廣達 / 仁寶 / 緯創 / 華碩 / 宏碁 / NB Sector

zakk

Citi：Taiwan NB ODMs

Strategic Direction Change Makes a Real Difference

  NB replacing DT and emerging demand for Netbook secure growth outlook — While we hold a conservative view on global PC shipments, we believe NB remains the brightest spot in the PC market thanks to the trend of NB replacing DT. We believe NB shipments could exceed DT shipments in 2009. In addition, emerging demand for Netbooks could fuel growth momentum for the Taiwan NB ODMs even though only few PC OEMs could benefit in 2008.

 Changes in competitive landscape — Taiwan NB ODMs have been trading at low PE multiples of 7-12x during the past 12 months due to investor concerns on margin contraction and lack of execution ability. However, the wind of change is blowing as Quanta and Compal have shifted their focus to enhance profitability by improving operating efficiency and scaling down unprofitable businesses. This has led to con. op. margin expansion at Quanta and Compal in 1Q, despite continuous pricing pressure and rising costs. Wistron, on the other hand, is expanding into low margin LCD monitor and TV businesses, which could raise execution risks; also, Wistron's increasing working capital needs could result in GDR issuance with potential earnings dilution of up to 18%.

 Lack of incentives to cut price for marginal order increase — Due to rising labor and component costs, we believe NB ODMs have less incentive to aggressively cut prices for marginal order increase in this round of order bidding. Though new players such as Flextronics and Hon Hai are aggressively entering this market, they should not be immediate threats to Quanta and Compal given lack of economies of scale. If these new entrants prove their R&D and manufacturing competitive advantages, we think intense price competition might emerge in 2H09 at the earliest. Nevertheless, the impact on NB ODMs’ gross margins is unlikely to materialize until 2H10.

  Buy Quanta (TP:NT$65), Compal (TP:NT$38). Sell Wistron (TP:NT$40) — We suggest investors switch from Wistron to Quanta and Compal, as we believe Wistron could face challenges to sustain profitability levels, while Quanta and Compal are focusing on profitability improvements which should lead to solid earnings growth with dividend payouts and ROE trending up.

 

 

Citi：Quanta Computer (2382.TW)廣達

Initiate at Buy: Restructuring Efforts Paying Off
 Initiate at Buy/Medium Risk — Our DCF-based target price is NT$65, which implies 12.1/10.0x 08/09E EPS. Quanta's valuation has been low, at 8.4x/6.9x  08/09E P/E, due to investors' lack of confidence on its execution ability. However, after the management reshuffle, we have seen Quanta's efforts to control operating expense by improving operating efficiency, and it delivered
operating margin expansion amid a tough environment in 1Q08.
 Switch focus to profitability — Quanta scaled down its LCD TV and handset businesses for better control of operating expenses. In addition, it cut 5,000 jobs in its China operation in 1Q08 and improved production efficiency through increasing use of automation to respond to the rising labor costs in China. Quanta targets to lower operating expense to sales ratio to 2.5%. If it could
achieve its target and retain consolidated operating margin at 2.5%, its 09E/10E earnings could grow at least 20% YoY.
 Secured leading position in NB industry — We estimate Quanta's 08 NB shipments could reach 39.5m units, up 24% YoY, with a leading worldwide market share of 29%. As Quanta's pricing has been very competitive, coupled with its strong R&D and manufacturing capability, we tend to believe PC OEMs should have limited incentives to switch large volume ODM projects away from
Quanta to other new players in the next two years.
 The major beneficiary of strong demand for Netbook — On the back of order wins from Acer and Dell, we expect Quanta to supply 4-5m units of Netbook in 08, with 35% worldwide market share.

 

 

Citi：Compal Electronics (2324.TW)仁寶

Initiate at Buy: A Solid Value Play
 Initiate at Buy/Medium Risk — Our DCF-based target price is NT$38, which implies 10.4/9.4x 08/09E EPS. Compal trades at a lower P/E multiple due to the concerns on investment losses from VIBO and slower top-line growth in 1H. On the back of a decent dividend yield of 7.4%, strong execution in core business and improving performance in Toppoly, Arcadyan and Swenc, current
valuation seems attractive. We believe downside risk could be limited given the lowered expectations on shipment and margin trends for 2H08.
 Strong execution ability secures its op. margin — Among tier-1 NB ODMs, Compal continued to deliver the highest con. op. margin on the back of efforts on cost control and focus on large volume mainstream models to best utilize its R&D resources. Compal also became reluctant to pursue volume growth at the expense of profitability. We forecast Compal's 08E earnings (excluding effect
from employee bonus expensing) could rise 19% YoY on 11% revenue growth.
 Improving profitability in L-T investments — Toppoly used to be Compal's largest burden. However, it is expected to turn profitable in 08 thanks to increasing application for small-size panels. In addition, Swenc and Arcadyan should also deliver strong earnings growth due to improving economies of scale.
 Burden from VIBO already well known — Compal guided an investment loss of NT$2bn from VIBO in 08. After the changes in marketing strategy, VIBO should have opportunities to narrow its loss and reach breakeven by the end of 09.

