Company Reports

We retain our fair value estimate for MediaTek of TWD 1,400 per share after slightly revising up 2024 numbers to account for updated guidance and first-quarter results, with no change to our long-term view. MediaTek’s share price is attractive, as we think the market underestimates customers’ willingness to pay a premium for chips with topnotch artificial intelligence features. In the long term, the know-how in AI on smartphones may be partially replicated on enterprise AI chips as the need for power efficiency is the same, which may pose upside potential to our base case.

We retain our fair value estimates on Taiwanese technology companies in our coverage following a powerful earthquake and multiple strong aftershocks near the eastern city of Hualien on April 3, namely: Advantech at TWD 337; Delta Electronics at TWD 331; GlobalWafers at TWD 710; Largan at TWD 3,000; MediaTek at TWD 1,400; Sino-American Silicon at TWD 281; Taiwan Semiconductor Manufacturing Co at TWD 950 (USD 151 per ADR); United Microelectronics Corp at TWD 70; and Win Semiconductors at TWD 245 per share.

We retain our fair value estimate on MediaTek at TWD 1,400 per share after rolling our model without changes to our underlying view. We find MediaTek undervalued for its continued ability to defend prices and take market share in the premium smartphone segment at the same time. Its long-term drivers in automotive, enterprise-use chips are more visible, with management signaling new categories of products to be shipped in late 2025. The key upside to our forecasts is MediaTek selling more expensive mobile chips due to demand induced by artificial intelligence, or AI, computing.

Having fortified its market share in midrange smartphones, MediaTek is vying for presence in premium models. The company is upping its game at premium chips, planning to release its third iteration in late 2023 with the latest technology, breaking away from its tendency to be a second adopter. We expect MediaTek to maintain its higher market share in mobile SoCs, which have improved relative to Qualcomm in the past two years. That said, there is no room to be complacent as Samsung and Apple taking market share will be bad news for MediaTek, as both design SoCs in-house. The recent 5G Open Resource Architecture can further MediaTek’s efforts to lock in customers as it offers unparalleled customization options on the chip level for carefully segmented performance for different prices and niche markets.

We hold our fair value estimates on MediaTek and Win Semiconductors at TWD 1,400 and TWD 245, respectively, after tweaks to our 2023 and 2024 estimates. We view inventory clearance has ended at both companies, and they will benefit from new launches from smartphone manufacturers. Both stocks are attractive in our view, as smartphone recovery has just begun and 5G proliferation should resume after a year of pause. Artificial intelligence is another bonus if it accelerates innovation on smartphones and other devices that attract consumers to replace their gadgets more frequently. MediaTek's and Win Semi's minimal exposure to a softening automotive market makes them good diversification targets against auto-heavy names in our coverage like Infineon and NXP.

Our MediaTek fair value estimate sheds 4% to TWD 1,400 per share after factoring in a weaker second-half 2023 outlook for all segments. We find MediaTek undervalued for its continued ability to defend prices and its automotive partnership with Nvidia slightly improves visibility of long-term growth. Smartphones are showing signs of recovery and could support the share price for the short term, and we observe the first mentions of automotive revenue improving sentiment for the company. The key upside to our forecasts is MediaTek selling more mobile chips due to demand induced by artificial intelligence, or AI, computing, and a potential business model of offloading computations from cloud providers.

Having fortified its market share in midrange smartphones, MediaTek is vying for presence in premium models. The company is upping its game at premium chips, planning to release its third iteration in late 2023 with the latest technology, breaking away from its tendency to be a second adopter. We expect MediaTek to maintain its higher market share in mobile SoCs, which have improved relative to Qualcomm in the past two years. That said, there is no room to be complacent as Samsung and Apple taking market share will be bad news for MediaTek, as both design SoCs in-house. The recent 5G Open Resource Architecture can further MediaTek’s efforts to lock in customers as it offers unparalleled customization options on the chip level for carefully segmented performance for different prices and niche markets.

