高盛 2011年亚洲科技行业的判断和预测

January 24, 2011 Asia: Technology: HardwareEquity ResearchAsia Technology Insight 2011: A new order takes shape New technologies gain momentum US-driven innovation is starting to fundamentally reshape and reorder the global tech sector. In our view, new products such as smartphones, tablets, and cloud computing will drive significant and accelerated 2011 sub-sector earnings growth. In addition, we also expect new longer-term growth scenarios and greater differentiation among tech stocks as established players and new entrants compete in OS, CPU, and end products, and as adoption opportunities change for DRAM, NAND, electronic parts, and display. Sector analysis We think new technologies from the US will have a greater impact on stocks earnings and prices in 2011 than where each subsector is in its individual cycle. We are bullish on smartphones, especially leaders in Android OS. We are also bullish on PCB (HDI) suppliers and passive parts, as we believe they are well placed to benefit from rapid global growth in smartphones and tablet PCs. We are less positive on PC stocks (ODM/OEM), on their slower growth and cannibalization by tablet PCs. Exploring industry themes In this report, we provide in-depth analysis of the three new key industry drivers smartphones, tablets, and cloud computing: notably, how 4G mobile rollout will impact the sector, how the iPads success is spurring non-PC companies to enter the market； and the impact of cloud computing on investment patterns. In addition, we analyze the implications of macro factors stemming from our Global ECS teams updated US and China growth and FX estimates. Introducing 25 top regional stock picks We base our top regional 25 picks on our analysts top recommendations in their coverage groups, then select those we believe are best positioned to benefit from the new industry drivers in 2011. Also, for the first time we screen our 117 covered stocks under our returns-based Directors Cut methodology and 2011E CROCI quartiling. These screens lend support to many of our top picks, and highlight four standoutstwo Buys: HTC, and Nitto Denko； two Sells: FIH, and Compal Comm. TOP PICKS BY COUNTRY * on conviction list Source: Goldman Sachs/Gao Hua Research estimates.Daiki Takayama +81(3)6437-9870 Goldman Sachs Japan Co., Ltd. The Goldman Sachs Group, Inc. 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. For Reg AC certification, see the end of the text. Other important disclosures follow the Reg AC certification, or go to /research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S. Henry King +852-2978-0748 Goldman Sachs (Asia) L.L.C. Michael Bang +82(2)3788-1655 Goldman Sachs (Asia) L.L.C., Seoul Branch Donald Lu, Ph.D +86(10)6627-3123 Beijing Gao Hua Securities Company Limited The Goldman Sachs Group, Inc. Global Investment Research Region Ticker Company RatingNameJapan 6981.OS Murata Mfg. Buy*6988.T Nitto Denko Buy*6501.T Hitachi Buy*6701.T NEC Buy*4901.T FUJI FILM Holdings Buy*6724.T Seiko Epson Buy*6752.T Panasonic Corporation Buy*6857.T Advantest Sell7731.T Nikon Sell*5201.T Asahi Glass Sell*Taiwan 2498.TW HTC Corp. Buy*8069.TWO E Ink Holdings Inc Buy*3037.TW Unimicron Buy*2409.TW AU Optronics Buy3008.TW Largan Precision Buy2369.HK China Wireless Technologies Buy8046.TW Nan Ya PCB Sell8078.TW Compal Communications Sell2038.HK Foxconn International Holdings SellChina ASIA AsiaInfo-Linkage Buy0522.HK ASM Pacific Technology SellKorea 034220.KS LG Display Buy*005930.KS Samsung Electronics Buy046890.KQ Seoul Semiconductor Sell011070.KS LG Innotek Co. Sell*January 24, 2011 Asia: Technology: Hardware Goldman Sachs Global Investment Research 2 Table of contents Executive summary 3 25 top picks for 2011 by market 10 Top picks for 2011 by sector； overview of sector and sub-sector analysis 17 Three key themes driving increased Asia supply chain earnings in 2011 24 (1) Smartphones: We expect to see initial impact of 4G in 2011 25 (2) Tablet PCs: We expect to see impact of many entries and effect of cannibalization in 2011 26 (3) Cloud computing: Theme building in 2011 28 Macro factors: North America recovery, China growth, and FX 31 Subsector Investment Summary 38 Growth estimates and financial ratios across markets 62 Appendix, including full sector stock recommendations and target prices 66 Ratings and target prices in this report are current as of January 21, 2011. Pricing is as of January 19. ASIA TECHNOLOGY TEAM JAPAN TAIWAN KOREA GAO HUA SECURITIES (CHINA) Daiki Takayama (Co-Leader) Ikuo Matsuhashi Toshiya Hari Takashi Watanabe Shumpei Kumagai Taichi Yoneya Kyoko Sano Kenya Moriuchi Nan Jiang Henry King (Co-Leader) Robert Chen Liang-chun Lin Edward Yen Kevin Lu Iris Wu Maggie Lu Michael Bang Marcus Shin Hyunwoo Nam Donald Lu, Ph.D Sam Li Evan Xu Lingling Hu L January 24, 2011 Asia: Technology: Hardware Goldman Sachs Global Investment Research 3 Executive summary A change in focus for looking at Asia tech stocks We believe it is now easier to assess Asian tech stocks on a more pan-regional basis, as we believe the primary drivers of growth in 2011 will be more focused on where individual companies are positioned in the supply chains of major new innovative products (smartphones, tablets, cloud computing). This is in contrast to the picture before the financial crisis which was marked by the influence of macro growth in different markets and the greater distinction being made between those companies linked to emerging market growth and those more closely correlated with developed market growth. From a sub-sector viewpoint, we believe innovations being pioneered in the US will have a greater impact in 2011 than where each subsector happens to be in its individual cycle. We see this phenomenon driving growth over several years, providing greater clarity on the prospects of Asia technology companies. Also lending itself to easier pan-regional comparison is the narrowing in differentials in valuations among Asian tech stocks with a convergence towards 15X forward P/E. Regional top picks selection 25 stocks We introduce our list of 25 top picks across the region stocks that cover each market and most market sub-sectors. We base our picks on our analysts top recommendations in their coverage groups, then select those we believe are best positioned to benefit from the new industry drivers in 2011 or to benefit from cycle momentum (top left panel of Exhibit 1). We then rank these according to their potential return to our target price (top right hand panel). In addition, we highlight stocks that appear on our top picks list that also screen appropriately under our Directors Cut and CROCI quartiling analyses (bottom panels). Screening our entire coverage universe using Directors Cut and CROCI Quartiles In order to compare tech stocks on a more regional basis we introduce our first screen of the 117 Asian tech stocks under coverage using our returns-based Directors Cut methodology the correlation between EV/GCI and CROCI/WACC on our 2011 estimates. High correlation for the Asian universe and for stocks with market cap in excess of US$10 bn implies high alpha generation if investors follow undervaluation and overvaluation signals. (Exhibits 2 and 3). The highest CROCI (and ROE) is in Taiwan/China, followed by Korea, then Japan. The explanation for CROCI improvement was primarily margin (DACF/revenues) improvement in Korea and Japan, while in Taiwan/China, increased turnover (revenues/GCI) was chiefly responsible. Supporting overlays: Note that we do not use Directors Cut as our primary valuation for deriving target prices for all our tech stocks for different sectors and sub-sectors across different markets our analysts may use P/B, EV/GCI, P/E, or Directors Cut, depending on the differing dynamics of each sub-sector. However, we find our screen is useful as a supplementary and comparative tool for looking at the stocks on a pan-Asian basis. January 24, 2011 Asia: Technology: Hardware Goldman Sachs Global Investment Research 4 Directors Cut: There are 15 names that screen as undervalued/overvalued using the Directors Cut screen (ie, the top and bottom 20% among the entire covered universe) that are rated Buy/Sell by our analysts. Of these, nine appear on our regional top pick list of 25 stocks (marked in bold below). Seven Buys: AU Optronics, Chimei Innolux, HTC Corp., Lenovo Group, LG Display, Nitto Denko, and Samsung Techwin. Eight Sells: ASM Pacific Technology, Advantest, Casio Computer, Compal Communications, Foxconn International Holdings, Foxconn Technology, Mediatek, and Seoul Semiconductor. CROCI Quartiling: Similarly we screen for stocks that appear on our list using our 2011CROCI quartile estimates. We show how our top picks rank under this screening in Exhibit 1. Standout calls: Two Buys / Two Sells Buy-rated stocks on our list of 25 that are also ranked in the first quartile for 2011 CROCI and have buy signals under Directors Cut: HTC and Nitto Denko Sell stocks on our list of 25 that are also ranked in the fourth quartile for 2011 CROCI and have sell signals under Directors Cut: Foxconn International Holdings and Compal Communications. Brief introduction to Directors Cut: The Directors Cut framework uses sector-relative EV/GCI to CROCI/WACC ratios (gross asset multiple vs. excess cash returns) to identify undervalued and overvalued stocks. According to ourbacktest, a market and sector neutral L/S portfolio based on Directors Cut would have generated a 85% annual return from 2000 to present (see Exhibits 2 and3). Stocks above the sector average line appear overvalued on a sector relative basis, stocks below the line appear undervalued. When the sector average line is below the 1:1 line, the sector appears undervalued on Directors Cut； when above, the sector appears overvalued. The buy/sell signalled stocks are those which are top / bottom 20% over valued / undervalued stocks (Exhibits 5 and 6). January 24, 2011 Asia: Technology: Hardware Goldman Sachs Global Investment Research 5 Exhibit 1: Our top stock picks with our Directors Cut and CROCI quartiling overlays Note: In the right hand panel, the numbers after each stock represent its rank among the relevant analysts coverage group. For example, HTC offers the most upside among Robert Chens 11 stocks under coverage. Source: Goldman Sachs Research estimates, Gao Hua Research estimates. Our top picks organized by industry driver Our top picks ranked by potential upside/downside and their relative position among the covering analysts coverage groupSecular / structural change theme Directors cut (EV/GCI=CROCI/WACC)Earnings momentum P/B vs ROEi.e. industry cycle, restrucuring, etc. Historical P/E, P/BTop Buys Top Sells Top Buys Top SellsSecular Shift Secular shift Top Buys & Ranking of upside to TP within coverage Top Sells & Ranking of downside to TP within coverage2498.TW HTC Corp. 5201.T Asahi Glass 2498.TW HTC Corp. 1/11 8046.TW Nan Ya PCB 1/38069.TWO E Ink Holdings Inc 8046.TW Nan Ya PCB 8069.TWO E Ink Holdings Inc 2/11 046890.KQ Seoul Semiconductor 3/9ASIA AsiaInfo-Linkage 8078.TW Compal Communications 034220.KS LG Display 2/9 5201.T Asahi Glass 1/102369.HK China Wireless Technologies 2038.HK Foxconn International Holdings ASIA AsiaInfo-Linkage 2/16 7731.T Nikon 1/76988.T Nitto Denko 2369.HK China Wireless Technologies 4/11 011070.KS LG Innotek Co. 1/96981.OS Murata Mfg. Industry Cycle 6752.T Panasonic Corporation 1/10 0522.HK ASM Pacific Technology 1/163037.TW Unimicron 046890.KQ Seoul Semiconductor 6724.T Seiko Epson 1/14 8078.TW Compal Communications 2/11005930.KS Samsung Electronics 7731.T Nikon 6988.T Nitto Denko 2/19 2038.HK Foxconn International Holdings 1/113008.TW Largan Precision 011070.KS LG Innotek Co. 6981.OS Murata Mfg. 3/19 6857.T Advantest 2/70522.HK ASM Pacific Technology 4901.T FUJI FILM Holdings 5/14Industry Cycle 6857.T Advantest 3037.TW Unimicron 1/3034220.KS LG Display 005930.KS Samsung Electronics 3/9005930.KS Samsung Electronics 6501.T