2013 Global Telecom Equipment Outlook

Transcription

1 Telecom Equipment Research Analysts: Kulbinder Garcha +1 (212) Achal Sultania Matthew Cabral +1 (212) Talal Khan, CFA +1 (212) Vlad Rom +1 (212) Ray Bao +1 (212) Asian Semiconductor Research Analyst: Randy Abrams Catalysts: Jan 8 11 Jan 24 Jan 24 Jan 30 Jan 31 Feb 8 Feb CES 2013, Las Vegas Nokia Q412 Earnings Apple F1Q13 Earnings QCOM F1Q13 Earnings Ericsson Q412 earnings ALU Q412 earnings Mobile World Congress Recent Webcasts: Out of Earnings 3Q12: Into Compute Christmas Q Storage Survey Highlights Nokia and RIMM: Not easily turned around, further downside risk Smartphones: High-end going higher Compute Update: Raising estimates, tablets driving growth 2Q12 Client Questions, Our Responses Emerging Apple: On track to realize potential 7 th January 2013 Global (Americas & Europe) Equity Research Global Telecom Equipment 2013 Global Telecom Equipment Outlook Market size underestimated for smartphones/handsets. Our detailed bottom up analysis suggests that the market underestimates the size of the low-end white-label smartphones, which causes us to restate our 2012/2013 volume estimates. Our estimates are 6%/15% higher for smartphones (and 3%/4% higher for overall handsets). We believe that the growth of the white-label smartphones specifically poses a threat for vendors like Nokia, RIMM, LG and possibly Samsung, given their exposure to feature phones and low-end smartphone segments. Raising LT smartphone units to 1.74bn a barbell develops for price points. We believe that the addressable market for smartphones is 4.95bn longer term, resulting in effective penetration of only 24% currently given our estimate of 1.2bn smartphone users at the end of We expect effective smartphone penetration to rise to ~80% long term driving smartphone volumes of 1.42bn/1.74bn units by 2015/2017 (26%/19% CAGR over this period). CS smartphone vendor scorecard Apple and Samsung lead. Our smartphone vendor scorecard is based on nine metrics (software, services, cloud, product, brand, distribution, compute convergence, IPR and chipset efficiency), which we believe drive success in smartphones. We conclude that secular share gainers will be Samsung, Apple and Huawei, while other vendors will struggle to make returns. Qualcomm (raising TP to $85) to dominate wireless chips. By explicitly linking our end-market estimates we introduce a proprietary wireless chip model and believe the market will grow to $57bn long term. Specifically we highlight Qualcomm s dominant LTE lead, strong IPR position, and exposure to the right customers (Apple/Samsung). Through a detailed technology, customer and product roadmap analysis we demonstrate that QCOM s mobile chip revenue share is set to expand to 44% LT from 39% in Further, with such scale and dominance we believe our current margin estimates for QCT at 19.1%/19.6% for FY13/14 could prove conservative. As a result, we raise our FY13/14 EPS estimates by 5%/6% to $4.60/$5.20, and also TP to $85 (from $75 previously). For details, please see our note QCOM: LTE investments driving value published concurrently. Emerging markets and low cost phones drive the Asian chipset vendors. A consistent source of upside to industry handset estimates is repeating itself with low cost smartphones. By 2015, emerging markets will represent 70% of the global smartphone market and sub-$200 smartphones will pass 40% of industry volumes, playing into the hands of the local brands and Asian chipset suppliers. We will monitor the inventory cycle, with a current adjustment on-going. We are restricted on Mediatek but believe Spreadtrum and RDA offer a low cost way to play the theme or overall growth through Asian foundries (TSMC/SMIC) or back-end suppliers (ASE/SPIL). DISCLOSURE APPENDIX CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, INFORMATION ON TRADE ALERTS, ANALYST MODEL PORTFOLIOS AND THE STATUS OF NON-U.S ANALYSTS. FOR OTHER IMPORTANT DISCLOSURES, visit research disclosures or call +1 (877) U.S. 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

2 What's new in our analysis 1) Raising and restating handset and smartphone estimates. Our extensive review of the handset market suggests that most industry observers underestimate the global market by continuing to ignore white label growth in emerging markets. Handsets Aggregate device shipments in the handset market could be as high as nearly 2.0bn units in 2012 (+7% yoy), and could continue to grow to 2.1bn in 2013 (+6% yoy) (3%/4% increase from our previous estimates). Smartphones We estimate smartphone volumes of around 716mn/976mn units in 2012/2013. This is an increase of 6%/15% versus our previous estimates. 2) CS smartphone vendor scorecard. Apple and Samsung lead. We continue to rely on our proprietary smartphone vendor scorecard which is based on nine metrics (software, services, cloud, product, brand, distribution, compute convergence, IPR and chipset efficiency), which we believe drive success in smartphones. We conclude that secular share gainers will be Samsung, Apple and Huawei, while other vendors will struggle. 3) Introducing the CS wireless chip model 13% revenue CAGR LT. We have for the first time linked our enddemand projections to wireless chip projections (= discrete basebands + discrete AP + integrated basebands). Driven by handset and smartphone growth, we conclude that this 2.6bn unit/$31bn TAM will grow at a unit/revenue CAGR of 10%/13% between ) New CS wireless chip vendor scorecard. We have developed a proprietary scorecard for winners and losers in the mobile chip market. Our scorecard identifies vendors best positioned for the long-term based on an evaluation of 5 attributes, including R&D intensity, Product roadmap, LTE & WCDMA positioning and scale. Specifically we have attempted to model each chip vendor s share on a product, technology and end-customer perspective. We conclude that Qualcomm ranks first on our scorecard among all the wireless chip vendors, and we see the company dominating the industry with revenue share rising to 44% LT. 5) Stock views: Qualcomm raising EPS and Price Target, reiterate Outperform Reiterate Outperform on Apple Reiterate Underperform rating on Nokia, Ericsson and Alcatel Lucent and our Neutral on RIMM Slide 2

3 Smartphone market size could be understated, similar to handsets in the past 2,200 2,000 1,800 Handset market could be nearly 2bn units in 2012 Smartphone volumes could reach over 1bn units in ,200 1, , ,600 1, ,200 1, E 2013E Gartner estimates IDC estimates CS estimates (OLD) CS estimates (NEW) Source: Gartner, IDC, Nokia, Credit Suisse estimates E 2012E 2013E 2013E CS old estimates Taiwan smartphone chip vendors Top China smartphone vendors Japan / Korea vendors Top 8 vendors Source: Gartner, IDC, Company data, Credit Suisse estimates 1) Our bottom-up analysis shows that global handset units can be 2bn in Our bottom-up analysis shows that the handset market in 2012 may be close to 2bn units, which implies mid-single digit yoy volume growth, followed by 2.1bn units in 2013 (higher than estimates from other sources). 2) Smartphone growth at tier I vendors to be led by Samsung and Apple. With robust volume growth at both Samsung and Apple, we believe smartphone units at tier I branded OEMs will continue to grow at around 25% per annum in 2012/ ) Smartphone baseband units from Asia to more than double in We believe that MediaTek and Spreadtrum together will ship over 325mn baseband units for smartphones in 2013, around 2.3x unit growth vs Even assuming 15% discount to their volumes, we estimate smartphones powered by these chips will grow from 125mn units in 2012 to 285mn in ) Bottom-up analysis shows volumes could be over 1bn in Our analysis suggests that global smartphone volumes could be as high as 730mn units in 2012 and 1.05bn in We have taken a conservative view and estimate 716mn/975mn units, which are 6%/15% higher than our previous estimates, and also higher than estimates from market research firms. Slide 3

4 Falling smartphone TCO especially in EMs means addressable market is 5bn Country Total cost of ownership, $ (Smartphone and/or Service plan) 2012E 2015E 2017E % CAGR ( ) Income cutoff level, US$ (000s) Addressable population, mn 2012E 2015E 2017E 2012E 2015E 2017E Additional population (2012 to 2017) % of Total population 2012E 2015E 2017E Developed countries North America United States % % 66% 83% Canada % % 83% 90% Western Europe France % % 86% 93% Germany % % 85% 91% Italy % % 51% 66% Spain % % 85% 91% United Kingdom % % 85% 90% Rest of WE % % 84% 90% Other developed Australia % % 100% 100% Hong Kong % % 91% 95% Japan % % 100% 100% Singapore % % 95% 100% South Korea % % 91% 95% Taiwan % % 91% 93% Total Developed % % 79% 88% Emerging countries China % ,236 1, % 90% 90% India % % 40% 50% Indonesia % % 80% 90% Brazil % % 60% 80% Pakistan % % 10% 10% Nigeria % % 40% 60% Bangladesh % % 10% 10% Russia % % 53% 71% Mexico % % 43% 52% Philippines % % 10% 20% Egypt % % 90% 100% Turkey % % 53% 72% Thailand % % 80% 90% Other emerging % ,010 1, % 58% 65% Total Developing % ,882 3,493 4,040 2,158 34% 59% 66% Global Total % ,439 4,299 4,945 1,860 37% 62% 69% 1 3 Source: Gartner, IMF, Credit Suisse estimates 1) We expect the TCO for a smartphone to decline by nearly $90 or 45% over the next 5 years to $103 (from $194 in 2012). This decline will be driven by a combination of lower end smartphones and falling ARPU levels. 2) Our affordability work shows that an additional 280mn people will be able to afford a smartphone in developed markets, but more importantly another 2.16bn in developing markets by The top three countries with the largest absolute growth in addressable population will be India, China, Indonesia and US. 3) Around 4.95bn people will be able to afford a smartphone by 2017, which is around 2x the current addressable population base of 2.4bn globally. Note: the TCO varies by region in subsidised markets it includes the ASP and ARPU paid in year 1 whereas in most of the emerging markets, it is simply the cost of the device Slide 4

