Asia Casing Sector - Credit Suisse

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11 November 2014
Asia Pacific/China&Taiwan
(Asia)/Technology - DRAM TW (Asia))
Two share gainers, one share loser
Figure 1: The casing sector—big gets bigger
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Catcher FTC Casetek non-top 3
Source: Company data, Credit Suisse estimates
Casing in the upcycle. We maintain our positive view on the casing sector.
We believe the demand driver for the casing sector will no longer just be the
functional advantages of the materials itself. Instead, how companies
differentiate the product and facilitate the manufacturing process should
become the major demand driver for the casing sector. Not just Apple, we
see an increasing number of brands, i.e., HTC (from 2010), Blackberry (from
2011), Sony (2012), MSFT (2013), China brands (2014) and Samsung
(2H14), etc., too increasingly focussing on industrial design. More
importantly, brands tend to stay with similar design for multiple years (and
not just one product cycle).
Big gets bigger. On the supply side, the entry barrier is also increasing both
technologically and financially, given (1) the increasing complexity of casing
design, which typically involves varied materials and several different
manufacturing processes, and (2) the high capital intensity (CNC machines
are expensive and suppliers have to build their capacity based on their yield
rates and peak season demand). As a result, the big tends to become bigger
over time. For instance, the combined operating profit share of the Top-3
casing makers (Catcher, FTC, and Casetek) has increased from 69% in
2008 to 85% in 1H14.
Accumulate Catcher. We expect both Catcher and Casetek to gain share in
the casing sector upcycle, at the expense of Foxconn group, given Apple's
expanded product portfolio and its EMS diversification strategy. Our top buy
idea is Catcher (30% potential upside). We initiate coverage on Casetek with
an OUTPERFORM rating and reiterate our NEUTRAL rating on Foxconn Tech.
Research Analyst
Pauline Chen
Focus table and charts Figure 2: Complexity of casing design
Plastic Al Mg Stainless steel Titanium Carbon fibre Glass fibre
Injection molding Stamping Die casting Extrusion Forging Unibody Winding
Source: Catcher website, Credit Suisse estimates
Figure 3: Capex-to-sales ratio by sub-sector (2013) Figure 4: Capex-to-sales trend for the casing sector
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3%
6%
9%
12%
15%
18%
0
4,000
8,000
12,000
16,000
20,000
24,000
capex (LHS) Capex-to-sales (RHS)(NT$mn)
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 5: Top-3 makers' operating profit share going up Figure 6: Operating profit share for casing (1H14)
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20%
30%
40%
50%
60%
70%
80%
90%
100%
Catcher, 59%
FTC, 13%
Casetek, 17%
Eson, 2%
Figure 7: 1H14 performance comparison Figure 8: Capex comparison
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20%
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60%
80%
100%
120%
Catcher FTC Casetek(NT$mn)
11 November 2014
Asia Casing Sector 3
Two share gainers, one share loser We maintain our positive view on the casing sector, given the increased focus on better
industrial design as well as higher entry barrier both technologically and financially. We
reiterate our OUTPERFORM rating on Catcher and our NEUTRAL stance on FTC, and
initiate coverage on Casetek with an OUTPERFORM. We believe that both Catcher and
Casetek will be gaining share in the casing sector upcycle, at the expense of Foxconn
group, given Apple's expanded product portfolio and its EMS diversification strategy.
Increasing focus on casing design
While Motorola was the first brand that started using metal casing in its handsets (in
2004), the popularity of metal casing design has shot up sharply since, thanks mainly to
Apple. Apple (with an estimated 16% of the portable device market share in 2014E), has
widely used metal casing across its product lines—iPod (2006), iMac (2007), iPhone
(2007), MacBook (2008), iPad (2010) and Apple Watch (2014). Apple has improved its
metal casing design through the unibody process, to further reduce the thickness of the
device and the complexity of the assembly process. Following Apple's emphasis on casing
design, we see an increasing number of brands putting more focus on casing design, such
as HTC (from 2010), Blackberry (from 2011), Sony (2012), MSFT (2013), China brands
(2014) and Samsung (2H14), etc. More importantly, brands tend to stay with similar design
for multiple years (and not just one product cycle).
Increasing barriers of entry
We also see increasing barriers of entry. The technology barrier for the casing sector is
the increasing complexity of design for portable devices, especially smartphones, which
typically involves varied materials and several different manufacturing processes. The
financial barrier is the relatively higher capex intensity, as suppliers have to build their
capacity based on their yield rates and peak season demand. This gives leading suppliers
the early-mover advantage, as the manufacturing know-how can be somewhat
accumulated over time. As a result, the big tends to become bigger over time. For instance,
the combined operating profits share of the Top-3 casing makers (Catcher, FTC, and
Casetek) has increased from 69% in 2008 to 85% in 1H14.
Stock view
Our top buy idea is Catcher (~30% potential upside to TP of NT$335). We believe iPhone
6 order win is an indication of Catcher's strengthening position in the premium casing
sector. This should lead to more order win opportunities in the future. We initiate coverage
on Casetek with an OUTPERFORM rating and a TP of NT$225, putting the stock at 12.5x
FY15 EPS. We also expect Casetek to gain market share in the premium casing sector.
We take a 10% discount on Casetek (versus Catcher), due to Casetek's relatively higher
concentration risks (for both customer base and product mix). We reiterate our NEUTRAL
rating on FTC, due to limited financial transparency, and on our belief that Apple's EMS
diversification strategy will lead to lower casing market share for the Foxconn group. We
fine tune our estimates by 0-3% and TP to NT$75 (from NT$71.43), putting the stock at
12.5x NTM EPS.
Investment risks
Risks to our call include: (1) Apple's product cycle; (2) suppliers' yield rates for new
product cycle; (3) high capex being a risk to margins; (4) Asian currency appreciation; and
(5) end-market demand.
11 November 2014
Price Target
(local) price EPS (local) EPS growth (%) P/E (x) P/B (x)
Company Ticker Rating 10-Nov (local) 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015E
Catcher 2474.TW O 259.0 355 21.0 23.6 14 13 12.4 11.0 2.4 2.1
Casetek 5264.TW O 195.0 225 16.0 17.9 -11 12 12.2 10.9 2.7 2.4
FTC 2354.TW N 81.9 75 5.3 5.7 3 8 15.5 14.4 1.5 1.4
Largan 3008.TW O 2,115 2,800 130 152 81 17 16.3 14.0 7.1 5.3
AAC 2018.HK O 44.0 54.0 2.0 2.6 -4 30 17.1 13.1 4.5 3.4
Sunny 2382.HK N 13.6 11.0 0.54 0.65 23 21 20.1 16.6 3.5 3.0
Delta 2308.TW N 175.0 210.0 8.6 9.5 19 10 20.2 18.5 5.0 4.6
*Juteng 3336.HK NR 4.2 n.a. 0.66 0.75 0 13 6.4 5.7 0.7 0.6
*BYDE 285.HK NR 9.3 n.a. 0.49 0.65 67 33 14.8 11.2 1.7 1.5
*Tongda 698.HK NR 1.1 n.a. 0.09 0.11 20 22 11.8 9.6 1.8 1.6
*KH Vatech 060720.KQ NR 34,100 n.a. 1,728 4,258 -54 146 19.7 8.0 2.1 1.7
Note: For AAC, Sunny Optical, and BYDE, share price is based on HKD and EPS is based on RMB. Exchange rate for RMB/HKD: 1.27.
Source: Company data, Credit Suisse estimates, *BLOOMBERG I/B/E/S estimates for Juteng, BYDE, Tongda, and KH Vatech. *Not rated
Figure 10: Taiwan Top-3 casing makers' summary view
Catcher FTC Casetek
Daily trading value (US$mn) 60 12 15
TP (NT$) 335 75 225
QFII holding (%) 54% 25% 76%
2014 revenue (NT$mn) 54,850 74,960 34,473
2015 revenue (NT$mn) 61,922 76,807 39,586
2014 GM (%) 46.1 18.6 27.9
2015 GM (%) 46.0 19.0 28.7
2014 OPM (%) 35.3 10.8 19.2
2015 OPM (%) 35.4 11.1 20.2
2014 EBITDA margin (%) 46.8 16.0 26.8
2015 EBITDA margin (%) 50.1 16.4 27.9
2014E EPS (NT$) 21.0 5.3 16.0
2015E EPS (NT$) 23.6 5.7 17.9
P/15E (x) 11.0 14.4 10.9
2014 CAPEX (NT$mn) 15,987 1,374 3,185
2015 CAPEX (NT$mn) 14,000 1,400 8,000
2014 R&D (NT$mn) 1,111 1,186 784
2014 R&D as % of revenue 2 1.6 2.3
2014 CCC (days) 136 106 63
2014 net cash (NT$mn) 16,564 27,819 6,340
2013 cash dividend (NT$) 5 1 9
2013 stock dividend (NT$) 0 0.5 0
2013 dividend payout ratio 27% 28% 50%
11 November 2014
Increasing focus on casing design In earlier times, the casing sector was divided by different materials, i.e., plastic, metal,
carbon fibre, etc., and most of the discussion was about the pros and cons of the material
itself. For instance, the general impression was that metal casing was mostly used in high-
end models, such as commercial PCs and high-end smartphones. This was based on the
argument that metal casings, compared to plastic ones, have certain advantages, such as
lightweight, better heat dissipation, better structural support, better vibration absorption,
better EMI (Electromagnetic Interference) shielding and recyclability, etc.
In our view, the demand driver for the casing sector will no longer just be the functional
advantages of the materials itself. Instead, the demand drivers for the casing sector should
emerge from product differentiation and improved manufacturing processes, given the
much shorter product life cycle. Not just Apple, we see almost every smartphone brand
such as Motorola, HTC, Blackberry, Sony, MSFT, Xiaomi, Lenovo, Huawei, Samsung,
etc., increasingly focussing on their industrial design. More importantly, brands tend to
stay with similar design for multiple years (and not just one product cycle).
