iPhone 5 VCM

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Global Equity Research11 September 2012

Global TechnologyThe J.P. Morgan View on iPhone 5 Implications: GetReady for a Major 12-18 Month Upgrade Cycle

Globa Technology

Mark MoskowitzAC

(1-415) 315-6704

[email protected]

J.P. Morgan Securities LLC

Philip Cusick, CFAAC

(1-212) 622-1444

[email protected]


Rod Hall, CFAAC

(1-415) 315-6713

[email protected]. Morgan Securities LLC

Christopher DanelyAC

(1-415) 315-6774

[email protected]


Harlan SurAC

(1-415) 315-6700

[email protected]


JJ ParkAC

(822) 758-5717

[email protected]

J.P. Morgan Securities (Far East) Ltd, SeoBranch

Gokul HariharanAC

(852) 2800-8564

[email protected]

J.P. Morgan Securities (Asia Pacific) Limite

Masashi ItayaAC

(81-3) 6736 8633

[email protected]

JPMorgan Securities Japan Co., Ltd.

Hannes WittigAC

(44-20) 7134-4926

[email protected]

J.P. Morgan Securities plc

James R. Sullivan, CFA

(65) 6882-2374

[email protected]

J.P. Morgan Securities Singapore Private

Limited

See page 36 for analyst certification and important disclosures, including non-US analyst disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that tfirm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factormaking their investment decision.

This report presents the collective J.P. Morgan technology and communications

research views on the sector and stock implications of the imminent iPhone 5

launch. We believe that the iPhone 5 will be revolutionary in form factor and

software capabilities, contributing to a major upgrade cycle over the next 12-18

months. The iPhone 5 stands to create winners and losers across the technology

food chain and in the handset market. Our research indicates that supply chain

constraints related to 28nm chips and in-cell displays are easing, which should

make for a fast, far reaching ramp, potentially impacting carriers designs on

slowing upgrade rates to protect margin.

Handset and PC sector implications. We expect the iPhone 5s battery

performance, screen size, and form factor thickness to sidestep the battery

hog and pocket hog labels of other LTE-based smartphones, likely hurting

market share ambitions of other handset makers. Meanwhile, we think that a

more user-friendly LTE-based device in the form of iPhone 5 stands to sustain

the land grab of smartphones taking IT dollars from PCs, dampening PC-related

growth prospects at Dell, Hewlett-Packard, and other PC makers.

Semiconductor sector implications. We believe the iPhone 5 launch

represents one of the few secular growth stories for semiconductors in 2H12.

Within our large-cap semiconductor space, strong demand forecasts for the

iPhone 5 should benefit Apple-levered analog names including Analog Devices,

Fairchild, and Avago. From a SMid semiconductor perspective, we believe the

iPhone 5 launch will likely spur another strong product cycle for connectivity

providers, Broadcom and Peregrine Semiconductor. Qualcomm should also

benefit from increased modem shipments. Conversely, we believe a strong

iPhone and iPad upgrade cycle is a likely negative for PC names such as Inteland AMD due to cannibalization of PC demand.

Component/technology enabler sector implications. We expect strong

demand related to iPhone 5 launch to benefit key Apple supply chain names in

Asia-based supply chain, including LG Display (In-cell panels), Samsung

Electronics (AP, mDRAM), LG Innotek (Camera module), and SEMCO

(MLCC). In the context of Paul Costers Applied Tech coverage universe, one

stock stands to benefit: Omnivision. In contrast, the introduction of native

mapping and TBT navigation on iOS 6 on the iPhone 5 stands to be a mild

negative for TeleNav, TeleCommunication Systems, and Garmin.

Wireless carrier sector implications. In the U.S., we expect upgrades to

increase in the near term as a result of the iPhone 5, likely pressuring carriers'margin profiles. Longer term, we expect the iPhone 5 to accelerate the already

begun upgrade cycle to 4G (LTE) for the U.S. wireless carriers from handset

bases dominated by 3G handsets today. As relates to European telecom

services, it is yet unclear how disruptive the iPhone 5 will be in European

markets, mainly because it is not yet known whether the device will support

European LTE frequencies. In any case, we do not think it will be as disruptive

as in the U.S.


