china smartphone sector - credit suisse

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

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13 January 2015

Asia Pacific/China

Equity Research

Semiconductor Devices

China Smartphone Sector SECTOR FORECAST

2015 Outlook: Looking for Profits in Emerging

Markets and LTE

Figure 1: Raising smartphones for emerging markets—still +20% units in 2015

Source: Credit Suisse estimates

■ Emerging markets lift smartphone units. Our global hardware team, in its annual wireless preview on 13 January, raised its 2014/15 smartphone unit forecasts by 3%/5% from 1,258/1,475mn to 1,290/1,542mn, due to faster emerging market smartphone penetration. Smartphone units in 2015 are projected to grow by 20% YoY and revenues to increase by a reasonable 8% YoY to US$348 bn.

■ Growth left in emerging markets, LTE and extension into wearables/IoT.

With developed markets now mature, emerging markets are keying growth, with China projecting +13% YoY to 473 mn in 2015 and other emerging markets forecasting +33% YoY to 706 mn. 2015 will be the year LTE accelerates; we project units from China brands will grow from 140 mn to 323 mn. Tablets have now slowed to single-digit growth so focus shifts to IoT and wearables, a potential US$40-45 bn market that could add 10% to foundry sales by 2016.

■ Selective picks in Asian due to mixed profitability. With unit growth

moderating and shifting downmarket, we are selective on companies that can

gain share and support margins. We remain positive on ASE on the back of

good margins and incremental SiP projects, SPIL on leverage to China LTE

handsets/infrastructure, and we view MediaTek as attractive exiting 1Q15 on

product refresh and improving mix. In driver ICs, we like Chipbond, ChipMOS,

Himax, Novatek, and Focaltech. In brands, we favour ZTE and Lenovo. In

components, our top picks are AAC, Largan, and Catcher.

■ Toning down a bit on TSMC. We have downgraded TSMC to NEUTRAL, toning down our positive view since the financial crisis due to increasing customer concentration risks, rising competition and moderating growth with the valuation back in line with its historical average. Results (Thursday) will still be strong due to 20nm/28nm at good yields and NT$ depreciation (a NT$1 EPS lift to 2015), but competition should stay in focus through 2015.

2010 2011 2012 2013 2014 2015E 2016E 2017E

New Estimate 304,681 494,447 725,476 1,019,432 1,290,513 1,542,237 1,757,676 1,937,963

YoY 62% 47% 41% 27% 20% 14% 10%

Old Estimate 298,847 472,891 721,258 1,032,231 1,257,603 1,475,385 1,688,637 1,865,594

YoY 58% 53% 43% 22% 17% 14% 10%

Increase (%) 2.0% 4.6% 0.6% -1.2% 2.6% 4.5% 4.1% 3.9%

Research Analyst

Randy Abrams, CFA

886 2 2715 6366

[email protected]

Jerry Su

886 2 2715 6361

[email protected]

Pauline Chen

886 2 2715 6323

[email protected]

Thompson Wu

886 2 2715 6386

[email protected]

Nickie Yue

886 2 2715 6364

[email protected]

https://doc.research-and-analytics.csfb.com/docView?sourceid=em&document_id=x609315&serialid=YDGpj2jQcZOaCMM%2bMdS9dg%2fBBSc6S7FlewSOIFkjt1I%3d

https://doc.research-and-analytics.csfb.com/docView?language=ENG&source=ulg&format=PDF&document_id=1043025371&serialid=9w1CBZK72kTaiv1APcCuCVW%2fc9ZJKo5U3xGtgBglsDc%3d

13 January 2015

China Smartphone Sector 2

Focus table and charts Figure 2: Summary of Credit Suisse's smartphone estimates (in millions, unless otherwise stated)


Figure 3: China brands leading the growth Figure 4: Low-Mid-End smartphones pass 50% in 2015

Source: Gartner Source: Credit Suisse estimates

Figure 5: Internet of Things Silicon seeing high growth Figure 6: 2015 Chinese chipsets shift over to LTE

Source: Gartner Source: Company data, Credit Suisse estimates

Figure 7: LTE to drive the next growth for MediaTek Figure 8: Export ramp supplementing slower China units

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Smartphone summary 2010 2011 2012 2013 2014 2015 2016 2017 CAGR 14-17

Global smartphone subscribers 504 794 1,215 1,777 2,418 3,092 3,762 4,400 22%

% of mobile subscribers 10% 14% 20% 27% 35% 43% 50% 56%

New adds 171 290 420 563 641 674 670 638 0%

Replacements 134 204 305 457 650 869 1,088 1,300 26%

Smartphone units 305 494 725 1,019 1,291 1,542 1,758 1,938 15%

YoY 76% 62% 47% 41% 27% 20% 14% 10%

Smartphone ASPs $363 $361 $329 $283 $250 $225 $203 $183 -10%

YoY 1% -1% -9% -14% -12% -10% -10% -10%

Smartphone revenue $110,596 $178,393 $238,557 $288,439 $323,147 $347,562 $356,502 $353,762 3%

YoY 78% 61% 34% 21% 12% 8% 3% -1%

0

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Units (000)

Nokia Research in Motion MotorolaApple Sony HTCSamsung LG Chinese brands

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YoY (%)Sales (US$)

ASSP / FPGA Microcontroller Sensors Bluetooth

Cellular Wi-Fi ZigBee Other Wireless

Wireline YoY Growth

2015 to China brands EDGE WCDMA TD-SCDMA CDMA 2000 LTE

Mediatek 46.9 258.5 38.4 - 125.0

Spreadtrum 40.0 44.9 44.1 - 30.0

Leadcore - 0.8 24.3 - -

Hi-Silicon - 2.0 4.0 14.0

Asian suppliers 86.9 306.1 110.8 0.0 169.0

% of shipments 17% 59% 22% 0% 33%

Share 100% 89% 93% 0% 52%

Qualcomm - 33.1 5.0 45.0 130.0

Broadcom - - - - -

Marvell - 2.7 3.0 - 21.3

Intel - 2.0 - - 3.0

Overseas suppliers 0.0 37.8 8.0 45.0 154.3

% of shipments 0% 19% 4% 23% 77%

Share 0% 11% 7% 100% 48%

Total 86.9 343.9 118.8 45.0 323.3

% of shipments 12% 48% 17% 6% 45%

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Revenue by Technology

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%/ QoQ / export ratio

Smartphone Units: mn

China smartphones Export smartphones Export %China QoQ Export QoQ

13 January 2015


2015 outlook: Looking for profits in emerging markets and LTE In coordination with our global hardware team, we publish our annual smartphone and tablet

outlook and raise industry unit estimates to factor in a faster ramp of China brands in the export

markets. We also provide an outlook and implications for the Asian supply chain.

Raising global smartphone units on China exports Our global hardware team, in its annual wireless preview on 13 January, raised its 2014/15

smartphone unit forecasts by 3%/5% from 1,258/1,475 mn to 1,290/1,542 mn, due to faster

emerging market smartphone penetration. Smartphone units in 2015 are projected to rise

20% YoY and revenues to increase by a reasonable 8% YoY to US$348 bn. Our industry

forecasts from 2014-17 notably slow to a 3.1% revenue CAGR based on a deceleration in

subscriber and replacement rates, although a scenario of steady penetration/replacement

rates keeps the revenue CAGR at 7.4%. LTE and emerging markets are now driving growth.

Asian chipset in China smartphone brands should again outgrow, with units rising 50% to 717

mn in 2014 and we estimate it will grow 28% to 918 mn in 2015.

Growth still from emerging markets and extension

into wearables/IoT

While developed markets are slowing to a 5% CAGR between 2014 and 2017, we project

China has a 9% CAGR from 420 mn units in 2014 to 538 mn by 2017 and other emerging

markets with a 24% CAGR, from 530 mn units in 2014 to 1,010 mn in 2017. China brands

are gaining, with volumes now at 80% of China shipments and rising to 45% of global

shipments. However, this is still below the 60% reached in feature phones, suggesting

more outgrowth is possible. Our key focus will be LTE, where we project LTE basebands

in China brands to grow from 140 mn in 2014 to 323 mn in 2015. Tablets have now slowed

to single-digit growth so the focus shifts to IoT and wearables, a potential US$40-45 bn

market that could add 10% to foundry sales by 2016.

LTE transition in focus; Qualcomm leading, but

MediaTek emerging Growth will continue but mix will shift increasingly toward LTE. We estimate Asian chipsets

grew 50% YoY to 717 mn in 2014 and project 28% YoY growth to 918 mn units versus

handset industry growth of +20% YoY. In 2015, we estimate 130 mn units for Qualcomm

into emerging markets, but see MediaTek approaching that (125 mn) as it ramps into its

customers and has a top-to-bottom refresh in early 2Q15. We also see Marvell maintaining

a decent position and Spreadtrum gaining both on mainstream 3G and starting its ramp on

LTE, with internal chipset in 1H15 and joint SoFIA 4G chipset with Intel late in the year.

Stock picks in the China smartphone space With unit growth moderating and shifting downmarket, we are selective on companies that

can gain share and support margins. We stay positive on ASE on good margins and

incremental SiP projects, SPIL on leverage to China LTE handsets/infrastructure and we

view MediaTek as attractive exiting 1Q15 on product refresh and improving mix.

We toned down our positive view on TSMC since the financial crisis due to increasing

customer concentration risks, moderating growth and rising competition, with valuation

being back in line with its historical average. Results (Thursday) should still be strong due

to 20nm/28nm offering good yields and NT$ depreciation (NT$1 EPS lift to 2015), but

competition should stay in focus through 2015. In driver ICs, we like Chipbond, ChipMOS,

Himax, Novatek, and Focaltech. In brands, we favour ZTE and Lenovo. In components,

our top picks are AAC, Largan and Catcher.

Smartphone unit estimates

raised by 3%/5% to 1,290 mn

(+27% YoY) in 2014 and

1,542 mn (+20% YoY)

for 2015

China growing from 420 mn

units in 2014 to 538 mn by

2017E (a 9% CAGR) and

emerging markets from 530 mn

units in 2014 to 1,010 mn in

2017E (a 24% CAGR)

Asian chipsets to grow 28%

YoY to 918 mn units in

2015—LTE still led by

Qualcomm, but MediaTek

could quadruple its units

We prefer ASE, view

MediaTek attract exiting

1Q15, but see competition

emerging in foundry

https://doc.research-and-analytics.csfb.com/docView?language=ENG&source=ulg&format=PDF&document_id=1043025371&serialid=9w1CBZK72kTaiv1APcCuCVW%2fc9ZJKo5U3xGtgBglsDc%3d

13 January 2015


Valuation summary Figure 9:CS Asian semiconductor valuation summary (in millions, unless otherwise stated)

Source: Company data, Credit Suisse estimates

Figure 10: ASE trading at a discount on a P/B basis Figure 11: SPIL's historical P/B band


Market Cap Price Target Inv'ment Target P/E P/B ROE

US$mn 12-Jan Local Curcy Rating upside 2014 2015 2014 2015 2014 2015

Asian semiconductor coverage

Foundry

TSMC 107,548 132.0 145.0 NTRL 9.8% 13.1 11.5 3.3 2.8 28.1% 26.6%

UMC 6,172 15.8 14.5 NTRL -7.9% 16.6 16.9 0.9 0.9 5.5% 5.3%

SMIC 3,215 0.72 0.80 NTRL 11.1% 21.2 21.9 8.7 8.5 5.7% 5.1%

Vanguard Semi 2,647 51.6 50.0 NTRL -3.1% 16.0 14.3 3.1 2.9 20.3% 20.7%

Hua Hong Semi 1,102 9.73 14.00 OPFM 43.9% 11.9 14.1 5.6 6.5 7.1% 6.1%

Total 119,582 13.4 11.9 3.7 3.3 25.9% 25.2%

Packaging & testing

ASE 9,489 37.7 47.0 OPFM 24.7% 13.1 11.8 2.2 2.0 17.6% 18.1%

SPIL 4,669 47.6 56.5 OPFM 18.7% 12.7 11.8 2.1 2.0 17.5% 17.4%

Powertech 1,260 52.5 60.0 OPFM 14.3% 13.6 11.7 1.4 1.3 10.0% 11.4%

Amkor 1,576 6.7 8.0 NTRL 20.3% 10.5 8.9 1.3 1.2 14.2% 14.3%

ASM Pacific 29,587 71.5 97.0 OPFM 35.8% 15.9 14.3 3.8 3.6 25.3% 26.3%

Total 15,418 4.9 4.4 1.1 1.0 21.4% 21.6%

IC design

MediaTek Inc. 23,667 488.0 540.0 OPFM 10.7% 15.7 14.8 3.4 3.2 23.0% 22.6%

Realtek Semiconductor 1,618 102.0 98.0 NTRL -3.9% 12.3 14.6 2.6 2.5 21.2% 17.4%

WPG Holdings Ltd 1,920 36.9 42.0 NTRL 13.8% 10.9 10.1 1.4 1.4 13.8% 14.0%

Total 27,205 15.0 14.2 3.7 3.4 23.7% 22.7%

China smartphone supply chain top picks

Driver IC

Chipbond 1,169 43.3 53.0 OPFM 22.4% 12.0 11.9 6.3 5.9 18.5% 16.9%

ChipMOS 1,169 43.3 53.0 OPFM 22.4% 12.0 11.9 2.1 1.9 18.5% 16.9%

Himax 1,409 8.19 12.00 OPFM 46.5% 2.7 1.8 3.0 2.7 14.2% 20.6%

Novatek 3,432 179.5 174.0 NTRL -3.1% 15.5 14.3 4.5 4.2 28.8% 30.2%

Total 7,179 14.9 13.2 3.3 3.1 21.2% 22.3%

Components

AAC 7,108 44.9 54.0 OPFM 20.3% 22.2 17.0 5.8 4.4 28.6% 29.3%

Largan 9,779 2,320.0 2,800.0 OPFM 20.7% 17.5 15.3 7.0 5.4 47.6% 39.9%

Catcher 194,909 253.0 335.0 OPFM 32.4% 12.1 10.7 2.3 2.0 20.3% 19.9%

Total 16,886 1.0 0.9 0.3 0.2 24.5% 23.3%

Handset brands

ZTE 7,847 17.7 20.0 OPFM 13.0% 21.9 17.3 2.4 2.2 11.6% 13.2%

Lenovo 15,207 10.8 13.0 OPFM 20.8% 138.3 162.0 37.5 36.8 28.8% 23.6%

Total 23,054 204.1 172.4 29.2 27.9 14.0% 15.3%

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13 January 2015


Table of contents Focus table and charts 2 2015 outlook: Looking for profits in emerging markets and LTE 3

Raising global smartphone units on China exports 3 Growth still from emerging markets and extension into wearables/IoT 3 LTE transition in focus; Qualcomm leading, but MediaTek emerging 3 Stock picks in the China smartphone space 3

Valuation summary 4 Raising global smartphone units on China exports 6

Smartphone industry slows to single digits in our baseline case 6 Sustained penetration and replacement cycles could provide upside to the industry

baseline 7 Growth still from emerging markets and extension into wearables/IoT 10

Low 3G penetration driving a 4G replacement cycle 10 Emerging market channel still has some growth legs 13 Asian chipsets may pass the feature phone peak 13 Low- to mid-tier smartphones more of the volumes 14 64-bit to become ubiquitous in 2015 15 Tablet maturation extends to emerging markets 16

LTE transition in focus; Qualcomm leading, but MediaTek emerging 21 China seeing an acceleration of LTE 21 Chipset volumes now shifting toward LTE 22 Qualcomm the LTE leader, but others players catching up in emerging markets 23 MediaTek maintaining good 3G share and now ramping into the 4G market 26 Intel had strong tablet success, but now shifting strictly from share to now also

improving profitability 29 Spreadtrum advancing its new roadmap and now backed by Intel 32 Marvell: Stays firmly committed to winning in mobile 34 NVIDIA and Broadcom exiting merchant basebands 35 Smartphone display components: Higher resolution; more integration 35 Smartphone components 40

Stock picks in the China smartphone space 42 TSMC: Competitive landscape in focus for 2015 44 Customers more concentrated and diversifying as Tier-two foundries ramp 44 Tier-two suppliers are finally viable options on 28nm 47 Technology, CFs, and GM support keeps us from being too negative 48 SMIC: 28nm and Chinese customers driving the 2015 outlook 50 MediaTek: Fighting the competition to preserve growth and margins with the shift

to LTE 52 LTE in focus: 1H15 the toughest period on competitive pressures 53 A couple of upside areas not in estimates—high-end LTE, Samsung and developed

markets 55 Maintain OUTPERFORM 56 WPG: Leading Asian IC distributor 57 Back-end: Moderate growth should continue in 2015 59 Capex may decline after stepping up in 2014 59 Profitability: GMs back on an improving trend 60 ASE growth driver from SiP continues 60 SPIL momentum milder after the strong 2014 ramp 62 Mobile devices: Chinese brands gaining share on export growth 63 TCLC: Export driving shipment and profit growth 65 Coolpad: Business model under transition 66 ZTE: 4G BTS & smartphone share gain lifting 2015 OP 68 Lenovo: Solid position with three-pronged strategy to succeed in smartphones 69

13 January 2015


Raising global smartphone units on China exports In our annual smartphone outlook, our global hardware team raised its smartphone unit

estimates due to continued strong penetration of smartphones in emerging markets. We raise

our smartphone unit estimates for 2014/2015 by 3%/5% from 1,258/1,475 mn to 1,290/1,542

mn, reflecting industry unit growth moderating from +27% YoY in 2014 to +20% YoY in 2015.

Figure 12: Raising our 2015 smartphone estimates; 2016-17 growth maintained (in millions, unless otherwise stated)


Higher smartphone estimates are being driven by the rise of Chinese brands, growing at

62% in 2014 versus +8% growth for traditional top-8 tier-ones (Apple, Samsung, Nokia,

Sony, Motorola, HTC, LG and Blackberry). We project this growth will continue but

moderate, with China growing at 28% YoY and traditional tier-ones at +13% YoY in 2015.

The rise of China smartphone brands is being paralleled by Asian chipset suppliers, with

MediaTek growing units from 223 mn to 358 mn in 2014 and according to our estimates

growing to 469 mn in 2015 and total Asian chipset shipments at 717 mn in 2014 and 918

mn in 2015. Even assuming a 10% discount to these volumes, we estimate that

smartphones powered by these chips will account for over half of industry volumes in

2014/2015.

Figure 13: China smartphone brands and chipsets growing at twice the industry rate (in millions, unless otherwise stated)


Smartphone industry slows to single digits in our

baseline case

Despite higher smartphone forecasts, industry growth is decelerating to single digits from

2015 in our global industry model, as ASPs are coming down about 10% YoY with the mix

shift to emerging markets. The total handset industry in 2015 is projected to grow 4% YoY

to US$354 bn and the smartphone industry by 8% YoY to US$347 bn.

2010 2011 2012 2013 2014 2015E 2016E 2017E

New Estimate 304,681 494,447 725,476 1,019,432 1,290,513 1,542,237 1,757,676 1,937,963

YoY 62% 47% 41% 27% 20% 14% 10%

Old Estimate 298,847 472,891 721,258 1,032,231 1,257,603 1,475,385 1,688,637 1,865,594

YoY 58% 53% 43% 22% 17% 14% 10%

Increase (%) 2.0% 4.6% 0.6% -1.2% 2.6% 4.5% 4.1% 3.9%

2011 2012 2013 2014E 2015E 2016E 2017E

Top 8 traditional tier-one vendors 463 545 667 720 810 875 741

YoY Growth 18% 22% 8% 13% 8% -15%

Chinese smartphone vendors 31 180 353 571 732 882 1,197

YoY Growth 477% 96% 62% 28% 20% 36%

Smartphone vendors 494 725 1,019 1,291 1,542 1,758 1,938

YoY Growth 47% 41% 27% 20% 14% 10%

Mediatek units 10 110 223 358 469 568 676

Spreadtrum units 0 32 121 128 159 186 214

Leadcore units 3 5 12 16 25 30 35

Hi-Silicon units 0 0 3 15 20 30 36

Foreign vendors into Chinese brands 75 103 119 196 240 282 308

Asian chipsets into China phones 88 249 478 714 913 1,095 1,268

YoY Growth 183% 92% 49% 28% 20% 16%

Discount / overlap factor 10% 10% 10% 10% 10% 10% 0%

Asian shipments after discount 79 224 430 643 822 986 1,268

Less Brands using Asian chipsets 48 44 77 72 89 103 71

Total based on chipset shipments 494 725 1,019 1,291 1,542 1,758 1,938

CS Smartphone Estimates 494 725 1,019 1,291 1,542 1,758 1,938

YoY Growth 47% 41% 27% 20% 14% 10%

Raising global smartphone

forecasts for 2014/2015 by

3%/5% to 1,290/1,542 mn, up

27%/20% YoY

China smartphones and

Asian chipsets to grow 28%

YoY in 2015, double the rate

of that of traditional tier-ones

Smartphone industry

revenue +8% YoY to

US$347 bn in 2015

13 January 2015


Figure 14: Summary of Credit Suisse's handset and smartphone estimates (in millions, unless otherwise stated)


The lower unit forecasts also parallel a slowdown in unit growth for the Asian chipset

suppliers, which are still witnessing double-digit unit declines in the feature phone market.

We estimate Asian chipset shipments increased +6% YoY in 2014 to 1.15 bn units and to

increase +3% YoY in 2015 to 1.19 bn.

Figure 15: Asian chipset vendors' growth share now more moderate (in millions, unless otherwise stated)


Sustained penetration and replacement cycles could

provide upside to the industry baseline

While our baseline industry model projects a sharp slowdown to single-digit revenue

growth, sustained penetration rates of smartphones in emerging markets and replacement

rates holding at 2014 levels would provide upside to our industry model. Our industry

smartphone model slows to a 3.1% revenue CAGR for 2014-17, although we note that the

model has smartphone subscriber penetration gains slowing from 7.9% penetration added

in 2014 to an average of 7.2% over 2014-17, and replacement rates decelerating from 2.7

to 2.9 years.

Handset summary 2010 2011 2012 2013 2014 2015 2016 2017 CAGR 14-17

Global subscriptions 5,175 5,780 6,155 6,545 6,890 7,215 7,538 7,861 4%

Global handset shipments 1,595 1,715 1,738 1,847 1,963 2,067 2,155 2,228 4%

YoY 19% 8% 1% 6% 6% 5% 4% 3%

Handset ASPs $138 $151 $166 $174 $173 $171 $168 $160 -3%

YoY 0% 9% 10% 5% 0% -1% -2% -5%

Handset revenue $220,473 $258,905 $288,934 $321,207 $339,796 $354,200 $361,842 $357,203 2%

YoY 19% 17% 12% 11% 6% 4% 2% -1%

Smartphone summary 2010 2011 2012 2013 2014 2015 2016 2017 CAGR 14-17

Global smartphone subscribers 504 794 1,215 1,777 2,418 3,092 3,762 4,400 22%

% of mobile subscribers 10% 14% 20% 27% 35% 43% 50% 56%

New adds 171 290 420 563 641 674 670 638 0%

Replacements 134 204 305 457 650 869 1,088 1,300 26%

Smartphone units 305 494 725 1,019 1,291 1,542 1,758 1,938 15%

YoY 76% 62% 47% 41% 27% 20% 14% 10%

Smartphone ASPs $363 $361 $329 $283 $250 $225 $203 $183 -10%

YoY 1% -1% -9% -14% -12% -10% -10% -10%

Smartphone revenue $110,596 $178,393 $238,557 $288,439 $323,147 $347,562 $356,502 $353,762 3%

YoY 78% 61% 34% 21% 12% 8% 3% -1%

2010 2011 2012 2013 2014E 2015E 2016E 2017E

Mediatek units 500 540 502 577 680 757 817 886

MStar units 10 49 76 0 0 0 0 0

Spreadtrum units 89 199 269 361 375 359 351 351

RDA units 1 10 96 138 65 25 0 0

Leadcore units 3 5 12 16 25 30 35

Hi-Silicon units 0 0 3 15 20 30 36

Asian baseband shipments 601 801 947 1,091 1,152 1,186 1,228 1,308

YoY Growth 59% 33% 18% 15% 6% 3% 4% 7%

% of industry 36% 43% 49% 56% 58% 58% 58% 60%21% 12% 5% 9% 2% 1% 2% 3%

CS Handset Estimates 1,652 1,852 1,919 1,941 1,990 2,056 2,119 2,166

YoY Growth 21% 12% 4% 1% 2% 3% 3% 2%

CS Prior Estimates 1,616 1,852 1,975 2,086 2,149 2,209 2,275 2,334

YoY Growth 17% 15% 7% 6% 3% 3% 3% 3%

Asian chipset shipments

+6%/+3% YoY in 2014/2015

Smartphone revenue CAGR

at 3% through 2017E, but

an upside scenario still

implies a 7% CAGR

13 January 2015


Figure 16: Mobile growth could stay higher with faster penetration/replacement cycles


We would note an upside scenario where penetration remains stable at the current 7.9%

rate and the replacement rate remains stable at 2.74 years. This would raise the 2014-17E

CAGR from 3.1% to 7.4% and keep smartphones at mid-to-high single-digit growth rates

through 2017, creating some continued investment opportunities.

Figure 17: Smartphone revenue CAGR near 8% if

replacement and penetration rates maintain 2014 levels

Figure 18: Smartphone units could reach 2.19 bn in 2017

versus the baseline forecast of 1.94 bn units


Smartphones have now penetrated 35% of mobile subscriber base in 2014, similar to

penetration rates for handsets in 2005, implying more penetration in emerging markets still

ahead. Our forecast through 2017 pegs smartphone penetration reaching 60% by that

year at 4.5 bn smartphone subscribers, equal to where handset penetration reached at the

dawn of the financial crisis in 2008.

CS Global Model 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 14-17 CAGR

Mobile subscribers 3,866 4,495 5,175 5,780 6,155 6,545 6,890 7,215 7,538 7,861 4.5%

Smartphone subscribers 257 333 504 794 1,215 1,777 2,418 3,092 3,762 4,400 22.1% % penetration 6.7% 7.4% 9.7% 13.7% 19.7% 27.2% 35.1% 42.9% 49.9% 56.0% 7.2%

Net additions 72 76 171 290 420 563 641 674 670 638

Replacements 78 98 134 204 305 457 650 869 1,088 1,300 26.0% Replacement rate 2.5 2.6 2.5 2.5 2.6 2.7 2.7 2.8 2.8 2.9

Smartphone units 151 173 305 494 725 1,019 1,291 1,542 1,758 1,938 14.5%

YoY 46.7% 40.5% 26.6% 19.5% 14.0% 10.3%ASPs $366 $359 $363 $361 $329 $283 $250 $225 $203 $183 -10.0%

YoY 2.1% 2.1% 2.1% 2.1% -8.9% -14.0% -11.5% -10.0% -10.0% -10.0%Revenue $55.1 $62.1 $110.6 $178.4 $238.6 $288.4 $323.1 $347.6 $356.5 $353.8 3.1%

Smartphone Revenue YoY 33.7% 20.9% 12.0% 7.6% 2.6% -0.8%

Upside Penetration 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 14-17 CAGR

Mobile subscribers 3,866 4,495 5,175 5,780 6,155 6,545 6,890 7,215 7,538 7,861 4.5%

Smartphone subscribers 257 333 504 794 1,215 1,777 2,418 3,105 3,843 4,632 24.2% % penetration 6.7% 7.4% 9.7% 13.7% 19.7% 27.2% 35.1% 43.0% 51.0% 58.9% 7.9%

Net additions 72 76 171 290 420 563 641 687 738 789

Replacements 78 98 134 204 305 457 650 884 1,135 1,404 29.3% Replacement rate 2.5 2.5 2.5 2.5 2.6 2.7 2.7 2.7 2.7 2.7

Smartphone units 151 173 305 494 725 1,019 1,291 1,571 1,872 2,194 19.3%

YoY 46.7% 40.5% 26.6% 21.7% 19.2% 17.1%ASPs $366 $359 $363 $361 $329 $283 $250 $225 $203 $183 -10.0%

YoY 2.1% 2.1% 2.1% 2.1% -8.9% -14.0% -11.5% -10.0% -10.0% -10.0%Revenue $55.1 $62.1 $110.6 $178.4 $238.6 $288.4 $323.1 $353.9 $379.8 $400.4 7.4%

YoY 33.7% 20.9% 12.0% 9.5% 7.3% 5.4%

Smartphone Replacement Years

$0 2.94 2.84 2.74 2.64 2.54

6.2% 6.2% 6.2% 6.2% 6.2% 6.2%

6.9% 6.9% 6.9% 6.9% 6.9% 6.9%

7.4% 7.4% 7.4% 7.4% 7.4% 7.4%

7.9% 7.9% 7.9% 7.9% 7.9% 7.9%

8.4% 8.4% 8.4% 8.4% 8.4% 8.4%

8.9% 8.9% 8.9% 8.9% 8.9% 8.9%

9.4% 9.4% 9.4% 9.4% 9.4% 9.4%Pen

etr

ati

on

Pace

Smartphone Replacement Years

$2,194 2.85 2.79 2.74 2.69 2.64

6.7% 1,938 1,965 1,988 2,013 2,038

7.1% 2,005 2,033 2,057 2,082 2,108

7.5% 2,072 2,101 2,125 2,151 2,177

7.9% 2,139 2,168 2,194 2,220 2,247

8.3% 2,206 2,236 2,262 2,289 2,316

8.7% 2,273 2,304 2,330 2,358 2,386

9.1% 2,341 2,372 2,399 2,427 2,456Pen

etr

ati

on

Pace

13 January 2015


Figure 19: Smartphone penetration in 2014 at 35%, where handsets were in 2004 (in millions, unless otherwise stated)


The smartphone cycle is happening much faster than the original handset penetration

cycle a decade earlier in emerging markets due to rising affordability, lower-cost

smartphones, full turnkey chipset reference designs and cannibalisation by smartphones

of other consumer devices (PNDs, digital cameras, music players and gaming).

Smartphones have reached 1.3 bn units four years faster than handsets reached 1.3 bn

units and emerging market smartphones are now at 1 bn units, 3.5 years faster than

handsets reached that level.

Figure 20: Smartphone penetration three years faster than

handsets ten years ago

Figure 21: Emerging market smartphones also at a three-

year faster pace versus emerging market handsets


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Handset penetration Smartphone penetration

Penetration (%)Subscribers (mn)

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Handsets (Actual) Smartphones (CS)

Units (mn)

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Emerging Mkt Handsets (Actual) Emerging Mkt Smartphones (CS)

Units (mn)

3.5 years

2.5 years

4 years

13 January 2015


Growth still from emerging markets and extension into wearables/IoT With developed markets having slowed to low single-digit growth, emerging markets still

fuel some growth, with wearables and Internet of Things' applications providing adjacent

addressable markets for baseband, processing, connectivity and sensors. Emerging

markets are still extending growth for smartphones for another few years. Relative to

developed markets at a 5% CAGR between 2014 and 2017, we project China has a 9%

CAGR and other emerging markets a 24% CAGR, owing to rising penetration in India, the

Middle East, Brazil and Africa. The faster growth from these areas is lifting emerging

market smartphones from 70% to 80% of smartphone units by 2017.

Figure 22: Emerging markets to approach 80% of the global smartphone market

Source: Gartner, Credit Suisse estimates

Market growth is now maturing in China so the focus should shift to other emerging

markets. We project China will see a 9% CAGR from 420 mn units in 2014 to 473 mn in

2015 and 538 mn by 2017. Emerging markets that are key targets for Chinese brands

exporting handsets should still grow faster, from 530 mn in 2014 to 706 mn in 2015, and

1,010 mn by 2017.

