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Initiation: Power Surge Coming

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Initiation: Power Surge Coming Electronics / Taiwan 29 May 2012 Simplo Technology Target price: NT$235.00 Up/downside: +12.7% 6121 TT Share price (29 May): NT$208.50 Initiation: power surge coming • Initiating with an Outperform rating and a six-month target price of NT$235 • We highlight the EV battery-pack business as a key growth driver in 2013-14E, in addition to tablet and Ultrabook battery packs • Management discipline, recruitment philosophy and good business outlook offer long-term investment appeal How do we justify our view? forecast the company’s total EV Forecast revisions (%) battery-pack business (BEV + LEV) to Year to 31 Dec 12E 13E 14E reach about 10% of its 2014E sales, up Revenue change n.a. n.a. n.a. Net-profit change n.a. n.a. n.a. from less than 2% in 2012E. We also EPS change n.a. n.a. n.a. highlight the disciplined management Source: Daiwa forecasts Chris Lin style of Simplo’s chairman, its (886) 2 8758 6251 Share price performance [email protected] recruitment philosophy and what we regard as a favourable business (NT$) (%) William Yang outlook. 290 160 (886) 2 8758 6259 250 140 [email protected] What we recommend 210 120 170 100 We initiate coverage with an Outperform (2) rating and a DCF- 130 80 What's new May-11 Aug-11 Nov-11 Feb-12 May-12 We see Simplo Technology’s (Simplo) derived six-month target price of Simplo Technology (LHS) NT$235, equivalent to a 13x PER on Relative to TWSE (RHS) electric vehicles (EV) battery-pack business as a key business growth our average 2012-13E EPS of 12-month range 148.00-259.00 driver in 2013-14, in addition to rising NT$18.20. Simplo has a good record Market cap (US$bn) 1.97 demand for the company’s lithium- of delivering on its guidance, along Average daily turnover (US$m) 14.63 ion polymer (Li-polymer) battery- with solid financials in growth Shares outstanding (m) 280 packs for tablets and Ultrabooks. In segments (for not only tablets and Major shareholder Pao Hsin International (4.2%) addition, we believe Simplo’s Ultrabooks but also EVs), which we disciplined management approach believe justifies a PER at par with Financial summary (NT$) and other success factors should peers globally. We see the main risks Year to 31 Dec 12E 13E 14E Revenue (m) 62,390 79,740 95,390 continue to support its business as: 1) pricing pressure from peers and brand makers, 2) market-share loss to Operating profit (m) 5,193 6,724 8,294 growth in the future. Net profit (m) 4,491 5,704 7,006 battery-cell makers in the battery- pack business, 3) lower-than-expected Core EPS 16.024 20.353 24.998 What's the impact EPS change (%) 21.8 27.0 22.8 tablet and Ultrabook demand, and 4) Aided by government subsidies, global Daiwa vs Cons. EPS (%) 1.93 6.36 19.49 shipments of battery-powered electric slower-than-expected EV battery PER (x) 13.0 10.2 8.3 vehicles (BEV) should reach 1.97m business. Dividend yield (%) 2.4 2.5 3.3 units (up 66% YoY) for 2012 and DPS 4.980 5.312 6.889 2.66m units (up 35% YoY) for 2013, How we differ PBR (x) 3.1 2.6 2.1 on our forecasts. Simplo plans to start Our 2013-14E EPS are 6% and 19%, EV/EBITDA (x) 9.2 7.0 5.4 shipping BEV battery-packs in 4Q12, respectively, above the Bloomberg ROE (%) 25.9 27.6 27.9 in addition to its existing battery-pack consensus figures, as we believe high- Source: Bloomberg, Daiwa forecasts shipments for light electric vehicles margin battery-packs for EVs should (LEV), ebikes and escooters. We trigger a surge in Simplo’s business growth in the next few years. Important disclosures, including any required research certifications, are provided on the last two pages of this report. Electronics / Taiwan 6121 TT 29 May 2012 Table of contents Power surge coming ......................................................................................................................... 6 Outperform rating and target price of NT$235 ........................................................................... 6 2012-14 outlook appears very promising ..................................................................................... 7 Fundamentals look very solid ....................................................................................................... 7 Risks .............................................................................................................................................. 8 EV battery-packs: the growth driver beyond 3C products ........................................................... 8 The more Li-polymer shipments, the better the dollar profit ................................................... 10 Profit streams = purchasing scale + cost controls + good yield rate .......................................... 