DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US 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. Investors should consider this report 6 June 2019
Asia Pacific Equity Research Technology
Asia Hardware Sector
Research Analysts Jerry Su 886 2 2715 6361 [email protected] Harvie Chou 886 2 2715 6364 [email protected] William Li 886 2 2715 6363 [email protected]
THEME
Computex 2019: PC still seeing innovation;
Cloud growth offset by enterprise slowdown
Figure 1: New NB platforms targeted at the faster growing high-end
Source: IDC, Credit Suisse estimates
■ Creator PC and Project Athena becomes the new theme. We met several PC and server makers during the 39th annual Computex last week.
Multiple PC brands, such as Acer, Asus, MSI, and Gigabyte, are allocating more resources to high-performance laptops for content creators. Lenovo and Compal also showcased their next-generation laptops with 5G-enabled and dual-screen design. Intel's project Athena targets to launch its next- generation laptop by end-2019 with longer battery life, superior performance and a slim form factor.
■ CPU supply constraint to be eased by late 3Q; graphic remains weak.
Our checks suggest Intel's CPU supply for the mid- to low-end segment are still facing constraints and might continue into 3Q19. We believe the CPU shortage for top-tiered PC makers would start to alleviate in late 3Q19 while tier two brands would still suffer until late 4Q19. For graphic card makers, MSI and Gigabyte have mostly normalised inventory for Pascal graphic cards in 1Q19, but they believe near-term demand remains soft.
■ Cloud server to see double-digit growth in 2019-20E. Hyper scale servers are still expected to see 10%+ growth YoY in 2019, despite lower memory prices, trade uncertainties and pent-up demand for Intel's new CPU, while enterprise server demand remains soft in 1H19. For 2020, we expect the growth to resume with deployment of new CPU and 5G capex- driving new server projects, including the demand from edge servers.
■ Prefer Compal and Razer; avoid Asus. We upgrade Compal to OUTPERFORM (from Neutral) with a new TP of NT$23, based on 10x 2020 P/E or 0.85x 12M P/B, on higher iPad shipments and better margins.
For cloud/serve plays, we would monitor Quanta's data centre growth and MacBook builds to look for an entry point. For brands, we continue to like Razer for its unique service opportunity and believe it is on track for non- GAAP breakeven in 2020. We stay UNDERPERFORM on Asus on a weaker product refresh, smartphone losses, and lower dividend in 2020.
19% 18% 20% 24% 26%
-20%
-10%
0%
10%
20%
30%
0 40 80 120 160 200
2014 2015 2016 2017 2018
ASP Over US$1,000 ASP below US$1,000
YoY % change (ASP over US$1,000) YoY % change (ASP below US$1,000)
Focus charts
Figure 2: Intel’s Project Athena 1.0 laptops to launch by holiday year-end
Source: Company data, Credit Suisse research
Figure 3: CS forecasting PC volumes to decline 2.5%/0.4% YoY in 2019/20E
Figure 4: ODM manufacturing base is diversifying on US tariff threat
Source: Company data, IDC, Credit Suisse estimates Source: : Company data, Credit Suisse research
Figure 5: Hyperscale operators' capex decelerating in 2019
Figure 6: Taiwan ODM server/cloud sales should moderate to 8.0% this year
Source: Company data, IDC, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Vendor Acer Dell HP Lenovo
Model name Swift 5 Dell XPS 13" 2-in-1 Envy 13" Wood Yoga S940
Project Athena 1.0 key specs Ready to go
Performance & Responsiveness Adaptive intelligence Worry-free battery life Always fast, reliably connected
Form factor & interaction Ultra-slim, 2-in-1, clam-shell / 12-15" at 1080p+ display, 3-side narrow bezel, touchpad/stylus support Biometric login (fingerprint/face recognition) / wake from sleep within 1 sec
Core i5/i7, >8GB DRAM dual-channel, >256GB SSD Far field voice services / OpenVINO/WinML support
1) 16+ hours of local video playback; 2) 9+ hours of real-world performance; 3) quick-charging Thunderbolt 3 / WiFi 6 Gig+ / Gigabit LTE option
-15.7%
-8.9%
-5.6%
-5.3% -6.9%
-3.9%
-6.9%
-3.7%
3.1% 2.1%
-0.1% 1.4%
-20%
-15%
-10%
-5%
0%
5%
0 20 40 60 80 100 120 140 160 180
2015 2016 2017 2018 2019E 2020E
Global DT units Global NB units Global DT YoY % Global NB YoY %
Company Product China Taiwan/SEA Mexico US LatAm Europe
PC v v v
Smartphone v
IoT v *
Sever v
PC v
Smartphone v
IoT v v
Sever v v v v
PC v v
Smartphone
IoT v
Sever v v v v
PC v
Smartphone v
IoT v v v
Sever v v v v
Compal
Inventec
Quanta
Wistron
0%
20%
40%
60%
80%
$0
$50,000
$100,000
$150,000
2013 2014 2015 2016 2017 2018 2019F 2020F 2021F
Facebook Google Amazon Microsoft
Baidu Alibaba Tencent Apple
IBM eBay Paypal Oracle
SAP LinkedIn Twitter Salesforce
Mercadolibre Top 7 YoY 2nd Tier YoY Total YoY Internet Company
capex YoY Internet Company
capex US$mn
29.2%
35.0%
8.0% 7.2%
13.3%
0%
5%
10%
15%
20%
25%
30%
35%
40%
$0
$100
$200
$300
$400
$500
$600
$700
$800
2017 2018 2019E 2020E 2021E
Taiwan server/cloud sales YoY change
6 June 2019
Computex 2019: PC still seeing innovation;
Cloud growth offset by enterprise slowdown
We met several PC and data-centre supply chain participants during the 39th annual Computex from 27 May to 1 June, as well as attending keynotes from Intel, Microsoft, AMD, etc. For the hardware sector, multiple PC brands including Acer, Asus, MSI and Gigabyte, are allocating more resources to high-performance laptops with higher colour accuracy displays for content creators, while Lenovo and Compal also showcased their next-generation laptops with 5G-enabled and dual-screen designs. Intel also revealed it has been working with major PC brands on launching a new laptop with Intel's Project Athena 1.0, which targets to establish a new standard for next-generation laptops. Intel and its partners target to launch these premium laptops based on Project Athena during the 2019 holiday season with more new models being adopted into 2020.
