瑞信 全球科技业:云计算—下一个前沿

lstaytodo

2020/08/23 发布于 技术 分类

文字内容
1. 21 July 2020 Equity Research Asia Pacific Global Technology Cloud computing: The next frontier Connections Series Technology Connections Series Figure 1: Cloud capex a new tech driver the past decade with legs for further growth Internet Company capex US$m n Internet Company capex YoY $30,000 125% $24,000 100% $18,000 75% $12,000 50% $6,000 25% $0 0% Top 7 capex 2nd Tier capex Cloud Capex YoY Cloud service YoY 1Q20 3Q19 1Q19 3Q18 1Q18 3Q17 1Q17 3Q16 1Q16 3Q15 1Q15 3Q14 1Q14 3Q13 1Q13 3Q12 1Q12 3Q11 -25% 1Q11 -$6,000 Internet service YoY Source: Company data, IDC, Credit Suisse estimates From data creation to data analytics: a major inflection driving structural growth in the data centre. While a solid 26% CAGR for data cited by Cisco is an old theme, what is new is our ability to monetise data, with AI and Machine Learning being the first technology to lower analytics costs, potentially unlocking the potential for 99.5% of data that has remained dark, leading to an accelerating application workload growth and an accelerating compute TAM. We estimate a US$90 bn compute TAM will accelerate from a 3-5% CAGR to 10-15% CAGR over the next five years. While we may see a 1-2 quarter capacity digestion in late 2020, following five quarters of strong data centre builds, the purpose of this report is to define and explore long-term trends and the supply chain underpinning the move to a data economy as a secular multi-year tailwind to growth. Cloud as a new ecosystem driver. Cloud IT infrastructure spending is delivering a 10% CAGR, vs -1.2% CAGR for traditional IT infrastructure, driven by the rising number of connected devices and video applications, proliferation of cloud services for enterprise and consumer, and accelerating AI data analytics. The rise of hyperscale and cloud service providers has supported the rise of an ODM Direct model, rising 10x from 2011-19 and growing from low single digits to 24% of servers and 6% of networking. We expect growth to continue, with cloud servers maintaining +15%/+14% YoY unit growth in 2020-21, well above -2%/+9% overall server growth, supporting outgrowth for the ODM Direct hardware makers, merchant silicon and components with leverage to the data centre theme. Supply chain opportunities. Key hardware beneficiaries include ODMs building out Open Compute Project (Quanta, Wiwynn), and hardware components supporting data centre design changes (Delta, FII, Hon Hai, Shengyi). Within semiconductors, foundry and fabless gain in HPC (TSMC, Aspeed), memory (Samsung, Micron and SK Hynix) from rising data centre storage and IC design service companies (Alchip) supporting system company and China upstarts designing complex HPC chips. In the US semis our picks are NVIDIA, Intel, AMD and Xilinx. While the shift to cloud infrastructure is a negative for US Hardware OEMs, IBM and NetApp are better positioned in a hybrid-first world. Amongst datacentre operators, we like Equinix, Digital Realty and Switch (globally) and GDS and VNET (China) and in Japan we prefer Anritsu (5G) and Renasas (data centre and auto). The Credit Suisse Connections Series leverages our exceptional breadth of macro and micro research to deliver incisive cross-sector and cross-border thematic insights for our clients. Research Analysts Randy Abrams, CFA 886 2 2715 6366 randy.abrams@credit-suisse.com Jerry Su 886 2 2715 6361 jerry.su@credit-suisse.com Manish Nigam 852 2101 7067 manish.nigam@credit-suisse.com John W. Pitzer 212 538 4610 john.pitzer@credit-suisse.com Contributing analysts Akinori Kanemoto Chaolien Tseng Colin McCallum Dalya Hahn Haas Liu Harvie Chou Hideyuki Maekawa Kenneth Fong Keon Han Kyna Wong Matthew Cabral Nicholas Teh Pauline Chen Sami Badri Sanguk Kim Tina Long DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
2. 21 July 2020 Focus charts and tables Figure 2: Data growth—self-perpetuating dynamic Figure 3: Global cloud infrastructure to deliver a 10% CAGR Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Credit Suisse Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, IDC Credit Suisse Figure 4: Cloud services 21% CAGR to US$419 bn by 2022 Figure 5: Public cloud to surpass enterprise servers in CY20 Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, IDC, Credit Suisse Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: IDC, Credit Suisse Figure 6: Cloud capex projected for teens growth in ‘20/21 Figure 7: ODM Direct model enabled by hyperscalers/CSPs Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, Credit Suisse Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data Figure 8: Cloud builds strong in 2020/21 even with a late year pause NT$bn/BMC (mn) Inventec Quanta Wiwynn MiTAC Accton Total QoQ YoY 1Q20 12.4 35.0 35.1 6.8 5.5 94.8 2Q20 20.0 37.9 52.1 9.0 6.1 125.0 3Q20E 22.0 47.6 55.3 9.2 7.0 141.1 4Q20E 18.0 47.6 56.6 8.8 7.8 138.7 1Q21E 16.0 42.0 53.6 8.5 6.6 126.7 2Q21E 22.0 43.2 64.8 10.6 7.9 148.5 3Q21E 24.0 54.7 67.6 11.4 9.3 167.0 4Q21E 22.0 55.2 65.6 10.8 8.3 161.9 2017 43.0 102.2 85.7 40.6 14.2 285.7 2018 63.0 125.1 181.1 22.0 18.5 409.7 2019 63.1 144.5 163.6 26.6 25.9 423.7 2020E 72.4 168.0 199.1 33.8 26.3 499.6 2021E 84.0 195.1 251.6 41.4 32.1 604.2 -22% 4% 32% 19% 13% 34% -2% 14% -9% 34% 17% 19% 12% 18% -3% 17% 54% 43% 3% 18% 21% Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, Credit Suisse estimates Global Technology 2
3. 21 July 2020 Cloud computing: The next frontier Increasing workload shift to the cloud Cloud IT infrastructure spending has grown faster (~17.5% CAGR) than global IT infrastructure spending (~6.5% CAGR) over 2015-19, and represents ~50% of total IT infrastructure spending. IDC forecasts that the cloud IT-mix will grow to 60% of that spending by 2022, implying a 10% CAGR vs. a -1.2% for traditional IT infrastructure. Cisco expects consumer IP traffic to grow even faster at a 26% CAGR (2019-22, representing 83-84% of traffic, with business IP traffic growing at a 23% CAGR. We see three enablers of this shift to the cloud: (1) increasing number of connected devices (this gets a further boost with the ramp up of 5G in the forthcoming years) and a rapid rise of video applications; (2) proliferation of services on the cloud accelerating data consumption in businesses, and (3) accelerating AI data analytics. Cloud IT spending is now ~50% of total global IT infra spend… …and is expected to still grow at a 10% CAGR over 2019-22E Cloud is driving growth for hyperscalers Cloud servers have outpaced the server market due to much stronger hyperscale and public cloud demand, delivering a 23% CAGR from 2015-18 vs. a 7% server unit CAGR. This part of the market is seeing a further boost from COVID-19-related acceleration in applications from on-premise to cloud. We forecast public cloud server unit growth of 15%/14% YoY in CY20/21, near our bottom-up growth in hyperscale capex at +17%/+17% in that period and outpacing our server unit forecast for -1.9%/+8.7%. Overall, Cisco estimates there will be in total 628 hyperscale data centres by the end of 2021, vs 509 in 2019, for an 11% CAGR growth. Thus, servers residing in hyperscale data centres are expected to make up over 50% of the total installed servers in data centres globally by 2021 (from 44% in 2019), representing 85% of the total public cloud servers and 87% of public cloud workload and compute instances. An increasing workload shift to the cloud has in turn been driving growth for the hyperscalers Public cloud server unit growth of 15%/14% YoY in CY20/21; hyperscale capex growth of 17% YoY in both the years Rise of the ODM model and merchant silicon As markets increasingly shift to adopt open-sourced platforms for greater optimisation of the total cost of ownership, starting from hyperscalers and CSPs, and followed by enterprises/ telcos longer-term, Taiwan cloud IT infrastructure ODMs have been key beneficiaries. ODMs’ enhanced sophistication in custom hardware design, flexibility in mass-scale manufacturing, and system integration and comprehensive after-market services coverage globally have helped them gain share at hyperscalers. The combined sales made by ODM Direct in servers increased by 10x over 2011-19, driving their combined share to over 24% in 2019 (just 4% in 2011). This trend is set to continue with the rising share of hyperscalers in the overall server mix. As the datacentre infrastructure’s innovation cycle gets disrupted, large operators’ demand cannot be served by the traditional model (OEMs' collaboration with silicon vendors). In response to this challenge, major OEMs are incorporating merchant silicon and supporting open standards. ODM Direct in servers to continue to gain share; Taiwan ODMs the key beneficiaries The trend is also necessitating server OEMs to support merchant silicon and open standards Supply chain opportunities The cloud/datacentre opportunity benefits parts of the technology supply chain globally and is likely to grow significantly as the development of 5G further accelerates existing trends. Within Asian downstream, certain ODMs are key beneficiaries, supported by further proliferation of the Open Compute Project (Quanta, Wiwynn). The shift to cloud infrastructure is a negative for US Hardware OEMs, though we like IBM and NetApp’s positioning in a hybrid-first world. Significant design changes for components requiring the ability to deal with high bandwidth, low latency and massive connectivity leads to opportunities for names such as Delta, FII, Hon Hai and Shengyi in China. Within semis, IC Design and advanced foundry get a lift from HPC (TSMC, Aspeed) and IC design service companies (Alchip) are providing design support to help system and fabless companies to design these complex HPC chips. In the US, top picks on the accelerating compute TAM are NVIDIA, Intel, AMD, Micron and Xilinx. Our Japan top picks are Anritsu on 5G device testing and Renasas on rebound in auto and from data centre. Public cloud service growth from hyperscalers will support server DRAM growth (now 35% of memory), supporting the memory demand side (Samsung, SK Hynix and Micron). Amongst datacentre operators, globally we highlight Equinix, Digital Realty and Switch and in China, GDS and VNET. Global Technology Given the scale of the cloud/datacentre opportunity, several stocks are leveraged to the theme—full list on the next page 3
4. 21 July 2020 Key stock picks Figure 9: Global technology suppliers leveraged to cloud data centre growth PB (x) 2020 ROE (%) 2020 30.3 15.9 13.2 14.2 (23.3) 23.8 40.3 17.4 28.9 25.9 47.6 32.6 2.9 3.0 1.2 4.6 6.6 5.4 3.0 5.9 1.8 0.7 3.9 0.9 9.2 3.2 3.0 1.0 1.7 1.6 0.9 2.2 5.6 12.7 5.3 2.9 35.4 13.6 17.6 7.8 15.8 14.9 6.9 12.8 16.0 27.7 34.6 15.3 23.3 Nam e Ticker Asian Hardw are Accton 2345.TW Delta Electronics 2308.TW FII 601138.SS Hon Hai 2317.TW Inventec 2356.TW Lenovo 0992.HK MiTAC 3706.TW Quanta 2382.TW Shengyi Tech 600183.SS Shennan Circuits 002916.SZ Wiw ynn 6669.TW ZTE 0763.HK Asian Sem iconductors Alchip Tech 3661.TW Rat Curr. Price (LCY) N O O O N N N O O N O O TWD TWD CNY TWD TWD HKD TWD TWD CNY CNY TWD HKD 236.50 184.00 14.79 88.00 24.75 4.55 29.55 78.00 29.00 162.67 753.00 23.00 240.00 208.00 17.00 93.00 24.00 4.50 32.20 90.00 48.10 194.60 960.00 26.10 O TWD 480.00 630.00 982 30.5 22.5 71.9 114.5 35.5 0.7 7.1 Amkor N USD 12.16 12.00 2,932 18.2 15.3 (5.0) 33.0 18.7 0.0 1.4 7.6 O O O N O N O O O N JPY TWD TWD TWD TWD TWD JPY KRW KRW TWD 2,435.00 69.30 1,255.00 284.00 607.00 1,075.00 593.00 54,400 82,900 367.00 2,880.00 84.00 1,300.00 250.00 730.00 970.00 1,290.00 65,000 118,000 365.00 3,159 10,381 1,480 1,325 32,393 2,795 9,545 268,891 49,731 321,942 21.3 11.8 41.8 72.8 29.7 26.3 10.8 15.4 13.0 20.3 20.6 10.9 34.5 33.9 20.2 22.3 9.5 11.0 6.9 20.1 35.0 3.8 20.7 (35.9) 31.6 22.3 (50.0) (51.0) (87.0) (1.7) 31.4 12.7 25.1 (15.3) 39.2 27.9 262.7 10.0 114.4 35.2 3.3 8.3 21.3 114.9 47.0 18.2 13.8 40.0 87.7 1.1 1.4 3.4 1.6 1.7 1.7 1.5 0.0 2.6 0.0 2.7 3.2 1.4 18.4 8.9 3.1 6.2 1.4 1.4 1.1 5.2 15.1 12.2 44.0 12.3 10.3 23.4 13.0 8.8 8.1 25.7 N U O O USD USD USD USD 60.37 9.67 125.11 44.81 44.00 8.50 150.00 53.00 44,723 12,424 111,084 9,940 11.4 8.0 11.5 13.1 9.6 7.4 10.1 10.2 16.9 19.7 (7.3) (9.2) (28.1) (31.4) (15.0) (16.4) 19.2 7.5 13.2 28.8 0.0 5.0 5.4 4.3 9.0 1.0 5.0 9.4 79.1 12.3 43.2 72.1 N O O O O O USD USD USD USD USD USD 55.04 312.71 60.00 49.47 408.06 100.49 33.00 400.00 75.00 90.00 425.00 100.00 64,462 141,888 254,040 54,961 250,957 24,439 66.7 14.5 12.7 19.1 70.4 37.6 46.8 12.9 12.0 9.9 49.5 31.1 55.5 2.3 9.2 (47.7) (11.5) (5.2) 63.4 0.9 (7.2) (58.0) (14.2) (19.1) 42.5 12.3 6.1 92.7 42.3 20.6 0.0 1.8 2.2 0.0 0.0 0.0 19.2 6.6 2.6 1.5 15.8 8.5 28.7 45.5 20.6 7.7 22.5 22.8 O O O O O O O O USD USD USD USD USD SGD USD USD 24.11 247.14 143.75 724.23 81.08 2.61 35.73 17.95 25.00 309.00 164.00 704.00 90.00 2.91 50.30 23.00 2,723 668,430 38,570 64,105 12,958 3,124 7,334 4,337 10.0 37.9 94.6 10.3 (4.4) 5.5 44.1 11.0 29.4 15.5 (27.2) 5.3 91.3 10.8 73.9 15.1 (12.4) 22.2 31.6 7.0 - to + 3.6 21.2 88.7 0.0 0.0 3.1 1.5 0.0 3.4 0.0 0.0 3.6 5.0 2.5 4.9 5.9 2.2 8.2 6.1 (2.5) 17.8 10.5 15.4 (0.3) 8.0 (14.6) 5.0 AMKR.OQ Anritsu 6754.T ASE 3711.TW Aspeed 5274.TWO GUC 3443.TW MediaTek 2454.TW Parade 4966.TWO Renesas 6723.T Sam sung Elec 005930.KS SK Hynix 000660.KS TSMC 2330.TW Global Hardw are Dell DELL HPE HPE IBM IBM NetApp NTAP.OQ Global Sem iconductors AMD AMD.OQ Broadcom Ltd AVGO Intel INTC.OQ Micron MU.OQ NVIDIA NVDA.OQ Xilinx XLNX.OQ Datacenter and cloud operators 21Vianet VNET.OQ Alibaba BABA Digital Realty DLR.N Equinix EQIX.OQ GDS GDS.OQ Keppel DC REIT KEPE.SI Kingsoft Cloud KC.OQ Sw itch, Inc. SWCH.N Mkt cap (USD m n) Yield (%) 2020 Target Price PE (x) 2020 2021 EPS grow th (%) 2019 2020 2021 4,500 16,037 43,486 40,819 3,061 7,098 1,214 10,351 9,727 11,281 4,727 25,026 26.1 23.7 16.9 12.2 10.5 10.6 12.9 17.2 35.1 45.9 17.4 19.1 20.1 20.5 14.9 10.7 13.7 8.5 9.2 14.7 27.2 36.5 11.8 14.4 67.3 27.1 9.2 3.6 (15.3) 11.3 (14.2) 5.5 25.5 58.6 (2.1) - to + 2.4 (13.8) (3.4) (14.3) 56.4 0.4 (1.9) 11.0 29.2 (8.9) 16.6 (9.1) (147.4) 28.2 83.9 30.1 (1794.7) 26.5 (56.3) 121.0 (131.2) 23.1 63.8 28.1 1093.4 25.6 (71.5) 64.1 Note: Names in bold are our preferred ideas currently. Priced as of 17 July 2020. O = Outperform, N = Neutral, U = Underperform. Source: Company data, Credit Suisse estimates Global Technology 4
5. 21 July 2020 The case for ‘data’ We have been arguing since 2010 that the only demand curve investors should be levered to in all of tech is data—it is the demand segment that we are likely underestimating. We have broken data into four separate segments: (1) Data Creation/ Collection, (2) Data Storage, (3) Data Transmission and (4) Data Analytics. While it is clear that Data Analytics is the most important segment as it provides the mechanism to monetise data without which there is no sustainable business model, we have also argued that our paradigm represents a virtuous cycle—the more data one can monetise through analytics, the more valuable data becomes. The more valuable data becomes, the more one wants to create, which leads to more storage and transition/networking demand. John Pitzer +1 212 538 4610 Declining cost curves are powerful economic engines While our Data Paradigm is now well understood and is mostly consensus within the investment community, we believe there is an important and under-appreciated dynamic also at play. The first three segments of data—Data Creation, Data Storage and Data Transmission—have all benefited from the non-linear COST declines during the digital age. Moore’s Law states that every year it is cheaper to make a transistor; there is a Moore’s Law equivalent in Storage and Networking called Kyrder’s Law and Butter’s Law, and Kryder’s Law, respectively. Importantly, it has been our observation that as the cost per function has declined over time, the ecosystem has always exploited declining cost curves to develop new use cases; the elasticity of new applications has always grown the market to be significantly larger than anyone predicted at inception. In contrast, over time the cost of analytics has mostly only increased—until recently in order to analyse data it needed to be clean and structured, and unfortunately, most of the data that is created is messy and unstructured. To date, structuring the unstructured data has been prohibitively costly (Big Data/Fast Data promised to address this issue but did not) and as a result, the VAST majority of the data we create is dark and unanalysed (we currently analyse less than 2% of the data we create). Declining cost curves create elasticity for new applications AI is the Moore’s Law of Analytics It is in this light that Artificial Intelligence (AI) is an extremely important advancement as we see it as the first technology in the digital age that promises to systematically lower the cost of analytics—as AI bypasses the need to structure data in order to analyse it. While we are not willing yet to say that AI represents a predictable, durable non-linear reduction in the cost of analytics (albeit it is interesting to note that current AI progress has been tracking a Moore’ Law curve every 6-9 months), we are growing more confident that AI is lowering the cost of analytics and opening up the available pool of data to be analysed. We are willing to take the leap of faith that as costs of analytics decline the ecosystem is poised to accelerate new use cases, growing the market to be likely significantly larger than even the most optimistic expectation. AI important in lowering the cost of analytics to create new use cases Quantifying the Semi TAM for data AI significantly lowers the dependence of silicon on software—as AI is a silicon-based technology that utilises every incremental transistor it is given. Thus, as we transition from mostly creating data to actually analysing data, compute intensity is poised to accelerate. We expect this elasticity of application explosion to underpin our view that the US$90 bn Compute TAM CAGR will accelerate from its historic 3-5% to 10-15%. Additionally, in an attempt to define the AI TAM, which primarily reflects a desire for increased efficiency, we used total global spend on COGS, opex, capex—which exceeds US$43 tn/year. Just a 1% value capture by Semis as we transition to a Data-Driven Economy equates to ~US$400 bn incremental SAM against CY19 Global Semi Rev of US$409 bn, with compute likely to capture 20%+. Global Technology Semiconductor TAM for compute is US$90 bn and may see an accelerating TAM from 3-5% to 10-15% 5
6. 21 July 2020 Cloud/data-centre supply chain Figure 10: Tech supply chain exposure to network infrastructure and servers Name Amkor ASE Industrial Chunghwa Precision Huatian Inari Amertron Powertech Technology TongFu Microelectronics BizLink Holding Chicony Delta Electronics DNF FIT Hon Teng Han's Laser Technology IBIDEN LG Innotek Lite-On Technology Luxshare Murata Manufacturing Partron Samsung SDI Sanan Optoelectronics SEMCO Shengyi Technology Shennan Circuits Shinko Electric Industries Sunway Communication Taiyo Yuden Tongda TXC Zhejiang Dahua Hikvision Nitto Denko Samsung Elec Anritsu Applied Materials ASM Pacific Technology Brooks Automation Fujitsu Keysight Technologies KLA Corporation Lam Research Corp. NEC Renesas Electronics SUMCO Teradyne Tokyo Ohka Kogyo ZTE Corporation ZTE Corporation AMD Analog Devices Aspeed eMemory Marvell MediaTek Inc. Nvidia Parade Technologies Realtek Semiconductor Xilinx Broadcom Hua Hong SMIC TSMC United Microelectronics VPEC Win Semiconductors Intel Maxim NXP Semiconductors On Semi Pegatron Texas Instruments Micron SK Hynix Inc. Advantech . Hon Hai Precision Inventec Co Ltd Lenovo Group Ltd Quanta Computer Sharp Venture Corporation Wistron Gigabyte Technology Kinsus Interconnect Nan Ya PCB Topoint Technology Tripod Technology Unimicron Technology Ticker AMKR US 3711 TT 6510 TT 002185 CH INRI MK 6239 TT 002156 CH 3665 TT 2385 TT 2308 TT 092070 KS 6088 HK 002008 CH 4062 JP 011070 KS 2301 TT 002475 CH 6981 JP 091700 KS 006400 KS 600703 CH 009150 KS 600183 CH 002916 CH 6967 JP 300136 CH 6976 JP 698 HK 3042 TT 002236 CH 002415 CH 6988 JP 005930 KS 6754 JP AMAT 522 HK BRKS 6702 JP KEYS KLAC LRCX 6701 JP 6723 JP 3436 JP TER 4186 JP 000063 CH 763 HK AMD ADI 5274 TT 3529 TT MRVL 2454 TT NVDA 4966 TT 2379 TT XLNX AVGO 1347 HK 981 HK 2330 TT 2303 TT 2455 TT 3105 TT INTC MXIM NXPI ON 4938 TT TXN MU 000660 KS 2395 TT 2317 TT 2356 TT 992 HK 2382 TT 6753 JP VMS SP 3231 TT 2376 TT 3189 TT 8046 TT 8021 TT 3044 TT 3037 TT Analyst Randy Abrams Randy Abrams Randy Abrams Chaolien Tseng Danny Chan Randy Abrams Chaolien Tseng Pauline Chen Pauline Chen Pauline Chen Sang Uk Kim Kyna Wong Kyna Wong Akinori Kanemoto Sang Uk Kim Pauline Chen Kyna Wong Akinori Kanemoto Sang Uk Kim Sang Uk Kim Kyna Wong Sang Uk Kim Kyna Wong Kyna Wong Akinori Kanemoto Kyna Wong Akinori Kanemoto Chaolien Tseng Pauline Chen Kyna Wong Kyna Wong Mika Nishimura Keon Han Hideyuki Maekawa John Pitzer Kyna Wong John Pitzer Hideyuki Maekawa John Pitzer John Pitzer John Pitzer Hideyuki Maekawa Hideyuki Maekawa Yoshiyasu Takemura John Pitzer Yoshiyasu Takemura Kyna Wong Kyna Wong John Pitzer John Pitzer Randy Abrams Haas Liu John Pitzer Randy Abrams John Pitzer Jerry Su Randy Abrams John Pitzer John Pitzer Randy Abrams Randy Abrams Randy Abrams Randy Abrams Jerry Su Jerry Su John Pitzer John Pitzer John Pitzer John Pitzer Pauline Chen John Pitzer John Pitzer Keon Han Pauline Chen Pauline Chen Jerry Su Jerry Su Jerry Su Mika Nishimura Gerald Wong Jerry Su Jerry Su Pauline Chen Pauline Chen Pauline Chen Pauline Chen Pauline Chen Sector Backend Backend Backend Backend Backend Backend Backend Component Component Component Component Component Component Component Component Component Component Component Component Component Component Component Component Component Component Component Component Component Component Component Components Components Conglomerate Equipment Equipment Equipment Equipment Equipment Equipment Equipment Equipment Equipment Equipment Equipment Equipment Equipment Equipment Equipment Fabless Fabless Fabless Fabless Fabless Fabless Fabless Fabless Fabless Fabless Fabless Foundry Foundry Foundry Foundry Foundry Foundry IDM IDM IDM IDM IDM IDM Memory Memory OEM/ ODM/ Brands OEM/ ODM/ Brands OEM/ ODM/ Brands OEM/ ODM/ Brands OEM/ ODM/ Brands OEM/ ODM/ Brands OEM/ ODM/ Brands OEM/ ODM/ Brands PCB/ Substrates PCB/ Substrates PCB/ Substrates PCB/ Substrates PCB/ Substrates PCB/ Substrates Networking / Infrastructure 10% 10% 10% 11% 15% 0% 0% 3% 3% 16% 0% 11% 12% 0% 5% 8% 6% 5% 5% 12% 5% 17% 30% 65% 0% 5% 5% 8% 30% 5% 5% 0% 2% 70% 2% 5% 0% 5-10% 63% 4% 1% 17% 12% 0% 69% 0% 75% 75% 0% 18% 5% 5% 28% 10% 0% 3% 15% 45% 49% 8% 5% 10% 5% 15% 25% 6% 21% 21% 5% 8% 18% 11% 2% 13% 13% 0% 0% 0% 1% 15% 0% 0% 20% 45% 3% 3% 5% Servers 0% 0% 0% 0% 0% 10% 50% 3% 3% 5% 4% 9% 0% 20% 3% 5% 2% 3% 0% 0% 0% 3% 10% 6% 25% 0% 3% 0% 3% 8% 10% 5% 9% 0% 25% 1% 6% 0% 0% 13% 20% 5% 0% 5% 0% 5% 5% 5% 15% 0% 90% 0% 0% 0% 25% 3% 0% 2% 0% 0% 0% 5% 1% 0% 0% 30% 0% 0% 0% 0% 0% 0% 30% 0% 13% 38% 13% 25% 8% 0% 28% 23% 0% 0% 0% 13% 3% Total Cloud Related 10% 10% 10% 11% 15% 10% 50% 5% 5% 21% 4% 20% 12% 20% 8% 13% 8% 8% 5% 12% 5% 20% 40% 71% 25% 5% 8% 8% 33% 13% 15% 5% 11% 70% 27% 6% 6% 5-10% 63% 17% 20% 22% 12% 5% 69% 5% 80% 80% 15% 18% 95% 5% 28% 10% 25% 6% 15% 47% 49% 8% 5% 15% 6% 15% 25% 36% 21% 21% 5% 8% 18% 11% 32% 13% 25% 38% 13% 25% 9% 15% 28% 23% 20% 45% 3% 15% 8% PCs 5% 10% 10% 1% 3% 25% 50% 45% 48% 26% 66% 18% 10% n/a 5% 53% 10% n/a 0% 5% 8% 5% 5% 0% n/a 0% n/a 1% 18% 0% 0% 30% 5% n/a 8% 3% 3% 12% 0% 29% 29% n/a n/a 10% 2% 10% 0% 0% 60% 1% 0% 8% 53% 5% 47% 65% 35% 6% 1% 8% 5% 20% 13% 5% 0% 50% 4% 0% 12% 12% 3% 61% 15% 8% 10% 43% 72% 58% 40% 7% 42% 77% 13% 15% 16% 15% 28% Smartphone 40% 45% 75% 10% 50% 30% 9% 0% 0% 11% 20% 43% 35% n/a 67% 13% 45% n/a 85% 20% 12% 40% 5% 10% n/a 80% n/a 74% 28% 0% 0% 13% 55% n/a 35% 19% 23% 1% 16% 27% 28% n/a n/a 30% 9% 30% 8% 8% 0% 10% 0% 65% 15% 50% 0% 2% 5% 0% 27% 10% 45% 45% 40% 80% 70% 3% 10% 13% 14% 60% 9% 11% 30% 0% 49% 17% 13% 0% 10% 0% 22% 0% 43% 10% 40% 20% 30% TV 5% 3% 1% 12% 0% 5% 0% 0% 0% 0% 0% 0% 10% n/a 3% 0% 0% n/a 0% 10% 13% 5% 5% 3% n/a 0% n/a 0% 0% 0% 0% 0% 10% n/a 0% 4% 0% n/a 0% 0% 0% n/a n/a n/a 0% n/a 0% 0% 0% 0% 1% 5% 0% 10% 0% 5% 15% 0% 0% 5% 10% 2% 13% 0% 0% 0% 0% 0% 0% 1% 0% 0% 5% 0% 1% 0% 0% 0% 15% 0% 3% 0% 0% 0% 0% 15% 0% Consumer 5% 12% 2% 10% 10% 20% 15% 25% 48% 7% 0% 5% 11% n/a 0% 13% 30% n/a 0% 3% 12% 5% 10% 0% n/a 6% n/a 16% 10% 20% 20% 20% 5% n/a 23% 5% 17% n/a 2% 17% 19% n/a n/a 5% 4% 5% 8% 8% 20% 6% 4% 10% 4% 20% 13% 2% 23% 6% 18% 35% 25% 5% 15% 0% 0% 0% 16% 0% 14% 10% 16% 10% 5% 0% 13% 2% 0% 13% 4% 0% 0% 0% 18% 13% 39% 10% 18% Automotive 25% 7% 0% 56% 2% 0% 0% 20% 0% 10% 0% 2% 17% n/a 12% 8% 5% n/a 5% 35% 0% 10% 25% 4% n/a 6% n/a 0% 5% 0% 0% 32% 4% n/a 2% 12% 0% n/a 6% 0% 3% n/a n/a 8% 3% 8% 0% 0% 0% 18% 0% 0% 0% 0% 6% 0% 1% 9% 1% 5% 5% 5% 5% 0% 0% 1% 21% 47% 33% 3% 19% 4% 3% 0% 0% 0% 0% 0% 22% 0% 0% 0% 0% 15% 3% 20% 15% Others/ Industrial 10% 13% 2% 0% 20% 10% 26% 5% 0% 25% 10% 12% 5% n/a 5% 3% 2% n/a 5% 15% 50% 15% 10% 12% n/a 3% n/a 0% 8% 67% 65% 0% 10% n/a 5% 51% 51% n/a 13% 10% 1% n/a n/a 9% 13% 9% 4% 4% 5% 47% 0% 7% 0% 5% 10% 20% 6% 32% 4% 30% 5% 8% 8% 0% 5% 10% 28% 18% 22% 7% 35% 3% 10% 80% 3% 0% 2% 4% 0% 78% 5% 0% 8% 3% 0% 5% 3% Source: Company data, Credit Suisse estimates Global Technology 6
7. 21 July 2020 Table of Contents Focus charts and tables 2 Cloud computing: The next frontier 3 Increasing workload shift to the cloud ...................................................................... 3 Cloud is driving growth for hyperscalers ................................................................... 3 Rise of the ODM model and merchant silicon ........................................................... 3 Supply chain opportunities ........................................................................................ 3 Key stock picks 4 The case for ‘data’ 5 Cloud/data-centre supply chain 6 Increasing workload shift to the cloud 10 Cloud Enabler 1: Increasing connected devices adoption driving accelerating data consumption ............................................................................................................ 11 Cloud Enabler 2: Proliferation of services on the cloud for business transformation16 Cloud Enabler 3: Accelerating AI Data Analytics ..................................................... 19 Cloud is driving growth for hyperscalers 22 Enterprise server/storage to grow faster than IT infrastructure .............................. 22 CS forecasts robust public cloud server growth ..................................................... 23 Types of data centres ............................................................................................... 26 Hyperscalers growing much faster than overall servers ......................................... 28 Switch market growth mild, but whitebox rising ..................................................... 31 Data-centre switching outpacing enterprise switching ........................................... 32 Healthy cloud momentum despite COVID-19 .......................................................... 35 Surge in activity supports 2Q20-3Q20, 4Q20/1Q21 could pause ahead of Ice Lake .. 35 Rise of the ODM model and merchant silicon 39 Open Compute Project (OCP): A major turning point ............................................. 39 ODM Direct key beneficiaries from the OCP rollout ................................................ 41 Networking switch ODM Direct grows from a low base .......................................... 43 New opportunities from 5G proliferation ................................................................. 44 Cloud IT infrastructure ODMs: Competitive landscape ........................................... 49 Rise of Merchant Silicon: Broadcom and Marvell .................................................... 54 Sector investment risks ........................................................................................... 57 Supply chain opportunities 59 Sector Section 64 Asian Hardware: PCs and ODMs Global Technology 65 7
8. 21 July 2020 Asian Hardware:'>Hardware: Components 68 Asian Hardware:'>Hardware: China Downstream 69 Asian Semiconductors:'>Semiconductors: Foundry/Backend/IC Design 73 Asian Semiconductor: IC Design Services 77 Global Semiconductors:'>Semiconductors: Memory 80 Japan technology sector 87 China data centre operators 88 China cloud operators 90 Stock Section 93 Accton 94 Advanced Micro Devices, Inc. 96 Alchip Tech 98 Aspeed 100 Broadcom Ltd 102 Dell Technologies 104 Delta Electronics 106 Digital Realty Trust, Inc. 108 Equinix, Inc. 110 Foxconn Industrial Internet 112 GDS Holdings Limited 114 GUC 116 Hewlett Packard Enterprise 118 Intel Corp. 120 International Business Machines 122 Inventec Co Ltd 124 Keppel DC REIT 126 Lenovo Group Ltd 128 Micron Technology Inc. 130 MiTAC Holdings Corporation 132 Global Technology 8
9. 21 July 2020 NetApp 134 NVIDIA Corporation 136 Parade Technologies 138 Quanta Computer 140 Samsung Electronics 142 Shengyi Technology 144 SK Hynix Inc. 146 Switch, Inc. 148 Taiwan Semiconductor Manufacturing 150 TongFu 152 Wiwynn Corporation 154 Xilinx 156 21Vianet Group 158 Global Technology 9
10. 21 July 2020 Increasing workload shift to the cloud We believe the global cloud IT infrastructure markets will ride on the favourable industry trend from an increasing traffic shift to cloud data centres, as IDC forecasts total spending on cloud IT infrastructure will grow at a 10% CAGR from US$67 bn in 2019 to US$88 bn by 2022. Data growth has four components: (1) Data Creation, (2) Data Storage, (3) Data Transmission and (4) Data Analytics. Data Analytics is the most important, as it provides the economic engine (i.e., as Data Analytics becomes more pervasive, data inherently becomes more valuable), which, in turn, should drive demand for more data. More Data Creation drives more Data Storage and Transmission and ultimately more Data Analytics, making a virtuous cycle). Declining cost curves create elasticity for new applications IDC forecasts cloud infrastructure spending will grow at a 10% CAGR through 2022 Figure 11: Data growth—self-perpetuating dynamic Source:'>Source: Credit Suisse We believe the global cloud IT infrastructure markets will continue to ride on the favourable industry trend of the increasing workload shift to the cloud, while COVID-19 has further accelerated the process, accommodating the accelerating cloud demand from ‘everything-fromhome’ (work-from-home, play-from-home, study-from-home) amidst the virus concerns globally. Evidently, Cisco’s 2019 Visual Networking Index (VNI) report estimates global IP traffic will grow at a 25.6% CAGR from 2019 to 2022 to 396 Exabytes (EB) per month or 4.8 Zettabyte (ZB) per year almost doubling from the 2019 level (i.e. 200 EB/month or 2.4 ZB/year). IP growth is maintaining a 26% growth CAGR Figure 12: Global cloud IT infrastructure markets forecasted to deliver a 10% CAGR from 2019-22, reaching US$88.6 bn in total size Cloud IT infrastructure spending in USD bn (L-axis) and YoY % change (R-axis) 37.5% $100 40% $88.6 $81.8 $74.7 $80 $65.3 24.1% $60 $40 $47.5 $35.0 $39.4 30% $67.0 20% 20.6% 11.5% 9.5% 12.6% $20 8.3% 2.6% $0 2015 2016 2017 2018 2019 Global cloud IT infrastructure spending 10% 0% 2020E 2021E 2022E YoY % chg Source:'>Source: Company data, IDC, Credit Suisse Global Technology 10
11. 21 July 2020 IT infrastructure spending is expected to grow at 6.5% overall from 2019-22, but cloud is growing at a 10% rate and traditional IT at -1% Overall, according to IDC, global IT infrastructure spending (including cloud and traditional IT infrastructure) reached US$134.7 bn in 2019, implying a 6.5% CAGR from 2015. IDC expects cloud IT infrastructure spending to represent half of the total spending for the first time in 2019, and forecasts cloud IT-mix will grow further to represent nearly 60% of the total spending by 2022, implying a 10% CAGR over 2019-22, while traditional IT infrastructure spending will decline at a 1.2% CAGR for the same period. Figure 13: Global cloud IT infrastructure hardware spending forecasted to see a 10% CAGR growth over 2019-22, vs traditional IT’s 1% CAGR decline for the same period Sales in US$ bn (L-axis) and YoY % change (R-axis) $100 $80 70 63 $60 $40 64 65 72 75 67 68 66 40% 89 82 100% 30% 65 65 48 53% 44% 42% 58% 47% 62% 50% 67% 47% 56% 58% 42% 53% 38% 50% 33% 2015 2016 2017 2018 2019 2020E 2021E 2022E 75% 20% 10% 39 35 Figure 14: Global cloud IT infrastructure spending reaching 50% of the total mix for the first time in 2019, and to grow to closer to 60% by 2022 % of total sales 50% 0% 25% $20 -10% $0 -20% 2015 2016 Cloud IT 2017 Traditional IT 2018 2019 2020E Cloud IT YoY % chg 2021E 0% 2022E Cloud IT Hardware Traditional IT YoY % chg Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, IDC, Credit Suisse Traditional IT Hardware Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, IDC, Credit Suisse By segment, Cisco expects consumer IP traffic to grow at a faster 26.1% CAGR from 2019-22, representing the majority of the total IP traffic (i.e. 83-84%), while business IP traffic makes up for the rest and is still delivering a 22.8% CAGR for the same period. Lastly, it expects Asia Pacific to post the fastest internet traffic growth at a 29% CAGR for 44% of the total traffic by 2022 (vs 40% in 2019), while North America and Europe will grow roughly in line with the overall markets for 40% of the total data flows, vs 45% in 2019. Figure 15: Global IP traffic projected to see a 26% CAGR growth from 2019 to 2022 IP traffic in EB/month (L-axis) and YoY % change (R-axis) 500 35% 27.9% 28.8% 400 396 26.4% 319 25.6% 300 200 Figure 16: Consumer IP traffic growing at a faster speed vs business, driving 83-84% of the global IP traffic IP traffic in EB/month (L-axis) and YoY % change (R-axis) 254 30% 500 35% 29.0% 201 300 20% 15% 156 10% 100 5% 0 25.9% 22.7% 2019 2020E Global IP traffic Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, Cisco, Credit Suisse 2021E 23.5% 26.4% 23.8% 100 30% 24.3% 21.2% 25% 20% 15% 200 82.7% 83.0% 83.5% 83.8% 84.1% 0% 2018 2022E 2019 2020E Consumer IP traffic Consumer IP traffic YoY % chg YoY % chg 10% 5% 0 0% 2018 27.7% 400 25% 24.1% 28.7% 2021E 2022E Business IP traffic Business IP traffic YoY % chg Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, Cisco, Credit Suisse Cloud Enabler 1: Increasing connected devices adoption driving accelerating data consumption We believe the growing connected devices and machine-to-machine (M2M) adoption empowered by the latest connectivity standards such as 5G and Wi-Fi 6, as well as LPWAN (LoRaWAN) and NB-IoT to connect IoT devices, will lead to an increase in data consumption, Global Technology Global devices and connections are projected to grow at a 10% CAGR from 2019-22 11
12. 21 July 2020 driving hiking demand needs for cloud and edge IT infrastructure investment. Cisco pointed out in its 2020 Annual Internet Report that it estimates global internet users to reach 5 bn by 2022, up from 4.2 bn in 2019 for a 6% growth CAGR, representing over 60% of the global population. It expects global devices and connections to grow even faster than the internet user growth at nearly a 10% CAGR from 2019-22, driven by the accelerating growth in the average numbers of devices per capita and household. Figure 17: Global internet users to grow at a 6% CAGR for a total of 5 bn by 2022 from 2019 Global internet users in billions (L-axis) and YoY % change (R-axis) 6.0 5.0 4.0 7.7% 3.9 4.5 4.2 4.7 6.4% 3.0 30 8% 25 6% 2% 1.0 0.0 0% 2018 2019 2020E Global internet users 2021E 2022E 20 15 4% 4.4% 2.0 10% 5.0 7.1% Figure 18: M2M connectivity leads all categories, while the combined shares for various CEs decline Billions of connected devices 10 5 0 2018 YoY % chg Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, Cisco, Credit Suisse 2019 M2M 2020E Smartphone TV 2021E PC Tablet 2022E Others Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, Cisco, Credit Suisse Among all, M2M connections (i.e. smart home, healthcare monitoring, smart transportation, smart manufacturing, etc.) are expected to deliver the highest growth with a 19% CAGR from 2019-22, representing 13 bn or 46% of the 25 bn total connected devices in 2022, vs 36% in 2019, supported by the increasing use-cases scenario, and new video-facilitated instances such as smart car with increasing needs of M2M connectivity. Of those devices, cellular connected IoT devices are projected to grow 3x from 2020-25 to 5 bn units. These devices will consist of 1 bn units on legacy 2G/3G networks, 2.5 bn units on NB-IoT or Cat-M low speed networks, and 1.5 bn requiring broadband connections on 4G and 5G networks. Figure 19: Cellular IoT connections to grow 3x to 5.5 bn by 2025 Figure 20: Traffic rising from more devices at faster speeds Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Ericsson Mobility Report, June 2020 Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Cisco In comparison, Cisco expects the relative shares for consumer electronics including smartphones, PCs/tablets, TVs, and others, to deliver a 2% CAGR for the same period, but its relative shares to decline to 54% in 2022, vs 64% in 2019, despite the continued growth of mobile subscribers (i.e. +8% CAGR for 5.6 bn in 2022, vs 5.2 bn in 2019), offset by the more saturated penetration of traditional consumer electronics devices. Global Technology Cellular IoT connections projected to grow 3x to 5.5 bn by 2025 12
13. 21 July 2020 The aggregate trend for data traffic is positive for 2018-23, spurred by three vectors: (1) mobile users growing by 12% to 5.7 bn units; (2) mobile connections rising 49% to 13.1 bn units; and (3) faster mobile speeds increasing from 13.2Mbps to 43.9Mbps. The IoT connectivity will span a broadening set of applications for the home, office, auto, city, manufacturing, energy, medical, retail and other industry verticals (agriculture, construction and emergency services). Figure 21: A number of connected applications driving data traffic increases Source:'>Source: Cisco VNI Global Mobile Data Traffic Forecast 5G transition to provide an additional impetus The mobile evolution from 1G to 4G has improved speeds from 14.4kbps to 100+Mbps, with shifting traffic on these mobile networks—from voice calls, texting, email, low resolution video, to now social media and richer video with 4G devices. The 5G build-out should help improve data speeds and the number of varying devices handled on the network to more advanced connected services. 5G should bring out support for cloud gaming, machine learning, AR/VR, telemedicine, connected vehicles and smart city services. Figure 22: 5G bandwidth supporting new-use cases Source:'>Source: Cisco VNI Global Mobile Data Traffic Forecast According to Cisco, 5G true data rates experienced by the average user should also continue to improve, rising from the 76Mbps in 2019 to 575 Mbps by 2023, far eclipsing the 44Mbps on 4G and 10Mbps on 3G. At the same time, fixed broadband speeds, according to Cisco, would also improve at a 20% CAGR, with average global speeds improving from 61Mbps in 2020 to 110Mbps in 2023. Global Technology 5G data rates projected to improve to 575Mbps versus 44Mbps for 4G data by 2023 13
14. 21 July 2020 Figure 23: 5G data rates to be over 10x 4G speeds Figure 24: Fixed broadband speeds to deliver a 20% CAGR (Mbps) Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Cisco Annual Internet Report, 2020 Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Cisco Annual Internet Report, 2020 Video remains a key application The rising speed is expected to enable better carrying of more advanced FHD and 4k video at lower latency. By data source, Cisco believes that consumer IP video (including internet video, IP video on demand, video files exchanged through file sharing, video-streamed gaming, etc.) would drive the majority of internet traffic, representing 71% of total data flow (or 82% of total including business applications such as video conferencing), vs 69% in 2019. Cisco also expects online gaming to post the highest growth from a lower base at a 55% CAGR from 2019-22 and 4% of total traffic by 2022, vs 2% in 2019, especially with the introduction of gaming streaming platforms by Google (Stadia), NVIDIA (GeForce Now) and Microsoft (Project xCloud). Lastly, it expects file sharing, web, email, and others to contribute the remaining 10% of global IP internet traffic. Figure 25: IP video continues to be the dominant driver, representing 70-80% of global IP traffic IP traffic in EB/month and % of mix 500 Figure 26: Gaming growth is outperforming on a lower base with IP traffic to deliver a 55% CAGR and 4% of mix by 2022 YoY % change in IP traffic (EB/month) 250% 396 400 200% 319 300 200 100 0 150% 254 201 156 17% 16% 49% 53% 2018 2019 10% 12% 14% 55% 2020E 58% 61% 100% 50% 0% 2021E 2022E 2018 2019 2020E 2021E 2022E -50% Internet video IP VOD/Managed IP video Web, email, and data Internet video Web, email, and data Online gaming Online gaming File sharing Business File sharing Managed IP video Business Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, Cisco, Credit Suisse Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, Cisco, Credit Suisse Overall, we believe the growing connected devices as well as average numbers of connected devices per capita or household should drive expanding internet traffic flow especially fuelled by the acceleration of data traffic from IP videos. According to Ericsson’s Mobility Report, data growth carried by cellular has maintained 60-70% growth over the past five years and is projected to grow 3x with the launch of 5G to 160 exabytes carried on the network per month. We believe this traffic growth would be increasingly supported by cloud IT infrastructure capacities owned by the hyperscalers. At the same time, we believe it should spur new business model creation from the Next Wave CSPs (cloud service providers) such as Uber, Netflix, Twitter, ByteDance etc. or newly emerging unicorns to capitalise on the unmet market opportunities from the hyperscalers. All in all, we believe Taiwan cloud IT infrastructure ODMs, Global Technology Ericsson is still noting 60-70% growth in mobile traffic each year 14
15. 21 July 2020 especially Quanta and Wiwynn, would be the key beneficiaries, given their expertise in cloud IT infrastructure, driving enhanced total cost of ownership (TCO) through better hardware customisation and tailoring for various use-case scenario by the CSPs. Figure 27: Global mobile traffic to grow 3x from 2020-25 (EB/Month) Figure 28: Mobile data traffic maintaining 60-70% growth (EB/month) Source:'>Source: Ericsson Mobility Report, June 2020 Source:'>Source: Ericsson Mobility Report, June 2020 Edge computing to accelerate as a result of proliferating devices and 5G With the rising number of internet-connected and machine-to-machine (M2M) devices, there is an increasing amount of IP traffic. Today’s internet networks cannot handle the high-speed data transmissions that tomorrow’s connected devices require. In traditional IP architecture, data must often travel hundreds of miles over a network between end-users or devices and cloud resources. This results in latency, or the slow delivery of time-sensitive data (connectorsupplier.com). Latency has long been a problem in managing networks, but it has become more of a critical concern with the proliferation of data (and attendant data analytics), number of devices (Internet of Things), and rising use of cloud and streaming services. Endusers and devices demand anywhere and anytime access to applications, services, and data housed in today’s data centres. The solution to reducing latency lies in edge computing. By establishing IT deployments for cloud-based services in edge data centres in localised areas, IT resources are effectively brought closer to end-users and devices. This helps to achieve efficient, high-speed delivery of applications and data. Edge data centres are typically located on the edge of a network, with connections back to a centralised cloud core. Edge computing will not materialise independently: its development is driven by the next iteration of mobile telephony, 5G. Therefore, edge computing and 5G are mutually dependent and will co-evolve: 5G cannot deliver on its promises without ultra-low latency and high levels of interconnection, or in other words, without a large fleet of smaller data centres physically located within the populations they serve. Together, they should deliver faster data processing, local caching and sharing of compute-power, energy efficiency at both the network and device level, resilience and security, and optimal work allocation. Global Technology 5G will help enable build-out of more edge data centres, another leg to hardware investment 15
16. 21 July 2020 Figure 29: The use case for edge computing—lowering latency Source:'>Source:'>Source:'>Source: connectorsupplier.com Cloud Enabler 2: Proliferation of services on the cloud for business transformation Aside from the increasing data workload as a result of the growing connected devices, especially M2M, and the acceleration of data traffic from IP videos, we believe the proliferation of services on the cloud is also one of the key enablers for the accelerating data consumption in businesses, leading to the growing need for cloud IT infrastructure. The corporate network is seeing a huge increase in network complexity as enterprise applications have moved to the cloud for CRM, supply chain, HR records, industrial IoT, payments and network security. The range of clients supported on the network is also rising including the various department applications and also a new network of connected devices including video, signage, door locks, cameras and personal connected devices. Figure 30: Network complexity rises with more clients/apps Figure 31: Networks moving to a distributed compute model Source:'>Source:'>Source:'>Source: Cisco Global Networking Trends Report, 2020 Source:'>Source:'>Source:'>Source: Cisco Global Networking Trends Report, 2020 Corporates are moving to a distributed compute model which includes own enterprise campus, branch and data centre for mission critical applications along with connection to multiple clouds (AWS, Microsoft, Google, IBM). As manufacturing operations become connected, corporates should also manage more Edge/IoT devices on cloud networks. IDC notes that 56% of organisations own and retain unstructured data sets that are larger than 51 petabytes. Furthermore, 40% of these organisations expect annual data growth of 30-49% Global Technology 16
17. 21 July 2020 over the next two years—notably led by state and federal governments. We also note that ~1/3 of government entities expect 70-89% of their data to be retained long term—further underscoring the opportunity for storage. IDC expects the amount of data created over the next three years to be larger than the total data created in the past 30 years. According to IDC, global cloud services sales are forecast to reach nearly US$420 bn by 2022, with a CAGR of 22% from 2019. In addition, it expects cloud services sales derived from public cloud to make up the majority of total sales (i.e. 97-98%) by growing roughly in line with the market over the same period, and private cloud service sales to deliver an 11% CAGR, reaching a total size of US$7.4 bn by 2022, vs US$5.4 bn in 2019. Cloud service sales are projected to grow at a 22% CAGR to US$420 bn between 2019 and 2022 Figure 32: Global cloud services sales to reach US$419 bn by 2022, vs US$232 bn in 2019, or more than a 22% CAGR, and public cloud driving the majority of sales Sales in US$ bn (L-axis) and YoY % change (R-axis) $500 30% 27.4% 23.9% $400 22.5% $287 $232 $200 10.2% 21.9% 20.3% 13.3% 20% 15% 11.1% 8.8% $100 $0 25% $349 $300 $187 $419 24.1% 10% 5% 97.3% 97.4% 97.7% 98.1% 98.2% 2018 2019 2020E 2021E 2022E Public cloud Private cloud Public cloud YoY % chg 0% Private cloud YoY % chg Source:'>Source: Company data, IDC, Credit Suisse IDC expects the public cloud platform to continue to be extensively leveraged by enterprises across industries and firm sizes given lower initial capex outlay requirements on subscriptionbased models, and a variety of services available to drive management innovation on the leading public cloud platforms (i.e. Microsoft’s Azure, Amazon’s AWS, etc.). Figure 33: Public cloud vs. private cloud vs. traditional IT Source:'>Source: IDC Among all the services provided by the public cloud companies, IDC notes that Software-as-aService (SaaS) should continue to dominate, representing 55% of total sales in 2022, but down from 63% in 2019, supported by key applications including customer relationship management (CRM), and enterprise resource management (ERM), as well as security SaaS for infrastructure software. In addition, it expects Platform-as-a-Service (PaaS) to be faster with nearly a 30% CAGR from 2019-22 (vs the market’s +22% CAGR) driven majorly by fast-growing demand for cloud-based databases, analytics and AI, and integration and orchestration services. Lastly, Global Technology Infrastructure as a Service growing the fastest at a 31% CAGR 17
18. 21 July 2020 Infrastructure-as-a-Service (IaaS) is expected to deliver the fastest expansion with more than a 31% CAGR from 2019-22, as clients opt for greater compute and storage capacities to support the growth of PaaS and SaaS. Figure 34: Global public cloud sales projected to deliver a 22% CAGR from 2019-22 Sales in US$ bn (L-axis) and YoY % change (R-axis) $500 30% 27.4% 23.9% 24.1% $400 $281 $300 Figure 35: IaaS growing fastest among all segments with over a 31% CAGR to support increasing SaaS/PaaS capacity needs Sales in US$ bn and % of mix $500 $411 $411 $342 21.9% $400 20.3% 20% $342 $281 $300 $200 $183 10% $200 $0 0% 2019 2020E Global public cloud sales 2021E 2022E $183 60% $0 18% 66% 14% 20% 2018 17% 16% 15% 24% 26% 27% 22% 2019 2020E 2021E 2022E IaaS YoY % chg Source:'>Source:'>Source:'>Source: Company data, IDC, Credit Suisse 57% 63% $100 $100 2018 55% $226 $226 PaaS SaaS Source:'>Source:'>Source:'>Source: Company data, IDC, Credit Suisse On the other hand, IDC believes private cloud services sales should maintain a positive growth trajectory, with a 7% CAGR from 2019-22, representing 1-3% of total cloud services sales, on the back of increasing adoption and/or shift away from public cloud to private or hybrid cloud. Specifically, IDC highlighted the offering of the next-generation hardware on more standardised software-defined infrastructure (SDI) for better scalability; the broader availability of turnkey solutions on open-sourced software stacks; and more flexible economic models, being key drivers for the growing proliferation of private cloud adoption. Figure 36: Public and hybrid cloud seeing wider adoption Source:'>Source:'>Source:'>Source: IDC, Gartner, NSIT, Credit Suisse Overall, we expect a healthy balance between the public and private cloud environment, as corporates balance trade-off between concerns on security and the physical ownership of data, vs size of opex and capex, depending on corporate strategic planning. It may also make more sense economically for the larger corporates such as Fortune 500 enterprises to maintain physical infrastructure either on-premise or off-premise through host or co-location, in order to achieve better flexibility in resource management and optimisation. Global Technology 18
19. 21 July 2020 Figure 37: Global private cloud services sales to deliver a 7% CAGR from 2019-22 Sales in US$ bn (L-axis) and YoY % change (R-axis) $8.0 $7 30% Figure 38: Both on-premise and off-premise services to grow roughly in line with the overall private cloud market Sales in US$ bn $8.0 $7 22.5% $6.0 $5 $6 $6.0 $5 $4.0 $4.0 13.3% $2.0 10.2% 11.1% 2019 2020E $2.0 0% Global private cloud sales Source:'>Source: Company data, IDC, Credit Suisse 2021E $1.7 $3.2 $3.5 2018 2019 $2.6 $2.1 $1.9 10% 8.8% $0.0 2018 $2.4 20% $3.9 $4.4 $4.8 2021E 2022E $0.0 2022E YoY % chg 2020E On-premise Off-premise Source:'>Source: Company data, IDC, Credit Suisse Cloud Enabler 3: Accelerating AI Data Analytics The new data economy rests heavily on AI’s ability to analyse the data that is being created at the edge and in the cloud in its unstructured form. NVIDIA currently has significant share in HPC/AI applications, but other entrants are vying for share in the space (Intel and Xilinx with FPGAs, AMD with GPUs, and potentially others down the line). We believe a rising tide can lift all boats in AI. We continue to argue that investors and companies alike are underestimating the potential compute TAM as the industry is on the cusp of a strong inflection of compute demand that would be stimulated as AI fundamentally lowers the cost of analytics for the first time in history and leads to a massive wave of data analytics for new "killer applications". AI analytics offers potential for a new rising compute TAM We estimate that the semi market for compute (CPU, GPU, FPGA, APU) to be ~US$90 bn growing to ~US$130 bn by 2025 (a 6% CAGR). Specifically, while the first three buckets of data have come from non-linear cost declines (Moore’s, Butter’s, Kryder’s Law) these have in turn driven an explosion of application elasticity and TAM expansion significantly larger than expected at inception. To date, the cost of analytics has only increased: ~98% of data created is unstructured; analytics schemes to date need structured data; and cleaning-up/organising unstructured data is extremely costly. AI/ML represents the first technology which allows for unstructured data analytics—dramatically lowering analytic costs and likely leading to an explosion of new applications to grow the TAM well ahead of already-robust projections. In addition, AI significantly lowers the dependence of silicon on software—AI is a silicon-based technology which can utilise every incremental transistor it is given. As we transition from mostly creating data, to actually analysing data, compute intensity is poised to accelerate underpinning a compute TAM CAGR of 10-15% up from 3-5% historically. Similar to declining cost curves in data creation, data storage and data transmission, as the cost of data analytics declines, we expect an elasticity of application explosion to underpin our view that the US$90 bn Compute TAM CAGR should accelerate. Top levered plays on compute: MU, NVDA, INTC, AMD and XLNX. The semiconductor market for compute is US$90 bn and could grow to US$130 bn by 2025 (6% CAGR), with potential to accelerate to a 10-15% growth rate transitioning from creating data to analysing data AI accelerators driving data centre investments GPUs are increasingly being used in the data-centre/cloud as their parallel processing abilities increase the compute power which is lowering the cost vs. CPUs. NVDA and AMD’s GPU sales to hyperscale customers for AI and deep learning applications began in 2012 with significant traction beginning in 2014. The growth estimates embedded in our TAM analysis are driven by impressive growth in AI server revenue. We expect overall accelerator revenue to deliver a ~65% CAGR from FY17-23, and we expect acceleration hardware to garner a significant portion of the revenues. NVIDIA estimates the AI training market TAM at US$10 bn and the AI inferencing market TAM at US$10 bn. Global Technology 19
20. 21 July 2020 Figure 39: Inference adoption is growing Figure 40: NVDA DGX expanding Compute TAM for AI Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: NVIDIA Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: NVIDIA Finding AI leadership position in the cloud GPUs in the cloud empower AI scientists and researchers with GPU-accelerated containers and feature deep learning frameworks. NVDA’s Volta has been chosen by every major cloud provider, which strengthens its leadership position in the space—with more than 2,000 companies using its platform. But AMD also has competitive offerings in the cloud market— again, we see this as a rising tide that should benefit all players. The most common industries from which these users have come to date are healthcare and transportation. 90 60% 75 50% 60 40% 45 30% 15% 30 20% 10% 15 10% 45 45% 40 40% 35 35% 30 30% 25 25% 20 20% 15 10 5 5% 0 0% F2017 F2018 F2019E F2020E F2021E F2022E F2023E AI Accelerator Non-AI Accelerator Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: IDC, Credit Suisse estimates. Figure 42: Cloud compute servers as a % of total data centre servers AI % of Total TAM (bn) TAM (bn) Figure 41: Total server accelerator and AI accelerator TAM 0 0% F2017 F2018 F2019E F2020E F2021E F2022E F2023E Cloud Servers On-Premise Server Cloud % of Total Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: IDC, Credit Suisse estimates. Data science is the next high-performance computing growth opportunity Data science is a rapidly growing field that expands the need for high-performance computing (HPC) intensity to a market of millions of professionals across almost any field—from science, healthcare, financial services and insurance to retail, logistics and travel. It is projected that demand for data scientists should rise >28% by 2020 alone. This new workload is expected to have a major impact on the HPC/server market, as demand for data science computing power is expected to more double over the next five years—growing the HPC TAM to ~US$50 bn. Global Technology Data science could help the HPC/server TAM double to US$50 bn over the next five years 20
21. 21 July 2020 Figure 43: Server shipments are expected to continue increasing… Figure 44: …as is accelerated computing 16 14 Units (m) 12 10 8 6 4 2 0 F2017 F2018 F2019E F2020E F2021E F2022E F2023E Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: IHS, Credit Suisse estimates Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: NVIDIA Figure 45: Network complexity is driving the market … Figure 46: …along with AI and inference growth Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: NVIDIA Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: NVIDIA Figure 47: Data Science is the next major HPC opportunity Figure 48: AI applications across industries Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: NVIDIA Global Technology Financial Technology PayPal’s Use of Machine Learning to Enhance Fraud Detection Internet Services Bing launches new intelligent search features, powered by AI Entertainment Comcast uses AI and ML for network insights Medical Imaging Deep Learning in Medical Ultrasound Public Health AI Helping Test Potential Treatments for Covid-19 Pharmaceuticals AI shows promise for breast cancer screening Climate Using AI to Improve Real-Time High-Impact Weather Disaster Response Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, Credit Suisse estimates 21
22. 21 July 2020 Cloud is driving growth for hyperscalers CS now forecasts -1.9%/+8.7% unit server growth in CY20/21, with poor enterprise demand contrasting with much stronger demand from hyperscale/public cloud customers. For public cloud servers, growth has been very rapid over the past half-decade (including a +22.6% unit CAGR for 2015-18). This part of the market is also seeing benefits from the recent COVIDrelated acceleration in migration of applications away from ‘on premise’ to the cloud. We forecast public cloud server unit growth of 15%/14% YoY in CY20/21, in line with bottom-up strength forecast for hyperscale capex. CS forecasts -2%/+9% overall server growth in 2020/21, but a higher +15%/+14% growth for public cloud servers Overall capex spending from the global tier 1 hyperscalers slowed in late 2018/1H19 from the strong 2017-18 cycle to digest capacity, responding to a decline in memory pricing and growing concerns over macro-uncertainty as a result of the trade disputes between the US and China. Based on our cloud hyperscaler tracker, the aggregated capex spending of tier 1 cloud vendors was up only 2.1% YoY in 2019 against +36/66%% YoY growth in 2017/18. Following that lull, growth has rebounded with capex growth projected to be up 16% YoY to US$92 bn in 2020 and we expect the momentum could continue in 2021, up 19%/8% YoY in 2021/22 based on our conversations with Taiwan ODMs and supported by the internet service and cloud business growth. Overall, Cisco estimates there should be in total 628 hyperscale data centres by the end of 2021, vs 509 in 2019, representing an 11% CAGR. Most of these data centres are expected to reside within North America and Asia Pacific (each making up 30-40% of the total). Thus, servers residing in hyperscale data centres are expected to make up over 50% of the total installed servers in data centres globally by 2021(from 44% in 2019), representing 85% of total public cloud servers and 87% of public cloud workload and compute instances. Enterprise server/storage to grow faster than IT infrastructure Within the IT infrastructure spending forecasts by IDC (discussed earlier in the previous section), it expects enterprise servers/storage expand at a faster 6.3% CAGR from 2019-22, vs the market’s +4.5% CAGR. Overall, IT infrastructure spending on enterprise servers/storage is projected to represent 71% of the total mix in 2022, vs 67% in 2019. We believe Taiwan cloud IT infrastructure ODMs would be beneficiaries, as the markets increasingly adopt open-sourced platforms for greater workload and TCO optimisation starting from hyperscalers and CSP, followed by enterprises/telcos longer term, given ODMs’ enhanced sophistication in: (1) custom hardware design; (2) flexibility in mass-scale manufacturing and system integration; and (3) global AM services coverage. Figure 49: IT infrastructure spending, excluding Ethernet switches, to deliver a 6% CAGR from 2019-22 Sales in US$ bn (L-axis) and YoY % change (R-axis) $120 $100 $93 $80 30.5% $64 $72 $90 $95 $101 $109 Figure 50: Server and storage making up a growing proportion of global IT infrastructure spending reaching 71% by 2022 Sales in US$ bn and % of mix 40% $140 30% 20% $62 15.4% 10% 8.8% 5.3% $20 -2.5% 6.4% 7.2% $100 $154 $138 $135 $140 68% 67% 68% 69% 71% 2019 2020E 2021E 2022E $112 $99 $103 0% -10% 2016 2017 2018 2019 IT infrastructure spending (excluding switches) Source:'>Source: Company data, IDC, Credit Suisse Global Technology 2020E 2021E YoY % chg 2022E $60 $40 -3.3% $0 2015 $120 $147 $80 $60 $40 $160 61% 60% 2015 2016 $20 64% $0 2017 2018 Server / Storages Ethernet switch Source:'>Source: Company data, IDC, IHS, Credit Suisse 22
23. 21 July 2020 Server units have maintained a 4% CAGR the past decade, though ODMs and hyperscalers segments have grown much faster Server revenue growth, which would drive the supply chain’s revenue opportunity and mix of components, has been at a premium to server unit growth over the past decade and projected to continue at that higher growth rate. From 2011-19, IDC estimates server units delivered a 4% CAGR and revenue a 7% CAGR while Gartner estimates units saw a 4% CAGR and revenue had a 5% CAGR. Figure 51: IDC/Gartner project server units to deliver low single-digit growth Server units (k) Server YoY 15,000 25% 12,000 20% 9,000 15% 6,000 10% 3,000 5% 0 0% IDC Server unit estimate IDC YoY Growth 2024F 2023F 2022F 2021F 2020F 2019 2018 2017 2016 2015 2014 2012 2013 -5% 2011 -3,000 Gartner server unit estimate Gartner YoY Growth Source:'>Source:'>Source:'>Source: IDC, Gartner For the forecast period from 2019-24, IDC has a one point premium with units +4% and revenue +5% while Gartner only projects +2% for units and revenue, though it does have revenue growth accelerating one percentage point after 2020. Figure 52: IDC projects server revenue growth faster than units Server units (k) and revenue (US$mn) Server YoY Figure 53: Gartner also projects slightly faster server revenue Server units (k) and revenue (US$mn) Server YoY 120,000 30% 120,000 30% 100,000 25% 100,000 25% 80,000 20% 80,000 20% 60,000 15% 60,000 15% 40,000 10% 40,000 10% 20,000 5% 20,000 5% 0 0% 0 0% IDC Server Units IDC Unit Growth Source:'>Source:'>Source:'>Source: IDC IDC Server Revenue IDC Revenue Growth Gartner Server Units Gartner Unit Growth 2024F 2023F 2022F 2021F 2020F 2019 2018 2017 2016 2015 2014 2013 -5% 2012 -20,000 2011 2024F 2023F 2022F 2021F 2020F 2019 2018 2017 2016 2015 2014 2013 2012 -5% 2011 -20,000 Gartner Server Revenue Gartner Revenue Growth Source:'>Source:'>Source:'>Source: Gartner CS forecasts robust public cloud server growth Our new server forecasts reflect our view that enterprise demand is under pressure both near term (weak macro due to COVID-19) and longer term (given accelerating public cloud adoption), contrasting with much stronger future demand from hyperscale/public cloud customers. Overall, we now forecast server unit growth of -1.9%/+8.7% in CY20/CY21. Contributing further to the weakness in CY20 is the ongoing digestion of well above-trend sales in CY17/18; we estimate that LTM x86 server units are ~6% above their long-term trend (using the 3% CAGR from 2010-17) despite a relatively weak CY19 (units -0.9% YoY). Even if we assume LT TAM growth doubles to +6% given the rising value of data, LTM shipments have only returned to trend rather than moving below to absorb the excess capacity sold during 2017/18. Global Technology 23
24. 21 July 2020 Figure 55: Public cloud demand has been steadily rising within the server mix; we expect it to surpass enterprise in CY20 13.0 70% 12.0 60% 10.0 Units ~6% above LT trend, ~1% below if CAGR inflects to +6% 9.0 8.0 7.0 Total x86 Units Linear Unit Trend (CY10-CY17) 50% 40% 30% 20% 10% 0% 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 11.0 Public Cloud % of Total Server Market LTM x86 Server Units (mn) Figure 54: LTM x86 server shipments still stand ~6% above their LT trend after a strong CY17-18; ~1% below if CAGR inflects Units Structural CAGR Increase Revenue Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: IDC, Credit Suisse estimates Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: IDC, Credit Suisse estimates Given that traditional enterprise and public cloud are effectively two distinct segments within the server market, with unique growth drivers and market dynamics, we are introducing a new forecast methodology that explicitly breaks them apart. Within each of these categories, we estimate the growth of both custom (~70%/5% of public/enterprise) and standard (~30%/95%) units, which then roll up to the total segment numbers. Public cloud servers have become an increasingly important part of the overall market, at nearly 50% of units (and ~45% of revenue) as of 1Q20; we expect this trend to continue, anticipating public cloud to represent the majority (>55%) of all servers sold by next year. Figure 56: We expect strong growth in public cloud (led by hyperscale) to largely offset weakness in enterprise demand Credit Suisse Server Model Shipments (units, '000s) Public Cloud Servers y/y % ch % of Total Custom-Built y/y % ch % of Public Cloud Standard y/y % ch % of Public Cloud Traditional Enterprise Servers y/y % ch % of Total Custom-Built y/y % ch % of Enterprise Standard y/y % ch % of Enterprise Total Server Shipments (units, '000s) y/y % ch Revenue ($ mn) Public Cloud Servers y/y % ch % of Total Custom-Built y/y % ch % of Public Cloud Standard y/y % ch % of Public Cloud Traditional Enterprise Servers y/y % ch % of Total Custom-Built y/y % ch % of Enterprise Standard y/y % ch % of Enterprise Total Server Revenue ($ mn) y/y % ch 2016 2017 2019 2020E 2021E '15-'18 '18-'21E CAGR CAGR 3,133 7.3% 32.8% 1,633 -3.5% 52.1% 1,500 22.3% 47.9% 6,425 -5.4% 67.2% 140 -6.3% 2.2% 6,284 -5.4% 97.8% 9,557 -1.6% 3,900 24.5% 38.1% 2,294 40.5% 58.8% 1,606 7.1% 41.2% 6,341 -1.3% 61.9% 231 64.7% 3.6% 6,109 -2.8% 96.4% 10,241 7.2% 5,377 37.9% 45.4% 3,116 35.8% 58.0% 2,261 40.7% 42.0% 6,472 2.1% 54.6% 296 27.8% 4.6% 6,176 1.1% 95.4% 11,849 15.7% 5,350 -0.5% 45.6% 3,695 18.5% 69.1% 1,656 -26.8% 30.9% 6,395 -1.2% 54.4% 347 17.2% 5.4% 6,048 -2.1% 94.6% 11,745 -0.9% 6,163 15.2% 53.5% 4,422 19.7% 71.8% 1,741 5.1% 28.2% 5,357 -16.2% 46.5% 234 -32.3% 4.4% 5,122 -15.3% 95.6% 11,520 -1.9% 7,007 13.7% 56.0% 5,127 15.9% 73.2% 1,880 8.0% 26.8% 5,511 2.9% 44.0% 261 11.2% 4.7% 5,251 2.5% 95.3% 12,518 8.7% 22.6% 9.2% 22.6% 18.0% 22.6% -6.0% -1.6% -5.2% 25.4% -4.1% -2.4% -5.3% 6.9% 1.8% $17,164 17.6% 29.2% $10,258 7.6% 59.8% $6,906 36.5% 40.2% $41,677 -8.6% 70.8% $877 -14.8% 2.1% $40,800 -8.4% 97.9% $58,841 -2.2% $23,291 35.7% 34.3% $14,750 43.8% 63.3% $8,541 23.7% 36.7% $44,593 7.0% 65.7% $1,505 71.6% 3.4% $43,088 5.6% 96.6% $67,885 15.4% $36,094 55.0% 40.6% $21,723 47.3% 60.2% $14,371 68.3% 39.8% $52,722 18.2% 59.4% $2,533 68.3% 4.8% $50,189 16.5% 95.2% $88,816 30.8% $35,803 -0.8% 41.0% $23,574 8.5% 65.8% $12,229 -14.9% 34.2% $51,498 -2.3% 59.0% $2,599 2.6% 5.0% $48,899 -2.6% 95.0% $87,300 -1.7% $41,440 15.7% 48.6% $28,163 19.5% 68.0% $13,278 8.6% 32.0% $43,752 -15.0% 51.4% $1,747 -32.8% 4.0% $42,005 -14.1% 96.0% $85,192 -2.4% $48,513 17.1% 51.2% $33,455 18.8% 69.0% $15,058 13.4% 31.0% $46,231 5.7% 48.8% $1,992 14.0% 4.3% $44,239 5.3% 95.7% $94,743 11.2% 35.2% 10.4% 31.6% 15.5% 41.6% 1.6% 5.0% -4.3% 35.0% -7.7% 4.1% -4.1% 13.9% 2.2% Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: IDC, Credit Suisse estimates Global Technology 2018 Figure 57: Overall, we expect server unit growth of -1.9%/+8.7% YoY in CY20/CY21 '15-'18 '18-'21E CAGR CAGR Credit Suisse Server Model 2016 2017 2018 2019 2020E 2021E Shipments (units, '000s) x86 y/y % ch % of Total 9,494 -1.4% 99.3% 10,180 7.2% 99.4% 11,754 15.5% 99.2% 11,600 -1.3% 98.8% 11,280 -2.8% 97.9% 12,212 8.3% 97.6% 6.9% 1.3% Linux y/y % ch % of Total 3,924 2.2% 41.1% 4,863 23.9% 47.5% 6,203 27.6% 52.3% 6,360 2.5% 54.2% 6,873 8.1% 59.7% 7,878 14.6% 62.9% 17.3% 8.3% Windows y/y % ch % of Total 5,553 -3.7% 58.1% 5,306 -4.5% 51.8% 5,538 4.4% 46.7% 5,226 -5.6% 44.5% 4,393 -15.9% 38.1% 4,322 -1.6% 34.5% -1.3% -7.9% RISC/EPIC (POWER, SPARC, etc) y/y % ch % of Total 55 -22.3% 0.6% 43 -22.1% 0.4% 40 -6.2% 0.3% 38 -6.5% 0.3% 37 -1.7% 0.3% 38 3.5% 0.3% -17.2% -1.6% Mainframe/other y/y % ch % of Total 8 -26.6% 0.1% 18 111.9% 0.2% 55 212.4% 0.5% 107 93.6% 0.9% 203 90.1% 1.8% 268 31.7% 2.1% 69.4% 69.2% 9,557 -1.6% 10,241 7.2% 11,849 15.7% 11,745 -0.9% 11,520 -1.9% 12,518 8.7% 6.9% 1.8% Revenue ($ mn) x86 y/y % ch % of Total $51,479 2.7% 87.5% $60,289 17.1% 88.8% $81,106 34.5% 91.3% $80,005 -1.4% 91.6% $75,844 -5.2% 89.0% $83,142 9.6% 87.8% 17.4% 0.8% Linux y/y % ch % of Total $22,948 6.2% 39.0% $29,899 30.3% 44.0% $42,621 42.5% 48.0% $42,775 0.4% 49.0% $45,131 5.5% 53.0% $52,630 16.6% 55.6% 25.4% 7.3% Windows y/y % ch % of Total $28,083 0.2% 47.7% $30,006 6.8% 44.2% $38,342 27.8% 43.2% $37,062 -3.3% 42.5% $30,545 -17.6% 35.9% $30,357 -0.6% 32.0% 11.0% -7.5% RISC/EPIC (POWER, SPARC, etc) y/y % ch % of Total $4,058 -24.3% 6.9% $3,648 -10.1% 5.4% $3,823 4.8% 4.3% $3,249 -15.0% 3.7% $2,994 -7.8% 3.5% $3,247 8.4% 3.4% -10.7% -5.3% Mainframe/other y/y % ch % of Total $3,304 -29.3% 5.6% $3,947 19.5% 5.8% $3,886 -1.5% 4.4% $4,046 4.1% 4.6% $6,354 57.0% 7.5% $8,354 31.5% 8.8% -6.0% 29.1% $58,841 -2.2% $67,885 15.4% $88,816 30.8% $87,300 -1.7% $85,192 -2.4% $94,743 11.2% 13.9% 2.2% Total Server Shipments (units, '000s) y/y % ch Total Server Revenue ($ mn) y/y % ch Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: IDC, Credit Suisse estimates 24