 

 

Citi：Wistron Corporation (3231.TW)緯創

Initiate at Sell: Bumpy Road Ahead
 Initiate at Sell/Medium Risk — Our DCF-based target is NT$40, which implies 10.1x 08E and 9.6x 09E earnings when factoring in the potential 21% share dilution from the GDR issue. We advise investors to trim positions due to concerns on execution risk in the LCD monitor and TV business, slowing pace of further NB market share gains, and likely deterioration in profitability. Our
2008E and 2009E earnings are below consensus by 14% and 26% respectively. We do not believe the market has fully factored in potential earnings downside risk from the rising sales mix of low margin business.
 Acquisition increases execution risk — We believe Wistron’s move to acquire Lite-On Tech’s LCD monitor business is risky and could negatively impact its earnings. Wistron would need to invest significant resources and efforts to turn around this low margin business and consequently could suffer from deteriorating ROE.
 Future top-line growth mainly from low margin business — As Wistron successfully narrowed its gap with the top 2 NB ODMs, we believe further growth from the NB business will be capped for a while before Wistron gains other large customer wins. Though sales from a new growth driver (LCD TV/monitor business) could represent 20% of Wistron’s 09E revenues, earnings
contribution could be limited at around 6%.
 Increasing funding needs with declining ROE/ROIC —Though Wistron delivered strong growth in the past two years, we are concerned recent strategic changes could increase execution risk and drag down its ROE/ROIC performance.

 

 

ASUSTeK 華碩 reported disappointing June sales, with shipment target misses at their NB, MB, and Eee PC lines. Though we think ASUSTeK’s 2Q earnings could fall below market expectation, we expect its fundamentals to follow normal seasonality in 3Q from a low 2Q base. Despite possible 2Q earnings weakness, we believe ASUSTeK’s stock price weakness (down 22% from recent peak on May 19, vs. TWSE down 25%) largely prices in potentially weaker than originally expected 2Q results and outlook.

shockly

Notebook ODM: June order cut? Not showing up in the numbers... - ALERT

• Notebook ODM expectation undershot, ends up not bad at all: Consensus was 10% Q/Q growth at the beginning of 2Q (vs. JPM at 8%). After the market realized China earthquake would have material impact on tech demand in China, Compal and Wistron guided down, and market consensus dropped to 4-5% (vs. JPM at 7%).

• Verdict is out, any miss has to do with plastic casing shortage: Top-4 ODM volume aggregated to 5% Q/Q growth and 35% Y/Y. In fact, had it not been for the bankruptcy of Everskill (4th biggest notebook plastic casing vendor in the world) in mid-June, notebook ODMs could have shipped 1-2% more, which would be very much in-line with our forecasts. Compal is most affected and they say they miss 200k shipment because of this component constraint. Inventec might have some slight impact as well.

• 18% Q/Q 3Q unit growth forecast (21% Q/Q including netbook): For 3Q08, Acer is cutting order from June-August, while HP, Dell and Toshiba stay strong. Plastic casing shortage continues to be the key factor, but this should actually be very positive for ODM profitability, as nowadays they control the procurement on this front. No price hike, low priority in allocation.

• Large market growth opportunity despite cloudy macro picture. Sub-notebook is bringing 2nd PCs to the developed world, while falling price points trigger rising developing world penetration (only 10-15% penetration on household basis). In fact, this is already happening as notebook unit has been accelerating in the past 3 quarters, while most other end markets have shown cracks already.

• Position for 12-18 month strong ODM profit cycle. If our thesis on strong notebook demand trajectory is right, then manufacturers are the clear plays here, as not just unit growth likely to stay strong but also utilization – and thus pricing and margin. We have turned positive on notebook ODMs and Asustek recently. In fact, both Wistron and Compal are toning up margin guidance for 2Q this week, while Wistron also say 3Q unit will grow at least 20% (vs. 15% previously).

 

zakk

Taiwan NB supply chain
Intel Implications: Expect a solid 3Q for Taiwan NB ODMs
Strong 2Q results and optimistic guidance for 3Q — Intel reported better-thanexpected 2Q08 revenue of $9.5bn, with particular strength from NB segment. For 3Q, Intel guided revenues to $10.3bn (range $10.0bn-10.6bn), above consensus of $10.1bn. This represents a sequential increase of 8.4%, in line with the normal seasonal increase of 8-11%. Though we are not surprised by Intel's positive guidance for NB growth based on our current check on Taiwan NB supply chain, we believe investors may feel more relieved after seeing Intel's results and positive guidance for 3Q.
We expect NB shipments to resume growth momentum in 2H of July — Though Taiwan NB ODMs' 2Q NB shipments disappointed with just 4% QoQ growth, we expect 3Q NB shipments from top-5 NB ODMs to grow by 23% QoQ, vs. companies' conservative guidance of 15-20%. We expect NB shipments to resume growth momentum in 2H of July after Intel's official launch of Centrino 2 platform. NB component makers (especially for hinge and battery pack makers) also saw increasing order forecasts from NB ODMs starting from July. End demand was lackluster in 2Q due to the delayed launch of Montevina; however, we expect that recent price cuts in old Santa Rosa platform NBs could also help boost end demand.
Demand in Europe and China improving gradually — Though end demand was weak in China and Europe in April and May, Acer and Asustek have seen some demand recoveries in these two markets starting from July. Acer guides 3Q NB shipments could grow by 15-20% QoQ, while Asustek expects 3Q NB shipments to grow by 30% QoQ from a low base in 2Q. In addition, channel distributors have been adding their order forecasts in these two weeks.
Gross margin was well supported in 2Q — Despite lower-than-expected NB shipments in 2Q, Taiwan NB ODMs' gross margin should be well supported in 2Q after passing on part of cost increase to PC OEMs. Taiwanese NB ODMs generally are turning optimistic about gross margin trend given the softening component prices and rising sales mix of new models.
Reiterate our positive view on Taiwan NB sector — On the back of resilient growth outlook for 3Q, already lowered market expectations and supportive dividend yield, we reiterate our Buy ratings on Quanta and Compal.

