M c I n t i r e I n v e s t m e n t I n s t i t u t e 1

MCINTIRE INVESTMENT INSTITUTE AT THE UNIVERSITY OF VIRGINIA

Roman Gryniv and Ilkhalid Kakimzhanov | 02/21/2013

Quanta Computer Inc TPE:2382

M c I n t i r e I n v e s t m e n t I n s t i t u t e

AGENDA

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Company Overview

Thesis points

Risks

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COMPANY OVERVIEW

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Quanta Computer is a Taiwan-based high-tech company that was established in 1988. It is an original design manufacturer (ODM) of laptop computers, tablets, servers, GPS systems and other electronic hardware. It has recently expanded to the cloud servers business

To the general public Quanta is known as largest notebook computer ODM company in the world. In fact one out of three laptops in the world is produced by Quanta.

Among the clients of Quanta are Apple, Amazon, Sony, Compaq, Dell, Hewlett-Packard, Cisco, Fujitsu, Lenovo, LG, Research In Motion, Sharp, Siemens, Sun Microsystems, Toshiba, and Vizio

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COMPANY OVERVIEW: STATISTICS

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Quanta Computer Inc TPE:2382

Current P/E 10.69 Market Cap $8.74 B 52wk range -1.86% Dividend Yield 5.95%

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COMPANY OVERVIEW: STRUCTURE

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70%

30%

2012

Laptops Other

Company structure

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THESIS POINTS

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3 •  Diversification – a way to long-term growth

4 •  Short-term catalyst: Potential revival of US CAPEX

2 •  Undervalued due to market misperception

1 •  Top Down Approach: The Rise of ODMs

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THE RISE OF ODMS

Why Quanta and not Apple?

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

THE RISE OF ODMS

•  Avoids “Brand” risk and change in customer tastes

•  Targets whole markets rather than one company

•  Industry Diversification

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ODMs vs OEMs

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2012

Laptops Other

THESIS POINTS

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undervalued

2014

Laptops Other

growth growth

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MARKET MISPERCEPTION

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In 2012, for the first time in 11 years, laptop shipments dropped by 1 percent from 353 million to 349 million.

Neither the holiday season, nor Windows 8 managed to support sales of PC laptops in the fourth quarter.

As a result, stock prices of major laptop manufacturers sunk in 2012. Most of the companies have experienced a decline in sales and profits.

Market down

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MARKET MISPERCEPTION

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Why is the story of Quanta different?

•  Quanta’s profit was up 19% in the last reported quarter, while its biggest competitor, Compal, experienced a 23% decrease. As a consequence Quanta is hugely undervalued with the lowest P/E ratio in the industry of 10.6, compared to the average of 14.

•  While competitors mostly implement “unpopular” short-run measures, such as job cuts and factory closings, Quanta diversifies to different markets and regularly pays 6% dividends, which gives a positive signal to the market.

•  The decline of the market is relatively slow. Such downsize will eliminate small and inefficient manufacturers that appeared because of the industry growth in the past. Quanta on the other hand has the highest operating margins and market share, thus, it will be experience the smallest damage.

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DIVERSIFICATION

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Quanta is investing in rapidly growing industries

Tablets Cloud computing

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DIVERSIFICATION

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Key trends in tablet markets

Ø  In 2013, for the first time, the tablet global tablet market is expected to overtake the laptops market.

Ø Android operated tablets are continuously increasing their market share at the expense of iOS operated iPads.

Ø  Tablets are becoming more of a “must-have” than a luxury product, due to the decrease in prices and diversification of products

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DIVERSIFICATION

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Quanta products

Google’s NEXUS 7 Base price: $199.99 2012 sales: 4.6M

T3 “Gadget of the year” & “Tablet of the year”

Amazon’s Kindle Fire Base price: $199.99 2012 3Q sales: 7M

Unique connectivity to Amazon’s cloud environment

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THESIS POINTS

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Quanta gains from increases in sales of Nexus and Kindle Fire. In 2012 it produced 15 million tablets, compared to 7.5 in 2011.

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DIVERSIFICATION

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Rapidly expanding cloud computing industry

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DIVERSIFICATION

Stratos Servers

Tropos Switches

Mesos Storage

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QUANTA CLOUD COMPTUING PRODUCTS

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DIVERSIFICATION

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Main clients of cloud services

Giants

• Google • Amazon • Facebook • Microsoft

Corporations

• Financial • Manufacturers • Telecom

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DIVERSIFICATION

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Giants of cloud services

Giants

• Google • Amazon • Facebook • Microsoft

OEM

• Cisco • HP • Juniper • Force10

ODM

Quanta

Customized solutions Avoiding mark-up

Expertize

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DIVERSIFICATION

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•  Quanta and Facebook closely work with each other on the Open Compute Project, Facebook’s effort to encourage collaboration on new hardware designs.

•  Quanta manufactured the servers for Facebook’s data center in Prineville, Oregon

Quanta and the Giants

•  Quanta is partnered with Google to create customized servers structures.

•  Quanta has signed a contract with Microsoft to design a Windows based private-cloud system for business customers

M c I n t i r e I n v e s t m e n t I n s t i t u t e

AGENDA

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Quanta and the Corporates

In 2012 the company has created a US subsidiary Quanta QCT that is aimed at distributing its cloud computing products to mid and large sized enterprises

For instance, in December 2012 Quanta has signed a contract with Goldman Sachs to provide cloud servers

Quanta has opened QCT subsidiaries in Shanghai and China to expand in Asian cloud computing markets. Partnered up with local Taiwan Mobile Corp, FarEast Tone Telecom and South Korea’s main internet provider KT to provide branded servers

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MANAGEMENT

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Strategy

•  Focus on innovative approach in research and development efforts to fully utilize our competitive advantage. Stimulate innovations through different perspectives.

•  Strong push for cost-down in material and transportation through standardization, quality control, and waste reduction.

The manifest of Quanta’s strategy to innovation is a newly built QRDC building. Company hugely invests in R&D side of the product line. In fact 5000 people out of 70000 employees work in R&D department.

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MANAGEMENT

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Executives

Barry Lam - Chairman Barry Lam is the founder and Chairman of Quanta Computer. With over 30 years of experience, Barry is widely hailed as a visionary and has been globally recognized for his accomplishments. In 1999 and 2002, Barry was chosen by Business Week as one of fifty "Stars of Asia". In 2002, he was highlighted in Business Week's list of the top 25 managers of the year for his achievements in leading Quanta in becoming the world's largest notebook producer.

C.C. Leung - Vice Chairman and President C.C. Leung is the co-founder and Vice Chairman of Quanta Computer. With over 30 years of industry experience in R&D, and manufacturing, C.C. was President of Quanta from late 1993 to mid-2006 and led the company into a period of rapid growth.

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PROFESSIONAL OPINION

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“We expect Quanta’s non-notebook business to see gradual growth and exceed the notebook division in the next three to five years, mostly helped by contributions from cloud computing, data center and tablets” – Kirk Yang, industry analyst at Barclays

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POTENTIAL REVIVAL OF US CAPEX

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US Capital Expenditure have stagnated in 2012 amid fear of US fiscal cliff and global economic uncertainty… But, at the same time…

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POTENTIAL REVIVAL OF US CAPEX

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Corporations have deleveraged, generating significant cash reserves

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POTENTIAL RISKS

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•  Significant reduction in Laptop sales in 2013

•  US capital expenditure continues to stagnate

•  “The Foxconn risk”

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RECOMMENDATION

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•  Initiate a 3% position