25. 21 July 2020 Public cloud servers: Robust growth For public cloud servers, growth has been very rapid over the past half-decade (including a +22.6% unit CAGR for 2015-18), with this growth tightly correlated to increases in hyperscale capex spend over that time (1Q16-1Q20 R2 = 0.62). This part of the market is also seeing benefits from the recent COVID-19-related acceleration in migration of applications away from on-prem; we believe this impact would remain even once things return to “normal” post-COVID. We also factor in the pending Ice Lake CPU release from Intel, which is expected to launch in 4Q20, albeit with a potential slowdown in 3Q ahead of its introduction. Incorporating all these factors, we anticipate robust public cloud server growth (+15.2%/ +13.7% YoY in CY20/21) through our forecast period, in line with bottom-up strength forecast for hyperscale capex. Figure 58: Growth in public cloud servers is tightly correlated to total hyperscale capex Figure 59: US fixed asset investment more of a “U” than a “V” based on our US econ forecasts; a drag on enterprise demand Quarterly US fixed private (total & equipment) investment; y/y % chg 100% 80% 10% R2 60% y/y % Cloud servers have maintained a 23% CAGR from 2015-18 and are tightly correlated to hyperscale capex = 0.62 5% 0% 40% -5% -10% 20% -15% 0% -20% -25% -20% -30% 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20E 3Q20E 4Q20E 1Q21E 2Q21E 3Q21E 4Q21E -40% Public Cloud S ervers US Fixed Private Investment:'>Investment: Total (y/y % chg) US Fixed Private Investment:'>Investment: Equipment (y/y % chg) Total Hyperscale CapEx Source:'>Source: Company data, Credit Suisse estimates Source:'>Source: Company data, Credit Suisse estimates Cautious on overall enterprise hardware spend We are cautious on both servers and storage enterprise hardware spend as the initial COVID bump to WFH/BCP demand fades and gives way to a weak macro backdrop which, in turn, puts pressure on IT budgets for at least the balance of CY20. In particular, we expect enterprise server demand to be meaningfully sub-seasonal in 2Q20 (-1.5% QoQ vs the +4.1% average) despite a weak 1Q, mirroring comments from distributor Synnex (that servers underperformed during their May quarter) and Dell (“[infrastructure spend] did ramp in April, but not at historical norms”). Looking at the rest of CY20, we view a “snap-back” as unlikely in 2H and expect more normal seasonality off a very low base (enterprise -17.3%/-17.8% YoY in 3Q/4Q). Overall we forecast CY20 enterprise units at -16.2% YoY. Heading into CY21, we are forecasting a gradual normalisation over the course of the year, with enterprise units up +2.9% YoY. Enterprise spending is slower, with servers -16.2% in 2020 but expected to rebound +2.9% YoY on gradual normalisation in 2021 Longer term, accelerating cloud adoption represents a headwind to traditional on-prem hardware spending, adding incremental pressure to enterprise units. From a vendor perspective, we view weak enterprise server demand as a negative for HPE (servers >50% of mix) and Dell (16% of total mix and 18% ex-VMware); however, we significantly prefer Dell’s positioning in a hybrid-first world due to its strategic ties with VMware vs. HPE’s overly on-prem-centric mix. Global Technology 25
26. 21 July 2020 Figure 60: ODM Direct (driven by outsized hyperscale demand) has taken significant market share over the past few years Unit Share ODM Direct Dell Technologies Hewlett Packard Enterprise HPE + H3C Inspur Lenovo Cisco Others Revenue Share ODM Direct Dell Technologies Hewlett Packard Enterprise HPE + H3C Inspur Lenovo Cisco Others 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 25.4% 20.4% 14.0% 20.4% 6.4% 5.9% 2.5% 25.4% 24.7% 19.4% 12.7% 20.8% 6.8% 7.6% 2.3% 26.5% 27.7% 17.6% 11.6% 20.4% 8.9% 6.1% 2.2% 25.9% 23.1% 19.4% 12.8% 21.2% 8.3% 6.4% 2.4% 27.6% 25.2% 20.0% 12.6% 18.1% 7.9% 5.3% 2.8% 26.0% 25.2% 17.8% 13.0% 19.6% 8.6% 6.7% 2.4% 26.2% 29.2% 16.4% 11.1% 20.5% 10.2% 6.6% 2.3% 24.2% 31.0% 16.1% 11.0% 22.6% 7.9% 6.9% 2.4% 24.8% 29.1% 18.4% 11.4% 16.9% 8.2% 6.0% 2.1% 24.8% 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 24.2% 19.3% 16.3% 18.5% 4.7% 5.7% 5.2% 24.5% 24.2% 19.3% 14.3% 16.5% 4.8% 6.8% 4.8% 25.7% 26.7% 17.9% 13.7% 16.1% 7.1% 6.1% 4.4% 24.2% 19.9% 18.8% 15.3% 17.8% 6.3% 6.2% 4.6% 28.9% 23.0% 20.2% 15.0% 17.8% 5.9% 5.7% 5.3% 24.9% 21.1% 18.9% 14.9% 18.0% 6.8% 6.0% 5.5% 26.7% 26.3% 17.1% 13.1% 16.9% 8.6% 5.4% 4.9% 24.5% 25.5% 15.7% 12.7% 16.3% 6.5% 5.6% 4.4% 29.6% 25.9% 18.7% 12.5% 15.5% 7.0% 5.6% 4.2% 26.1% Y/Y Change Q/Q Change 387bps -188bps -163bps 226bps -121bps 46bps -127bps -579bps 27bps 27bps 64bps -91bps -76bps -29bps -118bps 9bps Y/Y Change Q/Q Change 295bps 41bps -151bps 294bps -254bps -20bps -224bps -78bps 107bps 51bps -11bps -1bps -108bps -17bps 121bps -350bps Source:'>Source: Company data, Credit Suisse estimates Types of data centres As per Cisco, “a data-centre is a physical facility that organisations use to house their critical applications and data. A data centre's design is based on a network of computing and storage resources that enable the delivery of shared applications and data.” Figure 61: Data-centre multi-tier model topology Source:'>Source: Cisco Global Technology 26
27. 21 July 2020 While there is no hard and fast way of classifying data centres, in general, they are classified as follows: Enterprise data centres. These are probably the ‘oldest’ form of data centres that most people are aware of and date back to the early years of the evolution of computing architecture. An enterprise data centre is a facility owned and operated by the company it supports and is often built on site but can be off site in certain cases. It is optimised for its end users. Managed services data centres. These are essentially enterprise data centres where the management of the data centre has been outsourced to another party—in older days, it used to be tech-heavyweights such as IBM and HP among others, but a number of managed services providers have emerged over the years. The end-user company usually leases the equipment and infrastructure instead of buying it. Colocation data centres. These grew out of the above two type of data centres about 20 years ago as companies wanted to retain control of some key operations while outsourcing the rest. As per Cisco’s definition: “in colocation ("colo") data centres, a company rents space within a data centre owned by others and located off company premises. The colocation data centre hosts the infrastructure: building, cooling, bandwidth, security, etc., while the company provides and manages the components, including servers, storage and firewalls.” One added advantage of a ‘colo’ data centre is the ability to connect with other companies’ servers, which maybe co-located at the same data centre, thus minimising latency and connectivity issues. Interconnection is a large driver for businesses. Colocation data centres offer interconnection to SaaS such as salesforce, or PaaS like Azure. This enables businesses to scale and grow their business with minimal complexity at a low cost. Wholesale data centres. These started to emerge by the late 2000s with the emergence of larger ‘internet’ companies, as they wanted a much larger proportion of the ‘colo’ capacity at any given data centre. These facilities are commonly referred to as multi-tenant data centres (MTDC). Wholesale colocation data centres consist of one owner selling space, power and cooling to enterprise and hyperscale, like standard colocation. In most cases wholesale colocation provides the space, power and cooling. Hyperscale data centres (or cloud data centres). These have been the fast growing part of the data-centre universe and are the focus of most of our discussions in the next several sections. With the emergence of cloud service providers, such as AWS, Microsoft, Google and Alibaba, there came the need for such hyperscale data centres. A hyperscale data centre is a facility owned and operated by the company it supports. They offer robust, scalable applications and a storage portfolio of services to individuals or businesses. Hyperscale computing is necessary for cloud and big data storage. Such data centres have upwards of 500 cabinets (and more than 5,000 servers) and are at least 10,000 sq ft. in size (aflhyperscale.com). Edge data centres. These are the newest type of data centre class that has started to emerge in recent years and is expected to accelerate significantly, as 5G ramps along with its attendant use cases that would require significantly lower latency rates than is available through current network and cloud architecture. An edge data centre is a self-functioning data centre that holds localised IT deployments for cloud services, with compute, storage, and analytics resources for application processing and data caching. It would include the same power, cooling, connectivity, and security features that one finds in a centralised data centre, but on a smaller scale. Such an edge data centre resides on the outer edges of an IP network and handles the processing of applications, data analytics, and data storage closer to the end users, and devices that use those applications and data. Global Technology 27
28. 21 July 2020 Figure 62: A typical layout for an edge computing architecture Source:'>Source: connectorsupplier.com Hyperscalers growing much faster than overall servers We believe data traffic growth has been further accelerated by COVID-19 leading to the increasing build of cloud data centres and open-sourced hardware demand for compute, storage and networking especially by the globally leading hyperscalers. A hyperscale cloud operator is defined by Cisco as a company with: (1) more than US$1 bn in annual sales for SaaS, PaaS or IaaS; (2) more than US$2 bn in annual sales from SaaS; (3) more than US$4 bn in annual sales from internet, search and social networking; and (4) more than US$8 bn in annual sales from e-commerce/payment processing. Overall, it estimates there are in total 24 hyperscale operators globally, with only 7 of these headquartered outside of the US. Cisco forecasts there to be in total 628 hyperscale data centres by the end of 2021, vs 509 in 2019, representing an 11% CAGR. Most of the data centres, according to Cisco, are expected to reside within North America and Asia Pacific, with each making up 30-40% of the total hyperscale data centre count, followed by Europe at 15-20%. Figure 63: Global hyperscale data centres to deliver an 11% CAGR from 2019-21 Number of hyperscale data centres (L-axis) and YoY % change (R-axis) 800 20% 16% 600 14% 15% 14% 12% 400 10% 10% 200 0 5% 386 448 509 570 628 2017 2018 2019 2020E 2021E Total numbers of hyperscale data-center 0% YoY % chg Source:'>Source: Company data, Cisco, Credit Suisse Cisco expects servers residing in hyperscale data centres to make up more than 50% of the total installed servers in data centres globally by 2021, up from 44% in 2019, representing 85% of the total public cloud server installed base and 87% of public cloud workload and compute instances. Similarly, it also expects data flow in data centres to deliver more than a 35% CAGR from 2019-21 and total data-centre storage capacity to grow by four-fold from 2016-21, reaching 2.6 ZB/year by 2021. We believe the majority of this storage capacity expansion would be owned by the hyperscalers, which would drive a better demand uptick for open-sourced cloud IT infrastructure, with Taiwan ODMs as key beneficiaries. Global Technology Cisco estimates hyperscale will reach 50% of installed servers in data centres by 2021, up from 44% in 2019 28
29. 21 July 2020 Figure 64: Hyperscale data centres to make up more than 50% of global compute capacities in data centres by 2021 % of global servers installed in hyperscale data centres 60% 1,400 53% 50% 48% 44% 1,200 38.8% 37.8% 985 31.8% 1,000 38% 40% Figure 65: Data stored within data centres to surge by more than a 35% CAGR from 2019-21, driving hiking cloud storage demand Data in ZB/year (L-axis) and YoY % change (R-axis) 32% 30% 40% 30% 20% 397 400 10% 34.7% 547 600 20% 50% 36.6% 721 800 1327 10% 200 0% 0 2017 2018 2019 2020E 0% 2021E 2017 2018 % of global compute capacity installed in hyperscale DC 2019 2020E Data stored in data-center Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, Cisco, Credit Suisse 2021E YoY % chg Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, Cisco, Credit Suisse Cloud and internet growth supports hyperscale spend Relative to those modest market growth estimates for the overall server market, which includes mature enterprise, the growth in cloud and internet service revenue points to faster potential growth for that market tier. The cloud growth at the top operators—Microsoft, Amazon, Google and Alibaba—remained over 40% YoY through 1Q20. Overall revenue growth for these companies’ overall businesses, which include the social networking, gaming and e-commerce portions, also remains healthy, and is projected to grow +16% YoY to US$911 bn in 2020 and a further +19% YoY to US$1.08 tn in 2021. The strong growth in their own service plus hosted cloud workloads should require a high level of spend continuing from these channels. Figure 66: Cloud service growth at >40% supports spending Cloud Division Sales US$mn $24,000 Cloud Sales YoY Growth 120% $20,000 100% Figure 67: Internet service growth supports continued capex Internet company Sales & Capex (US$mn) $1,200,000 YoY Growth 80% $1,050,000 70% $900,000 60% $750,000 50% $16,000 80% $12,000 60% $600,000 40% $8,000 40% $450,000 30% $4,000 20% $300,000 20% $150,000 10% YoY Growth 2019 2018 2017 2016 2015 2014 2013 Internet capex Internet capex YoY 2021F Google Cloud Tencent Cloud 2020F Microsoft Azure Alibaba Aliyun Cloud 0% 2012 3Q19 Amazon Web Services Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: IDC $0 1Q20 1Q19 3Q18 1Q18 3Q17 3Q16 1Q17 1Q16 3Q15 1Q15 3Q14 1Q14 1Q13 3Q13 3Q12 1Q12 3Q11 0% 1Q11 $0 Internet revenue Internet revenue YoY Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Gartner Hyperscale capex spending rebounding in 2020-21 Overall capex spending from the global tier 1 hyperscalers slowed in late 2018/1H19 from the strong 2017-18 cycle to digest capacity, responding to declining memory pricing and growing concerns over macro-uncertainty as a result of the lingering trade negotiations between the US and China. Based on our cloud hyperscaler tracker, the aggregated capex spending of tier 1 cloud vendors—including Facebook, Google, Amazon and Microsoft in the US, and Baidu, Alibaba and Tencent in China—amounted to US$78.9 bn in 2019, up 2.1% YoY, a pause from the +36% YoY growth in 2017 and 65% YoY growth in 2018. Global Technology Hyperscale capex slowed to +2% YoY in 2019 but is now rebounding and we project +17%/+17% YoY growth in 2020-21 led by hosted services 29
30. 21 July 2020 Figure 68: Capex for the hyperscale/internet companies projected to rebound from -5% in 2019 to +17%/+17%/6% for 2020-22 Top 7 Hyperscale Capex 1Q19 2Q19 3Q19 4Q19 1Q20 2016 2017 2018 2019 2020F 2021F 2022F Facebook $3,962 $3,775 $3,676 $4,100 $3,558 $4,491 $6,733 $13,915 $15,513 $15,000 $18,582 $19,452 Google $4,638 $6,126 $6,732 $6,052 $6,005 $10,212 $13,184 $25,139 $23,548 $22,371 $28,084 $30,202 Amazon $3,290 $3,562 $4,697 $5,312 $6,795 $6,737 $11,955 $13,426 $16,861 $21,177 $23,186 $24,882 Microsoft $2,565 $4,051 $3,385 $3,545 $3,767 $9,114 $8,696 $14,223 $13,546 $16,867 $19,254 $22,394 Baidu $442 $198 $170 $126 $77 $630 $707 $1,322 $936 $1,890 $2,139 $2,149 Alibaba $847 $853 $1,284 $825 $548 $1,495 $3,467 $5,534 $3,809 $7,677 $9,550 $9,440 Tencent $656 $639 $947 $2,410 $860 $1,822 $2,020 $3,648 $4,653 $6,601 $7,711 $8,808 $16,400 $19,204 $20,891 $22,370 $21,610 $34,500 $46,763 $77,207 $78,866 $91,583 $108,506 $117,327 30.1% 35.5% 65.1% 2.1% 16.1% 18.5% 8.1% Top 7 Hyperscale capex YoY Grow th -10.6% 1.2% 13.1% 4.5% 31.8% QoQ Grow th -23.4% 17.1% 8.8% 7.1% -3.4% Apple $2,363 $2,000 $2,777 $2,107 $1,853 $12,962 $12,121 $13,858 $9,247 $10,469 $12,483 $10,971 IBM $614 $431 $681 $729 $783 $4,150 $3,773 $3,895 $2,455 $3,465 $3,380 $3,308 eBay $182 $137 $96 $139 $98 $626 $666 $651 $554 $486 $537 $563 Paypal $218 $139 $173 $174 $206 $669 $667 $823 $704 $938 $1,107 $1,386 Oracle $443 $413 $386 $349 $396 $1,604 $2,037 $1,468 $1,591 $1,960 $2,042 $2,102 SAP $359 $180 $182 $126 $367 $1,105 $1,443 $1,630 $848 $1,195 $1,228 $1,289 In MSFT In MSFT In MSFT In MSFT In MSFT $687 In MSFT In MSFT In MSFT In MSFT In MSFT In MSFT Tw itter $83 $136 $170 $152 $123 $219 $161 $484 $541 $635 $623 $642 Salesforce $167 $159 $178 $170 $136 $388 $540 $566 $674 $813 $954 $1,139 LinkedIn Mercadolibre $33 $38 $20 $49 $45 $77 $75 $90 $141 $181 $231 $295 $4,462 $3,633 $4,664 $3,995 $4,007 $22,487 $21,483 $23,465 $16,754 $20,142 $22,585 $21,695 YoY Grow th -32.3% -38.5% -13.8% -28.0% -10.2% 0.6% -4.5% 9.2% -28.6% 20.2% 12.1% -3.9% QoQ Grow th -19.6% -18.6% 28.4% -14.3% 0.3% 2nd Tier Hyperscale capex (US$m n) Total Hyperscale capex (US$m n) $20,862 $22,838 $25,555 $26,365 $25,617 $56,987 $68,246 $100,673 $95,620 $111,725 $131,091 $139,022 YoY Grow th -16.3% -8.3% 7.0% -2.2% 22.8% 16.7% 19.8% 47.5% -5.0% 16.8% 17.3% 6.0% QoQ Grow th -22.6% 9.5% 11.9% 3.2% -2.8% Note: 2020 based on guidance where given or Consensus, 2021-22 based on Factset Consensus. Source:'>Source:'>Source:'>Source: Company data, Credit Suisse estimates Following that lull, growth has rebounded with capex growth projected to be up 16% YoY to US$92 bn in 2020. We expect this momentum could continue in 2021, up 19% YoY to US$109 bn and up 8% YoY in 2022 to US$117 bn, based on our conversations with Taiwan ODMs and supported by the internet service and cloud business growth. Figure 69: Capex rebounding from the 2019 slowdown Figure 70: Cloud capex targeted to grow in mid-teens for 202021 Internet Company capex US$mn $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 Internet Company capex US$mn $140,000 Facebook Baidu IBM SAP Mercadolibre Source:'>Source:'>Source:'>Source: Company data Internet Company capex YoY 140% 120% 100% 80% 60% 40% 20% 0% -20% -40% Google Alibaba eBay LinkedIn Top 7 YoY Amazon Tencent Paypal Twitter 2nd Tier YoY Microsoft Apple Oracle Salesforce Total YoY Internet Company capex YoY 80% $105,000 60% $70,000 40% $35,000 20% $0 0% -$35,000 -20% 2013 2014 Facebook Baidu IBM SAP Mercadolibre 2015 2016 2017 Google Alibaba eBay LinkedIn Top 7 YoY 2018 2019 Amazon Tencent Paypal Twitter 2nd Tier YoY 2020F 2021F Microsoft Apple Oracle Salesforce Total YoY Source:'>Source:'>Source:'>Source: Company data, Credit Suisse estimates Among the hyperscalers, Google could come back from a slowdown this year tied also to slowing advertisement budgets and Facebook and Arista have also noted some project delays from COVID-19 and slower readiness of 400G optical modules. We expect some pick-up in data centre construction as COVID-19 restrictions also ease and companies develop new business continuity strategies for their network to manage for future disruptions and handle surge traffic demands. Factoring in the 2nd tier internet companies, overall capex would be set to rebound from -5% YoY at US$96 bn in 2019 and grow +17% in 2020 to US$112 bn and a further +17%/6% in 2021/22. Global Technology 30
31. 21 July 2020 Hyperscaler capex is sustainable in-line with historical 9% capex/sales and 40% of operating cash flow reinvested in capex To monitor the spending potential of the hyperscalers, we also consider their capital intensity (capex/sales) and spending as a percentage of their operating cash flow for a measure of their historical reinvestment in capacity for future growth. The hyperscale companies with the rebound in capex in 2020-21 would still have between 9% and 10% capex/sales, in line with the 2020-21 range though above the 2014-17 average of 8%. On a reinvestment of operating cash flow, we project capex would be 40% of operating cash flow, in line with the 2013-20 average and sustainable for the internet and hyperscale companies to invest in compute, storage and networking to further grow the business. Figure 71: Internet capex/sales near the historical range China Internet company Sales & Capex (US$mn) $250 Figure 72: Hyperscale reinvests about 40% of OCF in capex Hyperscale Capex/OCF (US$bn) Capex / OCF (%) China Internet company capex/sales 14% $360 60% 12% $300 50% 10% $240 40% $180 30% 4% $120 20% 2% $60 10% $200 $150 8% 6% Capex (US$mn) Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: IDC 2022F 2019 2018 2017 2016 2015 Operating Cash Flow (US$mn) 2021F China Internet capex/sales 2014 0% 2011 2021F 2020F 2019 2018 2017 2016 China Internet revenue $0 2020F China Internet capex 2015 2014 2013 2012 0% 2011 $0 2013 $50 2012 $100 Capex/OCF (%) Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Gartner Our Taiwan cloud IT infrastructure ODMs tracker aggregates cloud sales from Quanta, Wiwynn, Inventec and Accton to gauge overall sentiment on the cloud IT infrastructure orders pull-in by the leading hyperscalers. We believe the near-term outlook remains healthy with no changes in the order in-take by hyperscalers based on our conversations; nevertheless, we would note some bottlenecks on less efficient logistics and the supply chain due to the ongoing lockdown globally, which could result in order deliveries pushed over and modest cost increases although Taiwan ODMs may be able to acquire remedies later. Overall, we forecast Taiwan ODMs to record total cloud IT infrastructure equipment sales of NT$507.2/609.8 bn in 2020/21E for 18%/20% YoY growth. Figure 73: Taiwan cloud IT infrastructure ODMs cloud sales rebounding to double-digit % growth YoY in 2020/21E Figure 74: ODM server/storage sales track closely with hyperscale capex growth Sales in NT$ bn (L-axis) and YoY % change (R-axis) $700 $600 60% 55.1% 50% 44.4% $500 40% $400 30% $300 17.7% 20.2% 20% $200 4.0% $100 10% $0 ODM server/storage sales (US$k) 2018 2019 Taiwan ODM cloud revenues 2020E 2021E YoY % chg Note 1): Taiwan Cloud IT infrastructure ODMs tracker include cloud sales from Quanta, Wiwynn, Inventec, MiTAC (MCT) and Accton; 2) MiTAC’s MCT sales includes both cloud and enterprise. Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, Credit Suisse estimates 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% 2012 2013 2014 2015 2016 2017 2018 2019 2020F 2021F 0% 2017 ODM server/storage sales YoY $18,000 $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 Quanta Inventec ODM cloud/server YoY Hyperscale capex YoY Wiwynn Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, Credit Suisse estimates Switch market growth mild, but whitebox rising According to IHS, global switch units are expected to deliver a 2.5% CAGR over 2019-22, reaching US$29.7 bn and representing nearly 20% of global IT infrastructure hardware spending. Notably, data centres are also the segment in which whitebox players enjoy premium growth on continued share gains, given cloud operators’ focus on optimising the total cost of ownership (TCO) in terms of both opex and capex, as they leverage harder on whitebox ODM Global Technology Overall switching units growing at a 2.5% CAGR to US$29.7 bn 31
32. 21 July 2020 hardware design know-how and manufacturing capabilities, combining it with their in-house solution offerings. Figure 75: Global switching sales projected to see 2.5% CAGR over 2019-22, led by data-centre demand Sales in US$ mn (L-axis) and YoY % change (R-axis) $35,000 8.7% 8.5% $30,000 $25,000 $20,000 $15,000 $10,000 3.8% $5,000 3.4% 2.7% 1.7% 1.7% 1.5% $0 2015 2016 Enterprise campus 2017 2018 Data-center 2019E 2020E 2021E 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 2022E Total market sales YoY % chg Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, IHS, Credit Suisse Figure 76: Networking switch sales representing 19-20% of global infrastructure hardware spending Sales in US$ mn (L-axis) and YoY % change (R-axis) $180 25% $160 20% $140 27.1 $120 $100 22.6 23.0 28.5 27.6 29.3 29.7 15% 24.9 10% $80 $60 5% $40 0% $20 $0 -5% 2015 2016 Server/storage 2017 2018 2019E Ethernet switch 2020E 2021E 2022E Global IT infrastructure spending YoY % chg Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, IDC, IHS, Credit Suisse Data-centre switching outpacing enterprise switching Relative to the 2.5% switch CAGR, data-centre switching is a faster growing segment led by the top cloud service providers in the US and China, with the rest of cloud and enterprise relatively flat. The 650 Group projects these cloud service providers to drive data-centre switching to deliver an 11% CAGR from US$15 bn in 2020 to US$23 bn by 2024. Key drivers behind the upgrade include virtualisation, cloud, big data, collaboration and cost savings from the reduction of cabling and configuration complexity. The 25Gbps, 50Gbps and 100Gbps markets are growing rapidly being pushed by the hyperscalers (MSFT, Google, etc.) and switch chipmakers (AVGO, MLNX, CAVM) owing to better thermals and economics than the current 40Gbps and 100Gbps adapters and switches. By 2024, 400Gbps is expected to have carved out about 50% of the data-centre switching market, driving good upgrade demand. Data-centre switching growing faster at an 11% CAGR to US$23 bn by 2024 Figure 77: Cloud service providers driving Ethernet switching Figure 78: Ethernet switch driven by whitebox / higher speeds Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: 650 Group, Arista Networks Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Dell’Oro, Arista Networks, Sales in US$ bn and % of mix CS analyst Sami Badri’s overall networking forecast is in line with this with growth maintaining a 2.8% CAGR from 2018-23, switching growth at 2%, routing at 3% and WLAN at 8%. We believe the key area of growth outperformance is mainly speed migration (from 100GbE to 400GbE) on top of the total port unit growth (+8% CAGR for the same period). Global Technology 32
33. 21 July 2020 Figure 79: CS projects networking to maintain a 2% sales CAGR Source: Credit Suisse estimates, IHS Markit According to IHS, it noted that the 400GbE networking switch began shipments from 2019 and is expected to grow to represent 4% and more than 10% of total data-centre switch revenue in 2020 and 2021, respectively. Comparatively, the non-data-centre segment largely hinges on 1/10 GbE speed ports for enterprise, telco and campus networking applications, which have been facing greater pricing pressure, but would shift towards 10/25GbE in the next few years. 400Gbe pricing still at a 3-4x premium but starting to ramp in 2H20 toward 10% of the mix in 2022 Overall, IHS expects the ASP for 400GbE speed ports to be 3-4x that of the data-centre directed switch blended ASP in 2020, before it narrows to 3x in 2022, as the cost for chipsets and other components comes down. Accton started some shipments of 400GbE switches to Facebook in 2Q19, accounting for ~10% of sales in 2019E. We believe one of its hyperscale customers should also shift to 400GbE from 2H20 and overall 400GbE could account for 1213% of total sales in 2020E. Global Technology 33
34. 21 July 2020 Figure 80: 400GbE adoption began from 2019, representing 4% of total sales in 2020 and more than 10% of sales in 2021 % of total sales 100% 2% 2% 8% 21% 34% 80% 44% 5% 10% Figure 81: The latest wave of 400GbE port migration is a key driver of data-centre sales growth outperformance ASP in US$ $3,000 $2,500 51% $2,000 56% 60% 58% $1,500 40% $917 $887 2020E 2021E $1,000 20% $826 $500 $0 0% 2015 1GbE 2016 10GbE 2017 25GbE 2018 40GbE 2019 50GbE 2020E 100GbE 2021E 200GbE 2022E 400GbE Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, IHS, Credit Suisse 2015 2016 1GbE 50GbE 2017 2018 2019 10GbE 100GbE 25GbE 200GbE 2022E 40GbE 400GbE Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, IHS, Credit Suisse Despite 400GbE switch ports being expected to start proliferating in 2020, we believe the mainstream speed ports currently in data centres will remain on 100GbE ports, along with the 10GbE, despite the relative importance of 10GbE gradually declining, as the market continues to transit to higher speed ports to support expanding applications. In addition, new speed ports, including 25GbE, are also seeing rising adoption on 10GbE migration. We expect 100GbE switch ports to remain the mainstream port, supported by demand from high-end data centres and hyperscale cloud providers, and expect 400GbE ports to further proliferate in 2020-22. Figure 82: 10GbE ports see increasing penetration vs predominant 1GbE ports in the enterprise campus segment % of total market sales 100% $350 13% 13% 17% 22% 80% 25% 26% 35% 43% $228 $250 $174 $200 78% 78% 76% 73% 70% $189 $156 $130 $150 66% 57% 20% 0% $315 $300 60% 40% Figure 83: Continued speed port migration towards 10GbE helps offset the continued ASP erosion in enterprise campus ASP in US$ 48% $109 $100 $94 $50 8% 8% 6% 5% 4% 2015 2016 2017 2018 2019 100MbE 1GbE 2.5GbE Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, IHS, Credit Suisse 10GbE 2% 2020E $0 2021E 2022E 2015 2016 2017 100MbE 25/40/50/100GbE 2018 1GbE 2019 2.5GbE 2020E 2021E 2022E 10GbE Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, IHS, Credit Suisse In the non-data-centre enterprise campus segment, IHS forecasts overall port units for switches to deliver a +1% CAGR over 2019-22, driven by growing IoT end-points, along with digital transformation, and consistent with its 5.9% CAGR over 2014-19. We believe the incremental demand from the new Wi-Fi standard upgrade to 802.11ax should also drive better 2.5GbE and 5GbE speed port adoption, along with the support from 4G/LTE backhaul. However, enterprise mobility and IoT have also led to increasing wireless penetration vs wired end-points, which may be the key offsetting factor for the segment. The network evolution also has new investment to support a more horizontal spine-leaf network for hyperscale data centres, where a network of servers can communicate with each other to route and handle requests from anywhere in the cloud. OEMs such as HP, Dell and JNPR are incorporating merchant silicon and actively supporting open standards. Global Technology 34
35. 21 July 2020 Healthy cloud momentum despite COVID-19 We believe both CSPs (especially hyperscalers) and enterprises will continue to increase their spending on cloud IT infrastructure long term, accommodating the growing internet traffic and enhancing respective company’s competitiveness through DX. In the near-term, we also see the COVID-19 global outbreak makes the cloud IT infrastructure sector a rare beneficiary, given the increasing trend on work-from-home, stay-at-home, and distance education, amid the shelter-in-place orders globally. Some of the comments immediately after the outbreak were seeing surges in activity. Specifically, Microsoft wrote on its official Azure blog on 28 March that it saw increasing cloud activities by 775% in Italy in a one-month period amid lock-down; Verizon also pointed out first time in mid-Mar that it saw surging online activities in gaming (+75% week-over-week), VPN (+34% week-over-week), web traffic (+20% week-over-week) and video (+12% week-overweek) during the peak hour usage in the US; Amazon has recently kicked-off a second round of recruits by 75,000 people, after the prior round of 100,000 recruits in March, as it sees accelerating activities for online sales and AWS cloud services amid the outbreak. Figure 84: COVID-19 led to higher data traffic over broadband Figure 85: COVID-19 drove growth in e-learning/remote work Source:'>Source: Ericsson Mobility Report, June 2020 Source:'>Source: Ericsson Mobility Report, June 2020 Surge in activity supports 2Q20-3Q20, 4Q20/1Q21 could pause ahead of Ice Lake The surge of activity drove a strong recovery in server order activity in 2Q20 to Taiwan cloud IT infrastructure ODMs as key hyperscalers expanded capacities to support the surging cloud workflow. ODM sales to cloud service providers and hyperscalers recovered +32% QoQ and +19% YoY in 2Q20. Our checks with the supply chain suggest build rates remain healthy even following the strength into 3Q20, with our estimates up +13% QoQ for peak season build-up for US hyperscalers and China activity remains decent with some builds to support Singles Day capacity and still healthy online activity despite the COVID-19 situation stabilising in China. We expect a 1-2 quarter digestion in server builds late in the year, modelling -2% QoQ ODM sales in 4Q20 followed by a -9% QoQ decline in 1Q21 due both to traditional seasonal adjustments at year-end and capacity digestion ahead of Intel’s new Ice Lake platform refresh. We believe cloud makers will begin to adopt Ice Lake in 2Q21 and accelerate that in 2H21, with enterprise adoption starting one quarter after in 3Q21 due to their longer qualification time. Global Technology ODM shipments may flatten in 4Q20 but would still grow +14% YoY in 2020 35
36. 21 July 2020 Figure 86: Cloud builds and IC shipments strong in 2020/21 even with a late year pause NT$bn/BMC (mn) Inventec Quanta Wiwynn MiTAC Accton Total QoQ YoY ASpeed BMC units QoQ YoY 1Q20 12.4 35.0 35.1 6.8 5.5 94.8 2Q20 20.0 37.9 52.1 9.0 6.1 125.0 3Q20E 22.0 47.6 55.3 9.2 7.0 141.1 4Q20E 18.0 47.6 56.6 8.8 7.8 138.7 1Q21E 16.0 42.0 53.6 8.5 6.6 126.7 2Q21E 22.0 43.2 64.8 10.6 7.9 148.5 3Q21E 24.0 54.7 67.6 11.4 9.3 167.0 4Q21E 22.0 55.2 65.6 10.8 8.3 161.9 2017 43.0 102.2 85.7 40.6 14.2 285.7 2018 63.0 125.1 181.1 22.0 18.5 409.7 2019 63.1 144.5 163.6 26.6 25.9 423.7 2020E 72.4 168.0 199.1 33.8 26.3 499.6 2021E 84.0 195.1 251.6 41.4 32.1 604.2 -22% 4% 32% 19% 13% 34% -2% 14% -9% 34% 17% 19% 12% 18% -3% 17% 54% 43% 3% 18% 21% 2.7 3.3 3.1 2.6 2.9 3.3 3.5 3.3 6.8 7.9 8.6 11.6 13.1 4% 44% 24% 89% -8% 27% -17% -1% 15% 10% 13% 0% 6% 15% -6% 30% 48% 16% 9% 35% 13% Source:'>Source:'>Source:'>Source: Company data, Credit Suisse estimates We have witnessed a component inventory build in 1H20 as hardware suppliers carry buffer to manage for constraints and place rush orders for surging demand to support higher COVID-19 traffic. We expect inventory to come down after the 2H20 digestion, setting up a rebuild by 1Q21, a quarter ahead of the ODMs, and estimate a +15% QoQ rebound for Aspeed. Source:'>Source:'>Source:'>Source: Company data, Credit Suisse estimates Total Inventory Days 60 100% 40 80% 30 60% 20 40% 10 20% 0 0% Total Inventory Days Total Inventory YoY 2020/1C 2019/3C 2019/1C 2018/3C 2018/1C 2017/3C 2017/1C 2016/3C 2016/1C 2015/3C 2015/1C 2014/3C 2014/1C 2013/3C 2013/1C 2012/3C -20% 2012/1C -10 Total Sales YoY Source:'>Source:'>Source:'>Source: Company data, Credit Suisse estimates For some suppliers into the data centre, we expect a slowdown earlier following higher 1H20 volumes and inventory build-up, modeling Aspeed (70% share of server units) BMC shipments 8% QoQ in 3Q20 and -17% in 4Q20. The company and other semiconductor suppliers outshipped the supply chain in 1H20, with Aspeed units up 66% albeit from a depressed 1H19 base due to the trade war and hangover from the prior strong cycle in 2017/18. Global Technology Total Sales/Inventory YoY 120% 50 2011/3C Inventory Days 2019/1C 2019/2C 2019/3C 2019/4C 2020/1C Dell 20 18 19 19 22 HP 41 42 45 50 78 Lenovo 31 31 30 30 52 Inspur 75 68 68 68 115 Sugon 118 155 132 164 190 Inventec 38 34 35 28 59 Quanta 65 59 61 40 76 Wiwynn 42 36 59 35 74 Supermicro 110 85 94 88 124 Total Inventory Days 38 35 37 33 53 Total Sales YoY 2% 2% -4% -1% -7% Total Inventory YoY 0% -6% -7% -1% 26% Figure 88: Inventory higher following lower 1Q20 sales 2011/1C Figure 87: Hardware inventory increased 20 days exiting 1Q20 The data centre cycle typically builds for 5-6 quarters and then corrects for 1-2 quarters 36
37. 21 July 2020 Figure 89: Server IC components typically build for 5-6 quarters, followed by 1-2 quarter capacity and inventory adjustments ASpeed BMC units / MPU units (K) QoQ (%) 9,000 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% 7,500 6,000 4,500 3,000 1,500 0 -1,500 Intel & AMD CPU units (K) Aspeed Server YoY 3Q19 1Q19 3Q18 1Q18 3Q17 1Q17 3Q16 1Q16 3Q15 1Q15 3Q14 1Q14 3Q13 1Q13 3Q12 1Q12 -3,000 Aspeed BMC units (K) Intel/AMD CPU units YoY Source:'>Source: Company data, Mercury CPU Units, Credit Suisse estimates The inventory correction is normal for the server market, which has had six mild digestion periods since 2013 amid a continued uptrend in market volumes. Even with the correction late in the year, our ODM cloud sales are still forecast up 14% YoY and Aspeed BMC units would be up 35% YoY. We expect units to recover coming out of a late 2020 slowdown on new platform launches and to support the on-going growth in hosted and Internet service revenue. The more major CPU platform refreshes should be a good catalyst for another wave of upgrades. Intel’s Ice Lake finally moves its server platform to 10nm for better power performance, adds in higher speed connections for data transfer to the processor through PCIe 4.0 and support for higher core count CPUs for the high-end of the market. In 4Q21, Intel will follow with a new Eagle Stream Platform and Sapphire Rapids chipsets adding in support for PCIe 5.0 and higher performance DDR 5 memory. Intel Ice Lake platform ramps in 1H21 should stimulate another round of purchases Figure 90: Intel Ice Lake and Sapphire Rapids to drive server builds in 2021 Family Branding Process Node 14nm+ Cascade LakeSP/AP 14nm++ Platform Name Intel Purley Intel Purley MCP (Multi-Chip Package) Socket Max Core Count Max Thread Count Max L3 Cache Memory Support PCIe Gen Support TDP Range 3D Xpoint Optane DIMM Competition Launch Skylake-SP Cooper LakeSP/AP 14nm++ Ice Lake-SP Intel Whitley Intel Whitley No Granite Rapids Yes Sapphire Rapids 10nm++ Intel Eagle Stream TBD LGA 4189 TBD TBD Up To 38 TBD TBD Up To 76 TBD TBD TBA TBD TBD 10nm+ Yes Yes LGA 3647 LGA 4189 LGA 3647 BGA 5903 BGA 5903 Up To 28 Up To 28 Up To 28 Up To 48 Up To 48 Up To 56 Up To 56 Up To 56 Up To 96 Up To 96 38.5 MB L3 38.5 MB L3 TBA 66 MB L3 DDR4-2933 6DDR4-2666 6Up To 8Channel Channel DDR4 2933 12- Channel DDR4 Channel PCIe 3.0 PCIe 3.0 PCIe 3.0 140W-205W 165W-205W TBD N/A Apache Pass Barlow Pass PCIe 4.0 Up To 230W Barlow Pass AMD EPYC Naples 14nm AMD EPYC Rome 7nm AMD EPYC Rome 7nm AMD EPYC Milan 7nm+ 2017 2018 2019 Late 2020 8-Channel DDR4 7nm Intel Eagle Stream TBD 8-Channel DDR5 8-Channel DDR5 PCIe 5.0 TBD Crow Pass AMD Next-Gen EPYC (Post Milan) Late 2021 PCIe 5.0 TBD Donahue Pass AMD Next-Gen EPYC (Post Milan) 2022 Source:'>Source: Company data, Credit Suisse AMD is also continuing to upgrade platforms, with Zen 3 ramping up in 2H20 using TSMC 7nm, followed by Zen 4 on TSMC 5nm and also upgrading to PCIe 5.0 and DDR 5 support in 2021. Global Technology 37
38. 21 July 2020 Figure 91: AMD roadmap—refresh to Zen 4 on 5nm in 2021 Architecture Process Node PCIe support Memory High End Server (SP3) Max Server Cores / Threads Clock rate PC - Ryzen Family High End Desktop (TR4) Max HEDT Cores / Threads Mainstream Desktop (AM4) Max Mainstream Cores / Threads Zen 1 14nm PCIe 3.0 DDR4 Zen 1 / Zen+ 14nm / 12nm PCIe 3.0 DDR4 Zen 2 / Zen+ 7nm PCIe 4.0 DDR4 Zen 3 7nm PCIe 4.0 DDR4 Zen 4 5nm PCIe 5.0 DDR5 EPYC Naples EPYC Naples EPYC Rome EPYC Milan EPYC Genoa 32/64 32/64 64/128 64/128 TBD Up to 3.2GHz Up to 3.2GHz Up to 3.4GHz TBD TBD Ryzen 1000 Series Ryzen 2000 Series Ryzen 3000 Series Ryzen 4000 Series Ryzen 5000 Series Ryzen Threadripper Ryzen Threadripper Ryzen Threadripper Ryzen Threadripper Ryzen Threadripper 3000 Series (Castle 4000 Series 1000 Series 2000 Series 5000 Series Peak) (Genesis Peak) 16/32 32/64 64/128 TBD TBD Ryzen 1000 Series (Summit Ridge) Ryzen 2000 Series (Pinnacle Ridge) Ryzen 3000 Series (Matisse) Ryzen 4000 Series (Vermeer) Ryzen 5000 Series TBD 16-Aug Budget APU (AM4) N/A Year 2017 16-Aug 16/32 TBD Ryzen 2000 Series (Raven Ridge) 2018 Ryzen 3000 Series (Picasso 12nm 2019 Ryzen 4000 Series (Renior Zen 2) 2H20 Ryzen 5000 Series 2021 Source: Company data, Credit Suisse estimates Global Technology 38
39. 21 July 2020 Rise of the ODM model and merchant silicon An increasing workload shift to the cloud has in turn been driving growth for the hyperscalers. As markets increasingly shift to adopt open-sourced platforms for greater optimisation of the total cost of ownership, starting from hyperscalers to CSPs (and followed by enterprises/telcos longer-term), Taiwan cloud IT infrastructure ODMs have been key beneficiaries. ODMs’ enhanced sophistication in custom hardware design, flexibility in mass-scale manufacturing and system integration and comprehensive after-market (AM) services coverage globally had helped them gain share at the hyperscalers. Combined sales made by ODM Direct in servers has increased by 10x over 2011-19 (+34.6% CAGR), driving their combined share to over 24% in 2019 (just 4% in 2011). This trend is set to continue with the rising share of hyperscalers in the overall server mix. Similarly, the Datacentre Infrastructure innovation cycle is seeing disruption, as the demand of large operators cannot be served by the traditional model, which entails OEMs' collaboration with silicon vendors. In response to the challenge, major OEMs are incorporating merchant silicon and actively supporting open standards. ODM direct servers to hyperscale has grown 10x since 2011 Figure 92: Taiwan cloud IT infrastructure ODMs benefitting from the proliferation of open-sourced platforms making meaningful ways into global CSPs Source:'>Source: Company data Open Compute Project (OCP): A major turning point We note OCP (Open Compute Project) marked an important milestone for the ODM Direct business model to take-off in the past decade. Specifically, OCP was founded by Facebook in 2011 along with members including Intel, Microsoft, Rackspace, Goldman Sachs, and Sun Founder and Google early investor, Andy Bechtolsheim, as they aim to break the blackbox proprietary IT infrastructure to achieve greater choice, customisation, and cost savings (both capex and opex) based on an open-source platform where members can collaborate and share innovation and creativity, improving the efficiency of the data flowing worldwide. The Open Compute Project helped enable an open platform for data centre hardware development Figure 93: Key areas of focus by OCP for removal of blackbox proprietary architecture Source:'>Source: OCP Global Technology 39
40. 21 July 2020 Figure 94: Traditional business model with ODMs shipping indirectly to enterprises via brands or system integrators Figure 95: ODM Direct—new business model enabled first by hyperscalers and CSPs Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data The OCP take-off has transformed the hardware market, shifting from enterprises going to OEMs for IT equipment manufactured and/or designed by ODMs, to direct ODM engagement (i.e. ODM Direct) first from hyperscalers and CSPs. We are starting to see telcos and large enterprises follow, given their ability for greater customisation to achieve better workload optimisation and improving TCOs. We believe Taiwan cloud IT infrastructure ODMs especially Quanta and Wiwynn are the beneficiaries in the proliferation of ODM Direct in server and enterprise storages, while Accton is the beneficiary of ODM Direct growth in Ethernet switch. Figure 96: Key participants in the OCP Figure 97: OCP products recognition programme overview Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: OCP Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: OCP Importantly, Taiwan ODMs have been the important supporters for the proliferation of the OCP, with OCP Taiwan (OCPT) as one of the first regional communities within OCP founded in May2013, alongside other regional communities today established in Japan, China, the EU, India and Korea. Notably, Taiwan’s certified OCP solution providers currently make up 1/3 of the global solution providers, while 64% of the total OCP contribution projects (71% of OCP Accepted and 48% of OCP Inspired) have been contributed by key Taiwan ODM led by Accton’s Edgecore in networking, as well as Wiwynn and Quanta’s QCT in server/storages. Figure 98: Key Taiwan cloud IT infrastructure ODM overview Taiwan ODM suppliers have contributed 64% of the OCP contribution projects Figure 99: Taiwan ODMs leading overall OCP contributions Company Contribution projects Accepted Inspired Total Edgecore (Accton) Network 32 0 32 Wiwynn Server, Storage 21 2 23 QCT (Quanta) Server 7 13 20 Delta Network 1 5 6 MiTAC Rack & Power, Mezzaine 0 5 5 61 25 86 71% 48% 64% 86 52 135 Total # OCPT Product +Design Contibutions % of OCPT contribution Total # in OCP Community Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: OCP Global Technology Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: OCP, Credit Suisse 40
41. 21 July 2020 ODM Direct key beneficiaries from the OCP rollout We believe Taiwan cloud IT infrastructure ODMs have been key beneficiaries from the proliferation of ODM Direct by providing high quality open-sourced hardware solutions with greater customisation for workload optimisation and also more competitive pricing preferable by the hyperscalers and CSPs. Specifically, the combined sales made by ODM Direct in servers increased materially by over ten-fold over 2011-19 or +34.6% CAGR, driving their combined share to over 24% in 2019, vs less than 4% in 2011, while the overall market grew by a 6.4% CAGR for the same period. On the flip-side, the traditional server leader HPE’s sales have been declining at a 3% CAGR from 2011 to 2019, with its shares peaking in 2010 at 31% before the official rollout of OCP by Facebook, to 14% in 2019, as it intentionally retreated from the hyperscale markets due to lower profitability, while sales into Chinese customers are through its H3C JV. In the meantime, market share from Dell grew from nearly 15% in 2011 to 18% in 2019, and sales from Chinese vendors also increased. Similarly, we also see the proliferation of ODM Direct trend in enterprise storage with their combined sales increasing over ten-fold or at a +34% CAGR over 2011-19, driving the combined share to 18.6% in 2019, vs less than 3% in 2011, while the overall market saw a 5% CAGR growth for the same period. Figure 100: The combined ODM Direct share in server grew ten-fold from 2011 to 2019, reaching 24% share vs 4% in 2011 % of shares (L-axis) and YoY % change (R-axis) 30% 200% 25% 150% Figure 101: Market leader HPE’s share has been declining from peak of 31% in 2010 before the rollout of OCP, to 14% in 2019 % of market share 35% 30.8% 30% 25% 20% 100% 15% 50% 10% 21.8% 20% 15% 14.9% 14.2% 15.7% 23.7% 24.1% 22.4% 17.2% 17.8% 11.3% 13.8% 10% 0% 5% 0% ODM direct has grown at a 35% CAGR since 2011 to increase from 4% to 24% of global servers 2.4% 3.7% 4.0% 11.3% 14.9% 15.7% 17.2% 21.8% 23.7% 24.1% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 ODM Direct shares % ODM Direct sales YoY % chg -50% 5% 2.4% 0% 0.9% 2010 3.7% 4.0% 2011 2012 2013 ODM Direct Server market YoY % chg 2014 2015 HP 2016 Dell 2017 2018 2019 China Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, IDC, Credit Suisse Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, IDC, Credit Suisse Figure 102: ODM Direct share in enterprise storage also grew ten-fold from 2011 to 2019 for 18.6% shares in 2019 % of shares (L-axis) and YoY % change (R-axis) Figure 103: HPE’s share also declined materially in storage from a peak of 25% in 2010 to 12.5% in 2019 % of market share 20% 200% 30% 25.4% 150% 15% 25% 20% 16.4% 100% 15% 12.7% 10% 50% 5% 0% 1.8% 2.7% 2.9% 8.1% 10.6% 11.4% 2010 2011 2012 2013 2014 2015 ODM Direct share % 2016 ODM Direct sales YoY % chg Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, IDC, Credit Suisse Global Technology 12.6% 16.4% 2017 18.4% 18.6% 2018 2019 11.4% 5% 1.8% 2.7% 2.9% -50% 0% 0.5% 2010 2011 2012 HP 2013 2014 2015 Dell 20.7% 19.5% 18.6% 12.6% 12.5% 8.1% 10% 0% Storage market sales YoY % chg 10.6% 18.4% ODM Direct 2016 2017 2018 2019 China Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, IDC, Credit Suisse 41
42. 21 July 2020 ODM Direct model continually outpacing overall servers The ODM Direct model of supplying to hyperscale has been outpacing the OEM market consistently over the past decade. From 2011 to 2019, IDC estimates OEM server units grew only at a 1% CAGR to 8.3 mn units, while ODM Direct units grew at a 21% CAGR to 3.3 mn units. For Gartner, from 2014 to 2019, OEM units grew at a 2% CAGR to 10 mn units, while ODM Direct units grew at a 24% CAGR to 2.6 mn units. Figure 104: IDC ODM Direct outpacing the server market Server units (k) Figure 105: Gartner ODM Direct also shows outgrowth Server YoY Server units (k) Server YoY 4,000 60% 4,000 60% 3,000 45% 3,000 45% 2,000 30% 2,000 30% 1,000 15% 1,000 15% 0 0% 0 0% IDC OEM units IDC OEM YoY 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 3Q19 1Q19 3Q18 1Q18 3Q17 1Q17 3Q16 1Q16 3Q15 1Q12 1Q15 -30% 3Q14 -2,000 1Q14 -30% 3Q13 -2,000 1Q13 -15% 3Q12 -1,000 3Q11 -15% IDC ODM Direct units IDC ODM Direct YoY Gartner OEM units Gartner OEM YoY Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: IDC Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Gartner ODM vendors have grown their cloud business at a 40% CAGR since 2013, outpacing 3% server growth during that period Even with the robust outgrowth reported for the ODM Direct channel, it may still be undercounting the magnitude of unit growth for this segment. For the ODMs in our tracker or Quanta, Wiwynn and Inventec, their growth in cloud servers has increased at a 40% CAGR since 2013 to US$16.8 bn, outpacing their sales growth from OEM servers at a 3% CAGR to US$7.6 bn. Figure 107: ODM sales growth outpacing third party estimates ODM Server Sales (US$mn) vs. IDC ODM direct units $9,000 60% $9,000 $7,500 50% $7,500 $6,000 40% $6,000 $4,500 30% $4,500 $3,000 20% $3,000 $1,500 10% $1,500 ODM enterprise servers (US$mn) ODM enterprise YoY Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company Data, Credit Suisse estimates ODM cloud servers (US$mn) ODM cloud YoY IDC ODM Direct (K) ODM Cloud Server YoY 3Q19 3Q18 1Q19 1Q18 1Q17 3Q17 3Q16 1Q16 1Q12 3Q21F 1Q21F 1Q20 3Q20F 3Q19 1Q19 3Q18 1Q18 3Q17 1Q17 3Q16 1Q16 3Q15 1Q15 3Q14 -$3,000 1Q14 -20% 3Q13 -$3,000 1Q13 -$1,500 3Q12 -10% 1Q15 $0 -$1,500 3Q15 0% 1Q14 $0 ODM YoY (%) 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% 3Q13 ODM YoY (%) 1Q13 ODM Sales (US$mn) 3Q12 Figure 106: ODM cloud servers outpace enterprise servers 1Q12 Gartner ODM Direct Units Gartner ODM Direct YoY 3Q14 1Q11 -1,000 ODM cloud servers (US$mn) IDC YoY Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Gartner ODM growth of 40% for the cloud business and 17% for their overall revenue has also outpaced AMD and Intel server CPU units, which have grown at a 9% CAGR through the period. Global Technology 42
43. 21 July 2020 Figure 109: ODM servers also outpace Intel/AMD CPUs ODM cloud servers (US$mn) Intel/AMD CPU units YoY Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company Data, Credit Suisse estimates Intel & AMD CPU units (K) ODM Server YoY Aspeed BMC units (K) ODM Cloud Server YoY Intel & AMD CPU units (K) Aspeed Server YoY 3Q19 3Q18 3Q19 1Q19 3Q18 1Q18 -$3,000 1Q17 1Q20 3Q20F 3Q19 1Q19 3Q18 1Q18 3Q17 1Q17 1Q16 3Q16 3Q15 1Q15 3Q14 1Q14 3Q13 1Q13 3Q12 -$3,000 $0 -$1,500 3Q17 -$1,500 $1,500 3Q16 $0 $3,000 1Q16 $1,500 $4,500 3Q15 $3,000 $6,000 1Q15 $4,500 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% $7,500 3Q14 $6,000 YoY (%) $9,000 1Q14 $7,500 ASpeed BMC units / MPU units (K) 3Q13 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% 1Q13 YoY (%) $9,000 3Q12 ASpeed BMC units / ODM Cloud Sales (US$mn) 1Q12 1Q19 Aspeed with its BMC penetration and acquisition of Broadcom’s Emulex division has grown units at a 29% CAGR since 2013 Figure 111: Aspeed BMC outpaces Intel/AMD CPUs 1Q12 Figure 110: Aspeed BMC paces ODM cloud servers Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company Data, Credit Suisse estimates ODM servers (US$mn) Intel/AMD CPU units YoY Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company Data, Credit Suisse estimates Aspeed’s BMC unit growth has maintained a 29% CAGR above the CPU and the overall ODM growth rate since 2013 due to the combination of share gains, acquisition of Emulux enterprise server BMC business and higher leverage to hyperscale where it supplies all but Google versus enterprise where the company still does not have a share into HP, Dell and Huawei. ODM cloud servers (US$mn) Aspeed Server YoY 3Q17 1Q12 -$3,000 3Q19 3Q18 1Q19 3Q17 1Q18 3Q16 Intel & AMD CPU units (K) ODM Cloud Server YoY 1Q17 1Q16 1Q15 3Q15 1Q14 3Q14 3Q13 1Q13 3Q12 1Q12 -$3,000 $0 -$1,500 1Q18 -$1,500 $1,500 3Q16 $0 $3,000 1Q17 $1,500 $4,500 1Q16 $3,000 $6,000 3Q15 $4,500 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% $7,500 1Q15 $6,000 YoY (%) $9,000 1Q14 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% $7,500 3Q14 $9,000 ODM direct sales / MPU units (K) 1Q13 YoY (%) 3Q13 ODM direct cloud sales / MPU units (K) 3Q12 Figure 108: ODM cloud servers outpace Intel/AMD CPUs Aspeed BMC units (K) Intel/AMD CPU units YoY Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company Data, Credit Suisse estimates Networking switch ODM Direct grows from a low base We believe the ODM Direct take-off in networking will follow the same trend as in the server/storage on the proliferation of OCP, as it helps enhance the cost structure on the infrastructure deployment for cloud players, despite the higher quality and security requirement. ODM Direct has not yet seen a similar magnitude of adoption at cloud operators, given the higher barrier of requirement for security, durability and stability. However, we believe the pace of adoption should accelerate, as ODM players, especially Accton, further emulate the technology gap, while making ways more meaningfully into enterprise and telco in the 5G era in the longer term. Based on the IHS data, post the rollout of OCP, leading vendor Cisco saw the peak of its market share at 82% in 2010, similar to HPE in server. Its share halved from the peak to 41% as of 1-3Q19, with a change of +1.5% CAGR from 2011 to 2018, despite overall switch market sales seeing a 10% CAGR growth for the same period. Similarly, HPE’s sales in networking switch also declined materially by a 10% CAGR from 2011 to 2018 for 2% share in 2019, vs 11% in 2011, excluding the contribution from H3C in China, while Juniper and Dell shares remain relatively flattish at 4% and 3%, respectively. Comparatively, the combined whitebox shares have grown to over 6% in 2019 (vs 5% in 2014) with growth of a 15% CAGR from 2014 to 2018, along with the rise of Huawei and Arista to 11% and 17% shares, respectively. Global Technology Whitebox share in switch has grown to 6% share 43
44. 21 July 2020 Figure 112: ODM adoption in cloud data-centre switch slower, vs servers, but the overall pace should accelerate % of shares (L-axis) and YoY % change (R-axis) 8% 55% 60% Figure 113: Cisco leadership also narrowed materially from peak in 2010, due to the rise of ODM Direct, Huawei and Arista % of market share 90% 81.8% 80% 32% 6% 40% 15% 11% 3% 4% 12% 9% 4% -2% 2% 0% 8% 2% 20% 0% -20% -28% 5.2% 5.0% 4.9% 5.7% 6.5% 6.4% 2014 2015 2016 2017 2018 2019 % of market shares YoY % chg in sales 76.0% 71.9% 70% 67.2% 61.6% 59.2% 60% 55.1% 50.2% 50% 43.7% 30% 20% 10% -40% 0% 2010 Market YoY % chg Source:'>Source:'>Source:'>Source: Company data, IHS, Credit Suisse 41.1% 40% 2011 2012 Cisco Arista 2013 2014 HPE 2015 Juniper 2016 2017 Dell 2018 16.8% 11.3% 4.1% 3.4% 1.8% 2019 Huawei Source:'>Source:'>Source:'>Source: Company data, IHS, Credit Suisse Within all the networking hardware reference design by OCP members, Accton’s subsidiary Edgecore has been the most active member, contributing 14 networking hardware designs or 30% of the total 47 contributions, followed by Facebook with eight contributions (17%), with other contributors including Delta and Inventec in Taiwan, along with Mellanox, Broadcom, Dell, etc. Specifically, among the total 14 networking hardware contributions by Accton/Edgecore, 10 are related to the Ethernet switch, three are wireless access points; and the remaining one is for open cell site router. In 2018, Accton/Edgecore was also the first networking company providing 400GbE Ethernet switch reference design (i.e., AS7900-32X) to OCP, powered by Intel Broadwell CPU and Broadcom Tomahawk III, supporting Leaf/Spine deployment of 400G/100G and 32 QSFD-DD ports, each of which is capable of operating at 10G/25G/50G/100G/200G/400G modes. Comparatively, we see no other members have yet contributed the 400GbE speed for the networking switch until now. Accton/Edgecore accounts for 30% of OCP reference designs Figure 114: Key spec compare for Accton Edgecore contributions in 2018 AS9700-32X AS7326-56x AS7726-32X Launch CPU MAC 2018 Intel Broadwell Broadcom Tomahawk III 2018 Intel Broadwell Broadcom Tomahawk III 2018 Intel Broadwell Broadcom Tomahawk III Port 400G QSFP56-DD x 32 25G SFP28 x 48; 100G QSFP28 x 8; and 10G SFP+ x 2 32x 40/100G QSFP100 and 2 x 1/10G SFP+ ports (option) FLASH RAM SSD SPI FLASH 128MB x 2 16MB x 2 16MB x 2 DDR4 8GB x 2 DDR4 8GB x 2 DDR4 8GB x 2 M.2 100GB x 1, mSATA 100GB x M.2 32GB x 1, mSATA SSD 32GB M.2 32GB x 1, mSATA SSD 32GB 1 (option) x1 x1 Source:'>Source:'>Source:'>Source: Company data, OCP, Credit Suisse New opportunities from 5G proliferation We note the leading cloud IT infrastructure ODMs including Quanta, Wistron/Wiwynn, Hon Hai/FII, Inventec, and MiTAC started their server/storages business in early 2000 focusing on providing OEM manufacturing for traditional vendors, but all have shifted their focus to hyperscale data-centre operators or CSPs along with the OCP take-off in recent years, offering increased value-add for products with better customisation for workload optimisation at a lower TCO. We believe Taiwan ODMs are set for a second-wave of transformation from cloud to edge along with the 5G proliferation, as they capitalise on the new market opportunities with telecom operators on the open-sourced O-RAN and OCP OpenEDGE. We believe Quanta has been the front-runner in the space, while we expect other Taiwan ODMs to follow suit readying for the Global Technology 44
45. 21 July 2020 market take-off from 2021. We believe this will drive better profitability long-term, given the offering of more comprehensive 5G end-to-end hardware products and solutions to telecom operators. Figure 115: 5G creating new business models across multiple verticals on lower-latency service delivery Figure 116: Telco operators need flexible architectures to support different use-case scenarios Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Wistron Wiwynn Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Wistron Wiwynn 5G is the next generation of cellular mobile communication technology, and is expected to provide 3x spectrum efficiency; 10x improvement in latency, connection density, and experienced throughput; and 100x traffic capacity and network efficiency, according to IDC. Since the early introduction of 5G in late 2018, the new technology has already been rolled-out globally in eight countries, including five in Europe (Switzerland, Spain, Italy, Germany, and the UK) along with the US, China, South Korea and Australia. Overall, IDC forecasts the edge IT infrastructure market size, including spending on edge server and storage (external RAID and expansion), to reach US$18.7 bn by 2022, vs US$14 bn in 2019 for a 15% CAGR growth. Figure 117: 5G has 10x improvements over 4G in data speeds, latency, spectrum and connection density; as well as 100x enhancement in traffic capacity and network efficiency Figure 118: Total edge IT infrastructure spending projected to grow at a 15% CAGR from 2019 to 2022 US$ bn (L-axis) and YoY % change (R-axis) $20 18% 16.4% 14.8% 15% $16 14.7% 12% $12 9% 6.1% $8 $4 84.3% 84.4% 84.3% 84.7% 85.0% 3% $0 0% 2018 2019 Server Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: IDC 2020E 2021E External RAID and storage expansion 2022E Total YoY % chg Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, IDC, Credit Suisse We believe the proliferation of 5G, complemented by new generations of fibre, cable, Wi-Fi and short-range technologies, will drive significant changes in IT infrastructure deployment, from sole focus in cloud, to greater acceleration in the establishment of the central office (CO), as well as edge at Radio Access Network (RAN), with an aim to offload cloud workload to the edge, achieving less data processing latency and lowering total costs of data transport, in our view. This will enable new business models such as artificial intelligence (AI), autonomous driving, etc., through MEC (Multi-access Edge Computing) for telecom operators. Nevertheless, we note key challenges for the traditional telcos remain on the modernisation of their legacy proprietary IT infrastructure, as more flexible deployment carried out through network slicing will become increasingly important for telcos in order to meet the demand needs from various new IoT devices and ultra-low latency demand. In addition, the higher capex spending is also a major concern, as telcos are required to build more number of base stations than it used to be in the Global Technology 6% 5G networks offer an opportunity to offload cloud workloads to the network edge for lower latency 45
46. 21 July 2020 4G era to reach the same signal coverage, given the higher frequency bands used for the 5G network for both sub-6GHz and mmWave. Figure 119: Taiwan cloud IT infrastructure ODMs set to contribute to the second-wave of transformation from cloud to edge Source:'>Source: Wistron Wiwynn Figure 120: Enlarging opportunities for ODM Direct on vRAN proliferation allowing deployment of COTS at DU/CU and CO on virtualised network functions Source:'>Source: Wistron Wiwynn We believe the proliferation of 5G will further enlarge the total addressable markets for ODM Direct hardware, capitalising the demand needs from otherwise untouchable segments with telcos, as it helps improve the TCOs for both traditional telcos while offering a more modernised architecture, as well as non-conventional players such as Rakuten to more swiftly build-up its 5G network using industry standard hardware. Specifically, virtualised radio access network (vRAN) architecture is the key approach for telcos to achieve network modernisation, as it transforms the hardware-centric network model to a software-based SDI. This provides more flexibility, agility and cost efficiency for telecom operators by breaking up the traditional base stations into three major sub-parts, including radio unit (RU), distributed unit (DU) and centralised unit (CU), allowing the deployment of commercial off-the-shelf (COTS) servers for the DU/CU on virtualised network functions. We believe the TCO for telcos can be further enhanced on this new architecture given less hardware SKUs to support, while softwaredefined functions can also be managed remotely with less manpower needed. Lastly, we note some of the solutions are commonly shared between CO and edge, which can also help lower TCOs on less product SKUs management. Global Technology 5G networks with more open standards create a new opportunity for ODM direct hardware 46
47. 21 July 2020 Figure 121: vRAN with COTS drive more flexibility, agility and cost saving for the 5G network enabled by open-sourced proliferation at CO and edge Source:'>Source:'>Source:'>Source: Wistron Wiwynn We believe Taiwan ODMs are set for a second wave of transformation from cloud to edge on the open-sourced platforms, capitalising on increasing opportunities with telecom operators on carrier premise equipment and edge compute hardware. Among all the Taiwan IT infrastructure ODMs, we believe Quanta QCT has been the front runner in the space, collaborating with Rakuten to build the world’s first end-to-end cloud native mobile network. Specifically, Rakuten is a late comer into the Japan telecom space from 2014 as a MVNO (mobile virtual network operator), piggybacking NTT DOCOMO’s LTE network for mobile services. According to the company, the telecom services serve as the key building blocks for its unique ecosystem encompassing e-commerce, online travel reservations, credit cards, online banking, online securities, messaging applications, and payment services, with Big Data at the core. In the end of 2017, Rakuten kicked off its plans to enter into the MNO business submitting applications for the operation of a 4G network (i.e. 1.7 GHz band) before it received government approval in April 2018. At the same time, the company also began building its own radio stations in Japan, while working to devise new network architecture based on open-sourced platforms, bringing a complete virtualised infrastructure for both core network and radio access network (RAN), supported by the standardised open-sourced cloud/edge COTS. Notably, the first successful test was already reported in Feb-2019. In addition, Rakuten officially launched the 4G service from Apr-2020 and also received approval for the 5G special radio station deployment plan for the 3.7 GHz frequency band in the same month. Figure 122: Rakuten is a latecomer into MNO, but also has a key advantage vs peers with limited legacy infrastructure into 5G Figure 123: Rakuten’s base station buildout ahead of the original target for 4,738 deployment (vs plan for 3,432) as of end-Mar Source:'>Source:'>Source:'>Source: Rakuten Source:'>Source:'>Source:'>Source: Rakuten We believe the successful demonstration by Rakuten on the world’s first end-to-end cloud native mobile network should facilitate open-sourced platforms taking off with: (1) telcos supported by open-sourced cloud/edge IT infrastructure, as well as entirely virtualised RAN and core network, driving lower capex through ODM Direct; (2) lower opex through centralised deployment; and (3) fully automated services delivered through network function virtualisation (NFV). This is extremely important, along with the proliferation of 5G, given the needs to provide more variety of services through network slicing. Rakuten, leveraging the cloud native network, without the burden of a legacy infrastructure, has an advantage vs traditional telecom operators Global Technology Rakuten building the first end-to-end cloud native mobile network with open source platforms 47
