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China Handset Chip Market
Facing structural headwinds
Michael Chou
Research Analyst
(886) 2 2192 2836
michael.chou@db.com
Alan Hellawell
Research Analyst
(852) 2203 6240
alan.hellawell@db.com
Kc Kao, MBA
Research Analyst
(886) 2 2192 2831
kc.kao@db.com
Fundamental, Industry, Thematic, Thought Leading
Deutsche Bank Company Research's Investment Policy Committee has deemed
this work F.I.T.T for investors seeking differentiated ideas. We recommend
investors avoid those companies threatened by sharp ASP/margin erosion and
those likely to experience market share loss in an industry facing growth
deceleration.
Deutsche Bank AG/Hong Kong
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Investors should consider this report as only a single factor in making their investment decision.
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request that a copy of the IR be sent to them.
DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1
FITT Research
Top picks
MediaTek (2454.TW),TWD400.00 Sell
ZTE Corp (0763.HK),HKD33.80 Hold
Foxconn Int'l Holdings (2038.HK),HKD12.60 Buy
Sunplus Technology (2401.TW),TWD42.40 Sell
Companies featured
MediaTek (2454.TW),TWD400.00 Sell
2006A 2007E 2008E
P/E (x) 22.2 19.3 21.3
EV/EBITDA (x) 12.1 12.3 19.1
Price/book (x) 4.6 4.6 4.8
ZTE Corp (0763.HK),HKD33.80 Hold
2007A 2008E 2009E
P/E (x) 20.0 22.4 20.2
EV/EBITDA (x) 9.5 11.4 9.5
Price/book (x) 2.3 3.0 2.6
Foxconn Int'l Holdings (2038.HK),HKD12.60 Buy
2006A 2007E 2008E
P/E (x) 23.7 14.1 11.1
EV/EBITDA (x) 17.6 10.5 8.0
Price/book (x) 9.8 3.4 2.6
Sunplus Technology (2401.TW),TWD42.40 Sell
2006A 2007E 2008E
P/E (x) 15.0 15.8 19.0
EV/EBITDA (x) 20.0 10.0 27.2
Price/book (x) 3.9 3.2 2.3
Byd Electronic (0285.HK),HKD8.93 Buy
2006A 2007E 2008E
P/E (x) – 16.0 10.8
EV/EBITDA (x) – 11.2 6.3
Price/book (x) 0.0 3.2 2.4
Fundamental: Growth deceleration
We expect China handset makers to experience market share loss to global toptier
peers in 2008, which will slow unit growth of handset chips. Unit growth of
handset chips for China handset makers is forecast to decelerate to 28% YoY in
2008 and 20% in 2009 from 45% in 2007. This significant growth headwind will
have the greatest negative impact on those Asian chip vendors having a majority
of customers in China and limited exposure to global tier-one/two handset makers.
Industry: Proprietary analysis to identify LT survivors
We apply a scorecard methodology across the handset chip supply chain in China
and provide criteria to assess survivorship. We expect fewer survivors (Infineon,
MediaTek, STM/NXP, Texas Instruments and Qualcomm) in the China handset IC
market over the longer run.
Thematic: 1. Decelerating growth 2. Market share loss 3. ASP/margin
decline
Our bottom-up survey across 17 major China handset makers and 11 chip vendors
leads us to conclude that Asian handset chip vendors will experience China market
share losses and decelerating growth due to lack of CMOS single-chip solutions
which can reduce the BOM cost for handset makers by 20-30% on a simpler
architecture. China handset makers are shifting to Infineon and STM/NXP’s CMOS
platforms and we expect intensified downward pressure on ASP and margins.
Thought leading: ASP/margin erosion sharper than expected from 2008
We believe the Street underestimates the negative ASP/margin impact of rising
competition from Infineon and STM/NXP and slow migration to TD-SCDMA
(China’s 3G handset standard) and GPS handsets. We expect 25-35% YoY ASP
erosion and 2-4ppt margin decline in handset chips in 2008 and 2009, materially
sharper than the 15-20% and 1-2ppt in 2007 and consensus of 10-15% and 1-2ppt
for 2008 and 2009.
Thematic stock ideas: Negative: MediaTek, Sunplus, ZTE: Positive: FIH, BYD
MediaTek derives 55-60% of its net profit from the China handset chip market,
with limited exposure to global tier-one/two handset makers and lacks CMOS
single-chip handset solutions. This suggests more ASP/margin pressure and
earnings downside risk. Sunplus mMobile (Sunplus’ subsidiary for handset chips)
lacks RF CMOS design capability, suggesting limited room for design wins from
China handset makers. Investment implications for handset makers: FIH and BYD
benefit from the global handset makers’ share gain in China and increased
outsourcing. ZTE may suffer from a slow shift to TD-SCDMA. Sector
upside/downside risks: end demand surprises, magnitude of ASP decline and pace
of migration to TD-SCDMA and GPS handsets.
Table of Contents
Executive summary ........................................................................... 3
Outlook – Structural rather than cyclical issues from 2008 .......................................................3
Valuation multiple compression on structural challenges .........................................................4
Risks ........................................................................................................................................4
Theme #1 – Decelerating growth ..................................................... 5
Slowing growth momentum in 2008 and 2009 for Asian handset chip vendors ......................5
Emerging structural negatives ..................................................................................................6
Theme #2 – Market share loss .......................................................... 9
Market share decline for Asian handset chip vendors from 2008.............................................9
A new ball game - Why is the CMOS single-chip solution so important? ...............................11
Theme #3 – ASP and margin decline ............................................. 13
Stiff pricing competition from Infineon and NXP.....................................................................13
Competitive landscape analysis..................................................... 16
More consolidation – Limiting supplier survivorship ...............................................................16
Analysis for each handset chip vendor based on our criteria..................................................18
Valuation .......................................................................................... 23
Investment implications for handset chip vendors .................................................................23
Investment implications for handset makers: Buy FIH and BYD.............................................25
Risks.................................................................................................. 26
Stronger/weaker-than-expected end demand.........................................................................26
The progress in introduction of handset CMOS single-chip solutions ....................................26
The magnitude of price erosion ..............................................................................................26
The pace of migration to TD-SCDMA and GPS handsets .......................................................26
Appendix .......................................................................................... 27
Definition for technology terms ..............................................................................................27
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