5 Smartphone volumes to grow at CAGR of 19% long term Smartphone model summary 2008A 2009A 2010A 2011A 2012E 2013E 2014E 2015E 2016E 2017E CAGR CAGR Global mobile subscriptions (mn) 3,866 4,498 5,157 5,747 6,226 6,639 6,999 7,331 7,670 8,007 6% 5% Global new subscriptions (mn) Global mobile unit sell-in shipments (mn) 1,307 1,368 1,652 1,852 1,975 2,086 2,149 2,208 2,272 2,333 4% 3% Global smartphone subscribers (mn) ,178 1,693 2,267 2,841 3,373 3,892 34% 27% as % of total mobile subscribers 6% 7% 9% 13% 19% 26% 32% 39% 44% 49% Global smartphone addressable market (in mn by 2017) 4,945 4,945 4,945 4,945 4,945 4,945 4,945 4,945 4,945 4,945 Smartphone Effective Penetration (subs / addressable market) 5% 6% 10% 15% 24% 34% 46% 57% 68% 79% Net smartphone adds (mn) % 5% as % of total smartphone units 45% 46% 56% 58% 58% 53% 47% 40% 34% 30% Replacements units (mn) ,044 1,218 41% 32% as % of last year's smartphone subs 43% 39% 41% 41% 40% 39% 38% 38% 37% 36% as % of total smartphone units 55% 54% 44% 42% 42% 47% 53% 60% 66% 70% 1 Global smartphone units (mn) ,219 1,425 1,577 1,737 26% 19% % change yoy 14% 24% 73% 58% 51% 36% 25% 17% 11% 10% as % of mobile shipments 11% 13% 18% 26% 36% 47% 57% 2 65% 69% 74% Smartphone ASPs ($) % -9% % change yoy 4% -2% 2% -7% -7% -10% -10% -10% -10% 3 Global smartphone revenues ($ mn) 44,603 57,175 96, , , , , , , ,071 15% 8% % change yoy 12% 28% 69% 62% 40% 27% 12% 5% 0% -1% % of global handset market 26% 31% 44% 58% 71% 81% 88% 92% 94% 96% Source: Gartner, Credit Suisse estimates 1) Smartphone penetration still low at 24%. Given an installed base of some 1.18bn smartphone subscribers we estimate at the end of 2012 and our long-term smartphone addressable market forecast of around 4.95bn, the effective penetration at the end of 2012 is still low at 24%. Based on penetration gains driven by a falling TCO, we believe that smartphone adoption will gradually rise towards 80% over the next few years. 2) Slight moderation in volume growth but only after Driven by increasing affordability, smartphones will continue to see strong volume growth in 2012 (we estimate volumes to be up 51% yoy) resulting in revenue growth of 40% yoy as average ASPs decline only 7% in spite of growth in low end of the market helped by mix of higher ASP smartphones. We expect to see strong growth in 2013/2014 where we expect volumes to grow 36%/25% yoy reaching 976mn/1.22bn units respectively before seeing any moderation in volume growth. 3) Still looking for double digit growth in outer years. We believe smartphones remain one of the most attractive secular trends in technology, with volumes set to grow at a CAGR of 19% over the period Even with some moderation in growth in outer years, we still expect the smartphone market to see double digit volume growth over , eventually reaching annual shipments of 1.74bn units in Slide 5

6 Smartphones may take 95% of value in the handset industry long term Smartphones to account for 75% of all handset volumes by 2017, up from 35% in E 2013E 2014E 2015E 2016E 2017E CAGR E Global Handset Volumes (mn) Basic Phones % Feature Phones % Smartphones ,219 1,425 1,577 1, % Total 1,307 1,368 1,652 1,852 1,975 2,086 2,149 2,209 2,275 2, % Global Handset Volume Mix Basic Phones 31% 32% 32% 32% 31% 30% 28% 28% 26% 24% NM Feature Phones 58% 56% 50% 42% 33% 24% 15% 8% 5% 2% NM Smartphones 11% 13% 18% 26% 36% 47% 57% 65% 69% 74% 1 NM Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% NM Global Handset ASP ($) Basic Phones % Feature Phones % Smartphones % Total % Global Handset Revenue ($ mn) Basic Phones 25,675 24,569 27,130 27,288 25,365 22,434 19,482 17,150 14,695 11, % Feature Phones 101, ,737 98,919 88,852 68,981 48,774 25,940 12,552 6,700 2, % Smartphones 44,603 57,175 96, , , , , , , , % Total 171, , , , , , , , , , % Global Handset Revenue Mix Basic Phones 15% 13% 12% 10% 8% 6% 5% 5% 4% 4% NM Feature Phones 59% 55% 44% 33% 22% 14% 7% 3% 2% 1% NM Smartphones 26% 31% 43% 57% 70% 80% 87% 92% 94% 96% 2 NM Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% NM Source: Gartner, Company data, Credit Suisse estimates 1) Smartphones to grow to 75% of all global handset shipments by Given our view around continued growth in smartphones and move towards low-price points, we estimate that smartphones may account for nearly 75% of handset shipments by 2017, up from 35% in )..and 95% of industry revenues long term. But more importantly, we estimate smartphones may account for as much as 95% of all handset revenues in the long term, rising from 70% in Slide 6

7 Growth in $400+ ASP segment to continue in 2013 before slowing down $400+ ASP segment to grow from ~200mn in 2011 to 400mn in 2013; Also low end seeing strong growth in 2013 and beyond Price band E 2013E 2014E 2015E E 2013E 2014E 2015E <= $ % 1% 1% 2% 5% 10% $100 - $ % 17% 18% 23% 31% 32% $200 - $ % 24% 25% 22% 20% 18% $300 - $ % 18% 14% 13% 11% 9% $ % 40% 42% 41% 34% 31% 1 $400 - $ % 15% 14% 14% 13% 13% $ % 25% 27% 27% 21% 18% Total ,219 1, % 100% 100% 100% 100% 100% 1) $400+ ASP segment growing to unprecedented levels. Based upon our expectations for iphone 5 and Galaxy SIII effect, we now believe that the above $400 smartphone market could be close to 300mn in 2012 and rise further to 400mn in 2013, which implies over 4x increase from volume levels seen in ) A two player high-end market dominated by Apple and Samsung. In the above $400 smartphone market, Apple has enjoyed a market share of around 45% over the last 2-3 years, and we expect this trend to continue with the recent launch of iphone 5. However, what is worth noting here is that Samsung has managed to grow its market share in the high end to as high as 40% as per our estimates in 2012, and expected to rise further to 43% in This growth in the high end for both Apple and Samsung has resulted in several other vendors being squeezed out of the market such as Nokia, RIM and HTC. Smartphone market share in 400+ ASP segment (%) 100% Apple and Samsung dominate the $400+ ASP market 80% 60% 40% 20% 0% 11% 3% 9% 22% 3% 4% 40% 43% 47% 46% 44% 45% E 2013E 2 Others RIMM Nokia LG Sony Motorola Mobility HTC Samsung Apple Slide 7

8 CS smartphone scorecard: Apple and Samsung s dominance to continue Smartphones Weighting Apple Samsung Nokia HTC Huawei Motorola Sony ZTE LG RIM Lenovo Software 25% Services 15% Cloud 5% Product Portfiolio 15% Distribution & Supply Chain 10% Compute Convergence 5% Brand 10% IPR 10% Chipset efficiency 5% Total Score 100% % score 86% 73% 58% 57% 56% 56% 55% 54% 50% 48% 45% Overall Rank Unit share (2012E) 18.9% 29.1% 5.2% 4.5% 3.9% 2.7% 3.3% 3.8% 3.6% 4.6% 2.9% Rank Value share (2012E) 37.9% 27.0% 3.4% 4.5% 2.2% 2.7% 3.0% 2.1% 2.6% 3.3% 1.6% Rank Source: Gartner, Company data, Credit Suisse estimates Note: All scores are based on a scale of 1 to 10, with 10 being the best, and 1 being the lowest score Scorecard methodology: We believe that there are 9 key metrics in smartphone industry today. As such, we have ranked smartphone vendors on each of these metrics. In addition, we have weighted each metric depending on the relative importance to arrive at our score for vendors: Apple: Apple maintains its #1 rank with a score of 8.6/10. Apple scores very high on Software, Services, Cloud offering and Compute Convergence, along with strong Brand and Distribution scores. We believe areas where there is scope for improvement are IPR and Chipset Efficiency. Samsung: Samsung ranks #2, as the company benefits from its broad portfolio across price points, strong distribution, brand and Android focused OS strategy. A differentiated Services offering and IPR remain weak points. Nokia: Nokia maintains its position at #3, driven by strong distribution and IPR, coupled with an improving software and services offering as the company transitions its smartphone portfolio to Windows Phone. The lack of a cloud offering and compute convergence remains major shortcomings. HTC: HTC ranks #4 as the company gets mediocre scores across most metrics and weak scores on IPR, Cloud, Brand and Compute Convergence. Huawei: Huawei ranks #5 with weak scores in Cloud, Compute Convergence and Brand being offset by reasonable scores for distribution and Product Portfolio. Relative to the company s #9 position in terms of value share, the company s #5 ranking suggests share gains ahead. Motorola: Motorola ranks #6 also with mediocre scores across all metrics. While the company gets a Software score in-line with Android peers, it scores poorly on Cloud given the lack of a meaningful offering. Sony: Sony, following the split of the Sony-Ericsson JV ranks #7 on our scorecard and despite being focused on Android, the vendor suffers from limited distribution, lack of a Cloud offering and a weak IPR position. LG: LG ranks at #9 (after ZTE at #8) on our scorecard with particularly weak scores in Cloud, Compute Convergence, Brand, Distribution, and IPR. This limits a share recovery in our view. RIM: RIM slides down to #10 position with strength in Distribution being more than offset by a weak Cloud offering, IPR, Chipset, Compute Convergence position, and Software position (pending the launch of BB10 devices in early 2013). This suggests continued share loss ahead. Slide 8

