ASIA EX-JAPAN IT HARDWARE Initiating Coverage: Ultrabooks And
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EQUITY RESEARCH 6 October 2011 INITIATING COVERAGE ASIA EX-JAPAN IT HARDWARE Asia ex-Japan IT Hardware Initiating coverage: Ultrabooks and tablets 2-NEUTRAL Unchanged creating opportunities for some suppliers For a full list of our ratings, price targets and We initiate on three IT hardware suppliers – Foxconn Tech (FTC), Shin Zu Shing (SZS) earnings in this report, please see table on page 2 and Ju Teng – all No. 1 in their sub-segments of notebook casings and hinges: We expect FTC (2354 TT, 1-OW, PT NT$120) to benefit from a 3-year upcycle for metal Asia ex-Japan IT Hardware casings and SZS (3376 TT, 2-EW, PT NT$58) to profit on the likely adoption of hollow- Allen Chang type hinges in ultra-thin NBs. However, we believe Ju Teng (3336 HK, 3-UW, PT HK$1.20) +8862 663 84695 will suffer near term from the cannibalization of NBs with plastic casings until it can fully [email protected] offer metal casings. We maintain our 2-Neutral view on the Asia ex-Japan IT Hardware BCSTW, Taiwan sector with FTC, Simplo, Cheng Uei, Acer and Lenovo our top picks. Kirk Yang Tablets/ultrabooks appear the way forward: Most importantly, we view FTC, SZS and Ju +852 290 34635 Teng as important winners and losers – along with polymer battery makers Simplo [email protected] (1-OW, PT NT$290) and Dynapack (2-EW, NT$130) – in the current migration from Barclays Bank, Hong Kong conventional NBs with plastic casings to tablet/ultrabooks with metal casings. Sleek and stylish but with an acceptable ASP of US$699: The ultrabooks are poised for launch in 2H11 and 2012 – priced similarly to NBs, yet even more stylish and more affordable than Apple’s MacBook Air/Pro – will likely not create a new NB segment, but rather help to sustain and improve the market for conventional NBs by enhancing the product’s differentiation from tablets and smartphones. For our detailed proprietary analysis of the cost breakdown and margins for ultrabooks with various configurations see p9, Fig 5). Metal casings are becoming the norm for three reasons: 1) durability – thinner products require a stronger shell; 2) style – consumer electronics are now viewed more as accessories rather than simply portable computing devices; 3) eco-friendliness – metal casings are recyclable and their production low polluting. FTC should remain the leader in metal casings in 2012: In terms of capacity and appealing prices, FTC should remain the preferred metal casing provider for tablets/ultrabooks in the near term. Moreover, we believe FTC still has ample opportunity to expand its sales further given its first-mover advantage, position as the sole supplier for iPads/iPhones and the robust market for ultrabooks that we forecast. SZS’s thin and higher-end (hollow type) hinges for the MacBook Air/Pro and possibly for ultrabooks should ease any impact from tablet cannibalization of NBs. Ju Teng is working to catch up in the metal casings, but will likely not be competitive until 2013. Price PT Pot. up/ EPS CAGR P/E (x) Company Ticker Rating (NT/HK$) (NT/HK$) down to PT 2010-13E 2011E 2012E Foxconn Tech 2354.TT 1-OW 96.8 120 24% 20% 13.6 10.7 Shin Zu Shing 3376.TT 2-EW 60.4 58 -4% 1% 16.0 12.8 Ju Teng 3336.HK 3-UW 1.40 1.2 -14% -12% 6.0 5.9 Source: Company data, Barclays Capital estimates Barclays Capital does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by research analysts based outside the US who are not registered/qualified as research analysts with FINRA. PLEASE SEE ANALYST(S) CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 65. Barclays Capital | Asia ex-Japan IT Hardware Summary of our Ratings, Price Targets and Earnings Estimates in this Report Company Rating Price Price Target EPS FY1 (E) EPS FY2 (E) Old New 04-Oct-11 Old New %Chg Old New %Chg Old New %Chg Asia ex-Japan IT Hardware 2-Neu 2-Neu Acer Inc. (2353 TT / 2353.TW) 1-OW 1-OW 34.00 45.00 45.00 - -2.01 -2.01 - 4.47 4.47 - Asustek Computer Inc. (2357 TT / 2357.TW) 1-OW 1-OW 203.00 290.00 290.00 - 20.93 20.93 - 24.16 