Deutsche Bank Markets Research Rating Hold Asia Taiwan Technology Semiconductor & Equipment Company MediaTek Date 23 September 2014 Recommendation Change Facing more headwinds into 2015; downgrading to Hold Reuters Bloomberg Exchange Ticker 2454.TW 2454 TT TAI 2454 Forecasts And Ratios Year End Dec 31 2012A 2013A 2014E 2015E 2016E Sales (TWDm) 99,263 136,056 217,566 259,024 295,211 Net Income 15,688 27,515 48,240 53,434 58,653 DB EPS FD(TWD) 12.79 20.51 30.71 34.01 37.33 % Change 0.0% 0.0% -0.1% -3.2% -5.5% DB EPS growth (%) 3.7 60.3 49.7 10.8 9.8 PER (x) 23.0 17.8 16.1 14.5 13.2 Yield (net) (%) 2.9 2.5 3.0 4.6 5.2 ROE (%) 10.7 14.8 22.1 21.4 21.9 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close Intensifying pricing competition dampening mid-term margins outlook ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, 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. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 148/04/2014. Price at 22 Sep 2014 (TWD) 494.00 Price target - 12mth (TWD) 510.00 52-week range (TWD) 535.00 - 365.50 Taiwan Stock Exchange (TWSE) 9,135 Jessica Chang Research Analyst (+886) 2 2192 2838 [email protected]Key changes Rating Buy to Hold ↓ Price target 615.00 to 510.00 ↓ -17.1% Sales (FYE) 217,388 to 217,566 ↑ 0.1% Op prof margin (FYE) 23.3 to 23.2 ↓ -0.3% Net profit (FYE) 48,305.8 to 48,239.6 ↓ -0.1% Source: Deutsche Bank Price/price relative 280 320 360 400 440 480 520 560 9/12 3/13 9/13 3/14 MediaTek Taiwan Stock Exchang (Rebased) Performance (%) 1m 3m 12m Absolute -2.9 -2.9 33.5 Taiwan Stock Exchange (TWSE) -2.6 -1.5 11.3 Source: Deutsche Bank Stock data Market cap (TWDm) 776,085 Market cap (USDm) 25,679 Shares outstanding (m) 1,571.0 Avg daily value traded (USDm) 102.9 Source: Deutsche Bank Key indicators (FY1) ROE (%) 22.1 Book value/share (TWD) 153.0 Operating profit margin (%) 23.2 Source: Deutsche Bank Our latest industry checks suggest that competition in the China baseband market is intensifying faster than we anticipated. We expect MediaTek to continue having the highest overall market share there, but we envisage downside on ASP and margins capping earnings momentum in 2015 after the phenomenal growth achieved in 2013-2014. We thus downgrade to Hold. 3Q14 tracking in line with guidance rage, but upside potential limited We expect MediaTek to meet its 3Q14 sales guidance range. It anticipates GMs to fall to 47.5-49.5% from 49.6% in 2Q14. We note that shipments of MediaTek’s current most lucrative 3G octa-core SOC product MT6592 seemed to have peaked in 2Q14, while increasing shipments on lower-margin dual-chip LTE products could lead to GMs dilution for another one to two quarters before its low-cost solutions enter mass production in 2Q15. More challenges in 4Q14-1Q15 We see competition from both Qualcomm and Spreadtrum as heating up lately. We note Qualcomm receives a lot more design wins than MediaTek in LTE on its early mover advantages, which could weaken MediaTek’s pricing power in 4G. As such, it is less likely for MediaTek to enjoy as high GMs for 4G as it had in 3G previously. Also, we are aware that Spreadtrum is making a comeback to WCDMA and even targets to enter mass production for LTE in 1Q15, which could further impact industry GMs given its well-known low-price approach. Downgrading to Hold with target price at NT$510; risks We lower FY15-16E EPS by 3.2%/5.5% and reduce our target price to NT$510 based on 15x FY15E EPS. We move our valuation base from 2014 to 2015 and cut our target PER from 20x to 15x (the low end of its historical 15-25x PERs in the past three years) to reflect the slowing earnings growth. We think MediaTek has a chance to regain momentum in 2H15 if it can roll out new LTE products focusing sharply on the right segments ahead of rivals again. For now, we suggest a more conservative stance given a record-high QFII holding at 63% and potentially more downside to our reduced earnings estimates. Risks: faster/slower margins improvement and stronger/weaker smartphone demand.
