4 - Tech Hardware Sector

Please refer to page 124 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.
GLOBAL

Inside
Divergent Device; Convergent Demand 2
The line becomes more blurred; focus on
total device growth opportunities 8
User appetite or self-cannibalization? 14
Commercial replacement cycle could peak20
Low-priced NBs and more 2-1 NBs a
chance to outshine 22
More consolidated landscape, in particular
in consumer PC segments 27
Our Investment strategy and stock picks 32
Company notes 36
Valuation Table Summary
Mkt Cap Last Target TSR
Ticker Company Rating (US$m) Close Price (%)
AAPL US Apple O 576,392 96.3 104.0 10%
2357 TT Asustek O 7,121 291.5 349.0 26%
2317 TT Hon Hai O 43,301 89.0 114.0 31%
4938 TT Pegatron O 4,104 53.6 66.0 29%
3231 TT Wistron O 2,399 29.8 37.0 28%
2324 TT Compal N 2,934 20.2 21.7 14%
INTC US Intel N 152,738 30.9 30.0 0%
2356 TT Inventec N 2,501 21.2 21.8 10%
2382 TT Quanta N 9,274 73.0 80.0 15%
2353 TT Acer U 1,844 20.1 17.0 -15%
Source: Macquarie Research, October 2014; prices as of
17 October

Please see rating, TP and EPS changes in
Fig 82.

Analyst(s)
Macquarie Capital Securities Limited, Taiwan
Branch
Ellen Tseng
+886 2 2734 7524 ellen.tseng@macquarie.com
Kaylin Tsai
+886 2 2734 7523 kaylin.tsai@macquarie.com
Macquarie Capital (USA) Inc.
Deepon Nag
+1 212 231 8014 deepon.nag@macquarie.com
Ben Schachter
+1 212 231 0644 ben.schachter@macquarie.com

20 October 2014

Tech Hardware Sector
Divergent Device; Convergent
Demand
We are negative on the PC hardware sector in 2015 but we see a few
opportunities in selective segments. We favour brand OEMs with innovation
capabilities that can differentiate their product offerings or seize cross-over form
factor design opportunities ahead of its peers. We thus favour Apples supply
chain over traditional PC brands. After multiple brands have withdrawn from the
PC market, we expect further PC industry consolidation. We are thus more
negative on NB ODMs given less brand customers left. ODMs could face more
margin pressure. We are more cautious on commercial market growth but we
expect low-priced NBs and more 2-1 NBs to outshine other segments in 2015.
The line becomes more blurred: User Appetite or self-
cannibalization?
We forecast that total convergence devices will grow at a CAGR of 11.3% in
2013-2017. While cannibalization in each category seems to be inevitable; we
identify a few winners. We view the popularity of Office on iPads as a testament
to the desire for cloud-based work applications on lighter devices. Apple aims to
launch a large size iPad (>12) to address growing demand for the commercial
segment, despite the risk of cannibalizing its Macbook Air sales, but we believe
traditional PC brands are more vulnerable to Apples future success. With
Googles increasing investment in ChromeOS, Chromebooks could accelerate
the transition from client to cloud, and shift towards low-end cloud-based devices.
A converged Chrome/Android OS with support for Office would allow for greater
penetration of Chromebooks into the commercial market in the future.
Commercial PC replacement cycle could peak
While most mature markets have upgraded their commercial PCs due to the
Windows XP phase-out, emerging markets such as China and Latin America
have fallen behind the curve. This ideally suggests potential replacement
demand from emerging markets. However, we have not yet indentified signs of
an uptick from these emerging markets, and this could imply the commercial
upgrade cycle could be peaking slightly earlier than expected.
Low-priced NBs and more 2-1 NBs a chance to outshine
Despite consumer PC demand remaining soft in 2014, we believe there is a fair
chance that low-priced consumer NB/2-1 NBs could have a better opportunity to
outshine other segments in 2015. This is thanks to Microsoft Windows Bing
Program (lower OS fee, extension support to 11 above models) and more
compelling 2-1 and much thinner NB models launched based on the Intel Core M
processor. In addition, more PC brands have withdrawn from consumer PC
segments, indicating more share gain opportunities for tier-one players and
possibly a more rational pricing environment. We believe that Windows 10 as
unlikely to trigger a robust consumer replacement cycle, but see potential pent-
up demand in next 2 quarters.
Our investment strategy and stock picks
We favour Apple and its supply chain over traditional PC suppliers, given the
formers capability to drive consumer appetite. Apple and Hon Hai are our
favorite picks. We upgrade Asustek from N to OP; and favour its market share
gain capability. We downgrade Compal from OP to N given its higher
commercial NBs exposure. We retain N on Intel.
Macquarie Research Tech Hardware Sector
20 October 2014 2
Divergent Device; Convergent Demand
We are negative on the PC hardware sector in 2015; however, we see few opportunities in
selective segments. We favour brand OEMs with innovation capabilities that can differentiate
their product offerings or seize cross-over form factor design opportunities ahead of its peers.
We thus favour Apples supply chain over traditional PC brands. After multiple brands have
withdrawn from the PC market, we expect further PC industry consolidation. We are thus
more negative on NB ODMs given less brand customers left. ODMs could face more margin
pressure. We are more cautious on commercial market growth in 2015, but we expect low-
priced NBs and more 2-1 NBs/thinner NBs to outshine other segments in 2015.
The line is becoming more blurred; focus on total addressable
device market growth
While we identity decreasing value-added hardware in the long term, which is negative to the
tech hardware sector, we believe that selective tech hardware companies can leverage
growing form factor evolution from NBs, Chromebooks, Tablets, 2-1 NBs, smartphones etc
and provide consumers advanced options to own multiple different devices for mobility. We
see companies that are ahead of peers in innovating new device offerings, thus triggering
consumer replacement cycle, are better positioned.
We forecast that total convergence devices will grow at a CAGR of 11.3% in 2013-2017, or
total convergence devices to still grow 10.8% YoY in 2015, despite slowing growth versus
17% YoY in 2014. While cannibalization in each category seems to be inevitable, we expect
winners will benefit from form factor variations to gain respective market share, and seize the
opportunity to diversify and cross over with multiple devices.
Fig 1 Total Device Market Unit Forecast Fig 2 Total Device: Form Factor YoY Growth

Source: IDC, Macquarie Research, October 2014 Source: IDC, Macquarie Research, October 2014
User Appetite or self-cannibalization
We are seeing more comprehensive cannibalization between devices as the line is becoming
more blurred. This will continue to put pressure on some of the traditional PC brand
companies (such as Acer) who lack innovation and form factor design capabilities that
address better mobility devices.
Moreover, we view the popularity of Office on iPads as a testament to the desire for cloud-
based work applications on lighter devices. Apple aims to launch a large size iPad (>12) to
address growing demand for the commercial segment in 1Q15, despite the risk of
cannibalizing its Macbook Air sales, but we believe traditional PC brands are more vulnerable
to Apples future success. .
26%
17.3%
10.8%
9.3%
8.2%
0%
5%
10%
15%
20%
25%
30%
0
500
1000
1500
2000
2500
2013 2014E 2015E 2016E 2017E
YoY
unit: M
Desktop NB
2-1 NB/tablets Pure Tablet
High end smartphones Mid-range smartphones
Low-end smartphones Total device growth( YoY)
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
2013 2014E 2015E 2016E 2017E
Desktop NB
2-1 NB/Tablets Tablet
SubTotal(PC+Tablet) High end smartphones
Mid-range smartphones Low-end smartphones
total smartphone Total device growth( YoY)
Winners should
address growing
form factor
evolution in
convergence
devices
Apples capability to
drive consumer
appetites towards
divergent form
factors for mobility
20 October 2014 3
The larger iPads BOM cost will probably be lower than the new Macbook Airs and so should
retail pricing, if history is a guide: Apples Macbook Air 11/13 models are priced at US$899-
1199 and iPad Air 2 (9.7) at US$499-699. We think the new, larger iPad could be priced at
US$699-$999, and a new Macbook Air at US$999-1199. Such pricing may well lead to
cannibalisation of demand from the Apple Macbook Air (as well as other PC brands NB sales)
if users prefer to have more economic choices.
With Googles increasing investment in ChromeOS, Chromebooks could accelerate the
transition from client to cloud, shift towards low-end (or lower ASP) cloud-based devices. A
converged Chrome/Android OS with support for Office would allow for greater penetration of
Chromebooks into the commercial market in the future.
Fig 3 Dimension comparison for iPad Air 2/Macbook Air/new 12 Macbook Air
Name iPad Air 2 MacBook Air (11) MacBook Air (13) New >12" Macbook Air
New >12 iPad
(iPad Pro)
Launch Date October 2014 October 2013 October 2013 1Q15 NA
Price $499 / 599 / 699 (Wifi) US$899/US$1,199 US$1,199/US$1,299 US$999-1,199 US$699-999
Dimensions Height: 6.1mm
Width: 240mm
Depth: 169.5mm
Height: 17mm
Width: 300mm
Depth: 192mm
Height: 17mm
Width: 325mm
Depth: 227mm
Height: 9mm? Height: <7.5mm?
Display Diagonal 9.7" 11.6" 13.3" 12.9"? 12"?
Source: Company data, Macquarie Research, October 2014; new models are based on Macquarie Research
Commercial PC replacement cycle could peak
While most mature markets have upgraded their commercial PCs due to the Windows XP
phase-out, emerging markets such as China and Latin America have fallen behind the curve.
This ideally suggests potential replacement demand from emerging markets. However, we
have not yet indentified signs of an uptick from these emerging markets, and this could imply
the commercial upgrade cycle could be peaking slightly earlier than expected.
Fig 4 Desktop: Operating System Market Share Trend

Source: Net Application, Macquarie Research, October 2014

Commercial demand
could be peaking
early than expected
if the emerging
market does not
catch up
20 October 2014 4
Low-priced NBs and more 2-1 NBs a chance to outshine
Despite consumer PC demand remaining soft in 2014, we believe there is a fair chance that
low-priced consumer NB/2-1 NBs could have a better opportunity to outshine other segments
in 2015. This is thanks to Microsoft Windows Bing Program (lower OS fee, extension support
to 11 above models) as well as more compelling 2-1 NB/thinner NB models launched based
on the Intel Core M processor. As Intel Core M processors have lower power consumption
(4.5W vs 11W for Haswell generation), this could help OEMs reduce thermal solution costs
(such as fans/thermal module), and design much slimmer devices (less than 9mm) which
would likely attract more consumers to replace legacy NBs.
Near term, while we view Windows 10 as unlikely to trigger a robust consumer replacement
cycle, it could have a ST impact if consumers choose to wait for the new Windows 10 in the
next 2 quarters.
Moreover, we also expect a more consolidated landscape given Samsung, Sony, Toshiba
have withdrawn from either the regional PC markets or consumer PC market, which could
favour top-tier PC brands to gain further market share, in particular in the consumer PC
market. Post HPs recent split into two entities, we believe the new HP Inc (personal
computing and printers) will also need to focus on generating steadier shareholder returns,
which could prevent aggressive pricing cuts with a focus on profitability, in our view. This is
more positive for PC brands but more negative for ODMs given fewer brands customers left.
Fig 5 2-1 NB Projection Forecast Fig 6 Global PC brand Market share

Our Investment strategy and stock picks
While we believe the overall hardware sector landscape remains challenging, we foresee
selective opportunities and identify a few winners. We are selective in our stock picks. Our
favourite picks are based on the following investment strategies:
We favour Apple-related plays over traditional PC brands supply chains: We prefer
to stay with Apples major iPhone/iPad suppliers given Apples capability to grow divergent
cross-over devices such as iPhones, iPads, iPad minis, iPad Pro, Macbook Airs,
Macbook Pros, which are backed by its solid ecosystem. We also believe Apple will further
strengthen its market position, thus gaining more share. Apple (AAPL US, OP, covered by
Ben Schachter) and Apples major outsourcing supplier, Hon Hai (2317 TT, OP), for
Macbook Pros, iPhones, iPad Air/iPad mini/iPad Pro, remain our favourite stock picks.

0
5
10
15
20
25
30
2013 2014E 2015E 2016E 2017E
unit:M
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2
Lenovo HP
ASUS Acer
Dell Apple
Samsung+Sony+ Toshiba Fujitsu
Others
We also expect top-
tier brands to
benefit from more
consolidation
20 October 2014 5
We favour selective Asia PC brands over NB ODMs in general given a more
consolidated landscape after multiple PC brands have withdrawn from the PC
market: We favour Asia PC brands that can gain global market share consistently, as well
diversify into divergent form factors (tablets, smartphones) successfully. We are generally
concerned that ODMs could face more pricing pressure given only a few PC brands have
left in the market which will increase their negotiation power over ODMs. We upgrade
Asustek (2357 TT, OP) from Neutral to Outperform as we prefer its higher leverage of its
design capability to differentiate its product offerings, thus helping gain more market share.
Moreover, we believe Asusteks smartphone business could become profitable, given
rising scale of economies, and further diversify into the smartphone business on a longer-
term basis.
We are cautious given a commercial market slowdown, but are more positive on 2-1
form-factor, consumer NB opportunities: We think commercial demand could reach a
peak, and PC demand is unlikely to grow substantially but will have selective form-factor
opportunities. We maintain a Neutral rating on Intel (INTC, N, covered by Deepon Nag). As
we note that corporate PC shipments are set to decelerate in the coming quarters as the
Windows XP corporate replacement cycle tapers down. While we expect reacceleration
from consumer PC markets due to strong growth in emerging segments (2-in-1s,
Chromebooks), low price points and the release of Microsofts new operating system
(Windows 10), we are concerned on excess inventories in the channel and weakening
mix and are cautious on INTC stock. We also downgrade Compal (2324 TT, N) from
Outperform to Neutral as we believe the commercial NB upgrade cycle could reach
saturation and Compal has higher commercial NB demand exposure. Thus Compal will
have a high comparison base in 2014. It also faces an order reshuffle impact from Acer,
thus NB volumes will likely decline in 2015.
Fig 7 Recommendation/valuation summary
Mkt Cap Last Target TSR EPS (local $/) PER (X) P/BV (X) ROE (%) Div yield (%)
Ticker Company Rating (US$m) Close Price (%) 13A 14E 15E 13A 14E 15E 13A 14E 15E 13A 14E 15E 13A 14E 15E
EMS/ODM
2317 TT Hon Hai O 43,301 89.0 114.0 31% 7.30 8.00 9.26 12.2 11.1 9.6 1.7 1.6 1.4 15.1 14.9 15.8 2.1 3.1 3.6
2382 TT Quanta N 9,274 73.0 80.0 15% 4.84 5.20 6.03 15.1 14.0 12.1 2.3 2.4 2.3 15.1 16.8 19.3 5.2 5.0 5.8
2356 TT Inventec N 2,501 21.2 21.8 10% 1.97 1.91 2.07 10.8 11.1 10.3 1.4 1.5 1.4 13.5 13.0 14.1 7.5 7.2 7.8
4938 TT Pegatron O 4,104 53.6 66.0 29% 4.17 4.86 5.83 12.9 11.0 9.2 1.1 1.2 1.1 9.4 10.7 12.3 5.2 6.1 7.3
2324 TT Compal N 2,934 20.2 21.7 14% 0.57 1.26 2.12 35.5 16.0 9.5 0.9 1.0 1.0 2.4 5.9 10.1 4.9 7.0 7.0
3231 TT Wistron O 2,399 29.8 37.0 28% 2.42 2.01 3.24 12.3 14.9 9.2 1.1 1.1 1.0 8.9 7.4 11.8 6.2 3.4 5.4
Average 16.7 13.2 10.3 1.6 1.6 1.5 11.7 12.5 14.9 4.9 5.0 5.9

Brand
992 HK Lenovo NR 14,632 10.72 NR NA 0.06 0.08 0.09 25.1 18.0 15.9 5.6 4.9 4.0 24.6 27.9 26.4 0.2 0.2 0.3
2353 TT Acer U 1,844 20.1 17.0 -15% (7.54) 0.41 0.41 nmf 48.6 49.4 1.0 0.9 0.9 -31.3 2.0 1.9 0.0 0.0 0.0
2357 TT Asustek O 7,121 291.5 349.0 26% 28.56 28.06 30.30 10.2 10.4 9.6 1.6 1.5 1.4 16.4 15.1 15.4 6.6 6.5 7.1
AAPL US Apple O 576,392 96.3 104.0 10% 5.68 6.31 6.86 16.9 15.2 14.0 5.0 4.7 4.0 30.6 31.2 30.8 1.7 1.9 2.0
HPQ US HP NR 63,453 34.00 NR NA 3.99 3.61 3.74 8.5 9.4 9.1 2.9 2.4 2.2 -31.1 21.2 24.0 1.8 2.1 2.0
Average 15.2 20.3 19.6 3.2 2.9 2.5 1.9 19.5 19.7 2.0 2.2 2.3

PC Semi
INTC US Intel N 152,738 30.9 30.0 0% 1.9 2.3 2.4 16.3 13.9 12.8 2.7 2.7 2.4 17.6 19.3 19.8 2.9 2.9 2.9
NVDA US NVIDIA U 9,456 17.5 16.0 -7% 0.9 0.7 1.0 19.4 23.6 16.8 2.2 2.3 2.3 12.5 9.5 13.5 0.4 1.8 1.9
AMD US AMD N 2,021 2.6 4.0 52% -0.1 -0.1 0.1 nmf nmf 31.1 3.7 3.9 2.6 -15.3 -18.3 10.1 0.0 0.0 0.0
Average 17.9 18.8 20.2 2.9 3.0 2.4 4.9 3.5 14.5 1.1 1.6 1.6
Source: Bloomberg, Macquarie Research, October 2014, pricing as of October 17, 2014; note estimates for not rated stocks are based on Bloomberg
consensus

20 October 2014 6
Fig 8 Asia Hardware: dividend yield (2014E) is attractive though

Source: Macquarie Research, October 2014, market data as of Oct 17th, 2014
Fig 9 Asia Hardware stock QFII holding history

Source: TEJ, Macquarie Research, October 2014
* PC ODM= Compal, Quanta, Wistron, Inventec; PC brands=Asustek, Acer; EMS=Hon Hai, Pegatron

Fig 10 ODMs vs. Intel: Stock performance Fig 11 PC Brands vs. Intel: Stock performance

Source: TEJ, Macquarie Research, October 2014 Source: TEJ, Macquarie Research, October 2014
Average=4.8%
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Hon Hai Quanta Inventec Pegatron Compal Wistron Acer Asustek
(%)
30
35
40
45
50
55
(%)
PC ODM PC brands EMS
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
Compal Quanta Wistron
Inventec Hon Hai Pegatron
Intel
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
Acer Asustek Intel
20 October 2014 7
Fig 12 EMS vs. Apple: Stock performance


-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
Hon Hai Pegatron Apple
20 October 2014 8
The line becomes more blurred; focus on
total device growth opportunities
Total Device market to grow at a CAGR of 11.3% in 2013-2017
We identify decreasing value-added hardware in the long term is more negative to the tech
hardware sector. However, we believe that selective tech hardware companies could still
benefit from form-factor evolution such as NBs, Tablets, 2-1 NBs, large-size smartphones etc
as these devices design capabilities are further enhanced or improved along with technology
advancements. These efforts will thus provide consumers an option to own multiple different
devices for mobility; the innovation of device offerings could also help trigger the consumer
replacement cycle and increase total device market opportunities.
We forecast that total convergence devices will grow 10.8% in 2015, slowing from 17% YoY
in 2014, yet still positive unit growth. We still project total devices will grow at an 11.3%
CAGR during 2013-2017E. While cannibalization in each category seems to be inevitable,
winners will benefit from form factor variations to gain respective market share, and seize the
opportunity to diversify and cross over with multiple devices.
Fig 13 Total Device Unit Forecast
Volume( unit) 2013 2014E 2015E 2016E 2017E
Desktop 136 138 135 133 131
NB 178 171 169 167 166
2-1 NB/tablets 6.2 10.3 16 22.1 27
Pure Tablet 219 236 264 294 325
SubTotal (PC+Tablet) 539 555 584 616 650
High end smartphones 274 303 322 332 337
Mid-range smartphones 305 373 410 444 469
Low-end smartphones 422 578 687 796 911
SubTotal (smartphone) 1002 1253 1419 1572 1717

Growth rate (YoY) 2013 2014E 2015E 2016E 2017E
Desktop -8% 1.5% -2.0% -2.0% -1.0%
NB -11% -4.0% -1.5% -0.7% -0.6%
2-1 NB/Tablets 33.7 66.1% 55.3% 38.1% 22.2%
Tablet 52.20% 7.9% 12.0% 11.5% 10.5%
SubTotal (PC+Tablet) 8.0% 3.0% 5.1% 5.6% 5.4%
High end smartphones 21.8% 10.6% 6.3% 3.1% 1.5%
Mid-range smartphones 27.6% 22.3% 9.9% 8.3% 5.6%
Low-end smartphones 62.3% 37.0% 18.9% 15.9% 14.4%
Sub-total(smartphone) 38.0% 25.0% 13.2% 10.8% 9.2%
Total device growth (YoY) 26.0% 17.3% 10.8% 9.3% 8.2%
Source: IDC, Macquarie Research, October 2014
Fig 14 Total Device Unit/Growth Trend

26%
17.3%
10.8%
9.3%
8.2%
0%
5%
10%
15%
20%
25%
30%
0
500
1000
1500
2000
2500
2013 2014E 2015E 2016E 2017E
YoY
unit: M
Desktop NB 2-1 NB/tablets
Pure Tablet High end smartphones Mid-range smartphones
Low-end smartphones Total device growth( YoY)
Total device market
is growing, thanks
to form-factor
diversity as
consumers have
more options for
mobility

20 October 2014 9
Global PC bolstered by commercial replacement cycle in 2014,
growth rate to be more flattish going forwards
The 2014 Global PC industry have been bolstered by PC replacement demand in the
commercial segment. The desktop segment has been stronger due to commercial
replacement demand. During its recent 3Q earnings conference call, Intel mentioned they see
continued strength in enterprise demand, and its shifting from Desktop earlier this year and
moving to the NB segment in 2H14.
We estimate that the desktop segment will likely grow 1.5% YoY in 2014. For the NB
segment, while it has been negatively affected by tablets before, the NB segment unit decline
had became milder in 2014, declining by only 4% YoY in 2014 versus an 11% YoY decline in
2013, based on our estimate. Intel also said they expect a standard holiday seasons for
consumers in the PC segment.
Looking forwards, we project that total PCs (including 2-1 NBs/tablets) will decline only 0.3%
in 2014, versus a 9% decline in 2013, thanks to commercial NBs recovering as well as less
cannibalization. We expect the growth rate will be flattish in 2015-2017 (or grow
0.1%/0.7%/0.8%, respectively). Excluding 2-1 NBs, which could also be categorized as
tablets in IDC definition, we believe the PC sector could decline 1.6% YoY in 2014, and 1.7%
in 2015, or 1.3% in 2016.
Fig 15 Global PC unit Growth Forecast

Commercial segments have triggered corporate replacements because Microsoft stopped
support for Windows XP in April 2014.
Moreover, major brands support to launch Microsoft Windows Bing-enabled program, priced
at US$249 in 2Q14, has also helped stimulate some consumer demand for 2015 in our view.
PCs brands also have made some progress addressing tablet competition with more slim,
touch, and low-cost models available. Growth of Chromebooks, particularly in the education
segment in mature markets, is also contributing to PC units, despite much lower ASPs. In
addition to the stimulus from the end of support for Windows XP, severe competition from
tablets has declined as the tablet penetration rate stabilizes and volume shifts to smaller sizes
that are less competitive with PCs.
PC shipments in mature regions have been much stronger than emerging markets so far this
year, thanks not only to the commercial segment but also consumer segments showing an
upswing in these mature markets. Performance in emerging markets still continued to drag on
global PC shipments, resulting from poor economic and political challenges.
-10%
-2% -2%
-1%
-1%
-9%
-0.3%
0.1%
0.7% 0.8%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
-
50
100
150
200
250
300
350
2013 2014E 2015E 2016E 2017E
unit: M
Desktop NB 2-1 NB/tablets
YoY( Exclude 2-1)-RHS YoY( include 2-1)-RHS
Microsoft Windows
Bing-enable
program also
helping to stimulate
demand but lower
NB ASPs
2014 PC demand
has been supported
by the commercial
replacement cycle
and strengthened
from mature
markets, thus
offsetting a decline
in emerging markets
20 October 2014 10
Fig 16 Global PC shipments by form factor Fig 17 Global PC shipments by segment

Source: IDC, Macquarie Research, October 2014 Source: IDC , Macquarie Research, October 2014
Fig 18 PC Instalment Base is peaking Fig 19 Replacement demand as % of PC


Due to a stronger commercial replacement cycle, Desktop PC demand has been doing better
than NB PCs. In fact, NBs as % of PCs have been falling due to tablet cannibalization (Fig
16). As a result, total consumer PC demand has also fallen as a % of total PC, and
commercial PCs have dominated consumer PCs since 2Q13.
The PC instalment base is also peaking given limited additions for new PC users, while
tablets and smartphones attract from some light PC users. PC replacement demand has
been a main source of PC growth since 2010 (Fig 19).
Fig 20 illustrates PC unit growth has been improving, despite total PC unit growth not turning
to positive unit growth. However, commercial PC has turned to positive unit growth, while
consumer decline also became much milder versus 2013. Both commercial DTs and
consumer DTs outperformed consumer DTs and consumer NBs (Fig 22-23).

-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
Unit
Total DT PC Total NB PC
52%
53%
54%
55%
56%
57%
58%
59%
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
Unit
Total DT PC Total NB PC NB as % of PC
45%
46%
47%
48%
49%
50%
51%
52%
53%
54%
55%
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
Unit
Commercial PC Consumer PC Consumer as % of PC
-
200
400
600
800
1,000
1,200
1,400
1,600
1,800
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
2
2
0
1
3
2
0
1
4
2
0
1
5
2
0
1
6
2
0
1
7
2
0
1
8
PC install base(unit:m)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
-
50
100
150
200
250
300
350
400
replacement demand % as global PC
PC replacement
demand had been a
source of growth
since 2010
20 October 2014 11
Fig 20 Global PC growth YoY Trend (by form factor) Fig 21 Global PC growth - YoY growth (by segment)

Source: IDC tracker, Macquarie Research, October 2014 Source: IDC tracker, Macquarie Research, October 2014
Fig 22 Global Commercial PC growth - YoY trend Fig 23 Global Consumer PC growth - YoY trend

Source: IDC Tracker Macquarie Research, October 2014 Source: IDC tracker, Macquarie Research, October 2014
But Near-term Demand has been tapering off since August onwards
Microsoft and Intel plan to release a new platform in 1H15, which will likely affect PC demand
in 4Q14 as vendors are turning more cautious on inventory management. We think that there
is potential pent-up demand from consumers as they are waiting for new platforms, such as
Windows 10 (set to launch in 2Q15) and Intels 14nm Y series Broadwell processor
(launching in December, but mass produced in 1Q15). We expect consumer demand to
remain lukewarm this upcoming Christmas season.
In addition, Apples iPhone 6/6 Plus and upcoming new generation of iPad, launched in
October, will likely attract consumers, thus affecting consumer NB demand. In fact, NB ODMs
indicated a dropping off since mid-August, and we believe consumer demand in 4Q14 will
remain lacklustre.
According to figure 24-26, we forecast a worst case scenario in 4Q or declines in low-single
digits (-3% QoQ) for the top five NB ODMs. This is below historic seasonality (average 2010-
2013: +3% QoQ, or average 2002-2013: + 11% QoQ). We note that 4Q strength has been
much lower the past three years due to NB cannibalization, but 4Q14 could present a much
lower base due to a higher base in 3Q14 (+11% QoQ).

-16.0%
-14.0%
-12.0%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
Total PC Totoal DT PC Total NB PC
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
Total PC Total Commercial PC Total Consumer PC
-15%
-10%
-5%
0%
5%
10%
3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
Total commercial PC Commerical DT Commercial NB
-20.0%
-18.0%
-16.0%
-14.0%
-12.0%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
Total consumer PC Consumer DT Consumer NB
While NB ODMs
posted a stronger
than expected 3Q14,
a correction is likely
in 4Q14
20 October 2014 12
Fig 24 Top-Five ODMs NB shipments Fig 25 Top Five ODMs NB Shipments (YoY)

Source: Company Data, Macquarie Research, October 2014 Source: Company Data, Macquarie Research, October 2014
Fig 26 Top Five NB ODMs: Seasonality Trend (QoQ)

Source: Company Data, Macquarie Research, October 2014
We expect rising inventory risk near term
We also note that NB ODMs and PC OEM inventories appeared roughly normal to high in 2Q,
which adds risk of an inventory correction if consumer end demand remains soft in the
upcoming holiday seasons in 4Q14.

-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
1Q14 2Q14 3Q14 4Q14E
Unit: K
Quanta Compal Wistron Pegatron
Inventec YoY(RHS) QoQ(RHS)
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
Quanta Compal Wistron Pegatron Inventec Total
1Q14 2Q14 3Q14 4Q14E
-10%
8%
15%
11%
-12%
6%
2%
3%
-15%
-10%
-5%
0%
5%
10%
15%
20%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
1Q 2Q 3Q 4Q
2008 2009 2010 2011
2012 2013 2014 Average(2002-2007)-RHS
average(2002-2013)- RHS Average(2010-2013)- RHS
20 October 2014 13
Fig 27 NB ODM inventories Fig 28 PC OEM inventories

Source: FactSet, Company Data, Macquarie Capital (USA), October 2014. Source: FactSet, Company Data, Macquarie Capital (USA), October 2014.

38
36
35
26
41
39
43
34
35
38
44
33
44
39
41
27
37
41
0
5
10
15
20
25
30
35
40
45
50
1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14
NT$ bn
Average 5Yr Average
0
10
20
30
40
50
60
70
0
10
20
30
40
50
60
70
80
90
1
Q
9
8
4
Q
9
8
3
Q
9
9
2
Q
0
0
1
Q
0
1
4
Q
0
1
3
Q
0
2
2
Q
0
3
1
Q
0
4
4
Q
0
4
3
Q
0
5
2
Q
0
6
1
Q
0
7
4
Q
0
7
3
Q
0
8
2
Q
0
9
1
Q
1
0
4
Q
1
0
3
Q
1
1
2
Q
1
2
1
Q
1
3
4
Q
1
3
%
NT$ bn
Average (LHS) 5Yr Avg (RHS)
20 October 2014 14
User appetite or self-cannibalization?
Which one? You choose: Apple iPad Pro or Apples first 2-1
(NB/Tablet) MacBook Air
We are seeing more comprehensive cannibalization between devices as the line is becoming
more blurred. This will continue to put pressure on some of the traditional PC brand
companies (such as Acer) who lack innovation and form-factor design capabilities.
Since Apple launched the first generation iPad, consumer NBs have negatively been affected
by iPads rising penetration as consumers have become attracted to iPads mobility as well as
easy-to-use interface and solid app eco-systems. Nonetheless, iPads mainly cannibalized
consumer NBs and have not posed a big impact on the commercial segment. Apple aims to
launch >12 iPad (iPad Pro) in 1H15. We see the likelihood that Apple can further foray into
the commercial segment, thus further cannibalizing the commercial NB market segment if
Apple executes its strategy well.
Microsoft also announced that it will make its MSOffice (Excel, Word, PowerPoint) available
for the application in iPads. >12 inch iPad is likely emerging as an option for enterprise, and
Apple is also actively partnering with IBM. While this could potentially adversely affect Apples
Macbook Air sales if the pricing gap between iPad Pro (>12, likely 12) and Macbook Air
(>12) attracts more preference for iPad Pro, we think Apples foray into the large iPad
market could still have a more negative threat to traditional NB brands in general- in particular
for commercial NB demand in the future. Apple notes that in the enterprise market, 98 of the
Fortune 500 companies have adopted iPads, and 91% of the activations in enterprise tablets
are from iPads, according to Good Technology. Apple indicated many of those enterprises
are writing apps that are key proprietary apps for running that business, and this is great for
that company because they are more productive as result of that.
The 2-1 NBs offering could also affect traditional pure tablet demand in our view, especially if
those devices start to offer more attractive pricing. While Apple also aims to launch the
Macbook Air >12 model (likely 12.9 based on the Intel Core M processor) in 1Q15 we
believe that it is still unlikely Apple will adopt a 2-1 form-factor design given potential
cannibalization on its iPad, but any evolution Apple makes could continue going forwards,
thus changing the competitive competition. Microsoft also introduced its new Surface Pro 3
models with 12-inch screens and its 2-1 form-factor models. MSFT Surface Pro 3 has further
reduced the thickness by 14% compared to Surface Pro 2 the weight itself is also lighter
than the Apple MacBook Air. Although we dont think Microsoft can sell Surface Pro in big
volumes given its premium pricing over other similar MSFT-based OS 2-1 and much weaker
apps eco-system versus Apple, we think the proliferation of 2-1 devices and more mature
features backed by other hardware specs advancement will definitely be something to watch
in 2015 (Fig 31).
Apple Macbook Air (>12 with a Retina display) based on an Intel Core M processor will be
able to come with a thinner dimension profile likely 9 mm (vs the current Macbook Airs 17
mm)- thus more compelling NBs in 2015. While a new, larger iPad could also cannibalize
demand for the Macbook Air especially if the new tablet is priced lower and comes with an
optional keyboard function.
The larger iPads BOM cost will probably be lower than the new Macbook Airs and so should
retail pricing, if history is a guide: Apples Macbook Air 11/13 models are priced at US$899-
1199 and iPad Air 2 (9.7) at US$499-699. We think the new, larger iPad could be priced at
US$699-$999, and a new Macbook Air at US$999-1199. Such pricing may well lead to
cannibalisation of demand from the Apple Macbook Air if users prefer to have more economic
choices.

Apple has not yet
decided on a 2-1
form-factor design;
Apple will refresh
MacBook in 1Q15
will shrink the
thickness
Pricing gap will
definitely play a
crucial role in
affecting sale
strength of Apple
Macbook Air or
Apple iPad Pro
Apple aims to
launch large-size
iPads to target the
commercial
segment in 1H15.
Apples launch of
iPad Pro could
also cannibalize its
Macbook Air sales,
but could have more
impact to traditional
PC brands
20 October 2014 15
Fig 29 Smart Device: Market cannibalization

Source: Display Research, Macquarie Research, October 2014
Fig 30 Dimension comparison iPad Air 2/Macbook Air/new 12 Macbook Air
Model Name iPad Air 2 MacBook Air (11-inch) MacBook Air (13-inch)
New > 12" Macbook
Air
New >12 iPad
(iPad Pro)
Launch Oct-14 Oct-13 Oct-13 1Q15 1Q15
Price $499 / 599 / 699 (Wifi) US$899/US$1,199 US$1,199/US$1,299 US$999-1,199? US$699-999 ?
Dimensions Height: 6.1mm Height: 17mm Height: 17mm Height: 9mm? Height: .5mm?
Width: 240mm Width: 300mm Width: 325mm
Depth: 169.5mm Depth: 192mm Depth: 227mm
Display diagonal 9.7" 11.6" 13.3" 12.9"? 12?
Source: Company data, Macquarie Research, October 2014; New Models are based on Macquarie Research Estimates

Fig 31 Spec comparison for 2-1 and/or slim form factor NBs
Name
Microsoft
Surface Pro 3
Apple
MacBook Air(old)
Asus
Transformer Book T300FA
Model Picture

Form factor 2 in 1 NB only 2 in 1
Price $799 $899 up $599
Dimensions Height: 0.36"( 9.1mm) Height: 0.11-0.68" ( 2.8mm-17mm) Height: 0.79"(20.3mm)
Width: 11.5" Width: 11.8" Width: 12.1"
Depth: 7.93" Depth: 7.56" Depth: 8.15"
Weight: 1.76lbs 2.38lbs 3.52lbs
Embedded OS Microsoft Windows 8.1 Pro Mac OS X Mavericks Microsoft Windows 8.1/ 8.1 Pro
Display Diagonal 12" 11.6" 12.5"
Display Resolution 2160 x 1440 1366 x 768 1366 x 768
CPU Intel Core i7 1.7GHz dual-core Intel Core i5 with 3MB
shared L3 cache
Intel Core M
ROM capacity 64/128/256/512 GB 64GB/128GB 32GB/64GB eMMC(tablet)
500GB/1TB HDD (dock)
RAM capacity 4/8 GB 4GB and configurable to 8GB 4GB
Battery Life Up to 9 hours Up to 5 hours TBD
Source: Company data, Macquarie Research, October 2014
20 October 2014 16
We also expect to see more competitive overlap among display sizes for tablets, notebooks,
and smartphones, as Apple has announced its new iPhone 6 Plus with an increased screen
size of 5.5-inch. We believe the large screen of the iPhone 6 Plus will also cannibalize sales
of the Apple iPad mini with a 7 screen, which is not much bigger than the 5.5 iPhone 6 Plus.
According to Canalys, that 5 and above display is featured on almost half (47%) of the
smartphones with an unlocked retail price of US$500 or more in 1Q14, and on the remaining
53% of high-end smartphones, 87% were iPhones. Apple has launched iPhone 6/6 plus and
we believe the large-size smartphone trend will be accelerating.
We expect shipments of the 7- to 7.9-inch tablets will be cannibalized somewhat by 5.5-inch-
and-larger smartphones. We thus forecast that the unit share of the 7- to 7.9-inch tablets will
decline from 55% in 2014 to 35% in 2018. We believe shipments of tablets with 11-inch-and-
larger screens will rise from 2% in 2014 to 14% in 2018, as tablets directly compete with
smaller notebooks with screen sizes up to 13-inches.
While we also believe that the total tablet market size is still increasing, growth momentum
continues to decrease given prolonged upgrades and market saturation. We expect the
overall tablet market will only grow 7.9% YoY in 2014 and 12% YoY in 2015 (Fig 34).
Fig 32 Global tablet shipment growth trend Fig 33 Global smartphone shipment growth trend


Fig 34 Tablet forecast by operating system Fig 35 Tablet: Operating System Share


-50%
0%
50%
100%
150%
200%
-
10
20
30
40
50
60
70
80
90
1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
(m units)
Tablet shipment (LHS) QoQ growth (RHS)
YoY growth (RHS)
-10%
0%
10%
20%
30%
40%
50%
60%
-
50
100
150
200
250
300
350
1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
(m units)
Smartphone shipment (LHS) QoQ growth (RHS)
YoY growth (RHS)
0%
20%
40%
60%
80%
100%
120%
140%
160%
0.0
50.0
100.0
150.0
200.0
250.0
300.0
350.0
2012 2013 2014E 2015E 2016E 2017E
Unit: M
iOS Win 8 Android Total tablet YoY
0%
10%
20%
30%
40%
50%
60%
70%
80%
2011 2012E 2013 2014E 2015E 2016E
iPad Win 8 Android
7-7.9 tablet to be
cannibalized by 5.5
larger smartphone
CAGR 2013-2017= 10.4%
20 October 2014 17
Fig 36 Tablet: Commercial/Consumer Mix Fig 37 Tablet: Size Breakdown

Fig 38 Mini NB is fading rapidly Fig 39 2-in-1 NB/Tablet is rising

Google rising investment on Chrome OS
Our US tech team- Ben Schachter and Deepon Nag issued Macquarie Technology report
GOOG/INTC Bet on CA Chrome to win in May 2014 , and they believe that Chrome OS is
an underappreciated strategic priority for both Google and Intel, and also conclude the following :
Expanding the Chrome/Android platform is core to GOOG. We believe GOOGs ability
to deploy computing resources to build out a global platform more efficiently than others is
its core competitive advantage. With Sundar Pichai leading Android/Chrome/Apps, we see
the potential for Chrome/Android to be integrated into a single ecosystem/platform,
benefitting GOOG/INTC/others. In an open job post, GOOGs discusses Chrome as a
disruptive effort to move computing to the next level and away from the regimes that have
defined computing for the past 30 years.
Intel embracing Chrome opportunity, which we see as more strategic. Although most
initial Chromebooks designs were based on ARM architectures, we note that Intel has
increased its share of Chromebooks to over 50%.While the lower BOMs of Chromebooks
imply lower ASPs , we see this as a strategic opportunity for Intel to penetrate the Android
smartphone and tablet (and other devices) markets. We note that Google recently also
extended Android to wearables, a market Intel has also made investments in (such as its
recent purchase of Basis).
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2012 2013 2014E 2015E 2016E 2017E 2018E
Consumer Commercial
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2012 2013 2014E 2015E 2016E 2017E 2018E
Smaller than 8in. 8in. and larger
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
Unit:M
Mini NB Mini %
0
5
10
15
20
25
30
2013 2014E 2015E 2016E 2017E
unit:M
Googles Chrome
OS will have more
impact to PC form
factor, and impact to
PC makers as the
transition from
client device to low-
end cloud devices
accelerates as
opposed to
traditional NBs
20 October 2014 18
Following the Capex for over 10 years, ever since our 2004 GOOG initiation, weve
focused on GOOGs capex to understand its priorities. Its massive infrastructure is
now set to alter the traditional computing paradigm . We expect more aggressive support
for cloud computing, across a wider variety of devices on the Chrome/Android platform
beyond smartphones/ tablets/Chromebooks.
The Chrome ecosystem limited for now, but Android could open it up to new
markets. Chrome OS still has a thin application environment including a lack of support
for many productivity apps, but we note Android has a vast array of applications (including
MS office). While we believe that many Android apps wont port cleanly into the
Chromebook form factor, we believe the form factor lends itself better to productivity apps
than on a tablet or smartphone, and expect the expanding app ecosystem to act as a
catalyst for Chrome devices to increase penetration into the traditional Win-tel based PC
system installed base. We note that Android is now the largest platform ecosystem in both
the tablet and smartphone markets.
Monetization. More internet use = more $ for GOOG. While the model will evolve,
platform owners should be able to extract a toll from developers & users. Currently, most
platform models have the platform owner taking a 30% toll for apps.
Commercial PC market embracing PC-lite devices, adding risk to
traditional PC market
IDC estimates that the commercial PC market was ~45-50% of the overall PC market in
2013, and has seen growth over the past few quarters due to an increase in corporate
replacements ahead of the expiration of support for Windows XP. While iOS and Android
based tablets have not seen significant penetration into the commercial space, we note since
MSFT released Office for iPads on March 27, Office applications have been the most
downloaded apps on iTunes. We view the popularity of Office on iPads as a testament to the
desire for cloud based work applications on PC lite devices, and believe that a converged
Chrome/Android OS with support for Office would allow for greater penetration of
Chromebooks into the commercial market. We think the commercial PC Business will
decelerate in 2H14 as corporate replacements slow post the Windows XP expiration and the
introduction of Office on Chromebooks and iPads could further post more of a threat to
traditional PC companies.
IDC estimates that Chromebooks shipped roughly 2.5 million units in 2013 (~1% of total PC
market), and will grow 68% YoY in 2014. We believe Chromebooks are gaining share on
conventional notebooks and tablets due to their low price points and increased functionality
due to expanding cloud offerings. In fact, there are more PC brands embracing the
Chromebook opportunity in order to help grow their market share and ensure they do not
miss out on new disruptive innovation in this segment. However, we expect this will continue
to weigh down their average selling prices and make their product mix more unfavourable.
NPD marketing research firm reported that Chromebooks held 21% of the US notebook
market in 2013, up from a negligible amount in 2012. In addition, these devices rose from
0.2% of commercial market unit shipments in January to November 2012 to 9.6% for the
same period in 2013.