Our checks with PC and ODM makers suggest Intel's CPU supply for the mid- to low-end segment still faces constraints and may continue into 3Q19. We believe the CPU shortage for top-tier PC makers will start to alleviate in late 3Q19 while tier-two brands would still suffer until late 4Q19. On the other hand, PC brands highlighted they still see strong replacement demand for commercial laptops from the Win 7 upgrades and expect this to drive the NB replacement demand into 2020. For graphic card makers, MSI and Gigabyte mostly normalised their inventory for Pascal graphic cards in 1Q19, but they believe near- term demand remains soft. MSI and Gigabyte expects 2H19 demand to recover on seasonality and the possible launch of new SKUs with better price/performance.
For the cloud/data centre servers, we believe industry's growth in 2019 has been impacted by the memory price correction, uncertainties from trade tension, the higher base after strong spending in the past two years and pent-up demand for Intel's new CPU. Our checks suggest traditional enterprise servers are likely to decline YoY in 2019, while hyper-scale demand would still see 10%+ YoY growth. We expect the momentum to resume in 2020 with deployment of Intel's new 10nm platform, the increasing adoption of AMD's server platform and 5G capex spending driving 5G server projects, including demand from edge servers.
PC ODMs have already started the evaluation of new locations in South-East Asia and the Philippines for PC system assembly, while the assembly of some high-end models has been shifting back to Taiwan. For cloud/data centre servers, some of the system assembly and Surface mounting technology production has already been moved back to Taiwan given the tariff hike, while Mexico, Eastern Europe, Brazil, and even the US are under consideration for future expansion. For the PC brands, we think Lenovo has better diversification of its production capacity versus its peers, while Quanta is the only cloud/data centre server play with production capacity in the US. Nevertheless, we believe that brands and data centre customers would absorb the increasing tariffs or costs from relocation. We believe the impact on ODM profitability would be manageable, but the potential higher retail pricing for PCs could hurt end demand, which could lead to less operating leverage for the ODMs.
In terms of stocks, we upgrade Compal to an OUTPERFORM (from Neutral) with a new target price of NT$23, based on 10x 2020 P/E or 0.85x 12-month P/B, on higher iPad shipments and better margins. For cloud/serve plays, we would monitor Quanta's data centre growth and MacBook builds to look for an entry point. For the brands, we continue to like Razer for its unique service opportunity and believe it is on track for non-GAAP breakeven in 2020. We stay UNDERPERFORM on Asus due to a weaker product refresh, continued loss making for its smartphone business and lower dividends in 2020.
Creator PC and Project Athena
becomes the new theme
CPU supply constraint to be eased by later 3Q, graphic remains weak
Cloud server to see double-digit growth
in 2019-20E
Relocation still under evaluation
Prefer Compal and Razer; avoid Asus
Creator PC becomes the new theme; dual screen and project Athena to be the next drivers
We believe the "Creator" theme looks interesting as this appears to be an under- developed market with higher ASP potential, although the overall market size and end demand remain in doubt. According to Acer, it sees half of the consumers buying its gaming PC also using their device for productivity, while 15% of them never play games but use the device for content creation. To capture this potential market, Acer launched its Concept D brand PC in April and emphasised higher colour accuracy of the display (Delta E less than 1), as well as a lower noise level (less than 40db) from its new generation of thermal fan designs.
Figure 7: New notebook platforms targeted at the faster growing high end
Source: IDC, Credit Suisse research
Besides Acer, Asus and Gigabyte also launched new laptops to address this market, while MSI has already noticed this trend since 2018 and refreshed its product line at this year's Computex. We think Asus' StudioBook for creators might have disadvantages on display specification (Delta E <2 vs peers' Delta E <1), which could hurt its sell-through. For MSI, it has an early mover advantage for this theme as it has already noticed this trend and launched its laptop and desktop PCs since 2018. We believe the newly refreshed models could become a new driver for its system products.
Figure 8: Taiwan PC brands' selected new creator laptop spec comparison
Source: Company data, Credit Suisse
For the next-generation laptops, we believe dual-screen and Intel's project Athena could be the new drivers in 2020. Asus and Compal both showcased their new laptop designs that come with an additional 13-15" half screen display above the keyboard, offering enhanced productivity for professional users. Compal's unique hinge-stand design also
2014 2015 2016 2017 2018
Units (K)
ASP over US$1,000 32,759 28,848 31,241 38,021 42,545 ASP below US$1,000 140,620 132,590 124,157 122,145 121,030 Total 173,379 161,438 155,398 160,166 163,575
YoY %
ASP over US$1,000 3% -12% 8% 22% 12%
ASP below US$1,000 -3% -6% -6% -2% -1%
Total -2% -7% -4% 3% 2%
Vendor Acer Concept D Asus MSI Prestige Gigabyte
Model Concept D 7 ZenBook Pro Duo P65 Creator 9SE AERO 15 OLED
Form factor:
Height 16.9 mm 24 mm 17.9 mm 20 mm
Weight 1.5 kg 2.5 kg 1.9 kg ~2 kg
Display 15.6" IPS LCD 15.6" OLED + 14" LCD 15.6" IPS LCD 15.6" OLED
Resolution 4K 4K / UHD 4K FHD/UHD
Key specs
CPU Up to Gen 8 Intel Core i7 Up to Gen 9 Intel Core i9 Up to Gen 9 Intel Core i9 Up to Gen 9 Intel Core i9
GPU AMD Radeon RX Vega NVDA GeForce RTX 2060 NVDA GeForce RTX 2070 NVDA GeForce RTX 2080
Memory Up to 16GB DDR4 Up to 32 GB DDR4 Up to 32 GB DDR4 Up to 32 GB DDR4
Delta E 1.2 n.a. n.a. <1
Noise (dB) 31 n.a. n.a. n.a.
