Asian Tech Components NEUTRAL (Unchanged ... - Maybank · PDF fileon companies with a bigger...

October 12, 2015

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SEE PAGE 43 FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS

Asian Tech Components

Valuation comparison

Mkt Cap Price TP Rating +/- Ticker Name USDm Lccy Lccy

%

2474 TT Catcher

8,189

350.0 450.0 BUY 28.6

3008 TT Largan

11,011

2,690 2,950 BUY 9.7

2018 HK AAC

7,795

49.5

46.0 HOLD (7.0)

2015 Valuation

PER P/BV EV/

EBITDA ROE Div/

yield Ticker Name (x) (x) (x) (%) (%)

2474 TT Catcher

11.3

2.3 5.9 22.3 1.7

3008 TT Largan

16.1

5.9 10.6 41.5 1.9

2018 HK AAC

17.4

4.5 12.7 28.1 1.9

2016 Valuation

PER P/BV EV/

EBITDA ROE Div/

yield Ticker Name (x) (x) (x) (%) (%)

2474 TT Catcher

9.5

2.0

4.6 22.6 2.6

3008 TT Largan

13.6

4.6 8.7 37.6 2.5

2018 HK AAC

16.2

3.8 11.1 25.4 2.1

* as of 6 Oct closing

Source: Maybank

Go for winners in areas of spending Global smartphone sales growth is decelerating. Thus, focus

on companies with a bigger share of the value pie.

Our analysis shows the major categories smartphone makers

are spending money on include camera, external design

(casing) and user interface.

Catcher is our #1 pick in the smartphone food chain as it is

gaining share in the premium segment. Largan is our #2 pick

given its dominant position and the camera upgrade trend.

Industry growth slowdown in 4Q15/1Q16 is a re-entry point.

Resume coverage of Asian tech components sector We resume coverage of Catcher. It’s our Top Pick in the

smartphone food chain. We also resume coverage of Largan at BUY

and AAC Tech at HOLD.

Catcher is our Top Pick, followed by Largan Say goodbye to high-volume growth…: We expect smartphone unit

YoY growth to decelerate to only <10% in 2015F vs 28% in 2014,

with 5.4% in 4Q15 marking the bottom of this year. 1Q16 will still

be a tough quarter off from the 1Q15 high base (+16% YoY).

…but money-making opportunities still exist: Smartphone makers

are more aggressive in differentiating their products now. Our

analysis shows that camera, casing and user interface are areas

smartphone makers focus on. After analyzing market-share shifts

among suppliers of these components, we conclude Catcher as our

Top Pick, followed by Largan.

Catcher: gaining market share in the premium market. As a

metal casing supplier, Catcher is the purest high-end smartphone

play. The firm is also gaining more iPhone allocation thanks to

Apple’s sourcing strategy, its capacity commitment, and rapid

yield-rate improvement. Trading at eight-year average PER, we

believe the stock is undervalued.

Largan: ongoing camera upgrade. Largan leads the camera lens

module sector with at least 1+ year edge against its rivals. It is well

positioned to benefit from the ongoing camera upgrade trend,

including pixel, optical zoom, and dual camera. Earnings revision

will bottom in 4Q15 and form a good re-entry point, in our view.

Many other components are either facing intense competition or

seeing severe cost pressure, such as AP, camera module, haptics,

etc. Either ASP and/or market shares will be difficult to sustain.

We rate AAC as HOLD accordingly as its market-share loss could

lead to earnings downside vs consensus.

Risk factors: our key investment thesis comes from their ASP and

market-share expansion or loss, which also form upside/downside

risk. Sectorial risk mainly comes from forex, which will alter

companies’ margins (+ve) and emerging market (EM) demand (-ve).

(Unchanged)NEUTRAL

Stefan Chang, CFA

(852) 2268 0675

[email protected]

Warren Lau

(852) 2268 0644

[email protected]

October 12, 2015 2


Go for winners in areas of spending

Rapid volume growth does not exist anymore… Global smartphone unit growth has decelerated to <10% in 2015 from 28%

in 2014. Smartphone penetration rate in developed countries is already

saturated and we may only see replacement demand in the future. High-

end smartphone growth was driven by the iPhone only since last year, but

even the iPhone momentum is likely to weaken anytime soon. We now

forecast 4Q15 iPhone shipment of possibly only around 70m vs 74m in

4Q14. Our ground survey suggests that half of new iPhone 6s/6s+ models

were immediately available in the first week of product offering in the

first-round countries. This is compared to 1-2 months severe shortage for

almost everything when 6/6+ were launched last year. We believe supply-

chain companies have started to revise down their expectations of 4Q15

iPhone shipments recently.

Mid- to low-end smartphones, mostly sold in EM, are not doing any better.

EM used to be the volume driver for 2013-14 (supported by MediaTek’s

rapid growth, from ~100m in 2012 to 250m+ in 2013 and 350m+ in 2014),

but poor economic conditions and currency depreciation have shadowed

the growth since the beginning of the year. This is evidenced by MTK’s

2015F unit growth, which could be 10-15% YoY only, if not lower, and 4Q15

being possibly flattish YoY.

This scenario is likely to continue into 1Q16 as 1Q15 was a high base (+16%

YoY). We therefore believe starting 2016 with a conservative stance is a

more prudent approach. Volume growth story does not exist anymore for

both the high-end and mid- to low-end markets.

Figure 1: Global smartphone shipments and market shares

Shipments Market shares

2013 2014 2015F 2013 2014 2015F

Samsung 300 318 318 29% 24% 22%

Apple 151 193 225 15% 15% 16%

Huawei 47 74 99 5% 6% 7%

Xiaomi 13 58 71 1% 4% 5%

Lenovo* 44 94 71 4% 7% 5%

ZTE 38 43 61 4% 3% 4%

LG 46 59 59 5% 5% 4%

TCL^ 16 37 45 2% 3% 3%

Others 365 427 483 36% 33% 34%

Total 1,020 1,301 1,431 100% 100% 100%

YoY 40% 28% 10%

* Lenovo+Motorola since 2014; ^ TCL Comm only excludes Momoda

Source: IDC, Maybank

Who are the winners, and why? Figure 1 not only tells us about the change in market growth rate, but

more importantly also about the market-share changes among vendors. For

instance, Apple, Huawei and Xiaomi won market share from 2013 to 2014

and we project they will make further gains in 2015. Samsung lost

significant market share in 2014, but the downtrend has started to

stabilize in 2015. On the other hand, while many Chinese brands are

gaining market share at the expense of many other international brands

such as Sony and HTC, not all of them are winning — Lenovo and TCL are

unfortunately losing competitive ground.

A common thing among these winning brands is that they focus on high-end

or high-spec products — Apple is always in the premium segment while

Samsung has put the most effort on Galaxy S and Galaxy Note. Huawei and

Global smartphone shipment growth has decelerated significantly.

October 12, 2015 3


Xiaomi has also put more effort on high-spec mid-priced phones, compared

with Lenovo and TCL whose phones carry lower ASP and focus more on

mass market. We will analyse from a product offering point of view to see

what could be the reasons for companies that are successful, and identify

those key component suppliers that benefit from and help maintain the

trend.

What matters: camera, casing and UI

We start the analysis with Apple. Figure 2 shows iPhone spec upgrades

since iPhone 4s — basically everything. But when we talk about the BOM

cost structure, it is slightly different.

Figure 2: iPhone spec upgrade, since 2011

2011 2012 2013 2014 2015

iPhone 4s iPhone 5 iPhone 5s iPhone 6 iPhone 6+ iPhone 6s iPhone 6s+

AP A5 A6 A7 (+M7) A8 (+M8) A8 (+M8) A9 (+M9) A9 (+M9)

1Ghz dual-core

Cortex A9 1.3GHz dual-core ARM v7

1.3GHz dual-core ARM v8

1.4 Ghz dual-core ARM v8

1.4 Ghz dual-core ARM v8

70% faster, 90%+ graphic

70% faster, 90%+ graphic

Modem up to

HSPA/EVDO up to LTE up to LTE

up to LTE (multi-band)

up to LTE (multi-band)

up to LTE (cat 9)

up to LTE (cat 9)

Memory 512MB DDR2 1GB LPDDR2 1GB LPDDR3 1GB LPDDR3 1GB LPDDR3 N.A. N.A.

Display 3.5" 640x960 4" 1136x640 4" 1136x640 4.7" 1334x750 5.5" 1920x1080 4.7" 1334x750 5.5" 1920x1080

Display (ppi) 329ppi 326ppi 326ppi 326ppi 401ppi 326ppi 401ppi

Front camera VGA 1.2MP 1.2MP 1.2MP 1.2MP 5MP 5MP

Rear camera 8MP (1/3.2") 8MP (1/3.2") 8MP (1/3") 8MP (1/3", f2.2) 8MP+OIS (1/3',

f2.2) 12MP (f2.2)

12MP + OIS (f2.2)

Battery 1,432mAh /

5.3W 1,440 mAh /

5.45W 1,560 mAh /

5.92W 1,810mAh /

6.9W 2,915mAh /

11.1W

O/S iOS 5 iOS 6 iOS 7 iOS 8 iOS 8 iOS 9 iOS 9

Dimension (mm) 115.2x58.6x9.3 123.8x58.6x7.6 123.8x58.6x7.6 138.1x67x6.9 158.1x77.8x7.1 138.1x67.1x7.1 158.2x77.9x7.3

Weight 140g 112g 112g 129g 172g 143g 192g

Color Black/white Grey/silver Grey/silver/gol

d Grey/silver/gol

d Grey/silver/gol

d Grey/silver/gol

d/rose gold Grey/silver/gol

d/rose gold

Additional feature Siri Bigger screen Fingerprint (Touch ID)

Taptics engine Taptics engine 3D touch (Force

Touch) 3D touch (Force

Touch)

Price (launch) US$649 (16GB) US$649 (16GB) US$649 (16GB) US$649 (16GB) US$749 (16GB) US$649 (16GB) US$749 (16GB)

US$749 (32GB) US$749 (32GB) US$749 (32GB) US$749 (64GB) US$849 (64GB) US$749 (64GB) US$849 (64GB)

US$849 (64GB) US$849 (64GB) US$849 (64GB) US$849 (128GB) US$949 (128GB) US$849 (128GB) US$949 (128GB)

First release countries/regions 7 9 11 10 10 12 (China included)

12 (China included)

First weekend sales 4m+ 5m+ 9m+ (5c

included) 10m+ (6+ included)

13m (6s+ included)

Source: Company data, Maybank

October 12, 2015 4


Figure 3 has two important messages. The first is that although Apple

keeps the same ASP for the new iPhone every year, the cost increases year

over year, which we believe is a result of competition. iPhone 6s this year

should experience a similar trend. While we have yet had a complete BOM

cost structure for 6s, DRAM (2GB from 1GB), camera (8MP/1.2MP to

12MP/5MP), casing (harder 7,000series Al), U/I (3D touch sensor +

upgraded Taptics engine) can easily lift cost by USD20, which is difficult to

be made up from cost-reduction of the other components.

The second message is that not all components expand their cost % at the

same pace. In fact, only AP (application processor), display+touch,

camera, U/I, and casing are seeing both dollar value and cost % increase

over time. We leave out discussion of AP and display in this note, as the

former is simply a part of foundry/IDM competition, and the latter does

not affect panel makers’ revenue and earnings enough given the area size

remains too small vs TV panels. The remaining are camera, casing, and UI.

Figure 3: iPhones BOM cost structure

BOM cost (USD) iPhone 4s iPhone 5 iPhone 5s iPhone 6

16GB 16GB 16GB 16GB

Semiconductor 80.5 85.9 83.1 77.2

AP 15.0 17.5 19.0 20.0

Modem/analog front-end 23.5 34.0 32.0 28.5

Connectivity 6.5 5.0 4.2 4.2

PWMs 7.2 8.5 7.5 7.0

Memory - DRAM 9.1 10.5 11.0 10.0

Memmory - NAND Flash 19.2 10.4 9.4 7.5

Other components 114.4 124.0 125.6 141.5

Display+Touch 37.0 44.0 41.0 45.0

Camera (front/rear) 17.6 18.0 19.0 20.0

User interface + sensors 6.9 6.5 15.0 22.0

Battery 5.9 4.5 3.6 3.5

Casing 20.0 28.0 26.0 32.0

Other mechanicals 20.0 16.0 14.0 12.0

Others 7.0 7.0 7.0 7.0

Total 194.9 209.9 208.7 218.7

Semiconductor 41% 41% 40% 35%

AP 8% 8% 9% 9%

Modem/analog front-end 12% 16% 15% 13%

Connectivity 3% 2% 2% 2%

PWMs 4% 4% 4% 3%

Memory - DRAM 5% 5% 5% 5%

Memmory - NAND Flash 10% 5% 5% 3%

Other components 59% 59% 60% 65%

Display+Touch 19% 21% 20% 21%

Camera (front/rear) 9% 9% 9% 9%

User interface + sensors 4% 3% 7% 10%

Battery 3% 2% 2% 2%

Casing 10% 13% 12% 15%

Other mechanicals 10% 8% 7% 5%

Others 4% 3% 3% 3%

Total 100% 100% 100% 100%

Source: iSuppli, Maybank

iPhone BOM cost continued to increase generation by generation despite the retail price not going up. AP, display, camera, casing, and U/I are categories seeing YoY growth in both dollar terms and %.

October 12, 2015 5


Similar approach for Samsung may lead to a slightly different result. With

its LSI and memory division support, Samsung has higher cost allocation ($

and %) for semiconductors vs Apple for chips, such as bigger die-sized AP

and higher-density DRAM. Samsung’s semiconductor cost could easily be

10-20% higher than Apple’s. Its displays are in a similar situation as

semiconductors given flagship models adopt in-house Super AMOLED, which

is much more expensive than IPS TFT LCD which Apple uses.

Strategy for other components is similar to Apple: Samsung is also

increasing its dollar amount spending for camera, U/I, and casing. Samsung

has upgraded its camera from 8MP for the S3 to 16MP with OIS (optical

image stabilizer) for the S6. Samsung also for the first time adopted metal

casing/frame for S6 from plastic casing since S to S5. Lastly Samsung

continued to add more sensors, trying to enhance gestures and features.

For instance, S6 supports “slide to print screen” and “auto-shot by smile

detection when taking photos”. Both are new features thanks to adoption

of different sensors.

Figure 4: Galaxy S phones BOM cost structure

Galaxy S3 Galaxy S4 Galaxy S5 Galaxy S6

16GB 16GB 16GB 32GB

Semiconductor 84.4 94.4 98.4 112.0

AP 17.5 30.0 34.0 30.0

Modem/analog front-end 14.5 16.0 16.0 20.0

Connectivity 8.2 9.0 9.0 8.0

PWMs 7.0 8.0 8.0 8.0

Memory - DRAM 18.0 21.0 22.0 30.0

Memmory - NAND Flash 19.2 10.4 9.4 15.0

Other components 129.0 144.6 141.5 159.5

Display+Touch 65.0 75.0 63.0 60.0

Camera (front/rear) 19.0 20.0 22.0 24.5

User interface + sensors 12.7 16.0 20.0 26.0

Battery 4.9 5.6 5.5 5.0

Casing 8.0 8.0 10.0 18.0

Other mechanicals 13.4 14.0 15.0 20.0

Others 6.0 6.0 6.0 6.0

Total 213.4 239.0 239.9 270.5

Semiconductor 40% 39% 41% 39%

AP 8% 13% 14% 11%

Modem/analog front-end 7% 7% 7% 8%

Connectivity 4% 4% 4% 3%

PWMs 3% 3% 3% 3%

Memory - DRAM 8% 9% 9% 11%

Memmory - NAND Flash 9% 4% 4% 3%

Other components 60% 61% 59% 61%

Display+Touch 30% 31% 26% 23%

Camera (front/rear) 9% 8% 9% 9%

User interface + sensors 6% 7% 8% 10%

Battery 2% 2% 2% 2%

Casing 4% 3% 4% 7%

Other mechanicals 6% 6% 6% 8%

Others 3% 3% 3% 2%

Total 100% 100% 100% 100%

Source: iSuppli, Maybank

Samsung spends more money on semiconductors than Apple, but both firms are spending increasing amounts on camera, casing, and U/I.

October 12, 2015 6


Lastly we continue our study of Chinese brands, including Huawei, Xiaomi,

and another emerging brand Meizu. We started from their flagship models

with ASP at USD300-400. By our estimate, they carry BOM (bill of material)

cost of around USD180-200, approximately 10-20% lower than for iPhone or

Galaxy S phones, despite retail price being almost half. Putting aside their

more aggressive pricing strategy and focusing on their cost structure only,

one may find that their semiconductor dollar cost is no less than iPhone

(mostly because of bigger DRAM density) but USD30-50 lower than for

Samsung. On the other hand, their other component costs are not too far

from Samsung’s spending on Galaxy S — in fact they are higher in %. This is

a strong signal that Chinese brands are also focusing more on external and

feature design (similar to iPhone) to differentiate.

The three brands all spend the greatest % of cost on DRAM, display,

camera, and casing. DRAM spending is possibly inevitable for the

(increasingly) bulky Android system, but all other spending is crystal clear

that they share the strategy of Apple and Samsung: better input (camera),

better output (display), and better looking (design, casing).

