2018 global technology outlook
TRANSCRIPT
See important disclosures, including any required research certifications, beginning on page 115
Global Information Technology
2 January 2018
2018 Global Technology Outlook
Focus on themes that are set to shine
Healthy inventory should provide the foundations for the resumption of a cyclical upturn in the chip sector
But we still view chip cycles as largely irrelevant to investment; for outperformance, focus on growth themes that are set to shine
We present 6 growth themes/structural trends for 2018 investment: multi-cam, OLED, bandwidth, HMI, AI and storage
Rick Hsu(886) 2 8758 6261
Martin Lee(886) 2 8758 6262
See important disclosures, including any required research certifications, beginning on page 115
Global Information Technology
What's new: Witnessing the Android inventory glut, iPhone X launch and
3D laser rollout, we expect the technology industry to end 2017 with
healthy chip inventories, paving the way for the chip sector to resume its
cyclical upturn in 2018. Yet, we see modest revenue growth for the sector,
given it is still in a demand transition from mobile computing devices (MCD)
to the Big Data/Internet of Things (Big Data/IoT) cycle. Thus, we reiterate
our investment approach: be selective and focus on companies able to
outgrow the sector average by capitalising on growth themes that are set to
shine. For 2018, we present 2 growth themes and 4 structural trends that
we expect to shine: multiple cameras (multi-cam), organic light emitting
diode display (OLED), bandwidth, human machine interface (HMI), artificial
intelligence (AI) and storage.
What's the impact: MCD: multi-cam and OLED. In the MCD cycle,
despite a slowdown in smartphone demand, we continue to like the multi-
cam and OLED themes for their multi-year demand growth on spec
upgrades which are seeing penetration accelerate. We have become
downbeat on the fingerprint (FP) theme we flagged in 2017, due to
substitution threats from alternative technologies such as laser sensors.
Big Data/IoT: bandwidth, HMI, AI and storage. For the Big Data/IoT cycle,
we envisage 4 structural trends shining: bandwidth, HMI, AI and storage.
Active builds of cloud computing infrastructure to facilitate surging data
consumption have spurred demand for bandwidth, storage and compute
upgrades, respectively, benefiting: 1) fibre-optic (FO) transceiver makers in
both datacom and telecom data transmissions, 2) memory makers for
enterprise solid state drives (SSD) and servers’ in-memory compute, and 3)
high-performance computing (HPC) chipmakers for Big Data analytics
leading to a trend of AI for cross-platform compute, from cloud to edge.
Optical communication players are further leveraging their laser knowhow,
penetrating the consumer space and offering 3D laser sensing & imaging
technologies to create new demand and help enhance HMI.
What we recommend: We cherry-pick 18 stocks in Asia and the US which
we believe will capitalise on our highlighted 6 themes: Sony, AAC, Sunny
Optical, SEMCO (multi-cam), LGD (OLED), LMO, Inari (bandwidth),
WinSemi, LGI, Globetronics (HMI), Nvidia, Intel, TSMC (AI), SEC, SK
Hynix (storage), and Nidec, Ennoconn, Airtac (ADAS/IIoT).
How we differ: Key downside risks to our call would be any trajectories of
the tech upgrade-cycles below our expectations, including the multi-cam,
OLED and 3D laser ramps in smartphones, 10G and SiPh ramps in
bandwidth and supply/demand volatility in the memory space.
2 January 2018
2018 Global Technology Outlook
Focus on themes that are set to shine
Healthy inventory should provide the foundations for the resumption of a cyclical upturn in the chip sector
But we still view chip cycles as largely irrelevant to investment; for outperformance, focus on growth themes that are set to shine
We present 6 growth themes/structural trends for 2018 investment: multi-cam, OLED, bandwidth, HMI, AI and storage
Daiwa’s 2018 global tech picks
Stock Ticker Rating TP*
Multi-cam
Sony 6758 JP Buy 6,500
AAC 2018 HK Buy 200
Sunny Optical 2382 HK Buy 165
SEMCO 009150 KS Buy 132,000
OLED
LG Display 034220 KS Buy 39,000
Bandwidth
Inari INRI MK Buy 4.28
LMO 3081 TT Outperform 425
HMI
WinSemi 3105 TT Buy 366
LG Innotek 011070 KS Buy 220,000
Globetronics GTB MK Buy 8.00
AI
Nvidia NVDA US Buy 260
Intel INTC US Buy 55
TSMC** 2330 TT Outperform 260
Storage
SEC 005930 KS Buy 4,100,000
SK Hynix 000660 KS Buy 118,000
ADAS/IIoT
Ennoconn 6414 TT Buy 520
Airtac 1590 TT Buy 599
Nidec 6594 JP Buy 17,000
Source: Daiwa forecasts * Target prices in local currency ** Upgrading from Hold (3)
Global IT industry: evolving trends
Rick Hsu(886) 2 8758 6261
Martin Lee(886) 2 8758 6262
PC
MobileComm
MobileComputing
BigData
2
2018 Global Technology Outlook: 2 January 2018
Table of contents
Daiwa’s tech valuation panel ................................................................................... 6
Stocks to act on ........................................................................................................ 7
Focus on themes that are set to shine ..................................................................13
Recap of 2017 ................................................................................................................. 13
Outlook for 2018 .............................................................................................................. 15
Focus on the shining themes ........................................................................................... 20
Appendix 1: global chip inventory monitor ...........................................................34
Appendix 2: global chip revenue and guidance monitor .....................................35
Appendix 3: technology food chain and glossary of terms .................................36
Company Section
Sony ................................................................................................................................ 39
AAC Technologies ........................................................................................................... 43
Sunny Optical Technology ............................................................................................... 47
Samsung Electro-Mechanics ........................................................................................... 51
LG Display ....................................................................................................................... 55
Inari Amertron .................................................................................................................. 59
LandMark Optoelectronics ............................................................................................... 63
Win Semiconductors ........................................................................................................ 67
LG Innotek ....................................................................................................................... 71
Globetronics Technology ................................................................................................. 75
NVIDIA ............................................................................................................................ 79
Intel .................................................................................................................................. 83
Taiwan Semiconductor Manufacturing ............................................................................. 87
Samsung Electronics ....................................................................................................... 91
SK Hynix .......................................................................................................................... 95
Ennoconn ........................................................................................................................ 99
Airtac International Group .............................................................................................. 103
Nidec ............................................................................................................................. 107
3
2018 Global Technology Outlook: 2 January 2018
Daiwa’s Global Tech Team
Taiwan
Rick HSU
Tech head/Semiconductors
(886) 2 8758 6261
TSMC (2330 TT) MediaTek (2454 TT)
UMC (2303 TT) Novatek (3034 TT)
SMIC (981 HK) Realtek (2379 TT)
ASE (2311 TT)
SPIL (2325 TT)
Win Semiconductor (3105 TT)
LandMark Opto (3081 TT)
Steven TSENG
Computing & data centre
(886) 2 8758 6252
ASUSTeK Computer (2357 TT) Advantech (2395 TT)
Lenovo Group (992 HK) Ennoconn (6414 TT)
Pegatron Corp (4938 TT) Adlink (6166 TT)
Quanta Computer (2382 TT) Delta Electronics (2308 TT)
Hiwin Technologies Corp (2049 TT)
Airtac International Group (1590 TT)
Voltronic (6409 TT)
Kylie HUANG
Smart device food chain
(886) 2 8758 6248
AAC Technologies (2018 HK) Sunny Optical (2382 HK)
FIH Mobile (2038 HK) GIS (6456 TT)
HTC Corp (2498 TT) Catcher Technology (2474 TT)
Hon Hai Precision Industry (2317 TT) Casetek Holdings (5264 TT)
Largan Precision (3008 TT)
TPK (3673 TT)
TXC Corp (3042 TT)
Martin LEE
Research associate
(886) 2 8758 6262
Elsa CHENG
Research associate
(886) 2 8758 6253
Steven YANG
Research associate
(886) 2 8758 6245
Korea
SK KIM
Semiconductor/Display & Hardware
(82) 2787 9173
Samsung Electronics (005930 KS)
SK Hynix (000660 KS)
Samsung SDI (006400 KS)
Samsung Electro-Mechanics (009150 KS)
LG Innotek (011070 KS)
LG Display (034220 KS)
LG Electronics (066570 KS)
Henny JUNG
Research associate
(82) 2787 9182
US
Deepak SITARAMAN
Semiconductors and IT Hardware
(1) 212 612 6115
Apple (APPL US)
Broadcom (AVGO US)
Intel (INTC US)
NVIDIA (NVDA US)
4
2018 Global Technology Outlook: 2 January 2018
Daiwa’s Global Tech Team (continued)
Japan
Takumi SADO
Electronic Components
(81) 3 5555 7085
Ibiden (4062 JP) Japan Aviation Electronics Industry (6807 JP)
Minebea (6479 JP) Iriso Electronics (6908 JP)
Mabuchi Motor (6592 JP) Rohm (6963 JP)
Nidec (6594 JP) Kyocera (6971 JP)
Sanken Electric (6707 JP) Taiyo Yuden (6976 JP)
TDK (6762 JP) Murata Manufacturing (6981 JP)
Alps Electric (6770 JP) Nitto Denko (6988 JP)
Hirose Electric (6806 JP)
Junya AYADA
Consumer Electronic
(81) 3 5555 7091
Elecom (6750 JP) Casio Computer (6952 JP)
Panasonic (6752 JP) Olympus (7733 JP)
Sharp (6753 JP) Citizen Watch (7762 JP)
Fujitsu General (6755 JP) Yamaha (7951 JP)
Sony (6758 JP)
Pioneer (6773 JP)
Funai Electric (6839 JP)
Toru SUGIURA
SPE & Precision Machinery
(81) 3 5555 7124
Fujifilm Holdings (4901 JP) Shimadzu (7701 JP)
Konica Minolta (4902 JP) Nikon (7731 JP)
Disco (6146 JP) Screen Holdings (7735 JP)
Brother Industries (6448 JP) Hoya (7741 JP)
Renesas Electronics (6723 JP) Canon (7751 JP)
Seiko Epson (6724 JP) Ricoh (7752 JP)
Hitachi Kokusai Electric (6756 JP) Tokyo Electron (8035 JP)
Advantest (6857 JP) Hitachi High-Technologies (8036 JP)
Ushio (6925 JP)
Kazuya NISHIMURA
Industrial Electronics
(81) 3 5555 7161
Hitachi (6501 JP) Azbil (6845 JP)
Mitsubishi Electric (6503 JP)
Fuji Electric (6504 JP)
Sinfonia Technology (6507 JP)
Meidensha (6508 JP)
Daihen (6622 JP)
Omron (6645 JP)
Affin Hwang’s Tech Analyst
Malaysia
Kevin LOW
Telco, Technology & Small Caps
(603) 2146 7479
Globetronics (GTB MK) Oceancash Pacific Bhd (OCP MK)
Inari Amertron (INRI MK) SLP Resources (SLPR MK)
MPI (MPI MK)
KESM (KESM MK)
Uchi (UCHI MK)
Unisem (UNI MK)
Perak Transit (PERAK MK)
5
2018 Global Technology Outlook: 2 January 2018
The chip inventory cycle vs. SOX* The SCM revenue cycle vs. SOX*
Source: Company, Bloomberg, Daiwa estimates Note: * A total of 15 fabless chipmakers in the world under Daiwa’s monitor
Source: Company, Bloomberg, Daiwa estimates Note: SCM includes dedicated foundries and OSAT makers, ex-IDMs
Please also see:
Asia ex-Japan Tech Sector: Big Data: the next big thing
2016 Global Technology Outlook : Heading for the light
Regional Optical Communications Sector: Initiation: head for the leading lights
2 January 2015 9 December 2015 17 February 2016
Rick Hsu (886) 2 8758 6261 ([email protected])
Rick Hsu (886) 2 8758 6261 ([email protected])
Olivia Hsu (886) 2 8758 6262
Rick Hsu (886) 2 8758 6261 ([email protected])
Olivia Hsu (886) 2 8758 6262
2017 Asian Technology Outlook: Multiple themes emerging to shine
Asian Optical Sensing & Communication A whole new world
6 January 2017 28 June 2017
Rick Hsu (886) 2 8758 6261
Martin Lee (886) 2 8758 6262 ([email protected])
Rick Hsu (886) 2 8758 6261
Kevin Low (603) 2146 7479 ([email protected])
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6
2018 Global Technology Outlook: 2 January 2018
Daiwa’s tech valuation panel
Daiwa's tech stock valuation panel (Asia ex-Japan)
MktCap Share price PER (x) PBR (x) ROE (%) EPS growth (%)
Stock Ticker Rating (USDm) LC* 2016 2017E 2018E 2016 2017E 2018E 2016 2017E 2018E 2016 2017E 2018E
Greater China
AAC Tech 2018 HK Buy 22,400 142.50 36.5 27.8 19.6 10.2 8.0 6.1 31.2 32.3 35.3 29.6 31.1 42.3 Largan 3008 TT Buy 18,105 4,040.00 23.8 20.6 14.1 7.1 5.7 4.4 32.4 30.5 35.1 -5.9 15.5 46.9 Sunny Optical 2382 HK Buy 13,704 99.40 70.7 32.7 21.9 18.3 12.2 8.4 29.0 44.8 45.2 66.4 116.4 48.9 ASE 2311 TT Buy 10,945 37.55 14.2 14.3 12.5 2.0 1.8 1.6 13.8 13.4 13.5 11.3 -0.2 14.1 Catcher 2474 TT Buy 8,455 328.50 11.5 11.0 8.8 2.1 1.8 1.6 18.5 17.7 19.5 -12.3 4.7 25.2 WinSemi 3105 TT Buy 3,854 286.50 37.5 32.1 23.5 6.6 6.0 5.2 17.9 19.5 23.6 70.5 16.7 36.6 Airtac 1590 TT Buy 3,221 510.00 47.6 29.4 23.8 8.6 5.8 5.2 18.4 24.2 23.1 40.3 62.1 23.3 Ennoconn 6414 TT Buy 1,133 443.00 33.0 28.9 18.0 5.7 5.9 4.3 22.4 20.0 27.7 8.0 14.2 60.4 TSMC 2330 TT Outperform 195,780 226.00 17.5 17.1 15.3 4.2 3.8 3.4 25.6 23.3 23.2 9.0 2.7 11.2 Advantech 2395 TT Outperform 4,841 208.00 23.2 23.5 21.3 5.2 5.2 4.7 23.4 23.2 23.2 10.8 -1.1 10.5 Hiwin 2049 TT Outperform 3,033 324.00 67.1 32.8 28.3 6.3 5.6 4.9 9.6 18.3 18.6 -20.8 104.2 16.2 Novatek 3034 TT Outperform 2,338 115.00 14.0 13.5 11.9 2.5 2.4 2.3 17.7 18.1 19.6 -21.8 3.5 13.2 LandMark Opto 3081 TT Outperform 1,152 380.50 39.7 50.5 24.8 9.3 9.1 7.4 23.9 18.1 32.9 -12.0 -21.4 104.0 Adlink 6166 TT Outperform 461 63.40 32.0 26.5 18.1 2.9 2.8 2.6 10.0 10.8 15.1 -34.2 20.6 46.9 Hon Hai 2317 TT Hold 54,593 94.30 11.0 12.3 10.5 1.5 1.4 1.3 14.2 12.0 13.3 -0.3 -10.7 17.8 MediaTek 2454 TT Hold 15,116 286.00 19.1 23.5 16.7 1.8 1.9 1.8 9.8 7.9 10.8 -9.3 -18.9 41.0 Delta 2308 TT Hold 12,279 141.50 19.6 19.6 18.0 3.0 2.8 2.8 15.1 14.8 15.5 0.4 -0.2 8.7 Quanta 2382 TT Hold 7,936 61.50 15.7 15.2 11.6 1.8 1.9 1.8 11.4 12.1 15.8 -15.1 3.4 30.6 SMIC 981 HK Hold 7,847 13.18 26.1 39.6 35.3 2.1 1.9 1.8 8.3 5.0 5.4 19.4 -34.2 12.2 Lenovo 992 HK Hold 6,280 4.48 na 11.8 23.2 2.1 2.0 1.7 na 17.2 7.8 na na -49.2 Pegatron 4938 TT Hold 6,186 71.90 9.6 10.9 7.8 1.2 1.3 1.2 13.0 11.8 16.3 -17.9 -12.4 40.4 SPIL 2325 TT Hold 5,226 50.20 17.0 21.2 18.3 2.4 2.2 2.0 14.5 11.6 12.4 13.4 -19.7 15.8 Voltronic 6409 TT Hold 1,344 511.00 28.2 29.0 22.3 9.4 10.1 9.5 34.2 33.6 44.0 -4.8 -2.8 30.0 GIS 6456 TT Hold 2,257 199.00 21.3 8.8 8.0 5.0 3.6 2.8 24.4 47.8 39.4 26.9 141.8 10.3 FIH Mobile 2038 HK Hold 2,355 2.35 17.0 -23.0 16.4 0.7 0.7 0.7 3.8 0.0 4.2 -40.3 0.0 0.0 TPK 3673 TT Hold 1,133 83.40 na 10.4 9.7 1.0 1.0 1.0 na 9.5 10.4 na na 7.2 Casetek 5264 TT Hold 1,146 101.00 12.2 14.5 11.0 1.2 1.2 1.1 9.4 8.1 10.1 -50.3 -15.3 31.0 TXC 3042 TT Hold 409 39.55 12.0 11.6 10.6 1.3 1.2 1.2 10.0 10.7 11.5 8.9 3.1 10.0 Asustek 2357 TT Underperform 6,886 277.50 10.7 13.7 12.3 1.1 1.3 1.2 11.0 8.8 10.3 12.3 -21.9 12.0 UMC 2303 TT Underperform 6,031 14.30 21.7 19.6 24.6 0.8 0.8 0.8 3.8 4.2 3.3 -37.5 10.7 -20.3 Realtek 2379 TT Underperform 1,830 108.50 18.4 15.1 13.8 2.4 2.2 2.0 13.5 15.1 15.3 28.4 21.5 9.7 HTC 2498 TT Sell 2,021 73.60 na na na 1.2 1.3 1.4 na na na na na na
Korea
SEC 005930 KS Buy 283,722 2,548,000 14.2 7.5 6.1 1.9 1.6 1.4 12.5 21.1 22.1 31.7 90.2 22.0 SK Hynix 000660 KS Buy 50,279 76,500 18.6 5.0 3.8 2.2 1.7 1.3 13.0 38.7 37.8 -30.6 273.9 29.9 LG Display 034220 KS Buy 9,960 29,900 11.8 5.4 8.3 0.8 0.7 0.7 7.2 14.4 8.7 -6.2 119.1 -34.8 SEMCO 009150 KS Buy 6,953 100,000 nm 40.8 19.0 1.8 1.7 1.5 0.3 4.4 8.6 -95.3 nm 115.0 LG Innotek 011070 KS Buy 3,172 144,000 nm 17.2 9.3 1.9 1.7 1.4 0.3 10.5 16.7 -94.8 nm 86.4 LG Electronics 066570 KS Outperform 16,148 106,000 nm 9.7 9.9 1.4 1.4 1.2 0.6 14.4 13.0 -31.5 nm -1.2 Samsung SDI 006400 KS Outperform 12,457 204,500 na 19.1 11.4 1.3 1.1 1.0 na 6.2 9.2 na na 67.5
Malaysia
Globetronics GTB MK Buy 461 6.58 67.1 30.8 16.5 7.1 6.7 6.5 9.0 22.2 39.5 -58.0 136.3 86.9
Inari Amertron INRI MK Buy 1,734 3.44 35.1 23.6 16.1 8.0 7.3 6.4 24.8 31.4 41.0 32.4 49.2 46.6
Source: Daiwa forecasts, Factset Note: *local currency, based on share prices as of 28 December 2017; ** March year end for Lenovo, 2016=FY17, 2017E=FY18E, 2018E= FY19E
7
2018 Global Technology Outlook: 2 January 2018
Stocks to act on
Our investment guideline in the technology space has been focusing on growth themes
that should continue to shine, rather than on cyclicality, since global IT demand is in a
multi-year transition from MCD to the Big Data/IoT cycle. In our 2017 Tech Outlook report
(Multiple themes emerging to shine, 6 January), we presented our Daiwa tech
investment portfolio on a regional basis, covering a total of 16 stocks centred on 6 growth
themes that we expected to outperform the sector average: multi-cam, OLED, FP, optical
communications (OC), advanced driver assistance systems (ADAS) and industrial Internet
of Things (IIoT). The charts below summarise the performance of these picks in 2017 on
both absolute and relative bases.
Average returns of the 16 stocks we picked finished up 66% (from 30 December 2016 to
28 December 2017) on an absolute basis and 24% relative to local benchmark indices.
Among these stocks, the top performers were WinSemi, Sunny Optical, Inari Amertron and
Airtac, all seeing over 100% returns on absolute bases. In total, 9 of the stocks
outperformed their benchmarks and 7 underperformed.
For 2018, regardless of likely healthy inventory setting a good foundation for the cyclical
upswing to resume in the chip sector, we identify 6 growth themes/structural trends that
should continue to shine: multi-cam, OLED, bandwidth, HMI, AI and storage. This time,
expanding our investment scope to include the US tech sector, we cherry-pick 18 stocks
that we believe will capitalise on our 6 themes/trends in 2018 in terms of both fundamental
growth and stock performance.
MCD: multi-cam, OLED
Despite muted demand growth in the MCD cycle, we have been expecting the multi-cam and
OLED markets to outgrow the smartphone average in revenue terms, thanks to accelerated
penetration in the smartphone space on spec upgrades. We drop the silicon-based FP theme
as we think it may be threatened by alternative technologies like laser sensors.
For the multi-cam theme, we retain Sony and Sunny Optical and add AAC and SEMCO
to our picks, as we believe this is a multi-year theme for outperformance. We like Japan-
based Sony for its leadership in the CMOS image sensor (CIS) chip supply of the camera
food-chain, plus upside potential from the 3D laser demand. We continue to push China-
based Sunny Optical for its leadership in vehicle lenses and share gains in camera lenses
and modules in the Android smartphone market. We like China-based AAC for its
breakthrough in the optics business such as wafer-level lens (WLO) to ride on the multi-
cam/3D laser trends, on top of its incumbent acoustics and haptics businesses. We push
Korea-based SEMCO for its ability to capitalise on the multi-cam theme through its
strategic position in the Android camera module food-chain, as well as demand strength on
its multi-layer ceramic capacitor (MLCC) and substrate-like PCB (SLP) businesses.
Daiwa’s 2017 tech picks’ performance (absolute return) Daiwa’s 2017 tech picks’ performance (relative return)*
Source: TEJ, Bloomberg, Daiwa
Source: TEJ, Bloomberg, Daiwa Note: * Stock returns relative to MSCI IT sector country indices of Taiwan, Japan, Hong Kong,
Korea and Asia Pacific
(60%) (10%) 40% 90% 140% 190% 240%
WinSemiSunny OpticalInari Amertron
AirtacGlobetronics
SK HynixNidecSonyLMOSEC
TSMCASE
EnnoconnSMIC
LarganLG Display
Average (math)
(60%) (10%) 40% 90% 140% 190% 240%
WinSemiSunny Optical
AirtacInari Amertron
GlobetronicsNidecLMOSony
SK HynixTSMC
ASEEnnoconn
SECLargan
SMICLG Display
Average (math)
2017 top picks
performance check
Our 18 stocks in which
to invest for 2018
Sony, Sunny, AAC,
SEMCO and LGD
8
2018 Global Technology Outlook: 2 January 2018
Daiwa's 2018 global tech stock picks
Price
PER (x) PBR (x) ROE (%) Earnings growth (%)
Stock Ticker (LC)* Rating 2016 2017E 2018E 2016 2017E 2018E 2016 2017E 2018E 2016 2017E 2018E
Add
Multi-cam
Sony** 6758 JP 5,092 Buy 87.9 15.7 14.4 2.6 2.2 2.0 3.0 15.2 14.5 -50.4 458.1 9.0 AAC 2018 HK 142.50 Buy 36.4 27.8 19.5 10.2 8.0 6.0 31.2 32.3 35.3 29.6 31.1 42.3 Sunny Optical 2382 HK 99.40 Buy 72.2 33.4 22.4 18.7 12.5 8.5 29.0 44.8 45.2 66.8 116.4 48.9 SEMCO 009150 KS 100,000 Buy nm 39.3 18.3 1.8 1.7 1.4 0.3 4.4 8.6 -95.3 nm 115.0 OLED LG Display 034220 KS 29,900 Buy 11.8 5.4 8.3 0.8 0.7 0.7 7.2 14.4 8.7 -6.2 119.1 -34.8 Bandwidth Inari Amertron*** INRI MK 3.44 Buy 35.1 23.6 16.1 8.0 7.3 6.4 24.8 31.4 41.0 32.4 49.2 46.6 LandMark Opto 3081 TT 380.50 Outperform 39.4 50.5 24.8 9.2 9.1 7.4 23.9 18.1 32.9 -11.5 -22.1 104.0 HMI WinSemi 3105 TT 286.50 Buy 37.1 32.1 23.5 6.5 6.0 5.2 17.9 19.5 23.6 16.5 15.3 36.6 LG Innotek 011070 KS 144,000 Buy nm 17.2 9.3 1.9 1.7 1.4 0.3 10.5 16.7 -94.8 nm 85.6 Globetronics GTB MK 6.58 Buy 67.1 30.8 16.5 7.1 6.7 6.5 9.0 22.2 39.5 -58.0 136.3 86.9 AI Nvidia**** NVDA US 197.40 Buy 164.5 43.1 32.7 21.5 16.3 11.9 36.2 43.0 42.7 99.2 55.5 33.5 Intel INTC US 46.22 Buy 17.0 14.2 13.6 3.4 3.5 3.1 20.8 22.7 21.5 8.6 19.1 3.6 TSMC 2330 TT 226.00 Outperform 17.5 17.1 15.3 4.2 3.8 3.4 25.6 23.3 23.2 9.0 2.7 11.2 Storage SEC 005930 KS 2,548,000 Buy 14.7 8.0 6.6 1.8 1.6 1.4 12.5 21.1 22.1 19.9 84.3 20.1 SK Hynix 000660 KS 76,500 Buy 18.9 5.1 3.9 2.3 1.7 1.3 13.0 38.7 37.8 -31.7 268.1 29.9 IIoT/ADAS Ennoconn 6414 TT 443.00 Buy 33.1 28.9 18.0 5.7 5.9 4.3 22.4 20.0 27.7 18.1 14.5 60.4 Airtac 1590 TT 510.00 Buy 50.2 29.4 23.8 9.1 5.8 5.2 18.4 24.2 23.1 40.3 71.2 23.3 Nidec** 6594 JP 15,950 Buy 42.6 36.8 29.0 5.6 4.9 4.3 13.8 14.1 15.7 23.4 15.6 26.7
Avoid
HTC 2498 TT 73.60 Sell na na na 1.2 1.3 1.4 na na na na na na Realtek 2379 TT 108.50 Underperform 18.1 15.2 13.8 2.4 2.2 2.0 13.5 15.1 15.3 25.2 19.2 9.7 UMC 2303 TT 14.30 Underperform 21.7 19.6 24.6 0.8 0.8 0.8 3.8 4.2 3.3 -38.2 10.7 -20.3
Source: Daiwa forecasts, Factset Note: * Local currency based on share price as of 28 December 2017, ** March year-end for Sony and Nidec, ***June year-end for Inari (covered by Daiwa alliance partner Affin Hwang), **** January
year-end for Nvidia
In the OLED theme, our key focus for investment is Korea-based LG Display (LGD), on
our belief that LGD should be the most viable second-source for the smartphone OLED
panel supply in the next 1-2 years. Although Samsung Display is the industry leader in this
space, it is part of the Samsung Electronics Group whose key business drivers are not
OLED, but semiconductors such as NAND and DRAM.
Big Data: bandwidth, HMI, AI, Storage
In the next secular Big Data/IoT demand cycle, we are restructuring the 3 themes we
flagged in our 2017 Tech Outlook report into 4 structural trends in the global IT space by
taking into consideration new demand markets being created by laser and high-
performance computing technologies: bandwidth, HMI, AI and storage.
For bandwidth, we have been pushing 2 OC names, LandMark Opto (LMO) and Inari
Amertron, since last year. We keep both in our top picks list since we expect the Taiwan-
based LMO to deliver high earnings growth in 2018 from its silicon-photonics (SiPh) share
gains in the datacentre market and 10G ramp in China’s passive optical network (PON)
market. We expect Malaysia-based Inari to sustain its high growth profile from its new
business of iris-infrared (IR) and data-server applications, on top of its cash-cow business
of radio-frequency (RF) filter testing which should further help Inari capitalise on the next
cellular migration cycle from 4G to 5G architecture.
For HMI, our top pick is the Taiwan-based Win Semiconductors (WinSemi), which
dominates in the global 6” compound-semiconductor wafer-foundry capacity, occupying a
strong position to capitalise on the fast-growing trend of 3D laser sensing and imaging
demand and gain the lion’s share of the consumer vertical cavity surface emitting laser
(VCSEL) market. We also like Malaysia-based Globetronics for its strategic position in
laser module assembly for one of 2 supply chains that offer TrueDepth camera modules for
the iPhone X, and the Korea-based LG Innotek (LGI) on our belief that it has teamed up
with Lumentum (LITE US; USD49.05, not rated) to supply final laser camera module
assembly for the iPhone X.
Laser: LMO, Inari,
WinSemi, Globetronics
and LGI
9
2018 Global Technology Outlook: 2 January 2018
In AI, the stock we like the most for 2018 is US-based Nvidia, as we believe it will capture
the lion’s share of the global datacentre market that requires comprehensive compute of
data training, which makes its GPU the optimal solution for parallel computing architecture.
Its strong foothold in self-driving vehicle compute with its Tegra processor offering
represents another leg of business growth. We also like US-based Intel, which should
benefit from any expansion of the addressable market for AI spurred by applications that
require CPU for data inference at both the cloud and edge computing level.
Hyper-scale datacentre operators such as Google may choose to develop own application-
specific ICs (ASIC) in-house or team up with fabless chipmakers, making Taiwan-based
TSMC likely the ultimate winner as we expect it to dominate in the cutting-edge process
technologies and command most of the foundry business with all the IC designers and
system houses in this domain. We upgrade our rating one notch to Outperform (2).
The Korea-based Samsung Electronics (SEC) and SK Hynix were in our 2017 top picks
and we continue to include both for 2018 on our expectation of another robust year for the
memory sector, with datacentres’ density-upgrade requirements to drive NAND demand
from solid state drives (SSD) and DRAM demand from severs’ in-memory compute.
Last, but not the least, ADAS and IIoT were 2 growth themes we recommended in 2017,
and we continue to include them as part of our investment guideline, given their secular
demand growth representing derivative themes of AI and HMI. We continue to like Japan-
based Nidec for its strong footprint in the ADAS and IIoT markets. For ADAS, Nidec is the
industry leader in advanced motors to facilitate autonomous emergency braking systems
(AEB). For IIoT, it should enjoy rapid growth from its product offerings of servomotors,
inverters, speed reducers and controlling systems. Elsewhere in the IIoT space, we remain
buyers of Taiwan-based Ennoconn and Airtac, for the former’s strong earnings growth on
synergies after its consolidation of S&T’s business operations in the industrial PC space,
and the latter’s footprint in China’s pneumatic-equipment market to ride on the country’s
robust demand growth as a result of still low robot-density.
Please refer to page 10 for a snapshot of our investment thesis, and the company section
beginning on page 37 for financial/valuation details of each rated stock in our top picks list.
Among the 18 stocks, the potential top performers for 2018 are likely AAC, Sony, Nvidia
and Globetronics, as the strong gets stronger. Laggard plays for outperformance could be
Ennoconn and LGD.
In addition to our covered stock recommendations, we also suggest investors watch some
other names (see table below), which we believe could benefit from the growth
themes/structural trends we flag, directly or indirectly; although we actively monitor them,
they carry no ratings at this time.
Daiwa's 2018 global tech stocks to watch*
MktCap** Daily T/O PER (x) PBR (x) ROE (%) Earnings growth (%)
Stock Ticker (USDm) (USDm) 2016 2017E 2018E 2016 2017E 2018E 2016 2017E 2018E 2016 2017E 2018E
Multi-cam
XinTec 3374 TT 757 42.0 na na 42.4 4.4 5.0 na na na 11.0 na na na
OLED
SFA Engineering 056190 KS 1,299 10.0 17.8 8.0 8.3 1.8 1.8 1.6 14.7 26.1 20.6 153.7 122.4 -3.8
AP Systems 054620 KS 84 1.5 3.3 na na 0.4 na na 17.6 na na 213.9 na na
Bandwidth/HMI
VPEC 2455 TT 595 25.1 38.0 44.2 31.1 6.4 6.8 6.2 14.7 14.5 18.1 -21.2 -14.2 42.0
PCL Tech 4977 TT 234 6.5 21.0 20.4 16.1 4.6 4.5 4.1 22.5 22.2 27.1 23.7 3.0 26.9
Accelink 002281 CH 2,792 90.1 61.4 49.0 36.6 6.0 16.5 14.8 10.4 11.6 13.9 17.2 25.3 33.8
AI
CHPT 6510 TT 1,206 10.8 59.4 46.3 32.1 13.2 7.4 6.5 31.5 20.3 24.3 46.3 28.3 44.2
JCET 600584 CH 4,317 122.9 265.2 84.3 40.6 4.2 3.4 3.1 2.4 5.4 10.4 104.5 214.6 107.6
Storage
Silergy 6415 TT 1,961 4.7 39.7 30.4 22.8 7.1 6.0 4.8 23.0 21.8 23.7 22.3 30.6 33.4
ADAS/IIoT
IntelliEPI 4971 TT 130 3.1 37.3 29.7 25.2 2.6 2.6 2.4 7.0 8.5 9.7 -8.0 25.7 17.8
Cub Elecparts 2231 TT 919 3.9 24.5 24.9 18.6 8.4 8.2 6.8 41.5 36.1 42.9 -0.4 -1.4 33.6
Source: Company, Bloomberg Note: * Stocks Daiwa actively monitors but do not carry a rating, ** Based on prices as of 28 December 2017
AI: Nvidia, Intel, TSMC
Upgrading TSMC to
Outperform (2)
Storage: SEC and SK
Hynix
Others: Nidec,
Ennoconn and Airtac
10
2018 Global Technology Outlook: 2 January 2018
Summary of investment thesis for 2018 Daiwa's Pan-Asia tech picks
Stock Ticker Investment thesis
Sony 6758 JP We expect Sony’s CMOS image sensor (CIS) business to grow on: 1) increased adoption of dual-cameras in mobile devices in the near term, and 2) growing demand for 3D laser sensors (used for gesture recognition, AR, object/obstacles recognition) for time-of-flight (ToF) cameras in the medium term.
Over the long term, promising areas for Sony include products for automotive applications such as self-driving technologies.
Nidec 6594 JP Business is expanding at the world’s top brushless DC motor producer on the back of aggressive M&A activities.
New growth areas include next-generation brake motors, sensor units, and robotics. Our eyes are also on the impact of utilising IIoT in its own factories. We view the stock as an attractive long-term play.
SEC 005930 KS We expect component business at SEC to drive strong earnings in 2018, thanks to robust memory pricing and increased sales of flexible OLED.
The company announced its new shareholder return plan for 2018-20, which includes dividend hikes and additional share buybacks. We view this plan as positive to the share price for the next 3 years.
SK Hynix 000660 KS We expect tight DRAM supply to continue likely into 2018 thanks to: 1) eased seasonality in mobile DRAM from the iPhone X delay, and 2)slow technology migrations in the industry at 1x/1ynm nodes.
For NAND, although we expect likely oversupply in 2H18 driven by eased yield-issues for 3D-NAND, potential delays in production of 64/72-layer 3D-NAND and capacity losses from production conversion (from planar NAND to 3D-NAND) should limit supply.
LGD 034220 KS Considering solid OLED TV demand and LGD’s position as the only OLED panel vendor globally, we expect its OLED TV panel business to deliver further upside to its 2018 earnings power.
Despite LCD price drops, we believe any negative impact on LGD should be limited as it focuses on the premium segments of the TV and IT products.
LGI 011070 KS We expect a remarkable EPS growth of 86% YoY in 2018 for LGI, based on its solid position in Apple supply chain.
We forecast operating profit in its Optics Solutions business to nearly double in 2018, with increased sales of dual-cameras and 3D laser-sensor modules for its key customer.
SEMCO 009150 KS We expect an overall earnings improvement in each division of SEMCO, with strength driven by camera modules, MLCCs and SLPs.
We see demand drivers of: 1) rising dual-cam penetration and likely supply of 3D laser sensor modules, 2) tight supply of high-valued MLCCs, and 3) a new trend of material change in the smartphones to SLPs.
TSMC 2330 TT We believe TSMC will be the biggest beneficiary in the global foundry industry to capitalize on the rising secular trend of AI, thanks to its global leadership in the advanced CMOS process technologies to accommodate the requirement of transistor-count enhancement for HPC.
Near term, we see upside potential to the street’s expectation for its 1Q18 seasonality, thanks to demand strength on its 10nm and 16nm offsetting 28nm weakness. We are upgrading our rating to Outperform (2), from Hold.
LMO 3081 TT Regardless of slightly lower-than-expected revenue run-rate in the near term on GPON pricing pressure, we expect LMO to deliver strong earnings recovery structurally over 2018-19E, with EPS to grow nearly a 1x CAGR.
We see 2 structural demand drivers as intact: SiPh and 10G PON ramp-up, with new product rollouts further adding to business upside, including 25G for datacenters, high-power laser cutting and 6” epiwafer development for LiDAR.
WinSemi 3105 TT We expect strong earnings growth at WinSemi for multiple years driven firstly by VCSEL then by 5G deployment. Given its globa l leadership in the 6” GaAs wafer foundry capacity, WinSemi should command the lion’s share of the consumer VCSEL market which we forecast to grow a 120% revenue CAGR in 2017-20E.
We expect a prebuild of the 5G cellular infrastructure to begin from late 2018/early 2019 to drive RF PA upgrades from GaAs to GaN and benefit WinSemi in both volume and ASP terms. We forecast its EPS to grow a 32% CAGR over 2017-19E.
AAC 2018 HK We see AAC as set to benefit from the rising multi-cam adoption in smartphones, thanks to its breakthrough in optics with good production yields. We expect AAC to have more projects/client wins in 2018-19.
We expect AAC to deliver EPS growth of 25-42% with optics contributing 7-12% of its revenue in 2018-19E. We also see further upsides for 2019 and beyond if any project wins in the transmitter (Tx) lens for 3D laser sensing take place.
Sunny Optical
2382 HK We view Sunny Optical as a major beneficiary of the emerging adoption-trend of 3D laser sensing in smartphones, in addition to booming adoption of dual-cams with on-going camera-specs upgrades.
We forecast Sunny to deliver 42-49% EPS growth over 2018-19E, with the 3D sensing to contribute 4-12% of its revenue during the same period.
Ennoconn 6414 TT After its consolidation of S&T, Ennoconn may face a mixed impact initially, as the consolidation should boost Ennoconn’s revenue and opex at the same time. However, after the initial integration, Ennoconn should see clear cost/opex-saving synergies from mid-2018.
We believe Ennoconn will be a key beneficiary of the IIoT trend, since S&T regards its IoT solutions segment as the main business driver and the industrial handheld products should bring growth momentum to Ennoconn.
Airtac 1590 TT We are positive on Airtac due to solid pneumatic demand in China and likely contribution of new products such as electrical cylinders, linear guides, ball screws and switches from 2Q18.
We expect profit margin to further improve in 2018 through effective opex-control and automation and process improvement. Besides, we look forward to new products to bring upside at the margin front.
Inari Amertron
INRI MK The RF segment at Inari should continue to see robust expansion underpinned by 4G penetration and RF filter complexity. 5G rollout would be a key catalyst for premium RF filters.
Inari is also well positioned to benefit from biometric identification growth through its IRIS IR chip, higher data traffic via its data server segment and VCSEL related packages.
Globe GTB MK Revenue contribution from the sensor segment is set to expand from 43% in 2017E to 60% in 2018E on higher production capacity for Globe’s light and gesture sensors. Meanwhile, improved product mix would also aid margin expansion.
There should be a scope for new sensor products in 2018E as it has a strong partner with a leading Austrian optical and sensing company. Automotive laser headlamps for a niche LED company could also be a near term catalyst.
Nvidia NVDA US Nvidia is well positioned to benefit from strong addressable market growth in datacentre and automotive, given a durable competitive position resulting from its comprehensive investments in software and ecosystem.
We believe strong top-line growth, together with scope for meaningful gross margin expansion, will drive long-term earnings power toward USD15.
Intel INTC US Our positive view on Intel is driven by the company’s exposure to a large addressable market, an expanding asset portfolio to address emerging artificial intelligence workloads, as well as scope for continued operating leverage.
With shares trading at ~14x our 2018 EPS estimate of USD3.40 and ~12x our estimate of the company’s long-term earnings power of USD4, we view the risk/reward as attractive.
Source: Daiwa forecasts
11
2018 Global Technology Outlook: 2 January 2018
Recap of 2017 highlights in the tech sector
Source: Daiwa
Year of the iPhone cycle
2017 began with strong market expectations of an “iPhone 8” cycle, regardless of the
looming inventory glut in the Android smartphone food chain.
Despite the street forecasting volatility for new iPhone build on uncertainties about spec-
upgrades and preorders, we expect actual shipments in 2H17 to have met our 90m estimate a production base, since the September launch confirmed our spec-upgrade expectation.
Eye-catching 3D lasers
Following on the new iPhone cycle, a side-product that gained perhaps the most traction
with investors in 2017 was 3D laser sensing & imaging technology.
We put out a thematic report in June 2017 aiming to quantify this new laser market and
identify key players in the food chain. The launch of the iPhone X has cemented our thesis.
Android inventory glut
Growth themes playing out
While investors were excited by the 3D laser sensors and new iPhones, an inventory glut in
the Android smartphone space hit the market, due to a component shortage.
Yet we considered this as just a mid-cycle correction since it was supply-driven, not a
demand issue. We expected the excess inventory to normalize in 2H17.
In early 2017, we flagged 6 growth themes that should outgrow the sector average in
revenue terms: multi-cam, OLED, FP, OC, ADAS and IIoT.
We see these themes as playing out well, gauged by their 2017 revenue growth and
performances of the stocks we recommended centering on these themes.
Sustainable commodity cycle
Commodity cycles in the tech space have witnessed an upturn since 2H16, led by memory
chips and display panels, followed by silicon wafers.
Despite market noise about the sustainability of the upturn, 2017 commodity cycles unfolded
in line with our expectations, sustaining the uptrend through the year.
12
2018 Global Technology Outlook: 2 January 2018
Key themes for the tech sector in 2018
Source: Daiwa
Cyclical upturn to resume
We expect the tech industry to have exited 2017 with healthy inventory at the chip level
which should set a good foundation for the SCM up-cycle to resume in 2018, post the mid-cycle correction in 2017.
Yet, we stick with our view that cycles are irrelevant to investments due to the slowdown in smartphone demand growth. Be selective and focus on the shining themes.
Spec upgrades still the focus
In the smartphone market, we’ve flagged 3 themes that should outgrow the market average
through spec-upgrades: multi-cam, OLED and FP.
We continue to like the multi-cam and OLED themes for their multi-year growth on
smartphone penetration hikes. Our key stock calls are: Sony, AAC, Sunny, LGD and LGI.
Structural trends on the rise
Commodity cycle to continue
In the BigData market, we’ve flagged 3 themes for outgrowth: OC, ADAS and IIoT. Thanks
to the cloud infrastructure build and consumer laser ramp-up, we see 4 trends rising structurally for outgrowth: bandwidth, storage, AI and HMI.
We believe key beneficiaries are: WinSemi, LMO, Inari, Globetronics, LGI, SEC, SK Hynix, TSMC, ASE, Ennoconn, Airtac and Nidec.
We expect the commodity cycles to continue their upward trends in 2018, especially in the
memory space including NAND and DRAM.
Although we may encounter a backend-loaded noise of potential oversupply, we see such a
risk as manageable and remain buyers of SEC and SK Hynix.
An iPhone super-cycle?
Bullish investors seem to be heated up by the iPhone X’s OLED and TrueDepth features, on
their belief that 2018 may see a super-cycle for iPhone demand.
Although we’d treat this bull-talk as upside potential, we expect 2018 iPhone sales to grow
by 9% YoY, from our estimate of 220m for 2017.
13
2018 Global Technology Outlook: 2 January 2018
Focus on themes that are set to shine
After witnessing 3 major events in 2017 — namely, the iPhone 10-year anniversary,
Android inventory correction and advent of 3D laser sensors — we expect the technology
industry to end the Year of the Rooster with healthy inventory at the chip level. This should
set the foundations for the semiconductor contract manufacturing (SCM) sector to resume
its cyclical upturn in 2018. That said, we see modest revenue growth for the SCM sector in
2018, as the industry is still in transition with demand shifting from mobile computing
devices (MCD) to the Big Data/Internet of Things (Big Data/IoT) cycle. Therefore, we
reiterate our view that, when it comes to tech investments, chip cycles are largely
irrelevant; be selective and focus on companies that can outgrow the sector average by
capitalising on growth themes/structural trends that are set to shine post the smartphone
era.
In our 2017 Tech Outlook report (Multiple themes emerging to shine, 6 January), we
flagged 6 emerging themes, comprising: 1) multiple cameras (multi-cam), organic light
emitting diode display (OLED) and fingerprint (FP) through smartphone spec-upgrades
under the MCD cycle, and 2) optical communications (OC), advanced driver assistance
systems (ADAS) and industrial IoT (IIoT) under the Big Data/IoT cycle. For MCD, we
continue to like the multi-cam and OLED themes for their multi-year demand growth on
rising penetration in smartphones, but we have become downbeat on FP due to substitute
threats from alternative technologies such as 3D laser sensors.
For the Big Data/IoT cycle, we highlight 4 structural trends that we expect to shine:
bandwidth, human machine interface (HMI), artificial intelligence (AI) and storage. Active
builds of the cloud computing infrastructure to facilitate surging data consumption have
spurred demand for bandwidth, storage and compute upgrades, respectively benefiting: 1)
fibre-optic (FO) transceiver makers in the OC industry which play a crucial role in both
datacom and telecom data-transmission backbones, 2) memory makers of NAND for
enterprise solid state drives (SSD) and DRAM for servers’ in-memory compute, and 3)
high-performance computing (HPC) chipmakers for big-data analytics leading to a trend of
AI/deep-learning (DL) for cross-platform applications, from the cloud to edge computing.
Last but not the least, a fraction of the OC players are leveraging their laser knowhow and
making inroads into the consumer space, including smartphone and automotive, offering
3D laser sensing & imaging technologies to create new demand and help enhance HMI.
Recap of 2017
2017 began with market expectations of a strong “iPhone 8” cycle, on the back of the
iPhone’s 10-year anniversary, where some investors even envisioned a “super-cycle” to
boost the share-price performances of “Apple plays”. Despite zigzag street expectations of
the new iPhone build as a result of market noise on spec-change uncertainties such as
production yields, supply constraints and technology bottlenecks, all spec changes,
particularly for the iPhone X model, were broadly in line with our expectations (Greater
China Smartphones: All eyes on the iPhone X, 13 September). Therefore, regardless of
the street’s lingering uncertainties about the actual build on perceived iPhone 8/8+ sell-
through weakness and iPhone X yield issues, we expect 90m new iPhones to have been
shipped in 2017 on a production base, with strength geared toward the iPhone X at the
expense of the iPhone 8/8+.
We believe yield improvements in the iPhone X supply-chain are intact and expect
counter-seasonal strength for the iPhone X model in 1Q18 (Greater China Smartphones:
Near-term hiccup for iPhone X a buying opportunity, 23 October). This should allow
2017 total iPhone shipments to meet our estimate of 220m, up 3% YoY – unlikely to be
merited as a “super-cycle” but still a decent recovery, in our opinion, considering the 7%
YoY shipment decline in 2016.
2018 looks set to be a
good year for tech on
account of healthy
inventory
But cycles are irrelevant
to investments, in our
view
Focus on growth themes
for outperformance; we
present: multi-cam,
OLED, bandwidth, AI,
HMI and storage
2017 started with strong
expectations for the
“iPhone 8” cycle
14
2018 Global Technology Outlook: 2 January 2018
A side-product that gained investor traction and even overrode the iPhone cycle to become
the most eye-catching theme in 2017 was perhaps 3D laser sensing & imaging technology,
which is finding new applications in the smartphone space, after the market realised
Apple’s intention to build such technology into its flagship iPhone model. Daiwa’s tech
team addressed these new technology applications on 28 June with a comprehensive
thematic report (Asian Optical Sensing & Communication: A whole new world), in an
attempt to quantify the total addressable market (TAM), identify the major players in this
consumer laser food chain, and conclude our key stock calls in Asia under this new theme:
WinSemi and Globetronics, as well as LG Innotek (Initiation: key beneficiary of new
optical solution trend, 8 September). The launch of the iPhone X – Apple’s flagship
model of 2017 with a front camera embedded for the first time with a 3D laser sensor
named TrueDepth camera to handle facial recognition in a 3D format (ie, face ID) – has
further cemented our thesis on this fast-growing consumer laser market in the next few
years.
Just as investors were busy figuring out what exactly the new iPhone specs would be and
finding out who the beneficiaries of the eye-catching 3D lasers would be, an inventory
issue loomed and hit the market in 1H17, driven primarily by the Android smartphone food
chain. Nevertheless, we saw just a mid-cycle correction this time, rather than a severe
cyclical downturn, because we believed this inventory glut was supply-driven, not a
demand issue due to component shortages such as LCD panels, memory chips and
passive components. We therefore expected a demand snapback to normalise the excess
inventory in 2H17. TSMC’s comments on its 3Q17 results call reinforced our view on this
inventory normalisation (TSMC: Watch out for near-term volatility, 19 October), which
was further supported by our inventory monitor statistics. Indeed, quality stocks focusing
on the right growth themes were well shielded against the inventory glut this time, which
deviated from what history would suggest as a “high tide lifts all boats” and suggested the
market’s agreement with our big-picture view that:
The chip cycle is irrelevant during a demand transition from an MCD to a Big
Data/IoT cycle; focus on companies able to capitalise on the growth themes post the
smartphone demand slowdown.
As highlighted in our 2017 Tech Outlook report, we expected 6 themes in the sector to
emerge and outgrow the industry averages: multi-cam, OLED, FP, OC, ADAS and IIoT.
Among the 6, the first 3 are still MCD-driven where we forecast their revenue to outgrow
the smartphone average, thanks to accelerated penetration as a result of smartphone
spec-upgrades. The latter 3 are Big Data/IoT-driven, which should enjoy more structural
revenue growth than the first 3 since the demand cycle they are in is still young, in our
view. Our calls appear to have played out well since the 6 themes outgrew the smartphone
and chip sector averages in revenue terms, and as we addressed in the previous section,
stocks we recommended centring on the 6 themes outperformed the benchmark indices in
2017.
Last but not least, commodity cycles in the tech space have witnessed an upturn since
2H16, led by memory chips including NAND flash and DRAM, as well as flat-panel
displays, followed by silicon wafers across 300mm and 200mm, thanks primarily to under-
investments in these industries for years. Despite some concerns about the sustainability
of these commodity cycles, 2017 indeed unfolded in line with our expectations where these
commodities, especially memory chips and wafers, sustained their up-cycles through the
year.