Pantone certified/validated Validated x x Certified
Pricing US$1,699 n.a. US$2,899 n.a.
Asus' StudioBook for creators might has disadvantages on display spec
Windows to have native support of dual-screen laptops in 2H20
6 June 2019
provides a better acoustic experience as well as heat dissipation, which we believe could be important factors for content creators. Compal is now designing the software/interface for collaborating between the two screens but it expects Microsoft's roll-out of native support on the Windows operating system by 2H20 to further drive dual-screen adoption.
Intel also revealed it has been working with four major PC brands (Acer, Dell, HP and Lenovo) on launching the new laptop with Intel's Project Athena 1.0, which targets to establish a new standard for next-generation all-day battery-lasting laptops (16-hour video playback and nine hours of battery life in real-world scenarios), superior performance/responsiveness, always fast and reliable connectivity, a slim form-factor etc.
Intel and its partners target to launch these premium laptops based on Project Athena during the 2019 holiday season with more new models being adopted into 2020.
Figure 9: Intel’s Project Athena 1.0 laptops to launch by holiday year-end
Source: Company data, Credit Suisse research
CPU supply constraint to ease by late 3Q, graphic card demand remains soft
Our checks with PC and ODM makers suggest that CPU supply for the mid- to low-end segment is still facing constraints and might continue into 3Q19. Based on the current forecast, we believe the CPU shortage for top-tier PC makers would start to alleviate in late 3Q19, while smaller brands would still suffer until late 4Q19. This would impact PC brands and ODM's shipment targets for 2019, with only Lenovo and Compal seeing positive shipment growth YoY, while shipments for other brands (Acer and Asus) and ODMs (Quanta, Inventec, and Wistron) might decline by low single digits YoY.
Vendor Acer Dell HP Lenovo
Model name Swift 5 Dell XPS 13" 2-in-1 Envy 13" Wood Yoga S940
Project Athena 1.0 key specs Ready to go
Performance & Responsiveness Adaptive intelligence Worry-free battery life Always fast, reliably connected
Form factor & interaction Ultra-slim, 2-in-1, clam-shell / 12-15" at 1080p+ display, 3-side narrow bezel, touchpad/stylus support Biometric login (fingerprint/face recognition) / wake from sleep within 1 sec
Core i5/i7, >8GB DRAM dual-channel, >256GB SSD Far field voice services / OpenVINO/WinML support
1) 16+ hours of local video playback; 2) 9+ hours of real-world performance; 3) quick-charging Thunderbolt 3 / WiFi 6 Gig+ / Gigabit LTE option
Project Athena for next- generation laptop
CPU shortages hurting PC shipments in 2019
Figure 10: Intel and AMD both launched a new CPU at Computex
Source: Company data, Credit Suisse research
Several PC brands are also launching more models, with AMD's CPU for their desktop, consumer laptops and gaming laptops, and especially AMD announcing at Computex that it plans to ship its Navi Graphics in July, which could help to offset the impact from Intel's CPU shortage. For 2020, PC brands highlighted they are still seeing strong replacement demand for commercial laptops from the Win 7 upgrades and they expect this to continue to drive NB replacement demand.
Gaming remains the bright spot for PC shipments, as it is likely to be the only segment that would continue to grow in 2019. Several brands (Acer, Asus, MSI, Gigabyte, etc) introduced their new gaming PCs at Computex with affordable gaming models, as well as high-end gaming laptops. According to IDC, gaming laptop shipments are expected to enjoy double-digit YoY growth in 2019-20E, mainly driven by growing demographics from casual gamers.
Figure 11: CS is forecasting PC volumes to decline 2.5%/0.4% YoY in 2019/20E
Figure 12: IDC is forecasting gaming PC growth of 6%/12% in 2019/20E
Source: Company data, IDC, Credit Suisse estimates Source: IDC, Credit Suisse research
2018 2019 2020
Intel
Processor code name Coffee Lake Ice Lake Ice Lake
Core structure - Sunny Cove Willow Cove
Max core count 4 4 -
Max Threads 8 8 -
Max turbo-clock up to 4.8 GHz up to 4.1 GHz -
Memory support DDR4 2-channel DDR4 2-channel -
Technology node 14 nm++ 10 nm 10 nm
(Expected) launch time Sep-18 3Q19 -
Key spec - Thunderbolt 3.0/ WiFi 6 -
AMD
Processor code name RYZEN Gen 2 RYZEN Gen 3 -
Core structure Zen 2 Zen 2 Zen 2
Max core count 8 12 -
Max Threads 16 24 -
Max turbo-clock up to 4.3 GHz up to 4.6 GHz -
Memory support DDR4 4-channel - -
Technology node 12 nm 7 nm 7 nm
(Expected) launch time Jun-18 Jul-19 -
Key spec - PCIe 4.0 support -
-15.7%
-8.9%
-5.6% -5.3% -6.9%
-3.9%
-6.9%
-3.7%
3.1% 2.1%
-0.1% 1.4%
-20%
-15%
-10%
-5%
0%
5%
0 20 40 60 80 100 120 140 160 180
2015 2016 2017 2018 2019E 2020E
Global DT units Global NB units Global DT YoY % Global NB YoY %
13.9% 14.3% 13.3% 15.5%
11.1% 10.5% 10.4%
-4.0%
-20.0%
-1.9%
7.1% 6.3%
4.3% 3.5%
-25%
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-15%
-10%
-5%
0%
5%
10%
15%
20%
0 5 10 15 20 25 30 35
2016 2017 2018 2019E 2020E 2021E 2022E
Gaming NB units Gaming DT units Gaming NB YoY % Gaming DT YoY %
6 June 2019
For the graphic card makers, MSI and Gigabyte said they have mostly normalised their inventory for Pascal graphic cards in 1Q19, but they believe near-term demand remains soft. Gigabyte sees soft demand for RTX 2000 series graphic cards, largely due to higher pricing. Both MSI and Gigabyte expect 2H19 demand to recover on seasonality and the possible launch of new stock keeping units (SKU) with better price/performance. We believe that MSI and Gigabyte's graphic shipments would decline 6-9% YoY in 2019 but should recover in 2020 on new product cycle.
