27 January 2017 Asia Pacific/Taiwan Equity Research Semiconductor Devices

MediaTek Inc. (2454.TW / 2454 TT) Rating NEUTRAL Price (26-Jan-17, NT$) 213.50 DECREASE TARGET PRICE Target price (NT$) (from 225.00) 220.00 Upside/downside (%) 3.0 A further dip in sales/margins; cost-down

Mkt cap (NT$/US$ mn) 337,781 / 10,813 Enterprise value (NT$ mn) 211,382 pushes out to late 3Q17 Number of shares (mn) 1,582 Free float (%) 89.1 ■ 4Q16 sales and profitability at the low end. Mediatek 4Q16 sales were 52-wk price range (NT$) 260-192 NT68.8 bn, down 12% QoQ, vs -7% to -15% QoQ guidance, with 140 mn ADTO-6M (US$ mn) 39.7 Target price is for 12 months. shipments (-5% to -10%) due to a slowdown in India and modest

Research Analysts share loss on high-end Helio. Margins also dipped slightly with GMs at 34.5% Randy Abrams, CFA vs the 35% midpoint, taking OpMs to an all-time low of 5.8%. An NT$450 mn 886 2 2715 6366 FX gain (NT$0.30) kept EPS at NT$3.23, between CS/street estimates of [email protected] NT$2.83/NT$3.90. Haas Liu ■ 1Q17 below recent seasonality. Sales were guided down 14-22% QoQ, 886 2 2715 6365 [email protected] below the recent 10-15% normal decline due to moderation in and a slowdown in some export markets. /tablets are guided down about 20% to 105-115 mn and ASPs flat to down 5% as the Helio mix falls from 15-20% in 3Q16 to 10% by 1Q17 from shift to EM and a slight share loss on Helio due to the high-end modem lag. GMs were guided to a 50 bp lower midpoint of 34%, implying an OpM range of 1-8% vs the street’s 7%. ■ Growth outlook mixed; margin improvement shifts out. 2017 growth requires a strong reacceleration from a low 1Q base. Smartphones are decelerating from a strong 2016, and non-smartphone is balanced between double-digit growth areas (20-25% of the mix) from set-top, IoT, Wi-Fi, custom ASIC, and analog partially offset by a 5-10% decline in mature DVD/PC optical/feature phones (25% of the mix). GM recovery also now looks a bit later, with the third-gen modem (double-digit lower cost) launching late in 3Q17 near the CS ATC timing (9/6-9/8), pushing meaningful benefit at least to 4Q17. ■ Staying conservative with limited near-term catalysts. We lower our 2017E EPS from NT$16.00 to NT$14.50 and TP to NT$220 (from NT$225), based on 15x 2017E EPS (11x cash adjusted). We maintain our conservative view with sales decelerating and still-declining margins holding back meaningful improvement for a few more quarters. The company's guidance implies a meaningful rebound in 2Q17, raising the risk of further estimate cut. Valuation support should protect downside with a 5% cash yield and 35% of the market cap in cash and investments + 21% Goodix stake.

Share price performance Financial and valuation metrics

Year 12/14A 12/15A 12/16E 12/17E Revenue (NT$ mn) 213,062.9 213,255.2 275,511.3 289,702.0 EBITDA (NT$ mn) 50,007.1 31,041.7 29,909.4 29,809.2 EBIT (NT$ mn) 47,241.3 25,908.0 23,075.4 22,883.3 Net profit (NT$ mn) 45,356.5 25,937.0 23,462.5 22,672.8 EPS (CS adj.) (NT$) 29.67 16.74 15.01 14.50 Change from previous EPS (%) n.a. n.a. 3.5 (9.4) Consensus EPS (NT$) n.a. n.a. 15.28 17.52 EPS growth (%) 47.4 (43.6) (10.4) (3.4) The price relative chart measures performance against the P/E (x) 7.2 12.8 14.2 14.7 TAIWAN SE WEIGHTED INDEX which closed at 9,447.95 Dividend yield (%) 7.0 10.3 5.2 4.6 on 26/01/17. On 26/01/17 the spot exchange rate was EV/EBITDA (x) 3.3 6.3 7.1 6.3 NT$31.24/US$1 P/B (x) 1.32 1.38 1.42 1.30

Performance 1M 3M 12M ROE (%) 20.5 10.6 9.9 9.2 Absolute (%) -2.1 -10.1 1.2 Net debt/equity (%) Net Cash Net Cash Net Cash Net Cash

Relative (%) -5.8 -11.6 -19.2 Source: Company data, Thomson Reuters, Credit Suisse estimates

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse 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.

27 January 2017

Focus tables and charts

Figure 1: Mediatek 4Q16—1Q17 and 2016/2017 estimates in mn, unless otherwise stated 4Q16 1Q17 2016 2017 2018 (NT$ mn) Actual CS(old) Street Guidance CS CS(old) Street Guidance Actual CS(old) Street CS CS(old) Street Sales $68,675 $68,807 $69,618 NT$66.6-72.9bn $57,312 $60,607 $62,269 NT$53.6-59.1bn $275,511 $275,643 $277,058 $289,702 $300,832 $294,405 Chg -12.4% -12.2% -11.2% -7.0%-15.1% QoQ -16.5% -11.9% -10.6% -14-22% QoQ 29.2% 29.3% 281.0% 5.2% 9.1% 6.3% GM% 34.5% 34.9% 35.1% 33.5-36.5% 34.1% 35.1% 34.8% 32.5-35.5% 35.6% 35.7% 35.7% 34.2% 35.0% 35.3% OpM% 5.8% 6.1% 7.0% 4-11% 4.1% 3.4% 6.5% 1-8% 8.4% 8.5% 8.7% 7.9% 8.4% 8.8% Net Inc. 5,046 4,416 4,960 FX: 31.5 2,795 2,600 5,728 FX: 31.8 23,463 22,668 23,726 22,673 25,010 27,898 EPS (NT$) $3.23 $2.83 $3.19 $1.79 $1.66 $3.62 $15.01 $14.50 $15.09 $14.50 $16.00 $17.63 Source: the BLOOMBERG PROFESSIONAL™ service consensus, Company data, Credit Suisse estimates Figure 3: China has gained, though iPhone 8 could Figure 2: China 4G crosses over 3G this year repeat the modest gains seen with iPhone 6 in 4Q14 Subscriber base (mn) Penetration (%) China smartphones (mn) YTD YoY % 1,500 100% 550 25% 1,350 90% 440 20% 1,200 80% 330 15% 1,050 70% 220 10% 900 60% 110 5% 750 50% - 0% 600 40% (110) -5% 450 30% (220) -10% 300 20% (330) -15% 150 10% (440) -20% 0 0% (550) -25% 2009 2010 2011 2012 2013 2014 2015 2016E 2017E Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec 2G subscriber base 3G subscriber base 4G subscriber base 2014 2015 2016 2G penetration 3G penetration 4G penetration 2014 YTD YoY 2015 YTD YoY 2016 YTD YoY

Source: Company data, Credit Suisse Source: Company data, Credit Suisse Figure 4: Helio declines in 1Q on a shift to exports Figure 5: Mediatek's stock pressured by lower GMs Revenue (NT$bn) Helio % of Mediatek sales Mediatek Stock GM / OpMs (%) $50 40% Price (NT$) $700 70% $45 35% $40 $600 60% 30% $35 $500 50% 25% $30 $400 40% $25 20% $300 30% $20 15% $200 20% $15 10% $100 10% $10 $5 5% $0 0%

$0 0%

1Q03 4Q15 2Q02 4Q03 3Q04 2Q05 1Q06 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11 1Q12 4Q12 3Q13 2Q14 1Q15 3Q16 1Q16 2Q16 3Q16 4Q16E 1Q17E 2Q17E 3Q17E 4Q17E 3Q01 3G 4G Mainstream 4G Helio 4G Helio Share price Corporate GM % Corporate OpM % Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 6: Mediatek shipment and margin metrics Figure 7: Mediatek inventory near its average