3D lasers emerged to
gain traction with
investors
An Android inventory
glut caused a mid-cycle
correction …
… but was irrelevant to
investments as our
focus was on growth
themes
The upturns in memory
chips and silicon wafers
were sustained in 2017
15
2018 Global Technology Outlook: 2 January 2018
Outlook for 2018
Healthy inventory sets the foundation for an upturn to resume
“Where are we in the cycle?” remains one common question asked by tech investors,
despite the fact that we are in a secular demand transition. Therefore, as usual, we begin
our discussion of the 2018 tech outlook with fabless chip inventory, a barometer we use to
monitor the health of the tech industry. The global fabless chip inventory surprised us in
2017, surging to an all-time high at end-1Q17 on component shortages such as memory
chips and LCD panels. But this surge didn’t worry us since we believed it was supply-
driven, not a demand issue, and therefore expected some demand snapbacks in 2H17 to
help normalise the excess.
As we expected, destocking accelerated on demand snapbacks after the slow digestion in
2Q17, pushing down chip inventory to 73 days at end-3Q17, thanks to demand strength
from gaming, crypto-currency, automotive, datacentre and new smartphone launches
across Android and iOS platforms. Against the backdrop of supply-chain business
dynamics in 4Q17, we expect the chipmakers to exit 2017 with healthy inventory, hovering
around the 70-day level. This should set good foundations for the SCM sector to resume
its cyclical upturn in 2018, post the mid-cycle correction in 2017.
Chipmakers appeared to be overbuilding in 2H16 post the 2015 downturn, in our opinion,
with the situation further worsened by the component shortages, resulting in the 1Q17
inventory surge, particularly in the Android smartphone food chain. Despite slow digestion
in 2Q17, most fabless chipmakers we monitor saw their inventory normalise at end-3Q17,
except Realtek and MediaTek, which seemed to be keeping inventory high on their positive
business expectations.
Major fabless chip inventory trend* September-quarter fabless chip inventory breakdown*
Source: Company, Daiwa estimates Note: * A total of 13 fabless chipmakers monitored by Daiwa that represent c. 70% of global
fabless chip revenue
Source: Company, Daiwa estimates Note: * In dollar terms; a total of 13 fabless chipmakers monitored by Daiwa excluding BRCM
and ALTR due to M&As
Major fabless inventory status at September-quarter end* Major fabless revenue growth guidance for December-quarter*
Source: Company, Daiwa estimates Note: * Marvell is offering a deal to acquire Cavium
Source: Company, Daiwa forecasts Note: *Mid-point of guidance range; Realtek not available
30
40
50
60
70
80
90
1Q00
4Q00
3Q01
2Q02
1Q03
4Q03
3Q04
2Q05
1Q06
4Q06
3Q07
2Q08
1Q09
4Q09
3Q10
2Q11
1Q12
4Q12
3Q13
2Q14
1Q15
4Q15
3Q16
2Q17
Fabless inventory Average
Day
Qualcomm32%
Mediatek19%
NVidia14%
AMD 13%
Xilinx3%
Cirrus Logic3%
Realtek3%
Novatek3%
Dialog Semi3%
Marvell 3%
Himax2%
Silicon Lab1%
Sunplus1%
0
20
40
60
80
100
120
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Where are we in the
cycle?
Healthy inventory should
introduce a cyclical
upturn into 2018
16
2018 Global Technology Outlook: 2 January 2018
Fabless chip revenue aggregately reached the high end of companies’ guidance ranges,
rising by 14% QoQ in 3Q17 regardless of the high base (up 9% QoQ in 2Q), thanks to
demand strength at graphic vendors Nvidia and AMD, which both beat guidance, and at
Dialog Semi and Cirrus Logic on the new iPhone build, as well as at Himax on new product
ramp. Restocking from the Android smartphone food chain also helped 2 heavyweight
chipset vendors, Qualcomm and MediaTek. Looking into 4Q17, the chipmakers we monitor
expect roughly flat QoQ revenue on an aggregate basis, per their guidance, which we
consider healthy given the 2 consecutive quarters of above-seasonal strength in 2Q and
3Q (see Appendix 2 for details).
As usual, we look at the growth differential among the front-end foundries, back-end
outsourced semiconductor assembly and test (OSAT) vendors and fabless chipmakers as
a precursor to gauge inventory dynamics. Our assessment suggests the fabless chip
inventory will drop slightly in 4Q17 to 71-72 days, barring any skew factors such as
inventory write-offs and M&A. Foundry revenue seemed to be strong for 4Q per guidance
and our forecasts, but it should contract QoQ if we exclude the A11 application processor
(AP) build at TSMC that powers the new iPhones. This foundry seasonal weakness ex-
A11, together with muted revenue growth at OSAT players, suggests that demand growth
from fabless chipmakers should be met by inventory drawdowns, resulting in continued
inventory depletion as they exit 2017.
Foundry/OSAT/fabless revenue growth differentials (4Q17) Major SCM revenue growth guidance for December-quarter*
Source: Company, Daiwa forecasts Note: * Dedicated foundries only, excluding part-time IDMs such as SEC and Intel; ** Dedicated
OSAT makers only, excluding part-time IDMs
Source: Company, Daiwa forecasts Note: * Mid-point of guidance range; ASE on OSAT business only; SPIL and JCET not available
Global SCM revenue forecasts (quarterly)* Revenue growth comparison: SCM vs. chip average*
Source: Company, Daiwa forecasts Note: * Dedicated foundries and OSAT makers only, excluding part-time IDMs
Source: Company, Daiwa forecasts Note: * Excluding memory chips
-2%
0%
2%
4%
6%
8%
Foundry* Foundry ex-A11 OSAT** Fabless
QoQ
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
TS
MC
HH
Sem
i
SM
IC
AS
E
VIS
Am
kor
UM
C
JCE
T
SP
IL
Fou
ndry
OS
AT
QoQ
-30%
-20%
-10%
0%
10%
20%
30%
40%
0
5,000
10,000
15,000
20,000
25,000
30,000
1Q05
4Q05
3Q06
2Q07
1Q08
4Q08
3Q09
2Q10
1Q11
4Q11
3Q12
2Q13
1Q14
4Q14
3Q15
2Q16
1Q17
4Q17
E
3Q18
E
2Q19
E
Foundry revenue OSAT revenue Combined growth (YoY)
USDm
(50%)
(30%)
(10%)
10%
30%
50%
70%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
E
2018
E
2019
E
2020
E
Chip revenue growth* SCM revenue growth
Fabless revenue growth
seemed to be healthy in
4Q17
Supply-chain dynamics
suggest continued
inventory depletion in
4Q17
17
2018 Global Technology Outlook: 2 January 2018
But growth should remain modest post the correction
The SCM sector saw a counter-seasonal 2H16 in revenue terms which led to a sub-
seasonal 1H17 for inventory adjustments, on top of the component-shortage issue. Again,
per our inventory assessment, we see this as just a mid-cycle correction and forecast
sector revenue to increase by 6% YoY for 2017, followed by a stronger 9-10% pa in 2018
and 2019, with strength driven by broad-based chip restocking and the rising trend of AI
spurring demand for HPC processors across devices from cloud to the edge-computing
(see the next section for an elaboration on this AI topic).
On quarterly linearity, we expect the SCM sector, after the 2017 mid-cycle correction, to
resume its cyclical uptrend in 2018 and sustain the strength into 2019 regardless of
seasonal volatility. Using the SCM sector as a proxy, we see a similar pattern in the global
chip sector but with a lower growth trajectory, since the SCM players have structurally
gained market share against IDMs. We forecast global semiconductor revenue (ex-
memory) to rise by 7% YoY for 2018 and 5% YoY for 2019, following 8% YoY growth for
2017, or strong 21% YoY growth if including memory chips.
Despite the resumption of the SCM cyclical upturn, however, global chip revenue growth
ex-memory in the next 2 years should remain modest since smartphones as the big-ticket
item, which account for roughly 1/3 of chip demand, have tapered off in growth terms. This
demand slowdown, together with muted PC and digital consumer demand growth, appears
to have prompted cautious inventory rebuilds post the 2015 downturn, though component
shortages as a result of a recovery in commodities such as memory, discrete and LCD
have distorted supply-chain management and induced inventory volatility.
We forecast smartphone shipments to rise by around 5% YoY for 2017 and growth to hover
within a single-digit growth range in 2018-20, with incremental growth being driven by 4G
migration in emerging markets (EM). We expect 4G penetration to rise from c.65% in 2017
to over 80% in 2020. Since the next demand cycle of Big Data/IoT may not increase in size
until 2019, in our view, we expect only modest revenue growth in the global chip/SCM
sector over 2015-19 during this MCD-to-Big Data demand transition.
Global chip revenue growth forecast (annual) Global chip revenue growth forecast (quarterly)*
Source: Company, Daiwa forecasts Note: *excluding memory devices like DRAM and NAND
Source: WSTS, Daiwa forecasts Note: * excluding memory devices like DRAM and NAND
-30%
-20%
-10%
0%
10%
20%
30%
40%
0
50
100
150
200
250
300
350
400
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
E
2020
E
Semiconductor* Growth (RHS)
USDbn
-10%
0%
10%
20%
30%
40%
50%
60%
0
10
20
30
40
50
60
70
80
90
1Q10
3Q10
1Q11
3Q11
1Q12
3Q12
1Q13
3Q13
1Q14
3Q14
1Q15
3Q15
1Q16
3Q16
1Q17
3Q17
1Q18
E
3Q18
E
Semiconductor* Growth (YoY)
USDbn
We forecast global chip
revenue ex-memory to
rise by 7%/5% for
2018/19 due to …
… a slowdown in
smartphone demand
18
2018 Global Technology Outlook: 2 January 2018
Global smartphone demand forecasts 4G penetration in global mobile handset market
Source: IDC, Daiwa forecasts
Source: IDC, Daiwa forecasts
Global PC demand forecasts* Global tablet PC forecasts
Source: IDC, Daiwa forecasts Note: * Excluding tablet PCs
Source: IDC, Daiwa forecasts
Will 2018 see an iPhone super-cycle?
While we expect iPhone production in 2017 to have resumed modest 3% YoY growth after
a 7% YoY decline a year ago, bullish investors we’ve interacted with seem to be expecting
a super-cycle for 2018 new iPhones (say, the iPhone 11) in volume terms, with a strong
double-digit percentage YoY growth driven by the success of the iPhone X’s new features
such as TrueDepth and OLED panels, as well as by their expectations for the 2 features to
be included for all iPhone 11 models. Although we would treat this bullish expectation as
providing upside potential to our earnings forecasts for Apple plays under our coverage, we
forecast iPhone production in 2018 to increase by 9% YoY to 240m units, where we expect
the iPhone 11 family to cover 3 models, likely 2 OLED and 1 LCD versions, all having 3D
laser sensing & imaging solutions (for more details, please see The more the merrier –
multi-cameras are the next mega trend in smartphones (Part 3), 6 December 2017).
Consequently, we expect the iPhones to sustain a share of around the 15% level of the
global smartphone market.
Post the demand slowdown after 2015, we view the smartphone market as consolidating
into 2 segments: economy and premium, with Apple, SEC and Huawei dominating in the
premium segment, while other brands from China and emerging markets control the
economy segment. In the premium segment, Apple plays remain one of our investment
focuses in the smartphone space, where we prefer Catcher (Buy [1]), Largan (Buy [1])
and AAC (Buy [1]), for their competitive industry positions to benefit from the smartphone
spec-upgrades, explicitly or implicitly, on top of the multi-cam penetration trend. These
upgrades include casing, acoustics and antenna-module upgrades.
0%
10%
20%
30%
40%
50%
0
500
1,000
1,500
2,000
2010
2011
2012
2013
2014
2015
2016
2017
E
2018
E
2019
E
2020
E
Smartphone Growth (RHS)
m units
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
0
500
1,000
1,500
2,000
2010
2011
2012
2013
2014
2015
2016
2017
E
2018
E
2019
E
2020
E
2G/2.5G 3G 4G 4G penetration (RHS)
m units
(15%)
(10%)
(5%)
0%
5%
10%
15%
20%
0
50
100
150
200
250
300
350
400
2010
2011
2012
2013
2014
2015
2016
2017
E
2018
E
2019
E
2020
E
Desktop Notebook Growth (RHS)
m units
(40%)
(20%)
0%
20%
40%
60%
80%
100%
0
50
100
150
200
250
2011
2012
2013
2014
2015
2016
2017
E
2018
E
2019
E
2020
E
Tablet Growth (RHS)
m units
We forecast 2018 iPhone
production to rise by 9%
YoY to 240m units
Our preferred Apple
plays: Catcher, Largan
and AAC
19
2018 Global Technology Outlook: 2 January 2018
Apply plays and revenue exposure Global smartphone market-share trend
Sales contribution from Apple
Company Ticker Rating 2016E 2017E 2018E
Catcher 2474 TT Buy 55-60% 55-60% 55-60%
Largan 3008 TT Buy 45-50% 45-50% 45-50%
AAC 2018 HK Buy 45-55% 45-50% 45-50%
WinSemi 3105 TT Buy 20-30% 20-30% 20-30%
ASE 2311 TT Buy 25-30% 20-25% 20-25%
TSMC 2330 TT Outperform 15-20% 15-20% 15-20%
GIS 6456 TT Hold ~90% ~90% ~90%
Casetek 5264 TT Hold 85-90% 85-90% 85-90%
Pegatron 4938 TT Hold 65-70% 65-70% 65-70%
TPK 3673 TT Hold 50-60% 50-60% 50-60%
Hon Hai 2317 TT Hold ~50% ~50% ~50%
Source: Daiwa estimates and forecasts
Source: Gartner, “Market Share: PCs, Ultramobiles and Mobile Phones, All Countries, 3Q17 Update", by Mikako Kitagawa, Anshul Gupta, Roberta Cozza, Ranjit Atwal, David Glenn, Kanae Maita, Meike Escherich, Annette Jump, Lillian Tay, Tuong Huy Nguyen, Bruno Lakehal, Tracy Tay, Annette Zimmerman, CK Lu and Angie Wang published on 16 November 2017
iPhone X teardown by key supply-chain vendor
Source: Daiwa
0%
5%
10%
15%
20%
25%
30%
35%
40%
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
Apple China brands Samsung
LG Sony Nokia
HTC BlackBerry Others
A11 AP BionicTSMC
ModemQCOM, INTC
(SCM partners: TSMC, UMC, ASE,
SPIL, Amkor)
ConnectivityAVGO, NXP
(SCM partners: TSMC, ASE, SPIL,
Amkor)
WiFi PAMurata
(SCM: WinSemi)
Force touchAVGO (chip)
Nissha (sensor)GIS, TPK (lamination)
MEMS sensorInvenSense (chip)
ASE (SiP)
Camera moduleLGI, Sharp, Cowell,
O-film, Hon Hai
Silicon SiP Component
AMOLEDSEC
Camera lensLargan, Kantasu,
Genius
CISSony
AccousticAAC, Goertek, Merry
HapticsAAC, Nidec, Alps
Assembly
Hon HaiPegatron (8/8+ only)Wistron (8/8+ only)
Metal frameHon Hai, Foxconn
Tech, Jabil
FPCBZD Tech, NOK,
Flexium, Fujikura, Sumitomo, Career, Interflex, MFLEX
Battery cellLG Chem, Samsung
SDI, TDK/ATL, Tianjin Lishen
MLCCMurata, SEMCO, Taiyo Yuden, TDK
Cellular PAAVGO, Qorvo, SWKS
(SCM partners: WinSemi, AWSC,
ShunSin)
VCM/OISAlps, Mitsumi
Wireless chargingAVGO
3D laser sensorLumentum, ams
(SCM: IQE, WinSemi)
MemorySEC, Toshiba, SK
Hynix, Micron
PMICDialog Semi
(SCM partners: TSMC, VIS, SPIL)
Laser sensor moduleLG Innotek, Globetronics
Glass coverLens Technology,
Biel Crystal
20
2018 Global Technology Outlook: 2 January 2018
Daiwa's 2018 growth themes and structural trends in the tech space
Source: Daiwa
Focus on growth themes and structural trends
Although we expect healthy chip inventory to set a good foundation for the cyclical upturn
to resume in the SCM space, we see modest revenue growth for the sector in 2018-19
given it is still undergoing an MCD-to-Big Data/IoT transition. So, we reiterate our view that
the chip cycles are irrelevant to our investment approach during the transition; and we
advise investors to be selective and focus on companies that are able to outgrow the
sector average by capitalising on growth themes/structural trends that are set to shine post
the smartphone era.
Recall that in our 2017 Tech Outlook report, we flagged 6 themes that we believed would
emerge to shine: multi-cam, OLED and FP under the MCD cycle, and OC, ADAS and IIoT
under the Big Data/IoT cycle. For MCD, we continue to push multi-cam and OLED for their
multi-year growth on accelerated penetration in the smartphone market for spec-upgrades,
but we drop FP due to substitute threats from alternative technologies such as 3D laser
sensing and other optics solutions. For the Big Data/IoT demand cycle, we envision 4
structural trends rising to shine: bandwidth, storage, AI and HMI.
Active builds of cloud computing infrastructures to facilitate the surging data consumption
have spurred demand for bandwidth, storage and compute upgrades, respectively benefiting:
1) FO transceiver makers in the OC industry which play a crucial role in servicing both
datacom and telecom data-transmission backbones, 2) memory producers for NAND-based
SSD and DRAM-based in-memory server compute, and 3) HPC processor vendors for big-
data analytics which are further leading to a trend of AI/DL for cross-platform applications
with footprints expanding from the cloud to edge computing. Further, against the backdrop of
OC players leveraging their laser knowhow and making inroads into the consumer space,
including smartphone and automotive, the 3D laser sensing & imaging technologies are
rising to create new demand markets for hefty growth, helping enhance HMI to redefine the
way people interact with machines.
MCD: multi-year growth on smartphone spec-upgrades
Since the publication of our Big Data/IoT report (Big Data: the next big thing, 2 January
2015), we have envisioned the MCD demand cycle, led by smartphones, tapering off in
growth terms, while Big Data, spurred by the proliferation of IoT demand, takes over to
become the next secular demand cycle. Yet the transition doesn’t look to be smooth, as it is
taking time for the IoT market to ramp up in scale. We forecast the IoT market to overtake the
MCD market in dollar terms in 2019, at the earliest, leaving a transitional gap of 2015-18 with
modest growth for the tech sector as a whole. That said, we have outlined our expectation for
multi-cam, OLED and FP in the MCD cycle to outgrow and help bridge the transition, thanks
to smartphone vendors’ spec-upgrades in attempts to retain consumer traction. For 2018,
despite the rising threat of substitutes in the FP segment, we still like multi-cam and OLED.
We see 6 themes shining
for 2018: multi-cam,
OLED, bandwidth,
storage, AI and HMI
We favour multi-cam and
OLED in the MCD cycle
21
2018 Global Technology Outlook: 2 January 2018
Multi-cam and OLED on smartphone spec-upgrades remain our growth focus in the MCD cycle
Source: Daiwa Note: * MCD includes smartphone and tablet devices only
MCD growth theme No.1: multi-cam
Smartphone vendors’ continuing search for picture quality enhancement is perhaps one of
the most compelling differentiators, among others, to retain consumer traction amid the
demand slowdown. In 2017, we flagged the multi-cam trend as a shining theme in the
smartphone market for outperformance as vendors began to adopt dual-cam/triple-cam for
optimisation among light sensitivity, pixel size and form factor (Z-height), in order to
enhance image quality and facilitate the rising trend of augmented reality (AR) (The more
the merrier: multi-cameras are the next mega trend in smartphones; 2 August 2016).
The multi-cam adoption rates appear to have risen ahead of our previous expectation, on
our observation in the past few months, with smartphone penetration likely to reach 17% in
2017. We therefore recently revised up our penetration assumptions to 30% for 2018E
(previous: 25%), 40% for 2019E (33%) and 47% for 2020E (40%). We forecast multi-cam
smartphone shipments, after strong 267% YoY growth for 2017E, to rise at a 47% CAGR
to over 850m in 2020E, from 268m in 2017 and 502m in 2018E. This suggests that the
total multi-cam market, denoted by rear-cams as shown in the chart below, will expand at a
10% CAGR to nearly USD20bn in 2020E, from USD15bn in 2017E (up 20% YoY). This
compares with a roughly flat CAGR for total smartphone revenue over the same period.
Multi-cam penetration in the smartphone market Smartphone camera market forecasts: front vs. rear
Source: Daiwa estimates and forecasts Source: Daiwa estimates and forecasts
0
100
200
300
400
500
600
700
2010
2011
2012
2013
2014
2015
2016
2017
E
2018
E
2019
E
2020
EMCD* IoT
USDbn
MCD-to-IoT transition
0%
10%
20%
30%
40%
50%
0
500
1,000
1,500
2,000
2010
2011
2012
2013
2014
2015
2016
2017
E
2018
E
2019
E
2020
E
Multi-cam Single-cam Multi-cam penetration
m units
0%
10%
20%
30%
40%
50%
0
5,000
10,000
15,000
20,000
25,000
30,000
2010
2011
2012
2013
2014
2015
2016
2017
E
2018
E
2019
E
2020
E
Rear-cam Front-cam
Rear-cam growth Total-cam growth
USDm
We forecast a multi-cam
revenue CAGR of 10%
for 2017-20, vs. flat
growth for the
smartphone average
22
2018 Global Technology Outlook: 2 January 2018
Smartphone camera module food chain
Source: Daiwa
Key beneficiaries
Among the players across the smartphone camera food-chain to benefit from the multi-
cam story, our focus of investment is on the segment leaders which we believe will capture
the most value in the chain. We like Sony (Buy [1]) (IDM) and SMIC (Hold [3]) (foundry)
at the CMOS image sensor (CIS) chip end, Largan at the high-end lens set, Sunny
Optical (Buy [1]) at the lens set/module end, as well as LG Innotek (LGI: Buy [1]) and
SEMCO (Buy [1]) at the module end. In addition, we add AAC (Buy [1]) to our 2018 picks
given its business breakthrough in the optics solutions as a newcomer to capitalise on this
multi-cam story. CIS chip packager XinTec looks to be a name to watch. Please refer to
Daiwa’s smartphone analyst Kylie Huang’s sector update for more details: The more the
merrier: multi-cameras are the next mega trend in smartphones (Part 3), 6 December
2017.
MCD growth theme No.2: OLED
Whereas LCD is the mainstream panel solution for smartphones, OLED is gaining traction
from consumers given its better display quality and attractive features such as curved or
bendable form-factors, despite its higher cost. Thanks to the launch of the iPhone X, we
expect OLED-configured smartphone shipments to accelerate from 2H17 and enjoy a
strong 29% CAGR over 2017-20. We forecast OLED penetration in the mobile display
market – a proxy for smartphones – to reach nearly 50% in 2020, from 25% in 2017 and
32% in 2018, resulting in a 29% CAGR for the OLED market in dollar terms over 2017-
20E, with a size exceeding USD30bn in 2020E. This compares with just an 8% CAGR for
the total mobile display market over the same period.
Key beneficiaries
In the OLED space, we prefer the industry leaders and their food-chain partners owing to
the technology complexity where we believe yields are crucial to meet demand, rather than
any aggressive investment in capacity. We understand panel makers such as BOE
Technology Group in China have announced aggressive expansion plans to tap into the
OLED market, but the pace at which they turn built capacity into “effective capacity”
remains uncertain, in our opinion. We see Samsung Electronics (SEC) (Buy [1]) (through
Samsung Display) as the key beneficiary, given the group’s industry dominance. Other
potential beneficiaries we see from the food chain include SFA Engineering, AP Systems
and Universal Display (OLED US, USD174.80, not rated). Among other newcomers with
market-share potential, LG Display (LGD: Buy [1]) stands out for us, given its business
opportunity of potentially becoming the most viable second source for smartphone
vendors, likely in 2019.
CIS wafer fabrication
IDMSony, SEC, Canon, OnSemi, Toshiba, STMicro, Nikon
FablessOVTi, Aptina, GalaxyCore, PixArt, Novatek
FoundryTSMC, SMIC (LFoundry), Vanguard, UMC
XinTecKingpakTerrasem CoLite-OnTong Hsing
Lens setLargan, Kantatsu, SEMCO, Sunny Optical, Genius, Glorytek, Sekonix, Kolen, Diostech, AAC
VCM/OISAlps, Mitsuni, TDK
Lite-On TechSunny OpticalSEMCOLG InnotekPrimaxCowellO-FilmTrulyQtechSharpHon Hai
CIS chip packaging & test Key component manufacture Camera module assembly
Our multi-cam picks are
Sony, AAC, Sunny
Optical and SEMCO
We forecast the mobile
OLED market to grow at
a 29% CAGR over 2017-
20 in dollar terms
We like LGD and SEC in
the OLED space
23
2018 Global Technology Outlook: 2 January 2018
OLED penetration in the mobile device market Mobile device OLED market forecasts
Source: Daiwa forecasts
Source: Daiwa forecasts
Mobile OLED panel food chain
Source: Daiwa
Big Data: structural trends that rise to shine
Recall in our 2015 Big Data report that we categorised “5+1” demand verticals under the
Big Data/IoT demand cycle, where 5 functionalities should serve as the core, cross-
platform hardware requirement to facilitate the new ecosystem post the smartphone era:
data access, data process, data transmission, data storage, and data security. Thanks to
the cloud infrastructure builds by hyper-scale datacentre operators ahead of the cycle to
facilitate the surging data consumption, demand for data transmission bandwidth and
storage density is accelerating, so is demand for compute which is further leading to an AI
trend, against the backdrop of continued advances of Moore’s Law. Last but not least, with
2017 a milestone-year for Apple to start applying 3D laser sensing & imaging technologies
in the iPhone X, another trend of HMI enhancement appears to be rising to redefine the
way people interact with machines.
Rising structural trends under the Big Data/IoT cycle from hardware perspective
Source: Daiwa
0%
10%
20%
30%
40%
50%
60%
0
500
1,000
1,500
2,000
2,500
2014 2015 2016 2017E 2018E 2019E 2020E
OLED LCD OLED penetration
m units
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
0
10,000
20,000
30,000
40,000
50,000
2014 2015 2016 2017E 2018E 2019E 2020E
OLED LCD Growth - OLED Growth - total
USDm
Key materials
LG Chem, Samsung SDI, Dow Chemical, Merck, Duksan Neolux, Tosoh SMD,Doosan, UDC, NSSC, Chisso, Heesung Electronics, SFC,Idemitsu Kosan, Toray, LTC
CleanerKCTech, SEMES, DMS, STI,Invenia
EvaporatorTokki, SFA Engineering, Yas, AP Systems, Wonik, Sunic System
EncapJusung Engineering, AVACO, Top Engineering, AP Systems,Invenia, Kateeva
FlexibleTera Semicon, AP Systems, Viatron Technologies, EO Technics
TesterSoulbrain ENG, KMAC, Invenia,HB Technology, Orbotech,Youngwoo DSP, Gigalane
ModuleSFA Engineering, Top Engineering
Logistics
SFA, Toptec, AVACO, VesselOn
Evaporation Encapsulation Post process
Ban
dw
idth
Sto
rag
eH
MI
AI
Bandwidth, storage, AI
and HMI
24
2018 Global Technology Outlook: 2 January 2018
Big Data growth trend No.1: bandwidth
In our optical communication (OC) initiation report, (Head for the leading lights, 17
February 2016), we concluded that in the global IT demand evolution, although it takes
time for the IoT cycle to ramp up in scale and bridge its transitional gap with the MCD
cycle, the OC sector should ramp up ahead of the pack due to its infrastructure position in
the IT industry handling bandwidth upgrades to facilitate surged data transmissions in wire-
line communication infrastructure for both telecom and datacom. In the wireless data
communication, we expect the next generation of architecture – the 5G cellular network –
to be commercialised in 2019 at the infrastructure level for wireless bandwidth upgrade to
complete the entire data transmission ecosystem. This should further spur demand for
high-bandwidth FO transceivers for 5G base-station interconnectivity.
We expect the global OC market, taking a pause over 2016-17 due to China’s fibre-to-the-x
(FTTX) inventory glut, to resume growth post the correction, with demand being driven by:
1) bandwidth upgrades from datacom which is seeing bandwidth migrating from 10/40
gigabits per second (Gbps) to 25/100Gbps at hyper-scale datacentres, 2) telecom
architecture where China has started deploying 10Gbps passive optical networks (PON) in
2H17 at the access-point levels of the optical line terminals (OLT), as well as 3) 5G cellular
infrastructure builds aforementioned. The 10G PON upgrades at consumer levels of optical
network unit (ONU) will likely begin in 2019, further adding to demand upside. We forecast
the global OC market to rise by 12% YoY for 2018 and exceed USD70bn in 2020E for a
13% CAGR over 2017-20E. Within the OC space, growth of the silicon-photonic (SiPh)
market will perhaps be the most eye-catching, on our forecasts, enjoying a hefty 66%
CAGR over 2017-20E with a size exceeding USD4bn in 2020, thanks to Intel’s share gain
in the global datacentre market.
Key beneficiaries
In the global OC food chain, we believe the highest value proposition, in terms of profit
margins enjoyed from value-add processes, lies in the fully integrated device
manufacturers (IDM) such as Broadcom (AVGO US; USD260.42, Outperform [2]),
Lumentum and Finisar (FNSR US, USD20.45, not rated), as well as the upstream
epiwafer makers due to their high technology entry-barriers relative to the downstream
optical subassembly (OSA) makers and module assemblers. In the epiwafer-growing
segment of the chain, our investment focus has been on LandMark Opto (LMO:
Outperform [2]) – the global leader in the merchant market for optical contract
manufacturers. VPEC appears to be another name to watch, given its expanded footprint
in OC, from microwave communication (MC) epiwafer supply.
Inari (Buy [1]) stands to benefit, in our view, given its strategic position in the Broadcom
food chain. We also see PCL Tech as a name to watch in this Broadcom food chain.
WinSemi (Buy [1]), in spite of its leadership in 6” wafer (chip) foundry for the consumer
lasers, should possess potential in the infrastructure lasers with its ambition to penetrate
the high-valued epiwafer growing and chip foundries. We believe Accelink is worth
watching given its leadership in China’s OC industry.
Global OC market forecasts (infrastructure laser) Global SiPh market forecasts
Source: PTIDA, Daiwa forecasts Source: Daiwa forecasts
0%
5%
10%
15%
20%
25%
30%
0
20,000
40,000
60,000
80,000
2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E
Datacentre FTTX
MSA infrastructure Growth (RHS)
USDm
0%
50%
100%
150%
200%
250%
300%
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E
Silicon Photonics Growth (RHS)
USDm
OC demand drivers:
bandwidth upgrades
from datacom, telecom
and 5G interconnectivity
We forecast the OC
market to pass its trough
and grow at a 13% CAGR
over 2017-20E
In the OC space, we
prefer LMO and Inari
under Daiwa’s coverage
25
2018 Global Technology Outlook: 2 January 2018
Global fibre-optic (FO) transceiver food chain
Source: Daiwa
Big Data growth trend No.2: HMI
Leveraging on their core technologies of compound semiconductors, laser players are
expanding their footprints from the infrastructure laser (ie, OC) space into consumer
electronics aiming to broaden their addressable markets. With lasers likely offering an
optimal solution for 3D sensing & imaging (see our Asian OSC report: a whole new
world, 28 June 2017), we expect consumer lasers, mainly in the form of vertical cavity
surface emitting lasers (VCSEL) – a type of light emitting technology – to be the key
beneficiaries of the fast-growing demand for HMI enhancement across smartphone,
automotive, and other applications such as industrial, healthcare and smart-home IoT.
We forecast the consumer laser market to expand by a 108% CAGR over 2017-20E to
exceed USD10bn, thanks to it being in the infant stage of its product life cycle, with the first
phase of growth led by smartphones and followed by laser lighting and light detection and
ranging (LiDAR). These new demand drivers, together with data transmission bandwidth
upgrades from the existing market for infrastructure lasers, make the overall laser sector
attractive for structural investment, in our view, given that these applications all share the
same laser technologies of epiwafer growing, chip designing and manufacturing.
In the consumer laser food chain, we believe 6” wafer operators, including epiwafer-
growing recipes and chip-process capacity, will capture the most value in terms of profit
margins enjoyed from the value-add processes. This is because of: 1) high technology
entry-barriers for the epiwafer-growing knowhow including epitaxial-layer growing recipes
and metal organic chemical vapour deposition (MOCVD) reactor modification and
operations, and 2) right wafer size to best fit to the volume requirement from the consumer
market since 6” is currently the largest size in the global laser industry for commercial use.
Global consumer laser market forecasts* Consumer laser forecasts: smartphone vs. automotive
Source: Daiwa estimates and forecasts Note: * Values at final module level
Source: Daiwa estimates and forecasts
Epiwafer growing
Merchant LMO, IQE, Sumika, VPEC, IntelliEPI
IDMAvago (Broadcom), Sumitomo, Lumentum, Finisar, Oclaro, AAOI, II-VI, TriQuint (Qorvo), NeoPhotonics, Source Photonics, Oplink, IPG Photonics, Philips Photonics, WinSemi
FoundryGCS, Emcore, 44 Institute, WinSemi, Inari Amertron
IDMAvago (Broadcom), Sumitomo, Lumentum, Finisar, Oclaro, AAOI, II-VI, TriQuint (Qorvo), NeoPhotonics, Source Photonics, Oplink, IPG Photonics, Philips Photonics, Accelink, InnoLight, TrueLight, LuxNet, MACOM, MELCO, Ezconn
OSATPCL Tech, eLASER, ShunSin, Inari Amertron, ASE, Amkor, Venture
IDMAvago, Sumitomo, Lumentum, Finisar, Oclaro, AAOI, II-VI, TriQuint (Qorvo), NeoPhotonics, Source Photonics, Oplink, IPG Photonics, Philips Photonics, Accelink, InnoLight, TrueLight, LuxNet, MACOM, MELCO, Ezconn
SubcontractorPCL Tech, Sercomm, SGEC, etc
IDMAvago (Broadcom), Sumitomo, Lumentum, Finisar, Oclaro, AAOI, II-VI, TriQuint (Qorvo), NeoPhotonics, Source Photonics , Oplink, IPG Photonics, Philips Photonics, Accelink, InnoLight, MACOM, MELCO, Ezconn
Chip fabrication Optical subassembly Module assembly
0%
50%
100%
150%
200%
250%
300%
350%
400%
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E
Smartphone Automotive
Gaming, IIoT & others Growth (RHS)
USDm
0
5,000
10,000
15,000
20,000
25,000
2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E
Smartphone Automotive
USDm
crossover in size
Consumer lasers offer
new demand potential
for laser players
We forecast the
consumer laser market
to grow by a strong
108% CAGR over 2017-
20E
26
2018 Global Technology Outlook: 2 January 2018
Global laser sensing & imaging food chain (consumer laser)
Source: Daiwa
Key beneficiaries
Our focus stocks of investment for HMI are: 1) WinSemi for its 6” wafer-capacity
leadership in the compound-semiconductor foundry market and strategic business
relationship with Lumentum, 2) Globetronics (Buy [1]) for its close business ties with one
of the 2 laser camps (Lumentum and ams) we identified in our 3D laser report — both we
believe will excel in the consumer laser space, and 3) LGI for its strategic role as part of
the Lumentum supply chain offering laser camera module assembly. We think IQE (IQE
LN, GBP144.50, not rated) could benefit from this fast-growing consumer laser demand
given it has the largest share position in the global epiwafer-growing market. In light of the
consumer laser market’s infant status, newcomers are also worth watching for potential
business opportunities, such as VPEC, HLJ (3688 TT, TWD78.24, not rated), LMO,
Finisar and II-VI (IIVI US, USD47.55, not rated).
Big Data growth trend No.3: AI
Surging data consumption amid the Big Data cycle combined with constant computing-
power upgrades make a good couple to help accelerate demand growth for artificial
intelligence (AI), on our observation. According to Cisco’s white paper published in 2017,
global mobile data traffic grew by a hefty 96% YoY for 2016, 56% for 2017 and will expand
at a strong 45% CAGR over 2017-20E, thanks to continued spec-upgrades such as picture
quality on smartphones and proliferation of new IoT devices. Likewise, driven by Moore’s
Law evolution in the semiconductor industry, microprocessor compute advanced some 20x
in the past decade, with transistor count per mm2 silicon area (t/mm
2) escalating from
around 2.8m (Intel’s Core 2 Wolfdale at 45nm process node) in 2008 to 55m (Huawei’s
Kirin 970 at 10nm) in 2017, illustrated by the chart on the next page.
Indeed, 2 milestones were reached by non-Intel players in 2017 with ARM-based
transistor-design architecture: 1) through its design arm, HiSilicon, Huawei put out the Kirin
970, its first application processor (AP) for smartphones with an AI feature, the Neural
Processing Unit (NPU), which consists of some 55m t/mm2 at TSMC’s 10nm process node,
and 2) Apple introduced A11, its first AP for iPhones with an AI feature called Bionic Neural
Engine, which consists of nearly 49m t/mm2 also using TSMC’s 10nm. Both Kirin 970 and
A11 are significantly more powerful than Intel’s x86-based Xeon Broadwell CPU introduced
in 2016 based on 14nm process node. We believe the next generation of 7nm tech node at
TSMC will help raise the bar to the 100m t/mm2 mark, further enhancing its customers’ AI
processing capabilities and competitive edge over peers, despite still being far below the
1bn-transistor benchmark to a human brain.
As discussed in Daiwa’s Internet thematic report (Primer: machine learning, deep
learning and AI, 14 September 2017), written by China Internet analysts John Choi and
Alex Liu, machine learning is defined as any process by which a machine improves
performance of a specified task from experience it accumulates. That is:
Pt = ƒ (E), where P = performance, t = task, E = experience
Epiwafer growing
Merchant IQE, Sumika, VPEC, IntelliEPI, LMO
IDMLumentum, Finisar, II-VI, HLJ, WinSemi, Sumitomo
FoundryWinSemi, HLJ, AWSC, GCS
IDMLumentum, Finisar, II-VI, ams (Princeton), Philips Photonics, Sumitomo
OSATeLASER
IDMLumentum, Finisar, II-VI, ams (Heptagon), Philips Photonics, Sumitomo
SubcontractorLG Innotek, Globetronics, Sharp
IDMLumentum (LGI, Sharp), ams (Globetronics), Philips Photonics
Chip fabrication Optical subassembly Module assembly
In the consumer laser
space, we are buyers of
WinSemi, LGI and
Globetronics
Two favourable
conditions for AI:
surging data
consumption and rising
computing power
27
2018 Global Technology Outlook: 2 January 2018
Global mobile data traffic volume and growth
Source: Company, Daiwa; Note: 1 Exabyte = 1bn Gigabytes (GB)
Growth of transistor count vs. Moore's Law*
Source: Company, Daiwa Note: * Above line represents Intel’s baseline of theoretical transistor count for each node under Moore’s Law evolution; below line indicates physical transistor count produced by actual chips at
different nodes
From a hardware perspective, we define AI simply as machine learning that incrementally
evolves into deep learning with the implementation of neural network processing
algorithms to simulate a biological brain (see Appendix 3 for elaboration). We believe AI is
redefining the need in the global IT industry for HPC processors to facilitate a paradigm
shift in the computing architecture – from serial computing to parallel computing.
Machine learning involves a 2-stage process: data training and inference, with a goal of
mounting up levels of deep learning through recurrent processes for AI requirements. The
training process employs a big set of data with multiple layers (input layers, hidden layers
and output layers) of interconnected neurons to form a neural network for the probable
outcome optimisation through recurrent forward and backward propagations (ie, to
enhanced E as denoted in the formula above). This neural network process is both
mathematically computation-intensive and data-intensive, which requires multiple tasks to
be done simultaneously in one order, thus more efficiently to be facilitated by the parallel
computing than serial computing architecture, in our opinion. This makes a graphic
processing unit (GPU) a preference since a GPU, given its matrix-computation capability, is
more efficient than a general-purpose CPU for multi-task processing that shares the same
processor at the same time (please refer to Daiwa US tech analyst Deepak Sitaraman’s
US semiconductor report, Artificial intelligence driving the next era of compute, 16
November 2017, for more details).
0%
20%
40%
60%
80%
100%
0
10
20
30
40
50
60
2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E
Smartphone Notebook Other devices Growth (RHS)
Exabyte
m
m
m
m
m
AI involves deep-
learning of a machine
through neural network
processes to simulate a
biologic brain
Two processes of
machine learning:
training and inference
28
2018 Global Technology Outlook: 2 January 2018
AI: illustration of how HPC facilitates neural network process of machine learning
Source: Daiwa
An inference process seeks the optimal outcome – classifies or decisions (ie, to infer Pt as
denoted in the formula above), through the “trained” neural network with a set of data
input. This process is less computation- and data-intensive, thus suitable for serial-
computing processors like CPUs. The chart above illustrates how the neural network
process works with the parallel computing combined with serial computing architecture,
resulting in a likely optimal combination of using a CPU for inference process and a GPU
as an accelerator to support the CPU for the training process, in our opinion. In addition,
field programmable gate array (FPGA) is another alternative to use as an accelerator.
Market size
Thanks to its cross-platform coverage in terms of demand application that should expand
its footprint from cloud computing to edge computing, AI should serve as universal
technology handling big-data analytics through comprehensive computes across multiple
demand verticals under the Big Data cycle. In our opinion, the 4 application markets that
will rise faster in terms of AI adoption are: datacentre, smartphone, ADAS and IIoT.
Industry leaders gathered by TSMC at its 30-year anniversary celebration event pointed to
a collective view that AI should broaden its application markets from the cloud to device
computing (TSMC: Semiconductors: the next 10 years, 24 October 2017), supportive of
our view that, in addition to datacentres which are now the key demand market for HPC
processors to do cloud computing, numerous mobile and IoT devices should proliferate to
install HPC processors with AI capabilities for device computing (ie, edge computing), with
a trend of ultimately reaching ubiquitous computing (ie, AI processors everywhere).
NVDA’s Tegra processor, Xavier (Drive PX family), for autonomous-driving cars, Huawei’s
Kirin 970 as its first smartphone NPU processor, and Apple’s A11 Bionic as its first iPhone
processor with AI capabilities, are all examples of AI’s expansion into edge/device
computing. We expect cloud computing to require more comprehensive AI HPC processors
that handle both data training and inference than edge computing where inference-type of
processors are already good enough. We forecast the global AI-related HPC market to
expand at a 31% CAGR over 2017-20E and reach USD36bn in 2020E (chip value), with
the scale becoming meaningful from 2019 when 7nm processed with extreme ultraviolet
(EUV) lithography equipment is commercialised, concurrent with TSMC’s tech migration
roadmap given its global leadership where perhaps only SEC could match it, in our view
(see a tech comparison chart next page). TSMC expects the HPC market to reach
USD15bn by 2020 in wafer-value terms, which would translate into USD40bn in chip-value
terms and make our forecast of USD36bn achievable.
Training (E)
Parallel computing
Inference (P)Serial computing
Parallel computing
suitable for training,
serial computing for
inference
AI set to broaden its
application markets from
cloud to edge (device) …
… potentially creating a
market recording a 31%
CAGR over 2017-20E for
HPC with AI features
29
2018 Global Technology Outlook: 2 January 2018
Global AI-related HPC processor market forecasts TSMC’s process technology migration trend*
Source: Daiwa estimates and forecasts Note: * Others include supercomputer accelerators, AIaaS cloud, etc
Source: Company, Daiwa forecasts Note: * In terms of percentage revenue contribution
Technology migration roadmap comparison for HPC processors*
Source: Company, Daiwa forecasts Note: TG=TriGate transistor structure, FD-SOI=fully depleted silicon-on-insulator, TSMC’s 7nm+ = 7nm + EUV
AI datacentre processors should be the key demand driver, accounting for over 70% of
2017 total AI HPC processor market, based on our forecasts, but we expect processors for
AI smartphones and ADAS applications to grow faster at a 60% CAGR over 2017-20E, vs.
a 22% CAGR for AI datacentre processors, and command at least 40% share in 2020E.
The HPC processors in our market forecasts consist of only those that are AI-capable, able
to handle neural network processing for data training and/or inference, including AP, CPU,
GPU, FPGA and ASIC with applications for datacentres (training and inference) at the
cloud, and terminal devices like AI smartphones, self-driving cars and industrial/consumer
robotics, as well as other new AI-enabled IoT devices.
It is important to note that despite enjoying high growth, AI smartphone processor demand
is incremental and cannibalistic within the smartphone AP market, while AI datacentre and
ADAS are new demand markets (please refer to our November 2017 US semiconductor
report for more details of market forecast assumptions and business discussions).
Key beneficiaries
In light of different computing architecture requirements for training and inference of neural
network processing, we expect hybrid solutions through a combination of CPU plus GPU
or FPGA as an accelerator, or customised ASIC with both serial and parallel computing
capability, to benefit from this AI HPC trend. Potential food-chain beneficiaries from an IT
hardware perspective could be: 1) chip designers like Nvidia (Buy [1]), Xilinx (XLNX US,
USD68.50, not rated), HiSilicon (Huawei’s design arm), Qualcomm (QCOM US,
USD64.38, not rated), AMD (AMD US, USD10.55, not rated) and MediaTek (Hold [3]), 2)
chip foundries including TSMC (Outperform [2]) and SEC (Buy [1]), and 3) OSAT makers
such as CHPT, ASE (Buy [1]) and JCET. IDMs like Intel (Buy [1]) may also benefit from
any expansion of the addressable market spurred primarily by applications that require
CPU for data inference for both the cloud and edge computing, in our view.
Hyper-scale datacentre/cloud operators such as Google (ie, tensor processor unit [TPU])
may choose to develop their own ASICs in house or team up with fabless chipmakers, which
could dilute the addressable market for 3rd
-party processor merchants but add to business
upside for the foundries, making TSMC (which we upgrade to Outperform [2]) from Hold
[3]), which we expect to dominate in the cutting-edge technology foundry space (<=10nm),
perhaps the ultimate winner, though the contribution from its scale ramp-up may take time.
0%
20%
40%
60%
80%
100%
0
20,000
40,000
60,000
80,000
100,000
2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E
AI smartphone AI datacentre ADAS
IIoT & others* Growth (RHS)
USDm
0%
5%
10%
15%
20%
25%
30%
35%
40%
2010
2011
2012
2013
2014
2015
2016
2017
E
2018
E
2019
E
2020
E
90nm 65nm 40nm 28nm
20/16nm 10/7nm <=5nm
EUV era
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
TSMC 5nm
SEC 20nm 5nm
Intel 7nm
GF 7nm
10nm
7nm+40/45nm 28nm SiON/HKMG 20nm SOC/16nm FF 10nm 7nm
10nm
45nm 32/28nm 7nm EUV
32nm HKMG 22nm TG 14nm FF 10nm
45nm 32/28nm 22/22nm FD-SOI 14nm FF 12nm FD-SOI
14nm FF
AI smartphone demand
is incremental and
cannibalistic, while AI
datacentre and ADAS are
new demand markets
TSMC appears to be the
ultimate beneficiary of
rising AI demand, in our
view
30
2018 Global Technology Outlook: 2 January 2018
Global HPC food chain
Source: Daiwa
Big Data growth trend No.4: Storage
Similar to HPC processors for data computing and FO transceivers for transmission
bandwidth, memory chips look set to benefit from the Big Data/IoT cycle, driving density
upgrades for data storage as IT vendors offer consumers “free” data storage in the cloud,
aiming to monetise their offers through Internet services, in our view. NAND flash stands to
benefit from rising demand for enterprise SSD at datacentres while DRAM stands to
benefit from rising demand at servers for in-memory compute; both come on top of the
rising demand from smartphones as a result of spec upgrades on multi-cams/3D laser
sensors, resulting in demand for more density to store data.
The semiconductor memory sector has enjoyed an upturn since 2H16 and we expect the
sector to remain healthy into 2018, despite some likely easing of supply constraints in
NAND. According to our Korean research team, the supply/demand (S/D) dynamic for
DRAM should remain tight in 1H18 and gradually ease into 2H18, resulting in another
robust year in 2018 for slow technology migration that should limit bit-supply growth. As for
NAND, the S/D may reverse in 2H18, but within a manageable range, therefore suggesting
low risk for any large price swings hurting suppliers’ structural profitability. We forecast bit-
supply growth of 18%/39% YoY for DRAM/NAND in 2018, against bit-demand growth of
20%/40% YoY for the same year. This should lead to a broadly balanced year in 2018, yet
backend-loaded in terms of potentially mild oversupply risk.
Key beneficiaries
Supply constraint has been an issue in the memory space due to delays in technology
migration, yield ramp and conversion from DRAM to NAND. For DRAM, migration from
2xnm to 1x/1ynm has been bumpy and we expect 2z/1xnm to remain the mainstay process
nodes in 2017-18. For NAND, conversions from planar to 3D NAND have deterred volume
ramp despite active capex from major suppliers, due to capacity and yield losses during
the conversion. Toshiba (not rated) may be a wild card, if its memory business sale to the
Bain-Hynix consortium is completed smoothly (see our Memory market outlook: positive
on supply limitation, 9 October 2017, for more details). In the memory space, SEC and
SK Hynix (Buy [1]) remain our preference for investment.
Three core beneficiaries
under the Big Data cycle
are computing,
bandwidth and storage
Another robust year for
the memory sector in
2018
We continue to like SEC
and SK Hynix in the
memory space
Processor design
Fabless / system Nvidia, AMD, Xilinx, Huawei (HiSilicon), Google, Qualcomm, MediaTek, IBM
IDM Intel, SEC
Foundry TSMC, SEC (foundry division), Globalfoundries
IDM Intel, SEC
OSAT ASE (SPIL), JCET, Amkor, KYEC, CHPT (probe materials)
IDM Intel, SEC, TSMC (2.5/3D IC packaging captive)
Datacentre hyper - scale Internet operators such as Google, Facebook, Amazon, Alibaba and Tencent
ADAS System makers such as Delphi, Bosch, Autoliv and Denso
Smartphone Apple, SEC and Huawei
IIoT & others Embedded computing system makers such as Advantech, Adlink and Ennoconn
Chip fabrication Chip packaging & testing End - market a pplication
31
2018 Global Technology Outlook: 2 January 2018
Global DRAM supply/demand forecasts Global NAND supply/demand forecasts
Source: Daiwa forecasts
Source: Daiwa forecasts
Technology migration roadmap comparison: DRAM
Source: Company, Daiwa forecasts
Technology migration roadmap comparison: NAND
Source: Company, Daiwa forecasts
ADAS and IIoT remain our preferences for investment
ADAS and IIoT were 2 structural themes we expanded on in our 2017 Tech Outlook
report. Therefore, we will not duplicate the discussions in a separate section in this report
since both themes should see demand drivers from 2 themes: 1) AI, with HPC processors
for Big Data analytics, and 2) HMI, with sensors such as CIS for surround-viewing, 3D
lasers for LiDAR and mm-wave RF radars for autonomous emergency braking system
(AEB) implementation. While HPC and sensors are included in our previous AI and HMI
discussions, both ADAS and IIoT derivatives remain our preference for investment, as we
see the 2 as multi-year stories and expect them to grow faster than other demand verticals
under the Big Data/IoT cycle, in revenue terms.
We forecast the ADAS market at system levels to expand at roughly a 25% CAGR over
2017-25 (20% CAGR over 2017-20), from USD18bn in 2017 to USD31bn in 2020,
backend-loaded with growth to accelerate post 2020 when 5G wireless communication
infrastructure commercialises and regulations are upgraded to increase the degree of
autonomous driving for safety, comfort and energy efficiency.
