CHINA_SMARTPHONE_SECTOR：INNOVATION_EXPANDING_THE_LOW-TIER_OPPORTUNITY-2012-10-18.ppt

V12,03 October 2012Asia PacificEquity ResearchTechnology Hardware&EquipmentChina Smartphone Sector,Research AnalystsRandy Abrams,CFA886 2 2715 6366randy.abramscredit-Yan Taw Boon852 2101 7039yantaw.booncredit-,CHANNEL CHECKInnovation expanding the low-tier opportunityFigure 1:Low-cost smartphone build costs span from low to high-endV4000 V8 V9 V11,BOM Price:TechnologyDisplayOperating SystemCameraPixelsProcessorBatteryChipset,$58EDGE3.5Android 2.32MP480 x320650MHz1400mAhMT6573,$105WCDMA4.0Android 2.35MP800 x480650MHz1500mAhMT6573,$125WCDMA4.3Android 4.05MP960 x5401 Ghz1600mAhMT6575,$150WCDMA4.5Android 4.08MP1280 x7201 Ghz1600mAhMT6575,$185WCDMA4.5Android 4.08MP1280 x7201.2GHz Dual Core1600mAhMT6577,Source:Company data Chinas smartphone innovation fuelling the market.We remain positiveon the smartphone growth opportunity in emerging markets following ourvisit to the P/T Expo Comm in Beijing and recent updates from the carriersand supply chain.A broader range of price points from EDGE up to multi-core HSPA+/TD can allow Chinese brands to gain share and grow.TD-SCDMA push more aggressiveMarvell/Spreadtrum to benefit.China Mobile at its TD-SCDMA summit projected 60 mn units in 2012 andmore than 100 mn in 2013 with over 50 mn into the open channel.Marvell islaunching a quad core TD/WCDMA solution next year while Spreadtrumleads in the low-end and will launch dual core for volumes in 1Q13.WCDMA:Spanning a wider price rangeQualcomm/Mediatekaggressive.The low-cost WCDMA channel is witnessing a rapid move tomulti-core processors,allowing Chinese brands to garner share from themid-tier with more functionality.Mediatek and Qualcomm quad coreplatforms are targeting 1Q13,though joined by Marvells quad A7TD+WCDMA(PXA1088)later in 1H13.Low-cost tablets are anotheropportunity at 50 mn units in 2012 although the IC space is crowded withprivate Chinese companies.Mediatek will launch a standalone AP in 2013.Stock calls.We expect share gains from local Chinese vendors,broaderproduct lines at wider price ranges and push in export channels to continuehealthy unit growth in 2013.Main risks are:(1)normal inventory correctionsand(2)chipset price cuts which will limit some bullish calls for meaningfulGM expansion.We are RESTRICTED on Mediatek but see an attractiveopportunity at reasonable valuations for Spreadtrum and RDA in chipsetsand AAC in micro-acoustic components.DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS.U.S.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.Investorsshould consider this report as only a single factor in making their investment decision.,CREDIT SUISSE SECURITIES RESEARCH&ANALYTICS,BEYOND INFORMATIONClient-Driven Solutions,Insights,and Access,2,03 October 2012Focus charts and tables,Figure 2:Tier 2 brands now gaining share in China,Figure 3:Emerging mkts surpassed developed mkts in 1Q12,Mn(units)30,00025,00020,00015,00010,0005,0000,Local brand share(%)40.0%35.0%30.0%25.0%20.0%15.0%10.0%5.0%0.0%,Mn(units)100,00090,00080,00070,00060,00050,00040,00030,00020,00010,0000,Emerging mkt share(%)60.0%50.0%40.0%30.0%20.0%10.0%0.0%,1Q11,2Q11,3Q11,4Q11,1Q12,2Q12,1Q11,2Q11,3Q11,4Q11,1Q12,2Q12,Tier 2 brands,Huawei/ZTE,Tier ones,Local brand share,Developed market units,Emerging market units,Emerging market share,Source:Company data,Credit Suisse estimates,Source:Company data,Credit Suisse estimates,Figure 4:Upcoming single-chip dual-core apps processor+TD-SCDMA baseband,Chipset vendorChipset modelAvailabilityBasebandCPU coreClock speedGraphicsGPU performanceCamera supportVideo performanceProcess,MarvellPXA9883Q12TD-HSPA/EDGE/GSMDual-core ARM Cortex A91.2 GHzVivante