Rethinking Japanese Equities: Smartphone and LTE stocks

DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

05 July 2012 Asia Pacific/Japan Equity Research

Wireless Infrastructure & Outsourcing (Telecommunication Services) / OVERWEIGHT

Rethinking Japanese Equities: Smartphone and LTE stocks

THEME

Dawn of the smartphone/LTE era ■ Smartphone & LTE handbook: In Japan, smartphones and LTE are

entering an expansionary phase. In this report, we explain technology trends and present market forecasts and stock analyses. We hope this report serves as a handbook that furthers your understanding of this once-a-decade technological shift.

■ Industrial Electronics (Maekawa): We initiate coverage of Anritsu with an OUTPERFORM rating and a ¥1,180 target price. Sales are likely to be boosted by growing manufacturing testing equipment demand due to overseas 3G and rising output of LTE handsets. However, we also see profit growth from rising production from Japanese LTE handsets. For more details, please refer to our 5 July initiation report. We reiterate our OUTPERFORM rating on Dainippon Screen, which is set to benefit from increased investment in leading-edge processes due to rising shipments of smartphones and LTE handsets. We also maintain our OUTPERFORM rating on Advantest, which we expect would benefit from some global smartphone makers’ to adopt multi chip solution for 3G/LTE basebands.

■ Telecoms (Hayakawa): We maintain OUTPERFORM ratings on all four major telecom carriers and reiterate our OVERWEIGHT sector stance. We raise our target price for Softbank (9984), which is in the center of the new eight-year cycle for telecom stocks, from ¥3,000 to ¥3,500.

■ Electronic components (Kanemoto): Multiband handset use will likely continue to expand. We look for FDD multiband models with 3G (UMTS/CDMA) global roaming capability to be followed by models compatible with regional LTE service and then LTE global roaming. We expect the average number of FDD bands per cellular handset to increase, driving sustained growth in demand for duplexers, PAs, high-Q MLCC/inductors, and front-end modules (FEMs) that combine these components. Murata Manufacturing is well positioned to maximally benefit from such demand growth as a vertically integrated supplier of PAs, duplexers, high-frequency capacitors and inductors, and FEMs that incorporate these components. Further development of Murata’s recently acquired PA business will likely be a key to earnings. We reiterate our OUTPERFORM rating on Murata. We look for Taiyo Yuden and TDK to partner with US PA makers in their duplexer businesses. We intend to closely monitor their progress.

Research Analysts

Hitoshi Hayakawa 813 4550 9952

[email protected]

Hideyuki Maekawa 813 4550 9723

[email protected]

Akinori Kanemoto 81 3 4550 7363

[email protected]

05 July 2012

Rethinking Japanese Equities: Smartphone and LTE stocks 2

Table of contents 3G to 4G, Featurephone to Smartphone 3

New technology shift spearheaded by advanced countries 3 Global LTE market growth 3 Mobile technology branching in two directions globally 5

Japanese telecom stocks have embarked on a new eight-year cycle 7 Symbian’s demise leaves smartphone world dominated by iOS and Android 10

China, North America, and China key smartphone markets; Japan smaller but still significant 11

Era of 100mn Japanese smartphone users 12 Late to the game, Japanese makers sadly scramble for chips 12 Smartphones also likely to go unique-to-Japan 14 Partial reorganization of domestic handset makers inevitable 15

Can telecom carriers reap outsize profits during the eight-year cycle? 16 Two keys to increasing telecom spending as percentage of disposable income consumption 16 From unlimited to limited data plans 17 Data plans among North American carriers 18 First-class and economy-class needs 19 What one can do with a 5GB data allowance 20 Whether carriers can get consumers to pay higher rates an open question 20 Strategies for differentiation aside from rate plans important 20

Verifying the value theory in our Telecom Fundamentals Handbook (29 May) 22 Update of telecom stock valuations relative to model defensive portfolio 22 No change to our view: telecom stocks look clearly oversold 25 Dividend hikes and share buybacks gradually coming back into play 25 The smartphone-LTE “party” has only just begun 26

Investment stance on telecom stocks 27 Raise TP for Softbank; maintain OVERWEIGHT sector stance, bullish stance on all sector stocks 27

Electronic parts, semiconductors and SPE 28 LTE market poised for synchronous global expansion 28 Extensive lineup of LTE chipsets coming by 2013 33 Multiband shift likely to continue 36

Anritsu (6754 / 6754 JP) 39 Softbank (9984 / 9984 JP) 63

05 July 2012


3G to 4G, Featurephone to Smartphone New technology shift spearheaded by advanced countries Long Term Evolution (LTE) has been globally adopted as a fourth-generation (4G) mobile communication technology. It is set to be the dominant global mobile telecom standard for at least the next decade as the successor to 3G technologies such as WCDMA and CDMA-EVDO.

LTE is superior to 3G technologies in terms of spectral efficiency by a factor of 3–4. We believe growth in data traffic driven by smartphones' ongoing rapid proliferation will motivate global mobile telecom carriers to expeditiously migrate to LTE; in other words, smartphone proliferation and migration to LTE are positively correlated.

Global LTE market growth As of end-2011, there were some 8.5mn LTE subscribers globally, about 75% of which were in the US according to Wireless Intelligence and Ericsson. We estimate that global mobile phone subscribers total 5,758mn, some 762mn (13.2%) of which are smartphone users. LTE subscribers still only account for about 1% of global smartphone users.

Figure 1: Global LTE sutbscribership forecast

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Verizon, the largest US mobile telecom carrier, is bullish on LTE, and with AT&T also offering LTE service, we expect LTE to grow more prevalent in the US. From 2012, LTE services are also set for launch in Japan and South Korea. KDDI was initially planning to roll out LTE service from December 2012, but decided to move it forward to this autumn. Softbank recently broke its silence about its LTE rollout schedule by formally announcing scheduled launches from around September 2012.

Mobile telecom carriers in Europe, China, and India also are set to be early adopters of LTE, but we expect them to lag behind their US, Japanese, and South Korean counterparts. Europe, where telecom carriers have yet to recoup their investments in 3G infrastructure, appears to be three years behind the leading-edge countries.

Hitoshi Hayakawa

81 3 4550 9952

[email protected]

LTE subscribers currently account for a mere 1% of global smartphone users

LTE will initially be available in Japan, US, S Korea

05 July 2012


LTE has two variants, TDD (TD-LTE) and FDD (FD-LTE). China and India are adopting the former. In China, we estimate that LTE is five years away from mass-market prevalence. India, where demand for mobile broadband appears to be low to begin with, will likely take even longer to reach that point. In Japan, the US, Europe, and South Korea, FD-LTE is the predominant LTE technology. Softbank, which acquired a wireless business license from the bankrupt Willcom, is the only Japanese carrier with a TD-LTE network. After Softbank launches FD-LTE service in September, it will have both TD- and FD-LTE networks.

According to media reports, the next-generation iPhone will likely be LTE-enabled. As the new iPad unveiled this spring supports North American LTE frequency bands (usable only in North America), we believe introducing an LTE-enabled iPhone would be a logical next step for Apple. In our view, the advent of an LTE-enabled iPhone would undeniably have a major impact on LTE's global penetration rate, particularly in countries at the forefront of mobile Internet technology.

Figure 2: Global LTE subscribership forecast

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As of April 2012, 347 models of LTE-enabled mobile devices were available globally from 63 manufacturers. This total includes 64 smartphone models, 31 tablet models, 131 Wi-Fi router models, and 64 USB modem models. Currently, devices that connect to wireless networks via PCs outnumber smartphone and tablet models, but the latter two's share will likely increase.

In Japan, NTT DoCoMo's recently unveiled its summer 2012 model lineup. It comprises 19 models of mobile devices, including 16 smartphones, one smartpad, one Wi-Fi router-based model, and one feature phone. Twelve of the 19 devices are LTE-enabled, including 10 (62.5%) of the 16 smartphone models.

Global LTE subscribership forecasts project that LTE service subscribers will number 400–600mn by end-2016. This range equates to a 50- to 70-fold increase from 8.5mn as of end-2011. By comparison, we estimate global mobile phone subscribership will increase to roughly 7.5bn as of end-2016.

LTE has two variants: TD-LTE and FD-LTE

iPhone 4G likely to be LTE-enabled

347 LTE-enabled models are available globally from 63 manufacturerst

12 of 19 mobile devices offered by DoCoMo are LTE-enabled

05 July 2012


Figure 3: Operating Systems and CPUs for NTT DoCoMo's summer 2012 models

Maker Chip ClockF09D

ANTEPRIMA Qualcomm MSM8255 1.4GHz Android 4.0 X Jun 12

AQUOS PHONE stSH-07D

Qualcomm MSM8255 1GHz Android 4.0 X Jun 12

Optimus itL05D

Qualcomm MSM8960 1.5GHz Android 4.0 O Jun-Jul 12

MEDIAS XN-07D


ELUGA VP-06D

TI OMAP4460 1.5GHz Android 4.0 X Jun-Jul 12

ARROWS MeF-11D

Qualcomm MSM8255 1GHz Android 4.0 X Aug 12

Xperia SX SO-05D

Qualcomm MSM8960 1.5GHz Android 4.0 O Aug 12

GALAXY S ⅢSC-06D


AQUOS PHONE ZETASH-09D


Xperia GXSO-04D

Qualcomm MSM8960 1.5GHz Android 4.0 O Jul 12

ARROWS XX-10D

NVIDIA Tegra3 AP33 1.5GHz Android 4.0 O Jul-Aug 12

REGZA PhoneT-02D

Qualcomm MSM8960 1.5GHz Android 4.0 O Jul-Aug 12

Optimus VuL-06D/L-06D JOJO

Qualcomm APQ8060 1.5GHz Android 4.0 O Jul-Aug 12

ELUGA powerP-07D


AQUOS PHONE svSH-10D


DoCoMo Tablet TI OMAP4460 1.2GHz Android 4.0 X Aug 12

Rakuraku SmartphoneF-12D (targetting seniors)

Qualcomm MSM8255 1.4GHz Android 4.0 X Jul-Aug 12

CPUOS Xi (LTE) LaunchHandset model

Source: Company data, Credit Suisse estimates

Mobile technology branching in two directions globally In early-adopter countries, the shift to LTE will likely proceed rapidly in tandem with smartphones' proliferation. In Europe and elsewhere, by contrast, mobile telecom markets are only now entering the 3G era in earnest. In such countries, wireless carriers have yet to recoup their investment in 3G infrastructure. They are consequently not in a position to rapidly migrate to LTE. Although the US has a lower 3G penetration rate than South Korea and Japan, Verizon is proactively migrating to LTE. Verizon's existing 3G network uses CDMA, which is becoming outdated. Circumstances are somewhat different in Europe, where all mobile carriers use WCDMA networks.

05 July 2012


Figure 4: 3G penetration rates by country

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In North America, the first-tier carriers (Verizon, AT&T, Sprint, and T-Mobile USA) are planning to roll out LTE services on a nationwide basis. Second-tier carriers MetroPCS and Leap also plan to migrate to LTE. Verizon in particular is exhibiting a proactive commitment to LTE. When reporting FY12 1Q earnings, Verizon CFO Francis Shammo said that the company will aggressively shift traffic to and further expand its LTE network, already the strongest in North America.

Figure 5: North American carriers' LTE plans 2010 2011 2012 2013

Verizon

AT&T

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LEAP

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CLWR

Cover pop. of 200mby YE 2011

Launched in 38 citiesby YE 2010

Build completeby YE 2012








5K sitesby mid 2013


Launched in5 cities by mid-2011


Build completeby early 2014


Traial MarketsLaunched by YE 2011

"Expect to deploy 2/3 of our network footprint(66m population) over next 2-3 years"

Deploymentstarts 2011 (?)


Cover pop. of 260mby YE 2014/15


05 July 2012


Japanese telecom stocks have embarked on a new eight-year cycle Figure 6, which originally appeared in the summer 2012 edition of our Telecom Fundamentals Handbook published on 29 May, depicts Japanese telecom stocks' eight-year cycle. The previous cycle lasted eight years from FY3/04, the dawn of the 3G era, through FY3/11. The current cycle began in FY3/12 in our assessment.

Eight-year cycles comprise two phases. The first phase is characterized by revenue expansion, the second by price competition. In the previous eight-year cycle, the first phase lasted five years; the second, three years.

Figure 6: Telecom stocks' eight-year cycle

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Penetration rate of 3G and Smartphone (LHS) Total mobile revenue at 3 major telecoms (RHS)

Lack of technological drivers

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LTE eraSmartphone expansion

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Once 3G had more or less reached maturity around FY3/08, wireless carriers no longer had any means to differentiate their services except pricing. In response, they all began offering discounted pricing on multi-year contracts and introduced installment sales for handsets. In other words, they discounted monthly service charges in exchange for a reduction in handset subsidies, resulting in a decrease in both revenues and expenses. Mobile telecom revenues consequently flat-lined at a depressed level until mid-FY3/11. We consider these three years to be the second phase of the previous eight-year cycle.

At this point, a telecom industry savior appeared in the form of the smartphone—namely, the Apple iPhone. The iPhone debuted in Japan in July 2008, when Softbank began offering iPhone service, sparking a major boom.

In FY3/09, when the iPhone launched in Japan, the telecom industry's mobile telecom revenues fell sharply YoY and subsequently leveled off (Figure 6). Softbank, however, increased its share of industry revenues over this timeframe by offering iPhone service. In contrast, DoCoMo and KDDI's revenues declined YoY throughout this timeframe.

Specifically, DoCoMo’s revenues fell 10.3%, or roughly ¥500bn, from ¥4,711.8bn in FY3/08 to ¥4,224.2bn in FY3/11, while KDDI’s declined 9.5%, or about ¥300bn, from ¥2,862.5bn to ¥2,590.7bn. Meanwhile, Softbank’s revenues increased by some ¥340bn, from ¥1,631.2bn to ¥1,971.1bn.

Eight-year telecom cycle

Softbank gained revenue share with the iPhone

05 July 2012


Although it now seems laughable in retrospect, both DoCoMo and KDDI were initially cool toward iPhone and other smartphones' market potential. Softbank’s management, by contrast, discerned that change was afoot. A mere two years ago, DoCoMo estimated its initial smartphone models' annual sales at 500,000 units, 2.7% of its projected FY3/11 total handset sales of 18.2mn units. In actuality, smartphone demand surged far beyond DoCoMo’s initial projection. The company ended up selling 2.52mn smartphones in FY3/11 as its handset sales totaled 19.05mn units, nearly 1mn above its initial forecast. Smartphones accounted for 13.2% of this total, far more than management’s initial 2.7% estimate. Like DoCoMo, KDDI was initially blasé about smartphones before suddenly ramping up its smartphone strategy in FY3/12, when it achieved major growth in handset unit sales. The driving force behind this growth was KDDI's decision to offer the iPhone 4 last autumn.

The smartphone market pioneered by Softbank had yet to reach a 20% share of total mobile phone subscribers as of end-FY3/12 (Figure 7). The other 80% of mobile phone subscribers represents an untapped market. Another encouraging sign is that the smartphone boom coincides with the end of drags on revenue from the discounting that gained prevalence during the previous cycle's second phase (FY3/09–11). In fact, industry sales in FY3/12 started to sharply deviate from their trend during the previous cycle's second phase.

Figure 7: Smartphone users as % of total mobile phone subscribers

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Smartphones' potential was overlooked until two years ago

Smartphone boom coincides with end of YoY drag on revenues from discounting

05 July 2012


Japan to see smartphones take off in FY3/13 DoCoMo is targeting smartphone sales for FY3/13 of 13mn units. This represents a 54.6% share of company the company’s total mobile phone sales target of 23.8mn units. FY3/12 smartphone sales totaled 8.82mn, equivalent to 40% of overall mobile phone sales of 22.08mn.

KDDI’s smartphone sales target for FY3/11 was 1.09mn units, equivalent to 9% of its total target. Smartphone sales grew rapidly to 5.63mn in FY3/12, lifting the smartphone weighting of KDDI’s mobile phone unit sales to 41%, on par with DoCoMo’s. In our view, the 4.54mn unit YoY growth was clearly driven by the iPhone 4 release in the fall. Management’s FY3/13 smartphone sales target is 8mn units, equivalent to 67.8% of total unit sales of 11.8mn, a higher smartphone weighting than DoCoMo’s.

Softbank does not disclose separate targets for smartphone or total mobile phone unit sales. It sold 10.24mn handsets in FY3/11 and 12.3mn in FY3/12. While Softbank has yet to disclose specific figures, we estimate that smartphone sales were about 3mn units in FY3/11 (29% of total) and about 4.5mn in FY3/12 (37%). The company has concentrated on the iPhone to date, but we believe it will be expanding its Android line-up in FY3/13. We expect this to drive smartphone sales to 5.4mn in FY3/13, raising smartphones to some 50% of total handset units sales.

For the three carriers combined, we forecast total FY3/13 smartphone sales of 26.45mn units, or 58.9% of total handset sales. In FY3/14, we expect this to rise to 63.5% on total smartphone sales of 29.3mn units.

Figure 8: Smartphone unit sales forecasts

('000) 3/11 3/12 3/13E 3/14E 3/15ENTT DoCoMo

Smartphone 2,520 8,820 13,000 14,400 15,200Total handset sales 19,055 22,089 21,671 22,370 22,143% of smartphone 13.2% 39.9% 60.0% 64.4% 68.6%

KDDISmartphone 1,090 5,630 8,050 8,500 8,900Total handset sales 11,570 13,690 11,486 11,765 11,829% of smartphone 9.4% 41.1% 70.1% 72.2% 75.2%

SoftbankSmartphone 3,000 4,500 5,400 6,400 7,400Total handset sales 10,242 12,301 11,752 11,972 12,429% of smartphone 29.3% 36.6% 46.0% 53.5% 59.5%

Total of 3 carriersSmartphone 6,610 18,950 26,450 29,300 31,500Total handset sales 40,867 48,080 44,908 46,108 46,401% of smartphone 16.2% 39.4% 58.9% 63.5% 67.9%


DoCoMo targets smartphone sales of 13mn units

KDDI targets 8mn units

We expect 5.4mn unit sales for Softbank

Combined smartphone sales likely to reach 26.45mn units in FY3/13, accounting for nearly 60% of total unit sales volume

05 July 2012


Symbian’s demise leaves smartphone world dominated by iOS and Android Global smartphone sales reached 471.7mn units in 2011, rising a substantial 58% YoY from the 298.8mn units sold in 2010.

Apple became the leading smartphone maker in 2011, when it sold 93.1mn units (roughly double the 47.5mn recorded in 2010) and expanded its market share by 3.2ppt to 19.1%. Korean maker Samsung Electronics claimed the No. 2 spot, achieving a sharp 380% YoY increase in unit sales to 90.9mn (from 24mn in 2010) that lifted its market share by 10.7ppt to 18.7% (from 8% in 2010). These strong advances came largely at the expense of Nokia, which suffered YoY declines in unit sales and market share. Meanwhile, Sony—the only Japanese company in the global smartphone maker top 10—increased unit sales to 26.8mn (from 9.5mn in 2010) and expanded its market share to 5.5% (from 3.2% in 2010), but lost further ground against Samsung.