48. 21 July 2020 with enhanced nimbleness and flexibility for any new business opportunities driven by 5G. Within the Rakuten cloud platform, Quanta QCT is the exclusive supplier for the IT infrastructure both in the central and edge data centre segments, supporting core computing with NEC; Nokia and Altiostar for RAN; Nokia and Cisco for Core Network; and Oki, Fujitsu, Cisco and Ciena for the backhaul buildout. Figure 124: Rakuten launched the world’s first end-to-end cloud native mobile networks Figure 125: Full vendor line-up for the Rakuten cloud platform including Quanta QCT as exclusive hardware supplier Source:'>Source:'>Source:'>Source: Rakuten Source:'>Source:'>Source:'>Source: Rakuten While Quanta QCT has been the front-runner in the space (through its Rakuten partnership), we expect other ODMs to follow suit with more active engagement and R&D in the near term. Based on our conversations, we expect the market opportunities arising from 5G would still first be capitalised by carrier-premise IT infrastructure vendors, as they roll out their latest proprietary solutions, before the market take-off for Taiwan ODMs from 2021, supported by the proliferation of O-RAN and OCP OpenEDGE, and growing sophistication in design and customisation for the IT infrastructure ODMs. We believe this should drive better profitability in the long term, as the new businesses from 5G scale up. Figure 126: Edge IT infrastructure enables increasing use-cases in the 5G era Source:'>Source:'>Source:'>Source: OCP In addition, we believe Accton would be a key beneficiary from telcos’ migration to open- sourced platforms in the long term. Currently, we believe Accton has been working with Nokia and Ericsson by providing ODM services, but it could see greater contribution from direct business engagement with telcos in the long term. Notably, in 2019, the company formed a partnership with Rakuten to provide networking solutions on its virtual platform. We believe shipments to Rakuten may be limited in the near term, but this does symbolise a key milestone for Accton, showcasing its technology competency in open-structure-based networking hardware solutions. Also, we expect Accton to see incremental growth from 5G, supporting the build-out of wireless network and higher bandwidth requirement both at cloud and edge, as well as the introduction of new applications leveraging 5G’s key low-latency and high-bandwidth features. Global Technology 48
49. 21 July 2020 Cloud IT infrastructure ODMs: Competitive landscape We would note the leading cloud IT infrastructure ODMs, including Quanta, Wistron/Wiwynn, Hon Hai/FII, Inventec and MiTAC, started their respective businesses focusing on providing OEM manufacturing for traditional server/storage brands, but have shifted this to CSPs along with the ODM Direct take-off in the past decade, offering increasing value addition first from L6 motherboard design, to L9 white-box density optimised server/storage arrays and L10 racklevel converged systems, and in some cases to L11 integrated systems with OS and software testing. In addition, we also see second-tier players such as Gigabyte and ASRock foraying into cloud, leveraging their speciality in PC motherboard design, as they capture uncapped business opportunities with non-hyperscalers, on smaller volume orders and higher customisation requirements. Among all, Quanta and Wiwynn are our top picks in the space, given Quanta’s leading position on a more diversified customer base, as well as earlier progress into enterprise/telco, while Wiwynn continues to see the largest uplift from cloud IT infrastructure demand uptick as a pure-play cloud IT infrastructure ODM. We also like Accton as it continues to benefit from 400GbE speed-port migration with existing US hyperscale customers, while we could see potential upside from the entrance into other leading hyperscaler chains. Overall, we provide a brief summary of the key players for ODM Direct in server/storage below. Most of the cloud ODMs have shifted from supplying enterprises to direct service of cloud service providers For more details on this space, please see our report Racking Up from Cloud to Edge published today. Figure 127: Taiwan ODMs offering increasing value-add from L6 motherboard design, to L9 white-box density optimized server/storage arrays and L10 rack-level converged systems; in some cases to L11 integrated system with OS/software testing System Type Level Level 12 Level 11 Level 10 (rack system) Level 9 (node system) Full systems Level 8 Level 7 Level 6 (barebones system) Partial systems Level 5 Level 4 Level 3 Component level Level 2 Level 1 Integrated system Definition Level 11 with operating system and software remaining on the system after diagnostic testing Networking components, operating system, and software integrated plus diagnostic testing; operating system and software to be removed after testing Rack-level or multirack-level system assembly and testing (including operating system testing); operating system to be removed prior to shipment Node-level full system assembling and testing (including operating system testing); operating system to be removed prior to shipment Assembly of CPU, DRAM, HDD, SSD, additional storage add-ons, and testing Level 6 plus add-on cards and testing Level 5 system plus motherboard and testing Level 4 system plus cable, heatsink, and/or fan integrated Level 3 system plus power supply, and/or flat cable, and/or backplane Full computer chassis case Parts assembly and painted chassis cover Parts manufacturing, nonpainted stamped parts, molded parts Source: Company data, IDC, Credit Suisse Wiwynn best leveraged to hyperscalers and open-sourced platforms, followed by MiTAC Among the Taiwan ODMs, we believe Wiwynn’s pure exposure in cloud IT infrastructure will offer the best leverages, capturing the opportunities arisen from further proliferation of the OCP with the hyperscalers; greater penetration of open-sourced platforms into enterprises; as well as the open-sourced platforms’ take-off with telcos for carrier premise equipment and edge deployment along with the 5G proliferation. MiTAC has the second-highest exposure to cloud IT infrastructure after Wiwynn, for 50-60% of its total sales, considering MCT makes up 80-90% of MiTAC’s total sales and 30-35% of its total motherboard shipments are directed to the OEM customers. We believe MiTAC’s total sales in IT infrastructure will continue to recover after the business restructuring, as it reaps growing opportunities along with the cloud data-centres expansion by its key US hyperscale customer. Comparatively, most of the other leading ODMs, including FII under Hon Hai, Inventec, Quanta, and Wistron (including Wiwynn), have exposure in cloud IT infrastructure of below 30% given their diversified business operations. Global Technology Wiwynn has among the highest leverage to the hyperscale build-out among the ODMs, followed by Mitta 49
50. 21 July 2020 Figure 128: Wiwynn is the only pure play in cloud IT infrastructure, followed by MiTAC, providing best leverage on further proliferation of open-sourced platforms % of total sales Wiwynn MiTAC Wistron (incl. Wiwynn) Gigabyte ASRock Quanta Inventec FII 0% 20% 2020E 40% 2021E 60% 80% 100% 2017-19 avg Source:'>Source:'>Source:'>Source: Company data, Credit Suisse estimates In addition, we would note FII, Quanta and Wiwynn are the three largest cloud IT infrastructure ODMs globally, with FII representing ~1-1.5x of Wiwynn’s sales, factoring in ~20% of its cloud service equipment sales contribution are derived directly from hyperscalers and CSPs, despite its sales being mostly China-oriented. Also, we believe Quanta has a unique positioning among all Taiwan ODMs supported by its leading position with the US hyperscalers, as well as more diversified customers bases in enterprises (mostly Next Waves and CSPs), while it also leads the group in new business engagement with telcos for carrier premise equipment and edge compute. We expect Inventec’s scale will continue to decrease as proportion of Wiwynn next few years, given the majority of its business remains on OEMs, and its shipments to the US hyperscalers are mostly based on L6 motherboards. In terms of OPM, ASRock and Gigabyte’s consolidated OPMs are among the highest in the group despite the lower sales scale, supported by their larger branding business in motherboard and graphic cards, while FII also enjoys a better profitability on greater scales and components sales. Quanta’s, Inventec’s, and Wistron’s profitability are below Wiwynn’s due to the dilution from ODM/EMS in consumer electronics. Lastly, MiTAC’s OPM remains low at 1% on MCT strategic re-focus. Figure 129: FII has the largest cloud IT infrastructure sales at 1.0-1.5x of Wiwynn’s, but with a primary focus in China % of Wiwynn sales Figure 130: Wiwynn’s OPM % is below ASRock’s as it is a pure-play cloud IT infrastructure ODM; MiTAC has been in strategic refocus in recent years OPM % 160% 9.0% 140% 8.0% 7.0% 120% 6.0% 100% 5.0% 80% 4.0% 60% 3.0% 40% 2.0% 1.0% 20% 0.0% 0% FII Quanta Inventec 2020E 2021E MiTAC Gigabyte ASRock ASRock Wiwynn 2020E 2017-19 avg Source:'>Source:'>Source:'>Source: Company data, Credit Suisse estimates FII Gigabyte 2021E Quanta Inventec Wistron MiTAC 2017-19 avg Source:'>Source:'>Source:'>Source: Company data, Credit Suisse estimates Notably, Wiwynn’s ROE of 30-40% is materially higher than the peers’ at around 10% due to its lower equity balance, given comprehensive resource support by Wistron globally, while its debt-to-equity ratio is consistent with its peers at 70-80%. We expect Wiwynn can continue to Global Technology 50
51. 21 July 2020 maintain its ROE at a higher level at over 30% in 2020/21E, vs a 2017-19 average of 41%, supported by the cloud demand recovery and improving component pricing. Comparatively, MiTAC, ASRock and Gigabyte’s use of debt financing remain limited. Figure 131: Wiwynn’s ROE at 30-40% in 2020/21E, vs the 41% average in 2017-19, vs peers being mostly at 10-20%... ROE % Figure 132: …despite Wiwynn’s capital restructuring in line with key ODM peers Net debt/equity % 45% 40% 40% 20% 35% 0% 30% 25% -20% 20% -40% 15% -60% 10% -80% 5% -100% 0% Wiwynn FII Inventec ASRock 2020E Quanta 2021E Gigabyte Wistron FII MiTAC ASRock 2017-19 avg Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, Credit Suisse estimates Gigabyte Inventec 2020E 2021E Wiwynn MiTAC Quanta Wistron 2017-19 avg Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, Credit Suisse estimates China vendors catching up despite limited overseas market access Chinese server OEMs have grown share from 7% to 22% since 2014 China cloud IT infrastructure vendors have also made meaningful progress narrowing the technology gap with internationally leading players. Specifically, the combined revenue shares of China server OEMs delivered a 39% CAGR (vs +10% CAGR for the market) in the past five years, reaching a 22.4% share from 6.9% in 2014. We also see a similar trend taking place in enterprise storage with the combined sales of China vendors having a 20% CAGR (vs +7% CAGR for the market) over the past five years to reach a 19.5% share in 2019 vs 3.6% in 2014. Figure 133: HP and Dell server shares continue to decline due to ODM Direct proliferation and China vendor expansions Market share % by total server vendor revenues 30% Figure 134: Similar trend also taking place in enterprise storage with increasing presence by ODM Direct and China vendors Market share % by total enterprise storage vendor revenues 25% 28% 20.7% 26% 24.1% 24% 22% 21.1% 20% 18% 16% 10% 18.0% 15% 10% 13.8% 5% 8.4% 5.0% 12.4% 2015 19.5% 18.6% 14.6% 17.8% 17.3% 15.8% 14% 12% 22.4% 20% 2016 HP 2017 Dell Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, IDC, Credit Suisse ODM Direct 2018 China 2019 0% 2015 2016 HP 2017 Dell ODM Direct 2018 2019 China Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, IDC, Credit Suisse We believe the key drivers supporting the growth include: (1) the expansion of APAC excluding Japan’s market size (for which we believe China to be the key driver) as a proportion of the global market (27-28% of market in 2019 vs. 16-18% in 2011); and (2) an increase in Chinese vendors’ share in APAC excluding Japan (55-65% of market in 2019 vs. still less than 10% in 2011-12) with good support by preferential China policy. However, we continue to believe that China vendors pose limited challenges to Taiwan ODMs over the next few years. Global Technology 51
52. 21 July 2020 This is despite better progress on their home turf by offering lower pricing, given concerns on reliability and security, especially with the leading US-based hyperscalers, amid ongoing debates over the acceptance of Huawei to provide 5G infrastructure, as well as from the Bloomberg allegations of spying capability installed on Supermicro’s hardware sold to the US. In servers, we include Great Wall, H3C, Hikvision, Huawei, Inspur, Lenovo, Powerleader, Tongfang, Sugon and ZTE in our analysis. According to IDC, total server sales from these China vendors delivered a 39% CAGR from 2014-19, representing 22.4% of the global server sales in 2019 vs 6.9% in 2014. However, most of their shipments remain in Asia Pacific (excluding Japan), and more specifically China, in our view, with only three of the ten vendors, including Huawei, Inspur and Lenovo shipping to non-APAC markets. In 2019, less than 20% of total server sales from China vendors were destined for markets outside of the APAC-region, but up from 5-6% over 2009-13. Figure 135: Only three of the ten China server vendors are shipping outside APAC regions, making up 19% of 2019 sales % of sales Figure 136: China vendors’ combined sales outside of APAC regions also lower at 20% in enterprise storage in 2019 % of sales 100% 100% 90% 90% 80% 80% 70% 70% 60% 60% 50% 50% 40% 40% 30% 30% 20% 21% 10% 5% 0% 6% 5% 6% 31% 20% 23% 21% 5% 22% 19% 10% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Exposure in non-APAC 8% 0% Exposure in non-APAC Figure 137: China vendors as a whole have a majority of shipments still concentrated in the volume segment Market share % by server sales in 2019 Total 13.8% 17.8% 5.9% 24.1% 22.4% 7.3% 5.7% 4.2% 3.3% 1.2% High-End Enterprise 4.4% 0.0% 68.7% 0.0% 1.3% 0.0% 0.7% 0.3% 0.3% 0.0% Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, IDC, Credit Suisse 8% 9% 22% 23% 20% Exposure in APAC Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, IDC, Credit Suisse We would also note the similar trend of growing China vendors’ presence in enterprise storages. Specifically, we have included H3C, Hikvision, Huawei, Inspur, Lenovo, Sugon and ZTE into our analysis. According to IDC, sales from Chinese vendors delivered a 50% CAGR from 2014-18, representing 19.5% of global enterprise storage sales, vs 3.6% in 2014. However, as in servers, most of their shipments remain in Asia Pacific (excluding Japan), with non-APAC sales representing nearly 20% of their total storage sales in 2019 (vs less than 10% before 2017), and only Huawei, Inspur and Lenovo making their way to overseas markets. HP Dell IBM ODM Direct China Inspur Lenovo Huawei H3C Sugon 7% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Exposure in APAC Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, IDC, Credit Suisse 5% Midrange Enterprise 29.1% 17.9% 8.3% 8.4% 13.8% 3.0% 4.7% 4.8% 1.0% 0.2% Volume 11.7% 19.3% 0.0% 29.2% 25.8% 8.6% 6.3% 4.4% 4.1% 1.4% Chinese vendors have grown enterprise storage share from 4% to 20% since 2014 Figure 138: China vendors also have a leading exposure in the entry segment, but ramping up in the mid-range Market share % by enterprise storages sales in 2019 HP Dell IBM ODM Direct China Inspur Lenovo Huawei H3C Sugon Total 12.5% 20.7% 6.2% 18.6% 19.5% 5.8% 4.7% 4.7% 3.0% 1.1% High End 13.4% 20.7% 33.6% 0.0% 3.0% 0.7% 0.5% 1.0% 0.8% 0.0% Midrange 18.6% 23.1% 6.7% 3.4% 15.2% 1.6% 5.0% 6.2% 1.6% 0.6% Entry 9.2% 19.5% 0.3% 30.1% 25.1% 8.9% 5.5% 4.7% 4.1% 1.5% Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, IDC, Credit Suisse Among all the shipments made by the China vendors, the majority of them are volume servers with an average selling price of below US$25,000, based on IDC’s definition. On a blended basis, China vendors have an average selling price at US$6,152, or a 17% discount to the global average of US$7,433. In the mid-range segment for pricing between US$25,000 and US$249,999, the market continues to be led by US vendors, especially HP (29%) and Dell (18%), and China vendors as a whole represent 13.8% of total mid-range sales. High-end Global Technology 52
53. 21 July 2020 enterprise servers (i.e., an ASP above US$250,000) accounted for 7% of the overall market in 2019, with Lenovo, Huawei and H3C the only Chinese vendors competing in the segment despite overall shares remaining limited. IBM dominates this segment, representing 69% of total units. Figure 139: Global server ASP at a premium of more than 20% vs China vendors’ ASP in US$ (L-axis) and % of premium vs global vs China (R-axis) $8,000 Figure 140: China enterprise storage vendors catching up, but still at a 20-25% discount to the global average ASP in US$ (L-axis) and % of premium vs global vs China (R-axis) 250% $12,000 200% $10,000 200% 180% $7,000 $6,000 $5,000 150% $4,000 100% $3,000 160% 140% $8,000 120% $6,000 100% 80% $4,000 $2,000 60% 50% $1,000 40% $2,000 $0 20% 0% 2011 2012 China 2013 2014 Global 2015 2016 2017 2018 2019 Global ASP premium vs China vendors Source:'>Source: Company data, IDC, Credit Suisse $0 0% China Global Global ASP premium vs China vendors Source:'>Source: Company data, IDC, Credit Suisse Similarly, the majority of China vendors’ exposure to enterprise storage also remains entry grade solutions with an average selling price of below US$25,000 based on the IDC definition. On a blended basis, China vendors’ ASP was US$7,529 in 2019, or nearly a 24% discount to the global ASP of US$9,863. In the mid-range segment for pricing between US$25,000 and US$250,000, the market continues to be led by US vendors, including Dell (23%), HP (19%) and IBM (7%), with China vendors as a whole representing 15% of total mid-range sales. Highend solutions (i.e., an ASP above US$250,000) accounted for 12% of overall market sales in 2019, with Huawei and Lenovo the only sizeable Chinese vendors competing, while IBM and Dell led the segments, making up 34% and 21% of global sales, followed by HP’s 13%. For the China market, we maintain our view that cloud IT infrastructure spending by the leading China hyperscalers would be captured mainly by key China IT infrastructure vendors including Huawei, H3C, Inspur, Lenovo and Sugon. However, we believe Chinese vendors should face even higher pressure from expanding overseas, especially with the leading US hyperscalers, given concerns on reliability and security vs pricing, and amid the ongoing debate surrounding security vulnerability and potential backhaul breaches on Huawei-sourced carrier premise equipment, which is even more sensitive in the 5G era. Lenovo is the only China vendor with meaningful overseas hyperscaler exposure Among all the China IT infrastructure vendors, we believe that Lenovo is the only vendor having business engagement with one of the leading US hyperscalers (i.e. Microsoft), leveraging its globally leading position in PC. We see limited progress near term with other US hyperscalers, as Taiwan cloud IT infrastructure ODMs continue to dominate the market supported by healthy relationships with open-sourced platforms. Based on our conversations, we believe the US hyperscalers would also be more reluctant to switch suppliers, barring a major fiasco, as they value companies with a long track record of reliability/security, vs pricing. Lenovo is ahead of its peers gaining share to hyperscale vendors On the other hand, Lenovo’s management noted it has been shifting more resources to the China cloud IT infrastructure market by hiring of 200-300 new staff. It has already seen good progress with the Next Wave customers in China, with key customers wins including Meituan, JD.com, Kuaishou, etc. and is looking to capitalise on the expanding opportunities with the 250 Next Wave customers through further sales force expansion. We think the shift of its focus to the domestic business with a new family of products is the right strategy, given that Chinese enterprise customers are very sensitive on price/performance. We believe this could help reduce its reliance on hyperscale customers and fuel its DCG sales growth in the longer term, but could delay the turnaround of DCG business due to the upfront investment on opex and competition from peers, resulting in weaker margins. Global Technology 53
54. 21 July 2020 Overall, Lenovo expects its DCG group to see better sales in FY21 (FYE: March 2021), as it guided continued profitability growth, vs a US$226 mn loss in FY20, driven by an improving cloud (currently ~30% of DCG sales) outlook, and the demand uptick from the increasing workload shift to the cloud amid COVID-19. Figure 141: Lenovo’s DCG profit should remain in loss through FY21E Sales and PTI in US$ mn $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 -$1,000 FY16 FY17 FY18 FY19 DCG sales FY20E FY21E DCG PTI Source:'>Source:'>Source:'>Source: Company data, Credit Suisse estimates Rise of Merchant Silicon: Broadcom and Marvell ASIC to Merchant Conversion: The data-centre infrastructure innovation cycle is seeing disruption, as demand by large operators cannot be served by the traditional model, which entails OEMs collaborating with silicon vendors. In response to the challenge, OEMs such as HP, Dell, and JNPR are incorporating merchant silicon and actively supporting open standards. However, we would note that the conversion process is still relatively slow, especially in the enterprise market. In the switch silicon business, Broadcom and Marvell both see a sizeable opportunity as ASICs become displaced by merchants, specifically, the enterprise, data centre and carrier/service provider markets. Mediatek has also invested US$300 mn in R&D building out its ASIC team for data centre and secured design wins, with a data-centre switch ASIC with Cisco and an AI accelerator with Google. Figure 142: Datacentre switch mix over time Broadcom and Marvell leading in merchant silicon, although Mediatek is also starting to make inroads with Cisco and Google Figure 143: Total enterprise switch mix over time 100% 100% 90% 90% 80% 80% 70% 70% 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% 2016 2017 2018 1G 10G 2019E 25G Source:'>Source:'>Source:'>Source: Company data, IDC, Credit Suisse 2020E 40G 50G 2021E 100G 2022E 2023E 2016 2017 100M 2018 1G 2019E 10G 2020E 2021E 2022E 2023E 25G/40G/50G/100G Source:'>Source:'>Source:'>Source: Company data, IDC, Credit Suisse Enterprise fixed and modular conversion: This vertical primarily consists of campus wiring closet boxes, and campus aggregation and campus core platforms. This market is evenly divided between CSCO, which is still using ASIC, and the other players (HP, Dell and JNPR, etc.) that have moved to merchant, taking merchant to a 20-50% market share. Global Technology 54
55. 21 July 2020 Data centre fixed and modular: Merchant share has now reached ~50% in data centre. Broadcom especially has made progress in this segment over the past few years, particularly on the fixed side, and more recently it has been starting to make headway on the modular side. In 2014, CSCO started shipping the Nexus 9000, which is the first data-centre modular platform that shipped with Broadcom’s Silicon. Broadcom sees data centre top-of-rack and data-centre modular platforms as a ~ US$1 bn opportunity. Carrier Ethernet switch: Merchant share has now reached ~50% in carrier Ethernet switches. This vertical primarily consists of backhaul and aggregation. In provider edge/core routers, merchant share is still relatively low at ~20-50% and in packet optical transport the merchant share is also still relatively at ~20-50% as well. Most packet optical transport platforms do not have much Ethernet content inside, but they will need to and therefore Broadcom, Marvell, and other players are expected to gain share in the segment. 5G increasing content to drive growth In the carrier space, Marvell is one of the only merchant baseband suppliers for base stations. This has led to key contracts with Samsung, supplying 4G basebands and which has recently been extended to 5G/MIMO rollouts using OCTEON/Fusion processors (announced 20 March 2020). The revenue potential of 5G is significantly larger than for 3G/4G—with content per station increasing from US$200 (3G) to the high US$700-800 (4G/LTE), with 5G projected to be 4x higher—about US$2,500-$3,000 per station. Marvell has already outlined line-of-sight revenue of US$600 mn from Marvell/Cavium, with another US$150 mn from Avera, or totalling US$750 mn with ~10% market share today. We expect additional upside from the 3 March 2020 announcement of a partnership with NOK for multiple generations of custom/multi-core ARM-based processors for 5G rollouts—beginning to add revenue in 2H FY21. This is also a segment of merchant silicon that we expect to attract other entrants. 5G baseband content growing by 4x versus 4G to US$2,500-3,000 per base station Figure 144: 5G base station revenue to peak in 2023 Figure 145: ~4x the average base station content value Source:'>Source: Company data, Credit Suisse estimates Source:'>Source: Company data, Credit Suisse estimates Data centre in security and networking services: Historically, Cavium had a strong position with data-centre customers through the security and networking services offload—and therefore after being acquired by MRVL it is considered the leader in the space. This capitalises on two major trends driving the evolution of data centres: (1) distributed security and network services; and (2) the push towards having cloud-optimised ARM server processors. MRVL’s processors for data centres are unique in that they have the ability to integrate both security with data plane processing, and this has been an area that the company continues to emphasise and build out. Another area in which Marvell’s processors stand out is that they have an ARM architecture licence, which means Marvell can make changes to hardware built on ARM as long as the resulting design would comply with ARM’s architecture. Global Technology 55
56. 21 July 2020 Artificial Intelligence: Artificial intelligence (AI) and machine learning have often been described as the data for the 21st century and Marvell wants to be a part of this trend. Marvell has been focused on building out an AI-focused chip that specialises in inference—in particular building out its ARM-focused ThunderX family of server processors, which it hopes in the future to be sized appropriately for its hyperscale customers. Figure 146: Worldwide new internal data centre builds Figure 147: New service provider data centre builds 12000 5000 4500 4000 # of new segments # of new segments 10000 8000 6000 4000 2000 3500 3000 2500 2000 1500 1000 500 0 0 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Localized internal datacenter 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Midtier internal datacenter High-end internal datacenter Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, Credit Suisse Localized SP datacenter Midtier SP datacenter High-end SP datacenter Mega SP datacenter Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, Credit Suisse Cloud opportunity within merchant is rapidly expanding Marvell, for the first time (1Q20), disclosed that its revenue from the cloud market has exceeded 10% of total revenue—as it has worked to build a strong cloud franchise combining storage, networking and processor technology, and also has the unique ability to deliver products with standard, custom and semi-custom solutions. Importantly, the CEO commented that the cloud data centre market represents an opportunity for both storage and networking products similar in magnitude to 5G—implying ~US$750 mn near-line revenue. Cloud data centre spend is expected to outpace traditional data centre growth with a +11% CAGR vs traditional’s ~0.3% CAGR through 2024 (vs. overall data centre spends +5.7% CAGR); in other words, by 2024 cloud spend would be 1.5x traditional on-premises spend. Through the CAVM/Avera acquisitions, MRVL has positioned itself well for both storage and networking in the cloud with its NVMe accelerators, LiquidIO, and SmartNIC products. Figure 148: Cloud data centre revenue delivering ~11% CAGR Figure 149: Cloud spend is 1.5x on-premise spend Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, IDC, Credit Suisse estimates Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, IDC, Credit Suisse estimates Global Technology 56
57. 21 July 2020 Figure 150: Data-centre Ethernet switch rev growth in 100Gb Figure 151: Aligning with MRVL+CAVM DC solutions Source:'>Source: IDC Source:'>Source: Marvell Sector investment risks The following are the key risks to the cloud infrastructure hardware sector: Hyperscalers’ capex spending is cut along with changes in the business outlook and macro economy. We believe that globally leading hyperscalers’ capex planning should lead to changes in the magnitude and intensity of cloud IT infrastructure pull-in, which would have a profound impact on Taiwan cloud IT infrastructure ODMs’ sales outlook. In addition, we believe hyperscalers’ capex is much dependent on the macro-economy, leaving aside the difference in cloud service offerings, business models and operation. In 2019, hyperscalers’ capex spending was weaker after aggressive inventory pull-in from 2017-18, along with component pricing declines. We will continue to monitor the impact of COVID-19 on the macro-economy as well as capex spending by the hyperscalers; however, we believe order bookings remain healthy at this point, despite some spending push-off due to supply chain and logistic bottlenecks based on our conversations. Sector risks from volatile capex, COVID-19 volatility, component pricing and constraints and competitive pressures Regional lockdown amid COVID-19 driving incremental costs. We believe the recent global lockdown amid the COVID-19 outbreak have led to more difficult supply chain management by the Taiwan cloud IT infrastructure ODMs, which could drive incremental costs associated with logistics and transportation, as well as additional raw material inventory preparation on potentially higher pricing structures due to less efficient supply chains. According to our conversations, while Taiwan ODM SMT lines are all located in Taiwan and China, they have also established local rack-assembly production and offices close to their markets in the US and Europe to drive more efficient after-market support and delivery. Nevertheless, due to COVID-19 and the aftermath impact from lockdown, Taiwan ODMs might be required to offer more flexible cross-region manufacturing support and delivery, leading to higher costs structure in the near term, despite these incremental costs possibly being remedied by the CSPs, especially the globally leading hyperscalers, afterwards. Key component pricing fluctuations. We would note that key components for cloud IT infrastructure include CPU/GPU, memory, storage, etc., making up 80-90% of the total BOM of standard rack equipment, with these key components often negotiated by hyperscalers, for subsequent consignment for Taiwan ODM production and management. Given that the costs of these key components are mostly passed through into the final price, this can lead to significant changes in the sales and profitability reporting by ODM players. Evidently, Wiwynn’s sales in 2019 were weaker partially as a result of the falling memory pricing; however, its GM grew modestly to 6.9% from 5.9% for the same period. Global Technology 57
58. 21 July 2020 Potential CPU shortages leading to earlier projects termination. We see limited risk from the constraints and shortages in cloud IT infrastructure CPU in the near term, despite the recent lockdown in Southeast Asia where much of the semiconductor backend production is housed, given the prioritisation by Intel to the higher margin cloud IT infrastructure segments especially for the hyperscalers. Nevertheless, we would still highlight the potential risk from the CPU shortage, especially during the next-generation node transition (i.e. from the Purley platform using the 14 nm based Cascade Lake chipset to the Whitley platform using the 10 nm-based Ice Lake chipset). We have also picked up further delays for the rollout of the 10 nm-based Ice Lake into 2021 from the supply chain. Evidently, we have seen the earlier termination of project rollouts by tier 2/tier 3 CSPs due to the sudden cut of chipset supplies on the older Grantley platform at the end of 2019, as Intel optimised its in-house capacity for the latest generation platforms, leading to material changes in the outlook. However, we also see greater progress with AMD in cloud IT infrastructure, representing nearly 10% of total motherboard shipments, supported by better technology advancement (i.e. latest EPYC2 on 7 nm node fabbed by TSMC), amid Intel supply shortages. Figure 152: Intel server CPU roadmap overview Family Branding Process Node Haswell Broadwell Skylake-SP Cascade LakeSP/AP Cooper LakeSP/AP Ice Lake-SP Sapphire Rapids 22nm 14nm 14nm+ 14nm++ 14nm++ 10nm+ 10nm++ Platform Name Intel Grantley Intel Grantley Intel Purley Intel Purley Intel Whitley Intel Whitley Intel Eagle Stream Max Core Count Up To 16 Up To 22 Up To 28 Up To 28 Up To 48 Up To 38 TBD Memory Support DDR4-2133 4Channel DDR4-2400 4Channel DDR4-2666 6Channel Up To 8-Channel DDR4 8-Channel DDR4 8-Channel DDR5 PCIe 3.0 AMD EPYC Naples 14nm Up To 28 Up To 48 DDR4-2933 6Channel DDR4 2933 12Channel PCIe 3.0 AMD EPYC Rome 7nm PCIe 3.0 AMD EPYC Rome 7nm PCIe 4.0 AMD EPYC Milan 7nm+ PCIe 5.0 AMD EPYC Genoa 5nm 2017 2018 2019 2020 2021/22 PCIe Gen Support PCIe 3.0 PCIe 3.0 Competition n.a. n.a. Launch 2013 2014/15 Source: Company data, Credit Suisse Increasing competition driving changes in market share and profitability. We see limited risk from new entrants in the short-to-mid term, as it often requires years of lead time for qualification, aside from the need to have a long track-record of reliability and quality credentials, which are more important factors for globally leading hyperscalers, as compared to a pure focus on costs. In addition, we believe Taiwan leading cloud IT infrastructure ODMs also have very large manufacturing scale and global sales office support for after-market services, as well as greater capital intensity for key raw material procurement and inventory management, setting a higher bar for any potential entrants. However, we see potential changes in shares among the ODMs with the hyperscalers, given that the offering of cloud IT infrastructure is all based on the commonly designed open-sourced platforms. For example, after some delays, Wiwynn has successfully entered the Amazon cloud IT infrastructure supply chain, along with FII, Inventec, MiTAC and Quanta, with small-volume rack shipments (no motherboards) in 2Q20, before a more meaningful ramp into 2H, which could be a key driver for Wiwynn next few years. Global Technology 58
59. 21 July 2020 Supply chain opportunities Figure 153: Global technology suppliers leveraged to cloud data-centre growth PB (x) 2020 ROE (%) 2020 30.3 15.9 13.2 14.2 (23.3) 23.8 40.3 17.4 28.9 25.9 47.6 32.6 2.9 3.0 1.2 4.6 6.6 5.4 3.0 5.9 1.8 0.7 3.9 0.9 9.2 3.2 3.0 1.0 1.7 1.6 0.9 2.2 5.6 12.7 5.3 2.9 35.4 13.6 17.6 7.8 15.8 14.9 6.9 12.8 16.0 27.7 34.6 15.3 23.3 Nam e Ticker Asian Hardw are Accton 2345.TW Delta Electronics 2308.TW FII 601138.SS Hon Hai 2317.TW Inventec 2356.TW Lenovo 0992.HK MiTAC 3706.TW Quanta 2382.TW Shengyi Tech 600183.SS Shennan Circuits 002916.SZ Wiw ynn 6669.TW ZTE 0763.HK Asian Sem iconductors Alchip Tech 3661.TW Rat Curr. Price (LCY) N O O O N N N O O N O O TWD TWD CNY TWD TWD HKD TWD TWD CNY CNY TWD HKD 236.50 184.00 14.79 88.00 24.75 4.55 29.55 78.00 29.00 162.67 753.00 23.00 240.00 208.00 17.00 93.00 24.00 4.50 32.20 90.00 48.10 194.60 960.00 26.10 O TWD 480.00 630.00 982 30.5 22.5 71.9 114.5 35.5 0.7 7.1 Amkor N USD 12.16 12.00 2,932 18.2 15.3 (5.0) 33.0 18.7 0.0 1.4 7.6 O O O N O N O O O N JPY TWD TWD TWD TWD TWD JPY KRW KRW TWD 2,435.00 69.30 1,255.00 284.00 607.00 1,075.00 593.00 54,400 82,900 367.00 2,880.00 84.00 1,300.00 250.00 730.00 970.00 1,290.00 65,000 118,000 365.00 3,159 10,381 1,480 1,325 32,393 2,795 9,545 268,891 49,731 321,942 21.3 11.8 41.8 72.8 29.7 26.3 10.8 15.4 13.0 20.3 20.6 10.9 34.5 33.9 20.2 22.3 9.5 11.0 6.9 20.1 35.0 3.8 20.7 (35.9) 31.6 22.3 (50.0) (51.0) (87.0) (1.7) 31.4 12.7 25.1 (15.3) 39.2 27.9 262.7 10.0 114.4 35.2 3.3 8.3 21.3 114.9 47.0 18.2 13.8 40.0 87.7 1.1 1.4 3.4 1.6 1.7 1.7 1.5 0.0 2.6 0.0 2.7 3.2 1.4 18.4 8.9 3.1 6.2 1.4 1.4 1.1 5.2 15.1 12.2 44.0 12.3 10.3 23.4 13.0 8.8 8.1 25.7 N U O O USD USD USD USD 60.37 9.67 125.11 44.81 44.00 8.50 150.00 53.00 44,723 12,424 111,084 9,940 11.4 8.0 11.5 13.1 9.6 7.4 10.1 10.2 16.9 19.7 (7.3) (9.2) (28.1) (31.4) (15.0) (16.4) 19.2 7.5 13.2 28.8 0.0 5.0 5.4 4.3 9.0 1.0 5.0 9.4 79.1 12.3 43.2 72.1 N O O O O O USD USD USD USD USD USD 55.04 312.71 60.00 49.47 408.06 100.49 33.00 400.00 75.00 90.00 425.00 100.00 64,462 141,888 254,040 54,961 250,957 24,439 66.7 14.5 12.7 19.1 70.4 37.6 46.8 12.9 12.0 9.9 49.5 31.1 55.5 2.3 9.2 (47.7) (11.5) (5.2) 63.4 0.9 (7.2) (58.0) (14.2) (19.1) 42.5 12.3 6.1 92.7 42.3 20.6 0.0 1.8 2.2 0.0 0.0 0.0 19.2 6.6 2.6 1.5 15.8 8.5 28.7 45.5 20.6 7.7 22.5 22.8 O O O O O O O O USD USD USD USD USD SGD USD USD 24.11 247.14 143.75 724.23 81.08 2.61 35.73 17.95 25.00 309.00 164.00 704.00 90.00 2.91 50.30 23.00 2,723 668,430 38,570 64,105 12,958 3,124 7,334 4,337 10.0 37.9 94.6 10.3 (4.4) 5.5 44.1 11.0 29.4 15.5 (27.2) 5.3 91.3 10.8 73.9 15.1 (12.4) 22.2 31.6 7.0 - to + 3.6 21.2 88.7 0.0 0.0 3.1 1.5 0.0 3.4 0.0 0.0 3.6 5.0 2.5 4.9 5.9 2.2 8.2 6.1 (2.5) 17.8 10.5 15.4 (0.3) 8.0 (14.6) 5.0 AMKR.OQ Anritsu 6754.T ASE 3711.TW Aspeed 5274.TWO GUC 3443.TW MediaTek 2454.TW Parade 4966.TWO Renesas 6723.T Sam sung Elec 005930.KS SK Hynix 000660.KS TSMC 2330.TW Global Hardw are Dell DELL HPE HPE IBM IBM NetApp NTAP.OQ Global Sem iconductors AMD AMD.OQ Broadcom Ltd AVGO Intel INTC.OQ Micron MU.OQ NVIDIA NVDA.OQ Xilinx XLNX.OQ Datacenter and cloud operators 21Vianet VNET.OQ Alibaba BABA Digital Realty DLR.N Equinix EQIX.OQ GDS GDS.OQ Keppel DC REIT KEPE.SI Kingsoft Cloud KC.OQ Sw itch, Inc. SWCH.N Mkt cap (USD m n) Yield (%) 2020 Target Price PE (x) 2020 2021 EPS grow th (%) 2019 2020 2021 4,500 16,037 43,486 40,819 3,061 7,098 1,214 10,351 9,727 11,281 4,727 25,026 26.1 23.7 16.9 12.2 10.5 10.6 12.9 17.2 35.1 45.9 17.4 19.1 20.1 20.5 14.9 10.7 13.7 8.5 9.2 14.7 27.2 36.5 11.8 14.4 67.3 27.1 9.2 3.6 (15.3) 11.3 (14.2) 5.5 25.5 58.6 (2.1) - to + 2.4 (13.8) (3.4) (14.3) 56.4 0.4 (1.9) 11.0 29.2 (8.9) 16.6 (9.1) (147.4) 28.2 83.9 30.1 (1794.7) 26.5 (56.3) 121.0 (131.2) 23.1 63.8 28.1 1093.4 25.6 (71.5) 64.1 Note: Names in bold are our preferred ideas currently. Priced as of 20 July 2020. O = Outperform, N = Neutral, U = Underperform. Source: Company data, Credit Suisse estimates The cloud/datacentre opportunity impacts all parts of the technology supply chain globally and this opportunity is likely to grow significantly as the development of 5G–led technologies further accelerates existing trends. Within Asian downstream, certain ODMs are key beneficiaries of this trend, supported by further proliferation of the Open Compute Project (Quanta, Wiwynn). The shift to cloud infrastructure is a negative for US Hardware OEMs, though we like IBM and NetApp’s positioning in a hybrid-first world. Significant design changes for components requiring the ability to deal with high bandwidth, low latency and massive connectivity leads to opportunities for names such as Delta, FII, Hon Hai and Shengyi in China. Within semis, IC Design and advanced foundry get a lift from high performance computing (TSMC, Aspeed) and IC design service companies (Alchip) are providing design support to help system and fabless Global Technology Top stocks with leverage to the cloud data centre growth opportunity 59
60. 21 July 2020 companies to design complex high performance computing chips. In the US, top picks on the accelerating compute TAM are NVIDIA, Intel, AMD, Micron and Xilinx. Public cloud service growth from hyperscalers will support server DRAM growth (now 35% of memory), supporting the memory demand side (Samsung, SK Hynix and Micron). Amongst data centre operators, globally we highlight Equinix, Digital Realty and Switch and in China, GDS and VNET. Within semis, advanced foundry and packaging get a lift from high-performance computing (TSMC, Aspeed) and IC design service companies (Alchip) are providing design support to emerging fabless companies, helping them bring to market complex high-performance computing chips. In the US, our top picks for companies most levered to this theme are NVIDIA, Intel, AMD, Micron and Xilinx. As public cloud services become more dominated by hyperscalers, the rapid growth should drive a steady demand increase for server DRAM, which has already grown to nearly 35% of the total DRAM market (Samsung, SK Hynix and Micron). Asian Hardware:'>Hardware:'>Hardware:'>Hardware: PCs and ODMs (Jerry Su, Harvie Chou) We believe that Taiwan IT infrastructure ODMs are key beneficiaries from the continued expansion of global cloud spending by the leading US-based hyperscalers, supported by further proliferation of OCP, Taiwan ODMs’ leadership on the open-compute platform, as well as their respective long-standing hardware design/manufacturing know-how and global after-market service support. Quanta a top pick in hardware, also Initiating on Wiwynn with Outperform In this space, Quanta is our top pick among Taiwan ODMs, as we believe it can maintain its leading position with its more diversified customer base and earlier progress into enterprise/telco, driving enhanced long-term profitability. We also believe Accton would be a key beneficiary from the open-sourced platform take-off in networking switching, along with 400GbE speed-port migration, as well as new opportunities in 5G telco, but we see limited upside after the more than 100% run its share price YTD. We initiate coverage on Wiwynn with an OUTPERFORM rating ,as we expect it to see the largest momentum uplift from cloud IT infrastructure demand uptick, as the only pure play cloud IT infrastructure ODM with unique positioning with US hyperscalers, aside from new customer ramp from May 2020. Asian Hardware:'>Hardware:'>Hardware:'>Hardware: Components/EMS (Pauline Chen) Silicon scaling limitations, exponential data processing, broader machine-learning frameworks, on-device intelligence and 5G adoption have led to significant design changes for hardware components. How to deal with high bandwidth, low latency and massive connectivity, while meeting cost efficiency is also important, given a huge ASP increase on design change and an estimated 40% of electrical power used to cool down a data-centre. We expect the above trend to provide growth opportunities for the component sector, including high-speed/high-frequency design and better thermal dissipation technology. Delta and FII/Hon Hai are well positioned to capture the data-centre opportunity in our coverage. We believe Delta’s core competence in highly efficient power electronics and its rich product offerings (including server power supply, telecom power supply, cooling, power chokes and networking, etc) should continue to help it stay ahead of the power/energy efficiency competition. We expect FII/Hon Hai to gain market share in the fast-growing cloud market, thanks to its share gains in CSP (cloud service provider). While FII’s CSES generates a lowerthan-peer GM (at 4% in 2019, vs. Wiwynn’s 6.9%), due to its higher exposure to enterprise customers, we expect its continued market share gains in CSP (especially Microsoft) to drive margin improvement in CSES in 2020-21E. Delta and FII/Hon Hai best placed in hardware components Asian Hardware:'>Hardware:'>Hardware:'>Hardware: China Components (Kyna Wong) China’s cloud service market, though much smaller than that of the US, is growing much faster than the US one, and is now the second-largest cloud service market globally. We see opportunities from rising server demand and product upgrades driven by public cloud. We also see significant demand for telecom-use PCB under the accelerated 5G rollout in China. PCB names benefit from both units and price hikes in 5G (the content in a single base station increases by almost four times). Content in front-/mid-/backhaul and core network equipment also increases on higher ASPs with the penetration of high-speed materials. Apart from telecom, Global Technology Shennan and Shengyi are top picks in China components 60
61. 21 July 2020 5G brings rising demand for high-frequency/high-speed PCBs in servers for data-centres. The new generation of servers means higher requirements for PCB, especially for high-speed and high-multilayer, which generate higher margins than telecom. We also see structural opportunities in domestic substitution with the increasing shares of China server vendors. Among China component names, PCB supply chain companies—Shennan and Shengyi—are expected to benefit from data-driven demand, with server exposure rising from 6%/10% in 2019 to 10-20%/10-15% revenue contributions by 2022. Of the two companies, our preference is for Shengyi. Global Hardware: US Hardware (M Cabral) For hardware vendors, the distinction between traditional on-prem and public cloud end-markets is critical. US OEMs have historically been highly exposed to the former, which is likely to face sustained pressure both near term from a softer IT spending backdrop and longer term as public cloud share gains accelerate, particularly in a post-COVID-19 world. While public cloud presents significant growth potential for hardware spending, the associated margin profile is too low to support OEMs’ existing business models; we estimate GMs on servers sold to public cloud are likely in the high single digits vs. the 20%+ for enterprise demand. As a result, we view workloads shifting off-premises as a clear negative for traditional enterprise HW demand (servers, storage) as it shrinks the addressable market. That said, for those willing to look beyond near-term softness, we believe there’s an opportunity for vendors in our coverage that embraces a hybrid-first approach and leverages their incumbency to drive consistency between customers’ on-prem and off-prem environments. IBM is our top pick in the sector. We see the acquisition of Red Hat representing a landmark shift in strategy and creating an underappreciated opportunity to drive sustained revenue growth by bringing together the platform, incumbency and expertise necessary to help customers modernise the ~80% of applications that have yet to migrate to the public cloud. We also believe that NetApp’s data fabric strategy is a key competitive differentiator and presents a compelling longer term opportunity to drive a storage-centric approach to hybrid cloud, driving share gains with both traditional on-prem and “born in the cloud” customers. We like Dell’s positioning in a hybrid-first world (largely tied to VMware); however, we see pressure on “core” ISG and CSG in a weak macro coupled with outsized leverage that leaves little room for error. Finally, HPE remains over-indexed to on-prem demand, particularly servers at >50% of revenue, and lacks a compelling hybrid angle, in our view; its push towards ‘as-a-Service’ has gained good traction amid an increasing preference for opex > capex, but is still too small to offset pressure on its core business. IBM is our top pick in the US hardware sector Asian Semiconductors:'>Semiconductors: Foundry/Back-end/IC Design (Randy Abrams) We expect advanced foundry and packaging to get a lift from high-performance computing chips (server, network processors, FPGAs, AI accelerators) which is driving higher demand on the advanced nodes at higher wafer pricing and also requiring advanced packaging and testing. Rising merchant silicon content and growing compute demand in this less price-sensitive segment is a positive counterbalance to cost pressures in mobile/consumer. TSMC and Aspeed have the highest leverage to the on-going data-centre build-out in our coverage. TSMC has doubled its HPC business to 30% of sales since 2016 and should maintain a teen CAGR with the growing opportunity in both AMD and China CPUs, AI accelerators (GPU, FPGA and ASIC) and 5G infrastructure processors, leveraging advanced manufacturing and wafer-level system integration. Aspeed has more than a 90% exposure to servers and is more indexed to hyperscale over enterprise (two-thirds of shipments) also with expansion into edge servers, storage and switching, and adding one more cloud customer. Aspeed is our preferred pick as it has corrected on short-term 2H digestion, but should have multi-year unit growth while TSMC may moderate from the 2020 strength factoring in Huawei, QCOM and NVIDIA headwinds. TSMC and Aspeed best leveraged in the Asian foundry, back-end and IC design space Asian Semiconductors:'>Semiconductors: IC Design Services (Randy Abrams/Haas Liu) IC design service companies are leveraging semiconductor design capability and tight foundry relationships to supply system companies and emerging fabless design companies with design Global Technology 61
62. 21 July 2020 support, bringing to market increasingly challenging and customised designs for high performance computing (HPC). Taiwan design services companies accelerated from being flat in the 2007-13 period to a +9% CAGR from 2013-19, and could further accelerate to 20% from a fast-growing pipeline of HPC (AI, 5G, server, PC and networking). We believe Alchip, an IC design service company based in Taiwan with a strong R&D team in China and a focus on projects including HPC and AI on the advanced nodes, should benefit from the trend. The company's sales saw meaningful growth in 2019 supported by China CPU ramp for PC adopted by local governments and SOEs, and tape out of the AI project. We believe the company's sales should deliver a 30% CAGR from 2019-22 on more HPC and AI projects from its China and US customers. On the other hand, we are more conservative on GUC, the largest IC design service provider in Taiwan with its strong technology and capacity support across mature-to-advanced nodes from TSMC, as it needs to allocate some resources to legacy consumer customers—a segment which is only stable—offsetting some growth in AI and 5G. We expect the company's sales to see a solid 18% CAGR from 2019-22, with 30% GMs mainly driven by its customers' AI and 5G investments. Alchip playing a key role in design service enabling supercompute, AI and China CPU makers Global Semiconductors:'>Semiconductors: US Semiconductors (John Pitzer) We estimate the semi market for compute (CPU, GPU, FPGA and APU) at ~US$90 bn growing to ~US$130 bn by 2025 (a 6% CAGR). Specifically, our top picks for companies most levered to this TAM are NVIDIA, Intel, AMD, Micron and Xilinx. The new data economy rests heavily on AI’s ability to analyse the data being created at the edge and in the cloud in its unstructured form. NVDA currently has a significant share in HPC/AI applications, but other entrants are vying for share in the space (INTC and XLNX with FPGAs, AMD with GPUs, and potentially others down the line). Overall, we believe a rising tide lifts all boats in AI and all of these companies are positioned to benefit from the explosion in use cases. Whether in I/O, wired, networking, GPUs, or increasing demand for DRAM/NAND as complexity/workload increases, we continue to argue that investors and companies alike are underestimating the potential compute. AI in data centres fundamentally lowers the cost of analytics for the first time in history, which should unleash a very large wave of data analytics for TBD "killer applications". NVIDIA, Intel, AMD, Micron and Xilinx best leveraged to the rising compute TAM Global Semiconductors:'>Semiconductors: Memory (Keon Han, John Pitzer) Memory is becoming a more valuable resource. Designs and specs are no longer defined and driven by more diversified usage; therefore, customisation enhances value. Similarly, hyperscalers no longer use OEM-built servers, but rather design their own for scale, profit optimisation and cost efficiency. As public cloud services become more dominated by hyperscalers, the rapid growth should drive a steady demand increase for server DRAMs, which have already grown to nearly 35% of the total DRAM market. Experiencing a faster demand growth rate vs. the mobile segment and having a short replacement cycle, server DRAM is expected to become the most valuable DRAM segment in 2-3 years. Samsung, SK Hynix and Micron have high leverage to the on-going data-centre build-out. The CPU-to-memory ratio is balanced for optimal server performance and CPU core count, and the higher bandwidth and expanding number of memory channels continue to drive higher DRAM usage. An on-die error correction code requirement for DDR5 in order to detect and correct errors is a must and favours producers that are early to market. Finally, data centres (servers) are consumables that require replacement over a relatively short duration due to wear and tear from continuously running. New CPU generation that is more powerful and offers a competitive edge to customers’ performance can compel faster replacement cycles. As a result of decades of industry consolidation, the remaining three DRAM makers stand to benefit well from this data-centre growth. Memory makers Samsung, Hynix and Micron benefiting from the importance and rising demand for data centre storage Global data-centre operators (Sami Badri) The US data-centre operators are directly tied to the growth of cloud computing and hybrid IT infrastructure by building the core, shell, and power and cooling that many private and public clouds reside in. multi-tenant data centres (MTDCs) are more cost effective for most customers as they can take up space as necessary, growing their IT infrastructure in line with their business. In recent years, interconnection and cloud on-ramps have proliferated in data centres, Global Technology Top US REIT picks are EQIX, DLR and SWCH 62
63. 21 July 2020 increasing the value proposition of the data-centre ecosystem. Data-centre interconnection allows the direct connection of various tenants within the same MTDC to each other, which significantly improves throughput and decreases latency for customers. As cloud service providers have grown, they have increasingly used cloud on-ramps, which are points of presence within an MTDC that make it easy for tenants in a facility to connect into public cloud platforms. Cloud on-ramps provide an even greater incentive for enterprises to use MTDCs, drawing in enterprise clients, thereby aligning public cloud growth with MTDC growth. We highlight Equinix (EQIX), Digital Realty (DLR), and Switch (SWCH) as three well-positioned data-centre operators leveraged to the themes highlighted above. China data centre operators (Colin McCallum) Data centre operators receive monthly rent from IT tenants which are their customers, based on the floor area occupied by the tenants and the power they consume. Crucially, the more servers which are required to support internet content, the higher the demand for data centres. As such, there is a very clear link between data centre demand and data volumes, which are rising rapidly. Furthermore, an increase in cloud computing by definition increases demand for internet storage facilities such as data centres. We estimate that in China, data centre construction is a valueaccretive exercise, with an ROIC of 10.6-11.8% (based on utilisation of 85-98%), and so the faster the operators raise finance and construct capacity, the more value is created. We have OUTPERFORM ratings on both GDS and VNET, but an UNDERPERFORM rating on Dr.Peng. Following a sharp share price rally across the sector, GDS has most potential upside remaining and would be our top data centre pick. GDS and VNET are our top China data centre operator picks China cloud operators (Tina Long, Kenneth Fong, Kyna Wong) China’s public cloud market experienced exponential growth of 64% CAGR in the past five years, reaching US$7.5 bn (or Rmb50 bn) in 2018, according to IDC. Despite the rapid growth, China’s public cloud market is still nascent, evidenced by the fact that cloud IT spending merely accounted for 3% of China GDP in 2018, half of that of the US. On the back of continued strong demand on internet verticals, multi-cloud deployment and traditional industries picking up steam in cloud deployment, China’s cloud service penetration (cloud spending/IT spending) is expected to improve from 6% in 2019 to 15.8% in 2024. Other medium-term structural industry drivers include: (1) 5G, AI and IoT technologies applications, (2) overseas expansion on “Belt and Road” countries, and (3) policy support from the Chinese government. Kingsoft Cloud a new initiation benefiting from growth in China’s public cloud market Being the earliest mover in the cloud market in China a decade ago, AliCloud has spearheaded into the public cloud segment, and currently offers both IaaS (Infrastructure as a Service) and PaaS (Platform as a Service) to thousands of enterprises and government entities. As of 1Q19, it enjoyed a market share of 43% in China’s public cloud market, the largest one with shares equating to the aggregation of No 2 to 7 players, based on data compiled by IDC. In our view, AliCloud is well positioned to benefit from the industry tailwind, with several key advantages. Kingsoft Cloud (KC) is the largest independent cloud service provider in China, focusing on IaaS and PaaS, with its cloud solutions including both public and enterprise clouds. As of 2019, KC was ranked among the top 6 public service providers with ~5.4% market share in IaaS + PaaS in China, according to Frost & Sullivan. A few reasons why we like KC: (1) largest independent cloud service provider in China, (2) strategically selected verticals with high growth opportunities, (3) superior enterprise service capabilities with monetisation efficiency, and (4) strong technology capacities. Global Technology 63
64. 21 July 2020 Sector Section Global Technology 64
65. 21 July 2020 Asian Hardware: PCs and ODMs We believe that Asian cloud IT infrastructure ODMs have been key beneficiaries providing highquality open-source hardware solutions with greater scalability on more competitive pricing that is preferable by cloud service providers. We believe Quanta and Wiwynn in server and enterprise storage, and Accton in Ethernet switching, are key beneficiaries from the increasing workload shift to the cloud; improving hyperscalers’ capex cycle; and further proliferation of ODM Direct. We estimate 20-25% of Quanta’s sales are from IT infrastructure equipment (70-80% for cloud scenarios), which has better margins versus notebooks and wearable products, while 100% of Wiwynn’s sales are derived from cloud IT infrastructure equipment. For Accton, it joined the Facebook and Amazon supply chains in 2015, and we estimate data centre switch accounts for 35-40% of its total revenue. Jerry Su 886 2 2715 6361 Harvie Chou 886 2 2715 6364 Figure 154: Wiwynn and MiTAC have a higher sales exposure to cloud server Wiwynn MiTAC Wistron (incl. Wiwynn) Gigabyte ASRock Quanta Inventec FII 0% 20% 2020E 40% 2021E 60% 80% 100% 2017-19 avg Source:'>Source:'>Source:'>Source: Company data, Credit Suisse estimates ODM Direct proliferation to continue in servers and switches with new opportunities We expect ODM Direct proliferation in server/storage to continue, reaching 30% and 24% in 2022E, respectively, vs 24%/19% in 2019, and supported by the continued build-out of cloud data centres by the leading hyperscalers on the open-sourced platforms in order to meet the increasing cloud workload demand especially amid the COVID-19 outbreak. For networking switches, we expect ODM Direct to see a more meaningful take-off in the next few years, following the same patterns as in server/storage given the higher requirements for reliability and security, especially amid the migration from 100G to 400G. We expect ODM Direct penetration for data-centre switches to reach 10% in 2022, vs 6% as of the end of 2019. Figure 155: ODM Direct proliferation to continue in server/storage; switch to also follow same pattern long-term 26% 24% 24% 18% 24% 22% 20% 19% 2% 5% 30% 29% 30% 20% Figure 156: 400GbE speed port migration takes off from 2020 and is projected to reach 10% of the total market by 2022 100% 35% 25% ODM direct in server and storage now at 30% and 24% penetration respectively 80% 34% 44% 51% 56% 60% 15% 10% 58% 40% 10% 6% 8% 7% 6% 66% 10% 56% 47% 20% 5% 37% 31% 0% 0% 2018 2019 2020E Server Storage 2021E Switch Source:'>Source:'>Source:'>Source: Company data, IDC, IHS, Credit Suisse estimates Global Technology 2022E 2018 2019 <100GbE 2020E 100GbE 200GbE 2021E 2022E 400GbE Source:'>Source:'>Source:'>Source: Company data, IHS, Credit Suisse estimates 65
66. 21 July 2020 According to CS networking analyst Sami Badri, the 100G cycle featured share gains for ANET against Cisco, and while early moves in 400G shipments may be encouraging for ANET, we highlight that we expect 400G to start shipping at scale in 2021. The upcoming 400G cycle could prove to be competitive due to more vendors, as ANET, CSCO, JNPR, and potentially whitebox vendors, all look to take market share. 400G could prove to have more competition between ANET, CSCO, JNPR and whitebox Furthermore, we believe that the 400G cycle should be more of a level playing field for three key reasons: Optics have become more standardised since the 100G cycle enabling vendors to lower costs faster; Most key players are using merchant silicon; and Vendors have been able to make adjustments to their operating systems with CSCO now using its new IOS XR7 networking operating system software and JNPR using its Contrail/Junos with SONiC integration. The one key advantage ANET does have is its robust positioning in DCI/aggregation in dense Tier 1 nodes; however, in our view, this segment would not grow as fast as we have historically seen. We expect Taiwan ODMs are set for a second wave of transformation from cloud to the edge on open-sourced platforms. We expect increasing engagement by Taiwan ODMs with telecom operators, first from Quanta with the collaboration announcement with Rakuten to build a cloudnative mobile network, as well as the ONAP machine-learning-based data lake project with China Mobile in 2019, while we expect other ODMs to also follow suit with more active engagement and R&D in the near term. However, based on our conversations, we expect the market opportunities to first be capitalised by carrier-premise IT infrastructure vendors, before the market take-off for Taiwan ODMs from 2021, supported by the proliferation of OCP OpenEDGE on enhanced total costs of ownership, as well as increasing sophistication in design and customisation by Taiwan ODMs. We believe this should drive better profitability in the long term, given the offering of more comprehensive 5G end-to-end hardware products and solutions (including on-premises uCPE, edge computing, 5G NR, 5G Core, and service assurance and applications) to telecom operators. Figure 157: Taiwan cloud IT infrastructure ODMs set for a second wave of transformation from cloud to edge Source: Wistron Wiwynn For networking switches, we expect to see a more significant pick-up of 400GbE for cloud data-centre switches from 2H20, from the current mainstream port speed of 100GbE, and for this to further increase in 2021-22 as the cost structure of the transceivers, chipsets, etc., further improves. According to IHS, 400GbE sales are expected to further scale, representing more than 10% of total market sales in 2022, vs 2% in 2020. We also expect sales from ODM Direct in this segment to pick-up more significantly for nearly 20% of the market shares in 400GbE by 2022, vs 1% and 5% in 2019/20, respectively. Global Technology 66
67. 21 July 2020 Top picks in Taiwan ODMs: Quanta and Wiwynn; Accton/Parade preferred names but limited upsides We believe Taiwan IT infrastructure ODMs are the key beneficiaries from the continued expansion of global cloud spending by the leading US based hyperscalers, supported by further proliferation of OCP, and Taiwan ODMs leadership on the open-compute platform, as well as their respective long-standing hardware design/manufacturing know-how and global aftermarket services support. In this space, Quanta (NT$90.0 TP) is our top-pick among Taiwan ODMs, as we believe it will maintain its leading position on more diversified customers base, and earlier progress into enterprise/telco, driving enhanced profitability long-term. We also believe Accton (NT$240 TP) will be key beneficiary from the open-sourced platform take-off in networking switch, along with 400GbE speed-port migration, as well as new opportunities in 5G telco, but we see limited upsides after the over-100% run YTD. Initiating on Wiwynn with Outperform We initiate coverage on Wiwynn with an OUTPERFORM-rating and NT$960 TP (over 20% upside), as we expect it to see the largest momentum uplift from cloud IT infrastructure demand uptick, as the only pure play cloud IT infrastructure ODM with also unique positioning with the US hyperscalers, aside from new customer ramp from May-2020. Lastly, we also believe Parade (NT$970 TP) to benefit on PCIe4 take-off in data-centre and its technology leadership in high-speed IC, but also believe valuation becomes overly stretched after over 100% appreciation YTD. Global Technology 67
68. 21 July 2020 Asian Hardware: Components Market opportunity for the group Pauline Chen 886 2 2715 6323 Silicon scaling limitations, exponential data processing, broader machine learning frameworks, on-device intelligence and 5G adoption, have led to significant design changes for hardware components. How to deal with high bandwidth, low latency and massive connectivity, while meeting cost efficiency, is also important, given the huge ASP increase due to design changes and an estimated 40% of electrical power used to cool down a data centre. We expect the above trend to provide a growth opportunity for the components sector, which includes highspeed/high-frequency design and better thermal dissipation technology. Angela Pan 886 2 2715 6352 Supply chain implications PCB: The PCB sector benefits from a material change (CCL and FPC) to deal with high-speed and high-frequency requirements, which comprise at least a double-digit increase in ASP. Board makers also see benefit from the layer count increase, large area size and more usage of ABF substrate type compared to BT substrate type in data centres. Key suppliers have been adding capacity to meet demand growth and yield rate loss. Components seeing opportunity across PCB, power supply, thermal and connectors Power supply: Efficient power distribution and heat dissipation become more crucial, given more power consumption in HPC. With a 3,000+ Watt design becoming the mainstream for server power supply, power usage effectiveness (PUE) is also critical for total data-centre operating costs. We expect the change to be ASP accretive for leading suppliers, i.e. Delta, but we will monitor the progress of AI data centres, as these might theoretically reduce the number of servers required per data centre. Thermal: Better heat dissipation in data centres requires new thermal and casing design. Liquid cooling is seeing greater adoption in data centres, compared to other applications, i.e., PCs, NBs, smartphones and game consoles. Suppliers with better integration of different knowhow (including thermal, fans, casing material, etc) are likely to be better positioned, in our view. Connectors: The connector sector benefits from more pin counts, due to faster transmission speeds and massive connectivity, which is ASP accretive. The adoption of DDR5 and PCIe Gen4 could also lead to a design change from DIP to SMT, which also boosts ASP. Stock outlook Delta Electronics (2308 TT): We believe Delta’s core competence in highly efficient power electronics and its rich product offerings (including server power supply, telecom power supply, cooling, power chokes and networking, etc) should continue to help the company stay ahead in the power/energy efficiency competition. FII (601138 SS)/Hon Hai (2317 TT): We expect FII/Hon Hai to gain market share in the fast- growing cloud market, thanks to its share gains in cloud service provider (CSP). While FII’s CSES generates a lower-than-peer GM (4% in 2019, vs. Wiwynn’s 6.9%), due to its higher exposure to enterprise customers, we expect its continued market share gains in CSP US (especially Microsoft) to drive margin improvement in CSES over 2020-21E. Global Technology 68