9 Samsung, Apple and Huawei to gain smartphone share Strong volume growth for all vendors in 2012 ex Nokia and RIM Samsung, Apple & Huawei the share gainers Smartphone units ('000) E 2013E Smartphone unit share (%) E 2013E Apple 25,090 46,598 89, , ,700 Apple 15% 16% 19% 19% 20% Samsung 5,871 25,435 88, , ,315 Samsung 3% 9% 19% 29% 32% Nokia 70, ,167 84,614 37,287 18,532 Nokia 41% 34% 18% 5% 2% HTC 10,812 24,631 42,997 32,415 44,035 HTC 6% 8% 9% 5% 5% Motorola 2,572 13,667 17,352 19,661 15,079 Motorola 2% 5% 4% 3% 2% Sony 1,418 10,277 19,629 23,541 17,178 Sony 1% 3% 4% 3% 2% Huawei ,636 27,948 45,144 Huawei 0% 0% 3% 4% 5% Research in Motion 34,347 49,652 51,542 33,163 25,298 Research in Motion 20% 17% 11% 5% 3% LG 593 5,587 18,995 25,886 35,025 LG 0% 2% 4% 4% 4% Others 19,116 19,038 44, , ,229 Others 11% 6% 9% 24% 28% Total 170, , , , ,534 Total 100.0% 100.0% 100.0% 100.0% 100.0% of which Android based 6,798 67, , , ,418 of which Android based 4% 23% 47% 67% 69% Source: Gartner, Company data, Credit Suisse estimates 1) Apple s smartphone strength continues. Five years into the iphone launch, we believe that few handset vendors still come close to the quality of Apple s hardware, software, services and cloud offerings. In particular, we believe the success of the company s apps store, along with tight PC integration with itunes remains unrivalled. We expect Apple s smartphone share to reach 20% in 2013 from 19% in ) Samsung s share gains to continue in We expect Samsung s smartphone volumes to increase from 88mn in 2011 to 315mn in 2013, implying 32% share, driven mainly by strong traction of Android based models and continued product momentum. 3) Nokia share to bottom in We continue to believe that Nokia s smartphone share during the transition to Windows Phone will continue to decline in 2012 (vs.18% in 2011) before stabilising at around 2% levels in ) HTC share loss continues. We expect HTC s share losses to continue in the near term and fall to 5% in 2012/2013, down from 9% in 2011, owing to slow product cycle, weak brand and distribution, and increasing competition in the US market. 5) Huawei strong growth and but share gains off a small base. We expect Huawei will post meaningful growth, albeit off a small base, resulting in smartphone share of 4%/5% in 2012/2013, up from 3% in ) RIM loss of share to 5%/3% in 2012/2013 from 17% in We expect RIM s global share to fall to 5%/3% in 2012/2013 vs. 17%/11% in 2010/2011 given the lack of innovation at the vendor and rising competitive headwinds as the company transitions its portfolio toward BB10. 7) Sony, Motorola and LG share to gradually erode. We expect LG to maintain its global share at around 4%, but it will continue to be a sub-scale vendor at the global level. For MMI, we believe its market share will fade toward 2% in the long run, down from 4% in Similarly, Sony will struggle to maintain smartphone share and we forecast its share falling to 2% by 2013, down from 4% in Slide 9

10 LTE handsets to rise from 85mn in 2012 to over 450mn by LTE handsets to rise grow 5 fold over the next five years E 2013E 2014E 2015E 2016E 2017E Asia Pacific North America Western Europe Africa CEE Latin America Middle East % of the handset market % 35% 30% 25% 20% 15% 10% 5% 0% 1) LTE 2012 is the takeoff year. For LTE devices, we see 2012 as the takeoff year, with LTE enabled handsets rising from only 4% of global volumes in 2012 to ~20% by 2015, reaching over 450mn handset units. Given strong adoption trends in emerging markets helped by white-label vendors, we expect WCDMA to rise from 27% of handset market in 2012 to 42% by ) Apple / Samsung high-end driving LTE. Apple s latest ipad and iphone launches have been the most significant catalysts for LTE market growth in Indeed, we estimate that Apple LTE devices will account for 70% of all LTE smartphones and tablets to be sold in the market in Samsung s robust growth in high-end of the smartphone market. 3) LTE coverage to expand to 50% by Carrier network rollout plans in the US and potentially China point to a rapid expansion of LTE network coverage. There are around 100 LTE networks in commercial operation today, and expects LTE population coverage globally to increase from around 7% in mid-2012 and then to 50% by High end smartphone portfolio drives LTE take off LTE coverage to expand to 50% of global population by LTE LTE LTE Galaxy S Galaxy S II Galaxy S III Galaxy Note I Galaxy Note II Galaxy Note III Samsung LTE iphone iphone LTE 2 Population coverage (%) 100% 92% 85% 86% 85% 75% 53% 53% 55% 50% 50% 46% 35% 25% 3 2% 5% 0% GSM/EDGE WCDMA/HSPA CDMA LTE Source: Ericsson, Credit Suisse estimates Slide 10

11 High-end smartphones cannibalizing other CE markets E 2013E 2014E 2015E Others Camera TV Feature Phones Basic Phones PC (Consumer) Tablets Low & Mid-end smartphone High-end smartphone 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Mobile consumer electronic spend growing to 72% LT 1) Mobile computing (smartphones & tablets) growth outpaces the CE industry. 24% CAGR Smartphones and tablets together are expected to have a CAGR of 68% during 09-12E, which is significantly higher than the rest of industry (which 102 declined 2% during the same period). We expect 102 this category to be the primary driver of the CE industry and reach close to $450bn by Global consumer electronic consumption breakdown (as % of total) 9% 7% 7% 6% 6% 5% 14% 15% 14% 13% 11% 3% 3% 3% 3% 2% 4% 4% 16% 14% 13% 12% 6% 6% 5% 5% 19% 2% 22% 4% 2% 21% 7% 3% 19% 20% 23% 23% 11% 3% 14% 15% 14% 4% 15% 19% 5% 23% 16% 17% 14% 27% 22% 26% 22% 5% 12% 20% 5% 8% 15% 15% 6% 11% 5% 5% 5% 22% 6% 10% 23% 9% 3 2% 22% 20% 21% 22% 9% 30% 30% 31% 25% 6% 4% 17% 6% 8% 8% 6% 7% 10% 1% E 2013E 2014E 2015E High-end smartphone Low & Mid-end smartphone Tablets PC (Consumer) Basic Phones Feature Phones TV Camera Others 2) Within CE, high-end smartphones will be the biggest category in The high-end smartphone market will become a $160bn market in 2012 from $4bn in This explosive growth trajectory will make the high-end smartphone the largest category within the CE industry. Going forward, we forecast the market size to expand to $220bn in 2015 driven by the strength of Apple and Samsung s product portfolios. The two companies together will get ~90% of market share in the $400+ ASP market. 3) Mobile computing cannibalizes other markets. With considerable advancement in hardware components, software integration, and eco-system development, we believe smartphones and tablets are the future of computing and will significantly cannibalize other markets such as PC, TV, camera, and DVD, etc. Going forward, we expect smartphones and tablets together will account for nearly 60% of CE industry in 2015 compared to 32% in Slide 11

12 From end demand to wireless chipset: LT revenue growth 13% End demand sell through Units (mn) Units (mn) CAGR Feature phones 1,318 1,346 1,239 1, % Smartphones ,219 1,425 1,577 1,737 19% Total Handset 1,617 1,819 1,955 2,067 2,137 2,203 2,262 2,323 4% Data Cards % Tablets (all) % Total Devices 1,717 1,993 2,200 2,395 2,521 2,644 2,739 2,825 5% 1 Wireless chipset unit TAM Units (mn) CAGR Discrete AP % Discrete BB % Integrated BB+AP 1,839 2,063 2,003 2,181 2,285 2,428 2,626 2,685 6% Total TAM Units 1,972 2,422 2,653 3,098 3,350 3,671 4,012 4,207 10% 2 Revenue ($mn) CAGR Discrete AP 1,800 5,018 9,013 12,861 15,203 18,100 20,039 21,694 19% Discrete BB 1,007 2,498 5,564 7,954 9,365 10,485 11,605 12,741 18% 3 Integrated BB+AP 15,897 16,060 16,082 19,077 20,352 21,222 22,608 22,638 7% Total TAM Revenue 18,703 23,577 30,659 39,892 44,920 49,807 54,251 57,073 13% 4 ASP CAGR Discrete AP % Discrete BB % Integrated BB+AP % Blended ASP % BB and AP Accessible TAM Units (mn) CAGR Discrete AP (ex-aapl & Samsung) % Discrete BB % Integrated BB+AP 1,839 2,063 2,003 2,181 2,285 2,428 2,626 2,685 6% Total TAM Units 1,958 2,311 2,385 2,699 2,886 3,115 3,392 3,527 8% Revenue ($mn) CAGR Discrete AP (ex-aapl & Samsung) ,173 1,570 2,055 3,137 3,637 3,912 27% Discrete BB 1,007 2,498 5,564 7,954 9,365 10,485 11,605 12,741 18% Integrated BB+AP 15,897 16,060 16,082 19,077 20,352 21,222 22,608 22,638 7% Total TAM Revenue 17,140 19,378 22,819 28,600 31,771 34,844 37,850 39,291 11% 5 Source: Gartner, Credit Suisse estimates 1) End market demand to grow at a CAGR of 5%. We see overall end consumption for mobile compute products grow to 2.8bn units in 2017 from 2.2bn units in Within the mobile compute market, we think smartphones/tablets will be the main drivers. 2) driving 10% LT unit growth in chipset market to 4.2bn units in The market size difference between end market demand and the mobile chip market (17% difference in 2012) is mainly due to some white box devices not selling through and multiple chips per device. 3) Discrete AP market will see the rapid growth. We expect the discrete AP market to grow within the high-end smartphone market. We think most of discrete APs market will be produced in-house as Samsung and Apple together account for 87% unit share in ) Blended pricing to rise resulting in total TAM revenue growth at a 13% CAGR. The LT revenue growth will be driven by the mix shift towards baseband in LTE devices and discrete AP in high-end smartphone market, eventually driving the TAM to $57bn in ) Accessible market growing. With Apple and Samsung committed to their own application processor, we believe the accessible TAM grows at a 11% CAGR to $39bn long term. Slide 12

13 Baseband TAM: long-term unit growth of 8% Units (mn) by Device 2012E 2013E 2014E 2015E 2016E 2017E CAGR ('12-'17) Device Unit Mix 2012E 2013E 2014E 2015E 2016E 2017E Feature phones 1,404 1,410 1,299 1,267 1,349 1,287-2% Feature phones 61% 54% 47% 43% 42% 39% Smartphones ,219 1,425 1,577 1,737 19% Smartphones 31% 38% 44% 48% 49% 53% Total Handset 2,120 2,385 2,517 2,692 2,926 3,024 7% Total Handset 92% 92% 92% 92% 92% 91% Data Cards % 3 Data Cards 6% 5% 5% 5% 5% 5% Tablets (cellular only) % Tablets (cellular only 2% 2% 3% 3% 4% 4% Total Units 2,294 2,586 2,740 2,938 3,191 3,306 8% 1 Total 100% 100% 100% 100% 100% 100% 2 4 Units by Tech (mn) 2012E 2013E 2014E 2015E 2016E 2017E CAGR ('12-'17) Tech Unit Mix 2012E 2013E 2014E 2015E 2016E 2017E LTE ,061 49% 5 LTE 6% 14% 18% 22% 28% 32% WCDMA ,001 1,141 1,272 1,387 16% WCDMA 29% 32% 37% 39% 40% 42% 7 TD-SCDMA % TD-SCDMA 5% 5% 6% 6% 5% 5% GSM 1,155 1, % GSM 50% 41% 33% 28% 22% 18% CDMA % 8 CDMA 9% 8% 7% 5% 4% 3% Total Units 2,294 2,586 2,740 2,938 3,191 3,306 8% Total 100% 100% 100% 100% 100% 100% 6 Baseband market by device type: Baseband market by technology: 1 Baseband TAM growth of 8% LT driven by smartphones. We expect the baseband TAM to grow at a CAGR of 8% ( ) driven by robust smartphone growth (CAGR of 19%) which will more than offset the -2% CAGR decline in feature phones. 5 Robust LTE growth ahead. We see LTE as a key growth driver for the baseband market going forward. We forecast a CAGR of 49% between and expect LTE basebands to comprise 32% of the overall market LT. 2 3 Handset related basebands to comprise over 90% of the TAM even LT. Handsets overall (smartphones and feature phones) will comprise 91% of the baseband market even long term despite robust growth expected in tablets (off a small base). Higher handset BB shipments vs. device shipments are attributable to white label/illegal devices, inventory, and sell-in vs. sell-through differences. Data card related basebands to remain about 5% of the TAM. We expect data card basebands to grow at a 4% CAGR with data cards remaining about 5% of overall baseband market LT. 6 7 WCDMA growth to moderate, but still healthy. While we expect the shift to LTE to result in a moderation of WCDMA growth, we still look for a healthy 16% CAGR ahead. WCDMA basebands will comprise 42% of the market LT from 32% in GSM declines to accelerate. We forecast GSM volumes to decline at a 12% CAGR LT owing to the shift to newer WCDMA and LTE technology standards. LT GSM will comprise 18% of the baseband market from about 50% currently. 4 Tablets to grow to 4% of the market. While we forecast robust growth in tablet related BBs (23% CAGR), we forecast tablet BBs will comprise only 4% of overall baseband volumes LT, up from 2% in CDMA volumes in steady decline. Similarly, we expect a steady decline in CDMA volumes (-12% CAGR LT) with CDMA falling to 3% of overall baseband volumes from about 9% currently. Slide 13

