13 April 2017 Asia Pacific Equity Research Semiconductor Devices Asia Semiconductor Sector Research Analysts SECTOR FORECAST Randy Abrams, CFA 886 2 2715 6366 1Q17 preview: Choppy results season looms [email protected] Haas Liu Figure 1: Semiconductor revisions ahead of the 1Q17 results season: 886 2 2715 6365 TSMC, UMC, SMIC, Vanguard, Powertech, Mediatek, Realtek and WPG [email protected] 2017 EPS Target Price Price Target Inv'ment Target P/E P/B ROE Div Yld Change Change 12-Apr Local Curcy Rating upside 2017 2018 2017 2018 2017 2018 Foundry TSMC -2% Maintain at NT$205 191.0 205.0 OPFM 7.3% 14.3 13.0 3.2 2.9 23.9% 23.5% UMC 0% Maintain at NT$12 12.0 12.0 NTRL 0.0% 22.2 20.5 0.7 0.6 3.0% 3.2% SMIC 0% Maintain at HK$10.8 9.36 10.80 NTRL 15.4% 18.1 14.1 1.1 1.0 6.5% 7.7% Vanguard -6% Lower to NT$53 58.8 53.0 NTRL -9.9% 17.8 15.5 3.3 3.2 18.7% 20.9% Hua Hong 0% Maintain at HK$11 10.42 11.00 OPFM 5.6% 12.0 11.7 0.9 0.9 7.7% 7.5% Packaging & testing ASE 0% Restricted 38.3 RSTR RSTR NA 12.5 12.0 1.8 1.7 14.5% 14.4% Powertech 0% Maintain at NT$102 86.5 102.0 OPFM 17.9% 11.8 10.8 1.8 1.7 15.4% 16.1% Amkor 0% Maintain at US$9.5 11.2 9.5 NTRL -15.2% 14.9 13.2 1.7 1.5 12.2% 12.2% IC design MediaTek -8% Lower to NT$200 214.0 200.0 NTRL -6.5% 16.1 13.0 1.3 1.2 8.5% 9.9% Realtek -3% Lower to NT$130 107.5 130.0 OPFM 20.9% 13.2 12.0 2.3 3.8 17.7% 23.9% WPG -5% Lower to NT$38 38.2 38.0 NTRL -0.5% 10.1 9.1 1.2 1.1 12.5% 12.9% Source: Company data, Credit Suisse research. Note estimates already revised in the past week for Realtek and Mediatek We summarise key themes through the results season for our semiconductor coverage and preview each of our covered companies in this preview report, including updates from TSMC’s recent technology symposium. ■ A sub-seasonal 1Q17 result dampened by the rising TWD. We expect a conservative results season, with 1Q17 sales below seasonal and dampened by the slowdown in China smartphones, low season for iPhone components, some excess fabless inventory and a 5% YTD appreciation in the TWD. The foundries (TSMC and Vanguard), fabless (Mediatek) and distribution (WPG) only reached the low-end of guidance on these factors. ■ 2Q17 guidance could be light for several companies. We expect most of the companies to see modest improvement in 2Q17 from a low base in 1Q17, though we would note the momentum will stay sub-seasonal on still muted demand for smartphone and PC and continued inventory correction in fabless. In 2Q17, we expect guidance below street across TSMC, SMIC, Vanguard, Mediatek and Powertech as the communications space is in a lull ahead of iPhone 8 and also depleting some excess chip inventory built up during the tight period in 2016. The overseas chip companies should be more constructive as the broad-based auto/industrial remained healthy. ■ Estimate revisions. We already revised down TSMC (fabless inventory, China smartphone slowdown), Mediatek (China smartphone softness, some high-end share loss to Qualcomm) and Realtek (FX loss). In this report, we trim estimates on WPG (China smartphones) and Vanguard (push-out of fingerprint to 2H and slower small panel driver ICs). We also lowered 2Q17 for Powertech but keep full year intact after a better 1Q17 and potential rebound in 2H17 as iPhone NAND shipments ramp. We also see some risk to SMIC expectations into 2Q17 due to high exposure to China smartphones. ■ Wait for a better entry post results. We stay conservative on several stocks in our coverage with a risk of shortfall relative to street, including TSMC, Vanguard, SMIC, Mediatek and Powertech, with a better set-up for 2H17 as the business should rebound. We still see catalyst post results as iPhone ramps for TSMC and Powertech and also see decent growth outlook continuing for Realtek as some new products contribute. 