China Smartphone Sector

Transcription

1 Asia Pacific/China Equity Research Semiconductor Devices Research Analyst Randy Abrams, CFA randy.abrams@credit-suisse.com Jerry Su jerry.su@credit-suisse.com Pauline Chen pauline.chen@credit-suisse.com Thompson Wu thompson.wu@credit-suisse.com Nickie Yue nickie.yue@credit-suisse.com China Smartphone Sector SECTOR FORECAST 2015 Outlook: Looking for Profits in Emerging Markets and LTE Figure 1: Raising smartphones for emerging markets still + units in E 2016E 2017E New Estimate 304, , ,476 1,019,432 1,290,513 1,542,237 1,757,676 1,937,963 YoY 62% 47% 41% 27% 14% 1 Old Estimate 298, , ,258 1,032,231 1,257,603 1,475,385 1,688,637 1,865,594 YoY 58% 53% 43% 22% 17% 14% 1 Increase (%) % 0.6% -1.2% 2.6% 4.5% 4.1% 3.9% Source: Credit Suisse estimates Emerging markets lift smartphone units. Our global hardware team, in its annual wireless preview on 13 January, raised its 2014/15 smartphone unit forecasts by 3%/5% from 1,258/1,475mn to 1,290/1,542mn, due to faster emerging market smartphone penetration. Smartphone units in 2015 are projected to grow by YoY and revenues to increase by a reasonable 8% YoY to US$348 bn. Growth left in emerging markets, LTE and extension into wearables/iot. With developed markets now mature, emerging markets are keying growth, with China projecting +13% YoY to 473 mn in 2015 and other emerging markets forecasting +33% YoY to 706 mn will be the year LTE accelerates; we project units from China brands will grow from 140 mn to 323 mn. Tablets have now slowed to single-digit growth so focus shifts to IoT and wearables, a potential US$40-45 bn market that could add 1 to foundry sales by Selective picks in Asian due to mixed profitability. With unit growth moderating and shifting downmarket, we are selective on companies that can gain share and support margins. We remain positive on ASE on the back of good margins and incremental SiP projects, SPIL on leverage to China LTE handsets/infrastructure, and we view MediaTek as attractive exiting 1Q15 on product refresh and improving mix. In driver ICs, we like Chipbond, ChipMOS, Himax, Novatek, and Focaltech. In brands, we favour ZTE and Lenovo. In components, our top picks are AAC, Largan, and Catcher. Toning down a bit on TSMC. We have downgraded TSMC to NEUTRAL, toning down our positive view since the financial crisis due to increasing customer concentration risks, rising competition and moderating growth with the valuation back in line with its historical average. Results (Thursday) will still be strong due to 20nm/28nm at good yields and NT$ depreciation (a NT$1 EPS lift to 2015), but competition should stay in focus through DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION Client-Driven Solutions, Insights, and Access

2 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15E 3Q15E 1Q16E 3Q16E E 2016E 2017E 2018E 2019E 2020E Q104 Q304 Q105 Q305 Q106 Q306 Q107 Q307 Q108 Q308 Q109 Q309 Q110 Q310 Q111 Q311 Q112 Q312 Q113 Q313 1Q14 3Q14 Focus table and charts Figure 2: Summary of Credit Suisse's smartphone estimates (in millions, unless otherwise stated) Smartphone summary CAGR Global smartphone subscribers ,215 1,777 2,418 3,092 3,762 4,400 22% % of mobile subscribers 1 14% 27% 35% 43% 5 56% New adds Replacements ,088 1,300 26% Smartphone units ,019 1,291 1,542 1,758 1,938 15% YoY 76% 62% 47% 41% 27% 14% 1 Smartphone ASPs $363 $361 $329 $283 $250 $225 $203 $183-1 YoY 1% -1% -9% -14% -12% Smartphone revenue $110,596 $178,393 $238,557 $288,439 $323,147 $347,562 $356,502 $353,762 3% YoY 78% 61% 34% 21% 12% 8% 3% -1% Source: Credit Suisse estimates Figure 3: China brands leading the growth Figure 4: Low-Mid-End smartphones pass 5 in 2015 Units (000) 180, , , , ,000 80,000 60,000 40,000 20,000 0 Source: Gartner Nokia Research in Motion Motorola Apple Sony HTC Samsung LG Chinese brands Source: Credit Suisse estimates E 2016E 2017E $500+ $400<$500 $200<$400 $100<$200 <$100 Figure 5: Internet of Things Silicon seeing high growth Sales (US$) $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 Source: Gartner Figure 7: LTE to drive the next growth for MediaTek YoY (%) 45% 4 35% 3 25% 15% 1 5% ASSP / FPGA Microcontroller Sensors Bluetooth Cellular Wi-Fi ZigBee Other Wireless Wireline YoY Growth Revenue by Technology 1,600 1,400 1,200 1, G TD-SCDMA WCDMA LTE Figure 6: 2015 Chinese chipsets shift over to LTE 2015 to China brands EDGE WCDMA TD-SCDMA CDMA 2000 LTE Mediatek Spreadtrum Leadcore Hi-Silicon Asian suppliers % of shipments 17% 59% 22% 33% Share 10 89% 93% 52% Qualcomm Broadcom Marvell Intel Overseas suppliers % of shipments 19% 4% 23% 77% Share 11% 7% 10 48% Total % of shipments 12% 48% 17% 6% 45% Figure 8: Export ramp supplementing slower China units Smartphone Units: mn Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 China smartphones Export smartphones Export % China QoQ Export QoQ 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 %/ QoQ / export ratio 8 3Q15 4Q China Smartphone Sector 2

3 2015 outlook: Looking for profits in emerging markets and LTE In coordination with our global hardware team, we publish our annual smartphone and tablet outlook and raise industry unit estimates to factor in a faster ramp of China brands in the export markets. We also provide an outlook and implications for the Asian supply chain. Raising global smartphone units on China exports Our global hardware team, in its annual wireless preview on 13 January, raised its 2014/15 smartphone unit forecasts by 3%/5% from 1,258/1,475 mn to 1,290/1,542 mn, due to faster emerging market smartphone penetration. Smartphone units in 2015 are projected to rise YoY and revenues to increase by a reasonable 8% YoY to US$348 bn. Our industry forecasts from notably slow to a 3.1% revenue CAGR based on a deceleration in subscriber and replacement rates, although a scenario of steady penetration/replacement rates keeps the revenue CAGR at 7.4%. LTE and emerging markets are now driving growth. Asian chipset in China smartphone brands should again outgrow, with units rising 5 to 717 mn in 2014 and we estimate it will grow 28% to 918 mn in Growth still from emerging markets and extension into wearables/iot While developed markets are slowing to a 5% CAGR between 2014 and 2017, we project China has a 9% CAGR from 420 mn units in 2014 to 538 mn by 2017 and other emerging markets with a 24% CAGR, from 530 mn units in 2014 to 1,010 mn in China brands are gaining, with volumes now at 8 of China shipments and rising to 45% of global shipments. However, this is still below the 6 reached in feature phones, suggesting more outgrowth is possible. Our key focus will be LTE, where we project LTE basebands in China brands to grow from 140 mn in 2014 to 323 mn in Tablets have now slowed to single-digit growth so the focus shifts to IoT and wearables, a potential US$40-45 bn market that could add 1 to foundry sales by Smartphone unit estimates raised by 3%/5% to 1,290 mn (+27% YoY) in 2014 and 1,542 mn (+ YoY) for 2015 China growing from 420 mn units in 2014 to 538 mn by 2017E (a 9% CAGR) and emerging markets from 530 mn units in 2014 to 1,010 mn in 2017E (a 24% CAGR) LTE transition in focus; Qualcomm leading, but MediaTek emerging Growth will continue but mix will shift increasingly toward LTE. We estimate Asian chipsets grew 5 YoY to 717 mn in 2014 and project 28% YoY growth to 918 mn units versus handset industry growth of + YoY. In 2015, we estimate 130 mn units for Qualcomm into emerging markets, but see MediaTek approaching that (125 mn) as it ramps into its customers and has a top-to-bottom refresh in early 2Q15. We also see Marvell maintaining a decent position and Spreadtrum gaining both on mainstream 3G and starting its ramp on LTE, with internal chipset in 1H15 and joint SoFIA 4G chipset with Intel late in the year. Stock picks in the China smartphone space With unit growth moderating and shifting downmarket, we are selective on companies that can gain share and support margins. We stay positive on ASE on good margins and incremental SiP projects, SPIL on leverage to China LTE handsets/infrastructure and we view MediaTek as attractive exiting 1Q15 on product refresh and improving mix. Asian chipsets to grow 28% YoY to 918 mn units in 2015 LTE still led by Qualcomm, but MediaTek could quadruple its units We prefer ASE, view MediaTek attract exiting 1Q15, but see competition emerging in foundry We toned down our positive view on TSMC since the financial crisis due to increasing customer concentration risks, moderating growth and rising competition, with valuation being back in line with its historical average. Results (Thursday) should still be strong due to 20nm/28nm offering good yields and NT$ depreciation (NT$1 EPS lift to 2015), but competition should stay in focus through In driver ICs, we like Chipbond, ChipMOS, Himax, Novatek, and Focaltech. In brands, we favour ZTE and Lenovo. In components, our top picks are AAC, Largan and Catcher. China Smartphone Sector 3

4 Sep/99 May/00 Jan/01 Sep/01 May/02 Jan/03 Sep/03 May/04 Jan/05 Sep/05 May/06 Jan/07 Sep/07 May/08 Jan/09 Sep/09 May/10 Jan/11 Sep/11 May/12 Jan/13 Sep/13 May/14 Jan/15 Jan/03 Sep/03 May/04 Jan/05 Sep/05 May/06 Jan/07 Sep/07 May/08 Jan/09 Sep/09 May/10 Jan/11 Sep/11 May/12 Jan/13 Sep/13 May/14 Jan/15 Valuation summary Figure 9:CS Asian semiconductor valuation summary (in millions, unless otherwise stated) Market Cap Price Target Inv'ment Target P/E P/B ROE US$mn 12-Jan Local Curcy Rating upside Asian semiconductor coverage Foundry TSMC 107, NTRL 9.8% % 26.6% UMC 6, NTRL -7.9% % 5.3% SMIC 3, NTRL 11.1% % 5.1% Vanguard Semi 2, NTRL -3.1% % 20.7% Hua Hong Semi 1, OPFM 43.9% % 6.1% Total 119, % 25.2% Packaging & testing ASE 9, OPFM 24.7% % 18.1% SPIL 4, OPFM 18.7% % 17.4% Powertech 1, OPFM 14.3% % Amkor 1, NTRL 20.3% % 14.3% ASM Pacific 29, OPFM 35.8% % 26.3% Total 15, % 21.6% IC design MediaTek Inc. 23, OPFM 10.7% % Realtek Semiconductor 1, NTRL -3.9% % 17.4% WPG Holdings Ltd 1, NTRL 13.8% % 14. Total 27, % 22.7% China smartphone supply chain top picks Driver IC Chipbond 1, OPFM 22.4% % 16.9% ChipMOS 1, OPFM 22.4% % 16.9% Himax 1, OPFM 46.5% % 20.6% Novatek 3, NTRL -3.1% % 30.2% Total 7, % 22.3% Components AAC 7, OPFM 20.3% % 29.3% Largan 9,779 2, ,800.0 OPFM 20.7% % 39.9% Catcher 194, OPFM 32.4% % 19.9% Total 16, % 23.3% Handset brands ZTE 7, OPFM % 13.2% Lenovo 15, OPFM 20.8% % 23.6% Total 23, % Figure 10: ASE trading at a discount on a P/B basis NT$ ASE Historical PB Band x 2.5x 1.6x 0.8x Figure 11: SPIL's historical P/B band NT$ SPIL Historical PB Band x 2.5x 1.8x 1.2x 0 5 China Smartphone Sector 4

5 Table of contents Focus table and charts outlook: Looking for profits in emerging markets and LTE 3 Raising global smartphone units on China exports 3 Growth still from emerging markets and extension into wearables/iot 3 LTE transition in focus; Qualcomm leading, but MediaTek emerging 3 Stock picks in the China smartphone space 3 Valuation summary 4 Raising global smartphone units on China exports 6 Smartphone industry slows to single digits in our baseline case 6 Sustained penetration and replacement cycles could provide upside to the industry baseline 7 Growth still from emerging markets and extension into wearables/iot 10 Low 3G penetration driving a 4G replacement cycle 10 Emerging market channel still has some growth legs 13 Asian chipsets may pass the feature phone peak 13 Low- to mid-tier smartphones more of the volumes bit to become ubiquitous in Tablet maturation extends to emerging markets 16 LTE transition in focus; Qualcomm leading, but MediaTek emerging 21 China seeing an acceleration of LTE 21 Chipset volumes now shifting toward LTE 22 Qualcomm the LTE leader, but others players catching up in emerging markets 23 MediaTek maintaining good 3G share and now ramping into the 4G market 26 Intel had strong tablet success, but now shifting strictly from share to now also improving profitability 29 Spreadtrum advancing its new roadmap and now backed by Intel 32 Marvell: Stays firmly committed to winning in mobile 34 NVIDIA and Broadcom exiting merchant basebands 35 Smartphone display components: Higher resolution; more integration 35 Smartphone components 40 Stock picks in the China smartphone space 42 TSMC: Competitive landscape in focus for Customers more concentrated and diversifying as Tier-two foundries ramp 44 Tier-two suppliers are finally viable options on 28nm 47 Technology, CFs, and GM support keeps us from being too negative 48 SMIC: 28nm and Chinese customers driving the 2015 outlook 50 MediaTek: Fighting the competition to preserve growth and margins with the shift to LTE 52 LTE in focus: 1H15 the toughest period on competitive pressures 53 A couple of upside areas not in estimates high-end LTE, Samsung and developed markets 55 Maintain OUTPERFORM 56 WPG: Leading Asian IC distributor 57 Back-end: Moderate growth should continue in Capex may decline after stepping up in Profitability: GMs back on an improving trend 60 ASE growth driver from SiP continues 60 SPIL momentum milder after the strong 2014 ramp 62 Mobile devices: Chinese brands gaining share on export growth 63 TCLC: Export driving shipment and profit growth 65 Coolpad: Business model under transition 66 ZTE: 4G BTS & smartphone share gain lifting 2015 OP 68 Lenovo: Solid position with three-pronged strategy to succeed in smartphones 69 China Smartphone Sector 5

6 Raising global smartphone units on China exports In our annual smartphone outlook, our global hardware team raised its smartphone unit estimates due to continued strong penetration of smartphones in emerging markets. We raise our smartphone unit estimates for 2014/2015 by 3%/5% from 1,258/1,475 mn to 1,290/1,542 mn, reflecting industry unit growth moderating from +27% YoY in 2014 to + YoY in Figure 12: Raising our 2015 smartphone estimates; growth maintained (in millions, unless otherwise stated) E 2016E 2017E New Estimate 304, , ,476 1,019,432 1,290,513 1,542,237 1,757,676 1,937,963 YoY 62% 47% 41% 27% 14% 1 Old Estimate 298, , ,258 1,032,231 1,257,603 1,475,385 1,688,637 1,865,594 YoY 58% 53% 43% 22% 17% 14% 1 Increase (%) % 0.6% -1.2% 2.6% 4.5% 4.1% 3.9% Higher smartphone estimates are being driven by the rise of Chinese brands, growing at 62% in 2014 versus +8% growth for traditional top-8 tier-ones (Apple, Samsung, Nokia, Sony, Motorola, HTC, LG and Blackberry). We project this growth will continue but moderate, with China growing at 28% YoY and traditional tier-ones at +13% YoY in The rise of China smartphone brands is being paralleled by Asian chipset suppliers, with MediaTek growing units from 223 mn to 358 mn in 2014 and according to our estimates growing to 469 mn in 2015 and total Asian chipset shipments at 717 mn in 2014 and 918 mn in Even assuming a 1 discount to these volumes, we estimate that smartphones powered by these chips will account for over half of industry volumes in 2014/2015. Figure 13: China smartphone brands and chipsets growing at twice the industry rate (in millions, unless otherwise stated) E 2015E 2016E 2017E Top 8 traditional tier-one vendors YoY Growth 18% 22% 8% 13% 8% -15% Chinese smartphone vendors ,197 YoY Growth 477% 96% 62% 28% 36% Smartphone vendors ,019 1,291 1,542 1,758 1,938 YoY Growth 47% 41% 27% 14% 1 Mediatek units Spreadtrum units Leadcore units Hi-Silicon units Foreign vendors into Chinese brands Asian chipsets into China phones ,095 1,268 YoY Growth 183% 92% 49% 28% 16% Discount / overlap factor Asian shipments after discount ,268 Less Brands using Asian chipsets Total based on chipset shipments ,019 1,291 1,542 1,758 1,938 CS Smartphone Estimates ,019 1,291 1,542 1,758 1,938 YoY Growth 47% 41% 27% 14% 1 Smartphone industry slows to single digits in our baseline case Despite higher smartphone forecasts, industry growth is decelerating to single digits from 2015 in our global industry model, as ASPs are coming down about 1 YoY with the mix shift to emerging markets. The total handset industry in 2015 is projected to grow 4% YoY to US$354 bn and the smartphone industry by 8% YoY to US$347 bn. Raising global smartphone forecasts for 2014/2015 by 3%/5% to 1,290/1,542 mn, up 27%/ YoY China smartphones and Asian chipsets to grow 28% YoY in 2015, double the rate of that of traditional tier-ones Smartphone industry revenue +8% YoY to US$347 bn in 2015 China Smartphone Sector 6

7 Figure 14: Summary of Credit Suisse's handset and smartphone estimates (in millions, unless otherwise stated) Handset summary CAGR Global subscriptions 5,175 5,780 6,155 6,545 6,890 7,215 7,538 7,861 4% Global handset shipments 1,595 1,715 1,738 1,847 1,963 2,067 2,155 2,228 4% YoY 19% 8% 1% 6% 6% 5% 4% 3% Handset ASPs $138 $151 $166 $174 $173 $171 $168 $160-3% YoY 9% 1 5% -1% -2% -5% Handset revenue $220,473 $258,905 $288,934 $321,207 $339,796 $354,200 $361,842 $357,203 2% YoY 19% 17% 12% 11% 6% 4% 2% -1% Smartphone summary CAGR Global smartphone subscribers ,215 1,777 2,418 3,092 3,762 4,400 22% % of mobile subscribers 1 14% 27% 35% 43% 5 56% New adds Replacements ,088 1,300 26% Smartphone units ,019 1,291 1,542 1,758 1,938 15% YoY 76% 62% 47% 41% 27% 14% 1 Smartphone ASPs $363 $361 $329 $283 $250 $225 $203 $183-1 YoY 1% -1% -9% -14% -12% Smartphone revenue $110,596 $178,393 $238,557 $288,439 $323,147 $347,562 $356,502 $353,762 3% YoY 78% 61% 34% 21% 12% 8% 3% -1% The lower unit forecasts also parallel a slowdown in unit growth for the Asian chipset suppliers, which are still witnessing double-digit unit declines in the feature phone market. We estimate Asian chipset shipments increased +6% YoY in 2014 to 1.15 bn units and to increase +3% YoY in 2015 to 1.19 bn. Figure 15: Asian chipset vendors' growth share now more moderate (in millions, unless otherwise stated) E 2015E 2016E 2017E Mediatek units MStar units Spreadtrum units RDA units Leadcore units Hi-Silicon units Asian baseband shipments ,091 1,152 1,186 1,228 1,308 YoY Growth 59% 33% 18% 15% 6% 3% 4% 7% % of industry 36% 21% 43% 12% 49% 5% 56% 9% 58% 2% 58% 1% 58% 2% 6 3% CS Handset Estimates 1,652 1,852 1,919 1,941 1,990 2,056 2,119 2,166 YoY Growth 21% 12% 4% 1% 2% 3% 3% 2% CS Prior Estimates 1,616 1,852 1,975 2,086 2,149 2,209 2,275 2,334 YoY Growth 17% 15% 7% 6% 3% 3% 3% 3% Sustained penetration and replacement cycles could provide upside to the industry baseline While our baseline industry model projects a sharp slowdown to single-digit revenue growth, sustained penetration rates of smartphones in emerging markets and replacement rates holding at 2014 levels would provide upside to our industry model. Our industry smartphone model slows to a 3.1% revenue CAGR for , although we note that the model has smartphone subscriber penetration gains slowing from 7.9% penetration added in 2014 to an average of 7.2% over , and replacement rates decelerating from 2.7 to 2.9 years. Asian chipset shipments +6%/+3% YoY in 2014/2015 Smartphone revenue CAGR at 3% through 2017E, but an upside scenario still implies a 7% CAGR China Smartphone Sector 7

8 Penetration Pace Penetration Pace Figure 16: Mobile growth could stay higher with faster penetration/replacement cycles CS Global Model CAGR Mobile subscribers 3,866 4,495 5,175 5,780 6,155 6,545 6,890 7,215 7,538 7, % Smartphone subscribers ,215 1,777 2,418 3,092 3,762 4, % % penetration 6.7% 7.4% 9.7% 13.7% 19.7% 27.2% 35.1% 42.9% 49.9% % Net additions Replacements ,088 1, Replacement rate Smartphone units ,019 1,291 1,542 1,758 1, % YoY 46.7% 40.5% 26.6% 19.5% % ASPs $366 $359 $363 $361 $329 $283 $250 $225 $203 $ YoY 2.1% 2.1% 2.1% 2.1% -8.9% % Revenue $55.1 $62.1 $110.6 $178.4 $238.6 $288.4 $323.1 $347.6 $356.5 $ % Smartphone Revenue YoY 33.7% 20.9% % 2.6% -0.8% Upside Penetration CAGR Mobile subscribers 3,866 4,495 5,175 5,780 6,155 6,545 6,890 7,215 7,538 7, % Smartphone subscribers ,215 1,777 2,418 3,105 3,843 4, % % penetration 6.7% 7.4% 9.7% 13.7% 19.7% 27.2% 35.1% % 7.9% Net additions Replacements ,135 1, % Replacement rate Smartphone units ,019 1,291 1,571 1,872 2, % YoY 46.7% 40.5% 26.6% 21.7% 19.2% 17.1% ASPs $366 $359 $363 $361 $329 $283 $250 $225 $203 $ YoY 2.1% 2.1% 2.1% 2.1% -8.9% % Revenue $55.1 $62.1 $110.6 $178.4 $238.6 $288.4 $323.1 $353.9 $379.8 $ % YoY 33.7% 20.9% % 7.3% 5.4% We would note an upside scenario where penetration remains stable at the current 7.9% rate and the replacement rate remains stable at 2.74 years. This would raise the E CAGR from 3.1% to 7.4% and keep smartphones at mid-to-high single-digit growth rates through 2017, creating some continued investment opportunities. Figure 17: Smartphone revenue CAGR near 8% if replacement and penetration rates maintain 2014 levels Smartphone Replacement Years $ % 6.2% 6.2% 6.2% 6.2% 6.2% 6.9% 6.9% 6.9% 6.9% 6.9% 6.9% 7.4% 7.4% 7.4% 7.4% 7.4% 7.4% 7.9% 7.9% 7.9% 7.9% 7.9% 7.9% 8.4% 8.4% 8.4% 8.4% 8.4% 8.4% 8.9% 8.9% 8.9% 8.9% 8.9% 8.9% 9.4% 9.4% 9.4% 9.4% 9.4% 9.4% Figure 18: Smartphone units could reach 2.19 bn in 2017 versus the baseline forecast of 1.94 bn units Smartphone Replacement Years $2, Smartphones have now penetrated 35% of mobile subscriber base in 2014, similar to penetration rates for handsets in 2005, implying more penetration in emerging markets still ahead. Our forecast through 2017 pegs smartphone penetration reaching 6 by that year at 4.5 bn smartphone subscribers, equal to where handset penetration reached at the dawn of the financial crisis in % 1,938 1,965 1,988 2,013 2, % 2,005 2,033 2,057 2,082 2, % 2,072 2,101 2,125 2,151 2, % 2,139 2,168 2,194 2,220 2, % 2,206 2,236 2,262 2,289 2, % 2,273 2,304 2,330 2,358 2, % 2,341 2,372 2,399 2,427 2,456 China Smartphone Sector 8

9 95/05 96/06 97/07 98/08 99/09 00/10 01/11 02/12 03/13 04/14 05/15 06/16 07/17 08/18 09/19 10/20 11/21 96/06 97/07 98/08 99/09 00/10 01/11 02/12 03/13 04/14 05/15 06/16 07/17 08/18 09/19 10/20 11/ / / / / / / / / / / / / / / / /2023 Figure 19: Smartphone penetration in 2014 at 35%, where handsets were in 2004 (in millions, unless otherwise stated) Subscribers (mn) 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Penetration (%) Handset subscribers Handset penetration Smartphone subscribers Smartphone penetration The smartphone cycle is happening much faster than the original handset penetration cycle a decade earlier in emerging markets due to rising affordability, lower-cost smartphones, full turnkey chipset reference designs and cannibalisation by smartphones of other consumer devices (PNDs, digital cameras, music players and gaming). Smartphones have reached 1.3 bn units four years faster than handsets reached 1.3 bn units and emerging market smartphones are now at 1 bn units, 3.5 years faster than handsets reached that level. Figure 20: Smartphone penetration three years faster than handsets ten years ago Units (mn) 2,000 1,800 1,600 1,400 1,200 1, years 4 years 4 years Figure 21: Emerging market smartphones also at a threeyear faster pace versus emerging market handsets Units (mn) 1,800 1,600 1,400 1,200 1, years 3.5 years 4 years Handsets (Actual) Smartphones (CS) Emerging Mkt Handsets (Actual) Emerging Mkt Smartphones (CS) China Smartphone Sector 9

