China Handset Food Chain

Information Technology / Asia ex Japan 9 November 2012

What’s on the menu for 2013? China Handset Food Chain • We forecast 430m China smartphone shipments for 2013 Positive (initiation) • China smartphone players likely to pressure Apple and SEC’s Neutral ASPs; content and service providers well placed for growth • MediaTek remains our top pick; Spreadtrum, AAC Technology Negative

and FIH also offer exposure to the China handset food chain

Eric Chen (852) 2773 8702 [email protected]

See important disclosures, including any required research certifications, beginning on page 38 China Handset Food Chain 9 November 2012

Contents

What’s on the menu for 2013? ...... 5 Emerging trends in a fast-changing market ...... 5 Big rise in China smartphone shipments likely in 2013 ...... 5 Global brands feeling the pain ...... 6 SEC the only brand-name player that can compete on price with China smartphone makers 6 China smartphone makers primed for quad-core products ...... 7 China smartphone market – IC makers to realise relatively large profit margins ...... 9 Players with wide range of chip offerings best positioned for 2013 ...... 9 More opportunities for domestic service providers ...... 11 China mobile content providers offer growth potential but face risks to profitability ...... 11 China vs. global brands ...... 12 Turnkey approach and localised ecosystem ...... 12 BOM cost and shipment price gaps widening ...... 12 Three distinct clusters of players within China ...... 13 China players not as patent-sensitive ...... 14 China’s ecosystems ...... 14 Qualcomm trying localised approach with lower-priced offerings ...... 15 Appendices ...... 16 1. China on track to be the world’s biggest smartphone market this year ...... 16 2. EDGE and TD-SCDMA segments to grow fastest in 2013 ...... 16 3. TD-SCDMA likely to gain traction in 2013 ...... 16 4. Food chain players in China ...... 17 5. The CNY1,000 smartphone ...... 20 6. Xiaomi vs. Apple ...... 21 7. Mobile Internet players in China ...... 22 8. New models, new specs ...... 23 9. Who does what? ...... 24

Company Section MediaTek ...... 29 RDA Microelectronics ...... 33

Click to read more: Greater China Smartphone Sector: Focus on functions and features 10 October 2012 Birdy Lu (886) 2 8758 6248 ([email protected])

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Information Technology / Asia ex Japan 9 November 2012

and FIH also offer exposure to the China handset food chain

smartphone IC shipments would ■ What we recommend account for more than 50% of China’s As the main chipset provider in a smartphone shipments in 2013, fast-growing market, MediaTek driven by: 1) intense competition in (2454 TT, TWD317, Buy [1]) remains chipset migration between MediaTek our top sector pick. Rival RDA’s (Not Eric Chen and Qualcomm, and 2) domestic rated) long-term prospects appear to (852) 2773 8702 makers’ aggressive shift into multi- hinge on its ramping up EDGE [email protected] core devices. Tier-one smartphone smartphone IC shipments from giants Apple and Samsung 2Q13. As for Spreadtrum (SPRD US, Lynn Cheng Electronics (SEC) will likely face USD21.26, Underperform [4]), we (886) 2 8758 6253 are concerned about possible build- [email protected] blended ASP pressure from the China smartphone players from 2013 up in its inventory toward year-end,

given our forecast that China’s TD- onward. SCDMA smartphone shipments in ■ What's new 4Q12 will total 20m units, from 8m Within the China smartphone We assess the outlook and trends in 3Q12 and 5m in 1H12, backed by supply chain, we believe chipset that we expect to prevail for the China Mobile’s promotion. Risks to makers are the best placed to realise China Smartphone Sector in 2013, our sector view include lower-than- analysing the unique characteristics relatively large profit margins, given expected handset shipments in 2013. of the China supply chain, along their value to the chain in terms of with the positioning and prospects creativity, system design and ■ How we differ for the major Greater China players. technology. We are the first broker to provide detailed forecasts for the China ■ What's the impact China mobile content providers smartphone food chain and to look Sustained growth in China have potential to boost growth, at their implications for the global smartphone shipments in 2013 but face profitability risks too supply chain. We forecast shipments of 430m China’s mobile content market has a distinctly “local” ecosystem. units for 2013, up from 240m for Key stock calls 2012E and 64m for 2011. Our Smartphone users’ experience is constrained by the limited quality New Prev. projections have China’s MediaTek (2454 TT) smartphone market accounting for and capacity of 3G mobile data Rating Buy Buy more than 40% of global services in China, intermittent Target 383.00 420.00 smartphone shipments in 2013, up problems accessing foreign content, Upside S 20.8% from 27% for 2012E and 11% and a lack of applications with Spreadtrum Communications (SPRD US) estimated for 2011. This growth localised functions and interfaces. Rating Underperform Underperform should be a big boost to smartphone Target 18.40 18.40 players with exposure to China. We expect consolidation of the Downside T 13.5% smartphone industry in China to AAC Technologies (2018 HK) Impact on global players continue. With China set to Rating Buy Buy experience further growth in its Target 34.50 34.50 We expect the performance/ Upside S 19.8% technology gap between the global open retail market, as opposed to operator-dominated channels, we Foxconn International Holdings (2038 HK) brands and China players to narrow Rating Buy Buy rapidly in the coming months. On our expect domestic white-label product Target 3.80 3.80 forecasts, dual- and quad-core players to make a comeback and Upside S 6.1% gain significant market share. Source: Daiwa forecasts.

See important disclosures, including any required research certifications, beginning on page 38 China Handset Food Chain 9 November 2012

Sector stocks: key indicators

EPS (local curr.) Share Rating Target price (local curr.) FY1 FY2 Company Name Stock code Price New Prev. New Prev. % chg New Prev. % chg New Prev. % chg AAC Technologies 2018 HK 28.80 Buy Buy 34.50 34.50 0.0% 1.420 1.420 0.0% 1.888 1.888 0.0% Foxconn International Holdings 2038 HK 3.58 Buy Buy 3.80 3.80 0.0% (0.026) (0.026) 0.0% 0.002 0.002 0.0% MediaTek 2454 TT 317.00 Buy Buy 383.00 420.00 (8.8%) 13.203 14.426 (8.5%) 19.137 21.093 (9.3%) Spreadtrum Communications SPRD US 21.26 Underperform Underperform 18.40 18.40 0.0% 2.114 2.114 0.0% 2.057 2.057 0.0% Source: Daiwa forecasts; note: stock prices as of close on 8 November 2012

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value of the IC makers to the China supply chain to these companies’ creativity, advanced system design, and technology. MediaTek remains our preferred exposure to the China smartphone hardware supply chain, given its status as the major chipset provider, backed by its advanced technology, within a fast- What’s on the menu for growing market. As for MediaTek’s major rival, Qualcomm, we see its exposure to China declining in 2013? 2013 in the face of increased shipments of EDGE smartphones and the resulting market-share losses for the US company. Emerging trends in a fast- changing market 5) China mobile content providers offer exposure to growth, yet also face risks to 1) China’s smartphone shipments set to surge profitability. The mobile content market in China in 2013. We forecast shipments of 430m units for differs markedly from the global market. In China, 2013, up from 240m for 2012E and 64m for 2011. We local, customised Internet applications, such as Baidu, project China’s smartphone market to account for over Tencent QQ and Weibo, hold the upper hand in terms 40% of global smartphone shipments in 2013, up from of consumer adoption over Google, MSN Messenger, 27% for 2012E and an estimated 11% for 2011. On our Facebook and Twitter. Smartphone users’ experience is reading, this would make the China smartphone sector constrained by the limited quality and capacity of 3G one of the highest-growth sectors across all industries mobile data services in China, intermittent problems globally. Such growth has significant implications for accessing foreign content, and a lack of applications global brand-name smartphone makers’ earnings, in with Chinese-language interfaces or localised functions. our view. 6) Other developments for 2013. a) The retail 2) Global players feeling the pain. It is clear that price gap between smartphones from China players tier-2 global smartphone brand names (the likes of and global brand makers is likely to widen (the bill of HTC, Nokia, Motorola) are losing market share to high- materials [BOM] cost of a China-made smartphone is end, tier-1 global players. But they are also being 40% below that of a global-brand smartphone, while squeezed by low-priced China smartphones. Moreover, the shipment price of a China-made smartphone is 30% we expect global tier-1 smartphone players (namely lower than that of a global brand). b) We expect market Apple and SEC) to face blended ASP pressure from the share consolidation in China’s smartphone industry to China smartphone players from 2013. We expect the continue in 2013. At the same time, we expect China performance/technology gap between the global brand white-label product players to make a comeback and names and China smartphone players to continue gain significant market share from second-tier brand narrowing rapidly from 2012. name makers following the growth of open retail channels, which are not dominated by the telecom 3) Dual-core and quad-core smartphone IC operators. shipments set to rise. Multi-core smartphones are now mainstream products, not only for the global brands but for the China smartphone makers. We forecast dual-core and quad-core smartphone IC Big rise in China smartphone shipments to account for more than 50% of China’s shipments likely in 2013 smartphone shipments in 2013, driven by: 1) intense competition in chipset migration between MediaTek We forecast China smartphone shipments to jump to and Qualcomm, and 2) local smartphone makers’ 430m units in 2013, up from 240m units in 2012E and ongoing migration to multi-core phones. 64m units in 2011. By extension, China smartphone shipments are likely to surpass Apple’s (we forecast 4) Chipset makers set for large profit margins 125m units) and SEC’s (220m units) smartphone relative to the broader China smartphone shipments in 2012; and this growth is likely to have supply chain. This is in contrast to the global brand- significant implications for global brand-name makers. name supply chain, where in addition to the chipset We forecast China to account for 40% of smartphone makers, component vendors (such as AAC, TPK, shipments globally in 2013, up from 28% in 2012E. Largan) and leading end-product providers (like Apple and SEC) can be highly profitable. We attribute the

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China smartphone IC shipments MediaTek: growth in smartphone and feature-phone IC Smartphone ICs (m units) 2011 2012E 2013E shipments MediaTek 9 108 205 (m units) (m units) Spreadtrum 0 35 75 2011 2012E 2013E 2014E 2015E 2016E Infineon 0 - 0 600 600 MStar 0 1 0 Coolsand/RDA 0 - 10 500 500 2012-2014 Qualcomm 45 90 130 400 CAGR 61% 400 Others 10 6 10 Total 64 240 430 300 300 Market share (%) 2011 2012E 2013E 200 200 MediaTek 14 45 48 2005-2009 Spreadtrum 0 15 17 100 CAGR 78% 100 Infineon 0 - - 0 - MStar 0 0 - 2004 2005 2006 2007 2008 2009 2010 2011 Coolsand/RDA 0 - 2 Feature phone IC (LHS) Smartphone IC (RHS) Qualcomm 70 38 30 Others 16 3 2 Source: Company, Daiwa forecasts Totals 100 100 100 Source: Companies, Daiwa forecasts Interestingly, we note that the share prices of MediaTek and HTC, both well-known Taiwan smartphone solution providers but in two different food chains, are moving in different directions. Global brands feeling the pain Share-price performance: MediaTek vs. HTC

While the technology/product gap between China (TWD) (TWD) smartphone players and global brand-name makers is 600 1200 narrowing, the retail price gap is widening. Hence, we believe that since mid-2012, global tier-2 smartphone 500 1000 makers have been losing market share in China to 400 800 China-based rivals. 300 600

200 400 There are two key factors at play. First, multi-core smartphones are now entering the mainstream, and we 100 200 forecast these devices to account for more than 50% of 0 0 China’s smartphone shipments for 2013. Second, we Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 estimate the BOM cost of China smartphones is 40% MediaTek (LHS) HTC (RHS) below that of global brand smartphone makers. Source: TEJ

We believe China handset makers are attempting to rapidly duplicate their success with feature phones in the smartphone segment. On our forecasts, China’s SEC the only brand-name player smartphone IC shipments would peak in 2012-14, that can compete on price with rising at a 65% CAGR, essentially mirroring the historical trend in China’s feature-phone IC shipments. China smartphone makers

At the company level, we forecast MediaTek’s SEC has outperformed most of the other smartphone smartphone IC shipments to rise at a 61% CAGR from brands in terms of shipment growth in 2012. We 2012-14, as compared with a 78% CAGR in its feature- forecast its smartphone shipments to rise by 119% Y0Y phone IC shipments in 2005-09. for the full-year 2012. In 2013, we believe SEC will be the only global brand smartphone maker able to offer low-priced smartphones (at below USD150) in emerging markets. We attribute SEC’s price competitiveness to its internal component supply capability, as it can provide around 60% of the total BOM in-house (display, touch, memory, application processors [AP], baseband [BB]).

