chipbond 6147.TWO $40.50 $813 1.8 1.7 1.4 12.7 13.2 10.0 1.1 1.1 1.0 8.8 8.3 10.4 Panel AUO 2409.TW $11.00 $3,272 0.4 0.5 0.4 21.5 N/A 14.6 0.6 0.6 0.6 2.7 -0.3 3.9 Innolux 3481.TW $10.70 $3,291 0.3 0.4 0.3 9.8 N/A 11.3 0.5 0.5 0.5 4.7 -2.8 4.0 LG Display 034220.KS $26,700 $8,247 0.5 0.4 0.4 10.1 36.1 19.6 0.8 0.8 0.8 7.6 2.3 4.4 Japan Display 6740.T $180 $1,068 0.1 0.1 0.1 N/A N/A 62.2 0.3 0.3 0.3 -3.0 -8.3 1.5 Sharp 6753.T $101 $1,686 0.3 0.2 0.2 N/A N/A 19.7 0.9 5.7 0.8 -197.4 -299.7 -13.5 BOE 000725.SZ $2.34 $11,875 0.3 0.2 0.2 50.9 37.1 26.3 1.0 1.0 1.0 3.2 2.5 3.2 Tianma 000050.SZ $20.31 $4,254 0.4 0.4 0.3 41.4 39.7 31.4 2.1 1.9 1.8 6.6 5.0 6.2 Smartphone brands TCL Communications 2618.HK $7.13 $1,173 0.4 0.4 0.4 8.6 16.8 11.2 2.3 2.1 1.9 26.7 12.7 17.1 Coolpad 2369.HK $1.43 $925 0.4 0.4 0.3 N/A 72.3 20.3 0.9 1.2 1.1 -4.5 1.6 5.5 ZTE 0763.HK $9.45 $8,430 0.7 0.6 0.5 12.2 12.6 12.0 1.3 1.2 1.2 10.8 9.8 9.6 Lenovo 0992.HK $4.62 $6,610 0.1 0.2 0.1 7.7 N/A 8.0 1.6 2.2 2.1 20.3 -12.8 26.4 Smartphone components Largan 3008.TW $2,860.00 $11,857 6.0 7.1 5.3 15.9 18.8 12.9 6.1 5.1 3.9 38.1 27.3 30.6 Catcher 2474.TW $221.00 $5,221 1.5 1.6 1.2 6.8 8.1 7.7 1.5 1.3 1.2 21.7 16.4 15.4 AAC 2018.HK $63.80 $2,088 5.6 4.5 3.7 25.2 19.7 16.0 6.9 5.7 4.7 27.5 29.0 29.3 VPEC 2455.TW $45.65 $348 4.1 3.9 3.3 19.0 17.5 14.7 3.1 3.7 3.6 16.5 20.9 24.2 TXC 3042.TW $44.70 $428 1.5 1.3 1.2 14.8 13.5 12.3 1.5 1.4 1.4 9.9 10.5 11.1 Merry 2439.TW $71.00 $406 1.0 0.9 0.8 20.5 13.2 10.6 2.3 2.1 1.9 11.0 15.6 17.9 Sunny Optical 2382.HK $25.95 $3,165 2.2 1.8 1.5 36.9 25.1 19.7 7.3 6.0 4.8 19.9 23.8 24.5 Tongda 0698.HK $1.48 $1,094 1.5 1.2 1.0 12.4 9.2 7.8 2.2 1.9 1.7 17.3 20.3 21.7 O-Film 002456.SZ $28.77 $3,822 1.8 1.5 1.4 62.0 33.4 27.6 4.9 4.4 3.8 7.9 13.1 14.0 Truly 0732.HK $3.59 $1,345 0.7 0.7 0.7 12.3 10.9 8.6 1.5 1.3 1.2 11.9 12.4 14.0 FIH Mobile 2038.HK $2.50 $2,542 0.1 0.2 0.1 11.0 28.3 18.2 0.7 0.7 0.7 6.1 2.4 3.6 BYDE 1211.HK $45.05 $1,543 2.0 1.8 1.5 39.5 33.1 23.6 3.5 3.1 2.8 8.7 9.5 11.7 Median 0.9 0.8 0.7 13.8 14.1 12.2 1.9 2.0 1.8 11.0 12.6 13.6 Mean 1.2 1.2 1.0 18.8 18.9 14.8 2.1 2.1 1.8 9.3 5.3 14.0 Source: Company data, Credit Suisse estimate; Source for companies not under our coverage are Bloomberg, IBIS consensus

Asia Semiconductor Sector 4 11 July 2016 Demand stabilising but competitive intensity remains high We provide our latest update on the China smartphone supply chain following updates MWC and CES Shanghai from Mobile World Congress Shanghai and CES Shanghai alongside meetings with showcase the shift beyond several dozen Chinese tablet and smartphone OEMs, ODMs, design houses and chipset smartphones to IoT, VR and companies. We summarise main themes following our meetings, which include: (1) China / connected home products Export mid-range demand healthy; (2) Processors see MediaTek take share but face aggressive market pricing; (3) Smartphone platforms evolve to enable VR and dual camera; (4) China brands accelerate diversification into a diverse range of Internet of Things products (wearables, home automation, drones, and robots); and (5) Virtual Reality proliferates across head mounted displays, all-in-one and smartphone screens. China smartphone demand better through 1H16 The China smartphone market has improved since bottoming in 2Q15 at -4% YoY growth China smartphone demand in 1Q15, turning positive in 2Q15 and reaching 9% by 4Q15. While 1Q16 dropped to +2% rebounding through 2016 YoY, the weakness was from Apple’s drop in 6S (-23% QoQ / -9% YoY) and Samsung’s 22% YoY decline. China brands are still up 7% YoY with Chinese tier-ones up 9% YoY.

Figure 10: China brands and tier-ones growing 5-10% the past two quarters, faster than the China market up 2% 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2011 2012 2013 2014 2015 Grand total 103,326 104,420 105,415 107,502 98,752 105,409 109,825 116,993 100,655 90,588 214,188 350,722 420,664 426,108 QoQ 14% 1% 1% 2% -8% 7% 4% 7% -14% 151% 136% 64% 20% 1% YoY 31% 20% 11% 19% -4% 1% 4% 9% 2% Apple units 8,975 6,747 5,279 13,258 14,495 11,717 12,405 17,102 13,129 8,489 20,826 23,113 34,260 55,719 QoQ 35% -25% -22% 151% 9% -19% 6% 38% -23% 311% 145% 11% 48% 63% YoY 33% 60% -4% 100% 62% 74% 135% 29% -9% Samsung units 20,508 10,260 11,613 8,501 9,625 8,005 8,034 7,740 7,546 14,649 37,116 65,543 50,882 33,404 QoQ 21% -50% 13% -27% 13% -17% 0% -4% -3% 956% 153% 77% -22% -34% YoY 41% -35% -37% -50% -53% -22% -31% -9% -22% China ex-AAPL/SEC 73,844 87,412 88,523 85,743 74,632 85,688 89,385 92,151 79,980 67,449 156,245 262,066 335,522 336,985 QoQ 11% 18% 1% -3% -13% 15% 4% 3% -13% 106% 132% 68% 28% 0% Ex-AAPL/SEC YoY 29% 31% 25% 28% 1% -2% 1% 7% 7% Chinese Tier One 58,365 72,006 73,971 73,269 65,727 77,021 80,550 84,230 71,930 29,094 88,266 153,528 206,355 198,703 QoQ 43% 23% 3% -1% -10% 17% 5% 5% -15% YoY 81% 81% 83% 79% 13% 7% 9% 15% 9% 520% 203% 74% 34% -4% Source: IDC, Credit Suisse estimates Growth in 2Q16 has picked up, evidenced by MediaTek’s 30% QoQ sales growth with about 50% share of China brands. The China brands are now being led by growth from Huawei, Oppo and Vivo and rising brands such as Gionee and Meizu.

Figure 11: Apple/Samsung volumes pullback in 1Q16 Figure 12: MediaTek's 2Q16 ramp signals a reacceleration Units: mn YoY (%) Qtrly Smartphones (thousands) Global Share (%) 150 225% 50% 135 200% 240,000 210,000 120 175% 40% 105 150% 180,000 90 125% 150,000 30% 75 100% 120,000 60 75% 20% 90,000 45 50% 60,000 30 25% 10% 15 0% 30,000

- -25%

3Q13 4Q14 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 4Q13 1Q14 2Q14 3Q14 1Q15 2Q15 3Q15 4Q15 1Q16

1Q10 0 0%

3Q12 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 China ex-AAPL/SEC Samsung units Apple units Chinese brands Mediatek Smartphone Units Chinese brand global share YoY Ex-AAPL/SEC YoY Source: IDC, Credit Suisse estimates Source: IDC, Credit Suisse estimates China subscriber additions stay healthy, MIIT shows growth remains better in 2Q16 The MIIT points to healthy growth in 2Q16. Smartphone growth is tracking up 11% YTD MIIT China and IDC data through May with LTE growth up an even more robust 18% YTD. MIIT shows growth has shows China smartphone stayed positive each quarter over the past year after decelerating from 2H14. China is also brands outperformed benefiting from three carriers pushing LTE, with China Mobile still adding 15-20 mn units a Apple/Samsung YTD

Asia Semiconductor Sector 5 11 July 2016 month in 2Q16, down from 25 mn in 1Q16 but supplemented by 4-5 mn units/month from both China Telecom and China Unicom. China telcos are pacing to 350 mn 4G additions, up from 250 mn 4G additions in 2015. China Mobile targets 200 mn 4G additions and 330 mn smartphone terminal sales in 2016, supplemented by 60 mn additions for both China Unicom and China Telecom. The 4G rate could stimulate 450 mn units, above the 430 mn shipped in China in 2015 without factoring other replacement demand.

Figure 13: China 4G subscriber adds pacing 350 mn in 2016 Figure 14: China smartphones reaccelerate in 2H15 / 2016 4G monthly net adds (mn) Accumulative China smartphones (mn) YTD YoY % Total (mn) 30.0 600 500 20% 400 15% 25.0 500 300 10% 20.0 400 200 100 5% 15.0 300 - 0% 10.0 200 (100) -5% (200) -10% 5.0 100 (300) -15% 0.0 0 (400) (500) -20%

Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec

Jul-14 Jul-15

Apr-14 Oct-14 Apr-15 Oct-15 Apr-16

Jan-14 Jun-14 Jan-15 Jun-15 Jan-16

Feb-14 Mar-14 Feb-15 Mar-15 Feb-16 Mar-16

Aug-14 Sep-14 Nov-14 Dec-14 Aug-15 Sep-15 Nov-15 Dec-15

May-15 May-16 May-14 2014 2015 2016 Accumulative China Mobile China Unicom China Telecom 2014 YTD YoY 2015 YTD YoY 2016 YTD YoY

Source: Company data, Credit Suisse research Source: MIIT, Credit Suisse estimates LTE demand supports upgrades in emerging markets Figure 15: LTE penetration now passing 50% globally

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0% Worldwide US Latin America Western Europe CEMA Japan PRC Rest of Asia

12Q1 12Q2 12Q3 12Q4 13Q1 13Q2 13Q3 13Q4 14Q1 14Q2 14Q3 14Q4 15Q1 15Q2 15Q3 15Q4 16Q1

Source: Company data, Credit Suisse estimates The global smartphone market slowed to 10% YoY growth in 2015 and is on pace to 5% Global smartphone market YoY growth in 2016. LTE in 4Q15 crossed over 50% of handset shipments and is now is on pace for 5% YoY unit running 250-275 mn units/quarter out of 500 mn global handset shipments. China has growth, with 4G now largely also completed the cross-over to 4G smartphones in the market, with 90% of units crossing over 50% of now a variation of 4Q and 3G negligible, with 2Q feature phones holding steady at about shipments 10% of units. The remaining market now for further penetration is emerging markets.

Figure 16: Global units slow but LTE ramp continues Figure 17: China has largely completed the 4G transition mn units 100% 600.0 90% 80% 500.0 70% 400.0 60% 50% 300.0 40% 200.0 30% 20% 100.0 10% 0.0 0% 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q CY2012 CY2013 CY2014 CY2015 CY2016 CY2012 CY2013 CY2014 CY2015 CY2016 TDD/FDD-LTE FDD-LTE TD-LTE 3G 2G TDD/FDD-LTE FDD-LTE TD-LTE 3G 2G Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Asia Semiconductor Sector 6 11 July 2016

We expect 2H16 volumes to shift from the rest of Asia Pacific (SouthEast Asia) and Eastern Europe / Middle East / Africa. These areas are below 30% penetration but now rising. The entry factor price is now under US$50, less than a US$10 premium over 3G for a basic 4G HD smartphone carrying MediaTek MT6735 and 425.

Figure 18: Middle East / Africa LTE penetration still low Figure 19: Asia Pacific penetration still low too

100% 100% 90% 90% 80% 80% 70% 70% 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q CY2012 CY2013 CY2014 CY2015 CY2016 CY2012 CY2013 CY2014 CY2015 CY2016 TDD/FDD-LTE FDD-LTE TD-LTE 3G 2G TDD/FDD-LTE FDD-LTE TD-LTE 3G 2G

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Performance migration continues in smartphones IDC’s smartphone tracker is showing steady upgrades in chipset specifications to match Smartphone spec migration MediaTek’s drive for performance across its 4G tiers. The average AP clock speed has continues increased the past year from 1.4GHz to 1.6GHz and cores from 4 in 1H15 to 5.5-6 in 1H16. Figure 4: AP clock frequency steadily rising Figure 5: China smartphone core migration continues

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Cameras continue to drive processing and storage density. Average back camera megapixel count is 10-11, up from 8-9MP in 1H15 while NAND density has increased from 15GB in 1H15 to 22GB in 1H16. The addition of VR and dual camera support will help continue this trend for more density and processor performance in the coming few years. Figure 4: China smartphone megapixels continue to rise Figure 5: NAND density rising at a faster pace

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

Asia Semiconductor Sector 7 11 July 2016

China built smartphones on pace for low teens growth over 2015 We expect China-built smartphones based on baseband shipments will grow +14% YoY in China-built smartphones' 2016 to 889 mn, an acceleration from +8% YoY in 2015 due to three carriers pushing 4G pace to grow 14% YoY in in China and 3G to 4G transition finally accelerating in emerging markets. However, 2016, an acceleration from China-built tablets still face cannibalisation from smartphones and limited innovation and +8% in 2015 due to product development for upgrades and may decline further from 105 mn to 90 mn units. subsidies from China telcos Figure 20: China smartphone and tablet projections: 2011-2017E China built devices 2011 2012 2013 2014 2015 2016E 2017E 15-17 CAGR Smartphones (mn units) 87.9 237.2 466.1 723.1 777.6 888.7 951.8 7% YoY growth 170% 96% 55% 8% 14% 7% Tablets (mn units) 12.0 50.0 100.0 120.0 105.0 90.0 80.0 -9% YoY growth 317% 100% 20% -13% -14% -11% Smartphone and tablets (mn) 99.9 287.2 566.1 843.1 882.6 978.7 1,031.8 5% YoY growth 188% 97% 49% 5% 11% 5% Source: Company data, Credit Suisse estimates MediaTek seeing volumes rebound in 1H, though monitor risk for a 4Q16 correction MediaTek has seen demand pick up in 2016 at the expense of its competitors. MediaTek strength driven by Qualcomm’s 2Q FY16 (Mar) chipset shipments was 189 mn, -22% QoQ and 3Q FY16 share gains and better (Jun) was guided down 7% to up 3% QoQ to 175-195 mn due to Apple’s share loss and demand, but may be only some leverage to China. By contrast, MediaTek grew shipments from 110 mn in overshooting 1Q16 to 135-145 mn units in 2Q16 and guided an above seasonal 24-32% QoQ sales growth. MediaTek’s 2Q16 build is quite strong up 30% QoQ due to strong LTE push in China, share gains from Spreadtrum which was stronger in 3G but not yet in high volume on 4G and also some foundry 28nm shortages that may be prompting over-booking of chipsets. We would highlight that component builds for Oppo and Vivo are both tracking to 80-100 mn units for 2016, above our estimate for 75 mn shipments for Oppo and 60 mn for Vivo and strong growth from 40/36 mn for both respectively in 2015.