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Deutsche Bank Markets Research
Rating
Hold Asia
Taiwan
Technology
Semiconductor & Equipment
Company
MediaTek
Date
23 September 2014
Recommendation Change
Facing more headwinds into 2015; downgrading to Hold
Reuters Bloomberg Exchange Ticker 2454.TW 2454 TT TAI 2454
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, 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. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 148/04/2014.
Our latest industry checks suggest that competition in the China baseband market is intensifying faster than we anticipated. We expect MediaTek to continue having the highest overall market share there, but we envisage downside on ASP and margins capping earnings momentum in 2015 after the phenomenal growth achieved in 2013-2014. We thus downgrade to Hold.
3Q14 tracking in line with guidance rage, but upside potential limited We expect MediaTek to meet its 3Q14 sales guidance range. It anticipates GMs to fall to 47.5-49.5% from 49.6% in 2Q14. We note that shipments of MediaTek’s current most lucrative 3G octa-core SOC product MT6592 seemed to have peaked in 2Q14, while increasing shipments on lower-margin dual-chip LTE products could lead to GMs dilution for another one to two quarters before its low-cost solutions enter mass production in 2Q15.
More challenges in 4Q14-1Q15 We see competition from both Qualcomm and Spreadtrum as heating up lately. We note Qualcomm receives a lot more design wins than MediaTek in LTE on its early mover advantages, which could weaken MediaTek’s pricing power in 4G. As such, it is less likely for MediaTek to enjoy as high GMs for 4G as it had in 3G previously. Also, we are aware that Spreadtrum is making a comeback to WCDMA and even targets to enter mass production for LTE in 1Q15, which could further impact industry GMs given its well-known low-price approach.
Downgrading to Hold with target price at NT$510; risks We lower FY15-16E EPS by 3.2%/5.5% and reduce our target price to NT$510 based on 15x FY15E EPS. We move our valuation base from 2014 to 2015 and cut our target PER from 20x to 15x (the low end of its historical 15-25x PERs in the past three years) to reflect the slowing earnings growth. We think MediaTek has a chance to regain momentum in 2H15 if it can roll out new LTE products focusing sharply on the right segments ahead of rivals again. For now, we suggest a more conservative stance given a record-high QFII holding at 63% and potentially more downside to our reduced earnings estimates. Risks: faster/slower margins improvement and stronger/weaker smartphone demand.
23 September 2014
Semiconductor & Equipment
MediaTek
Page 2 Deutsche Bank AG/Hong Kong
Model updated:22 September 2014
Running the numbers
Asia
Taiwan
Semiconductor & Equipment
MediaTek Reuters: 2454.TW Bloomberg: 2454 TT
Hold Price (22 Sep 14) TWD 494.00
Target Price TWD 510.00
52 Week range TWD 365.50 - 535.00
Market Cap (m) TWDm 776,085
USDm 25,679
Company Profile
MediaTek is Asia's largest fabless IC design house focusing on designing and selling mobile phone baseband/AP, tablet AP, TV controller, Blu-ray player IC, optical disk drive controller, and connectivity IC etc. MediaTek has been the No.1 baseband player in China manufactured smartphone phone sector since 2012 in terms of shipment with market share of around 45-50% in 2012.