Figure 23: Emerging markets and China continue to outpace developed markets


Low 3G penetration driving a 4G replacement cycle

The Chinese market is now becoming more of an upgrade market for second smartphone

buyers upgrading from 2G and 3G to 4G. China Mobile's inferior 3G TD-SCDMA network

has left its penetration still lagging the other carriers. Even with a late 2014 acceleration of

0%

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China Rest of Asia Pacific Latin America

CEMA % of global market

% of industryEmerging market smartphones (mn)

2010 2011 2012 2013E 2014E 2015E 2016E 2017E 14-17

China 36.1 90.6 214.2 350.7 419.7 472.5 518.7 538.7 9%

YoY 151% 136% 64% 20% 13% 10% 4%

Rest of Asia Pacific 47.1 78.8 98.9 148.8 218.0 293.8 369.6 447.1 27%

Latin America 18.7 32.0 53.5 97.8 135.9 169.4 199.2 221.5 18%

CEMA 36.4 55.3 72.2 105.0 175.5 242.7 291.0 340.9 25%

Other Emerging 102.2 166.0 224.6 351.6 529.5 705.9 859.8 1,009.5 24%

YoY 62% 35% 57% 51% 33% 22% 17%

Developed 166.3 237.9 286.7 317.1 341.4 363.8 379.3 389.7 5%

YoY 43% 21% 11% 8% 7% 4% 3%

Total industry 304.7 494.4 725.5 1,019.4 1,290.5 1,542.2 1,757.7 1,938.0 15%

YoY 62% 47% 41% 27% 20% 14% 10%

China and emerging market

smartphones at 9%/24%

CAGRs versus developed

market's 5% over 2014-

2017E

13 January 2015


LTE, 3G+4G penetration is only 40% of its 800 mn subscriber base, lagging 50% to China

Unicom and 60% to China Telecom.

China Mobile is now on target to pass its 80 mn LTE unit target in 2014 and targets

150 mn units in 2015. The other carriers, China Unicom and China Telecom, are deploying

LTE so should see accelerating growth this year.

Figure 24: China Mobile's 3G+4G forms only 39% of its

800 mn subs, lagging the smaller carriers

Figure 25: China Mobile's net adds now accelerating


The China smartphone market is now dominated by local Chinese brands whose offerings

have improved in quality, branding and R&D, with better support from turnkey chipset

reference designs. The traditional tier-one market share is expected to decline from 60%

in 2011 to 20% by 2015, and the top-5 Chinese brands (Hauwei, Xiaomi [not listed],

Lenovo, ZTE and Coolpad) now have half the local marke,t and other brands and whitebox

have a further 30% share.

Figure 26: China’s smartphone market to grow from 420 mn in 2014 to 540 mn by 2017E (in millions, unless otherwise stated)


We expect Tier-ones to continue to undergrow relative to local Chinese brands. Every tier-

one has lost market share, with even Samsung dropping share from 18% to 13% in 2014

and Nokia, HTC, Motorola (now part of Lenovo) and Sony all declining in shipments. As a

group, Tier-one shipments declined from 98 mn to 92 mn in 2014 while the top-5 in China

grew from 139 mn to 208 mn, and the smaller Chinese brands still grew from 113 mn to

120 mn. Even globally, China's quarterly shipments are now 2x Samsung's shipment rate

and almost 3x Apple's shipments.

0.0

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4G net adds (mn)

China Mobile China Unicom China Telecom

China Smartphone Market 2011 2012 2013 2014E 2015E 2016E 2017E 14-17 CAGR

Samsung 14.4 30.2 58.9 54.0 58.0 62.0 64.0 6%

Apple 7.7 19.4 25.6 28.0 30.0 32.0 34.0 7%

Nokia 22.2 7.9 3.6 2.5 2.3 2.1 2.0 -7%

HTC 2.3 6.4 5.0 4.3 4.0 3.8 3.6 -6%

Motorola 4.7 4.3 1.8 0.3 0.0 0.0 0.0 -100%

Sony 3.0 2.3 3.2 2.3 2.2 2.1 2.0 -5%

BlackBerry 0.3 0.1 0.1 0.1 0.1 0.1 0.1 0%

Traditional Tier One's 54.7 70.6 98.2 91.5 96.6 102.1 105.7 5%

YoY Growth 29% 39% -7% 6% 6% 4%

Share 60% 33% 28% 22% 20% 20% 20%

Huawei 7.9 17.3 30.0 38.5 55.1 72.1 76.4 26%

Xiaomi 0.4 7.2 18.1 54.0 60.0 66.0 70.0 9%

Lenovo 1.7 21.5 40.5 50.4 52.5 56.7 58.3 5%

ZTE 6.1 14.9 19.9 19.2 21.3 22.2 23.6 7%

Coolpad 3.4 15.5 30.8 45.4 52.5 57.5 60.5 10%

Top 5 Chinese Brands 19.5 76.4 139.4 207.5 241.3 274.5 288.8 12%

YoY Growth 292.5% 82.5% 48.9% 16.3% 13.7% 5.2%

Share 21.5% 35.7% 39.7% 49.4% 51.1% 52.9% 53.6%

Other brands/whitebox 16.4 67.2 113.2 120.7 134.5 142.1 144.3 6%

YoY Growth 310% 68% 7% 11% 6% 2%

Share 18% 31% 32% 29% 28% 27% 27%

China Smartphones 90.6 214.2 350.7 419.7 472.5 518.7 538.7 9%

YoY Growth 136% 64% 20% 13% 10% 4%

Chinese local brands now

dominate the China

smartphone market

13 January 2015


Figure 27: Chinese brands leading the growth Figure 28: Tier-one's outpaced by Chinese brands

Source: Gartner Source: Company data, Credit Suisse estimates

Chinese smartphone brands are making a big push now on LTE, introducing a number of

low-cost models with Snapdragon 410 and MediaTek's MT6732 quad-core and also using

MediaTek's flagship high-end MT6795.

Figure 29: Chinese smartphone vendors improving in quality and specifications with lower cost LTE products

Source: Company data, Credit Suisse Research

We note that the whitebox and other brands which are expanding as Tier-two brands

(Hisense, BBK/Vivo, Oppo, Gionee, Tianyu/K-Touch, TCL) (all not listed) are becoming

household names in China and emerging markets, as the quality and volumes grow. Our

bottom-up analysis of Asia-built smartphones shows the top Chinese brands in the long

term would account for 65% of the market for Asian-built smartphones, with whitebox

brands commanding the other 35% of volumes, a similar mix to feature phones.

Figure 30: Chinese suppliers continue to ramp up their volumes


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2011 2012 2013 2014E 2015E 2016E 2017E

Traditional Tier One's Top 5 Chinese Brands

Other brands/whitebox Chinese brand share

Units (mn) China brand share (%)

China brand units (mn) 2011 2012 2013 2014E 2015E 2016E 2017E 14-17 CAGR

Huawei 15.6 27.2 52.0 77.0 100.1 120.1 144.1 23%

Lenovo 1.7 21.7 50.0 63.0 75.0 90.0 110.0 20%

Xiaomi 0.4 7.2 18.7 61.1 100.0 120.0 140.0 32%

ZTE 10.5 26.8 40.0 52.0 64.4 74.1 81.5 16%

Coolpad 3.9 16.1 35.0 50.4 63.3 76.6 88.9 21%

Gionee 0.0 6.8 11.4 12.0 18.0 25.0 30.0 36%

Oppo 0.1 3.1 11.0 30.0 50.0 65.0 75.0 36%

TCL/Alcatel 0.3 6.5 17.5 39.6 54.7 66.7 80.0 26%

Hisense 0.3 3.4 7.2 9.0 11.5 15.0 18.0 26%

Tianyu 0.4 3.6 13.3 12.0 15.0 18.0 21.0 21%

G-Five 0.0 0.0 2.0 5.0 8.0 12.0 12.0 34%

Bird 0.0 0.3 2.1 2.5 5.0 7.0 9.0 53%

BBK/Vivo 0.0 2.5 11.2 30.0 40.0 50.0 60.0 26%

Others 55.0 124.3 206.4 270.6 307.8 355.7 398.9 14%

China brand units (mn) 88.3 249.4 477.8 714.2 912.8 1,095.2 1,268.5 21%

Growth (YoY) 183% 92% 49% 28% 20% 16%

13 January 2015


Emerging market channel still has some growth legs

Smartphones are rising to a high portion of handset sales in China, but still lagging a bit

behind in emerging markets. Smartphones are projected to grow from 74% to 81% of device

sales to lift units +13% YoY to 473 mn units in 2015. The export channel for China brands

into other emerging markets is a bit less penetrated into a larger base. Emerging market

smartphones were 54% of 986 mn units in 2014, but could rise to 92% of 1,099 mn devices

in 2017E, a 24% CAGR from here, outpacing the 9% CAGR in China.

Figure 31: Chinese penetration of devices faster than other emerging markets (in millions, unless otherwise stated)


Asian chipsets may pass the feature phone peak

The market opportunity for Asian chipsets supplying into China handsets peaked at

800 mn units in 2011 out of a 1.4 bn global feature phone market. In smartphones, we

believe the figure could be even higher, as mobile penetration rates are still rising in

emerging markets, smartphone functionality is much higher than feature phones and local

brands and chipsets, with the help of a standardised Android OS, and a more developed

supply chain could improve on their penetration rates achieved in feature phones.

When the feature phone market peaked in 2011, Asian chipset suppliers had secured

about a 50% share of the chipset market. As tier-one chipset and handset suppliers pulled

out of the 2G market, Asian chipset suppliers have grown to 80% of the market share. We

believe Asian chipsets are now at 35% market share in smartphones and could grow to

45-50% by 2017, due to the rising mix of emerging markets in total industry device sales.

Smartphones do not need to peak at the 800 mn units capped for feature phones, as that

upside after 2011 was curtailed as smartphones began replacing feature phones. In this

case, Asian chipsets can ultimately target a ramp-up into the total 2 bn handset industry

shipment base as they convert into smartphones.

Figure 32: Asian feature phone shipments peaked at

800 mn in 2011

Figure 33: Asian chip suppliers continue to penetrate

smartphones


We looked at the success of Chinese brands in feature phones to gauge potential for their

smartphone penetration. Local brands have now reached an 80% smartphone share,

approaching the 80-90% range in feature phones since 2011. In the global market,

however, upside is possible, with Chinese brand share now reaching 45% of global

smartphone shipments, but still short of the 60% market share reached in feature phones.

Penetration of devices 2011 2012 2013 2014E 2015E 2016E 2017E 14-17 CAGR

China handsets 457.7 510.5 548.2 563.8 583.9 604.5 619.1 3%

China smartphones 90.6 214.2 350.7 419.7 472.5 518.7 538.7 9%

% of devices 20% 42% 64% 74% 81% 86% 87%

Emerging mkt handsets 896.8 955.8 959.5 986.1 1,025.8 1,065.7 1,099.3 4%

Emerging mkt smartphones 166.0 224.6 351.6 529.5 705.9 859.8 1,009.5 24%

% of devices 19% 23% 37% 54% 69% 81% 92%

Global handsets 1,818.3 1,907.1 1,944.8 1,983.6 2,046.3 2,109.7 2,158.8 3%

Global smartphones 494.4 725.5 1,019.4 1,290.5 1,542.2 1,757.7 1,938.0 15%

% of devices 27% 38% 52% 65% 75% 83% 90%

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Asian chipsets Feature phones incl. whitebrandsAsian share incl. whitebrands (%)

Chipset units (mn) Asian share (%)

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Asian chipsets Smartphones Asian share (%)

Chipset units (mn) Asian share (%)

Emerging market

smartphone penetration only

at 69% versus 81% in China

Asian feature phones

reached 800 mn units

before saturating

13 January 2015


Figure 34: Chinese smartphone brand share at 80% in

China, still with room to reach 90% in feature phones

Figure 35: Chinese smartphone brand share at 45% of

global smartphones, still below the 60% in feature phones

Source: Gartner Source: Gartner

Low- to mid-tier smartphones more of the volumes

The availability of better-quality low-cost smartphones with more advanced specs is

compressing the mid-to-high tier of the smartphone market. We project sub-US$100

smartphones to stay at 20% of industry volumes, the upper tier of the mass market at

US$100-200 to reach 35% of volumes, the former mid-tier of US$200-400 to squeeze to

15% of units, and the upper tier of US$400+ to remain at 20% of industry volumes.

Figure 36: Low- to mid-end smartphones to pass 50% in

2015

Figure 37: Sub-US$200 smartphones continue to grow


The mid-range in particular is witnessing a squeeze as the low-cost Chinese brands and

whitebox production expand capabilities using: (1) higher-resolution screens; (2) more

advanced cameras; (3) quad- and octa-core chipsets; (4) LTE chipsets from Qualcomm,

Marvell and MediaTek; (5) a growing supply chain of Chinese component suppliers; (6) a

large channel of Chinese-branded companies and whitebox that operate on lower GMs;

(7) R&D; and (8) manufacturing and component costs, and an open and online channel

that sells in emerging markets at thinner marketing and margins.

The low-end is now splitting into several categories of devices, including sub US$50 entry-

tier smartphones from MediaTek and Spreadtrum, high-end 3G quad- and octa-core 5-6"

display smartphones from MediaTek and Qualcomm, and an expanding base of LTE entry

level smartphones that can bring LTE smartphones to under US$100 factory price.

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3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

Chinese brand smartphone share Chinese brand FF share

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2008

2009

2010

2011

2012

2013

2014

2015E

2016E

2017E

$500+

$400<$500

$200<$400

$100<$200

<$1000.0%

15.0%

30.0%

45.0%

60.0%

75.0%

0

400

800

1,200

1,600

2,000

2008

2009

2010

2011

2012

2013

2014

20

15

E

20

16

E

20

17

E

<$100 $100<$200 $200<$400$400<$500 $500+ % <$200

Sub $200 % of industry (%)Smartphone market (mn)

The mid-tier of the market is

compressing from 40% to

15% of volumes

Overall sub-US$200

smartphones still growing

13 January 2015


Figure 38: Chinese vendors bring a 5" LTE smartphone to emerging markets at 20% of the retail price of an iPhone

Source: iSuppli, Chipworks, Company data, Credit Suisse estimates

With Chinese LTE smartphones making the US$100-200 category more competitive, we

now expect sub-US$200 smartphones to account for 57% of industry volumes or 879 mn

units in 2015, up more than 50% from 672 mn units in 2014.

Figure 39: Sub-US$200 smartphones gaining share of the market


64-bit to become ubiquitous in 2015

We are now seeing most vendors bring out 64-bit versions alongside Android 5.0 Lollipop,

the first version of Android able to take full advantage of the 64-bit processors. The feature

will serve as an additional marketing feature and the new ARM 64-bit v.8 architecture

(A53/A57) also has other architectural enhancements for better performance and lower

power (ARM noting 130mW power consumption on 28nm HPM).

Figure 40: ARM 64-bit processors benchmarking at higher performance than 32-bit

All cores running at 1.2GHz DMIPS CoreMark SPECint2000

ARM Cortex A5 1,920 - 350

ARM Cortex A7 2,280 3,840 420

ARM Cortex A9 r4p1 - - 468

ARM Cortex A53 (64-bit) 2,760 4,440 600

Source: Anandtech

Qualcomm announced it would offer its Snapdragon 410 based on the 64-bit ARM Quad

Cortex A53, integrating the LTE modem and running at 1.2-1.4GHz built on 28nm LP for

shipment in 2H14. MediaTek also planned its complete 4G LTE refresh in 1H15 with 64-bit.

Component Specs 16GB 64GB 128GB Component Specs 8GB

Display & Touchscreen 4.7" Retina Display with in-cell touch: 1334x750 $45.00 $45.00 $45.00 Display & Touchscreen 5" IPS 1280x720HD Capacitive Touch LCD $24.00

Application Processor 64-bit A8 on 20nm at TSMC $22.00 $22.00 $22.00 Application Processor No discrete AP $0.00

M8 Co-processor NXP M8 $2.50 $2.50 $2.50 Co-Processor No co-processor $0.00

Wireless Modem - Baseband, RFQCOM MDM9625M + WTR 1625L + WFR 1620 & WFR

1625 + QFE1000$35.00 $35.00 $35.00

Processor, Modem and Connectivity (WLAN,

Bluetooth, FM, GPS), Power MgmtMediatek MT6732 or Qualcomm Snapdragon 410 $13.00

WLAN / BT / FM / GPS BRCM: BT 4.0+FM+Wifi 11ac in a Murata or USI Module $6.00 $6.00 $6.00 WLAN / BT / FM / GPS No discrete connectivity $0.00

NFC IC NXP 65V10 + PN544 controller + AMS AS3923 Booster IC $2.50 $2.50 $2.50 NFC IC No NFC $0.00

Memory (DRAM) 1 GB LPDDR 3 (MU) $6.75 $6.75 $6.75 Memory (DRAM) 1 GB LPDDR 3 (Hynix), lower grade specification $6.00

Memory (NAND) NAND: Hynix 16GB, Toshiba 64/128GB (TLC -20-25%) $5.60 $19.20 $38.40 Memory (NAND) NAND: Micron, Toshiba or Hynix 8GB $3.00

Power amplifier + Switch

Multi-band PA module for global regions (SWKS LTE Low

band and Mid band, Avago LTE High band PAD and PA,

FBAR, TQNT 3G/EDGE PA, Murata, RFMD Antenna

Switch)

$10.00 $10.00 $10.00 Power amplifier + Switch Multi-band PA module for regional markets $4.00

User Interface & Sensors

Accelerometer (Bosch 3-axis, Invensense 6-axis), e-

compass (AKM), Gyro (STM), Temperature, Touch IC

(BRCM BCM5976 + TI 343S0694 transmitter)

$12.00 $12.00 $12.00 User Interface & Sensors Accelerometer, e-compass (AKM), Gyro (STM),

Temperature, Touch IC (FocalTech)$2.50

Fingerprint sensor USI module + Authentec IC $8.00 $8.00 $8.00 Fingerprint sensor None $0.00

AnalogDialog PMIC, Qualcomm PM8019 PMIC, Passives, TI,

MXIM, ISIL$7.50 $7.50 $7.50 Analog Integrated PWM, Sub PMIC (charger, LED driver) $1.00

Audio Codec Cirrus Logic $3.00 $3.00 $3.00 Audio Codec Integrated Codec $0.00

Cameras 8MP (Sony new sensor + Largan) + 1.2 MP (Sony) $15.50 $15.50 $15.50 Cameras 8MP (Sony or Omnivision Sensor + Largan Lens) + 2MP

Front (Galaxy Core)$9.00

Battery 1810 mAh $4.00 $4.00 $4.00 Battery 1,810 mAh (lower grade spec) $3.50

PCB 10-layer Any Layer Stacked Via HDI PCB + flex PCB $4.00 $4.00 $4.00 PCB Low-end HDI $2.20

Charger $3.00 $3.00 $3.00 Charger $0.90

Acoustics AAC speaker box, receiver, microphone (Knowles) $5.70 $5.70 $5.70 Acoustics Antenna, Speaker, Microphone $3.20

Haptics AAC haptics $2.00 $2.00 $2.00 Haptics Basic haptics vibration $0.50

Casing Metal Casing (100% metal) $30.00 $30.00 $30.00 Casing Plastic or Metal Stamping $1.50

Box Contents $7.50 $7.50 $7.50 Box Contents $1.50

Total BOM cost $237.55 $251.15 $270.35 Total BOM cost $75.80

Manufacturing (~7% GM) $18.00 $18.00 $18.00 Manufacturing (6% GM) $4.55

IP licensing (7% - QCOM, ARM, Imagination, Nokia etc) $16.63 $17.58 $18.92 IP licensing (7% - QCOM, ARM, Imagination, Nokia etc) $5.31

BOM + Manufacturing + IP $272.18 $286.73 $307.27 BOM + Manufacturing + IP $85.65

Apple Mark-Up (40% GM) $453.63 $477.88 $512.12 Vendor GM (10% GM) $95.17

Retail & Distribution Mark-Up (20%) $567.04 $597.36 $640.16 Retail & Distribution Margin (20%) $118.96

(Unit: mn) 2010 2011 2012 2013 2014 2015E 2016E 2017E

<$100 0.6 6.2 45.5 163.9 267.8 370.7 422.5 484.5

$100-$200 40.8 97.6 181.5 275.5 403.8 508.1 597.6 678.3

Total Sub US$200 41.5 103.8 227.0 439.4 671.6 878.8 1,020.1 1,162.8

YoY 150% 119% 94% 53% 31% 16% 14%

% of industry 14% 21% 31% 43% 52% 57% 58% 60%

Chinese LTE smartphones

to account for 57% of mix in

2015

13 January 2015


Tablet maturation extends to emerging markets

We estimate that the global tablet market slowed materially in 2014, growing only 6% YoY

to 274 mn versus +63% YoY in 2013. Shipments across iPad, Samsung, Amazon and the

whitebox all stalled out due to long replacement rates, cannibalization by larger

smartphones and limited innovation. We believe the whitebox market grew from 100 mn

units to 120mn units but was well short of some initial projections for 130-150 mn units.

Figure 41: Bottom-up tablet market projected to grow at 8% YoY to 295 mn units in 2015


The tablet market now stretches from very cheap entry-level models for US$25-40 factory

prices for entertainment (games, movies and music) to mini-pad 7.85" with iPad-like specs,

3G and now 4G mobile tablets still dominated by MediaTek and a rising class of Intel

inside tablets. Intel has aggressively engaged the local supply chain with its reference

design for Android and Windows tablets combining subsidies, marketing support, branding

and close work with local ODM suppliers. Factory prices for Intel tablets now start below

US$100, much lower than the US$200-300 solutions in the market 12-18 months ago.

Figure 42: Low-cost white-box tablets—product line-up for 2015


2014 Years Market share

Mar-14 Jun-14 Sep-14 Dec-14E CY2011 CY2012 CY2013 CY2014E 2015 2016 2017

Apple 16,350 13,276 12,316 20,321 40,497 65,736 74,208 62,263 63,254 65,801 71,592

Samsung 10,791 8,635 9,705 10,869 5,711 16,490 39,731 40,000 47,096 48,473 60,468

Amazon 994 186 367 5,230 4,748 10,436 9,779 6,777 7,658 8,037 9,923

Asus 2,579 2,526 3,405 2,730 1,730 6,843 12,209 11,240 13,658 14,992 19,436

Lenovo 2,045 2,374 3,063 2,476 764 2,101 7,782 9,958 12,467 13,243 17,277

Acer 733 970 1,227 997 2,002 1,496 4,855 3,928 4,829 7,496 10,181

Microsoft 543 438 576 855 0 840 2,281 2,411 3,309 3,998 5,553

HPQ 518 433 510 682 935 64 1,985 2,143 2,430 2,550 3,149

Motorola (bought by Lenovo) 10 2 1 17 1,034 306 120 29 33 35 43

Dell 484 441 421 338 186 96 782 1,684 1,911 2,005 2,476

Blackberry 0 0 0 16 1,177 839 353 16 378 397 490

Barnes & Noble 165 144 138 615 3,344 1,911 1,306 1,062 1,202 1,261 1,557

RCA 370 496 2,624 168 0 0 1,190 3,657 6,020 6,318 8,021

Huawei 458 787 738 515 337 1,119 1,539 2,499 3,834 4,747 6,170

Verizon 18 793 903 1,130 0 0 16 2,844 4,120 4,497 5,862

Advan 122 675 833 188 0 93 580 1,817 2,316 2,748 3,702

HTC 0 0 0 1 362 62 16 1 17 18 22

TCL 60 290 512 1,200 0 0 0 2,062 4,000 5,000 6,500

Total branded tablets 36,240 32,466 37,338 48,348 62,828 108,431 158,734 154,391 178,531 191,616 232,422

Others (industry model) 13,766 15,313 18,312 18,686 13,299 35,698 61,044 66,077 73,093 75,828 49,373

Industry forecast 50,006 47,779 55,650 67,033 76,127 144,129 219,778 220,468 251,625 267,444 281,795

Additional Whitebox 13,396 14,030 13,676 12,352 0 14,302 38,956 53,454 51,907 54,172 85,627

Whitebox total 27,162 29,343 31,988 31,037 13,299 50,000 100,000 119,531 125,000 130,000 135,000

Grand Total 63,402 61,809 69,326 79,385 76,127 158,431 258,734 273,922 303,531 321,616 367,422

YoY % 8.6% 21.8% 12.3% -9.7% 108.1% 63.3% 5.9% 10.8% 6.0% 14.2%

QoQ % -27.9% -2.5% 12.2% 14.5%

Ultra-low-end Mini Pad High-end 3G Mobile Ultra-high-end Intel Intel

Allwinner Rockchip Mediatek Mediatek Rockchip Intel Intel

A23 RK3188T MT8127 MT8312 RK3188 Bay Trail Bay Trail

Dual Core Quad core Quad core Dual core Quad core Dual core Dual core

1.5GHz 1.4GHz 1.3GHz 1.2GHz 1.6GHz x86 x86

Graphics ARM Mali-400 ARM Mali-400 ARM Mali-450 ARM Mali-400 ARM Mali-400 Intel In-house GPU Intel In-house GPU

Screen Size 7" 7.85" 10.1" 7" 9.7" Retina 7.0" 10.1"

Resolution 800 x 480 1024 x 768 1024 x 600 1024 x 600 2048 x 1536 1280 x 800 1280 x 800

Video NA NA NA NA NA 1080p 2160p

DRAM / Flash 512MB DDR3/4GB 1GB DDR3 / 8GB 1GB / 8GB 1GB / 8GB 2G DDR3 / 16GB 1GB / 16GB 2GB / 16GB

OS Android 4.4 Android 4.4 Android 4.4 Android 4.4 Android 4.4 Windows 8.1 Windows 8.1

Camera 0.3MP + 0.3MP 2MP + 2MP 0.3MP + 2MP 0.3MP + 2MP 2MP + 2MP 2MP + 2MP 2MP + 5MP

3G built-in NO NO NO YES NO YES YES

Factory price $30 $85 $62 $60 $132 $78 $140

CPU

Chipset

Tablet market to grow 6%

and 8% YoY in 2014/2015,

down significantly from

63% YoY in 2013

13 January 2015


With a long-term view, tablets are pacing the very early stage of the feature phone market

in the late 1990s and smartphone market starting from 2005 in their ramp-up towards 300-

400 mn units. Mobile communications, rising functionality and display size of emerging

market smartphones into the phablet category could ultimately cap the market around

400 mn units, as handsets did when they temporarily matured at those levels in 2000-02.

Figure 43: Whitebox share gains now slowing down Figure 44: Tablet market stalling before phones


The tablet chipset market is still relatively fragmented after Apple, due to relatively lower

barriers in ARM-based processors, allowing chipsets from Chinese suppliers Allwinner

(not listed), Rockchip (not listed) and Actions (not listed) to maintain high shipments in

entry tablets. In the past few years, however, both Intel with its Bay Trail push and

MediaTek with its push into communications/entertainment-geared tablet bundling

connectivity have both ramped into the #2/#3 positions after Apple with just over 40 mn

units shipped in 2014.

Figure 45: Tablet baseband market still fragmented Figure 46: Tablet chipset unit market share


Wearables including Android sports watches adding another potential driver Industry projections are upbeat on silicon into the Internet of Things, a broad growth driver

connecting all objects to the Internet and communicating with and controlling other

devices. The silicon enablers include low power microcontrollers to process the data,

sensors to gather input from the environment, and connectivity to communicate either

through to the cellular or wireline network or across the local network. Gartner projects

silicon for IoT to maintain a robust 29% CAGR over 2013-20 from US$7.2 bn to

US$43.5 bn.

Apple

Apple

AppleApple Apple Apple Apple

Samsung

Samsung

Samsung

Samsung Samsung Samsung Samsung

Amazon

Amazon

Amazon

Amazon Amazon Amazon Amazon

Asus

Asus

Asus

Asus Asus Asus Asus

Whitebox

WhiteboxWhitebox

Whitebox Whitebox Whitebox Whitebox

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

CY2011 CY2012 CY2013 CY2014E 2015E 2016E 2017E

0

500

1000

1500

2000

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

Tablets

Feature phones (re-based from 1995)

Smartphones (re-based from 2005)

Mn (units)

Apple Ax

Apple AxApple Ax

Rockchip

Rockchip

Rockchip

MediatekMediatek

Mediatek

Intel Intel

IntelAllwinnerAllwinner

AllwinnerSamsung Exynos

Samsung Exynos

Samsung Exynos

Qualcomm Qualcomm

Qualcomm

NVIDIA Tegra

NVIDIA Tegra

NVIDIA TegraTI OMAP

TI OMAP TI OMAPOther Other Other

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012 2013 2014

Tablet Chipset Market Units (mn) Market Share (%)

2012 2013 2014 2012 2013 2014

Apple Ax 65.8 74.3 62.3 42% 29% 23%

Rockchip 12.4 35.0 35.0 8% 14% 13%

Mediatek 3.0 21.9 41.9 2% 8% 15%

Intel 2.0 11.0 40.0 1% 4% 15%

Allwinner 18.3 35.0 35.0 12% 14% 13%

Samsung Exynos 12.6 20.0 20.0 8% 8% 7%

Qualcomm 3.9 10.0 10.0 2% 4% 4%

NVIDIA Tegra 13.4 20.0 5.0 8% 8% 2%

TI OMAP 12.0 10.0 0.0 8% 4% 0%

Actions 1.0 7.0 8.0 1% 3% 3%

RDA, AMLogic, Ingenic, Via 14.1 14.7 16.7 9% 6% 6%

Total 158.5 258.8 273.9 100% 100% 100%

Entry tablet chipset players

Allwinner, Rockchip, Actions

still have sizeable units but

Intel and MediaTek now

leading outside Apple

IoT silicon growth could stay

strong with a 29% CAGR

through 2020

13 January 2015


Figure 47: Internet of Things Silicon witnessing high growth

Source: Gartner

More and more vendors are creatively adopting MediaTek’s dual-core processor and

connectivity bundle (Aster, MT6572 and MT6577) to develop smart watches. The solutions

offer a compact Android smartphone experience in a watch for a broad span of prices

ranging from US$30 to US$250, and include 3G calling, Bluetooth connectivity for

headsets, email/ browsing, and watch and calendar functions.

Figure 48: Interesting wearables emerging Figure 49: Wearables for monitoring pets

Source: Company data, Credit Suisse Research Source: Company data, Credit Suisse Research

The wearable space is still in its infancy but we expect to see an emerging range of

whitebox and China-built products using the Asian supply chain. Baseband, RF and

connectivity suppliers including MediaTek, Spreadtrum and Realtek could see an adjacent

market emerge here, joining a broad base of overseas MCU, connectivity and sensor

manufacturers.

The wearable market opens up a potentially large market profiled by our tech team

(Pitzer/Garcha): a potential US$43 bn addressable opportunity at 15% penetration of the

smartphone subscriber base, at a US$100 device ASP, opening up US$1.9 bn in

additional foundry manufacturing content and 4% of incremental sales for TSMC by 2015E

at 50% manufacturing share.

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

20

13

20

14

20

15E

20

16E

20

17E

20

18E

20

19E

20

20E

YoY (%)Sales (US$)

ASSP / FPGA Microcontroller Sensors Bluetooth

Cellular Wi-Fi ZigBee Other Wireless

Wireline YoY Growth

MediaTek enabling low-cost

wearable products

13 January 2015


Figure 50: The wearables/IoT supply chain in Asia


We profile the opportunity for wearables and the broader Internet of Things connecting

every device which spans several major categories:

■ Silicon. Key IC devices include the main processor (a low power Microcontroller or

integrated mobile processor), connectivity (Wi-Fi, GPS, Bluetooth Smart, NFC,

Zigbee), memory, and sensors. Lead suppliers would be the foundries (TSMC for

leading edge, Hua Hong and Vanguard for 8"), IC design (MediaTek, Elan, Holtek), IP

(eMemory) and analog (Richtek, Silergy, On-Bright, GMT).

■ Hardware. The Asian brands (Samsung, LG, Huawei, Xiaomi) are all looking to

participate and contract manufacturers (Hon Hai, Quanta, USI) should benefit.