Figure 21: China smartphone brands shipments—unit growth rebounds in 2016 China brand units (mn) 2011 2012 2013 2014 2015 2016E 2017E 2018E 15-18 CAGR Huawei 15.6 27.2 52.0 77.0 107.0 130.0 145.0 160.0 14% Oppo 0.1 3.1 11.0 30.0 40.0 75.0 90.0 100.0 36% Xiaomi 0.4 7.2 18.7 61.1 72.5 68.0 71.0 75.0 1% BBK/Vivo 0.0 2.5 11.2 30.0 36.0 60.0 70.0 80.0 30% ZTE 10.5 26.8 40.0 48.0 50.0 54.8 58.4 63.2 8% Lenovo 3.7 23.7 45.5 59.4 43.5 41.0 41.0 41.8 -1% Lenovo's Moto 26.3 26.3 26.3 NM TCL/Alcatel 0.3 6.5 17.5 39.6 40.8 40.8 45.7 52.7 9% Coolpad 3.9 16.1 35.0 43.5 28.7 30.1 32.7 36.2 8% Meizu 1.0 2.0 3.0 5.2 24.8 22.0 23.0 25.0 0% Gionee 0.0 6.8 11.4 16.0 12.8 27.0 32.0 36.0 41% Tecno - 1.0 2.0 4.0 7.5 8.0 9.0 10.0 10% Hisense 0.3 3.4 8.3 11.7 6.0 5.0 4.0 4.0 -13% Tianyu / K-Touch 0.4 7.4 13.3 11.2 4.3 2.0 1.0 - -100% Bird 0.0 0.3 2.1 2.5 1.2 1.0 1.0 1.0 -6% G-Five 0.0 0.0 2.0 5.0 0.5 - - - -100% Others 51.5 103.3 193.1 278.9 302.0 297.7 301.7 288.8 -1% China brand units (mn) 87.9 237.2 466.1 723.1 777.6 888.7 951.8 1,000.0 9% Growth (YoY) 170% 96% 55% 8% 14% 7% 5% Source: Company data, Credit Suisse estimates

Asia Semiconductor Sector 8 11 July 2016 Chipsets offset growth with pricing, display lifted by the mid-end strength The chipset market is not seeing meaningful benefits from consolidation and better unit The chipset landscape growth in emerging markets. The market has seen exits the past couple years from remains competitive despite Broadcom, Marvell and Intel from the merchant SoC market but still has the core emerging a number of baseband market players Qualcomm, MediaTek and Spreadtrum along with merchant solutions from vendor exits over the past Apple, Samsung, Hi-Silicon (Huawei) and Leadcore (Xiaomi). Qualcomm and MediaTek few years have remain locked in a fierce battle for market share among non-Apple/Samsung branded 4G smartphones, requiring Spreadtrum to discount aggressively on 3G to maintain its share. The result is aggressive pricing that is offsetting some of the upside from higher units and exits of the other US merchant baseband suppliers. MediaTek gaining share with Helio, but Qualcomm controls the high end MediaTek continues to gain LTE share in China and emerging markets up to the mid-high- MediaTek and Qualcomm end with Helio, but has not cracked the flagship portion of the market. Our tracker of split mid-high end designs, design wins the past couple quarters shows Qualcomm edging MediaTek 70 to 53, though though Qualcomm still the difference is largely from the 17 design wins secured by Qualcomm’s flagship controls the flagship Snapdragon 820/821 processor. Qualcomm prices this product over US$50, well above 800 series MediaTek’s top-end US$25-30 pricing and commands a number of premium brands with this series (Samsung, LG, , LG, Sony, Vivo, Xiaomi, ZTE, Lenovo, LeTV, ). Figure 22: Qualcomm and MediaTek splitting the mid to high-end designs Mediatek Qualcomm Helio P10 Helio X10 Helio X20 Helio X25 Snapdragon 600x Snapdragon 808 Snapdragon 810 Snapdragon 820 Archos Diamond 2+ Creo Mark 1 360 N4 Elephone P9000 Asus Zen Fone 3 Acer Jade 2 Gigaset ME pro Asus ZenFone 3 Elephone M3 Elephone Vowney Alcatel 3 LeEco L2 Asus Zen Pad Z8 Acer Jade Primo HTC Butterfly 3 HP Elite x3 Gionee S6 Pro Gionee E8 Elephone P 9000 Meizu Pro 6 Gionee Elife S6 Blackberry Vienna Huawei HTC M10 Gionee S8 HTC One E9+ InFocus M888 Vernee Apollo HTC One A9 Lenovo Vibe X3 LeTV 1S Pro HTC Nexus Gionee W909 HTC One M9+ LeEco Le2 Jide Remix Pro LG Angler Lumia 950 XL Lenovo Zuk Z2 Imoo M1000 HTC One ME Meizu MX6 LeEco Le 2 LG G4 Motorola 2 LeTV Le Max Pro InFocus S1 HTC One X9 QIKU N4 Lenovo Lemon 3 LG Motorola LG G Flex 3 LEAGOO Elite 1 Letv 1S Smartcong Flagship Lenovo Phab Plus LG V10 OnePlus Two LG G5 Lenovo K5 Note Lumigon T3 Vernee Apollo Lite Lenovo Vibo K5/Plus Microsoft Lumix 950 S6 Active Moto X 2016 Meitu M6 Meitu V4 Xiaomi 4 Motorola Sharp AQUOS ZETA Nexus 6P Meizu MX5 ZOPO Speed 8 NuAns NEO Qiku Flagship Z5 One Plus 3 Meizu Blue Charm 2 Meizu MX6 Samsung Galaxy N5 edge Vivo Xshot 3s Oppo Find 9 Motorola X 2016 Plus Sony Xperia W+ Xiaomi Note Oppo R9 PPTV PP King 7s Oppo R9 Plus Xiaomi 4C ZTE Axon Perf. Sony Xperia C6 ZTE nubia Z9 Vivo Xplay 5 TCL 750 Sony Xperia Z4 Compact Sony Xperia X Xiaomi mi5 Umi Super Model Xiaomi Redmi Note2 TCL IDOL 4/4S ZTE Nubia Z11 Yu Yunicorn Xiaomi Redmi Note3 Max ZTE Nubia NX541 Vivo X6SPlus Vivo X7 Vodafone Plat 7 Xiaomi Mi Max ZTE Nubia Z11 ZTE Axon 7 Source: Company data, Credit Suisse research MediaTek focused on growing its Helio and refreshing its mainstream MediaTek’s smartphone roadmap is geared around improving performance over cost MediaTek continues the reductions to gain market share, with a view a stronger market position would allow it to chip performance better control pricing later. Its products are aimed at upgrading the Helio p-series mid-high- improvement to gain market end and x-series flagship and also improving performance at the entry level. This share and support blended performance focus has helped improve mix and blended pricing—its Helio line is pricing approaching 25-30% of its smartphone volume in 2Q16 and also helping stabilise blended pricing the past year for smartphones around US$9. Unfortunately the push on performance over cost has left it with a less optimal cost structure on 4G, causing the ramp of 4G to still drag on the overall corporate margin as it rises in the mix.

Asia Semiconductor Sector 9 11 July 2016

On processor performance, MediaTek is now benchmarking well and approaching Qualcomm’s Snapdragon 800 series with its Helio x20/x25 and competitive for most advanced smartphone tasks, with a claim it would also meet Google’s Project Daydream specs for a VR-enabled smartphone for its Daydream app store in development. Figure 23: Helio could pass 25% of MediaTek’s sales in 2H Figure 24: Helio supporting blended ASPs Revenue (NT$bn) Helio % of Mediatek sales Smartphone shipment (mn units) Smartphone ASP (US$) $50 40% 70.0 $30 $45 $27 35% 60.0 $40 $24 30% 50.0 $35 $21 $18 $30 25% 40.0 $15 $25 20% 30.0 $12 $20 15% 20.0 $9 $15 $6 10% 10.0 $10 $3 0.0 $0 $5 5% 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16E 3Q16E 4Q16E $0 0% 3G units 4G Mainstream units 4G Helio units 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16E 3Q16E 4Q16E Blended SP ASP 4G Helio ASP 4G Mainstream ASP 3G 4G Mainstream 4G Helio 4G Helio 3G ASP Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Despite better processing, MediaTek has not cracked Qualcomm’s flagship series due to a lag on the modem spec and qualifications in developed markets relative to the industry leader. MediaTek is still behind in offering the top modem spec with its leading modem in the Helio x20/p10 offering CAT 6 carrier aggregation (300Mbps) vs Qualcomm’s Snapdragon 820 with CAT 12 downlink (600Mbps) and CAT 13 uplink (250Mbps). Figure 25: MediaTek 2016 road map remains aggressive to establish its position on LTE 2014 2015 2016 1H 2H 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q MT6595 Octa, 2.2- X10 X20 Deca, Dual A72 + X25 X 2.5GHz, Octa A53, 64bit - MT6797T LTE SoC big.LITTLE, MT6795 MT6797 big.LITTLE, X30 28nm HPM, 4 20nm, 25MP, Deca, Dual A72 + Octa LTE Cat 13 64-bit Octa, 2.2GHz, 28nm HPM, 4 A7+4 A17, 20 H.265 4K2K A53, 64bit big.LITTLE, (1H17)

Helio A57+4 A53, 20MP, H.265 4K2K 30fps MP 30fps video, LTE 16nm, 25MP, H.265 video, 2560x1600, LTE R9 Cat4/HSPA+ R11 Cat-6, 2x20 4K2K 30fps video, LTE Decacore, 64bit (42/11)/TD, 21MP P10 CA+C2K SRLTE big.LITTLE, 10nm, MT6755 R11 Cat-6, 2x20 MT6290 + CA+C2K SRLTE 40MP, H.265 4K2K MT6592/M Octa, 1.3-1.5GHz, 8 A53, 28nm 30fps video

4G Octa A53, 28nm LP, 64 bit, 16 MP, 28nm LP, LP, 2.0 GHz, 21MP, Octa core, 28nm, 8x A7, 1080p30, FHD, LTE R9 Cat4+ 1080p30 video FHD 1.7-2.0GHz/ 1.4GHz, CDMA2000 1x/EVDO Rev. A (1920x1080), LTE P20 HD1080/HD720, 16MP R11 Cat6 2x20 CA Octa, 1.7GHz, 28nm MT6753 + C2K SRLTE Octa A53, 64bit,

MT6752 HPM, 8 A53, 16MP, LTE + C2K SoC MT6750/T Cat6, big.LITTLE, Mainstream Mainstream LTE SoC; 64 bit 1080p30 HD 1080. 16nm LTE R9 Octa A53, 28nm HPM, 1.5 GHz, 16MP, HD Display, LTE Cat6 MT6290 + MT6735 2xCA + C2K SRLTE MT6582/M LTE + C2K SoC MT6738 28nm, 4x Cortex A7, Quad A53, 1.3GHz, 13MP, 28nm Quad A53, 1.5 GHz, 28nm, 1.3GHz, qHD, 13MP LP, 64 bit, FHD (1920x1080), LTE 13MP, HD Display, LTE Cat6 R9 Cat4/HSPA+ (42/11)/TD, MT6732 CDMA2000 1x/EVDO Rev. A MT6737 LTE SoC; 64 bit

Entry Entry 4G MT6735P/M Quad A53, 1.3 -1.5 GHz, Quad, 1.5GHz, 28nm HPM, 4 LTE + C2K SoC 28nm, 13MP, HD Display, A53, 13MP, 1080p30 HD720. LTE Cat6 2xCA + C2K LTE R9 Cat4/HSPA+ Quad A53, 1.0GHz, HD (P) / qHD (M), SRLTE (42/11)/TD, HD 8MP, 1080p qHD, 28nm LP, 64 bit, LTE R9 Cat4+ CDMA2000 28nm, 4x Cortex A7, Quad A7, 1.3GHz, HD720, MT6582M 1.3GHz, 960x540 MT6580 HSPA+ (21/5.76)/EDGE MT6572/M MT6571 28nm, 1.0 GHz, 2 Cortex MT6570 28nm, 2x Cortex A7, A7. Power VR, W+TD

Entry Entry 3G Dual A7, 1.3GHz, qHD, 1.2GHz, 960x540 Source: Company data, Credit Suisse estimates HSPA+ (21/5.76)/EDGE Source: Company data, Credit Suisse estimates

Asia Semiconductor Sector 10 11 July 2016

MediaTek will still only have CAT 6 modem in 2H16 with its Helio P20 on 16nm so would MediaTek dominates in the need to make some optimisations to reach China Mobile’s CAT 7 requirement in 4Q16 for its mid-end market but QCOM Rmb2,000+ smartphones. Qualcomm should lead with its modem in the flagship models. continues to control the MediaTek will upgrade this modem with Helio x30 in 1H17 that would upgrade the premium segments manufacturing process to TSMC’s 10nm for better power/performance and the modem to CAT 10, which should be suitable for more global and China flagship smartphone models. MediaTek’s Helio series is gaining with the P10 offering high-end specs (full HD display, 2GB DRAM +32GB NAND, and 5MP + 13MP camera) for as low as US$100 and spanning up to above US$200 for a phone with MediaTek’s flagship Helio X20, QHD display with 5 + 21 MP camera and 4GB DRAM + 32GB NAND. Figure 26: China smartphones offering features with MediaTek P Series at US$100-150, X Series at above US$200 Company malata malata Elephone Elephone RAMOS DOOGEE malata Model name M1 M1 Plus P9000 Lite P9000 MOS3 F7 Pro M2

Image Technology TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE Android 5.1 Android 5.1 Android 6.0 Android 6.0 Android 5.1 Android 6.0 Android 4.4 Pixels 1920*1080 1920*1080 1920*1080 1920*1080 1920*1080 2560*1440 960*540 RAM 3GB 3GB 4GB 4GB 4GB 4GB 4GB ROM 16GB 32GB 32GB 32GB 64GB 32GB 64GB Display 5.2" 5.5" 5.5'' 5.5'' 5.5" 5.7" 5.5" Camera 8MP + 16MP 8MP + 21MP 5MP + 13MP 8MP + 13MP 8MP + 13MP 13MP + 21MP 8MP + 21MP Battery 2600mAh 3000mAh 3000mAh 3000mAh 4100mAh 4000mAh 3000mAh CPU Speed 1.3GHz 1.3GHz 2.0GHz 2.0GHz 1.5GHz 2.5GHz 1.3GHz Processor Chip Helio P10 Helio P10 Helio P10 Helio P10 Helio P10 Helio X20 Helio X20 Multi-core Octa Octa Octa Octa Octa Deca Deca Factory Price (USD) N/A N/A $153 $196 $199 $210 N/A Source: Company data, Credit Suisse research Despite Helio success in the mid-high end, we do note a wide variety of the Chinese models have migrated to the mainstream quad core (US$7-10 chipset) and octa core (US$15-18), which can meet most of the vendors' requirements and better price points versus the flagship Helio for a high-end niche category. MediaTek continues to ship in high volume its MT6735 quad core smartphone chipset for the entry tier though is now offering an enhanced edition with 20% better performance (MT6737), which is seeing design wins ranging from Asustek and Konka through smaller brands (Doogee, HomTom). Figure 27: MediaTek's MT6737 is gaining more traction started from May Company Doogee HOMTOM KONKA Asus Model name X5 Max Pro HT17 R3 Pegasus

Technology TDD-LTE/FDD-LTE TDD-LTE/FDD-LTETDD-LTE/FDD-LTE TDD-LTE/FDD-LTE Operating System Android 6.0 Android 6.0 Android 6.0 Android 5.1 Pixels 1280*720 1920*1080 1280*720 1920*1080 RAM 2GB 1GB 3GB 2GB ROM 16GB 8GB 32GB 16GB Display 5.0" 5.5'' 5.0" 5.2" Camera 5MP + 13MP 5MP + 13MP 8MP + 13MP 5MP + 13MP Battery 4000mAh 3000mAh 2400mAh 4100mAh CPU Speed 1.3GHz 1.3GHz 1.3GHz 1.3GHz Processor Chip MT6737 MT6737 MT6737 MT6737 Multi-core Quad Quad Quad Quad Factory Price (USD) $66 $70 $167 $197 Source: Company data, Credit Suisse estimates

Asia Semiconductor Sector 11 11 July 2016

Qualcomm to refresh its chipsets in 2H16 Qualcomm targets to maintain its high-end lead for Snapdragon 800 and match up Qualcomm's new chipsets competitively with MediaTek on the mid-tier Snapdragon 400 and 600 platforms. We refresh in 2H16, notably believe the company is planning MSM8997/MSM8998 toward the end of the year using Snapdragon 600 moves Samsung’s 10nm process and using at CAT 12/CAT 16 modems to stay ahead of back from 14nm to 28nm to MediaTek shifting to CAT 10 in 1H17. save cost In the Snapdragon 600 tier, Qualcomm is moving back from 14nm to 28nm HPM, likely motivated by cost and availability of multiple sources including Samsung and TSMC. The product would be optimised for emerging markets mid-high-end and with CAT 7 modem still meet China Mobile’s target for that modem standard in its Rmb2,000+ smartphones. In the Snapdragon 400 tier, Qualcomm would also offer a CAT 7 modem with its MSM8940 built on a low-cost 28nm LP process capable of multi-sourcing across Samsung, TSMC, UMC, GlobalFoundries and SMIC. This product would be positioned against MediaTek’s older MT6753 chipset (mainstream octa-core). For the low-end of the market, Qualcomm’s Snapdragon 200 series 8908/8909 would offer a quad core option against MediaTek’s MT6735/MT6737. Qualcomm also has improved tools for its reference design including Global Pass to speed time to market gap and a comprehensive online database of qualified suppliers.

