20151210-大和证券-Asia_Pacific_Daily_37页_3mb

2016 Global Technology Outlook Summary

Core Content

The 2016 Global Technology Outlook from Daiwa highlights a positive outlook for the Semiconductor Contract Manufacturing (SCM) sector, particularly the upstream technology segment, which is expected to be more attractive than the downstream as the industry cycle turns up. The report identifies three main investment themes for the 2016 tech sector: cyclical upturn, Apple supply chain, and continued 4G penetration. These themes are expected to drive growth and market share gains for key players in the industry.

Main Investment Themes

1. Cyclical Upturn:

   • The next upturn in the SCM industry is expected to start in March 2016 after inventory normalisation.
   • Companies that can capitalise on this recovery, especially those with diversified customer bases, are likely to benefit.

2. Apple Supply Chain:

   • The Apple supply chain has shown resilience during the prolonged inventory correction of 2015.
   • The report forecasts a significant increase in iPhone shipments for 2015 and remains positive about the next iPhone models in 2016, which could include new form factors, upgraded specs, and economy models.
   • TSMC is expected to reclaim a majority of the allocation for Apple's A10 processor, adding to its upside potential.

3. Continued 4G Penetration:

   • Although smartphone demand growth is tapering off, 4G penetration is expected to continue, driving incremental demand from process-tech and product-spec upgrades.
   • This trend is likely to increase the silicon content and component values per box.

Key Recommendations

Daiwa has upgraded several key companies in the tech sector to Buy (1) and highlighted 16 stocks as its 2016 Pan-Asia tech ideas. These include:

• Sony (6758 JP)
• Disco (6146 JP)
• SEC (005930 KS)
• TSMC (2330 TT)
• UMC (2303 TT)
• WinSemi (3105 TT)
• MediaTek (2454 TT)
• ASE (2311 TT)
• SPIL (2325 TT)
• Largan (3008 TT)
• Catcher (2474 TT)
• AAC (2018 HK)
• Pegatron (4938 TT)
• Hon Hai (2317 TT)
• Delta (2308 TT)

Additionally, the report highlights Big Data/IoT demand verticals such as fibre-optics, data storage, and sensors as potential outperformers due to bandwidth upgrades and the broad adoption of CMOS image sensors and fingerprint technologies.

Key Companies and Their Ratings

• TSMC (2330 TT):

  • Rating: Buy (1)
  • Target Price: TWD165.00 (up from TWD155.00)
  • Key Points: Expected to benefit from the next cyclical upturn, likely to reclaim the majority of the allocation for Apple's A10 processor. Its 16nm revenue is projected to rise 4.8x YoY to nearly USD5bn, with total revenue growing to USD29bn in 2016.
  • Dividend Yield: 3.2%
  • PBR (x): 3.2 (revised from 3.1)
  • BVPS (TWD): 55.059 (2016E)

• UMC (2303 TT):

  • Rating: Buy (1)
  • Target Price: TWD16.00 (up from TWD15.50)
  • Key Points: Reclaiming its status as the most viable second source, with a 5.5% target price increase.

• ASE (2311 TT):

  • Rating: Buy (1)
  • Target Price: TWD43.00 (up from TWD42.00)
  • Key Points: SiP/EMS adds to business upside, and the company is expected to benefit from the upcoming upturn.

• SPIL (2325 TT):

  • Rating: Buy (1)
  • Target Price: TWD54.00 (up from TWD49.50)
  • Key Points: Most profitable OSAT major, with a 14.9% target price increase.

Financial Highlights

• Revenue Growth:

  • TWD843,503 million (2015E)
  • TWD926,753 million (2016E)
  • TWD1,066,318 million (2017E)

• Net Profit:

  • TWD302,868 million (2015E)
  • TWD312,304 million (2016E)
  • TWD362,815 million (2017E)

• Core EPS (fully-diluted):

  • TWD11.680 (2015E)
  • TWD12.044 (2016E)
  • TWD13.992 (2017E)

• Free Cash Flow Yield:

  • 8.2% (2015E)
  • 5.3% (2016E)
  • 6.9% (2017E)

Key Risks

• Prolonged inventory correction
• Slower-than-expected 16nm ramp-up

Events and Roadshows

• Company Roadshows:

