Handset Industry - Yuanta IN140707.pdf

8/10/2019 Handset Industry - Yuanta IN140707.pdf

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Industry Initiation

Handset Industry

Dialing up new smartphone trends

Primary Analyst: Jeff Pu, CFA

+886 2 3518 7913 [email protected]

With significant contribution from:

Caitlin Huang



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Industry Initiation

Taiwan: Handsets 7 July, 2014

Top recommendations

Largan (3008 TT; BUY) with a TP of

NT$3,060 for 29% upside.

Catcher (2474 TT; BUY) with a TP of

NT$345 for 26% upside.

HTC (2498 TT; SELL) with a TP of

NT$88 for 37% downside.

Whats new?

We initiate coverage on

Taiwans handset sector,

focusing on six companies.

Largan and Catcher are our top

picks due to a mix of iPhone 6

share gains, ASP improvement,

and high exposure to fast

growing Chinese OEMs.

Industry outlook

We expect iPhone shipments to

pick up strongly in 4Q14, with

YoY expansion into 1H15.

In the low-end, the geographic

expansion of Chinese OEMs will

accelerate, while the growth of

e-commerce is favorable for

high-end components.

Handset Industryrimary Analyst: Jeff Pu, CFA



Caitlin Huang


http://research.yuanta.com

Bloomberg code: YUTA

Dialing up new smartphone trends

Structural changes amid industry deceleration: We expect smartphone

shipment growth to turn moderate over the next three years, and

highlight three potential structural trends: 1) weakening of Samsungs

no.1 position (positive for Taiwan component makers); 2) tier-two global

brands may exit the market as their share of profits contracts; and 3)

vendors will start selling more peripherals to enhance their portfolios,

with power banks and wearables being the new focus areas.Figure 1: Companies mentioned

Company Ticker Rating TP (NT$)

Largan 3008 TT BUY 3,060

Catcher 2474 TT BUY 345

Simplo 6121 TT HOLD-OPF 188HTC 2498 TT SELL 88

Foxconn Tech 2354 TT SELL 52

Dynapack 3211 TT SELL 55

Conquering the high-end iPhone mass production to commence in July:

We expect EMS makers to start mass production for the 4.7 iPhone 6 in

July and 5.5 model in August. We believe the iPhone 6 cycle will be very

strong, driven by the release of pent-up demand, iOS replacement, and

share gains from Android. As such, we forecast total iPhone builds will

grow by 85% QoQ in 4Q14, and expect better than historical shipments in

1H15, with strong YoY growth in 4Q14-2Q15, positive for the supply chain.

Meanwhile, we expect other high-end brands will face pressure given high-

end saturation. We prefer stocks enjoying ASP improvement and market

share gains into the iPhone 6 cycle Largan, Catcher, and Wistron.

Source: Yuanta Investment Consulting

Redefining the low-end space: Despite a slowdown in Chinas domestic

market, we believe most Chinese OEMs have maintained (or even

increased) their targets for 2014, suggesting faster geographical

expansion. We forecast the top-nine Chinese OEMs will capture 70% of

global smartphone unit growth this year, leaving little opportunities for

other players. In China, the sales channel is evolving with e-commerce

channels emerging strongly. This will lead to high-spec components

moving to lower price points, and we believe high-end component

makers with significant exposure to Chinese OEMs will outperform.

Recommendations:We have BUY ratings on Largan, given its ASP and

volume upside, and Catcher, for its iPhone market share gains. We expect

Simplo to make iPhone 6 share gains, but see little valuation upside and

assign it a HOLD-OPF rating. We rate SELL on Foxconn Tech, Dynapack,

and HTC due to competition.

ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ARE LOCATED IN APPENDIX A.

Yuanta 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.
http://research.yuanta.com/http://research.yuanta.com/


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Investment Summary

Long-term structural changes amid industry deceleration

With the recent flagship cycle turning weak, Chinas 3G/4G transition, and potential

pent-up demand ahead for new iPhones, we believe smartphone shipments will be

slow in 1Q-3Q14, with 4Q14 likely to record a strong uptick. On a three-year view,

we expect smartphone shipment growth to turn moderate, and highlight three

potential structural trends: 1) weakening of Samsungs no.1 position (positive for

Taiwan component makers); 2) tier-two global brands may exit the market as their

share of profits contracts; and 3) in addition to smartphones, vendors will start

selling peripherals to enhance their portfolios and/or to increase revenue, with

OEMs to focus on power banks and wearables.

On a three-year view, we

expect smartphone shipmentgrowth to turn moderate

Conquering the high-end iPhone mass production to commence in July

We expect EMS makers to start mass production for the 4.7 iPhone 6 in July and

5.5 model in August, and believe the iPhone 6 will enjoy a strong launch driven by

released pent-up demand, iOS replacement, and a market share shift from Android

(where user stickiness is a lot lower). According to our forecast, we expect iPhone 6

builds to reach 61 mn units in 4Q14, from 19 mn in 3Q14, resulting in total iPhone

builds growing 85% QoQ in 4Q14. Driven by improving component supply for the

two new iPhone models, we expect to see better than historical momentum in 1Q15,

with strong YoY increases in 4Q14-2Q15, boosting supply chain revenue.

Meanwhile, we expect that demand for other high-end brands (i.e. Sony, HTC, and

even Samsung) will be difficult to sustain with the high-end saturation. Within the

supply chain, we prefer companies benefiting from ASP improvement and market

share gains into the iPhone 6 cycle Largan (ASP improvement), Catcher (market

share upside) and Wistron (share gains, covered by our analyst Vincent Chen).

We expect EMS makers to s tart

mass production fo r the 4.7

iPhone 6 in July and 5.5

model in August

Redefining the low-end space

We expect only 10% YoY shipment growth in Chinas domestic smartphone market

this year, down significantly from 64% YoY in 2013. However, we believe the

demand pattern will be very back-end loaded with TD-LTE developing rapidly,

driven by increasing subsidy allocation and better availability of RMB1,000 4G

phones. Despite a YoY domestic market slowdown, we believe Chinese OEMs are

maintaining (or even increasing) their shipment targets for 2014, suggesting

further geographical expansion. We forecast the top-nine Chinese OEMs will

capture 70% of global smartphone unit growth this year, leaving little opportunities

for other players. In China, the proliferation of e-commerce sales is worth watching,

and we expect e-commerce smartphone sales to represent 18% of the China marketin 2014, up from 10% in 2013. We note that the new business model will lower

channel and marketing costs significantly, helping high-spec components move to

lower price points. We believe these trends will benefit high-end component

makers that have significant exposure to Chinese OEMs.

We expect only 10% YoY

shipment growth in Chinas

domestic smartphone market

this year, but believe Chinese

OEMs will move aggressively

to overseas markets

Investment recommen

dations

In our view, component makers are the better plays in this space, given our

expectation of iPhone strength and changes in the low-end market. Largan should

be a primary beneficiary of this trend, as camera lens content will increase in

smartphones. We see Catcher as poised for a strong earnings uptick, benefiting

from potential market share gains in the iPhone 6. While we believe Simplo will also

benefit, we only see limited valuation upside for the stock. In contrast, we are

negative on HTC (sales and earnings peaking in 2Q14), Foxconn Tech (competition

from Catcher and Hon Hai), and Dynapack (competition from Chinese packers).

In our view, component makers

are the better plays in thi s

space

Taiwan: Handsets 7 Jul, 2014 Handset Industry Page 3 of 79


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Figure 2: Valuation summary table of initiated stocks

EPS (NT$) PER (x) ROE (%)Company Ticker Rating

TP(NT$)

Mkt Cap(US$ mn) 2013 2014F 2015F 2013 2014F 2015F 2013 2014F 2015F

Largan 3008 TT BUY 3,060 10,658 72.3 127.9 170.1 32.8 18.5 13.9x 36% 46% 45%

Catcher 2474 TT BUY 345 6,905 18.4 19.7 26.6 14.9 13.9 10.3 21% 19% 22%

Simplo 6121 TT HOLD-OPF 188 1,948 10.5 11.4 12.4 18.0 16.6 15.2 18% 18% 18%

HTC 2498 TT SELL 88 3,902 (1.6) (1.3) (3.0) N.A. N.A. N.A. (2)% (1)% (3)%

Foxconn Tech 2354 TT SELL 52 3,263 5.4 3.5 3.9 13.8 21.2 19.2 11% 7% 7%

Dynapack 3211 TT SELL 55 453 5.5 5.7 4.1 16.2 15.7 21.6 12% 12% 9%


Figure 3: Valuation Comparison Table

EPS Grow th (%) PER (x) P/B (x) ROE (%)Company Ticker

Mkt Cap(US$ mn) 2014F 2015F 2014F 2015F 2014F 2015F 2014F 2015F

Handsets

HTC 2498 TT 3,902 N.A. N.A. N.A. N.A. 1.5 1.6 (1)% (3)%

Apple AAPL US 566,970 11% 9% 14.6 13.6 4.79 4.27 32% 33%

Samsung 005930 KS 190,657 (10)% 3% 7.3 7.1 1.23 1.07 18% 16%

Blackberry BBRY US 5,591 56% 42% N.A. N.A. 1.68 1.71 (9)% (5)%

LG Electronics 066570 KS 12,391 347% 41% 15.8 11.2 1.08 0.99 7% 9%

Coolpad 2369 HK 1,190 13% 17% 11.4 9.8 2.55 2.28 24% 24%

ZTE 763 HK 7,219 82% 20% 16.6 14.0 1.73 1.53 11% 11%

Average 13.2x 11.1x 2.1x 1.9x

Components

Largan 3008 TT 10,658 77% 33% 18.5 13.9 7.3 5.4 46% 45%

Catcher 2474 TT 6,905 7% 35% 13.9 10.3 2.4 2.1 19% 22%

Foxconn Tech 2354 TT 3,263 (35)% 11% 21.1 19.2 1.3 1.3 7% 7%

Casetek 5264 TT 1,987 (2)% 7% 9.84 9.18 2.2 1.9 25% 24%

Simplo 6121 TT 1,948 9% 9% 16.6 15.2 2.9 2.7 18% 18%Dynapack 3211 TT 453 3% (27)% 15.7 21.6 1.8 1.9 12% 9%

Flexium 6269 TT 558 (14)% (5)% 10.1 10.6 1.8 1.6 19% 16%

Career 6153 TT 487 84% 30% 12.2 9.4 1.7 1.5 15% 17%

Unimicron 3037 TT 44,773 52% 17% 25.1 21.5 1.0 1.0 4% 4%

Merry 2439 TT 1,001 65% 18% 17.6 14.9 4.6 3.9 29% 28%

Goertek 002241 CH 6,519 50% 37% 20.6 15.0 5.1 3.9 25% 27%

AAC Tech 2018 HK 8,269 16% 18% 19.0 16.1 5.3 4.3 30% 29%

Average 16.7x 14.7x 3.1x 2.6x




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Long-term structural changes amid

decelerating industry growth

A slow start to 2014

After a decent 1Q14 (30% YoY global smartphone shipment growth), we expect

shipment growth to slow in 2Q/3Q14 as recent flagship product cycles (Galaxy S5,HTC M8, and Sony Z2) have been weaker than expected. Specifically, sell-through

of the M8 turned weak in late-May, and Sony failed to deliver its Z2 globally, while

Samsungs Galaxy S5 is performing relatively well. Furthermore, 3Q14 will likely

experience pent-up demand ahead of the iPhone 6 launch, but this should then

create a very strong uptick in 4Q14.

