1、 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 awa
2、re 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.10 June 2019 Asia Pacific/Taiwan Equity Research Electronics Manufacturing Services Taiwan EMS/IPC Secto
3、r Research Analysts Pauline Chen 886 2 2715 6323 pauline.chencredit- Angela Pan 886 2 27156352 angela.pancredit- William Li 886 2 2715 6363 william.licredit- ASSUMING COVERAGE A year of rising cost pressure Figure 1:Assuming coverage on Hon Hai/Pegatron/Advantech Company New Rating New TP P/E(X)P/B(
4、X)2019 2020 2019 2020 Hon Hai N 77 9.3 9.1 0.8 0.7 Pegatron N 55 10.7 9.9 0.8 0.8 Advantech O 295 25.4 21.9 5.6 5.1 Source:Company data,Credit Suisse estimates A Assuming coverage on Hon Hai with NEUTRAL rating/NT$77 TP(from Neutral/NT$73),Pegatron with NEUTRAL rating/NT$55 TP(from Outperform/NT$60)
5、,and Advantech with OUTPERFORM rating/NT$295 TP(from Outperform/NT$275).EMS to suffer from production relocation.We expect EMS companies to speed up their production site diversification to non-China areas,to avoid any uncertainty in shipments amid rising trade tensions.We note that in 2010 when Hon
6、 Hai initiated its production relocation plan from coastal China to inland China,its EBIT per headcount saw 17%/10%YoY decline in 2010/2011.This,together with uncertainties of rising demand,could lead to heavier pricing pressure and earnings downside risks for the sector.Rising vertical integration
7、and IIoT to mitigate the cost headwinds.We believe Hon Hai and Pegatron will continue to focus on components vertical integration and industrial internet of things(IIoT)to mitigate the impact of rising costs.Relatively,Hon Hai is more ahead of Pegatron in these two areas,and the stock is also tradin
8、g at lower valuation(on both P/E and P/B)with higher net cash position.However,we note that it takes time to see if Hon Hais chairman succession plan(from one strong leader,Terry Gou,to five newly elected board members)could still lead the aircraft carrier as efficiently as it used to be.We believe
9、this trend should favour the IPC sector,in which Advantech arguably offers one of the best quality,given its extended product offerings and strengthening software integration capability in various areas.10 June 2019 Taiwan EMS/IPC Sector 2 Focus charts Figure 2:EMS/ODM global footprint Figure 3:Chin
10、a no longer cheaper on min.wages Source:Company data,Credit Suisse estimates Source:CEIC Figure 4:Hon Hai seeing labour cost coming down Figure 5:Pegatronsubsidiaries an earnings burden Source:Company data Source:Company data Figure 6:Prefer IPC over EMS(EBIT/headcount)Figure 7:AdvantechIIoT a key e
11、arning driver Source:Company data Source:Company data CompanyChinaTaiwanUSIndiaMexicoOthersHon Hai80-85%0-5%0-5%0-5%0-5%0-5%Pegatron90-95%0-5%0-5%Inventec80-85%0-5%0-5%10-15%0-5%Wistron80-90%0-5%0-5%5-10%0-5%Compal90-95%0-5%5%Quanta90%5%0-5%0-5%BrazilChinaMexicoIndonesiaVietnamCzech01002003004005006
12、0020092010201120122013201420152016201720182019(US$)0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%200820102012201420162018labour cost as of sales(%)-10%-5%0%5%10%15%20%25%30%35%20142015201620172018Net profit contribution from Casetek and Kinsus0.00.10.20.30.40.50.60.70.80.9200820092010201120122013201420152
13、0162017Hon HaiPegatronAdvantech(NT$mn)IIoTEIoTACGNCGService IoTGlobal service0%5%10%15%20%25%-30%-20%-10%0%10%20%30%40%50%(OPM)(sales YoY)10 June 2019 Taiwan EMS/IPC Sector 3 A year of rising cost pressure We assume coverage on Hon Hai with NEUTRAL rating/NT$77 TP(from Neutral/NT$73),Pegatron with N
14、EUTRAL rating/NT$55 TP(from Outperform/NT$60),and Advantech with OUTPERFORM rating/NT$295 TP(from Outperform/NT$275),respectively.We expect EMS companies to speed up their production site diversification to non-China areas to avoid any uncertainty in shipments amid rising trade tensions.This,togethe