14 CS baseband vendor scorecard Qualcomm wins by a significant margin Qualcomm Mediatek Intel Broadcom Spreadtrum Samsung Marvell Renesas ST Ericsson HiSilicon NVIDIA 1 R&D intensity i) R&D focus ii) OS support iii) IPR position Product roadmap i) Device price points addressed ii) Standalone vs. discrete product availability iii) Application processor LTE position i) Product Roadmap ii) Customer exposure and quality WCDMA position i) Product roadmap ii) Customer exposure and quality iii) Emerging market turnkey support Scale i) Exposure to technology standards ii) Manufacturing / access to foundry capacity Total Score Rank Wireless Chipset Unit Share (2012) 23% 19% 12% 4% 2% 5% 2% 2% 6% <1% 1% Rank Wireless Revenue Share (2012) 39% 7% 6% 3% 1% 10% 1% 1% 4% <1% 1% Rank Qualcomm ranks #1, with a score of 8.7/10. Qualcomm scores well on R&D, product roadmap, LTE and WCDMA positioning and scale. We highlight the company s dominant LTE lead, strong IPR position and its ability to influence future wireless standards, and exposure to the right customers. MediaTek ranks #2 with a score of 6.0/10. The company scores well on product roadmap given a broad portfolio and WCDMA positioning, given high exposure to China based vendors that are transitioning to 3G. Intel ranks #3 with a score of 5.6/10. Intel scores well on R&D intensity and scale in terms of manufacturing, but trails when it comes to LTE & WCDMA positioning, mainly owing to customer exposure. Broadcom ranks #4 with a score of 5.1/10. While the company scores best on Product roadmap, and WCDMA positioning given increasing exposure to Samsung, Broadcom falls short on LTE positioning, IPR position and OS support. Spreadtrum ranks #5 with a score of 4.6/10. While the company does well in TD- SCDMA and product roadmap (given price points addressed and exposure to China OEMs that are transitioning to 3G) the company has smaller scale. Samsung ranks #6 with a score of 4.4/10 with areas of strength including, manufacturing capabilities and a strong IPR position, while weak areas include roadmap, WCDMA positioning. Marvell ranks #7 with a score of 4.2/10. While the company scores reasonably well on Product roadmap and scale, a weak LTE and WCDMA position and customer exposure are negatives. Renesas ranks #8 with a score of 3.9/10. While the company s has a commercial LTE solution, the lack of customer exposure outside Japanese OEMs, poor WCDMA positioning, and a weak IPR position are weaknesses. ST-Ericsson ranks #9 with a score of 3.8/10. While the company scores best on IPR position, the company falls short on most other metrics including roadmap, LTE and WCDMA position. HiSilicon ranks #10 with a score of 3.7/10. While the company s has a commercial LTE solution, the lack of customer exposure outside of Huawei, poor WCDMA positioning, and a weak IPR position are weaknesses. Slide 14

15 R&D intensity the key to long term success Qualcomm significantly outspends peers on R&D related to wireless chipsets and IPR Total R&D Source: Company data Cumulative Wireless as a % of sales Qualcomm 2,006 2,050 2,200 2,771 3,608 12,635 95%+ Broadcom 1,498 1,535 1,758 1,977 2,294 9,061 ~50% Marvell ,010 1,056 4,711 ~30% Mediatek ,797 ~65% Spreadtrum % Huaw ei 1,650 2,101 2,607 3,732 4,308 14,397 NA ZTE ,117 1,337 1,404 5,398 ~100% Samsung 3,436 6,808 8,386 9,198 9,402 37,231 ~50% Intel 5,722 5,653 6,576 8,350 10,054 36,355 <10% Apple 1,178 1,416 1,959 2,612 3,653 10,818 ~55% Nokia 6,773 6,681 6,610 6,465 5,576 32,104 ~51% Ericsson 4,593 3,974 4,374 4,661 4,561 22,162 ~100% Google 2,793 2,843 3,761 5,162 7,156 21,715 ~10% Microsoft (FY) 8,164 9,115 8,714 9,043 9,811 44,847 <10% Average 2,810 3,118 3,455 3,944 4,384 18,259 OS support enables vendors to adapt to changing OEM landscape Qualcomm ST-Ericsson Intel/Infineon Broadcom Marvell MediaTek Spreadtrum OS Share (2012E) Android ios WP7/8 Symbian BB OS BB10 Bada 62.5% 19.8% 4.5% 3.5% 4.9% 0.0% 2.5% Key OS supported, meaningful customer wins OS supported, limited customer traction OS not supported 1) R&D enables a better IPR position. In particular R&D directed toward IPR that shapes wireless standards gives companies involved in the standards setting process an edge in our opinion in terms of key technologies that are needed. 2) Broad OS platform support enabled by dedicated R&D. The smartphone OS landscape has undergone dramatic changes. Symbian and RIM s OS, which in 2007 commanded 64%/10% market share respectively will have 4%/5% market share in Android and Apple have seen their respective market shares grow from 0%/3% in 2007 to 67%/19% in ) Supporting evolving wireless standards. We note as we move to R12 of 3GPP standards, the need for increased functionality rises, ranging from increasing integration with new WLAN standards to evolving the LTE releases themselves. We believe this is core part of its competitive advantage than has enabled a series of baseband firsts for Qualcomm. Peak DL Data Rate (Mbps) DL 1.8 Mbps UL 384 kbps A history of time-to-market and product superiority First HSDPA MSM 6275 First HSUPA DL 7.2 Mbps UL 5.76 Mbps MSM 7200 MDM 8200 First Integrated LTE Multimode MDM DL 100 Mbps 9x00 First HSPA+ Dl 28 Mbps UL 5.76 Mbps First DC-HSPA+ DL 42 Mbps MDM 8220 First Integrated LTE Smartphone DL 100 Mbps MSM 8960 MDM 9X MDM 9x25 First LTE World Mode DL 100 Mbps First LTE Advanced Carrier Aggregation with Cat4 DL 150 Mbps Slide 15

16 LTE, Spectrum compounds complexity in the chip baseband business 3GPP Release The need for increased wireless technology support from 3G to 4G R5 R6 R7 R8 R9 R10 R11 R12 Std. Complete Jun-04 Mar-06 Dec-07 Mar-09 Mar-10 Jun-11 Dec-12 Jun-14 And beyond... Products LTE FDD/TDD (Cat 1-5) irat L-U/G/C/T TM1-7 Up to 4x4 DL MIMO SON/ANR C-DRX, OTDOA/PRS FDD,UP, CP OTDOA/PRS TDD embms SSAC TWC TM8 DL BF Enh. Home enb FDD/TDD Cat 6-8 Carrier Aggr. embms enh. TM9 Enh. MIMO UL/DL eicic Relays MDT TBD Enhanced CA Enhanced eicic CoMP UTDOA epdcch New TD subfrm In-device coex. Smartphone enh. embms continuity SON/MDT Enh. TBD LTE Direct New Carrier Type Multi-flow Int. Suppr., TDD IM 3D MIMO Small cell enh. Push to Talk Enhanced embms Radio IW w/ WiFi Pub Safety support End-to-end W-AMR IMS A-GNSS HS UICC MMTEL (VoIP) EPC CSFB, SRVCC I-WLAN, IMS CS ecall CS Fallback enhancements SRVCC enhancements ZUC LTE Chinese encryption SIPTO/LIPA FMC Enh. Access Cntrl SRVCC 3G to LTE IMS VoIP with local breakout Hotspot 2.0 Enhanced WiFi IW EVS codec M2M Congestion cntrl Dynamic B cast UMTS HSDPA HSUPA MBMS DL MIMO DTX/DRX HS-SCCH-Less 64 QAM DL L2 Enh. E_CELL_FACH/PCH CS over HS Enhanced F-DPCH DC HSDPA Home NodeBs 64QAM+MIMO UL L2 Enh. EUL+CELL_FACH E-DRX+CELL_FACH IMB E-SCC DC HSDPA+MIMO Interband DC HSDPA DC HSUPA Home NodeB Enh. (inbound mobility, hybrid mode) TxAA/non MIMO Ues 4C HSDPA Interband MC MC HDSPA+MIMO SON/ANR HNB: Interference Management Minimization of drive tests FE-FACH HSDPA Multi-Flow UL MIMO UL Tx Div DL 4xMIMO 8C HSDPA SON/MDT Enhancements HSPA Hetnet WCDMA+ Flexible bandwidth Uplink Enhancements Radio interworking w/wi- Fi M2M ~40 different spectrum bands for TDD and FDD LTE Area/Band Group 450 US700 AWG700 DD AWS TD TD 2500TD 2600FD US US (T. VZ) PCS, Canada Japan (Docomo) KDDI Korea WiBro China TDD TD-S 3G India TDD 2012 Europe CDMA 2011 (GE) GSM 2011 UMTS ROW GSM/CDMA 2014 LTE1800 UMTS Legend: TDD FDD Slide 16