Years Inventory Inventory Days (NT$mn) NT$mn unless noted 2016F Prior 2017F Prior 2018F 3G Smartphones (mn) 168.2 168.2 135.8 139.8 124.6 40,000 160 4G Smartphones (mn) 334.6 331.9 389.3 390.3 420.7 35,000 140 Smartphones (mn) 502.7 500.1 525.1 530.1 545.3 30,000 120 ASPs (US$) $9.02 $9.06 $9.09 $9.29 $8.99 25,000 100 20,000 80 Tablets (mn) 41.9 41.9 38.9 38.5 36.5 15,000 60 ASPs (US$) $7.53 $7.53 $7.13 $7.13 $6.85 10,000 40 Feature phones (mn) 251.6 255.0 216.8 238.6 192.1 5,000 20 ASPs (US$) $1.36 $1.36 $1.29 $1.29 $1.24 - 0 Handset/Tablet Sales 167,481 167,614 170,626 176,325 172,477

Total Sales 275,510 275,642 289,702 300,832 304,316

1Q01 4Q01 3Q02 2Q03 1Q04 4Q04 3Q05 2Q06 1Q07 4Q07 3Q08 2Q09 1Q10 4Q10 3Q11 2Q12 1Q13 4Q13 3Q14 2Q15 1Q16 4Q16 GM % 35.6% 35.7% 34.2% 35.0% 35.2% 2Q00 Op M% 8.4% 8.5% 7.9% 8.4% 9.1% Inventory Inventory Days EPS $15.01 $14.50 $14.50 $16.00 $17.00 Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

MediaTek Inc. (2454.TW / 2454 TT) 2 27 January 2017

A further dip in sales/margins; cost-down pushes toward late 3Q17 Mediatek 4Q16 sales at Mediatek reported a below-seasonal 4Q16 and guided to a further decline in 1Q17 as the low end of guidance; growth moderates in China, and sees short-term impact from FX and India’s 1Q17 seasonally lower demonetisation in emerging markets. The company’s sales only reached the lower half of its down 7-15% QoQ guidance as its high-end Helio saw slowing demand and China smartphones slowed at year-end. The company also guided that its 1Q17 sales would be down more than seasonal, down 14-22% QoQ, due to continued impact from the stronger USD on exports and also some constraints on memory/OLED panels impacting builds, in contrast to logic chips which were tight in 2016 but now moving past their prior shortages. Mix is shifting towards exports as China seasonally slows, taking the high-end Helio mix down from 15-20% peak of 3Q16 shipments to a trough of 10% of 1Q17 shipments. Mediatek’s management admitted that high-end China demand for its Helio family has been impacted by weaker sell-through by China’s internet brands and continued insourcing by and . On the continued competitive pressures and sub- optimal cost structure on LTE, GMs were guided to drop a further 50 bp to 34%. GM improvement further We estimate Mediatek's growth in 2017 will decelerate from +29% in 2016 to +5% in 2017 pushed out to late 3Q17 as 4G’s share of shipments in China is already high at 90% and units slow from a higher base over 500 mn in 2016, offsetting potential mid-teens growth in emerging markets and opportunity in Samsung's J/A series. GM expansion is also pushed out to late 3Q17 when the company can finally ramp up its new cost-optimised entry-level chipsets, a more meaningful new architecture to improve the company’s cost structure, although that delayed launch implies limited help to GMs until 4Q17. Lower 2017/18E EPS, With 1Q17 sales and margins guidance coming down below expectations, we lower our with the results and 2017/18E EPS from NT$16.00/NT$17.00 to NT$14.50/NT$17.00 and our target price from outlook below NT$225 to NT$220 based on 15x 2017E EPS (11x cash adjusted) with a 5% cash yield. expectations We maintain our conservative view with sales decelerating and still-declining margins holding back meaningful improvement for a few more quarters.

Figure 8: Mediatek 4Q16 results and 1Q17-2Q17 CS estimates vs the street in mn, unless otherwise stated 4Q16 1Q17 2Q17 2016 (NT$ mn) Actual CS(old) Street Guidance CS CS(old) Street Guidance CS CS(old) Street Sales $68,675 $68,807 $69,618 NT$66.6-72.9bn $57,312 $60,607 $62,269 NT$53.6-59.1bn $69,747 $70,455 $72,718 Chg -12.4% -12.2% -11.2% -7.0%-15.1% QoQ -16.5% -11.9% -10.6% -14-22% QoQ 21.7% 22.9% 16.8% GM% 34.5% 34.9% 35.1% 33.5-36.5% 34.1% 35.1% 34.8% 32.5-35.5% 33.7% 35.0% 34.8% OpM% 5.8% 6.1% 7.0% 4-11% 4.1% 3.4% 6.5% 1-8% 6.5% 6.7% 8.5% Net Inc. 5,046 4,416 4,960 FX: 31.5 2,795 2,600 5,728 FX: 31.8 4,584 4,786 6,091 EPS (NT$) $3.23 $2.83 $3.19 $1.79 $1.66 $3.62 $2.93 $3.06 $3.89 Source: Bloomberg, Company data, Credit Suisse estimates 4Q16 sales and margins at the low end 4Q16 sales saw a less 4Q16 was already released at NT$68.7 bn at the low end of -7% to -15% QoQ guidance rich mix than expected due to slower sales, a late-year slowdown in China, share loss in the premium market and India’s demonetisation. Smartphone and tablet shipments were in line with the guidance for 135-145 mn but mix shifted a bit less to Helio than expected from 15-20% of shipments in 3Q16 to 10-15% in 4Q16 on a slight share loss on Helio due to the high-end modem lag in catching up CAT 7 requirement by China telecoms operators. Blended ASPs were in line with the guidance for flat to 5% decline.

MediaTek Inc. (2454.TW / 2454 TT) 3 27 January 2017

With higher shipments for China’s domestic market in 4Q16, margins remained under pressure due to continued price competition and cost structure for LTE chips. GMs dipped slightly to 34.5%, vs the 35.0% guidance midpoint, and opex was at the high end of the guidance due to some year-end accruals in 4Q16 and mask cost for 10nm, taking OpMs to an all-time low of 5.8%. Although core sales and operating profitability were lower, the non-operating income received a boost from higher interest income and a NT$450 mn FX gain (NT$0.30), which kept EPS at NT$3.23, between CS/street estimates of NT$2.83/NT$3.90. Inventory days were up slightly from 66 days in 3Q16 to 69 days in 4Q16, still in line with the guidance range for 63-73 days. 1Q17 declines below seasonal; margins pressured by mix shifting from the high end to the mainstream 1Q17 sales guided down Sales guidance was for a 14-22% QoQ decline, below the recent 10-15% normal decline 14-22% QoQ, worse than and CS/street estimates of -12%/-9% due to moderation in China and slowdown in some the seasonal pattern export markets (US dollar strength and India demonetisation). Smartphones + tablets are declining 20% QoQ from 140 mn to 110 mn and high-end Helio mix further dropping from 15-20% in 4Q16 to 10% in 4Q16 as retains its modem advantage and mix shift to low-end smartphones in emerging markets. GMs were guided to a 50 bp lower midpoint of 34% following the stabilisation in 2H16 due to a lack of new chip launch. On lower revenue scale, opex as a percentage of sales should grow modestly 27.5-29.5% midpoint (vs 4Q16 28.7%), further dampening OpM to 1-8% vs CS/street 3%/7%. 2017 growth outlook dampened by slowing smartphone demand Mediatek expects smartphone shipments to grow in line with the industry at mid-single digits YoY in 2017 following the strength from China in 2016. Chip ASPs are still pressured by competition from Qualcomm's aggressive product and technology roadmap, keeping core smartphone business growth mild. The non-smartphone product segments have some bright spots, although growth is balanced between double digit growth areas (20- 25% of the mix) from set-top, IoT, discrete Wi-Fi, custom ASIC and analog (Richtek), partially offset by 5-10% decline in mature DVD/PC Optical. Feature phone shipments will also decline modestly YoY as demand in emerging markets shifts to smartphones. We believe the company will only grow mid-single digits (CS +5% YoY) as business is dragged by slowing smartphone growth. Emerging market focus shifts from China to other developing markets Figure 10: China has gained, though iPhone 8 could Figure 9: China 4G crosses over 3G this year repeat the modest gains seen with iPhone 6 in 4Q14 Subscriber base (mn) Penetration (%) China smartphones (mn) YTD YoY % 1,500 100% 550 25% 1,350 90% 440 20% 1,200 80% 330 15% 1,050 70% 220 10% 900 60% 110 5% 750 50% - 0% 600 40% (110) -5% 450 30% (220) -10% 300 20% (330) -15% 150 10% (440) -20% 0 0% (550) -25% 2009 2010 2011 2012 2013 2014 2015 2016E 2017E Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec 2G subscriber base 3G subscriber base 4G subscriber base 2014 2015 2016 2G penetration 3G penetration 4G penetration 2014 YTD YoY 2015 YTD YoY 2016 YTD YoY

