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Pegatron Corporation (4938 TT) Summary

Core Content

Pegatron Corporation, based in Taiwan, is a leading provider of Design and Manufacturing Services (DMS) in the electronics and computing industry. The company is known for its diversified product portfolio, which includes smartphones, tablets, notebooks, game consoles, and other related technologies. The current share price is TWD41.00, with a market capitalization of USD3.1B and a target price of TWD55.00, representing a 34% increase.

Main Points

• Market Position: Pegatron has been assembling mid-end Apple devices since 2010, including the iPhone 4 CDMA, 5c, and iPad mini. In 3Q14, it will begin assembling the mainstream 4.7-inch iPhone 6, marking a significant milestone.

• Growth and Margin Expansion: The company is expected to improve its gross margin (GM) from 2.6% in 2013F to 2.8% in 2014F and further to 3.1% in 2015F. This is attributed to a better sales mix, including the iPhone 6 and potential Sony smartphone orders, and reduced capacity expansion.

• Smartphone Orders: Pegatron is anticipated to secure a potential Sony smartphone outsourcing order in 2015, which could provide a significant boost to its operations. It is also expected to increase smartphone shipments by 22% in 2014F and 28% in 2015F.

• Competition and Strategy: Despite concerns about competition from Wistron and Compal, the report suggests that Apple's diversification strategy is not a threat to Pegatron. Apple has been investing in Pegatron since 2010 and is training it as a reliable second source. It may take Apple 3–4 years to find a suitable alternative to Hon Hai, which is currently its primary supplier.

• Valuation and Performance: Pegatron is currently trading at 8–9x P/E, which is below its estimated fair value of 11x P/E. The company's earnings are expected to grow, with a forecast of 5% and 20% increases in operating profit for FY14 and FY15 respectively, higher than the consensus estimates.

• Key Metrics:

  • Revenue is projected to increase from TWD952,614 in FY13E to TWD1,010,664 in FY15E.
  • Core net profit is expected to rise from TWD9,196 in FY13E to TWD11,724 in FY15E.
  • Core EPS is forecasted to grow from TWD3.96 in FY13E to TWD5.05 in FY15E.
  • Net dividend yield is projected to increase from 3.7% in FY13E to 6.3% in FY15E.

Key Risks

• Weaker-than-expected smartphone demand, particularly for iPhones.
• Intensified competition from Hon Hai or Compal in server ASP/order allocation.
• Slower-than-expected execution in new projects.
• Potential loss of market share among key customers.

Key Figures and Tables

• Share Price Performance: Pegatron's share price has shown a 20% decline since 3Q13, but the report suggests it is on a recovery path.
• Earnings Model: The company's operating profits are expected to rise from TWD16,071 in FY13E to TWD21,426 in FY15E.
• Peer Comparison: Pegatron is compared with other DMS providers, including Largan, Catcher, AAC, and Hon Hai, with a target price that is considered a Street-high.

Conclusion

Pegatron is positioned for margin expansion and growth, driven by its new iPhone 6 assembly contract and potential Sony smartphone orders. Despite competition concerns, the company's strong relationship with Apple and its growing margin outlook support the BUY rating. The target price of TWD55.00 is based on a fair valuation model and reflects the company's improved financial performance and strategic direction.