THIS REPORT IS SOLELY FOR RECIPIENTS WHO ARE NON-CHINESE INVESTORS LOCATED OUTSIDE THE PEOPLE'S REPUBLIC OF CHINA ("PRC"). WITHOUT THE PRIOR WRITTEN CONSENT OF BNP PARIBAS, THE RECIPIENTS OF THIS REPORT SHALL NOT FURTHER DISTRIBUTE SUCH REPORT OR DISCLOSE ANY INFORMATION THEREIN TO ANY OTHER PERSON INCLUDING BUT NOT LIMITED TO ANY OTHER NON-CHINESE INVESTORS OR ANY PERSON IN PRC. 30 JANUARY 2016 SECTOR REPORT GREATER CHINA TECHNOLOGY Automatic for the people Auto electronics set for steady long-term growth We expect electronic components to become increasingly prevalent in vehicles as they play ever more important roles in enabling vehicles to be more connected, safer and greener. In addition, road safety will likely remain a key issue in many countries; government mandates requiring advanced driver assistance system (ADAS) functions will likely be a significant driver of ADAS demand. Gartner expects 15% of automobiles produced in 2019 to have some form of ADAS, up from 6% in 2014. Transparency Market Research expects the ADAS market to grow at a 19.2% CAGR over 2014-2020. Vehicle to vehicle/infrastructure technology to provide an extra leg of growth Current ADAS capabilities are limited by the effective range of onboard sensors and cameras. Hence, vehicle-to-vehicle (V2V) and vehicle-to-infrastructure (V2I) communication technology can considerably extend the range of a vehicle’s reception on the road. In terms of safety features, V2V and V2I can warn drivers about approaching accidents, bad weather, traffic congestion, roadwork, etc. We think cellular wireless connectivity will be essential here; the auto-related cellular modem market is forecast to grow at a 25% CAGR in 2012-2020, according to Automotive Multimedia & Communications (AMCS). Stock selection: We have BUYs on Wistron Neweb, Tung Thih, Sunny Optical and Joyson We initiate on Wistron Neweb and Tung Thih with BUY ratings: We expect them to benefit from rising demand for ADAS (for both) and V2V (for Wistron Neweb). We upgrade Sunny Optical to BUY: Sunny Optical is the global leader in vehicle lenses, and we see multiple drivers for its lens business. We maintain our BUY rating on Joyson Electronics: we expect it to benefit from ADAS and infotainment demand, supported by its leading human machine interface (HMI) know-how and design capabilities. BNPP recommendations Note: Priced at close of business 29/1/2016. Share prices and TPs are in listing currency. Sources: FactSet; BNP Paribas estimates Our research is available on Thomson One, Bloomberg, TheMarkets.com, FactSet and on http://eqresearch.bnpparibas.com/index. Please contact your salesperson for authorisation. Please see the important notice on the inside back cover. PREPARED AND PUBLISHED BY NON-US BROKER-DEALER(S): BNP PARIBAS SECURITIES (TAIWAN) CO LTD. THIS MATERIAL HAS BEEN APPROVED FOR U.S DISTRIBUTION. ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES CAN BE FOUND AT APPENDIX ON PAGE 80 Laura Chen Masahiro Wakasugi Jenny Tsai [email protected][email protected][email protected]+886 2 8729 7052 +813 6377 2240 +8862 8729 7054 Jimmy Huang [email protected]+886 2 8729 7057 Company BBG code Rating Share price Target price Upside/downside Wistron NeWeb 6285 TT Buy 84.00 103.00 +22.6% Sunny Optical Technology 2382 HK Buy 16.54 20.00 +20.9% Joyson Electronics 600699 CH Buy 31.25 35.50 +13.6% Tung Thih Electronic 3552 TT Buy 371.50 420.00 +13.1%
Transcript
GREATER CHIN A TECHN OLOGY BNP PARIBAS Laura Chen
THIS REPORT IS SOLELY FOR RECIPIENTS WHO ARE NON-CHINESE INVESTORS LOCATED OUTSIDE THE PEOPLE'S REPUBLIC OF CHINA ("PRC"). WITHOUT THE PRIOR WRITTEN CONSENT OF BNP PARIBAS, THE RECIPIENTS OF THIS REPORT SHALL NOT FURTHER DISTRIBUTE SUCH REPORT OR DISCLOSE ANY INFORMATION THEREIN TO ANY OTHER PERSON INCLUDING BUT NOT LIMITED TO ANY OTHER NON-CHINESE INVESTORS OR ANY PERSON IN PRC. 30 JANUARY 2016 SECTOR REPORT
GREATER CHINA TECHNOLOGY
Automatic for the people
Auto electronics set for steady long-term growthWe expect electronic components to become increasingly prevalent in vehicles as they play ever moreimportant roles in enabling vehicles to be more connected, safer and greener. In addition, road safety willlikely remain a key issue in many countries; government mandates requiring advanced driver assistancesystem (ADAS) functions will likely be a significant driver of ADAS demand. Gartner expects 15% ofautomobiles produced in 2019 to have some form of ADAS, up from 6% in 2014. Transparency MarketResearch expects the ADAS market to grow at a 19.2% CAGR over 2014-2020.
Vehicle to vehicle/infrastructure technology to provide an extra leg of growthCurrent ADAS capabilities are limited by the effective range of onboard sensors and cameras. Hence,vehicle-to-vehicle (V2V) and vehicle-to-infrastructure (V2I) communication technology can considerablyextend the range of a vehicle’s reception on the road. In terms of safety features, V2V and V2I can warndrivers about approaching accidents, bad weather, traffic congestion, roadwork, etc. We think cellularwireless connectivity will be essential here; the auto-related cellular modem market is forecast to grow at a 25% CAGR in 2012-2020, according to Automotive Multimedia & Communications (AMCS).
Stock selection: We have BUYs on Wistron Neweb, Tung Thih, Sunny Optical and JoysonWe initiate on Wistron Neweb and Tung Thih with BUY ratings: We expect them to benefit from risingdemand for ADAS (for both) and V2V (for Wistron Neweb). We upgrade Sunny Optical to BUY: SunnyOptical is the global leader in vehicle lenses, and we see multiple drivers for its lens business. Wemaintain our BUY rating on Joyson Electronics: we expect it to benefit from ADAS and infotainmentdemand, supported by its leading human machine interface (HMI) know-how and design capabilities.
BNPP recommendations
Note: Priced at close of business 29/1/2016. Share prices and TPs are in listing currency. Sources: FactSet; BNP Paribas estimates
Our research is available on Thomson One, Bloomberg, TheMarkets.com, FactSet and on http://eqresearch.bnpparibas.com/index. Please contact your salesperson for authorisation. Please see the important notice on the inside back cover.
PREPARED AND PUBLISHED BY NON-US BROKER-DEALER(S): BNP PARIBAS SECURITIES (TAIWAN) CO LTD. THIS MATERIAL HAS BEEN APPROVED FOR U.S DISTRIBUTION. ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES CAN BE FOUND AT APPENDIX ON PAGE 80
Broadly speaking, consumer electronics technologies are becoming increasingly established, leading to a slowdown in demand for the technology sector, especially for electronic component names. However, we note a trend for increasing adoption of electronic content in vehicles. The automotive industry is increasingly reliant on electronic components that enable vehicles to be more connected, safer and greener.
Among electronic vehicle technologies, we particularly favour ADAS and V2V technologies as these are increasingly relevant to promote and improve passenger/driver experience and road safety. Supporting this view, Gartner expects 15% of automobiles made in 2019 to have some form of ADAS, up from 6% in 2014; and Transparency Market Research expects a 19.2% CAGR in ADAS volumes in 2014-20.
With this promising outlook for ADAS and V2V, we initiate on Wistron Neweb and Tung Thih with BUY ratings: we expect them to benefit from rising ADAS (for both) and V2V (for Wistron Neweb) demand. We also upgrade Sunny Optical to BUY as it is the global leader in vehicle lenses, for which we see multiple positive drivers. We maintain our BUY on Joyson, which we expect to benefit from ADAS and infotainment demand, supported by its leading human machine interface (HMI) know-how and design capabilities.
Catalyst
We believe the key growth factor for the industry will be the continued proliferation of ADAS/V2V-related functions driven by government support via regulation mandates and associated infrastructure development. Along with higher entry barriers, i.e., stringent requirement in technologies and longer product/design cycle, we expect this trend to act as a positive catalyst for sensor, camera, connectivity and electronics component names.
Among our coverage, we expect 1) WNC’s positive catalyst to be a rising demand of wireless communication for automobile, 2) TTE’s positive catalyst to be the ADAS products growth and adoption rate increasing from China Local and JV brand, 3) Sunny Optical’s positive catalyst to be the lens growth from automobile and IoT application.
For the longer term catalyst, we expect V2V/V2I, the extension technology derived from current ADAS functions, to be the key growth driver given current technology constraint of ADAS by which the effective range of onboard sensors and cameras are limited.
Risk to our call
Risks to our call include: 1) Weaker than expected ADAS growth/penetration; 2) Slower than expected regulation; and 3) Unexpected intense competition among peers.
CONTENTS Automotive: The next tech growth driver? ............................... 3
ADAS is fast expanding ................................................................. 4
Great opportunity but long product development cycle ..... 15
Connectivity, safety and environmental issues are key
While demand for consumer electronics such as smartphones, NBs and tablets is slowing, the adoption of electronic content in vehicles is rising, with electronics components ever more essential for vehicles to be more connected, safer and greener. We see these three factors driving the development of more sophisticated electronic modules and subsystems with more semiconductor content:
Connectivity: Embedded wireless modems installed for telematics services are now being designed into cars, making the connected car a gateway to the IoT.
Safety: Enhancing motor vehicle safety has long been a primary focus of automotive design, and regulation will be a key driver in the adoption of automated driving features.
Environmental issues: Fuel efficiency and emissions standards in various markets are urging innovation in powertrain design and the use of alternative fuels. These also heavily rely on electronics and semiconductor technology, such as the development of electric vehicles (EV) and associated infrastructures.
High entry barriers from specific requirements…
The qualification for automobile-related components such as ADAS is more stringent than for consumer electronics components since they need to be automotive grade and to meet specific requirements for durability and reliability. In addition, the automotive industry has widely adopted the ISO 26262 standard that defines the functional safety requirements for electronic systems in cars. As a result, electronics suppliers must establish processes to meet safety standards (e.g. design guidelines, software standards and reviews, and impact analysis procedures). These specific requirements mean explicit entry barriers all the way through the auto parts manufacturing supply chain.
Parameter Consumer Industrial Automotive Temperature 0 ⁰C → 40 ⁰C -10 ⁰C → 70 ⁰C -40 ⁰C → 85/150 ⁰C Operation Time 1-3 years 5-10 years Up to 15 years Humidity Low Environment 0% up to 100% Tolerated Field Failure Rates < 10% << 1% Target "zero failure" Documentation None Conditional Must Supply None Up to 5 years Up to 30 years
The product design cycle in automobile related components is another key difference with consumer electronics components. The specific requirements for automotive-grade components mean a significantly longer product design cycle than typical consumer electronics components – as long as four years, vs 12-18 months.
ADAS is fast expanding
We expect the automotive electronics market to continue to grow as advanced driver assistance systems (ADAS) technology is becoming increasingly relevant to improve passenger/driver experience and enhance road safety. Gartner expect 15% of automobiles produced in 2019 to have some form of ADAS, up from 6% in 2014. Transparency Market Research expects a 19.2% CAGR in ADAS volumes in 2014-20. Most leading automobile companies are already increasingly adopting ADAS functions for better safety and driving assistance (Exhibits 4 and 5 highlight the expected solid growth outlook for ADAS). Land departure warning systems (LDWS) and self-parking systems (SPAS) have clearly high and growing penetration, and this should be a positive trend for sensors, cameras, wifi modules and electronic components.
ADAS uses electronic sensors to detect and prevent potential driving hazards in order to enhance road safety. ADAS sensing systems can be divided broadly into six categories: 1) sensing cameras, 2) milliwave radars, 3) laser radars, 4) ultrasonic sensors, 5) one module fusion systems and 6) view cameras.
The systems employ a variety of sensors and data processing functions, such as ADAS control modules, camera modules, radars, lidar and ultrasonic modules, and dedicated short-range communication (DSRC) modules. We think ADAS has the greatest accident reduction potential of all automotive technologies for the next 10 years as they improve a driver’s ability to detect and respond to potential hazards while driving. ADAS functions monitor the vehicle’s surroundings and the driver’s behaviour, and provide information to the driver or as direct control inputs to enhance the safety and convenience of a vehicle’s operation. As motor vehicle safety is a top priority for many governments, we expect regulators and insurance companies to start seeing the enormous benefits ADAS can bring.
Exhibit 4: ADAS unit shipment and penetration rate Exhibit 5: ADAS market revenue breakdown by application
Exhibit 7: Summary of ADAS functions and technologies
Product Definition
1) Sensing Camera A camera that detects and analyses information from inside and outside the vehicle to alert the driver and activate automatic control if necessary
A) Monocular Camera An automotive sensing camera equipped with a monocular camera (digital camera)
B) Stereo Camera A camera system using two lenses placed side by side for the recognition of three-dimensional spacial information. Stereo cameras
are used primarily for middle- and long-distance detection such as adaptive cruise control (ACC) and forward collision warning (FCW) in automotive sensing camera systems.
C) IR Camera An automotive sensing camera system using near- and far-infrared cameras. Infrared (IR) camera systems are used primarily in night vision systems (NVS) and night sensing systems (NSS).
Far-infrared camera An automotive sensing camera system using far-infrared cameras. Far-infrared camera systems are used primarily in NVS and NSS.
Because of the difference in wavelength from near-infrared cameras, far-infrared cameras can detect the heat emitted by objects. They are hence suited to detecting pedestrians and animals at least 200 metres away.
Near-infrared camera An automotive sensing camera system using near-infrared cameras. Near-infrared camera systems are used primarily in NVS and night detection system (NDS). Because their wavelength is closer to that of optical wavelength than that of far-infrared cameras, near-infrared cameras are suited to detecting objects at night in the short to medium distance within reach of near-infrared light. A near-infrared camera requires a near-infrared light projector along with a camera module.
View camera + sensing camera A view camera with an added sensing function.
Single A view camera with a single camera unit with an added sensing function.
Surround View A surround view system consisting of several cameras with an added sensing function.
2) Milliwave Radar A radar system that detects its surroundings in the short, medium to long distance using milliwave, sub-milliwave and other radars.
A) Milliwave Radar A radar system that detects its surroundings using milliwaves (30-300GHz). Milliwave radars for automotive sensing systems currently use the 76-77GHz band (described as 77GHz in this report) and will use the 79GHz band in the future. Their main application is medium-distance detection such as ACC, advanced emergency braking system (AEBS) and FCW.
B) Sub-Milliwave Radar A radar system that detects its surroundings using sub-milliwaves (10-30GHz). Sub-milliwaves radars for automotive sensing systems currently use the 24GHz band and will use the 25-26GHz band in the future. Their main application is short- to medium-distance detection such as cross traffic alerts (CTA), blind spot detection (BSD) and lane change assist (LCA).
3) Laser Radar A radar system that detects its surroundings mainly using near-infrared laser light.
A) Laser Radar Its main application is short- to medium-distance detection such as ACC and FCW.
B) Laser Finder Its main application is surround sensing for self-driving and self-parking cars.
4) Ultrasonic Sensor A sensor collects information outside the vehicle and notifies the driver, mainly for parking support.
Ultrasonic Sensor A sensor that detects objects and measures their distance by emitting ultrasound waves and receiving the reflected waves.
Its main application is parking support such as parking assist systems, but the product is likely to be installed in driving support systems as well in the future.
5) One Module Fusion A camera and a milliwave or laser radar are integrated into a single module/system for detecting the surroundings, mainly in the short, medium to long distance.
Milliwave + Monocular Camera A product integrating a monocular camera and a milliwave radar (77GHz) into a single module.
Laser Radar + Monocular Camera A product integrating a monocular camera and a laser radar into a single module.
6) View Camera A barebones camera that facilitates parking and other maneuvers.
Sources: TSR; BNP Paribas
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Government regulation to support promising ADAS growth
As road safety becomes an imperative issue for many nations, government mandates requiring some sort of ADAS functions in new vehicles are likely to be a primary demand growth driver. The following table shows examples of current key regulatory and policy developments affecting ADAS capabilities.
Technological constraint of ADAS: The need for V2V/V2I
Current ADAS capabilities are limited by the effective range of onboard sensors and cameras. For instance, radar can only detect objects in a direct line of sight from the antenna, but cannot sense around corners or through hills. Also, the range of radar detection is limited with long-range radar systems using 77GHz (up to 150 metres) and short- and medium-range systems using 24GHz (normally 30-50 metres).
Exhibit 8: ADAS current adoption by major global auto OEMs
Brand ADAS system Functionality Audi Pre-Sense Plus AEB,ACC, BSD, FCW, LDW BMW Driver Assistance Package Plus AEB, ACC, BSD, LDW Chrysler SafetyTec AEB, ACC, BSD, CTA, FCW, LDW, LKA Ford Adaptive Cruise Control with Forward Collision Warning with Brake Support ACC, AEB, FCW General Motors Driver Confidence Package #2 AEB, ACC, BSD, CTA, FCW, LDW, LKA Lexus Advanced Pre-Collision System AEB, DAM, LKA, ACC, Pedestrian/Object Detection, Night Vision Subaru EyeSight AEB, ACC, LDW/LKA, LDW, FCW Volvo CitySafety AEB, ACC, FCW
Sources: Company data; BNP Paribas
Exhibit 9: ADAS encompass a growing list of safety features
Source: Intersil
Exhibit 10: Major timeline for mandatory automobile electronics by regions
Mandatory automobile electronics USA Europe Japan China Taiwan
ESC (electronic stability control) 2011 2014 2014 NA 2018
Sources: ARTC; BNP Paribas
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The development of Vehicle-to-Vehicle (V2V) and Vehicle-to-Infrastructure (V2I) communication technology considerably extends the range of a vehicle’s reception on the road. V2V and V2I are jointly known as V2X and are based on smart interconnected networks:
V2V enables vehicles to communicate with each other by passing data from one vehicle to another; much V2V technology relates to safety.