IIoT, a set of intelligent processes enabled by a large data set from connected devices
used in industrial applications, is rising to benefit the industrial PC, automation and robotics
sectors, in our view. Using industrial robotics demand as a proxy, we forecast the market to
expand at a 15% CAGR over 2017-20 to exceed 500,000 units of industrial robots in 2020
from 346,000 units in 2017, with China (22% CAGR for the same period) driving growth
given its low robot-density relative to other countries. We expect China’s penetration of the
global robot market to rise to 40% in 2020, from 33% in 2017, which should benefit IIoT
players with revenue contributed from China.
(3%)
(2%)
(1%)
0%
1%
2%
3%
4%
0
5,000
10,000
15,000
20,000
25,000
30,000
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
E
1Q18
E
2Q18
E
3Q18
E
4Q18
E
Demand Supply S/D sufficiency (RHS)
m units (1Gb equ.)
(3%)
(2%)
(1%)
0%
1%
2%
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
E
1Q18
E
2Q18
E
3Q18
E
4Q18
E
Demand Supply S/D sufficiency (RHS)
m units (16Gb equ.)
SEC
SK Hynix
Micron 1y
3Q16 4Q161Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q18 4Q18
25nm 20nm 1xnm 1ynm
1Q17 2Q17 3Q17 4Q17 1Q18 2Q183Q15 4Q15 1Q16 2Q16
29nm 25nm 21nm 1xnm
2xnm 20nm 1xnm
SEC
V-NAND
Toshiba
V-NAND
Micron
V-NAND
SK Hynix
V-NAND
16nm 1znm
N/A V36 V48 V72
20nm 16nm 1znm
N/A V32/48 V64
1ynm 1z 1z+nm
N/A V48 V64 V9x
3Q18 4Q18
19nm 16nm 1znm
1Q17 2Q17 3Q17 4Q17 1Q18 2Q183Q15 4Q15 1Q16 2Q16 3Q16
N/A V24/V32 V48 V64 V9x
4Q161Q14 2Q14 3Q14 4Q14 1Q15 2Q15
We suggest focusing on
HPC and sensors due to
demand from ADAS and
IIoT derivatives
China should be the key
growth driver for
industrial robotics, in
our view
32
2018 Global Technology Outlook: 2 January 2018
ADAS market forecast (system level) Global industrial robot shipment forecasts
Source: Daiwa estimates and forecasts Source: International Federation of Robotics (IFR), Daiwa forecasts
Key beneficiaries
In our opinion, though a handful of food-chain players should benefit from the ADAS
theme, including chipmakers, component vendors and system device suppliers, we
prioritise the chip and component makers as our focus of investment. Again, we believe
HPC and sensors will be the 2 key beneficiaries in the ADAS domain.
For HPC, we see advanced silicon as the key value enabler, against the backdrop of the
rising AI applications in cars. In the upstream segments, we identify TSMC as the key
exposure to processor advances for ADAS, thanks to its leadership in HPC process
technologies to help customers such as Nvidia, NXP/Qualcomm and MediaTek penetrate
into the ADAS processor/SoC market. ASE/HoldCo and JCET should benefit from the
food-chain perspective given their offerings of advanced packaging and testing services,
such as fan-out wafer-level packaging (FO WLP), systems in packaging (SiP), and
2.5D/3D IC packaging, to accommodate the AI trend.
In the sensor food-chain, we like Sony, SMIC and Sunny Optical for their leadership in the
vehicle CIS chip and lens-set manufactures. We also like Nidec (Buy [1]) for its leadership
in advanced motors to facilitate ADAS. Other names to watch could be IntelliEPI and Cub.
In the IIoT domain, we like Ennoconn for its strong earnings growth over 2018-19 driven
by: 1) its acquisition of S&T to boost top-line with margin upside on integration synergies
for cost/opex savings, and 2) sustained supports from its strong parent company – the Hon
Hai Group (please see our automation analyst Steven Tseng’s company report: Reaping
the benefits of increasing synergies, 21 November 2017). We are also positive on
Airtac given: 1) it is riding on the favourable automation demand in China where room for
robot density growth remains ample, and 2) it should enjoy sustainable share gain in
China’s pneumatic equipment market and margin expansion on operating leverage. Other
names worth watching are Hiwin, Delta, Fanuc (6954 JP, JPY27,145, Hold [3]),
Advantech and Adlink.
0%
5%
10%
15%
20%
25%
30%
35%
40%
0
20,000
40,000
60,000
80,000
100,000
120,000
2010
2011
2012
2013
2014
2015
2016
2017
E
2018
E
2019
E
2020
E
2021
E
2022
E
2023
E
2024
E
2025
E
ADAS market at system level Growth (RHS)
USDm
0%
10%
20%
30%
40%
50%
0
200
400
600
800
1,000
1,200
2010
2011
2012
2013
2014
2015
2016
2017
E
2018
E
2019
E
2020
E
2012
E
2022
E
2023
E
2024
E
2025
E
Global (LHS) China's penetration
000 units
Stocks we like under our
coverage are TSMC,
Nvidia, Sony, ASE,
Sunny Optical, Nidec
and SMIC, for ADAS
Ennoconn and Airtac for
IIoT
33
2018 Global Technology Outlook: 2 January 2018
Global ADAS food chain
Source: Daiwa
Global IIoT food chain
Source: Daiwa
IC design & wafer fabrication
IDMNXP-Freescale, Renesas, ADI, Infineon , STMicro, TI, OnSemi-Fairchild, Bosch, Denso, Rohm, Toshiba, Mitsubishi, Skyworks, Maxim, Linear, Vishay, Intel, Sony, SEC, SK Hynix, IntelliEPI
FablessMobileye (Intel), Nvidia, Qualcomm, MTK, AMD, OVTi, Broadcom, Pixart, GalaxyCore
FoundryTSMC, UMC, SMIC, GF, HH Semi, Vanguard, Epsil
IDMRenesas, NXP-Freescale, Infineon, STMicro, OnSemi-Fairchild, Intel, Sony, SEC, SK Hynix
OSATASE, Amkor, SPIL, JCET-STATSChipPac, Kingpak, XinTec, Terrasem, KYEC,Tong Hsing Electronic, Hana Microelectronics, eLASER
SensorSunny Optical, Fujifilm, Maxell, Sekonix, Altek, LG Innotek, Wistron Neweb, Largan, Nidec, Nippon Ceramic, Murata, Audiowell, Sercomm, system IDMs
MotorNidec, Minebea, etcSystem IDMs like Bosch, Denso, Continental, TRW, etc
Delphi, Bosch, Autoliv, Valeo, Continental, Denso, Mando,Hyundai Mobis, SEC (Harman), ZF TRW, HELLA, Clarion, Panasonic, Pioneer, Magna, Sensata,Tung Thih, Cub Elecparts
Chip assembly & test Component & parts System devices
Connected device/equipment
Sensing device food chainAvago, STM, Qorvo, TI, Bosch, Sensortech, etc
Equipment food chainABB, Siemens, Schneider, GE, Honeywell, Emerson, Cisco, Fanuc, SMC, NSK, THK, Delta, Hiwin, Airtac, Techman/Quanta, etc.
ProcessorIntel, AMD, Qualcomm
ODMEnnoconn, Flytech, IEI, Quanta, etc.
OBMAdvantech, Kontron, Radisys, Posiflex, Adlink, NCR, IBM, HPE, Dell, etc.
Software platformMicrosoft, GE, IBM, Oracle, SAP, etc.
Software applicationMicrosoft, SAP, Salesforce, Bosch, HPE, etc.
Cloud services/ IIoT analyticsMicrosoft, AWS, IBM, Google, Cisco, AT&T, Bosch, GE, etc.
System IntegrationAccenture, Capgemini, IBM, S&T, etc.
Embedded computing system Software platform & application Service & system integration
34
2018 Global Technology Outlook: 2 January 2018
Appendix 1: global chip inventory monitor
Global chip inventory monitor (quarterly)
Day Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17
Fabless
ALTR 92 90 120 115 109 na na na na na na na
XLNX 129 128 129 126 105 97 101 102 103 106 105 106
BRCM 52 54 60 52 na na na na na na na na
QCOM 48 63 64 62 49 56 50 52 65 82 75 69
PMC Sierra 81 84 85 83 na na na na na na na na
NVDA 74 84 77 69 63 67 69 67 77 94 82 73
Cirrus Logic 53 53 64 75 70 109 102 66 54 90 106 88
MRVL 73 84 75 86 77 72 63 64 69 70 67 67
Q-Logic 48 50 67 96 82 76 na na na na na na
MediaTek 74 92 111 94 70 67 59 63 72 88 93 85
Realtek 72 94 103 92 64 60 62 61 70 73 85 91
Sunplus 90 110 90 94 103 106 92 89 81 93 88 90
Novatek 54 67 68 57 49 55 57 51 53 56 57 60
Himax 86 121 133 129 116 121 113 100 89 114 117 86
Siliconlab 70 77 82 82 73 71 72 73 72 75 76 78
Richtek 75 69 70 73 85 na na na na na na na
Dialog Semi 48 55 61 67 58 98 102 69 57 60 80 80
Fabless aggregate 64 75 78 75 70 69 63 58 69 84 80 73
IDM
Intel 75 79 85 83 87 89 95 91 83 92 98 99
AMD 82 89 96 87 97 110 91 55 92 111 93 69
Cypress 89 92 91 87 78 73 70 66 74 84 81 78
IFX 95 80 91 102 106 103 104 102 106 101 100 100
STM 95 99 95 99 103 108 104 99 95 95 95 91
Freescale 114 111 109 118 na na na na na na na na
TXN 117 124 126 116 119 135 133 120 128 132 131 120
ADI 125 126 127 113 128 137 122 104 101 91 80 91
Skyworks 57 61 60 55 55 71 93 96 86 93 95 92
Agilent 101 105 100 99 102 103 100 94 100 98 98 96
NXP 82 91 89 88 122 93 94 82 82 91 95 93
Fairchild 102 98 103 119 131 118 103 na na na na na
On Semi 113 118 118 115 122 127 121 134 110 100 109 107
Avago/Broadcom Ltd 57 59 53 56 66 78 83 75 79 77 75 73
Qorvo na 67 82 82 94 108 95 74 74 93 102 85
Maxim 110 105 96 96 118 98 96 95 99 102 107 111
IDM aggregate 89 90 93 92 100 97 99 92 91 96 97 95
IDM aggregate ex-Intel 97 96 96 96 108 101 102 92 96 98 97 92
Total aggregate inventory 79 84 87 86 90 89 88 82 84 92 92 89
Total aggregate inventory ex-Intel 80 86 88 86 92 88 86 80 85 92 90 85
Source: Company, Daiwa estimates Note: * ALTR, BRCM, PMC Sierra, Q-Logic, Richtek, Freescale and Fairchild were acquired; OVTi was privatised; RFMD and TriQuint merged into Qorvo
35
2018 Global Technology Outlook: 2 January 2018
Appendix 2: global chip revenue and guidance monitor
Global chip revenue and guidance monitor (quarterly)
Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 December-quarter guidance QoQ growth
USDm
mid hi low mid hi low
Fabless
XLNX 575 579 586 609 615 620 630 645 615 2% 4% -1%
QCOM 6,044 6,184 5,999 5,016 5,371 5,905 5,900 6,300 5,500 0% 7% -7%
NVDA 1,428 2,004 2,173 1,937 2,230 2,636 2,650 2,703 2,597 1% 3% -1%
MRVL 626 654 571 573 605 616 610 625 595 -1% 1% -3%
Cirrus Logic 259 429 523 328 321 426 530 550 510 25% 29% 20%
MediaTek 2,232 2,473 2,160 1,803 1,917 2,101 2,038 2,122 1,954 -3% 1% -7%
Realtek 303 324 308 321 328 361 351 351 351 -3% -3% -3%
Sunplus 64 59 56 48 60 61 58 58 58 -5% -5% -5%
Novatek 352 379 353 351 390 409 391 397 385 -5% -3% -6%
Himax 201 218 203 155 152 197 183 189 177 -7% -4% -10%
Silicon Lab 175 178 183 179 190 199 198 201 195 0% 1% -2%
Dialog Semi 246 346 365 271 256 363 435 455 415 20% 25% 14%
Total fabless 12,505 13,828 13,480 11,591 12,435 13,893 13,974 14,596 13,352 1% 5% -4%
IDM Intel 13,533 15,778 16,374 14,796 14,763 16,149 16,300 16,800 15,800 1% 4% -2%
AMD 1,027 1,307 1,106 984 1,222 1,643 1,397 1,446 1,347 -15% -12% -18%
Cypress 450 524 530 532 594 605 593 610 575 -2% 1% -5%
IFX 1,843 1,870 1,810 1,944 2,014 2,002 1,962 2,002 1,922 -2% 0% -4%
STM 1,703 1,797 1,859 1,821 1,923 2,136 2,350 2,424 2,275 10% 14% 7%
TXN 3,273 3,675 3,414 3,402 3,693 4,116 3,720 3,870 3,570 -10% -6% -13%
Skyworks 752 835 914 852 901 985 1,050 1,050 1,050 7% 7% 7%
ADI 870 1,004 984 1,148 1,434 1,541 1,490 1,540 1,440 -3% 0% -7%
Agilent 1,044 1,111 1,067 1,102 1,114 1,189 1,155 1,165 1,145 -3% -2% -4%
NXP 2,365 2,469 2,440 2,211 2,202 2,387 na na na na na na
On Semi 878 951 1,261 1,437 1,338 1,391 1,350 1,375 1,325 -3% -1% -5%
Maxim 566 561 551 581 602 576 620 640 600 8% 11% 4%
Avago/Broadcom Ltd 3,792 4,136 4,139 4,190 4,463 4,844 5,296 5,371 5,221 9% 11% 8%
Qorvo 699 865 826 643 641 822 840 850 830 2% 3% 1%
Total IDM 33,144 37,102 37,276 35,642 36,903 40,385 38,122 39,143 37,100 0% 3% -2%
Total sales** 45,649 50,931 50,756 47,233 49,338 54,278 52,095 53,739 50,452 0% 4% -3%
Growth (QOQ)
Total 6% 12% 0% -7% 4% 10% Fabless 13% 12% -4% -14% 9% 14% IDM 4% 12% 0% -4% 4% 9% Growth (YoY)
Total 0% 7% 15% 9% 8% 7% Fabless* -14% -6% 11% 5% 1% 3% IDM 7% 13% 17% 11% 11% 9% Mix*
Fabless 30% 30% 29% 27% 28% 29% IDM 70% 70% 71% 73% 72% 71%
Source: Company, Daiwa estimates Note: * Growth and revenue mix distorted due to the BRCM-AVGO acquisition; ** Guidance comparison excluding NXP who no longer gives guidance due to the pending acquisition from QCOM
36
2018 Global Technology Outlook: 2 January 2018
Appendix 3: technology food chain and glossary of terms
Global technology food chain
Source: Daiwa
Neural network process
Neural processing originally referred to the way a brain works, but now the term is used to
describe a computer architecture that mimics the biological function. In computers, neural
processing gives software the ability to adapt to changing situations and to improve its
function as more information becomes available. Neural processing is used in software to
perform such tasks as human facial recognition, weather prediction, analysis of speech
patterns and to learn new strategies in games.
A human brain is composed of approximately 100bn neurons. These neurons are nerve
cells that individually serve a simple function to process and transmit information. When
the nerve cells transmit and process in clusters, called a neural network, the results are
complex – such as creating and storing memory, processing language and reacting to
sudden movement. Artificial neural processing mimics this process at a simpler level. A
small processing unit, called a neuron or node, performs a simple task of processing and
transmitting data. As the simple processing units combine basic information through
connectors, the information and processing becomes more complex. Unlike traditional
computer processors, which need a human programmer to input new information, neural
processors can learn on their own once they are programmed.
Serial vs. parallel computing
Serial and parallel computing architectures both describe how a processor computes,
though in different ways. While the serial computing processes tasks in sequential order –
the next object begins processing only when the previous one is completed – with a single
processor such as Intel’s x86 CPU, parallel computing breaks apart computational tasks to
use several processors or cores simultaneously. In 2007, Nvidia firstly used parallel
processing to advance graphics technologies for its GPU. While a CPU is efficient for
general-purpose computation, a GPU excels in matrix computation which can serve as an
accelerator to help improve CPU performance, power and cost.
Edge vs. cloud computing
In contrast to centralised computing where all computation and analytics are done at the
cloud or datacentres (ie cloud computing), edge computing allows data to be processed at
the edge. In our definition, edge means any terminal devices with artificial intelligence (AI)
capability embedded in their processors. These devices include smartphones, cars, robots,
industrial PCs, wearables, drones and many other new IoT devices. The edge computing
makes these terminal devices capable of running sophisticated applications, thus helping
reduce latency for critical applications, lower dependence on the cloud and better
managing the massive deluge of data being generated by the IoT. By applying edge
computing, security and privacy can also be improved by keeping sensitive data within the
device.
Raw material suppliers Foundries OSAT/component
makers System vendors End demand
Channel inventory draw - down
Chip inventory draw - down SPE vendors
Channel distributors
Component inventory draw - down
37
2018 Global Technology Outlook: 2 January 2018
38
2018 Global Technology Outlook: 2 January 2018
Company Section
See important disclosures, including any required research certifications, beginning on page 115
Share Price Chart
Source: Compiled by Daiwa.
Market data
12-month range (Y) 3,262-5,485
Market cap (Y mn; 28 Dec) 6,437,074
Shares outstanding (000; 12/17) 1,264,154
Foreign ownership (%; 9/17) 57.9
Investment Indicators
3/17 3/18 E 3/19 E
P/E (X) 87.7 15.7 14.4
EV/EBITDA (X) 9.1 5.4 4.7
P/B (X) 2.57 2.24 1.96
Dividend yield (%) 0.39 0.49 0.49
ROE (%) 3.0 15.2 14.5
Net debt/equity (X) -0.3 -0.3 -0.4
Income Summary
(SEC; Y mn) 3/17 3/18 E 3/19 E
Sales 7,603,250 8,385,000 8,463,000
Op profit 288,702 680,000 730,000
Pretax income 251,619 650,000 730,000
Net income 73,289 409,000 446,000
EPS (Y) 58.1 323.5 352.8
DPS (Y) 20.00 25.00 25.00
See end of report for notes concerning indicators. Sony
Sony (6758 JP)
Target price: Y6,500 (from Y6,500 as of 28 Nov)
Share price (28 Dec): Y5,092 | Up/downside: +27.7%
Semiconductor earnings set to grow strongly
Semiconductors, including CMOS image sensors, a growth driver
Competitive dual cam, 3D sensors, automotive items to fuel growth
Reaffirming Buy (1) rating and 12-month target price of Y6,500
What's new: We see 2 growth drivers for Sony over the medium-to-long
term: 1) its supply chain encompassing a range of products from sensing
devices to digital imaging (CMOS image sensors, digital imaging products),
and 2) content (music, games, movies). In particular, we see a high
likelihood that CMOS image sensors will continue to see sharp operating
profit growth in and after 2018.
What’s the impact: With regard to mobile devices, which are the primary
application for CMOS image sensors, the biggest growth driver will likely be
increased adoption of dual-lens cameras in such devices, but we also see
medium-term growth potential in demand for 3D sensors used in time-of-
flight cameras. The sensors, which use technology developed by
Softkinetic Systems (acquired by Sony in 2015), have potential for use not
only in mobile devices but also in other products such as robots and drones
(gesture recognition, augmented reality, object/obstacle recognition). We
anticipate the expectations for such new earnings opportunities for Sony
will be heightened further in 2018.
Over the long term, one promising area for Sony is products for automotive
applications such as self-driving technology (we believe orders for Sony
from tier 1 suppliers for such products are on rise). The company is also
stepping up efforts to improve its profit margins in the semiconductors
segment in FY17, including cutting production costs and reducing lead
times. Thus, we look for operating profit growth from internal efforts in
addition to top-line growth for FY17 or later.
What we recommend: We reaffirm our Buy (1) rating and 12-month
SOTP-based target price of Y6,500. Our earnings forecasts call for
operating profit of Y680.0bn (up 2.4-fold YoY) for FY17, Y730.0bn (up 7%
YoY) for FY18, and Y800.0bn (up 10% YoY) for FY19. In the
semiconductors segment (incl. CMOS image sensors), we forecast an
operating profit of Y155.0bn (vs. a loss in FY16) for FY17, Y180.0bn (up
16% YoY) for FY18, and Y210.0bn (up 17% YoY) for FY19. The company
recorded a one-off gain associated with the sale of its camera module
operations in FY17. Without this factor, we forecast operating profit to rise
by 41% YoY for FY18. Main risks are FX rate and delayed dual-lens
camera penetration for smartphone.
Japan
Electric appliances 2 January 2018 Japanese report: 2 January 2018
Buy
(unchanged)
Junya Ayada 81-3-5555-7091
Daiwa Securities Co. Ltd.
40
Sony (6758 JP): 2 January 2018
Sony (6758): Income Summary (SEC; Y mn; y/y %)
Year to Sales Op profit Pretax income Net income EPS (Y) DPS (Y)
3/15 8,215,880 (6) 68,548 (159) 39,729 (54) -125,980 (loss) -113.0 0.00 3/16 8,105,712 (-1) 294,197 (329) 304,504 (666) 147,791 (profit) 119.4 20.00 3/17 7,603,250 (-6) 288,702 (-2) 251,619 (-17) 73,289 (-50) 58.1 20.00 3/18 E 8,385,000 (10) 680,000 (136) 650,000 (158) 409,000 (458) 323.5 25.00 3/19 E 8,463,000 (1) 730,000 (7) 730,000 (12) 446,000 (9) 352.8 25.00 3/20 E 8,596,000 (2) 800,000 (10) 800,000 (10) 495,000 (11) 391.6 25.00
3/18 CP 8,500,000 (12) 630,000 (118) 600,000 (138) 380,000 (418) 300.7 25.00
E: Daiwa estimates. CP: Company projections.
41
Sony (6758 JP): 2 January 2018
Financial Statements
(Y mn) 3/15 3/16 3/17 3/18 E 3/19 E 3/20 E
Income statement
Sales / Revenue 8,215,880 8,105,712 7,603,250 8,385,000 8,463,000 8,596,000
Operating profit 68,548 294,197 288,702 680,000 730,000 800,000
EBITDA 423,172 691,288 615,750 1,015,000 1,078,000 1,148,000
Pretax income 39,729 304,504 251,619 650,000 730,000 800,000
Net income -125,980 147,791 73,289 409,000 446,000 495,000
Balance sheet
Liquidity on hand 1,886,144 1,930,009 2,011,583 2,197,280 2,604,363 3,074,432
Fixed assets / Non-current assets 11,636,430 12,476,663 13,304,834 13,954,352 14,518,870 15,061,388
Total assets 15,834,331 16,673,390 17,660,556 18,653,135 19,641,641 20,683,052
Interest-bearing debt 933,612 893,545 1,199,541 1,199,541 1,199,541 1,199,541
Total liabilities 12,900,614 13,541,502 14,513,076 15,137,148 15,711,248 16,289,253
Total net assets / Total equity 2,928,469 3,124,410 3,135,422 3,515,987 3,930,393 4,393,799
Shareholders' equity 2,317,077 2,463,340 2,497,246 2,877,811 3,292,217 3,755,623
Cash flow statement
Cash flows from operating activities 754,640 749,089 809,262 947,480 1,132,026 1,195,012
Net income -125,980 147,791 73,289 409,000 446,000 495,000
Depreciation and amortization 354,624 397,091 327,048 335,000 348,000 348,000
Cash flows from investing activities -639,636 -1,030,403 -1,253,973 -898,518 -858,518 -858,518
Free cash flow 115,004 -281,314 -444,711 48,962 273,508 336,494
Cash flows from financing activities -263,195 380,122 452,302 136,734 133,575 133,575
Increase (decrease) in cash and cash equivalents -97,053 34,199 -23,470 185,696 407,083 470,069
Accounting standards SEC SEC SEC SEC SEC SEC
Financial indicators
Growth
Sales / Revenue (y/y %) 5.8 -1.3 -6.2 10.3 0.9 1.6
Operating profit (y/y %) 158.7 329.2 -1.9 135.5 7.4 9.6
Profitability
Operating profit margin (%) 0.8 3.6 3.8 8.1 8.6 9.3
EBITDA margin (%) 5.2 8.5 8.1 12.1 12.7 13.4
ROE (%) NA 6.2 3.0 15.2 14.5 14.0
ROA (%) NA 0.9 0.4 2.3 2.3 2.5
Financial leverage/dividend policy
Net debt-to-equity ratio (X) -0.4 -0.4 -0.3 -0.3 -0.4 -0.5
Equity-to-assets ratio (%) 14.6 14.8 14.1 15.4 16.8 18.2
Total dividends / shareholders' equity (%) 0.0 1.0 1.0 1.1 1.0 0.8
Dividend payout ratio (%) 0.0 16.8 34.4 7.7 7.1 6.4
Per-share data
EPS (Y) -113.0 119.4 58.1 323.5 352.8 391.6
DPS (Y) 0.00 20.00 20.00 25.00 25.00 25.00
Book value per share (Y) 1,982.5 1,952.8 1,977.7 2,276.5 2,604.3 2,970.9
Valuations Share price: Y5,092; market cap: Y6,437,074mn (28 Dec 2017)
P/E (X) NA 42.6 87.7 15.7 14.4 13.0
EV/EBITDA (X) 13.0 7.8 9.1 5.4 4.7 4.0
P/B (X) 2.57 2.61 2.57 2.24 1.96 1.71
Dividend yield (%) Nil 0.39 0.39 0.49 0.49 0.49
Source: Company materials; compiled by Daiwa. E: Daiwa estimates.
Company Outline
Sony once boasted an overwhelmingly strong presence in the consumer electronics market, with runaway hits like its
Trinitron CRT displays and the Walkman. It remains competitive in such fields as CMOS sensors, video games, and
professional broadcasting equipment, but is implementing restructuring programs for struggling LCD TV and
smartphone operations. Acquisitions of CBS Records and Columbia Pictures in the late 1980s helped it become a
major global player in the music and movie industries. It initially entered the financial industry through a JV with
Prudential, with domestic life insurance still a mainstay business on this front.
Translation/style check/accuracy check: Research Production Department
42
2018 Global Technology Outlook: 2 January 2018
See important disclosures, including any required research certifications, beginning on page 115
China Information Technology
What's new: We expect AAC to benefit from multi-cam adoption in
smartphones on the back of a breakthrough in its optics business. We view
any share-price pullback due to the market’s resetting of expectations for
the iPhone X going into the quiet season in 1Q18 as a good opportunity to
accumulate (see iPhone X: production on track for a strong 4Q17 but could
see a seasonal decline in 1Q18, 28 November). We reiterate our Buy (1)
call on AAC and TP of HKD200. AAC remains one of our top sector picks.
What's the impact: Bearing the fruits of multi-cams in smartphones. As
highlighted in The more the merrier – multi-cameras are the next mega trend
in smartphones (Part 3), published on 6 December, we are positive on the
smartphone camera component supply chain due to the rising trend of multi-
cams. We forecast 502-856m units of dual-cam smartphones in 2018-20E,
from 268m in 2017E and for 3D sensing smartphones to grow to 200-618m
for 2018-20E, from 34m in 2017E. We believe this should broaden the
addressable market for lens vendors and we see AAC benefitting from this
due to its recent breakthrough in optics products. We believe AAC has
delivered strong production yield for its lens products with major project wins
from top tier China brands in 2H17 (see A rosy 2018 on favourable trends
and new drivers, 10 November). Our research suggests AAC is in talks with a
Korean customer and is likely have more project/client wins in 2018. In total,
we forecast its optics revenue to account for 7-12% of 2018-19 revenue, up
from 1% in 2017E.
Further upside from 3D sensing in 2019 and beyond. Thanks to years of
development efforts in optics, AAC has developed its own wafer level lens
(WLO) products and received good feedback from its customers. We see
high possibility that AAC’s WLO or hybrid lens (WLO + plastic) solutions
could mean it is likely to supply Tx lenses (used for 3D sensing) for its major
smartphone customers and this could be another major earnings driver for
AAC in 2019 and beyond, which we have not yet factored into our estimates.
Multi drivers for solid earnings growth. In addition to a strong outlook for
its optics business, we see AAC’s main business – acoustics – benefiting
from ASP rises on spec upgrades (ie, water-proofing and stereo sound),
while its haptics products should benefit from increasing adoption in
Android smartphones. We forecast for 2018-19E EPS to grow by 25-42%.
What we recommend: We reiterate our Buy (1) call and TP of HKD200,
based on 27x PER, above its 3-year trading range of 13-25x, applied to our
1-year-forward EPS estimate. Key risk: weaker smartphone sell-through.
How we differ: Our 2018-19 EPS are 4-5% above the consensus likely due
to our more upbeat view on the benefits from new drivers and spec upgrades.
2 January 2018
AAC Technol ogies
Well positioned to benefit from multi-cam trends
Favourable trends intact; upside from 3D sensing could arrive in 2019
Forecasting EPS YoY growth of 25-42% in 2018-19E
Reiterate Buy (1) with TP of HKD200, remains one of our top picks
Source: Daiwa forecasts
Source: FactSet, Daiwa forecasts
AAC Technologies (2018 HK)
Target price: HKD200.00 (from HKD200.00)
Share price (28 Dec): HKD142.50 | Up/downside: +40.4%
Kylie Huang(886) 2 8758 6248
Steven Yang(886) 2 8758 6245
Forecast revisions (%)
Year to 31 Dec 17E 18E 19E
Revenue change - - -
Net profit change - - -
Core EPS (FD) change - - -
90
116
143
169
195
60
90
120
150
180
Dec-16 Mar-17 Jun-17 Sep-17 Dec-17
Share price performance
AAC Tech (LHS) Relative to HSI (RHS)
(HKD) (%)
12-month range 70.10-179.20
Market cap (USDbn) 22.40
3m avg daily turnover (USDm) 101.22
Shares outstanding (m) 1,228
Major shareholder Chun Yuan Wu Ingrid (21.4%)
Financial summary (CNY)
Year to 31 Dec 17E 18E 19E
Revenue (m) 20,360 26,500 32,050
Operating profit (m) 5,904 8,414 10,384
Net profit (m) 5,278 7,511 9,350
Core EPS (fully-diluted) 4.298 6.116 7.614
EPS change (%) 31.1 42.3 24.5
Daiwa vs Cons. EPS (%) (2.3) 4.3 4.8
PER (x) 27.8 19.6 15.7
Dividend yield (%) 0.9 1.1 1.5
DPS 1.070 1.289 1.835
PBR (x) 8.0 6.1 4.7
EV/EBITDA (x) 20.6 14.3 10.9
ROE (%) 32.3 35.3 33.7
44
AAC Technologies (2018 HK): 2 January 2018
Financial summary
Key assumptions
Profit and loss (CNYm)
Cash flow (CNYm)
Source: FactSet, Daiwa forecasts
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Receiver sales growth (% YoY) 49.0 30.3 21.6 (22.1) 69.0 3.9 20.6 16.6
Speaker box sales growth (% YoY) 91.4 79.0 (24.1) 13.9 27.9 32.6 31.5 20.6
Non-acoustic products sales growth (%
YoY) 0.0 0.0 1,858.8 145.1 56.5 46.0 37.4 24.7
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Acoustic proudcts 5,826 7,602 6,857 7,182 8,494 10,065 12,451 14,523
Non-acoustic 0 93 1,812 4,442 6,951 10,146 13,939 17,376
Other Revenue 457 401 210 115 62 149 110 151
Total Revenue 6,283 8,096 8,879 11,739 15,507 20,360 26,500 32,050
Other income 0 0 0 0 0 0 0 0
COGS (3,509) (4,637) (5,201) (6,867) (9,064) (11,972) (15,291) (18,365)
SG&A (464) (530) (537) (803) (763) (1,242) (1,398) (1,651)
Other op.expenses (462) (553) (656) (859) (1,166) (1,242) (1,398) (1,651)
Operating profit 1,849 2,376 2,485 3,210 4,514 5,904 8,414 10,384
Net-interest inc./(exp.) 4 6 10 (7) (33) (47) (30) (35)
Assoc/forex/extraord./others 163 453 85 233 152 105 150 155
Pre-tax profit 2,016 2,835 2,581 3,435 4,633 5,962 8,534 10,505
Tax (259) (263) (270) (325) (609) (686) (1,024) (1,156)
Min. int./pref. div./others 6 6 7 (3) n.a. n.a. n.a. n.a.
Net profit (reported) 1,763 2,578 2,318 3,107 4,026 5,278 7,511 9,350
Net profit (adjusted) 1,763 2,578 2,318 3,107 4,026 5,278 7,511 9,350
EPS (reported)(CNY) 1.435 2.099 1.887 2.530 3.278 4.298 6.116 7.614
EPS (adjusted)(CNY) 1.435 2.099 1.887 2.530 3.278 4.298 6.116 7.614
EPS (adjusted fully-diluted)(CNY) 1.435 2.099 1.887 2.530 3.278 4.298 6.116 7.614
DPS (CNY) 0.360 0.574 0.603 0.857 0.765 1.070 1.289 1.835
EBIT 1,849 2,376 2,485 3,210 4,514 5,904 8,414 10,384
EBITDA 2,192 2,828 3,010 3,921 5,476 7,192 10,415 13,126
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Profit before tax 2,016 2,835 2,581 3,435 4,633 5,962 8,534 10,505
Depreciation and amortisation 343 452 525 711 962 1,287 2,001 2,742
Tax paid (259) (263) (270) (325) (609) (686) (1,024) (1,156)
Change in working capital (521) (97) (890) (226) (353) (990) (3,050) (1,573)
Other operational CF items 6 (21) 8 (1) 4 (0) (0) (0)
Cash flow from operations 1,584 2,905 1,953 3,595 4,638 5,574 6,461 10,517
Capex (1,253) (782) (1,827) (2,493) (3,367) (5,300) (5,500) (3,000)
Net (acquisitions)/disposals (60) 264 (12) 8 (11) 1 1 2
Other investing CF items (59) (464) (341) 62 (776) (68) (70) (72)
Cash flow from investing (1,373) (981) (2,180) (2,424) (4,154) (5,367) (5,569) (3,070)
Change in debt 172 (108) 447 390 2,285 409 90 (459)
Net share issues/(repurchases) 0 0 0 0 0 0 0 0
Dividends paid (442) (705) (740) (1,052) (940) (1,314) (1,583) (2,253)
Other financing CF items (2) (71) (231) 113 (189) 0 0 0
Cash flow from financing (272) (884) (525) (550) 1,157 (905) (1,493) (2,712)
Forex effect/others 0 0 0 0 0 0 0 0
Change in cash (60) 1,040 (752) 621 1,640 (698) (601) 4,735
Free cash flow 212 1,924 (227) 1,171 1,271 274 961 7,517
45
AAC Technologies (2018 HK): 2 January 2018
Financial summary continued …
Balance sheet (CNYm)
Key ratios (%)
Source: FactSet, Daiwa forecasts
As at 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Cash & short-term investment 1,314 2,354 1,603 2,224 3,864 3,167 2,566 7,300
Inventory 958 832 1,267 1,718 2,623 2,993 4,247 5,101
Accounts receivable 2,329 2,581 3,850 4,196 6,156 7,252 9,801 11,854
Other current assets 6 36 30 43 186 244 318 384
Total current assets 4,607 5,802 6,750 8,181 12,829 13,656 16,932 24,640
Fixed assets 3,624 3,969 5,285 7,080 9,494 13,517 17,026 17,295
Goodwill & intangibles 0 0 0 0 0 0 0 0
Other non-current assets 694 906 1,244 1,159 1,934 1,992 2,051 2,113
Total assets 8,926 10,677 13,279 16,420 24,257 29,164 36,010 44,048
Short-term debt 1,035 905 1,418 1,159 3,303 3,601 3,673 3,306
Accounts payable 1,575 1,617 2,388 2,919 5,346 5,904 6,703 8,050
Other current liabilities 141 157 195 248 476 452 482 534
Total current liabilities 2,751 2,679 4,001 4,326 9,125 9,958 10,858 11,890
Long-term debt 0 0 0 649 789 900 918 827
Other non-current liabilities 44 66 0 0 0 0 0 0
Total liabilities 2,796 2,745 4,001 4,975 9,915 10,858 11,776 12,717
Share capital 100 100 100 100 100 100 100 100
Reserves/R.E./others 6,030 7,832 9,178 11,346 14,243 18,206 24,134 31,231
Shareholders' equity 6,130 7,932 9,278 11,445 14,343 18,306 24,234 31,331
Minority interests 0 0 0 0 0 0 0 0
Total equity & liabilities 8,926 10,677 13,279 16,420 24,257 29,164 36,010 44,048
EV 146,599 145,428 146,693 146,462 147,106 148,212 148,903 143,710
Net debt/(cash) (279) (1,450) (185) (416) 228 1,335 2,026 (3,168)
BVPS (CNY) 4.992 6.459 7.555 9.320 11.680 14.907 19.734 25.514
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Sales (YoY) 54.8 28.9 9.7 32.2 32.1 31.3 30.2 20.9
EBITDA (YoY) 57.1 29.0 6.5 30.3 39.6 31.3 44.8 26.0
Operating profit (YoY) 62.8 28.5 4.6 29.2 40.6 30.8 42.5 23.4
Net profit (YoY) 70.1 46.2 (10.1) 34.1 29.6 31.1 42.3 24.5
Core EPS (fully-diluted) (YoY) 70.1 46.2 (10.1) 34.1 29.6 31.1 42.3 24.5
Gross-profit margin 44.2 42.7 41.4 41.5 41.5 41.2 42.3 42.7
EBITDA margin 34.9 34.9 33.9 33.4 35.3 35.3 39.3 41.0
Operating-profit margin 29.4 29.3 28.0 27.3 29.1 29.0 31.8 32.4
Net profit margin 28.1 31.8 26.1 26.5 26.0 25.9 28.3 29.2
ROAE 32.2 36.7 26.9 30.0 31.2 32.3 35.3 33.7
ROAA 22.5 26.3 19.3 20.9 19.8 19.8 23.0 23.4
ROCE 28.7 29.7 25.4 26.8 28.5 28.6 32.6 32.3
ROIC 31.7 34.9 28.6 28.9 30.6 30.5 32.3 34.0
Net debt to equity n.a. n.a. n.a. n.a. 1.6 7.3 8.4 n.a.
Effective tax rate 12.8 9.3 10.5 9.5 13.1 11.5 12.0 11.0
Accounts receivable (days) 110.9 110.7 132.2 125.1 121.8 120.2 117.4 123.3
Current ratio (x) 1.7 2.2 1.7 1.9 1.4 1.4 1.6 2.1
Net interest cover (x) n.a. n.a. n.a. 431.1 137.5 124.8 278.6 299.8
Net dividend payout 25.1 27.4 31.9 33.9 23.3 24.9 21.1 24.1
Free cash flow yield 0.1 1.3 n.a. 0.8 0.9 0.2 0.7 5.1
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.
46
AAC Technologies (2018 HK): 2 January 2018
Global dual-cam and 3D sensing adoption in smartphones Global smartphone lens sets market
Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts
Global dual-cam adoption in smartphones by brand Global 3D sensing adoption in smartphones by brand
Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts
AAC: quarterly and annual P&L
2017E 2018E 2019E
(CNYm) 1Q 2Q 3Q 4QE 1QE 2QE 3QE 4QE Net sales 4,215 4,429 5,324 6,392 5,130 5,722 6,981 8,666 20,360 26,500 32,050
Gross profit 2,461 1,787 2,199 2,648 2,102 2,364 2,996 3,747 8,388 11,210 13,685 Operating costs 524 580 685 695 657 671 713 755 2,484 2,796 3,301 Operating profit 1,230 1,207 1,514 1,953 1,445 1,693 2,283 2,992 5,904 8,414 10,384 Pre-tax profit 1,226 1,215 1,499 2,022 1,475 1,723 2,313 3,022 5,962 8,534 10,505 Net profit 1,062 1,065 1,366 1,785 1,306 1,525 2,036 2,644 5,278 7,511 9,350 EPS (CNY) 0.86 0.87 1.12 1.46 1.07 1.25 1.67 2.16 4.30 6.12 7.61 Margins Gross margins 41.6% 40.4% 41.3% 41.4% 41.0% 41.3% 42.9% 43.2% 41.2% 42.3% 42.7% Operating margin 29.2% 27.3% 28.4% 30.6% 28.2% 29.6% 32.7% 34.5% 29.0% 31.8% 32.4% Pre-tax margin 29.1% 27.4% 28.2% 31.6% 28.8% 30.1% 33.1% 34.9% 29.3% 32.2% 32.8% Net margin 25.2% 24.0% 25.7% 27.9% 25.5% 26.7% 29.2% 30.5% 25.9% 28.3% 29.2% YoY (%) Net revenue 66% 47% 27% 11% 22% 29% 31% 36% 31% 30% 21% Gross profit 70% 42% 25% 11% 20% 32% 36% 42% 30% 34% 22% Operating income 90% 46% 25% 7% 18% 40% 51% 53% 31% 42% 23% Pre-tax income 85% 43% 19% 9% 20% 42% 54% 49% 29% 43% 23% Net income 72% 45% 24% 14% 23% 43% 49% 48% 31% 42% 25% QoQ (%) Net revenues -27% 5% 20% 20% -20% 12% 22% 24% Gross profit -27% 2% 23% 20% -21% 12% 27% 25% Operating income -33% -2% 25% 29% -26% 17% 35% 31% Pre-tax income -34% -1% 23% 35% -27% 17% 34% 31% Net income -32% 0% 28% 31% -27% 17% 33% 30%
Source: Company and Daiwa forecasts
AAC: 1-year-forward PER AAC: 1-year-forward PBR
Source: Bloomberg, Daiwa forecasts Source: Bloomberg, Daiwa forecasts
0%10%20%30%40%50%60%70%80%90%100%
0
1,000
2,000
2016 2017E 2018E 2019E 2020E
(m units)
Total smartphone Total dual-cam smartphoneTotal 3D sensing smartphone Dual-cam penetration rate (RHS)3D sensing penetration rate (RHS)
0
1
2
3
4
5
6
7
8
9
2016 2017E 2018E 2019E 2020E
(USDbn)
Single-cam (front+rear) Dual-cam
3D Sensing (Tx lens sets) 3D Sensing (Rx lens sets)
0
100
200
300
400
500
600
700
800
900
2016 2017E 2018E 2019E 2020E
(m units)
Apple Samsung Huawei Oppo Vivo Xioami Others
0
200
400
600
800
1,000
2016 2017E 2018E 2019E 2020E
(m units)
Apple (front) Apple (front + rear)
Samsung (front) Samsung (front + rear)
China & others (front) China & others (front + rear)
0
50
100
150
200
Jun-
07
Dec
-07
Jun-
08
Dec
-08
Jun-
09
Dec
-09
Jun-
10
Dec
-10
Jun-
11
Dec
-11
Jun-
12
Dec
-12
Jun-
13
Dec
-13
Jun-
14
Dec
-14
Jun-
15
Dec
-15
Jun-
16
Dec
-16
Jun-
17
Dec
-17
(HKD)
share price 9x 16x 23x 30x
0
50
100
150
200
Jun-
07
Dec
-07
Jun-
08
Dec
-08
Jun-
09
Dec
-09
Jun-
10
Dec
-10
Jun-
11
Dec
-11
Jun-
12
Dec
-12
Jun-
13
Dec
-13
Jun-
14
Dec
-14
Jun-
15
Dec
-15
Jun-
16
Dec
-16
Jun-
17
Dec
-17
(HKD)
share price 3x 5x 7x 9x
See important disclosures, including any required research certifications, beginning on page 115
China Information Technology
What's new: In addition to rising adoption of dual-cams on ongoing
camera spec upgrades, we continue to view Sunny as a key beneficiary of
the emerging trend of 3D sensing in smartphones (see The more the
merrier – multi-cameras are the next mega trend in smartphones [Part 3]).
Sunny remains one of our top sector picks. We view any share-price
pullback due to inventory adjustments from China smartphone brands for
the quiet season as an opportunity to accumulate. Reiterating Buy (1) call.
What's the impact: Rising 3D sensing boom in China. We forecast 3D
sensing adoption in smartphones to grow to 200-618m units for 2018-20E
(vs. 34m units in 2017E) with an USD13.5bn market size for module
vendors. We reiterate our view that Sunny is poised to benefit from this
trend on the back of its leading position in handset camera modules (HCM)
for China brands, its expertise in optical design and experience in 3D
sensing modules, and its cooperation with AMS (AMS SW, Not rated). Our
market research suggests China brands have strong interest in adopting
3D sensing in smartphones and we look for 3D sensing adoption in China
smartphones to grow to 30/120/225m units in 2018/19/20E, respectively,
from zero in 2017E, after software and design issues are resolved. Our
research also shows that Sunny is in talks with top-tier China brands and is
targeting the adoption of its 3D sensing for China smartphones from 3Q18.
In total, we forecast 3D sensing to contribute 4-12% of Sunny’s revenue for
2018-19E and expect this to increase further in 2020.
Favorable trends: dual-cams in smartphones + multi-cams in cars. On
broader adoption from high-end to mid-range smartphones, we estimate
dual-cam adoption to reach 31% of smartphones in 2018E, increasing to
40-48% in 2019-20E, which should provide strong drivers for Sunny’s HCM
and handset lens sets businesses. For its vehicle lens sets (VLS), we see
Sunny’s leading position remaining solid and expect it to continue
benefiting from the multi-cam trend in cars on rising adoption of ADAS.
Strong earnings growth. On back of continued spec upgrades, wider
adoption of dual-cams and the emerging trend of multi-cams in
smartphones, we forecast 42-49% YoY EPS growth for 2018-19E.
What we recommend: We reiterate our Buy (1) and TP of HKD165, based
on a 36x PER (above the past 3-year trading range of 10-36x), on our 1-
year forward EPS; Sunny could see a rerating if the contribution from 3D
sensing materialises. Key risk: higher pricing pressure due to competition.
How we differ: Our 2017-19E EPS are 5-15% above consensus which we
attribute to our more upbeat view on multi-cams in smartphones.
2 January 2018
Sunny Optical Technolog y
Key beneficiary of the multi-cam trend in smartphones
Multi-cam trends intact; to benefit from 3D sensing acceleration in 2019
Looking for 42-49% EPS growth in 2018-19E;
Reiterating Buy (1) and TP of HKD165; Sunny is one of our top picks
Source: Daiwa forecasts
Source: FactSet, Daiwa forecasts
Sunny Optical Technology (2382 HK)
Target price: HKD165.00 (from HKD165.00)
Share price (28 Dec): HKD99.40 | Up/downside: +66.0%
Kylie Huang(886) 2 8758 6248
Steven Yang(886) 2 8758 6245
Forecast revisions (%)
Year to 31 Dec 17E 18E 19E
Revenue change - - -
Net profit change - - -
Core EPS (FD) change - - -
50
119
188
256
325
20
53
85
118
150
Dec-16 Mar-17 Jun-17 Sep-17 Dec-17
Share price performance
Sunny Opti (LHS) Relative to HSI (RHS)
(HKD) (%)
12-month range 33.95-149.00
Market cap (USDbn) 13.70
3m avg daily turnover (USDm) 156.77
Shares outstanding (m) 1,077
Major shareholder Sun Xu Ltd (35.5%)
Financial summary (CNY)
Year to 31 Dec 17E 18E 19E
Revenue (m) 22,580 30,700 41,880
Operating profit (m) 2,976 4,574 6,533
Net profit (m) 2,750 4,096 5,830
Core EPS (fully-diluted) 2.553 3.803 5.413
EPS change (%) 116.4 48.9 42.4
Daiwa vs Cons. EPS (%) 4.6 8.1 14.7
PER (x) 32.7 21.9 15.4
Dividend yield (%) 0.3 0.8 0.5
DPS 0.291 0.638 0.376
PBR (x) 12.2 8.4 5.6
EV/EBITDA (x) 25.8 16.4 11.2
ROE (%) 44.8 45.2 43.3
48
Sunny Optical Technology (2382 HK): 2 January 2018
Financial summary
Key assumptions
Profit and loss (CNYm)
Cash flow (CNYm)
Source: FactSet, Daiwa forecasts
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Handset CCM shipment (m units) 97 133 187 228 270 325 375 442
Vehicle lens shipment (m units) 0 8 11 17 23 32 45 63
Handset lens shipment (m units) 36 26 75 302 379 580 707 851
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Handset CCM Revenues 2,307 4,157 6,576 7,785 11,055 17,319 23,912 33,205
Vehicle Lens Revenues 167 291 421 651 935 1,404 2,024 2,916
Other Revenue 1,510 1,365 1,429 2,260 2,622 3,858 4,764 5,759
Total Revenue 3,984 5,813 8,426 10,696 14,612 22,580 30,700 41,880
Other income 0 0 0 0 0 0 0 0
COGS (3,243) (4,846) (7,137) (8,933) (11,932) (17,748) (23,700) (32,206)
SG&A (214) (254) (320) (352) (485) (650) (849) (1,099)
Other op.expenses (163) (251) (392) (502) (694) (1,206) (1,576) (2,042)
Operating profit 363 462 577 909 1,501 2,976 4,574 6,533
Net-interest inc./(exp.) (3) (7) (14) (16) (16) (24) (24) (24)
Assoc/forex/extraord./others 37 49 71 (31) (38) 182 80 80
Pre-tax profit 397 504 634 862 1,446 3,134 4,630 6,589
Tax (58) (64) (73) (99) (175) (382) (532) (758)
Min. int./pref. div./others 7 (0) 5 (2) (1) (2) (2) (1)
Net profit (reported) 346 440 566 762 1,271 2,750 4,096 5,830
Net profit (adjusted) 346 440 566 762 1,271 2,750 4,096 5,830
EPS (reported)(CNY) 0.360 0.443 0.529 0.709 1.180 2.553 3.803 5.413
EPS (adjusted)(CNY) 0.360 0.443 0.529 0.709 1.180 2.553 3.803 5.413
EPS (adjusted fully-diluted)(CNY) 0.360 0.443 0.529 0.709 1.180 2.553 3.803 5.413
DPS (CNY) 0.071 0.102 0.112 0.154 0.207 0.291 0.638 0.376
EBIT 363 462 577 909 1,501 2,976 4,574 6,533
EBITDA 472 609 792 1,155 1,817 3,419 5,220 7,287
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Profit before tax 397 504 634 862 1,446 3,134 4,630 6,589
Depreciation and amortisation 109 147 215 246 317 443 645 753
Tax paid (58) (64) (73) (99) (175) (382) (532) (758)
Change in working capital (169) 55 (898) 609 (32) (1,361) (922) (1,220)
Other operational CF items 7 (0) 5 (2) (1) (2) (2) 0
Cash flow from operations 286 643 (117) 1,616 1,555 1,831 3,819 5,364
Capex (265) (286) (465) (351) (969) (1,500) (800) (800)
Net (acquisitions)/disposals 13 1 (62) (64) 11 0 0 0
Other investing CF items (38) (26) (178) (60) (58) 10 0 0
Cash flow from investing (291) (311) (705) (475) (1,016) (1,490) (800) (800)
Change in debt 34 392 56 167 234 11 0 0
Net share issues/(repurchases) 0 0 0 0 0 0 0 0
Dividends paid (69) (101) (120) (166) (223) (313) (687) (405)
Other financing CF items (27) 589 (55) (2) 21 0 0 0
Cash flow from financing (61) 879 (120) (0) 32 (303) (687) (405)
Forex effect/others 0 0 0 0 0 0 0 0
Change in cash (66) 1,211 (942) 1,141 571 39 2,331 4,159
Free cash flow 20 357 (582) 1,265 586 331 3,019 4,564
49
Sunny Optical Technology (2382 HK): 2 January 2018
Financial summary continued …
Balance sheet (CNYm)
Key ratios (%)
Source: FactSet, Daiwa forecasts
As at 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Cash & short-term investment 614 1,826 884 2,025 2,595 2,635 4,966 9,124
Inventory 748 768 896 897 2,828 2,535 3,386 4,601
Accounts receivable 901 1,172 2,388 3,003 3,716 4,640 6,308 8,605
Other current assets 4 1 36 93 178 205 256 322
Total current assets 2,267 3,766 4,204 6,017 9,318 10,015 14,916 22,653
Fixed assets 646 785 1,035 1,141 1,794 2,851 3,005 3,052
Goodwill & intangibles 0 0 0 0 0 0 0 0
Other non-current assets 89 114 354 478 525 515 515 515
Total assets 3,002 4,665 5,594 7,636 11,637 13,380 18,436 26,219
Short-term debt 103 489 522 683 904 922 922 922
Accounts payable 939 1,257 1,744 2,914 5,573 4,862 6,493 8,823
Other current liabilities 11 36 31 142 181 188 205 233
Total current liabilities 1,052 1,782 2,297 3,739 6,658 5,972 7,619 9,978
Long-term debt 0 18 36 33 31 49 49 49
Other non-current liabilities 18 6 11 19 34 10 10 10
Total liabilities 1,070 1,805 2,343 3,791 6,723 6,031 7,678 10,036
Share capital 98 105 105 105 105 105 105 105
Reserves/R.E./others 1,834 2,755 3,145 3,740 4,808 7,245 10,653 16,078
Shareholders' equity 1,932 2,860 3,251 3,845 4,913 7,350 10,758 16,183
Minority interests 0 0 0 0 0 0 0 0
Total equity & liabilities 3,002 4,665 5,594 7,636 11,637 13,380 18,436 26,219
EV 89,344 88,537 89,529 88,547 88,196 88,191 85,859 81,701
Net debt/(cash) (512) (1,319) (327) (1,309) (1,660) (1,665) (3,996) (8,154)
BVPS (CNY) 2.007 2.876 3.038 3.579 4.562 6.824 9.989 15.026
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Sales (YoY) 59.5 45.9 45.0 26.9 36.6 54.5 36.0 36.4
EBITDA (YoY) 58.1 29.1 30.0 45.9 57.3 88.1 52.7 39.6
Operating profit (YoY) 73.0 27.1 24.9 57.6 65.0 98.3 53.7 42.8
Net profit (YoY) 60.8 27.2 28.5 34.5 66.8 116.4 48.9 42.4
Core EPS (fully-diluted) (YoY) 61.3 23.1 19.4 34.0 66.4 116.4 48.9 42.4
Gross-profit margin 18.6 16.6 15.3 16.5 18.3 21.4 22.8 23.1
EBITDA margin 11.8 10.5 9.4 10.8 12.4 15.1 17.0 17.4
Operating-profit margin 9.1 7.9 6.8 8.5 10.3 13.2 14.9 15.6
Net profit margin 8.7 7.6 6.7 7.1 8.7 12.2 13.3 13.9
ROAE 19.2 18.4 18.5 21.5 29.0 44.8 45.2 43.3
ROAA 12.9 11.5 11.0 11.5 13.2 22.0 25.7 26.1
ROCE 19.1 17.1 16.1 21.7 28.8 42.0 45.6 45.2
ROIC 24.8 27.3 22.9 29.5 45.6 58.5 65.0 78.2
Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Effective tax rate 14.7 12.6 11.5 11.5 12.1 12.2 11.5 11.5
Accounts receivable (days) 70.0 65.1 77.1 92.0 83.9 67.5 65.1 65.0
Current ratio (x) 2.2 2.1 1.8 1.6 1.4 1.7 2.0 2.3
Net interest cover (x) 115.7 70.0 41.3 56.8 92.7 125.0 188.6 269.4
Net dividend payout 19.8 22.9 21.3 21.8 17.6 11.4 16.8 6.9
Free cash flow yield 0.0 0.4 n.a. 1.4 0.7 0.4 3.4 5.1
Company profile
Founded in 1984, Sunny Optical is the leading optical component manufacturer in the China
technology supply chain. It develops and provides optical-related products with various
applications, including instruments, components and opto-electronic modules. The company's
major customers include leading China smartphone brand name makers Huawei, Lenovo and
OPPO.
