MediaTek Inc.

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24 September 2014
(2454.TW / 2454 TT) COMPANY UPDATE
Working to withstand the competition
Competitive dynamics may cap the near term. Mediatek's stock has declined
5% the past quarter vs. -1% TAIEX performance and may stay range-bound the
next few months. The positives of China brands' strong 3G exports and 4G LTE
ramp to 30 mn units should be offset by modest GM erosion as Mediatek
positions less competitive first gen LTE SoCs against QCOM, and Spreadtrum
takes entry-tier share and may move ahead with an Intel MoU.
A substantial 3G/4G refresh provides support by MWC in late 1Q15.
Mediatek is slated for its most aggressive top-to-bottom refresh to date
focused both on lower cost and higher performance. Key upgrades include (1)
added support for CDMA 2000 (181 mn addressable market at China
Telecom), (2) ultra-low-cost chip for entry LTE rivalling QCOM, (3) second gen
quad- and octa-core LTE with CDMA 2000, and (4) 3G dual/quad core refresh.
New products should raise design win traction by 2Q15 and support GMs.
Outlook still on track to more realistic expectations. We believe the
market is well aware of competitive pressures and the street is finally reflecting
realistic assumptions for 4Q down seasonality and some modest GM decline
from a high base until the second gen LTE products launch. We maintain our
2014E/2015E EPS at NT$30/NT$33, allowing for mid-high single-digit sales
declines in 4Q14/1Q15 and GMs mildly down to bottom at 47% in 1Q15.
Maintain OUTPERFORM. While the stock may stay range-bound on
competitive moves and into the low season, we stay constructive into good
ramp into LTE next year and a valuation that reflects some competitive
pressure at 16x 2014E/14x 2015E with NT$100/share net cash. We rate
Mediatek OUTPERFORM and maintain our NT$570 TP on 19x 2014E EPS
based on same 2014E/2015E EPS of NT$30/NT$33.
Share price performance
Price (LHS) Rebased Rel (RHS)
The price relative chart measures performance against the
TAIWAN SE WEIGHTED INDEX which closed at 9084.9 on
23/09/14
On 23/09/14 the spot exchange rate was NT$30.23/US$1
Performance Over 1M 3M 12M Absolute (%) -7.1 -6.3 27.5 Relative (%) -3.9 -4.6 17.9
Financial and valuation metrics
Year 12/13A 12/14E 12/15E 12/16E Revenue (NT$ mn) 136,056.0 214,257.8 237,905.0 254,213.4 EBITDA (NT$ mn) 26,970.6 50,936.5 56,721.2 64,114.6 EBIT (NT$ mn) 25,243.7 48,579.1 54,477.1 61,881.9 Net profit (NT$ mn) 27,000.2 46,284.0 51,581.6 58,392.7 EPS (CS adj.) (NT$) 20.13 30.00 33.00 37.36 Change from previous EPS (%) n.a. 0 0.0 3.5 Consensus EPS (NT$) n.a. 31.2 34.2 35.1 EPS growth (%) 57.1 49.1 10.0 13.2 P/E (x) 23.5 15.8 14.3 12.7 Dividend yield (%) 1.9 3.2 4.7 5.2 EV/EBITDA (x) 24.8 13.3 11.5 10.0 P/B (x) 3.2 3.4 3.2 2.9 ROE (%) 14.6 22.6 23.1 24.2 Net debt/equity (%) net cash net cash net cash net cash
Source: Company data, Thomson Reuters, Credit Suisse estimates.
Rating OUTPERFORM* Price (23 Sep 14, NT$) 473.00 Target price (NT$) 570.00¹ Upside/downside (%) 20.5 Mkt cap (NT$ mn) 847,685 (US$28,038) Enterprise value (NT$ mn) 675,761 Number of shares (mn) 1,792.15 Free float (%) 89.1 52-week price range 535.0 - 365.5 ADTO - 6M (US$ mn) 106.6
*Stock ratings are relative to the coverage universe in each
analyst's or each team's respective sector.
¹Target price is for 12 months.
Research Analysts
(2454.TW / 2454 TT) 2
Focus tables and charts Figure 1: Mediatek 3Q14/4Q14 and 2014/2015 estimates in mn, unless otherwise stated
3Q14 4Q14 2014 2015 2016
(NT$ mn) CS CS(old) Street Guidance CS CS(old) Street CS CS(old) Street CS CS(old) Street
Sales $59,452 $59,056 $58,502 NT$56.8-61.2bn $54,668 $54,737 $55,854 $214,258 $213,931 $213,388 $237,905 $240,337 $242,971
Chg 9.8% 9.1% 8.1% +5-13% QoQ -8.0% -7.3% -6.1% 57.5% 57.2% 56.8% 11.0% 12.3% 13.9%
GM% 48.5% 48.5% 48.5% 47.5-49.5% 47.5% 47.5% 48.0% 48.5% 48.5% 48.5% 48.1% 48.2% 47.0%
OpM% 23.7% 23.5% 23.6% 20.5-26.5% 20.0% 20.0% 22.9% 22.7% 22.6% 23.6% 22.9% 22.9% 22.9%
Net Inc. 13,324 13,030 13,331 10,444 10,369 12,270 46,284 46,287 47,998 51,582 51,575 52,932
EPS (NT$) $8.52 $8.34 $8.57 $6.68 $6.63 $7.81 $30.00 $30.00 $31.07 $33.00 $33.00 $33.62 Source: the BLOOMBERG PROFESSIONAL™ service consensus, Company data, Credit Suisse estimates
Figure 2: Mediatek 2G/3G/LTE units vs. ASPs Figure 3: Mediatek 2G/3G/LTE sales vs. margins
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ASPs (US$)Units (mn)
2G units 3G (WCDMA+TD) units LTE units 2G ASPs 3G ASPs LTE ASPs Blended ASPs
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65%
0 2,500 5,000 7,500
10,000 12,500 15,000 17,500 20,000 22,500 25,000 27,500 30,000 32,500
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GM (%)Sales (NT$mn)
2G sales 3G (WCDMA+TD) sales LTE sales 2G GM % 3G GM % LTE GM % Corporate GM %
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 4: China brand exports supports further growth Figure 5: Mediatek gaining shares among local brands
-20%
0%
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40%
60%
80%
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75
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China smartphones Export smartphones Export % China QoQ Export QoQ
Chipsets to China brands 2012 2013 2014E 2015E 2016E 2017E 13-17 CAGR
Mediatek 109.8 223.2 352.1 472.1 596.3 729.9 34%
Mediatek share (%) 44% 45% 50% 54% 55% 56%
Spreadtrum 32.0 141.1 124.6 130.0 143.5 156.8 3%
RDA - 0.5 2.0 8.0 15.0 20.0 NM
Leadcore 5.0 12.0 18.0 22.0 25.0 30.0 26%
Asian suppliers 146.8 376.8 496.6 632.1 779.8 936.7 26%
YoY Growth 1009% 157% 32% 27% 23% 20%
Share 59% 76% 71% 72% 72% 72%
Qualcomm 81.6 98.9 164.3 196.9 219.9 251.3 26%
Intel - - 5.0 20.0 40.0 NM
Broadcom 2.5 7.0 5.0 - - - -100%
Marvell 15.0 13.0 25.0 27.0 28.5 30.0 23%
Hi-Silicon 2.6 12.0 20.8 31.2 37.4 95%
ST-Ericsson 3.5 0.5 - - - - NM
YoY Growth 37% 19% 69% 21% 20% 20%
Share 41% 24% 29% 28% 28% 28%
Total 249.4 498.8 702.9 881.8 1,079.4 1,295.4 27%
YoY Growth 183% 100% 41% 25% 22% 20% Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 6: Mediatek LTE chipset offerings Mediatek Mediatek Mediatek Mediatek Mediatek Mediatek Mediatek Mediatek Mediatek
LTE chipsets MT6290 MT6595 MT6732 MT6752 MT6795 MT6735 MT6735M MT6753 MT67XX
SoC Two chip SoC SoC SoC SoC LTE + C2K SoC LTE + C2K SoC LTE + C2K SoC LTE SoC
Technology 28nm HPM 28nm HPM 28nm 28nm HPM 28nm HPM 20nm 20nm 20nm 16FF+
Multi-core Quad core Octa core Quad core Octa core Octa core Quad core Quad core Octa core Octa core
CPU Coresonic SIMT 4 Cortex A7
+ 4 A17
(big.LITTLE) 1.5GHz 1.7GHz 2.2GHz 1.3-1.5GHz 1.0GHz 1.3-1.5GHz NA
GPU Mali 450 PowerVR 6 Mali-T760 Mali-T760 IMG G6200 NA NA NA NA
Ramp 2Q14 3Q14 4Q14 4Q14 1Q15 2Q15 2Q15 2Q15 4Q15 Source: Company data, Credit Suisse estimates
24 September 2014
(2454.TW / 2454 TT) 3
Working to withstand the competition Mediatek is caught in a lull after a very strong 3G product cycle where it outpaced the
competition marketing performance (pushing octa-core a year ahead of peers) and leading
cost down with successful and higher-margin cost-reduced dual and quad cores. The
company has benefited from a strong 3G ramp in China followed by penetration into
emerging markets, following its successful template on 2G.