Figure 28: Qualcomm smartphone roadmap advancing in 2H15 and 1H16 2014 2015 2016 1H 2H 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Quad, 2.3-2.7GHz 8994/ S810 LTE CA 450Mbps, 8084 8996/ S820 64-bit, X16 8998 20nm SoC Hydra 64 bit 14FF modem, , 10FF 28nm HPM Cat 16, 4k LTE CA X10 Cat 9, 60fps 9635M TD, 64-bit 64-bit, X12 S800 8997 28nm 8992/ S808 LTE modem,

Premium Premium 10FF 20nm SoC Cat 12, Kryo, QHD 2.5K 8976/ S620 9625M LTE CA X10 Cat 9, TD, 64-bit 28nm 28nm HPM 8976 Pro Octa, 4 A72 + 4 A53, 28nm HPM 8939/ S615 big.LITTLE, 1.4 GHz, CA, 4K, X8 CAT 7 X9 LTE modem, Cat 7, 28nm LP QHD, 4A72 + 4 A53 8953/ S625 8956/S618 S610 8952/ S617 14nm FF 8936/ 28nm HPM 28nm LP 28nm LP

Mainstream Hexa, 2 A72 + 4 Octa, 8 A53,, 64-bit, X9 Octa, 8 A53, 1.5 GHz,

Qualcomm S600 Qualcomm A53, X8 CAT 7, CA, Cat 7, CA, FHD X8 Cat 7, CA, FHD 1.2 GHz, 4K

8929/ S425 8937 / S430 28nm LP 28nm LP

Octa A53, 1.4 GHz, 64- Octa, 8 A53, 1.7 GHz, S4xxx / 8940 bit, Cat 4, FHD 64-bit, X6 modem Cat 28nm LP 4, FHD Source: Company data, Credit Suisse estimates X9 LTE modem, Cat 7, FHD, 4 A53 + 4 A53

S412 / 8917 Entry Entry S400 28nm LP 8916/ S410 28nm LP Quad, 4 A53, 1.4 GHz, 64-bit, X6 LTE Cat4, TD, Quad, Cat 4, FHD 1.2GHz, A53

LTE CA Cat4, TD, 8909/ S215 Quad A7 1.1 GHz 28nm LP

TD-SCDMA 8908/ S210 Low

S200 Dual A7 1.1 GHz 28nm LP

Source: Company data, Credit Suisse estimates Spreadtrum’s 4G only in small volume Spreadtrum’s major traction has been with WCDMA the past couple years in the entry level channels with its quad core WCDMA SC7731 built on TSMC’s 28nm. Most whitebox suppliers offer the Spreadtrum solution as a stable offering at US$1-2 cheaper than comparable MediaTek solutions, reaching a low US$20-40 factory price for entry 3G smartphones. We believe the pricing for the quad core chipset is now under US$5, undercutting MediaTek’s MT6580 by US$1-2.

Asia Semiconductor Sector 12 11 July 2016

Figure 29: Spreadtrum’s 4G starting in low volume Company Lephone Lephone Lephone InFocus InFocus Intex Lava Model name W2 W7 W5 Bingo 20 Bingo 21 Cloud String A71

Image Technology TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE Operating System Android 4.4 Android 4.4 Android 4.4 Android 4.4 Android 4.4 Android 4.4 Android 4.4 Pixels 1280*720 1280*720 1280*720 854*480 854*480 1280*720 1280*720 RAM 1GB 1GB 1GB 1GB 2GB 1GB 1GB ROM 8GB 8GB 8GB 8GB 8GB 8GB 8GB Display 5.0" 5.0" 5.0" 4.5" 4.5" 5.0" 5.0" Camera 2MP + 5MP 2MP + 5MP 2MP + 5MP 2MP + 5MP 2MP + 5MP 2MP + 5MP 2MP + 5MP Battery 1500mAh 2000mAh 2000mAh 2300mAh 2300mAh 2300mAh 2500mAh CPU Speed 1.5Ghz 1.5Ghz 1.5Ghz 1.5Ghz 1.5Ghz 1.3Ghz 1.5Ghz Processor Chip SC9830 SC9830 SC9830 SC9830 SC9830 SC9832 SC9830 Multi-core Quad Quad Quad Quad Quad Quad Quad FOB Price (USD) $45 $50 $55 $80 $82 $83 $87 Source: Company data, Credit Suisse research For 4G, however, Spreadtrum has only had modest traction. The company has been Spreadtrum has only shipping its SC9832 4G quad core entry level solution into a handful of China and India penetrated a small handful brands (Intex, Lava, InFocus, LePhone) at US$50-100 retail prices. The market traction to of brands in 4G date has not been as broad as its success on 2G and 3G, and given MediaTek's room to gain share as some customers migrate from 3G to 4G. We would monitor Spreadtrum’s ability to gain more design wins to disrupt the 4G space further but at this stage the impact remains limited. Spreadtrum still planning LTE launches, including an Intel fabbed 14nm chip in 2017 Spreadtrum is upgrading its 4G with its SC9860 Whale 2 octa-core 4G platform. The chip Spreadtrum's 4G schedule includes 8 ARM A53 CPUs and clocked over 2.0GHz and manufactured on TSMC’s 16nm. has delayed, but a new The Whale 2 supports WQXGA resolution, 4K2K video, dual camera and CAT 7 carrier 16nm TSMC chip in 2H16 aggregation. Compared with the dual Mail-T880 GPU cores in MediaTek’s mid-end Helio and Intel manufactured chip P20, Spreadtrum’s Whale 2 has quad core Mail-T880 GPU though most of the other specs in 1H17 planned are in line with MediaTek’s. Despite an announcement at MWC that the chip was in mass production and would ship in models in 2Q16, we have not yet seen the chip in the market. We also believe Spreadtrum is planning a 14nm chip at Intel in 1H17 after its SC9860, shifting from TSMC as part of the equity stake Intel took in Tsinghua Unigroup. Intel has cancelled its internal SoFIA project but would still see some potential if this chip sees better commercial success. Spreadtrum management had been targeting to grow their baseband shipment from 530 mn in 2015 (about 230 mn smartphones) to 600 mn units in 2016 with 120 mn for LTE smartphones. With the market shifting to 4G faster, we believe the company is falling short and may only ship 50-60 mn units at best as it has missed most of the 1H16 already. The company may end up closer to 250 mn smartphones, slightly below the market growth although could still have more market impact in 2017 if its new LTE chips can ramp into high volume production. Figure 30: Spreadtrum launching a 16nm TSMC chip in 2H16, Planning an Intel based chip in 1H17 Spreadtrum Spreadtrum Spreadtrum Spreadtrum Spreadtrum Spreadtrum Spreadtrum Chipset SC9620 2-chip Shark SC8831G SC7731G SC9832 SC9860 SC98xx Technology 40nm SMIC 40nm SMIC 28nm TSMC 28nm TSMC 28nm TSMC 16nm TSMC 14nm Intel Multi-core Quad Quad Quad Quad Quad Octa Octa CPU Modem Only A7 A7 A7 A7 A53 x86 Network 4G 4G 4G 3G 4G 4G 4G Frequency 1.0GHz 1.2GHz 1.4GHz 1.5GHz 1.5GHz >2.0GHz >2.0GHz GPU Mali-400 Mali-400 Mali-400 Mali-400 MP2 Mali-400 Mali-T880 TBD Sampling 3Q14 1Q14 3Q14 1Q15 4Q15 3Q16 1Q17 Ramp 4Q14 2Q15 1Q15 2Q15 2Q16 4Q16 2Q17 Source: Company data, Credit Suisse estimates

Asia Semiconductor Sector 13 11 July 2016

Intel shifts focus from smartphone SoCs to Sub- US$200 devices spanning 2-1s, Yoga and Surface Intel finally exited the smartphone SoC market after years of low share and attempts to Intel exited the smartphone gain traction with different platforms. The company had made an aggressive push the past SoC market due to high couple years to build up a local ecosystem for its SoFIA and bay trail Atom chipsets for low development costs and little priced smartphones and tablets and partnered with and Spreadtrum for new differentiation solutions. Management conceded though that the chipsets would be late as a me-too product in a fiercely competitive space and have now cancelled these chipsets. Intel has still capitalised on the ecosystem built in the past year with the Atom and SoFIA- Tablet makers are building R chipsets to target 2-in-1, Surface Like, Yoga and 360 degree. Windows based notebook notebooks to offset the at sub-US$200 factory prices. Vendors are building the notebooks using low cost US$8 tablet slowdown Intel Bay Trail chipsets and US$15 Intel Cherry Trail chipsets with free Windows license under 9” or US$15 Windows License to introduce low cost volumes. The low-priced Intel and Microsoft pricing is a way to regain emerging market share from the Android and ARM ecosystem. The new Cherry Trail offers 20-30% performance improvement over Bay Trail, better graphics and longer battery life.

Figure 31: Intel and Microsoft pushing entry level 2-1, 360 degree and Surface notebooks under US$200 Company Emdoor Cheng Fong Cheng Fong Cheng Fong Cheng Fong Emdoor Cheng Fong Model name EM-C6011 (2-1) MQ1106I (360 degree) MQ1302I (360 degree) MQ1202 (Surface) MQ1103I (NB) EM-C5013 (NB) MQ1402I (NB)

Operating System Windows 10 Windows 10 Windows 10 Windows 10 Windows 10 Windows 10 Pixels 1920*1080 1366*768 1920*1080 1920*1080 1366*768 1920*1200 1366*768 RAM 2GB 2GB 2GB 2GB 2GB 2GB 2GB ROM 16GB 16GB 128GB 32GB 32GB 64GB 128GB Display 10.1'' 12.2" 13.3" 11.6" 11.6" 12.2" 14.4" Camera 2MP + 5MP 0.3MP + 2MP 0.3MP + 2MP 2MP + 5MP 0.3MP 0.3MP + 2MP 0.3MP + 2MP Battery 10000mAh 10000mAh 10000mAh 10000mAh 10000mAh 10000mAh 10000mAh CPU Speed 1.6GHz 1.6GHz 1.6GHz 1.6GHz 1.6GHz 1.6GHz 1.6GHz Processor Chip Intel Core-M Intel Cherry Trail Intel Cherry Trail Intel Cherry Trail Intel Bay Trail Intel Skylake Intel Cherry Trail Factory Price (USD) $120 $126 $132 $139 $100 $109 $116 Source: Company data, Credit Suisse research The solution houses offer three specifications: (1) Surface type – 10-13” ultrathin notebooks with HD and full HD displays and thin keyboards, (2) 360 degree hinge foldable Yoga notebooks spanning 11.6”-14” HD/FHD, and 3) 2-in-1 detachable notebooks in 8.9”, 10.6” and 11.6” configurations. Windows-based tablets have higher requirements for panels (larger size and mostly starting from HD), benefiting AUO and Novatek. Most notebooks also have optional Huawei and Fibocom 4G modules. The builders have a few high priced models built using Intel’s Core M or Skylake, but the solutions are not pitched aggressively to higher chipset prices over US$100 and notebook prices over US$300.

Figure 32: Tablet specs have shown improvement and the price remains competitive

Ultra-low-end Mini Pad 4G Mobile High-end Intel Intel Intel Intel (2-1) Ultra-high-end Allwinner Mediatek Mediatek Mediatek Intel Intel Intel Intel HiSilicon Chipset A33 MT8735W MT8735 MT8752T Atom Cherry Trail Bay Trail Atom x3 Kirin930 Quad Core Quad core Quad core Octa core Quad core Quad core Quad core Quad core Octa core CPU 1.5GHz 1.2GHz 1.3GHz 2.0GHz x86 x86 x86 x86 2.0GHz Graphics ARM Mali-400 ARM Mali-450 ARM Mali-720 ARM Mali-720 Intel In-house GPU Intel In-house GPU Intel In-house GPU Mali-450 ARM Mali-628 Screen Size 7" 7.85" 10.1" 11.6" 7.0" 8" 10.1" 10.1" 8" Resolution 800 x 480 1024 x 768 1024 x 600 2048 x 1536 1024 x 600 1280 x 800 1280 x 800 1280 x 800 1920 x 1200 Video NA NA NA NA 1080p 2160p 2160p 2160p NA DRAM / Flash 512MB DDR3/8GB 1GB DDR3 / 8GB 1GB / 8GB 2GB / 16GB 1GB / 16GB 2GB / 16GB 2GB / 16GB 2GB / 16GB 3G / 64GB Windows 10 + Windows 10 + OS Android 4.4 Android 4.4 Android 4.4 Android 4.4 Windows 10 Android 5.0 Android 4.4 Android 4.4 Android 4.4 Camera 0.3MP 0.3MP + 2MP 0.3MP + 2MP 0.3MP + 5MP 0.3MP 0.3MP + 2MP 2MP + 5MP 2MP + 5MP 2MP + 8MP 3G built-in NO NO YES NO YES NO NO NO NO Factory price $28 $52 $80 $100 $50 $99 $140 $204 $250 Source: Company data, Credit Suisse research

Asia Semiconductor Sector 14 11 July 2016

The tablet market has been a disappointment for many of the vendors as pricing has collapsed and volumes squeezed out by smartphones and low cost 2-1s and notebooks. Our supply chain visits support our view that tablet market demand has been weak on /lower price NB cannibalisation, and tablet panel shipments could see a double digit YoY decline in 2015. Many of the vendors supplying tablets have tried to diversify into smartphones, low cost notebooks and various IoT and wearable devices. Within tablets, pricing can now range from US$30 for an entry tablet up to US$100-150 for an advanced Windows 10 tablet using the new Intel Cherry Trail Atom chipset with full HD display or with MediaTek’s high-end LTE octa-core chipset. MediaTek overall share still rising

Figure 33: Chipsets by vendor—MediaTek gaining share as Spreadtrum still lags on 4G Chipsets to China brands 2011 2012 2013 2014 2015 2016E 2017E 15-17 CAGR Mediatek 10.0 109.8 223.2 356.4 395.4 500.0 555.6 19% Mediatek share (%) 11% 44% 45% 47% 46% 50% 52% Spreadtrum 0.2 32.0 120.6 160.0 200.0 220.0 240.0 10% Leadcore 3.0 5.0 12.0 16.0 15.0 13.0 11.0 -14% Hi-Silicon 2.6 15.4 48.2 65.0 72.5 23% Asian suppliers 13.2 146.8 358.4 547.8 658.5 798.0 879.1 16% YoY Growth 1010% 144% 53% 20% 21% 10% Share 15% 59% 72% 72% 76% 80% 82% Qualcomm 53.5 81.6 116.7 187.9 184.8 190.7 192.7 2% Intel 0.0 0.0 10.0 5.0 0.0 NM Broadcom 1.5 2.5 7.0 5.0 0.0 0.0 0.0 NM Marvell 12.0 15.0 13.0 25.0 15.0 0.0 0.0 NM ST-Ericsson 8.0 3.5 0.5 0.0 0.0 0.0 0.0 NM Overseas suppliers 75.0 102.6 137.2 217.9 209.8 195.7 192.7 -4% YoY Growth 37% 34% 59% -4% -7% -2% Share 85% 41% 28% 28% 24% 20% 18% Chipset incl MTK/SPRD tier-1 88.3 249.4 495.6 765.7 868.3 993.7 1,071.8 11% YoY Growth 183% 99% 55% 13% 14% 8% Mediatek tier-one's 0.4 2.2 4.5 14.3 31.6 40.0 50.0 26% Spreadtrum tier-one's (Samsung) 0.0 10.0 25.0 28.3 59.0 65.0 70.0 9% Chipset total to China brands 87.9 237.2 466.1 723.1 777.6 888.7 951.8 11% YoY Growth 170% 96% 55% 8% 14% 7% Source: Company data, Credit Suisse estimates With Intel pulling out of the smartphone market and Spreadtrum lagging on the 3G to 4G MediaTek continues to gain transition, MediaTek is gaining unit share this year. MediaTek in 2Q16 is pacing 135 mn share with SPRD's delay on units, a 540 mn annualised run rate vs 395 mn units in 2015. Even with a 4Q16 correction LTE and Intel's exit from current over-shipment would put the company on pace for 27% YoY growth to 500 mn units for the full year. MediaTek’s shipment rate outpaces +10% YoY market growth for China and emerging markets and would expand its share from 45% to 51%, with Spreadtrum and Qualcomm most of the balance. Merchant solutions still capture some of the China branded shipments. Hi-Silicon is capturing close to half of Huawei’s shipments mostly at the mid-high-end (54 mn units), Leadcore some of Xiaomi’s low-end (22 mn) while Intel’s shipments are dropping following its withdrawal (for now) from the merchant baseband SoC market. Margins stay under pressure as pricing offsets unit growth While the smartphone chipset shipments are strong in 2016 for MediaTek, the competition MediaTek's GMs remain and mix shift from 3G to 4G at lower margins continues to pressure the corporate GM. under pressure due to the MediaTek expects GMs to stay within its range of 33.5-36.5% GMs in 2Q16, down about competition from Qualcomm 300 bp sequentially from the 4G shift and price competition. Entry LTE is now about US$7- and Spreadtrum 9 and accounting for about 70% of MediaTek’s 4G mix. Unfortunately, Spreadtrum is private so does not need to be as concerned with quarterly margins and Qualcomm also has cut 15% of its headcount in QCT to enable it to also deal with a lower GM as its expense base declines.