50
Sunny Optical Technology (2382 HK): 2 January 2018
Global dual-cam adoption in smartphones Global 3D sensing adoption in smartphones
Source: Company, Daiwa forecasts
Source: Company, Daiwa forecasts
Global smartphone camera module market Global smartphone lens sets market
Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts
Sunny Optical: semi-annual and annual P&L statement
2017 2018 2017E 2018E 2019E (CNYm) 1H 2HE 1HE 2HE
Net sales 10,032 12,548 13,043 17,657 22,580 30,700 41,880 COGS 7,962 9,786 10,137 13,564 17,748 23,700 32,206 Gross profit 2,070 2,762 2,906 4,094 4,832 7,000 9,674 Operating costs 822 1,034 1,116 1,310 1,856 2,425 3,141 Operating profit 1,248 1,728 1,790 2,784 2,976 4,574 6,533 Pre-tax income 1398 1734 1820 2808 3,132 4,628 6,588 Net income 1159 1591 1620 2476 2,750 4,096 5,830 EPS (CNY) 1.08 1.48 1.50 2.30 2.55 3.80 5.41 Operating ratios Gross margin 20.6% 22.0% 22.3% 23.2% 21.4% 22.8% 23.1% Operating margin 12.4% 13.8% 13.7% 15.8% 13.2% 14.9% 15.6% Pre-tax margin 13.9% 13.8% 14.0% 15.9% 13.9% 15.1% 15.7% Net margin 11.6% 12.7% 12.4% 14.0% 12.2% 13.3% 13.9% YoY (%) Net revenue 70% 44% 30% 41% 55% 36% 36% Gross profit 109% 63% 40% 48% 80% 45% 38% Operating income 148% 73% 43% 61% 98% 54% 43% Pre-tax income 153% 94% 30% 62% 117% 48% 42% Net income 149% 97% 40% 56% 116% 49% 42% HoH (%) Net revenue 15% 25% 4% 35% Gross profit 22% 33% 5% 41% Operating income 25% 39% 4% 56% Pre-tax income 57% 24% 5% 54% Net income 44% 37% 2% 53%
Source: Company, Daiwa forecasts
Sunny Optical: 1-year-forward PER Sunny Optical: 1-year-forward PBR
Source: Bloomberg, Daiwa forecasts Source: Bloomberg, Daiwa forecasts
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0
500
1,000
1,500
2,000
2016 2017E 2018E 2019E 2020E
(m units)
Total smartphone Total dual-cam smartphone Penetration rate
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0
500
1,000
1,500
2,000
2016 2017E 2018E 2019E 2020E
(m units)
Total smartphone Total 3D sensing smartphone Penetration rate
0
10
20
30
40
50
2016 2017E 2018E 2019E 2020E
(USDbn)
Single-cam (front+rear) Dual-cam 3D Sensing
0
2
4
6
8
10
2016 2017E 2018E 2019E 2020E
(USDbn)
Single-cam (front+rear) Dual-cam
3D Sensing (Tx lens sets) 3D Sensing (Rx lens sets)
0
50
100
150
200
Jun-
09
Dec
-09
Jun-
10
Dec
-10
Jun-
11
Dec
-11
Jun-
12
Dec
-12
Jun-
13
Dec
-13
Jun-
14
Dec
-14
Jun-
15
Dec
-15
Jun-
16
Dec
-16
Jun-
17
Dec
-17
(HKD)
Sunny 18x 26x 34x 42x
0
50
100
150
200
Jun-
09
Dec
-09
Jun-
10
Dec
-10
Jun-
11
Dec
-11
Jun-
12
Dec
-12
Jun-
13
Dec
-13
Jun-
14
Dec
-14
Jun-
15
Dec
-15
Jun-
16
Dec
-16
Jun-
17
Dec
-17
(HKD)
Sunny 4x 8x 12x 16x
See important disclosures, including any required research certifications, beginning on page 115
Korea Information Technology
What's new: We expect SEMCO to post strong earnings improvement in
2018 as we see positive tailwinds in the multi-layer ceramic capacitor
(MLCC), rigid flex (RF)-PCB and substrate-like PCB (SLP) markets. In our
view, 2H17 was just the beginning of a turnaround in earnings and we are
now more upbeat on SEMCO as the largest electronics-component
manufacturer in Korea.
What's the impact: Strong earnings momentum likely to continue in
2018E. We forecast SEMCO to post revenue of KRW8.3tn (+20.8% YoY)
and operating profit of KRW629bn (+96% YoY) in 2018. We see its
operating margin improving to 7.6% in 2018E (from 0.4%/4.7% in
2016/2017E). We believe 2018 will be a noteworthy year for SEMCO as we
expect revenue and operating profit improvement in all of its divisions.
Good times for MLCC, RF-PCB and SLP. Due to limited capacity
increases from key suppliers and difficulty in producing high-value MLCC,
we expect the MLCC market to remain tight in 2018. Given solid demand
for high premium MLCC for automotive use, leading MLCC makers are
allocating more capacity to autos while conservatively increasing capacity
for the IT segment. In its advanced circuit interconnection (ACI) segment,
while we expect high revenue growth for RF-PCBs to continue, we also
expect SLPs for high-end smartphones to drive earnings improvement in
2018. SEC has said it will adopt SLPs in its Galaxy S9 in 2018 and we
believe this is just the beginning of the penetration of SLPs in smartphones.
With 36% YoY revenue growth in 2018E, we expect the ACI division to turn
profitable to record an operating margin of 2.3% (vs. KRW72bn loss in
2017E). In digital modules (DM), we forecast earnings improvement from
increased adoption of dual-camera modules for key customers and China
smartphone makers. SEMCO is also developing a 3D-sensing module due
to increased demand from China customers. However, we expect a
meaningful contribution to earnings to be beyond 2018 due to a delay in its
key customer’s adoption.
What we recommend: We reiterate our Buy (1) call with an unchanged 12-
month target price of KRW132,000. Our target price is based on 25.0x
(unchanged) PER applied to our 2018E EPS forecast. Key risk to our call:
sharp decline in high-end smartphone demand.
How we differ: Our 2018-19E EPS forecasts are 3-6% higher than the
Bloomberg consensus, which we attribute to our more positive view on
SEMCO’s MLCC business.
2 January 2018
Samsung El ectro-M echanics
Solid earnings momentum driven by multiple positives
We expect strong earnings momentum in 2018E
Multiple positives in 2018: MLCC, RF-PCB, dual-camera and SLP
Reiterating Buy (1) call with an unchanged TP of KRW132,000
Source: Daiwa forecasts
Source: FactSet, Daiwa forecasts
Samsung Electro-Mechanics (009150 KS)
Target price: KRW132,000 (from KRW132,000)
Share price (28 Dec): KRW100,000 | Up/downside: +32.0%
SK Kim(82) 2 787 9173
Henny Jung(82) 2 787 9182
Forecast revisions (%)
Year to 31 Dec 17E 18E 19E
Revenue change - - -
Net profit change - - -
Core EPS (FD) change - - -
90
115
140
165
190
50,000
66,250
82,500
98,750
115,000
Dec-16 Mar-17 Jun-17 Sep-17 Dec-17
Share price performance
Samsung EM (LHS)Relative to KOSPI (RHS)
(KRW) (%)
12-month range 50,500-112,000
Market cap (USDbn) 6.95
3m avg daily turnover (USDm) 64.50
Shares outstanding (m) 75
Major shareholder Samsung Electronics (23.7%)
Financial summary (KRW)
Year to 31 Dec 17E 18E 19E
Revenue (bn) 6,836 8,257 9,445
Operating profit (bn) 321 629 702
Net profit (bn) 190 409 492
Core EPS (fully-diluted) 2,449 5,266 6,337
EPS change (%) n.a. 115.0 20.3
Daiwa vs Cons. EPS (%) 1.3 3.4 5.5
PER (x) 40.8 19.0 15.8
Dividend yield (%) 0.6 0.7 0.7
DPS 600 700 700
PBR (x) 1.7 1.5 1.3
EV/EBITDA (x) 8.1 5.8 5.2
ROE (%) 4.4 8.6 9.2
52
Samsung Electro-Mechanics (009150 KS): 2 January 2018
Financial summary
Key assumptions
Profit and loss (KRWbn)
Cash flow (KRWbn)
Source: FactSet, Daiwa forecasts
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
MLCC ASP (%) 31.8 (3.2) (7.1) 3.0 (9.3) 6.0 12.2 (2.1)
MLCC volume (%) (14.5) (0.7) 4.9 3.4 4.2 19.6 15.9 11.5
Camera module ASP (%) 10.9 (4.6) 12.3 1.4 (6.8) (1.1) 8.4 4.9
Camera module volume (%) 77.5 35.8 (31.3) 11.6 26.0 20.7 5.6 4.8
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
ACI (Advanced Circuit Interconnection) 2,076 1,864 1,631 1,518 1,320 1,416 1,922 2,519
LCR (Linkage of magnetic Flux coil,
Capacitor, Resistor)1,898 1,915 1,883 2,028 1,923 2,290 2,923 3,217
Other Revenue 3,938 4,477 2,586 2,631 2,790 3,131 3,413 3,709
Total Revenue 7,913 8,257 6,100 6,176 6,033 6,836 8,257 9,445
Other income 27 (2) 772 0 0 0 0 0
COGS (6,393) (6,709) (5,065) (4,865) (5,006) (5,538) (6,514) (7,468)
SG&A (939) (1,083) (971) (1,010) (1,002) (978) (1,115) (1,275)
Other op.expenses 0 0 (0) 0 0 0 0 0
Operating profit 608 462 837 301 24 321 629 702
Net-interest inc./(exp.) (32) (29) (28) (18) (31) (46) (42) (38)
Assoc/forex/extraord./others 35 3 783 84 39 13 6 16
Pre-tax profit 611 436 1,592 367 32 288 593 679
Tax (158) (90) (127) (45) (9) (87) (173) (177)
Min. int./pref. div./others (38) (15) (186) (9) (8) (11) (11) (11)
Net profit (reported) 414 330 1,279 313 15 190 409 492
Net profit (adjusted) 414 330 1,279 313 15 190 409 492
EPS (reported)(KRW) 5,182 4,443 8,230 4,031 190 2,449 5,266 6,337
EPS (adjusted)(KRW) 5,182 4,443 8,230 4,031 190 2,449 5,266 6,337
EPS (adjusted fully-diluted)(KRW) 5,182 4,443 8,230 4,031 190 2,449 5,266 6,337
DPS (KRW) 1,000 750 750 500 550 600 700 700
EBIT 608 462 837 301 24 321 629 702
EBITDA 1,127 1,082 1,497 795 633 1,101 1,407 1,482
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Profit before tax 611 436 1,592 367 32 288 593 679
Depreciation and amortisation 519 619 660 494 608 780 778 780
Tax paid (158) (90) (127) (45) (9) (87) (173) (177)
Change in working capital 625 (84) (51) 180 32 (226) (185) (218)
Other operational CF items (477) 24 (1,702) (459) 16 180 161 155
Cash flow from operations 1,119 904 373 537 680 936 1,173 1,219
Capex (907) (961) (860) (1,196) (1,052) (1,260) (790) (790)
Net (acquisitions)/disposals 50 20 15 186 68 33 17 17
Other investing CF items 155 126 473 789 (202) 70 (130) (130)
Cash flow from investing (702) (815) (372) (221) (1,186) (1,157) (903) (903)
Change in debt (69) 85 107 328 402 240 (134) (127)
Net share issues/(repurchases) (1) 0 (0) 0 0 0 0 0
Dividends paid (58) (79) (58) (63) (41) (48) (53) (53)
Other financing CF items (225) (44) (129) (298) (121) 98 240 240
Cash flow from financing (352) (38) (80) (33) 240 291 53 60
Forex effect/others 0 0 0 0 0 0 0 0
Change in cash 65 52 (80) 283 (266) 70 323 376
Free cash flow 213 (57) (487) (659) (372) (324) 383 429
53
Samsung Electro-Mechanics (009150 KS): 2 January 2018
Financial summary continued …
Balance sheet (KRWbn)
Key ratios (%)
Source: FactSet, Daiwa forecasts
As at 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Cash & short-term investment 707 769 1,477 1,124 1,105 1,359 1,967 2,290
Inventory 838 888 841 679 827 775 902 1,036
Accounts receivable 931 724 900 684 648 957 1,073 1,228
Other current assets 156 270 336 243 233 239 237 236
Total current assets 2,631 2,651 3,554 2,730 2,812 3,330 4,179 4,790
Fixed assets 2,586 2,950 2,926 3,298 3,714 4,008 4,023 4,036
Goodwill & intangibles 245 225 104 91 92 92 93 93
Other non-current assets 1,429 1,360 1,135 1,353 1,044 1,073 1,026 978
Total assets 6,891 7,185 7,719 7,269 7,663 8,504 9,321 9,898
Short-term debt 942 897 1,116 1,025 1,166 1,934 1,857 1,784
Accounts payable 476 393 391 272 396 406 472 540
Other current liabilities 541 497 643 471 481 509 499 500
Total current liabilities 1,959 1,787 2,151 1,768 2,043 2,849 2,829 2,825
Long-term debt 579 709 597 1,017 1,278 750 692 638
Other non-current liabilities 387 431 328 169 4 383 521 666
Total liabilities 2,926 2,927 3,076 2,954 3,325 3,982 4,042 4,129
Share capital 388 388 388 388 388 388 388 388
Reserves/R.E./others 3,506 3,786 4,165 3,834 3,852 4,031 4,770 5,209
Shareholders' equity 3,894 4,174 4,553 4,222 4,240 4,419 5,158 5,597
Minority interests 71 84 89 93 97 101 121 171
Total equity & liabilities 6,891 7,185 7,719 7,269 7,663 8,502 9,321 9,897
EV 8,355 8,391 7,795 8,436 8,906 8,895 8,173 7,773
Net debt/(cash) 814 837 236 917 1,339 1,325 583 132
BVPS (KRW) 51,103 54,871 59,829 55,610 55,896 58,248 68,031 74,329
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Sales (YoY) 31.2 4.3 (26.1) 1.2 (2.3) 13.3 20.8 14.4
EBITDA (YoY) 14.9 (4.0) 38.4 (46.9) (20.5) 74.0 27.7 5.3
Operating profit (YoY) 91.7 (23.9) 80.9 (64.0) (91.9) 1,215.0 96.0 11.6
Net profit (YoY) 36.0 (20.3) 287.2 (75.5) (95.3) 1,192.3 115.0 20.3
Core EPS (fully-diluted) (YoY) 45.8 (14.3) 85.3 (51.0) (95.3) 1,192.3 115.0 20.3
Gross-profit margin 19.2 18.7 17.0 21.2 17.0 19.0 21.1 20.9
EBITDA margin 14.2 13.1 24.5 12.9 10.5 16.1 17.0 15.7
Operating-profit margin 7.7 5.6 13.7 4.9 0.4 4.7 7.6 7.4
Net profit margin 5.2 4.0 21.0 5.1 0.2 2.8 4.9 5.2
ROAE 11.2 8.2 29.4 7.2 0.3 4.4 8.6 9.2
ROAA 5.8 4.7 17.2 4.2 0.2 2.4 4.6 5.1
ROCE 11.1 8.1 13.7 4.7 0.4 4.6 8.4 8.8
ROIC 9.3 7.4 15.4 5.2 0.3 3.9 7.6 8.8
Net debt to equity 20.9 20.1 5.2 21.7 0.0 0.0 0.0 0.0
Effective tax rate 25.9 20.7 8.0 12.1 28.6 30.1 29.2 26.0
Accounts receivable (days) 40.5 36.6 48.6 46.8 40.3 42.8 44.9 44.5
Current ratio (x) 1.3 1.5 1.7 1.5 1.4 1.2 1.5 1.7
Net interest cover (x) 19.0 15.8 30.3 16.3 0.8 7.0 15.1 18.2
Net dividend payout 19.3 16.9 9.1 12.4 290.2 24.5 13.3 11.0
Free cash flow yield 2.8 n.a. n.a. n.a. n.a. n.a. 5.1 5.7
Company profile
Samsung Electro-Mechanics (SEMCO) is the largest electronics-component manufacturer in Korea
in terms of market cap. The company's core products are MLCCs, handset PCBs, IC-packaging
substrates, and camera modules. Its major customers include Samsung Electronics mainly for
mobile, and a number of Chinese smartphone makers.
54
Samsung Electro-Mechanics (009150 KS): 2 January 2018
SEMCO: earnings forecasts by division
(KRW bn) 1Q17 2Q17 3Q17 4Q17E 2016 2017E 2018E 2019E
Revenue 1,570 1,710 1,841 1,715 6,033 6,836 8,257 9,445
DM 773 836 822 661 2,743 3,092 3,413 3,709
Camera Module 649 677 682 564 2,089 2,572 2,959 3,253
LCR 490 542 608 649 1,923 2,290 2,923 3,217
MLCC 436 483 547 597 1,677 2,064 2,682 2,927
ACI 293 320 400 404 1,320 1,416 1,922 2,519
Operating profit 25.5 70.7 103.1 121.5 24.4 320.8 628.9 702.1
DM 18.4 33.8 31.2 13.3 52.5 96.7 131.4 159.6
Camera Module 14.6 32.2 29.8 12.4 44.2 89.1 124.9 152.4
LCR 45.5 60.5 87.0 103.1 125.2 296.2 452.5 452.4
MLCC 48.2 57.0 83.3 100.5 123.4 289.0 448.4 446.8
ACI (38.1) (23.6) (15.1) 5.1 (152.8) (71.8) 45.1 90.2
OP margin 1.6% 4.1% 5.6% 7.1% 0.4% 4.7% 7.6% 7.4%
DM 2.4% 4.0% 3.8% 2.0% 1.9% 3.1% 3.8% 4.3%
Camera Module 2.3% 4.8% 4.4% 2.2% 2.1% 3.5% 4.2% 4.7%
LCR 9.3% 11.2% 14.3% 15.9% 6.5% 12.9% 15.5% 14.1%
MLCC 11.1% 11.8% 15.2% 16.8% 7.4% 14.0% 16.7% 15.3%
ACI -13.0% -7.4% -3.8% 1.3% -11.6% -5.1% 2.3% 3.6%
Source: Company, Daiwa forecasts
SEMCO: revenue by division SEMCO: operating-profit margin by division
Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts
SEMCO: peer EPS growth vs. PER SEMCO: peer PEG comparison
Source: Bloomberg, Daiwa forecasts (SEMCO and LGI) Note: EPS growth = 2017-18 growth, PER=2017-18 average PER
Source: Bloomberg, Daiwa forecasts (SEMCO and LGI) Note: PEG = [17-18E average PER/17-18E EPS growth]
22% 21% 23% 27%
32% 33%35% 34%
45% 45% 41% 39%
0%
20%
40%
60%
80%
100%
2016 2017E 2018E 2019E
ACI LCR DM
(15%)
(10%)
(5%)
0%
5%
10%
15%
20%
2016 2017E 2018E 2019E
DM LCR ACI
LGI
SEMCO
Sunny Optical
O-FilmLargan
Minebea MitsumiAlps
0%
20%
40%
60%
80%
100%
120%
140%
0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0
(EPS growth)
(P/E)
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5
LGI
SEMCO
Sunny Optical
O-Film
Largan
Minebea Mitsumi
Alps
See important disclosures, including any required research certifications, beginning on page 115
Korea Information Technology
What's new: We forecast a meaningful penetration by OLED in the mobile
and TV segments in 2018, and look for LG Display (LGD) to be a
beneficiary of OLED’s market transition. LGD is trading currently at 8.3x our
2018 EPS forecast, which we consider to be attractive.
What's the impact: Expecting weaker earnings for 4Q17. At its 3Q17
earnings call, LGD guided for mid-single digit QoQ growth in its shipments
by area and an overall decline in ASPs in 4Q17. The extent of the decline
in LCD panel prices eased in 4Q17, as panel makers focused on
profitability while set makers held promotions. Still, we expect weaker
earnings QoQ for 4Q17 due to cost increases for plastic OLED for mobile
use (LGD started mass production of plastic OLED at its E5 line in 3Q17),
as well as KRW appreciation. We expect the company’s earnings to
recover from 2Q18, backed by a further easing in the decline in LCD panel
prices together with an increase in the sales of OLED TV panels.
OLED TV business likely to turn around in 2018. For full-year 2018, we
forecast LGD to post revenue of KRW27tn (down 2% YoY) and operating
profit of KRW1.9tn (down 33% YoY), due mainly to the decline in LCD TV
panel prices and increase in plastic OLED costs. However, considering the
solid demand for OLED-TV and LGD’s position as the only global vendor of
the panels, we believe its OLED-TV panel business could support further
earnings upside in 2018, depending on its allocation and pricing strategy.
Also, we expect the company’s LCD business to realise solid earnings from
the premium segment for TV/IT products. Despite the Korean government’s
publicly stated concern over technology leakage, we expect LGD’s OLED
investment in Guangzhou (Gen-8.5 OLED 60K sheets/month) to remain on
track (production scheduled to begin in 1H19). Further out, we expect
plastic OLED for mobile to make a meaningful earnings contribution from
2019.
What we recommend: We reiterate our Buy (1) call with an unchanged
12-month target price of KRW39,000. Our target price is based on a PBR
of 0.9x applied to LGD’s 2017-18E average BVPS. Key risk: a further delay
in securing solid yields for plastic OLED.
How we differ: Our 2018-19E EPS are 15% above the consensus, which
we believe is due to our positive view on the OLED TV market.
2 January 2018
LG Displ ay
Driving the shift to OLED
Weaker earnings in near term due to LCD price decline, OLED costs
But OLED TV business looks set for turnaround in 2018E
Reiterating Buy (1) call with unchanged TP of KRW39,000
Source: Daiwa forecasts
Source: FactSet, Daiwa forecasts
LG Display (034220 KS)
Target price: KRW39,000 (from KRW39,000)
Share price (28 Dec): KRW29,900 | Up/downside: +30.4%
SK Kim(82) 2 787 9173
Henny Jung(82) 2 787 9182
Forecast revisions (%)
Year to 31 Dec 17E 18E 19E
Revenue change - - -
Net profit change - - -
Core EPS (FD) change - - -
70
79
88
96
105
26,000
29,250
32,500
35,750
39,000
Dec-16 Mar-17 Jun-17 Sep-17 Dec-17
Share price performance
LG Display (LHS) Relative to KOSPI (RHS)
(KRW) (%)
12-month range 27,300-38,900
Market cap (USDbn) 9.99
3m avg daily turnover (USDm) 83.21
Shares outstanding (m) 358
Major shareholder LG Electronics (37.9%)
Financial summary (KRW)
Year to 31 Dec 17E 18E 19E
Revenue (bn) 27,810 27,252 30,496
Operating profit (bn) 2,790 1,858 2,322
Net profit (bn) 1,986 1,296 1,540
Core EPS (fully-diluted) 5,550 3,622 4,303
EPS change (%) 119.0 (34.7) 18.8
Daiwa vs Cons. EPS (%) (3.1) 14.5 15.2
PER (x) 5.4 8.3 6.9
Dividend yield (%) 1.7 1.7 1.7
DPS 500 500 500
PBR (x) 0.7 0.7 0.6
EV/EBITDA (x) 1.8 1.9 1.6
ROE (%) 14.4 8.6 9.8
56
LG Display (034220 KS): 2 January 2018
Financial summary
Key assumptions
Profit and loss (KRWbn)
Cash flow (KRWbn)
Source: FactSet, Daiwa forecasts
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Large-size panel area growth (YoY%) 34.7 11.6 16.6 (3.8) 4.5 6.6 4.8 1.2
Large-size ASP growth (YoY%) 0.4 (3.2) (10.0) (16.6) (11.7) 7.3 (7.0) (0.7)
TV panel shipment area % to total 65.5 66.9 70.3 73.3 75.2 77.4 79.1 80.5
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
TV 13,620 11,791 10,555 10,902 10,197 12,019 12,508 14,523
Monitor 5,087 5,328 4,654 4,537 4,022 4,352 3,949 3,640
Other Revenue 10,722 9,914 11,247 12,945 12,285 11,439 10,796 12,333
Total Revenue 29,430 27,033 26,456 28,384 26,504 27,810 27,252 30,496
Other income 4,469 3,835 3,492 3,376 3,022 4,150 5,240 5,753
COGS (26,425) (23,525) (22,667) (24,070) (22,754) (22,349) (22,854) (25,356)
SG&A (2,093) (2,345) (2,431) (2,689) (2,438) (2,670) (2,539) (2,817)
Other op.expenses (4,469) (3,835) (3,492) (3,376) (3,022) (4,150) (5,240) (5,753)
Operating profit 912 1,163 1,357 1,626 1,311 2,790 1,858 2,322
Net-interest inc./(exp.) (159) (119) (61) (71) (72) (30) 12 13
Assoc/forex/extraord./others (295) (214) (55) (121) 77 (85) 19 (123)
Pre-tax profit 459 830 1,242 1,434 1,316 2,675 1,889 2,212
Tax (222) (411) (325) (411) (385) (542) (456) (538)
Min. int./pref. div./others (3) 7 (13) (57) (25) (148) (137) (135)
Net profit (reported) 233 426 904 967 907 1,986 1,296 1,540
Net profit (adjusted) 233 426 904 967 907 1,986 1,296 1,540
EPS (reported)(KRW) 652 1,191 2,527 2,701 2,534 5,550 3,622 4,303
EPS (adjusted)(KRW) 652 1,191 2,527 2,701 2,534 5,550 3,622 4,303
EPS (adjusted fully-diluted)(KRW) 652 1,191 2,527 2,701 2,534 5,550 3,622 4,303
DPS (KRW) 0 0 0 500 500 500 500 500
EBIT 912 1,163 1,357 1,626 1,311 2,790 1,858 2,322
EBITDA 5,382 4,998 4,850 5,001 4,333 6,940 7,098 8,075
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Profit before tax 459 830 1,242 1,434 1,316 2,675 1,889 2,212
Depreciation and amortisation 4,469 3,835 3,492 3,376 3,022 4,150 5,240 5,753
Tax paid (222) (411) (325) (411) (385) (542) (456) (538)
Change in working capital (1,156) (2,444) (940) (1,820) 1,054 1,764 212 43
Other operational CF items 1,020 1,775 (605) 147 (1,366) 30 (555) (450)
Cash flow from operations 4,570 3,585 2,865 2,727 3,641 8,078 6,329 7,020
Capex (3,972) (3,473) (2,983) (2,365) (3,736) (7,022) (7,100) (6,900)
Net (acquisitions)/disposals 59 40 40 447 278 90 26 26
Other investing CF items 225 (1,071) (508) (814) 269 (40) (57) (50)
Cash flow from investing (3,688) (4,504) (3,451) (2,732) (3,189) (6,972) (7,131) (6,924)
Change in debt (67) (553) 345 (23) 555 353 (56) (124)
Net share issues/(repurchases) 0 0 0 0 0 0 0 0
Dividends paid 0 0 0 (179) (179) 0 (179) (179)
Other financing CF items 19 162 60 28 (68) (117) (77) 240
Cash flow from financing (48) (391) 405 (174) 308 236 (313) (63)
Forex effect/others (13) (6) 50 42 0 0 0 0
Change in cash 821 (1,317) (132) (138) 760 1,342 (1,114) 33
Free cash flow 597 112 (118) 362 (95) 1,056 (771) 120
57
LG Display (034220 KS): 2 January 2018
Financial summary continued …
Balance sheet (KRWbn)
Key ratios (%)
Source: FactSet, Daiwa forecasts
As at 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Cash & short-term investment 2,654 2,323 2,416 2,524 2,722 3,965 2,877 2,953
Inventory 2,390 1,933 2,754 2,352 2,288 2,317 2,369 2,629
Accounts receivable 3,533 3,218 3,564 4,204 5,102 3,615 3,543 3,964
Other current assets 653 1,559 2,033 2,225 1,536 1,556 1,571 1,576
Total current assets 9,230 9,033 10,767 11,304 11,648 11,453 10,361 11,121
Fixed assets 13,108 11,808 11,403 10,546 12,031 15,230 17,259 18,548
Goodwill & intangibles 498 468 577 839 895 673 566 494
Other non-current assets 1,211 1,707 1,747 1,661 1,540 463 994 449
Total assets 24,456 21,715 22,967 22,577 24,884 27,827 29,180 30,613
Short-term debt 1,015 908 968 1,416 668 859 936 936
Accounts payable 4,147 3,000 3,392 2,765 2,877 2,897 2,974 3,300
Other current liabilities 4,044 2,881 3,190 2,426 3,513 3,821 3,949 4,352
Total current liabilities 9,206 6,789 7,550 6,607 7,058 7,577 7,859 8,588
Long-term debt 3,441 2,995 3,279 2,808 4,111 4,273 4,140 4,016
Other non-current liabilities 1,569 1,134 355 457 253 900 1,250 1,250
Total liabilities 14,215 10,918 11,184 9,872 11,422 12,749 13,249 13,854
Share capital 1,789 1,789 1,789 1,789 1,789 1,789 1,789 1,789
Reserves/R.E./others 8,421 8,822 9,642 10,404 11,167 12,819 13,569 14,396
Shareholders' equity 10,210 10,611 11,431 12,193 12,956 14,608 15,358 16,186
Minority interests 30 186 352 512 506 470 574 574
Total equity & liabilities 24,456 21,715 22,967 22,577 24,884 27,827 29,180 30,613
EV 12,129 12,058 12,474 12,526 13,089 12,219 13,334 13,132
Net debt/(cash) 1,802 1,579 1,831 1,700 2,056 1,167 2,198 1,999
BVPS (KRW) 28,619 30,176 32,932 35,507 37,624 42,139 44,524 46,838
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Sales (YoY) 21.2 (8.1) (2.1) 7.3 (6.6) 4.9 (2.0) 11.9
EBITDA (YoY) 86.4 (7.1) (3.0) 3.1 (13.4) 60.2 2.3 13.8
Operating profit (YoY) n.a. 27.5 16.7 19.8 (19.3) 112.8 (33.4) 25.0
Net profit (YoY) n.a. 82.7 112.2 6.9 (6.2) 119.0 (34.7) 18.8
Core EPS (fully-diluted) (YoY) n.a. 82.7 112.2 6.9 (6.2) 119.0 (34.7) 18.8
Gross-profit margin 10.2 13.0 14.3 15.2 14.1 19.6 16.1 16.9
EBITDA margin 18.3 18.5 18.3 17.6 16.3 25.0 26.0 26.5
Operating-profit margin 3.1 4.3 5.1 5.7 4.9 10.0 6.8 7.6
Net profit margin 0.8 1.6 3.4 3.4 3.4 7.1 4.8 5.0
ROAE 2.3 4.1 8.2 8.2 7.2 14.4 8.6 9.8
ROAA 0.9 1.8 4.0 4.2 3.8 7.5 4.5 5.2
ROCE 6.2 7.9 8.8 9.9 7.5 14.5 9.0 10.9
ROIC 3.9 4.8 7.7 8.3 6.2 14.0 8.2 9.5
Net debt to equity 17.7 14.9 16.0 13.9 15.9 8.0 14.3 12.3
Effective tax rate 48.5 49.5 26.1 28.6 29.2 20.2 24.1 24.3
Accounts receivable (days) 40.2 45.6 46.8 49.9 64.1 57.2 47.9 44.9
Current ratio (x) 1.0 1.3 1.4 1.7 1.7 1.5 1.3 1.3
Net interest cover (x) 5.7 9.7 22.4 23.1 18.1 93.9 n.a. n.a.
Net dividend payout 0.0 0.0 0.0 18.5 19.7 9.0 13.8 11.6
Free cash flow yield 5.6 1.0 n.a. 3.4 n.a. 9.9 n.a. 1.1
Company profile
LG Display (LGD), formerly LG.Philips LCD, is the largest TFT-LCD panel maker globally, with a
28% market share (in terms of revenue) in 2016. The company provides OLED panels as well as
LCD panels for TVs, monitors, notebook PCs, and mobile devices. It was established through a
50:50 joint venture with LG Electronics and Philips Electronics in September 1999, and was listed
on the Korea Stock Exchange and New York Stock Exchange in July 2004.
58
LG Display (034220 KS): 2 January 2018
LGD: earnings outlook by division
1Q17 2Q17 3Q17 4Q17E 2016 2017E 2018E 2019E
Revenue (KRW bn) 7,062 6,629 6,973 7,146 26,504 27,810 27,252 30,496
Large Size Total 5,226 5,171 5,090 5,212 19,270 20,699 20,419 21,859
Notebook 1,130 994 1,185 1,018 5,051 4,328 3,963 3,696
Monitor 1,059 1,127 1,116 1,050 4,022 4,352 3,949 3,640
TV 3,037 3,049 2,789 3,144 10,197 12,019 12,508 14,523
SM/Others 1,836 1,458 1,883 1,934 7,234 7,111 6,833 8,637
Operating profit 1,027 804 586 373 1,311 2,790 1,858 2,322
QoQ growth 14% -22% -27% -36%
YoY growth n.m. n.m. n.m. -59% -19% 113% -33% 25%
OP margin 14.5% 12.1% 8.4% 5.2% 4.9% 10.0% 6.8% 7.6%
Shipment area growth QoQ% / YoY% (7%) 0.8% 2% 9% 4% 2% 6% 9%
Large Size Total (6%) 1.4% 1% 9% 5% 1% 6% 8%
LCD TV panel (5%) 1% (1%) 13% 5% 3% 4% 3%
ASP growth QoQ% / YoY% (5%) (5%) 3% (7%) (12%) 4% (8%) 3%
Large Size Total 1% (1%) (3%) (7%) (12%) 7% (7%) (1%)
LCD TV panel 5% (0%) (10%) (6%) (17%) 9% (14%) (12%)
Source: Company, Daiwa forecasts
LCD supply-demand forecast LCD TV panel price trend by size
Source: Company, Bloomberg, Daiwa forecasts Source: Company, Bloomberg, Daiwa forecasts
LGD: 12-month forward PBR band LGD: 12-month forward PBR vs. return-on-equity
Source: Company, Bloomberg, Daiwa forecasts Source: Company, Bloomberg, Daiwa forecasts
0%
5%
10%
15%
20%
25%
0
10,000
20,000
30,000
40,000
50,000
60,000
1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18E 3Q18E
('000 sqm)
Supply Demand Seasonal Glut Level
(10%)
(5%)
0%
5%
10%
15%
20%
Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17
(MoM %)
32" open-cell HD 43" open-cell FHD 55" open-cell UHD
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
(KRW)
Price 0.6x 0.9x
1.1x 1.4x 1.6x
(10%)
(5%)
0%
5%
10%
15%
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18
(x)
12mths Fwd (x) ROE(RHS)
See important disclosures, including any required research certifications, beginning on page 115
Malaysia Information Technology
What’s new: From 750 RF testers as at end-1H FY17, Inari Amertron now
has 940 units and is targeting to have 1,000 units by end-December. We
believe that as 4G penetration increases, demand for RF filters will remain
strong. Separately, Inari is targeting to expand its revenue from Osram,
which today accounts for 15% of the group’s top line; Inari targets to increase
this contribution to 35% over 3-5 years. So far, Inari has secured the biometric
identification IRIS IR chip, which commenced production in 2Q17, and we
understand it is targeting additional products from Osram in 2018. Inari also
looks to be gaining momentum in VCSEL technology. It is already assembling
and packaging this product on a small scale for Broadcom’s data
communication business, and given the product reference and technology, we
think Inari will be able to capitalise on any further opportunities.
What’s the impact: RF provides stable but growing cashflows.
Demand for premium RF filters remains strong, despite the growth
saturation in the global smartphone market. Driven by an increase in bands
and the complexity of LTE coverage expansion, RF demand will likely
remain robust, especially as its customer Broadcom is a major player.
IRIS is the latest driver. We consider the IRIS IR chip to be a new
earnings driver, with scope for further growth as adoption of the technology
increases. The IRIS IR chip is still used only by a single Korean smartphone
brand for its flagship models. Adoption of this biometric identification across the
Korean brand’s smartphone range, or by other major customers, should spur
volume growth, in our view.
Higher capex for FY18. Capex for FY18 is projected to be MYR150m-
180m, which will go toward expansion for its RF and data server business,
as well as new product development. Apart from expansion plans for plant
P13, Inari is also slated to build its largest factory in Batu Kawan, on the
mainland, with a fully built-up floor space of 600k sq ft by October 2018.
What we recommend: We contend that Inari is well positioned to realise
growth from the RF segment. We believe it stands to benefit from the 5G
rollout, which should underpin better demand for premium RF filters. And
we see scope for additional growth drivers to kick in, as IRIS biometric
scanning adoption takes off and VCSEL packaging and test gathers
momentum. We continue to rate the stock as a Buy, with a TP of MYR4.28
based on 20x FY19E EPS. Key risk: high single customer concentration.
How we differ: On FY18-19E EPS, we are 30% above the market, as we
remain upbeat on Inari’s RF expansion and the contribution of new
products.
2 January 2018
Inari Amertron
Continuing to grow its revenue drivers
RF business, which provides stable cash flows, continues to expand
New IRIS IR business also contributing positively
Reiterating our Buy call with 12-month TP of MYR4.28
Kevin Low (603) 2146 7479
Forecast revisions (%) Year to 30 Jun 17E 18E 19E
Revenue change - - -
Net-profit change - - -
Core EPS (FD) change - - -
Source: Affin Hwang forecasts
12-month range RM1.6-3.5
Market cap (USDm) 1,725
3m average daily turnover (USDm) 6.4
Shares outstanding (m) 2,036
Major shareholder Insas Berhad (18.9%)
Source: Bloomberg
Financial summary (MYR) Year to 30 Jun 18E 19E 20E
Revenue (m) 1,596 1,946 2,119
Operating profit (m) 306 451 498
Net profit (m) 288 422 473
Core EPS (fully-diluted) 0.146 0.214 0.240
EPS change (%) 49.2 46.6 12.0
Daiwa vs Cons. EPS (%) 6.6 36.3 37.1
PER (x) 23.6 16.1 14.3
Dividend yield (%) 3.0 4.4 4.9
DPS 0.102 0.150 0.168
PBR (x) 7.3 6.4 5.6
EV/EBITDA (x) 18.6 13.4 12.4
ROE (%) 31.4 41.0 40.5
Source: Company, Affin Hwang forecasts
80
110
140
170
200
1.6
2.1
2.5
3.0
3.5
Dec-16 Mar-17 Jun-17 Sep-17 Dec-17
Share price performance
Inari Amer (LHS)Relative to FBMKLCI (RHS)
(MYR) (%)
Inari Amertron (INRI MK)
Target price: MYR4.28 (from MYR4.28)
Share price (28 Dec): MYR3.44 | Up/downside: +24.4%
60
Inari Amertron (INRI MK): 2 January 2018
Financial summary
Profit & Loss Statement
FYE June (RMm) 2016 2017 2018E 2019E 2020E
Total revenue 1043 1176 1596 1946 2119
Operating expenses (843) (908) (1209) (1402) (1521)
EBITDA 200 268 388 545 598
Depreciation (49) (66) (82) (94) (100)
Amortisation 0 0 0 0 0
EBIT 151 202 306 451 498
Net interest income/(expense) (0) 4 4 5 4
Associates' contribution 0 0 0 0 0
Others 0 0 0 0 0
Pretax profit 151 206 309 456 503
Tax (6) (12) (19) (27) (30)
Minority interest 1 (1) (3) (7) 0
Net profit 148 228 288 422 473
Core net profit 146 193 288 422 473
Balance Sheet Statement
FYE June (RMm) 2016 2017 2018E 2019E 2020E
Fixed assets 274 332 400 426 426
Other long term assets 50 14 14 14 14
Total non-current assets 324 346 414 441 441
Cash and equivalents 91 198 277 316 426
Stocks 165 169 262 325 354
Debtors 176 231 262 325 354
Other current assets 120 259 259 259 259
Total current assets 552 856 1060 1225 1393
Creditors 139 231 241 299 325
Short term borrowings 15 16 16 16 16
Other current liabilities 11 51 51 51 51
Total current liabilities 165 297 307 365 392
Long term borrowings 25 28 28 28 28
Other long term liabilities 3 3 3 3 3
Total long term liabilities 28 32 32 32 32
Shareholders' Funds 681 873 963 1096 1238
Cash Flow Statement
FYE June (RMm) 2016 2017 2018E 2019E 2020E
EBIT 151 202 306 451 498
Depreciation & amortisation 49 66 82 94 100
Working capital changes -45 33 -115 -68 -31
Cash tax paid -6 -12 -19 -27 -30
Others 21 22 4 5 4
Cashflow from operations 170 311 258 455 541
Capex -129 -121 -150 -120 -100
Disposal/(purchases) -43 53 0 0 0
Others 0 0 0 0 0
Cash flow from investing -172 -68 -150 -120 -100
Debt raised/(repaid) -33 -185 0 0 0
Equity raised/(repaid) 23 363 0 0 0
Net inct income/(expense) 0 4 4 5 4
Dividends paid -79 -193 -202 -295 -331
Others 0 -4 -4 -5 -4
Cash flow from financing -89 -15 -202 -295 -331
Net change in CF -90 228 -94 39 111
Free Cash Flow -2 243 108 335 441
Sources: company, Affin Hwang estimates
61
Inari Amertron (INRI MK): 2 January 2018
Financial summary continued …
Key Financial Ratios and Margins
FYE June (RMm) 2016 2017 2018E 2019E 2020E
Growth
Revenue (%) 11.8 12.8 35.7 21.9 8.9
EBITDA (%) 20.3 33.8 44.7 40.5 9.9
Core net profit (%) 9.8 32.4 49.2 46.6 12.0
Profitability
EBITDA margin (%) 19.2 22.8 24.3 28.0 28.2
PBT margin (%) 14.7 20.5 19.4 23.4 23.7
Net profit margin (%) 14.2 19.4 18.0 21.7 22.3
Effective tax rate (%) 3.9 5.8 6.0 6.0 6.0
ROA (%) 16.9 19.0 19.5 25.3 25.8
Core ROE (%) 24.0 24.8 31.4 41.0 40.5
ROCE (%) 22.9 24.8 31.9 42.1 41.3
Dividend payout ratio (%) 54.2 84.8 70.0 70.0 70.0
Liquidity
Current ratio (x) 3.4 2.9 3.5 3.4 3.6
Op. cash flow (RMm) 170 311 258 454.7 541.4
Free cashflow (RMm) 42 190 108 334.7 441.4
FCF/share (sen) 2 10 5 17.0 22.4
Asset management
Debtors turnover (days) 62 60 60 61.0 61.0
Stock turnover (days) 58 60 60 61.0 61.0
Creditors turnover (days) 49 55 55 56.0 56.0
Capital structure
Net Gearing (%) (25.9) (47.4) (51.3) (48.6) (52.0)
Interest Cover (x) 38.2 123.3 135.3 190.0 208.8
Quarterly Profit & Loss
FYE June (RMm) 1Q17 2Q17 3Q17 4Q17 1Q18
Revenue 282 275 274 346 373
Operating expenses (225) (220) (203) (261) -274
EBITDA 57 55 72 85 99
Depreciation (14) (15) (16) (21) -23
EBIT 43 40 55 63 76
Net int income/(expense) 1 1 1 1 1
Associates' contribution
Exceptional Items 6 23 (2) 8 -3
Pretax profit 50 64 54 72 74
Tax (2) (2) (2) (6) -5
Minority interest (0) 1 (1) (0) 0
Net profit 48 63 51 66 68
Core net profit 42 40 53 58 72
Margins (%)
EBITDA 20.3 20.1 26 24.5 26.5
PBT 17.7 23.4 20 20.9 19.7
Net profit 17.0 22.9 19 19.0 18.3
Sources: company, Affin Hwang estimates
Company profile
Inari Amertron Berhad is an investment holding company with wholly-owned subsidiaries involved in the
OSAT & electronics manufacturing services (EMS) industries. It currently has seven wholly-owned direct
subsidiaries: Inari Technology Sdn Bhd, Inari Semiconductor Labs Sdn Bhd, Inari Integrated Systems
Sdn Bhd, Inari South Keytech Sdn Bhd, Inari Global Limited, Simfoni Bistari Sdn Bhd, Inari International
Limited. Inari Amertron Berhad also has a 51% subsidiary, Ceedtec Sdn Bhd.
62
Inari Amertron (INRI MK): 2 January 2018
See important disclosures, including any required research certifications, beginning on page 115
Taiwan Information Technology
What's new: While we trim our forecasts for LandMark Opto (LMO) to
reflect a slightly weaker-than-expected monthly revenue run-rate for 4Q17,
this does not change our positive stance as we believe its structural
recovery remains intact. We flag silicon photonics (SiPh), 10G passive
optical network (PON) and new product rollouts as 2018 demand drivers
supporting a strong recovery of nearly 1x EPS CAGR over 2018-19E. We
reiterate our Outperform (2) rating despite a slight cut in TP to TWD425.
What's the impact: Near-term updates. LMO’s monthly revenue run-rate
for 4Q17 looked to be behind our previous forecast likely because its
customers are still cautious on 10G PON build post the inventory glut in
China, and due to pricing pressure from traditional GPON. We lower our
4Q17E revenue forecast by 6% to TWD637m, resulting in 3-7% EPS cuts
for 2017-19E. But these revisions do not harm our positive stance on
LMO’s structural recovery as 4Q17E revenue will still grow 82% YoY based
on our current forecasts, and we expect such strong YoY growth to sustain
into 2018. Our 4Q17E EPS is 4% above the consensus.
Structural recovery intact. We see 2 intact demand drivers sustaining
LMO’s recovery into 2018: SiPh and 10G PON, with new products such as
25G for datacentres, high-power laser cutting and 6” epiwafers for LiDAR
adding to business upside. SiPh has been the key growth driver in 2017,
enjoying nearly 1x YoY increase in revenue terms thanks to Intel’s share
gain in the fibre-optic transceiver market for datacentres where we believe
LMO is Intel’s sole epiwafer supplier. Although momentum may take a
pause in 1H18 after such strong growth, we expect it to resume in 2H18
when we forecast LMO’s SiPh revenue to grow c.50% HoH, after Intel
introduces new models. On 10G PON, China telcos only began ramping up
this advanced solution in 2H17. We expect more meaningful ramp-ups in
2018 for the access points, followed by a broader-based expansion a year
after when end-user optical-line terminals migrate to 10G.
What we recommend: In light of our forecast revisions, we trim our 12-
month TP to TWD425, from TWD440, based on a revised ROE-adjusted
PBR of 8.3x (previous: 8.5x) as a result of a lower ROE forecast and roll
over our valuation basis to 2018E, from 4Q17-3Q18. Despite this, we
reiterate our Outperform (2) rating and see any share pullback on muted
SiPh demand in 1H18 as a re-entry opportunity. Key downside risk: 2H18
SiPh demand lower than our expectation.
How we differ: We are 17-40% above consensus on 2018-19 EPS
forecasts likely owing to our more bullish assumptions on LMO’s SiPh
market-share gain and 10G PON ramp-up in China.