Figure 9: Unit sales for leading smartphone makers Figure 10: Market shares for leading smartphone makers

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Looking at market share trends for smartphone operating systems (OS), Android managed to significantly strengthen its position in 2011, expanding its market share to 43% (from 18% in 2010). With Symbian in decline, the OS market will likely become increasingly dominated by giants Android and iOS, and while Windows and other rivals are expected to make some inroads in the future, we think the prevailing OS hierarchy will remain intact for some time.

Figure 11: Smartphone OS sales units Figure 12: Smartphone OS sales shares

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Symbian still retains its No. 1 position in terms of active installations, but its market share contracted sharply YoY in 2011, reflecting a rapid decline in its installed base as users switched to devices powered by Android or iOS. With non-Apple smartphone makers around the world embracing Android in growing numbers, this trend is likely to prove irreversible.

Global smartphone sales surpassed 400mn units in 2011

Apple in the lead, followed by Samsung Electronics

Only two OS giants left: Android and iOS

05 July 2012


Europe, North America, and China key smartphone markets; Japan smaller but still significant Our IT hardware analyst Kulbinder Garcha’s smartphone outlook has global smartphone unit sales rising to 673.8mn in 2012, a 43% increase from the 470mn units sold in 2011 (following on from 58% YoY growth in 2011). He projects continued double-digit growth in the years ahead and expects unit sales to cross the 1bn mark in 2014.

Figure 13: Global smartphone unit sales outlook

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Figure 14 shows global unit sales by region. Going forward, China, North America, and Europe are likely to be the driving force behind smartphone expansion.

Figure 14: Global smartphone unit sales by region Smartphone units (mn) 2010 2011 2012E 2013ENorth America 72.0 107.3 119.4 132.4Western Europe 86.2 96.6 113.0 132.1Japan 17.9 25.0 30.5 33.9China 27.8 77.6 147.6 197.9India 9.0 13.1 28.3 58.7Korea 7.1 20.0 25.5 27.0Other APAC 29.5 48.6 78.7 86.2Brazil 5.2 9.3 15.3 20.6Mexico 3.4 9.3 15.2 20.3Other LatAM 9.0 15.0 22.5 32.1Russia 3.7 8.3 14.6 21.1Other Central & Eastern Europe 9.5 11.7 15.9 21.4Middle East & Africa 18.6 29.9 47.5 66.6Smartphone Units (mn) 298.8 471.7 673.8 850.1% YoY change 73% 58% 43% 26%

Source: Gartner, Credit Suisse estimates

Smartphone unit sales projected to exceed 600mn in 2012

05 July 2012


Figure 15 shows the smartphone unit sales assumptions underlying our own earnings estimates for the three mobile carriers, as published in our Telecom Fundamentals Handbook (summer 2012). Note that we base our forecasts on fiscal years, resulting in minor discrepancies with Credit Suisse global forecasts, which are premised on calendar years. Our estimates are also slightly more conservative than global forecast assumptions.

Figure 15: Smartphone unit sales forecasts for Japanese mobile carriers

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Era of 100mn Japanese smartphone users The day will eventually come when the product strategies of mobile telecom carriers put a smartphone in the hand of nearly every Japanese citizen. LTE penetration rates should also rise significantly. Some will claim at this stage that LTE and smartphones are not essential in their lives, but similar arguments were heard ten years ago when 3G debuted.

Today, nearly everyone has a 3G phone and almost nobody thinks twice about it. That is because they are the only kind that carriers sell at present. We believe the same is bound to occur with LTE and smartphones.

In this latest wave of technological innovation, the new segments of tablets seem set to promise to offer considerable enjoyment. Tablets have been slow to take off in Japan, but it looks very likely that many users will carry one as a second mobile device, suggesting that they could begin to significantly contribute to carriers’ earnings in the near future.

Late to the game, Japanese makers scramble for chips Apple’s iOS and Android are the two main types of OS used in smart wireless devices like smartphones and tablets. A key point to monitor is the extent to which Microsoft’s Windows 8 can make inroads into the OS segment now dominated by these two giants.

As the key components in handsets, processors (chips) can significantly influence the production costs and sales timing of handsets. There are two types of processors: those that drive the OS, including Android, and those that govern communications functions. The former are referred to as applications processors, while the latter are called baseband processors. There are also integrated processors that combine the two, such as Qualcomm’s MSM8960 processor, which we will describe later.

Consumer selection of mobile devices governed by carrier strategies

Heart of smartphones controlled by Qualcomm

05 July 2012


Most of the processors in mobile handsets use ARM architecture, licensed from ARM Holdings in the UK. The maximum performance of the processor is determined by the architecture used, the clock frequency, and the number of cores. Clock frequency refers to the operating frequency, the value of which describes how many signals are generated per second to control the pace of circuit processing, with higher values indicating greater processing capacity. This value is indicated in gigahertz (GHz) or megahertz (MHz). The core refers to the central part of the CPU that performs arithmetic processing. CPUs with two cores are called dual-cores, and in recent years quad-cores have also appeared.

Qualcomm of the US is the leading mobile processor maker. Others include ST-Ericsson (Switzerland), Broadcom (US), Nvidia (US), and Texas Instruments (US). PC segment powerhouse Intel (US) is also entering the market. The key point in high-end mobile processors going forward is likely to be LTE functionality.

For its recently announced 2012 summer collection, we estimate that DoCoMo has placed initial handset orders of 100,000–200,000 at most with various domestic handset makers. Consequently, potential difficulties among the latter in securing sufficient chip volume could have major repercussions.

Smartphones with Geiger counters hitting the market Softbank’s latest mobile lineup, announced on 29 May, revealed an expanded range of Android devices supplied by various domestic makers such as Fujitsu and Sharp. However, the real standout was Sharp’s distinctive Pantone 5, which is the first phone in the world capable of measuring radiation. We think the ingenuity of the design deserves credit and will clearly appeal to the predominantly female target market; in addition, the product features a stripped-down (i.e., user-friendly) Geiger counter that could find particular favor with mothers of young children in search of a more convenient way to measure radiation.

Figure 16: Softbank’s PANTONE® 5 107SH smartphone (supplied by Sharp) incorporates

easy-to-use Geiger counter

Source: Company data

As we had anticipated, Softbank also unveiled a smartphone that uses voice over PHS, another model unique to Softbank that we believe promises to set the company apart from its competitors. As the only Japanese carrier with a TDD-LTE network, Softbank is likely to introduce models with support for both TDD-LTE and FDD-LTE at some point in the future. Moreover, we expect the company to eventually expand its offerings to include the Samsung Galaxy and Sony Xperia series, two smartphone lines that have sold well at rivals DoCoMo and KDDI but were absent from Softbank’s latest summer line-up.

Chip performance = architecture × clock frequency × number of cores

Softbank building up its Android offerings

05 July 2012


Figure 17: Willcom DIGNO DUAL smartphone (supplied by Kyocera) incorporates voice

over PHS


To further boost smartphone penetration and entice users to spend more on LTE service, we think differentiation among carriers will assume greater importance, not just at the hardware level, but also in terms of services, which we review below.

Smartphones also likely to go unique-to-Japan The era of smartphone proliferation is likely to offer carriers new opportunities to offer unique-to-Japan services. The number of subscribers to KDDI’s au Smart Pass, allowing unlimited download of smartphone apps, has quickly grown to over 1mn. Unlimited apps for a monthly charge of ¥390 is an easy-to-understand proposition and an easy sell to customers at retail outlets, in our view. The Uta Pass, allowing for unlimited music listening, and the Video Pass, allowing for unlimited movie viewing, are examples of other new content services announced by the carrier and provide evidence that KDDI’s smartphone content strategy is starting to head in the right direction.

We believe these efforts are indicative of the talents of Makoto Takahashi, head of KDDI’s Value Segment. Takahashi also oversaw content during the full-scale 3G ramp-up 10 years ago and was one of the driving forces behind KDDI’s significant advances at that time. We expect him to make important contributions in this round of the eight-year cycle as well.

A serious concern for telecom carriers is having their value chain hijacked by Apple, with its vertically integrated business model, leaving them as simple pipeline providers. DoCoMo and KDDI in particular appear to be concerned about this, which is one of the reasons DoCoMo decided to not offer the iPhone.

Although KDDI seems to have had such doubts, it introduced the iPhone last year, on the back of Softbank’s initiative. As it turned out though, sales of the iPhone were not as strong as originally anticipated, and the company has ended up with sales fairly balanced between the Android and the iPhone, at about 60/40 respectively. We believe that as smartphones grow in popularity, the Android weighting will further rise.

Given the current options, if 70–80% of total smartphone subscribers eventually became Android users, only 20–30% of users would carry an iPhone (contributing only communications pipeline income). Carriers would be able to roll out a rapid succession of proprietary content services aimed at these 70–80%. At the same time, if Apple were to give its OK, content services like Uta Pass and Video Pass could also simply be added to the App Store.

Carriers to compete in areas other than price

KDDI starting to head in right direction

05 July 2012


Partial reorganization of domestic handset makers inevitable In a January 2009 interview with Nikkei Communications, we stated our opinion that the number of handset makers could be halved through mergers or withdrawals from the market. Unfortunately, this has come to pass. Sharp, Fujitsu, and Kyocera remain profitable, but NEC, Hitachi, and Casio have merged and continue to struggle.

All new handset models announced by DoCoMo, including those made by overseas manufacturers, have “mobile wallet” (electronic money) functionality. The popular Xperia models are also infrared and 1-seg capable. The addition of waterproofing would provide DoCoMo handsets with every function available in Japan. Overseas manufacturers have also begun to support these unique-to-Japan functions. Domestic manufacturers, who have attentively provided support for the detailed handset requirements of individual carriers to date, could come under pressure as a result. Meanwhile, as seen with the MSM8960, there is also the risk that Japanese carriers may again be subject to rationing by Qualcomm, which basically controls chipsets for the industry.

We believe that the domestic smartphone market entering an eight-year cycle is an enormous positive for Japanese makers, which are set to benefit from the “first half rule.” However, in our view this also applies to foreign makers and this is why they are stepping up their efforts to cater to domestic carriers and customize products in accordance with their individual requests. Within this competitive environment, there is no guarantee that all domestic handset makers will remain in the market.

Forecast contraction in number of competitors

Inclusion of unique-to-Japan functions a demonstration of overseas handset makers’ seriousness

05 July 2012


Can telecom carriers reap outsize profits during the eight-year cycle? Two keys to increasing telecom spending as percentage of disposable income consumption An increase in telecom spending as a percentage of disposable income consumption will be crucial if the telecoms are to achieve the kind of sales and profit growth during the eight-year cycle that we forecast. We believe that increasing this ratio will require: (1) the setting of high monthly rates for smartphones and LTE, and (2) securing sales levels and gross profits through handset sales. The following figure shows telecom spending as a percentage of disposable income consumption from 2002–11.

Figure 18: Telecom spending as a percentage of disposable income consumption

1.5%

2.0%

2.5%

3.0%

3.5%

1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Ministry of Internal Affairs and Communications, Credit Suisse

Lowering rates is therefore obviously a non-starter in our opinion. We believe that while rate-plan differentiation is a good idea, such efforts are worthless if these plans are not designed to ultimately increase revenue. The telecoms are investing record amounts in smartphone and LTE capabilities, and from the perspective of recouping these investments lowering rates goes completely against theory in our view.

Figure 19: Total capex at three mobile telecom carriers

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(JPY bn)

+10.8%


(1) Setting high monthly rates; (2) securing sales levels and gross margins through handset sales

Rate cuts a no-go

05 July 2012


A strategy for achieving differentiation through means other than rate plans is also extremely important. So what might such ways of achieving differentiation be? Before we take on that topic, we would first like to take stock of the current situation, then consider what mobile rate plans ought to be like in the next eight-year cycle.

From unlimited to limited data plans The main type of LTE plan at present involves paying a fixed amount for data usage up to a certain volume. In contrast, the main type of 3G rate plan basically offers unlimited data usage, although provisions exist for setting limits in the event of data usage that is far greater than normal. The increase in the number of smartphone users has led to a steep rise in wireless telecom traffic, and telecoms worldwide are banding together to take steps to limit traffic. One such effort is getting rid of unlimited data plans.

Figure 20 shows the monthly rates for smartphones and LTE at the three domestic carriers.

Figure 20: Smartphone and LTE monthly rates at three domestic carriers

4,725 5,250

5,775 5,775 6,300 6,510

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1,000

2,000

3,000

4,000

5,000

6,000

7,000

(JPY)

Note: Total of monthly data communication charge and basic charges.

Source: Company data, Credit Suisse

Among 3G smartphones, the Softbank iPhone has the lowest monthly rate, at ¥4,725 (¥315 basic charge plus ¥4,410 for unlimited data). Softbank’s monthly rate for smartphones other than the iPhone is ¥5,775 (¥315 basic charge plus ¥5,460 for unlimited data), which is ¥1,050 higher than the rate for the iPhone. KDDI’s monthly rate (the IS Flat plan) is ¥5,775. KDDI’s monthly rate is the same for the iPhone and for Android phones. NTT DoCoMo’s monthly rate (Packet Flat Rate plan) is likewise ¥5,775.

Next, let us look at LTE rates. The only two companies currently offering LTE services are NTT DoCoMo and Softbank (the latter through Willcom’s TDD-compatible AXGP network). Softbank plans to launch its own FDD-compatible LTE service this autumn, as does KDDI prior to December. Neither of these two companies has announced rates.

NTT DoCoMo offers LTE service under the Xi (Crossy) brand. There are two rate plans: Xi Packet Flat Rate and Xi Packet Flat Rate Double. Xi Packet Flat Rate is ¥6,300/month (¥315 basic charge plus a ¥5,985 base rate for data). The customer’s data speed is drastically throttled back if total data volume for the month exceeds 7GB. However, the data limit can be increased by 2GB for an extra ¥2,625/month. Xi Packet Flat Rate Double rate system features a sliding scale between two ends, with ¥2,415/month (¥315 basic charge plus ¥2,100 for data) the minimum charge and ¥6,825 (¥315 basic charge plus ¥6,510 for data) the maximum. The ¥2,415 charge applies until data volume reaches

Differentiation strategy unrelated to rate plans important

Among 3G smartphones, Softbank iPhone has the lowest price for monthly plans

NTT DoCoMo’s LTE service ¥6,300/month

05 July 2012


5,000KB. Beyond that, the charge rises in line with data volume until the upper tier of ¥6,825 is reached at 1.5GB of data.

Xi Packet Flat Rate subscribers pay a minimum of ¥6,300/month whether they use their handsets or not. In contrast, Xi Packet Flat Rate Double subscribers pay only ¥2,415 in months of minimal usage. The latter plan is thus suited to users whose usage varies from month to month, and in exchange for this flexibility the upper-end rate is higher than the base rate paid by Xi Packet Flat Rate subscribers. Note that the option to avoid data speed throttling once data volume reaches the 7GB limit by paying ¥2,625 for an additional 2GB is also available to Xi Packet Flat Rate Double subscribers.

NTT DoCoMo announced a new Xi 3GB plan on 20 June priced at ¥5,250 (¥315 + ¥4,935). This led to a string of hasty reports in the media that it had cut prices. However, we think NTT DoCoMo actually hiked prices by shifting its pricing model away from unlimited data usage to usage limits. Some may argue that NTT DoCoMo’s move is in fact a price reduction, because at the moment 80% of users never use more than 3GB. However, we expect this situation to change over the next few years as data usage increases sharply.

We think the rest of the sector could adopt the pricing models NTT DoCoMo uses for its new Xi plans (with data speeds slowed above usage limits). For example, if the iPhone 5 is made available on LTE networks, Softbank could abandon its ¥4,725 (¥315 + ¥4,410) flat-rate plan and offer a plan priced at ¥5,250 (¥315 + ¥4,935) with a 3GB limit like DoCoMo. Along with monthly handset charges of ¥525 for shifting to the iPhone 5, this would allow Softbank to push through a double price hike. We think this is feasible, depending on the strength of the next iPhone. We view the shift to LTE infrastructure as an opportunity for Softbank to tap into its base of roughly 10mn iPhone users, which it worked hard to build up by setting pricing at ¥4,725/month in 2008.

Softbank sells the TD-LTE compatible AXGP service operated by group member Wireless City Planning under the Softbank 4G brand. Softbank’s AXGP network currently only involves Wi-Fi routers, but the company plans to expand service to smartphones this autumn. Softbank 4G costs ¥6,510/month (¥525 basic charge plus a ¥5,985 base-rate data charge). As with NTT DoCoMo’s service, data speed is throttled back once data volume for the month exceeds a certain level. Also as with NTT DoCoMo’s service, the customer can avoid this by paying ¥2,625 for another 2GB. Note, however, that Softbank’s limit is 5GB, lower than NTT DoCoMo’s 7GB. Softbank has thus set a higher rate for its LTE service than NTT DoCoMo did.

We expect the ban on tethering (using smartphones as Wi-Fi routers to connect iPads or PCs to the internet) to come to an end with the abolition of unlimited data usage plans. In our view, the introduction of maximum limits on data usage will eliminate the risk of unrestricted use of mobile phone connections.

Data plans among North American carriers Looking at conditions in various other regions. In North America, carriers have gotten rid of their flat-rate data plans (however, people already on these plans are being allowed to stay on them). Also, data rates are currently the same for both 3G and LTE services.

The smartphone data rates charged by Verizon, North America’s largest telecom carrier, are $30/month for up to 2GB, $50 for up to 5GB, and $80 for up to 10GB. In all three plans, subscribers pay an additional charge of $10 for every 1G over their limit.

The smartphone data rates charged by AT&T are $20/month for up to 300MB, $30 for up to 3GB, and $50 for up to 5GB. Like Verizon, AT&T charges subscribers an additional $10 for every 1G over their limit. AT&T has a $20/month plan for light users and, unlike Verizon, for $30/month allows subscribers to use up to 3GB (vs. Verizon’s 2GB). Both companies charge the same for their 5GB plans.

Softbank’s LTE service more expensive than NTT DoCoMo’s at ¥6,510

Restrictions on tethering set to end under LTE

Both Verizon and AT&T getting rid of flat-rate data plans

05 July 2012


Figure 21: 3G smartphone rates at Verizon, AT&T and three Japanese leading mobile carriers Upper limit of data volume 300MB 2GB 3GB 5GB 7GB 10GB Unlimited AdditionalVerizon 3G/4GLTE - $30 - $50 - $80 - $10 Per 1GBAT&T 3G/4GLTE $20 - $30 $50 - - - $10 Per 1GBNTT Docomo 3G - - - - - - $72 -KDDI au 3G - - - - - - $72 -Softbank 3G - - - - - - $72 -Softbank iPhone - - - - - - $59 -NTT Docomo LTE (FD-LTE) - - $66 - $79 - - $33 Per 2GBSoftbank 4G (TD-LTE) - - - $81 - - - $33 Per 2GB

Note: JPY80/USD, Source: Company data, Credit Suisse

Verizon announced new family pricing plans on 12 June. Users pay standard fees for each handset per month but can choose to share a pooled amount of data. In the case of two smartphone users, each would pay a standard monthly rate of $40 for their devices, adding on up to 10GB in data usage for $100 per month that can be shared between them. The total cost for the two users would come to $180. The $40 standard plan for each device also includes unlimited voice and text usage. We think this plan is an attempt by Verizon to increase the amount of disposable income households spend on communications services.

First-class and economy-class needs

Although the rates set for 3G and LTE services are identical at this point, the management of the major North American telecoms are hinting that they will set premium rates for LTE. The idea is to have separate rate plans based on both communications speed and data volume.

