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  • 1. TAIWAN Pegatron 4938 TT Outperform Price (at 05:46, 19 Mar 2013 GMT) NT$43.80 Solid phase II of its turnaround 12-month target NT$ 55.00 Event Upside/Downside % 25.6  We reiterate our OP rating on Pegatron but raise our SOTP-based TP to Valuation NT$ 55.00 NT$55 from NT$51, given our now more positive view (vs our - Sum of Parts GICS sector recommendation upgrade note on 24 Jan) on its iPhone mini shipments and Technology Hardware & Equipment our higher 2013 margins and EPS assumption for its core as well as non-core Market cap NT$m 100,302 (mainly Casetek) business. Pegatron remains our top pick in the ODM/EMS 30-day avg turnover US$m 17.6 space. Market cap US$m 3,371 Number shares on issue m 2,290 Impact  Solid 1st source position in iPhone mini: While we believe Pegatron will be Investment fundamentals the major supplier of Apple’s iPhone mini products, we now expect its Year end 31 Dec 2011A 2012E 2013E 2014E shipments to likely come in higher than our original forecast of 7–8m units per Revenue bn 500.6 768.1 930.1 1,075.2 quarter (from late 3Q13). We believe the company will also face lower risk of Reported profit bn 0.1 6.1 9.8 11.6 Profit bonus exp bn 0.1 6.1 9.8 11.6 product transition in iPhone mini, given its progress along the learning curve Bon exp/rep profit % 0.0 0.0 0.0 0.0 and good execution on iPhone 4/4S production. We forecast Pegatron’s Adjusted profit bn 0.1 6.1 9.8 11.6 EPS rep NT$ 0.05 2.71 4.36 5.13 iPhone order allocation from Apple may approach 18–20% in 2013 (up from EPS rep growth % -98.2 5,392.9 61.3 17.5 <10% in 2012), and expect this increase in shipments to expand its OPM. EPS bonus exp NT$ 0.05 2.71 4.36 5.13 EPS bonus growth % -98.2 5,392.9 61.3 17.5  iPad mini demand better than expected: The street expects the iPad mini’s PER rep x 889.4 16.2 10.0 8.5 PER bonus exp x 889.4 16.2 10.0 8.5 sales to decline from 12m units in 1Q13 to 8-10m in 2Q13, due to the launch Total DPS NT$ 1.45 0.00 1.42 0.00 of re-fresh models in late 3Q12. However, our checks indicate that iPad mini Total div yield % 3.3 0.0 3.2 0.0 ROA % -1.9 0.7 2.0 2.7 demand in 2Q13 remain strong, thanks to its better sales from emerging ROE % 0.1 6.5 9.7 10.5 countries, especially in Asia. While we expect Pegatron’s 2Q13 iPad mini EV/EBITDA x 115.5 14.4 8.9 6.9 Net debt/equity % 10.9 25.1 32.4 29.2 sales to likely come in better than consensus estimate, we think its improving P/BV x 1.1 1.0 0.9 0.9 profit (from the break-even in Dec. 2012) could translate to earnings upside. 4938 TT rel TAIEX performance, & rec  Consensus expectation on NB business too cautious: We believe history management’s guidance of 1Q13 NB shipments (-20-25% QoQ) is too conservative and think the street is still underestimating its success in producing more high-margin touch NBs for brand clients to improve its product mix. This explains how Pegatron can still maintain its OPM from the NB business above the breakeven point despite its slowing shipments.  Rising EPS upside risks from Casetek: Pegatron still owns ~69% of Casetek shares post its IPO. Hence, Casetek’s strong earnings momentum will continue to support Pegatron’s EPS growth going forward. We also believe Pegatron’s management may consider selling some of its holdings to Note: Recommendation timeline - if not a continuous line, then there was no help increase Casetek’s free float and to realise some disposal income. Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, March 2013 Earnings and target price revision (all figures in NT$ unless noted)  We raise our 2013/2014E EPS by 7%/9% due to our higher OPM assumptions. We raise our TP from NT$51 to NT$55 on SOTP method. Analyst(s) Price catalyst Andrew Chang +886 2 2734 7526 andrew.chang@macquarie.com  12-month price target: NT$55.00 based on a Sum of Parts methodology. Daniel Chang +886 2 2734 7516 daniel.chang@macquarie.com  Catalyst: Better revenue and OPM; new order gains from OEM customers Winnie Cheng +886 2 2734 7523 winnie.cheng@macquarie.com Action and recommendation  Our 2013E EPS is 13% higher than the consensus, given our more optimistic 19 March 2013 Macquarie Capital Securities Limited, view on sales of its iPhone and iPad mini and non-op profit. We advise Taiwan Branch investors to accumulate the stock as its valuation remains attractive.Please refer to the important disclosures and analyst certification on inside back cover of this document, or on ourwebsite www.macquarie.com/disclosures.
  • 2. Macquarie Research Pegatron Analysis Fig 1 Pegatrons one-year forward PE bands 90 80 70 60 50 40 30 20 10 Mar-11 Mar-12 Jun-10 Sep-10 Dec-10 Jun-11 Sep-11 Dec-11 Jun-12 Sep-12 Dec-12 Price 10x 12x 14x 16x 18x Source: TEJ, Macquarie Research, March 2013 Fig 2 Pegatrons one-year forward PB bands 90 80 70 60 50 40 30 20 10 Mar-11 Mar-12 Jun-10 Sep-10 Dec-10 Jun-11 Sep-11 Dec-11 Jun-12 Sep-12 Dec-12 Price 0.6x 0.8x 1x 1.2x 1.4x Source: TEJ, Macquarie Research, March 201319 March 2013 2
  • 3. Macquarie Research PegatronPegatron (4938 TT, Outperform, Target Price: NT$55.00)Quarterly Results 3Q/12A 4Q/12E 1Q/13E 2Q/13E Profit & Loss 2011A 2012E 2013E 2014ERevenue m 192,449 238,831 209,069 222,878 Revenue m 500,566 768,059 930,138 1,075,232Gross Profit m 5,162 6,758 5,748 6,402 Gross Profit m 11,454 21,839 26,695 31,194Operating Expenses m -5,002 -6,121 -4,976 -5,527 Operating Expenses m -15,739 -20,100 -21,457 -23,028Operating Income m 160 637 772 875 Operating Income m -4,285 1,739 5,238 8,167Net Non-operating income m 1,346 2,278 1,350 1,350 Net Non-operating income m 4,348 5,241 5,750 5,100Pre-Tax Income m 1,506 2,915 2,122 2,225 Pre-Tax Income m 63 6,980 10,988 13,267Tax Expense m -153 -263 -212 -267 Tax Expense m 48 -876 -1,143 -1,654Exceptionals m 0 0 0 0 Exceptionals m 0 0 0 0Minority Interests m 0 0 0 0 Minority Interests m 0 0 0 -42Reported Earnings m 1,353 2,652 1,910 1,958 Reported Earnings m 111 6,104 9,845 11,571Reported Earnings (bonus exp) m 1,353 2,652 1,910 1,958 Reported Earnings (bonus exp) m 111 6,104 9,845 11,571Bonus exp / Reported Earnings % 0.0 0.0 0.0 0.0 Bonus exp / Reported Earnings % 0.0 0.0 0.0 0.0Adjusted Earnings m 1,353 2,652 1,910 1,958 Adjusted Earnings m 111 6,104 9,845 11,571EBITDA m 1,057 1,533 1,919 2,021 EBITDA m -932 5,324 9,823 13,552EPS (rep) NT$ 0.60 1.18 0.85 0.87 EPS (rep) NT$ 0.05 2.71 4.36 5.13EPS pcp growth (rep) % 269.9 171.9 49.6 138.3 EPS growth (rep) % -98.2 5,392.9 61.3 17.5EPS (rep bonus exp) NT$ 0.60 1.18 0.85 0.87 EPS (rep bonus exp) NT$ 0.05 2.71 4.36 5.13EPS pcp growth (rep bonus exp) % 269.9 171.9 49.6 138.3 EPS growth (rep bonus exp) % -98.2 5,392.9 61.3 17.5EPS (adj) NT$ 0.60 1.18 0.85 0.87 EPS (adj) NT$ 0.05 2.71 4.36 5.13EPS pcp growth (adj) % 269.9 171.9 49.6 138.3 EPS growth (adj) % -98.2 5,392.9 61.3 17.5Revenue