China Smartphone Sector

Transcription

1 28A 29A 21A 211A 212E 213E 214E 215E 216E 217E 7 January 213 Asia Pacific/China Equity Research Semiconductor Devices Research Analysts Randy Abrams, CFA randy.abrams@credit-suisse.com Yan Taw Boon yantaw.boon@credit-suisse.com China Smartphone Sector COMMENT Global handset forecast lifted by emerging market demand Figure 1: Emerging markets driving industry smartphone demand Emerging market smartphones (mn) 15 % of industry 1% % 6% 4% 2% % China India Rest of Asia Middle East and Africa E Europe Mexico Rest of LatAm Brazil Russia % of global market Raising industry forecasts to factor in whitebox demand. Our global hardware team has raised smartphone forecasts to 716 mn/976 mn units in 212/213, 6%/15% higher than our earlier estimates to factor in the faster ramp of Chinese smartphone brands supplied by Asian chipset vendors. Our estimates are higher than third party figures of 7 mn/855 mn for 212/13. Growth intact despite short-term inventory corrections. The expansion of emerging markets from 212 to 215 (from 6% to 75% of units) and sub- US$2 smartphones (from 2% to 4% of units) is benefiting smartphones powered by the Asian upstream (fabless, foundry and back-end). We project Asian built smartphones witnessing a 62% CAGR during to 823 mn units. We acknowledge the 4Q seasonal correction and trim Mediatek 213E shipments from 24 mn to 22 mn units, still close to 1% YoY growth. Beneficiaries across the ecosystem. We prefer to own the space through the manufacturers benefiting from unit growth (TSMC, ASE), IC design companies at reasonable valuations (Spreadtrum and RDA note Mediatek is Restricted), and Asian devices gaining share (ZTE and Lenovo). Within foundry, we downgrade UMC from Outperform to NEUTRAL with the same NT$14 TP (.85x P/B) (reduced mobile leverage as TI exits and Mediatek shifts to 28nm) and upgrade SMIC to OUTPERFORM (turnaround, China smartphone and tablet leverage) and raise our TP from HK$.41 (.7x P/B) to HK$.57 (1x P/B). DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON US ANALYSTS. FOR OTHER IMPORTANT DISCLOSURES, visit or call +1 (877) 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 1Q7 2Q7 3Q7 4Q7 1Q8 2Q8 3Q8 4Q8 1Q9 2Q9 3Q9 4Q9 1Q1 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 1Q 3Q 1Q1 3Q1 1Q2 3Q2 1Q3 3Q3 1Q4 3Q4 1Q5 3Q5 1Q6 3Q6 1Q7 3Q7 1Q8 3Q8 1Q9 3Q9 1Q1 3Q1 1Q11 3Q11 1Q12 3Q12 1Q13E 3Q13E 3Q11/1Q5 1Q12/3Q5 3Q12/1Q6 1Q13/3Q6 3Q13/1Q7 1Q14/3Q7 3Q14/1Q8 1Q15/3Q8 3Q15/1Q9 1Q16/3Q9 3Q16/1Q1 1Q17/3Q1 3Q17/1Q11 1Q18/3Q11 Q14 Q34 Q15 Q35 Q16 Q36 Q17 Q37 Q18 Q38 Q19 Q39 Q11 Q31 Q111 Q311 Q112 Q312 Q113E Q313E 7 January 213 Focus table and charts Figure 2: Summary of our CS smartphone estimates in mn, unless otherwise stated Smartphone summary CAGR Global smartphone subscribers ,178 1,693 2,267 2,841 3,373 3,892 27% % of mobile subscribers 1% 13% 19% 26% 32% 39% 44% 49% New adds % Replacements ,44 1,218 32% Smartphone units ,219 1,425 1,576 1,737 19% YoY 74% 58% 52% 36% 25% 17% 11% 1% Smartphone ASPs $324 $331 $37 $286 $258 $232 $29 $188-9% YoY -2% 2% -7% -7% -1% -1% -1% -1% Smartphone revenue $96,876 $156,232 $22,119 $279,79 $314,399 $33,6 $329,384 $326,556 8% YoY 7% 61% 41% 27% 13% 5% % -1% Figure 3: Apple, Samsung and Other driving devices Units () 1, 8, 6, 4, 2, Nokia Research in Motion Motorola Apple Sony Ericsson / Sony Mobile HTC Samsung LG Huawei + ZTE Chinese / Others Figure 5: Smartphone ramp faster than feature phones Qtrly shipments (mn) Asian share (mn) 25 5% 45% 2 4% 35% 15 3% 25% 1 2% 15% 5 1% 5% % Figure 4: Exports supporting Asian built smartphones Units (mn) E CAGR = 62% China shipments Export shipments Growth (YoY) % YoY Growth 1% Figure 6: MTK corrections even in a penetration cycle Mediatek sales (NT$mn) 4, 32, 24, 16, 8, Feature phones Smart phones 8% 6% 4% 2% % Asian Feature phone units FF Asian share (%) Asian Smartphone units Figure 7: UMC cash flows continue to drop versus TSMC US$mn (%) 18, 16, 14, 12, 1, 8, 6, 4, 2, UMC Operating Cashflow UMC OCF as % of TSMC OCF TSMC Operating Cashflow UMC Sales as % of TSMC Sales 8% 7% 6% 5% 4% 3% 2% 1% % Revenue Figure 8: SMIC now outgrowing UMC Revenue (US$mn) YoY Growth 1, 6% 8 4% 6 2% % 4-2% 2-4% - -6% UMC sales SMIC sales UMC YoY SMIC YoY China Smartphone Sector 2

3 Global handset forecast lifted by emerging market demand In coordination with our Global Hardware team, we are raising our industry handset and smartphone estimates to factor in the burgeoning whitebox smartphone growth this past year and into the next few years (see also Garcha Handset Industry 213 Outlook). Raising our global handset forecast We raise our handset estimates for 212 by 3% to 1.98 bn (+7% YoY) and 213 by 4% to 2.9 bn (+6% YoY), 55 mn and 75 mn above Gartner figures for 212/213 to account for the growth in Chinese branded handsets. We project Asian chipset vendors will ship close to 95 mn units in 212. Similarly, we project the smartphone market materially higher at 716 mn/976 mn units in 212/213, around 6%/15% higher than our earlier estimates and above IDC at 7 mn/855 mn units in 212/213. Emerging markets drive unit growth Emerging markets are projected to see a 26% CAGR vs. 19% for the industry years to expand from 54% to 7% of industry smartphone volumes by 217. The growth is being fuelled by sub-us$2 smartphone category which we expect to grow from 136 mn units in 212 to over 6 mn units in 215 (43% of global volumes). The market is increasingly opening up to Asian brands and is now only 36% supplied by Tier-1s, 35% by the Top 4 Chinese brands and 29% by Tier 2 Chinese brands/whitebox. We expect the Chinese smartphone market to grow from 197 mn units in 212 to 421 mn in 215. Beyond that, the export channel is opening up, powering expansion of Asian built smartphones to grow from 245 mn units in 212 to 823 mn by 215. The low-cost tablets add an additional driver, adding 5 mn units to our 113 mn global estimate in 212 and 8-12 mn to our 171 mn global tablet estimate in 213E (47% upside). We note 4Q12 is seeing an inventory correction, a seasonally normal phenomenon and also very similar to market leader Mediatek s track record to beat guidance in 3Q and miss guidance in 4Q. Asian suppliers leading in the emerging markets Our bottom-up of smartphone chipsets for Asian built smartphones (excluding the Korean vendors) showed a ramp from 68 mn units in 211 to 244 mn units in 212. We project these units expanding to 816 mn units in 215, offering growth of 83% in 213, 4% in 214, and 31% in 215, a substantial unit opportunity for several suppliers to provide revenue growth even in the face of price competition. We expect Mediatek to lead the market, ramping from 11 mn units in 212 to 22 mn in 213 and 37 mn units by 215, with Spreadtrum achieving similar 25% share to feature phones as it expands from 31 mn units in 212 to 199 mn units by 215. The upstart is RDA which is taking material share in feature phones and will sample its EDGE chipset from this quarter for 2H13 volumes. We expect Qualcomm to be the most material overseas competitor, with Marvell only having high-end TD traction and Broadcom still needing to demonstrate inroads. Stocks to invest for the next leg of growth We expect strong unit growth the next few years to set a good long-term trend and would still invest on pullbacks around inventory corrections. We prefer to own the space through the manufacturers benefiting from unit growth (TSMC, ASE), IC design companies at reasonable valuations (Spreadtrum and RDA note Mediatek is restricted), and Asian devices gaining share (ZTE and Lenovo). Within foundry, we downgrade UMC from Outperform to NEUTRAL with same NT$14 TP (.85x P/B) (reduced mobile leverage as TI exits and Mediatek shifts to 28nm) and upgrade SMIC (turnaround and China smartphone and tablet leverage) to OUTPERFORM and raise target price to HK$.57 (1x P/B). Smartphone estimates raised to 716mn/976mn for 212/213 Chinese smartphones growing from 197mn units in 212 to 421mn in 215 Asian built smartphones expand to over 8 mn units in 215, with Mediatek and Qualcomm leading Prefer TSMC, ASE, Spreadtrum, RDA, ZTE and Lenovo; Also switching from UMC into SMIC among Tier 2 foundries China Smartphone Sector 3

4 Valuation summary Figure 9: CS Asian semiconductor valuation summary in mn, unless otherwise stated Market Cap Price Target Inv'ment Target P/E P/B ROE US$mn 31-Dec Local Curcy Rating upside Foundry TSMC 86, OPFM 12.4% % 24.7% 24.4% UMC 5, OPFM 19.7% % 3.9% 5.% SMIC 1, NTRL 6.5% n.m n.m % -.8% 4.8% Vanguard Semi 1, OPFM 14.1% % 1.6% 15.3% Total 94, % 15.3% 18.1% Packaging & testing ASE 6, OPFM 7.9% % 12.2% 13.6% SPIL 3, OPFM 16.1% % 9.1% 1.6% Powertech 1, NTRL.1% % 9.7% 9.4% Total 11, % 12.1% 1.6% IC design MediaTek Inc. 13, RSTR RSTR NA % 14.2% 19.5% Mstar 3, RSTR RSTR NA % 19.2% 2.9% Realtek Semiconductor 1, NTRL -1.5% % 14.% 14.8% RDA OPFM 58.1% % 95.7% 71.1% Spreadtrum OPFM 5.6% % 38.% 37.1% WPG Holdings Ltd 2, NTRL -3.9% % 12.7% 14.1% Total 22, % 15.5% 16.% Figure 1: TSMC near its average historical P/E (NT$) x 9 13x 8 11x 7 9.5x Jan-3 Apr-4 Jul-5 Oct-6 Jan-8 Apr-9 Jul-1 Oct-11 Jan-13 Source: TEJ, Company data, Credit Suisse estimates Figure 12: SMIC s rebound could drive a return to 1x P/B HK$ 2.5 Figure 11: TSMC trading near its mid-cycle P/B (NT$) Sep-94 Sep-96 Sep-98 Sep- Sep-2 Sep-4 Sep-6 Sep-8 Sep-1 Sep-12 Source: TEJ, Company data, Credit Suisse estimates Figure 13: UMC approaching its post crisis average (NT$) 6 3.5x 3.x 2.3x 1.7x 2 SMIC PB Band 5 UMC PB Bands Mar 4 Mar 5 Mar 6 Mar 7 Mar 8 Mar 9 Mar 1 Mar 11 Mar 12 Source: TEJ, Company data, Credit Suisse estimates 1.5x 1x.5x.2x Jan/96 Jan/98 Jan/ Jan/2 Jan/4 Jan/6 Jan/8 Jan/1 Jan/12 Source: TEJ, Company data, Credit Suisse estimates 1.5x 1.1x.85x.6x China Smartphone Sector 4

5 Raising our global handset forecast Our global hardware team has reconciled the handset market to factor in white label handsets based on chipset and emerging market vendor shipments sold by the non-tier 1 brands. Many of these units are often undercounted in traditional published estimates on the industry size. Even factoring in a 15% discount to whitebox baseband shipments for unsold inventory and obsolescence, we raise our handset estimates by 3%/4%/2% to 1.98 bn/2.9 bn/2.15 bn, respectively, giving the handset market still healthy 7% growth in 212 and 6% in 213. Our revised estimates of bn in 212 and 2.86 bn in 213 are 55 mn above published Gartner figures in 212 and 75 mn above in 213. The higher forecasts come mainly from the continued growth of Chinese branded and whitebox handsets in emerging markets, now at 4% of global handsets and up from 3% in 211. We project Asian chipset vendors will ship close to 95 mn units in 212, with Mediatek still near 5 mn units, Spreadtrum adding 265 mn, MStar at 75 mn and RDA over 8 mn and still accelerating its run-rate to now 15 mn/month exiting the year. The Asian chipsets add to the 1.1 bn units shipped by the Top 14 global handset vendors to get chipset shipments at nearly 2.1 bn. Our global forecast at bn still discounts Asian chipsets by 15% to factor units shipping into ODM models of Tier 1s and obsolescence. Figure 14: Raising CS handset estimates in mn, unless otherwise stated E 213E Top 14 handset vendors 1,6 1,23 1,11 1,127 1,15 1,156 2nd tier Japan/Overseas brands Handsets excluding Asian brands 1,89 1,47 1,143 1,173 1,146 1,193 Mediatek units MStar units Spreadtrum units RDA units Asian baseband shipments ,43 Total chipset shipments 1,344 1,425 1,742 1,971 2,79 2,236 Discount / overlap factor 15% 15% 15% 15% 15% 15% Asian shipments after discount Total based on vendor analysis 1,36 1,368 1,652 1,851 1,939 2,8 5% 21% 12% 5% 7% CS Handset Estimates 1,36 1,368 1,652 1,851 1,975 2,86 5% 21% 12% 7% 6% Gartner estimates 1,222 1,211 1,597 1,776 1,83 2,5-1% 32% 11% 3% 1% Smartphone volumes now also being restated higher Similarly, the smartphone market is materially higher than expected as Asian chipset vendors continue to ramp smartphone chip volumes in 2H12 and 213. We estimate that volumes in the smartphone market will be 716 mn/976 mn units in 212/213, which are around 6%/15% higher than our earlier estimates. Further, these estimates are also significantly higher than estimates from other market research firms or analysts. For example, IDC expects the smartphone market to be 7 mn/855 mn units in 212/213. Raising our handset forecast to 1.98 bn units in 212 and 2.9 bn in 213, 3-4% above prior estimates Asian vendors shipping close to 95 mn chipsets in 212; our revised global forecast still discounts these volumes 15% Raising smartphones to 716 mn in 212 and 976 mn in 213 Figure 15: Revising our smartphone estimates higher in mn, unless otherwise stated E 213E 214E 215E New Estimate 298, , , ,534 1,218,529 1,424,756 YoY 58% 51% 36% 25% 17% Old Estimate 298, , ,87 885,317 1,5,273 1,175,758 YoY 58% 46% 29% 19% 12% Increase (%) % % 4% 1% 16% 21% China Smartphone Sector 5

