The Long Case For NXP Semiconductors

Stock: NXP Semiconductors Recommendation: BUY Team 10 Jerry Jiang Owen Gilmore Ziv Israel

November 5-7, 2014

presented by

Jack Ferraro, MBA

’70

RECOMMENDATION: BUY

Current Price: $73.5

Target Price: $96.3

Est. Timing: 12 months

Upside: 31%

Summary Valuation:

Our Target Price $96.3 is based on 18x our 2015 EPS forecast.

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COMPANY DESCRIPTION

• Over 50 years of operating history.

• Leader in High Performance Mixed Signal and Standard Products.

• Diverse applications: automotive, identification, wireless infrastructure, lighting, industrial, mobile, consumer and computing.

• Located in over 25 countries

• 25,691 employees.

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COMPANY DESCRIPTION

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CURRENT CAPITALIZATION

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HISTORICAL STOCK CHART

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E

X

E

L

L

E

N

T

M

A

N

A

G

E

T

M

E

N

T

1) Multiple Near Term Growth Drivers

– EMV Migration Tailwind

– Booming Mobile Payment / NFC Applications

2) Well Positioned for Long Term Growth

– Continuous Growth in Automotives

– Chances within “IoT”

3) Expecting Continuous Re-Rating

INVESTMENT THESIS

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THESIS #1: Multiple Near Term Growth Driver

• EMV Migration Tailwind EMV will be a global standard for bank

card payments through POS, ATM and etc. NXP has a global market share of over 70% in EMV IC.

China has about 3.8 billion bank cards and U.S. has about 1.5 billion bank cards.

China will complete all EMV migration on terminals by end of 2015.

U.S. is expected to start EMV migration by early 2015.

NXP’s revenue from bank cards is expected to grow at CAGR of 27% in the next 3 years.

Source: BMO Capital Markets

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THESIS #1: Multiple Near Term Growth Driver

• Booming Mobile Payment (NFC)

Near Field Communication (NFC) is currently applied in mobile phones and tablets for close range transactions/data exchange.

NFC Payment is fast and safe.

Both Apple (iPhone 6) and Samsung (GX5) use NXP as its sole or major source for NFC chip.

Juniper Research forecasted there will be about 516m users of NFC mobile payment services by the end of 2019, up from 101m this year.

Rev from secure connected device is guided to grow at CAGR of 18-22% in the next 3 years.

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THESIS #2: Well Positioned for Long Term Growth

• Continuous Growth in Automotive

Dominant market share (>2.5 RMS)in SAM of$2.7B

NXP expects the SAM to grow at 6-7% CAGR in next 5 years.

Long product cycle (over 10years)provides sustainable growth.

Growth drivers:Car2X, Increased intelligence to key, demand for increased safety and etc.

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THESIS #2: Well Positioned for Long Term Growth

• Huge Chances in “IoT”

Supply Chain Applications

Industry 4.0

Smart Home

Wearables

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THESIS #3:Expecting Continuous Re-Rating • HPMS revenue contribution will

increase from 68% in 2012 to 78% in 2016.

• Gross margin will improve from 46.8% in 2013 to 48.9% in 2016.

• Strong Operating Cash flow/FCF significant brought leverage down to 2x from 4.4x prior to IPO.

• Plan to repurchase up to 25 million common stocks since Feb 2014.

• EPS CAGR will be over 20% in the next years, significantly higher than peers.

