DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 2 March 2017 Americas/United States Equity Research Semiconductor Devices Semiconductors Research Analysts John W. Pitzer 212 538 4610 [email protected]William Miller 212 325 6964 [email protected]Charles Kazarian 212 538 4160 [email protected]Steven Jozkowski 212 325 2685 [email protected]COMMENT MWC 2017 – More Infrastructure, Less Handsets Introduction: We attended MWC 2017 in Barcelona, meeting with approximately 35 companies over 3 days across the handset and wireless infrastructure ecosystem. While this year's attendance, especially relative to investors, felt lighter than in the past reflecting perhaps lackluster handset introduction and a 5G transition which is still mostly on the come, we would highlight the following takeaways: (1) Handset innovation continues to underwhelm. It was fitting that the “buzz” MWC 2017 handset was the retro Nokia 3310. High-end launches from LG, Sony, Huawei and ZTE and mid-tier launches from Gionee and others had only incremental features albeit memory trends continued positive. Enthusiasm for AR/VR as the next handset killer app waned and while there is optimism on the coming GS8/ iPhone 8 cycles, it's more about replacement math than new features. (2) China Handsets worse than expected. China handsets are tracking down 10-15% q/q, worse than seasonal of down 10% q/q with OEMs and component suppliers in Barcelona incrementally more cautious on a C2Q recovery as the inventory correction is a bit deeper/longer than anticipated. We continue to estimate China handset unit growth of 6% in CY17, down from a 3YR CAGR of 25%. (3) Memory trends continue positive. Despite weak China handsets, commentary from handset OEMs and Infrastructure supply chain continues to point to tight memory supply for most of 2017. Weak C1Q demand is more than offset by extremely low inventory levels, and with GS8 ramp next month/iPhone 8 procurement starting in late C2Q, we see continued pricing tailwinds. Infrastructure memory content continues to accelerate with clear concern on under-supply in 2017. (4) Baseband share trends appear steady for 2017. While INTC introduced XMM 7650, its gigabit LTE modem with CDMA support on a 14nm internal process last week, we do not expect meaningful volume until 2018 implying share shifts in 2017 should be minimal. We would note in INTC's latest 10-K, mobile platform Rev in 2016 increased $222m or ~30% y/y, albeit less contra revenue helped. (5) AAPL tracking to plan. iPhone units are declining in-line with seasonal in 1H17, embedding ~80m C1H builds; the iPhone 8 "super cycle" in C2H should drive builds up at least >10% y/y, in addition clear biased to positive mix on larger screen and higher density. Wireless charging speculation still just that albeit RF content growth still strong y/y.
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DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Huawei Working with China Mobile on 5G China Mobile Published progress of 5G dual connectivity and presented AR/VR demos
Huawei Released 1st 5G network slicing routerProvides 50GE base station access and seamless compatability with 100GE, and achieves physical isolation of port
channels
INTCAnnounced progress on 5G trial with
ERIC/TERIC, T
5G trials will begin in Spring 2017 based on INTC's 5G Mobile Trial Platform - will enable residential and small to
medium business customers to access enhanced entertainment and broadband service
NOK Massive MIMO demo with Sprint Sprint Joint demonstration by Nokia & Sprint - 1st by US operator to use massive MIMO for TDD-LTE spectrum.
NOK Introduced 5G FIRST solution INTC, VZComprises radio access network (RAN) including NOK AirScale massive MIMO adaptive antennas and mobile transport
solutions as well as full service using INTC architecture and INTC 5G modem for initiation deployments starting in 2017
QCOMIntroduced 5G NR Trials at 3.5GHz
spectrumChina Mobile, ZTE Working with China Mobile and ZTE on 5G for faster deployments in China
QCOMPartnering with ERIC and network
operators for 5G NR Field Trials
ERIC, VOD, TLS, NTT
Docomo
QCOM and ERIC announced plans with VOD, TLS, and NTT Docomo to perform interoperability testing and field trial
based on 5G NR specifications being developed by 3GPP, starting in C2H17, C2H17, and C1H18 respectively.