Asia Semiconductor Sector 15 11 July 2016

Figure 4: MediaTek 4G ramping at lower margins Figure 5: Qualcomm chipset units vs OpM Sales (NT$mn) GM (%) Inventory (US$mn) Inventory days 40,000 65% 2,000 40% 37,500 60% 35,000 1,800 36% 32,500 55% 30,000 50% 1,600 32% 27,500 45% 1,400 28% 25,000 40% 22,500 35% 1,200 24% 20,000 17,500 30% 1,000 20% 15,000 25% 800 16% 12,500 20% 10,000 15% 600 12% 7,500 5,000 10% 400 8% 2,500 5% 200 4% 0 0%

0 0%

1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16

3Q05 1Q14 1Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 3Q14 1Q15 3Q15 1Q16 3Q16E 2G sales 3G (WCDMA+TD) sales LTE sales Inventory ($mn) Operating margin 3G GM % LTE GM % Corporate GM % Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Shifting landscape gives MediaTek an opportunity at A potential design win at Samsung could provide Samsung, but not yet confirmed 10% EPS upside to MediaTek in 2017 The Taiwan Economic Daily reported recently MediaTek will supply Samsung's A-series and J-series smartphones in 1Q17. The J-series is Samsung’s primary low-end and A- series represents its mid-high tier, combining for 200 mn of Samsung’s 320 mn units. Figure 34: Samsung's highest volume is from its J-Series low-mid range line

Source: Company data, CS Japan Components Team Research The landscape has shifted with Samsung losing chipset suppliers as they exit. The handset division was supplied by TI, ADI, Agere, Silicon Labs, Infineon, STM, NXP, Marvell, Broadcom and Intel over the years, suppliers that exited to focus on other businesses. Samsung had expected to use Marvell this year but low pricing helped forge its supplier exit; it is now using its own solution in more volumes and relying on Qualcomm as the main second source and Spreadtrum as a low-cost alternative. Figure 35: Samsung insourcing up from 70 mn to 110 mn Figure 36: Qualcomm share dips, Marvell exits

Source: Company data, CS Japan Components Team Research Source: Company data, CS Japan Components Team Research

Asia Semiconductor Sector 16 11 July 2016

The exit of multiple vendors makes it more possible to get into Samsung in 2017, though we do not believe the design wins are yet confirmed. MediaTek has had chips testing at Samsung for years but has not had a strong partnership relationship with the customer in any of its verticals to secure meaningful revenues. With Spreadtrum lagging MediaTek in 4G and now Intel, Marvell and Broadcom the most recent exits, we do see possibility of MediaTek inroads finally for a piece of the business in 2017 and believe some engagement will continue underway. Figure 37: Samsung uses a mix of Qualcomm, Samsung and Spreadtrum in its current products

Source: Company data, CS Japan Components Team Research We show a scenario of 20% market share for MediaTek of Samsung’s low-mid-tier (will still share allocation with Qualcomm and Samsung internal solutions) at US$12 ASP using a mix of 75% entry level LTE for the J-Series (MT6735/6737 range) at US$7 and Helio p- series at US$17 for the lower volume A-series would generate NT$12 bn sales and at 35% GM and 25% incremental Operating Margin would generate NT$1.71 EPS, or 11% upside to our 2017 estimates. At a similar 15x multiple (11x ex-cash), that would translate to about NT$25 extra to the share price. Figure 38: MediaTek could generate ~10% incremental EPS by adding Samsung in 2017 Samsung potential for Mediatek in 2017 Samsung A/J Series (mn) 200 ASP (US$) $9.50 Mediatek share 20% Mediatek revenue (NT$ mn) $12,274 GM% (35%) $4,296 Incremental Opex (10%) $1,227 Op Profit (NT$ mn) $3,069 Tax (NT$mn) $435 Net Income (NT$mn) $2,634 Shares 1,545 Incremental EPS in 2017: $1.71 Upside to 2017 Earnings: 10.7% Source: Company data, Credit Suisse estimates We sensitise MediaTek’s opportunity to units and pricing in 2017 assuming 35% GM and 25% incremental operating margin and find incremental EPS would range from NT$17 to

Asia Semiconductor Sector 17 11 July 2016

NT$20, above our initial NT$16 estimate. We do not yet factor the incremental Samsung business into our model until the business is more fully confirmed due to the lack of success getting designed in despite years of sampling. Figure 39: Samsung could contribute NT$1-3 EPS in 2017 Figure 40: Samsung business will be EPS accretive ASPs of chips shipped to Samsung (US$) ASPs of chips shipped to Samsung (US$) MTK's Samsung MTK's Samsung 5.5 7.5 9.5 11.5 13.5 5.5 7.5 9.5 11.5 13.5 units (mn) $17 units (mn) $0 10 5% $16.25 $16.34 $16.43 $16.52 $16.61 10 5% 1.5% 2.1% 2.7% 3.2% 3.8% 20 10% $16.50 $16.68 $16.86 $17.03 $17.21 20 10% 3.1% 4.2% 5.3% 6.4% 7.6% 30 15% $16.74 $17.01 $17.28 $17.55 $17.82 30 15% 4.6% 6.3% 8.0% 9.7% 11.4% 40 20% $16.99 $17.35 $17.71 $18.07 $18.43 40 20% 6.2% 8.4% 10.7% 12.9% 15.1%

50 25% $17.24 $17.69 $18.13 $18.58 $19.03 50 25% 7.7% 10.5% 13.3% 16.1% 18.9%

Samsung Samsung

60 30% $17.48 $18.02 $18.56 $19.10 $19.64 60 30% 9.3% 12.6% 16.0% 19.3% 22.7%

MTK's share at at MTK'sshare at MTK'sshare 70 35% $17.73 $18.36 $18.99 $19.62 $20.24 70 35% 10.8% 14.7% 18.6% 22.6% 26.5% Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Display: Mid-end products driving growth Our supply chain checks with various display module and component makers suggest Mid-end demand is mid-end smartphones (HD resolution) are still seeing strong demand, with some brands outperforming high-end facing panel supply shortage/tightness. Most of the mid- to high-end models have shifted demand to FHD resolution and high-end/flagship smartphones are now mostly equipped with WQHD TFT or OLED screen. Besides adopting a higher resolution or OLED display, new technologies, such as force touch, fingerprint sensor, dual camera and quick charge, are also the main selling points for mid-end smartphone makers. Korean, Taiwanese and Japanese panel suppliers are still the top choice by Chinese OEMs for higher resolution (FHD/WQHD) smartphone panels. However, some local panel makers like BOE and Tianma are also gaining more attraction, especially after they entered Xiaomi's supply chain in 2H15. Strong demand for mid-end smartphone has triggered supply shortage for 5" HD open-cell panels, and pricing rebound is expected to continue into 3Q16. This also helps stabilise panel pricing for higher resolution panels (5" FHD).

Figure 41: 5" FHD smartphone panel pricing stabilising Figure 42: Smartphone resolution shift is still on track 5" FHD LTPS HD+ FHD+ 34 100% 32 90% 86.1% 80.8% 30 80% 28 71.5% 70% 26 55.9% 24 60% US$ 22 50% 48.3% 38.5% 20 40% 27.6% 36.7% 18 30% 26.2% 16 20% 20.6% 14 10% 10.9% 12 1.7% 0% 0.0% 0.2% Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 2011 2012 2013 2014 2015 2016E 2017E

Source: IHS Source: Company data, IHS, Credit Suisse estimates Our checks with display supply chain suggests mid-end smartphones saw stronger growth than high-end models in 1H16, given the adoption of new features like quick charge and fast response fingerprint sensor, as well as stronger marketing campaigns in China. Several brands we talked to still aim to launch new products in 3Q16 as they believe the iPhone refresh in September will not have strong attraction than past cycles. We also noted some estimate cut about Huawei's full-year target (140 mn units), though the company officially denied this during MWC Shanghai. However, our checks with display component makers suggest Huawei has slowed down the pull in for the high-end models, given the negative impact from the delay launch in 1H16 and competition from

Asia Semiconductor Sector 18 11 July 2016 other local brands such as OPPO and VIVO. Nevertheless, Huawei plans to push more mid-end models to the market in 2H16 to meet its 140 mn units target. Chinese mid-tier smartphone makers are also aggressive on adopting OLED and in-cell TFT panels OLED gaining more attractions Samsung Display has been aggressively selling more OLED panels to Chinese Smartphone OLED panels smartphone brands since 2H15, especially to second tier brands as per these brands' are expanding across HD, requirements to differentiate their products with new features to compete with leading high-end FHD and WQHD peers. The aggressive adoption of the OLED for mid-end smartphones is mainly due to the fact that smartphone unit growth is slowing and further differentiation is difficult unless it could add new features or functions to smartphones. OLED appears to be one of the key differentiating factors besides fingerprint, quick charging and dual camera.

Figure 43: OLED taking share of tier two smartphone Figure 44: Chinese top smartphone brands' OLED makers' high-end products (OLED+LTPS TFT)—2H15 penetration in 2015-16 OLED LTPS TFT 2016 2015 Other Asus TCL Sharp Kyocera Xiaomi Blackber… TCL Coolpad HTC Microsoft ZTE ZTE Coolpad Huawei Fujitsu Gionee Lenovo Meizu BBK Meizu Lenovo Sony Gionee OPPO Xiaomi vivo LG Huawei OPPO Samsung Apple 0% 10% 20% 30% 40% 50% 0% 20% 40% 60% 80% 100% Source: Company data, IHS, Credit Suisse Source: Company data, IHS, Credit Suisse estimates Our supply chain checks suggest overall OLED panel shipment to Chinese smartphone Samsung Display will brands might increase from 50-60 mn in 2015 to 80-100 mn in 2016. Brands like OPPO remain the largest OLED and vivo are more aggressive on adopting OLED displays, while top brands like Huawei is panel supplier still struggling on using OLED on its flagship models given single source risk and cost in the near term structure concern. Our supply chain visit also indicated that Xiaomi is still evaluating the potential adoption of OLED, though it might work with LG Display, rather than Samsung.

Figure 45: Multiple Chinese smartphone brands adopting OLED for mid- to high-end segments Company VIVO Samsung Microsoft Gionee Huawei Huawei OPPO Meizu DOOV ZTE Model name Xplay 5 GS7 Lumia 950 E8 P9 Plus Mate S R9 Plus Pro 5 S5 Axon Max

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Technology TD/FDD-LTE TD/FDD-LTE TD/FDD-LTE TD/FDD-LTE TD/FDD-LTE TD/FDD-LTE TD/FDD-LTE TD/FDD-LTE TD/FDD-LTE TD/FDD-LTE Operating System Android 6.0 Android 6.0 Windows 10 Android 5.1 Android 6.0 Android 5.1 Android 5.1 Android 5.1 Android 5.1 Android 5.1 Pixels 2560 x 1440 2560 x 1440 2560 x 1440 2560 x 1440 1920 x 1080 1920 x 1080 1920 x 1080 1920 x 1080 1920 x 1080 1920 x 1080 RAM 6GB 4GB 3GB 3GB 4GB 3GB 4GB 4GB 3GB 3GB ROM 128GB 32GB 32GB 64GB 64GB 64GB 64GB 64GB 16GB 32GB Display 5.43" 5.1" 5.2" 6.0" 5.5" 5.5" 6.0" 5.7" 5.2" 6.0" Camera 16MP + 8MP 12MP + 5MP 20MP + 5MP 24MP + 8MP 12MP + 8MP 13MP + 8MP 16MP + 16MP 21MP + 5MP 13MP + 8MP 16MP + 13MP Battery 3600mAh 3000mAh 3000mAh 3500mAh 3400mAh 2700mAh 4120mAh 3050mAh 2270mAh 4140mah CPU Speed 2.15GHz 2.15GHz 1.8GHz 2.0GHz 2.5GHz 2.2GHz 1.8GHz 2.1GHz 1.3GHz 1.5GHz Processor Chip Snapdragon 820 Snapdragon 820 Snapdragon 808 Helio X10 Kirin 955 Kirin 935 Snapdragon 652 7420 MT6753 Snapdragon 8952 Multi-core Octa Octa Hexa Octa Octa Octa Octa Octa Octa Octa Price (RMB) 4,288 4,080 3,999 3,999 3,900 3,320 3,299 3,099 2,999 2,599 Source: Company data, ZOL Samsung Display is expected to remain the main supplier for OLED displays, although local Chinese panel makers like Tianma, Visionix and Ever Display also plan to ramp up

Asia Semiconductor Sector 19 11 July 2016 their shipments. Nevertheless, our checks suggest these new comers are still struggling with production yield and reliability, due to the fact that OLED technology is not just related to building up the capacity, but also about process know-how and recipe.

Figure 46: …while mid-range HD-resolution OLED adoption also increased vs 2H15 Company ivvi Gionee HTC Xiaolajiao Hisense ZTE TCL Motorola Dazen Lenovo Model name i3 S8 One A9 7 C1 A910 P618L Moto X X7 S90

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Technology TD/FDD-LTE TD/FDD-LTE TD/FDD-LTE TD-LTE TD/FDD-LTE TD/FDD-LTE TD/FDD-LTE WCDMA TD/FDD-LTE TD/FDD-LTE Operating System Android 6.0 Android 6.0 Android 6.0 Android 4.4 Android 5.1 Android 5.1 Android 4.4 Android 4.2 Android 4.4 Android 4.4 Pixels 1280 x 720 1920 x 1080 1920 x 1080 1280 x 720 1280 x 720 1280 x 720 1280 x 720 1280 x 720 1920 x 1080 1280 x 720 RAM 4GB 4GB 2GB 2GB 2GB 2GB 1Gb 2GB 2GB 1Gb ROM 64GB 64GB 16GB 16GB 16GB 16GB 8GB 16GB 16GB 16GB Display 5.2" 5.5" 5.0" 5.5" 5.5" 5.5" 5.0" 4.7" 5.2" 5.0" Camera 13MP + 8MP 16MP + 8MP 13MP + 4MP 20MP + 20MP 13MP + 5MP 13MP + 8MP 13MP + 5MP 10MP + 2MP 13MP + 8MP 13MP + 8MP Battery 2450mAh 3000mAh 2150mAh 2400mAh 2300mAh 2540mAh 5000mAh 2200m Ah 2700mAh 2300mAh CPU Speed 1.4GHz 2.0GHz 1.5GHz 1.5GHz 1.36GHz 1.3GHz 1.2GHz 1.7GHz 2.1GHz 1.2GHz Processor Chip Snapdragon 8937 MT 6755 Snapdragon 617 MT 6732 Snapdragon 8929 MT6735 Snapdragon 410 Snapdragon 8960T MT 6595 Snapdragon 410 Multi-core Octa Octa Octa Quad Octa Quad Quad Dual Octa Quad Price (RMB) 2,499 2,599 2,500 2,199 1,999 1,299 1,290 1,170 1,099 699 Source: Company data, ZOL TDDI volume also picking up Our conversation with some leading smartphone brands (Huawei, Gionne, VIVO, TCL, etc.) also suggest that the supply of "quality OLED panel" will remain tight in the next few years, especially with iPhone starting to adopt OLED from 2H17. To avoid the supply chain risk, these Chinese smartphone brands are planning to adopt in-cell TFT panels in the meantime to reduce overall thickness, while maintaining multi-sourcing strategy and competitive cost structure. Multiple panel makers like LGD, Sharp, Tianma, AUO, Innolux and BOE have been working with Taiwanese driver IC makers on the TDDI solution for the China market. Besides smartphone using in-cell TDDI, we also learned that certain tablet models from Huawei and Lenovo will adopt in-cell panels from 2H16. We expect TDDI volume to pick up from 2H16 and should further proliferate into 2017. FocalTech (HD resolution) and Synaptics (FHD resolution) are currently more ahead on TDDI among its peers, but our checks also suggest Himax and Novatek are seeing some design wins for 2H16. Backend packager Chipbond could also benefit from the in-cell display trend given in-cell TDDI requires longer testing time.

Figure 47: FocalTech is ahead on TDDI but Himax and Novatek are also catching up Key panel partners Main product Note FocalTech Sharp, Tianma, AUO, Innolux, BOE a-Si HD, LTPS FHD, IGZO HD Himax LGD, BOE, Tianma a-Si HD, LTPS FHD Same layout as FocalTech's Novatek LGD, Sharp, Tianma, AUO LTPS FHD Same layout as Synaptic's Synaptic LGD, BOE, Tianma LTPS FHD Source: Company data, Credit Suisse estimates Fingerprint sensor is becoming a standard feature Fingerprint sensing has become a standard biometric identification method for Chinese Fast response will become a mid- to high-end smartphones. Comparing with other biometric identification technologies, must-have feature for such as Iris sensing, eyeprint, voice recognition, etc., Chinese smartphone brands believe fingerprint from 2H16 fingerprint sensing offers better user experience, though it may not be the cheapest solution. Our supply chain checks also concluded that area type capacity fingerprint sensing remains the mainstream technology, and the adoption of other fingerprint sensing technologies (such as ultrasonic, optical, etc.) remain limited. Multiple Chinese smartphone makers we met mentioned the trends they are seeing or expecting for fingerprint sensors are: (1) more/better features, (2) IP protection, and (3) cost reduction. Several brands such as Lenovo, OPPO, ZTE, etc., said they are now using a faster response fingerprint sensor (0.1-0.3 seconds for unlocking) and made this one of

Asia Semiconductor Sector 20 11 July 2016 the key selling points for their flagship products. This has put pressure on other top tier brands, including global brands like Samsung, as they are now planning to adopt similar feature in their 2H16-2017 models.

Figure 48: Fingerprint sensing becomes a standard for mid- to high-end smartphones Company OPPO Gionee Samsung LeEco Lenovo Samsung LG VIVO Model name R9 S8 C5 Max 2 Z2 Pro A5 Stylus 2 Plus X7 Plus

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Technology TD/FDD-LTE TD/FDD-LTE TD/FDD-LTE TD/FDD-LTE TD/FDD-LTE TD/FDD-LTE TD-LTE TD/FDD-LTE Operating System Android 5.1 Android 6.0 Android 6.0 Android 6.0 Android 6.0 Android 5.1 Android 6.0 Android 5.1 Pixels 1920 x 1080 1920 x 1080 1920 x 1080 2560 x 1440 1920 x 1080 1920 x 1080 1280 x 720 1920 x 1080 RAM 4GB 4GB 4GB 4GB 4GB 2GB 2GB 4GB ROM 64GB 64GB 32GB 32GB 64GB 16GB 16GB 64GB Display 5.5" TFT-LCD 5.5" AMOLED 5.2" AMOLED 5.7" TFT-LCD 5" TFT-LCD 5.2" AMOLED 5.7" TFT-LCD 5.7" AMOLED Fingerprint sensor FPC FPC Synaptics/Egis Qualcomm FPC Synaptics/Egis IDEX FPC/Goodix Camera 13MP/16MP 16MP/8MP 13MP/8MP 21MP/8MP 13MP/8MP 13MP/5MP 13MP/8MP 16MP/16MP Battery 2850mAh 3000mAh 2600mAh 3100mAh 3500mAh 2900mAh 3000mAh 4000mAh CPU Speed 2.0GHz 2.0GHz 1.5GHz 2.15GHz 2.15GHz 1.5GHz 1.2GHz 1.8GHz Processor Chip MTK MT6755 MTK MT6755 QCOM Snapdragon 617 QCOM Snapdragon 820 QCOM Snapdragon 820 QCOM Snapdragon 615 QCOM Snapdragon 410 QCOM Snapdragon 620 Multi-core Octa core Octa core Octa core Quad core Quad core Octa core Quad core Octa core Price (RMB) 2,799 2,599 2,130 2,099 1,799 1,620 TBD TBD Source: Company data, Credit Suisse. Among the dozens of fingerprint-enabled smartphones we tested, Fingerprint Card, Egis and IDEX seem can meet the fast response requirement, while ultrasonic (Le Max2) had the worst performance (over 1 sec). Our checks suggest Egis' latest ET-500 series fingerprint solutions is gaining more attraction by local and international brands as the new chip can support fast response and black screen unlock. Our industry checks also indicated that Samsung might be changing its strategy and is considering to source third party recognition algorithm for its next generation phones as its internal solution cannot catch up with the end market requirement, which we believe should be positive for Egis.