10 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015E 2016E 2017E Growth still from emerging markets and extension into wearables/iot With developed markets having slowed to low single-digit growth, emerging markets still fuel some growth, with wearables and Internet of Things' applications providing adjacent addressable markets for baseband, processing, connectivity and sensors. Emerging markets are still extending growth for smartphones for another few years. Relative to developed markets at a 5% CAGR between 2014 and 2017, we project China has a 9% CAGR and other emerging markets a 24% CAGR, owing to rising penetration in India, the Middle East, Brazil and Africa. The faster growth from these areas is lifting emerging market smartphones from 7 to 8 of smartphone units by China and emerging market smartphones at 9%/24% CAGRs versus developed market's 5% over E Figure 22: Emerging markets to approach 8 of the global smartphone market Emerging market smartphones (mn) 1,600 1,400 1,200 1, % of industry China Rest of Asia Pacific Latin America CEMA % of global market Source: Gartner, Credit Suisse estimates Market growth is now maturing in China so the focus should shift to other emerging markets. We project China will see a 9% CAGR from 420 mn units in 2014 to 473 mn in 2015 and 538 mn by Emerging markets that are key targets for Chinese brands exporting handsets should still grow faster, from 530 mn in 2014 to 706 mn in 2015, and 1,010 mn by Figure 23: Emerging markets and China continue to outpace developed markets E 2014E 2015E 2016E 2017E China % YoY 151% 136% 64% 13% 1 4% Rest of Asia Pacific % Latin America % CEMA % Other Emerging , % YoY 62% 35% 57% 51% 33% 22% 17% Developed % YoY 43% 21% 11% 8% 7% 4% 3% Total industry , , , , , % YoY 62% 47% 41% 27% 14% 1 Low 3G penetration driving a 4G replacement cycle The Chinese market is now becoming more of an upgrade market for second smartphone buyers upgrading from 2G and 3G to 4G. China Mobile's inferior 3G TD-SCDMA network has left its penetration still lagging the other carriers. Even with a late 2014 acceleration of China Smartphone Sector 10

11 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 LTE, 3G+4G penetration is only 4 of its 800 mn subscriber base, lagging 5 to China Unicom and 6 to China Telecom. China Mobile is now on target to pass its 80 mn LTE unit target in 2014 and targets 150 mn units in The other carriers, China Unicom and China Telecom, are deploying LTE so should see accelerating growth this year. Figure 24: China Mobile's 3G+4G forms only 39% of its 800 mn subs, lagging the smaller carriers Figure 25: China Mobile's net adds now accelerating 4G net adds (mn) China Mobile China Unicom China Telecom The China smartphone market is now dominated by local Chinese brands whose offerings have improved in quality, branding and R&D, with better support from turnkey chipset reference designs. The traditional tier-one market share is expected to decline from 6 in 2011 to by 2015, and the top-5 Chinese brands (Hauwei, Xiaomi [not listed], Lenovo, ZTE and Coolpad) now have half the local marke,t and other brands and whitebox have a further 3 share. Figure 26: China s smartphone market to grow from 420 mn in 2014 to 540 mn by 2017E (in millions, unless otherwise stated) China Smartphone Market E 2015E 2016E 2017E CAGR Samsung % Apple % Nokia % HTC % Motorola Sony % BlackBerry Traditional Tier One's % YoY Growth 29% 39% -7% 6% 6% 4% Share 6 33% 28% 22% Huawei % Xiaomi % Lenovo % ZTE % Coolpad Top 5 Chinese Brands % YoY Growth 292.5% 82.5% 48.9% 16.3% 13.7% 5.2% Share 21.5% 35.7% 39.7% 49.4% 51.1% 52.9% 53.6% Other brands/whitebox % YoY Growth 31 68% 7% 11% 6% 2% Share 18% 31% 32% 29% 28% 27% 27% China Smartphones % YoY Growth 136% 64% 13% 1 4% We expect Tier-ones to continue to undergrow relative to local Chinese brands. Every tierone has lost market share, with even Samsung dropping share from 18% to 13% in 2014 and Nokia, HTC, Motorola (now part of Lenovo) and Sony all declining in shipments. As a group, Tier-one shipments declined from 98 mn to 92 mn in 2014 while the top-5 in China grew from 139 mn to 208 mn, and the smaller Chinese brands still grew from 113 mn to 120 mn. Even globally, China's quarterly shipments are now 2x Samsung's shipment rate and almost 3x Apple's shipments. Chinese local brands now dominate the China smartphone market China Smartphone Sector 11

12 Q104 Q304 Q105 Q305 Q106 Q306 Q107 Q307 Q108 Q308 Q109 Q309 Q110 Q310 Q111 Q311 Q112 Q312 Q113 Q313 1Q14 3Q14 Figure 27: Chinese brands leading the growth Units (000) 180, , , , ,000 80,000 60,000 40,000 20,000 0 Nokia Research in Motion Motorola Apple Sony HTC Samsung LG Chinese brands Figure 28: Tier-one's outpaced by Chinese brands Units (mn) China brand share (%) % % % % E 2015E 2016E 2017E Traditional Tier One's Top 5 Chinese Brands Other brands/whitebox Chinese brand share Source: Gartner Chinese smartphone brands are making a big push now on LTE, introducing a number of low-cost models with Snapdragon 410 and MediaTek's MT6732 quad-core and also using MediaTek's flagship high-end MT6795. Figure 29: Chinese smartphone vendors improving in quality and specifications with lower cost LTE products Source: Company data, Credit Suisse Research We note that the whitebox and other brands which are expanding as Tier-two brands (Hisense, BBK/Vivo, Oppo, Gionee, Tianyu/K-Touch, TCL) (all not listed) are becoming household names in China and emerging markets, as the quality and volumes grow. Our bottom-up analysis of Asia-built smartphones shows the top Chinese brands in the long term would account for 65% of the market for Asian-built smartphones, with whitebox brands commanding the other 35% of volumes, a similar mix to feature phones. Figure 30: Chinese suppliers continue to ramp up their volumes China brand units (mn) E 2015E 2016E 2017E CAGR Huawei % Lenovo Xiaomi % ZTE % Coolpad % Gionee % Oppo % TCL/Alcatel % Hisense % Tianyu % G-Five % Bird % BBK/Vivo % Others % China brand units (mn) , , % Growth (YoY) 183% 92% 49% 28% 16% China Smartphone Sector 12

13 E E 2016E 2017E Emerging market channel still has some growth legs Smartphones are rising to a high portion of handset sales in China, but still lagging a bit behind in emerging markets. Smartphones are projected to grow from 74% to 81% of device sales to lift units +13% YoY to 473 mn units in The export channel for China brands into other emerging markets is a bit less penetrated into a larger base. Emerging market smartphones were 54% of 986 mn units in 2014, but could rise to 92% of 1,099 mn devices in 2017E, a 24% CAGR from here, outpacing the 9% CAGR in China. Emerging market smartphone penetration only at 69% versus 81% in China Figure 31: Chinese penetration of devices faster than other emerging markets (in millions, unless otherwise stated) Penetration of devices E 2015E 2016E 2017E CAGR China handsets % China smartphones % % of devices 42% 64% 74% 81% 86% 87% Emerging mkt handsets , , , % Emerging mkt smartphones , % % of devices 19% 23% 37% 54% 69% 81% 92% Global handsets 1, , , , , , , % Global smartphones , , , , , % % of devices 27% 38% 52% 65% 75% 83% 9 Asian chipsets may pass the feature phone peak The market opportunity for Asian chipsets supplying into China handsets peaked at 800 mn units in 2011 out of a 1.4 bn global feature phone market. In smartphones, we believe the figure could be even higher, as mobile penetration rates are still rising in emerging markets, smartphone functionality is much higher than feature phones and local brands and chipsets, with the help of a standardised Android OS, and a more developed supply chain could improve on their penetration rates achieved in feature phones. When the feature phone market peaked in 2011, Asian chipset suppliers had secured about a 5 share of the chipset market. As tier-one chipset and handset suppliers pulled out of the 2G market, Asian chipset suppliers have grown to 8 of the market share. We believe Asian chipsets are now at 35% market share in smartphones and could grow to 45-5 by 2017, due to the rising mix of emerging markets in total industry device sales. Smartphones do not need to peak at the 800 mn units capped for feature phones, as that upside after 2011 was curtailed as smartphones began replacing feature phones. In this case, Asian chipsets can ultimately target a ramp-up into the total 2 bn handset industry shipment base as they convert into smartphones. Figure 32: Asian feature phone shipments peaked at 800 mn in 2011 Chipset units (mn) Asian share (%) 2,000 1,800 1,600 1,400 1,200 1, Figure 33: Asian chip suppliers continue to penetrate smartphones Asian feature phones reached 800 mn units before saturating Chipset units (mn) Asian share (%) 2, ,800 1,600 75% 1, ,200 1,000 45% % Asian chipsets Asian share incl. whitebrands (%) Feature phones incl. whitebrands We looked at the success of Chinese brands in feature phones to gauge potential for their smartphone penetration. Local brands have now reached an 8 smartphone share, approaching the 80-9 range in feature phones since In the global market, however, upside is possible, with Chinese brand share now reaching 45% of global smartphone shipments, but still short of the 6 market share reached in feature phones. Asian chipsets Smartphones Asian share (%) China Smartphone Sector 13

14 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 Figure 34: Chinese smartphone brand share at 8 in China, still with room to reach 9 in feature phones Figure 35: Chinese smartphone brand share at 45% of global smartphones, still below the 6 in feature phones Q14 2Q14 1Q14 4Q13 3Q13 2Q13 1Q13 4Q12 3Q12 2Q12 1Q12 4Q11 3Q11 2Q11 1Q11 4Q10 3Q10 2Q10 1Q10 Chinese brand smartphone share Chinese brand FF share Chinese brand smartphone share Chinese brand FF share Source: Gartner Source: Gartner Low- to mid-tier smartphones more of the volumes The availability of better-quality low-cost smartphones with more advanced specs is compressing the mid-to-high tier of the smartphone market. We project sub-us$100 smartphones to stay at of industry volumes, the upper tier of the mass market at US$ to reach 35% of volumes, the former mid-tier of US$ to squeeze to 15% of units, and the upper tier of US$400+ to remain at of industry volumes. The mid-tier of the market is compressing from 4 to 15% of volumes Figure 36: Low- to mid-end smartphones to pass 5 in E 2016E 2015E $500+ $400<$500 $200<$400 $100<$200 <$100 Figure 37: Sub-US$200 smartphones continue to grow Smartphone market (mn) 2,000 1,600 1, Sub $200 % of industry (%) 75. <$100 $100<$200 $200<$400 $400<$500 $500+ % <$ E 2016E 2017E The mid-range in particular is witnessing a squeeze as the low-cost Chinese brands and whitebox production expand capabilities using: (1) higher-resolution screens; (2) more advanced cameras; (3) quad- and octa-core chipsets; (4) LTE chipsets from Qualcomm, Marvell and MediaTek; (5) a growing supply chain of Chinese component suppliers; (6) a large channel of Chinese-branded companies and whitebox that operate on lower GMs; (7) R&D; and (8) manufacturing and component costs, and an open and online channel that sells in emerging markets at thinner marketing and margins. Overall sub-us$200 smartphones still growing The low-end is now splitting into several categories of devices, including sub US$50 entrytier smartphones from MediaTek and Spreadtrum, high-end 3G quad- and octa-core 5-6" display smartphones from MediaTek and Qualcomm, and an expanding base of LTE entry level smartphones that can bring LTE smartphones to under US$100 factory price. China Smartphone Sector 14

15 Figure 38: Chinese vendors bring a 5" LTE smartphone to emerging markets at of the retail price of an iphone Component Specs 16GB 64GB 128GB Component Specs 8GB Display & Touchscreen 4.7" Retina Display with in-cell touch: 1334x750 $45.00 $45.00 $45.00 Display & Touchscreen 5" IPS 1280x720HD Capacitive Touch LCD $24.00 Application Processor 64-bit A8 on 20nm at TSMC $22.00 $22.00 $22.00 Application Processor No discrete AP $0.00 M8 Co-processor NXP M8 $2.50 $2.50 $2.50 Co-Processor No co-processor $0.00 Wireless Modem - Baseband, RF QCOM MDM9625M + WTR 1625L + WFR 1620 & WFR QFE1000 Source: isuppli, Chipworks, Company data, Credit Suisse estimates $35.00 $35.00 $35.00 Processor, Modem and Connectivity (WLAN, Bluetooth, FM, GPS), Power Mgmt Mediatek MT6732 or Qualcomm Snapdragon 410 $13.00 WLAN / BT / FM / GPS BRCM: BT 4.0+FM+Wifi 11ac in a Murata or USI Module $6.00 $6.00 $6.00 WLAN / BT / FM / GPS No discrete connectivity $0.00 NFC IC NXP 65V10 + PN544 controller + AMS AS3923 Booster IC $2.50 $2.50 $2.50 NFC IC No NFC $0.00 Memory (DRAM) 1 GB LPDDR 3 (MU) $6.75 $6.75 $6.75 Memory (DRAM) 1 GB LPDDR 3 (Hynix), lower grade specification $6.00 Memory (NAND) NAND: Hynix 16GB, Toshiba 64/128GB (TLC %) $5.60 $19.20 $38.40 Memory (NAND) NAND: Micron, Toshiba or Hynix 8GB $3.00 Power amplifier + Switch User Interface & Sensors Multi-band PA module for global regions (SWKS LTE Low band and Mid band, Avago LTE High band PAD and PA, FBAR, TQNT 3G/EDGE PA, Murata, RFMD Antenna Switch) Accelerometer (Bosch 3-axis, Invensense 6-axis), e- compass (AKM), Gyro (STM), Temperature, Touch IC (BRCM BCM TI 343S0694 transmitter) $10.00 $10.00 $10.00 Power amplifier + Switch Multi-band PA module for regional markets $4.00 $12.00 $12.00 $12.00 User Interface & Sensors Accelerometer, e-compass (AKM), Gyro (STM), Temperature, Touch IC (FocalTech) Fingerprint sensor USI module + Authentec IC $8.00 $8.00 $8.00 Fingerprint sensor None $0.00 Analog Dialog PMIC, Qualcomm PM8019 PMIC, Passives, TI, MXIM, ISIL $7.50 $7.50 $7.50 Analog Integrated PWM, Sub PMIC (charger, LED driver) $1.00 Audio Codec Cirrus Logic $3.00 $3.00 $3.00 Audio Codec Integrated Codec $0.00 Cameras 8MP (Sony new sensor + Largan) MP (Sony) $15.50 $15.50 $15.50 Cameras 8MP (Sony or Omnivision Sensor + Largan Lens) + 2MP Front (Galaxy Core) $9.00 Battery 1810 mah $4.00 $4.00 $4.00 Battery 1,810 mah (lower grade spec) $3.50 PCB 10-layer Any Layer Stacked Via HDI PCB + flex PCB $4.00 $4.00 $4.00 PCB Low-end HDI $2.20 Charger $3.00 $3.00 $3.00 Charger $0.90 Acoustics AAC speaker box, receiver, microphone (Knowles) $5.70 $5.70 $5.70 Acoustics Antenna, Speaker, Microphone $3.20 Haptics AAC haptics $2.00 $2.00 $2.00 Haptics Basic haptics vibration $0.50 Casing Metal Casing (10 metal) $30.00 $30.00 $30.00 Casing Plastic or Metal Stamping $1.50 Box Contents $7.50 $7.50 $7.50 Box Contents $1.50 Total BOM cost $ $ $ Total BOM cost $75.80 Manufacturing (~7% GM) $18.00 $18.00 $18.00 Manufacturing (6% GM) $4.55 IP licensing (7% - QCOM, ARM, Imagination, Nokia etc) $16.63 $17.58 $18.92 IP licensing (7% - QCOM, ARM, Imagination, Nokia etc) $5.31 BOM + Manufacturing + IP $ $ $ BOM + Manufacturing + IP $85.65 Apple Mark-Up (4 GM) $ $ $ Vendor GM (1 GM) $95.17 Retail & Distribution Mark-Up () $ $ $ Retail & Distribution Margin () $ $2.50 With Chinese LTE smartphones making the US$ category more competitive, we now expect sub-us$200 smartphones to account for 57% of industry volumes or 879 mn units in 2015, up more than 5 from 672 mn units in Chinese LTE smartphones to account for 57% of mix in 2015 Figure 39: Sub-US$200 smartphones gaining share of the market (Unit: mn) E 2016E 2017E <$ $100-$ Total Sub US$ , ,162.8 YoY % 94% 53% 31% 16% 14% % of industry 14% 21% 31% 43% 52% 57% 58% 6 64-bit to become ubiquitous in 2015 We are now seeing most vendors bring out 64-bit versions alongside Android 5.0 Lollipop, the first version of Android able to take full advantage of the 64-bit processors. The feature will serve as an additional marketing feature and the new ARM 64-bit v.8 architecture (A53/A57) also has other architectural enhancements for better performance and lower power (ARM noting 130mW power consumption on 28nm HPM). Figure 40: ARM 64-bit processors benchmarking at higher performance than 32-bit All cores running at 1.2GHz DMIPS CoreMark SPECint2000 ARM Cortex A5 1, ARM Cortex A7 2,280 3, ARM Cortex A9 r4p ARM Cortex A53 (64-bit) 2,760 4, Source: Anandtech Qualcomm announced it would offer its Snapdragon 410 based on the 64-bit ARM Quad Cortex A53, integrating the LTE modem and running at GHz built on 28nm LP for shipment in 2H14. MediaTek also planned its complete 4G LTE refresh in 1H15 with 64-bit. China Smartphone Sector 15

16 Tablet maturation extends to emerging markets We estimate that the global tablet market slowed materially in 2014, growing only 6% YoY to 274 mn versus +63% YoY in Shipments across ipad, Samsung, Amazon and the whitebox all stalled out due to long replacement rates, cannibalization by larger smartphones and limited innovation. We believe the whitebox market grew from 100 mn units to 120mn units but was well short of some initial projections for mn units. Tablet market to grow 6% and 8% YoY in 2014/2015, down significantly from 63% YoY in 2013 Figure 41: Bottom-up tablet market projected to grow at 8% YoY to 295 mn units in Years Mar-14 Jun-14 Sep-14 Dec-14E CY2011 CY2012 CY2013 CY2014E Apple 16,350 13,276 12,316 20,321 40,497 65,736 74,208 62,263 63,254 65,801 71,592 Samsung 10,791 8,635 9,705 10,869 5,711 16,490 39,731 40,000 47,096 48,473 60,468 Amazon ,230 4,748 10,436 9,779 6,777 7,658 8,037 9,923 Asus 2,579 2,526 3,405 2,730 1,730 6,843 12,209 11,240 13,658 14,992 19,436 Lenovo 2,045 2,374 3,063 2, ,101 7,782 9,958 12,467 13,243 17,277 Acer , ,002 1,496 4,855 3,928 4,829 7,496 10,181 Microsoft ,281 2,411 3,309 3,998 5,553 HPQ ,985 2,143 2,430 2,550 3,149 Motorola (bought by Lenovo) , Dell ,684 1,911 2,005 2,476 Blackberry , Barnes & Noble ,344 1,911 1,306 1,062 1,202 1,261 1,557 RCA , ,190 3,657 6,020 6,318 8,021 Huawei ,119 1,539 2,499 3,834 4,747 6,170 Verizon , ,844 4,120 4,497 5,862 Advan ,817 2,316 2,748 3,702 HTC TCL , ,062 4,000 5,000 6,500 Total branded tablets 36,240 32,466 37,338 48,348 62, , , , , , ,422 Others (industry model) 13,766 15,313 18,312 18,686 13,299 35,698 61,044 66,077 73,093 75,828 49,373 Industry forecast 50,006 47,779 55,650 67,033 76, , , , , , ,795 Additional Whitebox 13,396 14,030 13,676 12, ,302 38,956 53,454 51,907 54,172 85,627 Whitebox total 27,162 29,343 31,988 31,037 13,299 50, , , , , ,000 Grand Total 63,402 61,809 69,326 79,385 76, , , , , , ,422 YoY % 8.6% 21.8% 12.3% -9.7% 108.1% 63.3% 5.9% 10.8% % QoQ % -27.9% -2.5% 12.2% 14.5% The tablet market now stretches from very cheap entry-level models for US$25-40 factory prices for entertainment (games, movies and music) to mini-pad 7.85" with ipad-like specs, 3G and now 4G mobile tablets still dominated by MediaTek and a rising class of Intel inside tablets. Intel has aggressively engaged the local supply chain with its reference design for Android and Windows tablets combining subsidies, marketing support, branding and close work with local ODM suppliers. Factory prices for Intel tablets now start below US$100, much lower than the US$ solutions in the market months ago. Figure 42: Low-cost white-box tablets product line-up for 2015 Ultra-low-end Mini Pad High-end 3G Mobile Ultra-high-end Intel Intel Chipset CPU Allwinner Dual Core Rockchip Quad core Mediatek Quad core Mediatek Dual core Rockchip Quad core Intel Dual core Intel Dual core A23 1.5GHz RK3188T 1.4GHz MT GHz MT GHz RK GHz Bay Trail x86 Bay Trail x86 Graphics ARM Mali-400 ARM Mali-400 ARM Mali-450 ARM Mali-400 ARM Mali-400 Intel In-house GPU Intel In-house GPU Screen Size 7" 7.85" 10.1" 7" 9.7" Retina 7.0" 10.1" Resolution 800 x x x x x x x 800 Video NA NA NA NA NA 1080p 2160p DRAM / Flash 512MB DDR3/4GB 1GB DDR3 / 8GB 1GB / 8GB 1GB / 8GB 2G DDR3 / 16GB 1GB / 16GB 2GB / 16GB OS Android 4.4 Android 4.4 Android 4.4 Android 4.4 Android 4.4 Windows 8.1 Windows 8.1 Camera 0.3MP + 0.3MP 2MP + 2MP 0.3MP + 2MP 0.3MP + 2MP 2MP + 2MP 2MP + 2MP 2MP + 5MP 3G built-in NO NO NO YES NO YES YES Factory price $30 $85 $62 $60 $132 $78 $140 Source: Company data, Credit Suisse Research China Smartphone Sector 16

17 With a long-term view, tablets are pacing the very early stage of the feature phone market in the late 1990s and smartphone market starting from 2005 in their ramp-up towards mn units. Mobile communications, rising functionality and display size of emerging market smartphones into the phablet category could ultimately cap the market around 400 mn units, as handsets did when they temporarily matured at those levels in Figure 43: Whitebox share gains now slowing down Whitebox Whitebox Whitebox Asus Amazon Asus Samsung Amazon Asus Samsung Amazon Samsung Apple Apple Apple Whitebox Whitebox Whitebox Whitebox Asus Amazon Asus Amazon Asus Amazon Asus Amazon Samsung Samsung Samsung Samsung Apple Apple Apple Apple CY2011 CY2012 CY2013 CY2014E 2015E 2016E 2017E Figure 44: Tablet market stalling before phones Mn (units) Tablets Feature phones (re-based from 1995) Smartphones (re-based from 2005) The tablet chipset market is still relatively fragmented after Apple, due to relatively lower barriers in ARM-based processors, allowing chipsets from Chinese suppliers Allwinner (not listed), Rockchip (not listed) and Actions (not listed) to maintain high shipments in entry tablets. In the past few years, however, both Intel with its Bay Trail push and MediaTek with its push into communications/entertainment-geared tablet bundling connectivity have both ramped into the #2/#3 positions after Apple with just over 40 mn units shipped in Entry tablet chipset players Allwinner, Rockchip, Actions still have sizeable units but Intel and MediaTek now leading outside Apple Figure 45: Tablet baseband market still fragmented Other Other Other TI OMAP NVIDIA Tegra Qualcomm Samsung Exynos Allwinner Intel Mediatek Rockchip Apple Ax TI OMAP NVIDIA Tegra Qualcomm Samsung Exynos Allwinner Intel Mediatek Rockchip Apple Ax NVIDIA TI OMAP Tegra Qualcomm Samsung Exynos Allwinner Intel Mediatek Rockchip Apple Ax Figure 46: Tablet chipset unit market share Tablet Chipset Market Units (mn) Market Share (%) Apple Ax % 29% 23% Rockchip % 14% 13% Mediatek % 8% 15% Intel % 4% 15% Allwinner % 14% 13% Samsung Exynos % 8% 7% Qualcomm % 4% 4% NVIDIA Tegra % 8% 2% TI OMAP % 4% Actions % 3% 3% RDA, AMLogic, Ingenic, Via % 6% 6% Total Wearables including Android sports watches adding another potential driver Industry projections are upbeat on silicon into the Internet of Things, a broad growth driver connecting all objects to the Internet and communicating with and controlling other devices. The silicon enablers include low power microcontrollers to process the data, sensors to gather input from the environment, and connectivity to communicate either through to the cellular or wireline network or across the local network. Gartner projects silicon for IoT to maintain a robust 29% CAGR over from US$7.2 bn to US$43.5 bn. IoT silicon growth could stay strong with a 29% CAGR through 2020 China Smartphone Sector 17

18 E 2016E 2017E 2018E 2019E 2020E Figure 47: Internet of Things Silicon witnessing high growth Sales (US$) $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 YoY (%) 45% 4 35% 3 25% 15% 1 5% Source: Gartner ASSP / FPGA Microcontroller Sensors Bluetooth Cellular Wi-Fi ZigBee Other Wireless Wireline YoY Growth More and more vendors are creatively adopting MediaTek s dual-core processor and connectivity bundle (Aster, MT6572 and MT6577) to develop smart watches. The solutions offer a compact Android smartphone experience in a watch for a broad span of prices ranging from US$30 to US$250, and include 3G calling, Bluetooth connectivity for headsets, / browsing, and watch and calendar functions. Figure 48: Interesting wearables emerging Figure 49: Wearables for monitoring pets MediaTek enabling low-cost wearable products Source: Company data, Credit Suisse Research Source: Company data, Credit Suisse Research The wearable space is still in its infancy but we expect to see an emerging range of whitebox and China-built products using the Asian supply chain. Baseband, RF and connectivity suppliers including MediaTek, Spreadtrum and Realtek could see an adjacent market emerge here, joining a broad base of overseas MCU, connectivity and sensor manufacturers. The wearable market opens up a potentially large market profiled by our tech team (Pitzer/Garcha): a potential US$43 bn addressable opportunity at 15% penetration of the smartphone subscriber base, at a US$100 device ASP, opening up US$1.9 bn in additional foundry manufacturing content and 4% of incremental sales for TSMC by 2015E at 5 manufacturing share. China Smartphone Sector 18