QRVOIntroduced Industry's First 5G
Front End3GPP
QM 19000 RFFE delivers high linearity, ultra-low latency, and extremely high thoroughput to meet or exceed the
developing requirements of upcoming 5G applications
ZTELaunched first SDN/NFV 5G IT baseband
unit based on INTC architectureINTC
Based on INTC architecture, compatible with 2G/3G/4G/Pre5G and supports cloud-radio access networks (C-RAN),
distributed-RAN (D-RAN) and 5G central and distributed units (CU/DU)
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Semiconductors 5
Partnerships: The 5G standards process is gathering momentum even if two camps
(VZ+NOK led consortium, and then a wider 3GPP consortium) are driving slightly different
paths, and the timeline now looks more secure with small scale trails in 2017, standards
being set in 2018, and rollouts beginning in 2019 with mass deployments by 2020. Given
the network infrastructure market has consolidated from 10 players in 2000 to 4 players
(ERIC, NOK, Huawei and ZTE) today, 5G standardization will require the continued global
partnering of the largest telecommunications technology developers, mobile operators and
Semi suppliers. In addition to progress from already-existing partnerships including VZ's
5G Technical Forum and the broader 3GPP, we would highlight the following at MWC
2017:
■ QCOM and ERIC announced plans with VOD, TLS, and NTT Docomo to perform
interoperability testing and field trials based on 5G NR starting in C2H17, C2H17, and
C1H18 respectively.
■ INTC and NOK announced fixed access availability with NOK 5G FIRST, comprised of
NOK’s radio access network (RAN) and INTC’s 5G modem and based on VZ 5G
Technology Forum specs – first deployments in C2H17.
■ INTC and T are launching their second 5G market trial in Texas based on 2nd-gen
INTC 5G Mobile Trial Platform and 39 GHz RFIC.
■ QRVO launched the industry’s first 5G RF front-end (QM19000 RFFE) – the Company
continues to help define 5G standards as a delegate to 3GPP.
5G Applications and Capabilities: The market expects three high-level use cases for 5G
specifications: (1) enhanced mobile broadband to support fast growing consumption of
video and other data-intensive mobile applications (AR/VR, 4K/8K video), (2) Machine to
Machine Communications for IoT applications involving large numbers of connected
devices, and (3) ultra-reliable and low latency communications for autonomous vehicles,
medical applications, smart grids, and industrial control systems. According to Ericsson,
5G will enable 29 billion devices to be connected to the internet globally by 2022, even as
data consumption grows by 5x per smartphone to ~25Gb per month, driven by increasing
internet video consumption. Key 5G technical requirements as per the International
Telecommunication Union (ITU) include: ultra-low latency, higher bandwidth, expanded
capacity, and energy efficiency – all supportive of our Data Growth Thesis, specifically
across the Auto/Industrial end-markets.
Figure 4: 5G utilizes new spectrum at >6GHz, plus current LTE infrastructure
Source: Company data
INTC Continues to Exert Influence: While the Mobile Comms standard setting
organization 3GPP was mostly composed of network infrastructure companies and QCOM
when the industry was setting standard for 2G and 3G, INTC is directly participating in the
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Semiconductors 6
development of 5G standards. We believe investing in 5G is a critical step for INTC as it
largely missed the opportunity to be a meaningful player in the 4G/LTE baseband battle.
INTC’s 5G demos at MWC 2017 highlighted the Company’s efforts in Autonomous driving
(1st public demo of 5G 28 GHz over the air connectivity between ERIC base station and
INTC GO Auto 5G Platform), Smart Home/VR and Smart Cities. Further, INTC expanded
numerous 5G partnerships including:
■ Collaboration with T, China Mobile, NTT DOCOMO, VOD, ERIC, Huawei, NOK on a
unified standard for 5G.
■ INTC and NOK announced fixed access availability with NOK 5G FIRST, comprised of
NOK’s radio access network (RAN) and INTC’s 5G modem to deliver fixed access
ultra-broadband wireless connectivity – first deployments in C2H17.
■ INTC and T launching their second 5G market trial in Texas based on 2nd-gen INTC
5G Mobile Trial Platform and 39 GHz RFIC.
■ INTC, ERIC, China Mobile announced the 1st Interoperable Cellular IoT-based factory
trial – leverages INTC XMM 7115 NB-IoT modem.
■ ZTE launched the first SDN/NFV 5G IT baseband unit based on INTC architecture. By
utilizing advanced SDN/NFV virtualization technology, the modular IT BBU is
compatible with 2G/3G/4G/Pre5G and supports cloud-radio access networks (C-RAN),
distributed-RAN (D-RAN) and 5G central and distributed units (CU/DU), which equips it
with a robust ability for future development.