6 Smartphone penetration (as % of addressable market) Smartphone subs as % of total mobile subs base 7 January 213 The smartphone estimates are also being restated to account for the significant volume ramp at the Asian chipset vendors. We estimate that Mediatek and Spreadtrum together grew shipments from 1 mn units in 211 but are on pace to 14 mn in 212 even with the late year inventory correction and on exit run rates could approach 335 mn units in 213. Even assuming a 15% discount to these volumes, we estimate that smartphones powered by these chips will account for some 17%/3% of global smartphone volumes in 212/213. Figure 16: CS smartphone estimates now factor in the Asian chipset shipments in mn, unless otherwise stated 1Q12 2Q12 3Q12 4Q E 213E Top 8 vendors Asian smartphone vendors Smartphone vendors Mediatek units Spreadtrum units Asian chipset shipments Discount / overlap factor 15% 15% 15% 15% 15% 15% 15% Asian shipments after discount Less Brands using Asian chipsets Total based on chipset shipments ,2 CS Smartphone Estimates Gartner estimates Penetration still has room to move higher The acceleration in demand from the Asian chipset vendors is coming from still low smartphone penetration particularly in emerging markets, where we expect penetration from affordability perspective to increase from 24% in 212 to 79% by 217 (Figure 17). This level of penetration would imply smartphone subscribers of 3.9 bn by 217. Our estimates imply by 217 smartphone penetration will reach 49% of the global mobile subscriber base (Figure 18), 54% of the global population, and 74% of overall handsets shipped. Smartphone penetration is still low at 19% of mobile subscribers Figure 17: Global smartphone penetration still low at 24% Effective smartphone penetration (based on affordability) over time 12% Figure 18: Smartphones account for 19% of mobile subs Smartphone subs base as percentage of mobile subscriptions 1% 1% 8% 6% 4% 2% 8% 6% 4% 2% % North America Western Europe Japan APAC (ex Japan) CEE MEA Latam Global 212E 213E 214E 215E 216E 217E % North America Handsets to grow through 213, smartphones through 215 Western Europe Japan APAC (ex Japan) CEE MEA Latam Global 212E 213E 214E 215E 216E 217E Our revised forecasts project handset units growing +7% YoY to 1,975 mn in 212 and +6% YoY to 2,86 mn in 213 and smartphones +52% YoY to 717 mn in 212 and +36% YoY to 976 mn in 213. The forecasts project another year of solid revenue growth for the industry at +12% YoY in 213 for overall handset growth to US$354 bn and +27% YoY growth for smartphones to US$279 bn. Looming further out is the period when the market China Smartphone Sector 6

7 95/5 96/6 97/7 98/8 99/9 /1 1/11 2/12 3/13 4/14 5/15 6/16 7/17 8/18 9/19 1/2 11/21 96/6 97/7 98/8 99/9 /1 1/11 2/12 3/13 4/14 5/15 6/16 7/17 8/18 9/19 1/2 11/21 7 January 213 moves ex-growth, currently projected in our model for overall handsets in 214 and smartphones in 216. Embedded in our industry model is a 27% replacement rate assumption of the prior year s subscriber base, a level which may still prove conservative. Figure 19: Summary of our CS handset and smartphone estimates in mn, unless otherwise stated Handset summary CAGR Global subscriptions 5,157 5,747 6,226 6,639 6,999 7,331 7,67 8,7 5% Global handset shipments 1,652 1,852 1,975 2,86 2,149 2,28 2,272 2,333 3% YoY 21% 12% 7% 6% 3% 3% 3% 3% Handset ASPs $135 $148 $161 $17 $166 $157 $151 $145-2% YoY 1% 1% 9% 6% -3% -5% -4% -4% Handset revenue $222,97 $274,645 $317,975 $354,62 $356,197 $347,677 $343,445 $338,559 1% YoY 21% 23% 16% 12% % -2% -1% -1% Smartphone summary CAGR Global smartphone subscribers ,178 1,693 2,267 2,841 3,373 3,892 27% % of mobile subscribers 1% 13% 19% 26% 32% 39% 44% 49% New adds % Replacements ,44 1,218 32% Smartphone units ,219 1,425 1,576 1,737 19% YoY 74% 58% 52% 36% 25% 17% 11% 1% Smartphone ASPs $324 $331 $37 $286 $258 $232 $29 $188-9% YoY -2% 2% -7% -7% -1% -1% -1% -1% Smartphone revenue $96,876 $156,232 $22,119 $279,79 $314,399 $33,6 $329,384 $326,556 8% YoY 7% 61% 41% 27% 13% 5% % -1% In the main report from Kulbinder Garcha, Handset Industry 213 Outlook report, the key drivers for rapid smartphone market growth in emerging markets include improving affordability (owing to a declining total cost of ownership for a smartphone), availability of lower-cost smartphones (including those from branded OEMs) enabled by lower BOM costs and chip vendors reference design programmes, and cannibalisation by smartphones of other consumer electronic device categories (including PNDs, digital cameras and portable music players and gaming devices). Indeed, as seen below, similar to the global trend, smartphone penetration in emerging markets is already higher than what handset penetration was at the same point in its lifecycle ten years ago. Smartphone penetration is on a three-year faster pace than feature phone penetration Figure 2: Smartphone penetration three years faster than handsets ten years ago Units (mn) 2, 1,8 1,6 1,4 1,2 1, years 3 years 4 years (fin. crisis) Figure 21: Emerging market smartphones also on a threeyear faster pace versus emerging market handsets Units (mn) 1,6 1,4 1,2 1, years 3 years 4 years (fin. crisis) Handsets (Actual) Smartphones (CS) Emerging Mkt Handsets (Actual) Emerging Mkt Smartphones (CS) China Smartphone Sector 7

8 26A 27A 28A 29A 21A 211A 212E 213E 214E 215E 216E 217E 7 January 213 Emerging markets drive unit growth Emerging markets are now powering the smartphone industry growth. Relative to global smartphone volumes witnessing a 19% CAGR between 212 and 217, emerging markets are expanding 26% owing to rising penetration in China, India, the Middle East, Brazil and Africa. This results in emerging market smartphones rising from 54% of global smartphones to 7% by 217. Emerging markets will be over 7% of smartphone devices shipped by 215 Figure 22: Emerging markets to approach 7% of the global smartphone market Emerging market smartphones (mn) % of industry 1% 8% 6% 4% 2% % China India Rest of Asia Middle East and Africa E Europe Mexico Rest of LatAm Brazil Russia % of global market The two main buckets of focus for unit plays are China, which will see a 29% CAGR to 421 mn units by 215 and emerging markets that are key targets for Chinese brands exporting handsets, powered by India (71% CAGR), Middle East and Africa (51% CAGR) and Brazil (44% CAGR). Figure 23: China and emerging markets outpacing developed markets E 213E 214E 215E China YoY 179% 153% 47% 26% 16% India Other APAC Brazil Mexico Other LatAm Russia E. Europe Middle East/Africa Other Emerging YoY 66% 59% 55% 38% 25% Developed YoY 36% 15% 14% 9% 7% Total industry , ,424.8 YoY 58% 51% 36% 25% 17% Low-end and high-end squeezes out the mid-range While our global team expects meaningful growth in the high-end and low-end of the smartphone market, the mid-range (US$2-4 ASP) is expected to continue to shrink as a portion of the overall smartphone market as seen below. Mid-range smartphones will represent only 25% of total smartphone volumes in 215E, down from 4% in 212. The mid range is seeing a significant squeeze as the low-cost Chinese brands and whitebox The mid-tier of the market is compressing from 4% to 25% of volumes by 215 China Smartphone Sector 8

9 producers expand capabilities using larger screens, better multi-core chipsets off the most advanced ARM processors, and benefit from operator subsidies which carriers can use at relatively low cost to bring a subscriber into the data usage paying base. Figure 24: Mid-end of smartphone market to represent only 25% of total units by 215E Percentage of global smartphone volumes broken down by price point over time 1% 9% $5+ 8% 7% 6% 5% 4% 3% 2% 1% $4 - $5 $3 - $4 $2 - $3 $1 - $2 <= $1 % E 213E 214E 215E At the low-end (sub-us$2 devices), our team forecasts rapid volume growth, driven by white-label vendors in China and India. As seen below, the low-end smartphone segment will grow to over 6 mn units in 215 (43% of global volumes) from 136 mn units in 212 (19% of global volumes), representing a 65% three-year CAGR. Figure 25: Sub-US$2 smartphones gaining share of the market E 213E 214E 215E Sub US$2 8,642 87, , , ,857 66,376 YoY 8% 56% 78% 79% 4% % of total 27% 19% 19% 25% 36% 43% While low-end smartphones will grow quickly, the market opportunity could be far greater as costs drop for the lowest-priced Android smartphones. A look at the feature phone market in 212 shows 1.2 bn units, with 6 mn under US$5 and 2 mn more between US$5 and US$1. Sub US$2 smartphones are seeing a 65% CAGR by 215 to over 6 mn units 2 mn more feature phones could be cannibalised on top of our forecasts Figure 26: Sub $2 smartphones to pass 4% of volumes Smartphone market (mn) Sub $2 % of industry (mn) 1,6 1,4 1,2 1, E 212E 213E 214E 215E -$1 $1-$2 $2-35 $35-$5 $5+ % <$2 45% 4% 35% 3% 25% 2% 15% 1% 5% % Figure 27: 2 mn more feature phones to cannibalise Feature units by price point (mn) 1,6 1,4 1,2 1, E 213E 214E 215E <= $5 $5 - $1 $1 - $15 $15 - $2 $2 - $25 $25 - $3 $3 - $35 $35 - $4 $4 - $45 $45 - $5 > $5 China Smartphone Sector 9

10 Q14 Q34 Q15 Q35 Q16 Q36 Q17 Q37 Q18 Q38 Q19 Q39 Q11 Q31 Q111 Q311 Q112 Q312 Q113E Q313E 7 January 213 We expect the 6 mn sub-us$5 handset market to have staying power as voice only basic phones for rural emerging market subscribers but see an opportunity for up to 2 mn upside to sub-us$2 smartphones to reach 8 mn units by 215 if the US$5-1 category is completely cannibalised. Growth from the industry from Samsung, Apple and also the Other brands Figure 28 below shows Apple and Samsung pulling away from the rest of the industry since 211, a well-known story. Of equal importance, however, we would also highlight the Chinese/other category depicted in red which is seeing a very similar acceleration. Chinese smartphone vendors have seen momentum build the few quarters with local Tier 3 brand share rising from 1% of Chinese smartphones in 4Q11 to 46% share in 3Q12. The presence of Mediatek, Qualcomm and Spreadtrum reference design platforms for these emerging customers has fuelled a rapid rise in competitiveness and availability both in subsidised carrier channels and the open market retail channel. Samsung, Apple and the other Chinese handset brands powering the industry growth Figure 28: Apple, Samsung... and Other driving smartphones notably the Chinese brands Units () 1, 8, 6, 4, 2, Nokia Research in Motion Motorola Apple Sony Ericsson / Sony Mobile HTC Samsung LG Huawei + ZTE Chinese / Others Figure 29: Tier 2 brands gaining more share in China (' units) Local brand share (%) 3, 5.% 45.% 25, 4.% 2, 35.% 3.% 15, 25.% 2.% 1, 15.% 5, 1.% 5.%.% 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 Tier 2 brands Huawei/ZTE Tier one's Local brand share A specific growth opportunity within China The Chinese market is a critical market for the local branded Chinese smartphone brands, whitebox and chipset suppliers into that channel. Overall market growth is poised to continue, driven by a significant step-up in subsidies of sub-rmb1, smartphones from Chinese brands and much better low-cost handset availability and quality. Samsung, Apple and the other Chinese handset brands powering the industry growth Figure 3: China penetration of devices faster than other emerging markets in mn, unless otherwise stated Penetration of devices China handsets China smartphones % of devices 17% 38% 53% 65% 74% Emerging mkt handsets ,6.9 1,12.6 1,137.4 Emerging mkt smartphones % of devices 16% 23% 34% 45% 54% The market is also a key market not dominated by the traditional Tier 1 brands, with feature phones traditionally 6% served by whitebox and local brands. The initial ramp of smartphones was dominated by the traditional global Tier 1s at 7% share in 211. In 212, however, this market made a marked turn and is now only 36% supplied by Tier 1s, 35% by the Top 4 Chinese brands (Huawei, ZTE, Lenovo and Coolpad), and 29% by the whitebox and Tier 2 Chinese brands. The key shift was substantial lowering of entry barriers due to higher quality chipset reference designs, better availability of components (panels, touch, image sensors, low cost mobile DRAM) and a stable Android platform. Tier 1s dropped their share of the China market from 7% in 211 to 36% in 212 China Smartphone Sector 1

11 The availability of these smartphones has already prompted a substantial rise in smartphone penetration of device purchases, from 17% of units in 211 (78 mn smartphones out of 458 mn handset sales) to 38% of units in 212 (197 mn of 512 mn handset sales). By 215, we model in our global forecast 421 mn of 57 mn handset sales (74% of device units). The export channel has taken off a bit slower, with penetration in emerging markets increasing YoY from 16% to 23% in 212 and projected to reach 54% in 215 (619 mn of 1.13 bn devices), a potential area of further upside. Smartphones now 38% of units shipped in China and 23% of units shipped in other emerging markets Figure 31: China smartphone market growing from 78mn to 421mn by 215 in mn, unless otherwise stated China Smartphone Market Samsung Apple Nokia HTC Motorola Sony Mobile Research In Motion Traditional Tier One's YoY Growth 29% 26% 19% 22% Share 7% 36% 31% 29% 3% Huawei Technologies Lenovo ZTE Coolpad Tier One Chinese Brands YoY Growth 262.9% 43.7% 23.4% 13.2% Share 24.5% 35.2% 34.5% 33.8% 33.% Other brands/whitebox YoY Growth 1345% 77% 35% 14% Share 5% 29% 35% 37% 37% CS Model - China Smartphones YoY Growth 153% 47% 26% 16% Based on rising affordability and quality continuing to improve, we expect the Chinese smartphone market to grow from 197mn units in 212 to 421mn in 215, with 3% from tier one s, 33% from the top Chinese brands and 37% from other brands. Figure 32: China smartphones split among Tier 1s, Chinese brands and whitebox in mn, unless otherwise stated Units (mn) China brand sha 12% 1% 8% 6% 4% 2% % Traditional Tier One's Other brands/whitebox Tier One Chinese Brands China Smartphone Sector 11

12 We note that the whitebox and other brands can expand as Tier 2 brands (Hisense, BBK, Oppo, Gionee, Tianyu/K-Touch, TCL, Xiaomi) become household names in China and emerging markets and the quality of clone Galaxy and iphones improve with better touch, quad core and sweeter flavours of Android versions. Export channel expands the opportunity for Asian built smartphones The rise of the Chinese brands in 212 saw more of the units diverted into the domestic market where carriers were eager to accelerate penetration to monetise their late start on 3G networks and also compete for share of subscribers ready to upgrade. In 212, we estimate Asian built smartphones shipped 126 mn of its 25 mn units (5% of volume) into China. We project Asian built smartphones (ex-korea) to ramp from 74 mn in 211 to 823 mn in 215 Figure 33: Asian built handset ramp in mn, unless otherwise stated Asian built smartphones Tier One Chinese Brands Other brands/whitebox China shipments (mn units) YoY Growth 447.3% 58.7% 29.4% 13.4% Share 31.3% 5.2% 44.% 4.9% 35.6% Export shipments (mn units) YoY Growth 147% 14% 47% 42% Share 69% 5% 56% 59% 64% Asian-built smartphones (mn) YoY Growth 241% 81% 39% 3% We expect the export channel to open up in the coming years as price points drop and carriers look to also expand into available 3G capacity. We forecast Asian built smartphones will grow from 245 mn units in 212 to 823 mn by 215. At that point, units would be closer to approaching the 25%:75% mix of Asian built feature phones shipped to China versus exported into other emerging markets. Figure 34: Export shipments also supporting growth of Asian built smartphones in mn, unless otherwise stated Units (mn) China shipments Export shipments Growth (YoY) E CAGR = 62% % YoY Growth 1% Our bottom-up of Asian built smartphones shows the top Chinese brands long-term having almost half of the market for Asian built smartphones, with whitebox brands and brands 8% 6% 4% 2% % China Smartphone Sector 12

13 E E 214E 215E 7 January 213 outside China (Spice, Fly, Micromax) commanding the other 5% of volumes, a similar mix to feature phones. Figure 35: Asian built smartphones continuing to ramp up Asian smartphone volumes Huawei ZTE Lenovo Coolpad Gionee Oppo TCL/Alcatel Hisense Xiaomi Tianyu G-Five Bird BBK Others Asian built smartphones (mn) Growth (YoY) 241% 81% 39% 3% Addressable market sanity check feature phones scaled to 8 mn units We expect history to repeat itself on smartphones for the volume opportunity. Asian chipsets, which are a close proxy to the Asian smartphone units reached 8 mn in 211 of the 1.4 bn global feature phone market before saturating, over 5% market share. In smartphones, we project the Asian chipsets reaching 6 mn units by 215, with another 2 mn from US branded chipset companies in this chipset market for Asian built smartphones. Asian feature phones also reached 8 mn units before saturating Figure 36: Feature phones also reached 8 mn units Chipset units (mn) Asian share (%) 2, 1,8 1,6 1,4 1,2 1, % 9% 8% 7% 6% 5% 4% 3% 2% 1% % Figure 37: Asian chip suppliers penetrating smartphones Chipset units (mn) 2, Asian share (%) 9% 1,8 1,6 75% 1,4 1,2 6% 1, 45% 8 6 3% % - % Asian chipsets Asian share incl. whitebrands (%) Feature phones incl. whitebrands Asian chipsets Smart phones Asian share (%) Penetration to date of Asian smartphone units remains on a continued pace above feature phone units at a similar penetration rate back in 26. Quarterly shipments have accelerated from less than 1 mn units to over 5 mn units, over a year faster than the feature phone pace. The rate of feature phone adoption would have 8 mn units reached by 216, but we expect could pull in for smartphones a year early to 215. Key factors for the faster penetration include wealth creation in emerging markets from 27 to 215, even better standardisation and competition among software and components (Android plus more chipset reference designs) and carrier subsidies in smartphones. Penetration is playing out faster so far for smartphones China Smartphone Sector 13