We cut our fair value estimate for MediaTek to TWD 1,460 per share from TWD 1,600 mainly as a result of lower mobile chip average selling prices and market share. However, we still see MediaTek as undervalued since its resilient gross margin illustrates its ability to defend ASP with its moat backed by intangible assets. Smartphone recovery in the second half is a reason to buy the stock for the short term, while its newly released Dimensity Auto platform for cars paves the way to prolong double-digit revenue CAGR beyond 2024. Downside is limited by its 7.8% dividend yield (reflecting bottom of cycle 2023 earnings) to be paid in June 2024.

Having fortified its market share in midrange smartphones, MediaTek is vying for presence in premium models. The company started releasing premium chips in December 2021 with the latest technology, breaking away from its tendency to be a second adopter. We expect MediaTek to maintain its higher market share in mobile SoCs, which have improved relative to Qualcomm in the past two years. That said, there is no room to be complacent as Samsung and Apple taking market share will be bad news for MediaTek, as both design SoCs in-house. The recent 5G Open Resource Architecture can further MediaTek’s efforts to lock in customers as it offers unparalleled customization options on the chip level for carefully segmented performance for different prices and niche markets.

We cut fair value estimate for MediaTek to TWD 1,600 per share from TWD 1,760 after baking in more cautious assumptions on MediaTek’s 5G mobile chip market share and 2023 5G smartphone penetration. However, we still see MediaTek as undervalued since it has showed gross margin resilience in spite of weak smartphone volumes in the short term, and the outlook for nonsmartphone ventures such as automotive and enterprise market remain bright. We think China’s reopening and the introduction of cheaper foldable phones are drivers of 2023 and 2024 smartphone sales.

Having fortified its market share in midrange smartphones, MediaTek is vying for presence in premium models. The company started releasing premium chips in December 2021 with the latest technology, breaking away from its tendency to be a second adopter. We expect MediaTek to maintain its higher market share in mobile SoCs, which have improved relative to Qualcomm in the past two years. That said, there is no room to be complacent as Samsung and Apple taking market share will be bad news for MediaTek, as both design SoCs in-house. The recent 5G Open Resource Architecture can further MediaTek’s efforts to lock in customers as it offers unparalleled customization options on the chip level for carefully segmented performance for different prices and niche markets.

Our fair value estimate on MediaTek remains at TWD 1,760 per share, corresponding to 24 times 2023 P/E. We view MediaTek as very undervalued since it is trading under 8 times to our 2023 EPS estimate (under 9 times to PitchBook consensus). The higher implied P/E of our fair value estimate is a result of confidence in MediaTek's ability to take more 5G mobile chipset market share, particularly the high-end; and grow its now-small automotive exposure beyond 2026. The stock is wrongly hammered in our opinion, as 5G transition is a pivotal moment for MediaTek to structurally improve its mobile chipset prices. Such improved pricing also increases the company's capability in funding development for automotive and other non-smartphone applications. We think a reversal of smartphone demand is the biggest and least predictable catalyst, but downside is limited by forward dividend yield of 13%, or 10% excluding special dividends.

We slightly shave our fair value estimate on MediaTek to TWD 1,760 from TWD 1,800, corresponding to 21 times 2023 P/E. Hence, we view MediaTek as substantially undervalued since it now trades at a 10-year low of 8.3 times 2023 P/E. We believe the market is overly worried about the near-term outlook for mobile phone sales to soften and current company guidance does not shift our view for one billion 5G smartphones to be shipped by 2025 from the 620 million we expect in 2022. Fears of Qualcomm taking significant market share in mobile systems-on-chip, or SoCs, appear overblown as well, as data from CINNO show MediaTek’s shipments fared better up to May.