15、r with uncertainties of rising demand,could lead to heavier pricing pressure and earnings downside risks for the sector.We believe Hon Hai and Pegatron will continue to focus on components vertical integration and industrial internet of things(IIoT)to mitigate the impact of rising costs.Relatively,H
16、on Hai is more ahead of Pegatron in these two areas,and the stock is also trading at a lower valuation(on both P/E and P/B)with higher net cash position.However,we note that it takes time to see if Hon Hais chairman succession plan(from one strong leader,Terry Gou,to five newly elected board members
17、)could still lead the aircraft carrier as efficiently as it used to be.We believe this trend should favour the IPC sector,in which Advantech arguably offers one of the best quality,given its extended product offerings and strengthening software integration capability in various areas.Production relo
18、cation adding costs Figure 8:EMS/ODM global footprint Company China Taiwan US India Mexico Others Hon Hai 80%0-5%0-5%0-5%0-5%0-5%Pegatron 90-95%0-5%0-5%Inventec 80-85%0-5%0-5%10-15%0-5%Wistron 80-90%0-5%0-5%5-10%0-5%Compal 90-95%0-5%5%Quanta 90%5%0-5%0-5%Source:Company data,Credit Suisse estimates W
19、e expect EMS companies to speed up their production site diversification to non-China areas,to avoid any uncertainty in shipments amid rising trade tensions.In the past few years,Hon Hai has made more than one announcement to invest outside of China,including its Wisconsin plant,which could see US$1
20、0 bn investment and 13K employee.Pegatron has readied its production lines in Indonesia(mainly for networking/STB),and is now evaluating investments in other SEA countries,including Vietnam and India.We note that in 2010 when Hon Hai initiated its production relocation plan from coastal China to inl
21、and China,its EBIT per headcount saw 17%/10%YoY decline in 2010/11.This,together with uncertainties of rising demand,could lead to heavier pricing pressure for the sector.Hon Hai has a relatively more diversified global footprint than Pegatron Hon Hai has a more diversified global footprint than Peg
22、atron(Figures 1 and 2),including the US,Brazil,Europe,India and South East Asia.According to both companies 2017 CSR reports(2018 CSR not available),Hon Hai claims that it has two strategic R&D clusters(one in Greater China and another in US),three design and manufacturing zones across Asia,the US a
23、nd Europe,and more than 200 subsidiaries and branch offices in Asia,the US and Europe.However,Pegatron states that its major DMS(Design,Manufacturing and Service)is mainly located in China,Mexico,and Czech Republic,with service centres in the US,Japan,Brazil,Singapore and Korea(for service).While we
24、 note that some of Hon Hais proposed investments have not been materialised,it at least shows more ambition on diversifying its global footprint.10 June 2019 Taiwan EMS/IPC Sector 4 Figure 9:Hon Hais global footprint Source:Company data Figure 10:Hon Hais committed investment vs actual spending Year
25、 Place Commitment Updated status 2010 Meoli,Taiwan NT$10 bn,for solar cell&module Shifting to Kunshan,China 2011 Brazil US$12 bn,100k jobs,for iPhone and iPad five plants in total Two plants to be out of production in 2015 employee based in Brasil 10K 2012 Indonesia US$1 bn,1 mn jobs,for smartphone
26、production Not in production 2013 Pennsylvania,US US$40 mn,500 jobs,for high-tech R&D Not in production 2015 Maharashtra,India US$5 bn,1 mn jobs,for manufacturing Not in production 2017 Wisconsin,US US$10 bn,13k jobs,for panel production hiring 0.1%negative earnings impact.BrazilChinaMexicoIndonesia
27、VietnamCzech010020030040050060020092010201120122013201420152016201720182019(US$)0%10%20%30%40%50%60%FoundryBackendFablessDisplayMachinetoolPCBChina production as of total value(2017)10 June 2019 Taiwan EMS/IPC Sector 6 Figure 15:Hon Hais component offerings(2018);Note:FII,FIH,and FIT are consolidate