14 1Q 3Q 1Q1 3Q1 1Q2 3Q2 1Q3 3Q3 1Q4 3Q4 1Q5 3Q5 1Q6 3Q6 1Q7 3Q7 1Q8 3Q8 1Q9 3Q9 1Q1 3Q1 1Q11 3Q11 1Q12 3Q12 1Q13E 3Q13E 3Q11/1Q5 1Q12/3Q5 3Q12/1Q6 1Q13/3Q6 3Q13/1Q7 1Q14/3Q7 3Q14/1Q8 1Q15/3Q8 3Q15/1Q9 1Q16/3Q9 3Q16/1Q1 1Q17/3Q1 3Q17/1Q11 1Q18/3Q11 7 January 213 Figure 38: Smartphone ramp faster than feature phones Qtrly shipments (mn) Asian share (mn) 25 5% 45% 2 4% 35% 15 3% 25% 1 2% 15% 5 1% 5% % Asian Feature phone units FF Asian share (%) Asian Smartphone units Figure 39: Addressable market should reach 9 mn units Units (mn) /211 26/212 27/213 28/214 29/215 21/ /217 Asian feature phone chips Asian smartphone chips Seasonal inventory builds and corrections also a feature of this market The bear case against the strong unit expansion in the market is triggered by ever present inventory builds and corrections in this market which creates volatility on shipment forecasts, industry and company earnings estimates, and share prices. A look at Mediatek shows overbuilds in 3Q most years into October golden week and then a subsequent correction in 4Q. The builds and corrections can also trigger offsetting cycles of bad pricing as the channels cleans inventory and subsequent stabilization with new platforms adding features and lowering cost. Retail and broker sentiment also will traditionally chase target prices up and down on overly optimistic and pessimistic industry projections against a long-term moderately strong growth pace even during the high growth penetration phase. The ultimate risk seen in 21 and 211 is market maturation where commoditization overtakes slowing unit growth to substantially compress sales. Figure 4: Mediatek s growth rate solid in the penetration phase but excess inventory builds can drive bullish forecasts to overshoot in mn, unless otherwise stated Mediatek sales (NT$mn) 4, 32, 24, 16, Feature phones Smart phones 4Q inventory corrections a normal feature of this market and points to a more moderate growth path rather than a maturation 8, Revenue The current 4Q12 period is seeing an inventory correction, a seasonally normal phenomenon and also very similar to the company track record to beat guidance in 3Q and miss guidance in 4Q. Visibility is low in the channel but normally improves between July and September to drive upside as supply tightens during the builds but then also turns poorer once the channel has stocked up from October to December, driving the 4Q miss. The company on average guides a 5% QoQ decline in 4Q but averages 1% QoQ result. Mediatek normally beats 3Q guidance and misses 4Q guidance China Smartphone Sector 14

15 1Q3 2Q3 3Q3 4Q3 1Q4 2Q4 3Q4 4Q4 1Q5 2Q5 3Q5 4Q5 1Q6 2Q6 3Q6 4Q6 1Q7 2Q7 3Q7 4Q7 1Q8 2Q8 3Q8 4Q8 1Q9 2Q9 3Q9 4Q9 1Q1 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 7 January 213 This year, the company guided a strong smartphone ramp based on visibility it saw in October, but is now set to miss that guidance with a 3-5% QoQ sales decline versus its initial 2-5% QoQ guidance. Figure 41: Mediatek 4Q12 guidance normally weaker Figure 42: 4Q avg. guide: -5%; 4Q avg. result -1% Revenue Growth QoQ (%) 35% 25% 15% 5% -5% -15% -25% Revenue Guidance Revenue Result % QoQ 25% 2% 15% 1% 5% % -5% -1% -15% Average Guidance Average Result 1Q 2Q 3Q 4Q Low cost tablets create an additional opportunity for unit growth and chipsets The global tablet market is seeing a new stage of growth similar to feature phones and now smartphones where a new class of whitebox tablets expands the global market into a new entry level tier of products for emerging markets. In 212, we saw an inflection point in this market with the introduction of Android 4., a release that standardized applications across smartphones and tablets and brought Android s more successful ecosystem into the tablet market. At the same time, ARM is lowering the entry barrier for chip companies to enable low cost computing, allowing multiple Chinese IC design companies to reach over 1 GHz single and dual core products with GPU cores capable of processing multimedia video and games. Figure 43: Low-cost white-box tablets product line-up Maysun T753 Maysun T732-2 Starworth SW-R7D-M39 Starworth SW-M7A-M38 Vivatel T11 Core Dual A9 Single A8 Dual A9 Quad A9 Dual A9 CPU MTK 6577 Allwinner A1 Rockchip 2918 MTK6575 NVDIA Tegra 2 Operation System Android 4. Android 4. Android 4.1 Android 4. Android 4. Clock speed 1.GHz 1.5GHz 1.GHz 1.2GHz 1.GHz Connectivity 3G (GSM+WCDMA)/Wifi 2G w/ calling function/ Wifi Wifi 3G/2G/Wifi 3G/Wifi Screen 7" 7" 7" TFT LCD 7" TFT LCD 1.1" Touch Capacitive Capacitive Capacitive Capacitive Capacitive Resolution 124x6 8x48 124x6 128x8 NAND 4GB (up to 32GB option) 4GB(up to 32GB) 4GB NAND Flash (up to 32GB) 4GB NAND Flash (up to 32GB) 16GB external (up to 32GB) DDR2/DDR3 RAM 512MB (up to 4GB option) SDRAM 512MB 1GB DDR3 1GB DDR3 RAM 1GB Front Camera.3-2.MP N/A.3-2.MP.3-2.MP 2.MP Back Camera 2.-5.MP.3-2.MP 2.-5.MP 2.-5.MP 3.MP ASP (US$) Source: Company data, Credit Suisse research Whitebox tablets expanding the tablet TAM. The global tablet market is accelerating as low cost tablets rapidly improving in functionality in the $6-2 price range, below tier one tablets. Initial demand is led by Chinese makers exporting to emerging markets with low PC penetration, with usage mainly for entertainment (games, movies and music) but starting to offer productivity as keyboard attachments and applications proliferate. Component builds add 5 mn units to Low cost tablets could add 5mn units in 212 and 8mn units in 213 to our global tablet estimates China Smartphone Sector 15

16 our 113mn global estimate in 212 and 8-12mn to our 171mn global tablet estimate in 213E (47% upside). Figure 44: 212/13E global tablet unit shipment estimates (with / without white-box) Mar-12 Jun-12 Sep-12 Dec-12E 212E 213E Apple 11,798 17,42 14,36 23,861 66,737 11,569 Samsung 1,9 2,391 5,1 5, 14,391 25, Microsoft 3 2,2 2,5 7, RIM ,4 6 Barnes & Noble ,2 2,65 5, Motorola ,25 1, Dell Acer ,8 5, Asus 6 8 2,3 2,3 6, 8, Lenovo ,752 4,958 Amazon 729 1,252 2,5 3,5 7,981 1, HTC ,65 2, Others (ex-whitebox) 929 1,822 2,198 4,949 1,221 Total (ex-whitebox) 18,266 25,24 29,28 39,98 112, ,449 White-box 6, 11, 16, 17, 5, 8, Grand total 24,266 36,24 45,28 56,98 162, ,449 Grant total / ex-white-box 33% 44% 55% 43% 45% 47% Greater Chinese IC Design leading momentum Greater China fabless lead in low cost tablets due to close ties to the Shenzhen manufacturing and design base. ARM has lowered the entry barrier with its dual and quad core Cortex A-series processors, with domestic Chinese fabless Allwinner, Rockchip, Actions, AMLogic and NuFront shipping dual-core now and quad-core in 1H13. For higherend tablets, Mediatek is supplying its MT6577/8377 and has 28nm chipsets on its 213 roadmap. For other components, CMOS sensors are led by Galaxycore, touch controller by Goodix, FocalTech, Elan, and Pixcir, connectivity by Realtek and RDA, driver ICs by Novatek, Himax, Orise, and Silicon Works, audio codec by Richtek and crystal by TXC. Asian fabless powering most of the components in low cost tablets Figure 45: White-box tablet semiconductor supply chain map CPU silicon IP 3D GPU silicon IP Foundries Apps Processors Touch screen controllers Wireless and audio Apps processor + baseband CMOS image sensor Source: Credit Suisse research China Smartphone Sector 16

17 Asian suppliers gain strength in emerging markets The Asian chipsets companies are benefiting and at the same enabling the ramp of Chinese smartphone brands and whitebox. In 21 and 211, these chipset companies struggled to transition from basic feature phone baseband chips towards 3G/smartphone due to still immature chipset development, local supply chain of cheap but good enough components and still poor emerging market affordability. The standardisation around the ARM platform which has democratized computing and Android as a low cost smartphone platform to build apps off has enabled a new wave of higher quality chipsets from Mediatek and Spreadtrum. China Unicom s recently launched devices focused on mass market dual core smartphones from branded Chinese vendors saw an almost even split of designs based on Mediatek and Qualcomm. Qualcomm secured wins from Hisense, KTouch/Tianyu, Coolpad, and Huawei while Mediatek was designed into smartphones from Malata, Lenovo, TCL, and ZTE. Even on quad core, Mediatek ahead of Qualcomm's release schedule, targeting initial samples of its Quad Core Cortex A7 chipset (MT6588) also in late 4Q12 with mass production in 1Q13 and supporting TD-SCDMA/HSPA+ on par with an inferior spec 8225Q which has prompted Qualcomm to sample a more competitive 8226 based on the A7 platform with higher-end Adreno graphics in 2Q13. Spreadtrum at the same time has forged a good niche in TD-SCDMA where it has secured wins across most branded Chinese on subsidized sub-$5 RMB smartphones. Mediatek securing a number of design wins on dual core and ramping quad core in 1Q13 Figure 46: Quad-core chipset (with integrated baseband) ramping up with mass market smartphones in 1H13 Company Mediatek Qualcomm Marvell Broadcom Spreadtrum Chipset MT6589 MSM8226/8626 PXA 188 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 35 Vivante GC1 VideoCore 4 ARM Mali Camera support 8-Mpixels 13-Mpixels 16-Mpixels 2-Mpixels NA Video 72p 18p 18p 18p NA Process node 28nm 28nm 28nm 4nm NA Source: Company data Our bottom s up of smartphone chipsets for Asian built smartphones (excluding the Korean vendors) has shown a ramp already from 68mn units in 211 to 244mn units in 212. We project these units expanding with the device forecast to 816mn units in 215, offering growth of 83% in 213, 4% in 214, and 31% in 215, a substantial unit opportunity for several suppliers to provide revenue growth even in the face of aggressive price competition. China Smartphone Sector 17

18 Figure 47: Smartphone chipsets into Asian smartphones ramping up to 8mn units in mn, unless otherwise stated Smartphone chipsets Mediatek Spreadtrum RDA Leadcore Asian suppliers YoY Growth 14% 12% 45% 36% Share 18% 58% 71% 74% 77% Qualcomm Broadcom Marvell ST-Ericsson Overseas suppliers YoY Growth 73% 27% 24% 15% Share 82% 42% 29% 26% 23% Total YoY Growth 241% 81% 39% 3% Emerging markets driven by EDGE and 3G over LTE The emerging markets are still a 2.75G and 3G market, with LTE starting from China in 214. In 212, EDGE smartphones surprised as device makers leveraged China Mobile s network of Wifi hot spots to bring out entry level EDGE smartphones which could also avoid some of the 3G royalty streams. The local vendors Mediatek and Spreadtrum captured most of this new channel with Mediatek supplying a version of its single and dual core chipsets (MT6513/6515/6517) with WCDMA turned off and Spreadtrum unveiling its SC682 for low cost EDGE. The EDGE channel is now flattening out in China as low priced subsidized WCDMA and TD-SCDMA smartphones offer 3G capability with very little premium over EDGE. We forecast EDGE shipments to drop from 42% to 3% of the Asian vendors shipments in 213, with WCDMA ramping from 38% to 43% and TD-SCDMA from 2% to 26%. EDGE smartphones could decline from 42% to 3% of the Asian vendors shipments in 213 Figure 48: 212 EDGE smartphones surprised 212 by technology EDGE WCDMA TD-SCDMA CDMA 2 Mediatek Spreadtrum RDA Leadcore Asian suppliers % of shipments 42% 38% 2% % Share 1% 51% 73% % Qualcomm Broadcom Marvell ST-Ericsson Overseas suppliers % of shipments % 51% 15% 34% Share % 49% 4% 1% Total % of shipments 25% 44% 16% 14% Figure 49: 213 shifts to WCDMA and TD-SCDMA 213 technology EDGE WCDMA TD-SCDMA CDMA 2 LTE Mediatek Spreadtrum RDA Leadcore Asian suppliers % of shipments 3% 43% 26% % % Share 1% 7% 92% % % Qualcomm Broadcom Marvell ST-Ericsson Overseas suppliers % of shipments % 46% 13% 39% 2% Share % 3% 19% 1% 1% Total % of shipments 22% 45% 21% 12% % Global players targeting the reference design market but playing catch-up The global players including Qualcomm, Broadcom, and Marvell have been also targeting the emerging Asian brands and looking to duplicate the success Mediatek had enabling the local brands in feature phones. Qualcomm has been most aggressive with its China Smartphone Sector 18

19 Qualcomm Reference Design (QRD) program, making steady improvements. The company has followed its initial 7227A (1GHz chipset) in 4Q11 with 8225 dual core in 2Q12 and plans its quad core 8225 in 1Q13 and 8226 in 2Q13. Qualcomm has used this to fuel designs in China and India with its reference design partnerships with a number of local vendors including Huawei, ZTE, Lenovo, Oppo, Coolpad, Haier, BYD, TCL-Alcatel to name a few. Qualcomm counts reference designs in over 1 smartphone devices with over 4 OEMs across 12 countries (Figure 5). We believe Qualcomm more than doubled its chipset shipments into this channel in 212 to 83mn and project 114mn in 213. Figure 5: Qualcomm s Reference Design (QRD) portfolio of smartphone chips Q1 13 8x3 Dual Kraits Q2 12 Q2 11 / Q3 11 MSM 7x25 MSM 7x27 First High Volume Q4 11 7x27A Single Core First 1GHz Single Core 8x25 Dual Core Dual Core MSM 8x25Q Quad Core Quad Core 4+ OEMs 1+ Launches 1+ in Design <6 days Launch Time-to-Market Source: Company data, Credit Suisse research Marvell: Early TD-SCDMA leader now facing more competition Marvell was an early leader with one of the only qualified smartphones solutions in the market when China Mobile launched its O-Phone smartphone platform off a version of Android. The company secured a number of leading design wins with most branded tierones. The company has seen some share erosion over the past year as WCDMA and EDGE volumes have accelerated from Mediatek and Qualcomm and Spreadtrum entered into low-end TD-SCDMA sockets in 2H12 with the help of China Mobile subsidies. Marvell is planning new chipset platforms targeting three variants of smartphones dualcore TD-SCDMA, dual-core WCDMA, quad-core TD-SCDMA/WCDMA. The PXA986/988 is a single platform with software and pin compatibility for dual-core WCDMA/TD-SCDMA (RF833/838 for WCDMA/TD-SCDMA, respectively). Marvell also plans to launch the PXA188 quad-core unified TD-SCDMA+WCDMA solution in late 1H13. With a new RF (Sparrow 2), Marvell offers a world phone that works in all both TD-SCDMA and WCDMA simultaneously. Speaking at the US Tech Conference, Marvell estimates that it has 5%-plus market share in TD-SCDMA smartphones and targets to sustain that share next year on release of its quad-core 1.2GHz TD-SCDMA+WCDMA single-chip solution in 1H13. By staying on the higher end segment, we believe Marvell will not play in the smart feature phone and lowend EDGE/TD-SCDMA smartphone market. We also are seeing Spreadtrum move up market with its first dual core chipset in 1H13 and also Leadcore and even Qualcomm secure dual core designs on TD-SCDMA. For TD-LTE/FD-LTE, Marvell expects devices toward the end of 213 using the latest LTE release 9 and believes it has a die size advantage. Marvell dual core and quad core solutions in 213 could restore some of its competitiveness China Smartphone Sector 19

