26 July 2016 Asia Pacific/Japan Equity Research Electrical Equipment (Network Equipment (Japan)) / MARKET WEIGHT Anritsu (6754 / 6754 JP) Rating (from Outperform) NEUTRAL* Price (25 Jul 16, ¥) 644 DOWNGRADE RATING Target price (¥) (from 1,000) 655¹ Chg to TP (%) 1.7 Market cap. (¥ bn) 88.41 (US$ 0.83) 5G business to grow after 2020; mobile profits Enterprise value (¥ bn) 76.50 Number of shares (mn) 137.28 soft until then Free float (%) 70.0 ■ Action: We gave our view of 5G networks in our 21 July report, 5G in the runup 52-week price range 897 - 560 *Stock ratings are relative to the coverage universe in each to 2020 (Part 1). Although chip development is accelerating, we think Anritsu analyst's or each team's respective sector. has limited opportunities at the carrier development stage, and forecast core ¹Target price is for 12 months. mobile profits to decline steadily for 2–3 years. We lower our FY3/17–18 Research Analysts estimates and introduce our FY3/19 forecasts. We previously expected R&D- related demand, but on further examination we do not see 5G-driven earnings Hideyuki Maekawa growth until at least 2020. We lower our target price from ¥1,000 to ¥655 and 81 3 4550 9723 [email protected] downgrade the stock from Outperform to NEUTRAL. Yoshiyasu Takemura ■ Investment case: A different product portfolio means Anritsu cannot take part in 81 3 4550 7358 NTT DoCoMo’s 5G testing, and with two rivals participating we cannot expect it [email protected] to grow its business at the 5G developing phase. Anritsu is positioned as it was for LTE. As opportunities for earnings growth emerged after LTE specs were decided, we do not think its competitiveness has declined, particularly in 5G, and accordingly estimate that its earnings structure and profits can expand in the long term when 5G rolls out. However, we cannot expect demand for R&D testing equipment to accelerate over the next 2–3 years, and see this, together with soft demand for testing equipment for manufacturing due to slower smartphone volume growth, contributing to steady profit declines for the mobile segment. ■ Risks: These include near-term order upside due to rebounding capex (Qualcomm) and demand growth for 5G development sufficient to compensate for slower demand for testing equipment for manufacturing. Possible risks include ongoing YoY dips for quarterly testing equipment orders and cuts to guidance. ■ Valuation: We have switched from P/E (FY3/16E 16.1x) to P/B in valuing the shares as we cannot expect growth potential. We base our ¥655 target price on our end-FY3/17 BPS estimate (¥574.45) and a P/B of 1.14x (product of the TOPIX P/B of 1.19x and the TOPIX relative P/B of 0.96x). Share price performance Financial and valuation metrics Year 3/16A 3/17E 3/18E 3/19E Price (LHS) Rebased Rel (RHS) Sales (¥ bn) 95.5 96.0 95.0 95.5 1000 120 Operating profit (¥ bn) 5.9 7.0 6.1 5.7 Pre-tax profit (¥ bn) 5.4 7.0 6.1 5.7 800 100 80 Profit for the year (¥ bn) 3.8 5.1 4.5 4.2 600 60 Net income (¥ bn) 3.8 5.1 4.5 4.2 400 40 Comprehensive income (¥ bn) 3.8 7.5 6.9 6.6 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 EPS (¥) 27.4 37.1 32.8 30.6 Change from previous EPS (%) n.a. -43.3 -54.0 The price relative chart measures performance against the IBES Consensus EPS (¥) n.a. 41.6 46.8 46.0 TOPIX which closed at 1325.36 on 22/07/16 EPS growth (%) -50.9 35.6 -11.8 -6.7 On 22/07/16 the spot exchange rate was ¥106.1/US$1 P/E (x) 22.6 17.3 19.7 21.1 Dividend yield (%) 3.9 2.3 2.2 1.9 Performance over 1M 3M 12M EV/EBITDA(x) 7.8 6.8 7.2 7.2 Absolute (%) 7.3 0.9 -22.2 P/B (x) 1.1 1.1 1.1 1.1 Relative (%) -2.7 5.7 -2.3 ROE(%) 4.9 6.6 5.6 5.1 Net debt/equity (%) net cash net cash net cash net cash Source: Company data, Thomson Reuters, IFIS, 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. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access 26 July 2016 Earnings estimates Near-term outlook North America smartphone majors’ adoption of chips from manufacturers such as Intel is supporting brisk demand for modem chips, and although we expect spending on test and measurement (T&M) equipment to increase, we see slowing volume growth for smartphones (we forecast 4.6% CAGR for 2015–18, Figure 1) depressing demand for T&M equipment for manufacturing. We also expect R&D spending constraints due to weakness (loss of market share) at Qualcomm to affect demand for T&M equipment for R&D, and accordingly forecast continued weakness for Anritsu’s mobile segment. At the same time, demand for server-use optical products is firm in the network infrastructure segment’s optical business, and demand for Anritsu equipment with specs for optical module manufacturing processes is expanding. The current focus is 10Gbps, while 40Gbps is the focus of development demand. In addition, LTE investment in North America is soft, and while we can look for investment in small cells, this is still not of a scale to contribute to earnings growth. Figure 1: Global handset/smartphone unit outlook 2,500 100% 2,000 80% 409 324 532 464 661 1,500 60% 828 1,011 1,221 mn unitsmn 1,000 1,290 40% 1,561 1,647 1,164 1,168 1,437 1,505 1,018 1,302 500 1,019 20% 727 494 305 124 151 173 0 0% 2007A 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016E 2017E 2018E Smartphone Feature phone YoY % Smartphone change (RHA) Source: IDC, Credit Suisse (global team) estimates Long-term outlook 5G plans around the world Developments in 5G are central to assessing the company’s long-term growth prospects. In our 21 July report, 5G in the runup to 2020 (Part 1), we laid out the likely roadmap for 5G. However, individual countries are pushing ahead with their own 5G strategies. Our electric components sector analyst Akinori Kanemoto says Korea, Japan, the US and China are the most advanced in developing 5G, while Europe, which was slow off the mark in 4G, announced a 5G Manifesto in July 2016 calling for EU-member states to catch up lost ground. We think Europe will aim to roll out commercial 5G services in line with target milestones planned by Korea, Japan, the US and China in 2018-20. Below is our take on 5G developments in each country: ■ Korea is planning to launch some 5G services by 2018, when the city of Pyeongchang is due to host the winter Olympic and Paralympic games. Services are likely to launch on the 28GHz band. Anritsu (6754 / 6754 JP) 2 26 July 2016 ■ In Japan, NTT DoCoMo plans to begin commercial services two years after Korea to coincide with the Tokyo 2020 Olympics. Services will probably use the 3.4–3.8GHz and 28GHz bands. ■ In the US, Verizon plans to start commercial testing in 2017 and AT&T intends to launch commercial services in 2020. Again, the 28GHz band appears to be the strongest candidate. On 14 July, the Federal Communications Commission (FCC) became the first body worldwide to open up spectrum for 5G services. ■ In China, China Mobile, China Unicom and China Telecom all plan to start 5G services in 2020. Testing is already underway in the 3.4–3.6GHz band, led by the IMT 2020 (5G) Promotion Group, but 3.3–3.4GHz, 4.4–4.5GHz and 4.8–4.9GHz are also candidates. ■ In Europe, Vodafone and Deutsche Telekom are actively developing 5G plans but still trail progress by Korea, Japan, the US and China. However, we think the release of the 5G Manifesto shows the EU will make up lost ground by 2020. Figure 2: Progress toward 5G in key regions and likely frequency bands Phase 1 Phase 2 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Activities of the 5G mobile evolution forum Tokyo Adopt strategic orientation towards R&D, standardization activities, international tie-ups, and education Olympics/Paralympics Japan 5G technology R&D via tie-ups between industry, academia, and the government Commercialization Consider 5G frequency band via R&D target in Japan Spectrum 3.4GHz..28GHz? WRC-19: 24.25GHz-86GHz? Expect start of 5G pre-service in parts of Korea→ PyeongChang Olympics/Paralympics S.Korea Korean government: Has allocated 1.6tn KRW to 5G R&D in 2014–21. Aiming for application by 2020. Commercialization target for SK Telecom/KT 5G Forum Others： 600MHz, 3.5-3.7GHz? Consider cases of 5G use, required conditions, technology Spectrum 28GHz? 28GHz? WRC-19: 24.25GHz-86GHz? IMT-2020 (5G) Promotion Group Consider cases of 5G use, required conditions, technology Commercialiation Beijing target in China Future Mobile Communication Forum Olympics/Paralympics China Start of 5G SIG working group.