The company looks poised for a short lull on LTE. The company's first two-chip LTE
solution and initial LTE SoCs do not quite match QCOM on integration but look to be
followed by refresh adding CDMA (opening a new 180 mn unit addressable market) and
also branching out into an ultra-low-cost solution and mainstream solution. The market is
over-concerned about LTE pricing at US$8-10, as this is only a de-spec low-end version
for lower screen resolution, 1GHz performance and lower MP camera (up to 8MP) but still
leaves room for more mid-high-end solutions that can take advantage of LTE's data
speeds for better multimedia. Mediatek should announce an aggressive product refresh
around the Mobile World Congress in early March, lowering its 3G/4G cost structure and
introducing more performance solutions.
We believe after lagging the past few months, the market is aware of some of the
competitive challenges with Qualcomm and the initial Spreadtrum progress with its
WCDMA quad core in entry-tier smartphones. While the stock may stay range-bound
particularly if Spreadtrum moves ahead with Intel MoU for cooperation, we still expect
Mediatek with a competitive roadmap to gain share at good margins on LTE through 2015.
We stay OUTPERFORM with the stock trading at 16x 2014E/14x 2015E and maintain our
NT$570 target price based on 19x 2014E/17x 2015E with NT$100 net cash/share.
Mediatek's LTE roadmap aggressively meeting the
competitive challenges – meaningful refresh at MWC
Figure 7: Mediatek smartphone roadmap—with second generation LTE SoCs and carrier aggregation by year-end
Source: Company data, Credit Suisse estimates, mtksj
Mediatek should have a fully
competitive LTE product line
around Mobile World Congress
We believe the company's next generation will respond well to competitive concerns, as
Mediatek is addressing both lower cost to compete in the entry level category and more
advanced solutions to maintain its position across its customers' portfolios. Key launches
include:
(1) Second generation mainstream quad- and octa-core LTE SoCs adding CDMA
support (MT6735/MT675x). Mediatek will launch its second generation quad/octa-
core SoCs which will lower cost moving to TSMC's 20nm and also add support for
CDMA 2000. The CDMA 2000 allows Mediatek traction on China Telecom's market for
the first time, adding an additional addressable space of 181 mn subscribers and also
gives it a better chance at design wins on traditional CDMA carriers in the US and
Latin America.
(2) Cost-down LTE SoC for the entry level market (MT6735M). Along with the second
generation SoCs, Mediatek will launch a lower-cost version of its LTE SoC for the
entry level 4G market targeted at the same US$8-10 price range as Qualcomm and
Marvell's entry level chipset. This product will de-spec for entry level ~US$80
smartphones, running processor at lower speeds, lower 8 MP camera support and
qHD display support. The lower features also will mean a sizeable mid-tier market may
remain above this product range at higher US$10-15 price points in the mainstream
category. Mediatek will still maintain CDMA 2000 for this product for China Telecom
and other CDMA carriers.
(3) Low-cost 3G refresh to answer Spreadtrum's challenge (MT657x/658x). Mediatek
should also announce cost-down versions of its 3G dual and quad core chips. These
chips will also support lower resolution displays and take out unnecessary features to
lower the cost structure to compete in the entry level 3G market.
(4) Carrier aggregation for the high-end 4G market (MT67xx). Mediatek is also
working on carrier aggregation, a feature that allows carriers to pair multiple
frequencies for higher peak data rates and important in allocating spectrum efficiently
as capacity gets tighter. The company would have its high-end 4G chip supporting
carrier aggregation by 4Q14.
Figure 8: Mediatek LTE chipset offerings Mediatek Mediatek Mediatek Mediatek Mediatek Mediatek Mediatek Mediatek Mediatek
LTE chipsets MT6290 MT6595 MT6732 MT6752 MT6795 MT6735 MT6735M MT6753 MT67XX
SoC Two chip SoC SoC SoC SoC LTE + C2K SoC LTE + C2K SoC LTE + C2K SoC LTE SoC
Technology 28nm HPM 28nm HPM 28nm 28nm HPM 28nm HPM 20nm 20nm 20nm 16FF+
Multi-core Quad core Octa core Quad core Octa core Octa core Quad core Quad core Octa core Octa core
CPU Coresonic SIMT 4 Cortex A7
+ 4 A17
(big.LITTLE) 1.5GHz 1.7GHz 2.2GHz 1.3-1.5GHz 1.0GHz 1.3-1.5GHz NA
GPU Mali 450 PowerVR 6 Mali-T760 Mali-T760 IMG G6200 NA NA NA NA
Ramp 2Q14 3Q14 4Q14 4Q14 1Q15 2Q15 2Q15 2Q15 4Q15 Source: Company data, Credit Suisse estimates
Mediatek's portfolio matching up closer to
Qualcomm's LTE offering
Mediatek's product roadmap competes more effectively against Qualcomm, matching up
on the low-end through mid-high-end, suitable for the Chinese brands' complete portfolio
offering:
Mobile World Congress
Mediatek's next refreshes
include second generation
support, de-spec version
181 mn subscriber
addressable market once
(2454.TW / 2454 TT) 5
Entry-tier for Qualcomm has a Mediatek match—also only one segment of the
market. While the market is concerned by Qualcomm's Snapdragon 210 (MSM8909)
at US$8-9, we believe Mediatek's MT6535M will pair up competitively with this chipset
and as the lower specs would serve only the entry tier of LTE smartphone users.
Mid-tier Qualcomm/Mediatek offering mainstream 64-bit SoCs. Qualcomm would
also still have mainstream Snapdragon 410 (MSM8916), its quad-core LTE 64-bit
SoC, paired against Mediatek's MT6535 and its higher-end Snapdragon 615
(MSM8939), an octa-core LTE SoC, for US$20 against Mediatek's octa-core refresh
(MT675x).
High-tier products also now have Mediatek products addressing the space. At
the high end, Qualcomm will have Snapdragon 800 versions using the octa-core a53
(MT8956) rivalling Mediatek's MT675x and octa-core a53/a57 (MT8994) rivalling
Mediatek's MT6795. Qualcomm notably is moving some of its chips away from its
proprietary Krait architecture as it has needed to focus on using ARM's standard cores
similar to Mediatek for time to market, though at the sacrifice of differentiation with its
own architecture. Mediatek though will still not have the CA support until 4Q15 and
also lags in penetrating developed market carriers in the US/Europe and continues to
lack penetration at the top brands, Samsung/Apple.
Figure 9: Qualcomm LTE chipset offerings Qualcomm Qualcomm Qualcomm Qualcomm Qualcomm Qualcomm Qualcomm Qualcomm Qualcomm
LTE chipsets Snapdragon 400 Snapdragon 400 Snapdragon 410 Snapdragon 610 Snapdragon 615 Snapdragon 810 Snapdragon 810 Snapdragon 808 Snapdragon 210
SoC MSM8926 SoC MSM8928 SoC MSM 8916 SoC MSM8929 SoC MSM8939 SoC MSM8956 SoC MSM8994 SoC MSM8992 SoC MSM 8909 SoC
Technology 28nm LP 28nm LP 28nm LP 28nm LP 28nm LP 20nm 20nm 20nm 28nm LP
Multi-core Quad core Quad core Quad core Octa core Octa core Octa core Octa core Hexa core Quad
CPU 4 Cortex A7
Frequency 1.2GHz 1.4-1.6GHz 1.2GHz 1.4-1.6GHz 1.5-1.7GHz 2GHz 2GHz 1.8GHz + 1.2GHz 1.1GHz
GPU Adreno 305/306 NA Adreno 306 Adreno 306 Adreno 405 Adreno 410 Adreno 410 Adreno 418 Adreno 304
ASPs (US$) US$15 US18 US$11-13 US$16-18 US$20 <US$35 NA US$45 < $9
Ramp 1Q14 1Q14 3Q14 4Q14 4Q14 1Q15 1Q15 2Q15 2Q15 Source: Company data, Credit Suisse estimates
Mediatek achieving its shipment guidance even
ahead of the SoC Ramp
Mediatek raised its LTE shipment guidance from 15 mn to 30 mn on its 2Q14 earnings call,
with most of the volume still from its two-chip solution with modem paired with quad or
octa-core processor. Mediatek expects SoCs volume mix to approach 20% of total LTE
chipsets by 4Q14 and our checks on online smartphone stores also suggest that most
models are still based on the two-chip solution, particularly the quad-core pair of
MT6582/M + MT6290 due to better pricing.
