asia mobile communication
TRANSCRIPT
See important disclosures, including any required research certifications, beginning on page 60
Pan Asia Information Technology
3 December 2018
Asia Mobile Communication
Let’s talk about 5G
2019 likely to be a tipping point for 5G cellular technology kicking off, triggered by telcos’ new capex cycle
We forecast over USD65bn of incremental value per year at the system level for the 5G build, from infrastructure to terminal devices
Compound semiconductors set to get most of the incremental value; we like WinSemi, Inari, SEMCO, LMO, MTK, TSMC, ASE, Delta
Rick Hsu(886) 2 8758 6261
Robert Hsu(886) 2 8758 6251
See important disclosures, including any required research certifications, beginning on page 60
Pan Asia Information Technology
What's new: Bandwidth upgrades have been one of our structural
investment themes in tech (2018 Tech Outlook). While we have seen
bandwidth upgrades in wireline data transmissions, 5G cellular migration
for wireless bandwidth upgrades has yet to materialise. But we expect 2019
to be a milestone for the 5G cycle, triggered by telcos’ new capex build. We
aim to quantify the 5G-enabled total addressable market and dig into the
supply chain for stock ideas. We find that the most incremental value is
likely to go to compound semiconductors, which we see as benefiting from
antenna upgrades for ultra-wide radio-spectrum coverage. WinSemi and
Inari are our conviction Buys.
What's the impact: 2019 likely to be a tipping point. Telcos majors in
Asia will likely soon initiate a new capex cycle, leading us to believe 2019
will be a tipping point for 5G cellular migration in the mobile communication
industry. We expect this spending cycle to be milder than previous cycles
but last longer, with South Korea and Japan leading the pack on technology
advances, government backing, and the Tokyo Olympics, followed by
China, the US and EU ramping up global scale from 2020.
What’s the 5G-enabled TAM? We forecast some 24m base stations to be
built by telcos we monitor during the 5G cycle, which will likely run for 10
years, with an ASP of USD25k for a TAM of USD490bn at the system level,
USD260bn at electronics, USD127bn at silicon, and USD2bn at the
materials level, all on an incremental and cumulative basis. Together with
our forecast USD180bn incremental value from 5G smartphones, we
expect the 5G-enabled TAM, from infrastructure to terminal devices, to
exceed USD650bn cumulatively, or over USD65bn/year at the system level
through the cycle. This forecast excludes any upside from IoT devices.
Tech likely to benefit the most. The tech supply chain with business geared
to the 5G base-station build will be a major winner, per our research into bills of
materials projecting that the value proposition will go to electronic content
handling technological upgrades for antennas, radio and baseband units to
meet 5G’s high bandwidth requirements. We see compound semiconductors
capturing most of the incremental value through the cycle.
What we recommend: Per the 5G supply chain (page 18), we cherry-pick
8 AeJ stocks from segments where we see investment value, including key
materials merchants, silicon content suppliers for radio frequency and
baseband, and their contract manufacturing partners.
How we differ: Daiwa is one of the few to quantify the 5G-enabled TAM.
3 December 2018
Asia Mobile Communication
Let’s talk about 5G
2019 likely to be a tipping point for 5G cellular technology kicking off, triggered by telcos’ new capex cycle
We forecast over USD65bn of incremental value per year at the system level for the 5G build, from infrastructure to terminal devices
Compound semiconductors set to get most of the incremental value; we like WinSemi, Inari, SEMCO, LMO, MTK, TSMC, ASE, Delta
No Capital Markets and Services Licence has been issued by the Malaysian Securities Commission to any member of Daiwa Capital Markets and accordingly this report and any part of its content may not be distributed or made available by any means within Malaysia.
Key stock calls
Inari Amertron (INRI MK)
Rating Target Upside
Buy 2.25
36.4%
Buy 2.25
Source: Daiwa forecasts
Daiwa’s 5G stock picks (AeJ)
Stock Ticker Rating TP (LC)*
WinSemi 3105 TT Buy 195**
Inari INRI MK Buy 2.25
SEMCO 009150 KS Buy 200,000
LMO 3081 TT Buy 345
MediaTek 2454 TT Buy 310
TSMC 2330 TT Buy*** 266**
ASE 3711 TT Buy 95
Delta 2308 TT Buy 159
Source: Daiwa forecasts Note: * Target price in local currency ** TP revised in this report ***
Rating revised in this report
Rick Hsu(886) 2 8758 6261
Robert Hsu(886) 2 8758 6251
New Prev.
Win Semiconductors (3105 TT)
Rating Buy Buy
Target 195.00 200.00
Upside 54.2%
2
Asia Mobile Communication: 3 December 2018
Sector stocks: key indicators
Inari INRI MK 1.65 Buy Buy 2.25 2.25 0.0% 0.084 0.084 0.0% 0.084 0.084 0.0%
Murata 6981 JP 17,315.00 Outperform Outperform 25,000 25,000 0.0% 1055.100 1055.100 0.0% 1315.300 1315.300 0.0%
Sumitomo Chemical 4005 JP 616.00 Outperform Outperform 750 750 0.0% 82.600 82.600 0.0% 81.300 81.300 0.0%
Kuraray 3405 JP 1,764.00 Hold Hold 2,300 2,300 0.0% 140.500 140.500 0.0% 152.000 152.000 0.0%
Daicel 4202 JP 1,270.00 Hold Hold 1,150 1,150 0.0% 120.900 120.900 0.0% 105.900 105.900 0.0%
Ube 4208 JP 2,587.00 Hold Hold 3,230 3,230 0.0% 295.100 295.100 0.0% 314.100 314.100 0.0%
Ibiden 4062 JP 1,579.00 Hold Hold 1,750 1,750 0.0% 88.000 88.000 0.0% 106.600 106.600 0.0%
TDK 6762 JP 8,950.00 Outperform Outperform 13,000 13,000 0.0% 681.000 681.000 0.0% 784.000 784.000 0.0%
Intel INTC US 49.31 Buy Buy 64 64 0.0% 4.600 4.600 0.0% 4.500 4.500 0.0%
Broadcom AVGO US 237.41 Buy Buy 345 345 0.0% 22.400 22.400 0.0% 23.000 23.000 0.0%
Source: Bloomberg, Daiwa forecasts
Cumulative base-station build for 5G cycle* 5G base-station average TAM/year at different level
Source: Daiwa estimates & forecasts Note: * B/S build by a total of 20 global telcos majors Daiwa monitors across China, Japan,
Korea, the US and EU
Source: Daiwa estimates & forecasts
Global smartphone shipment forecasts 5G smartphone shipment and penetration
Source: IDC, Daiwa estimates & forecasts Source: Daiwa estimates & forecasts
Share
Company Name Stock code Price New Prev. New Prev. % chg New Prev. % chg New Prev. % chg
ASE Technology Holding 3711 TT 62.40 Buy Buy 95.00 95.00 0.0% 3.731 3.732 (0.0%) 6.658 6.659 (0.0%)
China Tower 788 HK 1.16 Hold Hold 1.13 1.13 0.0% 0.016 0.016 0.0% 0.026 0.026 0.0%
Delta Electronics 2308 TT 130.00 Buy Buy 159.00 159.00 0.0% 6.739 6.739 0.0% 8.064 8.064 0.0%
Hon Hai Precision Industry 2317 TT 71.90 Hold Hold 81.70 81.70 0.0% 7.170 7.170 0.0% 8.931 8.931 0.0%
LandMark Optoelectronics 3081 TT 258.00 Buy Buy 345.00 345.00 0.0% 7.732 7.729 0.0% 13.462 13.462 0.0%
LG Innotek 011070 KS 99,800 Outperform Outperform 158,000 158,000 0.0% 7,159 7,159 0.0% 12,564 12,564 0.0%
MediaTek 2454 TT 237.50 Buy Buy 310.00 310.00 0.0% 13.699 13.721 (0.2%) 18.816 18.816 0.0%
Realtek Semiconductor 2379 TT 141.50 Underperform Underperform 115.00 115.00 0.0% 8.132 8.132 0.0% 8.719 8.719 0.0%
Samsung Electro-Mechanics 009150 KS 120,500 Buy Buy 200,000 200,000 0.0% 9,483 9,483 0.0% 15,392 15,392 0.0%
Semiconductor Manufacturing Int'l Corp 981 HK 7.19 Hold Hold 6.55 6.55 0.0% 0.024 0.024 0.0% 0.011 0.011 0.0%
Taiwan Semiconductor Manufacturing 2330 TT 225.50 Buy Outperform 266.00 260.00 2.3% 13.482 13.492 (0.1%) 15.107 15.107 0.0%
United Microelectronics 2303 TT 11.55 Underperform Underperform 11.80 11.80 0.0% 0.788 0.788 0.0% 0.676 0.676 0.0%
Voltronic Power Technology 6409 TT 516.00 Hold Hold 528.00 528.00 0.0% 22.066 22.066 0.0% 23.252 23.252 0.0%
Win Semiconductors 3105 TT 126.50 Buy Buy 195.00 200.00 (2.5%) 6.729 6.759 (0.4%) 7.812 8.158 (4.2%)
Rating Target price (local curr.) FY1
EPS (local curr.)
FY2
5G 4G
B/S count ASP TAM
24m
5.8m
$25k$19k
$600bn
$110bn
0
10
20
30
40
50
60
System Electronics Silicon Materials
USDbn
0%
10%
20%
30%
40%
50%
60%
0
500
1,000
1,500
2,000
2010
2011
2012
2013
2014
2015
2016
2017
2018
E
2019
E
2020
E
2021
E
2022
E
2023
E
2024
E
2025
E
Smartphone shipment Growth (RHS)
m units
0%
10%
20%
30%
40%
50%
60%
0
200
400
600
800
1,000
2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E
5G smartphone shipment 5G penetration
m units
3
Asia Mobile Communication: 3 December 2018
Global 5G cellular technology supply chain: peer valuation panel
Price MktCap PER (x) PBR (x) ROE (%) Earnings growth (%)
Stock Ticker Rating (LC)* (USDm) 2018E 2019E 2020E 2018E 2019E 2020E 2018E 2019E 2020E 2018E 2019E 2020E
Epiwafer LMO 3081 TT Buy 258.00 758 33.2 19.1 11.6 5.8 4.9 3.8 18.2 28.0 37.2 7.3 74.1 64.5
Sumitomo Chemical 4005 JP Outperform 616.00 8,974 7.6 7.7 na 1.0 0.9 na 13.8 12.4 na 0.9 -1.5 na
VPEC 2455 TT NR 60.90 365 26.9 20.8 17.1 4.0 3.9 3.8 15.0 18.6 22.0 6.1 29.6 21.6
IntelliEPI 4971 TT NR 49.90 59 27.9 24.9 17.2 1.2 1.2 na 4.3 4.7 na -49.4 11.8 44.8
IQE IQE LN NR 72.10 714 33.4 18.2 10.3 1.8 1.7 1.7 5.5 9.6 16.7 16.6 83.5 75.8
Average
2,174 25.8 18.1 14.1 2.8 2.5 3.1 11.4 14.7 25.3 -3.7 39.5 51.7
IC substrate/PCB
SEMCO 009150 KS Buy 120,500.00 8,031 12.2 7.5 7.2 1.8 1.5 1.2 15.9 21.4 18.5 355.0 62.3 4.5
LG Innotek 011070 KS Outperform 99,800.00 2,107 13.9 7.9 6.6 1.1 1.0 0.8 7.9 12.1 12.8 -3.1 75.5 20.6
Ibiden 4062 JP Hold 1,579.00 1,957 17.1 14.0 na 0.8 0.7 na 4.5 5.3 na 12.2 22.3 na
ZDT 4958 TT NR 78.30 2,043 7.4 7.8 8.6 1.2 1.1 1.0 16.0 13.7 11.8 65.5 -5.4 -9.8
TTMT TTMI US NR 11.89 1,233 6.7 6.3 5.1 1.0 0.9 0.9 15.5 14.8 16.7 47.8 6.4 23.3
Unimicron 3037 TT NR 21.15 1,032 28.6 24.0 18.8 0.7 0.7 0.7 2.6 3.1 4.0 168.4 19.3 27.4
AT&S ATS AV NR 17.68 777 9.4 10.1 9.0 1.0 1.0 0.9 11.1 9.5 9.8 na -6.5 11.8
Nanya PCB 8046 TT NR 30.45 638 na 150.3 21.0 0.7 0.7 0.6 -3.3 0.4 3.1 na na nm
Kinsus 3189 TT NR 45.00 651 19.4 12.3 9.9 0.7 0.7 0.7 3.6 5.5 6.6 110.8 57.5 24.0
Average
2,052 14.3 26.7 10.8 1.0 0.9 0.9 8.2 9.5 10.4 108.1 28.9 14.5
Semiconductor
Broadcom AVGO US Buy 237.41 98,156 10.6 10.3 9.5 4.7 4.6 5.4 39.5 26.9 34.0 316.9 2.7 8.3
MediaTek 2454 TT Buy 237.50 12,253 17.3 12.6 9.7 1.5 1.4 1.3 8.4 11.2 13.6 -10.4 37.3 30.1
Intel INTC US Buy 49.31 225,051 10.6 10.6 10.3 3.0 2.5 2.2 22.2 15.9 10.7 26.6 -0.2 3.3
Murata 6981 JP Outperform 17,315.00 34,324 17.3 13.9 na 2.4 2.1 na 14.5 16.0 na 54.0 24.7 na
Qorvo QRVO US NR 65.81 8,220 11.0 9.8 9.1 1.7 1.6 1.5 15.8 16.5 16.3 na 12.1 7.1
Skyworks SWKS US NR 72.77 12,919 9.8 8.9 8.1 2.9 2.5 2.1 29.7 28.1 25.8 30.4 9.6 10.8
Qualcomm QCOM US NR 58.26 70,621 14.7 13.0 11.3 -8.7 -6.6 -7.8 -59.5 -51.0 -69.0 95.3 12.8 15.4
Xilinx XLNX US NR 92.48 23,401 14.9 13.8 10.5 9.2 8.0 7.0 61.8 57.8 66.5 151.5 8.0 31.6
Average
60,618 13.3 11.6 9.8 2.1 2.0 1.7 16.6 15.2 14.0 94.9 13.4 15.2
SCM
WinSemi 3105 TT Buy 126.50 1,738 18.8 16.2 10.7 2.2 2.1 1.9 11.4 13.2 18.4 -24.2 16.1 51.7
TSMC 2330 TT Buy 225.50 189,558 16.7 14.9 13.2 3.4 3.1 2.9 21.7 22.0 22.8 1.9 12.0 13.4
ASE 3711 TT Buy 62.40 8,739 16.7 9.4 6.8 1.5 1.3 1.2 8.0 14.8 18.2 -30.9 78.5 38.1
Inari INRI MK Buy 1.65 1,250 19.7 19.6 15.9 4.9 4.5 4.2 27.2 24.0 27.4 37.3 0.4 23.7
AWSC 8086 TT NR 40.25 189 17.3 16.3 na 1.9 1.9 na 11.2 11.7 na 51.9 6.0 na
GCS 4991 TT NR 55.60 137 11.5 11.1 na 1.5 1.3 na 13.0 11.9 na 2.7 3.6 na
San'an Opto 600703 CH NR 14.27 8,363 16.5 14.0 11.4 2.6 2.3 1.9 15.8 16.1 16.9 11.4 17.8 22.9
ShunSin 6451 TT NR 71.40 244 38.8 16.0 na na na na na na na 75.0 142.3 na
Average
26,277 19.5 14.7 11.6 2.6 2.4 2.4 15.5 16.2 20.7 15.6 34.6 30.0
EMS
Hon Hai 2317 TT Hold 71.90 32,313 8.7 8.1 7.1 0.9 0.8 0.8 9.9 10.0 10.7 -17.0 7.5 12.9
Flex FLEX US NR 8.75 4,608 7.9 7.1 6.0 1.4 1.2 1.2 17.7 17.2 19.7 81.8 11.6 19.2
Jabil JBL US NR 24.97 4,042 8.2 7.5 7.6 2.0 1.9 1.7 24.8 25.7 22.1 280.8 10.1 -1.4
Venture VMS SP NR 14.91 3,130 11.8 11.2 10.9 1.8 1.7 1.5 15.5 14.9 14.2 -2.1 4.7 3.3
Sanmina SANM US NR 27.04 1,846 9.4 8.3 na na na na na na na 41.9 12.7 na
Average
9,188 9.2 8.4 7.9 1.5 1.4 1.3 17.0 17.0 16.7 77.1 9.3 8.5
Antenna system
Comba Telecom 2342 HK NR 1.24 383 34.4 24.0 17.1 0.8 0.7 0.7 2.2 3.0 4.0 218.7 43.3 40.0
CommScope COMM US NR 18.10 3,479 8.2 8.2 7.3 1.8 1.4 1.2 21.6 17.5 16.5 117.9 0.9 12.0
MOBI 947 HK NR 0.96 101 na na na na na na na na na na na na
Amphenal APH US NR 87.94 26,499 22.8 21.3 19.3 6.5 6.0 5.3 28.7 28.2 27.2 79.0 6.8 10.3
Tongyu Comm 002792 CH NR 25.02 810 58.8 39.5 22.6 2.8 2.7 2.4 4.8 6.8 10.8 -13.2 48.9 74.4
Ace Tech 088800 KS NR 4,025.00 123 na na na na na na na na na na na na
Average
5,232 31.0 23.2 16.6 3.0 2.7 2.4 14.3 13.9 14.6 100.6 25.0 34.2
Power system
Delta Electronics 2308 TT Buy 130.00 10,947 19.3 16.1 14.2 2.9 2.7 2.6 14.5 17.5 18.7 -4.8 19.7 13.7
ABB ABB US NR 20.28 43,970 15.5 13.9 12.6 2.8 2.6 2.4 17.9 18.6 19.0 28.1 11.3 11.0
Eaton ETN US NR 76.94 33,346 14.4 13.3 12.5 2.0 1.9 1.8 13.7 14.1 14.2 -22.3 8.3 6.0
Emerson Network EMR US NR 67.52 42,278 18.4 16.6 16.0 4.6 4.4 4.0 25.3 26.5 25.3 51.7 10.5 3.8
Schneider SU FP NR 64.28 42,117 14.9 13.4 12.7 1.8 1.7 1.6 11.9 12.3 12.3 16.4 10.6 6.1
Average
34,532 16.5 14.7 13.6 2.8 2.7 2.5 16.7 17.8 17.9 13.8 12.1 8.1
Telecom equipment
Ericsson ERIC US NR 8.39 27,985 4.7 2.2 1.6 0.3 0.3 0.3 6.8 13.9 17.5 na 113.5 34.6
Nokia NOK US NR 5.47 30,827 24.6 17.2 13.7 1.9 2.0 1.9 7.8 11.4 13.8 na 42.9 26.1
ZTE 000063 CH NR 19.87 11,299 na 18.0 13.2 2.9 2.6 2.3 -21.2 14.3 17.3 na na 36.2
Average
23,370 14.6 12.5 9.5 1.7 1.6 1.5 -2.2 13.2 16.2 na 78.2 32.3
Source: Bloomberg (for NR companies), Daiwa forecasts (for rated companies), Affin Hwang forecasts (for Inari covered by Daiwa alliance partner Affin Hwang) Note: * Local currency, based on share prices as of 30 November 2018; March year-end for Sumitomo Chemical, Ibiden, AT&S, Murata, Qorvo, Xilinx, Flex; June year-end for Inari; August year-end for
Jabil; September year-end for Skyworks, Qualcomm, Sanmina, Emerson Network; October year-end for Broadcom
When a report covers six or more subject companies please access important disclosures for Daiwa Capital Markets Hong Kong Limited at
http://www.hk.daiwacm.com/research_disclaimer.html or contact your investment representative or Daiwa Capital Markets Hong Kong Limited at Level 26, One Pacific Place, 88 Queensway, Hong Kong.
4
Asia Mobile Communication: 3 December 2018
Profile of analysts and associates who contributed to this report
Taiwan
Rick HSU
Tech head/Semiconductors
(886) 2 8758 6261
TSMC (2330 TT) Novatek (3034 TT)
UMC (2303 TT) Realtek (2379 TT)
SMIC (981 HK)
ASE (3711 TT)
Win Semiconductor (3105 TT)
LandMark Opto (3081 TT)
MediaTek (2454 TT)
Steven TSENG
Computing & data centre
(886) 2 8758 6252
ASUSTeK Computer (2357 TT) Advantech (2395 TT)
Lenovo Group (992 HK) Ennoconn (6414 TT)
Pegatron Corp (4938 TT) Adlink (6166 TT)
Quanta Computer (2382 TT) Delta Electronics (2308 TT)
Hiwin Technologies Corp (2049 TT)
Airtac International Group (1590 TT)
Voltronic (6409 TT)
Elsa CHENG
Research associate
(886) 2 8758 6253
Robert HSU
Research associate
(886) 2 8758 6262
Korea
SK KIM
Semiconductor/Display & Hardware
(82) 2787 9173
Samsung Electronics (005930 KS)
SK Hynix (000660 KS)
Samsung SDI (006400 KS)
Samsung Electro-Mechanics (009150 KS)
LG Innotek (011070 KS)
LG Display (034220 KS)
LG Electronics (066570 KS)
Henny JUNG
Research associate
(82) 2787 9182
Soulbrain (036830 KS)
Hana Materials (166090 KS)
Malaysia
Kevin LOW
Telco, Technology & Small Caps
(603) 2146 7479
Globetronics (GTB MK)
Inari Amertron (INRI MK)
MPI (MPI MK)
KESM (KESM MK)
Uchi (UCHI MK)
Unisem (UNI MK)
Mi (MI MK)
5
Asia Mobile Communication: 3 December 2018
Table of contents
Let’s talk about 5G ................................................................................................... 6
2019 likely to be a tipping point ..........................................................................................7
Telcos investment: this time, milder but longer ..................................................................8
So what’s the 5G-enabled TAM? ..................................................................................... 10
Tech sector likely to benefit the most ............................................................................... 18
Appendix: glossary of terms ..................................................................................23
Company Section
Win Semiconductors ........................................................................................................ 25
Inari Amertron .................................................................................................................. 29
Samsung Electro-Mechanics ........................................................................................... 32
LandMark Optoelectronics ............................................................................................... 35
MediaTek ......................................................................................................................... 39
Taiwan Semiconductor Manufacturing ............................................................................. 43
ASE Technology Holding ................................................................................................. 47
Delta Electronics .............................................................................................................. 51
6
Asia Mobile Communication: 3 December 2018
Let’s talk about 5G
Telcos majors in Asia will likely soon initiate a new capex cycle, per Daiwa’s research,
leading us to believe that 2019 could see a tipping point for 5G cellular network migration
in global mobile communications. We expect the spending cycle this time to be milder than
previous 3G/4G cycles, but last longer, with South Korea and Japan leading the pack on
technology advances, government backing, and the Tokyo Olympics, followed by China,
the US and EU ramping up their global scale from 2020.
This time, we think the tech supply chain with business geared towards the base-station
(B/S) build at the infrastructure end will be a major winner, per our in-depth tear-down
research, conducted by digging into the 5G B/S bills of materials (BoM) and projecting the
most value proposition that should go to electronics content on an incremental basis. This
is because 5G’s high bandwidth requirements demand several technological upgrades to
the likes of antennas, radio and baseband units, making silicon content, especially
compound semiconductors, within the total electronics space, likely to capture the most
incremental value through the 5G build-up cycle, in our view.
In sum, we forecast around 24m units of 5G B/S to be built cumulatively by 20 telcos we
monitor globally, with an ASP of USD25k (without tower systems) for a TAM of USD490bn
at the system level, USD260bn at the electronics level, USD127bn at the silicon level, and
c.USD2bn at the materials level, all on an incremental and cumulative basis for the 5G
build-out cycle, which we expect to last for 10 years. This means on a per-year average
TAM through this 10-year build-up cycle, USD49bn/26bn/13bn/0.2bn at the
system/electronics/silicon/materials level, as summarised in the chart on page 2. Together
with our forecast of USD180bn incremental value contributed by 5G smartphones, we
expect the total 5G-enabled TAM, from the infrastructure to terminal-device end, to exceed
USD650bn at the system level on a cumulative basis through the cycle, or over USD65bn
per year. This forecast excludes any upside from IoT devices.
We see the key beneficiaries in the tech supply chain being categorised by 3 segments, as
summarised in the table below, which represents Daiwa’s 5G stock picks for Asia-ex-Japan
(AeJ). Among the 8 stocks we cherry-pick, our conviction Buys are compound-
semiconductor players Win Semiconductor (WinSemi) and Inari Amertron (Inari) —
companies that we believe stand to benefit the most from radio frequency (RF) power
amplifier (PA) and filter upgrades, which are both unit- and ASP-accretive. Other stocks we
believe will benefit from the 5G cycle, directly or indirectly, are SEMCO (print circuit board
materials/high-end capacitor upgrade), LandMark Opto (LMO) (B/S fibre-optic bandwidth
upgrade), MediaTek (5G smartphone chipset upgrade), TSMC (advanced foundry work for
chip vendors), ASE (packaging & testing work for chip vendors), and Delta Electronics
(B/S power systems).
Daiwa's 5G investment portfolio and valuation summary (AeJ)
Price
PER (x) PBR (x) ROE (%) Earnings growth (%)
Stock Ticker (LC)* Rating 2018E 2019E 2020E 2018E 2019E 2020E 2018E 2019E 2020E 2018E 2019E 2020E
Key materials
LMO 3081 TT 258.00 Buy 33.2 19.1 11.6 5.8 4.9 3.8 18.2 28.0 37.2 7.3 74.1 64.5
SEMCO 009150 KS 120,500.00 Buy 12.2 7.5 7.2 1.8 1.5 1.2 15.9 21.4 18.5 355.0 62.3 4.5
Semiconductors WinSemi 3105 TT 126.50 Buy 18.8 16.2 10.7 2.2 2.1 1.9 11.4 13.2 18.4 -24.2 16.1 51.7
MediaTek 2454 TT 237.50 Buy 17.3 12.6 9.7 1.5 1.4 1.3 8.4 11.2 13.6 -10.4 37.3 30.1
TSMC 2330 TT 225.50 Buy 16.7 14.9 13.2 3.4 3.1 2.9 21.7 22.0 22.8 1.9 12.0 13.4
ASE 3711 TT 62.40 Buy 16.7 9.4 6.8 1.5 1.3 1.2 8.0 14.8 18.2 -30.9 78.5 38.1
Inari INRI MK 1.65 Buy 19.7 19.6 15.9 4.9 4.5 4.2 27.2 24.0 27.4 37.3 0.4 23.7
Devices & assembly Delta Electronics 2308 TT 130.00 Buy 19.3 16.1 14.2 2.9 2.7 2.6 14.5 17.5 18.7 -4.8 19.7 13.7
Source: Bloomberg, Daiwa estimates & forecasts Note: * Local currency, based on share prices as of 30 November 2018
2019 set to see a tipping
point, triggered by the
telcos’ capex cycle
Tech sector may capture
the most value on
hardware upgrade
We see an over
USD650bn TAM at the
system level for the 5G-
enabled build-out cycle
Conviction Buys:
WinSemi and Inari
7
Asia Mobile Communication: 3 December 2018
2019 likely to be a tipping point
The global networking & communication (N&C) ecosystem has seen bandwidth upgrades
at wireline infrastructure of datacentres, telecommunication backhauls and last miles,
against the backdrop of surging data transmissions, on the rise of the Big Data/Internet of
Things (BigData/IoT) demand cycle, but not for wireless cellular communications. In the
wireless cellular communication ecosystem, penetration of 4th generation (4G)/long-term
evolution (LTE) technology for data transmissions has reached plateaus of 75-80% over
2018-19, as shown in the chart below, potentially creating a bottleneck in the overall N&C
ecosystem of bandwidth mismatch between wireless and wireline data transmissions, and
hindering IoT development which requires high bandwidth, such as autonomous driving
and industrial automation (Industry 4.0).
Despite the bandwidth mismatch, telcos have been slow in spending on the next
infrastructure build of the 5th generation (5G) cellular network technology to upgrade
bandwidth, likely due to concerns about new investment returns and maximisation of the
4G payback period. However, we see 2019 as likely to be a tipping point, backed by the
jump-start of a new but potentially long-lasting capex cycle from the telcos, in order to
capitalise on the key advantages of 5G – enhanced mobile broadband (eMBB) technology
for ultra-wide-bandwidth connectivity and ultra-reliable low-latency communication (uRLLC)
with virtually zero latency in data transmissions – relative to 4G/LTE cellular technologies.