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Financial Assumptions

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Financial Assumptions

mn USD 2011 2012 2013 2014E 2015E 2016E

Rev % YoY Growth

High Perf Mixed Signal (HPMS) 2.6% 12.2% 18.7% 18.7% 12.4% 11.8%

Automotive -0.1% 1.0% 8.5% 12.0% 10.0% 8.0%

Total Identif ication 18.3% 41.3% 31.5% 13.1% 13.0% 13.2%

Infrastructure & Industrial -2.5% -3.2% 15.0% 21.6% 18.0% 15.5%

Portable & Computing -5.6% 12.7% 17.0% 43.2% 8.2% 10.0%

Standard Products 6.2% -3.9% -2.0% 10.6% 2.1% 2.5%

Manufacturing Operations -39.8% -33.2% -35.5% 23.7% -0.2% 0.0%

Total -5% 4% 10% 17% 10% 10%

mn USD 2011 2012 2013 2014E 2015E 2016E

Operating Margin

High Perf Mixed Signal (HPMS) 20.8% 22.9% 28.5% 29% 29% 30%

Standard Products 23.4% 15.3% 12.7% 20% 19% 19%

Manufacturing Operations -1.6% -1.4% -11.0% -11% -11% -11%

Total 19.9% 19.1% 23.3% 25.1% 25.2% 26.2%

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Financial Assumptions

mn USD 2011 2012 2013 2014E 2015E 2016E

Rev % YoY Growth

High Perf Mixed Signal (HPMS) 2.6% 12.2% 18.7% 18.7% 12.4% 11.8%

Automotive -0.1% 1.0% 8.5% 12.0% 10.0% 8.0%

Total Identif ication 18.3% 41.3% 31.5% 13.1% 13.0% 13.2%

Infrastructure & Industrial -2.5% -3.2% 15.0% 21.6% 18.0% 15.5%

Portable & Computing -5.6% 12.7% 17.0% 43.2% 8.2% 10.0%

Standard Products 6.2% -3.9% -2.0% 10.6% 2.1% 2.5%

Manufacturing Operations -39.8% -33.2% -35.5% 23.7% -0.2% 0.0%

Total -5% 4% 10% 17% 10% 10%

mn USD 2011 2012 2013 2014E 2015E 2016E

Operating Margin

High Perf Mixed Signal (HPMS) 20.8% 22.9% 28.5% 29% 29% 30%

Standard Products 23.4% 15.3% 12.7% 20% 19% 19%

Manufacturing Operations -1.6% -1.4% -11.0% -11% -11% -11%

Total 19.9% 19.1% 23.3% 25.1% 25.2% 26.2%

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Peer Comparison

NameMktCap

(m US$)PE FY0 PE FY1 PE FY2 PB FY0 PB FY1

14ROE

(%)

Net Debt/

Eq. (%)

EV/EBITD

A T12M

EV/EBITD

A FY1

NXP 18,504 24.9 15.5 13.4 31.6 20.0 90.0 171.5 16.2 13.6 KLA-TENCOR 13,346 24.4 25.2 18.0 3.8 5.2 21.9 (65.5) 13.7 13.5 MICROCHIP TECH 8,685 22.2 16.7 15.3 3.9 4.4 21.7 (15.2) 13.0 10.8