Hitachi 3/102409.TW AU Optronics 6701.T NEC 1/103008.TW Largan Precision 3/11Restructuring (mainly Japan names) 2409.TW AU Optronics 1/76724.T Seiko Epson6752.T Panasonic Corporation6701.T NEC6501.T Hitachi4901.T FUJI FILM HoldingsOverlay - Directors CutCROCI Quartiles Directors Cut based on Asia tech coverage (117 stocks) - Buy & Sell SignalsTop Buys which are 1st quartile within coverage Top Buys which are 2nd quartile within coverage Top Buys with Directors Cut Buy Signal Top Sells with Directors Cut Sell Signal2498.TW HTC Corp. ASIA AsiaInfo-Linkage 034220.KS LG Display 046890.KQ Seoul Semiconductor2369.HK China Wireless Technologies 2498.TW HTC Corp. 0522.HK ASM Pacific Technology6501.T Hitachi Top Sells which are 3rd quartile within coverage 6988.T Nitto Denko 8078.TW Compal Communications6988.T Nitto Denko 046890.KQ Seoul Semiconductor 2409.TW AU Optronics 2038.HK Foxconn International Holdings6981.OS Murata Mfg. 011070.KS LG Innotek Co. 6857.T Advantest005930.KS Samsung Electronics Other stocks flagged as Buy signals under DC3008.TW Largan Precision Top Sells which are 4th quartile within coverage 3481.TW Chimei Innolux Other stocks flagged as Sell signals under DC8046.TW Nan Ya PCB 0992.HK Lenovo Group 6952.T Casio Computer5201.T Asahi Glass 012450.KS Samsung Techwin 2454.TW Mediatek8078.TW Compal Communications 2354.TW Foxconn Technology2038.HK Foxconn International HoldingsJanuary 24, 2011 Asia: Technology: Hardware Goldman Sachs Global Investment Research 6 Exhibit 2: Our back test indicates Directors Cut is an effective method to generate alpha within our Asia tech universe % return over the average for our Asia technology coverage universe portfolio Exhibit 3: Our back test indicates Directors Cut is an effective method to generate alpha within our Asia tech universe - in % return over the average for our Asia technology coverage universe portfolio Source: Goldman Sachs Research Source: Goldman Sachs Research Exhibit 4: The basic Directors Cut methodology read Stocks above the sector average line appear overvalued on a sector relative basis, stocks below the line appear undervalued. When the sector average line is below the 1:1 line, the sector appears undervalued on Directors Cut； when above, the sector appears overvalued. Source: Goldman Sachs Research. 0%20%40%60%80%100%120%140%160%180%200%2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Buy/Sell - Alpha Average0%10%20%30%40%50%60%70%80%2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Buy Portfolio - Alpha Sell Portfolio - AlphaCROCI/WACCEV/GCIStocks appear overvalued on a sector relative basis (representing potential sell opportunities) - Excess value attributed by the market is well above excess returns on a sector relative basis, hence we can expect a de-rating of the stockSector average line (different from the 1:1 line due to sector specifics)Stocks appear undervalued on a sector relative basis (representing potential buy opportunities) - Excess returns are not fully valued by the market on a sector relative basis, hence we can expect a re-rating of the stock1:1 line (Perfect valuation, as EV/GCI = CROCI/WACC) 11January 24, 2011 Asia: Technology: Hardware Goldman Sachs Global Investment Research 7 Exhibit 5: EV/GCI and CROCI/WACC plot using our 2011 estimates blue line is sector average, black line is the 1:1 line Exhibit 6: EV/GCI and CROCI/WACC plot using our 2011 estimates, but with the y-axis extended for greater clarity blue line is the sector average, black line is the 1:1 line Source: Goldman Sachs Research estimates. Source: Goldman Sachs Research estimates. Three themes drive a shift in the tech sector: smartphones, tablets, cloud computing US-driven innovation is starting to reshape and reorder the global tech sector into a new framework. Apples iPhone has energized the spread of smartphones, and Apples iPad spurred the rise of tablet PCs, so these are not merely one-off hit products. These new products are changing consumer lifestyles, accelerating the move to cloud computing by consumers and companies, spurring companies to update their IT strategies, driving investment in upgrading telecom infrastructure, and paving the way for the creation of new industries. We see far reaching impact on the supply chain from these trends and indeed, so far in 2011: Microsoft has said it would begin to support ARM architectures with Windows 8, due out in 2012； Samsung has announced a huge 2011 capex budget for AMOLED； and Sharp, Toshiba Mobile Display, and Hitachi Display announced large capex plans for small- and mid-sized LCDs. Hon Hai subsequently announced it would take a controlling stake in Hitachi Display. We see two main themes that favor current leaders in supplying smartphones (1) Smartphones are starting to clarify how the 4G mobile service rollout will impact the tech sector (how mobile handsets are used and how competitiveness will change). (2) The success of tablet PCs has spurred non-PC companies into this market segment and existing tablet PCs are cannibalizing conventional PCs. In contrast, (3) the shift to cloud computing has accelerated the move to lighter-weight devices and investment in bolstering network infrastructure. We expect investors to explore this as an investment theme in 2011. AAC AcousticAdvanced Semiconductor EngineeringAdvantestAlps ElectricAsahi GlassAsahi HoldingsASM Pacific TechnologyASUSTeK ComputerAU OptronicsBrother IndustriesBYD ElectronicCanonCatcher TechnologyCheng Uei Preci ion (Foxlink)Chimei InnoluxChina Wireless TechnologiesCitizen HoldingsCompal ElectronicsDainippon ScreenDelta ElectronicsDiscoE Ink Holdings IncE pida MemoryEpistarEverlight ElectronicsFoxconn International HoldingsFoxconn T chnologyFUJI FILM H ldingsFujitsuFunai ElectricGS YuasaHirose ElectricHitachiHitach i Ko kusai El ctricHon Hai P ecisionHoribaHOYAHTC Corp.Hynix SemiconductorIbidenInventec AppliancesJapan Aviation Electronics IndustryKonica Minolta HoldingsKyoc raLargan PrecisionLenovo GroupLG DisplayLG Innotek Co.Lite-On TechnologyMabuc i MotorMat uda SangyoMediatekMin beaMitsubishi ElectriMitsumi ElectricMurata Mfg.Nan Ya PCBNECNGK In ulatorsNGK Spark PlugNichi onNidecNih Dem a K gyoNikonNip on Che i-CoNippon Electric GlassNitto De koOharOki Elect i IndustryOlymp sPa asonic C rporatiQuanta ComputerRene as ElectronicsRic hSamsung Electro-MechanicsSamsu ElectronicsSamsung SDI Samsung TechwinSanyo El ctricSeik Eps nSeoul SemiconductorSh rpShinko El ctric I dustriesSiliconware Pr ision IndustriesSilitech TechnologySonyTa yo YudenTamronTDKToky ElectronTos ibTPK HoldingTPV Te hn logyTripod TechnologyTSMCUlvacUni icr nUn ted Microelectronics Corp.Wint kWistronYamYoung Fast OptoelectronicsZTE Corporation (A) C r oration (H)0.0x5.0x10.0x15.0x20.0x25.0x30.0x35.0x40.0x0.0x 5.0x 10.0x 15.0x 20.0x 25.0x 30.0x 35.0x 40.0xEV/GCICROCI/WACCAdvanced Semiconductor EngineeringAdvantestAlps ElectricAsahi GlassAsahi HoldingsASUSTeK ComputerAU OptronicsBrother IndustriesBYD ElectronicCanonCatcher TechnologyCheng Uei Precision (Foxlink)Chimei InnoluxCitizen HoldingsDainippon ScreenDiscoE Ink Holdings IncElpida MemoryEpistarEverlight ElectronicsFoxconn International HoldingsFoxconn TechnologyFUJI FILM HoldingsFujitsuFunai ElectricGS Yuasa Hiro se ElectricHitachiHitachi Kokusai ElectricHon Hai PrecisionHoribaHOYAHynix SemiconductorIbidenInventec AppliancesJapan Aviation Electronics IndustryKonica Minolta HoldingsKyocera LG DisplayLG Innotek Co.Lite-On TechnologyMabuchi MotorMatsuda SangyoMinebeaMitsubishi ElectricMitsumi ElectricMurata Mfg.Na Ya PCBNECNGK InsulatorsNGK Spark PlugNichiconNidecNihon Dempa KogyoNikonNippon Chemi-ConNippon Electric GlassNitto DenkoOharaOki Electric IndustryOlympusPanasonic CorporationQuanta ComputerRenesas ElectronicsRicohSamsung Electro-MechanicsSamsung ElectronicsSamsung SDI CoSamsung TechwinSanyo ElectricSeiko EpsonSeoul SemiconductorSharpShinko Electric IndustriesSiliconware Precision IndustriesSonyTaiyo YudenTamronTDKTokyo ElectronToshibaTPV TechnologyTripod TechnologyTSMCUlvacUnimicronUnited Microelectronics Corp.WintekWistronYamahaZTE Corporation (A)ZTE Corporation (H)0.0x0.5x1.0x1.5x2.0x2.5x3.0x0.0x 1.0x 2.0x 3.0x 4.0x 5.0x 6.0x 7.0xEV/GCICROCI/WACCJanuary 24, 2011 Asia: Technology: Hardware Goldman Sachs Global Investment Research 8 As these trends play out, we envisage new competitive dynamics to emerge in the OS/CPU/end-product space and older dynamics to fade, in turn changing the content-per-box opportunity mix for DRAM, NAND, electronic components, and displays (LCDs, AMOLED, and touch panels) with considerable ramifications for Asian tech supply chains, which center on hardware. As these dynamics become clearer, it should become more apparent which firms will come out ahead and which are likely to fall behind. Sector breakdown Structurally bullish on smartphones, PCBs / passive components, less positive on PC (ODM/OEM) We expect Asian leaders in the Android OS smartphone space to continue to grow rapidly and we remain bullish on this group. We are also bullish on suppliers of PCBs (HDI) and passive parts as we think they are situated to gain the most from rapid global growth in smartphones and tablet PCs. We are less positive on PC stocks (ODM/OEM), which we view as being at risk of slower growth on cannibalization by tablet PCs. Where we are in the cycles cyclically bullish on LCD； less positive on foundries and SPE, LED； rebound for DRAM We look at the industry cycle of each subsector and find: passive parts are close to bottoming out, LCDs are near a bottom, DRAMs could bottom during Jan.-Mar. and then rebound in our view, foundries and SPE are close to peaking. Therefore, from a cyclical viewpoint, we are bearish on foundries and SPE and generally bullish on LCDs on a 6-12 month horizon. However we are more bearish on captive LED suppliers as we expect stagnant earnings sector-wide after a period of overinvestment. Some LED makers with diversified applications, such as Epistar and SemiLED, are still enjoying net margins near 20% in 4Q10, meaning gross margins may differ by as much as 20-30% among players in the sector. Differentiation by secular trends and subsector specific factors With the post-crisis cycle now almost back in alignment with normal industry cycles, we think disparities among subsectors and companies driven by secular trends will mean that where each subsector is in its cycle will be much less important in determing stock performance in 2011 than the differences among subsectors and between companies. We outline our views on the subsectors below. DRAM: We think DRAMs could bottom during Jan.