After a decent 1Q14 (30% YoYglobal smartphone shipment

growth), we expect shipment

growth to s low in 2Q/3Q14

For China, we believe shipments were slow in 1H14, due to 4G/3G transition and

possibly 3G inventory adjustment ahead of lower operators subsidies. We note that

China has been a key driver of global smartphone sales over the past two years.

Figure 4: Global smartphone shipment forecast (Unit: mn)

Source: IDC; Yuanta Investment Consulting

Growth to be driven by the low-end space

We expect the total cost of ownership for smartphones to decline while affordability

improves, driving further cannibalization of feature phones. On pricing, based on

our retail price survey, 3G smartphones using 4 (800x480) screens and dual-core

(some even quad-core) have reached as low as RMB299 in the open channel without

subsidy, and single core smartphones could reach the RMB150-180 level. Therefore,

we expect low-end smartphones to cannibalize feature phones further, driving

increasing penetration (although at a mild level as the penetration rate is already

high). The majority of the volume growth will come from the lower priced market i.e.

priced below US$200.

We expect the total cost o fownership for smartphones to

decline while affordability

improves



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Figure 5: Smartphone shipments by price band


From a penetration rate perspective, smartphone penetration could reach 64%, 70%,75%, in 2014/15/16 respectively, according to IDC.

Figure 6: Smartphone penetration forecast by region

Source: IDC; Gartner, Yuanta Investment Consulting

How we see the smartphone industry evolving over the next three years

Gartner expects global

smartphone shipments will

grow from 1.02 bn units in 2013

to 1.76 bn units in 2017

Gartner expects global smartphone shipments will grow from 1.02 bn units in 2013

to 1.76 bn units in 2017, representing a four-year CAGR of 15%. After years of very

high growth, smartphone growth is expected to slow moving forward.

On a three-year view, we expect smartphone shipment growth to be moderate, and

identify three structural trends: 1) weakening Samsungs no.1 position (positive for

Taiwan component makers); 2) tier-two global brands may exit; and 3) smartphone

vendors may start to offer more than just smartphones to customers.



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Three-year view 1: Samsungs market share erosion to lead to addressable market

expansion for Taiwan component makers

We expect Samsungs smartphone market share to fall from 30% in 2013 to 27% in

2014, and is likely to trend down further in 2015, driven by competition from China

OEMs (mid/low-end) and Apple (high-end). This trend will effectively expand the

addressable markets of most Taiwan component makers due to their low level of

exposure to Samsung.

We expect Samsungs

smartphone share to fall from

30% in 2013 to 27% in 2014

Based on our build plan forecast, further analysis suggests Samsung began facing

pressure in 2Q14, when mid/low-end smartphone shipments fell sharply QoQ.

Although we expect Samsung will maintain its build plan for 3Q14, we believe this

number faces downside risk given the launch of Apples iPhone 6.

2Q14 to be impacted by

Chinese OEMs, and Apple to

add more pressure in 3Q14

Figure 7: Our assembly build plan forecast for Samsungs smartphones (Unit: mn)

8 6 5

4

19

14

10

10

9

6

5

3

3

11

18

8

6

6

5

55

64

44

55

70

0

20

40

60

80

100

120

4Q13 1Q14 2Q14F 3Q14F 4Q14F

Others (mostly mid/low)

Other high-end

Note 4

Note 3

Galaxy S5

Galaxy S4

84

89

80

88

102

84

89

80

88

102

84

89

80

88

102

84

89

80

88

102


In the high-end market, we expect Apple to catch up to the large-screen product

cycle with its new larger-sized models in 2H14. Considering relatively flat high-end

market growth, any market share gain for the iPhone could squeeze other high-end

brands significantly. Although we expect Samsung will launch a competitive model

in the Note 4 in 4Q14 with potentially a bended AMOLED display, we note that the

volume could be low given limited display supply and a lack of applications.

In the high-end market, we

expect Apple to catch up to the

large-screen product cycle

with i ts new larger-sized

models in 2H14

In the mid/low-end market, we believe Samsung has been impacted by Chinese

OEMs since early-2Q14, due to a weaker price proposition, and our checks suggest

increased inventory for Samsung in China. Longer term, the potential expansion of

Chinese OEMs export business will pose another threat to Samsung. Unless

Samsung decides to accept lower OPM and partially abandon its pricing premium, it

will struggle to compete with Chinese OEMs which have OPMs close to zero.

In the mid/low-end market, we

believe Samsung has been

impacted by Chinese OEMs

since early-2Q14

In all, as Taiwan component makers have very limited exposure to Samsung, we

believe the addressable market for these component makers will expand going

forward. However, we do not expect HTC to benefit, as HTC has a similar but

weaker product position than Samsung.



8/79


Figure 8: Samsung market share trend


Three-year view 2: Tier-two global brands may exit

With Chinese smartphone OEMs dominating the sub-US$200 segment, the

shrinking mid-end market, and the Apple/Samsung (especially Apple) duopoly, we

see limited room for other global OEMs in this space. Profitability-wise, only four of

the top 11 OEMs were profitable in 2013 - Apple and Samsung banked operating

profit of US$69 bn, LG and Coolpad US$0.1 bn, and the rest lost US$2.4 bn

combined. With Apple/Samsung continuing to share the majority of profits, we

expect many OEMs who lack scale to exit the market in the next few years.

Figure 9: Smartphone industry profit share analysis

The top two represent the

majority of the industrys

profits , while others are

struggling to turn a profit

Operating Profit(US$ bn)

2011 2012 2013 2014F

Apple 29.7 42.7 44.7 52

Samsung 7.9 19.0 24.5 19.6

LG (0.3) 0.1 0.1 0.2

HTC 2.3 0.6 (0.1) (0.2)

Motorola (0.1) (0.2) (0.7) (0.5)

Nokia 1.4 (1.2) (0.2) (0.2)

Sony 0.1 (0.7) (0.3) (0.2)

RIMM 1.8 (1.5) (1.0) (0.7)

ZTE 0 (0.1) 0 0

Lenovo

0 (0.1)

0 0

Coolpad 0 0 0.1 0.2

Profit share ofApp le/Samsung

88% 105% 103% 102%

Source: Companies; Yuanta Investment Consulting

Three-year view 3: Smartphone vendors to sell more than just smartphones

The increasing penetration of smartphones is driving a shift in accessory design

toward smart accessories that offer higher levels of consumer interaction, user

experience, product value, and brand recognition. In addition to traditional

accessories (i.e., cover case, wireless earphone, etc), we expect power banks and

wearables to be the next areas of focus.


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Option 1: Power bank

Due to the limitation of mobile phone batteries and increasing number of functions,

we expect the power bank market to pick up, mainly driven by China. According to

ITRI, around 20-40% of smartphone users in China buy a power bank when they

acquire a smartphone.

From a brand-owner perspective, power banks represent a potential new revenue

stream. Xiaomi has performed strongly, selling 2.5 mn units/month of its powerbank in the first quarter after launch. With a bundling strategy and rising after-

market demand, we believe battery makers will benefit. From an ASP perspective,

we have seen cylindrical cell type prices stabilizing since 1Q14, resulting in more

favorable pricing for battery packers.

Power banks represent a

potential new revenue stream

Figure 10: Xiaomis power bank

Xiaomi Xiaomi

Retail price (RMB) 69 49

Capacity (mAh) 10400 5200

Battery cell Samsung SDI, LG Chemical Samsung SDI, LG Chemical

Battery packers Desay, SCUD Desay, SCUD

Control IC TI TI

Source: Xiaomi; Yuanta Investment Consulting

Figure 11: Global power bank demand forecast (Unit: mn)

Taiwan battery packers are

likely to benefit, as the majority

of demand is from China

Source: ITRI; Yuanta Investment Consulting



10/79

Option 2: Wearables

We have seen many new wearable product launches and investments from global

OEMs since 2012. In addition to non-IT brands (i.e. Nike and Jawbone), we expect

more IT OEMs to enter this space.

Demand-wise, we note that sports trackers account for the majority, while smart-

watches are still at a very early stage due to incorrect product positioning and high

price tags. Going forward, we believe these products should be positioned asactive devices, and remove unnecessary functions. If properly positioned, we

believe costs will fall and adoption rates will increase.

Figure 12: Global wearable market forecast (Unit: mn)

61

Source: ABI Research; Yuanta Investment Consulting

Design-wise, due to small display size and battery constraints, we do not expect

the devices or components inside to be powerful. From a power consumption

perspective, display and APU/MCU are the key parts that need to be reduced,

especially display given the always-on requirement.

Sensor and w ireless charging

are key components taking

good content value in

smartwatches

With the trend of reducing component usage, the number beneficiaries will be

limited from a content value perspective, and we only see sensors and potentially

wireless charging to gain content value.

