For Taiwanese Smartphone Suppliers, End of Stock Clearing and Faster Innovation Boosts Outlook

We hold our fair value estimates on MediaTek 2454 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.

Both firms anticipate revenue and profitability to improve sequentially in the fourth quarter, thanks to new launches and intermittent rush orders from Chinese customers. MediaTek expects topline and operating margin to improve 13% and 70 basis points, respectively, at their midpoints. Its confidence stems from smartphone replenishments and the debut of its top-tier Dimensity 9300 chipset. The premium chipset can fetch north of USD 100 apiece, which is over 3 times more costly than the average 5G processor. Win Semi anticipates sales and gross margin to improve a low-teens percentage and 2.6 percentage points to TWD 4.65 billion and 25% at their midpoints. Win Semi’s guidance is slightly ahead of our July forecasts as it means the company will turn an operating profit one to two quarters earlier than we project. As a result, our 2023 loss per share estimate has narrowed to 0.59 TWD from 1.86 TWD after hiking revenue forecast by 3.5%. We expect 2024 guidance, which will be provided around late January, to boost sentiment further in the stocks as the market is still concerned about the durability of smartphone recovery.