Commercial PC
market embrace
iPad would post
more threat to
traditional PC
makers
20 October 2014 19
Fig 40 Chromebook shipments to rise Fig 41 PC/tablet US commercial unit sales

Source: IDC, Macquarie Research (USA), May 2014

Source: IDC, Macquarie Capital (USA), May 2014. Data based on IDC
survey
Fig 42 Google Search Trend Fig 43 Android OS market share

Source: Google.com, Macquarie Research, October 2014. Source: : IDC, Gartner, Macquarie Capital (USA), May 2014.
Fig 44 Recent Chromebook models spec
Name
Samsung
Chromebook 2
(11.6")
Samsung
Chromebook 2
(13.3")
Asustek
Chromebook
C200
Asustek
Chromebook
C300
Acer
Chromebook
13
Acer
Chromebook
11
Toshiba
Chromebook 2
Launch Date May, 2014 May, 2014 May, 2014 May, 2014 September,
2014
September,
2014
September,
2014
Price $299.99 $399.99 $249.99 $249.99 $299.99 $199.99 $249.99
Dimensions 289.6 x 204.7 x
16.8 mm
323.1 x 223.5 x
16.5 mm
304.8 x 198.1 x
20.3 mm
330.2 x 231.1 x
22.9 mm
327.7 x 228.6 x
18.0 mm
299.7 x 203.2 x
18.0 mm
320 x 214 x
19.3 mm
Weight 1.10 kg 1.39 kg 1.13 kg 1.40 kg 1.50 kg 1.20 kg 1.35 kg
Embedded OS Google Chrome
OS
Google Chrome
OS
Google Chrome
OS
Google Chrome
OS
Google
Chrome OS
Google
Chrome OS
Google
Chrome OS
CPU Samsung Exynos 5
Octa 5420
Samsung Exynos
5 Octa 5800
Intel Celeron
N2830/N2930
Intel Celeron
N2830/N2930
Nvidia Tegra
K1
Intel Celeron
N2830
Intel Celeron
N2830
CPU Clock 1.9GHz+1.3GHz 2.0GHz+1.3GHz 2.16GHz 2.16GHz 2.1GHz 2.16GHz 2.16GHz
Storage 16GB eMMC 16GB eMMC 16GB/32GB eMMC 16GB/32GB eMMC 32 GB SSD 16 GB SSD 16 GB SSD
RAM Capacity 4GB 4GB 2/4GB Up to 4GB 4GB 2GB 2GB
Display Diagonal 11.6" 13.3" 11.6" 13.3" 13.3" 11.6" 13.3"
Display Resolution 1367 x 768 1920 x 1080 1367 x 768 1367 x 768 1920 x 1080 1367 x 768 1367 x 768
WLAN Built-in dual band
Wi-Fi 802.11
a/b/g/n
Built-in dual band
Wi-Fi 802.11
a/b/g/n
Built-in dual band
Wi-Fi 802.11
a/b/g/n
Built-in dual band
Wi-Fi 802.11
a/b/g/n
Built-in dual
band Wi-Fi
802.11 ac
Built-in dual
band Wi-Fi
802.11 a/b/g/n
Built-in dual
band Wi-Fi
802.11 a/b/g/n
Bluetooth Bluetooth 4.0
Compatible
Bluetooth 4.0
Compatible
Bluetooth 4.0
Compatible
Bluetooth 4.0
Compatible
Bluetooth 4.0
Compatible
Bluetooth 4.0
Compatible
Bluetooth 4.0
Compatible
Battery Life Up to 8 Hours Up to 8.5 Hours Up to 11 Hours Up to 10 Hours Up to 11 Hours Up to 8 Hours Up to 10.5
Hours
42.9%
32.3%
17.1%
0.2%
4.2%
0.8%
2.6%
34.1%
27.8%
15.8%
9.6%
8.7%
2.2% 1.8%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
Windows
Notebook
All Desktop iPads Chromebooks Android
Tablets
Windows
Tablets
Apple
Notebook
Jan-Nov 2012 Jan-Nov 2013
69%
79%
46%
62%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
2012 2013
Android smartphone market share Android tablet market share
20 October 2014 20
Commercial replacement cycle could peak
Windows XP migration cycle could also slow down in 2015
After Microsoft ended support for XP in April 2014, there has been some forced adoption of
Windows 7, couple with the need for corporate refreshes driving PC volumes since 2H13.
According to Net Application, as of the end of September 2014, there were still 23.87% of
PCs using Windows XP, although this ratio has fallen substantially from the peak since March
2013 (Fig 45).
We originally thought that this could still suggest room for an upgrade to Windows 7 in the
upcoming 2-3 quarters, however, we note that most mature markets have been upgrading
their commercial PCs, but emerging markets such as China and Latin America have not
experienced an uptick in commercial unit growth as shown on Fig 47-48.
While this ideally suggests potential commercial upgrade cycles from emerging markets, we
have not yet indentified any signs of uptick from these emerging markets any time soon, and
this could imply the commercial upgrade cycle could be peaking slightly earlier than expected.
In fact, during the peak Windows XP adoption, it used to dominate over 80% market share,
and Windows Vista has been a relatively unsucessful version of Windows OS. Windows 7 so
far has only caputred roughly 52.71% market share as of the end of September, still far below
Windows XPs peak level.
Fig 45 Windows Operating system version migration

Source: Net Application, Macquarie Research, October 2014
Fig 46 Windows XP EOL benefit fading

Source: IDC, Company Data, Macquarie Capital (USA), October 2014

-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
1
Q
0
1
3
Q
0
1
1
Q
0
2
3
Q
0
2
1
Q
0
3
3
Q
0
3
1
Q
0
4
3
Q
0
4
1
Q
0
5
3
Q
0
5
1
Q
0
6
3
Q
0
6
1
Q
0
7
3
Q
0
7
1
Q
0
8
3
Q
0
8
1
Q
0
9
3
Q
0
9
1
Q
1
0
3
Q
1
0
1
Q
1
1
3
Q
1
1
1
Q
1
2
3
Q
1
2
1
Q
1
3
3
Q
1
3
1
Q
1
4
3
Q
1
4
E
1
Q
1
5
E
Windows 95 end of life caused surge in demand,
followed by deceleration in PC growth
Windows XP end of life
Concern on whether
commercial
replacement cycle
could reach
saturation if
emerging market
uptick does not take
off soon
20 October 2014 21
Fig 47 US Commercial PC growth YoY trend Fig 48 China Commercial PC growth YoY trend

Source: IDC Tracker, Macquarie Research, October 2014 Source: IDC tracker, Macquarie Research, October 2014
Fig 49 EMEA Commercial PC growth YoY Trend

Fig 50 Latin America Commercial PC growth YoY
trend

Source: IDC Tracker , Macquarie Research, October 2014 Source: IDC tracker, Macquarie Research, October 2014

-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
Total Commercial PC Commerical DT Commercial NB
-40.0%
-35.0%
-30.0%
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
-50.0%
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
20 October 2014 22
Low-priced NBs and more 2-1 NBs a
chance to outshine
Despite consumer PC demands (both DT/NB) remaining soft, we believe there is a fair
chance that selective form-factor consumer NBs (2-1 NBs, low-priced NBs) could have a
better opportunity to outshine in 2015, thanks to more low-priced NB offerings supported by
Microsoft Windows Bing Program as well as more compelling 2-1 NB/thinner NB models
launching based on Intel Core M processors. Moreover, we also expect a more consolidated
landscape which favours top-tier PC brands, in particular in the consumer PC segment. Near
term, while we believe that Windows 10 is unlikely to trigger a robust consumer replacement
next two quarters.
Moreover, we also expect a more consolidated landscape given Samsung, Sony, Toshiba
have withdrawn from either the regional PC markets or consumer PC market, which could
favour top-tier PC brands to gain further market share, in particular in the consumer PC
market. Post HPs recent split into two entities, we believe the new HP Inc (personal
computing and printers) will also need to focus on generating steadier shareholder returns,
which could prevent aggressive pricing cuts with a focus on profitability, in our view. This is
more positive for PC brands but more negative for ODMs given fewer brands as customers.
Consumer PC demand remains soft but has a low comparison
base in 2015 onwards
Although consumer PC demand still posts negative unit growth, the YoY decline has became
less severe off of a lower comparison base. The market expectation for consumer PCs
remains pretty bearish, and as a result, we expect a consumer PC recovery will provide key
catalysts to the sector.
Fig 51 US consumer PC growth YoY Trend Fig 52 PRC Consumer PC growth YoY trend

-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
Total Consumer PC Consumer DT Consumer NB
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
Consumer demand
remains soft, but
market expectation
is low; a few
potential drivers
20 October 2014 23
Fig 53 EMEA consumer PC Growth YoY Trend

Fig 54 Latin America consumer PC growth YoY
Trend

Intel Core M (Broadwell) processor transition opportunity for more
2-1 offerings with a more compelling design
Intel will the launch Core M (14 nm) based series processors specifically applied for
notebook/2-1 models in 4Q14. Intel claims that the Core M processor (Broadwell) is about
50% smaller and 30% thinner than Intels Haswell (core i3, i5, and i7) chips, with a 60% lower
idle power level for a longer battery life. Availability will start in 4Q14, but will have more
offerings in 1Q15.
As the Intel Core M processor has lower power consumption (4.5W vs 11W for Haswell
generation), this could help OEMs reduce thermal solution costs (such as fans/thermal
module), and design much slimmer devices (less than 9mm) as an example. PC OEMs,
including HP, Lenovo, Asustek, Acer, and Dell, all unveiled the Intel Core M processor based
products and aim to be available in 4Q14 from October. These models include AsusTek
Transformer T300 Chi, Transform Book T300FA, Zenbook UX305, Dell Latitude 13 7000
series, or Lenovo Thinkpad Helix 2, or HP Envy x2.
Apple also aims to launch in 1Q15 the new Macbook Air (12 inch models) based on the Intel
core M processor (while the form factor could still be pure NB), but will reduce the thickness
of its Macbook air.
While PC OEMs are cautious not to overbuild inventory due to the rising risk of carrying
legacy products in early 4Q and have guided to QoQ declines in 4Q, we believe the transition
could still offer some fresh growth beyond 4Q14 and towards 2015.
Fig 55 Major Core M based NB model spec comparison
Name
Asus Transformer
Book T300FA
Asus Transformer
T300 Chi
Asus Zenbook
UX305
Dell Latitude 13 7000
series HPEnvy x2
Lenovo Thinkpad
Helix 2
Dimensions 308.5 x 207 x 20.3 mm 14.7 mm thick 324 x 226 x 12.3mm 320 x 230 x 20mm TBD 9.7mm thick
Weight 1.6 kg 0.68 kg 1.2 kg 3.67 pounds TBD 0.82 kg
Price USD599 TBD TBD TBD USD1,050 USD 999
OS Windows 8.1/Windows
8.1 Pro
Windows
8.1/Windows 8.1 Pro
Windows
8.1/Windows 8.1 Pro
Windows 8.1/Windows
8.1 Pro
Windows 8.1 Windows 8.1
CPU Intel Core M Intel Core M Intel Core M Intel Core M Intel Core M Intel Core M
HDD/SSD capacity 32GB/64GB
eMMC(tablet)
TBD 128GB/256GB SSD Up to 512 GB SSD
Up to 512 GB
SSD
128 GB to 180GB
SSD
RAM Capacity 4G 4G DDR3L 1600 4G/8G DDR3L 1600 Up to 8G DDR3L 1600 4G 4G/8G
Display diagonal 12.5" 12.5" 13.3" 13.3" 13.3" 11.6"
Display resolution
1366x768 2560x1480
3200x1800 or
1920x1200
1920x1080 1920x1080 1920x1080
WLAN Yes Yes Yes Yes Yes Yes
Bluetooth Yes Yes Yes Yes Yes Yes
Battery life TBD TBD 45Whr 30Whr TBD Up to 10 hrs
Release date Fall 2014 4Q14 TBD Oct-14 Oct-14 Oct-14
-35.0%
-30.0%
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
Total Consumer PC Consumer DT Consumer NB
-35.0%
-30.0%
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
The much slimmer
design could help
form-factor
innovation, and help
to drive NB demand
such as 2-1
products
20 October 2014 24
MSFT plans to develop various price ranges of models equipped
with MSFT OS system
To fend off tablet market cannibalization for NB segments, Microsoft has lowered the
Windows licenses fee to near $0 for any OEM building a device less than 9 inches. In
addition, Microsoft also added a low-cost Windows OS offering with Bing integration for
OEMs (note that Windows 8.1 with Bing is identical to the regular version of Windows 8.1, but
it has Microsoft's Bing search engine as a default). Microsoft provided brand OEM vendors
its Windows 8.1 with Bing solution, offering a lower licenses fee to enable them to sell NBs for
US$249 or lower on June 1, 2014. In fact, according to our understanding, Windows 8.1 with
a Bing OS option is available to OEMs at a price thats probably close to zero or US$15 at
low-cost devices.
Originally, Microsoft launched the Windows 8.1 OS with Bing solution for below US$249 for
notebooks in 2Q14, however Microsoft has decided to push the offering further in 2015. The
company aims to design some modifications on specifications and applied markets, which
could suppress Chromebooks. Microsoft will offer the program to target a different price range
for different sizes of NBs. They have clear guidance such as thickness needs to go much
slimmer than 25mm or battery life for 5 hrs, and memory starts for 1-4G DDR3 and 16-32GB
SDD or 500GB HDD.
However, to prevent the product line from hurting the brands profitability, the solution will
apply to 14 below models for mature markets, but PC vendors can release 15 models using
the Windows 8.1/ Bing program in other emerging markets. For example, Asustek will also
announce several new inexpensive 14 to 15 K and X series NBs in 4Q, priced at US$249,
using Intel Bay Trail M series processor.
The new offering, combined with lower hardware specs, aims to motivate OEMs to offer a
more attractive product line-up of value-based notebooks and tablets to the market. However,
the much lower NB price will still drive down revenue for PC makers, although it will also help
take attention away from Andorid devices, or Chormebook threat. According to supply chains,
the proportion of entry-level NBs could increase up to 60-70% in 2H15 versus only 50-60% in
1H14.
While these new notebooks have basic processors and specifications just like Chromebooks,
they offer the ability to run actual desktop applications and can work without being connected
to the Internet. They also offer more storage space than basic Chromebooks that ship with a
paltry 16GB of storage, a capacity that's considered standard on many base-model
smartphones and tablets. Please refer to Fig 56 for details on spec comparison.
These low-end Windows notebooks also come in larger screen sizes than most
Chromebooks, which have displays starting at 11 inches up to about 14 inches. For example,
HP Stream 14, a 14 laptop priced at US$299, is designed to take on Chromebook. HP also
has a 15.6-inch non-touch laptop. Dell's $249.99 US Inspiron 15 has a 15-inch display, runs
on an Intel Celeron processor and has 500GB of storage. Google's Chrome OS has no such
touch requirement, and can be managed quite easily with a mouse or a track pad.
While these low-price points could help to decrease the impact from Chromebooks, Microsoft
still lacks tightly integrated cloud services, and these low-cost Windows machines still carry
the burden of being seen as just another Windows client regardless of the price. For
industries like education that have embraced the Chromebook, a cheaper Windows PC is
unlikely to win them back to Microsoft. According to an industry survey, Google-
operated Chromebook devices accounted for almost 30 percent of all education shipments in
Q214. The devices also outnumbered shipments of notebooks running the Windows and
MacOS operating systems combined.

MSFT aims to offer
low-cost Windows
OS with Bing
integration to fend
off threat from
Chrome and
Android devices
The new MSFT Bing
program, however,
will lower ASPs and
hurt profitability for
mainstream models;
makers need to
drive more scale
Microsoft will
extend the offering
to cover multiple
segments, but will
limit to only 14
models in mature
markets
20 October 2014 25
Fig 56 Comparison of Chromebook and Windows low-end NBs
Type Windows NB Widows NB Chromebook Chromebook
Brand HP ASUS HP Acer
Model Stream 14 Eeebook X205-TA HP Chromebook 14 Acer C720
Price $299 $199 $299 $199
Processor AMD A4- 6400T Atom Bay Trail-T T3735 Intel Celeron 2955U Intel Celeron
OS Windows 8.1 Windows 8.1 Chrome OS Chrome OS
Battery 3 cell 38Wh 51 WHr, 4-cell 3 cell
Display 14" 1366x768 11.6" 1366x768 14" 1366x768 14" 1366x768
RAM 2GB 2GB 2GB 2GB
HDD 32GB eMMC 32 / 64GB eMMC 16GB SSD 16GB SSD
ODD NA NA NA NA
Graphics Intel Intel
Webcam Front facing VGA HD Cam VGA Cam
Ports 1 HDMI 1 HDMI 1 HDMI 1 HDMI
SD card reader SD card reader Multiformat media reader SD card reader
2 USB 2.0 1 USB 2.0 1 USB 2.0 1 USB 2.0
1 USB 3.0 1 USB 3.0 2 USB 3.0 1 USB 3.0
802.11 b/g/n 802.11 b/g 802.11 b/g/n 802.11 b/g/n
Bluetooth Bluetooth 4.0 Bluetooth Bluetooth
Dimension(inch) 0.7" height 11.3x7.6x0.69mm 13.6 x 9.4 x 0.81 11.3 x 8 x 0.75
Weight 1.75kg 2.16lbs(980g) 4.1lbs (1.9kg) 2.8lbs (1.3kg)
Notes 100GB free cloud space for 2
yrs from Microsoft
115GB free cloud space for 2
yrs from Microsoft
100GB free cloud space for 2
yrs from Google
30-day free trial for Google
Play Music Access
15GB for life/500GB ASUS
WebStorage free for 2 years
Windows 10 official release in 2Q15 unlikely to trigger a robust
consumer replacement cycle
Windows 10 was announced on September 30, 2014, and Microsoft claims it represents a
significant leap over Windows 8.
Microsoft claims that Windows 10 runs across all form-factor devices including desktops,
laptops, tablets, phablets and smartphones.
Start menu is back: The start menu will be returning on Windows 10
Better Touch/Keyboard and mouse integration: Microsoft is calling the new approach
Continuum and it is an umbrella term for a better merger between two different input
methods. Continuum will be able to automatically switch between modes by detecting how
users interact with their devices.
Virtual desktops: Multiple virtual desktops will enhance the multitasking ability.
Fig 57 Windows 10 major features
Feature Description
One OS One OS for all devices, including DT, NB, AIO, tablet, smartphone, Xbox, etc.
Traditional start menu Return of traditional Start menu is back side by side with the Metro UI.
Multitasking "Task View" feature for multitasking and creating multiple desktops.
Switch laptop/tablet mode "Continuum" feature for easy switching between laptop and tablet mode.
Command Prompt Command Prompt now able to copy and paste with keyboard shortcuts.
Overall, while we view Windows 10 as unlikely to trigger a robust consumer replacement
next 2 quarters. We expect consumer PC shipments to accelerate mostly due to reduced
price points and, to a lesser extent, to the launch of Windows 10. We note that 3 of the last 4
MSFT operating system updates have resulted in a YoY acceleration of PC shipments in the
quarter following the release.
We also note that Microsofts latest OS refresh in 2012 (Windows 8) didnt cause much of a
refresh cycle, and that Windows 8 users account for only 13% of current Windows users.
We note that most customers stayed with their current OS rather than upgrading to Windows
8 as shown by the 4% market share held by Windows 8 OS one year after launch. As a
result, we believe it is likely there may be pent up demand for a new OS after release.
We believe Windows
10 will unlikely
trigger a robust
consumer
replacement cycle,
but could lead to
some ST pent-up
demand post the
Windows 10 release
20 October 2014 26
Fig 58 PC shipments YoY (%) have accelerated in the quarter following a new
Windows OS release 3 of the last 4 instances


Fig 59 Desktop OS market share (%) 3Q14


Fig 60 Desktop OS market share quarter prior to
Windows 8 launch (2Q12)
Fig 61 Desktop OS market share one year post

Source: IDC, Company Data, Macquarie Capital (USA), October 2014 Source: IDC, Company Data, Macquarie Capital (USA), October 2014
Windows XP
45%
Windows 7
40%
Windows Vista
7%
Mac OS X
10.7
3%
Mac OS
X 10.6
3%
Linux
1%
Mac OS
X 10.5
1%
Other
0%
Windows XP
38%
Windows 7
45%
Windows Vista
4%
Windows 8
4%
Mac OS X
10.8
3%
Mac OS
X 10.6
2%
Mac OS
X 10.7
2%
Other
2%
20 October 2014 27
More consolidated landscape, in particular
in consumer PC segments
Given the difficulty in making a profit in the consumer PC market without scale, there are
more PC brands exiting from either regional PC markets or consumer PC markets in 2014.
We believe this still favors top-tier PC brands post the consolidation given a less crowded and
competitive landscape as well as opportunities to gain further market share.
In February 2014, Sony sold off its VAIO Personal computer business to a private
investment fund Japan Industrial Partners. The new company will only concentrate on
the sales of consumer and commercial PCs in the Japan market. Sony discontinued the
sales of PCs from 1Q14 onwards to other countries. In fact, since 1Q, Sony global NB
market share has slid from 2.45% 1Q14 to 1.03% in 2Q14, while its consumer NB share
also declined from 3.4% in 1Q14 to 1.5% in 2Q14.
In September 2014, Samsung decided to exit the NB market and chromebook sales in the
Europe market. According to IDC, Samsungs Europe NB market share slid to only 0.9% in
2Q14, down from 4.4% in 4Q13, as the company diverted its focus to other smart handheld
devices and away from the NB segment.
In September 2014, Toshiba announced it will restructure its PC business to focus only on
commercial segments and withdraw from the consumer segment. The company
announced reducing its size of its PC business by about 900 workers, or a 20% reduction
from its PC headcount, excluding manufacturing segments. Toshiba still captured 5.9% of
the consumer PC market share or 8.5% of the consumer NB market share. This presents
attractive opportunities for other PC brands.
In conclusion, as the combined Samsung+Sony+Toshiba market share still represents close
to 11% globally as of the end of 2Q14, this illustrates the potential market share gain
opportunities for top-tier brands, especially in the consumer segment.
Fig 62 Global NB PC market share trend Fig 63 Global consumer NB market share trend

Source: : IDC Macquarie Research, October 2014 Source: : IDC Macquarie Research, October 2014

0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2
Lenovo HP
Dell Acer
ASUS Apple
Samsung+Sony+Toshiba others
Fujitsu
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2
Lenovo HP
ASUS Acer
Dell Apple
Others
2014 a year of
withdrawing from
the PC market, in
particular consumer
PC segments
Ample room for top-
tier PC brands:
Toshiba still
captured 5.9% of
consumer PC market
share or 8.5% of
consumer NB market
share
20 October 2014 28
Fig 64 EMEA: NB market share trend Fig 65 EMEA: Consumer NB market share Trend

Source: IDC Macquarie Research, October 2014 Source: IDC Macquarie Research, October 2014

Fig 66 Global PC market share Trend Fig 67 Global Desktop PC market share Trend

Source: Macquarie Research, October 2014 Source: IDC Macquarie Research, October 2014
HP split-off could also suggest more favourable pricing environment
Furthermore, on October 7th, HP announced plans to split into two separate listed public
companies -- HP Enterprise and HP Inc as it aims to provide sharper, stronger and more
focused companies; compete better against competitors; respond faster to customer
requirements; and, optimize each firms financial return to provide different and compelling
investment opportunities. The transaction is expected closed by the end of fiscal year 2015.
Post the split, in order to maintain attractive shareholder returns, HPs PC business will either
focus more on driving profitability improvements without undercutting PC price too
aggressively or continue to cut costs, which could also put pressure on its outsourcing
downstream suppliers. HP is ranked as the 2nd PC brand globally with an 18.3% market
share, next to Lenovo in 2Q14. In conclusion, the split could be neutral to slightly positive for
Asia PC brands, such as Lenovo and Asustek, given the potential for more rational price
competition or further industry consolidation.

0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2
Lenovo HP
Acer Group ASUS
Dell Apple
Fujitsu Sony +Samsung + Toshiba
Others
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2
Lenovo HP
Acer Group ASUS
Apple Dell
Sony+Samsung+Toshiba MSI
Others
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2
Lenovo HP Dell
Acer Group ASUS Apple
Toshiba Samsung Fujitsu
Tongfang Others
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2
Lenovo HP Dell
Acer Apple Fujitsu
ASUS Tongfang Samsung
Haier Others
The new HP Inc
could focus more on
steady shareholder
return
20 October 2014 29
Fig 68 HP Inc. Overview (4QFY13-3QFY14) Fig 69 HP Enterprise Overview (4QFY13-3QFY14)

Source: HP, Macquarie Research, October 2014 Source: HP, Macquarie Research, October 2014

Fig 70 PC brands Profitability

Unlike in 2011, when HP announced the sell-off of its PC division and they lost the market
share, we believe HPs market share could still remain resilient given the following reasons (if
compared to historic events):
Both Printer +PC integrated together this time and carry HP brand:
We believe the integrated PC and Printer business under the HP brand will sustain its PC
market share. Meg Whitman (CEO) has been with HP since 2011 and was dedicated to
fully integrating the PC/Printer business (PC business and printing business integrated as
one unit until March 21, 2012). As a result, the split-off this time will produce two separate
listed companies with clearly specified business scope (Fig 68-69), and PC/Printer will be
under the HP Inc.(Fig 68).
It is not the first time, however, that HP has announced a split off in the PC business.
Before Meg Whitman as CEO, in Aug 2011, the former CEO Lo Apotheker once
announced the potential sell-off of the PC division. The announcement was just the
Personal PC business group itself without the printing business. Hence the PC business
would need to exit the HP brand, while the printing business would remain within the
company. Thus the PC business would need to create a new brand, which was costly and
would add uncertainty to HP consumers and enterprise customers as well as distributors.
The plan was later rejected and Mr. Apotheker was dismissed by the board. After that, over
the past three years, HP has merged the printing and PC business creating benefits such
as joint go-to-market, supply chain benefits, logistics, etc, so we believe the split-off this
time should have lower risk in losing PC market share.
Printing
59%
Personal
systems
41%
Revenue: USD57.2bn
Operating Profit: USD5.4bn (OPM: 9.4%)
Key Markets: NB/DT/Mobility/Graphics/ Printing /Managed
Print Services
CEO: Dion Weisler
Enterprise
Group
48% Enterprise
Services
39%
Software
7%
Financial
Services
6%
Revenue: USD58.4bn
Operating Profit: USD6.0bn (OPM: 10.2%)
Key Markets: Server/Networking/Software/ Storage/
Services/Cloud/Converged Systems
CEO: Meg Whitman
-12.0%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
HP (PC division) Asustek Acer Lenovo
However, we dont
think HP will lose
market share post
split
20 October 2014 30
The CEO turmoil situation without a prudent plan in 2010-2011:
Besides the announcement of splitting the PC business off in 2011, Mr. Apotheker also
made other decisions without a prudent plan, which caused a chaotic situation during Sep
2010-Sep 2011 and led to his resignation in September 2011, one year after he was
named CEO. On August 18, 2011, HP announced that it would strategically exit the
smartphone and tablet computer business, focusing on higher-margin "strategic priorities
of Cloud, solutions and software with an emphasis on enterprise, commercial and
government markets." And as mentioned above, HP also contemplated selling off their
personal computer division or spinning it off into a separate company, quitting the 'PC'
business, while continuing to sell servers and other equipment to business customers,
which was a strategy already undertaken by IBM in 2005. And HP also announced
acquiring British big data software firm Autonomy for a 79% premium. Shortly after, HP's
stock dropped sharply, by about 40% (including 25% in one day, 19 August 2011). Media
analysts described HP's actions as a "botched strategy shift" and a "chaotic" attempt to
rapidly reposition HP and enhance earnings that ultimately cost Apotheker his job.
Fig 71 HPs NB market share and event analysis


Fig 72 Major HP announcements
Time Event
Sep 30, 2010 Lo Apotheker was named as HP's new CEO and President.
Aug 18, 2011
HP announced that it would strategically exit the smartphone and tablet computer business,
focusing on higher-margin strategic priorities of Cloud, solutions and software with an
emphasis on enterprise, commercial and government markets. They also contemplated selling
their personal computer division or spinning it off into a separate company, at the time when it
was the biggest player in the NB market with 18.4% unit share in 2Q11. Actions include
discontinuing webOS devices (mobile phones and tablets) operation, and buying the UK big
data software firm Autonomy Corp for about a 79% premium.
Aug 19, 2011 HP's shares dropped 25% in one day (40% in total after the announcements).
Sep 22, 2011
HP Board of Directors dismissed Apotheker and replaced him with fellow board member and
former eBay chief Meg Whitman.
Oct 28, 2011 HP reaffirmed its commitment to the PC business.
Mar 21, 2012
HP announced its printing and PC divisions would become one unit headed by Todd Bradley
from the PC division.

0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
1Q102Q103Q104Q101Q112Q113Q114Q111Q122Q123Q124Q121Q132Q133Q134Q131Q142Q14
HP
HP announced the
intention to sell or spin off
its PC business on Aug
18, 2011.
HP announced to combine
PC and printing into one
unit on Mar 21, 2012.
20 October 2014 31
Fig 73 Dells NB market share and event analysis

Source :IDC, Macquarie Research, October 2014

Fig 74 Dell major announcements
Time Event
Feb 5, 2013
Dell announced it had struck a US$24.4bn leveraged buyout deal that would have delisted its
shares from the NASDAQ and Hong Kong Stock Exchange and taken it private.
Sep 12, 2013
Dell's Board agreed to let founder Michael Dell take the company private through a partnership
with investment firm Silver Lake Partners in a deal valued at US$24.9bn.
Oct 30, 2013 The offer was closed and Dell officially went private.

0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
1Q102Q103Q104Q101Q112Q113Q114Q111Q122Q123Q124Q121Q132Q133Q134Q131Q142Q14
Dell announed to go
private on Feb 5, 2013,
and the deal closed on
Oct 30, 2013.
20 October 2014 32
Our Investment strategy and stock picks
While we believe the overall hardware sector landscape remains challenging, we foresee
selective opportunities and identify a few winners.
We are negative on the PC hardware sector in 2015; however, we see few opportunities in
selective segments. We favour brand OEMs with innovation capabilities that can differentiate
their product offerings or seize cross-over form factor design opportunities ahead of its peers.
We thus favour Apples supply chain over traditional PC brands. After multiple brands have
withdrawn from the PC market, we expect further PC industry consolidation. We are thus
more negative on NB ODMs given less brand customers left. ODMs could face more margin
pressure. We are more cautious on commercial market growth in 2015, but we expect low-
priced NBs and more 2-1 NBs to outshine other segments in 2015.
We are selective in our stock picks. Our favourite picks are based on the following investment
strategies:
We favour Apple-related plays over traditional PC brands supply chains: We prefer
to stay with Apples major iPhone/iPad suppliers given Apples capability to grow divergent
cross-over devices such as iPhones, iPads, iPad minis, iPad Pro, Macbook Airs,
Macbook Pros, which are backed by its solid ecosystem. We also believe Apple will further
strengthen its market position, thus gaining more share. Apple (AAPL US, OP, covered by
Ben Schachter) and Apples major outsourcing supplier, Hon Hai (2317 TT, OP), for
Macboo Pros, iPhones, iPad Air/iPad mini/iPad Pro, remain our favourite stock picks.
We favour selective Asia PC brands over NB ODMs in general given a more
consolidated landscape after multiple PC brands have withdrawn from the PC
market: We favour Asia PC brands that can gain global market share consistently, as well
diversify into divergent form factors (tablets, smartphones) successfully. We are generally
concerned that ODMs could face more pricing pressure given only a few PC brands have
left in the market which will increase their negotiation power over ODMs. We upgrade
Asustek (2357 TT, OP) from Neutral to Outperform as we prefer its higher leverage of its
design capability to differentiate its product offerings, thus helping gain more market share.
Moreover, we believe Asusteks smartphone business could become profitable, given
rising scale of economies, and further diversify into the smartphone business on a longer-
term basis.
We are cautious given a commercial market slowdown, but are more positive on 2-1
form-factor, consumer NB opportunities: We think commercial demand could reach a
peak, and PC demand is unlikely to grow substantially but will have only selective form-
factor opportunities. We maintain a Neutral rating on Intel (INTC, N, covered by Deepon
Nag). We note that corporate PC shipments are set to decelerate in the coming quarters
as the Windows XP corporate replacement cycle tapers down. While we expect
reacceleration from consumer PC markets due to strong growth in emerging segments (2-
in-1s, Chromebooks), low price points and the release of Microsofts new operating system
(Windows 10), we are concerned on excess inventories in the channel and weakening
mix and are cautious on INTC stock. We also downgrade Compal (2324 TT, N) from
Outperform to Neutral as we believe the commercial NB upgrade cycle could reach
saturation and Compal has higher commercial NB demand exposure. Thus Compal will
have a high comparison base in 2014. It also faces an order reshuffle impact from Acer,
thus NB volumes will likely decline in 2015.

