Documente Academic
Documente Profesional
Documente Cultură
See important disclosures, including any required research certifications, beginning on page 49
Contents
New iPhones: we prefer the EMS companies to the component suppliers .................................3 Wow factor likely to be limited for new iPhones ....................................................................3 Market expectations are low .................................................................................................... 4 A change in focus in the product mix to the mid-range .......................................................... 4 EMS companies should do better; components makers likely to suffer ..................................5 What we recommend ................................................................................................................5 Appendix I: Pan-Asia Apple iPhone 5S/5C supply chain ............................................................ 7 Appendix II: whats new in iOS 7 ................................................................................................ 9 New features and a new look ................................................................................................... 9 Appendix III: fingerprint scanner .............................................................................................. 11 A closer look at the technology ............................................................................................... 11 Appendix IV: comparison of likely specs of 5S with those of other handsets ........................... 12 Appendix V: comparison of likely specs of 5C with those of other handsets ............................ 13 Company Section Hon Hai Precision Industry .................................................................................................... 14 Largan Precision .................................................................................................................... 22 AAC Technologies .................................................................................................................. 30 TXC Corp ................................................................................................................................ 38 Pegatron Corp ........................................................................................................................ 42
Kylie Huang
(886) 2 8758 6248 kylie.huang@daiwacm-cathay.com.tw
Jason Chen
(886) 2 8758 6251 jason.chen@daiwacm-cathay.com.tw
Whats new
Markets expectations low enough. Although we think the market sees limited spec upgrades for the new iPhones, we believe the markets expectations on the iPhone volumes are too low. We forecast the total iPhone production volume to be 90m for 2H13, higher than the markets expectation of 80-85m. Our research indicates that yieldrate issues with the fingerprint and display driver-ICs of the 5S, which are of concern to the market, were resolved recently. iPhone mix shifting focus to the mid-range. As the high-end smartphone segment is becoming saturated, we view the 5C as a clear indication that Apple is changing its focus to the mid-range segment. We forecast mid-range/legacy products to account for 62% of total iPhones for 2H13, up from 31% for 2H12. Electronic manufacturing services (EMS) players should do better than components suppliers. We expect the components firms to face increased pricing pressure, especially after the initial sell-in, due to the unfavourable product-mix change and the limited spec upgrades. Meanwhile, we believe the EMS firms which are volume players should enjoy scale benefits from the production-volume growth and possibly fast ramp-ups in yield rates due to the limited productdesign changes.
What we recommend
On 10 September, Apple is widely expected to unveil new iPhones. We outline our expectations for the new products and production volumes, and assess the implications for the Greater China supply chain. This report marks a transfer of coverage.
Whats the impact
companies when it comes to the forthcoming iPhones. For Hon Hai Precision Industry (Hon Hai), we reaffirm our Buy (1) rating given the 2H13 volume growth that we see from iPhones and overdone market concerns about new competition. We also like Pegatron Corp (Pegatron) for its expanding iPhone exposure. Among the components players, we downgrade both Largan Precision (Largan) and AAC Technologies (AAC) to Underperform (4) from Buy (1) due to rising margin risks on the back of the product-mix change. We downgrade TXC Corp (TXC) to Hold (3) from Buy (1) due to pricing pressure but see limited downside due to its undemanding valuation. The key risk to our sector view would be weaker-than-expected volumes for the new i-devices.
How we differ
New iPhones: wow factor likely to be limited. We expect Apple to announce two new handsets: a high-end flagship model (the 5S), and a new mid-range model (the 5C). We believe the 5S will be physically similar to the 5 but will have small upgrades to the battery, CPU and camera. The inclusion for the first time of a fingerprint scanner is likely to provide the only wow factor. As for the 5C, we expect lower specs than for the 5, with a plastic, coloured casing and lower memory. We think prices for the 5C will range from USD429-479 (USD49-99 with a contract), and that Apple will keep the 4S, as the low-end model offered free by operators with a contract.
We are more positive on the iPhone production volume than the market for 2H13, but more concerned about pricing pressure on the components firms due to Apples product-mix change and limited spec upgrades to new products.
Buy 1,250.00
See important disclosures, including any required research certifications, beginning on page 49
Rating New Buy Buy Hold Prev. Buy Buy Buy Buy Buy
Target price (local curr.) New 33.50 98.00 920.00 62.00 41.00 Prev. 105.00 62.00 % chg (6.7%) 0.0% New 1.840 8.177 65.796 4.487 3.115 44.50 (24.7%) 1,250.00 (26.4%) 57.00 (28.1%)
FY1 Prev. 1.988 8.759 64.826 4.487 % chg (7.4%) (6.6%) 1.5% 0.0% New 2.046 9.204 71.547 5.962 3.589
FY2 Prev. 9.868 5.962 % chg (6.7%) 0.0% 2.489 (17.8%) 80.150 (10.7%) 4.769 (24.7%)
4.062 (23.3%)
-2-
Photo
The 5S: fingerprint scanner may offer the only wow factor, but value addition capped by lack of NFC
Our market research suggests the 5S will be little different in appearance to the 5 (as was the case with the 4S and the 4), with small upgrades to the CPU, memory, battery, and camera, and the inclusion of a fingerprint scanner, which may be the only exceptional feature. We expect the fingerprint scanner to be used instead of passwords and the need to log in for some applications, and maybe to enhance security when one purchases items in the App Store. We believe this new feature would enhance the user experience but do not see it as a killer feature to attract consumers. In our view, the best use of a fingerprint scanner would be to enhance security, and provide privacy protection in an e-wallet environment. Meanwhile, our market research suggests there will be no NFC feature (which can turn the smartphone into an e-wallet) in the 5S. However, we do not see NFC as a technology whose time has come. While a good idea conceptually, the reality is that there is no international industry standard. The lack of an agreed standard is not just a global issue. There are no standards at a country level (or even at a city level), because of vested interests of the phone makers, credit-card issuers, mobile-service providers, and other related parties. Each party wants to take the lead, handle transactions, keep client data, and collect fees. Another limitation is that equipping smartphones with an NFC chip is not all that is required two-way communication is needed for NFC to work. On the retail side, all shops and outlets would have to install scanners. This leads to the question of who would subsidise the hardware costs for retail stores (many of which may be mom-and-pop shops, rather than chain stores).
Photo
Launch date Price (Contract price) Price (unlock price) Cellular Dimensions Weight Casing Colour Fingerprint scanner Embedded OS Display diagonal Display resolution PPI CPU ROM capacity RAM capacity Wireless LAN Camera resolution Flash Camcorder Secondary camera
Sep-13 Sep-13 Sep-12 USD199 (16GB) USD49-99 (8GB) USD199 (16GB) USD649 (16GB) USD429-479 (8GB) USD649 (16GB) LTE/ 3G 3G LTE/ 3G TD-LTE TD-SCDMA TD-SCDMA 123.8 x 58.6 x 7.6 mm 123.8 x 58.6 x 8.2 mm 123.8 x 58.6 x 7.6 mm 112 g (3.95 oz) 125g(4.41 oz) 112 g (3.95 oz) Aluminium Plastic Aluminium Black/white/gold 6 colours Black/white Yes No No iOS 7 iOS 7 iOS 6 4.0" (Retina) 4.0"(Retina) 4.0"(Retina) 1136 x 640 pixels 1136 x 640 pixels 1136 x 640 pixels 326 ppi 326 ppi 326 ppi Apple A7 dual-core Apple A6 dual-core Apple A6 dual-core 16/32/64/128GB 8/16GB 16/32/64GB 2GB 1GB 1GB 802.11 a/b/g/n 802.11 a/b/g/n 802.11 a/b/g/n 8 MP, f/2.0 8MP, f/2.4 8MP, f/2.4 (Dual-LED flash) (Single-LED flash) (Single-LED flash) 1080p@30fps 1080p@30fps 1080p@30fps 1.2MP 1.2MP 1.2MP
Source: Company, Daiwa estimates Note: We highlight the likely spec upgrades in dark blue and spec downgrades in light blue
The iPhone 5C should be a little thicker than the 5 due to the change in the casing material, but the other features such as the camera specs, display resolution, and acoustic design should remain the same. We expect prices for the 5C to range from USD429-479, targeting the mid-range smartphone segment. Our research also indicates that Apple will keep making the 4S, as a low-end model that is free with a contract.
1,000
40%
500
20%
0 2012 Low-end (LHS) Low-end YOY (RHS) Total YoY (RHS) 2013E 2014E Mid-range (LHS) Mid-range YoY (RHS)
Source: IDC, Daiwa forecasts Note: We define low-end smartphones as those that cost less than USD200, mid-range as those costing USD200-500 and those costing more than USD500 as high-end
2013E
2014E
Mid-range (USD200-500)
Source: Daiwa forecasts Note: This table represents Daiwas iPhone production forecasts, which will be slightly different from Apples iPhone sales figures
Flagship Model
Source: Daiwa forecasts Note: This chart represents Daiwas iPhone production forecasts, which will be slightly different from Apples iPhone sales figures
9 (Month)
What we recommend
Prefer EMS companies to the components makers
In terms of the forthcoming iPhones, we are confident about the production-volume growth outlooks for 2H13 for both the EMS companies and the components makers, but we are concerned about the pricing pressure that the component makers are likely to face due to the change in Apples product mix. We believe Apples iPhone product-mix shift to a more mid-range focus could benefit the EMS vendors, but result in margin risk for the components vendors. Within the Greater China Smartphone Sector, Hon Hai is our top pick as we see its earnings-growth momentum resuming in 2H13, driven by the launch of the next wave of i-devices and because we think the markets concerns about new competition are overdone. We suggest investors avoid the leading components companies, Largan and AAC, due to rising margin risks on the back of the change in iPhone mix. Following are our ratings and valuations for the Greater China iPhone supply chain stocks that we cover. Hon Hai (2317 TT, TWD82.00, Buy [1], TP: TWD98) We reiterate our Buy (1) rating on Hon Hai and believe the company will be the major beneficiary of the new idevices. Our six-month target price is TWD98, based on a one-year forward PER of 11x (its past-three-year average). We forecast Hon Hai to regain its revenuegrowth momentum in 2H13, as we expect the company to become the sole supplier for both the iPhone 5S and the next iPad, and that it will secure 25-30% of the mid-range iPhone orders. Moreover, we foresee margin -5-
expansion for Hon Hai given its cost savings from relocating its production plants inland within China, increasing vertical integration and automation, as well as the product-mix change of its major client, Apple. The main risk to our rating would be slower-thanexpected margin expansion. Largan (3008 TT, TWD1,050.00, Underperform [4], TP: TWD920) We are downgrading our rating on Largan to Underperform (4) from Buy (1). We like Largan for its quality management and leading industry position, but we foresee pricing pressure in 4Q13 and think its current valuation of 16x 2013E PER is unattractive compared with its past-three-year average of 14x. For 2H13, we expect its earnings-growth momentum to slow from 4Q13 given the change in the iPhone product mix and limited contribution from new clients, after a stellar 3Q13 on the back of new product launches and the effects of the peak season. Our new six-month target price is TWD920, based on a one-year rollingforward PER of 14x. The major risk to our negative view would be better-than-expected orders from new clients. AAC (2018 HK, HKD36.50, Underperform [4], TP: HKD33.50) We are downgrading our rating on AAC to Underperform (4) from Buy (1). Our new six-month target price is HKD33.50, based on a one-year forward PER of 14x (in line with its past-three-year average). We are concerned about the saturation that we see in the high-end smartphone market and consider the stocks current valuation, at a one-year forward PER of 15.4x, unjustified. Furthermore, we believe AAC could be negatively affected by its major clients product-mix change, with limited spec upgrades resulting in more severe pricing pressure. Overall, we expect AACs earnings growth to decelerate to a double-digit percentage YoY in the following 2-3 years from 70% for 2012. A better-than-expected margin would be the major upside risk to our negative view.