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Mark Moskowitz(1-415) [email protected]

Table of Contents

Overview ...................................................................................3Key Points on Apples iPhone 5 .............................................3

Broader Implications of iPhone 5 ...........................................7

U.S. IT Hardware.....................................................................11

Communications Equipment & Data Networking................17

Internet....................................................................................18

U.S. Semiconductors.............................................................20

U.S. SMid Semiconductors....................................................22

Asia Technology Hardware...................................................23

Asia Semiconductors.............................................................24

Asia Electronic Components Sector.....................................25

Applied & Emerging Technologies .......................................27

U.S. Telecom Services ...........................................................28

European Telecom Services..................................................31

Asian Telecom Services ........................................................34

Software Technology .............................................................35

In addition to the analysts on thecover page, the following analysts

also contributed to this report.

Doug AnmuthAC

(1-212) 622-6571

[email protected]

Paul Coster, CFAAC

(1-212) 622-6425

[email protected]

Sterling Auty, CFAAC

(1-212) 622-6389

[email protected]



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Overview

This report presents the collective J.P. Morgan technology and communications

research views on the sector and stock implications of the imminent iPhone 5 launch.

We believe that the iPhone 5 will be revolutionary in form factor and software

capabilities, contributing to a major upgrade cycle over the next 12-18 months. The

iPhone 5 stands to create winners and losers across the technology food chain and in

the handset market. Our research indicates that supply chain constraints related to

28nm chips and in-cell displays are easing, which should make for a fast, far

reaching ramp, potentially impacting carriers designs on slowing upgrade rates to

protect margin.

Key Points on Apples iPhone 5

iPhone 5 will be disruptive, driving a major upgrade cycle

Our assumption is that the iPhone 5 will be considered disruptive in terms of form

factor and software capabilities, likely driving a major upgrade cycle over the next

12-18 months. The step-function from iPhone 4 to iPhone 4S was evolutionary at

best, rendering the current product set nearly two year old, allowing the competition

to bridge the gap. We think the gap widens after the September 12 announcement, in

favor of Apple. As a result, the iPhone 5 stands to have an impact on the technology

food chain, handset market, and wireless carrier market. These topics are discussed

throughout this report.

Why we think the iPhone 5 will be revolutionary?

We believe the iPhone 5 device and related iOS 6 software upgrades will reaffirmApple's position as a leader in the smartphone competitive landscape. In the below

table (Table 1), we detail our assumptions for the incremental design changes for the

iPhone 5, as compared to its predecessor, the iPhone 4S. We consider many of the

changes to be more significant in nature, versus the previous upgrade of the iPhone

product line (iPhone 4 to 4S).

Table 1: J.P. Morgan Comparison of Expected Features - iPhone 5 versus iPhone 4S

iPhone 5 iPhone 4S Incremental

U.S. subsidized price (16GB) $199 $199 Value to consumer given the richness of the upgradeDisplay 4" Retina 3.5" Retina Closes the gap with other smartphone comparablesCellular connectivity LTE/World Phone World Phone Faster cellular-based data

Processor A6 Dual Core A5 Faster data and lower power consumptionOperating System iOS 6 iOS 5 3D maps, Passbook, FaceTime over cellular, and betterChina-related compatibility. Over 200 new features in total

Size and Weight 15% thinner, taller but withsame width, lighter vs. 4S

NA Wow factor, prestige

Back Aluminum and glass, unibody Glass Wow factor, prestigeAccessories New headphones and dock

connectorHeadphones - Wow factor, prestige. Connector - Allows orthinner form factor

NFC (Near Field Communication) None None No impact

Source: J.P. Morgan estimates; company data.

Highlights include a larger 4-inch display and LTE network connectivity. We expect

the device to be slightly thinner, lessening the potential of the new device being


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considered a pocket hog. We also believe the spatial alignment of the battery,

across a longer plane, will provide for improved battery life without compromising

the pursuit of a sleeker form factor. Lastly, with over 200 new features andimprovements to the iPhone operating system, iOS 6, we think that the Apple stands

to optimize the overall experience for the user beyond just focusing on the physical

device features. We discuss this software-led optimization in the next paragraph.

iOS 6 stands to advance Apples role in software-driven services

In our view, two big iOS 6 advancements are Passbook and Maps. We think that

these software-driven services stand to augment the end users experience and

underscore Apples increasing impact on the digital life. In our view, Passbook is the

precursor to what we have referred to previously as iPay for mobile payments.