20 October 2014 33
Fig 75 Recommendation/valuation summary
EMS/ODM
2317 TT Hon Hai O 43,301 89.0 114.0 31% 7.30 8.00 9.26 12.2 11.1 9.6 1.7 1.6 1.4 15.1 14.9 15.8 2.1 3.1 3.6
2382 TT Quanta N 9,274 73.0 80.0 15% 4.84 5.20 6.03 15.1 14.0 12.1 2.3 2.4 2.3 15.1 16.8 19.3 5.2 5.0 5.8
2356 TT Inventec N 2,501 21.2 21.8 10% 1.97 1.91 2.07 10.8 11.1 10.3 1.4 1.5 1.4 13.5 13.0 14.1 7.5 7.2 7.8
4938 TT Pegatron O 4,104 53.6 66.0 29% 4.17 4.86 5.83 12.9 11.0 9.2 1.1 1.2 1.1 9.4 10.7 12.3 5.2 6.1 7.3
2324 TT Compal N 2,934 20.2 21.7 14% 0.57 1.26 2.12 35.5 16.0 9.5 0.9 1.0 1.0 2.4 5.9 10.1 4.9 7.0 7.0
3231 TT Wistron O 2,399 29.8 37.0 28% 2.42 2.01 3.24 12.3 14.9 9.2 1.1 1.1 1.0 8.9 7.4 11.8 6.2 3.4 5.4
Average 16.7 13.2 10.3 1.6 1.6 1.5 11.7 12.5 14.9 4.9 5.0 5.9

Brand
992 HK Lenovo NR 14,632 10.72 NR NA 0.06 0.08 0.09 25.1 18.0 15.9 5.6 4.9 4.0 24.6 27.9 26.4 0.2 0.2 0.3
2353 TT Acer U 1,844 20.1 17.0 -15% -7.54 0.41 0.41 nmf 48.6 49.4 1.0 0.9 0.9 -31.3 2.0 1.9 0.0 0.0 0.0
2357 TT Asustek O 7,121 291.5 349.0 26% 28.56 28.06 30.30 10.2 10.4 9.6 1.6 1.5 1.4 16.4 15.1 15.4 6.6 6.5 7.1
AAPL US Apple O 576,392 96.3 104.0 10% 5.68 6.31 6.86 16.9 15.2 14.0 5.0 4.7 4.0 30.6 31.2 30.8 1.7 1.9 2.0
HPQ US HP NR 63,453 34.00 NR NA 3.99 3.61 3.74 8.5 9.4 9.1 2.9 2.4 2.2 -31.1 21.2 24.0 1.8 2.1 2.0
Average 15.2 20.3 19.6 3.2 2.9 2.5 1.9 19.5 19.7 2.0 2.2 2.3

PC IC
INTC US Intel N 152,738 30.9 30.0 0% 1.9 2.3 2.4 16.3 13.9 12.8 2.7 2.7 2.4 17.6 19.3 19.8 2.9 2.9 2.9
NVDA US NVIDIA U 9,456 17.5 16.0 -7% 0.9 0.7 1.0 19.4 23.6 16.8 2.2 2.3 2.3 12.5 9.5 13.5 0.4 1.8 1.9
AMD US AMD N 2,021 2.6 4.0 52% -0.1 -0.1 0.1 nmf nmf 31.1 3.7 3.9 2.6 -15.3 -18.3 10.1 0.0 0.0 0.0
Average 17.9 18.8 20.2 2.9 3.0 2.4 4.9 3.5 14.5 1.1 1.6 1.6
Source: Bloomberg, Macquarie Research, October 2014; pricing as of October 17, 2014; note estimates for not rated stocks are based on Bloomberg
consensus
Dividends for our Asia hardware sector remain attractive, on average of 4.8%, which could be
key support for these stocks despite unexciting growth outlook in general.
Fig 76 Asia Hardware: 2014E dividend yield comparison

Source: Macquarie Research, October 2014, market data as of October 17, 2014
Average=4.8%
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Hon Hai Quanta Inventec Pegatron Compal Wistron Acer Asustek
(%)
20 October 2014 34
Fig 77 Hardware stock QFII holding history

* PC ODM= Compal, Quanta, Wistron, Inventec; PC brands=Asustek, Acer; EMS=Hon Hai, Pegatron

Fig 78 ODMs vs. Intel: Stock performance Fig 79 PC Brands vs. Intel: Stock performance

Fig 80 EMS vs. Apple: Stock performance


30
35
40
45
50
55
(%)
PC ODM PC brands EMS
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
Compal Quanta Wistron
Inventec Hon Hai Pegatron
Intel
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
Acer Asustek Intel
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
Hon Hai Pegatron Apple
20 October 2014 35
Fig 81 Stock picks summary
Company Ticker Analyst Investment highlight PT & Valuation
Apple (OP) APPL US Ben Schachter *iTunes/Software/Services will be a key profit growth driver
for the foreseeable future, and we believe that these
businesses are underappreciated by the investment
community
*AAPLs hardware growth prospects uncertain
Innovation is sure to come in both hardware and software,
however quantifying their impact is nearly impossible
*Our TP of US$104 is based on PE methodology.
* The stock trades at 15.2x/14.0x 2014E/2015E PE,
versus its historic PE band of 9-17x since 2012
Asustek
(OP)
2357 TT Ellen Tseng * Beneficiary of better pricing environment from PC brands
consolidation and HP split-off.
* Better product innovation capability such as 2-1 products
leading to market share gain.
* Profitability of smartphone business to revive its growth
potential.
* Our TP of NT$349 is based on 11x 2H15-1H16 PE.
versus its historic PE band of 8-12x since 2012.
Hon Hai
(OP)
2317 TT Ellen Tseng * Major EMS for Apple's iPhone, beneficiary of strong
iPhone sales momentum.
* AppleiPad Pro supplier in addition to iPad air/iPad mini
* Diversified product portfolio with vertical integration
capability.
Pegatron
(OP)
4938 TT Ellen Tseng * Apples 2
nd
largest EMS supplier, focus mainly on iPhone
6/iPhone 5C
* Improving execution for Apples smartphone business, but
a 2
nd
tier player, with undemanding valuation
* favourable risk-reward
* Our TP of NT$66 is based on SOTP.
Wistron
(OP)
3231 TT Ellen Tseng * LCM business growth opportunities along with Apple
iPhone 6/6 Plus.
* Smartphone business to stabilize as becoming Apple's
supplier for iPhone 5C.
* NB business reviving the growth on share gain
Compal (N) 2324 TT Ellen Tseng * Higher exposure to commercial PC, thus will be impacted
by commercial upgrade peaking out.
* Acer's order reshuffle to affect 2015 growth outlook.
* Margin pressure post PC brands consolidation.
* Our TP of NT$21.7 is based on 10x 2H15-1H16
PE.
Intel (N) INTC US Deepon Nag

* Concern on channel inventory despite PC share gain
* Windows 10 to provide spark for 2H15 demand
* ASP pressure on unfavourable product mix in 2015.
* Our TP of US$30 is based on 12x 2015E PE.
versus its historic PE band of 9-17x since 2012
Inventec (N) 2356 TT Ellen Tseng * Decelerating demand NB and server
* Migration to Intel's Grantley Xeon will push back to 2015.
* Lenovos new server outsourcing still showing limited
progress
* Our TP of NT$21.8 is based on 10x 2H15-1H16
PE.
Quanta (N) 2382 TT Ellen Tseng * Potential cannibalization of NB from 12.9" iPad.
* Tiny earnings contribution from Apple Watch in 2015.
* Data Center business outlook remaining intact.
Acer (UP) 2353 TT Ellen Tseng * Unsustainable PC market share and shipment growth due
to less differentiation in product portfolio.
* BYOC development still in early stage
* Smartphone strategy not yet certain
* Our TP of NT$17 is based on 0.8x 2015 PB.
* The stock trades at 0.9x/0.9x 2014E/2015E PB,
and 48.6x/49.4x 2014E/2015E PE.
Source: Macquarie Research, October 2014

Fig 82 Summary of ratings/TP/earnings estimates changes
Present Previous Change
Ticker Company Rating
Target
Price
2014E
EPS
2015E
EPS
2016E
EPS Rating
Target
Price
2014E
EPS
2015E
EPS
2016E
EPS Rating
Target
Price
2014E
EPS
2015E
EPS
2016E
EPS
(LC) (LC) (LC) (LC) (LC) (LC) (LC) (LC) (%) (%) (%) (%)
AAPL US Apple O 104.0 6.31 6.86 7.02 O 104.0 6.31 6.86 7.02 - 0.0% 0.0% 0.0% 0.0%
2357 TT Asustek O 349.0 28.06 30.30 33.44 N 334.0 28.10 30.32 33.40 UG 4.5% -0.1% -0.1% 0.1%
2317 TT Hon Hai O 114.0 8.00 9.26 9.79 O 112.0 7.89 9.08 9.53 - 1.8% 1.4% 2.0% 2.8%
4938 TT Pegatron O 66.0 4.86 5.83 6.31 O 74.0 4.97 6.61 7.73 - -10.8% -2.2% -11.8% -18.3%
3231 TT Wistron O 37.0 2.01 3.24 3.50 O 37.0 2.05 3.26 3.52 - 0.0% -1.7% -0.7% -0.7%
2324 TT Compal N 21.7 1.26 2.12 2.23 O 31.5 1.32 2.68 3.14 DG -31.1% -4.2% -20.9% -29.1%
INTC US Intel N 30.0 2.21 2.41 2.63 N 30.0 2.21 2.41 2.63 - 0.0% 0.0% 0.0% 0.0%
2356 TT Inventec N 21.8 1.91 2.07 2.32 N 21.8 1.92 2.09 2.33 - 0.0% -0.5% -1.3% -0.3%
2382 TT Quanta N 80.0 5.20 6.03 7.48 N 89.0 5.38 6.33 7.76 - -10.1% -3.3% -4.8% -3.6%
2353 TT Acer U 17.0 0.41 0.41 0.43 U 17.0 0.34 0.27 0.29 - 0.0% 20.8% 51.4% 48.5%

20 October 2014 36
Company notes
Intel - Where did all the processors go? ................................................................................. 37
Asustek Computer - Steady progress ..................................................................................... 58
Hon Hai Precision - Still favorable iPhone 6/6 Plus cycle ....................................................... 69
Pegatron - Undervalued; Risk-reward favourable ................................................................... 77
Wistron - Growing along with Apple ........................................................................................ 86
Quanta - What if a larger iPad (>12) cannibalizes NB? ......................................................... 93
Compal - Margin risk kicks in ................................................................................................ 100
Inventec - Darkness before Dawn II ..................................................................................... 108
Acer - In transition but fortunes still uncertain ....................................................................... 115


20 October 2014 37
UNITED STATES

Cumulative excess processors (mn)

Source: Mercury Research, IDC, Macquarie Capital,
October 2014.

INTC US Neutral
Price (at 20:15, 17 Oct 2014 GMT) US$31.38
Valuation US$ 30.00
- PER
12-month target US$ 30.00
12-month TSR % -1.5
GICS sector
Semiconductors & Semiconductor
Equipment
Market cap US$m 158,312
30-day avg turnover US$m 1,270.2
Number shares on issue m 5,045

Investment fundamentals
Year end 31 Dec 2013A 2014E 2015E 2016E
Revenue m 52,708 55,849 58,574 62,386
EPS rep US$ 1.89 2.21 2.41 2.63
EPS adj US$ 1.85 2.27 2.41 2.63
PER adj x 17.0 13.8 13.0 11.9
Total DPS US$ 0.90 0.90 0.90 0.90
Total div yield % 2.9 2.9 2.9 2.9
P/BV x 2.7 2.7 2.5 2.3

Source: FactSet, Macquarie Capital (USA), October 2014
(all figures in USD unless noted)
Analyst(s)
Deepon Nag
+1 212 231 8014 deepon.nag@macquarie.com

20 October 2014
Macquarie Capital (USA) Inc.
Intel
Where did all the processors go?
Intel has been reporting significant processor growth for several quarters now, as
strength in the PC market, share gains versus AMD and expansion into new markets
(Chromebooks, tablets, and embedded) has driven sales. While the blurring of lines
between computing devices types makes it difficult to track where all the processors
are going, in conjunction with our Asia hardware team we take a detailed look at the
computing device market, including convertible 2-in-1s, Chromebooks, tablets and
smartphones. After adjusting both industry processor from Mercury Research and
computing device data from IDC, we estimate that there are roughly 4-9 million
excess processors in the supply chain, which adds risk to Consensus estimates.
Total computing market should be flat in CY14E, CY15E. Our Asia hardware
analyst, Ellen Tseng, estimates that PC shipments (NB+DT) will decline 1.7% YoY in
CY15E, with convertible 2-in-1s growing at 66% YoY and Chromebooks at 68%
YoY. Combining all compute device types (notebooks, desktops, and 2-in-1s) we
estimate the computing market will be roughly flat in CY14E and CY15E (see Fig 5).
Processors outgrow compute market for 6 straight quarters. Intel stated that PC
supply chain inventories were within normal levels and that it expects a seasonal Q4.
While we are modelling 6% QoQ growth in computing shipments in Q4, we note
Ellen expects Q4 notebook ODM shipments to decline 3% QoQ in Q4 (see Fig 6)
which adds risk to our estimates. Excluding tablet processor shipments from the
Mercury data, we estimate total microprocessors grew 7% YoY, well above a flat
estimated computing market in 3Q14. While we believe Intel is gaining significant
processor share versus AMD (110 basis points in 3Q14), we note that NB ODM and
PC OEM inventories appeared roughly normal to high in Q2 (Figures 8, 9) which
adds risk of an inventory correction if end demand softens. We also note that the PC
market growth is highly correlated with INTC stock performance (Figure 10).
Processor inventory built up, no matter what time period we use. We analysed
adjusted cumulative processor shipments relative to adjusted PCs and estimate
inventories grew from a surplus of roughly 1.2 million processors in 2Q14 to a
surplus of 9.2 million units in 3Q14 (see Figure 11). While we use 3Q10 as our base
quarter for analysis, we note that no matter which starting point we use, our analysis
suggests there are excess processors in the channel. Based on our CY14 computing
forecast of flat YoY and our CPU forecast, we estimate 4Q14 processor inventories
will stay at surplus of roughly 9 million units. While its possible that new applications
not captured in our model (embedded, storage, communications) may be soaking up
some of the surplus units, we believe the magnitude of the excess growth is
suspicious. We estimate every million processors add roughly $90 million and $0.01
EPS to our INTC CY14 EPS estimates.
Risk to estimates if inventory corrects. While we are impressed with Intels
execution, cash flow generation and strategic focus, we believe that a combination of
concerning fundamentals (softening end demand, elevated channel inventory levels,
end of Windows XP tailwind) and technicals (peaking gross margins, decelerating
estimate revisions) will pressure the stock in the coming months and are Neutral-
rated on INTC.
0.9
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Cumulative since 3Q10
INTC negative preannouncements
Current quarter
20 October 2014 38
Inside

Fig 1 Cumulative excess processors (millions)

Source: Mercury Research, IDC, Macquarie Capital, October 2014

Fig 2 INTC US vs S&P 500, & rec history

Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Capital (USA), October 2014
(all figures in USD unless noted)

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Current quarter
20 October 2014 39
Post results from Intel and AMD last week, we analysed processor inventories in the supply chain. We
also review Mercury Research processor market share. Our analysis suggests potential unit downside to
our INTC/AMD models if total computing unit growth in 2014 meets our flat YoY estimate.
From 2Q07-2Q14, PC shipment growth has had a very strong correlation with microprocessor shipment
growth (R = 0.92).
Fig 3 Microprocessor growth highly correlated with PC shipment growth

Source: Mercury Research, IDC, Macquarie Capital, October 2014.
However, processors have now outgrown PC shipments for 6 consecutive quarters, although that
followed a period where they undergrew for 3 consecutive quarters.
y = 0.696x + 0.0062
R = 0.919
-15%
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CPU shipment growth YoY (%) vs. PC shipment growth YoY (%)
Mercury DT+NB CPU units Linear (Mercury DT+NB CPU units)
20 October 2014 40
Fig 4 Processor shipments growing faster than computing device shipments (%)

New device categories driving growth
As our Asian hardware team writes, new device categories such as 2-in-1s, Chromebooks, and
phablets are experiencing significant growth as the line between computing device types blurs. While
we estimate conventional PC units will decline 1.7% YoY in CY14E, we expect 2-in-1 convertible tablets
to grow 66% YoY, and Chromebooks to grow 68% YoY.
IDC includes Chromebooks in its PC estimates, but excludes 2-in-1s and tablets. Adjusting the PC TAM
to include 2-in-1s, we estimate the total computing market TAM was roughly flat at 320 million units in
CY14E and will be flat YoY in CY15E.
Fig 5 Total device unit forecast
Volume( unit) 2013 2014E 2015E 2016E 2017E
Desktop 136 138 135 133 131
NB 178 171 169 167 166
2-1 NB/tablets 6.2 10.3 16 22.1 27
Pure Tablet 219 236 264 294 325
SubTotal (PC+Tablet) 539 555 584 616 650
High end smartphones 274 303 322 332 337
Mid-range smartphones 305 373 410 444 469
Low-end smartphones 422 578 687 796 911
SubTotal (smartphone) 1002 1253 1419 1572 1717

Growth rate( YoY) 2013 2014E 2015E 2016E 2017E
Desktop -8% 1.5% -2.0% -2.0% -1.0%
NB -11% -4.0% -1.5% -0.7% -0.6%
2-1 NB/Tablets 33.7 66.1% 55.3% 38.1% 22.2%
Tablet 52.20% 7.9% 12.0% 11.5% 10.5%
SubTotal(PC+Tablet) 8.0% 3.0% 5.1% 5.6% 5.4%
High end smartphones 21.8% 10.6% 6.3% 3.1% 1.5%
Mid-range smartphones 27.6% 22.3% 9.9% 8.3% 5.6%
Low-end smartphones 62.3% 37.0% 18.9% 15.9% 14.4%
Sub-total(smartphone) 38.0% 25.0% 13.2% 10.8% 9.2%
Total device growth( YoY) 26.0% 17.3% 10.8% 9.3% 8.2%
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Processor shipment growth above/(below) PC shipment growth
20 October 2014 41
Processors outgrow compute market for 6 straight quarters
Intel stated that PC supply chain inventories were within normal levels and that it expects a seasonal Q4.
Ellen expects Q4 notebook ODM shipments to decline 3% QoQ in Q4 as the tailwind from the Windows
XP EOL corporate refresh cycle fades.
Fig 6 Intel processor revenue versus notebook, motherboard and PC shipments

Source: Company Data, Macquarie Capital (USA), October 2014.
Excluding tablet processor shipments from the Mercury data, we estimate total microprocessors grew 7%
YoY, well above a flat estimated computing market.
2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14E
Intel processor revenue
QoQ 6% 5% 3% -9% 10% 8% 1%
prior year QoQ 5% -2% 1% -5% 6% 5% 3%
normal seasonality -3% 11% 4% -7% -3% 11% 4%
YoY -1% 6% 9% 5% 8% 11% 9%
Global PC units
QoQ -1% 6% 4% -12% 2% 6% 4%
prior year QoQ -4% 3% -2% -12% -1% 6% 4%
normal seasonality -2% 11% 12% -9% -2% 11% 12%
YoY -11% -10% -5% -5% -2% -2% -1%
Notebook ODM units
QoQ 4% 5% 7% -18% 7% 11% -3%
prior year QoQ 7% -2% 3% -18% 4% 5% 7%
normal seasonality 10% 20% 13% -11% 10% 20% 13%
YoY -14% -8% -4% -4% -1% 4% -6%
Motherboard units
QoQ 0% 2% 2% -9% 3% 3% 2%
prior year QoQ 8% 2% -10% -12% 0% 2% 2%
YoY -19% -19% -8% -5% -2% -2% -2%
20 October 2014 42
Fig 7 CPU shipment growth YoY (%) vs Computing market growth YoY (%)

While we believe Intel is gaining significant processor share versus AMD (110 basis points in 3Q14), we
note that NB ODM and PC OEM inventories appeared roughly normal to high in Q2 (figure 2,3) which
adds risk of an inventory correction if end demand softens.
Fig 8 NB ODM inventories Fig 9 PC OEM inventories

Source: FactSet, Company Data, Macquarie Capital (USA), October 2014. Source: FactSet, Company Data, Macquarie Capital (USA), October 2014.
We also note that PC market growth is highly correlated with INTC stock performance (Figure 10).
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20 October 2014 43
Fig 10 Accelerating PC shipments also correlated with INTC relative stock performance

Source: IDC, company data, Macquarie Capital (USA), October 2014. Relative stock outperformance vs. S&P500 as of
10/13/14.
Processor inventory built up, no matter what time period we use
We analysed adjusted cumulative processor shipments relative to adjusted PCs and estimate inventories
grew from a surplus of roughly 1.2 million processors in 2Q13 to a surplus of 9.2 million units in 3Q14.

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20 October 2014 44
Fig 11 Cumulative microprocessor inventory excess/(deficit), millions of units

Source: Mercury Research, IDC, Company Data, Macquarie Capital (USA), October 2014.
While we use 3Q10 as our base quarter for analysis, we note that no matter which starting point we use,
our analysis suggests there are excess processors in the channel.
Fig 12 Cumulative excess processors adjusted for starting point of analysis (thousands)

Source: Mercury Research, IDC, Company Data, Macquarie Capital (USA), October 2014. Black bars represent quarters
Intel negatively preannounced

0.9
(3.5)
(2.4)
1.9
2.7
(0.6)
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2.2
(5.3)
(9.0)
(4.6)
(2.5)
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20 October 2014 45
Based on our CY14 computing forecast of flat YoY and our CPU forecast, we estimate 4Q14 processor
inventories will stay at surplus of roughly 9 million units. We estimate every million processors add
roughly $90 million and $0.01 EPS to our INTC CY14 EPS estimates.
Where could we be wrong?
Areas to which our analysis is sensitive include the starting point for supply/demand balance, PC unit
tracking and the size of the non-PC processor market. We assume 3Q10 as a starting point for the
cumulative processor shipment analysis as we believe shipment rates and PC OEM inventories were
roughly balanced in 2H10 post Intels negative preannouncement in 3Q10. In addition, tracking channel
PC shipments is difficult and it may be the case that historical PC shipments are under/over-estimating
PC demand. It is possible that new applications not captured in our model (embedded, storage,
communications) may be soaking up some of the surplus units. Finally, if growth in non-PC applications
is above/below normal, it could alter our estimate of chip inventories. We include sensitivity analysis to
these variables.
Q3 above seasonal... again
Mercury estimates global shipments of microprocessors increased 11% QoQ in 3Q14, above a C05-C14
average of up 9% QoQ in Q3 and IDCs estimate for a global PC shipment increase of up 6% QoQ in
3Q14. Mercury estimates server processors increased 8% QoQ, and desktop and notebook processor
units increased 2% and 17% QoQ respectively. We note that the notebook processor estimate includes
the roughly 15 million tablet processors Intel shipped in Q3; if we exclude them we estimate notebook
processor shipments increased 12% QoQ. We expect overall processor units to be flat QoQ in 4Q14,
slightly below normal seasonality.
Fig 13 Processor shipments by form factor (QoQ change)

Source: Company data, Mercury Research, Macquarie Capital (USA), October 2014.
On a year-over-year basis, Mercury estimates CPU units were up 20% in 3Q14 (up 7% YoY ex-tablets),
above a 2% YoY decline in PC shipments. This marks the sixth quarter in a row that CPU shipment
growth was higher than PC shipment growth YoY.
Fig 14 Year-over-year CPU and PC unit shipment growth

Source: Company data, Mercury Research, IDC, Macquarie Capital (USA), October 2014. CPU YoY is ex-tablet.
Intel market share rises with share gains in NB and continued dominance in servers
Intels share of the microprocessor market grew 110 basis points to 89.7% in 2Q14 as share gains in
server and notebook offset share loss in desktop to AMD. Mercury estimates that Intels market share in
servers grew 50 basis points to 98.3%, its highest level since 2003. We note that AMD is disinvesting in
its legacy x86 server business, and we dont expect meaningful volumes from its ARM-based offerings
(Seattle) through 2015. INTCs market share in notebooks grew 260 basis points which we believe is
primarily due to share gains in the low-end of the market with its Bay Trail processors.
4Q13 1Q14 2Q14 3Q14 4Q14E
Server cpu -1% -9% 16% 8% 7%
Desktop cpu 4% -8% 7% 2% 0%
Mobile cpu -2% -8% 25% 17% 0%
Total cpu 1% -8% 17% 11% 0%
normal seasonality 2% -6% 5% 9% 1%
3Q13 4Q13 1Q14 2Q14 3Q14 4Q14E
CPU YoY -3% 3% -1% 2% 7% 7%
PC YoY -10% -5% -5% -1% -2% 1%
CPU H/(L) 6% 8% 4% 3% 8% 7%
20 October 2014 46
Fig 15 CPU microprocessor market share (% units)

Source: Mercury Research, Macquarie Capital (USA), October 2014.
We expect INTCs share to increase 50 basis points in 4Q14E driven largely by a 100 basis-point gain in
notebook PC market share as INTC continues to take share in the low-end of the notebook market.
Fig 16 Processor unit market share (%)

Source: Mercury Research, Macquarie Capital (USA), October 2014
Processors continue to ship above normal levels
Intel negatively preannounced in 3Q12, which coincided with a steep deceleration in PC shipment growth
and inventory destocking by PC OEMs through 1Q13. Since PC growth troughed in 1Q13, we believe
that processor inventories have benefitted from some inventory restocking as PC shipments have
accelerated into the expiration of support for Windows XP. We believe that as the Windows XP EOL
benefit fades, there is risk to processor overshipment with the PC demand decline.

INTC, 89.7%
AMD, 10.1%
Other, 0.2%
4Q13 1Q14 2Q14 3Q14 4Q14E
Intel 86.2% 87.1% 88.6% 89.7% 90.2%
AMD 13.5% 12.7% 11.2% 10.1% 9.6%
20 October 2014 47
Fig 17 PC shipments YoY (%) vs NB+DT processor shipments YoY (%)

Source: Mercury Research, IDC, Company data, Macquarie Capital (USA), October 2014.
While we estimate that Windows XP is still 20-25% of the total PC market, we believe the Windows XP
EOL benefit is largely over, leading to a decline in PC shipments in 2015.
Fig 18 PC unit growth YoY% post Windows OS support end of life

Source: Company data, Macquarie Capital (USA), October 2014
We also note that INTC stock outperformance is highly correlated with PC YoY growth.

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20 October 2014 48
Fig 19 INTC relative stock performance YoY (%) vs PC shipment growth YoY (%)

Source: IDC, Company data, Macquarie Capital (USA), October 2014
Inventories look normal in the supply chain but slightly elevated at ODMs
While inventories in the supply chain in Q2 relatively normal, we note that NB ODMs and PC OEM
inventories appeared roughly normal to high in Q2 which adds risk of an inventory correction if consumer
end demand remains soft.
Fig 20 Supply-chain inventories remain

Source: FactSet, Company data, Macquarie Capital (USA), October 2014.

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INTC rel performance YoY PC unit growth YoY (%)
2Q13 3Q13 4Q13 1Q14 2Q14 5 Year Q2 Average H/(L) than Average %
Semis 80 82 73 74 76 79 (4) -5%
Distributor 39 42 36 42 40 41 (1) -2%
Contract manuf acturer 43 45 33 42 44 44 (0) -1%
IT Distributor 33 34 30 35 35 33 2 7%
PC OEM 31 27 26 28 28 29 (0) -1%
Storage 37 40 38 42 44 36 8 21%
Comm OEM 57 60 50 64 65 64 2 3%
Handsets 36 36 27 34 35 34 0 1%
Carriers 11 11 10 10 10 10 0 1%
Electronic retail 73 87 42 67 73 71 2 3%
Cable and Satellite 13 12 9 11 10 12 (2) -15%
Total Weighted Average 34 35 29 34 34 35 (0) -1%
Note: 2Q13 3Q13 4Q14 1Q14 2Q14 5 Year Q2 Average
ODM 39 41 27 37 41 38 2 5%
Foundry 49 47 46 53 52 49 3 6%
20 October 2014 49
Key assumptions for analyzing excess processor inventory
In this report we attempt to quantify how much excess processor inventory could be in the supply chain
and what level of PC unit demand could consume it in 2014. In order to perform the analysis we have to
make several assumptions. Areas to which our analysis is sensitive include the starting point for
supply/demand balance, PC unit tracking and the size of the non-PC processor market. We assume
3Q10 as a starting point for the cumulative processor shipment analysis as we believe shipment rates
and PC OEM inventories were roughly in balance following Intels negative preannouncement in the
quarter. In addition, tracking channel PC shipments is difficult and it may be the case that historical PC
shipments are under/over-estimating PC demand. Finally, if growth in non-PC applications (including
newer ones in consumer electronics/handhelds) is above normal, it could consume some of the currently
estimated processor inventory. We include sensitivity analysis to these variables.
Assumption 1: Use 3Q10 as starting point to analyze cumulative excess processor levels
As part of estimating the accumulation of excess processor inventory (or, conversely, its burn), we are
establishing 3Q09 as a starting point due to a combination of growth parity between processors and PCs.
PC OCM inventories were roughly in line with a trailing average in Q2.
Fig 21 PC OEM days of inventory (days)

Source: Factset, Company Data, Macquarie Capital (USA) October 2014. Data for Lenovo, HP, Dell and Apple.
We analyzed sensitivities to timing for various starting points around 3Q10. In general, using 2Q13
shows the most excess inventory in 3Q14, while 3Q12 shows the least excess inventory in 3Q14.
Assumption 2: normal excess processor shipments of 4-5% of PC shipments
We would note processor unit shipments (as estimated by Mercury Research) have historically
outstripped PC unit shipments (as estimated by IDC). We believe this is primarily the result of desktop
and notebook processors finding their way into non-PC (or embedded) applications such as point-of-
sale (POS) terminals and industrial equipment. We estimate microprocessors outshipped PC systems by
14% in 3Q14.
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20 October 2014 50
Fig 22 Quarterly PC and ADJUSTED processor shipments (thousands of units)

Source: Company data, IDC, Mercury Research, Macquarie Capital (USA), October 2014.
We estimate during the C03-C07 period (a normal period of relatively stable PC end-demand),
processors outshipped PCs by an average of % per quarter. Over the last 10 years processors have
exceeded PC shipments by roughly 4.5%. Over the last 5 years to 3Q14, processors outshipped PCs by
an average of 5.5%. Our analysis assumes a normal range of 4-5%. In general, a higher normal
excess processor shipment rate will reduce the amount of excess PC processor inventory accumulated.
We do not believe 5.7% or 6.2% should be a base case scenario as it would have suggested that
processor inventories have been in deficit since 2010, which obviously has poor predictive value given
the 2 negative preannouncements the company has experienced in the meantime.
Fig 23 Quarterly CPU shipments above/(below) PC shipments (%)

Source: Company data, Mercury Research, IDC, Macquarie Capital (USA), October 2014.
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C03-C07 average = 6.2%
3Q14 10-year average = 4.5%
20 October 2014 51
Converged devices add risk to mix
In conjunction with our Asian hardware team, we see different computing devices converging as PCs
reach price points in parity with tablets and smartphones. We also note that corporate PC shipments are
set to decelerate in coming quarters as the Windows XP corporate replacement cycle tapers down. While
we expect reacceleration from consumer PC markets due to strong growth in emerging segments (2-in-
1s, Chromebooks), low price points and the release of Microsofts new operating system (Windows 10),
we are concerned on excess inventories in the channel and weakening mix and are cautious on INTC
stock.
Windows 10 could provide spark in 2H15 demand
Post the Windows XP EOL replacement cycle, we believe corporate PC shipments will decline into 2015.
Fig 24 Windows XP EOL benefit fading

Source: IDC, Company Data, Macquarie Capital (USA), October 2014.
However, we expect consumer PC shipments to accelerate due to reduced price points and the launch of
Windows 10. We note that 3 of the last 4 MSFT operating system updates have resulted in a YoY
acceleration of PC shipments in the quarter following the release.
Fig 25 PC shipments YoY (%) have accelerated in the quarter following a new Windows OS
release 3 of the last 4 instances

Source: IDC, Company Data, Macquarie Capital (USA), October 2014.
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WindowsXP launch (Aug '01)
WindowsVista launch (Nov '06)
Windows7 launch (July '09)
Windows8 launch (Aug '12)
20 October 2014 52
We also note that Microsofts latest OS refresh in 2012 (Windows 8) didnt cause much of a refresh
cycle, and that Windows 8 users account for only 13% of current Windows users.
Fig 26 Desktop OS market share (%) 3Q14

Source: Netmarketshare.com, Macquarie Capital (USA), October 2014
We note that most customers stayed with their current OS rather than upgrading to Windows 8 as shown
by the 4% market share held by Windows 8 OS one year after launch. As a result, we believe it is likely
there may be pent-up demand for a new OS.
Fig 27 Desktop OS market share quarter prior to
Fig 28 Desktop OS market share one year post

Source: Netmarketshare.com, Macquarie Capital (USA), October 2014 Source: Netmarketshare.com, Macquarie Capital (USA), October 2014
but mix is likely to become more of an issue in CY15E
While Macquarie expects overall PC shipments to decline modestly in CY15E, we note that the mix of
those PCs is likely to be much poorer. We estimate that INTCs notebook ASPs will decline 10% in
CY14E and 12% in CY15E due to mix, and are concerned of further downside risk in CY15E as
corporate PCs decline as a percentage of the mix.
Windows XP
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Linux
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Other
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Windows 8
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X 10.6
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Other
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20 October 2014 53
Fig 29 Commercial PC shipments as % of total PCs shipped (%)

Source: IDC, Macquarie Capital (USA), October 2014
Gaining share in tablets, but not as attractive a market
We estimate Intels market share of the non-Apple tablet market has grown from 2% in 1Q13 to 28% in
2Q14.
Fig 30 Intel tablet market share as % of total tablet market and non-iOS tablet market (%)

Source: Gartner, Company data, Macquarie Capital (USA), October 2014.
We expect continued inroads in CY15E, although note that decelerating tablet growth rates make share
gains the primary driver of segment growth. We estimate Intels mobile business will lose ~$3.5 in
CY15E.
Windows mobile platforms are indirect beneficiaries
One of the primary features expected in Windows 10 is the ability for apps to run across all Windows
devices. Previously app developers had to make a choice between developing for an Apple or Android
OS or the niche market Windows mobile OS. We believe a unified app store will increase the number of
apps available for Windows mobile devices, potentially increasing Windows Phone adoption.
MSFTs share in the smartphone market has been dwindling over the past few quarters but we believe
that the Windows 10 refresh may increase demand for Microsoft platform overall.
46% 46%
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1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14E 4Q14E 1Q15E 2Q15E 3Q15E 4Q15E
Intel market share Intel share of non-iOS market
20 October 2014 54
Fig 31 MSFT smartphone market share

Source: IDC, Macquarie Capital (USA), October 2014
While QCOM chips have been designed in the bulk of Windows Phones to date, we believe Intel can
drive a strong value proposition in the market given its deep technology development efforts in the
Windows ecosystem
CY14/15 estimates may be too high unless PC growth continues to accelerate
Consensus NTM estimates for INTC have come down over the past few years before rising over the past
few quarters. We note that peaking earnings are usually a negative indicator for INTC stock.
Fig 32 INTC NTM EPS estimates vs. INTC stock (US$)

2.0%
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20 October 2014 55
We are roughly in line with consensus for 2015.
Fig 33 Macquarie estimates versus Consensus estimates ($US millions, except per-share data)

Our estimates for the Data Center group are above Consensus estimates, offset by lower estimates for
the companys PC Client group. We note this analysis suggests there is further risk to our estimates for
the PC Client group, which implies significant downside to Consensus estimates if PC growth doesnt
continue to accelerate as we believe the street does not have inventory destocking in their models
Fig 34 Macquarie segment estimates versus Consensus segment estimates ($US millions, except per share data)

Valuation and recommendation
INTC trades at 13x 2015E EPS, above the high end of a normal range of 10-11x NTM EPS, but below
the S&P 500 PER of 16x. INTC also trades at 2.8x enterprise value to CY2014E revenue, above the high
end of a normal range of 2.1-2.5x. We are strong believers in Intels technology advantage, execution
and strong cash flow. However, we believe that cyclical inventory destocking, limited near-term gains
from the companys new initiatives and deterioration in the core PC market will lead to downward
estimate revisions. We would wait for a reset in expectations before adding to positions.
FYE Dec., $USmn 1Q14 2Q14 3Q14 4Q14E 1Q15E 2Q15E 3Q15E 4Q15E C13 C14E C15E
Macquarie Revenue 12,764 13,831 14,554 14,700 13,636 14,554 15,054 15,330 52,708 55,849 58,574
QoQ -8% 8% 5% 1% -7% 7% 3% 2%
YoY 1% 8% 8% 6% 7% 5% 3% 4% -1% 6% 5%
Consensus Revenue 12,764 13,831 14,554 14,700 13,721 14,145 14,829 14,986 52,708 55,849 57,681
QoQ -8% 8% 5% 1% -7% 3% 5% 1%
YoY 1% 8% 8% 6% 7% 2% 2% 2% -1% 6% 3%
Macquarie gross margin 59.7% 64.5% 65.0% 64.0% 60.6% 63.0% 62.0% 61.2% 59.8% 63.4% 61.7%
Consensus gross margin 59.7% 64.5% 65.0% 64.0% 61.7% 62.5% 63.4% 63.9% 59.8% 63.4% 62.9%
Macquarie operating margin 20.9% 28.4% 31.3% 30.2% 25.6% 29.8% 29.4% 29.1% 23.8% 27.9% 28.5%
Consensus operating margin 20.9% 28.4% 31.3% 30.2% 26.6% 27.6% 29.8% 30.6% 23.8% 27.9% 28.7%
Macquarie PF EPS $0.41 $0.56 $0.66 $0.64 $0.50 $0.62 $0.64 $0.64 $1.85 $2.27 $2.41
Consensus PF EPS $0.41 $0.55 $0.65 $0.66 $0.52 $0.57 $0.64 $0.65 $1.85 $2.27 $2.38
FYE Dec., $USmn 1Q14 2Q14 3Q14 4Q14E 1Q15E 2Q15E 3Q15E 4Q15E C13 C14E C15E
Macquarie PC Client Group 7,941 8,667 9,190 8,959 8,113 8,432 8,636 8,410 33,270 34,757 33,590
QoQ -8% 9% 6% -3% -9% 4% 2% -3%
YoY -1% 6% 9% 4% 2% -3% -6% -6% -3% 4% -3%
Consenus PC Client Group 7,941 8,667 9,190 9,205 8,495 8,627 8,976 8,999 33,270 35,003 35,097
QoQ -8% 9% 6% 0% -8% 2% 4% 0%
YoY -1% 6% 9% 7% 7% 0% -2% -2% -3% 5% 0%
Macquarie Data Center Group 3,087 3,509 3,700 3,969 3,695 4,132 4,165 4,360 12,161 14,265 16,352
QoQ -5% 14% 5% 7% -7% 12% 1% 5%
YoY 11% 19% 16% 22% 20% 18% 13% 10% 14% 17% 15%
Consenus Data Center Group 3,087 3,509 3,700 3,756 3,631 3,839 4,036 4,145 12,161 14,052 15,651
QoQ -5% 14% 5% 2% -3% 6% 5% 3%
YoY 11% 19% 16% 15% 18% 9% 9% 10% 14% 16% 11%
20 October 2014 56
Risk to our rating and target price
A majority of Intels revenue is derived from the PC end market. If PC end demand is better or worse
than expected, it could result in higher or lower than expected earnings and better or worse than
expected stock performance. In addition, the semiconductor market is very competitive and share shifts
can happen for a variety of reasons including end market shifts in demand and company execution. If
Intels market share in microprocessors is higher or lower than expected, our outlook on INTC stock
could improve or deteriorate. Tablet PCs are a new PC category which has the potential to significantly
displace traditional personal computers and current tablets do not use Intel processors. If tablet
displacement of PCs is higher than expected and/or Intel is not able to penetrate the market, it could
positively or negatively affect our outlook and estimates for INTC.