-Mar. and then rebound (positive), and see constraints on longer-term DRAM content-per-box growth (negative). NAND: Volumes are growing (positive), and ASPs and NAND capacity per box are aligned (mixed). Foundries: We think they are near a cyclical peak (negative) but long-term expansion of ARM architectures will increase their total addressable markets (positive). Display: In contrast to the cyclical recovery in LCDs toward 2H2011, we think OLEDs have long-term growth potential (positive), and the outlook for touch panels is balanced between volume growth (positive) and stiffer competition (negative). Electronic components: We look for a divergence between suppliers of PCBs and passive parts (positive) and suppliers of packages for Intel and HDDs (negative). January 24, 2011 Asia: Technology: Hardware Goldman Sachs Global Investment Research 9 Macro factors: North America recovery, China growth, FX We see three implications for the Asian tech sector stemming from the GS Global ECS Research teams macro and forex forecasts. The macro outlooks for North America (likely to recover quicker) and China (likely to stay on a rapid growth path) are positive given their outsized roles in driving the high-tech sector. We think the Asian tech sector as a whole is likely to be a stronger performer than many other sectors. We think North American recovery will be a theme in the first half of 2011, with a resurgence of Chinese economic growth becoming a theme in the second half, after financial tightening in China ends around mid-2011 (on our base case assumption of a soft landing). Therefore, we look for Japanese and Korean tech stocks, which are more heavily weighted toward North America, to perform well in the first half, and Taiwanese/Chinese tech stocks to perform well in the second half The GS Global ECS Research teams 2011 forex outlook is for the yen to weaken slightly versus the US$ and other Asian currencies (12-month forecast is 90/US$) as the yen has appreciated in 2010 faster than other Asian currencies. This would be a positive for Japanese tech stocks on a year-on-year basis. However, we think the KRW and the NT$ will appreciate only slightly against the US$ yoy, and Taiwanese and Korean companies are quick adapters, so we do not expect forex to be a strong enough factor to reshuffle the competitive balance within the region. What else is in this report? We also include an analysis of developments in each sub-sector； a comprehensive list of all our covered tech stocks in Asia； our projections for operating margin and ROE trends in the separate markets； historical P/E and P/B mapping； stock performance charts； market cap trends； currency cross-rates； our forecasts for unit sales of different products. January 24, 2011 Asia: Technology: Hardware Goldman Sachs Global Investment Research 10 25 top picks for 2011 by market In this section we provide a breakdown of our top picks ranked in the exhibit by potential return and in the following pages by markets. Exhibit 7: Our 2011 top picks in the region 25 stocks in focus Names ranked first by rating, then by potential upside/downside Note: FY1 and FY2 refer to the current and following fiscal years. *Indicated stock is on our regional Conviction list. For methodology and risks associated with our 12-month price targets mentioned, please refer to the analysts previously published research. For important disclosures, please go to /research/hedge.html. Source: Goldman Sachs Research estimates. Ticker Company Rating 19-Jan-11 Target Up/down P/E P/E P/BName Price Price side FY1 FY2 FY12498.TW HTC Corp. Buy* NT$ 890.00 1,360.00 53% 18.5x 9.5x 8.9x8069.TWO E Ink Holdings Inc Buy* NT$ 55.10 80.00 45% 16.3x 9.6x 2.6x6752.T Panasonic Corporation Buy* 1,167 1,500 29% 21.1x 21.7x 0.8x034220.KS LG Display Buy* W 38,550 49,000 27% 14.1x 9.5x 1.3x6701.T NEC Buy* 242 300 24% 56.5x 10.4x 0.8x6724.T Seiko Epson Buy* 1,522 1,880 24% 22.3x 11.0x 1.1x6501.T Hitachi Buy* 465 525 13% 9.3x 10.7x 1.4x6981.OS Murata Mfg. Buy* 6,140 6,900 12% 21.0x 15.7x 1.5x6988.T Nitto Denko Buy* 4,185 4,700 12% 12.1x 11.2x 1.7x3037.TW Unimicron Buy* NT$ 60.20 67.00 11% 12.2x 9.9x 2.0x4901.T FUJI FILM Holdings Buy* 3,085 3,400 10% 19.5x 12.8x 0.9xASIA AsiaInfo-Linkage Buy $ 18.18 26.00 43% 18.9x 19.0x 1.3x3008.TW Largan Precision Buy NT$ 817.00 1,130.00 38% 25.6x 14.7x 5.8x2409.TW AU Optronics Buy NT$ 29.75 40.00 34% 22.8x 11.6x 1.0x2369.HK China Wireless Technologies Buy HK$ 4.88 6.10 25% 16.7x 10.5x 7.6x005930.KS Samsung Electronics Buy W 997,000 1,000,000 0% 10.8x 10.4x 1.9x8046.TW Nan Ya PCB Sell NT$ 108.50 98.00 -10% 38.4x 17.9x 2.0x046890.KQ Seoul Semiconductor Sell W 39,350 32,000 -19% 27.6x 46.1x 4.4x6857.T Advantest Sell 1,849 1,410 -24% 49.0x 24.7x 2.4x8078.TW Compal Communications Sell NT$ 27.70 20.00 -28% 1.8x2038.HK Foxconn International Holdings Sell HK$ 5.76 4.10 -29% 1.4x0522.HK ASM Pacific Technology Sell HK$ 103.00 63.00 -39% 14.5x 21.7x 7.8x5201.T Asahi Glass Sell* 969 750 -23% 9.1x 13.9x 1.4x7731.T Nikon Sell* 1,866 1,340 -28% 23.4x 17.6x 1.9x011070.KS LG Innotek Co. Sell* W 130,000 75,000 -42% 24.2x 99.6x 1.9xJanuary 24, 2011 Asia: Technology: Hardware Goldman Sachs Global Investment Research 11 Taiwan/China We believe product migration will be the key in identifying Buys and Sells in Taiwan/China. In other words, we expect the market to focus on companies where the supply chain can lead product/technology development. Our top picks also include companies about which we believe the market has incorrect perceptions, which would provide investment opportunities. SevenBuys and four Sells. SevenBuys HTC (2498.TW； Buy, Conviction list). We believe HTC is still in the early stage of its super smartphone product cycle, and the company should continue to benefit from robust smartphone demand, its product leadership, and a new branding strategy designed to help enhance consumer preference for its brand. We also believe HTC creates significant competition for handset peers, and see it as on track to further expand its global handset value market share from its current fifth position. HTC is currently trading at 9X 2011E EPS. Our 12-month target price of NT$1,360 is based on 6.6X 2Q11-1Q12 P/B, implying 13.7X NTM P/E. Risks include severe component shortage and slowdown of global economy. E Ink (8069.TWO； Buy, Conviction list). We see solid Kindle demand outlook in 2011. We expect E Ink, the sole display provider for Amazons Kindle, to fully capture Amazons ebook business strength and generate solid operating leverage. We expect E Ink may post 1Q11 sales momentum ahead of both the Reuters consensus (-17% qoq) and our estimates (-20% qoq) due to continued Kindle strength, and believe the solid shipment outlook suggests upside to E Inks 2011 consensus EPS. E Ink is currently trading at 10X 2011E EPS. Our 12-month target price of NT$80 is based on 1.8X 2011E EV/GCI, implying roughly 14X 2011E P/E. Risks include pricing pressure and customer concentration risk. China Wireless (2369.HK； Buy). We view China Wireless a rising China OEM likely to benefit from operators strong push for 3G service subscriptions. We view its solid technology leadership and operator partnership as competitive advantages in capturing a major 3G handset upgrade opportunity. We expect China Wireless long-term growth trajectory to be solid, leveraging the “HTC way“(such as technology capability and corporate culture to pursue differentiation) to benefit from a 10-year paradigm shift in handset channel distribution dynamics in China. China Wireless is currently trading at 10X 2011E EPS. Our 12-month target price of HK$6.1 is based on 6.4X 2011E P/B, implying roughly 14X 2011E P/E.Risks include intensified competition, ASP erosion, Android patent vulnerability. Unimicron (3037.TW； Buy, Conviction list). We continue to like Unimicron within the greater China PCB space as we expect its growth over the next two years to be driven by smartphones and tablets. Unimicron supplies PCBs to the top smartphone vendors, most notably Apple and HTC, and also could benefit from other customers increasing their smartphone offerings. We believe increasing smartphone exposure will help improve both Unimicrons product mix and its margins.We also believe that Unimicron is one of Nvidias largest suppliers of IC substrates and thus stands to benefit from a large number of non-Apple tablets using Nvidias Tegra 2 solution.We estimate that Unimicron could supply up to 60% of Nvidia demand. Our 12-month target price of NT$67 is based on 1.2X EV/GCI and implies 11X NTM P/E.The risks to our positive view are rising copper prices, currency trends, and unchecked industry capacity growth. Largan (3008.TW； Buy). We are positive on Largans fundamental outlook as we expect the company to benefit from continued lens content upgrades, especially for the upcoming iPhone 5, in which we expect to see Largans 5 piece of plastic lens (5p) vs. the current iPhone 4 cameras 4p structure. We believe pixel migration will not end at 8MP, and expect to see 12MP cameras gradually ramp up for smartphones and 5MP cameras to be the mainstream spec on tablets in 2012. The introduction of 3D cameras on handsets would also increase Largans total addressable market. Largan is currently trading at 15X NTM P/E vs. the historical January 24, 2011 Asia: Technology: Hardware Goldman Sachs Global Investment Research 12 average of 17X. Our 12-month target price of NT$1,130 is based on 5.9X 2Q11-1Q12 P/B, implying 20X NTM EPS. Risks include slowdown in global economy and intense competition. AU Optronics (2409.TW； Buy). We view the poor earnings in 4Q10 are due to the slower product transition into the new lower-cost LED panel. We still expect a recovery scenario from 2Q11 due to new TV product launch. Their LED chip suppliers will begin increasing utilization from 1Q11. Chinese TV customers are cautiously optimistic about domestic TV after Chinese New Year, due to Tier 3 Cities TV replacement program, and lower channel inventory risks. Our 12-month NT$ 40 target price implies 1.2x book, or 16X 2011E P/E, a mid-cycle valuation. Risks include prolonged LED supply chain bottleneck could offset any rise in demand driven by price elasticity. AsiaInfo-Linkage (ASIA； Buy). We expect China telecos to increase their IT spending for software and services due to intense competition. ASIA should benefit from this industry growth based on its leading market position and could also drive growth through expansion into Southeast Asia. The company indicated core telecom revenue will increase by 17%-19% yoy on a pro forma basis in 2010, and we expect continue yoy growth in 2011 due to potential MNP deployment, CT BOSS and CRM upgrade, and the CU BOSS system in northern China. Our 12-month target price of US$26 is based on 17X non-GAAP NTM P/E. Downside risk: Wage inflation. Four Sells ASM Pacific (0522.HK； Sell). ASMPTs 3Q10 equipment revenue was twice as high as the last historical peak set in 3Q07. This suggests to us that ASMPT is a cyclical stock at the peak of the cycle. We maintain our concerns over the cyclical correction in SPE, the continuation of Chinese subsidies on LED equipment, and integration risk for the SEAS acquisition. Our 12-month target price is HK$63, based on 14X NTM P/E.Key risk: Faster-than-expected market share gain. Nan Ya PCB (8046.TW； Sell). We expect Nan Ya PCB to underperform the market on the impact of ARM-based CPU challenging the Intel/AMD platform, as well as the companys difficulty in sustaining margin improvement. Nan Ya PCB is one of the largest Taiwanese component suppliers to Intel and could be affected by any potential impact Intel has from ARM-based processors. We also believe Nan Ya PCB may not gain from ARM-based CPUs because substrates for ARM-based CPU could be priced 65% lower than substrates for Intel.We also think margin trends will be unstable given the difficulty in developing substrates for Intels new designs, leading to negative yield impact.Our 12-month target price of NT$98 is based on 1X EV/GCI and implies 17X NTM P/E. Risks include better than expected PC demand, falling copper prices, and faster than expected yield improvements on Intel projects. Foxconn Intl Holdings (2038.HK； Sell). We are structurally negative on FIH. We believe FIH could see a shrinking addressable market despite a growing handset market, and such a paradigm shift may pressure FIH to look for direct operator businesses, which may not be welcomed by its current OEM customers. We also think R&D expenditure will be required to ensure future capacity to take smartphone outsourcing, if any, impacting FIHs near-term profitability. Our 12-month HK$4.1 target price is based on 0.8X 2011E EV/GCI, implying 1.1X 2011E P/B. Risks include stronger than expected handset demand. Compal Comm (8078.TW； Sell). CCIs efforts in transitioning into a smartphone ODM do not seem to be progressing smoothly, as we note most smartphone OEMs do not outsource design. In addition, the increasingly varied customer mix, a rising number of projects, and shrinking shipment volume suggest to us that CCI is less capable of generating economies of scale and R&D efficiencies, making such a business model difficult to sustain over the long term. Our 12-m TP of NT$20 is based on 0.7X 2011E EV/GCI, implying 1.3X 2011E P/B. Stronger than