Function Technology Reason Problem Solved Global Providers Asia ex Japan chain

IC Mfg Foundry / Back-end

Contract manufacturers investing in specialty

technology (CIS, high voltage, MEMs,

embedded memory, 2.5D/3D IC)

Low cost and low power IC componentsIDMs (STM, NXP,

Renasas, TXN)

TSMC, UMC, SMIC,

Huahong Semi,

Vanguard, ASE, SPIL,

KYEC, Xintec, Win

Semi

Processor Low Power MCU/CPU

In smaller devices with less battery power,

minimizing the processing power requirement

on-board is critical for product battery life

On board compute requires low active,

standby and response to wake commands

FSL, MCHP, TXN,

NXPI, SLAB, CY,

ATML

Holtek, Elan, Mediatek

Memory DRAM, NANDStorage for pictures, music, and program

codeLow power DDR memory and TLC NAND

IDMs (Samsung,

Hynix, Micron)

Inotera, Nanya,

Winbond, ChipMos,

Powertech, Adata,

Phison, SIMO

Embedded FlashFlash in smart cards,

MCUs, sensors

Embedded flash is used for storage of code

and trimming circuit data

Memory on board provides fast cache of

important data and allows smaller form

factors

Cypress, Microchip,

Sidense, Kilopass,

Synopsys

eMemory (NVM IPs),

Huahong Semi (eNVM

foundry)

Connectivity Bluetooth 4.0/LE

Need low power wireless connection and

sufficient data rate to offload to

smartphones/cloud

Wearable-to-smartphone data connectionBRCM, QCOM,

SLABMediatek, RDA, Realtek

Connectivity WiFiHigher data rate applications will benefit from

the throughput of 11n or 11ac WiFi

Wearable-to-WiFi hotspot and smartphone

connectionn

BRCM, QCOM,

NXPI, TXNMediatek, RDA, Realtek

Connectivity GPSWearable products will likely include location

based features/functions, requiring GPS

Wearable-to-WiFi hotspot and smartphone

connectionn

BRCM, QCOM,

NXPI, TXNMediatek, Mitac

Power Mgmt DC-DC Conversion

Converting battery power into the correct

voltage/current is not without energy loss -

conversion is 80-95% efficient.

Increasing the conversion efficiency lowers

the effective battery consumption

MXIM, TXN, SWKS,

ONNN

Richtek, Silergy, On-

Bright, GMT

Sensors

Motion, Environmental,

and Body Monitors

Sensors

Wearables will be used to measure activity

levels, distance traveled, vital statistics, etc. to

be processed and/or communicated to other

devices/the cloud

Wearables will be used for a host of health

and fitness functions, requiring

sensing/monitoring and tracking of changes

in measured inputs

ADI, INVN, STM,

TXN, SLAB,

Freescale, NXPI

ASE, Elan,

FocalTech/Orise,

ChipMOS, Xintec,

EgisTech

Hardware

Clothing, Watches,

Glasses, Medical

devices

Connected gear that improves interaction with

our environment and others

Devices that can better capture and enhance

our life experiences

Sony, Samsung,

Apple, Google, Nike

Samsung, LG, Acer,

Asus, HTC, Huawei,

Xiaomi

Manufacturing Low cost EMSAsian EMS providers have relationships with

key OEMs

Ability to reach high volume manufacturing at

low costFlextronics, Jabil

Hon Hai, Pegatron,

Inventec, Mitac, USI

(ASE)

Battery Battery Composition

Limited form factor of mobile devices requires

increasing energy density of battery - size

growth not likely

Increased function and operating use time,

eliminate battery rigidity, reduce lithium

hazard

Sony, SamsungBYD, Simplo,

Dynapack

Displays LCOS, E-Ink, OLEDWearable display needs to be portable with

high resolution

LCOS displays can project an image in front

of the user at good resolution and low powerSony

Himax Display, Truly, E-

Ink, Samsung, LGD,

Orise/FocalTech

CamerasCMOS image sensors,

Lens, Camera Modules

Cameras can provide real time image capture

in glasses and watches

Wearable image capture, Sports DV a

popular product for Chicony

OVTI, On Semi,

Sony

Largan, Lite-On Tech,

Sunny Optical,

Chicony, Himax,

GalaxyCore

Interface Touch Display

Wearables with displays will likely be enabled

with touch. The ability to have touch function

independent of powering the display could

help reduce battery life

Wearables with large enough displays will

need a user interface. But smaller low power

displays needed to conserve power

SYNA, BRCM, CY,

ATML

O-Film, Elan, TPK,

Wintek, Youngfast, J-

Touch, Truly,

Focaltech, GIS

Interface Voice

Wearable products may not have physical

inputs, directing by voice activation or use of

MEMs microphone

Contact-less control of wireless devices will

likely be voice driven. Isolating voice relative

to ambient noise will be important

ADNC, CRUS AAC, Goertek, Merry

Component Any layer HDI Putting more circuits in a smaller/thinner PCB Can fit into the limited room in wearables Ibiden, SEMCOUnimicron, Compeq,

Unitech

Component FPCConnecting components or act as the

substrate for ICsSave the limited room for other components

Nippon Mektron,

Fujikura

ZDT, Flexium, Career

Tech, Ichia

Component Crystal component Provide frequencies to synchronize operations Need to be small in the form factorEpson Toyocom,

NDK, KDS, KyoceraTXC

Wearables could add up to

10% sales for TSMC by

2016E

13 January 2015


■ Display. Wearable displays that are portable and high resolution support Himax with

its LCOS, touch supply chain players TPK, Elan, O-Film and FocalTech, and the

display suppliers (Samsung, LGD, AUO, Innolux, Truly).

■ Camera. The camera lens (Largan), module (Sunny Optical), module makers

(Chicony), packaging (Xintec) and image sensors (Sony, Omnivision, GalaxyCore).

■ Components. Key components include PCBs, Flexible PCB IC substrate, and crystal

components in small form factor devices.

Figure 51: Wearables could add 10% to TSMC's sales by 2016E


Smartphone subscribers 2,263.7 2,263.7 2,263.7 2,837.4 2,837.4 2,837.4 3,263.1 3,263.1 3,263.1

Penetration 3.0% 5.0% 7.0% 7.0% 10.0% 13.0% 12.0% 15.0% 18.0%

Units 67.9 113.2 158.5 198.6 283.7 368.9 391.6 489.5 587.4

ASP ($) $75 $150 $250 $75 $150 $250 $75 $150 $250

TAM ($m) $5,093 $16,978 $39,614 $14,897 $42,562 $92,217 $29,368 $73,419 $146,838

COGS (35% GM) $3,311 $11,035 $25,749 $9,683 $27,665 $59,941 $19,089 $47,722 $95,445

Semi Content (20% of COGS) $662 $2,207 $5,150 $1,937 $5,533 $11,988 $3,818 $9,544 $19,089

Foundry (35% of Semi content) $232 $772 $1,802 $678 $1,937 $4,196 $1,336 $3,341 $6,681

TSMC (50% market share) $116 $386 $901 $339 $968 $2,098 $668 $1,670 $3,341

TSMC % of sales 0.5% 1.5% 3.6% 1.2% 3.4% 7.4% 2.1% 5.3% 10.7%

Connectivity $221 $883 $1,373 $646 $2,213 $3,197 $1,273 $3,818 $5,090

CPU $110 $353 $1,717 $323 $885 $3,996 $636 $1,527 $6,363

Power $110 $235 $515 $323 $590 $1,199 $636 $1,018 $1,909

Sensor $110 $294 $858 $323 $738 $1,998 $636 $1,273 $3,181

GPS $0 $147 $343 $0 $369 $799 $0 $636 $1,273

Misc $110 $294 $343 $323 $738 $799 $636 $1,273 $1,273

2014 2015 2016

13 January 2015


LTE transition in focus; Qualcomm leading, but MediaTek emerging Key themes in the Asian chipset landscape should be extension of growth in 3G markets

from emerging market penetration, but increasingly from the 4G transition, and the

upgrade cycle starting from China but also spilling into some emerging markets. LTE is a

meaningful driver, with our global model projecting handsets growing from 24% of 2014

volumes to 56% by 2017 or 1 bn units, and 60% of the global population by 2019.

Figure 52: LTE handset shipments to triple by 2017 Figure 53: LTE to reach 60% of global subs by 2019

Source: Company data, Credit Suisse estimates Source: Ericsson, Credit Suisse estimates

China seeing an acceleration of LTE

China made substantial progress rolling out LTE in 2014, with China Mobile on pace to

exceed its 80 mn subscriber target exiting 2014. Our CS Telco analyst Colin McCallum

indicated China Mobile coverage across Beijing, Shenzhen and Nanjing had improved to

96% of locations tested in "Implications of a Level Playing Field". China Mobile's offerings

by 4Q14 had expanded to 24 models from 12 brands, with the cheapest phone dropping to

US$82 using a MediaTek chipset.

Figure 54: 4G handsets available as of October 2014


China Mobile's infrastructure has expanded substantially, growing from 73k exiting 2013,

410k by 2Q14 and on pace to reach 650k exiting 2014 (above its 500k target), with 900k

by December 2015 (vs. 920k GSM and 500k TD-SCDMA) to ensure excellent coverage

across the top-100 China cities and good coverage out to 360 cities. China Unicom will

have 100k base stations exiting 2014 and targets 260k exiting 2015 (vs. 440k GSM and

529k WCDMA). China Unicom is also offering 33 models from 15 brands. China Telecom

should have 200k at the end of 2014 and targets 350k at the end of 2015, surpassing its

270k on CDMA 2000 and 270k on CDMA EV-DO.

305

405

442

560

758

886

990 1,002

0%

10%

20%

30%

40%

50%

60%

0

200

400

600

800

1,000

1,200

2011 2012E 2013E 2014E 2015E 2016E 2017E 2018E

% o

f t

ota

l h

an

dse

ts s

hip

pe

d

LTE

Vo

lum

es

Asia Pacific North America Western Europe Africa

CEE Latin America Middle East % of the handset market

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

GSM/EDGE WCDMA/HSPA LTE

2010 2012 2013 2019

85% >85%>85%

>90%

35%

>55%

>60%

>90%

2%

10%

20%

>65%

# of brands # of models Price range Cheapest model Most expensive model

China Mobile 4G (TD) 12 24 US$81.6-735.7 TCL P301M (Rmb498) iPhone 5s (Rmb4,488)

Unicom 4G (TD) 15 33 US$124-885 Lenovo A606 (Rmb759) Samsung Note4 (Rmb5,399)

Unicom 3G (WCDMA)* 65 801* US$33-736 Coolpad 7235 (Rmb199) iPhone 5s (Rmb4,488)

China Telecom 4G 6 9 US$115-623 Coolpad 5892 (Rmb699) Samsung Galaxy S5 (Rmb 3,799)

2015 drivers: continued 3G

growth in emerging market,

4G upgrade both in China

and exports

China Mobile LTE reached

80 mn subscribers exiting

2015

13 January 2015


Figure 55: Estimated number of BTS in the China Market

Source: Company data, Credit Suisse estimates, CS Telco analyst Colin McCallum

Chipset volumes now shifting toward LTE

With the ramp of LTE in China and starting into other emerging markets, growth should

continue but with mix shifting increasingly towards LTE. We estimate that Asian chipsets

have grown 50% YoY to 717 mn in 2014 and project 28% YoY growth to 918 mn units, a

bit over handset industry growth of +20% YoY since most of the growth is in emerging

markets.

Figure 56: Smartphone chipsets into Asian smartphones to reach 960 mn units by 2017E (in millions, unless otherwise stated)


Within that mix, LTE should increase from 20% to 45% of shipments, growing from 140 mn

to 323 mn units. WCDMA should still grow from 270 mn to 344 mn, as most of the export

shipments are still 3G, while TD-SCDMA, CDMA 2000 and EDGE will decline in the mix as

China Mobile and China Telecom ramp up 4G service. Based on MediaTek ramping up

from 223 mn units to 358 mn units in 2014, we believe that it increased share from 47% to

50%, leading Asian suppliers Spreadtrum, Leadcore (not listed) and Hi-Silicon (not listed)

and overseas vendors Qualcomm and Marvell, and lifted also with the exit of Broadcom.

We expect MediaTek to retain its market share near 50%, as its WCDMA share remains

high and LTE share is now growing with its SoC chipsets.

000s FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

China Mobile

BTS count - 2G 400 540 680 700 810 880 900 920 920

BTS count - 3G - 100 135 220 280 450 500 500 500

BTS count - 4G - 73 650 900 1000

BTS count - total 400 550 815 920 1,090 1,403 2,050 2,320 2,420

China Unicom

BTS count - 2G 208 285 329 375 411 420 430 440 450

BTS count - 3G 107 183 239 331 407 479 529 579

BTS count - 4G - 100 350 600

BTS count - total 208 392 512 614 742 827 1,009 1,319 1,629

China Telecom

BTS count - 2G 160 170 200 230 250 270 270 270 270

BTS count - 3G 100 140 200 240 270 270 270 270

BTS count - 4G 70 200 450 700

BTS count - total 160 170 200 230 250 340 470 720 970

Total towers in market 768 1,112 1,350 1,480 1,570 1,769 2,000 2,415 2,720

Chipsets to China brands 2011 2012 2013 2014E 2015E 2016E 2017E 14-17 CAGR

Mediatek 10.0 109.8 223.2 358.2 468.7 567.6 675.6 24%

Mediatek share (%) 11% 44% 47% 50% 51% 52% 53%

Spreadtrum 0.2 32.0 120.6 128.3 159.0 186.0 214.0 19%

Leadcore 3.0 5.0 12.0 16.0 25.0 30.0 35.0 30%

Hi-Silicon 2.6 15.4 20.0 30.0 36.0 33%

Asian suppliers 13.2 146.8 358.4 518.0 672.8 813.6 960.6 23%

YoY Growth 1009% 144% 45% 30% 21% 18%

Share 15% 59% 75% 73% 74% 74% 76%

Qualcomm 53.5 81.6 98.9 166.2 208.1 233.1 237.9 13%

Intel - - 5.0 20.0 40.0 NM

Broadcom 1.5 2.5 7.0 5.0 - - - -100%

Marvell 12.0 15.0 13.0 25.0 27.0 28.5 30.0 6%

ST-Ericsson 8.0 3.5 0.5 - - - - NM

Overseas suppliers 75.0 102.6 119.4 196.2 240.1 281.6 307.9 16%

YoY Growth 37% 16% 64% 22% 17% 9%

Share 85% 41% 25% 27% 26% 26% 24%

Total 88.3 249.4 477.8 714.2 912.8 1,095.2 1,268.5 21%

YoY Growth 183% 92% 49% 28% 20% 16%

We project LTE at 33% of

China baseband shipments

in 2015, up from 9% in 2014

13 January 2015


Figure 57: 2014 mix mainly on 3G, with LTE starting up Figure 58: 2015 market shifting over to LTE


Qualcomm the LTE leader, but others players

catching up in emerging markets

The Chinese-branded smartphone market is key to Qualcomm maintaining its targets—set

out at its analyst day in November—of achieving mid-teen unit growth and high single-digit

revenue growth in the next few years. Qualcomm still expects the China OEMs to continue

gaining share in 2015 by introducing competitive products at lower price points, with

Qualcomm targeting an aggressive road map to gain share into this tier of the market.

■ Qualcomm targets mid-teens unit growth, high single-digit revenue growth.

Qualcomm expects 3G/4G device shipments to grow +15% YoY in 2015 to 1.5 bn

units and maintain a 15% CAGR to 2.25 bn units by 2018. While smartphone unit

growth will moderate and only reach 1.8 bn, the company projects 450 mn units to

come from other areas using mobile, including tablets, automotive, Internet of Things

and networking. With ASPs moderating as a trade-up replacement market forms in

emerging markets, management expects to still sustain +8-10% sales growth and

>10% EPS growth through 2018.

■ Qualcomm growth strong in 2014 from China. Qualcomm indicated that it grew its

chipset revenue from China-built smartphones by 70% YoY to US$1.7 bn, implying it

shipped about 170 mn units at the low-tier’s US$10 ASP (in-line with our estimate),

giving it about 25% share of this channel. Qualcomm still lags MediaTek’s revenue

from the China brands (on pace to US$4.6 bn from smartphones and tablets) but is

growing at a faster rate off a lower base due to leading on the initial stage of LTE,

outpacing MediaTek’s +50% YoY growth from smartphones and tablets in 2014. We

estimate Qualcomm is shipping about 80 mn units of LTE chipsets into China brands

and doubling its volumes in 4Q14, outshipping MediaTek by a 3-to-1 margin for China

LTE in 2014, as MediaTek still targets 30 mn LTE units. In 2015, we estimate 130 mn

units for Qualcomm into emerging markets.

■ Emerging markets have room for higher penetration, with LTE just starting.

While growth in developed markets is stalling due to high penetration (mobile devices

are now at 113% and 3G/4G at 93%), emerging regions still have more headroom.

Qualcomm cited GSMA data showing 3G/4G penetration is still only 32% in 2014 and

will grow to 61% by 2018, offering several years of penetration gains just to approach

where developed market penetration was in 2010 (64%).

The company also sees a substantial penetration opportunity ahead in 4G. GSMA

estimates the global market has 7 bn cellular connections, with 4.2 bn still on 2G,

2.4 bn on 3G and only 0.4 bn on 4G. We note China Mobile only reached 30% 3G

penetration due to its inferior TD-SCDMA network, so could see a rapid 2G to 4G

upgrade cycle over the next couple of years.


Mediatek 53.7 206.9 64.7 - 32.9

Spreadtrum 45.0 23.0 60.3 - -

Leadcore - 0.5 15.5 - -

Hi-Silicon 3.0 12.4

Asian suppliers 98.7 230.3 140.6 0.0 45.3

% of shipments 19% 45% 27% 0% 9%

Share 100% 85% 89% 0% 32%

Qualcomm - 29.2 10.0 50.0 80.0

Broadcom - 5.0 - - -

Marvell - 5.0 5.0 - 15.0


% of shipments 0% 20% 8% 25% 48%

Share 0% 15% 9% 100% 68%

Total 98.7 269.6 158.6 50.0 140.3

% of shipments 14% 38% 22% 7% 20%


Mediatek 46.9 258.5 38.4 - 125.0

Spreadtrum 40.0 44.9 44.1 - 30.0

Leadcore - 0.8 24.3 - -

Hi-Silicon - 2.0 4.0 14.0

Asian suppliers 86.9 306.1 110.8 0.0 169.0

% of shipments 17% 59% 22% 0% 33%

Share 100% 89% 93% 0% 52%

Qualcomm - 33.1 5.0 45.0 130.0

Broadcom - - - - -

Marvell - 2.7 3.0 - 21.3

Intel - 2.0 - - 3.0


% of shipments 0% 19% 4% 23% 77%

Share 0% 11% 7% 100% 48%

Total 86.9 343.9 118.8 45.0 323.3

% of shipments 12% 48% 17% 6% 45%

Qualcomm targets 3G/4G

device shipments to grow

mid-teens YoY in 2015

LTE penetration still at an

early stage for exports

market

13 January 2015


Figure 59: Emerging region penetration still low Figure 60: Significant 4G penetration opportunity ahead

Source: Qualcomm Source: Qualcomm

■ Innovation continues on 4G, with high-end modems and processors pushing

20nm. Qualcomm is sustaining leadership in LTE modems (2,300+ designs in

development and 1,400 launched) by continually improving on data speeds, frequency

band support, voice modes (HD video, shifting from data to circuit-switched voice,

VoLTE), and new services (LTE Direct, LTE Broadcast, and Wi-Fi offloading). The

company announced its fifth-generation LTE modem at the event, a 20nm chipset

available in devices in 1H15 and supporting CAT 10 data rates (450 Mbps), frequency

bands up to 60 GHz, LTE broadcast, and 3x carrier aggregation. The company has

improved its downlink speeds by 3x, uplink speeds by 2x, while lowering power with

the move from CAT 4 to CAT 10 over the past three years. Carrier aggregation, which

is also going to be introduced by MediaTek in 2H15 on 20nm produced at TSMC, is

now commercialised on 21 networks and is being deployed at 79 carriers, up from one

last year and helping push the modem requirement to advanced technology.

Figure 61: LTE power/performance improves Figure 62: LTE road map gets more complex


■ Road map brings LTE down to the low-end of the stack, closely matching

MediaTek. Qualcomm’s strategy for 2015 is to drive LTE across all price tiers,

channels and regions. The company is carefully segmenting its chipsets, with

Snapdragon 210 (we estimate a US$8-9 ASP) offering 3G/LTE Cat 4 modem, 802.11n

Wi-Fi, HD display and 8MP camera capability; Snapdragon 410 (US$11-14 ASP)

offering 3G/4G Cat 4 modem, full HD display, and 13.5MP camera capability;

Snapdragon 610/615 (US$17-25) offering 3G/LTE Cat 4 modem, QHD display, and

16MP camera; and Snapdragon 808/810 (US$30-60 ASP) offering 3G/LTE Cat 6

modem with 4K display and 55 MP camera capability. The company will also offer dual

SIM across tiers, requiring 5x the complexity of 3G multi-SIM.

13 January 2015


Figure 63: Qualcomm introducing a broad range of Snapdragon chipsets across tiers


Figure 64: 2015 multi-tiered road map for LTE from low-end to high-end

Source: Qualcomm

■ ASP declines steeper now, but may moderate after 2015. Qualcomm reiterated

comments from its recent results that mobile device ASPs were coming down at a

faster pace, down 6% YoY in FY14 and are expected down 9-10% YoY in FY15. The

prices are dropping faster due to Chinese brands gaining share from traditional Tier-

ones with phones at lower price points, more volume coming from cost sensitive

emerging markets and more China phones switching back to three modes.

Management, however, is cautiously optimistic that ASP erosion will moderate to a

low- to mid-single-digit decline after FY15. The company expects the mix shift to

emerging markets to stabilise in the coming years, but importantly expects new

Chinese entrants to push toward higher-end smartphones with device innovation and

emerging market smartphones to shift from new entry-level penetration toward

replacement upgrades with a higher-end phone. The company cited data showing

70% of new smartphone users are prepared to pay more for a smartphone

replacement if it can offer better speed, battery, reliability and features.

Qualcomm Qualcomm Qualcomm Qualcomm Qualcomm Qualcomm Qualcomm Qualcomm Qualcomm

LTE chipsets Snapdragon 400 Snapdragon 400 Snapdragon 410 Snapdragon 610 Snapdragon 615 Snapdragon 810 Snapdragon 810 Snapdragon 808 Snapdragon 210

SoC MSM8926 SoC MSM8928 SoC MSM 8916 SoC MSM8929 SoC MSM8939 SoC MSM8956 SoC MSM8994 SoC MSM8992 SoC MSM 8909 SoC

Technology 28nm LP 28nm LP 28nm LP 28nm LP 28nm LP 20nm 20nm 20nm 28nm LP

Multi-core Quad core Quad core Quad core Octa core Octa core Octa core Octa core Hexa core Quad

CPU4 Cortex A7

32-bit

4 Cortex A7

32-bit

4 Cortex A53

64-bit

8 Cortex A53

64-bit

8 Cortex A53

64-bit

8 Cortex A53

64-bit

4 Cortex A53 +

4 Cortex A57

64-bit

2 Cortex A57 + 4

Cortex A53

4 Cortex A7

32-bit

Baseband FDD/TDD LTE

W/TD/EDGE

FDD/TDD LTE

W/TD/EDGE

FDD/TDD LTE

W/TD/EDGE

FDD/TDD LTE

W/TD/EDGE

FDD/TDD LTE

W/TD/EDGE

FDD/TDD LTE

W/TD/EDGE

FDD/TDD LTE

W/TD/EDGE

FDD/TDD LTE

Cat 6/7

W/TD/EDGE

Entry LTE;

FDD/TDD LTE/

W/TD/EDGE

Frequency 1.2GHz 1.4-1.6GHz 1.2GHz 1.4-1.6GHz 1.5-1.7GHz 2GHz 2GHz 1.8GHz + 1.2GHz 1.1GHz

GPU Adreno 305/306 NA Adreno 306 Adreno 306 Adreno 405 Adreno 410 Adreno 410 Adreno 418 Adreno 304

ASPs (US$) US$15 US18 US$11-13 US$16-18 US$20 <US$35 NA US$45 < $9

Ramp 1Q14 1Q14 3Q14 4Q14 4Q14 1Q15 1Q15 2Q15 2Q15

Qualcomm ASPs down

6%/10% YoY in

2014/2015E, but

management expects the

erosion to moderate in 2016

13 January 2015


Figure 65: ASPs coming down in FY14/15 Figure 66: Expansion of availability could help ASPs

longer term


MediaTek maintaining good 3G share and now

ramping into the 4G market

MediaTek has maintained a good position in emerging markets through its leading turnkey

support, high level of integration and fast product refreshes. The company maintained its

strong position on 3G by advancing quickly both on performance and cost to provide more

functionality but also allow higher functioning smartphones at competitive pricing and fast

time to market. The company maintained ASPs at US$10 by offsetting price declines on

similar functioning chips with a move to multi-core processors through the 3G cycle.

Figure 67: MediaTek's LTE could lift quad-core ASPs Figure 68: Blended ASPs supported by improving mix


The volume penetration story for the China brands even on 3G still has some legs due to

exports. Chinese brands are now over 75% market share in the China market but have

further room to expand in other emerging markets market. We estimate market share has

reached about a 40% global share for the China brands, with MediaTek having a 30%

global unit shipment share.

0.0

5.0

10.0

15.0

20.0

25.0

30.0

0.0

20.0

40.0

60.0

80.0

100.0

120.0

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14E

Single Units Dual Units Quad UnitsOcta Units Single ASPs Dual ASPsQuad ASPs Octa ASPs Blended ASPs

Units (mn) ASPs (US$)

-$1

$2

$5

$8

$11

$14

$17

$20

$23

$26

$29

$32

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14Single Units Dual Units Quad Units

Octa Units Single ASPs Dual ASPs

Quad ASPs Octa ASPs Blended ASPs

Units (mn) ASPs (US$)

Core migration and better

mix helping MediaTek

maintain smartphone ASPs

at US$10

Chinese brands have a 75%

share locally, but only 40%

globally, implying possible

upside with further gains

13 January 2015


Figure 69: Exports tracking to exceed China for MediaTek Figure 70: MediaTek and its customers gain global share

Source: Company data, Credit Suisse estimates Source: Company data, Gartner

MediaTek going through a transition period as it ramps into LTE, with a strong

product line-up from late 1Q15/2Q15, potentially lifting the product mix

The company will still need to work through a challenging 1H15. By coming into the market

a bit later on 4G against incumbent Qualcomm after leading in the second stage of the 3G

ramp, the company needs to be aggressive as it was initially on smartphones even without

an optimal cost structure. We believe initial 2-chip solution and first generation SoCs

ramping this past November (MT6732/MT6572 for smartphones and MT8732/8752 for

tablets) were not at optimal cost structures and competing against an aggressive

Qualcomm determined to hold share. MediaTek is moving back to the lower priced 28nm

LP and optimising the architecture and adding CDMA 2000 support with its next

generation MT6735/6755, a move that should help stabilise profitability by mid-year at

slightly lower levels.

The company's upcoming product launches should position it well for LTE.

Figure 71: MediaTek's LTE chipsets should have it competitive by late 1Q15

Source: Company data, Credit Suisse research

Key upcoming product launches for the company include:

(1) Second-generation mainstream quad-core and octa-core LTE SoCs adding

CDMA support (MT6735/MT6753): MediaTek will launch its second generation quad-

/ octa-core SoCs (MT6735/MT6753) moving to TSMC's 28nm LP for a better cost

structure versus 28nm HPM. We believe the quad-core refresh should start around

US$10-12 ASPs. The chips will also add CDMA 2000 support, allowing MediaTek to

address subscribers on China Telecom's network for the first time, adding an

additional addressable space of 181 mn subscribers and also gives it better chance at

design wins on traditional CDMA carriers in the US and Latin America.

-20%

0%

20%

40%

60%

80%

0

15

30

45

60

75

90

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15




0%

7%

14%

21%

28%

35%

42%

49%

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14

Chinese brands Mediatek Smartphone Units Chinese brand global share

Share % / MTK units (mn)Units (thousands)

Mediatek Mediatek Mediatek Mediatek Mediatek Mediatek Mediatek Mediatek Mediatek

LTE chipsets MT6290 MT6595 MT6732 MT6752 MT6795 MT6735M MT6735 MT6753 MT6796

SoC Two chip SoC SoC SoC SoC LTE + C2K SoC LTE + C2K SoC LTE + C2K SoC LTE SoC

Technology 28nm HPM 28nm HPM 28nm 28nm HPM 28nm HPM 28nm LP 28nm LP 28nm LP 20nm

Multi-core Quad core Octa core Quad core Octa core Octa core Quad core Quad core Octa core Octa core

CPU Coresonic SIMT 4 Cortex A7

+ 4 A17

4 Cortex A53

64-bit

8 Cortex A53

64 bit

4 A57 + 4 A53

64-bit

4 A53

64 bit

4 A53

64 bit

8 Cortex A53

64 bit 64 bit


W/TD/EDGE

FDD/TDD LTE

W/TD/EDGE

FDD/TDD LTE

W/TD/EDGE

FDD/TDD LTE

W/TD/EDGE

FDD/TDD LTE

W/TD/EDGE

CDMA2000/

FDD/TDD LTE

W/TD/EDGE

CDMA2000/

FDD/TDD LTE

W/TD/EDGE

CDMA2000/

FDD/TDD LTE

W/TD/EDGE

LTE Cat 6 + CA

Frequency 1.3GHz 2.2-2.5GHz

(big.LITTLE) 1.5GHz 1.7GHz 2.2GHz 1.0GHz 1.3-1.5GHz 1.3-1.5GHz NA

GPU Mali 450 PowerVR 6 Mali-T760 Mali-T760 IMG G6200 Mali-T720 MP1

450MHz

Mali-T720 MP2

450MHz

Mali-T720 MP3

450MHz NA

Ramp 2Q14 3Q14 4Q14 4Q14 1Q15 2Q15 2Q15 2Q15 4Q15

MediaTek to introduce its

next-generation LTE in

2Q15

MediaTek's next refreshes

include second-generation

LTE SoCs with CDMA 2000

support, de-spec version

LTE SoC, low-cost 3G

13 January 2015


Figure 72: Chinese vendors pre-marketing MT6732/MT6752 and MT6735 for 1H15


(2) Cost-down LTE SoC for the entry level market (MT6735M): Along with the second-

generation SoCs, MediaTek will launch a lower cost version of its LTE SoC MT6735M

for the entry level 4G market targeted at same US$8-10 price range as Qualcomm and

Marvell's entry level chipset. This product will de-spec for entry level ~US$80

smartphones, running processor at lower speeds, lower 8 MP camera support and

qHD display support. The lower features also will mean a sizeable mid-tier market may

remain above this product range at US$8-10 price points in the mainstream category.

MediaTek will still maintain CDMA 2000 for this product for China Telecom and other

CDMA carriers.

(3) Low-cost 3G refresh to answer Spreadtrum's challenge (MT6570/6580): MediaTek

should also announce cost-down versions of its 3G dual and quad-core chips. These

chips will also support lower resolution displays and take out unnecessary features to

lower the cost structure to compete in the entry level 3G market.

(4) Carrier aggregation for the high-end 4G market (MT67xx): MediaTek is also

working on carrier aggregation, a feature that allows carriers to pair multiple

frequencies for higher peak data rates and important in allocating spectrum efficiently

as capacity gets tighter. The company would have its high-end 4G chip supporting

carrier aggregation by 4Q14.

(5) Smartphone flagship MT6795 big.LITTLE. MediaTek's MT6795 is the next 64-bit

octa-core LTE SoC on MediaTek's product roadmap. It will be on 28nm HPM, using

MediaTek's CorePilot to unlock the full power of all eight cores (4 A57 + 4 A53) and up

to 2.2GHz. It supports 5-mode and uses Imagination PowerVR GPU. Additionally, it

integrates MediaTek's new 5-in-1 connectivity chipset MT6630, with Wi-Fi

802.11b/g/n/ac, Wi-Fi Direct/Miracast, low power Bluetooth, GPS/GLONASS and FM.

MT6795 is positioned to compete head-to-head with Qualcomm's high-end

Snapdragon 810 and will ramp by Chinese New Year.

The design-in traction for this product may allow MediaTek's product mix to perform

better than the bear case fear for rapid cannibalisation and low-end shift on LTE. We

believe the MT6795 is getting designed into 20 Chinese branded companies including

customers Xiaomi, Lenovo, Sony, HTC, Meizu, Malata, BBK/Vivo, Coolpad and

Gionee, with Xiaomi planning a higher volume model for launch in mid-2Q15. The

MT6795 is a performance at a reasonable price chip, fitting in well between

Qualcomm’s Snapdragon 615 and Snapdragon 810, with MediaTek’s chip at $30-40

versus Qualcomm’s flagship at Snapdragon at 810 at US$60-65.