Figure 49: Egis' latest ET-500 series fingerprint solutions— Figure 50: IDEX fingerprint solutions—Silicon based On- significant improvement on performance and die size Chip solutions now become the mainstream

Source: Company data, Credit Suisse Source: Company data, Credit Suisse Intellectual Property (IP) for fingerprint sensor now becomes a more important issue for Chinese smartphone brands as they begin to look for export opportunities. We have learned from multiple smartphone makers that they are becoming more concerned about the potential IP infringement of active sensing technology (owned by Apple), and have started to evaluate new fingerprint sensor suppliers such as Synaptics, Egis and IDEX. The recent announcement of TCL/Alcatel engaging with Synaptics, Samsung using Egis solution, and LGE adopting IDEX sensor are good examples that smaller fingerprint solution providers might become marginalised amid the cost and technology competition. Fingerprint solution providers expect module pricing to remain on a downward trend (module ASP $3-5, end market $4-6) but margin/profit could be sustained, given greater scale, cost reduction, and better production efficiency/yield. On the chip level, Egis and IDEX showcased new products with ~5 mm x ~5 mm sensing area offering more die-per- wafer than existing players. Nevertheless, we believe sensor sensitivity, design flexibility, IP, and module production yield are as important as the module cost for fingerprint sensors, especially for mid- to high-end phones focusing on mobile payment applications.

Asia Semiconductor Sector 21 11 July 2016 Chinese brands accelerating move into VR, Internet of Things and automotive The China brands at MWC and CES in Shanghai are evolving their business models in Smartphone brands are quest of new growth drivers with smartphones and tablets seeing high competition and eager to penetrate into the slowing growth. The overall semiconductor industry has grown at a 3.3% CAGR since the IoT, VR and other new 2007 peak and with smartphones maturing, vendors are now migrating into other digital markets following a consumer products spanning the broad Internet of Things applications including connected slowdown in smartphone home and wearables, virtual reality all-in-one and head mounted devices and some after- demand market automotive infotainment systems.

Figure 51: Chip revenue has slowed, shifting focus to new applications for growth Total IC revenue + sensors (US$mn) YoY (%) 350,000 CAGR +3.3% 70% 2007-2015 300,000 CAGR +3.4% 50% 2000-2007 250,000 30% 200,000 10% CAGR +17.6% 150,000 1991-2000 -10% 100,000 -30% 50,000 -50%

0 -70%

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Total IC Revenue + Sensors (US$mn) IC Y/Y Growth

Source: SIA, Credit Suisse estimates VR: Mass market ecosystem rapidly developing Many China brands and whitebox vendors are now shifting to the nascent virtual reality China brands and whitebox market where penetration is low but currently offers a land rush of hardware and content vendors are shifting to VR solutions looking to grab early mind share and volumes. Vendors are segmenting devices where penetration is low but into three market tiers: the market potential is big 1) High-end head mounted tethered systems. Most of the early advanced head mounted devices from branded companies such as Oculus, HTC Vive and Sony still rely on the computer or game console as the processing engine given the requirements for very fast refresh rates and high definition graphics. Oculus partnered with four PC system manufacturers including Asus, , Alienware (by Dell) and Falcon Northwest. These systems are designed and optimized specifically for Oculus Rift. Primary system requirements for Oculus Rift include GTX 970 or AMD R9 graphics or better, Intel i5 processors, 8GB or more memory. A few Chinese have developed tethered solutions but most are looking to rely on lower cost smartphone based approaches or all in one VR glasses integrating a reference design similar to that seen in the smartphone.

Asia Semiconductor Sector 22 11 July 2016

Figure 52: Oculus ready PC with Asus, Dell, Alienware and Falcom Northwest Oculus recommended Oculus Rift Optmized and Recommended PC PC Specifications Asus ROG G20 Alienware X51 Dell XPS 8900 Falcon Northwest Tiki

Video card NVIDA GTX 970 / AMX R9 NVIDIA GeForce GTX 970 NVIDIA GeForce GTX 970 NVIDIA GeForce GTX 970 NVIDIA GeForce GTX 980 CPU Intel i5-4590 or greater Intel i5 6400 Intel i5 6400 Intel i5 6400 Intel i7 6700 Memory (GB) 8GB plus 8GB 8GB 8GB 12GB Video Output HDMI 1.3 HDMI 1.3 HDMI 1.3 HDMI 1.3 HDMI 1.3 USB Prots 3x USB 3.0 plus 1x USB 2.0 6x US 3.0 6x USB 3.1 4x US 3.0 4x USB 3.1 6x USD 3.0 4x USD 2.0 6x USD 3.0 4x USD 2.0 OS Windows 7 64-bit or newer Win 10 Win 10 Win 10 Win 10 Storage N/A 1TB HDD 1TB HDD 1TB HDD 1TB HDD Price (excl. display) N/A US$1,149 USD$1,199 USD$1,199 US$2,699 Price (w/ purchase of VR) N/A US$949 US$999 US$999 N/A Source: Company data, Credit Suisse 2) All-in-One (AIO) VR devices. China brands have adapted reference designs using MediaTek, Rockchip, Qualcomm and Intel’s Atom for standalone VR devices capable of displaying multimedia content within the headset. The devices have a similar spec with the premium smartphones featuring Qualcomm Snapdragon 820 SoC, 4GB DRAM, 32GM NAND and AMOLED display supporting 2K resolution with pricing over US$500. The low-end ones feature Rockchip and Intel's Atom chips and priced at US$80-120 for the mainstream market and still have similar specs to a low end smartphone with 1-2GB DRAM, 8-16GB NAND flash, FHD display and basic camera for snapshots of the content. 3) VR goggles paired with smartphone. Many vendors are also showing basic versions like Samsung’s Galaxy Gear VR and Google Cardboard, with headsets that allow insertion of a smartphone for viewing multimedia and movies. The headsets are mainly dumb glasses for viewing the smartphone display close-up, with factory pricing starting at US$6-10.

Figure 53: China vendors are offering more All-In-One VR devices with a broad price range Company Maysun Maysun Maysun SAWINK FVIEW SUNGWORLD Chengfong Chengfong PicoVR Model name VR1 VR2 VR3 V03 VR-501 V05 VR550R VR551I neo

Device VR glasses VR glasses VR glasses All-in-One All-in-One All-in-One All-in-One All-in-One All-in-One Pixels NA NA NA 720x1080 1280*720 1920*1080 1920*1080 1920*1080 1200*1080 RAM NA NA NA 1GB 1GB 2GB 2GB 2GB 4GB ROM NA NA NA 8GB 16GB 16GB 32GB 32GB 32GB Display NA NA NA 5" 5.0" 5.0" 5.5'' 5.5'' AMOLED 3.8'' Camera NA NA NA NA NA NA NA NA NA Battery NA NA NA 2200mAh 3000mAh 4000mAh 3000mAh 5000mAh 5000mAh CPU Speed NA NA NA 1.3GHz 1.35GHz 1.8GHz 1.8GHz 1.8GHz 2.2GHz Rockchip Rockchip Rockchip RK3288 Rockchip RK3288 Processor Chip NA NA NA Intel Atom Z8350 Snapdragon 820 RK3126 A7 RK3288 A17 A17 A17 Multi-core NA NA NA Quad Quad Quad Quad Quad Quad Retail Price (USD) $7 $8 $9 $45 $80 $115 $130 $150 $519 Source: Company data, Credit Suisse research In addition to building the hardware, local suppliers are also building their ecosystem to China VR suppliers are support VR devices, a significant change compared with the smartphone era where iOS building their own and Android were the two dominating operating systems. The VR ecosystem development ecosystem to grow the in China could accelerate as entry pricing is quite low suitable for adoption at little market and provide multiple incremental cost beyond the basic smartphone for the low-end goggles. The device applications vendors and app providers in China are offering more solutions including gaming, video, education and virtual shopping to support the rising penetration of VR—Pico has introduced the PicoVR App platform compatible with Android 6.0 and its VR device PicoVR Neo with over 100k hours videos, 300 films of movies and close to 100 games. Archermind, another VR solution provider, also showcased its technology capability for medical care, industrial simulation and education with VR. To provide better user experience, KAT, a VR start-up, developed a treadmill supporting VR. The treadmill captures the user's motion and movement to simulate a virtual outdoor running experience. KAT is also looking to develop applications for virtual education, gaming and shopping.

Asia Semiconductor Sector 23 11 July 2016

Figure 54: KAT introduced a treadmill supporting VR Figure 55: G-Wearables VR solutions includes whole- body motion capturing sensors

Source: KAT Source: G-Wearables Google Daydream could accelerate China’s ecosystem development Google in May at its I/O conference launched its VR platform called Daydream available Google's Daydream is on Android Nougat later this year. The Google Daydream platform has potential to create creating an ecosystem for a wide ecosystem for the mass market using a high-end smartphone at US$300+ as the the mass market using the main engine for the graphics and multimedia, substantially lowering the entry price from smartphone as the engine the US$2,000+ system cost for high-end goggles tethered to an advanced gaming PC. Google is mandating a high-end smartphone specification that would stimulate upgrades of the processor and display further or drive replacements if VR applications can see wider interest. The vendor is mandating OLED Display for VR capable phones and high-end processor, noting the Snapdragon 800 series is the first Daydream ready processor. MediaTek believes its Helio series will also have enough performance to meet the specs. We expect that increasing requirements for supporting VR could potentially drive upgrade cycles on the SoC for next several years. The Hardware components of the Daydream platform consist of Smartphone, Headset and a controller. Google is working with leading smartphone vendors to develop new hardware that is "Daydream-ready". Among partners mentioned were Samsung, HTC, Huawei, Alcatel, ZTE and LG. The application developers then would also need to apply for Google certification to be listed in the Google Daydream application store, helping ensure a good base standard of content that can make VR more acceptable for mass adoption. The presence of an ecosystem of applications, content and capable smartphone devices around VR looks to make Daydream the best chance for VR to be realised in high volumes beyond the high-end gaming systems. We would expect within a year for MediaTek and Qualcomm reference designs for their higher end platforms (Snapdragon 600+ and Helio) to support Daydream and allow a proliferation of hardware and applications for the China smartphone ecosystem. IOT: wearables, home automation, set-tops drones, robots, GoPros China vendors are also adjusting their business model to address a wider range of IoT silicon opportunity could products beyond smartphones and tablets including over the time set-tops, home expand to US$35 bn by automation and security, drones, consumer robots and portable sports cameras. The 2020, representing 10% vendors are after the newer IoT growth areas, which collectively Gartner estimates is a incremental silicon growth silicon opportunity expanding from US$10 bn in 2015 to US$35 bn in by 2020, representing 10% incremental silicon growth beyond the industry.

Asia Semiconductor Sector 24 11 July 2016

Figure 56: The IoT semiconductor market could reach US$35 bn by 2020 Sales (US$mn) YoY (%) $40,000 45% $35,000 40% $30,000 35% 30% $25,000 25% $20,000 20% $15,000 15% $10,000 10% $5,000 5%

$0 0%

2013 2014

2015E 2016E 2017E 2018E 2019E 2020E ASSP / FPGA Microcontroller Sensors Bluetooth Cellular Wi-Fi ZigBee Other Wireless Wireline YoY Growth Source: Gartner The IoT ecosystem is seeing strong support from the ARM ecosystem, featuring silicon, Chipset suppliers are system houses, brands and cloud data providers. While IoT is associated with adding developing platforms connectivity and sensing to things, that opportunity for the connectivity chips pales in combining processing and comparison to the processing which will take on more importance as devices add connectivity with developers intelligence. The processing IC opportunity is projects at US$20 bn vs about US$7.5 bn support to bring products each for connectivity and sensing.

Figure 57: ARM has built a strong IoT ecosystem Figure 58: Growing computing requirement in IoT will drive incremental chip demand IoT semiconductor market (US$mn) $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 2013 2014 2015 2016 2017 2018 2019 2020 Communications Processing Sensing

Source: Company data, Credit Suisse estimates Source: Gartner Many of the leading chipset suppliers are developing platforms combining processing and connectivity along with developer support to bring new products to market. ARM based suppliers including MediaTek, Marvell, Microchip, NXP, Qualcomm, Realtek, Samsung, TI and most recently Cypress through its acquisition of Broadcom’s IoT division have all launched IoT platforms. Intel is also marketing its low power Quark processor based on its 1990s Pentium processor for IoT endpoint devices, with Atom and Xeon used for more advanced processing of endpoint data. While the space will be crowded with multiple chipset platforms, each will have benefits in their respective ecosystems. MediaTek is a key supplier for many of emerging IoT offerings in China that have adapted their business model from using its smartphone and tablet solutions. A number of wearables and home automation devices now use MediaTek’s chipsets though volumes are still in the low single digit millions.

Asia Semiconductor Sector 25 11 July 2016

Figure 59: Leading chipset companies all developing platforms to enable IoT devices Company Chips Description PSoC, MCU, Bluetooth low Cypress provides the ARM Cortex-M based PSoC programmable SoC and Cypress energy solutions compatible solutions for the automotive and industrial applications A low power consumption SoC to bring intelligence to the network edge and Intel Quark X1000 reduce development costs for IoT endpoint devices Dual/Quad Cortex-A72 chip which can integrate multiple 10GE ports with packet Marvell ARMADA 8000 processor for security and storage with full CPU and I/O virtualization Low power Cortex A7 dual processor integrates 3D graphics, display controllers Marvell IAP220 for home automation Mediatek MT2511 Mediatek's first bio-sensing analog front end chip for health and fitness devices Mediatek MT2523 Mediatek's SiP module offering GPS, low energy bluetooth Microchip provides a full portfolio of wireless,sensors and low power MCUs to Microchip IoT WiFi G AWS IoT kit enable end to end solutions help the developers connect the embedded system to the cloud A network switching platform supports the applications in data center and provide NXP QoriQ LS2088A power efficiency. Low power dual band WiFi connection, MCU capability with 1.5MB on-chip RAM, Qualcomm QCA4012 hardware and security A SoC optimized for wearables integrates quad Cortex A7 chip and X5 modem Qualcomm Snapdragon Wear 1100 supports Cat 4 and hardware/software security SoC comprised of Snapdragon X5 LTE modem for Internet of Things for security Qualcomm MDM9x07 and connectivity A module with WLAN, Bluetooth and FM receiver connectivity for smart home Realtek RTL8723CS and IoT gateway applications A module with ARM Cortex-M3 and memory with WiFi and networking capability Realtek RTL8711AF and can directly control sensors or devices An end-to-end, integrated IoT platform which includes integrated ecosystem, Samsung Artik from silicon to development tools to cloud to shorten the development cycle. SoC supports 2.4GHz protocols for short-range connectivity and sub-GHz for Silicon Labs Gecko long range connectivity for the next generation mobile devices IoT solutions for industrial and TI provides a broad portfolio of processors, MCUs, connectivity chips and TI automotive sensors for the IoT applications in automotive and industrial. Source: Company data, Credit Suisse research Realtek has developed the Ameba reference design allowing the company about US$2 content combining Microcontroller and connectivity through Wifi or Bluetooth. Ameba is equipped with peripheral interfaces, including, WiFi, NEC, power management IC, ADC and MCUs. The platform is adopted in Thunder Tiger's robots. The platform also has good support for application developers with certifications for Apple, Google and Arduino.

Figure 60: Realtek's Ameba Arduino MCUs are used in the robots

Source: Company data, Credit Suisse estimates Qualcomm is also putting more effort on expanding its communication platforms into IoE (Internet of Everything) channels in emerging markets. Qualcomm targets four new business: (1) wearables (smart glasses, smart watches, smart trackers, body sensors), (2) control and automation (home automation, energy management, security, appliances, lighting control), (3) consumer electronics (media and entertainment – video/audio streaming, content consumption and embedded), and (4) machine to machine and smart cities (energy and metering, industrial, building automation and transportation).

Asia Semiconductor Sector 26 11 July 2016

Figure 61: Qualcomm offers Snapdragon Flight to target the drone market

Source: Company data, Credit Suisse estimates The smart watch remained a feature at multiple vendors but looks to be quickly commoditising, with options now ranging from US$10-100 factory prices to run Android Wear or simulate the Apple Watch interface. Most of the devices run versions of MediaTek’s Aster or dual core chipset and are also capable of 3G calling. Volumes at these wearable suppliers remain modest in the hundreds of thousands.