Notably, Meizu recently announced MX4, the world's first LTE smartphone based on
Mediatek's octa-core big.LITTLE MT6595. It highlighted 87% CPU improvement and 88%
GPU upgrade, along with other high-end specs for only Rmb1,799, lower than original
market expectation of Rmb1,999. We believe other tier one vendors are also evaluating
this ultra-high-end chip. We expect TCL to have half of its new LTE models and ZTE to
have a third of its next LTE launches based on Mediatek solution and half of them being
the mainstream SoCs.
Mediatek responding to
volume by 4Q14
(2454.TW / 2454 TT) 6
Figure 10: Mediatek LTE smartphones—majority still on two-chip solution Company Meizu Huawei Coolpad Coolpad Lenovo TCL Asus Xiaomi Spicy Ginoee DOOV
Model name MX4 Honor 3C Dashen F2 8017 Golden Warrior
A808T P728M T45 Redmi 1S 5 GN151 C9
Image
Technology TDD/FDD-LTE TD-LTE TD-LTE TD-LTE TDD/FDD-LTE TD-LTE TD-LTE TD-LTE TD-LTE TD-LTE TDD/FDD-LTE
Operating System Android 4.42 Android 4.4 Android 4.2 Android 4.4 Android 4.4 Android 4.4 Android 4.4 Android 4.4 Android 4.4 Android 4.4 Android 4.4
Pixels 1152 x 1920 1280 x 720 1280 x 720 800 x 480 1280 x 720 1280 x 720 854 x 480 1280 x 720 1280 x 720 NA NA
RAM 2GB 1GB 1GB 512MB 2GB 1GB 512MB 1GB 1GB 1GB 1GB
ROM 16/32/64GB 4GB 16GB 4GB 16GB 8GB 4GB 8GB 8GB 8GB 16GB
Display 5.36" 4.7" 5.5" 4.0" 5.0" 5.5" 4.5" 4.7" 5.5" 4.7" 5.0"
Camera 20.7MP + 2MP 8MP 13MP 2MP + 8MP 5MP + 13MP 5MP + 13MP 0.3MP + 5MP 1.6MP + 8MP 8MP + 13MP 2MP + 5MP 8MP + 5MP
Battery 3100mAh 2000mAh 2500mAh 1650mAh 2500mAh 3300mAh 1750mAh 2200mAh 2700mAh 1800mAh 2000mAh
CPU Speed 2.2GHz 1.6GHz 2GB 1.3GHz 1.7GHz 1.4GHz 1.3GHz 1.3GHz 1.4GHz 1.3GHz 1.7GHz
Processor Chip MT6595 MT6582M +
MT6290
MT6592 +
MT6290
MT6582M +
MT6290
MT6592 +
MT6290
MT6592 +
MT6290
MT6582 +
MT6290
MT6582 +
MT6290
MT6592M +
MT6290
MT6582 +
MT6290
MT6590 +
MT6582M
Multi-core Octa; big.LITTLE Quad Octa Quad Octa Octa Quad Quad Octa Quad Quad
Price (RMB) 1,799 798 888 TBD 798 1,099 TBD 699 1,399 1,199 1,398 Source: Company data, Credit Suisse
However, supply for the 3G quad-core MT6582/M will likely stay tight through year-end, as
it is popular with exports on 3G, is getting more traction for the LTE two-chip solution and
is also more recently designed into the Android One smartphone in India, the Philippines
and Indonesia by year-end.
expectations
Mediatek at the conference maintained its 45-50% margin target, with goals to stay
towards the upper end of that range and noted pressure from LTE still manageable in
4Q14, as it only accounts for 20% of units and 10% of total company sales. However, we
expect margin to trough in 1Q15 with Qualcomm's aggressive pricing and also ahead of
Mediatek next generation LTE refreshes. We estimate LTE margins will be 40% now but
will drop to 36.8% in 1Q15 before it rebounds to 46.7% exiting 2015. We also expect LTE
ASPs to gradually decline from US$16 in 3Q14 to US$11.5 in 4Q15, though blended ASPs
still stable to slightly up at US$6.5 with a continued mix shift from 2G to 3G/4G. We model
for LTE to account for 20% total smartphone shipment in 4Q14 and reach at least 25% of
mix by 4Q15.
Figure 11: Mediatek 2G/3G/LTE units vs. ASPs Figure 12: Mediatek 2G/3G/LTE sales vs. margins
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0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65%
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1 5 E
GM (%)Sales (NT$mn)
2G sales 3G (WCDMA+TD) sales LTE sales 2G GM % 3G GM % LTE GM % Corporate GM %
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
We expect Mediatek GMs to decline from 49.6% in 2Q14 to 47.0% in 1Q15, with 2G GMs
stabilising at 39% and 3G slightly down from 53.6% to 53%, though overall still trending
slightly up. When compared with Qualcomm, Mediatek's ASPs still significantly lag
Qualcomm and have further room to grow.
Expecting margins to trough
down from 40% in 3Q14 to
37% in 1Q15; new products
should support margins by
(2454.TW / 2454 TT) 7
Figure 13: Factoring in mild GM dilution to 47.5% by 4Q14 Figure 14: Mediatek ASPs still below Qualcomm
0%
10%
20%
30%
40%
50%
60%
0
5,000
10,000
15,000
20,000
25,000
30,000
Smartphone GM% Total GM%
Mediatek SP ASPs Mediatek Blended ASPs
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
LTE inflection finally coming through as 3G
decelerates in China
Mediatek's LTE products are launching just as the China market is finally accelerating on
LTE uptake. China Mobile's 4G new subscriber additions grew from 6.5 mn to 9.1 mn in
August, up 41% MoM, and more than quadrupling April's level at 2.1 mn units, showing
the inflection is finally happening as lower-cost smartphones roll out from more vendors,
network coverage improves and more competitive chipsets for the entry tier emerge from
Mediatek and Qualcomm. YTD China 4G subscriber additions have reached 30.4 mn
mostly from China Mobile. A run-rate of 9-10 mn/month through 2H14 would put China
Mobile around 65 mn subscribers in 2014, with total China basebands shipping about 120
mn units into some channel build and models for subscribers not activating 4G for the
higher tariff immediately. On the flip side, 3G net subscriber additions are now showing a
sharp decline with China Mobile down 45% MoM to 1.3 mn in August, far below last year’s
10-12 mn range. China Unicom also dropped 50% MoM to 1.3 mn. China Telecom did
rebound 24% MoM to 1.8 mn but still below the range it was adding through 2H12 and
2013.
Figure 15: China Mobile 3G net adds declined 48% MoM in
May
Figure 16: China Mobile 4G grew 41% MoM in August;
YTD China 4G has reached 30.4 mn
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
2 J u
3G monthly net adds (mn)
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
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1.0
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Source: Company data, Credit Suisse Source: Company data, Credit Suisse
China's MIIT data also showing 3G still decelerating
We also are seeing the same trends in China's MIIT data, the government's figures for
handset shipments by standard and phone type. The following is a summary of the key
data published in August:
China Mobile subscriber net
adds showing LTE inflection
as 3G falls off
(2454.TW / 2454 TT) 8
Figure 17: MIIT data indicates that LTE is up to 38% of
total units shipped in August
Figure 18: August LTE new models reached 52% of mix
0%
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TD-LTE % 2G 3G TD-LTE Source: MIIT Source: MIIT
China handset shipments decline. China handsets were down 28% MoM and -40%
YoY to 30.3 mn in August.
