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UBS Investment Research
Asia Tech
A lpha Preferences
Adding ASE to Most preferred list
We add ASE (Buy) to our Most Preferred list. The shares are trading at 1.53x 1-yr
forward P/BV. ASE’s share price has dropped 25% YTD and 15% in the past three
months. We think the stock price has factored in the declining capacity utilisation
rates into 4Q11. UBS Analyst Jonah believes 4Q revenues could decline 5% to
10% QoQ - not worse in our view than current market expectations. We are
positive on the company’s long-term outlook given its leading position in copper
wire process and flip chip-chip scale package (FC CSP) technology. We also
expect ASE to benefit from growing outsourcing from analog semis manufacturers.
We think this provides an attractive buying opportunity.
Adding LG Electronics to Least pref. list
We add LGE (Neutral) to our Least Preferred list, given recent stock
outperformance leaves valuation more demanding at 14.7x '12E PE. We believe
this leaves limited room of outperformance under our moderated margin recovery
senario. We believe recent percieved positive catalyst for LGE has been the
coming ramp up of LTE based Optimus smartphone. We believe that considering
competition and the size of the TAM, this will indeed help but not be sufficient.
We believe that looking at LTE IP value is both difficult and premature as a
breakup scenario is unlikely. We are also below consensus for 3Q11 OP (Won25bn
UBSe vs. consensus Won40bn) and 2012E.
Move OSAT to O/W, Wireless to N/W; Memory & Foundries remain O/W
Most Preferred: Kinsus, Hynix Semiconductor, Samsung Electronics, TPK
Holding,,TSMC and now ASE; Least Preferred: Acer, Nanya PCB, HCL Tech
Hon Hai , Wintek and now LGE
HCL Technologies (HCLT.BO)
Sell
India
Technology Services
We do not expect the company’s margin differential with Infosys/TCS to widen without a
significant large revenue growth outperformance. HCL Technologies operating margin in
FY11 stood at 17.2% compared with its peers in the range of 22-29%. In addition, we expect
that there is likelihood of potential sluggishness in demand by early 2012, which could cause
downgrades to FY13 outlook. The company’s margins continue to suffer due to higher
dependence on more experienced employees and aggressive currency hedges leading to lower
margin resilience compared with the top Indian vendors. We expect more expenditure on
client-facing activities, which is likely to show up as higher SG&A expenditure. Over the
next two-three years we expect the margins to remain low and we do not foresee any other
catalyst for stock price upside. We remain cautious given our concern about a potential
tradeoff between margins and revenue growth.
— Valuation: We derive our price target from a DCF-based methodology and explicitly
forecast long-term valuation drivers using UBS’s VCAM tool. Our price target
assumes a 12.9% WACC, and terminal growth of 3%.
— Risk: We believe the continuing negative newsflow in developed economies
is likely to impair 2012 budgets and pose significant downside risk to our
earnings estimates in the near term. Appreciation of the Indian rupee against
major global currencies could also impact profitability for the company
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Asia Tech
A lpha Preferences
Adding ASE to Most preferred list
We add ASE (Buy) to our Most Preferred list. The shares are trading at 1.53x 1-yr
forward P/BV. ASE’s share price has dropped 25% YTD and 15% in the past three
months. We think the stock price has factored in the declining capacity utilisation
rates into 4Q11. UBS Analyst Jonah believes 4Q revenues could decline 5% to
10% QoQ - not worse in our view than current market expectations. We are
positive on the company’s long-term outlook given its leading position in copper
wire process and flip chip-chip scale package (FC CSP) technology. We also
expect ASE to benefit from growing outsourcing from analog semis manufacturers.
We think this provides an attractive buying opportunity.
Adding LG Electronics to Least pref. list
We add LGE (Neutral) to our Least Preferred list, given recent stock
outperformance leaves valuation more demanding at 14.7x '12E PE. We believe
this leaves limited room of outperformance under our moderated margin recovery
senario. We believe recent percieved positive catalyst for LGE has been the
coming ramp up of LTE based Optimus smartphone. We believe that considering
competition and the size of the TAM, this will indeed help but not be sufficient.
We believe that looking at LTE IP value is both difficult and premature as a
breakup scenario is unlikely. We are also below consensus for 3Q11 OP (Won25bn
UBSe vs. consensus Won40bn) and 2012E.
Move OSAT to O/W, Wireless to N/W; Memory & Foundries remain O/W
Most Preferred: Kinsus, Hynix Semiconductor, Samsung Electronics, TPK
Holding,,TSMC and now ASE; Least Preferred: Acer, Nanya PCB, HCL Tech
Hon Hai , Wintek and now LGE
HCL Technologies (HCLT.BO)
Sell
India
Technology Services
We do not expect the company’s margin differential with Infosys/TCS to widen without a
significant large revenue growth outperformance. HCL Technologies operating margin in
FY11 stood at 17.2% compared with its peers in the range of 22-29%. In addition, we expect
that there is likelihood of potential sluggishness in demand by early 2012, which could cause
downgrades to FY13 outlook. The company’s margins continue to suffer due to higher
dependence on more experienced employees and aggressive currency hedges leading to lower
margin resilience compared with the top Indian vendors. We expect more expenditure on
client-facing activities, which is likely to show up as higher SG&A expenditure. Over the
next two-three years we expect the margins to remain low and we do not foresee any other
catalyst for stock price upside. We remain cautious given our concern about a potential
tradeoff between margins and revenue growth.
— Valuation: We derive our price target from a DCF-based methodology and explicitly
forecast long-term valuation drivers using UBS’s VCAM tool. Our price target
assumes a 12.9% WACC, and terminal growth of 3%.
— Risk: We believe the continuing negative newsflow in developed economies
is likely to impair 2012 budgets and pose significant downside risk to our
earnings estimates in the near term. Appreciation of the Indian rupee against
major global currencies could also impact profitability for the company
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