Figure 62: Chinese smart watches commoditising to low factory price points Model name T1S SW-AW08 mini SW-M98 T3s SW-G2 T9 SW-GT08

Technology 2G 2G 2G 2G 2G 2G 2G Operating System Android Android Android Android Android Android Android Pixels 240*240 96*96 96*96 240*240 240*240 256*320 240*240 RAM 16KB 16KB 16KB 16KB 16KB 16KB 16KB ROM 256KB 256KB 256KB 256KB 256KB 256KB 256KB Display 1.54" 0.95" 0.95" 1.22" 0.91" 1.61" 1.5" Camera 0.3MP NA NA 0.3MP 2MP 0.3MP 0.3MP Battery 380mAh 190mAh 160mAh 300mAh 380mAh 270mAh 380mAh Processor Chip MT6261A MT6261A MT6261A MT2502C MT6261A MT2502C MT6261A FOB Price (USD) $15 $20 $20 $34 $36 $43 $53 Source: Company data

Figure 63: Wearables at 250 mn units and rising Figure 64: Auto/IoT/VR/Wearables rising vs smartphones Wearable Shipments (mn units) Wearable penetration Semiconductor market size (US$mn) Auto, IoT, VR and wearble as % of population % of smartphone market 600 50% 120,000 80% 525 40% 105,000 75% 450 90,000 70% 375 30% 75,000 65% 300 225 20% 60,000 60% 150 45,000 55% 10% 75 30,000 50% 0 0% 15,000 45%

0 40%

2015 2014 2016 2017 2018 2019 2020 2013 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Bluetooth Headsets Chest Straps Other Fitness Monitors Smart Garments Smartwatches Sports Watches Smartphones VR Wearable Cameras Wristbands Other Auto IoT Wearable penetration Wearables Auto/IoT/VR/Wearable % of smartphone Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Asia Semiconductor Sector 27 11 July 2016

China Mobile working to support IoT devices on its network Under China government's 13th 5-year development, IoT, big data and cloud computing are China Mobile is supporting the major areas that the government is backing and now seeing a big push by the local IoT services by providing telcos. China Mobile had a prominent space at CES Shanghai with no smartphone exhibits chips, modules and to focus entirely on enabling an IoT ecosystem and its China Mobile IoT Company focused promotes IoT products and on the IoT market. The carrier had 62 mn IoT terminals on its network exiting 2015 and has applications built demonstration products in 10 areas: transportation, logistics, power grid, smart home, security, medicine, industry, agriculture, environmental protection and financial services. China Mobile through this subsidiary supports IoT services, provides IoT chips and modules, promotes IoT products and applications and develops industry solutions by integrating applications. It also has IoT special numbers providing SMS, 2.5G service, free roaming, device management and smart billing platforms through a special network The carrier has built OneNET, an open platform which is able to support the development of various intelligent hardware and sensors backed by the company's massive connection networks, cloud platform and big data capability. The platform features easy connections of IoT appliances to smartphones, cloud platform to manage devices, QR code support, big data analytics support and an application platform for hardware on the network. The network is supporting wearable devices for SoS help and fitness, home security cameras, smart home gateways, mobile set-top boxes, automobile trackers, Internet of Vehicle functions (driving assistance and safety features), embedded 3G/4G modules, enterprise inventory tracking, remote temperature and humidity monitoring, monitoring of geological disasters, smoke detection, smart lamp control, E-vehicle charging location status, smart city and home services, and mobile payment applications.

Figure 65: China Mobile's OneNet platform provides full IoT solution

Source: China Mobile Internet service providers are also showcasing platforms for supporting connected things. JD.com is also allowing the JD.com was marketing its mobile application, which allows its customers to control customers to control connected devices serviced by JD's ecosystem. The platform also provides free cloud connected devices served computing, storage, data analysis and a portal for managing home connected appliances. by its ecosystem The company has created a developer platform for smart devices based on its code called JoyLink with a number of IC and component suppliers in its ecosystem (Intel, Qualcomm, Marvell, TI, MediaTek, Microchip, Realtek, Murata and Broadlink). Many solution providers at the China trade shows are developing a wide array of connected appliances in the home (smart plugs, LED bulbs, home entertainment and speakers, temperature and humidity sensors, security systems and Ethernet gateways).

Asia Semiconductor Sector 28 11 July 2016

Many of the appliances can use Google or Apple smartphones to control the devices remotely. Beyond the living room, a host of vendors are commoditising the Go Pro market with replica video cameras using Sunplus and Novatek and capable of 4k video recording and priced at US$40-80 factory prices. Design houses are also shifting their focus from smartphones to IoT applications. Thundersoft started in smartphone development but now is heavily marketing its IoT development capabilities based on Qualcomm and Intel reference designs working with ARM, Microsoft, , , Youku, Omnivision and Invensense. The design house offers PCB/BOM support, OS debugging, IoS/Android support, application framework and reference designs for drones, IP cameras, VR, robots, POS terminals and watches. Some of these solutions also require high-end processing. Thundersoft's IP camera design uses Qualcomm's mid-high-end Snapdragon 618 featuring hexa-core SoC, LTE X8 modem, 4K HEVC video, and heterogeneous computing for video analytics. A number of niche providers are also unveiling interesting new IoT appliances spanning surveillance with IP cameras with applications including home monitoring, baby and elderly care, store management, motion detection alarms and worker surveillance. One of the more unique applications is a sleeping assistance device from Sleep Shepherd that has an EEG sensor to monitor the brainwaves and use precise binaural tones to help the user fall asleep… does it really work? Another interesting highlight from the show is a smart micro-projector DOOGEE introduced which allows wireless transmission from smartphones and laptops. The mini smart projector has 1GB RAM, 8GB ROM, 2 speakers and 4,800mAh battery though still spotty resolution of only 854*480.

Figure 66: Device makers are exploring new business areas in IoT appliances Company Yuncooltech Coollang Blackview Sleep Shepherd MADGAZE ThunderSoft Lianluo Model name Warrier G1 - IP camera Xiaoyu 2.0 Finder 2 Blue Smart glass IP Camera Smart collars

Supporting OS Android / iOS iOS / Android iOS / Android iOS / Android Android Android NA Pixels 128*32 NA 854*480 NA 800*480 NA NA RAM 16KB NA 1GB NA 2GB 2GB NA ROM 16GB NA 8GB NA 8GB 64GB NA Sensor G-sensor, CIS NA NA EEG sensor, 3-axis sensor 9-axis sensor CMOS image sensor NA Camera 2MP NA NA NA 5MP 8MP NA Battery 3400mAh NA 4800mAh NA 600mAh 4000mAh 350mAh Processor Chip HiSilicon IP camera SoC M3 MCU quad core processor NA OMAP 4460 dual core Qualcomm Snapdragon 618 NA FOB Price (USD) $10 $30 $50 $230 $479 $799 $1,500 Source: Company data Robots are also proliferating from Chinese vendors, including Ubtech’s Alpha Alpha 2 adopting Samsung Exynos 5260 Hexacore processor, 2GB of DRAM and 16 GB of NAND with 20 joints capable of dancing to pop music and having built in voice chat capabilities. Lanker also introduced a low-end robot featuring ARM A7 core processor, which could tutor the kids and provide home surveillance with cameras and motion detector.

Figure 67: Robots are now rolling out from more of the Chinese manufacturers Company Disney (built by sphero) Ubtech Lankerobot Avatarmind Ubtech Plen Model name BB-8 Jimu robot I-One iPal Alpha 2 Plen 2 mirror robot

Processor Chip STMicro F3 MCU NA A7 NA Samsung Exynos 5260 Atmel ATmega32U4 Factory Price (USD) $150 $150 $199 $1,000 $1,500 $2,278 Source: Company data

Asia Semiconductor Sector 29 11 July 2016 Selective on stocks with content / share gains at defensible margins The China smartphone supply chain is seeing some investable opportunities from decent Top beneficiaries include unit growth this year (builds up 10-15% YoY) and spec upgrades (3G to 4G, camera, Egis, Himax, Largan, TSMC fingerprint, and display) that can still control margins well. Our top picks which we highlight and Win Semi; still include Egis (fingerprint gains into Samsung and China brands), Himax (China small panel conservative on MediaTek ramp and AR/VR content), Largan (rising spec upgrades and start of dual camera), TSMC on risk of a correction in (strong share and technology position with leverage to new cycles in VR, IoT and auto) units and pricing and Win Semi (rising RF content in smartphones and Wifi). While MediaTek is benefiting on units, we stay Neutral balancing on-going pricing /margin pressure and some risk of a correction from very strong build rates (+35% YoY).

Figure 68: Stock call valuation table—TSMC, Largan, Himax, Egistec and Win Semi remain top picks Price Mkt Cap EV/Sales (x) P/E Multiple (x) P/B Multiple (x) ROE Trough/Peak (EV/Sales) Company Ticker 7/7/2016 (US$mn) 2015 2016 2017 2015 2016 2017 2015 2016 2017 2015 2016 2017 Fabless MediaTek 2454.TW $237.00 $11,511 1.1 0.9 0.8 14.2 15.8 14.8 1.5 1.5 1.4 10.8 9.3 9.5 Himax HIMX $7.93 $1,363 2.0 1.7 1.5 54.2 20.1 14.8 3.0 2.8 2.6 5.6 14.0 17.6 Egistec 6462.TWO $147.00 $312 -1.2 -0.3 -0.1 NA 22.8 6.8 7.5 5.6 3.3 -6.7 24.6 48.4 Foundry TSMC 2330.TW $161.50 $129,425 -0.2 -0.2 -0.2 14.6 13.3 12.2 3.4 3.0 2.7 23.5 22.9 22.1 Win Semi 3105.TWO $61.90 $1,122 3.0 2.6 2.1 13.8 11.8 10.4 2.1 2.0 1.8 15.5 16.9 17.7 Smartphone components Largan 3008.TW $2,860.00 $11,857 6.0 7.1 5.3 15.9 18.8 12.9 6.1 5.1 3.9 38.1 27.3 30.6 Source: Company data, Credit Suisse estimates Egis (6462.TWO, OUTPERFORM, TP NT$250) New products and more design wins to drive 2H16-2017 earnings growth Egis' showcased its new fingerprint sensor solution (ET-500 series) at MWC Shanghai. Egis engaging for more The new chip now provides comparable performance (0.1-0.3 sec recognition speed) Samsung and China versus its peers (Fingerprint Card and Goodix), but with a much cheaper BOM cost, given smartphone fingerprint more die-per-wafer and its proprietary passive sensing technology (save $0.3 for metal design wins ring and another $0.3 for high voltage IC). The new chip will be able to detect fingerprint through ceramic (100 um thickness) or glass (175 um thickness), which could help Egis break into the high-end segment. Besides the existing design wins at Samsung (A5, C7/C5, etc.), we believe it could gain more market share at Samsung's 2H16 models, and could potentially enter the Galaxy S8 supply chain in early 2017. Egis is also working with multiple module makers (not just O-Film) to engage with Chinese leading smartphone brands including Huawei, Xiaomi, Lenovo, OPPO and vivo. Besides the lower cost structure and faster response time, we believe the Chinese smartphone brands that are growing their export channels now treat IP issues more seriously. As a result, we expect Egis to secure some design wins from these brands in the next three months, and the shipment to Chinese brands should pick up from 4Q16. We believe Egis' revenue and earnings will be very second half loaded in 2016, and we believe its superior technology and competitive cost structure should help the company to secure more projects for 2017. We fine tune our model but leave EPS estimates and TP unchanged. We reiterate OUTPERFORM and TP of NT$250, based on 15x 12M P/E.

Asia Semiconductor Sector 30 11 July 2016

Figure 69: Egis quarterly P/L NT$ mn 3Q15 4Q15 1Q16 2Q16E 3Q16E 4Q16E 1Q17E 2Q17E 3Q17E 4Q17E 2015 2016E 2017E Revenue 239 180 106 243 371 1,258 1,071 1,307 1,628 1,520 534 1,978 5,526 Gross profit 199 103 82 115 188 664 528 650 771 748 397 1,048 2,698 Operating profit 85 (64) (36) (17) 65 458 314 425 514 479 (63) 470 1,732 Net profit 46 (64) (56) (27) 63 463 297 336 441 412 (90) 444 1,486 EPS (NT$) 0.73 (1.03) (0.81) (0.39) 0.92 6.73 4.32 4.88 6.41 5.99 (1.44) 6.45 21.61 Gross margin (%) 83.3 57.4 77.2 47.1 50.6 52.8 49.3 49.8 47.4 49.2 74.3 53.0 48.8 Operating margin (%) 35.5 (35.6) (34.1) (6.9) 17.6 36.4 29.4 32.5 31.6 31.5 (11.8) 23.8 31.3 Net margin (%) 19.1 (35.8) (52.5) (11.0) 17.1 36.8 27.8 25.7 27.1 27.1 (16.8) 22.4 26.9 Source: Company data, Credit Suisse estimates Himax (HIMX.OQ, OUTPERFORM, TP US$13) Beneficiary of better mid-end smartphone demand Himax pre-announced its 2Q16 results before the market open on 5 July. 2Q16 revenues of Himax ramping smartphone, US$201.1 mn were up 11.5% QoQ (vs guidance of 7.5-12.5% QoQ) and was in-line with CS TV ICs and longer-term but above consensus estimates. The company attributed the strong sales in the small and gaining in AR/VR medium-sized driver IC business, where it started shipment of new products (OLED driver IC and OLED DDI and TDDI), as well as better end market demand on China new smartphone model launches. 2Q16 GM of 26.1% were down 10 bp QoQ but up 230 bp YoY on more favourable mix for S/M DDIC products and higher engineering fees for AR/VR projects. 2Q16 GM was in-line with its 26% guidance and CS/Street estimates. GAAP EPS of 11.5 cents were ahead of its 8.5-10.5 cents guidance and 13%/22% above CS/Street. For 3Q16, we believe Himax will continue to benefit from the solid demand for mid-end smartphone, as well as better seasonality for large size driver IC used on TVs. We estimate Himax's large size driver IC sales to grow 5-10% QoQ, S/M size to remain flattish, while its non-driver IC revenue is likely to see double digit QoQ growth as it continues to ramp AR/VR shipments. Net-net, we forecast Himax's 3Q16 sales to grow 7% QoQ and GM should remain stable at 25-26% range. It will also book the annual employee RSU expense in 3Q16, hence we estimate its GAAP EPS to decline to 8.1 cents from 11.5 cents in 2Q16, versus 1.4 cents loss in 3Q15. Longer-term, we believe its growth stories of large size DDI share gain, higher value-add for small/medium driver IC (OLED, TDDI, higher resolution, etc), and non-driver growth driven by superior AR/VR technology remains on tract. Samsung's OLED DDI outsourcing strategy will depend on end-market demand and TDDI ramp, and we have factored in the risk on Samsung reducing the OLED DDI outsourcing. We believe the recent pull back post consensus earnings cut offers a good entry point for the stock. We fine tune our model and keep our EPS estimates unchanged. We reiterate OUTPERFORM on Himax with target price of US$13, based on our DCF model, implying 24x 2017 P/E.

Figure 70: Himax quarterly P/L US$ mn 3Q15 4Q15 1Q16 2Q16P 3Q16E 4Q16E 1Q17E 2Q17E 3Q17E 4Q17E 2015 2016E 2017E Revenue 165.6 178.0 180.3 201.0 215.5 233.9 199.4 239.1 266.7 248.8 691.8 830.7 954.1 Gross profit 36.1 40.7 47.2 52.5 54.9 60.3 51.2 63.2 70.7 65.7 163.1 214.9 250.8 Operating profit (2.5) 8.6 15.2 21.9 16.2 25.8 17.5 28.6 32.0 31.0 30.7 79.1 109.0 Net profit (2.3) 6.1 13.1 19.8 13.9 21.4 15.1 24.4 26.9 25.8 25.2 68.2 92.2 EPS (US$) (0.014) 0.036 0.076 0.115 0.081 0.124 0.088 0.142 0.156 0.150 0.146 0.395 0.535 Gross margin (%) 21.8 22.9 26.2 26.1 25.5 25.8 25.7 26.5 26.5 26.4 23.6 25.9 26.3 Operating margin (%) (1.5) 4.8 8.4 10.9 7.5 11.1 8.8 12.0 12.0 12.4 4.4 9.5 11.4 Net margin (%) (1.4) 3.4 7.3 9.8 6.4 9.2 7.6 10.2 10.1 10.4 3.6 8.2 9.7 Source: Company data, Credit Suisse estimates

Asia Semiconductor Sector 31 11 July 2016

Largan Precision (3008.TW, OUTPERFORM, TP NT$3,400) Camera stays the focus for smartphone innovation Largan recently reported 2Q16 revenue up 21% QoQ to NT$10.1 bn, better than CS/street Largan benefiting from estimates (NT$9.5-9.9 bn) but in line with our latest view of up 20-22% QoQ (here). June continued megapixel (2016) shipment mix is also supportive for the continued spec upgrade, with 50-60% from migration and start of dual 10MP+ (versus 20-30% in June 2015), 20-30% from 8MP (versus 20-30%), and 10-20% camera adoption from 5MP (versus 0-10%). We believe the still-low module yield rates for new dual camera project (with optical zooming function) will amplify the lens shipments. This supports our 35-40% QoQ revenue growth estimates for 3Q16 (off a higher base), versus the iPhone supply chain (up 15-20% QoQ). Moreover, we expect Largan's GM to trend up QoQ for the rest of the year, thanks to: (1) growing scale, (2) the removal of sub-assembly for iPhone 7, and (3) tighter lens supply from spec upgrade. Figure 3: Case scenario for 2017 estimates Base case Bull case Bear Case Dual camera adoption in SP 10% 13% 7% Largan’s WW market share 32% 34% 30% Largan EPS (NT$) 222 230 156 P/E (x) 16 18 12 Likelihood 50% 30% 20% Source: Credit Suisse estimates Factoring in better near-term sales momentum, we recently raised our FY16-18 EPS by 1.6-2.2% and TP from NT$3,200 to NT$3,400, still putting the stock at a reasonable 15x FY17 EPS. Largan remains the best quality name to capture the dual camera story. Risks to our call may include (1) weaker-than-expected iPhone demand, (2) slower-than- expected adoption of dual camera, (3) Sunny Optical's lens ramp-up faster than expected, and (4) TWD appreciation. MediaTek (2454.TW, NEUTRAL, TP NT$225) Strong smartphone builds set up risk of a cooling off MediaTek's near-term business is strong, supported by better China smartphone demand MediaTek’s competitive on aggressive 3G-4G upgrades in China and emerging markets, mix shift toward mid-high pressures in 3G and 4G end Helio and some share gains from Spreadtrum lagging on the 4G transition and Marvell may dampen which exited late last year. We also believe tight supply and push to capitalise on China earnings power subsidies is encouraging in early build. MediaTek's 2Q16 sales were reported at NT$73 bn, up 31% QoQ and at the high end of guidance for up 24-32% QoQ. We model +5% QoQ growth off the higher base in 3Q16 as foundry supply constraints on 28nm persist and prompt a focus from procurement on securing supply rather than worrying about demand. Most Chinese smartphone vendors are also less worried about Apple's refresh after its disappointment last year and modest update planned this year.

