ntu investment challenge - asustek

7/31/2019 NTU Investment Challenge - Asustek

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NTU Student ResearchThis report is published for educational purposes only bystudents competing in the CFA Institute Research Challenge.

Important disclosures appear at the back of this report

Technology, Hardware

Asustek Rides on the Tide of Ultrabook and Tablet Growth

Earnings Overview

Net Profit(NT$ mn)

EPS(NT$)

EPS YoY(%)

P/E(x)

P/B(x)

Div. Yield(%)

2009A 12,479 16.06 (25.6%) 14.7x 0.8x 4.9%

2010A 16,489 21.55 34.2% 10.5x 1.6x 5.1%

2011E 16,068 21.35 (1.0%) 10.1x 1.5x 5.3%

2012E 19,764 26.26 23.0% 8.7x 1.5x 5.6%

2013E 23,479 31.19 18.8% 7.4x 1.3x 7.0%

Highlights

We initiate coverage of Taiwanese notebook vendor Asustek Computer (2357 TT/2357.TW) with atarget price of NT$315 (41% upside). We are bullish on industry trends such as the introduction ofUltrabook and Windows 8, which we believe will especially benefit Asustek due to its early entry onUltrabook and the above-industry-average R&D capability. Asustek will also release new low-endtablets, thus boosting tablet shipments by 69%, and should further expand its position in the emergingmarkets.

High Exposure to Emerging Markets Beats the Industry Slowdown: We believe Chinesenotebook market will continue to grow at 18% YoY due to the low PC penetration rate, even in the caseof economic slowdown, still contributing 28% of total sales in 2012. Furthermore, since HP and Acerare still relatively weak due to internal restructuring, we foresee that they will continue to concedemarket share. Accordingly, the estimated sales contribution from emerging markets will increase to 65%in 2012 from 62% in 2011.

Ultrabook Boosts Replacement Demand (413% Shipment 2010-13 CAGR): The Ultrabook is aslim-type notebook, with higher ASP and margin compared with regular notebooks. It is thin and fastwith long battery life, and thus should induce users to replace their old notebooks. As one of the fourfirst-tier Ultrabook makers, Asustek is believed to become the No. 1 Ultrabook vendor in 2012 with15.7% global Ultrabook market share. Benefitting from its first mover advantage, Asusteks Ultrabookpenetration rate will reach 16%, higher than the 10% industry average. We expect Ultrabook shipmentsto increase sharply after ASP drops to attractive levels in 3Q12, as component costs can be reduced by29%, resulting in 13% YoY notebook shipment growth in 2012.

Low-end Models & Windows 8 to Boost Tablet Shipments by 69%: Asusteks low-end model,the Eee Pad Memo while at US$249 only priced insignificantly higher than competitors, offerssignificantly superior specs. We believe this high capability/price product caters to the general publicsneeds in emerging markets. Moreover, the differentiating market segmentation protects Asustek fromfierce price competition with e-readers, such as Kindle Fire and Barnes & Noble Nook. Furthermore,Windows 8s dual-interface will induce more users to purchase devices capable of fully utilizing all ofits functions. We recognize that several of Asusteks products especially emphasize this dualfunctionality, rendering Asustek to be the main beneficiary in the upcoming wave of devices combiningthe benefits of touch and keyboard input.

Valuation Great Potential for Capital Gains (up to 61%): Our 12-month target price ofNT$315 (41% upside) is based on applying a P/E multiple of 12.0x to our 2012 EPS NT$26.3, and evenin our worst-case scenario, Asustek only has a potential downside of 11% from its current price level.Our target price implies a cash adjusted P/E of 9.7x and EV/EBITDA of 8.1x while the company iscurrently only trading at 6.7x and 5.6x respectively, thus providing an excellent investment opportunity.

Ticker: 2357 TT(2357.TW) Recommendation: Buy

Price: NT$ 224.0 Price Target: NT$315.0

Asustek Com uter

Date: 2012/1/18

Market Profile

52-wk High NT$26552-wk Low NT$178Avg. Daily Vol. 4.66 mn shares

Beta 0.91

2010 Dividend Yield 5.1%

Shares Outstanding 752.76 mn

Market Cap NT$168.62 bn

FINI Holdings 49.7%

Insider Holdings 3.8%

BV per share NT$138.6

Debt/ TotalCapital*

0%

ROE 12%

*Debt/Total Capital = (LT & ST Debt)/

(SH Equity + LT & ST Debt)

mn sharesNT$

Asustek - LTM Daily Price/Volume

Source: Bloomberg


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Figure 2: 9M11 Sales by Product Figure 3: 9M11 Sales by Region

-4%

WW* 8% #7 10% #5

WE** 11% #3 15% #3

EE** 20% #1 20% #1

China 11% #3 15% #2

Asia*** 7% #7 11% #4

JP 2% #10 3% #8

USA 6% #6 4% #7

*Worldwide

**West Europe (WE); East Europe (EE)

***Asia excludes JP and China

4Q09 3Q11

Top Consumer Notebook Brand Enjoying Multi-Growth Catalysts

Asustek Computer (Asus) was founded as a motherboard manufacturer in 1990, and has turned itself into oneof the biggest PC vendors in Taiwan emphasizing on consumer notebook. The company surpassed Toshibaand became the 5th largest notebooks (NB) vendor in the world with 9.7% market share in 3Q11, improving

from 8.2% in 4Q09. Within consumer NB, Asustek is the 3

rd

largest globally with 12.3% market share after HP(16.8%) and Acer (15.6%). This position is supported by its strong industrial design capability for consumerelectronics.

Asustek continues to maintain its leading position as the largest motherboard maker with 40%-45% globalmarket share in 2011. The companys products include notebooks (57% of 9M11 revenue), netbooks (10%),

tablets (10%) and motherboards (18%). Asustek widely covers all markets, including Asia Pacific (47% of9M11 revenue), West Europe (24%), East Europe (14%), North America (10%), and others. As the No. 1motherboard brand worldwide, Asustek would make the best use of its motherboard channel relationship tobetter promote its notebook in emerging markets.

Asustek 9M11 Revenue: NB contributes 58% of revenue; APAC and Europe dominate 85%

Source: Asustek Company data

We are positive on Asusteks 2011-13 revenue growth because it should be one of the biggest beneficiariesfrom 1) the newly launched Ultrabook and 2) introduction of Windows 8 in 2H12 while 3) its aggressivepenetration plan for emerging markets should continue to boost its market share in consumer NB.

First to launch Ultrabook: Asustek was the first PC manufacturer to introduce Ultrabook, the Zenbook,complying with Intels Ultrabook specifications to the market in 4Q11. This lightweight NB featuresenhanced boot-up speed as well as battery efficiency, and we expect Ultrabook to occupy 10% of world NBshipment this year from only 0.5% in 2011. Asustek should be one of the major beneficiaries of this industrytrend.

Fast progress in tablet sales: Asustek first entered the tablet market in 2Q11 and soon became the No. 2vendor of Android-based tablets worldwide by 3Q11 by selling 1.2 mn units (4%) within six months.

Growing NB in emerging markets - No. 1 in Russia, No. 2 in China and more to achieve: During 2011,Asustek expanded its market share in Asia (excluding Japan) by 4.2% (Figure 3). In Russia, the Companyhas surpassed Acer and became No. 1 notebook vendor in 3Q11. In China, Asustek gained 2.3% additionalmarket share in 2011, reaching 14.6% and became the second largest vendor behind Lenovo.

Figure 5: Asustek LTM stock performance vs. TWSE and TWSECPE

Source: Bloomberg, NTU Team

Note: TWSECPE (Taiwan Taiex Computer and Peripheral Equipment Industry Index)

Figure 4: Asustek Market

Share in Asia Pacific Excludes

Japan

Source: IDC

-23%

-23%

Figure 1: Asustek Gained 2%

Worldwide Market Share in 4Q09-

3Q11

Source: IDC


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Favorable PC & Tablet Industry Trends Benefit Asustek

We foresee accelerating world PC shipment growth in 2012-13 of 7% and 11% YoY, respectively, after theflat 1% YoY growth in 2011(Figure 6). Ultrabook is likely to stimulate replacement NB demand whilecontinuous NB penetration improvement in emerging markets should provide further support to PC shipment

growth. The new OS Windows 8 enhances critical functions for Windows -based tablets, and we are positiveon its potential to carve out more market share.

Asustek is likely to be the major beneficiary given its early readiness in Ultrabook while its successfuldetachable tablet design (detachable keyboard dock) can further leverage Windows 8 dual user-interface (UI)to attract users hoping to utilize both entertainment and professional functions. We are also positive on thefirms plans to expand its market share in Brazil and India (currently < 2% market share), after it has alreadysuccessfully achieved top two positions in China and Russia.