GC10001,560M Pix/s,96M Tri/s16-Mpixels1080p Full HD40nm,LeadcoreLC18103Q12TD-HSPA/EDGE/GSMDual-core ARM Cortex-A91.2 GHzARM Mali 400550M Pix/s,35M Tri/s20-Mpixels1080p Full HDTSMC 40LP,SpreadtrumSC88204Q12ETD-HSPA/EDGE/GSMDual-core ARM Cortex-A51.2 GHzARM Mali 400256M pix/s,30M Tri/s8-Mpixels720pTSMC 40LP,MediatekMT65831Q13EHSPA+/TD-SCDMADual-core ARM Cortex-A71.X GHzPowerVR SGX5441,600M Pix/s,55M Tri/s8-Mpixels720pTSMC 28nm,Source:Company dataFigure 5:LTE-FDD/TDD chipsets from major chipset vendors,Chipset vendorModelBasebandLTEDL/UL speedMIMOProcess node,MarvellPXA1802TD-LTE/LTE FDDLTE Category 4150/50 MbpsN/A40LP,LeadcoreLC1761LTD-LTE/LTE FDDLTE Category 4150/50 Mbps4x2 MIMO40LP,SpreadtrumSC9610TD-LTELTE category 3100/50 Mbps2x2 MIMO40LP,MediatekMT7138TD-LTE/FDD-LTELTE category 4100/50 MbpsN/A65LP,HisiliconBalong 710TD-LTE/LTE FDDLTE Category 4150/112 Mbps2x2/4x2 MIMO40LP,Source:Company data,Figure 6:Android tablet units catching up with iPad120100806040,Figure 7:Some 80%of tablets made in China are exported6050403020,10200,0,2011,2012E,2010,2011,2012,2013,2014,2015,2016,China-tablet shipment(mn units),Source:IDC,iOS,Android,Others,Source:EETimes,China-domestic tablet shipment(mn units),China Smartphone Sector,3,03 October 2012Innovation expanding the low-tieropportunityWe provide an update on the low-cost smartphone market following our visit to the P/T CommExpo in Beijing and recent developments from the carrier and supply chain.Keydevelopments include:(1)China Mobiles more aggressive push on TD-SCDMA,(2)innovation on multi-core platforms to have an effect on performance rather than cost,and(3)fast expansion in the low-cost tablet space,though dominated by unlisted Chinese vendors.,We remain positive on the emerging markets smartphones growth opportunity and believe2013 can remain a solid growth year with enough market expansion and productinnovation from the chipset players to maintain growth with at least stable margins.Abroader range of price points from low-end EDGE up to multi-core HSPA+can allow thebranded Chinese vendors to gain share and squeeze the mid-tier vendors further.We notethat emerging markets have overtaken developed markets this year in volume terms andlow-cost vendors in China have seen a rapid inflection in the past few quarters to takemarket share.Once growth slows and the market becomes saturated,the space will needto consolidate or find continued ways to innovate(rather than race to the bottom on costs)to avoid excess profits crowded out by new entrants as happened in feature phones.In themeantime,we still see significant expansion both in China and the export channel,whichis still at a nascent stage.,Chinese brands have anenlarging ecosystem todrive share gains,Figure 8:Tier 2 brands now gaining share in China,Figure 9:Emerging mkts surpassed developed mkts in 1Q12,Mn(units)30,00025,00020,00015,00010,0005,0000,Local brand share(%)40.0%35.0%30.0%25.0%20.0%15.0%10.0%5.0%0.0%,Mn(units)100,00090,00080,00070,00060,00050,00040,00030,00020,00010,0000,Emerging mkt share(%)60.0%50.0%40.0%30.0%20.0%10.0%0.0%,1Q11,2Q11,3Q11,4Q11,1Q12,2Q12,1Q11,2Q11,3Q11,4Q11,1Q12,2Q12,Tier 2 brands,Huawei/ZTE,Tier ones,Local brand share,Developed market units,Emerging market units,Emerging market share,Source:Company data,Credit Suisse estimates,Source:Company data,Credit Suisse estimates,Aggressive TD pushMarvell/Spreadtrum to benefitChina Mobiles TD-SCDMA push growing more aggressive,China Mobile(CM)held a TD-SCDMA summit last week for its supply chain and projectedan optimistic stance for market growth.The company maintained its expectations to sell60 mn TD-SCDMA mobile terminal devices in 2012,up from 9.4 mn in 2010.Spreadtrumbelieves that volume