Asia Hardware Insights: The casing sector 29 October 2018Asia Hardware Insights: The casing sector
P2
UBS Research THESIS MAP a guide to our thinking and what's where in this report
MOST FAVOREDLEAST FAVORED
Catcher, CasetekBYD Electronic, Foxconn Tech
PIVOTAL QUESTIONS Q: Can the metal-casing industry maintain growth in 2019, despite the increasing adoption
of non-metal materials in smartphones
No, we estimate the metal casing industry revenue could decline 5% YoY in 2019 after 13%/1%
YoY growth in 2017E/2018E, due to the declining ASP for metal parts used in Android
smartphones. more
Q: Is there increasing margin pressure across the board due to increasing adoption of non-
metal materials in smartphones
No. We expect more pricing pressure for metal casing makers in Android smartphone supply chain
while those in iPhone supply chain could have better bargaining power due to higher entry barriers
and a small number of capable suppliers. more
UBS VIEW Under a more challenging environment, we expect only share gainers in iPhone supply chain to
deliver strong growth while metal casing makers with Android exposure could face severe pricing
pressure. We think the market is not differentiating between Apple and Android producers, which
could throw out interesting opportunities, as the metal casing segment is trading at a multiple of 9x
2019E PE (a 25% discount to overall handset components sector).
EVIDENCE We estimate the ASP for Android metal parts in 2019 could be 25-50% lower than previous designs
due to lower entry barriers and shorter production time. We estimate a 14% YoY decline for
Android in 2019 but 6% YoY growth for iPhone. Our differentiated approach to look at industry
supply/demand by dividing the smartphone metal parts value into Apple and Android camps shows
an oversupply for metal casing makers in the Android camp.
WHAT'S PRICED IN We believe the market has priced in the challenges in the metal casing sector as metal casing stocks
are trading at an average of 9x 2019E PE, lower than the handset component sector average of 12x.
more
Metal casing industry value could fall 5% YoY in 2019E
Source: UBS estimates
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
-1020
25
30
35
2012E2013E2014E2015E2016E2017E2018E2019E
NotebookSmartphoneTabletYoY
(US$bn)
Asia Hardware Insights: The casing sector 29 October 2018Stock views and our differentiated analysis
We lower our 2018 metal casing industry revenue forecast by 1% and introduce
our 2019 forecast with a 5% YoY decline after our 13%/1% YoY growth
estimates for 2017/2018, due mainly to the declining ASP for metal parts used in
Android smartphones. We believe the market is overly concerned about metal
casing makers across the board, as the PE multiple is at a discount to handset
component space. Our differentiated approach to look at industry supply/demand
by dividing the smartphone metal parts value into Apple and Android camps
shows oversupply for metal casing makers in the Android camp.
Catcher (2474.TW; Buy)
We remain positive about Catcher's growth based on its potential share gain and
ASP increase in the iPhone supply chain. We assume Catcher continues to increase
its share and gain one additional iPhone model with a stainless steel metal frame
to support ASP expansion in 2019. We maintain our Buy rating and raise our price
target from NT$420.00 to NT$460.00, based on 11x 2019E PE.
Casetek (5264.TW; Buy)
We maintain our Buy rating on Casetek but lower our 2019-20 earnings forecasts
by 45% due to slower-than-expected ramp up of iPhone orders. Despite a difficult
start, we maintain our view that Casetek's penetration in iPhone is just the
beginning of share gains in the next two to three years. We believe the market has
low expectations about its share gain in iPhone and is bearish about its margin
trend given the loss in H118. We lower our price target from NT$105.00 to
NT$70.00, based on 12x 2019E PE.
Lens Tech (300433.SZ; Buy)
We believe Lens Tech would benefit from a better-than-expected adoption rate of
glass casing in mid-range to high-end smartphone models. While demand growth
for 3D glass in China smartphone OEMS has accelerated, we expect Lens Tech to
be major beneficiary with its competitive advantage in 3D glass, given its first-
mover advantage and expertise. We have a Buy rating and a price target of
Rmb9.50. We base our price target on DCF, assuming 8.0% WACC.
BYD Electronic (0285.HK; Sell)
We maintain our Sell rating on BYDE and believe the market is still too optimistic
about its improving profitability into 2019 and beyond. We believe the company
will find it challenging to improve profitability significantly under the rising pricing
pressure in the metal casing used in Android smartphones and aggressive capacity
expansion of 3D glass casing. We maintain our Sell rating and price target of
HK$8.00. We base our price target on DCF, assuming 9.9% WACC.
Foxconn Tech (2354.TW; Sell)
We maintain our Sell rating on Foxconn Tech and expect deteriorating profitability
for its metal casing business under increasing competition in the iPhone supply
chain. Although higher blended ASP for iPhone casing in 2019 could mitigate the
negative impact from its share loss in iPhone and lead to a slower decline in metal
casing revenue in 2019, we believe it could continue losing share in the iPhone
supply chain. We raise our 2019-21 earnings forecasts to reflect upside from
higher ASP for metal casing and strong game consoler revenue. We lower our
price target from NT$65.50 to NT$60.00, based on 9x 2019E PE.
Metal casing industry value could
decline 5% YoY in 2019
Buy; Price Target NT$460.00
Alice Chen
alice.chen@ubs
+886-2-8722 7343
Buy; Price Target NT$70.00
Alice Chen
alice.chen@ubs
+886-2-8722 7343
Buy; Price Target Rmb9.50
Jimmy Yu
jimmy.yu@ubssecurities
+86 21 3866 8880
Sell; Price Target HK$8.00
Alice Chen
alice.chen@ubs
+886-2-8722 7343
Sell; Price Target NT$60.00
Alice Chen
alice.chen@ubs
+886-2-8722 7343
Asia Hardware Insights: The casing sector 29 October 2018Differentiated approach to the industry supply/demand
Our differentiated approach to look at the industry supply/demand by dividing the
smartphone metal parts value into Apple and Android camps shows oversupply for
metal casing makers in the Android camp. While investors are concerned about
the potential oversupply of the metal casing across the board, we believe our
analysis should provide a clear picture about the divergent performance of
different metal casing makers.
For the demand side, we believe Apple's metal casing value could continue
growing into 2019 with higher contribution from stainless steel metal frame.
Conversely, we expect metal casing value for Android smartphone to decline 14%
YoY in 2019, due mainly to lower ASP for metal frame used in Android
smartphones, especially for China handset OEMs.
Figure 2: iPhone metal casing value Figure 3: Android smartphone metal casing value
Source:UBS estimatesSource:UBS estimates
From the supply side, metal casing makers in the Android smartphone supply chain
increased their computer numeric code control (CNC) machine capacity 64% YoY
in 2015, while only share gainers in the iPhone supply chain increased their CNC
machine capacity. With weaker demand, Android metal casing makers could face
more pricing pressure.
Figure 4: Major metal casing suppliers CNC machine capacity
CNC 2013 2014 2015 2016 2017 2018E
Apple 55 61 73 75 89 91
Android 50 60 99 107 123 126
Total 105 121 172 182 212 217
Apple10.9% 19.0% 3.3% 18.7% 2.2%
Android