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Fig 35 INTC income statement (US$ millions, except per share data)

Source: Company data, Macquarie Capital (USA), October 2014.

FYE Dec., $USmn 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14E 1Q15E 2Q15E 3Q15E 4Q15E C13 C14E C15E
Revenue 12,580 12,811 13,483 13,834 12,764 13,831 14,554 14,700 13,636 14,554 15,054 15,330 52,708 55,849 58,574
QoQ -7% 2% 5% 3% -8% 8% 5% 1% -7% 7% 3% 2%
YoY -3% -5% 0% 3% 1% 8% 8% 6% 7% 5% 3% 4% -1% 6% 5%
Cost of goods sold 5,514 5,341 5,069 5,263 5,138 4,914 5,096 5,292 5,372 5,382 5,721 5,941 21,187 20,440 22,415
QoQ -3% -3% -5% 4% -2% -4% 4% 4% 2% 0% 6% 4%
YoY 19% 8% 3% -7% -7% -8% 1% 1% 5% 10% 12% 12% 5% -4% 10%
Gross margins 7,066 7,470 8,414 8,571 7,626 8,917 9,458 9,408 8,264 9,172 9,333 9,389 31,521 35,409 36,159
Gross margin % 56.2% 58.3% 62.4% 62.0% 59.7% 64.5% 65.0% 64.0% 60.6% 63.0% 62.0% 61.2% 59.8% 63.4% 61.7%
Research and Development 2,527 2,516 2,742 2,826 2,846 2,859 2,842 2,950 2,900 2,925 3,000 3,025 10,611 11,497 11,850
% sales 20% 20% 20% 20% 22% 21% 20% 20% 21% 20% 20% 20% 20% 21% 20%
Sales, General, Admin. 1,947 2,165 1,970 2,006 2,037 2,061 1,979 1,950 1,814 1,852 1,850 1,845 8,088 8,027 7,361
% sales 15% 17% 15% 15% 16% 15% 14% 13% 13% 13% 12% 12% 15% 14% 13%
Other 73 70 74 74 73 72 77 65 65 65 65 65 291 287 260
% sales
Total operating expense 4,547 4,751 4,786 4,906 4,956 4,992 4,898 4,965 4,779 4,842 4,915 4,935 18,990 19,811 19,471
% sales 36% 37% 35% 35% 39% 36% 34% 34% 35% 33% 33% 32% 36% 35% 33%
Operating Income 2,519 2,719 3,628 3,665 2,670 3,925 4,560 4,443 3,485 4,330 4,418 4,454 12,531 15,598 16,688
% sales 20% 21% 27% 26% 21% 28% 31% 30% 26% 30% 29% 29% 24% 28% 28%
Interest/other (76) (26) (32) 2 160 78 10 10 10 10 10 10 (132) 258 40
Income before tax 2,443 2,693 3,596 3,667 2,830 4,003 4,570 4,453 3,495 4,340 4,428 4,464 12,399 15,856 16,728
% sales 19% 21% 27% 27% 22% 29% 31% 30% 26% 30% 29% 29% 24% 28% 29%
Tax 398 693 974 926 746 1,126 1,233 1,247 979 1,215 1,240 1,250 2,991 4,352 4,684
Tax rate % 16% 26% 27% 25% 26% 28% 27% 28% 28% 28% 28% 28% 24% 27% 28%
Pro-forma net income 2,045 2,000 2,622 2,741 2,084 2,877 3,337 3,206 2,517 3,125 3,188 3,214 9,408 11,504 12,044
% sales 16% 16% 19% 20% 16% 21% 23% 22% 18% 21% 21% 21% 18% 21% 21%
Diluted share count 5,080 5,106 5,100 5,103 5,117 5,123 5,045 5,000 5,000 5,000 5,000 5,000 5,097 5,071 5,000
Pro-forma EPS $0.40 $0.39 $0.51 $0.54 $0.41 $0.56 $0.66 $0.64 $0.50 $0.62 $0.64 $0.64 $1.85 $2.27 $2.41
YoY -24% -28% -11% 11% 1% 43% 29% 19% 24% 11% -4% 0% -13% 23% 6%
GAAP EPS $0.40 $0.39 $0.58 $0.51 $0.38 $0.55 $0.66 $0.63 $0.50 $0.62 $0.64 $0.64 $1.89 $2.22 $2.41
YoY -24% -28% 0% 6% -5% 39% 14% 23% 32% 15% -3% 2% -11% 17% 9%
Dividends per share $0.23 $0.23 $0.23 $0.23 $0.23 $0.23 $0.23 $0.23 $0.23 $0.23 $0.23 $0.23 $0.90 $0.90 $0.90
YoY 7% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 2% 0% 0%

20 October 2014 58
TAIWAN

2357 TT Outperform
Price (at 12:49, 17 Oct 2014 GMT) NT$291.50
Valuation NT$ 300.00-
310.00
- PER
12-month target NT$ 349.00
Upside/Downside % +19.7
12-month TSR % +26.8
Volatility Index Low/Medium
GICS sector
Technology Hardware & Equipment
Market cap NT$m 216,526
Free float % 29
30-day avg turnover US$m 24.3
Number shares on issue m 742.8

Year end 31 Dec 2013A 2014E 2015E 2016E
Revenue bn 421.4 436.6 463.2 505.1
Reported profit bn 21.4 20.8 22.5 24.8
Profit bonus exp bn 21.4 20.8 22.5 24.8
Bon exp/rep profit % 0.0 0.0 0.0 0.0
Adjusted profit bn 20.0 20.8 22.5 24.8
EPS rep NT$ 28.56 28.06 30.30 33.44
EPS rep growth % -4.1 -1.8 8.0 10.4
EPS bonus exp NT$ 28.56 28.06 30.30 33.44
EPS bonus growth % -4.1 -1.8 8.0 10.4
PER rep x 10.2 10.4 9.6 8.7
PER bonus exp x 10.2 10.4 9.6 8.7
Total DPS NT$ 19.31 19.08 20.60 21.63
Total div yield % 6.6 6.5 7.1 7.4
ROA % 7.5 7.3 8.0 8.4
ROE % 15.3 15.1 15.4 16.1
EV/EBITDA x 6.8 6.3 5.6 5.1
Net debt/equity % -46.0 -49.4 -49.9 -47.6
P/BV x 1.6 1.5 1.4 1.4

2357 TT rel TAIEX performance, & rec
history

Note: Recommendation timeline - if not a continuous line, then there was no
Macquarie coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, October 2014
(all figures in NT$ unless noted, TP in TWD)

Analyst(s)
Ellen Tseng
Kaylin Tsai

20 October 2014
Macquarie Capital Securities Limited,
Taiwan Branch
Asustek Computer
Steady progress
Event
We upgrade Asustek from Neutral to Outperform as we believe Asustek is: 1)
leading the pack in launching new 2-1 form factor models; 2) gaining
consumer NB market share post Toshibas withdrawal from the consumer PC
market; 3) The split-off of HP Inc could result in greater focus on profitability
thus easing industry pricing competition pressure; and 4) seeing improving
profitability in its smartphone division. Despite 4Q NB slowdown, we believe
Asustek will also outperform its peers in terms of growth in 4Q14. Further, PC
sector consolidation could also provide an upside cushion. Our new TP is
NT$349 (11x 2H15-1H16E PE), up from NT$334 (11x 2015E EPS) previously.
Impact
Profitability of smartphone business to revive its growth potential:
Thanks to ZenFones sweetspot pricing and its leverage to its well-established
IT distribution channels, ZenFone shipments have been growing, and are
likely to hit ~2.8m in 3Q (from 1m in 2Q), which could see the business break
even in 3Q14. On rising scale, we believe Asusteks smartphone division has
a fairly reasonable chance of reducing its overall opex ratio to 10% thus
generating close to a 2% operating margin in 2015 while this is our more
optimistic scenario, we believe Asusteks smartphone scale will be 50-60% of
Coolpads but with the advantage of sharing SG&A with other PC businesses.
Benefits from new 2-1 product innovation cycle: Asustek usually leads its
peers in new form factor NB launches thus benefits from the resulting market
share gains. As Intels Core M processor has lower power consumption (4.5W
vs 11W for Haswell), this could help OEMs reduce thermal solution costs and
design much slimmer devices (less than 9mm), resulting in reviving consumer
NB demand. We believe Asusteks Transformer Book T300 Chi/T300
FA/ZenBook UX 305 will be released ahead of its peers, hence could see
stronger sales growth in 4Q (we factor in +12% QoQ).
Fewer consumer PC brand players and HP split-off signal better pricing
environment: Given the difficulty in making profits in the consumer PC
market without scale, there are more brands exiting the space in 2014. We
believe this will favor top-tier PC brands post consolidation given a less
crowded competitive landscape as well as opportunities to gain further market
share.
Earnings and target price revision
We finetune our 2014E, 2015E and 2016E earnings by -0.1%, -0.1% and
0.1% respectively.
Price catalyst
12-month price target: NT$349.00 based on a PER methodology.
Catalyst: Asustek 3Q result, 4Q outlook, new NB launches
Action and recommendation
Asusteks valuation is undemanding at 10.4x/9.6x 2014E/2015E PE (vs
Lenovo at 18.0x/15.9x, based on Bloomberg consensus). It also offers a high
dividend yield of 6.5% with a strong balance sheet. Upgrade to Outperform.
20 October 2014 59
Smartphone business to turn profitable on rising scale
Continuous rollout in emerging markets, replicating domestic market success
Since the launch of the ZenFone in April this year, Asustek has shown steadier progress in building
its smartphone volume. Asustek expects that its September ZenFone shipments could exceed
1.1mn, vs 800-900K in July-August, and thus likely surpass its target of 2.6m in 3Q14 or reach
2.8m in 3Q14. We expect total unit sales could reach 4m in 4Q14. Asustek could ship over 8m in
2014 and 15.3m in 2015 on our estimates.
We attribute Asusteks initial success with the Zenfone to the following:
ZenFone price hit a sweet spot: ZenFones price hit a sweet spot (US$99-199) and
generated positive feedback from consumers. The company in fact gained smartphone share
in 2Q14 and leveraged its well-established PC brand awareness in emerging markets.
Leveraging its traditional IT channels could help broaden its market reach: Asustek
distributes its ZenFone by leveraging its existing distribution channels and thus could
distribute some of the branding and marketing expense across different product lines.
Asustek expects ZenFone sales to reach over 200K units per month in Taiwan/India, while
Indonesia, Malaysia, Thailand and Vietnam could add up to 700K per month. ZenFone made
its debut in Brazil on October 15, bringing the total to 13 countries selling this series of
smartphone (including other emerging countries such as Russia and Turkey). While Asustek
lacks a sizable home market like Lenovo in China, it has sold more than 1 million ZenFones in
Taiwan since its low-end smartphone debuted in the local market in April. Asustek ranks 2nd
in the Taiwan market, with local market share of 16% as of August. Riding on its success in
Taiwan, Asusteks ZenFone also surpassed Xiaomi in India in July, and it targets to sell 100K
units there in August. We believe its strong brand presence will play a crucial role in future
sales in these emerging markets.
Building scale should drive profitability on economies of scale
Asusteks loss from the smartphone business was a key overhang in 1H14 as the loss was still over
NT$1bn due to higher marketing expenses to build ZenFone consumer awareness; however,
Asustek has narrowed the loss substantially on expanding smartphone sales (and on the back of
Intels subsidy). On the rising scale of ZenFone shipments, Asustek CEO Jerry Shen mentioned that
its smartphone division likely turned profitable in September. We believe the smartphone division
could reach breakeven in 3Q14 on improving scale, thanks chiefly to additional market share gains.
We believe the smartphone business turning from being loss-making to profitable in 3Q14 could be a
key driver for the stock, as it could pave the path for multiple years of earnings growth if the
smartphone strategy is executed smoothly and successfully. Figs 1-2 illustrate our Asustek operating
profit estimates and operating margin estimates by product division; we expect improvements in its
smartphone business as a whole.
Fig 1 AsusTek: OP margin estimates by division Fig 2 Asustek: OP profit estimates by division

Source: Based on Macquarie Research estimates, October 2014 Source: Based on Macquarie Research estimates, October 2014
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
MB/Graphic
cards
NB Tablet Smartphone AIO& Others
2013 2014E 2015E
-2,000
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
MB/Graphic
cards
NB Tablet Smartphone AIO& Others
UnitLM
2013 2014E 2015E
20 October 2014 60
Although Asusteks smartphone business could only make low-teens gross margins in general, we
think the companys opex as a % of smartphone sales could fall to 10% going forward on rising
smartphone sales scale. If we benchmark it to other smartphone players, as shown in Fig 3,
Asusteks current sales are well below other smartphone companies, but we believe the sales gap to
the others could narrow in 2015 as we project its smartphone quarterly sales could jump to
US$445mn in 3Q14 or $632m in 4Q14, up from only US$159m in 2Q14. This implies that Asusteks
sales could reach 50-60% of those of Coolpad or Lenovo in terms of size, in our view. We think
Asustek has the advantage of being able to share the SG&A expense among its internal PC
segments (MB/NB), hence it operating margin could also benchmark Coolpads performance in the
longer term in our view.
Asusteks smartphone path could follow that of Lenovo in building the smartphone business.
Lenovos smartphone sales are 2-3x times those of Austek, but only generate a 1.4% OPM. We note
that Lenovo has much higher smartphone sales in the highly competitive China market while Asustek
is focused on other emerging markets. Unlike HTC, which only focuses on high-end smartphones,
thus creating higher corporate expenses from having to compete against the likes of Apple and
Samsung, we think Asustek would be able to drive operating margin expansion in 2015.
Fig 3 Smartphone brands sales (CY2Q14) Fig 4 Smartphone brands OP and OPM (CY2Q14)

Source: Companies, data as of CY2Q14, Macquarie Research, October
2014
Source: Companies, data as of CY2Q14, Macquarie Research, October
2014
What would happen without the Intel subsidy?
The first generation of the Asustek ZenFone has mainly adopted an Intel solution, and we believe
Intel also offers an attractive subsidy to Asustek for making the ZenFone given Intels ambition to
build a handset chip business. But Asustek is developing a 2nd generation ZenFone that will support
4G LTE connectivity, and this will be unveiled at CES in 2015. The new ZenFone 2 will be based on
a Qualcomm solution, not on Intels, hence there is a question mark over whether the ZenFone BOM
(bill of material) cost will go up, thus lowering Asusteks smartphone profitability.
We note that before the ZenFone launch, Asustek had limited support from major chip vendors such
as Qualcomm and Mediatek. Through its ZenFone launch, Asustek has built more reasonable
smartphone scale and thus is able to make more effort in supply chain management. This means
that even if it loses the Intel subsidy, its economies of scale in the smartphone business should help
drive down its cost structure, in our view. We also think that Asustek in fact has built a more
sustainable smartphone business strategy and requires resource support from more major vendors
other than just Intel to become a more viable smartphone player globally.

-
500
1,000
1,500
2,000
2,500
HTC Lenovo Coolpad Asustek
(USD m)
Smartphone sales
-14.0%
-12.0%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
-40.00
-20.00
-
20.00
40.00
60.00
80.00
100.00
HTC Lenovo Coolpad Asustek
(USD m)
OP (LHS) OPM (RHS)
20 October 2014 61
Fig 5 Asusteks Zenfone roadmap
Name
Asus
Zenfone 5
Asus
Zenfone 6
Asus
Zenfone 4
Asus
Zenfone 4 LTE
(A450CG)
Asus
Zenfone 5 LTE
(A500KL)
Dimensions 148.2 x 72.8 x 10.3 mm 166.9 x 84.3 x 9.9 mm 124.4 x 61.4 x 11.2 mm 135 x 67 x 11.3 mm 148.2 x 72.8 x 10.3 mm
Weight 140 g 200 g 115 g 134 g 145 g
Embedded OS Android OS v4.3 (Jelly
Bean), upgradable to
v4.4.2 (KitKat)
Android OS v4.3 (Jelly
v4.4.2 (KitKat)
Android OS v4.3 (Jelly
v4.4.2 (KitKat)
Android OS v4.4.2
(KitKat)
Android OS v4.4.2
(KitKat)
Price (NTD) $5,990 $6,490 $3,290 $3,790 $6,990
CPU Intel Atom Z2580 Intel Atom Z2580 Intel Atom Z2520 Intel Atom Z2520 Qualcomm Snapdragon
400 MSM8926
CPU clock Dual-core 2 GHz Dual-core 2 GHz Dual-core 1.2 GHz Dual-core 1.2 GHz Quad-core 1.2GHz
ROM capacity 8 GB 8/16 GB 4 GB 8GB 8GB
RAM capacity 2 GB 1/2 GB 1 GB 1 GB 2GB
Display diagonal 5.0" 6.0" 4.0" 4.5" 5"
Display resolution 720 x 1280 720 x 1280 480 x 800 480 x 800 720 x 1280
Expansion interfaces microSD, up to 32 GB microSD, up to 32 GB microSD, up to 32 GB microSD, up to 32 GB microSD, up to 32 GB
Bluetooth Yes, v4.0 with A2DP,
EDR
Yes, v4.0 with A2DP,
EDR
EDR
EDR
EDR
Wireless LAN Wi-Fi 802.11 b/g/n, Wi-Fi
Direct, Wi-Fi hotspot
Wi-Fi 802.11 b/g/n, Wi-Fi
Camera resolution 8 MP 13 MP 5 MP 8 MP 8 MP
Secondary camera 2 MP 2 MP Yes 0.3 MP 2 MP
Battery capacity 2050 mAh 3230 mAh 1170 mAh 1750 mAh 2110 mAh
Note Black, White, Red, Blue,
Gold
Black, White, Red, Gold Charcoal Black, Pearl
White, Cherry Red, Sky
Blue, Solar Yellow
Black, White, Red, Gold,
Purple
Black, White, Red, Gold,
Purple
Available date April 2014 April 2014 April 2014 July 2014 July 2014
PC industry consolidating further, Asustek leads in form factor innovation
More brands have withdrawn from the PC market, in particular the consumer PC market
Given the difficulty in making profit in the consumer PC market without scale, more brands are exiting
the consumer PC market in 2014. We believe this favors the top-tier PC brands post consolidation
given a less crowded competitive landscape as well as opportunities to gain further market share.
In February 2014, Sony sold off its VAIO Personal computer business to private investment
fund Japan Industrial Partners. The new company will only concentrate on sales of consumer
and commercial PCs in the Japan market. Sony discontinued sales of PCs to other countries
from 1Q14. In fact, Sonys global NB market share has slid from 2.45% in 1Q14 to 1.03% in
2Q14, while its consumer NB share also declined from 3.4% to 1.5% over the same period.
In September 2014, Samsung decided to exit the NB market and chromebook sales in the
Europe market. According to IDC, Samsungs Europe NB market share slid to only 0.9% in
2Q14, from 4.4% in 4Q13, as the company diverted its focus to other smart devices away
from the NB segment.
In September 2014, Toshiba started to restructure its PC business to focus only on the
commercial segments and withdraw from the consumer segment. The company announced it
would reduce the size of its PC business by about 900 workers, or a 20% reduction in its PC
headcount, excluding the manufacturing segments. As Toshibas 2Q14 consumer PC market
share was 5.9% and consumer NB market share was 8.5%, this presents an attractive
opportunity for other PC brands.
As shown in Figs 6-9, the combined Samsung+Sony+Toshiba market share still represents close to
11% globally - which illustrates the potential market share gain opportunities for Asustek in particular
in the consumer segment.
20 October 2014 62
Fig 6 Worldwide total NB market share Fig 7 Worldwide consumer NB market share


Fig 8 EMEA, Total NB market share Fig 9 EMEA: consumer NB market share

Desktops also offer market share growth opportunities
The desktop PC market is relatively more fragmented than the NB market. Given the PC industry
consolidation, Asustek has high hopes of growing its desktop shipments from 2m in 2013 to 4m in
2014. We note that progress was not visible in the first two quarters this year, but the company is
launching more competitive models in 2H14.
A growing year even on launch of a more competitive desktop line-up: With around 1.4%
desktop market share, Asustek expects to gain desktop market share at the expense of Acer and
other brands. Off a low base, the company expects to grow substantially faster than the industry.
In 2Q14, Asusteks desktop shipments grew 32.8% YoY, outperforming the overall markets 2.4%
based on IDC data.
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2
Lenovo HP
Dell Acer
ASUS Apple
Fujitsu
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2
Lenovo HP
ASUS Acer
Dell Apple
Others
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2
Lenovo HP
Acer Group ASUS
Dell Apple
Others
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2
Lenovo HP
Acer Group ASUS
Apple Dell
Others
20 October 2014 63
Fig 10 Global total PC market share Fig 11 Global total Desktop market share

HP split-off could also suggest more favorable pricing environment
Furthermore, on October 7
th
, HP announced it would split off its PC brand division. HP has
announced its plan to split into two separate listed public companies -- HP Enterprise and HP inc
as it aims to: provide sharper, stronger and more focused companies; compete more effectively
against competitors; respond faster to customer requirements; and optimize each firms financial
return to provide different and compelling investment opportunities. The transaction is to be closed by
the end of fiscal year 2015.
Post the split, in order to maintain attractive returns for shareholders, HPs PC business will either
focus more on driving profitability improvement without undercutting PC prices too aggressively or
continue to cut costs, which could also put pressure on its outsourcing downstream suppliers.
HP was ranked as the 2
nd
largest PC brand globally with an 18.3% market share, next to Lenovo, in
2Q14. In conclusion, the split could be neutral to slightly positive for Asia PC brands such as Lenovo
and Asustek, given the potential for more rational price competition or further industry consolidation.
Fig 12 OPM comparison - HPs PC division, Asustek, Acer, and Lenovo

Source: Companies, Macquarie Research, October 2014

0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2
Lenovo HP Dell
Toshiba Samsung Fujitsu
Tongfang Others
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2
Lenovo HP Dell
Acer Apple Fujitsu
ASUS Tongfang Samsung
Haier Others
-12.0%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
HP (PC division) Asustek Acer Lenovo
20 October 2014 64
Asustek leads in form factor innovation
The T-100/T-200 and Chromebook were among the key focuses of Asustek in growing its NB market
size earlier this year. Asustek is leveraging the T-100/T-200 to grow its market share, while its
Chromebook was launched at the end of 1Q14 to target the US and European educational markets.
With its success, Asustek is likely to continue expanding the product line to increase its presence and
try to become the market leader in the 2-1 category in 2H14.
Asustek showcased the T300 chi in June at Computex based on Intels Core M processor. As the
Intel Core M processor has a lower power consumption (4.5W vs 11W for Haswell generation), this
could help OEMs reduce thermal solution costs (such as fans/thermal modules), and design much
slimmer devices (less than 9mm) for example. Asustek is ahead of its peers in selling these new 2-1
form factor products in 4Q14 (from October onwards), and these models include the AsusTek
Transformer T300 Chi, Transform Book T300FA, Zenbook UX305.
Asustek is also taking advantage of Microsofts new offering by launching the Eeebook X205-TA (ie,
Microsoft provided brand OEM vendors with its Windows 8.1 with a Bing solution at a lower licence
fee to enable them to sell the NB at US$249 or lower from June 1, 2014). According to our supply
chain survey, the Windows 8.1 with Bing OS option is available to OEMs at a price thats probably
close to zero or US$15 for low-cost devices. Originally, Microsoft launched the Windows 8.1 OS with
Bing solution for below US$249 notebooks in 2Q14, but Microsoft has decided to promote the
solution further in 2015 (Digitimes, Sep 24, 2014).
We thus believe Asustek can ship 20.9m/22.5m (+11% YoY/ +8% YoY) NBs in 2014, and 2015, up
from 18.7m in 2013, even though global PC unit growth is unlikely to turn positive - but Asustek could
outperform its peers on the back of its market share gain.
Fig 13 Asustek new NB model specifications
Name
Asus
Transformer Book T300FA
Asus
Transformer T300 Chi
Asus
Zenbook UX305
Asus
EeeBook X205TA
Model Picture

Dimensions 308.5 x 207 x 20.3 mm 14.7 mm thick 324 x 226 x 12.3mm 286 x 193.3 x 17.5mm
Weight 1.6 kg 680 g 1.2 kg 1 kg
Price USD599 TBD TBD USD199
OS Windows 8.1/Windows 8.1 Pro Windows 8.1/Windows 8.1 Pro Windows 8.1/Windows 8.1
Pro
Windows 8.1 with Bing
CPU Intel Core M Intel Core M Intel Core M Intel Atom Bay Trail-T Z3735
HDD/SSD capacity 32GB/64GB eMMC(tablet)
TBD 128GB/256GB SSD 32GB/64GB eMMC
RAM Capacity 4G 4G DDR3L 1600 4G/8G DDR3L 1600 2G
Display diagonal 12.5" 12.5" 13.3" 11.6"
Display resolution 1366x768 2560x1480 3200x1800 or 1920x1200 1366x768
WLAN Yes Yes Yes Yes
Bluetooth Yes Yes Yes Yes
Battery life TBD TBD 45Whr 38Whr, 12 hrs battery life
Release date 4Q14 4Q14 TBD 4Q14
Source: Asustek, Macquarie Research, October 2014

20 October 2014 65
Fig 14 Tablets: Asustek and Lenovo market share trends


Fig 15 Top 5 tablet vendors, shipments and market share, 2Q2014 (m units)
Vendor
2Q14 Unit
Shipments
2Q14 Market
Share
2Q13 Unit
Shipments
2Q13 Market
Share
Year-over-Year
Growth
Apple 13.3 26.9% 14.6 33.0% -9.3%
Samsung 8.5 17.2% 8.4 18.8% 1.6%
Lenovo 2.4 4.9% 1.5 3.3% 64.7%
Asustek 2.3 4.6% 2.0 4.5% 13.1%
Acer 1.0 2.0% 1.5 3.4% -36.3%
Others 21.9 44.4% 16.4 37% 33.4%
Grand Total 49.3 100.0% 48.6 100.0% 11%
Vendor
1Q14 Unit
Shipments
1Q14 Market
Share
1Q13 Unit
Shipments
1Q13 Market
Share
Year-over-Year
Growth
Apple 16.4 32.5% 19.5 40.2% -16.1%
Samsung 11.2 22.3% 8.5 17.5% 32.0%
Asustek 2.5 5.0% 2.6 5.4% -2.8%
Lenovo 2.1 4.1% 0.6 1.3% 224.3%
Amazon 1.0 1.9% 1.8 3.7% -47.1%
Others 17.2 34.2% 15.5 31.8% 11.5%
Grand Total 50.4 100.0% 48.6 100.0% 3.9%
Source: IDC, Macquarie Research, October 2014; *IDC tablet numbers include 2-in-1 NB
Motherboard business is also showing signs of stabilization
As Gigabyte has closed the market share gap with Asustek, Asustek launched an aggressive plan in
late 2Q and aims to recapture its volumes from Gigabyte although this could affect its motherboard
profit margin, this could be offset by incremental volume strength. The company now expects the MB
business will also stabilize further in 4Q14, as it intends to maintain a market balance with other
motherboard makers. Moreover, Asustek also plans to charge motherboard competitors with
patent infringement, which could enable it to maintain its leadership in the market (source: AppleDaily
Sep 18, 2014).
0%
1%
2%
3%
4%
5%
6%
7%
8%
2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
Asustek Lenovo
20 October 2014 66
Fig 16 Operating margin comparison - AsusTek, Gigabyte, MSI, and Asrock

Source: Macquarie Research, October 2014; Note Asustek MB OPM alone was ~7% on average on our estimate.
Earnings Revisions
We are fine tuning our estimates post the companys 3Q14 sales release.
Fig 17 Earnings Revisions
2014E 2015E 2016E
NT$m New Old Diff % New Old Diff % New Old Diff %
Revenue 436,602 441,676 -1.1% 463,164 471,510 -1.8% 505,106 514,143 -1.8%
Gross profit 59,380 59,683 -0.5% 61,930 62,049 -0.2% 66,171 66,744 -0.9%
GM % 13.6% 13.5% 13.4% 13.2% 13.1% 13.0%
Operating profit 20,431 20,825 -1.9% 23,409 23,418 0.0% 25,717 25,744 -0.1%
OPM % 4.7% 4.7% 5.1% 5.0% 5.1% 5.0%
Pretax income 26,273 26,467 -0.7% 27,992 28,065 -0.3% 30,806 30,855 -0.2%
Net income 20,840 20,924 -0.4% 22,505 22,523 -0.1% 24,843 24,847 0.0%
EPS (NT$) 28.06 28.10 -0.1% 30.30 30.32 -0.1% 33.44 33.40 0.1%
Valuation: Smartphone improvement should be a key re-rating catalyst
We believe Asustek could be slightly re-rated on the improving competitive landscape, given the less
crowded space with Samsung, Sony and Toshiba shifting their focus and withdrawing from the PC
market. Strength in the ZenFone has also helped lift the stock performance on improving ZenFone
profitability. Asusteks much higher dividend yield of 6.5% (with its historical payout ratio at 60-70%)
has also helped regain investor confidence.
We revise our 12 month price target to NT$349, based on 11x 2H15-1H16 earnings. The average
brand names trade at 13.2x/12.2x 2014e and 2015e earnings (excluding Acer).
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
Asustek Gigabyte MSI Asrock
20 October 2014 67
Fig 18 Asusteks one-year forward PE band Fig 19 Asusteks one-year forward PE band

Source: TEJ, Macquarie Research, May 2014 Source: TEJ, Macquarie Research, May 2014

Fig 20 Brand names comparable valuation
992 HK Lenovo NR 14,632 10.72 NR NA 0.06 0.08 0.09 25.1 18.0 15.9 5.6 4.9 4.0 24.6 27.9 26.4 0.2 0.2 0.3
2353 TT Acer U 1,844 20.1 17.0 -15% (7.54) 0.41 0.41 nmf 48.6 49.4 1.0 0.9 0.9 -31.3 2.0 1.9 0.0 0.0 0.0
2357 TT Asustek O 7,121 291.5 349.0 26% 28.56 28.06 30.30 10.2 10.4 9.6 1.6 1.5 1.4 16.4 15.1 15.4 6.6 6.5 7.1
AAPL US Apple O 576,392 96.3 104.0 10% 5.68 6.31 6.86 16.9 15.2 14.0 5.0 4.7 4.0 30.6 31.2 30.8 1.7 1.9 2.0
HPQ US HP NR 63,453 34.00 NR NA 3.99 3.61 3.74 8.5 9.4 9.1 2.9 2.4 2.2 -31.1 21.2 24.0 1.8 2.1 2.0
Average 15.2 20.3 19.6 3.2 2.9 2.5 1.9 19.5 19.7 2.0 2.2 2.3
Source: Bloomberg, Macquarie Research, October 2014; market data as of October 17, 2014

Fig 21 Asustek brand quarterly P&L statement
(NT$m) 1Q14 2Q14 3Q14F 4Q14F 1Q15F 2Q15F 3Q15F 4Q15F 1Q16F 2Q16F 3Q16F 4Q16F
Revenues 100,265 95,459 113,481 127,397 108,400 105,495 116,651 132,618 117,412 115,801 126,998 144,895
Gross Profit 13,189 13,653 15,249 17,288 14,531 14,134 15,564 17,701 15,513 15,220 16,584 18,854
Operating Expenses 8,515 9,237 9,986 11,211 9,539 9,073 9,565 10,344 9,745 9,646 9,906 11,157
Operating Profit 4,675 4,416 5,263 6,077 4,992 5,061 5,999 7,357 5,768 5,574 6,678 7,697
PBT 5,211 6,259 7,733 7,070 5,692 5,761 7,202 9,400 6,468 6,274 7,915 10,171
Tax (848) (1,470) (1,701) (1,414) (911) (1,037) (1,440) (2,162) (1,035) (1,129) (1,583) (2,238)
Minorities - - - - - - - - - - - -
Net profit 4,363 4,789 6,032 5,656 4,782 4,724 5,761 7,238 5,433 5,145 6,332 7,933
EPS (NT$) 5.87 6.45 8.12 7.61 6.44 6.36 7.76 9.74 7.31 6.93 8.52 10.68

Profitability
Gross Margin 13% 14% 13% 14% 13% 13% 13% 13% 13% 13% 13% 13%
Operating Margin 5% 5% 5% 5% 5% 5% 5% 6% 5% 5% 5% 5%
Expense ratio 8% 10% 9% 9% 9% 9% 8% 8% 8% 8% 8% 8%
PBT Margin 5% 7% 7% 6% 5% 5% 6% 7% 6% 5% 6% 7%

QoQ Growth
Sales -16% -5% 19% 12% -15% -3% 11% 14% -11% -1% 10% 14%
Operating profit -12% -6% 19% 15% -18% 1% 19% 23% -22% -3% 20% 15%
PBT -29% 20% 24% -9% -19% 1% 25% 31% -31% -3% 26% 29%
Net Profit -23% 10% 26% -6% -15% -1% 22% 26% -25% -5% 23% 25%
EPS -23% 10% 26% -6% -15% -1% 22% 26% -25% -5% 23% 25%

YoY Growth
Sales -5% 6% 6% 7% 8% 11% 3% 4% 8% 10% 9% 9%
PBT -28% 7% 20% -3% 9% -8% -7% 33% 14% 9% 10% 8%
Net Profit -28% 0% 22% -1% 10% -1% -4% 28% 14% 9% 10% 10%
EPS -27% 2% 23% 0% 10% -1% -4% 28% 14% 9% 10% 10%

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20 October 2014 68

Asustek Computer (2357 TT, Outperform, Target Price: NT$349.00)
Quarterly Results 2Q/14A 3Q/14E 4Q/14E 1Q/15E Profit & Loss 2013A 2014E 2015E 2016E

Revenue m 95,459 113,481 127,397 108,400 Revenue m 421,379 436,602 463,164 505,106
Gross Profit m 13,653 15,249 17,288 14,531 Gross Profit m 54,304 59,380 61,930 66,171
Operating Expenses m -9,237 -9,986 -11,211 -9,539 Operating Expenses m -34,628 -38,949 -38,521 -40,454
Operating Income m 4,416 5,263 6,077 4,992 Operating Income m 19,676 20,431 23,409 25,717
Net Non-operating income m 1,843 2,470 993 700 Net Non-operating income m 7,102 5,842 4,646 5,111
Pre-Tax Income m 6,259 7,733 7,070 5,692 Pre-Tax Income m 26,778 26,273 28,055 30,827
Tax Expense m -1,470 -1,701 -1,414 -911 Tax Expense m -5,328 -5,433 -5,550 -5,985
Exceptionals m 0 0 0 0 Exceptionals m 1,464 0 0 0
Minority Interests m 0 0 0 0 Minority Interests m 0 0 0 0

Reported Earnings m 4,789 6,032 5,656 4,782 Reported Earnings m 21,450 20,840 22,505 24,843
Reported Earnings (bonus exp) m 4,789 6,032 5,656 4,782 Reported Earnings (bonus exp) m 21,450 20,840 22,505 24,843
Bonus exp / Reported Earnings % 0.0 0.0 0.0 0.0 Bonus exp / Reported Earnings % 0.0 0.0 0.0 0.0
Adjusted Earnings m 4,789 6,032 5,656 4,782 Adjusted Earnings m 19,986 20,840 22,505 24,843
EBITDA m 4,520 5,369 6,185 5,101 EBITDA m 20,061 20,852 23,851 26,179

EPS (rep) NT$ 6.45 8.12 7.61 6.44 EPS (rep) NT$ 28.56 28.06 30.30 33.44
EPS pcp growth (rep) % 1.8 23.3 0.1 9.6 EPS growth (rep) % -4.1 -1.8 8.0 10.4
EPS (rep bonus exp) NT$ 6.45 8.12 7.61 6.44 EPS (rep bonus exp) NT$ 28.56 28.06 30.30 33.44
EPS pcp growth (rep bonus exp) % 1.8 23.3 0.1 9.6 EPS growth (rep bonus exp) % -4.1 -1.8 8.0 10.4
EPS (adj) NT$ 6.45 8.12 7.61 6.44 EPS (adj) NT$ 26.62 28.06 30.30 33.44
EPS pcp growth (adj) % 47.0 23.3 0.1 9.6 EPS growth (adj) % -10.6 5.4 8.0 10.4

Revenue pcp growth % 6.5 6.0 6.6 8.1 PE (rep) x 10.2 10.4 9.6 8.7
Operating Income pcp growth % 12.0 8.6 14.1 6.8 PE (rep bonus adj) x 10.2 10.4 9.6 8.7
Reported Earnings pcp growth % 0.5 22.1 -0.6 9.6 PE (adj) x 11.0 10.4 9.6 8.7

Gross Profit Margin % 14.3 13.4 13.6 13.4 Total DPS NT$ 19.31 19.08 20.60 21.63
Operating Income Margin % 4.6 4.6 4.8 4.6 Total Div Yield % 6.6 6.5 7.1 7.4
Reported Earnings Margin % 5.0 5.3 4.4 4.4 Weighted Average Shares m 751.0 742.8 742.8 742.8
EBITDA Margin % 4.7 4.7 4.9 4.7 Period End Shares m 748.4 742.8 742.8 742.8

Profit and Loss Ratios 2013A 2014E 2015E 2016E Cashflow Analysis 2013A 2014E 2015E 2016E

Revenue Growth % 2.0 3.6 6.1 9.1 Reported Earnings m 21,450 20,840 22,505 24,843
Gross Profit Growth % -3.5 9.3 4.3 6.8 Depreciation & Amortisation m 385 421 442 462
Operating Income Growth % -10.6 3.8 14.6 9.9 Chgs in Working Cap m -5,734 -5,297 -3,661 -8,581
Reported Earnings Growth % -4.3 -2.8 8.0 10.4 Other m 9,121 1,316 -4,246 -4,711
EBITDA Growth % -11.9 3.9 14.4 9.8 Operating Cashflow m 25,222 17,280 15,040 12,013
Acquisitions m 0 0 0 0
Gross Profit Margin % 12.9 13.6 13.4 13.1 Capex m -15 -500 -400 -400
Operating Income Margin % 4.7 4.7 5.1 5.1 Asset Sales m 0 0 0 0
Reported Earnings Margin % 5.1 4.8 4.9 4.9 Other m 0 0 0 0
EBITDA Margin % 4.8 4.8 5.1 5.2 Investing Cashflow m -15 -500 -400 -400
Dividend (Ordinary) m -14,431 -14,485 -14,171 -15,303
Payout Ratio % 72.5 68.0 68.0 64.7 Equity Raised m 0 0 0 0
EV/EBITDA x 6.8 6.3 5.6 5.1 Debt Movements m 5 150 120 120
EV/EBIT x 6.9 6.4 5.7 5.2 Other m -2,360 320 320 320
Financing Cashflow m -16,787 -14,015 -13,731 -14,863
Balance Sheet Ratios
ROE % 15.3 15.1 15.4 16.1 Net Chg in Cash/Debt m 8,420 2,765 909 -3,250
ROA % 7.5 7.3 8.0 8.4
ROIC % 20.4 22.2 26.2 27.6 Free Cashflow m 25,207 16,780 14,640 11,613
Net Debt/Equity % -46.0 -49.4 -49.9 -47.6 FCF per Share NT$ 33.56 22.59 19.71 15.63
Interest Cover x nmf nmf nmf nmf P/FCF x 8.7 12.9 14.8 18.6
Price/Book x 1.6 1.5 1.4 1.4
Book Value per Share NT$ 180.7 190.6 201.8 214.6

Balance Sheet 2013A 2014E 2015E 2016E

Cash m 62,169 70,047 75,042 76,342
Receivables m 66,565 70,976 73,884 80,724
Inventories m 71,681 75,568 78,868 86,503
Investments m 53,057 53,057 53,057 53,057
Fixed Assets m 4,850 4,929 4,887 4,824
Intangibles m 0 0 0 0
Other Assets m 17,424 10,995 11,155 11,315
Total Assets m 275,746 285,572 296,893 312,766
Payables m 55,333 58,333 60,881 66,774
Short Term Debt m 0 0 0 0
Long Term Debt m 0 150 270 390
Provisions m 0 0 0 0
Other Liabilities m 85,213 85,533 85,853 86,173
Total Liabilities m 140,546 144,016 147,004 153,337
Total S/H Equity m 135,200 141,555 149,889 159,428
Total Liab & S/H Funds m 275,746 285,572 296,893 312,766

All figures in NT$ unless noted.