pcp growth % 23.3 55.0 40.1 18.8 PE (rep) x 889.4 16.2 10.0 8.5Operating Income pcp growth % nmf 26.1 79.7 71.0 PE (rep bonus adj) x 889.4 16.2 10.0 8.5Reported Earnings pcp growth % 269.9 171.9 49.6 138.3 PE (adj) x 889.4 16.2 10.0 8.5Gross Profit Margin % 2.7 2.8 2.7 2.9 Total DPS NT$ 1.45 0.00 1.42 0.00Operating Income Margin % 0.1 0.3 0.4 0.4 Total Div Yield % 3.3 0.0 3.2 0.0Reported Earnings Margin % 0.7 1.1 0.9 0.9 Weighted Average Shares m 2,256 2,256 2,256 2,256EBITDA Margin % 0.5 0.6 0.9 0.9 Period End Shares m 2,256 2,256 2,256 2,256Profit and Loss Ratios 2011A 2012E 2013E 2014E Cashflow Analysis 2011A 2012E 2013E 2014ERevenue Growth % 14.9 53.4 21.1 15.6 Reported Earnings m 111 6,104 9,845 11,571Gross Profit Growth % -27.5 90.7 22.2 16.9 Depreciation & Amortisation m 3,353 3,585 4,585 5,385Operating Income Growth % nmf nmf 201.2 55.9 Chgs in Working Cap m -7,246 -13,685 -10,872 -9,740Reported Earnings Growth % -98.2 5,392.9 61.3 17.5 Other m -2,370 -2,780 -3,782 -3,828EBITDA Growth % nmf nmf 84.5 38.0 Operating Cashflow m -6,152 -6,777 -223 3,388 Acquisitions m 0 0 0 0Gross Profit Margin % 2.3 2.8 2.9 2.9 Capex m -2,400 -10,000 -8,000 -8,000Operating Income Margin % -0.9 0.2 0.6 0.8 Asset Sales m 0 0 0 0Reported Earnings Margin % 0.0 0.8 1.1 1.1 Other m 0 0 0 0EBITDA Margin % -0.2 0.7 1.1 1.3 Investing Cashflow m -2,400 -10,000 -8,000 -8,000 Dividend (Ordinary) m -3,264 0 -3,205 0Payout Ratio % 2,937.4 0.0 32.6 0.0 Equity Raised m 0 0 0 0EV/EBITDA x 115.5 14.4 8.9 6.9 Debt Movements m 480 2,000 1,600 1,600EV/EBIT x -53.2 24.9 13.3 10.0 Other m 875 -841 -673 -420 Financing Cashflow m -1,909 1,159 -2,277 1,180Balance Sheet RatiosROE % 0.1 6.5 9.7 10.5 Net Chg in Cash/Debt m -10,461 -15,618 -10,500 -3,432ROA % -1.9 0.7 2.0 2.7ROIC % -8.1 1.5 3.8 5.2 Free Cashflow m -8,552 -16,777 -8,223 -4,612Net Debt/Equity % 10.9 25.1 32.4 29.2 FCF per Share NT$ -3.79 -7.44 -3.64 -2.04Interest Cover x nmf nmf nmf nmf P/FCF x -11.6 -5.9 -12.0 -21.4Price/Book x 1.1 1.0 0.9 0.9Book Value per Share NT$ 40.6 43.3 46.2 51.4 Balance Sheet 2011A 2012E 2013E 2014E Cash m 24,074 11,538 3,838 4,814 Receivables m 69,689 87,932 106,488 123,099 Inventories m 51,899 57,402 69,496 80,311 Investments m 39,402 41,561 44,511 47,561 Fixed Assets m 30,223 36,638 40,053 39,668 Intangibles m 0 0 0 0 Other Assets m 12,318 15,754 18,503 20,221 Total Assets m 227,605 250,825 282,888 315,674 Payables m 83,812 93,872 113,651 131,337 Short Term Debt m 15,919 16,919 17,719 18,219 Long Term Debt m 18,165 19,165 19,965 20,465 Provisions m 0 0 0 0 Other Liabilities m 18,125 23,181 27,225 29,753 Total Liabilities m 136,021 153,137 178,560 199,774 Total S/H Equity m 91,584 97,688 104,328 115,899 Total Liab & S/H Funds m 227,605 250,825 282,888 315,674All figures in NT$ unless noted.Source: Company data, Macquarie Research, March 201319 March 2013 3
  • 4. Macquarie Research PegatronImportant disclosures: Recommendation definitions Volatility index definition* Financial definitions Macquarie - Australia/New Zealand This is calculated from the volatility of historical All "Adjusted" data items have had the following Outperform – return >3% in excess of benchmark return price movements. adjustments made: Neutral – return within 3% of benchmark return Added back: goodwill amortisation, provision for Underperform – return >3% below benchmark return Very high–highest risk – Stock should be catastrophe