Motorola: The first handset brand using metal casing
Motorola, with an estimated 1% of the portable device market share in 2014, was the first
adopter of metal casing for its handsets. Its RAZR V3 was one of the best-selling handsets
in 2H04-2005, given its stylish design with the thinnest clamshell form-factor and an
anodised aluminum casing. While it changed the back case from metal casing to Kevlar in
its recent flagship models such as Droid RAZR (2011), Droid RAZR Maxx HD (2012), and
Moto X (2013/2014), it still uses external metal frame to provide better structural support.
Motorola also uses stainless steel for its first wearable device, Moto 360.
Figure 11: Motorola has stayed with metal casing design since 2011
RAZR V3 (2004): Aluminum Droid RAZR (2011): Al frame Droid RAZR Maxx HD (2012): Metal frame
Source: Motorola website
Figure 12: Motorola has stayed with metal casing design since 2011
Moto X (2013): Customised casing Moto X (2014): Al frame Moto 360 (2014): Stainless steel
Source: Motorola website
11 November 2014
Apple: The first brand widely using metal casing
While Motorola was the first brand that started using metal casing in its handsets (in
2004), the popularity of metal casing design has shot up sharply since, thanks mainly to
Apple. Apple (with an estimated 16% of the portable device market share in 2014E), has
widely used metal casing across its product lines—iPod (2006), iMac (2007), iPhone
(2007), MacBook (2008), iPad (2010) and Apple Watch (2014). Apple has improved its
metal casing design through the unibody process, to further reduce the thickness of the
device and the complexity of the assembly process.
Apple used aluminum casing for its first iPhone (iPhone 2G) in 2007. However, it changed
to engineering plastic casing for iPhone 3G/3GS in 2008/2009, given signal interference
issues. The back case was then changed to strengthening glass for iPhone 4/iPhone 4S in
2010/2011 due to its better strength (30 times stronger than plastic) and scratch-resistant
quality, although it still used stainless steel in the frame. However, the trend of
thinner/lighter smartphones made Apple revert to metal casing for iPhone 5. By adopting
aluminum unibody casing (as well as in-cell), Apple managed to reduce the weight by 20%
and thickness by 18% for iPhone 5 (compared with iPhone 4S), thus increasing the
strength support for the panel (given that it is one piece), and reducing the number of
components.
Figure 13: Apple iPod shuffle (2006)—Aluminum casing Figure 14: Apple iMac (2007)—Aluminum casing
Source: Apple website Source: Apple website
Figure 15: Apple iPhone 2G (2007)—Aluminum casing Figure 16: Apple MacBook Pro (2008)—Al unibody
11 November 2014
Figure 17: Apple iPhone 3G/3GS (2008-09)—plastic casing Figure 18: iPhone 4/4S (2010-11)—stainless steel frame
Figure 19: Apple iPad (2010)—Al unibody Figure 20: Apple Watch (2014)—metal unibody
HTC: Fan of unibody design
In the non-Apple camp, HTC, with an estimated 1% of the portable device market share in
2014, is known for/ proud of its industrial design for smartphones. Starting 2010, HTC's all
flagship models were manufactured using the unibody process, regardless of the casing
materials (aluminum or polycarbonate). In 2013-14, HTC tried to differentiate its flagship
models with casing materials. For instance, metal casing was used for high-end flagship
models (HTC One), while plastic casing was used for the cost-down versions of flagship
models (HTC Desire). Nevertheless, both HTC One and HTC Desire are manufactured
through the unibody process.
Figure 21: HTC Desire HD (2010)—Al unibody Figure 22: HTC Sensation (2011)—Al unibody
Source: Company website Source: Company website
11 November 2014
Figure 23: HTC has stayed with unibody casing design since 2010
One X (2012): Polycarbonate unibody One S (2012): Al unibody One V (2012): Al unibody
Source: Company website
Figure 24: HTC has stayed with unibody casing design since 2010
One (2013): Al unibody One (2014): Al unibody Desire (2014): Polycarbonate unibody
Blackberry: Keypad + metal frame
After HTC, Blackberry, with an estimated 1% of the portable device market share in 2014,
also started using metal frame for its flagship model (Bold 9900) beginning 2011.
Blackberry has used this metal frame design in 2012 (Curve 9320), 2013 (Q10), and 2014
(Passport).
Figure 25: Blackberry has stayed with metal frame design since 2011
Bold 9700 (2009): Plastic casing Bold 9900 (2011): Stainless steel frame Curve 9320 (2012): Al frame
11 November 2014
Figure 26: Blackberry has stayed with metal frame design since 2011
Z10 (2013): Internal stainless steel frame Q10 (2013): Metal frame Passport (2014): Stainless steel frame
Sony: Willing to try hybrid materials
From 2012, Sony, with an estimated 3% of the portable device market share in 2014,
started using metal casing for its flagship smartphones (Xperia V/Xperia P), and further
moved to aluminum unibody frame in 2013 and 2014 (Xperia Z series). For tablets, Sony
has focused on being lightweight. As a result, after starting from aluminum casing in 2012
(Xperia S tablet), it turned to glass fibre in 2013 (Xperia Z tablet), and then moved to
polycarbonate casing with metal frame in 2014 (Xperia Z2 tablet).
Figure 27: Sony has stayed with metal frame design for smartphones since 2012
Xperia V (2012): Metal frame Xperia Z (2013): unibody frame Xperia Z2 (2014): unibody frame
Figure 28: But Sony uses hybrid materials in tablets
Xperia S tablet (2012): Plastic+Al Xperia Z tablet (2013): Glass fibre Xperia Z2 tablet (2014): Metal frame
11 November 2014
Microsoft (Nokia): Room to increase metal adoption
Before the MSFT acquisition (the deal was announced in September 2013), Nokia's Lumia
smartphones were known for their colourful casing made by polycarbonate, although its
Symbian handsets, i.e., N78/N96, did use aluminum alloy casing. On the other hand,
Microsoft has been using metal casing (called VaporMg) since the first generation Surface
tablet in 2012. We believe the merger could lead to increasing metal casing adoption for
the combined entity (with an estimated 2% of the portable device market share in 2014).
One example is Lumia 930 (announced in 2014), which uses metal frame for the first time.
Figure 29: Nokia started using metal frame design in 2014 (after the MSFT acquisition)
Lumia 920 (2012): Polycarbonate Lumia 520 (2013): Polycarbonate Lumia 930 (2014): Al frame
Figure 30: Microsoft has been using metal casing since 2012
Surface (2012): VaporMg casing Surface Pro (2013): VaporMg casing Surface Pro (2014): VaporMg casing
Samsung: Moving to metal casing in 2H2014
While Samsung holds an estimated 22% of the portable device market share in 2014, it
has been pretty late in adopting metal casing in its flagship smartphone models. From
Galaxy S1 (in 2010) to S5 (in 1H2014), Samsung had been using (engineering) plastic
casing for its flagship smartphones, although they still require metal frame inside. A
technology called NCVM (Non Conductive Vacuum Metallisation) is widely used on top of
polycarbonate to provide similar metallic feel. Nevertheless, Samsung has started
embracing metal casing in its Galaxy Series since 2H of 2014, i.e., Galaxy Alpha and
Galaxy Note 4. As a result, we expect the metal casing adoption rate in Samsung to go up
in 2015E.
Figure 31: Samsung was not a fan of metal casing before 2014
Galaxy S1 (2010):
Figure 32: Samsung started using metal casing design in 2H14
Galaxy S5 (2014): Polycarbonate Galaxy Alpha (2014): Metal frame Galaxy Note 4 (2014): Metal frame
China brands: Metal casing for high-end models
Metal casing design has grown in popularity with China smartphones since 2014. Almost
every China smartphone brand has at least one model using metal casing. We notice that
most of them still prefer Al/Mg alloy casing for the frame or back case. Xiaomi even spent
half of the time during its two-hour presentation for the Mi4 launch event, to discuss its
industrial design (the stainless steel metal frame in particular). According to Xiaomi, Mi4
sports a 304 stainless steel metal frame, which was made in 40 processes, 193 precise
steps and processed in a CNC machine eight times.
Figure 33: Increasing number of China brands using metal casings
Xiaomi 4 (2014): Stainless steel frame Lenovo VIBE X2 (2014): Al alloy Huawei Ascend G7 (2014): Al unibody
11 November 2014
Coolpad 1s (2014): Al frame BBK Vivo X sky (2014): Metal casing ZTE Nubia X6 (2014): Metal casing
OPPO R3 (2014): Mg alloy TCL S860 (2014): Al frame Gionee Elife S5.5 (2014): Mg alloy
LGE: Will it move to metal casing design?
LGE, with an estimated 4% of the portable device market share in 2014, is probably the only
top-10 smartphone brand without any smartphone made of metal casing. However, LGE does
use metal casing for its tablet (G Pad 8.3) and wearable device (G Watch). According to media
reports, LGE filed trademarks for its G Flex Frame, G Frame, and F Frame on September 25,
2014 (click here). As a result, the market expects LGE to likely use metal frames in the future.
Figure 36: LGE key flagship models
G3 (2014): Plastic (metallic like) G Watch R (2014): Stainless steel G Pad 8.3 (2013): Al casing
Wearable devices: Still in early stage
The impact on metal casing demand from wearable devices is too early to be concluded,
because (1) the wearable device market is still in its early stage (year one), (2) there are
too many form factors for wearable devices, i.e., watch, glass, necklace, etc., and (3) there
are still pros and cons of using metal casings.