expected smartphone ramp-up. January 24, 2011 Asia: Technology: Hardware Goldman Sachs Global Investment Research 13 Korea We focus on structural changes rather than cyclical trends in Korea, and therefore are positive on Samsung Electronics as a core holding； are positive on LG Display, but negative on overinvestment in the LED space. Two Buys and two Sells. Samsung Electronics (005930.KS； Buy). We like the companys diversified earnings structure and new earnings growth potential. Despite weaker DRAM industry dynamics, we expect Samsung Electronics to enjoy 3.8% EPS growth in 2011 helped by: (1) stable NAND flash margins； (2) growing earnings contribution from AMOLED； (3) growing smartphone and tablet market share； and (4) benefits from Digital Media structuring. In addition, we believe that recent management changes at Samsung Electronics signal a greater management focus on new business growth in 2011 and beyond. The two businesses that we expect Samsung Electronics to focus on are AMOLED and System LSI. We expect these two businesses to account for as much as 13% of consolidated sales by 2013. We believe that capex at Samsung Electronics will remain close to the W20tn level over the next several years in order to support new business growth. SEC is trading at 5.1x FY11E EV/EBITDA and 1.7x FY11E P/B. Our Directors Cut based 12-month target price is W1,000,000, implying 5.5X FY11E EV/EBITDA and 1.8X FY11E P/B. Key risks include weaker tech demand and slower than expected new business execution. LG Display (034220.KS, Buy； Conviction list). We expect better LED industry trends to become much more evident from late 1Q11 or early 2Q11. As such, we believe share price performance may be lackluster in the short term. We expect better trends helped by new product launches, better TV and IT demand in 2H11, and limited supply growth. LG Display shares are trading at 1.3X FY11 P/B, which is similar to the past three-year average low, so better industry trends should help to lift valuation levels closer to mid-cycle levels closer to 1.4X-1.6X P/B. In addition, LG Displays entry into AMOLED should also help to lift sentiment as it should help to ease concerns over long term growth. LGD is trading at 3.3X FY11E EV/EBITDA and 1.1X FY11E P/B. Our Directors Cut based 12-month target price is W49,000, implying 4.1x FY11E EV/EBITDAand 1.4xFY11E P/B. Key risks include main LCD TV customers market share loss and poor AMOLED execution. Two Top Sells LED based LED is the sector that we are least positive on. While we agree that LCD LED TV growth should be significant in 2011 as LED TV penetration increases to 50% in 2011 from the 20% level in 2010, we believe that this will provide little earnings benefit for Korean LED makers for two reasons. (1) We expect LED prices to remain weak due to capacity overinvestment, and (2) volume growth may have little impact on margins due to the high variable cost base of Korean LED makers. Weaker-than-expected LED TV set growth in 2010 was mainly due to high LED TV set prices. In order to lower LED TV set prices, LED BLU prices will need to come down. In other words, LED chip/module prices will need to come down significantly. Even with greater set growth, we expect over-utilization rates to remain in the 50% range for the industry because of overinvestment in MOCVD equipment pointing to weak LED chip prices. In addition, higher utilization rates may not benefit margins as we estimate fixed costs may represent only 20% of overall costs. We see ASP stability is more meaningful for LED profitability rather than utilization rate improvement. We believe consensus earnings expectations for LG Innotek (011070.KS； Sell, Conviction list) and Seoul Semiconductor (046890.KQ； Sell) are too optimistic. LG Innotek is trading at 9.4X FY11E EV/EBITDA and 1.8X FY11E P/B. Our Directors Cut based 12-month target price is W75,000, implying 6.8X FY11E EV/EBITDAand 1.0X FY11E P/B. For Seoul Semiconductor, the stock is trading at 15.3X FY11E EV/EBITDA and 3.9X FY11E P/B. Our Directors Cur based 12-month target price is W32,000, implying 12.8X FY11E EV/EBITDA and 3.2X FY11E P/B. Key risks for both companies include weaker ASP erosion and faster than expected demand growth for LED general lighting. January 24, 2011 Asia: Technology: Hardware Goldman Sachs Global Investment Research 14 Japan Among Japanese companies, we think electronic component makers show growth potential. We see SPE makers as pure cyclical stocks. We note structural reform and restructuring efforts at integrated electronics, consumer electronics and, recently, precisions makers, highlighting revaluation based on core business cash generation as an investment idea. Seven Buys, three Sells. Two smartphone/tablet-related Buys Murata Mfg. (6981.OS； Buy, Conviction List). In our view, we think Murata benefits most from the current environment. In 2011, we expect growth in products such as MLCCs, SAW filters, high-frequency products, coils, and noise-reduction components, and see potential for upward revisions to 2H guidance. Our 6,90012-month price target is still derived from FY3/12 EV/GCI and CROCI/WACC correlation, and equates to a P/E of 19X our FY3/12 estimate. Risks include MLCC supply/demand shifts, strong yen. Nitto Denko (6988.T； Buy, Conviction List). We see 2011 as the year of a change in the perception of the company as a traditional LCD materials-related name due to the expansion of new applications for ITO film and transparent double-sided tape in tablet PCs (touch panels). We see a growing possibility that Nitto Denkos P/E will diverge from the equivalents for pure LCD names because of higher-than-expected earnings in 2H, new orders for tablet PCs for February/March, and the announcement of a new medium-term plan in April 2011 (showing a clear attitude on aggressive growth). Our 12-month price target of 4,700 is based on our FY3/12 EV/GCI vs.CROCI/WACC assumption. It equals a P/E of 13X on our FY3/12 estimate. Risks include LCD industry production trends and yen strength. Five structural reform and revaluation of core business-related Buys Hitachi (6501.T； Buy, Conviction List). We expect cash return to renew the historical peak due to the emergence of restructuring benefits (higher sales directly tied to increased marginal profits) and a focus on the social innovation business (information/communications, electric power, social/industrial infrastructure, construction machinery, and high-performance materials). Our new 525 12-month price target is based on P/B-ROE correlation. We apply a 1.6X P/B to our end-FY3/11 estimate. The target equates to a 12X P/E on our FY3/12 estimate. Risks: Diminished commitment to business restructuring, macro slowdown. NEC (6701.T； Buy, Conviction List), we see the potential for the effects of operating leverage in automotive battery-related businesses and telecom equipment, mainly in the IT service business (which is a profit source), to be easily shifted into the earnings structure. We anticipate a metamorphosis into a company that generates returns in excess of capital costs. Our 12-month target price of 300 uses a target P/B of 1.0X derived from ROE-P/B correlation and our end-FY3/11 forecast. Our target equals a P/E of 13X on our FY3/12 forecast. Risks include issues in the cellphone business. Fuji Film Holdings (4901.T； Buy, Conviction List), we expect continued restructuring benefits, a turnaround in the high-margin LCD film business, and a steady rebound in office equipment/medical.We believe the company will improve ROE to 7% by FY3/12, which in turn would justify a P/B multiple of 1.0x versus todays 0.85x. The share is trading on 13X our FY3/12EPS and 3.7X EV/EBITDA, still undervalued relative to our coverage. Our 12-month price target of 3,400, which is based on a P/B multiple of 1.0X, derived from our precisions coverage P/BROE correlation, and our end-FY3/11 BPS estimate. Risks include include prolonged weakness in LCD film demand, earnings deterioration in the digital camera business, and the strong yen. Seiko Epson (6724.T, Buy； Conviction List) as we expect the shares to begin pricing in normalizing profits in core businesses (printers, projectors, LCD devices) as it withdraws from small/medium-sized LCDs. Our 12-month price target of 1,880 is based on a P/B of 1.4X, derived from our precisions coverage P/B-ROE correlation, and our end-FY3/11 estimate. The shares look undervalued relative to coverage at an FY3/12 P/E of 11X. Risks are fiercer IJP competition, yen strength/euro weakness. January 24, 2011 Asia: Technology: Hardware Goldman Sachs Global Investment Research 15 Panasonic (6752.T； Buy, Conviction List), we expect business realignment and restructuring to end in 2011； starting in 2012, we expect white goods, batteries, and system networks to become new earnings drivers. Our 12-month price target of 1,500 is based on our FY3/13 hardware average EV/DACF assumption of 6.4X and equals a FY3/13E P/E of 14X.Risks include delays in restructuring. Three Sells on deteriorating competitiveness Nikon (7731.T； Sell, Conviction List). We expect FY3/12 earnings to fall short of market expectations due to a decline in purchasing share by major customers for advanced ArF liquid immersion lithography equipment (S620). Our FY3/12 forecast yields a 17.6X P/E and 6.0 EV/EBITDA multiple. Our 1,340 12-month target price is based on a P/B derived from our normalized ROE assumption and our end-FY3/11 BPS estimate Risks include Forex, stronger than expected OLED capex and DSLR camera sales. Advantest (6857.T； Sell) as it faces structural issues from the shrinking memory tester market and a weak earnings recovery. The stock is trading on P/E of 24.7X our FY3/11 EPS estimate and 9.6X FY3/12, hard to justify, despite growth prospects for DDR3 testers； and we are reiterate our Sell rating. Our 1,410 12-month target price is based on a P/B derived from our normalized ROE assumption and our end-FY3/11 BPS estimate Risks include changes in DRAM supply/demand and in competition on the logic tester market. Asahi Glass (5201.T； Sell Conviction List). Amid growing competition for LCD glass market share and increasing downward pressure on prices, we think the company will be disadvantaged by its use of the float method, which requires a grinding process, due to rising prices for cerium (a rare earth element used as a grinding agent) and the shift to thinner glass (making the grinding process more difficult). Our 750 12-month price target is based on our FY2011 LCD materials/glass coverage average EV/DACF of 7.0X. It equals a P/E of 5.9X on our FY12/11 forecasts. Risks include stronger-than-expected LCD panel demand, lower-than-expected glass supply on production problems, or other issues at competitors, and cerium price trends. 