UltrabookNB replacement cycle around the corner; expecting 9% YoY in 2012 industry NB shipment

We are positive that the attractive Ultrabook design will stimulate NB replacement. Since most consumerspurchased their latest notebook in 2008 or earlier (Figure 6), many of them may consider upgrading to a newerand faster model. We believe that they will be particularly attracted by the sleek design and speed of Ultrabook,thus boosting demand and industry penetration rate for these specific models.

Unique features: The critical design requirements make Ultrabook 1) more attractive than regularnotebooks: < 0.8 inches thick; < 1.5 kg; 2) longer battery life : >7 hours; 3) rapid start, fast response: 2-second instant-on with SSD (versus 10-sec on HDD); 4) price: < US$999 (versus regular notebook 2011 ASP:US$764).

Widely anticipated by the corporates: According to a survey by Techaisle, nearly 50% of small andmedium businesses expressed their interests in Ultrabooks over regular notebooks. Since Windows remainsthe preferred OS when it comes to running business applications and certain specialized software, we believethat Ultrabooks will become the prevailing commercial notebooks after the retail price reaches a level nearUS$750 in 4Q12.

A competitive-priced and OS-friendly choice: Based on our channel check, many MacBook Air users alsoinstall Windows on their devices in order to run native Windows applications, but the dual OS runs more

slowly and consumes 50% more power, making Windows-based Ultrabook a better choice for the majority ofWindows users.

Figure 7: Desktop and notebook shipment previously highly correlated with GDP growthGDP effect faded since 2011, indicating the saturation of global PC demand

Source: IDC, IMF, NTU Estimates

Asustek: One of the leaders on Ultrabook

Our initial analysis suggests that Acer, Asustek, Lenovo, HP and Samsung may lead in Ultrabook shipments in2012. However, Samsung and Lenovo still need time to strengthen their distribution channels in US andEurope while Lenovo is already well recognized in China.

Asustek should enjoy a period of exponential growth of Ultrabook in 2012 while it will benefit from decliningcomponent costs and is able to enhance its profit margins due to stronger R&D capability. It could leverage itsearly market entry along with excellent R&D capability to differentiate its Ultrabook models from competitors.

Figure 6: Global UltrabookPenetration and Shipments (est.)

Source: NTU Estimates

mn units


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The introduction of new Ivy-bridge models will enhance battery efficiency and boost Ultrabook shipments in3Q12 while the launch of Windows 8 and ASP (factory price) decline to US$595 will further amplifyshipments in 4Q12.

Pioneering R&D know-how: Asustek is well recognized for its consistently high product quality andpioneering designs such as netbooks and the detachable tablet (tablet with keyboard dock). Over 21% of the

firms operating expenditure is dedicated to R&D, which helps to shorten the product development cycle andsupport early preparation for future products.

Component cost reduction: We expect Intel to reduce its CPU price by at least US$30 in 2012, consideringthe threat from ARM offering competitive ASP and battery savings. We forecast further US$65 costreduction in SSD and another US$5 saving in casing. We also expect Asustek to release low-end Ultrabookmodels, which can reduce cost of storage and casing to US$35 and US$15, respectively, by applying HDDand plastic casing. After considering the sales mix of standard (32%) and low-end Ultrabooks (68%), wetherefore estimated combined cost savings of 28% in 2012, allowing manufacturers to offer lower ASPwithout hurting overall gross margin around 16% levels (vs. 12.8% on regular NB).

Figure 9: Ultrabook Bill of MaterialCost down of SSD, casing, and CPU facilitates Ultrabook ASP drop


Windows 8: Revolutionary OS facilitates demand for tablets and notebooks

Microsoft has introduced its new OS, Windows 8, which will be adopted by future PC and tablets. Weapplause its special Dual UI function, which allows tablet users to switch between entertainment mode(Metro UI) and traditional windows working environment (Traditional UI). We believe that the launch ofWindows 8 in 4Q12 will benefit the PC industry, especially non-Apple tablets and Ultrabooks.

In the initial stage, we expect more significant impact on tablet demand as Windows 8 attracts new tabletbuyers, but it may take a while to boost PC replacement demand given limited hardware upgrade requirements.We forecast the world market share for non-Apple tablets will grow by 5%, thus reaching 32% in 2012. In thelong run, we are positive on potential backloaded PC replacement growth as soon as the market hasaccumulated sufficient positive user experience on the new dual UI. We expect Windows 8, combined with theUltrabooks hardware and design advancements, to boost the industry Ultrabook penetration rate from 0.5% in2011 to 10% in 2012.

Dual User-Interface offers extended functionality: Windows 8 provides two user-interfaces (UI):Traditional UI and Metro UI. The Traditional UI provides a working environment similar to current

Windows 7 while Metro UI offers a touch interface. Users can switch between the two UIs as needed,allowing users to explore a new touch screen experience while retaining their familiar Windows workingenvironment. Several market surveys, including one conducted by BCG, have already suggested thatWindows 8 is highly anticipated by existing Windows users.

Majority of users are waiting for compatible tablets on Windows: More than 78% of PC users arecurrently using Windows as their main operating system, according to Chitika, a research firm. Thefamiliarity with the Windows environment and cross-platform integration increase the incentive to use aWindows-based OS on other devices, and we thus believe that the majority of Windows users will beinclined to purchase Windows tablets. Windows 8 significantly improves user experience, which should helpto boost its market share.

Improved system performance: The functional breakthroughs of Windows 8 are 1) faster boot-up time,reduced by 30-70% compared with Windows 7, and 2) lower power consumption. The new OS improves the

Figure 11: Traditional UI of

Windows 8

Source: Microsoft

Figure 10: Metro UI of Windows 8

Source: Microsoft

Figure 8: R&D Expense as % ofOPEX

Source: Bloomberg


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computing power management and allows programs to run more smoothly, thus addressing the main issuesof Windows 7.

Windows on ARM (WoA): A cost-efficient combination

Asustek should benefit from growing tablet market and broadened customer base

Windows 8 highlights the core design of Asustek: We estimate Asustek tablet shipments to grow by 83%YoY in 4Q12 and 43% YoY in 1Q13 after the release of Windows 8. We believe Windows 8 on touchscreens will trigger more demand for tablets for two reasons. First, Asusteks tablet design takes fulladvantage of the dual interface of Windows 8. For example, the current two tablet models (Eee Pad Sliderand Eee Pad TransformerSee Figure 13) both feature touch screens as well as a slide-out or keyboard dock.Furthermore, Asusteks status as one of the selected first-tier Windows on ARM (WoA) tablet makersallows it to benefit from first-mover advantage and become one of the leaders of WoA tablets.

Aggressive move to low-end tablets: We expect Asusteks tablet shipments to increase by 78% in 2012.Asusteks Eee Pad Memo offers superior specs at $249, a very competitive price compared with its peers(Product ComparisonSee Appendix 36). Judging from Kindle Fires dramatic success in 4Q11, we believethe general public yearns for good bargains in low-end models. Asusteks low-end tablet is priced onlyUS$50 higher than the Kindle Fire, but is equipped with more advanced hardware components, henceproviding a more attractive capability/price results. Besides launching its low-end model in the US, Asustekis expected to also target emerging markets, thus avoiding direct competition with Amazons Kindle Fire.

High Exposure to Emerging Markets Beats the Industry Slowdown

Demand of PC upgrades from desktops to notebooks, low PC penetration rate (below 30%), and highpopulation growth in emerging markets stimulate the notebook shipments. The emerging markets should bethe key growth driver for notebooks with 20% CAGR in shipments from 2010 to 2017 while developedmarkets grow slowly at 8% 2010-2017 CAGR. As emerging markets account for over 60% of total revenue toAsustek, we believe Asustek will be the biggest beneficiary from emerging market growth and we foresee afurther market expansion in Brazil and India for Asustek.

Fast-growing China market with 18% YoY sales growth, contributing 28% sales in 2012: Low PCpenetration rate and high population growth support strong notebook demand in China. Total sales fromChina will contribute to 28% of Asusteks revenue in 2012 because more third -tier cities will expand andbring in new demand. We believe the strong demand of first-time PC buyers from third-tier cities willsupport the market growth of 18% YoY, even in the case ofa slowdown of Chinas economy.

