Please refer to the important disclosures and analyst certification beginning on page 12 of this document, or on our
website www.macquarie.com.au/disclosures.
GLOBAL
Risk from China protectionism to Macquarie US Semiconductor universe
Source: Company data, Macquarie Capital (USA), December 2013. Stocks ranked in terms of most at risk to least at risk.
Analyst(s) Macquarie Capital (USA) Inc. Deepon Nag +1 212 231 8014 [email protected] Macquarie Capital Securities Limited, Taiwan Branch Jeff Su +886 2 2734 7512 [email protected] Macquarie Capital Securities Limited Danny Chu, CFA +852 3922 4762 [email protected]
17 December 2013
Semiconductors Rising US/China trade tensions playing out at China Mobile Amid rising signs of US/China regulatory and technological competition, we analyse
which US semiconductor companies are best and worst positioned in China, and the
impact of recent moves at China Mobile, which we view as the first front of a potential
“Technology Trade War”.
Who wins and loses if there’s a US/China “tech trade war”? There are signs of
rising Chinese-US government interventions in the technology space (Cisco/Huawei
difficulties winning bids in China/US, Chinese antitrust investigation against QCOM,
Chinese investment in homegrown tech companies). If a full blown US/China
“Technology Trade War” breaks out, we see the most direct risk to QCOM and BRCM,
although we believe this would impact their long term growth rates more than existing
revenues. We believe that MU and SNDK are the least exposed due to the high
barriers of entry in the memory industry and the lack of Chinese memory suppliers.
While the PLD and analog companies generate significant revenues from China and
US/European infrastructure OEMs, we believe they are well diversified in Chinese
OEMs as well and think local semiconductor competition for those sockets is limited.
Competition heating up in China. Our Asian telecommunications analyst Danny Chu
notes that China Mobile may lower its required cellular modem standards for 4G from
“5 modes+10 frequency bands” to “3 modes+7 frequency bands”. We believe this was
done to allow local manufacturers access to the 4G smartphone market where QCOM
has dominant market share in LTE baseband chips. We do not expect much
competition for the high end of the cellular or connectivity markets from local chip
companies due to their lagging technology, but we do believe it may be more difficult
for QCOM or BRCM to penetrate the low or mid tier of the market.
China Mobile/iPhone deal could be accretive to BRCM/QCOM but not by much. A
number of news sources have indicated that Apple and China Mobile are planning to
announce a partnership on December 18. While we believe a deal would be
incremental to shipments of total iPhones in China, our Asian telco team believes the
volume commitments China Mobile agreed to could be much lower than many
investors expect. We also believe that due to the iPhone’s high price in China (~$850),
demand will be limited and may cannibalize sales of other high end smartphones
where QCOM and BRCM have higher content. As such, we expect little incremental
impact to QCOM or BRCM’s financials from an Apple/China Mobile partnership.
LTE deployment at China Mobile should finally happen in 2014, although we
think it will be gradual. While several semiconductor companies have commented on
rising orders from China Mobile, we believe deployments will be gradual and orders
will be partially offset by slowing 2G/3G investment. Our recent supply chain analysis
indicates lean inventories in the comms food chain, which suggests some restocking if
orders from China Mobile increase. We estimate that the communications businesses
of our most exposed semiconductor companies will have a median growth rate of
roughly 14% YoY in 2014 due to increased carrier spending and inventory restocking.
Still follow the “Silver Linings Playbook” despite China risk. Despite risk of
regulatory and competitive challenges in China, we would follow the “Silver Linings
Playbook” and invest in cloud and connectivity semis over client exposed semis.
Name
QCOM
BRCM
NVDA
XLNX
ALTR
AMD
INTC
MXIM
ADI
LLTC
TXN
MU
SNDK
Macquarie Research Semiconductors
17 December 2013 2
Rising US/China trade tensions playing out at China Mobile
Amid rising signs of US/China regulatory and technological competition, we analyse which US
semiconductor companies are best and worst positioned in China, and the impact of recent moves at
China Mobile, which we view as the first front of a potential “Technology Trade War”.
Who wins and loses if there’s a US/China “tech trade war”?
Cisco recently commented that Chinese service providers were reluctant to use US designed network
equipment due to security concerns in the wake of the NSA surveillance scandal. We note the US has
had similar concerns about Chinese designed network equipment, blocking Huawei from supplying US
networks in 2011. China’s National Development and Reform Commission also recently launched an
investigation into anti-trust behaviour by Qualcomm. Chinese regulators have stated they will focus on
“price-fixing” which could lead to “unreasonably” high consumer prices in six major sectors, including
telecommunications. We note that QCOM’s chipsets and royalties to handsets at both China Unicom and
China Telecom are likely targets.
While US semiconductor companies derive a large portion of their revenues from direct Chinese
customers, we note that systems manufactured in China are often intended for other end markets. As a
result, we don’t believe that direct sales to China is a good gauge of Chinese exposure. We also
estimated the exposure of our companies to China through manufacturing, design, sales and
administrative operations. Most of our companies have less than 10% of their facilities and headcount
located in China. While SNDK has ~27% of its reported PP&E located in China (mostly back end and
testing facilities), we believe this is overstated due to its off balance sheet assets located in Japan as part
of its joint venture with Toshiba.
Fig 1 Risk from China protectionism to Macquarie US Semiconductor universe
Source: Company data, Macquarie Capital (USA), December 2013. Risk ranked from highest on top to lowest on bottom. Data from last reported fiscal year.
We see the most direct risk to QCOM and BRCM from rising protectionism in China, although we believe
this would impact their long term growth rates more than existing revenues. We believe that MU and
SNDK are the least exposed due to the high barriers of entry in the memory industry and the lack of
Chinese memory suppliers. While the PLD and analog companies generate significant revenues from
China and US/European infrastructure OEMs, we believe they are well diversified in Chinese OEMs as
well and believe local semiconductor competition for those sockets is limited.