20 Figure 51: Marvell s chipset platforms for multi-core TD-SCDMA + WCDMA TD-SCDMA TD-SCDMA Marvell PXA 988 Marvell RF838 Dual-core Cortex-A9 Marvell PXA 188 Marvell RF838 Quad-core Cortex-A7 World phone WCDMA WCDMA Marvell PXA 188 Sparrow 2 Marvell PXA 986 Marvell RF833 Marvell PXA 188 Marvell RF833 Quad-core Cortex-A7 Dual-core Cortex-A9 Source: Company data Quad-core Cortex-A7 Single platform development : Software / Pin compatible Broadcom re-entering China market with turnkey designs and new conceptual quad-core Broadcom (BRCM) is returning to the China market with turnkey design support for singlecore, dual-core and new conceptual quad-core (2+2) solutions and integrated cellular baseband, PMU and RFIC with wireless connectivity. BRCM s new turnkey designs are optimized to support Android 4. / 4.1 / 4.2. The new platforms are powered by HSPA / HSPA+ modem technologies. In terms of process node, BRCM is less aggressive and is staying at 4nm LP process with its new chipsets. Details of the new BRCM chipsets with turnkey for China market are as below. Broadcom is showcasing a 2+2 core solution for the low cost smartphone market Figure 52: Broadcom s new chipset with turnkey support to re-enter the China market Chipset BCM21654G BCM21664T BCM28145/55 Cores Single-core Dual-core Double dual-core CPU ARM Cortex A9 ARM Cortex A9 ARM Cortex A9 CPU speed 1. GHz 1.2 GHz 1.2 GHz Modem HSPA HSPA+ HSPA+ VPU VideoCore 4 VideoCore 4 VideoCore 4 ISP 8MP 12MP 2MP Video 72p 18p 72p/18p Source: Company data Broadcom highlighted its new China turnkey design push at its December analyst day on 6-December. BRCM is marketing its new conceptual quad-core (BCM28145/55) based on dual-core ARM Cortex-A9 and dual-core VideoCore. The BCM28145 supports 72P while supports 18p (different VideoCore block). With its differentiated dual-cpu + dual- VPU, the chip achieves 3% higher performance, 23% higher in 2D performance, 39% higher in 3D performance. BRCM s new quad-core claims significant power savings given its lower clock speed VideoCore (25MHz) for multimedia tasks. BRCM claims that a few Chinese smartphone vendors are ramping up productions with its 28145/28155 in early 213. However, we believe significant traction will take time for BRCM to make inroads. BRCM also expects to benefit from China Unicom s push towards HSPA+ in 213. To date, Broadcom s traction has been somewhat modest as its early focus was on tier one designs and support to Samsung and Nokia. The company had secured some ZTE, TCL and G-Five designs among others but we believe has lost share at these accounts with ZTE using more Qualcomm and some Mediatek/Spreadtrum at the low-mid end, G- Five now more over to Mediatek and TCL switching to Mediatek for majority and retaining a good portion with Qualcomm. China Smartphone Sector 2

21 Broadcom will look to add to its 2-engineer support team dedicated for the China market and build turnkey model based on its wide product portfolio in wireless connectivity, RF, PMU, modem, AP, and multimedia to gain a stronger foothold in the market so should not be counted out. Figure 53: WCDMA product roadmap Aggressive product launches keeps the space competitive Qualcomm 7227, 65nm, 6-8MHz, 1 Arm11, Adreno 2, HSPA 826, 45nm, GHz, 2 Scorpion, Adreno22, HSPA+ 763, 45nm, 8MHz, 1 Scorpion, Adreno 25, HSP 866, 45nm, GHz, 2 Scorpion, Adreno22, SPA+ 7227A, 45nm,.8-1GHz, 1 Cortex-A5, Adreno 2, HSPA 7227T, 45nm, 1GHz, 1 Cortex-A5, Adreno 2, HSPA 8225, 45nm, 1-1.2GHz 2 Cortex-A5, Adreno 23, HSPA 8227/823, 28nm, 1-1.2GHz, 2 Krait, Adreno 35, HSPA+ 8225Q, 28nm, 1 GHz, 4 Cortex-A5, HSPA+ 8226, 28nm, 1.5GHz, 4 Cortex A7, HSPA+ ST-Ericsson U6715, 65nm, 46 MHz, 1 Arm 9, HSPA modem U85, 45nm, 1GHz, 2 Cortex A9, ARM Mali 4, HSPA U95, 45nm, 1GHz, 2 Cortex A9, ARM Mali 4, HSPA+ PXA28145/PXA nm, 1.3GHz, 2 CortexA9, VC4, HSPA+ PXA2815, 4nm, 1.1GHz, 1 Cortex A9, Video Core 4, HSPA+ Broadcom BCM2153, 65nm, 312 MHz, 1 Arm11, VideoCore 3, HSDPA BCM2157, 65nm, 5 MHz, 1 Arm11, VideoCore 3, HSDPA BCM21553, 65nm, 1 GHz, 1 Arm11, VideoCore 3, HSDPA BCM21654, 4nm, 1GHz, 1 Cortex A9, VideoCore 4, HSPA BCM21664T, 1.2GHz dual core ARM Cortex A9, HSPA+ Intel XMM626, 65nm, HSPA+ Z2, 32nm, 1.2GHz, XMM6265, HSPA+ Marvell PXA91, 65nm, 86MHz, 1 Arm9, Vivante, HSDPA PXA968, 4nm, 1GHz, 1 Armv7, Vivante, TD, HSPA PXA978, 4nm, 1.2GHz, 1 Cortex A9, Vivante, TD, HSPA+ MediaTek MT6575, 4nm, 1 GHz, 1 Cortex A9. Power VR5, HSPA MT6577, 4nm, 1 GHz, 2 Cortex A9. Power VR5, HSPA MT6589, 28nm, 1 GHz, 4 Cortex A7, Power VR, HSPA+ MT8326, 28nm, 1.5 GHz, 4 Cortex A9, Power VR, HSPA+ MT832, 28nm, 1.5 GHz, 2 Cortex A9. Power VR5, WCDMA Spreadtrum SC771 (WCDMA), 4nm, 1 GHz, 1 Cortex A5, ARM Mali SC77xx (WCDMA), 4nm, 1.5GHz, 2 Cortex A7, ARM Mali, HSPA+ RDA RDA 885, WCDMA, RDA 886 TD Source: Company data Low cost Tablets see the Chinese fabless emerging Domestic Greater China fabless companies are leading in the semiconductor supply chain for white-box tablets. Allwinner, Rockchip, Actions Semi (ACTS), AMLogic and NuFront are key domestic Application processor vendors. More recently, we have seen the emergence of Mediatek as many of its existing smartphone customers have adapted its dual core MT6577/MT8377 for the tablet market to offer 3G connectivity with the voice turned off. Mediatek has already enabled the Shenzhen ecosystem in smartphones so has a pre-existing channel to enable this manufacturing base to move into more advanced computing. Mediatek is upgrading its roadmap with 28nm and quad core processors and hiring both GPU engineers to optimize the ARM and Imagination cores and speed binning experts to raise saleable chip output per wafer similar to Intel s speed binning of processors. Low cost tablets also emerging with quad core processors in 213 China Smartphone Sector 21

22 1Q5 3Q5 1Q6 3Q6 1Q7 3Q7 2Q9 4Q9 2Q1 4Q1 2Q11 4Q11 2Q12 4Q12E 2Q13E 4Q13E 1Q5 3Q5 1Q6 3Q6 1Q7 3Q7 1Q8 3Q8 1Q9 3Q9 1Q1 3Q1 1Q11 3Q11 1Q12 3Q12E 1Q13E 3Q13E 1Q14E 3Q14E 1Q15E 3Q15E 7 January 213 Figure 54: Chinese fabless catching up with overseas players on quad-core for white-box tablets by ramping in 1H13 Company Freescale Samsung NVIDIA Allwinner Rockchip Actions Tablet AP i.mx6 Quad Exynos 4 Tegra 3 A31 RK31XX ATM729 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-4 ARM Mali-4 Process node N/A 32nm 4nm 4nm 4nm 4nm Availability Oct-12 2H12 2H12 4Q12 4Q12 4Q12 Source: Company data Most leveraged sales contribution to the doubling in low cost tablet volumes in 213 are from other component suppliers including 1-15% of sales for SMIC and WPG, 5-1% for Realtek and Mediatek and 5% for TXC, Chipbond, Novatek, and Himax. Figure 55: Semiconductor suppliers benefiting from low cost tablet adoption Segments Listed companies Private companies Foundries Back-end TSMC, SMIC, UMC ASE, SPIL Apps processors Mediatek, Ingenic Allwinner, Rockchip, Nufront, AMLogic CMOS image sensor Omnivision GalaxyCore Touch screen controllers Elan, Goodix (Mediatek subsidiary) FocalTech, Pixcir Wireless Realtek, RDA Huawei/Hisilicon Driver ICs Audio Novatek, Himax, Orise Realtek Silicon IP ARM, Imaginations technologies Vivante Profitless prosperity or room for innovation? The high competition in the space between Asian and US chipset suppliers poses the question of whether the market looks attractive from a unit perspective but not from an investment perspective. Semiconductor IC design often presents challenges of forcing companies to find new content adders and new end markets to replace commoditizing end markets where slower unit growth gets drowned out by pricing pressure. The collapse in feature phone pricing as it commoditized and matured in 21 and 211 shows up in Mediatek s drop in margins from 6% to 42% in a 2 year period. Margins could continue to stabilize as smartphones ramp during the fast penetration phase Figure 56: Margins were under attack in feature phones Revenue Mediatek GM (NT$mn) (%) 28, 65% 24, 6% 2, 55% 16, 12, 5% 8, 45% 4, 4% 35% Figure 57: ASP pressure is a given in this segment Chipset units (mn) ASPs (US$) 28 $21 24 $18 2 $15 16 $12 12 $9 8 $6 4 $3 $ Feature phone sales Smartphone sales Feat. Phone GM% Smartphone GM% Total GM% Source: IDC, Credit Suisse estimates Feature phone units Feature phone ASPs Source: IDC, Credit Suisse estimates Smartphones units Smartphone ASPs China Smartphone Sector 22

23 Smartphones still offer unit growth and areas to innovate We do not yet view the smartphone industry in the commoditization phase as the device is still innovating on processing speed, multi-core processors, higher resolution, larger display sizes, new versions of Android and faster network standards. The device offers far more room than the entry level voice enabled handsets with small screen size. Competition will be a key swing factor in the market, including how well Qualcomm can move further into the whitebox channel with its QRD (some Spreadtrum EDGE smartphone platforms being offered at US$4-45 FOB), whether Broadcom or Marvell can make a stronger attempt at localising and also the degree of competition from RDA which for now is still a year away from meaningful EDGE smartphone volumes. Tier-one Chinese smartphone makers are migrating their high-end product portfolio to quad-core chipsets with advanced features ( high-resolution touch screen, 8MP- 13MP camera) in 213, with a number of quad core devices in the Figure below now appearing. Just one year on the heels of this year s first quad-core Nvidia Tegra 3 smartphones, Mediatek and Qualcomm will both be offering mass market 28nm quad-core chipsets are starting from US$2 but quickly dropping into the entry dual-core pricing range of US$ Tier one vendors migrating their device launches to quad core in 1H13 Figure 58: The latest quad-core smartphones from major Chinese smartphone vendors Company ZTE Huawei Lenovo Coolpad TCL Communications Model name ZTE U95 Honor 2 Lenovo K86 Coolpad HD 996 TCL Y9 Retail price (US$) Technology WCDMA WCDMA WCDMA WCDMA WCDMA Display size 4.3" 4.5" 5." 4.7" 4.5" Display resolution 8x48 128x72 96x54 128x72 128x72 OS Android 4. Android 4. Android 4..4 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 2mAh 223 mah 225mAh 2mAh 25mAh Chipset Nvidia Tegra 3 Hisilicon K3V2 Samsung Exynos 4412 Nvidia Tegra 3 Mediatek MT6589 Qualcomm launching quad-core for China market Qualcomm recently unveiled two new quad-core chipsets, the MSM8226 and the MSM8626, aimed to address China specific requirements, with the multi-sim capabilities (Dual SIM / Dual Standby and Dual SIM / Dual Active) while the companion WTR265 multi-mode radio transceiver supports TD-SCDMA, CDMA and HSPA+. The chipsets feature an Adreno 35 GPU capable of 18p video recording and playback and support for 13-megapixel cameras. The QRD versions of the chipsets, QRD8226 and QRD8626, are available for sampling by 2Q13. Mediatek ramping quad-core ahead competition Mediatek is matching up closely with Qualcomm's release schedule, targeting initial samples of its Quad Core Cortex A7 chipset (MT6588) also in late 4Q12 and mass production in 1Q13 and supporting TD-SCDMA + HSPA+. On pure specifications, Mediatek appears to have a slight edge, using a newer Cortex A7 core (higher raw Mediatek leads on specs with its entry level quad core platform until Qualcomm s 8226 is sampling in 2Q13 China Smartphone Sector 23

24 DMIPs/second), more advanced graphics claiming 18p video playback and digital processing of touch built into the processor. TCL Communications is the first vendor to announce a competitively priced (Rmb1,699) quad-core smartphone, the TCL Y9, based on Mediatek s MT6589. Our checks indicates that TCL Communications and Mediatek have been partnering to get the quadcore smartphone qualified with various telco operators internationally for the past few months. Spreadtrum quad-core ramping in 2Q13 Spreadtrum plans its first quad core using the ARM Cortex A7 core at 1.5 GHz for 2Q13 ramp-up, offering it potential to target higher-end smartphones running the latest Android versions. The company will be about a quarter behind Mediatek s planned ramp timetable, narrowing the gap if it can come to market on time. Spreadtrum first migrates its smartphone platform to a dual core A5 processor (SC68xx/SC88xx) with sampling in 4Q12 and volume in 1Q13 on both EDGE and TD- SCDMA. The product is important as Mediatek leads here by three quarters with its dual core MT6577 and is already ramping to 4% of its volume on this product line. Mediatek and Qualcomm should lead the emerging market quad core space Judging from the chipset specification and turnkey support, both Mediatek and Qualcomm are likely to stood out in the China market. While chipset specifications are interesting to compare, there is only one factor in securing design wins. Vendors will also select chipsets based on R&D / field support, firmware quality / reliability, overall reference design and solution cost, vendor-customer relationship, and ability to match chipset pricing and overall end-product BOM cost competitively. Chinese branded companies will likely continue to adopt a combination of Qualcomm, Mediatek and soon Marvell once it has a more competitive WCDMA offering in 213. Whitebox vendors, typically with a much faster time to market and low cost approach with more local components, are likely to stick with Mediatek given its localized and responsive support. Mediatek also has the advantage of placing its best work into the Chinese channel whereas Qualcomm needs to segment the market and offer the best features and its custom architecture to tier one vendors and cost optimized lower-end solutions for the emerging market brands. The best from Mediatek in this low-end channel can compete effectively with the cost optimized version from Qualcomm. Mediatek and Marvell will also have an advantage at China Mobile supporting both TD- SCDMA and WCDMA. Qualcomm should maintain its leadership in CDMA with support in the latest MSM8226/8626 quad-core chipset for use on China Telecom s network but its traction on TD-SCDMA targeting China Mobile s network may prove to be challenging given its disadvantage due to late time-to-market. Although Broadcom appears to have the right products and is starting to offer greater turnkey support for the China market, we believe it will take time for BRCM to build out its team and local customer base to gain meaningful traction. LTE more a 214 story for emerging markets Qualcomm still the leader We believe that the significant leap in network speeds on LTE will push use of new applications which in turn could drive incremental growth in the smartphone market, as we expect LTE handsets to grow from 85mn in 212 to around 45mn in 215, accounting for 2% of global handset market. In emerging markets, LTE will start from 214. We note that China Mobile has ambitious plans for TD-LTE (4G), with the carrier planning to use GSM for voice, TD-SCDMA for data and TD-LTE for high quality broadband. Mediatek partnering with TCL with first quad-core LTE to start from 214 in emerging markets China Smartphone Sector 24