Xiaomi has traditionally only used Qualcomm for high-end, but we believe Xiaomi is

developing a high-end model based on MediaTek’s premium 64-bit octa-core MT6795,

a big.LITTLE high-end chip from MediaTek launching with customers at CES in

China Telecom opens up a

181 mn subscriber

addressable market once

MediaTek adds CDMA 2000

support

13 January 2015


January. This win is significant—MT6795’s ASPs are around US$35 at good margins;

therefore, if Xiaomi's order volume with this model reaches 10 mn, or 10% of its total

targeted shipment units of 100 mn, then this project alone would contribute 5% of

MediaTek sales in 2015. Xiaomi’s adoption could trigger other vendors to follow and

help MediaTek’s mix and margins towards the higher end and not a race to bottom on

price and margins, as the bears fear. We also believe MediaTek is seeing some

design-ins on its Octa-core MT6752. Better LTE mix could help stabilise margins and

keep pricing more stable into next year as the market shifts from dual/quad-core on

3G to quad/octa-core on LTE.

Figure 73: MediaTek's smartphone roadmap—with second-generation LTE SoCs and carrier aggregation by year end

Source: Company data, Credit Suisse estimates, mtksj

Intel had strong tablet success, but now shifting

strictly from share to now also improving profitability

Intel is out-marketing the Asian chip suppliers now to gain a foothold in the market,

showcasing a large booth presence at electronic sourcing shows, providing more

marketing collateral materials, setting up meetings with buyers representatives in other

cities and offering subsidy support across the supply chain. Intel has assembled several

key elements to its strategy to push into the market.

1) Subsidy support. Customers continue to note that Intel is offsetting all the additional

design costs using Intel solutions over lower cost chipset and reference designs from

its Asian rivals.

2) Customer subsidy. Some vendors are noting customers can also receive additional

US$3-8 rebate per unit from Intel based on volume ramp rates into the multiple

thousands of monthly volume.

3) Free Microsoft Windows under 9”. Microsoft is also supporting the channel by

offering the free Windows 8 for tablets below 9” to help it win back share from ARM.

Customers are noting US$15 savings over the Windows licence paid on a 9” and

above tablet. The cheaper Intel chip and free Windows is allowing some Intel Bay

Intel is only targeting tablet

growth in line with the

industry and is lowering

some investments in entry

platforms and leveraging its

China partners

13 January 2015


Trail-based tablets to come in under a US$50 factory price, about a 75% cut from

price of many starting Intel Windows models just 18 months ago.

4) Branding support. Intel is providing additional marketing signage including its own

large booth at sourcing fairs and networking events to align OEMs/ODMs to end

customers including recent organised sales sessions to customers groups

in Europe.

5) Cheaper price points. The company has enabled much lower solution costs with the

entry-level Bay Trail with several customers launching entry 7” 3G Android tablets for

a US$40-50 factory price.

6) Local partnerships. Rockchip is now already marketing Intel’s 3G entry level SoC

and noting a Rockchip branded LTE SoC SoFIA on 3G and 4G are coming soon. Both

Rockchip and Spreadtrum could provide Intel a big incremental push of its

smartphone and tablet solutions into the China market.

Figure 74: China Intel brands/ODMs now supporting the ecosystem


Intel aggressively marketing the Bay Trail Entry Tablet Platform

Intel is noting to its Chinese partners that it now has 178 ODM tablets supported by Intel’s

Go-big global tablet marketing campaign. The company is offering a combination of the

following features for customers:

1) High performance. Intel is marketing its four Silvermont IA cores that fuel better

performance than rival ARM octa-core models for fast web browsing.

2) 64-bit ready. Intel notes the first 64-bit ready tablet platform (though MediaTek’s 64-

bit MT8732/8752 is also in the market so a moot point). Intel can however offer

Windows and Android.

3) New user experiences. Intel claims the cheapest Windows 8.1 tablets (supported by

prices under US$50), voice unlock of the tablet and multi-tasking and multi-window

capability.

4) Claims in-line to better performance than MediaTek’s rival octa-core platform.

Intel is marketing that its web browsing has up to 1.8x better performance compared

to MediaTek’s octa-core, up to 1.4x better performance over MT8135 devices, and

comparable AnTuTu 4.4.x and gaming benchmarks to MediaTek’s octa-core.

5) Bay-Trail M coming at the end of the year. Intel notes fanless computing with 8+

hours of usage and designs below 1kg and <11mm thin. Detachable notebooks will

target US$299-399 price points.

Intel's China ODM partners

ODM/SI ODM/SI ODM/SI

ADSC IP3 SOUTH HOLDINGS

Archermind Jumper Techvision

Bluebank KNC Thundesoft

Bmorn Lengda TongFang

Borqs iLife Topjoy

Cube Livefan TopStar

CVTE Luckystar Vido

DSO MALATA Wisky

EA MIKI Xmobile

Emdoor PN-Device Y&Q 德与方Galapad Ramos Yifang

Hampoo RFTECH Yitoa/英唐Hibertek KEP-tech Yuko

iNet Shuang Shuang ECS

Intel has several dozen

OEM customers marketing

solutions and seeing

growing customer interest

13 January 2015


Figure 75: Intel has enabled an ecosystem in China with its tablet reference designs


Despite strong progress and share gains in tablets in 2014, Intel at its November analyst

day did take a more conservative view on its merchant smartphone IC business, however,

potentially implying less risk to MediaTek and the Asian supply chain producing for

MediaTek and Qualcomm. After ramping up tablets from 10 mn to 40 mn units in 2014,

Intel now targets to grow in line with the market in 2015, as it also looks to improve

profitability and lower its contra-revenue to zero with the new products, reducing its annual

operating loss from mobile from US$4 bn to US$3.2 bn loss. The company also is lowering

its smartphone investments to now allow its China partners to take the lead on more of the

product development around its Atom core.

■ Modem and SoFIA moving into the client computing group: investments shifting

down in smartphones. Intel is doing a reorganisation to shift its modem and SoFIA

engineering and customer support teams into a broader platform engineering group and

mobile hardware teams into the client computing group. While management emphasised

that the move streamlines common functions under one organisation and helps target

products across devices where lines are blurring (phablets, tablets, notebooks, 2-1s,

etc.), it will give less-focused attention to the smartphone SoC market.

The company noted a conscious effort to redeploy resources, with fewer investments

in smartphone SoCs and more resources allocated to data centre, internet of things

and Intel marketing campaigns. Intel noted a prudent decision to rely on partners

Spreadtrum and Rockchip to develop spin-off SoCs and also market SoFIA 3G/4G

solutions into the China and emerging market smartphone channels.

Figure 76: Intel focused on modem attach rate for PCs

and tablets

Figure 77: Intel road map now includes Spreadtrum and

Rockchip advancing the SoFIA-R and SoFIA LTE

Source: Intel Source: Intel

Intel remains committed to modem development as a core platform IP for its other

core businesses, noting that it expects modem attach in tablets to grow from 30% to

70-90% over the next decade and attach in notebooks to grow from 5% now to 40-

60% by 2022. For the SoC market, however, the lower investments and reliance on

Intel targets tablet to grow in

line with the industry in

2015, keeping the threat

manageable for Asian

suppliers

13 January 2015


China partners may imply slightly less threat to MediaTek/Qualcomm in smartphones

than our original fears, after seeing Intel’s massive mobilisation of sales, marketing,

ODM/OEM support and product development, with Bay Trail in China tablets to go

from close to zero position to matching MediaTek’s shipment run rate of 40 mn + units

in 2014 (see our China smartphone update report in October).

■ Smartphone product roadmap unchanged and playing catch-up to MediaTek/

Qualcomm. Intel noted its smartphone roadmap presented a year ago is largely

unchanged. The company plans to ship its first integrated 3G processor and modem

SoC SoFIA 3G by the end of the year for the 1H15 ramp, SoFIA-R (quad-core with

Rockchip) in 1H15, SoFIA 4G by 3Q15 for the 2H15 ramp, and bring SoFIA LTE 2nd

generation into its own fab in 1H16. We note that the product introduction pace is

accelerated for Intel but still lagging Qualcomm/MediaTek, with 3G SoFIA looking

comparable to 2013 3G quad-cores and 4G SoFIA still lagging by about a year to

Qualcomm/MediaTek’s LTE SoC launches for emerging markets. The company will

also have a standalone Cat 10 modem XMM7360 for sampling in 1Q15 for 2H15

volume, matching timeline for Qualcomm’s recently announced MDM9x45 on 20nm.

At the high-end, the company will have Cherry Trail on 14nm in volume in 2015 and

Broxton Quad-core on 14nm for 2016. The company is now relegating Cherry Trail

and Broadwell to the more niche “module” market, as most smartphones now require

integrated chipsets like SoFIA.

■ Some product development shifting to Spreadtrum and Rockchip. With Intel still

only having one SoFIA design per six months on the road map (versus MediaTek and

Qualcomm having highly-segmented road maps), the company is now scaling back

some of its internal SoC development and relying more on the local ecosystem and

faster time to market development times of Rockchip and Spreadtrum. Intel is using

Rockchip as the scale partner for its SoFIA-R product for 1H15 and Spreadtrum for its

SoFIA-LTE product, though noting the ramp for that would be late in 2015. We still view

Spreadtrum and Rockchip also with local China subsidy support and home market

advantage as longer-term threats to MediaTek/Qualcomm, but risk looks a bit more

manageable now with Intel starting to scale back some of its own push into this channel.

Figure 78: Intel mobile road map for the premium tier Figure 79: Intel mobile road map in the value tier

Source: Intel Source: Intel

Spreadtrum advancing its new roadmap and now

backed by Intel

Spreadtrum should have more impact in the China smartphone market in the coming year.

The company has been hiring aggressively from Taiwan IC design companies and

foundries and ramping up its roadmap for 3G, 4G and supplementing it with the 4G SoFIA

chipset using Intel's modem and processor IP. We believe that it is also integrating with

RDA, using its low cost and well-integrated feature phone platform and also bundling its

low cost 3:1 and 4:1 connectivity solutions with Bluetooth, FM, GPS and Wi-Fi.

Intel's mobile offerings lag

Qualcomm and MediaTek

by a year

Spreadtrum's chipset

traction for low-cost 3G

remerging—an LTE chip to

follow in 2015

https://doc.research-and-analytics.csfb.com/docView?sourceid=em&document_id=x561906&serialid=Qe2oVV1eOI1NgYFwG3AA8h2JY9djuwYijrMCTBm0Iqc%3d

13 January 2015


Figure 80: Spreadtrum 3G designs with its single-, dual- and quad-core chips


Spreadtrum is now re-engaging with more customers again after its first-generation

WCDMA chipsets and dual/quad-core solutions had met limited initial traction. A broader

mix of customers including Samsung, Sking Mobile, Topwise, LongAn, SuperInWorld are

now adopting Spreadtrum as a lower cost alternative to MediaTek, adding it to their

portfolio as a second option rather than replacing MediaTek.

Spreadtrum’s SC7715 single core now supports Android 4.4 and is being positioned in

US$30-50 factory price smartphones with 3.5”-4” HVGA and WVGA displays. The

company is also starting to have its SC7730 quad-core designed into low-mid-range 5”

FWVGA and qHD phones at US$50-70. For 3G, the company is moving to TSMC's 28nm

HPC and sampling its SC7731G quad-core WCDMA chipset and SC8831G quad-core

TD-SCDMA chipset for US$7 or less.

Figure 81: Spreadtrum has rounded out its 3G product roadmap


In LTE, its 2-chip LTE solution also was certified at China Mobile in September and is now

shipping in limited quantities. That chip is following-on with the SC9830 for readiness at

year-end and shipments in January or February with price points under US$10 to match

up with MediaTek’s MT6535M and Qualcomm’s ultra-low cost MSM8908. The company

may be able to show designs by Mobile World Congress.

For late in the year, Spreadtrum will co-market a version of the Intel SoFIA chipset

featuring the XMM modem and x86 processor built around some of Spreadtrum's SoC IP.

We believe Intel will provide some marketing support and also sell the chipset to its own

customers, allowing Spreadtrum to also field the chipset into its channel. Spreadtrum

could use success on LTE and launch of the Intel SoFIA offerings as a springboard for a

China A-Share listing.

Spreadtrum Spreadtrum Spreadtrum Spreadtrum Spreadtrum

Chipset SC5715 SC7715 SC7727 SC8830G/SC7730G SC8831G/SC7731G

Technology 40nm 40nm 40nm 40nm 28nm HPM

Multi-core Quad Single Dual Quad Quad

CPU Cortex A7

Tablet Cortex A7 Cortex A7 Cortex A7 Cortex A7

Frequency 1.3GHz 1.2GHz 1.2GHz 1.3GHz 1.4GHz

Network WCDMA +

GSM

WCDMA +

GSM

WCDMA +

GSM

TD or WCDMA +

GSM + 4:1

connectivity

TD-GSM, WCDMA-

GSM

GPU Mali-400 Mali-400 Mali-400 Mali-400 Mali-400

Sampling 2Q14 4Q13 1Q14 1Q14 3Q14

Ramp 3Q14 1Q14 2Q14 2Q14 4Q14

13 January 2015


Figure 82: Spreadtrum rolling out LTE chipsets through 2015


Marvell: Stays firmly committed to winning in mobile

Marvell has had a long presence with its baseband business in China originally securing

numerous O-Phone design wins with China Mobile and as a long-time platform provider

for the Blackberry. Marvell now has competitive modems and application processors. The

company demonstrated in 3Q14 its five-mode LTE Release 10 CAT 7 modem with carrier

aggregation with China Telecom and Nokia Networks. The modem is capable of peak

download speeds of 260 Mbps with 20 MHz FDD spectrum at 1.8GHz and 20 MHz TDD

spectrum at 2.6 GHz. The ability to offer Carrier Aggregation in the modem places it about

a year ahead of MediaTek's launch and closer to market leader Qualcomm. It has passed

certification across Verizon, AT&T, China Mobile, and is in tests at NTT Docomo.

Figure 83: Marvell solutions now span 64-bit quad- and octa-core with modem


The company introduced new 64-bit SoCs for the China market in November, including a

cost down quad-core 64-bit A53 chipset (PXA 1908) and octa-core 64-bit A57 chipset

(PXA 1936). The new chipsets integrate five-mode (TD-LTE, FD-LTE, TD-SCDMA,

WCDMA and GSM) modems, security processors, sensor hubs, and the digital portion of

the GPS, Bluetooth, Wi-Fi and GPS along with and bundles with RF transceivers and

power management with codec, fuel gauges and camera flash control. The quad-core can

support 8-13 MP camera and 720p displays and octa-core can support 13-16MP camera

and 1080p display. Marvell did note it does not support the CDMA 2000 standard like

Qualcomm now or MediaTek from late 1Q15.

Marvell remains firmly committed to winning in mobile, pledging to offer better performing

processors, competitive chip designs and over time improved turnkey platform support.

The company noted a number of design wins with the new PXA1908 quad-core and

PXA1936 octa-core. Marvell is also in Google's Project Ara alongside NVIDIA Tegra K1

and Rockchip, a modular phone platform that could make it easier for end users to

upgrade internal silicon and components.

Spreadtrum Spreadtrum Spreadtrum Spreadtrum Spreadtrum Spreadtrum

Chipset SC9620 Modem Shark (2 chip) SC9830 (Shark L) T-SharkL Whale Nemo Wearable

Technology 40nm 40nm SMIC 28nm 28nm 28nm 55nm

Multi-core Quad Quad Quad Quad Octa Single

CPU Modem Cortex A7 Cortex A7 Cortex A53

64 bit

Cortex A53

64 bit Cortex A5

Frequency 1.0GHz 1.2GHz 1.2GHz 1.5GHz 1.5GHz Low freq.

Network TD/FDD-LTE

W/TD-SCDMA 2-chip LTE 1-chip LTE 1-chip LTE 1-chip LTE GSM + BT 4.0

GPU Mali-400 Mali-400 MP4 Mali-400 MP2 Mali-400 MP2 NA

Sampling 3Q14 Jan-14 Aug-14 Oct-14 2H15 2Q15

Ramp 4Q14 Jul-14 Nov 14/Feb 15 Mar-15 2H15 3Q15

Marvell Marvell Marvell Marvell Marvell Marvell

PXA1088 PXA1920 PXA1928 PXA1908 PXA1936 Cat 7 Modem

SoC SoC SoC SoC SoC Baseband

28nm 28nm 28nm 28nm 28nm 28nm

Quad core Quad core Quad core Cost Down Quad Octa-core NA

4 Cortex A74 Cortex A7

32-bit

4 Cortex A53

64-bit

4 Cortex A53

64-bit

8 A53

64-bit + Sensor

hub

CAT 7 CA

Rel.10 Modem

FDD/TDD LTE

W/TD/EDGE

FDD/TDD LTE

W/TD/EDGE

FDD/TDD LTE

W/TD/EDGE

FDD/TDD LTE

W/TD/EDGE

FDD/TDD LTE

W/TD/EDGE

FDD/TDD LTE

W/TD/EDGE

1.5GHz 1.5GHz 1.5GHz 1.5GHz 1.5GHz Data: 260Mbps

Vivante Vivante Vivante Vivante Vivante NA

3Q13 2Q14 2Q14 1Q15 1Q15 4Q14

Marvell is ahead of

MediaTek to offer carrier

aggregation, but still needs

to catch up to provide full

turnkey and ecosystem

13 January 2015


NVIDIA and Broadcom exiting merchant basebands

While Marvell stays committed to the merchant baseband and processor market, NVIDIA

and Broadcom are refocusing away from the space and in particular no longer competing

for mass market smartphone design wins. NVIDIA is now refocusing its Tegra application

processor on automotive, computing and gaming. The company has announced it will be

in the HP and Samsung Chromebooks and also power a number of the automotive

infotainment systems and the engine for its Project Shield gaming device. Broadcom

announced in early June 2014 it would exit the business and subsequently decided to

unwind the business rather than sell to another competitor. Broadcom is still focused on its

connectivity business and also enabling Internet of Things devices.

Smartphone display components: Higher resolution; more integration Higher resolution is more positive to driver IC than panel makers

Smartphone display size and resolution have been steadily increasing globally as

consumer demand shifts to large screen and lower display cost. China smartphone market

has already shifted towards large screen sizes in 2014, although entry-level and mid-range

4G smartphone pricing falls has fallen to US$100-150 (Rmb600-1,000). We expect the

size and resolution migration to continue in 2015 with mainstream sizes shifting towards

4.5"-5.0" with higher resolution (HD/FHD/WQHD) to account for ~50% of the shipments.

However, WVGA/qHD should still remain at a sizeable portion (35-40%) supported by

entry-level 4G smartphone take-off in China and the export demand for emerging markets.

Figure 84: China 4G smartphone models priced below RMB1,000

Source: JD.com, Company data, Credit Suisse Research

Company Coolpad TCL Coolpad Huawei ZTE Huawei ZTE Xiaomi

Model name 7,920 J730U K1 (7620L) 8817e A880 G620S-UL00 V5 Max Red Rice Note

Image

Technology TD/FDD-LTE TD/FDD-LTE TD/FDD-LTE TD-LTE TD/FDD-LTE TD/FDD-LTE TD/FDD-LTE TD_LTE

Modes 4 mode 4 mode 4 mode 4 mode 4 mode 4 mode 5 mode 3 mode

Operating System Android 4.1 Android 4.3 Android 4.3 Android 4.4 Android 4.4 Android 4.4 Nubia V5 Android 4.4

Pixels 1280 x 720 854 x 480 960 x540 1280 x 720 1280 x 720 1280 x 720 1280 x 720 1280 x 720

RAM 1GB 1GB 1GB 1GB 1GB 1GB 2GB 2GB

Storage 4GB 4GB 4GB 8GB 8GB 8GB 16GB 8GB

Display 5.0" 5.0" 5.5" 5.0" 5.0" 5.0" 5.5" 5.5"

Camera 8MP + 0.3MP 5MP + 0.3MP 8MP + 2MP 5MP + 0.3MP 8MP + 8MP 8MP + 1MP 13MP + 5MP 13MP + 5MP

Battery 2000mAh 2000mAh 2500mAh 2000mAh 2300mAh 2000mAh 3100mAh 3100mAh

CPU Speed 1.7GHz 1.2GHz 1.2GHz 1.2GHz 1.2GHz 1.2GHz 1.3GHz 1.6GHz

Processor Chip MSM8960 MSM8926 MSM8926 MSM8916 MSM8916 MSM8916 MSM8916 MSM8928

Multi-core Dual Quad Quad Quad Quad Quad Quad Quad

Price (RMB) 599 599 799 859 890 899 999 999

NVDA Tegra used for

automotive and other

applications, while BRCM

completely exited mobile

HD-above to account for

~50% of total smartphone

panel shipmentsin 2015

13 January 2015


Figure 85: Smartphone PPI migration—emerging markets Figure 86: Smartphone PPI migration—developed markets

Source: Company data, DisplaySearch, Credit Suisse estimates Source: Company data, DisplaySearch, Credit Suisse estimates

The larger screen size and higher resolution trend will require more advanced panel and

higher driver IC content but we believe driver IC supply chains are in a better position than

the panel makers as small-/medium-sized panels remain in an oversupplied environment

with declining ASPs. We expect back-end makers such as Chipbond and ChipMOS to

outperform pure fabless driver IC makers given driver IC back-end pricing has been

stabilising after the 4Q13 cut and higher resolution will consume more wafer area with

longer testing times for higher utilisation.

Figure 87: Smartphone resolution versus display size

Pixel per inch (PPI) 3.5" 4.0" 4.5" 5.0" 5.5" 6.0"

WVGA (800 x 480) 266 233 207 186 169 155

qHD (960 x 540) 314 275 244 220 200 183

HD720 (1280 x 720) 367 326 293 267 244

FHD (1920 x 1080) 440 400 367


For fabless driver IC makers, we believe overall revenue should continue to grow in 2015

given the higher resolution trend, but margins would still be under pressure as tier-two

players (Ilitek and FocalTech/Orise) have caught up on higher resolution products with

aggressive pricing strategies. We believe profits for smartphone driver IC will continue to

expand in 2015 but will be at a slower pace comparing to back-end makers.

Figure 88: Smartphone driver IC GM under pressure;

back-end (Chipbond/ChipMOS) in a better position

Figure 89: Orise and Ilitek catching up on small-/medium-

driver ICs


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2013 2014E 2015E 2016E

<150 PPI 150-250 PPI 250-350 PPI 350-450 PPI >450 PPI

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2013 2014E 2015E 2016E

<150 PPI 150-250 PPI 250-350 PPI 350-450 PPI >450 PPI

10%

15%

20%

25%

30%

35%

1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14

Novatek (DDI GM) ChipMOS LCDD GM

Chipbond core GM Orise GM

-

100

200

300

400

500

600

700

2011 2012 2013 2014E 2015E

US$ mn Novatek - S/M Himax - S/M Orise Ilitek

DDI back-end to benefit the

most on stabilised pricing

and better utilisation

13 January 2015


Smartphone panel facing more pricing pressure on new capacity builds

Higher resolution smartphone panels require more sophisticated display manufacturing

technology, which should stimulate demand for LTPS panels. However, our supply chain

checks suggest there will be at least six new LTPS fabs dedicated for higher resolution

S/M size panels being built in 2015-17, on top of existing fab expansions and ramp-up. We

estimate that the total LTPS area capacity will increase ~70% by 2016 versus 2014. We

note lower yield could slow down the ramp of these LTPS fabs, but we believe this does

not change the oversupply scenario for the LTPS panels.

Figure 90: LTPS mobile phone panel market share Figure 91: a-Si mobile phone panel market share

Source: DisplaySearch, Company data, Credit Suisse Research Source: DisplaySearch, Company data, Credit Suisse Research

Figure 92: Ramp-up schedule for upcoming small and medium panel capacity


Moreover, the catch-up by Chinese panel makers, Samsung Display's strategy to sell

OLED panels to external parties and the technology breakthrough of using a-Si or oxide

for HD/FHD panels should intensify the price competition for the small/medium size

panels. We believe tier-two pure small/medium size panel makers like HannStar (not

listed) and CPT (not listed) will face more pressure than its peers given the competition

from China (BOE, Tianma) (both not listed) and the fact that both lack of LTPS capability

or oxide technology.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14

Taiwan Korea Japan China

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14

ROW Taiwan Korea Japan China

Company 2013 2014 2015 2016 2017

BOE

CSOT

AUO

Innolux /

Foxconn

Tianma

Truly

Visionnox

EDO

Kunshan Gen 6 (LTPS) 30K/month

Gen 5.5 (LTPS & OLED) 30K/month -> 25K/month -> 35K/month

Chengdu Gen 6 (LTPS) 25K/month

Wuhan Gen 6 (LTPS) 25K/month

Kaohsiung Gen 6 (LTPS) 24K/month

Xiamen Gen 5.5 (LTPS) 15K/month LTPS + 15K/month OLED

Shanghai Gen 5.5 (LTPS) 15K/month (30K in 2017)?

Xiamen Gen 6 (LTPS) 30K/mth?

Wuhan Gen 6 (LTPS) 45K/mth?

Kunshan Gen 6 (LTPS) 30K/month

Huizhou Gen 4 (LTPS) 25K/month

Gen 4 (LTPS) 15K/month

Kunshan Gen 5.5 (LTPS) 8K/month

S/M size to continue to be in

oversupply on new LTPS

capacity additions and

breakthrough of using a-Si

for PPI panels

13 January 2015


Figure 93: Smartphone and tablet panel price trend Figure 94: S/M-size panel makers’ gross margin trend

Source: DisplaySearch, Credit Suisse Source: Company data, Credit Suisse

Figure 95: 5” HD smartphone panel prices for different technologies

Source: DisplaySearch, Credit Suisse

Embedded touch will take more share in 2015

Embedded touch (on-cell and in-cell) is expected to take more share within non-Apple

smartphones in 2015 given thinner/lighter design, improving yield, better cost, and the

push by panel/touch IC makers. Both on-cell and in-cell touch sensors are built amid panel

process, hence production yield will become an important factor for cost competitiveness.

In 2014, on-cell touch proliferation was slower-than-expected as it faced aggressive price

cut by conventional touch makers. However, with better yield and more panel makers

joining the on-cell camp (AUO, JDI, etc), on-cell touch is likely to gain more share in 2015.

20.0

25.0

30.0

35.0

40.0

45.0

US$

10.1" HD 5" FHD LTPS

-20%

-10%

0%

10%

20%

30%

40%

3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14

CPT Hannstar JDI Tianma

0

5

10

15

20

25

30

35

40

45

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14

US$

5" HD a-Si 5" HD LTPS 5" HD Oxide

13 January 2015


Figure 96: Single glass touch panel structure Figure 97: G/F/F touch panel structure

Source: Company data, Credit Source: Company data, Credit Suisse

Figure 98: On-cell touch panel structure Figure 99: Hybrid in-cell touch panel structure

Source: Company data, Credit Suisse Source: Company data, Credit Suisse

We also expect in-cell touch to secure more design-wins in 2015 for non-Apple

smartphones, especially touch IC makers like Synaptics and FocalTech have rolled out

their integrated TDDI solutions. In-cell (no matter its hybrid or full in-cell) could reduce

silicon and FPC costs, and achieve thinner design by integrating the sensor amid TFT

process. According to CS and industry estimates, in-cell with TDDI could reduce touch and

display cost by 30-40 vs conventional add-on type touch solutions.

JDI has been ahead on in-cell touch as it has been promoting its hybrid in-cell Pixeleye

solutions in the past few years. Among other panel makers, we believe LGD and AUO are

more aggressive on in-cell displays. Our checks also suggest Chinese smartphone brands

like Huawei and Oppo already adopted in-cell, and Xiaomi will also launch its first in-cell

smartphone in 2015.

Figure 100: Panel maker versus in-cell TDDI partner—JDI and LGD are ahead

Panel maker In-cell TDDI partner Mass production schedule

Japan Display Synaptics 2014

LG Display Synaptics, Himax, Novatek 2H14

AUO Synaptics, FocalTech 1H15

INX FocalTech mid-2015

CPT FocalTech mid-2015

HannStar FocalTech mid-2015

Tianma FocalTech mid-2015

BOE FocalTech mid-2015


Cover glass (1)

Color filter (2)

TFT backplane (3)

Touch sensor (SITO

or Caterpillar)Cover glass (1)

Color filter (2)

TFT backplane (3)

Touch sensor

(Rx)

Touch sensor

(Tx)

Synaptics and FocalTech

are pushing in-cell touch

panels with their TDDI

13 January 2015


Figure 101: TDDI could reduce over touch cost if production yield picks up

Source: Synaptics, Credit Suisse estimates

Smartphone components

China smartphone would remain the growing segment in 2015. The migration to LTE

smartphone should also lead to spec upgrades including larger-size/higher resolution

screen, longer battery life, improving audio/image quality, and increasing focus on

industrial design. The trends should further increase the entry barrier for components

design, and should favour technology leaders in our view.

On the other hand, we continue to see innovations in camera modules and casing design

in the component space. Camera module: we expect the penetration of OIS and dual

camera to increase, and 10 MP-plus to become the mainstream. This should lead to

another ASP upgrade cycle for the handset camera module supply chain. Casing: we

expect metal casing to increase, but the manufacturing process could be changed from

"more expensive pure CNC process" to a cost down version, such as "stamping + CNC",

or "die casing + CNC", or "pure stamping", or "pure die casting". This could lead to more

competition in the low-end metal casing sector. Acoustic: we also expect gradual

increase in speaker box/module adoption rates in China smartphones, driven by higher

4G demand.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

GFF multi-finger GF 2-finger On-cell (singlelayer) 2-chip

Hybrid in-cell 2-chip

Hybrid in-cellTDDI

Full in-cell TDDI

Assembly w/SMT Sub/FPC + additional main Mask TFT, insulator

Mask on TFT, metal ITO on top of CF ITO on Film

OCA Cover lens

13 January 2015


Figure 102: Flagship smartphones spec comparison

Source: Company data, Credit Suisse

Brand Apple HTC Samsung Sony LG

Image

Model iPhone 6 Plus M8 Galaxy Note 4 Xperia Z3 G3

Screen (inches) 5.5 5.0 5.7 5.2 5.5

Resolution 1920x1080 1920x1080 2560x1600 2560x1600 2560x1440

CPU A8, 1.4GHz QCOM, 2.3GHz QCOM, 2.7GHz QCOM, 2.5GHz QCOM, 2.5GHz

Camera 8MP/1.2MP 4MP/5MP 16MP/3.7MP 20.7MP/2.2MP 13MP/2.1MP

Casing Metal Unibody Metal Unibody Metal Frame Metal Frame Plastic

Battery 2915 mAh 2600 mAh 3220 mAh 3100 mAh 3000 mAh

Brand Xiaomi Lenovo Huawei ZTE Coolpad

Image

Model Mi4 Vibe Z2 Pro Honor 6 Plus Grand S II 8971

Screen (inches) 5.0 6.0 5.5 5.5 5.9

Resolution 1920x1080 2560x1440 1920x1080 1920x1080 1920x1080

CPU QCOM, 2.5GHz QCOM, 2.5GHz HiSilicon, QCOM, 2.2GHz QCOM, 2.3GHz

Camera 13MP/8MP 16MP/5MP Dual 8MP/8MP 13MP/5MP 13MP/2MP

Casing Metal Frame Metal Unibody Metal Frame Plastic Metal Frame

Battery 3080 mAh 4000 mAh 3600 mAh 2500 mAh 3000 mAh

13 January 2015


Stock picks in the China smartphone space In the Asian tech coverage, we would invest in companies that can take advantage of the

shift to LTE and rising emerging market penetration while protecting margins through

innovation or competitive advantage. We showcase the outlook across the tech sectors

with meaningful exposure to the smartphone market.

■ IC Design: MediaTek—transition into LTE lifts the outlook coming out of 1Q15.