With V2I, data is passed between vehicles and infrastructure over cellular or Wi-Fi networks, or from fixed roadside locations.
For safety purposes, V2V/V2I can provide drivers with early warnings of potential accidents, upcoming bad weather, traffic congestion or roadworks. In terms of efficiency, there are potential appliances in regulating traffic flow by providing drivers with data on, for example, traffic lights and traffic analysis. We think cellular wireless connectivity will be essential here as the auto-related cellular modem market is forecast to grow at a 25% CAGR in 2012-20, according to Automotive Multimedia & Communications (AMCS).
For connected vehicles, each vehicle acts as a sender, receiver and potentially intermediate in relation to information to/from a designated network or transportation unit, which then uses the information to ensure safety and smooth traffic operation. There are two factors that can impact the level of connectivity: traffic stream, eg, the traffic flow/density and market penetration; and the technology per se, eg, transmission range and interference caused by infrastructure.
In contrast, sensor-based vehicles use sensors (e.g. cameras, radar, lidar or ultrasonic), positioning systems, and connectivity to gather information and perform driving functions to varying extents without direct human control, including lane departure warnings, adaptive cruise control and emerging braking. That is, they do not rely on sending or receiving information from or to the vehicle itself.
The following tables should help clarify the two technologies and these two different technologies can be compensated in different occasions.
Exhibit 11: What is V2V & V2I
Source: SAFEPOT project funded by the European Commission
V2V : Vehicle to Vehicle
V2I : Vehicle to Infrastructure
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Exhibit 12: Example of how V2V/V2I works Exhibit 13: Example V2V/V2I in inner city
Sources: Wards Auto; Honda Source: 4erevolution
Exhibit 14: OEM Telematics ECU: Global Cellular Modern
Much the same as with ADAS, we think government regulation will play an essential role in the implementation of V2V & V2I and, to an extent, autonomous driving technology. The legislation framework for the use of V2V/V2I is in very early stages, but there are some signs that could result in regulatory support. For example, the US Department of Transportation (USDOT) has launched a Connected Vehicle Safety Pilot Program and the National Highway Traffic Safety Administration (NHTSA) will treat data from the pilot as important input for determining a Notice of Regulatory Intent (NRI) regarding V2V safety.
With regulations and associated infrastructure development still in early stages – but both needed for V2V and V2I (and the full potential of ADAS) to be fully achieved – a key risk is that the complexities of government regulations and associated infrastructure investment budget and spending lead to significant delays.
Exhibit 15: Examples of connected vehicle application Application Example Application Example
V2V Safety Emergency Electronic Brake Lights (EEBL) Mobility Advanced Traveller Information System
Forward Collision Warning (FCW) Intelligent Traffic Signal System (I-SIG)
Intersection Movement Assist (IMA) Signal Priority (transit, freight)
Left Turn Assist (LTA) Mobile Accessible Pedestrian Signal System (PED-SIG)
Eco-ICM Decision Support System Work Zone Traveller Information
Sources: US Department of Transportation; Centre of Automotive Research
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Implications: positive for sensors, cameras, wifi modules & electronic components
With a backdrop of rising ADAS adoption driven by regulatory requirements and supply chain push, sensor technology is increasingly essential for ADAS-related product development. We expect growth to be driven over the next few years by more widespread use of more mature ADAS technologies with lower costs and increasing reliability. According to Techno Systems Research (TSR), the overall sensing system market reached c309.85m units in volume terms (up 13% y-y) and USD5.9b in value terms (up 28% y-y) in 2015. TSR forecasts an 8% volume CAGRs and a 13% value CAGR in 2015-20. The market for sensing cameras, which can be used in many applications, is likely to grow significantly hereafter.
Exhibit 16: Current relevant regulations for V2V, V2I and Autonomy Item Date Country Activities Milestone
Heavy Vehicle V2V 2015 US Complete research necessary to support an agency decision on heavy vehicle V2V.
Agency decision
Heavy Vehicle Speed Limiters 2015 US Develop a coordinated NPRM with the Federal Motor Carrier Safety Administration.
Issue NPRM
Light Vehicle V2V 2016 US Initiate rulemaking that would require V2V devices in new light vehicles.
Issue NPRM (notice of proposed rulemaking)
Heavy Vehicle Crash Avoidance Technologies 2016 US Evaluate the range of relevant technologies.
Agency decision
Electronic Control Systems Reliability 2015 US Complete MAP-21 required Report to Congress on the highest priority areas with regard to the need for safety standards for electronic systems in passenger vehicles.
Report to Congress
Electronic Control Systems Reliability 2016 US Complete research to support an agency decision on possible regulatory options for enhanced functional safety requirements for electronic control systems.
Agency decision
Pedestrian Collision Avoidance and Mitigation (PCAM)
2016 US Develop objective test procedures and mannequin for assessment of PCAM systems.
Agency decision
Rear visibility 2018 US Requires all vehicles under 10,000 pounds, including buses and trucks, manufactured on or after May 1, 2018, with a compulsory field of view of a 10-foot by 20-foot zone
Final rule issuance
LDW 2013 EU Adopted to Vehicle Safety Rating N/A
AEB(Autonomous Emergency Braking System) 2014 EU Adopted to Vehicle Safety Rating N/A
Electronic Stability Program 2014 EU New vehicles manufactured after Nov 2014 are required to install ESP
N/A
Lane Keep Assist 2016 EU Adopted to Vehicle Safety Rating N/A
Speed Assistance Systems (SAS) protocol, with consideration given to nomad system integration, traffic sign recognition, conditional speed limits, traffic lights recognition, digital map data management, etc.
2016 EU Adopted to Vehicle Safety Rating N/A
Partial automated driving function 2017 EU Campaign N/A
AEB VRU under pedestrians and pedal cyclists in daylight and obscure lighting conditions
2018 EU Adopted to Vehicle Safety Rating N/A
AEB for pedestrian 2016 Japan Start experiment N/A
LDW 2014 Japan Start experiment N/A
Side view 2015 Japan Start experiment N/A
Rear visibility 2015 Japan Start experiment N/A
Sources: USDOP; NHSTA; NCAP; JNCAP; Company data; BNP Paribas
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Either sensor-based or connected-vehicle technologies can provide enhancement of mobility and safety, which will help drive adoption of both systems to an extent. We expect sensor-based and connected-vehicle technologies to converge as automotive and technology companies are investing in both connected and autonomous/sensor technologies and affiliated applications. In the long term, we believe the evolution of these advanced technologies will trigger a rebalancing of the entire automotive supply chain, with technology firms stepping up into more significant roles.
Exhibit 17: Overall market of sensing system (by value base)
Exhibit 18: Overall market of sensing system (by volume base)
(USD m) Sensing Camera Milliwave RadarLaser Radar One Module FusionUltrasonic Sensor View Camera. etc
CAGR：+13%
0
100,000
200,000
300,000
400,000
500,000
600,000
CY11
CY12
CY13
CY14
CY15
CY16E
CY17E
CY18E
CY19E
CY20E
CY21E
CY22E
('000 pcs) Sensing Camera Milliwave RadarLaser Radar One Module FusionUltrasonic Sensor View Camera. etc
CAGR：+8%
ADAS Evolution TimelineTechnologies ECU
Camera:- Mono- Stereo- ToF- IR
* Progression will be in incremental steps of automated assistance towards fully automated vehicles - e.g. emergency braking, automated parking….
Pedestrian Det.
Radar/Lidar
Ultrasonic
ACC
Brake Assist
Blind Spot
Park Assist
Lane Assist
Traffic Sign Rec.
Auto High Beam
Dynamic Lighting
Bird/Surround View
Night Vision
Multifunction Camera
SensorFusion
Highly Automated Driving Assistance based on fusion of
comprehensive environment information
2010 2015 2020
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The following is extracted from a BNP Paribas Japan report on Nidec “Deep dive shows ADAS potential”, 26 Jan 2016 by Masahiro Wakasugi.
Major components of sensing systems include:
1 Systems-on-clip (SoC) devices for ADAS,
2 Image sensors,
3 Lens modules and
4 Monolithic microwave integrated circuits (MMICs) for radars.
1) through 3) are major components of sensing camera systems, while 4) is a major component of milliwave radars and laser radars.
SoCs and DSPs for ADAS The five largest manufacturers of image-processing and recognition SoCs and digital signal processors (DSPs) for ADAS sensing cameras in 2015 in volume terms were Mobileye, Texas Instruments, Xilinx, Ambarella and Renesas Electronics, in that order. The maker of the “EyeQ” series of SoCs for sensing cameras, Mobileye commands a large market share of around 46% in volume terms.
In addition to “EyeQ3,” a current main SoC product, Mobileye, the market leader, supplies distinct products such as AEBS using only monocular cameras for Audi Q7 and an animal detection feature for Volvo XC90. Moreover, Mobileye is developing a new product named “EyeQ4” and plans to begin full-scale shipments in 2018. EyeQ4 will feature three cameras performing all (long, middle and short distance) sensing without milliwave radars or laser radars.
Unlike typical systems that use milliwave radars for long and medium distance and cameras for short distance, EyeQ4 is designed to perform all sensing functions using cameras. While OEM automakers and design concept by Tier 1 suppliers are likely to have the final say on whether to use cameras exclusively or in conjunction with radars, ZF TRW and Magna appear to intend to continue using Mobileye products hereafter.
Exhibit 20: ADAS sensor demand, 2012 vs 2017E Exhibit 21: Auto OEMs camera demand by parking application
From Japanese companies, Renesas Electronics of Japan is the fifth largest maker of SoCs and DSPs. The company supplies SoCs for surround view systems to Nissan and seeks hereafter to expand sales of its integrated SoC “R-Car’ series for ADAS that incorporate frontal sensing.
Image sensors The five largest manufacturers of image-processing and recognition SoCs and digital signal processors (DSPs) for ADAS sensing cameras in 2015 in volume terms were Mobileye, Texas Instruments, Xilinx, Ambarella and Renesas Electronics, in that order. The maker of the “EyeQ” series of SoCs for sensing cameras, Mobileye commands a large market share of around 46% in volume terms.
Lens modules The seven biggest manufacturers of lens modules in 2015 in volume terms were Sunny, Fuji Film, Gentex, Nidec Sankyo, Kyocera, Ricoh and Hitachi Maxell, in that order. Sunny’s lens has been chosen in Mobileye’s reference design (as was ON Semiconductor’s image sensor), a major factor behind the company’s leading market share.
Being selected in Mobileye’s reference design has recently enabled sensing camera component makers to capture a large share of the market.
MMICs for radars Among monolithic microwave integrated circuits (MMICs) for radars, we look at two main products: MMICs for 77GHz radars and those for 24GHz radars. The five largest manufacturers of MMICs for 77GHz radars in 2015 in volume terms were
Exhibit 22: SoC and DSP market share by manufacturer
Sources: TSR; BNP Paribas
Exhibit 23: Image sensor market share by manufacturer Exhibit 24: Lens module market share by manufacturer
Source: TSR Source: TSR
Mobileye45.8%
TI13.7%
Xilinx6.6%
Ambarella5.7%
Renesas5.1%
Toshiba4.6%
Hitachi3.3%
Freescale2.3%
ADI2.4%
Others10.4%
SoC/DSP Market Share (Volume based, CY15)
On Semiconductor
56.8%
Gentex13.1%
Sony8.6%
OmniVIsion6.7%
Melexis4.6%
Others10.2%
Sunny42.8%
Fujifilm15.1%
Gentex13.3%
Nidec Sankyo6.7%
Kyocera Opt4.2%
Ricoh Opt2.7%
Hitachi Maxell1.8%
Others13.4%
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Freescale Semiconductor, Infineon Technologies, TriQuint Semiconductor (Qorvo), United Monolithic Semiconductors (UMS) and Mitsubishi Electric, in that order.
Products for Continental, which controls a large share of the sensing system market, particularly in milliwave radars, account for the bulk of Freescale’s products, contributing to its high share in the MMIC market. Producing MMICs based on silicon germanium (SiGe), a semiconductor material, Freescale is more cost competitive than manufacturers of MMICs based on gallium arsenide (GaAs), which tend to be high-cost. The company seeks to enhance its cost competitiveness further hereafter by launching MMICs based on a complementary metal–oxide–semiconductor (CMOS) process.
The biggest manufacturer of MMICs for 24GHz radars in 2015 in volume terms was UMS, followed by Sumitomo Electric Industries. However, given the upcoming ban in 2018 on the use of 24GHz ultra-wideband (UWB) radars in Europe, the current major market, the 24GHz market is no longer likely to grow. Instead, 77GHz milliwave radars are likely to grow hereafter, resulting in growth by MMICs for 77GHz radars.
Exhibit 25: 77GHz MMIC market share by manufacturer Exhibit 26: 24GHz MMIC market share by manufacturer
Source: TSR Source: TSR
We also see rising demand for wireless communication for automobiles thanks to the V2V/V2I trend. Driven by end-consumer demand for a smartphone ‘experience’ embedded in their vehicles, we see a growing opportunity in infotainment. However, the different design cycles for automotive infotainment systems (two to three years vs six month for smartphones etc as explained earlier), OEMs face a major challenge in meeting demand given the large discrepancy in lead times between the two industries. This is leading to tier-1 hardware and software suppliers updating systems ‘over the air’ to provide new features and appearances, as well as updating hardware in the factory over the course of a vehicle sales cycle. The former clearly requires infotainment devices to have wireless modules.
Freescale55.9%
Infineon19.2%
TriQuint8.8%
UMS7.5%
Mitsubishi Electric3.1%
Others5.5%
UMS82.4%
Sumitomo Electric16.8%
Others0.8%
Exhibit 27: In-vehicle Infotainment revenue and growth
Sources: HIS; BNP Paribas
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(y-y %)(USD b) IVI revenue (LHS) IVI revenue growth (RHS)
BNP PARIBAS 30 JANUARY 2016 14
GREATER CHINA TECHNOLOGY Laura Chen
Great opportunity but long product development cycle
We expect growth in electronics parts for the auto market to lead to a shift in the supply chain towards those consumer electronics companies that can leverage large volume scale and faster time to market thanks to strong operational performances, increased flexibility and products that improve in-cabin convenience and automation.
However, safety critical and complex systems require sophisticated software development and verification that have resulted in longer development cycles, especially for many of the systems/components that need to work perfectly even in the harsh environments of brake or injection systems. In addition, supply chain relationships and ecosystems in the auto industry are typically long-standing and hard to break into. As such, we prefer names that already have a track record with good progress and steady investment in the market.
We initiate on Wistron Neweb and Tung Thih at BUY, upgrade Sunny Optical to BUY as the global leading vehicle lens company and maintain our BUY on Joyson.
Exhibit 28: Summary – electronic auto-related players under coverage
Company Ticker Product mix Contribution from auto Earning growth CAGR (2015-2017)
We initiate on Wistron Neweb and Tung Thih with BUY ratings. We upgrade Sunny Optical to BUY. We like its global lead in vehicle lens business. We maintain our BUY rating on Joyson.
Wistron Neweb (6285 TT, BUY, TP TWD103)
Wistron Neweb’s (WNC) auto-related products include radars, satellite radios and wireless/communication modules. WNC has worked with multiple tier-one auto part companies with key clients like Sirus XM, and tier one auto part suppliers such as Harman, Valeo and Intercontinental. Thanks to the rising trend of ADAS and V2V, WNC is seeing robust growth in its auto-related business.
In non-auto-related business, WNC has provided smart metre solutions for US and Japanese utility companies and we expect it to penetrate Europe in 2016. The implementation of smart metres helps governments to reduce emissions, secure energy supplies, reduce carbon footprints, and provide quality services to end users.
Thanks to the positive growth in automobile- and M2M-related products, we expect WNC to see some of its strongest revenue growth momentum in these segments (we forecast a total revenue CAGR of 16% in 2015-17E). We expect WMC’s sales revenue contribution from auto and M2M business to reach >30% in 2016E from 27% in 2015E. Our TP of TWD 103 is based on 15x FY16E PE, vs the global peer average of 15x and regional peer average of 18x. We believe WNC’s current valuation is attractive and, with its solid earnings growth outlook, we reiterate our BUY rating with a TP of TWD103, implying 22.6% upside.
Tung Thih Electronic (3552 TT, Buy, TP of TWD 420)
We believe that Tung Thih Electronic should benefit from ADAS system growth with its current products offering including ultrasonic parking assist systems, burglar proof equipment, multifunctional electronic rear-view mirrors, CCD/CMOS car cameras, AVM (around view monitoring) systems and TPMS (Tier Pressure Measuring System). Its revenue mix in 2014 is: 72% parking assist systems, 12% CMOS & MDS, 15% remote key entry systems and TPMS 1%. We believe Tung Thih is positioned to be a player as one of the global top three rear-view camera suppliers for parking sensors and with support from auto OEM manufacturers.
