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1、,ANCHOR,REPORT,BUY,Smartphones|C H I N ATE L E C O M S&TE C H N O L O G YNOMURA INTERNATIONAL(HK)LIMITED,Leping Huang,PhD,+852 2252 1598,NEW,THEME,The RMB1,000 revolutionThe advent of RMB1,000(circa US$150)smartphones promises to revolutioniseChinas telecom industry and the global handset space.As w
2、ell as driving 3Gsubscriber growth in China,we expect the availability of affordable,capable entry-levelsmartphones to lead to consolidation in the domestic handset industry,since smallwhite-box vendors dont have a reliable upgrade path to 3G from either a chipsetsourcing or product distribution sta
3、ndpoint.Moreover,we think these phones will helpChinese handset OEMs move up to the mid-range product segment,paving the way,Stocks for actionWe believe the market has yet torecognise TCL Com as a keybeneficiary of the growing popularity ofsocial network services(SNS)inemerging markets or BYDE as a
4、proxyfor China 3G subscriber growth.,for a further convergence in their valuations relative to handset brand vendors.Weforecast that Chinas smartphone market will expand from 20mn units in 2010F to,StockTCL Com(2618 HK),RatingBUY*,PricePrice targetHK$8.08 HK$11.00,62mn in 2012F,making it the worlds
5、second-largest smartphone market(after the US)by volume.We highlight a broad spectrum of beneficiaries from the arrival of,BYD Electronic(285 HK)China Wireless(2369 HK)NEUTRAL*,HK$5.13 HK$6.00HK$4.60 HK$4.50,smartphones for the masses:handset vendors such as BYDE,TCL Com,ZTE andHTC,along with retail
6、er Gome.Qualcomm,China Wireless and Digital China also look,Digital China(861 HK)ZTE(763 HK)HTC(2498 TT),NEUTRAL*HK$16.04 HK$17.00BUY HK$29.95 HK$36.00BUY NT$894 NT$1,000,set to benefit,though we view prevailing valuations as fair.We see MediaTek as a,Gome(493 HK),BUY,HK$2.89 HK$4.30,potential loser
7、 from the 2G-to-3G transition.,Qualcomm(QCOM US)MediaTek(2454 TT),NEUTRAL US$51.33 US$45.00REDUCE NT$398 NT$275,China to be the second-largest smartphone market by 2012F Android to spur convergence of handset brand vendors and OEMs 3G transition to consolidate Chinese handset industry Top picks:TCL
8、Com,BYDE,*Initiating coverage;prices as at 20 Jan closeAnalystsLeping Huang,PhD+852 2252 Nomura Asia-ex-Japan Research,Nomura U.S.ResearchNomura Anchor Reports examine the key themes and value drivers that underpin oursector views and stock recommendations for the next 6 to 12 months.Any authors nam
9、ed on this report are research analysts unless otherwise indicated.See the important disclosures and analyst certifications on pages 93 to 96.,Nomura,24 January 2011,Price,1,Smartphones|C H I N ATE L E C O M S&TE C H N O L O G YNOMURA INTERNATIONAL(HK)LIMITED,Leping Huang,PhD,+852 2252 1598,NEWTHEME
10、,ActionWe look at the emerging entry-level smartphone trend from the perspective of thewhole handset supplier chain covering chipset vendors,handset OEMs,distributorsand operators.BUY TCL Com(initiation),BYDE,ZTE and HTC as handset vendorbeneficiaries.In distribution,Synnex and Gome look well placed
11、.We reiterate ourREDUCE on MediaTek as a potential loser of the 2G-to-3G transition.We like ChinaWireless(initiation)and Digital China(initiation)but their valuations look fair.,Stocks for actionWe believe the market has yet to recogniseTCL Com as a key beneficiary of thegrowing popularity of social
12、 network services(SNS)in emerging markets or BYDE as aproxy for China 3G subscriber growth.,Catalysts,StockTCL Com(2618 HK),RatingBUY*,Price targetHK$8.08 HK$11.00,Positive catalysts include higher-than-expected 3G subscriber growth in China.,BYD Electronic(285 HK)China Wireless(2369 HK),BUYNEUTRAL*