will also be supplemented by 2030 mn retail channel units.Morenotably,CM now expects to sell over 100 mn TD-SCDMA mobile terminals in 2013,80%of which will be smartphones.Further,CM is looking to split the 100 mn units,with 50 mninto the carrier channel and 50 mn in the retail open channel to allow faster time to marketand customisationtraits that could enable Spreadtrums low-cost supply chain.China Mobile also plans to expand its distribution channels to allow customers to buy TD-SCDMA devices from both CM outlets and its partners sales network.The company hassigned strategic deals with several nationwide consumer electronics stores,includingSuning and Gome.China Smartphone Sector,China Mobile projects itsTD-SCDMA shipments willexpand from 60 mn units in2012 to 100 mn+in 2013,2014,4,03 October 2012More multi-core TD-SCDMA chipsets coming into the market,Multi-core TD-SCDMA chipset designs are proliferating with major chipset supplierssampling dual-core solutions in 3Q/4Q12.Spreadtrum and Mediatek will have massproduction on dual-core TD-SCDMA smartphone chipsets in 1Q13 and 2Q13,respectively.Marvell unveiled the PXA988 dual-core TD-SCDMA smartphone solution.Leadcore alsorecently launched a 40nm TD-SCDMA chipset LC1810 with dual-core Cortex-A9 and ARMMali 400 GPU.Coolpad is the first customer of LC1810 with product lunch in October 2012.This will follow by ZTE,Lenovo,Haier,and Tianmai.Leadcore targets to have 28nm quad-core TD-LTE by mid-2013.We expect Leadcore,Mediatek and Marvell to compete onhigher-end designs,with Spreadtrum still having strong share in the entry level and addingsome initial higher-end devices once it has its dual core chipset available in 2Q13.Figure 10:Upcoming single-chip dual-core apps processor+TD-SCDMA baseband,Multi-core TD-SCDMAchipsets are coming fromLeadcore,Marvell,Mediatekand Spreadtrum,Chipset vendorChipset modelAvailabilityBasebandCPU coreClock speedGraphicsGPU performanceCamera supportVideo performanceProcess,MarvellPXA9883Q12TD-HSPA/EDGE/GSMDual-core ARM Cortex A91.2 GHzVivante GC10001,560M Pix/s,96M Tri/s16-Mpixels1080p Full HD40nm,LeadcoreLC18103Q12TD-HSPA/EDGE/GSMDual-core ARM Cortex-A91.2 GHzARM Mali 400550M Pix/s,35M Tri/s20-Mpixels1080p Full HDTSMC 40LP,SpreadtrumSC88204Q12ETD-HSPA/EDGE/GSMDual-core ARM Cortex-A51.2 GHzARM Mali 400256M pix/s,30M Tri/s8-Mpixels720pTSMC 40LP,MediatekMT65831Q13EHSPA+/TD-SCDMADual-core ARM Cortex-A71.X GHzPowerVR SGX5441,600M Pix/s,55M Tri/s8-Mpixels720pTSMC 28nm,Source:Company dataTD-SCDMA smartphones pushing down to lower price points,China Mobile recently raised its TD-SCDMA terminal subsidy budget from Rmb20 bn toRmb26 bn even after only spending Rmb12 bn in 1H12.We believe the carrier subsidiesare also shifting to lower cost phones now that more suitable entry-level smartphones areavailable.We see mass-market TD-SCDMA smartphones(1GHz single core)ASPs fallingtowards Rmb500700 range with some of the new 2H12 product introductions.Spreadtrum has secured a number of TD-SCDMA wins(noted in the Figure below)with itssolution for this channel.Figure 11:Spreadtrum design wins starting to ramp for its 1 GHz single core chipset,TD-SCDMA drawing insubscribers with lower costsmartphones,Haier HT I617,Huawei 8808D,K-Touch T800,K-Touch T580,Lenovo A288t,ZTE Nova V6500,Image,Technology,TD-SCDMA/GSM TD-SCDMA/GSM TD-SCDMA/GSM TD-SCDMA/GSM TD-SCDMA/GSM,GSM,HSDPAOperating SystemPixelsProcessorDisplay,YesAndroid320 x4801Ghz3.5,YesAndroid 4.0480 x8001 Ghz4.0,YesAndroid 2.3480 x8001 Ghz4.0,YesAndroid 2.3320 x4801 Ghz3.5,YesAndroid 2.3320 x4801 Ghz3.5,YesAndroid 2.3320 x4801 Ghz3.5,Source:Company dataTD-LTE plans to get more aggressive,From our checks,CM has completed the tendering of 4Q12 TD-LTE