A comparison of ultra low cost handset chips
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A comparison of ultra low cost handset chips

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In this note, published in May 2007, I explained how Infineon\'s ultra-low cost GSM chip would trigger a revolution in the low-end handset market.

In this note, published in May 2007, I explained how Infineon\'s ultra-low cost GSM chip would trigger a revolution in the low-end handset market.

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A comparison of ultra low cost handset chips A comparison of ultra low cost handset chips Document Transcript

  • Produced by: ABN AMRO Bank NV Thursday 3 May 2007 Infineon Buy Absolute performance Trading Buy A comparison of ULC handset chips Short term (0-60 days) Overweight A teardown comparison of ultra low cost (ULC) handset models Sector relative to market from Nokia, Motorola, Sony Ericsson and LG, confirms our view that Germany Infineon's ULC2 is ahead of TI's LoCosto in terms of integration and Information Technology cost of ownership. We maintain our Buy rating. Hardware Price €11.47 Key forecasts Target price FY05A FY06A FY07F FY08F €14.50 Revenue (€m) 6631 7929 8318 10136 Market capitalisation EBITDA (€m) 1138 1521 1661 2008 €8.58bn Reported net profit (€m) -328.0 -280.0 149.9 539.6 Avg (12mth) daily turnover Normalised net profit (€m) -308.0 -138.0 183.9 539.6 Normalised EPS (€) -0.41 -0.18 0.25 0.72 €96.32m Dividend per share (€) n/a n/a n/a n/a Reuters Bloomberg Dividend yield (%) n/a n/a n/a n/a IFXGn.DE IFX GR Normalised PE (x) n/m n/m 46.6 15.9 EV/EBITDA (x) 7.24 5.21 4.90 3.87 Asset allocation EV/invested capital (x) 0.90 0.83 0.81 0.74 Equities Overweight ROIC - WACC (%) -0.24 1.30 2.07 3.51 Cash Neutral Accounting Standard: IFRS year to Sep, fully diluted Bonds Underweight Source: Company data, ABN AMRO forecasts Price performance (1M) (3M) (12M) Price (€) 11.7 11.2 9.6 Infineon beats Texas Instruments in ULC handset solutions Absolute % -1.6 2.7 18.9 We had argued that Infineon's ULC2 solution for low cost handsets appeared to be Rel market % -5.0 0.1 4.4 more integrated than Texas Instruments' LoCosto, but reserved our final conclusion Rel sector % -5.3 -1.7 14.3 until we actually had a real phone in the market using ULC2. Infineon's ULC2 May 04 May 05 May 06 integrates on a single chip a GSM/GPRS baseband, power management, SRAM and RF 16 transceiver while Texas Instruments' LoCosto does not integrate the power 14 management die. We also thought that LoCosto was not as good as ULC2 at 12 integrating external components. The combination of both factors could facilitate 10 substantial cost savings in terms of bill-of-materials but also in simplifying further the handset production process. 8 6 Teardown analysis of tier-1 ULCH models confirms this view IFXGn.DE Europe IT Hardware After performing a teardown analysis of the LG MG160A, the first handset on the Stock borrowing: Easy market to use Infineon's ULC2, we are incrementally more bullish on the prospects Volatility (30-day): 21.12% for this product. Comparing this phone with the Nokia 1112 and Motorola's Motofone, Volatility (6-month trend): ↓ both of which are based on Texas Instruments' LoCosto, leaves no room for 52-week range: 12.42-7.96 scepticism. Not only is Infineon's solution more integrated than TI's but also the size FTSE Eurotop 300 Index: 1568.99 of the chip appears to be smaller despite integrating more components and being Europe IT Hardware: 159.05 Source: ABN AMRO, Bloomberg manufactured on a 130nm node vs TI's 90nm. Nokia and LG use Infineon's ULC2; Samsung could be next; Buy Infineon has already announced wins at LG and Nokia for ULC handsets. We continue to believe that Infineon's ULC2 will capture c50% of Nokia's low-end handset volumes by the end of 2008, growing its revenues with Nokia in this space from €220m in FY07F to €314m in FY08F, despite shrinking GSM RF revenues. This success with Nokia and LG could be followed by design wins at Samsung in our view, should Samsung opt to enter the low-cost handset market. We stay at Buy with a target price of €14.50. Analyst Didier Scemama United Kingdom +44 20 7678 0772 didier.scemama@uk.abnamro.com Important disclosures and analyst certifications regarding companies can be found in the Disclosures Appendix. www.abnamroresearch.com Priced at close of business 30 April 2007. 250 Bishopsgate, London, EC2M 4AA, United Kingdom
  • I N V E S T M E N T V I E W Infineon ahead in low-cost handsets A teardown analysis of four ultra low-cost handsets from Nokia, Motorola, Sony Ericsson and LG confirms our view that Infineons’s ULC2 is ahead of TI’s LoCosto in terms of integration, which reduces handset costs. Incrementally more positive on Infineon’s ULC2 Until now we had been optimistic about the prospects for Infineon’s ULC2 solution as Our analysis leaves no room for confusion. Infineon's it appeared to offer a higher level of integration vs Texas Instruments LoCosto ULC2 seems to be well solution. We had reserved our final conclusion till we actually saw a real phone ahead of TI's LoCosto shipping in the market based on Infineon’s ULC2. The results of a teardown analysis we publish in this note simply leave no room for scepticism or doubt. Infineon’s ULC2 is simply much better than Texas Instruments’ LoCosto, based on our observations. While competition between the two companies is likely to remain intense, we believe that this product is likely to help Infineon become profitable in the wireless IC market and, more importantly, become a viable top-3 wireless IC vendor over the next 18 months. The technical prowess demonstrated by Infineon with the ULC2 makes us incrementally more positive on the potential design wins for this product with other tier-1 OEMs (Samsung most likely in our view) but also about the future success of Infineon’s single chip EDGE vs TI and Broadcom’s equivalent products. Technical difference and what it means to handset manufacturers There are currently on the market two solutions for low-cost handsets, the ULC2 from Infineon also called E-GOLDvoice and LoCosto from Texas Instruments. In addition, Silicon Labs recently sold its equivalent product called Aerofone to NXP. The product is not yet shipping so we have not been able to include it in our analysis. Table 1 : A comparison of the main single-chip GSM/GPRS solutions TXN’s LoCosto IFX’s ULC2 SLAB/NXP’s Aerofone Digital Baseband x x x SRAM x x x RF transceiver x x x Power management unit Separate chip x x Protocol stack x x Third party Geometry 90nm 130nm 130nm Source: Company data Technically, Infineon’s ULC2 differs from Texas Instruments’ LoCosto on the following parameters: ■ ‘Real’ single-chip solution for GSM handsets: While Texas Instruments claims LoCosto is a single-chip solution, the reality is that it is not. LoCosto is made up of two chips: one that integrates the digital baseband, SRAM and RF transceiver and another for power management and battery charging. Infineon’s ULC2 is, on the other hand, a ‘real’ single chip. It integrates monolithically, ie on one single die, the digital baseband, SRAM, RF transceiver and power management function. I NF I NE O N 3 M A Y 2 0 0 7 2 2