19 Figure 50: The wearables/iot supply chain in Asia Function Technology Reason Problem Solved Global Providers Asia ex Japan chain IC Mfg Foundry / Back-end Contract manufacturers investing in specialty technology (CIS, high voltage, MEMs, embedded memory, 2.5D/3D IC) Low cost and low power IC components IDMs (STM, NXP, Renasas, TXN) TSMC, UMC, SMIC, Huahong Semi, Vanguard, ASE, SPIL, KYEC, Xintec, Win Semi Processor Low Power MCU/CPU In smaller devices with less battery power, minimizing the processing power requirement on-board is critical for product battery life On board compute requires low active, standby and response to wake commands FSL, MCHP, TXN, NXPI, SLAB, CY, ATML Holtek, Elan, Mediatek Memory DRAM, NAND Storage for pictures, music, and program code Low power DDR memory and TLC NAND IDMs (Samsung, Hynix, Micron) Inotera, Nanya, Winbond, ChipMos, Powertech, Adata, Phison, SIMO Embedded Flash Flash in smart cards, MCUs, sensors Embedded flash is used for storage of code and trimming circuit data Memory on board provides fast cache of important data and allows smaller form factors Cypress, Microchip, Sidense, Kilopass, Synopsys ememory (NVM IPs), Huahong Semi (envm foundry) Connectivity Connectivity Bluetooth 4.0/LE WiFi Need low power wireless connection and sufficient data rate to offload to smartphones/cloud Higher data rate applications will benefit from the throughput of 11n or 11ac WiFi Wearable-to-smartphone data connection Wearable-to-WiFi hotspot and smartphone connectionn BRCM, QCOM, SLAB BRCM, QCOM, NXPI, TXN Mediatek, RDA, Realtek Mediatek, RDA, Realtek Connectivity GPS Wearable products will likely include location based features/functions, requiring GPS Wearable-to-WiFi hotspot and smartphone connectionn BRCM, QCOM, NXPI, TXN Mediatek, Mitac Power Mgmt Sensors Hardware Manufacturing Battery DC-DC Conversion Motion, Environmental, and Body Monitors Sensors Clothing, Watches, Glasses, Medical devices Low cost EMS Battery Composition Converting battery power into the correct voltage/current is not without energy loss - conversion is 80-95% efficient. Wearables will be used to measure activity levels, distance traveled, vital statistics, etc. to be processed and/or communicated to other devices/the cloud Connected gear that improves interaction with our environment and others Asian EMS providers have relationships with key OEMs Limited form factor of mobile devices requires increasing energy density of battery - size growth not likely Increasing the conversion efficiency lowers the effective battery consumption Wearables will be used for a host of health and fitness functions, requiring sensing/monitoring and tracking of changes in measured inputs Devices that can better capture and enhance our life experiences Ability to reach high volume manufacturing at low cost Increased function and operating use time, eliminate battery rigidity, reduce lithium hazard MXIM, TXN, SWKS, ONNN ADI, INVN, STM, TXN, SLAB, Freescale, NXPI Sony, Samsung, Apple, Google, Nike Flextronics, Jabil Sony, Samsung Richtek, Silergy, On- Bright, GMT ASE, Elan, FocalTech/Orise, ChipMOS, Xintec, EgisTech Samsung, LG, Acer, Asus, HTC, Huawei, Xiaomi Hon Hai, Pegatron, Inventec, Mitac, USI (ASE) BYD, Simplo, Dynapack Displays LCOS, E-Ink, OLED Wearable display needs to be portable with high resolution LCOS displays can project an image in front of the user at good resolution and low power Sony Himax Display, Truly, E- Ink, Samsung, LGD, Orise/FocalTech Cameras Interface Interface CMOS image sensors, Cameras can provide real time image capture Lens, Camera Modules in glasses and watches Touch Display Voice Wearables with displays will likely be enabled with touch. The ability to have touch function independent of powering the display could help reduce battery life Wearable products may not have physical inputs, directing by voice activation or use of MEMs microphone Wearable image capture, Sports DV a popular product for Chicony Wearables with large enough displays will need a user interface. But smaller low power displays needed to conserve power Contact-less control of wireless devices will likely be voice driven. Isolating voice relative to ambient noise will be important OVTI, On Semi, Sony SYNA, BRCM, CY, ATML ADNC, CRUS Component Any layer HDI Putting more circuits in a smaller/thinner PCB Can fit into the limited room in wearables Ibiden, SEMCO Component FPC Connecting components or act as the substrate for ICs Save the limited room for other components Component Crystal component Provide frequencies to synchronize operations Need to be small in the form factor Nippon Mektron, Fujikura Epson Toyocom, NDK, KDS, Kyocera Largan, Lite-On Tech, Sunny Optical, Chicony, Himax, GalaxyCore O-Film, Elan, TPK, Wintek, Youngfast, J- Touch, Truly, Focaltech, GIS AAC, Goertek, Merry Unimicron, Compeq, Unitech ZDT, Flexium, Career Tech, Ichia TXC We profile the opportunity for wearables and the broader Internet of Things connecting every device which spans several major categories: Silicon. Key IC devices include the main processor (a low power Microcontroller or integrated mobile processor), connectivity (Wi-Fi, GPS, Bluetooth Smart, NFC, Zigbee), memory, and sensors. Lead suppliers would be the foundries (TSMC for leading edge, Hua Hong and Vanguard for 8"), IC design (MediaTek, Elan, Holtek), IP (ememory) and analog (Richtek, Silergy, On-Bright, GMT). Wearables could add up to 1 sales for TSMC by 2016E Hardware. The Asian brands (Samsung, LG, Huawei, Xiaomi) are all looking to participate and contract manufacturers (Hon Hai, Quanta, USI) should benefit. China Smartphone Sector 19

20 Display. Wearable displays that are portable and high resolution support Himax with its LCOS, touch supply chain players TPK, Elan, O-Film and FocalTech, and the display suppliers (Samsung, LGD, AUO, Innolux, Truly). Camera. The camera lens (Largan), module (Sunny Optical), module makers (Chicony), packaging (Xintec) and image sensors (Sony, Omnivision, GalaxyCore). Components. Key components include PCBs, Flexible PCB IC substrate, and crystal components in small form factor devices. Figure 51: Wearables could add 1 to TSMC's sales by 2016E Smartphone subscribers 2, , , , , , , , ,263.1 Penetration Units ASP ($) $75 $150 $250 $75 $150 $250 $75 $150 $250 TAM ($m) $5,093 $16,978 $39,614 $14,897 $42,562 $92,217 $29,368 $73,419 $146,838 COGS (35% GM) $3,311 $11,035 $25,749 $9,683 $27,665 $59,941 $19,089 $47,722 $95,445 Semi Content ( of COGS) $662 $2,207 $5,150 $1,937 $5,533 $11,988 $3,818 $9,544 $19,089 Foundry (35% of Semi content) $232 $772 $1,802 $678 $1,937 $4,196 $1,336 $3,341 $6,681 TSMC (5 market share) $116 $386 $901 $339 $968 $2,098 $668 $1,670 $3,341 TSMC % of sales 0.5% 1.5% 3.6% 1.2% 3.4% 7.4% 2.1% 5.3% 10.7% Connectivity $221 $883 $1,373 $646 $2,213 $3,197 $1,273 $3,818 $5,090 CPU $110 $353 $1,717 $323 $885 $3,996 $636 $1,527 $6,363 Power $110 $235 $515 $323 $590 $1,199 $636 $1,018 $1,909 Sensor $110 $294 $858 $323 $738 $1,998 $636 $1,273 $3,181 GPS $0 $147 $343 $0 $369 $799 $0 $636 $1,273 Misc $110 $294 $343 $323 $738 $799 $636 $1,273 $1,273 China Smartphone Sector 20

21 LTE Volumes % of total handsets shipped LTE transition in focus; Qualcomm leading, but MediaTek emerging Key themes in the Asian chipset landscape should be extension of growth in 3G markets from emerging market penetration, but increasingly from the 4G transition, and the upgrade cycle starting from China but also spilling into some emerging markets. LTE is a meaningful driver, with our global model projecting handsets growing from 24% of 2014 volumes to 56% by 2017 or 1 bn units, and 6 of the global population by drivers: continued 3G growth in emerging market, 4G upgrade both in China and exports Figure 52: LTE handset shipments to triple by 2017 Figure 53: LTE to reach 6 of global subs by ,200 1, , E 2013E 2014E 2015E 2016E 2017E 2018E Asia Pacific North America Western Europe Africa CEE Latin America Middle East % of the handset market >9 85% >85% >85% 35% >6 >55% >9 GSM/EDGE WCDMA/HSPA LTE % 1 >65% Source: Ericsson, Credit Suisse estimates China seeing an acceleration of LTE China made substantial progress rolling out LTE in 2014, with China Mobile on pace to exceed its 80 mn subscriber target exiting Our CS Telco analyst Colin McCallum indicated China Mobile coverage across Beijing, Shenzhen and Nanjing had improved to 96% of locations tested in "Implications of a Level Playing Field". China Mobile's offerings by 4Q14 had expanded to 24 models from 12 brands, with the cheapest phone dropping to US$82 using a MediaTek chipset. China Mobile LTE reached 80 mn subscribers exiting 2015 Figure 54: 4G handsets available as of October 2014 # of brands # of models Price range Cheapest model Most expensive model China Mobile 4G (TD) US$ TCL P301M (Rmb498) iphone 5s (Rmb4,488) Unicom 4G (TD) US$ Lenovo A606 (Rmb759) Samsung Note4 (Rmb5,399) Unicom 3G (WCDMA)* * US$ Coolpad 7235 (Rmb199) iphone 5s (Rmb4,488) China Telecom 4G 6 9 US$ Coolpad 5892 (Rmb699) Samsung Galaxy S5 (Rmb 3,799) Source: Company data, Credit Suisse Research China Mobile's infrastructure has expanded substantially, growing from 73k exiting 2013, 410k by 2Q14 and on pace to reach 650k exiting 2014 (above its 500k target), with 900k by December 2015 (vs. 920k GSM and 500k TD-SCDMA) to ensure excellent coverage across the top-100 China cities and good coverage out to 360 cities. China Unicom will have 100k base stations exiting 2014 and targets 260k exiting 2015 (vs. 440k GSM and 529k WCDMA). China Unicom is also offering 33 models from 15 brands. China Telecom should have 200k at the end of 2014 and targets 350k at the end of 2015, surpassing its 270k on CDMA 2000 and 270k on CDMA EV-DO. China Smartphone Sector 21

22 Figure 55: Estimated number of BTS in the China Market 000s FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 China Mobile BTS count - 2G BTS count - 3G BTS count - 4G BTS count - total ,090 1,403 2,050 2,320 2,420 China Unicom BTS count - 2G BTS count - 3G BTS count - 4G BTS count - total ,009 1,319 1,629 China Telecom BTS count - 2G BTS count - 3G BTS count - 4G BTS count - total Total towers in market 768 1,112 1,350 1,480 1,570 1,769 2,000 2,415 2,720, CS Telco analyst Colin McCallum Chipset volumes now shifting toward LTE With the ramp of LTE in China and starting into other emerging markets, growth should continue but with mix shifting increasingly towards LTE. We estimate that Asian chipsets have grown 5 YoY to 717 mn in 2014 and project 28% YoY growth to 918 mn units, a bit over handset industry growth of + YoY since most of the growth is in emerging markets. We project LTE at 33% of China baseband shipments in 2015, up from 9% in 2014 Figure 56: Smartphone chipsets into Asian smartphones to reach 960 mn units by 2017E (in millions, unless otherwise stated) Chipsets to China brands E 2015E 2016E 2017E CAGR Mediatek % Mediatek share (%) 11% 44% 47% 5 51% 52% 53% Spreadtrum % Leadcore Hi-Silicon % Asian suppliers % YoY Growth 1009% 144% 45% 3 21% 18% Share 15% 59% 75% 73% 74% 74% 76% Qualcomm % Intel NM Broadcom Marvell % ST-Ericsson NM Overseas suppliers % YoY Growth 37% 16% 64% 22% 17% 9% Share 85% 41% 25% 27% 26% 26% 24% Total , , % YoY Growth 183% 92% 49% 28% 16% Within that mix, LTE should increase from to 45% of shipments, growing from 140 mn to 323 mn units. WCDMA should still grow from 270 mn to 344 mn, as most of the export shipments are still 3G, while TD-SCDMA, CDMA 2000 and EDGE will decline in the mix as China Mobile and China Telecom ramp up 4G service. Based on MediaTek ramping up from 223 mn units to 358 mn units in 2014, we believe that it increased share from 47% to 5, leading Asian suppliers Spreadtrum, Leadcore (not listed) and Hi-Silicon (not listed) and overseas vendors Qualcomm and Marvell, and lifted also with the exit of Broadcom. We expect MediaTek to retain its market share near 5, as its WCDMA share remains high and LTE share is now growing with its SoC chipsets. China Smartphone Sector 22

23 Figure 57: 2014 mix mainly on 3G, with LTE starting up 2014 to China brands EDGE WCDMA TD-SCDMA CDMA 2000 LTE Mediatek Spreadtrum Leadcore Hi-Silicon Asian suppliers % of shipments 19% 45% 27% 9% Share 10 85% 89% 32% Qualcomm Broadcom Marvell Overseas suppliers % of shipments 8% 25% 48% Share 15% 9% 10 68% Total % of shipments 14% 38% 22% 7% Qualcomm the LTE leader, but others players catching up in emerging markets Figure 58: 2015 market shifting over to LTE The Chinese-branded smartphone market is key to Qualcomm maintaining its targets set out at its analyst day in November of achieving mid-teen unit growth and high single-digit revenue growth in the next few years. Qualcomm still expects the China OEMs to continue gaining share in 2015 by introducing competitive products at lower price points, with Qualcomm targeting an aggressive road map to gain share into this tier of the market. Qualcomm targets mid-teens unit growth, high single-digit revenue growth. Qualcomm expects 3G/4G device shipments to grow +15% YoY in 2015 to 1.5 bn units and maintain a 15% CAGR to 2.25 bn units by While smartphone unit growth will moderate and only reach 1.8 bn, the company projects 450 mn units to come from other areas using mobile, including tablets, automotive, Internet of Things and networking. With ASPs moderating as a trade-up replacement market forms in emerging markets, management expects to still sustain +8-1 sales growth and >1 EPS growth through to China brands EDGE WCDMA TD-SCDMA CDMA 2000 LTE Mediatek Spreadtrum Leadcore Hi-Silicon Asian suppliers % of shipments 17% 59% 22% 33% Share 10 89% 93% 52% Qualcomm Broadcom Marvell Intel Overseas suppliers % of shipments 19% 4% 23% 77% Share 11% 7% 10 48% Total % of shipments 12% 48% 17% 6% 45% Qualcomm targets 3G/4G device shipments to grow mid-teens YoY in 2015 Qualcomm growth strong in 2014 from China. Qualcomm indicated that it grew its chipset revenue from China-built smartphones by 7 YoY to US$1.7 bn, implying it shipped about 170 mn units at the low-tier s US$10 ASP (in-line with our estimate), giving it about 25% share of this channel. Qualcomm still lags MediaTek s revenue from the China brands (on pace to US$4.6 bn from smartphones and tablets) but is growing at a faster rate off a lower base due to leading on the initial stage of LTE, outpacing MediaTek s +5 YoY growth from smartphones and tablets in We estimate Qualcomm is shipping about 80 mn units of LTE chipsets into China brands and doubling its volumes in 4Q14, outshipping MediaTek by a 3-to-1 margin for China LTE in 2014, as MediaTek still targets 30 mn LTE units. In 2015, we estimate 130 mn units for Qualcomm into emerging markets. LTE penetration still at an early stage for exports market Emerging markets have room for higher penetration, with LTE just starting. While growth in developed markets is stalling due to high penetration (mobile devices are now at 113% and 3G/4G at 93%), emerging regions still have more headroom. Qualcomm cited GSMA data showing 3G/4G penetration is still only 32% in 2014 and will grow to 61% by 2018, offering several years of penetration gains just to approach where developed market penetration was in 2010 (64%). The company also sees a substantial penetration opportunity ahead in 4G. GSMA estimates the global market has 7 bn cellular connections, with 4.2 bn still on 2G, 2.4 bn on 3G and only 0.4 bn on 4G. We note China Mobile only reached 3 3G penetration due to its inferior TD-SCDMA network, so could see a rapid 2G to 4G upgrade cycle over the next couple of years. China Smartphone Sector 23

24 Figure 59: Emerging region penetration still low Figure 60: Significant 4G penetration opportunity ahead Source: Qualcomm Source: Qualcomm Innovation continues on 4G, with high-end modems and processors pushing 20nm. Qualcomm is sustaining leadership in LTE modems (2,300+ designs in development and 1,400 launched) by continually improving on data speeds, frequency band support, voice modes (HD video, shifting from data to circuit-switched voice, VoLTE), and new services (LTE Direct, LTE Broadcast, and Wi-Fi offloading). The company announced its fifth-generation LTE modem at the event, a 20nm chipset available in devices in 1H15 and supporting CAT 10 data rates (450 Mbps), frequency bands up to 60 GHz, LTE broadcast, and 3x carrier aggregation. The company has improved its downlink speeds by 3x, uplink speeds by 2x, while lowering power with the move from CAT 4 to CAT 10 over the past three years. Carrier aggregation, which is also going to be introduced by MediaTek in 2H15 on 20nm produced at TSMC, is now commercialised on 21 networks and is being deployed at 79 carriers, up from one last year and helping push the modem requirement to advanced technology. Figure 61: LTE power/performance improves Figure 62: LTE road map gets more complex Source: Qualcomm Source: Qualcomm Road map brings LTE down to the low-end of the stack, closely matching MediaTek. Qualcomm s strategy for 2015 is to drive LTE across all price tiers, channels and regions. The company is carefully segmenting its chipsets, with Snapdragon 210 (we estimate a US$8-9 ASP) offering 3G/LTE Cat 4 modem, n Wi-Fi, HD display and 8MP camera capability; Snapdragon 410 (US$11-14 ASP) offering 3G/4G Cat 4 modem, full HD display, and 13.5MP camera capability; Snapdragon 610/615 (US$17-25) offering 3G/LTE Cat 4 modem, QHD display, and 16MP camera; and Snapdragon 808/810 (US$30-60 ASP) offering 3G/LTE Cat 6 modem with 4K display and 55 MP camera capability. The company will also offer dual SIM across tiers, requiring 5x the complexity of 3G multi-sim. China Smartphone Sector 24

25 Figure 63: Qualcomm introducing a broad range of Snapdragon chipsets across tiers Qualcomm Qualcomm Qualcomm Qualcomm Qualcomm Qualcomm Qualcomm Qualcomm Qualcomm LTE chipsets Snapdragon 400 Snapdragon 400 Snapdragon 410 Snapdragon 610 Snapdragon 615 Snapdragon 810 Snapdragon 810 Snapdragon 808 Snapdragon 210 SoC MSM8926 SoC MSM8928 SoC MSM 8916 SoC MSM8929 SoC MSM8939 SoC MSM8956 SoC MSM8994 SoC MSM8992 SoC MSM 8909 SoC Technology 28nm LP 28nm LP 28nm LP 28nm LP 28nm LP 20nm 20nm 20nm 28nm LP Multi-core Quad core Quad core Quad core Octa core Octa core Octa core Octa core Hexa core Quad CPU Baseband 4 Cortex A7 32-bit FDD/TDD LTE W/TD/EDGE 4 Cortex A7 32-bit FDD/TDD LTE W/TD/EDGE 4 Cortex A53 64-bit FDD/TDD LTE W/TD/EDGE 8 Cortex A53 64-bit FDD/TDD LTE W/TD/EDGE 8 Cortex A53 64-bit FDD/TDD LTE W/TD/EDGE Figure 64: 2015 multi-tiered road map for LTE from low-end to high-end 8 Cortex A53 64-bit FDD/TDD LTE W/TD/EDGE 4 Cortex A Cortex A57 64-bit FDD/TDD LTE W/TD/EDGE 2 Cortex A Cortex A53 FDD/TDD LTE Cat 6/7 W/TD/EDGE 4 Cortex A7 32-bit Entry LTE; FDD/TDD LTE/ W/TD/EDGE Frequency 1.2GHz GHz 1.2GHz GHz GHz 2GHz 2GHz 1.8GHz + 1.2GHz 1.1GHz GPU Adreno 305/306 NA Adreno 306 Adreno 306 Adreno 405 Adreno 410 Adreno 410 Adreno 418 Adreno 304 ASPs (US$) US$15 US18 US$11-13 US$16-18 US$20 <US$35 NA US$45 < $9 Ramp 1Q14 1Q14 3Q14 4Q14 4Q14 1Q15 1Q15 2Q15 2Q15 Source: Qualcomm ASP declines steeper now, but may moderate after Qualcomm reiterated comments from its recent results that mobile device ASPs were coming down at a faster pace, down 6% YoY in FY14 and are expected down 9-1 YoY in FY15. The prices are dropping faster due to Chinese brands gaining share from traditional Tierones with phones at lower price points, more volume coming from cost sensitive emerging markets and more China phones switching back to three modes. Qualcomm ASPs down 6%/1 YoY in 2014/2015E, but management expects the erosion to moderate in 2016 Management, however, is cautiously optimistic that ASP erosion will moderate to a low- to mid-single-digit decline after FY15. The company expects the mix shift to emerging markets to stabilise in the coming years, but importantly expects new Chinese entrants to push toward higher-end smartphones with device innovation and emerging market smartphones to shift from new entry-level penetration toward replacement upgrades with a higher-end phone. The company cited data showing 7 of new smartphone users are prepared to pay more for a smartphone replacement if it can offer better speed, battery, reliability and features. China Smartphone Sector 25

26 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14E Figure 65: ASPs coming down in FY14/15 Figure 66: Expansion of availability could help ASPs longer term Source: Qualcomm Source: Qualcomm MediaTek maintaining good 3G share and now ramping into the 4G market MediaTek has maintained a good position in emerging markets through its leading turnkey support, high level of integration and fast product refreshes. The company maintained its strong position on 3G by advancing quickly both on performance and cost to provide more functionality but also allow higher functioning smartphones at competitive pricing and fast time to market. The company maintained ASPs at US$10 by offsetting price declines on similar functioning chips with a move to multi-core processors through the 3G cycle. Core migration and better mix helping MediaTek maintain smartphone ASPs at US$10 Figure 67: MediaTek's LTE could lift quad-core ASPs Units (mn) ASPs (US$) 30.0 Single Units Dual Units Quad Units Octa Units Single ASPs Dual ASPs Quad ASPs Octa ASPs Blended ASPs Figure 68: Blended ASPs supported by improving mix Units (mn) ASPs (US$) $32 $29 $26 $23 $20 $17 $14 $11 $8 $5 $2 -$1 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 Single Units Dual Units Quad Units Octa Units Single ASPs Dual ASPs Quad ASPs Octa ASPs Blended ASPs The volume penetration story for the China brands even on 3G still has some legs due to exports. Chinese brands are now over 75% market share in the China market but have further room to expand in other emerging markets market. We estimate market share has reached about a 4 global share for the China brands, with MediaTek having a 3 global unit shipment share. Chinese brands have a 75% share locally, but only 4 globally, implying possible upside with further gains China Smartphone Sector 26

27 Figure 69: Exports tracking to exceed China for MediaTek Smartphone Units: mn Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 China smartphones Export smartphones Export % China QoQ Export QoQ 4Q13 Figure 70: MediaTek and its customers gain global share Source: Company data, Gartner MediaTek going through a transition period as it ramps into LTE, with a strong product line-up from late 1Q15/2Q15, potentially lifting the product mix The company will still need to work through a challenging 1H15. By coming into the market a bit later on 4G against incumbent Qualcomm after leading in the second stage of the 3G ramp, the company needs to be aggressive as it was initially on smartphones even without an optimal cost structure. We believe initial 2-chip solution and first generation SoCs ramping this past November (MT6732/MT6572 for smartphones and MT8732/8752 for tablets) were not at optimal cost structures and competing against an aggressive Qualcomm determined to hold share. MediaTek is moving back to the lower priced 28nm LP and optimising the architecture and adding CDMA 2000 support with its next generation MT6735/6755, a move that should help stabilise profitability by mid-year at slightly lower levels. The company's upcoming product launches should position it well for LTE. Figure 71: MediaTek's LTE chipsets should have it competitive by late 1Q15 Source: Company data, Credit Suisse research %/ QoQ / export ratio 8 Key upcoming product launches for the company include: 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 (1) Second-generation mainstream quad-core and octa-core LTE SoCs adding CDMA support (MT6735/MT6753): MediaTek will launch its second generation quad- / octa-core SoCs (MT6735/MT6753) moving to TSMC's 28nm LP for a better cost structure versus 28nm HPM. We believe the quad-core refresh should start around US$10-12 ASPs. The chips will also add CDMA 2000 support, allowing MediaTek to address subscribers on China Telecom's network for the first time, adding an additional addressable space of 181 mn subscribers and also gives it better chance at design wins on traditional CDMA carriers in the US and Latin America. 3Q15 4Q Units (thousands) 140, , ,000 80,000 60,000 40,000 20,000 0 Share % / MTK units (mn) 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 49% 42% 35% 28% 21% 14% Chinese brands Mediatek Smartphone Units Chinese brand global share Mediatek Mediatek Mediatek Mediatek Mediatek Mediatek Mediatek Mediatek Mediatek LTE chipsets MT6290 MT6595 MT6732 MT6752 MT6795 MT6735M MT6735 MT6753 MT6796 SoC Two chip SoC SoC SoC SoC LTE + C2K SoC LTE + C2K SoC LTE + C2K SoC LTE SoC Technology 28nm HPM 28nm HPM 28nm 28nm HPM 28nm HPM 28nm LP 28nm LP 28nm LP 20nm Multi-core Quad core Octa core Quad core Octa core Octa core Quad core Quad core Octa core Octa core CPU Coresonic SIMT Baseband Frequency FDD/TDD LTE W/TD/EDGE 1.3GHz 4 Cortex A7 + 4 A17 FDD/TDD LTE W/TD/EDGE GHz (big.little) 4 Cortex A53 64-bit FDD/TDD LTE W/TD/EDGE 8 Cortex A53 64 bit FDD/TDD LTE W/TD/EDGE 4 A A53 64-bit FDD/TDD LTE W/TD/EDGE 4 A53 64 bit CDMA2000/ FDD/TDD LTE W/TD/EDGE 4 A53 64 bit CDMA2000/ FDD/TDD LTE W/TD/EDGE MediaTek to introduce its next-generation LTE in 2Q15 8 Cortex A53 64 bit CDMA2000/ FDD/TDD LTE W/TD/EDGE 64 bit 7% LTE Cat 6 + CA 1.5GHz 1.7GHz 2.2GHz 1.0GHz GHz GHz NA Mali-T720 MP1 Mali-T720 MP2 Mali-T720 MP3 GPU Mali 450 PowerVR 6 Mali-T760 Mali-T760 IMG G6200 NA 450MHz 450MHz 450MHz Ramp 2Q14 3Q14 4Q14 4Q14 1Q15 2Q15 2Q15 2Q15 4Q15 MediaTek's next refreshes include second-generation LTE SoCs with CDMA 2000 support, de-spec version LTE SoC, low-cost 3G China Smartphone Sector 27

