PCSECTOROUTLOOKGOOGLEFIGHTSAPPLEWINDOWS8SITSOUTSIDETHERING1128.ppt

Arthur Liao1Taiwan Equity |Annual ReportFubon ResearchNovember 20, 2012Market WeightSource: Company, Fubon ResearchPC sector vs. TaiexPC sector 2013 outlookGoogle fights Apple, Windows 8 sits outside the ringInvestment summaryWith the rise of tablets and smartphones, consumers are spending less time on NBs.Mobility is becoming more important than stationary productivity. With the proliferationof wireless connectivity (3G, LTE), consumers’ preference for mobility is higher thanever. Basic tasks like e-mail, web browsing, social networking and media consumptionwhich were previously done on NBs have moved to mobile devices. This structural shiftin consumer behavior leads us to believe that the NB industry will not grow in 2013.Google and Apple the leading players, Windows 8 standing byGoogle has launched its Nexus series family of products, setting Nexus 4 vs. iPhone 5,80706050x 1.41.21.00.8Nexus 7 vs. iPad Mini and recently, Nexus 10 vs. iPad. We expect more intensecompetition between Google and Apple in mobile devices in the future. Bothcompanies want to dominate and grab maximum profit from mobile devices. However,we don’t see any advantage for Windows 8 amid this trend. Google’s best interest is ifthe tablet market becomes a commodity market like the PC, which would help drive theadoption of Google Play, the alternative to iTunes. In Taiwan, we view only Asustek11/11/1412/2/1412/5/1412/8/1412/11/14(2353 TT, Add) as a Google play stock.PC sector indexSource: Fubon Research(886-2) 6600-5930arthur.liao@Lynn Luo(886-2) 6600-5965lynn.luo@Sector/Taiex (RHS)Tablet substitution cannibalizing NBsWe expect PC (NB+DT) sales to decline 3% YoY in 2013 to 340mn from 349mn in 2012.With tablet substitution for NBs accelerating, we revise down our NB projection to194mn (down 4% YoY) and expect that the unit gap will be only 30mn units betweenNBs and tablets in 2013, with more tablets than NBs in 2014. Combined NB and tabletunits are expected to grow 12.2% in 2012, which will likely increase to 15.7% in 2013,suggesting that there is no real demand issue, but rather an issue of substitution(tablets substituting for NBs). Compal (2324 TT) and Wistron (3231 TT) will be victims ofthis trend, but Pegatron (4938 TT) is likely to come out a winner.Will iTV launch in 4Q13?Limited TV content is an obstacle for the spread of smart TVs, and we believe it will takesome time before we see widespread sales. We believe the driving force will be fromdedicated TV applications, user interface differentiation, and a shift to larger sizes(>50”). We expect that Apple will launch its 60” iTV in 4Q13 because its ecosystem onthe iPhone and iPad is mature, there are enough applications, and the OS includes theuser-friendly Siri voice interface. Hon Hai (2317 TT) will likely benefit as the soleassembler.PC sector valuation summaryCompanyTickerMktCapFubonPriceTPEPS (NT$)PE (X)PB (X)ROE (%)Yield (%)(US$mn)Rating(NT$)(NT$)FY12FFY13FFY12FFY13FFY12FFY13FFY12FFY13FFY12FFY13FHon HaiAsustekPegatronAcerQuantaSynnexWistronCompal2317 TT2357 TT4938 TT2353 TT2382 TT2347 TT3231 TT2324 TT36,6698,0502,8472,2769,0103,0582,1272,807AddAddAddNeutralNeutralNeutralReduceReduce903113723685628191073504422606124168.029.82.10.26.24.22.81.58.631.43.01.65.94.83.01.611.310.417.396.110.913.310.012.310.59.912.415.111.511.99.411.71.61.80.90.81.92.01.00.71.41.70.80.81.81.90.90.713.618.45.10.918.315.49.76.113.717.96.85.516.016.610.05.72.06.33.0N.M.5.95.35.316.22.06.74.24.35.95.36.016.2Source: Fubon Research estimates as of close on 2012/11/15See last page for disclaimer.2Taiwan Equity |Annual ReportGoogle and Apple the leading players, Windows 8 standing byIn our view, Google launched the Nexus 4, Nexus 7 and Nexus 10 to gain share for theAndroid ecosystem vs. the iOS. Google has a 95% share of mobile search, underscoring itsstrong mobile position. Some industry reports said that Google could be generatingaround US$9 per year per smartphone in the US and Western Europe through advertisingthrough Google’s search engine.Long-term, it is probably in Google’s best interest if the tablet market becomes more like acommodity market, similar to what happened historically in the PC space, which wouldhelp drive the adoption of Google Play, the alternative to iTunes. For example, the Nexus 7tablet with Android OS is optimized for consumer music, movies, games, books andmagazines through Google Play.In addition, we note that Google acquired Motorola Mobility in 3Q11 for US$12.5bn andadded over 17k patents to enhance the Android system. In the long term, Google will likelywork with top-tier mobile vendors to develop a high-end model to more directly competewith Apple, similar to Nexus 4 vs. iPhone 5, Nexus 7 vs. iPad Mini and Nexus 10 vs. iPad.Figure 