 

 

shockly

Wistron Corporation 緯創 : No Venture, No Gain: Upgrade to OW

Investment conclusion: Along with market pullback, Wistron’s price dropped 26% post announcement company will buy Lite-On Tech’s LCD monitor business.

 

We upgrade Wistron to OW from EW: 1) At a low peer P/E (9x/7x 08/09e FD EPS), Wistron offers an added option if it executes LCD TV business well, as we believe confusion about LCD monitor acquisition is priced in; 2) Diversification should boost 09 profits on
stable NB business; 3) 2Q/3Q margins should beat market expectations. We cut PT to NT$55 (10x 1-year forward fully diluted EPS), as we trim mid-term growth rate to reflect macro concerns. Risks to our call: 1) GDR issue: our estimate is <10% dilution vs.20% announced; and 2) macro concerns – Wistron supplies mainstream NB model for Acer/HP in 2H, likely outperforming other models, despite possibly slower global demand.

austin

M O R G A N   S T A N L E Y   R E S E A R C H

Wistron Corporation （緯創）
Announced to Push-Out Monitor Acquisition by One Month

Quick Comment: Wistron announced that it would delay the proposed deal to buy Lite-On Tech's monitor business due to complications in the legal process. The effective date of the acquisition will be delayed to Aug 31, 2008 from July 31, 2008. We believe the market will read the delay of this deal neutral to slightly positive because 1) the earnings drag on 2008 earnings will be smaller as the monitor business will be loss-making initially, and 2) this shows that Wistron is taking a more prudent due-diligence process to protect its right and minimize the risks of inventory revaluation loss that many fear. We see some profit-taking pressure after the sharp share
price rebound last week. We advise investors to accumulate on dips and reiterate our OW.

Limited impact on our earnings forecasts: We modeled the monitor acquisition would take place in the end of July. Thus, the delay of this deal could bring about 1% upside to our Q3 earnings forecasts, as the monitor business will likely be loss making initially. The
delay of the deal could bring marginal upside to our 2008 earnings forecast and no changes to our 2009 forecasts as we assume the monitor business will stay unprofitable till 2H09.

Will this deal go through? We believe this deal will eventually go through despite the complications in the legal or due diligent process initially. The monitor business, if executed well, will help enhance the cost-competitiveness of its LCD TV and all-in-one PC business with Wistron’s vertical integration strategy.

 

Nonetheless, Wistron has to carefully proceed the due-diligent process given Lite-On Tech’s roughly two month monitor inventory on hand (worth NT$7bn) even though Wistron claims the contract protects Wistron from any inventory revaluation loss. We’d rather see
Wistron carefully monitor the due diligence process rather than rush into closing the deal despite potentially longer due-diligence process.

shockly

Quanta Computer (2382.TW)

We are adjusting our EPS estimates and target price for Quanta post its 3% stock dividend on July 29. Our new EPS forecasts are NT$4.91 and NT$5.21 for 2008E and 2009E, respectively. Our earlier pre-dividend estimates were NT$5.17 and NT$5.50 for 2008E and 2009E, respectively.

 

Our 12-m target price moves to NT$49 (from NT$52 pre-dividend). We do not view these changes as material, and there is no change to our investment thesis or Neutral rating.

 

Asustek Computer (2357 華碩)

 

Don’t wait
Event
We reaffirm our Outperform rating and TP of NT$108. We expect Asustek to enjoy a robust 2H08 business recovery, which would even beat our current high expectation.

Impact
Macquarie vs consensus: We are more bullish on Asustek’s 2H08 business recovery than the Street. Even so, we still see upside to our 2H08 notebook (NB) and motherboard (MB) assumptions (shipments and margins).

Strong NB demand in 2H08: Management now expects its own-brand NB to grow by 50% QoQ to 1.8m units vs our 30% QoQ expectation (1.5m) on strong demand recovery from China and Europe. Management maintains its 6.6m unit target in 2008, which implies another 25% QoQ growth in 4Q08. Although we are not as bullish as management’s guidance due to an unclear economic outlook, we still see upside to our current 2008 expectation of 6m units. 

 

MB ASP/margin recovery on track: We have been highlighting to investors that Asustek’s MB ASP/margin-contraction issue in 2Q08 was a short-term issue. We maintain this view. Our checks with our industry contacts indicate that its MB ASP/margin are both recovering strongly in 3Q08. We expect Asustek’s MB ASP to recover from US$64 in 2Q08 to US$68–70 in 3Q08 as the high-end MB (P45) contribution is rising from 2Q08’s below 5% to 20% in 3Q08. We expect good ASP and margin recovery in 3Q08.