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However, we believe SEC’s smartphone ASP, and likely Huawei and ZTE launched their quad-core smartphones Apple’s as well, will decline significantly in 2013, as a (equipped with a quad-core processer and a large 4.3-4.5 result of smartphone price competition in China. YTD, inch screen) at the exhibition (see pictures below). we estimate the ASPs of smartphones sold in China Huawei’s Ascend D1-XL (4.5-inch screen) smartphone is have dropped by over 50% (to a shipment price of the company’s first quad-core model and features about CNY700 for a single-core smartphone in 4Q12). HiSilicon’s K3V2 quad-core processor. Huawei is the first quad-core smartphone provider in China. Smartphone cost structure: iPhone 4 ZTE’s flagship V985 model also has a 4.5-inch screen and AP Other 8.7% uses the Tegra3 quad-core processor, while Coolpad plans 19.0% to launch its quad-core smartphone this November, also Display featuring the Tegra 3 quad-core processor. Nvidia seems (Module+Touch) to be successfully penetrating the China quad-core AP Camera 21.3% 7.7% market, providing APs for smartphones, which we attribute to Qualcomm’s relati vely late launch schedule Semiconductor for its quad-core AP (MSM 8225Q). 9.3% China brands, such as ZTE’s V985, target to compete Mechanical Memory 11.3% 22.8% head-to-head with global brand-name players’ latest products, such as HTC’s One X, with a lower price of about CNY2,000. This indicates to us that global brand- Source: Daiwa name players are coming under increasing competitive pressure from the China players’ entry into the dual-core and quad-core product lines. China smartphone makers To our surprise, global handset makers, such as HTC and primed for quad-core products SEC, were absent from this year’s exhibition (only Nokia attended). We attribute their absence to: 1) their new We noted several emerging trends in the China product cycle schedules not being ready (SEC is likely to smartphone market when we visited the Beijing PT Expo release its new quad-core smartphone early next year), from 18-22 September. and 2) their finding it hard to differentiate their products from existing quad-core solutions. We expect China 1) China brand-name players are now ready to provide brand-name players’ quad-core smartphones, likely quad-core smartphone solutions with large screens priced at less than CNY2,000, to continue narrowing the (Huawei even has a smartphone based on an in- technology gap with global brand players. house AP).

2) China brand players stood out at the trade show by Our industry research indicates that the quad-core offering a much broader range of smartphone smartphones provided by China players are likely to be products than the other players. priced at CNY1,500-2,000, the China players’ dual-core 3) Multi-core (quad-core and dual-core) smartphones smartphones are likely to be priced at CNY800-1,500, are clearly becoming mainstream offerings, and we while prices of single-core models are likely to be as low as forecast such devices to account for more than 50% CNY1,000 in 1H13. Based on these market prices by of China’s smartphone IC shipments for 2013. segment and the China smartphone players’ intentions, we forecast more than 50% of China’s smartphone 4) Qualcomm’s market exposure in China looks set to shipments will be comprised of dual-code and quad-core decline in 2013, as a result of its relatively slow smartphones in 2013. schedule for quad-core AP.

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Huawei’s Ascend D1 XL model ZTE’s V985 model

Source: CNMO, Daiwa Source: CNMO, Daiwa Spec: 4.5-inch screen, HUAWEI-Hisilicon K3V2 CPU, 2,600m Ah battery Sspec: 4.5-inch screen, Tegra3 CPU, 2,600m Ah battery

Coolpad’s 8950 model Lenovo’s A800 model

Source: CNMO, Daiwa Source: CNMO, Daiwa Specs: 5.0 inch screen, Qualcomm MSM8X60 dual core CPU, 1,900m Ah battery Spec: 4.5-inch screen, dual core CPU, 2,000m Ah battery

Xiaomi’s Mi2 model

Source: CNMO, Daiwa Spec: 4.3-inch screen, Qualcomm Snapdragon APQ 8,064 CPU, 2,000m Ah battery

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China smartphone market – IC Players with wide range of chip makers to realise relatively large offerings best positioned for 2013 profit margins We believe that chip makers with a wide range of We believe the chipset makers are in a position to products (eg, MediaTek) will find it easier to compete realise relatively large profit margins compared with in the China smartphone IC market than those with the China supply chain as a whole. This is in contrast few offerings. We note that MediaTek has been trying to the global brand-name supply chain, where in over the past two years to narrow the technology gap addition to the chipset makers, component vendors (in AP frequency) and attain the breadth of (AAC, TPK, Largan) and leading end-product providers Qualcomm’s product portfolio. (Apple and Samsung) can record high profitability. We attribute IC makers’ value within the China We believe MediaTek stands to have a broader WCDMA smartphone supply chain to their turnkey solutions quad-core smartphone IC portfolio in China than incorporating advanced system design, the Android Qualcomm in 1H13, which should enable it to compete operating system, and software development. effectively in a price war between the two. Qualcomm’s MSM 8225Q chip (mass shipments due to start in 1Q13) China smartphone supply food chain will go head-to-head with MediaTek’s MT 6588 (mass China local smartphone shipments due to start in 1Q13) and MT 6589 (mass USD supply chain Xiaomi food chain shipments due to start in 2Q13) chips in the WCDMA 1. Processor MediaTek, Qualcomm, Qualcomm smartphone IC market. MediaTek’s MT 6588 (1.4GHz) Rockchip, Wondermedia, Allwinner, and MT6589 (1.7GHz) are based on the Cortex A7 2. Display (Module+Touch) Truly, Giantplus, J-Touch, TPK (touch) + Sharp architecture, which we believe offers better performance YoungFast, and over 20 local (panel/In-cell) players than the Cortex A5 used in Qualcomm’s MSM 8225Q. 3. Memory Samsung, Hynix, etc SEC 4. Mechanical/E-Mechanical (Glass Local small players FIH, Inventec Mediatek vs. Qualcomm: dual core and quad core competition & Metals, PCB...etc) Qualcomm for Global 5. Battery (3.7V) BYD, Desay, etc Desay MediaTek Qualcomm for China Brands 6. Bluetooth/ WLAN/PA MediaTek, RDA, Realtek, Broadcom, Avago, Single core MT6575 MSM7227A Skyworth Triquint Process 40nm 45nm 7. Camera Sunny Optical/ Galaxycore LiteOn AP CPU 1GHz, Cortex A9 1GHz, Cortex A5 8. Baseband / RF / PA Qualcomm, MediaTek Qualcomm MSM8260 Schedule (MT6573), (Dual Core, 1.5GHz) (commercialized) 1Q12 1Q12 9. User interface Local Android variants or Local Android MT6577 (MT6583 in MediaTek Dual code 2Q13) MSM 8225 (8227) MSM 8960 10. Power management IC/ Sensors Local power IC players Intersil Process 40nm 45nm 28nm 11. Box content/OEM In-house Foxlink, HRS Dual-core, 1GHz, Dual-core, 1GHz, Dual-core, 1.4 GHz, Total BOM (materials only) USD71 USD160 AP CPU Cortex A9 Cortex A5 Cortex A6 Schedule Source: Daiwa 1Q12 (commercialized) end-2Q12 2Q12 MT6588 (6589) Quad core /MT6599 MSM8225Q MSM 8064 Process 28nm 28nm 28nm Quad-core, 1.5GHz, Quad-core, 1.5GHz, Quad-core, 1.7GHz, AP CPU Cortex A7 Cortex A5 Krait Schedule 3Q12 (commercialized) 1Q13 1Q13 Source: Daiwa

We forecast Spreadtrum’s TD smartphone IC shipments to increase to 40m for 2013 (from 20m in 2012E), which implies Spreadtrum’s market share in the TD IC market is likely to exceed 80% in 2012, and over 50% in 2013.

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Qualcomm: handset IC product roadmap SEGMENT IN PRODUCTION 4Q11 2012 1Q13

Snapdragon S1 Snapdragon S2 Snapdragon S3 Snapdragon S4

28 nm 28 nm S4 APQ8064 S4 28 nm APQ8060A S4 Sampling APQ8030 Computing 28 nm 28 nm 28 nm New/28 nm S4 S4 S4 S4 APQ8x60A 65 nm 45 nm 45 nm MSM8960 MSM8064 MSM8974 Sampling Sampling S1 S2 S2 45 nm 45 nm 28 nm 28 nm QSD8x50 MSM8x55 APQ8055 S4 S4 Premium S3 S3 MSM8260A MSM8930 Smartphones 65 nm 45 nm 45 nm MSM8x60 APQ8060 Sampling 28 nm S1 S1 S2 28 nm 28 nm MSM7x27 MSM7x30 S4 S4 MSM7x27A S4 MSM8270 MSM8226 MSM8x30 Mass Market 65 nm 45 nm 45 nm 28 nm Smartphones S1 S4 S4 MSM7x25 S1 MSM7x25A MSM8225 MSM8x27

QSC61x5 QSC6295 DOr B/1xAdv HSPA+ Feature phones QSC6xxx QSC60x5 1x/DOrA QSC11x0 QSC62xx 1x HSDPA

Note: are mainstream products for global brandnames in 2012 , are mainstream products for China market in 2012.

Source: Company, Daiwa

MediaTek: handset IC product roadmap 12A/12i/65nm 12i/60nm(65nm) MT 6516 WCDMA GPRS/MP3/MP4 MT 6573 GPS, WVGA, 5M 12i/40nm 12i/28nm 12i/28nm smartphone 3G/WCDMA BB/RD 12i/40nm BT/ FM/ SD T/O : 1H11 1Q10 ramp up MT 6575 MT 6577 MT 6583 MT 6588 3G/WCDMA BB/RD 3G/WCDMA BB/RD WCDMA/TD/HSPA+ WCDMA/TD/HSPA+ 12A/12i/65nm T/O : 2H11 T/O : 1H12 Dual-core, 1.x GHz Quad-core, 1.x GHz

TD-SCDMA MT 6907 smartphone TDSCDMA T/O : Aug'10 1Q11 Ramp up

12i 65nm 12i/60 nm (65nm) MT 6235 MT 6255 Edge/MP3/MP4 MT 6236 EDGE SoC + GPS, VGA MT 6235-AL EDGE SoC + BT/PMU RF/BT/FM/PMU MT 6225/ MT626E FM/ SD+PMIC 4Q09 ramp up T/O : 1H11 T/O : 1H11 GPRS/MP3 4Q08 ramp up AVI, VGAFM/ SD 12i/M110 12i 65nm 12i/60 nm (65nm) Oct'10 Phase out 8C/8F/8S M110A MT 6253 MT 6251/ 6252/D MT 6250 Feature 8S/8C 0.153um Edge/MP3/MP4 MT 6253-AL SOC of 6223/ SoC + BT/FM/RF Phone GPS, VGA 2Q10 ramp up Simply 6253 2Q12 MT 6223 FM/ SD + PMIC+RF T/O : 10/14/10 GPRS/ MP3 3Q09 ramp up QCIF + PMIC

Source: Company, Daiwa

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Spreadtrum: handset IC product roadmap 40nm 40nm SC6810 MPEG4/MP3/AAC SC8805G TD-SCDMA Androd smartphone Wi-Fi/GPS 40nm 40nm smartphone 4Q11 ramp up All of SC8800G 2H11 ramp up SC8810 SC8820 SCxxxx TD/GSM/GPRS/EDGE TD TD 40nm 40nm HSDPA/WVGA 1.2GHz Dual-core/A5 1.5GHz Quad-core/A7 1Q12 ramp up 2H12 1Q13 SC 7710 WCDMA SC 77xx WCDMA smartphone 1.5GHz Dual-core/A7 1GHz/A5 1Q13 2H12

40nm

SC6820 EDGE/2.5G EDGE smartphone 1.2GHz Dual-core/A5 2H12

ARM7@86MHz SC6600L2 SC6600L6/7 GPRS, WQVGA, WQVGA, MP3/AAC, SC6531 SC 7702 Touch Panel, MP3 MPEG4, SDIO, Wi-Fi 2.5G BB/RF+BT/FM HSPA+ MPEG4, ATV/BT/FM ATV/BT/FM 2H12 2H12 mid-2009 2H10 ramp up Feature ARM9(200MHz) ARM7(78MHz) 40nm phone SC8800H SC6610/6620 SC8802G SC6500 TD/GSM/GPRS/EDGE GPRS, QCIF, TD/GSM/GPRS/EDGE GPRS, MP3,MPEG4, HSDPA 1.6M MP3,MPEG4, DC HSDPA,HSUPA2.2M DC, FM, Multimedia Features FM, Need SPI Flash Modem only Need SPI Flash only 4Q09 1H11/2Q11 ramp up 1H11 ramp up 1H12 ramp up Source: Company, Daiwa

More opportunities for domestic China mobile content providers service providers offer growth potential but face risks to profitability Within the China smartphone food chain, we note that third-party providers of Android OS variants (such as The mobile content market in China is very different Thundersoft [Not listed] and Borqs [Not listed]) have from the global content market. China has its own local emerged in recent years. These companies have started customized Internet applications, such as Baidu, to work closely with IC makers (namely Qualcomm and Tecent QQ and Weibo, instead of Google, MSN Spreadtrum), as well as handset makers, to provide Messenger, Facebook and Twitter. Moreover, faster, more customised software solutions. smartphone users’ experience is limited by the quality and capacity constraints of 3G mobile data services in In a similar vein, Xiaomi Technology is a third-party China, intermittent problems accessing foreign provider of Android user interfaces (UI) which give content, and a lack of applications with Chinese- users a modified, highly localised interface compared language interfaces and/or localised functions. with the stock Android experience. Such customisation includes local applications and weekly software On the other hand, users are more likely to jailbreak (to updates. break through the official settings of the handset to allow user customisation) and download unauthorised We believe that other domestic software and Internet applications, which might have copyright-infringement players are also leveraging their experience and local issues, or which could be downloaded for free. The knowledge of the China smartphone market to provide application market in China is relatively fragmented, customised solutions that global players can’t yet with a number of local third-party online application match. stores in existence, rather than being dominated by the App Store or Android market as it is in the global markets.