Figure 13: NVIDIA's historical graphic card spec comparison
Source: Company data, Credit Suisse research
Cloud server to see double-digit growth in 2019-20E
For the cloud/data centre servers, we believe industry's growth in 2019 would be impacted by the memory price correction, uncertainties from trade tensions, the higher base after strong spending in the past two years and pent-up demand for Intel's new CPU. Our checks suggest traditional enterprise server are likely to decline YoY in 2019, while hyper- scale demand will still see 10%+ YoY growth. We believe the ODM direct trend is unchanged and could accelerate into 2020 with more US and other tier two customers increase their outsourcing. According to IDC, ODM direct shipments grew 30% YoY in 2018 and accounted for 25.5% of overall volume vs 22.5% in 2017.
Figure 14: ODM direct shipments increase from IDC Figure 15: ODM direct shipment mix in 2018
Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research
For the ODM makers, we believe Wiwynn would be the only one seeing negative revenue growth, given the higher base in 2Q-3Q18 from Microsoft's pull-in. It is working on the qualification with new US customer (i.e. Amazon), and expects to see some revenue contribution from late 2019. Wiwynn also introduced its Edge Platform 100 (EP100) based on the Nokia-led OCP OpenEDGE specification at Computex. Wiwynn said its solution provides more flexible hardware deployment at edge sites for the upcoming 5G era with also ease of management through a software-optimising hardware resource pool depending on the needs of the ongoing application demand. Despite edge servers having a smaller half-width build, Wiwynn believes there is a limited difference in terms of cost structure (CPUs alone make up over 50% of the cost) against hardware deployed in the
GTX 1650 RTX 2060 RTX 2070 GTX 1060 GTX 960 GTX 760 GTX 660 GTX 560 GTX 460
Launch Apr-2019 Jan-2019 Oct-2018 Jul-2016 Jan-2015 Jun-2013 Sep-2012 May-2011 Jul-2010
Structure Turing Turing Turing Pascal Maxwell Kepler Kepler Fermi Fermi
Semi node 12 nm 12 nm 12 nm 16 nm 28 nm 28 nm 28 nm 40 nm 40 nm
CUDA cores 896 1,920 2,304 1,280 1024 1152 960 336 336
Base speed (MHz) 1,485 1,365 1,410 1,506 1127 980 980 810 675
Boost speed (MHz) 1,665 1,680 1,620 1,708 1178 1033 1033 1620 1350
Power (Watts) 75 160 175 120 120 170 140 150 160
Pricing (US$) US$149 US$349 US$499 US$299 US$199 US$249 US$299 US$199 US$199
5% 6%
8% 9%
13%
17% 17% 16%
23%
25%
0%
5%
10%
15%
20%
25%
30%
0 500 1,000 1,500 2,000 2,500 3,000 3,500
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
ODM Direct server shipments Market share %
Asia/Pacifi c (ex.
Japan) 9%
Japan 3% Rest of World
2%
USA 74%
Western Europe 12%
MSI and Gigabyte's graphic card shipments to decline 6-9% YoY
in 2019
Wiwynn to be the only one seeing negative growth in 2019
cloud data-centre site, given the higher requirements for low-latency, data-processing, efficiency power consumption in the 5G era.
Figure 16: Hyperscale operators' capex decelerating in 2019
Figure 17: Taiwan ODM server/cloud sales should moderate to 8.0% this year
Source: Company data, IDC, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Inventec and Lenovo both see slower enterprise server demand in 1H19. However, Inventec expects demand to recover from late 2Q19 as it ramps the shipments for Google's data centre and Chinese cloud customers, followed by storage server shipments for US customers in 4Q19. Net-net, we expect the momentum to resume in 2020 with the deployment of Intel's new 10nm platform, increasing adoption of AMD's server platform, and 5G capex spending driving 5G server projects, including demand from edge servers.
Quanta expects 2Q19 server/data centre sales to decline QoQ, but retains its full-year target of double-digit growth. It is also working with Rakuten to monetise the 5G telco infrastructure and edge server opportunities and we believe this could become a new growth driver for its cloud business from 2020.
No conclusion on capacity relocation for NB assembly
PC ODMs have been evaluating new production sites for laptops for nearly one year.
Although laptops could be subject to 25% tariffs if US-China trade tensions further escalate, our checks suggest that PC ODMs and brands still have not decided where to move the production of the mainstream products, while some high-end models have been shifting back to Taiwan. For Compal, it has been discussing with its NB customers on shifting more production to Vietnam, but noted that the overall production cost could increase by 5-10% given the additional costs for insurance, depreciation, transportation, and custom fees, offset by lower labour costs.