25 Figure 59: LTE roadmap for key products by vendor Qualcomm has the broadest LTE portfolio Qualcomm 896, 28nm, GHz, 2 Krait, Adreno 225/32, LTE 3 893, 28nm, 1.2 GHz, 2 Krait, Adreno 35, LTE 3,TD, HSA+ 8974, 28nm, 2GHz, Krait Quad, Adreno 32, LTE Cat 4 823, 28nm, 1.2GHz, 2 Krait, Adreno 35, LTE 3 MDM9x, 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 NVIDIA A954, 32nm, 1.85GHz, 2 Cortex A9, PowerVR544, LTE L854, 28nm, 1.85GHz, 2 Cortex A9, VR544, LTE A96, 28nm, 2.5GHz, 2 Cortex A15, VR6x, LTE Grey, 28nm HPM, 4+1, Icera LTE/HSPA, Q313 Intel XMM716, multimode LTE, BB/PMIC single chip Broadcom BCSM 5, LTE single mode, BB/RF single chip Mediatek MT7618, multimode LTE, Cat 3. Spreadtrum SC961, TDD-LTE, TDS/2G, 4nm Multimode LTE, TDD/FDD, 4nm Source: TSR For 213, China Mobile is targeting TD-LTE base stations to exceed 2, versus 7, GSM base stations and close to 22, TD-SCDMA base stations. Globally, China Mobile expects TD-LTE technology to cover over 2 billion people across countries by 214 with more than 5, base stations installed and over 1 models of mobile terminals available. While several vendors are either shipping or will ship LTE products by the end of the year, we would highlight significant variation in publicly available product roadmaps. We note that Qualcomm has the broadest LTE portfolio and leads peers by a wide margin. Qualcomm is best positioned from a scale and quality advantage with meaningful exposure to Apple and Samsung who we believe will collectively command 83%/92% of the LTE smartphone and tablet market in 212/213. Qualcomm likely leads on the early designs after proving out its solution with Apple and Samsung In addition to in-house solutions (from Samsung, Motorola, HiSilicon/Huawei) the vendors that are either shipping or will ship LTE products by the end of the year include Qualcomm, Renesas, ST-Ericsson and potentially Spreadtrum. China Smartphone Sector 25

26 Stocks to invest for the next leg of growth We expect strong unit growth the next few years to set a good long-term trend and would still invest on pullbacks around inventory corrections. We note several key areas to invest in the Asian supply chain. IC Design: Mediatek (restricted), Spreadtrum and RDA. The IC design companies in our coverage, Mediatek, Spreadtrum and RDA are in a competitive space but have a good inside track into the strong unit growth in emerging markets and for local vendors ramping in the sub-us$2 smartphone market. Mediatek is the market leader with its turnkey approach but we remain restricted. We view RDA and Spreadtrum offering low valuation relative to its market opportunity. Spreadtrum has a good local position on TD-SCDMA and RDA has used its strength in RF, connectivity and integration to excel on ultra-low cost components. Foundry TSMC and SMIC: The outsourced semiconductor manufacturers benefit from the strong unit growth but also have a good degree of pricing power as manufacturing barriers rise and advanced manufacturing grows more complex and capital intensive. TSMC is our top pick due to its dominant independent foundry status competing against IDMs that compete with their most attractive potential customers and 2 nd tier foundries lagging on technology and scale. SMIC is our emerging pick which we upgrade from Neutral to Outperform as a Chinese foundry with favourable opportunity to benefit from emerging Chinese fabless and a good position with overseas leaders Qualcomm and Broadcom. We downgrade UMC which has had a slow move into advanced application processors on 28nm and will face a headwind as TI exits its US$8mn wireless application processor business over the next year. Back-end: ASE and SPIL. We maintain our positive view on the back-end suppliers ASE and SPIL which are good unit plays on mobile growth at 5% of sales versus less than 2% contribution from traditional PC applications. The test and packaging sector is seeing a good expansion moving from feature phone to smartphones as it can slow bonder investments and capture higher margin flip chip business. The sector is focusing on leaner capex and better cash flow in 213 which should also keep utilization tight and pricing better. Figure 6: Key Asian low cost component suppliers in mn, unless otherwise stated Supply chain Key suppliers Foundry: Back-end: Asian fabless: Overseas fabless: Components: Semiconductor Distribution: PCBs: Optical Lens: Acoustics: Devices: Display/Touch components: Carriers: TSMC, SMIC ASE, SPIL Mediatek (restricted), RDA, Spreadtrum Qualcomm, Broadcom, Marvell, RFMD, Omnivision TXC (Quartz), SIMO (emmc) WPG Tripod Largan, Sunny Optical AAC Technologies ZTE, Lenovo, Samsung TPK, AUO, Novatek, Himax, Orise China Unicom, China Mobile, China Telecom IC Distribution: WPG. WPG is the leading semiconductor distributor in Asia and has assembled a string of acquisitions to drive 3-4% growth from to double its Asian distribution share from 12% to 24% since the financial crisis. Its IC design companies will be a competitive space, though low market caps for the ADRs factors in some of the pressure Maintaining TSMC as the technology pick, but switching our 2 nd tier foundry preference from UMC to SMIC ASE and SPIL to benefit from unit growth in the space WPG a distribution leader although margins have stagnated at lower levels China Smartphone Sector 26

27 semiconductor distribution business is still largely 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. Devices: ZTE and Lenovo. The Asian smartphone brands are seeing good unit growth, with Lenovo expanding from 2mn to 23mn units in 213 and ZTE from 2mn to 3mn units. Lenovo is approaching break-even scale and putting more effort on inhouse design and leveraging its China and emerging market channels and ZTE is using its position at Chinese and emerging market carriers to secure placement of its devices. Other components: TXC, AAC, Novatek, Orise. Improving device capability will benefit several components within the handset, including timing controllers (TXC), acoustics (AAC) and higher resolution panels (Novatek and Orise). Asian brands ZTE and Lenovo should outgrow the industry with emerging markets TXC, Novatek and AAC are other top component picks China Smartphone Sector 27

28 1Q5 3Q5 1Q6 3Q6 1Q7 3Q7 1Q8 3Q8 1Q9 3Q9 1Q1 3Q1 1Q11 3Q11 1Q12 3Q12 1Q13E 3Q13E 1Q14E 3Q14E 7 January 213 IC Design: More room for innovation on smartphones Mediatek ramping smartphones into a growing market The addressable market off our global model has emerging market smartphones scaling to 1,4mn units by 215 and sub-2 smartphones reaching 758mn units, similar to penetration rates seen in feature phones. Our revised estimates factor a scenario of Mediatek reaching 36% of emerging market smartphones and 49% of the sub-$2 smartphone market, with some further units possible in tablets. Lower price points driving faster penetration of smartphones Figure 61: MTK penetration in emerging market phones Emerging mkt smartphones YoY Growth 12 8% % 9 6% 8 7 5% 6 4% 5 4 3% 3 2% 2 1 1% % F 213F 214F 215F Emerging market smartphones Mediatek share Mediatek smartphones Figure 62: Mediatek penetration in low-cost phones US$5-2 smartphones Mediatek share (%) 8 8% E 212E 213E 214E 215E $5 - $1 $1 - $15 $15 - $2 Mediatek share Source: Credit Suisse estimates Smartphones now dominate the revenue picture Mediatek s revenues through was dragged down by the rapid compression in feature phone pricing coupled with market share loss as new entrants (Spreadtrum, MStar and RDA) eroded Mediatek s unique turnkey local chipset, service and support model. Figure 63: Smartphone sales now lead the revenue picture NT$mn 3, 25, 2, 15, 1, 5, % of MTK sales 9% 75% 6% 45% 3% 15% % 7% 6% 5% 4% 3% 2% 1% % Modeling smartphones now reaching 4% of sales, double the contribution of feature phones Feature phone sales Feature phone % of sales Smartphone sales Smartphone % of sales Sales compressed from peak run rate at NT$25bn at the end of 21 to less NT$8bn in 1Q12. The feature phone business has now dropped from 7% of 3Q11 sales to 2% of 3Q12 sales while smartphones have increased from 3% to over 4%, passing the point that feature phones materially impact the business. Tablets adding an incremental driver Mediatek is already seeing success with its MT6577 dual core (MT8377 with voice turned off) for 7 and 1 tablets around US$1-12 FOB. The company intends to go after this market with a differentiated solution offering cellular, Wifi, GPS, and multi-core computing to differentiate from the US$4-1 7 tablets largely coming from local Chinese vendors Allwinner and Rockchip. Vendors are currently using Mediatek s existing smartphone chip, but Mediatek sees an opportunity to introduce custom solutions for tablets that can push a higher performance platform for 1 IPS tablets in emerging markets. China Smartphone Sector 28

29 Figure 64: Low cost smartphone build costs span from low to high-end Quality QTM13 Timespad M1 Maysun T976 Melon-Vision V7M Beneworld Technology WCDMA WCDMA WCDMA WCDMA WCDMA Display 7" IPS 1.1" IPS 7" IPS 7" 7" Operating System Android 4. Android 4. Android 4. Android 4. Android 4.1 Camera 5MP+2MP 5MP+1.3MP 5MP+.3MP 2MP + 1.3MP 2MP +.3MP Pixels 124x6 128x8 128x6 124x x6 Processor 1.2GHz dual A9 1.2GHz dual A9 1.2GHz dual A9 1. GHz dual A9 1. GHz dual A1 Battery 4,mAh 6,6mAh 3,5mAh N/A N/A Chipset MT6577 MT8377 MT6577 MT8377 MT8377 Source: Company data Our checks show that Mediatek will target the white-box tablet market with three chipsets in 213. Mediatek will target the high-end market with 28nm MT81XX that supports 4kx2k display or 3D display, with mass production scheduled for 2Q13. With an integrated baseband and AP, the MT838x targets the mid-end segment in 1H13. Mediatek addresses the low-end segment with MT8317 (based on its MT6517 EDGE dual core chipset), launched in 4Q12. While Chinese players such as Allwinner and Rockchip have dominated the market, strong volume growth still provides Mediatek with ample opportunities. With aggressive dual-core and quad-core processors product roadmap and lever of existing smartphone customer base, Mediatek is likely to see unit shipment upside in 213E We estimate 15mn tablets for Mediatek embedded in our 22mn smartphone/tablet shipment estimate in 213. Figure 65: Mediatek s 213 tablet chipset roadmap High-end Mid-end (BB+AP) Low-end Chipset model MT81xx MT838x MT8317 Process node 28nm 28nm 4nm CPU Quad-core Dual-core Dual-core CA9 Graphics Mutli-core Mutli-core PowerVR SGX531 GPU Key selling point 3D Video / 3D display 72p HD video@3fps Integrated baseband Source: Company data Overshoot places growth on a slightly lower trajectory The company has faced the same overshoot seen in prior years where 3Q12 supply chain tightness drives over-exuberant customers to double book components and fill the channel with product. We are seeing a channel digestion that places Mediatek and industry growth on a lower but still solid growth trajectory. We believe the exit run rate for smartphones in 4Q12 is 42mn, down from our 47mn units and consequently lower our 213 forecast from 24mn units to 22mn units. The company is seeing some delay in purchases and ahead of quad core but expects to ramp this category from a low base in 1Q13 to 3% of sales for 213. Mediatek unveiling tablet chipsets in 2Q13 Reducing our 213 smartphone estimate from 24mn to 22mn following the 4Q12 inventory correction China Smartphone Sector 29

30 Figure 66: Credit Suisse assumptions for Mediatek, 29-15E NT$mn unless noted F 212 (old) 213F 213 (old) 214F 215F Feature phones (mn) ASPs (US$) $7.36 $5.39 $3.58 $2.28 $2.28 $1.85 $1.85 $1.5 $1.22 Smartphones (mn) ASPs (US$) $19.33 $13.51 $13.33 $11.23 $11.21 $9.58 $9.59 $8.34 $7.28 Handset Revenue 86,513 85,233 59,512 63,213 64,95 78,639 84,361 82,546 85,763 DTV 1,749 11,96 1,722 13,49 13,49 14,24 14,24 14,398 14,964 PC Optical 11,14 9,764 1,596 11,477 11,477 1,19 1,19 8,423 6,856 Consumer DVD 7,19 6,619 4,16 3,51 3,51 3,399 3,399 3,56 2,83 WLAN (Ralink) 1,867 9,198 9,198 1,613 1,613 11,227 11,751 Total Revenue 115, ,522 86,858 1,879 12, , ,56 119, ,137 GM % 58.7% 53.7% 45.3% 41.5% 41.5% 42.1% 42.1% 42.1% 42.1% Op M% 31.5% 27.4% 14.2% 12.8% 13.3% 14.9% 16.1% 14.7% 14.2% EPS $34.1 $28.46 $12.47 $13.27 $13.97 $16.71 $18.87 $17.5 $18.7 We trim our sales from +2% to -4% for 4Q12 and 1Q13 from -5% to -8% but expect GMs to track stable around 42%, as higher margin dual core is ramping up and offsetting a slowdown in lower margin EDGE chipsets. EDGE peaked around 5% of volume in late 3Q12 but we project will fall back to 3% in 4Q12. On lower shipment growth and stable margins, we reduce our EPS from NT$18.87 to NT$ Q12 sales below the lowend of guidance, GMs inline Figure 67: Reducing estimates to reflect the slower 4Q12 for Mediatek 4Q12 1Q (NT$ mn) Actual CS(old) Street Guidance CS CS(old) Street CS CS(old) Street CS CS(old) Street Sales $28,353 $3,89 $28,465 NT$ bn $26,19 $28,522 $26,676 $1,879 $12,615 $11,445 $116,784 $122,56 $132,478 Chg -3.8% 2.1% -3.4% -2% to +5% -7.9% -5.2% -6.3% 16.1% 18.1% 16.8% 15.8% 19.4% 3.6% GM% 42.% 42.% 41-43% 42.% 42.% 41.5% 41.5% 42.1% 42.1% R&D 6,252 6, % opex 6,161 6,161 22,762 22,762 25,16 25,16 SG&A 1,664 1,664 $6.3-$6.8bn 1,664 1,664 6,159 6,159 6,755 6,755 OpM% 14.1% 15.7% 15.2% % 12.% 14.6% 14.% 12.8% 13.3% 13.2% 14.9% 16.1% 17.9% Net Inc. 5,253 6,93 4,671 FX: NT$29:1 4,341 5,46 4,391 16,51 16,891 15,851 22,43 25,32 25,614 EPS (NT$) $3.92 $4.54 $3.71 $3.24 $4.7 $3.32 $13.27 $13.97 $12.77 $16.71 $18.87 $18.54 Source: Company data, Bloomberg consensus estimates, Credit Suisse estimates Spreadtrum driven off TD-SCDMA and lower-end smartphones Spreadtrum has capitalized on the market ramp of TD-SCDMA as it was one of the early successful chipset companies commercialising the standard in China. The market has accelerated through 2H12 after China Mobile raised its subsidy budget from Rmb2 bn to Rmb26 bn after spending Rmb12 bn in 1H12. Spreadtrum now expects to maintain 5% share of a TD market growing from 85mn units in 212 to 14mn in 213, with the open retail channel reaching 5% of volumes. We keep a bit more conservative for Spreadtrum, modelling 35mn TD units in 212 and 51mn in 213. In 213, the company will have a couple of incremental areas for growth, including design-in on Samsung s entry level TD- SCDMA platforms and its initial shipments into the WCDMA channel in 1H13. TD-SCDMA market reaccelerating after a slow 1H12 as subsidies rebound and low cost smartphones ramp China Smartphone Sector 3

