27 January 2017 Asia Pacific/Taiwan Equity Research Semiconductor Devices MediaTek Inc. (2454.TW / 2454 TT) Rating NEUTRAL Price (26-Jan-17, NT$) 213.50 DECREASE TARGET PRICE Target price (NT$) (from 225.00) 220.00 Upside/downside (%) 3.0 A further dip in sales/margins; cost-down Mkt cap (NT$/US$ mn) 337,781 / 10,813 Enterprise value (NT$ mn) 211,382 pushes out to late 3Q17 Number of shares (mn) 1,582 Free float (%) 89.1 ■ 4Q16 sales and profitability at the low end. Mediatek 4Q16 sales were 52-wk price range (NT$) 260-192 NT68.8 bn, down 12% QoQ, vs -7% to -15% QoQ guidance, with 140 mn ADTO-6M (US$ mn) 39.7 Target price is for 12 months. smartphone shipments (-5% to -10%) due to a slowdown in India and modest Research Analysts share loss on high-end Helio. Margins also dipped slightly with GMs at 34.5% Randy Abrams, CFA vs the 35% midpoint, taking OpMs to an all-time low of 5.8%. An NT$450 mn 886 2 2715 6366 FX gain (NT$0.30) kept EPS at NT$3.23, between CS/street estimates of [email protected] NT$2.83/NT$3.90. Haas Liu ■ 1Q17 below recent seasonality. Sales were guided down 14-22% QoQ, 886 2 2715 6365 [email protected] below the recent 10-15% normal decline due to moderation in China and a slowdown in some export markets. Smartphones/tablets are guided down about 20% to 105-115 mn and ASPs flat to down 5% as the Helio mix falls from 15-20% in 3Q16 to 10% by 1Q17 from shift to EM and a slight share loss on Helio due to the high-end modem lag. GMs were guided to a 50 bp lower midpoint of 34%, implying an OpM range of 1-8% vs the street’s 7%. ■ Growth outlook mixed; margin improvement shifts out. 2017 growth requires a strong reacceleration from a low 1Q base. Smartphones are decelerating from a strong 2016, and non-smartphone is balanced between double-digit growth areas (20-25% of the mix) from set-top, IoT, Wi-Fi, custom ASIC, and analog partially offset by a 5-10% decline in mature DVD/PC optical/feature phones (25% of the mix). GM recovery also now looks a bit later, with the third-gen modem (double-digit lower cost) launching late in 3Q17 near the CS ATC timing (9/6-9/8), pushing meaningful benefit at least to 4Q17. ■ Staying conservative with limited near-term catalysts. We lower our 2017E EPS from NT$16.00 to NT$14.50 and TP to NT$220 (from NT$225), based on 15x 2017E EPS (11x cash adjusted). We maintain our conservative view with sales decelerating and still-declining margins holding back meaningful improvement for a few more quarters. The company's guidance implies a meaningful rebound in 2Q17, raising the risk of further estimate cut. Valuation support should protect downside with a 5% cash yield and 35% of the market cap in cash and investments + 21% Goodix stake. Share price performance Financial and valuation metrics Year 12/14A 12/15A 12/16E 12/17E Revenue (NT$ mn) 213,062.9 213,255.2 275,511.3 289,702.0 EBITDA (NT$ mn) 50,007.1 31,041.7 29,909.4 29,809.2 EBIT (NT$ mn) 47,241.3 25,908.0 23,075.4 22,883.3 Net profit (NT$ mn) 45,356.5 25,937.0 23,462.5 22,672.8 EPS (CS adj.) (NT$) 29.67 16.74 15.01 14.50 Change from previous EPS (%) n.a. n.a. 3.5 (9.4) Consensus EPS (NT$) n.a. n.a. 15.28 17.52 EPS growth (%) 47.4 (43.6) (10.4) (3.4) The price relative chart measures performance against the P/E (x) 7.2 12.8 14.2 14.7 TAIWAN SE WEIGHTED INDEX which closed at 9,447.95 Dividend yield (%) 7.0 10.3 5.2 4.6 on 26/01/17. On 26/01/17 the spot exchange rate was EV/EBITDA (x) 3.3 6.3 7.1 6.3 NT$31.24/US$1 P/B (x) 1.32 1.38 1.42 1.30 Performance 1M 3M 12M ROE (%) 20.5 10.6 9.9 9.2 Absolute (%) -2.1 -10.1 1.2 Net