China smartphones also decrease. China smartphones decreased 34% MoM and
32% YoY to 24 mn units in August.
4G drops, 3G drop sharper. 4G smartphone shipments decreased 25% MoM to 11.6
mn while 3G dropped even more 39% MoM to 11.6 mn. We believe the market
paused ahead of concerns about the iPhone launch (now pushed out beyond this
year) and ahead of some new chipsets/models getting launched around the October
holiday.
New models have skewed to 4G. 3G new models have declined 24% MoM and LTE
new models also decreased 23% MoM, though LTE is now accounting for 52% of total
new models launched.
We would look at MIIT only for directional trends as the data has shown a pretty wide
mismatch with brands performance and the supply chain the past year. The government’s
MIIT data does not always track the market trend or supply chain, having shown a
smartphone peak last year in 2Q13 ahead of three quarters of stronger shipments in the
market by the supply chain and China brands.
3G exports offsetting the slowdown in China
As highlighted from the start of the year in our 2014 China smartphone outlook, the export
channel for China brands into other emerging markets will remain a bigger growth driver to
surprise on the upside. Emerging markets represent good potential as smartphones are a
smaller percent of a much larger handset base. Emerging market smartphones were only
37% of 960 mn units vs. 64% of 548 mn device sales for China but could rise to 78% or
860 mn units by 2017.
Figure 19: Emerging markets still have room for smartphones to further penetrate
Penetration of devices 2012 2013 2014E 2015E 2016E 2017E 13-17 CAGR
China handsets 510.5 548.2 563.8 583.9 604.5 619.1 3%
China smartphones 195.8 353.4 453.3 513.3 562.4 602.7 14%
% of devices 38% 64% 80% 88% 93% 97%
Emerging mkt handsets 955.8 959.5 986.1 1,025.8 1,065.7 1,099.3 3%
Emerging mkt smartphones 229.9 354.3 470.5 606.0 736.6 860.3 25%
% of devices 24% 37% 48% 59% 69% 78% Source: Company data, Credit Suisse estimates
Mediatek raised its full-year smartphone guidance from 300 mn to 350 mn at the last
conference, with export 3G growing from 30-35% of 2Q14 shipments to 35-40%+ of 2H14
shipments with penetration growing across SE Asia, Russia, Middle East, India, Africa and
Exports ramping to 40%+ of
shipment in 4Q14 and over
50% by 4Q15
(2454.TW / 2454 TT) 9
Latin America. We believe exports are still ramping well and will be slightly above 40% of
sales by 4Q14 and even exceeding China by 4Q15.
Figure 20: China brand exports support further growth Figure 21: Mediatek gaining shares among local brands
-20%
0%
20%
40%
60%
80%
0
15
30
45
60
75
90
China smartphones Export smartphones Export % China QoQ Export QoQ
Chipsets to China brands 2012 2013 2014E 2015E 2016E 2017E 13-17 CAGR
Mediatek 109.8 223.2 352.1 472.1 596.3 729.9 34%
Mediatek share (%) 44% 45% 50% 54% 55% 56%
Spreadtrum 32.0 141.1 124.6 130.0 143.5 156.8 3%
RDA - 0.5 2.0 8.0 15.0 20.0 NM
Leadcore 5.0 12.0 18.0 22.0 25.0 30.0 26%
Asian suppliers 146.8 376.8 496.6 632.1 779.8 936.7 26%
YoY Growth 1009% 157% 32% 27% 23% 20%
Share 59% 76% 71% 72% 72% 72%
Qualcomm 81.6 98.9 164.3 196.9 219.9 251.3 26%
Intel - - 5.0 20.0 40.0 NM
Broadcom 2.5 7.0 5.0 - - - -100%
Marvell 15.0 13.0 25.0 27.0 28.5 30.0 23%
Hi-Silicon 2.6 12.0 20.8 31.2 37.4 95%
ST-Ericsson 3.5 0.5 - - - - NM
YoY Growth 37% 19% 69% 21% 20% 20%
Share 41% 24% 29% 28% 28% 28%
Total 249.4 498.8 702.9 881.8 1,079.4 1,295.4 27%
YoY Growth 183% 100% 41% 25% 22% 20% Source: Company data, Credit Suisse Source: Company data, Credit Suisse estimates
As a supplemental driver in emerging markets, Mediatek is also the exclusive Android One
chipset provider into a set of US$72-99 ASP smartphones targeting emerging markets
based on a more rigid version of the Android operating system. We believe OEMs, ODMs,
and chipset vendors are all taking a small hit on margins to support this pricing range. First
model launches will be from India’s three vendors, Micromax, Karbonn and Spice, ramping
to 800-900K by year-end in India. Android One will next be available in other South East
Asian markets including the Philippines and Indonesia. Mediatek’s India VP also indicated
1.5-2 mn Android One handsets will be sold this year.
Spreadtrum re-emerging in entry smartphones
Spreadtrum announced a low-cost quad-core 3G chipset targeting the export market in
2Q14 and we are now seeing some brands in SE Asia adopt the product as a lower-priced
value alternative to Mediatek. The chip features a quad-core A7 processor at 1.2GHz for
WCDMA/EDGE/GSM networks and is priced at US$5-6, about $2-3 below Mediatek. The
chip is gaining traction at the low end of the 3G market as it enables more smartphones
around US$50 ASPs, taking some business from Mediatek's entry MT6571/6572 dual core
chipsets.
Figure 22: Spreadtrum seeing some WCDMA design-ins Figure 23: SPRD could help broaden Intel's thin roadmap Company Kenxinda Lenovo Coolpad
Model name A6 A396 7061
Image
Pixels 960 x 540 800 x 480 854 x 480
RAM 4GB 256MB 512MB
ROM 512MB 512MB 4GB
Display 5.0" 4.0" 5.0"
Battery 2000mAh 1500mAh 1800mAh
Multi-core Quad Quad Quad
Source: Company data, Credit Suisse, ZOL Source: Intel
SPRD low-cost quad-core
gaining traction from
Mediatek at US$5-6
possible; impact may take until 2016
Intel's strategy in emerging markets has been to more aggressively source locally, price
locally (low prices even if subsidies are needed) and partner locally to gain penetration.
The company adopted this plan for tablets from early this year with aggressive reference
design support, low pricing, subsidies to brands and channels and marketing support. Intel
also partnered with Rockchip to supplement its internal design for faster time to market
and better access and faster build-up of capabilities for the local channels.
We see potential for Intel to now partner with Spreadtrum on the smartphone side. Intel's
current roadmap lags Mediatek and Qualcomm. Its first integrated 3G SoFIA platform built
at TSMC launches in 4Q14, about six quarters after comparable Mediatek/Qualcomm
platforms and 4G SoFIA at mid-2015 at TSMC and in Intel's fabs in early 2016 is also at a
similar time gap. A deal with Spreadtrum could provide several key advantages to both
partners:
Gain share from a low base. Intel's Infineon business lost the volume traction it had
with its ULC 2G solution and does not have a presence in 3G/4G so can only gain with
a local tie-up. Spreadtrum also lagged Mediatek moving from single core to dual/quad
core and into WCDMA so is still playing catch-up and still has a 15-20% unit share and
even lower revenue share at the China brands.
Accelerate the product roadmap. Both companies have also lagged on the product
roadmap, so a marriage of Intel's transistor design and Spreadtrum's SoC and local
reference design work could expand Intel's family of products from one SoFIA into a
roadmap of products spanning tiers and price points and coming to market with faster
cadence.
Gain access to local customers and Spreadtrum's reference design support.
Spreadtrum can leverage its own local customer base and join with Intel's PC related
customers (Asus, Acer, Lenovo) to broaden the channel. Intel is now engaged with
local tablet independent design houses but needs to accelerate its push into
smartphone ODMs and design houses.
Potentially add a new customer for Intel's foundry. Intel could also look to pull in
Spreadtrum for some of its advanced products longer term through its partnership.
The deal would still come with some risks, including potential long-term transfer of Intel's
technology to a new batch of China competitors, conflicts between the collaboration with
Spreadtrum and work from Intel's internal design teams and Infineon teams, and potential
conflicts on customer targets between Intel's and Spreadtrum's sales teams. Competitive
impact would likely take until 2016 to bring to market new products and make major
market inroads, although this deal will reshape the landscape more firmly between
Intel/Spreadtrum, Mediatek and Qualcomm, with ZTE/Hi-Silicon remaining more targeted
on internal solutions and Marvell needing to find a way to stay competitive.