Wearables and AR/VR Hype Dies Down
MWC 2017 featured a lack of VR/wearables launches, in stark contrast to 1/2 years ago
respectively. Specific to VR Samsung unveiled the latest iteration of its Gear VR which
included an Oculus controller – while VR hype is nowhere near MWC 2016 levels which
featured multiple flagship launches and subsidies, and while AR/VR could have limited
financial impact in near term, with time, as newer products try to offer a more advanced
immersive experience, AR/VR can require even higher compute and graphics power that
could drive higher computing requirements for several years. In addition, AR/VR could
drive higher investment in the infrastructure required to support higher bandwidth and
computing requirements.
The major wearable launch was the Huawei Watch 2 which was most notable in that it
does not require tethering to a smartphone via SIM card slot – we view this as an
important driver towards more pervasive wearable adoption. Other features included
improved battery life, GPS, heart rate monitor, and NFC. MWC also featured demos of the
LG Watch (launched in early Feb). Despite slowing momentum around wearables as the
technology/capability is still outpacing the utility/market of such devices and the
infrastructure in place to support them, we believe that wearables still hold significant
promise, especially around health and fitness. We continue to see Wearables and IoT as
longer term accretive drivers for silicon consumption (Wearables unit CAGR of 25%
through 2020) but only when applications support their utility – 5G adoption an important
driver for IoT/IoE. Relative to the IoT opportunity for Semis we see multiple green shoots
for content growth in non-traditional areas including Factory Automation.
Autos: Semi Rev Growth Driven by Content
Autos Establishing Their Presence at MWC. Daimler, BMW, Ford, and Peugeot were
the four auto manufacturers at MWC in 2017 – a new emerging trend at a historically
handset dominated conference – signaling an emerging trend in the Semiconductor world
where Auto Electronics are moving to center stage. Peugeot brought a world-premier
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Semiconductors 7
concept car to MWC which had two self-driving modes and two active modes, providing
the driver more flexibility over how much control to give the vehicle. Mercedes-Benz
showcased their CASE strategy – Connected, Autonomous, Shared & Service, and
Electric Drive – with several products under the Daimler umbrella such as Moovel and
Car2go which focus of ride-sharing services. The presence of Auto OEMs at MWC is a
logical step given that more cars were newly connected to cell service than other device
last year (~32% vs. phones at ~31%). In addition to the major OEMs, other car brands
have released 5G connected car prototypes that communicate with several systems via
GPS and Cloud Services – indicating that IoT is rapidly emerging in the Auto world.
Roborace launched their first driverless robot car – Roborace is starting the world's first
motorsports for driverless robot cars in collaboration with Formula E – which is equipped
with five lidars, two radars, and six cameras, while the brain is powered by the NVDA
Drive PX2 AI chip.
Figure 5: Jan Auto Sales Up 1.5% Y/Y
Source: Company data, Credit Suisse estimates
Incremental Silicon Opportunities in Autos. The largest Semi Auto supplier announced
that five leading car OEMs will equip their future cars with Near Field Communication
(NFC) devices. This technology will enable secure interactions between smartphones and
smart cars such as complementary car access, Bluetooth and Wi-Fi pairing,
personalization and payments. NFC continues to gain momentum with consumers fueled
by the popularity of NFC-enables mobile phones and wearables. NFC devices can interact
within smart city infrastructure to provide secure access to hotel rooms, health clubs,
public transport, parking entry, stadiums, and other smart cars. QCOM also announced a
major design win with PSA Group, who will integrate the Snapdragon 820 Automotive
(820A) processor in to next-gen vehicles. As QCOM's most advanced automotive solution,
the Snapdragon 820A processor can support the PSA Group’s infotainment systems to