  • I N VE S T M E NT V IE W Integrating the power management function eliminates cUS$1 from the bill of materials and additional cents due to the simpler manufacturing process. Note that both solutions require two additional chips to make the phone work, a NOR flash memory chip that store data and code and a power amplifier chip that helps boost signals and reduce power consumption. ■ Fewer external components: Infineon claims that its ULC2 chip requires no more than 50 external components while TI has not commented on this issue, other than saying that the number of external components would vary per OEM. ■ Ability to ‘shrink’ the design to lower geometries: This is probably where LoCosto is potentially better positioned than ULC2. As Texas Instruments’ baseband+RF chip is all digital (the RF processing is made through the use of a DSP), it is relatively easy to ‘shrink’ ie to transition to lower geometries (ie for instance from 90nm currently to 65nm next year). Infineon should find it more difficult to shrink its ULC2 solution from 130nm (currently shipping) down to 65nm next year. The main reason for this is that Infineon’s solution integrates a CMOS RF chip, which is a mixed signal chip. The lower the geometry the more difficult it is design to high performance RF chips (due to the high level of ‘noise’ at these nodes). In addition, as the solution also integrates the power management function, Infineon may encounter difficulties with the higher voltage of this chip. Infineon has managed to address all these problems in the first iteration of the ULC2 by staying at 130nm. Infineon claimed at its analyst day that it is confident the transition to 65nm will be smooth. Cost comparison shows Infineon’s platform offers lowest cost We established in the note ‘A comparison of EDGE platforms’ published on 22 We have compared four low-end handset models November 2006 that Infineon had the best GPRS/EDGE platform in the market, offering the highest level of integration and the lowest cost of ownership with no compromise on performance. In this note we have compared the cost of four ultra low-cost handset models from Nokia (1112), Motorola (Motofone), Sony Ericsson (J110) and LG (MG160a). All four models are very similar. They are dual-band GSM-only candy-bar models with SMS capability. The LG and Sony Ericsson phones differ from the Nokia and Motorola models in the sense that they have a colour display. All four phones are the most entry-level models offered by each company. Table 2 : Cost comparison of ultra low cost GSM models Nokia 1112 US$ Motorola Motofone US$ Sony Ericsson J110 US$ LG MG160a US$ Digital baseband/SRAM TXN 3.00 TXN/NOK 3 TXN 3.5 RF transceiver SLAB/NXP 1.00 IFX 3.5 Power management unit TXN/NOK 1.00 TXN 1.00 TXN 1.00 Power amplifier module Renesas 1.20 ?? 1.20 ?? 1.20 SWKS 1.00 Flash memory STM 1.50 STM 1.50 INTC 1.50 INTC 1.50 # of other analog ICs 2 0.20 2 0.20 5 0.50 1 0.10 # of external components 69 0.35 174 0.87 105 0.53 49 0.25 Total GSM cost 7.25 8.27 8.73 6.35 % difference with LG phone 14% 30% 38% 0% # of other analog ICs 2 0.20 1 0.10 3 0.30 3 0.30 Other external components 44 0.22 77 0.39 81 0.41 35 0.18 Total non-cellular IC cost 0.42 0.49 0.71 0.48 Total BOM 7.67 8.76 9.43 6.82 % difference with LG phone 12% 28% 38% 0% Total # of ICs 8 7 13 7 Total # of external components 113 251 186 84 Dual-sided PCB? No Yes No No Source: ABN AMRO, company data On the basis of our cost estimate, we conclude that Infineon’s ULC2 GSM platform is The LG model based on Infineon's chip comes out the most competitive from an integration and cost point of view, beating even Nokia, on top I NF I NE O N 3 M A Y 2 0 0 7 3 3
  • I N VE S T M E NT V IE W while offering better features such as a colour display. The total cost of the GSM subsystem of the LG model (including the PA module, flash memory, other analog ICs and external components) came out at US$6.35, 14% cheaper than our estimate of the equivalent platform on the Nokia 1112 model, 30% cheaper than Motorola’s Motofone and 38% cheaper than the Sony Ericsson J110. If one includes other non-GSM related IC costs such as other analog ICs and external components that we identified around the SIM area, we found similar results with the LG model, 12% cheaper than Nokia, 28% cheaper than Motorola and 38% cheaper than Sony Ericsson. ■ We are somewhat amazed that the LG phone outperforms the Nokia phone in terms of costs. Nokia is well known for making low-cost handsets. In addition, given that this Nokia phone has been in the making for the last two years (TI and Nokia issued a joint press release back in January 2005), we are surprised to find that the Nokia model does not perform better. Like in the Motofone, we observed the use of a relatively large Renesas PA module which is twice as big as the Skyworks PA module used in the LG model. This could indicate that the RF performance of Infineon’s ULC2 is better than that of TI’s LoCosto. ■ The difference in cost with the Motofone is more significant and has to do with the use of a two-chip solution vs a single chip. We note also the use of a substantially larger power amplifier module in the Motofone, which may be related to a poorer performance of the radio in TI’s LoCosto. Here we believe that the very high number of external components can be explained by the fact that the phone was manufactured by an ODM. We also note the use of a dual-sided PCB vs a single- sided PCB for all other phones, which is inherently more costly (this is not reflected in our calculation though). ■ The substantial difference in cost between the LG model and the Sony Ericsson model is not surprising as the latter uses a multi-chip solution, which is inherently more costly than a single-chip solution. The high level of external components can also be explained by the fact that this phone was manufactured by an ODM, whose PCB design capability may not be as good as that of tier-1 OEMs. Teardown of Nokia 