TXC (3042 TT, TWD40.50, Hold [3], TP: TWD41) We are downgrading our rating on TXC to Hold (3) from Buy (1). We believe the worst of unfavourable currency fluctuations are now over for TXC and forecast 15% HoH revenue growth for 2H13. However, we expect TXC to experience pricing pressure in 2H13, on the back of its major clients product-mix change. As such, we are more cautious than the market on the companys margin expansion for 2013 and forecast a mild recovery in the operating margin to 11.5-12.0% for 2H13 (from 9.5-10% for 1H13). We believe TXC could regain its revenue-growth momentum in 2014, given the start of revenue contributions from new clients and its solid i-device orders. Our new six-month target price is TWD41, now based on a one-year forward PER of 12.5x (in line with its past-three-year average). The main upside risk to our view would be faster-thanexpected margin recovery, while the main downside risk would be further sharp Yen depreciation.
-6-
Polarizer Display driver IC Component 8MP camera module 8MP camera lens 1.3MP camera lens
VCM for lens module 1.3 MP CMOS sensor 8MP CMOS sensor MLCC
Duplexer
-7-
Ticker 3042 TT 6779 JP 6762 JP 6976 JP Not listed 6801 JP 6594 JP 4062 JP 2313 TT 011070 KS 3037 TT 7240 JP 5802 JP 4958 TT MFLX US 5803 JP 051370 KS 6269 TT 2018 HK 002241 CH Private TQNT US SWKS US AVGO US 2317 TT 2354 TT JBL US 2317 TT JBL US HIP SP Private SYNA US INVN US 6762 JP Private 006400 KS 051910 KS 6121 TT 3211 TT 2317 TT 4938 TT
Manufacturer TXC NDK TDK Taiyo Yuden Cymtec (Taiwan) Toko Nidec Ibiden Compeq LG Innotek Unimicron NOK Sumitomo ZD Tech M-flex Fujikura Interflex Flexium AAC Goertek Knowles Triquint Skyworks Avago Hon Hai Foxconn Tech Jabil Hon Hai Jabil Hi-P AuthenTec Snaptics Invensense TDK/ATL Tianjin Lishen Samsung SDI LG Chemical Simplo Dynapack Hon Hai Pagatron
iPhone 5S allocation 40% 40% 30% 30% 30% 10% 100% 40% 15-25% 10-20% 10-15% 15-20% 15-20% 10-15% 10-15% 10-15% 10% 5-10% 50% 35-40% 10-15% 25-50% 25% 25-50% 40% 40% 20% n.a. n.a. n.a. 100% 100% 100% 20-25% 20-25% 20-25% 20-25% 50-60% 40-50% 100% 0%
iPhone 5C allocation 40% 40% 30% 30% 30% 10% 100% 40% 15-25% 10-20% 10-15% 15-20% 15-20% 10-15% 10-15% 10-15% 10% 5-10% 50% 35-40% 10-15% 25-50% 25% 25-50% n.a. n.a. n.a. 30-40% 30-40% 20-30% n.a. n.a. 100% 20-25% 20-25% 20-25% 20-25% 50-60% 40-50% 25-30% 70-75%
Flexible PCB
Acoustic
PA
Metal casing
Plastic casing
-8-
Visual overhaul
With Apples hardware design head Jonathan Ive now tasked with overseeing Human Interfaces in the companys software, too, the icons and home screen in iOS 7 have an all-new look. Bars, buttons and shadows under icons and text on the home screen have been removed, though the underlying mode of interacting with the software is unchanged. We think the strippeddown, refined design of iOS 7 will impress users.
iOS 6 (RHS) vs. iOS 7 (LHS): home screen comparison
New features
Apple has added many new features, but we think AirDrop and Control Center are among the most impressive additions. Others, such as updates to Siri and the Photos app, along with iTunes Radio, may not be eye-catching enough, in our view. -9-
1) AirDrop With supported iDevices, this feature allows iOS users to share pictures, videos and other items from any app and save them in a convenient, secure way using WiFi and Bluetooth. One of the selling points is that no prior set-up is required. 2) Control Center The new Control Center in iOS 7 gives users a way to access commonly-used features with a simple swipe gesture. The five (non-customisable) rows in the beta software include mode setting (Airplane, Wi-Fi, Bluetooth, Do Not Disturb mode and Rotation Lock), brightness control, multimedia controls with a soundvolume bar, shortcuts for AirDrop and AirPlay, and quick access to the LED flashlight, timer, calculator, and camera. 3) Multitasking Given improved battery management, multitasking allows users to switch between different apps in the background, almost instantly, without draining resources. Similar to HTCs Sense Task switcher, screenshots of previously opened apps are displayed and applications can be closed with a simple swipe gesture. Among the other new features are an image editor incorporated into the Photos app, clearer, more natural-sounding female or male voices in Siri, and the new iTunes Radio service.
New features in iOS 7: AirDrop (LHS), Control Center (middle) and Multitasking (RHS)
- 10 -
Optical-based sensors
Similar to digital cameras and camcorders, opticalbased fingerprint sensors detect fingerprints by illuminating the surface of the finger. A charge-coupled device (CCD) system is used in the scanner to generate electrical signals in response to a fingerprint, from which a digital image is generated. This is a relatively low-cost solution, but the systems accuracy can be affected by dirt and the hardware is prone to damage.
Capacitance-based sensors
Capacitance-based sensors, on the other hand, contain small capacitive plates in which integrated circuits detect very low electrical charges sent from the users finger. By sensing the difference in the voltage output of a finger's ridges and valleys, the sensor forms the image of the fingerprint.
- 11 -
Photo
Release date Sep-13 Current unlocked price USD649/749/849 Dimensions 123.8 x 58.6 x 7.6 mm Weight: 112 g (3.95 oz) Embedded OS iOS 7 Display diagonal 4.0" (Retina) Display resolution 1136 x 640 pixels PPI 326 ppi Fingerprint scanner Yes CPU Apple A7 Dual-core CPU Clock ROM capacity: RAM capacity Wireless LAN GPS Camera resolution Aperture Autofocus (AF) Flash Camcorder Secondary camera Battery capacity Loudspeaker 1.6GHz 16/32/64/128GB 2GB 802.11 a/b/g/n Yes 8MP f/2.0 Yes (dual-LED flash) 1080p@30fps 1.2MP Li-Po 1600mAh Yes
Apr-13 Jul-13 13-Aug Mar-13 3Q13 Mar-13 Apr-13 USD619.99 USD759.50 TBD $549.99 TBD USD649.99 (32GB) USD579.99 136.6 x 69.8 x 7.9 mm 130.4 x 71.4 x 10.4 mm 129.3 x 65.3 x 10.4 mm 131.6 x 69.3 x 9.8 mm 138.5 x 70.9 x 8.9 mm 137.4 x 68.2 x 9.3 mm 119.6 x 66.8 x 10.4 mm 130 g (4.59 oz) 158 g (5.57 oz) 130 g (4.59 oz) 151 g (5.33 oz) 143 g (5.04 oz) 143 g (5.04 oz) 139 g (4.90 oz) Android 4.2.2 MS Windows Phone 8 Android 4.2.2 Android 4.1.2 Android 4.2.2 Android 4.1.2 BlackBerry 10 OS 5.0" Super AMOLED 4.5" AMOLED 4.7" AMOLED 5.0'' 5.2'' IPS 4.7" Super LCD3 3.1" Super AMOLED 1080 x 1920 pixels 768 x 1280 pixels 720 x 1280 pixels 1080 x 1920 pixels 1080 x 1920 pixels 1080 x 1920 pixels 720 x 720 pixels 441 ppi 332 ppi 312 ppi 441 ppi 424 ppi 469 ppi 328 ppi No No No No No No No Cortex-A15 & A7 Quad- Qualcomm MSM8960 Qualcomm MSM8960 Qualcomm MDM9215M Qualcomm MSM8974 Qualcomm APQ8064T Snapdragon S4 Dualcore Snapdragon Dual-core Pro Snapdragon Dual- / APQ8064 Quad-core Snapdragon 800 Quad- Snapdragon 600 Quadcore core core core 1.6 & 1.2 GHz 1.5 GHz 1.7 GHz 1.5 GHz 2.26 GHz 1.7 GHz 1.5 GHz 16/32/64GB 32GB 16/32GB 16GB 32GB 16/32/64GB 16GB 2GB 2GB 2GB 2GB 2GB 2GB 2GB 802.11 a/b/g/n 802.11 a/b/g/n 802.11 a/b/g/n 802.11 a/b/g/n 802.11 a/b/g/n/ac 802.11 a/ac/b/g/n 802.11 a/b/g/n Yes Yes Yes Yes Yes Yes Yes 13MP 41MP 10MP 13MP 13MP 4MP 8MP f/2.2 n.a. n.a. f/2.2 f/2.4 f/2.0 n.a. Yes Yes Yes Yes Yes Yes Yes (Single-LED flash) Xenon & LED flash (Single-LED flash) (Single-LED flash) (Single-LED flash) (Single-LED flash) (Single-LED flash) 1080p@30fps 1080p@30fps 1080p@30fps 1080p@30fps 1080p@30fps 1080p@30fps 1080p@30fps 2MP 1.2MP 2MP 2MP 2.1MP 2.1MP 2MP Li-Ion 2600 mAh Li-Ion 2000 mAh Li-Ion 2200 mAh Li-Ion 2370 mAh Li-Po 3000 mAh Li-Po 2300 mAh Li-Ion 2100 mAh Yes Yes Yes Yes Yes Yes Yes
Source: Companies, Daiwa Note: specs for the iPhone 5S are likely rather than confirmed
Photo
Release date Current unlocked price Dimensions Weight: Embedded OS Display diagonal Display resolution PPI Fingerprint scanner CPU CPU Clock ROM capacity: RAM capacity Wireless LAN GPS Camera resolution Aperture Autofocus (AF) Flash Camcorder Secondary camera Battery capacity Loudspeaker
Sep-13 USD649/749/849 123.8 x 58.6 x 7.6 mm 112 g (3.95 oz) iOS 7 4.0" (Retina) 1136 x 640 pixels 326 ppi Yes Apple A7 Dual-core 1.6GHz 16/32/64/128GB 2GB 802.11 a/b/g/n Yes 8MP f/2.0 Yes (dual-LED flash) 1080p@30fps 1.2MP Li-Po 1600mAh Yes
Apr-13 Mar-13 CNY2580 (16GB) CNY2600 157 x 78 x 6.9 mm 142 x 70 x 6.9mm 162 g (5.71 oz) 110 g (3.88 oz) Android 4.2 Android 4.1 5.5" IPS 5.0" IPS 1080*1920 pixels 1080*1920 pixels 401 ppi 441 ppi No No Intel Atom Z2580 Dual-core Qcom APQ8064 Quad-core 2.0GHz 1.5GHz 16/32 GB 16GB 2GB 2GB 802.11 a/b/g/n 802.11 a/b/g/n Yes Yes 13MP 13MP f/1.8 n.a. Yes Yes dual-LED LED flash 1080p@30fps 1080p@30fps 2MP 2MP Li-Po 2500 mAh Li-Ion 1780 mAh Yes Yes
Mar-13 CNY2750 140 x 71 x 9.4 mm 170 g (6.00 oz) Android 4.1 5.0" IPS 1080*1920 pixels 441 ppi No Haisi K3V2 Quad-core 1.5GHz 32GB 2GB 802.11 a/b/g/n Yes 13MP n.a. Yes LED flash 1080p@30fps 1.3MP Li-Ion 3000 mAh Yes
Apr-13 CNY2999 136.2 x 66.7 x 8.4 mm 122 g (4.30 oz) Android 4.1.2 4.7" IPS 720 x 1280 pixels 312 ppi No Haisi K3V2 Quad-core 1.5GHz 16GB 1GB 802.11 a/b/g/n Yes 13MP n.a. Yes LED flash 1080p@30fps 1.3MP Li-Ion 2420 mAh Yes
Feb-13 CNY2998 141.8 x 68.8 x 8.9 mm 165 g (5.82 oz) Android 4.1 5.0" IPS 1080*1920 pixels 441 ppi No Qualcomm APQ8064 Snapdragon 1.5GHz 16GB 2GB 802.11 a/b/g/n Yes 13MP f/2.2 Yes LED flash 1080p@30fps 1.9MP Li-Ion 2500 mAh Yes