Fine-tuning estimates; maintaining 2014E/2015E EPS
We largely maintain our estimates as we had already factored in some margin erosion
from the initial LTE chipsets and seasonal decline in 4Q14/1Q15. The company is still
growing about 10% QoQ but we expect to decline mid-high single digits in both
4Q14/1Q15 into the low season. We maintain our 3Q14/4Q14 GMs at 48.5%/47.5% as we
have factored in the LTE margin dilution, but we now trim 1Q15 from 47.6% to 47.0% as
Mediatek's portfolio largely would improve meaningfully from 2Q15 with its 3G and 4G
product refresh.
An Intel-Spreadtrum
Figure 24: 3Q14-1Q15 estimate revisions in mn, unless otherwise stated
3Q14 4Q14 1Q15 2014
(NT$ mn) CS CS(old) Street Guidance CS CS(old) Street CS CS(old) Street
Sales $59,452 $59,056 $58,502 NT$56.8-61.2bn $54,668 $54,737 $55,854 $50,947 $53,513 $53,919
Chg 9.8% 9.1% 8.1% +5-13% QoQ -8.0% -7.3% -6.1% -6.8% -2.2% -3.5%
GM% 48.5% 48.5% 48.5% 47.5-49.5% 47.5% 47.5% 48.0% 47.0% 47.6% 47.3%
OpM% 23.7% 23.5% 23.6% 20.5-26.5% 20.0% 20.0% 22.9% 18.5% 20.4% 22.7%
Net Inc. 13,324 13,030 13,331 10,444 10,369 12,270 9,134 10,377 11,471
EPS (NT$) $8.52 $8.34 $8.57 $6.68 $6.63 $7.81 $5.84 $6.64 $7.28 Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service consensus
We maintain 2014E/2015E EPS at NT$30/NT$33 and expect Mediatek to grow 11%/7%
YoY in 2015/2016. Our estimates are slightly below street at NT$31.07/NT$33.62 although
we believe the street is still in process of reflecting the 4Q14 normal down seasonality and
some modest erosion in GMs with the LTE ramp.
Figure 25: CS vs. street 2014-16 estimate summary 2014 2015 2016
(NT$ mn) CS CS(old) Street CS CS(old) Street CS CS(old) Street
Sales $214,258 $213,931 $213,388 $237,905 $240,337 $242,971 $254,213 $256,176 $261,057
Chg 57.5% 57.2% 56.8% 11.0% 12.3% 13.9% 6.9% 6.6% 7.4%
GM% 48.5% 48.5% 48.5% 48.1% 48.2% 47.0% 48.3% 48.0% 45.8%
OpM% 22.7% 22.6% 23.6% 22.9% 22.9% 22.9% 24.3% 23.5% 23.6%
Net Inc. 46,284 46,287 47,998 51,582 51,575 52,932 58,393 56,445 55,815
EPS (NT$) $30.00 $30.00 $31.07 $33.00 $33.00 $33.62 $37.36 $36.11 $34.76 Source: Company data, Credit Suisse estimates
We slightly lift smartphones in 2014E from 350 mn to 352 mn and raise 2015E from 455
mn to 472 mn. We slightly trim our 2014E/2015E ASPs from NT$10.2/NT$9.84 to
NT$10.26/NT$9.33 due to a mix shift to the entry tier on LTE with a lower price level. We
keep our estimates largely unchanged for the non-handset business. Management
remains confident of achieving 40 mn+ shipments this year though we trim 2015E tablets
from 58 mn to 55 mn as that market decelerates.
Figure 26: Mediatek operating assumptions in mn, unless otherwise stated
Quarters Years
NT$mn unless noted 1Q14 2Q14 3Q14E 4Q14E 2011 2012 2013 2014F Prior 2015F Prior
Smartphones (mn) 75.0 88.1 98.0 91.0 10.0 109.8 223.2 352.1 350.2 472.1 455.0
ASPs (US$) $10.16 $10.11 $10.34 $10.37 $13.33 $10.82 $9.93 $10.26 $10.28 $9.33 $9.84
Tablets (mn) 7.3 9.5 12.4 11.8 0.0 0.0 21.9 41.0 41.0 55.0 58.3
ASPs (US$) $11.26 $11.26 $11.15 $10.82 $0.00 $0.00 $12.28 $11.10 $11.10 $10.00 $9.99
Feature phones (mn) 88.7 84.3 84.3 71.6 530.2 391.9 354.0 328.9 328.9 278.3 270.5
ASPs (US$) $1.71 $1.66 $1.59 $1.53 $3.58 $2.26 $1.88 $1.63 $1.63 $1.42 $1.38
Handset/Tablet Sales 29,893 34,264 38,565 35,409 59,512 61,419 93,424 138,131 137,805 160,487 162,919
DTV 7,726 10,518 11,049 10,339 10,722 13,490 16,104 39,632 39,632 40,886 40,886
PC Optical 2,313 2,195 2,250 2,163 10,596 11,489 10,476 8,921 8,921 7,100 7,100
Consumer DVD 694 759 859 758 4,160 3,515 3,515 3,070 3,070 2,843 2,843
WLAN (Ralink) 3,831 4,117 4,277 3,714 1,867 9,365 12,450 15,939 15,939 16,824 16,824
LCD Monitor 448 698 725 686 0 0 0 2,557 2,557 2,629 2,629
STB 764 1,240 1,378 1,243 0 0 0 4,626 4,626 5,388 5,388
Op M% 23.5% 23.6% 23.7% 20.0% 14.2% 12.5% 18.6% 22.7% 22.6% 22.9% 22.9%
EPS $6.85 $8.03 $8.52 $6.68 $12.52 $12.81 $20.13 $30.00 $30.00 $33.00 $33.00 Source: Company data, Credit Suisse estimates
24 September 2014
Maintain OUTPERFORM
While the stock may stay range-bound on competitive moves and into the low season, we
stay constructive into good ramp into LTE next year and a valuation that reflects some
competitive pressure at 16x 2014E/14x 2015E with NT$100/share net cash. We rate
Mediatek OUTPERFORM and maintain our NT$570 TP on 19x 2014E EPS based on
same 2014E/2015E EPS of NT$30/NT$33.