1: Google vs. Apple product comparisonNexus 4iPhone 5Nexus 7iPad MiniNexus 10iPad 4Display4.7" IPS LCD 1280 x768, 318 ppi4.0" in-cell TFT1136x640, 326ppi7" (1280x768) IPS LCD,216ppi7.9" (1024x768) IPSLCD, 162ppi10.5" (2560x1600),300ppi9.7" (2048x1536) IPSLCD, 264ppiCPUQualcomm SnapdragonS4 Pro, Quad core,1.5GHzApple A6, Dual core,1.3GHzTegra 3 quad-core1.3GHzApple A5, Dual core,1GHzSamsung Exynos 5, Dual Dual core, Apple A6X,core, 1.7GHz 1.4GHzOSCameraMemoryAndroid 4.28MP / 1.3MP2GB RAMiOS 68MP, f2.4 (AF; 1080p) /1.2MP HD1GB RAMAndroid 4.11.2MP front camera1GB RAMiOS 65MP (1080p video) /1.2MP512 MB RAMAndroid 4.25MP (1080p video) /1.9MP2GB RAMiOS 65MP (1080p video) /1.2MP1GB RAMDimensions133.9 x 68.7 x 9.1 mm123.8 x 58.6 x 7.6 mm 198.5 x 120 x 10.45 mm200 x 134.7 x 7.2 mm 263.9 x 177.6 x 8.9 mm 241.2 x 185.7 x 9.4 mm16.3-watt-hour42.5-watt-hourBattery2100mAh1440mAh4325 mAhrechargeable9000mAhrechargeablelithium-polymer batterylithium-polymer batteryStorage8GB/16GB16GB/32GB/64GB8GB/16GB16GB / 32GB / 64GB16GB / 32GB16GB / 32GB / 64GBSource: Company, Fubon ResearchSee last page for disclaimer.3Taiwan Equity |Annual ReportApple’s business model hard to duplicateApple’s mobile device strategy can be defined as tight control over hardware, software andits distribution platform, coupled with continuous innovation and refinements both inhardware and software. After Apple’s success with the iPad and iPhone, an increasingnumber of industry participants have begun to adopt a similar strategy. However, wecontinue to believe that Apple’s mobile strategy will be difficult to replicate.Apple has designed its own CPU (AX series, system-on-chip), operating system (iOS) andis developing/maintaining its own software/media distribution platform (App Store, iTunesStore) and retail channel (Apple Store). This has historically led to limited fragmentation inthe ecosystem and higher profitability for Apple.Figure 2: IT business model is changingCPUOSRetailerSource: Companies, Fubon ResearchOn the other hand, within the Wintel camp, the CPU, software and channel sales arecontrolled by Intel, Microsoft and several PC OEMs, respectively. Unfortunately, Microsoftand Intel garner 60~70% of the profit, with PC OEMs only getting 10~15% as they areproduct resellers. Now, the Android OS offers a good chance for PC and handset OEMs togenerate more profit in this evolving tech ecosystem. Also, we believe that PC OEMs willbecome more aggressive than smartphone vendors in the tablet market.See last page for disclaimer.4Taiwan Equity |Annual ReportFigure 3: Android and iOS redefine IT tempo199820002001200720092012CupcakeHoneycombJelly Bean20092010201120122013iOS 1.0200720082009201020112012Source: Companies, Fubon ResearchAs seen in Figure 2, Google Android and Apple iOS have updated a new version each yearsince the launch of Cupcake in 2009 and iOS in 2007. However, Windows released a newversion after a 4~5 year delay, and it is not entirely suitable for mobile devices. We knowthat mobile devices typically change hardware specifications (like panel resolution, APUperformance) and software/media development (new games, apps) each year, and we seethis as a disadvantage for Windows 8 in the fight with Apple and Google for the next fewyears.See last page for disclaimer.5Taiwan Equity |Annual ReportWindows 8 – a war Microsoft cannot afford to loseMicrosoft is being challenged by Apple and Google where end-users prefer a light andeasy OS and are content with less powerful computing. Looking ahead, as user-interfaceintegration becomes more important, we think that Windows 8’s new UI: Metro UI andWindows Store may give consumers a new experience.There are several interesting key features, including:1). Fast-launching apps from a tile-based Start screen, replacing the Windows Start menuwith a customizable, scalable full-screen view of apps.2).Live tiles with up-to-date information from the apps3).Touch-optimized browsing when using Internet Explorer 10.Microsoft has adopted a touch-screen function for Windows 8, allowing fulltouch-optimized browsing with any hardware including tablets, PCs and mobile devices.Windows 8 still lacks a sufficient number of apps, and developers are lukewarm due to itssmall market share. Thus, Microsoft needs to push its OEMs or its product lines to increasemarket share, which will then encourage software companies to develop compatibleapplications in Windows 8 instead of iOS or Android. Otherwise, Windows 8 will onlydominate the PC market but lose share in mobile devices, which have twice the volume ofthe PC segment.See last page for disclaimer.workNo6Taiwan Equity |Annual ReportFigure 4: Smartphone OS comparisonApple iOS 6Google Android Jelly BeanMicrosoft Windows RT / Phone 8Selection of appsCall features650,000+ Apps- decline a call with