28 Figure 72: Chinese vendors pre-marketing MT6732/MT6752 and MT6735 for 1H15 Source: Company data, Credit Suisse research (2) Cost-down LTE SoC for the entry level market (MT6735M): Along with the secondgeneration SoCs, MediaTek will launch a lower cost version of its LTE SoC MT6735M for the entry level 4G market targeted at same US$8-10 price range as Qualcomm and Marvell's entry level chipset. This product will de-spec for entry level ~US$80 smartphones, running processor at lower speeds, lower 8 MP camera support and qhd display support. The lower features also will mean a sizeable mid-tier market may remain above this product range at US$8-10 price points in the mainstream category. MediaTek will still maintain CDMA 2000 for this product for China Telecom and other CDMA carriers. (3) Low-cost 3G refresh to answer Spreadtrum's challenge (MT6570/6580): MediaTek should also announce cost-down versions of its 3G dual and quad-core chips. These chips will also support lower resolution displays and take out unnecessary features to lower the cost structure to compete in the entry level 3G market. (4) Carrier aggregation for the high-end 4G market (MT67xx): MediaTek is also working on carrier aggregation, a feature that allows carriers to pair multiple frequencies for higher peak data rates and important in allocating spectrum efficiently as capacity gets tighter. The company would have its high-end 4G chip supporting carrier aggregation by 4Q14. (5) Smartphone flagship MT6795 big.little. MediaTek's MT6795 is the next 64-bit octa-core LTE SoC on MediaTek's product roadmap. It will be on 28nm HPM, using MediaTek's CorePilot to unlock the full power of all eight cores (4 A A53) and up to 2.2GHz. It supports 5-mode and uses Imagination PowerVR GPU. Additionally, it integrates MediaTek's new 5-in-1 connectivity chipset MT6630, with Wi-Fi b/g/n/ac, Wi-Fi Direct/Miracast, low power Bluetooth, GPS/GLONASS and FM. MT6795 is positioned to compete head-to-head with Qualcomm's high-end Snapdragon 810 and will ramp by Chinese New Year. The design-in traction for this product may allow MediaTek's product mix to perform better than the bear case fear for rapid cannibalisation and low-end shift on LTE. We believe the MT6795 is getting designed into 20 Chinese branded companies including customers Xiaomi, Lenovo, Sony, HTC, Meizu, Malata, BBK/Vivo, Coolpad and Gionee, with Xiaomi planning a higher volume model for launch in mid-2q15. The MT6795 is a performance at a reasonable price chip, fitting in well between Qualcomm s Snapdragon 615 and Snapdragon 810, with MediaTek s chip at $30-40 versus Qualcomm s flagship at Snapdragon at 810 at US$ Xiaomi has traditionally only used Qualcomm for high-end, but we believe Xiaomi is developing a high-end model based on MediaTek s premium 64-bit octa-core MT6795, a big.little high-end chip from MediaTek launching with customers at CES in China Telecom opens up a 181 mn subscriber addressable market once MediaTek adds CDMA 2000 support China Smartphone Sector 28

29 January. This win is significant MT6795 s ASPs are around US$35 at good margins; therefore, if Xiaomi's order volume with this model reaches 10 mn, or 1 of its total targeted shipment units of 100 mn, then this project alone would contribute 5% of MediaTek sales in Xiaomi s adoption could trigger other vendors to follow and help MediaTek s mix and margins towards the higher end and not a race to bottom on price and margins, as the bears fear. We also believe MediaTek is seeing some design-ins on its Octa-core MT6752. Better LTE mix could help stabilise margins and keep pricing more stable into next year as the market shifts from dual/quad-core on 3G to quad/octa-core on LTE. Figure 73: MediaTek's smartphone roadmap with second-generation LTE SoCs and carrier aggregation by year end, mtksj Intel had strong tablet success, but now shifting strictly from share to now also improving profitability Intel is out-marketing the Asian chip suppliers now to gain a foothold in the market, showcasing a large booth presence at electronic sourcing shows, providing more marketing collateral materials, setting up meetings with buyers representatives in other cities and offering subsidy support across the supply chain. Intel has assembled several key elements to its strategy to push into the market. 1) Subsidy support. Customers continue to note that Intel is offsetting all the additional design costs using Intel solutions over lower cost chipset and reference designs from its Asian rivals. 2) Customer subsidy. Some vendors are noting customers can also receive additional US$3-8 rebate per unit from Intel based on volume ramp rates into the multiple thousands of monthly volume. 3) Free Microsoft Windows under 9. Microsoft is also supporting the channel by offering the free Windows 8 for tablets below 9 to help it win back share from ARM. Customers are noting US$15 savings over the Windows licence paid on a 9 and above tablet. The cheaper Intel chip and free Windows is allowing some Intel Bay Intel is only targeting tablet growth in line with the industry and is lowering some investments in entry platforms and leveraging its China partners China Smartphone Sector 29

30 Trail-based tablets to come in under a US$50 factory price, about a 75% cut from price of many starting Intel Windows models just 18 months ago. 4) Branding support. Intel is providing additional marketing signage including its own large booth at sourcing fairs and networking events to align OEMs/ODMs to end customers including recent organised sales sessions to customers groups in Europe. 5) Cheaper price points. The company has enabled much lower solution costs with the entry-level Bay Trail with several customers launching entry 7 3G Android tablets for a US$40-50 factory price. 6) Local partnerships. Rockchip is now already marketing Intel s 3G entry level SoC and noting a Rockchip branded LTE SoC SoFIA on 3G and 4G are coming soon. Both Rockchip and Spreadtrum could provide Intel a big incremental push of its smartphone and tablet solutions into the China market. Figure 74: China Intel brands/odms now supporting the ecosystem Intel's China ODM partners ODM/SI ODM/SI ODM/SI ADSC IP3 SOUTH HOLDINGS Archermind Jumper Techvision Bluebank KNC Thundesoft Bmorn Lengda TongFang Borqs ilife Topjoy Cube Livefan TopStar CVTE Luckystar Vido DSO MALATA Wisky EA MIKI Xmobile Emdoor PN-Device Y&Q 德与方 Galapad Ramos Yifang Hampoo RFTECH Yitoa/ 英唐 Hibertek KEP-tech Yuko inet Shuang Shuang ECS Source: Company data, Credit Suisse research Intel aggressively marketing the Bay Trail Entry Tablet Platform Intel is noting to its Chinese partners that it now has 178 ODM tablets supported by Intel s Go-big global tablet marketing campaign. The company is offering a combination of the following features for customers: 1) High performance. Intel is marketing its four Silvermont IA cores that fuel better performance than rival ARM octa-core models for fast web browsing. 2) 64-bit ready. Intel notes the first 64-bit ready tablet platform (though MediaTek s 64- bit MT8732/8752 is also in the market so a moot point). Intel can however offer Windows and Android. 3) New user experiences. Intel claims the cheapest Windows 8.1 tablets (supported by prices under US$50), voice unlock of the tablet and multi-tasking and multi-window capability. 4) Claims in-line to better performance than MediaTek s rival octa-core platform. Intel is marketing that its web browsing has up to 1.8x better performance compared to MediaTek s octa-core, up to 1.4x better performance over MT8135 devices, and comparable AnTuTu 4.4.x and gaming benchmarks to MediaTek s octa-core. 5) Bay-Trail M coming at the end of the year. Intel notes fanless computing with 8+ hours of usage and designs below 1kg and <11mm thin. Detachable notebooks will target US$ price points. Intel has several dozen OEM customers marketing solutions and seeing growing customer interest China Smartphone Sector 30

31 Figure 75: Intel has enabled an ecosystem in China with its tablet reference designs Despite strong progress and share gains in tablets in 2014, Intel at its November analyst day did take a more conservative view on its merchant smartphone IC business, however, potentially implying less risk to MediaTek and the Asian supply chain producing for MediaTek and Qualcomm. After ramping up tablets from 10 mn to 40 mn units in 2014, Intel now targets to grow in line with the market in 2015, as it also looks to improve profitability and lower its contra-revenue to zero with the new products, reducing its annual operating loss from mobile from US$4 bn to US$3.2 bn loss. The company also is lowering its smartphone investments to now allow its China partners to take the lead on more of the product development around its Atom core. Intel targets tablet to grow in line with the industry in 2015, keeping the threat manageable for Asian suppliers Modem and SoFIA moving into the client computing group: investments shifting down in smartphones. Intel is doing a reorganisation to shift its modem and SoFIA engineering and customer support teams into a broader platform engineering group and mobile hardware teams into the client computing group. While management emphasised that the move streamlines common functions under one organisation and helps target products across devices where lines are blurring (phablets, tablets, notebooks, 2-1s, etc.), it will give less-focused attention to the smartphone SoC market. The company noted a conscious effort to redeploy resources, with fewer investments in smartphone SoCs and more resources allocated to data centre, internet of things and Intel marketing campaigns. Intel noted a prudent decision to rely on partners Spreadtrum and Rockchip to develop spin-off SoCs and also market SoFIA 3G/4G solutions into the China and emerging market smartphone channels. Figure 76: Intel focused on modem attach rate for PCs and tablets Figure 77: Intel road map now includes Spreadtrum and Rockchip advancing the SoFIA-R and SoFIA LTE Source: Intel Source: Intel Intel remains committed to modem development as a core platform IP for its other core businesses, noting that it expects modem attach in tablets to grow from 3 to 70-9 over the next decade and attach in notebooks to grow from 5% now to 40-6 by For the SoC market, however, the lower investments and reliance on China Smartphone Sector 31

32 China partners may imply slightly less threat to MediaTek/Qualcomm in smartphones than our original fears, after seeing Intel s massive mobilisation of sales, marketing, ODM/OEM support and product development, with Bay Trail in China tablets to go from close to zero position to matching MediaTek s shipment run rate of 40 mn + units in 2014 (see our China smartphone update report in October). Smartphone product roadmap unchanged and playing catch-up to MediaTek/ Qualcomm. Intel noted its smartphone roadmap presented a year ago is largely unchanged. The company plans to ship its first integrated 3G processor and modem SoC SoFIA 3G by the end of the year for the 1H15 ramp, SoFIA-R (quad-core with Rockchip) in 1H15, SoFIA 4G by 3Q15 for the 2H15 ramp, and bring SoFIA LTE 2 nd generation into its own fab in 1H16. We note that the product introduction pace is accelerated for Intel but still lagging Qualcomm/MediaTek, with 3G SoFIA looking comparable to G quad-cores and 4G SoFIA still lagging by about a year to Qualcomm/MediaTek s LTE SoC launches for emerging markets. The company will also have a standalone Cat 10 modem XMM7360 for sampling in 1Q15 for 2H15 volume, matching timeline for Qualcomm s recently announced MDM9x45 on 20nm. At the high-end, the company will have Cherry Trail on 14nm in volume in 2015 and Broxton Quad-core on 14nm for The company is now relegating Cherry Trail and Broadwell to the more niche module market, as most smartphones now require integrated chipsets like SoFIA. Intel's mobile offerings lag Qualcomm and MediaTek by a year Some product development shifting to Spreadtrum and Rockchip. With Intel still only having one SoFIA design per six months on the road map (versus MediaTek and Qualcomm having highly-segmented road maps), the company is now scaling back some of its internal SoC development and relying more on the local ecosystem and faster time to market development times of Rockchip and Spreadtrum. Intel is using Rockchip as the scale partner for its SoFIA-R product for 1H15 and Spreadtrum for its SoFIA-LTE product, though noting the ramp for that would be late in We still view Spreadtrum and Rockchip also with local China subsidy support and home market advantage as longer-term threats to MediaTek/Qualcomm, but risk looks a bit more manageable now with Intel starting to scale back some of its own push into this channel. Figure 78: Intel mobile road map for the premium tier Figure 79: Intel mobile road map in the value tier Source: Intel Source: Intel Spreadtrum advancing its new roadmap and now backed by Intel Spreadtrum should have more impact in the China smartphone market in the coming year. The company has been hiring aggressively from Taiwan IC design companies and foundries and ramping up its roadmap for 3G, 4G and supplementing it with the 4G SoFIA chipset using Intel's modem and processor IP. We believe that it is also integrating with RDA, using its low cost and well-integrated feature phone platform and also bundling its low cost 3:1 and 4:1 connectivity solutions with Bluetooth, FM, GPS and Wi-Fi. Spreadtrum's chipset traction for low-cost 3G remerging an LTE chip to follow in 2015 China Smartphone Sector 32

33 Figure 80: Spreadtrum 3G designs with its single-, dual- and quad-core chips Source: Company data, Credit Suisse research Spreadtrum is now re-engaging with more customers again after its first-generation WCDMA chipsets and dual/quad-core solutions had met limited initial traction. A broader mix of customers including Samsung, Sking Mobile, Topwise, LongAn, SuperInWorld are now adopting Spreadtrum as a lower cost alternative to MediaTek, adding it to their portfolio as a second option rather than replacing MediaTek. Spreadtrum s SC7715 single core now supports Android 4.4 and is being positioned in US$30-50 factory price smartphones with HVGA and WVGA displays. The company is also starting to have its SC7730 quad-core designed into low-mid-range 5 FWVGA and qhd phones at US$ For 3G, the company is moving to TSMC's 28nm HPC and sampling its SC7731G quad-core WCDMA chipset and SC8831G quad-core TD-SCDMA chipset for US$7 or less. Figure 81: Spreadtrum has rounded out its 3G product roadmap Spreadtrum Spreadtrum Spreadtrum Spreadtrum Spreadtrum Chipset SC5715 SC7715 SC7727 SC8830G/SC7730G SC8831G/SC7731G Technology 40nm 40nm 40nm 40nm 28nm HPM Multi-core Quad Single Dual Quad Quad CPU Cortex A7 Tablet Cortex A7 Cortex A7 Cortex A7 Cortex A7 Frequency 1.3GHz 1.2GHz 1.2GHz 1.3GHz 1.4GHz Network WCDMA + GSM WCDMA + GSM WCDMA + GSM TD or WCDMA + GSM + 4:1 connectivity TD-GSM, WCDMA- GSM GPU Mali-400 Mali-400 Mali-400 Mali-400 Mali-400 Sampling 2Q14 4Q13 1Q14 1Q14 3Q14 Ramp 3Q14 1Q14 2Q14 2Q14 4Q14 In LTE, its 2-chip LTE solution also was certified at China Mobile in September and is now shipping in limited quantities. That chip is following-on with the SC9830 for readiness at year-end and shipments in January or February with price points under US$10 to match up with MediaTek s MT6535M and Qualcomm s ultra-low cost MSM8908. The company may be able to show designs by Mobile World Congress. For late in the year, Spreadtrum will co-market a version of the Intel SoFIA chipset featuring the XMM modem and x86 processor built around some of Spreadtrum's SoC IP. We believe Intel will provide some marketing support and also sell the chipset to its own customers, allowing Spreadtrum to also field the chipset into its channel. Spreadtrum could use success on LTE and launch of the Intel SoFIA offerings as a springboard for a China A-Share listing. China Smartphone Sector 33

34 Figure 82: Spreadtrum rolling out LTE chipsets through 2015 Spreadtrum Spreadtrum Spreadtrum Spreadtrum Spreadtrum Spreadtrum Chipset SC9620 Modem Shark (2 chip) SC9830 (Shark L) T-SharkL Whale Nemo Wearable Technology 40nm 40nm SMIC 28nm 28nm 28nm 55nm Multi-core Quad Quad Quad Quad Octa Single CPU Modem Cortex A7 Cortex A7 Cortex A53 Cortex A53 64 bit 64 bit Cortex A5 Frequency 1.0GHz 1.2GHz 1.2GHz 1.5GHz 1.5GHz Low freq. Network TD/FDD-LTE W/TD-SCDMA 2-chip LTE 1-chip LTE 1-chip LTE 1-chip LTE GSM + BT 4.0 GPU Mali-400 Mali-400 MP4 Mali-400 MP2 Mali-400 MP2 NA Sampling 3Q14 Jan-14 Aug-14 Oct-14 2H15 2Q15 Ramp 4Q14 Jul-14 Nov 14/Feb 15 Mar-15 2H15 3Q15 Marvell: Stays firmly committed to winning in mobile Marvell has had a long presence with its baseband business in China originally securing numerous O-Phone design wins with China Mobile and as a long-time platform provider for the Blackberry. Marvell now has competitive modems and application processors. The company demonstrated in 3Q14 its five-mode LTE Release 10 CAT 7 modem with carrier aggregation with China Telecom and Nokia Networks. The modem is capable of peak download speeds of 260 Mbps with 20 MHz FDD spectrum at 1.8GHz and 20 MHz TDD spectrum at 2.6 GHz. The ability to offer Carrier Aggregation in the modem places it about a year ahead of MediaTek's launch and closer to market leader Qualcomm. It has passed certification across Verizon, AT&T, China Mobile, and is in tests at NTT Docomo. Marvell is ahead of MediaTek to offer carrier aggregation, but still needs to catch up to provide full turnkey and ecosystem Figure 83: Marvell solutions now span 64-bit quad- and octa-core with modem Marvell Marvell Marvell Marvell Marvell Marvell PXA1088 PXA1920 PXA1928 PXA1908 PXA1936 Cat 7 Modem SoC SoC SoC SoC SoC Baseband 28nm 28nm 28nm 28nm 28nm 28nm Quad core Quad core Quad core Cost Down Quad Octa-core NA 4 Cortex A7 4 Cortex A7 32-bit 4 Cortex A53 64-bit 4 Cortex A53 64-bit 8 A53 64-bit + Sensor hub CAT 7 CA Rel.10 Modem FDD/TDD LTE W/TD/EDGE FDD/TDD LTE W/TD/EDGE FDD/TDD LTE W/TD/EDGE FDD/TDD LTE W/TD/EDGE FDD/TDD LTE W/TD/EDGE FDD/TDD LTE W/TD/EDGE 1.5GHz 1.5GHz 1.5GHz 1.5GHz 1.5GHz Data: 260Mbps Vivante Vivante Vivante Vivante Vivante NA 3Q13 2Q14 2Q14 1Q15 1Q15 4Q14 The company introduced new 64-bit SoCs for the China market in November, including a cost down quad-core 64-bit A53 chipset (PXA 1908) and octa-core 64-bit A57 chipset (PXA 1936). The new chipsets integrate five-mode (TD-LTE, FD-LTE, TD-SCDMA, WCDMA and GSM) modems, security processors, sensor hubs, and the digital portion of the GPS, Bluetooth, Wi-Fi and GPS along with and bundles with RF transceivers and power management with codec, fuel gauges and camera flash control. The quad-core can support 8-13 MP camera and 720p displays and octa-core can support 13-16MP camera and 1080p display. Marvell did note it does not support the CDMA 2000 standard like Qualcomm now or MediaTek from late 1Q15. Marvell remains firmly committed to winning in mobile, pledging to offer better performing processors, competitive chip designs and over time improved turnkey platform support. The company noted a number of design wins with the new PXA1908 quad-core and PXA1936 octa-core. Marvell is also in Google's Project Ara alongside NVIDIA Tegra K1 and Rockchip, a modular phone platform that could make it easier for end users to upgrade internal silicon and components. China Smartphone Sector 34

35 NVIDIA and Broadcom exiting merchant basebands While Marvell stays committed to the merchant baseband and processor market, NVIDIA and Broadcom are refocusing away from the space and in particular no longer competing for mass market smartphone design wins. NVIDIA is now refocusing its Tegra application processor on automotive, computing and gaming. The company has announced it will be in the HP and Samsung Chromebooks and also power a number of the automotive infotainment systems and the engine for its Project Shield gaming device. Broadcom announced in early June 2014 it would exit the business and subsequently decided to unwind the business rather than sell to another competitor. Broadcom is still focused on its connectivity business and also enabling Internet of Things devices. Smartphone display components: Higher resolution; more integration NVDA Tegra used for automotive and other applications, while BRCM completely exited mobile Higher resolution is more positive to driver IC than panel makers Smartphone display size and resolution have been steadily increasing globally as consumer demand shifts to large screen and lower display cost. China smartphone market has already shifted towards large screen sizes in 2014, although entry-level and mid-range 4G smartphone pricing falls has fallen to US$ (Rmb600-1,000). We expect the size and resolution migration to continue in 2015 with mainstream sizes shifting towards 4.5"-5.0" with higher resolution (HD/FHD/WQHD) to account for ~5 of the shipments. However, WVGA/qHD should still remain at a sizeable portion (35-4) supported by entry-level 4G smartphone take-off in China and the export demand for emerging markets. HD-above to account for ~5 of total smartphone panel shipmentsin 2015 Figure 84: China 4G smartphone models priced below RMB1,000 Company Coolpad TCL Coolpad Huawei ZTE Huawei ZTE Xiaomi Model name 7,920 J730U K1 (7620L) 8817e A880 G620S-UL00 V5 Max Red Rice Note Image Technology TD/FDD-LTE TD/FDD-LTE TD/FDD-LTE TD-LTE TD/FDD-LTE TD/FDD-LTE TD/FDD-LTE TD_LTE Modes 4 mode 4 mode 4 mode 4 mode 4 mode 4 mode 5 mode 3 mode Operating System Android 4.1 Android 4.3 Android 4.3 Android 4.4 Android 4.4 Android 4.4 Nubia V5 Android 4.4 Pixels 1280 x x x x x x x x 720 RAM 1GB 1GB 1GB 1GB 1GB 1GB 2GB 2GB Storage 4GB 4GB 4GB 8GB 8GB 8GB 16GB 8GB Display 5.0" 5.0" 5.5" 5.0" 5.0" 5.0" 5.5" 5.5" Camera 8MP + 0.3MP 5MP + 0.3MP 8MP + 2MP 5MP + 0.3MP 8MP + 8MP 8MP + 1MP 13MP + 5MP 13MP + 5MP Battery 2000mAh 2000mAh 2500mAh 2000mAh 2300mAh 2000mAh 3100mAh 3100mAh CPU Speed 1.7GHz 1.2GHz 1.2GHz 1.2GHz 1.2GHz 1.2GHz 1.3GHz 1.6GHz Processor Chip MSM8960 MSM8926 MSM8926 MSM8916 MSM8916 MSM8916 MSM8916 MSM8928 Multi-core Dual Quad Quad Quad Quad Quad Quad Quad Price (RMB) Source: JD.com, Company data, Credit Suisse Research China Smartphone Sector 35

36 Figure 85: Smartphone PPI migration emerging markets Figure 86: Smartphone PPI migration developed markets E 2015E 2016E E 2015E 2016E <150 PPI PPI PPI PPI >450 PPI <150 PPI PPI PPI PPI >450 PPI Source: Company data, DisplaySearch, Credit Suisse estimates Source: Company data, DisplaySearch, Credit Suisse estimates The larger screen size and higher resolution trend will require more advanced panel and higher driver IC content but we believe driver IC supply chains are in a better position than the panel makers as small-/medium-sized panels remain in an oversupplied environment with declining ASPs. We expect back-end makers such as Chipbond and ChipMOS to outperform pure fabless driver IC makers given driver IC back-end pricing has been stabilising after the 4Q13 cut and higher resolution will consume more wafer area with longer testing times for higher utilisation. DDI back-end to benefit the most on stabilised pricing and better utilisation Figure 87: Smartphone resolution versus display size Pixel per inch (PPI) 3.5" 4.0" 4.5" 5.0" 5.5" 6.0" WVGA (800 x 480) qhd (960 x 540) HD720 (1280 x 720) FHD (1920 x 1080) For fabless driver IC makers, we believe overall revenue should continue to grow in 2015 given the higher resolution trend, but margins would still be under pressure as tier-two players (Ilitek and FocalTech/Orise) have caught up on higher resolution products with aggressive pricing strategies. We believe profits for smartphone driver IC will continue to expand in 2015 but will be at a slower pace comparing to back-end makers. Figure 88: Smartphone driver IC GM under pressure; back-end (Chipbond/ChipMOS) in a better position Figure 89: Orise and Ilitek catching up on small-/mediumdriver ICs 35% Novatek (DDI GM) Chipbond core GM ChipMOS LCDD GM Orise GM US$ mn Novatek - S/M Himax - S/M Orise Ilitek % % Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q E 2015E China Smartphone Sector 36

37 Smartphone panel facing more pricing pressure on new capacity builds Higher resolution smartphone panels require more sophisticated display manufacturing technology, which should stimulate demand for LTPS panels. However, our supply chain checks suggest there will be at least six new LTPS fabs dedicated for higher resolution S/M size panels being built in , on top of existing fab expansions and ramp-up. We estimate that the total LTPS area capacity will increase ~7 by 2016 versus We note lower yield could slow down the ramp of these LTPS fabs, but we believe this does not change the oversupply scenario for the LTPS panels. S/M size to continue to be in oversupply on new LTPS capacity additions and breakthrough of using a-si for PPI panels Figure 90: LTPS mobile phone panel market share Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 Taiwan Korea Japan China Source: DisplaySearch, Company data, Credit Suisse Research Figure 91: a-si mobile phone panel market share Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 ROW Taiwan Korea Japan China Source: DisplaySearch, Company data, Credit Suisse Research Figure 92: Ramp-up schedule for upcoming small and medium panel capacity Company BOE Gen 5.5 (LTPS & OLED) 30K/month -> 25K/month -> 35K/month Chengdu Gen 6 (LTPS) 25K/month CSOT AUO Innolux / Foxconn Tianma Xiamen Gen 5.5 (LTPS) 15K/month LTPS + 15K/month OLED Wuhan Gen 6 (LTPS) 25K/month Kunshan Gen 6 (LTPS) 30K/month Kaohsiung Gen 6 (LTPS) 24K/month Kunshan Gen 6 (LTPS) 30K/month Shanghai Gen 5.5 (LTPS) 15K/month (30K in 2017)? Xiamen Gen 6 (LTPS) 30K/mth? Wuhan Gen 6 (LTPS) 45K/mth? Truly Visionnox EDO Kunshan Gen 5.5 (LTPS) 8K/month Gen 4 (LTPS) 15K/month Huizhou Gen 4 (LTPS) 25K/month Moreover, the catch-up by Chinese panel makers, Samsung Display's strategy to sell OLED panels to external parties and the technology breakthrough of using a-si or oxide for HD/FHD panels should intensify the price competition for the small/medium size panels. We believe tier-two pure small/medium size panel makers like HannStar (not listed) and CPT (not listed) will face more pressure than its peers given the competition from China (BOE, Tianma) (both not listed) and the fact that both lack of LTPS capability or oxide technology. China Smartphone Sector 37