1112 The Nokia 1112 is the most low end Nokia model. This GSM handset has a The Nokia 1112 is the first Nokia phone to transition to monochrome display and is the successor of the hugely successful 11xx model, which a 'single chip' architecture has shipped in tens of millions of units over the last few years. This phone is the first Nokia model to have transitioned to a ‘single chip’ architecture. We believe this platform has been in the making for the last two years based on a joint press release published by Texas Instruments and Nokia in January 2005. The phone is about to be launched globally by Nokia. This phone, just like every other GSM/WCDMA Nokia phone, uses custom silicon, ie a proprietary solution designed by Nokia and manufactured by Texas Instruments. It is however very similar from a hardware point of view to a standard LoCosto solution shipping at Motorola and Sagem. However we assume it uses Nokia’s protocol stack. The main components in the phone are as follows: ■ GSM baseband/RF single chip: While the chip does not have any TI marking on it, it looks very similar to a standard LoCosto chip. We assume it is manufactured on TI’s high performance logic 90nm process technology. ■ Power management chip: The chip is only slightly smaller than the baseband+RF chip, which is quite surprising and disappointing. It appears to be a custom chip that Nokia developed with Texas Instruments. The chip does not appear to have any TI marking on it either. I NF I NE O N 3 M A Y 2 0 0 7 4 4
  • I N VE S T M E NT V IE W ■ Power amplifier module: The module comes from Renesas, one of the two power amplifier module suppliers to Nokia with RFMD. We note the relatively large size of the PA module. ■ Flash memory: This is a low-density NOR flash memory chip, which appears to come from STM. ■ External components: Thanks to the customised nature of this product, we believe that Nokia has been able to reduce the number of external components to a bare minimum, further reducing the bill-of-material of the phone. We counted 69 external components around the GSM sub-systems. In addition we counted two small analog ICs and 44 external components around the SIM card area. Teardown of Motorola Motofone The Motofone from Motorola was launched late last year. It is a GSM handset with an The Motofone was the first phone on the market using alphanumeric display. The phone offers SMS, clock and a speakerphone. It is a very LoCosto slim handset model (9mm). Our channel checks indicate that this phone is made by Taiwanese ODM Foxconn as well as Flextronics. This phone was the first handset in the market to leverage TI’s LoCosto solution. The main components in the phone are as follows: ■ GSM baseband/RF single chip: This chip is TI’s LoCosto, a single chip that integrates a GSM digital baseband, SRAM and RF transceiver, and has TI’s marking on it. We assume it is manufactured on TI’s high performance logic 90nm process technology. The chip is on the top side of the PCB. ■ Power management chip: The chip is the same size as the baseband+RF chip, which is surprising to us and is on the other side of the PCB. It appears to be a standard power management chip and has TI’s marking. ■ Power amplifier module: We could not identify the name of the supplier for the PA module, although it looks similar to that used in the Nokia 1112. Just as in the Nokia phone, we note the relatively large size of the PA module, which could indicate that LoCosto’s RF performance is poor. ■ Flash memory: This is a low-density NOR flash memory chip, which comes from STM. ■ External components: We were quite disappointed by the low level of integration for such a basic phone. We counted 251 external components in total, 77 of which were in the GSM subsystem. We also counted a total of three analog ICs. Teardown of LG MG160a The LG MG160a has just started to ship in Mexico. It is to our best knowledge the The LG MG160a is the first phone to ship with most basic phone made by LG. It is also the first phone in the market to use a ‘single Infineon's single chip chip’ that combines baseband, RF, power management and SRAM. The phone is a dual-band GSM handset with SMS, T9, calculator, alarm, currency converter, calendar, polyphonic ringtone and wallpapers. It also has a 65,000 pixel colour display. The main components in the phone are as follows: ■ GSM baseband/RF/PMU single chip: The main chip in the phone is Infineon’s ULC2, a single chip that combines a GSM digital baseband, SRAM, RF transceiver and power management unit (PMU). Note that our observation indicates that this chip is smaller than TI’s LoCosto despite integrating more components and is manufactured at the 130nm node (vs TI’s 90nm). ■ Power amplifier module: Next to Infineon’s ULC2 we found a power amplifier module that comes from Skyworks. This chip appeared to us to be smaller than I NF I NE O N 3 M A Y 2 0 0 7 5 5
  • I N VE S T M E NT V IE W the PA module found in the Motofone and the Nokia 1112. We believe the smaller size of the PA module may indicate that the RF performance of the ULC2 solution is better than that of LoCosto. ■ A flash memory chip: Intel provides a low-density NOR flash memory in the phone. ■ External components: The level of integration offered by Infineon’s ULC2 is best demonstrated when one compares the number of external components left on the PCB besides the main ICs described above. We counted a total of 84 external components, of which 49 are attributable to the GSM subsystem. We believe this phone offers the highest integration level despite offering more features than the one we analyses including a colour display. Teardown of Sony Ericsson J110 Sony Ericsson’s J110 was announced during 3GSM in February this year. It is a GSM The J110 model is the most basic phone sold by Sony handset with a colour display. The phone offers SMS, T9, calculator and a hands-free Ericsson speaking capability. As has been customary for Sony Ericsson, this phone’s design and production have been outsourced to ODMs (Arima and Flextronics, according to our channel checks) and leverages Texas Instruments’ GSM chipset. It is relatively surprising that this phone does not use LoCosto, given that the technical specifications of the phone do not strike us as particularly high end. The main components in the phone are as follows: ■ GSM baseband: The core of the phone is based on a Texas Instruments GSM digital baseband, which integrates some SRAM too. ■ Power management: Next to the GSM baseband, we found the power management unit, which also comes from Texas Instruments. ■ RF transceiver: The GSM