19 January 2015 Asia Pacific/Taiwan Equity Research IT Hardware (Technology - PC TW (Asia)/Technology - Hardware HK (Asia)) Asia Hardware Sector Research Analysts STRATEGY Thompson Wu 886 2 2715 6386 [email protected] ODM/EMS outlook: Cloud with a side of Apple Figure 1: ODM 2015 sales exposure by Apple, PC, and Enterprise/Cloud % 2015 sales: Figure in column chart represents YoY sales change % of sales 100% --14% YoY +14% YoY +2% YoY 90% +14% YoY +12% YoY +64% YoY +2% YoY 80% -3%YoY 70% +1% YoY +15% YoY -2.5% YoY 60% +8% YoY 50% -1% YoY +0% YoY +0.4% YoY 40% 30% +35% YoY +5% YoY 20% +6% YoY 10% +141% YoY +404% YoY 0% Hon Hai Quanta (1) Pegatron (2) Compal Wistron (3) Apple NB/DT Enterprise/Cloud Other Note: (1) Enterprise/Cloud excludes tablets; (2) Apple sales excludes Casetek); (3) Apple sales excludes LCD assembly, which we included into other sales. Source: Credit Suisse estimates ■ Focus on enterprise stories as consumer product cycles slow. We believe the ODM direct (white-box) server and storage business is the most attractive longer-term profit pool for the ODM/EMS sector. ODM direct vendors have stripped from traditional OEMs >US$26 bn in sales during 2008-3Q14; 2014 growth is still topping 39% YoY. The sector plans to market its white-box solutions to large enterprises, but we expect traction to be slow. Windows Server 2003 support expiration is a growth sweetener. ■ Apple diversification an overhang, but PC demand stabilises. Apple is shifting its iPhone orders in 2015, but 215 mn units (+16% YoY) with better ASP can lift Apple sales for all suppliers. Our forecast for flattish PC units implies notebook ODMs will see their PC businesses stabilise. ■ Hon Hai (OUTPERFORM) is our ODM/EMS top pick. We believe the market is overly cautious on Apple's diversification and the resultant impact on Hon Hai and under-appreciates Hon Hai's data-center business. We see earnings risk at Quanta (UNDERPERFORM) due to overly hyped Cloud expectations. Pegatron's (NEUTRAL) share price already reflects a bullish outlook and we see limited scope for earning upgrades. We expect Compal (OUTPERFORM) to have a profitable ramp up of iPad Mini, although Wistron (NEUTRAL) has the most potential earnings upside, if it can ramp up iPhone efficiently. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, 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. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access 19 January 2015 Focus charts and tables Figure 2: Hon Hai is our top Taiwan ODM/EMS pick; Lenovo is our top PC brand pick In local currency, unless otherwise stated 12mth Price TP 52 Week Market Net Cash DivYld 3mth His. 3YR P/E CS P/E (CY) Earning growth (CY) P/B ROE Company Ticker Analyst Rating Target 16-Jan upside high/low Cap Per Share Price Chg Low High 2014 2015 2014 2015 Trailing Fwd 12M Trailing Fwd 12M LC$ LC$ % LC$ US$m LC$ % % CS Cons CS Cons ODM/EMS Hon Hai Precision 2317.TW Thompson Wu OP 125.0 84.1 48.6% 71.8-102.0 39,208 11.72 2.1% -5.5% 7.9x 11.8x 9.8x 8.4x 18.1% 14.7% 16.9% 8.8% 1.3x 1.2x 13.8% 