38 US$ US$ Figure 93: Smartphone and tablet panel price trend 10.1" HD 5" FHD LTPS Figure 94: S/M-size panel makers gross margin trend Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 CPT Hannstar JDI Tianma Source: DisplaySearch, Credit Suisse Source: Company data, Credit Suisse Figure 95: 5 HD smartphone panel prices for different technologies Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 Source: DisplaySearch, Credit Suisse Embedded touch will take more share in " HD a-si 5" HD LTPS 5" HD Oxide Embedded touch (on-cell and in-cell) is expected to take more share within non-apple smartphones in 2015 given thinner/lighter design, improving yield, better cost, and the push by panel/touch IC makers. Both on-cell and in-cell touch sensors are built amid panel process, hence production yield will become an important factor for cost competitiveness. In 2014, on-cell touch proliferation was slower-than-expected as it faced aggressive price cut by conventional touch makers. However, with better yield and more panel makers joining the on-cell camp (AUO, JDI, etc), on-cell touch is likely to gain more share in China Smartphone Sector 38

39 Figure 96: Single glass touch panel structure Figure 97: G/F/F touch panel structure Source: Company data, Credit Figure 98: On-cell touch panel structure Source: Company data, Credit Suisse Figure 99: Hybrid in-cell touch panel structure Cover glass (1) Color filter (2) TFT backplane (3) Touch sensor (SITO or Caterpillar) Cover glass (1) Color filter (2) TFT backplane (3) Touch sensor (Rx) Touch sensor (Tx) Source: Company data, Credit Suisse Source: Company data, Credit Suisse We also expect in-cell touch to secure more design-wins in 2015 for non-apple smartphones, especially touch IC makers like Synaptics and FocalTech have rolled out their integrated TDDI solutions. In-cell (no matter its hybrid or full in-cell) could reduce silicon and FPC costs, and achieve thinner design by integrating the sensor amid TFT process. According to CS and industry estimates, in-cell with TDDI could reduce touch and display cost by vs conventional add-on type touch solutions. Synaptics and FocalTech are pushing in-cell touch panels with their TDDI JDI has been ahead on in-cell touch as it has been promoting its hybrid in-cell Pixeleye solutions in the past few years. Among other panel makers, we believe LGD and AUO are more aggressive on in-cell displays. Our checks also suggest Chinese smartphone brands like Huawei and Oppo already adopted in-cell, and Xiaomi will also launch its first in-cell smartphone in Figure 100: Panel maker versus in-cell TDDI partner JDI and LGD are ahead Panel maker In-cell TDDI partner Mass production schedule Japan Display Synaptics 2014 LG Display Synaptics, Himax, Novatek 2H14 AUO Synaptics, FocalTech 1H15 INX FocalTech mid-2015 CPT FocalTech mid-2015 HannStar FocalTech mid-2015 Tianma FocalTech mid-2015 BOE FocalTech mid-2015 China Smartphone Sector 39

40 Figure 101: TDDI could reduce over touch cost if production yield picks up GFF multi-finger GF 2-finger On-cell (single layer) 2-chip Hybrid in-cell 2- chip Hybrid in-cell TDDI Full in-cell TDDI Assembly w/smt Sub/FPC + additional main Mask TFT, insulator Mask on TFT, metal ITO on top of CF ITO on Film OCA Cover lens Source: Synaptics, Credit Suisse estimates Smartphone components China smartphone would remain the growing segment in The migration to LTE smartphone should also lead to spec upgrades including larger-size/higher resolution screen, longer battery life, improving audio/image quality, and increasing focus on industrial design. The trends should further increase the entry barrier for components design, and should favour technology leaders in our view. On the other hand, we continue to see innovations in camera modules and casing design in the component space. Camera module: we expect the penetration of OIS and dual camera to increase, and 10 MP-plus to become the mainstream. This should lead to another ASP upgrade cycle for the handset camera module supply chain. Casing: we expect metal casing to increase, but the manufacturing process could be changed from "more expensive pure CNC process" to a cost down version, such as "stamping + CNC", or "die casing + CNC", or "pure stamping", or "pure die casting". This could lead to more competition in the low-end metal casing sector. Acoustic: we also expect gradual increase in speaker box/module adoption rates in China smartphones, driven by higher 4G demand. China Smartphone Sector 40

41 Figure 102: Flagship smartphones spec comparison Brand Apple HTC Samsung Sony LG Image Model iphone 6 Plus M8 Galaxy Note 4 Xperia Z3 G3 Screen (inches) Resolution 1920x x x x x1440 CPU A8, 1.4GHz QCOM, 2.3GHz QCOM, 2.7GHz QCOM, 2.5GHz QCOM, 2.5GHz Camera 8MP/1.2MP 4MP/5MP 16MP/3.7MP 20.7MP/2.2MP 13MP/2.1MP Casing Metal Unibody Metal Unibody Metal Frame Metal Frame Plastic Battery 2915 mah 2600 mah 3220 mah 3100 mah 3000 mah Brand Xiaomi Lenovo Huaw ei ZTE Coolpad Image Model Mi4 Vibe Z2 Pro Honor 6 Plus Grand S II 8971 Screen (inches) Resolution 1920x x x x x1080 CPU QCOM, 2.5GHz QCOM, 2.5GHz HiSilicon, QCOM, 2.2GHz QCOM, 2.3GHz Camera 13MP/8MP 16MP/5MP Dual 8MP/8MP 13MP/5MP 13MP/2MP Casing Metal Frame Metal Unibody Metal Frame Plastic Metal Frame Battery 3080 mah 4000 mah 3600 mah 2500 mah 3000 mah Source: Company data, Credit Suisse China Smartphone Sector 41

42 Stock picks in the China smartphone space In the Asian tech coverage, we would invest in companies that can take advantage of the shift to LTE and rising emerging market penetration while protecting margins through innovation or competitive advantage. We showcase the outlook across the tech sectors with meaningful exposure to the smartphone market. IC Design: MediaTek transition into LTE lifts the outlook coming out of 1Q15. IC design is a competitive space with global players Qualcomm, Marvell and Intel competing against Asian suppliers MediaTek and Spreadtrum and semi-captive Asian suppliers Leadcore (Xiaomi) and Hi-Silicon (Huawei). MediaTek will still have a challenging 4Q14 and 1Q15 as 3G slows and LTE ramps at lower margins through the low season. We remain positive, however, with OUTPERFORM and NT$540 target price as we expect an improving outlook from late 1Q15 with upside catalysts from top-to-bottom product refresh and good design traction on its higher-end chips to keep LTE mix, pricing and margins more resilient than feared. Foundry: TSMC stock faces some competitive challenges, SMIC opportunities in front of it. The foundries have grown to have 40-5 of their sales from mobile products as beneficiaries of the smartphone/tablet acceleration the past few years, implying a moderating growth curve until IoT applications grow large enough to create new categories. We downgraded TSMC to a NEUTRAL with an unchanged target price of NT$145, toning down our positive view since the financial crisis due to increasing customer concentration risks, moderating growth, rising competition and valuation being back in line with its historical average. TSMC's business is growing more concentrated at its top-three mobile customers where further share gains are limited and tier-two foundries are finally ramping the high volume 28nm node at better yields. Although sequential sales and earnings momentum are now slowing through 2015, we are not overly negative due to TSMC's own good process technology and rising cash flows and yields as growth moderates. Upcoming results (Thursday) should still be strong, as management retains confidence on its position, leading edge ramped well in 2H14 and NT$ currency depreciation adds NT$1 to 2015 EPS. SMIC is our emerging market pick as a Chinese foundry with opportunity to benefit from the emerging Chinese fabless and ramp into Qualcomm on 28nm, but still subject to its ability to execute to improve its process. Figure 103: Key Asian component suppliers in smartphones (in millions, unless otherwise stated) Supply chain Key suppliers Foundry: Back-end: Asian fabless: Overseas fabless and IP: Components: Semiconductor Distribution: PCBs: Optical Lens: Acoustics: Devices: Display/Touch components: Carriers: Source: Credit Suisse estimates TSMC, SMIC, UMC ASE, SPIL, Chipbond, ChipMOS MediaTek Qualcomm, ARM, ememory, Qurvo, Skyworks TXC (Quartz), Silicon Motion WPG Kinsus, Unimicron Largan, Sunny Optical AAC Acoustics Lenovo, Samsung, ZTE TPK, O-Film, AUO, Novatek, Himax, Orise/FocalTech China Unicom, China Mobile, China Telecom Expect an improving outlook from late 1Q15 for MediaTek; maintain an OUTPERFORM Near-term results still solid, but less upside for TSMC due to competitive overhang China Smartphone Sector 42

43 Back-end: Remain constructive as margins hold up and Taiwan players have decent drivers. We have toned down our back-end view versus prior years as growth may moderate after strong gains in smartphones and incremental Apple content in 2014 and could see more mild restocking relative to prior years, giving less cyclical lift to the group. We still see a decent margin outlook for the sector due to favourable gold price and currency and mix shift to flip chip. We keep ASE an OUTPERFORM as it is continuing to ramp new SiP projects including the watch in 2015 and potentially camera modules longer-term and also recently upgraded SPIL to an OUTPERFORM as we view margins holding up and also stock supported by 1H15 ramp of China LTE infrastructure and handsets and end of the inventory correction coming out of 1Q15. Back-end sector growth now more moderate; prefer ASE IC distribution: WPG the best play but growth offset by muted margins: WPG has assembled a string of acquisitions to achieve 18% growth from to double its Asian distribution share from 12% to 26% since the financial crisis. Its semiconductor distribution business is tied into the greater China electronics supply chain for consumer, communications and PC applications (8 of sales), allowing it to tap into growth drivers from low cost smartphones, Apple related products, low-cost tablets, and emerging market digital set-tops. The company has lifted smartphone/tablet exposure from 15% to 5 over the past few years. We have stayed NEUTRAL on the stock as the mix shift to low-cost mobile products has driven a gradual erosion in margins to offset sales growth to dampen earnings momentum. Devices: ZTE and Lenovo. We remain constructive on ZTE amid China 4G capex cycle as ZTE is China's leading telecoms equipment vendor with a 30-35% market share of 4G BTS versus 25-3 for 3G. We estimate ZTE's GM will improve modestly to 31-32% in 2015 vs 30-31% in 2014, as a result of higher sales mix of networking equipment and profit recovery of its handset business with the focus shifting to fewer smartphone models and export/online channels. We remain constructive on Lenovo s smartphone strategy in light of increased market competition. Lenovo has tripled its China efforts with a three-pronged strategy in 2015 involves expanding scale in China through open-channel networks in tier 4-6 cities; re-introducing Moto back to attack the mid-to high-end; and setting up an Internet-focused smartphone company to compete against Xiaomi. We see continued traction in market outside of China and see Brazil and India as two key markets in focus in Overall, we forecast its smartphone shipments will increase to 84/91 mn in FY16/17E, from 72 mn in FY15E. Driver ICs: Chipbond, ChipMOS, Himax, Novatek, Ilitek, Focaltech. We expect the size and resolution migration to continue in 2015 with mainstream sizes shifting toward 4.5"-5.0" while higher resolution (HD/FHD/WQHD) to account for about 5 of the shipment. The larger screen size and higher resolution trend will require more advanced panel and higher driver IC content but we believe driver IC supply chain are in a better position than the panel makers as small/medium sizes panel remains in an oversupply environment with declining ASP. We expect back-end makers such as Chipbond and ChipMOS to outperform pure fabless driver IC makers given driver IC back-end pricing has been stabilising after the 4Q13 cut and higher resolution will consume more wafer area with longer testing time for higher utilisation. Components: AAC, Largan, Sunny Optical, Catcher. We expect Largan, AAC and Sunny Optical to benefit the most, from the spec upgrade cycle in China smartphones. Both Largan and Sunny Optical should benefit from the improving imaging quality i.e. adding OIS, dual camera, bigger aperture, etc, and their dominate market share in China smartphones. We are relatively more conservative on LOT, due to earnings uncertainties from its subsidiary LOM. In the acoustic sector, AAC should also benefit from the increasing adoption rate of speaker box of China smartphones. Lastly, the rising adoption rate of metal casing in China smartphone is expected to lead to a benign pricing environment, which should benefit Catcher indirectly. AAC, Sunny Optical, Largan, and Catcher are key component suppliers into the space China Smartphone Sector 43

44 TSMC: Competitive landscape in focus for 2015 We downgraded TSMC to a NEUTRAL (from Outperform) with an unchanged target price of NT$145, toning down our positive view since the financial crisis due to increasing customer concentration risks, moderating growth, rising competition and valuation being back in line with Taiwan tech and its historical average. More specifically, (1) TSMC's business is growing more concentrated at its top three mobile customers where further share gains are limited; (2) tier-two foundries are finally ramping the high volume 28nm node at better yields; (3) mobile continues to mature and shift downmarket, with TSMC gaining less high-end share after penetrating Apple last year; and (4) sequential sales and earnings momentum are now slowing through We are not overly negative due to TSMC's own good technology execution and rising cash flows and yields as growth moderates and still see strong results near-term when they report on Thursday. Customers more concentrated and diversifying as Tier-two foundries ramp The emergence of more foundries could shift the pricing landscape and begin eating into TSMC's market share on projects and customers in A look at TSMC's customer base at 28nm and below shows a concentrated profile with the top six contributing about half of the company's sales. TSMC can protect pricing where it has a dominant position but may increasingly need to face rivals' aggressive actions to fill their capacity through the large strategic customers that have the resources and volume to multi-source. TSMC's top customers driving a sizeable portion of its leading edge business Figure 104: Large customers a concentrated piece of TSMC's advanced technology 28nm & below US$mn $5,000 $4,500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 TSMC 28nm & below (%) 7 Qualcomm QCT Apple Mediatek NVIDIA AMD Broadcom Altera Xilinx Spreadtrum TI LSI Freescale Avago Oracle Marvell % of TSMC wafer sales 63% 56% 49% 42% 35% 28% 21% 14% 7% Figure 105: The top-three mobile customers propelled TSMC's growth Sales NT$mn YoY (%) 600, , , , , , Top 3 mobile customers Top 3 YoY Growth E Rest of TSMC Rest of TSMC YoY Growth Top-three customers have driven half of TSMC's growth but are accelerating their diversification. A substantial portion of TSMC's sales are being driven by the company's top three customers that have gained substantial share in the mobile market: Apple, Qualcomm and MediaTek. These customers grew their production at TSMC at a 47% growth rate during TSMC's post the financial crisis growth spurt, outpacing the 9% growth rate for the rest of the customer base to accelerate TSMC's overall growth by 700 bp to 16%. Top-three customers, in particular, have added 700bp to TSMC's growth the past four years Figure 106: TSMC's top-three mobile customers drove 5 of its growth, adding 7 points to its sales CAGR TSMC top 3 customers E CAGR '10-14 TSMC sales 257, , , , , , , , , , , YoY Growth 3.6% 19.1% 1.6% 3.3% -11.2% 41.9% 1.8% 18.5% 17.9% 27.1% Qualcomm 22,115 24,718 33,950 37,731 46,523 33,026 37,962 60,412 87, , , Mediatek 3,135 1,809 2,623 3,318 6,257 12,647 14,119 12,611 23,749 31,734 45, % Apple ,189 NA Top 3 mobile customers 25,250 26,527 36,573 41,049 52,780 45,672 52,081 73, , , , % YoY Growth 5.1% 37.9% 12.2% 28.6% -13.5% % 51.8% 46.4% 48.1% Rest of TSMC 231, , , , , , , , , , , YoY Growth 3.5% % -0.4% -10.8% 46.9% -3.6% 11.7% 9.9% 19.3% % of TSMC's revenue from top 3 9.8% % 12.7% 15.8% 15.4% 12.4% 17.1% 21.9% 27.2% 31.7% % of TSMC's growth from top % 19.8% 85.7% 111.4% % 277.6% 47.8% 56.7% 48.2% 50.3% China Smartphone Sector 44

45 These top-three customers have represented half of TSMC's growth during this period, a result of TSMC executing well to capture high share of these winning customers, with Apple leading high-end smartphones, Qualcomm dominating 3G and 4G baseband, and MediaTek leading the mass market brands emerging in China. Apple and Qualcomm's share looks to be peaking after a strong TSMC's strong outgrowth in 2014 was lifted further by the ramp into Apple's aggressive iphone 6 refresh, also wins in ipad, and continued share of near 7 of Qualcomm's US$7 bn foundry production TAM, as competitors lagged on 20/28nm. TSMC ramped Apple's 20nm business well and maintained most of Qualcomm's high-end Snapdragon 600/800 series and split some of the mainstream Snapdragon 200/400 with GlobalFoundries. For 2015, the situation changes and TSMC's market share at these customers looks set to drop from 4Q14 peak levels. At Apple, we expect Samsung to pick up the majority of the iphone business for the A9 processor from mid-2015 with the iphone 6S refresh along with first Gen Apple Watch S1 processor, with GlobalFoundries coming in 1-2 quarters later as a second source for the iphone. We still see TSMC securing the next ipad Air on 16nm FF+ and some phone share (potentially 4" iphone 6C on 20nm and a higher-end plus model on 16nm FF+ if GlobalFoundries lags as a back-up source). Even with the ipad and modest iphone share, TSMC's market share and sales dip here through 2015 and it may take it two years to get back to the 4Q14 highs at this ~1 customer. Our expectations for ipad and some iphone business though are consistent with TSMC management's tone for initial sales in 3Q15, and steep ramp toward high single digits to 1 sales in 4Q15 and towards of sales in 1H16, though they are still below some more optimistic views on TMSC s Apple share and down from TSMC s sweep of the 2014 refresh. Figure 107: TSMC volumes with Apple at a two-year high US$mn Apple % of TSMC $1,400 14% Figure 108: TSMC's Qualcomm allocation now declining US$mn Allocation % $9,000 9 $1,200 12% $7,500 75% $1,000 $800 $ % 6% $6,000 $4, % $400 4% $3,000 3 $200 $0 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 Samsung Apple share 3Q15 4Q15 For Qualcomm, the company continues to highlight its multi-sourcing strategy once it can ramp multiple foundries on advanced nodes to provide upside capacity buffer, diversification and better pricing. To give TSMC strong credit here, it has executed better on 28nm and 20nm and offered the effective capacity to dominate the business over the past few years while competitors struggled to improve yields and match TSMC's delivery. Figure 109: Qualcomm highlighted its multi-source strategy at its analyst day 1Q16 2Q16 3Q16 TSMC Apple share 4Q16 2% $1,500 $ Qualcomm Production Qualcomm TSMC TSMC Share of QCOM 15% Source: Qualcomm For 2015, however, we also see Qualcomm more successfully bringing in other foundries as it will keep 28nm on a now mature node in its fourth year, giving other foundries time to work out issues and build up a competitive process. We estimate it already has passed US$1 bn with GlobalFoundries last year on 28nm LP. Qualcomm's strategy and urgent China Smartphone Sector 45

46 need to produce lower cost chips to compete with MediaTek in emerging markets implies it uses the cheaper 28nm LP rather than 28nm HKMG process, keeping GlobalFoundries an alternative option through the year and also helping the ramp up for UMC and, later in the year, SMIC. Qualcomm's management noted multiple times at its analyst day that SMIC is a focus foundry and a key partner for China built smartphones and also to help it navigate the local Chinese political environment. The mass-market Snapdragon 400 using the 28nm LP process represents the higher growth area for 2015, more closely tracking the +24% emerging market unit growth and the LTE upgrade cycle as against the +6% developed market growth. At the high-end, TSMC's share may also fall from 10 by late in the year. We believe Qualcomm will split some Snapdragon 800 business to Samsung by 4Q15 on 14nm, and also bring in GlobalFoundries by 2016 once the technology is transferred successfully. Low cost smartphone chips staying on the less complex 28nm LP keeps the door open for more foundries While TSMC's yield is high (we believe over 8 on 20nm and achieving 8 on 16nm logic test chips), Samsung's yield is improving and we believe it is now in the 50-6 range on its internal Exynos versus 30-4 a few months back; this looks to be at acceptable levels for production, with 40k-50k WPM getting shifted to 14nm in Austin. We acknowledge a fair upside case for TSMC will be if competitors slip again when advanced technology enters high volume, an area that has kept business moving back to TSMC in the past few years, though at this stage Samsung/GF 14nm looks on track to move into production. Revised sensitivity to Qualcomm and Apple allocations We have updated our sensitivity of the Apple and Qualcomm allocations as TSMC's largest two customers factoring in some share erosion from 2014 peak levels. Apple share dipping from 2H14. We estimate TSMC's Apple share reached 8 in 2H14 (all the new products, with prior models at Samsung on 28nm) but could dip to 4 in 3Q15 as Samsung ramps up iphone on 14nm and also produces the S1 processor for the low volume watch. The implication is Apple would fall from 13% of sales in 4Q14 to 5% by 3Q15, creating a drag on sequential momentum off a high 1H15 base. From there, TSMC is working to regain allocation for 16nm FinFet+ in 2016 and 10nm in 2017, but this is still a swing factor. Factoring in the Samsung/GF alliance with majority of iphone, with TSMC ramping ipad in late 2015, and potentially a minor part of the phone business Figure 110: Apple share dips to 40-45% by 2H15 before rebounding in 2016 TSMC potential 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q Wafer demand (thousands) Revenue per 12" wafer, US$ 8,400 8,190 7,985 7,786 7,591 7,401 8,141 7,938 7,739 7,546 8,300 8,051 5,662 8,074 7,777 Apple Processor Sales (US$ mn) $1,031 $817 $758 $1,170 $927 $722 $840 $1,079 $911 $788 $953 $1,259 $2,755 $3,777 $3,568 TSMC share: % % 6 TSMC Apple assumption: $0 $163 $531 $936 $741 $578 $336 $486 $638 $552 $667 $881 $0 $1,631 $2,141 Apple % of TSMC % 7.6% % 8.3% 4.6% 7.1% 9.3% 7.4% 8.5% 11.4% % 7.7% Rest of TSMC $4,900 $5,912 $6,437 $6,255 $5,803 $6,424 $6,911 $6,399 $6,247 $6,919 $7,176 $6,845 $20,111 $23,505 $25,537 QoQ / YoY -0.7% 20.7% 8.9% -2.8% -7.2% 10.7% 7.6% -7.4% -2.4% 10.7% 3.7% -4.6% 16.9% 8.6% TSMC sales (US$ mn) $4,900 $6,076 $6,968 $7,191 $6,544 $7,002 $7,247 $6,885 $6,885 $7,470 $7,844 $7,726 $20,111 $25,135 $27,678 QoQ / YoY -0.7% % 3.2% % % % % For Qualcomm, we still expect it to ramp up second-source foundries and estimate its allocation to TSMC slipping from 68% in 2014 to 65% in 2015 and 6 by 2016 as additional foundries ramp 28nm and the Samsung/GF camp comes in on 14nm. Our base case is 1 US$-based wafer sales growth for TSMC in 2015 due to easy compares in 1H15, though by 4Q15, YoY growth could turn slightly negative. In our base case, TSMC would generate NT$11.50 EPS factoring in the boost from the recent NTD depreciation. China Smartphone Sector 46

47 E TSMC's Apple Allocation TSMC multiple TSMC's Apple Allocation Figure 111: Factoring in some decline of TSMC's share at QCOM/Apple 65% QCOM and 6 Apple in Qualcomm Production $2,508 $3,318 $4,352 $6,260 $7,111 $7,781 $8,715 Qualcomm TSMC $1,205 $2,057 $2,948 $4,398 $4,835 $5,058 $5,229 TSMC Share of QCOM 48% 62% 68% 7 68% 65% 6 Apple Production $445 $1,440 $2,582 $2,755 $3,777 $3,568 $3,706 Apple TSMC $0 $0 $0 $0 $1,631 $2,141 $2,594 TSMC Share of Apple 43% 6 7 Rest of TSMC $12,117 $12,486 $14,189 $15,713 $18,670 $20,480 $22,102 YoY Growth % 10.7% 18.8% 9.7% 7.9% Total TSMC $13,323 $14,543 $17,137 $20,111 $25,135 $27,678 $29,924 YoY Growth 9.2% 17.8% 17.4% % 8.1% Figure 112: TSMC's 2015 growth sensitivity to Qualcomm and Apple share TSMC's Qualcomm allocation $0 4 45% 55% 65% 75% 8-6.1% -4.6% -1.5% 1.6% 4.7% 6.2% -3.3% -1.8% 1.3% 4.4% 7.5% 9.1% 4-0.5% 1.1% 4.2% 7.3% 10.4% 11.9% % 5.6% 8.7% 11.8% 13.3% 6 2.4% 3.9% % 13.2% 14.8% 7 3.8% 5.3% 8.4% 11.5% 14.6% 16.2% 8 5.2% 6.8% 9.9% % 17.6% % 9.6% 12.7% 15.8% 18.9% 20.4% Figure 113: TSMC's 2015 sales growth sensitivity to allocation of Qualcomm and Apple s manufacturing TSMC's Qualcomm allocation $ % 55% 65% 75% 8 $8.45 $8.73 $9.29 $9.87 $10.45 $ % $8.84 $9.12 $9.69 $10.27 $10.86 $ % $9.09 $9.38 $9.95 $10.54 $11.14 $ $9.48 $9.77 $10.35 $10.95 $11.55 $ % $9.88 $10.17 $10.76 $11.36 $11.98 $ $10.01 $10.30 $10.90 $11.50 $12.12 $ $10.55 $10.85 $11.45 $12.07 $12.69 $ $11.10 $11.40 $12.02 $12.64 $13.28 $13.60 Figure 114: TSMC's 2015 stock price sensitivity to allocation of Qualcomm and Apple s manufacturing TSMC EPS based on QCOM/Apple share $8.50 $9.50 $10.50 $11.50 $12.50 $ x $82 $91 $101 $110 $120 $ x $90 $101 $111 $122 $133 $ x $99 $110 $122 $133 $145 $ x $107 $120 $132 $145 $158 $ x $116 $129 $143 $156 $170 $ x $124 $139 $153 $168 $183 $197 TSMC's position in MediaTek has already ramped up to a high level, capping upside While low-cost smartphones should be a natural driver for market share, TSMC's share penetration into its largest customer MediaTek has largely played out. A look at MediaTek's annual filings show TSMC's foundry share ramped up from to 7 from 2007 to 2013, growing from NT$1 bn/year to NT$45 bn/year (US$1.5 bn incremental sales). We expect TSMC to retain about 7 share, but see UMC finally being viable with good yields on 28nm and GlobalFoundries growing share off a lower base. MediaTek's choice to lower its manufacturing costs to compete with Qualcomm using 28nm LP technology rather than 28nm HKMG (10-15% lower wafer price) for most of its LTE products, also lowers MediaTek's entry barrier for to multi-source or at the very least may force TSMC to be more aggressive to protect business at this strategic customer. Figure 115: Low-end smartphones have more unit growth E 2016E 2015E $500+ $400<$500 $200<$400 $100<$200 <$100 Figure 116: TSMC's penetration at MediaTek already high NT$mn 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Allocation % 8 TSMC Volume UMC Volume GF / Chartered Volume TSMC % UMC % GF / Chartered % Tier-two suppliers are finally viable options on 28nm The 28nm technology node, a high volume process that ramped starting 2012 at very high market share, is now maturing and facing more competition as second tier foundries ramp. The node remains very important, holding at US$2 bn/quarter for TSMC, about one-third of its revenue and a node in which TSMC has held about 8 market share, ex. Apple, through The node remains a high volume node as the last process technology node China Smartphone Sector 47