IC design is a competitive space with global players Qualcomm, Marvell and Intel

competing against Asian suppliers MediaTek and Spreadtrum and semi-captive Asian

suppliers Leadcore (Xiaomi) and Hi-Silicon (Huawei). MediaTek will still have a

challenging 4Q14 and 1Q15 as 3G slows and LTE ramps at lower margins through the

low season. We remain positive, however, with OUTPERFORM and NT$540 target

price as we expect an improving outlook from late 1Q15 with upside catalysts from

top-to-bottom product refresh and good design traction on its higher-end chips to keep

LTE mix, pricing and margins more resilient than feared.

■ Foundry: TSMC stock faces some competitive challenges, SMIC opportunities in

front of it. The foundries have grown to have 40-50% of their sales from mobile

products as beneficiaries of the smartphone/tablet acceleration the past few years,

implying a moderating growth curve until IoT applications grow large enough to create

new categories. We downgraded TSMC to a NEUTRAL with an unchanged target price

of NT$145, toning down our positive view since the financial crisis due to increasing

customer concentration risks, moderating growth, rising competition and valuation

being back in line with its historical average. TSMC's business is growing more

concentrated at its top-three mobile customers where further share gains are limited

and tier-two foundries are finally ramping the high volume 28nm node at better yields.

Although sequential sales and earnings momentum are now slowing through 2015, we

are not overly negative due to TSMC's own good process technology and rising cash

flows and yields as growth moderates. Upcoming results (Thursday) should still be

strong, as management retains confidence on its position, leading edge ramped well in

2H14 and NT$ currency depreciation adds NT$1 to 2015 EPS. SMIC is our emerging

market pick as a Chinese foundry with opportunity to benefit from the emerging

Chinese fabless and ramp into Qualcomm on 28nm, but still subject to its ability to

execute to improve its process.

Figure 103: Key Asian component suppliers in smartphones (in millions, unless otherwise stated)

Supply chain Key suppliers

Foundry: TSMC, SMIC, UMC

Back-end: ASE, SPIL, Chipbond, ChipMOS

Asian fabless: MediaTek

Overseas fabless and IP: Qualcomm, ARM, eMemory, Qurvo, Skyworks

Components: TXC (Quartz), Silicon Motion

Semiconductor Distribution: WPG

PCBs: Kinsus, Unimicron

Optical Lens: Largan, Sunny Optical

Acoustics: AAC Acoustics

Devices: Lenovo, Samsung, ZTE

Display/Touch components: TPK, O-Film, AUO, Novatek, Himax, Orise/FocalTech

Carriers: China Unicom, China Mobile, China Telecom


Expect an improving outlook

from late 1Q15 for

MediaTek; maintain an

OUTPERFORM

Near-term results still solid,

but less upside for TSMC

due to competitive overhang


13 January 2015


■ Back-end: Remain constructive as margins hold up and Taiwan players have

decent drivers. We have toned down our back-end view versus prior years as growth

may moderate after strong gains in smartphones and incremental Apple content in

2014 and could see more mild restocking relative to prior years, giving less cyclical lift

to the group. We still see a decent margin outlook for the sector due to favourable gold

price and currency and mix shift to flip chip. We keep ASE an OUTPERFORM as it is

continuing to ramp new SiP projects including the watch in 2015 and potentially

camera modules longer-term and also recently upgraded SPIL to an OUTPERFORM

as we view margins holding up and also stock supported by 1H15 ramp of China LTE

infrastructure and handsets and end of the inventory correction coming out of 1Q15.

■ IC distribution: WPG the best play but growth offset by muted margins: WPG

has assembled a string of acquisitions to achieve 18% growth from 2009-2014 to

double its Asian distribution share from 12% to 26% since the financial crisis. Its

semiconductor distribution business is tied into the greater China electronics supply

chain for consumer, communications and PC applications (80% of sales), allowing it to

tap into growth drivers from low cost smartphones, Apple related products, low-cost

tablets, and emerging market digital set-tops. The company has lifted

smartphone/tablet exposure from 15% to 50% over the past few years. We have

stayed NEUTRAL on the stock as the mix shift to low-cost mobile products has driven

a gradual erosion in margins to offset sales growth to dampen earnings momentum.

■ Devices: ZTE and Lenovo. We remain constructive on ZTE amid China 4G capex

cycle as ZTE is China's leading telecoms equipment vendor with a 30-35% market

share of 4G BTS versus 25-30% for 3G. We estimate ZTE's GM will improve modestly

to 31-32% in 2015 vs 30-31% in 2014, as a result of higher sales mix of networking

equipment and profit recovery of its handset business with the focus shifting to fewer

smartphone models and export/online channels. We remain constructive on Lenovo’s

smartphone strategy in light of increased market competition. Lenovo has tripled its

China efforts with a three-pronged strategy in 2015 involves expanding scale in China

through open-channel networks in tier 4-6 cities; re-introducing Moto back to attack the

mid-to high-end; and setting up an Internet-focused smartphone company to compete

against Xiaomi. We see continued traction in market outside of China and see Brazil

and India as two key markets in focus in 2015. Overall, we forecast its smartphone

shipments will increase to 84/91 mn in FY16/17E, from 72 mn in FY15E.

■ Driver ICs: Chipbond, ChipMOS, Himax, Novatek, Ilitek, Focaltech. We expect the

size and resolution migration to continue in 2015 with mainstream sizes shifting toward

4.5"-5.0" while higher resolution (HD/FHD/WQHD) to account for about 50% of the

shipment. The larger screen size and higher resolution trend will require more

advanced panel and higher driver IC content but we believe driver IC supply chain are

in a better position than the panel makers as small/medium sizes panel remains in an

oversupply environment with declining ASP. We expect back-end makers such as

Chipbond and ChipMOS to outperform pure fabless driver IC makers given driver IC

back-end pricing has been stabilising after the 4Q13 cut and higher resolution will

consume more wafer area with longer testing time for higher utilisation.

■ Components: AAC, Largan, Sunny Optical, Catcher. We expect Largan, AAC and

Sunny Optical to benefit the most, from the spec upgrade cycle in China smartphones.

Both Largan and Sunny Optical should benefit from the improving imaging quality i.e.

adding OIS, dual camera, bigger aperture, etc, and their dominate market share in

China smartphones. We are relatively more conservative on LOT, due to earnings

uncertainties from its subsidiary—LOM. In the acoustic sector, AAC should also

benefit from the increasing adoption rate of speaker box of China smartphones.

Lastly, the rising adoption rate of metal casing in China smartphone is expected

to lead to a benign pricing environment, which should benefit Catcher indirectly.

Back-end sector growth now

more moderate; prefer ASE

AAC, Sunny Optical,

Largan, and Catcher are key

component suppliers into

the space

13 January 2015


TSMC: Competitive landscape in focus for 2015

We downgraded TSMC to a NEUTRAL (from Outperform) with an unchanged target price

of NT$145, toning down our positive view since the financial crisis due to increasing

customer concentration risks, moderating growth, rising competition and valuation being

back in line with Taiwan tech and its historical average. More specifically, (1) TSMC's

business is growing more concentrated at its top three mobile customers where further

share gains are limited; (2) tier-two foundries are finally ramping the high volume 28nm

node at better yields; (3) mobile continues to mature and shift downmarket, with TSMC

gaining less high-end share after penetrating Apple last year; and (4) sequential sales and

earnings momentum are now slowing through 2015. We are not overly negative due to

TSMC's own good technology execution and rising cash flows and yields as growth

moderates and still see strong results near-term when they report on Thursday.

Customers more concentrated and diversifying as

Tier-two foundries ramp

The emergence of more foundries could shift the pricing landscape and begin eating into

TSMC's market share on projects and customers in 2015. A look at TSMC's customer

base at 28nm and below shows a concentrated profile with the top six contributing about

half of the company's sales. TSMC can protect pricing where it has a dominant position

but may increasingly need to face rivals' aggressive actions to fill their capacity through

the large strategic customers that have the resources and volume to multi-source.

Figure 104: Large customers a concentrated piece of

TSMC's advanced technology

Figure 105: The top-three mobile customers propelled

TSMC's growth


■ Top-three customers have driven half of TSMC's growth but are accelerating

their diversification. A substantial portion of TSMC's sales are being driven by the

company's top three customers that have gained substantial share in the mobile

market: Apple, Qualcomm and MediaTek. These customers grew their production at

TSMC at a 47% growth rate during TSMC's 2010-14 post the financial crisis growth

spurt, outpacing the 9% growth rate for the rest of the customer base to accelerate

TSMC's overall growth by 700 bp to 16%.

Figure 106: TSMC's top-three mobile customers drove 50% of its 2010-14 growth, adding 7 points to its sales CAGR


0%

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14%

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28%

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56%

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1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16

TSMC 28nm & below (%)

28nm & below US$mn

Qualcomm QCT Apple Mediatek NVIDIAAMD Broadcom Altera XilinxSpreadtrum TI LSI FreescaleAvago Oracle Marvell % of TSMC wafer sales

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E

YoY (%)Sales NT$mn

Top 3 mobile customers Rest of TSMCTop 3 YoY Growth Rest of TSMC YoY Growth

TSMC top 3 customers 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E CAGR '10-14

TSMC sales 257,213 266,565 317,407 322,630 333,158 295,742 419,538 427,081 506,249 597,024 759,097 16.0%

YoY Growth 3.6% 19.1% 1.6% 3.3% -11.2% 41.9% 1.8% 18.5% 17.9% 27.1%

Qualcomm 22,115 24,718 33,950 37,731 46,523 33,026 37,962 60,412 87,099 130,564 145,867 40.0%

Mediatek 3,135 1,809 2,623 3,318 6,257 12,647 14,119 12,611 23,749 31,734 45,292 33.8%

Apple 0 0 0 0 0 0 0 0 0 0 49,189 NA

Top 3 mobile customers 25,250 26,527 36,573 41,049 52,780 45,672 52,081 73,023 110,848 162,298 240,348 46.6%

YoY Growth 5.1% 37.9% 12.2% 28.6% -13.5% 14.0% 40.2% 51.8% 46.4% 48.1%

Rest of TSMC 231,963 240,038 280,834 281,581 280,378 250,070 367,457 354,058 395,401 434,726 518,749 9.0%

YoY Growth 3.5% 17.0% 0.3% -0.4% -10.8% 46.9% -3.6% 11.7% 9.9% 19.3%

% of TSMC's revenue from top 3 9.8% 10.0% 11.5% 12.7% 15.8% 15.4% 12.4% 17.1% 21.9% 27.2% 31.7%

% of TSMC's growth from top 3 13.7% 19.8% 85.7% 111.4% 19.0% 5.2% 277.6% 47.8% 56.7% 48.2% 50.3%

TSMC's top customers

driving a sizeable portion of

its leading edge business

Top-three customers, in

particular, have added

700bp to TSMC's growth the

past four years


13 January 2015


These top-three customers have represented half of TSMC's growth during this period, a

result of TSMC executing well to capture high share of these winning customers, with

Apple leading high-end smartphones, Qualcomm dominating 3G and 4G baseband, and

MediaTek leading the mass market brands emerging in China.

■ Apple and Qualcomm's share looks to be peaking after a strong 2014. TSMC's

strong outgrowth in 2014 was lifted further by the ramp into Apple's aggressive iPhone

6 refresh, also wins in iPad, and continued share of near 70% of Qualcomm's

US$7 bn foundry production TAM, as competitors lagged on 20/28nm. TSMC ramped

Apple's 20nm business well and maintained most of Qualcomm's high-end

Snapdragon 600/800 series and split some of the mainstream Snapdragon 200/400

with GlobalFoundries.

For 2015, the situation changes and TSMC's market share at these customers looks

set to drop from 4Q14 peak levels. At Apple, we expect Samsung to pick up the

majority of the iPhone business for the A9 processor from mid-2015 with the iPhone

6S refresh along with first Gen Apple Watch S1 processor, with GlobalFoundries

coming in 1-2 quarters later as a second source for the iPhone. We still see TSMC

securing the next iPad Air on 16nm FF+ and some phone share (potentially 4" iPhone

6C on 20nm and a higher-end plus model on 16nm FF+ if GlobalFoundries lags as a

back-up source). Even with the iPad and modest iPhone share, TSMC's market share

and sales dip here through 2015 and it may take it two years to get back to the 4Q14

highs at this ~10% customer. Our expectations for iPad and some iPhone business

though are consistent with TSMC management's tone for initial sales in 3Q15, and

steep ramp toward high single digits to 10% sales in 4Q15 and towards 20% of sales

in 1H16, though they are still below some more optimistic views on TMSC’s Apple

share and down from TSMC’s sweep of the 2014 refresh.

Figure 107: TSMC volumes with Apple at a two-year high Figure 108: TSMC's Qualcomm allocation now declining


For Qualcomm, the company continues to highlight its multi-sourcing strategy once it can

ramp multiple foundries on advanced nodes to provide upside capacity buffer,

diversification and better pricing. To give TSMC strong credit here, it has executed better

on 28nm and 20nm and offered the effective capacity to dominate the business over the

past few years while competitors struggled to improve yields and match TSMC's delivery.

Figure 109: Qualcomm highlighted its multi-source strategy at its analyst day

Source: Qualcomm

For 2015, however, we also see Qualcomm more successfully bringing in other foundries

as it will keep 28nm on a now mature node in its fourth year, giving other foundries time to

work out issues and build up a competitive process. We estimate it already has passed

US$1 bn with GlobalFoundries last year on 28nm LP. Qualcomm's strategy and urgent

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US$mn

Samsung Apple share TSMC Apple share

Apple % of TSMC

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60%

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90%

$0

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$4,500

$6,000

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$9,000

2010 2011 2012 2013 2014 2015 2016

Allocation %US$mn

Qualcomm Production Qualcomm TSMC TSMC Share of QCOM

13 January 2015


need to produce lower cost chips to compete with MediaTek in emerging markets implies it

uses the cheaper 28nm LP rather than 28nm HKMG process, keeping GlobalFoundries an

alternative option through the year and also helping the ramp up for UMC and, later in the

year, SMIC. Qualcomm's management noted multiple times at its analyst day that SMIC is

a focus foundry and a key partner for China built smartphones and also to help it navigate

the local Chinese political environment.

The mass-market Snapdragon 400 using the 28nm LP process represents the higher

growth area for 2015, more closely tracking the +24% emerging market unit growth and

the LTE upgrade cycle as against the +6% developed market growth. At the high-end,

TSMC's share may also fall from 100% by late in the year. We believe Qualcomm will split

some Snapdragon 800 business to Samsung by 4Q15 on 14nm, and also bring in

GlobalFoundries by 2016 once the technology is transferred successfully.

While TSMC's yield is high (we believe over 80% on 20nm and achieving 80% on 16nm

logic test chips), Samsung's yield is improving and we believe it is now in the 50-60%

range on its internal Exynos versus 30-40% a few months back; this looks to be at

acceptable levels for production, with 40k-50k WPM getting shifted to 14nm in Austin. We

acknowledge a fair upside case for TSMC will be if competitors slip again when advanced

technology enters high volume, an area that has kept business moving back to TSMC in

the past few years, though at this stage Samsung/GF 14nm looks on track to move into

production.

Revised sensitivity to Qualcomm and Apple allocations

We have updated our sensitivity of the Apple and Qualcomm allocations as TSMC's

largest two customers factoring in some share erosion from 2014 peak levels.

■ Apple share dipping from 2H14. We estimate TSMC's Apple share reached 80% in

2H14 (all the new products, with prior models at Samsung on 28nm) but could dip to

40% in 3Q15 as Samsung ramps up iPhone on 14nm and also produces the S1

processor for the low volume watch. The implication is Apple would fall from 13% of

sales in 4Q14 to 5% by 3Q15, creating a drag on sequential momentum off a high

1H15 base. From there, TSMC is working to regain allocation for 16nm FinFet+ in

2016 and 10nm in 2017, but this is still a swing factor.

Figure 110: Apple share dips to 40-45% by 2H15 before rebounding in 2016


For Qualcomm, we still expect it to ramp up second-source foundries and estimate its

allocation to TSMC slipping from 68% in 2014 to 65% in 2015 and 60% by 2016 as

additional foundries ramp 28nm and the Samsung/GF camp comes in on 14nm. Our base

case is 10% US$-based wafer sales growth for TSMC in 2015 due to easy compares in

1H15, though by 4Q15, YoY growth could turn slightly negative. In our base case, TSMC

would generate NT$11.50 EPS factoring in the boost from the recent NTD depreciation.

TSMC potential 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 2013 2014 2015

Wafer demand (thousands) 123 100 95 150 122 98 103 136 118 104 115 156 487 468 459

Revenue per 12" wafer, US$ 8,400 8,190 7,985 7,786 7,591 7,401 8,141 7,938 7,739 7,546 8,300 8,051 5,662 8,074 7,777

Apple Processor Sales (US$ mn) $1,031 $817 $758 $1,170 $927 $722 $840 $1,079 $911 $788 $953 $1,259 $2,755 $3,777 $3,568

TSMC share: 0% 20% 70% 80% 80% 80% 40% 45% 70% 70% 70% 70% 0% 43% 60%

TSMC Apple assumption: $0 $163 $531 $936 $741 $578 $336 $486 $638 $552 $667 $881 $0 $1,631 $2,141

Apple % of TSMC 0.0% 2.7% 7.6% 13.0% 11.3% 8.3% 4.6% 7.1% 9.3% 7.4% 8.5% 11.4% 0.0% 6.5% 7.7%

Rest of TSMC $4,900 $5,912 $6,437 $6,255 $5,803 $6,424 $6,911 $6,399 $6,247 $6,919 $7,176 $6,845 $20,111 $23,505 $25,537

QoQ / YoY -0.7% 20.7% 8.9% -2.8% -7.2% 10.7% 7.6% -7.4% -2.4% 10.7% 3.7% -4.6% 16.9% 8.6%

TSMC sales (US$ mn) $4,900 $6,076 $6,968 $7,191 $6,544 $7,002 $7,247 $6,885 $6,885 $7,470 $7,844 $7,726 $20,111 $25,135 $27,678

QoQ / YoY -0.7% 24.0% 14.7% 3.2% -9.0% 7.0% 3.5% -5.0% 0.0% 8.5% 5.0% -1.5% 25.0% 10.1%

Low cost smartphone chips

staying on the less complex

28nm LP keeps the door

open for more foundries

Factoring in the

Samsung/GF alliance with

majority of iPhone, with

TSMC ramping iPad in late

2015, and potentially a

minor part of the phone

business

13 January 2015


Figure 111: Factoring in some decline of TSMC's share at

QCOM/Apple—65% QCOM and 60% Apple in 2015

Figure 112: TSMC's 2015 growth sensitivity to Qualcomm

and Apple share


Figure 113: TSMC's 2015 sales growth sensitivity to

allocation of Qualcomm and Apple’s manufacturing

Figure 114: TSMC's 2015 stock price sensitivity to

allocation of Qualcomm and Apple’s manufacturing


TSMC's position in MediaTek has already ramped up to a high level, capping upside

While low-cost smartphones should be a natural driver for market share, TSMC's share

penetration into its largest customer MediaTek has largely played out. A look at

MediaTek's annual filings show TSMC's foundry share ramped up from 20% to 70% from

2007 to 2013, growing from NT$1 bn/year to NT$45 bn/year (US$1.5 bn incremental

sales). We expect TSMC to retain about 70% share, but see UMC finally being viable with

good yields on 28nm and GlobalFoundries growing share off a lower base.

MediaTek's choice to lower its manufacturing costs to compete with Qualcomm using

28nm LP technology rather than 28nm HKMG (10-15% lower wafer price) for most of its

LTE products, also lowers MediaTek's entry barrier for to multi-source or at the very least

may force TSMC to be more aggressive to protect business at this strategic customer.

Figure 115: Low-end smartphones have more unit growth Figure 116: TSMC's penetration at MediaTek already high


Tier-two suppliers are finally viable options on 28nm

The 28nm technology node, a high volume process that ramped starting 2012 at very high

market share, is now maturing and facing more competition as second tier foundries ramp.

The node remains very important, holding at US$2 bn/quarter for TSMC, about one-third

of its revenue and a node in which TSMC has held about 80% market share, ex. Apple,

through 2014. The node remains a high volume node as the last process technology node

2010 2011 2012 2013 2014 2015 2016Qualcomm Production $2,508 $3,318 $4,352 $6,260 $7,111 $7,781 $8,715

Qualcomm TSMC $1,205 $2,057 $2,948 $4,398 $4,835 $5,058 $5,229

TSMC Share of QCOM 48% 62% 68% 70% 68% 65% 60%

Apple Production $445 $1,440 $2,582 $2,755 $3,777 $3,568 $3,706

Apple TSMC $0 $0 $0 $0 $1,631 $2,141 $2,594

TSMC Share of Apple 0% 0% 0% 0% 43% 60% 70%

Rest of TSMC $12,117 $12,486 $14,189 $15,713 $18,670 $20,480 $22,102

YoY Growth 3.0% 13.6% 10.7% 18.8% 9.7% 7.9%

Total TSMC $13,323 $14,543 $17,137 $20,111 $25,135 $27,678 $29,924

YoY Growth 9.2% 17.8% 17.4% 25.0% 10.1% 8.1%

TSMC's Qualcomm allocation

$0 40% 45% 55% 65% 75% 80%

0% -6.1% -4.6% -1.5% 1.6% 4.7% 6.2%

20% -3.3% -1.8% 1.3% 4.4% 7.5% 9.1%

40% -0.5% 1.1% 4.2% 7.3% 10.4% 11.9%

50% 1.0% 2.5% 5.6% 8.7% 11.8% 13.3%

60% 2.4% 3.9% 7.0% 10.1% 13.2% 14.8%

70% 3.8% 5.3% 8.4% 11.5% 14.6% 16.2%

80% 5.2% 6.8% 9.9% 13.0% 16.1% 17.6%

100% 8.1% 9.6% 12.7% 15.8% 18.9% 20.4%

TS

MC

's A

pp

le

All

ocati

on

TSMC's Qualcomm allocation TSMC EPS based on QCOM/Apple share

$12 40% 45% 55% 65% 75% 80%

0% $8.45 $8.73 $9.29 $9.87 $10.45 $10.75

15% $8.84 $9.12 $9.69 $10.27 $10.86 $11.16

25% $9.09 $9.38 $9.95 $10.54 $11.14 $11.44

40% $9.48 $9.77 $10.35 $10.95 $11.55 $11.86

55% $9.88 $10.17 $10.76 $11.36 $11.98 $12.29

60% $10.01 $10.30 $10.90 $11.50 $12.12 $12.43

80% $10.55 $10.85 $11.45 $12.07 $12.69 $13.01

100% $11.10 $11.40 $12.02 $12.64 $13.28 $13.60

TS

MC

's A

pp

le

All

ocati

on

TSMC EPS based on QCOM/Apple share

$8.50 $9.50 $10.50 $11.50 $12.50 $13.50

9.6x $82 $91 $101 $110 $120 $130

10.6x $90 $101 $111 $122 $133 $143

11.6x $99 $110 $122 $133 $145 $157

12.6x $107 $120 $132 $145 $158 $170

13.6x $116 $129 $143 $156 $170 $184

14.6x $124 $139 $153 $168 $183 $197TS

MC

mu

ltip

le

0%

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100%

2008

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TSMC % UMC % GF / Chartered %

13 January 2015


that does not require the added complexity of multiple patterning on the lithography and

HKMG and is still not a mandatory option on the LP process for cost sensitive products.

As the node matures, we are seeing second-tier foundries making progress and moving

ahead with capacity additions: (1) UMC 28nm yielding at mid-80% now and ramping up,

12" in China ahead of TSMC; (2) GlobalFoundries' 28nm already sizeable (20% market

share) and 14nm finally making progress; and (3) SMIC is starting up 28nm for Qualcomm

in 2H15 if it executes.

■ TSMC's 28nm capacity and revenue share is dipping a bit from 2015. On Tier-two

foundry ramp, we expect 28nm competition to be fiercer at strategic customers in

2015. We project 28nm capacity growth may re-accelerate from 10% YoY to 17% YoY

in 2015 with the new additions from GlobalFoundries and UMC. With UMC ramping off

a low base from 1H15 and SMIC from 2H15, we also expect TSMC's market share to

dip from 75% to 65% over the next two years. TSMC's capacity share also looks to be

falling slightly on our supply bottom rising with second-tier foundry capacity additions.

Figure 117: TSMC 28nm share declines as tier-two

foundries ramp

Figure 118: TSMC's capacity share also dipping in 2015


The space maintains fierce and well-backed indirect and direct competitors Intel and

Samsung (which is also now supporting GlobalFoundries technology migration), China-

backed SMIC, and now UMC finally having higher yields on high volume 28nm. These

factors should lead to a moderation of earnings and volatility will hinge on fewer large

customer designs-wins (Apple Ax, Snapdragon 800 series) and more price competition for

the mass market mainstream designs driving the critical advanced nodes.

Technology, CFs, and GM support keeps us from

being too negative

While we downgraded the stock to a NEUTRAL, we are not moving into the bear camp as

(1) TSMC is executing well on technology to ensure good yields/margins and reasonable

share and pricing, (2) it has a sizeable mature node base where the technology landscape

is more stable, and (3) it is committed to returning free cash flow through rising dividends

as it harvests more cash. Margins will see support from good yields, easing depreciation

growth, pre-builds in the low season to maintain utilisation, and NTD depreciation tailwind.

■ 4Q14 sales lifted by Apple builds and currency tailwind. 4Q14 sales reached

NT$222.5 bn, +6.4% QoQ, above guidance for NT$217-220 bn and CS/Street's

+5.3%/+4.6% QoQ. The company saw 1.8% sales boost (NT$3.9bn) from the

NT$/US$ 4Q average rate of 30.86 versus 30.31 guidance, accounting for the upside

relative to the midpoint of the guidance. Sales were driven by strong 20nm production

for Apple, contributing at least 20% of sales in 4Q14, offsetting modest decline in Non-

20nm business as customers adjusted inventory into the low season. Margins likely

will come in above the high-end of guidance of 48-50% on the higher sales, good

process yields on the 20nm ramp, and 70bp lift from favourable NTD.

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cash yields

13 January 2015


Figure 119: TSMC—4Q14/1Q15 and 2014-2016 CS versus street estimates

Source: Company data, Bloomberg consensus, Credit Suisse estimates

■ 1Q15 supported by products pre-building and currency tailwind. We expect the

company to guide 1Q15 sales down low to mid-single digits QoQ, similar to the normal

seasonal profile. TSMC will encourage customers to build in the low season to keep

capacity full through the year. TSMC may see a slightly sharper decline of the high-

ASP 20nm Apple business, but offset by the depreciating NTD, which will boost 3.5%

if NT$/US$ holds near current 32.0. Margins should hold up well as it again manages

capacity through the low season to keep utilisation high and the currency tailwind adds

another 150bp to GMs. The 6% NTD/USD depreciation at current levels of 32.0 would

boost TSMC’s growth in 2015 by 6% YoY, GMs by 240bp and EPS by a full NT$1.00,

adding 10% to earnings growth.

Figure 120: NTD depreciation could add NT$1 to 2015 EPS


Valuation now back in line after strong 2014 performance

With top customers' multi-sourcing, second-tier foundries catching up on 28nm and

revenue/earnings growth momentum moderating, we believe TSMC's stock is now fairly

valued trading at 13.3x/12.2x 2014/2015 P/E and 3.4x/2.8x 2014/2015 P/B. Despite robust

process technology, good margins and cash flows, the moderating growth, rising

competitor challenges and concentrating customer base may limit further upward multiple

expansion, keeping us more balanced on the stock at current levels.

Figure 121: TSMC trading near its long-term range Figure 122: TSMC trading at the midpoint of its P/B range


4Q14 1Q15 2Q15 2014 2015 2016

(NT$ mn) CS Street Guidance CS Street CS Street CS Street CS Street CS Street

Sales 220,053 218,671 NT$217-220bn 206,138 201,433 220,568 215,984 760,338 758,249 871,866 868,581 942,620 947,315

Chg (%) 5.3 4.6 +3.8-5.2% QoQ -6.3 -8.5 7.0 7.2 27.4 27.0 14.7 14.6 8.1 9.1

GM (%) 49.7 49.3 48-50% 48.4 47.9 50.5 49.1 49.5 49.4 49.8 49.0 48.4 48.6

OpM (%) 39.5 39.1 38-40% 37.9 36.5 39.9 38.3 38.7 38.7 39.0 38.4 37.6 38.8

Net Inc. 78,150 76,425 FX NT$30.31 70,467 66,193 70,485 68,094 261,923 259,662 298,263 289,597 311,148 313,254

EPS (NT$) 3.01 2.95 2.72 2.53 2.72 2.63 10.10 10.02 11.50 11.20 12.00 12.10

2014 2015 Flat NT$ 2015 CS 2015 NT$ Current

P&L at 30.2 P&L at 30.2 P&L at 31.5 P&L at 32.0

Wafer Sales (US$) $23,396 $25,868 $25,868 $25,868

YoY Growth (US$) 10.6% 10.6% 10.6%

NT$ 30.2 30.2 31.5 32

NT$ Sales $707,722 $781,200 $814,828 $827,762

Other Sales (NT$) $52,608 $52,608 $57,038 $57,038

Sales (NT$) $760,331 $833,809 $871,866 $884,800

YoY Sales (NT$) 9.7% 14.7% 16.4%

GM% 49.5% 48.1% 49.8% 50.4%

Gross Profit $376,364 $401,062 $433,753 $445,939

Operating Expense $81,896 $81,896 $93,429 $93,429

Operating Income 294,468 319,166 340,325 352,511

Op Margin % 41.6% 40.9% 41.8% 42.6%

Non Op Income 6,020 6,020 4,750 4,750

Pretax Income 300,488 325,187 345,075 357,261

Tax Rate 12.9% 12.9% 13.6% 13.6%

Net Income $261,871 $283,395 $298,196 $308,727

YoY Net Income 8.2% 13.9% 17.9%

EPS $10.10 $10.93 $11.50 $11.91

Shares 25,930 25,930 25,930 25,930

10.6x

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13 January 2015


SMIC: 28nm and Chinese customers driving the 2015

outlook

SMIC is the leading IC foundry in China and has engineered a turnaround as it has

focused on growing its local Chinese customer base, adding more specialty applications

including power management, CMOS image sensors and smart card IC solutions, and

also capitalising on greater domestic support for the chip industry.

The company’s revenue is driven by consumer and communications, with key customers

including Qualcomm and Broadcom among overseas customers and emerging Chinese

fabless including Spreadtrum, Shanghai Fudan, Giga Device, Hisilicon and Galaxy Core.

The company also generates 30% of sales from specialty applications including CMOS

sensors, power management and smart cards. The company also has a material

opportunity to address the high-volume low cost smartphone baseband market by ramping

its anchor customer Qualcomm in 2H15. SMIC will see a mild seasonal sales drop in 1Q15

but is already seeing utilization recover into 2Q15 as it backfills applications on 12" mature

nodes and prepares to ramp 28nm in 2H15.

Figure 123: SMIC driven by consumer/communication (in millions, unless otherwise stated)


■ China IC support providing a continued lift. SMIC expects to continue to benefit

both from its direct customers in China getting more support, from private equity

investments in the space and direct subsidies and JV opportunities in China. The

company’s R&D grants are up to US$40 mn this year and 55/45 JV fab in Beijing for

28nm continues to ramp toward 35K WPM, with the option to build a second 35K

WPM fab once that facility is complete. SMIC now serves a broad base of Chinese

fabless companies, including mobile basebands (Spreadtrum, RDA Micro), DTV and

Set-Top-Box chipsets (Hisilicon), wireless connectivity (RDA Micro), CMOS image

sensors (GalaxyCore), tablet apps processors (Rockchip, Allwinner), NOR flash

(GigaDevice), smart card ICs (CEC Huada, Shanghai Fudan Microelectronics,

Tongfang Microelectronics, and Datang Microelectronics ).

■ 28nm ramp key for 2015, ramp inflection from 2H15. SMIC will have 6K WPM

capacity in Shanghai in 4Q14 and 16K WPM by 4Q15, with first production in 1H15

and revenue in 3Q15 and ramping steeply from there. Most of the sales are from

Qualcomm and could reach mid-single digits in 3Q15 and 10-15% by 4Q15 if yields

ramp well. 2016 will focus on broadening the customer base with other US and China

customers engaged already.