debt/equity (%) Net Cash Net Cash Net Cash Net Cash Relative (%) -5.8 -11.6 -19.2 Source: Company data, Thomson Reuters, Credit Suisse estimates DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 27 January 2017 Focus tables and charts Figure 1: Mediatek 4Q16—1Q17 and 2016/2017 estimates in mn, unless otherwise stated 4Q16 1Q17 2016 2017 2018 (NT$ mn) Actual CS(old) Street Guidance CS CS(old) Street Guidance Actual CS(old) Street CS CS(old) Street Sales $68,675 $68,807 $69,618 NT$66.6-72.9bn $57,312 $60,607 $62,269 NT$53.6-59.1bn $275,511 $275,643 $277,058 $289,702 $300,832 $294,405 Chg -12.4% -12.2% -11.2% -7.0%-15.1% QoQ -16.5% -11.9% -10.6% -14-22% QoQ 29.2% 29.3% 281.0% 5.2% 9.1% 6.3% GM% 34.5% 34.9% 35.1% 33.5-36.5% 34.1% 35.1% 34.8% 32.5-35.5% 35.6% 35.7% 35.7% 34.2% 35.0% 35.3% OpM% 5.8% 6.1% 7.0% 4-11% 4.1% 3.4% 6.5% 1-8% 8.4% 8.5% 8.7% 7.9% 8.4% 8.8% Net Inc. 5,046 4,416 4,960 FX: 31.5 2,795 2,600 5,728 FX: 31.8 23,463 22,668 23,726 22,673 25,010 27,898 EPS (NT$) $3.23 $2.83 $3.19 $1.79 $1.66 $3.62 $15.01 $14.50 $15.09 $14.50 $16.00 $17.63 Source: the BLOOMBERG PROFESSIONAL™ service consensus, Company data, Credit Suisse estimates Figure 3: China has gained, though iPhone 8 could Figure 2: China 4G crosses over 3G this year repeat the modest gains seen with iPhone 6 in 4Q14 Subscriber base (mn) Penetration (%) China smartphones (mn) YTD YoY % 1,500 100% 550 25% 1,350 90% 440 20% 1,200 80% 330 15% 1,050 70% 220 10% 900 60% 110 5% 750 50% - 0% 600 40% (110) -5% 450 30% (220) -10% 300 20% (330) -15% 150 10% (440) -20% 0 0% (550) -25% 2009 2010 2011 2012 2013 2014 2015 2016E 2017E Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec 2G subscriber base 3G subscriber base 4G subscriber base 2014 2015 2016 2G penetration 3G penetration 4G penetration 2014 YTD YoY 2015 YTD YoY 2016 YTD YoY Source: Company data, Credit Suisse Source: Company data, Credit Suisse Figure 4: Helio declines in 1Q on a shift to exports Figure 5: Mediatek's stock pressured by lower GMs Mediatek Stock GM / OpMs (%) Revenue (NT$bn) Helio % of Mediatek sales $50 40% Price (NT$) $700 70% $45 35% $40 $600 60% 30% $35 $500 50% 25% $30 $400 40% $25 20% $300 30% $20 15% $200 20% $15 10% $100 10% $10 $5 5% $0 0% $0 0% 1Q03 4Q15 2Q02 4Q03 3Q04 2Q05 1Q06 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11 1Q12 4Q12 3Q13 2Q14 1Q15 3Q16 1Q16 2Q16 3Q16 4Q16E 1Q17E 2Q17E 3Q17E 4Q17E 3Q01 3G 4G Mainstream 4G Helio 4G Helio Share price Corporate GM % Corporate OpM % Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 6: Mediatek shipment and margin metrics Figure 7: Mediatek inventory near its average Years Inventory Inventory Days (NT$mn) NT$mn unless noted 2016F Prior 2017F Prior 2018F 3G Smartphones (mn) 168.2 168.2 135.8 139.8 124.6 40,000 160 4G Smartphones (mn) 334.6 331.9 389.3 390.3 420.7 35,000 140 Smartphones (mn) 502.7 500.1 525.1 530.1 545.3 30,000 120 ASPs (US$) $9.02 $9.06 $9.09 $9.29 $8.99 25,000 100 20,000 80 Tablets (mn) 41.9 41.9 38.9 38.5 36.5 15,000 60 ASPs (US$) $7.53 $7.53 $7.13 $7.13 $6.85 10,000 40 Feature phones (mn) 251.6 255.0 216.8 238.6 192.1 5,000 20 ASPs (US$) $1.36 $1.36 $1.29 $1.29 $1.24 - 0 Handset/Tablet Sales 167,481 167,614 170,626 176,325 172,477 Total Sales 275,510 275,642 289,702 300,832 304,316 1Q01 4Q01 3Q02 2Q03 1Q04 4Q04 3Q05 2Q06 1Q07 4Q07 3Q08 2Q09 1Q10 4Q10 3Q11 2Q12 1Q13 4Q13 3Q14 2Q15 1Q16 4Q16 GM % 35.6% 35.7% 34.2% 35.0% 35.2% 2Q00 Op M% 8.4% 8.5% 7.9% 8.4% 9.1% Inventory Inventory Days EPS $15.01 $14.50 $14.50 $16.00 $17.00 Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates MediaTek Inc.