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focus on bringing the products to market more quickly. Handset design houses, the so-called independent design houses (IDH), and third-party UI/application developers are thriving in response to the demand for differentiated mobile content. In short, third-party UI solutions and application providers have emerged to China vs. global brands support differentiation in software and user experience.

Turnkey approach and localised Innovation from white-label handsets ecosystem Supply chain Event MediaTek's solution Product/solution Dual SIM Card/Quad SIM Card Unlike the global brand-name makers, China IDHs provide design solutions Manufacturing smartphone makers largely adopt turnkey integrated Turnkey solutions from system makers solutions for handset ICs, while the system design is Market Meet demand from the mid-low end market Multi speaker output undertaken by handset IC design firms (such as Security MediaTek). The turnkey solution significantly reduces Component/feature TV signal reception the cost, technological barriers and time to market. Bluetooth headset Smartphone makers also keep costs in check by opting Multiple SIM card for components supplied by local players rather than Supply chain structure Small scale IDH and assembly manufacturer global component suppliers. Source: Daiwa

On the other hand, higher profit sharing between BOM cost and shipment price handset makers and distributors creates a higher incentive for distributors to sell China-made gaps widening smartphones. Despite some Chinese/global consumers’ concerns about product durability and lack of customer The China smartphone players also have a competitive service in a cost-driven business model (instead of edge in price/cost competition, and the retail price gap brand image-centred), we believe the attractive pricing between China and global brand makers looks to be of China-made smartphones will meet Chinese widening. consumers’ demand for usable entry-level products (or even as luxury accessories that have a similar look and On the one hand, we estimate the BOM cost for China functionality to global brands) in this transitional stage smartphones is 40% below that of global brand from feature phones to smartphones. smartphones, which we attribute to two different supply chains (one is the China ecosystem and the Another key factor is China makers’ ability to create other one is the brand-ODM ecosystem). On the other products that meet local demand (China has its own hand, we estimate the cost of shipping Chinese internal Internet ecosystem) in a way that global smartphones is 30% lower than for global brand brands as yet cannot. Besides, some niche-market smartphones, which we attribute to China makers’ low features have become required specs in the China margin requirements (from BOM cost to shipments market, such as multiple SIM cards, extremely long price). battery life, TV reception, multiple speakers, underlining the importance of multimedia functions in China’s smartphone supply chain maintains the key the China market. features of low cost and competitive pricing, which has led to strong demand from China and emerging While the design of smartphones has become more markets. In terms of BOM cost, we estimate China- homogeneous, with makers using similar low-cost made smartphones are less than 50% that of the chipset solutions, and the look of the products and iPhone 4, while the shipment price to the basic designs of the OS being similar, makers have to operator/distributor is 16% to that of the iPhone 4. differentiate their products with other features and

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Global-brand and China smartphones: difference in BOM cost and shipments USD iPhone 4 RIM-BlackBerry Torch China Smart phone Xiaomi HTC WildFile 1. Application Processor 15.46 (A4) 12 (QCOM) 0 (was embedded into Baseband) 10(QCOM) 0 (was embedded into Baseband) 2. Display (Module+Touch) 37.8 (3.5") 34.85 (3.2") 15 (3.2")/12(2.8") 35 25 40.4 (Flash: NAND, 16GB, 34.25 (Flash-eMMC NAND, SDRAM: 4GB 4Gb, MCP-8Gb OneNAND 1Gb Mobile DDR (additional cost) 22 15(512Mb Mobile DDR) 3. Memory MCP: to be verified Flash+4Gb Mobile DDR) 4. Mechanical/E-Mechanical 20 23 8 20 17 (Glass & Metals, PCB...etc) 5. Battery (3.7V) 6 3 3 5 5 6. Bluetooth/ WLAN 8.27 (Broadcom BCM4329) 10.6 (TI's W1271A) 8 8 4 7. Camera 13.7 (5MP/VGA) 10.8 (5MP) 5 12 5 16.41 (QCOM MDM6600 / SWKS 13.9 12 (7225A/7227A or MT 6573) 20 12 8. Baseband / RF / PA CDMA 800/1900) 9. User interface (Sensors) 8 12 3 4 3 10. Power management IC 7 5 4 2 4 11. Box contenet 6 11 6 8 8 Total materials 177 170 64 151 83 Estimated manufacturing cost 7 12 7 9 7 BOM cost 184 182 71 160 90 Shipments price for operator 500 380 80 180 150 Source: Daiwa

China handsets makers are increasingly targeting to features and competitive pricing is likely to be met with offer smartphones in the market with a mainstream strong demand domestically, in our view. price of CNY1,000. The combination of powerful

China: CNY1,000 smartphone the key product Lenovo A60 ZTE Blade V880 Huawei C8650 Coolpad 7260 Lenovo A750 Huawei G330D

Network GSM/WCDMA GSM/WCDMA GSM/CDMA 2000 GSM/WCDMA GSM/WCDMA GSM/WCDMA OS Android 2.3 Android 2.2 Android 2.3 Android 2.3 Android 2.3 Android 4.0 MSM8225 1GHz Processor MT6573 650 MHz MSM7527 600MHz MSM7627 600MHz MSM7227T 800MHz MT6575 1GHz Dual core Screen size 3.5" 3.5" 3.5" 4.0" 4.0" 4.0" Touch screen Capacitive Capacitive Capacitive Capacitive Capacitive Capacitive Carrier China Unicom China Unicom China Telecom China Unicom China Unicom China Unicom Available Aug-11 Nov-10 Aug-11 Feb-12 Mar-12 Aug-12 Retail price (CNY) 1050 950 975 1299 1299 1399 Sim card Dual sim card Single sim card Single sim card Dual sim card Dual sim card Dual sim card Source: China Unicom, Companies, ZOL, Daiwa.

in 2012 and 35% in 2013. In addition, we expect mobile Three distinct clusters of players Internet makers to contribute 10-15% of China’s within China smartphone shipments in 2012 and 20-25% in 2013.

Our checks on China smartphone shipments of the top We believe there will be around 50 smartphone makers smartphone providers competing in China in 2013. We break this group into (m units) 2011E 2012E 2013E three categories: 1) China brand names (such as Huawei 15 35 50 Lenovo), 2) white-label product players (such as ZTE 14 27 40 Gionee), 3) and mobile Internet providers (such as Lenovo 5 16 26 Coolpad 9 15 20 Xiaomi). TCL 3 12 18 Gionee 2 12 15 We forecast the top-10 brands to account for 59% Xiaomi 1 8 12 (142m/240m) of China’s smartphone shipments in OPPO 2 7 11 2012 and 48% (208m/430m) in 2013. On our BBK 1 5 8 Tianyu 1 5 8 projections, the country’s white-label product players Totals 53 142 208

will account for 25% of China’s smartphone shipments Source: Daiwa forecasts

- 13 - China Handset Food Chain 9 November 2012

China players not as patent- China’s ecosystems sensitive Some white-label product makers have transformed As a result of the ongoing Apple and SEC patent themselves into more formally recognised brands, yet dispute in the US and other markets, we believe Google still maintain certain features from their previous may eventually start charging licensing fees to all white-label phase, such as relatively attractive pricing Android OS licensees (to cover its cross-licensing and unique, creative design of the handsets. K-Touch costs). Almost all of the China smartphone makers use (Tianyu), BBK and Gionee are successful cases in point, the Android platform without any agreements with and have transformed themselves by building up brand Google. Should the global smartphone brand-name recognition in China. makers (such as SEC and HTC) have to pay to use the Android OS, we believe that would increase the China Another driver of this trend has been the rise of the smartphone makers’ cost advantage (as it is unlikely smartphone, creating another trend for mobile devices. that some of them would pay the licence fee). China With the increasing importance of content/value- smartphone-related players, such as MediaTek look well- added services and user experience, aside from placed given their lack of exposure to patent litigation. hardware specs and manufacturing, more sophisticated supply chain cooperation has grown into what we see Apple vs. SEC patent litigation worldwide today. Country Winner Germany Sep 2011 Apple SEC tablet sales banned due to design patent While the manufacturing of global and local brand violations (firm to change design to avoid ban) names (ZTE, Huawei, Tianyu, Gionee) is concentrated Australia Dec 2011 SEC SEC tablet sales permitted after finding that firm did not violate Apple’s touch-screen patent in Shenzhen, software and mobile content providers UK Jul 2012 SEC Court found SEC did not violate Apple’s design patent; are centred on Shanghai and Beijing. The roll-out of Samsung tablets permitted to be sold new communication standards from 2G (GSM/GPRS) South Korea Aug 2012 Tie Found violations of patents on communications technology and utility. Both firms ordered to pay to 3G (TD-SCDMA, WCDMA and CDMA) has damages, sales of some devices banned in South strengthened demand from end-users for mobile data Korea services and stronger connections with the telecom US Aug 2012 Apple SEC ordered to pay damages for violating Apple’s user interface and design patents operators. Japan Aug 2012 SEC Found SEC did not violate data-syncing patent Source: Various materials, compiled by Daiwa The three major China telcos, China Mobile, China Unicom, and China Telecom, with their mass subscriber bases, have created opportunities for promoting the transition from feature phones to smartphones. The subsidy plans for handset purchasing have also led to a significant acceleration in the growth of the handset market, while the incentives to increase ARPU have increased demand for data services and spurred content development.

China: evolution of the white-label supply chain 10 years of the white-brand supply chain * China handset players reshuffled * Handset licensing regulations lifted * Operators became valued more post insolvencies and M&A * Whitebox makers transitioned * Government eased down on whitebox development * MediaTek solution emerged * New brand names emerged * Overseas market development stepped up * Handset licensing regulations eased * Overseas market development

MP3/STB

2002~2004 2005 2006 Handset 2007 2008 2009 Smartphone DVD-Player * China handset players * Whitebox market established * Became very competitive booming, market share * Blackbox market flourished * Margin erosion accounts for 50% *PRC Government banned counterfeits * Seeking niche markets Source: Daiwa

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Qualcomm trying localised approach with lower-priced offerings

Since cost is a key element of the China handset market, price competition among handset IC providers remains a constant factor.

In order to compete with MediaTek, Qualcomm has adopted an aggressive pricing strategy and launched a turnkey solution, the Qualcomm Reference Design (QRD), to attract handset makers and to broaden adoption of its offerings.

Qualcomm previously offered more than one key model in its efforts to compete with MediaTek (such as the MSM7227/7225 to compete with MediaTek’s MT6573), and its products would typically require less qualification time than those of local IC vendors for brand-name makers. But MediaTek looks to be catching up rapidly through new product releases, going from the dual-core MT6577 in 2Q12 to the quad- core MT6588 by end-2012/1Q13. In our view, the product/performance gap between the two companies is narrowing. Indeed, Qualcomm has brought forward its release plans for the quad-core MSM8225Q to the end of 2012, from 1H13 previously, in order to compete with the MT6589.

Qualcomm’s QRD for handset ICs competes directly with MediaTek’s solution, and the US company dominates the market for 3G communication intellectual property (IP). But we believe that small handset makers and IDHs continue to favour MediaTek’s solution because: 1) it has a lower BOM cost in the total solution (reference board) than Qualcomm’s offering, 2) the smaller companies tend to have close ties with MediaTek for turnkey solutions, as MediaTek provides customised products that can lower the technology barriers facing China handset makers, and 3) MediaTek’s solution reduces the time to market to three months, compared with six months for brand names.

In contrast, global brand names are more likely to adopt Qualcomm’s solution first, since it requires less qualification time; according to our research in the market, MediaTek’s solution would need to be field- tested in the Europe and North America markets prior to adoption there.

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China: monthly 3G subscriber additions (000) 12,000 10,000 8,000 Appendices 6,000 4,000 2,000 1. China on track to be the world’s 0 -09 -12 p biggest smartphone market this y Jul-12 Jul-09 Jul-10 Jul-11 Jan-10 Jan-11 Jan-12 Mar-10 Mar-11 Mar-12 Se Nov-09 Sep-10 Nov-10 Sep-11 Nov-11 May-10 May-11 Ma year China Mobile China Unicom China Telecom Source: Companies China’s technology supply chain continues to grow in importance globally, and this trend is particularly pronounced in the smartphone market. According to research by IDC, China will account for 26.5% of global 2. EDGE and TD-SCDMA smartphone shipments in 2012, surpassing the forecast 17.8% share of the US. China’s tech supply players have segments to grow fastest in 2013 firsthand experience of the unique market conditions in China, having honed their skills producing white- For 2013, we forecast a 79% YoY increase in China’s label products. smartphone shipments to 430m units, from 240m in 2012. Leading that growth will be the EDGE and TD- On our forecasts, China is set to become the world’s SDMA smartphone segments, in our view. Emerging largest market for smartphones this year, not only in markets account for the majority of the potential terms of shipments but consumption. addressable market for EDGE smartphones, while the bulk of shipments of TD-SCDMA smartphones should As at the end of June, China’s 3G networks had 175m be comprised of reliable, competitive products priced subscribers (51m for China Telecom, 67m for China at CNY500 or less. Mobile, and 57m for China Unicom). We forecast smartphone shipments in China to total 240m units China smartphone shipments m units 2011 2012E 2013E this year, with 65% of this figure likely to go to the TD-SCDMA smartphones 6 35 75 domestic market. We expect smartphones (EDGE, EDGE smartphones 6 60 115 WCDMA, CDMA, or TD-SCDMA) and 3G phones WCDMA smartphone 32 110 170 (WCDMA, CDMA, TD-SCDMA) to account for 35- 40% CDMA Smartphone 20 35 70 of handsets sold in China in 2012, up from 10-15% for Total Smartphone 64 240 430 2011. Source: Daiwa forecasts

China: smartphone shipment forecasts 3. TD-SCDMA likely to gain (m units) 500 traction in 2013 430 400 +79% YoY We are reducing our forecast of TD-SCDMA handset 300 (smartphone + feature phone) shipments in 2012 to 60m 240 units (from 90m units). Our view reflects a weaker-than- 200 +275% YoY expected outlook for the China TD-SCDMA smartphone 100 64 market in 2012 on account of the unstable system design of TD-SCDMA compared with EDGE, a more mature 0 2011 2012E 2013E system for which the product market is booming.