Evolution of the mobile cellular communication network into 5G
Source: Company, Daiwa
Global handset breakdown by cellular technology Global cellular technology migration cycles
Source: IDC, Daiwa estimates & forecasts Source: IDC, Daiwa estimates & forecasts
5 2015 5 2016 2017 5 2018 520205 2019
90-95 GHz
70-85 GHz
38 GHz
28 GHz
2.9 GHz available bandwidth
10 GHz available bandwidth
4 GHz available bandwidth
2 GHz available bandwidth
Macro base station Densification Massive MIMO &digital beamforming
mmWave
• Increasing frequencybeyond 2.7GHz to 6GHz
• Increasing bandwidth• Increasing efficiency
• Small cells• DAS• LTE-U
• Up to 6GHz• Array antenna
• Ultra-wide bandwidth• Ultra-wide throughput
0
500
1,000
1,500
2,000
2010
2011
2012
2013
2014
2015
2016
2017
2018
E
2019
E
2020
E
2021
E
2022
E
2G/2.5G 3G 4G 5G
m units
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
2010
2011
2012
2013
2014
2015
2016
2017
2018
E
2019
E
2020
E
2G/2.5G 3G 4G 5G
We see a bandwidth
mismatch between
wireline and wireless
data transmissions
5G offers viable
solutions for its eMMB
and uRLLC features
8
Asia Mobile Communication: 3 December 2018
Global telcos capex cycle from 2G to 4G/LTE* 4G/LTE telcos capex breakdown by geography*
Source: Company, Daiwa estimates Note: * China top-3: China Mobile, China Telecom, China Unicom; Korea top-3: SK Telecom, KT,
LG Uplus; Japan top-3: NTT Docomo, KDDI, SoftBank; US majors: AT&T, Verizon, Sprint, T-Mobile; EU majors: Vodafone, Orange, British Telecom, Telefonica, Deutsche Telekom, Telecom Italia, Telenor ASA
Source: Company, Daiwa estimates Note: * China top-3: China Mobile, China Telecom, China Unicom; Korea top-3: SK Telecom, KT,
LG Uplus; Japan top-3: NTT Docomo, KDDI, SoftBank; US majors: AT&T, Verizon, Sprint, T-Mobile; EU majors: Vodafone, Orange, British Telecom, Telefonica, Deutsche Telekom, Telecom Italia, Telenor ASA
Telcos investment: this time, milder but longer
As shown in the chart above, global telcos’ capex cycle for the 4G/LTE build started after
the GFC, with Japan and South Korea leading the pack, followed by China, the EU and the
US, and peaked in 2015 for roughly a 5-year cycle of massive builds. Cumulative spending
during the 4G cycle mounted to USD868bn by a total of 20 major telcos in China, the US,
EU, Japan and South Korea, or an average of USD173bn per year. After under-spending
over 2016-18, the telcos majors look likely to kick off a new round of capex for the 5G build
from 2019 onwards, and we expect the spending cycle this time to be more moderate than
previous 3G and 4G cycles — but to last longer.
Taking as a proxy the major telcos of 3 countries (China, Japan and South Korea) under
Daiwa telcos team’s coverage, we estimate the 3-year run of contraction in aggregate
capex will end in 2018, with growth of 6% YoY for 2019 and 6% YoY for 2020, and a 3%
CAGR over 2018-25 to more than USD75bn in 2025 (see chart below). Our teams expect
this spending cycle to last until 2030, at least double the 4G cycle in duration, which
means, on a cumulative basis, aggregate capex would amount to USD880bn over the 5G
build-up cycle, averaging USD73bn/year during 2019-30 — 9% below the average
spending of c.USD80bn by the 3 countries for the 4G cycle.
Note: we believe our monitor of the 3 countries’ capex is a sound gauge of the global 5G
spending, as these countries together accounted for 45% of the global telcos spending in
the 4G cycle.
Capex cycle of telcos majors in China, Japan and Korea*
Source: Company, Daiwa estimates & forecasts Note: * China top-3: China Mobile, China Telecom, China Unicom; Korea top-3: SK Telecom, KT, LG Uplus; Japan top-3: NTT Docomo, KDDI,
SoftBank
(30%)
(20%)
(10%)
0%
10%
20%
0
50
100
150
200
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
China top-3 Korea top-3 Japan top-3
US majors EU majors Growth (YoY)
USDbn3G build
2G build
4G build
China31%
Korea4%
Japan10%
US28%
EU27%
(30%)
(20%)
(10%)
0%
10%
20%
30%
40%
0
20
40
60
80
100
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
E
2019
E
2020
E
2021
E
2022
E
2023
E
2024
E
2025
E
China top-3 Korea top-3 Japan top-3 Growth (YoY)
USDbn
2G build
3G build4G build 5G build
5G capex cycle likely to
kick off from 2019, and
be milder but last longer
than that for 4G
We expect Asian telcos
majors to spend an
average USD73bn/year
for 5G, 9% below that of
4G …
9
Asia Mobile Communication: 3 December 2018
Similar to the 4G cycle, we expect South Korea and Japan to jump-start the 5G
infrastructure build, due to their high 4G penetration relative to the world, government
backing, and the upcoming Tokyo Olympics. As depicted in our telcos report (5G migration:
the long and winding road, 2 May 2018), the South Korea government completed its
spectrum auction in mid-2018, releasing RF bands of 3.5GHz and 28GHz to telcos, SK
Telecom, KT and LG Uplus, which will likely spend an aggregate of KRW5.9tn (USD5.3bn)
in 2019 and KRW6.8tn (USD6.1bn) in 2020, up 18% and 15% YoY, respectively, after 6
years of declines over 2013-18, to deploy new B/S and related equipment at the
infrastructure end. According to research by Daiwa’s tech team, Samsung Electronics
(SEC) will likely showcase its first 5G smartphones at the 2019 Mobile World Congress
(MWC), supporting the country’s 5G ecosystem from the terminal-device end.
For Japan, we forecast aggregate capex for the 3 major telcos to reach JPY1.33tn
(USD12.1bn) in 2018, JPY1.29tn (USD11.4bn) in 2019 and JPY1.23tn (USD10.9bn) in
2020. Daiwa believes the government will open up 3.7/4.5/28GHz frequency bands to
these telcos, aiming to commercialise the country’s 5G services ahead of the 2020 Tokyo
Olympics. Elsewhere, in the US and EU, we understand that Verizon and AT&T are likely to
roll out commercial services for non-standalone-based 5G networks in 2020, while the race
for 5G rollouts has already begun in the EU, with the UK having allocated 3.4GHz
spectrum in March 2018. Other countries will likely follow suit by 2020.
China is the most crucial in terms of determining the scale and timing of the 5G ramp, in
our view, given its status as the largest contributor to global telcos spending. We
understand that a total of 16 cities in China are in the process of testing 5G network
interconnectivity, and the government aims to commercialise 5G services by 2020 through
working closely with domestic telecom equipment manufacturers like Huawei and ZTE —
only about 1 year behind the schedules of Japan and South Korea. Indeed, per our market
research, Chinese smartphone majors Huawei, Xiaomi, Oppo and Vivo will roll out their 5G
phones in 2019 to support the country’s 5G migration from the terminal-device end. We
believe the spectrum China plans to release will include 3.3/3.4/3.6/4.8/5.0GHz frequency
bands.
The International Telecommunication Union (ITU) selected 11 candidate frequencies for the
5G cellular networks in 2015, the 3rd
Generation Partnership Project (3GPP) chose 26.5-
29.6GHz spectrum as a global standard of millimetre-wave (mmWave) technology in 2017,
and the EU has proposed a bandwidth range of 24.5-27.5GHz for 5G. Daiwa’s telcos team
believes the 3GPP will set a 5G standard by June 2019 and others related to IoT
applications by end-2019, and then propose these specs to the ITU for finalisation. These
official decisions, combined with government backing, telcos’ capex launches, and
smartphone vendors’ support, mean we are comfortable in calling for 2019 to be a tipping
point for the global 5G build-up cycle to kick off.
Candidate frequency bands for 5G network from major countries in the world
Countries Date Candidate frequencies (bandwidth)
Korea June 2018 3.5GHz (280MHz), 28GHz (2.4GHz)
China TBD Issued frequency plans for 3.3-3.4GHz; 3.4-3.6GHz; 4.8-5.0GHz (500MHz)
Japan TBD Official 5G bands: 3.7GHz, 4.5GHz (max 500MHz), 28GHz (2GHz)
Australia 2018 1.5GHz, 3.4GHz, 3.6GHz (Oct-Dec 2018), 26GHz
Taiwan 2018 850MHz (10MHz), 1.8GHz (90MHz)
US Nov 2018 3.6GHz (150MHz), 28GHz (3.85GHz), 37GHz (3.85GHz), 39GHz (3.85GHz)
Germany 2018 2GHz (60MHz), 3.6GHz (300MHz)
France 2018 2.6GHz, 3.5GHz
Swiss 2018 700MHz (60MHz), 1.4GHz (91MHz), 3.6GHz (300MHz)
UK Mar 2018 2.3GHz (40MHz), 3.4GHz (150MHz)
Source: Global Mobile Suppliers Association (GSA), Daiwa
… led by South Korea
and Japan in 2019 …
… followed by major
countries such as China
and the US
Likely frequencies for
smartphones:
3.3/3.4/3.5/3.6/3.7/4.5/4.8/
5GHz; for B/S:
26/28/37/39GHz
10
Asia Mobile Communication: 3 December 2018
So what’s the 5G-enabled TAM?
Cellular B/S at the infrastructure and smartphones at the terminal-device end are the focus
of our TAM projection for the tech supply chain, though we expect other IoT devices to
follow suit at the terminal-device end, such as autonomous driving and industrial
automation in the longer term. In summary, we forecast the 5G-enabled TAM will amount to
USD600bn at the infrastructure end for a potential 10-year build-up cycle, on a total
number of c.24m B/S installed (excluding tower systems) by the 20 telcos majors we
monitor globally. This means an incremental build of c.18m B/S for a total sum of
USD490bn, including incumbent device upgrades, or USD49bn/year for the cycle — 2.2x
the average spending of c.USD22bn/year on the 4G cycle. For discrete B/S without power
systems, we forecast the 5G-enabled TAM to reach USD44bn/year.
Note: we exclude the tower systems from our TAM calculation as they would inflate the
value given their high ASP of c.USD45k/system, besides the fact that telcos normally lease
them from tower makers such as China Tower (for details, see our telco team’s initiation
published on 19 October 2018, Unattractive risk-reward profile).
We believe this projected 2.2x jump in B/S spending is reasonable as 5G B/S are both
unit- and ASP-accretive as a result of technological upgrades such as array-antenna
design to handle the surging number of radio directivity associated with the higher
bandwidth and spectrum coverage relative to their 4G counterparts. Actual spending could
turn out higher over time as our assessment does not include other regions in the rest of
the world, such as India, ASEAN and the Middle East.
For the Asian telcos majors we monitor, we forecast a TAM of c.USD500bn for a total of
20m units of 5G B/S build during the cycle (breakdown depicted in the chart below): China,
17-18m units (3.6-3.7m for 4G), and 1.2-1.3m units each for Japan (375k for 4G) and
South Korea (460k for 4G). Deducting the 4G build, this implies a TAM of USD410bn on an
incremental basis, translating into an average spend of USD41bn/year — 2.4x the average
4G spending and representing 45-55% of the telcos’ average capex/year during the cycle.
From this hardware bottom-up assessment, the B/S spending ratio looks much higher than
that of previous cycles (30-40% for 4G), which means that the telcos should bear the costs
by reallocating budgets from other pockets or raising total capex beyond the present top-
down forecasts of our telcos team. On the flip side, we believe the 5G cycle bodes well for
the telecom equipment vendors and their electronics suppliers from the tech sector. We
note that the top-5 vendors — Ericsson, Huawei, Nokia, ZTE and SEC — recorded
aggregate revenue of around USD95bn per year during the 4G cycle, on average.
Cumulative 4G B/S build breakdown by country Cumulative 5G B/S build breakdown forecasts*
Source: Daiwa estimates Source: Daiwa estimates & forecasts
China63%
Japan7%
Korea8%
US14%
EU 8%
Total B/S build = ~ 5.8m units
China73%
Japan5%
Korea5%
US11%
EU 6%
Total B/S build = ~ 24m units
We forecast average
spending on 5G B/S per
year to surge 2.2x to
USD49bn from that
spent on 4G
5G B/S are both unit-
and ASP-accretive due
to their array-antenna
design
Telcos’ pocket of capex
will likely be allocated
more for B/S build
during the 5G cycle
11
Asia Mobile Communication: 3 December 2018
A typical telcos capex breakdown in 4G cycle Global telecom equipment market share by 2016 revenue
Source: Daiwa estimates
Source: Gartner: "Market Share: Communications Service Provider Operational Technology,
Worldwide, 2016", published in April 2017, by Jouni Forsman and others Note: * Nokia acquired Alcatel-Lucent
At the terminal-device end, we expect 5G-configured smartphones to hit the market
starting in 2019, initially in low volume (just a few million units), mostly for connectivity
testing, as the infrastructure is not up to the requisite scale and density without
commercialisation in large countries like China. But we forecast the penetration to ramp to
6% in 2020 and surpass 50% by 2025, producing a TAM of c.USD180bn on a cumulative
basis, or USD18bn/year. Together with the B/S build, we forecast the total 5G-enabled
TAM at the system level to amount to >USD650bn throughout the cycle on a cumulative
basis, without considering other IoT devices (B/S: 73-75%; smartphone: 25-27%).
Rationale for our forecasts
Responsible for data transmissions to/from mobile communication devices such as
smartphones and tablets, B/S (also known as eNode B) consist of macro, micro and pico
cells (or known as a small cell), “layered” within the cellular N&C ecosystem depending on
data transmission bandwidth and distance as a function of RF and power. These different
B/S offer “cells” as part of the cellular networks in different layers to handle radio coverage
within a certain area (or a cell) (see Appendix for more details). In other words, the global
cellular network infrastructure is a complex mix of build-out among macro cells, micro cells
and small cells in different layers, depending on geographic coverage of rural, suburban,
urban or metro areas (refer to the chart on cellular network evolution, page 7).
To simplify our assumptions, we use a B/S with an average of 3 discrete antennas without
mmWave technology as a proxy for calculating the dollar value for the 4G cycle, and
assume this spec will be upgraded to a mmWave-configured B/S with 4x4 phased array
antennas, on average, in order to handle massive multiple input/multiple output (MIMO) RF
and digital beam-forming technology for the 5G cycle. The charts below summarise our
estimates of dollar content (ie, ASP) for a typical 4G and 5G B/S in different parts of the
supply chain.
Dollar content of a 4G B/S at different parts of the value chain* Dollar content of a 5G B/S at different parts of the value chain*
Source: Daiwa estimates & forecasts Note: * 3x3 discrete antenna design, sub-6GHz MIMO, excluding power system
Source: Daiwa estimates & forecasts Note: * 4x4 phased array antenna design, 28GHz mmWave/massive MIMO, excluding power
system
Mobile communication
equipment
Wireline equipment
Transmission equipment
Others
Ericsson28%
Huawei25%
Nokia*24%
ZTE12%
SEC3%
Others8%
55
3,547
10,400
16,000
0
5,000
10,000
15,000
20,000
Materials Silicon Electronics System
USD
125
6,110
14,800
22,000
0
5,000
10,000
15,000
20,000
25,000
Materials Silicon Electronics System
USD
We forecast the total 5G-
enabled TAM to exceed
USD650bn
To simplify the real
world, we assume 4G
B/S with 3 discrete
antennas and 5G B/S
with 4x4 array antennas
as the base-spec for our
calculations
12
Asia Mobile Communication: 3 December 2018
5G TAM across the food chain: B/S at the system level
Source: Daiwa
TAM at the system level
As shown in the chart on the previous page, depicting a typical breakdown of telcos’ capex
in the 4G infrastructure build, we estimate 30-40% (or 55-85% of mobile communication
equipment spending) went to the B/S, including macro cells that are typically installed with
towers and small cells that are typically installed indoors, as well as related software and
supportive devices such as power systems. During the 4G cycle, we estimate the total B/S
installation at 5.8m units, including macro, micro and small cells on a cumulative basis,
from the 20 telcos majors we monitor across China, the US, Japan, South Korea and the
EU, for a total value of USD360bn, or USD110bn excluding the tower systems. This implies
an ASP of c.USD19,000 for a B/S bundled with a power system, or c.USD16,000 per
discrete B/S without a power system.
Unit-accretive on eMBB/uRLLC requirement
For the 5G cycle, we expect the total B/S count from the 20 telcos majors we monitor to
surge by c.3x to 24m. This high incremental build of new B/S is primarily due to 5G’s ultra-
wide frequency-band coverage relative to 4G to facilitate eMBB and uRLLC technology
requirements. We see 28GHz as likely to become 5G’s mainstream spectrum under the
3GPP’s choice of the global mmWave technology standard, which creates a wavelength of
c.11mm, only 20% of that of 4G spectrum built-out of sub-6GHz (see chart below).
Therefore, a 28GHz-configured 5G B/S covers a shorter radio reach than a sub-6GHz 4G
counterpart, resulting in a larger number of B/S for the same distance of radio coverage,
roughly 3-10x varying from country to country depending on the density of geographic
coverage and considering the complicated nature of layer-mix among macro, micro and
small-cell installation, based on our market research.
Note: RF = speed of light (c) / wavelength (λ), where speed of light = 299,792,458 m/s
Radio frequency vs. wavelength 5G smartphone shipment and penetration
Source: Daiwa
Source: Daiwa estimates & forecasts
System
(USD49bn/year)ElectronicsSiliconMaterials
0 50 100 150 200
2.0
3.0
3.5
4.5
5.0
6.0
26.0
28.0
37.0
39.0
Wavelength (mm)
Fre
quen
cy (
GH
z)
mmWave
0%
10%
20%
30%
40%
50%
60%
0
200
400
600
800
1,000
2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E
5G smartphone shipment 5G penetration
m units
We forecast total B/S
build of 24m units for the
5G cycle, vs. 5.8m for 4G
13
Asia Mobile Communication: 3 December 2018
ASP-accretive on technology revolution
Using as a proxy a macro-cell B/S configured with massive MIMO 4x4 phased array
antenna covering 28GHz, we forecast the 5G B/S ASP to rise to USD25,000, vs.
USD19,000 for its 4G counterpart, due to the increased electronics BoM per box, given
several technological upgrades in radio antennas, from discrete to array type, and in silicon
content to accommodate the antenna evolution for ultra-wide-bandwidth data transmitting,
receiving, decoding and processing. Our ASP calculation is for a 5G B/S, including power
system but excluding tower, assuming the mainstream type is configured with the 4x4
phased array antennas to handle massive MIMO through beam-forming technology, vs.
MIMO 2x2 or 3x3 discrete antennas for an advanced 4G type (for example, the Ericsson
RBS 3000 series or Huawei BTS 3900).
It is hard to get the numbers precisely right because the global B/S build is a complex
mixture of different macro cells with different antenna counts depending on the RF
spectrum and power they cover, besides the use of in-door small cells that handle metro
coverage. But we believe our forecasts at least point investors in the right direction for 5G
investment from a quantitative approach.
Combined with the 24m unit build, we expect the total B/S build for the likely 10-year 5G
migration cycle to amount to USD600bn (excluding towers), or an average of USD49bn per
year on an incremental basis after deducting c.USD110bn spending for the 4G cycle. This
means 5G migration in the global cellular communication market would generate an
average TAM of USD49bn/year for the telecom equipment vendors, such as Ericsson,
Huawei and Nokia, priced at the system level, or USD44bn/year for them at the discrete
B/S level without power systems.
At the terminal-device end, we expect to see 5G smartphones in the consumer market
from 2019, initially at very low volume but ramping up to 6% of total smartphones in 2020,
surpassing 50% by 2025, and generating a TAM of c.USD180bn on a cumulative basis, or
c.USD18bn/year. The incremental dollar increase should come from RF PA, filters, modem
and application processors (AP) to handle broader bandwidth coverage, among others,
such as memory chips, passive components and printed circuit boards (PCB). Therefore,
we project each 5G smartphone will likely cost consumers an extra USD70 apiece on
average during the early years, gradually dropping to c.USD20 by 2025 as scale
economies are realised.
Illustration of a B/S with a tower Illustration of discrete macro-cell and small-cell B/S
Source: Daiwa Source: Company, Daiwa
Ericsson RBS3106 (100x65x45cm) Ericsson 6501 (12x27x30cm)
We forecast an ASP of
USD25,000 for 5G B/S
vs. USD19,000 for 4G
We forecast
USD49bn/year TAM for
5G B/S at the system
level
At the smartphone level,
TAM is c.USD18bn/year
14
Asia Mobile Communication: 3 December 2018
5G TAM across the food chain: B/S at the electronics level
Source: Daiwa
TAM at the electronics level
Excluding the power system for the purpose of our calculation at the electronics level, we
forecast an ASP of c.USD22,000 for a discrete 5G B/S with massive MIMO 4x4 phased
array antennas as the mainstream configuration, in which the BoM will likely hit
USD14,800, as shown in the chart below, up 42% from that of 4G, assuming a 1.5x mark-
up as a function of the 35% gross margin required by the telecom equipment vendors.
Accounting for 50% of the BoM (44% for 4G), the radio unit (RU) should be the largest cost
element, exceeding USD7,000 (60% more than that of 4G), thanks to the antenna
upgrades in a phased array format to handle high-frequency bands that should make the
5G RU both unit- and ASP-accretive. The baseband control unit (BCU) and power control
unit (PCU) contribute c.25% and c.5% of the BoM, respectively. Together with other
supportive units such as distribution units, the 3 RU, BCU and PCU represent the key
electronics content of a discrete 5G B/S, totalling c.USD13,000 per box, vs. c.USD8,600
for its 4G counterpart. Applying the unit build, we forecast the TAM at the electronics level
to reach USD315bn for the 5G cycle, around 6x that of 4G on an incremental basis,
translating into USD26bn/year over the 10-year build-up cycle vs. c.USD10bn/year during
the 4G’s 5-year build-up cycle.
Base-station BoM at the electronics level: 4G vs. 5G Base-station BoM at the silicon level: 4G vs. 5G
Source: Daiwa estimates & forecasts Note: * Including battery, software
Source: Daiwa estimates & forecasts
SystemElectronics
(USD26bn/year)SiliconMaterials
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
4G 5G
Baseband control unit Radio unit Power control unit
Fibre optics unit Other control units Other components*
USD
10,400
14,800
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
4G 5G
FPGA Processors RF PA Filter PMIC Radio Tx/Rx Other silicons
USD
3,547
6,110
USD26bn/year TAM for
5G B/S at the electronics
level
We believe RU should
capture the highest
value proposition
15
Asia Mobile Communication: 3 December 2018
5G TAM across the food chain: B/S at the silicon level
Source: Daiwa
TAM at the silicon level
TAM at the silicon level will likely amount to USD147bn for the 10-year 5G cycle, nearly 6x
that of 4G and translating into a USD12.7bn/year incremental TAM to the chipmakers, or
c.3x that of 4G. Strength should be driven by RF PA and filters in the RU, and field
programmable gate array (FPGA) in the BCU. In light of our projected 24m units of B/S
build over the 5G cycle, this means USD6,110 silicon content per box, or 72% more than
that of a 4G equivalent. The chart on the previous page illustrates the silicon-content
breakdown for a typical 5G B/S under our assumption and how its BoM changes from
4G/3x3 discrete to 5G/4x4 array antenna configurations.
Functioning as a decoder when radio signals are received from an antenna, FPGA should
be the biggest cost element, accounting for 41% of the total silicon BoM, or
USD2,500/box — 67% more than that of a 4G B/S (42% of BoM), on our forecasts. This is
because a typical 4G MIMO 3x3 B/S uses 3 FPGAs for data decoding, while the number
should rise to 4-5 when it comes to the 5G 4x4 type (or even higher, as an 8x8 type has
also been seen recently), according to our market research, due to a rise in antenna count.
Similarly, despite chipping in 14% of the 5G B/S silicon BoM, RF PA should see the dollar
value rising c.7x to USD880/box, compared with that of a 4G B/S where the RF PA
accounts for only 3% of the BoM. As we see it, this makes RF PA perhaps the most
incremental contributor in percentage terms during the 4G-to-5G migration, as a result of:
Unit growth. We expect the PA count/box to rise to 16 on average for a 5G B/S, from 2-
4 for 4G gear, assuming 1 PA covers 1 discrete antenna; in the case of a massive MIMO
4x4 B/S with phased array design, it has 8 antennas but 16 arrays, thus requiring 16
PAs as each PA covers 1 array. Furthermore, as the antennas will be upgraded to array
types, there may be upside for the PA content due to increased integration to cover
switch and low-noise amplifiers (LNA).
ASP hike. We see a 5G RF PA being priced at 1.5-2x that of a 4G equivalent due to
changes in materials, especially the wafer substrates that will be changed to gallium-
nitride (GaN) on silicon-carbide (SiC) or on pure silicon compound, from pure silicon, in
order to replace the silicon-based laterally diffused metal oxide semiconductor
(LDMOS), or even from GaAs in order to handle mmWave (over 24GHz) with higher
power resistance. The chart below illustrates how GaN will likely ramp up to replace
LDMOS through the 5G cycle by 2025. A GaN-on-SiC epiwafer costs c.USD5,000,
which is over 20x that of a GaAs epiwafer, although the process for GaN- and GaAs-
based PA is similar, with both using pseudo-morphic high electron-mobility transistor
(pHEMT) technology (see Appendix for explanation).
Similarly, filters should rise proportionally as they are bundled with PA, as well as radio
transceivers and antennas, to complete a RU of a B/S, in our view. We see these
meaningful RU upgrades during the 5G cycle boding well for the RF PA and filter
supply chain in the tech space. Other silicon that should see rises in dollar values are
processors, including digital signal processors (DSP) and central processing units
(CPU)/graphics processing units (GPU), with higher ASPs arising from CMOS process
technology migration in order to handle advances in computing power, in our view.
SystemElectronicsSilicon
(USD13bn/year)Materials
We forecast the TAM for
5G B/S at the silicon
level at USD12.7bn/year,
or 3x that of 4G
FPGA and RF PA/filters
are likely to be the focus
for value hikes during
the 4G-to-5G migration
16
Asia Mobile Communication: 3 December 2018
RF PA and FPGA count per B/S: 4G vs. 5G RF power device market breakdown by technology
Source: Daiwa estimates & forecasts Source: Yole Development
At the smartphone end of the ecosystem, we expect the incremental TAM from the 5G
cellular upgrades to approach USD60bn at the silicon level, or USD6bn/year over the 10-
year build cycle, split by 3 major content types: RF PA, AP/modem and other silicon like
filters and PMIC. AP/modem should seize the majority of the incremental value initially, but
RF PA and filters should rise over time in percentage contribution as we expect the
bandwidth spectrum a 5G phone covers to expand, from initially 3.5GHz to a wide range
from 3.3GHz to below 6GHz, or what the industry dubs as “sub-6” spectrum. Optimisation
of such sub-6GHz bandwidth coverage for a 5G phone could double the 4G PA count
currently of around 5-6 per phone (excluding WiFi which consumes another 1-4 PAs
depending on the discrete or MIMO type), but the actual number should be lower due to
the design of multimode/multiband PA (MMPA), resulting in a likely new add of 1-4 PAs on
an incremental basis.
0
2
4
6
8
10
12
14
16
18
FPGA count RF PA count
4G 5G
2-3
4-5
2-4
16
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2015
2016
2017
2018
E
2019
E
2020
E
2021
E
2022
E
2023
E
2024
E
2025
E
LDMOS GaAs GaN
We expect the
incremental TAM for 5G
smartphones to reach
USD6bn/year
17
Asia Mobile Communication: 3 December 2018
5G TAM across the food chain: B/S at the materials level
Source: Daiwa
TAM at the materials level
For TAM at the materials level, our focus is on advanced substrates and PCB, including the
compound-semiconductor epiwafers, IC substrates, high-density interconnect (HDI) PCB,
substrate-like PCB (SLP) and flexible PCB (FPCB), which accommodate the advanced RF
PA in RU and FPGA/processors in BCU of B/S for antenna evolution to handle the
eMBB/uRLLC technologies under 5G cellular networks. Similarly, 5G smartphones require
higher RF front-end modules (FEM), which should drive changes in materials for
redesigning and remanufacturing the FPCB, in our view.
Epiwafer
We forecast an incremental TAM of USD375m for GaN epiwafers over this 10-year 5G
build-up cycle, or roughly USD37m per year, which is premised on our key assumptions of
GaN to replace LDMOS, RF PA count of 16 per B/S, 4x4 array-antenna type, a total of 24m
B/S build during the cycle, 5,000 yield-adjusted PAs per 6” epiwafer and USD5,000 ASP
per GaN epiwafer with 10-15% price erosion per annum. After a foundry add-on value
through pHEMT process for better integration than hetero-junction bipolar transistor (HBT),
a finished PA wafer can be priced as high as USD15,000, resulting in an incremental TAM
of USD1.2bn on the back of 75,000 units of 6” finished wafer demand, or USD116m/year.
Epiwafer substrates and finished PA wafers for smartphones represent another revenue
stream for the compound-semiconductor supply chain, though the same GaAs compound
should be used. At the epiwafer level, we forecast TAM to exceed USD500m during the 5G
cycle, or USD53m/year, while we see TAM at the finished wafer level reaching USD3.7bn,
or c.USD370m/year, against the backdrop of 1.6m 6” wafer demand to accommodate a
total of 32bn PAs during this 10-year 5G build-out cycle. Overall, we forecast a TAM of
c.USD90m/year at the epiwafer level and USD485m/year at the finished PA wafer level
during the 5G cycle.
IC substrate and PCB
At the IC substrate and PCB level, we forecast an incremental TAM of c.USD0.9bn, or
USD90m/year, over the 5G cycle, mainly driven by the B/S build as we see lower value
add at the smartphone level from an incremental perspective, except for increased use of
SLP and advanced FPCB. Our calculations are based on the following key assumptions:
Rising ASP for 5G B/S PCBs, which are likely to use bismaleimide triazine (BT) epoxy
resin to handle higher frequencies;
Materials upgrades for 5G smartphone FPCBs, which are likely to use modified
polyimide (MPi) or liquid crystal polymer (LCP) film to replace the current materials of
polyimide (Pi) for higher RF handling;
Rising IC substrate counts to accommodate increased number of FPGAs and PAs.