20 October 2014 69
TAIWAN

2317 TT Outperform
125.00
- PER
Volatility Index Low
GICS sector
Market cap NT$bn 1,309
Free float % 22

Year end 31 Dec 2013A 2014E 2015E 2016E
Revenue bn 3,952.3 4,107.7 4,662.9 4,889.4
EPS rep NT$ 7.30 8.00 9.26 9.79
EPS rep growth % 11.9 9.6 15.8 5.7
EPS bonus exp NT$ 7.30 8.00 9.26 9.79
EPS bonus growth % 11.9 9.6 15.8 5.7
PER rep x 12.2 11.1 9.6 9.1
PER bonus exp x 12.2 11.1 9.6 9.1
Total DPS NT$ 1.82 2.80 3.24 3.43
Total div yield % 2.1 3.1 3.6 3.9
ROA % 5.0 5.8 6.6 6.4
ROE % 15.1 14.9 15.8 15.0
EV/EBITDA x 5.6 5.0 4.3 3.9
Net debt/equity % -22.1 -28.4 -34.2 -38.5
P/BV x 1.7 1.6 1.4 1.3

history


Analyst(s)
Ellen Tseng
Kaylin Tsai

20 October 2014
Taiwan Branch

Hon Hai Precision
Still favorable iPhone 6/6 Plus cycle
Event
We believe Hon Hai will benefit from rising sales of iPhone 6 Plus given it is
the sole supplier on iPhone 6 plus, which carries higher ASP than iPhone 6.
We thus slightly raise our earnings estimates and maintain our Outperform
rating on Hon Hai. Our TP goes to NT$114 (from NT$112) based on 12x
2H15-1H16 PE.
Impact
Higher iPhone 6 plus ratio should favor Hon Hai: We noted in our prior
Foxconn Technology report More favorable iPhone 6 plus trend that
Foxconns iPhone 6 plus mix will increase in 2015, versus previously
projected 25-30% by year end; this should favor Hon Hai as the company is a
major outsourcing partner for Apple iPhone 6 Plus but only shares 70%
allocation for iPhone 6. Moreover, as iPhone 6 plus carries higher BOM cost,
Hon Hai sales momentum could increase and could favor its OP leverage.
4Q sales momentum could remain rosy: Despite Hon Hais 3Q sales only
growing 8.1% QoQ and 3.4% YoY and missing consensus estimates by 2.8%,
its September sales of NT$415bn were up 51.0% MoM / 23.0% YoY, backed
by the iPhone 6/6 plus launch. Hon Hai expects 4Q sales to remain robust,
and we forecast 4Q sales to rise at least by 46.7% QoQ or 5.0% YoY; our
numbers have upside potential as 4Qs monthly average only needs to hit
NT$465bn to meet our numbers. Hon Hai will release its 3Q14 results in mid-
November; we expect 3Q EPS of NT$2.12 54.7% QoQ/0.8% YoY
assuming 7.1% GM and 3.4% OPM.
We anticipate rally post iPhone 6/6 plus launch, more benefit from large
iPad: As we highlighted in our prior Hon Hai report Expect a mild post-iPhone
6 launch rally, we expect Hon Hais share price could still rally post the post-
iPhone 6 launch thanks to strong iPhone 6/6 Plus sell-through globally. Since
the launch of Apple iPhone 6/iPhone 6 plus, iPhone 6/6 Plus volumes (pre-
orders/first weekend), sales have topped the prior iPhone generations,
indicating a stronger cycle which could last into 1H15. Moreover, Apple launch
of iPad Air 2/and potential launch of large size iPad in 1Q15 would benefit
Hon Hai as it is Apples major iPad supplier.
We slightly raise our earnings estimate for 2014/2015/2016 by
1.4%/2.0%/2.8%, respectively.
Price catalyst
Catalyst: Hon Hais 3Q result, 4Q sales momentum, iPhone 6/6 plus sell-
through
We believe the stock could again see catalysts from strong 4Q14 sales and
Apple iPhone 6/iPhone 6 plus sell-in strength carrying over into 2015. Hon Hai
remains our favorite pick in Taiwans hardware sector. We note that Hon Hais
future progress in EV and automation remain potential growth drivers.
20 October 2014 70
Promising 4Q ahead on strong iPhone 6/iPhone 6
Compared to iPhone 5S, iPhone 6/iPhone has much stronger consumer sales momentum; Apple
said it received more than four millions orders for its two new iPhone 6 models in the first 24 hours on
Sep 12, more than it had initially set aside for pre-orders. This set a pre-order record, surpassing the
iPhone 5s 2m, the iPhone 4Ss 1m and the iPhone 4s 0.6mn
Hon Hais September sales of NT$415bn were up 51.0% MoM /and up 23.0% YoY, supported by the
iPhone 6/6 plus launch. We note September YoY trend indicates its 4Q YoY growth could top our
current projection if Hon Hais other non-smartphone segments sales remains intact (we expect 4Q
sales to remain robust, and we forecast 4Q sales to rise at least by 46.7% QoQ, or 5.0% YoY). Our
numbers have upside potential as 4Qs monthly average only needs to hit NT$465bn to meet our
numbers.
Moreover, we think iPhone 6 plus mix will increase in 2015, versus previously projected at 25-30% by
year end; this should favor Hon Hai, as the company is a major outsourcing partner for Apple iPhone
6 Plus but only shares 70% allocation for iPhone 6. Moreover, as iPhone 6 plus carries higher BOM
cost (higher ASP for Hon Hai), Hon Hai sales momentum could increase, which would be favourable
for its operating leverage.
Fig 1 Hon Hai monthly sales trend


Fig 2 Hon Hai estimate revisions
2014E 2015E 2016E
NT$bn New Old Diff % New Old Diff % New Old Diff %
Revenue 4,108 4,102 0.1% 4,663 4,609 1.2% 4,889 4,818 1.5%
Gross profit 284 282 0.7% 332 325 2.1% 350 341 2.6%
GM % 6.9% 6.9% 7.1% 7.1% 7.2% 7.1%
Operating profit 133 132 1.1% 161 157 2.3% 168 164 2.5%
OPM % 3.2% 3.2% 3.4% 3.4% 3.4% 3.4%
Pretax income 153 151 1.2% 177 173 2.4% 187 181 3.2%
Net income 118 116 1.6% 137 134 2.3% 145 141 2.7%
EPS (NT$) 8.00 7.89 1.4% 9.26 9.08 2.0% 9.79 9.53 2.8%

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Monthly sales (LHS) YoY%-Monthly Sale(RHS) MoM%-Monthly Sale(RHS)
20 October 2014 71
Fig 3 Apple iPhone product cycle vs Apples share price performance (US$)

Source: Bloomberg, Macquarie Research, October 2014

Fig 4 Apple iPhone product cycle vs Hon Hai share price performance (NT$)

Source: Bloomberg, Macquarie Research, October 2014
Fig 5 Hon Hai: sales contribution from iPhone/iPad Fig 6 Hon Hai: Operating margin trend

Source: Company data, Macquarie Research, October 2014 Source: Company data, Macquarie Research, October 2014

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iPhone 5S / 5C
Launched
Sep 20 ,2013
iPhone 5
Launched
Sep 21, 2012
iPhone 4
Launched
June 24 2010
Hon Hai share price decoupled
with Apple due to Hon Hai's margin contraction
iPhone 4S
Launched
Oct 14, 2011
-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
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45.0
2010 2011 2012 2013 2014E
Iphone iPad
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20 October 2014 72
Fig 7 Apple iPhone vs global smartphone shipment
growth
Fig 8 Apple global smartphone market share,
quarterly trend

Source: Gartner, Macquarie Research, October 2014 Source: Gartner, Macquarie Research, October 2014
Fig 9 China smartphone brands: Global market share Fig 10 Samsung: Global smartphone market share

Source: Gartner, Macquarie Research, October 2014 Source: Gartner, Macquarie Research, October 2014

Fig 11 Apple iPhone cycles: Market reaction comparison
Market Factors iPhone 4 iPhone 4S iPhone 5 iPhone 5S iPhone 6
Smartphone industry growth Positive Positive Positive Positive Neutral to
Negative
High-end smartphone growth Positive Positive Negative Negative Negative
Apple iPhone market share gain Positive Positive Negative Negative Positive
Tablet industry growth Positive Positive Positive Positive Negative
Apple iPad market share gain Positive Positive Negative Negative Negative
Carrier subsidy Positive Positive Neutral Neutral Neutral to
Negative
Apple iWatch launch Positive
Apple enter large screen iPad Positive

Hon Hai other factors
Apple diversifying away from Hon Hai Neutral Neural Negative Negative Negative
Hon Hai margin trend Negative Negative Neural Positive Positive

0%
20%
40%
60%
80%
100%
120%
140%
Global smartphone YoY growth Apple iPhone YoY growth
0%
5%
10%
15%
20%
25%
iPhone 4
Launched
June 24 2010
iPhone 4S
Launched
Oct 14, 2011
iPhone 5
Launched
Sep 21, 2012
iPhone 5S / 5C
Launched
Sep 20 ,2013
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
Huawei Lenovo Xiaomi
Yulong ZTE TCL Communication
OPPO BBK Gionee
Tianyu Hisense Konka
Haier
0%
5%
10%
15%
20%
25%
30%
35%
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Jun 2009
Galaxy S
July 2010 Galaxy S2
May, 2011
Galaxy S3
May 2012
Galaxy S4
Apri 2013
Galaxy S5
Apr 2015
20 October 2014 73
Fig 12 Apple iPhone shipments

Fig 13 Apple iPad shipments


0
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1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
Units (m)
iPhone shipment
iPhone 4
Launched June
24, 2010
iPhone 5
Launched
Sep 21,
2012
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Launched
Oct 14 2011
iPhone 5S / 5C
Launched Sep
20, 2013
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3.3 4.2 7.3 4.7 9.2 11.1 15.4 11.8 17.0 14.0 22.9 19.5 14.6 14.1 26.0 16.4 15.3
2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
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iPad 1
Launched Jan
2010 iPad 2
Launched
Mar 2011
iPad 3
Launched
Mar 2012
iPad 4 / mini
Launched Oct
2012
iPad Air / mini 2
Launched Oct 2013
20 October 2014 74
Fig 14 iPad spec comparison
Name Apple iPad Air 2 Apple iPad Air Apple iPad mini 3
Apple iPad mini 2 w/
retina display
Model Picture

Launch Date October 2014 October 2013 October 2014 October 2013
Price
$499 / 599 / 699 / (Wifi)
$499 / 599 / 699 / 799
(Wifi)
$399 / 499 / 599 (wifi)
$399 / 499 / 599 / 699
(wifi)
Dimensions 240 x 169.5x 6.1mm 240 x 169.5 x 7.5 mm 200 x 134.7 x 7.5 mm 200 x 134.7 x 7.5 mm
Weight: 437 g 469g 331g 331g
Battery Capacity Li-on polymer 27.3W Li-on polymer 32.4W Li- polymer 23.8W Li- polymer 23.8W
Display Diagonal 9.7" 9.7" 7.9" 7.9"
Display Resolution 1536 x 2048 1536 x 2048 1536 x 2048 1536 x 2048
PPI 264 ppi 264 ppi 324 ppi 324 ppi
CPU Apple A8X Apple A7X Apple A7 Apple A7
Cores Dual-core Dual-core Dual-core Dual-core
CPU Clock 1.6GHz 1.3GHz 1.3GHz 1.3GHz
ROM capacity 16 / 64 / 128GB 16 / 32 / 64 / 128GB 16 / 64 / 128GB 16 / 32 / 64 / 128GB
RAM capacity TBD 1GB TBD 1GB
Bluetooth Bluetooth 4.0 Bluetooth 4.0 Bluetooth 4.0 Bluetooth 4.0
Wireless LAN 802.11ac 802.11a/b/g/n 802.11a/b/g/n 802.11a/b/g/n
Camera resolution 8MP 5MP 5MP 5MP
Secondary Camera 1.2MP 1.2MP 1.2MP 1.2MP
Battery Life 10hrs 10hrs 10hrs 10hrs
Loudspeaker Yes Yes Yes Yes
Hon Hai valuation
Hon Hai stock has derated since 2009 after it was not able to maintain earnings growth coupled with
margin erosion pressure. The stock has traded in a range of 7-16x since 2009. We believe the stock
should at least trade at a slight premium over hardware stocks average PE (average of 13.2x FY14
and 10.3x FY15E) band, as Hon Hai still generates ROE of around 15% and has vertical integration
capability. We set our price target of NT$114 based on 12x 2H15-1H16E earnings.
Fig 15 Hon Hai PE band Fig 16 Hon Hai PB band

Source: Bloomberg, Macquarie Research, October 2014 Source: Bloomberg, Macquarie Research, October 2014

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20 October 2014 75
Fig 17 Hon Hai Comparable valuation
EMS/ODM
2317 TT Hon Hai O 43,301 89.0 114.0 32% 7.30 8.00 9.26 12.2 11.1 9.6 1.7 1.6 1.4 15.1 14.9 15.8 2.1 3.1 3.6
2382 TT Quanta N 9,274 73.0 80.0 15% 4.84 5.20 6.03 15.1 14.0 12.1 2.3 2.4 2.3 15.1 16.8 19.3 5.2 5.0 5.8
2356 TT Inventec N 2,501 21.2 21.8 10% 1.97 1.91 2.07 10.8 11.1 10.3 1.4 1.5 1.4 13.5 13.0 14.1 7.5 7.2 7.8
4938 TT Pegatron O 4,104 53.6 66.0 29% 4.17 4.86 5.83 12.9 11.0 9.2 1.1 1.2 1.1 9.4 10.7 12.3 5.2 6.1 7.3
2324 TT Compal N 2,934 20.2 21.7 14% 0.57 1.26 2.12 35.5 16.0 9.5 0.9 1.0 1.0 2.4 5.9 10.1 4.9 7.0 7.0
3231 TT Wistron O 2,399 29.8 37.0 28% 2.42 2.01 3.24 12.3 14.9 9.2 1.1 1.1 1.0 8.9 7.4 11.8 6.2 3.4 5.4
Average 16.7 13.2 10.3 1.6 1.6 1.5 11.7 12.5 14.9 4.9 5.0 5.9
Source: Bloomberg, Macquarie Research, October 2014, prices as of 17 Oct.

Fig 18 Hon Hais quarterly P&L
NT$m 1Q14 2Q14 3Q14F 4Q14F 1Q15F 2Q15F 3Q15F 4Q15F 1Q16F 2Q16F 3Q16F 4Q16F
Revenues 883,479 879,094 950,715 1,394,406 1,069,120 1,031,595 1,148,300 1,413,901 1,112,350 1,081,374 1,207,026 1,488,678
Gross Profit 53,376 61,990 67,196 101,478 75,094 73,165 81,097 102,425 78,894 76,921 85,580 108,322
Profit before Tax 25,541 32,417 37,758 57,140 38,194 38,918 43,802 56,181 40,077 40,183 46,647 59,872
Tax (5,711) (11,792) (6,041) (9,714) (9,549) (11,675) (7,446) (8,989) (8,416) (12,457) (7,930) (10,178)
Net profit after tax 19,830 20,625 31,717 47,426 28,646 27,243 36,355 47,192 31,661 27,726 38,717 49,694
Minorities 287 439 483 531 558 586 615 646 678 712 747 785
Net profit 19,543 20,186 31,234 46,895 28,088 26,657 35,740 46,547 30,983 27,014 37,969 48,909
EPS 1.49 1.37 2.12 3.18 1.90 1.80 2.42 3.15 2.09 1.83 2.57 3.31

Profitability
Gross Margin 6% 7% 7% 7% 7% 7% 7% 7% 7% 7% 7% 7%
Pretax Margin 3% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4%
Net Margin 2% 2% 3% 3% 3% 3% 3% 3% 3% 2% 3% 3%

QoQ Growth
Sales -33% 0% 8% 47% -23% -4% 11% 23% -21% -3% 12% 23%
Operating Profit -53% 34% 14% 65% -33% -2% 10% 33% -29% -2% 14% 34%
Pretax Profit -51% 27% 16% 51% -33% 2% 13% 28% -29% 0% 16% 28%
Net Profit -54% 3% 55% 50% -40% -5% 34% 30% -33% -13% 41% 29%
EPS -54% 3% 55% 50% -40% -5% 34% 30% -33% -13% 41% 29%

YoY Growth
Sales 9% -2% 3% 5% 21% 17% 21% 1% 4% 5% 5% 5%
Operating Profit 50% 50% 0% 17% 70% 25% 21% -2% 3% 2% 6% 6%
Pretax Profit 13% 27% 6% 9% 50% 20% 16% -2% 5% 3% 6% 7%
Net Profit 20% 19% 2% 10% 44% 32% 14% -1% 10% 1% 6% 5%
EPS 19% 18% 1% 9% 43% 32% 14% -1% 10% 1% 6% 5%

20 October 2014 76

Hon Hai Precision (2317 TT, Outperform, Target Price: NT$114.00)

Revenue m 879,094 950,715 1,394,406 1,069,120 Revenue m 3,952,318 4,107,695 4,662,916 4,889,428
Net Non-operating income m 4,486 5,834 4,466 2,658 Net Non-operating income m 26,981 19,421 16,428 18,676
Tax Expense m -11,792 -6,041 -9,714 -9,549 Tax Expense m -28,950 -33,258 -37,659 -38,981
Exceptionals m 0 0 0 0 Exceptionals m 0 0 0 0
Minority Interests m -439 -483 -531 -558 Minority Interests m -649 -1,740 -2,404 -2,922

EBITDA m 45,916 50,293 71,343 53,601 EBITDA m 182,928 206,722 238,430 266,821

EPS pcp growth (rep) % 18.0 0.8 9.2 43.1 EPS growth (rep) % 11.9 9.6 15.8 5.7
EPS pcp growth (rep bonus exp) % 18.0 0.8 9.2 43.1 EPS growth (rep bonus exp) % 11.9 9.6 15.8 5.7
EPS pcp growth (adj) % 18.0 0.8 9.2 43.1 EPS growth (adj) % 11.9 9.6 15.8 5.7

Revenue pcp growth % -1.8 3.4 5.0 21.0 PE (rep) x 12.2 11.1 9.6 9.1
Reported Earnings pcp growth % 18.9 1.6 10.0 43.7 PE (adj) x 12.2 11.1 9.6 9.1

Reported Earnings Margin % 2.3 3.3 3.4 2.6 Weighted Average Shares m 14,620 14,733 14,793 14,793
EBITDA Margin % 5.2 5.3 5.1 5.0 Period End Shares m 14,643 14,793 14,793 14,793


Gross Profit Growth % -22.7 11.5 16.8 5.4 Depreciation & Amortisation m 73,613 73,287 77,762 98,718
Operating Income Growth % 0.8 22.1 20.4 4.6 Chgs in Working Cap m -3,230 -14,402 -31,696 -48,562
Reported Earnings Growth % 12.6 10.5 16.3 5.7 Other m -4,329 -92,667 -5,366 -5,903
EBITDA Growth % 3.7 13.0 15.3 11.9 Operating Cashflow m 172,752 84,076 177,733 189,129
Acquisitions m 336 -11,806 -2,000 -2,000
Gross Profit Margin % 6.4 6.9 7.1 7.2 Capex m -44,395 -26,820 -50,000 -60,000
Reported Earnings Margin % 2.7 2.9 2.9 3.0 Other m 10,153 5,905 0 0
EBITDA Margin % 4.6 5.0 5.1 5.5 Investing Cashflow m -33,906 -32,721 -52,000 -62,000
EV/EBITDA x 5.6 5.0 4.3 3.9 Debt Movements m 70,338 -106,354 95,000 98,000
EV/EBIT x 9.1 7.6 6.4 6.1 Other m -20,889 -2,343 0 0
Financing Cashflow m 31,696 -135,371 53,750 50,039
ROE % 15.1 14.9 15.8 15.0 Net Chg in Cash/Debt m 188,500 -87,964 179,483 177,168
ROA % 5.0 5.8 6.6 6.4
Price/Book x 1.7 1.6 1.4 1.3


Cash m 696,312 663,579 843,062 1,020,230
Receivables m 787,925 827,084 838,648 883,001
Inventories m 312,785 327,049 331,741 349,164
Investments m 71,286 109,983 117,349 125,252
Fixed Assets m 379,562 328,165 302,059 264,997
Other Assets m 64,591 69,370 93,845 118,675
Total Assets m 2,312,461 2,325,231 2,526,703 2,761,318
Payables m 712,704 745,206 755,896 795,597
Short Term Debt m 386,216 253,286 333,286 413,286
Long Term Debt m 132,164 158,173 173,173 191,173
Total Liabilities m 1,506,537 1,438,067 1,543,757 1,681,458
Total S/H Equity m 805,925 887,164 982,946 1,079,861
Total Liab & S/H Funds m 2,312,461 2,325,231 2,526,703 2,761,318



20 October 2014 77
TAIWAN

4938 TT Outperform
75.00
- Sum of Parts
GICS sector
Free float % 35

Year end 31 Dec 2013A 2014E 2015E 2016E
Revenue bn 949.8 968.6 981.0 1,003.6
EPS rep NT$ 4.17 4.86 5.83 6.31
EPS rep growth % 54.1 16.6 19.9 8.3
EPS bonus exp NT$ 4.17 4.86 5.83 6.31
EPS bonus growth % 54.1 16.6 19.9 8.3
PER rep x 12.9 11.0 9.2 8.5
PER bonus exp x 12.9 11.0 9.2 8.5
Total DPS NT$ 2.80 3.26 3.90 4.23
Total div yield % 5.2 6.1 7.3 7.9
ROA % 3.9 5.6 5.6 5.9
ROE % 9.4 10.7 12.3 12.6
EV/EBITDA x 1.8 1.5 1.5 1.4
Net debt/equity % -20.8 -27.8 -43.8 -49.7
P/BV x 1.1 1.2 1.1 1.0

history


Analyst(s)
Ellen Tseng
Kaylin Tsai

20 October 2014
Taiwan Branch
Pegatron
Undervalued; Risk-reward favourable
Event
Stronger consumer preference for the iPhone 6 Plus than original
expectations could affect Pegatrons smartphone business short term, but we
believe Pegatrons iPhone 6 volume was less than one fourth of Hon Hais
total iPhone 6/iPhone 6 plus production. We think Apple could adjust Hon
Hais total production by lowering iPhone 6 volumes to balance supply chain.
Mid-term, Apple could also consider bringing Wistron into its iPhone 6 supply
chain in addition to the iPhone 5C, which would increase investors concerns
on Pegatron. However, after considering the worst case scenario, we believe
the stock is undervalued with an attractive risk-reward. Maintain Outperform.
Impact
Higher iPhone 6 Plus but Apples strategy to maintain supply chain
balance: Apples pre-order status has indicated a strong consumer
preference for iPhone 6 Plus than early expectation. While this could benefit
Hon Hai given it is the sole supplier for iPhone 6 Plus and share iPhone 6
allocation with Pegatron, we believe Apple will have to adjust Hon Hai
production eventually to maintain supply chain balance. While we note that
Wistron has become part of Apples supply chain for iPhone 5C, and has
potential to gain iPhone 6 in 2Q15, we believe Wistron will focus more on
Apples low-end smartphones initially. Even when we assume Pegatrons
smartphone sales growth of only 9% in 2015 considering conservative % of
allocation from Apple, we believe the market is over-discounting the risk on
our sensitivity analysis( Fig 1 )
Concerns on 3Q earnings seem to be over-played: Market seems
generally concerned Pegatrons execution capability although it has delivered
two strong quarters. Despite ramping new iPhone 6 in 3Q, we believe the
yield for new products are less an issue in 3Q14. While its 3Q consolidated
gross margin could trend down due to rising initial ramp up cost and labor cost
hike, we still expect its 3Q consolidated OPM will reach at least 2.3% (same
as 1Q but lower than 2Qs 2.7%) vs consensus 2.2%.
Factoring rising uncertainty over its smartphone business and its computing
sales shortfall after Toshiba withdrew market, we cut our earnings estimate for
2014/15/16 by 2.2%/11.8%/18.3%. Our estimates are now more skewed on
the upside if Pegatron smartphone allocation is maintained and margin
outlook is enhanced. We lower our TP to NT$66 from NT$74.
Price catalyst
12-month price target: NT$66.00 based on a Sum of Parts methodology.
Catalyst: 3Q result, 4Q outlook and Apple iPhone 6 sales through
Pegatron DMS contributed about 50% of its profit. Pegatron is trading 0.75x
its DMS book plus 0.7x of the market value of its investment holdings. We
think the market has discounted all negatives, and the stock has priced in the
worst case. The stock is an attractive value play with a decent dividend yield,
in our view.
20 October 2014 78
Higher iPhone 6 Plus but Apples strategy to maintain supply chain
balance could further reduce impact
Apples pre-order status has indicated a strong consumer preference for iPhone 6 Plus given the
pricing differential between the two phones is less than $100 but it has a better camera(+OIS) and
battery capacity, in addition to a larger screen. While the iPhone 6 Plus could now come in higher
than early expectation (30% iPhone 6 plus/70% iPhone 6) to 50%:50%, this could benefit Hon Hai
given it is the sole supplier for iPhone 6 Plus and share iPhone 6 allocation with Pegatron.
We see limited impact to Pegatron given its capacity is only one fourth or one fifth of Hon Hais
capacity. As Hon Hai is the sole assembler of iPhone 6 Plus, the increased order allocation for
iPhone 6 Plus may shift some of Hon Hai iPhone 6s capacity to iPhone 6 Plus. We also believe
Apple will have to adjust Hon Hai production eventually to maintain supply chain balance.
Aside from iPhone, Pegatron also supplies Asusteks ZenFone. While the ZenFone carries much
lower margins as well as lower ASP, we expect the ZenFone could help drive Pegatrons smartphone
scale, thus it could enjoy operating leverage. While Asustek could consider adding 2
nd
smartphone
outsourcing partner, we think Asustek could almost double its smartphone volume in 2015 vs 2014.
(or from 8m in 2014 to 15m in 2015); thus the absolute volume impact could be minimal.
We think Hon Hai currently still account for 80% of total Apple iPhone production, vs Pegatrons 18%
and Wistrons 4%. While we note that Wistron has become part of Apples supply chain for iPhone
5C, and has potential to gain iPhone 6 in 2H15, we believe Wistron will focus more on Apples low-
end smartphones initially. Assuming Wistron will gain allocation up to 10% in 2015, Pegatron could
still maintain at least 15% allocation if Wistrons gain impacts Hon Hais and Pegatrons allocation
proportionately. Overall, we think Pegatron could still achieve its total smartphone volume(including
iPhone+ Asustek ZenFone) of at least 60m in 2015 vs 52m in 2014 based on our base case estimate,
given low 1H14 volume( 36%:64% in 1H14:2H14).
Even if Pegatron may potentially be affected by Wistrons rising allocation, our Bear Case I estimates
that 2015/2016 shipment decline to 45m/37m vs our current base case 60m/59m, thus EPS will have
further downside by 9% and 12%, but our SOTP still suggests NT$59 fair value, implying market is
overly discounting the risk, as current share price is NT$53.6 (Fig 1 for details).
Fig 1 Pegatron Smartphone sensitivity
Bear Case I Bear case II Base case Bull case I Bull Case II Bull Case III
Smartphone shipment 2015 (m) 45 55 60 65 70 75
Smartphone shipment 2016 (m) 37 52 59 64 69 74
2015 EPS (NT$) 5.3 5.63 5.83 6.01 6.19 6.37
2016 EPS (NT$) 5.55 6.08 6.31 6.48 6.65 6.82
SOTP(NT$) 59 64 66 67 69 70

Change (%)
2015 EPS -9% -3% 0% 3% 6% 9%
2016 EPS -12% -4% 0% 3% 5% 8%
SOTP(NT$) -10% -3% 0% 2% 5% 7%
Source: Macquarie Research, October 2014 *For details of our SOTP methdology, please refer to Fig 10
3Q margin down on initial ramp and labor costs, but not as low as 1Q level
Pegatron reported 3Q14 sales of NT$238.4bn, up 13.3% QoQ but down 7.8% YoY, while this was
below the streets estimate by 5%. This was due to a decline from game console and PC computing
segment revenue, but management thinks non-PC revenue (consumer + communication) tracked in
line to achieve 25-30% QoQ growth in 3Q14.
As Pegatron started ramping up for the iPhone 6 in 3Q, we estimate the initial costs and labor costs
hike will weight on its gross margin to 5.8%, from 6.1% in 2Q14, but we think it will not be as low as
1Q14 level at 5.2% as we believe it will benefit from rising sales scale and healthy yield. Despite
Pegatron facing severe issues in 2Q-3Q13 when migrating to new models (iPhone 5C) and failing to
drive yield, manufacturing efficiency and productivity, we expect the companys execution to improve
as it climbs the steep learning curve. While risk remains on the iPhone 6 yield rate performance, we
believe the company can build up more expertise this year versus last year. Yield rate concern will be
less an issue, in our view.
20 October 2014 79
We expect 4Q sales to grow 25.5% QoQ or 12.5% YoY backed by high season and smartphone
strength.
Fig 2 Pegatrons Consolidated GM and OPM trend

Computing segment: Pegatron will be a marginal player
Pegatrons computing segment revenue had declined 27% YoY in 2Q14, and its 3Q computing
segment remained lacklustre. Its 3Q14 NB shipment of 2m unit was down 20% QoQ and 40% YoY,
far below the average of NB ODMs of 11% QoQ and 7% YoY. We think its computing sales are also
hampered by Toshiba withdrawing from the consumer PC market. As NB ODM market is not
consolidated as PC brands, we think Pegatron will become a marginal player in the market given the
smallest unit share among the top five NB ODMs. We forecast its computing sales to decline by 24%
YoY in 2014 and 17% YoY in 2015.
Fig 3 NB ODMs shipment YoY trend Fig 4 NB ODMs shipment


0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
0%
1%
2%
3%
4%
5%
6%
7%
GM % OPM %
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
1Q14 2Q14 3Q14 4Q14E
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
(k units)
1Q14 2Q14 3Q14 4Q14E
20 October 2014 80
Consumer segment: Apple iPad mini slowdown
Overall, we still expect Pegatrons consumer sales to decline by 20% YoY in 2014. The
cannibalization of the NB market by tablets is prompting more PC brand names to consider offering
11.6/10.1 touch NBs or 2-in-1 devices (tablet + NB). The attractive pricing points (lower than $299-
399) could also gradually affect high-end tablet market demand (9.7-10.6 premium products).
Smartphone brands such as Samsung, LG, Sony, Moto, HTC and finally Apples iPhone 6 have
shifted some of their models to bigger screen smartphones (5-6).
So far, pricing for 5-6 smartphones from major brands on average has been 3x higher than 7
tablets from major brands this gives a higher incentive for brand names to sell more smartphones
than tablets.
In addition, Apple launched new iPad mini 3 on October 16
th
, which has limited spec upgrade despite
adding the finger print ID. The limited improvement on function will not likely trigger a customer
replacement cycle. While Apple also cut iPad mini 2 pricing by US$100 in order to revive consumers
appetite for Xmas season, we think the iPhone 6 Plus could also potentially cannibalize the iPad
mini owing to the similar screen size.
Pegatron generated 20% of sales from the consumer segment in 2Q (down 16% YoY), mainly from
the iPad mini. We expect there is growing risk of weaker demand on the iPad mini, but we expect
Pegatron will gain some PS4 in 2014 and possible iPad air allocation in 2015. Overall, we expect
Pegatrons consumer sales to decline 20% YoY in 2014 from a high 2013 base and then grow 4%
YoY in 2015.
Fig 5 Pegatron sales YoY growth by segment


-40%
-20%
0%
20%
40%
60%
80%
100%
120%
140%
160%
2010 2011 2012 2013F 2014F 2015F 2016F
Computing Consumer Communication
20 October 2014 81
Fig 6 Pegatron: Segment sales breakdown


Fig 7 DMS as % of Pegatron sales/or EBIT Fig 8 DMS GM/OP margin trend

Earnings revisions
Factoring rising uncertainty on smartphone business and its computing sales shortfall after Toshiba
withdrew the market, we cut our earnings estimate for 2014/15/16 by 2.2%/11.8%/18.3%,
respectively. We cut our computing segment revenue estimate the sharpest by 9.9%/23.0%/29.4%
for 2014/15/16 as the business outlook for the company is deteriorating. We lower our 2015/16
communication revenue estimates by 13.6%/16.0% to be more conservative on its smartphone
shipment growth given Apples strategy to diversify its suppliers by adding Wistron. Lastly, we cut our
consumer (tablet and game console) segment revenue estimates by 6.9%/11.8% in 2015/16 to
reflect the stabilizing demand for tablets, assuming shipment to grow only 6% and 3% in 2015 and
2016 respectively. Our earnings estimates are now more skewed on the upside if Pegatron
smartphone allocation is maintained and margin outlook is enhanced. We lower our SOTP based TP
(Fig 10) to NT$66 (from NT$74).
We forecast the ECB revaluation will drag 2014 earnings. We estimate that Pegatron will recognize a
NT$3.5bn ECB revaluation loss in 2014. However, such drag will be removed in 2015 as the
company will recall the ECB in Febuary 6, 2015. Pegatron issued ECBs of US$300m on February 6,
2012, and the ECB expires on February 6, 2017. On its ECB revaluation, the ECB conversion price
was adjusted to NT$40.11 (based on a fixed exchange rate of NT$29.71=US$1), and the original
size of the ECB offering was US$300m. Pegatron can recall the ECB three years after the ECB has
been issued (or after February 6, 2015; if for 20 consecutive trading days the share price exceeds
>125% *conversion price). Moreover, given the recent share price rally, we also expect most ECB
holders will convert to shares, as end of 2Q, it has converted 17%. We assume fully diluted share
count will rise to 2,553m vs 2,368m at end of September 2014.
41%
28%
34%
31% 30%
24%
25%
27%
20%
20%
24%
38%
30%
30%
39%
11%
9%
9%
11%
11%
0
50,000
100,000
150,000
200,000
250,000
300,000
2Q13 3Q13 4Q13 1Q14 2Q14
NT$ m
Computing Consumer Communication Others
87%
90% 90%
91% 90%
22%
55%
49%
53%
52%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2012 2013 2014E 2015E 2016E
DMS as % of consolidated sales DMS as % of EBIT
0%
0%
0%
1%
1%
1%
1%
1%
2%
0%
1%
1%
2%
2%
3%
3%
4%
4%
5%
GM(LHS) OPM(RHS)
20 October 2014 82
Fig 9 Pegatron Earning Revision
2014E 2015E 2016E
Revenue 968,552 999,236 -3.1% 980,953 1,138,083 -13.8% 1,003,630 1,209,644 -17.0%
Gross profit 55,531 56,544 -1.8% 58,480 63,902 -8.5% 61,153 68,559 -10.8%
GM % 5.7% 5.7% 6.0% 5.6% 6.1% 5.7%
Operating profit 23,775 24,661 -3.6% 24,787 27,780 -10.8% 26,529 30,755 -13.7%
OPM % 2.5% 2.5% 2.5% 2.4% 2.6% 2.5%
Pretax income 21,030 21,915 -4.0% 25,180 28,174 -10.6% 27,564 31,789 -13.3%
Net income 11,514 11,520 -0.1% 13,802 15,333 -10.0% 14,950 17,929 -16.6%
EPS (NT$) 4.86 4.97 -2.2% 5.83 6.61 -11.8% 6.31 7.73 -18.3%

Revenue by
segments

Computing 249,903 277,235 -9.9% 208,049 270,355 -23.0% 201,068 284,632 -29.4%
Consumer 203,219 201,807 0.7% 210,624 226,246 -6.9% 216,220 245,162 -11.8%
Communication 415,389 415,063 0.1% 461,125 533,943 -13.6% 477,506 568,157 -16.0%
Valuation suggests good risk reward
Our target price of NT$66 for Pegatron is based on a SOTP method (Fig 10). The implied value from
its core business is Pegatrons core profit after tax (2H15-1H16) per share multiplied by a 10x PE
ratio. For Pegatrons investment value, we added the effective market cap (discounted 20%) for its
subsidiaries including Kinsus, AsRock, Ability, AzureWave and Casetek, as well as its net cash
position. We have used fully diluted shares assuming its remaining ECB will be all fully converted into
shares, to set our PT.
According to Fig 12 split-up value analysis, Pegatron Book value per share (BVPS) was NT$61.5 at
end-2Q14. Its original investment holdings including Kinsus, Asrock, Ability, AzureWave, Casetek-
combined book value is NT$11.67 thus the rest core DMS BVPS is NT$49.83.(Fig 11) while NAV of
these affiliates has appreciated to NT$25.4 based on October 16 closing price. On our split up
valuation, Pegatron is trading 0.75x its DMS book plus 0.7x of the market value of its investment
holdings. We think the market have discounted all negatives. Our scenario analysis indicates if
applying 1x DMS PB, and 20% discount to its investment holding, its fair value will be NT$70.1.
Fig 10 Pegatron SOTP valuation
Pegatron's core business
Pegatron core profit - 2H15E-1H16 net income,
25% tax rate(NT$m)
9,086
PER (x) - 2H15-1H16 10.0
Implied value of core business on our valuation
method(NT$m)
90,858

Pegatron's strategic investment
Pegatron's stake Mkt Cap (NT$mn) Effective Mkt Cap (NT$mn)
Kinsus (3189 TT) 39.0% 51,290 20,003
AsRock (3515 TT) 58.7% 9,548 5,600
Ability (2374 TT) 11.7% 1,794 210
AzureWave (3694 TT) 27.5% 1,825 502
Casetek (5264 TT) 60.7% 63,563 38,602
Total value of investment 64,916

Total diluted shares(m) 2,553
Total value per share(m)
- Implied value from core business (NT$) - per
share
35.6
- Adding back 80% of Pegatron's value of
investment - per share(20% discount to
market value)
20.3
Less: Net Debt (9.9)
Pegatron's target price (NT$) 66
Effective Mkt Cap as of the price on Oct 16, 2014

20 October 2014 83
Fig 11 Investment holding value analysis
(NT$ m) Original investment Book Value Effective Mkt Cap
Kinsus (3189 TT) 2,460 9,948 20,003
AsRock (3515 TT) 462 3,191 5,600
Ability (2374 TT) 2,670 1,500 210
AzureWave (3694 TT) 778 610 503
Casetek (5264 TT) 6,990 14,551 38,602
Total Affiliate holding 13,360 29,800 64,917
Per share 11.7 25.4
Pegatron CON BVPS 61.5 61.5
Pegatron DMS BVPS 49.8 36.1
Original investment and book value as of June 30, 2014; Effective Mkt Cap as of the price on Oct 16, 2014

Fig 12 Split up valuation analysis
Scenario NAV NAV-II NAV-II NAV-II NAV-II
NT$ BVPS
1x DMS PB; market
value of investment
holding
1x DMS PB; 30%
discount to its
investment holding
market value
1x DMS PB; 20%
discount to its
investment holding
market value
0.8x DMS PB; 20%
discount to its
investment holding
market value
0.75x DMS PB; 30%
discount to its
investment holding
market value
DMS 49.8 49.8 49.8 49.8 39.9 37.4
Investment holding 11.7 25.4 17.8 20.3 20.3 17.8
Pegatron CON 61.5 75.2 67.6 70.1 60.2 55.2

Fig 13 Pegatrons valuation comparison
EMS/ODM
2317 TT Hon Hai O 43,301 89.0 114.0 31% 7.30 8.00 9.26 12.2 11.1 9.6 1.7 1.6 1.4 15.1 14.9 15.8 2.1 3.1 3.6
2382 TT Quanta N 9,274 73.0 80.0 15% 4.84 5.20 6.03 15.1 14.0 12.1 2.3 2.4 2.3 15.1 16.8 19.3 5.2 5.0 5.8
2356 TT Inventec N 2,501 21.2 21.8 10% 1.97 1.91 2.07 10.8 11.1 10.3 1.4 1.5 1.4 13.5 13.0 14.1 7.5 7.2 7.8
4938 TT Pegatron O 4,104 53.6 66.0 29% 4.17 4.86 5.83 12.9 11.0 9.2 1.1 1.2 1.1 9.4 10.7 12.3 5.2 6.1 7.3
2324 TT Compal N 2,934 20.2 21.7 14% 0.57 1.26 2.12 35.5 16.0 9.5 0.9 1.0 1.0 2.4 5.9 10.1 4.9 7.0 7.0
3231 TT Wistron O 2,399 29.8 37.0 28% 2.42 2.01 3.24 12.3 14.9 9.2 1.1 1.1 1.0 8.9 7.4 11.8 6.2 3.4 5.4
Average 16.7 13.2 10.3 1.6 1.6 1.5 11.7 12.5 14.9 4.9 5.0 5.9
Source: Bloomberg, Macquarie Research, October 2014, prices as of 17 Oct.