2013 2013 CNY2788 CNY2998 138 x 68.8 x 7.6mm 153.8 x 79.9 x 8mm 126 g (4.44 oz) 187 g (6.60 oz) Android 4.2 Android 4.2 5.0" OGS 5.0" IPS 1080*1920 pixels 1080*1920 pixels 441 ppi 386 ppi No No Qualcomm APQ8064 Qualcomm APQ8064 Snapdragon Snapdragon 1.5GHz 1.6GHz 16GB 16GB 2GB 2GB 802.11 b/g/n 802.12 b/g/n Yes Yes 13MP 13MP f/2.2 f/2.2 Yes Yes LED flash LED flash 1080p@30fps 1080p@30fps 2MP 5MP 2300mAh 3400mAh Yes Yes
Source: Companies, Daiwa Note: specs for the iPhone 5S are likely rather than confirmed
- 12 -
Photo
Release date Current unlocked price Dimensions Weight Embedded OS Display diagonal Display resolution PPI CPU: CPU clock: ROM capacity RAM capacity Wireless LAN GPS: Camera resolution Aperture Autofocus (AF) Flash Camcorder Secondary camera Battery capacity Loudspeaker
Sep-13 USD429-479 (8GB) 123.8 x 58.6 x 8.2 mm 125 g (4.41 oz) iOS 7 4.0"(Retina) 1136 x 640 pixels 326 ppi Apple A6 Dual-core 1.3GHz 8/16GB 1GB 802.11 a/b/g/n Yes 8MP f/2.4 Yes (Single-LED flash) 1080p@30fps 1.2MP Li-Ion 1600 mAh Yes
Jul-13 USD429.99 124.6 x 61.3 x 8.9 mm 107 g (3.77 oz) Android 4.0.4 4.8" Super AMOLED 720 x 1280 pixels 306 ppi Exynos 4412 Quad-core 1.4 GHz 8GB 1.5GB 802.11 a/b/g/n Yes 8MP n.a. Yes (Single-LED flash) 1080p@30fps 1.9MP Li-Ion 1900 mAh Yes
Jul-13 USD490.00 (16GB) 129 x 70.6 x 8.5 mm 139 g (4.90 oz) MS Windows Phone 8 4.5" AMOLED 768 x 1280 pixels 332 ppi Qualcomm MSM8960 Snapdragon Dual-core 1.5 GHz 16/32GB 1GB 802.11 a/b/g/n Yes 8MP f/2.0 Yes (Dual-LED flash) 1080p@30fps 1.3MP Li-Ion 2000 mAh Yes
13-Aug TBD 121.3 x 61.3 x 8.9 mm 130 g (4.59 oz) Android 4.2 4.3" 720 x 1280 pixels 342 ppi Qualcomm Snapdragon S4Pro Dual-core 1.7 GHz 16GB 2GB 802.11 a/b/g/n Yes 10MP n.a. Yes (Single-LED flash)
Jun-13 USD479.99 131.3 x 67.3 x 10.5 mm 138 g (4.87 oz) Android 4.1 4.55" 720 x 1280 pixels 323 ppi Qualcomm Snapdragon APQ8064 Quad-core 1.5 GHz 8GB 2GB 802.11 a/b/g/n/ac Yes 13.1 MP n.a. Yes (Single-LED flash) 1080p@30fps VGA Li-ion 2300 mAh Yes
1080p@30fps
2MP Li-Ion 2000 mAh Yes
3Q13 TBD TBD TBD Android OS, v4.1 4.7" True HD-IPS 720 x 1280 pixels 312 ppi Qualcomm 8230 Snapdragon 400 Dualcore 1.4 GHz 8GB 1GB 802.11 b/g/n Yes 8MP n.a. Yes (Single-LED flash) 1080p@30fps 1.3MP Li-Ion 2150 mAh Yes
Jun-13 USD449.99 134.8 x 67 x 9.3 mm 130 g (4.59 oz) Android 4.1.2 4.5" Super LCD2 540 x 960 pixels 245 ppi Qualcomm MSM8625Q Snapdragon 200 Quadcore 1.2 GHz 8GB 1GB 802.11 b/g/n Yes 8 MP f/2.0 Yes (Single-LED flash) 720p@24fps 1.6MP Li-Ion 1860 mAh Yes
Source: Companies, Daiwa Note: specs for the iPhone 5C are likely rather than confirmed
Photo
Release date Current unlocked price Dimensions Weight Embedded OS Display diagonal Display resolution PPI CPU: CPU clock: ROM capacity RAM capacity Wireless LAN GPS: Camera resolution Aperture Autofocus (AF) Flash Camcorder Secondary camera Battery capacity Loudspeaker
Sep-13 USD429-479 (8GB) 123.8 x 58.6 x 8.2 mm 125 g (4.41 oz) iOS 7 4.0"(Retina) 1136 x 640 pixels 326 ppi Apple A6 Dual-core 1.3GHz 8/16GB 1GB 802.11 a/b/g/n Yes 8MP f/2.4 Yes (Single-LED flash) 1080p@30fps 1.2MP Li-Ion 1600 mAh Yes
Apr-13 Mar-13 CNY 2088 (32GB) CNY2120 126 x 62 x 10.2 mm 159.9 x 82.4 x 8.5mm 145 g (5.11 oz) 189g (6.65 oz) Android 4.1 Android 4.1.2 4.3" IPS 5.7" IPS 720*1280 pixels 720*1280 pixels 342 ppi 258 ppi Qcom APQ8064 Pro Quad- Nvidia Tegra3 Quad-core core 1.7GHz 1.5GHz 16/32GB 16GB 2GB 2GB 802.11 a/b/g/n 802.11 a/b/g/n Yes Yes 8MP 13MP f/2.0 n.a. Yes Yes (Single-LED flash) (Single-LED flash) 1080p@30fps 1080p@30fps 2MP 1MP Li-Ion 2000 mAh Li-ion 3200 mAh Yes Yes
Mar-13 CNY2400 163.5 x 85.7 x 9.9 mm 198 g (6.98 oz) Android 4.1 6.1"IPS 720*1280 pixels 241 ppi Haisi K3V2 Quad-core 1.5GHz 8GB 2GB 802.11 a/b/g/n Yes 8MP n.a. Yes (Single-LED flash) 1080p@30fps 1MP Li-Ion 4050 mAh Yes
Jun-13 CNY2400 132.7 x 65.5 x 6.2 mm 120g (4.23 oz) Android 4.2 4.7" IPS 720*1280 pixels 312 ppi Haisi K3V2E Quad-core 1.5GHz 8GB 2GB 802.11 a/b/g/n Yes 8MP f/2.0 Yes (Single-LED flash) 1080p@30fps 5MP Li-Po 2000 mAh Yes
3Q13 CNY2298 136.5 x 68 x 7.3mm 110 g (3.88 oz) Android 4.2 4.7" IPS 720 x 1280 pixels 312 ppi MediaTek MT6589 Quadcore 1.2 GHz 16GB 1GB 802.11 b/g/n Yes 8MP f/2.0 Yes (Single-LED flash) 1080p 2MP 2000 mAh Yes
Aug-13 CNY2498 136.3 x 68.3 x 6.55mm 143g (5.03 oz) Android 4.2 4.7" IPS 720*1280 pixels 312 ppi MediaTek MT6589 Quadcore 1.2 GHz 16GB 1GB 802.11 a/b/g/n Yes 8MP f/2.2 Yes (Single-LED flash) n.a. 1.3MP 2000mAh Yes
Source: Companies, Daiwa Note: Specs for the iPhone 5C are likely rather than confirmed
- 13 -
Target (TWD): 105.00 98.00 Upside: 19.5% 3 Sep price (TWD): 82.00
1 2 3 4 5
Kylie Huang
(886) 2 8758 6248 kylie.huang@daiwacm-cathay.com.tw
unlikely to add a new iPhone assembler until 2H14, if it does at all. We expect Hon Hai to remain Apples major EMS partner, and assume a 75-80% order allocation for the iPhone/iPad in 2014. Margin expansion on the way. Thanks to cost savings from the relocation of Hon Hais production to inland China, more stable ASP environment, and the favourable trend that we see from its major clients move to the mid-range iPhone focus, we expect Hon Hais operating margin to expand from 2.8% for 2012 to 2.9%/3.1% for 2013/14, respectively.
What we recommend
How we differ
We are more positive than the market on the firms order allocation for new iPhones and its margin expansion.
Forecast revisions (%)
Year to 31 Dec Revenue change Net profit change Core EPS (FD) change
Source: Daiwa forecasts
What's new
We like Hon Hai and regard market concerns about competition as overdone. This report marks the transfer of analyst coverage.
What's the impact
(%)
105 96 88 79 70
We see strong earnings growth in 2H13. We assume Hon Hai will be the sole assembly company for both the iPhone 5S and next iPad, and that it is likely to secure 25-30% of the mid-range iPhone 5C orders. Thanks to its better product mix and increasing operating leverage, we forecast its earnings to grow by 90% HoH for 2H13. The robust 2H13 should enable Hon Hai to post modest earnings growth on a YoY basis for 2013, despite a tough year for its main customer Apple. Concerns about competition seem overdone. We think Hon Hais competitive cost structure, quick time to mass production and superior execution capability are hard to duplicate, and that Apple is
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Following our transfer of coverage, we lower our 2013-15E EPS by 3-7%. We reaffirm our Buy (1) rating and lower our six-month target price to TWD98 (from TWD105), based on a one-year forward PER of 11x (12x 2013E previously), the stocks pastthree-year average. Its strong 2H13E earnings growth should act as a share-price catalyst and be a positive for active investors. We would also advise long-term investors to gradually accumulate the shares as we think they are underpriced given the markets overly pessimistic view on Hon Hais position in the Apple supply chain. Risk would be slowerthan-expected margin expansion.
12-month range Market cap (USDbn) 3m avg daily turnover (USDm) Shares outstanding (m) Major shareholder
See important disclosures, including any required research certifications, beginning on page 49
1 2 3 4 5
Growth outlook
After disappointing 1H13 results due to inventory adjusments by Hon Hais main client, we expect the companys revenue growth momentum to resume in late-3Q13 on the back of the launch of new i-devices. We expect Hon Hai to be the sole assembler for both the iPhone 5S and the next iPad, while it should also secure 25-30% of orders for the mid-range iPhone. As a result, we expect the companys top line to rise by 24.4% HoH for 2H13E and 9.8% YoY for 2014E. On back of the companys increasing operating leverage, we forecast Hon Hais earnings to grow by 90% HoH for 2H13 and 12.6 % YoY in 2014.
Valuation
Following our transfer of coverage, we are cutting our 2013/2014/2015 EPS forecasts by 7%/7%/3% to TWD8.2/TWD9.2/TWD10.5, respectively. We set our new six-month target price at TWD98 (from TWD105), now based on a one-year forward PER of 11x, the stocks past-three-year average. We believe a PER methodology is the most appropriate way to evaluate downstream tech firms such as Hon Hai. We acknowledge that there are flaws with a PER methodology, such as a lack of insight into the long-term business outlook, a mismatch between earnings/cash flow, etc. But we think it is a more straightforward, intuitive and arguably more accurate way to predict a tech companys earnings power, at least in the near term.
Hon Hai
Source: TEJ, Daiwa forecasts
5x
10x
15x
Earnings revisions
According to the Bloomberg consensus, analysts have been gradually revising down Hon Hais 2013-14 EPS forecasts since late 1Q13, given the rising concerns about competition. Although we are cutting our 2013-15 earnings forecasts by 3-7%, we believe the market has been too pessimistic; our 2014 EPS forecast is still 10.3% higher than that of the consensus. We expect Hon Hais margin expansion (gross and operating) to continue in 2014 on the back of Apples product mix change, production relocation and increasing operating leverage.