5G B/S upgrades of processors and FPGAs are spurring demand for the Ajinomoto build-
up film (ABF) type of substrate, which, together with the adoption of MPi or LCP film, looks
to be creating a sub-theme for investors in this 5G build-up cycle.
SystemElectronicsSiliconMaterials
(USD0.2bn/year)
USD90m/year TAM for
epiwafers; USD485m/
year TAM for finished
wafers
USD90m/year TAM for IC
substrates and PCBs at
the B/S level
18
Asia Mobile Communication: 3 December 2018
Tech sector likely to benefit the most
From a tech hardware perspective, we categorise the 5G supply chain into 4 segments
(see the chart below): key materials, semiconductors, devices & assembly, and system
equipment. Our key focus is on B/S, followed by smartphones, as we forecast B/S to
account for c.75% of the incremental TAM over the 5G build-out cycle. We see the most
incremental value as likely to skew towards RF PA/filters and FPGAs used in the RU and
BCU of the B/S, respectively, as most technological upgrades are likely to centre on the
antenna system, from discrete to phased array, for eMBB and uRLLC. We expect other
incremental value to be captured by processors, PCUs and fibre-optics unit (FOU). In
addition to B/S and smartphones, we believe the 5G cycle will lead to additional business
upside for the tech sector from the likes of self-driving, industrial IoT (IIoT), and many other
IoT devices, driven by the 5G network’s wide coverage in terms of applications.
Key materials
In this segment, we focus on epiwafers, IC substrates and PCB, where we see epiwafers
as perhaps offering one of the best values for investment, given its oligopolistic competition
landscape with only a few players in the global merchant market (excluding IDM in-house).
Epiwafer merchant
GaN and GaAs epiwafers are the most crucial materials for RF PA manufacture to be used
in B/S and smartphones, where we forecast an average TAM of USD90m/year during the
5G cycle, or c. 45% of 2017 revenue of IQE (IQE LN, GBP72.1, NR), which is the leader in
the global communication epiwafer market (including microwave communication [MC] and
optical communication [OC], excluding light-emitting diode [LED]) and commands >40%
share (see the chart on the next page). We believe IQE likely stands to benefit the most in
this segment from its leading position in the GaN epiwafer supply to enjoy the most
incremental value proposition in the B/S RF PA upgrades, which are both unit- and ASP-
accretive.
5G cellular communication technology supply chain**
Source: Daiwa Note: * Unigroup = Spreadtrum + RDA; ** EMS = electronics manufacturing service
Key materials
Epiwafer merchantIQE, Sumika, VPEC, LMO, IntelliEPI, WinSemi (in-house)
IC substrate/PCBZDT, Nippon Mektron, TTMT, Unimicron, SEMCO, Sumitomo Chemical, Fujikara, Shinko, Ibiden, Meiko Electronics, AT&S, Nanya PCB, LG Innotek, Simmtech, Kinsus, SCC, Career Tech, Symtek, ASE Materials (in-house), DAP, Murata, Kuraray, Daicel, Ube Industries, Dupont, etc.
RF PA/filterBroadcom, Qorvo, Skyworks, Murata, HiSilicon, Ericsson, Nokia, Cree, NXP, ADI, Qualcomm
FPGA/basebandXilinx, Intel (Altera), Microsemi(Microchip), Lattice, Qualcomm, MediaTek, HiSilicon, SEC, Unigroup*
Foundry/OSATWinSemi, AWSC, GCS, Wavetek, San'an Opto, TSMC, SEC, Inari, ShunSin, PCL, ASE, Amkor, Venture
FO connectivityBroadcom, Qorvo, Finisar, Lumentum, Acacia, Oclaro, Emcore, MACOM, NeoPhotonics, Accelink, II-VI, MELCO, O-Net Tech, InnoLight, etc.
Telecom equipment Ericsson, Huawei, Nokia, ZTE, SEC
Smartphone/IoTSEC, Apple, Huawei, Xiaomi, Oppo, Vivo, Lenovo, LG, ZTE, Sony, TCL, HTC, Google, Microsoft, AWS, etc.
Semiconductors Devices & assembly System equipment
EMSHon Hai, Flex, Jabil, Creation Tech, Plexus, Fabrinet, Benchmark Electronics, Venture, Sanmina
Antenna systemKathrein-Werke, Comba Telecom Systems, CommScope, Huawei Tech, MOBI, Radio Frequency Systems (Nokia), Amphenal, Tongyu Communication, Ace Tech, Fiberhome
Power systemABB, Delta, Huawei Tech, Eaton, AEG Power Solutions, Emerson Network Power, Schneider
Tower systemChina Tower, Indus Towers, Reliance Infratel, Viom Networks, Crown Castle, Bharti Infratel, GTL, SBA, IHS Towers, American Tower
We see the most
incremental value being
skewed towards RF
upgrades for both B/S
and smartphones
We forecast TAM of
USD90m/year for
epiwafer suppliers, in
both 5G B/S and
smartphone PA
upgrades
19
Asia Mobile Communication: 3 December 2018
Global epiwafer market share by revenue* (2017) Global OC epiwafer market share by revenue* (2017)
Source: Company, Daiwa estimates Note: * MC and OC epiwafers only, excluding LED applications
Source: Company, Daiwa estimates Note: * Including epiwafers for 3D laser sensing applications
Being the second-largest vendor in the communication epiwafer market and accounting for
15% market share in 2017, VPEC (2455 TT, TWD60.9, NR) will likely benefit from RF PA
unit upgrades at terminal devices such as smartphones that use GaAs epiwafer as the key
materials to handle high RF, where we forecast an average TAM of USD53m/year over the
5G cycle. Assuming VPEC captures 15% of this incremental 5G market, we forecast a
revenue contribution of c.USD8m (TWD240m)/year to VPEC, or 11% of its 2017 revenue.
Although this incremental potential does not seem very attractive, we believe VPEC could
benefit from the higher-valued GaN segment, potentially becoming a viable alternative to
IQE for GaN epiwafer supply.
We note that VPEC installed a metal organic chemical vapour deposition (MOCVD) reactor
in 2018 to start the development of GaN-on-SiC epiwafer-growing technology with the goal
of capitalising on the fast-growing mmWave technology trend, spurred by 5G B/S
upgrades. VPEC intends to start commercialisation in 2020, at the earliest, which bodes
well for its long-term business if it successfully ramps up, in our view, as GaN-on-SiC
epiwafers are currently priced at USD5,000 — over 20x that of a GaAs counterpart.
Although not a key contributor to the 5G B/S BoM upgrade, indium phosphide (InP)
epiwafers should also benefit from this emerging cycle, as these are key materials in the
production of fibre-optic (FO) transceivers which should see unit growth from rising B/S
deployment and content growth from bandwidth upgrades to accommodate the higher
bandwidth associated with higher frequencies, from 10 gigabits per second (Gbps) at 4G to
25Gbps or even 100Gbps at 5G with dense wavelength division multiplexing (DWDM)
configuration. The key beneficiaries likely will be LMO (3081 TT, TWD258, Buy[1]) and IQE
in the InP epiwafer merchant market, in our view, where we forecast the 5G-enabled FO
epiwafer TAM at >USD20m/year, or c.10% of LMO’s 2017 revenue, if we assume it
captures a 25% market share. Additionally, Sumika, an in-house epiwafer arm of
Sumitomo Chemical (4005 JP, JPY616, Outperform[2]), should benefit from the 5G cycle
at both RF and FO levels, in our opinion.
IC substrate and PCB
In this segment, we focus on IC substrates for FPGA and processors used in B/S, given
their large die size relative to PAs, thus consuming a larger area of the substrate, which
uses ABF epoxy-resin to handle high computing performance. We also focus on PCB used
in the B/S electronics mainboard, which should use BT epoxy-resin to handle high
frequencies. At the terminal-device end, we focus on FPCB, SLP and IC substrates for
antenna upgrades. As there are many suppliers in this space (see the supply chain chart
on the previous page), the incremental TAM of USD90m/year, on our forecasts, should be
diluted; however, possible beneficiaries under Daiwa’s coverage could include SEMCO
(009150 KS, KRW120,500, Buy [1]), LG Innotek (LGI) (011070 KS, KRW99,800,
Outperform [2]) and Ibiden (4062 JP, JPY1,579, Hold [3]). SEMCO should further benefit
from its offering of high-end multi-layer ceramic capacitors (MLCC) for at both 5G
infrastructure and terminal-device end. Kinsus (3189 TT, TWD45.0, NR), a Taiwan-based
IQE42%
VPEC15%
Sumika13%
LMO14%
IntelliEPI6%
Others10%
IQE30%
LMO25%
Sumika19%
VPEC4%
IntelliEPI3%
Others 19%
We forecast TAM of
>USD20m/year for FO
epiwafer vendors
Potential beneficiaries:
SEMCO, Sumitomo
Chemical, LGI, Kinsus
20
Asia Mobile Communication: 3 December 2018
IC substrate/PCB vendor, expects its B/S-related revenue contribution to surge in 2019 to
a double-digit percentage; the contribution has been stagnant at a single-digit percentage
for the past 3 years after the 4G infrastructure build-up cycle tapered off.
Companies offering advanced materials of MPi or LCP film to help PCB makers meet 5G’s
high RF requirements may stand to capture more incremental value of the supply chain
relative to competitive board makers, in our view. Sumitomo Chemical should be one
beneficiary, with its LCP solution replacing the mainstream Pi counterpart.
Semiconductors
In this segment, RF PA vendors should be the biggest beneficiaries, in our view, led by
rising PA count/box with ASP-accretion at both B/S and smartphone ends. We expect
makers of other chips (such as RF filter, switch and LNA) used along with PAs to complete
a RF FEM for the 5G antenna upgrades to benefit too. Major FEM vendors include
Broadcom (AVGO US, USD237.41, Buy [1]), Qorvo (QRVO US, USD65.81, NR) and
Skyworks (SWKS US, USD72.77, NR) at the terminal-device end, and TriQuint (Qorvo),
Ericsson (ERIC US, USD8.39, NR), Nokia (NOK US, USD5.47, NR), Huawei (HiSilicon),
Cree (CREE US, USD44.14, NR), NXP (NXPI US, USD83.37, NR) and ADI (ADI US,
USD91.92, NR) on the infrastructure side. Murata (6981 JP, JPY17,315, Outperform [2]),
which focuses on WiFi PA modules, should also benefit if WiFi is expanded in terms of
MIMO count, in our view.
During its 2Q FY19 results call, Qorvo claimed that its 5G smartphone FEM solutions
supporting 3.5GHz had been selected by SEC and it was sampling a dual-band
3.5/4.9GHz FEM for a leading Chinese smartphone vendor. Furthermore, Qorvo has seen
demand strength supporting its GaN-based revenue, driven by customers’ 5G
infrastructure build. All of these factors appear supportive of our 5G thesis, with 2019 likely
to be a tipping point.
In Asia, our key investment focus is WinSemi (3105 TT, TWD126.5, Buy [1]) for its global
leadership in the RF PA foundry industry, where it has a diverse customer base
(Broadcom, Qorvo, Skyworks, Ericsson, Nokia, Huawei and Murata). As the key testing
house for Broadcom’s film bulk acoustic resonator (FBAR) as a filter used in the RF FEM,
Inari also stands to benefit from this 5G migration cycle, in our view. Based on our market
research, WinSemi is perhaps the only foundry able to commercialise GaN PA for 5G B/S.
Considering our forecast TAM of USD485m/year for RF PA at both B/S and smartphone
levels, we expect an average revenue contribution of c.USD315m/year to WinSemi during
the 5G cycle, assuming it captures a 65% market share. This figure represents c.55% of
the company’s total revenue in 2017, or 60% of its 2017 MC revenue excluding the 3D
VCSEL business.
Besides, we expect FPGA vendors to be beneficiaries, on the back of bandwidth upgrades
on the B/S front; the global FPGA market is also oligopolistic, with only a few vendors such
as Xilinx (XLNX US, USD92.48, NR), Altera, Microsemi and Lattice (LSCC US, USD5.86,
NR). Altera was acquired by Intel (INTC US, USD49.31, Buy[1]), while Microsemi was
acquired by Microchip (MCHP US, USD75.0, NR). Our focus is on the Asian
semiconductor contract manufacturing (SCM) business potential.
We forecast a TAM of
USD485m/year for RF PA
foundry
WinSemi and Inari stand
to benefit
21
Asia Mobile Communication: 3 December 2018
Global RF PA foundry market share by revenue (2017) Global FPGA market share by revenue (2017)
Source: Company, Daiwa estimates Note: * MC revenue only, excluding 3D VCSEL business
Source: Company, Daiwa estimates
Given Xilinx’s leadership position in the global FPGA market (c.45% market share in
2017), we highlight TSMC (2330 TT, TWD223, Buy[1]), offering advanced foundry services
to Xilinx, as a potential beneficiary. We believe Xilinx is one of TSMC’s top-10 customers,
accounting for a mid-single-digit percentage of TSMC’s revenue. Meanwhile, Intel could
benefit from its integrated solutions by bundling Altera’s FPGA with its own processor
offering. ASE (3711 TT, TWD57.4, Buy[1]), offering advanced packaging and testing
services to both Xilinx and Intel, should also benefit in the Asian SCM supply chain, in our
opinion.
Elsewhere in the 5G-related silicon content space, vendors that offer processors, DSP, AP
and/or modems that complete the BU, as well as memory chips (such as NAND and
DRAM), should also benefit from the 5G cycle, mainly through likely ASP accretion, albeit
to a lesser extent than the RF PA/filter and FPGA suppliers due to the former’s lack of unit
accretion. We think the main names to watch in this space are MediaTek (MTK) (2454 TT,
TWD228, Buy [1]), Qualcomm (QCOM US, USD55.25, NR) and HiSilicon (a private
design arm of Huawei); these 3 are among the top-10 customers of TSMC and ASE.
Based on our market research, all 3 AP/modem vendors will likely roll out their first 5G
modem solutions in 2019 — Helio M70 from MTK, Snapdragon X50 from Qualcomm, and
Balong 5G01 from HiSilicon. These moves should help the 5G build-up.
In the FO interconnectivity space, similar to their upstream epiwafer suppliers of LMO and
IQE, transceiver vendors such as Broadcom, Qorvo, Finisar (FNSR US, USD21.87, NR)
and Lumentum (LITE US, USD39.85, NR) should also benefit, though to a lesser extent in
view of the latter’s IDM status (diverse in scale, with more competition). Moreover, passive
components should also benefit, especially power chokes, inductors and MLCC, in our
opinion, as their content/box should rise proportionally with the rise in RF spectrum.
Devices and assembly
We categorise this segment of the 5G supply chain into 4 sub-segments: 1) electronics
manufacturing service (EMS) houses like Hon Hai (2317 TT, TWD71, Hold [3]), Flex (FLEX
US, USD8.25, NR) and Jabil (JBL US, USD24.64, NR), 2) antenna system vendors like
Kathrein-Werke, Comba (2342 HK, HKD1.27, NR) and MOBI (947 HK, HKD0.98, NR), 3)
power system suppliers like ABB (ABB US, USD19.82, NR), Delta Electronics (2308 TT,
TWD122, Buy [1]) and Huawei Technologies, and 4) tower system makers like China
Tower (788 HK, HKD1.13, Hold [3]), Indus Tower, and American Tower (AMT US,
USD160.39, NR). Although these players should also benefit from the 5G cycle through
unit accretion due to the likely surge in B/S count, the content/box may not rise, since it
depends on which layer of the B/S build these companies focus on: macro, micro or small
cells. Furthermore, many players operate in this space, adding to competition and diluting
the business potential for individual companies, in our view. We flag 3 companies under
Daiwa’s coverage to keep an eye on: Delta, Hon Hai and China Tower. Delta is our focus
as a 5G stock pick.
WinSemi*67%
AWSC7%
GCS9%
Wavetek 1%
Others16%
Xilinx45%
Altera35%
Lattice7%
Others13%
TSMC and ASE should
indirectly benefit from
FPGA upgrades
Delta is our 5G
investment focus in the
devices and assembly
space
22
Asia Mobile Communication: 3 December 2018
System equipment
Last but not least, telecom equipment vendors that offer B/S and ancillary devices, and
terminal device branders that sell smartphones should likewise benefit from the 5G cycle,
in our view. Yet, like device vendors and box assemblers, the system segment of the 5G
supply chain seems set to see competition, especially in the smartphone market where unit
growth has tapered off, leaving only room for growth from spec upgrades from 4G to 5G. In
this context, Xiaomi is arguably one exception due to its penetration into Internet services
by leveraging its strong smartphone sales to grow its average revenue per user (ARPU)
(see our initiation report, A hybrid Internet play, 5 October 2018, by our Internet analysts
John Choi and Candis Chan).
Relative to the smartphone branders in general, we see better business opportunities for
telecom equipment vendors, given the oligopolistic competition landscape, where the top 5
– Ericsson, Huawei, Nokia, ZTE and SEC – together control more than 90% of the
market by revenue (refer to chart, page 11). Based on our forecasts, the 5G build-up cycle
will likely generate USD49bn/year for telecom equipment vendors at the system level,
accounting for c.50% of their average revenue per year during the 4G cycle.
Stocks to invest in
The table below summarises our view of the front-line beneficiaries in the 5G supply chain
under Daiwa’s AeJ coverage, from upstream to downstream. For our company-specific
comments, refer to the accompanying company section.
Risks to our call
Below we highlight the main downside risks to our positive stance on the 5G cellular
migration cycle, which could alter our sector view at the macro level and company
forecasts at the micro level.
Trade tensions. The ongoing tensions have created an overhang for supply-chain
management in the tech space, chiefly by stoking business uncertainties, and could
impact China telecom equipment makers’ procurement of crucial components from the
US for 5G B/S, which in turn could potentially delay the build-up cycle in China by one
year or more.
Telcos spending. This represents another critical factor to monitor as, although Daiwa’s
telcos team forecasts the aggregate capex of the telcos majors in China, Korea and
Japan to begin a new cycle from 2019, any under-spending could threaten our volume
expectations and the trajectory of our 5G build-up forecasts.
5G standard. While we expect the 3GPP to settle upon the 5G standard by June 2019
and propose it to ITU for finalisation, any delays could push out our expectation of the
5G commercial ramp-up.
Daiwa's 5G investment portfolio and valuation summary (AeJ)
Price
PER (x) PBR (x) ROE (%) Earnings growth (%)
Stock Ticker (LC)* Rating 2018E 2019E 2020E 2018E 2019E 2020E 2018E 2019E 2020E 2018E 2019E 2020E
Key materials
LMO 3081 TT 258.00 Buy 33.2 19.1 11.6 5.8 4.9 3.8 18.2 28.0 37.2 7.3 74.1 64.5
SEMCO 009150 KS 120,500.00 Buy 12.2 7.5 7.2 1.8 1.5 1.2 15.9 21.4 18.5 355.0 62.3 4.5
Semiconductors WinSemi 3105 TT 126.50 Buy 18.8 16.2 10.7 2.2 2.1 1.9 11.4 13.2 18.4 -24.2 16.1 51.7
MediaTek 2454 TT 237.50 Buy 17.3 12.6 9.7 1.5 1.4 1.3 8.4 11.2 13.6 -10.4 37.3 30.1
TSMC 2330 TT 225.50 Buy 16.7 14.9 13.2 3.4 3.1 2.9 21.7 22.0 22.8 1.9 12.0 13.4
ASE 3711 TT 62.40 Buy 16.7 9.4 6.8 1.5 1.3 1.2 8.0 14.8 18.2 -30.9 78.5 38.1
Inari INRI MK 1.65 Buy 19.7 19.6 15.9 4.9 4.5 4.2 27.2 24.0 27.4 37.3 0.4 23.7
Devices & assembly Delta Electronics 2308 TT 130.00 Buy 19.3 16.1 14.2 2.9 2.7 2.6 14.5 17.5 18.7 -4.8 19.7 13.7
Source: Bloomberg, Daiwa estimates and forecasts Note: * Local currency, based on share prices as of 30 November 2018
We forecast a TAM of
USD49bn/year at the B/S
system level, or 50% of
the top-5 telecom
equipment vendors’ 4G
revenue
23
Asia Mobile Communication: 3 December 2018
Appendix: glossary of terms
5G network. 5G network is the 5th generation of cellular mobile communications that
succeeds the 4G/LTE/WiMax, 3G/UMTS and 2G/GSM networks. The 5G network targets
high data rate (up to 20Gbps), reduced latency (1 millisecond), energy efficiency (equal to
that of 4G), spectrum efficiency (3-4x that of 4G), higher system capacity (1,000Mbps/m2),
and massive device connectivity (106 devices/km
2).
Base station. A base station (B/S) is normally positioned in a location far above the
grounded area to provide radio signal coverage, categorised into macro cells (for rural
areas and highways), micro cells (for suburban and urban areas) and pico cells (also
known as small cells, for localised coverage and usually placed inside buildings), based on
the coverage needed.
eNode B. eNode B represents the evolution of Node B, which is referred to a B/S in a
4G/LTE network, corresponding to Node B in a 3G/UMTS network and B/S in a 2G/GSM
network. In the universal mobile telecommunication system (UMTS) network, the radio
network controller (centralising node) controls all the radio resources and mobility over
multiple Node Bs in a hieratical radio access network. In the LTE network, on the other
hand, eNode Bs as B/S have to manage radio resources and mobility in the cell and sector
to optimise all the user equipment’s communication in a flat radio network structure without
the centralising node.
mmWave technology. millimetre-waves (mmWave) technology is based on higher
frequencies ranging from 30GHz to 300GHz, with wavelength from 1mm to 10mm,
compared to the bands below 6GHz that are used for mobile devices with tens of
centimetres in wavelength.
Beam-forming. Beam-forming is a traffic-signalling system for B/S, implemented by
phased array antennas that identify the most efficient data-delivery route to a particular
user and reduces interference for nearby users in the process. Beam-forming can help by
focusing on a signal in a concentrated beam that points only in the direction of a user,
rather than broadcasting in many directions at once, thereby strengthening the signal’s
chances of arriving intact and reducing interference for everyone else.
FPGA. A field programmable gate array (FPGA) is a reprogrammable integrated circuit (IC)
that contains an array of programmable logic blocks, which can be reprogrammed to
desired application or functionality requirements after manufacturing.
LDMOS. Laterally diffused metal oxide semiconductor (LDMOS) transistors are used in
microwave/RF power amplifiers (PAs) based on pure silicon wafer substrates. These
transistors are often fabricated on p/p+ silicon epitaxial layers. The fabrication of LDMOS
devices mostly involves various ion-implanting and subsequent annealing cycles. Silicon-
based LDMOS transistors are widely used in RF PAs for B/S due to their higher breakdown
voltage and higher cut-off frequency. Generally, LDMOS devices operate at frequencies
below 3GHz.
pHEMT. Pseudo-morphic high electron-mobility transistors (pHEMTs) are evolved from
HEMTs, which are field-effect transistors incorporating a junction between two materials
with different band gaps (ie, a hetero-junction) as the channel instead of a doped region
(as is generally the case for metal oxide semiconductor field-effect transistors [MOSFETs]).
pHEMTs are widely used for high-frequency operations due to their low noise and power
performance, with applications including RF switch, wireless local area network (WLAN),
satellite communications, fibre-optic communications and advanced driver assistance
systems (ADAS).
24
Asia Mobile Communication: 3 December 2018
HBT. Hetero-junction bipolar transistors (HBTs) are a type of bipolar junction transistors
(BJT) that use different semiconductor materials for the emitter and base regions, creating
a hetero-junction. The HBT improves on the BJT with high linearity, good broadband
response, high breakdown voltage, high gain, high efficiency, low parasitic effects, design
without negative bias, low phase noise, etc. The HBT has good power magnification, low
standby current consumption, small size, and therefore, it has become the mainstream
technology for mobile phone PAs and WLAN PAs.
MMPA. A multi-mode multi-band power amplifier (MMPA) integrates multiple discrete PAs
into a single, small package to provide efficient, compact solutions that simplify RF design
for cost saving.
BT substrate. The bismalemide-triazine (BT) substrate is made from BT epoxy resin, a
material developed by Mitsubishi Gas Chemical, featuring high glass transition
temperature (Tg), low dielectric constant (Dk) and good insulation properties. BT
substrates are widely used in B/S due to their requirements of high frequency and intense
temperature environment.
ABF substrate. Ajinomoto build-up film (ABF) substrates are made from ABF, a material
developed by Ajinomoto Group. With its low coefficient of thermal expansion (CTE) and
high tensile modulus (a measure of flexibility along an axis of strain), ABF is used as a
high-tech resin coated copper (RCC) film for fine line formation to produce high-
performance ICs.
DWDM. Dense wavelength division multiplexer (DWDM) is a fibre-optic device that uses
multiplexing technology to increase bandwidth over existing fibre networks. DWDM works
by combining and transmitting multiple signals simultaneously at different wavelengths on
the same fibre. The technology creates multiple virtual fibres, thus multiplying the capacity
of the physical medium.
FBAR. Film bulk acoustic resonator (FBAR) filters are a form of bulk acoustic wave (BAW)
filter that have superior performance with steeper rejection curves than that of surface
acoustic wave (SAW) filters.
Pi. Polyimide (Pi) is a polymer of imide monomers, widely used for flexible copper clad
laminate (FCCL) in the fabrication of flexible print circuit boards (FPCBs), thanks to its
advantages of heat resistance, insulation, heat dissipation and abrasion resistance.
MPi vs. LCP. Liquid crystal polymer (LCP) is a thermoplastic polymer material. Compared
to Pi, LCP demonstrates lower Dk and loss dissipation factor (Df), making it widely useable
in high-frequency applications, such as FPCB for smartphone antennas. Recent
improvements in Pi have resulted in a new material with lower Dk and Df, named modified
Pi (MPi), which is now considered to be a low-cost alternative solution to LCP with better
yields and simpler production processes.
See important disclosures, including any required research certifications, beginning on page 60
Taiwan Information Technology
What's new: We see WinSemi as one of the key beneficiaries of the 5G
migration cycle given its global leadership position in the compound-
semiconductor foundries, and as capturing perhaps the most incremental
value from antenna upgrades at base stations (B/S) and smartphones.
Along with the rising adoption of laser sensing, we expect 5G and 3D to
help recover WinSemi’s structural earnings growth. We reiterate our Buy
(1) call and revise our TP to TWD195; it is a conviction Buy in Asian tech.
What's the impact: 5G likely to drive new secular PA growth. As
mentioned in the main section of this report, we expect WinSemi to capture
the most incremental value during the 5G migration cycle as its RF PA is
best suited for the wide-bandwidth requirement of antenna upgrades from
both infrastructure B/S and terminal-device smartphones. The revolutionary
design of phased-array antennas at B/S employs millimetre-wave
technology, which is both unit- and ASP-accretive, on the rising B/S count
for 5G coverage-density requirement and a shift in substrate materials from
pure silicon-based laterally diffused metal oxide semiconductor (LDMOS) to
gallium-nitride (GaN) on silicon carbide (SiC), which should significantly
increase the ASP. Although the shift from LDMOS to GaN compound may
not be margin-accretive due to materials cost pass-through, we project 5G
to contribute 7-22% to WinSemi’s RF PA revenue over 2019-21, resulting in
a 35% CAGR for its infrastructure PA sales.
Rising 3D adoption should diversify risk. Despite 3D laser sensing
being a secular trend in the tech space that enhances the way humans
interact with machines (A whole new world), we believe 2018 has been a
tough year for WinSemi due to the initial ramp-up for a single customer with
a bumpy supply-chain yield and inventory issues. However, we see active
adoption by Android smartphone vendors with multiple design projects
aimed at commercialisation in 2019, as well as a broadening of applications
into non-smartphone areas like surveillance and automotive. This should
help diversify customer risk. We cut our 2019E EPS by 4% to reflect the
recent headwinds from order cuts in the iPhone supply chain, but our
positive view on 3D lasers with a strong growth profile is unchanged. We
see 1Q19 as likely to mark an end to its 2018 business correction.
What we recommend: We forecast WinSemi’s earnings growth to rebound
post the 2018 correction, with a 33% EPS CAGR over 2018-20. We trim
our 12-month TP to TWD195 (from TWD200), based on an unchanged 1-
year forward PER of 25x. We reiterate our Buy (1) rating. Key downside
risk: prolonged PA/3D inventory correction.
How we differ: Our 2019-20E EPS are 10-32% above the consensus,
likely due to our more bullish contribution assumptions from 3D and 5G.