Eee PC demand also beats our optimistic expectation: We thought our Eee PC expectation in 3Q08 – 1.5m units (+50% QoQ) – was already aggressive. Asustek is now looking at 1.8m units, which easily beats our number. This signals its Eee PC demand remains robust and the component shortage has eased. In 1–3Q08, we think Asustek should deliver 3.5m units and its 5.0m target in 2008 seems quite achievable. We maintain our 5.5m target for Asustek.

 

Earnings revision
No change.

 

Price catalyst
12-month price target: NT$108.00 based on a ROE-g/COE-g methodology.

 

Catalyst: Strong 2H08 business momentum and attractive valuation.

 

Action and recommendation
YTD, Asustek underperformed the TWSE index and Acer (2353 TT N, NT$63.5, TP: NT$62) by 3% and 18%, respectively, due to concerns about its 2Q08 profitability and slower ODM business. We have consistently believed its 2Q08 was a hiccup and expect a strong 2H08 recovery. The stock now trades at 10.6x and 8.5x 2008E and 2009E PER, respectively, which is at its low end of its historical trading range. We suggest investors overlook its 2Q08 results and accumulate ahead of its strong 2H08 business recovery.

 

Acer Inc. (2353 宏碁)

Mergers and lower component prices favor Acer

 

Remains one of our top picks
Acer is due to host its quarterly call tomorrow night (31 July) and might provide financial updates. We expect the CEO to reiterate its confidence in margin expansions and solid revenue growth given the merger synergy and lower prices of key components (ie, LCD panels). Acer remains one of our top picks in the hardware sector with dividend-adjusted PO of NT$73.9 (16% potential upside).

Will at least meet 2Q guidance
We expect Acer to at least meet its 2Q guidance — flat GP/OP margin and slight QoQ revenue decline — based on IDC’s data (up 1% QoQ in units), reasonable channel inventory levels and stable pricing for mechanical parts (new/higher pricing for select parts will largely kick in only from 3Q). Disposal gains of over NT$1bn (ie, from Wistron) should bring the upside to net earnings.

3Q upside from Netbook and lower component prices
Our checks suggest that we might see moderate 3Q upsides for Acer in both sales (MLe:19% QoQ) and OP margin (up 10bp QoQ to 2.2%). The anticipation of a solid back-to-school season demand across regions, strong ramp-up of Aspire One and the full recognition of Packard could help Acer outpace its peers (~20% QoQ). Lower prices for panels/DRAM and even CPU are positive for margins.

Sustainable margin expansion remains the key
Acer indicated its focus on profitability from 2008 — rather than growth/scale as seen in the past — now that it has reached the scale to receive favorable pricing from key components (ie, CPU/OS) via Gateway acquisition. Consistent execution and sustainable margin expansions are critical to its P/E multiple (still a discount to peers) and stock performance (up 9% YTD vs -14% for Taiex).

austin

Asustek Computer Inc. 華碩
Anticipating Strong 3Q
Recovery

 

2Q miss in the price; 3Q rebound a near-term catalyst:

We reiterate our OW rating on Asustek in view of likely strong sales/margin rebound in 3Q and cheap valuation. The stock is trading at 11x/10x our new 08e/09e EPS, at the low end of its 3-yr historical trading range of 11-21x. We cut our PT to NT$96 from NT$112
as we trim our 08/09 EPS forecasts by 12%/13% to reflect the Q2 miss and a weaker macroenvironment. Our PT is based on our RI model, or 13x target P/E for our consolidated company 08e US GAAP EPS, or 13x/10x our brand/DMS 08e US GAAP earnings. Due to the Q2 miss and concerns about intensified price competition for eeePC, Asustek’s share price has corrected by 22% from its peak this year. We believe  Asustek’s weaker 2Q is priced into the stock. The company is due to hold a 2Q analyst meeting on Aug 6,
and we expect management to give bullish guidance for 3Q, which would likely be a near-term catalyst.

Anticipate strong recovery in 3Q: Asustek’s 2Q brand name sales dropped 8% QoQ, weaker than our forecast of flat QoQ mainly due to weaker demand in China and Europe. However, we forecast Asustek’s 3Q sales will grow 28% QoQ driven by: 1) 15% QoQ MB shipment growth on rising ASP boosted by high-end new product launch on top of seasonal strength; and 2) 32% QoQ NB shipments growth driven mainly by demand recovery in China and Europe.

Slow progress in Pegatron remains the key risk: We expect Pegatron to have limited NB new order wins in the coming 09 bidding, given still 100% holding under Asustek and Asustek’s fast NB market share gains. This would also delay Asustek’s outsourcing to ODMs, which would result in higher cost structure for Asustek’s brand name NBs.