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

MediaTek Inc. (2454.TW / 2454 TT) 4 27 January 2017

Following strong 4G upgrades in China in 2016, that market should now mature from a higher base. We expect China growth should moderate in 2017. China subscriber penetration of 3G and 4G is now much higher and leaves less room for growth from new smartphone subscribers. Following last year's surge in 4G addition, we would note 3G+4G penetration in China has increased from 64% in the end of 2015 to 80% in the end of 2016 and we expect that it will reach 98% by the end of 2017 (3G 20% and 4G 78%). The market LTE shipments have also now stabilised in the past six months—already at 90%+ of shipments— leaving less room now for 3G to 4G conversion of units in China. Mediatek believes the global smartphone market could grow 4-6% YoY to 1.6-1.7 bn units with most of the growth coming from emerging markets at 14-15% YoY from 680-700 mn units in 2016 to 800-820 mn in 2017. Management expects the China domestic market to slowdown from significant growth in 2016 to flat YoY in 2017 for 490-520 mn units. Our global model projects China at 447 mn, although chipset shipments topped 500 mn and carrier feedback also suggests a higher estimate. China Mobile recently indicated to its supply chain that it sold 400 mn units in 2016 and planned similar shipments in 2017, giving the market over 500 mn units, factoring in China Telecom and China Unicom paced over 100 mn 4G subscriber additions. The China market’s over 500 mn units in 2016 was fueled by a 4G upgrade cycle that could be near complete in 2017. After that growth, the market will largely be replacements, and over 500 mn units is already a reasonable 2.5 year replacement rate for the country's 1.3 bn subscription plans, implying modest growth after the 4G upgrade cycle is complete. Qualcomm still retains Competitive pressure persists in mobile processors the top tier until Mediatek advances its modem with The mobile processor space has largely consolidated around merchant suppliers Helio x30 in 1H17 Mediatek, Qualcomm and Spreadtrum along with in-house solutions from Samsung, Huawei and Apple (still outsources baseband), with also investing in Leadcore. Despite the consolidation on the merchant side, the market remains a competitive challenge with Qualcomm still controlling the high-end merchant market but aggressively battling Mediatek in the entry to mainstream, with Spreadtrum still a factor in the 3G market.

Figure 11: Qualcomm taking a modest lead, with a recent lift from China Mobile's CAT 7 requirement Spreadtrum Mediatek Qualcomm SC9830/9832 Helio P10 / P20 Helio X10 Helio X20 Helio X25 / X30 Snapdragon 61x / 625 Snapdragon 65x Snapdragon 808 Snapdragon 810 Snapdragon 820 / 835 Infocus Bingo 21 Archos Diamond 2+ Creo Mark 1 360 N4 Elephone P9000 Zenfone Max Asus Zenfone 3 Acer Jade 2 Gigaset ME pro Asus ZenFone 3 Intex Cloud String Elephone M3 Elephone Vowney Alcatel Flash 3 LeEco L2 HTC One A9 Asus Zen Pad Z8 Acer Jade Primo HTC Butterfly 3 HP Elite x3 Lephone W7 Gionee S6 Pro Gionee E8 Elephone P 9000 LeEco Le 2S Coolpad Cool1 Blackberry Vienna Huawei HTC M10 Lephone W9 Gionee S8 HTC One E9+ InFocus M888 M3 Lemon 3 NuAns NEO Lenovo Vibe X3 LeTV 1S Pro HTC Nexus Micromax Canvas Mega 2 Gionee W909 HTC One M9+ LeEco Le2 Meizu Pro 6 Lenovo Phab Plus R9 Plus LG Angler LeEco Cool 1 Lenovo Zuk Z2 Micromax Unite 4 Pro Imoo M1000 HTC One ME Meizu MX6 Vernee Apollo Lenovo Vibo K5/Plus X LG G4 Lumia 950 XL LeTV Le Max Pro Philips S326 InFocus S1 HTC One X9 QIKU N4 Micromax YU Yureka Gionee Elife S6 LG 2 LG G Flex 3 Rockcel Quartzo LEAGOO Elite 1 Letv 1S Smartcong Flagship Xiaomi Pro Jide Remix Pro LG V10 Motorola LG G5 J2 Lenovo K5 Note Lumigon T3 Vernee Apollo Lite Meizu Pro 7 LeEco Le 2 Microsoft Lumix 950 OnePlus Two LG V20 Samsung Z2 LG X Power with Sprint Meitu V4 Xiaomi Redmi 4 Sony Xperia XZ Motorola Active Moto X 2016 Xolo Era 1X Meitu M6 Meizu MX5 ZOPO Speed 8 Max Nextbit Ember Robin Sharp AQUOS ZETA Nexus 6P Meizu MX6 Sharp Aquos Z2 Sony Xperia M4 Vivo X7 Qiku Flagship One Plus 3 Meizu Blue Charm 2 Plus TCL IDOL 4/4S Vodafone Plat 7 Samsung Galaxy N5 edge Vivo Xshot 3s Oppo Find 9 Motorola X 2016 PPTV PP King 7s Vivo X6SPlus Xiaomi Mi Max Sony Xperia W+ Xiaomi Note Oppo R9 Asus Zen Fone 3 Xiaomi 4C ZTE Axon Perf. Sony Xperia C6 Sony Xperia Z4 Compact Huawei Nova Plus ZTE nubia Z9 Vivo Xplay 5 TCL 750 Xiaomi Redmi Note2 Huawei G9 Plus Xiaomi mi5 Umi Super Model Xiaomi Redmi Note3 ZTE Nubia Z11 Yu Yunicorn ZTE Nubia NX541 Xiaomi Mi 6 Meizu Note 6

Source: Company data, Credit Suisse research

Mediatek's market share MediaTek did well through most of 2016 in China and emerging markets up to the mid- can stay at 49% through high-end with Helio, but has not cracked the flagship portion of the market. Our tracker of 2017 design wins the past couple quarters shows Qualcomm edging MediaTek 84 to 60, although the difference is largely from the 17 design wins secured by Qualcomm’s flagship Snapdragon 820/821 processor. Qualcomm prices this product over US$50, well above MediaTek’s top-end US$25-30 pricing and commands a number of premium brands with this series (Samsung, LG, Motorola, LG, Sony, Vivo, Xiaomi, ZTE, Lenovo, LeTV, Asus).

MediaTek Inc. (2454.TW / 2454 TT) 5 27 January 2017

Figure 12: Chipsets by vendor—Mediatek shareholding relatively stable Chipsets to China brands 2011 2012 2013 2014 2015 2016E 2017E 2018E 15-18 CAGR Mediatek 10.0 109.8 223.2 356.4 395.4 502.7 525.1 545.3 11% Mediatek share (%) 11% 44% 45% 47% 46% 50% 49% 49% Spreadtrum 0.2 32.0 120.6 160.0 200.0 220.0 230.0 245.0 7% Leadcore 3.0 5.0 12.0 16.0 15.0 13.0 11.0 11.0 -10% Hi-Silicon 2.6 15.4 48.2 70.0 85.0 92.5 24% Asian suppliers 13.2 146.8 358.4 547.8 658.5 805.7 851.1 893.8 11% YoY Growth 1010% 144% 53% 20% 22% 6% 5% Share 15% 59% 72% 72% 76% 79% 80% 80% Qualcomm 53.5 81.6 116.7 187.9 184.8 203.8 218.5 230.3 8% 0.0 0.0 10.0 5.0 0.0 0.0 NM Broadcom 1.5 2.5 7.0 5.0 0.0 0.0 0.0 0.0 NM Marvell 12.0 15.0 13.0 25.0 15.0 0.0 0.0 0.0 NM ST-Ericsson 8.0 3.5 0.5 0.0 0.0 0.0 0.0 0.0 NM Overseas suppliers 75.0 102.6 137.2 217.9 209.8 208.8 218.5 230.3 3% YoY Growth 37% 34% 59% -4% 0% 5% 5% Share 85% 41% 28% 28% 24% 21% 20% 20% Chipset incl MTK/SPRD tier-1 88.3 249.4 495.6 765.7 868.3 1,014.5 1,069.6 1,124.1 9% YoY Growth 183% 99% 55% 13% 17% 5% 5% Mediatek tier-one's 0.4 2.2 4.5 14.3 31.6 35.2 64.4 74.8 33% Spreadtrum tier-one's (Samsung) 0.0 10.0 25.0 28.3 59.0 65.0 30.0 20.0 -30% Chipset total to China brands 87.9 237.2 466.1 723.1 777.6 914.3 975.2 1,029.3 10% YoY Growth 170% 96% 55% 8% 18% 7% 6% Source: Company data, Credit Suisse estimates