The pros of using metal casings
The most obvious advantage of using metal casings, especially in the watch form factor, is
the stylish design, in addition to better structural support in a smaller form factor. The
recently launched wearable devices (in 2014) all feature metal casing, including Apple
Watch, Samsung Galaxy Gear 2, Asus ZenWatch, LG G Watch R, and Moto 360. The only
exception is Samsung Galaxy Gear Neo (cost-down version) and Sony SmartWatch 3
(plastic casing band with metal casing on the back). In additional to metal casing design,
MIM (metal injection molding) also sees increasing demand in wearable devices.
Figure 37: Samsung Galaxy Gear (2013)—metal Figure 38: Samsung Galaxy Gear Neo (2014)—plastic
Figure 39: LG G Watch (mid 2014)—metal Figure 40: LG G Watch R (2H14)—metal
Figure 41: Sony SmartWatch (2013)—metal Figure 42: Sony SmartWatch 3 (2014)—plastic
11 November 2014
The cons of using metal casings
On the other hand, the biggest concern of using metal casings in wearable devices is
safety issue. This is because wearable devices are attached closely to human bodies. For
instance, the better heat dissipation of metal casing could become a disadvantage in a
wearable device, because the heat generated by the wearable device might be easier to
be passed directly to human skin. Another concern is that a wearable device made of
metal casing could be more harmful to human bodies in case of an accident.
Figure 43: Flagship wearable device spec comparison
Manufacturer Apple Samsung Asus Sony LG MOT Xiaomi
Image
Model Apple Watch Gear S ZenWatch SmartWatch 3 G Watch R MOT 360 Mi Band
Announced Sep-2014 Aug-2014 Sep-2014 Sep-2014 Sep-2014 Sep-2014 Jul-2014
Operating system iOS-based Tizen-based Android Wear Android Wear Android Wear Android Wear Android4.4
AP S1 Dual-core,
Storage TBD 4GB 4GB 4GB 4GB 4GB n.a.
Pixels TBD 480x360 320x320 320x320 320x320 320x290 n.a.
Dimensions (mm) TBD 58.3x39.8 50.6x39.8 51x36 53.6x46.4 46x46 36x14
Weight (g) TBD 67 50 45 62 49 13
Screen (inches) TBD 2.0 1.6 1.6 1.3 1.6 n.a.
Camera no no no no no no no
Casing Stainless Steel/
Plastic/ Stainless Steel
Work independently TBD Yes No No No No No
Connectors Bluetooth 4.0,
NFC Bluetooth 4.1,
Micro USB Bluetooth 4.0,
Micro USB Bluetooth 4.0
Battery TBD 300mAh 369mAh 420mAh 410mAh 320mAh 41mAh
Battery life (hrs) TBD Up to 48 n.a. Up to 48 Up to 48 Up to 24 Up to 720
Source: Company data, Credit Suisse
11 November 2014
Increasing barriers of entry On the supply side, the entry barrier of the casing sector is also increasing, both
technologically and financially. The increasing complexity of casing design, which typically
involves multiple materials and manufacturing processes, means higher capital intensity, a
longer learning curve, and therefore limited suppliers.
Technology barrier: Complexity of casing design
The technology entry barrier for the casing sector is the increasing complexity of casing
design for portable devices, especially smartphones. It is not just related to the material
itself, but more a function of "the manufacturing process of the materials". In most cases,
the latter (manufacturing process) matters more for the value of the casing makers. The
figure below summarises the different manufacturing process for different materials.
Figure 44: Complexity of casing design
Plastic Al Mg Stainless steel Titanium Carbon fibre Glass fibre
Injection molding Stamping Die casting Extrusion Forging Unibody Winding
Source: Catcher website, Credit Suisse estimates
Material
fibre, carbon fibre, glass, etc., have different strength, feeling, appearance, weight, and
therefore require different manufacturing processes, which leads to different costs. In most
cases (without considering different manufacturing processes), metal casings tend to be
more expensive than plastic casings.
Plastic casing has the advantages of better signal transmission, lower costs and
lightweight (for the material only), but it also comes with disadvantages of worse heat
dissipation (which might dampen the AP performance) and less strength (which requires
internal metal frame to support the structure).
Metal casing (including aluminum, magnesium, zinc, stainless steel, titanium, etc.), on the
other hand, has the advantages of better heat dissipation (which leads to better AP
performance), better strength (no need for internal structural support), and better industrial
design, but it also comes with the disadvantages of worse signal transmission (which
requires external antenna) and higher cost. As a result, smartphones with metal casing,
compared to plastic casing, tend to be more expensive.
Within metal casing, magnesium in theory is a better material than aluminum, given its
lighter weight, better heat dissipation, better strength, and better signal reception. However,
the biggest problem of using magnesium as external casing is the difficulty of surface
treatment. In most cases, it requires spray painting for magnesium external casing, versus
the anodising process for aluminum external casing.
Glass casing is another widely used casing material, besides plastic and metal. Amongst
the three materials, glass has the best strength but is also most vulnerable during a drop
test. The advantage of using glass as external casing is that the antenna can be built
inside. However, the disadvantages of using glass as external casing are their heavier
weight and the difficulty to shape. iPhone 4/4s is the best example of using glass as
external casing.
Figure 45: Different materials offer different outlook/feeling/weight
Galaxy S5 (plastic, 5.1", 145g) iPhone 4s (glass, 3.5", 140g) iPhone 5s (Al, 4", 112g) Xperia ion (Mg, 4.55", 144g)
Source: Company websites
Besides materials, different manufacturing processes also play an important role in
determining the casing value. For instance, plastic unibody casing tends to be more
expensive than plastic stamping. Al stamping casing tends to be cheaper than Al
unibody.
Die casting: Based on Catcher's website, die casting is to inject metals with better melting
and solidifying properties, such as aluminum, zinc, magnesium, and copper alloys into
heat resistant steel molds using high injection pressure. With the lower temperature of the
mold, the molten metal solidifies quickly and forms parts as a shape of cavity. After
solidifying, the runners/gates are removed and raw parts are produced. Then, final
products are made after different processes.
Stamping: Based on Catcher's website, stamping uses a machine to stamp to create the
desired shape. Also, during the process of manufacturing, the thickness of the raw
material won't change. Stamping is widely used in creating the 3-D parts for manufacturing
engineering, cutting or other special surface needs such as engraving. The raw material is
often stainless steel board, but aluminum or magnesium board can also be used as
stamping material.
Figure 46: Hot chamber die casting machine Figure 47: Metal stamping machine
Source: Wikimedia Source: Wikimedia
Forging: Based on Catcher's website, forging is a form shaping technology for metals.
Preheated or unheated raw material can be deformed with external pressure. During the
forging process, the metal flows like plastic and the final shape is close to the finished
product, which means better machinability and reduction in processing hours. Because the
crystals flow during the molding and shape changing process of the metal, the forging
11 November 2014
process possesses better physical properties such as strength, extension, and
toughness/flexibility than ordinary processing processes such as stamping, casting, or
machine processing.
Extrusion: Based on Catcher's website, the extrusion process is a method to press the
raw material inside strong containers and then extrude the shape through the mold to form
the shape. Most are long and straight raw profile with the same cutting surface provided
for post-processing. In order to get high quality extrusion parts, the temperature of the
mold, the preheat temperature of the material, the temperature of the container and the
temperature during extrusion must be monitored. Their variables will be different based on
the selection of the size, shape and material selection of the extrusion parts. Materials
include aluminum and magnesium alloys.
Figure 48: Metal forging Figure 49: Metal extrusion
Source: Company website Source: Wikimedia
Unibody: An unibody process starts with raw materials, i.e., aluminum, that is carved out
by CNC (computer numerical control) machines, and then programmed by its preferred
strength-to-weight ratio and the flexibility in the process. By using the unibody process, the
manufacturing process can be simplified, and the number of internal parts, i.e., bracing,
stiffening plates, can be reduced. As the device is made from a single piece of material
(metal or polycarbonate), it also makes the device more rigid and strong. Apple was the
first brand that widely adopted unibody process into its key product lines, including
MacBook (in 2008), iPad (in 2010), iPhone (in 2012), the fifth generation iPod Touch (in
2012), and Apple Watch (in 2014). According to Apple, by using the unibody process, it
reduces at least 50% of the component usage for a MacBook and reduces the number of
internal components from 30 to five for an iPhone.
Figure 50: Apple unibody MacBook Air Figure 51: Apple unibody iPad
11 November 2014
Increasing complexity of casing design: iPhone for example
As each material has its pros and cons and requires different manufacturing process,
multiple materials by multiple manufacturing processes become a more popular way
in modern smartphone design. For instance, HTC uses three materials (aluminum,
magnesium, and plastic) and three manufacturing processes (unibody, die casting, and
insert molding) in HTC One. Sony uses three materials (aluminum, plastic and glass) and
three manufacturing processes (unibody, injection, and stamping) in Xperia Z. Apple
remains innovative on iPhone casing design. In iPhone 5, Apple uses aluminum, glass and
plastic. In iPhone 6/ 6 Plus, Apple adds Titanium nitride stainless steel on top of aluminum
casing, and removes glass as top/bottom case.
Figure 52: Increasing complexity of casing design—major smartphone models
HTC One (5", 160g) Sony Xperia Z2 (5.2", 163g) iPhone 6 (4.7", 129g)
Financial barrier: Balance between capex and profits
Besides the technology barrier, the financial barrier for the casing sector is the capex-
intensity and a longer learning curve, which leads to limited output and therefore keeps
most of the profitability within the market leaders.
Relatively high capex intensity in the component sector
The average capex-to-sales ratio for Taiwan casing sector has been in the range of 7.5%-
10.2% from 2010 to 1H14. This ratio, compared to other downstream component sectors,
is relatively high (only next to the lens sector). However, on an absolute dollar basis,
Taiwan casing sector has spent NT$98 bn for capex in 2010-1H14 - the highest among all
component sectors. We expect the capex-to-sales ratio of the casing sector to increase in
the next few years, given the increasing complexity of casing design in portable devices.