17 Qualcomm offers the broadest LTE portfolio Qualcomm 8960, 28nm, GHz, 2 Krait, Adreno 225/320, LTE , 28nm, 1.2 GHz, 2 Krait, Adreno 305, LTE 3,TD, HSA+ 8974, 28nm, 2GHz, Krait Quad, Adreno 320, LTE Cat , 28nm, 1.2GHz, 2 Krait, Adreno 305, LTE 3 MDM9x00, Multimode LTE, LTE Cat3 MDM9x15, Multimode LTE, LTE Cat3, TDSCDMA MDM9x25, Multimode LTE, LTE Cat4, TDSCDMA, carrier aggr Renesas Sakura, LTE single mode SP2531/2531S, multimiode, LTE Cat 3 SP2531S, multimiode, LTE voice SP2541 multimiode, LTE Cat 4 ST-Ericsson A9540, 32nm, 1.85GHz, 2 Cortex A9, PowerVR544, LTE L8540, 28nm, 1.85GHz, 2 Cortex A9, VR544, LTE A9600, 28nm, 2.5GHz, 2 Cortex A15, VR6x, LTE NVIDIA Grey, 28nm HPM, 4+1, Icera LTE/HSPA, Q313 Intel XMM7160, multimode LTE, BB/PMIC single chip Broadcom BCSM 500, LTE single mode, BB/RF single chip Mediatek MT7618, multimode LTE, Cat 3. Spreadtrum SC9610, TDD-LTE, TDS/2G, 40nm Multimode LTE, TDD/FDD, 40nm CREDIT SUISSE SECURITIES (USA) LLC Slide 17

18 Qualcomm: Value share gainer in the wireless chipset market 50% Qualcomm to garner 44% wireless chipset revenue share LT, 6x the closest independent vendor 40% 30% 20% 10% 0% Qualcomm Apple Samsung Mediatek Intel Broadcom Spreadtrum Nvidia Texas Instruments Others Wireless Chipset Revenue Share. Source: Credit Suisse estimates ) Qualcomm gains ahead. Owing to a strong competitive position and favorable market tailwinds (including a rapid shift toward LTE and WCDMA), we expect Qualcomm s leading baseband unit and wireless chipset revenue share to continue to expand going forward. We forecast 38% baseband unit share and 44% wireless chipset value share LT. This makes Qualcomm 6 times the size of next independent player in 2017 providing a significant relative scale advantage. 2) Apple and Samsung surprisingly big. In the wireless chip market, owing to the use of their own application processors, we estimate that Apple and Samsung collectively will garner 33% revenue share, up from 27% in This is despite Apple not participating in the baseband market and despite our view that Samsung is unlikely to ramp up its own baseband efforts. 3) MediaTek gaining WCDMA unit share with broad value share stable. Driven by a deep Chinese customer base using its full turnkey solution and its ramping WCDMA portfolio into multi-core processors built on 28nm, we expect MediaTek to continue to maintain wireless chipset unit/value share of 19%/7% LT. 4) Spreadtrum value to hold stable. Driven by a strong TD position and start of offerings in WCDMA and multi core processors, we forecast Spreadtrum to maintain unit/value share at 9%/2% LT and grow with the addressable market. Slide 18

19 Qualcomm: Bottom up build suggests 44% revenue share long term 44% Wireless Chipset Revenue Share Long Term E 2013E 2014E 2015E 2016E 2017E '12-'17 CAGR LTE Unit Share Apple % 100% 100% 100% 100% 100% Samsung - 23% 17% 72% 71% 65% 57% 50% Nokia % 80% 90% 95% 95% 95% HTC - 100% 91% 91% 90% 90% 90% 90% Research in Motion % 100% 100% 100% 100% 100% Other LTE 88% 88% 66% 67% 55% 45% 37% 39% Total LTE Share 88% 78% 78% 86% 83% 78% 68% 67% LTE Units % 1 WCDMA Unit Share Samsung 78% 38% 35% 41% 42% 43% 39% 39% Nokia 0% 0% 4% 40% 45% 50% 50% 55% Apple 0% 27% 93% 88% 86% 81% 100% 100% Huawei 100% 91% 75% 75% 75% 75% 75% 75% HTC 100% 100% 95% 95% 95% 95% 95% 95% Other WCDMA 51% 50% 30% 26% 23% 22% 20% 17% Total WCDMA Share 47% 48% 47% 44% 40% 38% 34% 31% WCDMA Units % CDMA Unit Share Total CDMA Share 86% 89% 87% 88% 89% 90% 92% 98% CDMA Units % Total Baseband Unit Share Total Unit Share 22% 23% 27% 33% 35% 37% 37% 38% Total Units ,079 1,182 1, % Average Selling Price LTE $25.0 $27.2 $32.3 $30.4 $29.4 $28.1 $27.5 $ % WCDMA $18.7 $19.1 $17.9 $14.6 $14.0 $12.7 $11.1 $ % CDMA $14.8 $14.8 $14.2 $12.1 $11.2 $10.4 $9.6 $ % Total Baseband ASP $16.9 $17.5 $19.4 $19.9 $20.1 $19.6 $19.5 $ % Chipset Revenue LTE ,605 9,434 12,208 14,275 16,898 19, % WCDMA 4,330 5,572 5,709 5,310 5,525 5,439 4,843 3, % CDMA 2,855 3,174 2,614 2,063 1,799 1,473 1,251 1, % Standalone AP ,056 NM Total Chipset Revenue 7,204 9,158 11,949 17,077 19,961 21,962 23,976 25, % Total Rev Share 39% 39% 39% 43% 44% 44% 44% 44% ) Dominant LTE positioning to continue long term. Based on our proprietary bottom-up build of the baseband industry, we believe that Qualcomm s alignment with Apple and its reengagement with Samsung, coupled with the company s technological lead will is poised to maintain a dominant LTE share over the next several years. Even allowing for modest competitor gains, we forecast 4G share of 67% LT. 2) WCDMA share hinges on emerging low-end smartphone market. As higher-end devices push increasingly toward LTE connectivity, WCDMA will increasingly consist of the middle and lower tier devices within the smartphone market. This effect will be furthered by the explosive growth seen in low-end devices within emerging markets (particularly China). We model Qualcomm s WCDMA unit share falling toward 31% long term, though we note that meaningful levels of traction within low-end devices would prove our estimates conservative. 3) Baseband unit share to rise to 38% long term. Driven largely by the tremendous volume growth in LTE the next several years, we model Qualcomm s unit share at 38% long term. This is up considerably from 23% share in ) Moving toward unprecedented scale in wireless chipsets. We estimate that Qualcomm s LTE chipsets sell for ~$30 today which we expect to fade toward $27 over time. Accretive pricing mix, coupled with strong volume growth should drive Qualcomm s revenue share within the wireless chipset industry toward 44% LT from 39% in Slide 19

20 Qualcomm (O/P, TP $85) LTE investments to pay off Qualcomm financials EPS of $4.60/$5.20 in FY13/FY14 Calendar Year estimates CY2010 CY2011 CY2012E CY2013E CY2014E Global Drivers Total CDMA Devices Total WCDMA Devices Total TD-SCDMA devices Total LTE devices Total WCDMA/CDMA devices (mn) ,064 1,225 % change yoy 29% 21% 14% 18% 15% Fiscal Year estimates FY2010 FY2011 FY2012E FY2013E FY2014E QTL drivers CDMA licensing rate 3.9% 3.9% 3.9% 3.9% 3.9% WCDMA licensing rate 2.7% 2.8% 3.1% 3.1% 3.1% TD-SCDMA licensing rate 2.6% 2.6% 2.6% 2.6% 2.6% Blended licensing rate (%) 3.0% 3.1% 3.2% 3.2% 3.2% CDMA ASP ($) WCDMA ASP ($) TD-SCDMA ASP ($) Blended CDMA/WCDMA device ASP ($) % change yoy -9% 11% 7% 6% -1% 3 QCT drivers Total MSM Volumes (mn) % change yoy Blended MSM ASP ($) % change yoy -13% 5% 4% 19% -6% Segment details QCT revenues 6,696 8,859 12,142 17,003 19,949 QTL revenues 3,659 5,421 6,328 7,644 8,624 QWI revenues Other revenues (1) Qualcomm revenues ($ mn) 10,981 14,958 19,121 25,527 29,453 % change yoy 6% 36% 28% 34% 15% QCT EBT Margin 25.3% 23.2% 18.9% 19.1% 19.6% QTL EBT Margin 82.5% 87.7% 88.2% 87.7% 87.8% QWI EBT Margin 1.9% -23.3% -2.5% -0.6% -0.6% Qualcomm EBT PF ex. one offs ($ mn) 5,090 6,841 8,034 9,948 11,468 EBT margin excl. QSI, stock comp (%) 46.4% 45.7% 42.0% 39.0% 38.9% 1 CS pro forma EPS (ex. one offs, $) % change yoy 10% 35% 14% 24% 13% GAAP EPS ($) % change yoy 102% 31% 20% 33% 18% 1) Raising EPS estimates, reiterate OP. Our extensive review of both the mobile handset and chipset markets, leads us to believe that Qualcomm is set to benefit from its heavy levels of historic investments in LTE, providing an enduring competitive advantage. This, along with rising smartphone growth, should drive a LT EPS CAGR of 19%. We raise our above consensus EPS for FY13/FY14 by +5%/+6% and raise our PT to $85. 2) QCT to dominate basebands. Based on our proprietary wireless scorecard, we conclude that QCT is set to dominate the baseband market long term. Specifically, we highlight the company s dominant LTE lead, strong IPR position, and exposure to the right customers (Apple/Samsung). Through a detailed technology, customer and product roadmap analysis, we demonstrate that revenue share is set to expand to 44% long term from 39% in Further, with such scale and dominance, our current QCT margin estimates at 19.1%/19.6% could prove conservative. 3) QTL conservatively grows 21%/13% in FY13/FY14. We see support from: 1) smartphones driving volume growth of 16%/15% in FY13/14; 2) continued strength in ASPs (+6%/- 1% in FY13/FY14) as the >$400 device market is being driven to unprecedented levels; and 3) scope for upside as we exclude licensing opportunities from the 3G white label market and small cells. 4) Valuation raising PT to $85. Our SOTP gives a target of $86 with QTL worth $50 (based upon a conservative DCF) and QCT worth $24 (valuing in line with semi peers) despite superior growth prospects and net cash per share of over $15. In fact a more optimistic valuation supports a $95 level, over 50% above current levels. Slide 20