69. 21 July 2020 Asian Hardware: China Downstream Public cloud driving server demand Kyna Wong 852 2101 6950 China’s cloud service market size is much smaller than that of US, but the cloud service growth rate is much faster and it became the second-largest cloud service market globally in 2018 according to Frost & Sullivan. Overall, we see that China’s cloud penetration is about 5-6 years behind that of the US. However, with faster growth, we expect China’s cloud service penetration to gradually reduce the gap with the US. China’s internet cloud market is expected to reach Rmb217.5 bn in 2024, with a CAGR of 32.2% from 2019-24E. Among the internet vertical, video and games have the fastest CAGRs, followed by e-commerce. According to Frost & Sullivan, almost half of US traditional enterprises and public service organisations were using cloud services in 2019, but only 10.5% of those in China are doing the same. With increasing acceptance of cloud services among traditional enterprises, we expect fast growth in cloud services among these verticals, especially led by financial services and manufacturing, with 28.1%/28.4% CAGRs from 2019-24E in terms of market size in China. Stephen Yin 852 2101 6980 Figure 158: A 32.2% CAGR for China's internet cloud service market from 2019-24 (Rmb bn) 250 217 50 11 17 2015 2016 25 54 37 346 350 292 238 188 200 105 100 400 (Rmb bn) 250 138 150 Figure 159: A 26.2% CAGR for China's cloud market for enterprise and public service organisations from 2019-2024 300 175 200 Clive Cheung 852 2101 7069 150 76 100 50 34 43 58 2015 2016 2017 108 79 145 - 2017 Video 2018 2019 Game 2020E 2021E 2022E 2023E 2024E E-commerce Public Service Others Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Frost & Sullivan, Credit Suisse 2018 2019 Financial Service 2020E 2021E 2022E 2023E 2024E Education Manufacturing Others Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Frost & Sullivan, Credit Suisse Compared with the US, China’s public cloud market is driven by Infrastructure as a Service (IaaS), with an 87% contribution in 2019 with a continued high 36.8% CAGR for 2019-24E. Typical cloud service providers in China usually start with IaaS, renting cloud servers instead of building their own. Secondly, some of them engage in PaaS, while moving databases onto cloud servers. Eventually, they undertake first trials on the cloud version of the software (SaaS) which they have already used. PaaS and SaaS are still in their early stages in China. Cloud service providers intend to promote PaaS to lift customers’ loyalty. Figure 160: IaaS accounts for a majority of China's public cloud market 400 (Rmb bn) 350 300 250 200 150 100 12 50 Figure 161: Top-5 IaaS + PaaS players in China’s public cloud market in 2H19 368 297 232 173 122 20 32 2016 2017 81 52 - 2015 2018 IaaS 2019 PaaS Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Frost & Sullivan, Credit Suisse Global Technology 2020E 2021E 2022E 2023E 2024E SaaS Total Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: IDC 69
70. 21 July 2020 For public cloud, Alibaba (~40%), Tencent (~11-12%), China Telecom (7.6%), and Huawei (~7.5%) hold established positions, while the fifth player is Amazon (~6%), which has just overtaken Baidu in 2019. Alibaba and Tencent started with a large amount of SMEs with low ARPU and loyalty, while China Telecom and Huawei had higher exposure to large enterprises (including SoEs) and operators. Huawei grabbed market share with its offline channel and implementation capabilities, starting end-2017 in public cloud. For private cloud, the market is fragmented, but we believe Huawei ranked No. 1, followed by H3C/Inspur ranked No. 2/No. 3. In the value chain of public cloud, we see cloud service providers also working with internet data centre operators (IDC). Telecom operators are the largest IDCs in China, followed by some independent service providers such as GDS, 21Vianet, Sinnet, etc. The giant cloud service providers, such as Ali-Cloud, Tencent Cloud and Huawei Cloud would build their own IDCs, instead of leasing or renting. Alibaba said it would invest Rmb200 bn (US$28 bn) in its cloud infrastructure over three years. Tencent is also set to invest around Rmb500 bn (US$70 bn) over the next five years to launch an array of advances in cloud computing as well as other technological offerings. China public cloud led by Alibaba, Tencent, China Telecom and Huawei Figure 162: Value chain of China’s public cloud industry IT equipment Server/Storage Inspur, Huawei, H3C, HP, Dell, Lenovo, Sugon, Powerleader, ODMs Switch/Router Huawei, H3C, Cisco, Star-Net, Maipu Network infrastructure Optical network Optical Component: Accelink, Innolight, Eoptolink, CIG, O-Net, Broadex Fiber: YOFC, Fiberhome, Hengtong Network access China Mobile, China Telecom, China Unicom Other infrastructure Cabinet; Uninterruptible power supply; Land; Cooling; Monitoring IDC system integrator & service provider Telecom operator China Telecom, China Unicom, China Mobile 21 Vianet, GDS, Dr.Peng, Baosight, Sinnet, Kehua Hengsheng, AtHub, Gosun, Wangsu (CDN) Cloud player Customer Trusteeship 3rd-party player Wholesale PaaS Internet service provider Financial enterprise Retail SaaS Co-build Government Manufacturing Alibaba, Tencent, Baidu, Huawei, Kingsoft, JD, AWS, UCLOUD * Originally , third-party players built and hosted datacenters for operators and cloud players. Nowadays, they have stretched into each others’ fields, w here they build their own datacenters and provide services directly. Source: Company data We see opportunities from rising server demand and product upgrades driven by public cloud. The increment of servers mainly comes from cloud, which has expanded rapidly over the past few years. After an aggressive pull-in in 2018, overall capex spending from the global tier-1 hyperscalers slowed materially in 2019, while we are now seeing improving server momentum on hyperscalers’ rebounding capex spending. The aggregated capex spending of tier 1 cloud vendors—including Facebook, Google, Amazon and Microsoft in the US, and Baidu, Alibaba and Tencent in China—amounted to US$78.9 bn in 2019 with growth of 2.1% YoY. Cloud capex has started to recover from 4Q19 and we expect the momentum to continue into 2021. CS tech team forecasts total hyperscale capex is set to rebound from -5% YoY and US$96 bn in 2019 to +17% and US$112 bn in 2020, with a further +17%/6% in 2021/22. According to IDC, despite rising penetration of ODM Direct, China server vendor (Inspur, Lenovo, Huawei, H3C and Sugon) shares delivered a 34% CAGR in the global market over 2014-18. Their shares increased even more by over 10 pp domestically from 2014-18 to represent over 60% of total shares. Among all the shipments made by the China vendors, the majority are volume servers with an average selling price of less than US$25,000 based on IDC definition, but China vendors are also gaining shares in mid- to high-end servers as the premium of global ASPs over China has been decreasing to slightly more than 20% by the end of 2019. Global Technology 70
71. 21 July 2020 Figure 163: China server vendors gain share despite the rising share of the ODM Direct model 35% $8,000 30.8% 30% 21.8% 20% 14.9% 14.2% 15.7% 23.7% 17.2% 11.3% 24.1% 2.4% 0% 0.9% 2010 3.7% 4.0% 2011 2012 200% $6,000 22.4% $5,000 17.8% $4,000 13.8% $3,000 10% 5% 250% $7,000 25% 15% Figure 164: Global x86 server premium vs China decreasing to slightly more than 20% 150% 100% $2,000 50% $1,000 $0 2013 ODM Direct 2014 HP 2015 2016 Dell 2017 2018 2012 China China Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: IDC, Credit Suisse 0% 2011 2019 2013 2014 Global 2015 2016 2017 2018 2019 Global ASP premium vs China vendors Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, Credit Suisse Market opportunities for China’s PCB supply chain According to Prismark, the server/storage sector CAGR is expected to reach 5.8% over 201823, second only to wireless telecom infrastructure’s 6.0%. The new generation of servers means higher requirements for PCBs, especially for high-speed and high-multilayer, which generate higher margins than telecom. Server and telecom PCBs have similarities in technology and customer. We believe that SCC and Shengyi would benefit from the upcycle in the server market. SCC and Shengyi benefiting from multi-layer and higher speed requirements for PCBs Figure 165: PCB market CAGR for 2018-23 by application Figure 166: Server upgrade requires high-speed CCL Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Prismark, Credit Suisse Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Iteq, Credit Suisse We see very large demand for telecom-used PCBs under the accelerated 5G rollout in China, where we forecast 613k/885k/1,021k BTS shipments over 2020-22E. PCB names benefit from units and price hikes in 5G due to content in single BTS increasing by almost 4x, in addition to there being 1.1-1.5x the shipments of 4G BTS. Content in front-/mid-/backhaul and core network equipment also increases on higher ASPs with the penetration of high-speed materials. Apart from telecom, 5G brings rising demand for high-frequency/high-speed PCBs in server/IDC and vehicle electronics. The new generation of servers means higher requirements for PCBs, especially for high-speed and high-multilayer, which generate higher margins than telecom. We also see structural opportunities in domestic substitution, with the increasing shares of China server vendors. PCBs seeing a 4x content increase moving from 4G to 5G As the communication industry enters the 5G era, there are higher requirements for data traffic and transmission speed. Some 90-95% of servers are based on Intel’s x86 framework. It is estimated that Intel will move to the new generation of server platform by end-2020, and computing performance would be further enhanced. According to our company checks, the penetration rate of Intel’s Purley Platform (PCIe 3.0) is expected to increase from 80% in 2019 Global Technology 71
72. 21 July 2020 to 90% in 2020. The remaining share of servers is dominated by AMD, whose Rome Platform (PCIe 4.0) kicked off in 3Q19, while PCIe 5.0 was released in June 2019 with 4x the speed of the current PCIe 3.0. As a result, we see rising demand for high-speed PCB/CCL to satisfy this round of server upgrades. Our industry checks show that PCB accounts for c. 5% in the cost of IDC. Assuming that the average PCB GM is 20%, raw materials take up 60% of COGS, and CCL takes up 50% of material cost, that is, CCL’s market value is equal to 24% of the PCB. Based on this above assumption, we estimate CCL demand in IDC would reach Rmb6.2/6.6/7.2 bn in 2020-22E, of which high-speed CCL would be Rmb3.4/4.0/4.6 bn. Top picks: Shengyi Among China component names, we note that PCB supply chain stocks Shennan and Shengyi should benefit from data-driven demand with server exposure of 6%/10% in 2019 rising to 1020%/10-15% revenue contributions by 2022. Telecom remains the major driver given its more than 65%/30% contributions in Shennan/Shengyi, respectively. Data centre requires highfrequency and high-speed CCL, which should drive further domestic substitution given rising China server production and the urgent need for supply chain security. Shengyi (OUTPERFORM, TP Rmb48. As a leading PCB/CCL maker in China, Shengyi shall realise volume and price improvement from the promising demand from telecom, datacom and automotive. Its profitability will improve thanks to the product mix upgrade with penetration of high-frequency and high-speed and improvement of operation efficiency. We model NI to grow by 33%/29%/23% in 2020-22E, supported by 20% CAGR of revenue and GM improvement. Our TP of Rmb48.1 is based on 2021 EPS and 44x P/E (+0.5SD of A-share CCL peers five-year historical average) and it is at c.15% premium of the simple average of A-share peers with 28% NI CAGR and 20% ROE. Shennan (NEUTRAL, TP Rmb194.6): We like Shennan due to it being a leading PCB maker with comprehensive capabilities. It should achieve sustainable growth driven by 5G, server and IC substrate. We like its leadership in telecom PCB and ramping IC substrate business, but near-term ASP pressure in 5G BTS PCB is an overhang and we await a better entry point. We model NI to grow by 43%/23%/11% over 2020-22E, supported by improving revenue and profitability. Our target price of Rmb194.6 is based on 2021 EPS and 43x P/E which is in line with +1SD of its A-share PCB peers’ five-year historical average, and supported by 24% NI CAGR and 31% ROE in 2021. Global Technology 72
73. 21 July 2020 Asian Semiconductors: Foundry/Backend/IC Design TSMC is the key beneficiary on its technology leadership The foundries historically were underexposed to the high-performance computing market, as server processors with a high portion of silicon opportunity have been dominated by Intel fabbing the CPUs itself. We believe that TSMC is the key beneficiary in the growing data centre market for its strong technology roadmap supporting its high-performance computing customers migrating to the most advanced nodes compared with its peers’. For TSMC, the highperformance computing market has been more related to graphics, programmable logic chips (FPGA) from Xilinx/Altera and network processors. With TSMC's technology now advancing to 5nm along with its customers' ambitions to replace CPU in some use cases (e.g. AI server), the company is turning more competitive in the applications requiring better performance compared with Intel's 14nm and upcoming 10nm, with AMD targeting a 15% server market share in addition to its growing traction in the PC/NB market. China's initiative on replacing overseas CPU with domestic solutions for better technology control would also support TSMC's growth potential in the HPC market. Randy Abrams 886 2 2715 6366 Haas Liu 886 2 2715 6365 Figure 167: TSMC growing its business 22% in 2022, led by its HPC opportunities TSMC growth drivers HPC - TSMC HPC - Market TSMC share (%) Automotive - TSMC Automotive - Market TSMC share (%) IoT - TSMC IoT - Market TSMC share (%) Mobile - TSMC Mobile - Market TSMC Mobile share (%) Digital Consumer Other TSMC CS Estimates YoY Growth 2016 $6.1 $19.3 31.7% $1.3 $10.8 12.4% $1.7 $5.6 29.7% $15.1 $30.9 48.9% $2.6 $2.6 $29.4 10.6% 2017 $8.1 $22.5 36.1% $1.4 $12.2 11.4% $1.8 $7.3 24.8% $16.3 $31.3 51.9% $2.5 $2.0 $32.1 9.1% 2018 $10.9 $26.1 41.9% $1.7 $13.4 12.7% $2.1 $9.0 22.7% $15.6 $30.7 50.9% $2.3 $1.6 $34.2 6.5% 2019 $10.3 $26.2 39.3% $1.5 $14.5 10.6% $2.68 $11.4 23.6% $16.9 $30.5 55.3% $1.8 $1.4 $34.6 1.3% 2020 $13.6 $29.5 46.0% $1.46 $16.1 9.1% $3.1 $14.2 21.6% $20.3 $35.1 57.8% $2.1 $1.9 $42.4 22.5% 2021 $14.1 $32.0 44.1% $1.6 $17.9 9.0% $3.39 $17.6 19.2% $21.0 $39.9 52.8% $2.1 $1.6 $43.8 3.2% 18-21 CAGR 9% 7% -2% 10% 18% 25% 10% 9% -3.5% 8.6% Source: Company data We estimate TSMC’s has doubled its high performance computing business from US$6 bn in 2016 to US$12.6 bn in 2020, with key drivers including its dominant position in graphics and accelerators for AMD and NVIDIA. The company's FPGA and network business is also growing along with rising investment in data centres and AI. We estimate the company's high performance computing business to grow 5-10% YoY in 2021, following +20-25% in 2020, with drivers including: TSMC gaining more opportunity in HPC applications through AMD and China CPUs, FPGA, AI accelerators and network processors AMD’s continued ramps. AMD shifted its server and desktop platforms from GlobalFoundries’ 14nm to TSMC’s 7nm starting from 3Q19 and continued that migration to 7nm in 1Q20. TSMC is gaining share at an opportune time as AMD is also growing its share from a low base across server and desktop/notebook compute with a more competitive product line in part from its support now having access to more advanced capacity. For TSMC, we project its contribution from AMD based on consensus revenue growth for AMD to increase from US$1.5 bn in 2018 to US$3.9 bn by 2021, taking it from a 4-5% customer to a 9% customer at the end of the period. An upside case for AMD taking a 15% market share in servers, desktops and notebooks similar to its 2006 peak would bring that stream up to US$5.3 bn, providing further 4-5 points of upside to TSMC’s sales growth. Global Technology 73
74. 21 July 2020 New game console cycle. In addition to the CPU opportunity, AMD is also ramping up new game consoles, with TSMC manufacturing the CPU and GPU on 7nm. Figure 168: TSMC’s HPC business has grown at an 18% CAGR from 2015-20 HPC Silicon Market Servers and CPUs Graphics and Gaming AI Accelerators Cryptocurrency Programmable Logic Networking & Infrastructure Computing Peripherals HPC - Market HPC Wafer Opportunity Servers and CPUs Graphics and Gaming AI Accelerators Cryptocurrency Programmable Logic Networking & Infrastructure Computing Peripherals HPC - Market TSMC estimates (CS) Servers and CPUs Graphics and Gaming AI Accelerators Cryptocurrency Programmable Logic Networking & Network Processors Computing Peripherals HPC - TSMC TSMC share of HPC production 2015 $14.4 $7.1 $0.34 $0.3 $4.4 $13.0 $8.0 $47.5 2015 $6.5 $2.7 $0.1 $0.2 $1.0 $4.4 $3.4 $18.2 2015 $0.0 $2.0 $0.1 $0.1 $0.7 $1.6 $1.4 $5.9 32% 2016 $15.4 $8.4 $0.8 $0.4 $4.3 $13.2 $7.8 $50.4 2016 $6.9 $3.2 $0.2 $0.2 $1.0 $4.5 $3.4 $19.3 2016 $0.0 $2.0 $0.2 $0.2 $0.7 $1.6 $1.4 $6.1 32% 2017 $16.8 $10.9 $1.9 $2.5 $4.5 $14.1 $7.7 $58.5 2017 $7.6 $4.1 $0.4 $1.3 $1.1 $4.8 $3.3 $22.5 2017 $0.0 $2.4 $0.4 $1.3 $0.7 $1.8 $1.4 $8.1 36% 2018 $20.6 $13.0 $3.5 $3.3 $4.7 $14.6 $7.5 $67.3 2018 $9.3 $4.9 $0.8 $1.7 $1.3 $4.9 $3.2 $26.1 2018 $0.3 $3.7 $0.8 $1.6 $0.9 $2.0 $1.7 $11.0 42% 2019 $22.6 $12.4 $4.0 $1.0 $5.4 $15.6 $7.4 $68.3 2019 $10.2 $4.6 $0.9 $0.5 $1.5 $5.3 $3.2 $26.2 2019 $0.5 $3.6 $0.9 $0.4 $1.1 $2.2 $1.7 $10.3 39% 2020 $24.8 $14.4 $6.4 $2.0 $5.8 $17.18 $7.2 $77.8 2020 $11.2 $5.4 $1.4 $1.0 $1.6 $5.8 $3.1 $29.5 2020 $1.3 $4.3 $1.4 $0.7 $1.2 $2.6 $2.06 $13.6 46% 2021 $27.3 $15.5 $9.0 $2.0 $6.2 $18.04 $7.1 $85.1 2021 $12.3 $5.8 $2.0 $1.0 $1.7 $6.1 $3.0 $32.0 2021 $2.1 $3.6 $1.9 $0.6 $1.3 $2.74 $2.0 $14.1 44% 15-20 CAGR 11% 15% 80% NM 6% 6% -2% 10% 15-20 CAGR 11% 15% 80% NM 9% 6% -2% 10% 15-20 CAGR NM 16% 78% NM 12% 10% 8% 18% Source: Company data Good growth in network processors and FPGAs. The FPGA and network processors could see accelerating growth from the rising content in 5G base stations which requires additional compute by the cell site and also as accelerators in the data centre, with Xilinx expecting its served available market expanding at a 16% CAGR over FY20-24 (Mar) from US$15 bn to US$28 bn. We expect Xilinx to continue the partnership with TSMC's technology migration in the leading edge. Growth of AI accelerators. We believe NVIDIA's AI accelerator business is broadening to more companies developing own machine-learning and inference chips (Huawei, Alibaba, Amazon, Google, AMD and Xilinx and a host of start-ups). Potential compute business in China. China may provide another channel for server demand from its efforts to diversify from the US and have its own hardware and security software. Huawei introduced its Kunpeng 920 server CPU fabbed at TSMC claiming high bandwidth, I/O count and the most processing capability among the nascent ARM-based server chips. Alibaba also went to TSMC design service partner Global Unichip for its Hanguang 800 AI chipset built in TSMC. China fabless is developing their own CPU solutions to replace Intel/AMD for government and SOE (e.g. Phytium) and also working with IC design service companies and manufacture at TSMC. China CPUs is an emerging channel for TSMC given its process lead over the local foundries Although SMIC may get support from local government on funding, we believe the company will still be less competitive compared to TSMC in the most leading edge applications requiring highperformance computing, as the company is lagging in technology roadmaps by three generations (5-10 years) and lacks the most advanced manufacturing tool access (e.g. EUV). ASE/Amkor also targeting high performance compute While TSMC's back-end contribution is US$2.8 bn (8% of the company's sales), modest relative to the overall company due to the large scale of front-end wafer fabrication, we believe the business is a key growing piece in TSMC's strategy to sustain leadership. The company is advancing solutions to combine front-end foundry and advanced packaging to extend Moore's Law for its customers particularly in high performance computing, high-end mobile and advanced autonomous driving, with back-end technologies including InFO (integrated fan-out— Global Technology 74
75. 21 July 2020 redistribution layer in compound to package chips), CoWoS (chip on wafer on substrate—silicon interposers to connect chips) and SoIC (system on integrated chips—3D stacking to connect chips). TSMC has good traction in the business with 60 tape-outs for its CoWoS as of 2H19 with design wins at high-performance computing applications including FPGA (Xilinx), graphics (NVIDIA), networking (Broadcom and Mediatek), supercomputing (Fujitsu) and China CPU fabless (Phytium, Kunpeng) and 20 tape-outs for InFO with solutions for networking, mobile, AiP and wearables, and the high-profile iPhone design since 2016. Figure 169: TSMC believes its SoIC offers better power performance versus existing 2.5D and 3D IC packaging Figure 170: TSMC's back-end solutions include InFO, CoWoS using silicon interposer and SoIC using advanced 3D stacking Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data For the pure back-end companies, although the dollar content for high-performance computing is high, the volume opportunity is relatively low so the opportunity may be on the edge computing devices. We believe that ASE and Amkor’s computing business contributes 15% of its sales. The company in the core computing business should benefit from the applications including graphics and game consoles (AMD, NVIDIA) and networking chipsets while it can also leverage its strong SiP business in the edge computing business for 5G and RF content growth in end devices. Figure 171: Powertech has introduced its fan-out roadmap Figure 172: ASE and SPIL facilitate 5G networking packaging Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Powertech Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: ASE IC Design: Aspeed a near pure play, Mediatek has growing exposure with its ASIC solutions Aspeed has been dominant in its core baseboard management controllers (BMC) that comprise 90% of sales, with a 70% market share. The company supplies almost all of the major hyperscale customers through the Taiwan ODMs and has grown to a 35% enterprise server share following its acquisition of Broadcom’s Emulex Pilot division in 2H16. Although the business may slow down in the near term due to inventory overbuild in 1H20, we believe the company has drivers in 2021 including share gains in new cloud customers by 2H21 and more units into storage, switch and 5G Edge servers (incremental 5-10% of units). Some data-centre capex would also be deferred due to lockdown constraints this year. Global Technology Aspeed has a 70% share of server units with its Baseboard Management Controller for remote management of servers 75
76. 21 July 2020 For Mediatek, the company's subsidiary, Nephos, was set up in 2012 for the company's networking switch business with a focus on enterprise Ethernet switch chips. We believe the high-end data-centre switching business should grow as customised chipsets are penetrating into Cisco and Juniper following the company’s investments in the past few years. The company has several design wins, including a tier 1 OEM with its high-end Serdes data centre switch operating at 56Gbps, with 112Gbps in development and tape-out on TSMC’s 7nm. The market size is about US$2 bn+—dominated by Broadcom followed by Marvell, both operating at 60%+ GMs—and offers good potential for new entrants. The key for Mediatek in data centre switching, is maintaining time-to-market for these data centre upgrade cycles with much attention devoted to hitting the 5G market on time. Mediatek established its networking subsidiary and ASIC team to target data centre switch and AI acceleration projects, opening up a US$2 bn+ new market opportunity at higher margins than consumer and mobile Figure 173: Aspeed’s AST2600 BMC to be in mass production by the year-end Figure 174: Nephos provides a complete product portfolio with unified architecture to support higher capex efficiency Source:'>Source: Aspeed Source:'>Source: Nephos Global Technology 76
77. 21 July 2020 Asian Semiconductor: IC Design Services IC design service companies are benefitting from a trend for rising IC design difficulty as technology migrates, with the design cost surging from US$26 mn for 28nm to US$52mn for 16nm and US$130mn for 7nm. To ensure successful tape-out and secure foundries' capacity, design service companies can fill a gap supplying design support and foundry design-in to system companies and start-ups designing chipsets on the advanced nodes. The trend for IC customisation and higher design cost has accelerated the growth for major Taiwan IC design service companies with a 9% CAGR from 2013-19, in line with global fabless, following a slow 2007-13 (1% CAGR vs. global fabless' 9%) when the market was dominated by standardised chipsets (e.g. main processors in PCs and smartphones). Haas Liu 886 2 2715 6365 Figure 175: Performance, technology and target application comparison for major IC design service companies IC design service company Ticker Global Unichip Alchip Faraday VeriSilicon 3443.TW 3661.TW 3035.TW Pending $346 27.5% 6.5% $140 35.6% 10.0% $172 44.6% 7.5% $191 40.2% -4.7% 759 Front/back-end design, IP 65nm and above:'>above:'>above:'>above: 30% 40nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm: 13% 28nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm: 37% 16nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm: 16% 7nm and below:'>below:'>below:'>below: 4% 404 Front/back-end design, IP 55nm and above:'>above:'>above:'>above: 4% 40nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm: 6% 28nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm: 29% 20/16nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm: 33% 12/7nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm: 27% 882 Back-end design 0.25um:'>um: 0-5% 0.18-0.11um:'>um: 35-40% 90-55nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm: 20-25% 40nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm:'>nm: 15% 28nm and below:'>below:'>below:'>below: 20-25% 936 Front/back-end design, IP Computer: 43% Consumer:'>Consumer:'>Consumer:'>Consumer: 34% Communication:'>Communication: 11% Others:'>Others: 12% PC:'>PC:'>HPC:'>PC: 59% Network: 14% Niche: 18% Consumer:'>Consumer:'>Consumer:'>Consumer: 9% Industrial:'>Industrial: 30-35% IoT:'>AIoT: 30-35% Communication:'>Communication: 20% PC:'>PC: 10-15% Others:'>Others: 0-5% TSMC (100%) TSMC (~100%), Samsung, SMIC, GlobalFoundries UMC (70-75%), Samsung (20-25%) Revenue (US$mn) GMs OpMs Headcounts Service Technology support Targeted applications Foundry partners 28nm and below:'>below:'>below:'>below: 85% 28nm and above:'>above:'>above:'>above: 14% Consumer:'>Consumer:'>Consumer:'>Consumer: 38% IoT: 24% Data processing: 20% Industrial:'>Industrial: 10% PC:'>PC: 4% Automotive: 4% SMIC (30%), Samsung (5-10%), GlobalFoundries (5-10%), Hua Hong, TSMC Source:'>Source: Company data, Credit Suisse estimates Design service leveraged to China's CPU localisation Design service companies have been able to support China’s more aggressive stance in recent years in order to develop its own processors to capture more value in the tech chain and have better control of the IT ecosystem amid its ambition of "Made in China 2025" and the growing trade tension with the US. We believe that the PC/NB CPUs used by the government and SOEs are the first wave of chipsets that China aims to replace (5mn unit demand annually) and higher-end server CPUs should be the next (3 mn unit annual demand). Figure 176: Comparison of the technology developments for the major China CPU fabless China CPU fabless Shareholders Architecture PC Tech spec Manufacturing node Server Spec Manufacturing node IC design partner Ecosystem support Security China technology control Loongson Institute of Computing Technology, Chinese Academy of Sciences MIPS32 3A3000 1.5GHz Quad core 64 bit 28nm 3B3000 1.5GHz Quad core 64 bit 28nm Phytium Kunpeng Sunway Hygon Zhaoxin China Great Wall, CEC Group Huawei Wuxi Jiangnan Institute of Computing Technology Sugon, AMD, Hygon Shanghai Zhaoxin (VIA + Shanghai government) ARM v8 FT2000/4 2.0GHz Quad core 64 bit 16nm FT-2500/64 2.5GHz 64 cores 64 bit 16nm ARM v8 920s 2.0GHz Quad / Octa 64 bit 7nm 920 2.5GHz 64 cores 64 bit 7nm Sunway 64 SW410 1.6GHz Quad core 64 bit 40nm SW26010 1.45GHz 260 cores 64 bit 28nm x86 7185 2.0GHz 32 cores 64 bit 14nm 7185 2.0GHz 32 cores 64 bit 14nm x86 KX-6000 2.0GHz Quad core 64 bit 16nm KH-30000 3.0GHz Octa cores 64 bit 16nm NA Alchip, EE2 HiSilicon NA AMD VIA Limited High High Strong High Medium-High Strong High Medium-High Limited High High Strong High Low Strong High Low Source:'>Source: Company data, Credit Suisse estimates We expect Phytium, a China ARM CPU fabless, to lead its local peers on a strong roadmap migrating to 16nm for PC/NBs and 7nm for servers, benefitting its design service partner Global Technology 77
78. 21 July 2020 Alchip by supplying a US$720 mn TAM (far exceeding Alchip’s US$144 mn sales in 2019). The company also has exposure in China’s supercomputing system which should see content per system growing from US$30 mn for 16nm to US$50mn for 7nm. Figure 177: Alchip’s addressable market for China PC/NBs, server CPUs and supercomputing could reach US$780 mn Alchip's turnkey business China PC CPU shipment (000 units) China PC CPU ASP from Alchip (US$) China server CPU shipment (000 units) China server CPU ASP from Alchip (US$) China CPU sales contribution Supercomputing sales contribution China CPU + supercomputing contribution (US$mn) Alchip's sales (US$mn) % of Alchip's sales 2019 400 $45 0 $150 $18 $0 $18 $144 12% 2020 1,800 $45 10 $150 $83 $7 $90 $215 42% 2021 2,100 $45 50 $150 $102 $43 $145 $289 50% 2022 3,000 $45 150 $150 $158 $25 $183 $366 50% LT addressable market 6,000 $45 3,000 $150 $720 $60 $780 Source:'>Source:'>Source:'>Source: Credit Suisse estimates Growing AI computing drives ASIC demand Design service companies are also seeing new growth from AI chipset innovation accelerating to support demand for higher compute performance and the data analytics required for advanced semiconductor manufacturing technology. Figure 178: AI ASIC is going to outgrow the AI semiconductor market AI chipset market (US$mn) $45,000 AI chipset market YoY 150% $36,000 120% $27,000 90% $18,000 60% $9,000 30% $0 0% 2019 2020 2021 2022 2023 2024 ASIC market (US$mn) AI chipset market (US$mn) AI ASIC market YoY AI chipset market YoY Source:'>Source:'>Source:'>Source: Gartner, Credit Suisse estimates Gartner expects global AI semiconductor revenue to grow from US$12.3 bn in 2019 to US$43.9 bn in 2024 at a CAGR of 29%. Figure 179: Different types of chipset comparison for AI computing CPU Moderate High Highest Low Low High GPU High Very high Medium Moderate Moderate High FPGA Very high Very low Very high Low-moderate High Moderate General computing Cloud training Cloud inference Cloud inference Edge inference Intel, AMD Nvidia, AMD Xilinx, Altera Processing peak power Power consumption Flexibility Training Inference Cost per compute Major applications Companies ASIC Highest Low Lowest High High Low Cloud training Cloud inference Edge inference Diversified Source:'>Source:'>Source:'>Source: Credit Suisse estimates Global Technology 78
79. 21 July 2020 Although GPU and FPGA are the mainstream chipsets for AI computing, the demand for customised ASICs is rising, as they can provide more efficient computing for training and inference, with AI chipset projects mostly on 16/12nm and 7nm, and driving growth for Alchip/GUC in the coming years. Figure 180: Most of the AI semiconductor projects are on the advanced nodes, with TSMC being the key foundry beneficiary Start-ups AIMotive Blaize BrainChip Cambricon Cerebras Deep Vision DeepcreatIC Deephi DinoPlus Enflame Esperanto GrAI Matter Labs Graphcore Groq Habana Labs Hailo Horizon Robotics IntelliGo Intengine Tech Kneron Lightmatter Lynxi Mythic Novumind Preferred Networks Reduced Energy Microsystems SambaNova SenseTime SiMA.ai Syntiant Tenstorrent Thinkforce Tsinghua Thinker Unisound Vathys Wave Computing Xanadu Key focus area Semiconductor chipset and software for automated driving Vision processing chips Neuromorphic SoC (Akida) that can be function as an SoC or integrated into ASIC Device and cloud processors for AI Systems Specialized chip for deep-learning applications Low-power silicon architecture for computer vision Heterogeneous neuromorphic chips Compressed CNN networks and processors High-performance and ultra-low latency AI chipsets for 5G/edge computing Cloud-based deep learning chips for AI training platforms Massive array of RISC-V cores AI chipsets designed for ultra-low latency and low power processing at the edge Graph-oriented processors for deep learning Google spinout working on deep learning chip Programmable deep learning accelerators for data center training and inference Specialized deep learning microprocessor Chipsets and solutions for smart Home, automotive and public safety Hardware and software for image and speech processing AI chips for embedded system for edge computing NPU that accelerates neural network models making possible applications (e.g. face detection and gesture control) in embedded devices Programmable photonic to accelerate critical operations in deep neural networks Brain-like computing chip for high performance computing Ultra-low power neural networking inference chips based on flash+analog+digital AI for IoT Real time data analytics and chipset solutions with deep learning library Country Foundry Hungary GlobalFoundries US TSMC Australia TSMC China TSMC US TSMC US TSMC China SMIC China TSMC US NM China GlobalFoundries US TSMC France TSMC UK TSMC US NM Israel TSMC Israel NM China TSMC China NM China NM Most advanced node 22nm FD-SOI 28nm HPC 28nm 7nm 16nm 28nm HPC 40nm 7nm NM 12nm LP 7nm 28nm 16nm 14nm 7nm NM 16nm NM NM Tech investors Cisco, Samsung Denso, Samsung Listed Alibaba, TCL NA NA NA Xilinx NA Tencent, SummiView Western Digital NA Dell NA Intel NEC SK Hynix Mediatek NA US TSMC 16nm Alibaba, Himax, Qualcomm US China US US Japan NM NM Fujitsu TSMC TSMC NM 28nm 40nm 7nm 12nm Alphabet NA Lam Research, Micron, Softbank NA Hitachi, Fanuc Chipset solutions for deep learning and machine vision with low power consumption US GlobalFoundries 22nm FD-SOI NA Reconfigurable Array platform for matrix arithmetic for AI applications Chipset solutions for computer vision Machine Learning SoC platform for high performance and low power consumption Customized analog neural networks Deep learning processor for faster training and adaptability to future algorithms AI chips for edge computing Low power AI chips for edge computing Chipsets for AI-based speech and text capability Chipset design for deep learning supercomputers ASIC solutions for deep learning computers Quantum photonic processors US China US US Canada China China China US US Canada NM NM NM NM GlobalFoundries NM TSMC TSMC NM TSMC NM NM NM NM 40nm ULP 12nm NM 65nm LP 28nm NM 7nm NM Google, Intel Softbank, Singtel, Qualcomm, Alibaba Dell Amazon, Microsoft, Intel NA NA Tsinghua VC Qihoo NA Samsung NA Source: Company data, Credit Suisse estimates Key stocks: Alchip and Global Unichip We recently initiated coverage on Alchip with an OUTPERFORM rating and NT$425 target price, implying 20% upside, based on 25x our 2021 EPS and factoring in our expectation for a 30% sales CAGR from 2019-22. We believe the upper half of the long-term valuation should be supported by the opportunity in China PC CPU replacement demand in addition to its AI exposure. Alchip a good pick addressing supercomputer, AI and China CPU projects Separately, we also recently initiated coverage on Global Unichip with a NEUTRAL rating and NT$225 target price, reflecting 25x our 2021 EPS. We believe the company’s share is fairly valued at the upper half of its range factoring in its opportunity in 5G and AI. Key risks include: (1) slower local CPU/AI penetration in China or US restrictions; (2) consolidation or failure of emerging AI start-ups and system company projects; (3) the US further expanding its ban on Chinese companies’ access to IP/EDA tools; (4) customers growing and shifting to a foundry direct business model; and (5) intensifying competition from Verisilicon in China or build-up of more in-house teams. Global Technology 79
80. 21 July 2020 Global Semiconductors: Memory Levered to increasing compute intensity Cyclical dynamics have a way of accentuating secular trends at peaks and obfuscating them at troughs. Given that it now appears we are approaching the latter, we believe it might be helpful to outline why we have been secular bulls on memory since 2015. Any bullish thesis in memory needs a solid supply foundation. While managements enjoy discussing demand drivers—the next new thing, content growth, buzz words—it has been our experience that any bullish view on memory needs to be grounded in supply. Supply is more tangible and analysable, especially because demand is always the strongest when it is being significantly overstated—i.e. customers are building inventory. John Pitzer 212 538 4610 Keon Han 82 2 3707 3740 Dalya Hahn 212 538 7843 Sanguk Kim 82 2 3707 3795 Relative to supply—the secular thesis is fairly straightforward—as scaling has become more difficult, each successive node transition is leading to fewer incremental bits per wafer and a flattening cost curve, and this has continued to be the case for DRAM as cost-downs have declined from what was ~25% per year, to what we now see as ~8% per year. Bit/wafer growth is once again slowing. In NAND, flattening cost curves dominated the transition from 2D to 32L 3D as bits/wafer remained the same; however, there was a significant re-acceleration from 32L to 64L as incremental bits per wafer doubled—a significant driver of the oversupply in NAND in 2018-19. Importantly, now that the industry is transitioning to 9xL and for each successive generation, incremental bit growth/wafer is once again declining: 32L to 64L was a 100% increase, 64L to 9xL will be 50%, 9xL to 12xL will be 33% etc. This is an extremely important dynamic which we continue to believe the market has not fully grasped or appreciated. Moore’s Law also increases bit capacity. While a flattening cost curve might be viewed as negative for profitability/margins, we would remind investors that in semis, the same mechanism that lowers costs also increases capacity. Starting in the late 1990s through 2015 when Moore’s Law was accelerating, 300 mm fabs were becoming more productive, cycle times were declining and cost curves were steepening—and any benefits from lower cost were more than lost to accelerating supply growth and corresponding negative impact to ASPs. We see flattening cost curves as indicative of more rational/constrained supply and fundamentally better through-cycle pricing. Demand elasticity won’t drive supply growth. The best concern/retort to our thesis is the impact that better pricing might have on long-term bit growth—i.e., price elasticity has been a key driver of memory content growth and when memory pricing increases OEMs are likely to respond by “de-speccing” as they have done before in the PC and handset markets. While we have sympathy for this concern (especially for NAND which we view as more elastic), we would make several counter-points: DRAM is more inelastic than elastic especially in the cloud. The primary function of DRAM is to keep a processor fed when processors are mostly contained in PCs, tablets and handsets where applications are “good enough” and utilisation is low, i.e., processors are not eating often. DRAM content has a low ceiling; however, when you move processing power to the cloud, hyperscalers’ primary economic driver is utilisation. The more highly they can utilise the data centre, the more profitable they will be. Thus, with high utilisation meaning processors want to eat all the time, increasing DRAM becomes a point of leverage at any price. Global Technology 80
81. 21 July 2020 Figure 181: DRAM server content driving growth Figure 182: DRAM content/MPU units Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, Gartner, Credit Suisse estimates Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, Gartner, Credit Suisse estimates We have yet to see the impact of AI/ML workloads on DRAM demand. These workloads are extremely memory/DRAM intensive. There is no cognition without memory. The DGX2, NVIDIA’s ML server, has a maximum configuration of 1.5 TB of DRAM versus the average server of just 50 MB. While the DGX2 has ~1/2 the processing power of the human brain (note that the DGX2 needs 3,200 Watts, while the brain needs 32 Watt—i.e., biology is still multiple orders of magnitude more efficient), the human brain still has 100-300x the memory capacity of the DGX2. Most if not all of the private start-ups in semis are focused on solving the memory wall. Figure 183: Computing demand vs total NAND bit demand Figure 184: Changing NAND demand mix Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, Gartner, Credit Suisse estimates Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source:'>Source: Company data, Gartner, Credit Suisse estimates NAND is clearly driven by elasticity and a longer-term flattening of the cost curve is likely to put downward pressure on long-term NAND demand assumptions of 30-40%. However, we see a significant upgrade cycle coming in handsets in 2H20/2021—as 5G phones become more readily available. Data would suggest that consumers are delaying their upgrades and that the installed base of handsets is 12-18 months older than it was just a few years ago. Even without a killer app, we see 5G as a catalyst for consumers to upgrade. Memory becoming a more valuable resource in data centres DRAM and NAND designs are no longer simple. The origin of DRAM was to feed PCs that were simpler in spec and design, similar to planar NAND for storage in mobile devices prior to the advent of 3D NAND. As time progresses and the memory end market diverges to countless devices (IoT), spec is no longer defined. Every memory customer has their own spec; thus, memory continues to become more customised and is becoming a more valuable resource. This Global Technology 81
82. 21 July 2020 is also true in server DRAMs. Hyperscalers no longer use OEM-built servers; instead, they design their own servers for scale, profit optimisation and operating cost efficiency. We believe that this trend will accelerate as data centres built for public cloud services become more dominated by hyperscalers driving the steady demand increase for overall memory. In a short span of time, the server DRAM portion of the market has climbed from 18% to nearly 35%. Figure 185: Memory rising as a % of total semiconductor industry value Source:'>Source:'>Source:'>Source: Dram eXchange, Credit Suisse estimates Server to surpass mobile DRAM demand in a few years. Since 2016, the demand growth rate of server DRAM began to surpass mobile DRAM. We project total demand from servers to surpass the aggregate demand of the mobile segment by 2022-23. We believe that this is achievable given that: (1) global server shipments are expected to deliver a 7% CAGR to 2023 with the content-per-box growth rate at 15-20% YoY; (2) hyperscalers continue to represent a larger portion of global data-centre build-outs accounting for 87% of installed based public cloud servers; (3) newly installed data-centre CAGRs remain at 11%, having faster growth rates than the overall server average, representing consumption growth in memory; and (4) cloud data centres now constitute a majority of new data-centre storage capacity. The memory density increase per server unit should show similar trends experienced by the PC and mobile phone industry in the early years with density per box growing faster in earlier phases. Data workload continues to shift into the cloud while the number of connected devices is growing exponentially. Adding new services and software require more powerful CPUs that require more memory intensity. Figure 186: Server has nearly caught up to mobile DRAM demand Server close to rivalling mobile as the key driver of the DRAM market Figure 187: Server DRAM now commands a premium over PC/mobile 50% Unit: US$, 1Gb Equiv. 45% 1.4 60% 1.2 50% 1.0 40% 40% 35% 30% 30% 25% 0.8 20% 0.6 15% 0.4 0% 0.2 -10% 0.0 -20% 10% 5% 0% 2012 2013 PC Source:'>Source:'>Source:'>Source: Dram eXchange Global Technology 2014 Server 2015 2016 Mobile 2017 2018 Graphics 2019 Others 20% 10% 2020E Server ASP Server over Mobile(%, premium, RHS) Server over PC (%, premium, RHS) Source:'>Source:'>Source:'>Source: DRAM eXchange 82
83. 21 July 2020 Market opportunity for the group CPU cores and memory channels growing. Just as desktop PCs use their own CPU design (Intel i7, i9, etc.), servers use server-dedicated CPU series such as Intel Xeon (X86). Server processors need to be fast, and perform multiple and simultaneous tasks. The main difference is that a server CPU is typically mounted on a motherboard as two or more units in order to handle a high workload. Depending on the spec and purpose of the server (AI, web, database, storage, etc.), the memory requirement varies, but directionally would grow as more processors are added. The CPU-to-memory ratio is balanced for optimal server performance and specific tasks. Similarly, the server CPU’s core count (a maximum 48 cores as in the Intel Cooper Lake Xeon) and rising memory channel support (eight channels) should continue to correlate to higher DRAM intensity, as CPU bandwidth rises. Error correction code (ECC) requirement in server DRAM becomes more important. The primary difference between a PC DRAM and server DRAM is the requirement of ECC. Server processors, such as the Intel Xeon, would use ECC RAM. ECC detects and corrects any data that was incorrectly processed by a DRAM module before the memory error occurs. As data-centre servers are up and running continuously, any memory error could bring down the entire server and could cause data corruption. Severs cannot go down for any reason; therefore, ECC capability in server DRAM is an extra layer of protection. ECC is an algorithm placed in the memory controller and represents one check bit for each byte of data. As it takes up space, in order to store the ECC code in the memory, the bandwidth requirement increases. Server memory modules (eight chips) could have an added chip for storing ECC (the ninth chip). DDR5 for servers (2021) will likely incorporate on-die ECC. DRAM makers addressing these complexities will likely benefit with larger market shares. Already having introduced LP DDR5, we believe that Samsung should continue to lead the Server DDR5 advancement. Servers are eventually consumables and need replacement. Similar to PCs and smartphones, we believe that data-centres (servers) are consumables that require replacement in a relatively shorter duration. While server life cycle varies, the replacement cycle could be as short as three years given the wear and tear from continuously running. Additionally, each generation of new CPU could compel replacement if the server is different enough to make a notable impact on performance or operating costs. Offering the latest CPU also means a competitive edge among cloud service providers. A shift in server CPU generation can compel an entire instance type of servers in a data-centre: AMZN Web Services (AWS), for example, has 30 instance types making up millions of installed base servers across the world. Also, a customer’s data centre needs to vary depending on the specific service required and geographical location, which necessitates constant shifts and additions of server types. With 80% of global Server DRAM market share, we believe both Samsung and SK Hynix are in a strong position to benefit from data centre industry growth. Figure 188: Server DRAM content growth stable at ~20% per annum Figure 189: Korea dominates Server DRAM with an 80% market share—2020E 100% Micron, 20% 80% 60% Samsung , 43% 40% 20% 0% -20% 2012 2013 2014 PC 2015 Server Source:'>Source: DRAM eXchange, Credit Suisse Global Technology 2016 2017 Mobile 2018 2019 2020E SK Hynix, 37% Graphics Source:'>Source: DRAM eXchange, Credit Suisse 83
84. 21 July 2020 China demand potential and risk. China’s public cloud market experienced an exponential 64% CAGR over the past five years, reaching US$7.5 bn (or Rmb50 bn) in 2018, according to IDC. Despite the rapid growth, China’s public cloud market is still nascent, evidenced by cloud IT spending merely accounting for 3% of China’s GDP in 2018, half that of the US. Meanwhile, public cloud penetration (as a ratio to total IT spending excluding devices) was low, at a mere 10%, despite a big leap from 2% in 2014. In comparison, the US public cloud market is much bigger, at US$111 bn in 2018, or 15x larger, constituting 61% of the global cloud market. China’s demand potential is therefore great. Despite faster growth rates in cloud infrastructure investment, China generally lacks domestic suppliers of upstream semiconductors such as CPUs and memory. In 2014, China’s government issued a National IC Development Guideline to advance key semiconductor development and production domestically. While memory semiconductor development has not been explicitly stated, capital allocation toward the memory industry seems to be the natural outcome given the attractive size of the addressable end-market and break-away from 100% reliance on imports as a sourcing diversification strategy. It has already selected its DRAM champion in CXMT and NAND in YMTC. China failing in DRAM/NAND development would be industry neutral, while success could bring about a global oversupply risk in the future. Currently, the consensus expectation is for China to succeed in NAND on a limited basis, while DRAM development would likely prove more challenging. China a long-term risk for the memory sector, although the market offers a good potential source of growth Figure 190: China major Internet players’ capex Source: Company data, Credit Suisse Supply chain implications Investment for memory technology-advancement will continue. Rising data-centre builds are expected to continue to expand the total memory (DRAM/NAND) addressable market. In addition, requirements to support high data-processing speeds with a need for better coststructure/higher density and memory makers’ investment on technology advancement would continue either through node migration at DRAM or adding more layers on 3D NAND. Now with better inventory conditions at KR chipmakers (SEC/SK Hynix), KR memory makers’ efforts on technology investment will likely materialise by leveraging their newly built fabs in and out of Korea, such as SEC (Xian II fab/Pyeongtaek II fab) or SK Hynix (M15, M16 and Wuxi II fab). Nonetheless, total memory supply growth will likely be controlled thanks to the optimisation of production lines (i.e., conversion of obsolete DRAM lines into CIS). Global Technology Memory supply kept under control as older lines are converted to other applications like CMOS image sensors 84
85. 21 July 2020 Figure 191: KR chipmakers—DRAM wafer input capacity vs. technology migration 12" equiv., '000 wafers/mon 1,000 +9% YoY wafers input growth (4Q20E vs. 4Q19) Figure 192: KR chipmakers—3D NAND wafer input capacity vs. technology migration 75% 12" equiv., '000 wafers/mon 600 +12% YoY wafers input growth (4Q20E vs. 4Q19) 750 50% 80% 60% 400 500 40% 25% 250 200 20% 0 0% 1Q19 SEC 2Q19 3Q19 SK Hynix 4Q19 1Q20 2Q20E 3Q20E 4Q20E 1y or 1z nm DRAM as % to total DRAM output (RHS) Source:'>Source:'>Source:'>Source: Company data, Credit Suisse estimates 0 1Q19 SEC 2Q19 3Q19 SK Hynix 0% 4Q19 1Q20 2Q20E 3Q20E 4Q20E 92/96L or above as % to total NAND output (RHS) Source:'>Source:'>Source:'>Source: Company data, Credit Suisse estimates KR memory value chain well placed to benefit even fuelled by localisation effort. Against this backdrop, the KR memory supply chain (equipment/materials) will continue to benefit particularly when the industry’s inventory situation becomes healthier and overall memory makers’ fab UTRs recover. Due to demand uncertainties over the COVID-19 pandemic, overall memory capex will likely remain disciplined; however, at least for supplementary capex to make up for wafer capacity loss amid tech-migration this is likely to happen heading into FY21E. Particularly, SK Hynix’s supply chain may be able to see the bottom of its order cycle into 2H20E given the client’s necessity for technology innovation, improving memory profitability (NAND) and preparing new cleanroom spaces (M15/M16 and Wuxi II fab). Furthermore, ongoing supply chain localisation efforts in Korea, triggered by JP’s restrictions on core IT chemicals export (HF gas/EUV PR/Fluorinated polyimide) should continue to support market share gains for KR equipment/materials, with more intense collaborative R&D. Among our coverage universe, we like SK Materials (036490.KQ; OUTPERFORM; TP W225,000) given its more balanced top-line growth covering both IT and non-IT chemical market, its benefits from localisation efforts particularly at SK Hynix and accelerating EPS growth into FY21E (+41% YoY) with a better memory inventory cycle. Figure 193: Memory value chain—historical share price performance between equipment/materials Nov'07 = 100 800 600 400 200 0 KR chipmakers raise 3D NAND/DRAM CAPEX Samsung Xian 3D NAND capex starts Materials relatively outperformed equipment Materials 1,600 1,400 1,200 1,000 800 600 400 200 0 Equipment(RHS) Source:'>Source:'>Source:'>Source: Company data, Credit Suisse Stock outlook Samsung Electronics (005930 KS): Samsung’s highly diversified and vertically integrated business model is well positioned to benefit from global data-centre growth. Samsung dominates in the memory semiconductor production with ~50% market share and is the leading Server DRAM maker with a 43% market share. It remains the gold standard in DRAM with the Global Technology Samsung, Hynix and Micron poised to benefit from a healthy demand driver from the server market 85
86. 21 July 2020 start of 1z nm process implementing EUV technology, development and usage of LP DDR5 (server DDR5 in 2021) and leading in HBM1 and HBM2 (High Bandwidth Memory) used with GPUs required in video intensity and AI computing. In NAND, it was the world’s first to develop and produce 3D NAND and SSD for enterprise servers, which it now dominates. Samsung remains the undisputed memory supplier of choice among the hyperscalers. SK Hynix (000660 KS): With a 37% global Server DRAM market share, SK Hynix has been a consistently reliable DRAM producer throughout its history. While generally slightly behind in new DRAM design and technology development compared to Samsung, it retains high customer satisfaction for the high performance and reliability of its Server DRAM products. Its Wuxi, China, DRAM fab base keeps manufacturing and distribution closest to its largest customer base in China. Hynix’s NAND programme is still a bit of a work in progress, being late to 3D NAND transition and recent over-investment in 36L/72L NAND capacity. However, the severe losses are beginning to be mitigated as more 92L production expands. SK Hynix is a pure memory semiconductor company with 75% of revenue generated from more profitable DRAM products. Micron (MU US): DRAM continues to make-up most of MU’s revenue, accounting for ~68% of CY19 revenue and ~20% of total global production share. DRAM also drives a higher proportion of the company’s profit with average GM of ~45% vs NAND ~21%. MU achieved ramped 1y production in 1Q FY19 and meaningful production in 3Q FY19—we expect MU to achieve bit crossover in 1Q/2Q FY20 consistent with the timeline for 1x. As of MayQ, 1y/1z nodes together made up >50% of bit production and MU continues to progress on 1-alpha node (expected FY21) and is managing the construction schedule of its Taiwan cleanroom expansion, remaining on target for CY21 first output. It is also the only DRAM vendor with no new fab plans and, unlike its major competitors, has no plans for the adoption of EUV technology as yields on existing technology remain high. NAND makes up ~27% of MU revenue and ~16% of global production share. MU was able to limit its declines in 2019 compared to the industry due to higher bit growth and strong performance in mobile memory and SSDs. MU has progressed well on its cost-effective 96L floating-gate technology (we expect the company to achieve bit crossover in 4Q FY19/1Q FY20) and has also initiated shipments of QLC 3D NAND flash. High-value QLC bits now represent >10% of MU’s overall NAND production, contributing to NAND cost improvements. Overall, NAND high-value solutions now make up >75% of total NAND bits, on target to increase to 80% by FY21 Global Technology 86
87. 21 July 2020 Japan technology sector Electronic components The likely beneficiaries of expansion in the market for data centre-related business are Ibiden, which supplies flip-chip packages (FC-PKG) for server CPUs and GPUs and module substrates for server CPUs, and Shinko Electric, which manufactures FC-PKG and heat spreaders for server CPUs and electrostatic chucks for SPE. We forecast that a switchover to nextgeneration products by customers from 2H CY20 will accelerate the shift to high multilayer and large diameter server-use FC-PKG, that multi-chip module (MCM) server CPU chipsets will shift to 2.5D packages, and that rising demand for integrated CPU-GPU-HBM (high bandwidth memory) will drive an increase in the added value of substrates. However, we think these developments have already been priced in to current share prices. For HDD-related component makers Nidec (HDD-SPM motors), Minebea (supplier of fan motor ball bearings, as well as HDD-SPM motors and pivots) and TDK (HDD heads, suspension), we expect growth in sales of nearline HDDs for data centres to partially offset contraction in sales of PC HDDs, and look for higher sales of high-value-added server-use MLCCs (7XR, X6C spec) in the passive components business. Akinori Kanemoto 81 3 4550 7693 Hideyuki Maekawa 81 3 4550 7690 Semiconductor At Renesas Electronics, the 2019 acquisition of IDT supplies semiconductors for data centre and network applications, specifically products such as fully buffered DIMM (dual in-line memory module) chipsets, timing clocks and PMIC (power management ICs) for data centres. The company commands a 50% share of the DIMM chipset market, and we expect demand for LRDIMM (load reduced DIMM) to increase from the Intel Cooper Lake server CPU generation on. Data centre application sales currently generate only around 5% of consolidated sales, but we expect the weighting to grow over the long term. Networks We expect long-term growth in cloud use to generate higher demand for cloud interface devices 5G smartphones and 5G IoT, which are using increasing volumes of data. We anticipate expansion of data centre network infrastructure and see this as an important business opportunity for Anritsu: we expect growth in demand for the company’s measuring instruments for use in 5G smartphone and IoT applications, and for its optical devices for network infrastructure application. Stock outlook For Ibiden (4062, NEUTRAL, TP ¥3,280) and Shinko (6967, NEUTRAL, TP ¥1,660), we think expansion of server CPU FC-PKG have already been priced in to current share prices and we have a Neutral rating on Ibiden and Shinko. We recommend Renesas Electronics (6723, OUTPERFORM, TP ¥1,290) with the recovery of automotive production and data centre demand, which will also support the growth. And we also recommend Anritsu (6754, OUTPERFORM, TP ¥2,880) for 5G smartphone growth in 2H 2020 and 2021. Global Technology 87
88. 21 July 2020 China data centre operators Growing with the cloud Data centres are essentially large buildings with uninterrupted power supply, air-conditioning and connectivity to the backhaul of the telecoms carriers, and these buildings host IT servers in a secure and stable environment. Data centre operators receive monthly rent from the IT tenants which are their customers, based on the floor area occupied by the tenants and the power they consume. Colin McCallum 852 2101 6514 Data centres can therefore be thought of as necessary infrastructure for telecoms and internet services. Crucially, the more servers which are required to support internet content, the higher the demand for data centres. As such, there is a very clear link between data centre demand and data volumes, which are rising rapidly. Furthermore, since cloud computing involves data, software and processing power being held in a location other than an individual’s work station, growth in the use of cloud computing has clear implications; an increase in cloud computing would, by definition, increase demand for internet storage facilities such as data centres. In addition to the traditional ‘universal’ benefits for users of cloud computing, such as the ability to share, update and compute quickly and efficiently, as well as lower IT spending and maintenance costs, we observe that China’s government has been very supportive of cloud development, which effectively leads to centralisation of data collation and storage, and therefore improved control. Thus, state-owned enterprises (SOEs) have been encouraged to shift their programs, software, platforms and data onto the cloud. Other companies and individuals in China are also rapidly adopting public, private and hybrid cloud services. This shift has encouraged all of China's internet ‘hyperscalers’, together with overseas software companies such as Microsoft, to launch public, private and hybrid cloud services in China. Growth has been rapid. Frost & Sullivan has highlighted that spending on cloud services in China—the second-largest market in the world after the US—experienced a CAGR of 37.7% from Rmb45.0 bn in 2015 to Rmb161.8 bn in 2019. During that period, cloud services as a percentage of total IT spending in China increased from 2.0% (in 2015) to 6.0% (in 2019). Cloud revenue as a proportion of IT expenditure in China is still only 6.0%... Looking forward, the potential for growth is material; Frost & Sullivan estimates that spending on cloud services as a percentage of total IT spending in the US increased from 9.0% in 2015 to 15.8% in 2019 (and is expected to reach 33.7% in 2024). In China, Frost & Sullivan expects cloud services as a percentage of total IT spending to reach 15.8% in 2024, driving a 28.3% CAGR in cloud service revenue across FY19-24. Thus, cloud service revenue is expected to reach Rmb563.3 bn in 2024. Figure 194: Cloud revenue driven by internet verticals (Rmb mn) Figure 195: Cloud revenue driven by enterprise (Rmb mn) Source:'>Source: Frost and Sullivan Source:'>Source: Frost and Sullivan Global Technology 88
89. 21 July 2020 Frost & Sullivan sees two key growth drivers for cloud service revenues. First, there is expected to be high growth in demand from internet verticals, including video (a 37.9% CAGR), gaming (26.8% CAGR), e-commerce (28.9% CAGR) and others (11.5% CAGR). This is expected to drive a 32.2% CAGR in revenue from Rmb53.8 bn in 2019 to Rmb217.5 bn in 2024. …and Frost & Sullivan projects a 32.2% CAGR in cloud demand from internet verticals… Second, Frost & Sullivan projects increasing penetration of cloud into traditional enterprises and state organisations, as they shift IT infrastructure onto the cloud to enjoy cost savings, increased flexibility and increased data security. This engine is projected to drive revenue at a CAGR of 26.2% from 2019 to 2024, from Rmb108.0 bn in 2019 to Rmb345.9 bn in 2024. The two highest growth segments are expected to be financial services at a 28.1% CAGR and manufacturing at a 28.4% CAGR. …and a 26.2% CAGR from enterprises While barriers to entry are relatively low, when compared with, say, the telecoms industry, barriers to entry are quite some way from 'zero'. Access to land in the correct places (together with power quotas), access to fibre, and access to funding are all key ingredients which must be executed well. Once all of these ‘factors of production’ have been secured, the project management must be smooth and the IDC provider must ensure consistent high quality services to its customers. The table below shows estimated returns on capital for data centres in China – the fastest growing segment of construction within Asia. Done well, data centre construction is a valueaccretive business Data-centre construction is a relatively capital-intensive business, involving the deployment of circa US$138 mn to US$181 mn per large, high-powered data centre. Clearly, the data centre must be constructed first—a process that takes 12-18 months, before revenue is generated, and so access to finance is crucial. Figure 196: ROIC analysis—‘retail’ versus ‘wholesale’ Retail Rmb mn US$ mn Annual revenue EBITDA margin EBITDA Depreciation (years) Depreciation EBIT Tax rate (%) Tax NOPLAT 444 50.0% 222 14 (70) 152 25.0% (38) 114 63 50.0% 32 Land and shell capex Capex construction Capex facilities Total capex ROIC Payback revenue (years) Payback EBITDA (years) 365 240 360 965 11.8% 2.2 4.3 52 34 51 138 (10) 22 (5) 16 Wholesale Rmb mn US$ mn 576 48.0% 277 13 (98) 178 25.0% (45) 134 82 48.0% 40 365 360 540 1,265 10.6% 2.2 4.6 52 51 77 181 (14) 25 (6) 19 Source: Company data, Credit Suisse estimates However, our analysis shows that if the operator successfully achieves relatively fully utilisation (specifically, 85% utilisation under the retail model of renting space to SMEs and 98% under the wholesale model of renting to ‘hyperscalers’) then the returns on capital are above cost of capital, at 11.8% and 10.6% respectively based on current economics. Since we conclude that the business is value-accretive, the faster the operator raises finance and constructs capacity, the more value created. We currently have OUTPERFORM ratings on both GDS and VNET. In contrast, we rate Dr. Peng UNDERPERFORM; it has insufficient capital to grow its data centre business, while its core fixed broadband access business remains under competitive pressure. Global Technology 89
90. 21 July 2020 China cloud operators Alibaba: The dominant cloud service provider Tina Long 852 2101 7197 Alibaba’s cloud business AliCloud was established in 2009 to meet the surging internal need of computing power and started serving external clients since 2011. Being the earliest mover in the cloud market in China a decade ago, AliCloud has spearheaded into the public cloud segment, and currently offers both IaaS (Infrastructure as a Service) and PaaS (Platform as a Service) to thousands of enterprises and government entities. As of 1Q19, it enjoyed a market share of 43% in China’s public cloud market, the largest one with shares equating to the aggregation of No 2 to 7 players, based on data compiled by IDC. On a global basis, Alibaba had 6% of the global cloud market as of IDC’s last update in July 2019. In FY20, AliCloud has served 38% of Fortune 500 companies and it aims to become the world’s leading digital intelligence backbone in the coming three years with US$28 bn committed capex investment. Kenneth Fong 852 2101 6395 China’s public cloud market experienced an exponential 64% CAGR over the past five years, reaching US$7.5 bn (or Rmb50 bn) in 2018, according to IDC. Despite the rapid growth, China’s public cloud market is still nascent, evidenced by cloud IT spending merely accounted for 3% of China GDP in 2018, half of that of the US. Meanwhile, the public cloud penetration (as a ratio to total IT spending excluding device) was low, at a mere 10%, despite a big leap from 2% in 2014. In comparison, the US public cloud market is much bigger, at US$111 bn in 2018, or 15x larger, constituting 61% of the global cloud market. Alibaba had 6% of the global cloud market, but opportunity to expand with China’s fast growing public cloud market with +64% CAGR the past five years Kyna Wong 852 2101 6950 Stephen Yin 852 2101 6980 In our view, AliCloud is well positioned to benefit from the industry tailwind, with key advantages: 1) Technological robustness well tested: AliCloud spent years to develop the in-house Apsara big data platform, which could support smooth order processing during peak seasons. During double 2019 double 11, AliCloud processed a peak order rate of 554,000 orders per second—1,360 times more than the inaugural double 11 in 2009. And smart logistics engine powered 1.2 bn packages. 2) Well-established user base: AliCloud benefits from the 2B relationship established through Taobao, Tmall’s marketplace business and acquisition of China Civilink (万网, a leading internet infrastructure service provider). 3) a. Alibaba acquired China Civilink for Rmb540 mn in 2009 and integrated the business into AliCloud in 2013. The 200,000 business clients on the Civilink constituted the early user base of AliCloud. b. Additionally, Tmall and AliCloud launched CloudTmall (聚石塔) system together with China Civilink in July 2012, providing computing, database and other cloud services to Tmall and Taobao merchants. Through CloudTmall, AliCloud gets access to millions of merchants on Tmall and Taobao. c. In FY19, AliCloud had more than 1.4 mn paying customers, covering ~50% of Top 500 Chinese brands and more than half of A-share listed companies in China. Top clients are from industries such as internet, video, live streaming, e-commerce and financial services, which are tech-savvy and relatively easy to penetrate. AliCloud also added industry coverage across media, government, manufacturing, education and telecommunications in 2016-17. Medical health, retail, tourism, transportation & logistics, real estate & construction, energy, agriculture, IoT and AI were added in 2018-19. Going global: The overseas market would be another growth driver. AliCloud has achieved decent market share overseas—according to Gartner, AliCloud leads the APAC market with 19.6% market share, and ranks third globally with 7.7% market share, following AWS (48%) and Azure (15.5%). The overseas market is deemed to be of strategic importance to AliCloud. It is the only cloud service provider that established data centres in India and Indonesia. Global Technology 90