RF transceiver chip comes from Silicon Labs, which is now part of NXP. It is a low-cost CMOS RF chip. ■ Power amplifier module: A Skyworks power amplifier completes the GSM sub- system, as is customary across Sony Ericsson models. The size of the PA module seems to be similar to that found in the LG model described above. ■ A flash memory chip: Intel provides a low density NOR flash memory in the phone. ■ External components: Perhaps the most disappointing finding in this phone teardown is the incredible number of external components. Despite the maturity of the GSM standard, let alone of Texas Instruments/Silicon Labs/Skyworks’ solution for low-end GSM handsets, we counted as many as 186 external components, of which 105 form part of the GSM subsystem. Conclusion – Infineon leading in ULCH; EDGE next? The teardown analysis we have performed and detailed above confirms our view that Infineon's ULC2 outperforms TI's LoCosto Infineon has the best solution on the market for ultra low cost handsets. Our analysis easily has shown that it outperforms easily a traditional GSM multi-chip solution (as the one used in the Sony Ericsson model) but also TI’s LoCosto solution, even after it has been improved by Nokia (as seen in the Nokia 1112), in terms of integration and cost of ownership. We believe the main reason for this higher level of integration of external components may be attributable to the use of a ‘real’ CMOS RF transceiver in the single chip as opposed to a digital, DSP-based RF transceiver as the one used in TI’s LoCosto. We believe Infineon’s approach is better at capturing external components and appears to require a simpler power amplifier module, further reducing the total bill-of-materials. The real test for Infineon’s ULC2 will be whether they are able to ‘shrink’ the design of the chip down to 65nm. I NF I NE O N 3 M A Y 2 0 0 7 6 6
  • I N VE S T M E NT V IE W The entry-level handset market is dominated by Nokia, who shipped c106m GSM/GPRS units last year according to our estimates. We define entry level handsets as essentially GSM/GPRS that do not have a camera and do not run an open operating system. These phones may have a colour screen and some basic features such as an FM radio. Nokia’s recent announcement that it will use Infineon together with Texas Instruments in the low-cost handset market confirms our positive view of Infineon’s wireless business and its technical leadership. While Motorola and Sony Ericsson have so far only used Texas Instruments for low- Samsung has yet to enter the low end handset market end models, LG has now started to use Infineon. The only top-tier handset OEM that has not yet embarked into the low end market is Samsung. NXP (ex Philips Semiconductors) bought Silicon Labs’s RF transceiver, power amplifier and single chip GSM Aerofone product to address this opportunity as it is one of the two incumbents at Samsung for GPRS/EDGE handsets. Given the cost advantage of Infineon’s solution we believe that it would be likely to win this business should Samsung decide to enter this segment. Obviously beyond low-cost GSM/GPRS handsets, the battle is likely to move quickly to the mid-tier GPRS/EDGE cameraphone market. Infineon appears to be ahead of the game here as well. Infineon has already announced it will ship its single-chip EDGE by the end of the year and has won other customers for shipments next year. We believe Infineon is at least six months ahead of TI’s eCosto EDGE solution. Broadcom has also announced an impressive 65nm-based single-chip EDGE solution but has yet to announce customers for this product. TI announced a landmark design win with Motorola in January 2007, which includes Infineon appears well positioned in the single chip its single-chip EDGE, for initial deliveries in the second half of 2008. We believe this EDGE market is likely to put pressure on other tier-1 OEMs to accelerate the transition to single- chip EDGE. We believe this puts Infineon in an ideal position to convert its ULC2 wins at Nokia and LG in single chip EDGE wins as early as next year. If we are correct in assuming that Infineon also wins Samsung for its ULC2 solution (should it enter this space), we believe that one of the reasons for this would be its single chip roadmap extending into EDGE and, over time, 3G. Buy maintained with a target price of €14.50 We maintain our Buy rating on Infineon with a DCF-based price target of €14.50. At our target price Infineon stock would trade on 20x FY08F P/E, implying a valuation of 1.5x FY08F EV/sales for Infineon’s logic business (ie excluding its stake in Qimonda). We believe that the operating margin improvement we expect for the Logic business (ie 8% in FY08 and 10.6% in 4Q08) warrants this multiple. Note also that the value of the Qimonda stake remains depressed in our sum-of-the parts as the stock currently trades at 88% of trailing book value. With improving DRAM pricing, we believe Infineon’s share price should benefit as it would lower the implicit value of its logic business and help it reduce its stake in Qimonda. Risks We believe the downside risks to our recommendation and target price include: 1) a further fall in DRAM ASP, which would cut our operating profit forecast significantly, 2) a slowdown in the automotive and smart card IC markets, which would reduce the profitability of the AIM division, 3) failure to ramp up of new wireless solutions, 4) aggressive price competition in the broadband chip market, 5) the negative impact of a weakening EUR/USD. I NF I NE O N 3 M A Y 2 0 0 7 7 7
  • FI N A N C I AL Table 3 : Wireless revenue model €m FY06 1Q07 2Q07 3Q07F 4Q07F FY07F 1Q08F 2Q08F 3Q08F 4Q08F FY08F Wireless 778.0 131.0 132.0 170.0 222.0 655.0 241.3 231.2 278.9 333.6 1,085.0 % Change yoy -20% -42% -33% 4% 15% -16% 84% 75% 64% 50% 66% S T AT E M E NT S % Change sequential -32% 1% 29% 31% 9% -4% 21% 20% BenQ-Siemens-related business 248.8 % Change yoy -24% Nokia-related business 234.5 68.0 49.9 49.8 52.4 220.2 76.3 103.0 124.4 137.1 440.7 % Change yoy 8% -1% -4% -8% -13% -6% 12% 106% 150% 161% 100% % Change sequential 13% -27% 0% 5% 45% 35% 21% 10% I NF I NE O N GSM RF ASP (€) 1.19 1.15 1.05 1.05 1.05 1.08 1.05 0.89 0.89 0.89 0.96 GSM RF units (m) 197.0 59.1 47.6 47.4 39.0 193.1 31.7 17.8 13.6 8.3 71.4 Revenues 234.46 68.0 49.9 49.8 40.9 208.66 33.3 15.8 12.1 7.4 68.63 ULC2 ASP (€) 4.00 3.85 3.85 3.85 3.86 ULC2 units (m) 5.0 15.0 20.0 23.5 63.50 Revenues 20.0 57.8 77.0 90.5 245.23 EDGE RF ASP (€) 2.30 2.30 2.30 1.96 1.96 1.96 2.01 EDGE RF units 5.0 5.0 10.0 15.0 18.0 20.0 63.00 Revenues 11.5 11.50 23.0 29.4 35.3 39.2 126.88 Apple-related business 25.0 30.0 55.0 30.0 21.3 25.5 42.5 119.3 % Change yoy 2% 42% 117% % Change sequential 20% 0% -29% 20% 67% Apple handset shipments (m of units) 2.5 3.0 5.5 3.0 2.5 3.0 5.0 13.5 ASP (€) 10.00 10.00 10.00 10.00 8.50 8.50 8.50 8.83 LG-related business 21.0 21.0 30.0 36.0 60.0 147.0 60.0 40.0 50.0 60.0 210.0 % Change yoy 186% 186% 33% 39% 0% 43% % Change sequential 43% 20% 67% 0% -33% 25% 20% LG GPRS/EDGE handset shipments (m of units) 1.5 2.5 3.0 5.0 12.0 5.0 4.0 5.0 6.0 20.0 ASP (€) 14.00 12.00 12.00 12.00 12.25 12.00 10.00 10.00 10.00 10.50 Other wireless customers (Samsung, Panasonic, …) 273.8 42.0 52.1 59.2 79.6 232.8 75.0 67.0 79.0 94.0 315.0 % Change yoy -36% -41% -43% 30% 23% -15% 79% 29% 33% 18% 35% % Change sequential -35% 24% 14% 34% -6% -11% 18% 19% Source: ABN AMRO forecasts, company data 3 M A Y 2 0 0 7 8 9