We forecast a 33% earnings CAGR thanks to (1) product launches along with continued penetration into new and old customer base and (2) margin improvement led by favourable product mix and cost savings through in-house automation. We initiate with a BUY rating and a TP of TWD420, based on 1x FY16 PEG, implying 13.1% upside.
Sunny Optical (2382 HK, Buy, TP of HKD 20)
Sunny is current the global leader in vehicle lens supply with about a 35% volume market share. Key clients include: Mobileye, Gentex, TRW, Valeo, Bosch and Delphi. Vehicle lens business contributes about 5-6% of revenue, but with the increasing ADAS penetration and demand driven by safety regulations, we see a solid growth outlook. Besides, Sunny has started working on machine vision and other IoT applications. It has invested in several start-up solution providers such as Movidius, Mantis Vision and Light, focusing in 3D image, precision manufacturing and new camera applications. These could provide more catalysts in the longer term following its success in the mobile phone space.
In light of Sunny’s positive growth outlook in lens and automobile and IoT applications, we have raised our 2016E/2017E earnings by 7%/19%. While we think the slow smartphone market could remain a near-term headwind, we see more upside in non-smartphone markets with improvment in its lens shipment to support margin sustainability over longer term. Sunny’s share price has already pulled back c8% over the past month (vs MSCI Hong Kong Index downc11%); we think the current share price is a good entry point, and upgrade to BUY with a TP of HKD20 (18x our 2016/2017 average EPS, implies 20.9% upside). We raise our target PER
BNP PARIBAS 30 JANUARY 2016 17
GREATER CHINA TECHNOLOGY Laura Chen
from 16x to 18x (the high-end of its last three year PER range) in light of its positive long-term growth potential in lens and non-smartphone business.
Joyson (600699CH, BUY, TP RMB35.5)
We believe Joyson Electronics stands to benefit from potential ADAS and infotainment demand, supported by its leading human machine interface (HMI) know-how and design ability. HMI has been adopted in automotives as a way for drivers to receive information and command orders from/to vehicles. With the ongoing integration of advanced computer systems in vehicles, interfaces have become more complex. We think both ADAS and infotainment require advanced HMI designs to enhance user experience. We expect HMI to play a more important role in auto electronics as a result of the growing popularity of intelligent cars (smart cars) and infotainment/ADAS demand.
HMI business has accounted for more than 50% of Joyson’s total revenue since 2012 and we expect the sales contribution to grow by 25-30% y-y in 2016-17. We forecast an earnings CAGR of 39% in 2015-17 on the back of increasing HMI penetration, new opportunity from both EV BMS and industrial automation in China, and gross margin expansion from favourable product mix. Joyson is conducting overseas acquisitions and we reiterate our BUY rating with a TP of RMB35.5 based on 32x FY16E PE, implying 13.6% upside.
BNP PARIBAS 30 JANUARY 2016 18
Wistr on NeWeb 6285 TT BNP PARIBAS Laura Chen
30 JANUARY 2016 TAIWAN / TECHNOLOGY HARDWARE & EQUIPMENT
WISTRON NEWEB 6285 TT
Safely on the road to IOT KEY STOCK DATA
Sources: FactSet estimates; BNP Paribas estimates
Riding on an upward trend of IoT WNC is involved in the manufacture of communication devices, including satellite communication, wireless networking and embedded antenna. The company has penetrated different market segments, such as connected-car modules and smart meter wireless communication. We expect WNC’s sales and earnings to see a CAGR of 16% and 21% over 2015-2017, supported by wireless module/radar for autos, capacity expansion, and a potential new market in machine-to-machine (M2M) applications.
Solid growth in auto-related business WNC’s auto-related products include radar, satellite radio and wireless/communication module. WNC has worked with multiple tier-one clients such as SiriusXM, a satellite radio provider in the US auto market, and major auto part companies such as Harman, Valeo, and Intercontinental. On the back of rising trends of Advanced Driver Assistance (ADAS) or Vehicle-to-Vehicle (V2V), WNC is witnessing robust growth in the auto market.
Robust outlook in smart meter and M2M applications WNC has also provided smart meter solutions for US and Japanese utility companies, and we expect it to further penetrate Europe in 2016. We believe the implementation of smart meters will be advantageous for governments seeking to reduce emissions, secure energy supply, reduce their carbon footprint and provide quality service to the end-user. Backed by the positive growth trends in automobile and M2M, one of the strongest growth drivers for WNC, we estimate a 37% revenue CAGR in this segment during 2015-17.
Attractive valuation; BUY on positive long-term trend Our TP of TWD103 is based on 15x FY16E P/E, in line with its global peer average of 15x and regional peers on 18x, based on our and Bloomberg consensus estimates. It implies 22.6% upside potential. We believe at the current 12x 2016E P/E, WNC’s valuation is attractive. We also support our TP with a DCF analysis, which assumes perpetual growth of 2% and a WACC of 11.86%. With its solid earnings growth outlook, we initiate coverage with a BUY rating.
We initiate coverage on Wistron NeWeb (WNC) with a BUY rating and TWD103 TP, implying 22.6% upside potential. Our TP is based on 15x (historical mid-range) 2016E EPS, vs its global peers’ average of 15x and regional peers at 18x. Backed by the rising trend of IoT, increasing demand for ADAS and connected cars, we forecast WNC sales and earnings to see CAGRs of 16% and 21% over 2015-2017. We also believe growth in wireless module/radar for autos, capacity expansion, and a potential new market in M2M applications will drive revenue and earnings growth.
We expect solid growth in auto-related business as WNC has supplied satellite radios, connectivity modules, digital radio solutions and radar sensors to automobiles. But, we believe WNC’s smart meter and the M2M products will serve as one of the strongest growth drivers as governments promote installation of smart meters to better manage efficient energy usage.
Finally, we anticipate WNC’s smart home business, which accounts for 60-70% of total revenue, to steadily grow given more broadband coverage and increasing LTE popularity globally. In particular, we believe WNC’s higher exposure to the US market in this business will support its outperformance of peers, as the US economy is showing relative resilience to other countries/regions.
Catalyst
We believe the following catalysts will drive the current share price to our TP of TWD103.
1. solid growth in auto-related and M2M business
2. steady growth in smart home business
Furthermore, as ADAS-related functions are a major part of new automotive technologies to reduce accidents, this should support earnings over the longer term.
Risk to our call
The risks to our call include 1) weaker than expected ADAS growth/penetration, 2) slower-than-expected regulation timeframe, and 3) unexpected market share losses to its competitors.
Company background Key assumptions
Founded in 1996, Wistron NeWeb Corporation (WNC) is a leading manufacturing company in Taiwan specialising in professional networking equipment, including RF antenna design and manufacturing, communication software and hardware integration, mechanism and system design, and system integration and interface development.
2016E 2017E
Auto-related growth (%) 37.5 35.7
GM (%) 13.7 14.0
OPM (%) 4.8 5.2
Key executives Age Joined Title Hsieh Hung-Po "Haydn" 60 - Chairman/CEO Lee Liang-Hsiang - 2005 President - Business Group Sung Fen-Chiung - 2002 Chief Financial Officer
The two key factors in our sensitivity are auto-related sales growth and operating profit margin (OPM).
For every 2% change in auto-related sales growth, 2016E/2017E EPS would change by 0.6%/0.7%, all else being equal.
For every 1% change in OPM, 2016E/2017E EPS would change by 26.2%/24.3% all else being equal.
Smart Home - 65.9%
Auto-related - 25.2%
Mobile-related - 5.5%
Others - 3.3%
BNP PARIBAS 30 JANUARY 2016 20
Wistron NeWeb 6285 TT Laura Chen
Initiate coverage at BUY with TP of TWD103
Executive summary
We initiate coverage on Wistron NeWeb (WNC), a rising IoT player, with a BUY rating and TWD103 TP, implying 22.6% upside potential. Founded in 1996, WNC is involved in the manufacture of communication devices, including satellite communication, wireless networking, embedded antenna, and mobile handset products. The company specialises in 1) RF antenna design and manufacturing, 2) communication software and hardware integration, 3) mechanism and system design and 4) integration and interface development.
For many years, US and European service providers have been WNC’s main customers, with the company focusing mainly on telecommunication, satellite TV and satellite radio services. The company has been working on auto-related products for more than five years and boasts of providing satellite solutions to clients such as SiriusXM, a satellite radio provider in the US. With its technological expertise in wireless communication and capabilities in mechanical design, WNC has successfully penetrated the automobile market; many of its key clients are tier one auto part makers such as Harman, Valeo and Intercontinental. Aside from auto, it has also moved into the machine-to-machine (M2M) business for industrial applications such as smart meters. In our view, auto and M2M growth will be the key catalysts for revenue growth in the coming years.
The stock has outperformed MSCI Taiwan by c52% over the past year, driven by strong earnings growth and new forays in auto and M2M. We expect WNC’s earnings to see a CAGR of 21% over 2015-17E, and believe the current 12x FY16E P/E is still attractive. We see a solid upside potential for its share price due to its long-term growth prospects, and think its exposure to auto business will help the company outperform in the downstream tech space.
A solid player in IoT
We see WNC as a major beneficiary of the emerging theme of IoT and we expect ADAS/V2V and industrial connectivity applications to expand continuously, driven by increasing government regulation and wider broadband infrastructure deployment. WNC has worked with multiple tier-one auto part companies. According to Gartner forecasts, overall ADAS penetration in the auto sector will reach 15% in 2019. We expect WNC’s sales and profit to enjoy 16% and 21% CAGRs over 2015-2017E, supported by continuing growth in wireless communication modules for autos, capacity expansion, and growth potential in new markets in the M2M space.
Improving product mix and higher entry barrier in auto electronics business to support GM
As WNC focused more on the vertical market over the past few years, it helped the company achieve a stable gross margin (GM). With increasing auto and M2M business exposure, which have better than corporate average GM, we believe WNC should see steady earnings and margin increases in the long run.
Attractive valuation
Our TWD103 is based on 15x FY16E P/E, vs its global peers’ average of 15x and regional peers at 18x, based on our and Bloomberg consensus estimates. We believe the current valuation is attractive, even after its outperformance in the last 12 months. Our TP is also supported by our underlying DCF valuation check, which assumes a perpetual growth rate of 2% and a WACC of 11.86%, equating to 15x 2016E EPS.
Priced as of 29 Jan for non-US and non-EU stocks; 28 Jan for US and EU stocks Sources:*BNP Paribas estimates, others are Bloomberg consensus
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Wistron Neweb*
Tung Thih*
Joyson*
Sunny Optical*
Sercomm CorporationCheng Uei
Precision
BizlinkHu Lane
Cub Elecparts
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Sunny Optical*
DensoValeo
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Gentex
Brembo
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BNP PARIBAS 30 JANUARY 2016 22
Wistron NeWeb 6285 TT Laura Chen
Potential catalyst 1: Solid growth in auto-related and M2M business
Auto-related business
On the back of increasing demand for ADAS and connected cars, WNC is seeing solid growth in its auto-related business. WNC provides satellite radio, connectivity modules (wifi +BT), digital radio solutions and radar sensors for cars. Key clients include SiriusXM and tier one auto part suppliers such as Harman, Valeo, Intercontinental, etc. We see increasing demand for Advanced Driver Assistance Systems (ADAS), which we believe will be a growth driver for WNC.
ADAS are systems that use electronic sensors to detect and prevent potential driving hazards in order to enhance road safety. The systems employ a variety of sensors and data processing functions, such as ADAS control modules, camera modules, radar, lidar and ultrasonic modules, and dedicated short-range communication (DSRC) modules, which in our view will have the greatest accident reduction potential of all automotive technologies over the next 10 years, as these systems will improve the driver’s ability to detect and respond to potential hazards while the vehicle is in motion.
Priced as of 29 Jan, 2016 for non-US and non-EU stocks; 28 Jan, 2016 for US and EU stocks Sources:*BNP Paribas estimates, others are Bloomberg consensus
BNP PARIBAS 30 JANUARY 2016 23
Wistron NeWeb 6285 TT Laura Chen
Exhibit 7: ADAS electronics market growth, 2014-2018E Exhibit 8: ADAS unit shipment and penetration rate
* Progression will be in incremental steps of automated assistance towards fully automated vehicles - e.g. emergency braking, automated parking….
Traffic Sign Rec.
Auto High Beam
Dynamic Lighting
Bird/Surround View
Night Vision
Pedestrian Det.
Radar/Lidar
Ultrasonic
ACC
Brake Assist
Blind Spot
Park Assist
Lane Assist
Multifunction Camera
SensorFusion
Highly Automated Driving Assistance based on fusion of
comprehensive environment information
2010 2015 2020
BNP PARIBAS 30 JANUARY 2016 24
Wistron NeWeb 6285 TT Laura Chen
Current ADAS capabilities are limited by the effective range of on-board sensors and cameras due to current technology constraint. For instance, radar can only detect objects in a direct line of sight from the antenna, but it is unable to sense around corners or through hills. Yet, ranges of radar detection are limited where the long-range radar systems use 77 GHz (up to 150metres) while the short-and-medium range systems use 24 GHz (normally 30-50metres).
Hence, the development of Vehicle-to-Vehicle (V2V) and Vehicle-to-Infrastructure (V2I) communication technology will extend the range of a vehicle’s reception on the road considerably. We expect government regulation and relevant infrastructure investments to drive the adoption of V2V/V2I communication standards in the beginning. Countries like the US, and Japan, and continental Europe have been working in parallel towards this aim and there are increasing numbers of organisations, such as the Car-2-Car Communication Consortium and the Japan Automobile Research Institute, devoted to establishing global standards for dedicated short-range communication (DSRC) for V2V/V2I.
WNC’s solution for ADAS-related applications includes automotive radar (e.g. front detection radar sensors, BSD+ RCTA radar, and lane change assistant detection radar), automotive Wi-Fi/BT modules and automotive 4G modules. Its technology in microwave radar is typically more insensitive to inclement weather at relatively short ranges and it can be utilised in traffic management applications. In addition, this technology can directly measure speed across multiple lanes. These features are better than most of the ultrasonic and camera sensors currently on the market that are the most common solutions for ADAS. For instance, many environmental conditions, such as temperature changes, extreme air turbulence, fog, rain, and snow; vehicle shadows; sun glare; vehicle projections into adjacent lanes; occlusion; day-to-night transition; vehicle/road contrast; and water, salt grime, icicles, and cobwebs on camera lenses can affect the performance of ultrasonic and camera sensors. For ultrasonic-type sensors, large pulse repetition periods may degrade occupancy measurement on roads where vehicles travel at moderate to high speeds.
Along with its expertise in wireless communication, relationships with major tier-one auto part makers and previous experience in mobile phones, we think WNC should be able to further penetrate telematics or infotainment markets in the longer term.
24GHz Lane Change Assistant Detection Radar Sensor
Automotive Bluetooth Module
Automotive Wi-Fi Bluetooth Module
4G Wireless Communication Module
Features 1. A single sensor for forward vehicle and object detection
1. Three functions in one pair of sensors, including lane change assistant detection, rear cross-traffic alert, and rear pre-crash detection
1. Four functions in one pair of sensors, including blind spot detection (BSD), lane change assistance (LCA), rear cross traffic alert (RCTA), and door open warning (DOW)
1. Standards compliance: Bluetooth 3.0 + EDR
1. Standards compliance: IEEE802.11b/g + Bluetooth 2.1 + EDR
1. RF interface: primary, diversity Tx/Rx, and GNSS
2. Automotive-grade with proven track record by multiple car makers
2. automotive-grade with proven track record by multiple car makers
2. Operational in most weather conditions with proven performance through different field tests
2. Bluetooth audio interface: I2S & PCM
2. Interface: 4-bit SDIO transfer modes at full clock range of 0 to 50 MHz
2. 4G supported bands: NA, EU, CN, and ROW skus
3. Operational in all weather conditions
3. operational in all weather conditions
3. Capable of detection of rearward vehicles up to 100 m
3. Ambient operating temperature: –40 °C to +85 °C
Sources: WNC; BNP Paribas
BNP PARIBAS 30 JANUARY 2016 25
Wistron NeWeb 6285 TT Laura Chen
M2M business- smart meter and IoT applications in an industrial setting
Smart meters and M2M products are another potential growth engine for WNC. WNC has been working with utility companies in the US, Europe and Japan on their smart meter projects. WNC provides a total smart meter solution that includes: a M2M 3G connectivity module, a low voltage communication board, a US communication board, an advanced communication hub and SMCC communication hub.
The implementation of smart meters will be advantageous for governments seeking to reduce emissions, secure energy supply, reduce their carbon footprint and provide quality service to the end-user. Governments want to promote the installation of smart meters as they foresee better management and efficient usage of energy, which will subsequently foster competition. For instance, some countries in Europe, such as Italy, Sweden, and France, have opted for rapid deployment of these technologies, owing to European Union directives for energy end-use efficiency by 2020. Furthermore, growth in smart grid technologies should give rise to smart meters, in our view. Smart meters need to be installed in conjunction with some type of communication infrastructure to get the data back to the utility. Smart grid technologies include communication networks, advanced sensors and monitoring devices, which form the foundation for utilities to generate and deliver power, and for consumers to understand and control their electricity consumption.
The global M2M/smart meters market is projected by ABI to register a CAGR of 29.2% between 2014 and 2019, to reach USD36.2b by 2019 from USD7.7b in 2014.
Aside from smart meters, WNC is also seeking more opportunities in industrial IoT based on its technology in wireless modules. On the back of our expectations of positive growth trends in automobile and M2M, we expect WNC’s revenue in this segment to reach a CAGR of 37% during 2015-2017E, proving to be one of the strongest growth drivers of the company.