Mediatek's gains into Samsung to offset modest China share loss We estimate Mediatek’s share in the China built smartphone market increased from 45% to 49% from 2013 through 2016 with a good push into the mainstream LTE market, although is now getting capped from further gains and even slightly reversing through late 2016. The company lost some share late in 2016 into early 2017 in China's upper tiers of the market to Qualcomm due to lack of CAT 7 modem and a slight leg on qualification of super-regional models which Qualcomm is pushing with its global pass program. Mediatek's roadmap could maintain its position through the year Mediatek's roadmap Mediatek has not quite closed the gap with its high-end products to Qualcomm with its should sustain its Helio family. The lack of CAT 7 modem and its supply constraints through mid-2016 have position with new cost it some market share in 4Q16 into early 1Q17. We do believe the roadmap can stem products that can ramp further share loss by 2H17, however as Mediatek will introduce Helio X30 (10nm) and P25 by 2H17 (16nm) in late 1Q17 and follows with 2H17 upgrades with CAT 7 for the mainstream at better cost structure.

Figure 13: Helio shipment grows modestly in 2017 Figure 14: Helio lifting blended ASPs mildly Revenue (NT$bn) Helio % of Mediatek sales Smartphone shipment (mn units) Smartphone ASP (US$) $50 40% 90.0 $30 $45 35% 80.0 $27 $40 70.0 $24 30% $35 60.0 $21 $18 $30 25% 50.0 $15 40.0 $25 20% $12 30.0 $20 15% $9 $15 20.0 $6 10% 10.0 $10 $3 0.0 $0 $5 5% 1Q16 2Q16 3Q16 4Q16E 1Q17E 2Q17E 3Q17E 4Q17E $0 0% 3G units 4G Mainstream units 4G Helio units 1Q16 2Q16 3Q16 4Q16E 1Q17E 2Q17E 3Q17E 4Q17E Blended SP ASP 4G Helio ASP 4G Mainstream ASP 3G 4G Mainstream 4G Helio 4G Helio 3G ASP Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Better modem share and incremental Samsung should keep the company in line with the market growth and offset moderating China shipments and exposure to some of the mid- tier vendors in China not performing as well. M&A by its top competitor lowers its mobile exposure from 90% to 60%, also slightly lowering competitive intensity in smartphones.

MediaTek Inc. (2454.TW / 2454 TT) 6 27 January 2017

Figure 15: Mediatek smartphone roadmap 2015 2016 2017 1H 2H 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

X20 X25 X

- X30 X10 MT6797 MT6797T MT6795 LTE Cat 10 Deca, Dual A72 + Octa (1H17) Deca, Dual A72 + A53, 64bit big.LITTLE, 64-bit Octa, 2.2GHz, Helio Octa A53, 64bit 20nm, 25MP, H.265 28nm HPM, Cat4 Decacore, 64bit big.LITTLE, 4K2K 30fps video, LTE big.LITTLE, 10nm, 20nm, Cat-6, R11 Cat-6, 2x20 40MP, H.265 4K2K CA+C2K SRLTE 30fps video Octa, 1.3- P10 10nm, Deca cores, 4G 1.5GHz, 8 A53, MT6755 up to A73, 2.2 GHz 64 bit, 28nm Next P1 LP, Cat4+ Octa A53, 28nm P20 LP, 2.0 GHz, 21MP, MT6753 1080p30 video FHD Octa A53, 64bit, P25 Next P2 LTE + C2K SoC (1920x1080), LTE MT6750/T Cat6, big.LITTLE, Mainstream Mainstream R11 Cat6 2x20 CA 16nm 16nm, Octa core, + C2K SRLTE Octa A53, 28nm HPM, 1.5 GHz, 16nm, Octa A53, 16MP, HD Display, LTE Cat6 24MP, Dual A53 MT6735 2xCA + C2K SRLTE camera, Cat 6 LTE + C2K SoC MT6738 Quad A53, 1.3GHz, 13MP, 28nm Octa A53, 1.5 GHz, 28nm, LP, 64 bit, FHD (1920x1080), LTE 13MP, HD Display, LTE Cat6 R9 Cat4/HSPA+ (42/11)/TD, CDMA2000 1x/EVDO Rev. A MT6737 MT675x

Entry Entry 4G MT6735P/M Quad A53, 1.3 -1.5 GHz, LTE + C2K SoC 28nm, 13MP, HD Display, Under planning LTE Cat6 2xCA + C2K Quad A53, 1.0GHz, HD (P) / qHD SRLTE (M), 8MP, qHD, 28nm LP, 64 bit, LTE R9 Cat4+ CDMA2000 Quad A7, 1.3GHz, MT6580 HD720, HSPA+ (21/5.76)/EDGE MT673x MT6570 Under planning

Dual A7, 1.3GHz, qHD, Entry Entry 3G HSPA+ (21/5.76)/EDGESource: Company data, Credit Suisse estimates Source: Company data, Credit Suisse research

Mediatek management acknowledges its Helio refresh in 2Q17 will not likely yet improve margins although hopes better cost structure can start to improve margins in 2H17. We have kept more conservative in our model due to uncertain price reaction from its competitors and also similar refreshes coming from Qualcomm from top to bottom for its product family.

Figure 16: Mediatek 4G ramping at lower margins Figure 17: Mediatek's stock pressured by lower GMs Sales (NT$mn) GM (%) Mediatek Stock GM / OpMs (%) 50,000 70% Price (NT$) 45,000 63% $700 70% 40,000 56% $600 60% 35,000 49% 30,000 42% $500 50% 25,000 35% $400 40% 20,000 28% 15,000 21% $300 30% 10,000 14% $200 20% 5,000 7% $100 10% 0 0%

$0 0%

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

1Q17E 3Q17E

1Q03 4Q15 3Q01 2Q02 4Q03 3Q04 2Q05 1Q06 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11 1Q12 4Q12 3Q13 2Q14 1Q15 3Q16 2G sales 3G (WCDMA+TD) sales LTE sales 3G GM % LTE GM % Corporate GM % Share price Corporate GM % Corporate OpM % Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Mediatek's upcoming Helio chipsets in 2017 will still optimise for performance rather than cost, which keeps up the risk on margin pressure. The company is guiding GMs to now decline 100-200 bp from its recent mid-30% range in 1H17 as competitive pressures persist. The potential for a GM recovery also now looks later, with the third-gen modem (smaller die size and double digit lower cost) launching late in 3Q17 near the CS ATC timing (9/6-9/8), pushing meaningful benefit at least to 4Q17. The long wait for cost down chips in the entry tier gives Spreadtrum several more quarters to improve performance and competitiveness of its chips as an entry tier alternative. Mediatek is trying to balance the investment and cost control, guiding opex to grow single digit YoY.