European mobile carriers have been the first to adopt this approach. TeliaSonera in Sweden has launched the world’s first commercial LTE service. It offers LTE plans based on data speeds and limits. For example, its Total Plan costs SEK599 (roughly $84) and gives users maximum data speeds of 80Mbps and a data quota of 30GB. Other monthly plans include the SEK369 Stor Plan ($52; 40Mbps, 20GB) and the SEK199 Mellan Plan ($42; 20Mbps, 10GB).

Figure 22: TeliaSonera’s LTE rates

Name of pricing plan Total Stor MellanMonthly charge $84 $52 $42

Download speed 10-80Mbps 10-40Mbps 5-20Mbps

Max data volume 30GB 20GB 10GB Source: Company data, Credit Suisse

TeliaSonera’s rate structure can be viewed as a quality-of-service (QoS) rate model, in which data throughput and the data allowance depend on the rate paid. In marketing, this is called versioning pricing.

According to Dr. Rafi Mohammed, author of The 1% Windfall and The Art of Pricing, versioning involves setting a range of prices for what is essentially the same product or service. Specifically, versioning involves setting a premium price and a stripped-down price. In the context of telecommunications, premium means robust connectivity, high connection priority, guaranteed throughput, and wide coverage. Conversely, stripped-down means inferior connectivity, no or sub-premium guaranteed throughput, and low connection priority. We think TeliaSonera’s pricing model adheres to the idea of versioning.

The way some transportation companies set rates is similar. For example, shinkansen bullet trains have both Green cars (with wide, comfortable seats, all of which are reserved, so there is no need to compete with other passengers for a seat) and unreserved cars (in which the failure to line up early and secure a seat could mean standing all the way to

An interesting new plan from Verizon

Versioning pricing

05 July 2012


one’s destination). Similarly, airlines offer first and economy classes, providing passengers in each class with substantially different experiences despite their riding in the same aircraft and arriving at the same time.

NTT DoCoMo recently announced the Raku-Raku F-12D, a smartphone aimed at older customers, along with a data plan specifically for this handset: Raku-Raku Packet Flat Rate, costing ¥3,295/month (¥315 basic charge plus a ¥2,980 data charge). This plan is ¥2,480/month less than the ¥5,775/month Packet Flat Rate plan and seems intended to raise the currently low level of data usage among seniors by encouraging smartphone use.

What one can do with a 5GB data allowance Figure 23 shows the amount of usage possible at various data volumes. A 5GB/month plan, for example, would enable all of the following: 2,000 text messages, visits to 150 Web pages, 25 hours of streaming audio, uploading (and downloading) of 50 1MB photos to Facebook or other social-networking sites, and nine hours of HD streaming video.

Figure 23: Activities possible under various data allowances 2GB 5GB 10GB

Send/Receive text email 1000 emails 2000 emails 4000 emailsBrowse the web 100 pages 150 pages 300 pagesStream Radio 20 hours 25 hours 50 hours

Down/Upload photos (1MB)to SNS 20 pics 50 pics 100 picStream High-Resolution Video 2 hours 9 hours 18 hours Source: Company data, Credit Suisse

Whether carriers can get consumers to pay higher rates an open question We think that as the Japanese market adopts smartphones and LTE in earnest, rate versioning like that of TeliaSonora, with different rates for different throughput and data allowance limits, could become the norm, as could handset-specific rate plans, such as that for the Raku-Raku smartphone. We see as vitally important not simply whether carriers lower rates, but whether their rate setting ultimately results in an increase in mobile communications spending as a percentage of disposable income. For that reason, we think the key issue is whether the carriers are able to provide the kinds of services for which consumers would gladly play more than they do now.

Strategies for differentiation aside from rate plans important The innovator class and the early-adopter class—as defined in the diffusion of innovations theory developed by the late Stanford University professor Everett Rogers—have already transitioned to smartphones, and we see no major obstacles to their eventually adopting LTE. According to the innovator theory, the innovator class accounts for 2.5% of the market and the early-adopter class for another 13.5%, for a combined 16%. This 16% is widely considered a tipping point beyond which innovations spread to other classes of consumers (the 16% rule).

At this point in the eight-year cycle, the smartphone penetration rate in Japan is around 20%, meaning that smartphones have crossed this 16% tipping point, which Geoffrey Moore calls “the chasm.” According to the diffusion of innovations theory, the next consumer classes are the early majority and the late majority, who together account for 68% of the market. Going forward, it will be vital for marketing to be aimed at these classes (i.e., general consumers).

Smartphones have crossed the 16% chasm

05 July 2012


We think it will not be easy to get these classes to pay premium rates just by providing faster data speeds. In marketing to these classes, we think that in addition to making communications networks faster and more convenient to use regardless of location, nothing is more important than providing appealing handsets and contents.

For these reasons, we view favorably the healthy upper-tier market competition, firmly grounded in marketing theory, represented by expansion of the Android handset line-up and KDDI’s introduction of Smart Pass (which allows unlimited downloading of smartphone apps), Uta Pass (which allows unlimited music listening), and Video Pass (which allows unlimited movie viewing).

We think telecom carriers must strictly adhere to sound competitive strategies such as rate versioning, handset differentiation, and upper-tier differentiation if they are to benefit from the sales-growth phase that comprises the first half of the eight-year cycle. Holding down costs, including sales costs and handset-purchasing costs, is also important. If, right at the outset of the eight-year cycle, carriers were to move in a different direction (e.g., reducing rates) and industry revenues were to erode as a result, we would be forced to join those recommending the selling of telecom stocks.

What would cause us to recommend selling

05 July 2012


Verifying the value theory in our Telecom Fundamentals Handbook (29 May)

Update of telecom stock valuations relative to model defensive portfolio Conditions in the equity market remain tough. Under these conditions, defensive sectors like the telecom sector are typically seen as offering better prospects for returns. When we issued our Telecom Fundamentals Handbook (summer 2012) on 29 May, year-to-date performance for telecom stocks was below the market average, with the sector showing no signs of its expected defensive characteristics. However, sector performance is now gradually picking up on renewed buying of telecom stocks, particularly Softbank.

Figure 24: YTD performance: four major telecom stocks versus TOPIX

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1/12 2/12 3/12 4/12 5/12 6/12

4 co total TOPIX

Note: 4 companies = NTT, KDDI, NTT DoCoMo, Softbank

Source: Thomson Reuters, Credit Suisse estimates

Figure 25: YTD performance: NTT versus TOPIX Figure 26: YTD performance: KDDI versus TOPIX

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NTT TOPIX

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1/12 2/12 3/12 4/12 5/12 6/12

KDDI TOPIX

Source: Thomson Reuters, Credit Suisse Source: Thomson Reuters, Credit Suisse

Share price performance recovering slightly

05 July 2012


Figure 27: NTT DoCoMo versus TOPIX Figure 28: YTD performance: Softbank versus TOPIX

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NTT DoCoMoTOPIX

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Softbank TOPIX

Source: Thomson Reuters, Credit Suisse Source: Thomson Reuters, Credit Suisse

In our 29 May report, we showed evidence that telecom stocks were undervalued by compiling a model portfolio of Japanese companies, which from an institutional investor standpoint typically exhibit defensive qualities such as heavy exposure to domestic demand and a high dividend payout ratio, and then compared telecom sector performance to this portfolio’s. One month after the report, we revisited this approach to analyze telecom sector valuations.

As a reminder, let's look at the stocks in our model portfolio again. Our portfolio is made up of the 19 stocks shown below. Market cap and dividend yield have been updated (as of 4 July).

Figure 29: Model defensive portfolio Code Company name Market Value (JPY bn) Dividend yield (%)

9020 East Japan Railway 2,044.0 2.3%9021 West Japan Railway 668.0 3.0%9005 TOKYU 476.3 1.9%2914 Japan Tobacco 4,768.0 2.5%2802 AJINOMOTO 734.0 1.5%4452 Kao 1,167.1 2.8%2897 Nissin Food Products 359.4 2.5%3382 Seven & I Holdings 2,137.2 2.6%8267 AEON 797.2 2.4%2702 McDonald's Holdings Japan 301.2 1.3%4755 Rakuten 1,063.9 0.3%4689 Yahoo! Japan 1,532.3 1.4%4502 Takeda Pharmaceutical 2,890.2 4.9%4503 Astellas Pharma 1,670.6 3.6%4578 Otsuka Holdings 1,382.9 2.3%9531 Tokyo Gas 1,075.0 2.2%9532 Osaka Gas 706.3 2.4%9735 SECOM 865.5 2.7%4661 Oriental Land 827.4 1.1%

Note: Data as of 4 July. DPS estimates are companies’ except Rakuten and Yahoo! Japan (Credit Suisse

estimates) Source: Company data, Thomson Reuters, Credit Suisse estimates

05 July 2012


Figure 30 plots the performance of our model portfolio against TOPIX over the last three years, and Figure 31 plots it since the start of 2012. Both graphs show performance that is consistent with what we would expect to see from a defensive portfolio. Performance has been especially strong over the last three years and has been solid since 29 May.

Figure 30: Performance comparison: model portfolio vs. TOPIX (last three years)

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09/4 09/8 09/12 10/4 10/8 10/12 11/4 11/8 11/12 12/4

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Source: Thomson Reuters, Credit Suisse

Figure 31: Performance comparison: model portfolio vs. TOPIX (YTD)

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Source: Thomson Reuters, Credit Suisse

05 July 2012


No change to our view: telecom stocks look clearly oversold In Figure 32, we track telecom stock P/Es for the past three years relative to our model defensive portfolio based on the latest share prices.

Figure 32: Telecom stocks’ P/E relative to our model portfolio

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4/09 8/09 12/09 4/10 8/10 12/10 4/11 8/11 12/11 4/12

3-yr average: 0.72As of 29 June: 0.621σ=0.05

+1σ

-1σ

-2σ

+2σKDDI's entry intoiPhone market

Source: Thomson Reuters, company data, Credit Suisse estimates

As with Figure 16 in our 29 May report, Figure 32 above clearly shows a sharp decline in sector valuations after KDDI launched the iPhone. P/E was trending more than two standard deviations below the historical average, illustrating in our view how far telecom stocks had been oversold. We believe the the recent gains for telecom stocks as seen in the chart indicate the decline in valuations is close to a bottom. We believe the recovery in valuations will gain momentum as the sector moves into a new eight-year cycle.

Dividend hikes and share buybacks gradually coming back into play Figure 33 shows the dividend yield for telecom stocks relative to our model portfolio over the last three years, with the telecom sector providing an average yield of 1.09x. However, as we pointed out in our 29 May report, the relative dividend yield increased to a maximum of 1.32x (30 March). As of 29 June, it had returned to 1.23.

Figure 33: Telecom carriers’ dividend yield relative to defensive stocks over past three

years

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3-yr average: 1.09As of 29 June: 1.231σ=0.08

+2σ

+1σ

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KDDI's entry intoiPhone market


Darkest before the dawn

Yield gap is now very attractive

05 July 2012


The smartphone-LTE “party” has only just begun Telecom businesses have been very stable, and we see little risk of earnings falling well below expectations and dividends being cut. We believe companies are unlikely to cut their dividend forecasts for FY3/13 and think investors could secure yields in excess of 5% in light of potential dividend hikes in FY3/14 by NTT and NTT DoCoMo.

In addition to reliable yields, fundamentals are also strong. We believe the telecom sector is about to enter a phase of technological innovation that only comes around once every decade. In this phase, we see consumers spending a larger share of disposable income on mobile phone services amid a rise in usage fees and increased momentum in handset replacement, supporting sales growth in the mobile phone sector. We expect competition to attract customers will remain intense and the carriers may spend too much on advertising and promotion at times. While seasonal developments or factors specific to individual company strategies may have an impact, we anticipate margins at mobile phone carriers continuing to rise gradually, in line with the historical trend.

Figure 34: Projected sales for three major mobile carriers

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NTT DoCoMo KDDI Softbank YoY % of total sales (RHS)

8,658 8,7869,336 9,666 9,993

9,139


The possibility of an iPhone launch by NTT DoCoMo was the biggest risk for the telecom sector. We believe this was priced in, illustrated by the large correction to share prices. NTT DoCoMo’s decision to not enter the iPhone market served to dissipate risk for the whole sector, providing a trigger for a rebound in sector valuations. We believe the decision signals that the three carriers will continue to enjoy a healthy competitive environment that benefits them all. We also see it as the first step into a new eight-year cycle where the carriers can tap into new technological innovation to drive sales and profits higher.

We believe the reassessment of Japan’s telecom sector has only just started.

High-yield telecom stocks to enter positive fundamentals period driven by technological innovation

NTT DoCoMo passing on the iPhone extinguishes sector risk; share price gears starting to reverse direction

05 July 2012


Investment stance on telecom stocks

Raise TP for Softbank; maintain OVERWEIGHT sector stance, bullish stance on all sector stocks We raise our TP for Softbank from ¥3,000 to ¥3,500 after reassessing the value of its investment securities holdings. We make no change to our estimates or outlook for fundamentals. For more details, please refer to our report on Softbank also issued today, “Softbank: Center position in new eight-year cycle for telecom stocks”

We view domestic telecoms as a growth sector, supported by the rollout of LTE infrastructure and the growing popularity of smartphones. However, telecom stocks are currently trading on historically low valuations. Given this highly attractive investment opportunity, we have upgraded the sector from Market Weight to OVERWEIGHT and shifted to OUTPERFORM ratings on all Japanese telecom stocks. Our top pick is Softbank, followed by NTT DoCoMo, KDDI, and then NTT.

We upgraded NTT DoCoMo from Neutral to OUTPERFORM on 29 May in light of low valuations and prospects for a new eight-year cycle (first-half rule / second-half rule) driven by technological innovation. We also upgraded KDDI, which had seen a sharp drop in its share price, from Neutral to OUTPERFORM. Our view was that NTT DoCoMo would enjoy a sharp rise in profits if it decided to start selling the iPhone. However, we believe its decision not to sell the handset served to dissipate risk for the whole sector, providing a trigger for a rebound in sector valuations.

Figure 35: Sector P/E over past two years

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PER 2yr average

2yr average：10.89as of 4 July：9.59


Figure 36: Sector EV/EBITDA over past two years

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EV/EBITDA Average

2yr average：3.16as of 4 July：2.90

(x)


Upgrade sector view to OVERWEIGHT

Upgrade all four carriers to OUTPERFORM

05 July 2012


Electronic parts, semiconductors and SPE LTE market poised for synchronous global expansion 3G took more than five years to spread to developing countries

The 3G market dates back to 2001, when NTT DoCoMo first rolled out FOMA services; these subsequently burgeoned in Japan, Europe, and the US from 2005. In developing countries, in contrast, telecom carriers did not begin rolling out commercial 3G services until 2008–09, and 3G market growth was delayed until 2011–12.

Figure 37: 3G took over five years to start growing in developing countries

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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E

mn untits

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CEE

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Western Europe

North America

Asia Pacific

Source: Credit Suisse estimates

With LTE, we forecast synchronous global expansion including developing countries

According to the Global Mobile Suppliers Association (GSA), 327 telecoms in 99 countries are currently investing in LTE; 267 of these (in 86 countries) have announced plans to adopt LTE, and 80 have already launched commercial services (in 38 countries). An additional 60 carriers in 13 countries are now conducting preparatory trials for LTE adoption. Sixty-four more carriers plan to launch commercial services by end-2012. The total number of telecoms offering commercial LTE services is thus slated to increase to 144 by year-end.

Akinori Kanemoto

81 3 4550 7363

[email protected]

05 July 2012


Figure 38: Number of telecom carriers offering commercial LTE service (cumulative total)

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Source: GSA

US, Japan and South Korea at forefront of LTE rollout

According to the GSA and Informa Telecoms and Media, global LTE subscribership totaled 17mn as of March 31, 2012. Of this total, 64% of subscribers are in North America, 33% are in the Asia/Pacific (APAC) region, chiefly Japan and South Korea, and 3% are in Europe. In North America, Verizon Wireless and AT&T Mobility launched commercial LTE services on December 5, 2010 and September 18, 2011, respectively. In Japan, NTT DoCoMo launched commercial LTE service on December 24, 2010. In South Korea, SK Telecom and LG U+ launched commercial services on July 1, 2011. Over half Of NTT DoCoMo's most recently released lineup of new handset models are LTE-enabled.

Growth in LTE subscribership is likely to accelerate globally by virtue of the LTE-enabled iPhone 5 and Galaxy S3's upcoming releases later this year.

Figure 39: North America, Japan and South Korea spearheading LTE market expansion

Source: GSA

80 carriers have commenced commercial LTE service and 144 plan to do so by year-end

05 July 2012


European market is poised for expansion driven by launch of LTE service son Bands 3 and 20 in addition to Band 7

Europe, an early 3G adopter, is an LTE laggard, but expansion of LTE services in Europe is likely to pick up due to initiation of commercial LTE service on multiple frequency bands including Band 7 (2.6GHz), mainly in northern Europe; Band 3 (1,800MHz), which will be converted from GSM to LTE usage; and the Digital Dividend Band (Band 20, 790–862MHz), which will become available as a result of the digital switchover (transition from analog to digital broadcasting) scheduled to take place at end-2012.

Band 3 (1,800MHz) is likely to become the core band for LTE global roaming for several reasons. First, its coverage area is roughly double Band 7's (2.6GHz). Second, Band 3 enables carriers to reuse GSM 1,800MHz and UMTS 2,100MHz infrastructure, including antenna cables. Third, Band 3 can accommodate simultaneous LTE/GSM multi-RANs (radio access networks). Fourth, Band 3 can be used throughout much of the world, including Europe, APAC, South America, and the Middle East and Africa (MEA). Fifth, total spectrum is a broad 2x 75MHz and not fragmented.

Twenty carriers have already launched commercial LTE services on Band 3 and, another 37 are preparing to do so. Additionally, Band 3 spectrum has been allocated to over 350 carriers for GSM service. We expect many carriers to convert their Band 3 spectrum from GSM to LTE.