20 October 2014 84
Fig 14 Pegatrons quarterly P&L
Revenues 218,737 212,352 238,390 299,073 224,131 227,042 244,720 285,060 221,924 226,694 253,695 301,317
Gross Profit 11,297 13,003 13,865 17,366 13,054 13,439 14,782 17,204 13,379 13,376 16,080 18,318
PBT 4,462 3,671 5,492 7,405 4,951 5,795 6,586 7,848 5,893 5,691 7,524 8,455
Tax (976) (991) (1,318) (1,925) (1,089) (1,565) (1,647) (1,962) (1,297) (1,537) (1,881) (2,198)
Minorities 754 1,182 1,037 1,333 1,008 1,080 1,378 1,650 1,269 1,215 1,487 1,730
Net profit 2,732 1,498 3,137 4,147 2,853 3,150 3,562 4,236 3,328 2,939 4,156 4,527
EPS (NT$) 1.15 0.63 1.32 1.75 1.20 1.33 1.50 1.79 1.41 1.24 1.75 1.91

Profitability
Gross Margin 5.2% 6.1% 5.8% 5.8% 5.8% 5.9% 6.0% 6.0% 6.0% 5.9% 6.3% 6.1%
Operating/EBIT
Margin
2.3% 2.7% 2.3% 2.5% 2.3% 2.4% 2.6% 2.7% 2.6% 2.4% 2.9% 2.7%
Pretax Margin 2.0% 1.7% 2.3% 2.5% 2.2% 2.6% 2.7% 2.8% 2.7% 2.5% 3.0% 2.8%
Net Margin 1.2% 0.7% 1.3% 1.4% 1.3% 1.4% 1.5% 1.5% 1.5% 1.3% 1.6% 1.5%

QoQ Growth
Sales -17.8% -2.9% 12.3% 25.5% -25.1% 1.3% 7.8% 16.5% -22.1% 2.1% 11.9% 18.8%
Operating Profit -0.8% 12.6% -3.4% 36.0% -29.8% 5.3% 14.4% 20.5% -25.9% -4.6% 34.2% 13.5%
Pretax Profit -28.5% -17.7% 49.6% 34.8% -33.1% 17.1% 13.7% 19.2% -24.9% -3.4% 32.2% 12.4%
Net Profit -19.1% -45.2% 109.4% 32.2% -31.2% 10.4% 13.1% 18.9% -21.4% -11.7% 41.4% 8.9%
EPS -21.6% -45.2% 109.4% 32.2% -31.2% 10.4% 13.1% 18.9% -21.4% -11.7% 41.4% 8.9%

YoY Growth
Sales 0.5% 0.1% -6.1% 12.5% 2.5% 6.9% 2.7% -4.7% -1.0% -0.2% 3.7% 5.7%
Operating Profit 3.6% 114.7% 88.7% 46.7% 3.9% -2.8% 15.1% 2.0% 7.6% -2.6% 14.3% 7.6%
Pretax Profit -4.8% 7.0% 17.6% 18.6% 11.0% 57.9% 19.9% 6.0% 19.0% -1.8% 14.2% 7.7%
Net Profit 18.5% 7.6% 26.6% 22.7% 4.4% 110.3% 13.6% 2.2% 16.6% -6.7% 16.7% 6.9%
EPS 14.5% 3.9% 22.4% 19.0% 4.4% 110.3% 13.6% 2.2% 16.6% -6.7% 16.7% 6.9%

20 October 2014 85

Pegatron (4938 TT, Outperform, Target Price: NT$66.00)

Revenue m 212,352 238,390 299,073 224,131 Revenue m 949,752 968,552 980,953 1,003,630
Net Non-operating income m -2,033 -19 -89 -311 Net Non-operating income m 3,453 -2,745 394 1,034
Tax Expense m -991 -1,318 -1,925 -1,089 Tax Expense m -4,783 -5,211 -6,262 -6,912
Minority Interests m -1,182 -1,037 -1,333 -1,008 Minority Interests m -4,693 -4,306 -5,116 -5,701

EBITDA m 9,098 8,817 10,851 8,656 EBITDA m 29,502 37,370 38,511 40,654

EPS pcp growth (rep) % 3.9 22.4 19.0 4.4 EPS growth (rep) % 54.1 16.6 19.9 8.3
EPS pcp growth (rep bonus exp) % 3.9 22.4 19.0 4.4 EPS growth (rep bonus exp) % 54.1 16.6 19.9 8.3
EPS pcp growth (adj) % 3.9 22.4 19.0 4.4 EPS growth (adj) % 54.0 16.6 19.9 8.3

Revenue pcp growth % 0.1 -6.1 12.5 2.5 PE (rep) x 12.9 11.0 9.2 8.5



Gross Profit Growth % 7.2 22.0 5.3 4.6 Depreciation & Amortisation m 13,925 13,595 13,724 14,124
Operating Income Growth % 39.6 52.6 4.3 7.0 Chgs in Working Cap m -6,057 -25,661 9,316 -4,494
Reported Earnings Growth % 56.5 20.5 19.9 8.3 Other m 7,649 13,562 480 -20
EBITDA Growth % 21.3 26.7 3.1 5.6 Operating Cashflow m 25,071 13,010 37,322 24,560
Acquisitions m 121 -126 0 0
Reported Earnings Margin % 1.0 1.2 1.4 1.5 Other m -864 573 0 0
EV/EBIT x 3.4 2.4 2.3 2.2 Other m 2,522 4,705 0 0
Financing Cashflow m 1,861 -15,897 -3,714 -5,247
ROA % 3.9 5.6 5.6 5.9
Interest Cover x 37.0 nmf 196.3 nmf P/FCF x 9.4 21.3 3.8 6.2
Price/Book x 1.1 1.2 1.1 1.0


Cash m 81,711 71,993 102,402 118,515
Receivables m 133,236 149,536 142,530 150,658
Inventories m 103,599 126,768 115,178 121,690
Investments m 3,543 2,739 2,259 2,279
Fixed Assets m 73,917 68,102 58,578 48,653
Other Assets m 19,890 18,817 18,617 18,417
Total Assets m 415,896 437,956 439,563 460,212
Payables m 158,674 188,744 179,463 189,609
Short Term Debt m 23,094 14,370 18,370 22,370
Long Term Debt m 28,708 17,123 17,123 17,123
Total S/H Equity m 144,055 145,712 152,600 159,103



20 October 2014 86
TAIWAN

3231 TT Outperform
40.00
- PER
GICS sector
Free float % 46

Year end 31 Dec 2013A 2014E 2015E 2016E
Revenue bn 624.0 590.3 681.7 723.8
EPS rep NT$ 2.42 2.01 3.24 3.50
EPS rep growth % -14.3 -17.0 61.4 7.9
EPS bonus exp NT$ 2.42 2.01 3.24 3.50
EPS bonus growth % -14.3 -17.0 61.4 7.9
PER rep x 12.3 14.9 9.2 8.5
PER bonus exp x 12.3 14.9 9.2 8.5
Total DPS NT$ 1.84 1.01 1.62 1.75
Total div yield % 6.2 3.4 5.4 5.9
ROA % 2.2 2.0 3.1 3.1
ROE % 8.9 7.4 11.8 11.8
EV/EBITDA x 5.3 5.4 4.0 3.6
Net debt/equity % 18.1 20.3 24.2 24.3
P/BV x 1.1 1.1 1.0 1.0

history


Analyst(s)
Ellen Tseng
Kaylin Tsai

20 October 2014
Taiwan Branch

Wistron
Growing along with Apple
Event
We maintain our Outperform rating on Wistron and our TP of NT$37. Wistron
is poised to benefit from the strong Apple iPhone 6/6 plus replacement cycle,
thanks to its LCM module exposure to Japan Display (JDI). Its smartphone
business also stands to benefit if Apple revamps its outsourcing strategy for
more low-end iPhones. Its NB business is also reviving.
Impact
LCM business growth opportunities along with Apple iPhone 6/6 Plus:
The LCM assembly process is heavily labour-intensive, and Japanese panel-
makers have outsourced it to Taiwanese or Chinese suppliers to resolve
back-end bottlenecks. Thanks to the iPhone 6/6 plus launch, Wistrons LCM
sales saw a quantum jump in 3Q to NT$5bn, representing 3% of its total sales,
thanks to order flow from its major customer - JDI, Apples major iPhone 6/6
plus panel supplier. We estimate 4Q sales from LCM could further expand to
NT$13bn or 7% of its 4Q sales, which would be a major growth driver.
Smartphone business shows signs of stabilization as it becomes
Apples supplier: We think Apple is will unfold a new, more effective strategy
for a low-end phone for emerging markets. We believe Wistron stands to
benefit, as it now supplies parts for the iPhone 5C. We believe its smart-
device volume could grow over 34% in 2015 after a 39% decline in 2014.
NB business is reviving the growth on share gain: We also believe
Wistron will gain more allocation from Acer after Acers restructuring. Wistron
has regained orders for some Dell education models, which should help
revive its 2H NB shipment outlook. We expect its 2015 NB shipments to rise
to 24.1m versus 21.5m in 2014.
Strong 3Q sales but offset by lower operating margin: Wistron reported
stronger 3Q sales (+14.7% QoQ/-2.6% YoY), higher than its guidance of 10-
15% QoQ, thanks to NB strength and incremental LCM module sales
contribution. However, the sudden increase in demand has challenged
Wistron due to the inexperience of the workers at the back end. We think this
has taken the breakeven schedule for the LCM business from 4Q14 to 1Q15.
Due to the deferred profitability of the LCD module business, we now expect
its 3Q operating margin could fall to 1.0% from 2Qs 1.2% before it rises again
in 4Q14 to 1.2% and slips back to 1.0% in 1Q15. Overall, we expect 3Q EPS
of NT$0.6 (+16.1% QoQ).
We fine-tune our sales estimates on higher LCM module contribution, but
defer margin improvement, and thus trim our earnings estimates by
2.7%/0.8%/0.8% for 2014/15/16.
Price catalyst
Catalyst: 3Q analyst meeting, LCM becoming profitable, Apple iPhone
allocation
Maintain Outperform; consensus earning upgrades remain key catalysts for
the stock. Our 2015/2016E earnings are 9%/7% higher than street consensus.
20 October 2014 87
LCM: Growth opportunities along with Apple iPhone 6/6 plus
Rising LCM sales contribution: Japanese panel-maker outsourcing LCM module
Wistron is engaged in LCM (liquid crystal module) assembly and we expect LCD module contribution
will continue to rise in 2H14. LCM module assembly is a back-end process that involves taking the
panel from cell process and bonding the LCD Driver IC and assembly backlight, metal frame, and
other components to make the finished product. The LCM assembly process is heavily labour-
intensive, and Japanese panel-makers have been outsourcing it to Taiwanese or Chinese suppliers
to resolve back-end bottlenecks.
Wistron has secured major customers, including Japan Display, Sharp and Panasonic, of which
Japan Display is a key growth driver, thanks to the robust replacement cycle for Apples iPhone 6/6
Plus. Japan Display (JDI) is Apples major iPhone 6/iPhone 6 plus panel supplier, sharing allocation
with LG/Sharp for iPhone 6, and LG for iPhone 6 Plus. Givens JDIs high yield, JDI could be a major
iPhone 6 plus supplier by the year-end. Japan Display outsources its LCD module assembly to both
Wistron and Shin Tech (50% each).
So far, while LCM sales contributed only 3% of Wistrons 3Q14 revenue, LCM module ASP per piece
only captured MVA (manufacture value added) per module, as most components are on a
consignment basis from its Japanese customers directly. So, the value added from Wistron mainly
comes from assembly work. However, the LCM module business is labour-intensive and requires
highly skilled workers to improve its quality and yield.
Fig 1 LCM model assembly process


Module
Assembly Cell Array
CF
TFT
LCD LCM
20 October 2014 88
Fig 2 Wistron LCM sales Contribution from 3Q14

LCM business breakeven will defer to 1Q15 on lengthy learning curve and labour issues
Originally, Wistron hoped its LCM business gross margin could improve to around 8%, or an OPM of
about 2%, given the right scale economies. However, management has said execution has been
more difficult than its original expectation, due to labour supply issues and a lengthy learning curve.
Hence, it sees the breakeven for the LCD business being further pushed back into 1Q15.
We believe that Wistron, as JDI's backend supplier, didn't get a chance to gradually ramp up
production and to allow its workers to gain experience, due to a 2 month delay. The sudden ramp in
demand has caused quality challenges for Wistron, due to inexperience of its workers. This has
hampered the breakeven schedule, which is somehow disappointing in our view. We believe that the
LCM business does not have very high entry barriers. If it required a learning curve and relatively
high capex, it would have deterred new entrants. We believe Wistron has invested NT$5bn-10bn in
optics-related businesses, which should start contributing to its bottom line from 2015.
A potential turnaround from the new business in 1Q15 should significantly improve Wistrons
operating margins. Due to the LCD modules deferred profitability, we expect the 3Q operating
margin to pull back to 1.0% from 1.2% in 2Q before it rises again from 4Q14.
Fig 3 Wistron quarterly OPM trend Fig 4 Wistron quarterly GM trend


-
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20 October 2014 89
Wistron has regained NB growth on market share gains
In 3Q14, Wistrons NB shipments outperformed its peers, growing 16% QoQ but declining 3.3% YoY
versus NB ODMs average of +9% QoQ/ +5% YoY. We believe Wistron regaining allocation from
major brands was the key driver of its 3Q QoQ outperformance.
Wistron suffered from PC OEMs consolidation of ODM suppliers among the top two, but it managed
to take advantage of Acers recent restructuring, and is likely to gain more allocation from Acer.
Acers order allocation to Wistron has declined from a peak of 35% in 2012-2013 to ~10%. We
believe the allocation could rise again, given Acer needs to form more solid supplier relationships.
The recent stability in Acers rising allocation to Wistron (after Acers inventory correction for old
models) is due to Acer reviving its shipments (sell-in) to distributors substantially. IDC data also
suggests Acers market share could at least stabilize at current levels, without further deterioration.
Moreover, although Compal has supplied more than 70% of Dells orders, according to our estimate,
we think Dell may also be re-adjusting its order allocation to make it more balanced and reduce the
concentration risk. We think Wistron is well-placed to regain some incremental new NB orders from
the education market; hence, this should contribute upside to its 2014 NB volumes. Overall, we
expect its shipments to reach 21.5m/24.1m for 2014/2015, and think this number should not be too
difficult, based on the improving PC demand outlook.
Fig 5 NB ODM shipment QoQ growth Fig 6 NB ODM shipment YoY growth

* Inventecs shipment is for all PC unit
* Inventecs shipment is for all PC unit
Fig 7 Wistron Monthly sales Trend MoM/ YoY


-30%
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1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14
Quanta Compal Wistron
Pegatron Inventec
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20 October 2014 90
Fig 8 Wistron sales mix by product Fig 9 Wistron gross profit mix by product

Source: Macquarie Research, October 2014 Source: Macquarie Research, October 2014
Valuation reviving EPS growth in 2015 could trigger a re-rating
Wistron is trading at a PER of 14.9x on FY14E and 9.2x on FY15E, and a P/BV of 1.1x and 1.0x,
respectively. Any sequential earnings improvement should drive a re-rating as well as consensus
earnings upgrades. Our current earnings estimates are 9%/7% ahead of street consensus estimates
for 2015/2016. We believe an upgrade in consensus earnings estimates could be a potential catalyst
for the stock, as most analysts are bearish on it.
We believe Wistron is poised for a re-rating on acceleration in earnings growth we forecast 61%
net profit growth in 2015. Accordingly, we set our price target based on 11x 3Q15-2Q16E EPS; we
note our target PER multiple of 11x is near the high end of its historical PER multiple range.
Fig 10 Wistron PE band Fig 11 Wistron PB band


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Smartphone Tablets LCD TV
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Price 0.4x 0.7x 1x 1.3x 1.6x
20 October 2014 91
Fig 12 EMS/ODM valuation
EMS/ODM
2317 TT Hon Hai O 43,301 89.0 114.0 31% 7.30 8.00 9.26 12.2 11.1 9.6 1.7 1.6 1.4 15.1 14.9 15.8 2.1 3.1 3.6
2382 TT Quanta N 9,274 73.0 80.0 15% 4.84 5.20 6.03 15.1 14.0 12.1 2.3 2.4 2.3 15.1 16.8 19.3 5.2 5.0 5.8
2356 TT Inventec N 2,501 21.2 21.8 10% 1.97 1.91 2.07 10.8 11.1 10.3 1.4 1.5 1.4 13.5 13.0 14.1 7.5 7.2 7.8
4938 TT Pegatron O 4,104 53.6 66.0 29% 4.17 4.86 5.83 12.9 11.0 9.2 1.1 1.2 1.1 9.4 10.7 12.3 5.2 6.1 7.3
2324 TT Compal N 2,934 20.2 21.7 14% 0.57 1.26 2.12 35.5 16.0 9.5 0.9 1.0 1.0 2.4 5.9 10.1 4.9 7.0 7.0
3231 TT Wistron O 2,399 29.8 37.0 28% 2.42 2.01 3.24 12.3 14.9 9.2 1.1 1.1 1.0 8.9 7.4 11.8 6.2 3.4 5.4
Average 16.7 13.2 10.3 1.6 1.6 1.5 11.7 12.5 14.9 4.9 5.0 5.9
Source: Bloomberg, Macquarie Research, October 2014, prices as of October 17

Fig 13 Wistron quarterly P&L
Revenues 125,818 135,885 155,805 172,773 152,359 160,963 174,793 193,582 164,218 168,852 184,158 206,604
Gross Profit 6,550 8,539 8,930 10,048 8,700 9,168 9,965 11,067 9,180 9,451 10,326 11,653
Operating Profit 215 1,624 1,607 2,101 1,539 2,085 2,623 3,033 1,954 2,190 2,647 3,493
PBT 454 1,624 1,961 2,428 1,837 2,386 2,938 3,328 2,234 2,496 2,887 3,707
Tax -112 -408 -549 -631 -496 -644 -793 -899 -603 -674 -779 -1,001
Minorities 0 0 0 0 0 0 0 0 0 0 0 0
Net profit 342 1,216 1,412 1,797 1,341 1,742 2,145 2,430 1,631 1,822 2,107 2,706
EPS (NT$) 0.15 0.51 0.60 0.76 0.57 0.74 0.91 1.03 0.69 0.77 0.89 1.14

Profitability
Gross Margin 5.2% 6.3% 5.7% 5.8% 5.7% 5.7% 5.7% 5.7% 5.6% 5.6% 5.6% 5.6%
Operating Margin 0.2% 1.2% 1.0% 1.2% 1.0% 1.3% 1.5% 1.6% 1.2% 1.3% 1.4% 1.7%
Expense ratio 5.0% 5.1% 4.7% 4.6% 4.7% 4.4% 4.2% 4.2% 4.4% 4.3% 4.2% 4.0%
Pretax Margin 0.4% 1.2% 1.3% 1.4% 1.2% 1.5% 1.7% 1.7% 1.4% 1.5% 1.6% 1.8%
Net Margin 0.3% 0.9% 0.9% 1.0% 0.9% 1.1% 1.2% 1.3% 1.0% 1.1% 1.1% 1.3%

QoQ Growth
Sales -12% 8% 15% 11% -12% 6% 9% 11% -15% 3% 9% 12%
Operating Profit -76% 655% -1% 31% -27% 35% 26% 16% -36% 12% 21% 32%
Pretax Profit -72% 258% 21% 24% -24% 30% 23% 13% -33% 12% 16% 28%
Net Profit -63% 256% 16% 27% -25% 30% 23% 13% -33% 12% 16% 28%
EPS -64% 248% 16% 27% -25% 30% 23% 13% -33% 12% 16% 28%

YoY Growth
Sales -20% -17% -3% 21% 21% 18% 12% 12% 8% 5% 5% 7%
Operating Profit -88% 0% -13% 138% 616% 28% 63% 44% 27% 5% 1% 15%
Pretax Profit -78% -29% 1% 52% 305% 47% 50% 37% 22% 5% -2% 11%
Net Profit -79% -30% -4% 94% 292% 43% 52% 35% 22% 5% -2% 11%
EPS -79% -29% -7% 88% 284% 43% 52% 35% 22% 5% -2% 11%

20 October 2014 92

Wistron (3231 TT, Outperform, Target Price: NT$37.00)

Net Non-operating income m 0 354 327 297 Net Non-operating income m 1,785 920 1,209 1,039
Tax Expense m -408 -549 -631 -496 Tax Expense m -2,160 -1,700 -2,832 -3,057
Minority Interests m 0 0 0 0 Minority Interests m 0 0 0 0

EBITDA m 3,638 3,897 4,461 3,969 EBITDA m 13,990 14,220 19,423 21,551

EPS pcp growth (rep) % -28.9 -5.5 100.8 291.2 EPS growth (rep) % -14.3 -17.0 61.4 7.9
EPS pcp growth (rep bonus exp) % -28.9 -5.5 100.8 291.2 EPS growth (rep bonus exp) % -14.3 -17.0 61.4 7.9
EPS pcp growth (adj) % -28.9 -5.5 100.8 291.2 EPS growth (adj) % -14.7 -16.8 61.4 7.9

Revenue pcp growth % -16.6 -2.6 20.8 21.1 PE (rep) x 12.3 14.9 9.2 8.5
Operating Income pcp growth % -0.2 -12.6 138.4 615.8 PE (rep bonus adj) x 12.3 14.9 9.2 8.5
Reported Earnings pcp growth % -30.2 -3.9 103.4 291.6 PE (adj) x 12.4 14.9 9.2 8.5



Revenue Growth % -5.1 -5.4 15.5 6.2 Reported Earnings m 5,711 4,767 7,658 8,266
Operating Income Growth % -26.0 -8.9 67.3 10.8 Chgs in Working Cap m -5,247 -5,178 -5,812 -3,622
Reported Earnings Growth % -14.3 -16.5 60.6 7.9 Other m 767 -737 -3,280 -3,280
Acquisitions m -78 -1,102 -240 -240
Reported Earnings Margin % 0.9 0.8 1.1 1.1 Other m -3,395 -5,793 -8,000 -8,000
EV/EBITDA x 5.3 5.4 4.0 3.6 Debt Movements m -3,199 -1,616 1,600 1,600
EV/EBIT x 11.5 13.8 8.3 7.5 Other m 1,335 3,698 7,200 7,200
Financing Cashflow m -5,138 -2,199 6,417 4,971
ROE % 8.9 7.4 11.8 11.8 Net Chg in Cash/Debt m -2,493 -8,618 -1,916 562
ROA % 2.2 2.0 3.1 3.1
ROIC % 5.7 5.2 9.0 8.9 Free Cashflow m 4,590 621 -93 3,831
Net Debt/Equity % 18.1 20.3 24.2 24.3 FCF per Share NT$ 1.94 0.26 -0.04 1.62
Interest Cover x 8.6 nmf nmf nmf P/FCF x 15.3 114.0 -758.9 18.4
Price/Book x 1.1 1.1 1.0 1.0


Cash m 70,937 61,729 59,652 60,054
Receivables m 89,262 97,552 109,301 116,653
Inventories m 49,985 61,835 69,356 74,081
Investments m 8,048 9,167 9,647 10,127
Fixed Assets m 35,928 35,718 34,756 32,670
Other Assets m 16,381 23,100 33,920 44,740
Total Assets m 270,542 289,101 316,633 338,326
Payables m 95,457 110,653 124,111 132,566
Short Term Debt m 54,553 58,531 56,131 53,731
Long Term Debt m 28,340 15,928 19,928 23,928
Total S/H Equity m 66,196 62,661 67,935 72,373



20 October 2014 93
TAIWAN

2382 TT Neutral
95.00
- PER
GICS sector
Free float % 20

Year end 31 Dec 2013A 2014E 2015E 2016E
Revenue bn 880.4 928.5 1,066.8 1,204.2
EPS rep NT$ 4.84 5.20 6.03 7.48
EPS rep growth % -19.3 7.4 15.9 24.1
EPS bonus exp NT$ 4.84 5.20 6.03 7.48
EPS bonus growth % -19.3 7.4 15.9 24.1
PER rep x 15.1 14.0 12.1 9.8
PER bonus exp x 15.1 14.0 12.1 9.8
Total DPS NT$ 3.81 3.64 4.22 5.24
Total div yield % 5.2 5.0 5.8 7.2
ROA % 2.3 3.0 3.9 4.8
ROE % 15.1 16.8 19.3 22.0
EV/EBITDA x 11.5 9.3 7.1 5.7
Net debt/equity % -23.7 -53.4 -46.0 -47.7
P/BV x 2.3 2.4 2.3 2.0

history


Analyst(s)
Ellen Tseng
Kaylin Tsai

20 October 2014
Taiwan Branch
Quanta
What if a larger iPad (>12)
cannibalizes NB?
Event
With Apple Macbook Air and other consumer models accounting for the
dominant share of Quantas sales, any cannibalisation of NB sales by a new,
larger iPad Pro (>12) will severely dent its shipments. Moreover, we believe
other PC brands could also be adversely affected if such an iPad Pro forays
into NBs. We thus cut our EPS estimates for 2014/2015/2016 by 3.3%/4.8%/
3.6% and our target price from NT$89 to NT$80 based on 12x 2H15-1H16E
EPS.
Impact
What will you choose? A larger iPad (>12) or Apple Macbook Air? Apple
currently sells 11/13/15 models of the Macbook Air, and we believe Apple
will also consider refreshing its Macbook Air (>12 model) based on an Intel
Core M processor to offer the design benefits of reduced NB thickness. The
thickness of new Macbook Air could reduce to 9mm, but Apple might still price
the new Macbook Air at over US$1,000 versus a new large iPad (>12) which
we think could be priced at $699-999. We believe there is rising risk that the
larger iPad could also cannibalize sales of the Macbook Air (in particular 11-
13 models) and other PC brands NBs. Should such cannibalization occur,
Quanta will be increasingly vulnerable, as Apple accounts for over 25% of its
NB sales based on our estimate, and Quanta is the largest NB ODM globally.
Stronger 3Q, but bleak outlook for 4Q: Quantas notebook shipment in 3Q
rose 19% QoQ, beating its guidance of 10% QoQ and other top five NB
makers average unit growth of 11%. Its 3Q revenue still fell shy of our
estimate on higher proportion of low-ASP NBs for the holiday season.
Management said its PC clients shipped most of their NBs for Christmas early
in Aug-Sep, and we thus expect an inventory correction in 4Q14. We expect
PC clients will reduce their 4Q outlook (off a high base) as well as model
transition and we expect its NB shipments could decline 10% QoQ.
Apple Watchs contribution to earnings will remain tiny: We believe
Quanta will start shipping the Apple Watch in 1Q15, but we estimate it will
account for only 7% of Quantas revenue in 2015, assuming shipment of
20.2m units. If Apple Watch volumes beat the companys expectation, Apple
might also consider adding a second outsourcing supplier. Production
processes will also have their challenges, so initial margin/yield and hence
margins could be low. Fig 4-5 for Apple Watch sensitivity analysis.
We cut our NB revenue projection to factor in a weakening outlook for NB
shipment and ASP. Accordingly, we cut our 2014/2015/2016 earnings
estimates by 3.3%/4.8%/3.6%, respectively.
Price catalyst
Catalyst: 3Q result, 4Q demand outlook, and Apple Watch launch
We retain Neutral on Quanta. We are optimistic on Quantas growth prospects
in its new data center business, but its valuation remains stretched vs peers.
20 October 2014 94
What will you choose? Apple Macbook Air or a larger iPad?
We think Apple will refresh the Apple Macbook Air (>12 with a Retina display) based on an Intel
Core M processor, and a thinner profile ~9 mm (vs the current Macbook Airs 17mm). We also
believe Apple may launch a new larger-sized iPad Pro (>12). Mass production of the Macbook Air
could start in late 4Q, followed by a launch in 1Q15, and production of a >12 iPad could start in
1Q15.
Apple has traditionally outsourced production of the Macbook Air to Quanta and Macbook Pro to Hon
Hai. We think Quanta will produce components for the new slimmer 12 Macbook Air. Hon Hai will
probably make iPad Pro, as it has been Apples supplier for the iPad for years.
We are concerned that an iPad Pro could also cannibalize demand for the Macbook Air especially
if such a product is priced lower and comes with an optional keyboard function. Should such
cannibalization occur, Quanta will be increasingly vulnerable, as Apple accounts for over 25% of its
NB sales based on our estimate; in addition, Quanta is the largest NB ODM globally and hence
especially vulnerable if the iPad Pro successfully penetrates the commercial segment or takes more
share from NBs.
The larger iPads BOM cost will probably be lower than the new Macbook Airs and so should retail
pricing, if history is a guide: Apples Macbook Air 11/13 models are priced at US$899-1199 and
iPad Air 2 (9.7) at US$499-699. We think a new, larger iPad could be priced at US$699-999, and a
new >12 Macbook Air at US$999-1199. Such pricing may well lead to cannibalisation of demand
from the Apple Macbook Air.
Fig 1 Dimension comparison iPad Air 2/Macbook Air/new 12 Macbook Air
Name iPad Air 2
MacBook Air
(11)
MacBook Air
(13)
New >12"
Macbook Air
New >12 iPad
(iPad Pro)
Launch October 2014 October 2013 October 2013 1Q15 NA
Price
$499 / 599 /
699 (Wifi)
US$899/
US$1,199
US$1,199/
US$1,299
US$999-1,199 US$699-999
Dimensions
Height: 6.1mm
Width: 240mm
Depth: 169.5mm
Height: 17mm
Width: 300mm
Depth: 192mm
Height: 17mm
Width: 325mm
Depth: 227mm
Height: 9mm? Height: <7.5mm?
Display
diagonal
9.7" 11.6" 13.3" 12.9"? 12"?
Quantas NB shipment growth beat peers in 3Q14, outperformed NB peers,
but expect moderation in 4Q14
Although Quantass notebook shipment in 3Q rose 19% QoQ, beating its guidance of 10% QoQ
growth and other top five NB makers average shipment growth of 11%.
3Q revenue still fell shy of our estimate on higher proportion of low-ASP NBs for the holiday season.
Management said its PC clients shipped most of their NBs for Christmas early in Aug-Sep, and we
thus expect an inventory correction in 4Q14. We expect PC clients will reduce their 4Q outlook (off a
high base) as well as model transition and we expect its NB shipments could decline 10% QoQ.
Despite a softening 4Q outlook, our 2014 NB unit shipment outlook for Quanta remains largely
unchanged at 48m, given a higher 3Q base.
20 October 2014 95
Fig 2 NB ODMs QoQ shipment comparison Fig 3 NB ODMs YoY shipment comparison

Source: Companies data, Macquarie Research, October 2014 Source: Companies data, Macquarie Research, October 2014
Apple Watch scenario analysis
We believe the Apple Watch will be available in early 2015. The Watch is powered by Apples
custom-built Apple S1 SOC and Taptic engine, which is a vibrating motor that provides physical
feedback on receiving notifications. The screen uses a flexible Retina display and laminated
Sapphire glass to protect it from scratches and scrapes.
We believe Quanta will be the major outsourcing partner for Apple. While its difficult to quantify
volumes, we conduct a sensitivity analysis in Fig 4 for volume impact to earning.
Production processes would also have their challenges, so initial margin/yield and hence margins
could be low, we also provide gross margin/ASP sensitivity in Fig 5.
Fig 4 Earnings sensitivity to Quantas Watch shipment
Bear case (II) Bear case (I) Base case Bull case (I) Bull case (II)
2015 shipment (m) 10.2 15.2 20.2 25.2 30.2
2015 EPS (TWD) 5.7 5.9 6.0 6.2 6.3
2015 EPS change (%) -5.2% -2.7% 0.0% 2.2% 4.7%

Bear case (II) Bear case (I) Base case Bull case (I) Bull case (II)
2016 shipment (m) 14.7 21.9 29.1 36.3 43.5
2016 EPS (TWD) 7.1 7.3 7.4 7.7 7.9
2016 EPS change (%) -5.2% -2.4% 0.0% 3.3% 6.1%
Fig 5 Apple Watchs GM/ASP Earnings Sensitivity
ASP ASP
2015 EPS USD120 USD140 USD160 2015 EPS change (%) USD120 USD140 USD160
GM
5% 5.80 5.86 5.92
GM
5% -3.9% -2.9% -1.9%
6% 5.95 6.03 6.12 6% -1.4% 0.0% 1.4%
7% 6.10 6.21 6.32 7% 1.1% 2.9% 4.7%

ASP ASP
2016 EPS USD120 USD140 USD160 2016 EPS change (%) USD120 USD140 USD160
GM
5% 7.15 7.23 7.32
GM
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6% 7.36 7.48 7.61 6% -1.6% 0.0% 1.6%
7% 7.58 7.74 7.89 7% 1.2% 3.4% 5.5%

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Pegatron Inventec
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20 October 2014 96
Data center business outlook remains intact
Increasing rack-level solution; open-compute standard should lead to more opportunities:
We expect Quantas cloud business unit (CCBU) to grow its data center solutions and increase
the breadth of its product portfolio. In addition, Quanta will also carry more rack-level solutions
(including server, storage, and networking) in 2014. With the rising content of total offerings, we
expect Quantas CCBU business revenue to outgrow its unit growth. Management mentioned that
open-compute has given it more opportunities to expand the client roster.
Growing data center customer base: Quantas data center customers account for 85% of its
overall server revenue. In addition to working with hyperscale data center customers such as
Google, Facebook, Amazon and Rackspace, Quanta also confirmed that it works with 30-35 direct
customers, including China Internet service providers (such as Baidu) and other internet service
providers and enterprise customers (such as Twitter, Line, etc). Quanta has built a strong industry
reputation in hyper-scale business, which should not only help build its customer base but also
leverage its design expertise to secure new customers. The company also indicated the intention
to build direct business with Fortune 500 companies in the future.
Fig 6 Quanta data center revenue and as % of sales

Fig 7 Quanta gross profit mix by product segments


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20 October 2014 97
Estimate revisions
We lower our NB volumes assumption, thus change our sales assumption. Our earning changes are
summarized as below:
Fig 8 Quanta estimate revisions
2014E 2015E 2016E
NT$ m New Old Diff % New Old Diff % New Old Diff %
Revenue 928,487 987,788 -6.0% 1,066,754 1,190,101 -10.4% 1,204,165 1,317,825 -8.6%
Gross profit 42,529 44,492 -4.4% 50,472 53,765 -6.1% 61,452 64,097 -4.1%
GM % 4.6% 4.5% 4.7% 4.5% 5.1% 4.9%
OPM % 1.8% 1.8% 2.2% 2.0% 2.5% 2.4%
Net non-op items 9,224 8,987 2.6% 7,286 7,906 -7.8% 6,914 7,320 -5.6%
Pretax income 26,071 26,843 -2.9% 30,267 31,732 -4.6% 37,155 38,447 -3.4%
Net income 20,053 20,756 -3.4% 23,255 24,419 -4.8% 28,845 29,920 -3.6%
EPS (NT$) 5.20 5.38 -3.3% 6.03 6.34 -4.8% 7.48 7.76 -3.6%
Fig 9 Quanta net interest income as % of pre-tax
income
Fig 10 Quanta (FX + Derivatives) as % of pre-tax
income