2 January 2018
LandMar k Optoel ectronics
Structural recovery intact
Continued strong growth despite GPON pricing pressure
Key demand drivers for 2018: SiPh and 10G PON
Lowering forecasts/TP slightly but reiterating Outperform (2)
Source: Daiwa forecasts
Source: FactSet, Daiwa forecasts
LandMark Optoelectronics (3081 TT)
Target price: TWD425.00 (from TWD440.00)
Share price (28 Dec): TWD380.50 | Up/downside: +11.7%
Rick Hsu(886) 2 8758 6261
Martin Lee(886) 2 8758 6262
Forecast revisions (%)
Year to 31 Dec 17E 18E 19E
Revenue change (2.1) (5.8) (2.3)
Net profit change (2.8) (7.4) (3.8)
Core EPS (FD) change (2.8) (7.4) (3.8)
80
95
110
125
140
200
259
318
376
435
Dec-16 Mar-17 Jun-17 Sep-17 Dec-17
Share price performance
Land Mark (LHS)Relative to TWSE Index (RHS)
(TWD) (%)
12-month range 233.50-435.00
Market cap (USDbn) 1.15
3m avg daily turnover (USDm) 18.94
Shares outstanding (m) 91
Major shareholder Plenticom Asia Limited (12.4%)
Financial summary (TWD)
Year to 31 Dec 17E 18E 19E
Revenue (m) 2,048 3,452 6,028
Operating profit (m) 822 1,672 3,246
Net profit (m) 682 1,392 2,672
Core EPS (fully-diluted) 7.532 15.367 29.505
EPS change (%) (21.4) 104.0 92.0
Daiwa vs Cons. EPS (%) (2.3) 16.8 40.3
PER (x) 50.5 24.8 12.9
Dividend yield (%) 2.1 1.8 2.2
DPS 8.0 7.0 8.5
PBR (x) 9.1 7.4 5.3
EV/EBITDA (x) 29.5 15.8 8.5
ROE (%) 18.1 32.9 47.7
64
LandMark Optoelectronics (3081 TT): 2 January 2018
Financial summary
Key assumptions
Profit and loss (TWDm)
Cash flow (TWDm)
Source: FactSet, Daiwa forecasts
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Wafer shipment ('000) n.a. n.a. 34 41 41 43 73 128
Capacity utilization (%) n.a. n.a. 100 96 71 64 83 88
Blended ASP (USD) n.a. n.a. 1,263 1,545 1,594 1,546 1,579 1,570
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
PON n.a. n.a. 850 1,352 1,286 693 1,202 1,905
SiPhotonics n.a. n.a. 363 287 468 947 1,549 2,688
Other Revenue n.a. n.a. 95 389 357 408 702 1,435
Total Revenue 601 715 1,307 2,028 2,110 2,048 3,452 6,028
Other income 0 0 0 0 0 0 0 0
COGS (236) (312) (507) (691) (852) (933) (1,409) (2,285)
SG&A (57) (59) (66) (90) (102) (126) (162) (244)
Other op.expenses (24) (17) (26) (77) (108) (168) (209) (252)
Operating profit 284 326 708 1,169 1,048 822 1,672 3,246
Net-interest inc./(exp.) 3 3 4 8 11 8 9 13
Assoc/forex/extraord./others (3) 3 29 16 (1) 4 16 0
Pre-tax profit 283 332 741 1,193 1,058 834 1,697 3,259
Tax (53) (62) (127) (204) (182) (151) (306) (587)
Min. int./pref. div./others 0 0 0 0 0 0 0 0
Net profit (reported) 230 270 614 989 875 682 1,392 2,672
Net profit (adjusted) 230 270 614 989 875 682 1,392 2,672
EPS (reported)(TWD) 6.348 6.022 11.189 14.892 9.642 7.530 15.367 29.505
EPS (adjusted)(TWD) 6.348 6.022 11.189 14.892 9.642 7.530 15.367 29.505
EPS (adjusted fully-diluted)(TWD) 4.202 3.990 7.261 10.881 9.578 7.532 15.367 29.505
DPS (TWD) n.a. 0.000 3.000 7.000 9.000 8.000 7.004 8.498
EBIT 284 326 708 1,169 1,048 822 1,672 3,246
EBITDA 317 378 788 1,309 1,260 1,103 2,047 3,683
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Profit before tax 283 332 741 1,193 1,058 834 1,697 3,259
Depreciation and amortisation 33 52 80 140 211 281 375 437
Tax paid (53) (62) (127) (204) (182) (151) (306) (587)
Change in working capital (71) (12) (126) (308) 316 (335) (340) (880)
Other operational CF items 31 20 74 138 (51) 0 0 0
Cash flow from operations 224 330 643 958 1,352 629 1,427 2,229
Capex (58) (225) (239) (437) (251) (498) (600) (450)
Net (acquisitions)/disposals 0 0 0 0 0 0 0 0
Other investing CF items 6 1 (2) (29) (10) 0 0 0
Cash flow from investing (52) (224) (241) (466) (260) (498) (600) (450)
Change in debt 0 0 0 0 0 0 0 0
Net share issues/(repurchases) 0 0 0 1,541 0 0 0 0
Dividends paid (85) (73) (136) (426) (629) (731) (634) (770)
Other financing CF items 0 0 0 0 (127) 0 0 0
Cash flow from financing (85) (73) (136) 1,115 (756) (731) (634) (770)
Forex effect/others 0 0 2 (0) 0 0 0 0
Change in cash 87 33 269 1,607 336 (601) 192 1,010
Free cash flow 166 106 404 521 1,101 131 827 1,779
65
LandMark Optoelectronics (3081 TT): 2 January 2018
Financial summary continued …
Balance sheet (TWDm)
Key ratios (%)
Source: FactSet, Daiwa forecasts
As at 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Cash & short-term investment 313 346 614 2,221 2,557 1,957 2,149 3,159
Inventory 80 97 117 142 184 199 379 559
Accounts receivable 167 168 326 603 252 592 832 1,632
Other current assets 9 49 55 12 18 50 50 50
Total current assets 569 660 1,111 2,978 3,011 2,797 3,410 5,399
Fixed assets 306 474 660 935 1,046 1,332 1,645 1,696
Goodwill & intangibles 0 0 0 0 0 0 0 0
Other non-current assets 11 9 12 80 21 50 50 50
Total assets 886 1,143 1,784 3,993 4,079 4,179 5,105 7,145
Short-term debt 0 0 0 0 0 0 0 0
Accounts payable 28 34 86 80 87 107 187 287
Other current liabilities 90 118 207 319 255 260 270 295
Total current liabilities 118 152 293 399 342 367 457 582
Long-term debt 0 0 0 0 0 0 0 0
Other non-current liabilities 1 1 5 5 5 5 5 5
Total liabilities 120 153 298 404 347 372 462 587
Share capital 366 452 553 699 913 913 913 913
Reserves/R.E./others 400 537 933 2,890 2,819 2,894 3,730 5,646
Shareholders' equity 766 990 1,486 3,589 3,731 3,807 4,643 6,558
Minority interests 0 0 0 0 0 0 0 0
Total equity & liabilities 886 1,143 1,784 3,993 4,079 4,179 5,105 7,145
EV 34,161 34,128 33,859 32,252 31,916 32,516 32,324 31,315
Net debt/(cash) (313) (346) (614) (2,221) (2,557) (1,957) (2,149) (3,159)
BVPS (TWD) 21.135 22.085 27.088 54.045 41.097 42.020 51.265 72.409
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Sales (YoY) 27.8 19.0 82.9 55.1 4.1 (3.0) 68.6 74.6
EBITDA (YoY) 34.7 19.0 108.7 66.1 (3.8) (12.4) 85.5 79.9
Operating profit (YoY) 29.8 14.9 117.1 65.2 (10.3) (21.6) 103.5 94.1
Net profit (YoY) 37.6 17.3 127.4 61.1 (11.5) (22.1) 104.0 92.0
Core EPS (fully-diluted) (YoY) 28.0 (5.0) 82.0 49.9 (12.0) (21.4) 104.0 92.0
Gross-profit margin 60.7 56.3 61.2 65.9 59.6 54.5 59.2 62.1
EBITDA margin 52.8 52.8 60.3 64.6 59.7 53.9 59.3 61.1
Operating-profit margin 47.2 45.6 54.1 57.7 49.7 40.1 48.4 53.9
Net profit margin 38.3 37.8 47.0 48.8 41.5 33.3 40.3 44.3
ROAE 33.5 30.7 49.6 39.0 23.9 18.1 32.9 47.7
ROAA 28.6 26.6 41.9 34.2 21.7 16.5 30.0 43.6
ROCE 41.4 37.1 57.2 46.1 28.6 21.8 39.6 58.0
ROIC 55.3 48.3 77.4 86.5 68.3 44.5 63.1 90.3
Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Effective tax rate 18.8 18.8 17.1 17.1 17.2 18.2 18.0 18.0
Accounts receivable (days) 88.1 85.4 68.9 83.6 73.9 75.2 75.2 74.6
Current ratio (x) 4.8 4.3 3.8 7.5 8.8 7.6 7.5 9.3
Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Net dividend payout n.a. 0.0 41.3 64.3 94.0 106.2 45.6 28.8
Free cash flow yield 0.5 0.3 1.2 1.5 3.2 0.4 2.4 5.2
Company profile
Founded in June 1997, LandMark Optoelectronics Corporation (LandMark Opto) is a dedicated
compound semiconductor epiwafer supplier for optical communication (OC), with end-applications
focusing on passive optical network (PON), datacentre, cellular infrastructure, industrial and
consumer electronics. LandMark Opto is the largest pure OC epiwafer supplier globally by revenue.
66
LandMark Optoelectronics (3081 TT): 2 January 2018
LMO: quarterly P&L forecasts
TWDm 1Q17 2Q17 3Q17 4Q17E 1Q18E 2Q18E 3Q18E 4Q18E 2016 2017E 2018E 2019E
Revenue 376 479 556 637 623 733 999 1,096 2,110 2,048 3,452 6,028
COGS 196 235 235 266 265 302 399 443 852 933 1,409 2,285
Gross profit 180 244 321 371 358 431 600 653 1,258 1,115 2,043 3,742
Opex 58 69 86 80 80 87 100 104 210 293 371 497
Operating profit 121 175 235 291 278 345 500 549 1,048 822 1,672 3,246
Pretax profit 105 184 238 307 285 352 506 555 1,058 834 1,697 3,259
Income taxes 18 38 41 55 51 63 91 100 182 151 306 587
Net profit 87 146 197 252 233 289 415 455 875 682 1,392 2,672
EPS (TWD, basic) 0.97 1.62 2.18 2.78 2.58 3.19 4.58 5.02 9.64 7.53 15.37 29.51
EPS (TWD, fully diluted) 0.96 1.61 2.18 2.78 2.58 3.19 4.58 5.02 9.58 7.53 15.37 29.51
Margin
Gross 48% 51% 58% 58% 57% 59% 60% 60% 60% 54% 59% 62%
Operating 32% 37% 42% 46% 45% 47% 50% 50% 50% 40% 48% 54%
Net 23% 30% 35% 40% 37% 39% 42% 42% 41% 33% 40% 44%
Growth (QoQ)
Revenue 7% 27% 16% 15% -2% 18% 36% 10%
Gross profit 26% 36% 32% 16% -3% 20% 39% 9%
Operating profit 40% 44% 34% 24% -4% 24% 45% 10%
Net profit 2% 68% 35% 28% -7% 24% 44% 10%
EPS (basic) 2% 68% 35% 27% -7% 24% 44% 10%
EPS (FD) 2% 68% 35% 28% -7% 24% 44% 10%
Growth (YoY)
Revenue -40% -26% 13% 82% 66% 53% 80% 72% 4% -3% 69% 75%
Gross profit -58% -40% 14% 159% 99% 77% 87% 76% -6% -11% 83% 83%
Operating profit -67% -51% 2% 235% 129% 97% 113% 89% -10% -22% 103% 94%
Net profit -72% -50% 4% 194% 168% 98% 111% 81% -11% -22% 104% 92%
EPS (basic) -78% -61% 5% 195% 167% 97% 110% 81% -35% -22% 104% 92%
EPS (FD) -72% -49% 5% 197% 168% 98% 111% 81% -12% -21% 104% 92%
Source: Company, Daiwa forecasts
LMO: 4Q17 preview and 1Q18 outlook
4Q17E 1Q18E
TWDm Daiwa Consensus Variance Daiwa Consensus Variance
Revenue 637 622 2% 623 605 3%
Gross profit 371
358
Operating profit 291
278
Pretax profit 307
285
Net profit 252 243 4% 233 230 1%
Adjusted EPS (TWD) 2.78 2.68 4% 2.58 2.54 1%
Margin
Gross 58.3%
57.4%
Operating 45.7%
44.5%
Net 39.6%
37.4%
Revenue mix
PON 33%
34%
SiPhotonics 50%
47%
Infrastructure & others 17%
19%
Source: Bloomberg, Daiwa estimates & forecasts
LMO: SiPh revenue contribution LMO: PBR band
Source: Company, Daiwa estimates & forecasts Source: Company, TEJ, Daiwa forecasts
0%
10%
20%
30%
40%
50%
60%
0
100
200
300
400
500
600
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
E
1Q18
E
2Q18
E
3Q18
E
4Q18
E
SiPh revenue Revenue contribution (RHS)
(TWDm)
4
5
6
7
8
9
10
11
12
Jul-1
5
Sep
-15
Nov
-15
Jan-
16
Mar
-16
May
-16
Jul-1
6
Sep
-16
Nov
-16
Jan-
17
Mar
-17
May
-17
Jul-1
7
Sep
-17
Nov
-17
Jan-
18
Mar
-18
P/BV Mean Mean + s
Mean - s Mean + 2s Mean - 2s
(x)10.8x
7.6x
6.5x5.7x5.5x
10.2x
See important disclosures, including any required research certifications, beginning on page 115
Taiwan Information Technology
What's new: WinSemi has been our highest conviction-buy idea in the
consumer laser space since we initiated coverage on the thriving 3D
vertical cavity surface emitting laser (VCSEL) sector in June 2017. We
continue to suggest investors build a long-term position in the stock as we
expect WinSemi to command the lion’s share of consumer VCSEL
production, with further upside to be driven by upcoming 5G infrastructure
build out. Reiterating Buy (1) call with an unchanged TP of TWD366.
What's the impact: VCSEL is the key growth driver. Since our 3D laser
thematic report addressing the laser makers’ ambitions in the smartphone
and automotive markets, the demand trajectory for consumer VCSEL has
unfolded ahead of our previous expectations. We now forecast the
consumer laser market to reach USD167m (wafer value) in 2018E and
expand at a hefty 120% CAGR over 2017-20E. Controlling nearly half of
the global compound-semiconductor foundry capacity, WinSemi stands to
benefit perhaps the most in this high value-add segment of the food chain,
commanding an over 80% share of smartphone VCSEL production.
5G to reignite the next round of RF growth. As the 4G cellular cycle
tapers off, we forecast WinSemi's RF PA revenue to rise by 12% YoY for
2018E, vs. VCSEL growth of 2.25x YoY. But this is not the end for its PA
business, since we expect the next demand cycle to start from late-
2018/early-2019 when telcos start 5G infrastructure builds to spur base-
station PA upgrades from GaAs to GaN, benefitting WinSemi in both
volume and ASP terms. We have yet to factor this 5G potential in our
forecasts.
Near-term earnings preview. For 4Q17, we expect WinSemi to report
revenue of TWD5.1bn, up 16% QoQ and beating company guidance of up
a low-teens percentage. While our EPS estimate of TWD2.9 is 2% below
the consensus, we expect WinSemi to guide above-consensus for its 1Q18
outlook as we believe the street may have been too concerned on inflated
VCSEL demand (see Moving up the value chain, 11 December).
What we recommend: Given no changes to our forecasts, we reiterate our
12-month TP of TWD366, based on a 12-month forward PER of 30x
(unchanged). We suggest investors build a long-term position in the stock
and see any technical pullbacks as opportunities to accumulate. Key
downside risk: VCSEL demand ramping up below our expectations.
How we differ: Although we do not differ much from the consensus on
2018-19 EPS forecasts, we see upside potential from the strategic team-up
with Avago, for which we have yet to quantify the transferred demand.
2 January 2018
Win Semiconductors
Kicking off a strong earnings cycle
Thriving VCSEL business to drive a new earnings cycle
Next RF demand growth from 5G migration not far off
Reaffirming our Buy (1) call and TP of TWD366
Source: Daiwa forecasts
Source: FactSet, Daiwa forecasts
Win Semiconductors (3105 TT)
Target price: TWD366.00 (from TWD366.00)
Share price (28 Dec): TWD286.50 | Up/downside: +27.7%
Rick Hsu(886) 2 8758 6261
Martin Lee(886) 2 8758 6262
Forecast revisions (%)
Year to 31 Dec 17E 18E 19E
Revenue change - - -
Net profit change - - -
Core EPS (FD) change - - -
50
114
178
241
305
50
119
188
256
325
Dec-16 Mar-17 Jun-17 Sep-17 Dec-17
Share price performance
Win Semico (LHS)Relative to TWOTCI (RHS)
(TWD) (%)
12-month range 85.80-323.50
Market cap (USDbn) 3.85
3m avg daily turnover (USDm) 89.10
Shares outstanding (m) 403
Major shareholder Tien He Enterprise (5.4%)
Financial summary (TWD)
Year to 31 Dec 17E 18E 19E
Revenue (m) 16,602 21,057 25,235
Operating profit (m) 4,379 6,211 7,932
Net profit (m) 3,588 4,901 6,257
Core EPS (fully-diluted) 8.912 12.173 15.538
EPS change (%) 16.7 36.6 27.7
Daiwa vs Cons. EPS (%) 0.1 (1.4) 3.3
PER (x) 32.1 23.5 18.4
Dividend yield (%) 1.6 1.6 2.3
DPS 4.5 4.6 6.7
PBR (x) 6.0 5.2 4.4
EV/EBITDA (x) 16.6 11.8 9.0
ROE (%) 19.5 23.6 25.8
68
Win Semiconductors (3105 TT): 2 January 2018
Financial summary
Key assumptions
Profit and loss (TWDm)
Cash flow (TWDm)
Source: FactSet, Daiwa forecasts
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Wafer shipment (6" equ) 211,659 206,078 427,052 248,904 284,589 359,272 427,052 492,544
Utilisation rate (%) 82 73 89 86 87 89 89 90
Blended wafer ASP (USD) 1,797 1,705 1,578 1,519 1,465 1,431 1,456 1,498
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Cellular & WiFi 9,710 8,870 7,801 9,953 11,379 11,989 13,532 14,840
Infrastructure 1,528 1,610 2,108 2,063 2,079 3,063 3,290 4,758
Other Revenue (0) 1 1 (0) 165 1,551 4,235 5,637
Total Revenue 11,238 10,481 9,910 12,016 13,623 16,602 21,057 25,235
Other income 0 0 0 0 0 0 0 n.a.
COGS (7,598) (7,249) (6,400) (7,255) (8,634) (10,457) (12,623) (14,660)
SG&A (652) (627) (633) (678) (888) (1,042) (1,171) (1,380)
Other op.expenses (530) (495) (562) (572) (606) (724) (1,053) (1,262)
Operating profit 2,457 2,110 2,315 3,510 3,495 4,379 6,211 7,932
Net-interest inc./(exp.) (98) (64) (31) 6 (9) (23) 1 20
Assoc/forex/extraord./others (431) 167 145 (83) 402 35 60 60
Pre-tax profit 1,928 2,212 2,429 3,434 3,888 4,391 6,272 8,012
Tax (281) (401) (465) (762) (791) (838) (1,370) (1,755)
Min. int./pref. div./others 0 0 0 0 16 35 0 0
Net profit (reported) 1,648 1,812 1,963 2,672 3,113 3,588 4,901 6,257
Net profit (adjusted) 1,648 1,812 1,963 2,672 3,113 3,588 4,901 6,257
EPS (reported)(TWD) 2.448 2.402 2.649 3.970 6.038 8.912 12.173 15.538
EPS (adjusted)(TWD) 2.448 2.402 2.649 3.970 6.038 8.912 12.173 15.538
EPS (adjusted fully-diluted)(TWD) 2.404 2.369 2.623 4.478 7.636 8.912 12.173 15.538
DPS (TWD) 0.771 1.507 1.498 0.221 0.579 4.500 4.600 6.700
EBIT 2,457 2,110 2,315 3,510 3,495 4,379 6,211 7,932
EBITDA 3,764 3,932 4,196 5,433 5,866 6,916 9,655 12,142
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Profit before tax 1,928 2,212 2,429 3,434 3,888 4,391 6,272 8,012
Depreciation and amortisation 1,307 1,822 1,882 1,923 2,372 2,537 3,444 4,210
Tax paid (281) (401) (465) (762) (791) (838) (1,370) (1,755)
Change in working capital (572) 887 (118) (601) (959) 585 (1,710) 555
Other operational CF items 508 478 103 899 (739) 0 0 0
Cash flow from operations 2,890 4,998 3,830 4,893 3,770 6,676 6,635 11,022
Capex (3,317) (2,815) (738) (3,493) (3,226) (3,700) (4,000) (4,300)
Net (acquisitions)/disposals 0 0 0 0 0 0 0 0
Other investing CF items (639) 1,233 (535) (126) 1,392 0 0 0
Cash flow from investing (3,956) (1,583) (1,272) (3,619) (1,834) (3,700) (4,000) (4,300)
Change in debt 718 (2,942) (783) (520) 1,650 (1,469) (882) (331)
Net share issues/(repurchases) 3,029 (515) 0 (1,487) (1,790) 0 0 0
Dividends paid (519) (1,136) (1,110) (149) (298) (1,812) (1,852) (2,698)
Other financing CF items 51 112 25 64 (976) 100 100 100
Cash flow from financing 3,279 (4,481) (1,867) (2,092) (1,414) (3,181) (2,634) (2,928)
Forex effect/others 0 0 0 0 0 0 0 0
Change in cash 2,213 (1,065) 690 (818) 522 (206) 1 3,794
Free cash flow (427) 2,183 3,092 1,400 544 2,976 2,635 6,722
69
Win Semiconductors (3105 TT): 2 January 2018
Financial summary continued …
Balance sheet (TWDm)
Key ratios (%)
Source: FactSet, Daiwa forecasts
As at 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Cash & short-term investment 5,039 3,714 4,676 3,514 3,581 3,410 3,412 7,205
Inventory 2,101 1,127 1,500 2,471 2,727 2,737 3,837 3,832
Accounts receivable 1,049 650 690 700 1,069 1,074 1,674 1,624
Other current assets 675 198 259 299 442 300 300 300
Total current assets 8,865 5,689 7,125 6,984 7,819 7,522 9,223 12,962
Fixed assets 13,228 12,636 11,653 11,623 13,349 14,779 15,307 15,507
Goodwill & intangibles 128 624 345 2,332 1,740 1,700 1,300 1,270
Other non-current assets 1,370 2,162 2,694 3,172 3,502 3,502 3,502 3,502
Total assets 23,591 21,112 21,816 24,111 26,411 27,502 29,332 33,240
Short-term debt 0 0 0 24 0 0 0 0
Accounts payable 1,122 635 930 1,310 975 1,575 1,565 2,065
Other current liabilities 2,464 1,692 1,819 3,272 3,219 3,700 3,132 3,131
Total current liabilities 3,586 2,327 2,749 4,606 4,194 5,275 4,697 5,196
Long-term debt 5,559 3,721 2,938 2,099 3,674 2,204 1,323 992
Other non-current liabilities 21 171 189 198 225 225 250 300
Total liabilities 9,166 6,220 5,876 6,902 8,093 7,704 6,270 6,488
Share capital 7,542 7,393 7,422 5,966 4,077 4,077 4,077 4,077
Reserves/R.E./others 6,883 7,499 8,517 11,243 13,550 15,051 18,315 22,006
Shareholders' equity 14,425 14,892 15,940 17,209 17,626 19,127 22,392 26,082
Minority interests 0 0 0 0 691 670 670 670
Total equity & liabilities 23,591 21,112 21,816 24,111 26,411 27,502 29,332 33,240
EV 115,882 115,370 113,625 113,970 116,146 114,826 113,943 109,819
Net debt/(cash) 520 8 (1,737) (1,392) 93 (1,206) (2,089) (6,214)
BVPS (TWD) 21.434 19.746 21.508 25.572 34.191 47.503 55.610 64.775
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Sales (YoY) 26.3 (6.7) (5.5) 21.2 13.4 21.9 26.8 19.8
EBITDA (YoY) 33.9 4.4 6.7 29.5 8.0 17.9 39.6 25.8
Operating profit (YoY) 38.3 (14.1) 9.7 51.7 (0.4) 25.3 41.8 27.7
Net profit (YoY) 28.9 10.0 8.4 36.1 16.5 15.3 36.6 27.7
Core EPS (fully-diluted) (YoY) 21.9 (1.4) 10.7 70.7 70.5 16.7 36.6 27.7
Gross-profit margin 32.4 30.8 35.4 39.6 36.6 37.0 40.1 41.9
EBITDA margin 33.5 37.5 42.3 45.2 43.1 41.7 45.9 48.1
Operating-profit margin 21.9 20.1 23.4 29.2 25.7 26.4 29.5 31.4
Net profit margin 14.7 17.3 19.8 22.2 22.8 21.6 23.3 24.8
ROAE 13.5 12.4 12.7 16.1 17.9 19.5 23.6 25.8
ROAA 7.8 8.1 9.1 11.6 12.3 13.3 17.2 20.0
ROCE 13.8 10.9 12.3 18.4 16.9 19.9 26.8 30.4
ROIC 15.0 11.6 12.9 18.2 16.3 19.2 24.5 29.8
Net debt to equity 3.6 0.1 n.a. n.a. 0.5 n.a. n.a. n.a.
Effective tax rate 14.6 18.1 19.2 22.2 20.4 19.1 21.9 21.9
Accounts receivable (days) 27.6 29.6 24.7 21.1 23.7 23.6 23.8 23.8
Current ratio (x) 2.5 2.4 2.6 1.5 1.9 1.4 2.0 2.5
Net interest cover (x) 25.0 33.0 74.3 n.a. 383.3 190.4 n.a. n.a.
Net dividend payout 31.5 62.7 56.5 5.6 9.6 50.5 37.8 43.1
Free cash flow yield n.a. 1.9 2.7 1.2 0.5 2.6 2.3 5.8
Company profile
Founded in 1999, Win Semiconductors Corp (WinSemi) is the world’s largest compound
semiconductor foundry, focusing on gallium-arsenide (GaAs) foundry services for customers in both
wireless and fixed-line communication markets and infrastructure applications. It has a diverse
technology portfolio of processes that supports microwave frequency requirements from 50MHz to
100GHz. End-market applications for its products encompass smartphones, tablet PCs,
infrastructure base-stations, very small aperture terminal (VSAT) hubs, fibre optics, cable
televisions (CATV) and the automotive industry.
70
Win Semiconductors (3105 TT): 2 January 2018
WinSemi: quarterly P&L forecasts
TWDm 1Q17 2Q17 3Q17 4Q17E 1Q18E 2Q18E 3Q18E 4Q18E
2016 2017E 2018E 2019E
Total revenue 3,282 3,820 4,404 5,096 4,533 5,123 5,710 5,691
13,623 16,602 21,057 25,235
COGS -2,178 -2,398 -2,739 -3,142 -2,821 -3,107 -3,363 -3,331
-8,634 -10,457 -12,623 -14,660
Gross profit 1,105 1,422 1,664 1,954 1,712 2,016 2,347 2,359
4,989 6,145 8,434 10,574
Opex -373 -427 -436 -530 -494 -538 -594 -598
-1,495 -1,766 -2,223 -2,642
Operating profit 732 995 1,228 1,424 1,218 1,478 1,753 1,762
3,495 4,379 6,211 7,932
EBITDA 1,316 1,583 1,890 2,127 1,923 2,312 2,667 2,753
5,866 6,916 9,655 12,142
Pretax profit 592 995 1,365 1,439 1,233 1,492 1,769 1,778
3,888 4,391 6,272 8,012
Income taxes -95 -268 -201 -273 -210 -522 -283 -356
-791 -838 -1,370 -1,755
Net profit 496 745 1,181 1,165 1,023 970 1,486 1,422
3,113 3,588 4,901 6,257
FD O/S (m) 403 403 403 403 403 403 403 403
408 403 403 403
FD EPS (TWD) 1.23 1.85 2.93 2.89 2.54 2.41 3.69 3.53
7.64 8.91 12.17 15.54
Margin
Gross 34% 37% 38% 38% 38% 39% 41% 41%
37% 37% 40% 42%
Operating 22% 26% 28% 28% 27% 29% 31% 31%
26% 26% 29% 31%
EBITDA 40% 41% 43% 42% 42% 45% 47% 48%
43% 42% 46% 48%
Net 15% 20% 27% 23% 23% 19% 26% 25%
23% 22% 23% 25%
Growth (QoQ)
Total revenue 2% 16% 15% 16% -11% 13% 11% 0%
Gross profit 15% 29% 17% 17% -12% 18% 16% 1%
Operating profit 25% 36% 23% 16% -14% 21% 19% 1%
EBITDA 7% 20% 19% 13% -10% 20% 15% 3%
Net profit -12% 50% 59% -1% -12% -5% 53% -4%
FD EPS -11% 50% 59% -1% -12% -5% 53% -4%
Growth (YoY)
Total revenue 0% 7% 24% 59% 38% 34% 30% 12%
13% 22% 27% 20%
Gross profit -20% 2% 33% 103% 55% 42% 41% 21%
5% 23% 37% 25%
Operating profit -27% -4% 42% 144% 67% 49% 43% 24%
0% 25% 42% 28%
EBITDA -13% -2% 25% 73% 46% 46% 41% 29%
8% 18% 40% 26%
Net profit -41% 6% 17% 107% 106% 30% 26% 22%
17% 15% 37% 28%
FD EPS -12% 56% 19% 110% 106% 30% 26% 22%
71% 17% 37% 28%
Source: Company, Daiwa forecasts
WinSemi: 4Q17 preview and 1Q18 outlook
4Q17E 1Q18E
TWDm Daiwa Consensus Variance Daiwa Consensus Variance
Revenue 5,096 4,989 2% 4,533 4,466 2%
Gross profit 1,954
1,712
Operating profit 1,424
1,218
Pretax profit 1,439
1,233
Net profit 1,165 1,186 -2% 1,023 987 4%
Adjusted EPS (TWD) 2.89 2.95 -2% 2.54 2.45 4%
Margin
Gross 38.3%
37.8%
Operating 27.9%
26.9%
Net 22.9%
22.6%
Operation
Utilization* 100%
90%
Cellular contribution 37%
37%
Infrastructure contribution 15%
16%
WiFi contribution 28%
28%
VCSEL & other** 20%
19%
Source: Bloomberg, Daiwa estimates & forecasts Note: * Calculated as wafer shipment / capacity; ** Including optics and other sales
Global consumer laser market forecasts* WinSemi: 12-month forward PER bands
Source: Daiwa estimates & forecasts Note: * In wafer value terms
Source: Company, TEJ, Daiwa estimates & forecasts
0%
100%
200%
300%
400%
500%
0
500
1,000
1,500
2,000
2,500
2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E
Smartphone Automotive
Gaming, IIoT & others Growth (RHS)
USDm
0
50
100
150
200
250
300
350
400
Dec
-11
Apr
-12
Aug
-12
Dec
-12
Apr
-13
Aug
-13
Dec
-13
Apr
-14
Aug
-14
Dec
-14
Apr
-15
Aug
-15
Dec
-15
Apr
-16
Aug
-16
Dec
-16
Apr
-17
Aug
-17
Dec
-17
Apr
-18
Share price 5x 10x
15x 20x 25x
30x
TWD
See important disclosures, including any required research certifications, beginning on page 115
Korea Information Technology
What's new: For 2018, we forecast LG Innotek (LGI) to record top-line
growth of 28% YoY and even higher operating-profit growth (67% YoY),
which we expect to accrue mostly from its Optics Solutions (OS) business.
Following a recent share-price adjustment, due we believe to the market’s
concerns over iPhone X demand, the stock is trading at 9.5x PER on our
2018E EPS, which we consider to be attractive.
What's the impact: Meaningful earnings improvement in 2018E, driven
by OS business. On the basis of LGI’s solid position in the Apple supply
chain, we expect the company to see a marked earnings improvement in
2018, driven by an increase in sales of dual-cameras/3D-sensing modules
for Apple. We forecast high growth in its OS revenue in 2018 (KRW5.9tn,
+36% YoY) as its 3D-sensing module sales and dual-cam sales expand.
More broadly, we believe the company is widely seen as integral to the
Apple supply chain, and we expect it to maintain its competitive edge over
peers in OIS dual-camera/3D-sensing modules in 2018E.
Other divisions should also support earnings growth. Separately, we
look for solid earnings from the Substrate & Materials division on increased
RF-PCB/photomask sales. We understand that LGI started supplying RF-
PCB for touch-screen panels (TSP) to Apple in 4Q17. Although we estimate
its market share at just 10% for this year’s flagship smartphone model, we
expect its share to rise in 2018 due to recent product quality issues faced
by a competitor. Furthermore, if affiliate LG Display starts supplying OLED
panels from 2018, we think LGI is likely to supply RF-PCB for OLED panels
as well.
Automotive and Electronics (A&E) business looks set to take off. As
for the A&E business, we look for a 26% YoY increase in revenue for 2018
(vs. 10% YoY for 2017E) as a result of a continuous rise in the order back-
log (over KRW9tn). Although most of the backlog comprises automotive
parts, we also expect its electronics products, such as wireless charging
modules, to show robust revenue growth in 2018.
What we recommend: We reaffirm our Buy (1) call and 12-month TP of
KRW220,000. Our TP is based on an unchanged PER of 18.4x applied to
2017-18E EPS. As we expect LGI’s 2016-18E EPS growth to be even
faster than that for 2010, we apply the stock’s highest PER recorded during
2010 (18.4x). Key risk: a sharp fall in iPhone demand.
How we differ: Our 2018-19E EPS are 6-8% above consensus, which we
attribute to our more positive view on LGI’s OS business.
2 January 2018
LG Innotek
Robust earnings growth driven by optics solutions
Dual camera/3D-sensing modules to drive earnings growth in 2018E
RF-PCB and A&E should provide long-term growth momentum
Reaffirming Buy (1) call with unchanged TP of KRW220,000
Source: Daiwa forecasts
Source: FactSet, Daiwa forecasts
LG Innotek (011070 KS)
Target price: KRW220,000 (from KRW220,000)
Share price (28 Dec): KRW144,000 | Up/downside: +52.8%
SK Kim(82) 2 787 9173
Henny Jung(82) 2 787 9182
Forecast revisions (%)
Year to 31 Dec 17E 18E 19E
Revenue change 1.2 - -
Net profit change (0.4) - -
Core EPS (FD) change (0.4) - -
90
113
135
158
180
80,000
106,250
132,500
158,750
185,000
Dec-16 Mar-17 Jun-17 Sep-17 Dec-17
Share price performance
LG Innotek (LHS) Relative to KOSPI (RHS)
(KRW) (%)
12-month range 85,600-184,500
Market cap (USDbn) 3.17
3m avg daily turnover (USDm) 46.37
Shares outstanding (m) 24
Major shareholder LG Electronics (40.8%)
Financial summary (KRW)
Year to 31 Dec 17E 18E 19E
Revenue (bn) 7,321 9,361 9,862
Operating profit (bn) 322 536 589
Net profit (bn) 198 368 406
Core EPS (fully-diluted) 8,353 15,566 17,150
EPS change (%) n.a. 86.4 10.2
Daiwa vs Cons. EPS (%) (1.1) 6.4 7.9
PER (x) 17.2 9.3 8.4
Dividend yield (%) 0.2 0.3 0.3
DPS 350 400 500
PBR (x) 1.7 1.4 1.2
EV/EBITDA (x) 6.4 4.6 3.9
ROE (%) 10.5 16.7 15.5
72
LG Innotek (011070 KS): 2 January 2018
Financial summary
Key assumptions
Profit and loss (KRWbn)
Cash flow (KRWbn)
Source: FactSet, Daiwa forecasts
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Camera module shipment (m units) n.a. n.a. 151.9 173.0 147.6 161.9 183.0 180.3
Camera module blended ASP (USD) n.a. n.a. 15.7 14.8 16.4 20.9 21.8 20.3
3D-sensing module shipment (m units) n.a. n.a. 0.0 0.0 0.0 20.0 90.0 115.5
3D-sensing module ASP (USD) n.a. n.a. 0.0 0.0 0.0 13.0 13.1 13.5
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Optics Solution n.a. n.a. 2,746 3,024 2,871 4,351 5,938 6,004
Substrate & Material n.a. n.a. 1,699 1,468 1,152 1,114 1,243 1,304
Other Revenue n.a. n.a. 2,021 1,646 1,731 1,855 2,180 2,554
Total Revenue 5,316 6,212 6,466 6,138 5,755 7,321 9,361 9,862
Other income 471 529 535 482 351 345 422 429
COGS (4,754) (5,522) (5,603) (5,365) (5,102) (6,419) (8,241) (8,682)
SG&A (484) (554) (549) (549) (548) (579) (584) (591)
Other op.expenses (471) (529) (535) (482) (351) (345) (422) (429)
Operating profit 77 136 314 224 105 322 536 589
Net-interest inc./(exp.) (94) (93) (66) (40) (30) (25) (23) (20)
Assoc/forex/extraord./others (1) (21) (57) (62) (64) (15) (21) (28)
Pre-tax profit (18) 22 192 122 11 283 492 541
Tax (7) (6) (79) (27) (6) (85) (124) (135)
Min. int./pref. div./others (4) 4 4 0 0 0 0 0
Net profit (reported) (29) 20 117 95 5 198 368 406
Net profit (adjusted) (29) 20 117 95 5 198 368 406
EPS (reported)(KRW) (1,237) 771 4,761 4,018 209 8,353 15,566 17,150
EPS (adjusted)(KRW) (1,237) 771 4,761 4,018 209 8,353 15,566 17,150
EPS (adjusted fully-diluted)(KRW) (1,237) 771 4,761 4,018 209 8,353 15,566 17,150
DPS (KRW) 200 200 400 400 250 350 400 500
EBIT 77 136 314 224 105 322 536 589
EBITDA 549 665 849 706 456 667 958 1,018
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Profit before tax (18) 22 192 122 11 283 492 541
Depreciation and amortisation 471 529 535 482 351 345 422 429
Tax paid (7) (6) (79) (27) (6) (85) (124) (135)
Change in working capital 139 (230) 77 35 95 (87) (411) 12
Other operational CF items (205) 120 19 66 (119) 62 (30) 15
Cash flow from operations 381 436 743 678 332 517 348 862
Capex (350) (383) (261) (262) (319) (712) (510) (460)
Net (acquisitions)/disposals 23 17 17 9 18 60 60 60
Other investing CF items (56) (39) (65) (54) (55) (14) 0 0
Cash flow from investing (383) (405) (309) (306) (356) (666) (450) (400)
Change in debt (77) (7) (700) (396) 17 176 25 (238)
Net share issues/(repurchases) 1 23 279 0 0 0 0 0
Dividends paid 0 0 0 (6) (8) (6) (6) (8)
Other financing CF items (3) 1 (19) (7) (2) 8 7 12
Cash flow from financing (79) 16 (440) (408) 6 179 26 (234)
Forex effect/others (2) (0) 3 0 0 0 0 0
Change in cash (83) 47 (3) (36) (18) 29 (76) 228
Free cash flow 30 52 482 417 13 (195) (162) 402
73
LG Innotek (011070 KS): 2 January 2018
Financial summary continued …
Balance sheet (KRWbn)
Key ratios (%)
Source: FactSet, Daiwa forecasts
As at 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Cash & short-term investment 353 400 396 360 341 367 291 519
Inventory 478 376 354 303 403 435 605 613
Accounts receivable 1,147 1,166 1,264 1,085 1,292 1,396 1,944 1,964
Other current assets 95 65 68 41 48 44 44 44
Total current assets 2,073 2,007 2,082 1,789 2,084 2,242 2,884 3,140
Fixed assets 2,375 2,105 1,898 1,647 1,729 1,990 2,091 2,132
Goodwill & intangibles 1,222 168 181 207 213 291 350 405
Other non-current assets (784) 302 268 271 280 436 305 154
Total assets 4,886 4,581 4,429 3,914 4,324 4,975 5,638 5,839
Short-term debt 670 633 495 366 395 223 230 187
Accounts payable 740 564 653 502 805 936 1,251 1,292
Other current liabilities 599 432 499 427 533 447 438 437
Total current liabilities 2,009 1,629 1,647 1,295 1,734 1,606 1,919 1,916
Long-term debt 1,498 1,527 965 698 686 1,034 1,052 857
Other non-current liabilities 111 108 120 156 125 344 247 233
Total liabilities 3,618 3,264 2,732 2,149 2,545 2,985 3,218 3,006
Share capital 101 101 118 118 118 118 118 118
Reserves/R.E./others 1,167 1,216 1,578 1,647 1,660 1,872 2,301 2,715
Shareholders' equity 1,268 1,317 1,696 1,765 1,778 1,990 2,419 2,834
Minority interests 0 0 0 0 0 0 0 0
Total equity & liabilities 4,886 4,581 4,429 3,914 4,324 4,975 5,638 5,839
EV 5,223 5,168 4,472 4,112 4,148 4,298 4,398 3,933
Net debt/(cash) 1,815 1,761 1,064 704 740 890 991 525
BVPS (KRW) 62,905 65,298 77,407 74,587 75,154 84,088 102,241 119,741
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Sales (YoY) 16.8 16.8 4.1 (5.1) (6.2) 27.2 27.9 5.3
EBITDA (YoY) 46.8 21.3 27.5 (16.8) (35.5) 46.5 43.6 6.2
Operating profit (YoY) n.a. 76.1 130.6 (28.8) (53.1) 207.3 66.5 9.7
Net profit (YoY) n.a. n.a. 489.3 (18.4) (94.8) 3,890.9 86.4 10.2
Core EPS (fully-diluted) (YoY) n.a. n.a. 517.5 (15.6) (94.8) 3,896.6 86.4 10.2
Gross-profit margin 10.6 11.1 13.3 12.6 11.3 12.3 12.0 12.0
EBITDA margin 10.3 10.7 13.1 11.5 7.9 9.1 10.2 10.3
Operating-profit margin 1.5 2.2 4.9 3.6 1.8 4.4 5.7 6.0
Net profit margin (0.5) 0.3 1.8 1.5 0.1 2.7 3.9 4.1
ROAE n.a. 1.5 7.7 5.5 0.3 10.5 16.7 15.5
ROAA n.a. 0.4 2.6 2.3 0.1 4.3 6.9 7.1
ROCE 2.2 3.9 9.5 7.5 3.7 10.5 15.4 15.5
ROIC 3.5 3.1 6.3 6.7 2.0 8.3 12.8 13.0
Net debt to equity 143.1 133.7 62.7 39.9 41.6 44.7 40.9 18.5
Effective tax rate (42.5) 29.4 41.2 22.1 53.6 30.0 25.1 25.0
Accounts receivable (days) 68.7 68.0 68.6 69.8 75.4 67.0 65.1 72.3
Current ratio (x) 1.0 1.2 1.3 1.4 1.2 1.4 1.5 1.6
Net interest cover (x) 0.8 1.5 4.8 5.7 3.5 12.9 23.1 30.1
Net dividend payout n.a. 25.9 8.4 10.0 119.6 4.2 2.6 2.9
Free cash flow yield 0.9 1.5 14.1 12.2 0.4 n.a. n.a. 11.8
Company profile
Established in 1976, LG Innotek is one of largest electric part manufacturers in Korea. The
company covers various electric components from camera module, HDI, tape substrates, LED and
recently expanded its business opportunities to 3D-sensing module. Its largest customers include
US's largest smartphone maker, as well as its parent company, LG Electronics, which owns a 41%
stake in LG Innotek.
74
LG Innotek (011070 KS): 2 January 2018
LGI: earnings outlook by division
(KRW bn) 1Q17 2Q17 3Q17 4Q17E 2016 2017E 2018E 2019E
Consolidated revenue 1,644.7 1,339.6 1,787.2 2,549.1 5,754.6 7,320.7 9,361.4 9,861.8
Optics Solution 924.2 634.9 1,035.7 1,756.6 2,870.8 4,351.5 5,937.9 6,003.9
Substrate & Materials 264.1 271.3 283.3 295.3 1,152.4 1,113.9 1,243.0 1,303.7
Automotive & Electronics 307.2 271.5 313.6 352.2 1,132.9 1,244.4 1,564.5 1,963.8
LED 167.6 176.8 170.7 163.0 694.8 678.1 687.7 662.2
Consolidated operating profit 66.8 32.5 55.9 166.9 104.8 322.1 536.4 588.7
Optics Solution 72.7 11.7 31.6 136.3 112.7 252.3 436.6 458.1
Substrate & Materials 8.5 24.4 20.5 26.6 48.9 80.0 84.0 78.0
Automotive & Electronics -0.4 -1.0 10.2 10.6 14.7 19.3 21.0 46.0
LED -14.0 -2.6 -6.4 -6.5 -71.4 -29.5 -5.2 6.6
Consolidated OP margin 4.1% 2.4% 3.1% 6.5% 1.8% 4.4% 5.7% 6.0%
Optics Solution 7.9% 1.8% 3.1% 7.8% 3.9% 5.8% 7.4% 7.6%
Substrate & Materials 3.2% 9.0% 7.2% 9.0% 4.2% 7.2% 6.8% 6.0%
Automotive & Electronics -0.1% -0.4% 3.2% 3.0% 1.3% 1.6% 1.3% 2.3%
LED -8.3% -1.5% -3.7% -4.0% -10.3% -4.3% -0.8% 1.0%
Source: Company, Daiwa forecasts
LGI: revenue mix forecasts by division LGI: revenue from Apple
Source: Company, Daiwa forecasts
Source: Company, Daiwa forecasts
iPhone production volume estimates
1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17E 2016E 2017E 2018E
iPhone 5S/SE 6.0 9.0 8.0 7.5 5.5 5.5 0.0 0.0 30.5 11.0 0.0
iPhone 6/6 Plus 7.5 5.5 3.5 0.0 0.0 0.0 0.0 0.0 16.5 0.0 0.0
iPhone 6S/6S Plus 33.5 28.5 14.0 7.5 4.5 4.0 4.5 4.5 83.5 17.5 3.0
iPhone 7/7 Plus 0.0 0.0 22.5 61.0 38.0 32.0 20.5 11.0 83.5 101.5 11.5
iPhone 8 0.0 0.0 0.0 0.0 0.0 0.0 26.0 37.0 0.0 63.0 42.0
iPhone X 0.0 0.0 0.0 0.0 0.0 0.0 2.0 31.0 0.0 33.0 71.0
iPhone 8S/8S plus 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 85.0
Total 47.0 43.0 48.0 76.0 48.0 41.5 53.0 83.5 214.0 226.0 212.5
Source: Company, Daiwa forecasts
LGI: peer EPS growth vs. PER LGI: peer PEG comparison
Source: Company, Bloomberg, Daiwa forecasts for LGI and SEMCO Note: EPS growth = 17-18 growth, PER = 17-18 average PER
Source: Company, Bloomberg, Daiwa forecasts for LGI and SEMCO Note: PEG = [17-18E average PER / 17-18E EPS growth]
50%59% 63% 61%
20%15%
13% 13%
20%17% 17% 20%
12% 9% 7% 7%
0%
20%
40%
60%
80%
100%
2016 2017E 2018E 2019EOptics Solution Substrate & Material Automotive & Electronics LED
0
1,000
2,000
3,000
4,000
5,000
6,000
2016 2017E 2018E 2019E
(KRWbn)
Single-cam revenue Dual-cam revenue 3D-sensor revenue
LGI
SEMCO
Sunny Optical
O-Film
Lite-on
LarganMinebea MitsumiAlps
0%
50%
100%
150%
200%
250%
0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0
(EPS growth)
(P/E)
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5
LGI
SEMCO
Sunny Optical
O-Film
Largan
Minebea Mitsumi
Alps
See important disclosures, including any required research certifications, beginning on page 115
Malaysia Information Technology
What’s new: Sizable capex for sensor development. Globe has
allocated significant capex (MYR105m) for the development of its sensor
business in FY17. This is to take into account the commercialisation of new
sensor products, including a new light sensor, and additional capacity for its
existing gesture sensor, both of which ultimately head to a US smartphone
customer. In total, Globetronics is manufacturing 5 different sensors for this
major US smartphone brand, across all its product platforms
VCSEL-related packaging: forthcoming driver. Globe’s Austrian
sensor customer is a leading player in the VCSEL space, an area where
we see high growth potential over the near term as adoption increases in
the consumer market and eventually in the automotive segment. This
Austrian company has expanded its capabilities and capacity in this area in
anticipation of growth, given VCSEL’s benefits over existing technology.
Globe, a long-term contractor for this customer, stands to be a major
beneficiary, in our view.
Laser headlamps next? Globe is the manufacturing partner of a niche
LED manufacturer based in the US. Globe and the customer are
undergoing qualification for the latter’s laser headlamps, which will
potentially be used by two German automotive manufacturers. We consider
this opportunity, if it materialises, to be another business catalyst.
What’s the impact: We expect Globe’s top-line contribution from the sensor
segment to rise from 43% in FY17 to 60% in FY18. As this is a relatively
high-margin business, and as initial production costs are eliminated, there
could be upside to margins, in our view. We believe any positive
developments on the laser automotive headlamp front could also lead to
revenue upside. We project 87% YoY FY18 EPS growth as contributions
from the sensor division kick in.
What we recommend: We project EPS growth of 87% YoY in FY18 and
11% in FY19 for an FY16-19 EPS CAGR of 70%. The above-industry growth
rate is spurred by Globetronics’ extensive capex plans for the sensor
division. The stock’s FY18E PER of 16.5x is close to its past-5-year high,
which we consider to be justified given Globetronics’ strong earnings
growth profile. We have a TP of MY8, based on 20x FY18E EPS. Key risks:
loss of key customer, sharp appreciation of the Ringitt.
How we differ: On FY17-18E EPS, we are 10% above the market, likely
because we expect a stronger contribution from the sensor division to drive
growth. Given potential margin expansion from this more profitable
business, we think the market is likely mis-pricing this growth.