TD-SCDMA EDGE WCDMA CDMA Still, we see the advent of more competitors driving the Source: Daiwa forecasts TD-SCDMA smartphone market in 2013. MediaTek is becoming aggressive at the low end of the TD-SCDMA smartphone IC market with new product releases, and is targeting to launch a lower-cost version of its TD-SCDMA smartphone SoC IC in 1Q13. Moreover, in a bid to gain

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market share in the mid to high end of the TD-SCDMA Specifications of China Unicom's CNY1,000 smartphone market, it plans to launch its MT6517 dual-core and programme MT6589 (or MT6588) quad-core ICs by the end of 4Q12. 1st generation 2nd generation 3rd generation Processor ≧600MHz 800MHz-1GHz Dual core >3.5" Display >4.0" 4.0-4.5" As a result, we expect market-share competition between capacitive touch MediaTek and Spreadtrum in the TD-SCDMA Release date 2Q11 end 2011-1H12 Sep-12 smartphone IC market to intensify in 4Q12. We project Source: Daiwa Spreadtrum’s share of the global TD-SCDMA smartphone IC market to fall to over 50% in 2013, from over 80% in Established brands were the main beneficiaries of the 2012E, and forecast Spreadtrum’s TD-SCDMA operators’ subsidy programme, since they were best smartphone IC shipments to total 40m units for 2013, up placed to meet operators’ quality and volume demands, by 100% YoY vs. 20m units for 2012E. and had the scale economies needed to get prices down to competitive levels (ie, to a point where the subsidy MediaTek: handset IC market share was lower than for premium products such as the (%) 2011E 2012E 2013E iPhone). With the subsidised prices of large companies’ TD-SCDMA feature phone 33 20 30 brand-name phones being competitive with prices of TD-SCDMA smart phone 0 34 47 white-box smartphones, consumers shifting from Edge smartphone 50 80 61 WCDMA feature phone 50 90 67 feature phones to smartphones were inclined to opt for WCDMA smartphone 19 44 59 the brand-name offerings given the difference in Overall market share 29 44 48 product quality. Source: Daiwa forecasts China’s telecom operators have had a dominant role in consumers’ purchases of smartphones under the subsidy programme for low-priced smartphones (ie the 4. Food chain players in China CNY1,000 smartphone) since 2011. Although China Mobile and China Telecom guide for no significant Smartphone makers and brand-name increase in handset subsidies in 2012, consumers makers continue to seek low-priced, quality products. Leading domestic brands – growing Domestic brand names have gained significant market share through sales under the programme, while global through low-priced smartphones brands have launched mid- to low-end smartphones The arrival in 2011 of the CNY1,000 smartphone, (eg, HTC’s new Desire V) to capture mass-market backed by China’s telecoms operators, spurred the demand. market’s adoption of smartphones and led to rapid growth in shipments for China handset brands. ZTE and Huawei – building brand equity through cooperation with operators By promoting affordable smartphones, China Mobile, Domestic telecom equipment vendors ZTE and Huawei China Unicom, and China Telecom sought to increase are increasing their presence in the global equipment their subscribers’ take-up of mobile data services and market. Growth in their terminal businesses, which hence raise their average revenue per user (ARPU). The include handsets and data cards, has been supported operators actively promoted CNY1,000 smartphones by the feature-phone/smartphone ODM work they when such devices hit the market in the first half of have undertaken for operators such as Orange or 2011, prompting a transition in the market from Verizon. feature phones to smartphones.

As part of the CNY1,000 smartphone initiative, the first wave of devices was required to have a 600MHz-plus processor and a 3.5”-plus capacitive panel. The goal was to offer a decent smartphone user experience while hitting a price point of CNY1,000-1,500. Although the telecoms operators paid subsidies to handset makers in order to keep the retail price in check, and hence faced additional margin pressure, the end-product price hit a sweet spot for consumers. We believe the operators, together with handset providers such as Huawei, ZTE, and Lenovo, all ultimately benefited from this exercise.

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Orange Telecom’s ‘San Francisco’ supplied by ZTE Emerging brands – transforming from white brands Branded products typically carry higher margins than white-brand models. Stricter government regulation of the white-brand/black-box segment through product identification standards, together with increased competition from branded products, has prompted some white-brand makers to pursue a brand-led strategy. This typically means one of two things: 1) copying global-brand products, for which prices are typically high, or 2) rolling out their own brands.

Gionee and K Touch, formerly major players in the feature-phone market, have made the leap in the Source: Orange branded-product segment by enhancing their product quality and stepping up their marketing efforts. Lenovo – consumer brand in China Lenovo continues to gain ground in China’s Independent design houses smartphone market. According to a Sino Research survey undertaken in June, the top-3 makers of IDHs are a group unique to the China handset market. handsets (both feature phones and smartphones) in the These companies provide solutions for functions China market were SEC (15.73%), Lenovo (11%), and demanded by handset makers, cooperate with IC Huawei (9.54%) (Not listed). design companies and component suppliers, and coordinate the whole process, from design to mass Sino Research estimates that Lenovo accounted for 13.1% production of final products. By contrast, global brand of China’s smartphone market in 2Q12, up from 9.5% names tend to control key component procurement for 1Q12 and surpassing Huawei’s 2Q12 market share and outsource assembly to ODM makers. of 12.51%. According to Sino Research, Lenovo benefited most from the continued decline in Nokia’s IDH players can reduce the time to market and lower market share in smartphones. We believe Lenovo is the technology barriers to product development in the leveraging the strength of its brand name and 2G white-brand/black-box market. This has allowed a capitalising on its time-to-market capabilities. The steady stream of creatively designed handsets to reach company is using MediaTek’s turnkey solution, as well the market quickly, underpinning the rise in popularity as Broadcom and Qualcomm’s chipsets, to broaden its of white brands. product range. Just as in the smartphone market, differentiation in Mobile Internet players – new to China’s UI/software has become arguably more important than smartphone ecosystem hardware functions. At the same time, technology requirements have increased. White-brand players face The success of Xiaomi’s smartphone prompted China’s increased competition from brand-name smartphones Internet/mobile content providers to enter the offered at low prices, supported by operators’ subsidies smartphone food chain. Baidu, China largest search- and brand manufacturers’ scale economies. In sum, we engine player, announced plans in 2012 to launch a believe the IDH players, faced with an increasingly smartphone in cooperation with consumer electronics unfavourable competitive landscape, are headed for a company ChangHong and ODM maker FIH. Qihoo period of transition and consolidation. 360, best known for its PC security and web-browsing software, entered the fray by beginning pre-sales of its Against this backdrop, some IDH players have invested own devices in late June. Its U8832D and OT986 in developing their own-brand products (such as Vollo, smartphones are the result of cooperation with handset related to HuaQin, and Green Orange, related to brand makers Huawei (Not listed) and Alcatel (a brand Ragentek) and some have expanded their customer of TCL Communication), respectively. bases to encompass major global brands (eg, Cellon for Motorola).

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Cellon’s solution for Motorola - Defy Mini Thundersoft UI on Lenovo LePhone A1

Source: www.Sogi.com.tw Source: ThunderSoft

Green Orange - Mars 1 Borqs is another solutions provider which develops Android-based Open Mobile System (OMS)/OPhone UI. The China Mobile-backed OPhone system has been mainly adopted in the operator’s TD-SCDMA smartphones. In order to further develop its own smartphone ecosystem, China Mobile could roll out features specifically tailored to its customer base and further develop its online app store, the Mobile Market.

OPhone UI on Huawei T8300

Source: ZOL

Why have third-party UI solutions providers emerged? Being an open-source operating system, Android has created many opportunities for smartphone makers. It has also opened the door to companies offering third- party UI solutions designed to meet the requirements of the China market.

ThunderSoft, the largest Android outsourcing solutions Source: OPhone SDN provider in China, cooperates with Qualcomm and Spreadtrum to shorten handset makers’ time to Application providers – all about localising market. It does this by working together on system development with IC and handset makers, the goal Given the unique conditions in the China market, some being to have the phone software ready at the same application developers seek alternative means to raise time as the chip sets are finalised. This third-party the visibility of their products. Some cooperate with solution service also costs less than handset makers established domestic channels such as third-party developing in-house software for each chipset/model. platform providers (namely SkyMobi’s Maopao platform, which provides application downloads for With Spreadtrum targeting to increase shipments of its MediaTek- and Spreadtrum-based handsets) or SC8810 TD-SCDMA smartphone solution in 3Q12, we operators’ subscriber service packages and online think ThunderSoft will play an increasingly important platforms (namely China Mobile’s Mobile Market and role in China’s smartphone supply chain. China Unicom’s WoStore).

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Since customers in China are fairly new to installing with handset makers. Application developers have been applications on their own, and given data constraints known to copy well-known applications, as well as (some operators cap data plans and some handsets create distinctly local variants, to catch customers’ support only the 2G or 2.5G cellular data standards), attention. applications are sometimes pre-installed on handsets. This approach requires that developers work directly

Mobile Internet users as percentage of Internet users in China Internet use by China handset users: Weibo/microblog application experienced highest growth in 1H12

(mn users) Payment 450 80% 69.3% 72.2% Email 400 66.2% 70% Forum/Community/BBS 60.8% 350 60% Video/TV 300 Game 50% 250 39.5% Social network 40% Reading 200 30% Weibo 150 Music 20% 100 News 50 10% Search 0 0% Instant messenger 2008 2009 2010 2011 1H12 0 20406080100(%) Users (LHS) Penetration rate (RHS) Dec-10 Dec-11 Jun-12

Source: CNNIC (China Internet Network Information Center) Source: CNNIC

China smartphone market: top 10 brands (June 2012) 5. The CNY1,000 smartphone K-touch 3.11% ZTE and Huawei have built up their market share in iPhone 3.32% China and other emerging markets by rolling out low- HTC 5.71% priced smartphones, spearheaded by CNY1,000 Gionee 5.81% handsets as part of the aforementioned programme run ZTE 6.07% by China’s telecoms operators. Coolpad 7.30% Nokia 9.81% ZTE’s V880 and Huawei’s C8650 models, which have Huawei 12.51% proven popular in China, were respectively part of Lenovo 13.10% China Unicom and China Telecoms’ handset programmes. According to research conducted by Samsung 15.48% Analysys Market Research, a China market research Source: Sino Research institution, the five leading smartphone brands in China for 1Q12 were: 1) Samsung, 22.75%, 2) Huawei Notwithstanding concern about continuing margin (12.16%), 3) Nokia (11.1%), 4) ZTE (10.62%), and 5) pressure in the fiercely competitive handset business, Lenovo (7.96%). The four leading domestic brands — we believe ZTE and Huawei’s will maintain their Huawei, ZTE, Lenovo and Coolpad — together market-leading position and technological edge over accounted for more than 40% of the market. rivals in the transition to smartphones, with low-priced phones likely to continue to attract consumers in Our takeaway is that domestic brands are coming to emerging markets. prominence by rolling out attractively priced phones designed to meet the demand created by the telecom In this context, we note that China Unicom continues operators’ CNY1,000 subsidy programme. to offer subsidies for its 3G service and in September 2012 raised the spec requirements for its CNY1,000 Moreover, Sino Research estimates that smartphone smartphone programme. We believe this move will shipments in China increased by 164% YoY in 2Q12, continue to support shipments by major brands such as with Lenovo overtaking Nokia to take second place in ZTE and Huawei. the China smartphone market in June 2012.

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Component providers – few opportunities • Internet-centric business: the company built up for non-local players customer recognition of its product through As for Taiwan component makers, we think they are Internet-based promotion, an economically prudent gaining less traction from growth in the China way of raising its profile while interacting closely smartphone market than some may have expected. with would-be consumers. It also keeps costs in This is partly because their exposure to the mainland check through a shipment-by-order model (B2C). market is limited compared with that of global brand • Hit the sweet spot with a low-priced, high-specced names. At the same time, while Taiwan component product. Since the high specifications of the model makers have made headway in winning business with should sustain consumer interest until the bill of China brand names, white brands tend to favour materials falls, profitability in the latter parts of the components from local suppliers, chiefly on cost product’s life cycle may offset losses incurred in the grounds, and rely on turnkey solutions. initial stages.

