J.P. 摩根-亚太地区-科技行业-台湾ODM与EMS：谨慎看待-2019.3.18-46页.pdf

Asia Pacific Equity Research18 March 2019Equity Ratings and Price TargetsMkt CapPriceRatingPrice TargetCompanyTicker($mn)CCYPriceCurPrevCurEnd DatePrevEnd DateQuanta Computer Inc.2382 TT7,155.79TWD57.20Nn/c53.00Dec-1945.00Jun-19Pegatron Corp4938 TT4,391.81TWD51.90UWn/c40.00Dec-19n/cn/cWistron Corporation3231 TT1,942.24TWD21.10Nn/c20.00Dec-1917.00n/cCompal Electronics,Inc.2324 TT2,712.00TWD19.00UWn/c16.60Dec-1915.50Jun-19Source:Company data,Bloomberg,J.P.Morgan estimates.n/c=no change.All prices as of 18 Mar 19.Taiwan ODM/EMSAssuming coverage with a cautious viewTaiwanTechnology-HardwareAlbert Hung AC(886-2)2725-J.P.Morgan Securities(Taiwan)LimitedGokul Hariharan AC(852)2800-Bloomberg JPMA HARIHARAN J.P.Morgan Securities(Asia Pacific)LimitedErica Wong(852)2800-J.P.Morgan Securities(Asia Pacific)LimitedSee page 41 for analyst certification and important disclosures,including non-US analyst disclosures.J.P.Morgan 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.We assume coverage of the Taiwan ODM/EMS sector with a cautious view for2019 due to 1)lackluster product unit growth(esp.smartphone);2)slow manufacturing value-add growth resulting from lack of meaningful product design change and heightened industry competition;and 3)worsening cost structure such as rising labor costs and decentralized production base after relocation.Among ODMs,we are bearish on iPhone assemblers due to declining iPhone units and higher pricing pressure in the supply chain while we believe cloud server ODMs could outperform peers due to a secular industry uptrend in the next two to three years.Consequently,we are UW on Pegatron/Compal and remain Neutral on Quanta/Wistron.Our pecking order is:Quanta Wistron Compal Pegatron.2019 a tough year for ODM/EMS,especially iPhone assemblers.We expect negative earnings growth for the ODM/EMS sector this year due to declining product units and rising labor costs.Moreover,we believe iPhone assemblers could take bigger hit given weak bargaining power.We have seen signs of margin deterioration among iPhone suppliers recently(e.g.casing,acoustic)and expect assemblers to witness high ASP pressure due to limited design changes.Quanta likely near-term earnings miss,wait for better entry point.We expect Quanta to miss near-term earnings expectation and see stock price correction.Besides,Quantas server margin is likely to remain under pressure due to heightened industry competition,in our view.Pegatron cautious on iPhone assembly and Casetek.We forecast Pegatrons earnings to decline 13%yoy in 2019(vs.BBG estimate+21%),mainly due to declining iPhone units and pricing pressure.We are also cautious on Caseteks potential entry into the iPhone casing business given the latecomer disadvantage and potential yields hiccups.Wistron server strength offset by iPhone losses.We expect Wistrons server momentum to remain strong into 2019/20 thanks to double-digit growth in Wiwynn and share gains in Cisco.However,we expect Wistrons iPhoneassembly business to remain loss-making in the next 1-2 years given limited footprints to legacy models and heightened industry competition.Compal PC share gains shadowed by weak non-PC margin.We expect Compals margin to remain under pressure due to unfavorable pricing dynamics in PC assembly while its high PC exposure also implies a lackluster growth outlook in the medium to near term.Figure 1:ODMsrevenue growth by vendors(2018-20E)%Source:J.P.Morgan estimates,Bloomberg for Inventec2Asia Pacific Equity Research18 March 2019Albert Hung(886-2)2725-Table of Contents2019 a tough year for ODM/EMS industry.3Lackluster product unit growth ahead.4Slow manufacturing