Figure 13: Smartwatch power consumption and design trends

PartsPower consumption per

hour (run mode)Potential trends

MCU 380mW Cortex M3, Intels Quark

APU 500mW Cortex A5 or A7. Sports trackers don't need APU

1.5" LCD display(320x320)

70mWE-Paper (black and white), Mirasol display

Wireless Module 100mW

Sensors 18mW Up to 10 sensors

GPS 20mW

Bluetooth 70mW Bluetooth LE




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Functionally, we believe the key use of smartwatches (outside of syncing with

smartphones to provide time, missed calls and message alerts), is to take an active

role from a health perspective collecting user data and providing analysis/alerts.

We have not seen such a device in the market yet, but do expect the iWatch to act in

this way (by using the M7 co-processor). Thus, we expect the iWatch to stand out,

and boost the overall market size for smartphone-compatible watches. Our supply

chain checks suggest a build plan of 5-7 mn iWatch units in 2H14.

iWatch could be the first

active smartwatch, and we

forecast shipments to be 5-7

mn un its in 2014

Figure 14: iWatch plays

Industry Company Ticker2014

Sales %

2015

Sales %Rating TP

EPS2014(F)

EPS2015(F)

ODM/EMS Quanta 2382 6% 14% BUY 89 5.5 6.7

SATS ASE 2311 5% 6% HOLD-OPF 35 2.6 2.9

IC Substrate Kinsus 3189 5% 6% BUY 154 9.6 10.9

FPC Career 6153 7% 17% BUY 56 3.7 4.8

IC Design Richtek 6286 USD$399 USD$249 USD$199-279 USD$199 USD$299

Samsung Omate Sony Qualcomm Pebble

Product Galaxy Gear Omate TrueSmart SamrtWatch2 Toq Pebble Steel

Launch time Sep-13 Jan-14 Sep-13 Dec-13 Jan-14

OS Tizen Android 4.2 Android 4.0 Android 4.0.3 Pebble OS 2.0

APU 800MHz Exynos single-core 1.3GHz Cortex A7 dual-core 200MHz Cortex M3 200MHz Cortex M3 800MHz Cortex M3

Display 1.63" 320 x 320 AMOLED 1.54" 240 x 240 TFT LCD 1.6" 220 x 176 LCD 1.55" 288 192 Mirasol 1.25" 144 x 168 LCD

RAM 512MB 1GB -- -- 128KB

Storage 4GB 8GB -- -- 8MB

Camera 1.9MP 5MP No camera No camera No camera

Battery 315mAh 600mAh 140mAh 240mAh 130mAh

Retail prices USD$299 USD$249 USD$250 USD$349 USD$229

Source: Companies



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Conquering the high-end new iPhone

activities to begin in July

iPhone 6 (4.7) mass production to start in July

Based on our checks, we expect EMS suppliers to start mass production for the 4.7

iPhone 6 in July and the 5.5 model in August. We believe the 4.7 version will be onsale in the 2H of Sep, and the 5.5 version may hit the market a few weeks later. We

note that the 5.5 model features a display of around 400 ppi (vs. iPhone 5s/iPhone

6 (4.7) 326ppi), which requires more time to improve its product yield.

We introduce our build-plan estimates for the iPhone range in below. We note that

the yield rate of display (driver/touch IC for 4.7 and in-cell for 5.5) and metal

casing will have some impact on shipments at the initial stages. Together with likely

higher price points, we expect the iPhone 6 (4.7) to represent 79% and 74% of total

new iPhone 6 shipments in 3Q14 and 4Q14, respectively.

Supply chain bottlenecks at

the initial stages are likely in

display and metal casing

Figure 16: Our iPhone assembly build plan forecast (Unit: mn)


We expect the 4.7 iPhone 6 to

account for over 70% of total

new iPhone 6 shipments

during 2H14-1H15

Likely hardware features of the iPhone 6, and its competitors (Note 4, M8 Prime)

We predicted that Apple will adopt one platform for the two iPhone models in

different sizes - similar RF, quad-core A8 (some differences in graphics), and most

of the components for two devices. The key differences are likely to display (size,

ppi, and sapphire), metal casing, battery, OIS camera, and connector.

Figure 17: Our projected new iPhone spec

iPhone 6 (4.7") iPhone 6 (5.5")

EMS production Jul-14 Aug-14

Display 4.7" LTPS (1334x750, 326ppi) 5.5" LTPS (1920x1080, 401ppi)

Touch In-Cell In-Cell (5% with Sapphire cover lens)

Storage 16G/32G/64G 16G/32G/64G

APU Quad core A8 Quad core A8

NFC Yes Yes

DRAM 1GB LPDDR3 1GB LPDDR3

Camera 1.2MP, 8MP f2.2, without OIS 1.2MP, 8MP f2.2, OIS

Battery 1820mAh 2800mAh

Adopter 5W 10W

Thickness 6.5~7mm 7-7.5mm




13/79


At the same time as the iPhone 6 launch, we also expect Samsung and HTC to

announce their 4Q14 models Note 4 and M8 Prime. From a product perspective,

Note 4 will also come with decent spec (high-resolution camera, 2k AMOLED screen)

and potentially with an L-shape curved screen for the Note 4 premium version.

Thus, we expect the M8 Prime will face pressure in the high-end market in 2H14.

Figure 18: Our projected spec for Samsung and HTCs next flagship models

Galaxy Note 4 M8 Prime

EMS prodution Sep-14 Oct-14

Display 5.9" QHD Blended AMOLED 5.5" WQHD Display

Touch On-Cell GFF

Storage 32G/64G 16G/32G/64G

APU Exynos 64-bit APQ8084

NFC Yes Yes

DRAM 3GB LPDDR3 3GB LPDDR3

Camera 3MP, 20MP or 16MP OIS 5MP, 13MP duo camera

Battery TBD 2800mAh

Thickness around 9mm around 8mm


More aggressive product portfolio after the launch of the iPhone 6

We expect the price band of Apples iPhone portfolio to widen after the iPhone 6s

launch. According to our checks, we expect Apple will keep the iPhone 5s, iPhone

5c, and iPhone 4s into the holiday season, but with lower price points, likely

USD$100 lower than current prices. For the iPhone 6, the 4.7 version will likely

assume the mainstream iPhone starting price of USD$649, while the 5.5 model is

likely to be positioned similar to Samsungs Galaxy Note, which has a higher price

point than its mainstream Galaxy S series.

Figure 19: Likely changes in iPhone portfolio


Large-sized iPhone to gain users from Android

iOS users in general have a high level of stickiness, while Android users typically

shop around when picking new smartphones. According to Consumer Intelligence

Researchs 3Q13 survey, 78% of iOS users chose another iPhone, while 67% of

Android users stayed with Googles OS, but switched among Android brands. As

Samsung accounts for the largest share of new Android purchases, we believe thatSamsungs large-screen strategy and promotional campaign played key roles.

However, we believe that those two advantages can be overcome by Apple in 2H14.

In the high-end market, we

expect the Note 4 will be insecond pos ition in 2H14,

followed by the M8 Prime

We expect the p rice band of

Apples iPhone port fo lio to

widen after the iPhone 6s

launch

Apples fu ture product st rategy

will l ikely capture demand from

phablets and the mid-end

segment

iOS users in general have a

high level of stickiness, while

Android users typically shop

around when picking new

smartphones

B e f o r e i P h o n e 6 A f t e r iP h o n e 6

U S D 7 5 0

U S D 6 5 0

U S D 5 5 0

U S D 5 0 0

U S D 4 5 0

U S D 4 0 0

U S D 3 5 0

4 .7

5 .5


14/79


Figure 20: A comparison of consumers previous phone brands, and the next phone

brand purchased

Previous phone brandNew phone brand

App le Samsung HTC LG Nokia

Apple 78% 31% 31% 35% 30%

Samsung 11% 52% 35% 28% 30%

HTC 4% 6% 27% 7% 20%

LG 1% 5% 0% 18% 15%

Nokia 1% 2% 0% 0% 0%

Others 5% 4% 7% 12% 5%

Source: Consumer Intelligence Research, Yuanta Investment Consulting

Apples market share may rise, at the expense of Samsung/HTC/Sony

Since the launch of the iPhone 4S, the market share of the iPhone peaked in the

launch quarter with YoY growth deceleration. However, we expect the iPhone 6 to

see a strong start as the pent-up demand for a larger screen is released, and given

the likely market share shift to iOS from Android, where user stickiness is lower.

According to our build plan forecast, the incremental >USD$500 iPhone builds will

grow by nearly 30 mn units, and Galaxy Note 4 will also build around 14 mn units

in 2H14. Given the high-end market saturation, it is very difficult for other high-

end brands (i.e. Sony, HTC) to maintain their share.

Given the high-end market

saturation, it is very difficult for

high-end brands such as Sony

and HTC to maintain their

share

Figure 21: High-end (USD$500) market share forecast

0

10

20

30

40

50

60

70

80

90

100

1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14F 3Q14F 4Q14F

Others

Sony

HTC

Samsung

Apple

Source: IDC, Yuanta Investment Consulting

Driven by improving supply chain production for the two new iPhones, we expect to

see better than historical shipment momentum in 1Q15, with strong YoY increase

in 4Q14-2Q15, boosting supply chains revenue momentum.


15/79

Figure 22: iPhone shipment (Unit: mn), market share, and shipment YoY

28%

57%

29%

7%

20%

26%

7%

11%

17%

12%

39%44%

26%

0%

10%

20%

30%

40%

50%

60%

70%

80%

0

20

40

60

80

100

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14F

3Q14F

4Q14F

1Q15F

2Q15F

Total iPhone shipment

iPhone shipment YoY

Apple's market share

iPhone shipments will expand

YoY in 4Q14-2Q15F


Supply chain beneficiaries - new components with better functionality, rising

content per box, and/or share gains

While we believe the large-screen iPhone 6 cycle will boost volumes significantly,

we suggest investors focus on value/allocation gainers, and we highlight our

findings/views below for major hardware components related to this report:

Metal casing:Our industry checks suggest that both the 4.7 and 5.5 iPhone

will use metal casings with a very thin structure. We believe official allocation for

Hon Hai Group, Catcher, and Jabil is 70%, 15%, and 15% respectively, but our

supply chain checks suggest Jabils yield rate is very low, while Catcher's rate is

the highest. Thus, we expect Catcher to take more market share in iPhone. We

expect the low effective output to result in more stable ASP for metal-casing

makers and to help margins.