• Content service/usage should contribute an increasing proportion of profits, with the margin on 6. Xiaomi vs. Apple hardware manufacturing declining. Xiaomi’s ability to provide a customised UI and self-developed or co- Xiaomi Tech Company is a China-based software developed mobile apps/platforms (such as an online company founded in 2010. Through its MIUI platform app store) should help to raise consumer awareness, it aims to provide a refined UI for Android smartphone boosting Xiaomi’s efforts to develop its own distinct users. MIUI is known for providing a regular stream of user community, rather than one considered part of updates and interacting closely with users, and has as a the larger Android/Google platform. result built up a sizeable user community. The BOM cost and pricing: iPhone 4 vs Xiaomi company also provide a messaging application MiTalk, which is similar to the likes of What’sApp and Line. (US$) 600 500 Xiaomi released its own-brand smartphone, MiOne, in 500

4Q11 featuring competitive hardware (Qualcomm 400 MSM8260 1.5GHz dual-core processor, 4” capacitive touch screen, 8-megapixel camera) and a surprisingly 300 184 180 low price of CNY1,999. The handset was well received 200 160 in the market, with some 300,000 units presold within 100 two days of the launch. The company reports that it has shipped more than 3m units of the Xiaomi smartphone 0 iPhone 4 Xiaomi since its debut in 4Q11. BOM cost Shipments price for operator

Xiaomi announced its next-generation smartphone, the Source: Daiwa estimates

Mi2, in August 2012 and launched it on 30 October 2012. The Mi2 has a Qualcomm APQ8064 1.5GHz quad-core processor and 4.3” display, and is again priced at CNY1,999 (16GB RAM).

Following a recent round of fundraising, Xiaomi’s enterprise value stood at USD4bn at the end of 2Q12, according to the company itself, underlining the success of its efforts in the smartphone manufacturing arena, particularly its attempts to broaden its ecosystem.

In our view, the following factors could help to distinguish Xiaomi from other handset makers: • Emphasis on mobile content: the software on Xiaomi’s MIUI is updated every week and has several China consumer-oriented features, including a specially tailored app store.

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Spec and pricing comparison: Xiaomi MiOne and iPhone 4 marketing through social networks such as Weibo, Xiaomi iPhone 4 begun pre-sales through online channels, and pursued Processor Qualcomm dual core Apple A4 single core 1GHz a low-price/high-spec strategy. Moreover, it has sought Baseband MSM8260 1.5GHz Qualcomm Infineon to attract consumers through the use of pre-installed, Display 4” 3.5” customised Qihoo 360 apps such as a 360 web browser, TPK, Sharp TPK, Wintek, LG Display security software, wallpaper settings and localised app Memory Samsung (1G RAM) Samsung, Toshiba (16-32 GB) Bluetooth/WLAN/PA Broadcom, AzureWave Broadcom(WLAN) store. (WLAN) Skyworks, Avago (PA) Avago, Triquint (PA) The first 360 smartphone to reach the market was the Camera (8MP) LiteOn Largan AK47, manufactured by Alcatel. According to the Genius PCB Unimicron Unimicon company, 5,000 units sold out soon after pre-sales Compeq Compeq began on 28 June. While supply constraints can Touch IC ATMEL, Synaptics TI contribute to a “hunger marketing” strategy, whereby Power management Qualcomm PM8058 Qualcomm Dialog limited product availability enhances market RF IC Qualcomm QTR8615 awareness, they do illustrate the China supply chain’s Light sensors Intersil TAOS ability to supply niche-demand products within a Connector Foxlink, HRS Foxlink relatively short timeframe. Battery Desay, LG LG, Simplo Manufacturing Inventec Appliance, FIH Hon Hai Pegatron In July, Qihoo 360 announced more new models, OS Android 2.3/MIUI iOS 4.0 including one at the ultra-low price of CNY999 (with Available 4Q11 3Q10 MT6577 1GHz dual core processor) as well as a BOM Cost (USD) 160 184 scratch/water/dust-resistant model (manufactured by Shipment price (USD) 180 500 Retail Price (USD) 330 1,000 Haier and featuring a MSM8260A 1.5GHz dual-core Source: Daiwa processor). The low prices and relatively high specs have sparked debate among industry observers, some of whom argue that Internet players are treating profitability as a secondary consideration. 7. Mobile Internet players in China Subsequent 360 smartphone models have turned to smaller brands like GreenOrange, backed by IDH Ragentek. This may be an indication that brand-name 360 degrees — Internet companies set their players are refocusing on profitability and building stall out in China’s smartphone market brand equity by co-branding with Internet companies,

while smaller brands depend more on the market’s The success of Xiaomi’s smartphone has prompted awareness of the software provider. other China Internet/mobile content providers to join the smartphone food chain. Software wars

Alibaba, operator of Taobao Marketplace, China’s 360 Alcatel“AK47” smartphone largest online shopping platform, and Alipay, the country’s third-party online payment, has also invested in a cloud-computing service. Its subsidiary, Alibaba Cloud Computing, rolled out its own smartphone OS, AliCloud OS (also known as Aliyun), in K-Touch’s W700 smartphone in 2011. The design of the OS calls for full compatibility with Android applications while incorporating the cloud-storage services offered by the Alibaba group.

Cooperation on alternative OS has expanded to encompass hardware companies such as Haier, cooperating with Alibaba. But Google has taken a keen interest in these developments, citing concern over IP Source: Qihoo 360 infringements in related app stores and, more broadly, and attempting to define for its purposes what can be Qihoo 360, which has viewed Xiaomi as a major promoted as Android compatible. competitor from the outset, has also adopted the Internet-concept business model. It has conducted - 22 - China Handset Food Chain 9 November 2012

On 13 September, the planned release of Acer’s A800 quality and compatibility of software while keeping smartphone, which was to use the AliCloud 2.0 OS, was domestic handset makers on-side. To date, however, cancelled, with Google stating that non-compatible licence-fee-free Android OS installations — those not devices weaken the Android ecosystem and are at odds qualified by Google and thus ineligible to integrate with handset makers’ commitment not to ship non- various Google services — are ahead of the pack as compatible devices. China’s smartphone market expands.

Localised content and UI have been well received in China, where adoption of globally available software sometimes trails that of domestic equivalents (Weibo 8. New models, new specs vs Facebook and Twitter, instant messenger Tencent QQ vs MSN, and the Android market/Apple App Store Compared with the recent product offerings of global vs localised online stores). brand-name players, we highlight three main features common to handsets being produced by China-backed Global players are seeking to address the China companies: market’s unique characteristics. Apple’s iOS6, for • They feature low-resolution screens and little example, features expanded Chinese-language memory (typically 4GB), allowing for lower costs. capabilities (Siri) and software hooks into China- centric services (Tencent QQ and Weibo). At the same • Dual- and quad-core products are entering the time, however, China’s smartphone makers are keen to mainstream, as is Android 4.0. secure users through their own UI and applications • tailored to the domestic market. CNY1,500-1,900 is now the mainstream price-point for dual-core/quad-core products. Wary of allowing further fragmentation of the Android platform, Google faces a challenge to maintain the

New China smartphones Huawei ZTE Lenovo Lenovo Coolpad Xiaomi Model Ascend D quad XL Grand Era U985/V985 LePhone S720 A800 8950 Mi2 Network TD/WCDMA TD/WCDMA WCDMA WCDMA TD-SCDMA WCDMA OS Android 4.0 Android 4.0 Android 4.0 Android 4.0 Android 4.0 MIUI/Android 4.1 HiSilicon K3V2 quad core 1.2- nVidia Tegra 3 quad-core MT6577 dual-core Qcom MSM8260 dual- Qcom APQ8064 quad-core Processor MT6577 dual-core 1GHz 1.4GHz 1.5GHz 1.2GHz core 1.5Ghz 1.5GHz Display type 4.5" multi-touch 4.5" multi-touch 4.5" multi-touch 4.5" multi-touch 5.0" multi-touch 4.3" multi-touch Resolution 720*1280 (HD720) 540*960 (qHD) 540*960 (qHD) 480*854 (FWVGA) 480*960 (>WVGA) 720*1280 (HD720) Memory-Storage 8GB 4/8GB 4GB 5GB 4GB 16GB Memory-RAM 1GB 1GB 512 MB 513 MB 1GB 2GB Weight 150 g 115 g 140 g 155 g n.a. 145 g Thickness 11.5 mm 7.9 mm 9.9 mm 11.5 mm 9.98 mm 10.2 mm Rear: 8MP Rear: 8MP Rear: 8MP Rear: 8MP Rear: 8MP Camera Rear: 5MP Front: 1.3MP Front: 1.3MP Front: 1.3MP Front: 0.3MP Front: 2MP Carrier China Mobile/China Unicom China Mobile/China Unicom China Unicom China Unicom China Mobile China Unicom Global launch 4Q12 2H12 4Q12 Upcoming Upcoming October 2012 Pricing CNY2,699 CNY1,999 CNY1,799 CNY1,250 CNY3,889 CNY1,999 Source: Companies, Daiwa

- 23 - China Handset Food Chain 9 November 2012

New global-brand smartphones Apple Samsung Nokia Motorola HTC HTC ASUS Model iPhone5 Galaxy S3 Lumia 920 Droid Razr Maxx HD One X One X+ Padfone 2 Network LTE/WCDMA LTE/HSPA+/WCDMA LTE/WCDMA LTE LTE/WCDMA HSDPA/WCDMA 4G LTE/DC-HSPA+ OS iOS6 Android 4.0 WP8 Android 4.1 Android 4.0 Android 4.1 Android 4.0 Samsung Exynos quad core 1.4GHz, Qcom S4 ARM Cortex A9 / Qcom S4 MSM8960 nVidia Tegra 3 nVidia Tegra 3 quad-core Qcom S4 8260A quad core Processor Apple A6 dual core MSM8960 1.5Ghz Qualcomm dual core 1.5Ghz dual core quad-core 1.5GHz 1.7GHz 1.5GHz, ARM Cortex A15 dual core MSM8960 1.5GHz (For US LTE) Display type 4" Retina Display 4.8" Super AMOLED 4.5" multi-touch 4.7" multi-touch AMOLED 4.7" multi-touch 4.7" multi-touch 4.7" IPS Resolution 640*1136 720*1280 (HD720) 768*1280 (WXGA) 720*1280 (HD720) 720*1280 (HD720) 720*1280 (HD720) 720*1280 (HD720) Memory-Storage 16/32/64 GB 16/32/64 GB 32GB 32GB 32GB 64GB 16/32/64 GB Memory-RAM 1GB 1/2GB 1GB 1GB 1GB 1GB 2GB Weight 112 g 133 g 185 g 157 g 130 g 135 g 135 g Thickness 7.6 mm 8.6 mm 10.7 mm 9.3 mm 8.9 mm 8.9 mm 9 mm Rear: 8MP Rear: 8MP Rear: 8.7MP Rear: 8MP Rear: 8MP Rear: 8MP Rear: 13MP Camera Front: 1.2MP Front: 1.9MP Front: 1.2MP Front: 1.3MP Front: 1.3MP Front: 1.6MP Front: 1.2MP Carrier Verizon Global launch Sep-12 May-12 4Q12 4Q12 Apr-12 Oct-12 Oct 2012 (Taiwan); 4Q12 (Global) 32GB, unlocked: 16GB: USD600 32 GB/LTE: USD870 USD749 estimate EUR600 32GB:USD666 Pricing 16 GB/LTE: USD600 n.a. NT 20900 n.a. 2 yr contract: USD199- (USD772) 64GB: USD730 Unlocked: USD809 399 +Tablet set: USD300 Source: Companies, Daiwa

9. Who does what?

China smartphones: regional cluster

Beijing - - Policy - Operators - Mobile content, software R&D Korea - Handset design

Sichuan - Shanghai - -Hubfor Western China Japan -4G IP provider and emerging market - Mobile content, -Distributor application R&D -R&D center

Shenzhen - Hsinchu - - Handset design -ICdesign - Assembly, manufactuing - Semiconductor manufacturing

Source: Daiwa

- 24 - China Handset Food Chain 9 November 2012

China smartphones: ecosystem

-Qualcomm -TSMC -MediaTek --MStar -UMC Foundry - Spreadtrum -SMIC IC Design - RDA -- Coolsand - Global Foundries - Hisilicon -Leadcore

-Ilitek ODM - Foxconn International Holdings - Thundersoft Component -JTouch OEM -Compal Comm Software/ -Borqs -Truly Platform/ - Xiaomi (MIUI) Apps - Tecent provider - Qihoo 360 -Skymobi

-WinTech -Gionee -ZTE Emerging Design - Longcheer -K-Touch -Huawei local House - Huaqin Dominant -Lenovo -G Five brands - Cellon local - Coolpad - BBK brands -TCL - Oppo -Xiaomi