2013E EPS
Source: Bloomberg
2014E EPS
- 15 -
Financial summary
Key assumptions
Year to 31 Dec Consumer related sales growth PC and networking related sales growth (YoY%) iPhone shipment (mn units) iPad shipment (mn units) 2008 31.1 9.4 13.7 0.0 2009 5.3 (7.2) 25.1 0.0 2010 11.6 44.8 47.2 14.3 2011 11.5 (5.4) 80.5 40.0 2012 18.0 (19.5) 119.7 60.1 2013E 20.5 (1.8) 117.0 55.0 2014E 15.1 (0.5) 136.0 63.5 2015E 17.7 1.6 156.4 74.3
2008 72,594 32,736 (15,904) (19,401) (3,524) 66,501 (79,568) 30,767 (14,433) (63,234) (4,398) 0 (18,872) (25,785) (49,055) 0 (45,789) (13,067)
2009 88,031 38,399 (11,651) (17,186) (3,694) 93,899 (13,618) (17,095) (7,186) (37,899) 20,152 0 (8,156) 11,160 23,155 0 79,155 80,281
2010 91,477 41,131 (16,005) (37,014) (1,552) 78,038 (74,394) (52,600) (4,517) (131,511) 166,043 0 (17,158) (19,259) 129,626 0 76,153 3,644
2011 102,536 51,456 (20,602) (64,472) (3,067) 65,852 (128,885) 64,657 (15,164) (79,392) 73,134 0 (9,661) 25,309 88,782 0 75,242 (63,033)
2012 118,379 67,883 (26,592) 90,647 1,016 251,333 (93,086) (12,350) (15,290) (120,727) 71,362 0 (16,034) (10,028) 45,300 0 175,906 158,247
2013E 124,802 64,996 (27,956) 18,945 (2,843) 177,945 (71,536) (14,990) (954) (87,480) 25,182 0 (17,754) 0 7,428 0 97,892 106,408
2014E 138,086 73,451 (29,274) (12,636) (1,232) 168,394 (68,046) (13,990) (973) (83,009) 26,441 0 (24,196) 0 2,245 0 87,630 100,348
2015E 155,357 81,483 (31,538) (13,256) (1,619) 190,427 (64,732) (12,990) (993) (78,715) 27,763 0 (27,234) 0 529 0 112,241 125,695
- 16 -
2008 14.6 (13.6) (24.5) (29.0) (30.5) 8.6 5.3 3.6 2.8 15.5 6.3 14.5 15.2 7.8 21.9 49.1 1.3 36.0 14.8 n.a.
2009 0.4 17.9 18.2 37.3 34.3 9.5 6.2 4.3 3.9 18.9 8.0 15.5 18.1 net cash 13.2 53.6 1.5 191.7 22.7 8.3
2010 53.0 4.4 3.2 1.9 1.4 8.1 4.2 2.9 2.6 16.8 6.4 12.4 14.9 13.1 17.5 43.7 1.3 n.a. 12.5 0.4
2011 15.2 5.5 (3.8) 5.8 5.1 7.7 3.9 2.4 2.4 15.4 5.2 9.4 11.2 9.9 20.1 46.8 1.3 n.a. 19.7 n.a.
2012 13.1 31.3 30.9 16.1 15.4 8.4 4.5 2.8 2.4 15.5 5.0 10.5 13.6 net cash 22.5 51.8 1.2 n.a. 18.7 16.3
2013E (2.0) (1.3) 0.5 2.1 1.7 6.6 4.5 2.9 2.5 14.1 4.7 9.4 14.0 net cash 22.4 55.2 1.3 n.a. 25.0 11.0
2014E 9.8 17.1 19.5 12.6 12.6 6.8 4.8 3.1 2.6 14.2 5.0 10.3 16.7 net cash 21.2 47.8 1.3 n.a. 25.0 10.3
2015E 9.9 11.4 11.7 13.8 13.8 6.7 4.9 3.2 2.7 14.4 5.2 10.5 18.3 net cash 20.3 47.8 1.4 n.a. 25.0 13.0
Company profile
Established in 1974, Hon Hai Precision Industry (Hon Hai) started out making plastic products, connector products and cable assemblies. It is now the largest electronics manufacturing service (EMS) provider globally in terms of design, manufacturing, global logistics and after-market service.
- 17 -
growth in 2H13, with around 90% HoH growth in EPS, to TWD 5.4 for 2H13E from TWD2.8 in 1H13.
Hon Hai: revenue and earnings
(TWDbn) (TWDbn) 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 3Q12 4Q12 1Q13 2Q13 3Q13E 4Q13E Revenue (LHS)
Source: Company, Daiwa forecasts
- 18 -
2012
2013E
2015E
Source: Daiwa forecasts Note: This table represents Daiwas iPhone production forecasts, which will be slightly different to Apples iPhone sales figures
Flagship Model
Source: Daiwa forecasts Note: This table represents Daiwas iPhone production forecasts, which will be slightly different to Apples iPhone sales figures
- 19 -
research, we believe Apple is unlikely to add new iPhone assembly companies until 2H14 or later, if at all. Even if there are newcomers to the supply chain in 2H14, we believe they will start with small orders (highly unlikely to be profitable due to the lack of scale) and, thus, the impact on Hon Hai is likely to be limited for the next 2-3 years.
Hon Hai: vertically integrated components
Hon Hai's Ticker holding Main products Not-listed 100% Touch panels Not-listed 100% Camera lenses Handset design & assembly, enclosure, keypad, FIH Mobile 2038 HK 68% connector Zhen Ding Tech 4958 TT 41% Flexible PCB Fitipower Integrated Tech 4961 TT 36% Power management IC and display driver IC Foxconn Tech 2354 TT 30% Casing G-Tech 3149 TT 28% Cover glass Pan International 2328 TT 27% Component EMS Foxsemicon Integrated Equipment modules and components for 3413 TT 20% Tech semiconductor and TFT-LCD Sputtering system and vacuum-coating system UVAT Tech 3580 TT 17% equipments Advanced SMD LEDs for mobile phones and other related 3437 TT 14% OptoelectronicTech applications Ways Tech 3508 TT 13% Plastic surface decorating related products CyberTan Tech 3062 TT 11% Broadband and wireless networking products Simplo Tech 6121 TT 8% Battery-pack Innolux 3481 TT 4% LCD Solytech 1471 TT 3% Power supply-related products Related Cheng Uei 2392 TT Connectors, cable assemblies, and power packs Company Company Name GIS Wcube Co., Ltd
Source: Companies, TEJ
Hon Hai
Source: TEJ, Daiwa forecasts
5x
10x
15x
1x
2x
3x
80 60 40 20 0
Jul-09
Jul-10
Jul-11
Oct-09
Oct-10
Oct-11
Jul-12
Jan-10
Jan-11
Jan-12
Oct-12
OP YoY (RHS)
Catalysts/risks
We expect the major share-price catalysts to be: 1) solid revenue growth from 3Q13, and 2) margin expansion from 3Q13. The key risks to our target price would include: 1) the weaker-than-expected sell-through of new iPhones, 2) the Taiwan Dollar appreciating against the US Dollar by more than we expect, and 3) a higher-than-expected increase in labour/raw material costs.
NP YoY (RHS)
- 20 -
Jan-13
Jan-09
Apr-09
Apr-10
Apr-11
Apr-12
1% -20% 8% -5% 1%
-2% -23% 1% 5% 2%
Source: Company, Daiwa forecasts Note: 1 All listed companies in Taiwan have been required to adopt IFRS since 2013, and one major difference between IFRS and ROC GAAP is the reclassification of some items, such as warranties and provisions from operating expenses to COGS, thus the gross margins since 2013 cannot be directly compared with past numbers.
- 21 -
Largan Precision
3008 TT
Target (TWD): 1,250.00 920.00 Downside: 12.4% 3 Sep price (TWD): 1,050.00
Change in iPhone mix should mean rise in pricing pressure for Largan, with no change in specs for mid-range/legacy models Markets expectations on SEC orders could be overly optimistic: we expect contribution from SEC to remain limited in 2014 We see the risk of a margin disappointment for 4Q13. Valuation unattractive: down to Underperform
2 3 4 5
that SECs current vendors have sufficient lens supply, there is uncertainty about potential orders from SEC for Largan in 2014.
Kylie Huang
(886) 2 8758 6248 kylie.huang@daiwacm-cathay.com.tw
What's new
We are turning cautious on Largans prospects due to rising margin risks from the change in its main clients product mix. This report marks the transfer of analyst coverage.
What's the impact
Not immune to change. We expect Apple to shift the focus of its iPhones from solely the high-end segment to the mid-range segment. We expect this to result in greater pricing pressure on Largan, as the mid-range/legacy iPhones will not have upgraded camera lenses. Last piece may still be missing. The market has been optimistic about Largan winning orders from Samsung Electronics (SEC). Investors expect Largan to be a key 8MP/13MP lens vendor for SEC in 2H13 and for SEC to become one of its top-three clients in 2014. We believe there has been a delay in the qualification process, and so expect Largans shipments for SEC in 4Q13 to be small. Given this, and
Strong 3Q13 still likely, but 4Q13 could disappoint. We forecast 20% QoQ revenue growth for Largan for 3Q13, driven by the peak season and new-product launches. However, we expect pricing pressure to emerge in 4Q13 following the initial sell-in of new products and forecast its gross margin to fall to 45.4% for 4Q13, below the Bloomberg-consensus forecast of 47-48%. We are cutting our 2014-15 EPS forecasts by 11-14% to factor in the rising margin risk.
What we recommend
(%)
165 144 123 101 80
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
We like Largan for its quality management and leading industry position, but the current 2013E PER of 16x looks unattractive to us. We downgrade the stock to Underperform (4) from Buy (1) and lower our sixmonth target price to TWD920 (from TWD1,250 [one-year-forward PER of 16x]), now based on a one-year forward PER of 14x, in line with its past-three-year average. The major risk to our call would be better-thanexpected orders from new clients.
How we differ
12-month range 592.00-1,120.00 Market cap (USDbn) 4.72 3m avg daily turnover (USDm) 55.62 Shares outstanding (m) 134 Cathay Life Insurance Co., Ltd. (5.2%) Major shareholder
We are more concerned than the market about margin risk due to the
See important disclosures, including any required research certifications, beginning on page 49
1 2 3 4 5
Growth outlook
Largan has had a strong 2013 so far. This follows a tough 2012 on the back of a disappointing gross margin and reduced revenue growth, driven by weakness in end demand and a low utilisation rate. Although we expect revenue-growth momentum to remain strong for 2H13, we believe the companys earnings growth will decelerate significantly, to a double-digit YoY percentage for the coming year (3Q13-2Q14), driven by margin pressure from an unfavourable change in the iPhone model mix and limited contributions from new clients. We believe consensus expectations for SEC orders for 2014 are too optimistic and expect an insignificant revenue contribution from SEC in 2014.
Valuation
Our six-month target price is based on a 14x one-year forward PER, in line with the stocks past-three-year average. Considering the decelerating earnings growth we expect, we view the risk-reward profile unattractive at the current level, a 2013E PER of 16x. We believe PER is the most appropriate way to evaluate downstream tech companies such as Largan. We recognise the flaws in the methodology, such as a lack of insight into the long-term business outlook, and a mismatch between earnings and cash flow. However, we think it is a more straightforward, intuitive, and accurate way to predict a tech companys earnings power, at least over the near term.
6x
12x
18x
24x
Earnings revisions
The 2013-14 Bloomberg-consensus earnings forecasts have been raised gradually since late 4Q12, driven by the markets anticipation of the announcement of the addition of a new client, the expectation of shipment volume growth from new iPhones, and the companys strong margin in 1H13. Our 2014 EPS forecast is 8% below that of the consensus, which we expect to be cut on the back of rising margin pressure.