Competition heating up in China
Our Asian telecommunications analyst Danny Chu notes that China Mobile may lower its required
cellular modem standards for 4G from “5 modes+10 frequency bands” to “3 modes+7 frequency bands”.
He offers the following chart to show a “3 mode + 7 frequency band” scenario.
Name
% of sales
from China
% of operations in
China Comments
QCOM 49.0% 4% Risk of royalty stream and low end baseband displacing sockets in low and mid-tier handsets.
BRCM 31.2% <5% Some risk of low end WiFi displacing sockets in low and mid-tier handsets/tablets
NVDA 18.2% 5% Unlikely to displace discrete graphics, although risk for smartphone/tablet business
XLNX 19.8% <5% Exposure to Huaw ei should offset Cisco exposure; some threat of homegrow n ASICs/ASSPs displacing PLDs.
ALTR 32.7% <5% Exposure to Huaw ei should offset Cisco exposure; some threat of homegrow n ASICs/ASSPs displacing PLDs.
AMD 57.7% 9% Unlikely to displace microprocessors in servers or PCs, although risk to tablet business
INTC 15.6% 5-10% Unlikely to displace microprocessors in servers or PCs, although risk to tablet business
MXIM 40.8% <5% Large pow er management exposure leaves them somew hat vulnerable to homegrow n alternatives, but Samsung exposure helps.
ADI 13.0% 2% Diverse customer base and long life of sockets make displacement unlikely in near term
LLTC 38.0% <5% Diverse customer base and long life of sockets make displacement unlikely in near term
TXN 41.9% <5% Diverse customer base and long life of sockets make displacement unlikely in near term
MU 41.7% 5% No alternative Chinese manufacturers that can produce in volume and high barriers to entry.
SNDK 42.3% 27% No alternative Chinese manufacturers that can produce in volume and high barriers to entry. Large back end and testing facilities in China
Macquarie Research Semiconductors
17 December 2013 3
Fig 2 Frequency bands and most often corresponding mobile technology standard
Source: Company data, Macquarie Research, December 2013. Chart courtesy of Danny Chu. In the above diagram, grey shaded areas represent frequency bands under the scenario of “3 modes + 7 frequency bands”.
We believe this was done to allow local baseband manufacturers access to the 4G smartphone market
where QCOM’s large technological advantage has given them dominant global share in LTE baseband
chips. The Tsinghua Unigroup (which we believe is a proxy for the Chinese government) recently
acquired wireless semiconductor companies Spreadtrum and RDA Microelectronics. While the combined
IP of the two companies should allow them to produce cellular modems and connectivity chips for low
end smartphones at China Mobile, we note that neither company has announced an FDD LTE capable
chipset, or an 802.11ac WLAN connectivity chip, which makes design wins in high end globally based
handsets unlikely in our view.
Fig 3 Wireless IP portfolios of leading semiconductor companies
Source: Company data, Macquarie Capital (USA), December 2013. 802.11ac technology used with PC. ** Licensed technology from Inside Secure SA. *** Disinvesting in processor and connectivity businesses for consumer applications. **** Signed licensing agreement with Quantenna for 802.11ac technology. *****SPRD 40nm TD-LTE chip currently sampling; 28nm chip in development
1 1920 1980 2110 2170 WCDMA CT (CDMA)/CU (WCDMA)
2 1850 1910 1930 1990 WCDMA/GSM CM (TD-SCDMA)/ CU (WCDMA)/PAS
3 1710 1785 1805 1880 FDD LTE / GSM CM / CU (GSM)
5 824 849 869 894 WCDMA CT (CDMA)
7 2500 2570 2620 2690 FDD LTE TD-LTE
8 880 915 925 960 GSM CM / CU (GSM)
34 2010 2025 CM (TD-SCDMA)
38 2570 2620 CM (TD-LTE)
39 1880 1920 CM (TD-SCDMA)/PAS
40 2300 2400 CM (TD-SCDMA)
Technology standards
deployed outside of China
Technology standards deployed
within ChinaUplink (MHz) Downlink (MHz)
Paired Spectrum Unpaired Spectrum
(MHz)
Frequency
band
Cellular Baseband
(WCDMA/HSPA+)
Cellular Baseband
(TD-SCDMA)
Cellular
Baseband
(LTE)
WLAN
(802.11n)
WLAN
(802.11ac) Bluetooth GPS NFC
Qualcomm X X X X X X X X
Broadcom X 2H14 1H14 X X X X X
Marvell X X 2H13/1H14 X 2H13 X X X
Intel X 2H14 X X X* X X X**
Mediatek X X 2H13/1H14 X 2H13 X X X
Spreadtrum/RDA 2H13/1H14 X 1H14***** X X X
Texas Instruments*** X X X X X
Nvidia 2H13/1H14 1H14 1H14
AMD
Ericsson X X
STMicroelectronics X 2014**** X X X
Macquarie Research Semiconductors
17 December 2013 4
We do not expect much penetration of the high end of the cellular or connectivity markets from local chip
companies such as Tsinghua Unigroup due to their lagging technology, but we do believe it may be more
difficult for QCOM or BRCM to penetrate the low or mid tier of the market. Our Taiwan semiconductor
analyst Jeff Su also believes that while a large technology gap still exists, recent government actions by
the Chinese government may have some impact on Mediatek in the coming years. While we note that
QCOM has very little revenue contribution from China Mobile based handsets currently, and thus expect
little financial impact to the company if the relaxed standards are passed, we believe it could impair the
company’s ability to fulfil its 5 year target of double digit annual sales growth.