MediaTek Inc. (2454.TW / 2454 TT) 7 27 January 2017

Inventory grows slightly but still under control Mediatek's inventory Mediatek's inventory decreased in dollars by NT$3 bn to NT$34 bn, down 7% QoQ and below its 80-90 day slightly slower than the sales and cost of goods sold decline, lifting inventory 3 days to 69 target range at 69 days days but still in line with its post-crisis average of 67 days and the company's guidance for 63-73 days. It expects its own inventory to increase to 80-90 days in 1Q17 as the company maintained high orders deep into 4Q16 in response to the earlier chipset shortages. We now see some excess wafer bank needing to work down through 2Q17 as logic chips are more abundant but some other commodity components and FX volatility are constraining demand. We would also note that Qualcomm guided its chipset shipments down 20% QoQ in C1Q17 implying slower orders for 1-2 quarters across the low-mid-end smartphone space consistent with TSMC’s outlook for a pause continuing into 2Q17. Mediatek believes the foundry capacity on 28nm HPM/ 16nm is sufficient and no longer in constraint and expects the support from foundry/back-end to be smooth in 2017 vs. the constraints it faced in 2016.

Figure 18: Mediatek inventory stable at 69 days, near its post crisis average

Inventory Inventory Days (NT$mn) 40,000 160 35,000 140 30,000 120 25,000 100 20,000 80 15,000 60 10,000 40 5,000 20

- 0

2Q00 1Q01 4Q01 3Q02 2Q03 1Q04 4Q04 3Q05 2Q06 1Q07 4Q07 3Q08 2Q09 1Q10 4Q10 3Q11 2Q12 1Q13 4Q13 3Q14 2Q15 1Q16 4Q16

Inventory Inventory Days

Source: Company data, Credit Suisse estimates

Mediatek should be Mediatek’s recent slowdown has kept it capped around 10% of TSMC’s sales as its main about 10% of TSMC's foundry (~70% of allocation). Mediatek still expects momentum to rebound in 2Q17 with sales in 2017 China smartphone vendors introducing new models ahead of Apple's iPhone. TSMC guided a 9-10% QoQ decline in 1Q17 and further single digit decline in 2Q17 due to lull in China/export smartphones and wind-down of iPhone 7 processors, a factor which looks consistent with guidance from Mediatek and Qualcomm and the modest inventory rebuild. We model a 13% seasonal correction in 4Q16 for Mediatek’s orders to the foundries factoring in the slowdown in builds and moderation of inventory levels ahead of some product launches starting from 2Q17. Cash provides flexibility for cash returns and M&A MediaTek now has MediaTek retains a strong balance sheet with NT$95 bn net cash and investments NT$61 net cash per (NT$61/share) after distributing the dividend and funding the Richtek and Ilitek share for dividends and acquisitions. Mediatek has flexibility for further M&A and noted it will continue to invest in M&A smartphones, smart home and IoT along with its automotive and networking subsidiaries to drive the growth in the next 3-5 years.

MediaTek Inc. (2454.TW / 2454 TT) 8 27 January 2017

Figure 19: Mediatek's balance sheet remains strong Figure 20: Mediatek M&A supplementing its sales Balance Sheet (NT$ mn) 4Q16A 3Q16 Diff % 8 Yr Avg Revenue Cash and Investments 149,385 155,684 -4% 90,271 2013 2014 2015 2016E Total Debt 54,824 65,140 7,518 Mediatek organic sales $136,056 $177,539 $169,082 $211,320 Net Cash and investments 94,561 90,544 4% 82,752 YoY 30.5% -4.8% 25.0% Net Cash/Share 60.50 57.93 2.57 65.61 Mstar $35,524 $40,627 $45,503

Accts. Receivable 20,481 24,286 -16% 7,760 Richtek $2,991 $13,028 Receivable Days 27 28 -1 27 Ilitek $0 $4,350 Chingis Technology $166 $510 Inventory 33,923 36,630 -7% 9,917 Alpha Image Technology $389 $800 Inventory Days 69 66 3.0 66 Incremental M&A $35,524 $44,173 $64,191 Accounts Payable Days 48 52 -4 64 Mediatek sales w/M&A $136,056 $213,063 $213,255 $275,511 Cash Conversion Cycle 48 42 6 29 YoY 56.6% 0.1% 29.2% SH Equity 234,983 228,318 3% 121,249 Incremental M&A: 26.1% 4.9% 4.2% Book Value / Share 150.34 146.08 4.26 95.31 Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

The company has a track record of making acquisitions, acquiring ADI's handset division and Airoha/Goodix stakes for its mobile platform, MStar to enhance its digital home and consolidate in low cost smartphones, Ralink to improve in networking, Ilitek for driver ICs. The two recent acquisitions, however, Richtek and Ilitek provide only a modest incremental EPS accretion by using cash to add the incremental earnings though do not materially shift the company's business profile or market opportunity. Mediatek has been more conservative with buybacks, having only bought back 8 mn shares when the company was in product transition from feature phone to smartphone and the stock price declined significantly in 2011. Management may only do a modest buyback to support the shares on weakness, as we believe it will stay aggressive looking for M&A opportunities and would do a combination of stock and cash to keep deals accretive in the current environment of higher semiconductor valuations for take-out candidates. Free cash flow solid, though the dividend is down from the peak alongside the earnings decline MediaTek might cut its MediaTek historically has generated strong free cash flows due to its high operating dividend from NT$11 to margins and small requirements for capex. We project the company could generate NT$9.9 for 2016 NT$24 bn FCF in 2017, though down from the peak NT$38 bn level in 2013. With NT$61 consistent with the net cash/share and positive FCF though, the company still has ample resources to decline in its earnings maintain a decent dividend or pursue a buyback to support the shares. Mediatek’s dividend is sensitive to the company’s earnings level. The company now pledges 65-70% payout rate off a lower earnings base. Though revenue improves from a low base in 2015, the margins remain under pressure from competition and investment into new areas. We expect Mediatek’s cash dividend will decline from NT$11.00 cash dividend per share paid out of 2015 earnings during 2016 to NT$9.9 paid out in 2017. At NT$9.9, the cash yield is still a respectable 4.6% rate, above our Taiwan market average 3.6%.

MediaTek Inc. (2454.TW / 2454 TT) 9 27 January 2017

Figure 21: Cash flow summary for MediaTek—2009-16, FY17-18E Annual (NT$mn) CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17E CY18E CY06-15 Avg Revenue 115,512 113,522 86,857 99,263 136,056 213,063 213,255 275,511 289,702 304,316 119,565 Capital spending -1,574 -2,122 -2,585 -2,268 -1,629 -9,828 -9,368 -6,671 -6,000 -6,000 -3,419 Capex/Revenue (%) 1.4 1.9 3.0 2.3 1.2 4.6 4.4 2.4 2.1 2.0 2.6 Dep and amort 3,245 2,978 2,729 3,696 1,727 2,766 5,134 6,896 6,926 6,912 2,887 Depr/Revenue (%) 2.81 2.62 3.14 3.72 1.27 1.30 2.41 2.50 2.39 2.27 2.61 Operating cash flow 55,250 29,433 16,715 11,338 39,603 44,329 23,566 32,548 29,882 32,721 30,669 Free cash flow 53,677 27,310 14,130 9,069 37,974 34,500 14,197 25,877 23,882 26,721 27,250

FCF and Dividend Yields CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17E CY18E CY06-15 Avg FCF / Share (NT$) 49.86 25.11 12.99 7.45 28.31 22.57 9.17 16.55 15.27 17.09 23.41 FCF Yield (%) 23.4 11.8 6.1 3.5 13.3 10.6 4.3 7.8 7.2 8.0 11.0 FCF / EV (%) 24.1 12.2 6.3 4.1 17.0 15.5 6.4 11.6 10.7 12.0 12.2 Dividend per share (NT$) 13.90 26.00 20.22 8.33 9.00 15.00 22.00 0.00 9.85 9.42 15.93 Pre-Dividend closing price (NT$) 447.50 472.00 271.00 213.50 213.50 213.50 213.50 213.50 213.50 213.50 320.71 Dividend Yield (%) 3.1 12.2 9.5 3.9 4.2 7.0 10.3 0.0 4.6 4.4 6.3 Source: Company data, Credit Suisse estimates Lowering 2017E and 2018E EPS Lowering EPS for 2017 We maintain our conservative view with sales decelerating worse than seasonal and still and 2018 as near-term declining margins holding back meaningful improvement for a few more quarters. We trim guidance and business our 2017E/18E EPS from NT$16.00/NT$17.00 to NT$14.50/NT$17.00, still below the outlook are worse street’s NT$17.63/NT$17.85.