Valuation stretched
On more stretched valuation (14.0x/12.1x 2014E/2015E) versus its peers post our earnings cut, as
well as rising earnings risk, we downgraded the stock to Neutral on 15 August 2014. Our PT of
NT$80 is now based on 12x 2H15-1H16E PE vs prior PT of NT$89(13x 2H15-1H16 PE). We lower
our PE multiple to set our TP as we expect the rising NB cannibalization risk and margin hit could
lead to the stock slightly derating, while its data centre business growth could also be shadowed by
rising competition.
The stock had traded at the higher end of its PE band given the rising contribution from higher-
margin data center business. In addition, the company has paid steady cash dividends, which also
helps justify the premium over peers in the current tough environment.
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20 October 2014 98
Fig 11 Quantas one-year forward PE bands Fig 12 Quantas one-year forward PB bands


Fig 13 Quanta valuation comparison
EMS/ODM
2317 TT Hon Hai O 43,301 89.0 114.0 31% 7.30 8.00 9.26 12.2 11.1 9.6 1.7 1.6 1.4 15.1 14.9 15.8 2.1 3.1 3.6
2382 TT Quanta N 9,274 73.0 80.0 15% 4.84 5.20 6.03 15.1 14.0 12.1 2.3 2.4 2.3 15.1 16.8 19.3 5.2 5.0 5.8
2356 TT Inventec N 2,501 21.2 21.8 10% 1.97 1.91 2.07 10.8 11.1 10.3 1.4 1.5 1.4 13.5 13.0 14.1 7.5 7.2 7.8
4938 TT Pegatron O 4,104 53.6 66.0 29% 4.17 4.86 5.83 12.9 11.0 9.2 1.1 1.2 1.1 9.4 10.7 12.3 5.2 6.1 7.3
2324 TT Compal N 2,934 20.2 21.7 14% 0.57 1.26 2.12 35.5 16.0 9.5 0.9 1.0 1.0 2.4 5.9 10.1 4.9 7.0 7.0
3231 TT Wistron O 2,399 29.8 37.0 28% 2.42 2.01 3.24 12.3 14.9 9.2 1.1 1.1 1.0 8.9 7.4 11.8 6.2 3.4 5.4
Average 16.7 13.2 10.3 1.6 1.6 1.5 11.7 12.5 14.9 4.9 5.0 5.9
Source: Bloomberg, Macquarie Research, October 2014, prices as of October 17
Fig 14 Quantas quarterly P&L
NT$ m 1Q14 2Q14 3Q14F 4Q14F 1Q15F 2Q15F 3Q15F 4Q15F 1Q16F 2Q16F 3Q16F 4Q16F
Revenues 215,870 214,469 244,344 253,804 235,442 248,416 274,317 308,579 272,050 279,479 305,930 346,706
Gross Profit 8,743 10,576 11,552 11,659 10,629 12,044 13,006 14,793 13,262 14,337 16,066 17,788
PBT 6,150 5,693 7,553 6,675 6,483 7,150 8,139 8,496 7,959 8,618 10,343 10,236
Tax (1,298) (1,460) (1,662) (1,001) (1,426) (1,895) (1,791) (1,274) (1,751) (2,327) (2,275) (1,535)
Minorities 177 165 156 98 186 173 164 103 98 103 108 113
Net profit 4,675 4,067 5,735 5,576 4,871 5,082 6,185 7,118 6,110 6,188 7,959 8,588
EPS (NT$) 1.21 1.06 1.49 1.45 1.26 1.32 1.60 1.85 1.59 1.61 2.06 2.23

Profitability
Gross Margin 4.1% 4.9% 4.7% 4.6% 4.5% 4.8% 4.7% 4.8% 4.9% 5.1% 5.3% 5.1%
Operating/EBIT
Margin
1.3% 2.0% 2.1% 1.8% 1.9% 2.1% 2.3% 2.2% 2.3% 2.4% 2.8% 2.5%
Pretax Margin 2.8% 2.7% 3.1% 2.6% 2.8% 2.9% 3.0% 2.8% 2.9% 3.1% 3.4% 3.0%
Net Margin 2.2% 1.9% 2.3% 2.2% 2.1% 2.0% 2.3% 2.3% 2.2% 2.2% 2.6% 2.5%

QoQ Growth
Sales -20.5% -0.6% 13.9% 3.9% -7.2% 5.5% 10.4% 12.5% -11.8% 2.7% 9.5% 13.3%
Operating Profit -13.3% 49.0% 19.6% -12.6% 0.1% 18.4% 19.3% 6.3% -8.6% 9.7% 27.5% -0.7%
Pretax Profit -4.4% -7.4% 32.7% -11.6% -2.9% 10.3% 13.8% 4.4% -6.3% 8.3% 20.0% -1.0%
Net Profit -14.8% -13.0% 41.0% -2.8% -12.7% 4.3% 21.7% 15.1% -14.2% 1.3% 28.6% 7.9%
EPS -14.8% -13.0% 41.0% -2.8% -12.7% 4.3% 21.7% 15.1% -14.2% 1.3% 28.6% 7.9%

YoY Growth
Sales 9.3% 12.3% 10.9% -6.5% 9.1% 15.8% 12.3% 21.6% 15.5% 12.5% 11.5% 12.4%
Operating Profit 12.4% 55.5% 17.3% 35.1% 56.0% 23.9% 23.6% 50.4% 37.3% 27.3% 36.0% 27.0%
Pretax Profit 2.4% 1.2% 22.8% 3.8% 5.4% 25.6% 7.8% 27.3% 22.8% 20.5% 27.1% 20.5%
Net Profit 5.0% 1.1% 23.2% 1.6% 4.2% 25.0% 7.8% 27.7% 25.4% 21.8% 28.7% 20.6%
EPS 4.6% 0.7% 22.9% 1.6% 4.2% 25.0% 7.8% 27.7% 25.4% 21.8% 28.7% 20.6%

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20 October 2014 99

Quanta (2382 TT, Neutral, Target Price: NT$80.00)

Revenue m 214,469 244,344 253,804 235,442 Revenue m 880,402 928,487 1,066,754 1,204,165
Net Non-operating income m 1,387 2,403 2,167 1,969 Net Non-operating income m 11,158 9,218 7,260 6,888
Tax Expense m -1,460 -1,662 -1,001 -1,426 Tax Expense m -5,108 -5,421 -6,386 -7,889
Minority Interests m -165 -156 -98 -186 Minority Interests m -492 -596 -626 -422

EBITDA m 5,858 7,385 6,774 6,811 EBITDA m 19,761 24,463 32,347 40,008

EPS pcp growth (rep) % 0.7 22.9 1.5 4.0 EPS growth (rep) % -19.3 7.4 15.9 24.1
EPS pcp growth (rep bonus exp) % 0.7 22.9 1.5 4.0 EPS growth (rep bonus exp) % -19.3 7.4 15.9 24.1
EPS pcp growth (adj) % 0.7 22.9 1.5 4.0 EPS growth (adj) % -19.4 7.4 15.9 24.1

Revenue pcp growth % 12.3 10.9 -6.5 9.1 PE (rep) x 15.1 14.0 12.1 9.8



Revenue Growth % -13.5 5.5 14.9 12.9 Reported Earnings m 18,618 20,047 23,230 28,820
Operating Income Growth % -13.9 29.0 36.4 31.6 Chgs in Working Cap m 23,570 11,338 -20,697 -11,231
Reported Earnings Growth % -19.2 7.7 15.9 24.1 Other m -555 5,203 25 25
Acquisitions m -2,545 -3,486 1,200 1,200
Reported Earnings Margin % 2.1 2.2 2.2 2.4 Other m -91 -3,408 0 0
EV/EBITDA x 11.5 9.3 7.1 5.7 Debt Movements m -9,488 -11,133 -10,400 -10,400
EV/EBIT x 17.4 13.5 10.0 7.6 Other m -2,325 214 0 0
Financing Cashflow m -28,511 -25,555 -24,437 -26,679
ROE % 15.1 16.8 19.3 22.0 Net Chg in Cash/Debt m 19,939 7,326 -15,312 -2,098
ROA % 2.3 3.0 3.9 4.8
Price/Book x 2.3 2.4 2.3 2.0


Cash m 221,682 234,415 219,102 217,004
Receivables m 181,443 172,587 216,005 242,694
Inventories m 86,553 96,858 117,514 131,567
Investments m 4,253 4,052 4,052 4,052
Fixed Assets m 48,042 44,841 40,169 35,096
Other Assets m 16,112 19,501 17,607 15,714
Total Assets m 558,085 572,253 614,449 646,127
Payables m 191,283 203,402 246,780 276,291
Short Term Debt m 159,159 148,379 140,379 132,379
Long Term Debt m 31,401 20,329 17,929 15,529
Total S/H Equity m 131,087 123,023 132,241 144,807



20 October 2014 100
TAIWAN

2324 TT Neutral
33.00
- Price to Book
Volatility Index Medium
GICS sector
Free float % 24

Year end 31 Dec 2013A 2014E 2015E 2016E
Revenue bn 692.7 829.8 815.7 831.9
EPS rep NT$ 0.57 1.26 2.12 2.23
EPS rep growth % -61.4 121.7 68.4 5.0
EPS bonus exp NT$ 0.57 1.26 2.12 2.23
EPS bonus growth % -61.4 121.7 68.4 5.0
PER rep x 35.5 16.0 9.5 9.1
PER bonus exp x 35.5 16.0 9.5 9.1
Total DPS NT$ 0.99 1.42 1.42 1.49
Total div yield % 4.9 7.0 7.0 7.4
ROA % 2.9 3.2 2.9 2.9
ROE % 2.4 5.9 10.1 10.4
EV/EBITDA x 6.6 5.2 5.3 4.9
Net debt/equity % 17.2 12.2 14.1 22.2
P/BV x 0.9 1.0 1.0 0.9

history

(all figures in NT$ unless noted)

Analyst(s)
Ellen Tseng
Kaylin Tsai

20 October 2014
Taiwan Branch

Compal
Margin risk kicks in
Event
We cut our earnings estimates for Compal by 20.9% for 2015 and 29.1% for
2016 and thus downgrade the stock to Neutral from Outperform: 1) despite
solid mature market (US, EMEA, Japan) corporate replacement upgrade
cycles in the past few quarters, emerging markets in particular China still
show no clear signs of a pick up; this suggests commercial market strength
could be peaking soon; 2) despite PC OEM consolidation, there is limited
consolidation at the ODM level, suggesting the pricing environment remains
unfavorable for ODM players; and 3) Compal lost Acers order post Acers
order reshuffle, affecting the 2015 growth outlook. Our new PT is NT$21.7.
Impact
Commercial upgrade cycle might be peaking soon: There were still
23.87% of PCs using Windows XP as at the end of September. While we
originally thought this suggested room for upgrades to Windows 7 in the
upcoming 2-3 quarters and we note that most mature markets have been
upgrading their commercial PCs, emerging markets such as China and Latin
America are still experiencing a contraction in commercial unit orders. We
have not yet indentified sign of strength in these emerging markets so believe
the commercial upgrade cycle could be peaking slightly earlier than expected.
Order reshuffle could affect Compal growth outlook in 2015: Although
Compal has outshined its NB ODM peers in 2014 thanks to its higher
commercial NB exposure (1-3Q14 NB units, +9.9% YoY) and it is on track to
achieve our 2014 estimate of ~43m units, we estimate Compals NB
shipments could fall to 39.9m in 2015 due to the loss of its Acer contract (a 2-
3mn negative impact, in our view). Acer used to source 45% of its NBs from
Compal but that ratio will decline to 25-30% in 2015.
Margin pressure seems inevitable: Compals GM/OPM only reached
3.9%/1.37% in 2Q14 despite managements focus on increasing sales scale
(by building scale, Compal hopes to reduce its capex, thereby boosting OPM).
Yet further consolidation in PC brands post Toshibas recent withdrawal from
the space could further increase the negotiating power of top-tier PC brands
(HP, Dell, Lenovo, etc.) in their dealings with ODMs, which is clearly a
negative. In addition, Compal has a JV with Lenovo but as Lenovo increases
its in-house production of NBs and also increases NB volumes via the JV, this
could also negatively impact Compals overall growth outlook. Lastly, despite
Compals successful efforts to diversify into the smartphone space, an
increase of Apple iPads in its sales mix has also resulted in margin pressure.
We cut our earnings for 2014/15/16 by 4.2%/20.9%/29.1%. Our new PT is
NT$21.7 (NT$31.50 previously).
Price catalyst
Catalyst: 3Q result, PC outlook, server business progress
Our estimates are 22.2%/26.0% below consensus for 2015/16.
20 October 2014 101
Commercial market replacements Emerging market deployment slower
than expected
Microsoft ended its support for XP in April 2014, resulting in some forced adoptions of Windows 7.
This, coupled with the need for corporate refreshes, has been driving PC volumes since 2H13-1H14.
According to Net Application, as of the end of September 2014, 23.87% of PCs were still using
Windows XP, although this ratio has fallen substantially since March 2013 (Fig 1). Looking at these
numbers, we originally thought this suggested room for further upgrades to Windows 7 in the
upcoming 2-3 quarters, however we note that most mature markets have already been upgrading
their commercial PCs while emerging markets such as China and Latin are still experiencing a
contraction in commercial unit orders as shown in Figs 2-5. This ideally suggests potential upgrades
from emerging markets, yet we have not indentified signs of strength in these markets. This could
imply the commercial upgrade cycle is peaking slightly earlier than we expected.
Fig 1 Desktop operating system market share trend

Source: Net Application Survey; October 2014

Fig 2 China: Commercial PC growth rate Fig 3 US: Commercial PC growth rate


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Windows XP Windows 7 Windows Vista
Windows 8 Windows 8.1
-40.0%
-35.0%
-30.0%
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
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3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
-15.0%
-10.0%
-5.0%
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3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
20 October 2014 102
Fig 4 Latin America: Commercial PC growth Rate Fig 5 EMEA: Commercial PC growth Rate

Source: IDC, Macquarie Research, October 2014 Source:IDC, Macquarie Research, October 2014
2015 volume could be adversely affected by Acer order reshuffle
Although Compal has outshined its NB ODM peers in 2014 thanks to its higher commercial NB
exposure (1-3Q14 NB units, +9.9% YoY) and it is on track to achieve our 2014 estimate of ~43m
units, we estimate its NB shipments could decline to 39.9m in 2015 due to the loss of its Acer
contract (a 2-3mn negative impact, in our view). Acer used to source 45% of its NBs from Compal but
that ratio will decline to 25-30% in 2015.
Commercial NBs account for 30-35% of Compals NB business and consumer NBs account for 65-
70%. Nevertheless, factoring in the Compal/Lenovo JV, which mostly produces commercial NBs, the
companys overall exposure to commercial NBs is more than 50%. We thus believe Compal is more
vulnerable than peers should the commercial replacement cycle slow down. In fact, Compals 3Q NB
shipment growth (+12% QoQ/+28% YoY) was stronger than the other top-five NB ODMs average
(+11% QoQ/+7% YoY) thanks to its higher exposure to commercial NBs.
In addition, further consolidation in PC brands post Toshibas recent withdrawal from the space could
further increase the negotiating power of top-tier PC brands (HP, Dell, Lenovo, etc.) in their dealings
with ODMs, which is clearly a negative for Compal.
Also, while Compal has a JV with Lenovo, as Lenovo increases its in-house production of NBs and
also increases NB volumes via the JV, this could negatively impact Compals overall growth outlook.
It is true that Compal can recognize profit via this JV as it owns a 49% stake within it and this would
mitigate this negative impact. In the past few quarters, this JV performance was also volatile (Fig 6).
We also note that Lenovo and Compal were both granted call and put options that entitle Lenovo to
purchase from Compal and Compal to sell to Lenovo Compals 49% interest in the JV. The call and
put options will be exercisable at any time after October 1, 2019 and October 1, 2017, respectively.
Although any exercise of these options is some years away, it does add to risk, in our view.

-50.0%
-40.0%
-30.0%
-20.0%
-10.0%
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10.0%
20.0%
30.0%
40.0%
3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
-25.0%
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3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
20 October 2014 103
Fig 6 Lenovo JV investment gain/loss for Compal- volatile


Fig 7 NB shipment growth Compal outperformed
peers in 3Q (YoY)

Fig 8 NB ODM NB Shipments (3Q)

Fig 9 Compals revenue breakdown

Fig 10 Compals gross profit breakdown


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20 October 2014 104
Invested in IPC posited to gain in longer term:
Compals board recently agreed to invest in privately placed shares of Avalue Technology(3479 TT,
NR). The investment amount was NT$494m in exchange for 14mn Avalue shares. While this
investment has a limited financial impact (EPS contribution below NT$0.01), we believe it is a signal
that the company is prepared to position itself in future IoT business opportunities.
Earnings revision
We cut our assumption for NB unit shipments, which in turn impacts our 2015-2016 sales projections.
In addition, we also lower our operating margin assumptions, factoring in our lower-than-expected
GM assumptions. Thus we reduce our 2015E and 2016E operating profit estimates by 20.9% and
29.1%, respectively.
Fig 11 Compal earnings revision
2014E 2015E 2016E
Revenue 829,791 830,102 0.0% 815,745 895,502 -8.9% 831,901 938,994 -11.4%
Gross profit 32,982 35,070 -6.0% 32,290 38,262 -15.6% 33,111 41,025 -19.3%
GM % 4.0% 4.2% 4.0% 4.3% 4.0% 4.4%
OPM % 1.4% 1.4% 1.4% 1.6% 1.4% 1.7%
Pretax income 8,463 9,284 -8.8% 12,601 15,739 -19.9% 13,373 18,478 -27.6%
Net income 5,425 5,664 -4.2% 9,137 11,550 -20.9% 9,590 13,530 -29.1%
EPS (NT$) 1.26 1.32 -4.2% 2.12 2.68 -20.9% 2.23 3.14 -29.1%

Fig 12 Compals GM/OPM sensitivity analysis
2015 GM * 3.46% 3.71% 3.96% 4.21% 4.46%
2015 OPM 0.85% 1.10% 1.35% 1.60% 1.85%
2015 EPS (NT$) 1.38 1.75 2.12 2.49 2.86
2015 EPS Change (%) -35% -17% 0% 17% 35%

2016 GM * 3.48% 3.73% 3.98% 4.23% 4.48%
2016 OPM 0.9% 1.1% 1.38% 1.6% 1.9%
2016 EPS (NT$) 1.47 1.85 2.23 2.60 2.98
2016 EPS Change (%) -34% -17% 0% 17% 34%
* Implied GM based on fix OPEX ratio assumption of 2.6%/2.6% for 2015/2016.

Fig 13 Compal NB shipment sensitivity analysis
Bear Case II Bear Case I Base Case Bull Case I Bull Case II
2015 NB shipment y-y growth -13% -10% -7% -4% -1%
2015 shipment (m) 37.4 38.7 39.9 41.2 42.5
2016 shipment (m) 36.9 38.1 39.3 40.7 41.9
2015 EPS (NT$) 2.06 2.09 2.12 2.16 2.19
2016 EPS (NT$) 2.16 2.20 2.23 2.26 2.29

Change (%)
2015 EPS -3.0% -1.4% 0.0% 1.6% 3.1%
2016 EPS -2.9% -1.4% 0.0% 1.5% 3.0%

20 October 2014 105
Valuation
Compal is de-rated among ODM peers because of its unfavourable product mix and higher exposure
to NB business. Compared with Quanta and Inventec both early entrants to the server market
Compals valuation is less attractive, in our view. We believe its current valuation of 16.0x 2014E is
more demanding than its peers due mainly to a non-recurring earnings impact in 2014E. The stock
trades at 9.5x 2015E earnings versus its peers average of 10.3x.
We value Compal at 10x PE to arrive at our price target of NT$21.7 (based on 2H15-1H16 earnings).
The rising risk of a commercial demand slow-down coupled with the risk of margin pressure remains
our key concern despite the stocks attractive dividend yield. We think the stock has overly corrected
on overall equity market sell-down. Nonetheless, we recommend reducing the position after a
rebound on strong set of 3Q results we expect.
Fig 14 Compals one-year forward PE band Fig 15 Compals one-year forward PB band


Fig 16 Comparable valuation

Mkt
Cap Last Target TSR EPS (local $/) PER (X) P/BV (X) ROE (%) Div yield (%)
Ticker Company Rating US$m Close Price (%) 13A 14E 15E 13A 14E 15E 13A 14E 15E 13A 14E 15E 13A 14E 15E
2317 TT Hon Hai O 43,301 89.0 114.0 31% 7.30 8.00 9.26 12.2 11.1 9.6 1.7 1.6 1.4 15.1 14.9 15.8 2.1 3.1 3.6
2382 TT Quanta N 9,274 73.0 80.0 15% 4.84 5.20 6.03 15.1 14.0 12.1 2.3 2.4 2.3 15.1 16.8 19.3 5.2 5.0 5.8
2356 TT Inventec N 2,501 21.2 21.8 10% 1.97 1.91 2.07 10.8 11.1 10.3 1.4 1.5 1.4 13.5 13.0 14.1 7.5 7.2 7.8
4938 TT Pegatron O 4,104 53.6 66.0 29% 4.17 4.86 5.83 12.9 11.0 9.2 1.1 1.2 1.1 9.4 10.7 12.3 5.2 6.1 7.3
2324 TT Compal N 2,934 20.2 21.7 14% 0.57 1.26 2.12 35.5 16.0 9.5 0.9 1.0 1.0 2.4 5.9 10.1 4.9 7.0 7.0
3231 TT Wistron O 2,399 29.8 37.0 28% 2.42 2.01 3.24 12.3 14.9 9.2 1.1 1.1 1.0 8.9 7.4 11.8 6.2 3.4 5.4
Average 16.7 13.2 10.3 1.6 1.6 1.5 11.7 12.5 14.9 4.9 5.0 5.9
Source: Bloomberg, Macquarie Research, 17 October prices

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20 October 2014 106
Fig 17 Compals quarterly P&L
Revenue 170,635 201,870 226,843 230,443 195,569 198,507 200,283 221,386 190,780 203,871 204,848 232,403
Gross Profit 7,344 7,869 8,834 8,935 7,582 7,854 7,980 8,873 7,576 8,074 8,169 9,293
PBT (1,468) 2,694 3,841 3,396 2,680 3,159 3,239 3,523 2,976 3,219 3,316 3,863
Tax (657) (213) (845) (747) (590) (695) (713) (775) (655) (708) (730) (850)
Minorities 139 139 146 153 161 169 177 186 195 205 215 226
Net profit (2,264) 2,342 2,850 2,496 1,930 2,295 2,350 2,562 2,126 2,306 2,371 2,787
Adjusted EPS (NT$) (0.53) 0.54 0.66 0.58 0.45 0.53 0.55 0.60 0.49 0.54 0.55 0.65

Profitability
Gross Margin 4.3% 3.9% 3.9% 3.9% 3.9% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0%
EBIT Margin 1.4% 1.4% 1.5% 1.3% 1.2% 1.4% 1.4% 1.4% 1.3% 1.4% 1.4% 1.4%
Pretax Margin -0.9% 1.3% 1.7% 1.5% 1.4% 1.6% 1.6% 1.6% 1.6% 1.6% 1.6% 1.7%
Net Margin -1.3% 1.2% 1.3% 1.1% 1.0% 1.2% 1.2% 1.2% 1.1% 1.1% 1.2% 1.2%

QoQ growth
Sales -11.8% 18.3% 12.4% 1.6% -15.1% 1.5% 0.9% 10.5% -13.8% 6.9% 0.5% 13.5%
Operating Profit -6.4% 25.2% 16.0% -8.5% -24.7% 20.4% 2.9% 9.2% -19.1% 10.1% 2.5% 18.4%
Pretax Profit na na 42.5% -11.6% -21.1% 17.9% 2.5% 8.8% -15.5% 8.2% 3.0% 16.5%
Net Profit na na 21.7% -12.4% -22.7% 18.9% 2.4% 9.1% -17.0% 8.5% 2.8% 17.5%
EPS na na 21.7% -12.4% -22.7% 18.9% 2.4% 9.1% -17.0% 8.5% 2.8% 17.5%

YoY Growth
Sales 1.8% 21.0% 37.6% 19.1% 14.6% -1.7% -11.7% -3.9% -2.4% 2.7% 2.3% 5.0%
Operating Profit 10.5% 26.2% 39.2% 24.3% -0.1% -3.9% -14.7% 1.9% 9.5% 0.0% -0.4% 8.0%
Pretax Profit na 30.4% na -0.1% na 17.2% -15.7% 3.7% 11.0% 1.9% 2.4% 9.6%
Net Profit na 68.0% na -3.2% na -2.0% -17.6% 2.7% 10.2% 0.5% 0.9% 8.8%
EPS na 69.5% na -2.8% na -2.0% -17.6% 2.7% 10.2% 0.5% 0.9% 8.8%

20 October 2014 107

Compal (2324 TT, Neutral, Target Price: NT$21.70)

Net Non-operating income m -189 496 338 378 Net Non-operating income m -4,874 -3,128 1,557 1,871
Minority Interests m -139 -146 -153 -161 Minority Interests m -437 -576 -692 -841

EBITDA m 4,279 4,585 4,337 3,618 EBITDA m 14,821 16,963 16,532 17,591

EPS pcp growth (rep) % 69.5 nmf 2.5 nmf EPS growth (rep) % -61.4 121.7 68.4 5.0
EPS pcp growth (rep bonus exp) % 69.5 nmf 2.5 nmf EPS growth (rep bonus exp) % -61.4 121.7 68.4 5.0
EPS pcp growth (adj) % 69.5 nmf 2.5 nmf EPS growth (adj) % -61.4 122.2 68.4 5.0

Revenue pcp growth % 21.0 37.6 19.1 14.6 PE (rep) x 35.5 16.0 9.5 9.1
Operating Income pcp growth % 26.2 39.2 24.3 -0.1 PE (rep bonus adj) x 35.5 16.0 9.5 9.1
Reported Earnings pcp growth % 68.0 nmf 2.1 nmf PE (adj) x 35.6 16.0 9.5 9.1



Revenue Growth % 1.4 19.8 -1.7 2.0 Reported Earnings m 2,467 5,425 9,137 9,590
Gross Profit Growth % -5.7 17.3 -2.1 2.5 Depreciation & Amortisation m 5,587 5,372 5,488 6,088
Operating Income Growth % -8.3 25.5 -4.7 4.2 Chgs in Working Cap m -17,708 10,144 3,211 -3,794
Reported Earnings Growth % -61.5 119.9 68.4 5.0 Other m 10,204 84 -1,645 -1,838
EBITDA Growth % -5.7 14.5 -2.5 6.4 Operating Cashflow m 550 21,025 16,191 10,046
Acquisitions m -2,099 -415 0 0
Reported Earnings Margin % 0.4 0.7 1.1 1.2 Other m 1,579 1,934 0 0
EV/EBITDA x 6.6 5.2 5.3 4.9 Debt Movements m 29,371 9,043 12,400 20,000
EV/EBIT x 11.1 7.4 7.7 7.3 Other m -14,035 -4,301 -4,000 -4,000
Financing Cashflow m 11,001 459 2,278 9,878
ROE % 2.4 5.9 10.1 10.4 Net Chg in Cash/Debt m 2,811 15,772 10,469 11,925
ROA % 2.9 3.2 2.9 2.9
ROIC % 5.7 7.0 8.1 8.2 Free Cashflow m -8,223 14,789 10,191 4,046
Net Debt/Equity % 17.2 12.2 14.1 22.2 FCF per Share NT$ -1.89 3.44 2.37 0.94
Interest Cover x nmf nmf nmf nmf P/FCF x -10.7 5.9 8.5 21.5
Price/Book x 0.9 1.0 1.0 0.9


Cash m 48,875 63,156 73,625 85,550
Receivables m 183,696 195,277 187,602 196,938
Inventories m 51,219 72,119 69,190 72,641
Investments m 24,004 23,639 24,485 25,523
Fixed Assets m 21,209 23,651 24,952 25,653
Other Assets m 7,100 6,877 6,888 6,899
Total Assets m 336,103 384,719 386,742 413,202
Payables m 145,459 188,085 180,692 189,684
Short Term Debt m 51,972 50,154 62,154 82,154
Long Term Debt m 14,107 24,587 24,987 24,987
Total S/H Equity m 99,962 94,637 95,652 97,120



20 October 2014 108
TAIWAN

2356 TT Neutral
26.00
- PER
Volatility Index High
GICS sector
Free float % 59

Year end 31 Dec 2013A 2014E 2015E 2016E
Revenue bn 461.1 428.8 411.8 431.3
Bon exp/rep profit % 0.0 0.0 0.0 nmf
EPS rep NT$ 1.97 1.91 2.07 2.32
EPS rep growth % 122.0 -3.1 8.1 12.5
EPS bonus exp NT$ 1.97 1.91 2.07 2.32
EPS bonus growth % 122.0 -3.1 8.1 12.5
PER rep x 10.8 11.1 10.3 9.1
PER bonus exp x 10.8 11.1 10.3 9.1
Total DPS NT$ 1.60 1.53 1.65 1.98
Total div yield % 7.5 7.2 7.8 9.4
ROA % 3.8 3.7 4.2 4.5
ROE % 13.5 13.0 14.1 14.8
EV/EBITDA x 5.1 5.1 4.8 4.4
Net debt/equity % -35.4 -20.9 -18.1 -20.4
P/BV x 1.4 1.5 1.4 1.3

history


Analyst(s)
Ellen Tseng
Kaylin Tsai

20 October 2014
Taiwan Branch
Inventec
Darkness before Dawn II
Event
While we cut our earnings estimate for Inventec on September 29th,
September sales still came in below our estimate. Hence, 3Q sales (-3.4%
QoQ, -17.3% YoY) missed our street-low projection by 4% and consensus by
9%. We attribute the shortfall chiefly to softening demand in the NB/thin-
client/DT segment and, to a lesser extent, server model transition. We trim our
EPS estimates but retain our TP of NT$21.8. Maintain Neutral rating.
Impact
NB and server business demand decelerates slower 2H14 ahead: YoY
sales growth has been declining since May 2014 as Inventec lost orders for
Toshiba consumer NBs. Given the magnitude of the August and September
declines (-17%/-23% YoY) we think the slowdown was mainly an issue in the
NB business, coupled with slower-than-expected non-PC segments. Off a
high 2H13 base, we expect 4Q14 sales to drop 21.3% YoY (+4% QoQ).
Windows Server 2003 end of support on 14 July 2015, and migration to
Intels Grantley Xeon 2015 events, not 2014: We remain optimistic that
the server platform refresh cycle will drive 2015 server demand as enterprises
upgrade from Windows Server 2003 and migrate to the Intel Grantley chipset.
Meanwhile, sales in 2H14 are still likely to be slower than we had previously
expected as server upgrades to the Grantley platform could be hindered by
higher DDR4 memory pricing and a lengthy evaluation cycle. A delay in server
sales growth would mean a lacklustre 2H14, but a strong recovery in 2H15.
Lenovos new server outsourcing still showing limited progress: On
September 29
th
, Lenovo and IBM finally announced they will begin closing the
x86 server transaction effective October 1, 2014. This should favour
Inventecs prospects for new outsourcing business from Lenovo. According to
Inventec, however, there has been no meaningful discussion on possible
projects with Lenovo so far and, as such, we believe Inventec can expect little
in the form of outsourcing deals before 2016.
Xiaomi the only bright spot, with higher allocation in 2015: Although
Inventec originally shared Xiaomi manufacturing allocation roughly 50%:50%
with FIH Mobile, we believe Inventec can gain a larger allocation from Xiaomi
for 2015, as its conflict of interest with Xiaomi is less marked than FIH
Mobiles. FIH is a Hon Hai group company that supplies several companies
that compete with Xiaomi (such as the emerging Infocus brand, also a Hon
Hai affiliate). But we estimate Xiaomis sales contribution will still be <7%.
We fine-tune our 2014, 2015, 2016 earnings estimates down by
0.5%/1.26%/0.3%. Maintain Neutral and TP of NT$21.8.
Price catalyst
Catalyst: 3Q result, new server outsourcing orders for 2015-2016
Attractive dividend yield is main focus while its shares could over-correct ST.
20 October 2014 109
Growth decelerating faster than expected
Inventecs 3Q14 sales totaled NT$101.3bn, down 3.4% QoQ and 17.3% YoY, and were 4% below
our estimate. Inventecs top-line sales growth rate has been decelerating since September 2013; and
sales have actually been declining YoY since May 2014 off a high comparison base set in 2013,
mainly because the company lost Toshiba orders in late 2013. After a 17.3% YoY sales decline in
August, September monthly sales continued the decline, dropping 22.7% YoY. This indicated the
decline is due not only to the NB business but has also spread to other segments (Figs 1-2). The
stock gained substantial momentum in 2013 on the server business improving prospects but growth
peaked in 4Q13, in our view. We believe this is mainly due to the following factors:
While its HP relationship remains solid, the new server platform migration (Intel Grantley platform)
is scheduled for the September quarter, given companies could require evaluation of new
products/qualification, so the refresh cycle could be more back-loaded in 2H15, in our view.
Its NB business has suffered from higher than expected ASP erosion since 1H13, in addition to
losing Toshiba/HP consumer orders.
Off a higher 2H13 base, we now expect 4Q sales to decline by 21.3% YoY (or +4.5% QoQ).
Fig 1 Monthly sales (NT$ m) Fig 2 Monthly sales trend (YoY/MoM)

Grantley server platform refresh cycle still too early but will drive 2015;
too early to play on outsourcing business from Lenovo
We believe a server platform refresh cycle could drive server demand in 2015 as enterprises
upgrade from Windows Server 2003 and migrate to Intel Grantley. Microsoft will stop support of
Server 2003 on 14 July 2015. Meanwhile, 2H14 could be a bit slower than we had expected
previously though Inventec maintains server demand is currently healthy.
According to our US analyst Deepon Nag, Intel has started shipping its new server platform Grantley,
and will launch multiple variations in the next few quarters. While Intel expects the rollout to be
slower than prior launches due to high initial costs for DDR4 memory, it believes the combination of
improved performance, pent-up demand and share gain could help drive 8-11% of excess growth for
DCG. Intel said while its difficult to project the opportunity for Window Server 2003 upgrades,
roughly one-third of its own internal servers were still on the OS, implying a large opportunity. Intel
also said that it believes high DDR4 prices will push out some server strength from 4Q14 into 2015; it
currently expects about a 25% slower ramp than if DDR4 wasnt a factor. However, it still sees very
strong adoption.
Microsoft estimates there are about 23.8 million instances of Windows Server 2003 running today
across 11.9 million physical servers worldwide, making up about 39% of the entire Windows installed
base. While we think there is a lot of migration that needs to happen between now and July 14, 2015,
when Microsoft will stop providing support for the old OS and that this could still mean the
replacement cycle will happen in 2015 rather than 2H14.
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20 October 2014 110
Lenovo and IBM finally announced on September 29 that conditions for Lenovos acquisition of IBMs
x86 server business have been satisfied and the parties anticipate they will begin closing the
transaction effective from 1 October 2014. Lenovo said the February acquisition was recently
approved by the US. We believe this will be a step forward, and that it should help Inventec launch
discussions for new outsourcing business from Lenovo. According to Inventec, however, there has
been no discussion on possible projects from Lenovo so far and, as such, we believe Inventec has
little to expect in the way of outsourcing deals before 2016.
In addition, in the white box market, growth remains robust, and Inventec has also shipped to China
customers such as Alibaba, but we think ASP here is lower, while margins could potentially be lower
than other data centre customers.
Fig 3 Outsourcing changes to the Taiwan supply chain post the IBM x86 deal
Major suppliers of Lenovo's current x86 server Wistron (ODM), Inventec (ODM)
IBM's current x86 server major suppliers Hon Hai (EMS), Mitac (ODM), Wistron(ODM, board level)
Post deal - Lenovo + IBM suppliers (Macq estimate) Inventec (ODM), Wistron (ODM), Mitac (ODM)
IAC: Smartphone rising Xioami allocation
Although Inventec originally shared the Xiaomi manufacturing allocation roughly 50%:50% with FIH
Mobile, we believe Inventec can gain larger allocation from Xiaomi for 2015, as its conflict of interest
with Xiaomi is less than that of FIH Mobile, as FIH, as a Hon Hai group company, supplies to several
companies that compete with Xiaomi (such as the emerging Infocus brand, also from Hon Hai).
However, we estimate sales contribution from Xiaomi will still be <7%.
Inventec announced a NT$2.18bn capacity expansion in April 2014 at its Nanjing factory, which
caters mainly to its China (Xiaomi) and Japan smartphone customers. We believe this is mainly for
Xiaomi, as Xiaomi sold 26m smartphones in 1H14, and aims to ship over 60m in 2014, and 100m in
2015. Inventec would likely be the key beneficiary of higher shipments, as it could secure half of the
allocation, and the margin of the Xiaomi business is higher than that of its other businesses.
IAC previously guided that the total number of handheld devices (including smart handheld and
internet appliances) shipments will grow to 35-40m from 30m in 2013. The company further raised its
shipment target to 40-45m as it is seeing better momentum as time passes. The % of smartphones in
this total would rise from 50% in 2013 to 60%+ in 2014e and 65% in 2015e. By our calculation, total
smartphone shipments could rise to 45-50m if Xiaomis extra shipments are incorporated from 15m in
2013, implying a tripling in terms of YoY growth. IAC guided for the 1H14 vs 2H14 total shipment split
to be 45%/55%.
Fig 4 Handheld (IAC) revenue contribution to Inventec gradually increasing


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2012 2013 2014F 2015F 2016F
PC related Server Handheld (IAC) Tablet Solar Others
20 October 2014 111
Solar business outlook deteriorates after US imposes anti-dumping tariffs
On July 25, the US Department of Commerce determined a new set of anti-dumping tariffs against
China/Taiwan-made solar products with rates from 26.33% to 165.04%, in addition to 18.56%-
35.21% countervailing tariffs set on 3 June. The tariffs are much higher than the expected 20%,
implying the 5GW US market has shut the door on China/Taiwan solar producers (for details see the
link: http://enforcement.trade.gov/download/factsheets/factsheet-multiple-solar-products-ad-prelim-
072514.pdf)
According to Macquarie solar analyst Patrick Dai, the Taiwan solar makers were hit by anti-dumping
duties for the first time: preliminary duties are also expected to impact the Taiwan names, with
Taiwan cell manufacturers Gintech and Motech facing 27.59% and 44.18% duties, respectively, while
other Taiwan solar cell players are facing duties of 35.89%. Patrick believes that these duties are far
ahead of the markets expectation of <15-20% due to the heavy use by Chinese manufacturers of
Taiwan solar cell makers to avoid the original duties.
Inventec commented that while its direct sales exposure is mainly to Europe and Japan, with lower
exposure to the US market, it does see pricing erosion as solar makers try to decrease their
exposure to the US or seek to source their product indirectly from China. However, the company
anticipates more severe solar ASP erosion.
According to Figs 5-8, Inventec Solar Energy turned profitable in 1Q13, and generated a stable profit.
While Inventec Energy is still loss-making, the loss shrunk in 1Q but widened again in 2Q14. E-Tons
loss is also widening and its monthly sales have also decelerated. Overall, we now expect Inventecs
solar business to post a loss in 4Q14, and that this loss could persist into 2015.
Fig 5 E-Tons 2Q14 loss increased QoQ (NT$ m) Fig 6 E-Ton monthly sales trend (NT$ m)