Fig 4 QCOM has >$1bn in China, but we believe very little comes from China Mobile currently
Source: Qualcomm 2013 analyst day, presented on 11/20/13, November 2013
Fig 5 QCOM has guided for double digit sales and EPS growth over the next 5 years
Source: Qualcomm 2013 analyst day, presented on 11/20/13, November 2013
Macquarie Research Semiconductors
17 December 2013 5
QCOM has significant exposure to the other large Chinese carriers, China Unicom and China Telecom,
which is potentially at risk if the Chinese government aggressively targets QCOM’s licensing revenues.
China Unicom currently uses the WCDMA technology in its network, while China Telecom uses
CDMA2000 1xEV-DO. All handsets that use those technologies pay royalties to QCOM. We estimate
that the contribution of royalties from China Telecom and China Unicom increased from roughly 9% of
QTL in 2012 to roughly 13% in 2013E. We estimate that the combined royalties will account for roughly
10% of overall QCOM earnings before tax (EBT) in FY13E.
Fig 6 QCOM royalty contribution from China Unicom and China Telecom (US$ millions and %)
Source: Company data, Macquarie Capital (USA), December 2013.
China Mobile/iPhone deal could be accretive to BRCM/QCOM but not by much
A number of news sources have indicated that Apple and China Mobile may be planning to announce a
partnership on December 18. While we believe a deal would be incremental to shipments of total
iPhones in China, our Asian telecommunications team believes the volume commitments China Mobile
agreed to could be much lower than many investors expect. Danny believes the commitment could be 5-
10 million units/year versus market expectations of roughly 15-20 million units/year. We estimate QCOM
derived roughly 22% of its 4Q FY13 (October quarter) sales, BRCM derived roughly 15% of its 3Q13
sales, and SNDK derived roughly 23% of its 3Q13 sales from Apple. We estimate that QCOM collects
roughly $35-40 for every iPhone built.
We note that sales of iPhones in China may cannibalize sales of alternative high end smartphones such
as the Samsung Galaxy S4, where QCOM and BRCM have higher content. Thus, the benefits of more
iPhone shipments could be partially offset by lower average content in high end phones at China Mobile.
9%
13%
0%
2%
4%
6%
8%
10%
12%
14%
$0
$200
$400
$600
$800
$1,000
$1,200
2012 2013
China Unicom royalties China Telecom royalties % of QTL sales
Macquarie Research Semiconductors
17 December 2013 6
Fig 7 Content in LTE version of Samsung Galaxy S4 vs. Apple iPhone 5S
Source: iSuppli, iFixit, Company data, Macquarie Capital (USA), December 2013. * SNDK is one of multiple suppliers to Apple so content/device is an estimated average. SNDK ships negligible volumes to Samsung.** QCOM collects royalties from Apple and Samsung. SNDK collects royalties on much of the NAND it does not ship into Apple or Samsung.
We note volumes may be lower than investors recognize as there are already a large number of
unlocked iPhones on China Mobile’s network, and the iPhone has a very high price in China (~$850),
which may limit demand.
Fig 8 Pricing of unlocked 16Gb iPhone 5S and iPhone 5C by region (US$)
Source: Company data, Macquarie Capital (USA), December 2013. Prices converted from local currency to US$.
As such, we expect little incremental impact on QCOM or BRCM’s market share in China. Every 1.2
million incremental iPhones sold into China Mobile that don’t cannibalize an existing QCOM based
handset adds roughly $0.01 to our FY14E EPS estimates.
Samsung Galaxy S4 ASP Apple iPhone 5s ASP
Application processor QCOM Snapdragon 600 $20.00 Apple A7 $15.00
Baseband/RF/PA MDM9215+WTR1605L $25.00 MDM9615M+WTR1605 $32.00
WLAN/BT/FM/GPS BRCM BCM4335 $9.00 BRCM BCM4334 $4.20
Touchscreen Controller SYNA S5000B $1.00 BRCM BCM5976 $1.00
NFC Chip BRCM 20794S1A NA
Pow er Management QCOM PM8917/PM8821 $9.50 QCOM PM8018 $4.50
NAND content 16GB $12.80 16GB $12.80
QCOM content $54.50 $36.50
BRCM content $9.00 $5.20
SNDK content* $0.00 $4.60
$649$697
$867
$930
$735
$864
$549$581
$741
$797
$625
$733
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
US Canada UK Germany/ France/ Netherlands
Australia China
iPhone 5s (16GB) iPhone 5c (16GB)
Macquarie Research Semiconductors
17 December 2013 7
Fig 9 Δ QCOM FY14E EPS from incremental iPhones and iPads shipped into China Mobile (US$)
Source: Company data, Macquarie Capital (USA), December 2013. X-axis: incremental iPhones to our FY14E estimate. Y-axis: incremental iPads to our FY14E estimate.
For BRCM, we estimate every incremental 3.3 million iPhones adds roughly $0.01 to our CY14E EPS
estimate.
Fig 10 Δ BRCM CY14E EPS from incremental iPhones and iPads shipped into China Mobile (US$)
Source: Company data, Macquarie Capital (USA), December 2013. X-axis: incremental iPhones to our CY14E estimate. Y-axis: incremental iPads to our CY14E estimate.