Figure 5: BOM cost structure for Chinese brands’ flagship models

Huawei Honor 7 Xiaomi Mi4 Meizu MX5

Semiconductor 72.5

77.5

52.5

AP 20.0 Kirin 935 25.0 QCOM S801 14.0 MT6595

Modem/analog front-end 10.0

10.0

3.0

Connectivity 4.0

4.0

- embedded

PWMs 6.0

6.0

3.0

Memory - DRAM 25.0 3GB 25.0 3GB 25.0 3GB

Memmory - NAND Flash 7.5 16GB 7.5 16GB 7.5 16GB

Other components 119.0

116.0

134.0

Display+Touch 45.0 5,2" FHD 45.0

60.0 5.5" AMOLED FHD

Camera (front/rear) 23.0 20MP/8MP 22.0 13MP/8MP 23.0 21MP/5MP

User interface + sensors 10.0

10.0

10.0

Battery 5.0 3100mAh 5.0 3080mAh 5.0 3150mAh

Casing 20.0 metal casing 18.0 Diecasting 20.0 metal casing

Other mechanicals 10.0

10.0

10.0

Others 6.0

6.0

6.0

Total 191.5

193.5

186.5

Semiconductor 38%

40%

28%

AP 10%

13%

8%

Modem/analog front-end 5%

5%

2%

Connectivity 2%

2%

0%

PWMs 3%

3%

2%

Memory - DRAM 13%

13%

13%

Memmory - NAND Flash 4%

4%

4%

Other components 62%

60%

72%

Display+Touch 23%

23%

32%

Camera (front/rear) 12%

11%

12%

User interface + sensors 5%

5%

5%

Battery 3%

3%

3%

Casing 10%

9%

11%

Other mechanicals 5%

5%

5%

Others 3%

3%

3%

Total 100%

100%

100%


October 12, 2015 7


We may reach the same conclusion when we do a study of Chinese brands’

mass market models. In here we also introduce Lenovo’s A7000 as Lenovo

is a representative brand focusing on mass market. BOM cost is around

USD100 for these USD150-200 priced smartphones. While AP and DRAM

together inevitably cost ~25% of total cost, display and camera also each

account for double-digit % of BOM cost. Casing is cheaper here as they all

adopt plastic casing for cost-saving purposes. But our previous chat with

casing makers suggested that plastic casing ASP is also increasing for this

segment in order for differentiation, given semiconductor, display, etc are

basically identical.

Figure 6: BOM cost structure for Chinese brands’ mass market models

Huawei Honor 4c Xiaomi Hongmi

Note 2 Lenovo A7000

Semiconductor 40.5

41.5

34.5

AP 12.0 Kirin 620 12.0 MTK MT6795 10.0 MT6752m

Modem/analog front-end 3.0

3.0

2.0

Connectivity 2.0

- embedded - embedded

PWMs 4.0

3.0

3.0

Memory - DRAM 16.0 2GB 16.0 2GB 16.0 2GB

Memmory - NAND Flash 3.5 8GB 7.5 16GB 3.5 8GB

Other components 66.5

73.0

62.5

Display+Touch 18.0 5" HD720 25.0 5.5" FHD 20.0 5.5" HD720

Camera (front/rear) 15.0 13MP 15.0 13MP 12.0 8MP

User interface + sensors 7.0

8.0

6.0

Battery 3.5 2550mAh 5.0 3060mAh 4.5 2900mAh

Casing 8.0

5.0 Plastic 5.0 Plastic

Other mechanicals 10.0

10.0

10.0

Others 5.0

5.0

5.0

Total 107.0

114.5

97.0

Semiconductor 38%

36%

36%

AP 11%

10%

10%

Modem/analog front-end 3%

3%

2%

Connectivity 2%

0%

0%

PWMs 4%

3%

3%

Memory - DRAM 15%

14%

16%

Memmory - NAND Flash 3%

7%

4%

Other components 62%

64%

64%

Display+Touch 17%

22%

21%

Camera (front/rear) 14%

13%

12%

User interface + sensors 7%

7%

6%

Battery 3%

4%

5%

Casing 7%

4%

5%

Other mechanicals 9%

9%

10%

Others 5%

4%

5%

Total 100%

100%

100%


October 12, 2015 8


Investment thesis: go for winners in the cost

increasing areas

Our conclusion is very straight forward: if brands are spending more in

certain areas, we just follow the money. Thus, camera, casing, and U/I

will be our focus areas. By analysing their ASP and market share, our top

pick is Catcher, followed by Largan.

Figure 7: Market shares and ASP forecast for Catcher, Largan, and AAC

Company Catcher Largan AAC

Major product for iPhone casing rear camera lens * Taptics engine

Sales contribution

2015F 44.1 29.8 27.7

2016F 52.6 30.5 32.1

2017F 57.8 30.2 29.1

Allocation

2015F 15.0 83.0 70.0

2016F 19.0 77.0 61.0

2017F 23.0 79.0 60.0

ASP

2015F 34.4 2.3 2.95

2016F 33.9 2.4 3.96

2017F 32.1 2.5 3.62


* VCM (pass-through component) not included

Catcher: the purest high-end smartphone component play

As our investment thesis focuses on value increase rather than volume

growth, high-end smartphone naturally becomes the area that provides

more upside (as there is room for more expensive components).

Catcher is the industry leader for unibody metal casing which is mostly

adopted by high-end smartphones. We estimate the company has

40%+/65%+ sales exposure to iPhone/high-end smartphones respectively in

2015F, and there is a chance the ratio will further increase to 50%+/70%+

in 2016F. The company is not just enjoying ASP expansion (thanks to

iPhone’s adoption of higher grade aluminium) but also market-share

expansion. Entry barrier is high for high-end unibody metal casing given

the quality requirement and capacity support. Stock price is just trading at

the mean PE since GFC in 2008.

Largan: camera expansion ceiling not seen yet Key components for a camera module include sensor, VCM (voice control

motor), and lens module. In the greater China region, suppliers focus on

camera lens and camera module assembly, as high-end sensors now are

dominated by Sony, while Japanese suppliers Alps and Mitsumi control

high-end VCM (especially for those that support OIS — optical image

stabilizer).

We do not particularly favor camera module makers as the competition is

intense and entry barrier is not particularly high. There are at least 6-7

major camera module makers in the Greater China region and O-Film also

just decided to enter this area.

On the other hand, lens is another story as the production yield control for

high-end lens is extremely difficult. We prefer Largan in this area. The

firm has proven that its yield control is far ahead of anyone else in the

Catcher is seeing stable ASP and increasing market share. Largan’s market share is stable while ASP still has upside. AAC saw the biggest ASP jump but also lost significant market share.

October 12, 2015 9


world: evidenced by its superior margins vs peers. Organic market growth

is also not over: China Mobile said 76% of smartphones on its network this

year are equipped with 8MP+ rear camera (34% 13MP), suggesting still

ample upside vs international brands’ flagship models of 16MP/20MP. Front

camera upgrade has also just kicked off from this year from 1.2MP/3MP to

5MP/8MP following the selfie trend. Further new catalysts will be dual

camera and zoom camera, while Largan has indicated that almost all of its

customers are doing dual-camera design-in. The only less positive angle for

Largan is that its market share at high-end camera lens is already high. Its

sales/earnings driver will lie more on upgrade (ASP expansion per box)

rather than market-share gains (unit outgrowth).

AAC HOLD on valuation/competition

U/I improvement includes adoption of more sensors and more gesture

feedback, including sounds, lights, and motions. In the Greater China

region, the best representative company is AAC, which started to supply

haptics engine — an upgraded version of a vibrator — for iPhone 6/6+ in

2014. That said, we believe its valuation has fully factored in its haptics

business’ growth prospects, while the intensifying competition from Nidec

has not be discounted. Upside risk is if Android phones also start to adopt

haptics engine, which we haven’t seen yet.

Figure 8: Valuation comparison for regional component peers*

Mkt cap Price TP Rating +/- EPS (lccy) EPS g (%) P/E (x) P/BV (x) ROE (%) Div yield (%) Ticker Company USDm Lccy Lccy % 15F 16F 15F 16F 15F 16F 15F 16F 15F 16F 15F 16F

Taiwan 2474 TT Catcher 8,189 350.0 450.0 BUY 28.6 31.0 37.0 29.9 19.6 11.3 9.5 2.3 2.0 22.3 22.6 1.7 2.6 3008 TT Largan 11,011 2,690.0 2,950.0 BUY 9.7 166.8 197.3 15.1 18.3 16.1 13.6 5.9 4.6 41.5 37.6 1.9 2.5 5264 TT Casetek 1,490 144.5 N/A NR

14.3 16.1 (1.0) 11.9 10.1 9.0 1.6 1.4 17.2 17.7 4.7 5.3

2354 TT Foxconntech 4,066 95.7 N/A NR

9.0 8.8 32.6 (2.1) 10.7 10.9 1.5 1.3 14.4 12.9 2.9 3.1 2301 TT Lite-On Tech 2,261 31.9 N/A NR

3.0 3.3 8.3 8.3 10.6 9.8 0.9 0.9 9.0 9.7 6.4 7.0

4938 TT Primax 598 44.6 N/A NR

4.3 5.0 19.6 17.4 10.4 8.9 1.8 1.6 18.7 20.3 4.7 5.6 2454 TT MediaTek 12,159 245.0 245.0 HOLD - 16.9 15.5 (43.4) (8.5) 14.5 15.8 1.6 1.6 10.9 10.1 9.0 5.3 HK/CHN

2018 HK AAC 7,795 49.45 46.0 HOLD (7.0) 2.84 3.06 22.7 7.9 17.4 16.2 4.5 3.8 28.1 25.4 1.9 2.1 2382 HK Sunny Optical 2,302 16.18 N/A NR

0.8 1.1 24.8 12.9 19.5 15.1 3.7 3.1 20.6 22.4 1.5 1.9

0285 HK BYDE 1,422 4.93 N/A NR

0.5 0.6 8.9 15.7 9.0 7.8 0.9 0.8 11.2 12.2 1.2 1.3 002241 CH Goertek 5,680 23.65 N/A NR

1.2 1.4 9.9 18.1 19.7 16.7 3.7 3.1 17.6 18.8 0.7 0.7

002456 CH O-Film 2,960 18.26 N/A NR

0.9 1.2 20.3 36.3 21.4 15.7 2.9 2.5 13.8 15.6 0.9 1.1 3336 HK Juteng 585 3.97 N/A NR

0.7 0.8 9.0 9.4 5.6 5.1 0.6 0.6 11.5 11.9 4.0 4.4

0698 HK Tongda 1,012 1.38 N/A NR

0.1 0.2 33.0 28.0 11.0 8.6 1.9 1.6 18.6 20.5 2.9 3.7

Source: Bloomberg, Maybank

* As of Oct 06 2015 closing price

October 12, 2015

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Catcher Technology (2474 TT)

More market-share gains ahead Catcher is well positioned to expand its iPhone casing share

from current mid-teens % to mid-20’s % in 4-6 quarters.

Industry dynamics will be stable for the next 2-3 years.

Our target price of TWD450 is based on 12x 2016F PER.

Catcher is our Top Pick in the Greater China smartphone food

chain.

What’s New We resume coverage of Catcher Technologies with a BUY rating and

a TP of TWD450 based on 12x 2016F PER. Our target PER is slightly

above the average of 10x since 2008, which we believe is justified

by Catcher’s market-share gain and 15-20% earnings CAGR.

What’s Our View We expect Catcher to expand its iPhone casing market share from

the mid-teens % currently to the mid-20’s % the next 4-6 quarters.

Among its competitors, Hon Hai group is losing market share,

similar to its assembly business, while Jabil and Casetek are

gaining share slowly. Catcher also dominates the high-end metal

casing market for other smartphone brands. These factors should

continue to support Catcher’s earnings CAGR of 15-20% into 2017.

We believe that the high-end unibody metal casing industry

dynamics will be stable in the next 2-3 years. High-end CNC

(Computer Numerical Control) machine expansion has slowed,

while yield rate requirements set a high entry barrier for low-cost

players. We also do not currently see a risk of substitution from

other materials impacting casing capacity.

In the near term, Catcher should enjoy one of the strongest QoQ

sales momentum among iPhone suppliers thanks to its growing

market share. This should help the stock price outperform its

peers. We see a potential catalyst in a higher dividend in 2016/17F

on the back of rapid FCF improvement. Risk factors: concentration

risk (Apple), iPhone demand, and intensifying competition.

Key Data

Share Price Performance

Maybank vs Market

80

120

160

200

240

280

150

200

250

300

350

400

Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 Jun-15

Catcher - (LHS, TWD) Catcher / Taiwan TAIEX - (RHS, %)

1 Mth 3 Mth 12 Mth

Absolute(%) 4.6 (7.1) 27.0

Relative to index (%) 2.6 (2.0) 34.8

Positive Neutral Negative

Market Recs 21 1 3

Maybank Consensus % +/-

Target Price (TWD) 450.00 444.00 1.4

'15 PATMI (TWDm) 23,239 23,848 (2.6)

'16 PATMI (TWDm) 27,785 28,028 (0.9)

Source: FactSet; Maybank

FYE Dec (TWD m) FY13A FY14A FY15E FY16E FY17E

Revenue 43,245.6 55,277.4 82,911.4 100,440.4 115,070.4

EBITDA 19,140.9 26,091.8 39,814.3 47,840.3 54,575.5

Core net profit 13,817.1 17,887.8 23,238.9 27,784.5 32,202.9

Core EPS (TWD) 18.41 23.83 30.96 37.01 42.90

Core EPS growth (%) 26.7 29.5 29.9 19.6 15.9

Net DPS (TWD) 4.90 6.00 9.05 12.62 16.72

Core P/E (x) 19.2 14.8 11.4 9.5 8.2

P/BV (x) 3.6 2.8 2.4 2.0 1.7

Net dividend yield (%) 1.4 1.7 2.6 3.6 4.7

ROAE (%) 20.5 21.1 22.3 22.6 22.3

ROAA (%) 13.4 14.8 15.9 16.6 16.8

EV/EBITDA (x) 6.4 5.8 5.9 4.6 3.8

Net debt/equity (%) net cash net cash net cash net cash net cash

Stefan Chang, CFA

(852) 2268 0675

[email protected]

Share Price: TWD353.00 MCap (USD): 8.1B Taiwan

Target Price: TWD450.00 (+27%) ADTV (USD): 68M Technology (New) BUY

52w high/low (TWD)

3m avg turnover (USDm) Free float (%)

Issued shares (m)

Market capitalization Major shareholders: -Jia Wei Investment Co. Ltd. 6.6% -Kai Yi Investment Co., Ltd. 4.3% -Cathay Life Insurance Co., Ltd. 3.8%

393.00/228.00

79.7 68.2

TWD265.0B

751

October 12, 2015 11

Catcher Technology

More market-share gains ahead

iPhone casing allocation should continue to expand Catcher focuses on unibody metal casing for notebooks (NBs) and mobile

devices. Its sales breakdown for 2014 was around 33% NB casing, 33% non-

iPhone casing, 15% iPhone casing, 17% tablet casing, and 3% others. Going

forward, we believe increasing iPhone casing allocation will act as the

major catalyst for Catcher’s sales/earnings, as well as the stock price. This

is based on our estimate that the iPhone could account for 75% of high-end

smartphone metal casing worldwide in 2015F. Catcher’s iPhone allocation

in 2014 was 4% and should reach 15% in 2015F; its sales contribution was

15% in 2014 and should reach 44% in 2015F. We expect Catcher’s allocation

to grow to 19%/23% in 2016/17F and its iPhone casing 53%/58% of 2016/17F

sales.

Figure 9: Global high-end metal casing demand share (2015F)

Source: Maybank

Figure 10: Catcher’s iPhone casing allocation and sales %

Source: Maybank

Apple’s sourcing strategy and Catcher’s capabilities are the key reasons for

the latter’s market share gains, in our view. To simplify its supply chain

management and improve risk control, we believe Apple intends to keep

the primary supplier of every single component at about a 60% allocation,

if possible. Thus, we believe Apple will: 1) reduce Hon Hai’s (2317 TT, NR)

assembly share to the low-60%s from about 70% now, and; 2) use non-Hon

Hai components for those iPhones not assembled by Hon Hai. This may

explain why Pegatron (4938 TT, NR) has started to assemble the

mainstream iPhone since 2014 (iPhone 6) and why it has gained around a

30% allocation. Wistron (3231 TT, NR) is likely to be the next iPhone

assembler soon.

Metal casing is a more difficult task for Apple compared with assembly.

Hon Hai group used to account for 80% or more of the iPhone 5/5’s casing,

with Jabil as the second supplier with a minor allocation. Catcher only

started its iPhone casing business for the iPhone 6 in 2014 and has only a

mid-teen % allocation for now, followed by Jabil with about 5-10%

allocation. This means non-Hon Hai group metal casings still only account

for 20-25% of the total iPhone casing business, which should still have more

upside potential.

We expect both Catcher and Casetek (5274 TT, NR), a subsidiary of

Pegatron), to gain an increasing share of the iPhone casing business.

Catcher has proven its capability to do iPhone casing and its capex

commitment should enable the firm to keep gaining share. The firm spent

TWD20b in 2014 and plans to spend another TWD20b for capex in 2015F,

equivalent to USD1.3b in two years, with most of it directed to the iPhone.

iPhone, 75%

HTC, 3%

Sony, 4%

Samsung, 15%

Others, 4%

0%

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30%

40%

50%

60%

70%

3Q14 4Q14 1Q15 2Q15 3Q15F4Q15F1Q16F2Q16F3Q16F4Q16F

Allocation Sales contribution

October 12, 2015 12

Catcher Technology

Casetek, as a subsidiary of Pegatron, is set to supply iPhone casing once

the firm is ready, which could be during 2016. The firm has also committed

USD500m capex for 2015/16F mainly for Apple’s new products, including

new iPads and iPhones.

We estimate Catcher will have 26,000 CNC machines vs. Casetek’s 9,500 by

end-2015F, and will have 30,000 vs. 12,000 by end-2016F. This is the

second year Catcher has been a supplier for the iPhone, while Casetek has

not started. We believe Catcher is set to gain the majority of the non Hon-

Hai group allocation. We believe that a 25% market-share ceiling is a

reasonable target vs. the 40% total addressable market.

