2H19 Outlook Telecom Equipment/ Electronic Components Navigating headwinds Wonjae Park +822-3774-1426 [email protected] Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. Contents [Summary] Era of components and new markets 3 I. [Telecom Equipment] 1H19 review 5 II. [Telecom Equipment] 2H19 outlook 10 III. [Electronic Components] 1H19 review 15 IV. [Electronic Components] 2H19 outlook 16 V. Medium/long-term outlook 17 VI. Global peer group valuations 19 VII. Top picks 20 Samsung Electronics, LG Electronics, LG Innotek, Seoul Semiconductor [Conclusion] Korean IT industry showing resilience 24 [Summary] Era of components and new markets (1/3/05=100) 800 MSCI Korea IT (L) 2,200 US$/W (R) Era of TV era (Sony) Mobile phone era (Nokia) Smartphone era (Apple) components st SEC 2nd SEC 1st SEC 1 and LGE 2nd LGE 3rd LGE 8th automotive 600 electronics 1,800 market 400 1,400 200 1,000 0 600 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19F Source: Mirae Asset Daewoo Research 3| 2H19 Outlook [Telecom Equipment/Electronic Components] Mirae Asset Daewoo Research [Telecom Equipment] Foldables and 5G to drive demand Significant new growth opportunities for first time in three years 2020 • Full-scale 5G expansion - Differentiation 2019 by company * 1H19 iPhone 8/X iPhone XS - Foldables -S10andM/S Galaxy Note 7 2019 -New Apple Galaxy S8 Galaxy S9 Galaxy Fold models -5G expansion Galaxy Note 9 Galaxy S10 1Q16 1Q17 1Q18 1Q19 1Q20F Source: Mirae Asset Daewoo Research 4| 2H19 Outlook [Telecom Equipment/Electronic Components] Mirae Asset Daewoo Research I. [Telecom Equipment] 1H19 review Market environment: • Smartphone shipments remained on the downtrend in 1H19. 310mn units in 1Q19 (-6.6% YoY, -17.5% QoQ) Growth slowdown • Product differentiation has weakened: Market is increasingly consolidating around the big three. Decreased Big three players: Samsung Electronics (SEC; M/S 19.6%), Huawei (M/S 15.7%), and Apple (AAPL US/CP: differentiation US$189.00; M/S 13.1%) Consolidation into big three players Smartphone shipments and YoY growth Big three players’ M/S trend (mn units) (%) (%) 6.0 Smartphone shipments (L) 60 60 YoY growth (R) 4.5 4.3 40 50 3.1 3.0 20 40 1.5 0 0.0 -20 30 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q18 1Q19 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q18 1Q19 Source: IDC, Mirae Asset Daewoo Research Source: Counterpoint, Mirae Asset Daewoo Research 5| 2H19 Outlook [Telecom Equipment/Electronic Components] Mirae Asset Daewoo Research I. [Telecom Equipment] 1H19 review Big three • SEC: Shipments of 6.9mn units in 1Q19 (-1.8% YoY, -9.6% QoQ) 19.6% market share - Market share rebounded on solid Galaxy S10 sales. SEC: Rebound • Huawei: Shipments of 5.5mn units in 1Q19 (+44.6% YoY, -1.8% QoQ) 15.8% market share Huawei: Growth - The second largest smartphone maker in terms of market share Apple: Slowdown • Apple: Shipments of 4.6mn units in 1Q19 (-17.4% YoY, -29.4% QoQ) 13.1% market share - Weaker-than-expected new iPhone model sales depressed market share. SEC smartphone shipments and Huawei smartphone shipments and Apple smartphone shipments and YoY growth YoY growth YoY growth (mn units) Smartphone shipments (L) (%) (mn units) Smartphone shipments (L) (%) (mn units) Smartphone shipments (L) (%) YoY shipment growth (R) YoY shipment growth (R) YoY shipment growth (R) SEC M/S (R) Huwawei M/S (R) Apple M/S (R) 100 45 100 45 100 45 75 30 75 30 75 30 50 15 50 15 50 15 25 0 25 0 25 0 0 -15 0 -15 0 -15 1Q11 1Q13 1Q15 1Q17 1Q19 1Q11 1Q13 1Q15 1Q17 1Q19 4Q13 4Q14 4Q15 4Q16 4Q17 4Q18 Source: Counterpoint, Mirae Asset Daewoo Research Source: Counterpoint, Mirae Asset Daewoo Research Source: Counterpoint, Mirae Asset Daewoo Research 6| 2H19 Outlook [Telecom Equipment/Electronic Components] Mirae Asset Daewoo Research I. [Telecom Equipment] 1H19 review US: Apple struggled; SEC • In 1Q19, US smartphone shipments declined 15.3% YoY to 35.41mn units. Maturity stage remained stable; LGE • Apple’s new products displayed sluggish sales; SEC maintained the second-largest market share. disappointed • LG Electronics (LGE) remained in third place in the US market, while ZTE (000063 CH/CP: RMB28.50) showed a sluggish performance; Motorola’s market share turned upward. US smartphone shipments and YoY growth US quarterly smartphone M/S trends (mn units) (%) (%) 80 Shipments (L) 90 60 Apple SEC YoY shipment growth (R) LGE ZTE Motorola 60 60 45 40 30 30 20 0 15 0 -30 0 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q18 1Q19 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q18 1Q19 Source: Counterpoint, Mirae Asset Daewoo Research Source: Counterpoint, Mirae Asset Daewoo Research 7| 2H19 Outlook [Telecom Equipment/Electronic Components] Mirae Asset Daewoo Research I. [Telecom Equipment] 1H19 review China: Deceleration of • In 1Q, total smartphone shipments in China declined to 92.97mn units (-7% YoY). market growth slowdown; • In 1Q, Oppo + Vivo maintained the largest market share (16.9% for Oppo; 19.2% for Vivo). market share uptrend for • Huawei’s market share remained on an uptrend (29.2% in 1Q) Huawei vs. slight pickup for • SEC’s China market share turned upward to 1.4% in 1Q (+0.05%p YoY, +0.54%p QoQ) SEC China smartphone shipments and YoY growth China monthly smartphone M/S trends (mn units) Shipments (L) (%) (%) 250 Huawei + Oppo + Vivo (L) 100 60 Oppo + Vivo Huawei Total YoY growth (R) Apple Xiaomi Huawei + Oppo + Vivo YoY growth (R) SEC Huawei + Oppo + Vivo M/S (R) 200 75 45 150 50 30 100 25 15 50 0 0 -25 0 1Q15 1Q16 1Q17 1Q18 1Q19 9/14 3/15 9/15 3/16 9/16 3/17 9/17 3/18 9/18 3/19 Source: Counterpoint, Mirae Asset Daewoo Research Source: Counterpoint, Mirae Asset Daewoo Research 8| 2H19 Outlook [Telecom Equipment/Electronic Components] Mirae Asset Daewoo Research I. [Telecom Equipment] 1H19 review India: SEC striving to • In 1Q, India’s total smartphone shipments increased 16.5% YoY to 34.9mn units. maintain M/S; Xiaomi • Fierce competition continued between SEC and Xiaomi (1810 HK/CP: HK$10.16). remained the top player; In 1Q, SEC displayed a market share of 23.1% (-0.1%p YoY), while Xiaomi, recorded 27.6% (-3.5%p YoY) Indian players to recover in • Indian brands remained sluggish. 2H19 India smartphone shipments and YoY growth India quarterly smartphone M/S trends (mn units) (%) (%) 60 Shipments (L) 90 45 SEC YoY shipment growth (R) Xiaomi China (Huawei + Vivo + Oppo) YoY market growth (R) India (Micromax + Lava) Penetration (R) 45 60 30 30 30 15 15 0 0 -30 0 1Q13 1Q14 1Q15 1Q16 1Q17 1Q18 1Q19 1Q15 1Q16 1Q17 1Q18 1Q19 Source: IDC, Mirae Asset Daewoo Research Source: Counterpoint, Mirae Asset Daewoo Research 9| 2H19 Outlook [Telecom Equipment/Electronic Components] Mirae Asset Daewoo Research II. [Telecom Equipment] 2H19 outlook Foldables, new models, and • For 2019, smartphone sales volume is forecast at 1.4bn units (-0.8% YoY), with the smartphone market expected to grow to US$494.8bn (+7.5% YoY) 5G services to stimulate • Smartphone shipments (units): 1.44bn in 2015 1.47bn in 2016 1.47bn in 2017 1.41bn in 2018 1.4bn in replacement demand, 2019F leading to outperformance • The launch of foldable smartphones, new Galaxy/iPhone models, and 5G services will likely stimulate replacement demand, leading to outperformance by top-tiers. by leading players Global handset shipment and growth trends 2019 (Wbn) (%) * 1H 24 90 - Foldables Feature phones (L) -S10andM/S Smartphones (L) Smartphone market growth (R) 19.7 19.8 19.0 * 2H Smartphone shipment growth (R) 18.1 17.8 - New iPhone models 18 60 5.0 5.1 4.9 -5G expansion 4.1 3.5 14.7 14.7 14.015.7 12 14.1 30 7.5 1.8 6 0 -4.0 -0.8 0 -30 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019F Source: IDC, Mirae Asset Daewoo Research 10| 2H19 Outlook [Telecom Equipment/Electronic Components] Mirae Asset Daewoo Research II. [Telecom Equipment] 2H19 outlook Negative growth in • Smartphone market growth in China, as well as in the US and Western Europe, is slowing rapidly. developed markets and In particular, sales volume in China, which has been a key driver behind rapid smartphone market expansion, will likely contract in 2019. China; Positive Indian • Going forward, India and other Asia will likely drive global market growth. outlook India’s smartphone market is expected to grow 12.8% in 2019 (+14.5% in 2018). Global smartphone shipment growth 2016 2017 2018 2019F US 4.7% 0.5% -7.2% 0.3% W. Europe -8.3% -5.7% 3.2% -2.8% Japan 2.3% 8.4% 0.0% -3.4% China 8.7% -4.9% -10.5% -6.6% India 5.2% 14.0% 14.5% 12.8% Other Asia -0.1% -0.1% -2.1% 1.9% Latin America -0.3% 5.7% -7.1% -2.6% Total 1.8% 2.6% -2.2% -0.1% Source: IDC, Mirae Asset Daewoo Research 11| 2H19 Outlook [Telecom Equipment/Electronic Components] Mirae Asset Daewoo Research II. [Telecom Equipment] 2H19 outlook Market leadership to • Mature smartphone market SEC needs to expand its low/mid-end lineup (growth markets: India, South America, Southeast Asia), while also prove more important maintaining competitiveness in the high-end segment. than margin The company has to continue to improve cost efficiency, while maintaining brand competitiveness and economies of scale.