Total shareholders' equity 116,328 175,774 195,353 240,395 258,801 277,853
Net debt -81,585 -76,873 -103,859 -156,467 -170,097 -188,513
Key Company Metrics
Sales growth (%) -23.5 14.3 37.1 59.9 19.1 14.0
DB EPS growth (%) -56.6 3.7 60.3 49.7 10.8 9.8
EBITDA Margin (%) 17.4 16.3 19.8 24.8 24.1 23.4
EBIT Margin (%) 14.2 12.6 18.6 23.2 22.2 21.5
Payout ratio (%) 161.5 65.8 43.9 48.9 67.0 68.4
ROE (%) 11.9 10.7 14.8 22.1 21.4 21.9
Capex/sales (%) 2.3 0.9 0.4 2.3 0.9 0.9
Capex/depreciation (x) 0.7 0.2 0.4 1.5 0.5 0.5
Net debt/equity (%) -70.1 -43.7 -53.2 -65.1 -65.7 -67.8
Net interest cover (x) nm nm nm nm nm nm
Source: Company data, Deutsche Bank estimates
23 September 2014
Semiconductor & Equipment
MediaTek
Deutsche Bank AG/Hong Kong Page 3
Facing more headwinds into 2015; downgrading to Hold
Three key reasons why we turn conservative on MediaTek
MediaTek has demonstrated phenomenal growth in the past two years, thanks to its impressive technology advancement into smartphones, brilliant product planning and execution, as well as unparalleled customer support in China. However, we think MediaTek is entering a more challenging phase now due to three major reasons:
1. Qualcomm’s increased aggressiveness with improved China execution
We think the LTE battle between MediaTek and Qualcomm (QCOM) is likely to be tougher for MediaTek this time, although MediaTek has become a much stronger company now compared to its status when it first entered the 3G smartphone business in 2010. We generally view QCOM as the leading player in overall 3G and 4G, and we attribute MediaTek’s triumph in China 3G smartphone to its deeper understanding on local customer requirements and stronger FAE and turn-key support in China that QCOM was unable to match. For instance, MediaTek introduced quad- and octa-core products ahead of QCOM with strong customer acceptance, which propelled MediaTek’s shipments, expanded its market share rapidly, and improved its GMs in the past two years. However, we believe QCOM has become more experienced in China now and has thus made great effort to address China LTE demand properly and make its solutions available earlier than MediaTek this time. We believe MediaTek has been running at full speed to narrow the gap (and as a matter of fact, it has launched several LTE SOCs to showcase its capability), yet we think QCOM’s early entry has benefited QCOM from more design wins in 2H14 for mass production in 4Q14-1Q15. Thus, MediaTek needs to speed up in product introduction to catch the next design cycle in 2Q15.
With the current circumstances, we think it will be more difficult for MediaTek to lift its GMs through enhancing its product mix like it did in 3G, given QCOM’s leading position and clearly increased aggressiveness. We also think the LTE baseband market may enter the low-price stage faster than we previously expected given QCOM targets to sell its ultra-low-cost quad-core MSM8909 (S210) at US$8-9 in 2Q15, suggesting nearly no initial premium at LTE early stage vs. current mainstream 3G. We believe MediaTek maintains a similar timetable for its countering low-price product, but such a fast ASP downward trend will cap baseband product GMs for all players, including MediaTek and QCOM.
We acknowledge MediaTek’s LTE strategy is to come up with high-end products first to counter QCOM’s most lucrative businesses (S800), such as its MT6595 (high-end, mass production in 3Q14), followed by mid-range products MT6752 (mid- to high-end, mass production in 4Q14) and MT6732 (mid-end, mass production in 4Q14), and then lower-range products MT6735 (mid- to low-end) and MT6735m (low-end). MediaTek has not announced the timetable for MT6735/6735m, while our checks suggest these two mid- to low-end products will be in mass production around April next year. We believe the low-end product MT6735m will be important for MediaTek to increase its LTE
23 September 2014
Semiconductor & Equipment
MediaTek
Page 4 Deutsche Bank AG/Hong Kong
market shares in 2015, but the likely ASP of US$8-10 suggests that its GMs may be barely around 40% initially, if not lower.
2. Spreadtrum’s comeback likely to drive industry margins lower
We note that Spreadtrum has recently entered mass production for its WCDMA products after going through a slow first three quarters of this year. Spreadtrum usually is behind in technology compared to tier one rivals; however, it is famous in its low-price strategy, as seen in 2G feature phone and TD smartphone. Our checks suggest that its new WCDMA products have decent performance and attractive ASPs. Therefore, this could start to impact MediaTek’s WCDMA business in both shipments and GMs from 4Q14.
Moreover, our checks reveal that Spreadtrum aims to enter mass production for its LTE products in 1Q15. Although we have some reservations on such an aggressive target, we think competition from Spreadtrum is likely coming soon in 1H15. This is likely to dampen industry GMs of for entry-level LTE products earlier than expected.