 

Notebook Sector
Taiwan: Electronics
Negative

 

We initiate coverage of three Taiwan ODMs
We initiate coverage of Quanta Computer (Quanta), Compal Electronics (Compal) and Wistron Corp. (Wistron) with 5 (Sell) ratings. We believe the unfavourable ASP and margin trend driven by low-priced notebooks (netbooks) will weaken original design manufacturers’ (ODMs) sales growth and hurt their profit margins. We expect another derating cycle to begin, with no tier-1 ODMs escaping it. We have also downgraded our rating for Acer Inc (Acer) to 3 (Hold) from 1 (Buy), and lowered our six-month target price from NT$78 to NT$66, in view of its aggressive adoption of netbooks.

 

Netbooks expected to backfire and trigger a de-rating of ODMs 

 

We forecast netbooks to boost global notebook shipment growth to 27% YoY for 2009, but market value to expand by only 13% YoY as a result of netbook-driven price erosion. We forecast notebook ASPs to drop by 11% for 2009, versus the usual 5-10% decline per
year. Also, as netbooks are commoditised, we see no more extra profit from them. Netbooks generate lower margins for original equipment manufacturers (OEMs) and component makers than regular notebooks, and we believe the lower margin will apply throughout the value chain. Therefore, we think notebook ODMs will feel further margin pressure ahead as the netbook trend prevails.

Notebook market would be better off without netbooks
Competition between netbooks and regular notebooks is inevitable. Netbooks will create new demand for secondary notebooks, but compete with regular notebooks for users looking for a primary notebook. We estimate netbooks will cannibalise 5-10% of regular notebook shipments for 2009, and believe the competition will accelerate regular notebook ASP erosion, which we forecast to widen from 5-8% to 8-10% a year. With netbooks, we forecast notebook shipment growth to rise by 27% YoY for 2009, but the market value of
notebooks to rise by only 13% YoY to US$146bn. If netbooks had not been introduced, we estimate the market value would have risen to US$150bn for 2009.

 

Notebook ODMs remain price takers in front of OEMs
ODMs’ bargaining power is not proportional to their market share. We believe the lack of price discipline, OEMs’ manipulation, and competition from electronics manufacturing service (EMS) providers will continue to undermine ODMs’ bargaining power. Recently,
OEMs granted price increases mostly for components. ODMs can barely raise their manufacture value added (MVA) given a lack of capacity constraints, but may keep the recent price increases to themselves to ease their margin pressure temporarily. However, as price takers, ODMs cannot seek price increases constantly in our view, as the OEMs retain bargaining power over the ODMs.

 

Low-cost PCs for free

 

Have the telcos gone crazy?

Event
Reports of free low-cost PCs in Europe are starting to raise eyebrows in Asia.
To help investors understand the strategy, we spoke with Guy Peddy, our European telco analyst, and Chia-Lin Lu and Daniel Chang on their strategy and the impact on smartphone sales and whether they should be perceived as a threat. The full interview by Joseph Quinn starts on page 2.

Impact
Unexploited 3G networks are likely to be one of the main reasons that telcos in Europe have been so aggressive in trying to grow their mobile broadband subscriber base. Many initially upgraded networks to meet licence requirements despite limited consumer demand and low volumes of 3G enabled devices. 3G handsets only started to gain real traction in 2007 as prices came down, yet significant data capacity remains.

Hence, the entrance of 3G data cards. Telcos in Europe have been backing data cards since the beginning but it was not until the introduction of 3.5G (HSDPA) at up to 7.2Mbps and now HSUPA with improved upload speeds that mobile operators have really been able to compete with fixed broadband. Additionally, in some markets, eg Spain and UK, the differential between mobile and fixed-broadband speeds is less significant, so mobile broadband is an easier proposition to sell. We are also seeing this trend in Asia and the US.

Low-cost PCs may be the deal breaker. As with handsets, operators are willing to subsidise heavily in return for higher monthly tariffs, and the same is true for low-cost PCs. With any average retail price of ~US$300, operators are pushing packages of unlimited mobile data usage plus a free low-cost PC and USB dongle. Contract lengths vary between 18 and 24 months and fees range around £25–35 (US$50–70) a month for example. 

 

But does this threaten smartphones? No. Mobile operators are targeting two quite distinctive and separate markets. On the smartphone side, you have a handset that is bundled with voice, data and other value-add services while the low-cost PC bundle is targeting just data usage and, hence, should conceptually impact fixed broadband providers more. Smartphone users typically want a more functional handset in a compact package (ie HTC Diamond) while a low-cost PC focuses on the main needs of the user, eg Internet access and office applications (ie Eee PC). We believe these two user segments are quite distinct and have little to no overlap.

Outlook
We remain bullish on the outlook for both low-cost PCs and smartphones with the top beneficiaries to be HTC, Asustek and Acer. As smartphones have opened up a new market segment over the past 5 years, we believe low-cost PCs can do the same. We believe the view that they will only cannibalise other product segments is incorrect. Instead, we strongly push the view that they will open up a new area of growth. To conclude, we believe the telcos have not gone crazy but remain quite rational with innovative promotions.

 

Quanta Computer Inc. 廣達

The sector’s hidden gem

 

Remains one of our top picks
We expect Quanta to report another strong set of results for 2Q08 and positive 3Q08 guidance in late August. We reiterate Buy given its compelling PE of 8.6x 08E, strong ROE/cash, and improvements in execution. Quanta remains one of our top picks in the sector (and Taiwan/regional tech). We retain our PO of NT$57.0. (11x 08E; 27% potential upside), while fine-tuning 2008/09 estimates.