Exhibit 11: Cellular M2M global revenue trend
Sources: ABI estimates; BNP Paribas
Exhibit 12: WNC’s smart meter solutions
Category Smart Meter Smart Meter Smart Meter Smart Meter Model Name LV CB (Low Voltage
Communication Board) US CB (US Communication Board)
Advanced Communication Hub SMCC Communication Hub
Features 1. Supports WCDMA B1/6 1. Supports CDMA for WAN connectivity
1. Superior radio-frequency performance 1. Sub-GHz radio daughter card for SMCC used in the I-210C Meter
2. Supports FOTA (Firmware Over-The-Air) for firmware upgrades
2. Tamper detection once the meter is broken
2. Semi-industrial design to support ambient operational temperature range: –20 ℃ to 55 ℃
3. 3G/4G (compliant with Cat. 4) communication
3. Supports ECHONET Lite 3. Supports FOTA (Firmware Over-The-Air) for firmware upgrades
3. Supports WCDMA B1/8, GSM 900 for WAN connectivity
3. Low-power and low-data-rate sub-GHz radio technology
Potential catalyst 2: Smart home business to see steady growth
WNC’s smart home business is about 60-70% of its 2015E sales; it provides IP Cam, LTE outdoor CPE/IAD/Small cell and home security solutions for operators/system integrators in developed countries such as North America and Japan. With more broadband coverage and increasing LTE popularity globally, the smart home growth opportunity looks promising, as it can integrate more services in real-time image analysis, security control, etc. Despite the uncertain global economy, we expect WNC’s smart home business to remain healthy, driven by broadband infrastructure demand. In particular, most of its smart home business adopts telco operators and enterprise as sales channels (over 80%). Given WNC’s higher exposure to the US market (we estimate over 40% of its smart home business sales in 2015) we would expect the company to outperform its peers as the US economy is showing relative resilience compared with other countries.
Mobile Communication products- slow growth but limited downside risk
WNC still has some legacy products in mobile communications, such as embedded/Wi-Fi CE Antenna, MIMO Smart Antenna, LDS Antenna, LTE data routers and mobile wireless modules. Their revenue contribution is currently only about 5%. While we see muted mobile communication growth prospects, in particular for smartphones and NB, this will have little impact on WNC as the company has already transformed into an M2M and automobile player. We expect revenue contributions from mobile communication to continue to decline over the next two to three years.
Competitive landscape- communication/cellular technology, product reliability and duration
Given the growing opportunity of M2M, IoT and electronics for automobiles, we expect more new entrants in this market. However, for some niche segments, in particular in automobile and M2M, it takes time to build up customer relationships and the product cycle is much longer than in the conventional consumer electronics segment. In particular, client certification may take a few years, and for long-term quality consistency, after-market services are required. We believe WNC’s early mover advantage and expertise in wireless communication will support its long-term growth potential in the M2M and automobile market. WNC’s margin and earnings growth have been stable in the past few years. With more potential upside in the M2M and auto space in the longer term, we expect solid earnings growth.
While looking into WNC’s R&D expenses and those of its peers in networking and electronics auto parts, we found that R&D expenses have been steadily increasing across the board over the past few years.
The company has said it is seeking opportunities in industrial IoT, based on its core competence in broadband/wireless communication and multimedia. WNC’s capex increased from TWD657m in 2012 to TWD1.62b in 2015E, showing management’s confidence in the increasing demand for auto-related and M2M businesses.
Exhibit 17: R&D comparison vs regional peers
WNC* 2009 2010 2011 2012 2013 2014
Sales (TWD m) 15,904 27,338 33,982 344,35 36,654 403,27
R&D (TWD m) 955 1,240 1,454 1,392 1,550 1,647
R&D as % to sales (%) 6 5 4 4 4 4
TTE*
Sales (TWD m) 2,505 3,393 3,453 4,002 4,512 5,142
R&D (TWD m) 152 183 219 261 333 366
R&D as % to sales (%) 6 5 6 7 7 7
Sunny Optical*
Sales (RMB m) 1,310 1,818 2,499 3,984 5,813 8,426
R&D (RMB m) 76 100 131 163 251 392
R&D as % to sales (%) 6 5 5 4 4 5
Joyson*
Sales (RMB m) N/A N/A 1,462 5,358 6,104 7,077
R&D (RMB m) N/A N/A 68 129 211 310
R&D as % to sales (%) N/A N/A 5 2 3 4
Sercomm
Sales (TWD m) 7,089 86,40 13,242 19,268 19,077 23,193
R&D (TWD m) 434 454 565 808 970 1,127
R&D as % to sales (%) 6 5 4 4 5 5
Cheng Uei
Sales (TWD m) 42,233 56,997 81,597 102,877 106,156 91,068
R&D (TWD m) 956 1,220 1,566 1,626 1,769 1,927
R&D as % to sales (%) 2 2 2 2 2 2
Bizlink
Sales (TWD m) 3,687 5,145 5,596 5,799 7,112 7,482
R&D (TWD m) 53 65 81 107 157 200
R&D as % to sales (%) 1 1 1 2 2 3
Cub Elecparts
Sales (TWD m) 999 1,242 1,087 1,338 1,499 2,155
R&D (TWD m) 41 52 56 64 88 106
R&D as % to sales (%) 4 4 5 5 6 5
Source: Company data (* BNPP coverage), Bloomberg
BNP PARIBAS 30 JANUARY 2016 28
Wistron NeWeb 6285 TT Laura Chen
Risks to our investment case
Weaker than expected ADAS growth
We expect WNC’s earnings to see a CAGR of 21% from 2015E to 2017E, on the back of an increase in demand in the global ADAS market. If ADAS growth is significantly lower than forecast due to macroeconomic events, or negative catalysts in the auto-related industry, it could lead to downside risk to WNC’s profitability.
Slower than expected regulation timeframe
As road safety becomes imperative for many nations, we expect governments to require some form of ADAS functions be installed in new vehicles from 2017. Any delay or postponement of this regulation timeframe could be a downside risk to WNC’s profitability.
Unexpected market share losses to its competitors
Market shares across the consumer electronics auto-related industry have remained relatively stable over the past few years, as auto OEMs appear reluctant to change suppliers with any frequency. Any unexpected market share losses to its competitors would be a downside risk to WNC’s profitability.
Financial analysis
Profitability and margin
WNC has reported preliminary 2015 sales of TWD52.2b, above the Bloomberg consensus estimate of TWD51.1b. This implies a 15% CAGR from 2012 to 2015, backed by strong market demand for various wireless communication devices. We forecast its GM and OPM staying around 13-14% and 4-5% respectively for 2015 and 2016. We expect this to be mainly driven by a better product mix, i.e. more auto-related products are sold with a better than corporate average margin, which longer term could drive up overall margins. We project its top-line will grow 14%/18% in 2016E/2017E, based on the proliferation of ADAS and connected vehicles. This implies a CAGR of 16% over the period 2015-2017E.
We expect the smart home business to grow steadily, while we believe auto-related business will contribute more to overall revenue given the myriad products that the company supplies; satellite radio, connectivity modules, and digital radio solution and radar sensor for cars. Moreover, we believe WNC’s M2M products will serve as another growth engine. Although the smart home GM (slightly below corporate average) is likely to fall slightly due to competition from peers, we believe the above-average GM from auto-related business is sustainable and should increase significantly. The net result is that we forecast WNC’s overall GM to be stable in 2016/2017.
Exhibit 18: WNC’s sales/GM/OPM trend Exhibit 19: WNC’s revenue outlook by applications
(TWD m) Smart Home Auto-related Mobile-related Others
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4Q15 previews and 2016 outlook
WNC reported 4Q15 preliminary sales of TWD14.4b (up 4.7% q-q and 28% y-y), better than its guidance of a slight q-q decline. This was mainly due to early pull-in demand on its smart home product. Given the usual seasonal correction, we expect WNC to see 5-10% q-q sales decline in 1Q16, while we expect its margins to be stable at about 13% GM and 4-5% OPM. We expect its auto and M2M business will continue to grow, reaching >30% of its revenue in 2016E (from 27% in 2015E), driven by its breakthrough in the European smart meter market. With rising demand for wireless modules, M2M business and steady upside in auto, we are looking for around TWD60b sales for WNC in 2016E with EPS of TWD6.85 (up 14% y-y).
DCF valuation We also cross-check our valuation with a DCF. This values WNC at TWD33,627m, equating to 15x our 2016E EPS, with underlying assumptions of perpetual growth of 2% and a WACC of 11.86%. We estimate the free cash flow to be 2-4% of its total sales, while assuming EBIT margin to be around 4-5%. The other assumptions are summarised in Exhibit 24. We use a risk free rate of 1% with an equity risk premium of 10%, as WNC mainly conducts its financing activities in Taiwan. We use a cost of debt of 2%, with a current capital structure at around 10%/90% debt/equity.
To evaluate the ROE that WNC could generate from its business model, we use a DuPont analysis to compare the ratios among its major competitors, Sierra Wireless (SWIR US) and Telit Communication (TCM LN). Our analysis suggests that WNC has delivered a relatively stable ROE, mainly driven by constant improvement in asset efficiency and stable margin profile. Having said that, we forecast WNC’s 2016 ROE will likely remain stable at 17-18%, given the promising sales growth outlook with a better product mix and strong operating efficiency.
Exhibit 26: Pro-forma cash flow
No of years 0 1 2 3 4 5 6 7 8 9 10 Pro forma cash flow 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E Terminal
Exhibit 27: ROE comparison among direct competitors Exhibit 28: WNC’s DuPont analysis
Sources: Company data; Wistron NeWeb is BNP Paribas estimates, Sierra Wireless, Telit Communication are Bloomberg consensus
Sources: Wistron NeWeb, BNP Paribas estimates
(10)
(5)
0
5
10
15
20
25
30
2012 2013 2014 2015E 2016E
(%)WNCSierra WirelessTelit Communication
1.0
1.5
2.0
2.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
2012 2013 2014 2015E 2016E
(x)(%)
Profit margin (LHS)
Total asset turnover (RHS)
Financial leverage (RHS)
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Balance sheet analysis
There was an uptick in its cash conversion cycle from 31 days in 2013 to 35 days in 2014, while the cash conversion cycle from its major competitors, such as Sierra Wireless (SWIR US) and Telit Communication (TCM LN), were at 20 days and -3.54 days in 2014. We attribute the improvement as well as better than peers figures to WNC’s engagement with customers, which led to a better cash conversion cycle. Based on our view that WNC’s market share at major customers is stabilising, we expect WNC’s cash conversion cycle to stay around the level of 2014/2015E in 2016.
WNC had an equity-to-asset ratio of 47% in 2014 and 52% in 2015E. Its net debt-to-equity ratio changed from -31% in 2014 to -23% in 2015E post issuing an ECB on 25 December 2015 worth almost TWD1.5b with a premium of 104.1%, which had a conversion price of TWD88 per share. We see this issuance as an indication of management’s dedication to the promising auto-related and M2M businesses. We also observed a steady trend in WNC’s current and quick ratios. The company’s current ratio was 1.5/1.5 in 2014/2015E, which sits at the higher end among its major competitors. We think the leverage level is healthy and suggests financial efficiency.
Cash flow and capital expenditure
WNC’s capex increased significantly, to TWD1.62b in 2015E from TWD657m in 2012, mainly driven by strong demand for auto-related business, M2M business and smart home business that prompted WNC to spend on new manufacturing capacity. During WNC’s 3Q15 earnings call, management indicated capex in 2016 will be around TWD1.5b-1.8b, of which most would be used for capacity expansion, new plants and automation. Given the existing strong demand in ADAS/auto-related businesses that caused the company to expand its capacity, along with the
Exhibit 29: AR, AP and Inventory turnover Exhibit 30: Cash conversion cycle
Asset to liability ratio (x) 1.8 1.9 1.9 2.1 1.9 1.9
Equity to asset (%) 45.7 47.2 47.1 51.5 48.5 48.0
Sources: Wistron NeWeb; BNP Paribas estimates
0
10
20
30
40
50
60
70
80
90
2012 2013 2014 2015E 2016E
(days) A/R Inventory A/P
0
5
10
15
20
25
30
35
40
45
50
2012 2013 2014 2015E 2016E
(days)
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company’s intention to improve its operating costs via the adoption of further automation, we expect the company’s capex will continue to increase and then stabilise at a high level.
WNC’s operating and free cash flow have been volatile in the recent past (2012-2015E) because of its increased capex for capacity expansion. We view this as a positive sign, as considerable capital investment is typically a prerequisite for penetrating a new business. That said our estimates assume this capex begins to pay off in the form of higher cash flow from 2016-2017.
Company profile
Revenue breakdown by product
Smart-home-related sales account for 65-70% of 2015 total sales There are three major product categories: 1) Direct Broadcast Satellite (DBS), 2) Digital Home, and 3) Networking. WNC has specialised in design and manufacturing of antennas and LBNFs for DBS application and offers customised services, from design stage through to manufacturing, as well as logistics support for its customers around the world.
The company also offers MoCA networking applications, IP TV/OTT set-top boxes and home energy management in order to build a more complete digital home environment. The company holds a leading position in terms of volume market share on IEEE802.11ac product design and manufacture for retail and enterprise segments.
We believe WNC’s continued dedication to R&D and the integration of a variety of cutting-edge technologies, which include but are not limited to M2M communication, identification and sensing, telematics, and smart home application will make it highly competitive and enhance its market position.
As technology devices are being increasingly connected with standardised protocols, WNC is likely to see steady demand growth for smart home products and wireless broadband, which in turn might further extend to the development of cloud services.
Automotive-related sales account for 25-30% of its 2015 total sales WNC offers a wide variety of automotive-related products, ranging from automotive telematics connectivity modules, 3G/4G telematics applications to smart meters and radars, which support full function of Advanced Driver Assistance System (ADAS) applications.
The company commenced shipments of automotive BSD radar systems in 2011 and cellular and telematics products in 2015. WNC also began to ship its radar sensor solution in 2015 (although relatively few shipments so far, management is confident
this solution will make significant contributions from 2017 onward), while ongoing projects are likely to ramp up over time.
According to Gartner, about 15% of all automobiles produced by 2019 will accommodate some sort of ADAS, up from 6% in 2014. Given this increasing adoption, the technology and development of radar sensors and electronic communication become even more important.
With a better than corporate average margin in automotive-related products, we believe automotive-related products will be a key growth driver for WNC, given 1) increasing adoption of safety features in automobiles, reinforced by potential government regulation, 2) increasing penetration in lower priced, high-volume models, and 3) declining component costs to a more affordable level that drives up adoption.
Mobile-related sales accounted for c5% of 2015 total sales WNC’s specialisation in mobile related products includes satellite antennas, multi-band antennas and embedded antennas for NB, tablets and smartphone. The company is also working extensively in the integration of GSM, CDMA and 3G/4G wireless communication technologies.
The company’s 9M15 mobile-related sales performed relatively well, mainly driven by increased module shipments, but due to lower ASPs for mobile-related products, their contribution remains insignificant.
WNC’s management is focusing on integrated solutions; we agree this is an appropriate direction, as we expect integration of more versatile wireless to drive demand for mobile antennas and other communication modules. With decreasing costs of mobile broadband and smartphone saturation in many markets, the integration of cross-industry product services centering on software will become increasingly essential, in our view, reflected in applications that use high-speed mobile networks to transmit driving data and vehicle operating information to a cloud server, and then synchronise the information with hand-held devices so that users can assess their vehicle state in real time.
Geographic breakdown and market position
The Americas was the most important market for WNC in 2014, accounting for 46% of total revenue. Asia and Europe were the second and third largest revenue sources, contributing 31% and 13%, respectively. WNC also generated around 9% of its 2014 revenue from Taiwan.
WNC is well-known for its proficiency in NB antenna design. The company’s abilities in the design and manufacture of LDS antennas mean it can supply size-critical products. WNC has also become a major supplier for leading smartphone names and expects to maintain a high growth rate on the back of multi-network integration.
Exhibit 34: 2014 revenue breakdown by region
Sources: Wistron NeWeb; BNP Paribas
Amercias46.4%
Asia30.6%
Europe13.4%
Others0.4%
Taiwan9.1%
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According to management, WNC is a global technological leader in satellite communication. In the LNB market for direct broadcast and satellite services, the brand is trusted by global satellite operators and distributors as one that can recognise trends in international technologies ahead of its major competitors.
WNC has developed high-frequency Ka-band ODUs (outdoor units) and single-cable LNBs for receiving signals from multiple satellites. Despite facing price competition in the satellite space from major competitors, we believe WNC will be able to sustain its strong performance and steady growth rate thanks to its participation in new technologies.
Diversified customer base
WNC’s top customer accounted for just 15% for its 2014 revenue (12% in 1Q15). We believe this diversified customer base lowers the concentration risk should the competition intensify.
Exhibit 35: Revenue breakdown by customer
1Q15 2014 2013 (%) (%) (%)
WNC's top customer 12 15 20 Others 88 85 80
Sources: Wistron NeWeb; BNP Paribas
Exhibit 36: Board & management profile
Current position Name Experience Educational Background
Chairman & CEO Haydn Hsieh Director of aEnrich Technology Corp; Director of Wistron; Director of AOPEN; Independent Director of Raydium
Bachelor Degree
Director Representative of Wistron Corp. : Frank F.C. Lin
Director of AOPEN; Director of Wistron ITS; Chairman of AnexTEK; Chairman of WiseCap; Chairman of WLB (and others)
Bachelor Degree
Director Representative of Wistron Corp. : Henry Lin
CFO of Wistron Co.; Director of Browave; Independent Director of RDC Semiconductor (and others)
Master’s Degree
Director & President Jeffrey Gau COO of RF Link Systems Inc Ph. D.