2 January 2018
Globetronics Technolog y
Niche sensor play
Growing sensor business look set to drive profitability
VCSEL packages and laser headlamps could be next major drivers
Reaffirming our Buy call and 12-month TP of MYR8
Kevin Low (603) 2146 7479
Forecast revisions (%) Year to 30 Jun 17E 18E 19E
Revenue change - - -
Net-profit change - - -
Core EPS (FD) change - - -
Source: Affin Hwang forecasts
12-month range RM3.4-6.9
Market cap (USDm) 462
3m average daily turnover (USDm) 1.0
Shares outstanding (m) 285
Major shareholder Employees Provident Fund (10.2%)
Source: Bloomberg
Financial summary (MYR) Year to 31 Dec 17E 18E 19E
Revenue (m) 315 459 494
Operating profit (m) 66 126 141
Net profit (m) 60 113 125
Core EPS (fully-diluted) 0.214 0.399 0.444
EPS change (%) 136.3 86.9 11.2
Daiwa vs Cons. EPS (%) 15.7 12.4 5.0
PER (x) 30.8 16.5 14.8
Dividend yield (%) 2.4 5.5 6.1
DPS 0.16 0.36 0.40
PBR (x) 6.7 6.5 6.2
EV/EBITDA (x) 17.7 10.8 10.0
ROE (%) 22.2 39.5 42.2
Source: Company, Affin Hwang forecasts
90
113
135
158
180
3.0
4.0
5.0
6.0
7.0
Dec-16 Mar-17 Jun-17 Sep-17 Dec-17
Share price performance
Globetroni (LHS)Relative to FBMKLCI (RHS)
(MYR) (%)
Globetronics Technology (GTB MK)
Target price: MYR8.00 (from MYR8.00)
Share price (28 Dec): MYR6.58 | Up/downside: +21.6%
76
Globetronics Technology (GTB MK): 2 January 2018
Financial summary
Profit & Loss Statement
FYE Dec (RMm) 2015 2016 2017E 2018E 2019E
Total revenue 344 215 315 459 494
Operating expenses (257) (164) (216) (295) (320)
EBITDA 87 51 99 164 174
Depreciation (19) (20) (33) (37) (33)
Amortisation - - - - -
EBIT 67 31 66 126 141
Net interest income/(expense) 3 2 2 2 1
Associates' contribution 0 0 0 0 0
Others - - - - -
Pretax profit 71 33 68 128 142
Tax (10) (8) (8) (15) (17)
Minority interest - - - - -
Net profit 71 26 60 113 125
Core net profit 60 25 60 113 125
Balance Sheet Statement
FYE Dec (RMm) 2015 2016 2017E 2018E 2019E
Fixed assets 84 73 142 160 142
Other long term assets 23 22 22 22 22
Total non-current assets 107 95 165 182 164
Cash and equivalents 178 166 130 112 139
Stocks 18 9 16 24 27
Debtors 53 40 52 75 83
Other current assets 0 0 0 0 0
Total current assets 249 215 198 212 248
Creditors 43 36 43 63 69
Short term borrowings 11 - 30 30 30
Other current liabilities 1 1 1 1 1
Total current liabilities 54 37 74 94 100
Long term borrowings - - - - -
Other long term liabilities 2 9 9 9 9
Total long term liabilities 2 9 9 9 9
Shareholders' Funds 300 264 279 290 303
Cash Flow Statement
FYE Dec (RMm) 2015 2016 2017E 2018E 2019E
EBIT 67 31 66 126 141
Depreciation & amortisation 19 20 33 37 33
Working capital changes 5 15 (11) (11) (4)
Cash tax paid (10) (8) (8) (15) (17)
Others (4) 0 - - -
Cashflow from operations 89 59 80 137 153
Capex (32) (9) (103) (55) (15)
Disposal/(purchases) 15 3 3 2 2
Others - - - - -
Cash flow from investing (17) (6) (100) (53) (13)
Debt raised/(repaid) 8 (11) 30 - -
Equity raised/(repaid) 4 1 - - -
Net inct income/(expense) 3 2 2 2 1
Dividends paid (65) (65) (45) (101) (113)
Others (1) 7 (3) (2) (2)
Cash flow from financing (51) (66) (15) (102) (113)
Net change in CF 21 (13) (36) (18) 27
Free Cash Flow 56 50 (23) 82 138
Sources: Company data, Affin Hwang estimates
77
Globetronics Technology (GTB MK): 2 January 2018
Financial summary continued …
Key Financial Ratios and Margins
FYE Dec (RMm) 2015 2016 2017E 2018E 2019E
Growth
Revenue (%) (3.2) (37.3) 46.2 45.6 7.7
EBITDA (%) (17.6) (41.1) 93.2 65.3 6.4
Core net profit (%) 0.8 (57.8) 136.3 86.9 11.2
Profitability
EBITDA margin (%) 25.3 23.8 31.4 35.7 35.3
PBT margin (%) 23.7 15.5 21.6 27.9 28.8
Net profit margin (%) 20.8 11.9 19.1 24.5 25.3
Effective tax rate (%) 12.6 16.6 11.5 12.0 12.0
ROA (%) 20.0 8.3 16.6 28.6 30.3
Core ROE (%) 20.6 9.0 22.2 39.5 42.2
ROCE (%) 22.6 10.8 22.9 40.0 43.1
Dividend payout ratio (%) 90.9 252.1 75.0 90.0 90.0
Liquidity
Current ratio (x) 4.6 5.8 2.7 2.2 2.5
Op. cash flow (RMm) 88.6 58.8 79.7 136.8 152.9
Free cashflow (RMm) 56.3 49.9 (23.3) 81.8 137.9
FCF/share (sen) 20.0 17.7 (8.3) 29.0 48.9
Asset management
Debtors turnover (days) 56.6 60.0 60.0 60.0 61.0
Stock turnover (days) 19.0 19.0 19.0 19.0 20.0
Creditors turnover (days) 45.4 50.0 50.0 50.0 51.0
Capital structure
Net Gearing (%) (55.8) (62.7) (35.7) (28.2) (35.8)
Interest Cover (x) nm nm nm nm nm
Quarterly Profit & Loss
FYE 31 Dec (RMm) 3Q16 4Q16 1Q17 2Q17 3Q17
Revenue 52 47 50 63 87
Operating expenses -40 -34 -39 -50 -63
EBITDA 13 13 11 13 24
Depreciation -4 -8 -4 -4 -9
EBIT 8 5 6 9 16
Net int income/(expense) 0 1 0 0 0
Associates' contribution 0 0 0 0 0
Exceptional Items 2 3 -1 -1 0
Pretax profit 10 9 6 8 16
Tax -1 -2 -2 -1 -2
Minority interest
Net profit 9 6 5 7 14
Core net profit 8 3 5 8 14
Margins (%)
EBITDA 24.2 27.8 21.2 20.7 27.8
PBT 19.9 18.6 12.4 13.5 18.5
Net profit 17.4 13.6 9.4 11.2 16.5
Sources: Company data, Affin Hwang estimates
Company profile
Globetronics Technology Bhd is an investment holding company. It started of as an OSAT for Intel back
in the 90s and publicly listed in 1997. Globetronics gradually moved away from the IC segment after
2003, diversifying into the assembly of quartz crystal timing devices, LED and in 2012, the sensor
segment.
78
Globetronics Technology (GTB MK): 2 January 2018
See important disclosures, including any required research certifications, beginning on page 115
United States Information Technology
What’s new: Artificial Intelligence (AI)-driven compute growth is at an
inflection point and we see significant growth opportunities in the data
centre and automotive end-markets. For details, see our recent initiation
report: Artificial Intelligence driving the next era of compute.
What’s the impact: We view NVIDIA as a key beneficiary of AI-driven
compute growth. Our positive outlook is driven by 3 factors.
Strong addressable market growth. For the data centre and automotive
segments, we forecast the addressable market collectively to grow to
USD53.1bn long term from USD11.8bn in 2017 (a 21% CAGR). For
gaming, which remains an important end-market for NVIDIA (59% of
revenue in FY17E), we see a large installed base and the rising popularity
of eSports driving continued growth.
Building on an early lead. Being early in recognising the opportunity for
general purpose GPU compute in markets outside of gaming, NVIDIA has
built a durable lead through investments in software and the ecosystem.
We think this augurs well for the company to capture appreciable share of
the growing market.
Scope for meaningful leverage. As NVIDIA continues the transition to a
platform company from a supplier of discrete GPUs, the company
increasingly provides value to customers through its software efforts. Our
segmentation analysis shows that as software-rich data centre/automotive
revenue rises in the mix, the gross margin will expand by ~600bps to 66%
in FY21 from the current ~60% level. (For more detail, see our report
Growth and leverage…more to come.)
What we recommend: We reaffirm our Buy (1) rating on the stock and 12-
month target price of USD260, based on a blended average of our PER
and DCF analysis. With the shares trading at ~13.2x our FY22E earnings
power of ~USD15, we view the stock as attractive, given what we regard as
its strong growth prospects and scope for meaningful operating leverage.
While we expect volatility around the quarterly results, especially as data
centre revenue is likely to be lumpy, we think the fundamental outlook
remains attractive. Company-specific risks include competition from
alternative solutions for data centre acceleration (FPGAs, ASICs, start-
ups), and a slower-than-expected ramp of the market opportunity related to
autonomous vehicles.
2 January 2018
NVIDIA
Levered to AI-driven compute growth
We see NVIDIA as one of the best ways to play growth driven by AI
Scope for operating leverage driven by gross-margin expansion
We forecast FY22 earnings power of ~USD15
Deepak Sitaraman, CFA (1) 212 612 6115
Forecast revisions (%) Year to 31 Jan 18E 19E
Revenue change - -
Net-profit change - -
Core EPS (FD) change - -
Source: Daiwa forecasts
Market Data 12-month range 87.54-218.67
Market cap (USDm) 119,624
3m average daily turnover (USDm) -
Shares outstanding (m) 606
Major shareholder FMR LLC 8.47%
Source: Bloomberg
Financial summary (USD) Year to 31 Jan 18E 19E
Revenue (m) 9,538 12,123
Operating profit (m) 3,474 4,631
Net profit (m) 2,878 3,843
Core EPS (fully-diluted) 4.58 6.04
EPS change (%) 50 32
Daiwa vs Cons. EPS (%) 9.0 28.0
PER (x) 43.1 32.7
Dividend yield (%) 0.3 0.3
DPS 0.57 0.66
PBR (x) 16.3 11.9
EV/EBITDA (x) 29.6 22.5
ROE (%) 43.0 42.7
Source: Company, Daiwa forecasts; Reuters consensus
80
104
128
151
175
80
115
150
185
220
Dec-16 Mar-17 Jun-17 Sep-17 Dec-17
Share price performance
Nvidia (LHS)Relative to S&P 500 Index (RHS)
(USD) (%)
NVIDIA (NVDA US)
Target price: USD260 (from USD260)
Share price (28 Dec): USD197.40 | Up/downside: +31.7%
80
NVIDIA (NVDA US): 2 January 2018
Financial summary
Profit & Loss Statement (USDm)
$ in millions, except per share 2016 2017 2018E 2019E
Revenue 5,010 6,910 9,538 12,123
Cost of revenue 2,164 2,822 3,844 4,680
Gross profit 2,846 4,088 5,694 7,443
Non-GAAP gross margin, % 56.8% 59.2% 59.7% 61.4%
Research & development 1,216 1,328 1,578 1,980
% of sales 24.3% 19.2% 16.5% 16.3%
Sales, general and administrative 528 565 656 832
% of sales 10.5% 8.2% 6.9% 6.9%
Total operating expenses 1,723 1,867 2,220 2,812
% of sales 34.4% 27.0% 23.3% 23.2%
Operating income 1,125 2,221 3,474 4,631
Operating margin, % 22.5% 32.1% 36.4% 38.2%
Other 20 13 0 0
Pretax income 1,145 2,234 3,474 4,631
Pretax margin 22.9% 32.3% 36.4% 38.2%
Income tax expense 216 383 596 787
Effective tax rate 18.9% 17.1% 17.2% 17.0%
Non-GAAP Net income 929 1,851 2,878 3,843
Non-GAAP Net margin 18.5% 26.8% 30.2% 31.7%
Non-GAAP EPS $1.67 $3.06 $4.58 $6.04
Basic shares outstanding 543 541 600 604
Diluted shares outstanding 556 605 629 637
Source: Source: Company, Daiwa forecasts
81
NVIDIA (NVDA US): 2 January 2018
Cash flow (USDm)
$ in millions, except per share 2016 2017 2018E 2019E
Net income 614 1,666 2,697 3,536
Depreciation and amortization 197 187 196 206
Stock-based compensation expense 204 247 389 366
Restructuring and other charges 45 0 0 0
Amortization of debt discount 29 25 12 20
Gain on sale of long-lived assets and investments (6) (3) 1 0
Deferred income taxes 134 197 195 160
Other 9 32 36 20
Changes in assets and liabilities:
Accounts receivable (32) (321) (480) (648)
Inventories 66 (375) (70) (254)
Prepaid expenses and other current assets (16) (18) (25) 0
Accounts payable (11) 184 14 84
Accrued liabilities and other long-term liabilities 39 (135) (11) (5)
Inventories (97) (14) 72 0
Net cash provided by operations 1,175 1,672 3,027 3,485
Purchases of marketable securities (3,477) (3,134) (463) (684)
Sales and maturities of marketable securities 3,138 2,515 1,176 0
Proceeds fm sale of long-lived assets and investments 7 7 0 0
Purchases of property and equipment and intangible assets (86) (176) (237) (260)
Other 18 (5) (16) 0
Net cash provided by investing (400) (793) 460 (944)
Proceeds from issuance of debts/notes, net 0 1,988 (60) 0
Payment related to notes 0 (673) (741) 0
Proceeds related to employee stock plans 120 (9) 121 0
Payments for stock repurchases (587) (739) (909) (860)
Dividend paid (213) (261) (347) (398)
Payment related to tax on restricted stock units 0 0 (190) 0
Other 4 (15) (2) 0
Net cash provided by financing (676) 291 (2,128) (1,258)
Change in cash and cash equivalents 99 1,170 1,359 1,283
Cash and cash equivalents, Beginning 497 596 1,766 3,125
Cash and cash equivalents, Ending 596 1,766 3,125 4,408
Free cash flow 1,089 1,496 2,790 3,225
Source: Source: Company, Daiwa forecasts
82
NVIDIA (NVDA US): 2 January 2018
Financial summary continued …
Balance sheet (USDm)
$ in millions, except per share 2016 2017 2018E 2019E
Assets
Cash, cash equivalents and marketable securities 5,037 6,798 7,441 9,408
Short-term investment
Accounts receivable (net) 505 826 1,306 1,954
Inventories 418 794 864 1,118
Prepaid expenses and other 93 118 135 135
Deferred income taxes 0 0 0 0
Total current assets 6,053 8,536 9,745 12,614
Property,plant and equipment (net) 466 521 610 664
Goodwill 618 618 618 618
Intangible assets (net) 166 104 46 0
Other assets 67 62 70 70
Total assets 7,370 9,841 11,089 13,966
Liabilities
Accounts payable 296 485 508 593
Accrued liabilities 642 507 497 492
Note and capital lease obligations 1,413 796 23 23
Current liabilities 2,351 1,788 1,028 1,107
Long-term debt 0 1,983 1,985 1,985
Other long-term liabilities 453 271 464 464
Capital lease obligations, long term 10 6 1 1
Convertible debt conversion obligation 87 31 1 1
Total shareholders' equity 4,469 5,762 7,610 10,408
Liabilities and Shareholder Equity 7,370 9,841 11,089 13,966
Source: Company, Daiwa forecasts
Company profile
NVIDIA is a provider of GPU based parallel computing solutions for several end-markets including
Gaming, Datacentres, Automotive and OEM. The company operates a fabless business model and has
been evolving from a supplier of discrete semiconductor products to becoming a platform supplier in its
key end markets. The company was founded in 1993 by Jensen Huang, Chris Malachowsky and Curtis
Priem and is headquartered in Santa Clara, California.
See important disclosures, including any required research certifications, beginning on page 115
United States Information Technology
What’s new: Artificial Intelligence (AI)-driven compute growth is at an
inflection point and we see significant growth opportunities in the data
centre and automotive end-markets. For details, see our recent initiation
report: Artificial Intelligence driving the next era of compute.
What’s the impact: We view Intel as a beneficiary of the anticipated robust
growth of the data centre and automotive end-markets driven by AI. Our
positive outlook is driven by 3 factors.
Under-estimated addressable market growth. We believe growth in
Intel’s addressable market driven by AI is being underestimated by the
consensus. With AI-driven compute at an inflection point, we see the data
centre and automotive end-markets collectively expanding to USD53.1bn in
the long term from USD11.8bn in 2017 (a 21% CAGR).
Well-placed to benefit from AI. While there is a perception that Intel is not
well placed to participate in the AI opportunity (beyond inference), we
disagree for 3 reasons: 1) it’s early days for AI, as we expect the
addressable market to grow by a factor of 4 in the long term, 2) recognising
changes in data centre architectures for AI training, Intel has shown a
willingness to adapt, and has assembled a portfolio of assets to address
new AI workloads, and 3) based on our proprietary scorecard to evaluate AI
chip vendors across 5 key metrics, we think the company’s strength in
terms of ecosystem and its ability to drive the AI roadmap bode well.
Possibility of higher-than-expected operating leverage. We see scope
for operating leverage beyond what the market expects. While
management is committed to reducing spending to 30% of sales by “at
least 2020” (from ~34% in 2017) to drive leverage, we see 3 levers for
incremental upside to operating margins: 1) success in the datacentre
business with Nervana and FPGAs, 2) better-than-expected client
computing group margins driven by mix, and 3) an earlier-than-expected
ramp in the self-driving vehicle market, where Intel looks well placed with
Mobileye.
What we recommend: We reiterate our Buy (1) call and 12-month target
price of USD55, derived from a blended average of our PER, EV/FCF and
DCF analysis. With the stock trading at 13.6x our 2018E EPS forecast of
USD3.40, we view the risk/reward as attractive given its exposure to a
large addressable market, its expanding portfolio of assets to address AI
workloads, and a path to USD4.00 of long-term earnings power. Risks
include lack of traction for products targeting the AI opportunity and higher-
than-expected spending, which would limit incremental operating leverage.
2 January 2018
Intel
AI a catalyst for data-centric transformation
Beneficiary of strong addressable market growth …
… in data centre and automotive, which is being driven by AI
Trading at a 2018E PER of 13.6x, the risk/reward looks attractive
Deepak Sitaraman, CFA (1) 212 612 6115
Forecast revisions (%) Year to 31 Dec 17E 18E
Revenue change - -
Net-profit change - -
Core EPS (FD) change - -
Source: Daiwa forecasts
Market Data 12-month range 33.23-47.64
Market cap (USDm) 216,310
3m average daily turnover (USDm) -
Shares outstanding (m) 4,680
Major shareholder CapitalGrp 8.04%
Source: Bloomberg
Financial summary (USD) Year to 31 Dec 17E 18E
Revenue (m) 62,016 65,222
Operating profit (m) 18,936 20,831
Net profit (m) 15,774 16,341
Core EPS (fully-diluted) 3.25 3.40
EPS change (%) 20 4
Daiwa vs Cons. EPS (%) 0 4.0
PER (x) 14.2 13.6
Dividend yield (%) 2.4 2.5
DPS 1.09 1.16
PBR (x) 3.5 3.1
EV/EBITDA (x) 7.7 7.1
ROE (%) 22.7 21.5
Source: Company, Daiwa forecasts; Reuters consensus
80
89
98
106
115
32
36
40
44
48
Dec-16 Mar-17 Jun-17 Sep-17 Dec-17
Share price performance
Intel (LHS)Relative to S&P 500 Index (RHS)
(USD) (%)
Intel (INTC US)
Target price: USD55 (from USD55)
Share price (28 Dec): USD46.22 | Up/downside: +19.0%
84
Intel (INTC US): 2 January 2018
Financial summary
Profit & Loss Statement (USDm)
$ in millions, except per share 2015 2016 2017E 2018E
Net revenue 55,355 59,486 62,016 65,222
Cost of sales 20,333 21,907 22,645 24,041
Gross profit 35,022 37,579 39,371 41,181
Non-GAAP gross margin, % 63.3% 63.2% 63.5% 63.1%
Research & development 12,128 12,740 13,024 12,900
% of sales 21.9% 21.4% 21.0% 19.8%
Marketing, general & administrative 7,930 8,397 7,524 7,450
% of sales 14.3% 14.1% 12.1% 11.4%
Total operating expenses 20,058 21,037 20,435 20,350
% of sales 36.2% 35.4% 33.0% 31.2%
Operating income 14,964 16,542 18,936 20,831
Operating margin, % 27.0% 27.8% 30.5% 31.9%
Other 210 62 1,281 120
Pretax income 15,174 16,604 20,217 20,951
Pretax margin 27.4% 27.9% 32.6% 32.1%
Income tax expense 2,981 3,365 4,443 4,610
Effective tax rate 19.6% 20.3% 22.0% 22.0%
Non-GAAP Net income 12,193 13,239 15,774 16,341
Non-GAAP Net margin 22.0% 22.3% 25.4% 25.1%
Non-GAAP EPS $2.49 $2.72 $3.25 $3.40
Basic shares outstanding 4,742 4,730 4,706 4,665
Diluted shares outstanding 4,894 4,875 4,851 4,810
Source: Source: Company, Daiwa forecasts
85
Intel (INTC US): 2 January 2018
Cash flow (USDm)
$ in millions, except per share 2015 2016 2017E 2018E
Net Income 11,420 10,316 14,245 16,101
Depreciation 7,821 6,266 6,790 7,600
Share-based compensation 1,305 1,444 725 0
Restructuring 354 1,886 185 0
Excess tax benefit from share-based payment arrangements (159) (121) 0 0
Amortization of intangibles and other acquisition-related costs 890 1,524 1,324 1,300
Losses on equity investments, net (263) (432) (526) 0
Losses on divestitures 0 0 (387) 0
Deferred taxes (1,270) 257 1,248 0
Changes in assets and liabilities:
Accounts receivable (355) 65 (1,151) (937)
Inventories (764) 119 (1,512) (1,122)
Accounts payable (312) 182 564 289
Accrued compensation and benefits (711) (1,595) (601) 448
Income taxes payable 386 1,382 620 0
Other assets and liabilities 675 515 (413) 0
Net cash provided by operations 19,017 21,808 21,110 23,679
Additions to property, plant and equipment (7,326) (9,625) (11,509) (10,200)
Acquisitions, net of cash acquired (913) (15,470) (14,499) 0
Changes in trading assets 1,887 (1,330) (1,984) 0
Changes in short-term investments, net (1) 237 2,001 0
Changes in long-term investments, net (2,011) (963) (726) 0
Changes in loan receivable (434) 688 0 0
Other investing activities 615 646 3,325 0
Net cash provided by investing (8,183) (25,817) (23,392) (10,200)
Changes in total debt, net 9,002 1,219 (1,014) 0
Issuance of long-term debt, net of issuance costs 0 0 7,716 0
Repayment of debt 0 0 (500) 0
Excess tax benefit from SB comp 159 121 0 0
Proceeds from sales of shares through employee equity incentive plans 866 1,108 637 0
Repurchase and retirement of common stock (3,001) (2,587) (4,721) (3,192)
Restricted stock unit withholdings (442) (464) (404) (400)
Dividends (4,556) (4,925) (5,067) (5,409)
Other (116) (211) 204 0
Net cash provided by financing 1,912 (5,739) (3,149) (9,001)
Change in cash and cash equivalents 12,746 (9,748) (5,431) 4,478
Cash and cash equivalents, Beginning 2,561 15,308 5,560 129
Cash and cash equivalents, Ending 15,308 5,560 129 4,607
Free cash flow 11,691 12,183 9,601 13,479
Source: Source: Company, Daiwa forecasts
86
Intel (INTC US): 2 January 2018
Financial summary continued …
Balance sheet (USDm)
$ in millions, except per share 2015 2016 2017E 2018E
Assets
Cash and cash equivalents 15,308 5,560 129 4,607
Short-term investment 2,682 3,225 1,446 1,446
Trading assets 7,323 8,314 6,983 6,983
Account receivable 4,787 4,690 5,930 6,867
Inventories 5,167 5,553 7,076 8,198
Other current assets 3,053 8,166 2,767 2,767
Total current assets 38,320 35,508 24,331 30,868
Property,plant and equipment (net) 31,858 36,171 41,147 42,447
Marketable strategic equity securities 5,960 6,180 6,059 6,059
Other long-term investments 1,891 4,716 3,844 3,844
Goodwill 11,332 14,099 24,389 24,389
Identified intangible assets, net 3,933 9,494 13,058 13,058
Other assets 8,165 7,159 7,112 7,112
Total assets 101,459 113,327 119,940 127,777
Liabilities
Short-term debt 2,634 4,634 4,142 4,142
Accounts payable 2,063 2,475 3,810 4,099
Accrued compensation and benefits 3,138 3,465 2,833 3,280
Accrued advertising 960 810 892 892
Deferred income 2,188 1,718 1,706 1,706
Other accrued liabilities 4,663 7,200 7,590 7,590
Current liabilities 15,646 20,302 20,973 21,709
Long-term debt 20,036 20,649 27,498 27,498
Long-term deferred tax liabilities 954 1,730 2,943 2,943
Others 2,841 3,538 4,152 4,152
Total shareholders' equity 61,085 66,226 64,374 71,475
Liabilities and Shareholder Equity 101,459 113,327 119,940 127,777
Source: Source: Company, Daiwa forecasts
Company profile
Intel Corp. engages in the design, manufacture, and sale of compute and datacenter products and
technologies. It operates its business in six segments: Client Computing Group, Data Center Group,
Internet of Things Group, Non-Volatile Memory Solutions Group, Programmable Solutions, and All
Other. The company was founded by Robert Noyce and Gordon Moore in 1968 and is headquartered in
Santa Clara, California.
See important disclosures, including any required research certifications, beginning on page 115
Taiwan Information Technology
What's new: We believe TSMC stands to benefit the most in the foundry
sector from the rising trend of artificial intelligence (AI), thanks to its global
leadership in advanced CMOS process technologies to accommodate AI’s
rising transistor-density requirement. We upgrade the stock to Outperform
(2) from Hold (3) and lift our TP to TWD260, from TWD237. We expect
TSMC’s 1Q18 revenue guidance to surprise the market on the upside.
What's the impact: Best positioned to benefit from AI. As discussed in
the main section of our 2018 Tech Outlook report, we expect high-
performance computing (HPC) processors with AI capabilities to grow
rapidly in the next few years, as application markets broaden from
datacentres for cloud computing to terminal devices for edge computing.
These devices include smartphones, smart cars, industrial robotics and
many other new IoT devices under the big data demand cycle.
2018 likely an inflection point. Among these key demand verticals, while
smartphones can be viewed as replacement demand and thus could be
cannibalistic to existing application processors (AP), we see datacentres
and automotive applications creating new demand with a high-growth
profile. Although any meaningful revenue contribution may still take time
(TSMC targets for USD15bn wafer value in 2020 for the global HPC
market), 2018 may mark an inflection point with TSMC's global-first
commercial offer of 7nm to accommodate a surging transistor-count
requirement from AI processors such as AP, GPU, FPGA and ASIC.
1Q18 likely to beat consensus. While the street forecasts TSMC's 1Q18
revenue to contract by 9% QoQ, we see upside to the consensus forecast
due to: 1) unexpected order additions for A10/A11 processors filling up
seasonal slack in 16/10nm capacity, and 2) continued demand strength
from crypto-currency processors (we believe the key customer is Bitmain)
keeping 16nm production busy. These strengths should help mitigate
demand weakness from 28nm, resulting in a 4% increase in our 1Q
revenue forecast to TWD264bn, down 5% QoQ. With this favourable
starting-point, we raise our 2018-19 EPS forecasts by 3-5%.
What we recommend: Given our forecast revisions, we lift our 12-month
TP to TWD260 (from TWD237), as we raise our ROE-adjusted PBR to its
historical mean of 3.7x (from 3.5x) on a 4-quarter forward book value. We
expect its resilient 1Q18 revenue outlook to catalyse the share price to the
upside. Key downside risk: 7nm execution issues diluting its AI business.
How we differ: Although there’s not much difference between our and the
consensus forecasts, we believe the street is overly concerned about
TSMC’s valuation after the recent pullback in the share price.
2 January 2018
Tai wan Semiconductor M anufacturing
Upgrading: the time of AI is coming
In our view, best positioned in the foundry sector to benefit from AI
1Q18 likely a positive surprise thanks to A10, A11 and bitcoin
Upgrading one notch to Outperform (2) with higher TP of TWD260
Source: Daiwa forecasts
Source: FactSet, Daiwa forecasts
Taiwan Semiconductor Manufacturing (2330 TT)
Target price: TWD260.00 (from TWD237.00)
Share price (28 Dec): TWD226.00 | Up/downside: +15.0%
Rick Hsu(886) 2 8758 6261
Martin Lee(886) 2 8758 6262
Forecast revisions (%)
Year to 31 Dec 17E 18E 19E
Revenue change - 3.4 3.6
Net profit change 0.2 2.7 4.6
Core EPS (FD) change 0.2 2.7 4.6
94
99
105
110
115
170
189
208
226
245
Dec-16 Mar-17 Jun-17 Sep-17 Dec-17
Share price performance
TSMC (LHS)Relative to TWSE Index (RHS)
(TWD) (%)
12-month range 179.50-244.00
Market cap (USDbn) 195.78
3m avg daily turnover (USDm) 184.81
Shares outstanding (m) 25,930
Major shareholder National Development Fund (6.4%)
Financial summary (TWD)
Year to 31 Dec 17E 18E 19E
Revenue (m) 978,834 1,108,483 1,248,550
Operating profit (m) 386,069 437,129 495,189
Net profit (m) 343,296 381,782 432,048
Core EPS (fully-diluted) 13.239 14.724 16.662
EPS change (%) 2.7 11.2 13.2
Daiwa vs Cons. EPS (%) 0.6 0.2 (0.1)
PER (x) 17.1 15.3 13.6
Dividend yield (%) 3.1 3.3 3.5
DPS 7.0 7.5 8.0
PBR (x) 3.8 3.4 3.0
EV/EBITDA (x) 8.6 7.6 6.6
ROE (%) 23.3 23.2 23.3
88
Taiwan Semiconductor Manufacturing (2330 TT): 2 January 2018
Financial summary
Key assumptions
Profit and loss (TWDm)
Cash flow (TWDm)
Source: FactSet, Daiwa forecasts
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Capacity utilization (%) 93 94 100 94 95 95 99 101
Blended ASP (USD) 1,204 1,269 1,340 1,339 1,347 1,317 1,371 1,396
Wafer shipment (8" equ., '000) 14,045 15,666 18,591 19,717 21,612 23,914 26,294 29,110
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Wafer Foundry Revenue 500,324 590,144 754,708 837,024 937,475 959,645 1,082,654 1,219,458
Sub & Other Revenue 5,924 6,880 8,099 6,473 10,463 19,190 25,829 29,093
Other Revenue 0 0 0 0 (0) (0) 0 0
Total Revenue 506,249 597,024 762,806 843,497 947,938 978,834 1,108,483 1,248,550
Other income 0 0 0 0 0 0 0 0
COGS (262,654) (316,079) (385,072) (433,102) (473,106) (484,339) (555,095) (619,318)
SG&A (22,136) (23,398) (25,020) (24,803) (25,667) (27,431) (30,461) (34,159)
Other op.expenses (40,402) (48,118) (56,824) (65,545) (71,208) (80,995) (85,798) (99,884)
Operating profit 181,057 209,429 295,890 320,048 377,957 386,069 437,129 495,189
Net-interest inc./(exp.) 625 (811) (506) 939 3,011 1,298 4,180 4,615
Assoc/forex/extraord./others (128) 6,869 6,713 29,442 4,990 8,982 3,141 3,163
Pre-tax profit 181,554 215,487 302,098 350,429 385,959 396,349 444,450 502,967
Tax (15,590) (27,468) (38,317) (43,873) (51,621) (52,925) (62,223) (70,415)
Min. int./pref. div./others 195 128 118 18 (91) (127) (444) (503)
Net profit (reported) 166,159 188,147 263,899 306,574 334,247 343,296 381,782 432,048
Net profit (adjusted) 166,159 188,147 263,899 306,574 334,247 343,296 381,782 432,048
EPS (reported)(TWD) 6.410 7.257 10.178 11.823 12.890 13.239 14.724 16.662
EPS (adjusted)(TWD) 6.410 7.257 10.178 11.823 12.890 13.239 14.724 16.662
EPS (adjusted fully-diluted)(TWD) 6.409 7.256 10.177 11.823 12.890 13.239 14.724 16.662
DPS (TWD) 2.999 3.000 3.000 4.500 6.000 7.000 7.500 8.000
EBIT 181,057 209,429 295,890 320,048 377,957 386,069 437,129 495,189
EBITDA 312,407 365,612 496,143 542,554 601,785 627,667 705,458 811,015
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Profit before tax 181,554 215,487 302,098 350,429 385,959 396,349 444,450 502,967
Depreciation and amortisation 131,349 156,182 200,252 222,507 223,828 241,598 268,329 315,826
Tax paid (15,590) (27,468) (38,317) (43,873) (51,621) (52,925) (62,223) (70,415)
Change in working capital (20,755) (18,393) (64,937) 25,123 (17,770) (7,500) (31,000) (12,000)
Other operational CF items 12,506 21,575 22,428 (24,306) (561) (2,769) (3,114) (3,191)
Cash flow from operations 289,064 347,384 421,524 529,879 539,835 574,753 616,441 733,187
Capex (246,137) (287,595) (288,540) (257,523) (328,045) (336,782) (390,309) (496,105)
Net (acquisitions)/disposals (27,553) 5,644 4,069 49,874 (76,691) 856 0 0
Other investing CF items 494 897 2,050 (9,596) 9,296 0 0 0
Cash flow from investing (273,196) (281,054) (282,421) (217,246) (395,440) (335,926) (390,309) (496,105)
Change in debt 63,571 109,388 26 (810) (9) (88,110) (88,279) (12,967)
Net share issues/(repurchases) 0 0 0 0 0 0 0 0
Dividends paid (77,749) (77,773) (77,786) (116,683) (155,582) (181,510) (194,475) (207,440)
Other financing CF items 367 491 33,978 5,702 (5,252) 0 0 0
Cash flow from financing (13,811) 32,106 (43,782) (111,791) (160,843) (269,620) (282,754) (220,407)
Forex effect/others (2,118) 850 0 0 0 0 0 0
Change in cash (62) 99,285 95,322 200,843 (16,448) (30,793) (56,622) 16,674
Free cash flow 42,926 59,789 132,984 272,356 211,790 237,971 226,132 237,082
89
Taiwan Semiconductor Manufacturing (2330 TT): 2 January 2018
Financial summary continued …
Balance sheet (TWDm)
Key ratios (%)
Source: FactSet, Daiwa forecasts
As at 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Cash & short-term investment 150,918 245,343 437,006 586,163 632,109 600,461 543,839 560,513
Inventory 37,830 37,495 66,338 67,052 48,682 83,682 63,682 100,682
Accounts receivable 52,093 71,942 115,048 85,565 129,305 94,305 159,305 129,305
Other current assets 11,447 3,708 8,175 7,964 7,633 8,800 8,800 8,800
Total current assets 252,289 358,487 626,567 746,744 817,729 787,248 775,626 799,300
Fixed assets 617,529 792,666 818,199 853,470 997,778 1,022,401 1,156,713 1,365,682
Goodwill & intangibles 19,430 22,719 20,227 22,310 24,795 26,000 25,000 25,000
Other non-current assets 65,786 89,184 30,056 34,994 46,154 46,154 46,154 46,154
Total assets 955,035 1,263,055 1,495,049 1,657,518 1,886,455 1,881,803 2,003,493 2,236,137
Short-term debt 35,757 15,645 36,159 62,992 96,068 96,237 70,926 57,958
Accounts payable 15,239 16,359 23,370 19,725 27,325 19,825 33,825 28,825
Other current liabilities 91,440 157,774 141,485 129,512 194,847 124,599 131,821 152,362
Total current liabilities 142,436 189,778 201,014 212,229 318,239 240,660 236,571 239,145
Long-term debt 82,161 211,584 214,516 191,998 153,115 64,837 1,869 1,869
Other non-current liabilities 4,683 13,918 33,191 30,658 25,050 20,000 21,000 25,000
Total liabilities 229,281 415,280 448,721 434,884 496,404 325,497 259,440 266,014
Share capital 259,244 259,286 259,297 259,304 259,304 259,304 259,304 259,304
Reserves/R.E./others 463,953 588,222 786,904 962,368 1,129,944 1,296,072 1,483,375 1,708,941
Shareholders' equity 723,198 847,508 1,046,201 1,221,672 1,389,248 1,555,376 1,742,678 1,968,245
Minority interests 2,556 267 127 963 803 930 1,375 1,878
Total equity & liabilities 955,035 1,263,055 1,495,049 1,657,518 1,886,455 1,881,803 2,003,493 2,236,137
EV 5,829,736 5,842,333 5,673,976 5,529,969 5,478,057 5,421,723 5,390,510 5,361,372
Net debt/(cash) (33,000) (18,114) (186,331) (331,173) (382,926) (439,387) (471,044) (500,686)
BVPS (TWD) 27.897 32.686 40.348 47.114 53.577 59.984 67.207 75.906
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Sales (YoY) 18.5 17.9 27.8 10.6 12.4 3.3 13.2 12.6
EBITDA (YoY) 25.3 17.0 35.7 9.4 10.9 4.3 12.4 15.0
Operating profit (YoY) 27.9 15.7 41.3 8.2 18.1 2.1 13.2 13.3
Net profit (YoY) 23.8 13.2 40.3 16.2 9.0 2.7 11.2 13.2
Core EPS (fully-diluted) (YoY) 23.8 13.2 40.3 16.2 9.0 2.7 11.2 13.2
Gross-profit margin 48.1 47.1 49.5 48.7 50.1 50.5 49.9 50.4
EBITDA margin 61.7 61.2 65.0 64.3 63.5 64.1 63.6 65.0
Operating-profit margin 35.8 35.1 38.8 37.9 39.9 39.4 39.4 39.7
Net profit margin 32.8 31.5 34.6 36.3 35.3 35.1 34.4 34.6
ROAE 24.6 24.0 27.9 27.0 25.6 23.3 23.2 23.3
ROAA 19.2 17.0 19.1 19.4 18.9 18.2 19.7 20.4
ROCE 23.7 21.8 24.9 23.1 24.3 23.0 24.7 25.7
ROIC 26.9 24.0 30.6 32.0 34.5 31.5 31.5 31.1
Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Effective tax rate 8.6 12.7 12.7 12.5 13.4 13.4 14.0 14.0
Accounts receivable (days) 33.5 37.9 44.7 43.4 41.4 41.7 41.8 42.2
Current ratio (x) 1.8 1.9 3.1 3.5 2.6 3.3 3.3 3.3
Net interest cover (x) n.a. 258.3 585.1 n.a. n.a. n.a. n.a. n.a.
Net dividend payout 46.8 41.3 29.5 38.1 46.5 52.9 50.9 48.0
Free cash flow yield 0.7 1.0 2.3 4.6 3.6 4.1 3.9 4.0
Company profile
Incorporated in Taiwan in 1987, Taiwan Semiconductor Manufacturing Co. (TSMC) is the world’s
largest semiconductor foundry in revenue terms. TSMC offers foundry services such as wafer
masking, fabrication, probing and testing, to a high variety of customers including fabless
chipmakers and IDMs. Its manufacturing fabs are located in Taiwan, China, the US and Singapore.
90
Taiwan Semiconductor Manufacturing (2330 TT): 2 January 2018
TSMC: quarterly P&L forecasts
TWDbn 1Q17 2Q17 3Q17 4Q17E 1Q18E 2Q18E 3Q18E 4Q18E
2016 2017E 2018E 2019E
Total revenue 234 214 252 279 264 268 283 293
948 979 1,108 1,249
COGS -112 -105 -126 -141 -134 -135 -141 -145
-473 -484 -555 -619
Gross profit 121 109 126 138 130 133 142 148
475 494 553 629
Opex -26 -25 -28 -29 -29 -29 -29 -30
-97 -108 -116 -134
Operating profit 95 83 98 109 102 104 113 118
378 386 437 495
EBITDA 156 141 158 173 166 169 182 189
602 628 705 811
Pretax profit 98 86 101 112 103 106 115 120
386 396 444 503
Income taxes -10 -20 -11 -12 -14 -15 -16 -17
-52 -53 -62 -70
Net profit 88 66 90 99 88 91 99 103
334 343 382 432
FD O/S (m) 26 26 26 26 26 26 26 26
26 26 26 26
FD EPS (TWD) 3.38 2.56 3.47 3.84 3.41 3.51 3.81 3.99
12.89 13.24 14.72 16.66
Margin
Gross 52% 51% 50% 50% 49% 50% 50% 51%
50% 51% 50% 50%
Operating 41% 39% 39% 39% 38% 39% 40% 40%
40% 39% 39% 40%
EBITDA 66% 66% 63% 62% 63% 63% 64% 65%
63% 64% 64% 65%
Net 37% 31% 36% 36% 33% 34% 35% 35%
35% 35% 34% 35%
Growth (QoQ)
Total revenue -11% -9% 18% 11% -5% 1% 6% 4%
Gross profit -11% -11% 16% 10% -6% 2% 7% 4%
Operating profit -13% -13% 18% 12% -7% 3% 9% 5%
EBITDA -7% -9% 12% 9% -4% 2% 8% 4%
Net profit -13% -24% 36% 11% -11% 3% 9% 5%
FD EPS -13% -24% 36% 11% -11% 3% 9% 5%
Growth (YoY)
Total revenue 15% -4% -3% 6% 13% 25% 12% 5%
12% 3% 13% 13%
Gross profit 33% -5% -5% 1% 7% 22% 13% 7%
16% 4% 12% 14%
Operating profit 35% -9% -8% 0% 6% 25% 15% 8%
18% 2% 13% 13%
EBITDA 23% -4% -3% 4% 6% 19% 15% 9%
11% 4% 12% 15%
Net profit 35% -9% -7% -1% 1% 37% 10% 4%
9% 3% 11% 13%
FD EPS 35% -9% -7% -1% 1% 37% 10% 4%
9% 3% 11% 13%
Source: Company, Daiwa forecasts
TSMC: 4Q17 preview and 1Q18 outlook
4Q17E 1Q18E
TWDm Daiwa Consensus Variance Daiwa Consensus Variance
Revenue 278,958 277,700 0% 264,331 251,545 5%
Gross profit 138,417
130,073
Operating profit 109,405
101,525
Pretax profit 111,891
103,026
Net profit 99,471 97,164 2% 88,499 88,396 0%
Adjusted EPS (TWD) 3.84 3.75 2% 3.41 3.41 0%
Margin
Gross 49.6%
49.2%
Operating 39.2%
38.4%
Net 35.7%
33.5%
Operation
Shipment ('000, 12" equ.wafers) 2,879
2,745
Utilization* 99%
95%
10nm sales contribution 21%
22%
Source: Bloomberg, Daiwa estimates & forecasts Note: * Calculated as wafer shipment / capacity
TSMC: advanced technology revenue contributions TSMC: PBR trend
Source: Company, Daiwa forecasts Source: Company, TEJ, Daiwa forecasts
0%
5%
10%
15%
20%
25%
30%
35%
40%
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
E
1Q18
E
2Q18
E
3Q18
E
4Q18
E
1Q19
E
2Q19
E
3Q19
E
4Q19
E
28nm 20/16nm 10/7nm
0
1
2
3
4
5
6
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
Jan-
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Jan-
11
Jan-
12
Jan-
13
Jan-
14
Jan-
15
Jan-
16
Jan-
17
Jan-
18
P/BV Mean Mean + s Mean - s
X
2.5
3.53.7
4.2
2.0
See important disclosures, including any required research certifications, beginning on page 115
Korea Information Technology
What's new: We look for Samsung Electronics (SEC) to post strong
earnings in 2018, driven by tight memory supply and expanding supply of
flexible OLED for iPhones. In addition, a sharper focus on dividends in
SEC’s new shareholder return policy should be positive for the shares, in
our opinion. SEC is our top pick in the Korea technology space.
What's the impact: Component business to drive strong earnings in
2017-18E. SEC posted solid earnings for 3Q17 (revenue of KRW62tn,
operating profit of KRW14.5tn), driven by strong memory pricing (DRAM up
7% QoQ, NAND +2% QoQ). We expect a further earnings improvement for
4Q17 (operating profit of KRW16.4tn, up 12.6% QoQ) amid strong memory
pricing and increased sales of flexible OLED. On the 3Q17 results call,
management said it expected tight memory-market conditions to persist in
2018 due to solid demand for servers/mobiles and limited supply growth
from 1xnm migration and 3D-NAND conversion. Also, SEC guided that its
DRAM bit growth would be lower than industry-wide growth in 2017 and in
line with market growth in 2018, though it plans to add DRAM capacity in
Pyeongtaek from 2018. We expect memory to remain SEC’s cash cow,
contributing 67% of operating profit in 2018E. Also, we forecast the OLED
business to deliver 40% YoY revenue growth in 2018 on the back of an
expanding supply of flexible OLED for overseas customers.
Enhanced shareholder return plan. On 31 October, CFO SH Lee
announced a new shareholder return plan for 2018-20, which includes: 1)
raising annual dividends by 100% (KRW9.6tn) from 2018, 2) excluding
M&A costs from the FCF calculation, and 3) returning a minimum 50% of
FCF over 2018-20. We consider the plan to be positive for SEC’s share
price, as it enhances visibility on shareholder returns and underlines the
company’s focus on dividends. Indeed, SEC began phase 4 of its share
buyback/cancellation (712k common shares, 178k preferred shares) on
1 November. The company is guiding for KRW46.2tn of capex for 2017,
including KRW29.5tn for its semiconductor business and KRW14.1tn for its
display business.
What we recommend: We reaffirm our Buy (1) call and 12-month TP of
KRW4,100,000. Our target price is based on an equally-blended target
PER/PBR of 9.7x/2.2x applied to our 2018E EPS/BVPS. The key risk to our
call: a sharp drop in smartphone demand.
How we differ: Our 2017-19E EPS are 7-15% above the consensus
forecasts, likely due to our more positive view on the memory market.
2 January 2018
Samsung El ectronics
Strong earnings momentum, favourable dividend plan
We expect robust memory-driven earnings to continue in 2018
New shareholder plan focused on dividends is positive, in our view
Reiterating Buy (1) call and 12-month TP of KRW4,100,000
Source: Daiwa forecasts
Source: FactSet, Daiwa forecasts
Samsung Electronics (005930 KS)
Target price: KRW4,100,000 (from KRW4,100,000)
Share price (28 Dec): KRW2,548,000 | Up/downside: +60.9%
SK Kim(82) 2 787 9173
Henny Jung(82) 2 787 9182
Forecast revisions (%)
Year to 31 Dec 17E 18E 19E
Revenue change - - -
Net profit change - - -
Core EPS (FD) change - - -
95
104
113
121
130
1,600,000
1,925,000
2,250,000
2,575,000
2,900,000
Dec-16 Mar-17 Jun-17 Sep-17 Dec-17
Share price performance
Samsng Ele (LHS)Relative to KOSPI (RHS)
(KRW) (%)
12-month range 1,778,000-2,861,000
Market cap (USDbn) 283.72
3m avg daily turnover (USDm) 523.39
Shares outstanding (m) 120
Major shareholder National Pension Service (8.0%)
Financial summary (KRW)
Year to 31 Dec 17E 18E 19E
Revenue (bn) 241,292 263,655 276,923
Operating profit (bn) 54,852 67,436 62,721
Net profit (bn) 41,305 49,587 47,048
Core EPS (fully-diluted) 340,923 415,803 398,877
EPS change (%) 90.2 22.0 (4.1)
Daiwa vs Cons. EPS (%) 14.8 15.4 7.0
PER (x) 7.5 6.1 6.4
Dividend yield (%) 1.4 2.8 2.8
DPS 35,500 71,500 71,500
PBR (x) 1.6 1.4 1.2
EV/EBITDA (x) 3.3 2.5 2.4
ROE (%) 21.1 22.1 18.3
92
Samsung Electronics (005930 KS): 2 January 2018
Financial summary
Key assumptions
Profit and loss (KRWbn)
Cash flow (KRWbn)
Source: FactSet, Daiwa forecasts
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
DRAM bit growth (%) n.a. 23.1 57.1 30.9 35.6 14.3 19.0 31.4
DRAM ASP (%) n.a. (5.7) (8.1) (15.3) (26.8) 42.8 3.9 (24.8)
NAND bit growth (%) n.a. 55.5 45.1 57.7 67.7 28.7 39.4 46.2
NAND ASP (%) n.a. (24.8) (26.9) (29.3) (26.0) 21.8 (7.9) (24.4)
LCD Area (%) n.a. (6.2) 17.1 (3.6) (3.1) (6.0) 0.1 0.9
LCD Area ASP (%) n.a. (22.2) (18.2) (7.8) (29.5) 4.7 (16.8) (17.6)
OLED Unit (%) n.a. 40.1 (10.7) 24.4 41.1 32.8 33.5 18.8
OLED ASP (%) n.a. (3.1) (13.1) (1.0) (11.6) 6.8 5.9 (0.3)
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Semiconductor 34,890 37,437 39,730 47,587 51,160 75,036 91,716 95,690
IT & Mobile Communication 105,840 138,817 111,764 103,557 100,310 109,337 110,107 115,564
Other Revenue 60,374 52,439 54,712 49,510 50,397 56,920 61,831 65,669
Total Revenue 201,104 228,693 206,206 200,653 201,867 241,292 263,655 276,923
Other income 15,622 16,445 18,053 20,931 20,713 21,447 25,653 27,392
COGS (126,652) (137,696) (128,279) (123,482) (120,278) (127,542) (132,993) (149,699)
SG&A (33,870) (39,892) (38,517) (37,052) (38,237) (43,739) (48,826) (51,334)
Other op.expenses (27,155) (30,765) (32,439) (34,637) (34,824) (36,606) (40,053) (40,561)
Operating profit 29,049 36,785 25,025 26,413 29,241 54,852 67,436 62,721
Net-interest inc./(exp.) 246 842 1,240 985 916 1,057 1,501 2,224
Assoc/forex/extraord./others 619 737 1,610 (1,437) 556 98 (801) (858)
Pre-tax profit 29,915 38,364 27,875 25,961 30,714 56,007 68,136 64,087
Tax (6,070) (7,890) (4,481) (6,901) (7,988) (13,863) (17,715) (16,209)
Min. int./pref. div./others (660) (654) (312) (366) (310) (839) (833) (830)
Net profit (reported) 23,185 29,821 23,083 18,695 22,416 41,305 49,587 47,048
Net profit (adjusted) 23,185 29,821 23,083 18,695 22,416 41,305 49,587 47,048
EPS (reported)(KRW) 157,403 202,453 156,705 136,111 179,257 340,923 415,803 398,877
EPS (adjusted)(KRW) 157,403 202,453 156,705 136,111 179,257 340,923 415,803 398,877
EPS (adjusted fully-diluted)(KRW) 157,403 202,453 156,705 136,111 179,257 340,923 415,803 398,877
DPS (KRW) 8,000 14,300 20,000 21,000 27,500 35,500 71,500 71,500
EBIT 29,049 36,785 25,025 26,413 29,241 54,852 67,436 62,721
EBITDA 44,671 53,230 43,078 47,344 49,954 76,299 93,089 90,113
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Profit before tax 29,915 38,364 27,875 25,961 30,714 56,007 68,136 64,087
Depreciation and amortisation 15,622 16,445 18,053 20,931 20,713 21,447 25,653 27,392
Tax paid (6,070) (7,890) (4,481) (6,901) (7,988) (13,863) (17,715) (16,209)
Change in working capital (2,341) (1,483) 2,690 (3,073) 1,673 (7,053) (5,066) (2,866)
Other operational CF items 847 1,270 (7,163) 3,144 2,274 (782) 5,389 1,068
Cash flow from operations 37,973 46,707 36,975 40,062 47,386 55,756 76,397 73,471
Capex (22,965) (23,158) (22,043) (25,880) (24,143) (46,199) (36,995) (35,000)
Net (acquisitions)/disposals 644 377 386 357 271 216 259 252
Other investing CF items (9,000) (21,967) (11,149) (1,645) (5,787) 2,967 (6,774) (8,796)
Cash flow from investing (31,322) (44,747) (32,806) (27,168) (29,659) (43,016) (43,510) (43,544)
Change in debt 249 (3,735) 105 1,608 2,408 455 (93) 150
Net share issues/(repurchases) 0 0 (1,125) (5,015) (7,708) (8,767) (500) (9,850)
Dividends paid (1,265) (1,250) (2,234) (3,130) (3,115) (6,748) (7,655) (9,639)
Other financing CF items (848) 847 197 (37) (255) (9,197) (1,594) 8,623
Cash flow from financing (1,865) (4,137) (3,057) (6,574) (8,670) (24,257) (9,842) (10,715)
Forex effect/others 144 330 250 510 180 175 1,482 1,529
Change in cash 4,931 (1,846) 1,362 6,830 9,237 (11,342) 24,527 20,740
Free cash flow 15,008 23,550 14,932 14,182 23,243 9,557 39,402 38,471
93
Samsung Electronics (005930 KS): 2 January 2018
Financial summary continued …
Balance sheet (KRWbn)
Key ratios (%)
Source: FactSet, Daiwa forecasts
As at 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Cash & short-term investment 37,448 54,496 61,817 71,493 88,182 66,863 87,574 105,980
Inventory 17,747 19,135 17,318 18,812 18,354 24,296 25,334 28,516
Accounts receivable 23,861 25,256 24,695 25,168 24,279 28,783 31,552 33,140
Other current assets 8,212 11,873 11,317 9,342 10,615 12,049 13,301 12,558
Total current assets 87,269 110,760 115,146 124,815 141,430 131,991 157,760 180,194
Fixed assets 68,485 75,496 80,873 86,477 91,473 117,394 129,956 138,653
Goodwill & intangibles 3,730 3,981 4,785 5,396 5,344 14,610 13,239 12,011
Other non-current assets 21,588 23,838 29,619 25,491 23,928 25,536 26,698 26,958
Total assets 181,072 214,075 230,423 242,180 262,174 289,530 327,654 357,816
Short-term debt 9,443 8,864 9,808 11,377 13,980 13,104 13,500 14,048
Accounts payable 9,489 8,437 7,915 6,187 6,485 9,578 9,988 11,242
Other current liabilities 28,001 34,014 34,291 32,939 34,239 35,974 35,558 35,464
Total current liabilities 46,933 51,315 52,014 50,503 54,704 58,656 59,045 60,755
Long-term debt 5,452 2,296 1,458 1,497 1,303 2,634 2,145 1,747
Other non-current liabilities 7,206 10,447 8,863 11,120 13,204 14,496 14,676 14,692
Total liabilities 59,591 64,059 62,335 63,120 69,211 75,786 75,866 77,193
Share capital 898 898 898 898 898 898 898 898
Reserves/R.E./others 116,197 143,545 161,284 171,979 185,527 205,296 242,729 270,288
Shareholders' equity 117,094 144,443 162,182 172,877 186,424 206,194 243,626 271,185
Minority interests 4,386 5,573 5,906 6,183 6,539 7,550 8,161 9,437
Total equity & liabilities 181,072 214,075 230,423 242,180 262,174 289,530 327,654 357,816
EV 277,821 260,590 254,896 247,061 232,575 255,404 235,202 217,983
Net debt/(cash) (22,553) (43,335) (50,552) (58,619) (72,900) (51,125) (71,929) (90,185)
BVPS (KRW) 714,032 881,758 987,982 1,226,902 1,372,294 1,565,750 1,860,597 2,106,748
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Sales (YoY) 21.9 13.7 (9.8) (2.7) 0.6 19.5 9.3 5.0
EBITDA (YoY) 52.8 19.2 (19.1) 9.9 5.5 52.7 22.0 (3.2)
Operating profit (YoY) 85.7 26.6 (32.0) 5.5 10.7 87.6 22.9 (7.0)
Net profit (YoY) 73.0 28.6 (22.6) (19.0) 19.9 84.3 20.1 (5.1)
Core EPS (fully-diluted) (YoY) 73.0 28.6 (22.6) (13.1) 31.7 90.2 22.0 (4.1)
Gross-profit margin 37.0 39.8 37.8 38.5 40.4 47.1 49.6 45.9
EBITDA margin 22.2 23.3 20.9 23.6 24.7 31.6 35.3 32.5
Operating-profit margin 14.4 16.1 12.1 13.2 14.5 22.7 25.6 22.6
Net profit margin 11.5 13.0 11.2 9.3 11.1 17.1 18.8 17.0
ROAE 21.6 22.8 15.1 11.2 12.5 21.1 22.1 18.3
ROAA 13.8 15.1 10.4 7.9 8.9 15.0 16.1 13.7
ROCE 23.0 24.7 14.7 14.2 14.6 25.1 27.1 22.2
ROIC 24.6 28.4 18.7 16.3 18.0 29.2 29.1 25.3
Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Effective tax rate 20.3 20.6 16.1 26.6 26.0 24.8 26.0 25.3
Accounts receivable (days) 41.6 39.2 44.2 45.4 44.7 40.1 41.8 42.6
Current ratio (x) 1.9 2.2 2.2 2.5 2.6 2.3 2.7 3.0
Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Net dividend payout 5.1 7.1 12.8 15.4 15.3 10.4 17.2 17.9
Free cash flow yield 4.9 7.7 4.9 4.7 7.6 3.1 12.9 12.6
Company profile
Samsung Electronics Co., Ltd. manufactures a range of consumer and industrial electronic
equipment and products, such as semiconductors, display panels, handsets, personal computers,
and peripherals. The company had global market shares of 48% in DRAM (2016), 17% in large-
size display panels (2016), and 22% in Consumer Electronics (2016).