Catchers market share in

iPhone could be higher thanexpected

Camera:We expect the iPhone 6 camera to retain an 8MP resolution with the

same aperture. However, given the thinner iPhone structure and potentially

larger pixel size, we expect the lens structure to be even thinner, making it

difficult for tier-two suppliers to catch up. We do not expect OIS to be featured

in the 4.7 iPhone this time, due to slower than expected ramp up from Alps and

Mitsumi.

Largan will sti ll lead in iPhone

6 due to the requirement for

higher-quality lenses, leading

to higher ASPs

Battery: We expect battery capacity to reach 1800mAh and 2800mAh in the two

new iPhones, vs. 1470mAh for the iPhone 5s, resulting in a 3-5% increase in ASP.

We do not believe that Simplo (30-35% allocation) will lose share, as Apple may

need to keep one stable supplier (Simplo is the best in automation for single-

cell), while using Desay (40-45%) to take shares from Dynapack on better cost

and flexibility.

Simplos market share will be

maintained, while Dynapacks

share will be potentially eroded

Flexible PCB (covered by our analyst Steve Huang, CFA):We do not believe the

ASP upgrade will be meaningful during the size migration from 4 to 4.7 display.

Besides, Apple is increasing the number of suppliers in a single FPC piece, which

will accelerate the quarterly ASP erosion by more than 3-5%.

Continuing to suffer from ASP

pressure



16/79

Figure 23: iPhone 6 supply chain

Part Manufacturer Ticker Rating 2014F revenue % 2014F order allocati on%

EMS&ODM Hon Hai 2317 TT BUY 38% 65%

Pegatron 4938 TT HOLD-UPF 20% 25%

Wistron 3231 TT BUY 9% 7-10%

Largan 3008 TT BUY 40% 80+% (back camera)Camera Lens

Genius 3406 TT not rated 50+%


17/79

Redefining the low-end market

A slow start in the China market

MIITs 1Q14 smartphone data of 9.8% YoY was very weak, and we expect the

softness to last into 2Q14, due to China Mobiles 4G transition and increased

channel inventory, especially for 3G phones. For 2Q14, our checks suggest many

vendors, including global OEMs, are clearing 3G phone inventories due to China

Mobiles defocus on 3G. We believe consumers may have delayed their purchases in

anticipation of new 4G smartphones.

On the other hand, we believe the TD-LTE chipset and PA supply has been capped

the TD-LTE expansion YTD. For chipset, the only quality and low/mid end SoC

appears to be Qualcomms MSM8926, which is priced at USD$14-15. Marvell

(PXA1088) gained traction in 4Q13/1Q14, but the acceptance turned weak in 2Q14,

given unstable performance (evidenced by Marvels flat July-quarter revenue

guidance). MediaTek tried to keep its presence in TD-LTE by offering MT6582+90

with an aggressive price, but the volume was low, according to our checks. For PA,

the requirement of 5-mode in China Mobile and the late launch of MSM8916 (with

RF360) also worsened the shortage, in our view.

3G/4G transition, China

Mobiles subsidy, and

component sho rtage for 4G

phones led to softness in 1H14

Figure 24: China smartphone shipment QoQ


China domestic market growth of only 10% YoY in 2014

Although we believe demand will pick up in 2H14 when vendors launch their sub-

RMB1,000 4G smartphone models, the high penetration rate will likely lead to

moderate long-term growth. Chinas smartphone penetration hit 81% in 2013,

according to IDC, suggesting little opportunity for penetration to grow further.

Chinese OEMs are now seeing more intensive competition due to market saturation.

Chinese OEMs are now seeing

more intensive competition

due to market saturation



18/79

Figure 25: China smartphone penetration forecast


TD-LTE ramp up to lead to a back-end loaded 2014

Although 4G device demand has been disappointing YTD (1Q14 TD-LTE device was

around 10 mn), we expect a very back-end loaded 2014 with further growth in

2015-16, driven by China Mobiles TD-LTE subsidy shift (China Mobile only accepts

TD-LTE phones on its subsidy portfolio from June 1), increasing number of low-

priced 4G phones, and the ramp up of FDD-LTE in 2H14. For device makers, device

migration to 4G appears to be the way to capture the new growth stream in

domestic market.

Demand catalysts in 2H14:

China Mobiles subsidy on 4G,

sub-RMB1,000 4G phones, and

partial subsidy on FDD devices

On device pricing, we have seen Coolpads TD-LTE smartphone priced below

RMB1,000 (Coolpad 8720L supporting 3-modes at RMB699, 8730L supporting 5-

modes at RMB969), and we expect the retail prices of TD-LTE smartphones to reach

as low as RMB500-600 by 4Q14, helping the transition from 3G to 4G in 2H14. On

the other hand, we believe the trend of lower-priced LTE devices and a potential

clearance of 3G phones will impact industry ASP.



19/79

Figure 26: China TD-LTE smartphone line-up

ZTE Coolpad Samsung Huawei Samsung

Product Q802T 8730L (4G) G3518 Ascend P7 N9008V

Technology TD/FDD-LTE TD/FDD-LTE TD/FDD-LTE TD/FDD-LTE TD/FDD-LTE

Modes 5 mode 5 mode 5 mode 5 mode 5 mode

OperatingSystem

Android 4.3 Android 4.3 Android 4.3 Android 4.4 Android 4.3

Pixels 1280 x 720 1280 x 720 480 x 800 1920 x 1080 1920 x 1080

RAM 1GB 1GB 1GB 2GB 3GB

ROM 4GB 8GB 8GB 16GB 32GB

Display 5.0 5.5 4.5 5.0 5.7

Camera 5MP + 0.3MP 8MP + 2MP 8MP 13MP + 8MP 13MP + 2MP

Battery 2300mAh 2500mAh 2000mAh 2500mAh 3200mAh

CPU Speed 1.2GHz 1.2GHz 1.2GHz 1.8GHz 2.4GHz

Processor

ChipMSM8926 MSM8226 MSM8226 Kirin 910T MSM8926

Modes fromchips

5 mode 5 mode 5 mode 5 mode 5 mode

Muti-core Quad Quad Quad Quad Quad

Price (RMB) 1,099 1,648 1,858 2,888 4,279

Source: JD.com; Yuanta Investment Consulting

Figure 27: Chipset solutions for RMB1,000

Company Model Cores, ModeSupporting display

and cameraHandset retail price Others

MTK MT6582+MT6590 Quad-core, 5-mode4" display, 13MP rearcam, 5MP front cam


20/79

Figure 28: China LTE smartphone shipment forecast (Unit: mn)


China market saturation forces vendors to lift exports

Because of saturation in the domestic market, many Chinese OEMs have already

planned to expand their businesses overseas. While this trend has already started in

2013, we expect it to accelerate in 2014. Gartner sees strong growth for Chinese

vendors in the Middle East and Africa, Eastern Europe and, more recently, in

Western Europe. This could disrupt many markets in which Chinese vendors started

to emerge. Our recent supply chain checks suggest China overseas smartphone

shipments remain robust.

Therefore, we expect Chinese vendors to dominate the low-end market in the long

run in both China and overseas, backed by lower costs (i.e., low marketingexpenses and proximity to the supply chain), better flexibility (short lead time), and

lower requirement for margins (most are taking zero OPM). On the other hand,

global OEMs such as Samsung, HTC, Nokia, and LG will feel the pressure.

Figure 29: Chinese vendors market share in each region

Because of saturation in t he

domestic market, many

Chinese OEMs have already

planned to expand their

businesses overseas

Source: Gartner, Yuanta Investment Consulting



21/79

Outside China, the market is not easy for all Chinese OEMs to be successful in

because of the limited channels to market and higher standards of quality for

carriers in mature markets (i.e., more complicated certification processes and

patent portfolios). To overcome these barriers, we believe Chinese OEMs will invest

more resources in overseas markets to sustain growth - TCL's acquisition of

Alcatel-Lucent has provided TCL with a successful opportunity for leveraging

Alcatel-Lucent's global brand and established sales network. Lenovo's deal to buy

Motorola Mobility demonstrates another way of entering the global market, whileHuawei increased its marketing activities in Europe, and even smaller players, such

as Oppo, BBK, Gionee and Xiaomi, are lifting their international expansion.

Outside China, the market is

not easy for all Chinese OEMs

to be successful in because of

the limited channels to market

and higher standards of quality

for carriers in mature markets

For specific markets, we believe Huaweis market share in the Europe is likely to

increase (9% in 4Q13), ZTEs market share in the Latin America/US is also on the

rise, and TCL remains solid in Europe/MEA/Latin America. Lenovo will immediately

emerge as the No.5 player in Latin America, by leveraging Motorolas channel

network, and possibly some expansion in Southeast market.

The top-nine Chinese brands

will accoun t for 70% of global

smartphone industry growth in

2014

Figure 30: Chinese vendors shipment forecast, and export ratio

China vendors shipments(Unit: mn)

Export ratioVendors

2013 2014F 2013 2014F

Lenovo 45 63 8% 13%

Huawei 48 70 36% 46%

Coolpad 32 57 3% 12%

Xiaomi 13 66 0% 17%

OPPO 10 13 1% 8%

BBK 12 16 0% 15%

ZTE 42 50 47% 50%

Gionee 12 16 7% 15%

TCL 17 33 89% 90%

Total 231 386 25% 31%

Global shipment YoY growth 155Percentage of global unit growth 70%

Shipment YoY growth outside of China 61

Percentage of unit growth in ex-China 34%

Source: Gartner, IDC; Yuanta Investment Consulting

Increasing popularity of e-commerce to redefine low-end

By imitating Xiaomi's success and increasing consumer coverage, many OEMs have

started to invest more in internet distribution with models dedicated to online

channels. According to Gartner, China has 591 mn internet users, with

approximately 50% using the internet to purchase products or services. In terms

distribution channel share, we forecast sales through online channels will grow to18% in 2014, from 10% in 2013. 18% represents around 70 mn smartphones

(Xiaomi 40-45 mn, Coolpad 12-15 mn, Huawei 10 mn, ZTE 3-5 mn).