Figure 53: Capex-to-sales ratio by sub-sector (2013) Figure 54: Capex-to-sales trend for the casing sector
0%
3%
6%
9%
12%
15%
18%
0
4,000
8,000
12,000
16,000
20,000
24,000
11 November 2014
Sustainability of profitability
However, this is not just a money racing game. Even suppliers are financially capable of
expanding capacity aggressively; the gross capacity does not fully translate into real
output. The increasing complexity of casing design leads to lower yield rates. Moreover,
there is a significant seasonality for consumer products, e.g., 2H demand tends to be
much stronger than that in 1H. Accordingly, the "required" capacity will have to be based
on the annualised demand of 2H. As a result, how to maintain profitability in the slow 1H
becomes a tough task for casing suppliers.
The Figures 55-56 below summarises Taiwan casing companies' revenue and operating
profits split between 1H and 2H (from 2008-2013). Revenue-wise, Catcher and Juteng
seem to have less seasonality (likely due to their more diversified customer base), while
FTC and Casetek seem to have more obvious seasonality (likely due to their relatively
higher exposure to Apple). The seasonality for operating profits is more obvious for the
casing sector, due to high capex intensity.
Figure 55: Revenue seasonality Figure 56: Operating profits seasonality
46% 54%
44%
56%
42%
58%
42%
58%
41%
59%
45%
55%
0%
10%
20%
30%
40%
50%
60%
70%
The big gets bigger
As the casing design normally requires a long and early supplier involvement process, and
the investments are relatively high-capex intensive, customers tend to stay with similar
"core" design for multi-generation products. This gives existing suppliers the early-mover
advantage, as the manufacturing know-how can be somewhat accumulated over time. As
a result, the big tends to become bigger over time. For instance, the combined operating
profits share of the Top-3 casing makers (Catcher, FTC, and Casetek) has increased from
69% in 2008 to 85% in 1H14. The number could be even bigger, as we believe Hon Hai
keeps a meaningful portion of casing profits within itself.
Figure 57: Top-3 makers' operating profits share going up Figure 58: Operating profit share for casing (1H14)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Catcher, 59%
FTC, 13%
Casetek, 17%
Eson, 2%
11 November 2014
Stock view We reiterate our OUTPERFORM rating on Catcher, with a NT$335 TP (based on 14x
FY15E EPS). Our positive view on Catcher is based on its strengthening position in the
premium casing sector (not just iPhone 6 order wins), which should lead to more order
opportunities in the future. Its valuation at 11.0x FY15E EPS, versus the Taiwan market
average P/E of 13.4x, looks undemanding for a technology leader in an upcycle.
We initiate coverage on Casetek with an OUTPERFORM rating and a TP of NT$225,
putting the stock at 12.5x FY15E EPS. We also expect Casetek to gain market share in
the premium casing sector. However, we argue the share gains will be at the expense of
Foxconn group, not from Catcher. Valuation-wise, we use a lower P/E multiple on Casetek
(versus Catcher), due to Casetek's higher concentration risks (for both customers and
products).
We reiterate our NEUTRAL rating on FTC, due to limited financial transparency, and on
our belief that Apple's EMS diversification strategy will lead to lower casing market share
for the Foxconn group. We fine-tune our estimates by 0-3% and TP to NT$75 (from
NT$71.43), putting the stock at 12.5x NTM EPS.
Figure 59: Taiwan Top-3 casing makers' summary view
Catcher FTC Casetek
Daily trading value (US$mn) 60 12 15
TP (NT$) 335 75 225
QFII holding (%) 54% 25% 76%
2014 revenue (NT$mn) 54,850 74,960 34,473
2015 revenue (NT$mn) 61,922 76,807 39,586
2014 GM (%) 46.1 18.6 27.9
2015 GM (%) 46.0 19.0 28.7
2014 OPM (%) 35.3 10.8 19.2
2015 OPM (%) 35.4 11.1 20.2
2014 EBITDA margin (%) 46.8 16.0 26.8
2015 EBITDA margin (%) 50.1 16.4 27.9
2014E EPS (NT$) 21.0 5.3 16.0
2015E EPS (NT$) 23.6 5.7 17.9
P/15E (x) 11.0 14.4 10.9
2014 CAPEX (NT$mn) 15,987 1,374 3,185
2015 CAPEX (NT$mn) 14,000 1,400 8,000
2014 R&D (NT$mn) 1,111 1,186 784
2014 R&D as % of revenue 2 1.6 2.3
2014 CCC (days) 136 106 63
2014 net cash (NT$mn) 16,564 27,819 6,340
2013 cash dividend (NT$) 5 1 9
2013 stock dividend (NT$) 0 0.5 0
2013 dividend payout ratio 27% 28% 50%
11 November 2014
Investment risks The risks to our NT$335 target price for Catcher include: (1) increasing customer
concentration risk, which could lead to higher volatility in earnings; (2) yield rates for new
The risks to our OUTPERFORM rating and NT$225 target price for Casetek include: (1)
customer concentration risk, which could lead to higher volatility in earnings; (2) yield rates
for new product cycle; (3) high capex being a risk to margins; (4) potential fund raising
plans that may pose risks to our EPS, and (5) end-market demand.
The risks to our target price of NT$75 for Foxconn Technology include: (1) high capex
being a risk to margins; (2) a potential profit-sharing scheme between Foxconn Tech and
Hon Hai would impact our EPS estimates; (3) potential fund raising plans that may pose
risks to our EPS, and (4) end-market demand.
11 November 2014
Not just an iPhone 6 story
Reiterate OUTPERFORM. We reiterate our OUTPERFORM rating on
Catcher, with a NT$335 TP (based on 14x FY15E EPS). Our positive view
on Catcher is based on its strengthening position in the premium casing
sector, which should lead to more order win opportunities in the future. We
also like Catcher's relatively more diversified customer base and product mix.
Higher share at new smartphone project. We believe Catcher's position
within its major US smartphone customer is strengthening, given its scale
advantage and commitment to a diversified portfolio of casing technologies.
As a result, we expect its market share for new smartphone project to
increase in 2015E. We also do NOT think Casetek's potential expansion into
the flagship smartphone supply chain is at the expense of Catcher.
A stable earnings growth stock. Our positive view on Catcher is not based
on one single year's earnings growth. Instead, we expect Catcher to deliver
relatively more stable earnings growth over 2013-2016E. We believe its
diversified customer mix and product mix should help Catcher mitigate the
cyclicality of the casing sector.
Valuation. Catcher is trading at 11.0x FY15E EPS, at a discount to Taiwan
market average P/E of 13.4x and FTC's 14.4x. We argue that its long-
standing valuation discount should be removed, given Apple's EMS
diversification strategy. Its superior profitability in an upcycle also makes its
valuation undemanding.
Price (LHS) Rebased Rel (RHS)
The price relative chart measures performance against the
TAIWAN SE WEIGHTED INDEX which closed at 9237.03 on
18/09/14
On 18/09/14 the spot exchange rate was NT$30.24/US$1
Performance over 1M 3M 12M Absolute (%) -6.8 -9.3 46.3 — Relative (%) -7.8 -8.0 36.4 —
Financial and valuation metrics
Year 12/13A 12/14E 12/15E 12/16E Revenue (NT$ mn) 43,245.6 54,849.7 61,922.1 68,845.2 EBITDA (NT$ mn) 19,140.9 25,685.4 31,027.3 36,846.4 EBIT (NT$ mn) 13,915.7 19,346.8 21,897.3 24,004.9 Net profit (NT$ mn) 13,801.2 16,115.9 18,170.6 19,532.5 EPS (CS adj.) (NT$) 18.38 20.97 23.64 25.42 Change from previous EPS (%) n.a. 0 0 0 Consensus EPS (NT$) n.a. 21.5 24.9 27.6 EPS growth (%) 26.7 14.1 12.7 7.5 P/E (x) 14.1 12.4 11.0 10.2 Dividend yield (%) 1.9 2.2 3.3 3.3 EV/EBITDA (x) 9.1 7.0 5.7 4.5 P/B (x) 2.6 2.4 2.1 1.9 ROE (%) 20.5 20.6 20.5 19.3 Net debt/equity (%) net cash net cash net cash net cash
Source: Company data, Thomson Reuters, Credit Suisse estimates.
Rating OUTPERFORM* Price (10 Nov 14, NT$) 259.00 Target price (NT$) 335.00¹ Upside/downside (%) 29.3 Mkt cap (NT$ mn) 197,121 (US$ 6,454) Enterprise value (NT$ mn) 180,557 Number of shares (mn) 761.08 Free float (%) 92.7 52-week price range 310.0 - 173.0 ADTO - 6M (US$ mn) 60.2
*Stock ratings are relative to the coverage universe in each
analyst's or each team's respective sector.
¹Target price is for 12 months.