13、,HK$5.13HK$4.60,HK$6.00HK$4.50,Anchor themesEntry-level smartphones are an important trend in China and globally.Entry-level,Digital China(861 HK)ZTE(763 HK)HTC(2498 TT),NEUTRAL*HK$16.04 HK$17.00BUY HK$29.95 HK$36.00BUY NT$894 NT$1,000,smartphones should help Chinese operators drive 3G subscriber gr
14、owth and,Gome(493 HK),BUY,HK$2.89,HK$4.30,reshape the handset manufacturing and distribution industry.,Qualcomm(QCOM US)MediaTek(2454 TT),NEUTRAL US$51.33 US$45.00REDUCE NT$398 NT$275,*Initiating coverage;prices as at 20 Jan close,The RMB1,000 revolution China to be the second-largest smartphone mar
15、ket by 2012FWe forecast Chinas smartphone market will expand from 20mn in 2010F to 62mnin 2012F,and become the worlds second-largest smartphone market(after theUS)by volume in 2012F.Our affordability analysis shows that RMB1,000-2,000smartphones will drive 3G subscriber growth in China.We note that
16、the iPhone istargeted at the top 5%of total 3G subscribers in China.We think the difference inuser experience and associated service plans between high-end and low-endsmartphones will change the smartphone ecosystem.Android to spur convergence of handset brand vendors andOEMsWe believe the emergence
17、 of the Android OS has lowered the technology barriersbetween handset brand vendors(eg,Nokia,Motorola)capable of high-endproduct development and handset OEMs capable only of handset manufacturingand low-end handset design.These lower barriers should help handset OEMs topenetrate mid-range segments a
18、nd present investors with re-rating opportunitiesin handset OEMs,given a possible convergence in valuation between the twogroups,in our view.3G transition to consolidate Chinese handset industryWe think the transition from 2G to 3G in China will encourage consolidation in thehandset OEM industry,bec
19、ause small vendors do not have a reliable upgradepath to 3G due to licensing restrictions between MediaTek and Qualcomm,andwill likely face challenges in distribution due to the shift to an operator-centricmodel in 3G.From a distributor perspective,we expect PC and handsetdistribution to converge,es
20、pecially in smartphones,creating opportunities forexisting PC distributors such as Digital China and Synnex.Top picks:TCLC,BYDEWe call BUY on BYDE,TCL Com,ZTE,and HTC as beneficiaries in the handsetvendor sector.In distribution,we think Synnex and Gome look well placed.Wereiterate our REDUCE rating
21、on MediaTek as a potential loser from the 2G-to-3Gtransition.Nomura,AnalystsNomura Asia-Ex-Japan Research:Leping Huang,PhD+852 2252 Danny Chu,CFA+852 2252 Eve Jung+886 2 2176 Aaron Jeng,CFA+886 2 2176 Candy Huang+852 2252 Sachin Gupta,CFA+65 6433 Pankaj Suri+91 22 4053 Nomura U.S.Research:Romit Shah
22、+1 212 298 Sidney Ho,CFA+1 212 298 Sanjay Chaurasia+1 212 298 24 January 2011,3,3,3,5,8,8,10,13,15,15,16,17,18,20,28,50,81,2,Smartphones|China,Leping Huang,PhD,ContentsEntry-level smartphones why now?Why are we focusing on entry-level smartphones now?Key conclusionsTop picks:TCLC,BYDEMarket dynamics
23、China:second-largest smartphone market by 2012FRMB1,0002,000 smartphones to be the main driverEntry-level smartphones have global potentialCompetitive landscapeHandset supplier chain in China3G smartphones to reshape handset distribution3G transition to consolidate handset OEMsAndroid to converge ha
24、ndset brands and handset OEMsEntry-level smartphones to form a distinctive ecosystem in China,Company dynamicsOperatorsHandset vendorsDistributors/retailersLatest company viewsTCL Communication TechBYD ElectronicChina Wireless TechnologiesDigital ChinaZTE CorpHTC CorporationGome Electrical Appliance
25、sQualcomm IncMediatekNomura,22222426416072778589,24 January 2011,in China,3,Smartphones|China,Leping Huang,PhD,SummaryEntry-level smartphones why now?In this report,we discuss the emerging entry-level smartphone trend from theperspective of the whole handset supplier chain,covering chipset vendors,h