value add growth.5Worsening cost structure for EMS/ODM.7Declining profits among Taiwan ODM/EMS over years.8What could make us turn positive on ODM/EMS sector?.9Companies.11Quanta Computer Inc.12P/E and P/B bands.16Pegatron Corp.20P/E and P/B bands.23Wistron Corporation.27P/E and P/B bands.30Compal Electronics,Inc.34P/E and P/B bands.373Asia Pacific Equity Research18 March 2019Albert Hung(886-2)2725-2019 a tough year for ODM/EMS industryWe assume coverage of Taiwan ODM/EMS sector with a cautious view due to:1.Lackluster product unit growth(especially for the iPhone).2.Slow manufacturing value-add growth resulting from lack of meaningful product design change and heightened industry competition.3.Worsening cost structure,such as rising labor costs in China.We believe the high customer concentration and fragmented industry structure have put ODM/EMS vendors in an unfavorable position during a declining product cycle.Besides,the ongoing production relocation could lead to incremental costs for ODMs and dampen the structural profitability due to sub-optimal operational efficiency for decentralized production bases.Among ODM/EMS,we are bearish on iPhone assemblers due to declining iPhone unit and higher pricing pressure in the supply chain.On the other hand,we believe cloud server ODMs could outperform peers due to a secular industry uptrend in the next 2-3 years.However,Quantas share price has outperformed TAIEX by 10%since Nov 2018 and we see downside to consensus earnings estimates.Consequently,we are UW on Pegatron and Compal and remain Neutral on Quanta and Wistron.Table 1:ODM/EMS valuation table PriceMkt.capP/E(x)P/BV(x)ROE(%)YTDCompanyTickerRating(NT$)($,mn)FY19EFY20EFY19EFY20EFY19EFY20Estock perf.Hon Hai2317 TTN70.631,6909.88.90.70.77.3%7.7%0%Quanta2382 TTN57.07,12915.313.01.41.49.4%11.0%8%Pegatron4938 TTUW52.44,43214.211.50.90.96.4%7.9%2%Compal2324 TTUW18.82,67610.010.10.80.88.0%7.7%7%Wistron3231 TTN20.71,90511.610.30.80.87.0%7.7%8%Source:Company data,J.P.Morgan estimates,Bloomberg.Closing prices as of Mar 15,2019.Figure 2:ODMs revenue growth by vendors(2018-20E)%Source:J.P.Morgan estimates,Bloomberg for InventecFigure 3:ODMs earnings growth by vendors(2018-20E)%Source:J.P.Morgan estimates,Bloomberg for Inventec.13%12%1%9%6%9%10%-3%-4%7%4%4%2%0%5%7%7%1%3%3%5%-0.06-0.04-0.0200.020.040.060.080.10.120.14Hon HaiPegatronQuantaCompalWistronInventecTotalODM20182019E2020E-24%-24%0%54%17%3%-18%-5%-13%0%-7%11%-2%-5%10%24%18%-1%13%17%11%-0.3-0.2-0.100.10.20.30.40.50.6Hon HaiPegatronQuantaCompalWistronInventecTotalODM20182019E2020E4Asia Pacific Equity Research18 March 2019Albert Hung(886-2)2725-Lackluster product unit growth aheadWe see limited volume growth drivers for ODM/EMS in the next 2-3 years.While server growth is likely to remain a bright spot with continued ISP(internet service provider)investments and rising data traffic generation,we forecast flattish PC volume and declining smartphone units in 2019.In servers,we expect hyperscale cloud servers to outgrow enterprise servers due to ongoing migration to public cloud.Overall,we expect the sluggish product unit growth to contribute to lackluster topline growth for the overall ODM/EMS industry in 2019.Cloud servers remain the silver lining for ODM industryHyperscale cloud server has been a major growth driver for ODMs in 2018,as large internet companies,including Google and Facebook,posted a stronger-than-expected capex cycle.While we believe hyperscale server will continue to drive ODMs revenue growth in 2019/20,we expect the growth rate to slow down from 2018 level,as hyperscale capex growth moderates to low-teens range this year vs.50%+yoy growth in 2018.We expect overall server unit