48 that does not require the added complexity of multiple patterning on the lithography and HKMG and is still not a mandatory option on the LP process for cost sensitive products. As the node matures, we are seeing second-tier foundries making progress and moving ahead with capacity additions: (1) UMC 28nm yielding at mid-8 now and ramping up, 12" in China ahead of TSMC; (2) GlobalFoundries' 28nm already sizeable ( market share) and 14nm finally making progress; and (3) SMIC is starting up 28nm for Qualcomm in 2H15 if it executes. TSMC's 28nm capacity and revenue share is dipping a bit from On Tier-two foundry ramp, we expect 28nm competition to be fiercer at strategic customers in We project 28nm capacity growth may re-accelerate from 1 YoY to 17% YoY in 2015 with the new additions from GlobalFoundries and UMC. With UMC ramping off a low base from 1H15 and SMIC from 2H15, we also expect TSMC's market share to dip from 75% to 65% over the next two years. TSMC's capacity share also looks to be falling slightly on our supply bottom rising with second-tier foundry capacity additions. Figure 117: TSMC 28nm share declines as tier-two foundries ramp 28nm sales (US$mn) 3,500 3,000 2,500 2,000 1,500 1, Q16E 3Q16E 2Q16E 1Q16E 4Q15E 3Q15E 2Q15E 1Q15E 4Q14E 3Q14 2Q14 1Q14 4Q13 3Q13 2Q13 1Q13 4Q12 3Q12 2Q12 1Q12 TSMC % Figure 118: TSMC's capacity share also dipping in 2015 The space maintains fierce and well-backed indirect and direct competitors Intel and Samsung (which is also now supporting GlobalFoundries technology migration), Chinabacked SMIC, and now UMC finally having higher yields on high volume 28nm. These factors should lead to a moderation of earnings and volatility will hinge on fewer large customer designs-wins (Apple Ax, Snapdragon 800 series) and more price competition for the mass market mainstream designs driving the critical advanced nodes. Technology, CFs, and GM support keeps us from being too negative While we downgraded the stock to a NEUTRAL, we are not moving into the bear camp as (1) TSMC is executing well on technology to ensure good yields/margins and reasonable share and pricing, (2) it has a sizeable mature node base where the technology landscape is more stable, and (3) it is committed to returning free cash flow through rising dividends as it harvests more cash. Margins will see support from good yields, easing depreciation growth, pre-builds in the low season to maintain utilisation, and NTD depreciation tailwind. 4Q14 sales lifted by Apple builds and currency tailwind. 4Q14 sales reached NT$222.5 bn, +6.4% QoQ, above guidance for NT$ bn and CS/Street's +5.3%/+4.6% QoQ. The company saw 1.8% sales boost (NT$3.9bn) from the NT$/US$ 4Q average rate of versus guidance, accounting for the upside relative to the midpoint of the guidance. Sales were driven by strong 20nm production for Apple, contributing at least of sales in 4Q14, offsetting modest decline in Non- 20nm business as customers adjusted inventory into the low season. Margins likely will come in above the high-end of guidance of 48-5 on the higher sales, good process yields on the 20nm ramp, and 70bp lift from favourable NTD. 9 75% 6 45% 3 15% SMIC GlobalFoundries UMC TSMC TSMC % (ex-samsung) Capacity 3,500 3,000 2,500 2,000 1,500 1, % of TSMC capacity share TSMC UMC SMIC GlobalFoundries Samsung TSMC's Capacity Share TSMC will still harvest more cash flow as growth moderates, supporting rising cash yields China Smartphone Sector 48

49 Figure 119: TSMC 4Q14/1Q15 and CS versus street estimates 4Q14 1Q15 2Q (NT$ mn) CS Street Guidance CS Street CS Street CS Street CS Street CS Street Sales 220, ,671 NT$ bn 206, , , , , , , , , ,315 Chg (%) % QoQ GM (%) OpM (%) Net Inc. 78,150 76,425 FX NT$ ,467 66,193 70,485 68, , , , , , ,254 EPS (NT$) Source: Company data, Bloomberg consensus, Credit Suisse estimates 1Q15 supported by products pre-building and currency tailwind. We expect the company to guide 1Q15 sales down low to mid-single digits QoQ, similar to the normal seasonal profile. TSMC will encourage customers to build in the low season to keep capacity full through the year. TSMC may see a slightly sharper decline of the high- ASP 20nm Apple business, but offset by the depreciating NTD, which will boost 3.5% if NT$/US$ holds near current Margins should hold up well as it again manages capacity through the low season to keep utilisation high and the currency tailwind adds another 150bp to GMs. The 6% NTD/USD depreciation at current levels of 32.0 would boost TSMC s growth in 2015 by 6% YoY, GMs by 240bp and EPS by a full NT$1.00, adding 1 to earnings growth. Figure 120: NTD depreciation could add NT$1 to 2015 EPS Flat NT$ 2015 CS 2015 NT$ Current P&L at 30.2 P&L at 30.2 P&L at 31.5 P&L at 32.0 Wafer Sales (US$) $23,396 $25,868 $25,868 $25,868 YoY Growth (US$) 10.6% 10.6% 10.6% NT$ NT$ Sales $707,722 $781,200 $814,828 $827,762 Other Sales (NT$) $52,608 $52,608 $57,038 $57,038 Sales (NT$) $760,331 $833,809 $871,866 $884,800 YoY Sales (NT$) 9.7% 14.7% 16.4% GM% 49.5% 48.1% 49.8% 50.4% Gross Profit $376,364 $401,062 $433,753 $445,939 Operating Expense $81,896 $81,896 $93,429 $93,429 Operating Income 294, , , ,511 Op Margin % 41.6% 40.9% 41.8% 42.6% Non Op Income 6,020 6,020 4,750 4,750 Pretax Income 300, , , ,261 Tax Rate 12.9% 12.9% 13.6% 13.6% Net Income $261,871 $283,395 $298,196 $308,727 YoY Net Income 8.2% 13.9% 17.9% EPS $10.10 $10.93 $11.50 $11.91 Shares 25,930 25,930 25,930 25,930 Valuation now back in line after strong 2014 performance With top customers' multi-sourcing, second-tier foundries catching up on 28nm and revenue/earnings growth momentum moderating, we believe TSMC's stock is now fairly valued trading at 13.3x/12.2x 2014/2015 P/E and 3.4x/2.8x 2014/2015 P/B. Despite robust process technology, good margins and cash flows, the moderating growth, rising competitor challenges and concentrating customer base may limit further upward multiple expansion, keeping us more balanced on the stock at current levels. Figure 121: TSMC trading near its long-term range (NT$) x 14.6x Feb-15 Sep-14 Apr-14 Nov-13 Jun-13 Jan-13 Aug-12 Mar-12 Oct-11 May-11 Dec-10 Jul-10 Feb-10 Sep-09 Apr-09 Nov-08 Jun-08 Jan-08 Aug-07 Mar-07 Oct-06 May-06 Dec-05 Jul-05 Feb-05 Sep-04 Apr-04 Nov-03 Jun-03 Jan x 10.6x Figure 122: TSMC trading at the midpoint of its P/B range (NT$) x 140 3x x 100 2x Jan-03 Sep-03 May-04 Jan-05 Sep-05 May-06 Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 Sep-11 May-12 Jan-13 Sep-13 May-14 Jan-15 China Smartphone Sector 49

50 1Q03 4Q03 3Q04 2Q05 1Q06 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11 1Q12 4Q12 3Q13 2Q14 1Q15E 4Q15E SMIC: 28nm and Chinese customers driving the 2015 outlook SMIC is the leading IC foundry in China and has engineered a turnaround as it has focused on growing its local Chinese customer base, adding more specialty applications including power management, CMOS image sensors and smart card IC solutions, and also capitalising on greater domestic support for the chip industry. The company s revenue is driven by consumer and communications, with key customers including Qualcomm and Broadcom among overseas customers and emerging Chinese fabless including Spreadtrum, Shanghai Fudan, Giga Device, Hisilicon and Galaxy Core. The company also generates 3 of sales from specialty applications including CMOS sensors, power management and smart cards. The company also has a material opportunity to address the high-volume low cost smartphone baseband market by ramping its anchor customer Qualcomm in 2H15. SMIC will see a mild seasonal sales drop in 1Q15 but is already seeing utilization recover into 2Q15 as it backfills applications on 12" mature nodes and prepares to ramp 28nm in 2H15. SMIC is our emerging market pick as it should benefit from the China IC support and chance to ramp into Qualcomm on 28nm Figure 123: SMIC driven by consumer/communication (in millions, unless otherwise stated) Revenue (US$mn) Computer Consumer Communication Other/Industrial China IC support providing a continued lift. SMIC expects to continue to benefit both from its direct customers in China getting more support, from private equity investments in the space and direct subsidies and JV opportunities in China. The company s R&D grants are up to US$40 mn this year and 55/45 JV fab in Beijing for 28nm continues to ramp toward 35K WPM, with the option to build a second 35K WPM fab once that facility is complete. SMIC now serves a broad base of Chinese fabless companies, including mobile basebands (Spreadtrum, RDA Micro), DTV and Set-Top-Box chipsets (Hisilicon), wireless connectivity (RDA Micro), CMOS image sensors (GalaxyCore), tablet apps processors (Rockchip, Allwinner), NOR flash (GigaDevice), smart card ICs (CEC Huada, Shanghai Fudan Microelectronics, Tongfang Microelectronics, and Datang Microelectronics ). 28nm ramp key for 2015, ramp inflection from 2H15. SMIC will have 6K WPM capacity in Shanghai in 4Q14 and 16K WPM by 4Q15, with first production in 1H15 and revenue in 3Q15 and ramping steeply from there. Most of the sales are from Qualcomm and could reach mid-single digits in 3Q15 and 10-15% by 4Q15 if yields ramp well will focus on broadening the customer base with other US and China customers engaged already. China Smartphone Sector 50

51 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14E 1Q15E 2Q15E 3Q15E 4Q15E 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14E 1Q15E 2Q15E 3Q15E 4Q15E Figure 124: 28nm/40nm/65nm reaching over 4 of sales Figure 125: China fabless companies driving SMIC growth US$mn $300 $250 $200 $150 $100 $50 $0 28nm 40nm 65nm 90nm 0.13um 0.15um 0.18um 0.25um 0.35um North America China Eurasia 8 seeing support from China bank cards, power management and CMOS image sensors. SMIC sees three main types of demand supporting the growth of 8" fabs: (1) demand for analog and mixed signal content for the mobile device market; (2) advanced up from mature 6" IDM fabs (note Fairchild announced last week it would shut 6" capacity and increase foundry outsourcing); and (3) injected by new wave applications (IoT, wearable). The company also discussed its various technology offerings in its specialty process generating one-third of sales: (1) CIS SMIC is now qualifying 2MP BSI and will have 5/8MP in 2015, (2) PMIC 35um-.18um in volume production, (3) envm (MCU, smart card) 18um-55nm; the first bank card business is ramping into 2015, with four of six suppliers now qualified, (4) flash controller 55/40nm with demonstrated yield; and (5) MEMS: specialty process and total TSV packaging solution. Capex to stay near similar levels. SMIC capex is US$1 bn and the company sees similar range over the next couple years. The company wants to stay prudent on investment consistent with customer commitments rather than building a high amount of capacity in hope the applications come in. Figure 126: SMIC's operating metrics 1Q14 2Q14 3Q14 4Q14E 1Q15E 2Q15E 3Q15E 4Q15E E 2015E 2016E Capacity (8" equivalent) ,726 2,974 3,389 3,698 Sequential Change (%) 4% 2% 2% 7% 4% 2% 3% 13% 9% 14% 9% Shipment (8" equivalent) ,568 2,529 2,766 3,144 Sequential Change (%) -3% 12% 3% -6% -3% 9% 8% 7% 16% -2% 9% 14% Utilization (Shipments/Capacity) 8 87% 9 83% 76% 79% 84% 87% 94% 85% 82% 85% Logic ASP $724 $752 $738 $729 $721 $716 $739 $741 $760 $736 $730 $729 Sequential Change (%) -5% 4% -2% -1% -1% -1% 3% 5% -3% -1% Simple ASP (Revenue/Shipments) $776 $788 $780 $771 $762 $757 $781 $784 $760 $736 $730 $729 Sequential Change (%) -5% 2% -1% -1% -1% -1% 3% 5% -3% -1% Capex (US$mn) (Management) $108 $142 $282 $450 $350 $350 $350 $300 $770 $983 $1,350 $1,400 Capex (US$mn) (Cash Flows) $108 $142 $282 $450 $350 $350 $350 $300 $650 $983 $1,350 $1,400 Capex/revenue (%) 26% 29% 57% 98% 79% 74% 66% 53% 33% 53% 67% 61% Revenue $451 $511 $522 $485 $466 $503 $563 $603 $2,069 $1,969 $2,135 $2,423 EPS $0.03 $0.08 $0.07 $0.02 $0.01 $0.05 $0.07 $0.09 $0.16 $0.20 $0.21 $0.28 Gross Margin (%) 21% 28% 26% 22% 21% 26% 26% 27% 21% 24% 25% 25% Operating Margin (%) 7% 11% 8% 3% 2% 8% 1 12% 6% 7% 8% 9% Depreciation/Wafer $191 $164 $162 $199 $213 $211 $194 $182 Non Depreciation/Wafer $418 $401 $415 $402 $390 $351 $379 $391 Business on track, with utilisation improving by 1Q15. SMIC indicated 4Q14 is as expected for a decline consistent with other foundries. The company has seen some order pick-up into 1Q15 as it qualifies new 40nm applications (connectivity, set-top, TV) and sees a bit of recovery on its 12 also with some MCUs and NFC products ramping. Utilisation will start to rise in 1Q15 and sales decline looks pretty modest. 2Q15 should see a pick-up in the broader business, with 2H15 mostly from the 28nm ramp. 4Q14 down in-line with peers, but 1Q15 utilisation holds up better China Smartphone Sector 51

52 Figure 127: SMIC 4Q14-1Q15 and estimates summary 4Q14 1Q (US$ mn) CS Street Guidance CS Street CS Street CS Street CS Street Net sales $485 $488 $ mn $466 $482 $1,969 $1,982 $2,135 $2,256 $2,423 $2,549 Change % - 5 to 9% QoQ % -4.8% -4.2% 8.4% 13.8% 13.5% 13. GM % 21.9% 22.2% % 20.7% 20.8% 24.4% 24.6% 25.1% % 24.7% OpM % 3.5% 5.1% Opex $99-103mn 1.8% 4.4% 7.4% 7.9% 8.1% 8.7% 9.4% 9. Net income EPS (US$) $0.000 $0.001 $0.000 $0.001 $0.004 $0.003 $0.004 $0.004 $0.006 $0.006 ADR EPS (US$) $0.02 $0.05 $0.01 $0.05 $0.22 $0.15 $0.21 $0.20 $0.28 $0.30 HK EPS (HK$) $0.003 $0.01 $0.001 $0.01 $0.034 $0.02 $0.033 $0.03 $0.044 $0.05, Bloomberg consensus Maintain NEUTRAL. While we like SMIC s long-term potential as a beneficiary of the stepped-up support from China for its emerging semiconductor ecosystem and potential large opportunity even with a small share of Qualcomm s baseband TAM, we rate the stock as NEUTRAL with HK$0.80 target price. We believe the stock has run a bit ahead of fundamentals, with valuation now at 1.2x P/B despite 5% ROE, and coming off a year of growth disappointment and still requiring execution in a brand new fab ramping a 28nm node that has proved difficult for other foundries to ramp up. We would look for the next catalyst if the company can execute on 28nm. MediaTek: Fighting the competition to preserve growth and margins with the shift to LTE MediaTek has already gone through two strong handset product cycles with the initial ramp of feature phones in China and emerging markets followed by the past few years' penetration of low cost smartphones. The company is now looking to extend that product cycle by growth with further penetration but also by making the transition into LTE and continuing to provide areas to innovate on its platform in smartphones while extending into adjacent IoT and wearable applications. The addressable market off our global model still has some room left for further growth, with emerging market smartphones scaling from 900 mn units in 2014 to 1.5 bn units by 2017 and sub-$200 smartphones growing from 65 0mn units in 2014 to 1.2 bn units by Our estimates factor in a scenario of MediaTek reaching 43% of emerging market smartphones and 55% of the sub-us$250 smartphone market, with additional units from tablets. MediaTek reaching 43% of emerging market smartphones and 55% of the sub-us$250 smartphone market Figure 128: MTK's penetration in emerging market phones Emerging mkt smartphones Mediatek share (%) 1, , , , F2015F2016F2017F Emerging market smartphones Mediatek smartphones Mediatek share Figure 129: MTK's penetration in low-cost phones Sub US$200 smartphones Mediatek share (%) E 2016E 2017E <$100 $100<$200 Mediatek share Source: Credit Suisse estimates The company's gains have helped enable and come in parallel with the Chinese tier-one and tier-two brands taking market share in the local market and now ramping up into the export channel. Local Chinese brands now command 8 of the Chinese market and have passed 4 global market share, a ramp in step with MediaTek's ramp up since early China Smartphone Sector 52

53 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14E 1Q15E 3Q15E 1Q16E 3Q16E 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14E 1Q15E 3Q15E Figure 130: MediaTek taking share with local brands in China mn (units) Local brand share (%) Q11 2Q11 3Q11 4Q11 Tier 2 brands Tier one's China brand share 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 LTE in focus: 1H15 the toughest period on competitive pressures 3Q13 4Q13 1Q14 Figure 131: MediaTek/China share gains in global markets LTE will be a key focus for the market, with our forecasts projecting LTE unit shipments for the China brands growing from 140mn units in 2014 to 300mn+ in While Qualcomm has grown faster than MediaTek in 2014 in China and is outshipping MediaTek this year by about a 3:1 magnitude, we believe some of that is now a lagging indicator of its success as the early leader in LTE chipsets. MediaTek until late 4Q14 has been offering a less competitive 2-chip modem plus processor against Qualcomm s 3 rd generation LTE SoC. We are seeing ultra-low cost LTE coming in around US$8-10 (versus Qualcomm's 32- bit MSM8909 at $8), entry quad-core at US$10-12, mainstream octa-core at $17-19 and high-end big.little into 1Q15, pressuring margins into the low season in 4Q14. 2Q14 3Q14 75% 6 45% 3 15% Huawei/ZTE/Lenovo/Coolpad/Xiaomi Mediatek Smartphone Units Units (thousands) 160, , , ,000 80,000 60,000 40,000 20,000 Share % / MTK units (mn) 0 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 49% 42% 35% 28% 21% 14% Chinese brands Mediatek Smartphone Units Chinese brand global share 7% 1Q15 still a traditionally low season with lower margins Figure 132: MediaTek 2G/3G/LTE units vs ASPs Units (mn) ASPs (US$) 150 $ $20 90 $15 60 $10 30 $5 0 $0 Figure 133: MediaTek 2G/3G/LTE sales vs. margins Sales (NT$mn) 32,500 30,000 27,500 25,000 22,500 20,000 17,500 15,000 12,500 10,000 7,500 5,000 2,500 0 GM (%) 65% 6 55% 5 45% 4 35% 3 25% 15% 1 5% 2G units 3G (WCDMA+TD) units LTE units 2G ASPs 3G ASPs LTE ASPs Blended ASPs 2G sales 3G (WCDMA+TD) sales LTE sales 2G GM % 3G GM % LTE GM % Corporate GM % The ramp-up of LTE at competitive pricing and lower margins could possibly take margins to a lower level in 1H15 until the second generation SoC products pass cross-over in 2H15. Feedback is for LTE pricing at about 1 premium over 3G for similar specs and LTE mix is also better. We expect MediaTek's margins to trough in 2Q15 with Qualcomm's aggressive pricing and also should be ahead of MediaTek's next-generation LTE refreshes. We estimate LTE margins will be 41% now but will drop to 4 in 1Q15 before it rebounds back up to the mid-4 level exiting We also expect LTE ASPs to gradually decline from US$15.2 in 3Q14 to US$11.3 in 4Q15, although blended ASPs are still stable to slightly up at US$6.4 with continued mix shift from 2G to 3G/4G. We model LTE to account for 22% total smartphone shipment in 4Q14 and will reach at least 3 of mix by 4Q15. The company also expects continued core migration as mid- to high-end chips will all be on octa-core in 2015, while low-end and mainstream move to quad-core. China Smartphone Sector 53

54 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15E 3Q15E 1Q16E 3Q16E Figure 134: EM exports will continue to grow for MediaTek Smartphone Units: mn Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 China smartphones Export smartphones Export % China QoQ Export QoQ 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 %/ QoQ / export ratio 8 3Q15 4Q Figure 135: LTE to drive the next growth leg Revenue by Technology 1,600 1,400 1,200 1, G TD-SCDMA WCDMA LTE Our checks at multiple local brands, however, point to MediaTek s 6732/6752 SoCs launching this month at most of the China brands and seeing very wide design in traction. While some vendors acknowledge Qualcomm s platform is more stable and mature, and offers better power consumption, a wide array of local solution houses, component suppliers and brands with history working with MediaTek back in the feature phone days are now marketing a number of designs with MediaTek s new SoCs. Figure 136: MediaTek matching up closely with Qualcomm s offerings Mediatek Mediatek Mediatek Mediatek Mediatek Mediatek Mediatek Mediatek Mediatek LTE chipsets MT6290 MT6595 MT6732 MT6752 MT6795 MT6735M MT6735 MT6753 MT67XX SoC Two chip SoC SoC SoC SoC LTE + C2K SoC LTE + C2K SoC LTE + C2K SoC LTE SoC Technology 28nm HPM 28nm HPM 28nm 28nm HPM 28nm HPM 28nm LP 28nm LP 28nm LP 16FF+ Multi-core Quad core Octa core Quad core Octa core Octa core Quad core Quad core Octa core Octa core CPU Coresonic SIMT Baseband Frequency FDD/TDD LTE W/TD/EDGE 1.3GHz 4 Cortex A7 + 4 A17 FDD/TDD LTE W/TD/EDGE GHz (big.little) 4 Cortex A53 64-bit FDD/TDD LTE W/TD/EDGE 8 Cortex A53 64 bit FDD/TDD LTE W/TD/EDGE 4 A A53 64-bit FDD/TDD LTE W/TD/EDGE 4 A53 64 bit CDMA2000/ FDD/TDD LTE W/TD/EDGE 4 A53 64 bit CDMA2000/ FDD/TDD LTE W/TD/EDGE 4Q14 sales slightly lower. MediaTek reported 4Q14 sales of NT$55.5 bn, -3.5% QoQ, versus guidance up 2% to down 6% QoQ, below CS/Street at -2%/-2.4% QoQ, keeping at least within the guidance range after a disappointing November. The company is on-track to its LTE plans, though smartphone units were slightly down in 4Q14, mostly due to 3G decline. Other product lines, including TV and PC optical seasonally declined. Overall blended ASPs remained relatively stable, though we still expect margins to decline QoQ and model 48.5% as LTE ramps at lower margins. 1Q15 a low season for sales on fewer working days and product transition. 1Q15 will be a low season ahead of major product launches and to also see impact from fewer working days. We expect the company to guide 1Q15 sales down high single digits QoQ and model -6.4% QoQ vs. street -5.9% QoQ. The ramp-up of LTE at competitive pricing and lower margins could possibly take margins to a lower level in 1H15 (we re at 47%) until the second generation SoC products pass cross-over in 2H15. We expect MediaTek's margins to trough in 2Q15 with Qualcomm's aggressive pricing and still early in the ramp of MediaTek's next-generation LTE refreshes. Exports and LTE to drive the next growth cycle 8 Cortex A53 64 bit CDMA2000/ FDD/TDD LTE W/TD/EDGE 64 bit LTE Cat 6 + CA 1.5GHz 1.7GHz 2.2GHz 1.0GHz GHz GHz NA GPU Mali 450 PowerVR 6 Mali-T760 Mali-T760 IMG G6200 Mali-T720 MP1 Mali-T720 MP2 Mali-T720 MP3 450MHz 450MHz 450MHz NA Camera 13MP/16MP 20MP 13MP 16MP 20MP 8MP 13MP 16MP Ramp 2Q14 3Q14 4Q14 4Q14 1Q15 2Q15 2Q15 2Q15 4Q15 Next catalyst to emerge exiting 1Q15 China Smartphone Sector 54