TEXAS INSTRUMENT 53,470 21.1 19.5 17.3 5.1 5.2 25.8 12.3 11.6 10.9

BROADCOM CORP-A 24,491 30.5 14.1 12.7 2.8 2.8 14.3 (35.6) 23.0 10.0

INTEL CORP 162,456 16.1 14.7 14.4 2.9 3.0 20.0 (22.1) 6.6 6.5

ADV MICRO DEVICE 2,144 27.7 40.1 24.5 4.0 4.3 (4.1) 160.1 6.6 7.8

STMICROELECTRONI 6,315 N.A 38.3 18.3 1.1 1.1 3.0 (12.9) 4.5 4.7

INFINEON TECH 10,864 17.6 17.5 14.9 2.2 2.1 12.3 (52.5) 6.4 6.1

AVAGO TECHNOLOGI 22,048 44.9 18.8 14.0 7.1 7.8 32.6 (34.1) 35.6 15.2

ANALOG DEVICES 15,729 22.7 21.0 17.6 3.1 3.1 15.2 (80.4) 15.0 13.8

SKYWORKS SOLUTIO 11,548 31.4 19.1 14.9 4.8 5.0 24.0 (24.3) 18.2 14.2

QUALCOMM INC 114,162 15.6 12.4 11.5 2.9 2.8 20.5 (81.8) 9.4 7.6

XILINX INC 11,673 18.9 17.8 16.8 4.3 4.2 24.1 (32.6) 12.2 12.1

MARVELL TECH GRP 6,883 15.0 11.5 11.5 1.4 1.3 11.6 (42.1) 8.4 6.8

TOSHIBA CORP 18,326 28.0 15.0 11.4 1.6 1.6 10.5 75.7 8.5 7.6

SAMSUNG ELECTRON 163,467 6.0 8.6 9.3 1.0 1.2 14.4 (28.9) 2.7 3.1

NVIDIA CORP 10,806 21.3 16.2 14.9 2.5 2.6 14.2 (73.9) 9.2 8.1

High 44.9 40.1 24.5 7.1 7.8 32.6 160.1 35.6 15.2

Median 21.8 17.5 14.9 2.9 3.0 15.2 (32.6) 9.4 8.1

Low 6.0 8.6 9.3 1.0 1.1 (4.1) (81.8) 2.7 3.1

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Valuation

2012 2013 2014E 2015E 2016E

Revenue 4,358 4,815 5,628 6,177 6,766

yoy 4% 10% 17% 10% 10%

Gross Magin 45.8% 46.8% 48.2% 48.3% 48.9%

Operating Margin 19.1% 23.3% 25.1% 25.2% 26.2%

Operating Profits 834 1,120 1,418 1,560 1,776

Net Income - Pro Forma 477 840 1,185 1,288 1,494

yoy 4.8% 76.1% 41.1% 8.7% 15.9%

EPS- Pro Forma $1.68 $3.27 $4.74 $5.35 $6.47

0.2% 95.0% 44.7% 12.9% 21.0%

PE 43.7x 22.4x 15.5x 13.7x 11.4x

PB 14.5x 12.2x 20.x 18.x 16.x

• Our Target Price $96.3 is based on 18x our 2015 EPS forecast.

• The stock deserves trading at higher end of peer groups (10-25x 2015

EPS), due to it’s higher than market average growth, improving

profitability and improve leverage ratio.

• Based on current price $73.4, there’s a 31% upside. We suggest BUY.

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1) Significant design wins in “IoT”

2) More content value in mid-low end

automotive

3) Further adoption of NFC in mobile payment

(e.g. Apple Pay)

4) Spinning off its manufacturing business

INVESTMENT CATALYSTS

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INVESTMENT SUMMARY

• Industry leader in each core business

• Consistently outgrow market

• Well positioned for “IoT”

• Valuation re-rating is on the way

• Strong Management Team

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• Market share losing due to new entrant

• Competition leads to margin decline

• Alternative technologies

INVESTMENT RISKS

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APPENDIX

NXP Semiconductors N.V.

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MANAGEMENT TEAM

Background

• Mr. Richard L. Clemmer, known as Rick, has been Chief Executive Officer

and President of NXP Semiconductors N.V. since January 1, 2009. Mr.

Clemmer has been the Head of Global Sales and Marketing at NXP

Semiconductors N.V since July 2011. Mr. Clemmer has been the

Chairman of Management Board, Chief Executive Officer and President of

NXP B.V since January 1, 2009 and also serves as its Member of

Management Board. He served as a Senior Advisor at Kohlberg Kravis

Roberts & Co. since June 13, 2007.

• Mr. Hans Rijns has been the Chief Technology Officer of January 7, 2013

NXP Semiconductors NV and also serves as its Senior Vice President and

Head of Research. Mr. Rijns started his career at Philips Research as

scientist in the area of discrete-time mixed-signal circuits. Since 1996 he

has held various technical, business and executive management positions

at Philips Semiconductors and NXP.

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TOP HOLDERS OF STOCK

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INCOME STATEMENT

mn USD 2011 2012 2013 2014 2015 2016

Revenues 4,194 4,358 4,815 5,628 6,177 6,766

YoY -4.7% 3.9% 10.5% 16.9% 9.7% 9.5%

CoGS 2207 2362 2517 2916 3190 3455

Gross Profit 1987 1996 2298 2712 2986 3311

R&D 609 589 624 735 800 893

SG&A 562 580 563 569 632 647

Total Operating Expenses 1171 1169 1187 1299 1432 1540

Other Income (Exp) 17 7 9 5 5 5

Operating Income 833.0 834.0 1,120.0 1,418.2 1,559.5 1,775.7

Net Interest (307.0) (266.0) (179.0) (139.0) (147.8) (150.0)

Profit Before Taxes 526.0 568.0 941.0 1279.2 1411.7 1625.7

Taxes 25.0 28.0 34.0 26.0 57.2 65.9

MI 46.0 63.0 67.0 68.0 66.0 66.0

Net Income - Pro Forma 455.0 477.0 840.0 1,185.2 1,288.4 1,493.8

yoy 42.6% 4.8% 76.1% 41.1% 8.7% 15.9%

Net Income - GAAP 390.0 (115.0) 348.0 641.9 993.4 1,228.8

yoy -185.5% -129.5% 402.6% 84.5% 54.8% 23.7%

EPS - Pro Forma (ex. ESO) $1.68 $1.68 $3.27 $4.74 $5.35 $6.47

EPS - GAAP $1.57 ($0.46) $1.36 $2.58 $3.89 $3.13

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BALANCE SHEET mn USD 2011 2012 2013 2014 2015