91. 21 July 2020 We are confident that AliCloud will develop into a cornerstone business for Alibaba, as AWS does for Amazon. We see four main drivers for Alibaba’s cloud segment in the coming few years: 1) Scale: Scale is critical in public cloud as it enables reinvestment in differentiating services and drives down the cost of adoption. Meanwhile, similar to AWS, AliCloud dominates the public cloud market in China, with 40%+ market share, while the second-ranked player only has teens level of shares. We note cloud service providers are required heavy upfront capital investment for years in order to build up the capacity, AliCloud’s leadership is highly likely to sustain in our view. 2) Mix shift to PaaS and more value-add service: Starting off with offering the more commoditised IaaS, AliCloud has been learning and evolving to offer more value-add PaaS as well as teaming up with a strong line-up of Independent software vendors (ISVs) to provide comprehensive end-to-end solutions to business customers. Per our checks, PaaS in general attracts around 10% higher margin vs IaaS, and a segment-mix shift would steadily make AliCloud more profitable. In Alibaba’s case, we estimate PaaS-related revenue accounts for a bit over 10% of segment revenue at the moment. 3) Higher customer retention and ARPU: The rounds of price cuts in the past few years by AliCloud and its peers, in our view, are to encourage cloud adoption by new customers. Once the customers come, there are plenty of opportunities for AliCloud to up-sale a higher stack of products, and raise retentions and ARPU. We note that the customers onboarded in 2018 paid twice the ARPU of that of the customers onboarded in 2016. Meanwhile, the introduction of more value-add services will also improve retention. 4) Operating leverage: AliCloud’s adjusted EBITA margin has narrowed from -41.5% loss to a mere -3.5% between FY16 and FY20 on the back of a 90% revenue CAGR. We believe operating leverage will continue to improve margins riding on 61% revenue CAGR from FY20 to FY22. We project the EBITA margin to turn around and reach 2% in FY22 after breaking even in FY21. Kingsoft Cloud: The largest independent cloud service provider in China Kingsoft Cloud (KC) was established in 2012, and is the largest independent cloud service provider in China, focusing on IaaS and PaaS, with its cloud solutions including both public and enterprise clouds. KC focuses on premium customers across its strategic verticals and had 243 premium customers by end of 2019. As of 2019, KC was ranked among the top 6 public service providers with ~5.4% market share in IaaS + PaaS in China, according to Frost & Sullivan. KC is also among the top three internet cloud service providers in China in terms of revenue, and top ten public cloud service providers globally in terms of revenue from IaaS public cloud services in 2018. Kingsoft Cloud is the largest independent cloud service provider in China China’s cloud market is ~5 years behind the US. On the back of continued strong demand on internet verticals, multi-cloud deployment and traditional industries picking up steam in cloud deployment, China’s cloud service penetration (cloud spending/IT spending) is expected to improve from 6% in 2019 to 15.8% in 2024. Other medium-term structural industry drivers include: (1) 5G, AI and IoT technologies applications, (2) overseas expansion on “Belt and Road” countries, and (3) policy support from Chinese government. This process is further accelerated by COVID-19 that boosted online consumption scenarios. In our view, KC is well positioned to benefit from the industry tailwind, supported by its leadership and focuses: Largest independent cloud service provider in China: As top cloud service providers are normally internet conglomerates engaged in a wide range of business segments, potential conflicts of interest arise. KC offers full commitment to cloud services as its key and sole business driver and its neutrality offers it the competitive advantage vs. its peers. Besides, KC Global Technology 91
92. 21 July 2020 will enjoy the “spill-over” benefit for customers from leading cloud providers like BABA and Tencent looking for the second or third cloud provider, also known as multi-cloud strategy. Strategically selected verticals with high growth opportunities: KC focuses on a few strategically selected high growth areas such as online games, online video, and Finance and banking vertical, with 37%/38%/28% 2019-24E CAGR, respectively. Superior enterprise service capabilities with monetisation efficiency: KC has covered sector-leading companies and we expect it will continue to win blue-chip customers across industries. KC’s net dollar retention rate of Public Cloud Service Premium Customers stayed at a high level of 161%/155% in 2018/2019. Strong technology capacities: With a strong R&D team (1,150 staff by end of 2019) and capabilities to continuously upgrade its cloud solution, KC’s tech leadership includes first full-stack virtual cloud products, commercialised AI cloud PaaS platform, industry-leading edge computing products, and container technology in its CDN business, etc. Xiaomi and Kingsoft Group are two strategic partners to support KC’s long-term growth and successful execution of its strategies. In the medium term, we expect KC’s market share in public cloud (IaaS + PaaS)/traditional enterprises to reach 7.9%/5.7% respectively by 2024, driven by its growth strategies, improving revenue mix and operating leverage: Scale and growth strategies: KC plans to enter new emerging verticals such as IoT, AT and healthcare, and expects to adopt premium-customer strategy to cover and anchor industry leaders in new verticals. Despite KC still lagging the top Chinese players such as Ali Cloud/Tencent Cloud in terms of international footprints, we see its plan to invest ~50% of IPO proceeds (near Rmb2 bn) in upgrading and expanding its infrastructure should further increase its scale and international footprint. Mix shift to enterprise cloud: With faster growth in higher margin enterprise cloud (110% CAGR) vs. public cloud’s 49% CAGR, we expect the revenue share of enterprise cloud to increase from 12%/13% in 2019/1Q20 to 43% in 2024, as a result CDN’s revenue share should decrease from 54% in 2019 to 30% in 2024. Expanding premium customer base and ARPU: On customers’ business diversification/expansion, we forecast ARPU for KC premium customers to reach Rmb33.2mn by 2024 (16% 2019-24 CAGR), with total number of premium customers to grow by 41% CAGR and reach 1,339 by 2024. Revenue from premium customers is expected to consistently account for 96%+ of total revenue. Revenue/margins growth: We forecast revenue to grow by 64% CAGR (2019-24E) and reach Rmb46.3 bn by 2024E. KC’s non-GAAP gross margin has shown a consistent improvement from -9% in 2017 to +5% in 1Q20 on mix and operating leverage. We expect this trend to continue to reach a normalised 20% in 2023. With decreasing opex percentage of revenue, we forecast non-GAAP OPM to improve from -18% in 1Q20 to +11% in 2024E, with adjusted EBITDA and net profit to turn positive in 4Q20 and 2Q22, respectively. Improving cash flow: After KC’s initial investment over the past few years, we expect the asset utilisation will continue to improve as scale builds up. As such, we expect the growth of revenue would be faster than capex, leading to an improvement in cash flow. We expect operating cash flow and FCF to turn positive in 2021 and 2023, respectively. Global Technology 92
93. 21 July 2020 Stock Section Global Technology 93
94. 21 July 2020 Accton 2345.TW Beneficiary on ODM-direct proliferation in switch but limited upside in the near term FOCUS LIST STOCK Target price (12M, NT$) 240.00 Neutral IT Hardware Leading Ethernet switch ODM. Accton is a globally leading open-sourced based networking equipment ODM, and an early mover supporting the OCP take-off from the onset. We believe its leadership will further widen against peers, supported by comprehensive knowledge in hardware design, cost-efficient production and strong testing know-how, presenting the company as the key beneficiary of the favourable industry trend in faster speed ports migration, and new demand from 5G proliferation and new customers. ODM Direct proliferation continues, but 400G adoption push-out amid COVID-19. We believe ODM Direct in networking should catch up with server/storage on the proliferation of OCP long term, while 400G speed port migration by hyperscalers will accelerate the trend, in our view. Nevertheless, based on our industry checks, we see push-out in 400G migration at Accton’s existing customer (Amazon) and delay entering into new customer (Microsoft), despite Facebook having started 400G upgrade in 2019. We now forecast its cloud sales (including smart NIC) to remain more flattish for +1.5% YoY in 2020E, before rebounding to 22% and 18% YoY growth in 2021/22E, as impacts from COVID-19 subside. Lastly, we see 5G proliferation driving incremental demand uptick on open-sourced platform proliferation and higher speed requirement at the edge and datacentre with telcos, but the contribution will be limited in the near term. Price (17 Jul 20, NT$) Upside/downside (%) Mkt cap (NT$/US$ mn) Enterprise value (NT$ mn) Number of shares (mn) Free float (%) 52-wk price range (NT$) ADTO-6M (US$ mn) 236.50 1.5 132,089 / 4,485 121,776 558.52 75.3 262-133 48.2 Research Analysts Jerry Su 886 2 2715 6361 jerry.su@credit-suisse.com Harvie Chou 886 2 2715 6364 harvie.chou@credit-suisse.com ODM business also weakening on softer macro. Aside from cloud, we continue to expect Accton to gain share in its ODM business, at the expense of a Taiwanese peer. However, we see weakening enterprise demand becoming a key headwind into 2H20 and 2021 due to softer macro-economic outlook amid COVID-19, as corporates manage and optimise their spending. Overall, we forecast its ODM sales to decline 12% YoY in 2020E, before the business normalises to 11-12% YoY growth in 2021/22E. Retain NEUTRAL. We maintain our target price at NT$240 based on 20x 2021E P/E (from 18x 2021E) and peak multiple in the last three years. Accton’s shares have appreciated by nearly 90% since its trough in mid-March, as we see limited upsides on weaker enterprise demand, slower ramp on new customer, and 400G push-out amid COVID-19. We stay NEUTRAL and will continue to monitor the impacts from COVID-19, and progress of new hyperscale customer and 400G projects ramp, to look for a better entry point. Share price performance Financial and valuation metrics Year Revenue (NT$ mn) EBITDA (NT$ mn) EBIT (NT$ mn) Net profit (NT$ mn) EPS (CS adj.) (NT$) Chg. from prev. EPS (%) Consensus EPS (NT$) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 12/19A 55,401.0 6,579.3 6,040.0 4,950.5 8.87 n.a. n.a. 67.3 26.6 2.6 19.3 9.86 41.2 (41.4) 12/20E 54,198.3 6,797.9 6,103.9 5,075.6 9.09 0.0 9.33 2.4 26.0 2.9 17.3 9.2 36.6 (100.2) 12/21E 63,866.6 9,008.5 8,118.0 6,613.2 11.84 0.0 11.91 30.3 20.0 3.8 12.8 7.7 42.0 (98.7) 12/22E 73,774.2 10,831.7 9,791.0 7,776.3 13.92 0.0 15.18 17.6 17.0 4.4 9.8 5.3 36.9 (102.4) The price relative chart measures performance against the TAIWAN SE WEIGHTED INDEX which closed at 12,181.56 on 17/07/20. On 17/07/20 the spot exchange rate was NT$29.45/US$1 Performance Absolute (%) Relative (%) 1M 5.3 (0.3) 3M 14.8 (0.1) 12M 84.0 71.2 94
95. 21 July 2020 Accton (2345.TW / 2345 TT) Price (17 Jul 2020): NT$236.50 Income Statement (NT$ mn) Sales revenue Cost of goods sold EBITDA EBIT Net interest expense/(inc.) Recurring PBT Profit after tax Reported net profit Net profit (Credit Suisse) Balance Sheet (NT$ mn) Cash & cash equivalents Current receivables Inventories Other current assets Current assets Property, plant & equip. Investments Intangibles Other non-current assets Total assets Current liabilities Total liabilities Total debt Shareholders' equity Minority interests Total liabilities & equity Cash Flow (NT$ mn) EBIT Net interest Tax paid Working capital Other cash & non-cash items Operating cash flow Capex Free cash flow to the firm Investing cash flow Equity raised Dividends paid Financing cash flow Total cash flow Adjustments Net change in cash Per share Shares (wtd avg.) (mn) EPS (Credit Suisse) (NT$) DPS (NT$) Operating CFPS (NT$) Earnings Growth (%) Sales revenue EBIT EPS Margins (%) EBITDA EBIT Valuation (x) P/E P/B Dividend yield (%) EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE ROIC Credit ratios Net debt/equity (%) Net debt/EBITDA (x) Analyst: Jerry Su Rating: Neutral Target Price: NT$240.00 12/19A 55,401 44,402 6,579 6,040 (82) 6,130 4,950 4,950 4,950 12/19A 6,222 7,125 8,717 4,985 27,049 1,324 231 55 861 29,521 15,238 16,718 921 13,390 0 29,521 12/19A 6,040 0 0 3,293 (548) 8,785 (779) 8,006 (3,068) 5 (2,231) 2,898 8,615 0 8,615 12/19A 558 8.87 6.20 15.75 12/19A 12/20E 54,198 43,295 6,798 6,104 (137) 6,378 5,076 5,076 5,076 12/20E 15,491 8,554 8,195 494 32,734 2,033 187 0 1,152 36,106 20,889 21,750 1,109 14,353 0 36,106 12/20E 6,104 0 0 3,461 (334) 9,231 (1,345) 7,886 (4,284) 5 (3,460) 757 5,704 0 5,704 12/20E 559 9.09 6.82 16.53 12/20E 12/21E 63,867 50,708 9,008 8,118 (188) 8,292 6,613 6,613 6,613 12/21E 18,046 9,976 7,918 518 36,458 2,377 187 0 1,152 40,175 22,152 23,013 1,109 17,159 0 40,175 12/21E 8,118 0 0 93 (614) 7,597 (1,200) 6,397 (3,636) 0 (3,807) 0 3,962 0 3,962 12/21E 559 11.84 8.88 13.60 12/21E 12/22E 73,774 58,438 10,832 9,791 (244) 10,031 7,976 7,776 7,776 12/22E 26,655 11,732 9,297 609 48,293 2,021 187 0 1,152 51,654 25,855 26,715 1,109 24,936 0 51,654 12/22E 9,791 0 0 477 (973) 9,294 (650) 8,644 (1,986) 0 (4,960) 0 7,309 0 7,309 12/22E 559 13.92 10.44 16.64 12/22E 28.6 73.9 67.3 (2.2) 1.1 2.4 17.8 33.0 30.3 15.5 20.6 17.6 11.9 10.9 12/19A 26.6 9.86 2.6 2.3 19.3 21.0 12/19A 41.2 72.3 12/19A (41.4) (0.81) 12.5 11.3 12/20E 26.0 9.20 2.9 2.2 17.3 19.3 12/20E 36.6 130.0 12/20E (100.2) (2.12) 14.1 12.7 12/21E 20.0 7.70 3.8 1.8 12.8 14.2 12/21E 42.0 6548.3 12/21E (98.7) (1.88) 14.7 13.3 12/22E 17.0 5.30 4.4 1.4 9.8 10.9 12/22E 36.9 (4061.8) 12/22E (102.4) (2.36) Company Background Founded in October 1988, Accton is a leading open-source networking ODM/OEM partner for global top-tier players with particular specialisation in data centre, carrier access and campus networks. Blue/Grey Sky Scenario Our Blue Sky Scenario (NT$) 265.00 In the blue sky scenario, our blue sky value of NT$265 is based on 22x P/E, the peak multiple of the past three years, as we assume faster speed migration from Facebook and Amazon; better progress with new hyperscalers ramp and incremental contribution from the 5G take-off. Our Grey Sky Scenario (NT$) 110.00 In the grey sky scenario, our grey sky value of NT$110 is based on 11x P/E, its trough multiple of the past three year, as assume prolonged speed migration from Facebook and Amazon; and slower progress with new hyperscalers ramp and incremental contribution from the 5G takeoff. Share price performance The price relative chart measures performance against the TAIWAN SE WEIGHTED INDEX which closed at 12,181.56 on 17-Jul-2020 On 17-Jul-2020 the spot exchange rate was NT$29.45/US$1 Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 95
96. 21 July 2020 AMD Advanced Micro Devices, Inc. Beneficiary of rising compute tide Target price (12M, US$) 33.00 Neutral[V] Semiconductor Devices Growth beyond Gaming. AMD has two reportable segments of revenue: (1) Computing and Graphics (C&G) is 70% of revenue, which primarily includes desktop and notebook processors and chipsets, discrete and integrated graphics processing units (GPUs), data centre and professional GPUs and development services, and (2) Enterprise, Embedded and Semi-Custom segment (EESC) is 30% of revenue, and primarily includes server and embedded processors, semi-custom System-on-Chip (SoC) products, development services and technology for game consoles—thus both include components of data centres. Price (17 Jul 20, US$) 52-week price range Market cap (US$ m) Enterprise value (US$ m) High-growth data centre expanding into infrastructure. Recently at the Analyst Day 2019, AMD announced it was on track to achieve double-digit market share in Data Centre by 2Q20 and expects third Gen Epyc (shipping 2H20) to cover 100% of workloads up from ~80% in the second Gen. The company reiterated $19B Server TAM, $11B GPU TAM, and $5B Telco/Infra TAM leading to a high growth $35B high growth TAM by 2023. Within Data Centre, AMD expects its revenue balance to remain stable at ~50% Cloud, ~35% enterprise, and ~15% HPC. For the first time, AMD addressed the 5G Telco/Infra market as an opportunity for expansion in 5G base stations and highlighted recent successes with Nokia (Epyc Core 2x faster than competitors). John W. Pitzer 212 538 4610 john.pitzer@credit-suisse.com Outlook for 2020/21. For CY20/21, we expect Rev/EPS of US$8.4 bn/$1.00 and US$10 bn/$1.35—by segment: (1) Within C&G, Computing is growing at +21%/16% YoY and in (2) EESC, server is growing at +124%/12% YoY. During F1Q20, AMD revised its guidance for CY20 revenue to +20-30% YoY, midpoint of +25% YoY—which is lower than the original guidance of up 28-30% YoY. However, GM target remains at~45%, in line with CS and the original guidance of ~45%. 55.04 58.90 - 27.99 64,462.32 62,966 [V] = Stock Considered Volatile (see Disclosure Appendix) Research Analysts Dalya Hahn 212 325 7843 dalya.hahn@credit-suisse.com Eric Hu 212 325 4735 eric.hu@credit-suisse.com Jerome Darling 212 325 3211 jerome.darling@credit-suisse.com Valuation embeds significant share gains. The bull narrative centres on Epyc Server market share gains especially in 2H19 into 2020. We oscillate between rich valuation/high expectations and our view that investors continue to underestimate the LT Compute TAM. AMD currently trades at 51.7x NTM P/E. While below its three-year average of 54.4x, AMD is trading at a 181% premium to the SOX. While we expect AMD to take modest share, we believe that INTC’s investment over AMD creates a strong competitive moat. Share price performance Financial and valuation metrics Year EPS (Excl. ESO) (US$) Prev. EPS (Excl. ESO., US$) EPS (CS adj., ) P/E (Excl. ESO.) (x) P/E rel. (Excl. ESO., %) Revenue (US$ m) Net Debt (US$ m) OCFPS (US$) P/OCF (x) Number of shares (m) BV/share (Next Qtr., US$) Net debt (Next Qtr., US$ m) Dividend yield (%) 1,171.19 .8 403.0 - Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 12/19A 12/20E 0.63 1.00 0.50 0.83 88.0 54.8 451.4 217.1 6,731.0 8,416.0 -1,017 -1,496 0.31 0.60 176.9 91.2 Price/Sales (x) P/BVPS (x) Dividend (current, US$) 12/21E 1.35 1.18 40.7 208.8 9,990.0 -1,943 0.64 85.7 8.78 20.9 - On 17-Jul-2020 the S&P 500 INDEX closed at 3224.73Daily Jul19, 2019 - Jul17, 2020, 07/19/19 = US$32.51 Quarterly EPS 2019A 2020E 2021E Q1 0.05 0.18 0.28 Q2 0.08 0.16 0.31 Q3 0.18 0.30 0.37 Q4 0.31 0.36 0.39 96
97. 21 July 2020 Advanced Micro Devices, Inc. (AMD) Target Price: 33.00 Price (17 Jul 2020): US$55.04 Income Statement Revenue (US$ m) EBITDA Operating profit Recurring profit Cash Flow Cash flow from operations CAPEX Free cash flow to the firm Cash flow from investments Net share issue(/repurchase) Dividends paid Issuance (retirement) of debt Other Cash flow from financing activities Effect of exchange rates Changes in Net Cash/Debt Net debt at end Balance Sheet ($US) Assets Other current assets Total current assets Total assets Liabilities Short-term debt Total current liabilities Long-term debt Total liabilities Shareholder equity Total liabilities and equity Net debt Per share No. of shares (wtd avg) CS adj. EPS Prev. EPS (US$) Dividend (US$) Free cash flow per share Earnings Sales growth (%) Net profit growth (%) EPS growth (%) EBIT margin (%) Valuation EV/Sales (x) EV/EBIT (x) P/E (x) Quarterly EPS 2019A 2020E 2021E 12/19A 6,731.0 1,062.0 840.0 739.0 12/19A 376 (217) 159 (181) 35 0 (234) 447 248 1,111 (1,017) 12/19A 12/20E 8,416.0 1,324.1 1,324.1 1,275.1 12/20E 744 (287) 457 (269) 0 0 0 2 2 479 (1,496) 12/20E 12/21E 9,990.0 1,786.1 1,786.1 1,730.1 12/21E 796 (350) 447 (350) 0 0 0 0 0 447 (1,943) 12/21E 253 4,597 6,028 258 5,087 6,583 258 5,721 7,287 0 2,359 486 3,201 2,827 6,028 (1,017) 12/19A 1,208 0.50 0.00 0.13 12/19A 4.0 61.8 53.4 12.5 12/19A 9.43 75.5 109.0 Q1 0.05 0.18 0.28 Q2 0.08 0.16 0.31 0 2,202 488 3,044 3,539 6,583 (1,496) 12/20E 1,232 0.83 0.00 0.37 12/20E 25.0 66.7 63.3 15.7 12/20E 7.48 47.6 66.7 Q3 0.18 0.30 0.37 0 2,260 488 3,102 4,185 7,287 (1,943) 12/21E 1,240 1.18 1.00 0.36 12/21E 18.7 43.4 42.3 17.9 12/21E 6.26 35.0 46.8 Q4 0.31 0.36 0.39 Analyst: John Pitzer Rating: Neutral [V] Company Background Advanced Micro Devices, Inc. (AMD) is a global semiconductor company. The company primarily offers x86 microprocessors, embedded microprocessors and chipsets for desktop and notebook personal computers (PCs), professional workstations and servers. Blue/Grey Sky Scenario Our Blue Sky Scenario (US$) 65.00 Our blue sky scenario of US$65 assumes AMD exceeds its LT operating target, and gains sustainable market share in MPUs and GPUS— supporting LT EPS >U$2.00 and implying a value of US$65 at 38x P/E. Our Grey Sky Scenario (US$) 15.00 Our grey sky scenario of US$15 assumes AMD is not able to achieve its LT operating target, and does not achieve meaningful market share in MPUs and GPUs—supporting LT EPS US$1.00 and implying a value of US$15 at 15x P/E. Share price performance On 17-Jul-2020 the S&P 500 INDEX closed at 3224.73 Daily Jul19, 2019 - Jul17, 2020, 07/19/19 = US$32.51 Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 97
98. 21 July 2020 Alchip Tech 3661.TW Taiwan IC design service proxy China CPU proxy in Taiwan Target price (12M, NT$) 630.00 Outperform[V] Semiconductor Devices IC design service proxy for China semiconductor growth. We are initiating coverage on Alchip with an OUTPERFORM rating and a target price of NT$425. Alchip is an IC design service company based in Taiwan and has a strong R&D team in China, with a focus on the projects including HPC and AI on the advanced nodes. The company's sales saw a meaningful growth in 2019 supported by China CPU ramp for PC adopted by the local government and SOE and tape out of the AI project. We believe the company's sales should see a 30% CAGR from 2019-22 on more HPC and AI projects from its China and US customers. Key beneficiary from China CPU substitution. Alchip has been working more aggressively with Phytium, a leading CPU fabless in China, on ARM-based processor for PC/NB and server since 2014. The PC CPU project on 16nm has started mass production in 2H19 and the server CPU project is also on track for production in 2H20 as China is replacing CPU for government and SOE applications with its own solutions for technology control. With higher China CPU adoption, we estimate the sales from China CPU mass production will likely contribute 35-40% of Alchip's sales in 2020 and 50% in 2021 as local CPU penetration rises. The company also generates about 10% of sales from supercomputing, with a China project on 7nm booking $50 mn in late 20/early 21. Growing AI projects as second growth engine. We believe Alchip’s AI customer base is diversified, leveraging its experience in HPC. We believe the company has worked on Amazon's projects (Inferentia on 16nm and Graviton on 7nm) and leading AI start-ups including Habana (inference and training—acquired by Intel) and Astera Labs (PCIe-5 retimer invested by Intel), supporting the company's NRE and turnkey business growth. Healthy growth and operating leverage supports upper half valuation. On the growing China CPU and AI market opportunity, we model the company's EPS at NT$15.50/NT$21.00 in 2020/2021. Our target price of NT$630 is based on 30x of 2021 P/E, at the upper half of its 10-30x range, factoring in a more predictable project pipeline in the next few years and potential upside from China CPU demand (vs. valuation surge on cryptocurrency demand in 2017). Key risks: delay in AI investment, slower-than-expected China CPU penetration, China customers’ shift to foundry direct business model. Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 480.00 31.3 29,437 / 999 26,478 61.33 73.7 575-96.20 67.1 [V] = Stock Considered Volatile (see Disclosure Appendix) Research Analysts Haas Liu 886 2 2715 6365 haas.liu@credit-suisse.com Randy Abrams, CFA 886 2 2715 6366 randy.abrams@credit-suisse.com Share price performance Financial and valuation metrics Year Revenue (NT$ mn) EBITDA (NT$ mn) EBIT (NT$ mn) Net profit (NT$ mn) EPS (CS adj.) (NT$) Chg. from prev. EPS (%) Consensus EPS (NT$) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) Price (17 Jul 20, NT$) Upside/downside (%) Mkt cap (NT$/US$ mn) Enterprise value (NT$ mn) Number of shares (mn) Free float (%) 52-wk price range (NT$) ADTO-6M (US$ mn) 12/18A 3,450.7 1,108.0 321.9 257.4 4.2 n.a. n.a. (17.4) 114.2 0.2 24.7 10.07 9.1 (71.3) 12/19E 4,332.0 1,361.6 432.9 433.5 7.22 0.0 7.2 71.9 66.4 0.3 19.5 8.72 13.9 (85.4) 12/20E 6,716.9 2,337.8 1,098.8 939.8 15.5 0.0 12.12 114.5 31.0 0.7 11.3 7.23 25.6 (76.3) 12/21E 8,671.5 2,786.9 1,518.8 1,273.8 21.0 0.0 17.01 35.5 22.9 1.5 9.3 5.97 28.6 (74.5) The price relative chart measures performance against the TAIWAN SE WEIGHTED INDEX which closed at 12,181.56 on 17/07/20. On 17/07/20 the spot exchange rate was NT$29.45/US$1 Performance Absolute (%) Relative (%) 1M 31.0 25.4 3M 101.7 86.7 12M 435.7 422.9 98
99. 21 July 2020 Alchip Tech (3661.TW / 3661 TT) Price (17 Jul 2020): NT$480.00 Income Statement (NT$ mn) Sales revenue Cost of goods sold EBITDA EBIT Net interest expense/(inc.) Recurring PBT Profit after tax Reported net profit Net profit (Credit Suisse) Balance Sheet (NT$ mn) Cash & cash equivalents Current receivables Inventories Other current assets Current assets Property, plant & equip. Investments Intangibles Other non-current assets Total assets Current liabilities Total liabilities Total debt Shareholders' equity Minority interests Total liabilities & equity Cash Flow (NT$ mn) EBIT Net interest Tax paid Working capital Other cash & non-cash items Operating cash flow Capex Free cash flow to the firm Investing cash flow Equity raised Dividends paid Financing cash flow Total cash flow Adjustments Net change in cash Per share Shares (wtd avg.) (mn) EPS (Credit Suisse) (NT$) DPS (NT$) Operating CFPS (NT$) Earnings Growth (%) Sales revenue EBIT EPS Margins (%) EBITDA EBIT Valuation (x) P/E P/B Dividend yield (%) EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE ROIC Credit ratios Net debt/equity (%) Net debt/EBITDA (x) Analyst: Haas Liu Rating: Outperform [V] Target Price: NT$630.00 12/18A 3,451 2,159 1,108 322 (45) 335 257 257 257 12/18A 1,765 671 281 167 2,884 317 319 147 51 3,717 769 797 0 2,921 0 3,717 12/18A 322 0 (77) (391) 1,166 1,020 (712) 307 (1,258) (158) (64) (224) (463) 43 (420) 12/18A 61 4.20 1.07 16.65 12/18A 12/19E 4,332 2,721 1,362 433 (52) 525 434 434 434 12/19E 2,480 898 582 148 4,108 389 354 222 151 5,225 1,816 1,923 15 3,302 0 5,225 12/19E 433 0 (92) (248) 1,572 1,664 (511) 1,154 (295) 0 (91) (76) 1,293 (58) 1,235 12/19E 60 7.22 1.53 27.74 12/19E 12/20E 6,717 4,384 2,338 1,099 (51) 1,191 940 940 940 12/20E 2,734 1,540 605 190 5,069 599 354 222 151 6,396 2,259 2,366 15 4,029 0 6,396 12/20E 1,099 0 (251) (616) 1,682 1,915 (1,000) 915 (1,448) 0 (212) (212) 254 0 254 12/20E 61 15.50 3.50 31.57 12/20E 12/21E 8,671 5,713 2,787 1,519 (51) 1,615 1,274 1,274 1,274 12/21E 3,295 1,911 722 227 6,155 808 354 222 151 7,691 2,703 2,811 15 4,880 0 7,691 12/21E 1,519 0 (342) (391) 1,675 2,461 (1,000) 1,461 (1,478) 0 (423) (423) 561 0 561 12/21E 61 21.00 6.97 40.58 12/21E (19.1) 0.6 (17.4) 25.5 34.5 71.9 55.1 153.8 114.5 29.1 38.2 35.5 32.1 9.3 12/18A 114.2 10.07 0.2 7.9 24.7 85.0 12/18A 9.1 33.4 12/18A (71.3) (1.88) 31.4 10.0 12/19E 66.4 8.72 0.3 6.1 19.5 61.5 12/19E 13.9 54.1 12/19E (85.4) (2.07) 34.8 16.4 12/20E 31.0 7.23 0.7 3.9 11.3 24.0 12/20E 25.6 120.6 12/20E (76.3) (1.31) 32.1 17.5 12/21E 22.9 5.97 1.5 3.0 9.3 17.0 12/21E 28.6 108.8 12/21E (74.5) (1.30) Company Background Headquartered in Taipei, Alchip has a footprint around the major semiconductor markets to provide its local customers with real time service, including a Japan office set up in 2003, Wuxi in 2010, Hefei in 2016, Guangzhou in 2017 and Jinan in 2018. Blue/Grey Sky Scenario Our Blue Sky Scenario (NT$) 735.12 Our blue sky scenario implies value can be up to NT$735.12 on the back of stronger-than-expected China CPU demand or faster-than-expected AI and 5G project development. Our Grey Sky Scenario (NT$) 315.05 Our grey sky scenario implies value can be at NT$315.05 if there is weaker-than-expected China CPU demand or its customers fail to deliver on AI or 5G networking projects. Share price performance The price relative chart measures performance against the TAIWAN SE WEIGHTED INDEX which closed at 12,181.56 on 17-Jul-2020 On 17-Jul-2020 the spot exchange rate was NT$29.45/US$1 Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 99
100. 21 July 2020 Aspeed 5274.TWO Consolidating share in servers and expanding into networking Target price (12M, NT$) 1,300 Outperform[V] Semiconductor Equipment Technology leader in server BMC market. Aspeed has been dominant in its core Baseboard Management Controller (BMC) at 90% of sales, with 60-65% market share. The company supplies almost all of the major hyperscale customers through the Taiwan ODMs and has grown to 35% enterprise server share following its acquisition of Broadcom’s Emulex Pilot division. The rest of the 10% sales are from A/V extension SoC compressing video signal to display on remote signage, iCafe chipset solution enabling the operators to move the expensive gaming hardware to a back server closet and Cupola 360 degree camera capable of stitching 6 camera into a 30fps 4k2k stream. 2020 still strong on a low 1H20 compare despite 2H20 slowdown. We believe some of its customers in both the US and China are now trimming some orders after the inventory build-up in 1H20. We expect Aspeed's BMC business to slow down in 2H20 due to hyperscaler customers' inventory overbuilds in 1H20. Despite a slower 2H20, we still expect the company’s 2020 sales to grow 28% YoY, with growth lifted from easy 1H19 compares and good cloud momentum mainly from BMC into server and some attached to switch/networking with non-BMC 5-10% of sales. Opportunity from new customer wins and edge server penetration support growth in 2021. We believe the company has drivers in 2021, including share gains in new cloud customers by 2H21 and more units into storage, switch and 5G Edge servers (incremental 5-10% of units). Some data centre capex will also be deferred due to lockdown constraints, lifting Aspeed’s opportunity in 2021. Price (17 Jul 20, NT$) Upside/downside (%) Mkt cap (NT$/US$ mn) Enterprise value (NT$ mn) Number of shares (mn) Free float (%) 52-wk price range (NT$) ADTO-6M (US$ mn) 1,255 3.6 42,952 / 1,458 40,967 34.22 65.4 1,550-653 21.0 [V] = Stock Considered Volatile (see Disclosure Appendix) Research Analysts Randy Abrams, CFA 886 2 2715 6366 randy.abrams@credit-suisse.com Haas Liu 886 2 2715 6365 haas.liu@credit-suisse.com A pullback sets up an opportunity in a long-term growth story. We maintain 2020/21 EPS at NT$30.50/NT$37.00 and stay OUTPERFORM with an NT$1,300 TP based on 35x 21E P/E, the high-end of its range. The stock may stay volatile with 2H20 orders having risk of a 1-2 quarter inventory digestion, followed by another leg up on market growth and share gains in 2021. Share price performance Financial and valuation metrics Year Revenue (NT$ mn) EBITDA (NT$ mn) EBIT (NT$ mn) Net profit (NT$ mn) EPS (CS adj.) (NT$) Chg. from prev. EPS (%) Consensus EPS (NT$) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 12/18A 2,153.5 938.1 799.9 685.9 20.2 n.a. n.a. 28.7 62.1 1.2 44.4 18.29 31.1 (54.2) 12/19E 2,484.3 1,150.2 1,008.3 831.6 24.39 0.0 24.28 20.7 51.5 1.4 35.8 21.05 38.1 (89.3) 12/20E 3,187.6 1,450.7 1,308.4 1,043.2 30.5 0.0 31.17 25.1 41.1 1.6 28.1 18.12 47.4 (89.6) 12/21E 3,698.3 1,704.2 1,561.9 1,265.5 37.0 0.0 40.52 21.3 33.9 2.1 23.6 15.62 49.5 (98.7) The price relative chart measures performance against the TAIWAN SE WEIGHTED INDEX which closed at 12,181.56 on 17/07/20. On 17/07/20 the spot exchange rate was NT$29.45/US$1 Performance Absolute (%) Relative (%) 1M (4.2) (9.8) 3M 15.7 0.7 12M 97.0 84.2 100
101. 21 July 2020 Aspeed (5274.TWO / 5274 TT) Price (17 Jul 2020): NT$1,255 Income Statement (NT$ mn) Sales revenue Cost of goods sold EBITDA EBIT Net interest expense/(inc.) Recurring PBT Profit after tax Reported net profit Net profit (Credit Suisse) Balance Sheet (NT$ mn) Cash & cash equivalents Current receivables Inventories Other current assets Current assets Property, plant & equip. Investments Intangibles Other non-current assets Total assets Current liabilities Total liabilities Total debt Shareholders' equity Minority interests Total liabilities & equity Cash Flow (NT$ mn) EBIT Net interest Tax paid Working capital Other cash & non-cash items Operating cash flow Capex Free cash flow to the firm Investing cash flow Equity raised Dividends paid Financing cash flow Total cash flow Adjustments Net change in cash Per share Shares (wtd avg.) (mn) EPS (Credit Suisse) (NT$) DPS (NT$) Operating CFPS (NT$) Earnings Growth (%) Sales revenue EBIT EPS Margins (%) EBITDA EBIT Valuation (x) P/E P/B Dividend yield (%) EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE ROIC Credit ratios Net debt/equity (%) Net debt/EBITDA (x) Analyst: Randy Abrams Rating: Outperform [V] Target Price: NT$1,300 12/18A 2,154 864 938 800 (13) 854 686 686 686 12/18A 1,262 401 139 17 1,819 85 0 886 43 2,833 424 504 0 2,329 0 2,833 12/18A 800 0 0 (110) 89 779 (75) 704 (7) 0 (510) (560) 212 27 239 12/18A 34 20.20 15.01 22.95 12/18A 12/19E 2,484 913 1,150 1,008 (4) 1,037 832 832 832 12/19E 1,815 582 100 33 2,530 110 0 823 93 3,555 1,446 1,522 0 2,033 0 3,555 12/19E 1,008 0 0 (82) 354 1,280 (66) 1,215 (494) 0 (616) (618) 169 6 175 12/19E 34 24.39 18.05 37.55 12/19E 12/20E 3,188 1,194 1,451 1,308 0 1,309 1,043 1,043 1,043 12/20E 2,122 586 100 33 2,840 156 0 823 93 3,912 1,466 1,543 0 2,369 0 3,912 12/20E 1,308 0 0 (3) (163) 1,143 (87) 1,055 (164) 0 (707) (707) 272 0 272 12/20E 34 30.50 20.67 33.41 12/20E 12/21E 3,698 1,377 1,704 1,562 0 1,582 1,265 1,265 1,265 12/21E 2,713 762 100 43 3,617 202 0 823 93 4,735 1,911 1,987 0 2,748 0 4,735 12/21E 1,562 0 0 (79) 29 1,512 (87) 1,425 (163) 0 (887) (887) 462 0 462 12/21E 34 37.00 25.93 44.21 12/21E 13.7 23.5 28.7 15.4 26.1 20.7 28.3 29.8 25.1 16.0 19.4 21.3 43.6 37.1 12/18A 62.1 18.29 1.2 19.4 44.4 52.1 12/18A 31.1 62.3 12/18A (54.2) (1.35) 46.3 40.6 12/19E 51.5 21.05 1.4 16.6 35.8 40.8 12/19E 38.1 125.9 12/19E (89.3) (1.58) 45.5 41.0 12/20E 41.1 18.12 1.6 12.8 28.1 31.2 12/20E 47.4 448.5 12/20E (89.6) (1.46) 46.1 42.2 12/21E 33.9 15.62 2.1 10.9 23.6 25.8 12/21E 49.5 883.8 12/21E (98.7) (1.59) Company Background Aspeed is a fabless design house focusing on system on chip solutions for the data centre and advanced multimedia applications, due to senior management’s extensive background in PC chipsets and graphics. Blue/Grey Sky Scenario Our Blue Sky Scenario (NT$) 1,406 Our blue sky valuation scenario of NT$1,406 implies 38x 2021 P/E based on further gains in BMC in servers and networking and solid traction of its new products. Our Grey Sky Scenario (NT$) 925.07 Our grey sky valuation scenario of NT$925 implies 25x 2021 P/E based on slowing server growth, limited further share gains, and little traction on its new products. Share price performance The price relative chart measures performance against the TAIWAN SE WEIGHTED INDEX which closed at 12,181.56 on 17-Jul-2020 On 17-Jul-2020 the spot exchange rate was NT$29.45/US$1 Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 101
102. 21 July 2020 Broadcom Ltd AVGO Softconductor or Semiware: either way AVGO is undervalued Target price (12M, US$) 400.00 Outperform Semiconductor Devices Datacentre growth in wired/data transmission. We expect Wired Rev (~36% of Rev) growth to re-accelerate from what has been a -0.5% CAGR contraction to what is likely to be a 6-8% CAGR expansion. Despite its reset in CY19 as enterprise data centre spending paused in 2H19 and increased worries about Cisco’s transition from customer to competitor in the ASIC market, we see MSD growth driven by AVGO maintaining leadership positions in its diverse, wired product portfolio without high exposure to cloud and data centres. Broadcom may maintain in-line to above growth in networking. Overall, we expect Networking spend to grow at a 5.7% CAGR through 2024—with Cloud spend at nearly ~11% CAGR—leading to Datacentre Networking TAM of US$24.5 bn. We expect Wired Rev to grow at least in-line with this MSD Datacentre Networking TAM as AVGO’s products are more levered to the higher growth Cloud segment. Upside from Infrastructure & Networking (~US$38 bn SAM): We estimate growth from (1) Data Centre Ethernet switch SAM growth at a 10% CAGR to >$23 bn by 2023, with AVGO the segment leader driven by Cloud/Data Centre expansion; (2) Service Provider equipment SAM growth at a 7% CAGR to $38 bn in 2023; (3) higherperformance interconnect (10G to 40G); and (4) Wireless Infrastructure (4G to 5G upgrades). Growth in Ethernet switches and PHYs is driven by (1) build outs of packetbased networks for the delivery of video and mobile data over the Internet, (2) an increase in hosted services and cloud computing, (3) growth in unified communications in the enterprise, and (4) share gains. Price (17 Jul 20, US$) 52-week price range Market cap (US$ m) Enterprise value (US$ m) 312.71 327.80 - 167.87 141,887.56 178,184 Research Analysts John W. Pitzer 212 538 4610 john.pitzer@credit-suisse.com Dalya Hahn 212 325 7843 dalya.hahn@credit-suisse.com Eric Hu 212 325 4735 eric.hu@credit-suisse.com Jerome Darling 212 325 3211 jerome.darling@credit-suisse.com Outlook CY20/21: We expect CY20/21 Rev/EPS of US$23.9 bn/US$22.04 and US$25.3 bn/US$24.65 (+5.3%/6.1% YoY) and have established a 12-month TP of US$400. Our methodology combines a CY21 EV/FCF multiple and SOTP’s framework: (1) we model CY21 FCF of US$11.4 bn, (2) we assume a 70%/30% FCF split between Semiconductor Solutions (US$8 bn) and Infrastructure Software (US$3.4 bn), (3) we apply a ~21x EV/FCF multiple on Semi Solutions business—a ~15% discount to the SOX inline with 3/5-year average discount), and (4) we apply a ~15x EV/FCF multiple on Infrastructure Software in line with the combined multiples of CA and SYMC over the last 3/5 years. In aggregate, this implies the total EV of ~US$215 bn or ~US$400 per share over the next 12 months. At US$400 the stock would be trading at CY20/21 EV/FCF 21.6x/18.6x. Share price performance Financial and valuation metrics Year EPS (Excl. ESO) (US$) EPS (CS adj., ) Prev. EPS (CS adj., US$) P/E (CS adj.) (x) P/E rel. (CS adj., %) Revenue (US$ m) Net Debt (US$ m) OCFPS (US$) P/OCF (x) Number of shares (m) BV/share (Next Qtr., US$) Net debt (Next Qtr., US$ m) Dividend yield (%) 453.74 49.6 36,643.7 - Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 10/19A 10/20E 21.30 21.50 21.30 21.50 14.7 14.5 75.3 57.6 22,597.0 23,595.0 27,743 36,297 21.85 22.23 14.3 14.1 Price/Sales (x) P/BVPS (x) Dividend (current, US$) 10/21E 24.34 24.15 12.9 66.5 25,050.0 32,092 26.11 12.0 6.02 6.4 5.5 On 17-Jul-2020 the S&P 500 INDEX closed at 3224.73Daily Jul19, 2019 - Jul17, 2020, 07/19/19 = US$290.0 Quarterly EPS 2019A 2020E 2021E Q1 5.55 5.25 5.80 Q2 5.21 5.14 5.65 Q3 5.16 5.20 6.30 Q4 5.39 5.90 6.40 102
103. 21 July 2020 Broadcom Ltd (AVGO) Price (17 Jul 2020): US$312.71 Income Statement Revenue (US$ m) EBITDA Operating profit Recurring profit Cash Flow Cash flow from operations CAPEX Free cash flow to the firm Cash flow from investments Net share issue(/repurchase) Dividends paid Issuance (retirement) of debt Other Cash flow from financing activities Effect of exchange rates Changes in Net Cash/Debt Net debt at end Balance Sheet ($US) Assets Other current assets Total current assets Total assets Liabilities Short-term debt Total current liabilities Long-term debt Total liabilities Shareholder equity Total liabilities and equity Net debt Per share No. of shares (wtd avg) CS adj. EPS Prev. EPS (US$) Dividend (US$) Free cash flow per share Earnings Sales growth (%) Net profit growth (%) EPS growth (%) EBIT margin (%) Valuation EV/Sales (x) EV/EBIT (x) P/E (x) Quarterly EPS 2019A 2020E 2021E Q1 5.55 5.25 5.80 Analyst: John Pitzer Rating: Outperform Target Price: 400.00 10/19A 22,597.0 12,498.0 11,929.0 10,620.0 10/19A 9,697 (432) 9,265 (15,441) 3,741 (4) 13,581 (10,957) 6,361 4,805 27,743 10/19A 10/20E 23,595.0 13,198.8 12,611.3 11,035.3 10/20E 10,042 (496) 9,546 (11,203) 128 (6) 10,603 (6,907) 3,818 (8,554) 36,297 10/20E 10/21E 25,050.0 14,363.5 13,796.5 12,288.5 10/21E 11,696 (501) 11,195 (501) 0 (5) 0 (6,985) (6,990) 4,205 32,092 10/21E 729 9,917 67,493 851 13,038 76,591 851 17,162 73,584 0 6,899 30,011 42,523 24,970 67,493 27,743 10/19A 444 21.30 4.24 20.88 10/19A 8.3 0.6 2.3 52.8 10/19A 7.51 14.2 14.7 0 6,252 43,044 55,229 21,362 76,591 36,297 10/20E 452 21.50 5.51 21.13 10/20E 4.4 2.7 0.9 53.4 10/20E 7.55 14.1 14.5 Q3 5.16 5.20 6.30 1 6,395 43,044 55,372 18,212 73,584 32,092 10/21E 448 24.15 4.99 24.99 10/21E 6.2 12.3 12.3 55.1 10/21E 6.95 12.6 12.9 Q4 5.39 5.90 6.40 Q2 5.21 5.14 5.65 Company Background AVGO is a designer, developer and supplier of analog and digital semiconductor connectivity solutions. AVGO’s product portfolio serves four primary end markets: Wired Infrastructure, Wireless Communications, Enterprise Storage and Industrial. Blue/Grey Sky Scenario Our Blue Sky Scenario (US$) 450.00 Our blue sky scenario assumes that AVGO continues to grow EPS faster than Rev, executes on CA synergies and continues to gain content in the iPhone—an in-line EV/FCF multiple (merited given superior returns and diversity of growth drivers) yields a US$450 stock price. Our Grey Sky Scenario (US$) 275.00 Our grey sky scenario assumes that the macroeconomic environment deteriorates, the CA acquisition proves challenging, and iPhone demand is worse than expected the dividend yield provides a floor at US$275. Share price performance On 17-Jul-2020 the S&P 500 INDEX closed at 3224.73 Daily Jul19, 2019 - Jul17, 2020, 07/19/19 = US$290.0 Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 103
104. 21 July 2020 DELL Dell Technologies “Family” approach with VMware a key advantage in hybrid push; traditional on-prem more under pressure, particularly near term IT Hardware “Family” approach a key differentiator in push to hybrid cloud. Dell EMC’s core position in Enterprise hardware combined with majority stakes in VMware (virtualisation & SW-defined management) and Pivotal (modern app development & Kubernetes, now owned by VMware) represents a powerful engine for innovation and is a key strategic differentiator vs. more on-premise focused peers in an increasingly hybrid-first future. Indeed, we like Dell’s longer-term positioning and have already seen increased collaboration materialise in a number of joint offerings over the past few years including VxRail (#1 in hyperconverged), the Dell Technologies Cloud and Dell Unified Workspace, in addition to revenue synergies through the ability to cross-sell the “family” of brands. Well positioned as an enterprise leader; near-term environment more difficult. Dell’s core Infrastructure Solutions Group (ISG) is primarily focused on prem enterprise environments, offering a full spectrum of HW & Services across servers, storage and networking. Since its acquisition of EMC in 2016, the company maintains #1 global share in servers (ex-ODM) and external storage according to IDC, which provides it with key scale advantages in design, procurement and GTM coverage. It has also taken steps to combine portfolio particularly in storage, which we believe will help optimise R&D and S&M resources long term, despite some potential near-term disruption from combining multiple legacy platforms. Along with a deepening integration with VMware (81% owned by Dell), the leader in virtualisation, we believe this positions the company well to continue consolidating share in the years ahead. That said, pressure on IT budgets from a weaker macro and on margins from fading costs tailwinds and aggressive competition, particularly in more commoditised servers, remain key risks in the current environment. Target price (12M, US$) 44.00 Neutral Price (17 Jul 20, US$) 52-week price range Market cap (US$ m) Enterprise value (US$ m) 60.37 60.37 - 28.87 44,723.09 78,356 Research Analysts Matthew Cabral 415 249 7929 matthew.cabral@credit-suisse.com Dan Knauff, CFA 415 249 7925 daniel.knauff@credit-suisse.com Michael Allen 415 249 7926 michael.allen@credit-suisse.com Neutral on near-term caution and leverage. We balance our favourable view of Dell’s “family” approach in a hybrid-first world LT and undemanding valuation against near-term concerns as (1) PC tailwinds fade with the risk of pull-forward from 2H, compounded by waning Win 10 momentum; (2) a challenging Enterprise demand environment and a potential pause as Dell’s new mid-range PowerStore takes time to ram; and (3) outsized “core” debt leaves little room for error. Further, the key debate on the stock is squarely focused on strategic optionality around Dell’s 81% stake in VMware; we recognise the SOTP disconnect, but view VMW as a key piece of Dell’s strategic advantage longer-term. Share price performance Financial and valuation metrics Year EPS (Excl. ESO) (US$) EPS (CS adj., ) Prev. EPS (CS adj., US$) P/E (CS adj.) (x) P/E rel. (CS adj., %) Revenue (US$ m) Net Debt (US$ m) OCFPS (US$) P/OCF (x) Number of shares (m) BV/share (Next Qtr., US$) Net debt (Next Qtr., US$ m) Dividend yield (%) 1/20A 1/21E 8.75 6.66 7.36 5.29 8.2 11.4 42.1 45.2 92,501.0 88,322.8 42,754 33,633 12.38 12.23 4.9 4.9 740.82 Price/Sales (x) 4.5 P/BVPS (x) 42,074.7 Dividend (current, US$) - Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 1/22E 7.58 6.30 9.6 49.2 91,262.5 26,942 12.50 4.8 1/23E 8.63 7.35 8.2 49.2 94,361.6 20,181 12.82 4.7 0.50 11.3 - On 17-Jul-2020 the S&P 500 INDEX closed at 3224.73Daily Jul19, 2019 - Jul17, 2020, 07/19/19 = US$56.8 Quarterly EPS 2020A 2021E 2022E Q1 1.45 1.34 1.33 Q2 2.15 1.27 1.55 Q3 1.75 1.20 1.54 Q4 2.00 1.47 1.89 104
105. 21 July 2020 Dell Technologies (DELL) Price (17 Jul 2020): US$60.37 Income Statement Revenue (US$ m) EBITDA Operating profit Recurring profit Cash Flow Cash flow from operations CAPEX Free cash flow to the firm Cash flow from investments Net share issue(/repurchase) Dividends paid Issuance (retirement) of debt Other Cash flow from financing activities Effect of exchange rates Changes in Net Cash/Debt Net debt at end Balance Sheet ($US) Assets Other current assets Total current assets Total assets Liabilities Short-term debt Total current liabilities Long-term debt Total liabilities Shareholder equity Total liabilities and equity Net debt Per share No. of shares (wtd avg) CS adj. EPS Prev. EPS (US$) Dividend (US$) Free cash flow per share Earnings Sales growth (%) Net profit growth (%) EPS growth (%) EBIT margin (%) Valuation EV/Sales (x) EV/EBIT (x) P/E (x) Quarterly EPS 2020A 2021E 2022E Analyst: Matthew Cabral Rating: Neutral Target Price: 44.00 1/20A 92,501.0 11,787.0 10,148.0 7,328.0 1/20A 9,291 (2,564) 6,727 (5,028) (3,052) 0 (1,636) 84 (4,604) 1,091 42,754 1/20A 1/21E 88,322.8 10,061.1 8,480.2 5,541.3 1/21E 9,279 (2,154) 7,126 (440) (664) 0 (4,182) (42) (4,888) 9,121 33,633 1/21E 1/22E 91,262.5 10,854.3 9,214.1 6,684.3 1/22E 9,567 (2,181) 7,386 (2,541) (695) 0 (4,049) 0 (4,744) 6,691 26,942 1/22E 1/23E 94,361.6 11,795.4 10,096.4 7,756.5 1/23E 9,824 (2,243) 7,581 (2,603) (820) 0 (5,649) 0 (6,469) 6,761 20,181 1/23E 6,906 36,868 118,861 6,938 39,734 116,672 6,651 42,857 115,470 6,634 44,720 113,132 7,737 52,042 44,319 115,706 3,155 118,861 42,754 1/20A 751 7.36 0.00 8.96 1/20A 1.3 17.5 16.9 11.0 1/20A 0.95 8.6 8.2 Q1 1.45 1.34 1.33 9,561 54,355 37,660 111,598 5,074 116,672 33,633 1/21E 759 5.29 0.00 9.39 1/21E (4.5) (27.4) (28.1) 9.6 1/21E 0.89 9.2 11.4 Q2 2.15 1.27 1.55 8,161 54,793 35,051 110,546 4,924 115,470 26,942 1/22E 765 6.30 0.00 9.65 1/22E 3.3 20.3 19.2 10.1 1/22E 0.79 7.8 9.6 Q3 1.75 1.20 1.54 4,152 52,424 33,451 107,610 5,522 113,132 20,181 1/23E 767 7.35 0.00 9.89 1/23E 3.4 16.8 16.6 10.7 1/23E 0.69 6.4 8.2 Q4 2.00 1.47 1.89 Company Background Dell is a diversified IT hardware company focusing on PCs, accessories, and enterprise IT infrastructure. The company also owns majority stakes in several publicly traded enterprise-focused software firms including VMware, Pivotal and SecureWorks. Blue/Grey Sky Scenario Our Blue Sky Scenario (US$) 79.00 Our blue sky scenario of US$79 assumes a 150 bp increase in revenue growth, a 50 bp increase in gross margins, and 25 bp decrease in opex as a % of sales relative to our base case assumptions. This yields CY21E EPS of US$7.21 (17% upside to base case EPS) on which we apply an 11x multiple, to reflect a faster growth rate. Our Grey Sky Scenario (US$) 31.00 Our grey sky scenario of US$31 assumes a 150 bp decrease in revenue growth, 50 bp of downward pressure on gross margins, and a 25 bp increase in opex as a % of sales. This yields CY21E EPS of US$5.17 (-16% vs. our base case EPS) on which we apply a 6x multiple to reflect a slower growth rate. Share price performance On 17-Jul-2020 the S&P 500 INDEX closed at 3224.73 Daily Jul19, 2019 - Jul17, 2020, 07/19/19 = US$56.8 Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 105
106. 21 July 2020 Delta Electronics 2308.TW Well positioned to capture the 5G opportunity in cloud, edge, and device Target price (12M, NT$) 208.00 Outperform Electronic Components & Connectors Leadership in power and cooling to stay ahead in the power/energy efficiency competition. Silicon scaling limitation, exponential data processing, broader machine learning framework, on-device intelligence, and 5G adoption, have led to a significant design change on hardware components. How to deal with high bandwidth, low latency and massive connectivity, while meeting cost efficiency is also important, given a huge ASP increase on design change and an estimated 40% of electrical power used to cool down a data centre. We believe Delta’s core competence in highly efficient power electronics (including power supply, cooling components, rack, BMS, monitoring, and backup power) should continue to help the company stay ahead in the power/energy efficiency competition. A rich product offering to capture 5G opportunity. Delta offers customer-tailored data centre solutions that are highly reliable in power distribution, control system and energy saving (with PUE less than 1.4), which contributes to 4-5% of revenue, mainly for nonChina enterprise customers, but Delta is also gaining traction in HPC. Delta also offers richer product offerings including server power supply, telecom power supply, cooling, power chokes and networking, etc., to capture the 5G opportunity, with a combined revenue contribution of at least one-third of the total. Price (17 Jul 20, NT$) Upside/downside (%) Mkt cap (NT$/US$ mn) Enterprise value (NT$ mn) Number of shares (mn) Free float (%) 52-wk price range (NT$) ADTO-6M (US$ mn) 184.00 13.0 477,948 / 16,227 471,101 2,598 74.8 186-111 40.2 Research Analysts Pauline Chen 886 2 2715 6323 pauline.chen@credit-suisse.com Angela Pan 886 2 27156352 angela.pan@credit-suisse.com Mix-driven GM expansion on track. We think Delta’s mix-driven GM expansion is still on track, thanks to strong restocking in WFH and smartphones, and IA recovery. We see a fairly good chance for 2Q20 OPM to hit two-year highs, which should serve as a positive near-term catalyst. We expect its mix-driven margin uptrend to hold in 2H20, thanks to iPhone production volume QoQ growth (new SE and iPhone 11 to drive 3Q, and new 5G iPhone to drive 4Q), new game console launch, and non-China telecom orders. Delta rated OUTPERFORM. Delta is our preferred pick in the downstream component sector, given accelerating earnings momentum driven by growing revenue contribution from ASP/margin-accretive 5G business, which includes cloud, edge and device. Its earnings growth could be more powerful, if we see accelerating momentum in telecom power supply and networking businesses. Share price performance Financial and valuation metrics Year Revenue (NT$ mn) EBITDA (NT$ mn) EBIT (NT$ mn) Net profit (NT$ mn) EPS (CS adj.) (NT$) Chg. from prev. EPS (%) Consensus EPS (NT$) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 12/19A 268,131 33,394.2 19,408.8 23,117.8 8.9 n.a. n.a. 27.1 20.7 2.7 14.0 3.41 17.1 (6.4) 12/20E 268,335 48,101.2 23,621.0 19,933.1 7.67 0.0 7.72 (13.8) 24.0 2.9 9.9 3.25 13.9 (1.9) 12/21E 293,242 53,814.6 27,010.4 23,107.4 8.9 0.0 9.62 15.9 20.7 3.4 8.6 3.06 15.2 (6.9) 12/22E 315,154 57,477.2 29,273.1 24,948.0 9.6 0.0 11.16 8.0 19.2 3.7 8.0 2.95 15.7 (9.6) The price relative chart measures performance against the TAIWAN SE WEIGHTED INDEX which closed at 12,181.56 on 17/07/20. On 17/07/20 the spot exchange rate was NT$29.45/US$1 Performance Absolute (%) Relative (%) 1M 15.7 10.1 3M 36.8 21.9 12M 24.7 11.9 106
107. 21 July 2020 Delta Electronics Price (17 Jul 2020): NT$184.00 Income Statement (NT$ mn) Sales revenue Cost of goods sold EBITDA EBIT Net interest expense/(inc.) Recurring PBT Profit after tax Reported net profit Net profit (Credit Suisse) Balance Sheet (NT$ mn) Cash & cash equivalents Current receivables Inventories Other current assets Current assets Property, plant & equip. Investments Intangibles Other non-current assets Total assets Current liabilities Total liabilities Total debt Shareholders' equity Minority interests Total liabilities & equity Cash Flow (NT$ mn) EBIT Net interest Tax paid Working capital Other cash & non-cash items Operating cash flow Capex Free cash flow to the firm Investing cash flow Equity raised Dividends paid Financing cash flow Total cash flow Adjustments Net change in cash Per share Shares (wtd avg.) (mn) EPS (Credit Suisse) (NT$) DPS (NT$) Operating CFPS (NT$) Earnings Growth (%) Sales revenue EBIT EPS Margins (%) EBITDA EBIT Valuation (x) P/E P/B Dividend yield (%) EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE ROIC Credit ratios Net debt/equity (%) Net debt/EBITDA (x) (2308.TW / 2308 TT) Target Price: NT$208.00 12/19A 268,131 193,635 33,394 19,409 (149) 29,154 23,928 23,118 23,118 12/19A 46,490 57,035 39,316 4,717 147,558 57,851 5,248 26,359 74,022 311,037 85,726 136,683 35,390 140,157 34,198 311,037 12/19A 19,409 149 (5,227) (2,259) 23,014 35,086 (28,075) 7,011 (73,076) 11,776 0 22,096 (15,895) 0 (15,895) 12/19A 2,598 8.90 5.00 13.51 12/19A 12/20E 268,335 187,312 48,101 23,621 (303) 26,437 21,609 19,933 19,933 12/20E 38,785 61,863 45,635 4,717 151,000 68,402 5,904 27,241 67,400 319,946 87,690 138,646 35,390 147,102 34,198 319,946 12/20E 23,621 303 (4,829) (9,183) 25,412 35,324 (17,000) 18,324 (30,041) (12,988) 0 (12,988) (7,705) 0 (7,705) 12/20E 2,598 7.67 5.37 13.60 12/20E 12/21E 293,242 204,319 53,815 27,010 (360) 30,265 24,817 23,107 23,107 12/21E 48,580 60,870 48,072 4,717 162,239 67,889 6,548 27,262 67,379 331,317 89,906 140,863 35,390 156,256 34,198 331,317 12/21E 27,010 360 (5,448) 772 28,094 50,790 (14,000) 36,790 (27,041) (13,953) 0 (13,953) 9,795 0 9,795 12/21E 2,598 8.90 6.23 19.55 12/21E 12/22E 315,154 219,635 57,477 29,273 (527) 32,684 26,801 24,948 24,948 12/22E 54,189 61,079 50,172 4,717 170,156 67,542 6,523 27,202 67,439 338,862 91,815 142,772 35,390 161,892 34,198 338,862 12/22E 29,273 527 (5,883) (399) 29,355 52,873 (15,566) 37,307 (27,952) (19,312) 0 (19,312) 5,609 0 5,609 12/22E 2,598 9.60 6.72 20.36 12/22E 13.1 6.8 27.1 0.1 21.7 (13.8) 9.3 14.3 15.9 7.5 8.4 8.0 12.5 7.2 12/19A 20.7 3.41 2.7 1.7 14.0 24.1 12/19A 17.1 11.7 12/19A (6.4) (0.33) 17.9 8.8 12/20E 24.0 3.25 2.9 1.8 9.9 20.1 12/20E 13.9 11.3 12/20E (1.9) (0.07) 18.4 9.2 12/21E 20.7 3.06 3.4 1.6 8.6 17.2 12/21E 15.2 12.5 12/21E (6.9) (0.25) 18.2 9.3 12/22E 19.2 2.95 3.7 1.5 8.0 15.7 12/22E 15.7 13.5 12/22E (9.6) (0.33) Analyst: Pauline Chen Rating: Outperform Company Background Delta Electronics, Inc. is a Taiwan-based supplier of power management products; information & communication components; video products & electromechanical products, including inverters. Blue/Grey Sky Scenario Our Blue Sky Scenario (NT$) 230.00 Our blue sky scenario of NT$230.0 is based on +2 standard deviation multiple of FY20E earnings. Our Grey Sky Scenario (NT$) 103.00 Our grey sky scenario of NT$103 is based on its lowest share price YTD. Share price performance The price relative chart measures performance against the TAIWAN SE WEIGHTED INDEX which closed at 12,181.56 on 17-Jul-2020 On 17-Jul-2020 the spot exchange rate was NT$29.45/US$1 Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 107
108. 21 July 2020 Digital Realty Trust, Inc. DLR Leading hyperscale data centre aligned with cloud growth Target price (12M, US$) 164.00 Outperform Data Centre REITs DLR Indexed to cloud growth. DLR is the leading US hyperscale data centre provider, providing it with the most direct indexation to hyperscale cloud growth. Cloud service providers are projected to grow at a +12.0% CAGR through 2024E, based on the latest Omdia data. As DLR’s top customers (mainly hyperscale) have expanded their businesses, they have also meaningfully grown their footprints in DLR’s data centres. DLR’s top customers have grown from a base rent of ~US$679 mn (43% of rental revenues) in 2016 to ~US$1.2 bn in annualised base rent (53% of rental revenues) in 1Q 2020. Price (17 Jul 20, US$) 52-week price range Market cap (US$ m) Enterprise value (US$ m) InterXion acquisition enhances DLR’s position significantly. We are broadly constructive on DLR’s acquisition of InterXion for three reasons: InterXion is indexed to retail colocation in a high-growth region that is projected to grow significantly as enterprises migrate to hybrid cloud models; InterXion brings highly connected and rich communities of interest into DLR’s portfolio, and should spur high-margin interconnection growth; InterXion’s European focus significantly diversifies DLR’s US-focused operations. Following the deal, DLR is set to triple its European footprint, with the majority of InterXion capacity in mainland Europe, strengthening DLR’s opportunity to work with enterprises across multiple locations on the continent. Finally, while the deal is not accretive NT, there are many medium/LT strategic benefits from the combination of the businesses. Sami Badri 212 538 1727 ahmedsami.badri@credit-suisse.com 143.75 154.23 - 107.90 38,570.00 39,446 Research Analysts George Engroff 212 325 2289 george.engroff@credit-suisse.com Lauren Lucas 212 325 4310 lauren.lucas@credit-suisse.com Thesis: Three factors for our Outperform rating: (1) data centre demand remains elevated and DLR is in a solid position to capture the global digital infrastructure demand trends seen through its top 20 customer list, leasing backlog, and overall industry demand dynamics; (2) by 4Q20E, we project improved lease renewal spreads as older lease vintages are processed, and (3) DLR’s ROIC yields are forecasted to inflect higher, largely driven by the InterXion acquisition, headed to ~12% vs its historical average consistently below that level. InterXion is indexed to retail colocation in a high-growth region that is projected to grow significantly as enterprises migrate to hybrid cloud models; it brings highly connected and rich communities into DLR’s portfolio, and should spur high-margin interconnection growth; its European focus significantly diversifies DLR’s US-focused operations. Valuation: Outperform, US$164 target price. We value DLR at US$164 per share (implying a 12% upside potential), computed with a 25.5x multiple on our FY21 AFFOS estimate of US$6.42. Key risks include technological disruption, market competition, forex volatility, and REIT qualification loss. Share price performance Financial and valuation metrics Year Normalized FFO/Share (US$) Adjusted FFO/Share (US$) Credit Suisse diluted EPS (US$) P/AFFO(US$ m) Dividend Yield (US$ m) AFFO Payout Ratio % EBITDA Margin % Revenue (US$ m) Current Dividend yield (%) Price/AFFO EV/EBITDA Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 3.1 25.6 16.1 12/19A 6.65 5.93 2.35 24.3 3.0 72.9 56.6 3,209 Debt-to-Capitalization Net Debt-to-EBITDA Enterprise Value ($m) 12/20E 5.33 5.62 1.71 25.6 3.1 79.7 53.5 3,812 12/21E 6.39 6.42 2.25 22.4 3.6 81.5 56.2 4,430 2.6 32,925 On 17-Jul-2020 the S&P 500 INDEX closed at 3224.73Daily Jul19, 2019 - Jul17, 2020, 07/19/19 = US$117.73 Adjusted FFO 2019A 2020E 2021E Q1 1.53 1.44 1.64 Q2 1.50 1.35 1.55 Q3 1.48 1.35 1.59 Q4 1.41 1.48 1.63 108
109. 21 July 2020 Digital Realty Trust, Inc. (DLR) Price (17 Jul 2020): US$143.75 Per share Equiv. FPO (period Avg.) (mn) Adjusted FFO/Share (US$) DPS (US$) BV per unit (US$) Income Statement Revenue (US$) Property operating expenses Real estate taxes Net operating income (US$) Interest and investment income Other income Asset management fees (exp. item) Other expenses Interest expense/finance costs Total non-property expenses Share of associates/JVs' equity Net income before tax Income tax (expense) Distributable income to unitholders Net income (US$) Cash Flow Net interest paid Other cash & non-cash items Cash flow from operatiions Other investment/(outflows) Cash flow from investment Dividends paid Equity raised Net borrowings Other financing cash flows Financial cash flow Net cash flow Balance Sheet Assets Cash and equivalents Accounts receivable Total current assets Total fixed assets Investment properties Other investments Other non-current assets Total assets Accounts payable Short-term debt Total current liabilities Long-term debt Other non-current liabilities Total non-current liabilities Total liabilities Unit funds Reserves Shareholders' equity Total capital employed Earnings EBITDA growth (%) EBITDA Margin (%) Valuation EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) P/E (x) Dividend yield (%) P/B (x) Gearing Net Debt to EBITDA (X) Debt/Asset (%) Adjusted FFO 2019A 2020E 2021E Analyst: Sami Badri Rating: Outperform Target Price: 164.00 Q1 1.53 1.44 1.64 12/19A 210 5.9 4.3 40.3 12/19A 3,209 160 3,050 2,455 419 2,455 8 611 12 603 1,453 12/19A (419) 1,544 1,514 (351) (275) (997) (275) (1,272) (33) 12/19A 12/20E 263 5.6 4.5 58.5 12/20E 3,812 183 3,629 2,968 368 2,968 (49) 571 19 620 1,607 12/20E (368) 1,629 1,659 (2,540) (2,227) (1,412) 1,812 400 (169) 12/20E 12/21E 282 6.4 5.2 52.3 12/21E 4,430 212 4,219 3,293 418 3,293 40 771 29 731 1,864 12/21E (418) 2,100 2,150 (2,477) (2,477) (1,328) 1,570 242 (85) 12/21E 90 306 874 1,287 14,231 17,544 23,068 1,008 810 2,053 105 1,242 10,366 12,419 8,445 0 10,650 21,016 12/19A 2.7 56.6 12/19A 21.7 66.3 61.1 3.0 3.6 12/19A 0.5 4.0 425 927 1,064 19,105 24,315 33,772 1,781 771 2,553 104 1,781 14,418 16,970 15,368 0 16,802 31,219 12/20E 12.3 53.5 12/20E 19.3 59.6 83.9 3.1 2.5 12/20E 0.4 2.6 Q3 1.48 1.35 1.59 459 986 1,064 20,132 25,270 34,787 1,891 771 2,662 104 1,891 15,967 18,629 14,724 0 16,157 32,124 12/21E 22.0 56.2 12/21E 15.8 42.6 63.8 3.6 2.7 12/21E 0.4 2.5 Q4 1.41 1.48 1.63 Q2 1.50 1.35 1.55 Company Background Digital Realty is a global multi-tenant colocation provider that is structured as a Real Estate Investment Trust with global operations. Blue/Grey Sky Scenario Our Blue Sky Scenario (US$) 193.00 Our blue sky valuation of US$193 is based on our 2021 AFFO per share estimate of US$6.42 multiplied by a 30.0x P/AFFO multiple. Our Grey Sky Scenario (US$) 96.00 Our grey sky valuation of US$96 is based on our 2021 AFFO per share estimate of US$6.42 multiplied by a 15.0x P/AFFO multiple. Share price performance On 17-Jul-2020 the S&P 500 INDEX closed at 3224.73 Daily Jul19, 2019 - Jul17, 2020, 07/19/19 = US$117.73 Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 109
110. 21 July 2020 Equinix, Inc. EQIX On-ramps create mutually beneficial relationship between EQIX and cloud providers Target price (12M, US$) 704.00 Outperform Data Centre REITs Cloud and SaaS on-ramps a driving force behind the EQIX ecosystem value proposition. EQIX is the market interconnection leader, which is recurring and high margin long-term. It is the global and most distributed data centre REIT with a world class brand, a leader in almost every market it operates in and is positioned to benefit from 5G spending and interconnection optimisation. Cloud and SaaS on-ramps should accelerate the interconnection business through 2020. Cloud on-ramps increased 35% YoY in 2019 and have seen robust growth again in 2020. More recently, similar to the cloud and software defined networking providers, software-as-a-service companies are borrowing the on-ramp playbook. They are deploying points of presence across interconnection dense data centres (such as EQIX), enhancing enterprise application connectivity. Furthermore, customers/ enterprises are seeking these on-ramp/point of presence ecosystems. Most notable points of presence/on-ramp deployments come from Microsoft Azure, Cisco, Salesforce, ServiceNow, F5, and others—all deploying points of presence to win enterprise business. All in, after years of debate it is clear that cloud providers need data centre operators to win and generate more enterprise business. Thesis. We believe EQIX is best positioned as a global IX leader given its expanding business moat (mainly through scale, channel, and services reach) and global distribution. Given EQIX’s positioning, it has the strongest ecosystem of any MTDC, in our view, which creates a virtuous circle of enterprise demand. 2020 catalysts will include the ramp up of SaaS company/customer on-ramps, which we view should accelerate IX growth across EQIX’s vast portfolio; EQIX’s Hyperscale Infrastructure team, which ramped throughout 2019; and a lower average interest expense via newly issued investment grade debt, which will support higher AFFOS growth long-term. Price (17 Jul 20, US$) 52-week price range Market cap (US$ m) Enterprise value (US$ m) 724.23 728.69 - 486.58 64,104.90 62,629 Research Analysts Sami Badri 212 538 1727 ahmedsami.badri@credit-suisse.com George Engroff 212 325 2289 george.engroff@credit-suisse.com Lauren Lucas 212 325 4310 lauren.lucas@credit-suisse.com Valuation: Outperform, target price of US$704. Our target price of US$704 is based on 25x our FY21E AFFOS of US$25.74 per share and a DCF valuation assuming a terminal growth of 2.25% and WACC of 5.3%. Key investment risks include technological disruption, competition, rising interest rates, and REIT qualification loss. Share price performance Financial and valuation metrics Year Normalized FFO/Share (US$) Adjusted FFO/Share (US$) Credit Suisse diluted EPS (US$) P/AFFO(US$ m) Dividend Yield (US$ m) AFFO Payout Ratio % EBITDA Margin % Revenue (US$ m) Current Dividend yield (%) Price/AFFO EV/EBITDA Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 1.4 30.1 19.8 12/19A 15.53 22.85 22.85 31.7 1.4 43.1 48.3 5,562 Debt-to-Capitalization Net Debt-to-EBITDA Enterprise Value ($m) 12/20E 16.06 24.06 24.06 30.1 1.5 44.2 47.7 5,903 12/21E 18.13 25.74 25.74 28.1 1.6 45.4 48.4 6,510 -0.3 55,846 On 17-Jul-2020 the S&P 500 INDEX closed at 3224.73Daily Jul19, 2019 - Jul17, 2020, 07/19/19 = US$506.61 Adjusted FFO 2019A 2020E 2021E Q1 5.95 6.21 6.79 Q2 5.87 6.14 6.73 Q3 5.52 6.33 6.59 Q4 5.51 5.39 5.64 110