3 December 2018
Win Semiconductors
5G + 3D likely to help rebuild secular growth
5G migration likely to drive growth for the RF PA business
Rising 3D laser adoption expected to diversify single-customer risk
Reiterating our Buy (1) rating despite forecast, TP revisions
Source: Daiwa forecasts
Source: FactSet, Daiwa forecasts
Win Semiconductors (3105 TT)
Target price: TWD195.00 (from TWD200.00)
Share price (30 Nov): TWD126.50 | Up/downside: +54.2%
Rick Hsu(886) 2 8758 6261
Robert Hsu(886) 2 8758 6251
Forecast revisions (%)
Year to 31 Dec 18E 19E 20E
Revenue change (0.3) (3.2) (4.2)
Net profit change (0.4) (4.2) (2.0)
Core EPS (FD) change (0.4) (4.2) (2.0)
30
49
68
86
105
50
121
193
264
335
Nov-17 Feb-18 May-18 Aug-18 Nov-18
Share price performance
Win Semico (LHS)Relative to TWOTCI (RHS)
(TWD) (%)
12-month range 88.00-331.00
Market cap (USDbn) 1.74
3m avg daily turnover (USDm) 52.69
Shares outstanding (m) 424
Major shareholder Tien He Enterprise (5.1%)
Financial summary (TWD)
Year to 31 Dec 18E 19E 20E
Revenue (m) 17,337 19,121 23,485
Operating profit (m) 2,983 3,977 6,089
Net profit (m) 2,852 3,311 5,023
Core EPS (fully-diluted) 6.729 7.812 11.853
EPS change (%) (27.9) 16.1 51.7
Daiwa vs Cons. EPS (%) (0.6) 10.4 31.8
PER (x) 18.8 16.2 10.7
Dividend yield (%) 5.5 4.0 4.7
DPS 7.0 5.0 6.0
PBR (x) 2.2 2.1 1.9
EV/EBITDA (x) 8.2 6.7 4.8
ROE (%) 11.4 13.2 18.4
26
Win Semiconductors (3105 TT): 3 December 2018
Financial summary
Key assumptions
Profit and loss (TWDm)
Cash flow (TWDm)
Source: FactSet, Daiwa forecasts
Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E
Wafer shipment (6" equ) 206,078 343,196 248,904 284,589 354,835 343,196 365,713 422,813
Utilisation rate (%) 73 79 86 87 92 79 79 80
Blended wafer ASP (USD) 1,705 1,578 1,519 1,465 1,470 1,523 1,519 1,565
Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E
Cellular & WiFi 8,870 7,801 9,953 11,379 12,209 11,153 11,124 12,134
Infrastructure 1,610 2,108 2,063 2,079 2,784 3,064 3,610 4,989
Other Revenue 1 1 (0) 165 2,093 3,120 4,387 6,362
Total Revenue 10,481 9,910 12,016 13,623 17,086 17,337 19,121 23,485
Other income 0 0 0 0 0 0 0 0
COGS (7,249) (6,400) (7,255) (8,634) (10,758) (12,203) (13,097) (14,934)
SG&A (627) (633) (678) (888) (1,066) (1,219) (1,094) (1,324)
Other op.expenses (495) (562) (572) (606) (693) (932) (954) (1,138)
Operating profit 2,110 2,315 3,510 3,495 4,569 2,983 3,977 6,089
Net-interest inc./(exp.) (64) (31) 6 (9) (29) 13 8 22
Assoc/forex/extraord./others 167 145 (83) 402 (12) 451 60 60
Pre-tax profit 2,212 2,429 3,434 3,888 4,529 3,447 4,045 6,171
Tax (401) (465) (762) (791) (813) (627) (734) (1,148)
Min. int./pref. div./others 0 0 0 16 49 32 0 0
Net profit (reported) 1,812 1,963 2,672 3,113 3,764 2,852 3,311 5,023
Net profit (adjusted) 1,812 1,963 2,672 3,113 3,764 2,852 3,311 5,023
EPS (reported)(TWD) 2.402 2.649 3.970 6.038 9.335 6.729 7.812 11.853
EPS (adjusted)(TWD) 2.402 2.649 3.970 6.038 9.335 6.729 7.812 11.853
EPS (adjusted fully-diluted)(TWD) 2.369 2.623 4.478 7.636 9.335 6.729 7.812 11.853
DPS (TWD) 1.507 1.498 0.221 0.579 4.494 7.000 5.000 6.000
EBIT 2,110 2,315 3,510 3,495 4,569 2,983 3,977 6,089
EBITDA 3,932 4,196 5,433 5,866 7,131 6,150 7,200 9,816
Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E
Profit before tax 2,212 2,429 3,434 3,888 4,529 3,447 4,045 6,171
Depreciation and amortisation 1,822 1,882 1,923 2,372 2,562 3,167 3,224 3,727
Tax paid (401) (465) (762) (791) (813) (627) (734) (1,148)
Change in working capital 887 (118) (601) (959) (777) (210) (120) (800)
Other operational CF items 478 103 899 (722) 393 32 (0) 0
Cash flow from operations 4,998 3,830 4,893 3,787 5,894 5,809 6,414 7,951
Capex (2,815) (738) (3,493) (3,226) (3,994) (4,135) (2,650) (4,500)
Net (acquisitions)/disposals 0 0 0 0 0 0 0 0
Other investing CF items 1,233 (535) (126) 1,392 (1,153) 0 0 0
Cash flow from investing (1,583) (1,272) (3,619) (1,834) (5,147) (4,135) (2,650) (4,500)
Change in debt (2,942) (783) (520) 1,650 1,644 (2,362) (886) (664)
Net share issues/(repurchases) (515) 0 (1,487) (1,790) 5,540 0 0 0
Dividends paid (1,136) (1,110) (149) (298) (1,812) (2,967) (2,119) (2,543)
Other financing CF items 112 25 64 (976) (617) 100 100 100
Cash flow from financing (4,481) (1,867) (2,092) (1,414) 4,754 (5,229) (2,905) (3,107)
Forex effect/others 6 20 10 (20) (41) 0 0 0
Change in cash (1,059) 710 (808) 518 5,461 (3,555) 860 343
Free cash flow 2,183 3,092 1,400 561 1,900 1,674 3,764 3,451
27
Win Semiconductors (3105 TT): 3 December 2018
Financial summary continued …
Balance sheet (TWDm)
Key ratios (%)
Source: FactSet, Daiwa forecasts
Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E
Cash & short-term investment 3,714 4,676 3,514 3,581 10,812 7,257 8,117 8,460
Inventory 1,127 1,500 2,471 2,727 3,745 3,925 4,045 4,545
Accounts receivable 650 690 700 1,069 1,551 1,331 1,831 2,081
Other current assets 198 259 299 442 679 300 300 300
Total current assets 5,689 7,125 6,984 7,819 16,787 12,813 14,293 15,386
Fixed assets 12,636 11,653 11,623 13,349 14,468 15,920 15,143 16,102
Goodwill & intangibles 624 345 2,332 1,740 2,124 2,250 2,100 2,080
Other non-current assets 2,162 2,694 3,172 3,502 3,648 3,648 3,648 3,648
Total assets 21,112 21,816 24,111 26,411 37,027 34,632 35,184 37,217
Short-term debt 0 0 24 0 0 0 0 0
Accounts payable 635 930 1,310 975 1,698 1,448 1,948 1,898
Other current liabilities 1,692 1,819 3,272 3,219 3,379 4,792 3,986 4,064
Total current liabilities 2,327 2,749 4,606 4,194 5,077 6,241 5,934 5,963
Long-term debt 3,721 2,938 2,099 3,674 5,905 3,543 2,657 1,993
Other non-current liabilities 171 189 198 225 240 250 300 350
Total liabilities 6,220 5,876 6,902 8,093 11,223 10,034 8,892 8,306
Share capital 7,393 7,422 5,966 4,077 4,227 4,227 4,227 4,227
Reserves/R.E./others 7,499 8,517 11,243 13,550 21,343 20,121 21,766 24,334
Shareholders' equity 14,892 15,940 17,209 17,626 25,569 24,348 25,993 28,561
Minority interests 0 0 0 691 236 250 300 350
Total equity & liabilities 21,112 21,816 24,111 26,411 37,027 34,632 35,184 37,217
EV 53,620 51,875 52,220 54,396 48,941 50,148 48,453 47,495
Net debt/(cash) 8 (1,737) (1,392) 93 (4,907) (3,714) (5,459) (6,467)
BVPS (TWD) 19.746 21.508 25.572 34.191 63.414 57.450 61.331 67.391
Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E
Sales (YoY) (6.7) (5.5) 21.2 13.4 25.4 1.5 10.3 22.8
EBITDA (YoY) 4.4 6.7 29.5 8.0 21.6 (13.8) 17.1 36.3
Operating profit (YoY) (14.1) 9.7 51.7 (0.4) 30.8 (34.7) 33.3 53.1
Net profit (YoY) 10.0 8.4 36.1 16.5 20.9 (24.2) 16.1 51.7
Core EPS (fully-diluted) (YoY) (1.4) 10.7 70.7 70.5 22.3 (27.9) 16.1 51.7
Gross-profit margin 30.8 35.4 39.6 36.6 37.0 29.6 31.5 36.4
EBITDA margin 37.5 42.3 45.2 43.1 41.7 35.5 37.7 41.8
Operating-profit margin 20.1 23.4 29.2 25.7 26.7 17.2 20.8 25.9
Net profit margin 17.3 19.8 22.2 22.8 22.0 16.5 17.3 21.4
ROAE 12.4 12.7 16.1 17.9 17.4 11.4 13.2 18.4
ROAA 8.1 9.1 11.6 12.3 11.9 8.0 9.5 13.9
ROCE 10.9 12.3 18.4 16.9 17.0 10.0 13.9 20.3
ROIC 11.6 12.9 18.2 16.3 19.1 11.7 15.6 22.9
Net debt to equity 0.1 n.a. n.a. 0.5 n.a. n.a. n.a. n.a.
Effective tax rate 18.1 19.2 22.2 20.4 18.0 18.2 18.1 18.6
Accounts receivable (days) 29.6 24.7 21.1 23.7 28.0 30.3 30.2 30.4
Current ratio (x) 2.4 2.6 1.5 1.9 3.3 2.1 2.4 2.6
Net interest cover (x) 33.0 74.3 n.a. 383.3 158.5 n.a. n.a. n.a.
Net dividend payout 62.7 56.5 5.6 9.6 48.1 104.0 64.0 50.6
Free cash flow yield 4.1 5.8 2.6 1.0 3.5 3.1 7.0 6.4
Company profile
Founded in 1999, Win Semiconductors Corp (WinSemi) is the world’s largest compound
semiconductor foundry, focusing on gallium-arsenide (GaAs) foundry services for customers in both
wireless and wire-line communication markets and infrastructure applications. It has a diverse
technology portfolio of processes that supports microwave frequency requirements from 50MHz to
100GHz, with applications including smartphones, tablet PCs, cellular base-stations, very small
aperture terminal (VSAT), fibre optics, etc. It has started penetrating into vertical cavity surface
emitting laser (VCSEL) foundries since 2017 for consumer laser applications such as 3D laser
sensors and cameras.
28
Win Semiconductors (3105 TT): 3 December 2018
WinSemi: quarterly P&L forecasts
TWDm 1Q18 2Q18 3Q18 4Q18E 1Q19E 2Q19E 3Q19E 4Q19E 2017 2018E 2019E 2020E
Total revenue 4,464 4,567 4,066 4,240 3,829 4,512 5,330 5,449 17,087 17,337 19,121 23,485
COGS -2,943 -3,088 -3,025 -3,148 -2,888 -3,190 -3,505 -3,513 -10,758 -12,203 -13,097 -14,934
Gross profit 1,521 1,479 1,041 1,092 941 1,322 1,825 1,936 6,328 5,134 6,024 8,551
Opex -480 -533 -611 -526 -448 -478 -554 -567 -1,759 -2,151 -2,047 -2,462
Operating profit 1,041 946 429 566 493 844 1,270 1,369 4,569 2,983 3,977 6,089
EBITDA 1,799 1,733 1,251 1,367 1,215 1,621 2,103 2,261 7,131 6,150 7,200 9,816
Pretax profit 909 1,157 808 573 506 860 1,288 1,390 4,529 3,447 4,045 6,171
Income taxes -179 -252 -110 -86 -101 -189 -193 -250 -813 -627 -734 -1,148
Net profit 736 911 718 487 405 671 1,095 1,140 3,764 2,852 3,311 5,023
FD O/S (m) 423 423 424 424 424 424 424 424 403 424 424 424
FD EPS (TWD) 1.74 2.16 1.69 1.15 0.96 1.58 2.58 2.69 9.34 6.73 7.81 11.85
Revenue mix
Cellular 32% 38% 39% 34% 35% 35% 34% 31%
38% 36% 34% 31%
Infrastructure 14% 17% 19% 21% 20% 20% 17% 18%
16% 18% 19% 21%
WiFi 33% 28% 29% 25% 28% 26% 24% 22%
33% 29% 25% 21%
Optics & others 21% 17% 13% 20% 17% 19% 25% 28%
12% 18% 23% 27%
Margin
Gross 34% 32% 26% 26% 25% 29% 34% 36% 37% 30% 32% 36%
Operating 23% 21% 11% 13% 13% 19% 24% 25% 27% 17% 21% 26%
EBITDA 40% 38% 31% 32% 32% 36% 39% 41% 42% 35% 38% 42%
Net 16% 20% 18% 11% 11% 15% 21% 21% 22% 16% 17% 21%
Growth (QoQ)
Total revenue -20% 2% -11% 4% -10% 18% 18% 2%
Gross profit -29% -3% -30% 5% -14% 40% 38% 6%
Operating profit -36% -9% -55% 32% -13% 71% 51% 8%
EBITDA -23% -4% -28% 9% -11% 33% 30% 7%
Net profit -45% 24% -21% -32% -17% 66% 63% 4%
FD EPS -48% 24% -21% -32% -17% 66% 63% 4%
Growth (YoY)
Total revenue 36% 20% -8% -24% -14% -1% 31% 29% 25% 1% 10% 23%
Gross profit 38% 4% -37% -49% -38% -11% 75% 77% 27% -19% 17% 42%
Operating profit 42% -5% -65% -65% -53% -11% 196% 142% 31% -35% 33% 53%
EBITDA 37% 10% -34% -42% -32% -6% 68% 65% 22% -14% 17% 36%
Net profit 48% 22% -39% -64% -45% -26% 53% 134% 21% -24% 16% 52%
FD EPS 41% 16% -42% -65% -45% -27% 53% 134% 22% -28% 16% 52%
Source: Company, Daiwa forecasts
WinSemi: RF PA segment revenue trend* WinSemi: optics segment revenue trend*
Source: Company, Daiwa estimates & forecasts Note: * RF PA includes cellular, WiFi and infrastructure PA
Source: Company, Daiwa estimates & forecasts Note: * Optics includes 3D VCSEL and other lasers for optical communication
WinSemi: revenue trend breakdown by product segment WinSemi: 1-year forward PER bands
Source: Company, Daiwa estimates & forecasts Source: Company, TEJ, Daiwa forecasts
(20%)
(10%)
0%
10%
20%
30%
40%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
E
1Q19
E
2Q19
E
3Q19
E
4Q19
E
1Q20
E
2Q20
E
3Q20
E
4Q20
E
1Q21
E
2Q21
E
3Q21
E
4Q21
E
RF PA Growth (YoY)
TWDm
(100%)
(50%)
0%
50%
100%
150%
200%
0
500
1,000
1,500
2,000
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
E
1Q19
E
2Q19
E
3Q19
E
4Q19
E
1Q20
E
2Q20
E
3Q20
E
4Q20
E
1Q21
E
2Q21
E
3Q21
E
4Q21
E
Optics Growth (YoY)
TWDm
(40%)
(20%)
0%
20%
40%
60%
80%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
E
1Q19
E
2Q19
E
3Q19
E
4Q19
E
1Q20
E
2Q20
E
3Q20
E
4Q20
E
1Q21
E
2Q21
E
3Q21
E
4Q21
E
RF PA Optics Others Growth
TWDm
0
100
200
300
400
Dec
-11
Apr
-12
Aug
-12
Dec
-12
Apr
-13
Aug
-13
Dec
-13
Apr
-14
Aug
-14
Dec
-14
Apr
-15
Aug
-15
Dec
-15
Apr
-16
Aug
-16
Dec
-16
Apr
-17
Aug
-17
Dec
-17
Apr
-18
Aug
-18
Dec
-18
Apr
-19
Share price 5x 10x
15x 20x 25x
30x
TWD
See important disclosures, including any required research certifications, beginning on page 60
Malaysia Information Technology
What’s new: A whole new capex cycle with 5G. Capex related to 5G will
encompass data centres, edge computing, network transformation and 5G
network protocols. On the mobility side of the equation, there will be new
demand for modem and processor chipsets and RF related filters, which
we see benefiting Inari, one of the region’s largest RF testing houses.
What’s the impact: Mobile upgrades should drive next wave of
growth ... In our view, Inari stands to benefit from upgrades to datacentre
and mobility. With datacentre upgrades, the transition from 4G to 5G
technology will likely have 3 positive implications for Inari: 1) the number of
RF filters per device will rise because of the higher frequency spectrum and
massive multiple-input and multiple output required for 5G. From our
understanding, the transition to 5G could easily result in a multi-fold increase
in RF filters per device to cater to the higher capacity and bandwidth; 2)
higher filter requirements, leading to increased demand for premium filters. In
our view, demand for premium RF filters will be enhanced because of the
technology complexity; and 3) longer test cycle durations again because of
the increased complexity and higher requirement within the filter and front
end module, which combined should spur demand for Inari. This does not
take into account a potential device cycle upgrade by consumers as new
features are introduced like 3D and health sensors. In anticipation of this 5G
ramp, Affin forecasts the number of consigned testers to increase by c.25%
(by end-FYE6/19) from 850 testers as at end-FYE6/18.
… and infrastructure too. We envisage a rise in demand for Inari’s
datacentre transceiver/receiver mixed signal testing business. It currently
has 58 testers for this business segment and is part of Broadcom’s supply
chain for infrastructure applications, which will likely see increased
requirements as network infrastructure is upgraded to cater to the higher
bandwidth. While this portion of the business remains relatively small for
Inari currently, at c.5% of group revenue, we see real potential for upside.
What we recommend: As one of the largest RF testing houses in the
region and a key contractor for Broadcom’s wireless division, Inari is poised
to benefit from the proliferation of 5G. We forecast a 3-year forward core
earnings CAGR of 13%, underpinned by demand for its customers’
premium RF filters, while growth in new customers as Inari fills capacity
would be an added catalyst. We reaffirm our Buy call and 12-month TP of
RM2.25 based on a 24x CY2019E PER (20% premium to market). Key
risk: high single customer reliance and a sharp rise in the MYR vs. USD.
How we differ: Our FY19E EPS is 3.6% above the market, as we remain
upbeat on Inari’s RF expansion and the contribution from new products.
3 December 2018
AAC Technol ogies
The next growth wave
5G likely to drive a new growth cycle for Inari
Stands to benefit from more antennas and longer testing duration
Reiterating our Buy rating and TP of MYR2.25
Kevin Low (603) 2146 7479
Forecast revisions (%) Year to 30 Jun 19E 20E 21E
Revenue change - - -
Net-profit change - - -
Core EPS (FD) change - - -
Source: Affin Hwang forecasts
12-month range 1.58-2.56
Market cap (USDm) 1,208.8
3m average daily turnover (USDm) 5.9
Shares outstanding (m) 3,166.6
Major shareholder Insas Bhd 17.3%
Source: Bloomberg
Financial summary (MYR) Year to 30 Jun 19E 20E 21E
Revenue (m) 1,434.8 1,625.1 1,822.8
Operating profit (m) 382.3 456.7 515.6
Net profit (m) 274.6 329.2 383.0
Core EPS (fully-diluted) 0.086 0.106 0.123
EPS change (%) 0.7 23.6 16.4
Daiwa vs Cons. EPS (%) 3.6 3.3 (0.7)
PER (x) 19.2 15.6 13.4
Dividend yield (%) 3.7 4.5 5.2
DPS 6.2 7.4 8.6
PBR (x) 4.5 4.1 3.8
EV/EBITDA (x) 12.1 10.0 8.7
ROE (%) 24.7 27.4 29.3
Source: Company, Affin Hwang forecasts
70
79
88
96
105
2.6
2.9
3.2
3.5
3.8
Jan-16 Apr-16 Jul-16 Oct-16 Jan-17
Share price performance
Inari Amer (LHS)Relative to FBMKLCI (RHS)
(MYR) (%)
Inari Amertron (INRI MK)
Target price: MYR2.25
Share price (30 Nov): MYR1.65 | Up/downside: +36.4%
30
Inari Amertron (INRI MK): 3 December 2018
Financial summary
Profit & Loss Statement (MYRm)
FYE June 2016 2017 2018E 2019E 2020E 2021E
Total revenue 1043 1176 1376 1435 1625 1823
Operating expenses (843) (908) (1004) (1052) (1168) (1307)
EBITDA 200 268 372 382 457 516
Depreciation (49) (66) (80) (94) (100) (100)
Amortisation 0 0 0 0 0 0
EBIT 151 203 292 289 357 416
Net interest income/(expense) (0) 4 8 8 9 10
Associates' contribution 0 0 0 0 0 0
Others 0 0 0 0 0 0
Pretax profit 151 206 300 297 366 426
Tax (6) (12) (35) (31) (37) (43)
Minority interest 1 (1) (0) 0 0 0
Net profit 148 228 260 275 329 383
Core net profit 146 193 265 266 329 383
Quarterly Profit & Loss (MYRm)
FYE June 1Q18 2Q18 3Q18 4Q18 1Q19
Revenue 373 376 326 301 326
Operating expenses -274 -267 -231 -231 -249
EBITDA 99 109 94 70 77
Depreciation -23 -21 -22 -13 -22
EBIT 76 87 72 57 55
Net int income/(expense) 1 1 2 3 2
Associates' contribution
Exceptional Items -3 -11 -12 22 8
Pretax profit 74 78 62 81 65
Tax -5 -9 -7 -14 -5
Minority interest 0 0 0 1 0
Net profit 68 69 55 68 60
Core net profit 72 79 67 46 52
Margins (%)
EBITDA 26.5 28.9 29.0 23.4 23.7
PBT 19.8 20.7 19.2 27.0 19.9
Net profit 18.3 18.2 16.9 22.6 18.5
Cash flow (MYRm)
FYE June 2016 2017 2018E 2019E 2020E 2021E
EBIT 151 203 292 289 357 416
Depreciation & amortisation 49 66 80 94 100 100
Working capital changes -45 31 -54 -35 -34 -36
Cash tax paid -6 -12 -35 -31 -37 -43
Others 21 17 -13 16 9 10
Cashflow from operations 170 304 270 333 395 447
Capex -129 -120 -154 -120 -100 -100
Disposal/(purchases) -43 66 52 0 0 0
Others 0 0 0 0 0 0
Cash flow from investing -172 -54 -102 -120 -100 -100
Debt raised/(repaid) -33 -279 -52 0 0 0
Equity raised/(repaid) 23 363 149 0 0 0
Net inct income/(expense) 0 4 8 8 9 10
Dividends paid -79 -91 -184 -192 -230 -268
Others 0 -4 -8 -8 -9 -10
Cash flow from financing -89 -7 -88 -192 -230 -268
Net change in CF -90 243 80 21 64 79
Free Cash Flow -2 251 168 213 295 347
Source: Company, Affin Hwang forecasts
31
Inari Amertron (INRI MK): 3 December 2018
Financial summary continued …
Balance sheet (MYRm)
FYE June 2016 2017 2018E 2019E 2020E 2021E
Fixed assets 274 331 400 427 427 427
Other long term assets 50 15 7 7 7 7
Total non-current assets 324 346 408 434 434 434
Cash and equivalents 91 198 530 551 615 694
Stocks 165 169 161 240 272 305
Debtors 176 232 235 240 272 305
Other current assets 120 259 1 1 1 1
Total current assets 552 857 926 1031 1159 1304
Creditors 139 231 171 220 249 280
Short term borrowings 15 16 9 9 9 9
Other current liabilities 11 52 59 59 59 59
Total current liabilities 165 299 239 288 318 348
Long term borrowings 25 28 17 17 17 17
Other long term liabilities 3 3 6 6 6 6
Total long term liabilities 28 32 24 24 24 24
Shareholders' Funds 681 873 1071 1153 1252 1367
Key ratios (%)
FYE June 2016 2017 2018E 2019E 2020E 2021E
Growth
Revenue (%) 11.8 12.8 17.0 4.3 13.3 12.2
EBITDA (%) 20.3 33.9 38.7 2.8 19.4 12.9
Core net profit (%) 9.8 32.3 37.1 0.7 23.6 16.4
Profitability
EBITDA margin (%) 19.2 22.8 27.0 26.6 28.1 28.3
PBT margin (%) 14.7 20.5 21.5 21.3 22.5 23.3
Net profit margin (%) 14.2 19.4 18.9 19.1 20.3 21.0
Effective tax rate (%) 3.9 5.1 12.0 10.0 10.0 10.0
ROA (%) 16.9 18.9 19.5 18.7 20.7 22.0
Core ROE (%) 24.0 24.8 27.2 24.7 27.4 29.3
ROCE (%) 22.9 24.9 29.1 25.4 29.1 31.2
Dividend payout ratio (%) 54.2 40.0 70.9 70.0 70.0 70.0
Liquidity
Current ratio (x) 3.4 2.9 3.9 3.6 3.7 3.7
Op. cash flow (RMm) 170.4 304.4 270.0 333.1 394.8 447.3
Free cashflow (RMm) 41.6 184.8 115.8 213.1 294.8 347.3
FCF/share (sen) 1.3 5.9 3.7 6.8 9.5 11.1
Asset management
Debtors turnover (days) 61.7 72.0 60.0 61.0 61.0 61.0
Stock turnover (days) 57.6 52.4 60.0 61.0 61.0 61.0
Creditors turnover (days) 48.7 71.6 55.0 56.0 56.0 56.0
Capital structure
Net Gearing (%) (25.9) (47.4) (47.3) (45.7) (47.3) (49.1)
Interest Cover (x) 38.2 123.4 241.4 231.9 277.0 312.7
Source: Company, Affin Hwang forecasts
Company profile
Inari Amertron Berhad is an investment holding company with wholly-owned subsidiaries involved in
the OSAT & electronics manufacturing services (EMS) industries. It currently has seven wholly-owned
direct subsidiaries: Inari Technology Sdn Bhd, Inari Semiconductor Labs Sdn Bhd, Inari Integrated
Systems Sdn Bhd, Inari South Keytech Sdn Bhd, Inari Global Limited, Simfoni Bistari Sdn Bhd, and
Inari International Limited. Inari Amertron Berhad also has a 51% subsidiary, Ceedtec Sdn Bhd.
See important disclosures, including any required research certifications, beginning on page 60
Korea Information Technology
What's new: We expect Samsung Electro-Mechanics (SEMCO) to be one
of the beneficiaries of the transition to 5G. In addition to a favourable auto
MLCC business environment and multi-cam trends in 2019, we expect the
5G transition to be positive for longer-term earnings momentum from 2H19.
What's the impact: New business opportunity from increase in 5G
network penetration. Due to higher performance requirements, we expect
5G to boost demand for high-end smartphones, which we expect to launch
in 2H19, driving >30% growth for key content such as high-end IT MLCCs,
substrate-like PCBs (SLP) and communication modules (for 5G vs LTE).
We assume that 5G-based smartphones will use 30% more MLCCs than
LTE-based phones. For industrial MLCCs, we expect a meaningful rise in
MLCC demand for 5G network equipment from 2H19. Due to the US-China
trade war and security issues, we assume SEMCO’s customers such as
Nokia/Ericsson/SEC would gain market share over China network
equipment makers, which should be positive for SEMCO, in our view.
Expecting further earnings improvement in 2019. Despite concerns on
weak demand for IT/smartphones, we expect SEMCO to post solid
earnings in 2019, recording EPS growth of 62% YoY, driven by auto
MLCCs and multiple-camera modules. Thanks to robust demand for auto
MLCCs from an acceleration in the electrification of cars and limited supply
growth, we expect SEMCO’s auto MLCC sales to increase meaningfully in
2019, accounting for >10% of its total MLCC revenue. For camera
modules, we forecast expanding triple-camera module adoption from
Samsung Electronics and China smartphone makers to drive revenue
growth for its module solution business, due to the > 20% price premium
over dual-camera modules.
What we recommend: We reiterate our Buy (1) rating and 12-month TP to
KRW200,000, based on our target PER of 13.0x, which is the average
2019E PER for SEMCO’s MLCC peers, applied to 2019E EPS. Key risk: a
sharp decline in high-end smartphone demand.
How we differ: Our 2019E EPS is 4% higher than the consensus, which
we attribute to our bullish view on its MLCC earnings. However, we are
more conservative on its substrate business, thus our 2020E EPS forecast
is 3% lower than the consensus.