3. Product mix upside potential for 3G becoming limited
One of the key driving forces behind MediaTek GMs upside in the past three quarters was the increased sales contribution from its 3G octa-core product MT6592. It was well received by customers for their premium smartphone models for the China market in 1H14. MediaTek enjoyed very handsome ASP and GMs, as it was the only player offering this product at that time. However, with China’s domestic demand moving into LTE, we expect shipments of MT6592 to decrease as demand from emerging markets, a growing portion of MediaTek’s 3G business, is unlikely to be strong for this product given its high cost. Therefore, we think MediaTek’s GMs on 3G business may not be able to go up, while the increasing competition from Spreadtrum may soon impose negative impacts.
Revisions to earnings, target price and recommendation
In this review, we maintain our FY14-15 sales broadly unchanged. For 2015, we increase our shipment estimates to factor in potential upside from its expansion into the CDMA2000 segment starting early from 2Q15 (given it is about to launch MT6735 worldmode products in 1Q15), while we reduce ASP and GMs (from 47.2% to 46.2%) assumptions to take into consideration heating competition. After this review, we forecast MediaTek’s average earnings growth to slow to 10% for FY15-16 vs. 60% in 2013 and 50% in 2014, which is below the market’s optimistic expectation.
We lower our FY15-16E EPS by 3.2%/5.5% and reduce our target price to NT$510 based on 15x FY15E EPS. We move our valuation base from 2014 to 2015 and cut our target PER from 20x to 15x (the low end of its 15-25x historical PERs in the past three years) to reflect the slowing earnings growth. We consider 15x PER as reasonable compared to its local peers’ 10-18x.
Our earnings reduction may be seen as somewhat too mild at the first glance if compared to our target price cut. The reason for a greater decrease in our target price is based on our view that MediaTek is now a well-owned stock with a record-high QFII holding of 63%. Given the increased uncertainty in its mid-term earnings outlook, we do not exclude potential panic selling pressure among investors, as it usually takes MediaTek a few quarters to get through a correction, at the soonest, before the company resumes its earnings momentum through upside on either sales or margins. That said, we still think MediaTek has a fair chance to regain strength in late 2H15 if it can again roll
23 September 2014
Semiconductor & Equipment
MediaTek
Deutsche Bank AG/Hong Kong Page 5
out new LTE products focusing sharply on the right segments ahead of rivals like it did in 3G. For now, we suggest a more conservative stance given LTE is inevitable among all the players before the market enters a more mature stage after consolidation.
Risks:
1) Upside/downside on margins: MediaTek’s GMs are subject to competition and its product mix changes, while OMs are dictated by GMs and its opex control.
2) Stronger/weaker smartphone chip shipments: MediaTek’s smartphone chip business depends on LTE smartphone demand in China and 3G/2G smartphone in emerging markets. Also, MediaTek’s smartphone chip shipment is partly subject to its progress into global operator markets with CDMA2000 function included in its SOC.
MP time 3Q13 3Q13/4Q13 3Q14 4Q14 4Q14 2Q15 Source: Deutsche Bank, company data
23 September 2014
Semiconductor & Equipment
MediaTek
Deutsche Bank AG/Hong Kong Page 9
Appendix1
ImportantDisclosures
Additionalinformationavailableuponrequest
Disclosure checklist
Company Ticker Recent price* Disclosure
MediaTek 2454.TW 494.00 (TWD) 22 Sep 14 NA *Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies
For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=2454.TW
Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Jessica Chang
Historical recommendations and target price: MediaTek (2454.TW) (as of 9/22/2014)
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Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating
Current Recommendations
Buy Hold Sell Not Rated Suspended Rating
*New Recommendation Structure as of September 9,2002
Equity rating key Equity rating dispersion and banking relationships
Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock. Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Notes:
1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were:
Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12-month period Sell: Expected total return (including dividends) of -10% or worse over a 12-month period
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Asia-Pacific Universe
Companies Covered Cos. w/ Banking Relationship
23 September 2014
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Deutsche Bank AG/Hong Kong Page 11
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