Figure 22: CS vs. street 2016-18 estimate summary 2016 2017 2018 (NT$ mn) Actual CS(old) Street CS CS(old) Street CS CS(old) Street Sales $275,511 $275,643 $277,058 $289,702 $300,832 $294,405 $304,316 $320,701 $299,473 Chg 29.2% 29.3% 281.0% 5.2% 9.1% 6.3% 5.0% 6.6% 8.1% GM% 35.6% 35.7% 35.7% 34.2% 35.0% 35.3% 35.2% 35.1% 35.6% OpM% 8.4% 8.5% 8.7% 7.9% 8.4% 8.8% 9.1% 8.8% 9.4% Net Inc. 23,463 22,668 23,726 22,673 25,010 27,898 26,583 27,358 28,300 EPS (NT$) $15.01 $14.50 $15.09 $14.50 $16.00 $17.63 $17.00 $17.50 $17.85 14.2 16.6 14.2 14.7 15.0 12.2 12.6 13.7 12.0 P/E Multiple Source: Company data, Credit Suisse estimates

The following are our key assumptions in our estimates.

■ Smartphones projected to grow from 502 mn to 525 mn units. We project Mediatek’s smartphone shipment growth to slow down from 27% YoY in 2016 to 4% in 2017. The volume growth this year is decelerating as China shipments slow due to the higher base, offsetting some of the benefit from Samsung's adoption of Mediatek for some of its low to mid-end J-series smartphones.

■ Tablets continue to decline modestly. Tablets were 42 mn in 2016 and we model roughly a mild decline to 39 mn in 2017. The company has retained good share of connected tablets and also benefited from Intel’s lower activity in the space after discontinuing its SoFIA product and refocusing Atom on the embedded IoT opportunity.

■ Digital home is still seeing a good growth outlook this year. Mediatek has grown its Wi-Fi/connectivity and set-top and also added 5% additional sales through consolidation of a full year of Richtek contribution and 2-3% incremental contribution from Ilitek, Chingis and Alpha Image Technology. The company has seen growth in set-tops and TVs mainly from higher ASPs from 4k2k and Android TV.

MediaTek Inc. (2454.TW / 2454 TT) 10 27 January 2017

Figure 23: Mediatek operating assumptions Quarters Years 1Q17E 2Q17E 3Q17E 4Q17E 2015 2016F Prior 2017F Prior 2018F 3G Phones (mn) 28.9 34.1 37.4 35.4 236.8 168.2 168.2 135.8 139.8 124.6 4G Phones (mn) 73.2 93.0 114.4 108.7 158.6 334.6 331.9 389.3 390.3 420.7 Smartphones (mn) 102.1 127.1 151.8 144.1 395.4 502.7 500.1 525.1 530.1 545.3 ASPs (US$) $8.60 $8.96 $9.32 $9.31 $8.58 $9.02 $9.06 $9.09 $9.29 $8.99 Tablets (mn) 8.4 9.7 10.7 10.1 44.1 41.9 41.9 38.9 38.5 36.5 ASPs (US$) $7.25 $7.17 $7.10 $7.03 $8.57 $7.53 $7.53 $7.13 $7.13 $6.85 Feature phones (mn) 48.8 56.1 58.9 53.0 257.0 251.6 255.0 216.8 238.6 192.1 ASPs (US$) $1.31 $1.30 $1.29 $1.28 $1.48 $1.36 $1.36 $1.29 $1.29 $1.24 Handset/Tablet Sales 32,107 41,029 50,116 47,374 131,703 167,481 167,614 170,626 176,325 172,477 DTV 11,485 13,224 14,546 14,110 42,392 49,740 49,740 53,364 52,419 56,112 PC Optical 936 906 925 889 7,333 5,377 5,377 3,655 4,131 2,924 Consumer DVD 370 387 409 364 2,670 2,049 2,049 1,530 1,625 1,217 WLAN (Ralink) 3,682 4,149 4,879 4,543 15,279 16,550 16,550 17,253 17,192 18,710 LCD Monitor 588 631 676 660 2,534 2,496 2,496 2,555 2,684 2,642 STB 2,190 2,575 3,029 2,820 6,593 9,320 9,320 10,614 10,537 11,967 Other (GPS, RFID, IoT, Ilitek) 2,966 3,559 4,627 5,553 1,601 9,468 9,468 16,706 22,115 23,688 Richtek 2,989 3,288 3,616 3,508 3,150 13,028 13,028 13,400 13,803 14,580 Sales (NT$mn) 57,312 69,747 82,824 79,819 213,255 275,510 275,642 289,702 300,832 304,316 GM % 34.1% 33.7% 33.6% 35.2% 43.2% 35.6% 35.7% 34.2% 35.0% 35.2% OpM% 7.9% 9.7% 9.7% 5.8% 12.1% 8.4% 8.5% 7.9% 8.4% 9.1% EPS (NT$) $2.79 $4.16 $4.98 $3.23 $16.74 $15.01 $14.50 $14.50 $16.00 $17.00 Source: Company data, Credit Suisse estimates Maintain our conservative view: Mixed outlook on slow growth and delayed margins improvement Mediatek trading in line We rate Mediatek a NEUTRAL but lower our target price from NT$225 to NT$220 based with its historical range on 15x 2017E EPS (11x cash adjusted) with a 5% cash yield with the near-term sales and Qualcomm trading at slowdown and delayed lower cost chip architecture in the mainstream tiers to late 3Q17 15x 2017 EPS balanced by catalysts in 2017 from Samsung, x30 China branded wins. The stock is currently trading at 15x 2017 EPS, in line with its historical range though its discount to some global fabless peers averaging at 21x earnings. Mediatek maintains a discount due to the fierce rivalry in mobile chipsets and is trading near in-line with Qualcomm currently trading at 14x 2017 EPS.

Figure 24: Mediatek P/E—trading at 14x NTM EPS Figure 25: Mediatek trading below post crisis P/E

NT$ Mediatek Taiwan GAAP PE Band (X) 2454.TW P/E

690 35.0

610 30.0

530 25.0

450 20.0 20x 370 15.0 290 15x 10.0 210 10x 5.0 130

5x

Jul-12 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-13 Jul-14 Jul-15 Jul-16

Jan-05 Jan-12 Jan-15 Jan-04 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-13 Jan-14 Jan-16 50 Jan-03

Forward PE Average +1std -1std +2std -2std

Jul-07 Jul-08 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-01 Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse research, TEJ

MediaTek Inc. (2454.TW / 2454 TT) 11 27 January 2017

Figure 26: Fabless comparisons—MediaTek trading below its peer group Price Mkt Cap EV/Sales (x) P/E Multiple (x) P/B Multiple (x) ROE Trough/Peak (EV/Sales) Company Ticker 1/26/2017 (US$mn) 2015 2016 2017 2015 2016 2017 2015 2016 2017 2015 2016 2017 Select Asian fabless semiconductors MediaTek 2454.TW $213.50 $10,813 0.9 0.7 0.6 12.8 14.7 13.3 1.4 1.3 1.3 10.8 9.1 9.7 Nvidia - GAAP NVDA $107.79 $57,668 11.6 10.9 8.0 96.2 99.8 44.8 13.3 12.7 11.2 14.2 13.8 31.5 Nvidia - Pro Forma NVDA $107.79 $57,668 11.6 10.9 8.0 77.9 91.0 84.5 13.3 12.7 11.2 14.2 13.8 31.5 Realtek 2379.TW $109.00 $1,762 1.2 0.8 0.7 22.7 17.2 13.0 2.5 2.4 2.2 10.9 13.8 16.9 Qualcomm QCOM $56.90 $84,044 3.5 3.9 3.7 12.2 13.2 10.9 3.0 2.9 2.7 24.3 21.7 25.2 Xilinx XLNX $59.56 $15,040 6.3 6.9 6.6 24.0 28.7 25.8 6.0 5.9 6.4 26.1 21.4 26.4 Broadcom AVGO $202.48 $90,889 13.5 7.7 6.0 22.5 18.1 14.9 12.5 3.5 3.2 55.4 19.4 21.1 Silicon Labs SLAB $67.65 $2,824 4.3 4.0 3.7 30.2 25.3 24.7 3.7 3.6 3.2 12.7 14.2 11.4 Median 5.6 5.5 5.2 23.1 24.6 21.8 4.1 3.5 3.2 18.2 18.9 21.1 Mean 6.1 5.3 4.6 26.3 28.2 24.3 6.1 4.6 4.3 23.8 17.6 20.4 Source: Company data, the BLOOMBERG PROFESSIONAL™ service estimates for not covered companies, Credit Suisse estimates

