20150316-大和证券-Get_ready_for_the_tide_to_turn_16页_476kb

MediaTek Summary

Core Content

MediaTek (MTK) is projected to enter a new earnings-growth cycle, driven by 4G market-share gains and margin recovery. The company's strategy of prioritizing market share over margins is expected to yield results, with a structural margin recovery anticipated to begin in 3Q15 and continue into 2016. The analysis highlights a strong historical correlation between MediaTek's earnings growth and its share price performance, suggesting that the company's upcoming earnings recovery will act as a catalyst for its stock price.

Main Points

• Earnings Growth Cycle: MediaTek is expected to enter a new earnings-growth cycle, driven by 4G market share gains and margin recovery.
• Market Share Expansion: MTK's share of the global 4G chipset market is forecasted to increase from 5% in 2014 to 20% in 2015, 30% in 2016, and over 35% in 2017.
• Margin Recovery: Operating margin is expected to recover from 3Q15, supported by a product mix shift toward 4G, better yields, and increased scale economies.
• EPS Forecast: Revised forecasts show a 12.6% YoY drop in 2015E EPS and a 29.8% YoY increase in 2016E EPS.
• Valuation: The 12-month target price is raised to TWD550, based on an upcycle valuation of 18x forward PER, up from 15x previously.
• Upgraded Rating: The rating is upgraded from Hold (3) to Buy (1), reflecting the positive outlook on the company's future performance.

Key Financial Forecasts

Earnings Recovery

• 1H15: A tough period due to the 3G-to-4G transition, with EPS contraction.
• 3Q15 onwards: Earnings are expected to turn positive and remain so, with a 30% YoY growth in 2016.
• Market Reactions: The market is expected to revise earnings forecasts downward in the coming weeks, signaling that the worst is over and potentially boosting the stock price.

Strategic Product Roadmap

• MT6752 and MT6795: Launched in 4Q14, these mid-range and high-end chips helped MTK close the gap with Qualcomm.
• MT6735 and MT6735M: Scheduled for 2Q15, these low-end and ultra-low-end chips are expected to drive market share growth.
• Product Mix Shift: The shift toward higher-margin and higher-priced solutions is expected to slow ASP erosion and improve margins.

Market Share and Industry Position

• Global Market Share: MTK is expected to gain significant traction in the 4G smartphone market, becoming a major supplier for branded devices.
• Competition: The company is expected to compete more effectively with Qualcomm, as well as smaller players like Marvell and Spreadtrum/RDA.

Risks

• The main risk to the analysis is slower-than-expected 4G market-share gains.

Historical Correlation

• MTK's share price historically correlates with its earnings growth. The recent correction was due to the slowdown in earnings growth from the 3G cycle, but the company is now positioned to benefit from the 4G cycle.

Conclusion

The analysis concludes that MediaTek is on the verge of entering a new earnings-growth cycle, with strong market-share gains and margin recovery expected to drive its stock price upward. The upgraded rating to Buy and increased target price reflect this positive outlook, assuming the company successfully executes its 4G strategy.