LTE deployment at China Mobile should finally happen in 2014, although we think it will be gradual
China Mobile announced it would build over 200 thousand TD-LTE basestations in 2013, and guided
capital expenditures to grow over 50% YoY. We note that we believe the magnitude of the increase is
misleading due to the shift of capital investment from China Mobile’s parent company to the China Mobile
entity. However, guidance still implies over $31 billion in capex, almost as high as the roughly $36 billion
AT&T and Verizon are expected to spend in 2013, according to Consensus estimates.
iPhone shipments
-25 -20 -15 -10 -5 0 5 10 15 20 25 30
-25 ($0.40) ($0.33) ($0.26) ($0.19) ($0.11) ($0.04) $0.03 $0.10 $0.18 $0.24 $0.31 $0.38
-20 ($0.39) ($0.32) ($0.25) ($0.18) ($0.11) ($0.04) $0.04 $0.11 $0.19 $0.25 $0.32 $0.39
-15 ($0.38) ($0.31) ($0.24) ($0.17) ($0.10) ($0.03) $0.04 $0.12 $0.20 $0.26 $0.33 $0.40
-10 ($0.37) ($0.30) ($0.23) ($0.16) ($0.09) ($0.02) $0.05 $0.12 $0.21 $0.27 $0.34 $0.41
-5 ($0.36) ($0.29) ($0.22) ($0.15) ($0.08) ($0.01) $0.06 $0.13 $0.22 $0.28 $0.35 $0.42
0 ($0.36) ($0.28) ($0.21) ($0.14) ($0.07) $0.00 $0.07 $0.14 $0.23 $0.28 $0.36 $0.43
5 ($0.35) ($0.28) ($0.20) ($0.13) ($0.06) $0.01 $0.08 $0.15 $0.24 $0.29 $0.36 $0.43
10 ($0.34) ($0.27) ($0.20) ($0.12) ($0.05) $0.02 $0.09 $0.16 $0.24 $0.30 $0.37 $0.44
15 ($0.33) ($0.26) ($0.19) ($0.12) ($0.04) $0.03 $0.10 $0.17 $0.25 $0.31 $0.38 $0.45
20 ($0.32) ($0.25) ($0.18) ($0.11) ($0.04) $0.04 $0.11 $0.18 $0.26 $0.32 $0.39 $0.46
25 ($0.31) ($0.24) ($0.17) ($0.10) ($0.03) $0.04 $0.11 $0.19 $0.27 $0.33 $0.40 $0.47
30 ($0.30) ($0.23) ($0.16) ($0.09) ($0.02) $0.05 $0.12 $0.19 $0.28 $0.34 $0.41 $0.48
iP
ad
sh
ipm
en
ts
iPhone Shipments
-25 -20 -15 -10 -5 0 5 10 15 20 25
-25 ($0.17) ($0.15) ($0.14) ($0.12) ($0.11) ($0.09) ($0.08) ($0.06) ($0.05) ($0.03) ($0.02)
-20 ($0.15) ($0.13) ($0.12) ($0.10) ($0.09) ($0.07) ($0.06) ($0.04) ($0.03) ($0.01) $0.00
-15 ($0.13) ($0.11) ($0.10) ($0.08) ($0.07) ($0.05) ($0.04) ($0.02) ($0.01) $0.01 $0.02
-10 ($0.11) ($0.10) ($0.08) ($0.07) ($0.05) ($0.04) ($0.02) ($0.01) $0.01 $0.02 $0.04
-5 ($0.09) ($0.08) ($0.06) ($0.05) ($0.03) ($0.02) ($0.00) $0.01 $0.03 $0.04 $0.06
0 ($0.08) ($0.06) ($0.05) ($0.03) ($0.02) $0.00 $0.02 $0.03 $0.05 $0.06 $0.08
5 ($0.06) ($0.04) ($0.03) ($0.01) $0.00 $0.02 $0.03 $0.05 $0.06 $0.08 $0.09
10 ($0.04) ($0.02) ($0.01) $0.01 $0.02 $0.04 $0.05 $0.07 $0.08 $0.10 $0.11
15 ($0.02) ($0.01) $0.01 $0.02 $0.04 $0.05 $0.07 $0.08 $0.10 $0.11 $0.13
20 ($0.00) $0.01 $0.03 $0.04 $0.06 $0.07 $0.09 $0.10 $0.12 $0.13 $0.15
25 $0.02 $0.03 $0.05 $0.06 $0.08 $0.09 $0.11 $0.12 $0.14 $0.15 $0.17
i
Pad
Sh
ipm
en
ts
Macquarie Research Semiconductors
17 December 2013 8
Fig 11 2013E Capex of China Mobile vs AT&T+Verizon
Source: FactSet, Company data, Macquarie Capital (USA), December 2013.
And China Mobile hadn’t spent much of its capex guidance as of August 15th, 2013.
Fig 12 China Mobile 2013 capex budget versus 1H13 actual capital expenditures (RMB)
Source: Company data, Macquarie Capital (USA), December 2013.
While several semiconductor companies have commented on rising orders from China Mobile, we
believe the pace of orders may be gradual. We note Consensus expects roughly flat capex from China
Mobile in 2014E.
$16,057
$31,329
$36,925
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
Verizon+AT&T capex China Mobile capex
190.2
57
0
20
40
60
80
100
120
140
160
180
200
2013 Budget 1H 2013 actual
Macquarie Research Semiconductors
17 December 2013 9
Fig 13 China Mobile capex (US$ millions) and YoY (%)
Source: FactSet, Company data, Macquarie Capital (USA), December 2013.
We also note that China Mobile’s 2G and 3G networks remain underutilized, which may cause a decline
in investment in those technologies.
Fig 14 China Mobile basestations (thousands) and utilization rates (%)
Source: Company data, Macquarie Capital (USA), December 2013. Basestations count as of 8/15/13.
Our recent analysis of the semiconductor supply chain indicates that inventories at communications
OEMs and distributors are lean, which may suggest potential restocking for communications exposed
semi companies such as XLNX, ALTR, TXN, ADI and LLTC if orders from China Mobile increase.
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
China Mobile Capex YoY%
Increase partially due to capex being moved from parent company's financial statement to China Mobile's.
Current
Basestations Utilization
GSM 840 71.90%
TD-SCDMA 361 25%
TD-LTE 0 0%
Total 1201 57.80%
Macquarie Research Semiconductors
17 December 2013 10
Fig 15 Supply chain inventories by segment (days)
Source: FactSet, Bloomberg, Company data, Macquarie Capital (USA), December 2013.