Cost reduction: Lower price ofARM compared with Intel CPU(US$30 vs. US$120)

Longer battery hours: Lowpower consumption

Open platform: Rapid hardwareimprovements

WoA vs. Windows on Intel

Reliable OS: Higher security

protection on Windows Approved Apps: Quality control Software compatibility:

Convenience of Microsoft Office

WoA vs. Android on ARM

Figure 12: Preference of Tablet OS

Source: BCG (Jun 2011)

Figure 13: Eee Pad Transformer and

Slider

Source: Company dataFigure 14: Asustek - Tablet Shipment & ASP


mn units US$


Figure 15: Asustek - Annual Shipment & GlobalMarket Sharemn units


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Weak major competitors concede market share in China, Brazil, and India: HP and Acer, both amongthe top four players in emerging markets, are relatively weak in defending their market share sinceorganizational restructuring is still underway. HPs deteriorated financial position, downgraded to BBB+after the acquisition of British search engine company Autonomy , limits HPs financing capability formarket expansion. As for Acer, its hectic management in China and Europe and lack of concrete strategy

put itself at a disadvantage. We believe this provides an opportunity for Asustek to gain 2% additionalmarket share in both Brazil and India.

Strong motherboard brand image and wide-spread channels accelerate market share gains: AsAsustek enters Brazil and India market, we believe Asustek can leverage its well-known motherboard brandimage to promote its notebooks in new markets. As 3C malls remain the dominant notebook channel inemerging markets, we believe that Asusteks motherboard channel relationships will benefit its shelfpresence for notebooks, accelerating market penetration in Brazil and India.

Figure 17: Rapid growth in notebook shipments in China, Brazil, and India (All vendors)Low penetration rate and high population growth support high notebook demand.

Source: MIC, NTU Estimates

Figure 18: Emerging China and India grow faster than the developed countriesAsustek targets in China, Brazil, and India in 2012-2014

Source: MIC, NTU Estimates

Note: Penetration = PC ownership/Population

Figure16: Global NotebookShipment Forecast, 2010-2017E

Source: MIC

Notebook Shipment Growth (YoY %)

2010 2011E 2012E 2013E 2014EChina 35% 28% 22% 17% 17%

Brazil 100% 40% 37% 30% 25%

India 52% 43% 35% 30% 27%

Penetration Rate

2009 20% 4% 32% 32% 89% 98%

2015E 34% 17% 58% 63% 97% 129%


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Buy Asustek: Expanding Product Lines & Growing Markets

We recommend investors to buy Asustek for its strong growth potential in Ultrabook and tablets, which,combined with the continuous expansion in emerging markets, should boost 2012-13 EPS by 23% and 19% to

NT$26.3 and NT$31.2, respectively. The stock is traded at 8.7x 2012E PER, which we consider an attractiveprice to buy if compared with its EPS growth in the next two years. Asustek is also cash rich its net cash ofNT$45 bn implies 2012E cash-adjusted PER of only 9.7 times, if we deduct the surplus cash from marketcapitalization. We view short-term market concerns regarding the world macro outlook and 4Q11 resultsuncertainties as good opportunity for investors to accumulate the stock. Our price target of NT$315 is based on12 times 2012E PER, implying 41% upside potential from the current level.

Improved profitability along with surging Ultrabook shipments: Aforementioned strong Ultrabookindustry growth and Asusteks leading position should support its 2012-13 revenue and profit growth. TheASP decline in Ultrabook to US$690 by 3Q12 should boost Ultrabook demand. We expect Ultrabook tocontribute to 16% of Asusteks 2012 NB shipment (versus 10% of industry), the percentage which couldfurther grow to 31% in 2013 (versus 22% of industry). We forecast Asusteks 2012 NB shipment to grow13% YoY to 21.9 mn units, compared with 9% industry shipment growth. Our analysis suggests thatUltrabooks will contribute NT$4.96, or 19%, to Asusteks EPS in 2012.

Figure19: Ultrabook vs. regular notebook shipment and ASP

Source: Company data, NTU Estimates

Best prepared for Windows 8 platform: Asustek has already established a strong track record in the tabletmarket, being the 2nd biggest Android tablet vendor in the world. We feel that the dual UI offered byWindows 8 should make Microsoft-based tablets more attractive, and Asustek could ride on the growingtrend in 2012 as Windows-based tablets could finally grab a more significant market share. Asustek, with itsstrong R&D capability, has also been selected as one of the four initial manufacturers of WoA tablets, theonly Taiwanese company nominated. This allows Asustek to benefit from first-mover advantage indeveloping ARM-based tablets.

Extending its success in emerging markets: Asustek has already achieved leading positions in China (No.2) and Russia (No. 1) with 14.6% and 19.7% market shares in 3Q11, respectively. We remain positive on itsrevenue growth in these two countries as well as its plan to expand markets into Brazil and India. Asustekcould leverage its existing motherboard distribution channels to expedite market share gains in emergingmarkets as it has built strong relationships with local 3C malls.

Increased penetration to US retail market: Asustek recently expanded its retail channel with US retailgiant, Wal-Mart, aiming to gain a stronger foothold in the worlds biggest PC market (20% of the global PCshipments). Initially, we forecast 30% YoY growth from a low base to 2.3mn units, which would boostAsusteks 2012 total NB shipment by 2%.


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Value through Growth10.4% 2010-2012E EPS CAGRStrong EPS growth of 23% in 2012 with low downside potential (11% downside in bear scenario versus 41%upside in base case) supports buy rating.

P/EAttractive current valuation, 41% upside

Our P/E based 12-month target price of NT$315 (41% upside) for Asustek is based on implying a P/E multipleof 12.0x to our 2012 brand EPS forecast of NT$26.3 (17% higher than consensus). Asusteks historicalforward P/E range for 200810 was 6.9x14.7x, with an average of 11.0x. Currently the stock is trading at 8.7times its 2012 P/E, at the lower end of its historic PE band, and with its increasing ROE and EPS growth webelieve Asustek deserves a multiple slightly above its historical mean, especially considering depressedvaluation in the historic period due to the 2008 financial crisis, European debt crisis as well as Thai flood.

Cash-Adjusted P/EAsustek is cash rich and holds zero debt. An alternative valuation measure is to calculate cash-adjusted P/E bydeducting net cash from market capitalization. Our target price implies a 2012 cash-adjusted P/E of 9.7x whilethe company is currently only trading at 6.7x its 2012 cash-adjusted P/E, one of the lowest among its peers.

EV/EBITDAUsing EV/EBITDA, our target price implies a multiple of 8.1x, but the company is currently only traded at5.6x 2012E EV/EBITDA. Asusteks historical forward EV/EBITDA range for 2008-10 was 15.5x35.4x, with

a mean of 25.2x. We recognize the sharp downward trend in recent years and thus believe that in the futureAsusteks EV/EBITDA multiple will be closer to that of its industry peers while Asustek most likely continuesto trade at a premium considering historical trading ranges and strong future EBITDA growth.

Scenario AnalysisLimited downside (-11%) in worst-case scenario

In order to ensure the accuracy of our target price and further support our buy rating, we developed twoscenarios (See Appendix 4) to evaluate Asusteks stock price performance under different market conditions.

Bear Scenario: Slower adoption of Ultrabook, ASP decreasing faster than cost, lower OPMBull Scenario: Faster adoption of Ultrabook, cost decreasing faster than ASP, higher OPM

In our worst-case scenario net profit is 16% lower than in our base case, and the bull case is 16% higher thanour base case. We furthermore sensitized the EPS with different P/E multiples, ranging from 9.0x to 15.0x.

Figure 20: Asustek - EPS & P/E Sensitivity Analysis

Target Price Sensitivity Analysis

EPS

NT$ 22.1 24.2 26.3 28.3 30.4

ltil

9.0x 199 218 236 255 273

10.0x 221 242 263 283 304

11.0x 243 266 289 311 334

12.0x 265 290 315 340 364

13.0x 287 314 341 368 395

14.0x 310 339 368 396 425

15.0x 332 363 394 425 455Source: NTU Estimates

Applying a P/E multiple of 9.0x to our bear scenario our TP would shrink to NT$199, thus representing apotential downside of 11% from the current share price. Conversely, in our best-case scenario, implying amultiple of 12.0x to our bull EPS of NT$30.4, Asusteks share price would reach NT$364 (63% upside).


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2012 Net Profit Growth 23% YoY boosting EPS to NT$26.3

EarningsUltrabook expected to push up sales (2011-13E shipment CAGR: 413%) & improve margins13% EPS CAGR from 2010-13E: According to our forecasts, total notebook shipments CAGR for 2010 to

2013E will be 15% while revenue and gross profit CAGR for the same period both are expected to reach

15% each. EBIT and net profit respectively are expected to grow by 24% and 13% on average per year.

In comparison, for the past 3 years Asustek realized 9.7% revenue CAGR, 8.7% gross profit CAGR, 9.4%operating profit CAGR and 0.1% net profit CAGR.

Figure 21: Asustek - Sales & EPS Growth


Operating margin rising to more than 5%: In the past 3 years gross margins ranged from 11.6% to 13.8%.We expect gross margin to further improve due to a change in the product mix (Appendix 9). Higher marginproducts, such as the Ultrabook and tablets, should make up a higher share of revenue, which will alsotranslate into a higher operating margin.