3 December 2018
Samsung El ectro-M echanics
Key beneficiary of 5G transition
New business opportunity from increase in 5G network penetration
Auto MLCCs/multi-cam to drive further earnings improvement in 2019
Reiterating our Buy (1) rating and TP of KRW200,000
Source: Daiwa forecasts
Source: FactSet, Daiwa forecasts
Samsung Electro-Mechanics (009150 KS)
Target price: KRW200,000 (from KRW200,000)
Share price (30 Nov): KRW120,500 | Up/downside: +66.0%
SK Kim(82) 2 787 9173
Henny Jung(82) 2 787 9182
Forecast revisions (%)
Year to 31 Dec 18E 19E 20E
Revenue change - - -
Net profit change - - -
Core EPS (FD) change - - -
90
113
135
158
180
80,000
101,250
122,500
143,750
165,000
Nov-17 Feb-18 May-18 Aug-18 Nov-18
Share price performance
Samsung EM (LHS)Relative to KOSPI (RHS)
(KRW) (%)
12-month range 89,000-163,000
Market cap (USDbn) 8.04
3m avg daily turnover (USDm) 187.18
Shares outstanding (m) 75
Major shareholder Samsung Electronics (23.7%)
Financial summary (KRW)
Year to 31 Dec 18E 19E 20E
Revenue (bn) 8,343 10,287 11,342
Operating profit (bn) 1,135 1,739 1,817
Net profit (bn) 736 1,194 1,249
Core EPS (fully-diluted) 9,483 15,392 16,089
EPS change (%) 355.0 62.3 4.5
Daiwa vs Cons. EPS (%) (1.1) 4.0 (2.9)
PER (x) 12.7 7.8 7.5
Dividend yield (%) 0.7 0.7 0.7
DPS 800 850 900
PBR (x) 1.8 1.5 1.2
EV/EBITDA (x) 5.5 3.8 3.3
ROE (%) 15.9 21.4 18.5
33
Samsung Electro-Mechanics (009150 KS): 3 December 2018
Financial summary
Key assumptions
Profit and loss (KRWbn)
Cash flow (KRWbn)
Source: FactSet, Daiwa forecasts
Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E
MLCC ASP (%) (3.2) (7.1) 3.0 (9.3) 5.9 28.7 19.3 2.5
MLCC volume (%) (0.7) 4.9 3.4 4.2 22.2 28.5 16.1 11.1
Camera module ASP (%) (4.6) 12.3 1.4 (6.8) (5.2) 6.7 9.5 1.5
Camera module volume (%) 35.8 (31.3) 11.6 26.0 21.3 (4.9) 10.1 4.1
Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E
ACI (Advanced Circuit Interconnection) 1,864 1,631 1,518 1,320 1,446 1,500 1,654 1,807
LCR (Linkage of magnetic Flux coil,
Capacitor, Resistor)1,915 1,883 2,028 1,923 2,337 3,736 5,110 5,790
Other Revenue 4,477 2,586 2,631 2,790 3,055 3,107 3,523 3,745
Total Revenue 8,257 6,100 6,176 6,033 6,838 8,343 10,287 11,342
Other income (2) 772 0 0 0 0 0 0
COGS (6,709) (5,065) (4,865) (5,006) (5,430) (5,961) (7,159) (7,994)
SG&A (1,083) (971) (1,010) (1,002) (1,102) (1,246) (1,389) (1,531)
Other op.expenses 0 (0) 0 0 0 0 0 0
Operating profit 462 837 301 24 306 1,135 1,739 1,817
Net-interest inc./(exp.) (29) (28) (18) (31) (55) (77) (68) (57)
Assoc/forex/extraord./others 3 783 84 39 2 2 6 11
Pre-tax profit 436 1,592 367 32 254 1,060 1,677 1,771
Tax (90) (127) (45) (9) (76) (298) (456) (496)
Min. int./pref. div./others (15) (186) (9) (8) (16) (26) (27) (27)
Net profit (reported) 330 1,279 313 15 162 736 1,194 1,249
Net profit (adjusted) 330 1,279 313 15 162 736 1,194 1,249
EPS (reported)(KRW) 4,443 8,230 4,031 190 2,084 9,483 15,392 16,089
EPS (adjusted)(KRW) 4,443 8,230 4,031 190 2,084 9,483 15,392 16,089
EPS (adjusted fully-diluted)(KRW) 4,443 8,230 4,031 190 2,084 9,483 15,392 16,089
DPS (KRW) 750 750 500 500 750 800 850 900
EBIT 462 837 301 24 306 1,135 1,739 1,817
EBITDA 1,082 1,497 795 633 937 1,902 2,600 2,762
Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E
Profit before tax 436 1,592 367 32 254 1,060 1,677 1,771
Depreciation and amortisation 619 660 494 608 631 767 862 944
Tax paid (90) (127) (45) (9) (76) (298) (456) (496)
Change in working capital (84) (51) 180 32 (299) (21) (421) (211)
Other operational CF items 24 (1,702) (459) 16 208 231 239 238
Cash flow from operations 904 373 537 680 718 1,739 1,901 2,246
Capex (961) (860) (1,196) (1,052) (1,476) (1,122) (1,070) (1,280)
Net (acquisitions)/disposals 20 15 186 68 92 29 22 22
Other investing CF items 126 473 789 (202) 152 (29) (130) (280)
Cash flow from investing (815) (372) (221) (1,186) (1,232) (1,123) (1,178) (1,538)
Change in debt 85 107 328 402 125 13 (129) (122)
Net share issues/(repurchases) 0 (0) 0 0 0 0 0 0
Dividends paid (79) (58) (63) (41) (48) (57) (67) 0
Other financing CF items (44) (129) (298) (121) 71 6 0 0
Cash flow from financing (38) (80) (33) 240 148 (38) (196) (122)
Forex effect/others 0 0 0 0 0 0 0 0
Change in cash 52 (80) 283 (266) (366) 579 527 586
Free cash flow (57) (487) (659) (372) (759) 617 831 966
34
Samsung Electro-Mechanics (009150 KS): 3 December 2018
Financial summary continued …
Balance sheet (KRWbn)
Key ratios (%)
Source: FactSet, Daiwa forecasts
Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E
Cash & short-term investment 769 1,477 1,124 1,105 567 1,209 1,625 2,251
Inventory 888 841 679 827 919 825 992 1,109
Accounts receivable 724 900 684 648 829 1,085 1,337 1,475
Other current assets 270 336 243 233 164 200 205 205
Total current assets 2,651 3,554 2,730 2,812 2,479 3,318 4,159 5,040
Fixed assets 2,950 2,926 3,298 3,714 4,155 4,479 4,685 5,020
Goodwill & intangibles 225 104 91 92 149 93 95 100
Other non-current assets 1,360 1,135 1,150 1,044 984 1,196 1,051 1,001
Total assets 7,185 7,719 7,269 7,663 7,767 9,085 9,991 11,161
Short-term debt 897 1,116 1,025 1,166 1,671 1,858 1,785 1,715
Accounts payable 393 391 272 396 281 231 284 322
Other current liabilities 497 643 471 481 501 729 679 685
Total current liabilities 1,787 2,151 1,768 2,043 2,454 2,818 2,749 2,722
Long-term debt 709 597 1,017 1,278 898 723 667 615
Other non-current liabilities 431 328 169 4 84 343 292 292
Total liabilities 2,927 3,076 2,954 3,325 3,436 3,884 3,708 3,629
Share capital 388 388 388 388 388 388 388 388
Reserves/R.E./others 3,786 4,165 3,834 3,852 3,844 4,676 5,759 7,007
Shareholders' equity 4,174 4,553 4,222 4,240 4,232 5,064 6,147 7,395
Minority interests 84 89 93 97 100 137 137 137
Total equity & liabilities 7,185 7,719 7,269 7,663 7,767 9,085 9,991 11,161
EV 9,922 9,326 10,011 10,437 11,102 10,510 9,964 9,216
Net debt/(cash) 837 236 917 1,339 2,002 1,373 827 79
BVPS (KRW) 54,871 59,829 55,610 55,896 55,818 67,020 80,969 97,058
Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E
Sales (YoY) 4.3 (26.1) 1.2 (2.3) 13.4 22.0 23.3 10.3
EBITDA (YoY) (4.0) 38.4 (46.9) (20.5) 48.1 103.0 36.7 6.2
Operating profit (YoY) (23.9) 80.9 (64.0) (91.9) 1,155.0 270.7 53.2 4.5
Net profit (YoY) (20.3) 287.2 (75.5) (95.3) 999.7 355.0 62.3 4.5
Core EPS (fully-diluted) (YoY) (14.3) 85.3 (51.0) (95.3) 999.7 355.0 62.3 4.5
Gross-profit margin 18.7 17.0 21.2 17.0 20.6 28.5 30.4 29.5
EBITDA margin 13.1 24.5 12.9 10.5 13.7 22.8 25.3 24.3
Operating-profit margin 5.6 13.7 4.9 0.4 4.5 13.6 16.9 16.0
Net profit margin 4.0 21.0 5.1 0.2 2.4 8.8 11.6 11.0
ROAE 8.2 29.4 7.2 0.3 3.8 15.9 21.4 18.5
ROAA 4.7 17.2 4.2 0.2 2.1 8.7 12.5 11.8
ROCE 8.1 13.7 4.7 0.4 4.5 15.5 21.1 19.5
ROIC 7.4 15.4 5.2 0.3 3.6 12.6 18.5 17.8
Net debt to equity 20.1 5.2 21.7 0.0 0.0 0.0 0.0 0.0
Effective tax rate 20.7 8.0 12.1 28.6 30.1 28.1 27.2 28.0
Accounts receivable (days) 36.6 48.6 46.8 40.3 39.4 41.9 43.0 45.2
Current ratio (x) 1.5 1.7 1.5 1.4 1.0 1.2 1.5 1.9
Net interest cover (x) 15.8 30.3 16.3 0.8 5.6 14.7 25.7 31.6
Net dividend payout 16.9 9.1 12.4 263.8 36.0 8.4 5.5 5.6
Free cash flow yield n.a. n.a. n.a. n.a. n.a. 6.9 9.2 10.7
Company profile
Samsung Electro-Mechanics (SEMCO) is the largest electronics-component manufacturer in Korea
in terms of market cap. The company's core products are MLCCs, handset PCBs, IC-packaging
substrates, and camera modules. Its major customers include Samsung Electronics mainly for
mobile, and a number of Chinese smartphone makers.
See important disclosures, including any required research certifications, beginning on page 60
Taiwan Information Technology
What's new: While silicon-photonics (SiPh) should be the key growth
driver for LandMark Opto (LMO) from wireline bandwidth upgrades for
datacentres, we see 5G cellular migration as adding to its business upside
from bandwidth upgrades for base-station (B/S) fibre-optic (FO)
connectivity. Its recovery has been intact post its 1H18 product transition;
we reiterate our Buy (1) call with an unchanged TP of TWD345.
What's the impact: SiPh the key growth driver. Post its product
transition for a major customer from 100G to 400G SiPh transceivers for
datacentre applications, LMO has resumed business growth in this space.
We expect the growth to continue into 2019, with order share gains of this
major customer from multiple hyper-scale datacentre operators, plus an
order ramp-up from LMO’s new SiPh customers. We forecast its SiPh
revenue to grow 80% YoY in 2019 after a pause in 2018 and 110% YoY
growth in 2017. Its 10G PON business has been growing steadily
throughout the year, due to FTTX bandwidth upgrades in China from
access points likely over 2H17-2019, followed by last-mile solutions.
5G adding to business bonus. As depicted in the main section of this
report, FO transceiver makers should be side beneficiaries of the 5G
migration cycle, as the FO unit inside the B/S needs a bandwidth upgrade,
from 10G to 25/100G, in order to support wide-frequency coverage by
phased-array antennas. Positioned in the epiwafer segment of the FO food
chain and capturing the most value, in our view, LMO stands to benefit from
this 5G build-up cycle, with volume likely to ramp up more meaningfully in
2020-21. We forecast its 5G-related revenue to start at c.TWD30m in 2019,
and double each year to reach TWD120m in 2021 off a low base. We
understand its SiPh customers are also considering entering the 5G space,
adding potential upside to LMO.
Near-term update. LMO expects its 4Q18 revenue to hit a record (see our
26 October Flash). Its October revenue reached 34% of our 4Q18 forecast,
suggesting its business run-rate is on track to meet company/market
expectations. We forecast its 4Q18 EPS to reach TWD2.4, in line with the
consensus. We further forecast a modest revenue drop QoQ for 1Q19,
better than the consensus thanks to resilient SiPh order strength.
What we recommend: Given no changes in forecasts, we stick with our
12-month TP of TWD345, based on an ROE-adjusted PBR of 6.6x and
2019E BV. We reiterate our Buy (1) rating. Key downside risk: SiPh
recovery failing to be sustained as we expect.
How we differ: We are 26-47% above the consensus on 2019-20E EPS
forecasts, likely due to our more bullish SiPh order assumptions.
3 December 2018
LandMar k Optoel ectronics
A side beneficiary of 5G
Recovery intact on SiPh order resumption
5G ramp-up likely a side benefit of optic bandwidth upgrades
Reiterating Buy (1) with TP unchanged at TWD345
Source: Daiwa forecasts
Source: FactSet, Daiwa forecasts
LandMark Optoelectronics (3081 TT)
Target price: TWD345.00 (from TWD345.00)
Share price (30 Nov): TWD258.00 | Up/downside: +33.7%
Rick Hsu(886) 2 8758 6261
Robert Hsu(886) 2 8758 6251
Forecast revisions (%)
Year to 31 Dec 18E 19E 20E
Revenue change - - -
Net profit change - - -
Core EPS (FD) change - - -
50
66
83
99
115
150
220
290
360
430
Nov-17 Feb-18 May-18 Aug-18 Nov-18
Share price performance
Land Mark (LHS)Relative to TWSE Index (RHS)
(TWD) (%)
12-month range 188.50-429.00
Market cap (USDbn) 0.76
3m avg daily turnover (USDm) 7.43
Shares outstanding (m) 91
Major shareholder Tainet Communication System (9.0%)
Financial summary (TWD)
Year to 31 Dec 18E 19E 20E
Revenue (m) 2,365 3,495 5,246
Operating profit (m) 850 1,517 2,499
Net profit (m) 703 1,225 2,015
Core EPS (fully-diluted) 7.732 13.462 22.151
EPS change (%) 6.8 74.1 64.5
Daiwa vs Cons. EPS (%) (0.1) 26.1 47.2
PER (x) 33.4 19.2 11.6
Dividend yield (%) 1.9 2.1 2.7
DPS 5.0 5.5 7.0
PBR (x) 5.9 5.0 3.8
EV/EBITDA (x) 17.7 10.3 6.5
ROE (%) 18.2 28.0 37.2
36
LandMark Optoelectronics (3081 TT): 3 December 2018
Financial summary
Key assumptions
Profit and loss (TWDm)
Cash flow (TWDm)
Source: FactSet, Daiwa forecasts
Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E
Wafer shipment ('000) n.a. 34 41 41 43 53 76 115
Capacity utilization (%) n.a. 100 96 71 64 67 81 88
Blended ASP (USD) n.a. 1,263 1,545 1,594 1,546 1,482 1,513 1,490
Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E
PON 0 850 1,352 1,286 671 1,012 1,117 1,574
SiPhotonics 0 363 287 468 978 967 1,748 2,623
Other Revenue 715 95 389 357 390 386 631 1,049
Total Revenue 715 1,307 2,028 2,110 2,039 2,365 3,495 5,246
Other income 0 0 0 0 0 0 0 0
COGS (312) (507) (691) (852) (936) (1,090) (1,542) (2,229)
SG&A (59) (66) (90) (102) (132) (148) (181) (246)
Other op.expenses (17) (26) (77) (108) (177) (277) (255) (272)
Operating profit 326 708 1,169 1,048 794 850 1,517 2,499
Net-interest inc./(exp.) 3 4 8 11 11 14 14 20
Assoc/forex/extraord./others 3 29 16 (1) (13) 23 0 0
Pre-tax profit 332 741 1,193 1,058 791 887 1,531 2,519
Tax (62) (127) (204) (182) (136) (184) (306) (504)
Min. int./pref. div./others 0 0 0 0 0 0 0 0
Net profit (reported) 270 614 989 875 656 703 1,225 2,015
Net profit (adjusted) 270 614 989 875 656 703 1,225 2,015
EPS (reported)(TWD) 6.022 11.189 14.892 9.642 7.265 7.732 13.462 22.151
EPS (adjusted)(TWD) 6.022 11.189 14.892 9.642 7.265 7.732 13.462 22.151
EPS (adjusted fully-diluted)(TWD) 3.990 7.261 10.881 9.578 7.238 7.732 13.462 22.151
DPS (TWD) 0.000 3.000 7.000 9.000 8.000 5.000 5.505 7.000
EBIT 326 708 1,169 1,048 794 850 1,517 2,499
EBITDA 378 788 1,309 1,260 1,070 1,215 2,061 3,121
Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E
Profit before tax 332 741 1,193 1,058 791 887 1,531 2,519
Depreciation and amortisation 52 80 140 211 276 366 544 622
Tax paid (62) (127) (204) (182) (136) (184) (306) (504)
Change in working capital (12) (126) (308) 316 (201) (80) (455) (380)
Other operational CF items 20 74 138 (51) 15 0 (0) 0
Cash flow from operations 330 643 958 1,352 746 989 1,314 2,258
Capex (225) (239) (437) (251) (319) (590) (641) (671)
Net (acquisitions)/disposals 0 0 0 0 0 0 0 0
Other investing CF items 1 (2) (29) (10) (213) 0 0 0
Cash flow from investing (224) (241) (466) (260) (532) (590) (641) (671)
Change in debt 0 0 0 0 0 0 0 0
Net share issues/(repurchases) 0 0 1,541 0 0 0 0 0
Dividends paid (73) (136) (426) (629) (725) (453) (501) (637)
Other financing CF items 0 0 0 (127) (3) 0 0 0
Cash flow from financing (73) (136) 1,115 (756) (728) (453) (501) (637)
Forex effect/others 0 2 (0) 0 0 0 0 0
Change in cash 33 269 1,607 336 (514) (54) 173 950
Free cash flow 106 404 521 1,101 427 399 674 1,587
37
LandMark Optoelectronics (3081 TT): 3 December 2018
Financial summary continued …
Balance sheet (TWDm)
Key ratios (%)
Source: FactSet, Daiwa forecasts
Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E
Cash & short-term investment 346 614 2,221 2,557 2,043 1,989 2,162 3,112
Inventory 97 117 142 184 218 248 408 548
Accounts receivable 168 326 603 252 415 495 845 1,155
Other current assets 49 55 12 18 39 50 50 50
Total current assets 660 1,111 2,978 3,011 2,715 2,782 3,465 4,865
Fixed assets 474 660 935 1,046 1,112 1,573 1,701 1,793
Goodwill & intangibles 0 0 0 0 0 0 0 0
Other non-current assets 9 12 80 21 224 50 50 50
Total assets 1,143 1,784 3,993 4,079 4,050 4,405 5,216 6,708
Short-term debt 0 0 0 0 0 0 0 0
Accounts payable 34 86 80 87 83 113 168 238
Other current liabilities 118 207 319 255 242 285 310 350
Total current liabilities 152 293 399 342 325 398 478 588
Long-term debt 0 0 0 0 0 0 0 0
Other non-current liabilities 1 5 5 5 3 5 5 7
Total liabilities 153 298 404 347 329 403 483 595
Share capital 452 553 699 913 906 906 906 906
Reserves/R.E./others 537 933 2,890 2,819 2,815 3,097 3,827 5,207
Shareholders' equity 990 1,486 3,589 3,731 3,721 4,002 4,733 6,113
Minority interests 0 0 0 0 0 0 0 0
Total equity & liabilities 1,143 1,784 3,993 4,079 4,050 4,405 5,216 6,708
EV 23,127 22,859 21,252 20,915 21,430 21,483 21,311 20,361
Net debt/(cash) (346) (614) (2,221) (2,557) (2,043) (1,989) (2,162) (3,112)
BVPS (TWD) 22.085 27.088 54.045 41.097 41.240 43.991 52.021 67.189
Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E
Sales (YoY) 19.0 82.9 55.1 4.1 (3.4) 16.0 47.8 50.1
EBITDA (YoY) 19.0 108.7 66.1 (3.8) (15.1) 13.6 69.6 51.4
Operating profit (YoY) 14.9 117.1 65.2 (10.3) (24.3) 7.1 78.5 64.7
Net profit (YoY) 17.3 127.4 61.1 (11.5) (25.1) 7.3 74.1 64.5
Core EPS (fully-diluted) (YoY) (5.0) 82.0 49.9 (12.0) (24.4) 6.8 74.1 64.5
Gross-profit margin 56.3 61.2 65.9 59.6 54.1 53.9 55.9 57.5
EBITDA margin 52.8 60.3 64.6 59.7 52.5 51.4 59.0 59.5
Operating-profit margin 45.6 54.1 57.7 49.7 38.9 35.9 43.4 47.6
Net profit margin 37.8 47.0 48.8 41.5 32.2 29.7 35.0 38.4
ROAE 30.7 49.6 39.0 23.9 17.6 18.2 28.0 37.2
ROAA 26.6 41.9 34.2 21.7 16.1 16.6 25.5 33.8
ROCE 37.1 57.2 46.1 28.6 21.3 22.0 34.7 46.1
ROIC 48.3 77.4 86.5 68.3 46.1 36.5 53.0 71.8
Net debt to equity 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Effective tax rate 18.8 17.1 17.1 17.2 17.2 20.7 20.0 20.0
Accounts receivable (days) 85.4 68.9 83.6 73.9 59.7 70.2 69.9 69.6
Current ratio (x) 4.3 3.8 7.5 8.8 8.3 7.0 7.2 8.3
Net interest cover (x) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Net dividend payout 0.0 41.3 64.3 94.0 110.5 64.7 40.9 31.6
Free cash flow yield 0.5 1.7 2.2 4.7 1.8 1.7 2.9 6.8
Company profile
Founded in June 1997, LandMark Optoelectronics Corporation (LMO) is a dedicated compound
semiconductor epiwafer supplier for optical communication (OC), with end-applications focusing
primarily on telecom and datacom, including passive optical network (PON), datacentre and cellular
infrastructure, as well as industrial and consumer electronics. LMO is the largest pure OC epiwafer
supplier globally by revenue.
38
LandMark Optoelectronics (3081 TT): 3 December 2018
LMO: quarterly P&L forecasts
TWDm 1Q18 2Q18 3Q18 4Q18E 1Q19E 2Q19E 3Q19E 4Q19E 2017 2018E 2019E 2020E
Revenue 578 503 605 680 663 803 970 1,059 2,039 2,365 3,495 5,246
COGS 262 245 276 307 311 358 425 448 936 1,090 1,542 2,229
Gross profit 316 257 329 373 352 445 546 611 1,103 1,275 1,953 3,018
Opex 85 87 145 109 98 108 115 114 310 426 436 519
Operating profit 231 171 184 264 254 337 430 496 794 850 1,517 2,499
Pretax profit 224 200 193 271 257 340 434 500 791 887 1,531 2,519
Income taxes 42 54 39 49 51 68 87 100 136 184 306 504
Net profit 181 146 154 222 205 272 347 400 656 703 1,225 2,015
EPS (TWD, basic) 2.01 1.62 1.71 2.44 2.26 2.99 3.82 4.40 7.27 7.73 13.46 22.15
EPS (TWD, fully diluted) 2.00 1.61 1.70 2.44 2.26 2.99 3.82 4.40 7.24 7.73 13.46 22.15
Margin
Gross 55% 51% 54% 55% 53% 55% 56% 58% 54% 54% 56% 58%
Operating 40% 34% 30% 39% 38% 42% 44% 47% 39% 36% 43% 48%
Net 31% 29% 25% 33% 31% 34% 36% 38% 32% 30% 35% 38%
Growth (QoQ)
Revenue -8% -13% 20% 12% -2% 21% 21% 9%
Gross profit -12% -19% 28% 13% -6% 27% 23% 12%
Operating profit -12% -26% 8% 43% -4% 33% 28% 15%
Net profit -20% -20% 6% 44% -8% 32% 28% 15%
EPS (basic) -20% -20% 6% 43% -8% 32% 28% 15%
EPS (FD) -20% -20% 6% 44% -8% 32% 28% 15%
Growth (YoY)
Revenue 54% 5% 9% 8% 15% 60% 60% 56% -3% 16% 48% 50%
Gross profit 76% 6% 3% 4% 11% 73% 66% 64% -12% 16% 53% 54%
Operating profit 90% -2% -22% 1% 10% 97% 134% 88% -24% 7% 79% 65%
Net profit 108% 0% -22% -1% 13% 87% 125% 80% -25% 7% 74% 65%
EPS (basic) 108% 0% -22% -2% 12% 85% 124% 80% -25% 6% 74% 65%
EPS (FD) 108% 0% -22% -2% 13% 86% 124% 80% -24% 7% 74% 65%
Source: Company, Daiwa forecasts
LMO: 4Q18 results preview and 1Q19 outlook comparison
4Q18E 1Q19E
TWDm Daiwa Consensus Variance Daiwa Consensus Variance
Revenue 680 678 0% 663 624 6%
Gross profit 373
352
Operating profit 264
254
Pretax profit 271
257
Net profit 222 219 1% 205 198 4%
Adjusted EPS (TWD) 2.44 2.42 1% 2.26 2.19 3%
Margin
Gross 54.8%
53.1%
Operating 38.8%
38.3%
Net 32.7%
31.0%
Revenue mix *
Telecom 40%
39%
Datacom 55%
50%
Industrial & others 5%
11%
Source: Bloomberg, Daiwa forecasts Note: * Telecom includes PON and cellular interconnectivity, Datacom includes SiPh and datacentre connectivity
LMO: SiPh revenue contribution LMO: PBR trend
Source: Company, Daiwa estimates & forecasts Source: Company, TEJ, Daiwa forecasts
0%
10%
20%
30%
40%
50%
60%
0
100
200
300
400
500
600
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
E
1Q19
E
2Q19
E
3Q19
E
4Q19
E
SiPh revenue Revenue contribution (RHS)
(TWDm)
3
4
5
6
7
8
9
10
11
12
Jul-1
5
Sep
-15
Nov
-15
Jan-
16
Mar
-16
May
-16
Jul-1
6
Sep
-16
Nov
-16
Jan-
17
Mar
-17
May
-17
Jul-1
7
Sep
-17
Nov
-17
Jan-
18
Mar
-18
May
-18
Jul-1
8
Sep
-18
Nov
-18
Jan-
19
Mar
-19
P/BV Mean Mean + s
(x)
10.8x
7.6x
6.5x
4.8x
5.5x
10.4x
See important disclosures, including any required research certifications, beginning on page 60
Taiwan Information Technology
What's new: We believe MediaTek (MTK) stands to benefit from the 5G
migration cycle at terminal devices, with smartphones the first demand
driver followed by self-driving cars and other IoT devices, though any
meaningful P&L contribution may not be seen until 2020. That said, we
continue to merit its diversification efforts and expect its growth-platform
(GP) business to drive growth in 2019, on top of smartphone market-share
gain and sustained margin recovery. Buy (1) stands with an unchanged TP
of TWD310; MTK is our preferred exposure in Asian IC design space.
What's the impact: GP to drive growth. In our upgrade note,
Diversification efforts paying off, we envisioned that MTK has completed its
business transformation from smartphone-centric to embrace the next
BigData/IoT demand cycle, evidenced by its GP revenue outgrowing the
corporate average and lifting revenue contribution to one-third of total (as of
3Q18). We reiterate this view and expect its GP business to continue to
outgrow in 2019, ramping up revenue contribution above 35% by 4Q19,
thanks to commercialisation of its datacentre ASIC, on top of its existing
integrated solutions for IoT/NB-IoT and gaming applications.
5G to sustain growth. We believe MTK aims to roll out its first 5G discrete
modem chip (Helio M70) in 1H19 primarily for operators’ connectivity
testing in China for accommodating base-station build at the infrastructure
end, therefore seeing limited volume contribution in 2019. But we expect
MTK to roll out SoC (AP+modem) solutions in 2020 aiming for a meaningful
revenue ramp with volume increase to be amplified by higher ASP, as 5G
SoC will likely be priced over 2x higher than the 4G counterpart, though
gross margins may not necessarily rise, likely due to competition.
Near-term update. MTK’s October revenue reached 33% of our 4Q18
forecast, suggesting intact business run-rate with flat smartphone chipset
shipment QoQ, vs. competitor Qualcomm who will likely see its chipset
shipment decline by 20% QoQ per guidance. We expect MTK’s 4Q18 EPS
to be over TWD3.0, in line with consensus, thanks to share recovery in the
smartphone market. MTK aims to sustain margin recovery into 2019, from
an improved product mix across/within its 3 product platforms, and
synergies in its TV SoC business from the MStar merger.
What we recommend: We reiterate our Buy (1) call on MTK with an
unchanged 12-month TP of TWD310, based on a 4-quarter forward PER of
17x, on par with its 2017-20E EPS CAGR. Key downside risks: worse-than-
expected smartphone competition or GP business ramp-up.
How we differ: We are over 24- 32% above the consensus on 2019-20E EPS,
likely due to our more positive view on the GP and 5G business ramp-up.