Director Max Wu Chairman of Birch Venture Capital; Chairman of the NCTU Spring Foundation; Director of Novatek; Director of Glory Praise Photronics (and others)
Bachelor Degree
Director Philip Peng Independent Director of AU Optronics; Director of Acer Investment Inc.; Director of AOPEN; Director of Wistron ITS (and others)
Master’s Degree
Independent Director Robert Hung Independent Director of TSRC Corporation; Director of Coretronic Corp.; Chairman of Young Green Energy Co. (and others)
Master’s Degree
Independent Director S. T. Peng Professor Emeritus of the Department of Communications Engineering at Yuan Ze University (YZU); Director of NCTU Ting-ShiunTelecommunication Development and Education Foundation; Supervisor of SpringSoft Education Foundation; Research Professor of Dept. of Elect. Engineering, Polytechnic University (and others)
Ph. D.
Independent Director Morgan Chang CEO of Kuang Chien Computer Co., Ltd.; Supervisor of Great Eastern Resins Industrial Co., Ltd. (GRECO); Chairman of Manufacturers Association of Taichung Industrial Park (and others)
Bachelor Degree
President - Business Group/Senior VP
Lee Liang-Hsiang Vice President of C-One Technology Corp. Master’s Degree
CFO Sung Fen-Chiung Senior Manager of Acer Inc. Bachelor Degree
Senior Vice President Chen Fa-Yu Associate Professor of Hwa-Hsia Institute of Technology Ph. D.
Sources: Wistron NeWeb; BNP Paribas
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Exhibit 37: Milestones for WNC over the last five years
2015 Mar Obtained ISO/IEC 17025 (general requirements for the competence of testing and calibration laboratories) certification.
2015 Jan Established WNC Japan Inc. in Japan.
2014 Dec Awarded the Hsinchu Science Park Innovative Product Award.
2014 Nov Awarded the Taiwan Corporate Sustainability Report Award (Bronze Award) from the Taiwan Institute for Sustainable Energy.
2014 Oct Obtained ISO/IEC 27001 (information security management system) certification.
2014 Jul Established WNC UK Limited in the UK.
2014 Jun Mr. Haydn Hsieh was elected by the BOD as the Chairman.
2014 Mar Obtained TL 9000 (quality management system for the telecommunications industry) certification.
2013 Dec Honoured with the 2013 Hsinchu Science Park R&D Accomplishment Award and the Innovative Product Award.
2013 Nov Certified as an ―Authorized Economic Operator (AEO)‖ by the Customs Administration, Ministry of Finance, R.O.C.
2013 Nov Ranked first in the Commonwealth magazine ―Most Admired Company‖ 2013 survey among telecommunication enterprises in Taiwan.
2013 Apr Recognized among the 2012 Deloitte Technology Fast500 Asia Pacific
2012 Dec Received the Industrial Development Bureau, Ministry of Economic Affairs Industrial Sustainable Excellence Award and the Hsinchu Science Park R&D Accomplishment Award.
2012 Nov 4G Mobile Hotspot received the 2013 CES Innovations Design and Engineering Award.
2012 Sep Won an Invention Award in the 2012 National Invention & Creation Awards.
2012 Jul Established the WNC EICC management committee.
2012 Mar Established the New Jersey Office for the North American market.
2011 Dec Received the Hsinchu Science Park Innovative Product Award and the R&D Accomplishment Award.
2011 Oct Established the Irvine Office for the North American market.
2011 Sep Automotive BSD radar system commenced shipping.
2011 Sep Honoured with the Creation Award at the 2011 National Invention & Creation Awards.
2011 Aug Smart Shortcut hand-held interface received a red dot award for communication design.
2011 Aug Awarded the National HRD InnoPrize.
2011 Jun Published the first edition of the Corporate Social Responsibility report.
2011 Apr Obtained IECQ QC080000 (Hazardous Substance Process Management) and ANSI/ESD S20.20 (Electronic Discharge Control Program) certifications.
Sources: Wistron NeWeb; BNP Paribas
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Exhibit 38: WNC’s organisation structure
Sources: WNC; BNP Paribas
Shareholders
Board of Directos
Chairman & CEO
Audit Committee
Remuneration Committee
President
IR Office
Industrial Safety Office
Glo
balB
usin
ess
Dev
elop
men
t
New
Tec
hnol
ogy
Dev
elop
men
t
Prod
uctB
usin
ess
Mec
hani
cal a
nd In
dust
rial
Des
ign
Glo
bal S
uppl
y C
hain
M
anag
emen
t
Glo
bal M
anuf
actu
ring
Qua
lity
Assu
ranc
e
Lega
l & IP
MIS
Fina
nce
Hum
an R
esou
rces
Ad
min
istra
tion
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Corporate governance
Board structure
Number of Independent Directors (ID) 3
Percentage of IDs in the board 33%
ID participation/attendance at board meetings n/a
ID participation in audit/remuneration committees n/a
ID terms (years of service, re-election/replacement procedures) 3 years
Sources: Wistron NeWeb; BNP Paribas
Additional comments: There are three independent directors whose proficiencies are in business management, economics and engineering. The turnover of ID is relatively steady and in line with WNC’s procedures.
Audit practises
Auditor KPMG
Length of service At least five years
Reporting incidents n/a
Fee track record n/a
Policy on change of Audit firm n/a
Sources: Wistron NeWeb; BNP Paribas
Additional comments: KPMG has provided auditing and assurance services to WNC for at least five years. We believe that a stable relationship with the same auditor is a good sign for WNC’s corporate governance. Compensation and remuneration
Directors' remuneration vs. earnings/ROE/share performance 1% of the current-year earnings
Changes/stability in senior management Stable
Incidents of termination of senior management n/a
Track record on Insider sales n/a
Sources: Wistron NeWeb; BNP Paribas
Additional comments: WNC’s directors and management team are experienced and have not seen any big reshuffle in past years; thus, we see low risk of changes in management team.
Shareholders' rights
Communication - shareholder participation in AGMs/EGMs n/a
Related party transactions n/a
Voting issues - policies, incidents of rejected proposals n/a
Sources: Wistron NeWeb; BNP Paribas
Additional comments: WNC has set forth the rules and procedures of the shareholders’ meeting, which are clear and comprehensive, in our view. We believe this is an effective way to communicate with shareholders.
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Financial statements Wistron NeWeb
Sources: Wistron NeWeb; BNP Paribas estimates
Profit and Loss (TWD m) Year Ending Dec 2013A 2014A 2015E 2016E 2017E
Revenue 36,654 40,327 52,183 59,411 69,821
Cost of sales ex depreciation (30,567) (33,923) (43,806) (50,114) (58,555)
Gross profit ex depreciation 6,087 6,404 8,377 9,297 11,266Other operating income 0 0 0 0 0
EV/invested capital (x) 3.4 2.9 2.5 2.2 2.0* Pre exceptional & pre-goodwill and fully diluted ** EBITDA includes associate income and recurring non operating income
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Tung Thi h El ectr onic 3552 TT BNP PARIBAS Jenny Tsai
30 JANUARY 2016 TAIWAN / CAPITAL GOODS
TUNG THIH ELECTRONIC 3552 TT
Rising tide with ADAS opportunities KEY STOCK DATA
Sources: FactSet estimates; BNP Paribas estimates
New opportunities from ADAS, growing at 20% CAGR (2015-20) Consumers are demanding safer cars and government mandates are incrementally requiring expanded safety features such as Advance Driver Assistance System (ADAS). Transparency Market Research estimates the global ADAS market to reach USD50.4b in 2020 from USD14.8b in 2013. We also see China autos starting to embed ADAS products, although not required by China authorities, currently. IHS forecasts China ADAS market will grow at 20% CAGR over 2015-20. We believe TTE, a tier-I auto-parts and a leading global provider of sensor/camera related products, parking assistant products, autonomous parking related products, and TPMS, is poised to capitalize on the rising ADAS trend.
Car safety market to witness over 10% CAGR during 2015-2020 Markets and Markets forecast that car safety market of USD93.7b in 2015 will rise to USD153b by 2020. TPMS (Tire Pressure Measuring System), now mandatory in many countries (excluding China), will continue to see an increase in demand with a promising growth potential of 15% CAGR during 2015-19, according to RnRMarket Research. We expect China to make TPMS mandatory in 2017E proposed by China National Technical Committee; we believe TTE should benefit from its solid China customers base, although current sales contribution from TPMS is limited.
Customer base to help higher sales growth than auto demand TTE’s 9M15 China sales accounted for 77%. While China auto market remains lacklustre, we expect TTE sales may still enjoy a higher industry growth as auto OEMs are adding more features to attract customers. Also, 35-40% of TTE’s revenues come from fast-growing SUVs vs. PV. TTE supplied to 5 out of top 10 bestselling SUVs in 2015. Top 5 clients delivered higher-than-average PV growth over 2010-14, and top 2 clients did better than 11M15 avg. Hence, we believe TTE is more resilient to slowing auto market with a strong market penetration into both new and existing customers.
Initiate with Buy at TP of TWD420 based on 1.0x 2016E PEG Our TP of TWD420 is based on 1x 2016E PEG (vs 0.97x for peers) for its higher 2016E ROE and earnings growth compared to peers. We expect solid earnings CAGR of 33.0% during 2015E-17E supported by double digit CAGR growth of ADAS and TPMS over the same period.
Tung Thih Electronic Rel to Taiwan TAIEX Index(TWD) (%)
42
Tung Thih Electronic 3552 TT Jenny Tsai
Investment thesis
We initiate TTE with a BUY rating and TP of TWD420 based on 1x 2016E PEG (vs 0.97x for peers) for its higher 2016E ROE and earnings growth compared to peers. Our multiple implies 35.3x 2016E P/E (peak trailing and forward P/E of 31.6x-42.5x) vs global peer average of 19.7x based on our and Bloomberg consensus. Despite high valuations, we note that TTE outperformed TAIEX by 13% YTD supported by solid outlook and earnings CAGR of 33.0% during 2015-2017E.
We are positive on TTE benefitting from increasing content per car from global ADAS and TPMS demand which is likely to have a double digit growth during 2015-19E, driven by increasing awareness on auto safety in developed countries, leading to an increase in mandatory products that are required to fit into the new vehicles. Although Chinese authorities have not set any compulsory standards for ADAS and TPMS for new vehicles, we believe China will soon follow the US and Europe on these standards to improve auto safety. We believe that TTE with a solid China customer base, variety of product offerings, competitive cost structure and localization benefits should gain from incremental China demand. Lastly, we also expect that the D2XX platform from GM will serve as secular growth driver.
Catalyst
1. China NCAP making ADAS related products or TPMS compulsory or adopting their inclusion into rating system, or, increasing China local and JV brands applying ADAS/TPMS related products as they increase their content per car.
2. Better-than-expected demand from GM D2XX platform.
Risk to our call
Downside risk includes: 1) greater-than-expected slowdown in China auto market growth, especially in SUVs amid slowing economy; 2) slower-than-expected adoption of D2XX models, and 3) FX volatility, especially related to RMB/USD.
Company background Key assumptions
Tung Thih Electronics (TTE), Asia’s largest and globally the third largest parking radar manufacturer after Denso and Valeo, is a tier-1 OE supplier, providing automobile electronics and exporting products to 18 countries. Products include Parking Aid System (PAS), CMOS, Remote Key Entry, and others.
16-Sep The 66th IAA (Internationale Automobil-Ausstellung) Commercial Vehicles Show
16-Nov 3Q16 earnings release
The key earnings driver is margin.
We estimate every 5ppt increase in gross margin increases net profit by 30% in 2015E and 2016E, all else being equal.
We estimate every 5ppt decrease in gross margin decreases net profit 28% each in 2015E and in 2016E, all else being equal.
PAS - 72.0%
CMOS&MDS - 12.0%
RKE - 15.0%
TPMS - 1.0%
Others - 0.0%
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Investment Summary
We initiate Tung Thih Electronics (TTE) with a BUY rating. Our TP of TWD420 is based on 2016E 1x PEG. We believe TTE deserves a slightly higher target multiple to peers (0.97x) because of its higher ROE (2016E: 24.7% vs 21.6% peer average on Bloomberg consensus) and stronger earnings growth (2016E: 35.3% vs 17.2% peer average on Bloomberg consensus). Our TP implies 35.3x 2016 P/E. The implied P/E multiple is in the range of peak cycle trailing and forward PE of 31.6x-42.5x. We believe TTE’s higher than peers (global and Taiwan) multiple is justified by our expectation of strong earnings CAGR of 33.0% during 2015-2017E, driven by solid earnings growth driven by (1) product launches along with continued penetration into new and old customer base and (2) margin improvement led by favourable product mix and cost savings through in-house automation.
TTE is a qualified global tier-I auto parts provider with a strong position as top Asian, and globally, the third largest parking radar manufacturer after Denso and Valeo. It is also a tier-1 OEM supplier that provides automobile electronics and exports products to 18 countries. TTE provides sensor/camera related products; it also designs and manufactures parking assist system and autonomous parking systems which include blind spot detection, lane departure warning system, long range radar, and other product such as TPMS.
As of 2015, TTE has global market share of 5.4% in the Ultrasonic Sensor market, 4.6% in the Sensing market, and 0.9% in the Milliwave Radar & Laser Radar market.
In addition, TTE has transformed itself to a systems provider from a product-focus provider by developing its own software algorithms. We believe that TTE will benefit from the increasing need for sensor/camera modules driven by incremental demand for autonomous features, TPMS and stricter safety requirements imposed by authorities.
China market remains the largest revenue contributor, with 77% of 9M15 total revenue. Key customers are mostly located in China, which includes General Motor (GM), Renault, Great Wall Motor (GWM), SAIC, Chang’an Auto and Dongfeng Motor. Currently, the company has plants located in Xiamen, Kunshan, and Taoyuan.
We also believe TTE will benefit in the long term from its leading position globally as a tier-I auto parts supplier and its ability to capitalize on the significant market potential in Advance Driver Assistance System (ADAS) and Tire Pressure Measuring System (TPMS). Transparency Market Research estimates the global ADAS market to reach USD50.4b in 2020 from USD14.8b in 2015. Separately, IHS forecasts China ADAS market will grow at 20% CAGR over 2015-20. Additionally, RnRMarket Research estimates the potential of 15% CAGR during 2015-19 in TPMS. We believe TTE should see a significant growth over the next few years driven by continued market share gain from both new and existing customer portfolio and a 10-year order secured from GM D2XX platform through increasing GM models adoption. Thus, we are positive and like TTE for the following reasons:
1) ADAS demand on a rise
Consumers are demanding safer cars and government mandates are incrementally requiring expanded safety features such as Advance Driver Assistance System (ADAS). We believe ADAS is gaining attention of global car safety authorities in developed countries, particularly in the US and EU. We note that the spread of ADAS has been largely confined to North America, Western Europe and Japan where authorities are starting to make ADAS related products as part of the standard compulsory system. Global Information estimates the penetration of ADAS in the developed countries to be 8%, but only a measly 2% in the developing countries as of 2014. According to Gartner, 15% of the new vehicles will carry ADAS by 2019 compared with 6% in 2014, globally.
Thus, ADAS OEM camera demand including Lane Departure Warning, Blind Spot Detection, Parking, and Parking-Surround, should grow at 23.1% CAGR from 2015-2020, according to Strategy Analytics. In contrast to developed countries, China
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remains a laggard in its policy setting for ADAS, but we believe its regulations will follow soon and likely be implemented in 2018, according to China NCAP. Although there are no compulsory regulations, we note that some of the China auto local and joint-venture brands have already begun to embed ADAS products as a standard spec to attract customers with more features. In China, ADAS market is expected to rise at a CAGR of 20% over 2015-2020 according to IHS. As China is a top contributor to TTE’s revenues, we believe it will benefit from the rising ADAS demand.
2) Strong auto OEM customers base and continued market share gain
TTE’s major clients include GreatWall Motors, Chang’an Motor, Shanghai-GM, Shanghai-VW, and Dongfeng Nissan; together they contributed 45% of TTE’s 9M15 revenue. Over 2010-2014, TTE’s top 5 clients delivered sales CAGR of 18.9% CAGR, which is higher than overall China PV market sales CAGR of 9.4% during the same period.
The increasing demand and popularity of China SUV segment made it the fastest growing segment among overall China autos, and contributed 35-40% of TTE’s 2014 revenue. TTE products quality is well accepted by its customers as indicated by the fact that it has become a sole supplier for 5 out of 10 top selling SUV brands, according sales ranking in Nov 2015. Despite lacklustre sales in China auto market, we expect a strong customer portfolio and a higher focus on SUVs will offset any adverse impact from slower growth in overall China autos.
The 10-year GM D2XX platform order improves revenue visibility
In 2008, TTE won the global 10-year contract of D2XX from GM competing against Denso and Valeo. But, currently only 10 GM models are equipped with D2XX platform highlighting strong growth potential in this segment. We expect higher contribution and sales growth from GM as it adopts D2XX platform in 30 models in 2016 from 10 models, currently. We think that the long-term contract for its D2XX platform and quality recognition also serves as an opportunity for TTE to penetrate into more global OEM customers.