Figure 40: LTE1800 deployment plans

Country Ca rrier Status Country Carrier Sta tusPoland M oby land/C enterNet C omm ercially Launched Estonia EMT In deploymentLit huania Om nitel C omm ercially Launched France Bouygues Tr ialsSingapore M 1 LTE1800/2600 C om mercial Serv ice Launched France Orange Tr ialsGermany DT C omm ercially Launched Georgia Magticom 1800M Hz is an optionLatv ia LMT C omm ercially Launched Germany E Plus Tr ialsFinland Tel ia Sonera C omm ercially Launched Greece Cosmote Tr ialedS. Arabia Zain C omm ercially Launched Hong Kong Smartone LTE1800 in deploymentAustralia Telstra C omm ercially Launched Indonesia Indosat LTE1800 plannedDenmark Tel ia Sonera C omm ercially Launched It aly Three LTE 1800 in deployment for use alongside LTE2600Finland Elisa LTE2600/1800 DC-HSPA+ com mercial Serv ice Launched M alaysia Celcom Tr ials - 1800 and 2600M HzHong Kong C SL L imited LTE2600/1800 DC-HSPA+ com mercial Serv ice Launched Philippines Bayan Tel Plans to deploy LTE1800Singapore SingTel LTE1800/2600 C om mercial Serv ice Launched Russia Tele2 Tests completedFinland DNA LTE1800/2600 C om mercial Serv ice Launched Russia SMARTS Pilot tr ial network in UfaHungary T M obile C omm ercially Launched Singapore StarHub Targeting Q42012 launch

Sout h Korea KT C omm ercially Launched Slobvak Republic All operators Incumbents interestedCroat ia T -Hrvatski C omm ercially Launched Slovenia Mobitel LTE to be deployed in 800/1800/2600M Hz. LTE 1800 launch target 2012Croat ia VIP Net C omm ercially Launched South Africa MTN LTE1800 in deploymentAngola M ovicell C omm ercially Launched South Korea SK Telecom LTE1800 in deploymentUAE Et isalat LTE1800/2600 C om mercial Serv ice Launched Spain Yoigo LTE1800 in deploymentNamibia M TC C omm ercially Launched Sr i Lanka Dialog Ax iata LTE1800 plannedAustralia Optus LTE1800 in deployment Sweden Tele2 and Telnor LTE1800 in deployment v ia Net4M obili ty joint ventureAzerbaijan Azercell LTE1800 com mercial launch scheduled on 2012/6/18 Sweden Telia Sonera LTE1800 in deploymentAustralia VHA LTE1800 in deployment Thailand AIS/DPC -CAT Tr ialsBelgium M obistar LTE1800 in deployment Thailand True M ove Planning t rialsBelgium Prox imus LTE1800 in deployment Turkey Avea Tr ialsBulgar ia M -TEL Tr ials UAE Du LTE1800 in deployment , lanch ant icipated in 2012Brazil O i Tr ials UK Every thing Everywhere Tr ialling LTE1800. Prov isional approval given to deploy com mercial networkCroat ia VIPnet 800/1800M Hz cosumer t rial Venezuela Digitel LTE1800 plannedEstonia Elisa In deployment Source: GSA

TD-LTE, in addition to FDD, is likely to drive market growth in developing countries

Unlike 3G, LTE has a TDD (time-division duplexing) variant, TD-LTE. We expect TD-LTE to become the standard globally. In contrast to FDD (frequency-division duplexing), which requires paired bands (one for the uplink, another for the downlink), TDD uses only a single unpaired frequency band.

FDD can deliver more stable transmission quality by allocating separate frequency bands to uplink and downlink and then FDD are major technology in 3G era. In TDD, China Mobile, which uses TD-SCDMA for its 3G services, announced that it will offer TD-LTE services and telecoms that currently offer TDD services (e.g., WiMAX, PHS) all plan to launch or switch to TD-LTE services.

05 July 2012


Seven telecoms—Sky Brazil, Bhati Airtel (India), Softbank (Japan), Aero2 (Poland), Etisalat Mobily (Saudi Arabia), STC (Saudi Arabia), and 3 (Sweden)—have already launched commercial LTE services.

Telecoms are preparing to adopt TD-LTE in many other countries, including Australia, Canada, China (China Mobile plans to launch commercial service in 2013), Croatia, Denmark, France, Germany, Hong Kong, Ireland, Malaysia, Montenegro, Nigeria, Oman, Russia, Singapore, Taiwan, Thailand, the UK, Uruguay, the US, and Venezuela.

Figure 41: Telecoms that are testing or plan to launch commercial TD-LTE services

Country Operator NoteAustralia Viv id Wireless WiMAX operator

NBC 2.3GHzBrazil Sky Brazil Commercially Launched.Canada Xplornet WiMAX operator, 2.5/3.5GHzChina Cnina M obile Commercial serv ice in 2013Croatia Velatel 3.5GHzDenmark 3 2.6GHz, deploying combined FDD/TDDFrance O range Trial in Paris with supporting FDD/TDD

Bollore 3.5GHzGermany E-Plus 2.6GHzHong Kong China M obile Will deploy combined LTE FDD/TDD networks

Hutchison 3 Will deploy combined LTE FDD/TDD networksIndia Barti A irtel Commercially Launched.

RILQ ualcomm India LTE ventureTikona DigitalAircelBS NL May introduce TD-LTEM TNL May introduce TD-LTE

Ireland TD-LTE testing completed in June 2010Japan Softbank Mobile Commercially launched XGP/TD-LTE network in 2012M alaysia Packet networks WiMAX operator

Asiaspace WiMAX operator, 2.3GHzM ontenegro Velatel 3.5GHzNigeria Zoda Fones 3.5GHzOman O mantelPoland Aero2 Commercially Launched in Band 38 (2.6GHz) with FDD LTE (LTE1800)Russia Rostelecom 2.3GHz

Voentelecom Trialling TD-LTEM TS 2.6GHzM geafonBase TelEnforta 3.5GHz

Saudi Arabia Etisalat M obility Commercially Launched in Sept 2011.STC Commercially Launched in Sept 2011.

Singapore -- IDA plan to auction for TD-LTE spectrumSweden 3 Sweden Commercially Launched in Band 38 (2.6GHz) with FDD LTE (2600M Hz)Taiwan CHT Completed tests on the high speed rail system using TDD/FDD modes in 2.6GHz

FarEasTone/China M obile Co-oporating TD-LTE trial in TaipeiThe National Chial Tung University Coducted a trial of TD-LTE in 2010Global Mobile Corp WiMAX operatorFitel PHS/WiM AX operator

Thailand AIS/TO T Joint trial in 2.3GHzUK UK Broadband 3.5GHzUSA Clearwire Band41

Xplornet Communication WiMAX operatorVenezuela M ov ilmax 2.5GHz Source: GSA, Credit Suisse estimates

05 July 2012


Difference between UMTS and LTE

Although LTE is regarded as a UMTS successor technology, it differs substantially from UMTS in terms of its constituent communication technologies (Figure 42). LTE specifications are standardized in 3GPP (Third Generation Partnership Project) Release 8 and subsequent releases.

LTE supports both FDD and TDD multiplexing. In terms of multiple access, UMTS uses CDMA (code division multiple access) for both uplink and downlink, whereas LTE uses OFDMA (orthogonal frequency division multiple access) for the downlink and SC-FDMA (single-carrier frequency division multiple access) for the uplink (OFDMA can accommodate multiple carriers' high-rate data traffic in parallel). OFDA has several advantages over CDMA (per Nikkei Electronics). First, OFDMA subcarriers have narrow bandwidths and therefore can be modulated. OFDMA is consequently more resistant to fading than CDMA. Second, signals are frequency-domain, not time-domain, signals. Channel equalizers are consequently much easier to implement than with CDMA. Third, OFDMA can be made resistant to multipath delay spread. Fourth, frequency-domain signals can be optimally processed according to multipath wireless channels' frequency and phase characteristics, making OFDMA well-suited to MIMO (multiple input and multiple output). OFDMA's drawbacks include heavy PA (power amp) output and power consumption during transmission. SC-FDMA is therefore used on the transmission side.

Figure 42: Comparison of UMTS (HSPA) and LTE's key communication technologies UMTS (HSPA) LTE

FDD FDD/TDD

Downlink OFDMA

Uplink SC-FDMA

5MHｚ 1.4/3/5/10/15/20MHz

NA 2x2 to 4x4

Downlink 14.4Mbit/s 300Mbit/s

Uplink 5.7Mbit/s 150Mbit/s

Modulation method QPSK/16QAM QPSK/16QAM/64QAM

Peak data rate

CDMAMultiplexing access system

Standards

Frequency division multiplex system

MIMO

Frequency bandwidth

Source: Credit Suisse, based on information from multiple sources

Figure 43: 3GPP Release 8

Cat.1 Cat.2 Cat.3 Cat.4 Cat.5

Downlink 10 50 100 150 300

Uplink 5 25 50 50 75

5MHz 10MHz 15MHz 20MHz 20MHz

Uplink

DownlinkQPSK、

16QAM、64QAM

No Support

Support

Rx Diversity Support

2x2 MIMO Support

4x4 MIMO No Support

3GPP Rel.8

Peak data rate(Mbit/s)

Frequency bandwidth

Modulationmethod

QPSK、16QAM、64QAM

QPSK、16QAM

Source: TSR, Nikkei Electronics, Credit Suisse

05 July 2012


Extensive lineup of LTE chipsets coming by 2013 While Qualcomm's difficulties with MSM8960 and MDM9x15 chipset yields has been the sole focus of attention this year, Intel and ST Ericcson have pushed back their LTE chipset release dates to 2013 (from 2012 initially). Nonetheless, we expect all three companies to have LTE-compatible chipsets on the market in next year.

To date, Chinese/Taiwanese chipmakers have been the main suppliers of TD-SCDMA and TD-LTE chipsets, but Qualcomm, the biggest wireless chip maker, has now started to support TD-SCDMA in addition to FDD/TDD LTE with its MSM89x0 and MDM9x15 chipsets. Preparation to switch from GSM/TD-SCDMA to TD-LTE in China Mobile is ready. In terms of specifications, Qualcomm's 2012 chipset models are already Category 4-compatible, while other manufacturers’ chipsets are Category 3-compatible.

Figure 44: LTE chip supply timeline

MP Schedule Baseband Chip Process Remarks4Q2009 Samsung LTE single mode 65nm? Cat.34Q2010 QCOM MDM9200/9600 LTE muti-mode 65/40nm Cat.3

NVIDIA LTE muti-mode 40nm Cat.2, SDRHiSilicon LTE single mode N/A

1Q2011 Docomo/Renesas "Sakura" LTE single mode 45nm Cat.3GCT GDM7240 LTE single mode 65nm Cat.3, LGE IPMotorola LTE single mode N/A

2Q2012 QCOM MSM89x0 BB/AP single chip 28nmCat.3, FDD/TDD

BB/AP single chipTD-SCDMA

RMC "Pegasus" LTE muti-mode 45nm Data onlySamsung LTE muti-mode 45nm?

3Q2012 QCOM MDM9x15 LTE muti-mode 28nmCat.4, FDD/TDD

TD-SCDMA

RMC "Pegasus-S" LTE muti-mode 45nm Cat.4, FDD/TDD

RMC MP5232 LTE muti-mode 28nmCat.3, FDD/TDD

BB/AP single chip

HiSilicon LTE muti-mode N/A4Q2012 Docomo "Cosmos" LTE muti-mode N/A Cat.31H2013 STE M7400 LTE muti-mode 40nm Cat.3, FDD/TDD

Intel XMM7160 LTE muti-mode 40nm Cat.3, FDD/TDD

QCOM MDM9x25 LTE muti-mode 28nmCat.4, FDD/TDD

Carrier Aggregation

2H2013 QCOM MSM 8974 LTE muti-mode 28nmCat.4, FDD/TDD

BB/AP single chip

STE L8540 LTE muti-mode 28nmCat.3, FDD/TDD

BB/AP single chip

NVIDIA LTE muti-mode 28nm Cat.4

Source: TSR, Credit Suisse

Qualcomm will support carrier aggregation from 2013

Additionally, Qualcomm plans to support downlink carrier aggregation (CA) with its MSM8974 and MDM9x25 chipsets, both of which are scheduled to be released next year. CA allocates resources with an ultra-high-speed scheduler instead of a handover. With CA, separately allocated frequency bands are used simultaneously as a virtual single frequency band.

Initially, CA was generally not expected to be widely adopted before the advent of Advanced LTE, LTE's successor technology, but many major US and European carriers are apparently intent on adopting CA to increase peak data rates. CA-enabled handsets will likely be available on the market next year. They could improve users' experience by increasing throughput.

05 July 2012


Figure 45: Carrier aggregation bands in 3GPP rel.10 CA Band E-UTRA operating band

Intra band CACA_1 1 (generic example)

CA_40 40 (generic example)Inter band CA

CA_1-5 1+5 (generic, korea)CA band WI inter-band CA

CA_1-21 1+20 (NTT DOCOMO)CA_1-19 1+19 (NTT DOCOMO)CA_11-18 11+18 (KDDI)CA_1-18 1+18 (KDDI)CA_3-7 3+7 (Telia Sonera)

CA_4-13 4+13 (Verizon)CA_4-17 4+17 (AT&T)CA_20-7 20+7 (Orange etc)CA_5-12 5+12 (US Cellular)CA_4-12 4+12 (Cox)CA_2-17 2+17 (AT&T)CA_4-5 4+5 (AT&T)

CA_5-17 5+17 (AT&T)CA_1-7 1+7 (China telecom)CA_3-5 3+5 (SK telecom)CA_4-7 4+7 (Rogers)

CA_20-3 20+3 (Vodafone)CA_20-8 20+8 (Vodafone)

Source: Company data, Credit Suisse estimates, Nokia Siemens,

05 July 2012


Project substantial foundry and logic supply capacity in 2013 As noted above, Qualcomm has experienced LTE chip set supply issues since February 2012, but TSMC is investing in additional 28nm process capacity and we expect output to nearly double in 3Q 2012 compared with 2Q. We see production capacity expanding into 2013 due to ongoing investment in new lines currently under construction. Also, Qualcomm appears to be shifting to the use of multiple foundries, with Samsung Electronics likely to be the strongest contender for this new business. We think Samsung is planning to boost output of leading edge logic processes by converting a NAND line (former Line 14F, Austin) and installing a new line (Line 17). We therefore forecast Qualcomm’s chipset supply problems in 2–3Q 2012 to ease heading into 2013 and expect no major concerns for LTE growth from the supply side.

Figure 46: 32/28/20nm process capacity at TSMC/Samsung (installed equipment base)

18 33 3868 78 93

113 128148

0

2045

5060

90

100110

120

0

50

100

150

200

250

300

4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

2011 2012 2013

1,00

0 w

afer

/mon

th

TSMC Samsung


Hideyuki Maekawa

81 3 4550 9723

[email protected]

05 July 2012


Multiband shift likely to continue Smartphones expansion driving UMTS multiband shift

Figure 47 shows the ongoing shift to UMTS multiband. Since 2009, growth in UMTS global roaming devices has driven a steady expansion in the average number of FDD bands used per unit. Since 2009, growth has been particularly strong in the average number of FDD bands per mobile telephone handset, driven by the spread of global model smartphones. Through 2008, European models used Band 1 (2.1 GHz) and Band 8 (900 MHz) and US models used Band 2 (US PCS) and Band 5 (850 MHz). But in 2009 and 2010, the spread of global roaming-capable smartphones, led by the iPhone and etc., drove 30–40% annual growth in the number of FDD bands per cell phone handset.

Figure 47: FDD bands per unit

0.810.91

1.28 1.36 1.451.57

1.761.55

2.29 2.362.24 2.31 2.33

2.442.54

2.37

2.62

2.17

2.82

3.24

0.620.82

1.18

0.941.05 1.03 1.11

0.77

1.51

1.81

1.44 1.44 1.50

1.23

1.981.80

1.92

1.63

2.30

2.64

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

2007 2008 2009 2010 2011

Average FDD bands trend

Average FDD bands per total smartphone handset Average FDD bands per total handset


Average increase of 1–2 bands per region expected initially in LTE

The early phase of LTE will center on adapting UMTS global roaming (4–5 FDD bands) to handle LTE frequencies in each region. In North America, Verizon will use Band 13 and AT&T Mobility will use Bands 4 and 17, while in Europe, where rollout of LTE has been slow, Band 3 (LTE 1800) and Digital Dividend Band 20 (800 MHz) will be used in addition to Band 7 (2.6 GHz).

In duplexers, Band 3, the so-called LTE prime band, has a narrow uplink/downlink gap of just 20 MHz, which represents a high technical hurdle in addition to it being a high frequency band. It will be interesting to see development in this area going forward.

Technical issues related to LTE global roaming

In UMTS, it took a full 7–8 years from NTT DoCotMo’s launch of service in 2001 before global roaming handsets really began to take off. However, in the case of LTE, with major operators in both developed countries and developing countries set to roll out services at roughly the same time and growth in mobile content/applications running strong, we believe global roaming could begin as early as 2015–2016.

In LTE global roaming handsets, a total of 8–11 FDD bands are set to be adapted, including 4–5 UMTS bands as well as 4–6 LTE bands, and we expect to see continued

05 July 2012


growth in demand for front-end modules incorporating not only duplexers and PAs, but also High Q MLCCs and inductors. That said, these changes run the risk of pushing up the component count per cellular terminal to too high a level, and it remains to be seen whether this “RF crisis” can be averted by reducing or integrating the number of core components like duplexers and PAs and optimizing efficiency. We intend to closely monitor development at PA and duplexer makers.

Figure 48: LTE global roaming expected to drive up average number of bands

3G /CDMA 700s 800 850 900 1500 1700(AWS) 1800 1900 2100 2600 FDD 2300 2600 TDD

US CDMA UMTS UMTS/CDMA UMTS/CDMA

EU GSM/UMTS G SM UMTS

LTE 700 800 850 900 1500 1700(AWS) 1800 1900 2100 2600 FDD 2300 TDD 2600 TDD

USVZ(band13)

ATT(band17)US DD (Band12)

ATT,Met ro PCS

(PCS band)Sprint

CW,2012-?

EU DD800 (Band20)GSM⇒LTE

(Band3)FDD-LTE

Japan 2015-Docomo,

KDDI (Band6)2013- ? 2012-

DocomoKDDI

Soft bank

WCP(SBM),2011-

Korea 2013- SK, LG U+ KT

Other Area Canada,Latin Latin, APAC India, China China?

3GGlobal roaming

CDMA for US UMTS for USGSM/UMTS

for EUUMTS/CDMA

for USUMTS/CDMA

for USUMTS for EU

LTEGlobal roaming

LTE for US LTE for EU LTE for USLTE for EU/

APAC/Latin America

LTE for USLTE for EU/

APAC/Latin America

LTE for EU LTE for US LTE for US

CDMA for USUMTS/CDMA

for USUMTS/CDMA

for US

APAC, MEA, Latin America

GSM⇒LTE(Band3)

LTE UMTS for EULTE for EU/

APAC/Latin America

LTE eraGlobal roaming

LTE for US(Band13, 17)

UMTS for USGSM/UMTS

for EU

+


MIMO use in smartphones unlikely, but full-scale usage of receive diversity could drive growth in BPF and diversity module demand

MIMO usage trends are a key indicator of component demand. Adoption of MIMO for smartphones is complicated by battery capacity issues due to the high power requirements involved, and at this time the most realistic solution is probably to improve downlink throughput through incorporation of receive diversity as in the iPhone 4S. With use of receive diversity in non-iPhone handsets set to expand, we expect to see growth in demand for the diversity modules and band pass filters (BPF) of companies like Murata, TDK and Taiyo Yuden.

Areas offering the greatest potential for MIMO use include set devices like tablet PCs, USB dongles, and data cards that use comparatively large capacity batteries. Incorporating uplink MIMO would double the number of RF components used, so significant business opportunities could emerge in the event of full-scale adoption.