reserves, IFRS derivatives & hedging, expected to move up or down 60–100% in a year IFRS impairments & IFRS interest expense Benchmark return is determined by long term nominal – investors should be aware this stock is highly Excluded: non recurring items, asset revals, property GDP growth plus 12 month forward market dividend speculative. revals, appraisal value uplift, preference dividends & yield minority interests Macquarie – Asia/Europe High – stock should be expected to move up or Outperform – expected return >+10% down at least 40–60% in a year – investors should EPS = adjusted net profit / efpowa* Neutral – expected return from -10% to +10% be aware this stock could be speculative. ROA = adjusted ebit / average total assets Underperform – expected return <-10% ROA Banks/Insurance = adjusted net profit /average Medium – stock should be expected to move up total assets Macquarie First South - South Africa or down at least 30–40% in a year. ROE = adjusted net profit / average shareholders funds Outperform – expected return >+10% Gross cashflow = adjusted net profit + depreciation Neutral – expected return from -10% to +10% Low–medium – stock should be expected to *equivalent fully paid ordinary weighted average Underperform – expected return <-10% move up or down at least 25–30% in a year. number of shares Macquarie - Canada Outperform – return >5% in excess of benchmark return Low – stock should be expected to move up or All Reported numbers for Australian/NZ listed stocks Neutral – return within 5% of benchmark return down at least 15–25% in a year. are modelled under IFRS (International Financial Underperform – return >5% below benchmark return * Applicable to Australian/NZ/Canada stocks only Reporting Standards). Macquarie - USA Recommendations – 12 months Outperform (Buy) – return >5% in excess of Russell Note: Quant recommendations may differ from 3000 index return Fundamental Analyst recommendations Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return Recommendation proportions – For quarter ending 31 December 2012 AU/NZ Asia RSA USA CA EUR Outperform 47.87% 54.89% 54.41% 41.93% 60.86% 44.14% (for US coverage by MCUSA, 6.10% of stocks followed are investment banking clients) Neutral 37.94% 26.41% 38.24% 52.16% 33.70% 27.73% (for US coverage by MCUSA, 4.91% of stocks followed are investment banking clients) Underperform 14.19% 18.70% 7.35% 5.91% 5.44% 28.13% (for US coverage by MCUSA, 3.33% of stocks followed are investment banking clients)Company Specific Disclosures:Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures.Analyst Certification:The views expressed in this research accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of thecompensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. Theanalyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd ABN 94122 169 279 (AFSL No. 318062) (MGL) and its related entities (the Macquarie Group) and has taken reasonable care to achieve and maintainindependence and objectivity in making any recommendations.General Disclaimers:Macquarie Securities (Australia) Ltd; Macquarie Capital (Europe) Ltd; Macquarie Capital Markets Canada Ltd; Macquarie Capital Markets North AmericaLtd; Macquarie Capital (USA) Inc; Macquarie Capital Securities Ltd and its Taiwan branch; Macquarie Capital Securities (Singapore) Pte Ltd;Macquarie Securities (NZ) Ltd; Macquarie First South Securities (Pty) Limited; Macquarie Capital Securities (India) Pvt Ltd; Macquarie Capital Securities(Malaysia) Sdn Bhd; Macquarie Securities Korea Limited and Macquarie Securities (Thailand) Ltd are not authorized deposit-taking institutions for thepurposes of the Banking Act 1959 (Commonwealth of Australia), and their obligations do not represent deposits or other liabilities of Macquarie BankLimited ABN 46 008 583 542 (MBL) or MGL. 