Lastly, we think that FaceTime over cellular and its integration across the iPhone,

iPad, and Mac is a positive. All of these factors should provide a good set up for high

customer interest in the iPhone 5 device.

Passbook

Passbook is a new feature, which acts as a repository for bar-coded tickets and

coupons, such as airline boarding passes, movie tickets, and Starbucks cards.

Passbook allows consumers to store and access electronic versions of tickets and

merchant cards in one place. Passbook also is dynamic meaning that it can alert

consumers of flight delays or if a merchant is in close proximity, for example.

While early, we believe Passbook could be a precursor to an Apple-driven mobile

payments service, which we have discussed in prior reports. Recall, we believe

Apple could potentially introduce what we have dubbed iPay whereby Apple users

pay for goods and services using NFC technology embedded in an iPhone or iPad as

part of a mobile payment platform. Of note, as illustrated inTable 1 above, we do notcurrently believe that NFC will be incorporated into the iPhone 5. Rather, we expect

the functionality and usability of Passbook to further evolve over time, and NFC

capabilities to be incorporated into future iterations of the iPhone and iPad.

In our view, Passbook is more about retaining the users dependence on the iPhone

for optimized experiences versus incremental monetization. Indeed, we think that

Apple likely faces a major uphill battle in grabbing a financial piece of the mobile

payment market. Payment network incumbents are not likely to cede share to Apple.

Plus, unless Apple is willing to provide its users credit, Apple is not taking on any

financial risk as opposed to the credit card companies running the legacy payment

networks at most retail outlets.

MapsAnother key feature with iOS 6 is Maps, built by Apple with technology from the

recent acquisitions of Placebase, Poly9, and C3 Technologies. The new Apple Maps

application replaces Google Maps in iOS devices. The product works with Siri to

offer voice turn-by-turn navigation. In addition, the new application incorporates 3D

Flyover, which allows users to see places in highly detailed 3D rendering. Apple

Maps also incorporates Yelp to provide listings for over 100 million local businesses.

We believe Apples ability to create such a software-driven service demonstrate its

increasing role on augmenting the end users digital life.


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Siri

Another plus with iOS 6 is that Siri will support iPad. Moreover, Apple has been

increasing its advertisements of celebrity figures relying on Siri. In our view, themessage is that Siri 2.0 will usher in a more consistent, reliable, and expanded user

experience. To point, recall from the June WWDC event that Siri was highlighted as

being part of Apples natively-designed Maps, supporting voice turn-by-turn driving

direction, and that within the next 12 months, Siri will be the backbone for Eyes

Free service integrating Siri and Maps into automobiles. Apple has highlighted

several auto makers working with Apple on Eyes Free, including Audi, BMW,

Chrysler, GM, Honda, Jaguar, Land Rover, Mercedes, and Toyota.

Low smartphone penetration rate globally points to a multiplier effect

Beyond Apples market share opportunities within the smartphone market, we think

there is also plenty of headroom for growth for the totalsmartphone market, too.

This creates a unique opportunity for Apple, as the iPhone could be a beneficiary of a

growth multiplier effect one part from market share gains within the smartphonemarket and a second part from smartphone market gaining share within the handset

market overall. A bigger, stronger Apple stands to impact a wide array of component

suppliers and carriers, in our view.

We expect smartphone adoption to remain brisk for the remainder of C2012 and into

C2013. Below inTable 2,we illustrate J.P. Morgan worldwide iPhone unit sales

estimates, versus our smartphone and handset unit sales estimates. As shown below,

we expect smartphone unit growth of 30% YoY to significantly outpace that of

handset growth of 6%. Meanwhile, we expect iPhone unit growth of 30% YoY in

C2013. Our estimate points to over 50% handsets worldwide to be sold in C2013 are

to be smartphones. In addition, we expect overall iPhone penetration of the handset

market to likely to be only in the high-single digits. In our view, the analysis pointsto upside potential for our iPhone estimates, given the relative higher estimated

growth of the smartphone market combined with the iPhones low penetration

overall.