Expect another solid results for 2Q08
We expect 2Q earnings to increase 7% QoQ (outperforming peers) to NT$4.3bn due to flattish revenue/OPM (2.6%; in line with target), a lower tax rate, and likely FX gains. 2Q NB PC units were in-line at 8.7mn (up 9% QoQ vs 6% for the sector), helped by its wins at Toshiba from April. However, QoQ declined shipments to Apple for NB PCs and iMac dragged sales given higher ASP.

Momentum seems to have kicked-off from July
We expect 3Q sales (value) to grow 17% QoQ (unit growth: 18%) given strong momentum from HP, Apple and Dell at consumer lines, and ramp-up of Acer’s low-price models (Aspire One). We expect OPM to slide only 10bp in 3Q as higher contract prices, rising in-house components (i.e., plastic casing), and cost saving from loss-making divisions offset the impact of a changing product–mix.

Cherry-picking among NB PC ODMs yields good returns
Contrary to popular perception, NB PC ODMs have offered solid outperformance since 2001 – so long as one cherry-picked carefully every year. We now highlight our preference for Quanta over other NB PC ODMs and Hon Hai due to its No.1 position at fast-growing NB PCs (vs Hon Hai), higher earnings quality (vs Compal), lower execution risks (vs Wistron), and the Street’s low expectations.

zakk

Citi：Taiwan NB Food Chain
Strong July Shipments Support Positive 3Q Outlook

 July NB shipments from top-5 NB ODMs up 17% MoM — On the back of new model launches, NB ODMs generally saw double-digit MoM shipment growth in July. Among top-tier NB ODMs, Pegatron outperformed with July NB shipment up 30% MoM due to increasing shipments to Lenovo. Meanwhile, Wistron July NB shipments rose 18% QoQ thanks to strong shipments of Dell's and HPQ's consumer models.

 We forecast 3Q NB shipments from top-5 NB ODMs to grow by 24% QoQ — We expect top-5 NB ODMs' shipments to regain growth momentum in Sept., following a likely flat Aug. shipment, on the back of remaining resilient order strength. We raise our 3Q NB shipment QoQ growth from previous 19% to 24%, on the back of strong July shipments and improving demand from Europe and China.

 Taiwan NB component makers also enjoy strong growth in July — July sales of Chicony and SZS also grew by 17% and 21% MoM respectively. Chicony's July revenues hit a record high thanks to strength from image and power supply products. The company guided sequential growth in the next two months and 3Q revenue could grow by 20%+ QoQ. Meanwhile, SZS indicated that hinge
orders in Aug. and Sept. remained solid on the back of new NB model launches and rising shipments of netbook. The company guides a 30%+ QoQ growth for 3Q shipments.

 Still need to watch sell-through risk in 4Q08 — From our check on Taiwan NB supply chain, we have not seen any signs of slowing shipments by Sept. However, we have to highlight the growth momentum in 3Q should come mainly from channel inventory building and we still need to closely watch sellthrough risk in 4Q08 as visibility on end-demand remains low at current stage.

 Reiterate our positive view on NB ODM sector — On the back of strong NB shipment growth in 3Q coupled with NT dollar depreciation, we think NB ODMs' share price performance could be well supported near term. We retain our Buy ratings on Quanta and Compal.

 

 

 

shockly

Nomura--Asustek Computer 華碩 [2357 TT] - BUY

Asustek released (6 August) 2Q08 results lower than we expected mainly due to eroding operating margin performance. However, this disappointing result appears to be already priced in. For 3Q08, guidance is for sturdy NB and Eee PC shipments, plus 1-2pp improvement in operating margin. Management now expects to outsource one-two NB models in 4Q08, and 30% of Eee PCs in 2009, which we read as mildly positive for Asustek’s cost edge.

shockly

Wistron 緯創 : High growth and low valuation

We upgrade Wistron to Outperform from Underperform and raise our TP to NT$65.7 from NT$50 on higher forecast earnings and a rollover of our valuation to the 2008-09E average. We think Wistron is seeing strong NB demand and that its TV profit margin recovery is underway. The sharp share price correction in recent months factors in our concern about potential losses from its newly integrated monitor business.

 

shockly

Asustek Computer 2357 華碩

We cut forecast earnings by 18-23%, on a less-than-encouraging outlook for margins and volumes at Asustek's brand operation. The revisions also reflect mounting competition in low-cost PCs. Pegatron's continued dependence on Asustek remains an overhang. We downgrade Asustek to NEUTRAL.

27 August 2008 .....11 pages
Wistron Corporation (3231 緯創)
Sell: 2Q Results In-Line but Conservative Guidance for 3Q

Raise TP to NT$46 but retain Sell (3M) as most positives already priced in — Wistron's share price outperformed TAIEX by 27% QTD. As Wistron's NB shipments could peak in mid 4Q, coupled with its need to at some time restructure Lite-On LCD monitor business, we think the share price could pull back again in 4Q given lack of catalysts to support further share price rising.