14.2% Quanta Computer 2382.TW Thompson Wu UP 61.0 75.6 -19.3% 71.1-89.2 9,258 9.42 5.0% 3.6% 7.9x 14.6x 15.3x 13.8x 2.5% 1.7% 10.4% 17.2% 2.2x 2.1x 14.7% 15.3% Compal Electronics 2324.TW Thompson Wu OP 26.0 22.9 13.8% 19.6-29.6 3,203 -1.19 4.4% 13.1% 6.8x 13.0x 19.8x 9.5x 101.6% 120.1% 109.0% 80.4% 1.0x 0.9x 5.4% 10.0% Wistron 3231.TW Thompson Wu N 30.0 30.1 -0.2% 24.1-35.0 2,391 -12.39 6.0% 0.8% 5.5x 13.3x 15.4x 12.0x -19.8% -20.1% 29.0% 49.4% 1.0x 1.0x 6.8% 8.3% Pegatron 4938.TW Thompson Wu N 74.0 76.0 -2.6% 38.1-76.3 5,717 20.14 3.7% 41.8% 8.1x 17.0x 12.6x 11.3x 49.9% 50.1% 19.8% 15.5% 1.5x 1.6x 11.9% 13.8% ODM/EMS 4.2% 10.8% 7.2x 13.9x 14.6x 11.0x 30.5% 33.3% 37.0% 34.3% 1.4x 1.4x 10.5% 12.3% Brands Acer Group 2353.TW Thompson Wu UP 14.0 20.3 -30.9% 17.0-25.1 1,988 8.77 0.0% 2.6% 9.4x 9675.0x 26.9x 19.1x 110.0% 107.8% 40.4% -1.9% 0.9x 0.9x 3.5% 4.7% Asustek 2357.TW Thompson Wu N 300.0 316.0 -5.1% 277.0-353.0 7,442 99.28 6.2% 8.4% 6.7x 11.4x 11.7x 10.4x -6.2% -5.6% 11.9% 7.4% 1.5x 1.4x 13.2% 13.9% Lenovo Group Ltd 0992.HK Thompson Wu OP 13.0 10.4 25.5% 7.7-12.6 14,847 0.36 2.3% -4.3% 10.1x 18.6x 20.1x 14.1x -10.0% -2.8% 42.8% 28.2% 4.6x 3.8x 23.6% 25.4% HTC Corp 2498.TW Pauline Chen UP 110.0 147.5 -25.4% 121.5-175.0 3,905 66.40 0.0% 14.3% 5.2x 2264.7x 83.8x 68.6x 210.3% 212.3% 22.2% 87.1% 1.5x 1.5x 1.9% 2.2% Apple Inc AAPL.OQ Kulbinder Garcha OP 130.0 106.8 21.7% 71.3-119.0 626,482 -1.34 0.0% 9.4% 8.2x 15.1x 16.6x 11.8x 6.0% 6.7% 29.3% 15.0% 5.6x 5.3x 39.4% 48.0% Hewlett Packard HPQ.N Kulbinder Garcha OP 50.0 38.2 30.9% 28.0-40.7 70,044 -2.02 1.5% 11.8% 3.4x 9.7x 10.2x 9.6x -2.0% 3.0% 4.2% 3.5% 2.6x 2.5x 26.2% 26.3% Samsung Electronics 005930.KS Keon Han OP 1,680,000 1,316,000 27.7% 1,083,000-1,470,000 180,188 157,565 1.1% 20.8% 5.5x 10.7x 7.8x 7.7x -18.6% -26.2% 1.4% -6.3% 1.1x 1.0x 14.1% 12.8% Brands 1.6% 9.0% 6.9x 13.1x 13.3x 10.7x 41.4% 42.2% 21.7% 19.0% 2.6x 2.4x 17.4% 19.0% Distribution Synnex Technology 2347.TW Thompson Wu N 44.0 45.1 -2.4% 41.2-54.6 2,269 -12.97 6.2% 9.2% 8.6x 13.4x 13.8x 11.1x -1.3% -0.2% 23.8% 14.5% 1.6x 1.5x 11.9% 13.9% Digital China 0861.HK Thompson Wu OP 10.0 7.3 37.6% 6.3-9.1 1,026 -4.29 2.4% 4.6% 5.3x 10.8x 9.6x 8.3x 192.1% 199.3% 15.0% 15.4% 0.9x 0.8x 9.9% 10.2% WPG Holdings Ltd 3702.TW Randy Abrams N 42.0 36.4 15.4% 34.5-43.2 1,911 -25.90 6.6% 3.3% 6.1x 11.4x 10.7x 10.0x 18.3% 21.1% 7.3% 10.2% 1.4x 1.4x 13.2% 13.6% Senao Intl* 2450.TW n.m. n.a. n.a. 50.3 n.a. 49.6-90.9 412 n.a. n.a. -10.2% 11.7x 27.6x n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. PChome Online* 8044.TWO n.m. n.a. n.a. 360.5 n.a. 187.6-370.5 992 52.52 1.2% 33.3% 19.1x 38.6x 46.9x 36.4x n.a. 34.7% n.a. 25.6% 14.4x 11.8x 33.4% 34.7% VST Holdings* 0856.HK n.m. n.a. n.a. 2.6 n.a. 1.6-3.0 506 n.a. n.a. -0.8% 2.4x 7.2x 6.5x 6.0x n.a. 16.7% n.a. 8.6% 1.0x n.a. n.a. 14.8% Tech Data* TECD.OQ n.m. n.a. n.a. 56.0 n.a. 50.8-69.6 2,143 6.82 0.0% 1.5% 7.2x 13.3x 11.0x 10.2x n.a. 12.8% n.a. 8.2% 1.0x 0.9x 7.9% 9.0% Ingram Micro* IM.N n.m. n.a. n.a. 25.2 n.a. 22.8-30.8 3,930 -2.01 0.0% 6.4% 7.6x 11.4x 9.8x 8.4x n.a.