201101 China smart phone nomura.ppt

ANCHORREPORTBUYSmartphones|CHINATELECOMS&TECHNOLOGYNOMURAINTERNATIONAL(HK)LIMITEDLepingHuang,PhD+85222521598NEWTHEMETheRMB1,000revolutionTheadventofRMB1,000(circaUS$150)smartphonespromisestorevolutioniseChinastelecomindustryandtheglobalhandsetspace.Aswellasdriving3GsubscribergrowthinChina,weexpecttheavailabilityofaffordable,capableentry-levelsmartphonestoleadtoconsolidationinthedomestichandsetindustry,sincesmallwhite-boxvendorsdonthaveareliableupgradepathto3Gfromeitherachipsetsourcingorproductdistributionstandpoint.Moreover,wethinkthesephoneswillhelpChinesehandsetOEMsmoveuptothemid-rangeproductsegment,pavingthewayStocksforactionWebelievethemarkethasyettorecogniseTCLComasakeybeneficiaryofthegrowingpopularityofsocialnetworkservices(SNS)inemergingmarketsorBYDEasaproxyforChina3Gsubscribergrowth.forafurtherconvergenceintheirvaluationsrelativetohandsetbrandvendors.WeforecastthatChinassmartphonemarketwillexpandfrom20mnunitsin2010FtoStockTCLCom(2618HK)RatingBUY*PricePricetargetHK$8.08HK$11.0062mnin2012F,makingittheworldssecond-largestsmartphonemarket(aftertheUS)byvolume.WehighlightabroadspectrumofbeneficiariesfromthearrivalofBYDElectronic(285HK)ChinaWireless(2369HK)NEUTRAL*HK$5.13HK$6.00HK$4.60HK$4.50smartphonesforthemasses:handsetvendorssuchasBYDE,TCLCom,ZTEandHTC,alongwithretailerGome.Qualcomm,ChinaWirelessandDigitalChinaalsolookDigitalChina(861HK)ZTE(763HK)HTC(2498TT)NEUTRAL*HK$16.04HK$17.00BUYHK$29.95HK$36.00BUYNT$894NT$1,000settobenefit,thoughweviewprevailingvaluationsasfair.WeseeMediaTekasaGome(493HK)BUYHK$2.89HK$4.30potentialloserfromthe2G-to-3Gtransition.Qualcomm(QCOMUS)MediaTek(2454TT)NEUTRALUS$51.33US$45.00REDUCENT$398NT$275Chinatobethesecond-largestsmartphonemarketby2012FAndroidtospurconvergenceofhandsetbrandvendorsandOEMs3GtransitiontoconsolidateChinesehandsetindustryToppicks:TCLCom,BYDE*Initiatingcoverage；pricesasat20JancloseAnalystsLepingHuang,PhD+85222521598NomuraAsia-ex-JapanResearchNomuraU.S.ResearchNomuraAnchorReportsexaminethekeythemesandvaluedriversthatunderpinoursectorviewsandstockrecommendationsforthenext6to12months.Anyauthorsnamedonthisreportareresearchanalystsunlessotherwiseindicated.Seetheimportantdisclosuresandanalystcertificationsonpages93to96.Nomura24January2011Price1Smartphones|CHINATELECOMS&TECHNOLOGYNOMURAINTERNATIONAL(HK)LIMITEDLepingHuang,PhD+85222521598NEWTHEMEActionWelookattheemergingentry-levelsmartphonetrendfromtheperspectiveofthewholehandsetsupplierchaincoveringchipsetvendors,handsetOEMs,distributorsandoperators.BUYTCLCom(initiation),BYDE,ZTEandHTCashandsetvendorbeneficiaries.Indistribution,SynnexandGomelookwellplaced.WereiterateourREDUCEonMediaTekasapotentialloserofthe2G-to-3Gtransition.WelikeChinaWireless(initiation)andDigitalChina(initiation)buttheirvaluationslookfair.StocksforactionWebelievethemarkethasyettorecogniseTCLComasakeybeneficiaryofthegrowingpopularityofsocialnetworkservices(SNS)inemergingmarketsorBYDEasaproxyforChina3Gsubscribergrowth.CatalystsStockTCLCom(2618HK)RatingBUY*PricetargetHK$8.08HK$11.00Positivecatalystsincludehigher-than-expected3GsubscribergrowthinChina.BYDElectronic(285HK)ChinaWireless(2369HK)BUYNEUTRAL*HK$5.13HK$4.60HK$6.00HK$4.50AnchorthemesEntry-levelsmartphonesareanimportanttrendinChinaandglobally.Entry-levelDigitalChina(861HK)ZTE(763HK)HTC(2498TT)NEUTRAL*HK$16.04HK$17.00BUYHK$29.95HK$36.00BUYNT$894NT$1,000smartphonesshouldhelpChineseoperatorsdrive3GsubscribergrowthandGome(493HK)BUYHK$2.89HK$4.30reshapethehandsetmanufacturinganddistributionindustry.Qualcomm(QCOMUS)MediaTek(2454TT)NEUTRALUS$51.33US$45.00REDUCENT$398NT$275*Initiatingcoverage；pricesasat20JancloseTheRMB1,000revolutionChinatobethesecond-largestsmartphonemarketby2012FWeforecastChinassmartphonemarketwillexpandfrom20mnin2010Fto62mnin2012F,andbecometheworldssecond-largestsmartphonemarket(aftertheUS)byvolumein2012F.OuraffordabilityanalysisshowsthatRMB1,000-2,000smartphoneswilldrive3GsubscribergrowthinChina.WenotethattheiPhoneistargetedatthetop5%oftotal3GsubscribersinChina.Wethinkthedifferenceinuserexperienceandassociatedserviceplansbetweenhigh-endandlow-endsmartphoneswillchangethesmartphoneecosystem.AndroidtospurconvergenceofhandsetbrandvendorsandOEMsWebelievetheemergenceoftheAndroidOShasloweredthetechnologybarriersbetweenhandsetbrandvendors(eg,Nokia,Motorola)capableofhigh-endproductdevelopmentandhandsetOEMscapableonlyofhandsetmanufacturingandlow-endhandsetdesign.TheselowerbarriersshouldhelphandsetOEMstopenetratemid-rangesegmentsandpresentinvestorswithre-ratingopportunitiesinhandsetOEMs,givenapossibleconvergenceinvaluationbetweenthetwogroups,inourview.3GtransitiontoconsolidateChinesehandsetindustryWethinkthetransitionfrom2Gto3GinChinawillencourageconsolidationinthehandsetOEMindustry,becausesmallvendorsdonothaveareliableupgradepathto3GduetolicensingrestrictionsbetweenMediaTekandQualcomm,andwilllikelyfacechallengesindistributionduetotheshifttoanoperator-centricmodelin3G.Fromadistributorperspective,weexpectPCandhandsetdistributiontoconverge,especiallyinsmartphones,creatingopportunitiesforexistingPCdistributorssuchasDigitalChinaandSynnex.Toppicks:TCLC,BYDEWecallBUYonBYDE,TCLCom,ZTE,andHTCasbeneficiariesinthehandsetvendorsector.Indistribution,wethinkSynnexandGomelookwellplaced.WereiterateourREDUCEratingonMediaTekasapotentialloserfromthe2G-to-3Gtransition.NomuraAnalystsNomuraAsia-Ex-JapanResearch:LepingHuang,PhD+85222521598DannyChu,CFA+85222526209EveJung+886221769975AaronJeng,CFA+886221769962CandyHuang+85222521407SachinGupta,CFA+6564336968PankajSuri+912240533724NomuraU.S.Research:RomitShah+12122984326SidneyHo,CFA+12122984329SanjayChaurasia+1212298430524January201133358810131515161718202850812Smartphones|ChinaLepingHuang,PhDContentsEntry-levelsmartphoneswhynow?Whyarewefocusingonentry-levelsmartphonesnow?KeyconclusionsToppicks:TCLC,BYDEMarketdynamicsChina:second-largestsmartphonemarketby2012FRMB1,0002,000smartphonestobethemaindriverEntry-levelsmartphoneshaveglobalpotentialCompetitivelandscapeHandsetsupplierchaininChina3Gsmartphonestoreshapehandsetdistribution3GtransitiontoconsolidatehandsetOEMsAndroidtoconvergehandsetbrandsandhandsetOEMsEntry-levelsmartphonestoformadistinctiveecosysteminChinaCompanydynamicsOperatorsHandsetvendorsDistributors/retailersLatestcompanyviewsTCLCommunicationTechBYDElectronicChinaWirelessTechnologiesDigitalChinaZTECorpHTCCorporationGomeElectricalAppliancesQualcommIncMediatekNomura2222242641607277858924January2011inChina3Smartphones|ChinaLepingHuang,PhDSummaryEntry-levelsmartphoneswhynow?Inthisreport,wediscusstheemergingentry-levelsmartphonetrendfromtheperspectiveofthewholehandsetsupplierchain,coveringchipsetvendors,handsetOEMs,distributorsandoperators.Wediscussthescaleandtimetablefor3GandsmartphonesinChina,analysetheaffordablepricerangeofsmartphonesinChina,andassesstheimpactofsmartphonesonthewholehandsetsupplierchain,especiallywiththeemergenceoftheAndroidOSforChinesehandsetOEMs.Whyarewefocusingonentry-levelsmartphonesnow?AfternearlytwoyearsofChinasdevelopmentof3Gsubscribers,thetotalnumberof3Gsubscribershadreached38mnbytheendofOctober2010,progressthatwasfarbehindtheplanfor150mnsubscribersbyend-2011setbytheMinistryofIndustryandInformationTechnology(MIIT),Chinastelecomregulator.Handsetsareonemajorbottleneckto3Ggrowth.In2011,webelieve3GsubscribergrowthwillbeakeythemeforChinastelecomindustry,andentry-levelsmartphonescouldbeanimportantaccelerantofit.WeareseeingaboominsmartphonedevelopmentamongChinesehandsetOEMs.Mostcompaniesareaimingtocapitaliseonthegrowthopportunitiespresentedby3GinChinaandwanttopenetratethemid-rangesegmentoftheglobalhandsetmarket.Sucha“step-up”strategyhasprovedchallenginginthepast.WelookattheprospectsoftheAndroidOSchangingthepicturethistimearound.Webelievethistrendwillhaveasignificantimpactontheexistingglobalhandsetindustry.Exhibit1.SmartphonesmadebyChinesehandsetvendorsWhynow(1)?ImportantproductstodriveChina3GsubscribernumbersWhynow(2)?AndroidisboomingBrandModelLenovoLePhoneZTEX850K-TouchW606HuaweiIdeos/U8150CoolpadW711TCLOT-980MeizuM9HuaweiIdeosX5/U8800PhotoWirelessHSPA/GSMHSPA/GSMHSPA/GSMHSPA/GSMHSPA/GSMHSPA/GSMMSMHSPA/GSMHSPA/GSMScreensize(inch)TouchscreenProcessorOSCamera(mpixels)AnnouncedRetailprice(RMB)3.7CapacitiveQualcommSnapdragon1GHzAndroid2.13MPMay-20102,7002.8ResistiveQualcommMSM7227600MHzAndroid2.13MPJune-20108503.5CapacitiveSTEST6715468MHzAndroid2.12MPAug-20101,5002.8CapacitiveQualcommMSM7225528MHzAndroid2.23MPSep-201011993.5ResistiveSTEPHX6715468MHzAndroid2.12MPSep-20101,5002.8ResistiveQualcommMSM7227600MHzAndroid2.12MPSep-20101,6003.5CapacitiveSamsungS5PC1101GHzAndroid2.25MPDec-20102,5003.8CapacitiveQualcommMSM7230800MHzAndroid2.25MPDec-20102,600Source:GSMArena,PCOnline,ZOL.KeyconclusionsWenotethesharesofOEMshavehistoricallytradedatadiscounttohandsetbrands,thoughthatgapisnarrowing.Webelievetheentrybarriersintechnologyandbrandequityarethemainreasonsforthevaluationgap.AndwebelievetheAndroidOSandGoogleasabrandcouldbreakdownthesebarriersstillfurther.NomuraAndroidtospurconvergenceinvaluationsamonghandsetOEMs/brands24January2011May-09May-10Feb-09Mar-09Nov-09Mar-10Aug-09Sep-09Aug-10Sep-10Dec-09Nov-10Feb-10Oct-09Oct-10Jul-09Apr-09Apr-10Jul-10Dec-10Jan-09Jun-09Jan-10Jun-10304Smartphones|ChinaLepingHuang,PhDExhibit2.P/EcomparisonbetweenhandsetOEMandhandsetbrandsHandsetOEMsHandsetbrands252015Entrancebarrier1050Note:12-monthforwardP/E,handsetbrandsincludesNokiaandAppleComputer,handsetOEMsincludesChinaWireless,BYDElectronicsandTCLCommunications,ApplesforecastisBloombergconsensus,othersareNomuraforecastsSource:NomuraestimatesThefollowingExhibitsshowthehandsetsupplierchaininChina.WehighlightZTE,TCLCom,BYDElectronics,SynnexandGomeaskeybeneficiariesofthisstoryallareratedBUY.WhileweseeQualcomm,ChinaWirelessandDigitalChinaaspotentialbeneficiaries,too,weseeprevailingvaluationsasfair.WethinkMediaTekstandstolosefromthistrend,andwereaffirmourREDUCErating.Exhibit3.3GtransitiontotriggerindustryconsolidationHandsetComponentAACAcoustics(2018HK)Unimicron(3037TT)Distributor/RetailerDistributor:TellingTelecom(00829CH)DigitalChina(861HK)Synnex(2347TT)HandsetChipsetQualcomm(QCOMUS)MediaTek(2454TT)Spreadtrum(SPQDUS)HandsetOEMsOEM:ZTE(763HK)Huawei(unlisted)Retailer:Gome(493HK)ConsumerTCLCom(2618HK)ChinaWireless(2369HK)Lenovo(992HK)OperatorHandsetSoftwareGoogle(GOOGUS)ODM/EMSBYDElectronics(285HK)Foxconn(2038HK)ChinaMobile(941HK)ChinaTelecom(728HK)ChinaUnicom(762HK)Source:NomuraresearchNomura24January201165Smartphones|ChinaExhibit4.PositionofChinesehandsetvendorsChinaLepingHuang,PhDOverseas3G2GSource:NomuraresearchToppicks:TCLC,BYDEWeinitiatecoverageofTCLCommunicationswithaBUYratingandaPTofHK$11(36%potentialupside),DigitalChinawithaNEUTRALratingandaPTofHK$17,andChinaWirelesswithaNEUTRALratingandaPTofHK$4.5.WereaffirmourBUYcallsonBYDElectronics,ZTE,SynnexandGome,REDUCEonMediaTek,andNEUTRALonQualcomm.Exhibit5.Universesnapshot:whatschanged?PricePriceVarMethodTicker2618HKCompanynameTCLComActionInitiateRatingBUYCurrencyHK$Jan-208.08target11.00(%)36xFY11P/EReason12InlinewithhandsetOEMsaverage(12x)2369HKChinaWirelessInitiateNEUTRALHK$4.604.50(2)1415%premiumtohandsetOEMsbecauseofChinaexposure861HKDigitalChinaInitiateNEUTRALHK$16.0417.00-1xPEG.CompanyisintransitionfromdistributortoITservicesprovider.285HK763HKBYDElectronicZTEunchangedunchangedBUYBUYHK$HK$5.1329.956.0036.00172010Historical(fromFY07)average245%premiumtohistorical(fromFY2005)averageSource:NomuraresearchTCLCommunications(2618HK,notratedBUY,PT:HK$11):WeinitiateonTCLCommunicationTechnologywithaBUYratingandPTofHK$11.0,whichimpliesupsideof36%fromcurrentlevels.Webelievethemarkethasyettorecognisethatthecompanyisakeybeneficiaryofthepopularityofsocialnetworkservices(SNS)inemergingmarkets.GrowthinthecompanysSNSphoneofferingsandentry-levelsmartphonebusinessofferinvestorsadistinctiveASPandmarginexpansionstorywithinhandsetOEMs,inourview.BYDElectronics:(285HK,BUY,PT:HK$6.0):WereiterateourBUYcallandPTofHK$6.00.WesuggestinvestingaheadoftheFY10resultsannouncement,slatedfortheendofMarch.WebelievethecompanywillbeatconsensusFY10Fearnings,drivenbyatransformationtothehigher-marginODMbusinessfromEMStooffsettheimpactofwageinflation.WebelievetheODMbusinesswillcontinuetodriverobustearningsgrowthinFY11-12F,backedbystrong3GhandsetdemandinChina.Nomura24January20116Smartphones|ChinaLepingHuang,PhDChinaWireless(2369HK,notratedNEUTRAL,PT:HK$4.50):WeinitiatecoverageonChinaWirelessTechnologieswithaNEUTRALratingandaHK$4.50PT.WethinkthecompanysstrongR&Dcapabilityandproductportfoliowillhelptocapitaliseon3GandsmartphonedemandinChina.However,webelievethecompanystillneedstoboostitsmarketingexpensesandlearnhowtomanageitsbrandimagebeforebecominganestablishedbrandhandsetvendor(eg,ChinasHTC).Thestocks14.5xFY11FP/Elooksfair,inourview.DigitalChina(861HK,notratedNEUTRAL,PT:HK$17):WeinitiateonDigitalChinawithaNEUTRALcallandPTofHK$17.00.WelikeDigitalChinaspositionaskeybeneficiaryofthedigitalcityandothernationalITprojectsinChinas12thFive-YearPlan,andseeanyprogressasare-ratingopportunity.ZTE(763HK,BUY,PT:HK$36):WebelievethemarkethaslongseenZTEasatelecomequipmentvendor,butitsterminal(handset,anddatacard)businessisoneofitskeyrevenuedriversnow(26%ofsalesinFY10F).LookingtoFY11F,webelieveentry-levelsmartphoneswillhelpZTEtorealisebothmarket-shareandmarginexpansion.ReaffirmingBUY,withpricetargetofHK$36.HTC(2498TT,BUY,PT:NT$1,000):WereaffirmourBUYratingonHTC,givenourviewoffurtherupside,drivenbyexpectedmarket-sharegainsonitsleadingtechnologyinhardwareandsoftware,aswellasonrisingbrandawareness.Webelievethecompanyiswell-positionedwithinitsindustrytobenefitfromthetrendofdeviceconvergence.Welikeitsstrategytokeepstrengtheningthe“Senseexperience”,whichinourviewwillprovetobeanimportantdifferentiatorasthemarketmaturesin2012F.Gome(493HK,BUY,PT:HK$4.30):AccordingtoGome,demandfornewproductssuchassmartphoneishighowingtorisingincomesandimprovinglifestyles.WebelievenewproductsbodewellforSSSandsalesefficiencyimprovement,givenrelativelyhighASPs.GomeislikelytoaccelerateitsnewstoreopeningsinFY11F,from150-200to200-250,andwebelievefaster-than-expectedstoreexpansionwilldriveearningsfromFY11F.WereiterateourBUYratingandPTofHK$4.3.Qualcomm(QCOMUS,NEUTRAL,PT:US$45):QualcommhasstrongseculartailwindsthatshouldhelpitdriverevenuegrowthinFY12F.WeexpectQualcommto:1)gainshareinthebasebandmarket(currentsharestandsat40%),drivenbythegrowthof3Ghandsetsinemergingmarkets；2)addUS$0.20-0.25fromdesignwinsintheVerizoniPhone4(CDMAchipset)andtheupcomingiPhone5(forbaseband,replacingInfineon)；and3)improveitsroyaltyrevenuesduetoagrowing3GsubscriberbaseandotherdatadevicessuchaseReadersandtablets.MediaTek(2454TT,REDUCE,PT:NT$275):WemaintainourREDUCEratingandpricetargetofNT$275forMediaTek；ourPTimplies31%potentialdownside.WeexpectMediaTektorecordtwoconsecutiveyearsofearningsdeclines(theworstperformanceinthecompanyshistory),followedbyonlyamoderaterecoveryinFY12F.Nomura24January20117Smartphones|ChinaExhibit6.ValuationtableLepingHuang,PhDPriceMarketcapP/E(x)P/BV(x)ROE(%)BloombergtickerCompanynameRatingCurrencyJan-20(US$mn)FY10FFY11FFY10FFY11FFY10FHandsetchipsetQCOMUS2454TTQualcommMediaTekNEUTRALREDUCEUS$NT$51.3339883,03714,93918.913.817.432.3Handset/PCvendor2618HK285HK2369HK763HK2498TTTCLComBYDElectronicChinaWirelessZTEHTCBUYBUYNEUTRALBUYBUYHK$HK$HK$HK$NT$8.085.134.6029.958941,1401,4861,24311,03325,17212.69.717.224.314.552.414.350.916.153.4Distributorsandretailers861HK493HKDigitalChinaGomeElectricalNEUTRALBUYHK$HK$16.042.892,2475,59117.718.415.43.12.321.016.2TelecomServiceProvider941HK728HK762HKChinaMobileChinaTelecomChinaUnicomBUYNEUTRALBUYHK$HK$HK$77.304.5412.06199,32247,21836,83411.621.244.510.818.62.7Note:ForQualcomm:yearendsinSep.ForDigitalChina:yearendsinMarch.EstimateshavebeenprovidedaboveforFY11andFY12forthesecom