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Recommendations contained in one type of research product may differ fromrecommendations contained in other types of research, whether as a result of differing time horizons, methodologies, or otherwise. Before making aninvestment decision on the basis of this research, you need to consider, with or without the assistance of an adviser, whether the advice is appropriatein light of your particular investment needs, objectives and financial circumstances. There are risks involved in securities trading. The price of securitiescan and does fluctuate, and an individual security may even become valueless. International investors are reminded of the additional risks inherent ininternational investments, such as currency fluctuations and international stock market or economic conditions, which may adversely affect the value ofthe investment. 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  • 5. Macquarie Research Pegatrondistributed by Macquarie Capital (Europe) Ltd, which is authorised and regulated by the Financial Services Authority (No. 193905). Germany: InGermany, this research is issued and/or distributed by Macquarie Capital (Europe) Limited, Niederlassung Deutschland, which is authorised andregulated by the UK Financial Services Authority (No. 193905). and in Germany by BaFin. France: In France, research is issued and distributed byMacquarie Capital (Europe) Ltd, which is authorised and regulated in the United Kingdom by the Financial Services Authority (No. 193905). Hong Kong& Mainland China: In Hong Kong, research is issued and distributed by Macquarie Capital Securities Ltd, which is licensed and regulated by theSecurities and Futures Commission. In Mainland China, Macquarie Securities (Australia) Limited Shanghai Representative Office only engages in non-business operational activities excluding issuing and distributing research. Only non-A share research is distributed into Mainland China by MacquarieCapital Securities Ltd. Japan: In Japan, research is issued and distributed by Macquarie Capital Securities (Japan) Limited, a member of the TokyoStock Exchange, Inc. and Osaka Securities Exchange Co. Ltd (Financial Instruments Firm, Kanto Financial Bureau (kin-sho) No. 231, a member ofJapan Securities Dealers Association and The Financial Futures Association of Japan and Japan Investment Advisers Association). India: In India,research is issued and distributed by Macquarie Capital Securities (India) Pvt Ltd., 92, Level 9, 2 North Avenue, Maker Maxity, Bandra Kurla Complex,Bandra (East), Mumbai – 400 051, India, which is a SEBI registered Stock Broker having membership with National Stock Exchange of India Limited(INB231246738) and Bombay Stock Exchange Limited (INB011246734). Malaysia: In Malaysia, research is issued and distributed by Macquarie CapitalSecurities (Malaysia) Sdn. Bhd. 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  • 6. 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