Table 2: J.P. Morgan Estimates for iPhone, Smartphone and Handset Unit Sales

units, 000s

C2010 C2011 C2012E C2013E

iPhone units (JPMe) 47,487 93,102 130,321 169,424YoY Growth 96% 40% 30%

Smartphone units (JPMe) 298,847 471,743 668,043 868,717YoY Growth 58% 42% 30%

Handset units (JPMe) 1,427,000 1,578,632 1,577,810 1,671,742YoY Growth 11% 0% 6%

iPhone % of smartphone 16% 20% 20% 20%Smartphone % of handset 21% 30% 42% 52%iPhone % of handset 3% 6% 8% 10%

Source: J.P. Morgan estimates. Smartphone and handset market estimates courtesy of J.P. Morgan analyst Rod Hall.

We believe the smartphone market has multi-year expansion opportunities ahead

given its low penetration worldwide. In our view, it is inevitable that the growth of

smartphones will slow down and reach saturation at some point. However, we do not

think the event is likely to be a near to mid-term event. As smartphones gain more

functionality at a lower cost, their pervasiveness stands to increase.


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As a sanity check, we believe comparison against the penetration of handsets and

PCs worldwide offers a good perspective. Worldwide smartphone market penetration

is well below that of handsets and PCs. As shown inTable 3below, currentsmartphone penetration rates are below that of PC and handset markets across the

world. In addition, we believe there is likely to be a couple years before market

saturation occurs in smartphones. Therefore, smartphones likely have at least three

more years of above-market growth potential before there is potential for growth

headwinds due to saturation of the market, in our view.

Table 3: Smartphone vs. Handset and PC Penetration Rates by Region

C2009 C2010 C2011 C2012 C2013 C2014

Asia/Pacific Smartphone penetration 2 3% 6% 9% 12% 16%Handset penetration 37 43% 49% 54% 57% 58%PC penetration 9 11% 12% 14% 16% 19%

Eastern Europe Smartphone penetration 3 5% 8% 13% 20% 27%

Handset penetration 94 99% 101% 101% 102% 102%PC penetration 22 24% 27% 30% 35% 40%

Latin America Smartphone penetration 2 4% 8% 13% 18% 22%Handset penetration 67 71% 76% 78% 79% 80%PC penetration 20 22% 26% 30% 35% 40%

Middle East & Africa Smartphone penetration 2 2% 4% 5% 7% 10%Handset penetration 36 40% 45% 47% 49% 50%PC penetration 4 5% 5% 6% 7% 9%

North America Smartphone penetration 23 33% 46% 62% 77% 88%Handset penetration 109 113% 115% 114% 114% 113%PC penetration 92 98% 103% 106% 110% 112%

Western Europe Smartphone penetration 18 32% 44% 60% 77% 90%Handset penetration 126 128% 130% 131% 131% 131%

PC penetration 62 68% 72% 76% 80% 83%

Japan Smartphone penetration 26 24% 31% 43% 52% 56%Handset penetration 86 91% 97% 102% 107% 110%PC penetration 60 62% 65% 67% 68% 69%

Worldwide Smartphone penetration 4% 7% 10% 15% 20% 24%Handset penetration 53 58% 62% 66% 68% 68%PC penetration 18 20% 22% 24% 26% 29%

Source: Gartner and J.P. Morgan estimates.

We concede our method of determining overall smartphone penetration could be

viewed as flawed. InTable 3 above, we utilized the total population of each region as

the unit of comparison when determining the overall penetration rate of the devices

installed base. In many regions, 100% penetration is likely unachievable due to

various reasons, including the inability or lack of interest in possessing such a device.

In an effort to alleviate this potential concern, we present a separate analysis method

below, which results in a similar conclusion. As show inTable 4 andTable 5below,

a different way of analyzing various smartphone penetration rates is through direct

comparison of the installed bases of handsets and PCs. In our view, if an individual is

capable (and willing) to possess either a PC or smartphone, there is a higher

likelihood that same consumer would be interested in owning a smartphone as well.