31 1Q9 2Q9 3Q9 4Q9 1Q1 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12E 1Q13E 2Q13E 3Q13E 4Q13E 7 January 213 Figure 68: Spreadtrum s TD-SCDMA shipments rebound as procurement opens back up in mn, unless otherwise stated TD Shipments (mn) TD Share (%) % 8% 7% 6% 5% 4% 3% 2% 1% % SPRD TD-SCDMA Units SPRD TD market share (%) Samsung penetration extends into smartphones Spreadtrum s ramp at Samsung continues to expand, with the first 2 feature phones launching in November and 3 more set for January. Spreadtrum is also adding a TD- SCDMA smartphone now and EDGE smartphone in January for China and export markets, supplementing its existing modem sale into the TD Galaxy S3. CS analyst Keon Han estimates Samsung will ship 315mn smartphones and 145mn feature phones in 213, opening up a TAM half as large as the China open channel market. Initial volumes would start small in smartphones but could scale to 5mn/month in feature phones, driving upside to our -12% YoY unit estimate for Spreadtrum next year. Working to move into higher-end devices Spreadtrum has laid out a roadmap that keeps it competitive and narrows its gap with Mediatek, which ramped their smartphone business about a year before Spreadtrum (3Q11). Mediatek had the early lead on WCDMA and 1 GHz and dual core chipsets, ramping early in the year with its MT6575 and in 2H12 with dual core, whereas Spreadtrum will be out later in the year on single core and dual core from 1Q13. Due to this, Spreadtrum is still also ramping shipments, with 18mn units projected in 4Q12 versus Mediatek s 4-45mn units. Spreadtrum is targeting several key chipset upgrades to raise its competitiveness and support its blended smartphone pricing: Feature phones: SC6531 for 1Q13 ramp. Spreadtrum will launch its 4nm SC6531 including Bluetooth+FM for 4Q12 sampling and 1Q13 volume. The company has lost share to RDA in this segment (now at 11mn units/month) as RDA offered low cost and fast pace of integration to bring down pricing more aggressively. Spreadtrum s SC6531 also pulls in Bluetooth for the first time. Spreadtrum has secured feature phone design wins with Samsung which gives it a new customer and 18mn unit addressable market, outside the fiercely competitive Chinese customer base. Spreadtrum adding feature phone and low-end TD- SCDMA smartphone designs at Samsung SC6531 with connectivity on the roadmap for a 1Q13 ramp Dual core 1.2 GHz platform for TD-SCDMA and EDGE for 1Q13 ramp. Spreadtrum migrates its smartphone platform to a dual core A5 processor (SC68xx/SC88xx) with sampling in 4Q12 and volume in 1Q13 on both EDGE and TD-SCDMA. The product is important as Mediatek led it here by 3 quarters with its dual core MT6577 and is already ramping to 4% of its volume on this product line. Quad Core: 1.5 GHz platform for 2Q13 ramp. The company plans its first quad core using the ARM Cortex A7 core at 1.5 GHz for 2Q13 ramp, offering it potential to target China Smartphone Sector 31

32 higher end smartphones running the latest Android versions. The company will be about a quarter behind Mediatek s planned ramp timetable, narrowing the gap if it can come to market on time. Figure 69: Spreadtrum roadmap broadening to address more tiers of the low-cost handset market Source: Company data WCDMA: 1GHz platform for 4Q12 data cards, 1Q13 handset sampling. Spreadtrum is introducing its first WCDMA smartphone chipset from the MobilePeak team it acquired in 211. The platform will start at 1 GHz and give the company a foothold into China Unicom s 3G network and potential exports in 213. The platform has a good chance for ramp in 213 given, (1) HSPA+ data support at 21 mbps uplink versus existing HSPA at 7-14 mbps, utilising a key data network upgrade China Unicom has launched, (2) existing TD-SCDMA tier one base (Huawei, ZTE, K Touch, Lenovo) that Spreadtrum can design similar handsets for across network platforms, and (3) targeted ultra low-cost architecture to come in as the value solution. Spreadtrum will have initial production to Southeast Asia and India very late in 4Q12 with its WCDMA data card and sample smartphone chipsets through 1Q13 for a volume ramp the following quarter. Dual core and WCDMA chipsets are key to expanding into higher end smartphones in 213 LTE times for market entry when China launches in 214. Spreadtrum now has its TD-LTE + TD-SCDMA modem available for sampling on China Mobile s network. The company will follow with a 5 mode single chip which supports both TDD/FDD LTE standards, TD-SCDMA and WCDMA and 2.5G. That product is about a year behind Qualcomm s super chip but should be timed for the commercial network launch in China for 214. We also do not believe Qualcomm has not yet enabled material volumes for its TD function on its current commercial multi-mode offering. China Smartphone Sector 32

33 Maintaining shipment estimates, inventory correction limits upside We maintain our shipment estimates at 3.8mn in 212 and 91.5mn in 213. We believe the company initially gave some buffer for the normal 4Q slowdown which did hit the market again this year and now limits upside. We expect the company to also guide a seasonal 1% QoQ decline into 1Q13 to account for fewer working days. For feature phones, we keep conservative on our assumptions, modelling a steady decline in units and pricing the next few years, with 236mn units in 212 declining to 26mn units in 213. Our estimates factor volume ramp of some of Samsung s 2.5G phones for emerging markets. Figure 7: Spreadtrum shipment assumptions by standard and phone type in mn, unless otherwise stated US$mn unless noted F 214F 215F Feature phones (mn) ASPs (US$) $4.48 $3.89 $3.38 $2.26 $1.6 $1.31 $1.7 Smartphones (mn) ASPs (US$) $. $. $7.79 $5.99 $5.48 $5.5 $4.47 Sales by phone type ,47 ASPs (US$) $17.65 $9.96 $7.17 $6.17 $5.51 $4.62 $3.92 WCDMA units (mn) ASPs (US$) $. $. $. $7. $5.57 $5.6 $4.47 Sales by standard ,47 GM % 36.4% 44.% 41.6% 37.4% 37.8% 38.5% 39.1% Op M% -18.4% 2.% 2.2% 14.% 14.5% 15.3% 16.2% GAAP EPS -$.43 $1.29 $2.49 $1.75 $2.5 $2.36 $2.76 Pro Forma EPS -$.63 $1.48 $2.79 $2.25 $2.42 $2.72 $3.12 Our extended projections for Spreadtrum out to 215 factor Spreadtrum maintaining its 25% market share in a declining feature phone market and in smartphones, reaching a similar 25% market share as it attained in feature phones. Figure 71: CS assumptions for Spreadtrum s market share in mn, unless otherwise stated Shipments (mn) 25 Market share 3% Recent inventory correction in the market likely limits upside for Spreadtrum Long term, assuming a 25% market share for Spreadtrum of Asian chipsets as it achieved on 2.5G F 213F 214F 215F 25% 2% 15% 1% 5% % Feature phones Emerging mkt feature phone share Smartphones Emerging market smartphone share China Smartphone Sector 33

34 Outlook in-line rather than to upside We believe 4Q12 is on track to our US$194mn (+3% QoQ and guidance for US$189- $196mn and GMs flat at ~37%. Smartphones are still set to grow from 11mn to at least 18mn in 4Q12 on multiple branded Chinese design wins, offsetting price erosion. Feature phones are also supported with the ramp of 2 Samsung phones (E1282/E1263 Trios) from November toward 1mn units/month. Figure 72: Summary of CS Spreadtrum estimates for 4Q12/1Q13 and 212/213 in mn, unless otherwise stated SPRD Sep-12 Dec-12E Mar-13E 212E 213E Actual CS Cons Guidance CS Cons CS Cons CS Cons Sales $187.9 $194. $19. $189-$196mn $177.5 $168. $716.2 $716. $83.1 $837. % Q/Q chng 8.5% 3.3% 3.1% % QoQ -8.5% -11.6% % Y/Y chng 1.7%.9% 1.2% 6.2% 6.3% 15.9% 16.9% Gross Margin 37.3% 37.3% 37.4% 37.3% 37.3% 37.6% 37.4% 37.5% 37.8% 38.2% Op Margin 13.4% 13.3% 1.9% 14.% 14.5% Net Income $23. $23.4 $17.5 $91.1 $19.2 Net Margin 12.2% 12.1% 9.9% 12.7% 13.2% Pro Forma EPS $.55 $.56 $.45 $.42 $.29 $2.25 $1.78 $2.42 $2.5 GAAP EPS $.44 $.44 $.33 $1.75 $2.5 Diluted shares Maintain Outperform on Spreadtrum Spreadtrum is trading at 8.4x 213 GAAP EPS and 7.1x 213 EPS and has over $4 net cash/share. We believe the company could also consider a share buyback as it continues to generate US$8-$1mn free cash flow and receives $1-2mn R&D government subsidies per year. We maintain our target at 13x 213 US GAAP EPS and 11x 213 Pro Forma EPS. The stock at its target would still be a sizeable discount to Mediatek to allow for its China fabless discount on the US market. The stock is reasonable with valuation low, roadmap promising, and smartphone designs ramping into the low cost channel. RDA low cost upstart moving into smartphones RDA is an entrepreneurial Chinese fabless company that has established a track record of quickly penetrating new product categories with lower cost integrated solutions and steadily taking market share. The company has already used this strategy to command high market share across FM tuner, Bluetooth, power amplifiers, DVB-S tuners and most recently 2G basebands. RDA has penetrated several product areas with low cost structure and integration The company is leading on integration in feature phone chipset platforms, with very small die in its 8851 baseband integrating Bluetooth+FM on die. The company is also close to taping out a design that also pulls in the power amplifier, saving an additional 1 cents of BOM cost, important in a voice only phone selling under US$1. RDA is sampling its EDGE smartphone chipset this quarter and we believe will tape out WCDMA for 2H13 sampling, putting it on the path to compete in smartphone platforms. Its first EDGE volume ramp likely starts from 2H13 and WCDMA is more a 214 story. The company has already transitioned half its engineers over to software and has indicated the Android OS saves some on development time relative to proprietary feature phone operating systems. The company also believes smartphone ASPs will stay more resilient relative to feature phones for an extended period due to requirements to include more graphics, ARM Cortex processor, higher embedded memory, and support a more capable software platform and larger higher resolution screen - good for the overall space after the feature phone price wars. China Smartphone Sector 34

35 4Q12 tracking above guidance on share gains in 2G baseband raising 4Q estimates We believe RDA is tracking above its 4Q12 sales guidance for -9% to +1% QoQ growth to US$1-11 mn. GMs were guided up -1bp QoQ ( %) and are still in-line. We believe 4Q12 sales upside is coming from low cost baseband share gains with its integrated 8851 adding in Bluetooth and PAs doing well due to some transition following RFMD s acquisition of Amalfi and some pull out of the low-end 2G market by Skyworks. GMs should track in-line with guidance. Baseband run rates have continued to surprise higher, with units ramping from 1mn/month in 3Q12 to 15-16mn/month in November and December as the company takes share from Mediatek and a lesser extent Spreadtrum as those vendors focus more on the smartphone opportunity. 1Q13 will still low seasonal demand, with fewer working days due to Chinese New Year so we maintain 1Q13 and 213 estimates despite the stronger 4Q12. Raising 4Q12 sales above guidance on baseband share gains, maintaining 213 above street Figure 73: RDA tracking above guidance for 4Q12 in mn, unless otherwise stated RDA Dec-12E Mar-13E 212E 213E CS CS Orig. Cons Guidance Actual CS Orig. Cons CS CS Orig. Cons CS CS Orig. Cons Revenue $115.8 $15.7 $14.5 $1-11mn $96.2 $95.9 $95.8 $391.5 $381.4 $38.3 $463.5 $46.4 $44.8 % Q/Q chng 5.9% -3.3% -4.4% -9% to +1% QoQ -16.9% -9.3% -17.2% % Y/Y chng 4.6% 28.4% 33.6% 33.2% 35.5% 32.% 31.6% 18.4% 2.7% 15.9% Gross Margin 31.6% 31.7% 31.5% % 31.7% 32.% 32.% 32.1% 32.1% 32.1% 32.1% 32.2% 32.7% Op. Expenses $2.6 $2 $21 $21 $68 $68 $86 $85 Op Margin 13.8% 12.6% 1.2% 1.6% 14.6% 14.3% 16.% 13.6% 13.7% 16.3% Net Income $15.3 $13 $1 $1 $55 $52 $6 $6 Net Margin 13.2% 12.2% 1.% 1.3% 14.% 13.7% 12.9% 13.% Pro Forma EPS $.39 $.33 $.33 $.27 $.27 $.29 $1.38 $1.33 $1.29 $1.5 $1.5 $1.44 GAAP EPS $.33 $.28 $.21 $.21 $1.16 $1.11 $1.13 $1.23 $1.23 $1.32 Diluted shares Maintain OUTPERFORM on RDA RDA is transitioning into a baseband company with good low cost RF and connectivity with integrated baseband (with CMOS PA in 2H13), 3G PA, 3:1 connectivity, and in 2H13 an EDGE smartphone platform. The stock remains reasonable at 7.5x 213E EPS given diversified and growing product line for low-cost handsets. We maintain Outperform and NT$17 target based on average 212/213 EPS. We stay positive into a good roadmap that keeps RDA competitive on costs while adding content into baseband, connectivity, RF and into 3G/smartphones. China Smartphone Sector 35

36 1Q6 3Q6 1Q7 3Q7 1Q8 3Q8 1Q9 3Q9 1Q1 3Q1 1Q11 3Q11 1Q12 3Q12 7 January 213 IC Distribution: Mobile offsetting the PC decline WPG Driver from low cost tablets and smartphones We remain constructive on the medium term growth outlook for WPG continuing both from acquisitions and product cycles that WPG is tied into. The company has assembled a string of acquisitions to drive 3-4% growth from to double its Asian distribution share from 12% to 24% since the financial crisis. WPG has doubled its distribution share from 12% to 24% since 28 Figure 74: WPG has doubled its share of the APAC distribution market in mn, 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 (%) Scale has a positive network effect, as smaller distributors have less access to working capital, less broad product lines, reduced field support and customer bases and smaller distribution reach for demand creation. Its semiconductor distribution business is still largely 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 settops. Figure 75: WPG has substantial revenue and profit market share in China (US$ bn) Revenue Share 31% 31% 39% 41% 53% 56% Profit Share 36% 49% 52% 53% 56% 64% WPG segment mix is 39% PCs, 25% communications, 19% consumer, and 17% industrial/other. Within that, smartphones are 15% and tablets 1-15%. WPG has more content in a low cost tablet (core and peripheral components) versus Apple related (discretes and analog) and sees this segment at least doubling in 212, consistent with momentum seen at local tablet vendors exporting to emerging markets. WPG generates 15% of sales from smartphones and 1-15% from tablets Figure 76: WPG product mix dominated by PCs, communications and consumer (%) PC Communication Consumer Industrial Automotive Others China Smartphone Sector 36

37 For 4Q12, we believe the company is tracking to its guidance range of NT$88bn-93bn ( % QoQ growth). Sales are down seasonally as sluggish PC demand is offset by continued ramp from the emerging market low cost smartphones and tablets. 4Q12 GMs are tracking flat around 5% with operating margins within guidance for %. 4Q12 tracking in-line Figure 77: Maintaining WPG estimates 4Q12 1Q13 2Q (NT$ mn) Actual Street Guidance CS Street CS Street Actual Street CS Street Sales $91,448 $91,6 NT$88-93bn $89,436 $87,244 $99,274 $95,815 $361,593 $361,61 $394,563 $39,393 Chg -7.% -7.4% Dn % -2.2% -4.2% 11.% 9.8% 8.8% 8.8% 9.1% 8.% GM (%) 5.1% % 5.1% 5.1% 5.1% 5.1% Op.M(%) 1.8% % 1.7% 1.9% 1.8% 1.8% 1.9% 1.9% Net Inc. 1,162 1,52 1,394 4,679 4,755 5,358 5,447 EPS (NT$) $.72 $.8 $.65 $.73 $.86 $.87 $2.9 $3. $3.3 $3.53, Bloomberg consensus estimates WPG is trading at a bit of a premium at 11x 213E EPS versus its slower growth US peers Arrow and Avnet at 8.9x and 9.2x respectively. Synnex remains at a higher multiple at 12.4x as a company a bit more directly tied into China consumption versus WPG which distributes semiconductors that ship into products globally. Figure 78: WPG at a slight premium to its peer group Price Mkt Cap EV/Sales (x) P/E Multiple (x) P/B Multiple (x) Company Ticker 1/4/213 (US$mn) WPG 372.TW , Synnex 2347.TW 55 2, Arrow ARW , Avnet AVT , Median Mean Note: Valuation as of 14 July 21. China Smartphone Sector 37