To benefit from TPMS market as it expects to grow from low base
TPMS is one of the key parts in the car safety market as it is an automated system that sends warnings to the on-board computer’s display screen in the event of low tyre pressure. It is designed for driver to check the pressure in all four tyres and monitor whether tyre pressure has dropped below the safe standard. The system updates the tyre pressure quickly and accurately immediately after engine starts. With TPMS contributing only 1% of the TTE’s 2014 sales, we expect that this segment should benefit from an expanding market as China regulators follow the developed countries and mandate TPMS as a new safety standard for all new cars.
According to Reportbuyer, the global installation rate of TPMS reached 36% in 2014, up 6% from 2013, and they expect it to exceed 45% in 2015, creating a demand of more than 40 million sets.
Investment concerns
Despite a strong outlook for TTE, we note some downside risks and concerns:
TTE has heavy China exposure with around 75%-80% of sales contribution. If China economy continues to weaken and stay sluggish it may lead to greater revenue volatility, especially if SUV growth slows down faster than expected given a large proportion of sales is contributed from the SUV models.
D2XX platform can serve as a secular growth driver, but if the GM model adaptation rate is slower-than-expected, it could lower the revenues.
TTE currently has around USD23m of bank loan to finance its working capital due to longer accounts receivable days for China local OEM customers compared to joint venture OEM customers. Thus, we could see material working capital risk and FX volatility amidst the current uncertain macro environment.
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Industry Overview
ADAS market – the next rising star
ADAS (Advanced Driver Assistance Systems) is an intelligent and automated driving system which specifically uses active safety technology. It can be divided into two categories: safety assistance and convenience/comfort assistance.
Currently, the ADAS market penetration remains muted with 6% of the overall car demand and mostly dominated by high-end model vehicles. However, we believe as consumer safety is increasingly recognized, ADAS will also be installed in low-cost cars, driving global demand. Transparency Market Research projects global ADAS market to reach USD50.4b in 2020, growing at a CAGR of 19.2% during 2014-2020. According to IHS, China ADAS market will grow to near RMB18b, with CAGR of 20% over 2015-2020.
The ADAS system can significantly reduce the number of traffic accidents according to both EU and U.S authorities. In order to develop and adopt ADAS, more stringent requirements on safe driving policy from government authorities should be imposed. We expect ADAS demand to be driven by a combination of safety regulations by various governments as well as the global auto manufacturers’ need to differentiate their products to meet drivers’ demand for safety and convenience. But, cost remains a key concern. Thus, economies of scale and demand remain important metrics despite auto industry’s relentless attempts to reduce cost throughout the supply chain.
ADAS consists of many components and systems and cameras remain as a key component for ADAS, however, there are a few major systems that include Blind Spot Detection System, Backup Parking Aid System, Rear-Crash Collision Warning System, Land Departure Warning System, Collision Mitigation System, Adaptive Front-Lighting System, Night Vision System, Adaptive Cruise Control System, Pre Crash System and Parking Aid System.
Each system includes 1) data collection through different sensors, such as CCD/CMOS sensor or radar signals; 2) ECU which analyses the collected data and sends out controlling signals and 3) execution processor which helps vehicles to function according to ECU’s signal and process. In general, ADAS uses ultrasound sensors through radars such as (laser radar, microwave radar), cameras to assist the drivers by providing real-time information about the surrounding to help reduce car accidents.
Currently, the system integrators supplying ADAS for commercial vehicles are highly concentrated with WABCO, Continental AG and Bosch, which together account for around 60% of the global market share. As TTE transforms into a system provider from product provider, we believe it has a significant potential to capture a higher portion of the remaining market share by effectively competing with global leaders.
Exhibit 1: Global ADAS camera OEM demand Exhibit 2: China ADAS market size and growth
Source: Strategy Analytics Source: IHS
0
20
40
60
80
100
120
2015E 2016E 2017E 2018E 2019E 2020E
Blindspot LDWS Parking Parking-Surround(m units)
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35
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(%)(RMB b) Market size (LHS) Growth (RHS)
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In the US and Europe, some of the key ADAS systems are no longer exclusive to high-end luxury models but also available to the low-end models due to a gradual change in regulations making these systems compulsory from optional, previously.
According to the EU NCAP (New Car Assessment Program) – an auto safety rating administration – autos equipped with AEB (Autonomous Emergency Breaking) can reduce collision incidents by 38% if the speed is under 50km/hour. Starting 2014, the EU NACP already required that a new vehicle must have active safety installed to qualify for the fifth star of a 5-star crash safety rating system. The rating system required all new vehicles to have an automatic braking for pedestrians for the fifth star and a basic active safety for the fourth star. Thus, we saw that AEB system (Automatic emergency braking) systems have been added on to the assessment list of NCAP rating for any auto to achieve 4-star rating by 2017. By 2017, if a car does not have ADAS, it will get a 3-star crash safety rating at best.
We believe that similar standards will soon be instituted in the United States; the U.S NHTSA (National Highway Safety Transportation Agency) has already announced that CIB (Crash Imminent Breaking) and DBS (dynamic break support) will be the two most recommended auto accessories to be equipped into new cars.
In addition, the U.S NHTSA requires 10% of new vehicles less than 10,000 pounds (including buses and trucks) to be equipped with rear image technology in 2016. In 2017 and 2018, it will be 40% and 100% of new vehicles, respectively.
However, in China, we still do not see any specific proposal on ADAS by authorities. In 2018, C-NCAP plans to adopt certain active safety technologies into rating system. Currently, C-NCAP focuses on autonomous emergency brakes on different conditions and pedestrian safety. Although there is no regulation on rear view image, we see more and more SUV models installed with rear view imaging systems. Currently, nearly 80% (224 out of 286 types) of SUVs have installed rear view image systems and radar while only 55% (189 out of 342 types) of compact cars have such installations, suggesting significant potential opportunity to penetrate this segment.
Exhibit 3: ADAS Regulation timetable
Mandatory automobile electronics USA Europe Japan China Taiwan
ESC(electronic stability control) 2011 2014 2014 NA 2018
Source: ARTC
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Exhibit 4: Definitions of ADAS sensing systems
Product Definition
1) Sensing Camera A camera that detects and analyses information from inside and outside the vehicle to alert the driver and activate automatic control, if necessary.
A) Monocular Camera An automotive sensing camera equipped with a monocular camera (digital camera).
B) Stereo Camera A camera system using two lenses placed side by side for the recognition of three-dimensional spatial information. Stereo cameras are used primarily for middle- and long-distance detection such as adaptive cruise control (ACC) and forward collision warning (FCW) in automotive sensing camera systems.
C) IR Camera An automotive sensing camera system using near- and far-infrared cameras. Infrared (IR) camera systems are used primarily in night vision systems (NVS) and night sensing systems (NSS).
Far-infrared camera An automotive sensing camera system using far-infrared cameras. Far-infrared camera systems are used primarily in NVS and NSS. Because of the difference in wavelength from near-infrared cameras, far-infrared cameras can detect the heat emitted by objects. They are hence suited to detecting pedestrians and animals at least 200 metres away.
Near-infrared camera An automotive sensing camera system using near-infrared cameras. Near-infrared camera systems are used primarily in NVS and night detection system (NDS). Because their wavelength is closer to that of optical wavelength than that of far-infrared cameras, near-infrared cameras are suited to detecting objects at night in the short-to-medium distance within reach of near-infrared light. A near-infrared camera requires a near-infrared light projector along with a camera module.
View camera + sensing camera A view camera with an added sensing function.
Single A view camera with a single camera unit with an added sensing function.
Surround View A surround view system consisting of several cameras with an added sensing function.
2) Milliwave Radar A radar system that detects its surroundings in the short, medium-to-long distance using milliwave, sub-milliwave and other radars.
A) Milliwave Radar A radar system that detects its surroundings using milliwaves (30-300GHz).
Milliwave radars for automotive sensing systems currently use the 76-77GHz band (described as 77GHz in this report) and will use the 79GHz band in the future. Their main application is medium distance detection such as ACC, advanced emergency braking system (AEBS) and FCW.
B) Sub-Milliwave Radar A radar system that detects its surroundings using sub-milliwaves (10-30GHz).
Sub-milliwaves radars for automotive sensing systems currently use the 24GHz band and will use the 25-26GHz band in the future. Their main application is short-to-medium distance detection such as cross traffic alerts (CTA), blind spot detection (BSD) and lane change assist (LCA).
3) Laser Radar A radar system that detects its surroundings mainly using near-infrared laser light.
A) Laser Radar Its main application is short-to-medium distance detection such as ACC and FCW.
B) Laser Finder Its main application is surround sensing for self-driving and self-parking cars.
4) Ultrasonic Sensor A sensor collects information outside the vehicle and notifies the driver, mainly for parking support.
Ultrasonic Sensor A sensor that detects objects and measures their distance by emitting ultrasound waves and receiving the reflected waves.
Its main application is parking support such as parking assist systems, but the product is likely to be installed in driving support systems as well in the future.
5) One Module Fusion A camera and a milliwave or laser radar are integrated into a single module/system for detecting the surroundings, mainly in the short, medium-to-long distance.
Milliwave + Monocular Camera A product integrating a monocular camera and a milliwave radar (77GHz) into a single module.
Laser Radar + Monocular Camera A product integrating a monocular camera and a laser radar into a single module.
6) View Camera A barebones camera that facilitates parking and other maneuvers.
Source: TSR
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TTE should continue to see growth amid the slow China auto market
Despite slowing China PV market relative to its previous peak, we are seeing increasing ADAS products being equipped into the new vehicles for attracting customers. The actual 2015 PV sales growth was 7.1% y-y (Sedan -5.5% y-y, MPV 10.1% y-y, SUV 52.0% y-y, and Crossover -17.5% y-y) and we note that TTE still enjoys a stronger sales growth than the overall China PV market by generating 35-40% of its revenue from SUVs. Currently, in China, SUV has the fastest growth among all PVs and has been gaining market share in the overall PV market. Market share of PV grew to 29% in 2015 from 21% in 2014. In 2016, BNPP expects 7.1% y-y growth in total PV sales, and SUV will further expand its market share to 37% in 2016 from 29% in 2015.
Exhibit 5: A sampling of suppliers to major OEM automakers
--------------------------------- Sensing Camera --------------------------------- ------------------------- Automotive Radar ------------------------ Sensor
Monocular Stereo View+ IR 77-79GHz 24-26GHz Laser Ultrasonic
Potential new opportunities as the US likely to require back-up cameras in cars by 2018
As a leading tier-I auto parts provider, also specializing in sensors/cameras , autonomous parking system and blind spot detection, we see potential new opportunities for TTE as it should benefit from the US NHTSA’s new rule that all vehicles built on or after May 1, 2018 should have a back-up camera. The US market contributed 10% of TTE’s 2014 revenues.
US NHTSA indicated that 90% of accidents are caused by human errors. There are 292 fatalities and 18,000 injuries caused by parking accident according to Insurance Institute for Highway Safety (IIHS).
Exhibit 8: Ultrasonic sensor market: a sample supply chain matrix
Aud
i
BM
W
Chr
ysle
r
Dai
mle
r/Ben
z
Fiat
Ford
GM
Hon
da
Hyu
ndai
/KIA
Maz
da
MM
C
Nis
san
Ope
l
PS
A P
euge
ot-C
itron
Ren
ault
Suz
uki
Sub
aru
Tata
Gro
up
Toyo
ta
VW
Vol
vo
Ger Ger US Ger It US US JP KR JP JP JP Ger Fra Fra JP JP India JP Ger Swe
Bosch Ger
Cobra It
Delphi US
Denso JP
Fujitsu-ten JP
Hyundai Mobis KR
Mitsubishi Ele JP
Panasonic JP
TTE TW
Valeo Fr
Source: TSR
Exhibit 9: Different visibility under different parking facilities
Source: U-CAR; IIHS
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According to NHTSA, there are 210 death and 15,000 injuries caused by parking accidents. Thus, NHTSA requires 10% of new vehicles under 10,000 pounds (includes bus and trucks) to be equipped with rear image technology by 2016.
NHTSA stated that the back-up cameras should be installed on 40% of new vehicles by 2017 and 100% of new vehicles by 2018. By law, the required sensor detecting distance of rear view image should range between 3 meters to 6.1meters. We estimate cost of installing rear view image system is around USD132-142 for the full set. Yet, for vehicles equipped with monitor already, the total cost should be USD43-45 per car.
According to IHS, in 2015, US market shipped 17.53m passenger cars and light trucks shipments and should reach 18.19m passenger cars by 2017. We estimate that the US rear view image systems demand will grow at 217% CAGR over 2016E-2018E as compulsory rear view image systems is required to be installed on all new vehicles (100%) by 2018.
TPMS market – we expect the pie continues to expand
RnRMarket Research expects TPMS market to grow at 15% CAGR in 2015-2019. TPMS is an automated system that sends warnings to the on-board computer’s display screen in the event of low tyre pressure. It is designed for driver to check the pressure in all four tyres and monitor whether tyre pressure has dropped below the safe standard. The system updates the tyre pressure quickly and accurately after an engine starts. TPMS systems consist of TPMS sensors and receivers, and report real-time tyre pressure information to the driver, either via a gauge, an LED display or a warning light. In October 2000, United States legislation enacted the TREAD Act (Transportation Recall Enhancement, Accountability and Documentation) to mandate the use of TPMS in all light motor vehicles (under 10,000 pounds). This act affects all light motor vehicles sold after 1 September, 2007.
With normal use, the battery life of a TPMS sensor is only five to ten years, in most cases three to seven years, which implies a similar life-span for the TPMS products themselves. Therefore, the replacement cycle kicked-off from 2010, and we expect the replacement demand in US AM (after-sales market) that started in 2012, to continue to be robust. After the US government’s ruling, the European Union also passed legislation that requires TPMS on all new cars by November 2014. In Asia, TPMS is becoming mandatory for all new cars in Korea (June 2014) and Taiwan (July 2016). We also expect other Asian countries such as China, Japan, and Russia to implement the regulation in 2015-17.
In the US, the TPMS OE market is dominated by four players: Schrader (Not listed), Pacific (7250 JP, NR), Continental (CON Xetra, NR) and TRW with 92% market share. Some OE players such as Schrader and Continental also supply the AM, but no specific player really dominates the AM segment.
Exhibit 10: US PCR and Light Truck sales over 2016E-2020E and rear view image penetration
Sources: IHS research; BNP Paribas estimates
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(m) PCR and Light Truck Sales Autos required to have rear view image
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According to Reportbuyer research, the Europe OEM demand for TPMS is expected to hit 16.65m sets, surpassing the United States as the world's largest market, and on the other hand, this also implies there is a considerable AM demand for TPMS after the battery life ends. Harsh winter in many EU countries makes snow tire an additional necessity for new vehicles. Hence, the introduction of mandatory regulations on TPMS in November 2015 first created demand for TPMS for snow tires. EU will become the world's largest TPMS market, either in OEM or AM. Mainland China had its first standard for passenger vehicle TPMS in Mar 2015. Its demand for TPMS comes primarily from OEM market and has grown rapidly during 2014-2015. According to Reportbuyer research, the demand surged by 78.9% from a year ago to 4.42m sets in 2014 and is expected to reach 6.67m sets in 2015, a y-y jump of 50.9%. As China is likely to become the TPMS market with the greatest potential, we believe TTE should continue to benefit given its solid number of customer base in China.
Business operations
Tung Thih Electronic (TTE) is the global tier-I supplier of auto electronic components including Parking Aid System (PAS), Camera System, Radio System, and others. For 9M15, PAS contributed 65%, Camera 20%, RKE (Remote Key Entry) 13% and others 1% of revenue. During 2011-14, PAS accounted for more than 70% of revenue.
As of 2015, TTE has global market share of 5.4% in the Ultrasonic Sensor market, 4.6% in the Sensing market, and 0.9% in the Milliwave Radar & Laser Radar market.
In 2015, we saw more contributions along with increasing shipment of camera system due to increasing demand for ADAS and the rising trend of adopting camera products into standard spec in the China SUV markets.
In terms of revenue breakdown by region in 9M15, China accounted for around 75% of total revenue. TTE’s other regional revenue breakdown is as follows: Europe 6%, US 3%, and Taiwan 2%-3%. Outside China, TTE supplies to Renault, Suzuki (in India and Hungary), GM, and Ford.
Top 5 clients are all China players, including GreatWall, ChangAn, Shanghai GM, Shanghai VW, and Dongfeng Nissan, accounting for 45% of 9m15 revenues.
Parking Aid System
In 1990, TTE has developed its first parking aid system. Until now, it has upgraded parking aid system from analog sensor to smart sensor through semi-digital and
Exhibit 14: Tung Thih product configuration Category Parking Aid System Camera System Radio System Others
Items Parking Aid System Rear View Camera Body Control Module Head-up display
Auto Parking system Side View System Remote Key Entry Smart E-Mirror
digital sensor. Products can operate normally under vibration, high or low temperature, under high sensitivity and are waterproof.
Auto Parking System
Auto Parking System consists of 10 sensors that were installed on the both sides of the rear of the vehicles. Drivers only need to do is shift gear to R, throttle lightly, and control the brake. Drivers will receive instructions through LED screen, suggesting partial automation. This system can be used in parallel parking, auto parking out, and perpendicular parking.
Blind Spot Detection System
TTE installed ultrasonic sensors on the both sides of the rear of the vehicle to monitor area that is not visible through side-view mirrors. The system will send out warning signal when detecting approaching cars from behind.