For Wistron, it has been evaluating whether to restart its site in the Philippines for NB assembly. It believes labour costs in the Philippines could be cheaper than China, but the lack of supply chain support could be a burden on the overall cost structure. Inventec and Quanta have prepared some capacity in Taiwan but both note that the overall costs could increase by more than 10%, due to higher labour costs and additional costs for transportation.
0%
20%
40%
60%
80%
$0
$50,000
$100,000
$150,000
2013 2014 2015 2016 2017 2018 2019F 2020F 2021F
Facebook Google Amazon Microsoft
Baidu Alibaba Tencent Apple
IBM eBay Paypal Oracle
SAP LinkedIn Twitter Salesforce
Mercadolibre Top 7 YoY 2nd Tier YoY Total YoY Internet Company
capex YoY Internet Company
capex US$mn
29.2%
35.0%
8.0% 7.2%
13.3%
0%
5%
10%
15%
20%
25%
30%
35%
40%
$0
$100
$200
$300
$400
$500
$600
$700
$800
2017 2018 2019E 2020E 2021E
Taiwan server/cloud sales YoY change
Inventec and Quanta have prepared capacity in Taiwan
6 June 2019
Figure 18: Compal has highest PC mix; Inventec is most exposed to server (2018)
Figure 19: ODM manufacturing base diversification arising from US tariff threat
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse research
For the cloud/data centre servers, some of the system assembly and SMT production have already been moved back to Taiwan given the tariff hikes since 2H18, while Mexico, Eastern Europe, Brazil, and even the US are under consideration for future expansion. For the PC brands, we think Lenovo has better diversification of its production capacity versus its peers, while Quanta is the only cloud/data centre server play with production capacity in the US.
Nevertheless, we believe that brands and data centre customers would absorb the increasing tariffs or costs from relocation. In our view, the impact to ODMs' profitability would be manageable, but the potentially higher retail pricing for PCs could hurt end- demand, which could lead to less operating leverage for the ODMs.
82%
45% 58%
39%
18%
8%
13%
22%
37%
18%
24%
7% 19%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Compal Inventec Quanta Wistron
PC/Tablet Smartphone IoT/wearable Sever/Storage Others
Company Product China Taiwan/SEA Mexico US LatAm Europe
PC v v v
Smartphone v
IoT v *
Sever v
PC v
Smartphone v
IoT v v
Sever v v v v
PC v v
Smartphone
IoT v
Sever v v v v
PC v
Smartphone v
IoT v v v
Sever v v v v
Compal
Inventec
Quanta
Wistron
Company updates at 2019 Computex
We visited corporate booths and attended product launch events at Computex. We highlight some of the company-level takeaways for PC and hardware ODMs, including Asus, Acer, MSI, Gigabyte, Compal and Wiwynn.
Asus: ScreenPad and Duo Screens are the key focus
■ Launching laptops with dual screens but could lead to higher price points. Asus introduced its new notebook products including ZenBook Pro Duo/ZenBook Duo, the new ZenBook 13/14/15 and new VivoBook S14/S15, all equipped with upgraded ScreenPad 2.0. The ScreenPad 2.0 enables larger space on its secondary displays with at least 5.65” FHD touch screens and shortcuts to improve multi-tasking. The ScreenPad 2.0 is also more power saving because it’s directly driven by Intel's integrated GPU. It also released the 15.6” ZenBook Pro Duo and 14" Zen Book Duo, both with secondary displays (14" UDH and 12.6" FHD, respectively), targeting a 3Q19 launch at the earliest. It plans to reveal its pricing later.
■ Laptops for content creators. Asus also announced a series of StudioBook laptops to meet rising demand from creators. The new StudioBook W500 features a 15.6” 4K IPS display, Intel Core i7 CPU, NVIDIA Quadro RTX 5000 GPU, multiple I/O designs with a RJ45 port, allowing creators to upload videos more efficiently. It is also qualified as professional-grade color performance display by PANTONE, with its Delta E less than 2 vs Acer Concept D's less than 1 (smaller the better). We think the higher pricing and disadvantage on specs could result in share loss at the premium segment.
Figure 20: Asus’ newly launched laptops at Computex for creators
Source: Company data, Credit Suisse research
■ Zenfone 6 new flip camera and large battery design. Asus also presented its Zenfone 6 featuring a 6.4” IPS LCD display (vs 6.2” in Zenfone 5) with 2340 x 1080 resolution and 92% screen-to-body ratio, and an innovative flip-top dual camera (48MP+13M). The flip- top camera design enables users to take pictures and selfie on same camera, improving the resolution/image quality for selfie and panorama mode. It began shipping from the end of May with the price starting from €499.
■ Motherboard upgrades and ZenScreen Touch. Asus also launched its motherboard Prime Utopia with graphic cards moved to the back side of the motherboard, Asus’s new water cooling system and enhanced Hydra Cortex fan header connects up to four fans on the board in order to optimise heat dispassion/thermal management. Prime Utopia also has modularised I/O for different user demand and an advanced 7” OLED monitor with touch screen to control the cooling system (i.e. water cooling and fans). Besides, Asus’s ZenScreen Touch with its 15.6” IPS panel and the 10-point touch screen allows
Vendor Asus Asus Asus Asus
Model name ZenBook Pro Duo ZenBook Duo ZenBook 15/14 Vivobook S15/S14
Form factor:
Height 24 mm 19 mm 18.9/16.9 mm 18 mm
Weight 2.5 kg 1.8 kg 1.65/1.26 kg 1.8/1.4 kg
Display 15.6' OLED 14" LCD 15.6/14" LCD 15.6"/14" LCD
Resolution 4K (3840*2160) FHD (1920*1080) Up to 4K/FHD Full HD
Key specs
CPU Up to Intel Core i9 Intel Core i7 Up to Intel Core i7 Up to Intel Core i7
GPU NVDA RTX 2060 NVDA MX 250 NVDA GTX 1650/MX250 NVDA MX250/Intel UHD 620
Memory 8/16/32 GB DDR4 8/16 GB DDR3 8/16 GB DDR3 Up to 16 GB DDR4/DDR3
Storage Up to 1 TB SSD Up to 1TB SSD Up to 1TB SSD Up to 1TB SSD
ScreenPad 14" 4K touch display 12.6" FHD touch display 5.65" FHD+ IPS display 5.65" FHD+ IPS display
6 June 2019
users to connect their Android smartphones to improve productivity, even when they are travelling, on Asus’s ZenScreen Touch app.