28、d into Hon Hai;Source:Company data,Credit Suisse estimates Pegatron:a late comer with accelerating investments in vertical integration hurting margins Pegatron states that its vertical integration and strategic investments include motherboard,substrate,flexible PCB,casing,WiFi module,LED,large-scree
29、n monitor,camera module,fibre optic and connectors.However,the aggregate net profit contribution to Pegatron was negative in 2018,mainly hurt by Casetek(casing)and Fuyang(flexible PCB).Figure 16:Pegatrons component offerings(2018)Note:Casetek,Kinsus,Azurewave,ASROCK,Fuyang,and Lumens are consolidate
30、d into Pegatron;Source:Company data,Credit Suisse estimates Company nameVertical integrationRevenue(NT$bn)GM(%)EPS(NT$)Net Income(NT$mn)Ownership(%)Profit to Honhai(NT$mn)Profitcontribution%Sharp CorporationDisplay module,TVs,smart home devices,camera modules646.817.2%33.320,327.941.7%8,484.86.6%Fox
31、conn Industrial InternetCommunication network equipment,cloud service equipment,precision tools and industrial robots1,894.18.6%1.196,793.784.8%82,081.163.6%FIH Mobile LimitedHandset parts and assembly,Nokia mobile phone453.2-0.6%-0.1(26,015.6)62.0%(16,129.6)-12.5%FIT Hon TengManufacturing backplane
32、 connectors,memory cards,socketsand other electronic devices121.617.7%0.07,100.877.0%5,467.74.2%Foxconn TechnologyNB/smartphone casing,Game console assembly142.19.5%6.59,150.829.5%2,697.72.1%Zhen Ding TechnologyFlexible PCB design/SMT117.922.1%10.511,536.538.0%4,381.63.4%Ennoconn CorporationIndustri
33、al PC ODM/EMS69.022.1%14.52,868.939.4%1,130.60.9%ShuSin TechnologyPA/Optical transceiver module packaging4.518.8%2.8290.660.7%176.30.1%Asia Pacific TelecomTelecommunication services14.69.4%-0.8(3,267.7)19.7%(643.7)-0.5%Pan InternationalCable,Connector,PCB SMT27.28.7%2.31,348.726.5%357.50.3%CyberTAN
34、TechnologyBroadband and wireless networking devices8.66.4%0.5166.611.0%18.30.0%Advanced Opto TechnologyLED packaging,LED module4.66.0%-2.7(386.8)12.0%(46.4)0.0%G-Tech OptoelectronicsOptoelectronics glass processing service4.22.0%-0.6(124.5)22.0%(27.4)0.0%Foxsemicon Integrated TechSemiconductor and T
35、FT-LCD equipment manufacturing9.324.8%14.11,162.715.0%174.40.1%General Interface SolutionIntegrated touch display solutions128.48.6%11.83,980.222.5%897.10.7%Innolux CoporationTFT-LCD panel solution provider279.49.6%0.22,222.827.7%615.30.5%Sanying Precision IndustryPhotoelectricCamera module-(259.6)1
36、00%(259.6)-0.2%CircuTech InternationalIP-based HD video surveillance solutions1.25.0%-2.4(56.2)51%(28.4)0.0%Fitipower Integrated TechnologyPower management IC;LCD driver IC8.920.1%2.4346.128.0%96.90.1%Maxnerva TechSmart manufacturing and IoT solutions,and I.T.services1.338.6%0.015.510.9%0.60.0%ZY Te
37、chOptical lens molding tool1.240.4%2.3140.127.0%37.80.0%E SonMechanical parts for the consuming electrical products10.314.0%2.1370.325.7%95.20.1%Ways TechPlastic surface decorating techniques1.115.1%-1.0(90.7)9%(8.2)0.0%UVATSputtering equipment and coating OEM service0.930.8%3.1115.610%11.90.0%Usun
38、TechnologyAutomated system/machine integration/solution provider1.923.4%-0.6(50.6)15.3%(7.7)0.0%Galaxy Digital holdingDigital asset management and blockchain technology0.00.0%-41.3(1,105.5)7.0%(77.4)-0.1%China Harmony New energy AutoDeals exclusively in China luxury and ultra-luxury vehicles48.57.1%
39、2.13,115.78.4%262.70.2%Sub-total4,000.610.0%89,836.369.6%Company nameVertical integrationRevenue(NT$bn)GM(%)EPS(NT$)Net Income(NT$mn)Ownership(%)Profit to Pegatron(NT$mn)Profitcontribution%toCasetekmetal casing for NB,tablet&smartphone30.54.6%-4.13-1,702.059.4%-1,011.2-9.1%Kinsussubstrate,SLP,and PC
40、B for NB,wearable&smartphone23.722.7%0.78349.538.6%134.81.2%AzurewaveWiFi/Bluetooth module,Digital image module6.910.4%-0.81-118.432.8%-38.8-0.3%ASRockNB/server/IPC motherboard SMT10.222.3%4.91592.955.9%331.33.0%FuyangFlexible PCB designing/SMT-279.489.1%-249.0-2.2%LumensPTZ camera,Projector194.255.