We estimate that the communications businesses of our most exposed semiconductor companies will
have a median growth rate of roughly 14% YoY in 2014 due to increased carrier spending and inventory
restocking.
Fig 16 YoY growth rates for communications businesses of US semi companies (%)
Source: Company data, Macquarie Capital (USA), December 2013.
Brief history of semiconductor trade wars
Government intervention in the technology market is nothing new, with the interplay between the US and
Japan in the DRAM market in the 1980s serving as an instructive example. Between the period of 1978
and 1986, market share of DRAM chips from Japanese producers grew from under 30% to roughly 75%,
while US market share fell from roughly 70% to roughly 20%. This rapid shift in market share was
blamed in part on restrictions of US imports into Japan; in 1984 the market share of DRAM produced by
US companies was roughly 84% in the US, 55% in Europe, 47% in the rest of the world, and only 11% in
Japan. In 1985, after a severe downturn in the DRAM market led to widespread industry losses and the
exit of several US memory manufacturers, the US pursued “anti-dumping” complaints against the
Japanese semiconductor industry. This eventually led to the Semiconductor Trade Agreement of 1986,
which held that the US semiconductor industry would eventually realize over 20% market share in Japan.
Initial enforcement was very difficult for Japanese regulators, which led the US to impose 100% tariffs on
$300 million worth of Japanese imports in April 1987. This led Japanese firms to scale back production in
order to decrease their market share. The production cutbacks led to windfall profits for the entire DRAM
industry for the next few years. However, it also led to very high input costs for a number of end market
OEMs, particularly PC companies. As a result, a lobbying group was created to amend the agreement,
which ultimately happened in 1991. While the long term economic value of the trade war is unclear to
either country’s technology industry, both sides declared the actions to be a success.
1Q13 2Q13 3Q13 5 Year Q3 Average H/(L) than Average %
Semis 88 88 88 77 10 12%
Distributor 52 48 49 48 0 0%
Contract manufacturer 60 56 58 57 0 1%
IT Distributor 30 30 29 26 3 11%
PC OEM 32 38 32 26 6 20%
Storage 33 33 35 31 4 12%
Comm OEM 60 57 59 66 (7) -12%
Handsets 46 38 43 30 13 31%
Carriers 17 12 12 14 (2) -19%
Electronic retail 86 87 85 92 (7) -9%
Cable and Satellite 15 13 12 13 (0) -4%
Average 47 46 46 44 2 4%
Note: 1Q13 2Q13 3Q13 5 Year Q3 Average
ODM 46 47 45 44 1 3%
Foundry 50 49 46 44 2 5%
2007 2008 2009 2010 2011 2012 2013E 2014E
XLNX -9.2% 3.0% -2.1% 35.6% -5.9% -0.8% 1.7% 16.0%
ALTR -10.5% 4.0% 3.5% 64.7% 4.3% -12.4% -8.9% 17.1%
ADI -5.1% -9.9% -13.7% 24.7% 2.0% -6.9% 0.3% 11.5%
LLTC -9.8% -0.4% -27.7% 34.7% -11.3% -8.9% -2.6% 9.4%
Median -9.5% 1.3% -7.9% 35.2% -1.9% -7.9% -1.1% 13.7%
Macquarie Research Semiconductors
17 December 2013 11
While the DRAM market’s commodity nature is different than the network equipment market, we note
risks of similar anti-dumping actions or tariffs exist today. If the US or China were to artificially restrict
access to their home markets or ask for production cutbacks in response to claims of predatory pricing,
we believe it would be a negative for component companies as they would see lower volumes, which
could impair gross margins.
Still follow the “Silver Linings Playbook” despite China risk
Despite risk of regulatory and competitive challenges in China, we would follow the “Silver Linings
Playbook” and invest in cloud and connectivity semis over client exposed semis.
Fig 17 Macquarie US semiconductor comparison sheet
Source: FactSet, Company data, Macquarie Capital (USA), December 2013. Price data as of 12/16/13.
Rating Price
YTD
Return
Target
price
C14E
Div
Yield Shares Mkt cap
CY12
EPS
CY13E
EPS
CY14E
EPS
CY13E
P/E
CY14E
P/E
CY13E
Rel P/E
CY14E
Rel P/E
CY12
revenue
CY13E
revenue
CY14E
revenue
CY12
EV/Sales
CY13E
EV/Sales
Price to
book
Price to
net cash
INTC N $24.45 19% $22.00 3.7% 5,106 124,842 $2.13 $1.83 $1.83 13x 13x 0.8 0.9 53,341 52,574 52,913 2.3 2.3 2.7 32.5
AMD N $3.59 50% $4.00 752 2,700 ($0.69) ($0.15) $0.07 NM NM NM NM 5,422 5,240 6,205 0.7 0.7 5.0 (2.6)
NVDA UP $15.04 23% $14.00 2.3% 589 8,855 $0.90 $0.67 $0.76 23x 20x 1.4 1.3 4,280 4,036 4,339 1.2 1.3 2.0 2.4
QCOM OP $72.79 18% $85.00 1.9% 1,765 128,474 $4.43 $5.47 $6.18 13x 12x 0.8 0.8 20,458 25,582 28,211 5.6 4.5 3.9 9.5
BRCM OP $28.38 -15% $35.00 1.6% 578 16,404 $2.92 $2.68 $2.37 11x 12x 0.6 0.8 8,006 8,266 8,358 2.0 1.9 2.4 21.2
XLNX N $43.64 22% $48.00 2.3% 280 12,232 $1.80 $2.15 $2.42 20x 18x 1.2 1.2 2,195 2,310 2,565 5.2 5.0 4.1 15.4
ALTR N $31.11 -10% $35.50 1.8% 324 10,065 $1.72 $1.42 $1.82 22x 17x 1.3 1.1 1,783 1,766 2,096 4.2 4.2 3.3 3.8
TXN N $42.29 37% $45.00 2.6% 1,111 46,984 $1.37 $1.74 $2.38 24x 18x 1.5 1.2 12,825 12,156 12,916 3.8 4.0 4.5 (25.8)
LLTC OP $43.95 28% $40.00 2.4% 239 10,518 $1.68 $1.77 $2.07 25x 21x 1.5 1.4 1,283 1,317 1,460 7.7 7.5 11.0 16.6
ADI OP $48.74 16% $55.00 2.8% 313 15,274 $2.09 $2.28 $2.94 21x 17x 1.3 1.1 2,675 2,721 2,972 4.4 4.4 3.6 4.5
MXIM N $27.91 -5% $32.00 3.7% 297 8,282 $1.13 $1.60 $2.04 17x 14x 1.1 0.9 2,405 2,398 2,745 3.1 3.1 3.2 10.8
MU N $22.77 259% $20.00 1,014 23,082 ($1.12) $0.60 $2.84 38x 8x 2.3 0.5 5,693 5,708 5,141 4.3 4.3 3.1 (16.7)
SNDK OP $66.97 54% $75.00 1.3% 244 16,351 $2.38 $5.15 $5.81 13x 12x 0.8 0.8 5,053 6,134 6,996 2.4 1.9 2.2 3.7
