NOVATEK Microelectronics Co., LTD (3034 TT) When Drivers Are Not Going To Drive
National Chengchi University, Taiwan
CFA Institute Research Challenge Anna Cheng ｜ Yowen Chang ｜ Jackson Chen ｜ Brian Chien ｜ Yensheng Lee National Chengchi University 1
RECOMMENDATION: SELL 18% 200 (Mar. 31, 2016) 150 NT$ 129.5
TP 100 NT$ 106 50 2015/1/5 2015/4/5 2015/7/5 2015/10/5 2016/1/5 2016/12/31
TV Market Share Erosion Fail to Catch Up with the TDDI Takeoff Limited Contribution from SoC Business
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Business & Industry Overview
Investment Thesis Financial Analysis & Valuation Investment Risks
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Novatek, a Fabless Chip Design Company
IC Design Panel End Market
Foundry
Test
Assembly Driver IC SoC
Source: AUO, Asus, Sony, Huawei
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Display Driver IC, Main Product Line
Revenue Breakdown by Product Portfolio 2015
SoC 28%
DDIC 72%
Source: Company Data
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Panel Makers Utilize Novatek’s Products
IC Design Panel End Market
Foundry
Test
Assembly Driver IC SoC
Source: AUO, Asus, Sony, Huawei
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Taiwanese Panel Makers Are Main Customers
Revenue Breakdown by Geography, 2015
Japan
Taiwan 44% China
Korea
Source: Company Data
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Panels Are Applied to Electronic Products
IC Design Panel End Market
Foundry
Test
Assembly Driver IC SoC
Source: AUO, Asus, Sony, Huawei
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TVs & Smartphones Are Primary Applications
Revenue Breakdown by Product, 2015
Tablet Other
PC TV 40%
Smartphone 29%
Source: Company Data, IHS, NCCU Estimates
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Decisive Factors of Novatek’s Future Performance
Touch with Display System on Chip, 4K TV Driver Integration, SoC TDDI
Lucrative Competitive Developing Driver Technology Product Line
Source: Apple, Samsung National Chengchi University 10
Business & Industry Overview
Investment Thesis
Financial Analysis & Valuation Investment Risks
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4K TV Market Share Erosion
Fail to Catch Up with the TDDI Takeoff
Limited Contribution from SoC
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Main Customers Lose Market Share
4K TV Panel Market Share
Supplier: Himax
China
Supplier: Samsung Inhouse + Korean Fabless Korea
42%
25% 19% Supplier: Novatek
2014 2015 2020E Taiwan
Source: IHS, NCCU Estimates
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Main Customers Lose Market Share
4K TV Panel Market Share
Supplier: Himax
China
46%
62%
57% Supplier: Samsung Inhouse + Korean Fabless Korea
Supplier: Novatek
2014 2015 2020E Taiwan
Source: IHS, NCCU Estimates
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Main Customers Lose Market Share
4K TV Panel Market Share
12% 13% 24% Supplier: Himax China
Supplier: Samsung Inhouse + Korean Fabless Korea
Supplier: Novatek
2014 2015 2020E Taiwan
Source: IHS, NCCU Estimates
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TV End Market Is a Standstill
(Mn) TV Panel Shipments
270
240
210
180
150 2013 2014 2015E 2016E 2017E 2018E TV Demand TV Panel Supply
Source: IHS, NCCU Estimates
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Panel Oversupply Leads to Falling ASP
Panel Price vs. DDIC ASP Panel Price & Novatek’s DDIC ASP
Panel ASP MoM (55 inch TV) NT$ NT$ 18 160
-6% -4% -2% 0% 140 0% 15 120 12 100 -1% DDIC ASPMoM 9 80
-2% 60 6 40
3 -3% 20
0 0 -4% 2015 2016E 2017E 2018E DDIC ASP Panel Price (RHS)
Source: IHS, DisplaySearch, NCCU Estimates
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TV Business Fails to Drive
Novatek TV Market Share Novatek DDIC ASP
2015 2016E 25% 2015 -12%
22% NT$16 NT$14 2016E
2015 2020E 16 Source: IHS, NCCU Estimates
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4K TV Market Share Erosion
Fail to Catch Up with the TDDI Takeoff
Limited Contribution from SoC
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Lower Cost Attracts Smartphone Makers to Adopt TDDI
Smartphone Cost Breakdown TDDI Smartphone Cost Breakdown (NT$) (NT$)
$45
$41 Touch IC $ 21
TDDI Display Driver IC $ 41 $ 24
1.2
Source: IHS
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Lag Behind the Industry Curve
1H15 2H15 1H16 2H16 1H17
Sample Shipment Novatek
Shipment Focaltech + Orise
Shipment Synaptics + Renesas
Shipment Himax
Source: Company Data, NCCU Estimates
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Strategic Mistake Drags Down Market Share
Novatek’s Smartphone Market Share
2015 2016E
20% 17%
Source: NCCU Estimates
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4K TV Market Share Erosion
Fail to Catch Up with the TDDI Takeoff
Limited Contribution from SoC