05 July 2012


Figure 49: Specific LTE band details E-UTRA

Operating band

Band nameBandwidth

Bandwidth

UL-DL bandDuplexmode

Note

LTE FDD1 2.1GHz 1920 MHz - 1980 MHz 60 MHz 2110 MHz - 2170 MHz 60 MHz 130 MHz FDD UMTS Core2 PCS 1900 1850 MHz - 1910 MHz 60 MHz 1930 MHz - 1990 MHz 60 MHz 20 MHz FDD US PCS3 1800 MHz 1710 MHz - 1785 MHz 75 MHz 1805 MHz - 1880 MHz 75 MHz 20 MHz FDD GSM 1800/LTE 18004 AWS 1710 MHz - 1755 MHz 45 MHz 2110 MHz - 2155 MHz 45 MHz 355 MHz FDD NAM AWS5 850 MHz 824 MHz - 849 MHz 25 MHz 869 MHz - 894 MHz 25 MHz 20 MHz FDD 8506 850 MHz (Japan#1) 830 MHz - 840 MHz 10 MHz 875 MHz - 885 MHz 10 MHz 35 MHz FDD7 2.6 GHz (IMT Ext) 2500 MHz - 2570 MHz 70 MHz 2620 MHz - 2690 MHz 70 MHz 50 MHz FDD FDD 26008 900 MHz 880 MHz - 915 MHz 35 MHz 925 MHz - 960 MHz 35 MHz 10 MHz FDD GSM 9009 1700 MHz (Japan#2) 1749.9 MHz - 1784.9 MHz 35 MHz 1844.9 MHz - 1879.9 MHz 35 MHz 60 MHz FDD Japan, Korea 1700

10 Ext 1.7/2.1GHz 1710 MHz - 1770 MHz 60 MHz 2110 MHz - 2170 MHz 60 MHz 340 MHz FDD US AWS extension.11 1500 MHz lower (Japan#3) 1427.9 MHz - 1447.9 MHz 20 MHz 1475.9 MHz - 1495.9 MHz 20 MHz 28 MHz FDD Japan 150012 Lower 700 MHz 699 MHz - 716 MHz 17 MHz 729 MHz - 746 MHz 17 MHz 13 MHz FDD US DD13 Upper C 700 MHz 777 MHz - 787 MHz 10 MHz 746 MHz - 756 MHz 10 MHz 41 MHz FDD Verizon

14Upper D 700 MHz

Publc safety/private788 MHz - 798 MHz 10 MHz 758 MHz - 768 MHz 10 MHz 40 MHz FDD US - Public Safety

15 - Reserved Reserved 0 MHz FDD16 - Reserved Reserved 0 MHz FDD

17Lower B,C 700 MHz

AT&T blocks704 MHz - 716 MHz 12 MHz 731 MHz - 746 MHz 15 MHz 15 MHz FDD AT&T

18 850 MHz ((Japan#4) 815 MHz - 830 MHz 15 MHz 860 MHz - 875 MHz 15 MHz 30 MHz FDD Japan - 800 (KDDI)19 850 MHz ((Japan#5) 830 MHz - 845 MHz 15 MHz 875 MHz - 890 MHz 15 MHz 30 MHz FDD Japan - 800 (DoCoMo)20 CEPT 800 3 - 862 MHz 30 MHz 791 MHz - 821 MHz 30 MHz 71 MHz FDD EU 800 DD, MEA21 1500 MHz ((Japan#6) 1447.9 MHz - 1462.9 MHz 15 MHz 1495.9 MHz - 1510.9 MHz 15 MHz 33 MHz FDD Japan150022 3.5 GHz FDD 3410 MHz - 3490 MHz 80 MHz 3510 MHz - 3590 MHz 80 MHz 20 MHz FDD band 42 - FDD variant23 US S-Band 2000 MHz - 2020 MHz 20 MHz 2180 MHz - 2200 MHz 20 MHz 160 MHz FDD24 US L-Band 1626.5 MHz - 1660.5 MHz 34 MHz 1525 MHz - 1559 MHz 34 MHz 135.5 MHz FDD LightSquared25 US PCS extension 1850 MHz - 1915 MHz 65 MHz 1930 MHz - 1995 MHz 65 MHz 15 MHz FDD Sprint26 850 extention 814 MHz - 849 MHz 35 MHz 859 MHz - 894 MHz 35 MHz 10 MHz FDD Korea KT, Sprint

LTE TDD33 TDD 2000 Lower 1900 MHz - 1920 MHz 20 MHz 1900 MHz - 1920 MHz 20 MHz - TDD UMTS core - TDD

34 TDD 2000 Upper 2010 MHz - 2025 MHz 15 MHz 2010 MHz - 2025 MHz 15 MHz - TDDUMTS core - TDD,China TD/SCDMA

35 TDD 1900 Lower 1850 MHz - 1910 MHz 60 MHz 1850 MHz - 1910 MHz 60 MHz - TDD US (band2 - TDD variant)36 TDD 1900 Upper 1930 MHz - 1990 MHz 60 MHz 1930 MHz - 1990 MHz 60 MHz - TDD US (band2 - TDD variant)37 PCS Center Gap 1910 MHz - 1930 MHz 20 MHz 1910 MHz - 1930 MHz 20 MHz - TDD US PCS center-gap38 IMT Extension Gap 2570 MHz - 2620 MHz 50 MHz 2570 MHz - 2620 MHz 50 MHz - TDD China, LatAM, Europe39 China TDD 1880 MHz - 1920 MHz 40 MHz 1880 MHz - 1920 MHz 40 MHz - TDD China PHS40 2300 MHz 2300 MHz - 2400 MHz 100 MHz 2300 MHz - 2400 MHz 100 MHz - TDD MEA, India, China, Russia41 US 2600 2496 MHz - 2690 MHz 194 MHz 2496 MHz - 2690 MHz 194 MHz - TDD US (Clearwire)42 3500 MHz 3400 MHz - 3600 MHz 200 MHz 3400 MHz - 3600 MHz 200 MHz - TDD 3.4/5 GHz - TDD43 3700 MHz 3600 MHz - 3800 MHz 200 MHz 3600 MHz - 3800 MHz 200 MHz - TDD 3.7/8 GHz-TDD

Upllink operating bandBS receive UE transmit

Downlink operating bandBS receive UE transmit

Ful_low - Ful_high Ful_low - Ful_high

Source: 3GPP, Nokia Siemens, Credit Suisse

DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

05 July 2012 Asia Pacific/Japan Equity Research

Networking Equipment (Electrical Equipment) / MARKET WEIGHT

Anritsu (6754 / 6754 JP) INITIATION

Profit focus is on Japan-specific LTE smartphones ■ Action: We initiate coverage of Anritsu with an OUTPERFORM rating and a ¥1,180

TP (potential upside 23.8%). Earnings at the test and measurement business increased markedly in FY3/12 supported by LTE development, 3G manufacturing, additional global customers. We forecast growth in the LTE manufacturing domain to emerge as an additional factor driving profit growth in FY3/13, enabling Anritsu to achieve profit growth ahead of consensus estimates. We expect catalysts—including increased output of Japanese LTE smartphones on increased supplies of Qualcomm chipsets and higher demand from major overseas smartphone makers for measuring instruments for LTE handsets—to send the share price higher.

■ Investment case: In addition to the market view that earnings at Anritsu will benefit from growth of the smartphone and LTE markets, we focus on LTE manufacturing demand for Japan’s so-called “Galapagos smartphones” as a key factor for Anritsu’s profitability. Increased output of Japanese smartphones mainly drove Anritsu’s improved profit margin in 3Q FY3/12. Although the market is paying little attention to Japanese LTE smartphones, we believe increased output of these handsets will boost Anritsu’s profitability. At present, limited supply of Qualcomm chipsets make it difficult for Japanese smartphone makers to secure adequate supply of LTE chipsets. However, we expect supply shortages to be resolved by the latter half of 2012 owing to capacity expansion at TSMC, a Qualcomm foundry. With regard to orders, the market is anticipating a YoY decline in Apr–Jun, but we see little risk to 1Q earnings given the recent pace of LTE development and strong prospects of 3G manufacturing demand remaining at year-earlier levels. We accordingly expect demand for measuring instruments used during production of Japanese LTE smartphones to rebound on a YoY basis in Jul–Sep.

■ Catalysts/Risks: Catalysts include resolution of Qualcomm’s supply shortage, stronger-than-expected earnings, YoY gains in measuring instrument orders. Risks include early adoption of LTE measuring instruments made by rival Agilent, correction in 3G handsets, and delay in the take-off of LTE smartphone models.

■ Valuation: We base our ¥1,180 TP on a P/B of 2.35x against our FY3/13 BPS estimate of ¥500. Our assumed fair-value P/B is based on the P/B of 2.78x which corresponds to FY3/13 ROE of 17.0% derived from a ROE/TOPIX matrix which and then multiplied by the 12-month forward TOPIX P/B of 0.84x.

Share price performance

400600800

10001200

Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12

0100200300400

Price (LHS) Rebased Rel (RHS)

The price relative chart measures performance against the TOPIX which closed at 778.7 on 04/07/12 On 04/07/12 the spot exchange rate was ¥79.83/US$1

Performance Over 1M 3M 12M Absolute (%) 18.7 -7.0 32.9 Relative (%) 8.7 -1.3 43.8

Financial and valuation metrics

Year 3/12A 3/13E 3/14E 3/15E Revenue (¥ bn) 93.6 98.0 103.5 110.0 Operating profit (¥ bn) 14.4 17.4 19.6 22.1 Recurring profit (¥ bn) 13.6 16.4 18.6 21.1 Net income (¥ bn) 10.2 11.3 12.8 14.6 EPS (¥) 71.0 84.0 95.1 108.5 Change from previous EPS (%) n.a. IBES Consensus EPS (¥) n.a. 77.6 83.8 93.0 EPS growth (%) 221.6 18.3 13.3 14.1 P/E (x) 15.3 11.3 10.0 8.8 Dividend yield (%) 1.4 1.6 1.9 2.1 EV/EBITDA(x) 7.9 4.7 4.1 3.3 P/B (x) 2.7 1.9 1.6 1.5 ROE(%) 21.5 19.0 18.5 18.1 Net debt/equity (%) net cash net cash net cash net cash

Source: Company data, Thomson Reuters, IFIS, Credit Suisse estimates.

Rating OUTPERFORM* Price (04 Jul 12, ¥) 953 Target price (¥) 1,180¹ Chg to TP (%) 23.8 Market cap. (¥ bn) 131.84 (US$ 1.65) Enterprise value (¥ bn) 104.25 Number of shares (mn) 138.34 Free float (%) 60.0 52-week price range 1,101 - 707 *Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months.

Research Analysts

Hideyuki Maekawa 813 4550 9723

[email protected]

Chika Fukumoto 81 3 4550 7358

[email protected]

05 July 2012


Investment overview Initiating coverage at OUTPERFORM Anritsu’s shares have underperformed TOPIX since the last result announcement due to concerns about European macro conditions, weak orders momentum in 1Q, and NEC selling its 7.65mn shares of the company. However, we think the time has come to take into consideration the large number of themes and likely catalysts in the company’s business environment that we think give the stock considerable investment appeal at this time. We therefore initiate coverage with an OUTPERFORM rating and a ¥1,180 TP (potential return 23.8%).

Our TP is determined by valuing the stock at a P/B of 2.3x—based on an ROE/TOPIX matrix—against our FY3/12 BPS estimate of ¥500. The resulting implied P/E of 13.7x makes the stock look undervalued given forward earnings momentum and the expected emergence of a series of catalysts.

With smartphone usage on the rise and mobile networks moving to the Long-Term Evolution (LTE) technology for high-speed wireless communications, we think investor attention will increasingly fall on Anritsu. Investment in LTE development ahead of its commercial launch, demand for measuring instruments for 3G manufacturing, and new orders from global makers for 3G handsets fuelled growth in its test and measurement business, which led to 122% YoY increase in FY3/12 OP. We expect the strong earnings momentum to continue for at least the next three years, during which we forecast double-digit profit growth stemming from demand for measuring instruments for FD-LTE manufacturing and for TD-LTE development and manufacturing. Specifically, we forecast OP will expand 20.7% YoY to ¥17.4bn in FY3/13 (guidance ¥15.5bn) and another 12.6% to ¥19.6bn in FY3/14.

Amid the growing use of 3G/LTE mobile phones, we expect Anritsu’s share price to get a boost from a number of catalysts, including: (1) increased production of LTE handsets in Japan, (2) growing investment in LTE handset production lines around the world, (3) an increase in shipments of LTE chipsets, and (4) interconnection with the TD-CDMA network upon the commercial startup of China’s TD-LTE wireless communications technology.

As for orders trend, measuring instruments demand tends to rise the quarter before mobile-phone makers plan to boost production of new handsets. Assuming chipset supply increases as expected in Oct–Nov, we expect makers’ production preparations to boost orders momentum from Jul–Sep. We forecast flat YoY orders for measuring instruments in Apr–Jun as unexpectedly strong orders from Asian 3G manufacturing lines and domestic LTE development offset the absence of large volume of orders received a year ago from 3G handset lines. However, we expect orders to rise YoY from Jul–Sep. We accordingly forecast ¥18.0bn in Apr–Jun (largely flat YoY) to ¥18.5bn in Jul–Sep (up 14.2% YoY) and ¥18.5bn in Oct–Dec (up 15.4% YoY).

05 July 2012


Market analysis: factors supporting Anritsu profit growth scenario Earnings at Anritsu’s mainstay test and measurement business increased dramatically in FY3/12 (+172% YoY). We attribute this to increased demand for measuring instruments used in LTE development ahead of full-fledged launch of LTE handsets, increase in measuring instruments for 3G handset manufacturing in Asia, and new orders from major global smartphone manufacturers for 3G handset manufacturing.

We forecast Anritsu’s test and measurement business will sustain double-digit earnings growth beyond FY3/13 and regard LTE manufacturing demand as an additional factor driving FY3/13 earnings. In addition to the commercial FD-LTE services in Japan and the US, China is scheduled to launch its TD-LTE service commercially in 2013, which should fuel expectations of measuring instrument demand for TD-LTE development in FY3/13. We therefore regard Anritsu as a company positioned to benefit from the shift in communication technology (from 2G to 3G to LTE), not just from the growth in smartphone volumes.

Once LTE smartphone YoY units growth overtake the growth in 3G handsets in FY3/15 and beyond, we expect software upgrade demand, in addition to the normal measuring instrument hardware sales, to fuel further improvement in margins.

Figure 1: Factors in Anritsu’s earnings growth FY2010 FY2011 FY2012 FY2013

T&M business

OP (in bn JPY) 5 bn 13.7 bn 15.9 bn 18 bn

　YoY 124.3% 172.0% 15.8% 13.2%

FD-LTETD-LTE R&D

FD-LTE R&D

Domestic LTE manufacturing

Asia 3G manufacturing

Overseas FD-LTEmanufacturing

3G manufacturingAcquisition of new

customers

Overseas TD-LTEmanufacturing

Source: Credit Suisse estimates

LTE development, higher demand for 3G manufacturing in Asia, and market share of major global smartphone manufacturers’ 3G manufacturing drove earnings in FY3/12

TD-LTE development, LTE manufacturing in Japan and overseas to drive earnings in FY3/13 and beyond

05 July 2012


Specifically, we are focusing on the following five factors as supports for our earnings growth scenario for Anritsu: (1) increasing units of 3G handsets and smartphones, (2) the trend in LTE handsets production volume in Japan, (3) expansion of LTE handset production at overseas smartphone makers already in Anritsu’s customer base or targeted for inclusion and share gains in the market for LTE measuring instruments, (4) increasing shipments of LTE chipsets by baseband chipset makers, and (5) China’s TD-LTE network. We discuss each of these below.

(1) Benefits from growth in 3G/LTE handsets We forecast that global annual unit of handsets (traditional phones and smartphones) will expand at a CAGR of 5.3% during 2011–14, with total shipments rising from 1,775mn in 2011 to 2,073mn in 2014. During this period of moderate overall market growth, we expect a large shift in the composition of phones based on the GSM, 3G, and LTE wireless technologies. For Anritsu, which does not supply measuring instruments for GSM handsets, the shift to 3G/LTE handsets is a positive trend.

We forecast that global 3G handset shipments will grow at a CAGR of 12% during 2011–14, while LTE handset shipments expand at a CAGR of 238% over the same period. We think annual growth in shipments of 3G handsets peaked in 2010–11 but will remain in the 80–100mn range during 2012–14. Meanwhile, we forecast LTE handset shipments will rise sharply from 2012. If we add tablets and other LTE devices to LTE smartphones, the total growth in LTE device shipments should surpass that of 3G devices in 2012.

Consequently, we see volume growth and share expansion in 3G handset manufacturing and market growth in the domestic and overseas LTE arenas as opportunities for Anritsu to expand sales of its measuring instruments used on handset manufacturing lines.

A feature of Anritsu’s measuring instruments is that a software upgrade can make them compatible with LTE technology. For this reason, we anticipate investment in LTE compatible software upgrade on existing 3G measuring instruments in 2015, when LTE smartphones are likely to overtake 3G handsets in terms of YoY growth (Figure 4). In the following pages, we discuss the profitability this factor implies.

Figure 2: Handsets unit forecasts, by generation Figure 3: Handsets market shares, by generation

848 869 901 996 1,054 1,040 942 840 714

361 435 478601

715 790 887 9921,063

1

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0

500

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2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E

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70% 67% 65% 62% 59% 55%47%

41%33%

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Source: Credit Suisse estimates Source: Credit Suisse estimates

Anritsu’s sales unlikely to peak out as long as net growth in 3G and LTE remains positive (Figures 4–5)

05 July 2012


Figure 4: Net YoY increase of 3G handsets, LTE

smartphones and other LTE devices

Figure 5: Net YoY increase in 3G and LTE devices

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3G (WCDMA, TD-SCDMA etc) LTE - total Source: Credit Suisse estimates Source: Credit Suisse estimates

(2) Benefit from increased production of Japanese LTE handsets Anritsu has won a high share of measuring instruments used by Japanese handsets makers since the introduction of 3G handsets. Japan’s handset market has matured, with annual sales of 45–46mn units, but there is almost no new demand for measuring instruments from 3G handset-manufacturing lines. Meanwhile, the sharp rise in data communications traffic since 2011 has placed tremendous pressure on the existing 3G network, prompting NTT DoCoMo to push forward with the introduction of LTE handsets. The increase in the number of subscribers to NTT DoCoMo’s LTE services has strengthened other carriers’ efforts to shift their data traffic to LTE networks, and we expect greater diffusion of LTE smartphones in the Japan market. The consequent rise in shipments of LTE handsets by Japanese smartphone makers should boost demand for Anritsu’s measuring instruments used on handset production lines.

Anritsu began responding to the need for LTE measuring equipment in the latter half of 2011 and as a result has begun to see rising demand for its measuring instruments used in LTE handset development and production processes. At the moment, Japanese handset makers are having difficulty securing LTE chipsets from Qualcomm, which we think will limit the size of the initial shipments of summer 2012 models (Figure 6). Between now and Oct–Dec, however, we expect Qualcomm foundry TSMC to expand production capacity, which should help remedy the current supply shortages. We therefore expect Japanese makers’ LTE smartphone production volumes to begin expanding.

According to Hitoshi Hayakawa, our telecom sector analyst, LTE compatible handsets in Japan are poised to increase from 1% in FY3/12 to 51% in FY3/14 and exceed 80% in FY3/15. This implies substantial growth prospects through FY3/15, just in terms YoY growth in volumes.