  • 7-8 Dec: Guotai Junan (1788 HK), NDR, Tokyo
  • 11 Dec: China Travel International (308 HK), Group, HK
  • 11 Dec: China Travel International (308 HK), Luncheon, SG
  • 15 Dec: First FHC (2892 TT), NDR, Tokyo
  • 16-17 Dec: CJ Korea Express (000120 KS), NDR, Tokyo
  • 16 Dec: Beijing Enterprises Water (371 HK), NDR, Seoul
  • 17-18 Dec: Beijing Enterprises Water (371 HK), NDR, Tokyo
  • 5 Jan: China Aircraft Leasing (1848 HK), NDR, SG
  • 8 Jan: Siloam Int'l Hospitals (SILO IJ), NDR, US
  • 15 Jan: Nine Dragons Paper (2689 HK), Group, HK
  • 15 Jan: Nine Dragons Paper (2689 HK), Luncheon, SG
  • 28 Jan: Airports of Thailand (AOT TB), NDR, SG

• Daiwa Asian Events:

  • 10-11 Dec: Daiwa Taiwan Catch The Alpha Corporate Tokyo Day
  • 5-8 Jan 2016: Daiwa P.U.R.E. Energy Conference, HK
  • 28-29 Jan 2016: Daiwa Philippine Corporate Day Tokyo 2016
  • 29 Feb-4 Mar 2016: Daiwa Investment Conference Tokyo 2016

Regional Indices Performance

*Valuation based on MSCI Universe
**MSCI index priced as of 8 Dec

Company Profile

• Taiwan Semiconductor Manufacturing Co. (TSMC):
  • Incorporated in Taiwan in 1987.
  • The world's largest semiconductor foundry in revenue terms.
  • Offers foundry services such as wafer masking, fabrication, probing, and testing.
  • Customers include fabless chipmakers and IDMs.
  • Manufacturing facilities are located in Taiwan, China, the US, and Singapore.

Key Assumptions and Financial Summary

• Wafer Shipment Utilization:

  • 95.2% (2015E)
  • 96.9% (2016E)
  • 100.1% (2017E)

• Blended ASP (USD):

  • 1,326.2 (2015E)
  • 1,297.5 (2016E)
  • 1,307.2 (2017E)

• Wafer Shipment (in thousands):

  • 19,978.3 (2015E)
  • 22,040.3 (2016E)
  • 25,138.1 (2017E)

• ROE (%):

  • 26.6 (2015E)
  • 23.5 (2016E)
  • 23.4 (2017E)

• EV/EBITDA (x):

  • 6.0 (2015E)
  • 5.2 (2016E)
  • 4.4 (2017E)

• Free Cash Flow:

  • TWD299,430 million (2015E)
  • TWD194,430 million (2016E)
  • TWD251,975 million (2017E)

Key Ratios

• Sales (YoY):

  • 10.6% (2015E)
  • 9.9% (2016E)
  • 15.1% (2017E)

• EBITDA (YoY):

  • 9.8% (2015E)
  • 12.1% (2016E)
  • 15.1% (2017E)

• Operating Profit (YoY):

  • 7.9% (2015E)
  • 13.3% (2016E)
  • 16.1% (2017E)

• Net Profit (YoY):

  • 14.8% (2015E)
  • 3.1% (2016E)
  • 16.2% (2017E)

• Gross-Profit Margin:

  • 48.6% (2015E)
  • 49.6% (2016E)
  • 49.8% (2017E)

• EBITDA Margin:

  • 64.6% (2015E)
  • 65.9% (2016E)
  • 65.9% (2017E)

• Operating-Profit Margin:

  • 37.9% (2015E)
  • 39.0% (2016E)
  • 39.4% (2017E)

• Net Profit Margin:

  • 35.9% (2015E)
  • 33.7% (2016E)
  • 34.0% (2017E)

• ROAE:

  • 26.6% (2015E)
  • 23.5% (2016E)
  • 23.4% (2017E)

• ROAA:

  • 19.1% (2015E)
  • 17.5% (2016E)
  • 18.5% (2017E)

• ROCE:

  • 23.0% (2015E)
  • 22.9% (2016E)
  • 24.0% (2017E)

• ROIC:

  • 32.2% (2015E)
  • 33.3% (2016E)
  • 34.5% (2017E)

• Free Cash Flow Yield:

  • 8.2% (2015E)
  • 5.3% (2016E)
  • 6.9% (2017E)

Summary

The report presents a positive outlook for the SCM sector in 2016, highlighting the potential for a cyclical upturn, Apple supply chain growth, and continued 4G penetration. Daiwa recommends upgrading several key players to Buy, including TSMC, UMC, ASE, and SPIL, and has identified 16 stocks as its 2016 Pan-Asia tech ideas. The financial performance of TSMC shows promising growth in revenue and profit, with a target price increase and a diversified customer base expected to drive further gains. The report also outlines upcoming events and roadshows, and provides a detailed financial summary and key ratios for TSMC, emphasizing its strong position in the industry.