Asia Semiconductor Sector 32 11 July 2016

Figure 71: CS MediaTek revenue by product assumptions NT$mn unless noted 2009 2010 2011 2012 2013 2014 2015 2016F Prior 2017F 3G Smartphones (mn) 173.4 304.7 494.4 109.8 223.2 324.5 236.8 179.3 181.5 153.4 4G Smartphones (mn) 67.8 138.4 256.6 0.0 0.0 31.8 158.6 320.7 315.0 402.2 Smartphones (mn) 0.1 2.2 10.0 109.8 223.2 356.4 395.4 500.0 496.4 555.6 ASPs (US$) $19.33 $13.51 $13.33 $10.82 $9.93 $10.25 $9.30 $9.89 $9.84 $9.52 Tablets (mn) 0.0 0.0 0.0 0.0 21.9 41.3 44.1 42.5 42.5 40.7 ASPs (US$) $0.00 $0.00 $0.00 $0.00 $12.28 $10.94 $9.22 $9.34 $8.99 $9.10 Feature phones (mn) 354.8 498.1 530.2 391.9 354.0 300.0 257.0 261.6 255.9 219.6 ASPs (US$) $7.36 $5.39 $3.58 $2.26 $1.88 $1.65 $1.48 $1.34 $1.34 $1.27 Handset/Tablet Sales 86,513 85,233 59,512 61,419 93,424 138,934 141,657 185,011 182,604 191,833 Smartphone % of sales 0.1% 0.8% 5.1% 37.6% 47.7% 50.9% 54.7% 59.1% 58.9% 59.0% Tablet % of sales 0.0% 0.0% 0.0% 0.0% 5.8% 6.3% 6.1% 4.7% 4.6% 4.1% DTV 10,749 11,906 10,722 13,490 16,104 38,283 33,976 32,288 32,339 31,473 PC Optical 11,140 9,764 10,596 11,489 10,476 8,759 7,333 5,472 5,481 4,348 Consumer DVD 7,109 6,619 4,160 3,515 3,515 2,945 2,670 2,057 2,060 1,616 WLAN (Ralink) 0 0 1,867 9,365 12,450 15,726 15,279 16,911 17,060 16,541 LCD Monitor 0 0 0 0 0 2,532 2,534 2,425 2,429 2,463 STB 0 0 0 0 0 4,500 5,055 5,097 5,105 5,210 Other (GPS, RFID, IoT, Ilitek) 0 0 0 0 0 1,381 1,601 9,597 9,597 22,069 Richtek 0 0 0 0 0 0 3,150 13,093 13,093 13,936 Total Sales 115,512 113,522 86,858 99,278 135,968 213,062 213,256 271,952 269,767 289,489 GM % 58.7% 53.7% 45.3% 41.4% 44.0% 48.8% 43.2% 35.8% 35.9% 35.3% Op M% 31.5% 27.4% 14.2% 12.5% 18.6% 22.2% 12.1% 9.6% 9.3% 9.4% EPS $34.10 $28.46 $12.52 $12.81 $20.13 $29.67 $16.74 $15.50 $15.00 $16.00 EPS growth -16.5% -56.0% 2.3% 57.1% 47.4% -43.6% -7.5% -10.4% 3.3% Source: Company data, Credit Suisse estimates While volumes are better, our key concerns are on-going competitive pressure keeping uncertainty high on sustainability of margin improvement and also on risk of a 4Q16 correction following very strong shipments. MediaTek's 135mn run rate in 2Q16 implies 540mn annualised shipments, up 35% YoY in a market growing about 10% YoY, implying some share gains but also some risk of inventory overbuild. Competitive pressures remain high with Qualcomm still controlling the Snapdragon 800 tier and pricing most aggressively at MediaTek's top customers to protect its share. Spreadtrum is a limited factor with only a few Indian designs but still looms as a risk with planned SC9860 on TSMC's 16nm and a follow-on chip planned for 1H17 based on Intel's x86 architecture on 14nm. We are raising our shipments from 496 mn to 500 mn and lifting our 2016E EPS from MediaTek sales are NT$15.00 to NT$15.50 to reflect better near-term China smartphone strength though tracking stronger, maintain 2017E EPS at NT$16.00 due to the risk of a late year correction and ongoing revising up estimates competitive pricing risk. Upside to our call would come from a break-through on Helio into the modestly Snapdragon 800 category, which could come by 2Q17 with Helio x30 using TSMC 10nm and upgraded CAT 10 modem or also into Samsung, which could add 10-15% incremental EPS. Our NT$225 TP reflects 15x 2016E EPS of NT$15.50.

Figure 72: MediaTek 2Q-3Q16 and 2016-17 estimates CS vs Street 2Q16 3Q16 2016 2017 2018 (NT$ mn) CS CS(old) Street Guidance CS CS(old) Street CS CS(old) Street CS CS(old) Street Sales $72,527 $71,589 $70,583 NT$69.3-73.8bn $76,574 $73,630 $67,466 $271,952 $269,767 $253,709 $289,489 $288,585 $257,883 Chg 29.7% 28.1% 14.4% +24-32% QoQ 5.6% 2.9% -4.4% 27.5% 26.5% 19.0% 6.4% 7.0% 1.6% GM% 35.2% 35.2% 35.7% 33.5-36.5% 35.1% 35.3% 36.2% 35.8% 35.9% 36.7% 35.3% 35.3% 36.9% OpM% 10.3% 9.9% 9.9% 6-13% 11.4% 10.6% 10.1% 9.6% 9.3% 9.1% 9.4% 9.5% 9.5% Net Inc. 6,630 6,300 6,785 FX: 32.5 7,945 7,095 6,611 23,935 23,173 23,677 24,718 24,720 24,903 EPS (NT$) $4.29 $4.08 $4.25 $5.14 $4.59 $4.19 $15.50 $15.00 $14.90 $16.00 $16.00 $15.81 Source: Company data, Credit Suisse estimates Taiwan Semiconductor Manufacturing (2330.TW, OUTPERFORM, TP NT$177) TSMC will kick off 2Q16 results season Thursday, 14 July and should highlight a very strong 3Q16 up mid-high teens QoQ but also may flag potential for a below seasonal 4Q16 (normal is -3% QoQ) off the higher base. 3Q16 is very strong due to peak season

Asia Semiconductor Sector 33 11 July 2016 iPhone builds with TSMC securing full share of foundry and packaging for a10, strong graphics demand and 28nm tightness on the China smartphone build strength and upgrades to LTE in emerging markets. 4Q16 has risk of a below seasonal sales with inventory days already exiting 1Q16 high TSMC results next Thursday and potentially building further by end-3Q16 to above-seasonal levels and prompting cuts should highlight near-term from 4Q16 and a typical 1-2 quarter slowdown. Risk on a correction is about 15% on the strength and technology shares in historical corrections and a bit of underperformance during that period, but leadership, though this may should set up another entry into next year's dividend increase and 2H17 iPhone cycle plus also flag a dip post the potential for share gains on 7nm with Qualcomm, data center and incremental ramp of its strong build longer-term drivers from VR, automotive and IoT. TSMC should remain confident on its technology position for the advanced nodes and back-end technology with InFO ramping by the middle of this year and 10nm starting mass production by the end of this year. Management also believes it is leading on 7nm, consistent with our view that Samsung’s full shrink at 7nm using EUV may come out after TSMC's half node 7nm introduction in early 2018. We maintain our 2016/2017 EPS at NT$12.15/NT$12.20 and NT$177 TP on 14x 2016/17 EPS and 3x 2017 P/B. While we could see a brief correction in the shares if the cycle again corrects post the 3Q16 strength, we stay positive long-term due to intact leadership, high margins, benign landscape and rising cash yield. 2017 should be supported by a 1H dividend increase and 2H iPhone reacceleration. The company also may further raise its dividend from the NT$6 paid out this year to our estimate for an increase to NT$7, supported by NT$9-10 FCF/year.

Figure 73: TSMC 2Q-3Q16 and 2016-17 estimates CS vs Street 2Q16 3Q16 2016 2017 2018 (NT$ mn) CS Street Guidance CS Street CS Street CS Street Sales 217,007 219,251 NT$215-218bn 238,708 244,612 908,660 912,503 979,932 1,002,616 Chg (%) 6.6 7.7 +5.7% to +7.1% QoQ 10.0 11.6 7.7 8.2 7.8 10.3 GM (%) 50.0 49.7 49-51% 51.4 50.3 49.6 48.8 50.2 48.9 OpM (%) 39.5 39.3 38.5-40.5% 41.4 39.9 39.6 38.6 40.0 38.8 Net Inc. 66,555 68,808 FX: NT$32.3:1 89,679 88,668 315,038 310,138 342,279 341,028 PF EPS (NT$) 2.57 2.64 3.46 3.42 12.15 11.94 13.20 13.16 Source: Company data, Credit Suisse estimates Win Semi (3105.TWO, OUTPERFORM, TP NT$77) Well positioned to benefit from the RF content growth story Win Semi reported June sales of NT$1,216 mn, up1% MoM and up 18% YoY. Overall 2Q16 revenues of NT$3,559 mn were up 8% QoQ and up 15% YoY, in-line with our original expectation and the management guidance of high single digit QoQ. The strength during the quarter was mostly from the Android smartphone pull in and the wireless interface spec upgrade leading to more RF content per device. We expect 2Q16 gross margin to trend down 1.1 pp to 40.0%, due to higher depreciation from the new fab ramp. Looking into 3Q16, we expect Win Semi to deliver single digit QoQ growth for 3Q revenues, driven by the new product cycle from the US smartphone brand and continuous content growth. In addition, the momentum from the China smartphone market is likely to sustain. In the longer term, we believe Win Semi is well positioned to benefit from the RF component content growth story, driven by the cellular spec upgrade (3G into 4G, 3-mode into 5/6 mode, carrier aggregation, etc.) and WiFi transition into 802.11ac for higher data rates. 5G could kick in as another driver from 2018-20, both on the infrastructure build and device cellular interface upgrade. We thus have an OUTPERFORM rating on Win Semi and the target price of NT$77, based on 15x 12-month forward P/E.

Asia Semiconductor Sector 34 11 July 2016

Figure 57: Win Semi—quarterly P/L (NT$ mn) 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16E 3Q16E 4Q16E 2015 2016E 2017E Revenues 2,807 3,099 2,913 3,197 3,292 3,559 3,734 3,485 12,016 14,070 15,971 Gross profits 1,063 1,201 1,178 1,319 1,374 1,423 1,378 1,262 4,761 5,437 6,091 Operating profits 774 902 827 1,007 1,006 1,054 999 899 3,510 3,959 4,466 Net profits 618 537 805 711 839 697 832 748 2,672 3,117 3,562 EPS (NT$) 1.04 0.90 1.35 1.19 1.41 1.17 1.39 1.25 4.49 5.22 5.97 GM 37.9% 38.8% 40.4% 41.3% 41.7% 40.0% 36.9% 36.2% 39.6% 38.6% 38.1% OPM 27.6% 29.1% 28.4% 31.5% 30.6% 29.6% 26.8% 25.8% 29.2% 28.1% 28.0% NM 22.0% 17.3% 27.6% 22.3% 25.5% 19.6% 22.3% 21.5% 22.2% 22.2% 22.3% Source: Company data, Credit Suisse estimates AAC (2018.HK, OUTPERFORM, TP HK$75.70) Acoustic and RF/mechanical upgrades at China smartphones AAC is a leading acoustic component supplier in global market (both Apple supply chain and Chinese smartphones), while its RF/mechanical solutions are being adopted by Chinese clients from 2015. We see 1Q16 headwinds almost behind us and gain more confidence on acoustic and haptic upgrade cycle in 2016/17. Besides the content increase at Apple products, we noticed a fast acoustic upgrade in China smartphone side. For example, simply replacing speaker with speaker box could help the content to rise threefold (from US$0.43 to US$1.41 by our estimate for 2016). Take into account the acoustic upgrade in Chinese smartphone, we believe the LT perspective of both acoustic and haptics might be better than some market concerns on the upgrade trend after 2016. We believe AAC is the major beneficiary of haptic/acoustic upgrade cycle, driven by content increase in Apple and the rising adoption of speaker box/RF mechanical by China smartphones. We reiterate OUTPERFORM on AAC with target price of HK$75.7, which is based on 17x upcycle P/E and 2017E EPS. Tongda (0698.HK, OUTPERFORM, TP HK$2) Beneficiary of metal casing upgrade in mid/low-end China smartphones Tongda is a leader in low-cost metal casing solutions and well positioned with light CNC assets. Tongda's handset clients increase 39% YoY in 1Q16, which showed a very good momentum in smartphone metal casing even for a low season. Its major handset casing models include Huawei Head4, OPPO A53 and R9, Xiaomi 4c/ Redmi3/Redmi Note3, Qiku and Coolpad Fengshang max/iVVi i3. Considering most of these models were launched in March and more flagship models are to come, we believe 2Q metal casing growth would further accelerate. The recent share price correction was likely due to the market news of Huawei cutting down 3Q forecasts. We believe the impact on Tongda is limited and could be fully offset by upsides at other clients. Key analysis: (1) Per our channel check, we believe the cut is mainly on mid/high-end due to inventory overbuilt by the end of 2Q, and the magnitude should be lower than what the number looks like. (2) Although Huawei is Tongda's No.1 client (25% revenue exposure), Tongda is mainly supplying casings to Huawei's mid/low- end models. For example, Tongda is not a supplier for P9, Huawei's high-end flagship model for 1H16. (3) Besides Huawei, we see Tongda's business with Xiaomi low-end remains strong, while OPPO could provide some upside. (4) In addition, for 3Q, we expect rubber ring to start volume shipment for the US client, with further upsides at share allocation and new categories. (5) In conclusion, considering the upsides at OPPO, Xiaomi low-end, and the US client, we maintain our 36% net income growth forecast for FY16 despite the potential Huawei high-end inventory correction.

Asia Semiconductor Sector 35 11 July 2016

Therefore, we believe the correction is overdone and the current level provides a good opportunity to add positions on Tongda. We maintain our OUTPERFORM rating on Tongda with a TP of HK$2.0, which is based on 10x 2017E EPS. Truly (0732.HK, OUTPERFORM, TP HK$4.20) Beneficiary of rising fingerprint adoption and camera upgrade in China smartphones Truly is a China small- to medium-sized display maker, which is entering a new product cycle, driven by fingerprint modules and automotive displays. We like the stock for its valuation, better mix and improving earnings. We believe Truly should benefit from increasing China smartphone fingerprint penetration. Truly started shipping fingerprint modules in end-2015 and is ramping up its scale. We estimate the fingerprint revenue will witness a 232% CAGR in 2016-18E with margin upside. The company expects the fingerprint adoption in China smartphones will increase from 30% penetration rate this year to 60% in 2017, and will expand its capacity to capture the increasing demand. Management also sees fingerprint module shipments to ramp up meaningfully in 2H, and has reiterated its HK$1 bn revenue target for this year, which is in line with our expectation. Truly has started shipping ceramic-based fingerprint modules to Vivo for X7. The accumulated orders of X7 has reached over 1 mn in 5 days after its launch. We expect to see stronger growth in 2H, given the ramp of fingerprint products. Truly also sees growth from the handset camera module business, driven by spec upgrade (rising shipment from 8MP+) and potentially dual-cam. The company is working with several customers on dual cam designs and expects the market to pick up after the latest iPhone launch. Given it is a beneficiary of rising fingerprint adoption and camera upgrade in China smartphones, we reiterate OUTPERFORM on Truly with TP of HK$4.20, which is based on its historical average P/E of 10x. Sunny Optical (2382.HK, NEUTRAL, TP HK$23.30) Leading dual camera supplier in China smartphones Sunny is the No.1 camera module supplier and No.2 lens supplier in the China smartphone market, and No.1 in global vehicle lens market. It's also a leading player in the new dual-cam module at Android camp, serving Huawei's newly launched P9 and V8 models. Although the year-to-date (until May) shipment numbers were tracking below the full-year guidance, Sunny stated that the product mix could be leaning to the high-end and therefore helping revenue and margins. For HCM shipments (down 6% YoY YTD), Sunny believes its in-advance investment into the high-end (13+MP, and OIS, PDAF, dual-cam) could boost shipments in 2H. For dual-cam, although current models in markets are mainly focusing on better image quality and depth of field, Sunny believes zooming could be the new killer feature and is well prepared for related products since 2H16. Besides dual-cam, Sunny also showcased several new applications such as drones, AR/VR, and panoramic cameras. And Sunny targets to be a "smart eyes" module supplier in the future for related applications. We are encouraged from new businesses, including vehicle lenses which Sunny sees front-view (ADAS) as the fastest growing segment and believes it has a leading position in the market. We still remain positive on Sunny's margin up-cycle thesis, but feel the full valuation and fewer catalysts would put the stock on a rest for the near term. We are NEUTRAL on Sunny Optical with a TP of HK$23.3, which is based on 15.8x up-cycle P/E and 2017E EPS.