2010 best and worst performers The 20 best performers in our Asian technology coverage in 2010 were companies with smartphone exposure (HTC, China Wireless Technologies, Wintek, Largan, AAC Acoustic, and Murata Mfg.), restructuring names, and late cyclicals (Hitachi and Alps Electric). Most of the worst performers are either companies that: (1) suffering large opportunity losses in growth products, (2) have slipped in their relative industry positioning, or (3) are in product categories where high value-added is structurally difficult to sustain. We see 2011 as a year where these trends will continue, with earnings differentials becoming more pronounced. Out of the best performers in 2010, HTC, ChinaWireless Technologies, Largan, Murata should continue to perform well in 2011 in our view； as they stand to benefit from the smartphone theme boosting earnings significantly. On the other hand, we see FIH, BYD Electronics, Compal Communications, Mediatek, Shinko Electric (Intel-related) continuing to be adversely affected by the industry move to new technology such as tablets and smartphones, as these stocks are greatly geared towards older technologies. January 24, 2011 Asia: Technology: Hardware Goldman Sachs Global Investment Research 16 Exhibit 8: 2010 best/worst performance in our Asia technology coverage Source: Datastream. Best Performers in 2010 Worst Performers in 2010# Ticker Company Name Performance # Ticker Company Name Performance1 2369.HK China Wireless Technologies 225.5% 1 2038.HK Foxconn International Holdings -39.8%2 2498.TW HTC Corp. 157.8% 2 6839.OS Funai Electric -39.4%3 7740.T Tamron 78.9% 3 6665.T Elpida Memory -37.3%4 2384.TW Wintek 75.8% 4 0285.HK BYD Electronic -35.4%5 6770.T Alps Electric 73.2% 5 8078.TW Compal Communications -34.4%6 3008.TW Largan Precision 72.2% 6 5333.T NGK Insulators -34.4%7 2018.HK AAC Acoustic 61.9% 7 2357.TW ASUSTeK Computer -32.8%8 6501.T Hitachi 52.5% 8 6967.T Shinko Electric Industries -31.7%9 2308.TW Delta Electronics 42.5% 9 8069.TWO E Ink Holdings Inc -29.8%10 7735.T Dainippon Screen 42.5% 10 2393.TW Everlight Electronics -29.7%11 011070.KS LG Innotek Co. 38.7% 11 3367.TW Inventec Appliances -28.9%12 0522.HK ASM Pacific Technology 33.0% 12 5218.T Ohara -28.7%13 2311.TW Advanced Semiconductor Engineering 28.7% 13 6753.T Sharp -28.3%14 6503.T Mitsubishi Electric 24.4% 14 2454.TW Mediatek -25.0%15 6981.OS Murata Mfg. 24.1% 15 6857.T Advantest -23.6%16 6997.T Nippon Chemi-Con 22.5% 16 6764.T Sanyo Electric -22.8%17 3037.TW Unimicron 22.4% 17 4062.T Ibiden -22.4%18 2474.TW Catcher Technology 20.9% 18 2409.TW AU Optronics -21.9%19 5857.T Asahi Holdings 20.7% 19 3311.TW Silitech Technology -20.7%20 5334.T NGK Spark Plug 19.2% 20 3622.TW Young Fast Optoelectronics -19.8%Coverage Performance in 2010 (USD base) Index Performance in 2010# Coverage Performance # Index Performance1 Korea coverage (USD) 16.8% 1 KOSPI 21.9%2 Greater China coverage (USD) 14.1% 2 TAIEX 9.6%3 Japan coverage (USD) 13.6% 3 HANGSENG 5.3%4 TOPIX -1.0%Coverage Performance in 2010 (local currency base)# Coverage Performance1 Korea coverage (local currency) 13.8%2 Greater China coverage TW listed (local currency) 5.3%3 Greater China coverage HK listed (local currency) 2.0%4 Japan coverage (local currency) -1.0%January 24, 2011 Asia: Technology: Hardware Goldman Sachs Global Investment Research 17 Top picks for 2011 by sector； overview of sector and sub-sector analysis Exhibit 9: Our order of preference by subsector/supply chain segment； price targets and valuations for preferred stocks note that some of these stocks do not appear in our list of top 25 regional stocks Note: FY1 and FY2 refer to the current and following fiscal years. * denotes stock is on our Regional Conviction List. Source: Goldman Sachs Research estimates. 1/19/11Up/down P/E P/E P/BSector Ticker Company Name Rating to TP FY1 FY2 FY1Relatively Bullish Smartphones 2498.TW HTC Corp. Buy* 53% 18.5x 9.5x 8.9xwithin Asia Tech sector 2369.HK China Wireless Technologies Buy 25% 16.7x 10.5x 7.6xPCB, passive components 3037.TW Unimicron Buy* 11% 12.2x 9.9x 2.0x6981.OS Murata Mfg. Buy* 12% 21.0x 15.7x 1.5x3008.TW Largan Precision Buy 38% 25.6x 14.7x 5.8xLCD 2409.TW AU Optronics Buy 34% 22.8x 11.6x 1.0x3481.TW Chimei Innolux Buy 34% 9.6x 1.1x034220.KS LG Display Buy* 27% 14.1x 9.5x 1.3xRelatively Bearish PC (ODM / OEM) 2353.TW Acer Neutral 12% 13.6x 12.8x 3.0xwithin Asia Tech sectorFoundry 2330.TW TSMC Neutral -17% 12.6x 14.0x 3.2x6857.T Advantest Sell -24% 49.0x 24.7x 2.4x0522.HK ASM Pacific Technology Sell -39% 14.5x 21.7x 7.8xSPE 7731.T Nikon Sell* -28% 23.4x 17.6x 1.9x0522.HK ASM Pacific Technology Sell -39% 14.5x 21.7x 7.8x6857.T Advantest Sell -24% 49.0x 24.7x 2.4xLED 011070.KS LG Innotek Co. Sell* -42% 24.2x 99.6x 1.9x046890.KQ Seoul Semiconductor Sell -19% 27.6x 46.1x 4.4xJanuary 24, 2011 Asia: Technology: Hardware Goldman Sachs Global Investment Research 18 Relatively Bullish on smartphones, PCBs/passives, and LCDs We expect momentum to increase for smartphones and tablet PCs, which are growth products, and to exert strong influence on earnings differentiation in the Asia technology supply chain. The timing of cyclical corrections and recoveries is also starting to differ by subsector. Based on secular trends and inventory cycles, the subsectors/supply chain segments on which we are bullish are smartphones, components (PCBs and passive components) and LCDs. Smartphones: We expect earnings at many companies to benefit from smartphones again in 2011. We expect smartphones to gain further growth momentum, but not become commodities, and believe Asian smartphone leaders should keep their competitive positions. Versus consensus: We believe our assumptions underlying our smartphone/tablet PC forecasts are higher than those incorporated in the market consensus. Our smartphone forecast is 287 mn units (+67% yoy) for 2010, 451 mn units (+57%) for 2011, and 615 mn units (+36%) for 2012. We believe the market consensus forecast for 2011 is around 400 mn units. Additionally, in our Global Smartphone Survey: Implications for Handset Ecosystem (November 21, 2010) we indicated the possibility of a quicker increase in smartphone penetration rates in Europe and the US compared with our mobile phone penetration rate assumption (26% globally in 2011 and 50-55% in Europe and the US). Within related supply chain firms in Asia, some are starting to forecast more than 5oo mn units for 2011. Electronic components (passives and PCBs): Reflecting growth in smartphones and tablet PCs, PCB and passive component earnings should also benefit from firm supply/demand and growth in end-product adoption of high-value-added parts. Regarding Japanese components companies overall, we now expect year-on-year monthly order growth with which stock prices are highly correlated to bottom in Jan.-Mar. 2011. We also believe the bottom in terms of quarterly absolute order value was reached in Sept.-Oct. 2010, and we expect order growth for many components to rise qoq in Jan.-Mar. LCD panels: We think the worst is over for panel price momentum, with which stock prices are highly correlated. Currently, LCDTV-use panel prices continue to fall and are near cash costs for the individual makers, so the rate of decline is already moderating. We now expect the recovery to take a bit longer than we originally expected due to excess inventories, primarily in TVs after the year-end holidays, and expect the shares to come in focus again in Mar.-Apr. We maintain our positive view on the LCD sector heading into 2011. We would look to buy at the bottom of the cycle in late-1Q to early 2Q. Relatively bearish on PCs (ODM/OEM), foundries, SPE, and LEDs； rebound for DRAM In contrast, we see PCs (ODM, OEM) as in a transition period due to competition from tablets, price competition, and consolidation of production plants. We see foundries at the peak of their cycle. We see foundries and SPE are nearing the peak of the cycle. We expect severe earnings deterioration for LEDs due to over-investment and falling prices. Also, we see the tech subsectors performing as follows. In DRAM, spot prices, with which stock prices are highly correlated, could bottom during Jan.-Mar. and then rebound. We see constraints on longer-term DRAM content-per-box growth, which would be negative. NAND: Volumes are growing (positive), and ASPs and NAND capacity per box are aligned (mixed). Foundries. We expect shipments/production to exceed normal seasonality in the Jan.-Mar. quarter, with inventory turnover (number of days) is still at a normal level. However, we are already looking for the next peak because (1) absolute inventory January 24, 2011 Asia: Technology: Hardware Goldman Sachs Global Investment Research 19 levels are above the historical peak and (2) the capex/sales ratio is near the past peak set in around 2000 (while it is difficult to forecast earnings at the peak, when sales decline, the impact on earnings is substantial). Displays: In contrast to the cyclical recovery in LCDs toward 2H2011, we think OLEDs have long-term growth potential (positive), and the outlook for touchpanels is balanced between volume growth (positive) and stiffer competition (negative). Electronic components: We expect the gap to widen between suppliers of PCBs and passive parts (positive) and suppliers of packages for Intel and HDDs (negative). SPE. We expect global orders to peak in 1H2011. While we think a subsequent major correction will be avoided, we expect a peaking out, and anticipate the same for share prices, which tend to lead global orders slightly. Versus consensus: Our tablet PC forecasts are 17.5 mn units for 2010, 55 mn units for 2011, and 79 mn units for 2012 (assuming a PC cannibalization rate of 33-35%). We believe the 2011 market consensus is around 40-50 mn units. Because our forecasts factor in a larger impact for the impact from cannibalization than assumed by the market, our current PC growth rate (excluding tablet PCs) for 2011 is +8% yoy (12.5% growth for notebook PCs). We believe the consensus outlook is for PC growth of 10%+. We also assume a growth rate of 7% for HDDs in 2011. Earnings estimates GS more bullish than consensus, as we factor in a higher impact from secular trends We think our view factors in greater earnings influence from secular trends than the stock market consensus. Specifically, (1) we are relatively bullish on smartphone and tablet volume and relatively bearish on conventional PC volume, (2) we assume severe cannibalization by tablets (30%-35%), (3) we think new trends will evolve into strong waves that sustain momentum for several years, and (4) we are relatively bullish in our North American and Chinese macro assumptions, as a result of which our earnings estimates for our Asia technology coverage (117 companies) are on the high side. We forecast 29% operating profit growth for 2011across our coverage universe vs. I/B/E/S consensus 19%. Note: we make no changes to our estimates in this report. January 24, 2011 Asia: Technology: Hardware Goldman Sachs Global Investment Research 20 Exhibit 10: Summary of Asia technology industry supply chain and the areas in which we are bullish/bearish Source: Goldman Sachs Research. Secular growthLEDGeneral componentsLCDDRAMFoundryPC (ODM/OEM)SPEPCB / Passive partsSmartphone / Tablet PCStructural IssueRelatively Bullish Relatively BearishJanuary 24, 2011 Asia: Technology: Hardware Goldman Sachs Global Investment Research 21 Exhibit 11: We are bullish on smartphones: volume trend and forecasts Exhibit 12: We are bullish on tablet PCs: volume trendsand forecasts Source:Gartner, Global Mobile, World Bank, Goldman Sachs Research estimates.Source:Company data, Goldman Sachs Research estimates. Exhibit 13: Electronic component orders have bottomed: yoy order growth (trends and forecasts) vs. share prices Exhibit 15: LCD industry is near bottom: LCD panel price momentum trend and forecast Source: Company data, Datastream, Goldman Sachs Research estimates. Source:Company data, Datastream, Goldman Sachs Research estimates. 8 20 54 82 122 151 172 287 451 615 52% 50% 24% 14% 67% 57% 36%-100 200 300 400 500 600 700 03 04 05 06 07 08 09 10E 11E 12ESmartphones (Mn units / %YoY)17.5 54.7 79.2 212%45%-10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 10E 11E 12ETablets (K units / %YoY)50 100 150 200 250 300 350 400 450 500 550 -60%-40%-20%0%20%40%60%80%97/197/798/198/799/199/700/100/701/101/702/102/703/103/704/104/705/105/706/106/707/107/708/108/709/109/710/110/711/111/712/1W eig hted averag e m onthly orders yoy (27-com pany basi s) (l hs)Electronic com ponents index (rhs)Japan technol og y company index (rhs)SOX index (rhs)Mini bubble(fake recovery)1st post-IT-bubble recovery2nd post-IT-bubble recoveryIT bubbleGoldman Sachs Research Estimates-25%-20%-15%-10%-5%0%5%10%0501001502002503003504004505001/1/20044/1/20047/1/200410/1/20041/1/20054/1/20057/1/200510/1/20051/1/20064/1/20067/1/200610/1/20061/1/20074/1/20077/1/200710/1/20071/1/20084/1/20087/1/200810/1/20081/1/20094/1/20097/1/200910/1/20091/1/20104/1/20107/1/201010/1/20101/1/20114/1/20117/1/2011AGC stock price (Jan 2004 = 100)NEG stock price (Jan 2004 = 100)32-inch panel price change (3 half-month average)R2(NEGs stock vs. TV price change) = 0.452R2(AGCs stock vs. TV price change) = 0.503ForecastJanuary 24, 2011 Asia: Technology: Hardware Goldman Sachs Global Investment Research 22 Exhibit 16: Closer to the bottom for DRAM； DRAM price trend Exhibit 17: SPE is peaking out: industry order trend and forecasts Source: DRAMeXchange, Goldman Sachs Research. Exhibit 18: Foundry is near a peak: wafer shipment trend and forecasts (TSMC, UMC, & SMIC) Source: Company data, Goldman Sachs Research estimates. 