While pretax and net profit margins are expected to initially decline due to lower non-operating income in2011, this trend is likely to reverse in 2012.

Further EM Expansion (> 70%): According to our estimates, Asustek will further expand its position inthe emerging markets. We expect that 29% of revenue in 2012 will come from China and 17% from EasternEurope. West Europe will decrease to 17% and Asia ex. China & Japan will make up 24%. The remaining13% of revenue will come from the USA, Japan, and rest of the word (Appendix 10).

Ultrabook Major Revenue Contributor: With the launch of the Ultrabook, we expect regular notebooksshipment will gradually decrease. The tablets should cannibalize shipments from netbooks. Sincemotherboard is expected to remain flattish, their overall share of shipments will decrease as well. Accordingto our forecast, 2012 revenue contribution by product should be as follows: NB: 45% Ultrabook: 18%Netbook: 6% Motherboard: 14% Tablet: 8% and Others: 9%.

Cash FlowStable Operating Cash Flow & Dividend Yield of at Least 7% in 2013According to our forecast, operating cash flow (OCF) will slightly decrease in 2012 due to increasing networking capital requirements as the companys sales grow. However, by 2013, OCF should exceed previouslevels. We do not expect any major acquisitions of PP&E or LT investments, only maintenance CAPEX, and

also assume that financing cash flows will remain at roughly its previous level, as it is unlikely that Asustekwill change its dividend policy or require any further external funding. At a payout ratio of 55% Asusteksdividend yield in 2013 would be 7% while historical payout ratios have occasionally been even higher,supporting a dividend yield of 10% at a 75% payout ratio.

Balance Sheet & FinancingZero Debt & ROE Increasing to 19%Following 2009, Asusteks debt ratio increased by about 15% and its debt -to-equity ratio by roughly 38%,reaching 44% and 80% respectively.1 We forecast that both ratios will keep rising, reaching 50% and 101% in

1Debt ratio: Total Liabilities/Total Assets

Debt-to-equity ratio: Total Liabilities/Total Stockholders Equity

YoYYoY

NT$ bn

NT$ bn

igure 22: Asustek - Gross & Netrofit Margin



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2013. However, the majority of Asusteks liabilities are short-term (A/P, Other ST Liabilities) and since thecompany does not have any interest-bearing debt, its debt-to-capital ratio remains at 0%.2

In terms of operating performance, we see that Asusteks cash conversion cycle (CCC) decreased from 70days in 2009 to 41 days in 2010, but due to rising sales and thus increasing net working capital requirements,the companys CCC should rise to 45 days in 2013. Nevertheless, we still see slightly higher Inventory, A/P,

and A/R turnover (Appendix 14).

Furthermore, while current and quick ratios have both been on the decline for the past 3 years, our forecastconcludes that this trend will continue until 2012, before reversing in 2013. Asusteks current ratio is still onpar with the industry average of 1.65 while its quick ratio is slightly below the peer average of 1.07. Finally,ROE and ROA both are expected to increase over the coming years, in 2013 reaching 19% and 9%respectively while industry averages as of the last reporting date are 19% ROE and 8% ROA (Appendix 15).Using DuPont analysis, we can see that Asusteks ROE is increasing due to a higher operating margin as well

as rising asset turnover.

Investment Risks

Investment risks to our target price include: 1) Severe economy slowdown in Europe; 2) Slow market share

gain; 3) Increased peer competition in Ultrabook; and 4) HDD shortage impact

Severe economy slowdown in EuropeWe forecast West Europe should drop by 5% while East Europe grows at 10%. As West Europe and EastEurope respectively contribute 25% and 15% of the total revenue, we expect the combined impact fromEurope, 1% YoY decline in revenue, should have limited impact. As for Euro depreciation, Asustek is fullyhedged on Euro and 30% foreign exchange hedged on total revenue, according to the company. We believethat Euro depreciation should have limited impact on Asustek in 1H12, but a continuous depreciation maycause exchange losses in the long run.

Slow market share gain in emerging marketsIn our base case, we expect the following market share gains: China (+1.5%), Brazil (+2~3%), and India(+2~3%) in 2012. Asustek currently has little presence in Brazil and India with less than 2% market share in2011. Nevertheless, the markets in China, Brazil, and India will continue to grow at 18% YoY, 37% YoY, and

35% YoY, respectively, due to low NB penetration rate and high population growth. Even in the bear casewith no market share gain, the notebook shipments for Asustek in 2012 should remain as high as 19% YoYfrom these countries. (The base case contributes 27% YoY)

Increased peer competition in UltrabookAsustek did not unveil new Ultrabook model in CES 2012 while most PC vendors showed several newUltrabooks and many scheduled to launch new models in 2Q12. Nevertheless, we believe that most consumerswill delay the purchase until Windows 8 is launched, and Asustek is likely to release the new models by then.

HDD shortage impactUncertainty is eliminated; supply back to normal by mid-2012Most PC makers will suffer from the HDD shortage until mid-2012, but key component manufacturers havealready resumed production before December 2011. As the required recovery time is 6-8 months, we believethat 1) strongest impact on PC makers in 1Q12 (24% production shortfall to demand); 2) by 2Q12 productionwill be back to normal; 3) cumulated production shortfall will be fully digested by 3Q13.

2Debt-to-capital ratio: (Short-term Debt + Long-term Debt)/(Total Debt + Total Equity)


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11

Appendix

Financials

Exhibit 1: Asustek- Financial Summary

Income Statement (NT$mn) 2010A 2011E 2012E 2013E Cash Flow Statement (NT$mn) 2010A 2011E 2012E 2013E

Revenue 321,300 349,780 425,174 492,308 Net Profit 16,488 16,068 19,764 23,479

by Product Depreciation & Amortization 1,315 1,363 1,828 2,117

Notebook 179,246 198,836 193,360 182,770 Change in Working Capital (2,143) (560) 74 (2)

Ultrabook - 8,865 74,915 135,450 Others (3,343) (1,654) (5,632) (5,632)

Motherboard 52,279 56,948 58,850 59,475 Operating Cash Flow 16,335 15,216 14,929 22,491

Netbook - 18,800 35,755 51,930 Acquisition of PP&E (1,414) (1,069) (1,318) (1,526)

Tablet 50,478 31,661 23,910 20,790 Acquisition of Investments (485) (2,868) - -

Others 39,294 34,706 38,384 41,893 Proceeds-Disposal of Investments 2,373 44 - -

by Region Others (70) 16 - -

West Europe 80,324 76,960 73,000 80,000 Investing Cash Flow (2,121) (3,877) (1,318) (1,526)

East Europe 48,195 55,971 71,000 82,000 Treasury Stock (2,321) (2,609) - -

China 80,324 94,450 124,403 150,308 Cash Dividends (8,918) (8,638) (9,745) (12,085)

Asia (ex.Japan & China) 64,259 76,960 100,790 115,000 Others (20) 0 - -

Others 48,195 48,974 55,981 65,000 Financing Cash Flow (12,577) (11,247) (9,745) (12,085)

COGS (277,548) (302,084) (366,173) (425,112) Net Change in Cash 1,637 91 3,866 8,880

Gross Profit 43,752 47,695 59,001 67,196

OPEX (30,111) (29,738) (37,278) (41,581) Financial Ratios 2010A 2011E 2012E 2013E

Operating Profit 13,641 17,957 21,722 25,614 Margins (%)

Nonoperating Profit (net) 5,105 1,600 2,090 2,674 Gross margin 13.6% 13.6% 13.9% 13.6%

Pretax Profit 18,746 19,557 23,812 28,288 EBIT margin 4.2% 5.1% 5.1% 5.2%

Net Profit 16,489 16,068 19,764 23,479 Pre-tax margin 5.8% 5.6% 5.6% 5.7%

EPS (NTS) 21.55 21.35 26.26 31.19 Net margin 5.1% 4.6% 4.6% 4.8%

Dividend per share (NT$) 11.66 11.48 12.95 16.05

YoY growth (%)

Balance Sheet (NT$mn) 2010A 2011E 2012E 2013E Revenue 29.5% 8.9% 21.6% 15.8%

Cash & Cash Equivalents 41,395 41,485 45,351 54,231 Gross Profit 51.7% 9.0% 23.7% 13.9%

Accounts Receivable 39,861 43,787 52,927 56,038 Operating Profit 202.8% 31.6% 21.0% 17.9%

Inventories 41,847 52,805 63,159 67,046 Pretax Profit 45.9% 4.3% 21.8% 18.8%

Other Current Assets 17,308 20,434 24,699 26,151 Net Profit 32.1% (2.5%) 23.0% 18.8%