Mediatek financial statements Figure 27: Mediatek income statement in mn, unless otherwise stated Summary Income Statement 1Q16 2Q16 3Q16 4Q16 1Q17E 2Q17E 3Q17E 4Q17E 2012 2013 2014 2015 2016 2017F Net Sales 55,905 72,527 78,403 68,675 57,312 69,747 82,824 79,819 99,263 136,056 213,063 213,255 275,511 289,702 Sequential Change -9.4 29.7 8.1 -12.4 -16.5 21.7 18.7 -3.6 Y/Y Change 17.6 54.2 37.6 11.3 2.5 -3.8 5.6 16.2 14.3 37.1 56.6 0.1 29.2 5.2 Cost of Goods Sold 34,598 46,974 50,787 44,963 37,767 46,245 54,964 51,699 58,203 76,250 109,194 121,076 177,322 190,675 Gross Profits 21,307 25,553 27,617 23,712 19,545 23,502 27,859 28,120 41,060 59,806 103,869 92,180 98,189 99,027 Gross Margin 38.1 35.2 35.2 34.5 34.1 33.7 33.6 35.2 41.4 44.0 48.8 43.2 35.6 34.2 Operating Exp. Promotion 1,996 3,211 3,532 3,675 2,940 3,234 3,331 3,314 3,115 4,562 7,373 9,326 12,414 12,819 % of Sales 3.6 4.4 4.5 5.4 5.1 4.6 4.0 4.2 3.1 3.4 3.5 4.4 4.5 4.4 Operating Exp. Administrative 1,491 1,632 1,871 2,021 1,617 1,775 1,864 1,855 2,912 3,546 5,917 7,417 7,015 7,111 % of Sales 2.7 2.3 2.4 2.9 2.8 2.5 2.3 2.3 2.9 2.6 2.8 3.5 2.5 2.5 Operating Expense R&D 13,417 13,641 14,592 14,035 12,632 13,964 14,662 14,956 22,630 26,454 43,337 49,529 55,685 56,214 % of Sales 24.0 18.8 18.6 20.4 22.0 20.0 17.7 18.7 22.8 19.4 20.3 23.2 20.2 19.4 Total Operating Exp 16,904 18,484 19,995 19,731 17,188 18,973 19,857 20,125 28,657 34,561 56,627 66,272 75,114 76,144 Income from Operations 4,403 7,069 7,622 3,981 2,357 4,529 8,002 7,995 12,404 25,245 47,241 25,908 23,075 22,883 % of Sales 7.9 9.7 9.7 5.8 4.1 6.5 9.7 10.0 12.5 18.6 22.2 12.1 8.4 7.9 Non Operating Income 618 133 605 786 800 800 800 800 2,858 1,338 2,844 2,302 2,141 3,200 Net Investment Income/ (Loss) 231 173 553 801 200 200 200 200 1,223 2,450 1,223 1,137 1,759 800 Pretax Income 5,278 7,751 8,615 5,568 3,357 5,529 9,002 8,995 16,485 29,033 51,309 29,347 26,975 26,883 % of Sales 9.4 10.7 11.0 8.1 5.9 7.9 10.9 11.3 16.6 21.3 24.1 13.8 9.8 9.3 Income Taxes Exp. /(Gains) 805 1,162 785 430 470 853 1,260 1,259 941 2,062 5,951 3,600 3,182 3,843 Tax Rate 0.2 0.1 0.1 0.1 0.1 0.2 0.1 0.1 5.7 7.1 11.6 12.3 11.8 14.3 Net Income after Extraordinaries 4,363 6,500 7,792 5,046 2,795 4,584 7,650 7,644 15,583 27,001 45,357 25,937 23,463 22,673 % of Sales 7.8 9.0 9.9 7.3 4.9 6.6 9.2 9.6 15.7 19.8 21.3 12.2 8.5 7.8 Net EPS 2.79 4.16 4.98 3.23 1.79 2.93 4.89 4.89 12.81 20.13 29.67 16.74 15.01 14.50 Share Count (weighted) 1,564 1,563 1,564 1,564 1,564 1,564 1,564 1,564 1,217 1,342 1,529 1,549 1,564 1,564 Source: Company data, Credit Suisse estimates

MediaTek Inc. (2454.TW / 2454 TT) 12 27 January 2017

Figure 28: Mediatek cash flow summary (NT$ mn) 1Q16 2Q16 3Q16 4Q16 1Q17E 2Q17E 3Q17E 4Q17E 2012 2013 2014 2015 2016 2017 Net income 4,363 6,500 7,792 8,558 2,795 4,584 7,650 7,644 15,583 27,515 46,398 25,958 27,213 22,673 Depreciation & Amortization 1,659 1,717 1,765 1,756 1,735 1,728 1,733 1,731 3,696 1,727 2,766 5,134 6,896 6,926 Dec (inc)-A/R 597 -5,416 -3,317 5,378 4,779 -3,407 -3,583 823 799 -1,043 -4,925 -3,643 -2,758 -1,387 Dec (inc)-Inventory -2,897 -6,987 -2,616 4,332 4,951 -6,504 -6,689 2,505 -4,475 4,521 -12,995 -1,789 -8,168 -5,737 Inc (Dec)-A/P 6,866 7,083 113 -3,278 -3,794 4,470 4,597 -1,722 25 1,897 3,661 1,551 10,785 3,552 LT investment loss (gain) -128 -67 -455 650 -200 -200 -200 -200 -1,074 -2,151 -984 -658 0 -800 Investment disposal loss (gain) -24 202 -18 -145 0 0 0 0 -538 535 -625 -407 16 0 Others -2,589 9,089 -132 -7,804 -4,747 5,195 5,463 -1,255 -2,679 6,603 11,033 -2,581 -1,436 4,656 Operating Cash Flow 7,848 12,120 3,132 9,448 5,519 5,866 8,971 9,526 11,338 39,603 44,329 23,566 32,548 29,882

Sale(Pur) of ST Inv. -388 461 -1,350 -6,323 0 0 0 0 -169 93 -3,516 -3,882 -7,600 0 Sale(Pur) of LT Inv. -976 -2,000 -2,070 12,906 -200 -200 -200 -200 401 -462 -1,224 -2,555 7,860 -800 Sale of FA 56 1 -4 15 0 0 0 0 3 44 106 21 68 0 Capital Spending -1,874 -2,165 -1,385 -1,248 -1,500 -1,500 -1,500 -1,500 -2,268 -1,629 -9,828 -9,368 -6,671 -6,000 Others -169 -2,527 -55 -7,376 -966 -958 -964 -962 -2,143 -260 32,265 -16,996 -10,127 -3,850 Investing Cash Flow -3,351 -6,229 -4,864 -2,026 -2,666 -2,658 -2,664 -2,662 -4,177 -2,214 17,802 -32,781 -16,470 -10,650 Inc (Dec) of Debt -1,113 13,395 3,567 -10,269 0 0 0 0 4,768 20,145 17,084 2,927 5,580 0 Bonds Issued (Redeemed) 0 0 0 8 0 0 0 0 0 0 0 0 8 0 Dividend paid 0 0 -17,202 0 0 0 -15,405 0 -10,328 -12,074 -23,448 -34,403 -17,202 -15,405 Others 1,219 -16,044 2,006 -377 32,394 0 0 0 139 -23 207 -534 -13,196 32,394 Financing Cash Flow 107 -2,649 -11,629 -10,638 32,394 0 -15,405 0 -5,421 8,048 -6,157 -32,010 -24,810 16,989 Exchange influence -2,031 635 -2,663 860 0 0 0 0 -1,759 1,724 3,825 1,897 -3,199 0 Change in Cash Flow 2,573 3,876 -16,024 -2,357 35,247 3,207 -9,098 6,864 -19 47,161 59,799 -39,328 -11,931 36,221 Cash equivalent - beginning 153,280 155,963 159,214 143,446 149,385 188,032 194,640 188,942 85,821 85,867 132,998 192,798 190,138 195,824 Cash equivalent - end 155,963 159,214 143,446 149,385 188,032 194,640 188,942 199,206 85,867 132,998 192,798 153,280 149,385 199,206 Operating cash per share 5.02 7.75 2.00 6.04 3.53 3.75 5.74 6.09 9.32 29.52 29.00 15.21 20.82 19.11 FCF per share 3.82 6.37 1.12 5.24 2.57 2.79 4.78 5.13 7.45 28.31 22.57 9.17 16.55 15.27 Source: Company data, Credit Suisse estimates