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Quanta Computer Inc. (2382 廣達)
2Q Results Mixed: Lower
OPM but Sizable FX Gains

Quick Comment – Maintain EW: Quanta’s 2Q
adjusted consolidated operating profit reached
NT$4.2bn (-19%QoQ, +7% YoY), 19%/25% below our/
consensus forecasts due to lower OPM. However, 2Q
net income was NT$5.0bn (+26%QoQ, +37%YoY),
beating our/consensus forecasts by 20%/18% due
mainly to huge FX gain of NT$2.25bn (representing 33%
of 2Q pre-tax profit and 4 times larger than 1Q’s
NT$550mn). Quanta attributed the FX gain mainly to
RMB strength in 2Q. We reiterate our EW rating post 2Q
results conference call and expect the stock to trade in
line with the market because 1) dip in 2Q OPM supports
our view that room for further margin improvement is
getting smaller after the major improvement in 1Q, plus
rising pricing pressure from Dell, which had substantial
margin drop in 2Q, 2) 2H NB shipment growth
momentum should be only in line with industry growth,
but 3) high cash yield with consistently high dividend
payout ratio (68-79% in 05-08) may limit the downside.

shockly

Quanta Computer Inc. (2382 廣達)
Riding on the strong NB PC
wave


Retain Buy and PO of NT$57; top pick among NB ODMs
Quanta posted stronger 2Q earnings and provided solid guidance for 2H08 on 29
August. We reiterate our Buy rating on Quanta (#1 NB PC assembler), as the top
pick among NB PC ODMs, given its compelling P/E of 8.5x 2008/09E, strong
ROE/cash and improvements in execution. We retain our PO of NT$57.0 (10.5x
2008/09E), while tweaking up 2008/09E earnings by 2%/1%.

shockly

Quanta Computer Inc. (2382 廣達)
Buy
A good choice in NB space with brighter 2H08E outlook. U/G to Buy

Quanta posted 2Q consolidated revenue of NT$210.9bn, 2.6% lower than GS
estimate, however net earnings of NT$5.0bn (up 25.8% qoq and 18.8% yoy),
beat both GS estimate/Reuters consensus by 23% on a large forex gain of
NT$2.6bn. 2Q GM/OP margins both declined 0.5pp to 5.0%/2.1% from 1Q.
While the market appears concerned about ODM margin erosion after Dell
posted weaker than market expected July quarter results, we expect
Quanta’s 2H08 margins will trend up from 2Q. We also think the market may
have misunderstood Quanta’s large forex gain.

shockly

Compal Electronics (2324.TW 仁寶)
Valuation appears low, but we see no catalysts; d/g to Neutral

We remove Compal from our Buy list and downgrade to Neutral because: (1) It is
the key supplier of commercial NBs to Dell, which delivered a –ve view on global
IT spending; (2) Compal’s subsidiaries are currently not profitable; (3) we believe
reduction in orders from Toshiba and Acer may result in it loosing market share.
Although Compal’s lower valuation may indicate limited downside, we believe
lack of catalysts and increasing risks may cap its upside. We reduce our ‘08E/’09E
revenue estimates by 16%/17% and ‘08/’09 EPS estimates by 5%/10%. Since we
added it to the Buy list on 04/24/07, Compal stock is down 7% vs. TWSE -12%.
We note that Compel recently completed stock and cash dividends.

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Quanta (2382.tw 廣達)
Reiterate Neutral: Margin pressure will not lift easily

2Q08 earnings were TWD5bn/TWD1.38 per share, up 25.8% q-o-q. However, after taking out non-operating FX gain (TWD2.3bn/TWD0.62 per share), both gross (2.1%) and operating (5.0%) margins missed our forecasts (2.2%/5.4%) and were down from 1Q08 (2.6%/5.5%). Higher labour cost, RMB appreciation and higher commodity prices affected gross margin. One-time charge of tooling expense affected operating margin.

 

Quanta guided to stable 20% NB unit growth in 3Q08. July and August NB shipments are on track. Quanta holds its NB shipment target at 40mn (no change) in 2008, up 25% yo-y (including low cost NB), which implies 40% growth from 1H08 to 2H08. LCD TV
shipments in 2H08 to double from 1H08 with 2mn unit target for the whole of 2008. Limited margin upside; forecasts adjusted. As we expected, Quanta suffered margin erosion in order to protect its market share. Even though it guided to recovery in operating margin (back to 2.5% level) in 3Q08, we are not so optimistic. Dell’s result showed a sharp margin decline. We believe it will try to transfer its margin pressure to its ODMs.

We raise our 2008e net profit forecast by 3.4% but cut 2009e by 5.9%.
Maintain Neutral rating; cut target price to TWD51.4 from TWD53.4. Our target price is based on a PE of 10x 2009e EPS, the middle of Quanta’s trading range over the past 18 months. Our target price implies potential upside of 14.4% including dividend yield. Quanta’s share price is trading at 9x 2009e PE with limited upside.

Acer Inc (2353 宏碁)
Initiate at Buy: When Things Get Tough, the Tough Get Going

Initiate at Buy/Medium Risk — Our DCF-based target price of NT$74 implies 13.2x reported and 14.6x core FY09E EPS. Acer should outperform its peers in a tough environment, in our view, as it has reinforced its leadership with the acquisition of Gateway and Packard Bell. Improving economies of scale and cost synergies should further expand its operating margin. Moreover, Acer’s just launched Netbook, Aspire One, could be a growth driver in 2H08E-09E.