AVERAGE 38% 2.4% 20x 15x 1.2 1.0 3.6 3.5 3.9 5.8
MEDIAN 22% 2.3% 21x 15x 1.3 1.0 3.8 4.0 3.3 4.5
Macquarie Research Semiconductors
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Required disclosures
Fig 18 Risks to target price and rating
Stock Target Price Methodology Risk to rating
AMD Our target price is based off of a P/B multiple.
Given the company’s high exposure to the computing end market, if PC demand is better/worse it will add upside/risk to our “core” AMD forecast and our assumptions for sequential revenue growth in Q3 and Q4. While our checks indicate the company’s share outlook is improving due to stabilizing execution, the company has a long track record of mis-execution and still is in a secondary market share position in both microprocessors and graphics chips. If AMD experiences roadmap delays or problems with its factory partners (Global Foundries, TSMC) it could add risk to the company’s market share and our outlook. The company has one of the higher debt-to-capital levels in our group (0.83 ratio in 1Q13). Stocks such as AMD„s during various periods of credit concerns in recent years significantly underperformed. If macro risk or global credit concerns increase in the coming year, it could negatively impact AMD stock performance. If game console revenues are better/worse than expected, it could impact our estimates for AMD.
ALTR Our target price is based off of a relative P/E multiple.
We believe the communications end market is the largest market for ALTR. If carrier spending and IT networking spending are higher or lower than expected, or if there is an acceleration or delay in the expected networking build-out in Asia, it could add upside or risk to our estimates and our outlook on ALTR stock could improve or diminish. The CPLD market has been under-growing the broader PLD market in recent years and Altera has relatively higher exposure to this product category than its peers. If CPLDs continue to decline, it could negatively impact revenue growth at Altera and our estimates. Semiconductor companies experience inventory corrections due to over-shipping to customers and we believe we are currently exiting a correction. If the improving business conditions and inventory replenishment are better or worse than our expectations it could add upside or downside risk to our ALTR estimates and outlook. Finally, if PLD companies can exhibit superior growth due to increases in content in systems we could become more positive on ALTR stock.
ADI Our target price is based off of a relative P/E multiple.
ADI has significant exposure to the industrial end market, with a diverse customer base, but which is sensitive to general changes in global demand (GDP). If the current recovery reverses itself or if global GDP growth is lower than expected, it could add risk to our estimates for ADI. In the nearer term, we believe the semiconductor industry should enter an inventory correction within the next 6 months. If the impact on revenue and earnings is more negative than we currently expect, our rating and target price could be at risk. Over 20% of the company’s revenue is generated from amplifiers, a chip category that in recent years has grown slower than the broader analog industry. If amplifier sales are weaker than our estimates, it could add risk to our earnings estimates and target price for ADI.
BRCM Our target price is based off of a relative P/E multiple.
Broadcom products ship into a variety of end markets and as such are exposed to global changes in demand or GDP. If global GDP is better or worse than expected, it could improve or lower our outlook on BRCM stock. The company has relatively higher market share in certain areas such as Ethernet switch chips, set-top box chips, modems, Wifi and Bluetooth. If competition increases, it could limit the attractiveness of the markets and negatively affect our earnings outlook and outlook on BRCM stock. The company is currently receiving royalties from Qualcomm, which should expire in early 2013 and add roughly US$0.30–0.35 per share per year to EPS estimates. If consensus estimates and valuations fail to reflect the temporary nature of the royalty stream, it could cause stock multiples for BRCM to be below our expectation or add risk to Consensus estimates.
INTC Our target price is based off of a relative P/E multiple.
A majority of Intel’s revenue is derived from the PC end market. If PC end demand is worse than expected, it could result in lower than expected earnings and worse than expected stock performance. In addition, the semiconductor market is very competitive and share shifts can happen for a variety of reasons including end market shifts in demand and company execution. If Intel’s market share in microprocessors is lower than expected, our outlook on INTC stock could deteriorate. Tablet PCs are a new PC category which has the potential to significantly displace traditional personal computers and current tablets do not use Intel processors. If tablet displacement of PCs is higher than expected and/or Intel is not able to penetrate the market, it could negatively affect our outlook and estimates for INTC. Finally, the company acquired two large entities (McAfee and Infineon’s wireless business). If Intel’s ability to integrate and extract value from the acquisitions is worse than expected it could increase the dilutive effect of the acquisitions and negatively impact our estimates and outlook.