55 Figure 137: MediaTek's operating assumptions (in millions, unless otherwise stated) Quarters NT$mn unless noted 1Q14 2Q14 3Q14 4Q14E F 2015F 2016F 2017F Smartphones (mn) ASPs (US$) $10.16 $10.11 $10.19 $10.37 $13.33 $10.82 $9.93 $10.21 $9.53 $8.72 $7.93 Tablets (mn) ASPs (US$) $11.26 $11.26 $10.93 $10.49 $0.00 $0.00 $12.28 $10.92 $9.96 $9.19 $8.48 Feature phones (mn) ASPs (US$) $1.71 $1.66 $1.59 $1.53 $3.58 $2.26 $1.88 $1.63 $1.41 $1.25 $1.11 Handset/Tablet Sales 29,893 34,264 37,455 37,716 59,512 61,419 93, , , , ,404 DTV 7,726 10,518 10,533 10,111 10,722 13,490 16,104 38,888 39,312 39,801 40,416 PC Optical 2,313 2,195 2,202 2,063 10,596 11,489 10,476 8,774 6,775 5,412 4,327 Consumer DVD ,160 3,515 3,515 2,929 2,638 2,171 1,735 WLAN (Ralink) 3,831 4,117 4,118 3,577 1,867 9,365 12,450 15,643 16,201 17,407 18,097 LCD Monitor ,517 2,526 2,526 2,584 STB 764 1,240 1,318 1, ,473 4,988 5,263 5,595 Other (GPS, RFID, IoT) ,381 1,748 2,976 5,627 Total Sales 46,005 54,133 57,472 56,325 86,858 99, , , , , ,785 GM % 48.3% 49.6% 49.1% 48.5% 45.3% 41.4% % 47.5% 48.2% 47.9% Op M% 23.5% 23.6% % 12.5% 18.6% 23.2% 22.5% 23.3% 23.7% EPS $6.85 $8.03 $8.51 $7.68 $12.52 $12.81 $20.13 $31.00 $33.00 $36.00 $38.50 A couple of upside areas not in estimates high-end LTE, Samsung and developed markets MediaTek has several upside scenarios to our base assumptions and market expectations. The market may be too worried on LTE commoditization as product mix is improving from a mix of over 4 of units at single and dual-core on 3G to all quad-core and octa-core on 4G. Product mix could have even further upside, as MediaTek is also introducing a mainstream octa-core chipset for high-teens ASP (above low-end US$8-11 LTE pricing and blended $10 smartphone pricing) and also high-end big.little at US$30-35 ASP. In our base model yielding NT$33 EPS, we have assumed only 5% high-end big.little and 15% mainstream octa-core, with 8 of volume a split between mainstream quadcore and ultra-low cost quad-core. In an upside scenario of 15% of mix on big.little and 3 on mainstream octa-core, EPS would have over 1 upside to NT$ Years MediaTek could have upside from strong traction on its higher-end LTE chips or eventual push toward Samsung or developed markets Figure 138: 3G product mix in 2015 across cores Single Octa core core 13% 5% Figure 139: LTE mix will be higher-end High-end Octa core 5% Octa core 15% Quad core 45% Dual core 37% Quad core 8 MediaTek also has two largely untapped opportunities valued at US$10 bn developed markets, a US$6.5 bn opportunity based on 364 mn units at US$18 ASP (mainly a product equivalent to mainstream octa-core LTE) and Samsung, a US$3.5 bn opportunity based on 398mn smartphones and tablets at US$9 ASP (assuming a mix of product similar to MediaTek's product mix as Samsung would likely use MediaTek for the low to mid-end. China Smartphone Sector 55

56 MTK Octa-core LTE share MTK Developed Mkts We sensitise a scenario where 1 share of Samsung's volumes and 15% share of developed markets would yield EPS up to NT$ Both areas represent substantial upside that would drive the next leg up for the company. We believe Samsung's desire to differentiate from the Chinese platforms where MediaTek has highest share has limited it adopting MediaTek to date. That motivation should shift over time, however, as its partner Qualcomm is now as aggressive with QRD enabling Chinese brands and Samsung has lost market share to Chinese with that strategy so could use an additional platform and more localized Chinese sourcing to get more competitive. In developed markets, MediaTek has not been on par on IP and lagged traditionally on product performance versus Qualcomm. We believe MediaTek's chipsets now more closely match Qualcomm as Qualcomm is shifting more products to use ARM's A53/A57 configuration rather than its own optimized Krait architecture and MediaTek is moving into more advanced big.little and octa-core 64-bit implementations. MediaTek does still lag on carrier aggregation LTE modems, a feature not yet required in emerging markets but critical for efficiently using spectrum and reaching higher peak data rates in developed markets. MediaTek's first CA chipset will be in 3Q15 and may not be until 2016 before MediaTek can better approach the specifications of developed market mid-to-high end smartphones including the modem. Still, from a low base, developed markets and Samsung offer substantial upside mostly captured by Qualcomm's US$20 bn chipset business (over 2.5x MediaTek's 2015 sales estimate for US$8 bn, with US$6 bn from phones, tablets and connectivity). Figure 140: MediaTek's high-end LTE could drive upside Mediatek big.little LTE Mix big.little: Octa units $33 2% 5% 15% 25% 0 $30.55 $30.97 $31.61 $33.74 $ % $30.98 $31.41 $32.05 $34.18 $ $31.46 $31.88 $32.52 $34.65 $ % $31.93 $32.36 $33.00 $35.12 $ $32.41 $32.83 $33.47 $35.60 $ % $32.88 $33.31 $33.94 $36.07 $ $33.36 $33.78 $34.42 $36.55 $38.68 Maintain OUTPERFORM Figure 141: Samsung or developed markets be upside We maintain our OUTPERFORM rating on MediaTek with NT$540 target price based on 16x 2015E EPS. The company is not completely out of the woods as 1Q15 is still normally the low season; it will see LTE ramp up at competitive pricing and below corporate margins, and will see fierce pricing from Qualcomm determined to retain LTE share. We see catalyst from the upcoming shipment ramp, and the second generation SoC in 2Q15 and cost down 3G MT6570/MT6580 would maintain the company's competitive edge to allow it to benefit from stabilizing margins and growth in By 2H15, we also see developed markets and potentially Samsung's large volumes as an additional driver for the company. Mediatek Samsung Units in 2015 Samsung: Dev Mkt: $33 5% 1 15% 0 $33.00 $33.99 $34.98 $35.97 $ % $35.11 $36.10 $37.09 $38.08 $ $37.21 $38.20 $39.19 $40.18 $ % $39.32 $40.31 $41.30 $42.29 $ $41.43 $42.42 $43.41 $44.40 $ % $43.54 $44.53 $45.52 $46.51 $ $45.64 $46.63 $47.62 $48.61 $49.60 Figure 142: MediaTek's estimate summary 4Q14 1Q (NT$ mn) CS Street Guidance CS Street CS Street CS Street CS Street Sales $56,325 $56,081 $ bn $52,713 $52,760 $213,935 $213,571 $237,739 $242,455 $251,263 $263,950 Chg % -6% to +2% -6.4% -5.9% 57.2% % 13.5% 5.7% 8.9% GM% 48.5% % 47.3% 46.3% 48.9% 48.6% 47.5% 46.8% 48.2% 46.2% OpM% % % 20.1% 21.1% 23.2% 23.4% 22.5% 22.6% 23.3% 23. Net Inc. 12,010 12,215 10,518 10,690 47,825 48,167 51,578 51,808 56,271 55,860 EPS (NT$) $7.68 $7.79 $6.73 $6.90 $31.00 $31.00 $33.00 $32.93 $36.00 $34.87 Source: Company data, the BLOOMBERG PROFESSIONAL service consensus estimates, Credit Suisse estimates China Smartphone Sector 56

57 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 WPG: Leading Asian IC distributor We remain positive on the medium-term growth outlook for WPG as it expands organically as a large IC distributor for Greater China and also from stringing together acquisitions of smaller distributors. The company has doubled its Asian distribution share from 12% to 26% since the financial crisis through this combination. Figure 143: WPG has doubled its share of the APAC distribution market (in millions, unless otherwise stated) (US$ bn) WW Semiconductor TAM WW Semiconductor TAM in APAC Distributor TAM in APAC WPG s sales WPG s market share in APAC (%) Source: Company data Scale in distribution has had a positive effect in attracting working capital, broadening product lines, improving field support and growing customer bases. WPG's semiconductor distribution is largely tied into the greater China electronics supply chain allowing it to tap into growth drivers from low cost smartphones and tablets, Apple related products, computing and consumer products. Figure 144: WPG has substantial revenue and profit market share in China (US$ bn) Revenue Share 3 31% 31% 39% 41% 53% 57% 58% Profit Share 29% 36% 49% 52% 53% 56% 65% 61% Source: Company data WPG reported segment mix is 33% PCs (including tablet), 31% communications, 18% consumer, and 18% industrial/other. Within that, however, traditional PC components are now about 15% of sales and smartphone and tablet have reached 45-5 of sales. WPG has a good position both into China low cost tablets and Apple iphone and ipad (15% of sales) and also benefits from Intel's tablet traction engaging the local China supply chain. Figure 145: WPG product mix PC segment is 33% but includes tablets; smartphone/tablets now 45% of sales (%) PC Communication Consumer Industrial Automotive Others 4Q14 sales stronger than expected Figure 146: WPG segment mix (%) WPG 4Q14 sales reached NT$117bn, -1.8% QoQ, significantly above guidance for down 6-1 QoQ and CS/Street -7% QoQ, driven by shift in iphone-related components business from 3Q14 to 4Q14, better demand for mid-to-low-end smartphones and auto components in the secondary market. The company noted only moderate slowdown in PC, communications and consumer. Although the company usually sells off inventory toward the end of the year, it sees current market inventory level healthy and does not expect a sharp decline on margins. After an inventory clean-up in late 2013 and rebound in 1H14, GMs are again dipping a bit as mix gradually shifts to core mobile components. WPG has doubled its distribution share from 12% to 26% since 2008 WPG now generates 45-5 of sales from smartphones and tablets CoreComponent Analog & Mixed Signal Logic Discrete & Logic Memory Passive PEMCO Optical Others China Smartphone Sector 57

58 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 Figure 147: CS and Street WPG estimates for 4Q14/1Q15 and Q14 1Q (NT$ mn) CS Street Guidance CS Street CS Street CS Street CS Street Sales $110,637 $110,464 NT$ bn $106,211 $107,537 $446,033 $446,333 $482,292 $476,643 $521,298 $510,551 Chg -7.3% -7.4% Down % % 9.8% 9.9% 8.1% 6.8% 8.1% 7.1% GM (%) % % 4.55% 4.51% 4.57% 4.57% 4.61% 4.56% 4.66% NA Op.M(%) 1.58% % 1.48% 1.65% 1.77% 1.77% % 1.83% 1.85% Net Inc. 1,164 1,249 NT$30.4 to US$1 1,026 1,280 5,626 5,745 6,038 6,353 6,622 7,031 EPS (NT$) $0.70 $0.74 $0.62 $0.78 $3.40 $3.44 $3.65 $3.78 $4.00 $4.13, the BLOOMBERG PROFESSIONAL service consensus estimates GMs are stabilising at % and Opex should drop from 2.8% to 2.5% with operating leverage to restore operating margins to 2% with another double digit YoY growth in sales. The company had steadily lower margins the past couple years due to the shift to more lower margin panel distribution and increase core components, which represent only 20-25% of the PC cost but in mobile represent 45-5 of a smartphone/tablet cost. Smartphones have grown from 1 to 45-5 of sales the past 5 years but have now peaked now that tablets are back to normal growth while industrial/auto will come up so the shift to the margin dilutive mobile segment is now expected to be more gradual. Figure 148: WPG margins more stable at lower levels WPG Revenue WPG GM and Op (NT$mn) 140,000 Margin (%) , , , , , , Figure 149: Revolving credit funding working capital NT$mn 80,000 60,000 40,000 20, ,000-40,000-60,000 Sales GM (%) OpM (%) Cash and investments Net working capital Net debt Management remains optimistic about China smartphones for 2015, suggesting a substantial lift in new LTE models particularly ramping after Chinese New Year using the new MTK/QCOM SoCs at attractive price points. WPG also has good leverage to MediaTek and Intel's tablet reference designs, which are both taking share in China tablets. It still targets +1 YoY growth after reaching that goal this year. We model a bit more conservative +8% YoY due to lower base exiting 2014 and requiring strong QoQ growth to achieve +1. Following the results at low-end of guidance and seasonally lower 4Q14 outlook, we trimmed our 2014/2015 EPS from $3.45/$3.75 to $3.40/$3.65, below street at $3.62/$3.94. We stay NEUTRAL on the stock, but slightly revise down our target price from NT$43 to NT$42 based on lower 12x 2015 EPS. WPG offers emerging market unit exposure and solid 6-7% dividend yield based on NT$2.55 payout next year, but the stock is fairly valued at 11x 2014 EPS versus its IT distribution peers at 10x P/E. Figure 150: WPG in-line with its peer group Price Mkt Cap EV/Sales (x) P/E Multiple (x) P/B Multiple (x) Company Ticker 1/3/2014 (US$mn) WPG 3702.TW , Synnex 2347.TW , Arrow ARW , Avnet AVT , Median Mean Management optimistic on the growth potential from LTE smartphones in 2015 China Smartphone Sector 58

59 1Q99 3Q99 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q00 4Q00 3Q01 2Q02 1Q03 4Q03 3Q04 2Q05 1Q06 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11 1Q12 4Q12 3Q13 2Q14 Back-end: Moderate growth should continue in 2015 The Taiwan back-end has seen a return to growth since 2H12. The sector s revenue growth during was deflated by conversion of gold wirebond to copper wirebond at lower cost but also lower price. That transition is largely complete now and replaced with a positive sales driver from conversion of smartphones from wirebond to flip chip at higher ASPs. At the same time, new applications are driving incremental demand including module business for the fingerprint sensor and watches. The back-end sector should see a high single-digit sales decline in 1Q15 followed by restocking and new builds for smartphones along with some incremental units from the Internet of Things, a broad catchall category for connecting electronics to all devices and now increasing silicon content in the industrial and automotive verticals. Figure 151: Growth has now turned positive again Figure 152: Back-end has gained market share US$ mn YoY Growth $4, $3,500 8 $3,000 6 $2,500 4 $2,000 $1,500 $1,000 - $500-4 $0-6 Indexed Revenue SiP SPIL Amkor Stats YoY Growth TSMC UMC SMIC Vanguard ASE SPIL Amkor Capex may decline after stepping up in 2014 The back-end sector has seen steady upward revisions through 2014, with capital spending getting revised up from US$2.4 bn to US$2.9 bn, taking capex from -11% YoY coming into the year to +6% YoY exiting the year. The upward revisions were put in to support Apple s shift of back-end production from Samsung to the Taiwan OSAT, Amkor and Stats and for more turnkey mobile projects including test and assembly. We believe 2015 capex will be flat to down for equipment spending after the strong ramp in Capex will be down 7% YoY excluding Stats fab investment in its Korea facility, Amkor s Korea investment and SPIL s purchase of a used Promos fab. Back-end capex to decline in 2015 after 2014 builds Figure 153: 2014 back-end capex upward revision Capex (US$mn) orig 2014 w/ fab '14 YoY (%) 2014 ex-fab '14 YoY (%) '14 Rev % 2015 w/ fab '15 YoY (%) 2015 ex-fab '15 YoY (%) ASE $668 $700 $1,067 6 $1, % $1,050-2% $1,050-2% SPIL $503 $323 $698 39% $508 1% 116% $483-31% $483-5% Amkor $567 $450 $675 19% $640 13% 5 $725 7% $500-22% STATS $507 $565 $545 7% $371-27% -4% $392-28% $392 6% Powertech $305 $233 $ % $ % 28% $300 6% $300 6% King Yuan $166 $133 $230 39% $230 39% 73% $150-35% $150-35% Total $2,717 $2,405 $3,499 29% $3,100 14% 46% $3,099-11% $2,874-7% YoY (%) -11% 29% 14% -11% -7% We believe many IDMs are moving more asset light and also not spending materially, so expect more outsourcing in 2015 particularly as more fabless customers are moving into lower cost copper and back-end suppliers into higher throughput packaging. Capex/sales for the sector should decline slightly to, in line with levels. China Smartphone Sector 59

60 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 2Q00 1Q01 4Q01 3Q02 2Q03 1Q04 4Q04 3Q05 2Q06 1Q07 4Q07 3Q08 2Q09 1Q10 4Q10 3Q11 2Q12 1Q13 4Q13 3Q14 4Q99 2Q00 4Q00 2Q01 4Q01 2Q02 4Q02 2Q03 4Q03 2Q04 4Q04 2Q05 4Q05 2Q06 4Q06 2Q07 4Q07 2Q08 4Q08 2Q09 4Q09 2Q10 4Q10 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13E 2Q14E 4Q14E E 2015E Figure 154: Bonder additions slow as focus shifts to flip chip and wafer level packaging in mn, unless otherwise stated Wirebonders 30,000 25,000 20,000 15,000 10,000 5,000 - Utilization (%) Figure 155: Capital intensity higher due to advanced packaging Sales & Capex (US$ mn) $15,000 $13,500 $12,000 $10,500 $9,000 $7,500 $6,000 $4,500 $3,000 $1,500 $0 Capex/Sales (%) 4 36% 32% 28% 24% 16% 12% 8% 4% ASE SPIL Stats Wirebonder YoY Utilization Sales Capex Capex/Sales Profitability: GMs back on an improving trend The back-end has moved past its challenges with rising material costs from the increase in gold price. SPIL saw the most notable drag since 2007 from the rise in gold price, but has been progressively ramping up copper to over 7 of sales, with Taiwan OSAT over 6 due to a larger base of the IDM business that is in less cost sensitive applications. SPIL is improving product mix, with flip chip CSP advancing from 4% to 15% of sales since early 2013 and test growing from 1 to 12% of sales. The company will see another tailwind in 4Q14 as it further ramps up test for an overseas mobile customer and also benefits from another 1.5% appreciation in the NTD. Management noted that it has 20 bp GM improvement for each NT$0.1 move in the currency, so it is seeing about 100 bp lift through 2H14 if the NTD can stay around While margins are back to 2007 levels, they have been seen before during extended upturns. SPIL achieved GMs between 27% and 31% during and also had GMs over 3 during The company can maintain GMs in the mid- by continuing to improve the product mix as long as material costs are contained and the competitive landscape not disrupted too much by a Chinese acquisition of Stats-Chippac. Figure 156: TW OSAT raised ATM GMs towards 2007 levels Utilization % GM% 35% 3 25% 15% 1 5% Figure 157: SPIL margins still on a rebounding trend Utilization % 105% 95% 85% 75% 65% 55% 45% 35% GM has improved as gold costs drop and mix has shifted to test and flip chip Margins are at seven-year highs but have sustained these levels in the past Gross margin 35% 3 25% 15% 1 5% Assembly utilization Gross margin ASE growth driver from SiP continues 4Q14 IC ATM at high-end, EMS above on Apple builds. 4Q14 IC ATM reached NT$43.9bn, +4% QoQ, at high end of guidance for +2-4% QoQ. USI sales grew 34% QoQ, above implied guidance for +3 QoQ, driven by the ramp of Apple's fingerprint and Wi-Fi module. Consolidated sales were up 15% QoQ, above CS/Street's +11.5%/13.6% QoQ, including of SiP business. Consolidated GM may still be down slightly in 4Q14 due to more upside in the lower margin EMS business, though favourable NT$ also helps. Assembly utilization Gross margin Linear (Test utilization) IC ATM on track in 4Q14, 1Q15 will see seasonal softness China Smartphone Sector 60

61 Figure 158: ASE CS estimates summary for 4Q14-1Q15 and (NT$ in mn, unless otherwise stated) Source: Bloomberg, Company data, Credit Suisse estimates EMS should see the ramp of iwatch through We expect the company to guide 1Q15 IC ATM down low-teens QoQ, due to higher base off the 2H14 builds; GMs should hold up around our 24%. ASE should still have good momentum on EMS and could also get some support with ipad Pro + iwatch ($40 content) launching in the 1Q15 low season. We expect a seasonal decline in 1Q15, although with a higher base, IC ATM could be down low teens QoQ, while EMS holds up better with the new Apple projects. Figure 159: SiP business should grow again in Wifi Module Sales (US$) $394 $424 $432 $414 $883 $916 WiFi Module % of USI Sales 18.5% % % 17.2% Fingerprint Module Sales (US$ mn) $0 $318 $998 $1,295 $1,224 $1,146 Watch Module Sales (US$mn) $0 $0 $0 $751 $882 $887 Total SiP Sales (US$mn) $0 $318 $998 $2,046 $2,106 $2,033 NT$ $29.4 $29.6 $30.2 $30.3 $30.3 $30.3 SiP Sales (NT$mn) $0 $9,409 $30,149 $61,996 $63,809 $61,603 Consolidated Sales (NT$) $193,972 $219,862 $254,220 $302,960 $335,674 $349,506 SiP % of Consolidated % 11.9% 20.5% % ASE Shanghai monetisation. ASE announced on 20 November that USI would increase capital at Rmb27.06 per share, 1.5x the issuing cost at Rmb ASE raised a total of Rmb2.1 bn or NT$10.4 bn through USI. The capital increase will be for capacity and materials for Wi-Fi modules and wearable modules. Post completion, ASE's USI ownership drops from 88% to 82%, although its US$5 bn stake still represents 5 of ASE's valuation. If we factor in the market capitalization of the USI Shanghai, the back-end business (ATM ASE assembly, test and materials) is only valued at 7.8x 2015 P/E and 4.1x EV/EBITDA. Figure 160: ASE's market cap at US$5.2bn ex-usi value Market capitalization and enterprise value Shares (mn) 8,194 Current price (NT$) NT$ 31.3 Market capitalization of ASE Global (US$mn) $9,778 Net Debt (US$mn) $1,857 Enterprise Value of ASE Global (US$mn) $11,636 Value of USI Shanghai Stake (US$mn) 4,491 Market Capitalization of ASE ATM (US$mn) 5,288 Enterprise Value of ASE ATM (US$mn) 7,145 4Q14 1Q ATM USI CS Street Guidance ATM USI CS Street ATM USI CS Street ATM USI CS Street Sales 43,477 34,796 74,273 75,331 UP 2-4% QoQ 38,217 29,576 65,293 66, , , , , , , , ,554 Chg (%) Capacity +1%; UT +1-3% GM (%) Slightly down OpM (%) Flattish Net Inc. 7, ,282 6,895 4, ,229 5,005 23,019 2,956 23,019 22,468 26,219 3,834 26,219 25,492 EPS (NT$) SiP % of USI Sales % 44.5% 40.3% 38.2% SiP % of ATM Sales % 5.4% % 5. Figure 161: ASE's ATM trading at 8x P/E, 4.1x EV/EBITDA Maintain OUTPERFORM. We rate ASE as OUTPERFORM with a NT$47 target price. ASE is seeing sales momentum from SiP projects including Wi-Fi modules, fingerprint, and watch motherboard, with potential for camera module board assembly in the future. The SiP projects and Wi-Fi modules are holding 4Q14 sales above peers (consolidated sales up 10-15% QoQ vs peers' down 0-5% QoQ) and extending momentum into We stay positive on reasonable valuation, factoring in the US$5 bn 82% equity stake in USI Shanghai. Our TP of NT$47 is based on 2.5x forward P/B, implying 15x P/E, back to the levels it reached during the prior upturns despite this cycle ASE having the USI stake at half its value and enhancing the SiP potential. ASE's valuation attractive on sum-of-the-parts factoring the US$5bn valuation of USI Shanghai ASE Sum of the Parts ATM USI Eliminations Consolidated Net income (NT$mn) 21,177 3,834 1,208 26,219 P/E EBITDA (NT$mn) 54,944 5, ,771 EV/EBITDA Sales (NT$mn) 174, ,334-10, ,960 EV/Sales China Smartphone Sector 61

62 SPIL momentum milder after the strong 2014 ramp 4Q14 sales top expectations on ramp of overseas mobile. SPIL's 4Q14 sales reached NT$21.4 bn, down only 1% QoQ and better than its original weak guidance for -3-9% QoQ and CS/Street for -5%/-6% QoQ. Upside strength in 4Q14 was from overseas baseband and power management for a flagship smartphone, though gaming, consumer, network infrastructure and PC was still in the low season and adjusting inventory, areas that should recover post CNY. ASE view remains positive longer-term on ramp of SiP, Apple and rebound of IDM business 4Q14 margins to be boosted by the better sales and currency. We model 4Q14 GM at 25.4%, above the high-end of the company's 23-25% guidance on better sales and tailwind from NT$ depreciation. The 5% NT$ depreciation the past few months will be a near-term tailwind for Asian upstream and back-end in particular, with near 1% sales boost, 30bp positive GMs and 2-3% EPS for each 1% appreciation in the backend and 40-50bp GM boost for the foundries. We raise EPS from NT$0.82 to NT$ Q15 to see a modest decline in-line with seasonality. We expect SPIL to guide 1Q15 down mid to high single digits, in-line with seasonality due to fewer working days and low season for smartphones. SPIL can maintain GMs in the mid- range and near post crisis highs by continuing to improve product mix to flip chip with material costs contained and the competitive landscape not disrupted until 2016 by the Chinese acquisition of Stats. Figure 162: SPIL s 4Q14 and 1Q15 guidance versus CS 4Q14 1Q (NT$ mn) CS Street Guidance CS Street CS Street CS Street CS Street Net sales 20,570 20,567 NT$19.7-$21.0bn 19,335 19,820 82,210 82,185 88,266 88,705 95,336 94,787 QoQ (%) % QoQ % 18.5% 18.5% 7.4% 7.9% % GM (%) 24.2% % 22.5% 22.8% 24.5% 24.4% 25.2% 24.6% 25.2% 24.2% OpM (%) % 14-16% 12.7% % 15.8% 16.4% % 16.2% Net income 2,613 2,576 NT$30.3 2,100 2,291 11,332 11,182 12,193 11,789 13,287 12,476 EPS (NT$) , Bloomberg consensus Capital spending coming down from earlier highs. SPIL already trimmed 2014 core capex from NT$17-18 bn to NT$15.4 bn, with total spend at NT$21.1 bn including the recently purchased Promos used fab in Taichung. Capex for 2015 is now targeted back at the NT$14.5bn for flip chip, bump, and wafer level CSP. Focus for SPIL into 2015 will be continuing existing growth drivers from 4G emerging market smartphones and infrastructure, game console and expanding its Apple related exposure, with new targets including investment in fan-out wafer level packaging ahead of 2016 volume and for emerging IoT/wearables applications growth momentum milder. The stock offers some value at 12x 2015 EPS and 7% cash yield although growth momentum will be more mild in the coming year. We expect a mid-single digit QoQ decline in 1Q15 in-line with the group and also fewer working days due to Chinese New Year. SPIL sees a few positive trends supporting its growth into 2015, including: (1) Comms: increased adoption of 4G smartphones as prices come down, 4G roll out to export markets, and some remaining EM upgrades from feature phone to smartphones, (2) TV: TV replacement cycle will also require more ICs as density and pixel migrate, (3) LTE infrastructure: SPIL expects LTE base station build up to extend for another 1-2 years so will serve as an additional driver in 2015 as 3G base station was strong a decade ago. It also sees the memory unit market healthy. However, some growth will be offset by a high base this year (CS +18.5% YoY) and weak China whitebox tablet outlook. Next catalyst would be restocking in 1Q15 and resumption of LTE infrastructure/handset orders. China Smartphone Sector 62