94
Samsung Electronics (005930 KS): 2 January 2018
SEC: earnings forecasts by division
(KRW bn) 1Q17 2Q17 3Q17 4Q17E 2016 2017E 2018E 2019E
Sales revenue 50,548 61,000 62,050 67,694 201,866 241,292 263,655 276,923
Semiconductor 15,660 17,580 19,910 21,886 51,160 75,036 91,716 95,690
DRAM 7,164 8,396 9,802 10,797 22,049 36,160 44,323 43,592
NAND 4,821 5,399 6,362 7,380 15,299 23,962 30,488 33,607
System LSI 3,603 3,673 3,938 3,577 13,389 14,791 16,401 17,987
Display 7,290 7,710 8,280 10,075 26,940 33,355 40,975 45,206
LCD 2,859 2,923 2,697 2,636 11,357 11,116 9,277 7,712
OLED 4,424 4,791 5,587 7,439 15,607 22,241 31,208 36,969
IT & Mobile Communications 23,500 30,010 27,690 28,028 100,310 109,228 110,107 115,564
Handset 20,848 27,870 26,049 25,970 88,623 100,737 102,669 109,015
Consumer Electronics 10,340 10,920 11,130 12,092 47,050 44,482 40,612 39,246
Operating profit 9,898 14,070 14,530 16,357 29,241 54,855 67,436 62,721
Semiconductor 6,310 8,030 9,960 11,165 13,590 35,465 45,212 40,009
DRAM 3,916 5,057 6,241 7,137 8,524 22,351 28,936 25,000
NAND 2,017 2,550 3,100 3,723 3,695 11,390 14,743 12,956
System LSI 379 372 567 305 972 1,622 1,534 2,052
Display 1,300 1,710 970 1,717 2,230 5,697 7,663 8,331
LCD 329 600 298 269 -657 1,497 1,522 1,282
OLED 979 1,108 672 1,447 2,848 4,207 6,141 7,049
IT & Mobile Communications 2,070 4,060 3,290 3,012 10,810 12,432 13,197 12,842
Handset 1,905 3,844 3,298 3,010 9,816 12,058 13,276 13,085
Consumer Electronics 380 320 440 523 2,740 1,663 1,594 1,509
Source: Company, Daiwa forecasts
SEC: key assumptions for memory
1Q17 2Q17 3Q17 4Q17E 2016 2017E 2018E 2019E
DRAM
Bit growth (%) -11.0% 6.0% 9.1% 4.0% 35.6% 14.3% 19.0% 31.4%
ASP (%) 22.0% 12.5% 7.0% 5.0% -26.8% 42.8% 3.9% -24.8%
NAND
Bit growth (%) -11.0% 6.0% 15.3% 15.0% 67.7% 28.7% 39.4% 46.2%
ASP (%) 12.0% 7.5% 2.2% 0.0% -26.0% 21.8% -7.9% -24.4%
Source: Company, Daiwa forecasts
SEC: shareholder return programme for 2018-20
Policy Details
Dividend Payout
In 2017, increase annual dividends by 20% to KRW 4.8tn
For 2018 to 2020, increase annual dividends by 100% to KRW 9.6tn in each year, totalling approximately KRW29tn over 3 years
FCF management
No deduction of future M&A investments from FCF, increasing the capital available for shareholder returns, and providing shareholders with a more transparent and predictable return profile
Minimum 50% of FCF to be returned to shareholders over the 3-year period. Following dividend payment, remaining FCF to be used for additional cash dividends or share buybacks as appropriate
Source: Company, Daiwa Research
SEC: summary of 2017 share buybacks
Phase 1 (25 Jan.~10 Apr.) Phase 2 (28 Apr. ~ 20 Jul.) Phase 3 (28 Jul. ~ 23 Oct.) Phase 4 (1 Nov. ~ 31.Jan.2018)
Common share Preferred share Common share Preferred share Common share Preferred share Common share Preferred share
# of shares acquired 1,020,000 255,000 900,000 225,000 670,000 168,000 712,000 178,000
Average price (KRW) 2,009,636 1,576,041 2,343,364 1,844,831 2,503,829 2,026,806 2,702,000 2,135,000
Total spending (KRW tn) 2.05 0.40 2.11 0.42 1.68 0.34 1.92 0.38
Total spending (comm. + pfd.) 2.45 2.52 2.02 2.30*
Source: Company, Daiwa Research
SEC: 12-month forward PBR band SEC: 12-month forward PER band
Source: Bloomberg, Daiwa forecasts Source: Bloomberg, Daiwa forecasts
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
Jun-08 Jun-10 Jun-12 Jun-14 Jun-16
(KRW)
Price 0.8x 1.1x1.4x 1.7x 2.0x
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
Jun-08 Jun-10 Jun-12 Jun-14 Jun-16
(KRW)
Price 5.0x 7.0x9.0x 11.0x 13.0x
See important disclosures, including any required research certifications, beginning on page 115
Korea Information Technology
What's new: As the world’s No.2 memory/DRAM player in terms of
revenue, we expect SK Hynix to benefit from a favourable memory market
outlook for 2018. While we expect it to post solid 2018E earnings, we see
SK Hynix’s valuation as attractive given its shares are trading at a 3.8x
PER on 2018E EPS.
What's the impact: Tight DRAM supply likely to continue until 2018.
Due to solid demand for server DRAM and eased seasonality in mobile
DRAM from the iPhone X delay, we expect demand for DRAM to remain
stable in 1H18. On the supply side, we expect DRAM supply to remain tight
in 2018 on slower technology migration for 1x/1ynm DRAM. Although the
market is concerned about oversupply driven by the new capacity increase
from Samsung Electronics (SEC) in Pyeongtaek, we do not expect a sharp
rise in DRAM supply in 2018 as we view the capacity addition as necessary
to meet the demand. In addition, slower technology migration for 1ynm by
SEC and 1xnm by SK Hynix/Micron should limit supply growth, in our view.
Consequently, we expect DRAM prices to remain strong until 1H18 but see
a marginal decline in 2H18. In NAND, we expect an oversupply situation to
likely emerge from 2H18, driven by eased-yield issue for 3D-NAND.
However, we think a potential delay in production of 64/72 layer-based 3D-
NAND and capacity loss from conversion (from planar NAND to 3D-NAND)
may limit supply growth in 2018.
Expect strong earnings in 4Q17 and 2018. We forecast SK Hynix to
record revenue of KRW8.95tn (+11% QoQ) and operating profit of
KRW4.4tn for 4Q17 (+18% QoQ). Thanks to high seasonal demand for
PCs and solid demand for server/mobile applications, we expect blended
DRAM prices to increase by 5% QoQ for 4Q17. Based on our positive
memory outlook, we forecast SK Hynix to post revenue of KRW37tn (+23%
YoY) and operating profit of KRW17.8% (+30% YoY) for 2018.
What we recommend: We reiterate our Buy (1) rating with an unchanged
12-month target price of KRW118,000. Our target price is based on an
unchanged target PER of 5.9x applied to our 2018 EPS forecast. SK
Hynix’s shares are currently trading at a 3.8x PER on 2018E EPS, which
we think is attractive. Key risk: a sharp fall in smartphone demand.
How we differ: Our 2017-19E EPS are 4-20% above the Bloomberg
consensus likely as we are more positive on the memory market over the
period given our more upbeat memory price outlook.
2 January 2018
SK H yni x
Solid 2018 earnings momentum and attractive valuation
We expect DRAM supply to likely remain tight until 2018
SK Hynix should post strong earnings for 4Q17 and 2018, in our view
Reiterating our Buy (1) call with an unchanged TP of KRW118,000
Source: Daiwa forecasts
Source: FactSet, Daiwa forecasts
SK Hynix (000660 KS)
Target price: KRW118,000 (from KRW118,000)
Share price (28 Dec): KRW76,500 | Up/downside: +54.2%
SK Kim(82) 2 787 9173
Henny Jung(82) 2 787 9182
Forecast revisions (%)
Year to 31 Dec 17E 18E 19E
Revenue change - - -
Net profit change - - -
Core EPS (FD) change - - -
90
109
128
146
165
40,000
52,500
65,000
77,500
90,000
Dec-16 Mar-17 Jun-17 Sep-17 Dec-17
Share price performance
SK Hynix (LHS) Relative to KOSPI (RHS)
(KRW) (%)
12-month range 44,700-89,100
Market cap (USDbn) 50.28
3m avg daily turnover (USDm) 349.53
Shares outstanding (m) 706
Major shareholder SK Telecom (20.8%)
Financial summary (KRW)
Year to 31 Dec 17E 18E 19E
Revenue (bn) 30,034 36,992 37,761
Operating profit (bn) 13,667 17,812 15,718
Net profit (bn) 10,874 14,122 12,552
Core EPS (fully-diluted) 15,402 20,002 17,780
EPS change (%) 273.9 29.9 (11.1)
Daiwa vs Cons. EPS (%) 3.6 19.9 19.8
PER (x) 5.0 3.8 4.3
Dividend yield (%) 1.0 1.3 1.3
DPS 800 1,000 1,000
PBR (x) 1.7 1.3 1.0
EV/EBITDA (x) 2.7 1.9 1.5
ROE (%) 38.7 37.8 25.9
96
SK Hynix (000660 KS): 2 January 2018
Financial summary
Key assumptions
Profit and loss (KRWbn)
Cash flow (KRWbn)
Source: FactSet, Daiwa forecasts
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
DRAM bit growth (%) n.a. 34.1 33.4 23.0 24.7 24.9 18.1 27.3
DRAM ASP (%) n.a. 7.5 2.2 (19.5) (30.4) 48.6 6.8 (20.8)
NAND bit growth (%) n.a. 45.9 58.0 60.9 45.9 17.3 35.6 33.5
NAND ASP (%) n.a. (7.9) (38.0) (22.9) (28.5) 30.5 (12.7) (20.6)
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
DRAM 7,229 10,229 13,286 14,058 12,363 22,886 28,738 29,061
NAND 2,536 3,409 3,340 4,144 4,320 6,618 7,834 8,300
Other Revenue 397 526 500 596 515 529 421 400
Total Revenue 10,162 14,165 17,126 18,798 17,198 30,034 36,992 37,761
Other income 0 0 0 0 0 0 0 0
COGS (8,551) (8,865) (9,462) (10,515) (10,787) (12,357) (13,337) (16,077)
SG&A (1,839) (1,921) (2,554) (2,947) (3,134) (4,010) (5,844) (5,967)
Other op.expenses 0 0 0 0 0 0 0 0
Operating profit (227) 3,380 5,109 5,336 3,277 13,667 17,812 15,718
Net-interest inc./(exp.) (238) (190) (118) (78) (86) (92) (101) (76)
Assoc/forex/extraord./others 266 (115) 56 11 26 51 (91) (101)
Pre-tax profit (199) 3,075 5,048 5,269 3,216 13,627 17,620 15,541
Tax 41 (202) (853) (946) (256) (2,750) (3,495) (2,986)
Min. int./pref. div./others (0) (0) 0 (1) (7) (3) (3) (3)
Net profit (reported) (159) 2,872 4,195 4,322 2,954 10,874 14,122 12,552
Net profit (adjusted) (159) 2,872 4,195 4,322 2,954 10,874 14,122 12,552
EPS (reported)(KRW) (233) 4,099 5,842 5,937 4,120 15,402 20,002 17,780
EPS (adjusted)(KRW) (233) 4,099 5,842 5,937 4,120 15,402 20,002 17,780
EPS (adjusted fully-diluted)(KRW) (233) 4,099 5,842 5,937 4,120 15,402 20,002 17,780
DPS (KRW) 0 0 300 500 600 800 1,000 1,000
EBIT (227) 3,380 5,109 5,336 3,277 13,667 17,812 15,718
EBITDA 2,976 6,458 8,553 9,289 7,733 18,698 23,293 21,417
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Profit before tax (199) 3,075 5,048 5,269 3,216 13,627 17,620 15,541
Depreciation and amortisation 3,204 3,079 3,444 3,953 4,456 5,031 5,481 5,700
Tax paid 41 (202) (853) (946) (256) (2,750) (3,495) (2,986)
Change in working capital (733) 148 (640) 1,157 (1,106) (2,397) (1,344) (523)
Other operational CF items (100) 273 (1,133) (114) (762) (54) (528) (1,494)
Cash flow from operations 2,212 6,372 5,867 9,320 5,549 13,457 17,733 16,239
Capex (3,773) (3,206) (4,801) (6,775) (5,956) (8,925) (6,959) (6,929)
Net (acquisitions)/disposals 36 16 199 220 162 433 846 846
Other investing CF items (961) (1,702) (1,486) (571) (436) (4,127) (6,839) (6,839)
Cash flow from investing (4,698) (4,892) (6,088) (7,126) (6,230) (12,619) (12,953) (12,922)
Change in debt (304) (1,895) (402) (356) 517 (75) (168) (161)
Net share issues/(repurchases) 2,335 432 827 (859) 0 0 0 0
Dividends paid 0 0 0 (218) (353) (424) (582) (728)
Other financing CF items (113) (37) (396) (29) (48) 290 311 1,383
Cash flow from financing 1,917 (1,500) 28 (1,462) 117 (209) (440) 494
Forex effect/others (264) (94) (129) (58) (38) (50) (80) (80)
Change in cash (833) (114) (321) 674 (603) 578 4,261 3,731
Free cash flow (1,561) 3,166 1,066 2,545 (407) 4,532 10,774 9,310
97
SK Hynix (000660 KS): 2 January 2018
Financial summary continued …
Balance sheet (KRWbn)
Key ratios (%)
Source: FactSet, Daiwa forecasts
As at 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Cash & short-term investment 1,785 2,786 4,055 4,791 4,136 5,350 13,021 23,315
Inventory 1,509 1,178 1,498 1,923 2,026 2,588 2,793 3,367
Accounts receivable 1,720 1,942 3,733 2,628 3,252 5,976 7,360 7,513
Other current assets 300 747 1,078 417 425 453 455 454
Total current assets 5,314 6,653 10,364 9,760 9,839 14,367 23,629 34,650
Fixed assets 11,586 12,130 14,090 16,966 18,777 22,803 23,910 24,762
Goodwill & intangibles 984 1,110 1,337 1,705 1,916 2,218 2,181 2,178
Other non-current assets 765 903 1,092 1,246 1,684 1,958 1,958 1,958
Total assets 18,649 20,796 26,883 29,677 32,216 41,345 51,678 63,548
Short-term debt 2,719 870 1,755 1,013 705 627 602 578
Accounts payable 593 649 788 791 696 754 814 981
Other current liabilities 1,129 1,559 3,222 3,036 2,760 3,619 3,806 3,842
Total current liabilities 4,441 3,078 5,765 4,841 4,161 4,999 5,221 5,401
Long-term debt 3,753 3,706 2,420 2,805 3,631 3,634 3,491 3,353
Other non-current liabilities 715 946 662 644 401 451 465 468
Total liabilities 8,909 7,730 8,847 8,290 8,192 9,084 9,177 9,223
Share capital 3,488 3,569 3,658 3,658 3,658 3,658 3,658 3,658
Reserves/R.E./others 6,252 9,499 14,379 17,729 20,359 28,592 38,831 50,656
Shareholders' equity 9,740 13,067 18,036 21,387 24,017 32,250 42,489 54,314
Minority interests (1) (0) (0) 1 7 12 12 12
Total equity & liabilities 18,649 20,797 26,883 29,678 32,216 41,346 51,678 63,548
EV 57,931 54,897 53,037 51,791 52,532 50,974 43,135 32,679
Net debt/(cash) 4,687 1,790 120 (973) 200 (1,089) (8,928) (19,384)
BVPS (KRW) 14,031 18,399 24,775 29,379 34,028 45,696 60,199 76,948
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Sales (YoY) (2.2) 39.4 20.9 9.8 (8.5) 74.6 23.2 2.1
EBITDA (YoY) (22.4) 117.0 32.4 8.6 (16.8) 141.8 24.6 (8.1)
Operating profit (YoY) n.a. n.a. 51.2 4.4 (38.6) 317.1 30.3 (11.8)
Net profit (YoY) n.a. n.a. 46.1 3.0 (31.7) 268.1 29.9 (11.1)
Core EPS (fully-diluted) (YoY) n.a. n.a. 42.5 1.6 (30.6) 273.9 29.9 (11.1)
Gross-profit margin 15.9 37.4 44.8 44.1 37.3 58.9 63.9 57.4
EBITDA margin 29.3 45.6 49.9 49.4 45.0 62.3 63.0 56.7
Operating-profit margin n.a. 23.9 29.8 28.4 19.1 45.5 48.2 41.6
Net profit margin (1.6) 20.3 24.5 23.0 17.2 36.2 38.2 33.2
ROAE n.a. 25.2 27.0 21.9 13.0 38.7 37.8 25.9
ROAA n.a. 14.6 17.6 15.3 9.5 29.6 30.4 21.8
ROCE n.a. 20.0 25.6 22.5 12.2 42.1 42.9 30.0
ROIC (1.7) 21.6 25.7 22.7 13.5 39.4 44.1 37.1
Net debt to equity 48.1 13.7 0.7 n.a. 0.8 n.a. n.a. n.a.
Effective tax rate n.a. 6.6 16.9 17.9 8.0 20.2 19.8 19.2
Accounts receivable (days) 58.6 47.2 60.5 61.8 62.4 56.1 65.8 71.9
Current ratio (x) 1.2 2.2 1.8 2.0 2.4 2.9 4.5 6.4
Net interest cover (x) n.a. 17.8 43.2 68.6 38.1 148.7 176.3 207.5
Net dividend payout n.a. 0.0 5.1 8.4 14.6 5.2 5.0 5.6
Free cash flow yield n.a. 5.9 2.0 4.7 n.a. 8.4 19.9 17.2
Company profile
SK Hynix manufactures semiconductors, such as dynamic random access memory (DRAM) and
NAND flash memory. Formerly known as “Hynix”, the company was acquired by SK Group in
November 2011 and renamed “SK Hynix” in March 2013. Currently, SK Hynix is the world’s No.2
player in the DRAM market and has competitive technology in the NAND business as well. SK
Telecom is the biggest stakeholder, currently holding 21% of SK Hynix's outstanding shares.
98
SK Hynix (000660 KS): 2 January 2018
Hynix: earnings forecasts by division
1Q17 2Q17 3Q17 4Q17E 2016 2017E 2018E 2019E
Sales (KRW bn) 6,290 6,692 8,100 8,952 17,199 30,034 36,992 37,761
DRAM 4,655 5,086 6,237 6,909 12,363 22,886 28,738 29,061
NAND 1,510 1,472 1,701 1,935 4,320 6,618 7,834 8,300
Operating profit (KRW bn) 2,468 3,051 3,737 4,412 3,277 13,668 17,812 15,718
DRAM 2,277 2,739 3,471 4,096 3,193 12,582 16,823 15,173
NAND 192 268 269 316 -125 1,045 988 545
OP margin (%) 39.2% 45.6% 46.1% 49.3% 19.1% 45.5% 48.2% 41.6%
DRAM 48.9% 53.9% 55.6% 59.3% 25.8% 55.0% 58.5% 52.2%
NAND 12.7% 18.2% 15.8% 16.3% -2.9% 15.8% 12.6% 6.6%
Net profit 1,898 2,469 3,054 3,453 2,954 10,874 14,122 12,552
Source: Company, Daiwa forecasts
Hynix: forecast assumptions
1Q17 2Q17 3Q17 4Q17E 2016 2017E 2018E 2019E
DRAM
Bit growth (q-q%) -4.5% 2.5% 17.0% 4.5% 24.7% 24.9% 18.1% 27.3%
ASP (q-q%) 24.0% 10.7% 5.5% 5.0% -30.4% 48.6% 6.8% -20.8%
NAND
Bit growth (q-q%) -3.0% -6.2% 16.0% 19.0% 45.9% 17.3% 35.6% 33.5%
ASP (q-q%) 15.0% 8.0% -2.5% -1.5% -28.5% 30.5% -12.7% -20.6%
Source: Company, Daiwa forecasts
Hynix: 12-month-forward PBR band Hynix: 12-month-forward PER band
Source: Bloomberg, Daiwa forecasts
Source: Bloomberg, Daiwa forecasts
0
20,000
40,000
60,000
80,000
100,000
Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17
(KRW)
Price 1.0x 1.4x1.8x 2.1x 2.5x
0
20,000
40,000
60,000
80,000
100,000
Jan-13 Aug-13 Mar-14 Oct-14 May-15 Dec-15 Jul-16 Feb-17 Sep-17
(KRW)
Price 3.0x 4.8x
6.5x 8.3x 10.0x
See important disclosures, including any required research certifications, beginning on page 115
Taiwan Information Technology
What's new: Ennoconn remains our top pick in the Taiwan industrial PC
sector. We are positive on its consolidation of S&T (effective 3Q17), as we
see the resulting cost/opex savings supporting strong earnings growth for
Ennoconn in 2018-19E.
What's the impact: Riding on the IoT trend. We forecast S&T to contribute
60%-plus of Ennoconn’s consolidated revenue in 2018-19E, while S&T is
guiding for the IoT solutions segment (40%-plus of its revenue) to be the key
growth driver, backed by supportive industry trends (chiefly adoption of IoT
applications) and potential cross-selling synergies between S&T and Kontron
(more than 90%-owned by S&T). As for Ennoconn, we see the industrial
handheld segment being a major business driver in 2018E, thanks to solid
demand from smart home- and security surveillance-related applications.
Coupled with strength in network security and gaming, we forecast Ennoconn’s
consolidated revenue to rise by 136% YoY for 2017 and 65% YoY for 2018.
Promising synergies ahead. We are upbeat on the consolidation of
Ennoconn, S&T and Kontron, given the combination of Ennoconn’s acumen
in manufacturing/logistics, S&T’s software capabilities, and Kontron’s brand
recognition. Although we expect the consolidation to have a mixed impact on
Ennoconn initially (boosting both revenue and opex), we believe Ennoconn
will see a structural margin improvement after the initial integration.
Profit margin improvement from 2H18E. Compared with Ennoconn, S&T
has a better gross margin (software business and Kontron’s branding business)
but also much higher opex (higher R&D/sales spend). As such, the
consolidation of S&T has not yet benefited Ennoconn’s operating margin by
much. We expect its operating margin to be range-bound in 1H18E as: 1)
S&T/Kontron’s opex remains under control but Ennoconn’s rises due to more
sales/R&D spend in China for its cooperation with Kontron/S&T, and 2) the
supply chain consolidation of Ennoconn/S&T will take time, as it involves client
certification (1-2 quarters) and changes in logistics arrangements. As such, we
look for clearer cost/opex-saving synergies to emerge from mid-2018E.
What we recommend: We reiterate our Buy (1) rating and 12-month TP of
TWD520, based on a target PER of 25x (mid-point of its past 3-year range of
14-36x) applied to our 1-year-forward EPS estimate (ie, 4Q17-3Q18). We
forecast the company’s EPS to grow by 60% and 33% YoY for 2018-19, up
from 14% YoY for 2017E. Given the prospect of stronger revenue and earnings
in the next few quarters, we foresee clear share-price catalysts. Key downside
risks: worse-than-expected macro uncertainty and opex impact from M&A.
How we differ: Our 2017-19E EPS are 2-12% above the consensus, likely as
we are more positive on the synergies from the Ennoconn/S&T integration.
2 January 2018
Ennoconn
Consolidation synergies set to materialise
Consolidation of S&T should boost Ennoconn’s revenue and opex
Clearer cost/opex-saving synergies likely to emerge from mid-2018E
Reiterating Buy (1) rating and 12-month TP of TWD520
Source: Daiwa forecasts
Source: FactSet, Daiwa forecasts
Ennoconn (6414 TT)
Target price: TWD520.00 (from TWD520.00)
Share price (28 Dec): TWD443.00 | Up/downside: +17.4%
Steven Tseng(886) 2 8758 6252
Elsa Cheng(886) 2 8758 6253
Forecast revisions (%)
Year to 31 Dec 17E 18E 19E
Revenue change - - -
Net profit change - - -
Core EPS (FD) change - - -
60
75
90
105
120
300
363
425
488
550
Dec-16 Mar-17 Jun-17 Sep-17 Dec-17
Share price performance
Ennoconn (LHS)Relative to TWSE Index (RHS)
(TWD) (%)
12-month range 302.00-502.00
Market cap (USDbn) 1.13
3m avg daily turnover (USDm) 9.86
Shares outstanding (m) 77
Major shareholder Pao Hsin Int'l Investment (35.8%)
Financial summary (TWD)
Year to 31 Dec 17E 18E 19E
Revenue (m) 34,156 56,225 63,767
Operating profit (m) 1,917 3,664 4,814
Net profit (m) 1,172 1,879 2,508
Core EPS (fully-diluted) 15.308 24.560 32.768
EPS change (%) 14.2 60.4 33.4
Daiwa vs Cons. EPS (%) 2.0 12.2 8.9
PER (x) 28.9 18.0 13.5
Dividend yield (%) 2.3 2.5 2.7
DPS 10.0 11.0 12.0
PBR (x) 5.9 4.3 3.1
EV/EBITDA (x) 17.8 10.7 8.0
ROE (%) 20.0 27.7 26.9
100
Ennoconn (6414 TT): 2 January 2018
Financial summary
Key assumptions
Profit and loss (TWDm)
Cash flow (TWDm)
Source: FactSet, Daiwa forecasts
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Ennoconn revenue YoY % 61.9 36.5 63.2 118.9 30.9 136.0 64.6 13.4
S&T/Kontron revenue YoY % n.a. n.a. n.a. n.a. n.a. n.a. 110.6 11.4
Consolidated operating margin 8.5 13.3 12.3 10.7 10.8 5.6 6.5 7.5
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Industrial IoT n.a. n.a. 148 992 3,131 5,150 6,953 8,344
Network Securities n.a. n.a. 303 3,544 3,665 4,040 5,093 6,104
Other Revenue n.a. n.a. 4,601 6,520 7,676 24,966 44,179 49,320
Total Revenue 2,269 3,096 5,052 11,057 14,472 34,156 56,225 63,767
Other income 0 0 0 0 0 0 0 0
COGS (1,856) (2,433) (4,110) (9,040) (11,605) (24,873) (38,747) (43,717)
SG&A (134) (150) (183) (501) (849) (6,604) (12,849) (14,287)
Other op.expenses (87) (102) (137) (329) (459) (762) (965) (950)
Operating profit 192 411 622 1,187 1,559 1,917 3,664 4,814
Net-interest inc./(exp.) 6 9 7 (1) (32) (282) (387) (387)
Assoc/forex/extraord./others 10 31 75 124 169 498 398 398
Pre-tax profit 208 450 704 1,310 1,696 2,134 3,675 4,824
Tax (34) (78) (122) (234) (307) (368) (735) (965)
Min. int./pref. div./others 0 0 (20) (210) (366) (594) (1,061) (1,352)
Net profit (reported) 174 372 562 866 1,023 1,172 1,879 2,508
Net profit (adjusted) 174 372 562 866 1,023 1,172 1,879 2,508
EPS (reported)(TWD) 3.224 6.151 8.185 12.415 13.404 15.308 24.560 32.768
EPS (adjusted)(TWD) 3.224 6.151 8.185 12.415 13.404 15.308 24.560 32.768
EPS (adjusted fully-diluted)(TWD) 3.224 6.151 8.185 12.415 13.404 15.308 24.560 32.768
DPS (TWD) 1.739 1.736 5.503 6.000 11.580 10.000 11.000 12.000
EBIT 192 411 622 1,187 1,559 1,917 3,664 4,814
EBITDA 204 427 637 1,288 1,716 2,619 4,397 5,606
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Profit before tax 208 450 704 1,310 1,696 2,134 3,675 4,824
Depreciation and amortisation 12 16 15 101 157 701 732 792
Tax paid (34) (78) (122) (234) (307) (368) (735) (965)
Change in working capital (157) (94) (1,417) (5) (1,151) (5,418) (1,579) (1,517)
Other operational CF items 52 111 825 166 274 3,561 (0) 0
Cash flow from operations 80 405 5 1,338 669 610 2,093 3,135
Capex (7) (19) (21) (419) (102) (376) (394) (414)
Net (acquisitions)/disposals (12) (254) 362 (245) (4,471) 5,266 0 0
Other investing CF items (4) 2 (188) 39 (43) (2,783) 0 0
Cash flow from investing (23) (271) 152 (625) (4,617) 2,107 (394) (414)
Change in debt 21 (15) (6) 994 3,862 8,508 (1,050) 0
Net share issues/(repurchases) 125 0 778 0 0 0 0 0
Dividends paid (82) (94) (333) (412) (807) (763) (842) (918)
Other financing CF items 0 (0) (155) (110) (352) (7,281) 0 0
Cash flow from financing 64 (109) 285 473 2,703 465 (1,892) (918)
Forex effect/others (0) 1 3 (1) 0 0 0 0
Change in cash 121 27 445 1,184 (1,245) 3,181 (193) 1,802
Free cash flow 73 386 (16) 918 567 233 1,699 2,720
101
Ennoconn (6414 TT): 2 January 2018
Financial summary continued …
Balance sheet (TWDm)
Key ratios (%)
Source: FactSet, Daiwa forecasts
As at 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Cash & short-term investment 724 1,033 931 2,245 2,645 6,820 6,627 8,429
Inventory 105 225 992 1,309 1,972 5,929 6,369 7,186
Accounts receivable 591 507 2,019 2,531 3,919 9,077 11,553 13,103
Other current assets 60 6 38 90 203 2,309 2,309 2,309
Total current assets 1,479 1,771 3,979 6,175 8,739 24,134 26,858 31,027
Fixed assets 11 26 50 592 989 2,064 1,725 1,348
Goodwill & intangibles 2 2 917 863 1,016 13,017 13,017 13,017
Other non-current assets 10 9 291 166 4,802 1,667 1,667 1,667
Total assets 1,502 1,808 5,237 7,796 15,547 40,883 43,268 47,059
Short-term debt 21 6 0 200 2,265 1,721 1,721 1,721
Accounts payable 549 515 1,388 2,214 3,459 7,155 8,492 9,342
Other current liabilities 43 99 255 439 402 6,547 5,497 5,497
Total current liabilities 613 620 1,644 2,853 6,126 15,423 15,710 16,560
Long-term debt 0 0 0 477 1,496 9,538 9,538 9,538
Other non-current liabilities 3 2 8 3 23 1,824 1,824 1,824
Total liabilities 616 622 1,652 3,334 7,646 26,785 27,072 27,922
Share capital 539 605 687 697 763 765 765 765
Reserves/R.E./others 347 581 1,728 2,470 5,202 4,980 7,078 10,019
Shareholders' equity 886 1,186 2,415 3,167 5,965 5,745 7,844 10,785
Minority interests 0 0 1,170 1,295 1,936 8,352 8,352 8,352
Total equity & liabilities 1,502 1,808 5,237 7,796 15,547 40,883 43,268 47,059
EV 33,198 32,874 34,142 33,629 36,954 46,694 46,886 45,084
Net debt/(cash) (703) (1,027) (931) (1,568) 1,116 4,440 4,632 2,831
BVPS (TWD) 16.425 19.617 35.162 45.422 78.178 75.075 102.493 140.926
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Sales (YoY) 61.9 36.5 63.2 118.9 30.9 136.0 64.6 13.4
EBITDA (YoY) 115.4 109.7 49.1 102.3 33.2 52.6 67.9 27.5
Operating profit (YoY) 122.4 113.8 51.5 90.8 31.3 23.0 91.1 31.4
Net profit (YoY) 70.4 113.8 51.2 54.0 18.1 14.5 60.4 33.4
Core EPS (fully-diluted) (YoY) 49.8 90.8 33.1 51.7 8.0 14.2 60.4 33.4
Gross-profit margin 18.2 21.4 18.6 18.2 19.8 27.2 31.1 31.4
EBITDA margin 9.0 13.8 12.6 11.6 11.9 7.7 7.8 8.8
Operating-profit margin 8.5 13.3 12.3 10.7 10.8 5.6 6.5 7.5
Net profit margin 7.7 12.0 11.1 7.8 7.1 3.4 3.3 3.9
ROAE 22.5 35.9 31.2 31.0 22.4 20.0 27.7 26.9
ROAA 14.0 22.5 16.0 13.3 8.8 4.2 4.5 5.6
ROCE 24.5 39.1 26.0 27.2 18.6 10.4 13.9 16.6
ROIC 153.7 198.9 36.6 35.1 21.4 11.5 14.9 18.0
Net debt to equity n.a. n.a. n.a. n.a. 18.7 77.3 59.1 26.2
Effective tax rate 16.3 17.4 17.3 17.9 18.1 17.3 20.0 20.0
Accounts receivable (days) 64.3 64.7 91.2 75.1 81.3 69.4 67.0 70.6
Current ratio (x) 2.4 2.9 2.4 2.2 1.4 1.6 1.7 1.9
Net interest cover (x) n.a. n.a. n.a. 1,518.0 49.1 6.8 9.5 12.4
Net dividend payout 80.8 53.9 89.5 73.3 93.3 74.6 71.9 48.9
Free cash flow yield 0.2 1.1 n.a. 2.7 1.7 0.7 5.0 8.0
Company profile
Established in 1999 and listed in 2014, Ennoconn Corp. (Ennoconn) is a leading industrial PC (IPC)
manufacturer, 41%-held by Hon Hai. The company provides total hardware system solutions to
various vertical market applications (POS, banking automation, kiosks, lotteries and industrial
automation) on the ODM basis. With extensive professional knowledge, Ennoconn aims to deliver
state-of-the-art technology of a high quality and at speed to its clients. The company also adopts an
aggressive M&A strategy to facilitate its entry into different vertical application areas.
102
Ennoconn (6414 TT): 2 January 2018
Ennoconn: revenue and earnings forecasts and comparison with consensus
2017E 2018E 2019E
(TWDm) Previous New Consensus Previous New Consensus Previous New Consensus
Revenue 17,721 34,156 32,689 24,219 56,225 49,882 31,015 63,767 56,386
Diff (%) 92.7% 4.5% 132.2% 12.7% 105.6% 13.1%
Gross Margin (%) 18.4% 27.2% 26.2% 18.8% 31.1% 29.0% 19.3% 31.4% 29.8%
Operating profit 1,566 1,917 2,172 2,393 3,664 3,614 3,331 4,814 4,646
Op Margin (%) 8.8% 5.6% 6.6% 9.9% 6.5% 7.2% 10.7% 7.5% 8.2%
Net profit 1,168 1,172 1,149 1,906 1,879 1,675 2,663 2,508 2,302
EPS (TWD) 15.31 15.31 15.01 24.98 24.56 21.88 34.90 32.77 30.08
Diff (%) 0.0% 2.0% -1.7% 12.2% -6.1% 8.9%
Source: Bloomberg, Daiwa forecasts
Ennoconn: quarterly and annual P&L statement
2017E 2018E
(TWDm) 1Q 2Q 3Q 4QE 1QE 2QE 3QE 4QE
2016 2017E 2018E
Net revenue 3,654 4,232 11,889 14,381 12,130 13,401 13,969 16,725
14,472 34,156 56,225
Gross profit 658 716 3,573 4,336 3,636 4,125 4,417 5,299
2,867 9,283 17,478
Operating profit 294 199 625 798 616 802 995 1,252
1,559 1,917 3,664
Non-operating profit (17) 159 72 3 2 2 3 3
138 217 11
Pre-tax profit 278 358 697 801 618 804 998 1255
1696 2134 3675
Tax / minority int. (92) (75) (385) (410) (320) (406) (494) (575)
(673) (962) (1796)
Net profit 185 283 312 391 298 398 504 680
1,023 1,172 1,879
Net EPS (TWD) 2.43 3.71 4.08 5.11 3.89 5.20 6.59 8.88
13.40 15.31 24.56
Operating Ratios
Gross margin 18.0% 16.9% 30.1% 30.2% 30.0% 30.8% 31.6% 31.7%
19.8% 27.2% 31.1%
Operating margin 8.1% 4.7% 5.3% 5.6% 5.1% 6.0% 7.1% 7.5%
10.8% 5.6% 6.5%
Pre-tax margin 7.6% 8.5% 5.9% 5.6% 5.1% 6.0% 7.1% 7.5%
11.7% 6.2% 6.5%
Net margin 5.1% 6.7% 2.6% 2.7% 2.5% 3.0% 3.6% 4.1%
7.1% 3.4% 3.3%
YoY (%)
Net revenue 17% 18% 211% 263% 232% 217% 17% 16%
31% 136% 65%
Gross profit 1% -9% 378% 534% 453% 476% 24% 22%
42% 224% 88%
Operating profit -28% -54% 57% 151% 109% 302% 59% 57%
31% 23% 91%
Pre-tax profit -33% -25% 68% 105% 123% 125% 43% 57%
29% 26% 72%
Net profit -19% 6% 19% 48% 61% 40% 62% 74%
18% 15% 60%
QoQ (%)
Net revenue -8% 16% 181% 21% -16% 10% 4% 20%
Gross profit -4% 9% 399% 21% -16% 13% 7% 20%
Operating profit -8% -32% 214% 28% -23% 30% 24% 26%
Pre-tax profit -29% 29% 95% 15% -23% 30% 24% 26%
Net profit -30% 53% 10% 25% -24% 33% 27% 35%
Source: Company, Daiwa forecasts
Ennoconn: 1-year-forward PER bands Ennoconn: revenue breakdown by major segment
Source: TEJ, Daiwa forecasts Source: Company, Daiwa forecasts
100
200
300
400
500
600
Dec13 Dec14 Dec15 Dec16 Dec17
(TWD)
Share price 14x 18x 22x 36x
22%15% 12% 13%
25%
12%9% 10%
53%
23%
15% 15%
50%64% 63%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2016 2017E 2018E 2019E
Industrial IoT Network Security Other (under Ennoconn) S&T/Kontron
See important disclosures, including any required research certifications, beginning on page 115
Taiwan Industrials
What's new: We maintain our positive view on Airtac due mainly to solid
pneumatic demand in China and the likely contribution of new products (ie,
electrical cylinders, linear guides, ball screws and switches) from 2Q18.
Besides, we expect its operating margin to expand further in 2018 thanks to
management’s effective control of operating expenses.
What's the impact: Solid growth outlook for 1H18. We are positive on
Airtac’s revenue growth momentum in 1H18 due to: 1) strong seasonality –
we expect seasonal strength for the automation sector to drive Airtac’s
revenue by 31% YoY and 27% YoY for 1Q/2Q18, respectively, with solid
demand from the electronics, auto and battery sectors, and 2) new product
launches – Airtac targets to ship new products to its existing clients from
2Q18, including electrical cylinders, linear guides, ball screws and
switches. Airtac is confident about the quality and price-competitiveness of
its new products and believes the strong market demand for linear motion
components will boost these new businesses from 2Q18 onwards.
Margin recovery on the way. We expect Airtac’s operating margin to
rebound in 4Q17 from the trough in 3Q17, given stabilised commodity
prices and no more expenses for the rights-issue plan. As for 2018, we look
for the operating profit margin to improve further through effective opex
control and more automation and process improvements. We forecast the
operating margin to recover to over 30% in 2018E (from 28.8% in 3Q17)
and new products to spur upside for the gross margin in 2H17.
Capacity expansion to meet market demand. Given tight capacity, Airtac
has increased its capex for both its Ningbo and Tainan factories and
estimates 2017E capex will reach TWD3bn (vs TWD1.6bn in 2016), which
will increase capacity by 35-40% by end-2017. According to the company,
2018E capex will stay at TWD3bn, given its plans to build 2 more factories
(for linear guides and switches) in Taiwan, which Airtac estimates will lead
to a 30% capacity increase by end-2018. We believe the capex plans bode
well for solid revenue growth in 2018.
What we recommend: We reiterate our Buy (1) call and raise 12-month
TP to TWD599 from TWD550, based on a higher target PER of 28x (above
the mid-point of past-3-year PER range of 13-35x; vs 27x before) applied to
our 2018E EPS. Our higher target PER reflects our positive view on Airtac’s
earnings strength, as we expect its operating margin to rebound from the
trough in 3Q17, along with solid revenue seasonality in 1H18. Downside
risks to our view: 1) weaker-than-expected automation demand in China,
and 2) price competition with SMC (6273 JP, JPY46,520, Outperform [2]).
How we differ: Our 2018-19E EPS are 1-5% above consensus, likely as
we are more positive on Airtac’s revenue and margin trend.
2 January 2018
Airtac International Gr oup
Bright outlook for 2018
We are confident of strong revenue growth for 1H18E
Operating margin set to recover to over 30% for 2018E
Reiterating Buy (1) rating with higher TP of TWD599
Source: Daiwa forecasts
Source: FactSet, Daiwa forecasts
Airtac International Group (1590 TT)
Target price: TWD599.00 (from TWD550.00)
Share price (28 Dec): TWD510.00 | Up/downside: +17.5%
Steven Tseng(886) 2 8758 6252
Elsa Cheng(886) 2 8758 6253
Forecast revisions (%)Year to 31 Dec 17E 18E 19E
Revenue change - - -
Net profit change - - -
Core EPS (FD) change - - -
90
114
138
161
185
200
288
375
463
550
Dec-16 Mar-17 Jun-17 Sep-17 Dec-17
Share price performance
ATIG (LHS) Relative to TWSE Index (RHS)
(TWD) (%)
12-month range 241.86-530.00
Market cap (USDbn) 3.22
3m avg daily turnover (USDm) 16.88
Shares outstanding (m) 189
Major shareholder Ding Kan Invest Ltd. (14.9%)
Financial summary (TWD)
Year to 31 Dec 17E 18E 19E
Revenue (m) 13,808 17,064 20,570
Operating profit (m) 4,181 5,408 6,650
Net profit (m) 3,284 4,049 4,981
Core EPS (fully-diluted) 17.375 21.423 26.349
EPS change (%) 62.1 23.3 23.0
Daiwa vs Cons. EPS (%) 0.1 1.2 4.6
PER (x) 29.4 23.8 19.4
Dividend yield (%) 1.1 1.4 1.7
DPS 5.4 6.9 8.6
PBR (x) 5.8 5.2 4.7
EV/EBITDA (x) 20.5 16.4 13.5
ROE (%) 24.2 23.1 25.4
104
Airtac International Group (1590 TT): 2 January 2018
Financial summary
Key assumptions
Profit and loss (TWDm)
Cash flow (TWDm)
Source: FactSet, Daiwa forecasts
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
YoY growth of cylinder revenue (%) 4 37 16 9 23 32 25 21
YoY growth of valve revenue (%) (2) 25 11 (2) 17 28 22 21
Airtac's market share in China (%) 14 15 16 17 18 19 20 21
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Cylinder 2,356 3,216 3,724 4,054 4,974 6,551 8,160 9,863
Valve 1,674 2,100 2,330 2,294 2,688 3,451 4,204 5,086
Other Revenue 1,638 1,984 2,325 2,450 2,960 3,806 4,699 5,622
Total Revenue 5,668 7,300 8,379 8,797 10,622 13,808 17,064 20,570
Other income 0 0 0 0 0 0 0 0
COGS (2,700) (3,264) (3,776) (4,260) (5,186) (6,630) (8,141) (9,729)
SG&A (1,273) (1,641) (1,928) (2,174) (2,382) (2,615) (3,044) (3,621)
Other op.expenses (179) (201) (286) (290) (334) (382) (470) (570)
Operating profit 1,516 2,195 2,389 2,073 2,720 4,181 5,408 6,650
Net-interest inc./(exp.) (35) (39) (51) (61) (115) (144) (146) (147)
Assoc/forex/extraord./others 57 211 51 (172) 243 309 138 138
Pre-tax profit 1,538 2,367 2,389 1,840 2,848 4,345 5,400 6,641
Tax (420) (641) (602) (464) (820) (1,061) (1,350) (1,660)
Min. int./pref. div./others (14) (15) (15) (8) (109) (0) (0) (0)
Net profit (reported) 1,104 1,710 1,771 1,368 1,919 3,284 4,049 4,981
Net profit (adjusted) 1,104 1,710 1,771 1,368 1,919 3,284 4,049 4,981
EPS (reported)(TWD) 7.359 10.030 10.386 7.639 10.717 17.375 21.423 26.349
EPS (adjusted)(TWD) 7.359 10.030 10.386 7.639 10.717 17.375 21.423 26.349
EPS (adjusted fully-diluted)(TWD) 7.359 10.030 10.386 7.639 10.717 17.375 21.423 26.349
DPS (TWD) 5.392 3.800 6.300 4.800 4.000 5.369 6.950 8.569
EBIT 1,516 2,195 2,389 2,073 2,720 4,181 5,408 6,650
EBITDA 1,846 2,626 2,940 2,719 3,486 4,973 6,314 7,692
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Profit before tax 1,538 2,367 2,389 1,840 2,848 4,345 5,400 6,641
Depreciation and amortisation 330 431 551 647 766 793 906 1,043
Tax paid (420) (641) (602) (464) (820) (1,061) (1,350) (1,660)
Change in working capital (248) (977) (909) (385) (755) (1,732) (2,338) (2,511)
Other operational CF items (143) 249 104 99 (336) (829) 2 2
Cash flow from operations 1,057 1,429 1,532 1,736 1,703 1,517 2,619 3,514
Capex (1,713) (2,882) (2,670) (2,468) (1,613) (3,000) (3,003) (2,057)
Net (acquisitions)/disposals (287) 0 (62) 157 (3) 0 0 0
Other investing CF items (87) 219 (654) (219) (252) 1,825 0 0
Cash flow from investing (2,087) (2,663) (3,386) (2,530) (1,868) (1,175) (3,003) (2,057)
Change in debt 1,419 570 3,254 2,209 761 (1,393) 0 0
Net share issues/(repurchases) 0 1,960 0 0 0 3,000 0 0
Dividends paid (809) (570) (1,074) (818) (716) (961) (1,314) (1,620)
Other financing CF items 61 (74) (179) (218) (28) 169 0 0
Cash flow from financing 671 1,885 2,002 1,172 17 815 (1,314) (1,620)
Forex effect/others (42) (43) 28 60 (7) (139) 0 0
Change in cash (401) 608 175 439 (155) 1,017 (1,698) (162)
Free cash flow (656) (1,453) (1,138) (731) 90 (1,483) (384) 1,457
105
Airtac International Group (1590 TT): 2 January 2018
Financial summary continued …
Balance sheet (TWDm)
Key ratios (%)
Source: FactSet, Daiwa forecasts
As at 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Cash & short-term investment 1,086 1,591 2,494 3,092 3,688 2,857 1,159 997
Inventory 1,079 1,543 1,847 1,964 2,158 2,724 3,323 3,945
Accounts receivable 1,620 2,288 2,903 3,073 3,811 4,540 5,423 6,425
Other current assets 144 100 185 278 199 412 412 412
Total current assets 3,929 5,521 7,430 8,407 9,856 10,533 10,318 11,779
Fixed assets 5,628 8,106 10,430 12,083 11,769 15,202 17,299 18,313
Goodwill & intangibles 184 69 103 108 77 77 77 77
Other non-current assets 410 819 974 859 1,261 1,877 1,875 1,874
Total assets 10,152 14,517 18,937 21,456 22,963 27,689 29,569 32,043
Short-term debt 3,232 3,044 5,391 6,426 7,812 6,635 6,635 6,635
Accounts payable 543 774 769 776 1,123 1,271 1,561 1,866
Other current liabilities 279 362 479 884 887 1,122 685 685
Total current liabilities 4,054 4,179 6,639 8,086 9,821 9,029 8,881 9,186
Long-term debt 236 993 1,900 2,636 2,035 1,818 1,818 1,818
Other non-current liabilities 181 300 340 325 354 330 330 330
Total liabilities 4,471 5,473 8,879 11,047 12,211 11,177 11,030 11,334
Share capital 1,500 1,705 1,705 1,790 1,790 1,890 1,890 1,890
Reserves/R.E./others 4,034 7,194 8,200 8,468 8,850 14,611 16,639 18,808
Shareholders' equity 5,534 8,899 9,905 10,259 10,640 16,502 18,529 20,698
Minority interests 147 144 152 150 112 10 10 10
Total equity & liabilities 10,152 14,517 18,937 21,456 22,963 27,689 29,569 32,042
EV 98,932 98,993 101,352 102,523 102,674 102,009 103,707 103,868
Net debt/(cash) 2,382 2,446 4,796 5,970 6,159 5,596 7,294 7,456
BVPS (TWD) 36.891 52.196 58.096 57.303 59.434 87.299 98.024 109.498
Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Sales (YoY) 0.5 28.8 14.8 5.0 20.7 30.0 23.6 20.5
EBITDA (YoY) (10.0) 42.2 11.9 (7.5) 28.2 42.7 27.0 21.8
Operating profit (YoY) (15.0) 44.8 8.8 (13.2) 31.2 53.7 29.4 23.0
Net profit (YoY) (18.2) 54.9 3.5 (22.8) 40.3 71.2 23.3 23.0
Core EPS (fully-diluted) (YoY) (18.2) 36.3 3.5 (26.4) 40.3 62.1 23.3 23.0
Gross-profit margin 52.4 55.3 54.9 51.6 51.2 52.0 52.3 52.7
EBITDA margin 32.6 36.0 35.1 30.9 32.8 36.0 37.0 37.4
Operating-profit margin 26.7 30.1 28.5 23.6 25.6 30.3 31.7 32.3
Net profit margin 19.5 23.4 21.1 15.5 18.1 23.8 23.7 24.2
ROAE 20.3 23.7 18.8 13.6 18.4 24.2 23.1 25.4
ROAA 11.8 13.9 10.6 6.8 8.6 13.0 14.1 16.2
ROCE 18.2 19.7 15.7 11.3 13.6 18.4 20.8 23.7
ROIC 15.6 16.4 13.6 9.9 11.6 16.2 16.9 18.5
Net debt to equity 43.0 27.5 48.4 58.2 57.9 33.9 39.4 36.0
Effective tax rate 27.3 27.1 25.2 25.2 28.8 24.4 25.0 25.0
Accounts receivable (days) 98.4 97.7 113.1 124.0 118.3 110.4 106.6 105.1
Current ratio (x) 1.0 1.3 1.1 1.0 1.0 1.2 1.2 1.3
Net interest cover (x) 43.8 56.8 46.8 33.9 23.7 29.0 36.9 45.3
Net dividend payout 59.9 51.6 62.8 46.2 52.4 50.1 40.0 32.5
Free cash flow yield n.a. n.a. n.a. n.a. 0.1 n.a. n.a. 1.5
Company profile
Founded in 1988, Airtac is the second-largest manufacturer of pneumatic components in China, with
a 17% market share based on sales volume for 2015. Its key products include cylinder, valves, and
filters, regulators & lubricators (FRL). The company sells all the products under its own product brand,
AirTAC, and also provides after-sales services that include installation, maintenance, etc.