0.00.51.01.52.02.53.03.54.01Gb DDR2 ETT/UTT 1Gb DDR3 ETT/UTTDDR2 1Gb ETT/UTT180-day mov. ave.DDR3 1Gb ETT/UTT48% rebound 35%rebound(US$)100% rebound72% rebound150% rebound51% rebound0.550.60.650.70.750.80.850.90.9510200040006000800010000120001400016000180001Q973Q971Q983Q981Q993Q991Q003Q001Q013Q011Q023Q021Q033Q031Q043Q041Q053Q051Q063Q061Q073Q071Q083Q081Q093Q091Q103Q101Q11E3Q11E($mn)SPE orders (lhs) Utilization (rhs)7 quarters 5 quarters 4 quarters 8 quarters?400 800 1,200 1,600 2,000 2,400 2,800 3,200 3,600 4,000 4,400 4,800 5,200 5,600 1Q012Q013Q014Q011Q022Q023Q024Q021Q032Q033Q034Q031Q042Q043Q044Q041Q052Q053Q054Q051Q062Q063Q064Q061Q072Q073Q074Q071Q082Q083Q084Q081Q092Q093Q094Q091Q102Q103Q104Q10E(K8equivalentwafers)January 24, 2011 Asia: Technology: Hardware Goldman Sachs Global Investment Research 23 Exhibit 19: LCD stocks have not yet discounted cyclical turnaround Exhibit 20: SPE stocks are already discounting the cycle peak, in our view Source: Datastream, Goldman Sachs Research estimates Source:Company data, Datastream, Goldman Sachs Research estimates Exhibit 21: Foundry stocks are already back to mid-cycle multiples Exhibit 22: DRAM stocks have a chance of rebound, in our view Source:Datastream, Reuters Source:Company data, Goldman Sachs Research -15%-10%-5%0%5%10%15%20%25%30%010203040506070Jan-03Jun-03Dec-03Jun-04Dec-04May-05Nov-05May-06Nov-06Apr-07Oct-07Apr-08Oct-08Mar-09Sep-09Mar-10Sep-10Feb-11Aug-111-qtr trailing P/B vs. 1-qtr rolling ROE - AUOPrice 0.6x 1.1x 1.4x 1.7x ROENT$ ROE (%)0.0 50.0 100.0 150.0 200.0 250.0 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 Apr-96Oct-96Apr-97Oct-97Apr-98Oct-98Apr-99Oct-99Apr-00Oct-00Apr-01Oct-01Apr-02Oct-02Apr-03Oct-03Apr-04Oct-04Apr-05Oct-05Apr-06Oct-06Apr-07Oct-07Apr-08Oct-08Apr-09Oct-09Apr-10Oct-10Apr-11Oct-11(bn)（X）Quarterly orders (rhs) Relative P/B (lhs)Jul 1996-Oct 1997 （15 months）TEL price：+170%TOPIX：-18%Sep 2001-Apr 2002 （7 months）TEL price：+70%TOPIX：+5%Oct 2002-Sep 2003（11 months）TEL price：+82%TOPIX：+19%Oct 2005-Dec 2006（14 months）TEL price：+55%TOPIX：+18%Sep 1998-Feb 2000 （17 months）TEL price：+392%TOPIX：+58%Nov 2007-Apr 2008（5 months）TEL price：flatTOPIX：-14%25 35 45 55 65 75 85 051015202530354045Jul-06Sep-06Nov-06Jan-07Mar-07May-07Jul-07Sep-07Nov-07Jan-08Mar-08May-08Jul-08Sep-08Nov-08Jan-09Mar-09May-09Jul-09Sep-09Nov-09Jan-10Mar-10May-10Jul-10Sep-10Nov-10Jan-1112mth Fwd P/E (lhs) FP/E Mean + Stdev -Stdev Price (rhs)(X) NT$TSMC 12mth Fwd P/E0.00.51.01.52.02.5-20.0-15.0-10.0-5.00.05.010.0Elpida Ave. Annual ROE/CoE (lhs) Hynix Ave. Annual ROE/CoE (lhs)Elpida Act. P/B (rhs) Hynix Act. P/B (rhs)(X) (X)January 24, 2011 Asia: Technology: Hardware Goldman Sachs Global Investment Research 24 Three key themes driving increased Asia supply chain earnings in 2011 Three themes that emerged in 2010 and could intensify in 2011 Exhibit 23 shows the product and technology shifts in individual supply chains for the Asian high tech industry. There are already many popular themes in the stock market, but we believe these changes will gain momentum in 2011, so there could be even greater contrasts among the earnings of individual firms and supply chains for Asian technology firms on the whole. We think the following three key themes will have especially significant impacts on Asia supply chains: (1) smartphones, (2) tablet PCs, and (3) cloud computing. Exhibit 23: Product/technology changes in Asia supply chain Source: Goldman Sachs Research. SPEDisplaysSemiconductorsMaterialsLogic / Memory ( DRAM / NAND) Passive (LCR) / Substrate(PKG) / PCB / HDD parts / Battery / LED / Motor / Acoustic parts / Camera module / SolarLCD / AM OLED / Touch panelComponents and othersFoundry / Design house / Manufacturer Consumer electronics Corporate / InfrastructureConsumer PC / Tablet PC / E-book / TV / Handset / Smart phone / DSC / Game Cooperate PC / Storage & Network / Printer /Copy / Telecom /Smart Grid/ Alternative energy EMS / ODM / OEM / Design house / Manufacturer-Android 3.0- Higher growth -New DS - Cloud computing (virtualization , efficient network) - LTE - Capacity bottle neck- New regulation - Budget constraint- Replacement cycle - China phase 2 - Winner /Loser- Cannibalization- Higher growth -3DTV-Emerging market growth -Lower price-vs. HDD- HDD and SSD -Lower contents-Mobile DRAM -Small size display war -Mirror less camera-MLC to TLC- Passive: higher contents per box - Growing customers and mature customers- Suppliers migration-EUVL vs. Double patterning -3D packaging (TSV)-Touch panel technology -Smart TVJanuary 24, 2011 Asia: Technology: Hardware Goldman Sachs Global Investment Research 25 (1) Smartphones: We expect to see initial impact of 4G in 2011 The coming of 4G may change the way we use smartphones While the so-called 4G services such as Sprints WiMAX, T-Mobiles HSPA+, or Verizon 4G LTE (Long Term Evolution), are not technically 4G yetthis is the first time in commtech history that the bandwidth of commercial mobile broadband services is comparable to that of fixed broadband services such as DSL or cable. As mobile broadband technology continues to evolve, we believe that in the next 1-2 years we could see the bandwidth of commercial mobile broadband services surpassing that of fixed broadband services. This is probably the reason Verizon CEO Ivan Seidenberg commented that we may see the 4G network become a modest substitute for other home-entertainment services such as traditional cable or internet access. There are definitely other technical bottlenecks that need to be overcome by the industry, such as power efficiency, heat dissipation, and short range connectivity speed limit (WiFi, Bluetooth, USB) vs. 4G, but we believe the arrival of the 4G era could mark a fundamental change in the way we use smartphones, just like the 3G+ smartphone changed the way we access the internet. We believe that in the future, smartphones and/or tablets could be the center of our digital and cloud life； that is, we will use smartphones or tablet to access the internet, at the same time leveraging them to be our broadband hub to connect to other digital devices (such as PC, TV, and other consumer electronics), with these products gradually becoming the ultimate solution for last-mile household broadband connectivity service. 4G roadmap may raise the entry barrier to smartphone industry Verizon reports that its 4G LTE network currently covers around 110mn people in the US. Data rates for the 4G LTE network are 5-12 Mbps on the downlink and 2-5 Mbps on the uplink, up to 10x faster than the 3G network. At this data rate, users could experience much faster video and audio transmission, more real-time sharing or responsiveness, or even HD movies on their smartphones. We believe this suggests a potential broader connectivity of smartphones not only to users NB/PC but also to other devices such as TV. However, 4G LTE is a much more difficult broadband technology to commercialize in a compact smartphone device, with additional components such as radio, antenna, power amplifier and power management units raising the bar for hardware architecture design and the product qualification process from operators. If the center of our future digital and cloud life is smartphones, we believe leading smartphone vendors such as HTC stand in a very strong position to not just expand their global handset market share but also expand their business scope beyond smartphones. In contrast, we believe it will be very difficult for the non-smartphone makers, such as PC makers or TV makers, to launch compelling smartphone/tablet products to try to control this center, since the product design entry barrier and telecom relationship need years of experience. China smartphone market China demand for smartphones accelerated in 2010 due to the introduction of mid-range products priced at approximately US$300 and the introduction of the iPhone. We estimate China smartphone shipments reached 37mn in 2010, approximately 12% of total handset shipments. China is approximately three years behind North America in terms of smartphone penetration, and we expect Chinas smartphone growth to follow the pace of North America with some positive catalysts (improving smartphone quality and affordability and availability of mobile applications) offsetting price sensitivity and presence of three different 3G standards. We expect China smartphone shipments will increase to 65mn and 95mn in 2011 and 2012, respectively, with smartphone subs growing to 123mn and 174mn in 2011 and 2012, respectively. January 24, 2011 Asia: Technology: Hardware Goldman Sachs Global Investment Research 26 (2) Tablet PCs: We expect to see impact of many entries and effect of cannibalization in 2011 Since Apple introduced the iPad in April 2010, tablet PCs have become the most popular product in tech space, with nearly 80 tablets introduced at CES 2011. We believe this is perhaps the first time in the tech industry that so many players from each of the 3C industries (computer, communications, and consumer electronics) have launched similar products all in competition with each other. In light of this, as the tablet industry takes shape, we expect to see many varieties of tablets that involve multiple brands, multiple suppliers, multiple products (OS, screen size, form factor, CPU), multiple distributors, and employing either 3G or WiFi. Overall, we expect handset OEMs to have a stronger competitive edge in this space over PC OEMs and other players. Handset OEMs: We view tablets as an extension of smartphones We believe tablets have product characteristics that make this device more like the extension of a smartphone and less like a PC. (1) The purpose of a tablet is the consumption of information/data, more than its production. (2) The operating system (OS)/user experience is fragmented versus the standard OS/user experience. (3) Business model: 3G wireless models are more than wi-fi only models, with operators as the major distribution channel. Therefore, we believe smartphone makers stand a much higher chance to lead the tablet market, and the iPad experience so far also supports our view. Our industry checks suggest nearly 70% of iPads sold so far have 3G connectivity, further implying that tablets are more of a telecom-subsidized market. The Android OS has been the favored choice for many OEMs which have launched or will be launching their own tablet devices. The coming of Android 3.0 OS (a.k.a. Honeycomb) creates a fully optimized Google ecosystem support. We expect Android tablets to be the major competitor for the iPad after various Android models hit the market in 2H11. Among Android tablet makers, we expect HTC will lead the Android tablet race over the long term by leveraging its successful experience in the smartphone business； we expect the company to differentiate its products from others through its proprietary user experience or applications. PC OEMs: Focus more on PC tablets； yet a niche market only and limited market size We think PC/NB OEMs may continue to focus on Wintel-based tablets given (1) the need to differentiate their products, (2) the desire to leverage existing PC/NB products, and (3) possible support from Intel and Microsoft. However, as tablets are used primarily for leisure, we expect PC tablets will make up only a single-digit percentage of the overall tablet market, with the focus remaining on media tablets. In our view, PC