Figure 27: Mediatek P/E band—trading at 16x 2014E EPS Figure 28: Mediatek QFII holding now at 63%
10x
15x
19x
50
150
250
350
450
550
650
750
Jul/01 Jul/02 Jul/03 Jul/04 Jul/05 Jul/06 Jul/07 Jul/08 Jul/09 Jul/10 Jul/11 Jul/12 Jul/13 Jul/14
NT$ Mediatek US GAAP PE Band
ccccccccccccccccccccccc
25x
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
0
100
200
300
400
500
600
700
A ug
-1 3
A pr
-1 4
Mediatek QFII % (RHS) Mediatek Price NT$ (LHS) Mediatek QFII as % of TAIEX QFII (%)
NT$ %NT$ %NT$ stock %
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse research, TEJ
Figure 29: Asian fabless comparisons—MediaTek still trading at a P/E discount to its peer group despite higher ROEs
Price Mkt Cap EV/Sales (x) P/E Multiple (x) P/B Multiple (x) ROE Trough/Peak (EV/Sales)
Company Ticker 9/23/2014 (US$mn) 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015
Select Asian fabless semiconductors
MediaTek 2454.TW $473.00 $28,027 4.9 3.2 2.7 23.5 16.0 14.5 3.2 3.4 3.2 13.8 21.3 22.1
Realtek 2379.TW $109.00 $1,820 1.4 1.3 1.2 18.0 15.5 15.8 2.8 2.8 2.7 15.6 18.4 17.3
Qualcomm QCOM $76.29 $127,864 4.0 3.5 3.2 16.9 14.3 14.1 3.8 3.2 3.1 22.4 22.5 21.9
Xilinx XLNX $43.59 $11,703 5.3 4.9 4.7 25.0 19.1 18.6 3.9 4.2 3.8 16.1 24.0 21.5
Altera ALTR $36.08 $11,148 5.6 5.0 4.5 27.2 24.2 21.9 3.3 3.2 2.8 12.2 13.1 13.0
PMCS PMCS $7.63 $1,493 2.8 2.7 2.5 23.1 19.9 16.1 2.7 2.5 2.3 n.a. 11.9 12.4
Nvidia NVDA $18.89 $10,237 1.6 1.7 1.5 21.0 25.9 18.5 2.4 NA NA 12.5 9.4 14.4
Broadcom BRCM $40.28 $21,789 2.6 2.4 2.0 14.8 14.2 12.0 2.8 2.4 1.9 19.9 17.9 16.9
Marvell MRVL $13.57 $6,980 2.0 1.8 1.4 15.8 13.1 11.7 1.8 1.5 1.4 11.1 11.5 12.0
Silicon Labs SLAB $42.26 $1,835 2.9 2.7 2.6 20.8 22.0 19.2 2.4 2.3 2.2 12.7 9.0 9.8
Skyworks SWKS $56.77 $10,759 5.7 4.5 3.8 25.8 18.2 14.4 5.1 4.5 3.8 21.0 22.7 24.0
RFMD RFMD $11.61 $3,339 3.4 2.9 2.4 64.5 25.2 11.4 5.1 4.8 3.7 7.3 19.7 21.5
Median 2.9 2.7 2.5 21.0 19.1 15.8 2.8 3.0 2.8 14.1 17.9 16.9
Mean 3.4 3.0 2.7 24.8 19.2 15.8 3.3 3.1 2.8 15.1 16.4 16.8 Source: Company data, the BLOOMBERG PROFESSIONAL™ service estimates for not covered companies, Credit Suisse estimates
24 September 2014
Mediatek: Financials and operating metrics
Figure 30: Mediatek—income statement in mn, unless otherwise stated Summary Income Statement 1Q14 2Q14 3Q14E 4Q14E 1Q15E 2Q15E 3Q15E 4Q15E 2012 2013 2014F 2015F 2016F
Net Sales 46,005 54,133 59,452 54,668 50,947 56,611 66,781 63,566 99,263 136,056 214,258 237,905 254,213
Sequential Change 15.6 17.7 9.8 -8.0 -6.8 11.1 18.0 -4.8
Y/Y Change 91.9 62.7 52.4 37.4 10.7 4.6 12.3 16.3 14.3 37.1 57.5 11.0 6.9
Cost of Goods Sold 23,779 27,309 30,600 28,686 26,992 29,412 34,391 32,708 58,203 76,250 110,374 123,504 131,506
Gross Profits 22,226 26,824 28,852 25,983 23,955 27,198 32,391 30,858 41,060 59,806 103,884 114,401 122,708
Gross Margin 48.3 49.6 48.5 47.5 47.0 48.0 48.5 48.5 41.4 44.0 48.5 48.1 48.3
Operating Exp. Promotion 1,134 2,072 2,176 2,219 2,086 2,107 2,149 2,117 3,115 4,562 7,601 8,459 8,480
% of Sales 2.5 3.8 3.7 4.1 4.1 3.7 3.2 3.3 3.1 3.4 3.5 3.6 3.3
Operating Exp. Administrative 1,363 1,589 1,668 1,701 1,650 1,700 1,751 1,725 2,912 3,546 6,321 6,825 6,980
% of Sales 3.0 2.9 2.8 3.1 3.2 3.0 2.6 2.7 2.9 2.6 3.0 2.9 2.7
Operating Expense R&D 8,915 10,403 10,923 11,141 10,807 11,131 11,465 11,236 22,630 26,454 41,382 44,640 45,366
% of Sales 19.4 19.2 18.4 20.4 21.2 19.7 17.2 17.7 22.8 19.4 19.3 18.8 17.8
Total Operating Exp 11,413 14,063 14,767 15,062 14,544 14,938 15,365 15,077 28,657 34,561 55,305 59,924 60,826
Income from Operations 10,813 12,760 14,085 10,921 9,411 12,260 17,025 15,780 12,404 25,245 48,579 54,477 61,882
% of Sales 23.5 23.6 23.7 20.0 18.5 21.7 25.5 24.8 12.5 18.6 22.7 22.9 24.3
Non Operating Income 335 812 206 206 276 281 286 291 2,858 1,338 1,558 1,133 1,213
Net Investment Income/ (Loss) 536 209 340 340 340 340 340 340 1,223 2,450 1,424 1,360 1,360
Pretax Income 11,501 14,153 14,631 11,466 10,027 12,881 17,651 16,411 16,485 29,033 51,562 56,970 64,454
% of Sales 25.0 26.1 24.6 21.0 19.7 22.8 26.4 25.8 16.6 21.3 24.1 23.9 25.4
Income Taxes Exp. /(Gains) 1,362 1,605 1,317 1,032 902 1,459 1,589 1,477 941 2,062 5,315 5,427 6,101
Tax Rate 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 5.7 7.1 10.3 9.5 9.5
Net Income after Extraordinaries 10,147 12,558 13,324 10,444 9,134 11,431 16,072 14,944 15,583 27,001 46,284 51,582 58,393
% of Sales 22.1 23.2 22.4 19.1 17.9 20.2 24.1 23.5 15.7 19.8 21.6 21.7 23.0
Net EPS 6.85 8.03 8.52 6.68 5.84 7.31 10.28 9.56 12.81 20.13 30.00 33.00 37.36
Share Count (weighted) 1,482 1,563 1,563 1,563 1,563 1,563 1,563 1,563 1,217 1,342 1,543 1,563 1,563 Source: Company data, Credit Suisse estimates
Figure 31: MediaTek—key operating metrics Revenue by product (NT$mn) 1Q14 2Q14 3Q14E 4Q14E 1Q15E 2Q15E 3Q15E 4Q15E 2012 2013 2014F 2015F 2016F
Handsets 27,416 31,033 34,420 31,590 29,111 33,402 41,591 39,884 61,419 85,450 124,458 143,987 157,865
DTV 7726 10,518 11,049 10,339 9675 10,197 10,747 10,268 13,490 16,104 39,632 40,886 41,394
PC Optical (traditional) 2,050 1,939 1,972 1,898 1,579 1,528 1,555 1,497 10,598 9,477 7,859 6,159 4,855
Blu-Ray Optical 263 256 278 264 239 231 242 230 891 999 1,061 941 817
DVD Player 379 368 359 307 262 274 274 234 2,401 2,050 1,413 1,044 741
Blu-Ray Player 316 391 500 451 343 423 543 490 1,114 1,465 1,657 1,799 1,641
WLAN (Ralink) 3,831 4,117 4,277 3,714 3,763 4,176 4,635 4,249 9,365 12,450 15,939 16,824 18,077
Total Revenue (NT$mn) 41980 48,622 52,854 48,564 44971 50,232 59,586 56,852 99,278 127,995 192,020 211,640 225,391
Handset Units (mn) 164 172 182 163 157 175 211 207 502 577 681 750 834
Handset ASPs (US$) 5.58 5.98 6.30 6.48 6.16 6.36 6.58 6.42 4.13 4.99 6.09 6.40 6.31
Handset Revenue (NT$mn) 27,416 31,033 34,420 31,590 29,111 33,402 41,591 39,884 61,419 85,450 124,458 143,987 157,865
2.5G units (mn - for all below) 88.7 84.3 84.3 71.6 68.8 68.8 72.2 68.6 391.9 354.0 328.9 278.3 237.4
WCDMA units 56.0 66.3 74.3 60.7 60.5 72.6 94.4 94.4 97.2 168.1 257.3 322.1 369.6
TD-SCDMA units 19.0 20.0 14.0 11.9 10.7 10.1 9.8 9.4 12.5 55.1 64.8 40.0 26.6
LTE units 0.0 1.9 9.7 18.4 17.5 23.6 34.2 34.7 0.0 0.0 30.0 110.0 200.1
China units 57.3 60.3 63.8 56.9 52.0 57.8 69.5 68.3 170.5 213.6 238.3 247.7 275.1
Emerging/developed mkt units 93.3 97.4 102.0 89.4 92.9 102.5 122.2 118.0 286.3 311.7 382.2 435.6 475.2
Tier one units 13.1 14.7 16.4 16.3 12.6 14.9 19.0 20.7 44.8 52.0 60.4 67.2 83.4
Feature phone units 88.7 84.3 84.3 71.6 68.8 68.8 72.2 68.6 391.9 354.0 328.9 278.3 237.4
Smartphone units 75.0 88.1 98.0 91.0 88.7 106.4 138.5 138.5 109.8 223.2 352.1 472.1 596.3
Tablet units 7.3 9.5 12.4 11.8 11.8 12.9 15.5 14.8 0.0 21.9 41.0 55.0 65.4
FX Rate (NT$/US$) 30.0 30.1 30.0 30.0 30.0 30.0 30.0 30.0 29.7 29.7 30.0 30.0 30.0 Source: Company data, Credit Suisse estimates
24 September 2014
(2454.TW / 2454 TT) 14
Figure 32: MediaTek—balance sheet summary NT$ mn 1Q14 2Q14 3Q14E 4Q14E 1Q15E 2Q15E 3Q15E 4Q15E 2012 2013 2014 2015 2016
Cash, Cash Equivalent 173,917 196,431 189,911 196,153 202,453 217,849 205,477 219,463 90,276 139,219 196,153 219,463 232,013