network builds(20,000 TD-LTE base-stations)and will start the 2013 tendering process for 200,000 TD-LTE base-stations as early as 1Q13.ZTE and Huawei have each secured 30%marketshare in the 4Q12 deployments and we expect a very similar share allocation for 2013.Last week,China Mobile announced that it will,in 4Q12,start the procurement of 200,000TD-LTE mobile terminals(including data cards and handsets).In mid-September,ChinaChina Smartphone Sector,TD-LTE network push on toget service launched in,5,03 October 2012Mobile also invited bidding for 35,000 TD-LTE mobile terminals for network trials.BesidesQualcomms MSM8960,a handful of chipset vendors now offer multi-mode TD-LTEsolutions.These include Hisilion,Innofidei,Leadcore,Marvell,Mediatek,Sequans,Spreadtrum,and a few others.With aggressive push and MIIT likely to issue 4G licensesto CM as early as at the end of 2013,we see TD-LTE smartphones becoming mainstreamin 2014E when over 200,000 TD-LTE base-stations are in operation.Figure 12:LTE-FDD/TDD chipsets from major chipset vendors,Chipset vendorModelBasebandLTEDL/UL speedMIMOProcess node,MarvellPXA1802TD-LTE/LTE FDDLTE Category 4150/50 MbpsN/A40LP,LeadcoreLC1761LTD-LTE/LTE FDDLTE Category 4150/50 Mbps4x2 MIMO40LP,SpreadtrumSC9610TD-LTELTE category 3100/50 Mbps2x2 MIMO40LP,MediatekMT7138TD-LTE/FDD-LTELTE category 4100/50 MbpsN/A65LP,HisiliconBalong 710TD-LTE/LTE FDDLTE Category 4150/112 Mbps2x2/4x2 MIMO40LP,Source:Company dataBeneficiaries on TD-SCDMASpreadtrums mainstream still consists of entry level smartphones,Spreadtrums volume is still on low-cost EDGE and TD-SCDMA platforms where itscustomers are introducing sub US$100 smartphones.The company is planning its firstWCDMA chipset and TD-SCDMA dual core chipset for sampling in 4Q12 and 1Q13production,with quad core one quarter later.The companys timeline has been 12quarters later than peers but is still gaining share by targeting lower-cost designs in thelower-end segment of the market.We raised estimates recently to the high-end of 3Q12guidance and model a 4Q12 decline below street due to ramp of multiple branded Chinesecustomers for TD-SCDMA.We model smartphones ramping from 27.5 mn units in 2012 to90 mn in 2013 as the company adds WCDMA,multi-core and also grows its EDGE andTD-SCDMA business with a full-year of shipments in 2013 after shipping for only half ayear in 2012.Figure 13:Spreadtrums shipments,Spreadtrum securing a goodposition in entry levelsmartphones,US$mn unless notedFeature phones(mn)ASPs(US$)Smartphones(mn)ASPs(US$)Sales by phone type2.5G/2.75G units(mn)ASPs(US$)TD-SCDMA units(mn)ASPs(US$)WCDMA units(mn)ASPs(US$)Sales by standardGM%Op M%GAAP EPSPro Forma EPS,200923.4$4.480.0$0.0010522.3$3.781.2$17.650.0$0.0010536.4%-18.4%-$0.43-$0.63,201089.1$3.890.0$0.0034677.4$2.9711.7$9.960.0$0.0034644.0%20.0%$1.29$1.48,2011198.8$3.380.2$7.79674169.2$2.7229.8$7.170.0$0.0067441.6%20.2%$2.49$2.79,2012233.0$2.2627.5$6.40701227.4$2.1932.8$6.160.3$7.0070137.4%14.3%$1.75$2.20,2013F193.3$1.5990.0$5.41794207.1$1.8138.9$5.5337.2$5.4979437.9%15.1%$2.05$2.42,2014F160.5$1.28148.8$4.47871194.1$1.8040.8$4.6274.4$4.4787138.3%16.1%$2.34$2.71,2015F124.9$1.05217.8$3.63920188.3$1.8445.6$3.92108.9$3.6392038.4%16.6%$2.51$2.87,Source:Company data,Credit Suisse estimatesChina Smartphone Sector,2,SCDMA,6,03 October 2012Marvellnew multi-core TD-SCDMA/WCDMA platforms for 2013,Marvell is launching new chipset platforms targeting three variants of smartphonesdual-core TD-SCDMA,dual-core WCDMA,quad-core TD-SCDMA/WCDMA.The PXA986/988is a single platform with software and pin compatibility for dual-core WCDMA/TD-SCDMA(RF833/838 for WCDMA/TD-SCDMA,respectively).Marvell plans to launch the PXA1088quad-core TD-SCDMA+WCDMA soluti