Current Assets 140,411 158,510 186,136 203,466LT Investments 44,426 49,752 49,752 49,752 Liquidity

Fixed Assets (net) 4,499 3,812 3,302 2,711 Current Ratio 1.7 1.6 1.6 1.7

Other Assets 1,445 2,043 2,470 2,615 Quick Ratio 1.0 0.9 0.8 0.9

Total Assets 190,781 214,118 241,660 258,545 DIO 53 57 58 56

DSO 41 44 42 40

Accounts Payable 44,572 48,893 58,480 62,080 DPO 53 56 54 52

ST Debt - - - - CCC 41 44 46 45

Other Current Liabilities 37,434 47,815 57,796 61,193

Current Liabilities 82,006 96,708 116,277 123,273 Profitability

LT Debt - - - - ROA 7.6% 7.9% 8.7% 9.4%

Other LT Liabilities 2,732 6,999 6,999 6,999 ROE 11.8% 14.8% 17.3% 19.0%

Long-term Liabilities 2,732 6,999 6,999 6,999

Total Liabilities 84,738 103,707 123,276 130,272 Investment Valuation

P/E (x) 10.5 10.1 8.7 7.4

Shareholders' Equity 106,044 110,411 118,385 128,272 P/B (x) 1.6 1.5 1.5 1.3

Total Liab. & SH Equity 190,781 214,118 241,660 258,545 EV/EBITDA (x) 8.7 6.2 5.4 4.3

Div. Yield (%) 5.1% 5.3% 5.6% 7.0%

*

Debt Ratio=Total Lia bilities/Total Assets Leverage

Debt-to-Equity=Total Liabilities/SH Equity Debt Ratio* 44.4% 48.4% 51.0% 50.4%

Debt-to-Equity* 79.9% 93.9% 104.1% 101.6%

Capitalization Ratio 0.0% 0.0% 0.0% 0.0%

Source: Compan y data, NTU Estimates


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12

Exhibit 2: PC Industry ComparablesPri ce Marke t c ap

Company Ticker local US$ mn 2011E 2012E 2011E 2012E 2011E 2012E 2011E 2012E 2010 2011E 2012E

Asustek 2357.TW 224 5,718 10.1x 8.5x 7.8x 6.7x 6.5x 5.6x 15% 17% 27% 5% 23%

Acer Inc. 2353.TW 38 3,511 N/A 19.9x N/A 21.5x N/A 13.6x -8% 7% 20% -148% NMF

Lenovo Group Ltd. 0992.HK 6 7,909 16.4x 14.6x 6.8x 7.1x 4.2x 4.7x 21% 23% -215% 70% 29%Toshiba 6502 313 17,316 10.3x 8.9x 18.6x 16.1x 5.1x 4.6x 12% 15% -118% 157% 15%

Dell Inc. DELL 16 28,529 7.1x 7.7x 5.4x 6.1x 3.4x 4.0x 45% 36% 41% 49% 0%

HP HPQ 26 52,557 5.5x 6.4x 11.2x 13.0x 5.7x 6.4x 25% 19% 5% 16% -13%

Median 8.7x 8.9x 9.0x 13.0x 4.7x 4.7x

Average 9.8x 11.5x 10.5x 12.7x 4.6x 6.7x 19% 20% -54% 29% 8%

Source: Bloomberg, NTU Estimates

Cash Adjusted P/E=(Market Capitalization + Net Debt)/Net Income

EPS Growth*P/E(x)* Cash-adj. P/E* EV/EBITDA(x) ROE(%)

*EPS Adjusted

Exhibit 3: Asustek- Model AssumptionsIncome Statement Reasoning & Calculation

Revenue See detai led revenue forecast

Gross Margin See detai led revenue forecast

Operating Margin See detai led revenue forecast

NONOPI nte re st Inco me (ne t) 0.04%

Investment Income

Pegatron (See Pegatron Consensus NI) 24.5% of Pegatron NI

Askey - Assumed to be zero; No forecast basis

Others - Assumed to be zero; No forecast basis

Exchange Gain/(Loss) - Assumed to be zero; No forecast basis

Other Income (net) 0.1%

Dividend Income 0.3%

Pegatron Consensus NI

NT$ mn Q1 Q2 Q3 Q4 FYE

2011 (559) (672) 367 707 (157)

2012 1,350 1,350 1,350 1,350 5,398

2013 1,815 1,815 1,815 1,815 7,260

Tax Rate 17.0% Taiwan Corporate Tax Rate

Balance Sheet Reasoning & Calculation

Cash & Cash Equivalents Plug Plug

Working Capital

Seasonal DIO, DSO & DPO

Days Q1 Q2 Q3 Q4

DIO 56 68 59 54

DSO 43 43 39 39

DPO 58 63 49 50

Other Currents Assets/Sales 5.0%

LT Investments fixed

Fixed Assets Plus CAPEX, less D&A

Other Assets/Sales 0.5%

Other Current Liabi l ities/Sales 11.7%

Other LT Liabi l ities fixed

Cash Flow Statement Reasoning & Calculation

D&A/Sales 0.4%

CAPEX/Sales 0.3%Dividend Payout Ratio 55.0%

Others (Operating CF) Plug Plug

Source: Company Data, Bloomberg, NTU Estimates

Median consensus e stimates for Pegatron's net i ncome. Annual NI equal ly spli t

over each quarter, except for 2011 Q4, which is calculated as annual NI less sum of

NI of the previous 3 quarters. We apply annual NI instead of quarterly NI as more

estimates are provided for annual NI, which we thus beli eve is more accurate than

quarterly data.

Quarterly DIO, DSO, and DPO to capture effect of seasonality. Calculated as average

of the respe ctive quarter's DIO, DSO, and DPO for the pa st 3 years.

Company guideline is >50%


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13

Exhibit 4: Asustek- Scenario AnalysisBase

NB 2011E 2012E 2013E Ultrabook 2011E 2012E 2013E

Shipments (mn units) 14.3 14.3 14.1 Shipments (mn units) 0.3 3.6 7.9

% of Total Shipments 32% 29% 26% % of Total Shipments 1% 7% 14%

ASP (US$) 462 446 428 ASP (US$) 975 735 569

EPS Contribution (NT$) 9.87 9.59 9.07 EPS Contribution (NT$) 0.59 4.96 8.96% of Total EPS 52% 40% 32% % of Total EPS 3% 21% 32%

Netbook 2011E 2012E 2013E Motherboard 2011E 2012E 2013E



ASP (US$) 217 197 191 ASP (US$) 80 81 80

EPS Contribution (NT$) 0.35 0.26 0.23 EPS Contribution (NT$) 7.53 7.79 7.87

% of Total EPS 2% 1% 1% % of Total EPS 40% 33% 28%

Tablet 2011E 2012E 2013E Others 2011E 2012E 2013E

Shipments (mn units) 1.80 3.20 4.70 Shipments (mn units) NA NA NA

% of Total Shipments 4% 7% 9% % of Total Shipments NA NA NA

ASP (US$) 347 365 366 ASP (US$) NA NA NA

EPS Contribution (NT$) 0.93 1.77 2.58 EPS Contribution (NT$) (0.38) (0.42) (0.46)

% of Total EPS 5% 7% 9% % of Total EPS (2%) (2%) (2%)

Bull




ASP (US$) 462 449 428 ASP (US$) 975 792 590



Netbook 2011E 2012E 2013E Motherboard 2011E 2012E 2013E



ASP (US$) 217 197 191 ASP (US$) 80 82 83









Bear




ASP (US$) 462 441 415 ASP (US$) 975 710 526



Netbook 2011E 2012E 2013E Motherboard 2011E 2012E 2013EShipments (mn units) 4.80 3.95 3.35 Shipments (mn units) 23.30 22.70 23.10


ASP (US$) 217 197 191 ASP (US$) 80 79 78











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Exhibit 5: Asustek- PE Band and EV/EBITDA Band


Exhibit 6: Asustek- Quarterly P&L

(NT$ mn) 1Q11 2Q11 3Q11 4Q11E 1Q12E 2Q12E 3Q12E 4Q12E 1Q13E 2Q13E 3Q13E 4Q13E

Sales 73,905 71,666 102,077 102,169 96,426 94,809 110,442 123,496 113,762 117,891 129,900 130,755

Gross profit 11,468 10,556 12,488 13,183 13,591 12,985 15,363 17,062 15,518 16,097 17,811 17,770

Operating profit 3,461 4,245 5,260 4,991 4,717 4,872 5,794 6,339 5,864 6,118 6,781 6,852

Pre-tax profit 3,678 4,957 5,656 5,266 5,144 5,298 6,577 6,793 6,422 6,681 7,758 7,427