111. 21 July 2020 Equinix, Inc. (EQIX) Price (17 Jul 2020): US$724.23 Per share Equiv. FPO (period Avg.) (mn) Adjusted FFO/Share (US$) DPS (US$) BV per unit (US$) Income Statement Revenue (US$) Property operating expenses Real estate taxes Net operating income (US$) Interest and investment income Other income Asset management fees (exp. item) Other expenses Interest expense/finance costs Total non-property expenses Share of associates/JVs' equity Net income before tax Income tax (expense) Distributable income to unitholders Net income (US$) Cash Flow Net interest paid Other cash & non-cash items Cash flow from operatiions Other investment/(outflows) Cash flow from investment Dividends paid Equity raised Net borrowings Other financing cash flows Financial cash flow Net cash flow Balance Sheet Assets Cash and equivalents Accounts receivable Total current assets Total fixed assets Investment properties Other investments Other non-current assets Total assets Accounts payable Short-term debt Total current liabilities Long-term debt Other non-current liabilities Total non-current liabilities Total liabilities Unit funds Reserves Shareholders' equity Total capital employed Earnings EBITDA growth (%) EBITDA Margin (%) Valuation EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) P/E (x) Dividend yield (%) P/B (x) Gearing Net Debt to EBITDA (X) Debt/Asset (%) Adjusted FFO 2019A 2020E 2021E Analyst: Sami Badri Rating: Outperform Target Price: 704.00 Q1 5.95 6.21 6.79 12/19A 85 22.8 9.8 148.4 12/19A 5,562 1,851 3,711 4 2,545 452 2,545 693 185 693 507 12/19A (452) 2,086 1,996 (1,945) (1,945) (836) 2,038 1,202 1,262 12/19A 12/20E 87 24.1 10.6 0.0 12/20E 5,903 1,971 3,931 2,857 415 2,857 648 135 648 513 12/20E (415) 2,258 2,286 (3,081) (3,081) (925) 1,622 697 (124) 12/20E 12/21E 88 25.7 11.7 0.0 12/21E 6,510 2,175 4,335 3,056 469 3,056 810 162 810 648 12/21E (469) 2,552 2,497 (2,971) (2,971) (1,033) 2,610 1,577 1,104 12/21E Company Background 1,870 689 2,873 12,153 0 2,056 23,966 761 0 2,158 0 2,158 12,967 15,125 12,552 8,840 21,808 12/19A 11.4 48.3 12/19A 23.2 53.2 31.7 1.4 4.9 12/19A Net Cash 0.0 1,769 732 2,963 12,843 0 2,058 24,899 841 1,750 3,712 0 1,962 11,077 14,789 0 10,110 21,188 12/20E 4.7 47.7 12/20E 22.8 59.7 30.1 1.5 2,873 814 4,149 13,705 0 2,058 26,947 910 4,300 6,331 0 2,031 10,887 17,218 0 9,729 20,616 12/21E 11.9 48.4 12/21E 20.8 51.3 28.1 1.6 Our blue sky scenario of US$847 is based on 25.5x our FY21E AFFOS of US$25.74 per share and a DCF valuation assuming a terminal growth of 3.0% and WACC of 5.3%. Q2 5.87 6.14 6.73 12/20E Net Cash 7.0 Q3 5.52 6.33 6.59 Equinix is a global multi-tenant colocation provider that is structured as a Real Estate Investment Trust. Equinix maintains operations in North America, Europe, and Asia, and offers a range of products, services, and solutions. Blue/Grey Sky Scenario Our Blue Sky Scenario (US$) Our Grey Sky Scenario (US$) 847.00 472.00 Our grey sky scenario of US$472 is based on 16x our FY21E AFFOS of US$25.74 per share and a DCF valuation assuming a terminal growth of 1.25% and WACC of 5.3%. Share price performance On 17-Jul-2020 the S&P 500 INDEX closed at 3224.73 Daily Jul19, 2019 - Jul17, 2020, 07/19/19 = US$506.61 12/21E 0.5 16.0 Q4 5.51 5.39 5.64 Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 111
112. 21 July 2020 601138.SS Foxconn Industrial Internet A share gainer in the cloud market Target price (12M, Rmb) 17.00 Outperform Electronic Equipment & Instruments A share gainer in the cloud market. Silicon scaling limitation, exponential data processing, broader machine learning framework, on-device intelligence and 5G adoption, have led to a significant design change on hardware components. How to deal with high bandwidth, low latency and massive connectivity, while meeting cost efficiency is also important, given a huge ASP increase. While being a late comer in the cloud market, FII has been making decent progress by expanding its customer base from Dell/HPE/Oracle/ NVIDIA/NetApp/EMC, and has been gaining share in Microsoft, AWS, Alibaba, iQIYI, ByteDance, Tencent, etc. In 2019, cloud service equipment solution (CSES) accounted for 40% of FII’s revenue and 19% of gross profits. Growing CSP mix to drive cloud sales growth and margin expansion. We expect FII’s CSES to remain the key revenue growth driver in 2020-21E, thanks to strong underlying market growth and its share gains in CSP (cloud service provider). While FII’s CSES generates lower-than-peers GM (at 4% in 2019, vs. Wiwynn’s 6.9%), due to its higher exposure to enterprise customers, we expect its continued market share gains in CSP (especially Microsoft) to drive margin improvement in CSES in 2020-21E. FII’s CSP revenue grew 48% YoY and represented 20% of its CSES sales in 2019. Casing and CSP driving mix improvement in 2H20. Besides share gains in highermargin CSP, we expect mix improvement to also be driven by stabilising iPhone builds (from new SE and promotion on iPhone 11) and 5G iPhones launch. This should mitigate the impact from enterprise server noises in the near term. Price (17 Jul 20, Rmb) Upside/downside (%) Mkt cap (Rmb/US$ mn) Enterprise value (Rmb mn) Number of shares (mn) Free float (%) 52-wk price range (Rmb) ADTO-6M (US$ mn) 14.79 14.9 293,908 / 42,040 246,112 19,872 13.8 20.85-12.24 155.0 Research Analysts Pauline Chen 886 2 2715 6323 pauline.chen@credit-suisse.com Kyna Wong 852 2101 6950 kyna.wong@credit-suisse.com Angela Pan 886 2 27156352 angela.pan@credit-suisse.com FII rated OUTPERFORM. We believe FII’s market share gains in the fast growing cloud market, together with accelerating non-China 5G rollout, should keep earnings recovery on track. This should keep FII as the core profit generator of Hon Hai. Medium-term we will continue to monitor the progress on China-based suppliers’ expansion to iPhone casing/ assembly, which could impact FII’s value proposition in its top customer. Share price performance Financial and valuation metrics Year Revenue (Rmb mn) EBITDA (Rmb mn) EBIT (Rmb mn) Net profit (Rmb mn) EPS (CS adj.) (Rmb) Chg. from prev. EPS (%) Consensus EPS (Rmb) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 12/18A 415,378 24,523.5 21,242.8 16,902.4 0.86 n.a. n.a. (4.1) 17.2 0.8 10.4 4.07 34.0 (54.8) 12/19E 408,698 22,382.1 21,171.8 18,606.2 0.94 0.0 0.94 9.2 15.8 1.3 11.4 3.34 23.3 (43.0) 12/20E 434,163 21,199.2 20,061.2 17,973.2 0.91 0.0 0.93 (3.4) 16.3 1.3 11.3 2.88 18.9 (52.2) 12/21E 476,095 24,324.9 22,977.2 20,344.5 1.02 0.0 1.08 13.2 14.4 1.5 9.6 2.48 18.5 (51.0) The price relative chart measures performance against the Shanghai Shenzhen CSI300 index which closed at 4,544.70 on 17/07/20. On 17/07/20 the spot exchange rate was Rmb6.99/US$1 Performance Absolute (%) Relative (%) 1M 3.8 (9.3) 3M 5.7 (12.6) 12M 19.7 (0.9) 112
113. 21 July 2020 Foxconn Industrial Internet (601138.SS / 601138 CH) Target Price: Rmb17.00 Price (17 Jul 2020): Rmb14.79 Income Statement (Rmb mn) Sales revenue Cost of goods sold EBITDA EBIT Net interest expense/(inc.) Recurring PBT Profit after tax Reported net profit Net profit (Credit Suisse) Balance Sheet (Rmb mn) Cash & cash equivalents Current receivables Inventories Other current assets Current assets Property, plant & equip. Investments Intangibles Other non-current assets Total assets Current liabilities Total liabilities Total debt Shareholders' equity Minority interests Total liabilities & equity Cash Flow (Rmb mn) EBIT Net interest Tax paid Working capital Other cash & non-cash items Operating cash flow Capex Free cash flow to the firm Investing cash flow Equity raised Dividends paid Financing cash flow Total cash flow Adjustments Net change in cash Per share Shares (wtd avg.) (mn) EPS (Credit Suisse) (Rmb) DPS (Rmb) Operating CFPS (Rmb) Earnings Growth (%) Sales revenue EBIT EPS Margins (%) EBITDA EBIT Valuation (x) P/E P/B Dividend yield (%) EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE ROIC Credit ratios Net debt/equity (%) Net debt/EBITDA (x) 12/18A 415,378 379,486 24,523 21,243 (306) 20,072 16,908 16,902 16,902 12/18A 62,293 87,688 37,468 2,479 189,927 7,596 434 746 1,899 200,603 127,986 128,259 22,665 71,528 50 200,603 12/18A 21,243 0 0 (16,600) 17,363 22,006 (2,685) 19,321 (1,368) 26,781 (698) 24,885 45,522 426 45,948 12/18A 19,695 0.86 0.12 1.12 12/18A 12/19E 408,698 374,451 22,382 21,172 (771) 21,132 18,606 18,606 18,606 12/19E 66,901 85,329 41,646 1,815 195,690 6,644 550 850 1,878 205,613 115,973 116,264 28,461 87,912 68 205,613 12/19E 21,172 0 0 (5,114) (9,619) 6,439 (2,730) 3,709 (2,818) 979 (3,368) 2,720 6,342 97 6,438 12/19E 19,855 0.94 0.20 0.32 12/19E 12/20E 434,163 399,555 21,199 20,061 (1,439) 20,413 17,973 17,973 17,973 12/20E 82,466 89,054 42,209 1,815 215,544 8,622 712 735 1,878 227,490 123,651 123,943 28,461 102,111 68 227,490 12/20E 20,061 0 0 3,523 (1,112) 22,472 (3,000) 19,472 (3,000) 0 (3,907) (3,907) 15,565 0 15,565 12/20E 19,855 0.91 0.19 1.13 12/20E 12/21E 476,095 437,343 24,325 22,977 (1,635) 23,373 20,344 20,345 20,345 12/21E 89,422 98,867 46,201 1,815 236,304 10,390 873 619 1,878 250,064 130,153 130,445 28,461 118,183 68 250,064 12/21E 22,977 0 0 (7,801) (1,447) 13,730 (3,000) 10,730 (3,000) 0 (3,774) (3,774) 6,956 0 6,956 12/21E 19,855 1.02 0.22 0.69 12/21E 17.2 (4.1) (4.1) (1.6) (0.3) 9.2 6.2 (5.2) (3.4) 9.7 14.5 13.2 5.9 5.1 12/18A 17.2 4.07 0.8 0.6 10.4 12.0 12/18A 34.0 68.3 12/18A (54.8) (1.62) 5.5 5.2 12/19E 15.8 3.34 1.3 0.6 11.4 12.1 12/19E 23.3 44.6 12/19E (43.0) (1.72) 4.9 4.6 12/20E 16.3 2.88 1.3 0.6 11.3 12.0 12/20E 18.9 35.2 12/20E (52.2) (2.55) 5.1 4.8 12/21E 14.4 2.48 1.5 0.5 9.6 10.1 12/21E 18.5 37.0 12/21E (51.0) (2.51) Analyst: Pauline Chen Rating: Outperform Company Background FII primarily engages in the design and manufacturing of communication network equipment, mechanical parts (mainly casing), cloud service equipment, precision tooling, and industrial robots. Blue/Grey Sky Scenario Our Blue Sky Scenario (Rmb) 30.00 Our blue sky scenario valuation of Rmb30.0 is based on 24x 2020E EPS, close to the component P/E average of 27x. The 24x multiple is derived from sum-of-the-parts of components and assembly P/E, applying the weighting with FII’s gross profit mix. Our Grey Sky Scenario (Rmb) 9.10 Our grey sky valuation scenario of Rmb9,4 is based on 10x 2020E EPS, benchmarking the average NTM P/E of pure assemblers. Share price performance The price relative chart measures performance against the Shanghai Shenzhen CSI300 index which closed at 4,544.70 on 17-Jul-2020 On 17-Jul-2020 the spot exchange rate was Rmb6.99/US$1 Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 113
114. 21 July 2020 GDS GDS Holdings Limited Leading China datacentre operator Target price (12M, US$) 90.00 Outperform[V] Integrated Telecommunication Services GDS is the leading independent datacentre provider in China, focused on provision of high-powered data centres to hyperscalers (i.e. the wholesale market). On 22 June, GDS announced that it had raised US$505 mn in new equity through a private placement to Hillhouse Capital (Not listed) and ST Telemedia Global Data Centres (Not listed) at US$65 per ADS. Hillhouse invested US$ 400mn, while STT GDC invested US$105 mn. This latest well-timed capital raising follows US$600 mn in equity capital raised in March 2019, and US$250 mn raised in an underwritten public offering on 4 December 2019. Focussing on value-accretive wholesale data centre projects. Crucially, we expect GDS to deploy this capital in value-accretive wholesale datacentre projects. We currently forecast that GDS will enjoy a 34.6% three-year revenue CAGR across FY19-22. We also forecast an increase in margins as GDS enjoys some operational gearing over centralised costs, leading us to forecast a 35.8% three-year CAGR in adjusted EBITDA. Cash flow negative until FY25. However, we acknowledge that datacentre construction is capital intensive, and so we expect GDS to remain cash flow negative until FY25 and lossmaking until FY21. Maintain Outperform. To factor in both the strong structural growth and heavy capital expenditure, we use discounted cash flow (DCF) as our primary valuation methodology, deriving a target price of US$90 per ADS. GDS has enjoyed a sharp share price rally YTD, as the trends of work-from-home and increasing data use have resulted in upward revisions to consensus revenue and EBITDA forecasts, while the action of central banks has led to declining risk-free rates and borrowing rates (helpful given GDS’s negative cash flow generation). We therefore maintain our OUTPERFORM rating on GDS, given strong structural growth in the ‘virtual’ world, as well as cheaper debt servicing in the ‘real’ world. Financial and valuation metrics Year Revenue (Rmb mn) EBITDA (Rmb mn) EBIT (Rmb mn) Net profit (Rmb mn) EPS (CS adj.) (Rmb) Chg. from prev. EPS (%) Consensus EPS (Rmb) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 12/19A 4,122.4 1,621.8 479.8 (500.2) (3.63) n.a. n.a. n.m. n.m. 0.0 62.7 7.37 (5.9) 97.6 12/20E 5,884.0 2,498.2 1,171.8 (47.8) (0.32) 0.0 (1.57) n.m. n.m. 0.0 42.1 5.93 (0.4) 97.5 12/21E 7,962.5 3,447.0 1,578.5 80.5 0.52 0.0 0.42 n.m. 1,094.1 0.0 32.0 5.9 0.5 131.7 12/22E 10,004.6 4,275.7 1,927.7 182.1 1.17 0.0 3.09 126.2 483.6 0.0 26.8 5.83 1.2 160.1 Price (17 Jul 20, US$) Upside/downside (%) Mkt cap (US$ mn) Enterprise value (Rmb mn) Number of shares (mn) Free float (%) 52-wk price range (US$) ADTO-6M (US$ mn) 81.08 11.0 12,958 103,553 159.82 22.3 88.96-36.14 34.5 [V] = Stock Considered Volatile (see Disclosure Appendix) Research Analysts Colin McCallum, CA 852 2101 6514 colin.mccallum@credit-suisse.com Billy Lee 852 2101 6529 billy.lee@credit-suisse.com Share price performance The price relative chart measures performance against the MSCI CHINA F IDX which closed at 9,617.98 on 17/07/20. On 17/07/20 the spot exchange rate was US$1/US$1 Performance Absolute (%) Relative (%) 1M 14.4 5.8 3M 37.4 20.4 12M 105.9 86.9 114
115. 21 July 2020 GDS Holdings Limited Price (17 Jul 2020): US$81.08 Income Statement (Rmb mn) Sales revenue Cost of goods sold EBITDA EBIT Net interest expense/(inc.) Recurring PBT Profit after tax Reported net profit Net profit (Credit Suisse) Balance Sheet (Rmb mn) Cash & cash equivalents Current receivables Inventories Other current assets Current assets Property, plant & equip. Investments Intangibles Other non-current assets Total assets Current liabilities Total liabilities Total debt Shareholders' equity Minority interests Total liabilities & equity Cash Flow (Rmb mn) EBIT Net interest Tax paid Working capital Other cash & non-cash items Operating cash flow Capex Free cash flow to the firm Investing cash flow Equity raised Dividends paid Financing cash flow Total cash flow Adjustments Net change in cash Per share Shares (wtd avg.) (mn) EPS (Credit Suisse) (Rmb) DPS (Rmb) Operating CFPS (Rmb) Earnings Growth (%) Sales revenue EBIT EPS Margins (%) EBITDA EBIT Valuation (x) P/E P/B Dividend yield (%) EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE ROIC Credit ratios Net debt/equity (%) Net debt/EBITDA (x) (GDS.OQ / GDS US) Target Price: US$90.00 12/19A 4,122 3,080 1,622 480 916 (426) (442) (500) (500) 12/19A 5,811 880 0 394 7,085 19,185 0 2,300 2,923 31,493 4,000 20,137 16,899 11,356 0 31,493 12/19A 480 (916) (16) (232) 1,142 459 (5,131) (4,672) (5,131) 4,928 (40) 8,322 3,649 0 3,649 12/19A 138 (3.63) 0.00 3.33 12/19A 12/20E 5,884 4,409 2,498 1,172 1,235 (48) (48) (48) (48) 12/20E 6,425 751 0 394 7,569 26,188 0 2,300 2,923 38,980 11,639 24,137 20,899 14,843 0 38,980 12/20E 1,172 (1,235) 0 144 1,326 1,408 (8,329) (6,921) (8,329) 3,535 0 7,535 614 0 614 12/20E 152 (0.32) 0.00 9.29 12/20E 12/21E 7,963 5,971 3,447 1,579 1,493 101 81 81 81 12/21E 5,051 929 0 394 6,374 31,265 0 2,299 2,923 42,860 14,173 27,937 24,699 14,923 0 42,860 12/21E 1,579 (1,493) (20) (162) 1,868 1,771 (6,945) (5,174) (6,945) 0 0 3,800 (1,374) 0 (1,374) 12/21E 155 0.52 0.00 11.40 12/21E 12/22E 10,005 7,558 4,276 1,928 1,700 243 182 182 182 12/22E 2,865 1,088 0 394 4,346 35,825 0 2,298 2,923 45,392 15,739 30,287 27,049 15,105 0 45,392 12/22E 1,928 (1,700) (61) (144) 2,348 2,371 (6,907) (4,537) (6,907) 0 0 2,350 (2,187) 0 (2,187) 12/22E 155 1.17 0.00 15.26 12/22E 47.6 185.0 (4.4) 42.7 144.2 91.3 35.3 34.7 264.1 25.6 22.1 126.2 39.3 11.6 12/19A (156.2) 7.37 0.0 24.7 62.7 211.9 12/19A (5.9) 2.6 12/19A 97.6 6.84 42.5 19.9 12/20E (1795.8) 5.93 0.0 17.9 42.1 89.7 12/20E (0.4) 4.5 12/20E 97.5 5.79 43.3 19.8 12/21E 1094.1 5.90 0.0 13.8 32.0 69.8 12/21E 0.5 4.0 12/21E 131.7 5.70 42.7 19.3 12/22E 483.6 5.83 0.0 11.5 26.8 59.5 12/22E 1.2 3.9 12/22E 160.1 5.66 Analyst: Colin McCallum Rating: Outperform [V] Company Background GDS Holdings limited develops and operates data centres in China Blue/Grey Sky Scenario Our Blue Sky Scenario (US$) 97.00 Our blue sky scenario assumes data centre investments have more promising growth and lower risk. The fair value of our blue sky scenario is US$97.0, implying a FY20E EV/EBITDA multiple of 48x. Our Grey Sky Scenario (US$) 75.00 Our grey sky scenario assumes data centre investments have less promising growth. The fair value of our grey sky scenario is US$75.0, implying a FY20E EV/EBITDA multiple of 38x. Share price performance The price relative chart measures performance against the MSCI CHINA F IDX which closed at 9,617.98 on 17-Jul-2020 On 17-Jul-2020 the spot exchange rate was US$1/US$1 Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 115
116. 21 July 2020 GUC 3443.TW Turnkey volume uncertainty outweighs the opportunity in AI and 5G Target price (12M, NT$) 250.00 Neutral[V] Semiconductor Devices IC design service provider backed by TSMC's technology leadership. We initiate coverage on GUC with a NEUTRAL rating and a target price of NT$250 based on 28x 2021 P/E. GUC is the largest IC design service provider in Taiwan with strong technology and capacity support across mature to advanced nodes from TSMC that owns 35% of the company. We expect the company's sales to see a solid growth at 18% CAGR from 2019 to 22, with 30% GMs mainly driven by its customers' AI and 5G investments. Strategy optimised for application diversification but not growth potential. Compared with Alchip's focus on the high performance computing business, Global Unchip as TSMC's investment has a more balanced application mix, with 38% from computing (AI, HPC, BMC, SSD controller), 39% from consumer (drone, TV, surveillance camera, game console), 11% from communication (5G, networking) and 12% from others (solar). We expect GUC's diversification strategy to continue, forcing it to allocate resource in areas with less growth (consumer and solar) and limit its growth opportunity in HPC. AI and 5G NRE growing but volume production still uncertain. GUC's sales have almost doubled from 2013 to 2018, mainly driven by the surge in crypto demand but was also dragged by lower bitcoin pricing in 2019 with sales down 20% YoY. We expect the projects related to AI and 5G to be the main driver, with key ones including ZTE's 5G multiband networking chipset on 7nm, Alibaba and start-ups' AI projects, supporting growth reacceleration from 2H20 following slower QoQ trend in 1H20. Despite a healthy outlook from the NRE project pipeline, we believe the lack of production scale compared with Alchip's China CPU projects will limit the company's operating leverage. Price (17 Jul 20, NT$) Upside/downside (%) Mkt cap (NT$/US$ mn) Enterprise value (NT$ mn) Number of shares (mn) Free float (%) 52-wk price range (NT$) ADTO-6M (US$ mn) 284.00 -12.0 38,059 / 1,292 35,680 134.01 73.7 324-156 24.6 [V] = Stock Considered Volatile (see Disclosure Appendix) Research Analysts Haas Liu 886 2 2715 6365 haas.liu@credit-suisse.com Randy Abrams, CFA 886 2 2715 6366 randy.abrams@credit-suisse.com Stock at the upper half already values the HPC opportunity. We model GUC's EPS at NT$4.00/NT$8.60 for 2020/21, factoring in the company's improving growth outlook from AI and 5G investment but less operating leverage. Our target price of NT$250 is based on 27x 2021 P/E. The company's stock is at 51x/31x 2020/2021E CS estimates, at the upper half of its long-term range between 15-35x P/E. We see the premium valuation also reflects investors' high expectations for solid growth though any AI project delay in milestone or into production could drag the sentiment. Share price performance Financial and valuation metrics Year Revenue (NT$ mn) EBITDA (NT$ mn) EBIT (NT$ mn) Net profit (NT$ mn) EPS (CS adj.) (NT$) Chg. from prev. EPS (%) Consensus EPS (NT$) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 12/18A 13,459.8 1,509.6 1,096.4 988.2 7.37 n.a. n.a. 15.6 38.5 1.8 22.6 8.72 23.5 (89.5) 12/19E 10,710.1 1,295.3 697.2 633.5 4.73 0.0 4.37 (35.9) 60.1 1.8 27.4 8.82 14.6 (58.9) 12/20E 13,038.6 1,132.1 536.7 536.6 4.0 0.0 6.26 (15.3) 70.9 1.8 31.6 8.7 12.4 (51.4) 12/21E 15,775.0 1,912.8 1,316.2 1,152.9 8.6 0.0 9.14 114.9 33.0 1.8 18.7 7.43 24.3 (45.4) The price relative chart measures performance against the TAIWAN SE WEIGHTED INDEX which closed at 12,181.56 on 17/07/20. On 17/07/20 the spot exchange rate was NT$29.45/US$1 Performance Absolute (%) Relative (%) 1M 28.8 23.2 3M 16.6 1.7 12M 27.1 14.3 116
117. 21 July 2020 GUC (3443.TW / 3443 TT) Price (17 Jul 2020): NT$284.00 Income Statement (NT$ mn) Sales revenue Cost of goods sold EBITDA EBIT Net interest expense/(inc.) Recurring PBT Profit after tax Reported net profit Net profit (Credit Suisse) Balance Sheet (NT$ mn) Cash & cash equivalents Current receivables Inventories Other current assets Current assets Property, plant & equip. Investments Intangibles Other non-current assets Total assets Current liabilities Total liabilities Total debt Shareholders' equity Minority interests Total liabilities & equity Cash Flow (NT$ mn) EBIT Net interest Tax paid Working capital Other cash & non-cash items Operating cash flow Capex Free cash flow to the firm Investing cash flow Equity raised Dividends paid Financing cash flow Total cash flow Adjustments Net change in cash Per share Shares (wtd avg.) (mn) EPS (Credit Suisse) (NT$) DPS (NT$) Operating CFPS (NT$) Earnings Growth (%) Sales revenue EBIT EPS Margins (%) EBITDA EBIT Valuation (x) P/E P/B Dividend yield (%) EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE ROIC Credit ratios Net debt/equity (%) Net debt/EBITDA (x) Analyst: Haas Liu Rating: Neutral [V] Target Price: NT$250.00 12/18A 13,460 9,443 1,510 1,096 (27) 1,135 988 988 988 12/18A 3,906 910 1,332 480 6,629 1,089 0 288 104 8,109 3,635 3,743 0 4,366 0 8,109 12/18A 1,096 0 (147) (571) (151) 227 (529) (302) (743) 0 (670) (670) (1,186) 2 (1,184) 12/18A 134 7.37 5.00 1.69 12/18A 12/19E 10,710 7,180 1,295 697 (22) 783 633 633 633 12/19E 2,542 1,418 2,103 553 6,616 982 0 412 330 8,341 3,638 4,028 0 4,313 0 8,341 12/19E 697 0 (150) (973) 533 108 (490) (382) (735) 0 (670) (727) (1,354) (11) (1,365) 12/19E 134 4.73 5.00 0.81 12/19E 12/20E 13,039 9,543 1,132 537 (640) 661 537 537 537 12/20E 2,247 1,566 2,253 610 6,677 1,639 0 412 330 9,058 4,295 4,684 0 4,374 0 9,058 12/20E 537 0 (124) 139 881 1,433 (1,000) 433 (1,252) 0 (475) (475) (294) 0 (294) 12/20E 134 4.00 5.00 10.69 12/20E 12/21E 15,775 11,040 1,913 1,316 (640) 1,423 1,153 1,153 1,153 12/21E 2,325 1,800 2,552 701 7,379 2,296 0 412 330 10,418 4,903 5,293 0 5,125 0 10,418 12/21E 1,316 0 (270) (271) 960 1,734 (1,000) 734 (1,254) 0 (402) (402) 78 0 78 12/21E 134 8.60 5.00 12.94 12/21E 10.7 17.8 15.6 (20.4) (36.4) (35.9) 21.7 (23.0) (15.3) 21.0 145.2 114.9 11.2 8.1 12/18A 38.5 8.72 1.8 2.5 22.6 31.2 12/18A 23.5 (327.2) 12/18A (89.5) (2.59) 12.1 6.5 12/19E 60.1 8.82 1.8 3.3 27.4 50.9 12/19E 14.6 50.6 12/19E (58.9) (1.96) 8.7 4.1 12/20E 70.9 8.70 1.8 2.7 31.6 66.7 12/20E 12.4 22.4 12/20E (51.4) (1.99) 12.1 8.3 12/21E 33.0 7.43 1.8 2.3 18.7 27.1 12/21E 24.3 43.3 12/21E (45.4) (1.22) Company Background Global Unichip (GUC) is a leading IC design service company. The company designs chipsets 100% for its customers who do not have IC design capability and the goal is to reduce entry barriers and risks for chipset design and shorten the time to market. Blue/Grey Sky Scenario Our Blue Sky Scenario (NT$) 283.91 Our blue sky scenario implies share price can be up to NT$283.91 on the back of faster-than-expected AI and 5G project development. Our Grey Sky Scenario (NT$) 129.05 Our grey sky scenario implies share price can be at NT$129.05 if its customers fail to deliver on AI or 5G networking projects. Share price performance The price relative chart measures performance against the TAIWAN SE WEIGHTED INDEX which closed at 12,181.56 on 17-Jul-2020 On 17-Jul-2020 the spot exchange rate was NT$29.45/US$1 Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 117
118. 21 July 2020 Hewlett Packard Enterprise HPE Enterprise end-markets facing pressure from weak macro and increased cloud adoption Target price (12M, US$) 8.50 Underperform IT Hardware Enterprise focused with outsized exposure to compute. HPE is primarily focused on on-prem datacentre HW, including servers, storage, and networking and associated operational and financial services. The company derives >50% of revenue from its server business, where it holds the #2 share (ex-ODM) globally behind Dell. This business has faced persistent revenue pressure from ODM share gains, mainly in the public cloud market which HPE exited starting in CY17 due to low profitability; accelerating cloud adoption postCOVID-19 likely adds incremental pressure to traditional on-prem demand ahead. In response to the changing landscape, HPE has focused on shifting its mix toward higher value pockets of the market such as HPC, Composable, and Hyperconverged (incl. through M&A); however, it has been unable to offset the ongoing declines in core Compute, with knock-on effects to margin-rich Services. External storage, ~20% of revenue, has faced similar headwinds from soft enterprise demand, albeit to a lesser extent, with a focus on greater infusion of SW across its offerings to drive differentiation. HPE’s Intelligent Edge networking business remains a bright spot in the portfolio, leveraging its Aruba Central platform to create a unified network offering, and bolstered by its announced acquisition of SD-WAN vendor Silver Peak. Amid the WFH push and following a significant organic investment, recent momentum has been encouraging, but at only ~10% of revenue, Intelligent Edge is not enough of an offset for the overall HPE, in our view. Price (17 Jul 20, US$) 52-week price range Market cap (US$ m) Enterprise value (US$ m) 9.67 17.46 - 7.83 12,423.60 25,506 Research Analysts Matthew Cabral 415 249 7929 matthew.cabral@credit-suisse.com Dan Knauff, CFA 415 249 7925 daniel.knauff@credit-suisse.com Michael Allen 415 249 7926 michael.allen@credit-suisse.com Pushing to as-a-Service model. Another key component of HPE’s strategy is the goal to make its entire portfolio available as-a-Service by 2022 under its consumption based GreenLake model to support the rising preference for opex > capex, while also offering cloud services, SW, and Fin./Op. Services backing as differentiators. GreenLake is growing rapidly at >$4 bn in TCV (vs. >$3 bn in Oct.), and in our view helps lower barriers to adoption vs. legacy models; however, it still is less timely than public cloud, and with as-aService ARR at only ~2% of revenue currently, it will take time to make a sizeable impact. Underperform on soft Enterprise and cloud gains. With the short-term bump from WFH/BCP behind us, we see a tough macro weighing on IT budgets through at least C2H20, along with building margin pressure as DRAM tailwinds reverse vs. a soft demand backdrop that limits pricing power. Relative to peers looking to enable a consistent hybrid cloud platform, also we’re concerned that HPE is over-indexed to the traditional on-prem HW spend that will come increasingly under pressure as cloud accelerates post-COVID-19. Share price performance Financial and valuation metrics Year EPS (Excl. ESO) (US$) EPS (CS adj., ) Prev. EPS (CS adj., US$) P/E (CS adj.) (x) P/E rel. (CS adj., %) Revenue (US$ m) Net Debt (US$ m) OCFPS (US$) P/OCF (x) Number of shares (m) BV/share (Next Qtr., US$) Net debt (Next Qtr., US$ m) Dividend yield (%) 10/19A 10/20E 1.95 1.42 1.77 1.22 5.5 8.0 28.0 31.5 29,135.0 25,704.1 10,067 13,083 2.93 1.46 3.3 6.6 1,284.76 Price/Sales (x) 12.5 P/BVPS (x) 11,584.0 Dividend (current, US$) 1.24 Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 10/21E 1.51 1.31 7.4 38.0 25,126.9 12,925 2.05 4.7 10/22E 1.58 1.38 7.0 42.1 25,476.2 12,901 2.53 3.8 0.48 0.9 0.5 On 17-Jul-2020 the S&P 500 INDEX closed at 3224.73Daily Jul19, 2019 - Jul17, 2020, 07/19/19 = US$14.84 Quarterly EPS 2019A 2020E 2021E Q1 0.42 0.44 0.26 Q2 0.42 0.22 0.26 Q3 0.45 0.24 0.38 Q4 0.49 0.32 0.41 118
119. 21 July 2020 Hewlett Packard Enterprise Price (17 Jul 2020): US$9.67 Income Statement Revenue (US$ m) EBITDA Operating profit Recurring profit Cash Flow Cash flow from operations CAPEX Free cash flow to the firm Cash flow from investments Net share issue(/repurchase) Dividends paid Issuance (retirement) of debt Other Cash flow from financing activities Effect of exchange rates Changes in Net Cash/Debt Net debt at end Balance Sheet ($US) Assets Other current assets Total current assets Total assets Liabilities Short-term debt Total current liabilities Long-term debt Total liabilities Shareholder equity Total liabilities and equity Net debt Per share No. of shares (wtd avg) CS adj. EPS Prev. EPS (US$) Dividend (US$) Free cash flow per share Earnings Sales growth (%) Net profit growth (%) EPS growth (%) EBIT margin (%) Valuation EV/Sales (x) EV/EBIT (x) P/E (x) Quarterly EPS 2019A 2020E 2021E (HPE) Target Price: 8.50 10/19A 29,135.0 5,019.0 2,751.0 2,746.0 10/19A 3,997 (2,259) 1,738 (3,457) (2,249) (608) 3,517 (2,208) (1,548) (2,806) 10,067 10/19A 10/20E 25,704.1 4,030.1 1,924.3 1,804.3 10/20E 1,913 (1,557) 356 (993) (355) (629) 1,315 (836) (505) (3,016) 13,083 10/20E 10/21E 25,126.9 4,047.8 2,073.3 1,953.3 10/21E 2,689 (1,913) 776 (1,793) (200) (659) 0 120 (739) 157 12,925 10/21E 10/22E 25,476.2 4,080.9 2,135.3 2,015.3 10/22E 3,260 (1,999) 1,262 (1,879) (800) (678) 0 120 (1,358) 24 12,901 10/22E 2,474 15,143 51,803 2,828 15,504 49,902 2,837 15,543 49,132 2,844 15,647 48,619 4,425 19,159 9,395 34,654 17,098 51,803 10,067 10/19A 1,363 1.77 0.46 1.28 10/19A (5.6) 5.4 19.7 9.4 10/19A 0.77 8.2 5.5 Q1 0.42 0.44 0.26 5,162 19,100 11,553 36,953 12,914 49,902 13,083 10/20E 1,306 1.22 0.48 0.27 10/20E (11.8) (34.3) (31.4) 7.5 10/20E 0.99 13.3 8.0 Q2 0.42 0.22 0.26 5,162 18,509 11,553 36,293 12,803 49,132 12,925 10/21E 1,315 1.31 0.50 0.59 10/21E (2.2) 8.2 7.5 8.3 10/21E 1.01 12.2 7.4 Q3 0.45 0.24 0.38 5,162 18,348 11,553 36,014 12,569 48,619 12,901 10/22E 1,287 1.38 0.53 0.98 10/22E 1.4 3.2 5.4 8.4 10/22E 0.99 11.9 7.0 Q4 0.49 0.32 0.41 Analyst: Matthew Cabral Rating: Underperform Company Background HPE designs and sells enterprise hardware including servers, storage, and networking equipment, along with associated services. The company’s products are distributed through a variety of channels such as direct to customers, distributors and resellers. Blue/Grey Sky Scenario Our Blue Sky Scenario (US$) 14.00 Our blue sky scenario assumes a 150 bp increase in revenue growth and 50 bp increase in gross margins relative to our base case assumptions. On the cost side we incorporate 25 bp of operating leverage relative to our base case. This yields CY21E EPS of US$1.50 (13% upside to base case EPS) on which we apply a 9x multiple to reflect better revenue trajectory. Our Grey Sky Scenario (US$) 7.00 Our grey sky scenario assumes faster revenue decline by 100 bp compared to our base case, as well as a 25 bp decrease in gross margins. In addition, for costs we incorporate 25 bp of increased operating expenses relative to our base case, owing to flat operating expenses with lower revenues. This yields CY20E EPS of US$1.21 (8% downside vs our base case), on which we apply a 6x multiple reflecting faster declining revenues. Share price performance On 17-Jul-2020 the S&P 500 INDEX closed at 3224.73 Daily Jul19, 2019 - Jul17, 2020, 07/19/19 = US$14.84 Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 119
120. 21 July 2020 Intel Corp. INTC Perhaps not the most levered, but the most undervalued Target price (12M, US$) 75.00 Outperform Semiconductor Devices Datacentre driving growth beyond PCs. INTC’s Data-centric Centre Group makes up ~50% of the total Rev and has grown at a 13%/14% 3/5-year CAGR and we expect CY20/21 +10%/9% YoY growth. DCG encompasses workload-optimised platforms for compute, storage and network functions. Within this segment, the data centre group (DCG) makes up 32% of the total Rev and has grown at 11%/10% 3/5-year CAGRs and we expect +14%/8% YoY growth for CY20/21. Market segments include cloud service providers, enterprise and government, and communications service providers. These offerings span the full spectrum from the data centre core to the network edge. We expect overall INTC CY20/21 Rev/EPS of $73.5 bn/$4.75 and $76.8 bn/$5.00, respectively, with DCG contributing $2.38/$2.52. Price (17 Jul 20, US$) 52-week price range Market cap (US$ m) Enterprise value (US$ m) Our INTC bull thesis. Our positive view on INTC is based on the following: (1) AI lowers analytics costs, unlocking the more than 98% of Data today that goes unanalysed, (2) Compute is more levered to data analytics than creation, as analytics’ cost declines, new applications will drive accelerating Compute TAM—a rising king tide lifts all boats, (3) even with a share loss of 15-20%, underlying TAM growth should support DGC CAGR of 1012%, (4) share loss is less than certain (scale still matters as R&D is now a larger fix cost than capex, INTC spends $2 of R&D for every $1 of AMD revenue), software, applications optimisation, and channel partner development is now equally critical for success (market share especially, “wallet” share is more resilient than expected), absolute growth Rev/NI since 2017 is equal to 1.4x/10.5x “2019-AMDs”, and (5) Adjacencies (Memory, I/O, Connectivity, Packing) provide not only incremental TAM but also the needed IP to lower the cost of compute for customers—the Holy Grail for success. Dalya Hahn 212 325 7843 dalya.hahn@credit-suisse.com 60.00 68.47 - 44.61 254,040.00 256,275 Research Analysts John W. Pitzer 212 538 4610 john.pitzer@credit-suisse.com Eric Hu 212 325 4735 eric.hu@credit-suisse.com Jerome Darling 212 325 3211 jerome.darling@credit-suisse.com Most undervalued play in Compute. Current investor sentiment is still poor—despite 12+ upgrades since COVID-19—most are “getting out the way” NT but still negative of share loss longer term; thus, the stock is cheap, embedding what looks to be zero to negative LT growth versus our view that INTC can grow its data centre businesses at 8-12% CAGR and overall Rev at 3-5%—which should easily support a 15 x multiple on US$5.00 or our target price of US$75, even before we argue for sustained EPS growth. Reiterate our OUTPERFORM rating and US$75 target price—16x/15x CY20/21 EPS of US$4.75/US$5.00—still ~5+ turns below the Semi average. Share price performance Financial and valuation metrics Year EPS (Excl. ESO) (US$) EPS (CS adj., ) Prev. EPS (CS adj., US$) P/E (CS adj.) (x) P/E rel. (CS adj., %) Revenue (US$ m) Net Debt (US$ m) OCFPS (US$) P/OCF (x) Number of shares (m) BV/share (Next Qtr., US$) Net debt (Next Qtr., US$ m) Dividend yield (%) 4,234.00 9.2 -6,693.0 1.36 Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 12/19A 12/20E 5.43 5.09 5.09 4.72 11.8 12.7 60.5 50.3 71,965.0 73,478.0 11,911 2,235 7.41 7.59 8.1 7.9 Price/Sales (x) P/BVPS (x) Dividend (current, US$) 12/21E 5.38 5.00 12.0 61.6 76,750.0 -1,482 8.22 7.3 3.61 2.9 1.3 On 17-Jul-2020 the S&P 500 INDEX closed at 3224.73Daily Jul19, 2019 - Jul17, 2020, 07/19/19 = US$50.27 Quarterly EPS 2019A 2020E 2021E Q1 0.89 1.32 1.11 Q2 1.06 0.98 1.11 Q3 1.32 0.99 1.14 Q4 1.58 0.99 1.17 120
121. 21 July 2020 Intel Corp. (INTC) Price (17 Jul 2020): US$60.0 Income Statement Revenue (US$ m) EBITDA Operating profit Recurring profit Cash Flow Cash flow from operations CAPEX Free cash flow to the firm Cash flow from investments Net share issue(/repurchase) Dividends paid Issuance (retirement) of debt Other Cash flow from financing activities Effect of exchange rates Changes in Net Cash/Debt Net debt at end Balance Sheet ($US) Assets Other current assets Total current assets Total assets Liabilities Short-term debt Total current liabilities Long-term debt Total liabilities Shareholder equity Total liabilities and equity Net debt Per share No. of shares (wtd avg) CS adj. EPS Prev. EPS (US$) Dividend (US$) Free cash flow per share Earnings Sales growth (%) Net profit growth (%) EPS growth (%) EBIT margin (%) Valuation EV/Sales (x) EV/EBIT (x) P/E (x) Quarterly EPS 2019A 2020E 2021E Analyst: John Pitzer Rating: Outperform Target Price: 75.00 Q1 0.89 1.32 1.11 12/19A 71,965.0 36,134.0 23,752.0 25,775.0 12/19A 33,145 (16,213) 16,932 (1,405) (12,826) (5,576) 765 72 (17,565) (3,244) 11,911 12/19A 12/20E 73,478.0 27,899.0 24,197.3 23,413.3 12/20E 32,663 (16,018) 16,645 (16,486) (10,057) (5,632) 10,247 726 (4,716) 9,676 2,235 12/20E 12/21E 76,750.0 28,505.1 25,131.3 24,731.3 12/21E 35,357 (15,000) 20,357 (15,000) (7,999) (5,632) 0 0 (13,631) 3,717 (1,482) 12/21E 1,713 29,121 136,726 2,997 49,448 160,664 2,997 54,838 167,850 3,693 22,637 25,308 59,192 77,534 136,726 11,911 12/19A 4,473 5.09 1.25 3.79 12/19A 1.6 3.9 9.0 33.0 12/19A 3.70 11.2 11.8 3,464 22,128 36,455 61,911 98,753 160,664 2,235 12/20E 4,303 4.72 1.31 3.87 12/20E 2.1 (10.8) (6.4) 32.9 12/20E 3.49 10.6 12.7 Q3 1.32 0.99 1.14 3,464 21,724 36,455 59,557 108,988 168,545 (1,482) 12/21E 4,300 5.00 1.31 4.73 12/21E 4.5 6.0 5.8 32.7 12/21E 3.29 10.0 12.0 Q4 1.58 0.99 1.17 Q2 1.06 0.98 1.11 Company Background Intel Corporation is a semiconductor chip maker company. The Company develops advanced integrated digital technology products, primarily integrated circuits, components, such as microprocessors, chipsets, motherboards, wireless and wired connectivity. Blue/Grey Sky Scenario Our Blue Sky Scenario (US$) 90.00 Our blue sky scenario assumes a reacceleration in DCG growth, healthy PC environment and sustainable operating leverage, driving upside to US$90. Our Grey Sky Scenario (US$) 45.00 In our grey sky scenario, should the macro backdrop worsen we see a floor at US$45 or ~3% dividend yield. Share price performance On 17-Jul-2020 the S&P 500 INDEX closed at 3224.73 Daily Jul19, 2019 - Jul17, 2020, 07/19/19 = US$50.27 Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 121
122. 21 July 2020 International Business Machines IBM IBM + RHT stand ready to capitalise on the enterprise shift to cloud Target price (12M, US$) 150.00 Outperform IT Hardware Red Hat a key differentiator looking towards a hybrid cloud future. We believe the acquisition of Red Hat represents a landmark shift in strategy for IBM, significantly improving the company’s standing in the rapid push towards hybrid cloud and paving the way for sustained revenue-driven EPS growth ahead. Specifically, the combination brings together the platform (with Red Hat’s leading OpenShift offering), incumbency (given IBM’s vast middleware installed base), and expertise (GBS) to help modernise the ~80% of applications that have yet to migrate to the public cloud. Indeed, we see an opportunity for IBM to not only accelerate Red Hat’s standalone trajectory through its large enterprise salesforce, but also think “legacy” IBM gets pulled-through as well as customers look to leverage “core” IBM middleware (Cloud Paks) and the deep industry knowledge and technical know-how of IBM’s Services organisation to help modernise apps COVID-19 creates NT pause, but integration on track to drive acceleration ahead. Following the acquisition, IBM has made a good early progress integrating Red Hat, including standardising its hybrid cloud platform on OpenShift + Cloud Paks, accelerating growth of Red Hat’s core offerings with larger customer engagements (large deals up 50% YoY in 1Q, including the two biggest ever), and Services engagements with >100 clients using Red Hat technology. While the onset of COVID-19 likely drives a near-term pause in IT spend as companies reassess priorities, we believe IBM + Red Hat have now laid the foundation to capitalise on a trend of accelerating cloud adoption post-COVID-19. Services is a key piece of the opportunity, as we expect engagements to first materialise in Consulting followed by flow-through of App. Management projects as IBM helps customers migrate to the cloud. Price (17 Jul 20, US$) 52-week price range Market cap (US$ m) Enterprise value (US$ m) 125.11 156.76 - 94.77 111,084.16 165,443 Research Analysts Matthew Cabral 415 249 7929 matthew.cabral@credit-suisse.com Dan Knauff, CFA 415 249 7925 daniel.knauff@credit-suisse.com Michael Allen 415 249 7926 michael.allen@credit-suisse.com Outperform rated, offering a good balance of offence and defence. We remain firm that IBM + Red Hat is well positioned for the shift toward hybrid, and that the new CEO Arvind Krishna’s balanced focus on investment and LT growth (rather than just NT profitability) should allow it to emerge stronger post-COVID-19, with the potential for sustained, revenue-driven EPS growth ahead. This remains an underappreciated narrative and continued execution along this path will be key to shifting the prevailing investor perception that IBM is a legacy business facing secular top-line pressure. In the current environment. We also think IBM offers a balanced blend of both offence and defence, supported by positioning in customers’ mission-critical spend and a ~5% dividend yield. Share price performance Financial and valuation metrics Year EPS (Excl. ESO) (US$) EPS (CS adj., ) Prev. EPS (CS adj., US$) P/E (CS adj.) (x) P/E rel. (CS adj., %) Revenue (US$ m) Net Debt (US$ m) OCFPS (US$) P/OCF (x) Number of shares (m) BV/share (Next Qtr., US$) Net debt (Next Qtr., US$ m) Dividend yield (%) 12/19A 12/20E 13.51 11.75 12.81 10.89 9.8 11.5 50.1 45.5 77,148.0 73,937.2 59,986 54,359 16.54 20.49 7.6 6.1 887.89 Price/Sales (x) 22.3 P/BVPS (x) 58,751.3 Dividend (current, US$) 1.36 Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 12/21E 13.09 12.33 10.1 52.1 75,864.9 49,257 18.36 6.8 12/22E 14.96 14.21 8.8 52.8 79,267.0 44,099 18.79 6.7 1.49 5.1 6.7 On 17-Jul-2020 the S&P 500 INDEX closed at 3224.73Daily Jul19, 2019 - Jul17, 2020, 07/19/19 = US$149.68 Quarterly EPS 2019A 2020E 2021E Q1 2.25 1.84 1.84 Q2 3.17 1.93 2.36 Q3 2.68 2.70 3.23 Q4 4.71 4.41 4.90 122
123. 21 July 2020 International Business Machines (IBM) Target Price: 150.00 Price (17 Jul 2020): US$125.11 Income Statement Revenue (US$ m) EBITDA Operating profit Recurring profit Cash Flow Cash flow from operations CAPEX Free cash flow to the firm Cash flow from investments Net share issue(/repurchase) Dividends paid Issuance (retirement) of debt Other Cash flow from financing activities Effect of exchange rates Changes in Net Cash/Debt Net debt at end Balance Sheet ($US) Assets Other current assets Total current assets Total assets Liabilities Short-term debt Total current liabilities Long-term debt Total liabilities Shareholder equity Total liabilities and equity Net debt Per share No. of shares (wtd avg) CS adj. EPS Prev. EPS (US$) Dividend (US$) Free cash flow per share Earnings Sales growth (%) Net profit growth (%) EPS growth (%) EBIT margin (%) Valuation EV/Sales (x) EV/EBIT (x) P/E (x) Quarterly EPS 2019A 2020E 2021E 12/19A 77,148.0 16,949.0 12,188.0 12,503.5 12/19A 14,770 (2,370) 12,400 (26,936) (1,534) (5,707) 16,284 0 9,043 (25,553) 59,986 12/19A 12/20E 73,937.2 15,236.5 11,034.1 10,242.2 12/20E 18,379 (3,214) 15,165 (6,354) (61) (5,984) (3,144) 0 (9,189) 5,627 54,359 12/20E 12/21E 75,864.9 16,783.0 13,158.8 12,616.2 12/21E 16,556 (3,497) 13,059 (5,097) (40) (6,317) (6,000) (0) (12,357) 5,101 49,257 12/21E 12/22E 79,267.0 18,354.2 15,021.9 14,691.8 12/22E 17,038 (3,570) 13,468 (5,170) (40) (6,670) (6,000) (0) (12,710) 5,158 44,099 12/22E 4,834 38,420 152,187 6,072 39,961 148,735 6,158 39,384 146,730 6,355 39,605 146,177 8,797 37,701 54,102 131,201 20,985 152,186 59,986 12/19A 893 12.81 6.43 13.89 12/19A (3.1) (9.7) (7.3) 15.8 12/19A 2.22 14.0 9.8 Q1 2.25 1.84 1.84 11,642 40,790 48,185 126,131 22,603 148,735 54,359 12/20E 897 10.89 6.72 16.91 12/20E (4.2) (14.6) (15.0) 14.9 12/20E 2.24 15.0 11.5 Q2 3.17 1.93 2.36 11,642 41,142 42,185 120,424 26,306 146,730 49,257 12/21E 902 12.33 7.06 14.48 12/21E 2.6 13.9 13.2 17.3 12/21E 2.11 12.2 10.1 Q3 2.68 2.70 3.23 11,642 41,578 36,185 114,756 31,421 146,177 44,099 12/22E 907 14.21 7.41 14.85 12/22E 4.5 15.9 15.2 19.0 12/22E 1.96 10.3 8.8 Q4 4.71 4.41 4.90 Analyst: Matthew Cabral Rating: Outperform Company Background International Business Machines Corp. is an information technology company, which provides integrated solutions that leverage information technology and knowledge of business processes. This includes software, hardware, and services. Blue/Grey Sky Scenario Our Blue Sky Scenario (US$) 194.00 Our blue sky scenario assumes a 300 bp increase in revenue growth, a 50 bp increase in gross margins, and 50 bp decrease in opex as a % of sales relative to our base case assumptions. This yields CY21E EPS of US$13.87 (13% upside to base case EPS) on which we apply a 14x multiple to reflect a faster growth rate and the non-cash impact of the deferred revenue write-down. Our Grey Sky Scenario (US$) 100.00 Our grey sky scenario assumes a 500 bp decrease in CY20 revenue growth vs. our base case (easing to -300 bp in CY21), 100 bp of downward pressure on gross margins, and a 100 bp increase in opex as a % of sales. This yields CY21E EPS of US$10.00 (-19% vs. our base case EPS) on which we apply a 10x multiple to reflect a slower growth rate and negative leverage. Share price performance On 17-Jul-2020 the S&P 500 INDEX closed at 3224.73 Daily Jul19, 2019 - Jul17, 2020, 07/19/19 = US$149.68 Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 123
124. 21 July 2020 Inventec Co Ltd 2356.TW Cloud server growth offset by slower enterprise demand Target price (12M, NT$) 24.00 Neutral IT Hardware Greater tilt towards traditional OEM business. Inventec is also one of the early movers for IT infrastructure since 1998, despite its primary focus today still remaining on traditional OEM (60-70% of its server/storage sales), aside from some shares positioning across most of the hyperscalers in the US and China. As compared to other ODMs, we believe Inventec will see the best leverage to capture the long-term cloud IT infrastructure growth in China; however, the increasing ramp-up of this business will also lead to lower profitability, despite potentially better top-line momentum, as the projects are mostly evaluated based on periodic bidding, where it could also see intensifying competition from local OEMs including Inspur, Sugon, H3C, Lenovo, Huawei, etc. Cloud outlook remains healthy. We believe Inventec has one of the most diversified hyperscale customers base with exposure into both the US and China. Specifically, it ships the rack solutions directly to all leading China-based hyperscalers (i.e. Baidu, Alibaba and Tencent), while leveraging ZT Systems (Inventec a shareholder with about 20% share) in the US, providing custom-designed motherboards to Microsoft and Amazon, to minimise the risk of interest conflict with its brand customers, and also shipped directly to Google which operates its own final assembly. Overall, Inventec maintains its guidance for the cloud business to grow by double-digits percentage YoY in 2020, vs CSe of 15% YoY, amid COVID-19, as it expects healthy momentum from both China and US hyperscalers. Previous target price (12M, NT$) 21.50 Price (17 Jul 20, NT$) 24.75 Upside/downside (%) -3.0 Mkt cap (NT$/US$ mn) 88,790 / 3,015 Enterprise value (NT$ mn) 82,304 Number of shares (mn) 3,587 Free float (%) 70.0 52-wk price range (NT$) 27.70-18.75 ADTO-6M (US$ mn) 8.9 Research Analysts Jerry Su 886 2 2715 6361 jerry.su@credit-suisse.com Harvie Chou 886 2 2715 6364 harvie.chou@credit-suisse.com Traditional OEM weaker amid COVID-19. We continue to remain more cautious on Inventec’s enterprise business outlook, as we expect potentially weaker spending by enterprises due to weaker macro post the COVID-19 outbreak and lock-down into 2H, impacting its key customers’ (HP and Dell) orders pull-in momentum. Overall, we forecast its enterprise sales to remain more flattish for +0.9% YoY in 2020E, in-line with the company’s current guidance for flattish YoY change. Reiterate NEUTRAL. We raise our target price to NT$24.0 (from NT$21.5) based on the peak multiple 13x 2021E P/E. We could be more positive on Inventec if we see better progress in cloud from share gain and/or new customer wins. We believe the outlook for PC remains positive near-term from work-from-home, but will continue to monitor impacts from COVID-19 on its consumer-centric IAC business into 2H. We introduce 2022 estimates. Share price performance Financial and valuation metrics Year Revenue (NT$ mn) EBITDA (NT$ mn) EBIT (NT$ mn) Net profit (NT$ mn) EPS (CS adj.) (NT$) Chg. from prev. EPS (%) Consensus EPS (NT$) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 12/19A 500,953 10,557.2 6,403.5 5,508.0 1.54 n.a. n.a. (15.3) 16.1 8.7 9.4 1.56 9.7 18.4 12/20E 514,236 10,865.6 7,146.0 8,613.0 2.4 1.9 2.14 56.4 10.3 6.7 6.3 1.63 15.4 (36.6) 12/21E 540,750 11,762.3 7,938.0 6,604.7 1.84 (1.0) 1.97 (23.3) 13.4 7.1 6.1 1.65 12.2 (31.7) 12/22E 558,639 12,410.0 8,473.1 7,046.6 1.96 n.a. 2.22 6.7 12.6 8.2 5.1 1.46 12.3 (41.1) The price relative chart measures performance against the TAIWAN SE WEIGHTED INDEX which closed at 12,181.56 on 17/07/20. On 17/07/20 the spot exchange rate was NT$29.45/US$1 Performance Absolute (%) Relative (%) 1M (4.6) (10.2) 3M 4.9 (10.1) 12M 6.2 (6.6) 124
125. 21 July 2020 Inventec Co Ltd Price (17 Jul 2020): NT$24.75 Income Statement (NT$ mn) Sales revenue Cost of goods sold EBITDA EBIT Net interest expense/(inc.) Recurring PBT Profit after tax Reported net profit Net profit (Credit Suisse) Balance Sheet (NT$ mn) Cash & cash equivalents Current receivables Inventories Other current assets Current assets Property, plant & equip. Investments Intangibles Other non-current assets Total assets Current liabilities Total liabilities Total debt Shareholders' equity Minority interests Total liabilities & equity Cash Flow (NT$ mn) EBIT Net interest Tax paid Working capital Other cash & non-cash items Operating cash flow Capex Free cash flow to the firm Investing cash flow Equity raised Dividends paid Financing cash flow Total cash flow Adjustments Net change in cash Per share Shares (wtd avg.) (mn) EPS (Credit Suisse) (NT$) DPS (NT$) Operating CFPS (NT$) Earnings Growth (%) Sales revenue EBIT EPS Margins (%) EBITDA EBIT Valuation (x) P/E P/B Dividend yield (%) EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE ROIC Credit ratios Net debt/equity (%) Net debt/EBITDA (x) (2356.TW / 2356 TT) Target Price: (from NT$21.50) NT$24.00 12/19A 500,953 478,122 10,557 6,403 414 6,509 4,837 5,508 5,508 12/19A 18,953 89,246 37,346 6,623 152,168 30,729 3,184 881 6,131 193,093 127,046 136,122 29,409 57,093 1,700 193,093 12/19A 6,403 0 0 4,519 3,304 14,227 (3,818) 10,408 (14,861) 0 (5,919) (9,294) (9,928) 0 (9,928) 12/19A 3,587 1.54 2.16 3.97 12/19A 12/20E 514,236 491,004 10,866 7,146 (477) 12,097 8,266 8,613 8,613 12/20E 49,085 87,539 45,155 5,365 187,144 31,618 3,412 0 6,529 228,703 163,321 173,363 28,845 54,579 761 228,703 12/20E 7,146 0 0 27,243 5,189 39,577 (4,560) 35,017 (13,476) 0 (4,682) 3 26,104 0 26,104 12/20E 3,587 2.40 1.66 11.03 12/20E 12/21E 540,750 516,507 11,762 7,938 (611) 8,180 6,255 6,605 6,605 12/21E 46,865 92,292 49,751 5,656 194,564 31,439 3,412 0 6,529 235,943 171,163 181,311 29,563 53,872 761 235,943 12/21E 7,938 0 0 (2,410) 2,493 8,021 (2,800) 5,221 (9,247) 0 (7,752) 1,436 210 0 210 12/21E 3,587 1.84 1.77 2.24 12/21E 12/22E 558,639 533,499 12,410 8,473 (728) 8,752 6,697 7,047 7,047 12/22E 54,179 94,768 51,058 5,808 205,813 30,347 3,412 0 6,529 246,100 174,381 184,421 28,831 60,918 761 246,100 12/22E 8,473 0 0 (92) 2,513 10,893 (2,000) 8,893 (6,847) 0 (5,944) (1,464) 2,582 0 2,582 12/22E 3,587 1.96 2.04 3.04 12/22E (1.2) (14.5) (15.3) 2.7 11.6 56.4 5.2 11.1 (23.3) 3.3 6.7 6.7 2.1 1.3 12/19A 16.1 1.56 8.7 0.2 9.4 15.5 12/19A 9.7 7.0 12/19A 18.4 0.99 2.1 1.4 12/20E 10.3 1.63 6.7 0.1 6.3 9.6 12/20E 15.4 9.5 12/20E (36.6) (1.86) 2.2 1.5 12/21E 13.4 1.65 7.1 0.1 6.1 9.0 12/21E 12.2 16.8 12/21E (31.7) (1.47) 2.2 1.5 12/22E 12.6 1.46 8.2 0.1 5.1 7.5 12/22E 12.3 17.6 12/22E (41.1) (2.04) Analyst: Jerry Su Rating: Neutral Company Background Founded in 1975, Inventec designs, manufactures and markets notebook PC, smartphones, servers & storage and various consumer electronic goods for brand companies. Blue/Grey Sky Scenario Our Blue Sky Scenario (NT$) (from 25.00) 35.00 In our blue sky scenario, our blue sky value of NT$35.0 assumes a better market momentum from overall PC market and share gain from its US customers. We also have more optimistic assumptions in its server/datacentre business from continuing better capex cycle. Lastly, we expect better momentum from its newly acquired projects, namely wireless Airpod and HomePod. Our Grey Sky Scenario (NT$) 15.00 In our grey sky scenario, our grey sky value of NT$15.0 assumes a worse-than-expected market momentum from the overall PC market. We also assume a worse-than-expected performance for PC and downward revision in Facebook capex guidance. Lastly, we expect worse-thanexpected momentum from its newly acquired projects, namely wireless Airpod and HomePod. Share price performance The price relative chart measures performance against the TAIWAN SE WEIGHTED INDEX which closed at 12,181.56 on 17-Jul-2020 On 17-Jul-2020 the spot exchange rate was NT$29.45/US$1 Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 125
126. 21 July 2020 KEPE.SI Keppel DC REIT Positioned to continue delivering growth Target price (12M, S$) 2.91 Outperform REITs Stable organic growth profile. KDC REIT is the only pure-play data centre REIT in Singapore, with its portfolio comprising primarily of colocation assets (72% revenue), while it caters mainly to wholesale tenants. The majority of KDC REIT's assets are located in Singapore (63% of AUM) where new data centre demand of 305 MW is expected to exceed the supply of only 290 MW from 2020-23. Only 4% and 9% of KDC REIT's leases are up for renewal in 2020-21 and the annual escalations of 2-4% will drive organic growth. AEIs to supplement near-term growth. KDC REIT has announced and delivered on multiple AEI opportunities across its portfolio, with the increased power capacity at KDC SGP 5 already committed, while further improvements at KDC Dublin 2 and development of Intellicentre 3 in Australia will drive incremental revenue through 2021. Robust demand has led to the feasibility of AEIs at KDC REIT's assets and will support near-term growth. Acquisitions are key. The main catalyst for the stock had been its strong acquisition track record, as assets were mostly acquired with cap rates >7%. Acquisitions will remain a key driver, and despite compressing cap rates, the REIT's deal pipeline mainly consists of assets priced at 6% and above. In comparison, KDC REIT trades at a dividend yield of 3.8%, while borrowing costs will be 1-3%. Thus future acquisitions will continue to be accretive, and acquiring another S$700 mn (similar to 2019) worth of assets at 6% yield implies ~9% accretion to DPU. Over the next 12 months, acquisitions are likely to be from third parties while sponsored assets continue to stabilise. Best inorganic growth among S-REITs. KDC REIT trades at FY20E yield of 3.8%, but has one of the strongest inorganic growth profiles among S-REIT peers, while it continues to see robust demand. KDC REIT trades at a CY20 FFO yield of 4.2% which is comparable to global DC peers at 3.5-4.3%; we have factored in S$1.5 bn worth of acquisitions over three years into our new target price of S$2.91 (from S$2.34). Previous target price (12M, S$) Price (20 Jul 20, S$) Upside/downside (%) Mkt cap (S$/US$ mn) Enterprise value (S$ mn) Number of shares (mn) Free float (%) 52-wk price range (S$) ADTO-6M (US$ mn) 2.34 2.66 9.6 4,344 / 3,124 5,103 1,633 65.0 2.67-1.62 13.5 Research Analysts Nicholas Teh 65 6212 3026 nicholas.teh@credit-suisse.com Louis Chua, CFA 65 6212 5721 louis.chua@credit-suisse.com Terence Lee 65 6212 3011 terence.lee.2@credit-suisse.com Financial and valuation metrics Year Net property income (S$ mn) EBITDA (S$ mn) Net attributable profit (S$ mn) Distributable income (S$ mn) EPS (CS adj.) (S$) Consensus EPS (S$) EPS growth (%) P/E (x) DPU (S$) Chg. from prev. DPU (%) DPU yield (%) P/B (x) EV/ EBITDA (x) ROE (%) Net debt/equity (%) Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 12/19A 177.3 155.0 122.4 113.2 0.09 n.a. 5.5 29.4 0.08 n.a. 2.9 2.32 33.0 7.4 40.2 12/20E 223.7 194.2 157.3 156.1 0.1 0.09 10.8 26.5 0.09 1.9 3.4 2.2 26.3 8.2 37.5 12/21E 235.1 204.7 170.0 170.0 0.1 0.1 3.6 25.6 0.1 2.2 3.7 2.17 25.2 8.5 39.5 12/22E 239.8 209.1 173.5 174.9 0.11 0.11 2.1 25.0 0.1 n.a. 3.8 2.15 24.6 8.6 38.9 Share price performance The price relative chart measures performance against the FTSE STRAITS TIMES IDX which closed at 2,616.30 on 20/07/20. On 20/07/20 the spot exchange rate was S$1.39/US$1 Performance Absolute (%) Relative (%) 1M 7.7 8.4 3M 9.0 6.5 12M 54.8 77.3 126
127. 21 July 2020 Keppel DC REIT Price (20 Jul 2020): S$2.66 Income Statement (S$ mn) Gross revenue Property expenses Net property income EBITDA Net interest expense/(inc.) Recurring PBT Net profit (Credit Suisse) Distributable income Balance Sheet (S$ mn) Cash & cash equivalents Current receivables Current assets Property, plant & equip. Investment properties Investment in Associates/JV Total assets Current liabilities Long-term debt Total liabilities Unitholder funds Capital employed Cash Flow (S$ mn) EBIT Net interest Tax paid Working capital Other cash & non-cash items Operating cash flow Capex Net property acq. Investing cash flow Equity raised Dividends paid Financing cash flow Total cash flow Adjustments Net change in cash Per share Shares (wtd avg.) (mn) EPS (Credit Suisse) (S$) DPU (S$) BVPS (S$) NAV per share (S$) Earnings Growth (%) Gross revenue Net property income Net profit Distributable income DPU Margins (%) Net property income Pre-tax profit Net profit Valuation (x) P/E DPU yield (%) P/B EV/EBITDA Profitability (%) ROE ROA Credit ratios Net debt/equity (%) Net debt/EBITDA (x) Debt/asset (%) (KEPE.SI / KDCREIT SP) Target Price: (from S$2.34) S$2.91 12/19A 195 18 177 155 15 140 122 113 12/19A 156 96 280 0 2,637 0 2,928 108 880 1,018 1,903 2,812 12/19A 155 0 13 19 (21) 166 (33) (609) (643) 473 (129) 543 66 (2) 65 12/19A 1,352 0.09 0.08 1.14 1.17 12/19A 12/20E 245 22 224 194 19 175 157 156 12/20E 195 121 344 0 2,732 0 3,086 124 911 1,063 2,015 2,955 12/20E 194 0 15 (9) (19) 181 (10) (125) (135) 0 (127) 8 54 0 54 12/20E 1,567 0.10 0.09 1.21 1.23 12/20E 12/21E 257 22 235 205 20 184 170 170 12/21E 201 127 356 0 2,807 0 3,173 127 967 1,124 2,042 3,038 12/21E 205 0 12 (2) (14) 201 (10) (57) (67) 0 (154) (120) 14 0 14 12/21E 1,633 0.10 0.10 1.23 1.25 12/21E 12/22E 263 23 240 209 21 188 174 175 12/22E 203 129 361 0 2,828 0 3,199 129 967 1,125 2,066 3,062 12/22E 209 0 12 (1) (13) 207 (10) 0 (10) 0 (164) (186) 11 0 11 12/22E 1,634 0.11 0.10 1.24 1.26 12/22E 11.0 12.4 12.7 19.6 4.0 25.9 26.2 28.5 37.9 18.8 4.9 5.1 8.0 8.9 9.6 2.2 2.0 2.1 2.9 2.9 91.0 71.7 62.9 12/19A 29.4 2.9 2.32 33.0 12/19A 7.4 4.7 12/19A 40.2 4.93 31.4 91.2 71.3 64.1 12/20E 26.5 3.4 2.20 26.3 12/20E 8.2 5.2 12/20E 37.5 3.89 30.8 91.4 71.7 66.1 12/21E 25.6 3.7 2.17 25.2 12/21E 8.5 5.4 12/21E 39.5 3.94 31.8 91.2 71.6 66.0 12/22E 25.0 3.8 2.15 24.6 12/22E 8.6 5.4 12/22E 38.9 3.85 31.5 Analyst: Nicholas Teh Rating: Outperform Company Background The first data centre real estate investment trust (DC REIT) to be listed in Asia, Keppel DC REIT invests in a diversified portfolio of incomeproducing real estate. Blue/Grey Sky Scenario Our Blue Sky Scenario (S$) (from 2.73) 3.20 Further accretive acquisitions of S$2.5bn (assumes KDC REIT can double the size of its portfolio) at a spread of 3% over funding cost Our Grey Sky Scenario (S$) (from 1.38) 1.98 Based on derating toward highest yield of large cap industrial REIT at 5% Share price performance The price relative chart measures performance against the FTSE STRAITS TIMES IDX which closed at 2,616.30 on 20-Jul-2020 On 20-Jul-2020 the spot exchange rate was S$1.39/US$1 Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 127
128. 21 July 2020 0992.HK Lenovo Group Ltd DCG still in investment stage Target price (12M, HK$) 4.50 Neutral IT Hardware DCG still in investment stage. Lenovo established DCG, after the purchase of x86 server business, as well as OEM/reseller on storage and related software solutions from IBM in 2014. Despite years of investments, this business continues to remain loss-making due to costs alignment, technology enhancement (cross-platforms products on Intel/AMD/ ARM), and transformation from a server-centric model to a solutions-based model surrounding SDI. We believe it will still take a few more years to record profitability, but we expect it will continue to see larger pressure in hyperscale markets, given ODM Direct trend take-off is adopted extensively by US hyperscalers, while its China hyperscale business should also see more intensive competition from local peers. Focusing on Next Wave for longer-term growth. Lenovo expects its DCG sales to see a better outlook in FY21 (FYE: March 2021), as it guided continued profitability improvement, vs US$226 mn loss in FY20, driven by improving cloud (currently ~30% of DCG sales) momentum, and demand uptick from increasing workload shift to the cloud amid COVID-19. It has already seen good progress with the Next Wave in China with key customers wins including Meituan, JD.com, Kuaishou, etc., and is looking to capitalise on the expanding opportunities with the 250 Next Wave customers through further sales force expansion. Enterprise turning softer near-term. Management recently indicated demand from enterprises has turned weaker since the beginning of the year, due to weakening macro as a result of the pandemic, despite good business ramp during the past year with sales growing over 5% YoY, supported by better SDI (+27% YoY) and storage (+54% YoY) through NetApp partnership in China, expanding its storage product portfolio coverage from 15% to 90% covering entry to the mid-range portfolio. We expect the enterprise segment to remain a drag in the near-term, but will continue to monitor the impacts from COVID-19. Price (17 Jul 20, HK$) Upside/downside (%) Mkt cap (HK$/US$ mn) Enterprise value (US$ mn) Number of shares (mn) Free float (%) 52-wk price range (HK$) ADTO-6M (US$ mn) 4.55 -1.1 54,667 / 7,050 8,586 12,015 50.0 6.50-3.64 28.6 Research Analysts Jerry Su 886 2 2715 6361 jerry.su@credit-suisse.com William Li 886 2 2715 6363 william.li@credit-suisse.com Harvie Chou 886 2 2715 6364 harvie.chou@credit-suisse.com Reiterate NEUTRAL. We have a 12M target price of US$4.50 based on 10x 12M P/E. We believe Lenovo’s DCG business still remains in transition, as it focuses on portfolio enhancement and sales force expansion. We could be more positive if we see better progress with the new Next Wave cloud customers’ ramp, and improving enterprise momentum post the COVID-19 outbreak, along with more stable MBG profitability. Financial and valuation metrics Year Revenue (US$ mn) EBITDA (US$ mn) EBIT (US$ mn) Net profit (US$ mn) EPS (CS adj.) (US$) Chg. from prev. EPS (%) Consensus EPS (US$) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 3/19A 51,037.9 1,973.3 1,177.5 596.0 0.05 n.a. n.a. n.m. 11.7 5.0 4.4 1.59 13.4 41.9 3/20E 50,716.3 2,304.4 1,438.2 664.8 0.06 0.0 0.05 11.3 10.5 5.0 3.6 1.67 15.5 32.2 3/21E 52,401.7 2,356.0 1,416.0 666.7 0.06 0.0 0.06 0.4 10.5 5.5 3.9 1.56 15.4 47.2 3/22E 55,103.1 2,543.5 1,603.5 825.4 0.07 0.0 0.07 23.8 8.5 6.3 3.4 1.43 17.6 32.2 Share price performance The price relative chart measures performance against the HANG SENG INDEX which closed at 25,089.17 on 17/07/20. On 17/07/20 the spot exchange rate was HK$7.75/US$1 Performance Absolute (%) Relative (%) 1M 7.1 4.6 3M 3.9 1.0 12M (30.5) (18.7) 128
129. 21 July 2020 Lenovo Group Ltd Price (17 Jul 2020): HK$4.55 Income Statement (US$ mn) Sales revenue Cost of goods sold EBITDA EBIT Net interest expense/(inc.) Recurring PBT Profit after tax Reported net profit Net profit (Credit Suisse) Balance Sheet (US$ mn) Cash & cash equivalents Current receivables Inventories Other current assets Current assets Property, plant & equip. Investments Intangibles Other non-current assets Total assets Current liabilities Total liabilities Total debt Shareholders' equity Minority interests Total liabilities & equity Cash Flow (US$ mn) EBIT Net interest Tax paid Working capital Other cash & non-cash items Operating cash flow Capex Free cash flow to the firm Investing cash flow Equity raised Dividends paid Financing cash flow Total cash flow Adjustments Net change in cash Per share Shares (wtd avg.) (mn) EPS (Credit Suisse) (US$) DPS (US$) Operating CFPS (US$) Earnings Growth (%) Sales revenue EBIT EPS Margins (%) EBITDA EBIT Valuation (x) P/E P/B Dividend yield (%) EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE ROIC Credit ratios Net debt/equity (%) Net debt/EBITDA (x) (0992.HK / 992 HK) Target Price: HK$4.50 03/19A 51,038 43,667 1,973 1,178 310 856 657 596 596 03/19A 2,663 10,462 3,435 327 16,886 2,127 600 8,325 2,051 29,988 20,490 25,891 4,380 4,390 (293) 29,988 03/19A 1,178 0 0 (4,098) 4,393 1,473 (701) 772 (700) 0 (404) 123 895 (81) 815 03/19A 11,903 0.05 0.03 0.12 03/19A 03/20E 50,716 42,359 2,304 1,438 406 1,017 804 665 665 03/20E 3,551 9,834 4,947 402 18,733 2,515 611 7,985 2,284 32,128 23,258 28,069 4,860 4,191 (132) 32,128 03/20E 1,438 0 0 194 578 2,210 (953) 1,257 957 0 (431) (238) 2,928 (126) 2,802 03/20E 11,932 0.06 0.03 0.19 03/20E 03/21E 52,402 43,858 2,356 1,416 350 1,050 797 667 667 03/21E 2,804 11,830 3,696 309 18,639 2,555 611 7,325 2,284 31,414 22,253 27,063 4,860 4,482 (132) 31,414 03/21E 1,416 0 0 (1,658) 191 (51) (320) (371) (320) 0 (376) (376) (747) 0 (747) 03/21E 11,923 0.06 0.03 (0.00) 03/21E 03/22E 55,103 46,117 2,543 1,603 340 1,252 939 825 825 03/22E 3,325 12,115 3,958 327 19,725 2,595 611 6,665 2,284 31,880 22,299 27,110 4,860 4,902 (132) 31,880 03/22E 1,603 0 0 (519) 162 1,246 (320) 926 (320) 0 (405) (405) 521 0 521 03/22E 11,923 0.07 0.04 0.10 03/22E 12.5 203.9 400.3 (0.6) 22.1 11.3 3.3 (1.5) 0.4 5.2 13.2 23.8 3.9 2.3 03/19A 11.7 1.59 5.0 0.2 4.4 7.4 03/19A 13.4 14.7 03/19A 41.9 0.87 4.5 2.8 03/20E 10.5 1.67 5.0 0.2 3.6 5.8 03/20E 15.5 20.3 03/20E 32.2 0.57 4.5 2.7 03/21E 10.5 1.56 5.5 0.2 3.9 6.4 03/21E 15.4 18.3 03/21E 47.2 0.87 4.6 2.9 03/22E 8.5 1.43 6.3 0.2 3.4 5.4 03/22E 17.6 18.9 03/22E 32.2 0.60 Analyst: Jerry Su Rating: Neutral Company Background Lenovo Group Limited (Lenovo) is a personal technology company serving customers in more than 160 countries. The company is a personal computer (PC) vendor. It develops, manufactures and markets technology products and services. Blue/Grey Sky Scenario Our Blue Sky Scenario (HK$) 6.50 Our blue sky value of HK$6.5 assumes a better market momentum for the PC business and PTI rebound and maintains >5% as component shortage issues no longer exist. We assume a faster turnaround for DCG under the leadership of ex-Intel VP, Kirk Skaugen, after the comprehensive server/data-centre solutions product launches recently. Our Grey Sky Scenario (HK$) 3.50 Our grey sky value of NT$3.5 assumes a worse-than-expected market momentum for the PC business and PTI continues to fall <5% as component shortage issues persist. We assume widening smartphone losses from new flagship model launch and China restructuring. Share price performance The price relative chart measures performance against the HANG SENG INDEX which closed at 25,089.17 on 17-Jul-2020 On 17-Jul-2020 the spot exchange rate was HK$7.75/US$1 Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 129