Source: Daiwa

- 25 - China Handset Food Chain 9 November 2012

China smartphone supply chain: directory Fabless - smartphone IC Bloomberg code Description Product Qualcomm is the world’s largest fabless semiconductor producer, with Qualcomm QCOM US MSM 7225/7227A/8225/8225Q leading technology in wireless communication. MediaTek is Asia’s largest fabless providing handset IC and the world’s Mediatek 2454 TT MT 6573/6575/6577/6588/6583/6589 largest TV IC provider after acquiring MStar. Mstar is a premier IC design house supplying display-related products MStar 3697 TT MSW 8568/8535 and communication market. Spreadtrum was founded in Shanghai and Silicon Valley as a fabless Spreadtrum SPRD US company providing baseband, RF, and processor solutions for wireless SC 8810/6810/6820 communication. RDA is a IC fabless company that designs RF and mixed-signal wireless RDA RDA US SoC semiconductors, including baseband, Bluetooth, Wi-Fi, and power RDA 8852/8853/8851/8810 amplifiers, etc. HiSilicon was established in 2004 and provides communication solutions. HiSilicon Not listed It was preceded by ASIC Design Center of Huawei Technologies, which K3V2 was founded in 1991. Display Bloomberg code Description Product AUO is the second-largest TFT-LCD panel supplier in Taiwan, and fourth- AUO 2409 TT largest in the world. It accounts for an 8% market share in small-medium TFT-LCD panels size panels and is ranked second-largest worldwide. Truly Semiconductor was founded in 1991, providing flat panel displays Truly Not listed Touch display and both resistive and capacitive touch panels. Founded in 2001, JTouch specializes I then design and manufacture of JTouch 3584 TT Touch display resistive and capacitive touch panel sensors and modules. GiantPlus has expertise in manufacturing small-medium sized TFT-LCD GiantPlus 8105 TT Touch display and STN panels and touch panel modules. Established in 1990, Wintek has become one of the major global touch- Wintek 2384 TT panel suppliers, mainly for mobile devices. It also manufactures related Touch display touch-module components and TFT-LCD displays and modules. Mobile content/Software Bloomberg code Description Product SKYMobi is the largest company in mobile application platform in China. Headquartered in Hangzhou, the company has branched in Beijing, SKYMobi MOBI US Maopao (third-party application store for EDGE smartphones) Shanghai and Shenzhen supporting handset makers in developing mobile content. Sina is a Chinese online media company which operates Internet portal, Sina Sina US social media and web content. Sina Weibo, the microblog/social network, Weibo (microblog, social network) has a mass user base. Qihoo 360 is a China software company which offers Internet and mobile security services. Known for its antivirus software and Internet browser, it Qihoo 360 QHIU US 360 Safeguard(AntiVirus software), 360 Secure Browser (Web browser) recently entered the smartphone market, offering customised content in partnership with local handset makers. Tencent is the largest, most-used portal in China. It is known for Internet Tencent 0700 HK services such as instant messaging software Tencent QQ, online gaming Tencent QQ (instant messenger) and operates online ads. Xiaomi Technology, founded in 2010, is a well-known Internet company which provides a high-end smartphone, the Xiaomi phone, in China. Its Xiaomi Technology Not listed MIUI (Android based UI), MITalk (instant messenger) core services include mobile applications and Android-based user interface customisation firmware. Thundersoft is a solutions provider for the Android system for smartphones, tablets, Internet TVs and STB applications; it is in Thundersoft Not listed Android based UI (for Qualcomm, Spreadtrum IC) partnership with handset makers and IC vendors to improve the user experience. Borqs is a third-party Android software services company which provides Borqs Not listed customisable Android software platform solutions to telecom carriers, Android based UI (OPhone - UI supported by China Mobile) handset makers and chipset vendors. Alibaba is the largest Internet business platform in China, known for its Alibaba Not listed online shopping platform, Taobao Marketplace, and third-party online OS developer, mobile payment app provider payment service. Design house Bloomberg code Description Product Longcheer is the one of the leading handset design solution companies in Longcheer LHL SP Handset design (Huawei, TCL, Lenovo) China. It was listed on the Singapore Exchange main board in 2005. Wintech provides integrated product designs, production and services in WingTech Not listed Handset design (Spreadtrum) handset products covering GSM, CDMA, TD-SCDMA and EVDO. Established in 2005 and based in Shanghai, Huaqin supports the Huaqin Not listed Handset design (Coolpad) development, manufacturing and selling of mobile terminals. Cellon is a wireless design manufacturer with expertise in the Cellon Not listed development of wireless end-devices, module solutions and handset Handset design (Motorola) ODM business. Bellwave is a Korean-based design company offering wireless Bellwave Not listed Handset design communication devices including GSM handsets.

- 26 - China Handset Food Chain 9 November 2012

China smartphone supply chain: directory (cont’d) Power Amplifier (PA) Bloomberg code Description Product RDA is an IC fabless company which designs RF and mixed-signal RDA Microelectronics RDA US wireless SoC semiconductors including baseband, Bluetooth, Wi-Fi, and PA, connectivity IC power amplifiers. RFMD is a US IDM company which designs and manufactures RFMD RFMD US PA semiconductors for handset and wireless communication applications. Avago is a US-based IC design company with a focus on compound III-V Avago AVGO US semiconductors. It is one of the major GaAs PA suppliers for mobile PA device applications. Skyworks is a US-based IDM semiconductor supplier offering industrial, Skyworks SWKS US PA automotive wireless communication and mobile device applications. Winsemi, founded in 1999 in Taiwan, was the first pure GaAs foundry Win Semiconductor 3105 TT provider in the world, mainly supplying PA design houses and IDMs for GaAs PA foundry mobile device applications. AWSC is a pure GaAs foundry service company established in 1998 in AWSC 8086 TT Taiwan. It offers process for PA and switches used in smartphone and GaAs PA foundry wireless communication applications. Memory Bloomberg code Description Product Macronix is a Taiwan-based IDM company specialising in non-volatile Macronix 2337 TT Flash memory memory, providing NOR Flash, NAND Flash and ROM products. Etron was founded in 1991 in Taiwan as a fabless company focusing on Etron 5351 TT SRAM memory ICs. Its product offerings include DRAM, SRAM and SoC. ESMT is a Taiwan-based memory IC design company. It provides DRAM, ESMT 3006 TT Multi Chip Package (MCP), SRAM Mobile DRAM, NOR Flash, MCP, and analogue ICs. LED backlight Bloomberg code Description Product ASM Pacific is the largest semiconductor-assembly equipment maker in the world. The company was founded in 1975 in Hong Kong and has ASM Pacific Technology 522 HK expanded its business from moulding compounds and encapsulation LED equipment vendors moulds into semiconductor-assembly equipment manufacturing, surface mount technology equipment manufacturing and lead-frame stamping. Since its founding in 1996, Epistar has focused on epitaxy wafers and the LED chip process. It is a leading global LED chip supplier, ranking No.1 Epistar 2448 TT LED chips globally for four-element LED (AlGaInP) (red light) capacity and one of the top three for nitride LED (InGaN) (blue and green light) capacity. Lite-On was founded in 1975 as a producer of LEDs in Taiwan. The Lite-on Tech 2301 TT company currently focuses on providing imaging, power supply, LED modules enclosures and LED products. Harvatek is a manufacturer of semiconductor chips and LEDs, based in Harvatek 6168 TT Taiwan. It provides design, manufacturing and testing for OEM makers, LED packaging distributors and design houses for a wide range of applications. Battery Bloomberg code Description Product BYD specialises in IT, autos and new energy. It is the world’s largest BYD 285 HK supplier of rechargeable batteries and a major provider of handset Battery cells casings. Cheng Uei (Foxlink) is a member of the Hon Hai group. It supplies Cheng Uei 2392 TT connectors, cables and power management devices on an OEM/ODM Cables/chargers/connectors basis for global communication device makers. Dynapak was founded in 1998 as a major supplier of notebook battery Dynapak 3211 TT Battery packs packs. The company also offers battery packs for mobile devices. Simplo is the world’s leading provider of notebook batteries, with around 25% of the global cylindrical battery-pack market and 50% of the polymer Simplo 6121 TT Battery packs battery-pack market. Its customers include all the key notebook ODMs and OEMs with the exception of Samsung. Acoustic and handsfree Bloomberg code Description Product AAC Technologies designs and manufactures miniature acoustic AAC Acoustic 2018 HK components, including speakers, receivers, microphones and hands-free Speakers, receivers, microphones headsets, for use in mobile phones and other handheld devices. Goertek is a company headquartered in Shangdong, providing acoustic Goertek 002241 SZ component and audio consumer electronics product design and Speakers, receivers, microphones manufacturing. Merry was founded in 1975 in Taiwan and specialises in electro-acoustic Merry Electronics 2439 TT components including speakers, microphones, portable, handsfree and Speakers, handsfree headsets, microphones Bluetooth headsets. Fujikon is a Hong Kong-based company focusing on producing audio Fujikon 927 HK Speakers, receivers, microphones headphones, speaker systems, microphones and power components.

- 27 - China Handset Food Chain 9 November 2012

China smartphone supply chain: directory (cont’d) Lens module Bloomberg code Description Product Sunny Optical is a China-based provider of optical product development Sunny Optical 2382 HK and manufacturing. Its product lines include glass/plastic lenses, lens Camera lens module modules and optical instruments. Founded in 1981, Asia Optical is a Taiwan-based company specialising Asia Optical 3019 TT Camera lens module in optical lenses, optical instruments and lens modules. Casing Bloomberg code Description Product FIH was formerly the handset division of Hon Hai and was spun off in Foxconn International Holdings 2038 HK 2000. Its key accounts include global handset OEMs, such as Nokia, Casing Motorola and Sony Ericsson. BYD specialises in IT, autos and new energy. It is the world’s largest BYD 285 HK supplier of rechargeable batteries and a major provider of handset Casing casings. Catcher is one of the world’s largest suppliers of magnesium-alloy casings and components for notebook PCs. Catcher’s operations have Catcher 2474 TT Casing been extended to other consumer products, such as handsets, iPods, digital camera, and printers. ODM/OEM Bloomberg code Description Product FIH was formerly the handset division of Hon Hai and was spun off in Foxconn International Holdings 2038 HK 2000. Its key accounts include global handset OEMs, such as Nokia, Handset OEM/ODM (Xiaomi, Motorola) Motorola and Sony Ericsson. Compal Communications is the largest handset ODM globally. Motorola and Nokia are the company's top-2 customers. Compal Electronics is the company’s largest shareholder, with a 47.8% stake. Compal Compal Communications 8078 TT Handset OEM/ODM (Nokia) Communications’ CDMA and 3G design teams merged with those of Compal Electronics in 2007 to expand into the smartphone and handheld device markets. Arima was founded in 1999 as a member of Arima Group, and Arima Communications 8101 TT specialises in the development and manufacture of handset products for Handset OEM/ODM (Motorola) global customers on OEM/ODM basis. Leading smartphone brands Bloomberg code Description Product ZTE is one of the global leading providers of telecommunication ZTE 763 HK equipment and network solutions. It is also the top communication V880, V985 (Quad-core) terminal (including smartphone) provider in the China market. Huawei is a leading global ICT solution provider for telecommunications Huawei Not listed networks and is leveraging this expertise to build up its end-devices Ascend D1 Quad XL (Quad-core) brand. Lenovo is the world’s second-largest PC maker in terms of volume, with Lenovo 992 HK manufacturing bases in China, India and Mexico. The company is one of A60, A750, A800 (Dual-core) the top smartphone vendors in the China market as well. Coolpad is a subsidiary of China Wireless Technologies focusing on Coolpad 2369 HK wireless communication product solutions. Coolpad is one of the top 7260, 8950 (Dual-core) smartphone vendors in the China market. TCL (000100 SZ) is one of the largest consumer electronics companies TCL Communication 2618 HK in China. TCL Communication Technology is a mobile vendor in the S500 China market which owns the TCL and Alcatel brands. Oppo is a China-based consumer electronics company which is Oppo Not listed Find dedicated to high-end smartphone development and production. Xiaomi Technology, founded in 2010, is a well-known Internet company which provides a high-end smartphone, the Xiaomi phone, in China. Its Xiaomi Technology Not listed MiOne (Dual-core), Mi2 (Quad-core) core services include the mobile applications and Android-based user interface customisation firmware. Emerging smartphone brands Bloomberg code Description Product Established in 2002, Gionee is a handset company in China. It is known Gionee Not listed for its presence in the white-brand 2G handset market in China and GN105 emerging markets. Tianyu is a China-based mobile phone company known for its strong Tianyu K-Touch Not listed position in the white-brand 2G handset market. The company owns the W760 brand K-Touch. Founded in 2003, G Five is a China-based handset vendor which targets G-Five Not listed A72 the overseas markets, especially emerging markets. BBK is a consumer electronics company which offers smartphones in the BBK Not listed Vivo China market. Source: Companies, Daiwa

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Information Technology / Taiwan 2454 TT Information Technology / Taiwan 9 November 2012

MediaTek

MediaTek Target (TWD): 420.00 J 383.00 Upside: 20.8% 2454 TT 8 Nov price (TWD): 317.00

Margins: flat in the short term, expanding in the long term 1 Buy (unchanged) 2 Outperform • Aggressive pricing strategy today should leave the company well 3 Hold positioned for the long term 4 Underperform • We forecast its blended ASP to rise by 17% YoY for 2013, on 5 Sell increasing smartphone IC shipments and a better product mix • Reducing earnings forecasts and target price; reiterating Buy call on our top sector pick

How do we justify our view?