By imitating Xiaomi's success

and increasing consumer

coverage, many OEMs have

started to invest more in

internet distribution



22/79

Figure 31: China smartphone sales breakdown by channel type

10

18

21

8

9

9

47

37

32

35

36

38

0

10

20

30

40

50

60

70

80

90

100

2013 2014F 2015F

Carriers

Traditional retailers

Direct retail channel

retailers

On-line platform


Within online stores, although there are over 2,000 stores, we believe tier-one

platforms such JD.com, Tmall, and Sunning around a 90% share of the B2C e-

commerce market. Thus, co-operation with JD.com is becoming the focus of OEMs,

and Coolpad and ZTE have developed close relationships with JD.com.

Figure 32: Major online platforms

Tier-1

Tier-2

Others


Increasing market share of e-

commerce is positive to high-

end components reaching

lower-priced market

In our view, the increasing market share of e-commerce is positive to the

smartphone supply chain, and especially to components. Thus, we believe the

addressable market for high-end components will expand into lower-price pointsegment. For more industry implications:

1) We expect online retail channels will enhance the competitiveness of local

brands to compete with global OEMs due to the high-spec/lower-price strategy.

2) E-commerce channels could improve OEMs ASPs, given the higher BOM cost

(using better components), amid better profitability as a result of cost savings

(channel cost and even marketing expenses) and better inventory management.

These savings could be allocated to high-end components.

3) The increasing BOM is favorable to high-end components, such as APUs,

cameras, display and even touch panels. For instance, RMB799-988 online

models feature similar specs as RMB2,000 models (720p display, 13MP camera,

Quad-core), and RMB1,500-2,000 models come with even higher-end

components (1080p display, 13/16MP cam, the most advanced processor).



23/79


Figure 33: Supply chain profitability distribution


Online

For OEMs, to avoid conflicts with existing retail sales channels, many develop sub-

brands to expand their market coverage; for example, Huawei's Honor, Coolpads

Great God, and ZTEs Nubia. Xiaomi leads in e-commerce with its unique online-

oriented business model (around 70% of total shipments). Other leading e-

commerce OEMs are Huawei, Coolpad, and ZTE, which have around 15-20%, 20-

25%, and 10% of their total shipments from online channels respectively.

Figure 34: Major online smartphone models

Xiaomi Xiaomi ZTE ZTE Huawei Huawei Coolpad CoolpadModel Mi3 Hongmi Note Z5S Z5S mini Honor 3X Honor 3C Great God F1 Great God 1SReleasedate 13-Sep 13-Jun 13-Dec 13-Nov 13-Dec 13-Dec 14-Apr 14-May

Display 5" 1920x1080441 ppi

5.5" 1280x720267 ppi

5" 1920x1080441 ppi

4.7" 1280x720312 ppi

5.5" 1280x720267 ppi

5" 1280x720 294ppi

5" 1280x720 294ppi

7" 1920x1080318 ppi

Internal

storage16/64GB storage

2GB RAM8GB storage

1GB RAM16GB storage

2GB RAM16GB storage

2GB RAM8GB storage

2GB RAM4/8GB storage

1/2GB RAM8GB storage

2GB RAM16GB storage

2GB RAMCamera 13MP, 2MP 13MP, 5MP 13MP, 5MP 13MP, 5MP 13MP, 5MP 8MP, 5MP 13MP, 5MP 13MP, 5MP

CPU

Quad-core2.3GHz

QualcommSnapdragonMSM8974AB

Octa-core1.7GHz

Mediatek MT6592

Quad-core2.3GHz

QualcommSnapdragonMSM8974AB

Quad-core1.7GHz

QualcommSnapdragon 600

Octa-core1.7GHz

Mediatek MT6592

Quad-core1.3GHz

Mediatek MT6582

Octa-core1.7GHz

Mediatek MT6592

Octa-core1.7GHz

Mediatek MT6592

Battery 3,050mAh 3,100mAh 2,300mAh 2,000mAh 3,000mAh 2,300mAh 2,500mAh 4,000mAhStartingPrice(RMB)

RMB 1,499(16GB) RMB 799 RMB 1,799 RMB1,499 RMB1,598 RMB798 (4GB) RMB888 RMB1,888

Source: JD.com; Yuanta Investment Consulting


24/79

Beneficiaries of the overseas expansion of Chinese vendors and e-commerce model

As mentioned, we believe component makers are better plays to capture the

volume/share expansion of China vendors and the addressable market expansion

of high-end components due to the emergence of e-commerce. We see a limited

number of EMS beneficiaries (only FIH Mobile), as the market is dominated by

Chinese EMS/ODM makers. By sub-sector, we expect the main beneficiaries to be:

Proccesor:MediaTek (2454 TT; HOLD-OPF)

Display/touch:HannStar (6116 TT; NR), AUO (2409 TT; BUY), Innolux (3481 TT;

HOLD-OPF), O-film (002456 CH; NR), Truly (732 HK; NR)

Display ICs:Orise (3545 TT; HOLD-OPF), Ilitek (3598 TT; BUY), Novatek (3034 TT;

BUY), Himax (HIMX US; NR)

Touch ICs: Focal Tech (5280 TT; BUY), Elan (2458 TT; BUY)

Crystal components: TXC (3042 TT; BUY), Siward (2484 TT; NR)

Camera modules: Sunny Optical (2382 HK; NR), Truly (732 HK; NR), BYDE (285 HK;

NR), Hon Hai (2317 TT; BUY), Lite-On (2301 TT; NR), O-Film (002456 CH; NR),

Primax (4915 TT; NR)

Lens: Sunny Optical (2382 HK; NR), Largan (3008 TT; BUY)

Acoustics:Goertek (002241 CH; NR), AAC Tech (2018 HK; NR)

Mechanical parts: BYDE (285 HK; NR), FIH Mobile (2038 HK, NR)

EMS:FIH Mobile. We note that Chinese EMS makers dominate the EMS business with

Water World, Wingtech, Hai Pai, Huan Huang and Huaqin making up the top-five,

with a run rate of over 4 mn units a month.



25/79

Initiation

Taiwan: Handsets 7 July, 2014

Action

BUY (Initiation)

TP upside (downside) 29.1%

Close 4 July, 2014

Price NT$2,370.00

12M Target NT$3,060.00

Previous Target N.A.

TAIEX 9,510.05

Whats new?

We initiate coverage of Largan

with a BUY rating and TP of

NT$3,060, based on 18x

2015F P/E.

Our view

We anticipate upside on both

volume and ASP, with the

company to benefit from

Samsungs market share loss,

addressable market expansion

for high-end components,

multi-camera design, and spec

migration.

Company profile:Largan is a leading manufacturer of lenses used in handsets and other consumer IT products such

as digital still cameras (DSCs), multi-function printers (MFPs) and webcams.

Share price performance relative to TAIEX

Largan (3008 TT)

823

1,023

1,223

1,423

1,623

1,823

2,023

2,223

Jun-13 Sep-13 Dec-13 Mar-14

-12

8

28

48

68

88Share Pr ice (NT$) Per fo rmance re la tive to TAIEX (%)

The best is yet to come

Initiate coverage with a BUY rating:We initiate coverage of Largan with

a BUY rating and TP of NT$3,060, based on 18x 2015F EPS, with our

valuation multiple 10% higher than its historical average of 16x.In the

near-term, we believe new products from key customers will drive

strong monthly sales until the end of the year. In the mid- to long-

term, we anticipate upside on both ASP and volume, and expect

Largans share price to continue to outperform.Market cap US$10,658.2 mn

6M avg. daily tur nover US$48.8 mn

Outstanding shares 134.1 mn

Free float 74.6%FINI ownership 22.1%

Major shareholders Chen Shih Ching,5.1%

Net debt/equ ity (69.2%)

BVPS (2014F) NT$326.37

P/B (2014F) 7.3x

Volume upside:We expect weakening Samsung market share to lead

to share gains for Largans key customers. Meanwhile, the rise of the

e-commerce business model in the China smartphone market will help

high-end component providers penetrate the low-price smartphone

market. In terms of handset design, we expect duo-cameras (i.e. HTC

M8) and multi-cameras (Amazon) to become more prevalent, serving

as a positive driver for Largan.Financial outlook (NT$ mn)

ASP upside:We expect the upward ASP trend to last into 2015/16,

driven by thinner lens structures. Apple and HTC will continue to

reduce handset thickness while increasing pixel size and pitch, while

other clients will likely use higher pixel counts. We expect Sony and

Samsung to use up to 20MP in 4Q14, with Chinese OEMs to follow.The rise of OIS will also add more complexity given higher precision on

lens edges. Although we do not anticipate new features such as array

cameras and optical zoom to become more common in the near-term,

we note Largan is the leader in this space.

Year to

Dec2013 2014F 2015F 2016F

Sales 27,433 43,978 59,673 69,364

Op. profit 10,781 21,051 28,004 32,282

Net profit 9,610 17,157 22,823 26,335

EPS (NT$) 72.32 127.90 170.14 196.32

EPS growth(%)

74.3 76.9 33.0 15.4

DPS (NT$) 28.50 58.00 80.00 90.00

P/E (X) 32.8 18.5 13.9 12.1

Div. yield(%)

1.2 2.4 3.4 3.8Sustainable growth: We see limited threats from competition. Genius

remains slow on yield improvement and client base expansion. Korean

and Japanese makers continue to operate on smaller scales and focus

mostly on local markets. Given the continued spec upgrades, we

expect Largans dominance to be sustained.

ROE (%) 35.9 46.2 44.5 39.5

ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ARE

Primary Analyst: Jeff Pu CFA



Caitlin Huang




LOCATED IN APPENDIX A.