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Computer CommunicationConsumer Other/Industrial

SMIC is our emerging

market pick as it should

benefit from the China IC

support and chance to ramp

into Qualcomm on 28nm

13 January 2015


Figure 124: 28nm/40nm/65nm reaching over 40% of sales Figure 125: China fabless companies driving SMIC growth


■ 8” seeing support from China bank cards, power management and CMOS image

sensors. SMIC sees three main types of demand supporting the growth of 8" fabs: (1)

demand for analog and mixed signal content for the mobile device market; (2)

advanced up from mature 6" IDM fabs (note Fairchild announced last week it would

shut 6" capacity and increase foundry outsourcing); and (3) injected by new wave

applications (IoT, wearable). The company also discussed its various technology

offerings in its specialty process generating one-third of sales: (1) CIS—SMIC is now

qualifying 2MP BSI and will have 5/8MP in 2015, (2) PMIC—35um-.18um in volume

production, (3) eNVM (MCU, smart card)—18um-55nm; the first bank card business is

ramping into 2015, with four of six suppliers now qualified, (4) flash controller—

55/40nm with demonstrated yield; and (5) MEMS: specialty process and total TSV

packaging solution.

■ Capex to stay near similar levels. SMIC capex is US$1 bn and the company sees

similar range over the next couple years. The company wants to stay prudent on

investment consistent with customer commitments rather than building a high amount

of capacity in hope the applications come in.

Figure 126: SMIC's operating metrics


■ Business on track, with utilisation improving by 1Q15. SMIC indicated 4Q14 is as

expected for a decline consistent with other foundries. The company has seen some

order pick-up into 1Q15 as it qualifies new 40nm applications (connectivity, set-top,

TV) and sees a bit of recovery on its 12” also with some MCUs and NFC products

ramping. Utilisation will start to rise in 1Q15 and sales decline looks pretty modest.

2Q15 should see a pick-up in the broader business, with 2H15 mostly from the

28nm ramp.

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US$mn

North America China Eurasia

1Q14 2Q14 3Q14 4Q14E 1Q15E 2Q15E 3Q15E 4Q15E 2013 2014E 2015E 2016E

Capacity (8" equivalent) 731 743 743 758 809 837 857 886 2,726 2,974 3,389 3,698

Sequential Change (%) 4% 2% 0% 2% 7% 4% 2% 3% 13% 9% 14% 9%

Shipment (8" equivalent) 582 649 669 629 611 665 721 769 2,568 2,529 2,766 3,144

Sequential Change (%) -3% 12% 3% -6% -3% 9% 8% 7% 16% -2% 9% 14%

Utilization (Shipments/Capacity) 80% 87% 90% 83% 76% 79% 84% 87% 94% 85% 82% 85%

Logic ASP $724 $752 $738 $729 $721 $716 $739 $741 $760 $736 $730 $729

Sequential Change (%) -5% 4% -2% -1% -1% -1% 3% 0% 5% -3% -1% 0%

Simple ASP (Revenue/Shipments) $776 $788 $780 $771 $762 $757 $781 $784 $760 $736 $730 $729

Sequential Change (%) -5% 2% -1% -1% -1% -1% 3% 0% 5% -3% -1% 0%

Capex (US$mn) (Management) $108 $142 $282 $450 $350 $350 $350 $300 $770 $983 $1,350 $1,400

Capex (US$mn) (Cash Flows) $108 $142 $282 $450 $350 $350 $350 $300 $650 $983 $1,350 $1,400

Capex/revenue (%) 26% 29% 57% 98% 79% 74% 66% 53% 33% 53% 67% 61%

Revenue $451 $511 $522 $485 $466 $503 $563 $603 $2,069 $1,969 $2,135 $2,423

EPS $0.03 $0.08 $0.07 $0.02 $0.01 $0.05 $0.07 $0.09 $0.16 $0.20 $0.21 $0.28

Gross Margin (%) 21% 28% 26% 22% 21% 26% 26% 27% 21% 24% 25% 25%

Operating Margin (%) 7% 11% 8% 3% 2% 8% 10% 12% 6% 7% 8% 9%

Depreciation/Wafer $191 $164 $162 $199 $213 $211 $194 $182

Non Depreciation/Wafer $418 $401 $415 $402 $390 $351 $379 $391

4Q14 down in-line with

peers, but 1Q15 utilisation

holds up better

13 January 2015


Figure 127: SMIC—4Q14-1Q15 and 2014-2016 estimates summary

Source: Company data, Credit Suisse estimates, Bloomberg consensus

■ Maintain NEUTRAL. While we like SMIC’s long-term potential as a beneficiary of the

stepped-up support from China for its emerging semiconductor ecosystem and

potential large opportunity even with a small share of Qualcomm’s baseband TAM, we

rate the stock as NEUTRAL with HK$0.80 target price. We believe the stock has run a

bit ahead of fundamentals, with valuation now at 1.2x P/B despite 5% ROE, and

coming off a year of growth disappointment and still requiring execution in a brand

new fab ramping a 28nm node that has proved difficult for other foundries to ramp up.

We would look for the next catalyst if the company can execute on 28nm.

MediaTek: Fighting the competition to preserve

growth and margins with the shift to LTE

MediaTek has already gone through two strong handset product cycles with the initial

ramp of feature phones in China and emerging markets followed by the past few years'

penetration of low cost smartphones. The company is now looking to extend that product

cycle by growth with further penetration but also by making the transition into LTE and

continuing to provide areas to innovate on its platform in smartphones while extending into

adjacent IoT and wearable applications.

The addressable market off our global model still has some room left for further growth,

with emerging market smartphones scaling from 900 mn units in 2014 to 1.5 bn units by

2017 and sub-$200 smartphones growing from 65 0mn units in 2014 to 1.2 bn units by

2017. Our estimates factor in a scenario of MediaTek reaching 43% of emerging market

smartphones and 55% of the sub-US$250 smartphone market, with additional units

from tablets.

Figure 128: MTK's penetration in emerging market phones Figure 129: MTK's penetration in low-cost phones

Source: Company data, Credit Suisse estimates Source: Credit Suisse estimates

The company's gains have helped enable and come in parallel with the Chinese tier-one and

tier-two brands taking market share in the local market and now ramping up into the export

channel. Local Chinese brands now command 80% of the Chinese market and have passed

40% global market share, a ramp in step with MediaTek's ramp up since early 2011.

4Q14 1Q15 2014 2015 2016

(US$ mn) CS Street Guidance CS Street CS Street CS Street CS Street

Net sales $485 $488 $496-475mn $466 $482 $1,969 $1,982 $2,135 $2,256 $2,423 $2,549

Change -7.0% -6.4% - 5 to 9% QoQ -4.0% -1.3% -4.8% -4.2% 8.4% 13.8% 13.5% 13.0%

GM % 21.9% 22.2% 19.5-22.5% 20.7% 20.8% 24.4% 24.6% 25.1% 24.0% 25.5% 24.7%

OpM % 3.5% 5.1% Opex $99-103mn 1.8% 4.4% 7.4% 7.9% 8.1% 8.7% 9.4% 9.0%

Net income 14 22 5 20 152 147 150 176 200 210

EPS (US$) $0.000 $0.001 $0.000 $0.001 $0.004 $0.003 $0.004 $0.004 $0.006 $0.006

ADR EPS (US$) $0.02 $0.05 $0.01 $0.05 $0.22 $0.15 $0.21 $0.20 $0.28 $0.30

HK EPS (HK$) $0.003 $0.01 $0.001 $0.01 $0.034 $0.02 $0.033 $0.03 $0.044 $0.05

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emerging market

smartphones and 55% of

the sub-US$250

smartphone market

13 January 2015


Figure 130: MediaTek taking share with local brands

in China

Figure 131: MediaTek/China share gains in global markets


LTE in focus: 1H15 the toughest period on

competitive pressures

LTE will be a key focus for the market, with our forecasts projecting LTE unit shipments for

the China brands growing from 140mn units in 2014 to 300mn+ in 2015. While Qualcomm

has grown faster than MediaTek in 2014 in China and is outshipping MediaTek this year

by about a 3:1 magnitude, we believe some of that is now a lagging indicator of its

success as the early leader in LTE chipsets. MediaTek until late 4Q14 has been offering a

less competitive 2-chip modem plus processor against Qualcomm’s 3rd

generation LTE

SoC. We are seeing ultra-low cost LTE coming in around US$8-10 (versus Qualcomm's 32-

bit MSM8909 at $8), entry quad-core at US$10-12, mainstream octa-core at $17-19 and

high-end big.LITTLE into 1Q15, pressuring margins into the low season in 4Q14.

Figure 132: MediaTek 2G/3G/LTE units vs ASPs Figure 133: MediaTek 2G/3G/LTE sales vs. margins


The ramp-up of LTE at competitive pricing and lower margins could possibly take margins

to a lower level in 1H15 until the second generation SoC products pass cross-over in 2H15.

Feedback is for LTE pricing at about 10% premium over 3G for similar specs and LTE mix

is also better. We expect MediaTek's margins to trough in 2Q15 with Qualcomm's

aggressive pricing and also should be ahead of MediaTek's next-generation LTE refreshes.

We estimate LTE margins will be 41% now but will drop to 40% in 1Q15 before it rebounds

back up to the mid-40% level exiting 2015. We also expect LTE ASPs to gradually decline

from US$15.2 in 3Q14 to US$11.3 in 4Q15, although blended ASPs are still stable to

slightly up at US$6.4 with continued mix shift from 2G to 3G/4G. We model LTE to account

for 22% total smartphone shipment in 4Q14 and will reach at least 30% of mix by 4Q15.

The company also expects continued core migration as mid- to high-end chips will all be

on octa-core in 2015, while low-end and mainstream move to quad-core.

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0%5%10%15%20%25%30%35%40%45%50%55%60%65%

02,5005,0007,500

10,00012,50015,00017,50020,00022,50025,00027,50030,00032,500

1Q

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GM (%)Sales (NT$mn)

2G sales 3G (WCDMA+TD) sales LTE sales2G GM % 3G GM % LTE GM %Corporate GM %

1Q15 still a traditionally low

season with lower margins

13 January 2015


Figure 134: EM exports will continue to grow for MediaTek Figure 135: LTE to drive the next growth leg


Our checks at multiple local brands, however, point to MediaTek’s 6732/6752 SoCs

launching this month at most of the China brands and seeing very wide design in traction.

While some vendors acknowledge Qualcomm’s platform is more stable and mature, and

offers better power consumption, a wide array of local solution houses, component

suppliers and brands with history working with MediaTek back in the feature phone days

are now marketing a number of designs with MediaTek’s new SoCs.

Figure 136: MediaTek matching up closely with Qualcomm’s offerings


■ 4Q14 sales slightly lower. MediaTek reported 4Q14 sales of NT$55.5 bn, -3.5%

QoQ, versus guidance up 2% to down 6% QoQ, below CS/Street at -2%/-2.4% QoQ,

keeping at least within the guidance range after a disappointing November. The

company is on-track to its LTE plans, though smartphone units were slightly down in

4Q14, mostly due to 3G decline. Other product lines, including TV and PC optical

seasonally declined. Overall blended ASPs remained relatively stable, though we still

expect margins to decline QoQ and model 48.5% as LTE ramps at lower margins.

■ 1Q15 a low season for sales on fewer working days and product transition. 1Q15

will be a low season ahead of major product launches and to also see impact from

fewer working days. We expect the company to guide 1Q15 sales down high single

digits QoQ and model -6.4% QoQ vs. street -5.9% QoQ. The ramp-up of LTE at

competitive pricing and lower margins could possibly take margins to a lower level in

1H15 (we’re at 47%) until the second generation SoC products pass cross-over in

2H15. We expect MediaTek's margins to trough in 2Q15 with Qualcomm's aggressive

pricing and still early in the ramp of MediaTek's next-generation LTE refreshes.

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E

2.5G TD-SCDMA WCDMA LTE

Revenue by Technology

Mediatek Mediatek Mediatek Mediatek Mediatek Mediatek Mediatek Mediatek Mediatek

LTE chipsets MT6290 MT6595 MT6732 MT6752 MT6795 MT6735M MT6735 MT6753 MT67XX

SoC Two chip SoC SoC SoC SoC LTE + C2K SoC LTE + C2K SoC LTE + C2K SoC LTE SoC

Technology 28nm HPM 28nm HPM 28nm 28nm HPM 28nm HPM 28nm LP 28nm LP 28nm LP 16FF+

Multi-core Quad core Octa core Quad core Octa core Octa core Quad core Quad core Octa core Octa core

CPU Coresonic SIMT 4 Cortex A7

+ 4 A17

4 Cortex A53

64-bit

8 Cortex A53

64 bit

4 A57 + 4 A53

64-bit

4 A53

64 bit

4 A53

64 bit

8 Cortex A53

64 bit 64 bit


W/TD/EDGE

FDD/TDD LTE

W/TD/EDGE

FDD/TDD LTE

W/TD/EDGE

FDD/TDD LTE

W/TD/EDGE

FDD/TDD LTE

W/TD/EDGE

CDMA2000/

FDD/TDD LTE

W/TD/EDGE

CDMA2000/

FDD/TDD LTE

W/TD/EDGE

CDMA2000/

FDD/TDD LTE

W/TD/EDGE

LTE Cat 6 + CA

Frequency 1.3GHz 2.2-2.5GHz

(big.LITTLE) 1.5GHz 1.7GHz 2.2GHz 1.0GHz 1.3-1.5GHz 1.3-1.5GHz NA

GPU Mali 450 PowerVR 6 Mali-T760 Mali-T760 IMG G6200 Mali-T720 MP1

450MHz

Mali-T720 MP2

450MHz

Mali-T720 MP3

450MHz NA

Camera 13MP/16MP 20MP 13MP 16MP 20MP 8MP 13MP 16MP

Ramp 2Q14 3Q14 4Q14 4Q14 1Q15 2Q15 2Q15 2Q15 4Q15

Exports and LTE to drive the

next growth cycle

Next catalyst to emerge

exiting 1Q15

13 January 2015


Figure 137: MediaTek's operating assumptions (in millions, unless otherwise stated)


A couple of upside areas not in estimates—high-end

LTE, Samsung and developed markets

MediaTek has several upside scenarios to our base assumptions and market

expectations. The market may be too worried on LTE commoditization as product mix is

improving from a mix of over 40% of units at single and dual-core on 3G to all quad-core

and octa-core on 4G. Product mix could have even further upside, as MediaTek is also

introducing a mainstream octa-core chipset for high-teens ASP (above low-end US$8-11

LTE pricing and blended $10 smartphone pricing) and also high-end big.LITTLE at US$30-

35 ASP.

In our base model yielding NT$33 EPS, we have assumed only 5% high-end big.LITTLE

and 15% mainstream octa-core, with 80% of volume a split between mainstream quad-

core and ultra-low cost quad-core. In an upside scenario of 15% of mix on big.LITTLE and

30% on mainstream octa-core, EPS would have over 10% upside to NT$36-36.50.

Figure 138: 3G product mix in 2015 across cores Figure 139: LTE mix will be higher-end


MediaTek also has two largely untapped opportunities valued at US$10 bn—developed

markets, a US$6.5 bn opportunity based on 364 mn units at US$18 ASP (mainly a product

equivalent to mainstream octa-core LTE) and Samsung, a US$3.5 bn opportunity based

on 398mn smartphones and tablets at US$9 ASP (assuming a mix of product similar to

MediaTek's product mix as Samsung would likely use MediaTek for the low to mid-end.

Quarters Years

NT$mn unless noted 1Q14 2Q14 3Q14 4Q14E 2011 2012 2013 2014F 2015F 2016F 2017F

Smartphones (mn) 75.0 88.1 97.5 97.6 10.0 109.8 223.2 358.2 468.7 567.6 675.6

ASPs (US$) $10.16 $10.11 $10.19 $10.37 $13.33 $10.82 $9.93 $10.21 $9.53 $8.72 $7.93

Tablets (mn) 7.3 9.5 11.9 13.1 0.0 0.0 21.9 41.9 57.9 64.5 73.4

ASPs (US$) $11.26 $11.26 $10.93 $10.49 $0.00 $0.00 $12.28 $10.92 $9.96 $9.19 $8.48

Feature phones (mn) 88.7 84.3 78.4 70.5 530.2 391.9 354.0 321.9 288.5 249.0 210.7

ASPs (US$) $1.71 $1.66 $1.59 $1.53 $3.58 $2.26 $1.88 $1.63 $1.41 $1.25 $1.11

Handset/Tablet Sales 29,893 34,264 37,455 37,716 59,512 61,419 93,424 139,329 163,551 175,706 186,404

DTV 7,726 10,518 10,533 10,111 10,722 13,490 16,104 38,888 39,312 39,801 40,416

PC Optical 2,313 2,195 2,202 2,063 10,596 11,489 10,476 8,774 6,775 5,412 4,327

Consumer DVD 694 759 785 691 4,160 3,515 3,515 2,929 2,638 2,171 1,735

WLAN (Ralink) 3,831 4,117 4,118 3,577 1,867 9,365 12,450 15,643 16,201 17,407 18,097

LCD Monitor 448 698 712 659 0 0 0 2,517 2,526 2,526 2,584

STB 764 1,240 1,318 1,151 0 0 0 4,473 4,988 5,263 5,595

Other (GPS, RFID, IoT) 335 342 349 356 0 0 0 1,381 1,748 2,976 5,627

Total Sales 46,005 54,133 57,472 56,325 86,858 99,278 135,968 213,934 237,739 251,263 264,785

GM % 48.3% 49.6% 49.1% 48.5% 45.3% 41.4% 44.0% 48.9% 47.5% 48.2% 47.9%

Op M% 23.5% 23.6% 24.0% 22.0% 14.2% 12.5% 18.6% 23.2% 22.5% 23.3% 23.7%

EPS $6.85 $8.03 $8.51 $7.68 $12.52 $12.81 $20.13 $31.00 $33.00 $36.00 $38.50

Single core5%

Dual core37%Quad core

45%

Octa core13%

Quad core80%

Octa core15%

High-end Octa core

5%

MediaTek could have

upside from strong traction

on its higher-end LTE chips

or eventual push toward

Samsung or developed

markets

13 January 2015


We sensitise a scenario where 10% share of Samsung's volumes and 15% share of

developed markets would yield EPS up to NT$41.30. Both areas represent substantial

upside that would drive the next leg up for the company. We believe Samsung's desire to

differentiate from the Chinese platforms where MediaTek has highest share has limited it

adopting MediaTek to date. That motivation should shift over time, however, as its partner

Qualcomm is now as aggressive with QRD enabling Chinese brands and Samsung has

lost market share to Chinese with that strategy so could use an additional platform and

more localized Chinese sourcing to get more competitive.

In developed markets, MediaTek has not been on par on IP and lagged traditionally on

product performance versus Qualcomm. We believe MediaTek's chipsets now more

closely match Qualcomm as Qualcomm is shifting more products to use ARM's A53/A57

configuration rather than its own optimized Krait architecture and MediaTek is moving into

more advanced big.LITTLE and octa-core 64-bit implementations. MediaTek does still lag

on carrier aggregation LTE modems, a feature not yet required in emerging markets but

critical for efficiently using spectrum and reaching higher peak data rates in developed

markets. MediaTek's first CA chipset will be in 3Q15 and may not be until 2016 before

MediaTek can better approach the specifications of developed market mid-to-high end

smartphones including the modem. Still, from a low base, developed markets and

Samsung offer substantial upside mostly captured by Qualcomm's US$20 bn chipset

business (over 2.5x MediaTek's 2015 sales estimate for US$8 bn, with US$6 bn from

phones, tablets and connectivity).

Figure 140: MediaTek's high-end LTE could drive upside Figure 141: Samsung or developed markets be upside


Maintain OUTPERFORM

We maintain our OUTPERFORM rating on MediaTek with NT$540 target price based on 16x

2015E EPS. The company is not completely out of the woods as 1Q15 is still normally the low

season; it will see LTE ramp up at competitive pricing and below corporate margins, and will

see fierce pricing from Qualcomm determined to retain LTE share. We see catalyst from the

upcoming shipment ramp, and the second generation SoC in 2Q15 and cost down 3G

MT6570/MT6580 would maintain the company's competitive edge to allow it to benefit from

stabilizing margins and growth in 2015. By 2H15, we also see developed markets and

potentially Samsung's large volumes as an additional driver for the company.

Figure 142: MediaTek's estimate summary

Source: Company data, the BLOOMBERG PROFESSIONAL™ service consensus estimates, Credit Suisse estimates

Mediatek big.LITTLE LTE Mix

big.LITTLE: 0.0 2.5 6.2 18.7 31.2

Octa units $33 0% 2% 5% 15% 25%

0 0% $30.55 $30.97 $31.61 $33.74 $35.87

22 5% $30.98 $31.41 $32.05 $34.18 $36.30

45 10% $31.46 $31.88 $32.52 $34.65 $36.78

68 15% $31.93 $32.36 $33.00 $35.12 $37.25

92 20% $32.41 $32.83 $33.47 $35.60 $37.73

115 25% $32.88 $33.31 $33.94 $36.07 $38.20

139 30% $33.36 $33.78 $34.42 $36.55 $38.68MT

K O

cta

-co

re L

TE

sh

are

Mediatek Samsung Units in 2015

Samsung: 0 20 40 60 80

Dev Mkt: $33 0% 5% 10% 15% 20%

0 0% $33.00 $33.99 $34.98 $35.97 $36.96

18 5% $35.11 $36.10 $37.09 $38.08 $39.07

36 10% $37.21 $38.20 $39.19 $40.18 $41.17

55 15% $39.32 $40.31 $41.30 $42.29 $43.28

73 20% $41.43 $42.42 $43.41 $44.40 $45.39

91 25% $43.54 $44.53 $45.52 $46.51 $47.50

109 30% $45.64 $46.63 $47.62 $48.61 $49.60

MT

K D

evelo

ped

Mkts

4Q14 1Q15 2014 2015 2016 2017

(NT$ mn) CS Street Guidance CS Street CS Street CS Street CS Street

Sales $56,325 $56,081 $54.0-58.6bn $52,713 $52,760 $213,935 $213,571 $237,739 $242,455 $251,263 $263,950

Chg -2.0% -2.4% -6% to +2% -6.4% -5.9% 57.2% 57.0% 11.1% 13.5% 5.7% 8.9%

GM% 48.5% 48.0% 47.5-49.5% 47.3% 46.3% 48.9% 48.6% 47.5% 46.8% 48.2% 46.2%

OpM% 22.0% 22.6% 19.5-25.5% 20.1% 21.1% 23.2% 23.4% 22.5% 22.6% 23.3% 23.0%

Net Inc. 12,010 12,215 10,518 10,690 47,825 48,167 51,578 51,808 56,271 55,860

EPS (NT$) $7.68 $7.79 $6.73 $6.90 $31.00 $31.00 $33.00 $32.93 $36.00 $34.87

13 January 2015


WPG: Leading Asian IC distributor

We remain positive on the medium-term growth outlook for WPG as it expands organically

as a large IC distributor for Greater China and also from stringing together acquisitions of

smaller distributors. The company has doubled its Asian distribution share from 12% to

26% since the financial crisis through this combination.

Figure 143: WPG has doubled its share of the APAC distribution market (in millions, unless otherwise stated)

Source: Company data

Scale in distribution has had a positive effect in attracting working capital, broadening

product lines, improving field support and growing customer bases. WPG's semiconductor

distribution is largely tied into the greater China electronics supply chain allowing it to tap

into growth drivers from low cost smartphones and tablets, Apple related products,

computing and consumer products.

Figure 144: WPG has substantial revenue and profit market share in China

Source: Company data

WPG reported segment mix is 33% PCs (including tablet), 31% communications, 18%

consumer, and 18% industrial/other. Within that, however, traditional PC components are

now about 15% of sales and smartphone and tablet have reached 45-50% of sales. WPG

has a good position both into China low cost tablets and Apple iPhone and iPad (15% of

sales) and also benefits from Intel's tablet traction engaging the local China supply chain.

Figure 145: WPG product mix—PC segment is 33% but

includes tablets; smartphone/tablets now 45% of sales

Figure 146: WPG segment mix


4Q14 sales stronger than expected

WPG 4Q14 sales reached NT$117bn, -1.8% QoQ, significantly above guidance for down

6-10% QoQ and CS/Street -7% QoQ, driven by shift in iPhone-related components

business from 3Q14 to 4Q14, better demand for mid-to-low-end smartphones and auto

components in the secondary market. The company noted only moderate slowdown in PC,

communications and consumer. Although the company usually sells off inventory toward

the end of the year, it sees current market inventory level healthy and does not expect a

sharp decline on margins. After an inventory clean-up in late 2013 and rebound in 1H14,

GMs are again dipping a bit as mix gradually shifts to core mobile components.

(US$ bn) 2005 2006 2007 2008 2009 2010 2011 2012 2013

WW Semiconductor TAM 238.0 262.0 270.0 249.0 231.0 298.0 300.0 292.0 306.0

WW Semiconductor TAM in APAC 119.0 140.0 148.0 124.0 119.0 160.0 164.0 163.0 174.0

30% Distributor TAM in APAC 36.0 42.0 44.0 37.0 36.0 48.0 49.2 48.9 52.2

WPG’s sales 3.6 3.6 4.3 4.5 6.0 8.2 11.5 12.2 13.8

WPG’s market share in APAC (%) 10.0 8.6 9.8 12.3 16.6 17.0 23.5 25.0 26.4

(US$ bn) 2006 2007 2008 2009 2010 2011 2012 2013

Revenue Share 30% 31% 31% 39% 41% 53% 57% 58%

Profit Share 29% 36% 49% 52% 53% 56% 65% 61%

-

10

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(%)

PC Communication Consumer Industrial Automotive Others

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CoreComponent Analog & Mixed Signal LogicDiscrete & Logic Memory PassivePEMCO Optical Others

WPG has doubled its

distribution share from 12%

to 26% since 2008

WPG now generates

45-50% of sales from

smartphones and tablets

13 January 2015


Figure 147: CS and Street WPG estimates for 4Q14/1Q15 and 2014-2016

Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service consensus estimates

GMs are stabilising at 4.5-4.7% and Opex should drop from 2.8% to 2.5% with operating

leverage to restore operating margins to 2% with another double digit YoY growth in sales.

The company had steadily lower margins the past couple years due to the shift to more

lower margin panel distribution and increase core components, which represent only 20-

25% of the PC cost but in mobile represent 45-50% of a smartphone/tablet cost.

Smartphones have grown from 10% to 45-50% of sales the past 5 years but have now

peaked now that tablets are back to normal growth while industrial/auto will come up so

the shift to the margin dilutive mobile segment is now expected to be more gradual.

Figure 148: WPG margins more stable at lower levels Figure 149: Revolving credit funding working capital


Management remains optimistic about China smartphones for 2015, suggesting a

substantial lift in new LTE models particularly ramping after Chinese New Year using the

new MTK/QCOM SoCs at attractive price points. WPG also has good leverage to

MediaTek and Intel's tablet reference designs, which are both taking share in China

tablets. It still targets +10% YoY growth after reaching that goal this year. We model a bit

more conservative +8% YoY due to lower base exiting 2014 and requiring strong QoQ

growth to achieve +10%.

Following the results at low-end of guidance and seasonally lower 4Q14 outlook, we

trimmed our 2014/2015 EPS from $3.45/$3.75 to $3.40/$3.65, below street at $3.62/$3.94.

We stay NEUTRAL on the stock, but slightly revise down our target price from NT$43 to

NT$42 based on lower 12x 2015 EPS. WPG offers emerging market unit exposure and

solid 6-7% dividend yield based on NT$2.55 payout next year, but the stock is fairly valued

at 11x 2014 EPS versus its IT distribution peers at 10x P/E.

Figure 150: WPG in-line with its peer group


4Q14 1Q15 2014 2015 2016


Sales $110,637 $110,464 NT$107.5-112.5bn $106,211 $107,537 $446,033 $446,333 $482,292 $476,643 $521,298 $510,551

Chg -7.3% -7.4% Down 5.7-9.9% -4.0% -2.6% 9.8% 9.9% 8.1% 6.8% 8.1% 7.1%

GM (%) 4.50% 4.46% 4.4-4.7% 4.55% 4.51% 4.57% 4.57% 4.61% 4.56% 4.66% NA

Op.M(%) 1.58% 1.60% 1.5-1.7% 1.48% 1.65% 1.77% 1.77% 1.80% 1.85% 1.83% 1.85%

Net Inc. 1,164 1,249 NT$30.4 to US$1 1,026 1,280 5,626 5,745 6,038 6,353 6,622 7,031

EPS (NT$) $0.70 $0.74 $0.62 $0.78 $3.40 $3.44 $3.65 $3.78 $4.00 $4.13

0.0

1.0

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0

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60,000

80,000

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140,000

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WPG GM and Op Margin (%)

WPG Revenue (NT$mn)

Sales GM (%) OpM (%)

-60,000

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-20,000

0

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NT$mn

Cash and investments Net working capital Net debt

Price Mkt Cap EV/Sales (x) P/E Multiple (x) P/B Multiple (x)

Company Ticker 1/3/2014 (US$mn) 2012 2013 2014 2012 2013 2014 2012 2013 2014

WPG 3702.TW 34.3 2,044 0.3 0.2 0.2 10.7 11.2 9.8 1.5 1.5 1.5

Synnex 2347.TW 47.75 2,513 0.3 0.3 0.2 13.4 13.1 11.6 1.8 1.7 1.6

Arrow ARW 52.69 5,012 0.3 0.3 0.3 12.0 11.2 9.8 1.4 1.3 1.2

Avnet AVT 42.68 5,823 0.3 0.3 0.3 10.5 12.3 10.2 1.6 1.4 1.2

Median 0.3 0.3 0.2 11.3 11.8 10.0 1.5 1.5 1.3

Mean 0.3 0.3 0.3 11.6 12.0 10.3 1.6 1.5 1.4

Management optimistic on

the growth potential from

LTE smartphones in 2015

13 January 2015


Back-end: Moderate growth should continue in 2015

The Taiwan back-end has seen a return to growth since 2H12. The sector’s revenue

growth during 2010-12 was deflated by conversion of gold wirebond to copper wirebond at

lower cost but also lower price. That transition is largely complete now and replaced with a

positive sales driver from conversion of smartphones from wirebond to flip chip at higher

ASPs. At the same time, new applications are driving incremental demand including

module business for the fingerprint sensor and watches. The back-end sector should see

a high single-digit sales decline in 1Q15 followed by restocking and new builds for

smartphones along with some incremental units from the Internet of Things, a broad catch-

all category for connecting electronics to all devices and now increasing silicon content in

the industrial and automotive verticals.

Figure 151: Growth has now turned positive again Figure 152: Back-end has gained market share


Capex may decline after stepping up in 2014

The back-end sector has seen steady upward revisions through 2014, with capital

spending getting revised up from US$2.4 bn to US$2.9 bn, taking capex from -11% YoY

coming into the year to +6% YoY exiting the year. The upward revisions were put in to

support Apple’s shift of back-end production from Samsung to the Taiwan OSAT, Amkor

and Stats and for more turnkey mobile projects including test and assembly. We believe

2015 capex will be flat to down for equipment spending after the strong ramp in 2014.

Capex will be down 7% YoY excluding Stats fab investment in its Korea facility, Amkor’s

Korea investment and SPIL’s purchase of a used Promos fab.

Figure 153: 2014 back-end capex upward revision


We believe many IDMs are moving more asset light and also not spending materially, so

expect more outsourcing in 2015 particularly as more fabless customers are moving into

lower cost copper and back-end suppliers into higher throughput packaging. Capex/sales

for the sector should decline slightly to 20%, in line with 2011-14 levels.