Figure 11: Global high-end CNC capacity assumption, 2011-2016F

2011 2012 2013 2014 2015F 2016F CAGR Remarks

Catcher 11,000 13,500 16,000 21,000 26,000 30,000 22% Started to supply iPhone from 2H14

Hon Hai / FTC 25,000 35,000 40,000 45,000 48,000 50,000 15% Should continue to maintain 60%+ of iPhone in 2016E

Casetek 2,000 5,000 6,000 7,000 9,500 12,000 43% US$500m capex & net addition of 5,000 in 2014-16F

Jabil 4,000 4,500 5,000 6,000 7,000 8,000 15% US$200m in mobile business

Total high-end 42,000 58,000 67,000 79,000 90,500 100,000 19%

Industry YoY

38% 16% 18% 15% 10%


Near-term catalysts: 3Q15 results and 4Q15 guidance Catcher’s 3Q15 sales came in above street consensus, and totaled TWD21b,

+4% QoQ and +44% YoY. There were three drivers for the better than

expected 3Q15 sales: 1) Sony Xperia Z5 family pull-in (Catcher is the

primary supplier); 2) iPhone 6s started from late August; and 3) NRE (non-

recurring-engineering) revenues. We are expecting more NRE revenues to

be booked in 3Q15 as iPhone 6s adopts a harder metal (7,000 series

aluminium) and adds one more color (rose gold), which suggests more

projects. More NRE’s should also be positive for Catcher’s margins. We

expect Catcher’s 3Q15 GM to stay resilient at 47% or above. Our 3Q15F EPS

estimate is TWD7.92, +13%/+24% QoQ/YoY, which is 5% below consensus as

we are less aggressive on Catcher’s non-operating gains (the Street is more

aggressive on Catcher’s forex gain given TWD depreciation while we have

not factored in this yet). Our 3Q15 operating profit estimate is 2% higher

than consensus.

We expect Catcher’s 4Q15 sales to increase 14%/41% QoQ/YoY, which is

slightly below the current consensus. Our relatively conservative stance is

because we are expecting 4Q15 iPhone shipments to be at around 70m

(about 10% lower YoY) vs. consensus of 75m or more (flat to slightly higher

YoY). That said, Catcher’s allocation gain plus its ASP expansion (we

estimate 10% or more for iPhone 6s vs iPhone 6) should drive its 4Q15 sales

above its iPhone component peers and possibly just behind AAC Tech.

Looking ahead, we forecast Catcher to gain 19%/23% of iPhone casing

allocation in 2016/2017. Our 2015/16/17F EPS are TWD30.7/37.0/42.9,

respectively, representing a CAGR of 18% for 2015-2017. Our 2015F EPS is

about 3% below the Street, mainly due to our less aggressive non-operating

gain (on forex) and 4Q15 iPhone shipments. Our 2016F EPS is 3% above the

Street.

October 12, 2015 13

Catcher Technology

Figure 12: Maybank estimates vs street consensus

3Q15F 4Q15F 2015F 2016F

MKE Street Var (%) MKE Street Var (%) MKE Street Var (%) MKE Street Var (%)

Sales TWDm 20,958 21,154 (0.9) 23,970 24,749 (3.1) 82,457 83,044 (0.7) 100,616 94,768 6.2

Gross profit TWDm 9,880 9,748 1.4 11,120 11,696 (4.9) 38,658 38,582 0.2 46,699 43,499 7.4

OP profit TWDm 7,609 7,472 1.8 8,548 9,330 (8.4) 29,909 30,323 (1.4) 36,075 34,214 5.4

Net profit TWDm 5,946 6,224 (4.5) 7,174 7,614 (5.8) 23,043 23,683 (2.7) 27,779 27,007 2.9

EPS NT$ 7.92 8.29 (4.5) 9.56 10.14 (5.8) 30.70 31.55 (2.7) 37.01 35.98 2.9

Gross margins % 47.1 46.1 1.1 46.4 47.3 (0.9) 46.9 46.5 0.4 46.4 45.9 0.5

OP margins % 36.3 35.3 1.0 35.7 37.7 (2.0) 36.3 36.5 (0.2) 35.9 36.1 (0.2)

Net margins % 28.4 29.4 (1.1) 29.9 30.8 (0.8) 27.9 28.5 (0.6) 27.6 28.5 (0.9)

Source: Company data, Bloomberg, Maybank

Industry dynamics to be stable for 2-3 years

It is tough for a 2nd-tier vendor to move up to the high-end There have been concerns over CNC machine over-supply, especially after

Samsung Electronics (005930 KS, BUY) built up 10k of in–house capacity and

BYDE expanded to 10k or more by end-2014. However, we believe over-

capacity should not be a concern. Building-up capacity does not equal

gaining orders.

The earliest example was back in 2013 when HTC just launched its flagship

model M7. BYDE was very aggressive on pricing and gained a 50%+

allocation. But soon BYDE encountered quality issues (gap between screen

and casing too wide), and Catcher regained most of the allocation after

the first few months that continued into M8 (2014).

Casing for Apple products will only become more difficult rather than

easier. Casetek has been supplying iPad casing for 3+ years, but has yet to

start supplying the iPhone. Catcher, although has supplied iPhone 6 since

2014, was still speculated to have struggled with yield issues in both 2014

and 2015 – though both times it resolved the issues in time. Apple already

has three qualified vendors (Hon Hai/FTC, Catcher and Jabil) for the

iPhone and may soon have a 4th (Casetek). We do not expect there to be

another new supplier anytime soon.

Only counting the combined capacity of the four high-end metal casing

suppliers, the capacity YoY expansion is expected to fall to only 10% in

2016F vs. 18%/15% in 2014/15F (see figure 3). The increase is largely at

Catcher and Casetek, which are set to gain more allocation. We are not

concerned about industry-wide overcapacity.

Unibody metal casing will last for another 2-3 years

Another Street whisper is that Apple will change its material adoption.

Given that Apple accounts for 75% of the market demand for the high-end

unibody smartphone metal casing, it would be significant for suppliers such

as Catcher if Apple makes a change. However, we believe such a dramatic

change is very unlikely as Apple will need 200m+/yr of unit capacity from

any new material to replace the current metal.

The most often discussed composite material to replace the current

aluminium metal casing includes liquid metal and carbon fiber. Both may

not require intensive CNC processing as the aluminium metal casing does.

For the liquid metal, Apple’s major partner is Liquidmetal, which our

channel checks suggest is still more at the R&D and patent filing stage than

October 12, 2015 14

Catcher Technology

mass production. The production process for liquid metal also remains

immature. As for carbon fiber, the process time takes much longer than

CNC metal casing, and its external design restriction is much greater than

metal, including limitations on color, shape, etc. Also, there is no large

scale installed capacity in the world at this time.

In our view, it is more likely for Apple to adopt a different composition of

metal than a brand-new material. For greater structural strength, Apple

adopted 7,000 series aluminium material for iPhone 6s/6s plus vs 6,000

series for iPhone 6/6 plus. We have learned that Apple recently filed

another patent for material that is likely to reduce the EMS shielding

effect from conventional metal. Could this be a possible approach to

improve its antenna design? If Apple still adopts metal for iPhone 7 and

requires CNC, iPhone 7s will follow, which implies we should not be

concerned about a drastic change in the industry dynamic before end-

2018.

Financial Analysis

Sales: iPhone casing the major driver Catcher’s 2014 sales breakdown was comprised of 33% NB, 34% non-iPhone

smartphone, 15% iPhone, 16% tablet, and 3% others. We believe Catcher’s

NB and tablet casing business will suffer YoY declines going forward as

both ASP and shipments for NB and tablet are under pressure. Its non-

iPhone casing business may only experience moderate growth given the

market is already saturated, while Catcher’s market share is also already

high. Thus, iPhone casing will act as the major growth driver going

forward.

Based on our estimates, every 5% iPhone casing allocation can contribute

14-15% Catcher’s sales. We assume Catcher’s allocation in 2015/16/17F of

total iPhone to be 15%/19%/23%, and iPhone will account for 44%/53%/58%

of Catcher’s sales. We forecast Catcher’s 2015/16/17F annual sales growth

to be 49%/22%/15%.

Figure 13: Catcher’s iPhone sales contribution & YoY sales growth, 2012-2017F


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More iPhone casing allocation is the major driver for Catcher’s sales growth.

October 12, 2015 15

Catcher Technology

Strong margins: high-40% level for GM a new norm Catcher’s GM has ranged from 40-45% since 1Q12, but jumped to 45% and

above starting from 2Q14, which, in our view, was the result of three

favourable factors. The first was economies of scale, led by iPhone casing.

iPhone quality requirement is higher, but so is the volume. Catcher can

duplicate the same recipe into a bigger scale instead of readjusting the

parameters between the lines for different clients. This should lead to less

capacity conversion loss and lift utilization rate, as well as margins.

The second was NRE’s, which should result from increasing difficulty of

casing design. NRE is now almost a recurring item given there are many

changes in casing design in any new model. Even the external looking

iPhone 6s and 6 are nearly identical, but the harder material and more

color choices require several new R&D projects.

Lastly, we believe Catcher has increasing pricing power against its non-

Apple clients. Other high-end metal casing suppliers are nearly all devoted

to Apple business, including Hon Hai and Casetek. Thus, Catcher is one of

the few, if not the only one, that has sufficient capacity and design

capability for other smartphone makers. As a result, its margins should be

well supported.

Going forward Catcher’s GMs should be well supported at 45%+, in our

view. This is because: 1) Catcher’s iPhone business sales % will continue to

expand; and 2) other smartphone makers, such as Sony and HTC are most

likely to stay with Catcher; and 3) we expect continuous growth of NRE.

Figure 14: Catcher’s GM trend, 1Q12-4Q16F

Source: Maybank

Sustainable 15-20% earnings CAGR into 2017 Together with the 15%+ annual sales growth for 2015/17F and stable

margins, we estimate Catcher’s 2015/16/17F annual operating profit YoY

growth will be 49%/21%/15%, and its 2015/16/17F net profit YoY growth

will be 29%/21%/16% (Catcher had a major FX gain in 2014 that boosted its

2014 net profit).

25%

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45%

50%

55%

Gross margins OP margins

We expect Catcher’s GM to remain resilient at 45%+.

October 12, 2015 16

Catcher Technology

Figure 15: Catcher’s EPS and earnings, 2012-2017F

Source: Maybank

Potential upside to cash dividend Catcher’s payout ratio may not be the best among its tech peers at only

27% in 2013, down from 40% in 2012. But this was largely a result of its

huge capex in these years. Capex increased to TWD20b in 2014 from

TWD8.6/9.6b in 2012/13, which led FCF to fall to TWD6.8b in 2014 from

TWD10.5b in 2013. Capex for this year is still around TWD20b, as suggested

by the company, which will result in only TWD1.8b of FCF (working capital

requirement surged on larger scale of sales volume), in our estimate. The

2014 payout ratio was still at multi-years low 26% (dividend paid in 2015).

However, starting from the next year we expect FCF to start expanding as

the initial investment for the iPhone business should be more or less done.

Catcher may continue to invest for higher iPhone allocation and some for

future products, such as wearable devices, but this should not be as much

as TWD20b in 2014/15F. We forecast capex to be TWD15b going forward

and 2016/17F FCF to be TWD23.1b/23.3b. We estimate that the dividend

payout ratio should have a chance to return to the previous 40% level.

Figure 16: Catcher’s FCF vs cash dividend payout (TWDb)


Figure 17: Catcher’s cash dividend payout ratio vs FCF


* Cash div/FCF, on cash flow basis; ** cash div/EPS, on accounting basis

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October 12, 2015 17

Catcher Technology

Valuations

Our target price of TWD450 is based on 12x 2016F PER Our target price of NT$450 for Catcher is based on 12x 2016F PER.

Catcher’s PER averaged 9.2x since 2008, and has remained between 7-11x

for the past 24 months. Hence, our target PER of 12x may look aggressive

at the first glance. However, the forward PER on “actual EPS” should be

distorted, in our view, as the street has failed to gauge Catcher’s earnings

power during the past 2 years. Should we adopt the year-beginning EPS

expectation to draw Catcher’s PER band, the stock mostly traded at 9-13x

since 2011, with the average PER since 2008 at 10x, and the average plus

1x STDV at 12.2x.

We believe the stock’s current PER is still too low for a company with a

leading position in the metal casing industry and a 15-20% earnings CAGR.

We attribute the low PER to: 1) failure of consensus to capture Catcher’s

earnings power, as mentioned above; 2) industry concerns that unibody

metal casing will be replaced; and 3) concerns regarding competition.

We believe all three concerns should gradually fade, which should lead to

a possible re-rating. With 15-20% earnings CAGR for the coming 2 years, we

believe the stock should trade towards the high-end of its range supporting

our 12x PER target multiple. Our TP is also supported by the fair value

derived by our ROE-g/COE-g of NT$458. An additional catalyst is the upside

potential we see for its cash dividend driven by our forecast rapid

improvement in FCF.

Figure 18:12-mth forward PER, actual basis

Source: TEJ, Maybank

Figure 19: 12-mth forward PER, “expected EPS” basis


Figure 20: ROE-g/COE-g fair value appraisal

Fair value (TWD) 458

Beta 1.4

Cost of equity 9.9

Average ROE 15-17 (%) 22.4

Terminal growth rate (%) 2.0

ROE-g 20.4

COE-g 7.9

Justified P/BV ratio 2.6

FY16F BVPS (TWD) 177.8

Source: Maybank

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October 12, 2015 18

Catcher Technology

Figure 21: Sales model & P&L model: Catcher

1Q15 2Q15 3Q15F 4Q15F 1Q16F 2Q16F 3Q16F 4Q16F 2014A 2015F 2016F 2017F Sales model

Sales breakdown

NB casing TWDm 4,634 4,697 4,755 5,179 4,616 4,728 4,614 4,903 18,555 19,266 18,861 18,117 handset casing - non-iPhone TWDm 4,059 5,874 6,032 3,345 5,553 6,158 5,609 3,966 17,984 19,310 21,286 23,110 Handset casing - iPhone TWDm 6,870 7,432 8,608 13,485 10,523 11,896 13,929 16,616 8,015 36,395 52,964 66,611 tablet casing TWDm 1,697 1,567 1,522 1,552 1,360 1,353 1,442 1,435 9,195 6,339 5,591 5,480 Others TWDm 140 560 487 416 400 466 442 431 1,528 1,602 1,739 1,753 Total TWDm 17,400 20,129 21,404 23,978 22,452 24,599 26,037 27,351 55,277 82,911 100,440 115,070 Sales breakdown

NB casing % 26.6 23.3 22.2 21.6 20.6 19.2 17.7 17.9 33.6 23.2 18.8 15.7 handset casing - non-iPhone % 23.3 29.2 28.2 14.0 24.7 25.0 21.5 14.5 32.5 23.3 21.2 20.1 Handset casing - iPhone % 39.5 36.9 40.2 56.2 46.9 48.4 53.5 60.7 14.5 43.9 52.7 57.9 tablet casing % 9.8 7.8 7.1 6.5 6.1 5.5 5.5 5.2 16.6 7.6 5.6 4.8 Others % 0.8 2.8 2.3 1.7 1.8 1.9 1.7 1.6 2.8 1.9 1.7 1.5 Total % 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

P&L model

1Q15 2Q15 3Q15F 4Q15F 1Q16F 2Q16F 3Q16F 4Q16F 2014A 2015F 2016F 2017F FX

31.6 30.9 32.0 32.8 33.0 33.0 33.0 33.0 30.3 31.8 33.0 33.0

Sales TWDm 17,400 20,129 21,404 23,978 22,452 24,599 26,037 27,351 55,277 82,911 100,440 115,070 Cost of Goods Sold TWDm (9,291) (10,581) (11,227) (12,854) (12,061) (13,074) (13,898) (14,713) (29,176) (43,953) (53,746) (61,394) Gross Profit TWDm 8,109 9,548 10,177 11,124 10,392 11,526 12,139 12,638 26,101 38,958 46,695 53,677 OPEX TWDm (1,866) (2,039) (2,320) (2,573) (2,370) (2,586) (2,762) (2,886) (6,076) (8,798) (10,605) (12,068) OP Profit TWDm 6,243 7,509 7,858 8,551 8,022 8,939 9,377 9,752 20,025 30,161 36,090 41,609 Total Non-OP Profit TWDm 6 652 171 312 292 320 338 356 3,520 1,142 1,306 1,496 Pretax Profit TWDm 6,250 8,161 8,029 8,862 8,313 9,259 9,715 10,108 23,545 31,302 37,396 43,105 Net Profit TWDm 4,665 5,258 6,139 7,177 6,205 5,966 7,429 8,185 17,888 23,239 27,785 32,203 EPS TWD 6.2 7.0 8.2 9.6 8.3 7.9 9.9 10.9 23.8 31.0 37.0 42.9

Profit Margins Gross Margins % 46.6 47.4 47.5 46.4 46.3 46.9 46.6 46.2 47.2 47.0 46.5 46.6

OP Margins % 35.9 37.3 36.7 35.7 35.7 36.3 36.0 35.7 36.2 36.4 35.9 36.2 Net Margins % 26.8 26.1 28.7 29.9 27.6 24.3 28.5 29.9 32.4 28.0 27.7 28.0

QoQ

Sales % 2.3 15.7 6.3 12.0 (6.4) 9.6 5.8 5.0 Gross Profit % (0.5) 17.7 6.6 9.3 (6.6) 10.9 5.3 4.1 OP Profit % 0.7 20.3 4.6 8.8 (6.2) 11.4 4.9 4.0 Net Profit % (27.6) 12.7 16.7 16.9 (13.5) (3.9) 24.5 10.2 EPS % (27.6) 12.7 16.7 16.9 (13.5) (3.9) 24.5 10.2

YoY

Sales % 67.1 51.1 47.3 40.9 29.0 22.2 21.6 14.1 27.8 50.0 21.1 14.6 Gross Profit % 88.4 45.6 43.5 36.5 28.1 20.7 19.3 13.6 42.5 49.3 19.9 15.0 OP Profit % 94.6 45.6 44.0 37.9 28.5 19.0 19.3 14.0 43.9 50.6 19.7 15.3 Net Profit % 56.2 44.2 27.6 11.4 33.0 13.5 21.0 14.0 29.5 29.9 19.6 15.9 EPS % 56.2 44.2 27.6 11.4 33.0 13.5 21.0 14.0 29.5 29.9 19.6 15.9


October 12, 2015 19

Catcher Technology

Risk factors: Concentration risk: Catcher’s sales exposure to Apple (including iPhone,

Macbook, and iPad) will stay at 60%+ from 2015, in our estimate. Thus,

change in Apple product demand and/or Apple’s sourcing strategy may

alter Catcher’s business outlook.

iPhone demand: Our key investment thesis for Catcher is its market shares

gain in iPhone casing. Our underlying 2016/17F iPhone shipments

assumption is at only mid-single digit % YoY growth, slightly below

consensus. If iPhone demand is weaker than our assumption, however, our

2016/17F sales and earnings forecast for Catcher may still have downside

even if Catcher can meet our assumption for iPhone casing allocation.