3 December 2018
Medi aTek
Growth-platform the key driver; 5G to come later
Growth-platform products are paying off and driving a recovery
5G will likely follow suit to sustain business growth
Reiterating Buy (1) with an unchanged 12-month TP of TWD310
Source: Daiwa forecasts
Source: FactSet, Daiwa forecasts
MediaTek (2454 TT)
Target price: TWD310.00 (from TWD310.00)
Share price (30 Nov): TWD237.50 | Up/downside: +30.5%
Rick Hsu(886) 2 8758 6261
Robert Hsu(886) 2 8758 6251
Forecast revisions (%)
Year to 31 Dec 18E 19E 20E
Revenue change - - -
Net profit change (0.2) - -
Core EPS (FD) change (0.2) - -
65
76
88
99
110
200
241
283
324
365
Nov-17 Feb-18 May-18 Aug-18 Nov-18
Share price performance
Mediatek (LHS)Relative to TWSE Index (RHS)
(TWD) (%)
12-month range 202.00-362.00
Market cap (USDbn) 12.26
3m avg daily turnover (USDm) 34.37
Shares outstanding (m) 1,592
Major shareholder BLACKROCK (5.3%)
Financial summary (TWD)
Year to 31 Dec 18E 19E 20E
Revenue (m) 241,153 276,636 327,268
Operating profit (m) 17,142 31,389 41,822
Net profit (m) 21,803 29,945 38,953
Core EPS (fully-diluted) 13.699 18.816 24.476
EPS change (%) (11.0) 37.3 30.1
Daiwa vs Cons. EPS (%) 1.7 23.9 32.2
PER (x) 17.3 12.6 9.7
Dividend yield (%) 4.2 4.2 5.1
DPS 10.0 10.0 12.0
PBR (x) 1.5 1.4 1.3
EV/EBITDA (x) 11.3 6.4 4.8
ROE (%) 8.4 11.2 13.6
40
MediaTek (2454 TT): 3 December 2018
Financial summary
Key assumptions
Profit and loss (TWDm)
Cash flow (TWDm)
Source: FactSet, Daiwa forecasts
Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E
Smartphone chipset ASP (US$) 11.37 10.35 8.20 9.05 8.32 7.88 7.89 7.88
Smartphone shipset shipment ('000) 198 357 402 513 418 377 445 567
Total handset market share (%) 24.9 34.4 35.4 38.8 31.3 27.7 30.9 36.0
Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E
Optical Storage Revenue 15,925 15,150 15,823 18,615 16,195 15,483 15,073 14,523
Digital Home Revenue 14,648 42,748 46,400 51,807 46,349 46,754 46,849 45,789
Other Revenue 105,483 155,165 151,032 205,090 175,672 178,916 214,714 266,957
Total Revenue 136,056 213,063 213,255 275,512 238,216 241,153 276,636 327,268
Other income 0 0 0 0 0 0 0 0
COGS (76,250) (109,194) (121,076) (177,322) (153,330) (148,164) (168,289) (197,979)
SG&A (8,108) (13,290) (16,743) (19,429) (17,896) (18,011) (19,182) (22,014)
Other op.expenses (26,454) (43,337) (49,529) (55,685) (57,171) (57,835) (57,776) (65,454)
Operating profit 25,244 47,241 25,908 23,076 9,819 17,142 31,389 41,822
Net-interest inc./(exp.) 1,609 2,647 2,272 1,959 1,714 1,665 1,757 2,018
Assoc/forex/extraord./others 2,694 2,462 1,189 2,178 15,705 6,248 1,715 1,720
Pre-tax profit 29,547 52,350 29,368 27,213 27,237 25,055 34,861 45,560
Tax (2,062) (5,951) (3,599) (3,182) (3,167) (3,156) (4,741) (6,378)
Min. int./pref. div./others 30 (1) 190 (330) 263 (97) (174) (228)
Net profit (reported) 27,515 46,398 25,959 23,701 24,333 21,803 29,945 38,953
Net profit (adjusted) 27,515 46,398 25,959 23,701 24,333 21,803 29,945 38,953
EPS (reported)(TWD) 20.508 30.039 16.600 15.156 15.557 13.699 18.816 24.476
EPS (adjusted)(TWD) 20.508 30.039 16.600 15.156 15.557 13.699 18.816 24.476
EPS (adjusted fully-diluted)(TWD) 20.391 29.526 16.518 14.981 15.391 13.699 18.816 24.476
DPS (TWD) 9.000 15.181 22.000 11.000 9.534 10.000 10.000 12.000
EBIT 25,244 47,241 25,908 23,076 9,819 17,142 31,389 41,822
EBITDA 26,971 50,007 31,042 29,972 17,029 24,553 39,804 51,721
Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E
Profit before tax 29,547 52,350 29,368 27,213 27,237 25,055 34,861 45,560
Depreciation and amortisation 1,727 2,766 5,134 6,896 7,210 7,410 8,414 9,899
Tax paid (2,062) (5,951) (3,599) (3,182) (3,167) (3,156) (4,741) (6,378)
Change in working capital 5,374 (14,258) (3,881) (5,604) 9,923 (10,950) 3,050 (13,000)
Other operational CF items 4,987 9,423 (3,646) 7,225 (19,855) (97) (174) (228)
Cash flow from operations 39,573 44,330 23,376 32,548 21,348 18,263 41,410 35,852
Capex (1,629) (9,828) (9,368) (6,671) (4,053) (4,823) (5,533) (6,545)
Net (acquisitions)/disposals (369) (4,741) (6,438) (6,832) (7,636) 0 0 0
Other investing CF items (216) 32,370 (16,975) (2,966) 3,042 0 0 0
Cash flow from investing (2,214) 17,802 (32,781) (16,470) (8,647) (4,823) (5,533) (6,545)
Change in debt 20,145 17,084 2,927 5,763 11,472 (5,057) (5,049) (5,041)
Net share issues/(repurchases) 0 0 0 0 0 0 0 0
Dividends paid (12,074) (23,448) (34,403) (17,202) (14,912) (15,915) (15,915) (19,098)
Other financing CF items (23) 207 (534) (13,372) (344) 0 0 0
Cash flow from financing 8,048 (6,157) (32,010) (24,810) (3,784) (20,972) (20,964) (24,139)
Forex effect/others 1,724 3,825 1,897 (3,198) (4,140) 0 0 0
Change in cash 47,131 59,800 (39,518) (11,931) 4,778 (7,533) 14,913 5,168
Free cash flow 37,944 34,502 14,008 25,876 17,295 13,440 35,877 29,307
41
MediaTek (2454 TT): 3 December 2018
Financial summary continued …
Balance sheet (TWDm)
Key ratios (%)
Source: FactSet, Daiwa forecasts
Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E
Cash & short-term investment 139,219 205,294 166,898 154,254 170,120 162,588 177,501 182,669
Inventory 9,347 22,341 24,130 33,923 26,540 31,540 34,540 43,540
Accounts receivable 7,628 12,552 16,195 20,481 16,895 22,895 22,845 30,845
Other current assets 5,547 8,367 7,650 11,620 25,109 15,000 15,000 15,000
Total current assets 161,741 248,555 214,873 220,278 238,664 232,023 249,886 272,054
Fixed assets 11,312 23,295 34,390 36,858 36,939 38,581 39,485 40,586
Goodwill & intangibles 15,509 60,758 75,431 72,015 76,029 75,500 74,000 73,000
Other non-current assets 70,075 18,511 26,556 41,562 43,182 43,206 43,306 43,356
Total assets 258,637 351,119 351,250 370,712 394,814 389,310 406,678 428,996
Short-term debt 29,052 46,161 49,123 54,524 64,316 59,316 54,316 49,316
Accounts payable 10,944 36,735 34,566 46,044 44,110 44,634 51,134 55,634
Other current liabilities 21,389 18,724 17,577 18,779 18,832 18,857 18,849 19,541
Total current liabilities 61,385 101,620 101,266 119,347 127,257 122,807 124,299 124,492
Long-term debt 87 54 0 419 382 325 276 235
Other non-current liabilities 1,812 1,839 2,896 4,283 5,976 6,000 6,500 7,000
Total liabilities 63,283 103,513 104,163 124,049 133,615 129,132 131,075 131,726
Share capital 13,495 15,714 15,716 15,821 15,814 15,814 15,814 15,814
Reserves/R.E./others 181,821 231,454 224,712 228,958 243,998 243,073 258,673 280,568
Shareholders' equity 195,315 247,168 240,428 244,779 259,812 258,887 274,487 296,382
Minority interests 38 438 6,659 1,884 1,387 1,290 1,116 888
Total equity & liabilities 258,637 351,119 351,250 370,712 394,814 389,310 406,678 428,996
EV 267,939 219,339 266,866 280,555 273,946 276,324 256,188 245,751
Net debt/(cash) (110,081) (159,080) (117,774) (99,311) (105,422) (102,947) (122,909) (133,118)
BVPS (TWD) 145.577 160.024 153.748 156.529 166.105 162.669 172.470 186.228
Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E
Sales (YoY) 37.1 56.6 0.1 29.2 (13.5) 1.2 14.7 18.3
EBITDA (YoY) 66.5 85.4 (37.9) (3.4) (43.2) 44.2 62.1 29.9
Operating profit (YoY) 101.9 87.1 (45.2) (10.9) (57.4) 74.6 83.1 33.2
Net profit (YoY) 75.4 68.6 (44.1) (8.7) 2.7 (10.4) 37.3 30.1
Core EPS (fully-diluted) (YoY) 58.1 44.8 (44.1) (9.3) 2.7 (11.0) 37.3 30.1
Gross-profit margin 44.0 48.8 43.2 35.6 35.6 38.6 39.2 39.5
EBITDA margin 19.8 23.5 14.6 10.9 7.1 10.2 14.4 15.8
Operating-profit margin 18.6 22.2 12.1 8.4 4.1 7.1 11.3 12.8
Net profit margin 20.2 21.8 12.2 8.6 10.2 9.0 10.8 11.9
ROAE 14.8 21.0 10.6 9.8 9.6 8.4 11.2 13.6
ROAA 11.7 15.2 7.4 6.6 6.4 5.6 7.5 9.3
ROCE 12.3 18.2 8.8 7.7 3.1 5.3 9.7 12.4
ROIC 26.1 48.2 20.9 14.7 5.7 9.6 17.5 22.7
Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Effective tax rate 7.0 11.4 12.3 11.7 11.6 12.6 13.6 14.0
Accounts receivable (days) 19.1 17.3 24.6 24.3 28.6 30.1 30.2 29.9
Current ratio (x) 2.6 2.4 2.1 1.8 1.9 1.9 2.0 2.2
Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Net dividend payout 43.9 50.5 132.5 72.6 61.3 73.0 53.1 49.0
Free cash flow yield 10.0 9.1 3.7 6.8 4.6 3.6 9.5 7.8
Company profile
MediaTek (MTK) was the largest fabless chipmaker in Asia and the third-largest in the world in
terms of 2017 revenue, with product offerings across optical storage, digital home, smartphone,
automotive and other IoT applications. It has successfully captured the industry demand cycles
from optical disk drives to feature phones to smartphones, and now faced another transition to the
next demand cycle of the BigData/IoT.
42
MediaTek (2454 TT): 3 December 2018
MTK: quarterly P&L forecasts
TWDm 1Q18 2Q18 3Q18 4Q18E 1Q19E 2Q19E 3Q19E 4Q19E
2017 2018E 2019E 2020E
Growth platform 15,103 18,302 21,943 19,176 18,557 20,816 25,030 25,910
51,108 74,524 90,313 111,493
Mobile platform 18,757 25,827 25,287 25,547 23,770 28,612 31,403 31,556
113,926 95,418 115,340 146,639
Legacy platform 15,793 16,352 19,800 19,264 17,054 17,273 18,693 17,964
73,182 71,210 70,983 69,136
Total revenue 49,654 60,481 67,030 63,987 59,380 66,700 75,125 75,430
238,216 241,153 276,636 327,268
COGS -30,569 -37,369 -41,206 -39,021 -36,642 -40,656 -45,528 -45,463
-153,330 -148,164 -168,289 -197,979
Gross profit 19,085 23,113 25,825 24,967 22,739 26,044 29,597 29,966
84,886 92,989 108,347 129,289
Opex -17,155 -19,020 -19,515 -20,156 -17,933 -18,676 -20,134 -20,215
-75,067 -75,846 -76,958 -87,468
Operating profit 1,929 4,092 6,310 4,811 4,806 7,368 9,464 9,751
9,819 17,142 31,389 41,822
EBITDA 3,703 5,931 8,157 6,762 6,638 9,401 11,740 12,024
17,029 24,553 39,804 51,721
Non-op gain/loss 1,183 4,665 1,342 723 895 845 870 862
17,418 7,913 3,472 3,738
Pretax profit 3,113 8,757 7,652 5,534 5,701 8,213 10,334 10,613
27,237 25,055 34,861 45,560
Income taxes -452 -1,260 -779 -664 -741 -1,068 -1,447 -1,486
-3,167 -3,156 -4,741 -6,378
Net profit 2,645 7,438 6,877 4,842 4,931 7,105 8,835 9,074
24,333 21,803 29,945 38,953
FD O/S (m) 1,581 1,579 1,580 1,592 1,592 1,592 1,592 1,592
1,581 1,592 1,592 1,592
FD EPS (TWD) 1.67 4.71 4.35 3.04 3.10 4.46 5.55 5.70
15.39 13.70 18.82 24.48
Margin
Gross 38% 38% 39% 39% 38% 39% 39% 40%
36% 39% 39% 40%
Operating 4% 7% 9% 8% 8% 11% 13% 13%
4% 7% 11% 13%
EBITDA 7% 10% 12% 11% 11% 14% 16% 16%
7% 10% 14% 16%
Net 5% 12% 10% 8% 8% 11% 12% 12%
10% 9% 11% 12%
Revenue mix
Growth platform 30% 30% 33% 30% 31% 31% 33% 34%
21% 31% 33% 34%
Mobile platform 38% 43% 38% 40% 40% 43% 42% 42%
48% 40% 42% 45%
Legacy platform 32% 27% 30% 30% 29% 26% 25% 24%
31% 30% 26% 21%
Growth (QoQ)
Total revenue -18% 22% 11% -5% -7% 12% 13% 0%
Gross profit -15% 21% 12% -3% -9% 15% 14% 1%
Operating profit 50% 112% 54% -24% 0% 53% 28% 3%
EBITDA 17% 60% 38% -17% -2% 42% 25% 2%
Net profit -74% 181% -8% -30% 2% 44% 24% 3%
FD EPS -74% 182% -8% -30% 2% 44% 24% 3%
Growth (YoY)
Total revenue -11% 4% 5% 6% 20% 10% 12% 18%
-14% 1% 15% 18%
Gross profit 2% 14% 11% 11% 19% 13% 15% 20%
-14% 10% 17% 19%
Operating profit 59% 74% 27% 273% 149% 80% 50% 103%
-57% 75% 83% 33%
EBITDA 26% 43% 20% 114% 79% 59% 44% 78%
-43% 44% 62% 30%
Net profit -61% 214% 35% -52% 86% -4% 28% 87%
3% -10% 37% 30%
FD EPS -61% 215% 35% -53% 85% -5% 28% 87%
3% -11% 37% 30%
Source: Company, Daiwa forecasts
MTK: revenue mix trend* MTK: 4-quarter forward PER bands
Source: Company, Daiwa estimates & forecasts Note: * MP includes smartphone and tablet, GP includes IoT, PMIC, ASIC and STB, LP
includes digital home, feature phone & optical storage
Source: Company, TEJ, Daiwa forecasts
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1Q13
3Q13
1Q14
3Q14
1Q15
3Q15
1Q16
3Q16
1Q17
3Q17
1Q18
3Q18
1Q19
E
3Q19
E
Growth platform Mobile platform Legacy platform
0
100
200
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Jul-0
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Jul-1
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1
Jul-1
2
Jul-1
3
Jul-1
4
Jul-1
5
Jul-1
6
Jul-1
7
Jul-1
8
Share price 5x 10x15x 20x 25x
TWD
See important disclosures, including any required research certifications, beginning on page 60
Taiwan Information Technology
What's new: TSMC should capture the lion’s share of multiple demand
verticals under the BigData/IoT market, by our definition, that require state-of-
art, cutting-edge CMOS process technologies, with AI the most promising
demand driver, followed by 5G bandwidth upgrades. We upgrade our rating
one notch to Buy (1) and raise our TP to TWD266.
What's the impact: AI the key growth driver. Since we flagged the advent of
artificial intelligence (AI) prompting computing upgrades to handle a surge in
data computation (see our 2018 Tech Outlook), TSMC has been one of our
major AI plays to benefit from this secular trend, thanks to its unparalleled
technology offerings to facilitate both cloud and edge computing in various
forms of xPU architecture (GPU, CPU, TPU, ASIC) tailor-made for customers.
We expect TSMC’s AI business to outgrow the corporate average, approaching
40% of revenue by 2020, comparable to mobile applications. This should help
drive its 7nm-and-below tech nodes to 30% of revenue by 2019, mitigating
muted smartphone growth.
5G adding to upside. Despite some overlap with AI on smartphone processor
upgrades for edge computing, 5G should add to TSMC’s business upside,
given rising FPGA count per base station to facilitate data decoding of wider
bandwidth coverage than 4G. FPGA is TSMC’s second-wave technology
driver, where we believe Xilinx, the industry leader in this market, is its largest
FPGA customer, accounting for over 5% of revenue. Smartphone chipmakers’
5G upgrades should keep TSMC’s mobile business resilient, despite growing
below average due to replacement demand. We expect its 3 key customers
MediaTek, Qualcomm and HiSilicon to roll out discrete 5G modems in 2019 for
connectivity tests, followed by SoC products (AP+modem) in 2020 for
commercial volume.
Near-term outlook. Headwinds from the crypto-currency overhang and
iPhone order cut have raised market concerns over TSMC’s 1Q19 wafer
loadings, but we expect its 7nm to remain resilient and help mitigate these
headwinds, thanks to a diverse base of customers in the mobile and
datacentre domains ramping up volume. We expect the 7/7+nm to be a strong
node for TSMC and forecast its 1Q19 revenue to drop by only 5% QoQ —
better than the consensus of a 10% QoQ decline.
What we recommend: Given our view of attractive valuations, we upgrade
TSMC one notch to Buy (1) with a revised 12-month TP of TWD266 (from
TWD260), based on an ROE-adjusted PBR of 3.7x (previous: 3.6x). Key risk:
competition from SEC’s (005930 KS, KRW41,850, Buy [1]) EUV offering.
How we differ: We are slightly above the consensus on 2019-20E EPS, likely
due to our more positive stance on AI and 5G demand.
3 December 2018
Tai wan Semiconductor M anufacturing
Upgrading: everyone’s foundry, from AI to 5G
AI to drive secular growth in the next demand cycle
5G to add to business upside on AP/modem/FPGA upgrades
Upgrading one notch to Buy (1); raising TP to TWD266
Source: Daiwa forecasts
Source: FactSet, Daiwa forecasts
Taiwan Semiconductor Manufacturing (2330 TT)
Target price: TWD266.00 (from TWD260.00)
Share price (30 Nov): TWD225.50 | Up/downside: +18.0%
Rick Hsu(886) 2 8758 6261
Robert Hsu(886) 2 8758 6251
Forecast revisions (%)
Year to 31 Dec 18E 19E 20E
Revenue change - - -
Net profit change (0.1) - -
Core EPS (FD) change (0.1) - -
90
98
105
113
120
210
225
240
255
270
Nov-17 Feb-18 May-18 Aug-18 Nov-18
Share price performance
TSMC (LHS)Relative to TWSE Index (RHS)
(TWD) (%)
12-month range 212.00-266.00
Market cap (USDbn) 189.63
3m avg daily turnover (USDm) 274.06
Shares outstanding (m) 25,930
Major shareholder National Development Fund (6.4%)
Financial summary (TWD)
Year to 31 Dec 18E 19E 20E
Revenue (m) 1,032,460 1,171,155 1,303,906
Operating profit (m) 384,643 441,119 502,268
Net profit (m) 349,598 391,719 444,291
Core EPS (fully-diluted) 13.482 15.107 17.134
EPS change (%) 1.9 12.0 13.4
Daiwa vs Cons. EPS (%) (0.2) 1.1 (1.4)
PER (x) 16.7 14.9 13.2
Dividend yield (%) 3.5 4.0 4.4
DPS 8.0 9.0 10.0
PBR (x) 3.4 3.1 2.9
EV/EBITDA (x) 7.8 6.9 6.0
ROE (%) 21.7 22.0 22.8
44
Taiwan Semiconductor Manufacturing (2330 TT): 3 December 2018
Financial summary
Key assumptions
Profit and loss (TWDm)
Cash flow (TWDm)
Source: FactSet, Daiwa forecasts
Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E
Capacity utilization (%) 94 100 94 95 93 93 96 99
Blended ASP (USD) 1,269 1,340 1,339 1,347 1,338 1,355 1,350 1,365
Wafer shipment (8" equ., '000) 15,666 18,591 19,717 21,612 23,510 24,672 27,471 30,251
Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E
Wafer Foundry Revenue 590,144 754,708 837,024 937,475 956,941 1,006,767 1,131,323 1,259,558
Sub & Other Revenue 6,880 8,099 6,473 10,463 20,506 25,693 39,833 44,348
Other Revenue 0 0 0 (0) 0 0 0 0
Total Revenue 597,024 762,806 843,497 947,938 977,447 1,032,460 1,171,155 1,303,906
Other income 0 0 0 0 0 0 0 0
COGS (316,079) (385,072) (433,102) (473,106) (482,621) (533,160) (603,883) (662,542)
SG&A (23,398) (25,020) (24,803) (25,667) (28,535) (29,190) (32,461) (34,783)
Other op.expenses (48,118) (56,824) (65,545) (71,208) (80,732) (85,467) (93,692) (104,312)
Operating profit 209,429 295,890 320,048 377,957 385,559 384,643 441,119 502,268
Net-interest inc./(exp.) (811) (506) 939 3,011 6,134 8,958 8,882 10,375
Assoc/forex/extraord./others 6,869 6,713 29,442 4,990 4,439 3,509 3,671 3,428
Pre-tax profit 215,487 302,098 350,429 385,959 396,133 397,110 453,673 516,070
Tax (27,468) (38,317) (43,873) (51,621) (52,986) (47,424) (61,500) (71,264)
Min. int./pref. div./others 128 118 18 (91) (35) (88) (454) (516)
Net profit (reported) 188,147 263,899 306,574 334,247 343,111 349,598 391,719 444,291
Net profit (adjusted) 188,147 263,899 306,574 334,247 343,111 349,598 391,719 444,291
EPS (reported)(TWD) 7.257 10.178 11.823 12.890 13.232 13.482 15.107 17.134
EPS (adjusted)(TWD) 7.257 10.178 11.823 12.890 13.232 13.482 15.107 17.134
EPS (adjusted fully-diluted)(TWD) 7.256 10.177 11.823 12.890 13.232 13.482 15.107 17.134
DPS (TWD) 3.000 3.000 4.500 6.000 7.000 8.000 9.000 10.000
EBIT 209,429 295,890 320,048 377,957 385,559 384,643 441,119 502,268
EBITDA 365,612 496,143 542,554 601,785 645,702 680,258 765,062 859,290
Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E
Profit before tax 215,487 302,098 350,429 385,959 396,133 397,110 453,673 516,070
Depreciation and amortisation 156,182 200,252 222,507 223,828 260,143 295,615 323,943 357,023
Tax paid (27,468) (38,317) (43,873) (51,621) (52,986) (47,424) (61,500) (71,264)
Change in working capital (18,393) (64,937) 25,123 (17,770) (15,466) 5,000 (41,000) 0
Other operational CF items 21,575 22,428 (24,306) (561) (2,505) (2,683) (3,065) (3,175)
Cash flow from operations 347,384 421,524 529,879 539,835 585,318 647,618 672,051 798,655
Capex (287,595) (288,540) (257,523) (328,045) (330,588) (340,236) (407,175) (408,700)
Net (acquisitions)/disposals 5,644 4,069 49,874 (76,691) (16,258) 5,967 0 0
Other investing CF items 897 2,050 (9,596) 9,296 10,681 0 0 0
Cash flow from investing (281,054) (282,421) (217,246) (395,440) (336,165) (334,270) (407,175) (408,700)
Change in debt 109,388 26 (810) (9) (38,131) (93,401) (22,950) (6,770)
Net share issues/(repurchases) 0 0 0 0 0 0 0 0
Dividends paid (77,773) (77,786) (116,683) (155,582) (181,513) (207,440) (233,370) (259,300)
Other financing CF items 491 33,978 5,702 (5,252) (23,180) 0 0 0
Cash flow from financing 32,106 (43,782) (111,791) (160,843) (242,824) (300,841) (256,320) (266,070)
Forex effect/others 850 0 0 0 0 0 0 0
Change in cash 99,285 95,322 200,843 (16,448) 6,329 12,507 8,556 123,885
Free cash flow 59,789 132,984 272,356 211,790 254,730 307,381 264,876 389,955
45
Taiwan Semiconductor Manufacturing (2330 TT): 3 December 2018
Financial summary continued …
Balance sheet (TWDm)
Key ratios (%)
Source: FactSet, Daiwa forecasts
Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E
Cash & short-term investment 245,343 437,006 586,163 632,109 649,358 655,899 664,455 788,339
Inventory 37,495 66,338 67,052 48,682 73,881 61,881 86,881 74,881
Accounts receivable 71,942 115,048 85,565 129,305 122,317 132,317 154,317 169,317
Other current assets 3,708 8,175 7,964 7,633 11,647 8,800 8,800 8,800
Total current assets 358,487 626,567 746,744 817,729 857,203 858,897 914,453 1,041,337
Fixed assets 792,666 818,199 853,470 997,778 1,062,542 1,089,372 1,188,237 1,260,622
Goodwill & intangibles 22,719 20,227 22,310 24,795 30,547 27,000 25,500 25,000
Other non-current assets 89,184 30,056 34,994 46,154 41,569 41,569 41,569 41,569
Total assets 1,263,055 1,495,049 1,657,518 1,886,455 1,991,862 2,016,837 2,169,759 2,368,528
Short-term debt 15,645 36,159 62,992 96,068 122,168 86,717 70,537 69,183
Accounts payable 16,359 23,370 19,725 27,325 30,069 33,069 39,069 42,069
Other current liabilities 157,774 141,485 129,512 194,847 206,470 140,222 150,372 164,498
Total current liabilities 189,778 201,014 212,229 318,239 358,707 260,008 259,978 275,750
Long-term debt 211,584 214,516 191,998 153,115 91,800 33,850 27,080 21,664
Other non-current liabilities 13,918 33,191 30,658 25,050 18,595 21,000 22,000 25,000
Total liabilities 415,280 448,721 434,884 496,404 469,102 314,858 309,058 322,414
Share capital 259,286 259,297 259,304 259,304 259,304 259,304 259,304 259,304
Reserves/R.E./others 588,222 786,904 962,368 1,129,944 1,262,754 1,441,886 1,600,154 1,785,051
Shareholders' equity 847,508 1,046,201 1,221,672 1,389,248 1,522,058 1,701,190 1,859,458 2,044,355
Minority interests 267 127 963 803 702 790 1,243 1,759
Total equity & liabilities 1,263,055 1,495,049 1,657,518 1,886,455 1,991,862 2,016,837 2,169,759 2,368,528
EV 5,829,368 5,661,011 5,517,004 5,465,092 5,412,527 5,312,673 5,281,621 5,151,482
Net debt/(cash) (18,114) (186,331) (331,173) (382,926) (435,390) (535,332) (566,838) (697,492)
BVPS (TWD) 32.686 40.348 47.114 53.577 58.699 65.607 71.711 78.841
Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E
Sales (YoY) 17.9 27.8 10.6 12.4 3.1 5.6 13.4 11.3
EBITDA (YoY) 17.0 35.7 9.4 10.9 7.3 5.4 12.5 12.3
Operating profit (YoY) 15.7 41.3 8.2 18.1 2.0 (0.2) 14.7 13.9
Net profit (YoY) 13.2 40.3 16.2 9.0 2.7 1.9 12.0 13.4
Core EPS (fully-diluted) (YoY) 13.2 40.3 16.2 9.0 2.7 1.9 12.0 13.4
Gross-profit margin 47.1 49.5 48.7 50.1 50.6 48.4 48.4 49.2
EBITDA margin 61.2 65.0 64.3 63.5 66.1 65.9 65.3 65.9
Operating-profit margin 35.1 38.8 37.9 39.9 39.4 37.3 37.7 38.5
Net profit margin 31.5 34.6 36.3 35.3 35.1 33.9 33.4 34.1
ROAE 24.0 27.9 27.0 25.6 23.6 21.7 22.0 22.8
ROAA 17.0 19.1 19.4 18.9 17.7 17.4 18.7 19.6
ROCE 21.8 24.9 23.1 24.3 22.8 21.6 23.3 24.5
ROIC 24.0 30.6 32.0 34.5 31.9 30.1 31.0 32.8
Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Effective tax rate 12.7 12.7 12.5 13.4 13.4 11.9 13.6 13.8
Accounts receivable (days) 37.9 44.7 43.4 41.4 47.0 45.0 44.7 45.3
Current ratio (x) 1.9 3.1 3.5 2.6 2.4 3.3 3.5 3.8
Net interest cover (x) 258.3 585.1 n.a. n.a. n.a. n.a. n.a. n.a.
Net dividend payout 41.3 29.5 38.1 46.5 52.9 59.3 59.6 58.4
Free cash flow yield 1.0 2.3 4.7 3.6 4.4 5.3 4.5 6.7
Company profile
Incorporated in Taiwan in 1987, Taiwan Semiconductor Manufacturing Co. (TSMC) is the world’s
largest semiconductor foundry in revenue terms. TSMC offers foundry services such as wafer
masking, fabrication, probing and testing, to a high variety of customers including fabless
chipmakers and IDMs. Its manufacturing fabs are located in Taiwan, China, the US and Singapore.