Net profit 3,421 3,595 4,681 4,371 4,270 4,397 5,459 5,638 5,330 5,545 6,439 6,165

Gross margin 15.5% 14.7% 12.2% 12.9% 14.1% 13.7% 13.9% 13.8% 13.6% 13.7% 13.7% 13.6%

Operating margin 4.7% 5.9% 5.2% 4.9% 4.9% 5.1% 5.2% 5.1% 5.2% 5.2% 5.2% 5.2%

Pre-tax margin 5.0% 6.9% 5.5% 5.2% 5.3% 5.6% 6.0% 5.5% 5.6% 5.7% 6.0% 5.7%

Net margin 4.6% 5.0% 4.6% 4.3% 4.4% 4.6% 4.9% 4.6% 4.7% 4.7% 5.0% 4.7%

Revenue QoQ (11.7%) (3.0%) 42.4% 0.1% (5.6%) (1.7%) 16.5% 11.8% (7.9%) 3.6% 10.2% 0.7%

Revenue YoY (7.7%) (4.7%) 24.0% 22.1% 30.5% 32.3% 8.2% 20.9% 18.0% 24.3% 17.6% 5.9% Source: NTU Estimates


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Exhibit 7: AsustekStock Price vs. Monthly Sales (Consolidated)

Stock Price vs. Monthly Sales Stock Price vs. Monthly Sales YoY

Source: Bloomberg, TEJ Source: Bloomberg, TEJ

Exhibit 8: AsustekMonthly Sales Forecast


NT$bnNT$ %NT$


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Exhibit 9: Asustek - Sales by Product, 2010-2013E


Exhibit 10: Asustek - Sales by Region, 2010-2013E



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Exhibit 11: Asustek - Product Shipment/ASP/Gross Margin Forecast2009 2010 2011E 2012E 2013E

Shipment (mn units)

NB+Ultrabook+Netbook 12.2 16.9 19.4 21.9 25.6

NB+Ultrabook 6.8 10.9 14.6 17.9 22.0

Regular NB 6.8 10.9 14.3 14.3 14.1

Netbook 5.4 6.0 4.8 4.0 3.6

Ul trabook NA NA 0.3 3.6 7.9

MB 21.0 21.6 23.4 24.0 24.4

Tablet NA NA 1.8 3.2 4.7

Shipment Growth YoY

NB+Ultrabook+Netbook 14% 39% 14% 13% 17%

Global NBs+Ultra+Net 24% 5% 4% 9% 16%

NB+Ultrabook 17% 60% 33% 23% 23%

Regular NB 17% 60% 31% 0% (1%)

Netbook 10% 11% (20%) (17%) (10%)Ultrabook NA NA NA 1087% 122%

MB (5%) 3% 8% 2% 2%

Global Desktop (11%) 13% (3%) 4% 4%

Tablet NA NA NA 78% 47%

ASP(US$)

Regular NB 571 543 456 443 428

Netbook 310 278 218 197 191

Ultrabook 975 695 566

MB 78 80 80 81 80

Tablet NA NA 349 345 371

ASP YoY Change

Regular NB (20%) (5%) (16%) (3%) (3%)

Netbook (7%) (10%) (22%) (9%) (3%)

Ultrabook NA NA NA (29%) (19%)

MB (9%) 3% 1% 1% (1%)

Tablet NA NA NA (1%) 7%

Gross Margin Rate

Regular NB 13.6% 13.4% 13.2% 12.8% 13.0%

Netbook 9.0% 8.5% 8.2% 8.0% 8.0%

Ultrabook 17.0% 16.2% 14.9%

MB 20.0% 20.0% 20.3% 20.6% 21.0%

Tablet 14.3% 13.9% 13.6% Source: NTU Estimates


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Exhibit 12: AsustekRevenue Breakdown by Product/ Product Mix Forecast2009 2010 2011E 2012E 2013E

Revenue (NT$mn)

NB+Ultrabook+Netbook 168,388 229,724 237,337 290,855 339,010

NB+Ultrabook 117,746 179,246 205,676 266,945 318,220

Regular NB 117,746 179,246 196,811 192,030 182,770

Netbook 50,643 50,478 31,661 23,910 20,790

Ultrabook NA NA 8,865 74,915 135,450

MB 49,497 52,279 56,948 58,850 59,475

Tablet NA NA 19,050 33,460 52,770

Others 30,293 39,294 35,727 40,816 40,816

Total Revenue 248,178 321,297 349,062 423,981 492,071

Revenue Growth

NB+Ultrabook+Netbook (4%) 36% 3% 23% 17%

NB+Ultrabook (6%) 52% 15% 30% 19%

Regular NB (6%) 52% 10% (2%) (5%)Netbook 2% (0%) (37%) (24%) (13%)

Ultrabook NA NA NA 745% 81%

MB (13%) 6% 9% 3% 1%

Tablet NA NA NA 76% 58%

Total (7%) 29% 9% 21% 16%

Product Mix (Sales)

NB+Ultrabook+Netbook 68% 71% 68% 69% 69%

NB+Ultrabook 47% 56% 59% 63% 65%

Regular NB 47% 56% 56% 45% 37%

Netbook 20% 16% 9% 6% 4%

Ultrabook NA NA 3% 18% 28%

MB 20% 16% 16% 14% 12%

Tablet NA NA 5% 8% 11%

Others 12% 12% 10% 10% 8% Source: NTU EstimatesNote: Others include desktop, monitor and smartphone.


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Exhibit 13: AsustekEBIT/EBIT Margin Forecast


Exhibit 14: AsustekTurnover Ratios Forecast


Exhibit 15: AsustekROA/ROE Forecast



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Exhibit 16: AsustekCurrent Ratio/ Quick Ratio Forecast


Exhibit 17: AsustekDIO/DSO/DPO/CCC Forecast



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Ultrabooks

We believe Ultrabook will overpass MacBook Air in the following quarters for these reasons:

1. High OS familiarityWindows has the highest market share among all operating systems. In the past, users buy MacBook Air and installed Windows on it.This is because there was no slim type notebook for them to purchase. Besides, Windows has better software compatibility thanUltrabook, especially for business users.

Source: hitslink

2. Longer battery lifeUltrabooks 7 hour battery life is longer than MacBook Airs 4 hour under Windows 7. Most users will choose Ultrabook if they want towork under Windows.

3. Same hardware strengthSSD was not common. However, when SSD is equipped in Ultrabook, Windows users can also enjoy fast boot -up. Ultrabook now hasthe slim and fast feature as well.

4. Cheaper than MBAPrice is the top factor (55%) that influences the consumer purchase decision, according to insightxplorer. Ultrabook can offer a morecompetitive price since there are more notebook vendors in the market. Also, Ultrabook is now having around 20% discount toMacBook Air, being a more favorable choice to customers.

Exhibit 18: CES TakeawaysASP Erosion Starts, Low-end Models Emerge in the MarketSource: BestBuy 2012/01/10, NTU

Acer Aspire S5 Asus Zenbook Lenovo U310 Samsung Series 5

Size/Weight 13.3/1.35kg,

1.5cm thick

11.6/1.2kg, 13.3/1.4kg

0.9cm thick

13.3/1.7kg,

1.8cm thick

13.5/1.38kg

1.4~1.76cm thick

CPU Intel Core Series i5-2467M(1.6GHz)

i5-2557M(1.7GHz)

i7-2677M(1.8GHz)

Ivy Bridge platform Core i3/i5

options

Intel Core i5

Storage SSD(TBD) 128GB SSD

256GB SSD

500GB HDD

64GB SSD

500GB HDD

128GB SSD/256GB SSD

Price TBD(2Q12) US$999~1399 US$699(2Q12) US$900

Other HDMI,USB 3.0,

Thunderbolt, Magic Flip,

Acer Always Connect

Micro HDMI, USB 3.0, mini

VGA

USB 3.0 port, all-important

memory card slot

8G Memory, HDMI,USB 3.0, Card

reader, HD LED SuperBright

Display


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Exhibit 19: Ultrabook Bill of Materials


Bill of materialsComponent 2011 % of Total 2012 % of Total 2012 HDD+Plastic Casing % of Total

CPU 160 22% 130 19% CPU 130 19%

MB 70 10% 70 12% MB 70 12%

Memory 27 4% 25 4% Memory 25 4%

SSD 180 25% 115 20% HDD 35 20%

Battery 30 4% 27 5% Battery 27 5%

Casing 55 8% 50 9% Plastic Casing 15 9%

OS 55 8% 55 10% OS 55 10%

Panel 70 10% 62 9% Panel 62 9%

Others 35 5% 33 6% Others 33 6%

MVA 34 5% 28.35 5% MVA 28.35 5%

Total 716 100% 595.35 100% Total 480.35 100%

Product mix 100% 32% 68%

Overall BOM Drop -28%


Note: MVA- Market Value Added


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Exhibit 20: Quarterly Ultrabook Market Share Forecast