Acer: Focusing on content creators and gamers
■ Focus on content creators demand in 2019—Concept D. Acer launched a new platform designed to meet the low-noise and high-display spec for creators at its Spring event in April in New York and showcased these products at this year's Computex. The new Concept D brand leverages its resources from gaming PC but with an upgrade on display (Delta E less than 1) and a self-designed thermal system for better cooling with lower noise. It has already started shipments of Concept D laptops in selected countries beginning in June 2019.
■ New Predator design to improve heat dissipation. Acer also upgraded its high-end gaming product lines with the new Predator Helio series featuring 17.3” FHD IPS display with a 144Hz refresh rate and 3ms response time, Intel's Gen 9 Core i9 CPU and NVIDIA's RTX 2080 graphics card. Its HyperDrift keyboard deck can slide forward along a rail and reveal the laptop’s cooling fans to improve heat dissipation and sound effects.
Acer cited that by pulling the keyboard forward and pressing the special “Turbo” button, users can see a 18-20% boost in performance on better thermal management. Helio 700 keyboard's ‘WASD’ keys use Magforce design, which are designed to respond and activate at various pressures and travel deeper than traditional key switches. These four keys and switches are easily replaceable with traditional key switches. Acer plans to start shipping the new Predator Helio 700 in 2Q19 priced at €2,700.
■ New Swift with Intel's 10nm Gen 10 CPU. Acer also launched its upgraded Swift 5 with Intel's latest 10 nm Gen 10 “Ice Lake” CPU (from Gen 8), and expects to start shipping by year-end 2019. As a close partner of Intel, Acer’s thin and light Swift series notebooks are one of the four PC brands to launch new products with Intel’s Project Athena 1.0. It includes key specs such as WiFi 6 and Thunderbolt 3, and at the least Intel's Core i5 level CPU, with over a 8GB memory/256 GB SSD, a touch screen/stylus pen, narrowed bezel design and last but not least, a powerful battery with a high-speed charging function. Acer claimed the Swift 5 could be the lightest 14” notebook with a graphics card inside and targets to start shipping before the year-end holiday season.
MSI: Dual engines driving growth
■ Early mover on creator NB. At Computex, MSI upgraded its mainstream/high-end gaming notebooks and prestige/workstation series for content creators. MSI highlighted it has launched laptops for creators since 2018 and believes other PC peers putting more effort into meet creators' demand would help grow the TAM. Its new 17.3” FHD WS75 laptop is powered by the Intel Gen 9 Core Xeon processor up to the NVIDIA Quadro RTX 4000 GPU, with a four-sided thin bezel LCD display with less than 2 Delta E colour difference performance, and exclusive MSI cooler Boost Trinity plus heat dissipation solution. WS75 plans to start shipments in 3Q19 with a starting price of US$3,200.
■ Continue expanding share in gaming. We believe MSI is one of the PC brands launching the most new products at this year's Computex. It provided not only PCs for creators, but also powerful gaming laptops for mainstream/enthusiastic gamers. GT 76 Titan, for example, features the Intel Gen. 9 Core i9 CPU, NVIDIA RTX 2080 GPU, 17.3”
FHD/4K thin bezel display and is also equipped with MSI Cooler Boost Titan Technology (four cooling fans and 11 heat pipes), which allows CPU/GPU to drive at full performance.
The GT 76 Titan begins shipment in July with a starting price of US$4,700.
Gigabyte: Gaming still the key targeting market
■ Gaming demand continues to drive revenue growth. Despite an overall PC slowdown, Gigabyte still expects its notebooks, desktops and monitors to outgrow the industry due to its strong growth from gaming. At Computex, Gigabyte upgraded its AORUS 15 series, featuring Intel Gen 9 Core i7 processor, with up to a 15.6” Full HD 240 Hz thin bezel IGZO display, up to the NVIDIA RTX 2070 GPU, NAHIMIC 3 sound technology, and Gigabyte claims it to be their best performance laptop with under one inch of thickness. The AORUS 15 series is now available starting from US$1,600 and Gigabyte expects to launch the AORUS 17 with a larger 17” display in late-2019 to early 2020.
■ Launching AERO family for content creators. Gigabyte launched a new 17.3”
AERO 17 at Computex, which features up to an Intel Gen. 9 Core i9 processor and up to an NVIDIA RTX 20 series GPU with 4K LCD display. Gigabyte cited its AERO brand is a product series built for professionals/content creators, with high-end processing power in a highly portable form factor. Gigabyte expects to start shipping the new AERO 17 in 3Q19, with its key advantages of multiple I/O supports, X-Rite Pantone certification to enhance its colour performance which could improve Delta E to less than 1. Pricing for the AERO 17 has not yet been released but is expected to be higher than US$1,800, which is the price of the AERO 15, another AERO member with a smaller display.
Compal: 5G and dual-screen NB key PC themes
■ New NB focus on 5G and dual-screen. Compal highlighted it is the first NB ODM- launched 5G-enabled notebook reference design powered by ARM-based Qualcomm Snapdragon 8cx SoC, announced at the end of 2018 exclusively for notebook and tablets. Compal explained its 5G notebook solution has built in nine 5G-enabled antenna, providing support for 5G connectivity on both Sub-6 GHz and mmWave.