2013 (from 44% in 2012E) as a result ■ How we differ of its wide range of dual-/quad-core We are more positive than the AP offerings and aggressive pricing market on the outlook for MediaTek’s strategy. These market-share gains smartphone IC shipments.

will likely be accompanied by a flat Forecast revisions (%) Eric Chen gross margin in the near term. Year to 31 Dec 12E 13E 14E (852) 2773 8702 However, we are positive on the Revenue change 1.5 1.1 1.1 [email protected] longer-term margin outlook, on the Net profit change (8.5) (9.3) (1.8) back of scale economies and rapid EPS change (8.5) (9.3) (1.8) Lynn Cheng product migration. We forecast a Source: Daiwa forecasts (886) 2 8758 6253 gross margin (after acquiring MStar) [email protected] for MediaTek of 44% for 2H13, up Share price performance (%) from 42% for 1H13. (TWD) 340 115 ■ What's new 310 105 We are more positive than the market While we forecast MediaTek’s 280 95 on MediaTek’s operating margin, as handset IC shipments to decline by 250 85 we look for it to embark on an uptrend 5% YoY for 2012, we look for its 220 75 in the long run. We believe the margin revenue to expand by 18% YoY for Nov-11 Feb-12 May-12 Aug-12 Nov-12 Mediatek (LHS) will be supported by a rising blended 2012 and 17% YoY for 2013, on Relative to TWSE Index (RHS) ASP, as we expect smartphone IC blended ASP growth of 16% YoY for shipments to continue to increase. 2012 and 17% YoY for 2013 12-month range 236.50-339.00 (previous forecasts: 14% and 18% Market cap (USDbn) 14.69 ■ What's the impact YoY). We now forecast the company 3m avg daily turnover (USDm) 120.50 to ship 205m smartphone IC units Shares outstanding (m) 1,349 Our research in the market indicates Major shareholder Li Tsui-Hsin (3.6%) that early last week MediaTek cut the for 2013 (previously 200m), up from price of its MT6515/6515M chips by 108m for 2012E (previously 105m). Financial summary (TWD) 5% and its MT6577 chip by 10%. It Year to 31 Dec 12E 13E 14E looks to be prioritising market share ■ What we recommend Revenue (m) 102,492 163,445 185,785 by aggressively cutting prices, which We cut our 2013E EPS by 9% to Operating profit (m) 13,634 30,326 44,475 TWD19.14 to reflect our less Net profit (m) 16,158 30,006 43,266 we believe will help it to maintain its Core EPS (fully-diluted) 13.203 19.137 27.594 market share in EDGE smartphone favourable outlook for MediaTek’s EPS change (%) 7.8 45.0 44.2 ICs at 70% through to year-end, and gross and operating margins for Daiwa vs Cons. EPS (%) (2.1) 0.4 22.5 at 61% in 2013 (RDA Micro- 1H13. In turn our six-month target PER (x) 24.0 16.6 11.5 electronics [Not rated] will likely join price falls to TWD383, on an Dividend yield (%) 2.4 2.8 4.0 unchanged 2013E PER of 20x (past- DPS 7.470 8.767 12.707 the EDGE smartphone IC market PBR (x) 3.4 3.4 2.9 from 2Q13). We forecast MediaTek’s one-year average). MediaTek EV/EBITDA (x) 20.2 9.2 6.1 market share in WCDMA remains our top sector pick; ROE (%) 13.4 21.9 27.1 smartphone ICs to rise to 59% in reaffirming Buy (1) rating. Source: FactSet, Daiwa forecasts

See important disclosures, including any required research certifications, beginning on page 38 China Handset Food Chain 9 November 2012

1 Buy (unchanged) How do we justify our view? 2 Outperform

3 Hold Growth outlook

4 Underperform Valuation 5 Sell Earnings revisions

Growth outlook MediaTek: blended ASP We believe MediaTek’s rising ASP will underpin the (USD) 2011 2012E 2013E 2014E company’s long-term revenue growth and profit 2G handset IC 3.2 2.1 1.7 1.5 YoY % -29% -36% -17% -12% growth – we forecast its 2012 revenue to rise by 18% 3G + smartphone handset IC 8.9 7.6 7.4 6.7 YoY even as its handset IC shipments decline by 5% YoY % 18% -15% -2% -10% YoY. We now forecast MediaTek’s 2013 smartphone IC Blended ASP 3.6 4.2 4.9 5.2 shipments to be 205m units (200m previously), up from YoY % -31% 16% 17% 6% 108m units in 2012 (105m previously), while we expect Revenue contribution 2G 93% 61% 44% 28% its handset IC blended ASPs come in at USD4.2 for 2012 3G 7% 39% 56% 72% (up 16% YoY) and USD4.9 for 2013 (up 17% YoY), Source: Company, Daiwa forecasts rebounding from a 31% YoY decline in 2011. The upward trend in the blended ASP should support a long- term improvement in the company’s operating margin.

Valuation MediaTek: 12-month forward PER

MediaTek is trading at a PER of 16.6x on our revised (TWD) 2013E EPS, vs. a 5.5-34.3x PER range to its 12-month 750 forward EPS over the past 5 years. Our target price is based on an unchanged 20x PER (corresponding to the 600 30x stock’s average PER over the past year) on our 2013E 450 EPS. Among the risks to our Buy (1) rating are lower- 20x than-expected smartphone-IC shipments to China. 300 15x 10x 150 5x

0 Jan-05 Jun-06 Nov-07 Apr-09 Sep-10 Feb-12

Source: Company, Daiwa forecasts

Earnings revisions MediaTek: share-price performance and 2013E consensus EPS

MediaTek’s aggressive pricing strategy to gain market (TWD) (TWD) share implies a flat outlook for its gross margin in the 700 50 near term, in our view. However, we believe the market 45 600 will revise up its earnings forecasts as we look for an 40 500 improving gross and operating profit margin in the long 35 run, backed by the upward trend in MediaTek’s blended 400 30 25 ASP, better scale economies and rapid product 300 migration. The company’s low-cost TD-SCDMA 20 200 smartphone SoC and EDGE smartphone SoC are 15 scheduled to be launched in 2Q13. 100 10 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12

MediaTek share price (LHS) Bloomberg 2013 consensus EPS (RHS) Source: Bloomberg

- 30 - China Handset Food Chain 9 November 2012

Financial summary

Key assumptions Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Average selling price (USD) 6.9 6.6 6.5 5.0 4.0 4.5 5.4 5.4 Change in ASP (%) 12 (4) (2) (22) (21) 12 21 0 WCDMA smartphone IC market n.a. n.a. n.a. n.a. 18.8 43.6 58.8 59.3 Rev percentage from smartphone n.a. n.a. n.a. n.a. 7.3 38.8 56.4 71.5 +3G handsets (%)

Profit and loss (TWDm) Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Handset IC Revenues 44,737 60,351 82,134 80,389 57,662 71,440 94,467 107,379 TV & DVD IC Revenues 21,707 19,499 18,655 17,534 17,954 17,567 53,200 60,472 Other Revenue 14,227 10,552 14,723 15,599 11,242 13,485 15,778 17,934 Total Revenue 80,672 90,402 115,512 113,522 86,857 102,492 163,445 185,785 Other income 00000000 COGS (35,341) (41,819) (47,695) (52,614) (47,513) (59,753) (93,053) (97,202) SG&A (4,288) (5,000) (7,245) (6,519) (5,816) (6,107) (9,776) (10,697) Other op.expenses (9,154) (21,275) (24,185) (23,311) (21,184) (22,997) (30,290) (33,411) Operating profit 31,889 22,308 36,387 31,079 12,345 13,634 30,326 44,475 Net-interest inc./(exp.) 1,490 1,290 494 586 1,007 900 900 700 Assoc/forex/extraord./others 1,473 (2,500) 550 623 852 2,345 730 1,000 Pre-tax profit 34,852 21,098 37,431 32,288 14,203 16,880 31,956 46,175 Tax (1,462) (1,924) (725) (1,351) (587) (722) (1,949) (2,909) Min. int./pref. div./others 203 16 0 25 7 0 0 0 Net profit (reported) 33,593 19,190 36,706 30,961 13,623 16,158 30,006 43,266 Net profit (adjusted) 33,593 19,190 36,706 30,961 13,623 16,158 30,006 43,266 EPS (reported)(TWD) 32.042 17.886 33.624 28.293 12.246 13.203 19.137 27.594 EPS (adjusted)(TWD) 32.042 17.886 33.624 28.293 12.246 13.203 19.137 27.594 EPS (adjusted fully-diluted)(TWD) 32.042 17.886 33.624 28.293 12.246 13.203 19.137 27.594 DPS (TWD) 10.999 14.637 11.010 20.720 16.414 7.470 8.767 12.707 EBIT 31,889 22,308 36,387 31,079 12,345 13,634 30,326 44,475 EBITDA 33,995 25,603 39,632 34,056 15,074 16,500 34,625 48,989

Cash flow (TWDm) Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Profit before tax 34,852 21,098 37,431 32,288 14,203 16,880 31,956 46,175 Depreciation and amortisation 2,106 3,295 3,245 2,978 2,729 2,866 4,299 4,514 Tax paid (1,462) (1,924) (725) (1,351) (587) (722) (1,949) (2,909) Change in working capital (7,020) 4,016 2,423 (4,487) 379 (1,425) (8,728) (2,226) Other operational CF items (2,235) 9,113 12,876 (20) (16) 3,694 6,973 425 Cash flow from operations 26,241 35,599 55,250 29,408 16,707 21,294 32,550 45,979 Capex (1,696) (1,705) (1,574) (2,122) (2,585) (2,843) (3,127) (3,440) Net (acquisitions)/disposals 2,269 (1,394) 4,620 (3,035) 1,886 0 0 0 Other investing CF items (8,813) (7,385) (1,277) (1,117) 1,714 0 0 0 Cash flow from investing (8,240) (10,483) 1,769 (6,274) 1,016 (2,843) (3,127) (3,440) Change in debt 41 (40) 0 0 4,255 0 0 0 Net share issues/(repurchases) 0 000004,2030 Dividends paid (14,415) (19,630) (15,024) (28,343) (21,999) (11,015) (16,561) (24,005) Other financing CF items 35 (3,213) 125 270 (2,172) 0 (529) 0 Cash flow from financing (14,339) (22,883) (14,899) (28,073) (19,917) (11,015) (12,887) (24,005) Forex effect/others 00000000 Change in cash 3,662 2,233 42,120 (4,940) (2,194) 7,436 16,536 18,534 Free cash flow 24,545 33,894 53,676 27,285 14,123 18,450 29,423 42,539 Source: FactSet, Daiwa forecasts

- 31 - China Handset Food Chain 9 November 2012

Financial summary continued …

Balance sheet (TWDm) As at 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Cash & short-term investment 60,510 57,594 96,847 92,073 91,032 98,468 115,079 133,613 Inventory 10,540 5,547 8,173 9,388 9,392 11,812 18,219 19,031 Accounts receivable 7,082 5,429 7,267 7,164 7,384 8,713 15,498 17,616 Other current assets 2,030 2,656 1,751 3,970 4,234 4,996 6,880 7,820 Total current assets 80,162 71,226 114,038 112,595 112,042 123,988 155,676 178,081 Fixed assets 5,922 6,504 6,889 7,808 9,810 11,760 15,863 17,496 Goodwill & intangibles 5,136 12,375 11,005 9,897 16,472 16,530 17,295 17,451 Other non-current assets 7,647 8,970 6,662 7,734 9,417 11,362 11,827 12,027 Total assets 98,867 99,074 138,594 138,035 147,741 163,640 200,660 225,054 Short-term debt 32 1 0 0 4,107 4,107 4,194 4,194 Accounts payable 7,537 4,907 11,794 8,419 9,022 11,346 15,810 16,515 Other current liabilities 5,152 12,324 17,660 17,367 17,299 21,755 30,612 31,977 Total current liabilities 12,721 17,232 29,454 25,786 30,428 37,208 50,616 52,686 Long-term debt 9 0 0 0 148 148 929 929 Other non-current liabilities 67 83 248 535 837 837 837 837 Total liabilities 12,797 17,316 29,702 26,321 31,413 38,193 52,382 54,452 Share capital 10,409 10,732 10,901 10,999 11,475 11,475 15,680 15,680 Reserves/R.E./others 75,529 70,879 97,970 100,714 104,803 113,972 132,599 154,923 Shareholders' equity 85,937 81,611 108,871 111,713 116,278 125,447 148,279 170,602 Minority interests 132 148 21 0 50 0 0 0 Total equity & liabilities 98,867 99,074 138,594 138,035 147,741 163,640 200,660 225,054 EV 367,413 370,305 330,924 335,678 341,023 333,537 317,794 299,260 Net debt/(cash) (60,469) (57,593) (96,847) (92,073) (86,777) (94,213) (109,956) (128,490) BVPS (TWD) 79.217 75.229 98.993 101.560 101.330 92.967 94.568 108.806