24.16 - Cheng Uei Precision Industry Co., Ltd. (2392 TT / 2392.TW) 1-OW 1-OW 65.50 100.00 100.00 - 5.91 5.91 - 9.07 9.07 - Chicony Electronics (2385 TT / 2385.TW) 2-EW 2-EW 50.00 52.00 52.00 - 7.40 7.40 - 5.84 5.84 - Compal Electronics Inc. (2324 TT / 2324.TW) 3-UW 3-UW 26.60 26.00 26.00 - 3.13 3.13 - 3.72 3.72 - Darfon Electronics (8163 TT / 8163.TW) 1-OW 1-OW 18.75 28.00 28.00 - 0.46 0.46 - 1.31 1.31 - Digital China Holdings Ltd. (861 HK / 0861.HK) 1-OW 1-OW 8.14 18.30 18.30 - 1.14 1.14 - 1.41 1.41 - Dynapack International Technology Corp. (3211 TT / 3211.TW) 2-EW 2-EW 102.00 130.00 130.00 - 9.84 9.84 - 11.84 11.84 - Foxconn Technology Co., Ltd. (2354 TT / 2354.TW) N/A 1-OW 104.00 N/A 120.00 - N/A 7.26 - N/A 9.23 - Hon Hai Precision Industry Co., Ltd. (2317 TT / 2317.TW) 1-OW 1-OW 68.90 100.00 100.00 - 7.64 7.64 - 9.98 9.98 - Inventec Inc. (2356 TT / 2356.TW) 3-UW 3-UW 11.50 10.00 10.00 - 1.46 1.46 - 1.43 1.43 - Ju Teng International Co., Ltd. (3336 HK / 3336.HK) N/A 3-UW 1.40 N/A 1.20 - N/A 0.20 - N/A 0.20 - Lenovo Group Ltd. (992 HK / 0992.HK) 1-OW 1-OW 4.66 6.50 6.50 - 0.04 0.04 - 0.05 0.05 - Pegatron Corp. (4938 TT / 4938.TW) 2-EW 2-EW 28.35 27.00 27.00 - 0.03 0.03 - 3.39 3.39 - Quanta Computer Inc. (2382 TT / 2382.TW) 3-UW 3-UW 58.80 49.00 49.00 - 5.71 5.71 - 6.16 6.16 - Shin Zu Shing Co., Ltd. (3376 TT / 3376.TW) N/A 2-EW 61.00 N/A 58.00 - N/A 3.87 - N/A 4.85 - Simplo Technology Co., Ltd. (6121 TT / 6121.TW) 1-OW 1-OW 184.00 290.00 290.00 - 14.12 14.12 - 20.71 20.71 - Skyworth Digital Holdings Ltd. (751 HK / 0751.HK) 1-OW 1-OW 2.36 6.10 6.10 - 0.61 0.61 - 0.71 0.71 - Sunrex Technology (2387 TT / 2387.TW) 3-UW 3-UW 20.30 19.00 19.00 - 1.64 1.64 - 2.06 2.06 - Synnex Technology International Corp. (2347 TT / 2347.TW) 2-EW 2-EW 67.20 83.00 83.00 - 4.53 4.53 - 5.26 5.26 - TPV Technology Ltd. (903 HK / 0903.HK) 2-EW 2-EW 2.20 3.60 3.60 - 0.06 0.06 - 0.08 0.08 - Wistron Corporation (3231 TT / 3231.TW) 2-EW 2-EW 34.50 40.00 40.00 - 5.04 5.04 - 5.01 5.01 - Source: Barclays Capital Share prices and target prices are shown in the primary listing currency and EPS estimates are shown in the reporting currency. FY1(E): Current fiscal year estimates by Barclays Capital. FY2(E): Next fiscal year estimates by Barclays Capital. Stock Rating: 1-OW: 1-Overweight 2-EW: 2-Equal Weight 3-UW: 3-Underweight RS: RS-Rating Suspended Sector View: 1-Pos: 1-Positive 2-Neu: 2-Neutral 3-Neg: 3-Negative 6 October 2011 2 Barclays Capital | Asia ex-Japan IT Hardware INVESTMENT SUMMARY Until this year, metal casings had We initiate coverage of three IT hardware suppliers – Foxconn Tech (1-OW, PT NT$120), been a niche segment within the Shin Zu Shing (2-EW, PT NT$58) and Ju Teng (3-UW, PT HK$1.20). All three companies are supply chain, requiring both important players in the notebook supply chain, each ranked No. 1 in their respective sub- sufficient capacity and a high segments. However, we also see them as key players in the current migration from yield rates for suppliers to be conventional NBs with plastic casings to tablet/ultrabooks with metal casings. Other key profitable; however, we see 2011 companies with exposure to the strong growth expected in tablets/ultrabooks are the as the beginning of a 3-year polymer battery makers Simplo(1-OW, PT NT$290) and Dynapack (2-EW, NT$130). upcycle for metal casings as they We maintain our 2-Neutral stance on the Asia ex-Japan IT Hardware sector. Our top 1-OW become the mainstream picks among the 22 stocks we cover are FTC (2354.TT), Simplo (6121.TT), Cheng Uei packaging material (2392.TT), Acer (2353.TT) and Lenovo (0992.HK) for EPS growth in 2012E. Thin-and-light concept to drive product evolution We expect FTC to benefit most We reiterate our view that the thin-and-light concept will drive product design trends – such from the expected upsurge in as that for tablets (the iPad in particular), ultra-thin type NBs (MacBook Air/Pro), ultrabooks metal casings, as it should (for most of the other top-tier brand PC makers) and mid- to high-end smartphones remain the leader in the segment (iPhone in particular).