4Q11E 1Q12E 2Q12E 3Q12E 4Q12E

Acer 27% 19% 14% 13% 13%

Asustek 29% 20% 13% 15% 16%

Toshiba 15% 12% 10% 7% 8%

Lenovo 29% 20% 17% 14% 15%

Sony 0% 0% 5% 4% 6%

HP 0% 16% 14% 11% 13%

Samsung 0% 12% 13% 14% 14%

Others 0% 0% 15% 20% 15%

Total 100% 100% 100% 100% 100%


Exhibit 21: Quarterly Ultrabook Shipment Forecast by PC vendors, 4Q11E-4Q12E(000 unit ) 4Q11E 1Q12E 2Q12E 3Q12E 4Q12E

Acer 275 470 650 950 1,100

Asustek 300 500 600 1,100 1,360

Toshiba 150 300 450 500 650

Lenovo 300 480 800 1,000 1,300

Sony NA NA 250 300 500

HP NA 400 650 800 1,100

Samsung NA 300 600 1,000 1,200

Others NA NA 700 1,450 1,240

Total 1,025 2,450 4,700 7,100 8,450

Ranking #1 #1 #4 #1 #1

Asustek Mkt Share 29% 20% 13% 15% 16%


Exhibit 22: Windows Ultrabook on ARM Provides Better Margin for PC Makers(US$/unit) Windows on Intel Windows on ARM

Price 1,190 1,070

Retailer Margin Charges 15% 15%

Distributer's Margin Charges 8% 8%

NB Maker's ASP 916 824

Related COGS 716 586

CPU 160 30

Operating System 55 55

Others 501 501

Gross Margin 200 238

% of Revenue 17% 22%



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Exhibit 23: Asustek- Ultrabook Affordability Analysis4Q11E 1Q12E 2Q12E 3Q12E 4Q12E 1Q13E 2Q13E 3Q13E 4Q13E

Global NB Shipment('000) 55,353 50,000 53,000 61,500 62,500 63,000 63,000 68,000 69,000

Asus Ultrabook ASP (US$) 975 891 759 693 595 594 578 561 545

Retail Price (US$) 1,229 1,123 956 873 750 749 728 707 686

Affordable % of People 13% 13% 16% 25% 25% 25% 35% 40% 55%

Total Shipments ('000) 7,196 6,500 8,480 15,375 15,625 15,750 22,050 27,200 37,950

Apple's Shipment ('000) 1,600 1,365 1,950 3,844 4,063 3,938 5,733 7,072 10,247

% of total 22% 21% 23% 25% 26% 25% 26% 26% 27%

Non Apple Shipment ('000) 5,596 5,135 6,530 11,531 11,563 11,813 16,317 20,128 27,704

Asus in non-apple % 25% 25% 20% 16% 16% 16% 15% 14% 14%

Asus's Shipment Forecast ('000) 1,399 1,284 1,306 1,845 1,850 1,890 2,448 2,818 3,878

Asus's Ultrabook Shipment('000) 300 500 600 1,100 1,360 1,500 1,700 2,300 2,400


Exhibit 24: Ultrabook Market Share Forecast



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Regular Notebook

Exhibit 25: 2Q11 Market Share of Consumer Notebooks with ASP >US$1000

Source: Gartner

Exhibit 26: HDD Supply Estimation


Exhibit 27: Notebook ASP by PC Vendors (2Q11)

Vendor ASP(US$) PC sales as % of total revenue

Acer 554 81%

Asustek 628 73%

Samsung 652 1%

HP 725 30%

Dell 733 67%

Lenovo 752 94%

Toshiba 1,156 14%

Sony 1,157 10%

Fujitsu 1,280 20%

Apple 1,553 34%

Source: Bloomberg

2011E 2012E 2013E 2014E

(mn units) 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Unconstrained

Demand175 160 166 180 183 166 173 189 193 174 182 198 202

YoY 5% 0% 0% 3% 5% 4% 4% 5% 5% 5% 5% 5% 5%

Total HDDs

Produced120 121 159 185 198 187 187 190 198 189 191 190 202

YoY (29%) (25%) (5%) 5% 65% 55% 18% 3% 0% 1% 2% 0% 2%

Production Shortfall 55 39 8 (5) (15) (21) (14) (1) (5) (15) (9) 8 0

% of Demand (31%) (24%) (5%) 3% 8% 13% 8% 1% 3% 9% 5% (4%) 0%

Cumulative Shortfall 55 87 83 68 44 17 1 0 (6) (20) (30) (21) (21)

Inventory - - - - - - - 0.2 5.5 20.4 29.7 21.4 21.0

Weeks of Inventory - - - - - - - 0 0.4 1.5 2.1 1.4 1.4


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Exhibit 28: IDC 4Q11 PC Shipment Estimates

Vendor 4Q11 Shipment QoQ YoY 4Q11 3Q11

('000 units) Market Share Market Share

HP 15,123 (9.1%) (15.9%) 16.3% 17.9%

Lenovo 13,012 3.7% 36.8% 14.0% 13.5%

Dell 11,970 8.5% 7.3% 12.9% 11.8%

Acer 9,790 3.9% (8.0%) 10.6% 10.1%

Asus 6,243 7.9% 26.3% 6.7% 6.2%

Others 36,564 (3.1%) (5.6%) 39.4% 40.5%

Total 92,702 (0.5%) (0.3%) 100% 100%

Source: IDC

Exhibit 29: PC Vendors ComparisonStrengths/WeaknessesAsustek Acer HP Dell Lenovo Samsung

Strengths

High R&Dcapability

Good brandImage in

Europe

Wide MBchannel

relationship in

China

High exposureto EMs

Cost benefitfrom MB

Good brandImage in

Europe

High brandimage from

netbook in US.

Enterprise-focused

Global #2 incommercial NB

Goodmarketing andafter-service

Brand image

Enterprise-focused


Good after-service

High exposureto EMs


Hired Lanci;aggressiveexpansion plan

Supply chainadvantage: low

component

costs

High C/P value Synergy of

product

integration(ha

ndset + NB +

TV)

Weaknesses

High exposureto consumer

market:

correlated to

economic

change

High exposureto consumer

market:

correlated to

economic

change Low price

strategy: low

margins

Restructuring

Losing sharesin both

commercial

and consumer

notebooks

Restructuring

Losing sharesin both

commercial

and consumer

notebooks

Sufferingoperating loss

in EMs outside

of China

Weak PCchannel

Weak after-service

Source: NTU Team


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Exhibit 30: Portable PC Market Share in BRIC by Shipment

Brazil China

Source: IDC Source: IDC

India Russia



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Exhibit 31: Regional Portable PC Market Share by Shipment

USA West Europe


Japan APAC



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Tablet- Prevailing touch screen applications broadens customer base Intuitive user interface extends customer base to elderly and children:

We believe the tablet market will continue to grow at 36% CAGR in 2012-2013 as there are still a great amount of consumerscontemplating whether or not purchase a tablet. With the release of more attractively priced high-quality low-end tablets, theseconsumers and those with less disposable income (especially in the emerging markets) are likely to be more inclined to follow the touchtrend. Furthermore, due to touch input being more intuitive and easier to learn, consumers that previously had no affinity withcomplicated electronic devices, e.g. elderly people, will further boost the base of potential customers.

Touch screen trend favors PC vendors with high R&D capability:As more and more users embrace the benefits of having a touch screen, programmers will keep their focus on supplying programsspecifically targeting this touch-screen experience. Furthermore, since extensive R&D resources are required to ensure software-hardware compatibility and quickly be able to release a full functioning product to the market, vendors with more R&D expertise are atan advantage.

Exhibit 32: 3Q11 Global Tablet Market Share

Source: DigiTimes

Exhibit 33: Total # of Windows Apps on Market Place

Source: wp7appexplorer.com


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Tablets will Keep Growing since Consumer Electronic Market is Well Segmented

We believe the consumer electronic market is well segmented. PCs, smartphones, E-readers (e.g., Kindles) and regular tablets (tabletsexcluding e-readers) have a little overlapping on functions and price.

Tablet is a product in between of PCs (desktops, notebooks) and smartphone by size and price. Tablet shares some similar features with PCand smartphone, but own its consumer base by providing unique services which can hardly be replaced by either devices.

Exhibit 34: Consumer Electronic Market Is Well Segmented

Source: NTU Team

Regular Tablet vs. Desktop & NB: Serve different needs-Regular tablet: Provide better user experience on entertainment with better portability.-Desktop & NB: Provide better working environment with aid of keyboard and mouse.