38 3Q3 1Q4 3Q4 1Q5 3Q5 1Q6 3Q6 1Q7 3Q7 1Q8 3Q8 1Q9 3Q9 1Q1 3Q1 1Q11 3Q11 1Q12 3Q12E MCUs Smart card Smartphone Auto Feature phone Other Networking Voice phone DTV / STB HDD/SSD Laptops/tablets PMP Desktops Camera Printer 7 January 213 Foundries: Significant content drive from mobile The foundries see a great value expansion with the move from a feature phone (US$1.5 manufacturing content) to low cost smartphone (US$8 manufacturing content) to high-end smartphone (US$15 manufacturing content) due to more advanced processor, connectivity, RF, CMOS sensor, display driver and peripheral components (touch, emmc controller). The mobile device architecture is led by the ARM processor core, which is a low cost and low power chipset licensed into a number of high volume devices including tablets, smartphones, microcontrollers, set-tops, TV controllers, and digital cameras. ARM has experienced such strong revenue growth in recent years as its low power system-on-chip architecture has enabled the creation of mobile computing devices. The company s technology commands almost 1% share of the phone and mobile computing markets (smartphone and tablet), making ARM s growth agnostic to specific company market share. We are seeing the proliferation of ARM driving the communications end market, now over 5% for most of the core foundries and also competition in the space forging a push to the most advanced technology node. Foundries see a significant content expansion from feature phones even to low cost smartphones Figure 79: TSMC sales track ARM shipments Arm Sales/TSMC Shipments Figure 8: ARM has high share in high volume markets TAM - 215: # of chips ARM Market Share 1, 1% 8, 8% 6, 6% 4, 4% 2, 2% - % Arm sales TSMC shipments 215 chips ARM share The combination of mobile growth into smartphones and tablets is far outweighing the declining growth from notebooks, netbooks and feature phones. We project growth from mobile at 2% in 212, 18% in 213 and still 11% in 214. For TSMC, which is gaining share, we see over 2% YoY growth from mobile each year and sales contribution from the mobile applications ramping from 4% of sales in 211 to 55% of sales by 214. Figure 81: Mobile growth still growing double digits US$mn 2, 17,5 15, 12,5 1, 7,5 5, 2,5 YoY Growth (%) 7% 6% 5% 4% 3% 2% 1% % -1% E 212E 213E 214E Tablets Feature phones Netbooks YoY nbs/netbooks/feature phones Smartphones Notebooks YoY smartphones/tablets YoY Growth Mobile Figure 82: TSMC contribution from mobile rising US$mn 14, % of TSMC sales 6% 12, 5% 1, 4% 8, 6, 3% 4, 2% 2, 1% % E 212E 213E 214E Tablets Smartphones Feature phones Notebooks Netbooks % from smartphone/tablet % from notebook/netbook/feature phones % from mobile Advanced manufacturing is growing increasingly important. A look at the 28nm ramp for TSMC shows one of the sharpest ramps in history despite the fears of slowing Moore s Law as mobile application processors and graphics make a fast switch to deal with higher China Smartphone Sector 38

39 1Q99 4Q99 3Q 2Q1 1Q2 4Q2 3Q3 2Q4 1Q5 4Q5 3Q6 2Q7 1Q8 4Q8 3Q9 2Q1 1Q11 4Q11 3Q12 2Q13 1Q99 3Q99 1Q 3Q 1Q1 3Q1 1Q2 3Q2 1Q3 3Q3 1Q4 3Q4 1Q5 3Q5 1Q6 3Q6 1Q7 3Q7 1Q8 3Q8 1Q9 3Q9 1Q1 3Q1 1Q11 3Q11 1Q12 3Q12 1Q13 7 January 213 data rates, more advanced applications and operating systems and to drive graphics and multimedia to higher resolution displays. TSMC advanced communications ICs driving its business TSMC is in a strong position as enabler of multiple fabless competing to go after market opportunity in mobile and stay competitive on performance and specifications. The company is doing well at both ends of the supply chain, securing strong share of LTE through Qualcomm s success, mobile processors with long-time partner NVIDIA and we believe now adding Apple as a new partner. At the low-tier, the competitive drive to multicore keeps the pressure on chip companies to move to the newest node (28nm) to reduce die size and offer optimal power and performance. TSMC s communications and 28nm ramp remains strong Figure 83: Communications continues to accelerate NT$mn 7, 6, 5, 4, 3, 2, 1, - Figure 84: 28nm set seeing the sharpest ramp of any node Revenue (NT$) 35, 3, 25, 2, 15, 1, 5, - Computer Communication Consumer Other/Industrial Memory Linear (Communication).5um+.25/.35um.15/.18um.13um 9nm 65nm 4nm 28nm TSMC s 28nm ramp remains on a fast clip and will be in the sweet spot of margins, reaching corporate average in 213. The company remains on track to over 2% of sales in 4Q12 and expects 3% of sales in 213, with GMs reaching low 4% in 4Q12 and at corporate average in 213. Figure 85: TSMC 28nm should be supported by a second wave of customers in nm US$mn 2, 1,75 1,5 1,25 1, Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 Qualcomm QCT NVIDIA AMD graphics AMD mobile processors Altera Mediatek Spreadtrum Broadcom TI LSI Freescale Marvell TSMC 28nm (%) 4% Xilinx Front-end 28nm Mfg % of TSMC wafer sales 35% 3% 25% 2% 15% 1% 5% % 28nm to reach 3% of TSMC s sales in 213 China Smartphone Sector 39

40 We believe the company is adding 2 nd wave low power plus customers to Poly SION (Mediatek, Spreadtrum), supplementing the high-end ramp of graphics and applications processors. We still factor Qualcomm driving the highest volumes and pushing up into a more advanced process moving from Poly Sion to High-K Metal Gates to support Apple/Samsung. We also see potential for Apple to move in as another primary customer with initial volumes from 2H13 and more meaningful from 214 supporting its advanced technology development. TSMC will also add about 25% of its 28nmm business from graphics and 2% of volume will come from a broad second wave of customers including network processors (Freescale, Cavium), connectivity and embedded processors (Broadcom, TI), PLDs (Altera, Xilinx), multi core mass market smartphone ICs (Mediatek, Spreadtrum), and storage controllers (Marvell, LSI). Figure 86: CS estimates above street for TSMC in mn, unless otherwise stated 4Q12 1Q (NT$ mn) Actual Street Guidance CS Street CS Street CS Street CS Street Sales 131,88 132,543 $129-$131bn 124, ,9 56,32 56,995 6, ,729 7, ,495 Chg (%) % QoQ GM (%) % OpM (%) % Net Inc. 41,42 41,872 FX$ ,711 36, ,1 167, , , , ,789 EPS (NT$) Valuation may stay near the upper end of its range as growth accelerates the next few years and mobile projects provide visibility into earnings. We maintain our target at NT$19, 15x 213E EPS (versus 11-15x range) and 3.4x P/B (versus x range). TSMC trading near average cycle levels Figure 87: TSMC near its average historical P/E (NT$) x 9 13x 8 11x 7 9.5x Jan-3 Apr-4 Jul-5 Oct-6 Jan-8 Apr-9 Jul-1 Oct-11 Jan-13 Figure 88: TSMC trading near its mid-cycle P/B (NT$) Sep-94 Sep-96 Sep-98 Sep- Sep-2 Sep-4 Sep-6 Sep-8 Sep-1 Sep x 3.x 2.3x 1.7x Source: TEJ, Company data, Credit Suisse estimates SMIC Upgrading to Outperform as a turnaround and mobile beneficiary Source: TEJ, Company data, Credit Suisse estimates SMIC s new management team has changed focus to better using existing capacity to improve customer and product mix to build a sustainable profitable business over outright expansion to compete on scale and technology with larger players. We are encouraged by improving execution to keep the company on more stable footing to compete in its area of competency, including cost effective source for emerging Chinese fabless, specialty memory and a good base of US fabless customers using multiple foundries. The company is a complementary option for customers needing a lower cost option on n-1 and n-2 process nodes to TSMC, particularly Chinese fabless receiving government R&D subsidies but also requiring them to manufacture in a local foundry if the process technology is competitive. The company s base in China is also of growing value to the local supply chain growing volumes in fast growing low cost smartphones and tablets. Upgrading SMIC on leverage to low cost smartphones and tablets and good management turnaround progress China Smartphone Sector 4

41 1Q3 2Q3 3Q3 4Q3 1Q4 2Q4 3Q4 4Q4 1Q5 2Q5 3Q5 4Q5 1Q6 2Q6 3Q6 4Q6 1Q7 2Q7 3Q7 4Q7 1Q8 2Q8 3Q8 4Q8 1Q9 2Q9 3Q9 4Q9 1Q1 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 7 January 213 Figure 89: SMIC driven by communication/consumer (low cost smartphone/tablet market) In mn, unless otherwise stated Revenue (US$mn) Computer Consumer Communication Other/Industrial SMIC s has brought break-even utilization down from 9% to 85% and driving a return to small profitability. The company is also in process of engineering profitability and revenue outgrowth throughout the semiconductor inventory correction through its position supplying Wifi and RF to high-end smartphones and multiple components (baseband, AP, connectivity, memory controllers, RF, flash and CMOS image sensors) into low cost tablets and smartphones. The company is establishing a more stable platform as a cost-effective source for emerging Chinese fabless companies and a more reliable source for US fabless adopting multiple foundries. SMIC achieved +25-3% YoY growth in 212 driven by Chinese fabless (35% of sales) supplying into low cost smartphones and tablets and a few large US customers, including.18 micron power management for mobile and 55/65nm handset and set-top ICs. SMIC is benefitting from Chinese fabless who are now starting 4nm for low-cost computing at disruptive prices. SMIC supplies a broad space of emerging Chinese fabless customers Figure 9: SMIC serving most of the major Chinese fabless semiconductor companies (Revenue in US$ mn) YoY SMIC rank rank Companies revenue revenue growth Major product customer 1 1 Shenzhen HiSilicon Technologies % Comm. ASIC Yes 2 2 Spreadtrum Communications % Wireless ASSP Yes 3 3 RDA Microelectronics % Wireless ASSP Yes 4 4 GalaxyCore % Image Sensor Yes 5 5 Leadcore Technology % Wireless ASSP No 12 6 CEC Huada Electronic Design (HED) % Smart card Yes 7 7 Shanghai Huahong % Smart card No 9 8 Beijing Tongfang Microelectronics (TMC) % Smart card No 14 9 Fuzhou Rockchip Electronics % Consumer ASSP Yes 6 1 Nationz Technologies % Smart card No 1 11 Shanghai Fudan Microelectronics Group % Smart card Yes 1 12 Datang Microelectronics Technology (DMT) % Smart card Yes 8 13 Vimicro % Compute ASSP No Shenzhen State Microelectronics % ASIC Yes Actions Semiconductor % Consumer ASSP No Ingenic Semiconductor % Consumer ASSP No Source: Gartner Total 2,17 2,915 45% China Smartphone Sector 41

42 Driven by smartphones/tablets, SMIC is shipping 35, wafers per month for PMIC based on mature process. Out checks indicate that Qualcomm s PMIC in the Apple iphone 5 is manufactured at SMIC. In the CMOS image sensor market, SMIC s key customer GalaxyCore shipped around 6 mn units in 211, an increase of 7% from 35 mn units in 21. The majority of GalaxyCore s CIS has resolution is under 2Mpixels and it mainly serves the China feature phone market and is preparing for higher-pixel products for the booming smartphone market. In the NOR flash segment, SMIC s key customer - GigaDevice - provides a wide range of NOR Flash in embedded consumer and mobile device market. GigaDevice has experience similar growth in the mobile handset flash market to Spreadtrum in baseband, RDA in RF, and GalaxyCore in CIS. GigaDevice's 211 revenue is about US$6 mn, a 15% growth from 21. The strong partnership with SMIC has given GigaDevice competitiveness against IDM competitors, Macronix and Winbond. It adopted the 12-inch wafer with upgraded process technology for mass production, which gave it competitive manufacturing costs and flexible capacity. Avoiding commoditisation with specialty platforms SMIC has lagged the 2 year industry technology cadence with the move to 65nm in 29 (three years after 9nm) and the move to 4nm (3 years after 65nm). About 5% of SMIC s capacity are in mature process technologies (9nm and above). To avoid commoditisation, the management team opts to target more cost sensitive applications that do not require the most advanced high performance node and also mixed signal and RF on legacy nodes. The majority of Chinese fabless companies are still using mature technology nodes (greater than 11nm) for analog and mixed signal products. This keeps a sizable long term revenue for SMIC s legacy 6 and 8 wafer fabs as long as the company has high-quality specialty processes for the Chinese market. The mix of n-1 and n-2 projects and specialty platform on mature process allows the company to target customers for their more cost sensitive applications for the emerging market supply chain. Existing specialty process technologies SMIC offers and its key customers for each in the following table. A sizable revenue for SMIC s mature process lies specialty platforms for the emerging market supply chain Figure 91: SMIC avoiding mature process commoditisation with specialty platforms Specialty process Process node focus Key customers CMOS Image Sensor (CIS) 13nm-18nm GalaxyCore NOR Flash 65nm-18nm GigaDevice Micro-controller Unit (MCU) 65nm-18nm Various Power MOSFET 18nm-3nm Various BCD Technology 18nm-35nm Various Power Management IC (PMIC) 13nm Qualcomm Smart Card IC 11nm-13nm HED, Datang, Fudan Source: Company data SMIC tracking to the high-end of 4Q12 guidance We believe SMIC tracking to the high-end of 4Q12 guidance on strength from overseas (Broadcom/Qualcomm) and local Chinese fabless ramping on low cost chipsets for smartphones and white-box tablets. The company is continuing a turnaround from 1 years of mostly losses into a modestly profitable and sustainable operation. SMIC now targets 5% ROE by 2H13 as it ramps 4nm to 1-15% of sales and improves yield on 55/65nm and brings up its Shanghai 3mm line to scale, offering potential for the stock to move towards 1x P/B. We see a good opportunity for the company as it has an inside track to Chinese fabless receiving subsidies and offers a lower cost manufacturing base for emerging market mobile devices. SMIC should reach the highend of its 4Q guidance and is tracking flat to slightly down in 1Q13, above the peer group China Smartphone Sector 42

43 1Q7 2Q7 3Q7 4Q7 1Q8 2Q8 3Q8 4Q8 1Q9 2Q9 3Q9 4Q9 1Q1 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 7 January 213 Figure 92: SMIC tracking to the high-end of its guidance for 4Q12 in mn, unless otherwise stated 4Q12 1Q13 2Q (US$ mn) Actual Street Guidance CS Street CS Street CS Street CS Street Net sales $466 $465 $461-$47mn $461 $449 $57 $469 $1,681 $1,681 $2,43 $1,887 Change 1% 1% Flat to up 2% -1% -4% 1% 5% 27% 27% 21% 12% GM % 18.3% 18-2% 16.8% 21.9% 21.% 22.4% OpM % 2.7% 4.3% Opex $7-74mn.8%.8% 7.% NM -.2%.% 7.4% 2.2% Net income 5 1 (2) (18) (12) EPS (US$) $. $. $. $. $.1 $. -$.1 $. $.3 $.1 We are upgrading from NEUTRAL to OUTPERFORM and taking our target from HK$.41 (.7x BV) to HK$.57, representing 1x P/B, as the company outgrows the group and selffunds its capex. SMIC management has turned around operations to achieve break-even profitability and should be able to fund moderate growth with operating cash flow. The company has created a more sustainable business that should outgrow the industry as the company targets its growing Chinese fabless customer base and draws in more multisource business from its overseas customers. Figure 93: SMIC could keep re-rating back to 1x P/B (HK$.57 / US$3.65 per ADS) 2.5 HK$ SMIC PB Band Upgrading from Neutral to Outperform and raising our target from HT$.41 (.7x P/B) to HK$.57 (1x P/B) 1.5 Mar 4 Mar 5 Mar 6 Mar 7 Mar 8 Mar 9 Mar 1 Mar 11 Mar x 1x.5x.2x UMC: Downgrading to Neutral TI wireless headwind adds to the 28nm disappointment We are downgrading UMC from Outperform to Neutral and keeping our NT14 target, a level with only 13% upside following the recent 22% rebound in the stock. We were more optimistic early in 212 into improving cyclical momentum, more customer support on 28nm/4nm and low valuations. The exit of TI from its application processor business, still ramping 28nm yields and recent rebound to.76x P/B near its.85x post crisis average dampens upside potential. Downgrading UMC to Neutral following the recent rebound due to slow 28nm execution and drag from TI s exit from the AP business Figure 94: UMC cash flows continue to drop versus TSMC US$mn (%) 18, 16, 14, 12, 1, 8, 6, 4, 2, UMC Operating Cashflow UMC OCF as % of TSMC OCF TSMC Operating Cashflow UMC Sales as % of TSMC Sales 8% 7% 6% 5% 4% 3% 2% 1% % Figure 95: SMIC now outgrowing UMC Revenue (US$mn) YoY Growth 1, 6% 8 4% 6 2% % 4-2% 2-4% - -6% UMC sales SMIC sales UMC YoY SMIC YoY China Smartphone Sector 43