shipment to grow by 4%/5%in 2019/20,lower than the strong 11%growth last year.However,we believe cloud server is likely to remain one of the few tech end-products with secular growth trend in the next 2-3 years,thanks to rising computingdemand and more data generation.Therefore,we expect cloud server ODMs to outperform other ODM/EMS peers.Figure 4:Overall server unit and yoy trendmn unit,%Source:Gartner,J.P.Morgan estimates.Figure 5:ODM direct server unit and yoy trend k unit,%Source:Gartner,J.P.Morgan estimates.Note:9M18 yoy growth rate based on the shipment in 9M18 over the shipment in 9M17.PC industry stabilization supported by Win-10 upgrade cycleWe forecast PC shipments to stay flattish in 2019/20.We believe the ongoing Win-10 migration should continue to drive commercial PC demand in the next few quarters.This,coupled with strength in high-end consumer segments(e.g.gaming),is likely to offset the weakness in mainstream consumer PCs,in our view.Moreover,we expect the Intel CPU shortage to be largely resolved by late-2Q or 3Q this year thanks to incremental Intels 14nm capacity.This could drive some near-2%2%2%10%0%3%11%4%5%0%2%4%6%8%10%12%02468101214162012201320142015201620172018E 2019E 2020EServer Shipments(mn unit)Y/Y22%25%40%15%31%35%0%5%10%15%20%25%30%35%40%45%-200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000201320142015201620179M18ODM direct server unit(k unit)Y/Y5Asia Pacific Equity Research18 March 2019Albert Hung(886-2)2725-term shipment upside for the ODMs by then,in our view.Downside risk is potential slowdown in PC demand in 2H19 due to saturated Win-10 penetration.Figure 6:Overall PC unit and yoy growthmn unit,%Source:Gartner,J.P.Morgan estimates.Declining smartphone units accentuate pricing pressure in supply chainGiven lingering macro weakness in emerging markets and prolonged replacement cycles in developed markets,we expect overall smartphone shipments to decline by 5%yoy in 2019,before large-scale 5G adoption drives a meaningful demand recovery from 2020 onwards.We forecast iPhone unit to decline by 11%/0%to 185mn each in 2019/20,due to the limited spec upgrade.Figure 7:Global smartphone shipment and yoy trendmn unit,%Source:IHS,J.P.Morgan estimates.Figure 8:iPhone unit growth and yoy trendmn unit,%Source:Company data,J.P.Morgan estimates.Slow manufacturing value-add growth We expect limited MVA growth for ODM/EMS vendors in 2019 given declining addressable markets and heightened industry competition.Among declining products,we see most pricing pressure in the Apple iPhone supply chain due to high customer concentration.We have seen some signs of margin deterioration in iPhone component vendors(e.g.casing,acoustic)over the last 3 months and expect iPhone EMS vendors to witness similar pricing pressure due to lack of meaningful specupgrade.-3%-11%-1%-8%-6%-3%0%0%0%-12%-10%-8%-6%-4%-2%0%2%0501001502002503003504002012201320142015201620172018E2019E2020EPC Shipments(mn unit)Y/Y8%2%3%-3%-5%1%-0.08-0.06-0.04-0.0200.020.040.060.080.11,1501,2001,2501,3001,3501,4001,4501,50020142015201620172018E2019E2020EGlobal smartphone shipment(mn unit)yoy growth%232 217 215 207 185 185-6%-1%-4%-11%0%-12%-10%-8%-6%-4%-2%0%-50 100 150 200 25020152016201720182019E2020EiPhone shipment(mn unit)yoy growth%6Asia Pacific Equity Research18 March 2019Albert Hung(886-2)2725-Lack of meaningful design change in upcoming iPhone cycle We have seen limited spec upgrades in the iPhone XS/XR cycle and our research indicates lens to be the only area of major spec upgrades in the upcoming iPhone cycle.Consequently,we expect pricing pressure in the iPhone assembly space to prolong into the next product cycle.Table 2:iPhone Specification