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TV SoC Is the Key Driver in Novatek’s SoC Business
SoC Revenue Breakdown, 2015
TV SoC Others 50% 50%
Source: Company Data
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SoC Market Share, 2015
Novatek Others Korean In-house
Realtek
Mediatek& MStar Market Share Loss in Samsung’s In-House Production
Samsung’s TV SoC Suppliers Breakdown
100%
30% 80% 55% 60%
60% MediaTek
40%
20% 30% 25% 20%
0% 2014 2015 2016E 2017E
Source: iSuppli, Company Data, NCCU Estimates
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SoC Market Share
5% 7% 9% 7% Chinese Vendors 17% 23% Novatek 21% 19% In-house system
Realtek 48% 44% Mstar&Mediatek
2015 2016E Falling ASP Results from Price-Sensitive Market
Novatek SoC Market Share Novatek SoC ASP
2015 2016E 10%
2015 -8%
7% NT$48.5 NT$44.6
2016E
Source: Company Data, NCCU Estimates
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Business & Industry Overview Investment Thesis
Financial Analysis & Valuation
Investment Risks
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Over-optimistic Consensus Will Be Revised Down
2016 Revenue Forecast (NT$, mn)
58,000
54,000 -4.8% 50,000 -5% -11.9% -2.1% 46,000
42,000
38,000 Street 4K4K TVTV TDDITDDI SoCSoC NCCU Consensus Estimates
Source: Thomson Reuters, NCCU Estimates National Chengchi University 28
Rising R&D Expenses Erode Profitability
R&D Expenses (NT$, mn)
8,000 18%
16% 7,000 14%
6,000 12%
10% 5,000 8%
4,000 6% 2015E 2016E 2017E 2018E 2019E
R&D Expenses (LHS) % of Revenue (RHS)
Source: Company Data, NCCU Estimates
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ROE Estimates Are Lower Than the Consensus
ROE Estimates versus Consensus
30% 27.3%
26% 22.3% 22.0% 22% 18.8% 20.3% 18%
16.7% 14% 13.3% 10% 2014 2015E 2016E 2017E
Team Estimates Street Consensus
Source: Thomson Reuters, NCCU Estimates
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Dividend Yield Will Be Less Attractive
Dividend Yield
(NT$)
12 10%
10 7.7% 8%
8 6.1% 5.2% 6% 6 4.3% 4.6% 4% 4
2% 2
0 0% 2015 2016E 2017E 2018E 2019E
Dividend Per Share (LHS) Dividend Yield (RHS) Source: Company Data, NCCU Estimates
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Valuation Suggests Downside with TP NT$106 (-18%)
Stock Price Performance (NT$) 200
170
140
110 $106
80
50 2013/1/2 2014/1/2 2015/1/2 2016/1/2 2017/1/2 2014-01 2015-01 2016-01 2016-12
Source: Company Data, NCCU Estimates
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High Correlation Between Forward PB & ROE
Forward PB - ROE Correlation
(ROE) (PB) 60%10x ROE Forward PB 60%10x
50%8x 50%8x
40%6x 40%6x
30%4x 30%4x
20%2x 20%2x
10%0x 10%0x 2006 2008 2010 2012 2014 2016E
Source: Company Data, NCCU Estimates
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TP NT$106 Derived by PB-ROE Valuation
Too Optimistic Weakening Profitability ROE 22% 2016E ROE 16.7%
2.9x
2.2x
Current P/B Expected P/B
Source: Company Data, NCCU Estimates National Chengchi University 34
Bull Case Shows Limited Upside
Stock Price Performance 1 (NT$) 4K TV Market 150 Share Gain $5 $139 140 $17 +8.5% Current Price: $129.5 2 130 Significant TDDI 120 Shipments $11 110 $106
3 100 Improving SoC Business 90
80 Base Case 4K TV TDDI SoC Bull Case
Source: NCCU Estimates
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Business & Industry Overview Investment Thesis Financial Analysis & Valuation
Investment Risks
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Main Risks with Upside Potential
High Goods Trade M&AM&A PossibilitiesPossibilities Agreement fromfrom ChinaChina
with China
TDDI Reaches 4K TV Market Share Significant Gain
Shipments Impact
SoC ASP
Remains Stable
Low
Low Probability High
Source: NCCU Estimates
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High M&A Impact but Low Probability
M&A Possibilities from China High M&A Goods Trade Possibilities Agreement • Caused by Loosening Investment from China with China Regulations for Chinese Firms
• Higher Share Price Due to Re-rated P/E
Impact Stress Test - BUY
Base SELL HOLD BUY
Low NT$106 NT$117 NT$142 NT$150 -18% -10% +10% Low Probability High
Source: NCCU Estimates
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Possible Market Share Gain, Still a SELL
Passage of Cross-Strait Goods High M&A Goods Trade Possibilities Agreement Trade Agreement from China with China • 5% Tariff Could Be Lowered for AUO
and Innolux
• Market Share Gain in China Impact Stress Test - SELL
Base SELL HOLD
Low NT$106 NT$116 NT$117 NT$142 -18% -10% +10% Low Probability High
Source: NCCU Estimates
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RECOMMENDATION: 18% SELL TP: NT$ 106 Drivers Are not Going to Drive
• 4K TV Market Share Erosion • Fail to Catch Up with the TDDI Takeoff • Limited Contribution from SoC
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Thank You
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