Research Analysts
Pauline Chen
Catcher Technology 2474.TW / 2474 TT Price (10 Nov 14): NT$259.00, Rating:: OUTPERFORM, Target Price: NT$335.00, Analyst: Pauline Chen
Target price scenario
Scenario TP %Up/Dwn Assumptions
Upside 400.00 54.44 16x FY15 PE Central Case 335.00 29.34 14x FY15 PE Downside 300.00 15.83 12x FY15 PE
Key earnings drivers 12/13A 12/14E 12/15E 12/16E
Sales (NTmn) 43,246 54,850 61,922 68,845 GMs (%) 42.4 46.1 46.0 45.2 — — — — — — — — — — — —
Income statement (NT$ mn) 12/13A 12/14E 12/15E 12/16E
Sales revenue 43,246 54,850 61,922 68,845 Cost of goods sold 24,925 29,576 33,465 37,705 SG&A 3,562 4,816 5,331 5,798 Other operating exp./(inc.) (4,382) (5,228) (7,900) (11,504) EBITDA 19,141 25,685 31,027 36,846 Depreciation & amortisation 5,225 6,339 9,130 12,841 EBIT 13,916 19,347 21,897 24,005 Net interest expense/(inc.) (367.2) (644.2) (612.8) (710.4) Non-operating inc./(exp.) 3,190 1,577 742 465 Associates/JV 55.8 70.8 79.9 88.8 Recurring PBT 17,528 21,638 23,332 25,269 Exceptionals/extraordinaries — — — — Taxes 3,711 5,506 5,140 5,712 Profit after tax 13,817 16,132 18,193 19,557 Other after tax income — — — — Minority interests 15.9 16.3 22.0 24.1 Preferred dividends — — — — Reported net profit 13,801 16,116 18,171 19,532 Analyst adjustments — — — — Net profit (Credit Suisse) 13,801 16,116 18,171 19,532
Cash flow (NT$ mn) 12/13A 12/14E 12/15E 12/16E
EBIT 13,916 19,347 21,897 24,005 Net interest 367.2 644.2 612.8 710.4 Tax paid (3,711) (5,506) (5,140) (5,712) Working capital 218 (5,852) (4,000) (548) Other cash & non-cash items 8,455 7,970 9,930 13,371 Operating cash flow 19,245 16,602 23,300 31,826 Capex (9,629) (15,987) (14,000) (14,000) Free cash flow to the firm 9,615 615 9,300 17,826 Disposals of fixed assets — — — — Acquisitions (1,609) (2,895) (76) (84) Divestments — — — — Associate investments — — — — Other investment/(outflows) 329 3,815 (300) (300) Investing cash flow (10,909) (15,068) (14,376) (14,384) Equity raised (1,331) (6,777) (6,532) (6,532) Dividends paid — — — — Net borrowings (10,969) (5,329) (861) (2,697) Other financing cash flow (55.8) (76.5) (102.1) (113.5) Financing cash flow (12,356) (12,182) (7,496) (9,342) Total cash flow (4,020) (10,648) 1,429 8,100 Adjustments — — — — Net change in cash (4,020) (10,648) 1,429 8,100
Balance sheet (NT$ mn) 12/13A 12/14E 12/15E 12/16E
Cash & cash equivalents 42,643 31,996 33,424 41,524 Current receivables 17,505 25,270 29,276 29,827 Inventories 3,873 5,452 5,831 6,018 Other current assets 1,325 1,960 1,960 1,960 Current assets 65,347 64,677 70,491 79,328 Property, plant & equip. 34,903 40,874 45,820 47,063 Investments 1,991 1,984 2,386 2,800 Intangibles — — — — Other non-current assets 3,139 5,967 5,967 5,967 Total assets 105,379 113,502 124,665 135,158 Accounts payable 4,782 5,538 5,924 6,113 Short-term debt 20,648 13,450 12,699 10,348 Current provisions 6,144 9,513 9,513 9,513 Other current liabilities — — — — Current liabilities 31,575 28,501 28,136 25,975 Long-term debt — 1,982 1,871 1,525 Non-current provisions 104.1 — — — Other non-current liab. 20.2 — — — Total liabilities 31,699 30,483 30,007 27,500 Shareholders' equity 73,509 82,844 94,483 107,483 Minority interests 170.6 174.8 174.8 174.8 Total liabilities & equity 105,379 113,502 124,665 135,158
Per share data 12/13A 12/14E 12/15E 12/16E
Shares (wtd avg.) (mn) 750.7 768.5 768.5 768.5 EPS (Credit Suisse) (NT$)
18.4 21.0 23.6 25.4 DPS (NT$) 5.00 5.70 8.50 8.50 BVPS (NT$) 98 108 123 140 Operating CFPS (NT$) 25.6 21.6 30.3 41.4
Key ratios and valuation
12/13A 12/14E 12/15E 12/16E
Growth(%) Sales revenue 16.8 26.8 12.9 11.2 EBIT 14.5 39.0 13.2 9.6 Net profit 26.7 16.8 12.7 7.5 EPS 26.7 14.1 12.7 7.5 Margins (%)
EBITDA 44.3 46.8 50.1 53.5 EBIT 32.2 35.3 35.4 34.9 Pre-tax profit 40.5 39.5 37.7 36.7 Net profit 31.9 29.4 29.3 28.4 Valuation metrics (x) P/E 14.1 12.4 11.0 10.2 P/B 2.64 2.40 2.11 1.85 Dividend yield (%) 1.93 2.20 3.28 3.28 P/CF 10.1 12.0 8.5 6.3 EV/sales 4.05 3.29 2.88 2.43 EV/EBITDA 9.1 7.0 5.7 4.5 EV/EBIT 12.6 9.3 8.1 7.0 ROE analysis (%) ROE 20.5 20.6 20.5 19.3 ROIC 22.4 24.4 24.0 24.2 Asset turnover (x) 0.41 0.48 0.50 0.51 Interest burden (x) 1.26 1.12 1.07 1.05 Tax burden (x) 0.79 0.75 0.78 0.77 Financial leverage (x) 1.43 1.37 1.32 1.26 Credit ratios Net debt/equity (%) (29.9) (20.0) (19.9) (27.5) Net debt/EBITDA (x) (1.15) (0.64) (0.61) (0.80) Interest cover (x) (37.9) (30.0) (35.7) (33.8)
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12MF P/E multiple
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Not just an iPhone 6 story Where we differ from the street
(1) We believe the softer September and October revenue was mainly hurt by initially
lower yield rate for new flagship smartphone model, as the customer asked Catcher to
add one more colour given strong demand. We believe this suggests that Catcher's
position within that customer is strengthening.
(2) We expect Catcher to expand its market share in its major US smartphone customer,
given its scale advantage and commitment to a diversified portfolio of casing
technologies. As a result, we do NOT think Casetek's potential expansion into the
flagship smartphone supply chain is at the expense of Catcher.
(3) As smartphone casing design is more complicated, we expect Catcher to dedicate
most of its resources to new smartphone projects. This could lead to lower share at
other projects, i.e., tablets and NB. Nevertheless, we believe its new smartphone
project should be sufficient to provide Catcher double-digit YoY revenue growth, given
its much bigger volume.
(4) Our positive view on Catcher is not based on single-year earnings growth. Instead, we
expect relatively more stable earnings growth for Catcher, given its diversified
customer mix and product mix, which should also mitigate the cyclicality of the casing
sector.
A re-rating story
Catcher is trading at 11.0x FY15E EPS, at a discount to Taiwan market of 13.4x. Its
valuation had been at a discount to FTC since 2010, because the lack of parent (EMS)
company support puts Catcher in a relatively weak position to secure major allocation
when the technology is relatively mature. However, we argue that the long-standing
valuation discount should be removed, given Apple's EMS diversification strategy. As a
result, our TP is based on 14x P/E, or the middle of its historical trading range of 5-25x.
We believe this is reasonable, given its superior profitability in an upcycle sector.
Figure 60: Catcher—forward P/E band Figure 61: P/E gap between Catcher and FTC
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11 November 2014
Figure 62: Catcher—QFII holding versus share price Figure 63: Catcher—share price versus consensus
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(NT$)(NT$) 2014E EPS (LHS) 2015E EPS (LHS) share price (RHS)
Source: Company data, TEJ Source: Company data, Bloomberg estimates
Risks
Risks to our NT$335 target price for Catcher include: (1) increasing customer
concentration risk, which could lead to higher volatility in earnings; (2) yield rates for new
11 November 2014
Initiate with OUTPERFORM. We initiate coverage on Casetek with an
OUTPERFORM rating and a TP of NT$225, putting the stock at 12.5x
FY15E EPS. We expect Casetek to benefit from Apple's commitment to its
premium casing design (metal unibody) and from Apple's EMS diversification
strategy. This should lead to market share gains and improving profitability,
due to better production scale.
But the share gains are likely a 2H15 story at the earliest. Against
consensus expectations, we believe the market share gains in 2015E will be
more likely from MacBook and iPads, instead of iPhones. This is because (1)
iPhone casing design involves multiple materials and multiple manufacturing
process, which requires a longer learning curve, (2) Casetek has been
underinvested in 2013-2014, which suggests new order win will be a 2H15 or
2016 story, and (3) Casetek's "proposed" capex of US$505 mn will be for
land, factories and equipment, and for multiple new smartphone customers.
Potential fund raising or lower dividend payout. Casetek's board of
directors proposed a sizable capex plan for ~US$505 mn (or NT$15 bn) for
land, equipment and factories, versus its 2013 capex of NT$940 mn and its
net cash position of NT$11 bn as of 2Q14. This suggests that Casetek will
need to either seek external funding (debt more likely) or lower its cash
dividend payout ratio (50% in 2013).
Valuation. Our TP on Casetek puts a 10% valuation discount to Catcher,
given Casetek's relatively higher concentration risks in terms of customer
base and product mix. Nevertheless, we think its valuation at 10.9x FY15E
EPS, versus the Taiwan market average P/E of 13.4x, remains attractive for
a market share gain story in a casing sector upcycle. Risks to our rating and
target price include: (1) customer concentration risks; (2) yield rates for new
product cycle; (3) high capex being a risk to margins; (4) potential fund
raising plans that may pose risks to our EPS, and (5) end-market demand.