Intensifying competition: We now assume that Catcher will control 60% of

the iPhone casing market that is not supplied by Hon Hai group in 2017,

while Casetek and Jabil will supply the rest. If Casetek and/or Jabil decide

to become more aggressive for whatever reasons, Catcher’s allocation may

have downside risk.

October 12, 2015 20

Catcher Technology

Stress test: We also do a stress test for Catcher, which Maybank Kim Eng has done for

all companies under coverage in early Sept. Our scenario shows that 2016F

net profit will be 13% lower than our current estimate should sales be 10%

below our forecast. That said, a possible TWD depreciation will boost

earnings by 8% for every 5% fall in the TWD. An interest rate hike should

also help Catcher’s earnings, given its net cash position, though Taiwan’s

interest rate is most likely staying stable in 2016F. The Central Bank of

Taiwan just cut the rate 12.5bps Sept 20. In brief, if we adopt our scenario

2 (sales drop by 10%, TWD depreciates by 10%, and interest rate increases

by 100bps) Catcher’s earnings would be 4% higher than our current

forecast. Figure 12-13 contains a summary of the results of our stress test.

Figure 22: Summary of our stress test

FY Dec 2014 2015 2016

TWD b

Change in Revenue Base -5% -10% Base -5% -10%

Revenue 55 82 78 74 101 96 91

Operating profit 20 30 28 26 36 34 31

Net profit 18 23 22 20 28 26 24

Free cash flow 7 2 1 (0) 23 22 20

Net debt (net cash) (33) (29) (28) (26) (44) (42) (40)

Change in Exchange Rate Base -5% -10% Base -5% -10%

New USDTWD assumption 30.32 31.80 33.39 34.98 33.00 34.65 36.30

Size of FX debt (in USD b) 0 0 0 0 0 0 0


Net profit 18 23 25 27 28 30 32

Free cash flow 7 2 4 6 23 26 29

Net debt (net cash) (33) (29) (31) (33) (44) (47) (51)

Change in Interest Rate Base -50 bps -100 bps Base -50 bps -100 bps

New interest rate assumption 0.0% 0.5% 1.0% 0.0% 0.5% 1.0%


Net profit 18 23 23 23 28 28 28

Free cash flow 7 2 2 2 23 23 24

Net debt (net cash) (33) (29) (29) (29) (44) (44) (45)


Figure 23: Aggregate impact from stress test and valuation

Aggregated Impact FY14 FY15 FY15 Scenario 1 FY16 FY16 Scenario 2

TWD b MKE Est (-5% rev, -5% fx,

+50 bps i/r) MKE Est

(-10% rev, -10% fx, +100bps i/r)

Operating profit 20 30 30 36 37

% Change

1%

3%

Net profit 18 23 23 28 29

% Change

2%

4%

Free cash flow 7 2 3 23 26

% Change

60%

13%

Net debt (net cash) (33) (29) (30) (44) (47)

Valuations

PER (x) 14.8 11.5 11.3 9.5 9.1

EV/EBITDA (x) 9.0 5.9 5.8 4.9 4.7

P/FCF (x) 39 148.5 92.6 11.4 10.1

P/B (x) 2.8 2.4 2.3 2.0 2.0

Dividend yield (%) 1.4% 1.7% 1.8% 2.6% 2.7%

Source: Maybank

October 12, 2015 21

Catcher Technology

FYE 31 Dec FY13A FY14A FY15E FY16E FY17E

Key Metrics

P/E (reported) (x) 19.2 14.8 11.4 9.5 8.2

Core P/E (x) 19.2 14.8 11.4 9.5 8.2

P/BV (x) 3.6 2.8 2.4 2.0 1.7

P/NTA (x) 3.6 2.8 2.4 2.0 1.7


FCF yield (%) 4.0 2.6 0.7 8.7 8.8

EV/EBITDA (x) 6.4 5.8 5.9 4.6 3.8

EV/EBIT (x) 8.9 7.6 7.8 6.1 5.0

INCOME STATEMENT (TWD m)

Revenue 43,245.6 55,277.4 82,911.4 100,440.4 115,070.4

Gross profit 18,320.7 26,101.3 38,958.5 46,694.6 53,676.9

EBITDA 19,140.9 26,091.8 39,814.3 47,840.3 54,575.5

Depreciation (5,225.2) (6,066.9) (9,653.6) (11,750.5) (12,966.2)

Amortisation 0.0 0.0 0.0 0.0 0.0

EBIT 13,915.7 20,024.9 30,160.7 36,089.8 41,609.3

Net interest income /(exp) 367.2 661.4 584.1 803.5 920.6

Associates & JV 55.8 1.9 110.3 502.2 575.4

Exceptionals 117.4 215.4 17.5 0.0 0.0

Other pretax income 3,072.2 2,640.9 429.7 0.0 0.0

Pretax profit 17,528.3 23,544.6 31,302.3 37,395.6 43,105.2

Income tax (3,711.2) (5,656.8) (8,063.4) (9,611.0) (10,902.3)

Minorities 0.0 0.0 0.0 0.0 0.0

Perpetual securities 0.0 0.0 0.0 0.0 0.0

Discontinued operations 0.0 0.0 0.0 0.0 0.0

Reported net profit 13,817.1 17,887.8 23,238.9 27,784.5 32,202.9

Core net profit 13,817.1 17,887.8 23,238.9 27,784.5 32,202.9

BALANCE SHEET (TWD m)

Cash & Short Term Investments 42,643.1 48,137.2 46,190.7 61,427.3 74,143.3

Accounts receivable 17,766.5 21,430.0 31,275.4 34,189.0 42,521.1

Inventory 3,873.2 5,600.5 7,314.6 8,023.6 9,694.8

Property, Plant & Equip (net) 34,903.1 45,405.4 58,010.2 61,259.7 63,293.5

Intangible assets 102.6 146.4 164.2 177.7 192.3

Investment in Associates & JVs 1,990.5 1,800.2 1,711.0 1,745.4 1,780.6

Other assets 4,100.0 14,445.0 11,200.1 11,970.9 12,812.6

Total assets 105,379.0 136,964.7 155,866.2 178,793.5 204,438.2

ST interest bearing debt 20,648.3 15,527.0 17,136.0 17,136.0 17,136.0

Accounts payable 4,782.3 6,223.7 6,865.7 7,531.2 9,099.9

LT interest bearing debt 0.0 0.0 0.0 0.0 0.0

Other liabilities 6,268.0 19,125.0 19,322.0 20,630.0 22,081.0

Total Liabilities 31,698.9 40,875.5 43,323.7 45,297.1 48,316.7

Shareholders Equity 73,509.5 95,897.7 112,376.3 133,330.2 155,955.4

Minority Interest 170.6 191.5 166.2 166.2 166.2

Total shareholder equity 73,680.1 96,089.2 112,542.5 133,496.4 156,121.6


Total liabilities and equity 105,379.0 136,964.7 155,866.2 178,793.5 204,438.2

CASH FLOW (TWD m)

Pretax profit 17,528.3 23,544.6 31,302.3 37,395.6 43,105.2

Depreciation & amortisation 5,225.2 6,066.9 9,653.6 11,750.5 12,966.2

Adj net interest (income)/exp 0.0 0.0 0.0 0.0 0.0

Change in working capital (2,312.1) (3,807.8) (10,507.3) (2,957.1) (8,434.7)

Cash taxes paid 0.0 0.0 0.0 0.0 0.0

Other operating cash flow 0.0 0.0 0.0 0.0 0.0

Cash flow from operations 20,115.6 26,983.3 22,159.8 38,143.1 38,353.3

Capex (9,629.4) (20,211.9) (20,194.9) (15,000.0) (15,000.0)

Free cash flow 10,486.2 6,771.4 1,964.9 23,143.1 23,353.3

Dividends paid (4,504.2) (3,760.3) (4,622.3) (6,971.7) (9,724.6)

Equity raised / (purchased) 0.0 0.0 0.0 0.0 0.0


Change in Debt (11,037.3) (1,628.7) 1,609.0 0.0 0.0

Perpetual securities distribution 0.0 0.0 0.0 0.0 0.0

Other invest/financing cash flow (2,143.1) 4,241.7 933.8 517.8 527.2

Effect of exch rate changes 1,177.2 3,116.6 (1,824.7) (1,464.6) (1,464.6)

Net cash flow (6,021.2) 8,740.7 (1,939.4) 15,224.6 12,691.4

October 12, 2015 22

Catcher Technology


Key Ratios

Growth ratios (%)

Revenue growth 16.8 27.8 50.0 21.1 14.6

EBITDA growth 16.5 36.3 52.6 20.2 14.1

EBIT growth 14.5 43.9 50.6 19.7 15.3

Pretax growth 25.6 34.3 32.9 19.5 15.3

Reported net profit growth 26.7 29.5 29.9 19.6 15.9

Core net profit growth 26.7 29.5 29.9 19.6 15.9

Profitability ratios (%)

EBITDA margin 44.3 47.2 48.0 47.6 47.4

EBIT margin 32.2 36.2 36.4 35.9 36.2

Pretax profit margin 40.5 42.6 37.8 37.2 37.5

Payout ratio 26.6 25.2 29.2 34.1 39.0

DuPont analysis

Net profit margin (%) 32.0 32.4 28.0 27.7 28.0

Revenue/Assets (x) 0.4 0.4 0.5 0.6 0.6

Assets/Equity (x) 1.4 1.4 1.4 1.3 1.3

ROAE (%) 20.5 21.1 22.3 22.6 22.3

ROAA (%) 13.4 14.8 15.9 16.6 16.8

Liquidity & Efficiency

Cash conversion cycle 125.0 118.2 113.7 120.5 123.2

Days receivable outstanding 138.0 127.6 114.4 117.3 120.0

Days inventory outstanding 45.7 58.4 52.9 51.4 51.9

Days payables outstanding 58.6 67.9 53.6 48.2 48.8

Dividend cover (x) 3.8 4.0 3.4 2.9 2.6

Current ratio (x) 2.1 2.5 2.6 3.0 3.5

Leverage & Expense Analysis

Asset/Liability (x) 3.3 3.4 3.6 3.9 4.2


Net interest cover (x) na na na na na

Debt/EBITDA (x) 1.1 0.6 0.4 0.4 0.3

Capex/revenue (%) 22.3 36.6 24.4 14.9 13.0

Net debt/ (net cash) (21,994.8) (32,610.2) (29,054.7) (44,291.3) (57,007.3)

Source: Company; Maybank

October 12, 2015

Com

pany U

pdate

C

OM

PA

NY R

ESEA

RC

H |


Largan Precision (3008 TT)

Back in the limelight (soon) Resume coverage. Dual cameras and continuous pixel

migration are the key catalysts for Largan for next 2-3 years.

Largan ahead of rivals in terms of technology by 1-2 years.

10%/22% upside to our FY16/17F EPS if the next-generation

iPhone adopts dual cameras.

What’s New We resume coverage of Largan with a BUY and TP of TWD2,950,

15x FY16F PER (eight-year average PER).

What’s Our View This has been a challenging year for Largan due to soft smartphone

shipments. We forecast FY15 earnings to grow by only 15% YoY (vs

72%/102% in FY13/14). That said, we expect the deceleration in

earnings growth to stabilize and Largan can still grow its earnings

by 15-20% YoY in FY16/17F, driven by continuous pixel migration,

the adoption of dual cameras, and iPhone spec upgrade.

Largan has had 80%-plus share of rear camera supply for iPhone

6/6+ since 2014. We believe Largan has a good chance of

maintaining its market share as iPhone’s camera spec upgrade has

not slowed down, and competitors’ yield/capacity are not catching

up, as evidenced by their sales performance. Largan still has a 1-2

year lead on its rivals, in our view.

An earlier component build-up by Apple this year, weakness in

China smartphone sales, and 4Q15 iPhone shipments downside may

cause Largan’s 4Q15 sales/earnings to decline YoY, the first fall

since 3Q12. However, we forecast Largan’s sales/earnings YoY to

return to growth again in 1Q16. Quick money may still find it hard

to time the bottom, but investors with a longer-term investment

horizon may use 4Q15’s expected correction for re-entry,

especially to participate in the potential upside from iPhone’s dual

cameras, if true. Risks include softer-than-expected end demand,

competitors catching up, and slowdown in camera migration.

Key Data


Maybank vs Market

Share Price: TWD2,610.00 MCap (USD): 10.7B Taiwan

Target Price: TWD2,950.00 (+13%) ADTV (USD): 104M Technology (Unchanged)BUY

52w high/low (TWD)

3m avg turnover (USDm)

Free float (%)

Issued shares (m)

Market capitalization

Major shareholders:

-CHEN SHIH CHING 5.2%

-CHIANG TSUI YING 4.9%

-LIN EN PING 4.5%

3,710.00/1,950.00

67.3

103.9

TWD350.1B

134

50

100

150

200

250

300

350

400

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000


Largan - (LHS, TWD) Largan / Taiwan TAIEX - (RHS, %)

1 Mth 3 Mth 12 Mth

Absolute(%) (7.8) (20.5) 14.7

Relative to index (%) (9.5) (16.1) 21.8


Market Recs 14 10 1


Target Price (TWD) 2,950.00 3,525.00 (16.3)

'15 PATMI (TWDm) 22,379 23,436 (4.5)

'16 PATMI (TWDm) 26,464 27,345 (3.2)


FYE Dec (TWD m) FY13A FY14A FY15E FY16E FY17E

Revenue 27,433.3 45,810.3 57,198.3 64,827.0 72,393.2

EBITDA 12,228.8 22,728.0 29,006.1 33,636.0 39,431.7

Core net profit 9,609.8 19,438.1 22,378.8 26,463.7 31,167.4

Core EPS (TWD) 71.64 144.91 166.83 197.28 232.35

Core EPS growth (%) 72.3 102.3 15.1 18.3 17.8

Net DPS (TWD) 28.50 51.00 66.73 78.91 92.94

Core P/E (x) 36.4 18.0 15.6 13.2 11.2

P/BV (x) 11.5 7.6 5.7 4.4 3.5


ROAE (%) 35.9 50.7 41.5 37.6 34.9

ROAA (%) 27.5 39.0 30.9 28.5 27.7

EV/EBITDA (x) 11.9 12.9 10.6 8.7 7.0


Stefan Chang, CFA

(852) 2268 0675

[email protected]

October 12, 2015 24

Largan Precision

Camera upgrade has not ended yet

Continuous pixel upgrade + dual cameras in China We believe there is still more room for smartphone camera upgrade, both

rear camera and front camera. In 2015, international flagship models have

installed 16MP/20MP rear cameras (such as Samsung’s GS6, HTC’s M9, and

Sony’s Z5), while Chinese flagship models have only started to catch up in

3Q15 (for instance, Huawei’s Honor 7 and Meizu’s MX5). China Mobile in

Sep-15 indicated that 76% of smartphones in its network are equipped with

8MP+ rear camera (34% for 13MP), echoing our view that the upgrade cycle

may continue for another 1-2 years. Front camera is the same story;

Chinese flagship models have started to adopt 5MP/8MP front camera to

meet the selfie demand, but this is still lower than those selfie-oriented

models provided by international brands, such as HTC’s Desire 826 (ultra-

pixel or 13MP front camera).

Dual cameras are a more significant catalyst should smartphone makers

start to use them. Dual cameras, as suggested by its name, require two

lens modules for one camera, and the ASP can easily be 50-100% higher

than a conventional lens module with the same pixel count. Smartphone

makers usually buy both lens modules, identical or not, from the same

vendor for easier yield/performance control. The first dual-camera model

was HTC’s M8, which is equipped with a depth-view camera (1.3MP) and a

4MP ultra-pixel main camera. The second major phone producer to install

dual cameras is Huawei in the Honor 6, which is equipped with two

identical 8MP cameras. Largan supplied for both models. Largan said

almost all of its major customers are designing smartphones with dual

cameras, and we should see more smartphones with this feature next year.

In our model, we assume Largan will supply 15m/30m dual cameras in

FY16/17F in China, suggesting about 3%/6% penetration rate. Dual cameras

will account for 2.7%/4.4% of Largan’s FY15/16F sales.

A key question is whether iPhone will upgrade to dual cameras. We believe

Apple is doing qualification for all possible solutions. To be conservative,

however, we still assume iPhone 7 will be equipped with a single camera

with upgrade mainly in terms of a slimmer form factor. That said, our

scenario analysis shows that if iPhone 7/7+ and their successors adopt dual

cameras (ie ASP double), our FY16/17F earnings will have 10%/22% upside.

Figure 24: Scenario analysis: what if iPhone 7/7s and their successors have dual cameras?

(TWDm) FY16F

FY17F

Remark

Base Dual cameras Base Dual cameras

Sales 64,827 74,426 72,393 95,952

iPhone rear camera 19,747 25,671 21,878 37,193 30%/70% of 2016/17F iPhones are with dual cameras

VCM 12,248 15,923 11,777 20,021 Dual VCM are also required under the scenario

Others 32,832 32,832 38,738 38,738 Not changed

Gross profit 35,967 39,652 41,980 51,700

OPEX 4,485 5,149 4,953 6,565 Keep opex ratio the same

OP profit 31,482 34,503 37,027 45,134

Non-OP profit 393 393 439 439 Unchanged

Pre-tax profit 31,875 34,896 37,466 45,573

Tax (5,412) (5,924) (6,298) (7,661) Keep tax ratio the same

Net profit 26,464 28,971 31,167 37,912.16

EPS (TWD) 197.3 216.0 232.3 282.6

GM 55.5% 53.3% 58.0% 53.9% Lower GM as a result of more VCM (pass-through) sales

OPM 48.6% 46.4% 51.1% 47.0%

Source: Maybank

October 12, 2015 25

Largan Precision

Still has a lead on rivals in terms of technology Largan recently announced Sep-15 sales of TWD5.5b, +4% QoQ/+19% YoY.