Exhibit 35: Percentage of Users Who Use PCs/ Tablets Regularly for Activity

Source: Alphawise

Regular Tablets vs. e-readers & Smartphones: Difference in screen size and computing power.-Screen size of e-reader & smartphone is not big enough for users to enjoy movies.-Poor computing power on e-reader & smartphone cannot function complicated tasks well such as running high-end video games

(e.g., Warcraft, Battlefield, etc.).

%


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Core Competence of Eee PadUnique Detachable/Sliding Keyboard DesignAsustek is the first tablet maker who applied a detachable (pictures 1 to 3 below) and sliding (picture 4) keyboard design on its tabletmodels. Besides enjoying first mover advantage, Asustek has set up solid entry barrier by patents relating to several crucial parts of itsproducts. For example, the sliding keyboard design, three-in-one dock, several fixing and circuit modules have been patented by the UnitedStates Patent and Trademark Office.To illustrate, we take the Transformer, which can be separated into a panel and a dock. The panel comprises touch screen, CPU, memory, battery, camera and earphone plug. It provides complete tablet function, and can work

independently. The dock comprises keyboard, touchpad, power supplier and other expansion such as USB, SD card readers. It provides supportive

functions for the panel.

Exhibit 36: CES TakeawaysAsustek is Launching Low-end Products to Grab Market Shares

Transformer Prime TF700T Eee Pad Memo 370T Amazon Kindle Fire Nook Color

Launch Time 2Q12 in USA 2Q12 in USA 3Q11 3Q11CPU 4 Core Nvidia Tegra 3 CPU 4 Core Nvidia Tegra 3 CPU Dual Core TI OMAP4 CPU 800 MHz TI processor

Display 10.1, 1920 X 1080, Super IPS 7.7, 1280x720, IPS 7.1,1024 x 600, IPS 7, 1024 X 600,IPS

OS Android 4.0 Ice Cream Sandwich Android 4.0 Ice Cream Sandwich Android 2.3(Customized) Android 2.3

Memory 1GB RAM, 32GB/64GB Storage 1GB RAM, 16GB Storage 512MB RAM, 8GB Storage 512 MB RAM

Camera 8M main autofocus camera.

2M second camera

8M Camera No Camera No Camera

Weight 586g 399g 413g 448g

Thick 10.4mm TBD 11.4mm 12.1mm

Connection WiFi 802.11 b/g/n,

Bluetooth 2.1+ EDR

HDMI, WiFi, Bluetooth WiFi 802.11 b/g/n 802.11 b/g/n

Price 32GB US$599, 64GB US$699 US$249 US$199 US$199

With Keyboard With Amazon Cloud service

Future OutlookNetbook and Motherboard

MotherboardA saturated market, unlikely to have double digit growthDesktop penetration already reached a historic high and the market will only have regular replacement demand. In 2011, Asustek owns 40%market share in the motherboard market, and we believe the global desktop market is mature, thus only enjoying single digit growth. Wehave already seen the penetration rate drop on desktop in US, resulting from a demand shift to notebooks. Asusteks motherboard business isquite mature due to PC market saturation.

We estimate Asusteks motherboard shipment will grow 2% YoY and worldwide desktop gro ws 4% YoY to factor in the notebooksubstitution effect in developed countries. However, as companies delayed capital expenditure during financial crisis and the average lifecycle of desktop replacement is 5 to 7 years, we will see replacement demand from corporates in 2012 and 2013. As for emerging markets,
http://www.uspto.gov/http://www.uspto.gov/http://www.uspto.gov/http://www.uspto.gov/


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China motherboard demand grows at 11% YoY in 2010-11 according to MIC, which we estimate with the other emerging markets to be themain source of growth on motherboard.

NetbookShift to low-end tabletsWe believe shipments will drop by 17% YoY in 2012 due to cannibalization from tablets. The effect will get more severe as Windows 8

launches in 3Q12, shifting more netbook users to tablets. As tablets enjoy higher margins than netbooks, we believe the shift will enhancethe overall operating margin.

Exhibit 37: AsustekNetbook shipment declines, 2009-2013E


iYogi Insights- Windows 8According to a recent survey (Jan. 31, 2013) by iYogi Insights, 57% of existing tablet users would like to upgrade to Windows 8 while 19%of those who do not yet own a tablet declared their intent to upgrade. Consumers seem to endorse Microsofts strategy for a s ingle interfaceacross multiple devices (69%) as 85% of tablet users would like their tablet and PC to have the same feel, with 53% of tablet users desiringto use the Metro interface of Windows 8. Furthermore, Windows 8 will likely benefit from a higher awareness of its release, as 95% of

respondents are aware of the soon to be launched new OS as opposed to only 40% for Windows 7.Source: iYogi Insights


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Ownership

Exhibit 38: Asustek- FINI Holdings

Source: TEJ, Bloomberg

Exhibit 39: AsustekShareholding Structure (Top 10 shareholders)

Source: TEJ, Bloomberg

Rank Top 10 Shareholders

1 Citibank (Taiwan) & Asus ADR

2 Jonney Shih-a

3 ChungHwa Post4 Standard Chartered Bank & Xie Wei Qi

5 JP Morgan Chase & Saudi Arabia M.A.

6 First Bank & Jonney Shih's Trust AC.

7 Labor Pension Fund Supervisory Committee

8 Standar & Fan Jia De Devel. Fund Account

9 Ted Hsu

10 T'ung Tzu Hsien


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OthersExhibit 40: Stock Price Movement vs. Events

Source: Company data, Bloomberg

Company GovernancePros Cons

Two independent directors High meeting participation rate Engineer-based management team Independent innovation R&D unit Continuous compliance learning among all board of directors

Same board of director team and the management team Multi-board of director identities in several companies Board of directors hold significant position in several company

subsidiaries

Corporate Social Responsibility - Eco-friendly production, design, and recyclingAsustek puts emphasis on eco-friendly production processes and has acquired IECQ HSPM recognition for its toxin-free production sitesworldwide. Its green ideas cover component purchases to back-end recycling, and the complete green plan has won the company theExcellence in Energy Efficient Product Design from 2011 ENERGY STAR Award .


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High R&D capability:Asusteks high R&D capability does not only reflect on its fascinating products but also on its malfunction rate. Its laptop malfunction rate isthe lowest among the peers, which suggests that warranty costs can be reduced by better R&D capability.

Exhibit 41: 3 Year Laptop Malfunction Rates by Manufacturer

Source: squaretrade

ROEDuPont AnalysisAnalyzing Asusteks return on equity in more detail, we can see that its increasing ROE mainly stems from the following factors:

1. Operating margin improvement brought along by the product mix change in which high margin products such as the Ultrabook andtablets contribute a higher share

2. Higher asset turnover as sales grow faster than assets3. Higher leverage as assets grow faster than stockholders equity due to higher working capital requirements induced by sales growthThese combined effects are stronger than the lower interest burden, and together boost Asusteks ROE to 19% in 2013.

Exhibit 42: ROE - DuPont



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Exhibit 43: Asustek Group Structure

1

Computer Related

AsusTek(2357)

Pegatron(4938)

UnihanTechnology

eCareme

Shinewave

Unimax

IUT

AsusTek (ShuZhou)

()

Huawei

AXUS

EnerTronics

AGAit

Askey

ASMediaTech

ASRock

Pegavision

BaiShuo

MinShuo

Lumens

Advansus

HuaChi

Kinsus

(3189 TT)

GNDC

ASAP

Runtop

Consus

KS-Tech

GuanShuo

AVY precision

KaiShuo

Ability Enterprise

(2374 TT)

DonGuan Energy

Azurewave

(3694 TT)

ShuenHai

61%

100%

85%

100%

100%

100%

100%

57%

100%

77%

51%

39%

100%

59%

50%

100%

100%

100%

100%

100%

100%

57%

28%

AMA Precision

Kaida

ChunShuo

100%

100%

100%

100%

100%

100%

100%

13%

100%

100%

51%

100%

Consumer Electronics Related

100%

ASin

60%

25%

Source: Company Data

Disclosures:

Ownership and material conflicts of interest:The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company.The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content orpublication of this report.Receipt of compensation:

Compensation of the author(s) of this report is not based on investment banking revenue.Position as an officer or director:The author(s), or a member of their household, does not serves as an officer, director or advisory board member of the subject company.Market making:The author(s) does not act as a market maker in the subject companys securities.Ratings guide:Banks rate companies as a BUY, HOLD or SELL.Disclaimer:The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, butthe author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be usedas the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation ofan offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA Taiwan, CFA Instituteor the CFA Institute Research Challenge with regard to this companys stock.

ntu investment challenge - asustek

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