Having fortified its market share in midrange smartphones, MediaTek is vying for presence in premium models. The company started releasing premium chips in December 2021 with the latest technology, breaking away from its tendency to be a second adopter. We expect MediaTek to maintain its higher market share in mobile SoCs, which have improved relative to Qualcomm in the past two years. That said, there is no room to be complacent as Samsung and Apple taking market share will be bad news for MediaTek, as both design SoCs in-house. The recent 5G Open Resource Architecture can further MediaTek’s efforts to lock in customers as it offers unparalleled customization options on the chip level for carefully segmented performance for different prices and niche markets.

Without material changes in our forecasts, we retain our fair value estimate on MediaTek at TWD 1,800 per share, corresponding to 21.4 times 2022 P/E. MediaTek is trading at 10 times 2022 P/E, which makes it a compelling buy. Using its five-year average P/E of 18 times, we estimate the market is pricing in two consecutive EPS plunges of over 20% in 2023 and 2024, respectively, due to price erosion in its mobile systems-on-chip, or SoCs, amid competition from Qualcomm. We reckon the market is assigning negligible value to its endeavors in enterprise, automotive and industrial applications. But we view MediaTek can at least win customers in auto infotainment, and customized datacenters where power management plays a pivotal role.

We increase our fair value estimate on MediaTek to TWD 1,800 per share, corresponding to 21.7 times 2022 P/E, after lifting 2022 to 2025 revenue forecasts by up to 6% and net profit projections by about 10% to account for a more bullish outlook in PC and enterprise computing markets. We think MediaTek shares are attractive at 12.7 times 2022 P/E, pressured by near-term fears of smartphone inventory correction and not fully pricing in long-term growth in PCs; Internet of Things; augmented or virtual reality, AR/VR; and enterprise application specific integrated circuits. Our uncertainty rating on MediaTek is lowered to high from very high as it appears worsening of the chip shortage is improbable and better chip performance should better protect the company from abrupt price wars.

Having fortified its market share in midrange smartphones, MediaTek is vying for presence in premium models. The company released a premium chip in December 2021 with the latest technology, breaking away from its tendency to be a second adopter. We expect MediaTek to sustain its higher market share in mobile SoCs, which have improved relative to Qualcomm in the past two years. That said, there is no room to be complacent as Samsung and Apple taking market share will be bad news for MediaTek, as both design SoCs in-house. The recent 5G Open Resource Architecture can further MediaTek’s efforts to lock in customers as it offers unparalleled customization options on the chip level for carefully segmented performance for different prices and niche markets.

We maintain our fair value estimate for MediaTek at TWD 1,730 per share, corresponding to 22.4 times 2022 P/E. Our 2022 to 2025 forecasts are unchanged even though we have slightly increased our 2021 assumptions to account for earlier price improvement in 5G system-on-chips, or SoCs.

Having fortified its market share in midrange smartphones, MediaTek is vying for presence in premium models. The company’s plan is to release a chip by the end of 2021 with the latest technology, breaking away from its tendency to be a second adopter. We expect MediaTek to sustain its higher market share in mobile SoCs, which have improved relative to Qualcomm in the past two years. That said, there is no room to be complacent as Samsung and Apple taking market share will be bad news for MediaTek, as both design SoCs in-house. The recent 5G Open Resource Architecture can further MediaTek’s efforts to lock in customers as it offers unparalleled customization options on the chip level for carefully segmented performance for different prices and niche markets.

Having fortified its market share in midrange smartphones, MediaTek is vying for presence in premium models. The company’s plan is to release a chip by the end of 2021 with the latest technology, breaking away from its tendency to be a second adopter. We expect MediaTek to sustain its higher market share in mobile SoCs, which have improved relative to Qualcomm in the past two years. That said, there is no room to be complacent as Samsung and Apple taking market share will be bad news for MediaTek, as both design SoCs in-house. The recent 5G Open Resource Architecture can further MediaTek’s efforts to lock in customers as it offers unparalleled customization options on the chip level for carefully segmented performance for different prices and niche markets.