Despite the inclusion of the additional antenna, it is capable of still achieving a narrow- border design with more than a 90% screen-to-body ratio. In addition to the 5G- enabled notebook, Compal also showcased its dual-screen notebook solution which further enhances productivity for users. It highlighted that despite the dual-screen design, this notebook is capable of more than ten hours of operation supported by dual AMOLED display and AI technology which tracks users eyes' gazing direction for direct display on/off control. Interestingly, the unique hinge-stand design on this dual-screen notebook also provides better acoustic experience as well as heat dissipation.
Nevertheless, it admitted that there is currently limited application support before Microsoft rolls out ecosystem support by 2H20.
Figure 21: Compal’s 5G enabled notebook Figure 22: Compal’s dual-screen notebook
Source: Company data Source: Company data
■ Increasing contribution from smart devices with a key highlight in wearables.
Compal entered the Apple Watch supply chain in 2017 for the Watch Series 1 model and further entered into the new Watch Series 4 last year. Despite no related products being showcased in the showroom, we believe this area has been an increasingly
6 June 2019
important segment for Compal in its effort to diversify away from its PC-centric business. Aside from Apple, Compal is also the exclusive supplier for premium smart watches for premium brands including Folli Follie and Fossil Group which also include Michael Kors, Tory Burch, Kate Spade under the group. Notably, Compal also showcased its new wireless headphone wearable solution, allowing heart beat monitoring supported by an embedded PPG (Photoplethysmogram) sensor.
■ Expanding smart medical solutions. Compal invested in Avalue in 4Q14 through a private placement and became the largest shareholder with a 22% stake. Compal said its partnership with Avalue focuses on the smart healthcare area with Avalue providing solutions including surgical grade displays, while Compal also showcased medical- grade bedside care total solutions, and solutions for rehab and baby smart diapers, etc., for the medical vertical. Compal highlighted its efforts in building the server/storage business as well as 5G capability (it plans to launch the new 5G module next month for over 1 Gbps) that would serve to enhance its long-term competitiveness, providing total solutions ultimately for long-distance operations. According to the company, it has already been able to reduce overall latency to less than 5 ms, a key leading edge over its peers.
Wiwynn: Launching next Gen of cloud Infrastructure
■ Immersion Cooling System + 48v to 12v board key spotlight. Wiwynn showcased its latest proprietary Immersion Cooling Solution targeting the next generation of data centres for higher power density demand, especially for cloud computing, AI and HPC (high performance computing) applications. According to the company, the two-phase immersion cooling solution is designed with an Open Compute Project (OCP) TiogaPass server board and 48-volt technology, partnering with 3M’s patented non- conductive dielectric fluids and Fluorinert electronic liquids, for better heat dissipation.
In addition, the system also allows lower PUE (Power Usage Effectiveness) at 1.02, while offering greater cooling capacity (up to 1kW x 100 servers) with tool-less maintenance. Wiwynn also introduced its proprietary server board add-on to translate 48V power input into 12V to lower the higher costs associated with hardware upgrades given the mainstream board still uses 12V power input. 48V voltage has seen increasing penetration given the higher power conversion efficiency (98% now vs 96%
previously), 16x reduction in the current loss during distribution on top of running on a similar safety environment. Cloud data centres, such as Google, have been actively using the 48V power source design to boost computing density and rack utilisation.
Figure 23: Wiwynn’s Immersion Cooling solution
Figure 24: Existing 12V Server uses the Wiwynn 48V Power Converter Board
Source: Company data Source: Company data
Increasing edge demand along with the proliferation of 5G. Wiwynn demonstrated a wide range of cloud IT infrastructure including the introduction of the Edge Platform 100 (EP100) based on the Nokia-led OCP OpenEDGE specification. Wiwynn said its solution provides more flexible hardware deployment at edge sites for the upcoming 5G era with ease of management through the software optimising hardware resource pool depending on the needs of the ongoing application demand. It also clarified that the edge servers,
despite their smaller half-width build, have a limited difference in terms of cost structure (CPUs alone make up over 50% of the cost) against hardware deployed in the cloud data- centre site, given the higher requirement for low latency, data processing and efficient power consumption in the 5G era.
6 June 2019
Asia Pacific/Taiwan IT Hardware
Acer Group
(2353.TW / 2353 TT)Rating NEUTRAL
Price (05-Jun-19, NT$) 18.85
Target price (NT$) 21.00
Upside/downside (%) 11.4
Mkt cap (NT$/US$ mn) 57,963 / 1,849 Enterprise value (NT$ mn) 35,274
Number of shares (mn) 3,075
Free float (%) 92.7
52-wk price range (NT$) 27.55-17.50
ADTO-6M (US$ mn) 5.2
Target price is for 12 months.
Research Analysts Jerry Su 886 2 2715 6361 [email protected] Harvie Chou 886 2 2715 6364 [email protected] William Li 886 2 2715 6363 [email protected]
Focusing on higher ASP segments
■ Gaming and Concept D to support ASP growth. We expect Acer's PC shipment to decline 2.4% YoY in 2019 as it continues shifting its focus toward higher ASP gaming PCs, Concept D for designers, and ultra-slim NBs, as well as impact from industry-wide Intel CPU shortages. We expect Intel's CPU supply to improve from late 2Q19 and Acer's PC shipment should turn positive YoY in 2H19. Given the higher sales mix from gaming, ultra-slim, and Concept D (we estimate 37% in 2019 vs 33% in 2018), we expect 6% YoY ASP growth in 2019, leading to 4%/2% PC/overall sales growth.