Yuanta 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.


26/79

Earnings outlook

Volume upside - weakening Samsung market share

We expect Samsungs market share to continue to weaken, with Apple and Chinese

OEMs to take share from both ends. Please see page 17 of this report for more

details on China smartphone shipments. Given Largans dominance with Apple and

Chinese vendors (high-spec segment), its addressable market will likely expand.

Figure 35: Smartphone market share


Volume upside the e-commerce business model

The rise of the e-commerce business model in the China smartphone market is also

positive for smartphone component makers, in our view, as the addressable market

for high-end components will expand into the lower-price smartphone segment.

From OEMs perspective, e-commerce channels could lead to greater cost savings,

with lower channel costs and marketing expenses, and better inventory

management. These savings could in turn be allocated to high-end components to

strengthen product line-ups.

The addressable market for

high-end components will

expand into the low er-price

smartphone segment

For instance, the current RMB799-988 online models feature a similar spec to theRMB2,000 models (720p display, 13MP camera, Quad-core), while the RMB1,500-

2,000 online models come with even higher-end components (1080p display,

13/16MP cam, the most advanced processor).

Taiwan: Handsets 7 Jul, 2014 Largan (3008 TT) Page 26 of 79


27/79

Figure 36: China smartphone sales breakdown by channel type

1

18

21

8

9

9

47

37

32

35

36

38

1

2

3

4

5

6

7

8

9

1

2 13 2 14F 2 15F

Carriers

Traditional retailers

Direct retail channel

retailers

On-line platform


Volume upside - multi-camera design

In terms of handset design, we expect duo-cameras (i.e. HTC M8) and multi-

cameras (Amazon) to become more prevalent, serving as a positive driver for

Largan. Our supply chain checks suggest several Chinese OEMs are likely to adopt

multi-camera design for either front (detecting motion) or rear cameras (depth +

image). This will be supported by the integration of SoC (Snapdragon 801, 805) and

the improvement of software to fix calibration issues. We believe this will help

boost the total market for lenses and at the same time help sustain ASPs given

higher requirements for even front cameras. For example, Amazons VGA sensor

actually has a higher ASP due to its tiny structure but wide angle.

Our supply chain checks

suggest several Chinese OEMs

are likely to adopt mult i-

camera design for either front

or rear cameras

Figure 37: HTC M8 and Amazons Fire Phone

Amazon Fire Phone HTC One M8

Launch date

Jul-14

Mar-14Display 4.7" 720p 5" 1080p

APU Qualcomm Snapdragon 800 Qualcomm Snapdragon 801

Normal cameras 13MP/f2.0, 2.1MP Duo camera (4MP, 2MP), 5MP

Add it ional 4 cameras VGA

Functions of multi -cameraGesture detection and head/eye

trackingGesture detection and head/eye

tracking

Source: Company, Yuanta Investment Consulting



28/79

Upside to ASP

After a likely 9-10% YoY ASP expansion in 2014, we forecast its lens ASP to increase

by another 9% YoY in 2015, driven mainly by the thinner lens structures. We note

that Apple and HTC will continue to reduce handset thickness while increasing pixel

size and pitch, leading to thinner lens structure. We expect OEMs will use higher

pixel counts, and we expect to see more 20MP smartphone cameras by 4Q14, led

by Sony and Samsung, with Chinese OEMs to follow in early 2015.

Moreover, the rise of OIS will also add more complexity given higher precision on

lens edge and refraction. Although we do not anticipate new features such as array

cameras and optical zoom to become more common in the near-term, we note

Largan is the leader in this space.

Figure 38: Spec comparison for Apple iPhones 8MP camera

iPhone 4S iPhone 5 iPhone 5c iPhone 5s iPhone 6 (4.7")iPhone 6

(5.5")

Smartphonethickness 9.3mm 7.6mm 8.97mm 7.6mm around 7mm 7~7.5mm

Pixel counts 8MP 8MP 8MP 8MP 8MP 8MP

Aper tur e

f2.4

f2.4

f2.4

f2.2

f2.2

f2.2

Sensor size 1/3.2" 1/3.2" 1/3.2" 1/3" Larger than 5s Larger than 5s

Pixel size 1.4um 1.4um 1.4um 1.5um Larger than 5s Larger than 5s

Focal length 4.28mm 4.1mm 4.1mm 4.12mm

Lens element 5 5 5 5 5 5

Imagestabilizer

No No Digital Digital Digital Optical


Figure 39: Largans shipment mix forecast


Apple and HTC wi ll cont inue to

reduce handset thickness

while increasing pi xel size and

pitch, leading to thinner lens

structure



29/79

Sustainablesecular growth

There are, of course macro risks, which could potentially lead to an overall demand

slowdown or smartphone demand weakness. However, we see limited threats from

competitors. Following a significant improvement in iPhone 4S camera production

yield, Genius encountered yield rate problems when lens structure becomes thinner

(see Figure 6 - monthly sales chart). Our supply chain checks suggest Genius

remains slow in yield improvement for high-end lenses. Korean and Japanese

makers lack scale and tend to focus on local markets. Thus, as long as specscontinue to migrate, we do not expect strong competition for Largan, and believe it

will be able to sustain its dominance.

As long as specs continue to

migrate, we do not expect

strong competition for Largan,

and believe it will be able to

sustain its dominance.

Figure 40: Monthly revenue for Largan and Genius

Source: TEJ, Yuanta Investment Consulting

Earnings outlook

We expect Largans sales momentum to remain strong through 2014, driven mainly

by the launches of new iPhones, ASP improvement, and potential market share

gains in China. With GM increasing, we forecast 2014F EPS to reach NT$128, up

77% YoY.

For 2015F, we forecast sales to grow by 36% YoY due to a combination of a 23-24%

shipment increase and a 9-10% YoY blended ASP improvement on limited

competition and spec migration. We forecast gross margin will drop slightly YoY on

slightly higher VCM and OIS mix. Net-net, we expect EPS growth to remain strong

into 2015F, up 33% YoY.

We expect EPS growth toremain strong into 2015F, up

33% YoY



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Figure 41: Largans EPS vs. ROE, 2009-15F

(NT )


Figure 42: Largans quarterly & annual earnings highlights (consolidated basis)

(NT$ mn) 1Q2014A 2Q2014F 3Q2014F 4Q2014F FY2014F 1Q2015F 2Q2015F 3Q2015F 4Q2015F FY2015F

Sales 6,858 9,963 11,594 15,563 43,978 11,664 12,950 15,284 19,775 59,673

COGS (3,045) (4,177) (5,386) (6,998) (19,607) (5,535) (5,854) (7,146) (8,788) (27,323)

Gross profit 3,814 5,786 6,207 8,565 24,372 6,129 7,096 8,137 10,987 32,349

Opex (601) (770) (870) (1,080) (3,321) (900) (970) (1,115) (1,360) (4,345)

Op. profit 3,213 5,016 5,337 7,485 21,051 5,229 6,126 7,022 9,627 28,004

Non-op 314 70 70 70 524 111 111 111 111 444

Pretax 3,527 5,086 5,407 7,555 21,576 5,340 6,237 7,133 9,738 28,448

Minority 0 0 0 0 0 0 0 0 0 0

Income tax (528) (1,882) (838) (1,171) (4,419) (828) (2,183) (1,106) (1,509) (5,626)

Net income 3,000 3,204 4,569 6,384 17,157 4,512 4,054 6,028 8,228 22,823

FD WA EPS (NT$) 22.36 23.89 34.06 47.59 127.90 33.64 30.22 44.93 61.34 170.14

Wtd. avg. no. of shrs 134 134 134 134 134 134 134 134 134 134

Margin analysis

Gross margin 55.6% 58.1% 53.5% 55.0% 55.4% 52.5% 54.8% 53.2% 55.6% 54.2%

Op. margin 46.9% 50.3% 46.0% 48.1% 47.9% 44.8% 47.3% 45.9% 48.7% 46.9%

Pre-tax margin 51.4% 51.0% 46.6% 48.5% 49.1% 45.8% 48.2% 46.7% 49.2% 47.7%

Effective tax rate 15.0% 37.0% 15.5% 15.5% 20.5% 15.5% 35.0% 15.5% 15.5% 19.8%

Growth (% QoQ)

Sales (26.3%) 45.3% 16.4% 34.2% 60.3% (25.1%) 11.0% 18.0% 29.4% 35.7%

Op. profit (15.7%) 56.1% 6.4% 40.2% 95.3% (30.1%) 17.2% 14.6% 37.1% 33.0%

Net income (11.9%) 6.8% 42.6% 39.7% 78.5% (29.3%) (10.2%) 48.7% 36.5% 33.0%

FD WA EPS (12.7%) 6.8% 42.6% 39.7% 76.9% (29.3%) (10.2%) 48.7% 36.5% 33.0%

Source: Company data, Yuanta Investment Consulting

Note: A * represents historical data reconciled by Yuanta



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Valuation

We initiate coverage on Largan with a BUY, and TP of NT$3,060, based on 18x

2015F EPS and equivalent to 7.0x 2015F BVPS, using a ROE-P/B methodology.

18x 2015F EPS - NT$3,060

We use 18x P/E in our valuation, 10% higher than its historical trading average of

16x. We expect earnings to remain strong over our forecast period. We apply 2015F

earnings to better reflect Largan's long-term growth potential. Our valuation is

undemanding compared to the valuation in previous up-cycles (over 19x). We use a

P/E-based valuation methodology, as we believe the market will be primarily

focused on Largans earnings outlook as the dynamics of the smartphone industry

remain advantageous to the company. We generally adopt P/E methodology in our

valuation of most downstream component makers.

ROE P/B valuation NT$3,060

We use ROE-P/B as an alternative valuation methodology. This approach takes into

consideration both ROE and cost of equity. Our ROE-P/B valuation analysis also

yields a target price of NT$3,060, which is the same as our P/E based target price.