05 July 2012


Figure 6: NTT DoCoMo’s summer 2012 handset models

Maker Chip ClockF09D

ANTEPRIMA Qualcomm MSM8255 1.4GHz Android 4.0 X 41072

AQUOS PHONE stSH-07D

Qualcomm MSM8255 1GHz Android 4.0 X 41072

Optimus itL05D


MEDIAS XN-07D


ELUGA VP-06D

TI OMAP4460 1.5GHz Android 4.0 X Jun-Jul 12

ARROWS MeF-11D

Qualcomm MSM8255 1GHz Android 4.0 X 41133

Xperia SXSO-05D

Qualcomm MSM8960 1.5GHz Android 4.0 O 41133

GALAXY S ⅢSC-06D


AQUOS PHONE ZETASH-09D


Xperia GXSO-04D


ARROWS XX-10D

NVIDIA Tegra3 AP33 1.5GHz Android 4.0 O Jul-Aug 12

REGZA PhoneT-02D

Qualcomm MSM8960 1.5GHz Android 4.0 O Jul-Aug 12

Optimus VuL-06D/L-06D JOJO

Qualcomm APQ8060 1.5GHz Android 4.0 O Jul-Aug 12

ELUGA powerP-07D


AQUOS PHONE svSH-10D


DoCoMo Tablet TI OMAP4460 1.2GHz Android 4.0 X 41133

Rakuraku SmartphoneF-12D (targetting seniors)

Qualcomm MSM8255 1.4GHz Android 4.0 X Jul-Aug 12

CPUOS

Xi (LTE)LaunchHandset model


Figure 7: LTE smartphone shipments and share of Japanese handsets market

1%

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51%

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NTT Docomo KDDI Softbank LTE ratio


We focus on volume growth in Japanese LTE-compatible handsets because measuring instruments used in LTE handset manufacturing could be highly profitable, in our view. Anritsu’s test and measurement business recorded 23.1% increase in operating margins despite a sales decline QoQ in 3Q FY3/12. We attribute this to a positive impact on profits from the surge in Japanese makers’ LTE handset production. If shipments for high-margin LTE measuring instruments equipped with all options increase on growing demand from Japanese handset makers that run full tests on LTE devices, Anritsu’s profitability would most likely improve even if the impact on sales is limited.

Qualcomm chipset supply shortages likely to limit initial lot of summer handset models at various manufacturers to several hundred thousand units, lower than previous initial lots plan

Forecast easing chipset supplies in Oct–Dec and growth in LTE handset volumes

Japanese LTE-compatible handsets to exceed 50% in FY3/14, providing tailwind to Anritsu’s test and measurement business

05 July 2012


Figure 8: Quarterly trend in OP margin at Anritsu’s test and measurement business

16.1%

20.8%

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17.7%

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1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

06/3 07/3 08/3 09/3 10/3 11/3 12/3

Sal

es (

mn

JPY

)

Ope

ratin

g P

rofit

s(%

)


Another positive for Anritsu’s business environment is Sony’s absorption of Sony Ericsson. Anritsu supplied measurement instruments for handsets models developed at the European center led by Ericsson, which also adopted rivals testers, but its market share will likely rise from the latter half of this year through 1H 2013 on sales of handset models developed solely by Sony.

(3) Orders from global LTE handset manufacturing lines Anritsu has yet to receive many orders from global smartphone makers for its measuring instruments for use on mass production lines. At present, we think the handset makers are using LTE R&D measuring instruments on their production lines. However, we expect demand for manufacturing line measuring instruments to emerge once the makers start up mass production. Anritsu has yet to win any orders from makers such as Apple and Nokia, but we think Samsung, HTC and other Chinese makers present a business opportunity for the company. We will keep an especially close eye on orders from Samsung Electronics, which last October ordered its first Anritsu measuring instrument for use on mass-production lines.

As shown in Figure 9, LTE handsets are expected to take off in North America and Asia (including Japan and South Korea), and a new YoY handset sales forecasts (Figure 4–5) indicate that global smartphone makers will have to buy new LTE-compatible measuring instruments in 2012–13.

Sony’s absorption of Sony Ericsson as a wholly owned subsidiary a positive for Anritsu’s test and measurement business

Margins improved QoQ in 3Q FY3/12 even though sales fell, most likely owing to an improved sales mix on demand for measuring instruments used on LTE-handset manufacturing lines

05 July 2012


Figure 9: LTE handset units forecast, by region

27 59

94 150

33

78

114

164

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(4) Increasing shipments of LTE chipsets by baseband chipset makers; likely timing of expansion at Anritsu’s test and measurement business On an annual basis, LTE handset shipments are expected to expand, as noted in factors (1) and (3) above. On a quarterly basis, however, that expansion is not likely to take place from 1H 2012 through the Jul–Sep quarter owing to the baseband chipset supply problems. From Oct–Dec, however, Qualcomm foundry TSMC’s expansion of its production capacity using leading-edge processes should enable Anritsu’s Japanese customers to increase unit output while also boosting demand for measuring instruments from overseas makers starting up full production on LTE-handset production lines.

Inquiries about manufacturing-line measuring instruments generally are made six months before the introduction of new handsets, with product delivery about three months before the start of production (for inspection and acceptance by customers). As such, if we assume LTE handset production will expand in Oct–Dec, we should be able to begin seeing orders from the latter half of Apr–Jun into the first half of Jul–Sep. Considering the manufacturing costs, expanded demand for measuring instruments used on LTE handset manufacturing lines should help boost Anritsu’s profit margin. We therefore expect profitability to improve in the latter half of FY3/12.

LTE handset volumes increase in North America and Japan

Measuring instruments orders for global LTE smartphone manufacturing to pick up in earnest

05 July 2012


Figure 10: LTE-baseband maker TSMC’s plan to expand capacity on leading-edge

process lines (equipment installation basis)

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(5) Commercial launch of China’s TD-LTE in 2013; interconnectivity with TD-SCDMA would benefit Anritsu Anritsu is the only measuring equipment maker which delivered testing and measuring wireless devices based on China’s TD-SCDMA (Time Division Synchronous Code Division Multiple Access) technology. At February’s Mobile World Congress in Barcelona, China Mobile announced that the commercial launch of TD-LTE was planned for 2013. China is expected to begin practical testing of its version of LTE, TD-LTE (for Time Division–LTE) and then move to a full commercial launch. If China decides to take a dual approach that allows interconnectivity between TD-SCDMA and TD-LTE networks, Anritsu would be in a more advantageous position than other measuring equipment makers because of its track record in TD-SCDMA.

We expect China to roll out its TD-LTE network in 2013 and forecast that annual units of compatible devices will expand to 89mn by 2015. The startup of China’s LTE market represents another promising business opportunity for Anritsu, in our view.

Production system able to boost output should be in place by 4Q 2012

05 July 2012


Figure 11: Forecast of annual handset units in China, by generation

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In addition, as our electronic components analyst Akinori Kanemoto noted in the LTE report dated 5 July, seven carriers have already introduced TD-LTE as a substitute for WiMAX and PHS, with many others actively considering the proposition. We therefore see upside potential for Anritsu from demand for its handheld base station analyzers as well as its manufacturing-use measuring equipment.

Interconnectivity between TD-SCDMA and TD-LTE networks could put Anritsu at an advantage given its experience with TD-SCDMA

05 July 2012


Figure 12: Carriers operating commercial TD-LTE services, operators conducting trials

and those scheduled to launch TD-LTE

Country Operator NoteAustralia Vivid Wireless WiMAX operator

NBC 2.3GHzBrazil Sky Brazil Commercially Launched.Canada Xplornet WiMAX operator, 2.5/3.5GHzChina Cnina Mobile Commercial service in 2013Croatia Velatel 3.5GHzDenmark 3 2.6GHz, deploying combined FDD/TDDFrance Orange Trial in Paris with supporting FDD/TDD

Bollore 3.5GHzGermany E-Plus 2.6GHzHong Kong China Mobile Will deploy combined LTE FDD/TDD networks

Hutchison 3 Will deploy combined LTE FDD/TDD networksIndia Barti Airtel Commercially Launched.

RILQualcomm India LTE ventureTikona DigitalAircelBSNL May introduce TD-LTEMTNL May introduce TD-LTE

Ireland TD-LTE testing completed in June 2010Japan Softbank Mobile Commercially launched XGP/TD-LTE network in 2012Malaysia Packet networks WiMAX operator

Asiaspace WiMAX operator, 2.3GHzMontenegro Velatel 3.5GHzNigeria Zoda Fones 3.5GHzOman OmantelPoland Aero2 Commercially Launched in Band 38 (2.6GHz) with FDD LTE (LTE1800)Russia Rostelecom 2.3GHz

Voentelecom Trialling TD-LTEMTS 2.6GHzMgeafonBase TelEnforta 3.5GHz

Saudi Arabia Etisalat Mobility Commercially Launched in Sept 2011.STC Commercially Launched in Sept 2011.

Singapore -- IDA plan to auction for TD-LTE spectrumSweden 3 Sweden Commercially Launched in Band 38 (2.6GHz) with FDD LTE (2600MHz)Taiwan CHT Completed tests on the high speed rail system using TDD/FDD modes in 2.6GHz

FarEasTone/China Mobile Co-oporating TD-LTE trial in TaipeiThe National Chial Tung University Coducted a trial of TD-LTE in 2010Global Mobile Corp WiMAX operatorFitel PHS/WiMAX operator

Thailand AIS/TOT Joint trial in 2.3GHzUK UK Broadband 3.5GHzUSA Clearwire Band41

Xplornet Communication WiMAX operatorVenezuela Movilmax 2.5GHz Source: GSA, Credit Suisse estimates

Risks ■ Persistence of Qualcomm’s supply issues resulting in delayed LTE handset shipments

and missed volume targets for Japanese LTE handset makers

■ Production cuts due to weak sales of 3G handsets

■ Missed orders from the LTE manufacturing lines of major global smartphone makers

■ Earlier than expected certification of Agilent in measuring instruments for LTE manufacturing (risk still low for 2012)

■ NTT DoCoMo iPhone release leading to downward revisions to production plans for Japan-specific smartphone models

05 July 2012


Earnings forecasts Could achieve medium-term target a year early in FY3/14

We forecast OP of ¥17.4bn (+20.7% YoY; guidance ¥15.5bn) in FY3/13, ¥19.6bn (+12.6%) in FY3/14, and ¥22.1bn (+12.8%) in FY3/15. We think Anritsu could exceed its ¥19.0bn target for FY3/15 a year ahead of schedule.

We expect Anritsu to continue growing, driven by mobile device manufacturing applications within its test and measurement business (Figures 14–15). We expect sales from mobile applications to remain stable in measuring instruments for R&D use, while sales growth in LTE manufacturing applications drives growth. We also expect sales in 3G manufacturing to remain high.

As noted in our above market analysis (1), the broad market penetration of 3G handsets along with the rapid growth of LTE handsets are likely to drive profit improvement at Anritsu over the next three years by lifting sales of measuring instruments for manufacturing. At the same time, we expect stable demand for measuring instruments for development from chipset makers and developers of technologies that use the next-generation LTE Advanced and TD-LTE standards.

Potential short-term catalysts include acquisition of greater quantities of Qualcomm LTE chipsets for Japanese smartphones in the Oct–Dec quarter and orders from global smartphone makers investing in measuring instruments for their LTE handset manufacturing lines. Given the rise of smartphone manufacturing in Oct–Dec, such factors could begin contributing to earnings in Jul–Sep.

Figure 13: Anritsu (6754): Sales by segment Figure 14: Anritsu (6754): Test and measurement

business sales breakdown

0

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Mobile Network Infrastructure Electronics

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 15: Anritsu (6754): Sales breakdown within mobile

7,400 10,000

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R&D Manufacturing for 3G Manufacturing for LTE


05 July 2012


Growth in measurement instruments for LTE manufacturing to improve earnings mix

We expect the main driver for Anritsu to remain its test and measurement business, particularly in mobile applications. For this business, we forecast YoY growth of ¥1.6bn in sales and ¥1.45bn in profits in FY3/13, driven by sales growth in measuring instruments for LTE manufacturing. We anticipate an especially notable contribution to earnings-mix improvement from full-featured measuring instruments for domestic LTE smartphones.

Compared with measuring instruments for 3G, those for LTE require a much higher proportion of development costs in software development rather than platform development. This means that a period of recouping investment can follow the requisite primary software-development phase. We expect new investment in this area to be substantial over the next several years. While this will include sales of new platforms for LTE manufacturing, as the unit growth rates of 3G and LTE handsets cross over (as we expect them to in FY3/16), we also expect growing demand for software upgrades to some of the existing 3G platforms already installed in customer factories.

We expect a turn to profitability in networking and infrastructure applications. Write-downs in FY3/12 mean that ¥350mn/year in goodwill amortization will be absent beginning with FY3/13. We also expect cost reductions from EMS activities and growth in sales of handheld base station analysers in North America.

Figure 16: Anritsu (6754): OP by segment Figure 17: Anritsu (6754): Test and measurement

business OP breakdown

(15,000)

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(5,000)

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Test and Measurement Industrial Automation Others

3,201 4,650

11,165 12,600 14,700

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Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 18: Anritsu (6754): Cost ratios

69.1% 68.1% 69.0% 68.6% 61.7% 65.1%73.9% 69.2% 63.9% 60.5% 56.1% 56.2% 62.0% 58.1% 55.3% 52.8% 50.2% 49.1% 47.9%

24.0% 26.6% 28.2% 26.8%

23.3%29.1%

39.8%

28.5%30.4% 34.5% 37.5% 38.5%

37.0%35.7% 35.7%

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14/3CSE

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COGS ratio SG&A ratio OPM


Software development cost ratio for LTE measurement instruments higher

LTE software CoGS extremely low, so LTE shift should continue improving company-wide CoGS

05 July 2012


Outlook for orders We note several factors likely to impact YoY quarterly orders in FY3/13. Likely positives include production growth in Japanese LTE handsets and Samsung’s investments in LTE handset manufacturing lines. Production corrections due to falling 3G-handset demand are a risk.

We expect measuring instrument orders to be about flat YoY in the Apr–Jun quarter. Despite some concern in the market that orders could decline YoY—based on: (1) large orders in Apr–Jun 2011 for use in 3G manufacturing at major Korean firms, and (2) the slow pace of LTE handset output growth in 2012 resulting from supply delays at Qualcomm—we expect strong demand from domestic LTE development and overseas 3G manufacturing to compensate. We forecast quarterly orders of ¥18.0bn (YoY flat, QoQ+3.6%) in Apr–Jun, ¥18.5bn (YoY+14.2%, QoQ+2.8%) in Jul–Sep, and ¥18.5bn (YoY +15.4%, QoQ+2.8%) in Oct–Dec at the test and measurement business, with a YoY uptrend starting from Jul–Sep. We expect measuring instrument procurement to begin in Jul–Sep in advance of the expected easing of Qualcomm chip supply problems in Oct–Dec.

Figure 19: Anritsu (6754): Order forecasts for test and measurement business

16,812

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07/3 08/3 09/3 10/3 11/3 12/3 13/3 CSE 14/3 CSE

Orders (mn JPY) YoY


Dividend policy Anritsu does not have a fixed payout-ratio policy, but rather sets its dividend based on the level of consolidated NP and a general assessment of business conditions, with a preference for making adjustments by raising its dividend as a share of consolidated NAV.

We forecast dividend of ¥15 in FY3/13 (17.0% payout-ratio), ¥18 in FY3/14 (18.0%), and ¥20 in FY3/15 (18.4%). We expect dividend as a share of NAV to remain in 3.0–3.1% range.

1Q FY3/13 orders flat YoY but likely to rebound to positive growth in 2Q and after

05 July 2012


Figure 20: Anritsu (6754): DOE

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Medium-term business plan Anritsu’s current three-year business plan ending FY3/15 targets sales of ¥110bn, OP of ¥19bn and NP of ¥13bn, with a 20% RoE. It also targets ¥9.0bn for its own in-house indicator, the Anritsu Capital-cost Evaluation (ACE), consisting of post-tax OP less the cost of capital.

Figure 21: Anritsu (6754): three-years business plan GLP 2014

93.6 bn JPY 94.5 bn JPY 110.0 bn JPY 98 bn JPY 110 bn JPY

13.9 bn JPY 15.5 bn JPY 19.0 bn JPY 17.4 bn JPY 22.1 bn JPY

8.1 bn JPY 10.0 bn JPY 13.0 bn JPY 11.3 bn JPY 14.6 bn JPY

20.0% 20.0% 20.0% 17.0% 16.6%

5.3 bn JPY 7.0 bn JPY 9.0bn JPY

Sales 70.5 bn JPY 70.0 bn JPY 80.0 bn JPY 73.5 bn JPY 83.5 bn JPY

OP 13.7 bn JPY 14.0 bn JPY 16.0 bn JPY 15.9 bn JPY 20.4 bn JPY

Sales 14.2 bn JPY 15.0 bn JPY 18.0 bn JPY 15.0 bn JPY 17.0 bn JPY

OP 0.5 bn JPY 1.0 bn JPY 1.5 bn JPY 1.0 bn JPY 1.2 bn JPY

GLP 2014

Indicators FY2011(IFRS Non-audit)

FY2012 FY2014FY2012

CSE

T&M

IndustAuto

FY2014CSE

Sales

OP

Net Income

ROE

ACE


The core theme of its plan is to realize profitable, sustained growth. Figure 22 shows its market-growth forecasts and sales and profit targets for its measuring instruments and industrial equipment segments.

05 July 2012


Figure 22: Medium- and long-term management basic strategy

Sales growthrate OPM

T&M ①Mobile broadband service market

②Asia Market

Indust Auto ①Asia Market

North Americal Market

Consolidated

3-5% ≧7% ≧12%

- - - ≧18%

Market aveannual

growth rateGrowth driver

Target

3-5% ≧7% ≧20%


Profitability comparable to Agilent’s A comparison with Agilent’s EMG segment, for which a continuous data series is available since the last segment revisions in 2008, shows that Anritsu’s operating margin is comparable to Agilent’s (Figure 25). There are few places where margin gaps are not apparent between overseas manufacturers and domestic manufacturers such as Anritsu that basically only produce in their own domestic plants (generally, margins are higher among overseas SPE makers that we cover).

In 2009–10, Agilent noted intensifying competition in the market for measuring instruments for manufacturing and therefore shifted from manufacturing applications toward research applications. Its profit margins began rising on this shift, as well as on an easing of the competitive environment and the growth of 3G and LTE demand.

Agilent has announced measurement instruments for LTE manufacturing and we expect the competitive environment to intensify once again, but we also think it is premature to be concerned about this in view of the degree of practical product refinement at this stage. Over the next several years, we therefore do not expect margins deterioration to affect mainstay measuring instruments for LTE manufacturing.

Figure 23: Anritsu vs. Agilent Measurement Business

Sales

Figure 24: Anritsu vs. Agilent: Measurement Business

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Figure 25: Anritsu vs. Agilent Measurement Business OPM

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05 July 2012


Valuation We base our ¥1,180 TP on a P/B of 2.35x against our FY3/13 BPS estimate of ¥500. Our 2.35x multiple is based on the correlation of ROE/TOPIX and P/B, specifically a P/B of 2.78x corresponding to FY3/13 ROE of 17.0%, multiplied by the 12-month forward TOPIX average P/B of 0.83x. We view the shares as undervalued at the implied P/E of 14.0x our FY3/13 earnings forecast in relation to past trends.

When the equity market shifts its focus toward company-specific growth factors away from general macroeconomic considerations, the average TOPIX P/B could rise, lifting Anritsu’s fair valuation even higher.