■ Leveraging AOPEN to further increase corporate exposure. Acer's corporate PC mix increased from 35% of units in 2014 to 42% in 2018, still below industry average of 54%. It plans to leverage AOPEN's (Acer owns 40.55% stake) unique middleware meldCX, which provides customers an easy way to transfer among different platforms, to further increase its hardware and services to enterprise customers. Moreover, Acer is also investing in digital information management services (ACSI) and server (Altos) as new drivers to grow its corporate business.
■ Business model and balance sheet improving. We believe Acer's new management team has successfully transformed its product line-up toward more premium segment, as well as re-building a new brand image. Its decision of exiting smartphone in 4Q16 is no longer a drag to its profitability as warranty has largely ended. Its balance sheet has also improved in the past few years given the rising ROE and steady increase in tangible book value with net cash accounting for 47% of market cap as of 1Q19. BoD has proposed a cash dividend of NT$0.77 (76% payout), implying 4.4% yield.
■ Retain NEUTRAL. We fine tune our model and lower 2019E EPS by 1.1% on CPU supply constraint but leave our 2020E EPS largely unchanged. We retain NEUTRAL on Acer and set our TP at NT$21.0, based on 1.1x tangible P/B or 17x 2019 P/E. We would be more constructive if its margin expansion or corporate business accelerates. We also introduce 2021 estimates.
Share price performance
The price relative chart measures performance against the TAIWAN SE WEIGHTED INDEX which closed at 10,461.62 on 05/06/19. On 05/06/19 the spot exchange rate was NT$31.35/US$1
Performance 1M 3M 12M
Absolute (%) (7.1) (6.5) (24.9) Relative (%) (3.1) (7.9) (19.1)
Financial and valuation metrics
Year 12/18A 12/19E 12/20E 12/21E
Revenue (NT$ mn) 242,270 247,689 261,410 272,536
EBITDA (NT$ mn) 4,578.2 5,393.9 6,420.7 6,950.2
EBIT (NT$ mn) 3,738.5 3,845.5 4,849.8 5,364.3
Net profit (NT$ mn) 3,060.4 3,593.2 3,784.9 4,199.5
EPS (CS adj.) (NT$) 1.0 1.17 1.23 1.37
Chg. from prev. EPS (%) n.a. (1.1) 0.5 n.a.
Consensus EPS (NT$) n.a. 1.21 1.26 1.32
EPS growth (%) 12.0 17.4 5.3 11.0
P/E (x) 18.9 16.1 15.3 13.8
Dividend yield (%) 4.4 4.6 5.1 4.3
EV/EBITDA (x) 7.6 6.7 5.3 4.5
P/B (x) 0.9 0.96 0.94 0.92
ROE (%) 4.8 5.8 6.2 6.8
Net debt/equity (%) (39.5) (36.0) (38.7) (41.9)
Source: Company data, Refinitiv, Credit Suisse estimates
Figure 25: Acer’s quarterly P/L
Source: Company data, Credit Suisse estimates
Figure 26: Acer launched Concept D notebook series for creators demand in April-2019
Figure 27: Acer PC shipment could see positive YoY in 2H19 due to CPU shortage alleviates in late 2Q19
Source: Company data, Credit Suisse Source: IDC, Credit Suisse
Figure 28: Acer forward P/E Figure 29: Acer QFII holding
Source: Bloomberg, Credit Suisse Source: TEJ, Credit Suisse
NT$ mn 3Q18 4Q18 1Q19 2Q19E 3Q19E 4Q19E 2019E 2020E Revenue 65,326 63,665 54,703 57,888 67,190 67,907 247,689 261,410
GP 6,893 6,745 5,772 6,308 7,187 7,263 26,530 28,225
OP 1,170 1,091 554 600 1,355 1,337 3,846 4,850
Net profit 912 560 706 711 1,095 1,081 3,593 3,785
EPS (NT$) 0.30 0.18 0.23 0.23 0.36 0.35 1.17 1.23
GM (%) 10.6 10.6 10.6 10.9 10.7 10.7 10.7 10.8
OPM (%) 1.8 1.7 1.0 1.0 2.0 2.0 1.6 1.9
Vendor Acer Acer Acer
Model name Concept D 9 Concept D 7 Concept D 5
Form factor:
Height 23.5 mm 17.9 mm 16.9 mm
Weight 4.1 kg 2.1 kg 1.5 kg
Display 17.3" LCD touch display 15.6" IPS LCD 15.6" IPS LCD
Resolution 4K (3840*2160) 4K (3840*2160) 4K (3840*2160)
Key specs
CPU Up to Gen 9 Intel Core i9 Up to Gen 9 Intel Core i7 Up to Gen 8 Intel Core i7
GPU NVDA RTX 2080 NVDA RTX 2080 AMD Radeon RX Vega M GL
Memory up to 32 GB DDR4 up to 32 GB DDR4 8/16 GB DDR4
Storage Up to 1 TB SSD Up to 1 TB SSD Up to 1 TB SSD
Delta E 0.7 1.1 1.2
Noise (dB) 39 39 31
Pricing US$4,999 US$2,299 US$1,699
Launch 3Q19 Jun-19 Jun-19
0 100 200 300 400 500 600
0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500
1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 Acer notebook Acer notebook ASP
12x 14x 16x 18x 20x 22x 24x 26x
Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Dec-18 Feb-19 Apr-19 Jun-19 -2 Std dev = 15.0x
-1 Std dev = 16.7x
Average = 18.4x +1 Std dev = 20.1x
+2 Std dev = 21.8x
10 15 20 25 30 35
Jun-16 Oct-16 Feb-17 Jun-17 Oct-17 Feb-18 Jun-18 Oct-18 Feb-19 Jun-19
%
Acer QFII Holding %