130. 21 July 2020 Micron Technology Inc. MU It’s a memory-centric world, complexity increasing Target price (12M, US$) 90.00 Outperform[V] Semiconductor Devices The computing world is more memory intensive. DRAM specifically is more inelastic than elastic especially in the cloud (the primary function of DRAM is to keep a processor fed) and when processors are mostly contained in PCs, tablets, handsets where applications are “good enough” and utilisation is low (i.e., processors are not eating often) DRAM content has a low ceiling. However, when one moves processing power to the cloud, hyperscalers’ primary economic driver is utilisation (the more highly they can utilise the datacentre the more profitable they will be) and high utilisation means processors want to eat all the time—increasing DRAM becomes a point of leverage at any price. We have yet to see the impact of AI/ML workloads on DRAM demand. These workloads are extremely memory/DRAM intensive. There is no cognition without memory. The DGX2, NVDA’s ML server, has a maximum configuration of 1.5 TB of DRAM versus the average server of just 50 MB, and while the DGX2 has ~1/2 the processing power of the human brain (btw the DGX2 needs 3,200 watts, the brain’s 32 watts; i.e., biology is still multiple orders of magnitude more efficient), the human brain still has been 100-300x the memory capacity of the DGX2. Most all of the private start-ups in semis are focused on solving the memory wall. Valuation/opportunity in increasing complexity. We see this long-term meaningful increase in memory content setting up for sustainably higher economic returns not reflected in the current valuation. We would highlight: (1) 5G handsets have as much as 6x/3x the DRAM/NAND content with penetration well below 10%, and (3) Memory to Logic ratio in consumer devices is 1:1, in enterprise servers ~6:1, hyperscale servers ~12:1, and AI servers ~35:1. F3Q/F4Q will be the 14th/15th consecutive quarter of positive FCF with cross-cycle GM/EBITDA/ROIC of +40%/+50%/20%—clearly indicative of a structural improving model. MU currently trades at 5.6x NTM EV/EBITDA, below its four-year trough average of ~6.7x; we reiterate our OUTPERFORM rating and target price of US$90 (~2.5x P/B FTM—top quartile average). We see downside at 1.2x book or ~US$39—implying $4 of upside for every $1 of downside—the best risk-reward in Semis. 1,111.00 33.9 -2,795.0 - Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 49.47 59.99 - 34.47 54,961.09 52,558 [V] = Stock Considered Volatile (see Disclosure Appendix) Research Analysts John W. Pitzer 212 538 4610 john.pitzer@credit-suisse.com Dalya Hahn 212 325 7843 dalya.hahn@credit-suisse.com Eric Hu 212 325 4735 eric.hu@credit-suisse.com Jerome Darling 212 325 3211 jerome.darling@credit-suisse.com Share price performance Financial and valuation metrics Year EPS (Excl. ESO) (US$) Prev. EPS (Excl. ESO., US$) EPS (CS adj., ) P/E (Excl. ESO.) (x) P/E rel. (Excl. ESO., %) Revenue (US$ m) Net Debt (US$ m) OCFPS (US$) P/OCF (x) Number of shares (m) BV/share (Next Qtr., US$) Net debt (Next Qtr., US$ m) Dividend yield (%) Price (17 Jul 20, US$) 52-week price range Market cap (US$ m) Enterprise value (US$ m) 8/19A 8/20E 6.31 2.80 6.17 2.59 7.8 17.7 40.2 69.9 23,406.0 21,379.0 -571 -2,403 11.48 7.77 4.3 6.4 Price/Sales (x) P/BVPS (x) Dividend (current, US$) 8/21E 5.23 4.99 9.5 48.6 24,200.0 -7,564 10.67 4.6 2.62 1.5 - On 17-Jul-2020 the S&P 500 INDEX closed at 3224.73Daily Jul19, 2019 - Jul17, 2020, 07/19/19 = US$45.52 Quarterly EPS 2019A 2020E 2021E Q1 2.97 0.48 0.88 Q2 1.72 0.45 0.99 Q3 1.06 0.82 1.43 Q4 0.56 1.05 1.92 130
131. 21 July 2020 Micron Technology Inc. (MU) Price (17 Jul 2020): US$49.47 Income Statement Revenue (US$ m) EBITDA Operating profit Recurring profit Cash Flow Cash flow from operations CAPEX Free cash flow to the firm Cash flow from investments Net share issue(/repurchase) Dividends paid Issuance (retirement) of debt Other Cash flow from financing activities Effect of exchange rates Changes in Net Cash/Debt Net debt at end Balance Sheet ($US) Assets Other current assets Total current assets Total assets Liabilities Short-term debt Total current liabilities Long-term debt Total liabilities Shareholder equity Total liabilities and equity Net debt Per share No. of shares (wtd avg) CS adj. EPS Prev. EPS (US$) Dividend (US$) Free cash flow per share Earnings Sales growth (%) Net profit growth (%) EPS growth (%) EBIT margin (%) Valuation EV/Sales (x) EV/EBIT (x) P/E (x) Quarterly EPS 2019A 2020E 2021E Analyst: John Pitzer Rating: Outperform [V] Target Price: 90.00 Q1 2.97 0.48 0.88 8/19A 23,406.0 13,285.0 7,812.0 7,944.0 8/19A 13,189 (9,855) 3,334 (10,085) (2,550) 0 210 (98) (2,438) (1,298) (571) 8/19A 8/20E 21,379.0 8,985.0 3,401.4 3,401.4 8/20E 8,870 (8,000) 870 (6,908) (203) 0 714 (646) (135) 1,832 (2,403) 8/20E 8/21E 24,200.0 12,955.6 6,668.5 6,558.5 8/21E 12,162 (7,000) 5,162 (7,000) 0 (1) 0 1 0 5,161 (7,564) 8/21E 1,767 16,503 48,887 508 18,659 53,342 521 23,305 58,700 1 6,390 4,541 13,007 34,992 48,888 (571) 8/19A 1,149 6.17 0.00 2.90 8/19A (23.0) (51.1) (48.1) 33.4 8/19A 2.32 7.0 8.0 1 6,739 6,356 14,642 38,602 53,343 (2,403) 8/20E 1,141 2.59 0.00 0.76 8/20E (8.7) (58.3) (58.4) 15.9 8/20E 2.46 15.5 19.1 Q3 1.06 0.82 1.43 2 7,430 6,356 15,334 43,270 58,702 (7,564) 8/21E 1,140 4.99 1.00 4.53 8/21E 13.2 92.6 96.8 27.6 8/21E 1.96 7.1 9.9 Q4 0.56 1.05 1.92 Q2 1.72 0.45 0.99 Company Background Micron Technology, Inc. is a manufacturer & marketer of semiconductor devices, principally dynamic random access memory, NAND Flash memory, as well as other innovative memory technologies, packaging solutions & semiconductor systems Blue/Grey Sky Scenario Our Blue Sky Scenario (US$) 100.00 Our blue sky scenario of US$100 assumes ~11x EPS, sustainable industry growth, and reduced pricing volatility. Our Grey Sky Scenario (US$) 30.00 Our grey sky scenario of US$30 assumes trough EPS of ~US$3.75 and an 8x P/E multiple. Share price performance On 17-Jul-2020 the S&P 500 INDEX closed at 3224.73 Daily Jul19, 2019 - Jul17, 2020, 07/19/19 = US$45.52 Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 131
132. 21 July 2020 3706.TW MiTAC Holdings Corporation The awakening titan Target price (12M, NT$) 32.20 Neutral IT Hardware Initiate with NEUTRAL and TP of NT$32.2. MiTAC is a leading cloud IT infrastructure ODM in Taiwan. After the corporate restructure in 2014, MiTAC Holding Corporation (MHC) was created along with three major business segments including MCT for cloud computing, MDT for auto and MIC for new services. We believe the market has largely priced-in the better near-term outlook with MCT post its strategic realignment in the past few years. Our 2020E EPS is still 19% below street, factoring in a more conservative outlook for enterprise demand in MCT, and in MDT due to continued weakness in automobile end-demand on softening macro during COVID-19. MCT: Healthy cloud outlook on increasing workload shift to cloud. We believe MiTAC will continue to benefit from increasing data workload shift to the cloud environment, especially driven by its key US hyperscale customer’s (i.e. Amazon) data-centres ramp. We also believe the ongoing orders pull-in from its main OEM customer (Inspur) for the China hyperscalers remain healthy, providing good scale benefits on improving profitability profile post the restructure in recent years. However, we have concerns on enterprise demand into 2H, which could drive slower OEM orders pull-in, as this part of the business still consists of 30-35% of total units shipment by motherboard, including servers and storages. Price (17 Jul 20, NT$) Upside/downside (%) Mkt cap (NT$/US$ mn) Enterprise value (NT$ mn) Number of shares (mn) Free float (%) 52-wk price range (NT$) ADTO-6M (US$ mn) 29.55 9.0 35,654 / 1,211 32,368 1,207 75.5 31.34-20.89 14.4 Research Analysts Harvie Chou 886 2 2715 6364 harvie.chou@credit-suisse.com Jerry Su 886 2 2715 6361 jerry.su@credit-suisse.com MDT: continued outlook softness in auto impacting near-term orders. We expect a weaker auto end-demand from a softer macro economy as a result of the COVID-19 global outbreak. This not only impacts its B2C products (dash cam and DVR) sales-through, but also enterprise’s willingness to invest. We believe the recent lock-down and travel restrictions have also led to qualification push-off with B2B/B2B2C business. Fairly valued. MiTAC trades at 13x/9x/8x our 2020/2021/22E EPS, vs past three-year average of 10x within a range of 7-14x on street forward EPS. Our TP of NT$32.2 applies the mid-cycle 10x P/E, with improving MCT outlook offset by MDT weakness. Shares offer a 4.4% dividend yield on NT$1.0 cash/share (38% cash dividend payout) on 2019 EPS. Net cash per share was NT$4.1 as of 1Q20 for 12% of its market cap. Key risks: (1) better/weaker momentum with MCT; (2) improving/deteriorating auto end-demand; and (3) increasing/decreasing contribution from key non-op entities. Share price performance Financial and valuation metrics Year Revenue (NT$ mn) EBITDA (NT$ mn) EBIT (NT$ mn) Net profit (NT$ mn) EPS (CS adj.) (NT$) Chg. from prev. EPS (%) Consensus EPS (NT$) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 12/19A 35,832.0 1,421.7 501.0 2,817.9 2.34 n.a n.a. (14.2) 12.7 3.4 23.6 0.91 7.3 (5.2) 12/20E 41,550.9 1,400.6 399.4 2,765.7 2.29 n.a 3.02 (1.9) 12.9 3.0 22.4 0.89 7.0 (10.7) 12/21E 49,917.8 2,186.2 1,089.0 3,881.2 3.22 n.a 3.09 40.3 9.2 4.3 13.3 0.83 9.4 (15.4) 12/22E 57,155.8 2,979.2 1,782.5 4,453.1 3.69 n.a 14.7 8.0 4.9 9.0 0.78 10.1 (19.0) The price relative chart measures performance against the TAIWAN SE WEIGHTED INDEX which closed at 12,181.56 on 17/07/20. On 17/07/20 the spot exchange rate was NT$29.45/US$1 Performance Absolute (%) Relative (%) 1M 5.7 0.1 3M 7.3 (7.7) 12M 18.8 6.0 132
133. 21 July 2020 MiTAC Holdings Corporation (3706.TW / 3706 TT) Target Price: NT$32.20 Price (17 Jul 2020): NT$29.55 Income Statement (NT$ mn) Sales revenue Cost of goods sold EBITDA EBIT Net interest expense/(inc.) Recurring PBT Profit after tax Reported net profit Net profit (Credit Suisse) Balance Sheet (NT$ mn) Cash & cash equivalents Current receivables Inventories Other current assets Current assets Property, plant & equip. Investments Intangibles Other non-current assets Total assets Current liabilities Total liabilities Total debt Shareholders' equity Minority interests Total liabilities & equity Cash Flow (NT$ mn) EBIT Net interest Tax paid Working capital Other cash & non-cash items Operating cash flow Capex Free cash flow to the firm Investing cash flow Equity raised Dividends paid Financing cash flow Total cash flow Adjustments Net change in cash Per share Shares (wtd avg.) (mn) EPS (Credit Suisse) (NT$) DPS (NT$) Operating CFPS (NT$) Earnings Growth (%) Sales revenue EBIT EPS Margins (%) EBITDA EBIT Valuation (x) P/E P/B Dividend yield (%) EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE ROIC Credit ratios Net debt/equity (%) Net debt/EBITDA (x) 12/19A 35,832 30,642 1,422 501 (33) 3,083 2,774 2,818 2,818 12/19A 6,665 6,697 7,762 2,066 23,189 7,811 23,374 1,036 0 55,410 14,103 15,856 4,595 39,171 0 55,345 12/19A 501 0 0 (1,266) 998 233 (1,623) (1,390) (2,542) 1,405 (1,384) 3,304 994 (55) 939 12/19A 1,207 2.34 1.00 0.19 12/19A 12/20E 41,551 36,207 1,401 399 29 2,953 2,675 2,766 2,766 12/20E 8,255 7,140 8,594 790 24,778 7,072 23,141 1,025 0 56,016 14,240 15,984 3,980 39,912 0 55,896 12/20E 399 0 0 (1,204) 964 159 (1,198) (1,038) 2,061 1,293 (1,077) (1,469) 752 (38) 714 12/20E 1,207 2.29 0.90 0.13 12/20E 12/21E 49,918 43,336 2,186 1,089 21 4,224 3,801 3,881 3,881 12/21E 10,545 8,006 9,964 1,022 29,536 7,261 23,141 1,025 0 60,963 16,388 18,133 3,980 42,711 0 60,843 12/21E 1,089 0 0 (320) 884 1,653 (1,200) 453 1,719 0 (1,082) (1,082) 2,290 0 2,290 12/21E 1,207 3.22 1.26 1.37 12/21E 12/22E 57,156 49,374 2,979 1,783 1 4,859 4,373 4,453 4,453 12/22E 12,673 9,065 11,472 1,157 34,366 7,350 23,141 1,025 0 65,883 18,371 20,120 3,980 45,643 0 65,763 12/22E 1,783 0 0 (715) 962 2,029 (1,200) 829 1,620 0 (1,520) (1,520) 2,128 0 2,128 12/22E 1,207 3.69 1.45 1.68 12/22E 16.5 50.0 (14.2) 16.0 (20.3) (1.9) 20.1 172.7 40.3 14.5 63.7 14.7 4.0 1.4 12/19A 12.7 0.91 3.4 0.9 23.6 67.0 12/19A 7.3 1.3 12/19A (5.2) (1.46) 3.4 1.0 12/20E 12.9 0.89 3.0 0.8 22.4 78.6 12/20E 7.0 1.0 12/20E (10.7) (3.05) 4.4 2.2 12/21E 9.2 0.83 4.3 0.6 13.3 26.7 12/21E 9.4 2.7 12/21E (15.4) (3.00) 5.2 3.1 12/22E 8.0 0.78 4.9 0.5 9.0 15.1 12/22E 10.1 4.4 12/22E (19.0) (2.92) Analyst: Harvie Chou Rating: Neutral Company Background Founded in 1982, MiTAC was one of the pioneers for the R&D, manufacturing and sales of PC systems, but later diverged its focus entirely to the contracted manufacturing business model with also long experience and exposure in cloud infrastructure equipment. Blue/Grey Sky Scenario Our Blue Sky Scenario (NT$) 45.00 Our blue sky scenario assumes an NT$45 value based on the peak multiple of 14x 2021E P/E, factoring in a better sales growth from MCT driven by increasing cloud IT equipment pull-in by key customer. We also factor in a better pace of recovery from MDT post COVID-19. Our Grey Sky Scenario (NT$) 25.00 Our grey sky scenario assumes an NT$25 target price based on the trough multiple of 8x 2021E P/E, factoring in a weaker sales growth from MCT due to slower enterprise spending, partially offset by stable cloud momentum. We also factor in a weaker prospect from MDT due to lower auto end demand as a result of lingering impacts from COVID-19. Share price performance The price relative chart measures performance against the TAIWAN SE WEIGHTED INDEX which closed at 12,181.56 on 17-Jul-2020 On 17-Jul-2020 the spot exchange rate was NT$29.45/US$1 Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 133
134. 21 July 2020 NetApp NTAP Data Fabric strategy increasingly important as cloud adoption accelerates Target price (12M, US$) 53.00 Outperform[V] IT Hardware Data Fabric strategy a key advantage. NetApp’s SW-based Data Fabric strategy is a clear differentiator vs. storage peers, and a key advantage in an increasingly hybrid-first world. Indeed, by extending its core ONTAP data management SW across on-prem environments and the three major public clouds, NetApp provides customers with consistency on the journey to hybrid cloud and allows them to “future-proof” investment in traditional storage arrays as they evaluate the ideal location for their various workloads over time. In addition to improving NetApp’s positioning on-prem, the availability to run ONTAP natively in AWS, Azure and GCP increases their relevancy in the public cloud, particularly for cloud-native buyers that largely fall outside the traditional storage TAM. We acknowledge the ramp in their Cloud Data Services business has been disappointing to-date, but are encouraged by the recent uptick (+34% QoQ in F4Q), and will be looking for continued momentum in a post-COVID-19 world with faster adoption rates of public cloud here to stay as a much-needed offset to pressure on traditional HW spend. Favourable all-flash product mix: NetApp also benefits from outsized exposure to allflash arrays (>60% of product), which remains one of the few consistent growth areas in traditional on-prem HW as falling SSD costs allow enterprises to take advantage of the performance benefits of all-flash for more price-sensitive workloads. We see significant runway for further adoption of all-flash arrays, both within NetApp’s current installed base (~24% All-Flash) and the broader market (CSe: >50% share by CY21), combined with its SW-based advantages, enabling NetApp to outperform the overall external storage spending over time. Near-term, we are more cautious on the on-prem storage demand (both broadly and for NetApp specifically), with any rushed WFH/BCP spend likely behind us as pressure on IT budgets sets in, but highlight NetApp’s incumbency as a relative advantage given the COVID-19 backdrop likely makes PoCs for new platforms more difficult and its established installed base provides a highly profitable recurring revenue to support the ongoing investment. Price (17 Jul 20, US$) 52-week price range Market cap (US$ m) Enterprise value (US$ m) 44.81 65.38 - 35.35 9,939.59 8,010 [V] = Stock Considered Volatile (see Disclosure Appendix) Research Analysts Matthew Cabral 415 249 7929 matthew.cabral@credit-suisse.com Dan Knauff, CFA 415 249 7925 daniel.knauff@credit-suisse.com Michael Allen 415 249 7926 michael.allen@credit-suisse.com A relative winner in the push to hybrid; Outperform. Despite a soft demand backdrop and potential margin risks as fading NAND cost tailwinds likely reverse ahead, we believe NetApp’s Data Fabric strategy that enables a storage-centric approach to hybrid will be a key differentiator as cloud adoption accelerates. Further, we believe competitive concerns from Dell’s new PowerStore launch are overblown and could actually present an opportunity, given a potentially disruptive upgrade process, with management keen to take advantage. Share price performance Financial and valuation metrics Year EPS (Excl. ESO) (US$) EPS (CS adj., ) Prev. EPS (CS adj., US$) P/E (CS adj.) (x) P/E rel. (CS adj., %) Revenue (US$ m) Net Debt (US$ m) OCFPS (US$) P/OCF (x) Number of shares (m) BV/share (Next Qtr., US$) Net debt (Next Qtr., US$ m) Dividend yield (%) 4/20A 4/21E 4.65 4.00 4.10 3.43 10.9 13.1 56.1 51.7 5,412.0 4,973.4 -998 -1,930 4.56 4.44 9.8 10.1 221.82 Price/Sales (x) 3.2 P/BVPS (x) -1,659.1 Dividend (current, US$) 1.07 Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 4/22E 5.00 4.41 10.2 52.1 5,306.0 -1,539 5.28 8.5 4/23E 5.68 5.06 8.9 53.1 5,497.6 -1,328 6.38 7.0 1.95 24.0 1.9 On 17-Jul-2020 the S&P 500 INDEX closed at 3224.73Daily Jul19, 2019 - Jul17, 2020, 07/19/19 = US$59.42 Quarterly EPS 2020A 2021E 2022E Q1 0.65 0.43 0.72 Q2 1.09 0.88 1.10 Q3 1.16 0.99 1.28 Q4 1.24 1.10 1.32 134
135. 21 July 2020 NetApp (NTAP) Price (17 Jul 2020): US$44.81 Income Statement Revenue (US$ m) EBITDA Operating profit Recurring profit Cash Flow Cash flow from operations CAPEX Free cash flow to the firm Cash flow from investments Net share issue(/repurchase) Dividends paid Issuance (retirement) of debt Other Cash flow from financing activities Effect of exchange rates Changes in Net Cash/Debt Net debt at end Balance Sheet ($US) Assets Other current assets Total current assets Total assets Liabilities Short-term debt Total current liabilities Long-term debt Total liabilities Shareholder equity Total liabilities and equity Net debt Per share No. of shares (wtd avg) CS adj. EPS Prev. EPS (US$) Dividend (US$) Free cash flow per share Earnings Sales growth (%) Net profit growth (%) EPS growth (%) EBIT margin (%) Valuation EV/Sales (x) EV/EBIT (x) P/E (x) Quarterly EPS 2020A 2021E 2022E Analyst: Matthew Cabral Rating: Outperform [V] Target Price: 53.00 4/20A 5,412.0 1,276.5 1,122.5 1,141.5 4/20A 1,060 (124) 936 1,076 (1,309) (439) (400) 188 (1,960) 466 (998) 4/20A 4/21E 4,973.4 1,032.9 909.3 950.2 4/21E 1,008 (124) 884 (249) 0 (432) 0 (8) (440) 932 (1,930) 4/21E 4/22E 5,306.0 1,271.6 1,137.5 1,193.4 4/22E 1,171 (133) 1,039 (265) (1,000) (422) 0 (8) (1,430) (391) (1,539) 4/22E 4/23E 5,497.6 1,371.7 1,232.2 1,288.1 4/23E 1,331 (137) 1,194 (275) (1,000) (397) 0 (8) (1,405) (211) (1,328) 4/23E 490 4,274 7,522 483 4,608 7,670 498 4,290 7,363 509 4,129 7,203 522 3,616 1,146 7,280 242 7,522 (998) 4/20A 233 4.10 1.92 4.03 4/20A (11.9) (18.6) (9.2) 20.7 4/20A 1.65 8.0 10.9 Q1 0.65 0.43 0.72 30 2,858 1,150 6,591 1,078 7,670 (1,930) 4/21E 227 3.43 1.92 3.89 4/21E (8.1) (18.4) (16.4) 18.3 4/21E 1.61 8.8 13.1 Q2 1.09 0.88 1.10 30 2,945 1,150 6,722 641 7,363 (1,539) 4/22E 222 4.41 1.92 4.69 4/22E 6.7 25.8 28.8 21.4 4/22E 1.58 7.4 10.2 Q3 1.16 0.99 1.28 30 3,435 750 6,897 306 7,203 (1,328) 4/23E 209 5.06 1.92 5.72 4/23E 3.6 7.9 14.7 22.4 4/23E 1.57 7.0 8.9 Q4 1.24 1.10 1.32 Company Background NetApp is a storage provider focusing on hybrid cloud and hybrid cloud services and solutions. Its data fabric strategy helps companies manage data across on-premise, cloud, and multi-cloud environments. Blue/Grey Sky Scenario Our Blue Sky Scenario (US$) 64.00 Our blue sky scenario assumes a 100 bp increase in revenue growth and 50 bp increase in gross margins, without reflecting any operating leverage. This yields CY21E EPS of US$4.28 (+4% vs. our base case) and drives a higher 15x multiple. Our Grey Sky Scenario (US$) 32.00 Our grey sky scenario reflects a 400 bp decrease in revenue growth and 200 bp downward pressure on gross margins, in addition to 300 bp of negative opex leverage. This yields CY21E EPS of US$2.91(-29% vs. our base case) and drives a lower 11x multiple. Share price performance On 17-Jul-2020 the S&P 500 INDEX closed at 3224.73 Daily Jul19, 2019 - Jul17, 2020, 07/19/19 = US$59.42 Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 135
136. 21 July 2020 NVIDIA Corporation NVDA Most levered to data economy, open-ended TAM Target price (12M, US$) 425.00 Outperform[V] Semiconductor Devices The data-driven economy underpins semi value capture, NVDA most levered. Over the past five years, NVDA’s Rev base has become more diversified and focused on its highgrowth end markets, particularly in the Datacentre segment (~5% of Rev in FY2014 and ~20% of Rev in FY2018, and >27% in FY2020). Growth in the Datacentre segment (which has the highest margins out of NVDA’s end markets) has coincided with increased profitability for the company (non-GAAP OpM of ~16% in FY2014 and ~38% in FY2019). Data centre to grow within NVIDIA. NVDA forecasts a US$50 bn TAM for its Datacentre business by FY2023 with new opportunities in high performance computing (HPC), Hyperscale computing, and Cloud computing. While we expect NVDA to control a decreasing share of the market throughout our forecast period as competition enters the space, we believe that this segment will continue to make up an increasing proportion of the total rev, reaching >40% of total revenue in FY202. Importantly, our analysis suggests the company could be significantly underestimating the market opportunity. NVIDIA’s moat helps it capture a good share of the growing compute TAM. We estimate the Compute TAM is growing from ~US$90 bn to US$230 bn by 2025 (~15% CAGR). While the AI tech space should become increasingly crowded as competitors see the size of the opportunity, NVDA should benefit from capturing even a small percentage of Server TAM. Note, though NVDA has built sustainable moats in the Datacentre with CUDA and DGX/Volta, we conservatively modelled NVDA’s share declining from 90% to 50% in Server Accelerators and the company can still maintain DC Rev at a +30% three-year CAGR (growing to ~44% of Rev from ~27% in FY20). Price (17 Jul 20, US$) 52-week price range Market cap (US$ m) Enterprise value (US$ m) 408.06 420.36 - 148.77 250,956.90 238,349 [V] = Stock Considered Volatile (see Disclosure Appendix) Research Analysts John W. Pitzer 212 538 4610 john.pitzer@credit-suisse.com Dalya Hahn 212 325 7843 dalya.hahn@credit-suisse.com Eric Hu 212 325 4735 eric.hu@credit-suisse.com Jerome Darling 212 325 3211 jerome.darling@credit-suisse.com Outlook for 2020-21. Recently, NVDA provided FY21 (CY20) opex of US$4.1 bn (+32% YoY), inclusive of MLNX, COVID-19, organic investment and an extra-week this FY. NVDA does not manage to forecast OpM but we would highlight that median opex/rev over the last 20 years has been ~26.5% and even at 27.5% the implied FY21 rev is ~$15 bn and thus underscoring our FY21/22/23 EPS of US$8.25/$9.90/$11.50. Our 12- month target price of US$425 is based on EV/FCF of 40x on CY22; in addition our target price represents an average P/E multiple of 35x to CY25 EPS of >US$15 discounted back. Share price performance Financial and valuation metrics Year EPS (Excl. ESO) (US$) EPS (CS adj., ) Prev. EPS (CS adj., US$) P/E (CS adj.) (x) P/E rel. (CS adj., %) Revenue (US$ m) Net Debt (US$ m) OCFPS (US$) P/OCF (x) Number of shares (m) BV/share (Next Qtr., US$) Net debt (Next Qtr., US$ m) Dividend yield (%) 12/19A 12/20E 7.58 7.06 6.75 5.80 60.4 70.4 310.0 278.7 11,716.0 10,918.0 -6,206 -12,607 6.00 7.74 68.0 52.7 615.00 Price/Sales (x) 15.8 P/BVPS (x) -5,814.0 Dividend (current, US$) - Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 12/21E 10.39 8.25 49.5 254.0 14,900.0 -32,333 12.73 32.0 12/22E 11.22 9.90 41.2 247.3 17,130.0 -55,539 10.05 40.6 22.47 18.9 - On 17-Jul-2020 the S&P 500 INDEX closed at 3224.73Daily Jul19, 2019 - Jul17, 2020, 07/19/19 = US$168.44 Quarterly EPS 2019A 2020E 2021E Q1 2.05 0.88 1.80 Q2 1.94 1.24 1.94 Q3 1.84 1.78 2.15 Q4 0.80 1.89 2.35 136
137. 21 July 2020 NVIDIA Corporation (NVDA) Price (17 Jul 2020): US$408.06 Income Statement Revenue (US$ m) EBITDA Operating profit Recurring profit Cash Flow Cash flow from operations CAPEX Free cash flow to the firm Cash flow from investments Net share issue(/repurchase) Dividends paid Issuance (retirement) of debt Other Cash flow from financing activities Effect of exchange rates Changes in Net Cash/Debt Net debt at end Balance Sheet ($US) Assets Other current assets Total current assets Total assets Liabilities Short-term debt Total current liabilities Long-term debt Total liabilities Shareholder equity Total liabilities and equity Net debt Per share No. of shares (wtd avg) CS adj. EPS Prev. EPS (US$) Dividend (US$) Free cash flow per share Earnings Sales growth (%) Net profit growth (%) EPS growth (%) EBIT margin (%) Valuation EV/Sales (x) EV/EBIT (x) P/E (x) Quarterly EPS 2019A 2020E 2021E Analyst: John Pitzer Rating: Outperform [V] Target Price: 425.00 12/19A 11,716.0 4,678.3 4,476.5 4,558.5 12/19A 3,744 (525) 3,219 (4,265) (925) (371) (861) (2,157) 1,098 (6,206) 12/19A 12/20E 10,918.0 4,000.0 3,706.0 3,860.0 12/20E 4,782 (488) 4,294 2,780 0 (391) (767) (1,158) 6,401 (12,607) 12/20E 12/21E 14,900.0 9,105.4 5,741.8 5,619.8 12/21E 7,920 (695) 7,225 (1,595) (983) (427) 19,779 18,369 19,725 (32,333) 12/21E 12/22E 17,130.0 6,444.0 6,935.4 6,771.4 12/22E 6,257 (717) 5,540 (717) (1,748) (502) 19,916 17,666 23,206 (55,539) 12/22E 136 11,329 14,064 157 17,391 21,016 195 41,739 46,036 195 66,358 70,871 0 1,329 1,988 3,950 10,114 14,064 (6,206) 12/19A 624 6.75 0.00 5.16 12/19A (5.7) (11.8) (11.5) 38.2 12/19A 20.89 54.7 60.4 Q1 2.05 0.88 1.80 0 1,784 1,991 5,111 15,905 21,016 (12,607) 12/20E 618 5.80 0.00 6.95 12/20E (6.8) (15.0) (14.2) 33.9 12/20E 21.83 64.3 70.4 Q2 1.94 1.24 1.94 0 1,142 6,959 9,394 36,642 46,036 (32,333) 12/21E 622 8.25 0.00 11.62 12/21E 36.5 43.3 42.3 38.5 12/21E 14.67 38.1 49.5 Q3 1.84 1.78 2.15 0 1,993 6,959 10,245 60,626 70,871 (55,539) 12/22E 623 9.90 0.00 8.90 12/22E 15.0 20.1 20.0 40.5 12/22E 11.41 28.2 41.2 Q4 0.80 1.89 2.35 Company Background Nvidia Corporation focuses on PC graphics, graphics processing unit (GPUs) and artificial intelligence (AI). The Company's processor has created platforms that address four markets: Gaming, Professional Visualisation, Datacentre, and Automotive. Blue/Grey Sky Scenario Our Blue Sky Scenario (US$) 475.00 In the blue sky scenario, NVDA sees a full materialisation of its forecasted Datacentre and Autonomous vehicle TAMs of US$50 bn and US$60 bn, respectively, and NVDA maintains positions of leadership in both. Moreover, in this scenario, NVDA sees a successful launch of its Volta gaming chips, and sees continued positive secular trends in the Gaming industry. This will drive EPS of ~US$16 in FY2023, and the stock can be worth in US$475 at a 30x P/E. Our Grey Sky Scenario (US$) 175.00 In the grey sky scenario, NVDA sees increased competition from companies like INTC and AMD in the datacentre space, while internallydeveloped ASICs take market share as well. Also in this scenario, the proliferation of AV is delayed, as a result of increased regulation and other factors. Finally, AMD regains significant market share of the PC Gaming industry. This will drive EPS of ~US$7 in FY2023, and the stock can be worth US$175 at a 30x P/E. Share price performance On 17-Jul-2020 the S&P 500 INDEX closed at 3224.73 Daily Jul19, 2019 - Jul17, 2020, 07/19/19 = US$168.44 Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 137
138. 21 July 2020 4966.TWO Parade Technologies Limited contribution from PCIe4 in 2021 Target price (12M, NT$) 970.00 Neutral Semiconductor Devices Leading data-centre high-speed interface provider. Parade is a globally leading fabless IC design house focusing on the research and development of mixed-signal ICs and highspeed interfaces for a variety of consumer products including NB, smartphones, tablets, etc. It also started making more meaningful progress in the data-centre segment shipping PCIe3 redriver/retimer to US data centre customer as well as Chinese OEMs from 4Q17. Currently, Parade is the exclusive high-speed interface provider for PCIe4 (i.e. TI and IDTI key competitors in PCIe3) for 4-channel and 16-channel solutions adoptable on both Intel and AMD platforms (limited ARM/HiSilicon), as it claims its unique architecture offers a better power efficiency, lower latency, and better system performance. It is also working with Intel using a companion chip as an alternate solution for PCIe4 before the take-off. Previous target price (12M, NT$) 895.00 Price (17 Jul 20, NT$) 1,075 Upside/downside (%) -9.8 Mkt cap (NT$/US$ mn) 86,002 / 2,920 Enterprise value (NT$ mn) 77,634 Number of shares (mn) 80.00 Free float (%) 76.7 52-wk price range (NT$) 1,135-513 ADTO-6M (US$ mn) 35.9 Limited contribution from PCIe4 near-term. Parade believes PCIe4 (16Gbps) spec upgrade from PCIe3 (8Gbps) to be key drivers, as it estimates the total addressable market of its PCIe4 products could reach US$200 mn for the next 3-4 years, while it aims for 30% of the overall share. In addition, despite the COVID-19 outbreak, Parade continues to hold its positive tone for 2020 with the aim to outgrow the overall semi industry, given its leadership in PCIe4, as it has already kicked-off mass production from 2Q for riser cards, and storage and AI machine in data-centre. It expects PCIe4 shipments to further pick-up in 4Q20 and 2021, as Intel's new chipset becomes available. It also believes PCIe4 will remain mainstream into 2022 as the next generation PCIe5 will not be ready to ramp in the next ~2 years, given higher entry barriers for new comers. We expect PCIe4’s contribution to remain limited in 2020, and increase to 4% of sales in 2021E. Research Analysts Jerry Su 886 2 2715 6361 jerry.su@credit-suisse.com Harvie Chou 886 2 2715 6364 harvie.chou@credit-suisse.com Share gain story intact. Parade has secured more design-wins with China panel customers on eDP T-Con bundle-selling with SIPI IC for high-end NB, including gaming. We also see the recent acquisition on Fresco Logic offers a good opportunity for Parade to enter into MacBook and other i-Devices on USB4, given its know-how on DP, switch, converter, as well as Fresco's strength/IP in USB Host and Hub. Reiterate NEUTRAL. We recently downgraded Parade, as limited upside from the current level post over 100% run last 12M. However, we raise our TP to NT$970 (from NT$895) based on the peak multiple of 21x 2021E P/E. We would look for a better entry point to play the server and USB4 growth. We introduce our 2022 estimates. Share price performance Financial and valuation metrics Year Revenue (NT$ mn) EBITDA (NT$ mn) EBIT (NT$ mn) Net profit (NT$ mn) EPS (CS adj.) (NT$) Chg. from prev. EPS (%) Consensus EPS (NT$) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 12/19A 11,810.6 2,885.8 2,398.1 2,433.8 30.61 n.a. n.a. 22.3 35.1 1.2 27.0 7.59 23.2 (72.0) 12/20E 14,033.8 3,709.0 3,260.8 3,128.5 39.14 6.6 37.27 27.9 27.5 1.4 20.9 6.43 25.4 (64.3) 12/21E 15,747.8 4,328.1 3,872.6 3,696.1 46.25 3.4 45.19 18.2 23.2 1.8 17.4 5.54 25.6 (69.2) 12/22E 17,700.2 4,743.9 4,317.6 4,109.8 51.42 n.a. 55.3 11.2 20.9 2.1 15.4 4.82 24.7 (72.9) The price relative chart measures performance against the TAIWAN SE WEIGHTED INDEX which closed at 12,181.56 on 17/07/20. On 17/07/20 the spot exchange rate was NT$29.45/US$1 Performance Absolute (%) Relative (%) 1M 16.0 10.4 3M 55.3 40.4 12M 103.6 90.8 138
139. 21 July 2020 Parade Technologies (4966.TWO / 4966 TT) Price (17 Jul 2020): NT$1,075 Target Price: (from NT$895.00) NT$970.00 Income Statement (NT$ mn) Sales revenue Cost of goods sold EBITDA EBIT Net interest expense/(inc.) Recurring PBT Profit after tax Reported net profit Net profit (Credit Suisse) Balance Sheet (NT$ mn) Cash & cash equivalents Current receivables Inventories Other current assets Current assets Property, plant & equip. Investments Intangibles Other non-current assets Total assets Current liabilities Total liabilities Total debt Shareholders' equity Minority interests Total liabilities & equity Cash Flow (NT$ mn) EBIT Net interest Tax paid Working capital Other cash & non-cash items Operating cash flow Capex Free cash flow to the firm Investing cash flow Equity raised Dividends paid Financing cash flow Total cash flow Adjustments Net change in cash Per share Shares (wtd avg.) (mn) EPS (Credit Suisse) (NT$) DPS (NT$) Operating CFPS (NT$) Earnings Growth (%) Sales revenue EBIT EPS Margins (%) EBITDA EBIT Valuation (x) P/E P/B Dividend yield (%) EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE ROIC Credit ratios Net debt/equity (%) Net debt/EBITDA (x) 12/19A 11,811 6,767 2,886 2,398 (106) 2,516 2,434 2,434 2,434 12/19A 8,106 1,198 944 551 10,799 278 0 2,375 321 13,773 2,397 2,513 0 11,260 0 13,773 12/19A 2,398 0 0 443 523 3,364 (77) 3,287 (491) 85 (981) (780) 2,094 0 2,094 12/19A 80 30.61 12.46 42.31 12/19A 12/20E 14,034 7,789 3,709 3,261 (96) 3,366 3,128 3,128 3,128 12/20E 8,581 1,661 1,120 801 12,163 220 0 2,339 1,499 16,221 2,759 2,867 0 13,355 0 16,221 12/20E 3,261 0 0 (528) 316 3,049 (104) 2,945 (1,532) 184 (1,217) (1,041) 475 0 475 12/20E 80 39.14 15.23 38.14 12/20E 12/21E 15,748 8,631 4,328 3,873 (111) 3,996 3,696 3,696 3,696 12/21E 10,732 1,963 1,261 947 14,903 156 0 2,339 1,463 18,861 3,237 3,345 0 15,517 0 18,861 12/21E 3,873 0 0 (111) 279 4,040 (100) 3,940 (356) 0 (1,534) (1,534) 2,151 0 2,151 12/21E 80 46.25 19.19 50.55 12/21E 12/22E 17,700 10,050 4,744 4,318 (138) 4,467 4,110 4,110 4,110 12/22E 12,982 2,169 1,444 1,046 17,642 116 0 2,339 1,448 21,546 3,623 3,731 0 17,814 0 21,546 12/22E 4,318 0 0 (101) 218 4,435 (100) 4,335 (372) (0) (1,812) (1,812) 2,251 0 2,251 12/22E 80 51.42 22.68 55.49 12/22E 14.0 22.9 22.3 18.8 36.0 27.9 12.2 18.8 18.2 12.4 11.5 11.2 24.4 20.3 12/19A 35.1 7.59 1.2 6.6 27.0 32.5 12/19A 23.2 67.6 12/19A (72.0) (2.81) 26.4 23.2 12/20E 27.5 6.43 1.4 5.5 20.9 23.7 12/20E 25.4 76.5 12/20E (64.3) (2.31) 27.5 24.6 12/21E 23.2 5.54 1.8 4.8 17.4 19.4 12/21E 25.6 75.0 12/21E (69.2) (2.48) 26.8 24.4 12/22E 20.9 4.82 2.1 4.1 15.4 16.9 12/22E 24.7 82.6 12/22E (72.9) (2.74) Analyst: Jerry Su Rating: Neutral Company Background Parade is a fabless IC vendor focusing on the eDP T-Con and other highspeed interface products for applications including NBs, All-In-One PCs, tablets, etc. Blue/Grey Sky Scenario Our Blue Sky Scenario (NT$) (from 950.00) 1,200 Our blue sky scenario of NT$1,200 is based on 25x 12M P/E. In our blue sky scenario, we assume the growth from eDP T-Con and highspeed interface to accelerate, leading to a better margin profile. We use the peak cycle multiple of 25x to derive our blue sky TP. Our Grey Sky Scenario (NT$) (from 400.00) 600.00 Our grey sky scenario of NT$600 is based on 12x 12M P/E. In our grey sky scenario, we assume muted growth for eDP T-Con and slower growth for high-speed interface. We also expect touch IC revenue to decline 20%+ due to lack of TDDI product. We apply a trough cycle multiple of 12x to derive our grey sky TP. Share price performance The price relative chart measures performance against the TAIWAN SE WEIGHTED INDEX which closed at 12,181.56 on 17-Jul-2020 On 17-Jul-2020 the spot exchange rate was NT$29.45/US$1 Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 139
140. 21 July 2020 Quanta Computer 2382.TW Diversified server play for cloud, enterprise, and 5G telco take-off Target price (12M, NT$) 90.00 Outperform IT Hardware Leading Cloud IT infrastructure ODM. Quanta is an industry pioneer kicking-off design and manufacturing of IT infrastructure since 2003, with foray into cloud from 2010 along with the establishment of key subsidiary QCT specifically for the segment in 2012. We expect Quanta/QCT to continue to maintain its leadership, supported by a diversified customer base with prominent shares across most of the leading US hyperscalers, as well as better progress with enterprises. We also believe carrier premise equipment and edge compute to be key drivers from 2021, along with further proliferation of 5G. Prominent shares with the US hyperscalers. We believe Quanta/QCT will continue to maintain its leadership in the ODM Direct space, leveraging its extensive experience in design and manufacturing. It has good share positioning with the US leading hyperscalers including Google and Facebook, with also exposure into most of the remaining Super 7 in the US and China (Microsoft, Amazon, Baidu and Alibaba). Quanta’s recent guidance for the cloud in 2020 remains healthy for double-digits % YoY growth, vs CSe of +16% YoY, despite concerns about COVID-19. Management also reiterated its commitment for further capacity expansion in Taiwan, representing a key proportion of its NT$8-9 bn capex spending in 2020, as a result of the US/China trade tension started since 2H18. Good business ramp in enterprise. According to management, enterprise sales have been representing over 20% of its total IT infrastructure sales since 4Q19, with good coverage across Fortune 500, telecom equipment, telcos, unicorn, etc. We believe it is set for a second wave of transformation from cloud to the edge cooperating first with nonconventional Japan based telco Rakuten for the open-sourced carrier-premise equipment at the central and edge data-centres in 2019, and we expect this could be a key driver for Quanta from 2021 and in the future, as a leading ODM with a proven track record in the telco space, along with further proliferation of 5G. Previous target price (12M, NT$) 75.00 Price (17 Jul 20, NT$) 78.00 Upside/downside (%) 15.4 Mkt cap (NT$/US$ mn) 301,264 / 10,229 Enterprise value (NT$ mn) 308,968 Number of shares (mn) 3,862 Free float (%) 61.5 52-wk price range (NT$) 78.70-51.70 ADTO-6M (US$ mn) 22.8 Research Analysts Jerry Su 886 2 2715 6361 jerry.su@credit-suisse.com Harvie Chou 886 2 2715 6364 harvie.chou@credit-suisse.com Top pick for ODM. We retain our OUTPERFORM rating and raise target price to NT$90.0 (from NT$75.0) on peak multiple of 16.5x 2021E P/E. Quanta is our top pick among Taiwan ODMs, as we believe its leadership will allow it to capitalise on the expanding cloud opportunities, as well as edge compute along with 5G proliferation. We expect the stock to advance on improving OPM and profitability, and better NB momentum. We introduce our 2022 estimates. Share price performance Financial and valuation metrics Year Revenue (NT$ mn) EBITDA (NT$ mn) EBIT (NT$ mn) Net profit (NT$ mn) EPS (CS adj.) (NT$) Chg. from prev. EPS (%) Consensus EPS (NT$) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) 12/19A 1,029,611 28,409.4 18,990.9 15,942.7 4.13 n.a. n.a. 5.5 18.9 5.1 11.7 2.1 11.2 21.4 Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 12/20E 1,022,091 27,466.9 19,012.9 17,702.6 4.58 1.9 4.44 11.0 17.0 6.0 10.6 2.18 12.6 (7.4) 12/21E 1,051,142 31,829.3 22,984.3 20,789.0 5.38 5.1 5.14 17.4 14.5 6.5 9.5 2.17 15.0 0.3 12/22E 1,070,418 34,310.5 25,059.0 22,497.7 5.82 n.a. 5.63 8.2 13.4 6.6 8.1 1.87 15.0 (14.9) The price relative chart measures performance against the TAIWAN SE WEIGHTED INDEX which closed at 12,181.56 on 17/07/20. On 17/07/20 the spot exchange rate was NT$29.45/US$1 Performance Absolute (%) Relative (%) 1M 14.5 8.9 3M 24.2 9.3 12M 26.6 13.8 140
141. 21 July 2020 Quanta Computer (2382.TW / 2382 TT) Target Price: (from NT$75.00) NT$90.00 Price (17 Jul 2020): NT$78.00 Income Statement (NT$ mn) Sales revenue Cost of goods sold EBITDA EBIT Net interest expense/(inc.) Recurring PBT Profit after tax Reported net profit Net profit (Credit Suisse) Balance Sheet (NT$ mn) Cash & cash equivalents Current receivables Inventories Other current assets Current assets Property, plant & equip. Investments Intangibles Other non-current assets Total assets Current liabilities Total liabilities Total debt Shareholders' equity Minority interests Total liabilities & equity Cash Flow (NT$ mn) EBIT Net interest Tax paid Working capital Other cash & non-cash items Operating cash flow Capex Free cash flow to the firm Investing cash flow Equity raised Dividends paid Financing cash flow Total cash flow Adjustments Net change in cash Per share Shares (wtd avg.) (mn) EPS (Credit Suisse) (NT$) DPS (NT$) Operating CFPS (NT$) Earnings Growth (%) Sales revenue EBIT EPS Margins (%) EBITDA EBIT Valuation (x) P/E P/B Dividend yield (%) EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE ROIC Credit ratios Net debt/equity (%) Net debt/EBITDA (x) 12/19A 1,029,611 980,444 28,409 18,991 (516) 20,552 16,315 15,943 15,943 12/19A 192,606 204,314 122,569 33,257 552,745 47,497 2,611 832 10,941 614,627 443,196 472,696 222,985 143,212 0 614,627 12/19A 18,991 0 0 22,056 6,394 47,441 (6,961) 40,479 (26,530) 0 (13,133) (76,688) (55,777) 0 (55,777) 12/19A 3,863 4.13 3.98 12.28 12/19A 12/20E 1,022,091 972,681 27,467 19,013 (950) 23,134 18,159 17,703 17,703 12/20E 167,298 226,257 153,382 34,428 581,365 44,603 2,694 0 11,645 640,307 477,958 496,313 156,592 137,999 0 640,307 12/20E 19,013 0 0 24,535 7,175 50,722 (6,732) 43,990 (19,009) 0 (13,849) (133,937) (102,224) 0 (102,224) 12/20E 3,863 4.58 4.68 13.13 12/20E 12/21E 1,051,142 997,724 31,829 22,984 (1,085) 26,628 21,189 20,789 20,789 12/21E 156,089 234,492 170,561 35,681 596,824 41,757 2,694 0 11,645 652,920 489,679 508,033 156,592 138,892 0 652,920 12/21E 22,984 0 0 (14,947) 6,681 14,718 (4,800) 9,918 (15,631) 0 (15,378) 0 (913) 0 (913) 12/21E 3,863 5.38 5.06 3.81 12/21E 12/22E 1,070,418 1,014,210 34,310 25,059 (1,276) 28,772 22,898 22,498 22,498 12/22E 181,556 235,740 171,215 35,871 624,383 38,506 2,694 0 11,645 677,227 491,488 509,842 156,592 161,390 0 677,227 12/22E 25,059 0 0 (282) 6,721 31,498 (4,800) 26,698 (15,631) 0 (18,059) 0 15,867 0 15,867 12/22E 3,863 5.82 5.15 8.15 12/22E 0.2 32.8 5.5 (0.7) 0.1 11.0 2.8 20.9 17.4 1.8 9.0 8.2 2.8 1.8 12/19A 18.9 2.10 5.1 0.3 11.7 17.5 12/19A 11.2 8.3 12/19A 21.4 1.07 2.7 1.9 12/20E 17.0 2.18 6.0 0.3 10.6 15.3 12/20E 12.6 9.8 12/20E (7.4) (0.39) 3.0 2.2 12/21E 14.5 2.17 6.5 0.3 9.5 13.1 12/21E 15.0 13.1 12/21E 0.3 0.02 3.2 2.3 12/22E 13.4 1.87 6.6 0.3 8.1 11.0 12/22E 15.0 13.9 12/22E (14.9) (0.73) Analyst: Jerry Su Rating: Outperform Company Background Quanta Computer Inc. is principally engaged in the research, development, manufacture and distribution of notebook computers. The company provides series products of notebook computers; wireless communication series products; LCD, etc. Blue/Grey Sky Scenario Our Blue Sky Scenario (NT$) (from 85.00) 100.00 Our blue sky value of NT$100.0 assumes a better market momentum from the overall PC market and share gain from its US customers. We also have more optimistic assumptions in its server/data-centre business from a continuing better capex cycle. Our Grey Sky Scenario (NT$) 50.00 Our grey sky value of NT$50.0 assumes a worse-than-expected market momentum from overall PC market. We also assume a worse-thanexpected performance for PC and downward revision in Facebook capex guidance. Share price performance The price relative chart measures performance against the TAIWAN SE WEIGHTED INDEX which closed at 12,181.56 on 17-Jul-2020 On 17-Jul-2020 the spot exchange rate was NT$29.45/US$1 Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 141
142. 21 July 2020 Samsung Electronics 005930.KS Leadership into the next generation memory FOCUS LIST STOCK Target price (12M, W) 65,000 Outperform Semiconductor Devices Samsung’s highly diversified and vertically integrated business model is well positioned to benefit from global datacentre growth. Samsung dominates in the memory semiconductor production with ~50% market share and is the leading Server DRAM maker with 43% market share. It remains the gold standard in DRAM with the start of 1z nm process implementing EUV technology, development and usage of LP DDR5 (server DDR5 in 2021) and leading in HBM1 and HBM2 (High Bandwidth Memory) used with GPUs required in video intensity and AI computing. In NAND, it was the world’s first to develop and produce 3D NAND and SSD for enterprise servers, which it currently dominates. Samsung remains the undisputed memory supplier of choice among the hyperscalers. Price (17 Jul 20, W) Upside/downside (%) Mkt cap (W/US$ bn) Enterprise value (W bn) Number of shares (mn) Free float (%) 52-wk price range (W) ADTO-6M (US$ mn) Despite COVID-19 impacting global consumers, handsets, CE profits, driven by TVs and home appliance sales, remain strong through online sales globally. Cost reduction is aggressive on deep marketing and advertisement expenditures. While home appliance sales are likely to slow on seasonality, handset volumes will likely grow sharply into 3Q20 due to new product launches. DRAM/NAND ASP and bit shipments appear slightly stronger than expected providing some earnings upside. Although the display division remained in deep losses during 2Q20, OLED UTR should pick-up on new iPhone cycle by 3Q20 driving earnings recovery. Other customer wins for OLED on new 5G product launches should drive OLED recovery during 2H20. Research Analysts We remain confident about the continual earnings growth into 2021. Memory industry’s capex cuts have remained in force since 2019, largely cleaning up inventory and causing price spikes despite much weaker demand caused by COVID-19. As the supply side remains tight, risks of sharp price declines are low. Additionally, the smartphone mix should improve to normalise profit margins as foldable products and 5G handsets become more mainstream and outsourcing to ODMs rise. Discontinuation of the TFT-LCD business will recover more than W1 tn in earnings on a YoY basis. 54,400 19.5 324,756 / 269.86 305,244 5,970 80.3 62,400-42,500 991.2 Keon Han 82 2 3707 3740 keon.han@credit-suisse.com Sang Uk Kim 82 2 3707 3795 sang.kim@credit-suisse.com James Oh 82 2 3707 3764 james.oh@credit-suisse.com Quarterly earnings growth should resume as handsets recover and OLED enters a new product cycle. We think yearly earnings will remain in a growth mode and should accelerate by 2021. We maintain our target price of W65,000 on 1.5x mid-cycle 2021E P/B target multiple. Share price performance Financial and valuation metrics Year Revenue (W bn) EBITDA (W bn) EBIT (W bn) Net profit (W bn) EPS (CS adj.) (W) Chg. from prev. EPS (%) Consensus EPS (W) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 12/19A 230,399 61,920.8 27,772.9 21,743.7 3,192 n.a. n.a. (51.0) 17.0 2.6 5.1 1.43 8.6 (3.2) 12/20E 220,879 63,301.7 30,829.6 23,925.5 3,513 0.0 3,776 10.0 15.5 2.6 4.7 1.36 9.0 (10.3) 12/21E 249,440 79,259.9 43,819.0 33,506.3 4,919 0.0 5,328 40.0 11.1 2.6 3.5 1.25 11.8 (14.9) The price relative chart measures performance against the KOREA SE KOSPI IDX which closed at 2,201.19 on 17/07/20. On 17/07/20 the spot exchange rate was W1,203.44/US$1 Performance Absolute (%) Relative (%) 1M 4.2 1.4 3M 5.8 (9.1) 12M 18.0 11.5 142
143. 21 July 2020 Samsung Electronics Price (17 Jul 2020): W54,400 Income Statement (W bn) Sales revenue Cost of goods sold EBITDA EBIT Net interest expense/(inc.) Recurring PBT Profit after tax Reported net profit Net profit (Credit Suisse) Balance Sheet (W bn) Cash & cash equivalents Current receivables Inventories Other current assets Current assets Property, plant & equip. Investments Intangibles Other non-current assets Total assets Current liabilities Total liabilities Total debt Shareholders' equity Minority interests Total liabilities & equity Cash Flow (W bn) EBIT Net interest Tax paid Working capital Other cash & non-cash items Operating cash flow Capex Free cash flow to the firm Investing cash flow Equity raised Dividends paid Financing cash flow Total cash flow Adjustments Net change in cash Per share Shares (wtd avg.) (mn) EPS (Credit Suisse) (W) DPS (W) Operating CFPS (W) Earnings Growth (%) Sales revenue EBIT EPS Margins (%) EBITDA EBIT Valuation (x) P/E P/B Dividend yield (%) EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE ROIC Credit ratios Net debt/equity (%) Net debt/EBITDA (x) (005930.KS / 005930 KS) Target Price: W65,000 12/19A 230,399 147,226 61,921 27,773 (1,890) 30,433 21,744 21,744 21,744 12/19A 26,886 39,369 26,766 88,364 181,385 119,825 7,592 20,704 23,059 352,564 63,783 89,684 18,394 259,765 6,262 352,564 12/19A 27,773 0 0 (2,546) 20,156 45,383 (25,368) 20,015 (65,316) 0 (9,639) (9,485) (29,418) 0 (29,418) 12/19A 6,811 3,192 1,416 6,663 12/19A 12/20E 220,879 135,319 63,302 30,830 (1,410) 32,850 23,925 23,925 23,925 12/20E 43,044 35,060 26,533 88,364 193,001 115,905 7,592 23,121 19,248 358,867 58,796 82,539 14,584 273,212 6,262 358,867 12/20E 30,830 0 0 1,208 22,138 54,175 (24,297) 29,879 (27,539) 0 (10,478) (10,478) 16,158 0 16,158 12/20E 6,811 3,513 1,416 7,954 12/20E 12/21E 249,440 146,958 79,260 43,819 (1,680) 45,899 33,506 33,506 33,506 12/21E 59,258 39,594 28,815 88,364 216,030 114,982 7,592 25,539 19,248 383,391 60,291 84,034 14,584 296,241 6,262 383,391 12/21E 43,819 0 0 (5,320) 21,368 59,867 (29,933) 29,934 (33,175) 0 (10,478) (10,478) 16,214 0 16,214 12/21E 6,811 4,919 1,416 8,790 12/21E (5.5) (52.9) (51.0) (4.1) 11.0 10.0 12.9 42.1 40.0 26.9 12.1 12/19A 17.0 1.43 2.6 1.4 5.1 11.4 12/19A 8.6 8.2 12/19A (3.2) (0.14) 28.7 14.0 12/20E 15.5 1.36 2.6 1.3 4.7 9.6 12/20E 9.0 8.9 12/20E (10.3) (0.45) 31.8 17.6 12/21E 11.1 1.25 2.6 1.1 3.5 6.4 12/21E 11.8 12.7 12/21E (14.9) (0.56) Analyst: Keon Han Rating: Outperform Company Background Samsung Electronics manufactures and exports a wide range of consumer and industrial electronic equipment and products such as memory chips, TFT-LCD, personal computers, peripherals, monitors, televisions, and home appliances. Blue/Grey Sky Scenario Our Blue Sky Scenario (W) 79,000 Our blue sky scenario is based on:'>on: (1) better-than-expected smartphone shipments along with higher margin; (2) stronger OLED demand; and (3) more proactive shareholder return policy. Our blue sky scenario valuation (W79,000) is based on 1.8x P/B to FY21E EPS. Our Grey Sky Scenario (W) 43,800 Our grey sky scenario is based on:'>on: (1) weaker-than-expected smartphone demand; (2) worse-than-expected DRAM/NAND demand growth; and (3) any mis-execution on foldable smartphone launch. Our grey sky scenario valuation (W43,800) is based on 1.0x P/B to FY21E EPS. Share price performance The price relative chart measures performance against the KOREA SE KOSPI IDX which closed at 2,201.19 on 17-Jul-2020 On 17-Jul-2020 the spot exchange rate was W1,203.44/US$1 Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 143
144. 21 July 2020 600183.SS Shengyi Technology CCL leader riding on 5G/Datacom upcycle Target price (12M, Rmb) 48.10 Outperform[V] Electronic Components & Connectors Beneficiary of 5G upcycle. We estimate PCB (printed circuit board) content increases by almost 5x in 5G BTS vs 4G, plus an enlarged volume on higher coverage density. We anticipate the addressable market for PCB in 5G roll-out could reach Rmb84 bn/Rmb168 bn in China/worldwide and CCL demand in telecom about Rmb20 bn/Rmb40 bn in China/global, among which high-frequency CCL will reach Rmb6 bn/Rmb12 bn and highspeed CCL will reach Rmb10 bn/Rmb20 bn in China/global. Datacom and automotive next drivers. Apart from telecom infrastructure, we also anticipate boosting demand from datacom and automotive in 5G era: CCL demand in IDC could reach Rmb6.2/6.6/7.2 bn in 2020-22E while high-frequency CCL demand in mmWave radar could reach Rmb0.3/0.5/0.7 bn in 2020-22E. Domestic substitution of high-end CCL. Although China CCL companies have occupied large shares, they mainly concentrated on the low-end segment. Given the intense trade dispute and premium cost, we see an urgent need of domestic substitution in highfrequency and high-speed CCL. Shengyi is the leader among domestic CCL companies, and should become the key beneficiary and benefit from product mix improvement. We anticipate the high-frequency and high-speed CCL business to post revenue of Rmb3.5/6.7/9.9 bn in 2020-22E, implying a CAGR of 69%, with its contribution in total revenue reaching 22%/35%/43%. Price (20 Jul 20, Rmb) Upside/downside (%) Mkt cap (Rmb/US$ mn) Enterprise value (Rmb mn) Number of shares (mn) Free float (%) 52-wk price range (Rmb) ADTO-6M (US$ mn) 29.75 61.7 67,964 / 9,727 68,783 2,285 46.0 34.82-14.50 193.4 [V] = Stock Considered Volatile (see Disclosure Appendix) Research Analysts Kyna Wong 852 2101 6950 kyna.wong@credit-suisse.com Clive Cheung 852 2101 7069 clive.cheung@credit-suisse.com OUTPERFORM. Networking/server/automotive accounted for c.65% of Shengyi’s revenue. We believe 5G and data trends are two sustainable drivers. We model NI to grow by 33%/29%/23% in 2020-22E, supported by 20% CAGR of revenue and GM improvement. Our TP of Rmb48.1 is based on 2021 EPS and 44x P/E (+0.5SD of A-share CCL peers’ five-year historical average) and it is at a c.20% premium of the simple average of A-share peers with 28% NI CAGR and 20% ROE. Key risks include: trade tension, Huawei ban, pricing pressure, copper price fluctuation, 5G roll-out delays etc. Share price performance Financial and valuation metrics Year Revenue (Rmb mn) EBITDA (Rmb mn) EBIT (Rmb mn) Net profit (Rmb mn) EPS (CS adj.) (Rmb) Chg. from prev. EPS (%) Consensus EPS (Rmb) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 12/19A 13,241.1 2,353.3 1,943.9 1,438.7 0.66 n.a. n.a. 25.5 45.3 1.4 29.6 7.67 18.9 17.2 12/20E 15,865.5 3,161.5 2,634.6 1,928.7 0.85 0.0 0.84 29.2 35.1 1.8 21.6 5.62 18.5 1.4 12/21E 19,176.6 4,093.9 3,423.0 2,486.4 1.09 0.0 1.04 28.9 27.2 2.3 16.9 5.22 19.9 10.3 12/22E 23,132.7 4,862.7 4,168.8 3,062.4 1.35 0.0 1.24 23.2 22.1 2.8 14.1 4.8 22.6 4.1 The price relative chart measures performance against the Shanghai Shenzhen CSI300 index which closed at 4,680.30 on 20/07/20. On 20/07/20 the spot exchange rate was Rmb6.99/US$1 Performance Absolute (%) Relative (%) 1M 1.5 (12.7) 3M (4.3) (27.2) 12M 105.3 82.4 144
145. 21 July 2020 Shengyi Technology Price (20 Jul 2020): Rmb29.75 Income Statement (Rmb mn) Sales revenue Cost of goods sold EBITDA EBIT Net interest expense/(inc.) Recurring PBT Profit after tax Reported net profit Net profit (Credit Suisse) Balance Sheet (Rmb mn) Cash & cash equivalents Current receivables Inventories Other current assets Current assets Property, plant & equip. Investments Intangibles Other non-current assets Total assets Current liabilities Total liabilities Total debt Shareholders' equity Minority interests Total liabilities & equity Cash Flow (Rmb mn) EBIT Net interest Tax paid Working capital Other cash & non-cash items Operating cash flow Capex Free cash flow to the firm Investing cash flow Equity raised Dividends paid Financing cash flow Total cash flow Adjustments Net change in cash Per share Shares (wtd avg.) (mn) EPS (Credit Suisse) (Rmb) DPS (Rmb) Operating CFPS (Rmb) Earnings Growth (%) Sales revenue EBIT EPS Margins (%) EBITDA EBIT Valuation (x) P/E P/B Dividend yield (%) EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE ROIC Credit ratios Net debt/equity (%) Net debt/EBITDA (x) (600183.SS / 600183 CH) Target Price: Rmb48.10 12/19A 13,241 9,713 2,353 1,944 42 1,795 1,553 1,439 1,439 12/19A 1,062 4,602 2,100 947 8,712 5,984 383 380 76 15,535 5,257 6,181 2,673 8,834 520 15,535 12/19A 1,944 0 (242) 428 (438) 1,692 (1,580) 112 (1,566) 35 (742) (173) (47) (3) (50) 12/19A 2,193 0.66 0.42 0.77 12/19A 12/20E 15,866 11,336 3,161 2,635 99 2,399 2,057 1,929 1,929 12/20E 2,797 5,282 2,091 947 11,116 7,444 408 364 83 19,416 5,832 6,756 2,973 12,051 609 19,416 12/20E 2,635 0 (343) (696) 261 1,857 (1,973) (116) (1,973) 2,500 (910) 1,851 1,735 0 1,735 12/20E 2,276 0.85 0.53 0.82 12/20E 12/21E 19,177 13,483 4,094 3,423 99 3,190 2,735 2,486 2,486 12/21E 1,860 6,121 2,302 947 11,230 9,555 436 348 92 21,661 6,980 7,905 3,273 12,974 782 21,661 12/21E 3,423 0 (455) (553) 404 2,819 (2,768) 51 (2,768) 0 (1,212) (987) (937) 0 (937) 12/21E 2,276 1.09 0.69 1.24 12/21E 12/22E 23,133 16,254 4,863 4,169 99 3,935 3,374 3,062 3,062 12/22E 2,953 7,067 2,552 947 13,520 9,899 468 333 101 24,321 8,285 9,209 3,573 14,112 999 24,321 12/22E 4,169 0 (561) (553) 422 3,476 (1,026) 2,450 (1,026) 0 (1,563) (1,357) 1,093 0 1,093 12/22E 2,276 1.35 0.85 1.53 12/22E 10.5 41.5 25.5 19.8 35.5 29.2 20.9 29.9 28.9 20.6 21.8 23.2 17.8 14.7 12/19A 45.3 7.67 1.4 5.3 29.6 35.8 12/19A 18.9 16.7 12/19A 17.2 0.68 19.9 16.6 12/20E 35.1 5.62 1.8 4.3 21.6 25.9 12/20E 18.5 19.0 12/20E 1.4 0.06 21.3 17.9 12/21E 27.2 5.22 2.3 3.6 16.9 20.3 12/21E 19.9 21.0 12/21E 10.3 0.34 21.0 18.0 12/22E 22.1 4.80 2.8 3.0 14.1 16.5 12/22E 22.6 23.1 12/22E 4.1 0.13 Analyst: Kyna Wong Rating: Outperform [V] Company Background Shengyi is a principally engaged in the manufacture and distribution of copper clad laminates (CCLs), bonding sheets and PCBs. Its products are mainly used for making single, double-sided and multi-layer circuit boards, used in electronics. Blue/Grey Sky Scenario Our Blue Sky Scenario (Rmb) 66.90 Our blue sky scenario value of Rmb66.9 assumes higher sales, gross margin and lower opex-to-sales ratio with a 5x more multiple from the base case. Our Grey Sky Scenario (Rmb) 32.40 Our grey sky scenario value of Rmb32.4 assumes lower sales, gross margin and higher opex-to-sales ratio with a 5x less multiple from the base case. Share price performance The price relative chart measures performance against the Shanghai Shenzhen CSI300 index which closed at 4,680.30 on 20-Jul-2020 On 20-Jul-2020 the spot exchange rate was Rmb6.99/US$1 Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 145
146. 21 July 2020 SK Hynix Inc. 000660.KS Datacentre DRAM demand benefits Hynix’s core competencies Target price (12M, W) 118,000 Outperform Semiconductor Devices With 37% of the global Server DRAM market share, SK Hynix has been a consistently reliable DRAM producer throughout its history. Hynix retains high customer satisfaction for quality and high performance Server DRAM products. Its Wuxi, China DRAM fab base, keeps manufacturing and distribution closest to its largest customer base in China. Hynix’s NAND programme is still of a bit of work-in-progress, being late to 3D NAND transition and recent over-investment in 36L/72L NAND capacity. However, the severe losses are beginning to get mitigated as more 92L production expands. NAND sales to enterprise SSDs have started to drive mix improvement. Hynix is a pure memory company with 75% of revenue generated from more profitable DRAM products. Hynix's 2Q20 DRAM/NAND bit growth is tracking at flat/~8% QoQ guidance. Our 2Q20 OP estimate remains at W1.7 tn on richer Server DRAM mix and rapidly rising NAND productivity. DRAM ASP should surprise on the upside. Revenue mix of Server DRAM should approach 50% of DRAM sales and ASP increase should exceed 20%, given continual price hikes seen in 2Q20. Despite the Mobile DRAM channel inventory being filled, ASP is not falling as wafer conversion continues from mobile to servers. NAND losses are improving. OPM recovered from -70% in 2Q19 to -21% in 1Q20. SSD portion improved to 52% by 1Q20 vs 2019 average of 43%, and enterprise SSD sales are growing, driving up bit volume and ASP increase that is absorbing the rise in fixed costs. DRAM demand visibility is now extending to 3Q20. Changes at the margin include more of 3Q20 DRAM production being matched with customer backlog and confidence building that ASP will not fall sharply in 3Q20 either. Early producers' indication suggests blended ASP could remain flat to down low-single digits QoQ. NAND losses are moderating. Getting the NAND business right will be the critical factor given the W3.0/W1.0 tn loss in 2019/2020. Hynix plans to further cut capex in 2020 by 25% to 30% on a YoY basis to ensure inventory correction and ASP remains firm in 2021. Price (17 Jul 20, W) Upside/downside (%) Mkt cap (W/US$ bn) Enterprise value (W bn) Number of shares (mn) Free float (%) 52-wk price range (W) ADTO-6M (US$ mn) 82,900 42.3 60,351 / 50.15 67,856 728.00 72.6 105,000-69,000 307.0 Research Analysts Keon Han 82 2 3707 3740 keon.han@credit-suisse.com Sang Uk Kim 82 2 3707 3795 sang.kim@credit-suisse.com James Oh 82 2 3707 3764 james.oh@credit-suisse.com We maintain our TP of W118k on mid-cycle 2021E P/B of 1.4x. Despite the uncertainty around COVID-19, we still see core OP growing over 100% YoY on memory cycle recovery. Share price performance Financial and valuation metrics Year Revenue (W bn) EBITDA (W bn) EBIT (W bn) Net profit (W bn) EPS (CS adj.) (W) Chg. from prev. EPS (%) Consensus EPS (W) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 12/19A 26,991.0 11,266.9 2,712.2 2,016.2 2,948 n.a. n.a. (87.0) 28.1 0.0 6.1 1.14 4.0 18.6 12/20E 31,615.7 15,791.2 5,980.0 4,322.9 6,320 0.0 6,304 114.4 13.1 0.0 4.2 1.06 8.4 12.7 12/21E 38,364.6 21,462.2 11,046.1 8,112.0 11,860 0.0 11,588 87.7 7.0 0.0 2.9 0.93 14.2 3.9 The price relative chart measures performance against the KOREA SE KOSPI IDX which closed at 2,201.19 on 17/07/20. On 17/07/20 the spot exchange rate was W1,203.44/US$1 Performance Absolute (%) Relative (%) 1M (4.5) (7.3) 3M (1.4) (16.4) 12M 11.0 4.5 146
147. 21 July 2020 SK Hynix Inc. (000660.KS / 000660 KS) Price (17 Jul 2020): W82,900 Target Price: W118,000 Income Statement (W bn) Sales revenue Cost of goods sold EBITDA EBIT Net interest expense/(inc.) Recurring PBT Profit after tax Reported net profit Net profit (Credit Suisse) Balance Sheet (W bn) Cash & cash equivalents Current receivables Inventories Other current assets Current assets Property, plant & equip. Investments Intangibles Other non-current assets Total assets Current liabilities Total liabilities Total debt Shareholders' equity Minority interests Total liabilities & equity Cash Flow (W bn) EBIT Net interest Tax paid Working capital Other cash & non-cash items Operating cash flow Capex Free cash flow to the firm Investing cash flow Equity raised Dividends paid Financing cash flow Total cash flow Adjustments Net change in cash Per share Shares (wtd avg.) (mn) EPS (Credit Suisse) (W) DPS (W) Operating CFPS (W) Earnings Growth (%) Sales revenue EBIT EPS Margins (%) EBITDA EBIT Valuation (x) P/E P/B Dividend yield (%) EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE ROIC Credit ratios Net debt/equity (%) Net debt/EBITDA (x) 12/19A 26,991 18,825 11,267 2,712 208 2,443 2,016 2,016 2,016 12/19A 1,310 4,251 5,229 2,826 13,616 39,941 806 2,556 6,844 63,763 8,063 16,596 10,522 49,825 (0) 63,763 12/19A 2,712 0 0 (377) 8,336 10,671 (13,496) (2,825) (13,896) 0 (1,027) 2,186 (1,039) 0 (1,039) 12/19A 684 2,948 0 15,600 12/19A 12/20E 31,616 19,687 15,791 5,980 238 5,697 4,323 4,323 4,323 12/20E 3,551 5,269 5,469 2,826 17,116 40,250 806 2,432 6,844 67,447 6,638 16,641 10,424 53,464 (0) 67,447 12/20E 5,980 0 0 (1,115) 8,675 13,541 (10,117) 3,424 (10,518) 0 (684) (782) 2,241 0 2,241 12/20E 684 6,320 0 19,796 12/20E 12/21E 38,365 20,029 21,462 11,046 211 10,535 8,112 8,112 8,112 12/21E 6,722 6,394 5,564 2,826 21,507 42,296 806 2,309 6,844 73,761 6,695 15,698 9,424 60,721 (0) 73,761 12/21E 11,046 0 0 (1,163) 8,204 18,087 (12,660) 5,427 (13,061) 0 (855) (1,855) 3,171 0 3,171 12/21E 684 11,860 0 26,443 12/21E (33.3) (87.0) (87.0) 17.1 120.5 114.4 21.3 84.7 87.7 41.7 10.0 12/19A 28.1 1.14 0.0 2.6 6.1 25.5 12/19A 4.0 4.5 12/19A 18.6 0.78 49.9 18.9 12/20E 13.1 1.06 0.0 2.1 4.2 11.2 12/20E 8.4 8.0 12/20E 12.7 0.41 55.9 28.8 12/21E 7.0 0.93 0.0 1.6 2.9 5.7 12/21E 14.2 14.5 12/21E 3.9 0.11 Analyst: Keon Han Rating: Outperform Company Background SK Hynix Inc. manufactures semiconductors, such as dynamic random access memory (DRAM) low-power mobile DRAMs, NAND flash memory for smartphones, tablet PCs and solid state drives (SSD), and static random access memory (SRAM chips). Blue/Grey Sky Scenario Our Blue Sky Scenario (W) 135,000 Our blue sky scenario is based on (1) better-than-expected DRAM pricing into FY19; (2) faster-than-expected 72L 3D NAND qualification from enterprise SSDs client; (3) better-than-expected margin at NAND business and (4) better yield rates on 1x nm DRAM migration. Our Grey Sky Scenario (W) 74,000 Our blue sky scenario is based on (1) worse-than-expected DRAM pricing into FY19; (2) delay of 72L 3D NAND qualification from enterprise SSDs client; (3) yield rates penalties on 72L 3D NAND mass production (4) low productivity on 1x nm DRAM migration. Share price performance The price relative chart measures performance against the KOREA SE KOSPI IDX which closed at 2,201.19 on 17-Jul-2020 On 17-Jul-2020 the spot exchange rate was W1,203.44/US$1 Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 147
148. 21 July 2020 Switch, Inc. SWCH High performance compute to drive a long tail of demand for SWCH facilities Target price (12M, US$) 23.00 Outperform[V] Wireline Beneficiary of high performance compute demand. SWCH delivers immense power distributions to colocation customers above both global and North American average power capacities. It is capable of delivering power distribution of 55KW+ per cabinet to tenants due to its new and novel vintage builds, a figure higher than cloud data centres (on average), which are estimated to deliver ~40KW. We view that high power distribution will be in demand in the long-term as artificial intelligence, machine learning, and internet of things continue to necessitate computationally intensive tasks. Price (17 Jul 20, US$) 52-week price range Market cap (US$ m) Enterprise value (US$ m) Robust campus and growing edge proposition. One advantage unique to SWCH is its connectivity segment (20% of total revenues), in which the company created an ecosystem that allows its customers to buy telecom services as a cooperative. By bundling its customers together SWCH has reduced the overall cost for the services and passes those savings onto its customers. The company even guarantees 30% savings to its customers that participate in CORE Cooperative, SWCH’s telecom community combined offering. Moreover, SWCH generally saves any given customer between 30% and 50% on their telecom expense, which is clearly a meaningful factor when enterprises are deciding between multiple data centre operators. SWCH is looking to become a leader in Class 4 edge computing, but physical security at edge facilities remains a key concern. Recently, SWCH has developed Switch Sentry to address the issue. Switch Sentry is a fully autonomous security robot backed with the reliability of 24/7 human in the loop monitoring, and as-needed piloting, built to enhance enterprise security systems. Sami Badri 212 538 1727 ahmedsami.badri@credit-suisse.com 17.95 19.11 - 11.22 4,337.01 5,110 [V] = Stock Considered Volatile (see Disclosure Appendix) Research Analysts George Engroff 212 325 2289 george.engroff@credit-suisse.com Lauren Lucas 212 325 4310 lauren.lucas@credit-suisse.com Thesis. We reiterate our OUTPERFORM rating on SWCH for the following reasons: It has shown strong signings recently, with over US$10mn of incremental annualised recurring revenue in 1Q20; its connectivity bundling can be a meaningful driver in winning business; and SWCH’s new national sales team, an experienced group of industry experts, should help drive top-line growth outside of its Las Vegas campus. Valuation: OUTPERFORM; target price of US$23. Based on our SWCH DCF model, with a WACC of 6.4% (reflecting a 25% debt-to-capital ratio) and terminal growth of 2.0%, we arrive at a US$23 target price. Key risks include rev. concentration, share ownership control, dependency on future plans, and intellectual property protection ability. Share price performance Financial and valuation metrics Year EPS (Excl. ESO) (US$) EPS (CS adj., ) Prev. EPS (CS adj., US$) P/E (CS adj.) (x) P/E rel. (CS adj., %) Revenue (US$ m) Net Debt (US$ m) OCFPS (US$) P/OCF (x) Number of shares (m) BV/share (Next Qtr., US$) Net debt (Next Qtr., US$ m) Dividend yield (%) 241.62 2.6 769.4 - Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 12/19A 12/20E 0.13 0.15 0.13 0.15 139.3 121.0 714.5 478.8 462.3 519.5 727 763 0.86 1.11 21.0 16.1 Price/Sales (x) P/BVPS (x) Dividend (current, US$) 12/21E 0.28 0.28 64.1 329.1 583.4 820 1.06 17.0 8.84 6.5 - On 17-Jul-2020 the S&P 500 INDEX closed at 3224.73Daily Jul19, 2019 - Jul17, 2020, 07/19/19 = US$13.2 Quarterly EPS 2019A 2020E 2021E Q1 0.01 -0.01 0.06 Q2 0.02 0.04 0.08 Q3 0.03 0.05 0.07 Q4 0.05 0.07 0.07 148