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. 13 April 2017 Focus charts and tables Figure 2: Asian Semis valuation metrics Market Cap Price Target Inv'ment Target 52 Week P/E P/B ROE Div Yld US$mn 12-Apr Local Curcy Rating upside high/low 2017 2018 2017 2018 2017 2018 Foundry TSMC 162,078 191.0 205.0 OPFM 7.3% 144.0-195.0 14.3 13.0 3.2 2.9 23.9% 23.5% UMC 4,837 12.0 12.0 NTRL 0.0% 11.2-13.0 22.2 20.5 0.7 0.6 3.0% 3.2% SMIC 5,173 9.36 10.80 NTRL 15.4% 5.90-12.18 18.1 14.1 1.1 1.0 6.5% 7.7% Vanguard Semi 3,181 58.8 53.0 NTRL -9.9% 49.1-67.1 17.8 15.5 3.3 3.2 18.7% 20.9% Hua Hong Semi 1,394 10.42 11.00 OPFM 5.6% 6.49-11.20 12.0 11.7 0.9 0.9 7.7% 7.5% Total 175,270 14.9 14.6 2.7 2.4 19.4% 19.4% Packaging & testing ASE 9,651 38.3 RSTR RSTR NA 28.5-39.9 12.5 12.0 1.8 1.7 14.5% 14.4% Powertech 2,205 86.5 102.0 OPFM 17.9% 63.0-93.5 11.8 10.8 1.8 1.7 15.4% 16.1% Amkor 2,676 11.2 9.5 NTRL -15.2% 5.4-12.3 14.9 13.2 1.7 1.5 12.2% 12.2% Total 19,574 14.5 13.3 1.7 1.7 13.4% 13.6% IC design MediaTek Inc. 10,950 214.0 200.0 NTRL -6.5% 192.0-256.5 16.1 13.0 1.3 1.2 8.5% 9.9% Realtek Semiconductor 1,776 107.5 130.0 OPFM 20.9% 85.5-130.0 13.2 12.0 2.3 3.8 17.7% 23.9% WPG Holdings Ltd 2,097 38.2 38.0 NTRL -0.5% 33.4-41.0 10.1 9.1 1.2 1.1 12.5% 12.9% Total 14,824 14.6 14.4 1.3 1.3 9.7% 11.1% Semiconductor equipment ASM Pacific 5,603 107.0 127.0 OPFM 18.7% 52.1-108.0 21.2 18.5 4.5 4.0 22.7% 23.2% Total 5,603 21.2 18.5 4.5 4.0 22.7% 23.2% Source: Company data, Credit Suisse Figure 3: China smartphone will tougher compares Figure 4: NTD appreciated against USD by 6% YTD China smartphones (mn) YTD YoY % NTD/USD 550 25% 35 440 20% 34 330 15% 33 220 10% 32 110 5% 31 - 0% 30 (110) -5% 29 (220) -10% 28 (330) -15% 27 (440) -20% 26 (550) -25% 25 Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec Jul-14 Jul-12 Jul-13 Jul-15 Jul-16 2014 2015 2016 Jul-11 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 2017 2014 YTD YoY 2015 YTD YoY NTD/USD 2016 YTD YoY 2017 YTD YoY Source: Company data, Credit Suisse Source: Company data, Credit Suisse Figure 5: TSMC’s 1H17 is soft but will rebound in 3Q Figure 6: TSMC +1SD P/E despite softer 1H17 Sales (NT$) QoQ Change (X) 2330.TW P/E $300,000 30% 20.0 $250,000 25% 18.0 $200,000 20% 16.0 $150,000 15% $100,000 10% 14.0 $50,000 5% 12.0 $0 0% 10.0 -$50,000 -5% 8.0 -$100,000 -10% Jul-06 Jul-13 Apr-08 Oct-04 Oct-11 Apr-15 Jun-16 Jan-03 Jun-09 Jan-10 Jan-17 Mar-04 Mar-11 Feb-07 Feb-14 Dec-05 Nov-08 Dec-12 Nov-15 Aug-03 Sep-07 Aug-10 Sep-14 May-05 May-12 4Q10 3Q12 2Q14 1Q16 4Q17 2Q10 3Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 Forward PE Average +1std -1std +2std -2std Revenue QoQ Growth Source: Company data, Credit Suisse Source: Company data, Credit Suisse Asia Semiconductor Sector 2 13 April 2017 1Q17 preview: Choppy results loom Stocks are holding up The stocks have been resilient through 1Q17 despite a mixed outlook due to relatively high despite a soft outlook for fabless inventory, slowdown in China smartphone demand from the strength in 2016 and the group through 1H17 also an incremental headwind from the 5% TWD appreciation, which impacts the Taiwan as China smartphones exporters’ translated sales and margins.