Inventories 16,649 19,326 20,120 17,290 17,748 19,340 22,613 21,507 13,867 9,347 17,290 21,507 26,938
Account receivables 13,572 12,983 16,288 14,978 13,958 15,510 18,296 17,415 6,585 7,628 14,978 17,415 22,226
Other current assets 6,745 7,652 8,403 7,727 7,201 8,002 9,440 8,985 7,343 5,547 7,727 8,985 8,958
Total current asset 210,884 236,392 234,722 236,148 241,361 260,700 255,826 267,370 118,071 161,741 236,148 267,370 290,135
LT investment 10,122 9,918 9,918 9,918 9,918 9,918 9,918 9,918 65,120 68,040 9,918 9,918 9,918
Fixed Assets 14,770 15,180 14,376 13,573 12,769 11,966 11,162 10,359 10,708 11,312 13,573 10,359 7,145
Intangible Assets 60,584 59,488 59,488 59,488 59,488 59,488 59,488 59,488 15,842 15,509 59,488 59,488 59,488
Other Assets 2,183 2,879 2,879 2,879 2,879 2,879 2,879 2,879 502 2,035 2,879 2,879 2,879
Total Non-Current Assets 87,659 87,465 86,662 85,858 85,054 84,251 83,447 82,644 92,172 96,896 85,858 82,644 79,430
Total assets 298,543 323,857 321,384 322,006 326,415 344,951 339,274 350,014 210,243 258,637 322,006 350,014 369,565
Accounts payable 17,421 18,439 20,660 15,718 14,790 16,116 18,844 17,922 9,047 10,944 15,718 17,922 17,959
Other current liabilities 28,976 55,233 60,660 55,780 51,983 57,761 68,139 64,858 14,916 21,359 55,780 64,858 64,666
Total current liabilities 68,530 107,751 115,399 105,576 100,852 107,956 121,062 116,859 32,873 61,385 105,576 116,859 116,703
Other LT liabilities 1,535 1,721 1,721 1,721 1,721 1,721 1,721 1,721 1,482 1,812 1,721 1,721 1,721
Total Long Term liabilities 1,615 1,789 1,789 1,789 1,789 1,789 1,789 1,789 1,595 1,899 1,789 1,789 1,789
Total Liabilities 70,145 109,540 117,188 107,366 102,641 109,746 122,851 118,648 34,469 63,283 107,366 118,648 118,492
Total Equity 228,338 214,280 204,159 214,603 223,738 235,169 216,386 231,330 175,740 195,315 214,603 231,330 251,036
Total Liabilities & Equity 298,543 323,857 321,384 322,006 326,415 344,951 339,274 350,014 210,243 258,637 322,006 350,014 369,565
Profitability Ratios 1Q14 2Q14 3Q14E 4Q14E 1Q15E 2Q15E 3Q15E 4Q15E 2012 2013 2014F 2015F 2016F
Return on Equity (ROE) 4.4 5.9 6.5 4.9 4.1 4.9 7.4 6.5 8.9 13.8 21.6 22.3 23.3
Return on Assets (ROA) 3.4 3.9 4.1 3.2 2.8 3.3 4.7 4.3 7.4 10.4 14.4 14.7 15.8
Return on Net Assets (RONA) 8.1 9.9 10.1 8.3 7.4 9.0 12.0 11.4 13.0 22.6 36.8 39.5 42.5
Return on Sales 22.1 23.2 22.4 19.1 17.9 20.2 24.1 23.5 15.7 19.8 21.6 21.7 23.0
Efficiency Ratios
Asset Turns (Annualized Sales / Assets) 0.6 0.7 0.7 0.7 0.6 0.7 0.8 0.7 0.5 0.5 0.7 0.7 0.7
Days sales outstanding (DSO) 26.9 21.9 25.0 25.0 25.0 25.0 25.0 25.0 24.2 20.5 25.5 26.7 31.9
Days of inventory 63.9 64.6 60.0 55.0 60.0 60.0 60.0 60.0 87.0 44.7 57.2 63.6 74.8
Cash conversion cycle 24.0 24.9 23.4 30.0 35.0 35.0 35.0 35.0 54.4 12.8 30.7 37.3 56.8
Working Capital -31,564 -67,790 -70,587 -65,581 -61,944 -65,105 -70,713 -68,952 -5,078 -38,863 -65,581 -68,952 -58,581
(Increase)/Decrease in working capital (7,299) 36,226 2,797 (5,006) (3,638) 3,161 5,608 (1,761) (4,340) 33,784 26,718 3,370 (10,371)
Per Share Values
Book Value per common share 154.07 137.10 130.62 137.30 143.15 150.46 138.44 148.00 144.45 145.59 139.10 148.00 160.61
Cash per common share 117.35 125.68 121.50 125.50 129.53 139.38 131.46 140.41 74.20 103.78 127.14 140.41 148.44
Net Cash per common share 102.37 103.83 99.66 103.65 107.68 117.53 109.62 118.56 66.79 82.04 105.01 118.56 126.59 Source: Company data, Credit Suisse estimates
Figure 33: Mediatek—cash flow summary (NT$ mn) 1Q14 2Q14 3Q14E 4Q14E 1Q15E 2Q15E 3Q15E 4Q15E 2012 2013 2014 2015 2016
Net income 10,147 12,558 13,324 10,444 9,134 11,431 16,072 14,944 15,583 27,515 46,474 51,582 58,393
Depreciation & Amortization 729 572 520 536 557 583 554 550 3,696 1,727 2,357 2,244 2,233
Dec (inc)-A/R -5,945 589 -3,305 1,310 1,019 -1,552 -2,787 881 799 -1,043 -7,350 -2,438 -4,810
Dec (inc)-Inventory -7,303 -2,677 -794 2,830 -458 -1,591 -3,274 1,106 -4,475 4,521 -7,943 -4,217 -5,431
Inc (Dec)-A/P 6,477 1,017 2,222 -4,942 -928 1,326 2,728 -922 25 1,897 4,774 2,204 36
LT investment loss (gain) -484 -144 -340 -340 -340 -340 -340 -340 -1,074 -2,151 -1,307 -1,360 -1,360
Investment disposal loss (gain) 2 -409 0 0 0 0 0 0 -538 535 -407 0 0
Others 5,523 1,546 4,675 -4,204 -3,271 4,978 8,940 -2,826 -2,679 6,603 7,540 7,821 -165
Operating Cash Flow 9,148 13,054 16,301 5,635 5,714 14,835 21,894 13,393 11,338 39,603 44,137 55,836 48,895
Sale(Pur) of ST Inv. -269 -10 0 0 0 0 0 0 -169 93 -279 0 0
Sale(Pur) of LT Inv. -862 645 -340 -340 -340 -340 -340 -340 401 -462 -897 -1,360 -1,360
Sale of FA 63 4 0 0 0 0 0 0 3 44 68 0 0
Capital Spending -603 -687 -500 -500 -500 -500 -500 -500 -2,268 -1,629 -2,290 -2,000 -2,000
Others 32,852 70 -216 -233 -254 -279 -250 -247 -2,143 -260 32,473 -1,030 -1,019
Investing Cash Flow 31,182 22 -1,056 -1,073 -1,094 -1,119 -1,090 -1,087 -4,177 -2,214 29,075 -4,390 -4,379
Inc (Dec) of Debt -6,956 11,935 0 0 0 0 0 0 4,768 20,145 4,979 0 0
Bonds Issued (Redeemed) 0 0 0 0 0 0 0 0 0 0 0 0 0
Dividend paid 0 0 -23,445 0 0 0 -34,855 0 -10,328 -12,074 -23,445 -34,855 -38,686
Others -789 293 0 0 0 0 0 0 139 -23 -496 0 0
Financing Cash Flow -7,745 12,228 -23,445 0 0 0 -34,855 0 -5,421 8,048 -18,962 -34,855 -38,686
Exchange influence 1,424 -2,155 0 0 0 0 0 0 -1,759 1,724 -731 0 0
Change in Cash Flow 34,009 23,149 -8,201 4,562 4,620 13,716 -14,052 12,306 -19 47,161 53,520 16,591 5,830
Cash equivalent - beginning 132,998 166,999 190,138 189,911 196,153 202,453 217,849 205,477 85,821 85,867 132,998 196,153 190,138
Cash equivalent - end 166,999 190,138 189,911 196,153 202,453 217,849 205,477 219,463 85,867 132,998 196,153 219,463 232,013
Operating cash per share 6.17 8.35 10.43 3.61 3.66 9.49 14.01 8.57 9.32 29.52 28.61 35.72 31.28
FCF per share 5.77 7.91 10.11 3.29 3.34 9.17 13.69 8.25 7.45 28.31 27.13 34.44 30.00 Source: Company data, Credit Suisse estimates
24 September 2014
ARM Holdings (ARM.L, 916.5p) Acer Group (2353.TW, NT$22.05) Actions (ACTS.OQ, $2.25) Amazon com Inc. (AMZN.OQ, $324.5) Apple Inc (AAPL.OQ, $101.06) Asustek (2357.TW, NT$290.5) Broadcom Corp. (BRCM.OQ, $40.275) China Mobile Limited (0941.HK, HK$95.1) China Telecom (0728.HK, HK$4.79) China Unicom Hong Kong Ltd (0762.HK, HK$12.34) Coolpad Group Limited (2369.HK, HK$1.61) Google, Inc. (GOOGL.OQ, $597.27) Hewlett Packard (HPQ.N, $36.47) HiSilicon (Unlisted) Huawei (002502.SZ, Rmb16.82) Imagination Technologies (IMG.L, 190.5p) Intel Corp. (INTC.OQ, $34.71) Lenovo Group Ltd (0992.HK, HK$11.98) Marvell Technology Group Ltd. (MRVL.OQ, $13.57) MediaTek Inc. (2454.TW, NT$473.0, OUTPERFORM, TP NT$570.0) QUALCOMM Inc. (QCOM.OQ, $76.29) Realtek Semiconductor (2379.TW, NT$109.0) ST-Ericsson (Unlisted) Samsung Electronics (005930.KS, W1,161,000) Sony (6758.T, ¥1,896) Sunny Optical Technology Group Co., Limited (2382.HK, HK$11.08) TCL Communication Technology Holdings Limited (2618.HK, HK$9.57) Taiwan Semiconductor Manufacturing (2330.TW, NT$122.5) ZTE Corporation (0763.HK, HK$17.18)
Disclosure Appendix
Important Global Disclosures
I, Randy Abrams, CFA, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for MediaTek Inc. (2454.TW)
2454.TW Closing Price Target Price