26、andsetOEMs,distributors and operators.We discuss the scale and timetable for 3G andsmartphones in China,analyse the affordable price range of smartphones in China,and assess the impact of smartphones on the whole handset supplier chain,especiallywith the emergence of the Android OS for Chinese hands
27、et OEMs.Why are we focusing on entry-level smartphones now?,After nearly two years of Chinas development of 3G subscribers,the total number of3G subscribers had reached 38mn by the end of October 2010,progress that was farbehind the plan for 150mn subscribers by end-2011 set by the Ministry of Indus
28、try andInformation Technology(MIIT),Chinas telecom regulator.Handsets are one majorbottleneck to 3G growth.In 2011,we believe 3G subscriber growth will be a key themefor Chinas telecom industry,and entry-level smartphones could be an importantaccelerant of it.We are seeing a boom in smartphone devel
29、opment among Chinese handset OEMs.Most companies are aiming to capitalise on the growth opportunities presented by 3Gin China and want to penetrate the mid-range segment of the global handset market.Such a“step-up”strategy has proved challenging in the past.We look at the prospectsof the Android OS
30、changing the picture this time around.We believe this trend willhave a significant impact on the existing global handset industry.Exhibit 1.Smartphones made by Chinese handset vendors,Why now(1)?Important productsto drive China 3G subscribernumbersWhy now(2)?Android is booming,BrandModel,LenovoLePho
31、ne,ZTEX850,K-TouchW606,HuaweiIdeos/U8150,CoolpadW711,TCLOT-980,MeizuM9,HuaweiIdeos,X5/U8800Photo,Wireless,HSPA/GSM,HSPA/GSM HSPA/GSM HSPA/GSM HSPA/GSM HSPA/GSMMSM,HSPA/GSM,HSPA/GSM,Screen size(inch)Touch screenProcessorOSCamera(m pixels)AnnouncedRetail price(RMB),3.7CapacitiveQualcommSnapdragon1GHzA
32、ndroid 2.13MPMay-20102,700,2.8ResistiveQualcommMSM 7227600MHzAndroid 2.13MPJune-2010850,3.5CapacitiveSTEST6715468MHzAndroid 2.12MPAug-20101,500,2.8CapacitiveQualcommMSM 7225528MHzAndroid 2.23MPSep-20101199,3.5ResistiveSTEPHX6715468MHzAndroid 2.12MPSep-20101,500,2.8ResistiveQualcommMSM7227600MHzAndro
33、id 2.12MPSep-20101,600,3.5CapacitiveSamsungS5PC1101GHzAndroid 2.25MPDec-20102,500,3.8CapacitiveQualcommMSM 7230800MHzAndroid 2.25MPDec-20102,600,Source:GSM Arena,PC Online,ZOL.Key conclusions,We note the shares of OEMs have historically traded at a discount to handset brands,though that gap is narro
34、wing.We believe the entry barriers in technology and brandequity are the main reasons for the valuation gap.And we believe the Android OS andGoogle as a brand could break down these barriers still further.Nomura,Android to spur convergence invaluations among handsetOEMs/brands24 January 2011,May-09,
35、May-10,Feb-09,Mar-09,Nov-09,Mar-10,Aug-09,Sep-09,Aug-10,Sep-10,Dec-09,Nov-10,Feb-10,Oct-09,Oct-10,Jul-09,Apr-09,Apr-10,Jul-10,Dec-10,Jan-09,Jun-09,Jan-10,Jun-10,30,4,Smartphones|China,Leping Huang,PhD,Exhibit 2.P/E comparison between handset OEM and handset brands,Handset OEMs,Handset brands,252015E
36、ntrance barrier1050Note:12-month forward P/E,handset brands includes Nokia and Apple Computer,handset OEMs includes ChinaWireless,BYD Electronics and TCL Communications,Apples forecast is Bloomberg consensus,others are NomuraforecastsSource:Nomura estimatesThe following Exhibits show the handset sup
37、plier chain in China.We highlight ZTE,TCL Com,BYD Electronics,Synnex and Gome as key beneficiaries of this story allare rated BUY.While we see Qualcomm,China Wireless and Digital China aspotential beneficiaries,too,we see prevailing valuations as fair.We think MediaTekstands to lose from this trend,