Figure 43: Largan- target price derivation

Target price derived from P/E valuation (NT$) 3,060

Target price derived from ROE-P/B valuation (NT$) 3,060

Final target price based on average of DCF and P/B valuation (NT$) 3,060

Source: Yuanta Investment Consulting estimates

Figure 44: 12-month forward looking P/E band chart




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Figure 45: 12-month forward looking P/B band chart


Figure 46: ROE P/B methodology

COE ROE-P/B

Risk-free rate 1.4% ROE 2015F 44.5%

Risk premium 7.0% Cost of equity 8.1%

Company beta

0.96

(ROE-9)/(Cost of Equity-g)

*g = 2% 7.0

Cost of equity 8.1% BVPS 2015F (NT$) 439

Fair value NT$3,060



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Balance Sheet

Year as of Dec(NT$ mn)

2012 2013 2014F 2015F 2016F

Cash & ST investment 11,604 17,045 30,554 43,760 63,184

Inventories 2,532 2,693 4,043 5,634 6,602

Accounts receivable 6,581 6,823 7,832 10,627 7,602

Others 255 248 397 539 626

Current assets 20,973 26,809 42,825 60,559 78,014

LT investments 334 274 266 271 276

Net fixed assets 9,731 9,800 11,082 12,428 13,225

Others 151 1,730 1,730 1,730 1,730

Other assets 10,216 11,804 13,079 14,430 15,232

Total assets 31,188 38,614 55,904 74,989 93,246

Accounts payable 3,555 2,507 2,954 4,117 4,825

ST borrowings 93 83 271 0 0

Others 4,426 5,507 8,828 11,979 13,924

Current liabilities 8,075 8,097 12,054 16,096 18,749

Long-term debts 0 0 0 0 0

Others 49 71 71 71 71

Lo ng -t er m l iab il iti es 49 71 71 71 71

Total liabilities 8,124 8,168 12,125 16,167 18,821

Paid-in capital 1,341 1,341 1,341 1,341 1,341 Capital surplus 1,694 1,796 1,796 1,796 1,796

Retained earnings 20,029 27,308 40,642 55,684 71,288

Capital adjustment 0 0 0 0 0

Shareholders' equity 23,064 30,445 43,779 58,821 74,425

Source: Company data, Yuanta

Cash Flow

Year to Dec(NT$ mn)

2012 2013 2014F 2015F 2016F

Net profit 5,578 9,610 17,157 22,823 26,335

Depr & amortization 1,208 1,448 1,731 1,968 2,205 Change in working cap. (783) (363) 1,261 (214) 4,622

Others (2) 51 12 0 0

Operating cash flow 6,000 10,746 20,161 24,576 33,162

Capex (2,865) (1,504) (3,000) (3,300) (2,989)

Change in LT inv. (101) 9 (5) (5) (5)

Change in other assets (19) (1,593) (13) (13) (13)

Investment cash flow (2,985) (3,088) (3,018) (3,318) (3,007)

Change in share capital (2,324) (2,229) (3,823) (7,780) (10,731)

Net change in debt (356) 12 189 (271) 0

Other adjustments 0 0 0 0 0

Financing cash flow (2,679) (2,217) (3,634) (8,051) (10,731)

Net cash flow 336 5,440 13,509 13,206 19,424

Free cash flow 3,015 7,658 17,143 21,258 30,155


Profit and Loss

Year to Dec(NT$ mn)

2012 2013 2014F 2015F 2016F

Sales 20,072 27,433 43,978 59,673 69,364

Cost of goods sold (11,710) (14,472) (19,607) (27,323) (32,022)

Gross profi t 8,362 12,961 24,372 32,349 37,342

Operating expenses (1,564) (2,180) (3,321) (4,345) (5,060)

Operating prof i t 6,798 10,781 21,051 28,004 32,282

Interest income 84 122 238 409 588

Interest expense 0 0 (6) (5) 0

Net interest 84 122 232 404 588

Net Invst.Inc/(loss) 2 (51) (12) 0 0

Net oth non-op.Inc/(loss) (73) 649 305 40 40

Net extraordinaries 0 0 0 0 0

Pretax income 6,811 11,501 21,576 28,448 32,911

Income taxes (1,234) (1,891) (4,419) (5,626) (6,576)

Net p ro fi t 5,578 9,610 17,157 22,823 26,335

EBITDA 8,005 12,229 22,782 29,972 34,488

EPS (NT$) 41.50 72.32 127.90 170.14 196.32

EPS (NT$) Bonus Adj. 41.50 72.32 127.90 170.14 196.32


Key Ratios

Year to Dec 2012 2013 2014F 2015F 2016F

Growth (% YoY)

Sales 25.6 36.7 60.3 35.7 16.2

Op profit 24.2 58.6 95.3 33.0 15.3

EBITDA 25.6 52.8 86.3 31.6 15.1

Net profit 7.3 72.3 78.5 33.0 15.4

EPS 7.9 74.3 76.9 33.0 15.4

Profitability (%)

Gross margin 41.7 47.2 55.4 54.2 53.8

Operating margin 33.9 39.3 47.9 46.9 46.5

EBITDA margin 39.9 44.6 51.8 50.2 49.7

Net profit margin 27.8 35.0 39.0 38.2 38.0

ROA 19.9 27.5 36.3 34.9 31.3

ROE 26.0 35.9 46.2 44.5 39.5

Stability

Gross debt/equity (%) 0.4 0.3 0.6 0.0 0.0

Net cash (debt)/equity (%) 49.9 55.7 69.2 74.4 84.9

Int. coverage (X) 128,513.4 302,651.4 3,484.3 5,991.6 N.A.

Int. & ST debt cover (X) 73.1 139.2 77.8 5,991.6 N.A.

Cash flow int. cover (X) 113,216.2 282,787.3 3,255.0 5,175.2 N.A.

Cash flow/int. & ST debt (X) 64.4 130.1 72.6 5,175.2 N.A.

Current ratio (X) 2.6 3.3 3.6 3.8 4.2

Quick ratio (X) 2.3 3.0 3.2 3.4 3.8

Net debt (NT$ mn) (11,511.3 (16,962.4) (30,282.4) (43,760.2 (63,184.0)

BVPS (NT$) 171.59 229.11 326.37 438.51 554.83

Valuation Metrics (x)

P/E 57.1 32.8 18.5 13.9 12.1

P/FCF 105.6 41.1 18.5 15.0 10.5

P/B 13.8 10.3 7.3 5.4 4.3

P/EBITDA 39.8 25.8 14.0 10.6 9.2

P/S 15.9 11.5 7.2 5.3 4.6




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Initiation

Taiwan: Electronic Components 7 July, 2014

Action

BUY (Initiation)

TP upside (downside) 25.9%

Close 4 July, 2014

Price NT$274.00

12M Target NT$345.00

Previous Target N.A.

TAIEX 9,510.1

Whats new?

We initiate coverage of Catcher

with a BUY rating and TP ofNT$345.

We forecast EPS to grow by

35% YoY to NT$26.6 in 2015F,

10% above the consensus

estimate.

Our view

The sizable iPhone addressable

market and Catchers superiortechnology will lead to upside to

the Street earnings estimates.

We believe Catcher will benefit

the most from healthy industry

supply/demand.

Company profile:Catcher manufactures aluminum and magnesium alloy casing for notebook computers, handsets

and other consumer electronics devices.

Share price performance relative to TAIEX

Catcher (2474 TT)

-18

-8

2

12

22

32

42

52

62

123

173

223

273

323

Jul-13 Oct-13 Jan-14 Apr-14

S ha re P ri ce ( NT $) P er fo rm a nc e re la ti ve t o TA IE X (% )

Upside from sizable addressable market

Initiate coverage with a BUY:We initiate coverage of Catcher with a BUY

rating and TP of NT$345, based on 13x 2015F EPS, or 2.6x 2015F

BVPS. We expect Catcher to see strong earnings expansion in 4Q14-

2015F, driven mainly by an increasing share of iPhone allocation. In

addition, industry supply/demand should remain fairly healthy into

2015, and we expect Catcher to be the major beneficiary.Market cap US$6,904.8 mn6M avg. daily tur nover US$58.8 mn

Outstanding shares 751.7 mn

Free float 70.6%

FINI ownership 54.1%

Major shareholders Chairman Hung,8.8%

Net debt/equ ity (28.4%)

BVPS (2014F) NT$112.87

P/B (2014F) 2.4x

Sizable iPhone TAM:We expect shipments of iPhones featuring metal-

casing will grow to 215 mn units in 2015 (out of 235 mn total iPhones),

up from 155-160 mn in 2014. Based on a casing ASP of US$30-35,

the addressable market for Catcher could reach US$6.5-7.5 bn in

2015, vs. its annual sales of US$2 bn. We expect Catcher to gain

allocation share from Jabil, which lags in technology and scale. We

estimate that Catcher will hold a 20% market share of the 4.7 iPhone

in 2015, which will represent 46% of our 2015F sales forecast. Our

2015F earnings estimate is 10% higher than the consensus forecast.

Financial outlook (NT$ mn)

Year to

Dec2013 2014F 2015F 2016F

Sales 43,246 55,779 74,225 86,586

Op. profit 13,916 17,956 24,944 29,521

Net profit 13,801 14,754 19,994 23,820

EPS (NT$) 18.42 19.66 26.59 31.67

EPS growth(%)

27.0 6.8 35.2 19.1

DPS (NT$) 5.00 8.00 8.00 9.00

P/E (X) 14.9 13.9 10.3 8.7

Div. yield(%)

1.8 2.9 2.9 3.3

Improving NB demand for Apple and Dell:Driven by more affordable

prices, we estimate that the total build plan for MacBook is 15 mn

units in 2014, compared to 12.4 mn in 2013. In addition, Dell is

performing well, supported by stable commercial replacement demand.

We believe Catcher is the prime beneficiary given its sales exposure to

MacBook (17-20%) and Dell (8-9%).

Balanced supply/demand:Our analysis suggests only 14% YoY CNC

machine installed base expansion in 2014, which could lead to more

balanced supply/demand in 2H14 as several models are launched.

With likely demand acceleration in 2015 (led by the iPhone), we expect

industry dynamics to remain fairly healthy, benefiting Catcher the

most given its faster expansion pace and new client additions.