  • FI N A N C I AL Table 4 : Revenue by division €m FY06 1Q07 2Q07 3Q07F 4Q07F FY07F 1Q08F 2Q08F 3Q08F 4Q08F FY08F Automotive, Industrial and Multimarket 2,839.0 710.0 741.0 750.0 774.3 2,975.3 740.0 775.0 800.0 809.0 3,124.0 % Change yoy 13% 9% 1% 5% 5% 5% 4% 5% 7% 4% 5% S T AT E M E NT S % Change sequential -4% 4% 1% 3% -4% 5% 3% 1% Wireless 778.0 131.0 132.0 170.0 222.0 655.0 241.3 231.2 278.9 333.6 1,085.0 % Change yoy -20% -42% -33% 4% 15% -16% 84% 75% 64% 50% 66% % Change sequential -32% 1% 29% 31% 9% -4% 21% 20% Wireline 427.0 105.0 106.0 110.0 111.0 432.0 115.0 117.0 120.0 123.0 475.0 % Change yoy 2% -5% -4% 7% 7% 1% 10% 10% 9% 11% 10% I NF I NE O N % Change sequential 1% 1% 4% 1% 4% 2% 3% 2% Communications 1,205.0 236.0 238.0 280.0 333.0 1,087.0 356.3 348.2 398.9 456.6 1,560.0 % Change yoy -13% -29% -23% 5% 12% -10% 51% 46% 42% 37% 44% % Change sequential -21% 1% 18% 19% 7% -2% 15% 14% Qimonda 3,815.0 1,173.0 984.0 885.4 1,204.2 4,246.7 1,204.2 1,250.6 1,351.0 1,649.9 5,455.8 % Change yoy 41% 73% 6% -9% -2% 11% 3% 27% 53% 37% 28% % Change sequential -5% -16% -10% 36% 0% 4% 8% 22% Other 175.0 70.0 50.0 50.0 50.0 220.0 50.0 50.0 50.0 50.0 200.0 Corporate reconciliation -105.0 -58.0 -51.0 -51.0 -51.0 -211.0 -51.0 -51.0 -51.0 -51.0 -204.0 Consolidated Sales 7,929.0 2,131.0 1,962.0 1,914.4 2,310.5 8,317.9 2,299.5 2,372.8 2,548.9 2,914.6 10,135.8 % Change yoy 19.6% 27.3% -1.6% -2.9% 0.9% 4.9% 7.9% 20.9% 33.1% 26.1% 21.9% % Change yoy -6.9% -7.9% -2.4% 20.7% -0.5% 3.2% 7.4% 14.3% Source: ABN AMRO forecasts, company data Table 5 : EBIT by division €m FY06 1Q07 2Q07 3Q07F 4Q07F FY07F 1Q08F 2Q08F 3Q08F 4Q08F FY08F Automotive, industrial and Multimarket 246.0 55.0 66.0 70.0 75.0 266.0 70.0 75.0 81.4 86.0 312.4 Operating margin (%) 8.7% 7.7% 8.9% 9.3% 9.7% 8.9% 9.5% 9.7% 10.2% 10.6% 10.0% Qimonda 186.0 225.0 77.0 -38.8 35.4 298.7 85.0 113.7 104.6 143.0 446.3 Operating margin (%) 4.9% 19.2% 7.8% -4.4% 2.9% 7.0% 7.1% 9.1% 7.7% 8.7% 8.2% Communications -156.0 -57.0 -53.0 -25.0 0.0 -135.0 11.5 7.0 31.0 60.0 109.5 Operating margin (%) -12.9% -24.2% -22.3% -8.9% 0.0% -12.4% 3.2% 2.0% 7.8% 13.1% 7.0% Other -1.0 -3.0 -5.0 -5.0 -5.0 -18.0 -5.0 -5.0 -5.0 -5.0 -20.0 3 Operating margin (%) -0.6% -4.3% -10.0% -10.0% -10.0% -8.2% -10.0% -10.0% -10.0% -10.0% -10.0% M A Y Corporate Rec -159.0 -4.0 -4.0 -8.0 -8.0 -24.0 -7.0 -7.0 -7.0 -7.0 -28.0 Operating margin (%) 1.5% 0.1% 0.1% 0.2% 0.2% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 2 0 0 7 Consolidated EBIT 116.0 216.0 81.0 -6.8 97.4 387.7 154.5 183.7 205.0 277.0 820.2 EBIT Margin 1.5% 10.1% 4.1% -0.4% 4.2% 4.7% 6.7% 7.7% 8.0% 9.5% 8.1% Source: ABN AMRO forecasts, company data 910
  • FI N A N C I AL Table 6 : P&L €m FY06 1Q07 2Q07 3Q07F 4Q07F FY07F 1Q08F 2Q08F 3Q08F 4Q08F FY08F Consolidated sales 7,929.0 2,131.0 1,962.0 1,914.4 2,310.5 8,317.9 2,299.5 2,372.8 2,548.9 2,914.6 10,135.8 % Change yoy 19.6% 27.3% -1.6% -2.9% 0.9% 4.9% 7.9% 20.9% 33.1% 26.1% 21.9% S T AT E M E NT S % Change sequential -6.9% -7.9% -2.4% 20.7% -0.5% 3.2% 7.4% 14.3% Cost of good sold 5,854.0 1,465.0 1,471.0 1,472.2 1,690.5 6,098.7 1,664.8 1,687.1 1,804.6 2,046.0 7,202.6 Gross profit 2,075.0 666.0 491.0 442.2 620.0 2,219.2 634.7 685.7 744.3 868.5 2,933.2 Gross margin (%) 26.2% 31.3% 25.0% 23.1% 26.8% 26.7% 27.6% 28.9% 29.2% 29.8% 28.9% R&D 1,249.0 292.0 259.0 293.0 320.5 1,164.5 300.0 310.0 335.0 372.7 1,317.7 % Sales 15.8% 13.7% 13.2% 15.3% 13.9% 14.0% 13.0% 13.1% 13.1% 12.8% 13.0% I NF I NE O N SG&A 751.0 172.0 161.0 160.0 197.4 690.4 185.0 200.0 215.0 241.3 841.3 % Sales 9.5% 8.1% 8.2% 8.4% 8.5% 8.3% 8.0% 8.4% 8.4% 8.3% 8.3% Other operating expenses -42.0 0.0 -7.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total expenses 1,958.0 464.0 413.0 453.0 524.9 1,854.9 485.0 510.0 550.0 613.9 2,158.9 % Sales 24.7% 21.8% 21.1% 23.7% 22.7% 22.3% 21.1% 21.5% 21.6% 21.1% 21.3% Operating profit 117.0 202.0 78.0 -10.8 95.1 364.3 149.7 175.7 194.3 254.6 774.3 % Sales 1.5% 9.5% 4.0% -0.6% 4.1% 4.4% 6.5% 7.4% 7.6% 8.7% 7.6% Restructuring charge -23.0 -2 -20 0 0 -22.0 0 0 0 0 0.0 Interest income (expense), net -92.0 -9 -12 -12 -12 -45.0 -10 -10 -10 -10 -40.0 Equity in earnings (losses) of associated companies 78.0 37.0 28.0 10.0 12.0 87.0 15.0 20.0 25.0 40.0 100.0 Other income -33.0 6.0 10.0 5.0 5.0 26.0 5.0 5.0 5.0 5.0 20.0 Minority interest -23.0 -27 -12 -11 -15 -65.0 -15 -18 -20 -23 -76.0 Exceptional items -142.0 0 -30 0 0 -30.0 0 0 0 0 0.0 Minority interests -1.0 0 0 0 0 0.0 0 0 0 0 0.0 Pre-tax profit -119.0 207.0 39.0 -18.8 85.4 312.7 144.5 173.7 195.0 267.0 780.2 Tax -161 -87 -50 2 -27 -161 -44 -54 -59 -82 -239 Tax rate % 117% -42% -128% -12% -31% -52% -30% -31% -30% -31% -31% Net profit -280.0 120.0 -11.0 -16.5 58.8 151.3 100.6 119.6 136.0 185.3 541.5 Shares issued 748 748 748 748 748 748 748 748 748 748 748 Diluted EPS -0.37 0.16 -0.01 -0.02 0.08 0.20 0.13 0.16 0.18 0.25 0.72 ‘Clean’ diluted EPS -0.18 0.16 0.03 -0.02 0.08 0.25 0.13 0.16 0.18 0.25 0.72 Source: ABN AMRO forecasts, company data 3 M A Y 2 0 0 7 1011