Sept sales marked the lowest sales YoY this year and down from growth of

50%/34% in Jul/Aug. Some argued this is a result of Largan losing some

market share to rivals, but we believe this argument is not valid.

The first reason is Largan continued to outgrow its major peer Genius

(3406 TT, NR), which is another major lens supplier for Apple. Figure 2

shows Largan still outgrew Genius on a YoY basis each month this year

except Feb. In fact, Genius’ Jul and Aug sales were down YoY, a very rare

situation if Genius is gaining more allocation, as iPhone shipments YoY this

year remain positive (+19% YoY).

Figure 25: Sales YoY comparison: Largan and Genius (2015)

Source: Maybank

There’s also news suggesting Kantatsu in Japan is gaining some market

share from Largan. Kantatsu is an unlisted company so we do not have the

sales figures. However, our checks from Japan suggest Kantatsu is not

increasing its capacity. Together with Genius’ monthly sales, it looks more

like Kantatsu is gaining market share, if any, from Genius.

To conclude, we believe Largan’s recent monthly sales slowdown is a

result of Apple’s earlier component build-up (in Jun/Jul) and the

continuous weakness in China, instead of market-share loss. With the rapid

upgrade in iPhone camera, we believe it is difficult for rivals to catch up.

Figure 26: major iPhone rear camera upgrade since iPhone 4

iPhone 4 iPhone 4s iPhone 5 iPhone 5s iPhone 6 1Phone 6s

Phone thickness 9.3mm 9.3mm 7.6mm 7.6mm 6.9mm 7.1mm

Pixel 5MP 8MP 8MP 8MP 8MP 12MP

Aperture F2.8 F2.4 F2.4 F2.2 F2.2 F2.2

Sensor size 1/3.2" 1/3.2" 1/3.2" 1/3" 1/3" 1/3"

pixel size 1.7um 1.4um 1.4um 1.5um 1.5um 1.22um


Our checks with supply chains also echo our view. O-Film is aggressively

entering the camera module business and the firm has indicated it will

mainly cooperate with Largan for high-end lens. Sunny Optical has also

admitted that the gap against Largan at high-end lens remains at least one

year. Thus, we believe Largan’s business risk should be more from the

macro/end-demand than competition in the next 1-2 years, if not longer.

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

Jan Feb Mar Apr May Jun Jul Aug Sep

Largan Genius

Largan still outgrew its peer, which suggests that Largan is not losing market share.

iPhone camera is always upgraded with each new generation but pixel count has not changed for four generations.

October 12, 2015 26

Largan Precision

Deceleration in earnings growth to stabilize

3Q15 results and 4Q15 outlook likely to be disappointing… 3Q15 sales totalled TWD16.1b, +17% QoQ/+33% YoY. Sep-15 sales of

TWD5.5b were +4% MoM/+19% YoY, slightly better than the guidance,

which was revised down to being flat MoM. But we expect margins fell to

51.9% (from 57.7% in 2Q15) due to higher iPhone sales (as a % of total

sales), which carry VCM (voice control motor) – a pass-through component,

while yield rate may not have hit a satisfactory level at the initial ramp

up. Our 51.9%/44.7% GM/OPM forecasts are 1.8ppts/1.5ppts below

consensus, and our 3Q15 EPS forecast of TWD47.6 is slightly lower than

consensus estimate.

We now forecast Largan’s 4Q15 sales to grow by only 4-5% QoQ vs

consensus of 15%+. This is significantly below the previous years’

seasonality and only better than -13% QoQ for 4Q11 since 2010. 4Q15 sales

may be flat/decline (on a YoY basis), the worst since 2Q12. Our

conservative stance is due to: 1) earlier component build-up of iPhone

should cast a shadow on 4Q15 growth (easily 30%+ QoQ in previous years;

4Q15F: 13%); 2) possible downside to 4Q15 iPhone shipments (we are

looking at around 70m vs consensus of 75m+); and 3) continuous weakness

in China smartphone sales, evidenced by our check that MediaTek’s 4Q15F

may have downside risk to our current -6% QoQ. Thus, margins may not

recover as the high-margin China sales are not warming up. Our 4Q15F EPS

for Largan is TWD50.4, +6% QoQ/-9% YoY but 6% lower than consensus. And

our FY15F EPS therefore becomes TWD166.8, +15% YoY (3% below

consensus).

Figure 27: MKE’s earnings forecasts for Largan and comparison with consensus

3Q15F 4Q15F FY15F FY16F

MKE Street Var (%) MKE Street Var (%) MKE Street Var (%) MKE Street Var (%)

Sales TWDm 16,086 15,964 0.8 16,770 18,551 (9.6) 57,198 58,899 (2.9) 64,827 68,061 (4.8)

Gross profit TWDm 8,350 8,573 (2.6) 8,707 9,633 (9.6) 31,001 32,188 (3.7) 35,967 37,195 (3.3)

OP profit TWDm 7,196 7,381 (2.5) 7,529 8,079 (6.8) 27,012 27,806 (2.9) 31,482 32,073 (1.8)

Net profit TWDm 6,387 6,422 (0.5) 6,760 7,204 (6.2) 22,379 22,996 (2.7) 26,464 26,823 (1.3)

EPS TWD 47.61 47.88 (0.5) 50.40 53.71 (6.2) 166.83 171.43 (2.7) 197.28 199.96 (1.3)

Gross margins % 51.9 53.7 (1.8) 51.9 51.9 (0.0) 54.2 54.7 (0.5) 55.5 54.7 0.8

OP margins % 44.7 46.2 (1.5) 44.9 43.6 1.3 47.2 47.2 0.0 48.6 47.1 1.4

Net margins % 39.7 40.2 (0.5) 40.3 38.8 1.5 39.1 39.0 0.1 40.8 39.4 1.4


…but YoY deceleration in growth may stabilize from here We forecast Largan’s FY15F sales/earnings to grow by 25%/15%, down from

67%/102% in FY14 and 37%/72% in FY13. Figure 5 suggests that in the past

five years, Largan’s sales and earnings growth decelerated only when

global smartphone and iPhone both showed YoY growth slowing down. For

instance, iPhone YoY growth was only 13% in 2013 vs global smartphones of

40%+, but Largan still benefited from market-share gain in China. Global

smartphone growth fell to 28% in 2014 but iPhone speeded up to 25%

(driven by iPhone 6), and Largan’s sales/earnings growth were boosted.

We expect global smartphone and iPhone sales to grow by 10%/19% YoY in

2015F, down from 28%/25% in 2014, and Largan will inevitably be adversely

affected. Its earnings growth of 15% YoY is slower than its sales growth of

25% YoY, a result of the high base in FY14 due to TWD1.5b in forex gain

last year. We expect FY15F operating profit to still grow by 28% YoY,

slightly outgrowing its top line.

October 12, 2015 27

Largan Precision

Figure 28: Largan’s sales/earnings growth vs global smartphone and iPhone

Source: Maybank

Despite a sharp deterioration in sales/earnings growth YoY in FY15, we are

now forecasting the deceleration is close to the end, and FY16/17F

sales/earnings will grow by 10-15%/15-20% YoY with potential upside. In

fact, we anticipate Largan’s YoY performance on quarterly basis can return

positive as early as in 1Q16, as there is possible restocking following the

3Q/4Q correction by the Android camp/Apple. The last time Largan posted

poor 4Q sales was in 2010 and 2011 (+5% QoQ in 4Q10, -13% in 4Q11), and

Largan delivered better-than-seasonal sales in all the subsequent quarters

(+8% QoQ/+51% YoY in 1Q11, and -6% QoQ/+18% YoY in 1Q12). We

currently forecast 1Q16 sales of TWD12.9b, -23% QoQ but +23% YoY.

On a full-year basis, Largan’s top line should continue to outgrow

smartphone unit growth (likely to be single digit in FY16F, in our view),

supported by continuous camera upgrade by smartphone makers. For

instance, lens module ASPs for iPhone rear cameras always go up by 5-10%

YoY when a new model is launched thanks to “minor upgrades”, including

thickness, aperture, pixel count, or sensor size (see Figure 3). Our current

FY15/16/17F EPS are TWD166.8/197.3/232.3, or 15%/18%/18% YoY growth,

respectively. Our FY15/16F EPS are 3%/1% below consensus.

0%

20%

40%

60%

80%

100%

120%

0%

20%

40%

60%

80%

100%

120%

2011 2012 2013 2014 2015F

Smartphone shipments YoY Largan sales YoY

Largan EPS YoY iPhone shipments YoY

Largan’s sales and earnings YoY growth are only at risk when both global smartphone and iPhone shipments YoY growth are at risk.

October 12, 2015 28

Largan Precision

Figure 29: Sales and P&L model for Largan

1Q15 2Q15 3Q15F 4Q15F 1Q16F 2Q16F 3Q16F 4Q16F 2014A 2015F 2016F 2017F

Sales model

Sales breakdown

iPhone - rear TWDm 3,397 3,732 4,515 5,427 3,782 4,246 5,269 6,450 13,021 17,070 19,747 21,878

iPhone - front TWDm 974 1,081 1,270 1,462 915 1,038 1,252 1,517 4,372 4,787 4,723 5,177

VCM TWDm 2,799 3,044 3,401 3,759 2,516 2,796 3,205 3,731 9,765 13,003 12,248 11,777

Zoom lens TWDm - - - - 79 125 238 340 - - 782 1,411

high-end (10MP+) TWDm 2,026 3,510 3,907 3,549 3,245 4,119 4,515 3,965 7,117 12,992 15,845 20,030

mid-to high-end (8MP) TWDm 387 785 855 687 631 742 795 678 3,457 2,715 2,844 3,234

mid-to low-end (5MP) TWDm 562 1,145 1,677 1,417 1,188 1,307 1,426 1,307 6,148 4,800 5,227 4,237

low-end (2MP and below) TWDm 255 290 295 304 306 270 236 206 1,243 1,144 1,018 823

Dual camera - non iPhone TWDm - - - - 116 347 578 693 - - 1,733 3,168

Others TWDm 169 189 165 165 165 165 165 165 689 688 659 659

Total TWDm 10,567 13,776 16,086 16,770 12,942 15,156 17,678 19,051 45,810 57,198 64,827 72,393

Sales breakdown

iPhone - rear % 32.1 27.1 28.1 32.4 29.2 28.0 29.8 33.9 28.4 29.8 30.5 30.2

iPhone - front % 9.2 7.8 7.9 8.7 7.1 6.9 7.1 8.0 9.5 8.4 7.3 7.2

VCM % 26.5 22.1 21.1 22.4 19.4 18.4 18.1 19.6 21.3 22.7 18.9 16.3

high-end (10MP+) % 19.2 25.5 24.3 21.2 25.1 27.2 25.5 20.8 15.5 22.7 24.4 27.7

mid-to high-end (8MP) % 3.7 5.7 5.3 4.1 4.9 4.9 4.5 3.6 7.5 4.7 4.4 4.5

mid-to low-end (5MP) % 5.3 8.3 10.4 8.4 9.2 8.6 8.1 6.9 13.4 8.4 8.1 5.9

low-end (2MP and below) % 2.4 2.1 1.8 1.8 2.4 1.8 1.3 1.1 2.7 2.0 1.6 1.1

Dual camera - non iPhone % 0.0 0.0 0.0 0.0 0.9 2.3 3.3 3.6 0.0 0.0 2.7 4.4

Others % 1.6 1.4 1.0 1.0 1.3 1.1 0.9 0.9 1.5 1.2 1.0 0.9

Total % 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

P&L model

1Q15 2Q15 3Q15F 4Q15F 1Q16F 2Q16F 3Q16F 4Q16F 2014A 2015F 2016F 2017F

FX

31.2 31.8 32.5 32.8 33.0 33.0 33.0 33.0 30.8 32.1 33.0 33.0

Sales TWDm 10,567 13,776 16,086 16,770 12,942 15,156 17,678 19,051 45,810 57,198 64,827 72,393

Cost of Goods Sold TWDm (4,574) (5,825) (7,736) (8,063) (5,682) (6,125) (8,184) (8,868) (21,291) (26,197) (28,860) (30,413)

Gross Profit TWDm 5,994 7,951 8,350 8,707 7,260 9,031 9,494 10,183 24,520 31,001 35,967 41,980

OPEX TWDm (813) (845) (1,154) (1,178) (903) (1,031) (1,232) (1,318) (3,453) (3,989) (4,485) (4,953)

OP Profit TWDm 5,181 7,106 7,196 7,529 6,356 8,000 8,262 8,865 21,067 27,012 31,482 37,027

Total Non-OP Profit TWDm (99) (134) 97 102 78 92 107 115 1,896 (33) 393 439

Pretax Profit TWDm 5,082 6,972 7,294 7,631 6,435 8,092 8,369 8,980 22,963 26,978 31,875 37,466

Net Profit TWDm 4,407 4,824 6,387 6,760 5,580 5,599 7,329 7,956 19,438 22,379 26,464 31,167

EPS TWD 32.9 36.0 47.6 50.4 41.6 41.7 54.6 59.3 144.9 166.8 197.3 232.3

Profit Margins

Gross Margins % 56.7 57.7 51.9 51.9 56.1 59.6 53.7 53.4 53.5 54.2 55.5 58.0

OP Margins % 49.0 51.6 44.7 44.9 49.1 52.8 46.7 46.5 46.0 47.2 48.6 51.1

Net Margins % 41.7 35.0 39.7 40.3 43.1 36.9 41.5 41.8 42.4 39.1 40.8 43.1

QoQ

Sales % (37.4) 30.4 16.8 4.3 (22.8) 17.1 16.6 7.8

Gross Profit % (29.9) 32.7 5.0 4.3 (16.6) 24.4 5.1 7.3

OP Profit % (29.2) 37.1 1.3 4.6 (15.6) 25.9 3.3 7.3

Net Profit % (40.7) 9.5 32.4 5.8 (17.5) 0.3 30.9 8.6

EPS % (40.7) 9.5 32.4 5.8 (17.5) 0.3 30.9 8.6

YoY

Sales % 54.1 38.1 33.1 (0.7) 22.5 10.0 9.9 13.6 67.0 24.9 13.3 11.7

Gross Profit % 57.2 37.0 31.6 1.8 21.1 13.6 13.7 16.9 89.2 26.4 16.0 16.7

OP Profit % 61.2 38.7 33.1 2.8 22.7 12.6 14.8 17.7 95.4 28.2 16.6 17.6

Net Profit % 46.9 29.6 20.8 (9.0) 26.6 16.1 14.7 17.7 102.3 15.1 18.3 17.8

EPS % 46.9 29.6 20.8 (9.0) 26.6 16.1 14.7 17.7 102.3 15.1 18.3 17.8


October 12, 2015 29

Largan Precision

Valuations

Resume coverage with BUY rating and TP of TWD2,950 Our TP of TWD2,950 is based on 15x FY16F PER. One may wonder why we

are positive on the stock despite our FY15/16F EPS being slightly below

consensus. Our answer is we believe the stock is close to the bottom of its

valuation cycle now to factor in the 3Q15/4Q15 possible downside. The

share price should have room to rise after the recent weakness.

Figure 7 shows Largan’s eight-year average 12-month forward PER was 13x

with 1STDV of 3.6x, while the stock mostly traded between 13x and 19x

since 2014. This may make our target PER of 15x look aggressive given the

slowing earnings growth. However, we believe Figure 8 is a more

representative chart to justify our target valuation. We believe the Street

has had a hard time forecasting Largan’s earnings since FY13. At the

beginning of FY13/14, consensus FY13/14F EPS were only TWD54/78 for

Largan, while the actual EPS turned out to be TWD72/145. If we replace

the actual EPS by “expected EPS” of each year to draw the PER band for

Largan again, its eight-year average 12-month PER is 14.4x. Our 15x target

PER is not too much higher than the average. Our target price is also at a

~10% premium to the fair value derived by ROE-g/COE-g fair value

appraisal, which could be justified by its 15-20% earnings growth and

leading market position.

Figure 30: 12-mth forward PER, on actual basis


Figure 31: 12-mth forward PER, on “expected EPS” basis



Fair value (TWD) 2,688

Beta 1.4

Cost of equity 9.9

Average ROE 15-17 (%) 38.0


ROE-g 36.0

COE-g 7.9


FY16F BVPS 590.0

Source: Maybank

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000


Largan

7x

9x

11x

13x

15x

17x

19x

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000


Largan

7x

9x

11x

13x

15x

17x

19x

October 12, 2015 30

Largan Precision

Stress test Our scenario shows that FY16 net profit will be 11% lower than our forecast

if sales are 10% below our expectations. That said, if the TWD depreciates,

(which we think is possible) this will boost earnings by 7% for every 5%

depreciation in the TWD.

Interest rate hike should also help Largan’s earnings given its net cash

position, although Taiwan’s interest rate is most likely to remain stable, if

not decline in 2016. Taiwan’s central bank recently lowered its interest

rate by 12.5bps. In short, should we adopt our scenario 2 (i.e. sales drop

by 10%, the TWD depreciates by 10%, and interest rate increases by

100bps), Largan’s earnings should be 5% higher than our current forecast.

Figures 10-11 provide a summary of our stress test results.