Cash and cash equivalents $743.0 $617.0 $670.0 $690.5 $1,084.2

Accounts Receivable 479.0 510.0 542.0 730.3 778.5

Inventories 618.0 715.0 740.0 751.5 787.4

Assets held for sale 39.0 10.0 13.0 6.0 6.0

Total Current Assets $1,966.0 $1,954.0 $2,092.0 $2,285.2 $2,770.3

Property and Equipment 1,063.0 1,070.0 1,048.0 1,074.0 954.0

Goodw ill 2,231.0 2,277.0 2,358.0 2,210.0 2,210.0

Intangible assets, ex Goodw ill 1,171.0 965.0 755.0 586.0 586.0

Investments in Equity Investees 37.0 45.0 52.0 59.0 59.0

Other long term assets 144.0 128.0 144.0 141.0 141.0

Total Assets $6,612.0 $6,439.0 $6,449.0 $6,355.2 $6,720.3

Liabilities

Accounts Payable $455.0 $562.0 $544.0 $673.1 $705.3

Accrued Liabilities 332.0 627.0 608.0 577.2 615.4

Liabilities held for sale 21.0 0.0 1.0 0.0 0.0

Short term provisions 130.0 0.0 0.0 0.0 0.0

Short term debt 52.0 307.0 40.0 51.0 551.0

Other current liabilities 59.0 0.0 0.0 0.0 0.0

Total Current Liabilities $1,049.0 $1,496.0 $1,193.0 $1,301.3 $1,871.6

Long-Term Debt $3,747.0 $3,185.0 $3,281.0 $3,757.0 $3,257.0

Long-term provisions 347.0 0.0 0.0 0.0 0.0

Other Noncurrent Liabilities 112.0 474.0 429.0 380.0 380.0

Total Liabilities $5,255.0 $5,155.0 $4,903.0 $5,438.3 $5,508.6

Shareholders' Equity

Shareholders' Equity 1,357.0 1,049.0 1,546.0 916.9 1,211.6

Total Shareholder's Equity $1,357.0 $1,284.0 $1,546.0 $916.9 $1,211.6

Total Liabilities & Equity $6,612.0 $6,439.0 $6,449.0 $6,355.2 $6,720.3

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CASH FLOW STATEMENT mn USD 2010 2011 2012 2013 2014 2015

Cash Flow from Ops.

Net Income ($456.0) $390.0 ($115.0) $348.0 $641.9 $993.4

Depreciation & Amortization 684.0 591.0 533.0 514.0 411.0 420.0

Stock based comp 12.0 31.0 52.0 88.0 133.0 136.0

(Gain) loss on of debt (57.0) 32.0 161.0 114.0 3.0 0.0

Minority Interests 86.0 77.0 27.0 (58.0) (5.0) 0.0

Changes in Operating Assets and Liabilities 80.0 (568.0) 22.0 (180.0) 71.6 (13.9)

Net Cash from Operations $450.0 ($5.0) $682.0 $644.0 $1,320.1 $1,521.7

Cash Flow from Investing

PP&E ($258.0) ($220.0) ($250.0) ($215.0) ($312.0) ($300.0)

Proceeds from disposal of PPE 31.0 25.0 1.0 3.0 2.0 0.0

Net Cash from Investing ($269.0) ($202.0) ($243.0) ($240.0) ($345.0) ($300.0)

Cash Flows from Financing

Proceeds from common stock, net $448.0 ($47.0) ($26.0) ($228.0) ($1,358.0) ($800.0)

Short term debt, net 8.0 17.0 0.0 (436.0) 16.0 500.0

Credit facility, net (200.0) (400.0) 231.0 (80.0) 600.0 0.0

Long term debt, net (411.0) (429.0) (739.0) 205.0 (135.0) (500.0)

Capital payments to non controlling (2.0) (67.0) (40.0) (59.0) (50.0) 0.0

Net Cash from Financing ($157.0) ($926.0) ($574.0) ($598) ($927) ($800)

Other Adj (68.0) 788.0 (31.0) 0.0 (6.0) 0.0

Cash and Cash eqv at beginning 1,041.0 898.0 1,351.0 1185.0 991.0 1033.1

Net increase in cash and cash eqv. (133.0) (1,154.0) (166.0) -194.0 42.1 421.7

Cash & cash equivalent for discontinued ops 10.0 1,597.0 (45.0) 0.0 -6.0 0.0

Cash and Cash eqv at end 898.0 1,351.0 1,185.0 991.0 1033.1 1454.8