-60%

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0%

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$0

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11

1Q

12

3Q

12

1Q

13

3Q

13

1Q

14

3Q

14

YoY GrowthUS$ mn

SiP SPIL Amkor Stats YoY Growth

0.30

1.30

2.30

3.30

4.30

5.30

6.30

7.30

8.30

1Q

00

4Q

00

3Q

01

2Q

02

1Q

03

4Q

03

3Q

04

2Q

05

1Q

06

4Q

06

3Q

07

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08

1Q

09

4Q

09

3Q

10

2Q

11

1Q

12

4Q

12

3Q

13

2Q

14

TSMC UMC SMIC Vanguard ASE SPIL Amkor

Indexed Revenue

Capex (US$mn) 2013 2014 orig 2014 w/ fab '14 YoY (%) 2014 ex-fab '14 YoY (%) '14 Rev % 2015 w/ fab '15 YoY (%) 2015 ex-fab '15 YoY (%)

ASE $668 $700 $1,067 60% $1,067 60% 43% $1,050 -2% $1,050 -2%

SPIL $503 $323 $698 39% $508 1% 116% $483 -31% $483 -5%

Amkor $567 $450 $675 19% $640 13% 50% $725 7% $500 -22%

STATS $507 $565 $545 7% $371 -27% -4% $392 -28% $392 6%

Powertech $305 $233 $267-300 -7% $267-300 -7% 28% $300 6% $300 6%

King Yuan $166 $133 $230 39% $230 39% 73% $150 -35% $150 -35%

Total $2,717 $2,405 $3,499 29% $3,100 14% 46% $3,099 -11% $2,874 -7%

YoY (%) -11% 29% 14% -11% -7%

Back-end capex to decline

in 2015 after 2014 builds

13 January 2015


Figure 154: Bonder additions slow as focus shifts to flip

chip and wafer level packaging in mn, unless otherwise stated

Figure 155: Capital intensity higher due to advanced

packaging


Profitability: GMs back on an improving trend

The back-end has moved past its challenges with rising material costs from the increase in

gold price. SPIL saw the most notable drag since 2007 from the rise in gold price, but has

been progressively ramping up copper to over 70% of sales, with Taiwan OSAT over 60%

due to a larger base of the IDM business that is in less cost sensitive applications.

SPIL is improving product mix, with flip chip CSP advancing from 4% to 15% of sales

since early 2013 and test growing from 10% to 12% of sales. The company will see

another tailwind in 4Q14 as it further ramps up test for an overseas mobile customer and

also benefits from another 1.5% appreciation in the NTD. Management noted that it has 20

bp GM improvement for each NT$0.1 move in the currency, so it is seeing about 100 bp lift

through 2H14 if the NTD can stay around 30.4.

While margins are back to 2007 levels, they have been seen before during extended

upturns. SPIL achieved GMs between 27% and 31% during 2005-07 and also had GMs

over 30% during 1993-97. The company can maintain GMs in the mid-20% by continuing

to improve the product mix as long as material costs are contained and the competitive

landscape not disrupted too much by a Chinese acquisition of Stats-Chippac.

Figure 156: TW OSAT raised ATM GMs towards 2007

levels

Figure 157: SPIL margins still on a rebounding trend


ASE growth driver from SiP continues

■ 4Q14 IC ATM at high-end, EMS above on Apple builds. 4Q14 IC ATM reached

NT$43.9bn, +4% QoQ, at high end of guidance for +2-4% QoQ. USI sales grew 34%

QoQ, above implied guidance for +30% QoQ, driven by the ramp of Apple's fingerprint

and Wi-Fi module. Consolidated sales were up 15% QoQ, above CS/Street's

+11.5%/13.6% QoQ, including 20% of SiP business. Consolidated GM may still be

down slightly in 4Q14 due to more upside in the lower margin EMS business, though

favourable NT$ also helps.

0%10%20%30%40%50%60%70%80%90%100%

-

5,000

10,000

15,000

20,000

25,000

30,000

4Q

99

2Q

00

4Q

00

2Q

01

4Q

01

2Q

02

4Q

02

2Q

03

4Q

03

2Q

04

4Q

04

2Q

05

4Q

05

2Q

06

4Q

06

2Q

07

4Q

07

2Q

08

4Q

08

2Q

09

4Q

09

2Q

10

4Q

10

2Q

11

4Q

11

2Q

12

4Q

12

2Q

13

4Q

13

E2

Q1

4E

4Q

14

E

Utilization (%)Wirebonders

ASE SPIL Stats Wirebonder YoY Utilization

0%

4%

8%

12%

16%

20%

24%

28%

32%

36%

40%

$0

$1,500

$3,000

$4,500

$6,000

$7,500

$9,000

$10,500

$12,000

$13,500

$15,000

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14E

20

15E

Capex/Sales (%)Sales & Capex (US$ mn)

Sales Capex Capex/Sales

5%

10%

15%

20%

25%

30%

35%

40%

50%

60%

70%

80%

90%

100%

1Q

02

3Q

02

1Q

03

3Q

03

1Q

04

3Q

04

1Q

05

3Q

05

1Q

06

3Q

06

1Q

07

3Q

07

1Q

08

3Q

08

1Q

09

3Q

09

1Q

10

3Q

10

1Q

11

3Q

11

1Q

12

3Q

12

1Q

13

3Q

13

1Q

14

3Q

14

GM%Utilization %

Assembly utilization Gross margin

0%

5%

10%

15%

20%

25%

30%

35%

35%

45%

55%

65%

75%

85%

95%

105%

2Q

00

1Q

01

4Q

01

3Q

02

2Q

03

1Q

04

4Q

04

3Q

05

2Q

06

1Q

07

4Q

07

3Q

08

2Q

09

1Q

10

4Q

10

3Q

11

2Q

12

1Q

13

4Q

13

3Q

14

Gross marginUtilization %

Assembly utilization Gross margin Linear (Test utilization)

GM has improved as gold

costs drop and mix has

shifted to test and flip chip

Margins are at seven-year

highs but have sustained

these levels in the past

IC ATM on track in 4Q14,

1Q15 will see seasonal

softness

13 January 2015


Figure 158: ASE—CS estimates summary for 4Q14-1Q15 and 2014-2015 (NT$ in mn, unless otherwise stated)

Source: Bloomberg, Company data, Credit Suisse estimates

■ EMS should see the ramp of iWatch through 2015. We expect the company to guide

1Q15 IC ATM down low-teens QoQ, due to higher base off the 2H14 builds; GMs should

hold up around our 24%. ASE should still have good momentum on EMS and could also

get some support with iPad Pro + iWatch ($40 content) launching in the 1Q15 low

season. We expect a seasonal decline in 1Q15, although with a higher base, IC ATM

could be down low teens QoQ, while EMS holds up better with the new Apple projects.

Figure 159: SiP business should grow again in 2015


■ ASE Shanghai monetisation. ASE announced on 20 November that USI would

increase capital at Rmb27.06 per share, 1.5x the issuing cost at Rmb17.86. ASE

raised a total of Rmb2.1 bn or NT$10.4 bn through USI. The capital increase will be

for capacity and materials for Wi-Fi modules and wearable modules. Post completion,

ASE's USI ownership drops from 88% to 82%, although its US$5 bn stake still

represents 50% of ASE's valuation. If we factor in the market capitalization of the USI

Shanghai, the back-end business (ATM – ASE assembly, test and materials) is only

valued at 7.8x 2015 P/E and 4.1x EV/EBITDA.

Figure 160: ASE's market cap at US$5.2bn ex-USI value Figure 161: ASE's ATM trading at 8x P/E, 4.1x EV/EBITDA


■ Maintain OUTPERFORM. We rate ASE as OUTPERFORM with a NT$47 target price.

ASE is seeing sales momentum from SiP projects including Wi-Fi modules, fingerprint,

and watch motherboard, with potential for camera module board assembly in the

future. The SiP projects and Wi-Fi modules are holding 4Q14 sales above peers

(consolidated sales up 10-15% QoQ vs peers' down 0-5% QoQ) and extending

momentum into 2015. We stay positive on reasonable valuation, factoring in the US$5

bn 82% equity stake in USI Shanghai. Our TP of NT$47 is based on 2.5x forward P/B,

implying 15x P/E, back to the levels it reached during the prior upturns despite this

cycle ASE having the USI stake at half its value and enhancing the SiP potential.

4Q14 1Q15 2014 2015

ATM USI CS Street Guidance ATM USI CS Street ATM USI CS Street ATM USI CS Street

Sales 43,477 34,796 74,273 75,331 UP 2-4% QoQ 38,217 29,576 65,293 66,027 159,305 103,447 254,220 254,876 174,126 139,334 302,960 296,554

Chg (%) 3.0 30.0 11.5 13.1 Capacity +1%; UT +1-3% -12.1 -15.0 -12.1 -12.4 11.2 31.7 15.6 15.9 9.3 34.7 19.2 16.7

GM (%) 29.0 7.5 20.5 19.9 Slightly down 24.2 8.4 18.0 19.0 27.3 8.7 20.6 20.4 27.6 7.7 19.4 20.0

OpM (%) 18.0 3.5 12.1 11.6 Flattish 11.6 3.4 8.3 9.8 15.9 3.5 11.3 11.2 16.1 3.3 10.8 11.0

Net Inc. 7,282 991 7,282 6,895 4,229 831 4,229 5,005 23,019 2,956 23,019 22,468 26,219 3,834 26,219 25,492

EPS (NT$) 0.89 0.15 0.89 0.85 0.52 0.12 0.52 0.62 2.88 0.44 2.88 2.81 3.20 0.58 3.20 3.16

2012 2013 2014 2015 2016 2017

Wifi Module Sales (US$) $394 $424 $432 $414 $883 $916

WiFi Module % of USI Sales 18.5% 16.0% 12.6% 9.0% 16.9% 17.2%

Fingerprint Module Sales (US$ mn) $0 $318 $998 $1,295 $1,224 $1,146

Watch Module Sales (US$mn) $0 $0 $0 $751 $882 $887

Total SiP Sales (US$mn) $0 $318 $998 $2,046 $2,106 $2,033

NT$ $29.4 $29.6 $30.2 $30.3 $30.3 $30.3

SiP Sales (NT$mn) $0 $9,409 $30,149 $61,996 $63,809 $61,603

Consolidated Sales (NT$) $193,972 $219,862 $254,220 $302,960 $335,674 $349,506

SiP % of Consolidated 0.0% 4.3% 11.9% 20.5% 19.0% 17.6%

SiP % of USI Sales 0.0% 12.0% 29.1% 44.5% 40.3% 38.2%

SiP % of ATM Sales 0.0% 1.9% 5.4% 6.0% 5.3% 5.0%

Market capitalization and enterprise value

Shares (mn) 8,194

Current price (NT$) 37.35

NT$ 31.3

Market capitalization of ASE Global (US$mn) $9,778

Net Debt (US$mn) $1,857

Enterprise Value of ASE Global (US$mn) $11,636

Value of USI Shanghai Stake (US$mn) 4,491

Market Capitalization of ASE ATM (US$mn) 5,288

Enterprise Value of ASE ATM (US$mn) 7,145

ASE Sum of the Parts ATM USI Eliminations Consolidated

Net income (NT$mn) 21,177 3,834 1,208 26,219

P/E 7.8 36.7 11.7

EBITDA (NT$mn) 54,944 5,828 0 60,771

EV/EBITDA 4.1 24.1 6.0

Sales (NT$mn) 174,126 139,334 -10,500 302,960

EV/Sales 1.3 1.0 1.2

ASE's valuation attractive

on sum-of-the-parts

factoring the US$5bn

valuation of USI Shanghai

13 January 2015


SPIL momentum milder after the strong 2014 ramp

■ 4Q14 sales top expectations on ramp of overseas mobile. SPIL's 4Q14 sales

reached NT$21.4 bn, down only 1% QoQ and better than its original weak guidance

for -3-9% QoQ and CS/Street for -5%/-6% QoQ. Upside strength in 4Q14 was from

overseas baseband and power management for a flagship smartphone, though

gaming, consumer, network infrastructure and PC was still in the low season and

adjusting inventory, areas that should recover post CNY.

■ 4Q14 margins to be boosted by the better sales and currency. We model 4Q14

GM at 25.4%, above the high-end of the company's 23-25% guidance on better sales

and tailwind from NT$ depreciation. The 5% NT$ depreciation the past few months will

be a near-term tailwind for Asian upstream and back-end in particular, with near 1%

sales boost, 30bp positive GMs and 2-3% EPS for each 1% appreciation in the back-

end and 40-50bp GM boost for the foundries. We raise EPS from NT$0.82 to

NT$0.95.

■ 1Q15 to see a modest decline in-line with seasonality. We expect SPIL to guide

1Q15 down mid to high single digits, in-line with seasonality due to fewer working days

and low season for smartphones. SPIL can maintain GMs in the mid-20% range and

near post crisis highs by continuing to improve product mix to flip chip with material

costs contained and the competitive landscape not disrupted until 2016 by the

Chinese acquisition of Stats.

Figure 162: SPIL’s 4Q14 and 1Q15 guidance versus CS

Source: Company data, Credit Suisse estimates, Bloomberg consensus

■ Capital spending coming down from earlier highs. SPIL already trimmed 2014

core capex from NT$17-18 bn to NT$15.4 bn, with total spend at NT$21.1 bn including

the recently purchased Promos used fab in Taichung. Capex for 2015 is now targeted

back at the NT$14.5bn for flip chip, bump, and wafer level CSP. Focus for SPIL into

2015 will be continuing existing growth drivers from 4G emerging market smartphones

and infrastructure, game console and expanding its Apple related exposure, with new

targets including investment in fan-out wafer level packaging ahead of 2016 volume

and for emerging IoT/wearables applications.

■ 2015 growth momentum milder. The stock offers some value at 12x 2015 EPS and

7% cash yield although growth momentum will be more mild in the coming year. We

expect a mid-single digit QoQ decline in 1Q15 in-line with the group and also fewer

working days due to Chinese New Year. SPIL sees a few positive trends supporting its

growth into 2015, including: (1) Comms: increased adoption of 4G smartphones as

prices come down, 4G roll out to export markets, and some remaining EM upgrades

from feature phone to smartphones, (2) TV: TV replacement cycle will also require

more ICs as density and pixel migrate, (3) LTE infrastructure: SPIL expects LTE

base station build up to extend for another 1-2 years so will serve as an additional

driver in 2015 as 3G base station was strong a decade ago. It also sees the memory

unit market healthy. However, some growth will be offset by a high base this year (CS

+18.5% YoY) and weak China whitebox tablet outlook. Next catalyst would be

restocking in 1Q15 and resumption of LTE infrastructure/handset orders.

4Q14 1Q15 2014 2015 2016


Net sales 20,570 20,567 NT$19.7-$21.0bn 19,335 19,820 82,210 82,185 88,266 88,705 95,336 94,787

QoQ (%) -5.0% -5.0% -3-9% QoQ -6.0% -3.6% 18.5% 18.5% 7.4% 7.9% 8.0% 6.9%

GM (%) 24.2% 24.0% 23-25% 22.5% 22.8% 24.5% 24.4% 25.2% 24.6% 25.2% 24.2%

OpM (%) 15.0% 15.3% 14-16% 12.7% 14.0% 15.9% 15.8% 16.4% 16.0% 16.5% 16.2%

Net income 2,613 2,576 NT$30.3 2,100 2,291 11,332 11,182 12,193 11,789 13,287 12,476

EPS (NT$) 0.84 0.82 0.67 0.72 3.63 3.57 3.90 3.79 4.25 3.98

ASE view remains positive

longer-term on ramp of SiP,

Apple and rebound of IDM

business

13 January 2015


Figure 163: ASE trading at a discount on a P/B basis Figure 164: SPIL's historical P/B band


Mobile devices: Chinese brands gaining share on

export growth

Chinese smartphone brands’ market share has been on the rise since 2011 and

experienced another leg up in 2014 in the domestic and overseas markets. In 9M14,

Chinese smartphone brands accounted for 77% share of domestic shipments and 41%

globally. The share gain is being led by competitive pricing with cheaper component costs,

increasing on-line sales, and lower licensing expenses. We think Chinese brands will

continue to gain share in 2015 support by the take-off of entry level 4G smartphone in

China and continuous smartphone proliferation in the emerging markets. Based on CS’

analysis, we forecast 2015 China smartphone sales of 473 mn units (up 13% YoY) and

overall shipments by Chinese brands (incl. to export market) to reach 913 mn units

(up 28% YoY).

Figure 165: China smartphone brands’ market share keeps rising

Source: IDC

Operators pushing 4G proliferation

China's 4G smartphone penetration also saw a hike in 2014 after China Mobile

accelerated its TD-LTE 4G BTS (base transceiver station) builds. According to China

Mobile, it has installed 410K 4G BTS as of end-Jun 2014 and targeted to reach ~650K by

end-2014. China Telecom and China Unicom also speeded up their 4G BTS builds as the

government granted more FDD-LTE trail licenses in 4Q14. We believe the 4G BTS

installations will continue in 2015 and the operators will continue to drive 4G subscriber

base with subsidy and more entry-level 4G smartphones.

0.8x

1.6x

2.5x

3.0x

0

10

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Se

p/9

9

Ma

y/0

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/07

Ma

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n/1

5

NT$ ASE Historical PB Band

1.2x

1.8x

2.5x

3.2x

5

20

35

50

65

Jan

/03

Se

p/0

3

Ma

y/0

4

Jan

/05

Se

p/0

5

Ma

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6

Jan

/07

Se

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/09

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2

Jan

/13

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p/1

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/15

NT$ SPIL Historical PB Band

0%

20%

40%

60%

80%

100%

1Q

07

3Q

07

1Q

08

3Q

08

1Q

09

3Q

09

1Q

10

3Q

10

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11

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14

3Q

14

China smartphone brands' market share in China

China smartphone brands' market share globally

Chinese brands took 77% of

share in China and 41%

globally in 9M14

4G BTS builds are ahead of

the schedule

13 January 2015


Figure 166: China's 4G BTS installation plans Figure 167: China Mobile's 4G net additions

Source: Company data, Credit Suisse estimates Source: Company data

Near-term demand remains slow, but entry-level 4G will help shipment to recover

after CNY

Our checks with the smartphone display component makers and OEMs suggest China

smartphone supply chain is still under inventory adjustment in 4Q14 and are seeing softer

pull-in this year before Chinese New Year holiday (January to early February). We believe

the pull-in should resume after the Chinese New Year holiday but believe the 4G

smartphone shipment growth in China in 2015 will be driven by low to mid-end entry level

4G models, which adopts 4G chipsets but could be equipped with lower specs (such as

less memory, smaller screen size, lower display resolution, lower pixel camera, and etc).

We also noted that the concern on IP infringement could potentially hurt smaller Chinese

smartphone makers' margins.

Figure 168: China's 4G entry-level smartphone cost analysis

Source: DisplaySearch, Credit Suisse estimates

With competitive pricing environment for the entry-level 4G models and potential rising

licensing fees, we think Chinese smartphone brands that has greater domestic exposure

will be in a less favourable position versus those that ship to overseas markets. We thus

favour TCL Comm and Lenovo over Coolpad.

Figure 169: TCLC, ZTE, and Huawei has higher overseas exposure than Coolpad

2014 shipments (mn) China Overseas

Huawei 75.0 60% 40%

Lenovo 63.0 80% 20%

Xiaomi 61.1 90% 10%

ZTE 52.0 30% 70%

Coolpad 50.4 95% 5%

TCLC 39.6 10% 90%


-

500

1,000

1,500

2,000

2,500

3,000

FY12 FY13 FY14 FY15 FY16

'000 BTS China Mobile China Unicom China Telecom

0

2

4

6

8

10

12

14

16

18

Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14

mn

2015 target

US$ 2H14 1H15 2H15

AP Chipset + Baseband (Quad core 1.1 GHz 64 bit) 12.0 9.0 8.0

ROM + RAM 6.8 6.6 6.3

Connectivity (Bluetooth/GPS/WiFi) 1.0 0.9 0.8

MEMs (Gyro/Light…) 2.5 2.2 1.8

RF/PA 6.0 5.0 4.5

Display + Touch (4.5" FWVGA) 11.0 10.0 9.5

Camera Module (5M/2M) 5.0 4.8 4.5

PCB+Passives 8.0 7.0 6.5

Battery (2000 mAh) 2.0 1.7 1.5

Mechanical Parts and Assembly 7.0 6.0 5.0

Royalty 4.0 3.0 2.0

Others (Chasis, Speakers, Filters, Bus) 5.0 4.0 3.0

Total Cost 70.3 60.2 53.4

FOB Price 84.0 71.0 60.0

Retail Price 105.0 85.0 69.0

OEM GM 16.3% 15.2% 11.0%

Retail GM 20.0% 16.5% 13.0%

China 4G entry level smartphone BOM

Entry-level 4G BOM cost will

continue to decline in 2015

Prefer TCLC and Lenovo

over Coolpad

13 January 2015


Figure 170: Gross margin comparison between major Chinese smartphone brands

Source: Company data, Credit Suisse estimates Note: Coolpad’s 3Q14 stands for CS estimated 2H14 GM

TCLC: Export driving shipment and profit growth

TCL Communication (TCLC) is a 58% owned subsidy of TCL Corp. TCLC was established

in 2004 and acquired Alcatel's handset business in July 2005. Since then, the company

has been managing two brands for its products, TCL and ALCATEL ONETOUCH.

Recently, it announced to acquire the Palm brand trademark and plans to use the Palm

name for on-line channels. According to IDC, TCLC ranked the seventh-largest handset

brands in the world and 12th-largest smartphone brand in the world in 9M14.

TCLC shipped 33.2 mn units of smartphones in 9M14 and ranked number 6 among

Chinese smartphone brands globally. TCLC also reported 19.3% GM in 9M14 with 3.9%

OPM, ahead of its peers given 90% of its smartphone shipments are outside of China. It

also entered tablet business and introduced its 4G smartphone models in 1H14.

Figure 171: TCLC's smartphone models

Source: Company data, JD.com, Credit Suisse

We remain positive on the medium-term growth outlook for TCLC as it is well positioned to

capture the 2015-16 smartphone proliferation given it has a complete product portfolio

(feature phone, smartphone, tablet), well established operator channels, strong branding,

competitive cost structure, and 60-65% of its smartphone sales are from emerging markets.

We estimate TCLC's smartphone shipment to reach 39.5 mn in 2014 (up 125% YoY) and

will see another 39% growth in 2015 to 54.7 mn units, driven by entering more operator

channels in the US and the feature phone replacement cycle in the emerging markets.

We also expect TCLC to benefit from the 4G proliferation, which should help its overall

ASP and margins. The company mentioned that 4G accounted for 15% of smartphone

shipments in 3Q14 and we expect that ratio will increase to 20-25% in 2015 as it ships

more 4G smartphones into North America (20-25% of sales) and Europe (15-20% of

0%

5%

10%

15%

20%

25%

30%

35%

40%

1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14

ZTE TCLC Coolpad

Company TCL TCL TCL Alcaltel Alcaltel Alcaltel Alcaltel

Model name P331M J730U P688L Pop C7 Idol 2S Idol X+ Hero 2

Image

Technology TD-LTE TD/FDD-LTE TD/FDD-LTE HSPA TD-LTE HSPA TD-LTE

Operating System Android 4.4 Android 4.3 Android 4.3 Android 4.2 Android 4.3 Android 4.2 Android 4.4

Pixels 854 x 480 854 x 480 960 x 540 854 x 480 1280 x 720 1920 x 1080 1920 x 1080

RAM 512MB 1GB 1GB 1GB 1GB 2GB 2GB

Storage 4GB 4GB 4GB 4GB 8GB 16GB 16GB

Display 4.5" 5.0" 5.5" 5.0" 5.0" 5.0" 6.0"

Camera 5MP 5MP + 0.3MP 8MP + 2MP 5MP + 0.3MP 8MP + 1.3MP 13.1MP + 2MP 13.1MP + 5MP

Battery 2000mAh 2000mAh 3300mAh 2000mAh 2150mAh 2500mAh 3100mAh

CPU Speed 1.3GHz 1.2GHz 1.2GHz 1.3GHz 1.2GHz 2.0GHz 2.0GHz

Processor Chip MT6582+MT6290 MSM8926 MSM8926 MT6582M MSM8926 MT6592 MT8392

Multi-core Quad Quad Quad Quad Quad Octa Octa

Price (RMB) 459 599 799 799 1,399 1,499 2,999

TCLC is the seventh-largest

handset brands in the world

TCLC smartphone shipment

to grow 38% YoY to 55mn

units in 2015

13 January 2015


sales) channels. With a well-controlled OPEX, we expect TCLC's earnings to see 39%

YoY growth in 2015.

Figure 172: TCLC's global smartphone market share Figure 173: TCLC's smart device revenue breakdown

(3Q14)

Source: Company data, IDC, Credit Suisse Source: Company data

4Q14 smartphone shipments tracking ahead, upside to FY14 sales outlook

TCLC raised its 2014 revenue growth target from 45% to over 50% YoY at its 3Q14 result

meeting, implying over 20% YoY growth for 4Q14. According to the company, December

smart device shipments of over 5.4 mn units/month has set the record for 2014, 4Q14 total

smart device shipments reached 15.5 mn units, up 103% YoY. We see upside to our prior

shipment/sales forecast and fine-tune our model to reflect the better 4Q14. We now expect

4Q14 smartphone shipment of 14.3 mn units (up 39% QoQ) and tablet shipment of 1.2 mn

units. For 2014, we estimate smartphone shipment of 39.5 mn units and tablet shipment of

2mn units. We keep our 2014-15 EPS largely unchanged and maintain our TP of HK$11.5,

based on 10x 2014-15 average P/E.

Figure 174: TCLC's quarterly P/L

HK$ mn 1Q14 2Q14 3Q14 4Q14E 1Q15E 2Q15E 2013 2014E 2015E

Revenue 5,541 6,677 7,779 10,493 5,968 8,105 19,362 30,489 38,636

Gross profit 1,087 1,294 1,481 1,973 1,146 1,532 3,672 5,835 7,285

Operating profit 198 276 308 442 203 308 292 1,225 1,885

Net profit 177 254 294 417 168 257 313 1,142 1,595

EPS (HK$) 0.15 0.22 0.25 0.35 0.14 0.22 0.28 0.97 1.34

Gross margin (%) 19.6 19.4 19.0 18.8 19.2 18.9 19.0 19.1 18.9

Operating margin (%) 3.6 4.1 4.0 4.2 3.4 3.8 1.5 4.0 4.9

Net margin (%) 3.2 3.8 3.8 4.0 2.8 3.2 1.6 3.7 4.1


Coolpad: Business model under transition

Coolpad Group was established in June 2002 and is focused on handset and mobile

related product developments. It has a close relationship with the Chinese carriers and

was ahead on 4G smartphone development in 1H14. According to IDC, Coolpad was

ranked the fourth-largest smartphone maker in China and seventh-largest smartphone

brand in the world in 9M14.

0%

1%

1%

2%

2%

3%

3%

2010 2011 2012 2013 9M14

TCLC global smartphone market share

Americas 52%

EMEA 34%

APAC 5%

China 9%

Smart device revenues

Reiterate OUTPERFORM

on TCLC with a target price

of HK$11.5

Coolpad ranks as the

seventh-largest smartphone

brand globally

13 January 2015


Figure 175: Coolpad smartphone shipment trend Figure 176: Coolpad China smartphone market share


Coolpad shipped 24 mn units of smartphones in 1H14 with ~40% of the shipments are 4G.

For 2014, Coolpad targets over 50mn units of smartphone shipments and expects 4G to

account for ~60% of its total volume. Its business model is under transition as the

management aims to cut down its smartphone models and shift its resource to new sales

channels post the operator subsidy cuts. It announced two sub-brands in 2H14 for on-line

(Dazen) and retail channel (ivvi). It also entered into a joint-venture agreement with Qihoo

360 for the on-line Dazen brand, where Qihoo 360 will own 45% stake of the new JV

company and Qihoo’s software/Apps will be pre-installed on the Dazen smartphones.

Figure 177: Coolpad's smartphone models


Coolpad aims to increase overseas sales exposure from 2% in 1H14 to 20-30% longer-

term by working with US/European operators and open channels in APAC (i.e., India and

Indonesia). Coolpad has recruited new management team to run its overseas business,

which we think should help it to see a more meaningful contribution in 2016.

Pricing remains competitive in China

Coolpad’s smartphone ASP increased by 7% HoH in 1H14, thanks to rising penetration of

4G smartphone. However, we believe its ASP are seeing a downward trend in 2H14 on

intense price competition post subsidy cuts, despite 4G mix will continue to increase. We

think the ASP decline is inevitable in 2H14-2016 given the de-specing trend of entry-level

4G smartphone and competition from peers. We lower our ASP assumption and cut our

2014-16 EPS by 9-18%. We cut our target price to HK$1.6 (from HK$1.85), based on 9.5x

2015 P/E (from 10x P/E, vs the 8-12x historical range). Maintain our NEUTRAL.

0

5,000

10,000

15,000

20,000

25,000

0

5

10

15

20

25

30

35

40

1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14E 1H15E 2H15E

HK$ mnmn unitsSmartphone shipments Revenue (RHS)

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2010 2011 2012 2013 9M14

Coolpad China smartphone market share

Company Coolpad Coolpad Coolpad Coolpad Coolpad Coolpad Coolpad

Model name 7,920 8730L K1 (7620L) Dazen F1 Dazen F2 S6 (9190L) ivvi

Image

Technology TD/FDD-LTE TD-LTE TD/FDD-LTE FDD-LTE TD-LTE FDD-LTE TD-LTE

Operating System Android 4.1 Android 4.3 Android 4.3 Android 4.4 Android 4.4 Android 4.3 Android 4.4

Pixels 1280 x 720 1280 x 720 960 x540 1280 x 720 1280 x 720 1280 x 720 1280 x 720

RAM 1GB 1GB 1GB 1GB 2GB 2GB 2GB


Display 5.0" 5.5" 5.5" 5.0" 5.5" 5.95" 5.5"

Camera 8MP + 0.3MP 8MP + 2MP 8MP + 2MP 13MP + 5MP 13MP + 5MP 13MP + 5MP 13MP + 8MP


CPU Speed 1.7GHz 1.2GHz 1.2GHz 1.2GHz 1.7Ghz 1.2GHz 1.7GHz

Processor Chip MSM8960 MSM8926 MSM8926 MSM8916 MT6592 MSM8928 MSM8939

Multi-core Dual Quad Quad Quad Octa Quad Quad

Price (RMB) 599 738 799 888 1,099 1,359 1,799

Coolpad's business model is

under transition; it setup two

sub-brands for on-line

(Dazen) and retail (ivvi)

channels

Reduce Coolpad's TP to

HK$1.6 as we trim 2014-

16E EPS by 9-18%

13 January 2015


Figure 178: Coolpad's quarterly P/L

HK$ mn 1H13 2H13 1H14 2H14E 1H15E 2H15E 2013 2014E 2015E

Revenue 9,632 9,992 14,935 16,055 16,874 19,244 19,624 30,990 36,118

Gross profit 1,254 1,276 2,026 2,055 2,143 2,406 2,530 4,081 4,549

Operating profit 275 186 514 385 439 498 461 899 937

Net profit 213 136 413 290 344 373 349 702 717

EPS (US$) 0.05 0.032 0.097 0.068 0.081 0.088 0.083 0.165 0.169

Gross margin (%) 13.0 12.8 13.6 12.8 12.7 12.5 12.9 13.2 12.6


Net margin (%) 2.2 1.4 2.8 1.8 2.0 1.9 1.8 2.3 2.0


ZTE: 4G BTS & smartphone share gain lifting 2015 OP

ZTE was founded in 1985 and is well-known as a leading telecom networking equipment

and smartphone vendor. In 9M14, ZTE had 57% of total revenue from networking

equipment, 30% from the handset, and 14% from software/service. It has benefited from

the China 4G BTS builds given the aggressive build up plans by the carriers, as well as

gaining share from foreign peers on better cost structure and pricing.

ZTE’s handset business were loss making in 2013 given the pricing competition in the

China market and overbuilt of smartphone inventory. ZTE changed its strategy for handset

business since 4Q13 as the company focus more on mid- to high-end models, rather than

market share or shipment. It cut half of its smartphone models (mainly low-end models),

reduce overhead costs, and shifted its focus to the export markets.