Exhibit 19: Parking Aid System
Source: Tung Thih Electronic
Exhibit 20: Auto Parking System
Source: Tung Thih Electronic
Exhibit 21: Blind Spot Detection System
Source: Tung Thih Electronic
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Camera System
Rear View Camera, Side View System, Around-View Monitoring
Rear View Camera shows rear images of vehicle on the screen, making parking easier. TTE has adopted AEC-Q100 certified image sensor that is high speed and high image resolution. The Side View System shows image of front-right wheel, which also helps detect a blind spot for drivers. Around-View Monitoring is composed of 4 cameras installed separately at the front and rear of the vehicle, demonstrated on the screen, and offers a 360-degree panoramic view to the driver. Lane Departure System shows the current road on screen and will send warning when a vehicle departs its lane.
TPMS
Tire Pressure Monitor (TPMS) monitors the tire pressure and tire temperature consistently. When the temperature is too high or low or the pressure is not at normal levels, it will send alarm to the system automatically.
Penetrating into D2XX platform allows its parts to share among GM models
D2XX is GM’s global platform. In such highly competitive automobile era, platform plays an important role for an auto manufacturing company because different cars can be based on a similar platform. This allows the company to cut cost of production of its cars. The general concept of the platform is being more flexible
Exhibit 22: Around View Monitoring and Lane departure system
Source: Tung Thih Electronic
Exhibit 23: TPMS
Source: Tung Thih Electronic
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which means a platform can be used for various cars; spare parts can also be shared among various models and brands.
TTE has successfully penetrated into D2XX platform, which combines the rear view image, blind spot detection and auto parking system. It is designed to be lightweight, highly modular, and has exceptional driving dynamics. D2XX replaces Delta 2 and Theta vehicle platforms and will be first introduced in 2015 Chevrolet Cruze in 2015. GM plans to install D2XX into 30 types of vehicles. Although D2XX products have lower margin, we believe TTE will use in-house automation to curtail its costs.
In 2012, TTE won this 10-year contract, beating global tier-I players, such as Bosch, Valeo, and Denso. The order of D2XX reflects global level product quality, future stable orders, and potential opportunities to approach more clients. In 2015, TTE has supplied around 10 types of GM’s vehicles in China. Currently, Chevrolet Cruze and Buick Envision, which adopt D2XX platform, are among the top 10 bestselling vehicles in compact car and SUV segments, respectively. As more and more types of vehicles adopt D2XX, we expect sales contribution to increase to over 10% in 2016 from low single digit, currently.
China market and Customer Portfolio
China auto market remains the largest key contributor to TTE. In general, TTE enjoyed a higher y-y revenue growth than that of the China overall PV market, thanks to its SUV penetration. Yet, its overall sales growth remains slower than China SUV market. Amid a slow auto market, TTE’s monthly y-y revenue growth slowed in both 2Q15 and 3Q15 as the company is still penetrating into new customers or increasing its share in the existing customer base. We expect TTE to further penetrate into a top-tier client in 2016. We believe TTE will be more resilient even if China auto market slows down.
TTE’s main customers include GWM, Changan, SH-GM, SH-VW, and DFN. Over 2010-2014, top 5 clients delivered stronger-than-average PV sales CAGR of 18.9%. In 2015, top 5 clients delivered slower-than-average growth of 6.6%. But, top 2 clients such as GreatWall and Changan delivered a strong 2015 y-y car sales growth of 23.0% and 8.4%, respectively.
Recently, TTE began to supply to Beijing Huyndai Elantra and SAIC-GM-Wuling (Two MPVs: Hongguang and Baojun 730 One SUV: Baojun 560) and is making effort to penetrate into JAC motors, Guangqi Honda, and Dongfeng Honda. TTE began to supply to SAIC-GM-Wuling since Oct 15, and we also believe TTE should see stronger sales growth contributions from SAIC-GM-Wuling as its MPV and SUV have been in top selling brands for a long time. Lastly, although we expect SAIC VW to gradually stop sourcing from TTE in 1H16, we believe that the company is attempting to penetrate the FAW VW supply chain to compensate for SAIC VW’s order losses.
Exhibit 24: D2XX adaption timetable Exhibit 25: Cruze and Envision Sales in 2015 Year Brand Model
Current
2015 Chevrolet Cruze(China)
2016 Chevrolet Cruze(North America)
2016 Buick Envision
2016 Chevy Volt
Future/Expected 2016 Buick Excelle GT/XT
2016 Opel Antara
2017 Opel Astra
2017 Chevrolet Equinox
2017 Chevrolet Orlando
2017 Buick Verano
2017 GMC Terrain
2018 Cadillac ELR
Source: GM Source: Sohu
0
5
10
15
20
25
30
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15
Feb-
15
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-15
Apr-1
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-15
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Sep-
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Nov
-15
('000 units) Envision Cruze
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For SUV models, TTE is well positioned in the supply chain of top selling SUV models out of more than 100 SUV models in China, including GWM H6 and H2, Changan CS 35 and CS 75, SH-GM Envision, and SAIC-GM-Wuling Baojun 560. In Nov ’15, 5 out of top 10 selling SUVs were supplied by TTE. We believe strong customer portfolio would support TTE’s steady growth.
Currently, the TTE has plants located in Xiamen, Kunshan, and Taoyuan. In 1Q16, TTE will ramp up its second Kunshan plant to meet demand from the D2XX platform. The plant will be responsible for producing reverse parking sensor. The Xiamen plant will likely add an addition plant nearby in 2016 which would start contributing as early as late 2017 or early 2018. Currently, its production is supported by leased facilities, but, TTE targets to terminate the leasing facilities as it moves to the new plant to ownership from leasing. We expect 2016 CAPEX to be TWD700m and 2017 CAPEX to be TWD500m.
Product competitiveness
Solid R&D ability
Amid the increasing intensified competition in the automobile electronics industry, TTE’s long-term target is to keep up the product innovation with better quality. TTE today has transformed itself to a system provider from a product-focused provider as by developing its own software algorithms. From 2011-3Q15, TTE maintained its R&D at least 7% of revenue, which is far higher than other Taiwan peers. Among the global peers, TTE’s R&D ratio is higher than 5-year average of Valeo (5%), but lower than Denso (9%) and Bosch (10%). TTE will also continue to invest in ADAS-related products with its own research team and also work with research scholars from universities.
TTE remains cost competitive
We believe that China auto market is currently experiencing an overcapacity problem as 2016 total capacity will grow 20% y-y while sales will only grow 7.1% y-y. As China auto market slows down, we expect market condition to remain intensified with more pricing pressure, which is likely to add more pressure on its suppliers.
As for customer mix, we believe TTE should stay cost competitive given that the Top 2 clients are ChangAn Motors and GreatWall Motors—both are cost-efficient players in the China auto market. In addition, TTE won the D2XX order on competitive pricing compared to other bidders.
Currently, its ASP competition in reverse parking sensor market has intensified, with continued ASP decline. But, we believe its continuous effort to curtail costs and developed new products will help TTE stay cost competitive in the future.
Improving ROE
In 2009 and 2010, TTE achieved nearly 25% ROE. However, since 2011, it has dropped to 15% as TTE has undergone key component integration resulting in lower margin. We expect ROE to improve to 27.9% in 2017 from 21.0% in 2015E since TTE will have better asset turnover rate and net margin. As automation in Kushan
Exhibit 31: R&D investment remains high among peers
Sources: TEJ; BNP Paribas
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
2011 2012 2013 2014 3Q15
(%)
TTE BizLink Hota CubHu Lane Iron Force Hiroca Ta YihTong Yang Summeko Lu Hane TurvoE-Lead
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plant will be completed in 2H16, we see margin improvement of 1%-2% in 2H16. We also see steady CCC days and slightly positive net gearing.
Outlook in 2015-2017E remains promising
The preliminary sales in 2015 was TWD7.04b, up 36.9% y-y and we estimate 2015 EPS to come in at TWD8.80, up 52.8% y-y, thanks to increasing models from GM (US) with 5 models which we estimate to have contributed 32% y-y growth in 2015. We estimated that gross margin will drop 0.1% to 30.6% as D2XX has lower-than-average gross margin in 2015.
Looking forward in 2016E, we estimate 33% y-y sales growth because 1) D2XX platform will adapt and get equipped into more GM models, which is likely to double and 2) China auto players are likely to equip more ADAS products to attract end customers amid a slow auto market. In 1H16, we expect that the SAIC VW, which accounts for 3%-4% of its total sales, is likely to gradually stop sourcing from TTE. Yet, TTE is attempting to penetrate the FAW VW supply chain to compensate for SAIC VW’s order losses.
In 1H16, we expect margin pressure given that TTE received lower margin products for Beijing Hyundai orders, while we expect margin to improve in 2H16 thanks to in-house automation upgrade. Net, we expect gross margin to improve marginally in 2016 to 30.8% from 30.7% in 2015, while we expect more cost saving through solid execution with the operating margin improving to 14.3% in 2016E from 14.2% in 2015. Overall, we expect TTE to deliver 35.3% y-y EPS growth in 2016E.
Exhibit 32: ROE and Net margin Exhibit 33: Asset Turnover and Leverage
As we move to 2017, despite increasing demand, we expect y-y sales growth to decline to 23.2% due to a higher base. But, we expect both gross and operating margin to improve to 31.5% and 15.4% thanks to favourable product mix and better cost control. With improving margins, we expect 2017 EPS of TWD15.55, up 30.6% y-y. We also expect that 2017 ROE to improve to 27.9% from 21.0% in 2015E.
Du Pont Analysis
We expect ROE will increase to 27.9% in 2017E from 21.0% in 2015E since net margin improves to 11.3% in 2017E from 10.5% in 2015E and asset turnover rate increases to 1.01 in 2017E from 0.81 in 2015E. We attribute net margin improvement to better cost control and stronger client mix. Also, we believe higher demand from ADAS and D2XX will drive higher asset turnover rate.
Valuation
We initiate TTE with a BUY rating and TP of TWD420 based on 1x 2016E PEG. We believe TTE deserves a slightly higher target multiple to peers (0.97x) because of its higher ROE (2016E: 24.7% vs 21.6% peer average on Bloomberg consensus) and stronger earnings growth (2016E: 35.3% vs 17.2% peer average on Bloomberg consensus). Our TP implies 35.3x 2016E P/E, which is within the range of peak trailing and forward P/E of 31.6x-42.5x versus global peer average of 19.7x 2016 P/E based on our and Bloomberg consensus. Despite high valuations, we note that TTE outperformed TAIEX by 13% YTD supported by solid outlook and earnings CAGR of 33.0% during 2015-2017E.
Exhibit 36: 2015-2017E earnings estimates
2015E Change 2016E Change 2017E Change
(TWD m) (y-y %) (TWD m) (y-y %) (TWD m) (y-y %)
Total sales 7,038 36.9 9,364 33.0 11,537 23.2
Cost of goods sold (4,874) (6,480) (7,907) Gross profit 2,164 37.2 2,884 33.3 3,630 25.9
Established in 1979, TTE was founded by Mr. Hsin-Chung Chen, Chairman and CEO, who has more than 30 years of experience in auto electronics. TTE is a global tier-I auto parts supplier. The company offers parking assistant systems which include rear parking assistant, auto parking aid, blind spot detection, side distance guard, rear view camera, around view monitor, lane departure warning system, remote keyless entry, engine anti-theft system, tier pressure measuring system, keyless start system, body control module, e-mirror and head-up display.
Exhibit 38: Trailing vs Forward P/E Exhibit 39: Forward P/E vs Earnings growth
Priced as of Jan 29, 2016 Sources: Bloomberg; *BNP Paribas estimates
05
101520253035404550
Jan-
09
Jun-
09
Nov
-09
Apr-1
0
Sep-
10
Feb-
11
Jul-1
1
Dec
-11
May
-12
Oct
-12
Mar
-13
Aug-
13
Jan-
14
Jun-
14
Nov
-14
Apr-1
5
Sep-
15
(x) Trailing P/E Forward P/E
Median Trailing P/E:18.5x
Median Forward P/E:14.6x
(40)(30)(20)(10)010203040506070
0
5
10
15
20
25
30
35
Jan-
09
Jan-
10
Jan-
11
Jan-
12
Jan-
13
Jan-
14
Jan-
15
Jan-
16
(%)(x) Forward P/E (LHS) Earnings growth (RHS)
BNP PARIBAS 30 JANUARY 2016 61
Tung Thih Electronic 3552 TT Jenny Tsai
In the early stage, TTE provided parking radar to Nan Yang Industries and Yulon Motor (2201.TW). In the end of 1990s, due to labor shortage, Chairman decided to move factories to Xiamen. In 1994-2000, when Yulon Motor started to cooperate with Dongfeng Motor, TTE was able to penetrate into the Dongfeng Motor supply chain based on its previous relationship with Yulon Motor, also giving itself an opportunity to penetrate into other China local brands. As the Chinese economy picked-up, increasing global auto brands started to expand business in China through JVs, which paved the way for TTE to penetrate into global tier I OEM auto parts supply chain with their recognized products and quality.
Exhibit 41: Management Exhibit 42: Top ten shareholders
Name Position
Hsin-Chung Chen CEO and Chairman
Ch'en Shun Jung CTO
Li Chih Liang CEO in China region
Lu Fang Ch'eng Financial Manager
(%)
1 Hsin-Chung Chen 4.52
2 Quan Hang Investment Co., Ltd. 3.81
3 Ch'en Sheng Ju 3.71
4 Ch'en Shun Jung 3.51
5 Tong Zhan Investment Co., Ltd. 3.29
6 Samoa Gold Rock International 3.23
7 Xu Hang Investment Co., Ltd. 3.1
8 Taiwan Bank & Jun Hao Emerging Market Sm 2.05
9 Sheng Wei Investment Co., Ltd. 1.81
10 Samoa Ai Fan High-tech International Ltd 1.76
Source: Tung Thih Annual report Source: TEJ
Exhibit 43: Organization chart
Source: Tung Thih
Tung Thih Electronics
同冠顧問有限公司
台灣Tung Thih Electronic
USA Co, Inc.Tung Thih Electronic
Japan Co, Inc.Tung Thih Electronic
Europe GmbHPolar Lights
Enterprise Ltd.
Forever Lucky Investment Development Corp.
Tung Thih Electronic(Xiamen)China Co, Inc.
Tung Thih Electronic(Kushan)China Co, Inc.
Great Combo Ltd.
100% 100% 100% 100% 100%
100%100%
100% 75%
25%
BNP PARIBAS 30 JANUARY 2016 62
Tung Thih Electronic 3552 TT Jenny Tsai
Corporate governance
Board structure
Number of Independent Directors (ID) 3
Percentage of IDs in the board 27.27%
ID participation/attendance at board meetings 27.27%
ID participation in audit/remuneration committees 100%
ID terms (years of service, re-election/replacement procedures) 3 years
Sources: Company; BNP Paribas
Additional comments: NA
Audit Practices
Auditor PWC
Length of service 2 years
Reporting incidents NA
Fee track record TWD 3,280,000 for 2014
Policy on change of Audit firm NA
Sources: Company; BNP Paribas
Additional comments: NA
Compensation and remuneration
Directors' remuneration vs. earnings/ROE/share performance 2.63% of 2014 earnings
Changes/stability in senior management Stable
Incidents of termination of senior management Change in CEO in 2010
Track record on Insider sales 560k shares transacted in 2015
Sources: Company; BNP Paribas
Additional comments: NA
Shareholders' rights
Communication - shareholder participation in AGMs/EGMs 71.57%
Related party transactions NA
Voting issues - policies, incidents of rejected proposals None
EV/invested capital (x) 11.3 8.4 7.7 6.2 5.2* Pre exceptional & pre-goodwill and fully diluted ** EBITDA includes associate income and recurring non operating income
BNP PARIBAS 30 JANUARY 2016 65
Sunny Optical Technolog y 2382 H K BNP PARIBAS Laura Chen
30 JANUARY 2016 HONG KONG / TECHNOLOGY HARDWARE & EQUIPMENT
SUNNY OPTICAL TECHNOLOGY 2382 HK
Grabbing the lens opportunity KEY STOCK DATA
Sources: FactSet estimates; BNP Paribas estimates
Decelerating growth in phone camera module well anticipated Despite muted smartphone growth and fierce price competition in China, Sunny’s camera module business growth was better than the market average, with shipments up 22% y-y in 2015. We believe the company’s better technology in higher resolution products and dual-cam design should help sustain its ASP and maintain y-y growth. We forecast 16% y-y camera module shipment growth in 2016 vs the Chinese smartphone market’s flattish growth outlook.
More upside potential in lenses Sunny’s phone camera lens business has shown strong y-y growth over the past two years, thanks to its improving yield rate and capacity. We expect the company to continue taking shares in China and moving to the high-end 13MP+ market. We are looking for 48% y-y shipment growth for its lens business in 2016 (vs over 100% y-y in 2015). Sunny plans to further expand its lens capacity to 40m units per month in 2016 from 30m units per month in 2015.
Opportunities in machine vision, automobile and IoT Sunny is currently the global No.1 vehicle lens supplier in volume terms. With increasing ADAS (Automatic Driver Assist Systems) penetration and tighter safety regulations, we see solid growth prospects here. Besides, Sunny has started working on machine vision and more applications in IoT. These should provide longer-term catalysts following its success in the mobile phone space.
Upgrade to BUY, TP HKD20 In light of Sunny’s positive growth outlook in lens and automobile and IoT applications, we have increased our 2016E/2017E earnings by 7% and 19%. While we think the slow smartphone market could remain a near-term headwind, Sunny Optical should be able to improve its lens shipments to sustain margins over the longer term. Sunny’s share price has already pulled back c8% over the past month (vs MSCI Hong Kong down c11%); we think it is a good entry point. Upgrade to BUY with a HKD20 TP (18x our 2016/17E average EPS).