OEMs are less competitive in media tablets than handset/TV OEMs are given their cost disadvantages, lack of familiarity with the relevant OS, and their lack of distribution channels. However, the low margin for the whole supply chain may create an advantage to PC/NB OEMs versus handset OEMs, but not necessarily versus TV OEMs. The operating profit margins for PC/NB OEMs are generally 2%+ to 5%+ (Acer, ASUSTeK, and Lenovo) compared with 10%+ to 20%+ for smartphone/handset OEMs (HTC, Nokia, and RIM) and around 2% for TV OEMs (Sony, LG and Samsung TV divisions). As PC/NB OEMs may be happy to pursue lower operating profit margins than smartphone/handset OEMs, they could price their tablets lower, even with their relative cost disadvantage. TV OEMs: Connected TV/Smart TV may be another catalyst for media tablets We think the user interface (UI), in addition to software content, will be the key to success for smart TVs. We believe the design of remote controls for connected TVs (such as Google TV) are not particularly user friendly, offering an opportunity to link a consumers tablet, smartphone and smart TV together. Consumers could use either their smartphone or tablet (given a with more user friendly design) in an open platform to control their smart TV remotely. January 24, 2011 Asia: Technology: Hardware Goldman Sachs Global Investment Research 27 Therefore, it makes more sense for TV makers to look to develop tablets and smartphones for 3C convergence and the digital home. VIZIO, the No. 1 US TV brand by shipment volume in 3Q10, has announced it is entering the tablet and smartphone market. Unlike Samsung, LGE or Sony which are 3C players, VIZIO is the only pure TV player to enter one of the two other 3Cs outside its home silo. Because wireless may cause a delay when remote controlling, VIZIOs tablet has a built-in infra-ray to enhance the wireless to real time. As VIZIO is strong in the low price channel distribution market, we think its tablet products may provide a floor to prices in the media tablet market. Many non-Apple tablets may be short lived although we expect Android-based tablet models to consolidate and emerge as competition to Apple We expect a short-term share price rally for the tablet vendors in the supply chain when inventory is built for new tablets, and then for those suppliers that stand to benefit from standout models as the market consolidates. We think Apple will continue to dominate the tablet market, with a few larger players emerging to share the non-Apple market. Our US tech team forecasts tablet PC shipments of 54.6 mn in 2011, with 37.2 mn for Apple and 17.4 mn for non-Apple. The non-Apple portion of 17.4 mn units represents only 7% of the NB market in 2011E. In other words, PC/NB OEMs efforts/returns may not be justified given such a small non-Apple tablet market. Also, because handset OEMs may be more competitive than PC/NB OEMs in the tablet market, we think the portion of the non-Apple tablet pie that PC/NB OEMs can share would be even smaller. Our assumption for PC cannibalization by tablets is a comparatively severe 30%-35% Our tablet shipment forecast jumps from 9 mn in 2010 to 55 mn in 2011 and 79 mn in 2012. We have a comparatively severe 33%-35% assumption for tablet cannibalization of regular PCs. We see not only netbook substitution, but also possible deferral of replacement purchases for current consumer notebooks. We think there may also be increased news flow about usage by businesses and government offices in 2011. Exhibit 24: We expect substantial effect from the many tablet entrants, and cannibalization by tablets in 2011: Tablet PC shipment Source: Company data, Goldman Sachs Research estimates. 1Q11E 2Q11E 3Q11E 4Q11E 2011E 1Q12E 2Q12E 3Q12E 4Q12E 2012EWorldwide tablet shipments 9,276 11,807 14,006 19,577 54,666 14,056 17,889 20,201 27,039 79,184 Y/Y % change n.a. 261.1% 234.4% 94.6% 212.1% 51.5% 51.5% 44.2% 38.1% 44.9%Q/Q % change -7.8% 27.3% 18.6% 39.8% n.a. -28.2% 27.3% 12.9% 33.8% n.a.iPad shipments 6,029 7,675 9,804 13,704 37,212 9,839 11,628 13,131 16,223 50,821 % of total 65.0% 65.0% 70.0% 70.0% 68.1% 70.0% 65.0% 65.0% 60.0% 64.2%Y/Y % change n.a. 134.7% 134.1% 81.7% 148.1% 63.2% 51.5% 33.9% 18.4% 36.6%Q/Q % change -20.1% 27.3% 27.7% 39.8% -28.2% 18.2% 12.9% 23.6%Non-iPad tablet shipments 3,246 4,133 4,202 5,873 17,454 4,217 6,261 7,070 10,816 28,364 % of total 35.0% 35.0% 30.0% 30.0% 31.9% 30.0% 35.0% 35.0% 40.0% 35.8%Y/Y % change n.a. n.a. n.a. 133.6% 594.1% 29.9% 51.5% 68.3% 84.2% 62.5%Q/Q % change 29.1% 27.3% 1.7% 39.8% n.a. -28.2% 48.5% 12.9% 53.0% n.a.January 24, 2011 Asia: Technology: Hardware Goldman Sachs Global Investment Research 28 (3) Cloud computing: Theme building in 2011 Conditions in place for acceleration in cloud computing adoption Cloud computing lends itself well to the enterprise market as it allows companies to reduce maintenance costs, and the technology is useful in areas such as data leak prevention. The provision of surplus CPU capacity at a low price from the likes of Amazon and Google is an extra boost for the market. Virtual software packages are readily available and, with not only CIOs but also CEOs growing comfortable with the word “cloud”, we expect usage to increase in step with a recovery in corporate IT budgets. On the consumer side, there have been doubts about the consumer market in terms of cloud convenience and the time needed for the concept to take hold (if it does). However, Apple and Google have shown that consumers have no problem using the cloud and are not resistant to the concept. Here we look at cloud computing from four angles: thin client adoption, the concentration of intelligence at data centers (servers), fortification of the network environment, and impact on the IT services industry. (I) Thin client adoption The spread of cloud computing poses the risk of a fall in demand for better and more powerful CPUs, DRAMs, and storage. Such an environment would be tough for hardware makers, including parts manufacturers, if the decline in demand for performance/functionality is not offset by a rise in volume. In the long term, we see potential benefits from volume growth and perhaps even a U-turn from central processing. In the near term, however, conditions may not favor higher-performance client computers. Enterprise thin clients not only require no HDD but can also function smoothly with limited NAND flash memory. High-powered CPUs and DRAMs are unnecessary. This is affecting desktop PCs in particular. In the medium term, large and medium-size corporations will likely be able to handle their business using only client PCs or tablets/smartphones. The many thin client PCs on the market use only Atom-level CPUs and about 2GB of DRAM power. Most of them have only 2GB or 4GB flash memories, which is much smaller than MP3 player memories. We think thin clients are also taking firm root in the consumer market, with Apples iPad perhaps having set the trend. The takeoff of tablets is evidence that lower-spec hardware than traditional PCs fits the bill when a person wants only to consume information and has a reasonable network environment. Limited storage capacity also suffices. However, unlike in the enterprise market, we expect some continuing demand for downloads as it is difficult to control consumer demand for downloads. We do not think PC industry manufacturers are watching these trends idly. We expect them to seek to drum up demand as usual in 2011 with enhanced product performance. This should give related companies a certain degree of momentum in 2011. In the HDD space, we believe it would make sense to pursue the hybrid HDD product segment in order to avoid substitution with SSDs. We expect to see HDDs combined with small NAND flash memories since such a combination would allow HDDs to catch up with SSDs in terms of startup speed and power consumption. January 24, 2011 Asia: Technology: Hardware Goldman Sachs Global Investment Research 29 (II) Concentration of intelligence in the backyard The processing formerly done on the client side is transferred to data centers (or servers) but this does not mean that all client added-value shifts to the server. Cloud computing signifies an increase in the operating rate and productivity of the worlds CPUs and storage. CPU operating rates will be increased by taking on the processing work of not only client PCs, but also servers. From the storage standpoint, cloud computing eliminates some file downloading and saving in multiple locations. To improve systems performance and investment efficiency, it has become practical for data centers to use a mix & match ofSATA HDDs, SAS HDDs, and SSDs. If cost cutting is the sole objective, a combination of SATA HDD and SAS HDD would suffice. (III)Need for stronger network infrastructure We think use of cloud computing will result in significant growth in network data traffic. Continued demand for stronger wireless infrastructure: We think traffic offloads via wi-fi etc. will be effective to some extent, particularly when household devices are used, but also think the bulk of outdoor traffic will travel over cellphone networks and that mobile infrastructure will have to be strengthened. We expect traffic to grow at uncontrollable speeds as smartphones penetrate. We have always thought carriers with weak infrastructure will need to make incremental investments. Otherwise, perhaps the most they can hope for is that metered plans will restrain consumer use. We do not think there will be many cases like T-Mobile, which recently announced a ban on using mobile infrastructure for downloads. Traffic response also required for wireline infrastructure: It is said that wireless traffic will grow at an annual pace of 100% with only 30%-40% growth for wireline traffic. However, we believe this scenario does not hold because wireless traffic always flows onto wireline. As with wireless, we think new steps will have to be taken with infrastructure. We think the time is not so far away when growth in wireline traffic can be handled by (1) additions of the line cards and (2) lighting up dark fiber. Use of streaming will have to be stepped up: We expect increased use of streaming as carriers seek to minimize network burdens. Developments at Apple and Google and with TV products suggest that streaming is the way companies want to go, rather than downloads. Depending on size, 5Mbps-20Mbps is adequate for streaming provided the speed holds steady. We see the following as segments to watch. Wireless infrastructure: We think the traffic growth generated by smartphones is exceeding carrier expectations and expect further strengthening to be required for base station environs and wireless backbone. We also think it very likely that use of next-generation technologies, such as LTE, will be brought forward. In the past, Japanese carriers have generally invested more than they initially planned when introducing new technologies, and we will be watching their LTE investment. Optical transmission: WDM, which is widely used for backbone, is reaching its limits. 