2013E EPS
Source: Bloomberg
2014E EPS
- 23 -
Financial summary
Key assumptions
Year to 31 Dec Mobile phone lens shipment (K units) Blended ASP of handset lens (USD) Gross margin of VCM assembly (%) 2008 200,491 1.01 0.0 2009 173,300 1.12 5.0 2010 215,100 1.21 7.3 2011 286,554 1.33 6.8 2012 344,730 1.34 5.3 2013E 478,434 1.44 6.0 2014E 563,891 1.44 6.0 2015E 663,559 1.43 5.8
2008 3,338 565 (96) 711 (17) 4,502 (1,420) (39) (16) (1,475) 94 0 (1,232) (200) (1,338) 0 1,688 3,081
2009 2,643 622 (157) (466) 14 2,656 (1,057) (20) (26) (1,103) (120) 0 (1,301) 591 (831) 0 723 1,599
2010 4,334 737 (289) (539) 21 4,263 (1,066) (1) (21) (1,088) 142 0 (1,341) (23) (1,223) 0 1,952 3,197
2011 5,837 900 (638) 1,202 18 7,318 (3,149) (2) (23) (3,173) 319 0 (1,811) 37 (1,456) 0 2,690 4,169
2012 6,811 1,208 (1,234) (783) (2) 6,000 (2,865) (101) (19) (2,985) (356) 0 (2,280) (43) (2,679) 0 336 3,136
2013E 10,634 1,434 (1,808) (937) (7) 9,317 (3,500) (10) 75 (3,435) 10 0 (2,683) 0 (2,673) 0 3,208 5,817
2014E 11,704 1,837 (2,107) (921) (7) 10,506 (2,150) (10) 0 (2,160) (52) 0 (4,413) 0 (4,465) 0 3,881 8,356
2015E 13,362 2,084 (2,485) (468) (7) 12,485 (2,150) (10) 0 (2,160) 0 0 (4,799) 0 (4,799) 0 5,527 10,335
- 24 -
2008 27.1 6.2 6.9 26.2 24.2 53.3 49.3 41.7 43.4 29.4 26.1 28.1 50.2 net cash 2.9 79.9 5.0 n.a. 40.1 2.2
2009 9.0 (9.2) (12.7) (23.3) (24.3) 43.8 41.0 33.4 30.5 19.4 17.0 21.1 38.7 net cash 6.0 86.6 5.0 n.a. 54.0 1.1
2010 51.5 61.4 71.3 62.7 61.7 47.0 43.7 37.7 32.7 26.9 23.3 30.8 57.9 net cash 6.7 82.1 5.0 n.a. 44.8 2.3
2011 29.4 18.0 17.4 28.5 28.5 43.4 39.9 34.2 32.5 28.7 23.7 29.8 57.7 net cash 10.9 76.4 3.3 n.a. 43.9 3.0
2012 25.6 25.6 24.2 7.3 7.3 41.7 39.9 33.9 27.8 26.0 19.9 31.3 54.2 net cash 18.1 91.7 2.6 n.a. 48.1 2.2
2013E 32.8 43.8 48.2 58.2 58.2 46.4 43.2 37.8 33.1 33.8 25.1 38.4 64.2 net cash 17.0 104.9 2.7 n.a. 50.0 4.1
2014E 15.6 16.3 14.7 8.7 8.7 45.8 43.5 37.5 31.2 30.2 22.6 36.2 62.5 net cash 18.0 111.8 2.9 n.a. 50.0 5.9
2015E 15.2 13.9 14.0 13.3 13.3 45.4 43.0 37.1 30.6 29.1 21.8 35.1 66.7 net cash 18.6 112.1 3.1 n.a. 50.0 7.3
Company profile
In Asia ex-Japan, Largan Precision (Largan) is the leading lens manufacturer for mobile handsets. Nokia, Motorola, Sony Ericsson, Apple, HTC and RIM are the companys major customers. It currently has around a 28% share of the global handset lens market.
- 25 -
Source: Daiwa forecasts Note: This chart represents Daiwas iPhone production forecasts, which are slightly different from the iPhone sales figures reported by Apple
increase by 20-30% HoH for 2H13, and estimate that over 30% of the new capacity is likely to be allocated to SEC. But, we now see rising risks from this aggressive capacity expansion due to uncertainty over the SEC orders. If there are further delays or if SEC cancels orders, Largan might have to cut prices to win orders to fill its capacity, which in turn could result in further margin pressure in 2014.
Largan: capex trend
(TWDm) 3,000 2,500 2,000 1,500 1,000 500 0 2008 2009 2010 2011 Capex 2012 1H12 1H13
Source: Company
- 27 -
(TWD) 1,200 1,000 800 600 400 200 0 Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Largan
Source: TEJ, Daiwa forecasts
OP YoY (RHS)
6x
12x
18x
24x
(TWD) 1,200 1,000 800 600 400 200 0 Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Largan
Source: TEJ, Daiwa forecasts
NP YoY (RHS)
2x
4x
6x
8x
- 28 -
920.0 Underperform 33.50 Underperform 41.0 Hold 11.60 Buy n.a. Not rated n.a. Not rated n.a. Not rated n.a. Not rated n.a. Not rated n.a. Not rated n.a. Not rated n.a. Not rated n.a. Not rated n.a. Not rated n.a. Not rated
- 29 -
AAC Technologies
2018 HK
Target (HKD): 44.50 33.50 Downside: 8.2% 3 Sep price (HKD): 36.50
1 2 3 4 5
Kylie Huang
(886) 2 8758 6248 kylie.huang@daiwacm-cathay.com.tw
Eric Chen
(852) 2773 8702 eric.chen@hk.daiwacm.com
potential for AAC in the high-end smartphone segment, which we see as saturated with slower volume growth and limited room for further soundquality enhancements. AACs intention to win orders in the mid-tolow-end segment could be a long-term positive if it can deliver solid profitability in this pricingcompetitive segment. However, we believe AAC could see its margins decline during this transition period. Valuation premium looks unjustified. Driven by the increasingly unfavourable industry trend, AACs EPS growth rate should decelerate to around 12% YoY for 3Q13E-2Q14E, compared with 6070% for 3Q12-2Q13, on our forecasts.
What we recommend
AAC due to the increasingly unfavourable product mix for smartphones overall.
Forecast revisions (%)
Year to 31 Dec Revenue change Net profit change Core EPS (FD) change
Source: Daiwa forecasts
What's new
We have turned cautious on AAC due to the increasingly unfavourable industry trend and its unattractive valuation. This report marks a transfer of analyst coverage.
What's the impact
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Affected by major clients product mix change. AACs largest client, Apple, looks likely to become more focused on mid-range iPhones. We forecast Apples mid-range and legacy iPhones to account for 62% of its iPhone production volume in 2H13, from 31% in 2H12. We believe this change would result in more pricing pressure on AAC, due to unlikely spec upgrades on midend/legacy models. Upside capped for high-end, uncertainty of being able to tap into mid-to-low end. We are concerned about the business
Following a transfer of coverage, to factor in the margin risks, we cut our 2013-15E EPS by 7-18% and downgrade AAC to Underperform (4) (from Buy [1]). Our new six-month target price of HKD33.50, based on a 14x one-year forward (ie, 3Q13E2Q14E) PER, is in line with the stocks past-3-year average (formerly HKD44.50 on a 16x PER). A betterthan-expected margin would be the main risk to our view.
How we differ
12-month range 25.85-46.40 Market cap (USDbn) 5.78 3m avg daily turnover (USDm) 27.75 Shares outstanding (m) 1,228 Chun Yuan Wu Ingrid (21.4%) Major shareholder
See important disclosures, including any required research certifications, beginning on page 49
1 2 3 4 5
Growth outlook
We expect AACs revenue and earnings growth to decelerate from 3Q13 onwards, driven by: 1) Apples product mix shift to mid-range smartphones, 2) limited possibilities for product spec upgrades for AACs clients, and 3) a slowdown in demand for high-end smartphones. We forecast AACs rate of annual EPS growth to decelerate to 11% YoY for 2014 and 14% YoY for 2015 from the 70% YoY growth the company posted for 2012.
80% 70% 60% 50% 40% 30% 20% 10% 0% 2012 2013E Sales growth (RHS) 2014E 2015E EPS growth (RHS)
Valuation
We have a new six-month target price for AAC of HKD33.50, based on a one-year forward PER of 14x, in line with the stocks past-3-year average (formerly HKD44.50 on a 16x PER). AAC trades at a 15.4x oneyear forward PER, which we view as unattractive based on its past-3-year average, and we see the risk of a derating due to the lukewarm near-term earningsgrowth outlook. We believe the PER methodology is more appropriate to evaluate downstream tech companies like AAC. While we recognise flaws with this methodology, such as a lack of insight into the longterm business outlook, a mismatch between earnings/cash flow, etc., we think it is a more straightforward, intuitive and arguably accurate way to predict a tech companys earnings power, at least in the near term
AAC
5x
12x
19x
Earnings revisions
Following a transfer of coverage, we are cutting our 2013/2014/2015 EPS forecasts for AAC to CNY1.84/ CNY2.05/CNY2.33, respectively, representing cuts of 7%/18%/17%, respectively. We believe the 2013-14 Bloomberg-consensus earnings forecasts for AAC have reached the peak; they have trended down since late 2Q13, due mainly to market concerns about high-end smartphone saturation. Our 2013E EPS is slightly (2.6%) lower than that of the consensus, while our 2014E EPS is around 7% lower.
Nov-11
Feb-12
May-12
Aug-12
Nov-12
Feb-13
May-13
2013E EPS
Source: Bloomberg
2014E EPS
- 31 -
Financial summary
Key assumptions
Year to 31 Dec Receiver sales growth (% YoY) Speaker box sales growth (% YoY) MEMS microphone sales growth (% 2008 28.5 0.0 0.0 2009 (38.0) 0.0 0.0 2010 39.9 0.0 0.0 2011 35.8 109.0 44.9 2012 49.0 91.4 151.5 2013E 38.6 76.4 27.8 2014E 19.0 17.7 20.6 2015E 15.3 18.8 15.2
2008 616 133 (26) (43) (0) 680 (588) 0 120 (469) 18 0 0 12 30 0 241 212
2009 676 170 (67) 133 5 918 (245) 0 4 (241) (13) 0 (118) (77) (208) 0 469 677
2010 1,099 197 (112) (155) (1) 1,029 (576) (104) (177) (857) 283 0 (245) (211) (172) 0 (1) 172
2011 1,142 259 (109) (369) (0) 923 (1,189) (75) (100) (1,363) 421 0 (441) 100 80 0 (361) (441)
2012 2,016 0 (259) (469) 6 1,294 (927) (60) (43) (1,030) 144 0 (442) (26) (324) 0 (60) 264
2013E 2,533 0 (279) (593) 19 1,680 (900) 0 (14) (914) 31 0 (705) 0 (674) 0 92 766
2014E 2,816 0 (310) (600) 15 1,921 (855) 0 (14) (869) 32 0 (904) 0 (872) 0 180 1,052
2015E 3,204 0 (352) (558) 12 2,305 (898) 0 (14) (912) 33 0 (1,005) 0 (972) 0 421 1,393
- 32 -
2008 15.6 11.1 3.8 8.3 9.9 41.7 32.2 26.3 26.2 21.4 17.1 20.1 31.5 net cash 4.2 107.2 3.5 n.a. 20.0 0.6
2009 (2.3) 12.3 8.8 4.2 4.1 44.9 37.0 29.3 27.9 18.8 15.5 18.6 29.6 net cash 9.9 107.0 3.5 n.a. 39.8 1.9
2010 52.0 54.1 64.1 60.5 60.5 45.1 37.5 31.6 29.5 26.3 20.1 26.0 40.6 net cash 10.2 110.2 2.2 n.a. 44.7 0.5
2011 21.2 11.0 7.2 5.0 5.0 44.0 34.4 28.0 25.5 23.8 16.9 22.5 29.5 net cash 9.5 125.0 1.7 n.a. 42.7 n.a.
2012 54.8 32.5 62.8 70.1 70.1 44.2 29.4 29.4 28.1 32.9 22.5 29.3 32.4 net cash 12.8 110.9 1.6 n.a. 40.0 0.7
2013E 33.5 32.7 32.7 28.2 28.2 43.1 29.3 29.3 27.0 33.3 22.6 31.3 33.7 net cash 11.0 118.4 1.7 n.a. 40.0 2.2
2014E 15.4 14.8 14.8 11.2 11.2 42.8 29.1 29.1 26.0 30.0 21.0 29.8 31.5 net cash 11.0 126.3 1.8 n.a. 40.0 3.0
2015E 14.0 13.6 13.6 13.7 13.7 42.5 29.0 29.0 25.9 28.3 20.5 28.5 30.2 net cash 11.0 127.0 2.0 n.a. 40.0 3.9
Company profile
AAC Technologies designs and manufactures miniature acoustic components, including speakers, receivers, microphones and hands-free headsets, for use in mobile phones and other consumer handheld devices.