ComparisoniPhoneXS MaxiPhoneXSiPhoneXRiPhone XiPhone 8 PlusiPhone 8iPhone 7 PlusiPhone 7Announced9/12/189/12/189/12/189/12/179/12/179/12/179/7/169/7/16Availability9/21/20189/21/201810/26/201810/27/179/22/179/22/179/16/169/16/16Display 6.5 OLED5.8 OLED6.1 LCD5.8 OLED5.5 LCD4.7 LCD5.5 LCD4.7 LCDTouchOut-CellOut-CellOut-CellOut-CellIn-CellIn-CellIn-CellIn-CellResolution2688 12422436 11251792 8282436 11251920 10801334 7501920 10801334 750Screen-to-body84%83%79%83%67%65%68%66%Pixel per inch456459326459401326401326OSiOS 12iOS 12iOS 12iOS 11iOS 11iOS 11iOS 10iOS 10APA12A12A12A11,2.39 GHzA11,2.39 GHzA11,2.39 GHzA10,2.34 GHzA10,2.34 GHzRAM(DRAM)4 GB4 GB3 GB3 GB 3 GB 2 GB 3 GB 2 GB Storage(NAND)64/256/512 GB64/256/512 GB64/128/256 GB64/256 GB64/256 GB64/256 GB32/128/256 GB32/128/256 GBRear CameraDual-12 MPDual-12 MP12 MPDual-12 MPDual-12 MP12 MPDual-12 MP12 MPOIS Dual OISDual OISSingle OISDual OISSingle OISSingle OISSingle OISSingle OISFace IDYesYesYesYesNoNoNoNo3D TouchYesYesNoYesYesYesYesYesBattery3,714 mAh2,658 mAh2,942 mAh2,716 mAh2,691 mAh1,821 mAh2,900 mAh1,960 mAhWireless ChargingYes,Qi standardYes,Qi StandardYes,Qi StandardYes,Qi StandardYes,Qi StandardYes,Qi StandardNoNoCasingStainless Steel Frame,2.5D GlassStainless Steel Frame,2.5D GlassAluminum Frame,2.5D GlassStainless Steel Frame,2.5D GlassAluminum Frame,2.5D GlassAluminum Frame,2.5D GlassAluminum Frame,UnibodyAluminum Frame,UnibodyDual-simYesYesYesNoNoNoNoNoLaunch PriceFrom$1,099From$999From$749From$999From$799From$699From$769From$649Source:Company reports and J.P.MorganODM/EMS industry competition remains high due to weak bargaining powerGiven the consolidated market share among top brands in tech products(e.g.PC/smartphone),ODM/EMS vendors generally suffer from high customer concentration risks.Most of ODM/EMS vendors have 40%+of revenue coming from their single largest customers.Coupled with the highly competitive nature(limited product differentiation)of the ODM/EMS industry,this gives each ODM/EMS little bargaining power in pricing,which largely limits the potential for any margin expansion.Figure 9:Largest customer revenue contribution%of ODM/EMS in 2017Source:Company data.62%61%51%40%26%0%10%20%30%40%50%60%70%QuantaPegatronHon HaiCompalWistronLargest customer revenue contribution%in 20177Asia Pacific Equity Research18 March 2019Albert Hung(886-2)2725-Worsening cost structure for ODM/EMSChina labor costs remain on uptrendAs the majority of ODM/EMS production bases are still located in China,the rising minimum wage requirements and increasing social security costs have weighed on ODM/EMS margins in the past few years.We expect the labor wage hike in China to likely persist into the next few years,which would continue to pressurize margins.Moreover,labor shortage has been another pain point for ODM/EMS vendors in recent years.In order to secure enough labor during high seasons,ODM/EMS vendors have to pay incremental costs to labor agencies and additional bonuses to labor.Figure 10:Shanghai minimum wage trendRMB Source:Bloomberg based on Ministry of Human Resources and Social Security of China.Figure 11:Shenzhen minimum wage trendRMBSource:Bloomberg based on Ministry of Human Resources and Social Security of China.Automation not enough to offset the rising costsHon Hai and other EMS vendors have been active in adopting automation in the production lines over past few years.However,it is hard to automate all the assembly lines given there could be slight design changes in different product cycles.Although Hon Hai has successfully lowered its headcount to 700k now from almost one million in 2014,the automation benefits have not come through in earnings.Figure 12:Hon Hais headcount000