Macquarie Research Semiconductors
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Fig 18 Risks to target price and rating
Stock Target Price Methodology Risk to rating
LLTC Our target price is based off of a relative P/E multiple.
More than half of the company’s revenue comes from the industrial/auto/military end market. If global end demand and orders from industrial equipment manufacturers are lower than expected, this could lower our earnings outlook for LLTC. The analog industry is highly fragmented, with many companies supplying products sometimes in overlapping markets. If competitors become more adept at high performance analog, this could negatively affect Linear’s market share position or corporate margins and our outlook on LLTC could diminish. LLTC stock historically has been among the more defensive semiconductor stocks in our group during a semiconductor stock correction, falling less from peak levels than the group average. However, it has been an underperformer in a rising market. If semiconductor stocks outperform the broader market, this would add risk to our thesis for LLTC stock.
MXIM Our target price is based off of a relative P/E multiple.
Maxim is a broad-based provider of semiconductors and electronics to many end markets. As such, the company’s results are affected by global end demand (GDP). If global GDP deteriorates unexpectedly or accelerates faster than expected, it could add risk or upside to our estimates and our outlook for MXIM stock could deteriorate or improve. We are concerned the company’s exposure to relatively lower-margin segments could limit gross margin expansion at MXIM. However, the company has been focusing its development on higher-margin industrial and communications segments. If the company is more successful than we expect in these markets, it could provide better-than-expected gross margins at Maxim and our outlook on MXIM stock could improve.
MU Our target price is based off of a P/B multiple.
We believe the PC end market is the largest market for Micron. If PC end demand is better than expected, it could result in higher-than-expected earnings and better than expected stock performance. We are concerned that accelerating capacity growth in CY11/12 will result in excess capacity, weak memory pricing and MU stock underperformance. However, if supply growth is less than expected, our outlook on MU could improve. In addition, the semiconductor market is very competitive and share shifts can happen for a variety of reasons including end market shifts in demand and company execution. If Micron’s market share in memory is higher than expected, our outlook on MU stock could improve. Finally, MU has acquired another large, commodity memory business (Numonyx). If the company is able to successfully integrate the acquisition and the NOR flash industry fundamentals are better than expected, our outlook on MU stock could improve.
NVDA Our target price is based off of a relative P/E multiple.
A majority of Nvidia’s revenue is derived from the PC end market. If PC end demand is better or worse than expected, it could result in higher or lower than expected earnings and better or worse than expected stock performance. The company has been trying to diversify its revenue to improve its growth prospects (application processors and high-performance computing chips). If the company is more successful than we are currently expecting, it could improve our outlook for Nvidia’s earnings prospects and NVDA stock. In addition, the semiconductor market is very competitive and market share shifts can happen for a variety of reasons including end market shifts in demand and company execution. If Nvidia’s market share in graphics chips is higher or lower than expected, our outlook on NVDA stock could improve or deteriorate.
TXN Our target price is based off of a relative P/E multiple.
TI is a broad-based provider of semiconductors and electronics to many end markets. As such, the company’s results are affected by global end demand (GDP). If global GDP accelerates or deteriorates unexpectedly, it could add upside or risk to our estimates and our outlook for TXN stock could improve or deteriorate. TI recently acquired NSM for $6.5 billion. If integration of National into TXN is better or worse than expected, it could add upside to estimates or risk of execution issues which could cause our outlook on TXN to improve or deteriorate. The company has invested in significant factory capacity which is currently underutilized. If factory utilization (through end demand or restructuring) is better or worse than expected, it could add upside or downside risk to our estimates and we could become more positive or negative on TXN stock.
XLNX Our target price is based off of a relative P/E multiple.
We believe the communications end market is the largest market for XLNX. If carrier spending and IT networking spending are higher or lower than expected, or if there is an acceleration or delay in the expected networking build-out in Asia, it could add upside or risk to our estimates and our outlook on ALTR stock could improve or diminish. Semiconductor companies experience inventory corrections due to over-shipping to customers and we believe we are currently exiting a correction. If the improving business conditions and inventory replenishment are better or worse than our expectations it could add upside or downside risk to our XLNX estimates and outlook. Finally, if PLD companies can exhibit superior growth due to increases in content in systems we could become more positive on XLNX stock.
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17 December 2013 14
Fig 18 Risks to target price and rating
Stock Target Price Methodology Risk to rating
QCOM Our target price is based off of a relative P/E multiple.
QCOM products ship in systems which touch many different geographic regions. If global GDP is better or worse than expected, it could lower our outlook on QCOM stock. The company’s chip business (QCT) has relatively high market share in CDMA class phones, but much lower share in WCDMA class phones. If the company’s market share in either category deteriorates, it could negatively affect our outlook on QCOM stock. A significant amount of the company’s earnings power is derived by royalties and fees from handset OEMs which is based on pricing. If handset pricing is worse than expected it could have a significantly negative impact to our earnings forecast and our outlook on QCOM stock. The company appears to have fewer key technologies associated with newer, leading-edge wireless standards such as LTE/Wimax, compared with CDMA technology. We believe the company will receive normal royalty rates on multi-mode phones, but the royalty rate on single mode LTE/Wimax technology appears to be lower than prior generations of QCOM technology.
SNDK Our target price is based off of a P/B multiple.
The NAND market is extremely volatile, and excess supply can lead to aggressive pricing from competitors which can impact SNDK margins and stock underperformance. The company is dependent on die shrinks on leading edge semiconductor technologies; if the pace slows or stops altogether it could hinder SNDK’s competitive advantage. The company has a large retail presence; any reduction in consumer purchasing could lead to large inventories and subsequent writedowns for the company. The company relies on manufacturing facilities in Japan, any interruption in production could hinder the company’s ability to sell products. The company sources its wafers in Yen and prices its products in USD; any changes in those currency levels against other currencies could hurt the company’s competitive position or margins.