Share price performance
18/09/14
Performance Over 1M 3M 12M Absolute (%) 3.2 10.8 28.3 — Relative (%) 2.2 12.0 18.3 —
Year 12/13A 12/14E 12/15E 12/16E Revenue (NT$ mn) 36,542.6 34,472.5 39,586.2 44,317.9 EBITDA (NT$ mn) 11,104.7 9,222.9 11,052.9 12,886.9 EBIT (NT$ mn) 8,277.0 6,609.5 7,987.4 8,913.6 Net profit (NT$ mn) 6,122.8 5,441.2 6,074.0 6,741.5 EPS (CS adj.) (NT$) 18.02 16.02 17.88 19.84 Change from previous EPS (%) n.a. Consensus EPS (NT$) n.a. 16.2 18.4 19.5 EPS growth (%) 73.9 -11.1 11.6 11.0 P/E (x) 10.8 12.2 10.9 9.8 Dividend yield (%) 4.6 4.1 4.1 4.1 EV/EBITDA (x) 5.3 6.5 5.7 4.9 P/B (x) 2.6 2.7 2.4 2.1 ROE (%) 29.8 22.0 23.2 22.5 Net debt/equity (%) net cash net cash net cash net cash
Rating OUTPERFORM* Price (10 Nov 14, NT$) 195.00 Target price (NT$) 225.00¹ Upside/downside (%) 15.4 Mkt cap (NT$ mn) 66,243 (US$ 2,169) Enterprise value (NT$ mn) 59,903 Number of shares (mn) 339.71 Free float (%) 17.2 52-week price range 202.0 - 148.0 ADTO - 6M (US$ mn) 15.4
Research Analysts
Pauline Chen
Casetek Holdings Limited 5264.TW / 5264 TT Price (10 Nov 14): NT$195.00, Rating:: OUTPERFORM, Target Price: NT$225.00, Analyst: Pauline Chen
Scenario TP %Up/Dwn Assumptions
Upside 270.00 38.46 15.0x PE Central Case 225.00 15.38 12.5x PE Downside 180.00 (7.69) 10.0x PE
Sales (NTmn) 36,543 34,473 39,586 44,318 GMs (%) 30.8 27.9 28.7 28.6 — — — — — — — — — — — —
Sales revenue 36,543 34,473 39,586 44,318 Cost of goods sold 25,272 24,867 28,221 31,628 SG&A 2,247 2,212 2,494 2,788 Other operating exp./(inc.) (2,081) (1,830) (2,182) (2,986) EBITDA 11,105 9,223 11,053 12,887 Depreciation & amortisation 2,828 2,613 3,065 3,973 EBIT 8,277 6,609 7,987 8,914 Net interest expense/(inc.) 109.0 66.4 73.9 74.5 Non-operating inc./(exp.) (39.8) 260.9 185.2 149.6 Associates/JV — — — — Recurring PBT 8,128 6,804 8,099 8,989 Exceptionals/extraordinaries — — — — Taxes 2,005 1,363 2,025 2,247 Profit after tax 6,123 5,441 6,074 6,741 Other after tax income — — — — Minority interests — — — — Preferred dividends — — — — Reported net profit 6,123 5,441 6,074 6,741 Analyst adjustments — — — — Net profit (Credit Suisse) 6,123 5,441 6,074 6,741
EBIT 8,277 6,609 7,987 8,914 Net interest (46.7) 177.7 111.3 75.0 Tax paid (2,005) (1,363) (2,025) (2,247) Working capital 2,800 1,236 (926) (339) Other cash & non-cash items 2,726 2,630 3,065 3,973 Operating cash flow 11,751 9,291 8,214 10,376 Capex (940) (3,185) (8,000) (8,000) Free cash flow to the firm 10,811 6,105 214 2,376 Disposals of fixed assets — — — — Acquisitions (358.2) (108.1) (126.4) (141.5) Divestments — — — — Associate investments — — — — Other investment/(outflows) (805.9) 5.5 (300.0) (300.0) Investing cash flow (2,104) (3,288) (8,426) (8,442) Equity raised 3,101 (3,191) — — Dividends paid (340) (2,718) (2,718) (2,718) Net borrowings (5,670) (954) 262 (415) Other financing cash flow — — — — Financing cash flow (2,908) (6,862) (2,456) (3,132) Total cash flow 6,738 (859) (2,668) (1,198) Adjustments — — — — Net change in cash 6,738 (859) (2,668) (1,198)
Cash & cash equivalents 10,793 9,934 7,265 6,067 Current receivables 8,898 8,258 9,322 9,757 Inventories 2,310 2,176 2,461 2,659 Other current assets 2,220 940 940 940 Current assets 24,220 21,308 19,989 19,423 Property, plant & equip. 15,062 15,588 20,649 24,818 Investments — 150.0 450.0 750.0 Intangibles — — — — Other non-current assets 2,806 2,804 2,804 2,804 Total assets 42,088 39,850 43,893 47,795 Accounts payable 3,814 3,229 3,653 3,946 Short-term debt 1,252 1,832 1,965 1,754 Current provisions 8,721 8,488 8,488 8,488 Other current liabilities — — — — Current liabilities 13,787 13,549 14,107 14,188 Long-term debt 2,027 1,762 1,891 1,688 Non-current provisions 866.4 — — — Other non-current liab. 402.5 — — — Total liabilities 17,083 15,311 15,997 15,876 Shareholders' equity 25,006 24,539 27,895 31,919 Minority interests — — — — Total liabilities & equity 42,088 39,850 43,893 47,795
Shares (wtd avg.) (mn) 339.7 339.7 339.7 339.7 EPS (Credit Suisse) (NT$)
18.0 16.0 17.9 19.8 DPS (NT$) 9.00 8.00 8.00 8.00 BVPS (NT$) 73.6 72.2 82.1 94.0 Operating CFPS (NT$) 34.6 27.3 24.2 30.5
12/13A 12/14E 12/15E 12/16E
Growth(%) Sales revenue 10.2 (5.7) 14.8 12.0 EBIT 75.3 (20.1) 20.8 11.6 Net profit 87.2 (11.1) 11.6 11.0 EPS 73.9 (11.1) 11.6 11.0 Margins (%)
EBITDA 30.4 26.8 27.9 29.1 EBIT 22.7 19.2 20.2 20.1 Pre-tax profit 22.2 19.7 20.5 20.3 Net profit 16.8 15.8 15.3 15.2 Valuation metrics (x) P/E 10.8 12.2 10.9 9.8 P/B 2.65 2.70 2.37 2.08 Dividend yield (%) 4.62 4.10 4.10 4.10 P/CF 5.64 7.13 8.06 6.38 EV/sales 1.61 1.74 1.59 1.44 EV/EBITDA 5.29 6.50 5.68 4.94 EV/EBIT 7.1 9.1 7.9 7.1 ROE analysis (%) ROE 29.8 22.0 23.2 22.5 ROIC 31.8 29.6 28.1 24.9 Asset turnover (x) 0.87 0.87 0.90 0.93 Interest burden (x) 0.98 1.03 1.01 1.01 Tax burden (x) 0.75 0.80 0.75 0.75 Financial leverage (x) 1.68 1.62 1.57 1.50 Credit ratios Net debt/equity (%) (30.0) (25.8) (12.2) (8.2) Net debt/EBITDA (x) (0.68) (0.69) (0.31) (0.20) Interest cover (x) 76 99 108 120
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12MF P/B multiple
Riding on Apple’s growth Where we differ from the street
(1) 2015E share gains at Apple, likely from MacBook and iPads, instead of iPhones.
We expect Casetek to benefit from Apple's commitment to its premium casing design
(metal unibody) and from Apple's EMS diversification strategy. As a result, we expect
Casetek to gain market share within Apple. The bigger production scale should help
Casetek improve its operational profitability. However, against consensus
expectations, we believe the market share gains in 2015E will be more likely from
MacBook and iPads, instead of iPhones. This is because (1) iPhone casing design
involves multiple materials and multiple manufacturing process, which makes it more
difficult to make and thus requires a longer learning curve, (2) Casetek has been
underinvested in 2013-2014 and it will take at least 6-12 months to get new capacity
fully ready, and (3) Casetek's "proposed" capex of US$505 mn will be for land,
factories and equipment, and for multiple new smartphone customers.
(2) Underinvestment in 2013-2014 suggests new order win will be 2H15 or 2016
story. As the casing design requires a long early supplier involvement process,
suppliers will need to expand the capacity "ahead" of any sizable new order wins.
However, in 2010 to 1H14, Casetek's aggregate capex was only NT$15.9 bn, versus
Catcher's NT$36 bn. On 7 November 2014, Casetek's board of directors proposed a
capex of ~US$505 mn (or NT$15 bn) for land, factories and equipment. Assuming
100% of the proposed capex is for equipment, it could increase its CNC scale by
5,000 sets, based on our estimates, still well below Catcher or Foxconn group's over
20,000 sets each. The lead time also suggests that revenue contribution from the new
capex will be a 3Q15 story at the earliest.
(3) Potential aggressive capex could come along with fund raising or lower
dividend payout. Given the proposed capex (of US$505 mn) is bigger than its net
cash position (NT$11 bn as of 2Q14), Casetek will need to either seek external
funding or lower its cash dividend payout ratio (it paid 50% of its 2013 distributable
earnings as dividend), in our view. At the earnings call, Casetek's management said
that debt financing will be more likely, rather than equity financing. Management also
said that it will keep its dividend payout ratio, if there is no reinvestment opportunity.
Figure 64: Casetek’s earnings estimates
2014E 2015E 2016E
Sales 34,473 34,108 1 39,586 39,455 0 44,318 41,734 6
Gross profits 9,605 9,605 0 11,365 11,442 -1 12,690 11,748 8
Gross margins (%) 27.9 28.2 28.7 29.0 28.6 28.1
Operating profits 6,609 6,738 -2 7,987 8,236 -3 8,914 8,639 3
Operating margins (%) 19.2 19.8 20.2 20.9 20.1 20.7
Pre-tax income 6,804 6,825 0 8,099 8,251 -2 8,989 8,663 4
Pre-tax margins (%) 19.7 20.0 20.5 20.9 20.3 20.8
Net income 5,441 5,429 0 6,074 6,272 -3 6,741 6,555 3
EPS (NT$) 16.0 16.0 0 17.9 18.5 -3 19.8 19.3 3
Source: Company data, Credit Suisse estimates, Bloomberg estimates
Initiate coverage with OUTPERFORM
We initiate coverage on Casetek with an OUTPERFORM rating and a TP of NT$225,
putting the stock at 12.5x FY15E EPS. Our TP on Casetek puts a 10% valuation discount
against Catcher, given Casetek's relatively higher concentration risks in terms of customer
base and product mix. Nevertheless, we think its valuation at 10.9x FY15E EPS, versus
the Taiwan market average P/E of 13.4x, remains attractive for a market share gains story
in a casing sector upcycle.