Figure 26: Anritsu (6754): Relative P/B correlation with ROE/TOPIX

y = 15.549x + 0.1404R² = 0.7492

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Correlation between relative P/B and ROE

Source: Thomson Reuters

Figure 27: Anritsu (6754): P/E Figure 28: Anritsu (6754): P/B

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Figure 29: Anritsu (6754): P/B relative to TOPIX

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05 July 2012


Earnings forecasts Figure 30: Anritsu (6754): FY3/13–15 forecasts Anritsu (6754)

Est. P/E¥953 as of; ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥ YoY (%) (x)ConsolidatedMar-12 Actual 93,586 20.2 14,414 106.1 13,593 153.5 10,180 231.7 71.0 221.6Mar-13 CS E 7/5 98,000 4.7 17,400 20.7 16,400 20.7 11,300 11.0 84.0 18.3 11.3

CoE 4/26 94,500 1.0 15,500 7.5 14,500 6.7 10,000 -1.8 78.0 9.8 12.2IBES E 96,822 3.5 16,289 13.0 15,517 14.2 10,552 3.7 77.6 9.3 12.3

Mar-14 CS E 7/5 103,500 5.6 19,600 12.6 18,600 13.4 12,800 13.3 95.1 13.3 10.0IBES E 101,011 4.3 17,617 8.2 16,868 8.7 11,485 8.8 83.8 8.0 11.4

Mar-15 CS E 7/5 110,000 6.3 22,100 12.8 21,100 13.4 14,600 14.1 108.5 14.1 8.8IBES E 104,833 3.8 19,333 9.7 18,800 11.5 12,940 12.7 93.0 10.9 10.3

Note: Recurring profit from I/B/E/S equals pretax profit, as there is no such term

7/4 price (¥) EPSSales Operating profit Recurring Profit Net profit


Figure 31: Anritsu (6754): Performance by segment Segment P/L CS E CS E CS E

(mn JPY) 05/3 06/3 07/3 08/3 09/3 10/3 11/3 12/3 13/3 14/3 15/3

Test and MeasurementSales 55,245 65,113 72,882 72,717 57,449 48,270 53,462 70,531 73,500 78,000 83,500　　YoY 15.9% 17.9% 31.9% 11.7% -21.2% -33.6% -6.9% 46.1% 4.2% 6.1% 7.1%Operating profit 4,236 5,290 4,716 4,126 -791 2,251 5,050 13,735 15,900 18,000 20,400　　YoY 322.3% 24.9% 11.3% -22.0% -116.8% -45.4% -738.4% 510.2% 15.8% 13.2% 13.3%Operating profit margin 7.7% 8.1% 6.5% 5.7% -1.4% 4.7% 9.4% 19.5% 21.6% 23.1% 24.4%

Industrial AutomationSales 12,233 12,198 12,295 13,595 12,980 11,641 12,325 14,221 15,000 16,000 17,000　　YoY 6.9% -0.3% 0.5% 11.5% 5.6% -14.4% -5.0% 22.2% 5.5% 6.7% 6.3%Operating profit 1,001 787 608 814 596 610 659 528 1,000 1,100 1,200　　YoY 13.6% -21.4% -39.3% 3.4% -2.0% -25.1% 10.6% -13.4% 89.4% 10.0% 9.1%Operating profit margin 8.2% 6.5% 4.9% 6.0% 4.6% 5.2% 5.3% 3.7% 6.7% 6.9% 7.1%

Information and Communications and OthersSales 16,560 13,950 14,266 14,171 13,509 13,635 12,064 8,832 9,500 9,500 9,500　　YoY -14.1% -15.8% 2.3% -0.7% -4.7% 0.9% -11.5% -26.8% 7.6% 0.0% 0.0%Operating profit -377 -1,530 1,033 -1,173 1,099 1,721 848 151 500 500 500　　YoY 402.7% 305.8% -167.5% -213.6% -193.7% 56.6% -50.7% -82.2% 231.1% 0.0% 0.0%Operating profit margin -2.3% -11.0% 7.2% -8.3% 8.1% 12.6% 7.0% 1.7% 5.3% 5.3% 5.3%


05 July 2012


Figure 32: Anritsu (6754): Income statement (IFRS accounting from FY3/13) P/L CS E CS E CS E

(mn JPY) 05/3 06/3 07/3 08/3 09/3 10/3 11/3 12/3 13/3 14/3 15/3

Sales 84,039 91,262 99,445 100,485 83,940 73,548 77,853 93,586 98,000 103,500 110,000

YoY 7.2% 8.6% 9.0% 1.0% -16.5% -12.4% 5.9% 20.2% 4.7% 5.6% 6.3%Sales cost 53,665 55,204 55,786 56,474 52,005 42,707 43,033 49,384 49,200 50,800 52,700Gross profit 30,374 36,058 43,659 44,011 31,935 30,841 34,820 44,202 48,800 52,700 57,300

YoY 25.8% 18.7% 21.1% 0.8% -27.4% -3.4% 12.9% 26.9% 10.4% 8.0% 8.7%　Gross profit margin 36.1% 39.5% 43.9% 43.8% 38.0% 41.9% 44.7% 47.2% 49.8% 50.9% 52.1%SGA 25,511 31,508 37,300 38,655 31,029 26,257 27,825 29,787 31,400 33,100 35,200Operating profit 4,862 4,549 6,358 5,356 905 4,583 6,994 14,414 17,400 19,600 22,100　YoY 168.9% -6.4% 39.8% -15.8% -83.1% 406.4% 52.6% 106.1% 20.7% 12.6% 12.8%　Operating profit margin 5.8% 5.0% 6.4% 5.3% 1.1% 6.2% 9.0% 15.4% 17.8% 18.9% 20.1%

-2,839 -2,921 -3,165 -7,362 -735 -1,005 -1,632 -821 -1,000 -1,000 -1,000 Total non operating income 226 924 1,107 737 522 314 259 272Total non operating expenses 3,065 3,844 4,272 8,099 1,257 1,319 1,891 1,093Recurring Profit 2,023 1,628 3,193 (2,006) 170 3,578 5,362 13,593 16,400 18,600 21,100　YoY -180.5% -19.5% 96.1% -162.8% -108.5% 2004.7% 49.9% 153.5% 20.7% 13.4% 13.4%　Recurring profit ratio 2.4% 1.8% 3.2% -2.0% 0.2% 4.9% 6.9% 14.5% 16.7% 18.0% 19.2%Total of special income 570 1,798 326 35 1,334 351 8 10Total of extraordinary losses 515 1,399 418 1,186 3,741 16 1,132 2,252Net profit before tax adjustments 2,078 2,027 3,101 -3,150 -2,236 3,912 4,237 11,351 16,400 18,600 21,100Net profit 1,279 562 1,375 -3,900 -3,540 385 3,069 10,180 11,300 12,800 14,600　YoY 16.2% -56.1% 144.7% -383.6% -9.2% -110.9% 697.1% 231.7% 11.0% 13.3% 14.1%　Net profit ratio 1.5% 0.6% 1.4% -3.9% -4.2% 0.5% 3.9% 10.9% 11.5% 12.4% 13.3%

EPS 9.31 4.18 10.79 -30.60 -27.78 3.02 24.09 79.39 88.12 99.81 108.61　YoY 7.9% -55.1% 158.1% -383.6% -9.2% -110.9% 697.7% 229.6% 11.0% 13.3% 8.8%EPS (fully diluted) 8.22 3.77 9.72 - - 2.77 22.08 71.01 83.99 95.13 108.51　YoY 6.97 2.22 18.3% 13.3% 14.1%

BPS （net assets per share） 472.16 477.92 483.25 414.16 294.29 295.49 313.09 399.56 499.55 581.94 643.762.1% 0.9% 2.2% -6.8% -7.8% 1.0% 7.9% 21.5% 19.0% 18.5% 18.1%

Dividend per share 7.00 7.00 7.00 7.00 3.50 0.00 7.00 15.00 15.00 18.00 20.00Payout ratio 75.2% 186.2% 64.9% -22.9% -12.6% 0.0% 29.1% 18.9% 17.0% 18.0% 18.4%

Capex *Including construction in progress 1,869 2,698 2,319 2,790 2,236 1,134 1,549 3,165 4,300 2,000 2,000　YoY 22.2% 44.4% -14.0% 20.3% -19.9% -49.3% 36.6% 104.3% 35.9% -53.5% 0.0%

Depreciation　*Excluding goodwill 3,400 3,453 3,599 3,373 3,099 2,979 2,589 2,555 2,800 3,000 3,000　YoY -20.1% 1.6% 4.2% -6.3% -8.1% -3.9% -13.1% -1.3% 9.6% 7.1% 0.0%

R&D expenses 8,231 12,509 14,072 14,679 11,704 9,387 9,380 10,012 10,000 10,000 10,000　YoY -20.6% 52.0% 12.5% 4.3% -20.3% -19.8% -0.1% 6.7% -0.1% 0.0% 0.0% Source: Company data, Credit Suisse estimates

05 July 2012


Figure 33: Anritsu (6754): Balance sheet B/S CS E CS E CS E

(mn JPY) 05/3 06/3 07/3 08/3 09/3 10/3 11/3 12/3 13/3 14/3 15/3

Current assets (Total) 92,121 96,063 85,391 75,659 62,286 67,749 69,673 84,654 83,685 81,176 98,988Cash and deposits 31,844 24,171 18,947 17,384 18,538 26,269 27,993 39,596 37,585 33,176 48,788Notes and accounts receivable-trade 23,379 28,812 28,113 27,616 20,428 21,012 19,175 23,605 24,700 26,100 27,700Inventories (Total) 24,810 24,467 26,599 20,652 14,728 13,469 15,762 14,812 14,800 15,300 15,900Other current assets 10,189 11,010 10,734 10,007 8,592 6,999 6,743 6,641 6,600 6,600 6,600

Fixed assets 49,973 56,326 55,003 49,258 38,697 33,439 29,575 28,414 30,000 28,900 27,800Tangible assets (Total) 25,158 24,466 23,459 21,946 20,986 19,117 17,652 16,884 18,400 17,400 16,400Intangible assets (Total) 10,060 18,698 18,308 15,368 4,380 3,509 1,872 625 600 500 400Investments and other assets 14,754 13,160 13,235 11,943 13,330 10,812 10,049 10,904 11,000 11,000 11,000

Total assets 142,111 152,389 140,395 124,917 100,983 101,188 99,249 113,069 113,685 110,076 126,788

Current liabilities 24,063 47,976 51,086 27,435 28,062 27,813 20,403 43,948 35,100 26,000 34,700Notes and accounts payable-trade 7,304 9,341 7,476 7,269 5,020 5,296 6,147 4,919 4,900 5,100 5,300 Short-term debt 6,441 25,382 28,582 6,276 16,683 11,174 2,239 20,836 5,000 0 3,900Other current liabilities 10,318 13,253 15,028 13,890 6,359 11,343 12,017 18,193 25,200 20,900 25,500

Noncurrent liabilities 57,739 43,442 27,690 44,636 35,395 35,700 38,938 14,256 14,450 9,450 5,550Long-term debt 55,000 25,207 24,451 40,734 32,003 32,759 35,778 10,258 9,650 4,650 750Other noncurrent liabilities 2,739 18,235 3,239 3,902 3,392 2,941 3,160 3,998 4,800 4,800 4,800Liabilities (Total) 81,802 91,418 78,776 72,071 63,458 63,514 59,342 58,205 49,550 35,450 40,250

Minority shareholders' equity

Capital (Total) 60,308 60,970 63,341 58,540 43,810 44,191 47,002 62,007 71,242 81,733 93,645Unrealized gains/losses and exchange rate adjustments (1,736) (5,749) (6,305) (6,537) (7,107) (7,217) (7,180) (7,180) (7,180)Bonds with warrants attached 13 54 19 19 11 73 73 73 73Total net assets 61,619 52,845 37,524 37,674 39,906 54,863 64,135 74,626 86,538Total liabilities and net assets 142,111 152,389 140,395 124,917 100,983 101,188 99,249 113,069 113,685 110,076 126,788 Source: Company data, Credit Suisse estimates

05 July 2012


Figure 34: Anritsu (6754): Valuations

Anritsu(6754) CS E CS E CS E¥9534-Jul-12 05/3 06/3 07/3 08/3 09/3 10/3 11/3 12/3 13/3 14/3 15/3

Total assets 142,111 152,389 140,395 124,917 100,983 101,188 99,249 113,069 113,685 110,076 126,788Equity 60,308 60,970 63,341 58,540 43,810 44,191 47,002 62,007 71,242 81,733 93,645Cash and deposits 31,844 24,171 18,947 17,384 18,538 26,269 27,993 39,596 37,585 33,176 48,788Interest-bearing debt 61,441 50,589 53,033 47,010 48,686 43,933 38,017 31,094 14,650 4,650 4,650D/E 101.9% 83.0% 83.7% 80.3% 111.1% 99.4% 80.9% 50.1% 20.6% 5.7% 5.0%Net D/E 49.1% 43.3% 53.8% 50.6% 68.8% 40.0% 21.3% -13.7% -32.2% -34.9% -47.1%ROE 2.1% 0.9% 2.2% -6.8% -7.8% 1.0% 7.9% 21.5% 19.0% 18.5% 18.1%ROA 0.9% 0.4% 0.9% -2.9% -3.1% 0.4% 3.1% 9.6% 10.0% 11.4% 12.3%

Shares　High 857 749 771 603 368 438 806 1,100　Average 633 571 528 276 176 246 332 814 953 953 953　Low 745 649 646 473 263 337 541 568

Aggregate market value　High 109,712 95,900 98,717 77,207 47,118 56,081 103,202 141,745　Average 81,036 73,110 67,604 35,338 22,535 31,497 69,329 104,355 122,211 122,211 128,107　Low 95,362 83,150 82,765 60,515 33,707 43,119 42,509 72,728

EPS 9.31 4.18 10.79 (30.60) (27.78) 3.02 24.09 79.39 88.12 99.81 108.61PER （ｘ）

　High 92.05 179.19 71.46 (19.71) (13.25) 145.03 33.46 13.86　Average 67.99 136.60 48.93 (9.02) (6.34) 81.46 13.78 10.26 10.82 9.55 8.77　Low 80.01 155.36 59.91 (15.45) (9.48) 111.51 22.48 7.15

BPS 472.16 477.92 483.25 414.16 294.29 295.49 313.09 399.56 499.55 581.94 643.76PBR　High 1.82 1.57 1.60 1.46 1.25 1.48 2.57 2.75　Average 1.34 1.19 1.09 0.67 0.60 0.83 1.06 2.04 1.91 1.64 1.48　Low 1.58 1.36 1.34 1.14 0.89 1.14 1.73 1.42

CFPS 18.27 15.68 19.42 (2.06) (1.72) 13.14 22.09 46.22 51.18 61.60 65.46PCFR　High 46.9 47.8 39.7 (293.0) (213.7) 33.3 36.5 23.8　Average 34.6 36.4 27.2 (134.1) (102.2) 18.7 15.0 17.6 18.6 15.5 14.6　Low 40.8 41.4 33.3 (229.7) (152.9) 25.6 24.5 12.3

EBITDA 8,262 8,002 9,957 8,729 4,004 7,562 9,583 16,969 20,200 22,600 25,100EV　High 139,309 122,318 132,803 106,833 77,266 73,745 113,226 133,243　Average 110,633 99,528 101,690 64,964 52,683 49,161 79,353 95,853 99,276 93,684 83,969　Low 124,959 109,568 116,851 90,141 63,855 60,783 52,533 64,226

EV/EBITDA　High 16.9 15.3 13.3 12.2 19.3 9.8 11.8 7.9　Average 13.4 12.4 10.2 7.4 13.2 6.5 8.3 5.6 4.9 4.1 3.3　Low 15.1 13.7 11.7 10.3 15.9 8.0 5.5 3.8

ROIC 2.4% 2.2% 3.9% -1.0% 0.9% 4.7% 7.0% 15.8% 18.3% 21.6% 22.9% Source: Company data, Credit Suisse estimates

05 July 2012


Figure 35: Anritsu (6754): Financial summary


05 July 2012


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1.2

4.1

10.1

7.2

4.5

2.5

2.2

EMS

15.6

7.3

1.3

1.1

12.7

17.3

4.6

3.6

3.3

4.5

Com

petit

ors

18.8

13.8

2.0

1.8

16.0

16.9

9.3

7.7

0.9

0.9

Ab

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05 July 2012


HOLT Figure 37: HOLT analysis

Current Price: JPY 941.00 Warranted Price: JPY 935.77 Valuation date: 04-Jul-12

Sales Growth (parallel % point change to forecasts) Mar-11A Mar-12A Mar-13E Mar-14E Mar-15E

-2.0% -1.0% 0.0% 1.0% 2.0% Sales Growth, % 5.9 20.2 4.7 5.6 6.3

EBITDA Mgn, % 13.1 18.5 20.6 21.8 22.8

Asset Turns, x 0.43 0.50 0.53 0.56 0.58

CFROI®, % 2.0 8.0 8.5 9.8 10.6

Disc Rate, % 6.9 7.6 7.7 7.7 7.7

Asset Grth, % -1.1 5.6 0.6 0.8 2.6

Value/Cost, x 1.0 1.2 1.3 1.2 1.2

Economic PE, x 52.5 14.7 14.9 12.8 11.3

Leverage, % 38.5 24.8 20.7 20.7 20.7

More than10%

downsideWithin 10%

More than10%

upside

Source: Credit Suisse HOLT®. CFROI, HOLT, and ValueSearch are trademarks or registered trademarks of Credit Suisse Group AG or its affiliates in the United States and other* Operating margin (yellow) is EBITDA (grey) plus rental expense and R&D expense

2.0% 10% 15% 21% 27% 34%

10% 16% 22%

1.0% 5% 10% 16% 21% 28%

4% 10%

-1.0% -5% 0% 5% 10% 16%

HO

LT

-

Cre

dit

Su

isse

An

alys

t S

cen

ario

Dat

a

ANRITSU CORPORATION(C) (6754)

EB

ITD

A M

arg

in (p

aral

lel %

po

int

chan

ge

to f

ore

cast

s)

-2.0% -9% -5% 0%

0.0% 0% 5%

-50.00

-40.00

-30.00

-20.00

-10.00

0.00

10.00

20.00

30.00

2002 2004 2006 2008 2010 2012 2014 2016

Sales Growth (in %)

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

2002 2004 2006 2008 2010 2012 2014 2016

Operating Margin and EBITDA (in %) - see note*

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

2002 2004 2006 2008 2010 2012 2014 2016

Asset Turns (x)

-15.00

-10.00

-5.00

0.00

5.00

10.00

15.00

2002 2004 2006 2008 2010 2012 2014 2016

HistoricalCFROI

HistoricalTransactionCFROI

ForecastCFROI

ForecastTransactionCFROI

Discount Rate

CFROI & Discount Rate (in %)

-20.00

-15.00

-10.00

-5.00

0.00

5.00

10.00

15.00

20.00

2002 2004 2006 2008 2010 2012 2014 2016

HistoricalAsset GrowthRate

HistoricalGrowth InclIntang

ForecastGrowth

ForecastGrowth InclIntang

NormalisedGrowth Rate

Asset Growth (in %)

Source: Credit Suisse HOLT, Credit Suisse estimates

05 July 2012


Asia Pacific / Japan Integrated Telecommunication Services (Telecommunication Services) /

OVERWEIGHT

Softbank (9984 / 9984 JP) INCREASE TARGET PRICE

Center position in new eight-year cycle for telecom stocks ■ Upward rerating of sector has just begun: Telecom sector valuations, which

hitherto languished at low levels, have recently embarked on an upward trend, reflecting expectations of structural improvement across the industry supported by a new eight-year cycle. That said, sector valuations remain below historical norms (Figures 1–2), while Softbank’s sector-relative valuations are still tracking roughly one standard deviation below their historical averages. This implies ample scope for further upside, and we therefore raise our TP from ¥3,000 to ¥3,500 (potential return 17%) and reiterate our OUTPERFORM rating.