FY Dec 2014 2015 2016

TWDb

Change in revenue Base -5% -10% Base -5% -10%

Revenue 46 57 54 51 65 62 58


Net profit 19 22 21 20 26 25 24

Free cash flow 14 21 20 19 25 23 22

Net debt (net cash) (27) (41) (40) (39) (57) (55) (53)

Change in exchange rate Base -5% -10% Base -5% -10%

New USD/TWD assumption 30.83 32.08 33.68 35.28 33.00 34.65 36.30

Size of FX debt (in USD b) 0 0 0 0 0 0 0


Net profit 19 22 24 26 26 28 30

Free cash flow 14 21 23 25 25 27 29

Net debt (net cash) (27) (41) (44) (46) (57) (60) (63)

Change in interest rate Base -50 bps -100 bps Base -50 bps -100 bps



Net profit 19 22 23 23 26 27 27

Free cash flow 14 21 21 22 25 25 26

Net debt (net cash) (27) (41) (42) (42) (57) (57) (58)




TWDb MKE Est (-5% rev, -5% fx,

+50 bps i/r) MKE Est

(-10% rev, -10% fx, +100bps i/r)

Operating profit 21 27 27 31 33

% Change

2%

3%

Net profit 19 22 23 26 28

% Change

3%

5%

Free cash flow 14 21 22 25 27

% Change

4%

10%

Net debt (net cash) (27) (41) (43) (57) (60)

Valuation

PER (x) 17.1 14.9 14.5 12.6 12.0

EV/EBITDA (x) 12.8 10.0 9.8 8.7 8.3

P/FCF (x) 23 15.8 15.1 13.4 12.2

P/B (x) 7.2 5.4 5.3 4.2 4.1

Dividend yield (%) 1.1% 2.1% 2.1% 2.7% 2.8%


October 12, 2015 31

Largan Precision


Key Metrics

P/E (reported) (x) 36.4 18.0 15.6 13.2 11.2

Core P/E (x) 36.4 18.0 15.6 13.2 11.2

P/BV (x) 11.5 7.6 5.7 4.4 3.5

P/NTA (x) 11.5 7.6 5.7 4.4 3.5


FCF yield (%) 2.4 4.1 6.0 7.1 8.2

EV/EBITDA (x) 11.9 12.9 10.6 8.7 7.0

EV/EBIT (x) 13.5 14.0 11.4 9.3 7.4

INCOME STATEMENT (TWD m)

Revenue 27,433.3 45,810.3 57,198.3 64,827.0 72,393.2

Gross profit 12,960.9 24,519.7 31,001.1 35,967.4 41,980.1

EBITDA 12,228.8 22,728.0 29,006.1 33,636.0 39,431.7

Depreciation (1,447.8) (1,661.1) (1,994.5) (2,153.6) (2,404.9)

Amortisation 0.0 0.0 0.0 0.0 0.0

EBIT 10,781.0 21,066.8 27,011.7 31,482.4 37,026.8

Net interest income /(exp) 122.0 250.4 219.2 68.8 76.8

Associates & JV (51.4) 31.5 162.7 324.1 362.0

Exceptionals 0.0 0.0 0.0 0.0 0.0

Other pretax income 649.1 1,614.3 (415.3) 0.0 0.0

Pretax profit 11,500.7 22,963.1 26,978.3 31,875.4 37,465.5

Income tax (1,890.9) (3,525.0) (4,599.5) (5,411.7) (6,298.1)

Minorities 0.0 0.0 0.0 0.0 0.0




Core net profit 9,609.8 19,438.1 22,378.8 26,463.7 31,167.4

BALANCE SHEET (TWD m)



Inventory 2,693.3 3,538.3 6,020.4 6,346.0 6,590.0

Reinsurance assets 0.0 0.0 0.0 0.0 0.0



Investment in Associates & JVs 273.7 111.2 110.8 113.0 115.3

Other assets 1,819.4 2,479.5 2,557.6 2,687.7 2,826.4

Total assets 38,613.6 61,053.6 83,871.6 101,957.5 123,055.9

ST interest bearing debt 82.6 190.2 269.3 269.3 269.3


Insurance contract liabilities 0.0 0.0 0.0 0.0 0.0


Other liabilities 5,578.0 9,666.0 17,131.0 17,432.0 17,740.0







CASH FLOW (TWD m)

Pretax profit 11,500.7 22,963.1 26,978.3 31,875.4 37,465.5

Depreciation & amortisation 1,447.8 1,661.1 1,994.5 2,153.6 2,404.9


Change in working capital (3,412.8) (8,674.3) (7,093.5) (7,014.1) (8,651.2)

Cash taxes paid 0.0 0.0 0.0 0.0 0.0



Capex (3,057.0) (5,210.9) (3,062.2) (2,986.5) (3,271.7)

Free cash flow 8,243.5 14,477.0 21,111.5 24,769.2 28,734.9

Dividends paid (2,280.4) (3,823.0) (6,841.2) (8,951.5) (10,585.5)



Change in Debt (10.6) 107.6 79.2 0.0 0.0


Other invest/financing cash flow (2,114.2) (264.7) (1,066.2) (4,819.6) (9,973.4)

Effect of exch rate changes 60.4 100.8 (144.3) (152.1) (152.1)

Net cash flow 3,898.8 10,597.7 13,139.0 10,845.9 8,023.9

October 12, 2015 32

Largan Precision


Key Ratios

Growth ratios (%)

Revenue growth 36.7 67.0 24.9 13.3 11.7

EBITDA growth 52.8 85.9 27.6 16.0 17.2

EBIT growth 58.6 95.4 28.2 16.6 17.6

Pretax growth 68.9 99.7 17.5 18.2 17.5

Reported net profit growth 72.3 102.3 15.1 18.3 17.8

Core net profit growth 72.3 102.3 15.1 18.3 17.8


EBITDA margin 44.6 49.6 50.7 51.9 54.5

EBIT margin 39.3 46.0 47.2 48.6 51.1


Payout ratio 39.8 35.2 40.0 40.0 40.0

DuPont analysis


Revenue/Assets (x) 0.7 0.8 0.7 0.6 0.6

Assets/Equity (x) 1.3 1.3 1.4 1.3 1.2

ROAE (%) 35.9 50.7 41.5 37.6 34.9

ROAA (%) 27.5 39.0 30.9 28.5 27.7






Dividend cover (x) 2.5 2.8 2.5 2.5 2.5

Current ratio (x) 3.3 3.0 2.7 3.4 4.2




Net interest cover (x) na na na na na

Debt/EBITDA (x) 0.0 0.0 0.0 0.0 0.0

Capex/revenue (%) 11.1 11.4 5.4 4.6 4.5

Net debt/ (net cash) (16,962.4) (27,355.8) (41,440.8) (57,086.5) (75,063.2)


October 12, 2015

Com

pany U

pdate

C

OM

PA

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ESEA

RC

H |


AAC Technologies (2018 HK)

Are we at the peak? AAC benefits from major client’s haptics engine upgrade for

its smartphones, but its market-share loss caps the upside.

RF antenna should be the next growth driver for AAC, but

the scale in the next 1-2 years may not move the needle.

Resume coverage with HKD46 TP, 15x FY16F PER. Saturated

sales/earnings growth might cap valuation expansion. HOLD.

What’s New We resume coverage of AAC with a HOLD rating and TP of HKD46,

based on 15x FY16F PER. AAC is one of the few tech companies to

provide in line/better-than-expected 2H15 guidance. However, we

believe the short-term positives are already in the price, while

potential downside risk to 2H15 and rich valuations will cap further

share price performance. Our FY15/16/17F EPS of

CNY2.32/2.51/2.60 are 1%/7%/15% below consensus.

What’s Our View AAC’s better-than-expected 2H15 outlook is a result of its 100%+

ASP increase for iPhone’s Taptics engine (phone vibration).

However, AAC’s share of allocation from Apple has plunged from

80%+ to <50%, offsetting some of the upside from the ASP increase.

The acoustic business showed a recovery this year due to Chinese

customers’ speaker box adoption but the biggest delta is this year.

The scale of the RF antenna business is still immaterial. All in all,

we believe 3Q15 is the YoY peak for AAC.

For the nearer term, AAC’s bullish 2H outlook could be at risk. Its

non-Apple business is under pressure amid soft demand due to

currency volatility in emerging markets. Also, our supply chain

survey suggests iPhone shipments could fall YoY in 4Q15 (possibly in

1Q16 too), below Street expectations. AAC’s recent share-price

strength may not be warranted, especially as valuations already

top its components peers yet it offers only single-digit YoY

FY16/17F earnings growth. Upside risk is RF antenna doing better

than expected, or an earlier adoption of haptic engines by the

Android camp. Downside risk is iPhone demand, ASP erosion for

haptics and intense competition in the acoustic business.

Key Data


Maybank vs Market

Share Price: HKD48.90 MCap (USD): 7.7B Hong Kong

Target Price: HKD46.00 (-6%) ADTV (USD): 19M Technology (Unchanged)HOLD

80

100

120

140

160

180

200

25.0

30.0

35.0

40.0

45.0

50.0

55.0


AAC Tech - (LHS, HKD) AAC Tech / Hang Seng Index - (RHS, %)

1 Mth 3 Mth 12 Mth

Absolute(%) 1.8 16.4 11.3

Relative to index (%) 0.3 26.5 16.6


Market Recs 17 11 1


Target Price (HKD) 46.00 50.16 (8.3)

'15 PATMI (CNYm) 2,864 2,901 (1.3)

'16 PATMI (CNYm) 3,076 3,339 (7.9)


FYE Dec (CNY m) FY13A FY14A FY15E FY16E FY17E

Revenue 8,095.9 8,879.3 11,090.0 12,244.8 12,850.7

EBITDA 2,809.7 3,141.9 3,845.5 4,337.5 4,594.2

Core net profit 2,571.5 2,323.7 2,850.8 3,076.0 3,196.7

Core EPS (CNY) 2.09 1.89 2.32 2.51 2.60

Core EPS growth (%) 46.4 (9.6) 22.7 7.9 3.9

Net DPS (CNY) 0.65 0.85 0.78 0.85 0.88

Core P/E (x) 19.1 21.2 17.2 16.0 15.4

P/BV (x) 6.2 5.4 4.5 3.8 3.2


ROAE (%) 36.9 27.3 28.3 25.5 22.6

ROAA (%) 26.2 19.4 19.6 18.0 16.5

EV/EBITDA (x) 12.3 12.9 12.7 11.1 10.2


Stefan Chang, CFA

(852) 2268 0675

[email protected]

52w high/low (HKD)

3m avg turnover (USDm) Free float (%)

Issued shares (m)

Market capitalization Major shareholders: -WU CHUN YUAN INGRID 21.4% -Capital Research & Management 11.0% -PAN ZHENG MIN 9.9%

55.00/37.60

54.5 18.9

HKD60.0B

1,228

October 12, 2015 34

AAC Technologies

Are we at the peak?

This has been a good year for AAC as its acoustic business resumed YoY

growth while haptics started in 3Q14 contributing to its sales for the full

year. However, our view is AAC could be already close to the peak – if not

already at the peak, given: 1) Taptics sales growth will be capped by lower

allocation from Apple; 2) the biggest speaker box upgrade cycle by Chinese

customers could be this year; and 3) the scale of the RF antenna business

remains too small to drive the company.

Haptics engine: how long can it drive AAC’s growth for? AAC started to provide the Taptics (iPhone’s version of haptics) engine for

iPhone 6 since 3Q14, and AAC controlled nearly 80-90% of Apple’s demand.

Jinlong (300032 CH, NR) is another supplier but we believe the company

suffered from yield issues and lost most of the allocation from Apple after

the initial stage. With only two quarters of contributions, we estimate

haptics already accounted for 15% of AAC’s FY14 sales (26% for 2H14).

Without haptics, AAC’s FY14 sales YoY could be already in negative

territory.

That said, we anticipate the rapid haptics sales growth to gradually

moderate going forward. On the positive end, Apple has a major upgrade

of its Taptics engine in its new iPhone 6s/6s+ (due partly to its 3D Touch

function), and we believe the initial ASP could be at almost USD5, more

than double the old version. On the negative front, however, ASP erosion

for Taptics could be rapid after the initial stage once yield rate improves.

A 5-10% QoQ drop is not impossible after the first 1-2 quarters. In addition,

AAC’s allocation from Apple should have dropped to <50% vs the previous

80%+, as Nidec has become the primary supplier. The doubling in AAC’s ASP

benefit will be offset by the lower allocation.

We forecast AAC’s haptics sales to grow by 126%/28% YoY in FY15/16F, and

haptics will account for 28%/32% of AAC’s FY15/16F sales. On a quarterly

basis, we estimate haptics to account for 34% of 4Q15 sales and then cool

off slightly to 31-32% from then onwards. FY16F YoY growth is mainly

driven by the ASP expansion, as we believe volume will see YoY decline.

Upside for haptics will be if the Android camp follows Apple to adopt

haptics engine. We have not seen any major Android smartphone with

haptics design-in (i.e. selection of components) at this stage yet, meaning

1H16 models are already unlikely.

Figure 35: AAC’s haptics sales and sales %


Figure 36: Blended ASP assumption for haptics engine


0%

5%

10%

15%

20%

25%

30%

35%

40%

0

200

400

600

800

1,000

1,200

1,400

Haptics sales (CNYm) Sales % (RHS)

0

1

2

3

4

5

3Q14 4Q14 1Q15 2Q15 3Q15F4Q15F1Q16F2Q16F3Q16F4Q16F

Blended ASP (USD)

October 12, 2015 35

AAC Technologies

Acoustic: speaker box a +ve; but competition is not easing AAC’s 2Q15 acoustic sales grew (on a YoY basis) for the first time since

4Q13, thanks to Chinese customers’ adoption of speaker boxes as well as

the improvement in Samsung’s smartphone sales momentum. Chinese

smartphone makers are aggressive to upgrade from traditional speakers

and microphones to speaker boxes and MEMS microphones. The

incremental cost could be USD1.5-2.0 for the upgrade, but can provide a

much better sound effect.

However, we believe the biggest delta for AAC is already behind it. While

the upgrade will continue from Chinese high-end to mid-end phones (BOM

[bill of material] cost at ~USD80-100), lower-end smartphones will have a

hard time to adopt speaker boxes given the cost constraint. Also, supply is

increasing rapidly. Other than Goertek (002241 CH), AAC’s biggest

domestic competitor, there are also some new comers such as Sunway.

Both ASP and margins for this part of the business will come under pressure

as a result. In addition, our industry study shows AAC is still giving up some

market share for iPhone microphones to Knowles, while Goertek is also still

gaining market share for iPhone acoustic components.

We forecast FY15F dynamic components and MEMS microphones together

to account for 65% of AAC’s sales vs 76% for FY14, a result of haptic sales

growth. This will translate into a 6% YoY growth. On a quarterly basis, we

expect acoustic YoY growth to peak in 3Q15. However, we anticipate

acoustic sales will become flattish YoY again in FY16F, driven by slow

smartphone volume growth and ASP erosion from competition.

Figure 37: AAC’s acoustic sales and sales %


RF antenna: too early and too small to save the day RF antenna is AAC’s new business. The company is focusing on the middle

frame as well as antenna+casing design. AAC is also expanding its CNC

(computer numerical control) machine capacity for this part of the

business, from 600 this year to the 2,000 target in 2016F. AAC’s existing

customer is LeTV phone and its target customers include names such as

Moto and Xiaomi.

We do not have a clear visibility for this brand new business’

upside/downside yet. ASP for such antenna design, including middle frame

or metal casing + antenna, could be as high as USD15-20 or USD40+ (casing

included). Only high-end Chinese customers may adopt such design, while

other companies such as Tongda (698 HK NR) are already doing similar

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0

500

1,000

1,500

2,000

2,500

1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15F4Q15F1Q16F2Q16F3Q16F4Q16F

Acoustic sales (CNYm) Acoustic sales %

October 12, 2015 36

AAC Technologies

products. As such, we expect the RF antenna business to continue to

contribute only 5-10% of AAC’s sales.

Financial analysis

3Q15/4Q15 previews: hard to surprise on the upside AAC indicated 3Q15 sales grew by double digits QoQ, and the 1H15:2H15

sales trend could be similar to 1H14:2H14, suggesting a 42:58 split. We

estimate 3Q15 sales were CNY2.73b, +14% QoQ/+32% YoY, still mainly

driven by haptics sales. We expect margins were stable at 41-42%. Higher

sales % from haptics is theoretically positive for margins, but new product

yield loss (for iPhone 6s) will offset some of the positives. Intense

competition in the acoustic field may also cap AAC’s margin expansion.

Our 3Q15F EPS is CNY0.56, +10% QoQ/+26% YoY.

We forecast 4Q15 sales to be CNY3.65b, +33% QoQ/+18% YoY, mainly

driven by higher haptics ASP and Apple’s peak season sales. 1H15:2H15

sales will therefore become 42:58. That said, we believe the risk is to the

downside as our supply chain check suggests iPhone volume sales in 4Q15

should come under pressure (we expect sales of around 70m units, or a

high single digit % YoY decline), and 1Q16 low season (we expect 45-50m,

around 30% QoQ decline) should limit Apple from a continuous build-up.

With flat margin assumption, our 4Q15F EPS is CNY0.76, +35% QoQ/+19%

YoY.

On a full-year basis, our FY15/16/17F EPS are CNY2.32, CNY2.51 and

CNY2.60, respectively, representing 23%/8%/4% growth YoY. Our

FY15/16/17F EPS are 1%/7%/15% below consensus.