46
Taiwan Semiconductor Manufacturing (2330 TT): 3 December 2018
TSMC: quarterly P&L forecasts
TWDbn 1Q18 2Q18 3Q18 4Q18E 1Q19E 2Q19E 3Q19E 4Q19E 2017 2018E 2019E 2020E
Total revenue 248 233 260 291 276 288 305 302 977 1,032 1,171 1,304
COGS -123 -122 -137 -151 -144 -148 -156 -157
-483 -533 -604 -663
Gross profit 125 112 123 140 132 141 148 146
495 499 567 641
Opex -28 -27 -28 -31 -30 -31 -33 -32
-109 -115 -126 -139
Operating profit 97 84 95 108 102 110 116 114
386 385 441 502
EBITDA 168 156 169 187 181 189 198 198
646 680 765 859
Pretax profit 100 88 99 111 105 112 120 117
396 397 454 516
Income taxes -10 -15 -10 -12 -10 -19 -16 -16
-53 -47 -62 -71
Net profit 90 72 89 98 94 93 104 101 343 350 392 444
FD O/S (m) 26 26 26 26 26 26 26 26
26 26 26 26
FD EPS (TWD) 3.46 2.79 3.44 3.80 3.63 3.59 4.01 3.88
13.23 13.48 15.11 17.13
Margin
Gross 50% 48% 47% 48% 48% 49% 49% 48%
51% 48% 48% 49%
Operating 39% 36% 37% 37% 37% 38% 38% 38%
39% 37% 38% 39%
EBITDA 68% 67% 65% 64% 66% 65% 65% 65%
66% 66% 65% 66%
Net 36% 31% 34% 34% 34% 32% 34% 33%
35% 34% 33% 34%
Growth (QoQ)
Total revenue -11% -6% 12% 12% -5% 4% 6% -1%
Gross profit -10% -11% 11% 13% -5% 6% 5% -2%
Operating profit -11% -13% 13% 14% -6% 7% 6% -2%
EBITDA -6% -7% 8% 11% -3% 4% 5% 0%
Net profit -10% -19% 23% 11% -4% -1% 12% -3%
FD EPS -10% -19% 23% 11% -4% -1% 12% -3%
Growth (YoY)
Total revenue 6% 9% 3% 5% 11% 24% 17% 4%
3% 6% 13% 11%
Gross profit 3% 3% -2% 1% 6% 26% 20% 5%
4% 1% 14% 13%
Operating profit 2% 1% -3% -1% 5% 30% 22% 5%
2% 0% 15% 14%
EBITDA 8% 10% 0% 4% 8% 21% 17% 5%
7% 5% 12% 12%
Net profit 2% 9% -1% -1% 5% 29% 17% 2%
3% 2% 12% 13%
FD EPS 2% 9% -1% -1% 5% 29% 17% 2%
3% 2% 12% 13%
Source: Company, Daiwa forecasts
TSMC: revenue mix by application* TSMC: advanced technology revenue contribution*
Source: Company, Daiwa estimates & forecasts Note: * HPC = high-performance compute; IoT = Internet of things
Source: Company, Daiwa estimates & forecasts Note: * 7nm including 7nm+ EUV version
TSMC: free cashflow yield TSMC: PBR trend
Source: Company, Daiwa estimates & forecasts Source: Company, TEJ, Daiwa forecasts
0%
20%
40%
60%
80%
100%
2011
2012
2013
2014
2015
2016
2017
2018
E
2019
E
2020
E
Mobile HPC (AI) IoT Automotive & others
0%
5%
10%
15%
20%
25%
30%
35%
40%
1Q14
3Q14
1Q15
3Q15
1Q16
3Q16
1Q17
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1Q18
3Q18
1Q19
E
3Q19
E
1Q20
E
3Q20
E
28nm 20/16nm 10/7nm 5nm
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P/BV Mean Mean + s Mean - s
(x)
2.5
3.53.74.2
2.0
4.0
See important disclosures, including any required research certifications, beginning on page 60
Taiwan Information Technology
What's new: Positioned at the back end of the semiconductor contract
manufacturing food chain with global leadership similar to TSMC at the
front end, ASE operates a diverse product portfolio, which should help
capture multiple demand verticals under the BigData/IoT cycle, including
5G for wireless bandwidth upgrades. With its synergies bearing fruit post
China’s conditional approval of the merger deal, we expect ASE to regain
market share on economies of scale going forward. As such, we reiterate
our Buy (1) call and 12-month TP of TWD95.
What's the impact: A broad-based 5G play. In our view, ASE embraces
multiple product upgrades from the 5G migration cycle at infrastructure
base stations and terminal-device smartphones, as well as many other IoT
devices, with its product offerings of IC packaging & testing for RF filter/PA
and FPGA both volume-accretive, and for discrete modems and SoC
(AP+modem) both ASP-accretive. We believe key customers in the
outsourced semiconductor assembly and test (OSAT) market are
Broadcom, NXP, Cree (Infineon), Xilinx, MediaTek, Qualcomm and
HiSilicon, which collectively contribute over half of ASE’s OSAT revenue.
Share gain on synergies and scale. As assessed in our initiation report,
Reborn stronger, we expect the holding company’s acquisition of ASE and
SPIL to be both scale- and ROE-accretive, on the back of share recovery in
the OSAT market with enhanced pricing power, plus opex savings on
business synergies. Business post the deal completion this year has been
progressing well, in our opinion, as evidenced by ASE regaining market
share (as depicted in the chart on page 50). EMS, its other business unit,
should help contribute extra growth, given ASE’s still limited footprint in the
global EMS market with an expanded customer base to help gain market
share, on top of its existing wearable and security system-in-package (SiP)
products for a major customer.
Near-term update. October revenue of TWD39bn reached 33% of our
4Q18 forecast, suggesting the monthly run rate is intact, and we expect
ASE to post a 4Q18 net profit of TWD5.6bn (consensus forecast:
TWD6.2bn).
What we recommend: We reiterate our Buy (1) call on ASE with an
unchanged 12-month TP of TWD95, based on an ROE-adjusted PBR of
1.9x 2019E BV. ASE remains our preferred exposure in the Asian OSAT
sector. Key risk: business synergies failing to meet our expectation.
How we differ: Our 2019-20E EPS are 20-37% above the consensus,
likely due to our more positive assumption on ASE’s business synergies.
3 December 2018
ASE Technolog y H ol ding
Diverse exposure with 5G adding to upside potential
Broad-based 5G customers make up over half of OSAT revenue
Likely market-share recovery on business scale and synergies
Reiterating our Buy (1) rating and TP of TWD95
Source: Daiwa forecasts
Source: FactSet, Daiwa forecasts
ASE Technology Holding (3711 TT)
Target price: TWD95.00 (from TWD95.00)
Share price (30 Nov): TWD62.40 | Up/downside: +52.2%
Rick Hsu(886) 2 8758 6261
Robert Hsu(886) 2 8758 6251
Forecast revisions (%)
Year to 31 Dec 18E 19E 20E
Revenue change - - -
Net profit change - - -
Core EPS (FD) change - - -
75
86
98
109
120
55
65
75
85
95
Nov-17 Feb-18 May-18 Aug-18 Nov-18
Share price performance
ASE Techno (LHS)Relative to TWSE Index (RHS)
(TWD) (%)
12-month range 56.40-91.00
Market cap (USDbn) 8.74
3m avg daily turnover (USDm) 15.22
Shares outstanding (m) 4,321
Major shareholder ASE Enterprises Ltd. (15.9%)
Financial summary (TWD)
Year to 31 Dec 18E 19E 20E
Revenue (m) 401,741 465,008 544,705
Operating profit (m) 26,798 39,944 54,233
Net profit (m) 16,121 28,769 39,724
Core EPS (fully-diluted) 3.731 6.658 9.193
EPS change (%) 72.8 78.5 38.1
Daiwa vs Cons. EPS (%) (3.2) 20.0 36.6
PER (x) 16.7 9.4 6.8
Dividend yield (%) 6.1 4.8 5.3
DPS 3.8 3.0 3.3
PBR (x) 1.5 1.3 1.2
EV/EBITDA (x) 5.7 4.7 4.0
ROE (%) 8.0 14.8 18.2
48
ASE Technology Holding (3711 TT): 3 December 2018
Financial summary
Key assumptions
Profit and loss (TWDm)
Cash flow (TWDm)
Source: FactSet, Daiwa forecasts
Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E
Packaging utilisation (%) n.a. n.a. n.a. n.a. 79.9 79.8 83.0 91.8
Testing utilisation (%) n.a. n.a. n.a. n.a. 74.3 73.5 77.4 83.3
FC & bumping utilisation (%) n.a. n.a. n.a. n.a. 73.0 70.0 75.2 81.7
Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E
SAT sales n.a. n.a. n.a. n.a. 240,046 245,425 283,475 333,417
EMS sales n.a. n.a. n.a. n.a. 133,948 156,316 181,532 211,288
Other Revenue n.a. n.a. n.a. n.a. 0 0 0 0
Total Revenue n.a. n.a. n.a. n.a. 373,994 401,741 465,008 544,705
Other income n.a. n.a. n.a. n.a. 0 0 0 0
COGS n.a. n.a. n.a. n.a. (309,259) (337,101) (383,219) (442,050)
SG&A n.a. n.a. n.a. n.a. (20,064) (20,080) (22,041) (25,705)
Other op.expenses n.a. n.a. n.a. n.a. (16,524) (17,762) (19,804) (22,717)
Operating profit n.a. n.a. n.a. n.a. 28,147 26,798 39,944 54,233
Net-interest inc./(exp.) n.a. n.a. n.a. n.a. (1,936) (2,376) (3,191) (3,026)
Assoc/forex/extraord./others n.a. n.a. n.a. n.a. 6,877 (550) 1,200 1,200
Pre-tax profit n.a. n.a. n.a. n.a. 33,087 23,872 37,953 52,407
Tax n.a. n.a. n.a. n.a. (8,063) (6,608) (7,591) (10,481)
Min. int./pref. div./others n.a. n.a. n.a. n.a. (1,680) (1,143) (1,594) (2,201)
Net profit (reported) n.a. n.a. n.a. n.a. 23,345 16,121 28,769 39,724
Net profit (adjusted) n.a. n.a. n.a. n.a. 23,345 16,121 28,769 39,724
EPS (reported)(TWD) n.a. n.a. n.a. n.a. 2.159 3.731 6.658 9.193
EPS (adjusted)(TWD) n.a. n.a. n.a. n.a. 2.159 3.731 6.658 9.193
EPS (adjusted fully-diluted)(TWD) n.a. n.a. n.a. n.a. 2.159 3.731 6.658 9.193
DPS (TWD) n.a. n.a. n.a. n.a. 3.130 3.800 3.000 3.300
EBIT n.a. n.a. n.a. n.a. 28,147 26,798 39,944 54,233
EBITDA n.a. n.a. n.a. n.a. 71,977 72,658 85,647 99,935
Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E
Profit before tax n.a. n.a. n.a. n.a. 33,087 23,872 37,953 52,407
Depreciation and amortisation n.a. n.a. n.a. n.a. 43,830 45,860 45,702 45,702
Tax paid n.a. n.a. n.a. n.a. (8,063) (6,608) (7,591) (10,481)
Change in working capital n.a. n.a. n.a. n.a. 13,497 (19,500) (4,500) (26,000)
Other operational CF items n.a. n.a. n.a. n.a. (15,525) 8,857 (1,594) (2,201)
Cash flow from operations n.a. n.a. n.a. n.a. 66,826 52,481 69,971 59,427
Capex n.a. n.a. n.a. n.a. (37,632) (47,200) (43,225) (45,053)
Net (acquisitions)/disposals n.a. n.a. n.a. n.a. 7,550 (105,579) 0 0
Other investing CF items n.a. n.a. n.a. n.a. 1,631 1,500 1,500 1,500
Cash flow from investing n.a. n.a. n.a. n.a. (28,451) (151,279) (41,725) (43,553)
Change in debt n.a. n.a. n.a. n.a. (23,646) 72,404 (19,503) (20,602)
Net share issues/(repurchases) n.a. n.a. n.a. n.a. 10,290 0 0 0
Dividends paid n.a. n.a. n.a. n.a. (16,668) (11,362) (12,963) (14,259)
Other financing CF items n.a. n.a. n.a. n.a. 3,767 0 0 0
Cash flow from financing n.a. n.a. n.a. n.a. (26,256) 61,042 (32,466) (34,862)
Forex effect/others n.a. n.a. n.a. n.a. (4,466) 0 0 0
Change in cash n.a. n.a. n.a. n.a. 7,653 (37,757) (4,220) (18,988)
Free cash flow n.a. n.a. n.a. n.a. 29,194 5,281 26,746 14,374
49
ASE Technology Holding (3711 TT): 3 December 2018
Financial summary continued …
Balance sheet (TWDm)
Key ratios (%)
Source: FactSet, Daiwa forecasts
Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E
Cash & short-term investment n.a. n.a. n.a. n.a. 75,834 36,765 32,546 13,558
Inventory n.a. n.a. n.a. n.a. 40,204 55,704 54,704 73,704
Accounts receivable n.a. n.a. n.a. n.a. 72,078 74,578 95,078 106,078
Other current assets n.a. n.a. n.a. n.a. 5,888 21,391 36,500 36,500
Total current assets n.a. n.a. n.a. n.a. 194,004 188,439 218,827 229,840
Fixed assets n.a. n.a. n.a. n.a. 197,566 215,873 228,565 233,053
Goodwill & intangibles n.a. n.a. n.a. n.a. 22,061 38,100 36,000 30,000
Other non-current assets n.a. n.a. n.a. n.a. 33,277 35,063 35,063 35,063
Total assets n.a. n.a. n.a. n.a. 446,909 477,475 518,456 527,955
Short-term debt n.a. n.a. n.a. n.a. 21,385 21,385 21,385 21,385
Accounts payable n.a. n.a. n.a. n.a. 49,129 47,629 62,629 66,629
Other current liabilities n.a. n.a. n.a. n.a. 61,301 53,279 73,003 71,102
Total current liabilities n.a. n.a. n.a. n.a. 131,816 122,293 157,017 159,116
Long-term debt n.a. n.a. n.a. n.a. 68,808 147,515 128,012 107,410
Other non-current liabilities n.a. n.a. n.a. n.a. 11,799 9,500 11,500 12,000
Total liabilities n.a. n.a. n.a. n.a. 212,423 279,308 296,529 278,526
Share capital n.a. n.a. n.a. n.a. 108,126 43,620 43,620 43,620
Reserves/R.E./others n.a. n.a. n.a. n.a. 113,160 139,550 161,715 187,016
Shareholders' equity n.a. n.a. n.a. n.a. 221,285 183,170 205,335 230,636
Minority interests n.a. n.a. n.a. n.a. 13,200 14,998 16,592 18,793
Total equity & liabilities n.a. n.a. n.a. n.a. 446,909 477,475 518,456 527,955
EV n.a. n.a. n.a. n.a. 297,189 416,763 403,074 403,660
Net debt/(cash) n.a. n.a. n.a. n.a. 14,359 132,134 116,851 115,237
BVPS (TWD) n.a. n.a. n.a. n.a. 20.466 42.391 47.520 53.376
Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E
Sales (YoY) n.a. n.a. n.a. n.a. n.a. 7.4 15.7 17.1
EBITDA (YoY) n.a. n.a. n.a. n.a. n.a. 0.9 17.9 16.7
Operating profit (YoY) n.a. n.a. n.a. n.a. n.a. (4.8) 49.1 35.8
Net profit (YoY) n.a. n.a. n.a. n.a. n.a. (30.9) 78.5 38.1
Core EPS (fully-diluted) (YoY) n.a. n.a. n.a. n.a. n.a. 72.8 78.5 38.1
Gross-profit margin n.a. n.a. n.a. n.a. 17.3 16.1 17.6 18.8
EBITDA margin n.a. n.a. n.a. n.a. 19.2 18.1 18.4 18.3
Operating-profit margin n.a. n.a. n.a. n.a. 7.5 6.7 8.6 10.0
Net profit margin n.a. n.a. n.a. n.a. 6.2 4.0 6.2 7.3
ROAE n.a. n.a. n.a. n.a. 21.1 8.0 14.8 18.2
ROAA n.a. n.a. n.a. n.a. 10.4 3.5 5.8 7.6
ROCE n.a. n.a. n.a. n.a. 17.3 7.7 10.8 14.5
ROIC n.a. n.a. n.a. n.a. 8.6 6.7 9.6 12.3
Net debt to equity n.a. n.a. n.a. n.a. 6.5 72.1 56.9 50.0
Effective tax rate n.a. n.a. n.a. n.a. 24.4 27.7 20.0 20.0
Accounts receivable (days) n.a. n.a. n.a. n.a. 35.2 66.6 66.6 67.4
Current ratio (x) n.a. n.a. n.a. n.a. 1.5 1.5 1.4 1.4
Net interest cover (x) n.a. n.a. n.a. n.a. 14.5 11.3 12.5 17.9
Net dividend payout n.a. n.a. n.a. n.a. 145.0 101.9 45.1 35.9
Free cash flow yield n.a. n.a. n.a. n.a. 10.8 2.0 9.9 5.3
Company profile
Established in April 2018, ASE Industrial Holding Co (HoldCo) is a holding company which
privatised ASE and SPIL fully on 30 April 2018 through an equity and cash swap, respectively, and
listed on the same day with senior management assigned mainly by ASE. HoldCo has become the
No.1 OSAT maker in the world, offering a comprehensive product portfolio to its customers from
wirebonding, flip-chip & bumping, system-in-package (SiP) to broad-based electronics
manufacturing services (EMS).
50
ASE Technology Holding (3711 TT): 3 December 2018
ASE: quarterly P&L forecasts
TWDm 1Q18 2Q18 3Q18 4Q18E 1Q19E 2Q19E 3Q19E 4Q19E
2017 2018E 2019E 2020E
SAT revenue 55,193 61,285 65,601 63,346 61,428 68,464 76,549 77,035
240,046 245,425 283,475 333,417
EMS revenue 28,686 30,472 41,996 55,162 41,063 41,040 47,399 52,030
133,948 156,316 181,532 211,288
Total revenue 83,879 91,757 107,597 118,508 102,491 109,504 123,948 129,065
373,994 401,741 465,008 544,705
SAT COGS -45,715 -49,418 -51,371 -49,460 -49,098 -53,515 -58,291 -59,347
-188,955 -195,964 -220,250 -252,948
EMS COGS -25,986 -27,604 -37,846 -49,701 -36,751 -36,731 -42,659 -46,827
-120,304 -141,137 -162,968 -189,102
Total COGS -71,701 -77,022 -89,217 -99,161 -85,849 -90,246 -100,950 -106,174
-309,259 -337,101 -383,219 -442,050
SAT GP 9,478 11,867 14,231 13,886 12,330 14,949 18,258 17,688
51,091 49,461 63,225 80,469
EMS GP 2,700 2,868 4,150 5,461 4,312 4,309 4,740 5,203
13,644 15,179 18,564 22,185
Total gross profit (GP) 12,178 14,735 18,381 19,347 16,642 19,258 22,997 22,891
64,735 64,640 81,789 102,655
SG&A -4,192 -4,977 -5,341 -5,570 -5,022 -5,256 -5,826 -5,937
-20,064 -20,080 -22,041 -25,705
R&D -3,704 -3,818 -4,419 -4,853 -4,202 -4,490 -4,958 -5,163
-15,589 -16,793 -18,812 -21,909
PPA amortization* -229 -244 -248 -248 -248 -248 -248 -248
-936 -969 -991 -808
Operating profit 4,054 5,696 8,372 8,676 7,170 9,265 11,966 11,544
28,147 26,798 39,944 54,233
Net interest income (expense) -460 -411 -760 -745 -790 -820 -810 -771
-1,936 -2,376 -3,191 -3,026
Other non-op gains (losses) -1,007 -293 505 245 300 300 300 300
6,877 -550 1,200 1,200
Pretax profit 2,587 4,992 8,117 8,176 6,680 8,745 11,456 11,073
33,087 23,872 37,953 52,407
Income tax -1,591 -1,500 -1,554 -1,963 -1,336 -1,749 -2,291 -2,215
-8,063 -6,608 -7,591 -10,481
Minority interest & others -260 0 -306 -577 -281 -367 -481 -465
-1,680 -1,143 -1,594 -2,201
Net profit 736 3,492 6,257 5,636 5,063 6,628 8,684 8,393
23,345 16,121 28,769 39,724
EPS 0.17 0.81 1.45 1.30 1.17 1.53 2.01 1.94
2.16 3.73 6.66 9.19
O/S (m) 4,362 4,319 4,320 4,321 4,321 4,321 4,321 4,321
10,813 4,321 4,321 4,321
EBITDA 15,247 16,963 19,786 19,882 17,959 20,198 23,156 23,533
71,310 71,878 84,847 99,135
Margin
SAT GM 17% 19% 22% 22% 20% 22% 24% 23%
21% 20% 22% 24%
EMS GM 9% 9% 10% 10% 11% 11% 10% 10%
10% 10% 10% 11%
Total gross margin (GM) 15% 16% 17% 16% 16% 18% 19% 18%
17% 16% 18% 19%
Operating 5% 6% 8% 7% 7% 8% 10% 9%
8% 7% 9% 10%
Net 1% 4% 6% 5% 5% 6% 7% 7%
6% 4% 6% 7%
Growth (QoQ)
SAT revenue -11% 11% 7% -3% -3% 11% 12% 1%
EMS revenue -34% 6% 38% 31% -26% 0% 15% 10%
Total revenue -21% 9% 17% 10% -14% 7% 13% 4%
Gross profit -33% 21% 25% 5% -14% 16% 19% 0%
Operating profit -53% 41% 47% 4% -17% 29% 29% -4%
Net profit -88% 374% 79% -10% -10% 31% 31% -3%
EPS -71% 379% 79% -10% -10% 31% 31% -3%
Growth (YoY)
SAT revenue -3% 5% 5% 2% 11% 12% 17% 22%
-2% 2% 16% 18%
EMS revenue -2% 8% 27% 27% 43% 35% 13% -6%
16% 17% 16% 16%
Total revenue -3% 6% 12% 12% 22% 19% 15% 9%
4% 7% 16% 17%
Gross profit -16% 0% 5% 7% 37% 31% 25% 18%
-11% 0% 27% 26%
Operating profit -27% 0% 0% 1% 77% 63% 43% 33%
-25% -5% 49% 36%
Net profit -65% -55% -12% -10% 588% 90% 39% 49%
-26% -31% 78% 38%
EPS -14% 12% 119% 124% 595% 90% 39% 49%
-32% 73% 78% 38%
Source: Company, Daiwa estimates & forecasts Note: * Purchase price allocation associated with SPIL acquisition
Global OSAT market share dynamics ASE: PBR trend
Source: Company, Daiwa estimates & forecasts Note: * ASE Tech Holding = ASE + SPIL, excluding ASE’s EMS business;
** JCET started consolidating STATS-ChipPAC in 3Q15; Amkor started consolidating J-Devices in 1Q16; *** China top-3 includes JCET, TSHT and TFME
Source: Company, TEJ, Daiwa estimates & forecasts
5%
10%
15%
20%
25%
30%
35%
1Q10
3Q10
1Q11
3Q11
1Q12
3Q12
1Q13
3Q13
1Q14
3Q14
1Q15
3Q15
1Q16
3Q16
1Q17
3Q17
1Q18
3Q18
1Q19
E
3Q19
E
1Q20
E
3Q20
E
ASE Tech Holding* JCET**
Amkor China top-3***
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
Apr
-18
May
-18
Jun-
18
Jul-1
8
Aug
-18
Sep
-18
Oct
-18
Nov
-18
Dec
-18
Jan-
19
Feb
-19
Mar
-19
Apr
-19
May
-19
P/BV Mean Mean + s
Mean - s Mean + 2s Mean - 2s
(x)
See important disclosures, including any required research certifications, beginning on page 60
Taiwan Information Technology
What's new: We expect the upcoming 5G rollout to benefit Delta, given its
strong capabilities in telecom-related power solutions. Furthermore, we
believe 5G could facilitate the growth of Delta’s other key segments (EV,
automation, data centres) and bode well for its favourable product-mix shift.
What's the impact: Leading global telecom power solutions provider.
The telecom power business comes under Delta’s infrastructure segment,
which we estimate will account for 11-12% of its 2018 sales. Delta believes
it is the largest supplier of telecom power solutions globally following its
acquisition of Eltek in 2015. Eltek is a Norway-based company that
specialises in telecom base stations (B/S) and infrastructure-related power
solutions. Eltek’s clients are mainly in Europe, North America and Africa,
and Delta’s clients are in Asia and the US. As such, both companies have
highly complementary client bases and are able to serve telcos and
equipment vendors across the world.
Promising opportunities from 5G. Delta is positive about 5G-related
opportunities from 2019. In fact, management believes that such
opportunities could emerge faster than the market’s expectations, given the
current progress it sees in China, Japan, Europe, and the US.
We expect Delta to benefit from 5G rollout due to higher B/S spending, as
we estimate average spending on 5G B/S to be 2.2x that spent on 4G
(refer to the main sector section of this report). Given the higher density
requirement of 5G B/S deployment (including macro-cells and micro/small-
cells) and more sophisticated energy requirements for signal beams, the
spending on 5G power solutions should also be higher than that on 4G.
This will be very positive for incumbent players like Delta, in our view.
In addition, as 5G will lay the groundwork to facilitate applications like
autonomous vehicles and industrial automation, we expect it to become a
highly effective growth catalyst for other important segments of Delta, such
as automation, EV, data centre, and networking-related products.
What we recommend: We reiterate our Buy (1) rating and our 12-month
TP of TWD159, still based on a target PER of 20x (near the mid-point of its
past-3-year range of 14-25x), applied to our 1-year forward EPS. We are
positive on Delta’s earnings outlook for 2019-20, led by a favourable
product-mix shift and better operating leverage. In fact, we believe the
upcoming 5G rollout will help to accelerate such favourable trends. Key
downside risk: worse-than-expected impact from the US-China trade war.
How we differ: Our 2018-20E EPS are 3-7% above the consensus, likely
due to our more positive view on Delta’s profit margin trends.