149. 21 July 2020 Switch, Inc. (SWCH) Price (17 Jul 2020): US$17.95 Income Statement Revenue (US$ m) EBITDA Operating profit Recurring profit Cash Flow Cash flow from operations CAPEX Free cash flow to the firm Cash flow from investments Net share issue(/repurchase) Dividends paid Issuance (retirement) of debt Other Cash flow from financing activities Effect of exchange rates Changes in Net Cash/Debt Net debt at end Balance Sheet ($US) Assets Other current assets Total current assets Total assets Liabilities Short-term debt Total current liabilities Long-term debt Total liabilities Shareholder equity Total liabilities and equity Net debt Per share No. of shares (wtd avg) CS adj. EPS Prev. EPS (US$) Dividend (US$) Free cash flow per share Earnings Sales growth (%) Net profit growth (%) EPS growth (%) EBIT margin (%) Valuation EV/Sales (x) EV/EBIT (x) P/E (x) Quarterly EPS 2019A 2020E 2021E Analyst: Sami Badri Rating: Outperform [V] Target Price: 23.00 12/19A 462.3 231.1 76.9 34.3 12/19A 209 (308) (98) (309) 163 0 (120) 43 (222) 727 12/19A 12/20E 519.5 258.2 201.8 38.7 12/20E 269 (328) (58) (328) 109 0 (15) 94 (37) 763 12/20E 12/21E 583.4 292.1 243.7 71.9 12/21E 258 (312) (53) (312) 60 0 (15) 45 (57) 820 12/21E 11 59 1,774 13 86 1,995 14 34 2,113 0 140 745 1,146 628 1,774 727 12/19A 245 0.13 0.00 (0.40) 12/19A 13.9 7.6 11.0 16.6 12/19A 10.95 65.8 139.3 Q1 0.01 -0.01 0.06 Q2 0.02 0.04 0.08 0 169 814 1,279 716 1,995 763 12/20E 242 0.15 0.00 (0.24) 12/20E 12.4 13.9 15.1 38.8 12/20E 9.82 25.3 121.0 Q3 0.03 0.05 0.07 0 135 814 1,251 862 2,113 820 12/21E 244 0.28 0.00 (0.22) 12/21E 12.3 90.2 88.7 41.8 12/21E 8.84 21.2 64.1 Q4 0.05 0.07 0.07 Company Background Switch, Inc., based in Las Vegas, Nevada, is a technology communications infrastructure company offering colocation and connectivity services to globally interconnected entities that support the most innovative technology ecosystems. Blue/Grey Sky Scenario Our Blue Sky Scenario (US$) 35.00 Our blue sky scenario of US$35 is computed from our discounted cash flow model with a WACC of 6.4% and a terminal growth rate of 4.15%. Our Grey Sky Scenario (US$) 12.00 Our grey sky scenario of US$12 is computed from our discounted cash flow model with a WACC of 6.4% and a terminal growth rate of 0.4%. Share price performance On 17-Jul-2020 the S&P 500 INDEX closed at 3224.73 Daily Jul19, 2019 - Jul17, 2020, 07/19/19 = US$13.2 Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 149
150. 21 July 2020 2330.TW Taiwan Semiconductor Manufacturing Data centre diversifies its exposure beyond smartphones Semiconductor Devices High performance computing growing its importance. TSMC's high performance computing business has more than doubled from US$6.1 bn in 2016 to US$12.6 bn in 2020E, growing at a 20% CAGR and is now the second-largest revenue driver at 30% of sales vs. 40-45% for smartphones. The company has a TAM expansion adding server chipsets adding AMD from GlobalFoundries and emerging China CPU makers, AI accelerators in FPGA, ASIC and GPU form, and 5G network processors and merchant data chipsets. The company benefitted from the surge in cryptocurrency demand in 2017-18 but the business has wound down since 2H18 when the Bitcoin pricing dropped. Data centre/AI investment and China localisation support business acceleration. TSMC should be the key beneficiary for the growing graphic and FPGA demand in data centre and AI computing with its technology leadership and capacity support. The growing requirement for AI training and inference should also support ASIC demand, with most of the semiconductor start-up developing AI chipsets working with TSMC on 16/12nm and 7nm for the company's front-end manufacturing and back-end packaging solutions. Growth high in 2020E, but still expected to moderate in 2021. We expect TSMC to still grow mid-teens YoY in 2020 supported by AMD ramps of server, PC and game console, Apple’s build-up in 2H20, 5G from Mediatek and Qualcomm (still at TSMC in 2H for highend and modem) and Huawei shipping through 3Q20. 2021 growth nets out to +6% YoY, factoring in early 2021 potential inventory adjustments along with the NVIDIA/Qualcomm shifts and Huawei impact offsetting continued drivers from other lead customers including HPC/AMD, Mediatek, Broadcom and Apple. Target price (12M, NT$) 365.00 Neutral Price (17 Jul 20, NT$) 367.00 Upside/downside (%) -0.5 Mkt cap (NT$/US$ mn) 9,516,450 / 323,106 Enterprise value (NT$ mn) 9,041,315 Number of shares (mn) 25,930 Free float (%) 87.3 52-wk price range (NT$) 367-246 ADTO-6M (US$ mn) 555.1 Research Analysts Randy Abrams, CFA 886 2 2715 6366 randy.abrams@credit-suisse.com Haas Liu 886 2 2715 6365 haas.liu@credit-suisse.com Maintain NEUTRAL with some offsetting headwinds in 2021. We keep our 2020/21 EPS at NT$18.00/NT$18.15 and stay NEUTRAL with TP at NT$365 with milder growth, with offsets from Huawei, Qualcomm, NVIDIA and high semiconductor inventory. TSMC's longer-term industry position stays solid due to wide distance for its ecosystem and technology and drivers from 5G, high performance computing through AMD, AI accelerator, game console and Mac ramps, and from a low base in advanced auto and IoT. Share price performance Financial and valuation metrics Year Revenue (NT$ mn) EBITDA (NT$ mn) EBIT (NT$ mn) Net profit (NT$ mn) EPS (CS adj.) (NT$) Chg. from prev. EPS (%) Consensus EPS (NT$) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) 12/18A 1,031,474 676,170 383,624 351,187 13.54 n.a. n.a. 2.3 27.1 2.2 13.3 5.68 22.0 (30.7) Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 12/19E 1,069,985 659,543 372,701 345,317 13.32 0.0 13.32 (1.7) 27.6 2.7 13.8 5.87 20.9 (25.2) 12/20E 1,262,856 835,353 510,569 466,741 18.0 0.0 17.56 35.2 20.4 2.7 10.8 5.23 27.1 (29.1) 12/21E 1,304,942 899,449 516,377 471,840 18.2 0.0 18.79 1.1 20.2 3.0 9.8 4.74 24.7 (36.3) The price relative chart measures performance against the TAIWAN SE WEIGHTED INDEX which closed at 12,181.56 on 17/07/20. On 17/07/20 the spot exchange rate was NT$29.45/US$1 Performance Absolute (%) Relative (%) 1M 16.5 10.9 3M 19.7 4.8 12M 44.5 31.7 150
151. 21 July 2020 Taiwan Semiconductor Manufacturing Price (17 Jul 2020): NT$367.00 Income Statement (NT$ mn) Sales revenue Cost of goods sold EBITDA EBIT Net interest expense/(inc.) Recurring PBT Profit after tax Reported net profit Net profit (Credit Suisse) Balance Sheet (NT$ mn) Cash & cash equivalents Current receivables Inventories Other current assets Current assets Property, plant & equip. Investments Intangibles Other non-current assets Total assets Current liabilities Total liabilities Total debt Shareholders' equity Minority interests Total liabilities & equity Cash Flow (NT$ mn) EBIT Net interest Tax paid Working capital Other cash & non-cash items Operating cash flow Capex Free cash flow to the firm Investing cash flow Equity raised Dividends paid Financing cash flow Total cash flow Adjustments Net change in cash Per share Shares (wtd avg.) (mn) EPS (Credit Suisse) (NT$) DPS (NT$) Operating CFPS (NT$) Earnings Growth (%) Sales revenue EBIT EPS Margins (%) EBITDA EBIT Valuation (x) P/E P/B Dividend yield (%) EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE ROIC Credit ratios Net debt/equity (%) Net debt/EBITDA (x) (2330.TW / 2330 TT) Target Price: NT$365.00 12/18A 1,031,474 533,488 676,170 383,624 (11,643) 397,510 351,184 351,187 351,187 12/18A 695,182 129,198 103,231 24,069 951,680 1,072,050 29,305 17,002 20,091 2,090,128 340,543 412,632 180,555 1,676,818 679 2,090,128 12/18A 383,624 11,643 (46,326) (31,942) 257,444 574,443 (315,582) 258,861 (314,269) 0 (207,443) (245,125) 15,049 9,862 24,911 12/18A 25,930 13.54 8.00 22.15 12/18A 12/19E 1,069,985 577,326 659,543 372,701 (12,940) 389,803 345,301 345,317 345,317 12/19E 583,448 139,771 82,981 16,414 822,614 1,352,377 30,172 18,094 41,548 2,264,805 590,736 642,710 175,422 1,621,410 685 2,264,805 12/19E 372,659 12,940 (44,502) 15,525 258,475 615,097 (458,802) 156,295 (457,181) 0 (259,304) (269,639) (111,724) (9,114) (120,838) 12/19E 25,930 13.32 10.00 23.72 12/19E 12/20E 1,262,856 617,148 835,353 510,569 (11,504) 528,364 466,595 466,741 466,741 12/20E 705,040 134,314 97,600 16,342 953,296 1,352,377 22,917 18,094 41,548 2,388,232 524,457 567,884 175,422 1,819,512 836 2,388,232 12/20E 510,569 11,504 (61,769) (12,868) 287,068 734,504 (492,588) 241,916 (483,618) 0 (259,304) (233,579) 17,307 (7,561) 9,746 12/20E 25,930 18.00 10.00 28.33 12/20E 12/21E 1,304,942 644,256 899,449 516,377 (14,205) 536,182 471,840 471,840 471,840 12/21E 903,921 160,836 107,800 19,568 1,192,126 1,352,377 22,917 18,094 41,548 2,627,062 576,855 620,108 175,422 2,006,118 836 2,627,062 12/21E 516,377 14,205 (64,342) (32,908) 431,429 864,761 (410,415) 454,346 (418,531) 0 (285,234) (285,409) 160,822 0 160,822 12/21E 25,930 18.20 11.00 33.35 12/21E 5.5 (0.5) 2.3 3.7 (2.8) (1.7) 18.0 37.0 35.2 3.3 1.1 1.1 65.6 37.2 12/18A 27.1 5.68 2.2 8.7 13.3 23.5 12/18A 22.0 30.1 12/18A (30.7) (0.76) 61.6 34.8 12/19E 27.6 5.87 2.7 8.5 13.8 24.4 12/19E 20.9 27.8 12/19E (25.2) (0.62) 66.1 40.4 12/20E 20.4 5.23 2.7 7.1 10.8 17.6 12/20E 27.1 36.0 12/20E (29.1) (0.63) 68.9 39.6 12/21E 20.2 4.74 3.0 6.7 9.8 17.0 12/21E 24.7 35.4 12/21E (36.3) (0.81) Analyst: Randy Abrams Rating: Neutral Company Background Taiwan Semiconductor Manufacturing Co., Ltd. is principally engaged in the research, development, manufacture and distribution of integrated circuit (IC) related products. The company operates its businesses through wafer manufacture, mask production. Blue/Grey Sky Scenario Our Blue Sky Scenario (NT$) 382.13 Our blue sky scenario valuation of NT$382 for TSMC is based on its continued leading position in advanced nodes and specialty technology. TSMC could thus maintain high market share and structural profitability. Our Grey Sky Scenario (NT$) 272.95 Our grey sky valuation scenario of NT$273 for TSMC assumes the company is facing more competition in advanced nodes from Samsung and Intel internal and thus cannot maintain its pricing power and profitability. Share price performance The price relative chart measures performance against the TAIWAN SE WEIGHTED INDEX which closed at 12,181.56 on 17-Jul-2020 On 17-Jul-2020 the spot exchange rate was NT$29.45/US$1 Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 151
152. 21 July 2020 TongFu 002156.SZ Growing with AMD’s share gains and China CPU emergence, but fair valuation Target price (12M, Rmb) 30.10 Neutral[V] Semiconductor Devices Beneficiary of AMD’s share gain. Tongfu has ~50% revenue from Tongfu-AMD JV factories which have over 95% revenue from AMD’s CPU and GPU. Although Tongfu’s share allocation within AMD has fallen over the past year with AMD migration from 14nm to 7nm, Tongfu still has nearly half allocation for AMD’s 7nm processors. Besides AMD, Tongfu is also working with China CPU developers for OSAT for China CPU as it has better CPU/GPU OSAT experience than other China peers. So emerging China CPU demand will fuel the Tongfu-AMD JV growth on top of solid demand from AMD. We expect the Tongfu-AMD JV to grow revenue at 21% CAGR in 2020-22. Growing China fabless besides MediaTek’s share gain. The other half of the business is benefitting from fast-growth China fabless customers and, more recently, MediaTek’s smartphone processor share gain within Huawei. MediaTek contributes about 10-20% revenue for original Tongfu. Further, Tongfu continues to grow revenues with China fabless customers in the areas of RF, power, mobile, automotive industrial and base station. The next meaningful driver is China’s DRAM and Tongfu is one of the major OSAT partners for China’s DRAM company. We expect the original Tongfu to grow revenue at 18% CAGR in 2020-22. Margin expansion driven by revenue growth and opex control. We expect Tongfu’s operating margin to expand from 0.4% in 2019 to 6.7% in 2022, as a result of improving GM as well as disciplined opex. The GM expansion comes from continued high utilisation, better production efficiency as well as better customer pricing. Price (20 Jul 20, Rmb) Upside/downside (%) Mkt cap (Rmb/US$ mn) Enterprise value (Rmb mn) Number of shares (mn) Free float (%) 52-wk price range (Rmb) ADTO-6M (US$ mn) 26.19 14.9 30,216 / 4,324 32,252 1,154 68.2 33.30-8.05 242.4 [V] = Stock Considered Volatile (see Disclosure Appendix) Research Analysts Chaolien Tseng 852 2101 6795 chaolien.tseng@credit-suisse.com Kyna Wong 852 2101 6950 kyna.wong@credit-suisse.com NEUTRAL due to fair valuation. While we like Tongfu for its multiple growth drivers across server, mobile and China, the valuation doesnot look attractive when comparing with global OSAT peers with Tongfu’s share trading at 4.9x on consensus 2021 BPS with 9% ROE. Our TP of Rmb30.1 is based on 3.6x 2021 BPS. The 3.6x multiple is at its +1.0 STDEV of historical P/B on consensus forward 12M BPS. Rated Neutral. Upside risks:'>risks: A-share semi/tech rally, even better AMD/MediaTek share gain in server/smartphone, faster China CPU/DRAM development and better GM expansion. Downside risks:'>risks: Weaker server demand, weaker AMD/MediaTek demand on an even longer pandemic, slower-than-expected China CPU/DRAM development and slower GM expansion on steeper capacity build. Share price performance Financial and valuation metrics Year Revenue (Rmb mn) EBITDA (Rmb mn) EBIT (Rmb mn) Net profit (Rmb mn) EPS (CS adj.) (Rmb) Chg. from prev. EPS (%) Consensus EPS (Rmb) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 12/19A 8,266.6 1,256.7 33.7 19.1 0.02 n.a. n.a. (84.9) 1,578.5 0.0 26.9 5.05 0.3 55.0 12/20E 10,297.3 1,841.4 487.2 347.7 0.29 0.0 0.27 1,659.2 89.7 0.4 16.8 3.36 4.2 7.2 12/21E 12,109.8 2,258.8 721.5 546.0 0.41 0.0 0.45 39.5 64.3 0.6 14.1 3.17 5.1 14.2 12/22E 14,134.7 2,678.2 949.2 762.0 0.57 0.0 0.67 39.6 46.1 0.8 12.1 2.95 6.6 16.7 The price relative chart measures performance against the Shanghai Shenzhen CSI300 index which closed at 4,680.30 on 20/07/20. On 20/07/20 the spot exchange rate was Rmb6.99/US$1 Performance Absolute (%) Relative (%) 1M 11.3 (2.9) 3M 9.8 (13.1) 12M 217.8 194.9 152
153. 21 July 2020 TongFu (002156.SZ / 002156 CH) Price (20 Jul 2020): Rmb26.19 Income Statement (Rmb mn) Sales revenue Cost of goods sold EBITDA EBIT Net interest expense/(inc.) Recurring PBT Profit after tax Reported net profit Net profit (Credit Suisse) Balance Sheet (Rmb mn) Cash & cash equivalents Current receivables Inventories Other current assets Current assets Property, plant & equip. Investments Intangibles Other non-current assets Total assets Current liabilities Total liabilities Total debt Shareholders' equity Minority interests Total liabilities & equity Cash Flow (Rmb mn) EBIT Net interest Tax paid Working capital Other cash & non-cash items Operating cash flow Capex Free cash flow to the firm Investing cash flow Equity raised Dividends paid Financing cash flow Total cash flow Adjustments Net change in cash Per share Shares (wtd avg.) (mn) EPS (Credit Suisse) (Rmb) DPS (Rmb) Operating CFPS (Rmb) Earnings Growth (%) Sales revenue EBIT EPS Margins (%) EBITDA EBIT Valuation (x) P/E P/B Dividend yield (%) EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE ROIC Credit ratios Net debt/equity (%) Net debt/EBITDA (x) Analyst: Chaolien Tseng Rating: Neutral [V] Target Price: Rmb30.10 12/19A 8,267 7,136 1,257 34 198 (14) 37 19 19 12/19A 2,225 1,697 1,894 245 6,061 7,439 161 272 2,225 16,157 7,253 9,655 5,799 5,977 391 16,157 12/19A 34 0 0 (298) 1,680 1,415 (2,109) (694) (2,180) 0 (224) 1,608 843 9 852 12/19A 1,154 0.02 0.00 1.23 12/19A 12/20E 10,297 8,638 1,841 487 278 364 372 348 348 12/20E 5,790 2,655 2,087 277 10,809 8,203 161 268 2,747 22,188 8,036 11,172 6,578 10,454 429 22,188 12/20E 487 0 0 (421) 1,683 1,750 (2,843) (1,093) (2,874) 4,000 (87) 4,662 3,539 26 3,565 12/20E 1,191 0.29 0.10 1.47 12/20E 12/21E 12,110 10,029 2,259 722 215 660 620 546 546 12/21E 2,913 3,004 2,556 279 8,752 9,356 161 268 2,755 21,293 6,433 9,569 4,578 11,087 503 21,293 12/21E 722 0 0 (423) 1,626 1,924 (2,665) (742) (2,665) 0 (135) (2,135) (2,877) 0 (2,877) 12/21E 1,341 0.41 0.16 1.43 12/21E 12/22E 14,135 11,565 2,678 949 182 921 866 762 762 12/22E 2,471 3,395 2,992 279 9,138 10,323 161 268 2,755 22,645 6,871 10,007 4,578 11,898 607 22,645 12/22E 949 0 0 (390) 1,804 2,363 (2,670) (307) (2,670) 0 (135) (135) (442) 0 (442) 12/22E 1,341 0.57 0.22 1.76 12/22E 14.5 (82.9) (84.9) 24.6 1346.3 1659.2 17.6 48.1 39.5 16.7 31.5 39.6 15.2 0.4 12/19A 1578.5 5.05 0.0 4.1 26.9 1003.2 12/19A 0.3 (1.0) 12/19A 55.0 2.84 17.9 4.7 12/20E 89.7 3.36 0.4 3.0 16.8 63.6 12/20E 4.2 4.6 12/20E 7.2 0.43 18.7 6.0 12/21E 64.3 3.17 0.6 2.6 14.1 44.2 12/21E 5.1 5.4 12/21E 14.2 0.74 18.9 6.7 12/22E 46.1 2.95 0.8 2.3 12.1 34.1 12/22E 6.6 6.3 12/22E 16.7 0.79 Company Background Headquartered in Nantong, Jiangsu Province, TFME is a leading OSAT company in China. Established in 1997 and listed in 2007, it offers various products including WLCSP,BGA and Bumping, etc, 70% of which are overseas sales. Blue/Grey Sky Scenario Our Blue Sky Scenario (Rmb) 39.20 Our blue sky scenario of Rmb39.2 assumes that the company enjoys better-than-expected revenue/margin growth from AMD’s substantial share gains in CPU/GPU as well as providing more advanced packaging/testing services at high yields to AMD’s advanced processors. Our Grey Sky Scenario (Rmb) 21.10 Our grey sky scenario of Rmb21.1 assumes that the company suffers even lower utilization for both AMD and non-AMD businesses due to worsening global economy and intensified pricing competition with Chinese and worldwide peers during the downturn. Further, its advanced technologies to AMD may experience lower-than-expected yields. Share price performance The price relative chart measures performance against the Shanghai Shenzhen CSI300 index which closed at 4,680.30 on 20-Jul-2020 On 20-Jul-2020 the spot exchange rate was Rmb6.99/US$1 Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 153
154. 21 July 2020 6669.TW Wiwynn Corporation A unique jewel in the crown Target price (12M, NT$) 960.00 Outperform[V] IT Hardware Initiate coverage with OUTPERFORM and TP of NT$960. Wiwynn is a leading opensourced cloud IT infrastructure ODM, having unique positioning with the two major global hyperscalers (Facebook/Microsoft). Its sales surged by 1x CAGR from 2016 to 2018 driven by cloud IT infrastructure ramps, but declined nearly 10% YoY in 2019 due to memory pricing correction, although its total server volumes continued to grow. We believe Wiwynn, as a pure play cloud IT infrastructure ODM, will see the best leverage from increasing workload shift to cloud, along with further ODM Direct proliferation, as we forecast over +30% CAGR in earnings from 2019-22E. Our TP of NT$960 (over 20% upside) is based on 15x 2021E P/E, 0.5SD above its average since the Mainboard listing. Healthy cloud outlook despite COVID-19. We believe Wiwynn’s near-term outlook remains healthy, despite the prolonging impact from COVID-19, and the subsequent supply chain and logistics bottleneck, as its key hyperscale customers work to secure enough local capacities in meeting the surging demand from work-from-home and distance education. Along with the ramp of the third hyperscaler in the US (Amazon) starting from May-2020, we believe it could potentially lead to more upsides in the near term. Readying for second-wave of transformation. Aside from capitalising the opportunities in cloud, we also believe Wiwynn is set for a second-wave of transformation along with the 5G take-off, having already introduced a new product line-up the past year including all-inone 3U system (EP100 on Intel; EP120 on ARM); ES200 for short-depth servers; and SV302G3 for AI. We expect the business to officially take-off from 2021, driving better profitability on more value-add offerings. We also believe the market has failed to quantify the opportunities from the new business, leaving ample room for further upgrade. Price (17 Jul 20, NT$) Upside/downside (%) Mkt cap (NT$/US$ mn) Enterprise value (NT$ mn) Number of shares (mn) Free float (%) 52-wk price range (NT$) ADTO-6M (US$ mn) 753.00 27.5 131,655 / 4,470 127,933 174.84 57.0 873-355 47.4 [V] = Stock Considered Volatile (see Disclosure Appendix) Research Analysts Harvie Chou 886 2 2715 6364 harvie.chou@credit-suisse.com Jerry Su 886 2 2715 6361 jerry.su@credit-suisse.com OUTPERFORM. Wiwynn trades at 17x/12x/9x our 2020/2021/22E, vs its historical average of 14x since the Mainboard listing in March-2019, and YTD average of 16x P/E, in a range of 9-19x. We believe the stock will further advance as a leading pure-play cloud IT infrastructure ODM, taking advantage of the long-term trend from increasing data workflow shift to cloud, and new edge opportunities taking- off from 2021. Key risks: (1) capex spending pushed off by key customers due to shelter-in-place orders amid the COVID-19 pandemic; (2) volatility in key components pricing leading to lower margins; and (3) lockdown of manufacturing sites for virus containment. Share price performance Financial and valuation metrics Year Revenue (NT$ mn) EBITDA (NT$ mn) EBIT (NT$ mn) Net profit (NT$ mn) EPS (CS adj.) (NT$) Chg. from prev. EPS (%) Consensus EPS (NT$) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 12/19A 163,600 8,370.0 8,160.1 6,169.3 37.06 n.a n.a. (2.1) 20.3 3.1 15.3 6.52 40.1 (16.6) 12/20E 199,114 11,289.7 10,851.8 8,564.6 43.2 n.a 43.8 16.6 17.4 3.9 11.3 5.31 38.1 (16.2) 12/21E 251,610 15,008.1 14,188.9 11,149.9 63.77 n.a 53.59 47.6 11.8 5.1 8.4 4.28 40.1 (17.4) 12/22E 314,904 20,183.7 18,964.5 14,919.7 85.34 n.a 67.69 33.8 8.8 6.8 6.1 3.37 42.7 (22.3) The price relative chart measures performance against the TAIWAN SE WEIGHTED INDEX which closed at 12,181.56 on 17/07/20. On 17/07/20 the spot exchange rate was NT$29.45/US$1 Performance Absolute (%) Relative (%) 1M (7.6) (13.2) 3M 13.6 (1.4) 12M 108.9 96.1 154
155. 21 July 2020 Wiwynn Corporation Price (17 Jul 2020): NT$753.00 Income Statement (NT$ mn) Sales revenue Cost of goods sold EBITDA EBIT Net interest expense/(inc.) Recurring PBT Profit after tax Reported net profit Net profit (Credit Suisse) Balance Sheet (NT$ mn) Cash & cash equivalents Current receivables Inventories Other current assets Current assets Property, plant & equip. Investments Intangibles Other non-current assets Total assets Current liabilities Total liabilities Total debt Shareholders' equity Minority interests Total liabilities & equity Cash Flow (NT$ mn) EBIT Net interest Tax paid Working capital Other cash & non-cash items Operating cash flow Capex Free cash flow to the firm Investing cash flow Equity raised Dividends paid Financing cash flow Total cash flow Adjustments Net change in cash Per share Shares (wtd avg.) (mn) EPS (Credit Suisse) (NT$) DPS (NT$) Operating CFPS (NT$) Earnings Growth (%) Sales revenue EBIT EPS Margins (%) EBITDA EBIT Valuation (x) P/E P/B Dividend yield (%) EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE ROIC Credit ratios Net debt/equity (%) Net debt/EBITDA (x) (6669.TW / 6669 TT) Target Price: NT$960.00 12/19A 163,600 152,252 8,370 8,160 251 7,758 6,169 6,169 6,169 12/19A 11,992 16,847 17,442 133 46,413 718 0 19 997 48,147 27,532 27,928 8,638 20,165 0 48,147 12/19A 8,160 0 0 1,781 (1,781) 8,160 (747) 7,413 (2,816) 226 (2,432) 957 6,301 0 6,301 12/19A 166 37.06 23.00 49.02 12/19A 12/20E 199,114 184,505 11,290 10,852 411 10,712 8,565 8,565 8,565 12/20E 13,680 15,515 23,332 3,020 55,547 1,264 0 0 983 57,795 32,656 33,014 9,658 24,782 0 57,795 12/20E 10,852 0 0 (3,342) (1,849) 5,661 (973) 4,687 (2,898) 2 (4,017) 1,961 4,723 0 4,723 12/20E 198 43.20 29.39 28.55 12/20E 12/21E 251,610 233,290 15,008 14,189 418 13,937 11,150 11,150 11,150 12/21E 15,009 17,986 30,431 3,501 66,927 1,656 0 0 983 69,567 38,417 38,774 9,658 30,793 0 69,567 12/21E 14,189 0 0 (4,290) (2,220) 7,679 (1,200) 6,479 (3,611) 0 (5,139) 0 4,068 0 4,068 12/21E 175 63.77 38.26 43.92 12/21E 12/22E 314,904 291,154 20,184 18,964 408 18,650 14,920 14,920 14,920 12/22E 18,371 21,171 38,763 4,800 83,105 1,647 0 0 983 85,736 46,356 46,713 9,658 39,022 0 85,736 12/22E 18,964 0 0 (4,877) (2,826) 11,262 (1,200) 10,062 (3,611) 0 (6,690) 0 7,651 0 7,651 12/22E 175 85.34 51.20 64.42 12/22E (9.6) 14.9 (2.1) 21.7 33.0 16.6 26.4 30.8 47.6 25.2 33.7 33.8 5.1 5.0 12/19A 20.3 6.52 3.1 0.8 15.3 15.7 12/19A 40.1 37.4 12/19A (16.6) (0.40) 5.7 5.5 12/20E 17.4 5.31 3.9 0.6 11.3 11.8 12/20E 38.1 46.1 12/20E (16.2) (0.36) 6.0 5.6 12/21E 11.8 4.28 5.1 0.5 8.4 8.9 12/21E 40.1 49.1 12/21E (17.4) (0.36) 6.4 6.0 12/22E 8.8 3.37 6.8 0.4 6.1 6.5 12/22E 42.7 54.4 12/22E (22.3) (0.43) Analyst: Harvie Chou Rating: Outperform Company Background Founded in 2012, Wiwynn is the globally leading open-sourced cloud IT infrastructure ODM established under Wistron Corporation, targeting to provide increasing optimised workload IT solutions to cloud operators with the best total cost of ownership. Blue/Grey Sky Scenario Our Blue Sky Scenario (NT$) 1,200 Our blue sky scenario assumes NT$1,200 target price based on the peak multiple of 19x 2021E P/E, factoring in a better sales growth as a result of accelerating capital expenditure spending by its top-two customers, while it also sees faster ramp of new hyperscale client. Our Grey Sky Scenario (NT$) 600.00 Our grey sky scenario assumes NT$600 target price based on the trough multiple of 9x 2021E P/E, factoring in a slower sales growth due to capital expenditure outlook cut by its two key customers due to weaker macro amid COVID-19. We also assume slower ramp of its new hyperscale client. Share price performance The price relative chart measures performance against the TAIWAN SE WEIGHTED INDEX which closed at 12,181.56 on 17-Jul-2020 On 17-Jul-2020 the spot exchange rate was NT$29.45/US$1 Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 155
156. 21 July 2020 XLNX Xilinx Solid core with DCG growth optionality Target price (12M, US$) 100.00 Outperform Semiconductor Devices LT increasing leverage to datacentre. XLNX is ramping up its efforts with key data centre customers, ecosystem partners and software application developers, to further enable innovation and deployments in compute acceleration, computational storage and network acceleration. Its DCG group made up ~7% of rev in FY19, which we see increasing to ~9%/14% by FY20/21. Price (17 Jul 20, US$) 52-week price range Market cap (US$ m) Enterprise value (US$ m) Datacentre growth starting to materialise. While DCG is still only ~7% of rev, we expect growth to reaccelerate to 80% YoY by F4Q20 with strong momentum at hyperscalers where XLNX is expanding its ecosystem across compute, storage and networking segments. We continue to see XLNX as well positioned to benefit from 5G infrastructure build-outs and more importantly to an accelerating compute TAM driven by AI and data analytics. While investors are hyper-focused on architectural/share shifts, we continue to stress that AI is first and foremost a “rising tide”—we see AI adding ~$430 bn of incremental Semi TAM and ~$130 bn of compute TAM beneficial to CPUs, GPUs, FPGAs and ASICs. We would note that Wireless rev of $200 mn in F1Q was already ~30% above the prior Wireless peak in 2014 even as we are still very early innings. Research Analysts Outlook for CY2020/21. Post a 6/29 positive pre, we raised our FY21 rev/EPS to US$2.93 bn/US$2.68 from US$2.86 bn/US$2.56 and we maintain our FY22 rev/EPS at US$3.15 bn/US$3.23. Specifically in DCG we see FY20/21 +22%/51% YoY growth. 100.49 132.14 - 68.98 24,438.60 24,452 John W. Pitzer 212 538 4610 john.pitzer@credit-suisse.com Dalya Hahn 212 325 7843 dalya.hahn@credit-suisse.com Eric Hu 212 325 4735 eric.hu@credit-suisse.com Jerome Darling 212 325 3211 jerome.darling@credit-suisse.com Valuation. While XLNX’s positive pre-announcement will likely intensify concerns that nearterm semi strength is inventory build/pull-ins due to COVID-19 and US/China uncertainties, we continue to see a multi-quarter tailwind as supply chain has likely become more redundant, more sovereign, more automated and more intelligent in a post-COVID-19 world, in addition to a secular transfer of value from traditional industries into silicon driven by an increasingly data driven economy. XLNX is currently trading at 34.0x/29.7x CY20/CY21 EPS, or 33.3x our annualised trough EPS of $0.68, and 27.6x our CY21 EPS. We’d note risks include: (1) continued COVID-19 uncertainty, (2) Huawei ban, and (3) comparatively slower ramp in DCG/RF-SoC, though we remain positive on secular tailwinds (AI, ML, 5G) driving XLNX’s growth, as the Compute TAM accelerates. Share price performance Financial and valuation metrics Year EPS (Excl. ESO) (US$) EPS (CS adj., ) Prev. EPS (CS adj., US$) P/E (CS adj.) (x) P/E rel. (CS adj., %) Revenue (US$ m) Net Debt (US$ m) OCFPS (US$) P/OCF (x) Number of shares (m) BV/share (Next Qtr., US$) Net debt (Next Qtr., US$ m) Dividend yield (%) 3/19A 3/20E 3.49 3.31 3.49 3.31 28.8 30.4 147.8 120.3 3,059.0 3,162.7 550 14 4.41 4.91 22.8 20.5 243.19 Price/Sales (x) 10.5 P/BVPS (x) 233.6 Dividend (current, US$) - Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 3/21E 2.68 2.68 37.6 192.8 2,934.0 -547 3.77 26.7 3/22E 3.23 3.23 31.1 186.8 3,150.0 1,246 4.31 23.3 8.19 10.0 - On 17-Jul-2020 the S&P 500 INDEX closed at 3224.73Daily Jul19, 2019 - Jul17, 2020, 07/19/19 = US$122.7 Quarterly EPS 2019A 2020E 2021E Q1 0.74 0.95 0.60 Q2 0.84 0.91 0.63 Q3 0.93 0.65 0.65 Q4 0.95 0.76 0.75 156
157. 21 July 2020 Xilinx (XLNX) Price (17 Jul 2020): US$100.49 Income Statement Revenue (US$ m) EBITDA Operating profit Recurring profit Cash Flow Cash flow from operations CAPEX Free cash flow to the firm Cash flow from investments Net share issue(/repurchase) Dividends paid Issuance (retirement) of debt Other Cash flow from financing activities Effect of exchange rates Changes in Net Cash/Debt Net debt at end Balance Sheet ($US) Assets Other current assets Total current assets Total assets Liabilities Short-term debt Total current liabilities Long-term debt Total liabilities Shareholder equity Total liabilities and equity Net debt Per share No. of shares (wtd avg) CS adj. EPS Prev. EPS (US$) Dividend (US$) Free cash flow per share Earnings Sales growth (%) Net profit growth (%) EPS growth (%) EBIT margin (%) Valuation EV/Sales (x) EV/EBIT (x) P/E (x) Quarterly EPS 2019A 2020E 2021E Analyst: John Pitzer Rating: Outperform Target Price: 100.00 3/19A 3,059.0 961.7 961.7 973.3 3/19A 1,132 (89) 1,043 (620) (143) (364) 0 (46) (553) 0 220 550 3/19A 3/20E 3,162.7 853.7 853.7 895.7 3/20E 1,245 (129) 1,116 (129) (242) (370) 0 0 (612) 0 536 14 3/20E 3/21E 2,934.0 767.2 767.2 735.2 3/21E 933 0 933 0 0 (372) 0 0 (372) 0 561 (547) 3/21E 3/22E 3,150.0 892.5 892.5 864.5 3/22E 1,062 0 1,062 0 0 (372) 0 0 (372) 0 (1,793) 1,246 3/22E 2,556 3,892 5,151 1,099 2,909 4,693 1,099 3,476 5,182 1,099 1,690 3,366 0 475 1,235 2,290 2,862 5,151 550 3/19A 257 3.49 0.00 4.07 3/19A 24.0 79.1 80.1 31.4 3/19A 8.17 26.0 28.8 Q1 0.74 0.95 0.60 0 1,086 747 2,378 2,315 4,693 14 3/20E 254 3.31 0.00 4.40 3/20E 3.4 (6.2) (5.2) 27.0 3/20E 7.73 28.6 30.4 Q2 0.84 0.91 0.63 0 989 747 2,282 2,900 5,182 (547) 3/21E 247 2.68 0.00 3.77 3/21E (7.2) (21.1) (19.1) 26.1 3/21E 8.14 31.1 37.6 Q3 0.93 0.65 0.65 0 996 747 2,288 1,078 3,366 1,246 3/22E 247 3.23 0.00 4.31 3/22E 7.4 20.1 20.6 28.3 3/22E 8.15 28.8 31.1 Q4 0.95 0.76 0.75 Company Background Xilinx, Inc. (Xilinx) designs, develops and markets programmable platforms. These programmable platforms have components, which include integrated circuits (ICs) in the form of programmable logic devices (PLDs) Blue/Grey Sky Scenario Our Blue Sky Scenario (US$) 150.00 In our blue sky scenario, XLNX (1) gains PLD share from INTC/ALTR, (2) achieves out-sized AWS traction, and (3) drives OpM leverage through a tightly managed opex budget. High-double digit rev growth, operating leverage, and multiple expansion drive our blue-sky value of US$150. Our blue sky valuation is 47.3x CY21 EPS. Our Grey Sky Scenario (US$) 80.00 In our grey sky scenario, XLNX (1) cedes PLD share due to competitive pricing pressures from INTC/ALTR, (2) struggles to address AMZN's requirements and loses design wins, and (3) continues to struggle to manage opex. Our grey sky of US$80 assumes mid-single digit rev growth, no OpM leverage, and a stable multiple. Our grey sky valuation is 25.2x CY21 EPS. Share price performance On 17-Jul-2020 the S&P 500 INDEX closed at 3224.73 Daily Jul19, 2019 - Jul17, 2020, 07/19/19 = US$122.7 Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 157
158. 21 July 2020 VNET 21Vianet Group A strategic shift in the right direction Target price (12M, US$) 25.00 Outperform[V] Integrated Telecommunication Services 21 Vianet (VNET) is a carrier-neutral data centre provider in China, with circa 5.0% market share. Having divested from loss-making bandwidth reselling and fixed broadband services, VNET is now more focused on the construction of data centres, as well as VPN services and cloud services. Furthermore, it is now offering ‘wholesale’ data centre services to hyperscale customers such as Alibaba, as opposed to its traditional focus on the ‘retail’ space. On 22 June 2020, VNET issued US$150 mn in convertible bonds (carrying a 4.5% coupon and a strike of US$17 per ADS), to a Blackstone private equity fund, which enters as a new strategic investor. While there is some risk on execution, our expectation is that VNET will seek to deploy this capital in value-accretive wholesale datacentre projects. We currently forecast that VNET will enjoy a 26.0% three-year revenue CAGR across FY19-22. We also forecast an increase in margins as VNET enjoys some operational gearing over centralised costs, leading us to forecast a 31.2% three-year CAGR in adjusted EBITDA. However, we acknowledge that data centre construction is capital intensive, and so we expect VNET to remain cash flow negative until FY24 and loss-making until FY23. To factor in both the strong structural growth and heavy capital expenditure, we use discounted cash flow (DCF) as our primary valuation methodology, deriving a target price of US$25 per ADS. VNET has enjoyed an extremely powerful share price rally YTD, as investors have welcomed the shift in strategy towards wholesale data centre provision; this is expected to allow VNET to enjoy structural growth given the trends of work from home and increasing data use. Indeed, the share price has almost reached our DCF-based target price. We maintain our OUTPERFORM rating but await revised rollout guidance—expected in the 2Q20 results briefing scheduled for late August. Financial and valuation metrics Year Revenue (Rmb mn) EBITDA (Rmb mn) EBIT (Rmb mn) Net profit (Rmb mn) EPS (CS adj.) (Rmb) Chg. from prev. EPS (%) Consensus EPS (Rmb) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 12/19A 3,789.0 954.4 182.2 (182.3) (1.62) n.a. n.a. n.m. n.m. 0.0 24.0 3.54 (3.4) 74.2 12/20E 4,629.4 1,152.0 346.5 (127.4) (1.14) 0.0 (0.44) n.m. n.m. 0.0 21.9 3.63 (2.4) 121.8 12/21E 5,959.3 1,624.4 570.6 (143.1) (1.28) 0.0 1.3 n.m. n.m. 0.0 17.3 3.73 (2.8) 181.5 12/22E 7,571.2 2,213.6 842.9 (53.9) (0.48) 0.0 2.51 n.m. n.m. 0.0 13.8 3.77 (1.1) 234.1 Price (17 Jul 20, US$) Upside/downside (%) Mkt cap (US$mn) Enterprise value (Rmb mn) Number of shares (mn) Free float (%) 52-wk price range (US$) ADTO-6M (US$ mn) 24.11 3.7 2,723 24,209 112.95 45.9 29.25-6.41 8.2 [V] = Stock Considered Volatile (see Disclosure Appendix) Research Analysts Colin McCallum, CA 852 2101 6514 colin.mccallum@credit-suisse.com Billy Lee 852 2101 6529 billy.lee@credit-suisse.com Share price performance The price relative chart measures performance against the MSCI CHINA F IDX which closed at 9,617.98 on 17/07/20. On 17/07/20 the spot exchange rate was US$1/US$1 Performance Absolute (%) Relative (%) 1M 41.9 33.3 3M 56.5 39.5 12M 238.6 219.6 158
159. 21 July 2020 21Vianet Group Price (17 Jul 2020): US$24.11 (VNET.OQ / VNET US) Target Price: US$25.00 Income Statement (Rmb mn) Sales revenue Cost of goods sold EBITDA EBIT Net interest expense/(inc.) Recurring PBT Profit after tax Reported net profit Net profit (Credit Suisse) Balance Sheet (Rmb mn) Cash & cash equivalents Current receivables Inventories Other current assets Current assets Property, plant & equip. Investments Intangibles Other non-current assets Total assets Current liabilities Total liabilities Total debt Shareholders' equity Minority interests Total liabilities & equity Cash Flow (Rmb mn) EBIT Net interest Tax paid Working capital Other cash & non-cash items Operating cash flow Capex Free cash flow to the firm Investing cash flow Equity raised Dividends paid Financing cash flow Total cash flow Adjustments Net change in cash Per share Shares (wtd avg.) (mn) EPS (Credit Suisse) (Rmb) DPS (Rmb) Operating CFPS (Rmb) Earnings Growth (%) Sales revenue EBIT EPS Margins (%) EBITDA EBIT Valuation (x) P/E P/B Dividend yield (%) EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE ROIC Credit ratios Net debt/equity (%) Net debt/EBITDA (x) 12/19A 3,789 2,850 954 182 291 (176) (181) (182) (182) 12/19A 1,808 657 0 2,763 5,228 5,444 1,923 1,400 279 14,274 4,469 9,042 5,692 5,303 279 14,274 12/19A 182 (291) (5) (631) 772 27 (1,249) (1,222) (1,612) (3) 0 1,040 (545) 0 (545) 12/19A 113 (1.62) 0.00 0.24 12/19A 12/20E 4,629 3,467 1,152 347 301 (127) (127) (127) (127) 12/20E 1,433 800 0 3,188 5,422 7,499 1,923 1,329 279 16,452 7,135 11,348 7,650 5,175 279 16,452 12/20E 347 (301) 0 (136) 805 715 (2,790) (2,075) (2,790) 0 0 1,700 (375) 0 (375) 12/20E 111 (1.14) 0.00 6.41 12/20E 12/21E 5,959 4,347 1,624 571 603 (143) (143) (143) (143) 12/21E 730 1,025 0 3,862 5,618 9,864 1,923 1,258 279 18,942 9,053 13,981 9,736 5,032 279 18,942 12/21E 571 (603) 0 (77) 1,054 945 (3,348) (2,403) (3,348) 0 0 1,700 (703) 0 (703) 12/21E 111 (1.28) 0.00 8.47 12/21E 12/22E 7,571 5,417 2,214 843 786 (54) (54) (54) (54) 12/22E 388 1,297 0 4,679 6,364 11,913 1,923 1,187 279 21,665 11,113 16,758 11,875 4,978 279 21,665 12/22E 843 (786) 0 (122) 1,371 1,305 (3,348) (2,043) (3,348) 0 0 1,700 (343) 0 (343) 12/22E 111 (0.48) 0.00 11.71 12/22E 11.4 (23.3) 10.0 22.2 90.2 29.4 28.7 64.7 (12.4) 27.0 47.7 62.4 25.2 4.8 12/19A (104.0) 3.54 0.0 6.0 24.0 125.8 12/19A (3.4) 2.4 12/19A 74.2 4.07 24.9 7.5 12/20E (147.5) 3.63 0.0 5.5 21.9 72.9 12/20E (2.4) 3.4 12/20E 121.8 5.40 27.3 9.6 12/21E (131.3) 3.73 0.0 4.7 17.3 49.1 12/21E (2.8) 4.5 12/21E 181.5 5.54 29.2 11.1 12/22E (348.7) 3.77 0.0 4.0 13.8 36.2 12/22E (1.1) 5.6 12/22E 234.1 5.19 Analyst: Colin McCallum Rating: Outperform [V] Company Background 21 Vianet provides data centre and cloud services in China Blue/Grey Sky Scenario Our Blue Sky Scenario (US$) 28.50 Under our 'blue-sky' scenario we assume more promising growth and lower risk than under our base case. This gives a 'blue-sky' valuation of US$28.5/ADS. At that value, the implied FY20 EV/EBITDA would be 18.3x Our Grey Sky Scenario (US$) 15.30 Under our 'grey-sky' scenario we assume lower growth and higher risk than under our base case. This gives a 'grey-sky' valuation of US$21.8/ADS. At that value, the implied FY20 EV/EBITDA would be 15.3x. Share price performance The price relative chart measures performance against the MSCI CHINA F IDX which closed at 9,617.98 on 17-Jul-2020 On 17-Jul-2020 the spot exchange rate was US$1/US$1 Source: Company data, Refinitiv, Credit Suisse estimates Global Technology 159
160. 21 July 2020 Companies Mentioned (Price as of 19-Jul-2020) 21Vianet Group (VNET.OQ, $24.11, OUTPERFORM[V], TP $25.0) Accton (2345.TW, NT$236.5, NEUTRAL, TP NT$240.0) Advanced Micro Devices, Inc. (AMD.OQ, $55.04, NEUTRAL[V], TP $33.0) Alchip Tech (3661.TW, NT$480.0, OUTPERFORM[V], TP NT$630.0) Aspeed (5274.TWO, NT$1255.0, OUTPERFORM[V], TP NT$1300.0) Broadcom Ltd (AVGO.OQ, $312.71, OUTPERFORM, TP $400.0) Dell Technologies (DELL.N, $60.37, NEUTRAL, TP $44.0) Delta Electronics (2308.TW, NT$184.0, OUTPERFORM, TP NT$208.0) Digital Realty Trust, Inc. (DLR.N, $143.75, OUTPERFORM, TP $164.0) Equinix, Inc. (EQIX.OQ, $724.23, OUTPERFORM, TP $704.0) Foxconn Industrial Internet (601138.SS, Rmb14.79, OUTPERFORM, TP Rmb17.0) GDS Holdings Limited (GDS.OQ, $81.08, OUTPERFORM[V], TP $90.0) GUC (3443.TW, NT$284.0, NEUTRAL[V], TP NT$250.0) Hewlett Packard Enterprise (HPE.N, $9.67, UNDERPERFORM, TP $8.5) Intel Corp. (INTC.OQ, $60.0, OUTPERFORM, TP $75.0) International Business Machines (IBM.N, $125.11, OUTPERFORM, TP $150.0) Inventec Co Ltd (2356.TW, NT$24.75, NEUTRAL, TP NT$24.0) Keppel DC REIT (KEPE.SI, S$2.61, OUTPERFORM, TP S$2.91) Lenovo Group Ltd (0992.HK, HK$4.55, NEUTRAL, TP HK$4.5) MiTAC Holdings Corporation (3706.TW, NT$29.55, NEUTRAL, TP NT$32.2) Micron Technology Inc. (MU.OQ, $49.47, OUTPERFORM[V], TP $90.0) NVIDIA Corporation (NVDA.OQ, $408.06, OUTPERFORM[V], TP $425.0) NetApp (NTAP.OQ, $44.81, OUTPERFORM[V], TP $53.0) Parade Technologies (4966.TWO, NT$1075.0, NEUTRAL, TP NT$970.0) Quanta Computer (2382.TW, NT$78.0, OUTPERFORM, TP NT$90.0) SK Hynix Inc. (000660.KS, W82,900, OUTPERFORM, TP W118,000) Samsung Electronics (005930.KS, W54,400, OUTPERFORM, TP W65,000) Switch, Inc. (SWCH.N, $17.95, OUTPERFORM[V], TP $23.0) Taiwan Semiconductor Manufacturing (2330.TW, NT$367.0, NEUTRAL, TP NT$365.0) Wiwynn Corporation (6669.TW, NT$753.0, OUTPERFORM[V], TP NT$960.0) Xilinx (XLNX.OQ, $100.49, OUTPERFORM, TP $100.0) Disclosure Appendix Analyst Certification Randy Abrams, CFA, Jerry Su, Manish Nigam, John W. Pitzer, Pauline Chen, Harvie Chou, Keon Han, Sang Uk Kim, Kyna Wong, Chaolien Tseng, Hideyuki Maekawa, Akinori Kanemoto, Matthew Cabral, Sami Badri, Dalya Hahn, Haas Liu, Tina Long, Colin McCallum, CA, Nicholas Teh and Kenneth Fong each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. 3-Year Price and Rating History for 21Vianet Group (VNET.OQ) VNET.OQ Date 09-Jun-20 23-Jun-20 Closing Price (US$) 13.05 23.75 Target Price (US$) 20.00 25.00 Rating O* * Asterisk signifies initiation or assumption of coverage. O U T PERFO RM Global Technology 160
161. 21 July 2020 3-Year Price and Rating History for Accton (2345.TW) 2345.TW Date 10-Feb-20 19-Mar-20 14-May-20 15-Jul-20 Closing Price (NT$) 181.50 149.00 211.00 252.50 Target Price (NT$) 210.00 200.00 240.00 240.00 Rating O* N * Asterisk signifies initiation or assumption of coverage. O U T PERFO RM N EU T RA L 3-Year Price and Rating History for Advanced Micro Devices, Inc. (AMD.OQ) AMD.OQ Date 26-Jul-17 24-Oct-17 31-Jan-18 30-Apr-19 30-Jul-19 29-Oct-19 Closing Price (US$) 14.76 14.25 13.74 27.63 33.87 33.03 Target Price (US$) 10.50 12.00 13.50 25.00 30.00 33.00 Rating N * Asterisk signifies initiation or assumption of coverage. N EU T RA L 3-Year Price and Rating History for Aspeed (5274.TWO) 5274.TWO Date 21-Jan-19 04-Mar-19 12-Mar-19 12-Jul-19 13-Aug-19 07-Oct-19 13-Jan-20 08-May-20 Closing Price (NT$) 602.00 749.00 731.00 631.00 738.00 814.00 982.00 1235.00 Target Price (NT$) 660.00 681.00 775.00 660.00 750.00 900.00 1140.00 1300.00 Rating N* * Asterisk signifies initiation or assumption of coverage. Global Technology O N EU T RA L O U T PERFO RM 161
162. 21 July 2020 3-Year Price and Rating History for Broadcom Ltd (AVGO.OQ) AVGO.OQ Date 20-Nov-17 05-Dec-17 19-Jul-18 06-Nov-18 15-Nov-18 14-Mar-19 09-Aug-19 11-Nov-19 14-Jun-20 Closing Price (US$) 274.88 261.65 210.37 228.25 236.34 268.20 275.73 312.75 300.25 Target Price (US$) 335.00 300.00 320.00 400.00 Rating NR O R NR O R NR O N O T RA T ED O U T PERFO RM REST RIC T ED * Asterisk signifies initiation or assumption of coverage. 3-Year Price and Rating History for Dell Technologies (DELL.N) DELL.N Date 11-Apr-19 15-Aug-19 30-Aug-19 27-Nov-19 28-Feb-20 19-May-20 29-May-20 Closing Price (US$) 63.86 46.90 51.53 50.32 40.46 44.04 49.64 Target Price (US$) 65.00 58.00 61.00 55.00 53.00 41.00 44.00 Rating N* * Asterisk signifies initiation or assumption of coverage. N EU T RA L 3-Year Price and Rating History for Delta Electronics (2308.TW) 2308.TW Date 31-Jul-17 31-Oct-17 30-Apr-18 01-Aug-18 31-Oct-18 21-Nov-18 16-Jan-19 02-May-19 04-Nov-19 02-Apr-20 30-Apr-20 10-Jun-20 10-Jul-20 Closing Price (NT$) 160.50 145.00 108.00 107.50 130.00 125.50 149.50 159.50 134.50 120.00 140.00 160.50 183.50 Target Price (NT$) 181.00 170.00 160.00 150.00 155.00 150.00 172.00 175.00 163.00 155.00 161.00 182.00 208.00 Rating O N O O U T PERFO RM N EU T RA L * Asterisk signifies initiation or assumption of coverage. Global Technology 162
163. 21 July 2020 3-Year Price and Rating History for Digital Realty Trust, Inc. (DLR.N) DLR.N Date 17-Jan-18 27-Apr-18 08-Aug-18 24-Sep-18 25-Sep-18 20-Dec-18 29-Oct-19 16-Mar-20 31-May-20 Closing Price (US$) 107.01 107.80 121.54 115.92 115.92 106.10 130.59 128.31 143.56 Target Price (US$) 95.00 101.00 130.00 Rating N* R N 130.00 123.00 164.00 R NR O * Asterisk signifies initiation or assumption of coverage. N EU T RA L REST RIC T ED N O T RA T ED O U T PERFO RM 3-Year Price and Rating History for Equinix, Inc. (EQIX.OQ) EQIX.OQ Date 03-Aug-17 02-Nov-17 17-Jan-18 15-Feb-18 27-Apr-18 09-Aug-18 02-Nov-18 20-Dec-18 14-Feb-19 02-May-19 11-Jul-19 09-Oct-19 19-Dec-19 13-Feb-20 11-May-20 Closing Price (US$) 449.36 488.68 441.90 407.31 421.15 444.99 392.43 358.21 420.59 465.01 523.88 575.00 575.92 635.75 678.00 Target Price (US$) 510.00 515.00 524.00 519.00 525.00 520.00 500.00 467.00 474.00 506.00 556.00 581.00 634.00 630.00 704.00 Rating O O U T PERFO RM * Asterisk signifies initiation or assumption of coverage. 3-Year Price and Rating History for Foxconn Industrial Internet (601138.SS) 601138.SS Date 23-Jul-18 15-Nov-18 03-Apr-19 02-Sep-19 04-Nov-19 09-Jan-20 31-Mar-20 Closing Price (Rmb) 17.25 12.89 16.08 14.52 15.78 18.30 13.21 Target Price (Rmb) 20.30 17.00 18.50 17.10 18.00 20.60 17.00 Rating O* * Asterisk signifies initiation or assumption of coverage. O U T PERFO RM Global Technology 163
164. 21 July 2020 3-Year Price and Rating History for GDS Holdings Limited (GDS.OQ) GDS.OQ Date 12-Sep-17 19-Oct-17 09-Nov-17 20-Dec-17 26-Jan-18 23-May-18 20-Jun-18 01-Aug-18 04-Jan-19 14-Mar-19 15-May-19 10-Jul-19 02-Oct-19 05-Dec-19 26-Feb-20 14-May-20 23-Jun-20 Closing Price (US$) 10.90 14.72 18.03 22.58 27.46 39.26 43.43 25.00 23.06 35.58 38.01 37.98 39.54 47.15 59.07 60.88 80.56 Target Price (US$) 13.80 15.80 20.70 23.00 23.10 37.50 47.00 47.00 35.00 41.50 43.50 45.00 50.50 52.00 68.00 72.00 90.00 Rating O N U N O O U T PERFO RM N EU T RA L U N D ERPERFO RM * Asterisk signifies initiation or assumption of coverage. 3-Year Price and Rating History for Hewlett Packard Enterprise (HPE.N) HPE.N Date 15-Aug-17 11-Apr-19 15-Aug-19 24-Oct-19 04-Mar-20 19-May-20 22-May-20 Closing Price (US$) 13.77 16.27 12.68 15.89 12.26 10.04 9.17 Target Price (US$) 14.00 12.00 13.00 11.50 9.00 8.50 Rating NC U* * Asterisk signifies initiation or assumption of coverage. Effective July 3, 2016, NC denotes termination of coverage. N O T CO V ERED U N D ERPERFO RM 3-Year Price and Rating History for Intel Corp. (INTC.OQ) INTC.OQ Date 28-Jul-17 27-Oct-17 26-Jan-18 24-Apr-18 27-Apr-18 27-Jul-18 25-Oct-19 24-Jan-20 Closing Price (US$) 35.31 44.40 50.08 51.45 52.73 47.68 56.46 68.47 Target Price (US$) 35.00 42.00 55.00 60.00 65.00 58.00 65.00 75.00 Rating N O * Asterisk signifies initiation or assumption of coverage. Global Technology N EU T RA L O U T PERFO RM 164
165. 21 July 2020 3-Year Price and Rating History for International Business Machines (IBM.N) IBM.N Date 19-Jul-17 15-Aug-17 11-Apr-19 15-Apr-20 Closing Price (US$) 147.53 142.07 143.78 118.69 Target Price (US$) 110.00 173.00 150.00 Rating U NC O* * Asterisk signifies initiation or assumption of coverage. Effective July 3, 2016, NC denotes termination of coverage. N O T CO VERED O UT PERFO RM 3-Year Price and Rating History for Inventec Co Ltd (2356.TW) 2356.TW Date 07-Aug-17 13-Nov-17 27-Mar-18 15-May-18 15-Aug-18 13-Nov-18 30-May-19 06-Jun-19 14-Aug-19 12-Nov-19 20-Jan-20 25-Mar-20 13-May-20 Closing Price (NT$) 25.45 23.05 23.35 23.15 25.00 23.35 23.85 22.95 21.70 22.85 22.90 21.60 23.50 Target Price (NT$) 28.00 25.00 23.00 22.00 24.00 22.00 Rating O N * N 23.00 22.00 21.00 22.00 21.00 21.50 O U T PERFO RM N EU T RA L * Asterisk signifies initiation or assumption of coverage. 3-Year Price and Rating History for Keppel DC REIT (KEPE.SI) KEPE.SI Date 16-Oct-17 16-Apr-18 18-Jul-18 08-Oct-18 17-Oct-18 22-Jan-19 16-Apr-19 18-Jul-19 16-Sep-19 21-Nov-19 13-Jan-20 Closing Price (S$) 1.33 1.43 1.36 1.32 1.32 1.41 1.46 1.70 1.77 2.00 2.20 Target Price (S$) 1.45 1.54 1.53 Rating O 1.46 1.49 1.56 1.83 1.80 2.34 R O R O O U T PERFO RM REST RICT ED * Asterisk signifies initiation or assumption of coverage. Global Technology 165
166. 21 July 2020 3-Year Price and Rating History for Lenovo Group Ltd (0992.HK) 0992.HK Date 24-Jul-17 29-Sep-17 20-Nov-17 25-Jan-18 25-May-18 16-Aug-18 02-Oct-18 15-Jan-19 16-Jan-19 22-Feb-19 30-May-19 06-Jun-19 15-Aug-19 29-Nov-19 20-Jan-20 02-Apr-20 14-Apr-20 17-Apr-20 Closing Price (HK$) 4.95 4.31 4.44 4.72 4.18 4.60 5.76 5.71 5.71 7.00 5.62 5.63 5.64 5.17 5.86 4.04 4.17 4.38 Target Price (HK$) 5.00 5.00 4.55 4.20 4.60 5.50 Rating N R N R N 5.50 6.20 N EU T RA L REST RICT ED * N 6.20 6.10 5.90 6.10 4.50 R N 4.50 * Asterisk signifies initiation or assumption of coverage. 3-Year Price and Rating History for Micron Technology Inc. (MU.OQ) MU.OQ Date 27-Sep-17 19-Dec-17 19-Mar-18 21-May-18 20-Jun-18 Closing Price (US$) 37.09 43.98 60.14 55.48 58.95 Target Price (US$) 50.00 60.00 70.00 80.00 90.00 Rating O * Asterisk signifies initiation or assumption of coverage. O U T PERFO RM 3-Year Price and Rating History for NVIDIA Corporation (NVDA.OQ) NVDA.OQ Date 25-Nov-18 11-Mar-19 01-May-20 20-May-20 Closing Price (US$) 145.00 161.14 282.78 358.80 Target Price (US$) 225.00 425.00 Rating O* R NR O * Asterisk signifies initiation or assumption of coverage. O U T PERFO RM REST RIC T ED N O T RA T ED Global Technology 166
167. 21 July 2020 3-Year Price and Rating History for NetApp (NTAP.OQ) NTAP.OQ Date 09-Aug-17 11-Apr-19 23-May-19 02-Aug-19 15-Aug-19 13-Nov-19 13-Feb-20 19-May-20 Closing Price (US$) 42.24 75.49 61.66 46.04 46.47 60.07 55.18 44.68 Target Price (US$) 40.00 89.00 79.00 62.00 60.00 70.00 68.00 53.00 Rating N O* * Asterisk signifies initiation or assumption of coverage. N EU T RA L O U T PERFO RM 3-Year Price and Rating History for Parade Technologies (4966.TWO) 4966.TWO Date 02-Aug-17 02-Nov-17 07-Dec-17 27-Apr-18 02-Aug-18 14-Feb-19 01-Nov-19 10-Jan-20 13-Feb-20 02-Apr-20 14-Apr-20 30-Apr-20 27-May-20 Closing Price (NT$) 464.50 503.00 512.00 461.00 459.00 523.00 570.00 610.00 710.00 650.00 669.00 738.00 916.00 Target Price (NT$) 540.00 600.00 650.00 610.00 600.00 630.00 690.00 705.00 830.00 775.00 800.00 865.00 895.00 Rating O O U T PERFO RM N EU T RA L N * Asterisk signifies initiation or assumption of coverage. 3-Year Price and Rating History for Quanta Computer (2382.TW) 2382.TW Date 07-Aug-17 10-Aug-17 07-Nov-17 14-Nov-17 28-Mar-18 13-May-18 08-Aug-18 14-Sep-18 14-Nov-18 02-Apr-19 30-May-19 06-Jun-19 14-Aug-19 15-Oct-19 13-Nov-19 20-Jan-20 31-Mar-20 14-May-20 Closing Price (NT$) 75.90 75.70 72.00 72.30 59.20 53.10 53.10 52.00 49.50 58.00 56.70 58.20 56.30 54.00 60.90 65.00 60.20 65.00 Target Price (NT$) 61.00 66.00 68.00 64.00 58.00 51.00 55.00 57.00 52.00 55.00 Rating N 64.00 62.00 60.00 72.00 75.00 70.00 75.00 N EU T RA L O U T PERFO RM * N O * Asterisk signifies initiation or assumption of coverage. Global Technology 167
168. 21 July 2020 3-Year Price and Rating History for SK Hynix Inc. (000660.KS) 000660.KS Date 04-Jun-18 21-Jun-18 25-Oct-18 11-Jan-19 08-Mar-19 25-Apr-19 29-May-19 25-Sep-19 02-Apr-20 Closing Price (W) 89,800 88,500 64,700 65,100 66,700 80,200 66,100 81,900 80,000 Target Price (W) 140,000 108,000 95,000 91,000 98,000 95,000 103,000 118,000 Rating NR O * Asterisk signifies initiation or assumption of coverage. N O T RA T ED O U T PERFO RM 3-Year Price and Rating History for Samsung Electronics (005930.KS) 005930.KS Date 27-Jul-17 31-Oct-17 09-Mar-18 27-Apr-18 11-Jun-18 21-Sep-18 13-Dec-18 08-Jan-19 31-Jan-19 15-Mar-19 19-Sep-19 31-Jan-20 02-Apr-20 29-Apr-20 Closing Price (W) 49,800 55,080 49,740 53,000 49,900 47,400 40,000 38,100 46,150 44,200 49,150 56,400 46,800 50,000 Target Price (W) 69,200 72,400 70,800 74,000 72,000 70,000 64,500 53,000 58,000 54,800 61,300 82,000 66,000 65,000 Rating O O U T PERFO RM * Asterisk signifies initiation or assumption of coverage. 3-Year Price and Rating History for Switch, Inc. (SWCH.N) SWCH.N Date 31-Oct-17 16-May-18 14-Aug-18 07-Aug-19 09-Oct-19 11-Nov-19 12-Feb-20 28-Feb-20 11-May-20 Closing Price (US$) 19.13 13.20 10.85 13.75 15.51 15.57 17.05 14.34 18.17 Target Price (US$) 22.00 19.00 14.00 15.00 18.00 19.00 21.00 22.00 23.00 Rating O* * Asterisk signifies initiation or assumption of coverage. Global Technology O U T PERFO RM 168
169. 21 July 2020 3-Year Price and Rating History for Taiwan Semiconductor Manufacturing (2330.TW) 2330.TW Date 10-Sep-17 20-Oct-17 19-Jan-18 20-Feb-18 12-Jun-18 12-Dec-18 01-Apr-19 19-Apr-19 27-May-19 19-Jul-19 14-Oct-19 16-Dec-19 17-Jan-20 04-Mar-20 02-Apr-20 15-May-20 18-May-20 09-Jun-20 13-Jul-20 17-Jul-20 Closing Price (NT$) 218.00 237.50 255.50 236.50 229.00 226.50 245.50 264.50 231.00 259.00 290.00 336.00 333.00 320.50 271.50 298.00 290.00 319.00 354.50 367.00 Target Price (NT$) 217.00 241.00 259.00 275.00 270.00 250.00 280.00 300.00 270.00 290.00 325.00 375.00 385.00 360.00 320.00 350.00 300.00 320.00 340.00 365.00 Rating N O N EU T RA L O U T PERFO RM N * Asterisk signifies initiation or assumption of coverage. 3-Year Price and Rating History for Xilinx (XLNX.OQ) XLNX.OQ Date 27-Jul-17 24-Jan-18 02-Oct-18 23-Jan-19 24-Apr-19 24-Oct-19 29-Jan-20 Closing Price (US$) 63.84 73.48 80.19 89.55 139.72 93.12 88.06 Target Price (US$) 75.00 85.00 100.00 110.00 135.00 110.00 100.00 Rating O * Asterisk signifies initiation or assumption of coverage. O U T PERFO RM As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most att ractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as Europea n (excluding Turkey) ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin America, Turkey and Asia (excluding Japan and Australia), stock ratings are based on a stock’s total return relative to the average total return of the rele vant country or regional benchmark (India - S&P BSE Sensex Index); prior to 2nd October 2012 U.S. and Canadian ratings were based o n (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analys t’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Global Technology 169
170. 21 July 2020 Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover mul tiple sectors. Credit Suisse's distribution of stock ratings (and banking clients) is: Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 49% (32% banking clients) Neutral/Hold* 37% (27% banking clients) Underperform/Sell* 12% (21% banking clients) Restricted 1% *For purposes of the NYSE and FINRA ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors. Important Global Disclosures Credit Suisse’s research reports are made available to clients through our proprietary research portal on CS PLUS. Credit Suisse research products may also be made available through third-party vendors or alternate electronic means as a convenience. Certain research products are only made available through CS PLUS. The services provided by Credit Suisse’s analysts to clients may depend on a specific client’s preferences regarding the frequency and manner of receiving communications, the client’s risk profile and investment, the size and scope of the overall client relationship with the Firm, as well as legal and regulatory constraints. To access all of Credit Suisse’s research that you are entitled to receive in the most timely manner, please contact your sales representative or go to https://plus.credit-suisse.com . Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: https://www.creditsuisse.com/sites/disclaimers-ib/en/managing-conflicts.html . Any information relating to the tax status of financial instruments discussed herein is not intended to provide tax advice or to be used by anyone to provide tax advice. Investors are urged to seek tax advice based on their particular circumstances from an independent tax professional. Credit Suisse has decided not to enter into business relationships with companies that Credit Suisse has determined to be involved in the development, manufacture, or acquisition of anti-personnel mines and cluster munitions. For Credit Suisse's position on the issue, please see https://www.credit-suisse.com/media/assets/corporate/docs/about-us/responsibility/banking/policy-summaries-en.pdf . The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities Target Price and Rating Valuation Methodology and Risks:'>Risks: (12 months) for 21Vianet Group (VNET.OQ) Method:'>Method: Our target price of US$25.0 for 21 Vianet Group Inc is based on a discounted cash flow (DCF) built out to 2028, using a WACC (weighted average cost of capital) of 9.4% and a terminal growth rate of 3.8%. We rate VNET OUTPERFORM based on rising data use and cloud computing in China, together with valuation. Risk: Risks that could impede achievement of our target price of US$25.0 for 21 Vianet Group Inc and OUTPERFORM rating include: higher- or lower-than-expected growth of IDC revenue in the Chinese market, being squeezed by its most important supplier and competitor, Unicom and Telecom, and a lack of barrier to new entrants. An additional risk is the company's variable interest entity (VIE) structure. Target Price and Rating Valuation Methodology and Risks:'>Risks: (12 months) for Accton (2345.TW) Method:'>Method: We have a NEUTRAL rating and a 12M TP of NT$240 for Accton, based on 20x 2021E P/E (price-to-earnings), 1 standard deviation above past three years' average, as we believe Accton is the key beneficiary in the ODM Direct trend take-off in switch with widening competitive advantages vs peers, migration to faster speed for switch, and new demand from 5G proliferation and new customers. Global Technology 170
171. 21 July 2020 However, shares have appreciated nearly 90% since the trough in mid-March, as we see limited upsides especially on weaker enterprise demand and slower growth on new customer and 400G push-out amid COVID-19. Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk: Key risks to our NEUTRAL rating and NT$240 target price for Accton include:'>include: (1) stronger-/weaker-than-expected demand for datacentre; (2) faster/slower ramp of 400G data-centre switch; (3) market share gain/loss for enterprise and ODM business; (4) faster/slower revenue growth for 5G and telco; and (5) stronger/weaker gross margin. Target Price and Rating Valuation Methodology and Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks: (12 months) for Advanced Micro Devices, Inc. (AMD.OQ) Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method: Our $33 target price is based on 33x CY20 EPS. We rate AMD Neutral reflecting our expectation for competitive responses from peers to mitigate the translation of unit share in to Rev share along with our expectation for higher opex to mitigate OpM leverage. Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk: Risks to our $33 target price and Neutral rating are (1) Technology Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk: as with all technology companies, AMD is at the risk of a step function technology introduction into the marketplace, which could render many or all of AMD's technologies obsolete and (2) Competitive Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk: AMD's primary competitor INTC has over 85% of the MPU market, a strong balance sheet and brand equity. Competitive activities by INTC (including pricing) could severely impact the AMD business. Target Price and Rating Valuation Methodology and Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks: (12 months) for Alchip Tech (3661.TW) Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method: Our OUTPERFORM rating and target price of NT$630 for Alchip Tech is based on 30x P/E (price-to-earnings), factoring in our expectation for 30% sales CAGR from 2019-22, implying 20% upside from the current price of NT$522. We believe the upper half of the long-term valuation should be supported by the company's earnings upside from stronger-than-expected China PC CPU replacement demand and faster-than-expected Phytium’s server CPU penetration into the China government and SOE projects. Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk: Risk to our OUTPERFORM rating and target price of NT$630 for Alchip Tech include:'>include: (1) Macro uncertainty leads to slower semiconductor investment, (2) Timing uncertainty in AI chipset development, (3) Customers shift to foundry direct business model, (4) Slower local CPU penetration in China, (5) U.S. further expands its ban on China companies' access to IP/EDA tools. Target Price and Rating Valuation Methodology and Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks: (12 months) for Aspeed (5274.TWO) Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method: We have an OUTPERFORM rating on Aspeed as we believe the current share price has not yet reflected the company's high share in data centre and improving market outlook this year while its other growth options will also ramp. Our target price of NT$1,300 is based on 35x 2021E earnings, from the upper half of its historical range, due to potential for the sector valuation to rebound in 2020 following the cyclical semiconductor slowdown and closer to resumption of hyperscale build-outs also as 5G's higher volume commercialisation approaches in 2020 and new products push for customer adoption. Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk: Risks to our target price of NT$1,300 and OUTPERFORM rating for Aspeed: (1) data-centre growth hits a prolonged slowdown, (2) share gains in BMC do not materialise in servers or networking, (3) competition emerges on new product generations or customers insource, new products fail to gain market acceptance and the valuations for semiconductor growth companies derate. Target Price and Rating Valuation Methodology and Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks: (12 months) for Broadcom Ltd (AVGO.OQ) Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method: Our Outperform rating and $400 target price for AVGO are based on 18.6x times CY21 EV/FCF, modestly below peers despite superior returns and profitability. We rate AVGO Outperform as we expect it to appreciate more than its peers. Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk: Risks to our $400 target price and Outperform rating for AVGO are (1) competitive pressures in the Wireless business, (2) high customer concentration, (3) failure to execute on cost synergies, and (4) the highly cyclical nature of the semiconductor industry. Target Price and Rating Valuation Methodology and Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks: (12 months) for Dell Technologies (DELL.N) Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method: We rate Dell Neutral with a $44 target price. Our $44 12-month target price is based on a 50/50 split between P/E (8x CY21 EPS of $6.17) and EV/EBITDA (8x CY21 EBITDA of $10.7bn). Our Neutral rating contrasts Dell’s “family” approach that positions the company well for the coming shift to hybrid cloud with high leverage that leaves little room for error vs. a decelerating IT spending environment ahead. Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk: Risks to our $44 target price and Neutral rating include elevated leverage, interest rate policy, storage integration, decelerating IT spending, increased competition, FX, global economic growth, COVID, and trade tensions. Target Price and Rating Valuation Methodology and Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks: (12 months) for Delta Electronics (2308.TW) Global Technology 171
172. 21 July 2020 Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method: Our target price of NT$208 for Delta is based on 21x 2021E EPS, using +1 STD P/E. We rate Delta at OUTPERFORM, as we remain positive on Delta's 5G and EV story, and near-term catalysts include strong 2Q result and resilient margin guidance. Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk: Risks that could impede achievement of our NT$208 target price for Delta could include:'>include:'>include:'>include:'>include:'>include:'>include:'>include: (1) end-market demand, especially on industrial automation, (2) opex controls, as the company is migrating from a component supplier to a solution provider, and (3) execution capability to improve Eltek's OPM, through cross-selling opportunities. Risks to our OUTPERFORM rating for Delta could include (1) slower-than-expected OPM expansion, due to weak end-demand or mis-execution in M&A; and (2) unexpected changes in Delta's business strategy due to a new management team. Target Price and Rating Valuation Methodology and Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks: (12 months) for Digital Realty Trust, Inc. (DLR.N) Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method: Our $164 target price and Outperform rating for Digital Realty is computed from a 25.5x P/ AFFO multiple applied on our 2021 AFFO per share estimate of $6.42. Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk: Risks to our $164 target price and Outperform rating for Digital Realty are 1) changes in I.T. architecture displacing Digital's technology and real estate, 2) speculative data center developments that may compress market pricing and impact Digital's margins and profits, 3) economic risk associated with a slowdown in overall I.T. spending, 4) regulatory risks associated with changes in data sovereignty laws, requiring companies to own and manage their own data centers rather than leasing from multi-tenant data centers, and 5) REIT qualification risk where the company must abide by numerous complex rules to qualify for its tax free status. Target Price and Rating Valuation Methodology and Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks: (12 months) for Equinix, Inc. (EQIX.OQ) Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method: Our Outperform rating and target price of $704 are based on 25x our FY21E AFFOS of $25.74 per share and a DCF valuation assuming a terminal growth of 2.25% and WACC of 5.3%. Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk: Risks to our $704 target price and Outperform rating for Equinix are 1) changes in I.T. architecture displacing Equinix's technology and real estate, 2) speculative data center developments that may compress market pricing and impact Equinix's margins and profits, 3) economic risk associated with a slowdown in overall I.T. spending, 4) regulatory risks associated with changes in data sovereignty laws, requiring companies to own and manage their own data centers rather than leasing from multi-tenant data centers, and 5) REIT qualification risk where the company must abide by numerous complex rules to qualify for its tax free status. Target Price and Rating Valuation Methodology and Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks: (12 months) for Foxconn Industrial Internet (601138.SS) Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method: We have an OUTPERFORM rating on FII, as we believe FII will stay as the core profit generator of Hon Hai, driven by 5G build out and strong momentum in cloud business with further upside from share gains. Our TP of Rmb17.0 is based on 18x NTM P/E, at +1 STD P/E, to reflect solid cloud growth and gradual 5G roll-out in China, despite rising demand uncertainties on smartphones. Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk: Risks to our OUTPERFORM rating and TP of Rmb17.0 for FII include:'>include:'>include:'>include:'>include:'>include:'>include:'>include: (1) Apple product demand, given FII's 20-30% revenue exposure to that customer; (2) RMB/USD trend, as most of its revenue is dominated by RMB and USD; (3) slower-than-expected progress in installing BEACON in Hon Hai's factories; (4) faster-than-expected market share loss or weaker-than-expected demand in server, networking and telecom business; and (5) Shanghai stock market multiple fluctuations, which may pose a risk to our TP multiple. Target Price and Rating Valuation Methodology and Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks: (12 months) for GDS Holdings Limited (GDS.OQ) Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method: Using a WACC of 8.8% (risk free rate 3.0%, ERP 5.5%, Beta 1.4, target gearing 33%) and terminal growth of 4.3%, we derive a DCF-based target price of US$90.0/ADS for GDS Holdings Limited. Given we believe GDS's execution, as a non-State Owned Enterprise (SOE) in a very high growth segment of China's telecom services space, has been very good, we maintain our OUTPERFORM rating. Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk: The risks to our target price of US$90.00 and OUTPERFORM rating for GDS Holdings Limited include:'>include:'>include:'>include:'>include:'>include:'>include:'>include: (1) lower-than-expected utilization and (2) higher-than-expected capex incurred for IDC construction. Target Price and Rating Valuation Methodology and Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks: (12 months) for GUC (3443.TW) Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method:'>Method: Our NEUTRAL rating and target price of NT$250 for GUC is based on 28x P/E (price-to-earnings). We believe the company's share is fairly valued at the upper half of its historical range, factoring in its opportunity in 5G and AI, though the timing of the project ramp for meaningful revenue contribution and profitability remain uncertainty. Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk:'>Risk: Risk to our NEUTRAL rating and target price of NT$250 for GUC include:'>include:'>include:'>include:'>include:'>include:'>include:'>include: (1) Macro uncertainty leads to slower semiconductor investment, (2) Timing uncertainty in AI chipset development, (3) Customers shift to foundry direct business model. Global Technology 172
173. 21 July 2020 Target Price and Rating Valuation Methodology and Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>Risks:'>