  • FI N A N C I AL Table 7 : Balance sheet €m FY06 1Q07 2Q07 3Q07F 4Q07F FY07F FY08F Cash and cash equivalents 2,040.0 2,047.0 1,500.0 1,459.9 1,327.5 1,327.5 2,653.9 Marketable Securities 615.0 635.0 505.0 505.0 505.0 505.0 505.0 S T AT E M E NT S Accounts receivable, net 1,245.0 1,093.0 994.0 1,102.9 1,255.7 1,255.7 1,410.6 Inventories 1,202.0 1,310.0 1,372.0 1,360.2 1,286.3 1,286.3 1,519.1 Deferred income taxes 97.0 91.0 92.0 92.0 92.0 92.0 92.0 Other current assets 482.0 564.0 413.0 413.0 413.0 413.0 413.0 Total current assets 5,681.0 5,740.0 4,876.0 4,933.0 4,879.5 4,879.5 6,593.6 Property, plant and equipment, net 3,764.0 3,732.0 3,705.0 3,655.0 3,605.0 3,605.0 3,515.0 I NF I NE O N Long-term investments, net 659.0 657.0 685.0 685.0 685.0 685.0 685.0 Restricted cash 78.0 78.0 78.0 78.0 78.0 78.0 78.0 Deferred income taxes 627.0 609.0 626.0 596.0 566.0 566.0 446.0 Other assets 376.0 346.0 355.0 462.6 612.4 612.4 612.4 Total assets 11,185.0 11,162.0 10,325.0 10,409.6 10,425.9 10,425.9 11,930.0 Liabilities and shareholders' equity Short-term debt and current maturities 797.0 800.0 251.0 251.0 251.0 251.0 1,201.2 Accounts payable 1,245.0 1,214.0 1,097.0 1,200.2 1,157.6 1,157.6 1,367.2 Accrued liabilities 562.0 535.0 481.0 481.0 481.0 481.0 481.0 Deferred income taxes 26.0 23.0 25.0 22.0 19.0 19.0 19.0 Other current liabilities 675.0 633.0 603.0 603.0 603.0 603.0 329.9 Total current liabilities 3,305.0 3,205.0 2,457.0 2,557.2 2,511.6 2,511.6 3,398.2 Long-term debt 1,208.0 1,222.0 1,147.0 1,147.0 1,147.0 1,147.0 1,147.0 Deferred income taxes 60.0 55.0 81.0 81.0 81.0 81.0 81.0 Other liabilities 457.0 416.0 389.0 389.0 389.0 389.0 389.0 Total liabilities 5,030.0 4,898.0 4,074.0 4,174.2 4,128.6 4,128.6 5,015.2 Ordinary share capital 1,495.0 1,495.0 1,495.0 1,495.0 1,495.0 1,495.0 1,495.0 Additional paid in capital 5,800.0 5,800.0 5,800.0 5,800.0 5,800.0 5,800.0 5,800.0 Retained earnings -1,828.0 -1,708.0 -1,719.0 -1,735.5 -1,676.7 -1,676.7 -1,135.2 Accumulated other comprehensive (loss) income -152.0 -185.0 -190.0 -200.0 -212.0 -212.0 -212.0 Minority interests 840.0 862.0 865.0 876.0 891.0 891.0 967.0 3 Total Shareholders' equity 6,155.0 6,264.0 6,251.0 6,235.5 6,297.3 6,297.3 6,914.8 M A Y Total Liabilities and Shareholders' equity 11,185.0 11,162.0 10,325.0 10,409.6 10,425.9 10,425.9 11,930.0 Source: ABN AMRO forecasts, company data 2 0 0 7 1112
  • FI N A N C I AL Table 8 : Infineon sum-of-the-parts valuation Implied EV/EBITA @ Value Sales EBIT margin target Estimated FCF yield €m Per share Methodology Multiple Peers FY06 FY07 FY08 FY06 FY07 FY08 FY06 FY07 FY08 FY06 FY07 FY08 S T AT E M E NT S AIM 4,731 6.32 EV/sales FY08 1.51 2,839 2,975 3,124 8.7% 8.9% 10.0% 7.2 6.9 6.5 4% 4% 5% Autos 2,166 2.90 EV/sales FY08 1.70 MELE, ELG, AMIS 1,215 1,191 1,274 10.0% 11.2% 12.2% Industrial & Multi-Market 1,724 2.31 EV/sales FY08 1.50 FCS, ONNN, IRF 955 1,074 1,150 10.5% 10.2% 10.9% Chip card ICs and ASIC 840 1.12 EV/sales FY08 1.20 ATML 669 710 700 3.7% 3.2% 4.6% Communications 2,577 3.45 EV/sales FY08 1.65 1,205 1,087 1,560 -12.9% -12.4% 7.0% 28.6 171.8 12.3 -5% -4% 3% Wireless 1,627 2.18 EV/sales FY08 1.50 TXN, RFMD, SWKS 778 655 1,085 -21.3% -24.9% 6.5% I NF I NE O N RF transceivers 929 1.24 EV/sales FY08 1.70 SLAB, RFMD, SWKS 472 467 547 10.0% 10.0% 10.0% Baseband 618 0.83 EV/sales FY08 1.30 TXN, AGR 276 143 475 -78.1% -149.6% 2.4% Connectivity 80 0.11 EV/sales FY08 1.27 CSR, SIRF, DSPG 31 45 63 8.0% 8.0% 8.0% Wireline 950 1.27 EV/sales FY08 2.00 BRCM, CNXT, MRVL 427 432 475 2.3% 6.0% 8.2% Broadband access 612 0.82 EV/sales FY08 2.23 BRCM, CNXT, MRVL 190 220 275 -6.0% 3.1% 7.6% Legacy access 338 0.45 EV/sales FY08 1.69 CNXT 237 212 200 9.0% 9.0% 9.0% Corporate & others -300 -0.40 70 9 -4 n.m. n.m. n.m. n.m. n.m. n.m. Net cash 391 0.52 Deferred tax assets 566 0.76 EV/sales Total Logic market cap 7,965 10.65 1.70 4,114 4,071 4,680 -1.7% 2.2% 8.0% 12.6 11.6 8.6 -1% 1% 4% FY08 Qimonda (85.9% stake) 3,130 4.18 $ 14.44 293.7m shares 3,815 4,247 5,456 4.9% 7.0% 8.2% Total 11,095 14.83 7,929 8,318 10,136 1.5% 4.7% 8.1% 7.4 6.8 5.6 Current IFX EV 8,121 10.86 11.38 € 7,929 8,318 10,136 1.5% 4.7% 8.1% 5.5 5.0 4.1 Implied 'stub' EV 4,991 6.67 EV/sales FY08 1.07 4,114 4,071 4,680 -1.7% 2.2% 8.0% 8.0 7.3 5.5 -1% 1% 6% Implied valuation for Comms 170 0.23 Source: Company data, ABN AMRO estimates 3 M A Y 2 0 0 7 1213
  • DISCLOSURES APPENDIX Recommendation structure Absolute performance, short term (trading) recommendation: A Trading Buy recommendation implies upside of 5% or more and a Trading Sell indicates downside of 5% or more. The trading recommendation time horizon is 0-60 days. For Australian coverage, a Trading Buy recommendation implies upside of 5% or more from the suggested entry price range, and a Trading Sell recommendation implies downside of 5% or more from the suggested entry price range. The trading recommendation time horizon is 0-60 days. Absolute performance, long term (fundamental) recommendation: The recommendation is based on implied upside/downside for the stock from the target price. A Buy/Sell implies upside/downside of 10% or more and a Hold less than 10%. For listed property trusts (LPT) or real estate investment trusts (REIT) the recommendation is based upon the target price plus the dividend yield, ie total return. A Buy implies a total return of 10% or more, a Hold 5-10% and a Sell less than 5%. This structure applies to research on Asian and European stocks published from 1 November 2005; on Australian stocks from 7 November 2006 and on continental European small and mid cap stocks from 23 November 2006. For UK small caps a Buy/Sell implies upside/downside of 10% or more, an Add/Reduce 5- 10% and a Hold less than 5%. Performance parameters and horizon: Given the volatility of share prices and our pre-disposition not to change recommendations frequently, these performance parameters should be interpreted flexibly. Performance in this context only reflects capital appreciation and the horizon is 12 months. Sector relative to market: The sector view relative to the market is the responsibility of the strategy team. Overweight/Underweight implies upside/downside of 10% or more and Neutral implies less than 10% upside/downside. Target price: The target price is the level the stock should currently trade at if the market were to accept the analyst's view of the stock and if the necessary catalysts were in place to effect this change in perception within the performance horizon. In this way, therefore, the target price abstracts from the need to take a view on the market or sector. If it is felt that the catalysts are not fully in place to effect a re-rating of the stock to its warranted value, the target price will differ from 'fair' value. Asset allocation: The asset allocation is the responsibility of the economics team. The recommended weight (Over, Neutral and Under) for equities, cash and bonds is based on a number of metrics and does not relate to a particular size change in one variable. Stock borrowing rating: The stock borrowing rating is the subjective view and responsibility of the ABN AMRO equity finance team: Easy implies ready availability. Moderate implies some availability. Hard implies availability is tight. Impossible implies no availability. Distribution of recommendations The tables below show the distribution of ABN AMRO's recommendations (both long term and trading). The first column displays the distribution of recommendations globally and the second column shows the distribution for the region. Numbers in brackets show the percentage for each category where ABN AMRO has an investment banking relationship. Long Term recommendations (as at 02 May 2007) Trading recommendations (as at 02 May 2007) Global total (IB%) Europe total (IB%) Global total (IB%) Europe total (IB%) Buy 625 (20) 250 (45) Trading Buy 11 (27) 5 (60) Add 24 (54) 23 (57) Hold 494 (19) 223 (37) Reduce 0 (0) 0 (0) Sell 139 (6) 52 (15) Trading Sell 4 (25) 1 (100) Total (IB%) 1282 (19) 548 (39) Total (IB%) 15 (27) 6 (67) Valuation and risks to target price Infineon (RIC: IFXGn.DE, Rec: Buy, CP: €11.47, TP: €14.50): The downside risks to our DCF-based target price include: (1) a negative impact of the high inventory levels in the channel; (2) a further slowdown in the automotive and smart-cards markets; (3) failure of the ramp-up and a negative impact from competition in the wireless handset market; (4) a significant slowdown in the DRAM market; and (5) failure to achieve the cost reductions the company is seeking. Infineon Stock performance, recommendations and coverage (as at 1 May 2007) Trading recommendation history (as at 02 May 2007) Date Rec Analyst 16 Mar 2007 Trading Buy CA 11 Jan 2007 n/a CA 22 Nov 2006 Trading Buy CA 18 Nov 2006 n/a CA 18 Sep 2006 Trading Buy CA Didier Scemama started covering this stock on 18 Aug 04 Moved to new recommendation structure between 1 November 2005 and 31 January 2006 Regulatory disclosures Subject companies: IFXGn.DE ABN AMRO ROTHSCHILD is appointed by Infineon as Co-Lead Manager of Qimonda AG's IPO offering.: IFXGn.DE ABN AMRO has received compensation for investment banking services from this company, its subsidiaries or affiliates during the previous 12 months: IFXGn.DE ABN AMRO expects to receive, or intends to seek, compensation during the next three months for investment banking services from this company, its subsidiaries or affiliates: IFXGn.DE ABN AMRO Rothschild was appointed as Joint Lead Manager for the GDR offering of Inotera Memories Inc.: IFXGn.DE I NF I NE O N 3 M A Y 2 0 0 7 14 13
  • DISCLOSURES APPENDIX Global disclaimer  Copyright 2007 ABN AMRO Bank N.V. and affiliated companies ("ABN AMRO"). All rights reserved. This material was prepared by the ABN AMRO affiliate named on the cover or inside cover page. It is provided for informational purposes only and does not constitute an offer to sell or a solicitation to buy any security or other financial instrument. While based on information believed to be reliable, no guarantee is given that it is accurate or complete. While we endeavour to update on a reasonable basis the information and opinions contained herein, there may be regulatory, compliance or other reasons that prevent us from doing so. The opinions, forecasts, assumptions, estimates, derived valuations and target price(s) contained in this material are as of the date indicated and are subject to change at any time without prior notice. 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  • INFINEON: KEY FINANCIAL DATA Income statement €m FY05A FY06A FY07F FY08F Revenue 6631 7929 8318 10136 Cost of sales -4774 -5854 -6099 -7203 Operating costs -719.0 -554.0 -557.9 -924.9 EBITDA 1138 1521 1661 2008 DDA & Impairment (ex gw) -1316 -1405 -1271 -1190 EBITA -178.0 116.0 390.3 818.3 Goodwill (amort/impaired) n/a n/a n/a n/a EBIT -178.0 116.0 390.3 818.3 Net interest -9.00 -92.0 -45.0 -40.0 Associates (pre-tax) n/a n/a n/a n/a Other pre-tax items -20.0 -142.0 -34.0 0.00 Reported PTP -207.0 -118.0 311.3 778.3 Taxation -120.0 -161.0 -161.4 -238.7 Minority interests -1.00 -1.00 0.00 0.00 Other post-tax items 0.00 0.00 0.00 0.00 Reported net profit -328.0 -280.0 149.9 539.6 Tot normalised items -20.0 -142.0 -34.0 0.00 Normalised EBITDA 1138 1521 1661 2008 Normalised PTP -187.0 24.0 345.3 778.3 Normalised net profit -308.0 -138.0 183.9 539.6 Source: Company data, ABN AMRO forecasts year to Sep Balance sheet €m FY05A FY06A FY07F FY08F Cash & market secs (1) 2006 2655 1833 3159 Other current assets 2568 3026 3047 3435 Tangible fixed assets 3751 3764 3605 3515 Intang assets (incl gw) n/a n/a n/a n/a Oth non-curr assets 1959 1740 1941 1821 Total assets 10284 11185 10426 11930 Short term debt (2) 99.0 797.0 251.0 1201 Trade & oth current liab 1566 1807 1639 1848 Long term debt (3) 1566 1208 1147 1147 Oth non-current liab 1424 1218 1092 818.9 Total liabilities 4655 5030 4129 5015 Total equity (incl min) 5629 6155 6297 6915 Total liab & sh equity 10284 11185 10426 11930 Net debt (2+3-1) -341.0 -650.0 -434.5 -810.7 Source: Company data, ABN AMRO forecasts year ended Sep Cash flow statement €m FY05A FY06A FY07F FY08F EBITDA 1138 1521 1661 2008 Change in working capital -76.0 -407.0 -428.8 94.9 Net interest (pd) / rec -9.00 -92.0 -45.0 -40.0 Taxes paid -120.0 -161.0 -161.4 -238.7 Other oper cash items 111.0 244.0 76.0 64.0 Cash flow from ops (1) 1044 1105 1102 1889 Capex (2) -1368 -1253 -1284 -1100 Disposals/(acquisitions) 0.00 0.00 0.00 0.00 Other investing cash flow 1130 429.0 9.00 0.00 Cash flow from invest (3) -238.0 -824.0 -1275 -1100 Incr / (decr) in equity 23.0 0.00 4.00 0.00 Incr / (decr) in debt -289.0 762.0 25.0 0.00 Ordinary dividend paid n/a n/a n/a n/a Preferred dividends (4) n/a n/a n/a n/a Other financing cash flow 5.00 0.00 0.00 0.00 Cash flow from fin (5) -261.0 762.0 29.0 0.00 Forex & disc ops (6) n/a n/a n/a n/a Inc/(decr) cash (1+3+5+6) 545.0 1043 -143.8 788.5 Equity FCF (1+2+4) -324.0 -148.0 -181.8 788.5 Lines in bold can be derived from the immediately preceding lines. year to Sep Source: Company data, ABN AMRO forecasts I NF I NE O N 3 M A Y 2 0 0 7 16 15