11 November 2014
Figure 65: Casetek—forward P/E band Figure 66: Casetek—rolling P/B band
7.0
8.0
9.0
10.0
11.0
12.0
Risks
Risks to our rating and target price for Casetek include: (1) customer concentration risk,
which could lead to higher volatility in earnings; (2) yield rates for new product cycle; (3)
high capex being a risk to margins; (4) potential fund raising plans that may pose risks to
our EPS, and (5) end-market demand.
(1) Customer concentration risk
Casetek is one of the major tablet and NB casing suppliers to a US-based top-tier brand.
The high customer concentration would lead to meaningful earnings impact in the slow 1H.
(2) Yield rates for new product cycle
The increasing complexity of casing design makes the new products more difficult to make.
Thus, the lower yield rates for new products could hurt its margins.
(3) High capex being a risk to margins
Casetek's board of directors approved its capex budget of ~US$505 mn (or NT$15 bn) on
7 November 2014. This is a sizable capex plan (versus the 2013 capex of NT$940 mn),
and therefore the higher depreciation cost in the following years would be a risk to its
margins.
(4) Potential fund raising plans that may pose risks to our EPS
As the planned capex is bigger than its net cash position (NT$11 bn as of 2Q14), Casetek
will need to either seek external funding or lower its cash dividend payout ratio. The
potential fund raising plans in the future would pose risk to our EPS estimates.
(5) End-market demand
Weaker-than-expected end-demand for NB and tablets could have a negative impact on
its revenue and earnings, as we estimate ~80% of its revenue would be from those two
products in 2014.
Company background
Casetek was founded in August 2010 in the British Cayman Islands. However, its history
of making light metal casing can be traced back to 2004, through its 100%-owned
subsidiary, Ri-Ten. The company is the third-largest metal casing supplier in Taiwan, next
to Foxconn group and Catcher. Headquartered in Taipei, Casetek's major production sites
are located in Shanghai (China) and Suzhou (China). The company was listed on the
Taiwan Stock Exchange on 25 January 2013.
11 November 2014
Source: Company data
Business segments
Casetek's major product mix includes tablet casings (~70% of 2014E revenues), NB
casings, (10% of 2014E revenues) and others (~20% of 2014E revenues). Casetek is one
of the major tablet and NB casing suppliers to a US-based top-tier brand. To mitigate its
high customer concentration risk, the company has expanded its product application to
power pack and wearable devices in 1H14.
Figure 68: Casetek—revenue mix (2014E) Figure 69: Casetek—top management profile
Name Position Major Experience
(4938.TW), Chairman at Kinsus
(Shanghai) and AVY Precision
Li Wei-Pang VP/Head of RD Senior manager at Pegatron (4938.TW)
Source: Company data, Credit Suisse estimates Source: Company data
Shareholding structure
According to data released by the company, top 10 shareholders of Casetek owned 72.6%
of the outstanding shares as of Sept 2014. Pegatron is the largest shareholder, with 60.7%
holdings (through a wholly owned investment company, Asuspower). Its CEO Mr. Chuang
Yu-Chih owns 0.3% stake.
Declared date Shares
Source: Company data
11 November 2014
Figure 71: Casetek—share price versus consensus Figure 72: Casetek—top 10 shareholders
100
125
150
175
200
15
16
17
18
19
20
21
22
(NT$)(NT$) 2014E EPS (LHS) 2015E EPS (LHS) share price (RHS)
Share holder name Holding
2 Cathay Life Insurance Co., Ltd. 3.6%
3 Shin Kong Life Insurance Co., Ltd. 2.4%
4 Mercuries Life Insurance Co., Ltd. 1.9%
5 HSBC & Kenstand Investment Limited Inves 1.4%
6 AVY Precision Technology Inc. 0.9%
7 Yuanta Duo Fu Equity Fund 0.5%
8 Taiwan Life Insurance Co., Ltd. 0.4%
9 New Labor Pension Fund 0.4%
10 Chuang Yu Chih (CEO) 0.3%
Top 10 72.6% Source: Company data, Bloomberg estimates Source: Company data
Figure 73: Casetek—key subsidiaries
Source: Company data, Credit Suisse
11 November 2014
strategy
Upside to be capped by Apple's EMS diversification strategy. Being the
major metal casing supplier of the Apple supply chain, we believe FTC
should also benefit from Apple's new product cycle. However, we believe
Apple's EMS diversification strategy should cap the earnings upside of the
Foxconn group.
Underinvestment in 2010-1H14. As the casing design requires a long early
supplier involvement process, suppliers will need to expand the capacity
"ahead" of any sizable new order wins. However, it appears that FTC has
underinvested during 2010 to 1H14, with aggregate capex only at NT$11.6
bn, versus Catcher's NT$36 bn and Casetek's NT$15.9 bn. The
underinvestment, in theory, should cap FTC's growth opportunity, unless
FTC has superior operational efficiency (by using limited numbers of CNC
machines to make more complicated casing design with a bigger volume).
Operating performance not supportive. However, the operating
performance does not suggest that Catcher has inferior operational
efficiency, compared to FTC. For instance, in 1H14, FTC's revenue
(including game console assembly, thermal module and light metal casing)
was 4% higher than Catcher's (a pure light metal casing supplier), while its
operating profits were only 22% of Catcher's.
Maintain NEUTRAL. FTC is trading at 14.4x FY15E EPS, at a premium to
Taiwan market of 13.4x. Its valuation has been at a premium to Catcher since
2010, because its parent (EMS) company support puts FTC in a relatively better
position to secure major allocation. However, we believe the lack of financial
transparency and Apple's EMS diversification strategy could cap FTC's valuation.
We fine-tune our estimates by 0-3% and TP to NT$75 (from NT$71.43), putting
the stock at 12.5x NTM EPS. We stay sideways on the stock.
Share price performance
Price (LHS) Rebased Rel (RHS)
10/11/14
Performance over 1M 3M 12M Absolute (%) 7.1 18.8 19.3 — Relative (%) 6.1 20.0 9.3 —
Year 12/13A 12/14E 12/15E 12/16E Revenue (NT$ mn) 94,598.1 74,960.4 76,807.0 81,381.6 EBITDA (NT$ mn) 11,214.8 11,979.6 12,575.6 13,100.9 EBIT (NT$ mn) 6,974.4 8,067.0 8,528.6 8,913.6 Net profit (NT$ mn) 7,027.8 7,266.1 7,840.8 8,426.3 EPS (CS adj.) (NT$) 5.12 5.28 5.70 6.12 Change from previous EPS (%) n.a. -0.1 -3.0 -2.7 Consensus EPS (NT$) n.a. 4.88 5.44 5.50 EPS growth (%) -16.6 3.0 7.9 7.5 P/E (x) 16.0 15.5 14.4 13.4 Dividend yield (%) 1.2 1.8 1.9 2.1 EV/EBITDA (x) 7.1 7.1 5.8 5.1 P/B (x) 1.6 1.5 1.4 1.3 ROE (%) 10.8 10.1 10.1 10.0 Net debt/equity (%) net cash net cash net cash net cash
Rating NEUTRAL* Price (10 Nov 14, NT$) 81.90 Target price (NT$) (from 71.43) 75.00¹ Upside/downside (%) -8.4 Mkt cap (NT$ mn) 112,352 (US$ 3,678) Enterprise value (NT$ mn) 84,533 Number of shares (mn) 1,371.81 Free float (%) 58.1 52-week price range 81.9 - 61.0 ADTO - 6M (US$ mn) 12.2
Research Analysts
Pauline Chen
Foxconn Technology Corp 2354.TW / 2354 TT Price (10 Nov 14): NT$81.90, Rating:: NEUTRAL, Target Price: NT$75.00, Analyst: Pauline Chen
Sales (NTmn) 94,598 74,960 76,807 81,382 GMs (%) 12.7 18.6 19.0 19.0 — — — — — — — — — — — —
Sales revenue 94,598 74,960 76,807 81,382 Cost of goods sold 82,550 61,016 62,216 65,956 SG&A 3,816 4,692 4,676 4,896 Other operating exp./(inc.) (2,983) (2,727) (2,661) (2,571) EBITDA 11,215 11,980 12,576 13,101 Depreciation & amortisation 4,240 3,913 4,047 4,187 EBIT 6,974 8,067 8,529 8,914 Net interest expense/(inc.) (214.2) (663.2) (670.5) (806.4) Non-operating inc./(exp.) 974.5 (190.6) 142.0 319.7 Associates/JV (2.6) (60.5) (62.0) (65.7) Recurring PBT 8,160 8,479 9,279 9,974 Exceptionals/extraordinaries — — — — Taxes 1,166 1,228 1,438 1,548 Profit after tax 6,995 7,251 7,841 8,426 Other after tax income 16.4 — — — Minority interests (16.5) (15.0) — — Preferred dividends — — — — Reported net profit 7,028 7,266 7,841 8,426 Analyst adjustments — — — — Net profit (Credit Suisse) 7,028 7,266 7,841 8,426
EBIT 6,974 8,067 8,529 8,914 Net interest 214.2 663.2 670.5 806.4 Tax paid (1,166) (1,228) (1,438) (1,548) Working capital (3,625) (12,338) 5,679 (1,688) Other cash & non-cash items 5,432 3,737 4,127 4,441 Operating cash flow 7,830 (1,098) 17,567 10,925 Capex (1,711) (1,374) (1,400) (1,600) Free cash flow to the firm 6,119 (2,472) 16,167 9,325 Disposals of fixed assets — — — — Acquisitions (1,627) (54) (52) (55) Divestments — — — — Associate investments — — — — Other investment/(outflows) (225) (476) (2,317) (1,664) Investing cash flow (3,563) (1,904) (3,769) (3,319) Equity raised 1,066 (1,550) (2,022) (2,182) Dividends paid — — — — Net borrowings 1,170 (1,043) — — Other financing cash flow — — — — Financing cash flow 2,235 (2,593) (2,022) (2,182) Total cash flow 6,502 (5,595) 11,776 5,424 Adjustments — — — — Net change in cash 6,502 (5,595) 11,776 5,424