- 33 -
Source: Daiwa estimates and forecasts Note: This chart represents Daiwas iPhone production forecasts, which will be slightly different from the iPhone sales figures reported by Apple
Upside looks capped for highend; rising uncertainties from move into mid-low range phones
We are positive about AACs leading position in the acoustic components industry through its competitive technology, solid execution, and quality management team. However, we believe the company might enter a transition period due to the changing dynamics in the smartphone industry. For the high-end smartphone segment, in addition to the likelihood that sales-volume growth could slow from 2H13 onwards due to this segment moving into the saturated stage, we are concerned that the room for further upgrades to acoustic components could be limited or proceed at a slower pace. Take Apple for example. To fulfil the sound quality requirement for popular apps like Siri (personal voice assistant) and Facetime (video call), Apple added another MEMS microphone and upgraded the receiver to HD for the iPhone 5 (released in September 2012) to enhance its sound quality. However, we do not expect a similar degree of upgrades for the new forthcoming iPhone 5S. Our market research shows that the iPhone 5S may only have small upgrades to the receiver, and as such, we believe AAC may only post a single-digit rise in its ASPs for its components supplied for this new model for 2H13, compared with a 20-30% ASP increase on average for its components for the iPhone 5 last year. We also view this limited acoustic upgrade on the iPhone 5S as an indication that the sound quality is already good enough for this new high-end smartphone, and that there is no urgency for an immediate further significant improvement.
Others 1.5%
Apple 45.2%
- 34 -
During the 2Q13 results meeting for analysts held on 16 August, AACs management team indicated its intention to gain more shares with customers other than Apple in the mid-to-low end smartphone segment. We have two perspectives on this statement: 1) it may indicate that AAC expects its business to be adversely affected by its major clients product mix change and thats why the company is willing to move from the very profitable high-end segment to the midto-low end one, or 2) it could broaden AACs addressable market given that currently the company has limited exposure to mid-to-low end phones, and if AAC can deliver solid margins and profitability in a lower and more competitive pricing environment, this could be a long-term positive for the company. However, we believe this switch in strategy will take time to bear fruit, and expect AACs profit margins to come under more pressure during the transition period, which we expect in coming years.
The AAC stock is trading at a one-year forward PER of 15.4x, at a premium to its past-3-year average trading multiple of 14x, which we view as unjustified. We see a risk of a de-rating during the next 6-12 months given the lukewarm near-term earnings-growth outlook we see for the company. Thus, we downgrade our rating on the stock to Underperform (4) (from Buy [1]).
AAC
5x
12x
19x
AAC
2x
4x
- 35 -
(HKD)
OP YoY (RHS)
(HKD)
NP YoY (RHS)
- 36 -
3008 TT 1,050.00 2018 HK 36.50 3042 TT 40.50 2382 HK 9.04 2474 TT 148.50 2354 TT 77.10 3406 TT 173.00 2439 TT 76.70 3311 TT 43.95 2402 TT 16.20 2392 TT 61.90 6269 TT 117.00 6153 TT 31.95 4958 TT 78.90 0285 HK 3.70
920.00 Underperform 33.50 Underperform 41.00 Hold 11.60 Buy n.a. Not rated n.a. Not rated n.a. Not rated n.a. Not rated n.a. Not rated n.a. Not rated n.a. Not rated n.a. Not rated n.a. Not rated n.a. Not rated n.a. Not rated
21% 18% 7% 4% 5%
1% 1% 7% 1% 2%
When a report covers six or more subject companies please access important disclosures for Daiwa Capital Markets Hong Kong Limited at http://www.daiwacm.com/hk/research_disclaimer.html or contact your investment representative or Daiwa Capital Markets Hong Kong Limited at Level 26, One Pacific Place, 88 Queensway, Hong Kong.
- 37 -
TXC Corp
3042 TT
Target (TWD): 57.00 41.00 Upside: 1.2% 3 Sep price (TWD): 40.50
We believe TXC has come through the worst of pricing competition from Japan peers as a result of Yen depreciation Sales growth should resume in 2H13; but the market may be overlooking possible pricing pressure from a major client Valuation undemanding but we suggest investors wait for the market to cut earnings expectations. Downgrade to Hold
2 3 4 5
Kylie Huang
(886) 2 8758 6248 kylie.huang@daiwacm-cathay.com.tw
20% of revenue), could switch its focus to mid-range products, thus increasing pricing pressure on TXC given no upgrade in specs to midrange/legacy models. For 2H13, we forecast TXCs revenue to rise by 15% HoH with the operating margin recovering to 11.5-12.0%. 2014 should be better. Our research suggests TXC recently won new clients for high-end networking products and two new smartphonechip vendors. We expect the contribution to ramp up in 2014 and be revenue-growth drivers for TXC. It should also benefit the volume growth of i-devices in 2014 as we expect it to have a stable market share from 2H13. Overall, we expect TXC to see double-digit EPS growth for 2014 from a fall of about 20% YoY for this year. To factor in a slower margin recovery, we cut our respective 2013-14 EPS forecasts.
What we recommend
How we differ
We are more cautious than the market on TXCs 2H13 recovery story given the pricing pressure we expect.
Forecast revisions (%)
Year to 31 Dec Revenue change Net profit change Core EPS (FD) change
Source: Daiwa forecasts
What's new
Following an unfavourable change in the product mix of a major client and the markets high earnings expectations, we have become less positive on the stock. This report marks a transfer of the coverage.
What's the impact
(%)
115 105 95 85 75
Worst should be over... TXC had weak 1H13 results, due mainly to a market-share loss and pricing competition from Japan peers (weak Yen). We do not expect sharp currency volatility to continue and believe TXC has seen the worst of the impact from the weak Yen. but market expectations too high and clients product-mix change should have an impact. The market expects TXC to have a back-loaded year, with 2H13 revenue rising by about 30% HoH and the operating margin recovering to 12.5-13.0% (2Q13: 10.2%). However, the likelihood of pricing pressure in 2H13 is being overlooked. In particular, Apple, (15-
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
12-month range Market cap (USDbn) 3m avg daily turnover (USDm) Shares outstanding (m) Major shareholder
We are downgrading our rating to Hold (3) from Buy (1), and lowering our six-month target price to TWD41 (from TWD57), now based on a 12.5x one year forward PER (14x 2013E PER previously), in line with the stocks past-three-year average. Upside risk would be a faster-than-expected margin recovery, while downside risk would be further sharp Yen depreciation.
See important disclosures, including any required research certifications, beginning on page 49
1 2 3 4 5
Growth outlook
Given that the worst of the impact from Yen depreciation should be over for TXC, we expect the companys revenue to recover in 2H13. However, we believe that the consensus forecasts of about 30% HoH revenue growth and an operating margin of 12.5-13.0% is too optimistic given the strong likelihood of pricing pressure from one of its major customers. Overall, we expect 2014 to be a better year for TXC. Given the contributions from new clients and solid orders of i-devices, we forecast 2014 EPS to rise by 15.2% YoY, up from a decline of 19.4% YoY for 2013.
20% 15% 10% 5% 0% -5% -10% -15% -20% -25% 2012E 2013E Sales growth (RHS) 2014E 2015E EPS growth (RHS)
Valuation
We see limited downside to the current PER valuation (12x on a one-year forward basis), which we regard as undemanding, given the improved growth outlook we expect for 2014. At the same time, we see limited upside given what we see as the markets high 2013-14 expectations. Our new six-month target price of TWD41 is based on a one-year forward PER of 12.5x, in line with the stocks past-three-year average. We suggest investors revisit the stock after the market revises its expectations.
TXC
Source: TEJ, Daiwa forecasts
6x
10x
14x
18x
Earnings revisions
The share price has fallen by 15% YTD, underperforming the Taiex by 20%, as the consensus 2013-14 earnings forecasts have been cut gradually on the back of the companys disappointing 1H13 results and increased competition from peers. However, we are still less optimistic on its margin recovery in 2H13 given an unfavourable product-mix change by one of the companys major customers. Our 2013 EPS forecast is about 15.3% lower than that of the consensus. We expect the consensus forecasts to be cut further over the coming months given the pricing pressure that we expect.
2013E EPS
Source: Bloomberg
2014E EPS
- 39 -
Financial summary
Key assumptions
Year to 31 Dec Handset sales growth (YoY%) Consumer sales growth (YoY%) PC and networking related sales growth (YoY%) 2008 135.6 (43.7) 1.0 2009 26.1 (8.0) 2.7 2010 44.4 8.2 22.2 2011 15.9 (1.4) 23.6 2012 37.2 (1.2) (8.2) 2013E (13.5) 6.6 (8.8) 2014E 15.2 (0.9) 8.2 2015E 12.5 1.2 7.6
2008 1,056 739 (104) (419) 0 1,271 (1,910) 0 (9) (1,919) 839 0 (480) 36 395 0 (253) (639)
2009 968 845 (186) 232 0 1,859 (499) 0 (104) (603) (193) 0 (543) 57 (680) 0 576 1,360
2010 1,325 852 (135) (125) (4) 1,914 (1,780) (131) (26) (1,937) 673 0 (581) (2) 90 0 67 133
2011 1,213 922 (163) (471) (16) 1,486 (1,519) (140) (86) (1,745) 333 0 (741) 322 (86) 0 (345) (33)
2012 1,303 878 (154) (567) (3) 1,458 (897) (3) (19) (918) 216 0 (665) 236 (212) 0 327 561
2013E 1,096 868 (132) 36 (6) 1,863 (800) (10) (5) (815) 89 0 (681) 75 (518) 0 531 1,063
2014E 1,263 964 (152) (285) (6) 1,784 (1,000) (10) (5) (1,015) 92 0 (579) 0 (487) 0 283 784
2015E 1,464 1,084 (175) (313) (8) 2,052 (1,000) (10) (5) (1,015) 94 0 (667) 0 (573) 0 465 1,052
- 40 -
2008 17.8 5.3 (9.4) (16.5) (21.2) 27.7 25.3 15.3 12.9 17.7 11.5 16.3 17.6 17.4 9.9 111.0 2.1 45.9 57.1 n.a.
2009 5.0 (0.9) (10.9) (17.8) (18.9) 24.6 23.9 13.0 10.1 13.6 8.6 13.2 12.8 2.3 19.2 111.7 2.0 40.0 74.2 10.8
2010 24.9 18.9 34.2 52.2 48.6 26.3 22.8 14.0 12.3 19.1 11.6 16.2 18.1 12.4 10.2 99.4 2.0 60.3 62.2 1.1
2011 2.6 (5.7) (14.5) (11.8) (12.4) 24.3 21.0 11.6 10.6 15.4 9.1 12.2 12.5 20.0 13.4 109.2 2.2 69.6 63.3 n.a.
2012 10.4 3.0 9.2 9.4 11.2 23.0 19.5 11.5 10.5 15.3 9.2 12.2 12.5 15.8 11.8 110.5 2.0 58.9 59.3 4.5
2013E (8.4) (8.7) (14.0) (16.0) (19.4) 24.3 19.5 10.8 9.6 12.0 7.4 9.9 10.5 9.8 12.0 121.6 2.2 51.0 60.0 8.5
2014E 9.6 14.2 16.7 15.2 15.2 24.4 20.3 11.5 10.1 13.1 8.2 11.0 12.1 6.9 12.0 111.2 2.2 73.6 60.0 6.3
2015E 9.6 14.2 15.5 15.9 15.9 24.5 21.1 12.1 10.7 14.2 8.9 12.0 13.5 2.6 12.0 111.2 2.3 93.8 59.8 8.4
Company profile
TXC Corporation (TXC) was founded in 1983. The company designs, manufactures, and sells frequency-control crystal components.TXC has two major production sites, one in North Taiwan (Ping-Cheng) and the other in East China (NingBo). Each accounts for roughly 50% of the firms total output value, but the Taiwan company is mainly engaged in small crystal production and advanced optical modules.