  • INFINEON: PERFORMANCE AND VALUATION Standard ratios Infineon STMicroelectronics ASML Performance FY05A FY06A FY07F FY08F FY07F FY08F FY07F FY08F Sales growth (%) -7.83 19.6 4.91 21.9 3.26 8.72 9.40 12.3 EBITDA growth (%) -27.3 33.7 9.23 20.9 -7.31 7.36 10.1 12.9 EBIT growth (%) n/a n/a 236.5 109.6 6.58 40.5 3.91 11.3 Normalised EPS growth (%) n/a -55.2 n/a 193.4 -5.24 29.3 16.7 6.69 EBITDA margin (%) 17.2 19.2 20.0 19.8 22.6 22.3 27.3 27.4 EBIT margin (%) -2.68 1.46 4.69 8.07 7.46 9.63 23.0 22.8 Net profit margin (%) -4.64 -1.74 2.21 5.32 7.45 8.80 18.0 17.1 Return on avg assets (%) -2.87 -0.98 1.85 4.95 4.67 5.82 16.0 14.7 Return on avg equity (%) -5.31 -2.34 2.95 8.17 7.49 8.89 29.3 24.6 ROIC (%) 10.1 11.6 12.4 13.8 13.9 15.9 33.1 32.1 ROIC - WACC (%) -0.24 1.30 2.07 3.51 0.12 2.06 22.8 21.8 year to Sep year to Dec year to Dec Valuation EV/sales (x) 1.24 1.00 0.98 0.77 1.62 1.43 2.23 1.80 EV/EBITDA (x) 7.24 5.21 4.90 3.87 7.19 6.42 8.16 6.57 EV/EBITDA @ tgt price (x) 9.23 6.70 6.27 5.00 6.97 6.22 10.5 8.61 EV/EBIT (x) n/m 68.4 20.9 9.49 21.8 14.9 9.68 7.91 EV/invested capital (x) 0.90 0.83 0.81 0.74 1.12 1.02 2.79 2.84 Price/book value (x) 1.52 1.39 1.36 1.24 1.79 1.65 3.68 2.87 Equity FCF yield (%) -3.78 -1.73 -2.12 9.19 5.23 6.06 6.51 8.05 Normalised PE (x) n/m n/m 46.6 15.9 24.0 18.5 13.5 12.6 Norm PE @ tgt price (x) n/m n/m 59.0 20.1 23.3 18.0 16.9 15.8 Dividend yield (%) n/a n/a n/a n/a 1.68 1.83 n/a n/a year to Sep year to Dec year to Dec Per share data FY05A FY06A FY07F FY08F Solvency FY05A FY06A FY07F FY08F Tot adj dil sh, ave (m) 748.0 748.0 748.0 748.0 Net debt to equity (%) -6.06 -10.6 -6.90 -11.7 Reported EPS (EUR) -0.44 -0.37 0.20 0.72 Net debt to tot ass (%) -3.32 -5.81 -4.17 -6.80 Normalised EPS (EUR) -0.41 -0.18 0.25 0.72 Net debt to EBITDA -0.30 -0.43 -0.26 -0.40 Dividend per share (EUR) n/a n/a n/a n/a Current ratio (x) 2.75 2.18 2.58 2.16 Equity FCF per share (EUR) -0.43 -0.20 -0.24 1.05 Operating CF int cov (x) 130.3 14.8 29.1 54.2 Book value per sh (EUR) 7.53 8.23 8.42 9.24 Dividend cover (x) 0.00 0.00 0.00 0.00 year to Sep year to Sep Priced as follows: IFXGn.DE - €11.47; STM.PA - €14.40; ASML.AS - €19.99 Source: Company data, ABN AMRO forecasts INFINEON: VALUATION METHODOLOGY Economic Profit Valuation US$ m % Discounted Cash Flow Valuation US$ m % Adjusted Opening Invested Capital 11898.9 111 Value of Phase 1: Explicit (2007 to 2008) 537.8 5 NPV of Economic Profit During Explicit Period -728.8 -7 Value of Phase 2: Value Driver (2009 to 2013) 3807.3 34 NPV of Econ Profit of Remaining Business (1, 2) -208.5 -2 Value of Phase 3: Fade (2014 to 2028) 2920.5 26 NPV of Econ Profit of Net Inv (Grth Business) (1, 3) -258.1 -2 Terminal Value 3800.6 34 Enterprise Value 10703.4 100 Enterprise Value 11066.2 100 Plus: Other Assets 0.0 0 FCF Grth Rate at end of Phs 1 implied by DCF Valuation 5.3 Less: Minorities 0.0 0 FCF Grth Rate at end of Phs 1 implied by Current Price 4.0 Less: Net Debt (as at 02 May 2007) -145.5 -1 Equity Value 10849.0 101 Returns, WACC and NPV of Free Cash Flow No. Shares (millions) 748.0 12% 900 Per Share Equity Value 14.50 800 Current Share Price 11.47 10% 700 600 8% Sensitivity Table No of Years in Fade Period 500 #REF! 5 10 15 20 25 6% 400 8.8% 16.12 16.29 16.37 16.39 16.39 300 4% WACC 9.8% 15.18 15.16 15.10 15.01 14.93 200 10.8% 14.30 14.13 13.96 13.79 13.65 100 2% 11.8% 13.47 13.19 12.93 12.71 12.53 0 12.8% 12.71 12.32 12.00 11.74 11.55 0% (100) 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 Performance Summary Phase 2 Avg Phase 1 NPV of FCF (RHS) Phase 2 NPV of FCF (RHS) 2007 2008 2009 (2009 - 2013) Phase 3 NPV of FCF (RHS) Total Business ROIC Invested Capital Growth (%) 3.2 1.7 0.5 0.5 Growth Business ROIC Remaining Business ROIC Operating Margin (%) 9.0 11.1 12.0 13.0 WACC Capital Turnover (x) 0.7 0.9 1.2 1.2 Source: ABN AMRO 1. In periods following the Explicit Period i.e. Phase 2 and Phase 3 2. Remaining Business is defined as Capital as at the end of Phase 1 and capex = depreciation thereafter 3. Net Investment is defined as capex over and above depreciation after Phase 1 I NF I NE O N 3 M A Y 2 0 0 7 17 16
  • Strategic & competitive overview Infineon Company description Buy Price relative to sector Infineon is one of the largest semiconductor chip vendors. The company operates in several 110 markets, including Automotive, Industrial and Multimarkets, Communications (both wireless and 100 wireline) and Memory. It recently listed its Memory business on the New York Stock Exchange under the name Qimonda. Infineon's largest customers include Dell, Nokia, Cisco, Samsung, 90 Hewlett-Packard and Siemens. 80 70 60 50 May Aug Dec Mar Jul Oct Feb Jun Sep Jan Apr 04 04 04 05 05 05 06 06 06 07 07 Strategic analysis Average SWOT company score: 2 Revenue distribution 2007F Strengths 3 13% Leader in 300mm DRAM technology; leading RF design capabilities; strong links with automotive 36% OEMs. 51% Weaknesses 1 Half of Infineon's revenue is tied to the DRAM industry, where the market is too fragmented and AIM Memory Comms too capital-intensive and where Infineon's market share is too small to be profitable through a cycle. In wireless, the company is expanding its customer base, which we expect will improve Source: ABN AMRO forecasts margins. Market data Opportunities 2 Headquarters Consolidation in the DRAM industry would certainly help Infineon, but this has been elusive over the St Martin Str. 53, 81669 Munich, Germany past few years. A break-up of the company with a focus on communications and autos would be Website positive, in our view. RF design expertise is an advantage for single-chip integration. www.infineon.com Threats 2 Shares in issue We believe Infineon needs to expand its market share in wireless to c10% to be a long-term 748.0m competitor. This could lead to aggressive pricing and lower margins. Freefloat 100% Scoring range is 1-5 (high score is good) Majority shareholders Dodge & Cox (6%), Brandes (5%), Capital (4%) Information Technology Hardware Sector view Overweight Sector rel to Europe We believe that the tech sector now offers a valuation case. As the sector has displayed little 110 economic sensitivity over the last years, the sector performance now stands out as an anomaly 105 among the cyclicals as it has missed out on the cyclical rally. We believe macro trends and sector 100 fundamentals warrant a tech Overweight rating. 95 The sector view is set in consultation with the relevant company analyst but is the ultimate responsibility of the Strategy Team. 90 85 80 75 May Aug Dec Mar Jul Oct Feb Jun Sep Jan Apr 04 04 04 05 05 05 06 06 06 07 07 Industry competitive position Average competitive score: 3- Broker recommendations Supplier power 3- 20 Chip suppliers have little pricing power in general, except when global capacity is tight. Pricing of application-specific chips tends to be less volatile than that of general-purpose chips. 15 Barriers to entry 2+ 10 Barriers to entry have come down within the past five years due to the emergence of the 5 fabless/foundry model. Customer power 2- 0 Customers of the chip industry have increased their pricing power due to the consolidation of Buy Hold Sell several OEMs, distributors and EMS. Source: Reuters Substitute products 5+ There are no substitute products for semiconductor chips. Rivalry 2- There is intense competition in this industry. Scoring range 1-5 (high score is good) Plus = getting better Minus = getting worse I NF I NE O N 3 M A Y 2 0 0 7 18