Source: Company data, Macquarie Research, September 2014 Source: Company data, Macquarie Research, September 2014
Fig 7 Inventec: Solar affiliate investment loss (NT$ m) Fig 8 Inventec: Solar investment loss (NT$ mn)

Source: Company, Macquarie Research, October 2014 Source: Company Macquarie Research, October 2014
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2011 2012 2013
Inventec Solar Energy E-Ton Solar Energy Inventec Energy
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1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
Inventec Solar Energy E-Ton Solar Energy Inventec Energy Total
20 October 2014 112
Valuation premium valuation has been narrowing versus other ODMs
Inventec has traded in a 4.6-18.6x PER range since 2010. The stock is now trading at 11x/10x
2014/2015E PE, versus the sector average of 13x/10x. While its valuation is not stretched, we think it
lacks catalysts in the next six months. Moreover, downward earnings revisions by the street could
also lead to a de-rating, in our view. Guidance has been lukewarm for 2H14 as it only guided for
flattish or slight growth in 2H vs 1H. Our unchanged TP of NT$21.8 is based on 10x 2H15-1H16.
Fig 9 Inventecs one-year forward PE band Fig 10 Inventecs one-year forward PB band


Fig 11 ODM/EMS companies valuation table
Mkt cap Last Target TSR EPS (local $/) PER (X) P/BV (X) ROE (%) Div yield (%)
Ticker Company Rating (US$ m) Close Price (%) 13A 14E 15E 13A 14E 15E 13A 14E 15E 13A 14E 15E 13A 14E 15E
EMS/ODM
2317 TT Hon Hai O 43,301 89.0 114.0 31% 7.30 8.00 9.26 12.2 11.1 9.6 1.7 1.6 1.4 15.1 14.9 15.8 2.1 3.1 3.6
2382 TT Quanta N 9,274 73.0 80.0 15% 4.84 5.20 6.03 15.1 14.0 12.1 2.3 2.4 2.3 15.1 16.8 19.3 5.2 5.0 5.8
2356 TT Inventec N 2,501 21.2 21.8 10% 1.97 1.91 2.07 10.8 11.1 10.3 1.4 1.5 1.4 13.5 13.0 14.1 7.5 7.2 7.8
4938 TT Pegatron O 4,104 53.6 66.0 29% 4.17 4.86 5.83 12.9 11.0 9.2 1.1 1.2 1.1 9.4 10.7 12.3 5.2 6.1 7.3
2324 TT Compal N 2,934 20.2 21.7 14% 0.57 1.26 2.12 35.5 16.0 9.5 0.9 1.0 1.0 2.4 5.9 10.1 4.9 7.0 7.0
3231 TT Wistron O 2,399 29.8 37.0 28% 2.42 2.01 3.24 12.3 14.9 9.2 1.1 1.1 1.0 8.9 7.4 11.8 6.2 3.4 5.4
Average 16.7 13.2 10.3 1.6 1.6 1.5 11.7 12.5 14.9 4.9 5.0 5.9
Source: Bloomberg, Macquarie Research, October 2014; market data as of 17 October, 2014

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20 October 2014 113
Fig 12 Inventecs quarterly P&L
Revenue 116,685 104,904 101,340 105,910 96,371 97,386 105,504 112,530 100,904 101,643 111,344 117,415
Gross Profit 5,802 5,559 5,472 6,030 5,395 5,547 6,017 6,533 5,784 5,858 6,486 6,905
PBT 2,705 2,124 2,055 2,500 2,153 2,212 2,469 2,922 2,406 2,497 2,866 3,176
Tax (758) (617) (514) (600) (603) (619) (617) (730) (674) (699) (717) (794)
Minorities 53 29 10 (50) (53) (55) (58) (61) (64) (67) (70) (74)
Net profit 1,894 1,478 1,531 1,950 1,603 1,647 1,910 2,252 1,796 1,865 2,220 2,456
EPS (NT$) 0.53 0.41 0.43 0.54 0.45 0.46 0.53 0.63 0.50 0.52 0.62 0.68

Profitability
Gross Margin 5.0% 5.3% 5.4% 5.7% 5.6% 5.7% 5.7% 5.8% 5.7% 5.8% 5.8% 5.9%
Operating Margin 1.7% 1.6% 1.8% 2.1% 1.9% 1.9% 2.0% 2.3% 2.0% 2.1% 2.2% 2.4%
PBT Margin 2.3% 2.0% 2.0% 2.4% 2.2% 2.3% 2.3% 2.6% 2.4% 2.5% 2.6% 2.7%
Net margin 1.6% 1.4% 1.5% 1.8% 1.7% 1.7% 1.8% 2.0% 1.8% 1.8% 2.0% 2.1%

QoQ Growth
Sales -13.3% -10.1% -3.4% 4.5% -9.0% 1.1% 8.3% 6.7% -10.3% 0.7% 9.5% 5.5%
Operating Profit -17.7% -13.8% 5.6% 25.0% -17.5% 1.0% 14.4% 22.7% -20.9% 2.2% 18.1% 12.9%
Pretax Profit 24.1% -21.5% -3.3% 21.6% -13.9% 2.7% 11.6% 18.3% -17.7% 3.8% 14.8% 10.8%
Net Profit 6.2% -22.0% 3.6% 27.3% -17.8% 2.8% 15.9% 17.9% -20.3% 3.9% 19.0% 10.6%
EPS 6.2% -22.0% 3.6% 27.3% -17.8% 2.8% 15.9% 17.9% -20.3% 3.9% 19.0% 10.6%

YoY Growth
Sales 15.8% 1.6% -17.3% -21.3% -17.4% -7.2% 4.1% 6.3% 4.7% 4.4% 5.5% 4.3%
Operating Profit 40.7% 9.5% -20.3% -6.3% -6.1% 9.9% 19.2% 17.0% 12.1% 13.6% 17.2% 7.8%
Pretax Profit 16.9% -5.8% -5.6% 14.7% -20.4% 4.1% 20.2% 16.9% 11.7% 12.9% 16.1% 8.7%
Net Profit 6.3% -8.2% -19.4% 9.3% -15.4% 11.5% 24.7% 15.5% 12.1% 13.2% 16.3% 9.0%
EPS 6.3% -8.2% -19.4% 9.3% -15.4% 11.5% 24.7% 15.5% 12.1% 13.2% 16.3% 9.0%

20 October 2014 114

Inventec (2356 TT, Neutral, Target Price: NT$21.80)

Net Non-operating income m 444 281 282 324 Net Non-operating income m 1,412 1,764 1,372 1,524
Minority Interests m -29 -10 50 53 Minority Interests m 865 -42 226 275

Bonus exp / Reported Earnings % 0.0 0.0 0.0 0.0 Bonus exp / Reported Earnings % 0.0 0.0 0.0
EBITDA m 2,844 2,909 3,363 2,988 EBITDA m 12,589 12,376 13,126 14,452

EPS pcp growth (rep) % -8.2 -19.4 9.3 -15.4 EPS growth (rep) % 122.0 -3.1 8.1 12.5
EPS pcp growth (rep bonus exp) % -8.2 -19.4 9.3 -15.4 EPS growth (rep bonus exp) % 122.0 -3.1 8.1 12.5
EPS pcp growth (adj) % -8.2 -19.4 9.3 -15.4 EPS growth (adj) % 123.3 -3.1 8.1 12.5

Revenue pcp growth % 1.6 -17.3 -21.3 -17.4 PE (rep) x 10.8 11.1 10.3 9.1
Operating Income pcp growth % 9.5 -20.3 -6.3 -6.2 PE (rep bonus adj) x 10.8 11.1 10.3 9.1
Reported Earnings pcp growth % -8.2 -19.4 9.3 -15.4 PE (adj) x 10.8 11.1 10.3 9.1



Revenue Growth % 12.3 -7.0 -4.0 4.7 Reported Earnings m 7,074 6,854 7,412 8,337
Gross Profit Growth % 18.3 0.2 2.7 6.6 Depreciation & Amortisation m 5,077 4,756 4,743 5,031
Operating Income Growth % 109.2 1.4 10.0 12.4 Chgs in Working Cap m 4,905 -11,318 -3,657 -1,276
Reported Earnings Growth % 120.1 -3.1 8.1 12.5 Other m 4,051 -1,518 25 46
EBITDA Growth % 30.6 -1.7 6.1 10.1 Operating Cashflow m 21,107 -1,226 8,522 12,138
Acquisitions m -2,301 666 800 800
Reported Earnings Margin % 1.5 1.6 1.8 1.9 Other m -1,832 -713 -1,200 -1,200
EV/EBIT x 8.7 8.3 7.5 6.7 Other m 786 929 1,600 1,600
Financing Cashflow m 4,656 -8,063 117 -329
ROA % 3.8 3.7 4.2 4.5
ROIC % 10.4 14.0 13.5 13.8 Free Cashflow m 18,157 -5,088 2,522 6,138
Net Debt/Equity % -35.4 -20.9 -18.1 -20.4 FCF per Share NT$ 5.06 -1.42 0.70 1.71
Interest Cover x nmf nmf nmf nmf P/FCF x 4.2 -14.9 30.2 12.4
Price/Book x 1.4 1.5 1.4 1.3


Cash m 60,509 47,488 50,527 56,736
Receivables m 67,124 67,158 71,356 74,453
Inventories m 39,400 31,594 33,529 34,957
Investments m 2,477 2,401 2,376 2,330
Fixed Assets m 34,032 34,041 36,526 38,723
Other Assets m 10,629 10,575 10,547 10,519
Total Assets m 214,171 193,257 204,862 217,717
Payables m 94,468 73,842 76,318 79,567
Short Term Debt m 24,414 20,858 24,858 28,858
Long Term Debt m 14,243 14,547 14,547 14,547
Total S/H Equity m 61,812 57,944 61,472 65,480



20 October 2014 115
TAIWAN

2353 TT Underperform
18.00
- Price to Book
Upside/Downside % -15.4
12-month TSR % -15.4
GICS sector
Free float % 30

Year end 31 Dec 2013A 2014E 2015E 2016E
Revenue bn 360.1 335.0 343.0 350.3
Reported profit bn -20.5 1.1 1.1 1.2
Profit bonus exp bn -20.5 1.1 1.1 1.2
Adjusted profit bn -20.5 1.1 1.1 1.2
EPS rep NT$ -7.54 0.41 0.41 0.43
EPS rep growth % -605.8 nmf -1.6 6.1
EPS bonus exp NT$ -7.54 0.41 0.41 0.43
EPS bonus growth % -605.8 nmf -1.6 6.1
PER rep x nmf 48.8 49.6 46.7
PER bonus exp x nmf 48.8 49.6 46.7
Total DPS NT$ 0.00 0.00 0.00 0.00
Total div yield % 0.0 0.0 0.0 0.0
ROA % -5.5 1.0 1.0 1.0
ROE % -31.3 2.0 1.9 2.0
EV/EBITDA x -3.4 6.5 6.0 6.0
Net debt/equity % -47.6 -36.2 -42.4 -41.9
P/BV x 1.0 0.9 0.9 0.9

history


Analyst(s)
Ellen Tseng
Kaylin Tsai

20 October 2014
Taiwan Branch
Acer
In transition but fortunes still uncertain
Event
While Acer improved its 3Q global PC market share performance, we think its
less compelling product portfolio versus its peers could imply that its recent
market share gain will not be sustainable. Acers high ARs overdue (~12%)
also pose a potential risk to its cash sufficiency. Its cloud related businesses
are still at an early stage of investment which could require potential fund
raising. We maintain UP with a TP of NT$17 based on 0.8x 2015E book value.
Impact
Unsustainable PC market share and shipment growth: Acer reported
3Q14 sales of NT$86.1bn, up 5.8 QoQ but down 6.6% YoY, in line with our
estimates but 4% below Bloomberg estimates. Its September sales also
declined 5.7% YoY. Acer s 3Q14 global PC market share reached 8.4% with
6.6m unit shipments - up from 7.9% in 2Q14 or 7.4% in 3Q13 thanks to
Chromebooks and entry-level NBs. Given it has less differentiation in its
product portfolio, we think its NB market share gain and shipment growth will
remain volatile despite the short term spike.
More aggressive in BYOC and IoT: Acer recently consolidated its R&D
sources for BYOC (Build Your Own Cloud), AOP (Acer Open Platform) and
abApp to improve its services and ecosystem on the cloud and IoT. It also
joined Intels OIC (Open Interconnect Consortium) to compete with the
AllSeen Alliance between Qualcomm and Google in the IoT sector. Given the
sales contribution is still less than 10% for this segment and this investment is
still in the early stages, it is unlikely to become a meaningful growth driver any
time soon.
Acers smartphone strategy is not yet certain: Acer expected strong
sequential tablet shipment growth for 3Q on a broadening of its product
portfolio, but we think that with industry demand slowing down and the large
size iPhone potentially cannibalizing small size tablet demand, Acers tablet
sales growth could be lukewarm. We model flat YoY growth for 2014, from
4.3m units in 2013. With only 1.3m units shipped in 2013, and about 1m in
1H14, Acers smartphone business has yet to reach economies of scale and
has not shown significant potential given less attractive product design and
differentiation compared to other products available.
We increase our 2014/15/16 earnings estimates from
NT$0.34/NT$0.27/NT$0.29 to NT$0.41/NT$0.41/NT$0.43 on higher GM
assumptions due to a more favorable pricing environment.
Price catalyst
12-month price target: NT$17.00 based on a Price to Book methodology.
Catalyst: 3Q14 earnings release, Acers market share performance, and its
restructuring status
Acer trades at a stretched PE (49x), or close to 1x PB. Its book carries
NT$9.5/ share from intangible assets, which poses a potential write-off risk.
20 October 2014 116
We remain concerned over Acers growth and market share sustainability
due to lack of a compelling product portfolio
According to IDCs preliminary 3Q14 PC shipment data, Acers total PC shipments reached 6.6m
units, growing 12.3% QoQ and 11.4% YoY on a lower base and contribution from Chromebooks
and entry-level NBs. Looking forward, we think Acers shipment growth momentum will slow down
after passing the low base shipment period in 2013. With more pricing competition in mainstream
and entry-level NBs, we think its shipment growth momentum will not be sustainable especially
given its lack of a compelling product portfolio compared to its peers. During 3Q14, its global PC
market share was 8.4%, thanks to revived shipment growth and industry consolidation.
Nonetheless, we notice that its competitors such as Lenovo and HP are also gaining share
aggressively with the exit from the market of Samsung, Sony, and Toshiba. We remain concerned
over its market share sustainability given fiercer competition in the mainstream market and its less
visible product differentiation.
In Fig 14, we show how Acers overdue ARs as a % of the total are increasing. Given that IDCs
shipment numbers include shipments to end users or distribution channels, there is a possibility
that the increasing overdue % of total accounts receivable is due to channel inventory stocking,
and thus supports the shipment growth. If this happens again, we will monitor the 4Q shipments
closely for signs of a correction.
In the NB segment, Acers market share was 10.8% in 2Q14, close to Asusteks 10.0%. But
shipments are still declining on a YoY basis. We think the exit of brands from the consumer PC
market will help Acer to stabilize its status, in particular Samsungs exit of the business in Europe,
where Acer has about 40% sales exposure; however, we still need to monitor whether Acer will
start to see positive YoY shipment growth. We prefer Asustek in the NB market due to its higher
exposure to the consumer market and more appealing product portfolio. Please refer to our
accompanying report on Asustek.
We are less impressed by Acers recent product specifications. Acers R&D as a % of sales
contributed only roughly 0.8% of its sales, versus Asusteks 1.6%, in 2Q14. This continues to
suggest that Asustek is focusing more on product innovation, thus differentiating it from Acer in
our view.
Fig 1 Acer PC shipment growth trend Fig 2 Global total PC market share

-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
(k units)
Shipment (LHS) YoY (RHS) QoQ (RHS)
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3
Lenovo HP Dell
20 October 2014 117
Fig 3 Acer NB shipment growth trend Fig 4 Worldwide total NB market share

Fig 5 EMEA, Total NB market share Fig 6 EMEA: consumer NB market share


-35.0%
-30.0%
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
(k units)
Shipment (LHS) YoY (RHS) QoQ (RHS)
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2
Lenovo HP
Dell Acer
ASUS Apple
Fujitsu
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2
Lenovo HP
Acer Group ASUS
Dell Apple
Others
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2
Lenovo HP
Acer Group ASUS
Apple Dell
Others
20 October 2014 118
Fig 7 Acers recent NB specs
Name
Acer
Aspire Switch 10.1
Acer
Aspire Switch 11
Acer
Aspire R13
Acer
Aspire R14
Model Picture

Processor Intel Atom processor (quad-core,
1.3GHz)
Intel Core i3/i5 or Intel Atom
Z3745
Intel Core i5/i7 Intel Core i3/i5/i7
OS Windows 8.1 Windows 8.1 Windows 8.1 Windows 8.1
Memory 2GB 4GB or 2GB Up to 8GB Up to 12GB
Storage 32GB or 64GB SSD Up to 128GB SSD or up to 64GB
eMMC
Up to 1TB SSD 500GB or 1TB HDD
Display 10.1", 1920x1080 or 1280x800 11.6", 1920x1080 or 1366x768 13.3", 1920x1080 or
2560x1440
14", 1366x768
Touch enabled Yes Yes Yes Yes
Dimensions NA NA NA NA
Weight 2.58 pounds NA NA NA
Battery life Up to 8 hours NA Up to 8 hours NA
Announce date Sep-14 Sep-14 Sep-14 Sep-14
Release date Sep-14 Oct-14 Oct-14 Oct-14
Price (USD) 329.99 399 899 599
BYOC strategy and IoT development Still too early to make a meaningful
sales contribution
As a major turnaround plan in Acers restructuring, BYOC (Build Your Own Cloud) has been highly
expected by the company to bring a new revenue stream with higher margins than its core PC
business. For commercial users, BYOC can help them create a multi-network, cross-platform, multi-
device cloud-based solution with Acers open platform (AOP), which supports multiple OS and could
work on PCs, smartphones, tablets, and web storage. For consumers, BYOC, accompanied by
Acers products, could provide storage capacity on demand. For non-Acer product users, they could
access Acer BYOC Apps (abApps) to create their own cloud for more efficient data management.
Acers BYOC platform had reached 3mn users by mid September, and it expects this to grow to 5mn
by end-2014 and 10mn in 2015. The business has established a more mature business model in the
commercial market and has already turned profitable. It is expanding the end-user sectors into smart
automotive, smart home, digital content and services, and other apps with cross-sector alliances.
Acer recently consolidated its R&D sources for BYOC, AOP and abApp for more efficient services
and ecosystem on the cloud and IoT. It also joined Intels OIC (Open Interconnect Consortium) to
compete with the AllSeen Alliance between Qualcomm and Google in the IoT market.
Recently, we have seen more PC vendors such as Asustek expanding their user base in the
personal cloud market. Based on their scale of PC shipments, accessibility for their cloud services
should not be a big issue, but user experience and platform design would be the key. If the service is
successful, customers are likely to become stickier to the end-devices. Nonetheless, the cloud
business has yet to become a growth driver for Acer and we estimate sales contribution to be less
than 10% still. We need to closely monitor whether it will become a meaningful growth driver.
Fig 8 Acers BYOC development plan
Fields Application Alliance
Cloud smart automotive Entertainment and security ATS, Studio X-Gene, Mediatek
Cloud smart home Home appliances control EcoLumia, Carry Tech, Mediatek
Digital content and service E-book, E-tickets, online shopping
Pili, Wind Music, Bionet, Common Wealth
Magazine, Business Weekly, etc.
App Commercial and consumer NTI, FutureDail

20 October 2014 119
Flattish tablet and uncompelling smartphone outlook
During IFA 2014 in September, besides several new NB models, Acer also introduced a few tablets -
Iconia Tab 8 W, Iconia One 8, and Iconia Tab 10 with prices ranging from USD149-199 and with a
Windows or Android OS. Acer also announced its latest pure smartphone, Liquid Z500, priced at
USD195 and featuring a 5 HD screen, quad-core Mediatek processor, 8MP camera, and 1GB
RAM/4GB ROM memory. The products were due to be released in Sep/Oct this year. However, the
recent slowdown in the tablet market, as well as a lack of differentiating factors from other products in
the market, could mean a lacklustre outlook. Despite the aggressive pricing, we expect muted
shipment growth for Acers tablets given weakening tablet demand and fiercer competition from
smartphone vendors, which could also cannibalize smaller size tablet demand.
Unlike Asustek which unveiled a more compelling smartphone business strategy in our view, Acers
smartphone business does not seem compelling to us. As shown in Fig 10, Acers smartphone has a
lower performance-to-price ratio than its peers and the production pipeline is about 1-2 quarters
behind, which suggests the products are less competitive.
Fig 9 Acers recent tablet specs
Name
Acer
Iconia Tab 8 W
Acer
Iconia One 8
Acer
Iconia Tab 10
Model Picture

OS Windows 8.1 with Bing Android 4.4 Android 4.4
Display 8", 1280x800 8", 1280x800 10", 1920x1080
Processor Intel Atom Z3735G processor
(Quad-core)
Intel Atom Z3735G processor
(Quad-core)
MediaTek quad-core
processor
Weight 370 g 340 g NA
Announce date Sep-14 Sep-14 Sep-14
Release date Oct-14 Oct-14 Sep-14
Price (USD) 149.99 149.99 199

Fig 10 Acers recent smartphone spec comparison with peers
Name
Acer
Liquid Z500
Acer
Liquid Z500
Asus
Zenfone 5
Xiaomi
Redmi Note
Model Picture

OS Android 4.4 Android 4.4 Android 4.4 Android 4.2
Display 5", 1280x720 5", 1280x720 5", 1280x720 5.5", 1280x720
Processor Mediatek MT6582,
Quad-core 1.3 GHz
Mediatek MT6582,
Quad-core 1.2 GHz
Intel Atom Z2580/ Z2560,
Dual-core 2 GHz
(Z2580)/ 1.6 GHz
(Z2560)
Mediatek MT6592,
Octa-core 1.4/1.7
GHz
Camera (rear/front) 8MP/2MP 8MP/2MP 8MP/2MP 13MP/5MP
ROM capacity 4GB 16GB 16GB/8GB 8GB
RAM capacity 1GB 2GB 2GB/1GB 2GB/1GB
Battery 2000mAh 3500mAh 2110mAh 3200mAh
Announce date Sep-14 Jun-14 Jan-14 Mar-14
Release date Sep-14 Aug-14 Apr-14 Mar-14
Price (USD) 195 253 149 130

20 October 2014 120
Fig 11 Acers gross margin trend Fig 12 Acers operating margin trend

Earnings Revisions
We increase our 2014/15/16 earnings estimates from NT$0.34/NT$0.27/NT$0.29 to NT$0.41
/NT$0.41 /NT$0.43 on higher GM assumptions due to a more favorable pricing environment post
multiple brands withdrawal from the consumer PC market. However, we note that the risk to our
estimates lies in Acers sustainability in creating successful sell-though in our view.
We note from its financial statements that in 2014 Acer has borrowed short-term loans at a high
interest rate of 12-13% (vs. 0.5-8.4% in 2013). As Acers top line shrinks, even though it could
maintain a normal operating leverage, the interest expense fluctuation could be a swing factor for
its bottom line, in our view.
Fig 13 Acer: Earnings Revision Table
2014E 2015E 2016E
Revenue 335,001 335,130 0.0% 343,030 343,262 -0.1% 350,316 350,549 -0.1%
Gross profit 29,737 29,746 0.0% 30,404 30,416 0.0% 30,954 30,965 0.0%
GM % 8.9% 8.9% 8.9% 8.9% 8.8% 8.8%
Operating profit 2,016 1,774 13.6% 2,082 1,613 29.1% 2,030 1,551 30.9%
OPM % 0.6% 0.5% 0.6% 0.5% 0.6% 0.4%
Pretax income 1,469 1,228 19.7% 1,380 912 51.3% 1,465 986 48.6%
Net income 1,122 929 20.8% 1,104 729 51.5% 1,172 789 48.5%
EPS (NT$) 0.41 0.34 20.8% 0.41 0.27 51.4% 0.43 0.29 48.5%
Risk on Acers hidden Balance Sheet
We are also concerned over Acers cash sufficiency. Its account receivable amount (AR) is
declining on lower sales scale but the ratio of ARs overdue remained high as of the end of 2Q14
(or ~12%) based on its financial statements, as shown in Fig 14. We note that Acers cash would
not be sufficient to pay the balance if netting AR with account payables (AP) with other current
liabilities assuming 10% of its AR would be written off. The assumption is based on its current
level of overdue AR as a % of total ARs at 10-14% in the past year, as Fig 15 shows.
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
GM
-12.0%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
OPM
20 October 2014 121
Fig 14 Acers AR trend and overdue as % of AR Fig 15 Acer cash sufficiency analysis

NT$bn 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
(1) Cash 48.1 53.2 34.4 43.4 43.1 40.9
(2) AR 70.6 69.0 67.5 63.8 62.2 68.4
(3) AP and Other
current liabilities
117.8 126.8 107.9 111.5 100.5 108.1
Cash balance after
(1)+(2)-(3)
Assume 0% write
off for AR
0.9 -4.6 -5.9 -4.3 4.8 1.2
Assume 10% write
off for AR
-6.1 -11.5 -12.7 -10.7 -1.5 -5.6
Assume 20% write
off for AR
-13.2 -18.4 -19.4 -17.1 -7.7 -12.5

Acer booked a ~NT$10bn impairment loss in 3Q13, and there is still a combined amount of
NT$25.9bn in intangible assets on its 2Q14 balance sheet, thus there is potential BVPS downside
risk - we estimate book value per share generated from this goodwill, trademark rights and others
is equal to NT$9.5/per share. If Acer needs to write off all of this intangible asset value (a worse-
case scenario), this still implies significant downside risk.
Fig 16 Acers intangible asset impairment for the past 3 years
NT$m 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
Goodwill 20,477 20,210 21,023 20,710 20,710 25,265 24,868 24,927 24,747 25,534 20,871 21,087 21,396 20,822
Trademark rights 10,043 9,922 9,985 9,883 9,883 9,651 9,544 5,958 5,958 5,859 216 215 210 205
Others (iGware) 5,872 5,438 5,198 4,811 4,809 9,271 8,756 8,432 8,429 8,072 7,672 7,418 7,213 4,936
Total 36,393 35,570 36,206 35,404 35,402 44,187 43,169 39,317 39,135 39,465 28,759 28,720 28,819 25,963
Increase/decrease -822 636 -802 -3 8,786 -1,018 -3,852 -182 330 -10,706 -39 99 -2,856
QoQ increase/decline -2.3% 1.8% -2.2% 0.0% 24.8% -2.3% -8.9% -0.5% 0.8% -27.1% -0.1% 0.3% -9.9%
Total intangible assets
per share (NT$)
13.7 13.5 13.8 13.5 13.0 16.2 15.9 14.4 14.4 14.5 10.6 10.5 10.6 9.5
Acer also plans to issue 300m new shares at a tentative price of NT$20 per share, and the share
dilution would be around 11% on our estimate.
Acer valuation remains stretched
We applied 0.8x 2015E PB to set our TP, as we factor in potential book value impairment risk.
Acers valuation remains stretched on a PE basis, in our view.
Fig 17 Acers 12-month forward PE Fig 18 Acers 12-month forward PB


0%
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58,000
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64,000
66,000
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70,000
72,000
1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
NT$ m
Account Receivable (LHS) Overdue % as of AR (RHS)
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20 October 2014 122
Fig 19 Acer: Comparable valuations
Brand
992 HK Lenovo NR 14,632 10.72 NR NA 0.06 0.08 0.09 25.1 18.0 15.9 5.6 4.9 4.0 24.6 27.9 26.4 0.2 0.2 0.3
2353 TT Acer U 1,844 20.1 17.0 -15% (7.54) 0.41 0.41 nmf 48.6 49.4 1.0 0.9 0.9 -31.3 2.0 1.9 0.0 0.0 0.0
2357 TT Asustek O 7,121 291.5 349.0 26% 28.56 28.06 30.30 10.2 10.4 9.6 1.6 1.5 1.4 16.4 15.1 15.4 6.6 6.5 7.1
AAPL US Apple O 576,392 96.3 104.0 10% 5.68 6.31 6.86 16.9 15.2 14.0 5.0 4.7 4.0 30.6 31.2 30.8 1.7 1.9 2.0
HPQ US HP NR 63,453 34.00 NR NA 3.99 3.61 3.74 8.5 9.4 9.1 2.9 2.4 2.2 -31.1 21.2 24.0 1.8 2.1 2.0
Average 15.2 20.3 19.6 3.2 2.9 2.5 1.9 19.5 19.7 2.0 2.2 2.3
Source: Bloomberg, Macquarie Research, October 2014, Price as of Oct 17, 2014

Fig 20 Acers quarterly P&L
Revenues 76,724 81,337 86,065 90,876 81,136 82,359 86,698 92,835 82,600 83,804 88,755 95,157
Gross Profit 6,374 7,528 7,760 8,075 7,124 7,266 7,708 8,305 7,239 7,371 7,858 8,486
Operating Profit 127 662 654 572 425 466 550 640 419 452 530 629
PBT 146 528 443 353 254 296 374 457 283 316 387 479
Tax (145) (43) (89) (71) (51) (59) (75) (91) (57) (63) (77) (96)
Minorities 0 (0) - - - - - - - - - -
Net profit 1 485 354 282 203 236 299 365 226 253 310 383
Adjusted EPS (NT$) 0.00 0.18 0.13 0.10 0.07 0.09 0.11 0.13 0.04 0.03 0.03 0.03

Profitability
Gross Margin 8% 9% 9% 9% 9% 9% 9% 9% 9% 9% 9% 9%
Pretax Margin 0% 1% 1% 0% 0% 0% 0% 0% 0% 0% 0% 1%
Net Margin 0% 1% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

QoQ Growth
Sales -11% 6% 6% 6% -11% 2% 5% 7% -11% 1% 6% 7%
Operating Profits na 421% -1% -13% -26% 10% 18% 16% -35% 8% 17% 19%
Pretax Profits na 262% -16% -20% -28% 16% 27% 22% -38% 12% 23% 24%
Net Profit na 43254% -27% -20% -28% 16% 27% 22% -38% 12% 23% 24%
EPS na 43254% -27% -20% -28% 16% 27% 22% -69% -26% -8% -1%

YoY Growth
Sales -17% -9% -7% 5% 6% 1% 1% 2% 2% 2% 2% 3%
Operating Profits 343% na na na 234% -30% -16% 12% -1% -3% -4% -2%
Pretax Profits -68% na na na 74% -44% -16% 29% 11% 7% 4% 5%
Net Profit -100% na na na 18065% -51% -16% 29% 11% 7% 4% 5%
EPS -100% na na na 18065% -51% -16% 29% -44% -64% -74% -79%

20 October 2014 123

Acer (2353 TT, Underperform, Target Price: NT$17.00)

Operating Income m 662 654 572 425 Operating Income m -11,410 2,016 2,082 2,030
Net Non-operating income m -135 -212 -219 -171 Net Non-operating income m -9,654 -546 -701 -565
Pre-Tax Income m 528 443 353 254 Pre-Tax Income m -21,064 1,469 1,380 1,465
Tax Expense m -43 -89 -71 -51 Tax Expense m 544 -347 -276 -293
Minority Interests m 0 0 0 0 Minority Interests m -0 -0 0 0

Reported Earnings m 485 354 282 203 Reported Earnings m -20,519 1,122 1,104 1,172
Reported Earnings (bonus exp) m 485 354 282 203 Reported Earnings (bonus exp) m -20,519 1,122 1,104 1,172
Adjusted Earnings m 485 354 282 203 Adjusted Earnings m -20,519 1,122 1,104 1,172
EBITDA m 1,200 1,322 1,241 1,096 EBITDA m -8,710 4,439 4,779 4,758

EPS (rep) NT$ 0.18 0.13 0.10 0.07 EPS (rep) NT$ -7.54 0.41 0.41 0.43
EPS pcp growth (rep) % nmf nmf nmf 18,064.9 EPS growth (rep) % -605.8 nmf -1.6 6.1
EPS (rep bonus exp) NT$ 0.18 0.13 0.10 0.07 EPS (rep bonus exp) NT$ -7.54 0.41 0.41 0.43
EPS pcp growth (rep bonus exp) % nmf nmf nmf 18,064.9 EPS growth (rep bonus exp) % -605.8 nmf -1.6 6.1
EPS (adj) NT$ 0.18 0.13 0.10 0.07 EPS (adj) NT$ -7.54 0.41 0.41 0.43
EPS pcp growth (adj) % nmf nmf nmf 18,064.9 EPS growth (adj) % -605.2 nmf -1.6 6.1

Revenue pcp growth % -9.0 -6.6 4.9 5.8 PE (rep) x nmf 48.8 49.6 46.7
Operating Income pcp growth % nmf nmf nmf 233.7 PE (rep bonus adj) x nmf 48.8 49.6 46.7
Reported Earnings pcp growth % nmf nmf nmf 18,065 PE (adj) x nmf 48.8 49.6 46.7



Revenue Growth % -16.2 -7.0 2.4 2.1 Reported Earnings m -20,519 1,122 1,104 1,172
Operating Income Growth % nmf nmf 3.3 -2.5 Chgs in Working Cap m -2,280 -13,007 2,537 -1,356
Reported Earnings Growth % -605.4 nmf -1.6 6.1 Other m 11,449 3,321 -200 -200
EBITDA Growth % nmf nmf 7.6 -0.4 Operating Cashflow m -8,651 -6,141 6,139 2,345
Acquisitions m 0 35 0 0
Gross Profit Margin % 6.3 8.9 8.9 8.8 Capex m -350 -302 -400 -400
Operating Income Margin % -3.2 0.6 0.6 0.6 Asset Sales m 658 0 0 0
Reported Earnings Margin % -5.7 0.3 0.3 0.3 Other m 420 -780 -1,800 -1,800
EBITDA Margin % -2.4 1.3 1.4 1.4 Investing Cashflow m 728 -1,046 -2,200 -2,200
Dividend (Ordinary) m 0 0 0 0
Payout Ratio % nmf 0.0 0.0 0.0 Equity Raised m 0 0 0 0
EV/EBITDA x -3.4 6.5 6.0 6.0 Debt Movements m -629 1,184 2,400 2,400
EV/EBIT x -2.6 14.2 13.8 14.2 Other m -397 50 400 400
Financing Cashflow m -1,026 1,234 2,800 2,800
ROE % -31.3 2.0 1.9 2.0 Net Chg in Cash/Debt m -7,629 -6,280 6,539 2,745
ROA % -5.5 1.0 1.0 1.0
ROIC % -39.0 5.2 4.5 4.8 Free Cashflow m -9,001 -6,442 5,739 1,945
Net Debt/Equity % -47.6 -36.2 -42.4 -41.9 FCF per Share NT$ -3.31 -2.37 2.11 0.71
Interest Cover x -19.5 3.4 4.2 3.6 P/FCF x -6.1 -8.5 9.5 28.1
Price/Book x 1.0 0.9 0.9 0.9


Cash m 43,365 36,977 43,316 45,860
Receivables m 63,805 76,401 74,268 76,126
Inventories m 35,566 37,425 38,206 39,174
Investments m 4,667 5,081 5,281 5,481
Fixed Assets m 6,134 5,468 4,771 4,042
Other Assets m 36,962 34,542 34,942 35,342
Total Assets m 190,500 195,894 200,784 206,025
Payables m 55,218 56,804 57,990 59,459
Short Term Debt m 390 574 974 1,374
Long Term Debt m 16,175 15,551 17,551 19,551
Total S/H Equity m 56,251 57,606 58,511 59,482


20 October 2014 124
Important disclosures:
Recommendation definitions
Macquarie - Australia/New Zealand
Outperform return >3% in excess of benchmark return
Neutral return within 3% of benchmark return
Underperform return >3% below benchmark return

Benchmark return is determined by long term nominal
GDP growth plus 12 month forward market dividend
yield
Macquarie Asia/Europe
Outperform expected return >+10%
Neutral expected return from -10% to +10%
Underperform expected return <-10%
Macquarie First South - South Africa
Outperform expected return >+10%
Neutral expected return from -10% to +10%
Underperform expected return <-10%
Macquarie - Canada
Outperform return >5% in excess of benchmark return
Neutral return within 5% of benchmark return
Underperform return >5% below benchmark return
Macquarie - USA
Outperform (Buy) return >5% in excess of Russell
3000 index return
Neutral (Hold) return within 5% of Russell 3000 index
return
Underperform (Sell) return >5% below Russell 3000
index return

Volatility index definition*
This is calculated from the volatility of historical
price movements.

Very highhighest risk Stock should be
expected to move up or down 60100% in a year
investors should be aware this stock is highly
speculative.

High stock should be expected to move up or
down at least 4060% in a year investors should
be aware this stock could be speculative.

Medium stock should be expected to move up
or down at least 3040% in a year.

Lowmedium stock should be expected to
move up or down at least 2530% in a year.

Low stock should be expected to move up or
down at least 1525% in a year.
* Applicable to Asia/Australian/NZ/Canada stocks
only
Recommendations 12 months
Note: Quant recommendations may differ from
Fundamental Analyst recommendations
Financial definitions
All "Adjusted" data items have had the following
adjustments made:
Added back: goodwill amortisation, provision for
catastrophe reserves, IFRS derivatives & hedging,
IFRS impairments & IFRS interest expense
Excluded: non recurring items, asset revals, property
revals, appraisal value uplift, preference dividends &
minority interests

EPS = adjusted net profit / efpowa*
ROA = adjusted ebit / average total assets
ROA Banks/Insurance = adjusted net profit /average
total assets
ROE = adjusted net profit / average shareholders funds
Gross cashflow = adjusted net profit + depreciation
*equivalent fully paid ordinary weighted average
number of shares

All Reported numbers for Australian/NZ listed stocks
are modelled under IFRS (International Financial
Reporting Standards).

Recommendation proportions For quarter ending 30 September 2014
AU/NZ Asia RSA USA CA EUR
Outperform 48.73% 59.90% 35.63% 42.00% 60.28% 42.11% (for US coverage by MCUSA, 6.09% of stocks followed are investment banking clients)
Neutral 33.76% 24.97% 39.08% 52.67% 36.17% 38.42% (for US coverage by MCUSA, 8.12% of stocks followed are investment banking clients)
Underperform 17.52% 15.13% 25.29% 5.33% 3.55% 19.47% (for US coverage by MCUSA, 0.51% of stocks followed are investment banking clients)

Company-specific disclosures:

Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures.

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