a canned SMS response- filter out calls from specified contacts600,000+ Apps- decline a call with a canned SMS response- filter out calls from specified contacts100,000+ Apps- filter out calls from specified contacts- include a Do Not Disturb toggleVoice command-launch apps-pull data from various sources-voice search and dictation-built-in speech recognition which supports offline-place calls and send texts-search the web and launch apps-interface with car audio and navigation systemsMaps-Apple's own map-3D buildings-turn-by-turn navigation-traffic updates-points of interest-Google maps-3D buildings-offline caching-turn-by-turn navigation-Street View and Compass Mode-NAVTEQ maps-3D buildings-offline caching-turn-by-turn navigation-dynamic routing for public transitMobile payment-Passbook in iOS6 will collect tickets, rewards cards, -Google Wallet includes mobile payments, deals,-Wallet allows users to store credit/debit cardsdebit/credit cards, etc. into a single app.rewards and offers.and rewards/loyalty cards and to access deals.-deliver updates and notifications-limited mobile partners (Sprint in US, MasterCard) -It will make use of secure NFC elements stored-limited devices with NFCon SIM cards.Browser syncBrowsing across all of iOS and OS X devices areunified by iCloud Tabs.Tabs, bookmarks and search syncing throughChrome Beta.Media streamingSmarter Icons-Airplay lets users stream music, photos, and videowirelessly from iOS devices to the Apple TV andAirPlay-enabled speakers.-only available within Apple product ecosystem-Badges would show up on an app when there arenew messages, emails or notifications.-However, they don't display information.-For Android devices, the hubs will be able to takeaudio and video streams, and split them out totelevisions and speakers.-Android employs widgets for real-time updates,which allows for a certain degree of customization.-SmartGlass serves as the media streamingportal to the Xbox and pushes content back andforth between the Xbox and Windows8/Windows Phone 8 devices.-Live Tiles display notifications and importantinformation.-Users are able to personalize the tiles into threedifferent sizes depending on how they want theinformation displayed.Source: Company, Fubon ResearchSee last page for disclaimer.7Taiwan Equity |Annual ReportTablets a substitute, cannibalizing NBsWe are cutting our PC sales forecast again and now expect PC shipments to decline 3% in2013 to 340mn from 349mn in 2012. As tablet substitution over NBs is accelerating withcheaper Android tablets, Apple dropped the price level with the new iPad mini, andWindows 8 now supports the tablet form factor. We revise down our NB forecast to 194mn(down 4% YoY) and expect that the unit gap with tablets will be only 31mn units in 2013,and we expect tablets to outsell NBs by 2014. Combined NB and tablet units are expectedto grow 12.2% in 2012 and 15.7% in 2013, suggesting that there is not a true demand issue,but rather an issue of substitution (tablets taking the place of NBs). Please see Figure 4Figure 5: Breakdown of global PC and tablet shipment forecasts (mn)500400300200100-20102011DTNB2012 ETablet2013 ESource: Fubon ResearchWe forecast that the global tablet market size will reach 107mn units in 2012 and 163mnunits in 2013, up 62% and 52% YoY, respectively. We think that Apple will extend itsleadership in the tablet market in 2012~13. The company’s sustained leadership in thetablet market is the result of outstanding programming and form factor design.However, we think Windows 8 tablets will not directly compete with the moreconsumer-oriented tablets currently available, and Microsoft will create demand in thecommercial market. PC growth has slowed since the iPad and other tablets came onto themarket.See last page for disclaimer.8Taiwan Equity |Annual ReportWe expect to see several Windows 8-based PCs with tablet-like form factors in 2013. Weprefer form factor as a criteria, differentiating between X86-based clamshell NBs, andtablets as devices with detachable keyboards, which are ARM-based.Figure 6: Breakdown of global PC and tablet shipment forecasts (mn)60,00050,00040,00030,00020,00010,000-1Q112Q113Q114Q111Q122Q123Q12 E4Q12ESee last page for disclaimer.Source: Fubon ResearchNBTablet9Taiwan Equity |Annual ReportiTV is coming in 4Q13?iTV rumors have been circulating since 2010. However, we believe that Apple’s iTV willinclude Siri-powered voice control, the virtual assistant. It will also have gesturerecognition through a front-facing camera and suitable apps customized for thelarge-panel screen from the App Store.Our panel analyst Calvin Shao projects that the main driver for LCD TV panel demand interms of area will be size migration, and the increasing percentage of 50’’+ TV panelshipments is driving the average TV size up.Figure 