MacqTech Express Headwinds for HTC ::Macquarie Research,

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MacqTech Express
Headwinds for HTC
Event
 We believe the smartphone market has entered a period of severe competition.
We maintain our cautious view on HTC but continue to believe Samsung will
lead the Android market share game. We also like ODM/EMS players as
outsourcing beneficiaries.
Impact
 Sprint's strong commitment to Apple's iPhone for next four years. There
have been various news reports in past weeks discussing Sprint's strong
commitment to iPhone for the next four years. Yesterday, Sprint management
said it has a minimum US$15.5bn iPhone commitment to Apple for the next four
years, which should translate into 25m+ units or 6-7m per year. Based on our
estimates, HTC currently sells 7-8m smartphones (35% of its US shipment) to
Sprint and should be the largest supplier of Sprint. Sprint's aggressive subsidy
and commitment to the iPhone implies that the iPhone will be its most important
product in coming years, which would significantly cannibalise HTC's volume
shipment to Sprint. HTC's EVO line-ups such as EVO 3D have a high ASP
compared to its other products; hence, potential ASP/margin impacts are
foreseeable.
 Strong iPhone outlook. Our US telecom analyst, Kevin Smithen, published a
note yesterday highlighting that based on his bottom-up estimates for each of
the key operators, the launch of the 4S at T, VZ and S and increased demand
for the 3GS and 4S driven by price cuts, he now expects 4Q iPhone sales to
reach 11.1m units. The US accounts for about 30-35% of global iPhone
shipments, which implies a robust 4Q iPhone shipment of 32-37m units vs its
3Q11 shipment of 17m units
 Nokia announced two WP7 phones yesterday. Nokia announced Lumia 800
(€420) and Lumia 710 (€270) yesterday. Nokia has introduced AMOLED games
so we believe Lumia 800 should offer a similar powerful battery life, and thin
features as found in Samsung Galaxy Nexus and Motorola Droid Razr. Our
checks show that HTC is behind the current AMOLED trend and could only
come out with an AMOLED device in 1H12. Lumia 710 is a more affordable
WP7 phone and we expect more aggressively priced low-end models to come
out in 1H12 given its strong manufacturing capability and supply-chain
management. This is in line with our HTC downgrade report in June where
we discussed our concern about Nokia's aggressive WP7 strategy from 4Q11
and 2012 that may put additional pressure on HTC. Our handset and
component analyst, Kylie Huang, believes that both FIH and Compal
Communication are the key beneficiaries of Nokia’s WP7 outsourcing trend.
Outlook
 We continue to believe that smartphones are moving into a mature cycle rapidly
and that HTC's strong R&D value will gradually be diluted and it needs more
time to build channel knowledge. For smartphone brands, we believe investors
should focus on companies with differentiated features (ie, AMOLED) and
strong channel knowledge. We like Samsung and iPhone plays (Hon Hai and
Pegatron). We also like ODM/EMS players as we expect they will benefit from
the rapid outsourcing trend – FIH and CCI. We continue to avoid HTC despite
its sharp correction. We see further downside to our and the street’s HTC
forecasts. We await its analyst meeting and 4Q11 guidance (Oct 31th).