Asia Semiconductor Sector 36 11 July 2016

Companies Mentioned (Price as of 08-Jul-2016) AAC Technologies Holdings Inc (2018.HK, HK$65.95) ARM Holdings (ARM.L, 1129.0p) AU Optronics (2409.TW, NT$10.9) Advanced Wireless Semiconductor Company (8086.TWO, NT$55.7) Amkor Technology Inc. (AMKR.OQ, $5.6) Apple Inc (AAPL.OQ, $95.94) Asustek (2357.TW, NT$267.0) BOE Technology Group Co. Ltd (000725.SZ, Rmb2.35) BYD Co Ltd (1211.HK, HK$47.1) Baidu Inc (BIDU.OQ, $163.42) Broadcom Ltd (AVGO.OQ, $150.99) Catcher Technology (2474.TW, NT$219.5) China Mobile Limited (0941.HK, HK$87.45) China Telecom (0728.HK, HK$3.5) China Unicom Ltd (0762.HK, HK$7.98) Chipbond (6147.TWO, NT$40.5) Coolpad Group Limited (2369.HK, HK$1.38) Cypress Semiconductor Corp. (CY.OQ, $10.1) Egis Technology Inc. (6462.TWO, NT$153.0, OUTPERFORM[V], TP NT$250.0) Elan Microelectronics Corp (2458.TW, NT$37.0) FIH Mobile (2038.HK, HK$2.52) Fingerprint Card (Unlisted) FocalTech Corporation, Ltd. (3545.TW, NT$25.8) Gionee Communication (Unlisted) GlobalFoundries (Unlisted) Goodix (Unlisted) Google (GOOAV.OQ, $568.67) Hi Silicon (Unlisted) Himax Technologies, Inc. (HIMX.OQ, $8.03, OUTPERFORM[V], TP $13.0) Electrical Holdings (0921.HK, HK$3.49) Hua Hong Semiconductor Limited (1347.HK, HK$7.09) Innolux Corporation (3481.TW, NT$10.9) Intel Corp. (INTC.OQ, $33.2) InvenSense (INVN.N, $5.94) JD.com, Inc. (JD.OQ, $20.57) Japan Display (6740.T, ¥179) LG Display Co Ltd. (034220.KS, W28,850) Largan Precision (3008.TW, NT$2875.0, OUTPERFORM[V], TP NT$3400.0) Leadcore (Unlisted) Lenovo Group Ltd (0992.HK, HK$4.68) Letv (Unlisted) Marvell Technology Group Ltd. (MRVL.OQ, $9.77) MediaTek Inc. (2454.TW, NT$238.0, NEUTRAL, TP NT$225.0) Meizu (Unlisted) Merry Electronics Co. Ltd (2439.TW, NT$72.2) Microchip Technology Inc. (MCHP.OQ, $50.4) Microsoft Corporation (MSFT.OQ, $51.38) Motorola Solutions (MSI.N, $65.05) Murata Manufacturing (6981.T, ¥10,475) NXP Semiconductors N.V. (NXPI.OQ, $76.47) Novatek Microelectronics Corp Ltd (3034.TW, NT$122.0) OmniVision Tech (OVTI.OQ, $29.38) PT Blue Bird (BIRD.JK, Rp4,000) QUALCOMM Inc. (QCOM.OQ, $52.93) Qorvo (QRVO.OQ, $54.37) Realtek Semiconductor (2379.TW, NT$102.0) (005930.KS, W1,460,000) Semiconductor Manufacturing International Corp. (0981.HK, HK$0.62) Sharp (6753.T, ¥103) Shenzhen O-film Tech Co., Ltd (002456.SZ, Rmb29.26) Silicon Laboratories Inc. (SLAB.OQ, $47.5) Sitronix (8016.TW, NT$101.0) Skyworks Solutns (SWKS.OQ, $60.89) Sony (6758.T, ¥3,013) Spreadtrum Communication (SPRD.OQ^L13, $30.93) Spreadtrum Communication (SPRD.OQ^L13, $30.93) Sunny Optical Technology Group Co., Limited (2382.HK, HK$26.2) Synaptics (SYNA.OQ, $48.31) TCL Communication Technology Holdings Limited (2618.HK, HK$7.13) TXC Corp. (3042.TW, NT$45.2) Taiwan Semiconductor Manufacturing (2330.TW, NT$164.5, OUTPERFORM, TP NT$177.0) Texas Instruments Inc. (TXN.OQ, $61.77) Tianma Microelectronics Co. Ltd (000050.SZ, Rmb21.04) Tongda Group Holdings Ltd (0698.HK, HK$1.48) Truly International (0732.HK, HK$3.72) Tsinghua Unigroup (Unlisted) United Microelectronics (2303.TW, NT$12.4) Visual Photonics Epitaxy Co., Ltd (2455.TW, NT$42.45) Win Semiconductors Corp (3105.TWO, NT$61.1, OUTPERFORM, TP NT$77.0) Xiaomi (Unlisted) ZTE Corporation (0763.HK, HK$9.68)

Asia Semiconductor Sector 37 11 July 2016

Disclosure Appendix

Important Global Disclosures Randy Abrams, CFA, Jerry Su, Pauline Chen, Sam Li, Derrick Yang and Kyna Wong each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for Egis Technology Inc. (6462.TWO)

6462.TWO Closing Price Target Price Date (NT$) (NT$) Rating 05-Jan-16 134.00 220.00 O * 12-May-16 124.50 240.00 10-Jun-16 138.50 250.00 * Asterisk signifies initiation or assumption of coverage.

OUTPERFORM

3-Year Price and Rating History for Himax Technologies, Inc. (HIMX.OQ)

HIMX.OQ Closing Price Target Price Date (US$) (US$) Rating 12-Mar-14 15.65 19.00 O * 15-Apr-14 9.32 17.00 09-May-14 6.68 13.00 24-Jul-14 5.97 8.50 08-Aug-14 7.40 9.00 15-Sep-14 8.46 11.00 27-Oct-14 7.71 12.00 09-Feb-15 7.58 8.40 N 16-Apr-15 6.31 6.00 27-Apr-15 6.16 5.90 OUTPERFORM NEUTRAL 15-May-15 6.14 5.70 29-Jun-15 7.90 8.40 10-Aug-15 6.56 8.00 28-Aug-15 6.88 8.80 O 30-Oct-15 5.92 8.20 13-Nov-15 6.39 8.40 04-Dec-15 7.76 8.80 19-Jan-16 6.97 9.00 05-Feb-16 8.08 9.80 23-Mar-16 10.08 13.00 * Asterisk signifies initiation or assumption of coverage.

Asia Semiconductor Sector 38 11 July 2016

3-Year Price and Rating History for Largan Precision (3008.TW)

3008.TW Closing Price Target Price Date (NT$) (NT$) Rating 23-Jul-13 875.00 999.00 O 25-Jul-13 935.00 1060.00 07-Oct-13 1000.00 1130.00 23-Jan-14 1185.00 1360.00 24-Apr-14 1755.00 2100.00 04-Jun-14 1980.00 2310.00 07-Jul-14 2425.00 2800.00 07-Apr-15 2755.00 2940.00 16-Apr-15 2785.00 3280.00 10-Jun-15 3270.00 3750.00 OUTPERFORM NEUTRAL 08-Jul-15 3280.00 3760.00 16-Jul-15 3520.00 4000.00 13-Oct-15 2630.00 3600.00 10-Nov-15 2590.00 2800.00 N 14-Jan-16 1855.00 2130.00 14-Apr-16 2375.00 2650.00 01-Jun-16 2830.00 3200.00 O 05-Jul-16 2950.00 3400.00 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for MediaTek Inc. (2454.TW)

2454.TW Closing Price Target Price Date (NT$) (NT$) Rating 02-Aug-13 363.00 400.00 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 07-Oct-14 455.50 540.00 10-Feb-15 454.00 520.00 29-Mar-15 419.00 425.00 N 27-Apr-15 410.50 405.00 OUTPERFORM NEUTRAL 15-Jun-15 409.00 430.00 03-Aug-15 299.00 300.00 02-Nov-15 270.00 250.00 11-Jan-16 209.00 230.00 18-Apr-16 234.50 250.00 02-May-16 230.00 225.00 * Asterisk signifies initiation or assumption of coverage.

Asia Semiconductor Sector 39 11 July 2016

3-Year Price and Rating History for Taiwan Semiconductor Manufacturing (2330.TW)

2330.TW Closing Price Target Price Date (NT$) (NT$) Rating 17-Jul-13 109.00 116.00 O 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 17-Jul-14 124.50 145.00 08-Jan-15 138.00 145.00 N 17-Jul-15 140.00 150.00 16-Oct-15 137.50 156.00 11-Dec-15 139.50 163.00 O OUTPERFORM NEUTRAL 31-Mar-16 162.00 177.00 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Win Semiconductors Corp (3105.TWO)

3105.TWO Closing Price Target Price Date (NT$) (NT$) Rating 11-Nov-15 45.45 62.00 O * 08-Jan-16 50.10 63.00 07-Mar-16 59.40 69.00 07-Apr-16 66.10 77.00 * Asterisk signifies initiation or assumption of coverage.

OUTPERFORM

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the ana lyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings 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 represen ting the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 1 2-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, wh ich was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.

Asia Semiconductor Sector 40 11 July 2016

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's of stock ratings (and banking clients) is:

Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 55% (40% banking clients) Neutral/Hold* 35% (17% banking clients) Underperform/Sell* 10% (40% banking clients) Restricted 0% *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 individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and- analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Target Price and Rating Valuation Methodology and Risks: (12 months) for Egis Technology Inc. (6462.TWO) Method: We set our target price at NT$250, reflecting 15x 12M P/E, based on our expectation of a 60% CAGR for non-Apple smartphone fingerprint sensors for 2015-18E and a 14% market share for Egis in 2017E. We rate Egis an OUTPERFORM, as we believe it should be one of the major beneficiaries of fingerprint sensor proliferation in the next few years. Risk: Risks to our OUTPERFORM rating and NT$250 target price for Egis Technology Inc. would include: (1) Slower adoption rate of fingerprint sensors for non-Apple smartphones; (2) new entrants intensifying the competition; (3) a delay in the ramp-up of shipments, leading to negative operating leverage; and (4) slower growth leading to a de-rating of the stock. Target Price and Rating Valuation Methodology and Risks: (12 months) for Himax Technologies, Inc. (HIMX.OQ) Method: Our target price of US$13.0 for Himax Technologies is derived from our DCF (discounted cash flow) model, implying 24x 2017 P/E (price- to-earnings). We assume a neutral beta with a risk-free rate of 2%, equity risk premium of 9.0%, and terminal growth rate of 3.0%. We rate Himax OUTPERFORM as we think Himax is a key beneficiary of China TFT ramp and OLED take-off. Risk: Risks that could impede achievement of our US$13.0 target price and OUTPERFORM rating for Himax Technologies include: (1) Better/weaker-than-expected demand for smartphone and tablet PCs. (2) Better/slower-than-expected 4K2K penetration. (3) Intensifying pricing competition and failure to lower its manufacturing costs for DDI products. (4) Faster/slower ramp up of non-driver business. Target Price and Rating Valuation Methodology and Risks: (12 months) for Largan Precision (3008.TW) Method: Our target price of NT$3,400 for Largan Precision is based on weighted average of case scenario, which puts the stock at ~15x FY17 EPS. We think the worst might be behind us, and would position the stock for rising adoption rate of dual camera. Our OUTPERFORM rating on Largan is based on the rationale that the rising penetration rate of dual camera will become a new growth driver for the company, as it increases the total addressable market in smartphone, and helps Largan to secure its dominant market share in handset lens. Risk: Risks that could impede achievement of our NT$3,400 target price for Largan Precision include: (1) weaker-than-expected demand for iPhone 7, (2) slower-than-expected adoption of dual camera, (3) Sunny Optical ramping up faster than expected, and (4) unexpected NTD

Asia Semiconductor Sector 41 11 July 2016

appreciation (against USD). Risks to our OUTPERFORM rating may include: (1) weaker/better tech demand, (2) greater volatility in FX, and (3) change in the competitive landscape. Target Price and Rating Valuation Methodology and Risks: (12 months) for MediaTek Inc. (2454.TW) Method: Our target price of NT$225 for Mediatek is based on 15x 2016E EPS (earnings per share), in-line with global peers. We maintain our conservative outlook as the company does yet control its destiny on pricing and margins due to fierce competition and thus have a NEUTRAL rating on Mediatek. Risk: Risks that could cause the share price to diverge from our NT$225 target price and cause us to change our NEUTRAL rating 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. Target Price and Rating Valuation Methodology and Risks: (12 months) for Taiwan Semiconductor Manufacturing (2330.TW) Method: Our NT$177 target price for TSMC is based on 14x average 16/17 EPS (earnings per share), implying 3x P/B (price-to-book), near the midpoint of its average 11-15x and 2.5-3.5x range. We are seeing business outlook improving and technology leadership should keep market share and profitability intact and dividends will likely rise again as capex moderates; we therefore have an OUTPERFORM rating on the stock. Risk: Risks that could impede achievement of our NT$177 target price and OUTPERFORM rating for TSMC would include: fierce competition, demand failing to pick up or Apple orders not being as strong as expected. Target Price and Rating Valuation Methodology and Risks: (12 months) for Win Semiconductors Corp (3105.TWO) Method: Our target price of NT$77 for Win Semiconductors Corp is based on 15x 12M forward EPS (earnings per share), vs the historical range of 6-20x 12M forward P/E (price-to-earnings). We have OUTPERFORM rating on Win Semi as we believe it is well positioned to benefit from the RF growth trend with its strong customer relationship, technology independence, and margin expansions on favourable product mix. Risk: Risks that could impede achievement of our NT$77 target price and OUTPERFORM rating for Win Semi include: (1) slower shipment growth in the LTE-enabled devices, (2) lower capex among telecom operators for LTE infrastructure due to macro uncertainties, (3) weaker WiFi demand on delayed spec upgrade to 802.1ac and softer IoT device proliferation.

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 (3105.TWO, HIMX.OQ, 2330.TW, 0992.HK, BIRD.JK, 005930.KS, INTC.OQ, QCOM.OQ, 3034.TW, 3545.TW, AMKR.OQ, 3481.TW, 034220.KS, 6740.T, 6753.T, 2455.TW, AAPL.OQ, MRVL.OQ, 2357.TW, MCHP.OQ, NXPI.OQ, CY.OQ, TXN.OQ, MSFT.OQ, BIDU.OQ) 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 (0992.HK, BIRD.JK, INTC.OQ, 034220.KS, AAPL.OQ, MRVL.OQ, MCHP.OQ, NXPI.OQ, CY.OQ, MSFT.OQ) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (INTC.OQ, TXN.OQ) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (AAPL.OQ, CY.OQ) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (0992.HK, BIRD.JK, INTC.OQ, 034220.KS, AAPL.OQ, MRVL.OQ, MCHP.OQ, NXPI.OQ, CY.OQ, MSFT.OQ) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (2454.TW, 3105.TWO, HIMX.OQ, 3008.TW, 0992.HK, 2618.HK, BIRD.JK, 005930.KS, INTC.OQ, QCOM.OQ, 3034.TW, 3545.TW, 2458.TW, AMKR.OQ, 3481.TW, 034220.KS, 6740.T, 6753.T, 2474.TW, 2455.TW, 1211.HK, 2382.HK, 0728.HK, 0762.HK, AAPL.OQ, MRVL.OQ, 2357.TW, ARM.L, MCHP.OQ, NXPI.OQ, CY.OQ, TXN.OQ, JD.OQ, 6981.T, MSFT.OQ, BIDU.OQ) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (INTC.OQ, TXN.OQ) within the past 12 months As of the date of this report, Credit Suisse makes a market in the following subject companies (INTC.OQ, QCOM.OQ, 6753.T, AAPL.OQ, MSI.N, 6758.T, MCHP.OQ, CY.OQ, TXN.OQ, MSFT.OQ). As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (2454.TW, 6462.TWO, 2379.TW, 3034.TW, 2303.TW, 0981.HK, 2409.TW, 3481.TW, 2474.TW, 2455.TW, 3042.TW, 2439.TW, 0728.HK, 2357.TW). Credit Suisse beneficially holds >0.5% long position of the total issued share capital of the subject company (3008.TW, 0728.HK).

Asia Semiconductor Sector 42 11 July 2016

Credit Suisse beneficially holds >0.5% short position of the total issued share capital of the subject company (005930.KS, 034220.KS). Credit Suisse has a material conflict of interest with the subject company (INTC.OQ) . Credit Suisse Securities (USA) LLC is acting as financial advisor to Intel Corp (INTL) on its announced proposed acquisition of LSI’s Axxia Networking Business from Avago Technologies Limited (AVGO). 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. Credit Suisse has a material conflict of interest with the subject company (MCHP.OQ) . Credit Suisse is acting as financial advisor to Micrel Inc. (MCRL) in relation to its proposed sale to Microchip Technology Inc. (MCHP). Credit Suisse has a material conflict of interest with the subject company (NXPI.OQ) . Credit Suisse is Sell-Side Advisor to NXP on the sale of its Standard Products Business.

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Asia Semiconductor Sector 43 11 July 2016

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