38、and we reaffirm our REDUCE rating.Exhibit 3.3G transition to trigger industry consolidation,Handset ComponentAAC Acoustics(2018 HK)Unimicron(3037 TT),Distributor/RetailerDistributor:Telling Telecom(00829 CH)Digital China(861 HK)Synnex(2347 TT),Handset ChipsetQualcomm(QCOM US)MediaTek(2454 TT)Spreadt
39、rum(SPQD US),Handset OEMsOEM:ZTE(763 HK)Huawei(unlisted),Retailer:Gome(493 HK),Consumer,TCL Com(2618 HK)China Wireless(2369 HK),Lenovo(992 HK),Operator,Handset SoftwareGoogle(GOOG US),ODM/EMSBYD Electronics(285 HK)Foxconn(2038 HK),China Mobile(941 HK)China Telecom(728 HK),China Unicom(762 HK)Source:
40、Nomura research,Nomura,24 January 2011,6,5,Smartphones|ChinaExhibit 4.Position of Chinese handset vendorsChina,Leping Huang,PhDOverseas,3G2GSource:Nomura researchTop picks:TCLC,BYDEWe initiate coverage of TCL Communications with a BUY rating and a PT of HK$11(36%potential upside),Digital China with
41、a NEUTRAL rating and a PT of HK$17,and ChinaWireless with a NEUTRAL rating and a PT of HK$4.5.We reaffirm our BUY calls on BYDElectronics,ZTE,Synnex and Gome,REDUCE on MediaTek,and NEUTRAL onQualcomm.Exhibit 5.Universe snapshot:whats changed?,Price,Price,Var,Method,Ticker2618 HK,Company nameTCL Com,
42、ActionInitiate,RatingBUY,CurrencyHK$,Jan-208.08,target11.00,(%)36,xFY11 P/E Reason12 In line with handset OEMs average(12x),2369 HK,China Wireless,Initiate NEUTRAL,HK$,4.60,4.50,(2),14 15%premium to handset OEMs because of,China exposure,861 HK,Digital China,Initiate NEUTRAL,HK$,16.04,17.00,-1x PEG.
43、Company is in transition from,distributor to IT services provider.,285 HK763 HK,BYD ElectronicZTE,unchangedunchanged,BUYBUY,HK$HK$,5.1329.95,6.0036.00,1720,10 Historical(from FY07)average24 5%premium to historical(from FY2005),averageSource:Nomura research TCL Communications(2618 HK,not rated BUY,PT
44、:HK$11):We initiate onTCL Communication Technology with a BUY rating and PT of HK$11.0,whichimplies upside of 36%from current levels.We believe the market has yet torecognise that the company is a key beneficiary of the popularity of social networkservices(SNS)in emerging markets.Growth in the compa
45、nys SNS phoneofferings and entry-level smartphone business offer investors a distinctive ASP andmargin expansion story within handset OEMs,in our view.BYD Electronics:(285 HK,BUY,PT:HK$6.0):We reiterate our BUY call and PTof HK$6.00.We suggest investing ahead of the FY10 results announcement,slatedf
46、or the end of March.We believe the company will beat consensus FY10F earnings,driven by a transformation to the higher-margin ODM business from EMS to offsetthe impact of wage inflation.We believe the ODM business will continue to driverobust earnings growth in FY11-12F,backed by strong 3G handset d
47、emand inChina.,Nomura,24 January 2011,6,Smartphones|China,Leping Huang,PhD,China Wireless(2369 HK,not rated NEUTRAL,PT:HK$4.50):We initiatecoverage on China Wireless Technologies with a NEUTRAL rating and a HK$4.50PT.We think the companys strong R our PT implies 31%potential downside.We expect Media
48、Tek to record two consecutive years of earnings declines(theworst performance in the companys history),followed by only a moderate recoveryin FY12F.,Nomura,24 January 2011,7,Smartphones|ChinaExhibit 6.Valuation table,Leping Huang,PhD,Price,Market cap,P/E(x),P/BV(x),ROE(%),Bloomberg ticker Company na
49、me,Rating Currency,Jan-20,(US$mn),FY10F,FY11F,FY10F,FY11F,FY10F,Handset chipset,QCOM US2454 TT,QualcommMediaTek,NEUTRALREDUCE,US$NT$,51.33398,83,03714,939,18.913.8,17.416.9,3.55.1,3.15.2,14.632.3,Handset/PC vendor,2618 HK285 HK2369 HK763 HK2498 TT,TCL ComBYD ElectronicChina WirelessZTEHTC,BUYBUYNEUT
50、RALBUYBUY,HK$HK$HK$HK$NT$,8.085.134.6029.95894,1,1401,4861,24311,03325,172,12.69.717.224.318.6,8.88.114.518.112.6,5.41.37.53.79.4,3.81.14.23.17.1,52.414.350.916.153.4,Distributors and retailers,861 HK493 HK,Digital ChinaGome Electrical,NEUTRALBUY,HK$HK$,16.042.89,2,2475,591,17.718.4,15.414.9,3.62.6,
