Biometrics Initiating Coverage 14 June 2016 You should touch this Sector Biometrics Substantiated by the rapid deployment of fingerprint sensors in smartphones over the recent years, we find such sensors now also relevant and applicable for a broad range of new products and solutions for the Shares and recommendations future. In addition to continued growth from smartphone penetration, we view smart cards and various Internet of Things applications/gadgets as Company Ticker Currency Rec. Share price Target price Upside Fingerprint Cards FINGB SS SEK HOLD 89 97 9% the most imminent drivers for further demand, as cost of sensor production IDEX IDEX NO NOK BUY 8.1 13 61% has been marginalized on industrialization and new technologies. In sum, NEXT Biometrics NEXT NO NOK BUY 127 200 57% we expect an addressable fingerprint sensor market of USD ~5bn by 2020e, Source: Factset, Pareto Securities Equity Research and not reflected in current share prices. We initiate coverage of FING – HOLD, TP SEK 97, IDEX – BUY, TP NOK 13, and NEXT – BUY, TP NOK 200. A market reaching 2.5bn sensors in 2020e Market growth both for existing and new verticals Sensors (bn) When Apple introduced the TouchID functionality to its iOS in 2013, it proved 3 2.5 to be a catalyst for a vast deployment of fingerprint sensors in smartphones. On the emergence of new technologies and higher degree of industrialization 2.1 0.6 2 of the value-chain driving down costs, such sensors are becoming relevant 1.6 0.4 0.6 also for other mass-market applications such as smart cards and various 0.2 0.5 1.0 0.3 gadgets and IoT solutions. As such, we anticipate further growth driven by 1 0.6 0.1 higher penetration within smartphones, but the major growth going forward 1.3 0.3 1.1 1.2 likely being driven by these new verticals, lifting the addressable fingerprint 0.2 0.8 sensor market from USD ~1bn in 2016e to USD ~5bn by 2020e. 0 2014 2015 2016e 2017e 2018e 2019e 2020e Commercialization to trigger re-pricing of shares Smartphones ex. Apple Smartcards Other Source: Statista, IDC, IHS, Pareto Securities Equity Research In our view, the rapid deployment of fingerprint sensors in smartphones highlights the attractiveness of the concept, and the mass-market’s willingness to adopt the functionality. Becoming relevant also for smart cards and various gadgets/IoT solutions should enable a substantial market opportunity for NEXT and IDEX, triggering a re-pricing of the shares as the FPC revenues displaying fast sensor adoption commercial value proposition materializes. Revenues (SEKm) Apple launch Android 6.0 iPhone 6S with include native 1,600 2nd gen. Touch ID fingerprint Fingerprint Cards (FINGB SS) – HOLD, TP SEK 97 support Enjoying a first-mover advantage, Fingerprint Cards (FPC) has achieved tremendous growth over the past years, being able to offer a mass-market 1,200 Apple Samsung Samsung Apple launches launch launch solution to the rapidly growing market for fingerprint sensors in acquires iPhone 5S Galaxy S5 Galaxy S6 AuthenTec with swipe with touch 800 with smartphones. However, we see increasing competition, volume-growth for USD 356m TouchID sensor sensor driven by a price-sensitive entry-level smartphone segment, and existing customers seeking to multi-source sensors. We are in line with consensus on 400 EBIT for 2016-18e, and on challenging commercial trends diluting the growth potential, we find the share fairly priced at EV/EBIT’18e 6.3x. 0 Q1'12 Q3'12 Q1'13 Q3'13 Q1'14 Q3'14 Q1'15 Q3'15 Q1'16 IDEX (IDEX NO) – BUY, TP NOK 13 Source: Company data, Pareto Securities Equity Research Post warrant exercises by Invesco and Woodford, IDEX has a comfortable liquidity position ahead of the commercialization of its proprietary product offerings. Its solutions are largely ready for the mass-market, and the company already has secured participation in the recent LG smartphone launch, displaying its relevance as a multi-sourcing partner for OEMs. It has furthermore established a partnership with a global payment company. Becoming profitable in 2018e, we find the share to represent a fully-funded diversified bet on existing as well as emerging sensor verticals. Analysts NEXT Biometrics (NEXT NO) – BUY, TP NOK 200 Fredrik Steinslien As the smartphone fingerprint sensors have tended to become smaller, NEXT +47 24 13 21 54, [email protected] has turned its focus towards more of a pure-play smart card concentration. Espen Klette Its proprietary technology utilizing a thermal principle enables a significant +47 24 13 39 35, [email protected] cost advantage, however less prominent in competition with smaller sensors. As such, the sensors are likely to be more relevant for solutions requiring both security and convenience, and the fully ISO compliant card solutions should make the company a preferred sensor provider for a wide range of products in terms of access, ID, payment, governmental/military cards. Please refer to important disclosures on the last 5 pages of this document Biometrics Initiating Coverage Contents Investment case .................................................................................................................................................................................... 3 Financially set for commercialization ................................................................................................................................................... 6 Several potential triggers for the shares ...................................................................................................................................... 7 We initiate coverage with BUY on IDEX/NEXT, HOLD on FINGB ................................................................................................... 9 Pareto versus consensus ............................................................................................................................................................. 11 Addressable market of USD ~5bn in 2020e ........................................................................................................................................ 13 Total fingerprint sensor market approaching USD 15bn in 2020 ............................................................................................... 13 Intensifying capacitive competition ............................................................................................................................................ 16 Market share trajectory expectations ........................................................................................................................................ 16 Adoption set to increase for smartphones ......................................................................................................................................... 18 Three players have dominated the smartphone sensor market ................................................................................................ 18 Slowing smartphone growth, but increasing ex-Apple market .................................................................................................. 20 Mobile payments to drive adoption for fingerprint sensors ...................................................................................................... 21 Smart cards emerging as the next vertical ......................................................................................................................................... 23 Cost and technology propositions now viable for smart cards .................................................................................................. 24 Appendix I: Peer table ........................................................................................................................................................................ 28 Appendix II: Ownership structures ..................................................................................................................................................... 28 Appendix III: Competitive overview .................................................................................................................................................... 29 Fingerprint Cards ................................................................................................................................................................................ 30 IDEX ..................................................................................................................................................................................................... 43 NEXT Biometrics ................................................................................................................................................................................. 56 14 Jun 2016 Pareto Securities Research 2(70) Biometrics Initiating Coverage Investment case We initiate coverage with a We initiate coverage of the Nordic fingerprint sensing biometrics space, with a positive view on the fingerprint positive view on the sector, given the vast market opportunity, and proven sensor biometrics sector rapid deployment seen for smartphones when solutions become commercialized. Driven by companies such as Apple, Samsung and Microsoft, traditional PIN codes, passwords, ID cards, physical keys and other identification technologies are increasingly replaced by fingerprint technology. As displayed by the rapid growth for Fingerprint Cards (FPC), the concept has been broadly adopted across a wide range of players