Cash & cash equivalents 39,975 34,380 46,157 51,580 Current receivables 20,797 39,388 31,274 33,850 Inventories 2,135 4,657 3,814 4,121 Other current assets 8,462 7,908 7,908 7,908 Current assets 71,368 86,333 89,153 97,460 Property, plant & equip. 16,806 14,302 14,037 12,502 Investments 4,346 4,778 4,764 5,432 Intangibles — — — — Other non-current assets 2,719 2,722 2,722 2,722 Total assets 95,240 108,136 110,677 118,116 Accounts payable 9,823 18,112 14,835 16,029 Short-term debt 6,797 6,561 6,561 6,561 Current provisions 8,545 8,478 8,478 8,478 Other current liabilities — — — — Current liabilities 25,165 33,152 29,874 31,069 Long-term debt — — — — Non-current provisions 429.4 — — — Other non-current liab. 377.8 — — — Total liabilities 25,972 33,152 29,874 31,069 Shareholders' equity 69,153 74,984 80,796 87,014 Minority interests 115.1 97.8 97.8 97.8 Total liabilities & equity 95,240 108,136 110,677 118,116
Shares (wtd avg.) (mn) 1,372 1,377 1,377 1,377 EPS (Credit Suisse) (NT$)
5.12 5.28 5.70 6.12 DPS (NT$) 1.00 1.47 1.58 1.70 BVPS (NT$) 50.4 54.5 58.7 63.2 Operating CFPS (NT$) 5.7 (0.8) 12.8 7.9
12/13A 12/14E 12/15E 12/16E
Growth(%) Sales revenue (29.2) (20.8) 2.5 6.0 EBIT (23.5) 15.7 5.7 4.5 Net profit (16.1) 3.4 7.9 7.5 EPS (16.6) 3.0 7.9 7.5 Margins (%)
EBITDA 11.9 16.0 16.4 16.1 EBIT 7.4 10.8 11.1 11.0 Pre-tax profit 8.6 11.3 12.1 12.3 Net profit 7.4 9.7 10.2 10.4 Valuation metrics (x) P/E 16.0 15.5 14.4 13.4 P/B 1.62 1.50 1.40 1.30 Dividend yield (%) 1.22 1.79 1.94 2.08 P/CF 14 (103) 6 10 EV/sales 0.84 1.13 0.95 0.83 EV/EBITDA 7.06 7.06 5.79 5.14 EV/EBIT 11.4 10.5 8.5 7.6 ROE analysis (%) ROE 10.8 10.1 10.1 10.0 ROIC 17.1 16.6 16.3 18.1 Asset turnover (x) 0.99 0.69 0.69 0.69 Interest burden (x) 1.17 1.05 1.09 1.12 Tax burden (x) 0.86 0.86 0.84 0.84 Financial leverage (x) 1.37 1.44 1.37 1.36 Credit ratios Net debt/equity (%) (47.9) (37.1) (49.0) (51.7) Net debt/EBITDA (x) (2.96) (2.32) (3.15) (3.44) Interest cover (x) (32.6) (12.2) (12.7) (11.1)
0
5
10
15
20
25
12MF P/E multiple
12MF P/B multiple
Upside capped by Apple's EMS diversification strategy Where we differ from the street
Being the major metal casing supplier of the Apple supply chain, we believe FTC should
also benefit from Apple's new product cycle. However, we believe Apple's EMS
diversification strategy should cap the earnings upside of the Foxconn group. This is
evidenced by:
(1) Capex: As the casing design requires a long early supplier involvement process,
suppliers will need to expand the capacity "ahead" of any sizable new order wins.
However, from 2010 to 1H14, Catcher has been the only casing maker with an
aggressive capex plan (aggregate capex reached NT$36 bn), versus FTC's NT$11.6
bn, and Casetek's NT$15.9 bn. The underinvestment, in theory, should cap FTC's
growth opportunity, unless FTC has superior operational efficiency (by using limited
numbers of CNC machines to make more complicated casing design with a bigger
volume).
(2) Operating performance: However, the operating performance does not suggest that
Catcher has inferior operational efficiency, compared to FTC. For instance, in 1H14,
FTC's revenue (including game console assembly, thermal module and light metal
casing) was 4% bigger than Catcher (a pure light metal casing supplier), while its
operating profits were only 22% of Catcher's.
(3) We believe FTC's strong September revenue (up 45% MoM/down 12% YoY) was
driven by both light metal casing (iPhone 6 and iPad) and game consoles assembly.
We note that Macronix also reported 47% MoM revenue growth in September.
Figure 74: 1H14 performance comparison Figure 75: Capex comparison
0%
20%
40%
60%
80%
100%
120%
Catcher FTC Casetek(NT$mn)
Financial transparency could cap its valuation
FTC is trading at 14.4x FY15E EPS, at a premium to Taiwan market of 13.4x. Its valuation
has been at a premium to Catcher since 2010, because its parent (EMS) company support
puts FTC in a relatively better position to secure major allocation. However, we believe the
lack of financial transparency and Apple's EMS diversification strategy could cap FTC's
valuation. We fine-tune our estimates by 0-3% and TP to NT$75 (from NT$71.43), putting
the stock at 12.5x NTM EPS. We stay sideways on the stock.
11 November 2014
Figure 76: FTC—forward P/E band Figure 77: FTC—QFII holding versus share price
0
5
10
15
20
25
30
35
Source: Company data, Credit Suisse estimates Source: Company data, TEJ
Risks
The risks to our target price of NT$75 for Foxconn Technology include: (1) high capex
being a risk to margins; (2) a potential profit-sharing scheme between Foxconn Tech and
Hon Hai would impact our EPS estimates; (3) potential fund raising plans that may pose
risks to our EPS, and (4) end-market demand.
11 November 2014
AAC Technologies Holdings Inc (2018.HK, HK$44.0) Apple Inc (AAPL.OQ, $108.94) BYD Electronic International Co Ltd. (0285.HK, HK$9.27) BlackBerry (BBRY.OQ, $11.06) Casetek Holdings Limited (5264.TW, NT$195.0, OUTPERFORM, TP NT$225.0) Catcher Technology (2474.TW, NT$259.0, OUTPERFORM, TP NT$335.0) Coolpad Group Limited (2369.HK, HK$1.71) Delta Electronics (2308.TW, NT$175.0) Foxconn Technology Corp (2354.TW, NT$81.9, NEUTRAL, TP NT$75.0) HTC Corp (2498.TW, NT$136.0) Hon Hai Precision (2317.TW, NT$98.3) Ju Teng Intl (3336.HK, HK$4.24) KH Vatec (060720.KQ, W34,100) LG Electronics Inc (066570.KS, W64,800) Largan Precision (3008.TW, NT$2115.0) Lenovo Group Ltd (0992.HK, HK$10.52) Macronix Intl (2337.TW, NT$6.77) Microsoft Corporation (MSFT.OQ, $48.84) Pegatron (4938.TW, NT$56.7) Samsung Electronics (005930.KS, W1,268,000) Sony (6758.T, ¥2,344) Sunny Optical Technology Group Co., Limited (2382.HK, HK$13.62) Tongda Group (0698.HK, HK$1.06) Xiaomi (Unlisted) ZTE Corporation (0763.HK, HK$18.76)
Disclosure Appendix
Important Global Disclosures
I, Pauline Chen, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for Catcher Technology (2474.TW)
2474.TW Closing Price Target Price
Date (NT$) (NT$) Rating
29-Nov-11 144.00 178.00 O
O U T PERFO RM
U N D ERPERFO RM
N EU T RA L
11 November 2014
3-Year Price and Rating History for Foxconn Technology Corp (2354.TW)
2354.TW Closing Price Target Price
Date (NT$) (NT$) Rating
21-Feb-12 110.14 133.89 O *
O U T PERFO RM
N EU T RA L
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows:
Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.
Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.
Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.
*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the re levant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10- 15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s t otal return relative to the average total return of the relevant country or regional benchmark.
Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:
Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.
Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.
Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.
*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Outperform/Buy* 46% (54% banking clients)
Neutral/Hold* 38% (51% banking clients)
Underperform/Sell* 13% (44% banking clients)
Restricted 3%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.
11 November 2014
Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.
Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and- analytics/disclaimer/managing_conflicts_disclaimer.html
Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.
Price Target: (12 months) for Catcher Technology (2474.TW)
Method: Our target price of NT$335 for Catcher is based on 14x NTM EPS (earnings per share). We use 14x, compared to its historical trading range of 5-25x and Taiwan tech sector average P/E (12x).
Risk: Risks to our NT$335 target price for Catcher may include: (1) increasing customer concentration risk, which could lead to higher volatility in earnings; (2) yield rates for new product cycle; (3) high capex being a risk to margins; (4) Asian currency appreciation; and (5) end- market demand.
Price Target: (12 months) for Casetek Holdings Limited (5264.TW)
Method: Our NT$225 target price for Casetek puts the stock

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Asia Casing Sector - Credit Suisse