- 41 -
Pegatron Corp
4938 TT
Target (TWD): 62.00 62.00 Upside: 36.3% 3 Sep price (TWD): 45.50
1 2 3 4 5
Steven Tseng
(886) 2 8758 6252 steven.tseng@daiwacm-cathay.com.tw
Jason Chen
(886) 2 8758 6251 jason.chen@daiwacm-cathay.com.tw
this model. Meanwhile, in the PC business, we believe Pegatron is losing its share of Asusteks outsourcing business and is only seeing modest order gains from other clients. However, we expect the weakness in the PC segment to be offset by solid revenue growth in its non-PC business. Operating margin should rise in 2H13. For 2Q13, Pegatron had a lower-than-expected operating margin of 0.3-0.4%, due to: 1) a lessfavourable product mix, 2) higher initial costs/expenses for new products (we believe these were for the new mid-range iPhone), and 3) some notebook-capacity relocation. However, we expect the margin to recover in 2H13 on the back of better operating leverage and rising capacity utilisation, due to revenuegrowth momentum from a rise in shipment volumes of new i-devices.
What we recommend
than that of the Bloomberg consensus as a result of our more positive view on revenue growth and the operating margin.
Forecast revisions (%)
Year to 31 Dec Revenue change Net profit change Core EPS (FD) change
Source: Daiwa forecasts
13E -
14E -
15E -
(%)
130 119 108 96 85
What's new
We expect Apple to unveil two new phones on 10 September. As a major assembly firm for Apples consumer (in addition to Hon Hai), we expect Pegatron to benefit from the salesvolume growth of the new i-devices.
What's the impact
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Should be a major beneficiary of the likely mid-range iPhone 5C. The mid-range 5C should be a lower-spec version of the iPhone 5, with a plastic, coloured casing and less memory. We would expect prices for the 5C to range from USD429 to USD479. We also expect Apple to continue selling the 4S as a low-end model. Our market research suggests that Pegatron began mass production of the iPhone 5C in August. The company should be the major supplier of the 5C, and we would expect it to account for 7075% of Apples order allocation for
12-month range 35.20-55.40 Market cap (USDbn) 3.50 3m avg daily turnover (USDm) 17.59 Shares outstanding (m) 2,290 Asustek Computer Inc. (19.6%) Major shareholder
We reiterate our Buy (1) rating for Pegatron and our six-month target price of TWD62, based on a oneyear forward PER of 12x, equivalent to the stocks past-two-year average. The key risk would be weaker-thanexpected shipment volume for the new i-devices.
How we differ
See important disclosures, including any required research certifications, beginning on page 49
1 2 3 4 5
Growth outlook
We expect Pegatron to record strong net-profit growth for both 2013 and 2014, due mainly to it being allocated new orders from Apples likely iPhone 5C and a steady improvement in its operating margin on the back of better operating leverage and rising capacity utilisation.
Valuation
Our six-month target price of TWD62 is based on a PER of 12x applied to our one-year forward EPS forecast. Our PER multiple is equivalent to the stocks past-two-year average. We reiterate our Buy (1) rating as the current 2013E PER of 10.1x looks attractive to us compared with the stocks past-three-year range of 8-14.5x.
9.5x
12x
14.5x
Pegatron
Earnings revisions
The Bloomberg-consensus 2013-14 EPS forecasts have been cut recently to factor in the weak 2Q13 results and a potential delay in the new iPad mini. We believe that a recovery in the operating margin will be the major catalyst for the share price over the coming months. Our 2013 and 2014 EPS forecasts are respectively 7% and 18% higher than those of the consensus.
Nov-11
Feb-12
May-12
Aug-12
Nov-12
Feb-13
May-13
Aug-13
2013E EPS
2014E EPS
- 43 -
Financial summary
Key assumptions
Year to 31 Dec Notebook shipment (m unit) Tablet sales revenue YoY (%) Communication revenue YoY (%) Computing revenue YoY (%) 2008 n.a. n.a. n.a. n.a. 2009 n.a. n.a. n.a. n.a. 2010 15.4 n.a. n.a. n.a. 2011 13.3 n.a. 118 3 2012 16.9 n.a. 99 23 2013E 14.8 241 22 (0) 2014E 15.4 16 54 1 2015E 15.9 31 11 6
2008 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
2009 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
2010 7,315 5,727 (1,104) 8,485 0 20,423 (10,729) 0 6,228 (4,501) 12,144 0 0 (14,001) (1,857) (2,625) 11,440 9,694
2011 63 5,627 48 (4,790) 0 948 (15,922) 0 980 (14,942) 3,775 0 0 9,215 12,990 1,685 681 (14,974)
2012 6,980 6,324 (876) 6,674 (6,324) 12,778 (20,261) 0 9,472 (10,789) (1,138) 0 0 9,166 8,028 (1,636) 8,381 (7,483)
2013E 11,973 7,021 (1,697) 942 0 18,239 (6,102) 0 5,226 (876) 2,956 0 (3,662) 9,166 8,460 (859) 24,964 12,137
2014E 16,450 7,919 (2,797) 942 0 22,514 (7,427) 0 5,226 (2,201) 5,321 0 (6,165) 9,166 8,322 (1,247) 27,388 15,088
2015E 19,663 8,846 (3,343) 942 (0) 26,108 (8,265) 0 5,226 (3,039) 9,223 0 (8,192) 9,166 10,197 (1,247) 32,019 17,843
- 44 -
2008 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 0.0 n.a. n.a. n.a. n.a. n.a. n.a.
2009 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 0.0 n.a. n.a. n.a. n.a. n.a. n.a.
2010 n.a. n.a. n.a. n.a. n.a. 3.6 1.7 0.4 1.4 13.7 7.8 3.3 1.8 net cash 15.1 16.7 1.6 8.1 0.0 9.3
2011 14.9 (82.2) n.a. (98.2) (98.2) 2.3 0.3 n.a. 0.0 0.1 0.1 n.a. (4.6) 10.9 n.a. 39.9 1.3 n.a. 0.0 n.a.
2012 53.4 500.8 n.a. 5,399.1 5,317.6 2.8 1.0 0.2 0.8 6.5 2.2 1.4 1.5 0.4 12.6 41.5 1.2 n.a. 0.0 n.a.
2013E 24.6 89.9 376.8 68.3 68.3 3.1 1.6 0.9 1.1 10.1 3.1 5.8 7.4 net cash 14.2 40.8 1.2 41.6 35.6 11.6
2014E 23.2 35.2 54.1 32.9 32.9 3.2 1.8 1.1 1.2 12.4 3.5 7.7 11.1 net cash 17.0 37.6 1.2 26.6 45.2 14.5
2015E 11.3 19.8 24.8 19.5 19.5 3.3 1.9 1.2 1.2 13.8 3.5 8.2 14.2 net cash 17.0 39.4 1.2 36.8 50.2 17.1
Company profile
Founded in January 2008, Pegatron is a subsidiary of Asustek and an electronic and computing DMS (design and manufacturing service) company with extensive experience in product development. It also has vertically integrated capabilities. Pegatrons product line includes motherboards, desktop PCs, notebooks, smartphones, tablets, broadband, wireless systems, game consoles, networking equipment, set-top boxes, multimedia, and LCD TVs.
- 45 -
- 46 -
Daiwas Regional Deputy Asia Head Pacific of Asia Pacific Research Research; Regional Directory Head of Product Management
Pranab Kumar SARMAH (852) 2848 4441 Regional Head of Research Promotion Kevin LAI (852) 2848 4926 kevin.lai@hk.daiwacm.com Deputy Head of Regional Economics; Macro Economics (Regional) Hui MIAO (852) 2848 4464 Macro Economics (China) Christie CHIEN (852) 2848 4482 Macro Economics (Taiwan) hui.miao@hk.daiwacm.com christie.chien@hk.daiwacm.com
Sung Yop CHUNG (82) 2 787 9157 sychung@kr.daiwacm.com Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel Jun Yong BANG Tyres; Chemicals Anderson CHA Banking/Finance (82) 2 787 9168 (82) 2 787 9185 junyong.bang@kr.daiwacm.com anderson.cha@kr.daiwacm.com
Mike OH (82) 2 787 9179 mike.oh@kr.daiwacm.com Capital Goods (Construction and Machinery) Sang Hee PARK Consumer/Retail (82) 2 787 9165 sanghee.park@kr.daiwacm.com
Jonas KAN (852) 2848 4439 jonas.kan@hk.daiwacm.com Head of Hong Kong Research; Head of Hong Kong and China Property; Regional Property Coordinator; Property Developers (Hong Kong) Jeff CHUNG (852) 2773 8783 Automobiles and Components (China) jeff.chung@hk.daiwacm.com
Jae H LEE (82) 2 787 9173 jhlee@kr.daiwacm.com IT/Electronics (Tech Hardware and Memory Chips) Joshua OH (82) 2 787 9176 IT/Electronics (Handset Components) joshua.oh@kr.daiwacm.com
Grace WU (852) 2532 4383 grace.wu@hk.daiwacm.com Head of Greater China FIG; Banking (Hong Kong, China) Jerry YANG (852) 2773 8842 jerry.yang@hk.daiwacm.com Banking (Taiwan)/Diversified Financials (Taiwan and China) Leon QI (852) 2532 4381 Banking (Hong Kong, China) leon.qi@hk.daiwacm.com
Thomas Y KWON (82) 2 787 9181 yskwon@kr.daiwacm.com Pan-Asia Head of Internet & Telecommunications; Software (Korea) Internet/On-line Game SoYoung WANG Transportation/Logistics TAIWAN Mark CHANG Head of Research Steven TSENG (886) 2 8758 6245 mark.chang@daiwacm-cathay.com.tw (886) 2 8758 6252 steven.tseng@daiwacm-cathay.com.tw (82) 2 787 9133 soyoung.wang@kr.daiwacm.com
Joseph HO (852) 2848 4443 joseph.ho@hk.daiwacm.com Head of Industrials and Machineries (Hong Kong, China); Capital Goods Electronics Equipments and Machinery (Hong Kong, China) Winston CAO (852) 2848 4469 Capital Goods Machinery (China) winston.cao@hk.daiwacm.com
IT/Technology Hardware (PC Hardware) Christine WANG (886) 2 8758 6249 christine.wang@daiwacm-cathay.com.tw IT/Technology Hardware (Automation); Cement; Consumer Kylie HUANG (886) 2 8758 6248 kylie.huang@daiwacm-cathay.com.tw IT/Technology Hardware (Handsets and Components) Lynn CHENG (886) 2 8758 6253 lynn.cheng@daiwacm-cathay.com.tw IT/Electronics (Semiconductor) INDIA Punit SRIVASTAVA (91) 22 6622 1013 punit.srivastava@in.daiwacm.com Head of Research; Strategy; Banking/Finance Navin MATTA (91) 22 6622 8411 Automobiles and Components Saurabh MEHTA Capital Goods; Utilities Mihir SHAH FMCG/Consumer Deepak PODDAR Materials Nirmal RAGHAVAN Oil and Gas; Utilities (91) 22 6622 1018 nirmal.raghavan@in.daiwacm.com (91) 22 6622 1009 (91) 22 6622 1020 (91) 22 6622 1016 navin.matta@in.daiwacm.com saurabh.mehta@in.daiwacm.com mihir.shah@in.daiwacm.com deepak.poddar@in.daiwacm.com
Eric CHEN (852) 2773 8702 eric.chen@hk.daiwacm.com Pan-Asia/Regional Head of IT/Electronics; Semiconductor/IC Design (Regional) Felix LAM (852) 2532 4341 felix.lam@hk.daiwacm.com Head of Materials (Hong Kong, China); Cement and Building Materials (China, Taiwan); Property (China) Dennis IP (852) 2848 4068 dennis.ip@hk.daiwacm.com Power; Utilities; Renewables and Environment (Hong Kong/China) John CHOI (852) 2773 8730 john.choi@hk.daiwacm.com Regional Head of Small/Medium Cap; Small/Mid Cap (Regional); Head of Multi-Industries (Hong Kong, China); Internet (China) Joey CHEN Steel (China) (852) 2848 4483 joey.chen@hk.daiwacm.com
Kelvin LAU (852) 2848 4467 kelvin.lau@hk.daiwacm.com Head of Transportation (Hong Kong, China); Hong Kong and China Research Coordinator; Transportation (Regional) Jibo MA (852) 2848 4489 jibo.ma@hk.daiwacm.com Head of Custom Products Group; Custom Products Group Thomas HO Custom Products Group PHILIPPINES Rommel RODRIGO (63) 2 813 7344 rommel.rodrigo@dbpdaiwacm.com.ph ext 302 Head of Philippines Research; Strategy; Capital Goods; Materials (852) 2773 8716 thomas.ho@hk.daiwacm.com
SINGAPORE Adrian LOH (65) 6499 6548 adrian.loh@sg.daiwacm.com Head of Singapore Research, Regional Head of Oil and Gas; Oil and Gas (ASEAN and China); Capital Goods (Singapore) David LUM Property and REITs (65) 6329 2102 david.lum@sg.daiwacm.com
Ramakrishna MARUVADA (65) 6499 6543 ramakrishna.maruvada@sg.daiwacm.com Head of ASEAN & India Telecommunications; Telecommunications (ASEAN & India)
- 47 -
Daiwas Offices
Office / Branch / Affiliate DAIWA SECURITIES GROUP INC HEAD OFFICE Daiwa Securities Trust Company Daiwa Securities Trust and Banking (Europe) PLC (Head Office) Daiwa Europe Trustees (Ireland) Ltd Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753 (81) 3 5555 3111 One Evertrust Plaza, Jersey City, NJ 07302, U.S.A. 5 King William Street, London EC4N 7JB, United Kingdom Level 3, Block 5, Harcourt Centre, Harcourt Road, Dublin 2, Ireland (1) 201 333 7300 (81) 3 5555 0661 (1) 201 333 7726 Address Tel Fax
(44) 207 320 8000 (44) 207 410 0129 (353) 1 603 9900 (353) 1 478 3469
Daiwa Capital Markets America Inc Daiwa Capital Markets America Inc. San Francisco Branch Daiwa Capital Markets Europe Limited Daiwa Capital Markets Europe Limited, Frankfurt Branch Daiwa Capital Markets Europe Limited, Paris Representative Office Daiwa Capital Markets Europe Limited, London, Geneva Branch Daiwa Capital Markets Europe Limited, Moscow Representative Office Daiwa Capital Markets Europe Limited, Bahrain Branch Daiwa Capital Markets Hong Kong Limited Daiwa Capital Markets Singapore Limited Daiwa Capital Markets Australia Limited DBP-Daiwa Capital Markets Philippines, Inc Daiwa-Cathay Capital Markets Co Ltd Daiwa Securities Capital Markets Korea Co., Ltd. Daiwa Securities Capital Markets Co Ltd, Beijing Representative Office Daiwa SSC Securities Co Ltd Daiwa Securities Capital Markets Co. Ltd, Bangkok Representative Office Daiwa Capital Markets India Private Ltd Daiwa Securities Capital Markets Co. Ltd, Hanoi Representative Office