7: iTVSource: Companies, Fubon ResearchApple entered the living room with their long-awaited set-top box, code-named the iTV, in1Q07. The box can stream video from a connected Mac/PC or directly from the internet.We believe that iTV will offer HD content because the components include ahigh-definition panel, and according to industry sources, there are HDMI jacks on the backof the device. Other than that, there are rumored to be USB, Ethernet, RCA and opticalaudio connectors on the unit. In addition, we expect 802.11 functionality, called “wirelesscomponent video,” to be included, so that users can watch movies, view photo slideshowsand play games all on HDTV through an iPhone or iPadFurthermore, the iTV will be likely to offer apps through the App Store, and it’s clear thatthere will be cross-pollination between iPad and iPhone / iPod touch offerings and newApple TV applications.See last page for disclaimer.10Taiwan Equity |Annual ReportHon-Hai (2317 TT) started promoting a new 60’’ TV using an aggressive pricing strategyafter the company linked up with Sharp’s 10G fab in 1H12, a development that sparkedconsumers’ attention toward larger-sized TVs. By reducing channel costs and cooperatingwith cable content providers, Hon-Hai lowered the 60’’ TV retail price, and othersecond-tier TV brands have also started to promote larger sizes more aggressively. Weproject that 50’’+ TV panel shipments will increase from 14.5mn in 2012 to 22.1mn in 2013while the weight of overall LCD TV panel units will rise from 7% to 10% in 2013. On anarea basis, we project that 50’’+ TVs will account for 22% of overall LCD TV panel demandin 2013.Figure 8: TV size breakdown120.0100.020" <80.020‐29"60.030‐39"40.040‐49"20.00.0< 50"20082009201020112012E2013E2014ESource: Companies, Fubon ResearchSee last page for disclaimer.BuyAddReduceSell11Taiwan Equity |Annual Report* For more information, please input “FBRS” in your Bloomberg systemDisclaimerAnalyst CertificationThe research analyst responsible for this report hereby certifies (or, where multiple research analysts are primarily responsible for this report) that:(1) the views expressed in this research report accurately reflect the analyst’s personal views about the subject securities and issuers.(2) the analyst also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in thisresearch report.DisclaimerThis document is for informational purposes only and does not constitute a solicitation for the purchase or sale of any securities. The information contained herein was obtainedfrom sources, which we believe to be reliable, but whose accuracy and completeness we do not guarantee. The opinions and recommendations herein do not take into accountthe investment objectives, financial situation and particular needs of the reader. Opinions expressed are subject to change without notice. Investors should assume that FubonSecurities or its subsidiaries or its affiliates is seeking or will seek investment banking or other business relationships with the companies in this report. Copyright 2010 FubonInvestment Service – All rights reserved. Any duplication or redistribution of this report is prohibited. Additional information is available upon request.Fubon Research reports are distributed in the United States only to Major U.S. Institutional Investors (as defined in General Rules and Regulations promulgated 15a-6 under theSecurities Exchange Act of 1934, as amended (the “Act”) and SEC staff interpretations thereof). All transactions by U.S. Institutional Investors in the securities mentioned in thisreport must be effected through a registered broker-dealer under Section 15 of the Act. Fubon Securities Co. is registered to conduct a securities business in Taiwan but is notregistered as, or an affiliate of, a U.S. broker-dealer.Fubon's Rating SystemRatingNeutralNot Rated (NR)Under ReviewSector RatingOverweightMarket WeightUnderweightSee last page for disclaimer.DefinitionExpected absolute return to be over 30% within the next 6 monthsExpected absolute return to 10-30% within the next 6 monthsExpected absolute return to be level within the next 6 monthsExpected absolute return to be negative 10-30% within the next 6 monthsExpected absolute return to be over negative 30% within the next 6 monthsPursuant to Fubon acting in deals involving the company or there is not a sufficient fundamental basis for determining an investment ratingFubon is in the process of determining an investment rating and will assign a rating within the 3- to 6-month horizonDefinitionSector expected to outperform the broader market indexes within the next 6-12 monthsSector expected to perform in line with the broader market averages within the next 6-12 monthsSector expected to underperform the broader market indexes within the next 6-12 months.。