106
Airtac International Group (1590 TT): 2 January 2018
Airtac: revenue and earnings forecasts and comparisons vs. consensus
(Consolidated) 2017E 2018E 2019E
(TWDm) Previous New Consensus Previous New Consensus Previous New Consensus
Revenue 13,283 13,808 13,726 16,204 17,064 16,634 19,344 20,570 19,253
Diff (%) 4.0% 0.6% 5.3% 2.6% 6.3% 6.8%
Gross Margin (%) 52.9% 52.0% 52.5% 52.7% 52.3% 52.7% 52.8% 52.7% 53.1%
Operating profit 4,155 4,181 4,242 5,198 5,408 5,401 6,279 6,650 6,494
Op Margin (%) 31.3% 30.3% 30.9% 32.1% 31.7% 32.5% 32.5% 32.3% 33.7%
Net profit 3,174 3,284 3,280 3,837 4,049 4,001 4,640 4,981 4,762
EPS (TWD) 16.79 17.37 17.35 20.30 21.42 21.17 24.55 26.35 25.19
Diff (%) 3.5% 0.1% 5.5% 1.2% 7.3% 4.6%
Source: Bloomberg, Daiwa forecasts
Airtac: quarterly and annual P&L statement
2017 2018
(TWDm) 1Q 2Q 3Q 4QE 1QE 2QE 3QE 4QE
2016 2017E 2018E
Net Revenue 2,813 3,597 3,858 3,540 3,684 4,583 4,549 4,249
10,622 13,808 17,064
COGS -1,355 -1,660 -1,894 -1,721 -1,771 -2,163 -2,166 -2,042
-5,186 -6,630 -8,141
Gross profit 1,458 1,937 1,965 1,819 1,913 2,419 2,383 2,207
5,435 7,178 8,923
Operating expenses -638 -728 -853 -779 -796 -894 -923 -902
-2,716 -2,998 -3,514
Operating profit 820 1,209 1,112 1,040 1,117 1,526 1,460 1,305
2,720 4,181 5,408
Non-operating profit 17 88 64 -5 -2 -2 -3 -2
128 165 -8
Pre-tax profit 837 1,297 1,176 1,036 1,115 1,523 1,457 1,304
2,848 4,345 5,400
Income taxes -210 -311 -280 -259 -279 -381 -364 -326
-929 -1,061 -1,350
Net profit 626 986 896 776 837 1,143 1,093 978
1,919 3,284 4,049
Net EPS (TWD) 3.50 5.51 4.74 4.11 4.43 6.04 5.78 5.17
10.72 17.37 21.42
Operating Ratios
Gross margin 51.8% 53.8% 50.9% 51.4% 51.9% 52.8% 52.4% 51.9%
51.2% 52.0% 52.3%
Operating margin 29.1% 33.6% 28.8% 29.4% 30.3% 33.3% 32.1% 30.7%
25.6% 30.3% 31.7%
Pre-tax margin 29.7% 36.1% 30.5% 29.3% 30.3% 33.2% 32.0% 30.7%
26.8% 31.5% 31.6%
Net margin 22.3% 27.4% 23.2% 21.9% 22.7% 24.9% 24.0% 23.0%
18.1% 23.8% 23.7%
YoY (%)
Net revenue 24% 23% 39% 33% 31% 27% 18% 20%
21% 30% 24%
Gross profit 28% 29% 37% 33% 31% 30% 14% 19%
20% 32% 24%
Operating profit 58% 52% 51% 55% 31% 25% 21% 21%
31% 54% 29%
Pre-tax profit 37% 58% 22% 129% 33% 17% 24% 26%
55% 53% 24%
Net profit 43% 63% 65% 135% 34% 16% 22% 26%
40% 71% 23%
QoQ (%)
Net revenue 6% 28% 7% -8% 4% 24% -1% -7%
Gross profit 6% 33% 1% -7% 5% 26% -2% -7%
Operating profit 22% 47% -8% -6% 7% 37% -4% -11%
Pre-tax profit 85% 55% -9% -12% 8% 37% -4% -11%
Net profit 89% 57% -9% -13% 8% 37% -4% -11%
Source: Company, Daiwa forecasts
Airtac: 1-year-forward PER bands Airtac: revenue breakdown by products
Source: TEJ, Daiwa forecasts Source: Company, Daiwa forecasts
100
150
200
250
300
350
400
450
500
550
Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17
Share price 13x 18x 25x 35x
(TWD)
44% 44% 46% 47% 47% 48%
29% 28% 26% 25% 25% 25%
9% 9% 8% 8% 8% 8%
18% 19% 20% 20% 20% 20%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2013 2014 2015 2016 2017E 2018E
Cylinder Valve FRL Others
See important disclosures, including any required research certifications, beginning on page 115
Share Price Chart
Source: Compiled by Daiwa.
Market data
12-month range (Y) 9,713-16,550
Market cap (Y mn; 28 Dec) 4,722,408
Shares outstanding (000; 12/17) 296,076
Foreign ownership (%; 9/17) 35.9
Investment Indicators
3/17 3/18 E 3/19 E
P/E (X) 42.6 36.8 29.0
EV/EBITDA (X) 24.2 20.3 16.6
P/B (X) 5.59 4.86 4.28
Dividend yield (%) 0.53 0.60 0.69
ROE (%) 13.8 14.1 15.7
Net debt/equity (X) 0.1 0.1 -0.0
Income Summary
(IFRS; Y mn) 3/17 3/18 E 3/19 E
Revenue 1,199,311 1,466,000 1,611,000
Op profit 139,403 171,000 207,000
Pretax income 141,350 164,000 207,000
Net income 111,036 128,400 162,700
EPS (Y) 374.4 433.7 549.5
DPS (Y) 85.00 95.00 110.00
See end of report for notes concerning indicators. Nidec
Nidec (6594 JP)
Target price: Y17,000 (from Y17,000 as of 26 Oct)
Share price (28 Dec): Y15,950 | Up/downside: +6.6%
Potential for sharp growth in ADAS/IoT space
Business expanding at world’s top brushless DC motor producer
New growth areas: next-gen brake motors, sensor units, robot products
Eyes on effects of utilizing IoT in own plants; attractive long-term play
What's new: Nidec is the world’s leading producer of brushless DC motors.
HDD spindle motors were previously its main product line (estimated
market share: 85%), but the firm has since FY12 been shifting its business
portfolio by expanding into automotive applications, as well as appliance,
commercial, and industrial applications. To expand the size and scope of its
operations, it has been actively promoting M&A.We see potential for Nidec
in 2 fields: IIoT and ADAS.
Outlook: Nidec’s products for ADAS include sensor modules and
electronic control units (manufactured by subsidiary Nidec Elesys; formerly
Honda Elesys, acquired in March 2014) and automotive motors (produced
by its parent). Nidec Elesys’s operating margin had apparently been limited
to roughly 5% before the acquisition, but market expansion and group
synergies have pushed up this figure to around 15% for FY17 (ending
March 2018). As for automotive motors, we estimate parent sales
amounted to JPY72bn for FY16. Its main product in this area is motors for
electric power steering systems. From 2018, we expect next-generation
motors for electric brakes to take off sharply in terms of shipments. Brake
motors currently in use are for anti-lock braking systems and mostly employ
low-cost brush motors, partly because they are only used in emergencies.
In contrast, for next-generation electric brakes, which can also be used in
autonomous cars, brushless motors, wherein lies Nidec’s forte, are seen as
promising – in fact, the company has already received long-term orders
from a few tier-1 auto parts suppliers.
Meanwhile, its products for IIoT consist of servomotors and inverters
produced by the drive business (acquired from Emerson Electric in
February 2017), speed reducers for robots (produced by subsidiary Nidec-
Shimpo), and control systems for automatic guided vehicles (developed
jointly by Nidec Motor [North American motor business acquired from
Emerson Electric], Nidec-Shimpo, and Nidec Sankyo). We expect these
products to see rapid shipment growth going forward. Also, Nidec has
embraced the use of IoT at its own plants to markedly improve its
productivity and has already begun to see results.
What we recommend: Earnings have been strong over the past few
years, with operating profit showing double-digit growth driven by rising
sales of motors for automobiles, energy-saving appliances, and industrial
robots, as well as productivity improvements. Going forward, we see
double-digit organic earnings growth as well as boosts from further
acquisitions. We recommend a long-term buy and hold strategy for Nidec. A
risk to our call is a greater-than-expected contraction in the HDD market.
Japan
Electric appliances 2 January 2018 Japanese report: 2 January 2018
Buy
(unchanged)
Takumi Sado 81-3-5555-7085
Daiwa Securities Co. Ltd.
108
Nidec (6594 JP): 2 January 2018
Chart 1: Automotive Order Backlog (by major applications)
Source: Company materials; compiled by Daiwa. Note: Estimates represent company projections.
Chart 2: Earnings by Segment (IFRS; Y mn)
FY16 17 CP 17 E 18 E
1H 2H (y/y %) 2H (y/y %) 1H 2H E (y/y %) 1H 2H (y/y %)
Revenue 564,030 635,281 1,199,311 (1.8) 734,110 1,450,000 (20.9) 715,890 750,110 1,466,000 (22.2) 787,000 824,000 1,611,000 (9.9)
Small precision motors (fans, small vibration motors, motors for HDDs, CDs, DVDs, etc.)
211,716 225,389 437,105 (-2.4) 220,474 227,226 447,700 (2.4) 225,500 231,500 457,000 (2.1)
% of revenue 37.5 35.5 36.4 30.8 30.3 30.5 28.7 28.1 28.4
Automotive, appliance, commercial & industrial products (appliance/industrial motors, automotive motors, automotive components)
265,645 306,440 572,085 (3.1) 390,572 415,028 805,600 (40.8) 450,500 479,500 930,000 (15.4)
% of revenue 47.1 48.2 47.7 54.6 55.3 55.0 57.2 58.2 57.7
Machinery (variable decelerators, FA equipment) 53,884 68,457 122,341 (13.5) 67,849 70,351 138,200 (13.0) 72,000 74,000 146,000 (5.6)
% of revenue 9.6 10.8 10.2 9.5 9.4 9.4 9.1 9.0 9.1
Electronic & optical components (electronic components, optical components)
31,032 33,040 64,072 (-0.1) 34,997 35,503 70,500 (10.0) 37,000 37,000 74,000 (5.0)
% of revenue 5.5 5.2 5.3 4.9 4.7 4.8 4.7 4.5 4.6
Other (pivot assemblies, etc.) 1,753 1,955 3,708 (1.1) 1,998 2,002 4,000 (7.9) 2,000 2,000 4,000 (0.0)
% of revenue 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.2 0.2
Operating profit 68,985 70,418 139,403 (18.5) 87,388 170,000 (21.9) 82,612 88,388 171,000 (22.7) 99,400 107,600 207,000 (21.1)
Operating profit margin (%) 12.2 11.1 11.6 11.9 11.7 11.5 11.8 11.7 12.6 13.1 12.8
Small precision motors 32,967 34,962 67,929 (5.0) 36,142 37,858 74,000 (8.9) 37,900 39,600 77,500 (4.7)
Operating profit margin (%) 15.6 15.5 15.5 16.4 16.7 16.5 16.8 17.1 17.0
Automotive, appliance, commercial & industrial products 27,969 29,188 57,157 (24.8) 38,644 44,956 83,600 (46.3) 53,000 59,200 112,200 (34.2)
Operating profit margin (%) 10.5 9.5 10.0 9.9 10.8 10.4 11.8 12.3 12.1
Machinery 10,200 11,591 21,791 (44.9) 12,586 11,814 24,400 (12.0) 13,300 13,900 27,200 (11.5)
Operating profit margin (%) 18.9 16.9 17.8 18.6 16.8 17.7 18.5 18.8 18.6
Electronic & optical components 4,878 4,984 9,862 (82.3) 5,531 5,869 11,400 (15.6) 6,900 6,900 13,800 (21.1)
Operating profit margin (%) 15.7 15.1 15.4 15.8 16.5 16.2 18.6 18.6 18.6
Other 287 272 559 (3.9) 281 319 600 (7.3) 300 300 600 (0.0)
Operating profit margin (%) 16.4 13.9 15.1 14.1 15.9 15.0 15.0 15.0 15.0
Eliminations and unallocated -7,316 -10,579 -17,895 (-) -10,572 -12,428 -23,000 (-) -12,000 -12,300 -24,300 (-)
Pretax income 66,274 75,076 141,350 (20.6) 86,370 163,000 (15.3) 76,630 87,370 164,000 (16.0) 99,400 107,600 207,000 (26.2)
Net income 50,094 60,942 111,036 (23.4) 67,926 128,000 (15.3) 60,074 68,326 128,400 (15.6) 78,100 84,600 162,700 (26.7)
EPS (Y) 374.36 432.32 433.67 549.52
Capex 30,483 38,235 68,718 (-16.1) 58,159 100,000 (45.5) 41,841 58,159 100,000 (45.5) 40,000 60,000 100,000 (0.0)
Depreciation 28,860 30,840 59,700 (-8.1) 27,168 60,000 (0.5) 32,832 32,168 65,000 (8.9) 36,000 39,000 75,000 (15.4)
R&D expenses 25,602 27,205 52,807 (1.6) 33,211 60,000 (13.6) 26,789 30,211 57,000 (7.9) 32,000 33,000 65,000 (14.0)
Cash flow (depreciation + net income) 78,954 91,782 170,736 (10.2) 95,094 188,000 (10.1) 92,906 100,494 193,400 (13.3) 114,100 123,600 237,700 (22.9)
EBITDA (depreciation + operating profit) 97,845 101,258 199,103 (9.0) 114,556 230,000 (15.5) 115,444 120,556 236,000 (18.5) 135,400 146,600 282,000 (19.5)
Source: Company materials; compiled by Daiwa. E: Daiwa estimates. CP: Company projections.
0
20
40
60
80
100
120
FY16 17 18 19 20
(mn units) As of Oct 2016
Next generation braking system Sunroof
Seat adjustment Engine cooling
Oil pump Dual clutch
Electric power steering (EPS)
0
20
40
60
80
100
120
FY16 17 18 19 20
(mn units) As of Oct 2017
Next generation braking system Sunroof
Seat adjustment Engine cooling
Oil pump Dual clutch
Electric power steering (EPS)
Nidec (6594): Income Summary (IFRS; Y mn; y/y %)
Year to Revenue Op profit Pretax income Net income EPS (Y) DPS (Y)
3/15 1,028,385 (18) 110,939 (31) 107,092 (27) 76,015 (35) 271.6 70.00 3/16 1,178,290 (-) 117,662 (-) 117,164 (-) 89,945 (-) 303.0 80.00 3/17 1,199,311 (2) 139,403 (18) 141,350 (21) 111,036 (23) 374.4 85.00 3/18 E 1,466,000 (22) 171,000 (23) 164,000 (16) 128,400 (16) 433.7 95.00 3/19 E 1,611,000 (10) 207,000 (21) 207,000 (26) 162,700 (27) 549.5 110.00
3/18 CP 1,450,000 (21) 170,000 (22) 163,000 (15) 128,000 (15) 432.3 95.00
E: Daiwa estimates. CP: Company projections.
Note: To extent possible, figures retroactively adjusted to reflect discontinued operations and fair value assessments of assets acquired and liabilities assumed in acquisitions.
109
Nidec (6594 JP): 2 January 2018
Financial Statements
(Y mn) 3/15 3/16 3/17 3/18 E 3/19 E
Income statement
Sales / Revenue 1,028,385 1,178,290 1,199,311 1,466,000 1,611,000
Operating profit 110,939 117,662 139,403 171,000 207,000
EBITDA 162,384 182,612 199,103 236,000 282,000
Pretax income 107,092 117,164 141,350 164,000 207,000
Net income 76,015 89,945 111,036 128,400 162,700
Balance sheet
Liquidity on hand 269,902 305,942 321,580 353,678 463,352
Fixed assets / Non-current assets 628,325 621,545 776,031 811,031 836,031
Total assets 1,357,340 1,376,636 1,676,106 1,850,745 2,007,335
Interest-bearing debt 282,498 300,667 412,431 412,431 412,431
Total liabilities 604,241 605,267 820,269 869,074 894,052
Total net assets / Total equity 753,099 771,369 855,837 981,671 1,113,283
Shareholders' equity 744,972 763,023 846,603 972,437 1,104,049
Cash flow statement
Cash flows from operating activities 91,875 147,659 129,853 166,644 240,762
Net income 76,015 89,945 111,036 128,400 162,700
Depreciation and amortization 51,445 64,950 59,700 65,000 75,000
Cash flows from investing activities -81,230 -95,377 -211,476 -107,900 -100,000
Free cash flow 10,645 52,282 -81,623 58,744 140,762
Cash flows from financing activities -19,508 7,775 95,848 -26,647 -31,088
Increase (decrease) in cash and cash equivalents 22,162 36,040 15,638 32,097 109,674
Accounting standards SEC IFRS IFRS IFRS IFRS
Financial indicators
Growth
Sales / Revenue (y/y %) 17.5 - 1.8 22.2 9.9
Operating profit (y/y %) 30.7 - 18.5 22.7 21.1
Profitability
Operating profit margin (%) 10.8 10.0 11.6 11.7 12.8
EBITDA margin (%) 15.8 15.5 16.6 16.1 17.5
ROE (%) 12.0 11.9 13.8 14.1 15.7
ROA (%) 6.0 - 7.3 7.3 8.4
Financial leverage/dividend policy
Net debt-to-equity ratio (X) 0.0 -0.0 0.1 0.1 -0.0
Equity-to-assets ratio (%) 54.9 55.4 50.5 52.5 55.0
Total dividends / shareholders' equity (%) 2.8 3.1 3.0 2.9 2.9
Dividend payout ratio (%) 25.8 26.4 22.7 21.9 20.0
Per-share data
EPS (Y) 271.6 303.0 374.4 433.7 549.5
DPS (Y) 70.00 80.00 85.00 95.00 110.00
Book value per share (Y) 2,533.1 2,572.6 2,854.4 3,284.4 3,728.9
Valuations Share price: Y15,950; market cap: Y4,722,408mn (28 Dec 2017)
P/E (X) 58.7 52.6 42.6 36.8 29.0
EV/EBITDA (X) 29.2 25.8 24.2 20.3 16.6
P/B (X) 6.30 6.20 5.59 4.86 4.28
Dividend yield (%) 0.44 0.50 0.53 0.60 0.69
Source: Company materials; compiled by Daiwa. Notes: 1) Firm adopted IFRS from FY16. FY15 figures retroactively adjusted. Figures for FY14 on SEC basis.
2) To extent possible, figures retroactively adjusted to reflect discontinued operations and fair value assessments of assets acquired and liabilities assumed in acquisitions. E: Daiwa estimates.
Company Outline
Nidec is the world’s leading producer of brushless DC motors (high-performance, high-efficiency motors that use ICs
for motor control). While HDD motors were previously its main product line, falling demand for PCs, i.e., a slowdown in
HDD motors, has led the firm to significantly shift its business portfolio to new growth areas: (1) automotive products
and (2) home appliance, commercial and industrial products. The company has particularly focused on expanding in
the automotive field via M&As and other measures in response to increasing use of electronics in cars. The company’s
aggressive M&A strategy, driven by CEO Shigenobu Nagamori’s proactive management, have gained wide recognition
in the market.
Translation: Research Production Department Style check: K.R. Accuracy check: #.#. Research Production Department ##London Translation Team ##New York Translation Team Translation/style check/accuracy check: Research Production Department
110
2018 Global Technology Outlook: 2 January 2018
Daiwa’s Asia Pacific Research Directory
HONG KONG
Takashi FUJIKURA (852) 2848 4051 [email protected]
Regional Research Head
Jiro IOKIBE (852) 2773 8702 [email protected]
Co-head of Asia Pacific Research
John HETHERINGTON (852) 2773 8787 [email protected]
Co-head of Asia Pacific Research
Craig CORK (852) 2848 4463 [email protected]
Regional Head of Asia Pacific Product Management
Paul M. KITNEY (852) 2848 4947 [email protected]
Chief Strategist for Asia Pacific; Strategy (Regional)
Kevin LAI (852) 2848 4926 [email protected]
Chief Economist for Asia ex-Japan; Macro Economics (Regional)
Olivia XIA (852) 2773 8736 [email protected]
Macro Economics (Hong Kong/China)
Kelvin LAU (852) 2848 4467 [email protected]
Head of Automobiles; Transportation and Industrial (Hong Kong/China)
Leon QI (852) 2532 4381 [email protected]
Regional Head of Financials; Banking; Diversified financials; Insurance (Hong Kong/China)
Yan LI (852) 2773 8822 [email protected]
Banking (China)
Anson CHAN (852) 2532 4350 [email protected]
Consumer (Hong Kong/China)
Adrian CHAN (852) 2848 4427 [email protected]
Consumer (Hong Kong/China)
Jamie SOO (852) 2773 8529 [email protected]
Gaming and Leisure (Hong Kong/China)
John CHOI (852) 2773 8730 [email protected]
Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap
Alex LIU (852) 2848 4976 [email protected]
Internet (Hong Kong/China)
Carlton LAI (852) 2532 4349 [email protected]
Small/Mid Cap (Hong Kong/China)
Dennis IP (852) 2848 4068 [email protected]
Regional Head of Power, Utilities, Renewable and Environment (PURE); PURE (Hong Kong/China)
Daniel YANG (852) 2848 4443 [email protected]
Power, Utilities, Renewable and Environment (PURE) – Solar and Nuclear (China)
Jonas KAN (852) 2848 4439 [email protected]
Head of Hong Kong and China Property
Cynthia CHAN (852) 2773 8243 [email protected]
Property (China)
Michelle WANG (852) 2773 8842 [email protected]
Transportation – Industrial and Logistics (China)
Fiona LIANG (852) 2532 4341 [email protected]
Transportation – Railway; Construction and Engineering (China)
Thomas HO (852) 2773 8716 [email protected]
Custom Products Group
PHILIPPINES
Micaela ABAQUITA (63) 2 737 3021 [email protected]
Property
Gregg Ilag (63) 2 737 3023 [email protected]
Utilities; Energy
SOUTH KOREA
Sung Yop CHUNG (82) 2 787 9157 [email protected]
Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel
Mike OH (82) 2 787 9179 [email protected]
Banking; Capital Goods (Construction and Machinery)
Iris PARK (82) 2 787 9165 [email protected]
Consumer/Retail
SK KIM (82) 2 787 9173 [email protected]
IT/Electronics – Semiconductor/Display and Tech Hardware
Thomas Y KWON (82) 2 787 9181 [email protected]
Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Games
TAIWAN
Rick HSU (886) 2 8758 6261 [email protected]
Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design (Regional)
Nora HOU (886) 2 8758 6249 [email protected]
Banking; Diversified financials; Insurance
Steven TSENG (886) 2 8758 6252 [email protected]
IT/Technology Hardware (PC Hardware)
Kylie HUANG (886) 2 8758 6248 [email protected]
IT/Technology Hardware (Handsets and Components)
Helen CHIEN (886) 2 8758 6254 [email protected]
Small/Mid Cap
INDIA
Punit SRIVASTAVA (91) 22 6622 1013 [email protected]
Head of India Research; Strategy; Banking/Finance
Saurabh MEHTA (91) 22 6622 1009 [email protected]
Capital Goods; Utilities
SINGAPORE
Ramakrishna MARUVADA (65) 6499 6543 [email protected]
Head of Singapore Research; Telecommunications (China/ASEAN/India)
David LUM (65) 6329 2102 [email protected]
Banking; Property and REITs
Royston TAN (65) 6321 3086 [email protected]
Oil and Gas; Capital Goods
Jame OSMAN (65) 6321 3092 [email protected]
Transportation – Road and Rail; Pharmaceuticals and Healthcare; Consumer (Singapore)
JAPAN
Yukino YAMADA (81) 3 5555 7295 [email protected]
Strategy (Regional)
111
2018 Global Technology Outlook: 2 January 2018
Daiwa’s Offices
Office / Branch / Affiliate Address Tel Fax
DAIWA SECURITIES GROUP INC
HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753 (81) 3 5555 3111 (81) 3 5555 0661
Daiwa Securities Trust Company One Evertrust Plaza, Jersey City, NJ 07302, U.S.A. (1) 201 333 7300 (1) 201 333 7726
Daiwa Securities Trust and Banking (Europe) PLC (Head Office) 5 King William Street, London EC4N 7JB, United Kingdom (44) 207 320 8000 (44) 207 410 0129
Daiwa Europe Trustees (Ireland) Ltd Level 3, Block 5, Harcourt Centre, Harcourt Road, Dublin 2, Ireland (353) 1 603 9900 (353) 1 478 3469
Daiwa Capital Markets America Inc. New York Head Office Financial Square, 32 Old Slip, New York, NY10005, U.S.A. (1) 212 612 7000 (1) 212 612 7100
Daiwa Capital Markets America Inc. San Francisco Branch 555 California Street, Suite 3360, San Francisco, CA 94104, U.S.A. (1) 415 955 8100 (1) 415 956 1935
Daiwa Capital Markets Europe Limited, London Head Office 5 King William Street, London EC4N 7AX, United Kingdom (44) 20 7597 8000 (44) 20 7597 8600
Daiwa Capital Markets Europe Limited, Frankfurt Branch Neue Mainzer Str. 1, 60311 Frankfurt/Main, Germany (49) 69 717 080 (49) 69 723 340
Daiwa Capital Markets Europe Limited, Paris Representative Office 17, rue de Surène 75008 Paris, France (33) 1 56 262 200 (33) 1 47 550 808
Daiwa Capital Markets Europe Limited, Geneva Branch 50 rue du Rhône, P.O.Box 3198, 1211 Geneva 3, Switzerland (41) 22 818 7400 (41) 22 818 7441
Daiwa Capital Markets Europe Limited, Moscow Representative Office
Midland Plaza 7th Floor, 10 Arbat Street, Moscow 119002, Russian Federation
(7) 495 641 3416 (7) 495 775 6238
Daiwa Capital Markets Europe Limited, Bahrain Branch 7th Floor, The Tower, Bahrain Commercial Complex, P.O. Box 30069, Manama, Bahrain
(973) 17 534 452 (973) 17 535 113
Daiwa Capital Markets Hong Kong Limited Level 28, One Pacific Place, 88 Queensway, Hong Kong (852) 2525 0121 (852) 2845 1621
Daiwa Capital Markets Singapore Limited 7 Straits View, Marina One East Tower, #16-05 & #16-06, Singapore 018936, Republic of Singapore
(65) 6387 8888 (65) 6282 8030
Daiwa Capital Markets Australia Limited Level 34, Rialto North Tower, 525 Collins Street, Melbourne, Victoria 3000, Australia
(61) 3 9916 1300 (61) 3 9916 1330
DBP-Daiwa Capital Markets Philippines, Inc 18th Floor, Citibank Tower, 8741 Paseo de Roxas, Salcedo Village, Makati City, Republic of the Philippines
(632) 813 7344 (632) 848 0105
Daiwa-Cathay Capital Markets Co Ltd 14/F, 200, Keelung Road, Sec 1, Taipei, Taiwan, R.O.C. (886) 2 2723 9698 (886) 2 2345 3638
Daiwa Securities Capital Markets Korea Co., Ltd. 20 Fl.& 21Fl. One IFC, 10 Gukjegeumyung-Ro, Yeongdeungpo-gu, Seoul, Korea
(82) 2 787 9100 (82) 2 787 9191
Daiwa Securities Co. Ltd., Beijing Representative Office Room 301/302，Kerry Center，1 Guanghua Road，Chaoyang District，
Beijing 100020, People’s Republic of China
(86) 10 6500 6688 (86) 10 6500 3594
Daiwa (Shanghai) Corporate Strategic Advisory Co. Ltd. 44/F, Hang Seng Bank Tower, 1000 Lujiazui Ring Road, Pudong, Shanghai China 200120 , People’s Republic of China
(86) 21 3858 2000 (86) 21 3858 2111
Daiwa Securities Co. Ltd., Bangkok Representative Office 18th Floor, M Thai Tower, All Seasons Place, 87 Wireless Road,
Lumpini, Pathumwan, Bangkok 10330, Thailand (66) 2 252 5650 (66) 2 252 5665
Daiwa Capital Markets India Private Ltd 10th Floor, 3 North Avenue, Maker Maxity, Bandra Kurla Complex, Bandra East, Mumbai – 400051, India
(91) 22 6622 1000 (91) 22 6622 1019
Daiwa Securities Co. Ltd., Hanoi Representative Office Suite 405, Pacific Palace Building, 83B, Ly Thuong Kiet Street, Hoan Kiem Dist. Hanoi, Vietnam
(84) 4 3946 0460 (84) 4 3946 0461
DAIWA INSTITUTE OF RESEARCH LTD
HEAD OFFICE 15-6, Fuyuki, Koto-ku, Tokyo, 135-8460, Japan (81) 3 5620 5100 (81) 3 5620 5603
MARUNOUCHI OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6756 (81) 3 5555 7011 (81) 3 5202 2021
New York Research Center 11th Floor, Financial Square, 32 Old Slip, NY, NY 10005-3504, U.S.A. (1) 212 612 6100 (1) 212 612 8417
London Research Centre 3/F, 5 King William Street, London, EC4N 7AX, United Kingdom (44) 207 597 8000 (44) 207 597 8550
112
2018 Global Technology Outlook: 2 January 2018
SK Hynix: share price and Daiwa recommendation trend
Source: Daiwa
Note: where appropriate, historical target prices have been adjusted to reflect the current share count
LG Display: share price and Daiwa recommendation trend
Source: Daiwa
Note: where appropriate, historical target prices have been adjusted to reflect the current share count
Date Target Price Rating Date Target price Rating Date Target price Rating
16/10/15 43,000 Buy 10/10/16 50,000 Buy 04/07/17 77,000 Buy
18/01/16 40,000 Buy 03/01/17 54,000 Buy 25/07/17 87,000 Buy
06/04/16 39,000 Buy 31/01/17 64,000 Buy 09/10/17 100,000 Buy
05/09/16 46,000 Buy 25/04/17 68,000 Buy 24/11/17 118,000 Buy
46,00043,000
40,000 39,000
46,00050,000
54,000
64,00068,000
77,000
87,000
100,000
118,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
110,000
120,000
Dec
-14
Jan-
15
Feb
-15
Mar
-15
Apr
-15
May
-15
Jun-
15
Jul-1
5
Aug
-15
Sep
-15
Oct
-15
Nov
-15
Dec
-15
Jan-
16
Feb
-16
Mar
-16
Apr
-16
May
-16
Jun-
16
Jul-1
6
Aug
-16
Sep
-16
Oct
-16
Nov
-16
Dec
-16
Jan-
17
Feb
-17
Mar
-17
Apr
-17
May
-17
Jun-
17
Jul-1
7
Aug
-17
Sep
-17
Oct
-17
Nov
-17
Target price (KRW) Closing Price (KRW)
Date Target Price Rating Date Target price Rating Date Target price Rating
18/11/16 36,000 Buy 21/04/17 41,000 Buy 26/07/17 44,000 Buy
17/01/17 39,000 Buy 07/07/17 49,000 Buy 17/10/17 39,000 Buy
26,000
36,000
39,000
41,000
49,000
44,000
39,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Dec
-14
Jan-
15
Feb
-15
Mar
-15
Apr
-15
May
-15
Jun-
15
Jul-1
5
Aug
-15
Sep
-15
Oct
-15
Nov
-15
Dec
-15
Jan-
16
Feb
-16
Mar
-16
Apr
-16
May
-16
Jun-
16
Jul-1
6
Aug
-16
Sep
-16
Oct
-16
Nov
-16
Dec
-16
Jan-
17
Feb
-17
Mar
-17
Apr
-17
May
-17
Jun-
17
Jul-1
7
Aug
-17
Sep
-17
Oct
-17
Nov
-17
Target price (KRW) Closing Price (KRW)
113
2018 Global Technology Outlook: 2 January 2018
Samsung Electronics: share price and Daiwa recommendation trend
Source: Daiwa
Note: where appropriate, historical target prices have been adjusted to reflect the current share count
LG Innotek: share price and Daiwa recommendation trend
Source: Daiwa
Note: where appropriate, historical target prices have been adjusted to reflect the current share count
Date Target Price Rating Date Target price Rating Date Target price Rating
16/10/15 1,470,000 Buy 07/10/16 1,960,000 Buy 27/04/17 2,890,000 Buy
31/12/15 1,580,000 Buy 27/10/16 1,930,000 Buy 28/06/17 3,200,000 Buy
31/03/16 1,510,000 Buy 29/11/16 1,980,000 Buy 09/10/17 3,500,000 Buy
24/06/16 1,710,000 Buy 30/12/16 2,200,000 Buy 31/10/17 4,100,000 Buy
28/07/16 1,740,000 Buy 24/01/17 2,350,000 Buy
09/08/16 1,940,000 Buy 23/03/17 2,700,000 Buy
1,700,000
1,470,0001,580,000 1,510,000
1,710,0001,740,0001,940,0001,960,0001,930,0001,980,000
2,200,0002,350,000
2,700,0002,890,000
3,200,000
3,500,000
4,100,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
4,500,000
Dec
-14
Jan-
15
Feb
-15
Mar
-15
Apr
-15
May
-15
Jun-
15
Jul-1
5
Aug
-15
Sep
-15
Oct
-15
Nov
-15
Dec
-15
Jan-
16
Feb
-16
Mar
-16
Apr
-16
May
-16
Jun-
16
Jul-1
6
Aug
-16
Sep
-16
Oct
-16
Nov
-16
Dec
-16
Jan-
17
Feb
-17
Mar
-17
Apr
-17
May
-17
Jun-
17
Jul-1
7
Aug
-17
Sep
-17
Oct
-17
Nov
-17
Target price (KRW) Closing Price (KRW)
Date Target Price Rating Date Target price Rating
08/09/17 240,000 Buy 19/10/17 220,000 Buy
83,000
240,000
220,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
220,000
240,000
Dec
-14
Jan-
15
Feb
-15
Mar
-15
Apr
-15
May
-15
Jun-
15
Jul-1
5
Aug
-15
Sep
-15
Oct
-15
Nov
-15
Dec
-15
Jan-
16
Feb
-16
Mar
-16
Apr
-16
May
-16
Jun-
16
Jul-1
6
Aug
-16
Sep
-16
Oct
-16
Nov
-16
Dec
-16
Jan-
17
Feb
-17
Mar
-17
Apr
-17
May
-17
Jun-
17
Jul-1
7
Aug
-17
Sep
-17
Oct
-17
Nov
-17
Target price (KRW) Closing Price (KRW)
114
2018 Global Technology Outlook: 2 January 2018
Samsung Electro-Mechanics: share price and Daiwa recommendation trend
Source: Daiwa
Note: where appropriate, historical target prices have been adjusted to reflect the current share count
Date Target Price Rating Date Target price Rating Date Target price Rating
04/01/16 79,000 Buy 19/10/16 64,000 Buy 17/04/17 82,000 Buy
14/04/16 76,000 Buy 20/01/17 66,000 Buy 22/06/17 125,000 Buy
04/07/16 74,000 Buy 17/02/17 69,000 Buy 14/11/17 132,000 Buy
70,000
79,00076,000 74,000
64,000 66,00069,000
82,000
125,000
132,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
110,000
120,000
130,000
140,000
Dec
-14
Jan-
15
Feb
-15
Mar
-15
Apr
-15
May
-15
Jun-
15
Jul-1
5
Aug
-15
Sep
-15
Oct
-15
Nov
-15
Dec
-15
Jan-
16
Feb
-16
Mar
-16
Apr
-16
May
-16
Jun-
16
Jul-1
6
Aug
-16
Sep
-16
Oct
-16
Nov
-16
Dec
-16
Jan-
17
Feb
-17
Mar
-17
Apr
-17
May
-17
Jun-
17
Jul-1
7
Aug
-17
Sep
-17
Oct
-17
Nov
-17
Target price (KRW) Closing Price (KRW)
All statements in this report attributable to Gartner represent [Bank’s/Issuer’s/Client’s] interpretation of data, research opinion or viewpoints published as part of a syndicated subscription service by Gartner, Inc., and have not been reviewed by Gartner. Each Gartner publication speaks as of its original publication date (and not as of the date of this [presentation/report]). The opinions expressed in Gartner publications are not representations of fact, and are subject to change without notice.
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2018 Global Technology Outlook: 2 January 2018
Important Disclosures and Disclaimer
This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof.
Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Group Inc., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person.
Daiwa Securities Group Inc., Affin Investment Bank Berhad, their respective subsidiaries or affiliates, or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including market making activities, derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures.
Ownership of Securities
For “Ownership of Securities” information, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Investment Banking Relationship
For “Investment Banking Relationship”, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Portions of this publication are prepared by Affin Hwang Investment Bank Berhad (“Affin Hwang”) and reviewed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates (collectively, “Daiwa”), and is distributed and/or originated from outside Malaysia by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. The role of
Daiwa Securities Group Inc. and/or its non-U.S. affiliates in connection with this publication is solely limited to the review and distribution of this publication ; and Daiwa Securities Group Inc. and/or its non-U.S. affiliates are not involved in the preparation of this publication in any other way. This research is for Daiwa clients only and the publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Other than disclosures relating to Daiwa, this research is based on current public information that Affin Hwang and Daiwa consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. The analysts named in this report may have from time to time discussed with clients, including Daiwa’s salespersons and traders, or may discuss in this report, trading strategies that reference catalysts or events that may have a near-term impact on the market price of the equity securities discussed in this report, which impact may be directionally counter to the analysts' published price target expectations for such stocks. Any such trading strategies are distinct from and do not affect the analysts' fundamental equity rating for such stocks, which rating reflects a stock's return potential relative to its coverage group as described herein. 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 Affin Hwang ,Daiwa Securities Group Inc. nor any of its or their respective parent, holding, subsidiaries or affiliates, nor any of its or their 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 where such an offer or solicitation would be illegal nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication constitutes the views of the analyst(s) named herein and does not necessarily reflect those of Affin Hwang, Daiwa Securities Group Inc. and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments. Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Investors should review current options disclosure documents in relation to such investments. All research reports are disseminated and available to our clients simultaneously through electronic publication to our internal client websites. Not all research content is redistributed to our clients or available to third-party aggregators, nor is Daiwa and Affin Hwang responsible for the redistribution of our research by third party aggregators. Affin Hwang, Daiwa Securities Group Inc., its subsidiaries and affiliates, and its or their respective directors, officers and employees, from time to time may have trades as principals, or may 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: No Va Land Investment Group Corporation (NVL VN), PT Totalindo Eka Persada Tbk (TOPS IJ), PT Integra Indocabinet Tbk (WOOD IJ), PT Buyung Putera Sembada (HOKI IJ), Cromwell European REIT (CERT_SP).
*Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa
Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd.
Disclosure of Interest of Affin Hwang Investment Bank
Investment Banking Relationship
Within the preceding 12 months, Affin Hwang Investment Bank has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Serba Dinamik Holdings Berhad (SDH MK), HAI-O-ENT (HAIO MK), SP Setia Bhd Group (SPSB MK).
Hong Kong
This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司) (“DHK”) which is regulated by the Hong Kong Securities and Futures
Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research.
Relevant Relationship (DHK)
DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage.
Korea
The developing analyst of this research and analysis material hereby states and confirms that the contents of this material correctly reflect the analyst’s views and opinions and that the analyst has not been placed under inappropriate pressure or interruption by an external party. Name of Analyst : SK Kim / Henny Jung
Disclosure of Analysts’ Interests If an analyst engaging in or a person who exercises influences on the preparation or publication of a Research Report containing recommendations for general investors to trade financial investment instruments with regard to which the analyst or the influential person has personal interests and if the recommendations contained in the Report may have impacts on the personal interests, Daiwa Securities Capital Markets Korea Co., Ltd.(“Daiwa Securities Korea”)shall ensure that the Analyst or the influential person notifies that he/she has personal interests with regard to:
116
2018 Global Technology Outlook: 2 January 2018
1. The equity, the equity-linked bonds and the instruments with the subscription right to the equity issued by the legal entity covered in the Research Report (or the legal entity subject to the investment recommendations); 2. The stock option granted by the legal entity covered in the Research Report (or the legal entity subject to the investment recommendations); or 3. The equity futures, the equity options and the equity-linked warrants backed by the equity prescribed in the preceding Paragraph 1 as the underlying assets. Legal Entities subject to Research Report Coverage Restrictions Daiwa Securities Korea hereby states and confirms that Daiwa Securities Korea has no conflicts of interests with the legal entity covered in this Research Report: 1. In that Daiwa Securities Korea does NOT offer direct or indirect payment guarantee for the legal entity by means of, for instance, guarantee, endorsement, provision of collaterals or the acquisition of debts; 2. In that Daiwa Securities Korea does NOT own one-hundredth (or 1/100) or more of the total number of outstanding equities issued by the legal entity; 3. In that The legal entity is NOT an affiliated company of Daiwa Securities Korea pursuant to Sub-paragraph 3, Article 2 of the Monopoly Regulation and Fair Trade Act of Korea; 4. In that, although Daiwa Securities Korea offers advisory services for the legal entity with regard to an M&A deal, the size of the M&A deal does NOT exceed five-hundredths (or 5/100) of the total asset size or the total number of equities issued and outstanding of the legal entity; 5. In that, although Daiwa Securities Korea acted in the capacity of a Lead Underwriter for the initial public offering of the legal entity, more than one-year has passed since the IPO date; 6. In that Daiwa Securities Korea is NOT designated by the legal entity as the ‘tender offer agent’ pursuant to the Paragraph 2, Article 133 of the Financial Services and Capital Market Act or the legal entity is NOT the issuer of the equity subject to the proposed tender offer; this requirement, however applies until the maturity of the tender offer period; or 7. In that Daiwa Securities Korea does NOT have significant or material interests with regard to the legal entity. Disclosure of Prior Distribution to Third Party This report has not been distributed to the third party in advance prior to public release. The following explains the rating system in the report as compared to KOSPI, based on the beliefs of the author(s) of this report. "1": the security could outperform the KOSPI by more than 15% over the next 12 months, unless otherwise stated. "2": the security is expected to outperform the KOSPI by 5-15% over the next 12 months, unless otherwise stated. "3": the security is expected to perform within 5% of the KOSPI (better or worse) over the next 12 months, unless otherwise stated. "4": the security is expected to underperform the KOSPI by 5-15% over the next 12 months, unless otherwise stated. "5": the security could underperform the KOSPI by more than 15% over the next 12 months, unless otherwise stated. “Positive” means that the analyst expects the sector to outperform the KOSPI over the next 12 months, unless otherwise stated. “Neutral” means that the analyst expects the sector to be in-line with the KOSPI over the next 12 months, unless otherwise stated. “Negative” means that the analyst expects the sector to underperform the KOSPI over the next 12 months, unless otherwise stated. Additional information may be available upon request.
Singapore
This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore Limited in respect of any matter arising from or in connection with the research.
Australia
This research is distributed in Australia by Daiwa Capital Markets Australia Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research.
India
This research is distributed in India to Institutional Clients only by Daiwa Capital Markets India Private Limited (Daiwa India) which is an intermediary registered with Securities & Exchange Board of India as a Stock Broker, Merchant Bank and Research Analyst. Daiwa India, its Research Analyst and their family members and its associates do not have any financial interest save as disclosed or other undisclosed material conflict of interest in the securities or derivatives of any companies under coverage. Daiwa India and its associates, may have received compensation for any products other than Investment Banking (as disclosed)or brokerage services from the subject company in this report or from any third party during the past 12 months. Daiwa India and its associates may have debt holdings in the subject company. For information on ownership of equity, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
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This research is solely for reference and not intended to provide tailored investment recommendations. This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd. and it may only be distributed in Taiwan to specific customers who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd. and non-customers including (i) professional institutional investors, (ii) TWSE or TPEx listed companies, upstream and downstream vendors, and specialists that offer or seek advice, and (iii) potential customers with an actual need for business development in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research including non-customer recipients of this research shall not provide it to others or engage in any activities in connection with this research which may involve conflicts of interests. Neither Daiwa-Cathay Capital Markets Co., Ltd. nor its personnel who writes or reviews the research report has any conflict of interest in this research. Since Daiwa-Cathay Capital Markets Co., Ltd. does not operate brokerage trading business in foreign markets, this research is prepared on a “without recommendation” to any foreign securities basis and Daiwa-Cathay Capital Markets Co.,
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United Kingdom
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This research is distributed into the United States directly by Daiwa Capital Markets Hong Kong Limited and indirectly by Daiwa Capital Markets America Inc. (DCMA), a U.S. Securities and Exchange Commission registered broker-dealer and FINRA member firm, exclusively to “major U.S. institutional investors”, as defined under Rule 15a-6 promulgated under the U.S. Securities Exchange Act of 1934, as amended, and as interpreted by the staff of the U.S. Securities and Exchange Commission (SEC). This report is not an offer to sell or the solicitation of any offer to buy securities. U.S. customers wishing to effect transactions in any designated investment discussed in this report should do so through a qualified salesperson of DCMA. Non-U.S. customers wishing to effect transactions in any designated investment discussed in this report should contact a Daiwa entity in their local jurisdiction. The securities or other investment products discussed in this report may not be eligible for sale in some jurisdictions.
Analysts employed outside the U.S., as specifically indicated elsewhere in this report, are not registered as research analysts with FINRA. These analysts may not be associated persons of DCMA, and therefore may not be subject to FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
ADDITIONAL IMPORTANT DISCLOSURES CAN BE FOUND AT:
https://daiwa3.bluematrix.com/sellside/Disclosures.action
Ownership of Securities:
For “Ownership of Securities” information please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Investment Banking Relationships:
For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
DCMA Market Making:
For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Research Analyst Conflicts:
For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.
Research Analyst Certification:
For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analyst is named on the report); and no part of the compensation of such analyst (or no part of the compensation of the firm if no individual analyst is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.
The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report.
"1": the security could outperform the local index by more than 15% over the next 12 months.
"2": the security is expected to outperform the local index by 5-15% over the next 12 months.
"3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months.
"4": the security is expected to underperform the local index by 5-15% over the next 12 months.
"5": the security could underperform the local index by more than 15% over the next 12 months.
Disclosure of investment ratings
Rating Percentage of total
Buy* 65.9%
Hold** 20.1%
Sell*** 14.0%
Source: Daiwa
Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 30 September 2017. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings.
For stocks and sectors in Malaysia covered by Affin Hwang, the following rating system is in effect:
Stocks:
BUY: Total return is expected to exceed +10% over a 12-month period
HOLD: Total return is expected to be between -5% and +10% over a 12-month period
SELL: Total return is expected to be below -5% over a 12-month period
NOT RATED: Affin Hwang Investment Bank Berhad does not provide research coverage or rating for this company. Report is intended as information only and not as a recommendation
Sectors:
OVERWEIGHT: Industry, as defined by the analyst’s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months
NEUTRAL: Industry, as defined by the analyst’s coverage universe, is expected to perform in line with the KLCI benchmark over the next 12 months
UNDERWEIGHT: Industry, as defined by the analyst’s coverage universe is expected to underperform the KLCI benchmark over the next 12 months
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Conflict of Interest Disclosure
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 Relationship”, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Relevant Relationships
Affin Hwang 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.
Affin Hwang market making
Affin Hwang may from time to time make a market in securities covered by this research.
Additional information may be available upon request.
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