MediaTek Inc. (2454.TW / 2454 TT) 13 27 January 2017

Companies Mentioned (Price as of 26-Jan-2017) Apple Inc (AAPL.OQ, $121.88) Asustek (2357.TW, NT$273.0) Broadcom Ltd (AVGO.OQ, $202.48) Chingis (3408.TWO^K12) Chingis (3408.TWO^K12) Chingis (3408.TWO^K12) GlobalFoundries (Unlisted) Ilitek (3598.TW^F16) Ilitek (3598.TW^F16) Ilitek (3598.TW^F16) LG Electronics Inc (066570.KS, W53,200) LeEco (Unlisted) Lenovo Group Ltd (0992.HK, HK$5.13) MediaTek Inc. (2454.TW, NT$213.5, NEUTRAL, TP NT$220.0) Motorola (MSI.BA, $151.6) Mstar Semiconductor (3697.TW^B14) Mstar Semiconductor (3697.TW^B14) Mstar Semiconductor (3697.TW^B14) NVIDIA Corporation (NVDA.OQ, $107.79) QUALCOMM Inc. (QCOM.OQ, $56.9) Realtek Semiconductor (2379.TW, NT$109.0) Richtek Technology (6286.TW^D16) Richtek Technology (6286.TW^D16) Richtek Technology (6286.TW^D16) (005930.KS, W1,995,000) Silicon Laboratories Inc. (SLAB.OQ, $67.65) Sony (6758.T, ¥3,520) Spreadtrum Communication (SPRD.OQ^L13) Spreadtrum Communication (SPRD.OQ^L13) Spreadtrum Communication (SPRD.OQ^L13) Taiwan Semiconductor Manufacturing (2330.TW, NT$185.5) United Microelectronics (2303.TW, NT$11.35) Vivo Participacoes (VIVO4.SA^F11) Vivo Participacoes (VIVO4.SA^F11) Vivo Participacoes (VIVO4.SA^F11) Xiaomi (Unlisted) Xilinx (XLNX.OQ, $59.56) ZTE Corporation (000063.SZ, Rmb15.15)

Disclosure Appendix Analyst Certification I, Randy Abrams, CFA, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for LG Electronics Inc (066570.KS)

066570.KS Closing Price Target Price Date (W) (W) Rating 27-Jan-14 68,900 75,000 N 29-Apr-14 71,700 83,000 * 24-Jul-14 77,000 87,000 29-Oct-14 67,800 78,000 29-Jan-15 62,600 75,000 29-Apr-15 61,200 68,000 02-Jun-15 55,400 62,000 09-Jul-15 45,750 53,500 29-Jul-15 43,800 49,000 25-Aug-15 40,850 45,500 NEUTRAL

30-Oct-15 49,100 46,200 26-Jan-16 54,800 49,000 16-Mar-16 61,900 54,000 28-Apr-16 58,200 57,000 19-May-16 54,000 50,000 25-Jan-17 54,200 52,000 * Asterisk signifies initiation or assumption of coverage.

MediaTek Inc. (2454.TW / 2454 TT) 14 27 January 2017

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

2454.TW Closing Price Target Price Date (NT$) (NT$) Rating 28-Jan-14 400.50 500.00 O 08-Apr-14 460.00 540.00 01-May-14 472.00 570.00 07-Oct-14 455.50 540.00 10-Feb-15 454.00 520.00 29-Mar-15 419.00 425.00 N 27-Apr-15 410.50 405.00 15-Jun-15 409.00 430.00 03-Aug-15 299.00 300.00 02-Nov-15 270.00 250.00 OUTPERFORM NEUTRAL 11-Jan-16 209.00 230.00 18-Apr-16 234.50 250.00 02-May-16 230.00 225.00 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Samsung Electronics (005930.KS)

005930.KS Closing Price Target Price Date (W) (W) Rating 27-Jan-14 1,292,000 1,760,000 O 07-Jul-14 1,292,000 1,740,000 08-Jul-14 1,295,000 1,720,000 28-Aug-14 1,242,000 1,700,000 07-Oct-14 1,162,000 1,680,000 03-Sep-15 1,122,000 1,630,000 29-Oct-15 1,325,000 1,785,000 11-Jan-16 1,152,000 1,690,000 28-Jan-16 1,145,000 1,550,000 01-Jun-16 1,333,000 1,702,000 OUTPERFORM

28-Jul-16 1,507,000 1,790,000 15-Dec-16 1,759,000 2,400,000 24-Jan-17 1,908,000 2,650,000 * Asterisk signifies initiation or assumption of coverage. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attra ctive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.

MediaTek Inc. (2454.TW / 2454 TT) 15 27 January 2017

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors. Credit Suisse's distribution of stock ratings (and banking clients) is:

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Target Price and Rating Valuation Methodology and Risks: (12 months) for MediaTek Inc. (2454.TW) Method: Our target price of NT$220 for Mediatek is based on 15x 2017E EPS (earnings per share), in-line with global peers. We have a conservative outlook as the company does yet control its destiny on pricing and margins due to fierce competition and thus have a NEUTRAL rating on Mediatek. Risk: Risks that could cause the share price to diverge from our NT$220 target price and cause us to change our NEUTRAL rating for Mediatek include the impact of competitive products and pricing, timely design acceptance by its customers, timely introduction of new technologies, ability to ramp new products into volume, industry-wide shifts in supply and demand for semiconductor products, industry overcapacity, availability of manufacturing capacity, and financial stability in end markets.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names The subject company (QCOM.OQ, 2330.TW, AAPL.OQ, 2303.TW, 066570.KS, 6758.T, 005930.KS, 0992.HK, 2357.TW, 000063.SZ, NVDA.OQ, XLNX.OQ, AVGO.OQ) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (QCOM.OQ, AAPL.OQ, 066570.KS, 005930.KS, 0992.HK, AVGO.OQ) within the past 12 months. Credit Suisse has managed or co-managed a public offering of securities for the subject company (AVGO.OQ) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (QCOM.OQ, AAPL.OQ, 066570.KS, 005930.KS, 0992.HK, AVGO.OQ) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (2454.TW, QCOM.OQ, 2330.TW, AAPL.OQ, 2303.TW, 066570.KS, 6758.T, 005930.KS, 0992.HK, 2357.TW, 000063.SZ, NVDA.OQ, 2379.TW, XLNX.OQ, AVGO.OQ) within the next 3 months. As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (2454.TW, 2330.TW, 2303.TW, 0992.HK, 2357.TW, 2379.TW). Credit Suisse beneficially holds >0.5% long position of the total issued share capital of the subject company (066570.KS, 005930.KS). Credit Suisse has a material conflict of interest with the subject company (QCOM.OQ) . Credit Suisse is Financial Advisor to NXP Semiconductors (NXPI.OQ) on their sale to Qualcomm Incorporated (QCOM.OQ).

MediaTek Inc. (2454.TW / 2454 TT) 16 27 January 2017

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MediaTek Inc. (2454.TW / 2454 TT) 17 27 January 2017

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EU: This report has been produced by subsidiaries and affiliates of Credit Suisse operating under its Global Markets Division This research may not conform to Canadian disclosure requirements. In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-US customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. US customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the US. Please note that this research was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority or in respect of which the protections of the Prudential Regulation Authority and Financial Conduct Authority for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. 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This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. Copyright © 2017 CREDIT SUISSE AG and/or its affiliates. All rights reserved. Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.

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