63 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 Sep/99 May/00 Jan/01 Sep/01 May/02 Jan/03 Sep/03 May/04 Jan/05 Sep/05 May/06 Jan/07 Sep/07 May/08 Jan/09 Sep/09 May/10 Jan/11 Sep/11 May/12 Jan/13 Sep/13 May/14 Jan/15 Jan/03 Sep/03 May/04 Jan/05 Sep/05 May/06 Jan/07 Sep/07 May/08 Jan/09 Sep/09 May/10 Jan/11 Sep/11 May/12 Jan/13 Sep/13 May/14 Jan/15 Figure 163: ASE trading at a discount on a P/B basis Figure 164: SPIL's historical P/B band NT$ ASE Historical PB Band 3.0x 2.5x NT$ 65 SPIL Historical PB Band 3.2x 2.5x x 0.8x x 1.2x 0 5 Mobile devices: Chinese brands gaining share on export growth Chinese smartphone brands market share has been on the rise since 2011 and experienced another leg up in 2014 in the domestic and overseas markets. In 9M14, Chinese smartphone brands accounted for 77% share of domestic shipments and 41% globally. The share gain is being led by competitive pricing with cheaper component costs, increasing on-line sales, and lower licensing expenses. We think Chinese brands will continue to gain share in 2015 support by the take-off of entry level 4G smartphone in China and continuous smartphone proliferation in the emerging markets. Based on CS analysis, we forecast 2015 China smartphone sales of 473 mn units (up 13% YoY) and overall shipments by Chinese brands (incl. to export market) to reach 913 mn units (up 28% YoY). Chinese brands took 77% of share in China and 41% globally in 9M14 Figure 165: China smartphone brands market share keeps rising 10 China smartphone brands' market share in China China smartphone brands' market share globally Source: IDC Operators pushing 4G proliferation China's 4G smartphone penetration also saw a hike in 2014 after China Mobile accelerated its TD-LTE 4G BTS (base transceiver station) builds. According to China Mobile, it has installed 410K 4G BTS as of end-jun 2014 and targeted to reach ~650K by end China Telecom and China Unicom also speeded up their 4G BTS builds as the government granted more FDD-LTE trail licenses in 4Q14. We believe the 4G BTS installations will continue in 2015 and the operators will continue to drive 4G subscriber base with subsidy and more entry-level 4G smartphones. 4G BTS builds are ahead of the schedule China Smartphone Sector 63

64 Figure 166: China's 4G BTS installation plans '000 BTS China Mobile China Unicom China Telecom 3,000 2,500 2,000 1,500 1, FY12 FY13 FY14 FY15 FY16 Figure 167: China Mobile's 4G net additions mn Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Source: Company data Near-term demand remains slow, but entry-level 4G will help shipment to recover after CNY Our checks with the smartphone display component makers and OEMs suggest China smartphone supply chain is still under inventory adjustment in 4Q14 and are seeing softer pull-in this year before Chinese New Year holiday (January to early February). We believe the pull-in should resume after the Chinese New Year holiday but believe the 4G smartphone shipment growth in China in 2015 will be driven by low to mid-end entry level 4G models, which adopts 4G chipsets but could be equipped with lower specs (such as less memory, smaller screen size, lower display resolution, lower pixel camera, and etc). We also noted that the concern on IP infringement could potentially hurt smaller Chinese smartphone makers' margins. Figure 168: China's 4G entry-level smartphone cost analysis 2015 target China 4G entry level smartphone BOM US$ 2H14 1H15 2H15 AP Chipset + Baseband (Quad core 1.1 GHz 64 bit) ROM + RAM Connectivity (Bluetooth/GPS/WiFi) MEMs (Gyro/Light ) RF/PA Display + Touch (4.5" FWVGA) Camera Module (5M/2M) PCB+Passives Battery (2000 mah) Mechanical Parts and Assembly Royalty Others (Chasis, Speakers, Filters, Bus) Total Cost FOB Price Retail Price OEM GM 16.3% 15.2% 11. Retail GM % 13. Source: DisplaySearch, Credit Suisse estimates With competitive pricing environment for the entry-level 4G models and potential rising licensing fees, we think Chinese smartphone brands that has greater domestic exposure will be in a less favourable position versus those that ship to overseas markets. We thus favour TCL Comm and Lenovo over Coolpad. Entry-level 4G BOM cost will continue to decline in 2015 Prefer TCLC and Lenovo over Coolpad Figure 169: TCLC, ZTE, and Huawei has higher overseas exposure than Coolpad 2014 shipments (mn) China Overseas Huawei Lenovo Xiaomi ZTE Coolpad % 5% TCLC China Smartphone Sector 64

65 Figure 170: Gross margin comparison between major Chinese smartphone brands 4 35% 3 25% 15% 1 5% 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 ZTE TCLC Coolpad Note: Coolpad s 3Q14 stands for CS estimated 2H14 GM TCLC: Export driving shipment and profit growth TCL Communication (TCLC) is a 58% owned subsidy of TCL Corp. TCLC was established in 2004 and acquired Alcatel's handset business in July Since then, the company has been managing two brands for its products, TCL and ALCATEL ONETOUCH. Recently, it announced to acquire the Palm brand trademark and plans to use the Palm name for on-line channels. According to IDC, TCLC ranked the seventh-largest handset brands in the world and 12 th -largest smartphone brand in the world in 9M14. TCLC is the seventh-largest handset brands in the world TCLC shipped 33.2 mn units of smartphones in 9M14 and ranked number 6 among Chinese smartphone brands globally. TCLC also reported 19.3% GM in 9M14 with 3.9% OPM, ahead of its peers given 9 of its smartphone shipments are outside of China. It also entered tablet business and introduced its 4G smartphone models in 1H14. Figure 171: TCLC's smartphone models Company TCL TCL TCL Alcaltel Alcaltel Alcaltel Alcaltel Model name P331M J730U P688L Pop C7 Idol 2S Idol X+ Hero 2 Image Technology TD-LTE TD/FDD-LTE TD/FDD-LTE HSPA TD-LTE HSPA TD-LTE Operating System Android 4.4 Android 4.3 Android 4.3 Android 4.2 Android 4.3 Android 4.2 Android 4.4 Pixels 854 x x x x x x x 1080 RAM 512MB 1GB 1GB 1GB 1GB 2GB 2GB Storage 4GB 4GB 4GB 4GB 8GB 16GB 16GB Display 4.5" 5.0" 5.5" 5.0" 5.0" 5.0" 6.0" Camera 5MP 5MP + 0.3MP 8MP + 2MP 5MP + 0.3MP 8MP + 1.3MP 13.1MP + 2MP 13.1MP + 5MP Battery 2000mAh 2000mAh 3300mAh 2000mAh 2150mAh 2500mAh 3100mAh CPU Speed 1.3GHz 1.2GHz 1.2GHz 1.3GHz 1.2GHz 2.0GHz 2.0GHz Processor Chip MT6582+MT6290 MSM8926 MSM8926 MT6582M MSM8926 MT6592 MT8392 Multi-core Quad Quad Quad Quad Quad Octa Octa Price (RMB) ,399 1,499 2,999 Source: Company data, JD.com, Credit Suisse We remain positive on the medium-term growth outlook for TCLC as it is well positioned to capture the smartphone proliferation given it has a complete product portfolio (feature phone, smartphone, tablet), well established operator channels, strong branding, competitive cost structure, and 60-65% of its smartphone sales are from emerging markets. We estimate TCLC's smartphone shipment to reach 39.5 mn in 2014 (up 125% YoY) and will see another 39% growth in 2015 to 54.7 mn units, driven by entering more operator channels in the US and the feature phone replacement cycle in the emerging markets. TCLC smartphone shipment to grow 38% YoY to 55mn units in 2015 We also expect TCLC to benefit from the 4G proliferation, which should help its overall ASP and margins. The company mentioned that 4G accounted for 15% of smartphone shipments in 3Q14 and we expect that ratio will increase to 20-25% in 2015 as it ships more 4G smartphones into North America (20-25% of sales) and Europe (15- of China Smartphone Sector 65

66 sales) channels. With a well-controlled OPEX, we expect TCLC's earnings to see 39% YoY growth in Figure 172: TCLC's global smartphone market share 3% 3% 2% 2% Figure 173: TCLC's smart device revenue breakdown (3Q14) Smart device revenues China 9% APAC 5% 1% 1% EMEA 34% Americas 52% M14 TCLC global smartphone market share Source: Company data, IDC, Credit Suisse Source: Company data 4Q14 smartphone shipments tracking ahead, upside to FY14 sales outlook TCLC raised its 2014 revenue growth target from 45% to over 5 YoY at its 3Q14 result meeting, implying over YoY growth for 4Q14. According to the company, December smart device shipments of over 5.4 mn units/month has set the record for 2014, 4Q14 total smart device shipments reached 15.5 mn units, up 103% YoY. We see upside to our prior shipment/sales forecast and fine-tune our model to reflect the better 4Q14. We now expect 4Q14 smartphone shipment of 14.3 mn units (up 39% QoQ) and tablet shipment of 1.2 mn units. For 2014, we estimate smartphone shipment of 39.5 mn units and tablet shipment of 2mn units. We keep our EPS largely unchanged and maintain our TP of HK$11.5, based on 10x average P/E. Reiterate OUTPERFORM on TCLC with a target price of HK$11.5 Figure 174: TCLC's quarterly P/L HK$ mn 1Q14 2Q14 3Q14 4Q14E 1Q15E 2Q15E E 2015E Revenue 5,541 6,677 7,779 10,493 5,968 8,105 19,362 30,489 38,636 Gross profit 1,087 1,294 1,481 1,973 1,146 1,532 3,672 5,835 7,285 Operating profit ,225 1,885 Net profit ,142 1,595 EPS (HK$) Gross margin (%) Operating margin (%) Net margin (%) Coolpad: Business model under transition Coolpad Group was established in June 2002 and is focused on handset and mobile related product developments. It has a close relationship with the Chinese carriers and was ahead on 4G smartphone development in 1H14. According to IDC, Coolpad was ranked the fourth-largest smartphone maker in China and seventh-largest smartphone brand in the world in 9M14. Coolpad ranks as the seventh-largest smartphone brand globally China Smartphone Sector 66

67 Figure 175: Coolpad smartphone shipment trend mn units Smartphone shipments Revenue (RHS) HK$ mn 25,000 20,000 Figure 176: Coolpad China smartphone market share , , H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14E 1H15E 2H15E 5, M14 Coolpad China smartphone market share Coolpad shipped 24 mn units of smartphones in 1H14 with ~4 of the shipments are 4G. For 2014, Coolpad targets over 50mn units of smartphone shipments and expects 4G to account for ~6 of its total volume. Its business model is under transition as the management aims to cut down its smartphone models and shift its resource to new sales channels post the operator subsidy cuts. It announced two sub-brands in 2H14 for on-line (Dazen) and retail channel (ivvi). It also entered into a joint-venture agreement with Qihoo 360 for the on-line Dazen brand, where Qihoo 360 will own 45% stake of the new JV company and Qihoo s software/apps will be pre-installed on the Dazen smartphones. Coolpad's business model is under transition; it setup two sub-brands for on-line (Dazen) and retail (ivvi) channels Figure 177: Coolpad's smartphone models Company Coolpad Coolpad Coolpad Coolpad Coolpad Coolpad Coolpad Model name 7, L K1 (7620L) Dazen F1 Dazen F2 S6 (9190L) ivvi Image Technology TD/FDD-LTE TD-LTE TD/FDD-LTE FDD-LTE TD-LTE FDD-LTE TD-LTE Operating System Android 4.1 Android 4.3 Android 4.3 Android 4.4 Android 4.4 Android 4.3 Android 4.4 Pixels 1280 x x x x x x x 720 RAM 1GB 1GB 1GB 1GB 2GB 2GB 2GB Storage 4GB 8GB 4GB 8GB 16GB 16GB 16GB Display 5.0" 5.5" 5.5" 5.0" 5.5" 5.95" 5.5" Camera 8MP + 0.3MP 8MP + 2MP 8MP + 2MP 13MP + 5MP 13MP + 5MP 13MP + 5MP 13MP + 8MP Battery 2000mAh 2500mAh 2500mAh 2500mAh 2500mAh 2800mAh 2700mAh CPU Speed 1.7GHz 1.2GHz 1.2GHz 1.2GHz 1.7Ghz 1.2GHz 1.7GHz Processor Chip MSM8960 MSM8926 MSM8926 MSM8916 MT6592 MSM8928 MSM8939 Multi-core Dual Quad Quad Quad Octa Quad Quad Price (RMB) ,099 1,359 1,799 Source: Company data, JD.com, Credit Suisse Coolpad aims to increase overseas sales exposure from 2% in 1H14 to 20-3 longerterm by working with US/European operators and open channels in APAC (i.e., India and Indonesia). Coolpad has recruited new management team to run its overseas business, which we think should help it to see a more meaningful contribution in Pricing remains competitive in China Coolpad s smartphone ASP increased by 7% HoH in 1H14, thanks to rising penetration of 4G smartphone. However, we believe its ASP are seeing a downward trend in 2H14 on intense price competition post subsidy cuts, despite 4G mix will continue to increase. We think the ASP decline is inevitable in 2H given the de-specing trend of entry-level 4G smartphone and competition from peers. We lower our ASP assumption and cut our EPS by 9-18%. We cut our target price to HK$1.6 (from HK$1.85), based on 9.5x 2015 P/E (from 10x P/E, vs the 8-12x historical range). Maintain our NEUTRAL. Reduce Coolpad's TP to HK$1.6 as we trim E EPS by 9-18% China Smartphone Sector 67

68 Figure 178: Coolpad's quarterly P/L HK$ mn 1H13 2H13 1H14 2H14E 1H15E 2H15E E 2015E Revenue 9,632 9,992 14,935 16,055 16,874 19,244 19,624 30,990 36,118 Gross profit 1,254 1,276 2,026 2,055 2,143 2,406 2,530 4,081 4,549 Operating profit Net profit EPS (US$) Gross margin (%) Operating margin (%) Net margin (%) ZTE: 4G BTS & smartphone share gain lifting 2015 OP ZTE was founded in 1985 and is well-known as a leading telecom networking equipment and smartphone vendor. In 9M14, ZTE had 57% of total revenue from networking equipment, 3 from the handset, and 14% from software/service. It has benefited from the China 4G BTS builds given the aggressive build up plans by the carriers, as well as gaining share from foreign peers on better cost structure and pricing. Handset accounts for 3 of ZTE's revenue ZTE s handset business were loss making in 2013 given the pricing competition in the China market and overbuilt of smartphone inventory. ZTE changed its strategy for handset business since 4Q13 as the company focus more on mid- to high-end models, rather than market share or shipment. It cut half of its smartphone models (mainly low-end models), reduce overhead costs, and shifted its focus to the export markets. Figure 179: ZTE smartphone models Company ZTE ZTE ZTE ZTE ZTE ZTE ZTE Model name Q801L V5S Q802D A880 V5 Max Grand S II Star 2 ZTE smartphone mix is improving; it ranked the fifthlargest smartphone brand in the US Image Technology FDD-LTE TD/FDD-LTE FDD-LTE TD/FDD-LTE TD/FDD-LTE TD/FDD-LTE TD-LTE Operating System Android 4.3 Nubia UI2.5 Android 4.4 Android 4.4 Nubia UI2.5 Android 4.3 Android 4.4 Pixels 854 x x x x x x x 1080 RAM 1GB 1GB 1GB 1GB 2GB 2GB 2GB Storage 4GB 8GB 8GB 8GB 16GB 16GB 16GB Display 5.0" 5.0" 5.0" 5.0" 5.5" 5.5" 5.0" Camera 5MP + 0.3MP 8MP + 5MP 8MP + 5MP 8MP + 8MP 13MP + 5MP 13MP + 2MP 13MP + 5MP Battery 2300mAh 2400mAh 2000mAh 2300mAh 3100mAh 3100mAh 2300mAh CPU Speed 1.2GHz 1.2GHz 1.2GHz 1.2GHz 1.3GHz 2.3GHz 2.3GHZ Processor Chip MSM8926 MSM8916 MSM8916 MSM8916 MSM8916 MSM8974AB MSM8974AB Multi-core Quad Quad Quad Quad Quad Quad Quad Price (RMB) ,699 2,499 Source: Company data, JD.com, Credit Suisse We expect ZTE's handset business to turn around in 2014 on better sales mix (7 export), streamlining of product portfolio (4 4G), and cost reduction. We estimate its 2014 smartphone shipment to reach 52 mn in 2014 (up 37% YoY) and will see 24% growth in 2015 to 64 mn units, driven by continued share gain in the US and stabilising of its domestic business. Its smartphone shipments in overseas markets saw strong growth in 9M14 and ranked fifth-largest smartphone brand in the US in 9M14. We believe handset division is no longer a drag on ZTE's overall business in 2014 post the restructuring. China Smartphone Sector 68

69 Figure 180: ZTE's revenue breakdown (9M14) Others service & software 14% Figure 181: ZTE's smartphone market share in N. America Handset 3 Networking equipment 57% Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 ZTE smartphone market share in North America Source: IDC, Credit Suisse Remain positive on 4G BTS builds and handset OP growth We remain positive on ZTE given acceleration of 4G BTS builds in China, as well as better OP for its handset business. We forecast 4Q14 EPS of Rmb0.275, tracking to the higherend of its guidance (Rmb ) on solid 4G BTS demand and better handset growth. We fine tune our model and keep our EPS estimates largely unchanged. We expect ZTE s 2015 revenue to grow 13% YoY to Rmb95,028 mn and EPS to grow 27% YoY to Rmb1.02. Our TP of HK$20 is based on 15.5x 2015 P/E, versus 10-22x range of 3G capex cycle, and is trading at around 35% discount versus the A-share. Reiterate OUTPERFORM. Reiterate OUTPERFORM with a target price of HK$20 Figure 182: ZTE's quarterly P/L Rmb mn 1Q14 2Q14 3Q14 4Q14E 1Q15E 2Q15E E 2015E Revenue 19,053 18,645 21,103 25,370 20,486 22,386 75,162 84,171 95,028 Gross profit 6,391 4,730 6,410 8,099 6,351 6,895 20,387 25,630 29,879 Operating profit 1,145 1, ,878 1,024 1,410 3,444 5,185 6,515 Net profit ,358 2,777 3,520 EPS (Rmb) Gross margin (%) Operating margin (%) Net margin (%) Figure 183: ZTE A-share valuation premium over H-share (forward P/E) Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 ZTE - A share valuation premium over H share Average Lenovo: Solid position with three-pronged strategy to succeed in smartphones Lenovo enters 2015 with a decisive three-pronged China smartphone strategy. First, Lenovo will further pursue the entry-level part of the China smartphone market with its core Lenovo devices. They will do so by penetrating deeper into rural-china (i.e. tier 4-6 cities) through open channels, which can help with profitability. The second step will be the China Smartphone Sector 69

70 launch of Internet-focused smartphone China company, with a different brand, and place it in direct competition with Xiaomi. The third step in its China strategy is to re-launch the Motorola brand (i.e. in 1Q15), attacking the mid-to high-end of the market and where most of the profit resides. We see continued traction in market outside of China and see Brazil and India as two key markets in focus in Overall, we forecast its smartphone shipments will increase to 84/91 mn in FY16/17E, from 72 mn in FY15E. Motorola strengthens Lenovo's position at the high-end Lenovo paid US$2.91 bn for Motorola Mobility. It came with the Moto and Droid series brands, which have shown promising results YTD and access wireless patents and IP, and carrier relationships. Motorola's sales were US$4.7 bn in CY1Q-3Q14 (+48% YoY) and US$6.0 bn over the last 12 months (+27% YoY), but the business was in operating loss over this period. Overall, we forecast Motorola adds an incremental US$2.8/6.4 bn in sales in FY15/16 with operating losses of US$397/282 mn. Figure 184: Motorola new Moto X, Droid and Moto G smartphones volumes are promising YoY% smartphone unit change Q13 2Q13 3Q13 4Q13 1Q14 2Q14 Global smartphone unit YoY % change Motorola smartphone unit YoY % change Source: Gartner Device Market Share, Credit Suisse estimates Motorola marries well with Lenovo smartphone products and strategy To date, the majority of Lenovo's smartphones sold are into China (8 in the Sept quarter) and are expanding into Asia-Pac, Russia, and India. Many of the devices are sold within the US$ price-point. Motorola volumes are largely in the United States and Brazil. Motorola's newly launched Moto X series, Droid, and Moto G series are showing promising demand. Lenovo can cross-license >2,500 wireless and related IP from Google, improving the cost profile and development times of Lenovo's branded smartphones sold in these region. Lastly, Motorola has over 30 global carrier relationships. Figure 185: Motorola's key smartphone markets are North America and Brazil; India is also very promising % of 2Q14 Motorola smartphone shipments North America 29.5% Figure 186: Vast majority of Lenovo's smartphones sold are into China and at entry-level price points % of 2Q14 Lenovo smartphone shipments Japan 0. Latin America 1.3% Eastern Europe 5.5% MEA 2.1% Latin America 46.8% Japan 0. Western Europe MEA7. 0.2% Asia Pac 16.5% Source: Gartner Device Market Share, Credit Suisse estimates Asia Pac 91.1% Source: Gartner Device Market Share, Credit Suisse estimates China Smartphone Sector 70

71 Lenovo paid US$2.91 bn for Motorola Mobility transaction details Lenovo used US$660 mn in cash, issued US$750 mn in Lenovo stock, and US$1.5 bn in deferred consideration in the form of three-year interest-free promissory note. Lenovo issued mn shares to Google for the stock consideration portion at a price of HK$ per share (closing price on 30 October), which results in ~5% share dilution. Google has a one-year lock-up period for the mn Lenovo shares it was granted. The lock-up starts on date of deal completion date (30 Oct, 2014). A separate cash payment of US$228 mn was also paid to Google primarily for the cash and working held by Motorola at the time of close. The deal includes handset portfolio but also more The deal included Motorola Mobility's business, which includes Moto X and Droid series brands for the premium category and Moto G and E series for in value segments. In addition, Lenovo will add Moto 360 Android Wear Motorola Xoom and Xoom Wi-Fi Accessories Bluetooth adapters, headsets, speakers, and related peripherals. Lenovo will also gain 3,500 technical and other employees staffed in 33 locations globally (2,800 are US based), of which 2,500 have technical expertise and IP background. Lenovo said on its 30 January media conference call that it will retain Motorola's Chicago-area based headquarters and has NO plans to lay-off personnel. Figure 187: Motorola launched smartphone portfolio is streamlined to five models target entry, mid, and high-end Manufacturer Motorola Motorola Motorola Motorola Motorola Model Moto E DROID Turbo Nexus 6 Moto X (2014) Moto G (2014) Announce date May-14 Oct-14 Oct-14 Sep-14 Sep-14 Ship date May-14 Oct-14 Nov-14 Sep-14 Sep-14 Form factor: Display size (in) Resolution 540 x x x x x 1280 Height x Width x Depth (mm) x 64.8 x x 73.3 x x 83 x x 72.4 x x 70.7 x 11 Weight 142 g 169 g 184 g 144 g 149 g Core internals Processor Snapdragon 200, 1.2 GHz Snapdragon 805 quadcore, 2.7 GHz Snapdragon 805 quadcore, 2.7 GHz MSM8974AC Snapdragon 801, 2.5 GHz MSM8226 Snapdragon 400, 1.2 GHz Memory 1 GB RAM 3 GB RAM 3 GB RAM 2 GB RAM 1 GB RAM Operating system Android (KitKat) Android (KitKat) Android 5.0 (Lollipop) Android (KitKat) Android (KitKat) Storage type/capacity (GB) 4 GB 32 / 64 GB 32 / 64 GB 16 / 32 GB 8 / 16 GB Features Battery life (hrs) NA Up to 48 h (3G) Up to 24 h NA Up to 24 h (3G) Standby (days) NA NA NA NA NA Camera Yes Yes Yes Yes Yes Rear-camera (MP) 5 MP 21 MP 13 MP 13 MP 8 MP Front-camera (MP) No 2 MP 2 MP 2 MP 2 MP Wireless technology 3G 4G LTE 4G LTE 4G LTE 3G Wi-Fi Yes Yes Yes Yes Yes GPS Yes Yes Yes Yes Yes Bluetooth BT4.0 BT4.0 BT4.1 BT4.0 BT4.0 Retail Price ($USD) US$129 US$ US$649 US$ $ Google cross-licenses Motorola's mobile patent portfolio Google maintains the vast majority of the Motorola Mobility's patent portfolio. This includes current patent application and inventions pending approval. They will license back to Motorola Mobility. Motorola will retain over 2,000 patents assets and a "large-number" of patent cross-license agreements, plus the brand and trade market portfolio. China Smartphone Sector 71