Date (NT$) (NT$) Rating
31-Oct-11 318.00 306.00 U
U N D ERPERFO RM
N EU T RA L
REST RICT ED
O U T PERFO RM
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
As of December 10, 2012 Analysts’ stock rating are defined as follows:
Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.
Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.
Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.
*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total retu rn relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total
24 September 2014
(2454.TW / 2454 TT) 16
return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican 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; prior to 2nd October 2012 U.S. and Canadian ratings were 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. 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. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.
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Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.
Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.
Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.
*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.
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Global Ratings Distribution
Outperform/Buy* 44% (54% banking clients)
Neutral/Hold* 40% (50% banking clients)
Underperform/Sell* 14% (43% banking clients)
Restricted 3%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d 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.
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Price Target: (12 months) for MediaTek Inc. (2454.TW)
Method: Our target price of NT$570 for MediaTek Inc. is based on 19x 2014E EPS of NT$30, as ASP/GMs mix improves but still reflects a bit of risk on the 3G to 4G transition in the coming few months.. We believe the stock can reach that level by year-end on successful LTE launch, similar to its range the past few years. We are positive on Mediatek due to: (1) a strong product cycle in emerging market smartphone and tablets; (2) market leadership continuing to sustain in the face of tough competition due to fast product innovation both on lower cost and higher performance solutions; and (3) additional drivers from China brands ramping export markets and push to more advanced processors, tablets and TD-SCDMA and LTE over the next few years.
Risk: Risks that could impede achievement of our NT$570 target price for Mediatek include volatility near-term due to 1) post-May holiday lull, 2) risk of price cuts on 3G from QCOM ahead of the high season, and 3) LTE news flow starts out negative as QCOM, BRCM, MRVL and INTC have solutions ahead of Mediatek's competitive SoCs from late 3Q14.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names
The subject company (2454.TW, MRVL.OQ, 2330.TW, INTC.OQ, 005930.KS, AMZN.OQ, HPQ.N) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.
24 September 2014
Credit Suisse provided investment banking services to the subject company (INTC.OQ, 005930.KS, AMZN.OQ, HPQ.N) within the past 12 months.
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Credit Suisse has received investment banking related compensation from the subject company (INTC.OQ, 005930.KS, AMZN.OQ, HPQ.N) within the past 12 months
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As of the date of this report, Credit Suisse makes a market in the following subject companies (MRVL.OQ, INTC.OQ, AAPL.OQ, AMZN.OQ, HPQ.N).
As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (2454.TW, MRVL.OQ, ARM.L, 2330.TW, 2379.TW, AAPL.OQ).
Credit Suisse has a material conflict of interest with the subject company (2330.TW) . Credit Suisse is acting as the financial advisor to Motech Industries Inc in relation to the share subscription by Taiwan Semiconductor Manufacturing Co., Ltd.
Credit Suisse has a material conflict of interest with the subject company (INTC.OQ) . Credit Suisse Securities (USA) LLC is acting as financial advisor to Intel Corp (INTL) on its announced proposed acquisition of LSI’s Axxia Networking Business from Avago Technologies Limited (AVGO).
Credit Suisse has a material conflict of interest with the subject company (005930.KS) . Credit Suisse is acting as exclusive financial advisor to Samsung Electronics and Samsung Fine Chemicals in relation to the proposed sale of their ownership stakes in the semiconductor wafer joint ventures with SunEdison, SMP Ltd and MEMC Korea Company Ltd, to SunEdison.
As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject company (AAPL.OQ). A Credit Suisse analyst involved in the preparation of this report has a long position in the common stock of AAPL.
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Important Regional Disclosures
Singapore recipients should contact Credit Suisse AG, Singapore Branch 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 (2454.TW, MRVL.OQ, ARM.L, 2382.HK, 2330.TW, 2379.TW, INTC.OQ, 005930.KS, AAPL.OQ, AMZN.OQ, HPQ.N) within the past 12 months
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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.
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An analyst involved in the preparation of this report received third party benefits in connection with this research report from the subject company (HPQ.N)
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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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Taiwanese Disclosures: This research report is for reference only. Investors should carefully consider their own investment risk. Investment results are the responsibility of the individual investor. Reports may not be reprinted without permission of CS. Reports written by Taiwan based analysts on non-Taiwan listed companies are not considered recommendations to buy or sell securities under Taiwan Stock Exchange Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers.
To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
Credit Suisse AG, Taipei Securities Branch ........................................................................................................ Randy Abrams, CFA ; Nickie Yue
24 September 2014
For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683.
24 September 2014
(2454.TW / 2454 TT) 19
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Mediatek's LTE roadmap aggressively meeting the competitive challenges – meaningful refresh at MWC
Mediatek should announce an aggressive refresh around Mobile World Congress
Mediatek's portfolio matching up closer to Qualcomm's LTE offering
Mediatek achieving its shipment guidance even ahead of the SoC Ramp
LTE to have modest margin pressure consistent with expectations
LTE inflection finally coming through as 3G decelerates in China
China's MIIT data also showing 3G still decelerating
3G exports offsetting the slowdown in China
Spreadtrum re-emerging in entry smartphones
An Intel-Spreadtrum MoU on the heels of Rockchip is possible; impact may take until 2016
Fine-tuning estimates; maintaining 2014E/2015E EPS
Maintain OUTPERFORM
Disclosure Appendix