21 Qualcomm valuation raising PT to $85 Base case suggests value of $85 per share Base Case Key assumptions SOTP 87 Value QTL on a DCF (terminal growth of 1%) Value QCT on P/E of 15x (in line with peers) CS HOLT 96 Assume LT sales CAGR of 2%, R&D Life of only 5 years Historical P/E 73 Apply 2 year average P/E of 14x Average 85 Upside Case Key assumptions SOTP 96 Value QTL on a DCF (terminal growth of 3%) QCT on P/E of 18x, 20% premium to peers CS Holt 104 Assume LT sales CAGR of X%, R&D Life of only 10 years Historical P/E 86 Apply 5 year average P/E of 17x Average 95 Qualcomm is trading 20% below 5 yr. average P/E 24x 22x 20x +1 SD 18x Average 16x 14x -1 SD 12x 10x SOTP analysis suggests conservative value of $87 Segment CY13 Financials Implied Valuation Multiple Method Sales EBT EBITDA EPS EV/EBITDA EV/Sales P/E EV Value/Share QCT Multiple 17,673 3,431 4,716 $ x 2.6x 14.8x 45,100 $25.85 QTL DCF 7,856 6,884 7,178 $ x 11.0x 16.5x 86,382 $49.50 QWI / Other Multiple 880 N/M N/M N/M N/M 0.2x N/M 176 $0.10 Onshore cash 9,800 $5.62 Offshore cash (After tax) 11,074 $6.35 Total $26,409 $7,483 $10,660 $ x 5.8x 18.4x 152,531 $ ) QCT business worth $26 per share. While QCT has superior growth outlook superior to industry peers and dominating market share, to be conservative, we only apply a benchmark 15x P/E multiple on 2013 estimated EPS of $1.75 and this gives us value of $26 per share. 2) QTL business worth $49 per share. Our DCF valuation is based on conservative 1% terminal growth rate and 3.1% royalty rate LT. Potential upside from unlicensed 3G market and small cells are not counted. While QTL has a similar business model and growth profile compared to ARM, the implied P/E multiple for QTL is 60% lower than ARM. 3) Fully taxed cash worth $12 per share. Slide 21

22 Apple (O/P, TP $750) Compute Advantage Provides the Edge Apple Summary P&L Revenue breakdown by product segment CY10 CY11 CY12E CY13E Macs 18,459 22,951 23,822 25,389 iphone 30,069 61,006 88, ,737 ipad 9,566 24,903 35,360 52,842 ipod 8,308 6,556 4,993 4,671 Peripherals + Other 1,938 2,503 2,763 3,051 Software, Service + Other 2,728 3,012 3,378 3,386 Other Music 5,215 6,910 8,631 10,231 Total revenue ($ bn) 76, , , ,307 % change 63% 68% 31% 30% Gross Profit ($ bn) 29,571 54,223 70,449 92,078 Gross margin (%) 38.8% 42.4% 42.1% 42.4% Operating profit ($ bn) 21,487 43,303 56,215 75,496 Operating margin (%) 28.2% 33.9% 33.6% 34.7% EPS ($) Expanding carriers drives ~75mn units and $10.30 of EPS iphone opportunity with top 50 unserved carriers Long term Subs at top 50 carriers not covered by Apple in EMs (mn) 2,306 % of global subscriptions 37% Handsets at > $400 ASP as % of total market 15% Handset replacement rate (%) 50% Apple's market share in handsets > $400 ASP (%) 44% Potential opportunity for Apple (mn) 76.4 iphone ASP ($) 525 Incremental revenue from iphone ($ mn) 40,118 iphone GM (%) 42.5% Incremental gross profits from iphone ($ mn) 17,050 Incremental operating profits from iphone ($ mn) 12,821 iphone OM (%) 32.0% Incremental EPS ($) $10.30 Source: Gartner, Company data, Credit Suisse estimates 2 3 1) Reiterate Outperform, sustainable compute advantages. With a structural advantage in the broader compute market, Apple can continue to gain share in the PC and smartphone markets. Our EPS estimates for CY12/CY13 are $44.88/$60.19 or 3%/17% above consensus. Long term, Apple should deliver robust EPS growth of 25%, driving toward $75 earnings power. This leads us to reiterate our Outperform rating. Please refer to our detailed companion handset note published today, Bigger market, Apple and Samsung win. 2) Ranking first on our scorecard. We continue to see the iphone as a secular share gainer, growing units 48%/38% to 138mn/191mn in CY12/13. Five years after the first iphone launch, Apple continues to rank above peers. When looking at our proprietary scorecard, which takes in to account 9 key factors ranging from software and services to brand and distribution, Apple ranks #1. We assume Apple will be able to consolidate its smartphone market share to 20% in 2013, up from 19% in As Apple scales its distribution, we estimate that the next 50 largest carriers could increase iphone units by around 75mn annually. 3) Compute advantage gives the competitive edge. Perhaps the biggest advantage for Apple is being driven by the company s ability to compete in the broader compute market, i.e., smartphones, tablets and PCs, unlike other vendors. When considered in the context of the entire compute market, in volume terms, Apple has ~19% share which will rise given its exposure to the relatively faster growing smartphone and tablet markets toward 22% long term. 4) Valuation. With solid product cycles in 2H12 and shares trading on a P/E of 9x our CY13 EPS, we believe Apple remains inexpensive in the context of 30% bottom-line growth and $128 of net cash per share. Slide 22

23 Mobile computing, where Apple targets to dominate 100% 90% 80% 70% 1 60% 50% 40% 30% 20% 10% 0% E 2013E 2014E 2015E 3 Other Symbian Blackberry Windows (PCs) Windows (SP / Tablets) Android Mac OS ios (ipad/iphone) 1 Apple mastering all, but for what share? For now we believe that Apple is materially advantaged, principally because the company s vertically integrated structure allows it to simultaneously address all three markets i.e. PCs, tablets and smartphones effectively. Moreover much of the innovation comes in software. Add to this the broad range of i-services that are built well beyond itunes; to include an apps store, iad service, ibooks and now icloud; the company allows consumers to seamlessly access content across multiple devices. The issue is that when considered in the context of the entire compute market in volume terms Apple have a ~19% share, this will rise given their exposure to the relatively faster growth smartphone and tablet end markets to 22% longer term. 2 Google/Android, monetizing growth, need to expand beyond smartphone. Google is aiming to address the compute market as well as protect and grow its search revenues through multiple strategies. To date Android has collectively captured significant volume share within smartphones 67% share, however, its share within tablets remains anemic at some 30%. Furthermore it has seen limited traction with its Chrome OS. Longer term it will without doubt have a robust level of share in the market based upon its smartphone exposure of the compute market and a strong emerging market presence. Share could rise to 40% longer term from 30% currently. However we believe its execution outside of smartphones remains to be seen. In particular, the ongoing continuous complaints against the headaches of Android fragmentation, risk alienating either consumers or developers, which are two main stakeholders in this new compute world. 3 Microsoft traditional strength, can it all change with Windows 8? Historically this platform has dominated the market, however with the higher exposure of Windows to the PC market, limited success in smartphones and tablets this has been eroded. The good news is that we believe the company is strategically targeting the move towards a common UI, with Windows 8, which will support the new Metro UI. In addition given the alliance with Nokia and level of support on the smartphone side, not to mention Microsoft s traditional strong hold in the corporate market; we believe that long term share will remain steady at 25% compared to 30% currently. CREDIT SUISSE SECURITIES (USA) LLC Slide 23

24 Nokia (U/P, TP 1.85) Still a challenging turnaround Nokia summary P&L losses to persist in 2013 Nokia D&S business E 2013E Nokia overall units (mn) Smart Devices (mn) Symbian devices (mn) Windows Phone devices (mn) Mobile Phones (mn) Low-end units (mn) Mid-end units (mn) Devices ASP (reported) ( ) % change yoy 0% -14% -20% -17% Smart Devices ASP ( ) Symbian devices ASP ( ) Windows Phone devices ASP ( ) 0% Mobile Phones ASP ( ) D&S Revenue ( mn) 29,134 23,943 15,446 11,210 % growth -18% -35% -27% Devices & Services GM (%) 29.9% 27.7% 20.8% 22.6% Smart Devices GM (%) 30.8% 23.7% 6.4% 11.9% Symbian device GM (%) 30.8% 23.6% 8.5% 10.0% Windows Phone device GM (%) 27.0% 4.0% 12.0% Smart Devices GM (excl inventory allowance) (%) 30.8% 23.7% 13.0% 11.9% Mobile Phones GM (%) 28.0% 26.1% 23.3% 21.2% Others GM (%) 54.1% 80.6% 80.4% 87.0% D&S Gross Profits ( mn) 8,722 6,640 3,206 2,534 D&S Opex ( mn) (clean excl one-off items) (5,323) (4,958) (4,153) (3,393) % of sales 18% 21% 27% 30% D&S Operating profits ( mn) 3,399 1,682 (947) (860) D&S OM (%) 11.7% 7.0% -6.1% -7.7% Nokia group EPS ( ) (0.28) (0.24) 1) Reiterate Underperform. Despite the recent stock run, we retain our below consensus EPS estimates of ( 0.28)/( 0.24). We believe that Nokia faces material challenges in turning the business around over the next 12 months. This, combined with our concerns around cash burn, leads us to reiterate our Underperform rating. For details, please refer our companion note published today Bigger market, Apple and Samsung win. 2) Doubts around the traction for Windows Phone 8. In our view, Nokia s WP devices will struggle to gain traction given several factors: 1) Nokia s hardware offering lacks competitiveness when compared to the iphone 5 and Galaxy SIII; 2) the WP differentiation is not well understood by consumers; and 3) the pace of the WP8 rollout from Nokia either by market or product portfolio will prove slow, meaning that traction through 2013 will be challenging. We expect WP units of 17.5mn in 2013, driving Nokia s smartphone share to a modest 2%, down from 5%/18% in 2012/ ) An accelerated decline in feature phones. We see a material acceleration in low-end white-label smartphones powered by MediaTek and Spreadtrum, which we believe will pressure the feature phone market and result in an accelerated decline for Nokia s Mobile Phone business. For 2012, Nokia s Mobile Phones will account for 300mn units, revenues of 9.5bn and 450mn in operating profit. We expect this to decline to 270mn units in 2013, with sales of 7.4bn and a mere 125mn in operating profits. 4) Low likelihood of breakup implies significant downside. The likelihood of any breakup at Nokia appears low over the next 12 months. If this were to occur, we see 2.35 as the upside case, based on our NAV. However, the downside risk is that share price may track consolidated net cash/share, which we see heading to only 0.50 by Our SOTP based TP for Nokia remains 1.85, which assumes 0.50x EV/sales for NSN and adding back net cash/share ending Slide 24