ROE (%) 20.5 18.6 21.8 22.1

ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ARE

Primary Analyst: Jeff Pu CFA



Caitlin Huang




LOCATED IN APPENDIX A.

Yuanta 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.


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Earnings Outlook

Sizable iPhone TAM

We forecast shipments of iPhones featuring metal-casing will grow to 215 mn units

in 2015 (out of 235 mn total iPhones), up from 155-160 mn in 2014. Based on a

casing ASP of US$30-35, Catchers addressable market for iPhone casing could

reach US6.5-7.5 bn in 2015, vs. Catchers annual sales of around US$2 bn in 2014F.

In our view, this figure of US$6.5-7.5 bn is actually conservative when considering

the value of the iPhone 4S (stainless steel rim) and some inner parts.

We forecast shipments of

iPhones featuring metal-casing

will grow to 215 mn units i n2015

Among iPhone outer-casing parts suppliers (Hon Hai, Foxconn Tech, Catcher, Jabil),

we expect Catcher to gain share from Jabil, which lags in technology and scale.

Indeed, we note that Jabils yield rate during the initial ramp up was lower than its

peers. We estimate that Catcher will take a 20% market share in 2015, representing

46% of our 2015F sales forecast. Despite recent noise around yield-rate issues, with

iPhone shipments increasing our supply chain checks suggest that Apple might

further diversify its suppliers, and we believe Catcher is likely to be the main

supplier to gain meaningfully from this move, given its superior product quality,

large scale, and long-term partnership with Apple.

We expect Catcher to gain

share from Jabil, which lags in

technology and scale

Figure 47: Our iPhone 6 contribution estimates for Catcher

Unit s (mn) 2H14F 2015F

Total iPhone builds 114 235

iPhone 6 & next gen 78 215

4.7" iPhone 6 & next gen 64 161

Metal casing-4.7" iPhone 6 &

next gen (10% higher than set)70 177

Our forecasts for Catcher 2H14F2015F - our

forecast

2015F - 10%

from Jabil

2015F - 15%

from JabilCatcher's shipment (mn units) 10.0 34.8 44 53

Allocation assumption 14% 20% 25% 30%

Sales contribution 32% 46%

Upside to our sales forecast 13% 25%


Improving NB demand

On April 29, Apple updated the MacBook Air with faster processors and lower prices

(starting price is now US$899, from US$999 previously), strengthening its sales

outlook. Thus, we estimate that the industry build plan for MacBook is around 15

mn units in 2014, compared to 12.4 mn in 2013.

In addition, Dell (another key account of Catcher) is also tracking well in terms of its

target of 21 mn units in 2014, vs. 19.2 mn in 2013. We believe the momentum is

driven by the stable commercial replacement demand as Windows XP support is

discontinued. We believe Catcher is a prime beneficiary given its sales exposure to

MacBook (17-20%) and Dell (8-9%).

Taiwan: Electronic Components 7 Jul, 2014 Catcher (2474 TT) Page 35 of 79


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Figure 48: Our estimated build plans for MacBook and Dells NBs


Industry supply expansion remains slow

On an aggregate basis, we believe there could be 14% YoY CNC machine additions

in 2014 by major vendors. Among metal casing vendors, Catcher is the most

aggressive casing maker in CNC expansion, while others remain fairly

conservative/disciplined. However, we note that the BYD-Es number is

underestimated, as the company can rent CNC machines from many small local

enterprises. With limited capacity addition this year and demand acceleration in

2015 (led by Apples iPhone), we expect industry supply/demand to remain very

healthy, with Catcher to benefit the most.

We expect industry

supply/demand to remain very

healthy, with Catcher to benefit

the most

Figure 49: Industry CNC additions for major vendors

CNC Machine capacity (k unit s, year-end) 2012 2013 2014F

Catcher 14.0 16.0 20.0

Foxconn Tech 12.0 15.0 16.0

Hon Hai and FIH 8.0 9.5 11.0

Casetek 4.0 5.5 6.5

Juteng - Compal 2.5 3.0 3.5

Green Point / Jabil 6.5 8.0 8.0

BYD-E 2.0 4.0 4.8

Total 49.0 61.0 69.8

YoY growth 38% 24% 14%




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Figure 50: Industry demand analysis

(Unit s: mn) 2012 2013 2014F 2015F

Smartphone using CNC

HTC 13 11 9 8

Sony 5 9 14 17

RIM 8 7 3 2

Apple 136 153 171 227

Samsung 0 0 2 5

Chinese brands 4 6 20 30

Subtotal 166 186 218 288

Growth (YoY) 28% 12% 17% 32%

Tablets using CNC

iPads 66 74 71 65

Others 3 6 7 8

Total 69 80 78 73

Growth (YoY) 64% 17% -3% -6%

NB using CNC

MacBook 13.5 12.4 14.9 15.2

Other ultrabooks 8.0 7.5 9.0 10.0

Total 21.5 19.9 23.9 25.2

Growth (YoY) 46% -7% 20% 5%


Earnings outlook

We estimate the iPhone will

account for 16% and 46% of

Catchers 2014 and 2015 sales

respectively

Driven by a faster ramp up of the iPhone 6 and stable NB demand, we expect

Catchers top-line growth to accelerate to 29% YoY in 2014, followed by 33% YoY in

2015. In our earnings model, we estimate the iPhone will account for 16% and 46%

of Catchers 2014 and 2015 sales respectively.

In addition, NB demand appears to be stabilizing following the retirement of

Windows XP and a slowdown in tablet demand. We conservatively forecast NB PC

casing sales to be flat in 2014 and down 4% YoY in 2015. On the other hand, webelieve that the iPad mini will be the key drag due to slowing tablet demand and

limited spec changes into the next-generation iPad mini with Retina (touch ID is the

only difference).

Figure 51: Catchers EPS vs. ROE, 2009-15F

(NT )




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Figure 52: Quarterly highlights (consolidated basis)

(NT$ mn) 1Q2014A 2Q2014F 3Q2014F 4Q2014F FY2014F 1Q2015F 2Q2015F 3Q2015F 4Q2015F FY2015F

Sales 10,416 12,519 13,836 19,008 55,779 16,196 17,102 18,496 22,431 74,225

COGS (6,112) (7,309) (8,234) (10,912) (32,568) (9,449) (9,960) (10,683) (12,748) (42,841)

Gross profit 4,303 5,210 5,602 8,096 23,211 6,746 7,141 7,813 9,683 31,384

Opex (1,095) (1,220) (1,300) (1,640) (5,255) (1,465) (1,545) (1,605) (1,825) (6,440)

Operating profit 3,208 3,990 4,302 6,456 17,956 5,281 5,596 6,208 7,858 24,944

Non-operating profit 651 215 215 215 1,294 250 250 250 250 999

Pre-tax profit 3,859 4,205 4,517 6,671 19,250 5,531 5,846 6,458 8,107 25,943

Income tax (872) (1,387) (903) (1,334) (4,497) (1,106) (1,929) (1,292) (1,621) (5,948)Net income 2,984 2,817 3,613 5,336 14,754 4,425 3,917 5,166 6,486 19,994

FD WA EPS (NT$) 3.98 3.75 4.82 7.11 19.66 5.88 5.21 6.87 8.62 26.59

Wtd. avg. no. of shares 752 752 752 752 752 752 752 752 752 752

Margin analysis

Gross margin 41.3% 41.6% 40.5% 42.6% 41.6% 41.7% 41.8% 42.2% 43.2% 42.3%

Operating margin 30.8% 31.9% 31.1% 34.0% 32.2% 32.6% 32.7% 33.6% 35.0% 33.6%

Pre-tax margin 37.0% 33.6% 32.6% 35.1% 34.5% 34.2% 34.2% 34.9% 36.1% 35.0%

Effective tax rate 22.6% 33.0% 20.0% 20.0% 23.4% 20.0% 33.0% 20.0% 20.0% 22.9%

Growth (% QoQ)

Sales (20.6%) 20.2% 10.5% 37.4% 29.0% (14.8%) 5.6% 8.2% 21.3% 33.1%

Operating profit (22.0%) 24.4% 7.8% 50.1% 29.0% (18.2%) 6.0% 10.9% 26.6% 38.9%

Net income (14.1%) (5.6%) 28.3% 47.7% 6.9% (17.1%) (11.5%) 31.9% 25.5% 35.5%

EPS (14.2%) (5.6%) 28.3% 47.7% 6.8% (17.3%) (11.5%) 31.9% 25.5% 35.2%

Source: Company data, Yuanta Investment Consulting estimatesNote: A * represents historical data reconciled by Yuanta



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Valuation

We initiate coverage of Catcher with a BUY rating, and set our target price at

NT$345, based on 13x 2015F EPS, or 2.6x 2015F BVPS.

13x 2015F EPS - NT$345

Our target multiple of 13x P/E is 10% higher than its historical trading average over

the past five years, given its robust earnings outlook for 2014 and 2015. We use a

P/E-based valuation methodology, as we believe the market will be primarily

focused on Catcher's earnings outlook as the dynamics of the smartphone and NB

industry change to its advantage. We use 2015 estimates to better capture

Catchers growth potential in the next 12 months.

ROE P/B valuation NT$345

We use ROE-P/B as an alternative valuation methodology. This approach takes into

consideration both ROE and cost of equity. The ROE-P/B valuation analysis yields

NT$345, which is the same as our P/E based target price.

Figure 53: Catcher - target price derivation

Target price derived from P/E valuation (NT$) 345

Target price derived from ROE-P/B valuation (NT$) 345

Final target price based on average of DCF and P/B valuation (NT$) 345

Source: Yuanta Investment Consulting estimates

Figure 54: 12-month forward looking P/E band chart




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Figure 55: 12-month forward looking P/B band chart


Figure 56: ROE P/B methodology

COE ROE-P/B

Risk-free rate 1.4% ROE 2015F 21.8%

Risk premium 7.0% Cost of equity 9.5%

Company beta 1.2 (ROE-g/(Cost of equity - g) 2.6

Cost of equity 9.4% BVPS 2015F (NT$) 131

Fair value 345

Source:TEJ; Yuanta Investment Consulting


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