3 December 2018
Delta El ectr onics
5G: a promising catalyst ahead
Telecom power business to be a direct beneficiary of 5G rollout
We expect 5G to help accelerate Delta’s favourable product-mix shift
Reiterating our Buy (1) rating and 12-month TP of TWD159
Source: Daiwa forecasts
Source: FactSet, Daiwa forecasts
Delta Electronics (2308 TT)
Target price: TWD159.00 (from TWD159.00)
Share price (30 Nov): TWD130.00 | Up/downside: +22.3%
Steven Tseng(886) 2 8758 6252
Elsa Cheng(886) 2 8758 6253
Forecast revisions (%)
Year to 31 Dec 18E 19E 20E
Revenue change - - -
Net profit change - - -
Core EPS (FD) change - - -
70
79
88
96
105
90
105
120
135
150
Nov-17 Feb-18 May-18 Aug-18 Nov-18
Share price performance
Delta Ele (LHS)Relative to TWSE Index (RHS)
(TWD) (%)
12-month range 98.90-149.00
Market cap (USDbn) 10.95
3m avg daily turnover (USDm) 36.47
Shares outstanding (m) 2,598
Major shareholder Hsiang Ta International (10.3%)
Financial summary (TWD)
Year to 31 Dec 18E 19E 20E
Revenue (m) 236,822 257,714 279,288
Operating profit (m) 18,465 24,339 28,043
Net profit (m) 17,504 20,946 23,818
Core EPS (fully-diluted) 6.739 8.064 9.169
EPS change (%) (4.8) 19.7 13.7
Daiwa vs Cons. EPS (%) 2.9 7.1 6.4
PER (x) 19.3 16.1 14.2
Dividend yield (%) 3.8 3.8 4.2
DPS 5.0 5.0 5.5
PBR (x) 2.9 2.7 2.6
EV/EBITDA (x) 10.7 8.8 7.9
ROE (%) 14.5 17.5 18.7
52
Delta Electronics (2308 TT): 3 December 2018
Financial summary
Key assumptions
Profit and loss (TWDm)
Cash flow (TWDm)
Source: FactSet, Daiwa forecasts
Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E
Industrial Automation revenue growth
(YoY)6 7 4 11 21 14 16 18
Passive Components revenue growth
(YoY)16 38 15 2 15 30 18 16
Advanced Power Solutions revenue
growth (YoY)8 39 8 (6) (3) 8 10 10
Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E
Power Electronics 102,933 114,480 109,889 111,690 118,121 120,243 128,721 137,446
Automation 21,140 21,944 24,323 27,242 32,995 37,582 43,780 51,453
Other Revenue 52,980 54,211 69,239 75,423 72,462 78,998 85,214 90,389
Total Revenue 177,053 190,635 203,452 214,356 223,578 236,822 257,714 279,288
Other income 0 0 0 0 0 0 0 0
COGS (132,033) (139,141) (148,083) (154,862) (162,809) (173,712) (186,387) (201,117)
SG&A (14,237) (16,235) (20,405) (23,181) (24,287) (26,136) (28,321) (30,284)
Other op.expenses (11,274) (12,441) (14,465) (15,487) (16,707) (18,509) (18,667) (19,844)
Operating profit 19,508 22,819 20,499 20,826 19,774 18,465 24,339 28,043
Net-interest inc./(exp.) 548 785 178 240 253 250 251 250
Assoc/forex/extraord./others 2,440 2,918 4,097 3,725 3,771 3,833 3,107 3,113
Pre-tax profit 22,497 26,522 24,775 24,790 23,798 22,548 27,696 31,406
Tax (3,582) (4,203) (4,892) (5,530) (5,041) (4,530) (6,216) (7,051)
Min. int./pref. div./others (1,258) (1,615) (1,168) (462) (376) (513) (534) (536)
Net profit (reported) 17,657 20,704 18,715 18,798 18,381 17,504 20,946 23,818
Net profit (adjusted) 17,657 20,704 18,715 18,798 18,381 17,504 20,946 23,818
EPS (reported)(TWD) 7.244 8.494 7.205 7.237 7.076 6.739 8.064 9.169
EPS (adjusted)(TWD) 7.244 8.494 7.205 7.237 7.076 6.739 8.064 9.169
EPS (adjusted fully-diluted)(TWD) 7.244 8.494 7.205 7.237 7.076 6.739 8.064 9.169
DPS (TWD) 5.305 5.800 7.930 5.000 5.000 5.000 5.000 5.500
EBIT 19,508 22,819 20,499 20,826 19,774 18,465 24,339 28,043
EBITDA 27,850 30,455 28,894 29,958 29,931 29,434 35,454 39,348
Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E
Profit before tax 22,497 26,522 24,775 24,790 23,798 22,548 27,696 31,406
Depreciation and amortisation 8,342 7,636 8,395 9,133 10,157 10,969 11,115 11,305
Tax paid (3,582) (4,203) (4,892) (5,530) (5,041) (4,530) (6,216) (7,051)
Change in working capital (3,022) (5,044) (4,052) (2,118) (7,433) 1,122 (4,323) (4,369)
Other operational CF items 1,877 2,924 6,834 4,625 5,488 (1,849) (1,107) (1,113)
Cash flow from operations 26,112 27,835 31,059 30,900 26,969 28,260 27,166 30,177
Capex (8,824) (5,532) (7,974) (8,078) (12,879) (11,841) (12,370) (12,847)
Net (acquisitions)/disposals 1 (350) 0 0 0 0 0 0
Other investing CF items 361 (882) (746) 922 67 287 0 0
Cash flow from investing (8,461) (6,764) (8,720) (7,156) (12,812) (11,554) (12,370) (12,847)
Change in debt 1,868 8,852 (17,163) 5,942 7,631 (1,658) 0 0
Net share issues/(repurchases) 0 0 0 0 0 0 0 0
Dividends paid (12,843) (14,138) (19,330) (12,988) (12,988) (12,988) (12,988) (14,286)
Other financing CF items (222) (2,172) (18,159) (1,158) (874) 0 0 0
Cash flow from financing (11,197) (7,458) (54,652) (8,204) (6,231) (14,645) (12,988) (14,286)
Forex effect/others 2,770 3,469 970 (3,026) (3,617) 0 0 0
Change in cash 9,223 17,082 (31,342) 12,514 4,309 2,060 1,808 3,043
Free cash flow 17,288 22,303 23,085 22,822 14,091 16,419 14,795 17,330
53
Delta Electronics (2308 TT): 3 December 2018
Financial summary continued …
Balance sheet (TWDm)
Key ratios (%)
Source: FactSet, Daiwa forecasts
Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E
Cash & short-term investment 59,806 74,188 51,811 56,313 58,630 60,084 61,581 64,487
Inventory 18,042 21,572 23,912 25,953 30,825 30,290 32,501 35,069
Accounts receivable 44,305 46,696 50,639 52,564 55,498 57,231 62,280 67,494
Other current assets 4,349 5,376 5,791 3,572 2,750 2,762 2,762 2,762
Total current assets 126,503 147,832 132,153 138,402 147,704 150,369 159,124 169,812
Fixed assets 37,195 36,815 41,891 40,558 44,339 43,447 42,952 42,692
Goodwill & intangibles 10,858 11,706 25,425 30,919 33,834 33,317 33,317 33,317
Other non-current assets 22,741 24,080 26,806 25,236 24,662 26,819 28,237 29,487
Total assets 197,296 220,433 226,276 235,115 250,539 253,952 263,630 275,308
Short-term debt 4,562 5,801 11,110 12,539 17,464 13,876 13,876 13,876
Accounts payable 32,816 33,749 35,882 37,514 37,925 40,246 43,182 46,595
Other current liabilities 21,990 25,074 29,360 31,210 33,833 43,269 43,269 43,269
Total current liabilities 59,368 64,624 76,352 81,264 89,221 97,391 100,327 103,740
Long-term debt 18,828 26,468 3,994 8,514 11,219 13,149 13,149 13,149
Other non-current liabilities 11,306 13,672 16,377 16,328 16,325 16,429 16,429 16,429
Total liabilities 89,501 104,764 96,723 106,106 116,765 126,969 129,905 133,318
Share capital 24,375 24,375 25,975 25,975 25,975 25,975 25,975 25,975
Reserves/R.E./others 69,193 78,546 98,395 98,139 98,582 90,508 97,250 105,515
Shareholders' equity 93,568 102,921 124,370 124,114 124,557 116,483 123,225 131,491
Minority interests 14,227 12,747 5,183 4,894 9,217 10,500 10,500 10,500
Total equity & liabilities 197,296 220,433 226,276 235,115 250,539 253,952 263,630 275,308
EV 315,490 308,509 306,156 307,316 316,949 315,121 313,624 310,718
Net debt/(cash) (36,417) (41,918) (36,708) (35,259) (29,948) (33,060) (34,556) (37,462)
BVPS (TWD) 38.386 42.223 47.880 47.781 47.952 44.844 47.439 50.621
Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E
Sales (YoY) 0.7 7.7 6.7 5.4 4.3 5.9 8.8 8.4
EBITDA (YoY) 16.1 9.4 (5.1) 3.7 (0.1) (1.7) 20.5 11.0
Operating profit (YoY) 22.3 17.0 (10.2) 1.6 (5.1) (6.6) 31.8 15.2
Net profit (YoY) 9.6 17.3 (9.6) 0.4 (2.2) (4.8) 19.7 13.7
Core EPS (fully-diluted) (YoY) 8.9 17.3 (15.2) 0.4 (2.2) (4.8) 19.7 13.7
Gross-profit margin 25.4 27.0 27.2 27.8 27.2 26.6 27.7 28.0
EBITDA margin 15.7 16.0 14.2 14.0 13.4 12.4 13.8 14.1
Operating-profit margin 11.0 12.0 10.1 9.7 8.8 7.8 9.4 10.0
Net profit margin 10.0 10.9 9.2 8.8 8.2 7.4 8.1 8.5
ROAE 19.9 21.1 16.5 15.1 14.8 14.5 17.5 18.7
ROAA 9.3 9.9 8.4 8.1 7.6 6.9 8.1 8.8
ROCE 15.5 16.4 14.0 14.1 12.7 11.7 15.5 17.0
ROIC 23.5 26.5 19.7 17.3 15.8 14.9 19.6 21.4
Net debt to equity net cash net cash net cash net cash net cash net cash net cash net cash
Effective tax rate 15.9 15.8 19.7 22.3 21.2 20.1 22.4 22.5
Accounts receivable (days) 85.0 87.1 87.3 87.9 88.2 86.9 84.6 84.8
Current ratio (x) 2.1 2.3 1.7 1.7 1.7 1.5 1.6 1.6
Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Net dividend payout 79.7 80.1 93.4 69.4 69.1 70.7 74.2 68.2
Free cash flow yield 5.1 6.6 6.8 6.8 4.2 4.9 4.4 5.1
Company profile
Founded in 1971, Delta Electronics has been the global leader in switching power supply solutions
since 2002 and DC brushless fans since 2006. Its business covers 3 key areas: power electronics
(eg, power supplies, thermal management products and passive components), automation (eg,
controllers, robot arms and building management systems), and infrastructure (eg, datacenter
infrastructure, networking and EV charging).
54
Delta Electronics (2308 TT): 3 December 2018
Delta: quarterly and annual P&L statement
2018E 2019E
(TWDm) 1Q 2Q 3Q 4QE 1QE 2QE 3QE 4QE 2017 2018E 2019E
Net revenue 50,870 57,897 63,617 64,438 57,058 61,993 69,129 69,534
223,578 236,822 257,714
COGS (37,856) (43,393) (45,843) (46,621) (41,417) (44,605) (49,886) (50,480)
(162,809) (173,712) (186,387)
Gross profit 13,014 14,504 17,774 17,818 15,641 17,388 19,244 19,055 60,768 63,110 71,327
Operating expenses (10,243) (10,999) (11,804) (11,599) (10,784) (11,593) (12,443) (12,169) (40,994) (44,645) (46,988)
Operating profit 2,771 3,505 5,970 6,219 4,857 5,796 6,800 6,886
19,774 18,465 24,339
Non-operating profit 971 904 1,386 823 826 850 845 836
4,024 4,083 3,357
Pretax profit 3,742 4,409 7,355 7,041 5,683 6,646 7,646 7,722 23,798 22,548 27,696
Income taxes (862) (994) (1,125) (1,549) (1,307) (1,529) (1,682) (1,699) (5,041) (4,530) (6,216)
Net profit 2,781 3,277 6,090 5,356 4,247 4,981 5,828 5,889
18,381 17,504 20,946
Net EPS (TWD) 1.07 1.26 2.34 2.06 1.64 1.92 2.24 2.27
7.08 6.74 8.06
Operating Ratios
Gross margin 25.6% 25.1% 27.9% 27.7% 27.4% 28.0% 27.8% 27.4%
27.2% 26.6% 27.7%
Operating margin 5.4% 6.1% 9.4% 9.7% 8.5% 9.3% 9.8% 9.9%
8.8% 7.8% 9.4%
Pre-tax margin 7.4% 7.6% 11.6% 10.9% 10.0% 10.7% 11.1% 11.1%
10.6% 9.5% 10.7%
Net margin 5.5% 5.7% 9.6% 8.3% 7.4% 8.0% 8.4% 8.5%
8.2% 7.4% 8.1%
YoY (%)
Net revenue 4% 8% 6% 5% 12% 7% 9% 8%
4% 6% 9%
Gross profit -2% -1% 10% 8% 20% 20% 8% 7%
2% 4% 13%
Operating profit -30% -23% 9% 7% 75% 65% 14% 11%
-5% -7% 32%
Pretax profit -25% -19% 6% 10% 52% 51% 4% 10%
-4% -5% 23%
Net profit -29% -23% 11% 12% 53% 52% -4% 10%
-2% -5% 20%
QoQ (%)
Net revenue -17% 14% 10% 1% -11% 9% 12% 1%
Gross profit -21% 11% 23% 0% -12% 11% 11% -1%
Operating profit -52% 27% 70% 4% -22% 19% 17% 1%
Pretax profit -42% 18% 67% -4% -19% 17% 15% 1%
Net profit -42% 18% 86% -12% -21% 17% 17% 1%
Source: Company, Daiwa forecasts
Delta: major business segments, revenue contribution and growth outlook
Segments Sub-segments Major products Revenue mix YoY growth
2016 2017 2018E 2017 2018E
Power Electronics
Merchant & mobile power AC adapters for notebooks, game consoles; industrial power; medical powers; display products 23% 21% 19% -5% -5-10%
Embedded power Power supplies for desktop, server, switches, home/industrial applications 10% 9% 8% - 6% -5-10%
Components Power chokes, power modules, optical transceivers, resistors, RF modules 11% 12% 13% +14% +20-25%
Fans & thermal management
Cooling fans for PC, servers, storage devices, vehicles, industrials; cooling solutions for data centres; ventilations; vapor chambers; heat pipes
10% 10% 10% +3% Slightly up
Automotive electronics Powertrain solutions, power management <1% <1% ~1% Strongly up
Automation Industrial automation Controllers, inverters, servo motor/drive, PLC, HMI, CNC, robotic arms 11% 12% 12% +15% +5-10%
Building automation Building management system, controllers, lighting systems, HVAC systems, surveillance systems 2% 3% 4% +60% +30-40%
Infrastructure ICT infrastructure Telecom power, networking, datacentre infrastructure 27% 27% 28% +4% +5-10%
Energy infrastructure EV charging, renewable energy, energy storage, medium voltage drives 4% 4% 5% +10% +25-30%
Source: Company, Daiwa forecasts
Delta: 1-year forward PER band Delta: sales mix by segment
Source: TEJ, Daiwa forecasts Source: Company, Daiwa forecasts
40
90
140
190
240
Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16 Nov-17 Nov-18
Share price 10x 14x 25x 29x
(TWD)
55% 53% 51% 50%
13% 15% 16% 17%
32% 32% 33% 32%
1% 1% 1% 1%
0%
20%
40%
60%
80%
100%
2016 2017 2018E 2019E
Power Electronics Automation Infrastructure Other
55
Asia Mobile Communication: 3 December 2018
56
Asia Mobile Communication: 3 December 2018
57
Asia Mobile Communication: 3 December 2018
Daiwa’s Asia Pacific Research Directory
HONG KONG
Takashi FUJIKURA (852) 2848 4051 [email protected]
Regional Research Head
Jiro IOKIBE (852) 2773 8702 [email protected]
Co-head of Asia Pacific Research
John HETHERINGTON (852) 2773 8787 [email protected]
Co-head of Asia Pacific Research
Craig CORK (852) 2848 4463 [email protected]
Regional Head of Asia Pacific Product Management
Paul M. KITNEY (852) 2848 4947 [email protected]
Chief Strategist for Asia Pacific; Strategy (Regional)
Kevin LAI (852) 2848 4926 [email protected]
Chief Economist for Asia ex-Japan; Macro Economics (Regional)
Kelvin LAU (852) 2848 4467 [email protected]
Head of Automobiles; Transportation and Industrial (Hong Kong/China)
Fiona LIANG (852) 2532 4341 [email protected]
Industrial (Hong Kong/China)
Jay LU (852) 2848 4970 [email protected]
Automobiles and Components (Hong Kong/China)
Janice ZHANG (852) 2773 8842 [email protected]
Transportation (Hong Kong/China)
Leon QI (852) 2532 4381 [email protected]
Regional Head of Financials; Banking; Diversified financials; Insurance (Hong Kong/China)
Kevin JIANG (852) 2532 4383 [email protected]
Banking (China)
Anson CHAN (852) 2532 4350 [email protected]
Consumer (Hong Kong/China)
Adrian CHAN (852) 2848 4427 [email protected]
Consumer (Hong Kong/China)
Andrew CHUNG (852) 2773 8529 [email protected]
Head of Gaming (Hong Kong/China)
John CHOI (852) 2773 8730 [email protected]
Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap
Carlton LAI (852) 2532 4349 [email protected]
Small/Mid Cap (Hong Kong/China)
Dennis IP (852) 2848 4068 [email protected]
Regional Head of Power, Utilities, Renewable and Environment (PURE); PURE (Hong Kong/China)
Don LAU (852) 2848 4469 [email protected]
Power, Utilities, Renewable and Environment (PURE) – Utilities (Hong Kong)
Anna LU (852) 2848 4465 [email protected]
Power, Utilities, Renewable and Environment (PURE) – Nuclear (China)
Jonas KAN (852) 2848 4439 [email protected]
Head of Hong Kong and China Property
Cynthia CHAN (852) 2773 8243 [email protected]
Property (China)
Bryan CHIK (852) 2773 8741 [email protected]
Custom Products Group
Selwyn CHENG (852) 2773 8716 [email protected]
Custom Products Group
PHILIPPINES
Renzo CANDANO (63) 2 737 3022 [email protected]
Consumer
Micaela ABAQUITA (63) 2 737 3021 [email protected]
Property
Gregg ILAG (63) 2 737 3023 [email protected]
Utilities; Energy
SOUTH KOREA
Sung Yop CHUNG (82) 2 787 9157 [email protected]
Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Machinery
Mike OH (82) 2 787 9179 [email protected]
Banking; Capital Goods (Construction and Defence); Utilities; Steel
Josh RHEE (82) 2 787 9124 [email protected]
Chemicals
Iris PARK (82) 2 787 9165 [email protected]
Consumer/Retail
SK KIM (82) 2 787 9173 [email protected]
IT/Electronics – Semiconductor/Display and Tech Hardware
Henny JUNG (82) 2 787 9182 [email protected]
IT/Electronics – Semiconductor/Display and Tech Hardware (Small/Mid Cap)
Thomas Y KWON (82) 2 787 9181 [email protected]
Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Games
TAIWAN
Rick HSU (886) 2 8758 6261 [email protected]
Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design (Regional)
Nora HOU (886) 2 8758 6249 [email protected]
Banking; Diversified financials; Insurance; Strategy
Steven TSENG (886) 2 8758 6252 [email protected]
IT/Technology Hardware (Automation & PC Hardware)
Kylie HUANG (886) 2 8758 6248 [email protected]
IT/Technology Hardware (Handsets and Components)
Helen CHIEN (886) 2 8758 6254 [email protected]
Small/Mid Cap
INDIA
Punit SRIVASTAVA (91) 22 6622 1013 [email protected]
Head of India Research; Strategy; Banking/Finance
Saurabh MEHTA (91) 22 6622 1009 [email protected]
Capital Goods; Utilities
SINGAPORE
Ramakrishna MARUVADA (65) 6228 6742 [email protected]
Head of Singapore Research; Telecommunications (China/ASEAN/India)
David LUM (65) 6228 6740 [email protected]
Banking; Property and REITs
Royston TAN (65) 6228 6745 [email protected]
Oil and Gas; Capital Goods
Jame OSMAN (65) 6228 6744 [email protected]
Transportation – Road and Rail; Pharmaceuticals and Healthcare; Consumer (Singapore)
JAPAN
Yukino YAMADA (81) 3 5555 7295 [email protected]
Strategy (Regional)
58
Asia Mobile Communication: 3 December 2018
Daiwa’s Offices
Office / Branch / Affiliate Address Tel Fax
DAIWA SECURITIES GROUP INC
HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753 (81) 3 5555 3111 (81) 3 5555 0661
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59
Asia Mobile Communication: 3 December 2018
LG Innotek: share price and Daiwa recommendation trend
Source: Daiwa
Note: where appropriate, historical target prices have been adjusted to reflect the current share count
Samsung Electro-Mechanics: share price and Daiwa recommendation trend
Source: Daiwa
Note: where appropriate, historical target prices have been adjusted to reflect the current share count
Date Target Price Rating Date Target price Rating Date Target price Rating
08/09/17 240,000 Buy 22/03/18 172,000 Buy 11/09/18 158,000 Outperform
19/10/17 220,000 Buy 27/04/18 138,000 Buy
23/01/18 190,000 Buy 25/06/18 161,000 Outperform
83,000
240,000
220,000
190,000
172,000
138,000
161,000 158,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
220,000
240,000
Nov
-15
Dec
-15
Jan-
16
Feb
-16
Mar
-16
Apr
-16
May
-16
Jun-
16
Jul-1
6
Aug
-16
Sep
-16
Oct
-16
Nov
-16
Dec
-16
Jan-
17
Feb
-17
Mar
-17
Apr
-17
May
-17
Jun-
17
Jul-1
7
Aug
-17
Sep
-17
Oct
-17
Nov
-17
Dec
-17
Jan-
18
Feb
-18
Mar
-18
Apr
-18
May
-18
Jun-
18
Jul-1
8
Aug
-18
Sep
-18
Oct
-18
Nov
-18
Target price (KRW) Closing Price (KRW)
Date Target Price Rating Date Target price Rating Date Target price Rating
14/04/16 76,000 Buy 17/04/17 82,000 Buy 22/05/18 160,000 Buy
04/07/16 74,000 Buy 22/06/17 125,000 Buy 18/07/18 190,000 Buy
19/10/16 64,000 Buy 14/11/17 132,000 Buy 06/09/18 220,000 Buy
20/01/17 66,000 Buy 01/02/18 126,000 Buy 01/11/18 200,000 Buy
17/02/17 69,000 Buy 11/04/18 145,000 Buy
79,000 76,000 74,00064,000 66,00069,000
82,000
125,000132,000
126,000
145,000
160,000
190,000
220,000
200,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
220,000
Nov
-15
Dec
-15
Jan-
16
Feb
-16
Mar
-16
Apr
-16
May
-16
Jun-
16
Jul-1
6
Aug
-16
Sep
-16
Oct
-16
Nov
-16
Dec
-16
Jan-
17
Feb
-17
Mar
-17
Apr
-17
May
-17
Jun-
17
Jul-1
7
Aug
-17
Sep
-17
Oct
-17
Nov
-17
Dec
-17
Jan-
18
Feb
-18
Mar
-18
Apr
-18
May
-18
Jun-
18
Jul-1
8
Aug
-18
Sep
-18
Oct
-18
Nov
-18
Target price (KRW) Closing Price (KRW)
All statements in this report attributable to Gartner represent [Bank’s/Issuer’s/Client’s] interpretation of data, research opinion or viewpoints published as part of a syndicated subscription service by Gartner, Inc., and have not been reviewed by Gartner. Each Gartner publication speaks as of its original publication date (and not as of the date of this [presentation/report]). The opinions expressed in Gartner publications are not representations of fact, and are subject to change without notice.
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Important Disclosures and Disclaimer
This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Group Inc., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person.
Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including market making activities, derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. Daiwa Securities Group Inc., its subsidiaries or affiliates do and seek to do business with the company(s) covered in this research report. Therefore, investors should be aware that a conflict of interest may exist. The following are additional disclosures. Ownership of Securities
For “Ownership of Securities” information, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationship
For “Investment Banking Relationship”, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Japan Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc.
Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc. Investment Banking Relationship
Within the preceding 12 months, the subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Cromwell European REIT (CERT_SP), Beijing Enterprises Water Group Ltd (371 HK), Mirae Asset Daewoo Co Ltd (006800 KS).
*Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa
Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd. Hong Kong
This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司) (“DHK”) which is regulated by the Hong Kong Securities and Futures
Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research. Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage. Korea
The developing analyst of this research and analysis material hereby states and confirms that the contents of this material correctly reflect the analyst’s views and opinions and that the analyst has not been placed under inappropriate pressure or interruption by an external party.
Name of Analyst :
Disclosure of Analysts’ Interests If an analyst engaging in or a person who exercises influences on the preparation or publication of a Research Report containing recommendations for general investors to trade financial investment instruments with regard to which the analyst or the influential person has personal interests and if the recommendations contained in the Report may have impacts on the personal interests, Daiwa Securities Capital Markets Korea Co., Ltd.(“Daiwa Securities Korea”)shall ensure that the Analyst or the influential person notifies that he/she has personal interests with regard to: 1. The equity, the equity-linked bonds and the instruments with the subscription right to the equity issued by the legal entity covered in the Research Report (or the legal entity subject to the investment recommendations); 2. The stock option granted by the legal entity covered in the Research Report (or the legal entity subject to the investment recommendations); or 3. The equity futures, the equity options and the equity-linked warrants backed by the equity prescribed in the preceding Paragraph 1 as the underlying assets. Legal Entities subject to Research Report Coverage Restrictions Daiwa Securities Korea hereby states and confirms that Daiwa Securities Korea has no conflicts of interests with the legal entity covered in this Research Report: 1. In that Daiwa Securities Korea does NOT offer direct or indirect payment guarantee for the legal entity by means of, for instance, guarantee, endorsement, provision of collaterals or the acquisition of debts; 2. In that Daiwa Securities Korea does NOT own one-hundredth (or 1/100) or more of the total number of outstanding equities issued by the legal entity; 3. In that The legal entity is NOT an affiliated company of Daiwa Securities Korea pursuant to Sub-paragraph 3, Article 2 of the Monopoly Regulation and Fair Trade Act of Korea; 4. In that, although Daiwa Securities Korea offers advisory services for the legal entity with regard to an M&A deal, the size of the M&A deal does NOT exceed five-hundredths (or 5/100) of the total asset size or the total number of equities issued and outstanding of the legal entity; 5. In that, although Daiwa Securities Korea acted in the capacity of a Lead Underwriter for the initial public offering of the legal entity, more than one-year has passed since the IPO date; 6. In that Daiwa Securities Korea is NOT designated by the legal entity as the ‘tender offer agent’ pursuant to the Paragraph 2, Article 133 of the Financial Services and Capital Market Act or the legal entity is NOT the issuer of the equity subject to the proposed tender offer; this requirement, however applies until the maturity of the tender offer period; or 7. In that Daiwa Securities Korea does NOT have significant or material interests with regard to the legal entity. Disclosure of Prior Distribution to Third Party This report has not been distributed to the third party in advance prior to public release. The following explains the rating system in the report as compared to KOSPI, based on the beliefs of the author(s) of this report. "1": the security could outperform the KOSPI by more than 15% over the next 12 months, unless otherwise stated. "2": the security is expected to outperform the KOSPI by 5-15% over the next 12 months, unless otherwise stated. "3": the security is expected to perform within 5% of the KOSPI (better or worse) over the next 12 months, unless otherwise stated. "4": the security is expected to underperform the KOSPI by 5-15% over the next 12 months, unless otherwise stated. "5": the security could underperform the KOSPI by more than 15% over the next 12 months, unless otherwise stated. “Positive” means that the analyst expects the sector to outperform the KOSPI over the next 12 months, unless otherwise stated. “Neutral” means that the analyst expects the sector to be in-line with the KOSPI over the next 12 months, unless otherwise stated. “Negative” means that the analyst expects the sector to underperform the KOSPI over the next 12 months, unless otherwise stated. Additional information may be available upon request.
Singapore This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore Limited in respect of any matter arising from or in connection with the research. Australia
This research is distributed in Australia by Daiwa Capital Markets Australia Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research.
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India
This research is distributed in India to Institutional Clients only by Daiwa Capital Markets India Private Limited (Daiwa India) which is an intermediary registered with Securities & Exchange Board of India as a Stock Broker, Merchant Bank and Research Analyst. Daiwa India, its Research Analyst and their family members and its associates do not have any financial interest save as disclosed or other undisclosed material conflict of interest in the securities or derivatives of any companies under coverage. Daiwa India and its associates, may have received compensation for any products other than Investment Banking (as disclosed)or brokerage services from the subject company in this report or from any third party during the past 12 months. Daiwa India and its associates may have debt holdings in the subject company. For information on ownership of equity, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
There is no material disciplinary action against Daiwa India by any regulatory authority impacting equity research analysis activities as of the date of this report.
Associates of Daiwa India, registered with Indian regulators, include Daiwa Capital Markets Singapore Limited and Daiwa Portfolio Advisory (India) Private Limited. Taiwan This research is solely for reference and not intended to provide tailored investment recommendations. This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd. and it may only be distributed in Taiwan to specific customers who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd. and non-customers including (i) professional institutional investors, (ii) TWSE or TPEx listed companies, upstream and downstream vendors, and specialists that offer or seek advice, and (iii) potential customers with an actual need for business development in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research including non-customer recipients of this research shall not provide it to others or engage in any activities in connection with this research which may involve conflicts of interests. Neither Daiwa-Cathay Capital Markets Co., Ltd. nor its personnel who writes or reviews the research report has any conflict of interest in this research. Since Daiwa-Cathay Capital Markets Co., Ltd. does not operate brokerage trading business in foreign markets, this research is prepared on a “without recommendation” to any foreign securities basis and Daiwa-Cathay Capital Markets Co., Ltd. does not accept orders from customers to trade in such foreign securities that are without recommendation. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd. in respect of any matter arising from or in connection with the research. Philippines This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Phil ippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities.
For relevant securities and trading rules please visit SEC and PSE links at http://www.sec.gov.ph and http://www.pse.com.ph/ respectively. Thailand This research is distributed to only institutional investors in Thailand primarily by Thanachart Securities Public Company Limited (“TNS”).
This report is prepared by analysts who are employed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates. This report is provided to you for informational purposes only and it is not, and is not to be construed as, an offer or an invitation to make an offer to sell or buy any securities. Neither TNS, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees accept any liability whatsoever for any direct or consequential loss arising from any use of this research or its contents.
The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable. However, TNS, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees make no representation or warranty, express or implied, as to their accuracy or completeness. Expressions of opinion herein are subject to change without notice. The use of any information, forecasts and opinions contained in this report shall be at the sole discretion and risk of the user.
TNS, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates, their respective directors, officers, servants and employees may have positions and financial interest in securities mentioned in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this research. Therefore, investors should be aware of conflict of interest that may affect the objectivity of this research. United Kingdom
This research report is produced by Daiwa Securities Co. Ltd. and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange and Eurex. This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available. Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory. Germany This document is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany. Bahrain This research material is distributed in Bahrain by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113 United States
This research is distributed into the United States directly by Daiwa Capital Markets Hong Kong Limited and indirectly by Daiwa Capital Markets America Inc. (DCMA), a U.S. Securities and Exchange Commission registered broker-dealer and FINRA member firm, exclusively to “major U.S. institutional investors”, as defined under Rule 15a-6 promulgated under the U.S. Securities Exchange Act of 1934, as amended, and as interpreted by the staff of the U.S. Securities and Exchange Commission (SEC). This report is not an offer to sell or the solicitation of any offer to buy securities. U.S. customers wishing to effect transactions in any designated investment discussed in this report should do so through a qualified salesperson of DCMA. Non-U.S. customers wishing to effect transactions in any designated investment discussed in this report should contact a Daiwa entity in their local jurisdiction. The securities or other investment products discussed in this report may not be eligible for sale in some jurisdictions.
Analysts employed outside the U.S., as specifically indicated elsewhere in this report, are not registered as research analysts with FINRA. These analysts may not be associated persons of DCMA, and therefore may not be subject to FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
ADDITIONAL IMPORTANT DISCLOSURES CAN BE FOUND AT:
https://daiwa3.bluematrix.com/sellside/Disclosures.action
Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions. Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analyst is named on the report); and no part of the compensation of such analyst (or no part of the compensation of the firm if no individual analyst is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report. The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report.
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"1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months.
Disclosure of investment ratings
Rating Percentage of total
Buy* 72.1%
Hold** 19.7%
Sell*** 8.2%
Source: Daiwa
Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 30 September 2018. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings. Additional information may be available upon request. Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.) If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items.
In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.
In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.
For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.
There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.
There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.
Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.
When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association