25 Nokia core cash burn to continue, creates concerns around liquidity Nokia Group excluding NSN: Continued levels of high cash burn may create concerns around liquidity FCF calculation ( mn) E 2013E 2014E Sales 29,785 24,618 16,297 12,095 11,476 Operating income (excl. PPA) 3,200 1,599 (900) (780) (560) EBIT margin (%) 10.7% 6.5% -5.5% -6.4% -4.9% D&A EBITDA 3,622 1,990 (653) (609) (399) (-) Capex (-) Cash restructuring outlays (+) Microsoft Payment (-) Interest Expense / (Income) 535 (266) (-) Cash taxes (-) Change in NWC (1,728) (-) Other reconciliation (907) Nokia Group ex-nsn FCF 4, (2,452) (1,809) (1,124) (+) FCF 4, (2,452) (1,809) (1,124) (-) Acquisitions (200) 0 0 (-) Dividends paid 1,519 1, (-) Proceeds from issuance of shares (-) Debt repayment (76) (8) (461) 1, Total cashflow 2,964 (1,872) (2,534) (3,059) (2,098) Gross Cash 11,077 9,289 6,755 3,696 1,598 Gross Debt 3,992 3,710 4,171 2,921 1,947 Net Cash 7,085 5,579 2, (349) 1) D&S continued operating loss ahead. Despite the company s efforts in launching Windows Phone 8 phones and broadening price points for Windows Phone devices, we are concerned about consumer traction of Windows Phone platform. For 2013, we assume an operating loss of around 850mn in D&S segment. 2) Higher restructuring cost. While Nokia is targeting cash restructuring of 800mn in its D&S business over Q412 and 2013, we think the company may need to do further restructuring. As a result, we assume another 1bn of cash restructuring costs in our FCF estimates, which will be taken over ) Stable payment stream from Microsoft. We expect payment from Microsoft to remain at 720mn per annum for the next two years. 4) Cash flow to remain a headache. Given continued level of D&S losses, significant cash restructuring, maturing debt and recent proceeds from converts, we expect Nokia group excl. NSN to exit 2013 with 3.7bn of gross cash. More importantly we see net cash declining from around 3.0bn in Q312 to 2.6bn/ 0.8bn by end of 2012/2013, which is concerning. Slide 25

26 RIMM (N, TP $11) Visibility on Services deteriorating Operating Profit ($ mn) RIM financials EPS of $(1.11)/$(0.74) in FY13/FY14 FY ending Feb (in $ mn) FY11 FY12 FY13E FY14E RIM smartphone units ('000) 52,350 49,000 28,392 25,367 % change yoy 42.6% -6.4% -42.1% -10.7% RIM smartphone ASP ($) % change yoy -7.8% -11.3% -19.2% -8.0% Net revenues 19,907 18,435 10,850 9,046 % change yoy 33.1% -7.4% -41.1% -16.6% Gross Profit 8,825 6,860 3,251 3,331 Gross margin 44.3% 37.2% 30.0% 36.8% R&D 1,315 1,489 1,314 1,234 SG&A 2,364 2,466 1,984 1,894 Amortisation Stock option expense Operating income (incl. options) 4,636 2,237 (889) (517) Operating margin 23.3% 12.1% -8.2% -5.7% Net income 3,411 1,803 (582) (386) Net margin 17.1% 9.8% -5.4% -4.3% EPS incl. options ($) (1.11) (0.74) EPS excl. options ($) (0.80) (0.55) We expect RIM will lose $2.7bn in hardware in FY14 6,000 4,000 2,000 - (2,000) (4,000) F2009 F2010 F2011 F2012 F2013E F2014E Hardware Services Software Others 1 1) A challenging turnaround for RIM. We believe that a combination of a late arrival of BB10 devices, as well as a fiercely competitive environment, hinders RIM s ability to turnaround its handset business given its current strategy. We estimate 3% market share in CY13 for RIM s smartphone business (vs. 5% in CY12), as we believe the tardiness of BB10 combined with a lack of differentiation and high price point portfolio prevents an easy recovery. While we remain at Neutral simply given the risk of a takeout at some point; however both fundamentals and NAV analysis suggest downside risks. 2) Running out of the services revenue stream. Visibility on RIM s Services revenue stream (more or less stable so far over the last few quarters) is rapidly deteriorating given BB10 monetization of the NOC, ongoing carrier renegotiation and declining subscribers. This means that service revenue should fall, and we note the recent quarter marks the first time management has discussed its expectation that some of the base may generate no service revenue. We assume services revenue of $3.9bn/$3.3bn in FY13/14, down 4%/16% y/y, further compounding issues around profitability. In turn, this would expose the company s high level of hardware losses which we estimate could be as high as $3.5bn/$2.7bn in FY13/FY14. 3) Break up is possible, but asset desirability is low. While a break up is possible, we believe that converting the NOC for other platforms may require a high level of effort for minimal functionality improvement, along with question marks around IPR valuation. Our NAV estimate for RIM is about $3.1bn, significantly below current market cap, and requires the acquirer to take over and then shut down the hardware segment. The appointment of bankers to explore all strategic options implies that the company is clearly prepared to sell its assets and a deal cannot be ruled out. At current levels, RIM continues to offer meaningful downside from fundamental standpoint as we believe that sale of business will prove to be a challenge. Our TP of $11 is based on applying 0.3x EV/sales multiple to FY14 estimate. Source: Credit Suisse estimates Slide 26

27 MSI (O/P, TP $62) Outsized capital distributions, healthy fundamentals MSI financials EPS of $3.70 in ) Steady growth and capital distribution on track. We continue to believe that healthy fundamentals coupled with outsized capital distributions will drive double digit earnings growth for several years. Motorola Solutions Income Statement E 2013E Net Sales 7,617 8,203 8,701 9,135 % change y/y 9.6% 7.7% 6.1% 5.0% Cost of Sales 3,749 4,016 4,312 4,568 Gross Profit 3,868 4,187 4,390 4,567 Gross margin (%) 50.8% 51.0% 50.4% 50.0% R&D 1, ,039 1,102 % of sales 13.1% 11.9% 11.9% 12.1% SG&A 1,806 1,840 1,855 1,860 % of sales 23.7% 22.4% 21.3% 20.4% Operating Income 1,061 1,371 1,496 1,605 Operating margin (%) 13.9% 16.7% 17.2% 17.6% Other Expense / (income) % of sales 1.5% 0.5% 0.9% 0.8% Pretax Income 944 1,333 1,417 1,530 Pretax profit margin (%) 12.4% 16.3% 16.3% 16.7% Income Taxes (clean) Tax rate (%) 32.4% 34.1% 34.8% 34.9% Pro Forma Net Income (ex-options, ex-amort) Net income margin (%) 8.2% 10.8% 10.6% 10.9% Pro-forma EPS (ex-options, ex-amort) % change 34.1% 41.8% 20.8% 17.5% GAAP EPS FD shares outstanding Estimate cash distributions of $7.5bn through E 2013E 2014E 2015E Beginning Gross Cash 9,105 5,257 3,640 3,070 2,924 Net profits ,077 D&A Working Capital (394) (208) (113) Pension - (370) (320) (400) (300) Other Cash From Operations ,067 1,064 1,088 Capex (180) (190) (204) (211) (213) Free Cash Flow Share Buybacks (1,110) (2,482) (1,800) (1,200) (550) Dividends (72) (273) (333) (399) (479) Change in Debt (1,218) Ending Gross Cash 5,257 3,640 3,070 2,924 2,771 Ending Gross Debt 1,535 1,864 2,564 3,164 3,164 Ending Net Cash 3,722 1, (240) (393) Total Pension & Adj (2,400) (2,030) (1,710) (1,396) (1,096) Net Cash incl. Pension & Adj 1,322 (254) (1,204) (1,636) (1,489) 2) Visibility emerging on While narrowbanding has inflated revenues in 2012 we see strong growth is possible through 2013 as we assume 6.0% y/y revenue growth with OM of 17.3% given several factors: (1) the aged publicsafety infrastructure in the US, (2) high levels of analog devices, (3) LTE public safety roll outs, and (4) a refreshed portfolio should drive continued growth in Further, the prioritization of spending on first responders means that segment revenues are relatively immune to global fiscal tightening. On the Enterprise segment, while under macro pressure (down ~6% y/y ex-iden and currency), we see a deferral rather than cancellation of contracts. We model core revenue/om (ex-iden) +5.5%/16.5% in ) Capital distribution story on track. We continue to believe that the move toward a more meaningful net debt position (we assume to nearly $1.5bn long term from $200mn today), together with healthy cash flow generation (OCF of ~$1bn/year), will drive meaningful capital returns to shareholders through buybacks and dividends. On our estimates, we expect aggregate buybacks & dividends to total $7.5bn from 2012 to 2015 this represents almost 50% of the current market cap. Note our current debt to EBITDA ratio is around 2x, however we believe the company have flexibility to raise this to 2.5x which could release another $1.25bn on distribution or 6% of the share count. 4) Valuation. Our $62 target price implies that shares can trade on 13x our 2013 taxed cash EPS in addition to the dividend yield of 2.2%. We believe this multiple is appropriate given a 17% EPS CAGR between Summary of key valuation metrics Key Metrics based on: Current $53 Target $ E 2013E 2012E 2013E EV/EBITDA 7.2x 6.6x 9.6x 8.8x EV/Revenue 1.4x 1.4x 1.9x 1.8x PF P/E 15.2x 13.0x 19.7x 16.8x PF P/E (cash) 15.9x 11.7x 16.1x 13.6x Source: Credit Suisse estimates Slide 27

28 Lenovo a rising China smartphone star Rising China smartphone star 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 Samsung 10.0% 14.6% 19.2% 24.7% 20.6% 17.7% 16.7% Lenovo 1.2% 0.9% 1.7% 3.6% 7.3% 11.1% 14.8% Huawei 7.5% 7.3% 11.0% 12.5% 10.4% 8.8% 10.7% Yulong 6.8% 5.2% 3.5% 3.4% 5.4% 8.5% 9.8% ZTE 3.0% 5.3% 8.4% 11.0% 8.1% 8.7% 8.6% Apple 9.9% 13.3% 10.4% 7.5% 17.0% 12.3% 6.9% Ginoee 0.0% 0.0% 0.0% 0.1% 1.5% 3.2% 4.7% HTC 2.4% 2.4% 4.1% 2.8% 2.2% 4.6% 4.5% Mo 8.0% 7.6% 5.7% 4.7% 3.4% 2.6% 2.6% Others 59.2% 51.0% 41.7% 34.4% 27.5% 25.0% 23.2% Source: Gartner, Company data Tracking to become China s largest smartphone vendor 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 F2010 F2011 F2012 F2013E F2014E F2015E F2016E 1. Rising China smartphone brand. In less than a year, Lenovo has emerged as the second largest China smartphone brand shipping 7.0 million units in Sept-12 quarter, reaching 14.8% market share. 2. Strong growth to continue. Strong China demand and expansion into 10 countries next year (from 5 this year) will improve its scale and narrow current operating losses to break-even in FY14E. 3. Consolidating PC share improves scale. We expect Lenovo to consolidate global PC share and grow its shipments by 11%/4% in CY13/14E. Scaling benefits from volumes lifts OPM to new levels. 4. Valuation. We forecast its corporate OPM to increase to 2.6% in FY14E (vs. 2.3% in FY13E) and for earnings to grow ~28% (CS/Consensus of US$0.074/$0.069) driven by scaling benefits in both its PC and MIDH businesses. Lenovo is trading at 12.8x our FY14E EPS (7.8x ex-cash). (OUTPERFORM / 12M TP HK$8.30) PC share consolidation improves overall scale & OPM 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% F2011 F2012 F2013E F2014E F2015E 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% China smartphone shipments Non-China smartphone shipments Global PC market share Lenovo OPM Slide 28