44 3Q 2Q1 1Q2 4Q2 3Q3 2Q4 1Q5 4Q5 3Q6 2Q7 1Q8 4Q8 3Q9 2Q1 1Q11 4Q11 3Q12 3Q 1Q1 3Q1 1Q2 3Q2 1Q3 3Q3 1Q4 3Q4 1Q5 3Q5 1Q6 3Q6 1Q7 3Q7 1Q8 3Q8 1Q9 3Q9 1Q1 3Q1 1Q11 3Q11 1Q12 3Q12 4Q99 2Q 4Q 2Q1 4Q1 2Q2 4Q2 2Q3 4Q3 2Q4 4Q4 2Q5 4Q5 2Q6 4Q6 2Q7 4Q7 2Q8 4Q8 2Q9 4Q9 2Q1 4Q1 2Q11 4Q11 2Q12 4Q12 4Q99 2Q 4Q 2Q1 4Q1 2Q2 4Q2 2Q3 4Q3 2Q4 4Q4 2Q5 4Q5 2Q6 4Q6 2Q7 4Q7 2Q8 4Q8 2Q9 4Q9 2Q1 4Q1 2Q11 4Q11 2Q12 4Q12 7 January 213 Technology progress mixed, with 28nm still lagging UMC s 28nm is still not materializing as a notable percentage of revenue. While the company still targets 5% of sales in the December month, we believe it could hold in the low-mid single digits in 1H13 due to TI s limited 28nm business and slow progress porting its other baseband customer s designs. 28nm High K Metal Gate seems a bit delayed, with revenue now slated for early nm revenue is growing better and expanded from 9% to 13% of sales in 3Q12 and will pass 15% in 4Q12 but is now 3 year old technology and even facing competition from SMIC s ramp there. 28nm may stay low through 1H13 Figure 96: UMC s 28nm contribution remains tiny Wafer Revenue 14, (NT$) 12, 1, 8, 6, 4, 2, years 2 years 2 years 3 years 2.5 years Figure 97: Communications revenue continues to decline Wafer Revenue (NT$) 2, 16, 12, 8, 4, -.25um.18um.13um 9nm 65nm 4nm 28nm Computer Communication Consumer Other/Industrial Memory UMC continues to lag on utilization and profitability UMC has continued to lag in a sluggish business cycle, with utilization remaining 2% below TSMC and GMs and wafer price also about 25% lower than TSMC s average. The company has the combined disadvantage of later to market entry at each technology node, lower yields and 2 nd source status which requires lower wafer price but at the same time higher cost structure owing to lower purchasing scale for equipment and materials. TSMC has not made progress relative to TSMC on margins or utilization Figure 98: UMC s utilization gap to TSMC continues Utilization % 11% 1% 9% 8% 7% 6% 5% Figure 99: GMs and pricing also remain lower Wafer price (US$) $1,8 $1,6 $1,4 $1,2 $1, $8 $6 $4 $2 $ GM/Price Premium(%) 6% 5% 4% 3% 2% 1% % TSMC Utilization UMC Utilization TSMC ASPs UMC ASPs Gross Margin Gap Price premium TI adds another headwind to a declining communications business UMC has gradually seen its leading edge support wane, as graphics have shifted the advanced business to TSMC, Xilinx has moved over to TSMC for 28nm and below and now TI is exiting the OMAP application processor business. TI noted in 4Q12 that the business is a US$8mn revenue stream moving to near zero exiting 213 with most of that piece outsourced to foundries. As TI s traditional partner, UMC could face a US$3mn headwind on TI business in 213 about 6-7% of sales. At the same time, the Qualcomm ramp has been delayed and is still disappointing creating limited drivers for the Key customer TI s OMAP business will drop from US$8mn to $ over the next year China Smartphone Sector 44

45 28nm technology. Mediatek offers one option but is also increasingly relying on TSMC as it shifts to the most advanced node of 28nm earlier than it historically pushed the leading edge as its business mix moves to more advanced smartphones and tablets over lowerend consumer products (PC optical, DVD, feature phones). Maintaining 213/214 estimates UMC is on track to 4Q12 guidance so we maintain near-term estimates and 213 and 214 at NT$.83/NT$.92, below street of NT$.84/NT$.98 respectively. We expect a muted growth outlook and stable full year GMs in the low 2% range and operating margins near 1%. Maintaining 213/214 estimates Figure 1: Leaving estimates unchanged for UMC for in mn, unless otherwise stated NT$ 4Q12 1Q (mn) Actual Street Guidance CS Street CS Street CS Street CS Street Sales 26,134 26,517 Ship down 7-9% 24,566 25,694 16,44 16,64 112, , , ,952 Chg (%) US$ ASPs +2% GM (%) 18.5 High Teens R&D 2,286 2,38 9,19 9,444 1,6 SG&A 1,5 1,65 4,248 4,358 4,626 OpM (%) Util 75-79% Net Income 1,382 1,764 Comms ,76 8,124 8,651 1,436 1,727 11,57 12,954 EPS (NT$) Likely stays in its post financial crisis range We expect UMC will stay in its post crisis range from.6x to 1.1x and maintain our target at average.85x, with less opportunity to break to the high-end given headwinds on 28nm communications and decline of its TI business. We would consider next positive catalysts to upgrade would come from a better break-through on 28nm in 2H13 which could trigger some return of Mediatek s advanced business and the ramp of more Qualcomm production. Maintaining our price target at NT$14 reflecting post crisis average P/B (.85x P/B) Figure 11: ROE continues to drop each cycle 1-Yr FWD P/B 8. ROE (annualized) 4.% Figure 12: UMC approaching post crisis average levels (NT$) % 6. 3.% % 4. 2.% % 2. 1.% 1. 5.%..% 1/6/96 1/6/98 1/6/ 1/6/2 1/6/4 1/6/6 1/6/8 1/6/1 1/6/12 ROE (Ann'lized) UMC Fwd PB Average +1d -1d +2d -2d ROE (Qtr) UMC PB Bands Jan/96 Jan/98 Jan/ Jan/2 Jan/4 Jan/6 Jan/8 Jan/1 Jan/12 1.5x 1.1x.85x.6x China Smartphone Sector 45

46 3Q2 1Q3 3Q3 1Q4 3Q4 1Q5 3Q5 1Q6 3Q6 1Q7 3Q7 1Q8 3Q8 1Q9 3Q9 1Q1 3Q1 1Q11 3Q11 1Q12 3Q12 1Q13E 3Q13E 1Q99 3Q99 1Q 3Q 1Q1 3Q1 1Q2 3Q2 1Q3 3Q3 1Q4 3Q4 1Q5 3Q5 1Q6 3Q6 1Q7 3Q7 1Q8 3Q8 1Q9 3Q9 1Q1 3Q1 1Q11 3Q11 1Q12 3Q12 1Q13E 3Q13E 7 January 213 Back-end: ASE and SPIL benefit as unit plays We expect the back-end demand drivers to be led by communications, an end market that has expanded on the back of rising wireless penetration and more recently more silicon in tablets and smartphones. Mobile is reaching 5% of sales and smartphones and tablets still offer another year of strong double digit growth from the push into emerging markets. The test and packaging sector is also seeing better control on margins as pricing firms and mix shifts to flip chip and copper wirebonding. The overall back-end sector should see a bottoming out in demand in 1Q13 driven by end of inventory depletion and low season for tech builds. We expect a stronger recovery in 2Q13 driven by smartphone and tablet but extending into PCs as Windows 8 effect takes its course with further IDM outsourcing opportunities. Mobile represents 5% of sales for the back-end sector Figure 13: Back-end sales driven by communications Figure 14: Back-end sales set to rebound in 213 End Markets US$mn $2,1 $1,8 $1,5 $1,2 $9 $6 $3 $ US$ mn $3,5 $3, $2,5 $2, $1,5 $1, $5 $ YoY Growth 1% 8% 6% 4% 2% % -2% -4% -6% Communications Computer Consumer Memory ASE SPIL Amkor Stats YoY Growth We maintain our 212 and 213 EPS at NT$1.73/NT$2.1, slightly above street at NT$1.99/NT$2.38 respectively. We believe the back-end had a slow late 4Q12 and are tracking slightly below seasonal 1Q13 on the whitebox depletion but expect a reacceleration in 2Q13 on new smartphone ramps and broader supply chain restocking. Figure 15: Maintaining CS estimates for ASE for NT$ in mn, unless otherwise stated ATM USI CS Street ATM USI CS Street ATM USI CS Street Sales 13,859 6, ,48 19,15 15,143 66, ,638 25, ,647 68,74 235, ,624 Chg (%) GM (%) R&D 6,1 1,71 7,792 6,79 1,744 8,533 7,495 1,815 9,31 SG&A 8,18 2,66 1,876 8,83 2,725 11,555 9,819 2,836 12,655 OpM (%) Net income 12,928 2,573 12,928 12,678 15,741 2,878 15,741 14,928 18,798 2,937 18,798 17,632 EPS (NT$) Source: Bloomberg, Company data, Credit Suisse estimates SPIL is tracking in-line with our estimates for sales at the lower-end of guidance flat to down 3% QoQ. GMs are on track to guidance for %, with pricing staying firm and copper ramping from 55% to 6% of sales to partially offset the NT$ appreciation. China Smartphone Sector 46

47 Sep/99 Mar/ Sep/ Mar/1 Sep/1 Mar/2 Sep/2 Mar/3 Sep/3 Mar/4 Sep/4 Mar/5 Sep/5 Mar/6 Sep/6 Mar/7 Sep/7 Mar/8 Sep/8 Mar/9 Sep/9 Mar/1 Sep/1 Mar/11 Sep/11 Mar/12 Sep/12 Jan/96 Oct/96 Jul/97 Apr/98 Jan/99 Oct/99 Jul/ Apr/1 Jan/2 Oct/2 Jul/3 Apr/4 Jan/5 Oct/5 Jul/6 Apr/7 Jan/8 Oct/8 Jul/9 Apr/1 Jan/11 Oct/11 Jul/12 7 January 213 Figure 16: SPIL s 3Q12 and 4Q12 guidance near in-line with CS, slightly below the street 4Q12 1Q13 2Q (NT$ mn) Actual Street Guidance CS Street CS Street CS Street CS Street CS Street Net sales 16,39 16,539 NT$16.3-$16.8bn 15,47 15,823 16,947 17,325 64,899 65,118 69,484 7,177 75,288 75,856 QoQ (%) -2.7% -1.8% to -3% QoQ -6.% -4.3% 1% 9.5% 6.% 6.3% 7.1% 7.8% 8.4% 8.1% GM (%) 17.7% % 14.9% 18.5% 17.9% 18.9% 18.8% OpM (%) 9.2% 1 OpM 9-1% 5.7% 8.9% 1.1% 1.8% 9.8% 9.9% 1.6% 11.2% 1.5% 12.1% Net income 1,346 1, ,236 1,518 1,652 5,45 5,546 6,486 6,854 6,943 7,759 EPS (NT$) , Bloomberg consensus The back-end stocks normally trough early in the inventory adjustments, factoring in that lower supply growth and inventory depletion could help drive a bottoming out in utilization. Beyond cyclical factors, we like structural drivers for the companies, including ability to cut costs from the switch to copper, revenue drivers from high growth communications applications, continued lift from outsourcing and inherent capex control due to short equipment lead times. ASE and SPIL still offer some upside at 1.7x P/B versus mid cycle range at 2x P/B. Stocks have rallied but still trade below mid-cycle Figure 17: ASE trading at a discount on a P/B basis Figure 18: SPIL still trading below mid-cycle levels NT$ ASE Historical PB Band 6 5 NT$ 65 SPIL Historical PB Band 3x 4 2.4x 5 2.4x x 1.2x.8x x 1.2x 5 China Smartphone Sector 47

48 Mobile Devices: Asian brands gain share ZTE: Upgrading to OUTPERFORM Smartphone mix shift improving profitability (covered by Yan Taw Boon) We upgrade ZTE to OUTPERFORM with a target price of HK$16.75 after raising our E earnings from Rmb.1/.6/.64 to Rmb.8/.79/.92. We were neutral on ZTE previously on potential margin risks on lingering unprofitable contracts and smartphone pricing erosions. We now expect its 213E earnings to grow 69% YoY off a low-base in 212E, driven by: Robust smartphones volume growth and high-end mix driving better profitability. Strength in China 4G network spending and subsiding effects of low-margin contracts High-end mix shift stabilizing smartphone margins As part of its profitability improvement strategy, ZTE is shifting its focus from low-end smartphones to higher end smartphones. This is supported by (1) the launch of new highend models for the China market such as the Nubia Z5 priced at about Rmb3,6 (US$57), (2) expansion in overseas channel. We expect ZTE s overseas smartphones will expand from 14 mn in 211 to 21 mn in 212, up 5%. Driven by overseas sales, we now expect ZTE s mid-to-high-end smartphones (priced above Rmb1,) to grow from 6-7 mn units in 212E to mn units in 213E. While we expect less than 5% of its smartphones to be priced above Rmb3, (~US$48), the focus on high-end smartphones should stabilize blended ASPs and gross margin. Expecting above Rmb1, smartphones to grow to 13-15mn units from 6-7 mn in 212E. Figure 19: Smartphone product mix shift towards the high-end stabilizing 213E gross margins at 16.9% Model U95 U985 (Grand Era) V985 Grand S Nubia Z5 Screen size 4.3" 4.5" 4.5" 5." 5." Resolution 8x48 128x72 128x72 192x18 192x18 Processor Nvidia Tegra3 Nvidia Tegra3 Nvidia Tegra3 Snapdragon APQ864 Snapdragon APQ864 Quad-core, 1.3GHz Quad-core, 1.5GHz Quad-core, 1.5GHz Quad-core, 1.5GHz Quad-core, 1.5GHz Rear camera 5MP 8MP 8MP 13MP 13MP Storage 4GB 4GB 4GB n/a n/a Memory 1GB 1GB 1GB 2GB 2GB Price (RMB) 999 1,7 1, , 3,688 Source: Company data Reflecting robust demands in China and export sales, we raise our estimates for E to 28mn/39mn/5mn (from previously 25mn/35mn/46.5mn). We expect ZTE s smartphone business to see gross margin stabilizing due to (1) greater economies of scale driven by robust volume growth, (2) more aggressive component cost-downs, and (3) stabilizing ASP driven by high-end product mix shift. While pricing pressure remains given intense competition in China market, ZTE is magnifying its component cost-down efforts by shifting towards local supply chains. We expect the stabilizing blended pricing and component cost-downs to allow its smartphone gross margins to stay at 17.3% in 213E, higher than its Chinese peers at an average of 12%. Combining this with better scale driven by robust unit shipment growth and Raise smartphone unit estimates to 28mn / 39mn / 5mn in E Smartphone gross margins stabilizing at 17.3% in 213E China Smartphone Sector 48