Financial Square, 32 Old Slip, New York, NY10005, U.S.A. 555 California Street, Suite 3360, San Francisco, CA 94104, U.S.A. 5 King William Street, London EC4N 7AX, United Kingdom Trianon Building, Mainzer Landstrasse 16, 60325 Frankfurt am Main, Federal Republic of Germany 36, rue de Naples, 75008 Paris, France 50 rue du Rhne, P.O.Box 3198, 1211 Geneva 3, Switzerland Midland Plaza 7th Floor, 10 Arbat Street, Moscow 119002, Russian Federation 7th Floor, The Tower, Bahrain Commercial Complex, P.O. Box 30069, Manama, Bahrain Level 28, One Pacific Place, 88 Queensway, Hong Kong 6 Shenton Way #26-08, DBS Building Tower Two, Singapore 068809, Republic of Singapore Level 34, Rialto North Tower, 525 Collins Street, Melbourne, Victoria 3000, Australia 18th Floor, Citibank Tower, 8741 Paseo de Roxas, Salcedo Village, Makati City, Republic of the Philippines 14/F, 200, Keelung Road, Sec 1, Taipei, Taiwan, R.O.C. One IFC, 10 Gukjegeumyung-Ro, Yeouido-dong, Yeongdeungpo-gu, Seoul, 150-876, Korea Room 3503/3504, SK Tower, No.6 Jia Jianguomen Wai Avenue, Chaoyang District, Beijing 100022, Peoples Republic of China 45/F, Hang Seng Tower, 1000 Lujiazui Ring Road, Pudong, Shanghai 200120, Peoples Republic of China 18th Floor, M Thai Tower, All Seasons Place, 87 Wireless Road, Lumpini, Pathumwan, Bangkok 10330, Thailand 10th Floor, 3 North Avenue, Maker Maxity, Bandra Kurla Complex, Bandra East, Mumbai 400051, India Suite 405, Pacific Palace Building, 83B, Ly Thuong Kiet Street, Hoan Kiem Dist. Hanoi, Vietnam
(44) 20 7597 8000 (44) 20 7597 8600 (49) 69 717 080 (33) 1 56 262 200 (41) 22 818 7400 (7) 495 641 3416 (973) 17 534 452 (852) 2525 0121 (65) 6220 3666 (61) 3 9916 1300 (632) 813 7344 (49) 69 723 340 (33) 1 47 550 808 (41) 22 818 7441 (7) 495 775 6238 (973) 17 535 113 (852) 2845 1621 (65) 6223 6198 (61) 3 9916 1330 (632) 848 0105
(886) 2 2723 9698 (886) 2 2345 3638 (82) 2 787 9100 (82) 2 787 9191
(86) 21 3858 2000 (86) 21 3858 2111 (66) 2 252 5650 (66) 2 252 5665
(91) 22 6622 1000 (91) 22 6622 1019 (84) 4 3946 0460 (84) 4 3946 0461
DAIWA INSTITUTE OF RESEARCH LTD HEAD OFFICE MARUNOUCHI OFFICE 15-6, Fuyuki, Koto-ku, Tokyo, 135-8460, Japan (81) 3 5620 5100 (81) 3 5620 5603 (81) 3 5202 2021
Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6756 (81) 3 5555 7011
11th Floor, Financial Square, 32 Old Slip, NY, NY 10005-3504, U.S.A. 3/F, 5 King William Street, London, EC4N 7AX, United Kingdom
- 48 -
Disclaimer
This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Capital Markets Co. Ltd., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures. Japan Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc. Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc. Investment Banking Relationship Within the preceding 12 months, The subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: REXLot Holdings Limited (555 HK); Huadian Fuxin Energy Corporation Limited (816 HK); Chaowei Power Holdings Limited (951 HK); CITIC Securities Company Limited (6030 HK); China Outfitters Holdings Limited (1146 HK); The People's Insurance Company (Group) of China Limited (1339 HK); China Precious Metal Resources Holdings Company Limited (1194 HK); Jiangnan Group Limited (1366 HK); Blackgold International Holdings Ltd (BGG AU); Tosei Corporation (8923 JP); Modern Land (China) Co. Ltd (1107 HK). *Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited, Daiwa Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd. Hong Kong This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (DHK) which is regulated by the Hong Kong Securities and Futures Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research. Ownership of Securities For Ownership of Securities information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationship For Investment Banking Relationship, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage. DHK market making DHK may from time to time make a market in securities covered by this research. Singapore This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets Singapore Limiteds interest and/or its representatives interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore Limited in respect of any matter arising from or in connection with the research. Australia This research is distributed in Australia by Daiwa Capital Markets Stockbroking Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research. Ownership of Securities For Ownership of Securities information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. India This research is distributed by Daiwa Capital Markets India Private Limited (DAIWA) which is an intermediary registered with Securities & Exchange Board of India. This report is not to be considered as an offer or solicitation for any dealings in securities. While the information in this report has been compiled by DAIWA in good faith from sources believed to be reliable, no representation or warranty, express of implied, is made or given as to its accuracy, completeness or correctness. DAIWA its officers, employees, representatives and agents accept no liability whatsoever for any loss or damage whether direct, indirect, consequential or otherwise howsoever arising (whether in negligence or otherwise) out of or in connection with or from any use of or reliance on the contents of and/or omissions from this document. Consequently DAIWA expressly disclaims any and all liability for, or based on or relating to any such information contained in or errors in or omissions in this report. Accordingly, you are recommended to seek your own legal, tax or other advice and should rely solely on your own judgment, review and analysis, in evaluating the information in this document. The data contained in this document is subject to change without any prior notice DAIWA reserves its right to modify this report as maybe required from time to time. DAIWA is committed to providing independent recommendations to its Clients and would be happy to provide any information in response to any query from its Clients. This report is strictly confidential and is being furnished to you solely for your information. The information contained in this document should not be reproduced (in whole or in part) or redistributed in any form to any other person. We and our group companies, affiliates, officers, directors and employees may from time to time, have long or short positions, in and buy sell the securities thereof, of company(ies) mentioned herein or be engaged in any other transactions involving such securities and earn brokerage or other compensation or act as advisor or have the potential conflict of interest with respect to any recommendation and related information or opinion. DAIWA prohibits its analyst and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analyst cover. This report is not intended or directed for distribution to, or use by any person, citizen or entity which is resident or located in any state or country or jurisdiction where such publication, distribution or use would be contrary to any statutory legislation, or regulation which would require DAIWA and its affiliates/ group companies to any registration or licensing requirements. The views expressed in the report accurately reflect the analysts personal views about the securities and issuers that are subject of the Report, and that no part of the analysts compensation was, is or will be directly or indirectly, related to the recommendations or views expressed in the Report. This report does not recommend to US recipients the use of Daiwa Capital Markets India Private Limited or any of its non US affiliates to effect trades in any securities and is not supplied with any understanding that US recipients will direct commission business to Daiwa Capital Markets India Private Limited. Taiwan This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd and it may only be distributed in Taiwan to institutional investors or specific investors who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research. Philippines This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities. For relevant securities and trading rules please visit SEC and PSE Link at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively. United Kingdom This research report is produced by Daiwa Capital Markets Europe Limited and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (FCA) and is a member of the London Stock Exchange, Eurex and NYSE Liffe. Daiwa Capital Markets Europe Limited and/or its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the Securities), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and/or its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.
- 49 -
This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europes affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available. Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-and-regulatory . Regulatory disclosures of investment banking relationships are available at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Germany This document has been approved by Daiwa Capital Markets Europe Limited and is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany. Bahrain This research material is issued/compiled by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113 This material is provided as a reference for making investment decisions and is not intended to be a solicitation for investment. Investment decisions should be made at your own discretion and risk. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document, Content herein is based on information available at the time the research material was prepared and may be amended or otherwise changed in the future without notice. All information is intended for the private use of the person to whom it is provided without any liability whatsoever on the part of Daiwa Capital Markets Europe Limited, Bahrain Branch, any associated company or the employees thereof. If you are in doubt about the suitability of the product or the research material itself, please consult your own financial adviser. Daiwa Capital Markets Europe Limited, Bahrain Branch retains all rights related to the content of this material, which may not be redistributed or otherwise transmitted without prior consent. United States This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparers views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMAs views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMAs non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (telephone 212-612-7000). Ownership of Securities For Ownership of Securities information please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationships For Investment Banking Relationships please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. DCMA Market Making For DCMA Market Making please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Research Analyst Conflicts For updates on Research Analyst Conflicts please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions. Research Analyst Certification For updates on Research Analyst Certification and Rating System please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report. The following explains the rating system in the report as compared to relevant local indices, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next six months. "2": the security is expected to outperform the local index by 5-15% over the next six months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next six months. "4": the security is expected to underperform the local index by 5-15% over the next six months. "5": the security could underperform the local index by more than 15% over the next six months. Additional information may be available upon request. Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.) If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. In some cases, we may also charge a maximum of 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan. For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements. There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements. There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc. When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association
- 50 -