29 Asian device chain penetrating low cost smartphones and tablets Randy Abrams Low cost smartphones move up in features Company ZTE Huawei Lenovo Coolpad TCL Communications Model name ZTE U950 Honor 2 Lenovo K860 Coolpad HD 9960 TCL Y900 Retail price (US$) Technology WCDMA WCDMA WCDMA WCDMA WCDMA Display size 4.3" 4.5" 5.0" 4.7" 4.5" Display resolution 800x x x x x720 OS Android 4.0 Android 4.0 Android Android 4.1 Android 4.1 Camera 5MP 8MP 8MP 13MP 8MP CPU speed 1.3 Ghz 1.4 Ghz 1.4 Ghz 1.5 Ghz 1.3 Ghz Battery 2000mAh 2230 mah 2250mAh 2000mAh 2500mAh Chipset Nvidia Tegra 3 Hisilicon K3V2 Samsung Exynos 4412 Nvidia Tegra 3 Mediatek MT6589 Mediatek enabled tablets with dual core and cellular into distribution at US$120 Quality QTM13 Timespad M10 Maysun T9760 Melon-Vision V7M Beneworld Technology WCDMA WCDMA WCDMA WCDMA WCDMA Display 7" IPS 10.1" IPS 7" IPS 7" 7" Operating System Android 4.0 Android 4.0 Android 4.0 Android 4.0 Android 4.1 Camera 5MP+2MP 5MP+1.3MP 5MP+0.3MP 2MP + 1.3MP 2MP + 0.3MP Pixels 1024x x x x x600 Processor 1.2GHz dual A9 1.2GHz dual A9 1.2GHz dual A9 1.0 GHz dual A9 1.0 GHz dual A10 Battery 4,000mAh 6,600mAh 3,500mAh N/A N/A Chipset MT6577 MT8377 MT6577 MT8377 MT8377 Slide 29

30 Emerging markets driving the Asian brands Emerging markets ramp to 70% of smartphone volumes Sub $200 smartphones ramping to 40% of the industry Emerging market smartphones (mn) A 2007A 2008A 2009A 2010A 2011A China India Rest of Asia Middle East and Africa E Europe Mexico Rest of LatAm Brazil Russia % of global market Industry driven by Samsung, Apple. and Other 2012E 2013E 2014E 2015E 2016E % of industry 100% 2017E 80% 60% 40% 20% 0% Smartphone market (mn) 1,600 1,400 1,200 1, E 2012E 2013E 2014E 2015E 0-$100 $100-$200 $ $350-$500 $500+ % <$200 Local brand share gain is real in China Sub $200 % of industry (mn) 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Units (000) 100,000 80,000 60,000 40,000 20,000 0 Q104 Q304 Q105 Q305 Q106 Q306 Q107 Q307 Q108 Nokia Research in Motion Motorola Apple Sony Ericsson / Sony Mobile HTC Samsung LG Huawei + ZTE Chinese / Others Q308 Q109 Q309 Q110 Q310 Q111 Q311 Q112 Q312 Q113E Q313E Slide 30

31 Asian built smartphones could scale to 800mn units by 2015 China split between tier one, Chinese brands and whitebox Asian built smartphones could ramp to 800mn by 2015 Units (mn) China brand sha % % % % 60 40% % 0 0% Traditional Tier One's Other brands/whitebox Tier One Chinese Brands Units (mn) % YoY Growth 100% E CAGR = 62% 80% 60% 40% 20% 0% China shipments Export shipments Growth (YoY) Asian feature phones ramped to 800mn before saturating Smartphone ramp faster to date than feature phones Chipset units (mn) Asian share (%) 2,000 1,800 1,600 1,400 1,200 1, Asian chipsets Asian share incl. whitebrands (%) E Feature phones incl. whitebrands 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Qtrly shipments (mn) Q11/1Q05 1Q12/3Q05 3Q12/1Q06 1Q13/3Q06 3Q13/1Q07 1Q14/3Q07 3Q14/1Q08 Asian Feature phone units FF Asian share (%) 1Q15/3Q08 3Q15/1Q09 1Q16/3Q09 3Q16/1Q10 1Q17/3Q10 Asian share (mn) 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 3Q17/1Q11 Asian Smartphone units 1Q18/3Q11 Slide 31

32 Low cost Android tablets another Asian based ecosystem CPU silicon IP 3D GPU silicon IP Foundries Apps Processors Touch screen controllers Wireless and audio Apps processor + baseband CMOS image sensor Company Freescale Samsung NVIDIA Allwinner Rockchip Actions Tablet AP i.mx6 Quad Exynos 4 Tegra 3 A31 RK31XX ATM7029 Multi-core Quad-core Quad-core Quad-core Quad-core Quad-core Quad-core CPU ARM Cortex-A9 ARM Cortex-A9 ARM Cortex-A9 ARM Cortex-A7 ARM Cortex-A9 ARM Cortex Clock speed 1.5GHz 1.4/1.6 GHz 1.6GHz 1.5 GHz 1.6GHz 1.2GHz PowerVR PowerVR ARM Mali GeForce Graphics SGX543 ARM Mali-400 ARM Mali-400 Process node N/A 32nm 40nm 40nm 40nm 40nm Availability Oct-12 2H12 2H12 4Q12 4Q12 4Q12 Slide 32

33 Fabless IC design investable or profitless prosperity? Margins were under attack in feature phones Pricing pressure a given in this segment Inventory corrections can distort the growth rate and sentiment Seasonality to guidance misses Mediatek sales (NT$mn) 40,000 32,000 24,000 16,000 8, Q00 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 1Q13E 3Q13E Revenue % QoQ 25% 20% 15% 10% 5% 0% -5% -10% -15% Average Guidance Average Result 1Q 2Q 3Q 4Q Slide 33

34 MediaTek/Spreadtrum volume ramp with more stable margins Volume assumptions for Mediatek NT$mn unless noted F 2013F 2014F 2015F Feature phones (mn) ASPs (US$) $7.36 $5.39 $3.58 $2.28 $1.85 $1.50 $1.22 Smartphones (mn) ASPs (US$) $19.33 $13.51 $13.33 $11.23 $9.59 $8.34 $7.28 Handset Revenue 86,513 85,233 59,512 63,213 78,739 82,587 85,808 DTV 10,749 11,906 10,722 13,490 14,024 14,398 14,964 PC Optical 11,140 9,764 10,596 11,477 10,109 8,423 6,856 Consumer DVD 7,109 6,619 4,160 3,501 3,399 3,056 2,803 WLAN (Ralink) 0 0 1,867 9,198 10,613 11,227 11,751 Total Revenue 115, ,522 86, , , , ,182 GM % 58.7% 53.7% 45.3% 41.5% 42.1% 42.1% 42.1% Op M% 31.5% 27.4% 14.2% 12.8% 14.9% 14.7% 14.3% EPS $34.10 $28.46 $12.47 $13.27 $16.74 $17.51 $18.08 Volume assumptions for Spreadtrum US$mn unless noted F 2014F 2015F Feature phones (mn) ASPs (US$) $4.48 $3.89 $3.38 $2.26 $1.60 $1.31 $1.07 Smartphones (mn) ASPs (US$) $0.00 $0.00 $7.79 $5.99 $5.48 $5.05 $4.47 Sales by phone type ,047 ASPs (US$) $17.65 $9.96 $7.17 $6.17 $5.51 $4.62 $3.92 WCDMA units (mn) ASPs (US$) $0.00 $0.00 $0.00 $7.00 $5.57 $5.06 $4.47 Sales by standard ,047 GM % 36.4% 44.0% 41.6% 37.4% 37.8% 38.5% 39.1% Op M% -18.4% 20.0% 20.2% 14.0% 14.5% 15.3% 16.2% GAAP EPS -$0.43 $1.29 $2.49 $1.75 $2.05 $2.36 $2.76 Pro Forma EPS -$0.63 $1.48 $2.79 $2.25 $2.42 $2.72 $3.12 Company Mediatek Qualcomm Marvell Broadcom Spreadtrum Chipset MT6589 MSM8226/8626 PXA 1088 BCM28155 SCxxxx Availability 1Q13E 2Q13E 1H13E 1Q13E 1H13E Baseband HSPA+ / TD-SCDMA HSPA+ / TD / CDMA TD-SCDMA / HSPA HSPA+ HSPA+/TD-SCDMA CPU core Quad-core Quad-core Quad-core Double dual-core Quad-core ARM Cortex-A7 ARM Cortex-A5 ARM Cortex A7 ARM Cortex A9 ARM Cortex-A7 Clock speed 1.3 GHz 1.x GHz 1.x GHz 1.2GHz 1.5 GHz Graphics PowerVR SGX544 Adreno 305 Vivante GC1000 VideoCore 4 ARM Mali Camera support 8-Mpixels 13-Mpixels 16-Mpixels 20-Mpixels NA Video 720p 1080p 1080p 1080p NA Process node 28nm 28nm 28nm 40nm NA Slide 34

35 Foundry and back-end manufacturers another way to play the smartphones ramp TSMC shipments tracks ARM sales Back-end sales (ASE/SPIL) also driven off mobile End Markets US$mn $2,100 $1,800 $1,500 $1,200 $900 $600 $300 $0 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13E 3Q13E Communications Computer Consumer Memory SMIC now outgrowing UMC on low cost mobile ramps UMC communications sales continue to decline Revenue (US$mn) 1, YoY Growth 60% 40% 20% 0% -20% -40% Wafer Revenue (NT$) 20,000 16,000 12,000 8,000 4,000-1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13-60% - 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 UMC sales SMIC sales UMC YoY SMIC YoY Computer Communication Consumer Other/Industrial Memory Slide 35