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Asustek Computer 2357 華碩
Adjusting EPS and target price on stock dividend

We are adjusting our EPS estimates and target price for ASUSTeK post its
10% stock dividend on August 29. Our new EPS forecasts are NT$6.72/
NT$7.06/ NT$7.72 for 2008E/2009E/2010E, respectively. Our earlier predividend
estimates were NT$7.48/ NT$8.04/ NT$8.79 for
2008E/2009E/2010E, respectively. Our 12-m target price moves to NT$84
(from NT$95 pre-dividend). We do not view these changes as material, and
there is no change to our investment thesis or Buy rating.

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Compal Electronics (2324.TW 仁寶)
Weaker 3Q; But Netbooks Ramp to Help 4Q

Quick Comment – US corporates still weak, but
netbook ramp to help 4Q: Compal held 2Q analyst
meeting today. It cut 3Q and 08 targets mainly due to
weakness in the US commercial NB market coupled with
soft demand in Europe starting in 3Q. However, 4Q
guidance was better than our forecasts mainly due to
netbook ramp. We understand Compal is the major
supplier for Dell’s netbook – Inspiron Mini 9 (shipments
started in Sep and 08 shipment target is close to 1mn).
We reiterate our EW rating given Compal’s high exposure
to vulnerable US corporate NBs (it is the major supplier
for Dell’s commercial NB) and earnings risk from TPO.

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Compal Electronics (2324.TW 仁寶)
Anticipated cracks, laggard in good industry dynamics


Good industry dynamics, laggard for a reason: Notebook ODMs
have outperformed the TWSE by 20% since mid-June. In our view,
ODM pricing power is in a sweet spot of strong demand and
constrained supply. Compal has been a laggard due to companyspecific
hiccups and slower future growth. “A rising tide lifts all
boats”, so Compal should eventually benefit from improving industry
dynamics as well. We stay OW with a DCF-based Jun-09 PT of
NT$40. A key risk to our PT is that if demand falls apart, pricing
power will fall into the hands of consumers, resulting in margin
contraction of the entire PC supply chain.

zakk

Daiwa：ASUSTeK Computer (2357 TT) 華碩

Could be the next to cut its notebook-shipment forecast

We believe Compal Electronics (2324 TT, NT$25.50, 5) will not be alone in
cutting its notebook-shipment forecasts for 3Q, 4Q and FY08. We think
ASUSTeK Computer (ASUSTeK) may follow suit soon.

 

大和總研：需求不如預期 績優生華碩恐跟進調降NB出貨目標 (cnYES)

    NB需求不如預期，不只仁寶 (2324-TW)調降出貨目標，大和總研預估，NB績優股華碩 (2357-TW)可能很快就會步上後塵；加上宏碁Aspire One問市，對華碩的代表作Eee PC更是一大打擊。

    由於中國市場需求並未如預期恢復，而歐洲市場雖回溫，但仍無法彌補其他地區的下滑；大和總研技產業分析師黃文堯點名，在市場需求無法提振下，華碩有可能第 3次調降2008年NB出貨預期目標，從 600-660萬台下修至600萬台；而第3季NB的出貨量可能僅符合原先預期150-180萬台的低標。

    華碩前 2次調降NB出貨目標時，股價已先行反映，若在度調降目標，股價可能也難以避免將進行修正。

    此外，宏碁Aspire One上市後，果然對華碩Eee PC形成威脅；宏碁預估第3季Aspire One將可達到220萬台的出貨量，華碩Eee PC卻僅有 150-180萬台。不只國內競爭對手宏碁來勢洶洶，戴爾和聯想也積極進行低價促銷，將價格調降至349美元，比起Eee PC的450美元便宜了100美元以上。

    黃文堯認為，Eee PC過去被市場給予過高的評價，但在Aspire One及其他 NetBook上市後，Eee PC已缺乏產品區隔性，如此一來，華碩恐怕要以削價方式才能維持 NetBook龍頭品牌的寶座，獲利也將因此跟著降低。

    而在主機板方面，儘管華碩以極具競爭力的價格在大陸市場贏回市佔率，但期盼奧運後市場復甦的美夢恐怕難以達成，華碩第3季15%的出貨成長率可能有下修危機；且第3季為主機板出貨旺季，第4季將出貨量將更為減少；大和總研評估，要達成華碩預期今年 240萬個主機板的出貨量，恐怕是個大挑戰。

    黃文堯比喻，華碩向來是市場最愛的「績優股」，也因此被給予更高的期待，但再好的學生都可能因為目標訂得過高而失敗；大和總研提醒，若不想遭到華碩拖累，就應趕快出脫持股，重申「賣出」警示。

Daiwa：Quanta Computer (2382 TT) 廣達

Another clue: the netbook is poisoned

Quanta Computer’s (Quanta) sales declined by 18.5% YoY for August, despite
notebook (including netbooks) shipment growth of 7% YoY. We believe this is
another clue pointing toward netbooks’ cannibalisation of regular notebooks.