Sunny Optical Technology Rel to MSCI Hong Kong(HKD) (%)
66
Sunny Optical Technology 2382 HK Laura Chen
Investment thesis Sunny Optical is not immune to the slowdown in smartphone growth and fierce price competition in China. However, we believe the company’s leading technology in higher resolution products and dual cam design should sustain its ASP and we are looking for 16% y-y shipment growth for its camera module business in 2016.
Given the rising demand for ADAS and connected cars, as well as increasing safety regulations, we see solid growth prospects for Sunny Optical as the global No. 1 vehicle lens supplier. Moreover, the company has started engaging in machine vision and more applications in IoT, and we believe these could provide more earnings catalyst in the longer term following its success in the smartphone space.
We upgrade Sunny Optical to BUY (from Hold), with a new TP of HKD20 (from HKD15). We have also increased our 2016E/2017 earnings forecasts by 7%/19% to reflect our view that the company will be able to show positive growth in lens, automobile and IoT applications. Our TP is based on 18x (from 16x) our 2016/17E EPS average, at the mid- to high-end of the P/E range of the last three years.
Catalyst The company’s share price has already pulled back c8% in a past month and we believe that decelerating growth in smartphone camera module is well anticipated by the market. We expect increasing ADAS penetration and tighter safety regulations to drive up the share price.
Besides, Sunny Optical’s engagement in machine vision and more applications in IoT should sustain its longer-term growth, in our view.
Risk to our call Key risks to our call include: 1) slower than expected smartphone camera upgrading trend, 2) unexpected ASP decline, and 3) lower than expected ADAS demand/ penetration.
Company background Key assumptions
Sunny Optical is China’s leading optical components and products manufacturer. It is currently the largest camera module producer for smartphones in China. Its major customers include Huawei, Lenovo, Oppo, Ginoee and BBK. In addition to camera modules, it produces optical components and instruments.
Key factors for our sensitivity analysis are shipment growth and OPM.
If shipment growth increases/decreases 2% in 2015/2016, EPS would change by 1.1%/1.1%, all else being equal.
If OPM changes by 2% in 2015/2016, EPS would change by 14%/15.2%, all else being equal.
Optical components - 16.6%
Optoelectronic porducts - 80.7%
Optical instrument - 2.6%
BNP PARIBAS 30 JANUARY 2016 67
Sunny Optical Technology 2382 HK Laura Chen
Decelerating growth in phone camera modules well anticipated
Despite muted smartphone growth and fierce price competition in China, Sunny’s camera module business growth was better than the market average with shipments up 22% y-y in 2015. We believe the company’s better technology in higher resolution products and dual-cam design should help sustain its ASP and maintain y-y growth. For 2016, we expect camera module shipments to grow 16% y-y, reaching 265m units vs the Chinese smartphone market’s flattish growth outlook of 455m units, according to Gartner.
More upside potential in lenses
Sunny’s phone camera lens business has shown strong y-y growth over the past two years, thanks to its improving yield rate and capacity. We expect the company to continue taking shares in China and moving to the high-end 13MP+ market. We are looking for 48% y-y shipment growth for its lens business in 2016 (vs over 100% y-y in 2015). Sunny plans to further expand its lens capacity to 40m units per month in 2016 from 30m units per month in 2015.
Exhibit 1: Sunny Optical Camera module shipment trend
Exhibit 2: Sunny Optical camera modules shipment by resolution
Opportunities in machine vision, automobile and IoT
According to management, Sunny is the global No.1 vehicle lens supplier in volume terms with about 35% market share. Key clients include Mobileye, Gentex, TRW, Valeo, Bosch, and Delphi. Vehicle lenses now contribute about 5-6% of its revenue; on the back of increasing ADAS penetration and the safety regulation push, we see a solid growth outlook here. Besides, Sunny has started working on machine vision and more applications in IoT. Machine vision involves AI technologies that allow camera-equipped devices to make sense of the images they’re capturing. The Internet of things offers plenty of opportunities for low-power, high-performance vision processing, from helping robots find their way, to enabling connected devices to recognise and adapt to their users. Sunny has invested in several start-up solution providers such as Movidius and Mantis Vision and Light, focusing on 3D image, precision manufacturing and new camera applications. These could provide more earnings catalysts in the longer term following its success in the mobile phone space.
Upgrade to BUY, TP HKD20
Given the muted smartphone outlook and fierce competition in the phone camera space, our 2H15 net profit projection is 11% lower than Bloomberg consensus. However, we think the downside risk from phone cameras is limited and we see more upside potential in its lens business.
In light of Sunny’s positive growth outlook in lens, automobile and IoT applications, we have increased our 2016/2017 earnings estimates by 7% and 19%. While we think the slow smartphone market could remain a near-term headwind, we think its early movement in new technology such as dual-cam and 3D machine vision will help the company achieve stronger growth in 2017. Along with its increasing lens sales, we expect to see margin recovery in 2017.
Given Sunny’s share price has already pulled back c8% over the past month vs MSCI Hong Kong down c11%, we think it is a good entry point. Upgrade to BUY with a new TP of HKD20 (18x our 2016/2017E average EPS). We increased our target PER from 16x in light of its positive long term growth potential in lens and non-smartphone business, and this multiple is at the mid- to high end of its two-year historical P/E range.
Exhibit 4: 2H15 earnings preview
BNPP 2H15E 1H15 Change 2H14 Change BBG 2H15E Diff
(RMB m) (RMB m) (h-h %) (RMB m) (y-y %) (RMB m) (%)
EV/invested capital (x) 6.2 4.0 3.7 3.4 3.2* Pre exceptional & pre-goodwill and fully diluted ** EBITDA includes associate income and recurring non operating income
BNP PARIBAS 30 JANUARY 2016 74
GREATER CHINA TECHNOLOGY Laura Chen
Financial statementsJoyson Electronics
Profit and Loss (RMB m) Year Ending Dec 2013A 2014A 2015E 2016E 2017E
Revenue 6,104 7,077 8,394 10,645 13,070
Cost of sales ex depreciation (4,668) (5,390) (6,166) (7,883) (9,775)
Gross profit ex depreciation 1,436 1,687 2,228 2,762 3,294Other operating income - - - - -
EV/invested capital (x) 5.6 5.2 4.3 3.7 3.2* Pre exceptional & pre-goodwill and fully diluted
Source: Joyson Electronics, BNP Paribas estimates
* includes convertables and preferred stock which is being treated as debt
** EBITDA includes associate income and recurring non operating income
BNP PARIBAS 30 JANUARY 2016 76
GREATER CHINA TECHNOLOGY Laura Chen
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BNP PARIBAS 30 JANUARY 2016 77
GREATER CHINA TECHNOLOGY Laura Chen
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BNP PARIBAS 30 JANUARY 2016 78
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BNP PARIBAS 30 JANUARY 2016 79
GREATER CHINA TECHNOLOGY Laura Chen
Disclaimers and Disclosures
APPENDIX
DISCLAIMERS AND DISCLOSURES APPLICABLE TO NON-US BROKER-DEALER(S): BNP PARIBAS SECURITIES (TAIWAN) CO LTD
ANALYST(S) CERTIFICATION
Laura Chen, BNP Paribas Securities (Taiwan) Co Ltd, +886 2 8729 7052, [email protected]
The BNP Paribas Securities (Taiwan) Co Ltd Analysts mentioned in this disclaimer are employed by a non-US affiliate of BNP Paribas Securities Corp., and are not registered/ qualified pursuant to NYSE and/or FINRA regulations
The individual(s) identified above certify(ies) that (i) all views expressed in this report accurately reflect the personal view of the analyst(s) with regard to any and all of the subject securities, companies or issuers mentioned in this report; and (ii) no part of the compensation of the analyst(s) was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed herein.
IMPORTANT DISCLOSURES REQUIRED IN THE UNITED STATES BY FINRA RULES AND OTHER JURISDICTIONS "BNP Paribas” is the marketing name for the global banking and markets business of BNP Paribas Group. No portion of this report was prepared by BNP Paribas Securities Corp (US) personnel, and it is considered Third-Party Affiliate research under NASD Rule 2711. The following disclosures relate to relationships between companies covered in this research report and the BNP entity identified on the cover of this report, BNP Securities Corp., and other entities within the BNP Paribas Group (collectively, "BNP Paribas").
The disclosure column in the following table lists the important disclosures applicable to each company that has been rated and/or recommended in this report:
BNP Paribas represents that: 1. Within the past year, it has managed or co-managed a public offering for this company, for which it received fees.2. It had an investment banking relationship with this company in the last 12 months.3. It received compensation for investment banking services from this company in the last 12 months.4. It expects to receive or intends to seek compensation for investment banking services from the subject company/ies in the next 3 months.5. It beneficially owns 1% or more of any class of common equity securities of the subject company.6. It makes a market in securities in respect of this company.7. The analyst(s) or an individual who assisted in the preparation of this report (or a member of his/her household) has a financial interest position in
securities issued by this company. The financial interest is in the common stock of the subject company, unless otherwise noted.8. The analyst (or a member of his/her household) is an officer, director, or advisory board member of this company or has received compensation from the
company.
IMPORTANT DISCLOSURES REQUIRED IN KOREA The disclosure column in the following table lists the important disclosures applicable to each Korea listed company that has been rated and/or recommended in this report:
1. The performance of obligations of the Company is directly or indirectly guaranteed by BNP Paribas Securities Korea Co. Ltd (“BNPPSK”) by means ofpayment guarantees, endorsements, and provision of collaterals and/or taking over the obligations.
2. BNPPSK owns 1/100 or more of the total outstanding shares issued by the Company.3. The Company is an affiliate of BNPPSK as prescribed by Item 3, Article 2 of the Monopoly Regulation and Fair Trade Act.4. BNPPSK is the financial advisory agent of the Company for the Merger and Acquisition transaction or of the Target Company whereby the size of the
transaction does not exceed 5/100 of the total asset of the Company or the total number of outstanding shares.5. BNPPSK has taken financial advisory service regarding listing to the Company within the past 1 year.6. With regards to the tender offer initiated by the Company based on Item 2, Article 133 of the Financial Investment Services and Capital Market Act,
BNPPSK acts in the capacity of the agent for the tender offer designated either by the Company or by the target company, provided that this provisionshall apply only where tender offer has not expired.
7. The listed company which issued the stocks in question in case where 40 days has not passed since the new shares were listed from the date of entering into arrangement for public offering or underwriting-related agreement for issuance of stocks
8. The Company that has signed a nominated advisor contract with BNPPSK as defined in Item 2 of Article 8 of the KONEX Market Listing Regulation.9. The Company is recognized as having considerable interests with BNPPSK in relation to No.1 to No. 8.10. The analyst or his/her spouse owns (including delivery claims of marketable securities based on legal regulations and trading and misc. contracts) the
following securities or rights (hereinafter referred to as “Securities, etc.” in this Article) regardless of whose name is used in the trading.1) Stocks, bond with stock certificate, and certificate of pre-emptive rights issued by the Company whose securities dealings are being solicited.2) Stock options of the Company whose securities dealings are being solicited.3) Individual stock future, stock option, and warrants that use the stocks specified in Item 1) as underlying.
Company Ticker Disclosure (as applicable)
Sunny Optical Technology 2382 HK 2, 3, 4
Company Ticker Price (as of 21-Jan-2016 closing price) InterestN/A N/A N/A N/A
BNP PARIBAS 30 JANUARY 2016 80
GREATER CHINA TECHNOLOGY Laura Chen
History of change in investment rating and/or target price
Sunny Optical Technology (2382 HK)
Laura Chen started covering this stock from 03 Oct 2013 Price and TP are in local currency Valuation and risks: Key downside risks to our P/E-based target price include: 1) slower than expected smartphone camera upgrading trend, 2) unexpected ASP decline, and 3) lower than expected ADAS demand/ penetration Sources: FactSet; BNP Paribas
Joyson Electronics (600699 CH)
Jimmy Huang started covering this stock from 29 January 2016 Price and TP are in local currency Valuation and risks: Our TP is based on 32x FY16E P/E. Risk: 1) soft global auto market, 2) currency trends, especially EUR depreciation, 3) market competition, 4) market share loss to international competitors, 5) difficulties integrating overseas and domestic business units, and 6) slower-than-expected EV development in China and overseas.. Sources: FactSet; BNP Paribas
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Date Rating Target price Date Rating Target price Date Rating Target price03-Oct-13 Hold 8.30 26-Jun-14 Hold 10.42 27-Apr-15 Hold 18.0002-Dec-13 Hold 7.30 18-Aug-14 Hold 9.20 18-Aug-15 Hold 15.0012-Mar-14 Hold 8.40 27-Jan-15 Reduce 9.20
Date Rating Target price Date Rating Target price31-Aug-15 Buy 30.00 28-Oct-15 Buy 35.50
BNP PARIBAS 30 JANUARY 2016 81
GREATER CHINA TECHNOLOGY Laura Chen
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This publication may not be distributed to the public media or quoted or used by the public media without the express written consent of BNP Paribas.
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the brand name “BNP PARIBAS/FSS”. BNPP is not an affiliate of FSSIA or FSS. FSS also publishes a different research product under the brand name “FINANSIA SYRUS,” which is prepared by research analysts who are not part of FSSIA and who may cover the same securities, issuers, or industries that are the subject of this report. The ratings, recommendations, and views expressed in this report may differ from the ratings, recommendations, and views expressed by other research analysts or research teams employed by FSS. This report is being distributed outside Thailand by members of BNP Paribas. Turkey: This report is being distributed in Turkey by TEB Investment (TEB YATIRIM MENKUL DEGERLER A.S., Teb Kampus D Blok Saray Mah. Kucuksu Cad. Sokullu Sok., No:7 34768 Umraniye, Istanbul, Turkey, Trade register number: 358354, www.tebyatirim.com.tr) and outside Turkey jointly by TEB Investment and BNP Paribas. Information, comments and suggestions on investment given in this material are not within the scope of investment consulting. The investment consulting services are rendered tailor made for individuals by competent authorities considering the individuals’ risk and return preferences. However the comments and recommendations herein are based on general principles. These opinions may not be consistent with your financial status as well as your risk and return preferences. Therefore, making an investment decision only based on the information provided herein may not bear consequences in parallel with your expectations. This material issued by TEB Yatırım Menkul Değerler A.Ş. for information purposes only and may be changed without any prior notification. All rights reserved. No part of this material may be copied or reproduced in any manner without the written consent of TEB Yatırım Menkul Değerler A.Ş. Although TEB Yatırım Menkul Değerler A.Ş. gathers the presented material that is current as possible, it does not undertake that all the information is accurate or complete, nor should it be relied upon as such. TEB Yatırım Menkul Değerler A.Ş. assumes no responsibility whatsoever in respect of or arising out or in connection with the content of this material to third parties. If any third party chooses to use the content of this material as reference, he/she accepts and approves to do so entirely at his/her own risk.
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RECOMMENDATION STRUCTURE
Stock Ratings Stock ratings are based on absolute upside or downside, which we define as (target price* - current price) / current price. BUY (B). The upside is 10% or more. HOLD (H). The upside or downside is less than 10%. REDUCE (R). The downside is 10% or more. Unless otherwise specified, these recommendations are set with a 12-month horizon. Thus, it is possible that future price volatility may cause a temporary mismatch between upside/downside for a stock based on market price and the formal recommendation. * In most cases, the target price will equal the analyst's assessment of the current fair value of the stock. However, if the analyst doesn't think the market willreassess the stock over the specified time horizon due to a lack of events or catalysts, then the target price may differ from fair value. In most cases, therefore, our recommendation is an assessment of the mismatch between current market price and our assessment of current fair value. Industry Recommendations Improving (): The analyst expects the fundamental conditions of the sector to be positive over the next 12 months. Stable (previously known as Neutral) (): The analyst expects the fundamental conditions of the sector to be maintained over the next 12 months. Deteriorating (): The analyst expects the fundamental conditions of the sector to be negative over the next 12 months. Country (Strategy) Recommendations Overweight (O). Over the next 12 months, the analyst expects the market to score positively on two or more of the criteria used to determine market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns relative to the market cost of equity. Neutral (N). Over the next 12 months, the analyst expects the market to score positively on one of the criteria used to determine market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns relative to the market cost of equity. Underweight (U). Over the next 12 months, the analyst does not expect the market to score positively on any of the criteria used to determine market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns relative to the market cost of equity.
RATING DISTRIBUTION (as at 29 January 2016)
Should you require additional information concerning this report please contact the relevant BNP Paribas research team or the author(s) of this report.
Total BNP Paribas coverage universe 725 Investment Banking Relationship (%)
Buy 419 (57.8%) Buy 28.16
Hold 192 (26.5%) Hold 35.42
Reduce 114 (15.7%) Reduce 34.21
BNP PARIBAS 30 JANUARY 2016 83
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HONG KONG BNP Paribas Securities (Asia) Ltd 63/F, Two International Finance Centre 8 Finance Street, Central Hong Kong SAR China Tel (852) 2825 1888 Fax (852) 2845 9411
SHANGHAI
KUALA LUMPUR
Malaysia
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MUMBAI
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35/F
31
TAIPEI BNP Paribas Securities (Taiwan) Co Ltd 72 F, Taipei 101 No. 7 Xin Yi Road, Sec. 5 Taipei, Taiwan
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Tel
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https://eqresearch.bnpparibas.com
TEB Investment (A JV between TEB Bank and BNP Paribas) TEB Kampus D7 Saray Mahallesi Sokullu Sok No 7 Umraniye 34768 Istanbul Turkey Tel: (90 216) 636 44 44 Fax: (90 216) 631 44 00