Figure 38: Maybank estimates vs consensus

3Q15F 4Q15F 2015F 2016F 2017F

MKE Street Var (%) MKE Street Var (%) MKE Street Var (%) MKE Street Var (%) MKE Street Var (%)

Sales CNYm 2,735 2,682 2.0 3,649 3,462 5.4 11,090 10,856 2.2 12,245 12,507 (2.1) 12,851 14,083 (8.8)

Gross profit CNYm 1,140 1,113 2.5 1,532 1,443 6.2 4,625 4,510 2.6 5,094 5,210 (2.2) 5,310 5,861 (9.4)

Operating profit CNYm 765 767 (0.2) 1,032 1,018 1.3 3,095 3,112 (0.5) 3,411 3,620 (5.8) 3,544 4,070 (12.9)

Net profit CNYm 690 716 (3.6) 930 921 1.0 2,851 2,871 (0.7) 3,076 3,323 (7.4) 3,197 3,751 (14.8)

EPS CNY 0.56 0.58 (3.6) 0.76 0.75 1.0 2.32 2.34 (0.7) 2.51 2.71 (7.4) 2.60 3.06 (14.8)

Gross margin % 41.7 41.5 0.2 42.0 41.7 0.3 41.7 41.5 0.2 41.6 41.7 (0.1) 41.3 41.6 (0.3)

Operating margin % 28.0 28.6 (0.6) 28.3 29.4 (1.1) 27.9 28.7 (0.8) 27.9 28.9 (1.1) 27.6 28.9 (1.3)

Net margin % 25.2 26.7 (1.5) 25.5 26.6 (1.1) 25.7 26.4 (0.7) 25.1 26.6 (1.4) 24.9 26.6 (1.8)


October 12, 2015 37

AAC Technologies

Figure 39: Sales model and P&L model for AAC

1Q15 2Q15 3Q15F 4Q15F 1Q16F 2Q16F 3Q16F 4Q16F 2014A 2015F 2016F 2017F Sales model

Sales breakdown

Dynamic components CNYm 1,198 1,540 1,678 1,838 1,400 1,417 1,511 1,795 5,949 6,254 6,122 6,450

Receiver CNYm 323 383 382 416 350 364 379 450 1,958 1,505 1,543 1,627 Speaker CNYm 184 304 318 362 287 298 310 368 933 1,169 1,263 1,333 Speaker boxes CNYm 691 852 978 1,059 763 755 822 977 3,059 3,580 3,316 3,490

MEMS Microphones CNYm 207 212 241 271 231 237 267 301 842 931 1,037 1,296 Vibrator/Haptics CNYm 772 493 568 1,243 874 902 967 1,181 1,358 3,076 3,925 3,744 Antenna/Transducer CNYm 104 112 193 237 209 215 231 272 433 645 927 1,106 Others CNYm 23 46 55 60 54 54 60 66 296 184 234 254 Total CNYm 2,305 2,402 2,735 3,649 2,767 2,826 3,037 3,615 8,879 11,090 12,245 12,851

Sales breakdown (%) Dynamic components

52% 64% 61% 50% 51% 50% 50% 50% 67% 56% 50% 50% Receiver

14% 16% 14% 11% 13% 13% 12% 12% 22% 14% 13% 13%

Speaker

8% 13% 12% 10% 10% 11% 10% 10% 11% 11% 10% 10% Speaker boxes

30% 35% 36% 29% 28% 27% 27% 27% 34% 32% 27% 27%

MEMS Microphones

9% 9% 9% 7% 8% 8% 9% 8% 9% 8% 8% 10% Vibrator/Haptics

34% 21% 21% 34% 32% 32% 32% 33% 15% 28% 32% 29%

Antenna/Transducer

5% 5% 7% 6% 8% 8% 8% 8% 5% 6% 8% 9% Others

1% 2% 2% 2% 2% 2% 2% 2% 3% 2% 2% 2%

Total

100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

P&L Model

1Q15 2Q15 3Q15F 4Q15F 1Q16F 2Q16F 3Q16F 4Q16F 2014A 2015F 2016F 2017F FX (CNY/USD)

6.30 6.30 6.35 6.35 6.35 6.35 6.35 6.35 6.30 6.33 6.35 6.35

Sales CNYm 2,305 2,402 2,735 3,649 2,767 2,826 3,037 3,615 8,879 11,090 12,245 12,851

Cost of Goods Sold CNYm (1,349) (1,405) (1,594) (2,117) (1,616) (1,650) (1,775) (2,110) (5,201) (6,465) (7,151) (7,541) Gross Profit CNYm 956 997 1,140 1,532 1,152 1,176 1,261 1,505 3,678 4,625 5,094 5,310 OPEX CNYm (328) (327) (375) (500) (382) (387) (417) (497) (1,193) (1,530) (1,683) (1,766) OP Profit CNYm 628 671 765 1,032 769 788 844 1,008 2,485 3,095 3,411 3,544 Total Non-OP Profit CNYm (35) (38) (0) (0) (0) (0) (0) (0) (95) (73) (0) (0) Pretex Profit CNYm 662 709 766 1,032 769 788 845 1,009 2,581 3,168 3,411 3,545 Net Profit CNYm 604 626 690 930 694 711 762 910 2,324 2,851 3,076 3,197 EPS CNY 0.49 0.51 0.56 0.76 0.57 0.58 0.62 0.74 1.89 2.32 2.51 2.60 EPS HKD 0.60 0.63 0.69 0.92 0.69 0.71 0.76 0.90 2.33 2.84 3.06 3.18

Profit Margins (%) Gross Margins

41.5% 41.5% 41.7% 42.0% 41.6% 41.6% 41.5% 41.6% 41.4% 41.7% 41.6% 41.3% OP Margins

27.2% 27.9% 28.0% 28.3% 27.8% 27.9% 27.8% 27.9% 28.0% 27.9% 27.9% 27.6%

Net Margins

26.2% 26.1% 25.2% 25.5% 25.1% 25.2% 25.1% 25.2% 26.2% 25.7% 25.1% 24.9% QoQ (%)

Sales

-25.6% 4.2% 13.8% 33.4% -24.2% 2.1% 7.5% 19.1% Gross Profit

-25.0% 4.3% 14.3% 34.4% -24.8% 2.1% 7.3% 19.3%

OP Profit

-27.1% 6.8% 14.1% 34.8% -25.4% 2.5% 7.1% 19.4% Net Profit

-23.1% 3.6% 10.3% 34.8% -25.4% 2.5% 7.1% 19.4%

EPS

-23.1% 3.6% 10.3% 34.8% -25.4% 2.5% 7.1% 19.4% YoY (%)

Sales

24.3% 29.0% 32.5% 17.7% 20.1% 17.6% 11.0% -0.9% 9.7% 24.9% 10.4% 4.9% Gross Profit

28.3% 27.1% 30.5% 20.2% 20.5% 17.9% 10.7% -1.7% 6.3% 25.8% 10.1% 4.2%

OP Profit

20.8% 31.1% 29.3% 19.7% 22.6% 17.5% 10.3% -2.2% 4.6% 24.6% 10.2% 3.9% Net Profit

24.5% 23.7% 26.1% 18.5% 14.9% 13.6% 10.3% -2.2% -9.6% 22.7% 7.9% 3.9%

EPS 24.5% 23.7% 26.1% 18.5% 14.9% 13.6% 10.3% -2.2% -9.6% 22.7% 7.9% 3.9%


October 12, 2015 38

AAC Technologies

Valuations

PER already tops its components peers Our target price of HKD46 is based on 15x FY16F PER, higher than its

average of 13.6x since 2010 to award the company for its execution of new

products (haptics and RF antenna). The stock traded at above 15x PER for

most of 2014 on the back of the anticipated iPhone 6 launch and the

company’s bullish indication about its non-acoustic business (haptics) for

iPhone. Valuation was boosted to 15x+ PER again in late-4Q14/early 1Q15

on hopes of the launch of the Apple Watch but Nidec was subsequently

proven to be the major supplier. AAC’s share price corrected to below 15x

(this year: 13x) after peaking.

We think the current 16x PER is not sustainable as AAC is once again losing

the primary supplier position to Nidec for iPhone 6s/6s+ Taptics engine. If

our forecasts are correct, AAC’s FY16/17F earnings will grow by only 8%/4%

YoY, which may not justify 15x PER. In comparison, the other two major

iPhone components suppliers, Largan and Catcher, are trading at only

13x/10x our FY16F PER. Despite the country premium (i.e. Hong Kong), we

see Largan and Catcher provide a better risk-to-return profile.

Alternative valuation method: trading at fair value We derived HKD48 fair value for AAC using our ROE-g/COE-g fair value

appraisal, implying 15.7x FY16F PER. This is compared with Catcher (20%+

discount to fair value) and Largan (at fair value). AAC’s FY16/17F earnings

growth is slower than that for Catcher and Largan, and therefore such a

premium over peers looks unattractive to us.

Figure 40: Summary of AAC’s PER history (2010-current)

Current PER 16.2x Mean + 2x sdv. 19.2x

High 20.3x Mean + 1x sdv. 16.4x

Mean 13.6x Mean 13.6x

Low 8.5x Mean - 1x sdv. 10.7x

1x Sdv. 2.8x Mean - 2x sdv. 19.2x


Figure 41: AAC’s 12-mth forward PER


Figure 42: AAC’s 12-mth forward P/BV


0

10

20

30

40

50

60

Jan 10 Dec 10 Nov 11 Oct 12 Sep 13 Aug 14 Jul 15

AAC

9x

11x

13x

15x

17x

19x

0

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30

40

50

60

Jan 10 Dec 10 Nov 11 Oct 12 Sep 13 Aug 14 Jul 15

AAC

2.0x

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3.5x

4.0x

4.5x

October 12, 2015 39

AAC Technologies


Fair value (HKD) 48

Beta 0.9

Cost of equity 7.4

Average ROE 15-17 (%) 25.4


ROE-g 23.4

COE-g 5.4


FY15F BVPS (HKD) 11.1

Source: Maybank

Stress test Our scenario shows FY16 net profit will be 13% lower than our current

forecast if sales are 10% below our expectation. That said, further CNY

depreciation, which we think it’s possible, will boost earnings by 9% for

every 5% devaluation in the CNY. Interest rate hike does not affect AAC’s

earnings significantly. In brief, should we adopt our scenario 2 (i.e. sales

drop by 10%, CNY depreciates by 10%, and interest rate increases by

100bps) AAC’s earnings should be 5% higher than our current forecast.

Figure 10-11 summaries of our stress test.


FY Dec FY14 FY15 FY16

CNYb

Change in revenue Base -5% -10% Base -5% -10%

Revenue 8.9 11.1 10.5 10.0 12.2 11.6 11.0

Operating profit 2.5 3.1 2.9 2.7 3.4 3.2 3.0

Net profit 2.3 2.9 2.7 2.5 3.1 2.9 2.7

Free cash flow 0.4 1.5 1.3 1.1 2.2 2.0 1.8

Net debt (net cash) (0.2) (0.4) (0.2) 0.1 (1.3) (1.0) (0.7)

Change in exchange rate Base -5% -10% Base -5% -10%

New USDCNY assumption 6.3 6.3 6.6 7.0 6.4 6.7 7.0

Size of FX debt (in USD b) 0.0 0.0 0.0 0.0 0.0 0.0 0.0


Net profit 2.3 2.9 3.1 3.4 3.1 3.4 3.6

Free cash flow 0.4 1.5 1.8 2.1 2.2 2.5 2.8

Net debt (net cash) (0.2) (0.4) (0.8) (1.2) (1.3) (1.7) (2.1)

Change in interest rate Base -50 bps -100 bps Base -50 bps -100 bps



Net profit 2.3 2.9 2.9 2.9 3.1 3.1 3.1

Free cash flow 0.4 1.5 1.5 1.5 2.2 2.2 2.1

Net debt (net cash) (0.2) (0.4) (0.4) (0.4) (1.3) (1.2) (1.2)




CNYb MKE Est (-5% rev, -5% fx, +50

bps i/r) MKE Est

(-10% rev, -10% fx, +100bps i/r)

Operating profit 2.5 3.1 3.2 3.4 3.6

% Change

3%

5%

Net profit 2.3 2.9 2.9 3.1 3.2

% Change

2%

6%

Free cash flow 0.4 1.5 1.6 2.2 2.3

% Change

6%

5%

Net debt (net cash) (0.2) (0.4) (0.5) (1.3) (1.4)

Valuation

PER (x) 21.4 17.3 16.9 16.1 15.2

EV/EBITDA (x) 15.6 12.7 12.3 11.3 10.6

P/FCF (x) 120 32.6 30.6 22.3 21.3

P/B (x) 5.4 4.5 4.5 3.8 3.7

Dividend yield (%) 2.1% 1.9% 2.0% 2.1% 2.2%


October 12, 2015 40

AAC Technologies


Key Metrics

P/E (reported) (x) 19.1 21.3 17.2 16.0 15.4

Core P/E (x) 19.1 21.2 17.2 16.0 15.4

P/BV (x) 6.2 5.4 4.5 3.8 3.2

P/NTA (x) 6.2 5.3 4.4 3.7 3.2


FCF yield (%) 5.2 0.8 3.1 4.5 5.3

EV/EBITDA (x) 12.3 12.9 12.7 11.1 10.2

EV/EBIT (x) 14.6 16.4 15.8 14.1 13.2

INCOME STATEMENT (CNY m)

Revenue 8,095.9 8,879.3 11,090.0 12,244.8 12,850.7

Gross profit 3,458.7 3,678.0 4,625.2 5,093.8 5,310.0

EBITDA 2,809.7 3,141.9 3,845.5 4,337.5 4,594.2

Depreciation (437.1) (660.7) (755.0) (932.9) (1,056.8)

Amortisation 3.0 4.0 5.0 6.0 7.0

EBIT 2,375.6 2,485.3 3,095.5 3,410.6 3,544.4

Net interest income /(exp) 5.9 8.3 (8.1) 0.2 0.2

Associates & JV 12.3 (1.4) (1.8) 0.0 0.0

Exceptionals 0.0 0.0 0.0 0.0 0.0

Other pretax income 440.7 88.3 82.7 0.0 0.0

Pretax profit 2,834.5 2,580.6 3,168.3 3,410.8 3,544.7

Income tax (263.1) (270.2) (304.3) (334.8) (347.9)

Minorities 0.0 0.0 0.0 0.0 0.0




Core net profit 2,571.5 2,323.7 2,850.8 3,076.0 3,196.7

BALANCE SHEET (CNY m)



Inventory 831.6 1,267.2 1,594.1 1,758.4 1,859.4

Reinsurance assets 0.0 0.0 0.0 0.0 0.0



Investment in Associates & JVs 4.8 15.7 15.7 15.7 15.7

Other assets 757.7 1,118.3 1,140.1 1,162.3 1,184.9

Total assets 10,677.0 13,279.1 15,843.5 18,247.1 20,610.8

ST interest bearing debt 904.7 1,417.8 1,446.2 1,475.1 1,504.6


Insurance contract liabilities 0.0 0.0 0.0 0.0 0.0


Other liabilities 224.0 281.0 302.0 326.0 352.0







CASH FLOW (CNY m)

Pretax profit 2,834.5 2,580.6 3,168.3 3,410.8 3,544.7

Depreciation & amortisation 434.1 656.7 750.0 926.9 1,049.8


Change in working capital 84.1 933.7 411.5 314.7 173.1

Cash taxes paid 0.0 0.0 0.0 0.0 0.0



Capex (781.6) (1,316.5) (2,000.0) (1,800.0) (1,800.0)

Free cash flow 2,547.8 412.3 1,518.0 2,219.7 2,608.0

Dividends paid (799.6) (1,043.0) (958.6) (1,035.4) (1,079.4)



Change in Debt (130.2) 513.1 28.4 28.9 29.5


Other invest/financing cash flow (577.6) (634.0) (327.0) (327.0) (327.0)

Effect of exch rate changes 0.0 0.0 0.0 0.0 0.0

Net cash flow 1,040.4 (751.6) 260.8 886.3 1,231.2

October 12, 2015 41

AAC Technologies


Key Ratios

Growth ratios (%)

Revenue growth 28.9 9.7 24.9 10.4 4.9

EBITDA growth 29.3 11.8 22.4 12.8 5.9

EBIT growth 28.5 4.6 24.6 10.2 3.9

Pretax growth 40.6 (9.0) 22.8 7.7 3.9

Reported net profit growth 46.4 (10.2) 24.0 7.4 3.9

Core net profit growth 46.4 (9.6) 22.7 7.9 3.9


EBITDA margin 34.7 35.4 34.7 35.4 35.8

EBIT margin 29.3 28.0 27.9 27.9 27.6


Payout ratio 31.1 45.1 33.6 33.8 33.8

DuPont analysis


Revenue/Assets (x) 0.8 0.7 0.7 0.7 0.6

Assets/Equity (x) 1.4 1.5 1.4 1.4 1.4

ROAE (%) 36.9 27.3 28.3 25.5 22.6

ROAA (%) 26.2 19.4 19.6 18.0 16.5






Dividend cover (x) 3.2 2.2 3.0 3.0 3.0

Current ratio (x) 2.2 1.7 1.7 1.9 2.1




Net interest cover (x) na na nm na na

Debt/EBITDA (x) 0.3 0.5 0.4 0.3 0.3

Capex/revenue (%) 9.7 14.8 18.0 14.7 14.0

Net debt/ (net cash) (1,449.6) (184.9) (417.3) (1,274.7) (2,476.4)


October 12, 2015 42


Research Offices

REGIONAL

Sadiq CURRIMBHOY

Regional Head, Research & Economics

(65) 6231 5836 [email protected]

WONG Chew Hann, CA

Regional Head of Institutional Research


ONG Seng Yeow

Regional Head of Retail Research


TAN Sin Mui

Director of Research


ECONOMICS

Suhaimi ILIAS Chief Economist Singapore | Malaysia (603) 2297 8682 [email protected]

Luz LORENZO Philippines

(63) 2 849 8836 [email protected]

Tim LEELAHAPHAN Thailand (66) 2658 6300 ext 1420 [email protected]

JUNIMAN Chief Economist, BII Indonesia (62) 21 29228888 ext 29682

[email protected]

STRATEGY

Sadiq CURRIMBHOY

Global Strategist


Willie CHAN

Hong Kong / Regional


MALAYSIA

WONG Chew Hann, CA Head of Research (603) 2297 8686 [email protected] • Strategy

Desmond CH’NG, ACA (603) 2297 8680 [email protected] • Banking & Finance

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LIEW Wei Han

(603) 2297 8676 [email protected] • Consumer Staples

LEE Cheng Hooi Regional Chartist (603) 2297 8694 [email protected]

Tee Sze Chiah Head of Retail Research (603) 2297 6858 [email protected]

Cheah Chong Ling (603) 2297 8767 [email protected]

HONG KONG / CHINA

Howard WONG Head of Research (852) 2268 0648 [email protected] • Oil & Gas - Regional

Benjamin HO (852) 2268 0632 [email protected] • Consumer & Auto

Jacqueline KO, CFA (852) 2268 0633 [email protected] • Consumer Staples & Durables