■ Effective price hike by DoCoMo is good news for Softbank: On 20 June, NTT DoCoMo announced a new LTE service plan with a 3GB usage limit priced at ¥4,935. We have argued that this effectively amounts to a price hike—and not a reduction—as it marks a distinct shift away from flat-rate plans that offer unlimited usage. If this model becomes the industry norm, we think the arrival of an LTE-capable iPhone5 could provide Softbank with an opportunity to increase prices. In such an event, we would need to review our forecasts.

■ Catalysts: Potential catalysts include announcements of LTE service plans and the launch of the iPhone5. One risk for the sector is the introduction by one of the carriers of a flat-rate LTE service plan offering unlimited usage. However, given Softbank’s desire to steer away from unlimited usage plans, we doubt the company would be keen to pioneer such a plan.

■ Valuation: Our ¥3,500 TP remains based on a sum-of-the-parts model, but we modify three assumptions. (1) We raise our EV/EBITDA for the mobile communications segment from 4x to 4.3x. (2) We raise our estimate of the theoretical value of Alibaba Group Holding to ¥2.8tn ($35bn) based on the recent agreement with Yahoo Inc. (3) We adjust the value of investments in Yahoo Japan and other companies to reflect present market value.

Share price performance

20002500300035004000

Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12

80100120140160

Price (LHS) Rebased Rel (RHS)

The price relative chart measures performance against the TOPIX which closed at 778.7 on 04/07/12 On 04/07/12 the spot exchange rate was ¥79.83/US$1

Performance Over 1M 3M 12M Absolute (%) 22.3 27.9 -4.2 Relative (%) 10.4 34.4 5.8

Financial and valuation metrics

Year 3/12A 3/13E 3/14E 3/15E Revenue (¥ bn) 3,202.4 3,281.9 3,481.5 3,714.5 Operating profit (¥ bn) 675.3 728.2 782.7 864.5 Recurring profit (¥ bn) 632.3 692.7 751.2 837.0 Net income (¥ bn) 313.8 334.5 370.7 423.9 EPS (¥) 278.8 297.0 329.3 376.5 Change from previous EPS (%) n.a. 0 0 0 IBES Consensus EPS (¥) n.a. 287.3 322.4 355.0 EPS growth (%) 65.4 6.6 10.8 14.4 P/E (x) 8.8 10.0 9.0 7.9 Dividend yield (%) 1.6 1.3 1.3 1.3 EV/EBITDA(x) 3.4 3.5 3.0 2.6 P/B (x) 2.9 2.6 2.0 1.6 ROE(%) 39.7 29.7 25.1 22.6 Net debt/equity (%) 73.5 41.2 16.7 net cash

Source: Company data, Thomson Reuters, IFIS, Credit Suisse estimates.

*Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months.

Research Analysts

Hitoshi Hayakawa 813 4550 9952

[email protected]

Rating OUTPERFORM* Price (04 Jul 12, ¥) 2,979 Target price (¥) (from 3,000) 3,500¹ Chg to TP (%) 17.5 Market cap. (¥ bn) 3,299.92 (US$ 41.34) Enterprise value (¥ bn) 3,832.47 Number of shares (mn) 1,107.73 Free float (%) 65.0 52-week price range 3,185 - 2,067

05 July 2012


Valuation Telecom sector valuations recently turned upward after bottoming out (Figures 1–2), as the market evidently took note of prospects for accelerated adoption of smartphones and LTE service, as well as for what we regard to be a new eight-year cycle. That said, valuations are still well below their two-year historical averages, suggesting the upward rerating of the sector has only just begun.

Figure 1: Sector P/E

8

9

10

11

12

13

14

10/6 10/8 10/10 10/12 11/2 11/4 11/6 11/8 11/10 11/12 12/2 12/4 12/6

(X)

PER 2yr average

2yr average：10.89as of 4 July：9.591σ＝1.11


Figure 2: Sector EV/EBITDA

2.6

2.8

3.0

3.2

3.4

3.6

3.8

6/10 8/10 10/10 12/10 2/11 4/11 6/11 8/11 10/11 12/11 2/12 4/12 6/12

EV/EBITDA Average

2yr average：3.16as of 4 July：2.90σ=0.27

(x)


Upward rerating of telecom sector far from over

05 July 2012


Softbank’s sector-relative P/E and EV/EBITDA are also on a recovery track, but similarly remain roughly one standard deviation below their two-year historical averages. In other words, the stock continues to be oversold.

Figure 3: Softbank relative P/E

0.6

0.8

1.0

1.2

1.4

1.6

1.8

10/6 10/8 10/10 10/12 11/2 11/4 11/6 11/8 11/10 11/12 12/2 12/4 12/6

(x) 2yr average：1.14as of 4 July：1.071σ＝0.21σ +2

σ +1

σ -1

σ -2


Figure 4: Softbank relative EV/EBITDA

2.6

2.8

3.0

3.2

3.4

3.6

3.8

6/10 8/10 10/10 12/10 2/11 4/11 6/11 8/11 10/11 12/11 2/12 4/12 6/12

EV/EBITDA Average

2yr average：3.16as of 4 July：2.90σ=0.27

(x)


05 July 2012


Raising target price Our ¥3,500 TP remains based on a sum-of-the-parts model but we modify three assumptions. (1) We raise our EV/EBITDA for the mobile communications segment from 4x to 4.3x. (2) We raise our estimate of the theoretical value of Alibaba Group Holding to ¥2.8tn ($35bn) based on the recent agreement with Yahoo Inc. (3) We adjust the value of investments in Yahoo Japan and other companies to reflect present market value.

Figure 5: Summary of our SOTP revision

-950 -950

462 462

2,792 3,034

783953

-1,000

0

1,000

2,000

3,000

4,000

JPY3,087Last revision (29 May)

JPY3,499New (5 July)

(JPY)

Investment securities values

Mobile telecommunications

BB, fixed-line and others

Net debt

+170

+242


We derive our EV/EBITDA of 4.3x for the mobile communications segment by applying Softbank’s sector-relative EV/EBITDA of 1.38x to the telecom sector’s two-year average of 3.15x. This increases our per-share EV estimate for the segment by 8.6% from ¥2,792 to ¥3,034 (up ¥242).

We originally estimated the theoretical value of Alibaba Group Holding at ¥2tn (putting Softbank’s 33% stake at ¥666bn). However, a recent joint statement released by Alibaba Group Holding and Yahoo Inc. on 21 May suggested a value of $35bn, or roughly ¥2.8tn assuming ¥80/$. We revise up our estimate to match this figure (bringing Softbank’s 33% stake up to ¥924bn), which increases the value per share of this investment from ¥352 to ¥492 (up ¥140).

Finally, where applicable, we revise our estimates for investments other than Alibaba Group Holding to reflect present market value. This increases the value per share of these investments from ¥340 to ¥370 (up ¥30). In total, we revise up the value per share of Softbank’s securities holdings from ¥783 to ¥953 (up ¥170).

In light of the above, we raise our TP from ¥3,000 to ¥3,500 and maintain our OUTPERFORM rating.

05 July 2012


Figure 6: Sum-of-the-parts valuation (¥mn) (¥ Per Share)

Investment securities values 1,055,392 953 - - - - A

Investment securities of listed companies in Japan 644,200 343

Value of Alibaba Group Holdings (33%) 924,000 492

Value of RenRen (33.4%) 50,600 27

Value of PPTV (35%) 120,000 64

Other 50,000 27 Note: Per share value are after tax

Mobile Telecommunications segment EV 3,360,897 3,034 - - - - B

Mobile Telecommunications segment EBITDA 773,153

EBITDA multiple x 4.35

Broadband Infrastructure segment EV 150,657 136 - - - - C

Broadband Infrastructure segment EBITDA 50,219

EBITDA multiple x 3

Fixed-line Telecommunications segment EV 313,171 283 - - - - D

Fixed-line Telecommunications segment EBITDA 104,390

EBITDA multiple x 3

Others EV 48,000 43 - - - - E

Others EBITDA 16,000

EBITDA multiple x 3

Net Debt 1,052,255 -950 - - - - F

Market Capitalization 3,875,862 - - - - G

Diluted number of shares outstanding (million) 1,108 - - - - H

Theoretical share price (¥) - - - - I = G / H3,499 Source: Company data, Credit Suisse estimates

Figure 7: Consolidated earnings summary DPS P/E

¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥ YoY (%) ¥ (x)Consolidated3/12 A 3,202,435 6.6 675,283 7.3 632,256 31.6 313,752 65.4 279 65.4 40 10.73/13 CS E 3,281,912 2.5 728,215 7.8 692,684 9.6 334,464 6.6 297 6.6 40 10.0

CoE - - Over 700bn - - - - - - - - -3/14 CS E 3,481,498 6.1 782,704 7.5 751,191 8.4 370,739 10.8 329 10.8 40 9.03/15 CS E 3,714,451 6.7 864,471 10.4 837,011 11.4 423,947 14.4 377 14.4 40 7.9

Sales Operating profit Recurring profit Net profit EPS


05 July 2012


Companies Mentioned (Price as of 04 Jul 12) Anritsu (6754, ¥953, OUTPERFORM, TP ¥1,180, MARKET WEIGHT) KDDI (9433, ¥528,000, OUTPERFORM, TP ¥570,000, OVERWEIGHT) NTT DoCoMo (9437, ¥134,600, OUTPERFORM, TP ¥150,000, OVERWEIGHT) Softbank (9984, ¥2,979, OUTPERFORM, TP ¥3,500, OVERWEIGHT) Aeon Co Ltd (8267, ¥984, OUTPERFORM, TP ¥1,300, MARKET WEIGHT) Ajinomoto (2802, ¥1,115, NEUTRAL, TP ¥1,100, MARKET WEIGHT) Apple Inc. (AAPL, $582.10, OUTPERFORM, TP $750.00) ARM Holdings (ARM.L, 506 p) Astellas Pharma (4503, ¥3,265, OUTPERFORM, TP ¥4,100, UNDERWEIGHT) AT&T (T, $35.17, OUTPERFORM, TP $36.50) Broadcom Corp. (BRCM, $34.43, OUTPERFORM, TP $50.00) Casio (6952, ¥482, NEUTRAL, TP ¥490, MARKET WEIGHT) Clearwire (CLWR, $1.20, OUTPERFORM [V], TP $4.75) East Japan Railway Company (9020, ¥4,795, OUTPERFORM, TP ¥6,040, MARKET WEIGHT) Ericsson (ERIC, $8.91, NEUTRAL, TP $8.53) Fujitsu (6702, ¥381, NEUTRAL, TP ¥420, MARKET WEIGHT) Hitachi (6501, ¥483, NEUTRAL, TP ¥410, MARKET WEIGHT) HTC Corp (2498.TW, NT$378.50, NEUTRAL [V], TP NT$400.00) Intel Corp. (INTC, $26.95, OUTPERFORM, TP $35.00) JT (2914, ¥445,000, OUTPERFORM, TP ¥490,000, MARKET WEIGHT) Kao (4452, ¥2,071, NEUTRAL, TP ¥2,120, MARKET WEIGHT) KDDI (9433, ¥503,000, OUTPERFORM, TP ¥570,000, OVERWEIGHT) Kyocera (6971, ¥6,790, OUTPERFORM, TP ¥8,500, MARKET WEIGHT) Leap Wireless (LEAP, $5.81, NEUTRAL [V], TP $5.50) LG Electronics Inc (066570.KS, W62,800, NEUTRAL, TP W81,400) McDonald's Holdings Co. Japan (2702, ¥2,284) MetroPCS (PCS, $5.90, NEUTRAL, TP $8.00) Microsoft Corp. (MSFT, $30.70, OUTPERFORM, TP $38.00) Motorola Inc. (MOT, $47.88) NEC (6701, ¥127, NEUTRAL, TP ¥180, MARKET WEIGHT) Nippon Telegraph and Telephone (9432, ¥3,555, OUTPERFORM, TP ¥4,700, OVERWEIGHT) Nissin Foods Holdings (2897, ¥2,956, NEUTRAL, TP ¥2,900, MARKET WEIGHT) Nokia (NOK1V.HE, Eu1.93, NEUTRAL [V], TP Eu2.00) Nokia Corporation (NOK, $2.38, NEUTRAL [V], TP $2.60) NTT DoCoMo (9437, ¥126,700, OUTPERFORM, TP ¥150,000, OVERWEIGHT) Nvidia Corporation (NVDA, $12.99) Oriental Land (4661, ¥8,710) Osaka Gas (9532, ¥320, NEUTRAL, TP ¥320, MARKET WEIGHT) Otsuka Holdings (4578, ¥2,371, OUTPERFORM, TP ¥2,600, UNDERWEIGHT) QUALCOMM Inc. (QCOM, $55.64, OUTPERFORM, TP $75.00) Rakuten, Inc. (4755, ¥79,300, OUTPERFORM, TP ¥95,000, OVERWEIGHT) Samsung Electronics (005930.KS, W1,182,000, OUTPERFORM, TP W1,610,000) Secom (9735, ¥3,480) Seven & i Holdings (3382, ¥2,285, OUTPERFORM, TP ¥3,100, MARKET WEIGHT) Sharp Corp. (6753, ¥425, NEUTRAL, TP ¥570, MARKET WEIGHT) Softbank (9984, ¥2,752, OUTPERFORM, TP ¥3,000, OVERWEIGHT) Sony (6758, ¥1,163, NEUTRAL, TP ¥1,750, MARKET WEIGHT) Sprint (S, $3.29, OUTPERFORM [V], TP $4.00) Takeda Pharmaceutical (4502, ¥3,490, NEUTRAL, TP ¥3,500, UNDERWEIGHT) TeliaSonera (TLSN.ST, SKr43.26, NEUTRAL, TP SKr52.00) Texas Instruments Inc. (TXN, $28.05, OUTPERFORM, TP $40.00) Tokyo Gas (9531, ¥384, NEUTRAL, TP ¥380, MARKET WEIGHT) Tokyu Corporation (9005, ¥353, NEUTRAL, TP ¥380, MARKET WEIGHT) Verizon (VZ, $43.95, OUTPERFORM, TP $45.00) West Japan Railway Company (9021, ¥3,165, NEUTRAL, TP ¥3,450, MARKET WEIGHT) Yahoo Japan (4689, ¥25,260, OUTPERFORM, TP ¥30,000, OVERWEIGHT) ZTE Corporation (0763.HK, HK$14.68, OUTPERFORM, TP HK$23.00) Alibaba.com Limited (1688.HK) RenRen (RENN) Huawei (unlisted) LightSquared (unlisted) Research In Motion (unlisted)

05 July 2012


T-Mobile USA (unlisted) Willcom (unlisted) Wireless City Planning (unlisted) PPTV (unlisted)

Disclosure Appendix Important Global Disclosures Hitoshi Hayakawa, Hideyuki Maekawa & Akinori Kanemoto each certify, with respect to the companies or securities that he or she analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

See the Companies Mentioned section for full company names. 3-Year Price, Target Price and Rating Change History Chart for 6754 6754 Closing

Price Target

Price

Initiation/ Date (¥) (¥) Rating Assumption

0

200

400

600

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6-Jul-

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Closing Price Target Price Initiation/Assumption Rating

¥

O=Outperform; N=Neutral; U=Underperform; R=Restr icted; NR=Not Rated; NC=Not Covered

3-Year Price, Target Price and Rating Change History Chart for 9984 9984 Closing

Price Target

Price

Initiation/ Date (¥) (¥) Rating Assumption 11-Sep-09 2080 3000 3-Jun-10 2298 3300 5-Oct-10 2722 4000 30-May-11 3035 4500 19-Jan-12 2067 3000

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6-May-1

2

Closing Price Target Price Initiation/Assumption Rating

¥

O=Outperform; N=Neutral; U=Underperform; R=Restr icted; NR=Not Rated; NC=Not Covered

The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities. Analysts’ stock ratings are defined as follows: Outperform (O): The stock’s total return is expected to outperform the relevant benchmark* by at least 10-15% (or more, depending on perceived risk) over the next 12 months. Neutral (N): The stock’s total return is expected to be in line with the relevant benchmark* (range of ±10-15%) over the next 12 months. Underperform (U): The stock’s total return is expected to underperform the relevant benchmark* by 10-15% or more over the next 12 months. *Relevant benchmark by region: As of 29th May 2009, Australia, New Zealand, U.S. and Canadian ratings are based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe**, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. Some U.S. and Canadian ratings may fall outside the absolute total return ranges defined above, depending on market conditions and industry factors. For Latin American, Japanese, and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; for European stocks, ratings are based on a stock’s total return relative to the analyst's coverage universe**. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. **An analyst's coverage universe consists of all companies covered by the analyst within the relevant sector.

05 July 2012


Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ coverage universe weightings are distinct from analysts’ stock ratings and are based on the expected performance of an analyst’s coverage universe* versus the relevant broad market benchmark**: Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months. *An analyst’s coverage universe consists of all companies covered by the analyst within the relevant sector. **The broad market benchmark is based on the expected return of the local market index (e.g., the S&P 500 in the U.S.) over the next 12 months. Credit Suisse’s distribution of stock ratings (and banking clients) is:

Global Ratings Distribution Outperform/Buy* 48% (59% banking clients) Neutral/Hold* 41% (57% banking clients) Underperform/Sell* 10% (50% banking clients) Restricted 2%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.

Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html

Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

See the Companies Mentioned section for full company names. Price Target: (12 months) for (6754) Method: We base our Y1,180 target price for Anritsu on a P/B of 2.35x against our FY3/13 BPS estimate of Y500. Risks: Risks to our Y1,180 target price for Anritsu include earlier-than-expected adoption of LTE measuring instruments made by rival Agilent, correction in 3G handsets, and delay in the take-off of LTE smartphone models. Price Target: (12 months) for (9984) Method: Our ¥3,500 target price for Softbank is based on a sum-of-the-parts model. For investment security valuations, we assign ¥953 per share. We apply EV/EBITDA of 4.35x for the mobile communications segment and 3x for the broadband infrastructure, land-line communications, and other segments, versus our revised FY3/13 EBITDA estimate. We use the FY3/12 result for net interest-bearing debt. Our FY3/13 EPS estimate is ¥297 and implied P/E from our TP is 11.8x. Risks: Risks to our ¥3,500 target price for Softbank include the introduction by one of the carriers of a flat-rate LTE service plan offering unlimited usage. However, given Softbank's desire to steer away from unlimited usage plans, we doubt the company would be keen to pioneer such a plan. Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names. Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (9984) within the next 3 months. Important Regional Disclosures Singapore recipients should contact a Singapore financial adviser for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (9984) within the past 12 months.

Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.

As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

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05 July 2012


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05 July 2012 Asia Pacific / Japan

Equity Research

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Rethinking Japanese Equities: Smartphone and LTE stocks

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