deliver immersive in-car experiences, such as music and video streaming, 3-D navigation,
support for multiple high-resolution displays, and superior GPU performance with
intelligent pre-emption and context switching – the processor is expected to begin
appearing in select PSA vehicles starting in 2020. Lastly, Huawei and Vodafone, with the
support of Audi, have demonstrated the use of cellular technology to connect cars to each
other, to people, and to roadside infrastructure using a new technology called Cellular V2X
(C-V2X). As part of the move to 5G, the new C-V2X technology enables rapid exchange of
information promising to bring about a transformational change to driving, vehicle safety,
Companies Mentioned (Price as of 02-Mar-2017) AT&T (T.N, $42.07) Advanced Micro Devices, Inc. (AMD.OQ, $13.9) Amazon com Inc. (AMZN.OQ, $848.91) Analog Devices Inc. (ADI.OQ, $83.65) Apple Inc (AAPL.OQ, $138.96) BMW (BMWG.F, €86.964) BlackBerry (BBRY.OQ, $6.89) Broadcom Ltd (AVGO.OQ, $217.29) Cavium (CAVM.OQ, $66.78) China Mobile Limited (0941.HK, HK$85.35) Cirrus Logic (CRUS.OQ, $54.25) Daimler (DDAIY.PK^A17, $97.75) Ericsson (ERIC.OQ, $6.53) Facebook Inc. (FB.OQ, $136.76) Ford Motor Company (F.N, $12.66) Gionee Communication (Unlisted) Huawei Technologies (Unlisted) Intel Corp. (INTC.OQ, $35.91) LG Electronics Inc (066570.KS, W61,600) Lenovo (LNVGY.PK, $30.685) Lenovo Group Ltd (0992.HK, HK$4.66) Linear Technology Corp. (LLTC.OQ, $64.95) Mellanox Technologies Ltd. (MLNX.OQ, $48.1) Micron Technology Inc. (MU.OQ, $24.7) NTT DoCoMo (9437.T, ¥2,683) NVIDIA Corporation (NVDA.OQ, $99.0) NXP Semiconductors N.V. (NXPI.OQ, $103.61) Nokia (NOK.N, $5.22) PSA Peugeot Citroen (PEUP.PA, €18.525) QUALCOMM Inc. (QCOM.OQ, $56.37) Qorvo (QRVO.O, $66.11) Samsung Electronics (005930.KS, W1,986,000) Skyworks Solutns (SWKS.O, $94.76) Sony (6758.T, ¥3,583) Telstra Corporation (TLS.AX, A$4.57) Texas Instruments Inc. (TXN.OQ, $78.08) Verizon Communications Inc (VZ.N, $49.98) Vivocom Intl (VIVO.KL, RM0.175) Vodafone Group (VOD.L, 202.5p) Volkswagen (VLKPY.PK, $49.72) Xiaomi (Unlisted) Xilinx (XLNX.OQ, $59.35) ZTE Corporation (0763.HK, HK$12.54)
Disclosure Appendix
Analyst Certification I, John W. Pitzer, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for LG Electronics Inc (066570.KS)
066570.KS Closing Price Target Price
Date (W) (W) Rating
29-Apr-14 71,700 83,000 N *
24-Jul-14 77,000 87,000
29-Oct-14 67,800 78,000
29-Jan-15 62,600 75,000
29-Apr-15 61,200 68,000
02-Jun-15 55,400 62,000
09-Jul-15 45,750 53,500
29-Jul-15 43,800 49,000
25-Aug-15 40,850 45,500
30-Oct-15 49,100 46,200
26-Jan-16 54,800 49,000
16-Mar-16 61,900 54,000
28-Apr-16 58,200 57,000
19-May-16 54,000 50,000
25-Jan-17 54,200 52,000
* Asterisk signifies initiation or assumption of coverage.
N EU T RA L
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Semiconductors 12
3-Year Price and Rating History for Samsung Electronics (005930.KS)
005930.KS Closing Price Target Price
Date (W) (W) Rating
06-May-14 1,346,000 1,760,000 O
07-Jul-14 1,292,000 1,740,000
08-Jul-14 1,295,000 1,720,000
28-Aug-14 1,242,000 1,700,000
07-Oct-14 1,162,000 1,680,000
03-Sep-15 1,122,000 1,630,000
29-Oct-15 1,325,000 1,785,000
11-Jan-16 1,152,000 1,690,000
28-Jan-16 1,145,000 1,550,000
01-Jun-16 1,333,000 1,702,000
28-Jul-16 1,507,000 1,790,000
15-Dec-16 1,759,000 2,400,000
24-Jan-17 1,908,000 2,650,000
* Asterisk signifies initiation or assumption of coverage.
O U T PERFO RM
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Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 45% (64% banking clients) Neutral/Hold* 39% (59% banking clients) Underperform/Sell* 14% (53% banking clients) Restricted 2% *For purposes of the NYSE and FINRA ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, a nd Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.
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This research report is authored by: Credit Suisse Securities (USA) LLC ................................................................................................................... John W. Pitzer ; Steven Jozkowski
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2 March 2017
Semiconductors 15
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