Figure 179: ZTE smartphone models


We expect ZTE's handset business to turn around in 2014 on better sales mix (70%

export), streamlining of product portfolio (40% 4G), and cost reduction. We estimate its

2014 smartphone shipment to reach 52 mn in 2014 (up 37% YoY) and will see 24%

growth in 2015 to 64 mn units, driven by continued share gain in the US and stabilising of

its domestic business. Its smartphone shipments in overseas markets saw strong growth

in 9M14 and ranked fifth-largest smartphone brand in the US in 9M14. We believe handset

division is no longer a drag on ZTE's overall business in 2014 post the restructuring.

Company ZTE ZTE ZTE ZTE ZTE ZTE ZTE

Model name Q801L V5S Q802D A880 V5 Max Grand S II Star 2

Image

Technology FDD-LTE TD/FDD-LTE FDD-LTE TD/FDD-LTE TD/FDD-LTE TD/FDD-LTE TD-LTE

Operating System Android 4.3 Nubia UI2.5 Android 4.4 Android 4.4 Nubia UI2.5 Android 4.3 Android 4.4

Pixels 854 x 480 1280 x 720 1280 x 720 1280 x 720 1280 x 720 1920 x 1080 1920 x 1080

RAM 1GB 1GB 1GB 1GB 2GB 2GB 2GB


Display 5.0" 5.0" 5.0" 5.0" 5.5" 5.5" 5.0"

Camera 5MP + 0.3MP 8MP + 5MP 8MP + 5MP 8MP + 8MP 13MP + 5MP 13MP + 2MP 13MP + 5MP


CPU Speed 1.2GHz 1.2GHz 1.2GHz 1.2GHz 1.3GHz 2.3GHz 2.3GHZ

Processor Chip MSM8926 MSM8916 MSM8916 MSM8916 MSM8916 MSM8974AB MSM8974AB

Multi-core Quad Quad Quad Quad Quad Quad Quad

Price (RMB) 499 699 799 890 999 1,699 2,499

Handset accounts for 30%

of ZTE's revenue

ZTE smartphone mix is

improving; it ranked the fifth-

largest smartphone brand in

the US

13 January 2015


Figure 180: ZTE's revenue breakdown (9M14) Figure 181: ZTE's smartphone market share in N. America

Source: Company data, Credit Suisse estimates Source: IDC, Credit Suisse

Remain positive on 4G BTS builds and handset OP growth

We remain positive on ZTE given acceleration of 4G BTS builds in China, as well as better

OP for its handset business. We forecast 4Q14 EPS of Rmb0.275, tracking to the higher-

end of its guidance (Rmb0.20-0.28) on solid 4G BTS demand and better handset growth.

We fine tune our model and keep our EPS estimates largely unchanged. We expect ZTE’s

2015 revenue to grow 13% YoY to Rmb95,028 mn and EPS to grow 27% YoY to Rmb1.02.

Our TP of HK$20 is based on 15.5x 2015 P/E, versus 10-22x range of 3G capex cycle,

and is trading at around 35% discount versus the A-share. Reiterate OUTPERFORM.

Figure 182: ZTE's quarterly P/L

Rmb mn 1Q14 2Q14 3Q14 4Q14E 1Q15E 2Q15E 2013 2014E 2015E

Revenue 19,053 18,645 21,103 25,370 20,486 22,386 75,162 84,171 95,028

Gross profit 6,391 4,730 6,410 8,099 6,351 6,895 20,387 25,630 29,879

Operating profit 1,145 1,293 869 1,878 1,024 1,410 3,444 5,185 6,515

Net profit 622 506 703 946 442 753 1,358 2,777 3,520

EPS (Rmb) 0.18 0.15 0.20 0.28 0.13 0.22 0.39 0.81 1.02

Gross margin (%) 33.5 25.4 30.4 31.9 31.0 30.8 27.1 30.5 31.4


Net margin (%) 3.3 2.7 3.3 3.7 2.2 3.4 1.8 3.3 3.7


Figure 183: ZTE—A-share valuation premium over H-share (forward P/E)


Lenovo: Solid position with three-pronged strategy

to succeed in smartphones

Lenovo enters 2015 with a decisive three-pronged China smartphone strategy. First,

Lenovo will further pursue the entry-level part of the China smartphone market with its

core Lenovo devices. They will do so by penetrating deeper into rural-China (i.e. tier 4-6

cities) through open channels, which can help with profitability. The second step will be the

Networking equipment 57%

Handset 30%

Others service & software 14%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14

ZTE smartphone market share in North America

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14

ZTE - A share valuation premium over H share Average

Reiterate OUTPERFORM

with a target price of HK$20

13 January 2015


launch of Internet-focused smartphone China company, with a different brand, and place it

in direct competition with Xiaomi. The third step in its China strategy is to re-launch the

Motorola brand (i.e. in 1Q15), attacking the mid-to high-end of the market and where most

of the profit resides. We see continued traction in market outside of China and see Brazil

and India as two key markets in focus in 2015. Overall, we forecast its smartphone

shipments will increase to 84/91 mn in FY16/17E, from 72 mn in FY15E.

Motorola strengthens Lenovo's position at the high-end

Lenovo paid US$2.91 bn for Motorola Mobility. It came with the Moto and Droid series

brands, which have shown promising results YTD and access wireless patents and IP, and

carrier relationships. Motorola's sales were US$4.7 bn in CY1Q-3Q14 (+48% YoY) and

US$6.0 bn over the last 12 months (+27% YoY), but the business was in operating loss

over this period. Overall, we forecast Motorola adds an incremental US$2.8/6.4 bn in sales

in FY15/16 with operating losses of US$397/282 mn.

Figure 184: Motorola new Moto X, Droid and Moto G smartphones volumes are promising YoY% smartphone unit change

Source: Gartner Device Market Share, Credit Suisse estimates

Motorola marries well with Lenovo smartphone products and strategy

To date, the majority of Lenovo's smartphones sold are into China (80% in the Sept

quarter) and are expanding into Asia-Pac, Russia, and India. Many of the devices are sold

within the US$100-150 price-point. Motorola volumes are largely in the United States and

Brazil. Motorola's newly launched Moto X series, Droid, and Moto G series are showing

promising demand. Lenovo can cross-license >2,500 wireless and related IP from Google,

improving the cost profile and development times of Lenovo's branded smartphones sold

in these region. Lastly, Motorola has over 30 global carrier relationships.

Figure 185: Motorola's key smartphone markets are North America and Brazil; India is also very promising % of 2Q14 Motorola smartphone shipments

Figure 186: Vast majority of Lenovo's smartphones sold are into China and at entry-level price points % of 2Q14 Lenovo smartphone shipments

Source: Gartner Device Market Share, Credit Suisse estimates Source: Gartner Device Market Share, Credit Suisse estimates

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14

Global smartphone unit YoY % change Motorola smartphone unit YoY % change

North America29.5%

Western Europe7.0%MEA

0.2%

Asia Pac16.5%

Japan0.0%

Latin America46.8%

Eastern Europe5.5% MEA

2.1%

Asia Pac91.1%

Japan0.0%

Latin America1.3%

13 January 2015


Lenovo paid US$2.91 bn for Motorola Mobility—transaction details

Lenovo used US$660 mn in cash, issued US$750 mn in Lenovo stock, and US$1.5 bn in

deferred consideration in the form of three-year interest-free promissory note. Lenovo

issued 519.1 mn shares to Google for the stock consideration portion at a price of

HK$11.2173 per share (closing price on 30 October), which results in ~5% share dilution.

Google has a one-year lock-up period for the 519.1 mn Lenovo shares it was granted. The

lock-up starts on date of deal completion date (30 Oct, 2014). A separate cash payment of

US$228 mn was also paid to Google primarily for the cash and working held by Motorola

at the time of close.

The deal includes handset portfolio but also more

The deal included Motorola Mobility's business, which includes Moto X and Droid series

brands for the premium category and Moto G and E series for in value segments. In

addition, Lenovo will add Moto 360 Android Wear Motorola Xoom and Xoom Wi-Fi

Accessories Bluetooth adapters, headsets, speakers, and related peripherals. Lenovo will

also gain 3,500 technical and other employees staffed in 33 locations globally (2,800 are

US based), of which 2,500 have technical expertise and IP background. Lenovo said on its

30 January media conference call that it will retain Motorola's Chicago-area based

headquarters and has NO plans to lay-off personnel.

Figure 187: Motorola launched smartphone portfolio is streamlined to five models target entry, mid, and high-end


Google cross-licenses Motorola's mobile patent portfolio

Google maintains the vast majority of the Motorola Mobility's patent portfolio. This includes

current patent application and inventions pending approval. They will license back to

Motorola Mobility. Motorola will retain over 2,000 patents assets and a "large-number" of

patent cross-license agreements, plus the brand and trade market portfolio.

Manufacturer Motorola Motorola Motorola Motorola Motorola

Model Moto E DROID Turbo Nexus 6 Moto X (2014) Moto G (2014)

Announce date May-14 Oct-14 Oct-14 Sep-14 Sep-14Ship date May-14 Oct-14 Nov-14 Sep-14 Sep-14

Form factor:Display size (in) 4.3 5.2 5.96 5.2 5.0Resolution 540 x 960 1440 x 2560 1440 x 2560 1080 x 1920 720 x 1280 Height x Width x Depth (mm) 124.8 x 64.8 x 12.3 143.5 x 73.3 x 8.3 - 11.2 159.3 x 83 x 10.1 140.8 x 72.4 x 10 141.5 x 70.7 x 11 Weight 142 g 169 g 184 g 144 g 149 g

Core internals

Processor

Snapdragon 200, 1.2

GHz

Snapdragon 805 quad-

core, 2.7 GHz

Snapdragon 805 quad-

core, 2.7 GHz

MSM8974AC

Snapdragon 801, 2.5

GHz

MSM8226 Snapdragon

400, 1.2 GHz Memory 1 GB RAM 3 GB RAM 3 GB RAM 2 GB RAM 1 GB RAMOperating system Android 4.4.2 (KitKat) Android 4.4.4 (KitKat) Android 5.0 (Lollipop) Android 4.4.4 (KitKat) Android 4.4.4 (KitKat)Storage type/capacity (GB) 4 GB 32 / 64 GB 32 / 64 GB 16 / 32 GB 8 / 16 GB

FeaturesBattery life (hrs) NA Up to 48 h (3G) Up to 24 h NA Up to 24 h (3G)Standby (days) NA NA NA NA NACamera Yes Yes Yes Yes Yes

Rear-camera (MP) 5 MP 21 MP 13 MP 13 MP 8 MPFront-camera (MP) No 2 MP 2 MP 2 MP 2 MP

Wireless technology 3G 4G LTE 4G LTE 4G LTE 3GWi-Fi Yes Yes Yes Yes YesGPS Yes Yes Yes Yes YesBluetooth BT4.0 BT4.0 BT4.1 BT4.0 BT4.0

Retail Price ($USD) US$129 US$599.99 US$649 US$499.99 $179.99

13 January 2015


In 2013 when Google acquired Motorola Mobility, Motorola had 24,500 patents covering its

Home and Mobile operating segments. These patents cover a wide range of technology

include smartphones and handsets, mobile and telecom standards, video etc.

Bringing Motorola back into China

Lenovo announced on 7 January that it will bring back Motorola smartphones to China. It

plans to release three devices—the Moto X, Moto X Pro and Moto G in 1Q15. The Moto X

will be available in early February in a various different designs. User will be able to design

their own devices using a service called Moto Maker; similar to the service being offed

other countries. The Moto X Pro, which has similar specs to Nexus 6, will launch in China

after the Chinese New Year. The 5” Moto G, which features 4G LTE connectivity, quad-

core processor, and dual-SIM capabilities, will launch by the end of February. The official

retail price for all three devices is expected to be announced by late January.

To formulate an Internet-Focused Smart Device Company in China next year

Lenovo announced (click here) in Oct 2014 it plans to create a new company focus on

building an "internet based smart device company" in China. Operations are set for 1 April,

2015 and operate under a separate name and brand. Chen Xudong, preside of Lenovo

China and Asia-Pac Emerging Markets will become CEO of the new company. Lenovo's

strategy is to target China's consumer mobile device market from both a hardware and

software/application perspective. The new company will use direct internet-based

business model. This appears to draw on similar characteristics of Xiaomi's business

model. No updated were provided during this quarter's earnings call.

http://news.lenovo.com/article_display.cfm?article_id=1852

13 January 2015


Companies Mentioned (Price as of 12-Jan-2015)

AAC Technologies Holdings Inc (2018.HK, HK$44.9) ARM Holdings (ARM.L, 998.0p) ASM Pacific Tech. (0522.HK, HK$71.45) AU Optronics (2409.TW, NT$18.35) Acer Group (2353.TW, NT$20.65) Actions (ACTS.OQ, $1.95) Advanced Semicon. Engr. (2311.TW, NT$37.7, OUTPERFORM, TP NT$47.0) Advantest (6857.T, ¥1,436) Amazon com Inc. (AMZN.OQ, $291.41) Amkor Technology Inc. (AMKR.OQ, $6.48) Apple Inc (AAPL.OQ, $109.25) Arrow Electronics, Inc. (ARW.N, $55.44) Asustek (2357.TW, NT$333.0) Avnet Inc. (AVT.N, $41.79) BlackBerry (BBRY.OQ, $10.12) Broadcom Corp. (BRCM.OQ, $41.72) Catcher Technology (2474.TW, NT$253.0) China Mobile Limited (0941.HK, HK$94.85) China Telecom (0728.HK, HK$4.43) China Unicom Hong Kong Ltd (0762.HK, HK$11.1) ChipMOS Technologies Inc. (8150.TW, NT$43.3) Chipbond (6147.TWO, NT$62.9) Coolpad Group Limited (2369.HK, HK$1.48) Datang International Power Generation Co. Ltd. (0991.HK, HK$4.31) FocalTech Corporation, Ltd. (5280.TW, NT$148.5) FocalTech Corporation, Ltd. (5280.TW^A15, NT$148.5) Google (GOOG.OQ, $492.55) HTC Corp (2498.TW, NT$152.0) Hewlett Packard (HPQ.N, $39.92) Himax Technologies, Inc. (HIMX.OQ, $7.95) Hua Hong Semiconductor Limited (1347.HK, HK$9.73) ILITEK (3598.TW, NT$70.9) Intel Corp. (INTC.OQ, $36.6) Kinsus Interconnect Tech (3189.TW, NT$103.5) Largan Precision (3008.TW, NT$2320.0) Lenovo Group Ltd (0992.HK, HK$10.76, OUTPERFORM, TP HK$13.0) Lite-On Technology (2301.TW, NT$37.3) Marvell Technology Group Ltd. (MRVL.OQ, $15.92) MediaTek Inc. (2454.TW, NT$488.0, OUTPERFORM, TP NT$540.0) Microsoft Corporation (MSFT.OQ, $46.6) Motorola Solutions (MSI.N, $64.35) NVIDIA (NVDA.OQ, $19.69) Nokia (NOK1V.HE, €6.41) Novatek Microelectronics Corp Ltd (3034.TW, NT$179.5) OmniVision Techs (OVTI.OQ, $27.23) Orisetech (3545.TW, NT$37.15) Powertech (3296.TW, NT$21.5) QUALCOMM Inc. (QCOM.OQ, $73.57) RDA Microelectronics (RDA.OQ^G14, $18.45) RDA Microelectronics (RDA.OQ, $18.45) Realtek Semiconductor (2379.TW, NT$102.0) Samsung Electronics (005930.KS, W1,316,000) Semiconductor Manufacturing International Corp. (0981.HK, HK$0.72) Siliconware Precision (2325.TW, NT$47.6, OUTPERFORM, TP NT$56.5) Sony (6758.T, ¥2,599) Sunny Optical Technology Group Co., Limited (2382.HK, HK$11.34) Synnex Technology International Corp (2347.TW, NT$46.15) TCL Communication Technology Holdings Limited (2618.HK, HK$7.31) TPK Holdings (3673.TW, NT$211.0) TXC Corp. (3042.TW, NT$37.75) Taiwan Semiconductor Manufacturing (2330.TW, NT$132.0, NEUTRAL, TP NT$145.0) Unimicron Technology Corp (3037.TW, NT$23.25, NEUTRAL, TP NT$25.0) United Microelectronics (2303.TW, NT$15.75) Vanguard International Semiconductor (5347.TWO, NT$51.6) Verizon Communications Inc (VZ.N, $47.08) WPG Holdings Ltd (3702.TW, NT$36.9, NEUTRAL, TP NT$42.0) ZTE Corporation (0763.HK, HK$17.7)

Disclosure Appendix

Important Global Disclosures

Randy Abrams, CFA, Jerry Su, Pauline Chen and Thompson Wu each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

13 January 2015


3-Year Price and Rating History for Advanced Semicon. Engr. (2311.TW)

2311.TW Closing Price Target Price

Date (NT$) (NT$) Rating

30-Jan-12 26.27 29.83 O

23-Apr-12 25.40 31.58

26-Jul-12 19.48 27.20

26-Apr-13 25.85 31.00

16-Jul-13 25.35 R

29-Aug-13 25.45 31.00 O

09-Oct-13 29.00 34.00

20-Dec-13 27.25 31.50

10-Feb-14 29.15 32.50

08-Apr-14 33.45 40.00

28-Apr-14 34.75 42.00

08-Jul-14 39.90 47.00

15-Oct-14 35.05 R

28-Nov-14 37.55 47.00 O

* Asterisk signifies initiation or assumption of coverage.

O U T PERFO RM

REST RICT ED

3-Year Price and Rating History for Lenovo Group Ltd (0992.HK)

0992.HK Closing Price Target Price

Date (HK$) (HK$) Rating

06-Feb-12 6.17 6.95 O

09-Feb-12 6.49 7.15

23-Apr-12 7.29 8.30

24-May-12 6.73 7.70

04-Sep-12 6.62 7.50

05-Sep-12 6.12 R

06-Sep-12 6.36 7.50 O

18-Dec-12 7.27 8.30

08-Jan-13 7.42 8.40

31-Jan-13 8.07 10.00

24-May-13 7.66 9.30

31-May-13 7.99 R

26-Jun-13 7.01 9.30 O

08-Nov-13 8.53 10.30

08-Jan-14 8.99 10.60

27-Jan-14 9.90 R

06-Nov-14 10.78 13.00 O


O U T PERFO RM

REST RICT ED

13 January 2015


3-Year Price and Rating History for MediaTek Inc. (2454.TW)



30-Jan-12 279.50 270.00 U

04-Apr-12 277.00 300.00 N

30-Apr-12 253.00 260.00

25-Jun-12 280.50 300.00

29-Jun-12 273.00 R

27-Jun-13 328.00 400.00 O

09-Sep-13 370.00 440.00

01-Nov-13 404.50 480.00

06-Jan-14 431.50 500.00

08-Apr-14 460.00 540.00

01-May-14 472.00 570.00

07-Oct-14 455.50 540.00


U N D ERPERFO RM

N EU T RA L

REST RICT ED

O U T PERFO RM

3-Year Price and Rating History for Siliconware Precision (2325.TW)



30-Jan-12 32.75 36.00 O

31-Jan-12 34.00 39.00

24-Apr-12 33.20 41.00

26-Jul-12 28.65 36.00

30-Apr-13 35.00 40.00

01-Nov-13 35.10 42.00

07-Apr-14 41.45 50.00

02-May-14 45.00 54.00

03-Jul-14 51.20 56.00

30-Jul-14 44.60 50.00 N

05-Jan-15 48.20 56.50 O


O U T PERFO RM

N EU T RA L

3-Year Price and Rating History for Taiwan Semiconductor Manufacturing (2330.TW)



18-Jan-12 76.70 79.00 O

19-Mar-12 83.70 90.00

27-Apr-12 86.00 95.00

19-Jul-12 77.50 87.00

08-Oct-12 89.10 95.00 N

06-Dec-12 96.60 109.00 O

19-Apr-13 106.50 116.00

19-Feb-14 108.00 122.00

12-Mar-14 113.00 130.00

18-Apr-14 123.00 137.00

10-Jul-14 134.50 150.00

17-Jul-14 124.50 145.00

08-Jan-15 138.00 145.00 N


O U T PERFO RM

N EU T RA L

13 January 2015


3-Year Price and Rating History for Unimicron Technology Corp (3037.TW)



09-Feb-12 40.65 40.00 N

12-Jul-12 33.20 38.00

18-Oct-12 31.80 37.00

30-Oct-12 30.30 35.00

18-Feb-13 28.30 32.00

30-Apr-13 31.10 33.50

10-Jul-13 28.50 33.00

31-Jul-13 27.55 32.00

24-Oct-13 24.10 29.00

06-Jan-14 22.65 29.00 O

25-Apr-14 26.15 32.50


N EU T RA L

O U T PERFO RM

3-Year Price and Rating History for WPG Holdings Ltd (3702.TW)



30-Jan-12 40.25 38.50 N

03-Feb-12 40.65 41.00

23-May-12 35.40 38.50

06-Aug-12 32.80 37.50

02-Nov-12 34.85 36.50

01-Feb-13 39.95 36.00

03-May-13 36.65 39.00

23-Jul-13 38.00 40.00

01-Nov-13 34.50 38.50

06-Jan-14 34.20 39.50

13-May-14 39.60 41.00

05-Aug-14 41.30 43.00

31-Oct-14 37.00 42.00


N EU T RA L

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.

Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.

Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.

*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U .S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non -Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respective ly. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.

Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

13 January 2015


Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:

Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.

Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.

Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.

*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An ana lyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 46% (54% banking clients)

Neutral/Hold* 38% (50% banking clients)

Underperform/Sell* 14% (43% banking clients)

Restricted 2%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis . (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.

Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html

Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Price Target: (12 months) for MediaTek Inc. (2454.TW)

Method: Our target price of NT$570 for MediaTek Inc. is based on 19x 2014E EPS of NT$30, as ASP/GMs mix improves but still reflects a bit of risk on the 3G to 4G transition in the coming few months.. We believe the stock can reach that level by year-end on successful LTE launch, similar to its range the past few years. We are positive on Mediatek due to: (1) a strong product cycle in emerging market smartphone and tablets; (2) market leadership continuing to sustain in the face of tough competition due to fast product innovation both on lower cost and higher performance solutions; and (3) additional drivers from China brands ramping export markets and push to more advanced processors, tablets and TD-SCDMA and LTE over the next few years.

Risk: Risks that could impede achievement of our NT$570 target price for Mediatek include volatility near-term due to 1) post-May holiday lull, 2) risk of price cuts on 3G from QCOM ahead of the high season, and 3) LTE news flow starts out negative as QCOM, BRCM, MRVL and INTC have solutions ahead of Mediatek's competitive SoCs from late 3Q14.

Price Target: (12 months) for Taiwan Semiconductor Manufacturing (2330.TW)

Method: Our NT$145 target price for TSMC is based on mid-cycle 3x forward P/B (versus 2.5-3.5x range) and 12.6x P/E (versus 10.5-15x range). Slowing sequential growth momentum and rising competition keeps fair value at the midpoint of its historical range and caps multiple expansion.

Risk: Risks that could cause the share price to diverge from our NT$145 target price for TSMC would include: evidence of competitor execution stumbles continuing, new growth/customer drivers emerging or evidence of TSMC's position strengthening even in the face of stronger competitive challenges as we approach 2016/17.

Price Target: (12 months) for Siliconware Precision (2325.TW)

Method: Our NT$56.5 target price for SPIL is based on 2.4x P/B, implying 14x 2015E EPS of NT$4.05. We view the company as well supported on potential catalysts from LTE smartphones and a 2nd wave of China telecom infrastructure, a seasonal pick-up across consumer products and a ramp of TV controllers, game consoles and PCs, and the end of an inventory correction coming out of 1Q15.

Risk: Risks that could impede achievement of our NT$56.5 target price for SPIL include: (1) Continued inventory correction or weaker restocking; (2) price competition from peers that is more severe than expected; (3) SPIL, like its peers, would be affected by an unexpected slowdown of the global economy; and (4) cost control and/or material costs are not as good as the company expects.

13 January 2015


Price Target: (12 months) for Advanced Semicon. Engr. (2311.TW)

Method: Our NT$47 target price for ASE is based on 2.4x forward P/B (price-to-book), back to the levels it reached during the prior 2000, 2002, 2004 and 2007 upturns. We see potential catalysts for continued re-rating from ramp of more SiP projects, resumption of K7 operations, start of Apple A8 packaging and test, and growth from DRAM.

Risk: Risks that could impede achievement of our NT$47 target price for ASE include: (1) The global semiconductor up-cycle not as strong as expected; being an upstream company, ASE tends to be more cyclical than other tech plays. (2) Price competition from peers more severe than expected. (3) ASE, like its peers, would be affected by an unexpected slowdown of the global economy. (4) Cost control not as good as expected. (5) 2H14 inventory correction.

Price Target: (12 months) for WPG Holdings Ltd (3702.TW)

Method: WPG's target price of NT$43 is based on 12x our 2014E EPS, in-line with the midpoint of its ex-Lehman 9-15x range from 2006-10.

Risk: The major risks to our 12-month target price of NT$43 for WPG (3702.TW) include: 1) Outlook of WPG's semiconductor distribution business is tied to the overall semiconductor demand. 2) Relationship with IC suppliers 3) Risk of excess component inventory and cash flow management 4) Financial costs and availability of bank credits.

Price Target: (12 months) for Lenovo Group Ltd (0992.HK)

Method: Our HK$13 target price for Lenovo is based on 15x FY16E earnings per share (EPS). This price/earnings (P/E) multiple is at the mid point of its historical trading range. We believe Lenovo should trade at a premium on the back of its ability to leverage the corporate PC cycle, a net share gainer from disruption at HP and Acer, its defensible position in China, which also provides further growth oppurtunity.

Risk: The key risks to our target of HK$13 for Lenovo include: (1) China demand is weaker than expected, (2) the corporate rebound is slower than expected and (3) Lenovo is unable to gain share in PC markets outside of China. All these factors may restrict operating margin expansion, which would be another key risk.

Price Target: (12 months) for Unimicron Technology Corp (3037.TW)

Method: Our target price of NT$25 for Unimicron is based on 0.8x P/B (at -1 Std dev), given longer-than-expected margin recovery amid macro uncertainties.

Risk: Risk factors to our target price of NT$25 for Unimicron are: (1) stronger/weaker demand for handsets, consumer electronic products and NB PCs; (2) margin erosion, given increased competition, weaker demand for high-end handsets, rising raw material prices (copper and gold), and unfavourable currency movements; (3) aggressive expansion from its substrate peers may lead to over-supply and unfavourable pricing environment for entry-level HDI PCBs; and (4) slower/faster-than-expected penetration into new FC BGA substrate customer.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names

The subject company (2330.TW, 0992.HK, 3037.TW, 3034.TW, QCOM.OQ, INTC.OQ, BRCM.OQ, MRVL.OQ, 005930.KS, 5280.TW, RDA.OQ, 6758.T, AAPL.OQ, NOK1V.HE, HIMX.OQ, 0728.HK, 0763.HK, AMKR.OQ, 2498.TW, 5280.TWÂ15) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.

Credit Suisse provided investment banking services to the subject company (0992.HK, QCOM.OQ, INTC.OQ, MRVL.OQ, 005930.KS, 5280.TW, 6758.T, AAPL.OQ, NOK1V.HE, 5280.TWÂ15) within the past 12 months.

Credit Suisse provided non-investment banking services to the subject company (BRCM.OQ) within the past 12 months

Credit Suisse has managed or co-managed a public offering of securities for the subject company (0992.HK, AAPL.OQ) within the past 12 months.

Credit Suisse has received investment banking related compensation from the subject company (0992.HK, QCOM.OQ, INTC.OQ, MRVL.OQ, 005930.KS, 5280.TW, 6758.T, AAPL.OQ, NOK1V.HE, 5280.TWÂ15) within the past 12 months

Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (2454.TW, 0992.HK, 3037.TW, 3034.TW, QCOM.OQ, INTC.OQ, MRVL.OQ, 005930.KS, 5280.TW, RDA.OQ, 6758.T, AAPL.OQ, NOK1V.HE, 3008.TW, 2301.TW, 3673.TW, HIMX.OQ, 0762.HK, 0728.HK, 2474.TW, 5347.TWO, AMKR.OQ, 0522.HK, 2498.TW, 5280.TWÂ15) within the next 3 months.

Credit Suisse has received compensation for products and services other than investment banking services from the subject company (BRCM.OQ) within the past 12 months

As of the date of this report, Credit Suisse makes a market in the following subject companies (QCOM.OQ, INTC.OQ, BRCM.OQ, MRVL.OQ, RDA.OQ, 6758.T, AAPL.OQ, MSI.N, HIMX.OQ, AMKR.OQ).

13 January 2015


As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (2454.TW, 2330.TW, 2325.TW, 2311.TW, 3702.TW, 3037.TW, 2303.TW, 3034.TW, AAPL.OQ, 2379.TW, 3008.TW, 2301.TW, 3673.TW, 2409.TW, 0728.HK, 3189.TW, 2347.TW, 2474.TW, 6147.TWO, 5347.TWO, 2498.TW).

Credit Suisse has a material conflict of interest with the subject company (2330.TW) . Credit Suisse is acting as the financial advisor to Motech Industries Inc in relation to the share subscription by Taiwan Semiconductor Manufacturing Co., Ltd.

Credit Suisse has a material conflict of interest with the subject company (0992.HK) . Credit Suisse is acting as financial advisor to Lenovo Group Limited for its proposed acquisition of Motorola Mobility Group from Google.

Credit Suisse has a material conflict of interest with the subject company (0981.HK) . Credit Suisse USA LLC is acting as an advisor to Atmel Corp on the potential transaction with Microchip Technology and On Semiconductor.

Credit Suisse has a material conflict of interest with the subject company (INTC.OQ) . Credit Suisse Securities (USA) LLC is acting as financial advisor to Intel Corp (INTL) on its announced proposed acquisition of LSI’s Axxia Networking Business from Avago Technologies Limited (AVGO).

Credit Suisse has a material conflict of interest with the subject company (005930.KS) . Credit Suisse is acting as exclusive financial advisor to Samsung Electronics and Samsung Fine Chemicals in relation to the proposed sale of their ownership stakes in the semiconductor wafer joint ventures with SunEdison, SMP Ltd and MEMC Korea Company Ltd, to SunEdison.

As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject company (AAPL.OQ). A Credit Suisse analyst involved in the preparation of this report has a long position in the common stock of AAPL.

For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.

Important Regional Disclosures

Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (2454.TW, 2330.TW, 2325.TW, 2311.TW, 3702.TW, 0992.HK, 3037.TW, 2303.TW, 0981.HK, 3034.TW, QCOM.OQ, INTC.OQ, BRCM.OQ, MRVL.OQ, 005930.KS, 5280.TW, RDA.OQ, 6758.T, AAPL.OQ, NOK1V.HE, MSI.N, 2379.TW, 3042.TW, 3008.TW, 2301.TW, 3673.TW, 2409.TW, HIMX.OQ, 0762.HK, 0941.HK, 0728.HK, 3189.TW, 2347.TW, ARM.L, 0763.HK, 2474.TW, 2018.HK, 6147.TWO, 8150.TW, 5347.TWO, 1347.HK, AMKR.OQ, 0522.HK, 2498.TW, 5280.TW^A15) within the past 12 months

An analyst involved in the preparation of this report has visited certain material operations of the subject company (AAPL.OQ) within the past 12 months

The travel expenses of the analyst in connection with such visits were not paid or reimbursed by the subject company, other than de minimus local travel expenses.

Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.

Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.

For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.

The following disclosed European company/ies have estimates that comply with IFRS: (NOK1V.HE).

Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (2311.TW, 0992.HK, 3034.TW, RDA.OQ, AAPL.OQ, NOK1V.HE, MSI.N, HIMX.OQ, AMKR.OQ) within the past 3 years.

As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

Principal is not guaranteed in the case of equities because equity prices are variable.

Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.

Taiwanese Disclosures: This research report is for reference only. Investors should carefully consider their own investment risk. Investment results are the responsibility of the individual investor. Reports may not be reprinted without permission of CS. Reports written by Taiwan based analysts on non-Taiwan listed companies are not considered recommendations to buy or sell securities under Taiwan Stock Exchange Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers.

To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Credit Suisse AG, Taipei Securities Branch .................................... Randy Abrams, CFA ; Jerry Su ; Pauline Chen ; Thompson Wu ; Nickie Yue

13 January 2015


For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.

13 January 2015


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Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.

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