41、2%107.21.0%CanonDigital camera,mobile phone/handset camera module7.68.5%-1.64-463.011.7%-54.3-0.5%Fresco LogicUSB-C/PD,superspeed transport,I/O aggreration IC-8.2%-Lightel Technologies Fiber optic related products/components and services-7.7%-SpeedtechCommunication,computer,automotive and consumer c
42、onnectors5.120.5%1168.54.8%8.00.1%Valens SemiconductorAudioVisual and automotive ultra-high-definition multimedia IC-4.2%-Sub-total84.113.6%-1,257.7-772.0-6.9%10 June 2019 Taiwan EMS/IPC Sector 7 Rising focus on Industrial Internet of Things(IIoT)Hon Hai Well positioned for smart manufacturing but w
43、ill first focus on internal adoption and cost restructuring We believe Foxconn group is in a unique position in smart manufacturing,leveraging(1)Hon Hais 40+years of manufacturing experience,(2)FIIs open IIoT platform and leading position in networking equipment and(3)Ennoconn groups diversified pre
44、sence in IPC,sensing devices and software system.The continued investment and development of smart manufacturing did not reflect in FIIs revenue,as the group turned to internal adoption,refocusing its resource to improve its cost structure and staying competitive amid rising demand uncertainty.Cost
45、benefits slowly come through FII stated that several internal operations benefit from smart manufacturing efforts,such as yield rate improvement,life extension of tools(cutting tools),longer maintenance cycle of tools(nozzle parts)and enhanced production efficiency.FII further claimed that its award
46、ed lighthouse factory(Shenzhen)demonstrated smart manufacturing capability including self-maintenance and real time monitoring,which has enhanced production efficiency by 30%,reduced inventory turnover by 15%and reduced labour by 88%.Overall Hon Hai delivered 0.2 pp YoY OPM improvement in 2018,despi
47、te cost headwinds from components/material prices,labour cost pressure,tightened environmental cost and unfavourable FX.Its labour cost as of sales also went down to 6.3%of sales in 2018,vs.7.0%+level in previous five years.FII also showed labour cost decrease(down 6%YoY)on top of double-digit reven
48、ue YoY growth.Figure 17:Hon Hais labour cost burden slowly comes down Figure 18:Hon Hais labour cost per headcount seeing decelerating growth from 2015 Source:Company data Source:Company data Foxconns physical manufacturing+industrial internet Foxconn group has its diversified roots in different lay
49、ers of smart manufacturing,including its core layer which is also the smart sensing layer(data collection and monitor,information mining layer),the cloud network layer(including edge computing),platform layer(the BEACON platform)and application layer(various applications including customer relations
50、hip management,supply chain management,quality control,security,environmental management,etc.).Please see our FII initiation for more details on Foxconn groups smart manufacturing build up.0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%200820102012201420162018labour cost as of sales(%)-10%-5%0%5%10%15%20%2