11 Distinct management style with self-discipline at its core ........................................................ 12 A successful model that has turned a profit since Sung took over ............................................ 13 More about the battery industry ................................................................................................ 15 Appendix A: DCF valuation ........................................................................................................ 16 Appendix B: Simplo’s quarterly range-guidance track record .................................................... 17 Appendix C: peer valuations ....................................................................................................... 18 Appendix D: Simplo, consolidated P&L ..................................................................................... 19 Appendix E: commonly used batteries for mobile devices ........................................................ 20 Appendix F: the anatomy of a battery by type ........................................................................... 21 Appendix G: EV-battery projects by automakers ...................................................................... 22 Appendix H: different government subsidies for EVs ............................................................... 23 Appendix I: battery-pack supply chain ...................................................................................... 24 Appendix J: Glossary .................................................................................................................. 25 - 2 - Electronics / Taiwan 6121 TT 29 May 2012 How do we justify our view? Growth outlook Valuation Earnings revisions Global BEV market: shipments and shipment growth Growth outlook While most investors should be familiar with Simplo’s ('000 units) 66% business-growth story for 2012-13E from Li-polymer 5,000 70% battery-packs for tablets and Ultrabooks, we believe high 60% 4,000 demand for lithium-ion battery-packs (Libs) and charging 43% 50% systems for EVs is likely to trigger a surge in Simplo’s 3,000 35% 29% 40% business growth and in the next few years. 2,000 23% 21% 22% 30% 20% 1,000 We believe Simplo is running ahead of the game in 10% preparing new sales-growth drivers, such as batteries for 0 0% light EVs, ebikes and escooters, and for battery-powered 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E EVs for electric buses, taxis and public-sector vehicles. We HEV (Ni-MH) HEV (Li-ion) PHEV (Li-ion) forecast EV battery sales to account for about 10% of its EV (Li-ion) YoY (% , RHS) total sales in 2014 (from less than 2% in 2012) and note Source: Consolidation of various company materials, Daiwa forecasts that they have higher gross margins than 3C products. Note: Please refer to the glossary for definitions of the different types of EVs Valuation Simplo: DCF valuation summary We set a six-month target price for Simplo of NT$235, Economic-profit valuation NT$m derived from our DCF valuation (assuming a WACC of Adjusted opening invested capital 12,819 NPV of economic profit during explicit period 8,151 13.52%, a risk-free rate of 1.27% and a beta of 0.99). Our NPV of economic profit of remaining business 15,261 target price is equivalent to a PER of 13x (three-year NPV of economic profit of net investments (growth business) 24,174 historical range of 7-17x) on our average 2012-13E EPS Enterprise value 60,405 of NT$18.20. We believe Simplo’s good track record of Plus net cash (2012E) 5,682 delivering on its guidance (see Appendix B), along with Equity value 66,087 No. of shares (m) 280.3 its solid financials and favourable business-growth Equity value per share (NT$) 235.0 outlook, justify a valuation at a par with regional peers’ Source: Daiwa estimates average 2012E PER of 12.9x (see Appendix C). Simplo: QFII holdings vs. consensus 2012E EPS Earnings revisions The Bloomberg consensus 2012 EPS forecast for Simplo (NT$) (NT$) has been revised down since the end of 2011, due to: 1) 55 18.0 the product transition from the iPad 2 to the new iPad, 17.5 and 2) expectations of a weak 1Q12 and subdued results 50 for that quarter. 17.0 45 16.5 However, we expect the company’s quarterly results to 16.0 improve sequentially for the rest of this year. As the 40 company has a consistent track record of meeting or 15.5 beating its guidance and the current consensus numbers 35 15.0 look conservative to us, we do not envisage downward May-10 Nov-10 May-11 Nov-11 May-12 revisions by the consensus in the near term and would see QFII Holdings (LHS) 2012E EPS Consensus (RHS) recent share-price weakness as a good entry point. Source: Bloomberg, TEJ - 3 - Electronics / Taiwan 6121 TT 29 May 2012 Financial summary Key assumptions Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Notebook battery shipment
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