Source: Company data, Macquarie Capital (USA), December 2013.
Other stocks mentioned
China Mobile (941 HK, HK$80.30, Neutral, Danny Chu)
Apple (AAPL US, US$557.50, Not rated)
China Telecom (728 HK, HK$3.88, Outperform, Danny Chu)
China Unicom (762 HK, HK$11.58, Outperform, Danny Chu)
MediaTek (2454 TT, NT$417.00, Neutral, Jeff Su)
Huawei Technology (002502 CH, Rmb14.34, Not rated)
Cisco Systems (CSCO US, US$20.68, Not rated)
AT&T (T US, US$34.15, Neutral, Kevin Smithen)
Verizon Communications (VZ US, US$48.26, Outperform, Kevin Smithen)
Macquarie Research Semiconductors
17 December 2013 15
Important disclosures:
Recommendation definitions
Macquarie - Australia/New Zealand Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield
Macquarie – Asia/Europe Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%
Macquarie First South - South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%
Macquarie - Canada Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return
Macquarie - USA
Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return
Volatility index definition*
This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be expected
to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only
Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations
Financial definitions
All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).
Recommendation proportions – For quarter ending 30 September 2013
AU/NZ Asia RSA USA CA EUR
Outperform 50.56% 56.87% 48.78% 41.00% 61.75% 47.10% (for US coverage by MCUSA, 5.85% of stocks followed are investment banking clients)
Neutral 38.95% 25.18% 42.68% 54.40% 34.43% 30.89% (for US coverage by MCUSA, 3.90% of stocks followed are investment banking clients)
Underperform 10.49% 17.94% 8.54% 4.60% 3.83% 22.01% (for US coverage by MCUSA, 0.00% of stocks followed are investment banking clients)
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Financials – cont’d
Online Brokers, Exchanges & Asset Managers Sameer Murukutla (New York) (1 212) 231 0689
Mortgage & Consumer Finance Sean Dargan (New York) (1 212) 231 0663 Asim Imran (Toronto) (1 416) 848 3521
Property & Casualty Insurance Amit Kumar (New York) (1 212) 231 8013 Asim Imran (Toronto) (1 416) 848 3521
Industrials
Chemicals Cooley May (New York) (1 212) 231 2586
Construction and Engineering/Machinery Sameer Rathod (San Francisco) (1 415) 762 5034
Electrical Equipment & Building Products Mike Wood (New York) (1 212) 231 6590
Transports & Logistics Kelly Dougherty (New York) (1 212) 231 2493
Materials
Paper & Packaging Al Kabili (New York) (1 212) 231 0683
Steel & Metals Aldo Mazzaferro (New York) (1 212) 231 0693
Coal Luke McFarlane (New York) (1 212) 231 2637
Global Metals & Mining Daniel Greenspan (Toronto) (1 416) 848 3541 Pierre Vaillancourt (Toronto) (1 416) 848 3647 Michael Siperco (Toronto) (1 416) 848 3520 Michael Gray (Vancouver) (1 604) 639 6372
Real Estate
REITs Robert Stevenson (Head of US REITs) (1 212) 231 8068 Michael Smith (Toronto) (1 416) 848 3696 Shahzeb Zakaria (New York) (1 212) 231 0647
TMET
Telecommunications Kevin Smithen (New York) (1 212) 231 0695 Greg MacDonald (Toronto) (1 416) 628 3934
Business & Computer Services Kevin McVeigh (New York) (1 212) 231 6191
Cable, Satellite & Entertainment Amy Yong (New York) (1 212) 231 2624
TMET – cont’d
Internet Ben Schachter (Head of TMET) (1 212) 231 0644 Tom White (New York) (1 212) 231 0643
Semiconductors Deepon Nag (New York) (1 212) 231 8014
Software & IT Hardware Brad Zelnick (New York) (1 212) 231 2618
Media & Entertainment Tim Nollen (New York) (1 212) 231 0635
Utilities & Alternative Energy
Angie Storozynski (Head of US Utilities & Alternative Energy) (1 212) 231 2569 Andrew Weisel (New York) (1 212) 231 1159 Rob Catellier (Toronto) (1 416) 848 3512
Commodities & Precious Metals
Colin Hamilton (Global) (44 20) 3037 4061 Jim Lennon (London) (44 20) 3037 4271 Kona Haque (London) (44 20) 3037 4334
Oil & Gas
Vikas Dwivedi (Houston) (1 713) 275 6352
Economics and Strategy
Dane Leone (New York) (1 212) 231 6369 David Doyle (Toronto) (1 416) 848 3663
Quantitative Analysis
Gavin Smith (New York) (1 212) 231 0588
Find our research at
Macquarie: www.macquarie.com.au/research
Thomson: www.thomson.com/financial
Reuters: www.knowledge.reuters.com
Bloomberg: MAC GO
Factset: http://www.factset.com/home.aspx
CapitalIQ www.capitaliq.com
Contact Gareth Warfield for access (612) 8232 3207
Email addresses
Equities Head of Global Cash Equities
Stevan Vrcelj (Sydney) (612) 8232 5999
Head of US Equities
Ken Savio (New York) (1 212) 231 1184
Head of Canadian Equities
Alex Rothwell (Toronto) (1 416) 848 3677
Sales US Sales
Austin Graham (New York) (1 212) 231 2494 Peter Doerr (Chicago) (1 312) 660 9052 Ross Peet (San Francisco) (1 415) 762 5069
Canada Sales
Roy McDowall (Montreal) (1 514) 925 2864
US Quantitative Specialist Sales
Victor Morange (New York) (1 212) 231 2538
Trading US Sales Trading
Austin Graham (New York) (1 212) 231 2494
Canada Trading
Perry Catellier (Toronto) (1 416) 848 3619
International Sales Trading
Chris Reale (New York) (1 212) 231 2555