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INDIA

Jigar SHAH Head of Research


• Oil & Gas • Automobile • Cement

Anubhav GUPTA


• Metal & Mining • Capital Goods • Property

Vishal MODI


• Banking & Financials

Abhijeet KUNDU


• Consumer

Neerav DALAL


• Software Technology • Telcos

SINGAPORE

Gregory YAP (65) 6231 5848 [email protected] • SMID Caps • Technology & Manufacturing • Telcos

YEAK Chee Keong, CFA (65) 6231 5842 [email protected] • Offshore & Marine

Derrick HENG, CFA (65) 6231 5843 [email protected] • Transport • Property • REITs (Office)

Joshua TAN (65) 6231 5850 [email protected] • REITs (Retail, Industrial)

John CHEONG (65) 6231 5845 [email protected] • Small & Mid Caps • Healthcare

TRUONG Thanh Hang (65) 6231 5847 [email protected] • Small & Mid Caps

INDONESIA

Isnaputra ISKANDAR Head of Research (62) 21 2557 1129 [email protected] • Strategy • Metals & Mining • Cement

Rahmi MARINA (62) 21 2557 1128 [email protected] • Banking & Finance

Aurellia SETIABUDI (62) 21 2953 0785 [email protected] • Property

Pandu ANUGRAH (62) 21 2557 1137 [email protected] • Infra • Construction • Transport• Telcos

Janni ASMAN (62) 21 2953 0784 [email protected] • Cigarette • Healthcare • Retail

Adhi TASMIN (62) 21 2557 1209 [email protected] • Plantations

PHILIPPINES

Luz LORENZO Head of Research (63) 2 849 8836 [email protected] • Strategy • Utilities • Conglomerates • Telcos

Lovell SARREAL (63) 2 849 8841 [email protected] • Consumer • Media • Cement

Rommel RODRIGO (63) 2 849 8839 [email protected] • Conglomerates • Property • Gaming • Ports/ Logistics

Katherine TAN (63) 2 849 8843 [email protected] • Banks • Construction

Michael BENGSON (63) 2 849 8840 [email protected] • Conglomerates

Jaclyn JIMENEZ (63) 2 849 8842 [email protected] • Consumer

Arabelle MAGHIRANG (63) 2 849 8838 [email protected] • Banks

THAILAND

Maria LAPIZ Head of Institutional Research Dir (66) 2257 0250 | (66) 2658 6300 ext 1399 [email protected] • Consumer • Materials • Ind. Estates

Sittichai DUANGRATTANACHAYA (66) 2658 6300 ext 1393 [email protected] • Services Sector • Transport

Sukit UDOMSIRIKUL Head of Retail Research (66) 2658 6300 ext 5090 [email protected]

Mayuree CHOWVIKRAN (66) 2658 6300 ext 1440 [email protected] • Strategy

Padon VANNARAT (66) 2658 6300 ext 1450 [email protected] • Strategy

Surachai PRAMUALCHAROENKIT (66) 2658 6300 ext 1470 [email protected] • Auto • Conmat • Contractor • Steel

Suttatip PEERASUB (66) 2658 6300 ext 1430 [email protected] • Media • Commerce

Sutthichai KUMWORACHAI (66) 2658 6300 ext 1400 [email protected] • Energy • Petrochem

Termporn TANTIVIVAT (66) 2658 6300 ext 1520 [email protected] • Property

Jaroonpan WATTANAWONG (66) 2658 6300 ext 1404 [email protected] • Transportation • Small cap

VIETNAM

LE Hong Lien, ACCA Head of Institutional Research (84) 8 44 555 888 x 8181 [email protected] • Strategy • Consumer • Diversified • Utilities

THAI Quang Trung, CFA, Deputy Manager, Institutional Research (84) 8 44 555 888 x 8180 [email protected] • Real Estate • Construction • Materials

Le Nguyen Nhat Chuyen (84) 8 44 555 888 x 8082 [email protected] • Oil & Gas

NGUYEN Thi Ngan Tuyen, Head of Retail Research (84) 8 44 555 888 x 8081 [email protected] • Food & Beverage • Oil&Gas • Banking

TRINH Thi Ngoc Diep (84) 4 44 555 888 x 8208 [email protected] • Technology • Utilities • Construction

PHAM Nhat Bich (84) 8 44 555 888 x 8083 [email protected] • Consumer • Manufacturing • Fishery

NGUYEN Thi Sony Tra Mi (84) 8 44 555 888 x 8084 [email protected] • Port operation • Pharmaceutical • Food & Beverage

TRUONG Quang Binh (84) 4 44 555 888 x 8087 [email protected] • Rubber plantation • Tyres and Tubes • Oil&Gas

October 12, 2015 43


APPENDIX I: TERMS FOR PROVISION OF REPORT, DISCLAIMERS AND DISCLOSURES

DISCLAIMERS

This research report is prepared for general circulation and for information purposes only and under no circumstances should it be considered or intended as an offer to sell or a solicitation of an offer to buy the securities referred to herein. Investors should note that values of such securities, if any, may fluctuate and that each security’s price or value may rise or fall. Opinions or recommendations contained herein are in form of technical ratings and fundamental ratings. Technical ratings may differ from fundamental ratings as technical valuations apply different methodologies and are purely based on price and volume-related information extracted from the relevant jurisdiction’s stock exchange in the equity analysis. Accordingly, investors’ returns may be less than the original sum invested. Past performance is not necessarily a guide to future performance. This report is not intended to provide personal investment advice and does not take into account the specific investment objectives, the financial situation and the particular needs of persons who may receive or read this report. Investors should therefore seek financial, legal and other advice regarding the appropriateness of investing in any securities or the investment strategies discussed or recommended in this report.

The information contained herein has been obtained from sources believed to be reliable but such sources have not been independently verified by Maybank Investment Bank Berhad, its subsidiary and affiliates (collectively, “MKE”) and consequently no representation is made as to the accuracy or completeness of this report by MKE and it should not be relied upon as such. Accordingly, MKE and its officers, directors, associates, connected parties and/or employees (collectively, “Representatives”) shall not be liable for any direct, indirect or consequential losses or damages that may arise from the use or reliance of this report. Any information, opinions or recommendations contained herein are subject to change at any time, without prior notice.

This report may contain forward looking statements which are often but not always identified by the use of words such as “anticipate”, “believe”, “estimate”, “intend”, “plan”, “expect”, “forecast”, “predict” and “project” and statements that an event or result “may”, “will”, “can”, “should”, “could” or “might” occur or be achieved and other similar expressions. Such forward looking statements are based on assumptions made and information currently available to us and are subject to certain risks and uncertainties that could cause the actual results to differ materially from those expressed in any forward looking statements. Readers are cautioned not to place undue relevance on these forward-looking statements. MKE expressly disclaims any obligation to update or revise any such forward looking statements to reflect new information, events or circumstances after the date of this publication or to reflect the occurrence of unanticipated events.

MKE and its officers, directors and employees, including persons involved in the preparation or issuance of this report, may, to the extent permitted by law, from time to time participate or invest in financing transactions with the issuer(s) of the securities mentioned in this report, perform services for or solicit business from such issuers, and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto. In addition, it may make markets in the securities mentioned in the material presented in this report. MKE may, to the extent permitted by law, act upon or use the information presented herein, or the research or analysis on which they are based, before the material is published. One or more directors, officers and/or employees of MKE may be a director of the issuers of the securities mentioned in this report.

This report is prepared for the use of MKE’s clients and may not be reproduced, altered in any way, transmitted to, copied or distributed to any other party in whole or in part in any form or manner without the prior express written consent of MKE and MKE and its Representatives accepts no liability whatsoever for the actions of third parties in this respect.

This report is not directed to or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. This report is for distribution only under such circumstances as may be permitted by applicable law. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. Without prejudice to the foregoing, the reader is to note that additional disclaimers, warnings or qualifications may apply based on geographical location of the person or entity receiving this report.

Malaysia

Opinions or recommendations contained herein are in the form of technical ratings and fundamental ratings. Technical ratings may differ from fundamental ratings as technical valuations apply different methodologies and are purely based on price and volume-related information extracted from Bursa Malaysia Securities Berhad in the equity analysis.

Singapore

This report has been produced as of the date hereof and the information herein may be subject to change. Maybank Kim Eng Research Pte. Ltd. (“Maybank KERPL”) in Singapore has no obligation to update such information for any recipient. For distribution in Singapore, recipients of this report are to contact Maybank KERPL in Singapore in respect of any matters arising from, or in connection with, this report. If the recipient of this report is not an accredited investor, expert investor or institutional investor (as defined under Section 4A of the Singapore Securities and Futures Act), Maybank KERPL shall be legally liable for the contents of this report, with such liability being limited to the extent (if any) as permitted by law.

Thailand

The disclosure of the survey result of the Thai Institute of Directors Association (“IOD”) regarding corporate governance is made pursuant to the policy of the Office of the Securities and Exchange Commission. The survey of the IOD is based on the information of a company listed on the Stock Exchange of Thailand and the market for Alternative Investment disclosed to the public and able to be accessed by a general public investor. The result, therefore, is from the perspective of a third party. It is not an evaluation of operation and is not based on inside information. The survey result is as of the date appearing in the Corporate Governance Report of Thai Listed Companies. As a result, the survey may be changed after that date. Maybank Kim Eng Securities (Thailand) Public Company Limited (“MBKET”) does not confirm nor certify the accuracy of such survey result.

Except as specifically permitted, no part of this presentation may be reproduced or distributed in any manner without the prior written permission of MBKET. MBKET accepts no liability whatsoever for the actions of third parties in this respect.

US

This research report prepared by MKE is distributed in the United States (“US”) to Major US Institutional Investors (as defined in Rule 15a-6 under the Securities Exchange Act of 1934, as amended) only by Maybank Kim Eng Securities USA Inc (“Maybank KESUSA”), a broker-dealer registered in the US (registered under Section 15 of the Securities Exchange Act of 1934, as amended). All responsibility for the distribution of this report by Maybank KESUSA in the US shall be borne by Maybank KESUSA. All resulting transactions by a US person or entity should be effected through a registered broker-dealer in the US. This report is not directed at you if MKE is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to you. You should satisfy yourself before reading it that Maybank KESUSA is permitted to provide research material concerning investments to you under relevant legislation and regulations.

UK

This document is being distributed by Maybank Kim Eng Securities (London) Ltd (“Maybank KESL”) which is authorized and regulated, by the Financial Services Authority and is for Informational Purposes only. This document is not intended for distribution to anyone defined as a Retail Client under the Financial Services and Markets Act 2000 within the UK. Any inclusion of a third party link is for the recipients convenience only, and that the firm does not take any responsibility for its comments or accuracy, and that access to such links is at the individuals own risk. Nothing in this report should be considered as constituting legal, accounting or tax advice, and that for accurate guidance recipients should consult with their own independent tax advisers.

October 12, 2015 44


Disclosure of Interest

Malaysia: MKE and its Representatives may from time to time have positions or be materially interested in the securities referred to herein and may further act as market maker or may have assumed an underwriting commitment or deal with such securities and may also perform or seek to perform investment banking services, advisory and other services for or relating to those companies.

Singapore: As of 13 October 2015, Maybank KERPL and the covering analyst do not have any interest in any companies recommended in this research report.

Thailand: MBKET may have a business relationship with or may possibly be an issuer of derivative warrants on the securities /companies mentioned in the research report. Therefore, Investors should exercise their own judgment before making any investment decisions. MBKET, its associates, directors, connected parties and/or employees may from time to time have interests and/or underwriting commitments in the securities mentioned in this report.

Hong Kong: KESHK may have financial interests in relation to an issuer or a new listing applicant referred to as defined by the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission.

As of 13 October 2015, KESHK and the authoring analyst do not have any interest in any companies recommended in this research report.

MKE may have, within the last three years, served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the previous 12 months, significant advice or investment services in relation to the investment concerned or a related investment and may receive compensation for the services provided from the companies covered in this report.

OTHERS

Analyst Certification of Independence

The views expressed in this research report accurately reflect the analyst’s personal views about any and all of the subject securities or issuers; and no part of the research analyst’s compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in the report.

Reminder

Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct its own analysis of the product and consult with its own professional advisers as to the risks involved in making such a purchase.

No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior consent of MKE.

Definition of Ratings

Maybank Kim Eng Research uses the following rating system

BUY Return is expected to be above 10% in the next 12 months (excluding dividends)

HOLD Return is expected to be between - 10% to +10% in the next 12 months (excluding dividends)

SELL Return is expected to be below -10% in the next 12 months (excluding dividends)

Applicability of Ratings

The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment ratings are only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not carry investment ratings as we do not actively follow developments in these companies.

DISCLOSURES

Legal Entities Disclosures

Malaysia: This report is issued and distributed in Malaysia by Maybank Investment Bank Berhad (15938-H) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets and Services License issued by the Securities Commission in Malaysia. Singapore: This material is issued and distributed in Singapore by Maybank KERPL (Co. Reg No 197201256N) which is regulated by the Monetary Authority of Singapore. Indonesia: PT Kim Eng Securities (“PTKES”) (Reg. No. KEP-251/PM/1992) is a member of the Indonesia Stock Exchange and is regulated by the BAPEPAM LK. Thailand: MBKET (Reg. No.0107545000314) is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange Commission. Philippines: Maybank ATRKES (Reg. No.01-2004-00019) is a member of the Philippines Stock Exchange and is regulated by the Securities and Exchange Commission. Vietnam: Maybank Kim Eng Securities JSC (License Number: 71/UBCK-GP) is licensed under the State Securities Commission of Vietnam.Hong Kong: KESHK (Central Entity No AAD284) is regulated by the Securities and Futures Commission. India: Kim Eng Securities India Private Limited (“KESI”) is a participant of the National Stock Exchange of India Limited (Reg No: INF/INB 231452435) and the Bombay Stock Exchange (Reg. No. INF/INB 011452431) and is regulated by Securities and Exchange Board of India. KESI is also registered with SEBI as Category 1 Merchant Banker (Reg. No. INM 000011708) US: Maybank KESUSA is a member of/ and is authorized and regulated by the FINRA – Broker ID 27861. UK: Maybank KESL (Reg No 2377538) is authorized and regulated by the Financial Services Authority.

October 12, 2015 45


Malaysia Maybank Investment Bank Berhad

(A Participating Organisation of

Bursa Malaysia Securities Berhad)

33rd Floor, Menara Maybank,

100 Jalan Tun Perak,

50050 Kuala Lumpur

Tel: (603) 2059 1888;

Fax: (603) 2078 4194

Singapore Maybank Kim Eng Securities Pte Ltd

Maybank Kim Eng Research Pte Ltd

50 North Canal Road

Singapore 059304

Tel: (65) 6336 9090

London Maybank Kim Eng Securities

(London) Ltd

5th Floor, Aldermary House

10-15 Queen Street

London EC4N 1TX, UK

Tel: (44) 20 7332 0221

Fax: (44) 20 7332 0302

New York Maybank Kim Eng Securities USA

Inc

777 Third Avenue, 21st Floor

New York, NY 10017, U.S.A.

Tel: (212) 688 8886

Fax: (212) 688 3500

Stockbroking Business:

Level 8, Tower C, Dataran Maybank,

No.1, Jalan Maarof

59000 Kuala Lumpur

Tel: (603) 2297 8888

Fax: (603) 2282 5136

Hong Kong Kim Eng Securities (HK) Ltd

Level 30,

Three Pacific Place,

1 Queen’s Road East,

Hong Kong

Tel: (852) 2268 0800

Fax: (852) 2877 0104

Indonesia PT Maybank Kim Eng Securities

Plaza Bapindo

Citibank Tower 17th Floor

Jl Jend. Sudirman Kav. 54-55

Jakarta 12190, Indonesia

Tel: (62) 21 2557 1188

Fax: (62) 21 2557 1189

India Kim Eng Securities India Pvt Ltd

2nd Floor, The International 16,

Maharishi Karve Road,

Churchgate Station,

Mumbai City - 400 020, India

Tel: (91) 22 6623 2600

Fax: (91) 22 6623 2604

Philippines Maybank ATR Kim Eng Securities Inc.

17/F, Tower One & Exchange Plaza

Ayala Triangle, Ayala Avenue

Makati City, Philippines 1200

Tel: (63) 2 849 8888

Fax: (63) 2 848 5738

Thailand Maybank Kim Eng Securities

(Thailand) Public Company Limited

999/9 The Offices at Central World,

20th - 21st Floor,

Rama 1 Road Pathumwan,

Bangkok 10330, Thailand

Tel: (66) 2 658 6817 (sales)

Tel: (66) 2 658 6801 (research)

Vietnam Maybank Kim Eng Securities Limited

4A-15+16 Floor Vincom Center Dong

Khoi, 72 Le Thanh Ton St. District 1

Ho Chi Minh City, Vietnam

Tel : (84) 844 555 888

Fax : (84) 8 38 271 030

Saudi Arabia In association with

Anfaal Capital

Villa 47, Tujjar Jeddah

Prince Mohammed bin Abdulaziz

Street P.O. Box 126575

Jeddah 21352

Tel: (966) 2 6068686

Fax: (966) 26068787

South Asia Sales Trading Kevin Foy

Regional Head Sales Trading

[email protected]

Tel: (65) 6336-5157

US Toll Free: 1-866-406-7447

North Asia Sales Trading Andrew Lee

[email protected]

Tel: (852) 2268 0283

US Toll Free: 1 877 837 7635

Malaysia Rommel Jacob [email protected] Tel: (603) 2717 5152

Thailand Tanasak Krishnasreni [email protected] Tel: (66)2 658 6820

Indonesia Harianto Liong [email protected] Tel: (62) 21 2557 1177

New York Andrew Dacey [email protected] Tel: (212) 688 2956

India Manish Modi [email protected] Tel: (91)-22-6623-2601

Vietnam Tien Nguyen [email protected]

Tel: (84) 44 555 888 x8079

Philippines Keith Roy [email protected] Tel: (63) 2 848-5288

www.maybank-ke.com | www.maybank-keresearch.com

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