100Gps traffic needs to shift to coherent transmission. Such a shift should be positive for telecoms equipment manufacturers such as NEC and Fujitsu. Active components (e.g. lasers): The current shift to 40Gbps and the shift to 100Gbps that we expect to begin in 2014 represent opportunities for tightening up supply/demand. January 24, 2011 Asia: Technology: Hardware Goldman Sachs Global Investment Research 30 (IV) IT services impact For sectors similar to systems integration, we see cloud computing as neutral at best over the medium term and probably somewhat negative. The IT services industrys hope is that customers will maintain their IT budgets and spend the money in areas other than cloud computing, but from the customer standpoint, cost-cutting is the key incentive for using cloud technology. In addition, we think value-added could flow overseas. Efficient offshore use seems likely to be crucial in determining medium-term growth. The key cloud players are largely American. VMSoftware and Citrix are leaders in virtual software, while Amazon, Google, and S are key CPU (server) capacity providers. Japanese systems integrators tend to use overseas packaged and semipackaged software. We do not see significant differences between the majors approach to the cloud, including those with vendor affiliations. In the comparatively short term, cloud computing may be a positive. It could become a rallying call for IT investment, generating demand for systems renewal. We draw an analogy with SCM in 2000. In terms of Japanese IT services market recovery from 2011, we think this could result in a short spurt of high single-digit (%) growth. Exhibit 25: Cloud theme becomes more realistic in 2011: Cloud service model Source: Fujitsu company data, Goldman Sachs Research. IaaS PaaS SaaSInfra as a Service Platform as a Service Software as a ServiceWork process Clients AssetApplicationsMiddle wareOSHard, Facilities Vendors AssetInternetClients AssetClients AssetVendors AssetVendors AssetExclusive line / IntranetData centre Public CloudPrivate CloudClient Enterprise CloudJanuary 24, 2011 Asia: Technology: Hardware Goldman Sachs Global Investment Research 31 Macro factors: North America recovery, China growth, and FX Macro factors are also important in driving commtech sector earnings growth in Asia. Relevant macro factors in the US and China Within the GS Global ECS Research teams macro forecasts, we see the following three points as highly important for the Asian technology sector. On December 17, our US team raised its forecast for real US GDP growth up to 3.4% for 2011 (previously 2.7%) and to 3.8% for 2012 (previously 3.6%). Meanwhile, the team does not expect an increase in the Federal Funds rate by 2013, and expects monetary easing policies to continue for some time. In China, the government is likely to maintain policies to curb inflation, so there could be somewhat of a headwind around April-June 2011. However, our economist team sees little risk of growth slowing markedly because of excess tightening. GS ECS Research looks for real GDP growth of 10% in 2011 and 9.5% in 2012, as it expects stronger economic expansion than the consensus (9.1% in 2011). Implications: The macro outlooks for North America (likely to recover quicker) and China (likely to stay on a rapid growth path) are positive given their outsized roles in driving the high tech sector. We think the Asian tech sector as a whole is likely to be a stronger performer than other sectors in the region. We think North American recovery will be a theme in the first half of 2011, with a resurgence of Chinese economic growth becoming a theme in the second half after financial tightening in China ends around mid-2011 (soft landing). Therefore, we look for Japanese and Korean tech stocks, which are more heavily weighted toward North America, to perform well in the first half, and Taiwanese/Chinese tech stocks to perform well in the second half Forex and monetary policy As for differences in monetary policy in major nations in 2011, our GS ECS Research team expects the continuation of loose money policies in the US and Japan, the continuation of a tight money policy in China, a growing tendency toward a tight money policy in Korea, and a bias toward gradual tightening in 2011-2012 in Taiwan and Europe. The team sees the yen weakening slightly against the dollar and other Asian currencies gaining ground on the dollar in general (especially the Korean won). The team assumes that the yen will weaken against the euro. January 24, 2011 Asia: Technology: Hardware Goldman Sachs Global Investment Research 32 Implications: A weaker yen would be a positive for Japanese tech stocks in year-on-year terms. However, we think the KRW and the NT$ will appreciate only slightly against the US$ yoy, and Taiwanese and Korean companies are quick adapters, so we do not expect forex to be a strong enough factor to reshuffle the competitive balance within the region. Japan: Our ECS team is expecting Asian currencies to appreciate against the US$ in 2011 but sees depreciation for the yen, which appreciated in 2010. The teams 12-month forecast is 90/US$. If the yen reaches this level, we believe the profit impact for Japanese high-tech companies would be positive； our earnings estimates assume 80/US$. (1) Most high-tech companies have assumed 80/US$ for 2HFY10, and are working towards stable profit generation at that level. (2) Earnings detriment was much worse during the depreciation from 90/US$ to 80/US$ than the depreciation from 100/US$ to 90/US$. However, we think Taiwanese and Korean companies are capable of moving quickly to counter currency appreciation and we therefore mild year depreciation is not enough toexpect Japan to gain an advantage in terms of the regional cost competitive differential. Taiwan: The New Taiwan Dollar (NT$) appreciated 5% vs. the US$ in 2010, especially in 2H10, when the NT$ appreciated by 6%. Under a strong NT$ scenario, we believe the export-oriented Taiwan tech sector would face headwinds for both the top and bottom lines. Our sensitivity analysis suggests if the 2011 average NT$/US$ rate comes in 5% higher than our base-case assumption, our overall Taiwan tech coverage space would see a 17% hit on 2011 operating profits. However, our analysis shows that OEMs (branded companies) may benefit from the rising NT$ due to their currency-diversified revenue pool and cost savings from their US$ based cost pool, while downstream firms with slimmer margins may suffer more than upstream. Versus other countries, we note that NT$ appreciation against the Rmb should lower Rmb-based costs (eg, giving tech companies with high China production upside in terms of labor and other costs), and create downside for brand companies with sales in China in terms of revenue. Separately, we expect the strong NT$ vs the EUR would mainly negatively impact brand companies with high functional currency exposure in EUR. Korea: A stronger Korean won (KRW) is negative for earnings of Korean tech companies. However, we need to consider two factors: (1) the pace of appreciation； and (2) KRW movements versus the yen and the NT$. As long as the pace of KRW appreciation is slow, Korean companies can offset the negative impact by: (1) reducing overall costs, (2) shifting raw material procurement strategies, (3) changing settlement currencies, and (4) shifting production overseas. If currency moves are sudden, however, there can be shocks to short-term earnings, as witnessed in 2H08. In addition, we need to consider the relative value of the KRW against the yen and NT$. Currently, the KRW/ and KRW/NT$ cross rates are higher than 3Q08 levels. As regional currencies appreciate in tandem, Korean companies may not lose competitiveness despite a stronger absolute KRW level in 2011. Of note, we expect the Korean won to appreciate to the W1,050/US$ level by end 2011 and W1,000/US$ by end-2012. January 24, 2011 Asia: Technology: Hardware Goldman Sachs Global Investment Research 33 Exhibit 26: Japan is most correlated to US GDP change: US GDP consensus vs Japan tech Exhibit 27: US GDP consensus vs Korea tech Exhibit 28: US GDP consensus vs Taiwan tech Source: Consensus Economics, Datastream. Source:Consensus Economics, Datastream. Source:Consensus Economics, Datastream. Exhibit 29: Taiwan is most correlated to China GDP change: China GDP consensus vs Japan techExhibit 30: China GDP consensus vs Korea tech Exhibit 31: China GDP consensus vs Taiwan tech Source:Consensus Economics, Datastream. Source:Consensus Economics, Datastream. Source: Consensus Economics, Datastream. -10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 (4.00)(3.00)(2.00)(1.00)-1.00 2.00 3.00 4.00 USA consensus GDP forecast vs Japan tech market cap2007 US Consensus (LHS) 2008 US Consensus (LHS) 2009 US Consensus (LHS)2010 US Consensus (LHS) 2011 US Consensus (LHS) Japan Tech Market Cap (RHS)-50,000 100,000 150,000 200,000 250,000 (4.00)(3.00)(2.00)(1.00)-1.00 2.00 3.00 4.00 USA consensus GDP forecast vs Korea tech market cap2007 US Consensus (LHS) 2008 US Consensus (LHS) 2009 US Consensus (LHS)2010 US Consensus (LHS) 2011 US Consensus (LHS) Korea Tech Market Cap (RHS)-1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 (4.00)(3.00)(2.00)(1.00)-1.00 2.00 3.00 4.00 USA consensus GDP forecast vs Taiwan tech market cap2007 US Consensus (LHS) 2008 US Consensus (LHS) 2009 US Consensus (LHS)2010 US Consensus (LHS) 2011 US Consensus (LHS) Taiwan Tech Market Cap (RHS)-10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 -2.00 4.00 6.00 8.00 10.00 12.00 China consensus GDP forecast vs Japan tech market cap2007 China Consensus (LHS) 2008 China Consensus (LHS) 2009 China Consensus (LHS)2010 China Consensus (LHS) 2011 China Consensus (LHS) Japan Tech Market Cap (RHS)-50,000 100,000 150,000 200,000 250,000 -2.00 4.00 6.00 8.00 10.00 12.00 Jan-06Apr-06Jul-06Oct-06Jan-07Apr-07Jul-07Oct-07Jan-08Apr-08Jul-08Oct-08Jan-09Apr-09Jul-09Oct-09Jan-10Apr-10Jul-10Oct-10China consensus GDP forecast vs Korea tech market cap2007 China Consensus (LHS) 2008 China Consensus (LHS) 2009 China Consensus (LHS)2010 China Consensus (LHS) 2011 China Consensus (LHS) Korea Tech Market Cap (RHS)-1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 -2.00 4.00 6.00 8.00 10.00 12.00 China consensus GDP forecast vs Taiwantech market cap2007 China Consensus (LHS) 2008 China Consensus (LHS) 2009 China Consensus (LHS)2010 China Consensus (LHS) 2011 China Consensus (LHS) Taiwan Tech Market Cap (RHS)January 24, 2011 Asia: Technology: Hardware Goldman Sachs Global Investment Research 34 Exhibit 32: Japan is most correlated to US$ change: Japanese tech coverage market cap, index, and Japanese yen January 2003 indexed as 100 Exhibit 33: No strong correlation to US$: Korean tech coverage market cap, index, and Korean won January 2003 indexed as 100 Source:Datastream. Source:Datastream. Exhibit 34: No strong correlation to US$: Taiwan tech coverage market cap, index, and Taiwanese dollar (January 2003 indexed as 100) Source:Datastream. -20 40 60 80 100 120 -50 100 150 200 250 J-03M-03S-03J-04M-04S-04J-05M-05S-05J-06M-06S-06J-07M-07S-07J-08M-08S-08J-09M-09S-09J-10M-10S-10J-11Japan coverage market cap (LHS) TOPIX (LHS) USD/JPY (RHS)-20 40 60 80 100 120 140 -50 100 150 200 250 300 350 400 J-03M-03S-03J-04M-04S-04J-05M-05S-05J-06M-06S-06J-07M-07S-07J-08M-08S-08J-09M-09S-09J-10M-10S-10J-11Korea coverage market cap (LHS) KOSPI (LHS) USD/KRW (RHS)-20 40 60 80 100 120 -50 100 150 200 250 300 350 400 J-03M-03S-03J-04M-04S-04J-05M-05S-05J-06M-06S-06J-07M-07S-07J-08M-08S-08J-09M-09S-09J-10M-10S-10J-11Taiwan coverage market cap (LHS) TAIEX (LHS) USD/NTD (RHS)January 24, 2011 Asia: Technology: Hardware Goldman Sachs Global Investment Research 35 Exhibit 35: We expect steady US recovery while high growth in China continues； GS Global ECS Research macro forecasts Source: GS Global ECS Research forecasts. 2009 2010 2011 2012 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4China 9.1 10.1 10 9.5 11.9 10.3 9.6 9.4 9.8 10.2 10.1 9.7USA -2.6 2.8 3.4 3.8 2.4 3 3.2 2.7 2.7 3.3 3.6 3.9Advanced Economies -3.3 3.0 2.8 3.1 2.7 3.2 3.4 2.9 2.6 2.6 2.9 3.2Emerging Markets 3.2 7.7 7.4 7.2 8.3 8.2 7.0 6.7 6.9 7.0 7.2 7.1World -0.7 5.0 4.7 4.9 5.0 5.3 4.9 4.5 4.4 4.5 4.7 4.9ASEAN (Assoc. of SE Asian Nations) 1.7 6.7 5.5 5.8 8.1 7.6 6.2 5.0 4.6 5.0 6.2 6.3Asia 3.9 8.2 7.2 7.1 9.7 8.5 7.9 7.1 6.9 7.1 7.3 7.3Asia Emerging Economies 7.5 9.1 9.0 8.7 10.5 9.5 8.7 8.4 8.7 9.1 9.1 8.8Asia ex Japan 6.3 9.0 8.4 8.2 10.5 9.6 8.5 7.9 8.0 8.2 8.6 8.5Asia ex Japan, China, India 0.4 7.4 5.1 5.4 9.4 8.8 6.5 5.3 3.9 4.1 5.8 6.6BRICS 5.4 8.7 8.6 8.2 9.8 9.2 8.1 8.0 8.3 8.7 8.7 8.4Central and Eastern Europe -0.9 2.9 3.8 3.9 1.9 2.8 3.6 3.5 3.8 3.9 3.7 3.8EU27 -4.0 1.9 2.3 2.2 0.8 2.1 2.3 2.6 2.6 2.1 2.2 2.1Europe -3.9 1.9 2.2 2.2 0.8 2.1 2.3 2.6 2.6 2.1 2.