Key ratios (%) Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Sales (YoY) 43.0 12.1 27.8 (1.7) (23.5) 18.0 59.5 13.7 EBITDA (YoY) 36.7 (24.7) 54.8 (14.1) (55.7) 9.5 109.8 41.5 Operating profit (YoY) 37.1 (30.0) 63.1 (14.6) (60.3) 10.4 122.4 46.7 Net profit (YoY) 48.8 (42.9) 91.3 (15.7) (56.0) 18.6 85.7 44.2 Core EPS (fully-diluted) (YoY) 45.7 (44.2) 88.0 (15.9) (56.7) 7.8 45.0 44.2 Gross-profit margin 56.2 53.7 58.7 53.7 45.3 41.7 43.1 47.7 EBITDA margin 42.1 28.3 34.3 30.0 17.4 16.1 21.2 26.4 Operating-profit margin 39.5 24.7 31.5 27.4 14.2 13.3 18.6 23.9 ROAE 43.8 22.9 38.5 28.1 12.0 13.4 21.9 27.1 ROAA 38.3 19.4 30.9 22.4 9.5 10.4 16.5 20.3 ROCE 41.5 26.6 38.2 28.2 10.6 10.9 21.4 27.0 ROIC 151.8 81.5 197.1 188.0 48.1 42.9 81.9 103.6 Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Effective tax rate 4.2 9.1 1.9 4.2 4.1 4.3 6.1 6.3 Accounts receivable (days) 24.7 25.3 20.1 23.2 30.6 28.7 27.0 32.5 Current ratio (x) 6.3 4.1 3.9 4.4 3.7 3.3 3.1 3.4 Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Net dividend payout 34.3 81.8 32.7 73.2 134.0 56.6 45.8 46.1 Source: FactSet, Daiwa forecasts

Company profile MediaTek is the fourth-largest IC-design house globally and Asia’s largest. The company is a leader in PC optical-disk-driver (ODD) ICs, DVD-player ICs, and DVD-recorder lCs. It is also one of the major providers of handset ICs and LCD-TV ICs globally.

- 32 -

Information Technology / United States RDA US Information Technology / United States 9 November 2012

RDA Microelectronics

RDA Microelectronics Target (USD): n.a. Up/downside: - RDA US 8 Nov price (USD): 10.99

Leading handset IC provider Not Rated • One of the market's major providers of single-chip integrated circuits • 8851 chips appear to put the company ahead of its rivals in the integration stakes • RDA’s EDGE smartphone IC, scheduled to launch in 2Q13, is central to the company’s outlook for 2013

MediaTek (2454 TT, TWD317, Bluetooth, and an FM transceiver). Buy[1]) currently are the only two At a conference on 6 November, the companies to provide single-chip company’s management said that SoC (system-on-a-chip) ICs with the market share of its 3-in-1 memory (PSRAM) built-in. connectivity IC was 10% for Eric Chen September, and expected it to (852) 2773 8702 Launched in 2Q12, RDA’s 55nm increase to more than 30% for 2013. [email protected] single-chip baseband (RDA8851) with PSRAM/Bluetooth/FM built in, In October this year, RDA paid a Lynn Cheng appears to be the most cost- cash dividend of USD0.20/share, or (886) 2 8758 6253 competitive solution on the market USD1.20/ADS share, for a total [email protected] currently. It appears that RDA has a amount of US55.9m. This was one of similar integration schedule to highest cash dividends among the ■ Background MediaTek, if not a couple of months semiconductor makers in the region. Founded in 2004, RDA ahead of MediaTek’s. Microelectronics (RDA) is a fabless ■ Valuation company that designs power At the same time, its integration Based on the Bloomberg-consensus amplifier (PA), radio frequency (RF) plans appear to be more advanced 2013 EPS forecast of USD1.47, the and mixed-signal connectivity ICs. than those of Spreadtrum stock is trading currently at a PER Communications (SPRD US, multiple of 7.5x. RDA acquired Coolsand (Not listed), USD21.26, Underperform[4]). a private Chinese company Management guides for its providing baseband solutions, on 26 baseband-IC revenue to rise by 30% March 2012 for a consideration of YoY for 2013, indicating total USD46m (USD26m in the form of a baseband-IC shipments of 150m for share swap and USD20m in cash). 2013. Share price performance (USD) (%) At its quarterly conference call, RDA is scheduled to ship its first 14 150 13 133 management said the company’s EDGE smartphone IC in 2Q13. This could be critical to the company’s 11 115 baseband-IC shipments amounted 10 98 ambitions of establishing itself as an to about 10m units/month in 3Q12, 8 80 indicating total baseband-IC IC provider to China’s smartphone Nov-11 Feb-12 May-12 Aug-12 shipments of 100m for 2012. players in 2013. RDA Micro (LHS) Relative to S&P 500 Index (RHS)

Moreover, RDA is the only other IC ■ Highlights 12-month range 8.74-13.85 RDA’s positive outlook on handset maker in Greater China besides Market cap (USDbn) 0.47 IC integration is underlined by its MediaTek to offer in the market an 3m avg daily turnover (USDm) 0.18 acquisition of Coolsand. RDA and IC with 3-in-1 connectivity (Wi-Fi, Source: FactSet, Daiwa

See important disclosures, including any required research certifications, beginning on page 38 China Handset Food Chain 9 November 2012

- 34 - China Handset Food Chain 9 November 2012

Daiwa’s Asia Pacific Research Directory

HONG KONG SOUTH KOREA Nagahisa MIYABE (852) 2848 4971 [email protected] Chang H LEE (82) 2 787 9177 [email protected] Regional Research Head Head of Korea Research; Strategy; Banking/Finance John HETHERINGTON (852) 2773 8787 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Regional Head of Product Management Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Pranab Kumar SARMAH (852) 2848 4441 [email protected] Shipbuilding; Steel Regional Head of Research Promotion Anderson CHA (82) 2 787 9185 [email protected] Mingchun SUN (852) 2773 8751 [email protected] Banking/Finance Head of China Research; Chief Economist (Regional) Mike OH (82) 2 787 9179 [email protected] Dave DAI (852) 2848 4068 [email protected] Capital Goods (Construction and Machinery) Deputy Head of Hong Kong and China Research; Pan-Asia/Regional Head of Clean Sang Hee PARK (82) 2 787 9165 [email protected] Energy and Utilities; Utilities; Power Equipment; Renewables (Hong Kong, China) Consumer/Retail Kevin LAI (852) 2848 4926 [email protected] Jae H LEE (82) 2 787 9173 [email protected] Deputy Head of Regional Economics; Macro Economics (Regional) IT/Electronics (Tech Hardware and Memory Chips) Chi SUN (852) 2848 4427 [email protected] Thomas Y KWON (82) 2 787 9181 [email protected] Macro Economics (China) Pan-Asia Head of Internet & Telecommunications; Software (Korea) – Internet/On-line Game Jonas KAN (852) 2848 4439 [email protected] Shannen PARK (82) 2 787 9184 [email protected] Head of Hong Kong Research; Head of Hong Kong and China Property; Regional Custom Products Group Property Coordinator; Property Developers (Hong Kong) Jeff CHUNG (852) 2773 8783 [email protected] TAIWAN Automobiles and Components (China) Mark CHANG (886) 2 8758 6245 [email protected] Grace WU (852) 2532 4383 [email protected] Head of Research; Regional Head of Small/Medium Cap; Small/Medium Cap (Regional) Head of Greater China FIG; Banking (Hong Kong, China) Birdy LU (886) 2 8758 6248 [email protected] Jerry YANG (852) 2773 8842 [email protected] IT/Technology Hardware (Handsets and Components) Banking/Diversified Financials (Taiwan) Christine WANG (886) 2 8758 6249 [email protected] Leon QI (852) 2532 4381 [email protected] IT/Technology Hardware (PC Hardware) Banking (Hong Kong, China) Chris LIN (886) 2 8758 6251 [email protected] Joseph HO (852) 2848 4443 [email protected] IT/Technology Hardware (Panels) Head of Industrials and Machineries (Hong Kong, China); Capital Goods –Electronics Equipments and Machinery (Hong Kong, China) Bing ZHOU (852) 2773 8782 [email protected] INDIA Consumer/Retail (Hong Kong, China) Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Hongxia ZHU (852) 2848 4460 [email protected] Head of Research; Strategy; Banking/Finance Consumer, Pharmaceuticals and Healthcare (China) Navin MATTA (91) 22 6622 8411 [email protected] Eric CHEN (852) 2773 8702 [email protected] Automobiles and Components Pan-Asia/Regional Head of IT/Electronics; Semiconductor/IC Design (Regional) Saurabh MEHTA (91) 22 6622 1009 [email protected] Felix LAM (852) 2532 4341 [email protected] Capital Goods; Utilities Head of Materials (Hong Kong, China); Cement and Building Materials (China, Mihir SHAH (91) 22 6622 1020 [email protected] Taiwan); Property (China) FMCG/Consumer John CHOI (852) 2773 8730 [email protected] Deepak PODDAR (91) 22 6622 1016 [email protected] Head of Multi-Industries (Hong Kong, China); Small/Mid Cap (Regional); Materials Internet (China) Nirmal RAGHAVAN (91) 22 6622 1018 [email protected] Kelvin LAU (852) 2848 4467 [email protected] Oil and Gas; Utilities Head of Transportation (Hong Kong, China); Hong Kong and China Research

Coordinator; Transportation (Regional) SINGAPORE Jibo MA (852) 2848 4489 [email protected] Head of Custom Products Group; Custom Products Group Adrian LOH (65) 6499 6548 [email protected] Head of Singapore Research, Regional Head of Oil and Gas; Oil and Gas (ASEAN and Thomas HO (852) 2773 8716 [email protected] China); Capital Goods (Singapore) Custom Products Group Srikanth VADLAMANI (65) 6499 6570 [email protected]

Banking (ASEAN) PHILIPPINES David LUM (65) 6329 2102 [email protected] Rommel RODRIGO (63) 2 813 7344 [email protected] Property and REITs ext 302 Ramakrishna MARUVADA (65) 6499 6543 [email protected] Head of Philippines Research; Strategy; Capital Goods; Materials Head of ASEAN & India Telecommunications; Telecommunications (ASEAN & India) Danielo PICACHE (63) 2 813 7344 [email protected]

ext 293

Property; Banking; Transportation – Port

- 35 - China Handset Food Chain 9 November 2012

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- 36 - China Handset Food Chain 9 November 2012

Share price and Daiwa recommendation trend

Samsung Electronics: share price and Daiwa recommendation trend

Date Target price Rating Date Target price Rating Date Target price Rating 07/04/10 1,040,000 Outperform 07/07/11 1,100,000 Outperform 21/03/12 1,600,000 Buy 30/04/10 1,080,000 Outperform 27/09/11 1,000,000 Outperform 10/04/12 1,700,000 Buy 06/10/10 970,000 Outperform 28/10/11 1,100,000 Outperform 27/04/12 1,800,000 Buy 22/12/10 1,100,000 Outperform 06/12/11 1,200,000 Outperform 28/01/11 1,200,000 Outperform 27/01/12 1,300,000 Outperform

1,800,000 1,800,000 1,700,000 1,600,000 1,600,000

1,400,000 1,300,000 1,200,000 1,200,000 1,200,000 1,080,000 1,100,000 1,100,000 1,100,000 1,040,000 1,000,000 970,000 970,000 1,000,000 920,000 800,000

600,000 Jul-10 Jul-11 Jul-12 Apr-10 Apr-11 Apr-12 Oct-10 Oct-11 Oct-12 Jan-10 Jan-11 Jan-12 Jun-10 Jun-11 Jun-12 Mar-10 Mar-11 Mar-12 Feb-10 Feb-11 Feb-12 Nov-09 Dec-09 Aug-10 Sep-10 Nov-10 Dec-10 Aug-11 Sep-11 Nov-11 Dec-11 Aug-12 Sep-12 May-10 May-11 May-12

Target price (KRW) Closing Price (KRW)

Source: Daiwa

- 37 - China Handset Food Chain 9 November 2012

Disclaimer

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The following explains the rating system in the report as compared to KOSPI, based on the beliefs of the author(s) of this report.

"1": the security could outperform the KOSPI by more than 15% over the next six months. "2": the security is expected to outperform the KOSPI by 5-15% over the next six months. "3": the security is expected to perform within 5% of the KOSPI (better or worse) over the next six months. "4": the security is expected to underperform the KOSPI by 5-15% over the next six months. "5": the security could underperform the KOSPI by more than 15% over the next six months.

“Positive” means that the analyst expects the sector to outperform the KOSPI over the next six months. “Neutral” means that the analyst expects the sector to be in-line with the KOSPI over the next six months “Negative” means that the analyst expects the sector to underperform the KOSPI over the next six months

Additional information may be available upon request.

- 38 - China Handset Food Chain 9 November 2012

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This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FSA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

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Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. - 39 - China Handset Food Chain 9 November 2012

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Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.

Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

The following explains the rating system in the report as compared to relevant local indices, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next six months. "2": the security is expected to outperform the local index by 5-15% over the next six months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next six months. "4": the security is expected to underperform the local index by 5-15% over the next six months. "5": the security could underperform the local index by more than 15% over the next six months.

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