InTable 4below, we illustrate the ratio of smartphones to handset installed base

worldwide, by region. Over time, we expect this ratio to rise as increasing


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penetration of smartphones cannibalize the handset installed base. As shown, there is

still plenty of room for continued above handset market growth. We anticipate

overall smartphone penetration into the handset installed base to be less than 40% inC2014. We believe this dynamic indicates plenty of headroom for above-handset

market growth for smartphones. Even so, we anticipate the smartphone market in

more developed regions of the world to saturate in the next 3-5 years.

Table 4: Smartphone/Handset Installed Base Ratio by Region

C2009 C2010 C2011 C2012 C2013 C2014

Asia/Pacific 0.04 0.07 0.12 0.17 0.22 0.27Eastern Europe 0.03 0.05 0.08 0.13 0.19 0.27Latin America 0.03 0.06 0.11 0.17 0.22 0.28Middle East & Africa 0.04 0.06 0.08 0.11 0.15 0.21North America 0.21 0.29 0.40 0.55 0.67 0.78Western Europe 0.14 0.25 0.34 0.46 0.59 0.68Japan 0.30 0.26 0.32 0.42 0.48 0.51Worldwide 0.08 0.11 0.17 0.23 0.29 0.36


InTable 5below, we illustrate the estimated ratio of smartphone to PC installed base

worldwide, by region. As mentioned earlier, we believe a consumer capable of

owning a personal computer will likely also be able and willing to purchase a

smartphone. For this particular analysis, we expect the ratio to rise to greater than

one over time. Reason being is that many households may have only one PC, while

multiple members of a household may own smartphones, in our view.

Table 5: Smartphone/PC Installed Base Ratio by Region

C2009 C2010 C2011 C2012 C2013 C2014

Asia/Pacific 0.18 0.27 0.46 0.63 0.76 0.85Eastern Europe 0.14 0.21 0.30 0.43 0.57 0.68Latin America 0.09 0.18 0.32 0.44 0.51 0.56Middle East & Africa 0.38 0.48 0.69 0.86 1.01 1.17North America 0.25 0.33 0.45 0.59 0.70 0.78Western Europe 0.29 0.47 0.62 0.80 0.97 1.08Japan 0.44 0.39 0.48 0.64 0.75 0.81Worldwide 0.23 0.33 0.48 0.63 0.75 0.84


Broader Implications of iPhone 5

Handset and PC sector implications

We expect the iPhone 5s battery performance, screen size, and form factor thickness

to sidestep the battery hog and pocket hog labels of other LTE-based

smartphones, likely hurting market share ambitions of other handset makers.Meanwhile, we think that a more user-friendly LTE-based device in the form of

iPhone 5 stands to sustain the land grab of smartphones taking IT dollars from PCs,

which stands to dampen the PC-related growth prospects at Dell and Hewlett-

Packard and other PC makers.

Overall, we believe that our total smartphone estimates already account for an iPhone

driven volume ramp in H212. We are currently forecasting 24% 2H/1H growth in

smartphone shipments in H212 (28% H/H in H211). We see limited impact on the

overall handset market from the possible launch of a new iPhone, due to its small


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market share (just 6% in Q212). We are already forecasting sequential growth of 3%

and 9% in the overall handset market in Q312 and Q412, respectively.

Supply of Qualcomms 28nm chips is generally viewed as one of the key risks to

high-end smartphone industry growth in H212. However, in our 28nm chip

supply/demand analysis published on 8 June we concluded that Qualcomm should be

able to meet 28nm chip demand from Apple up to about 40m iPhone 5 units. At

present our Apple analyst, Mark Moskowitz, estimates that iPhone 5 shipments are

likely to be around 25m units in the December quarter well below QCOMs ability

to supply 9x15 modem chips. This means that there is plenty of room for upside to

QCOM shipments should the iPhone 5 outpace current market sales expectations.

Semiconductor sector implications

Despite macro headwinds weighing on semiconductor demand, we believe the

iPhone 5 launch represents one of the few secular growth stories for the sector in

2H12. Within our U.S. large-cap semiconductor space, strong demand forecasts forthe iPhone 5 should benefit Apple-levered analog names including Analog Devices,

Fairchild, and Avago. Qualcomm should also benefit from increase shipments of its

next generation 28nm modem chips. We believe most of the analog suppliers have

low single digit dollar content exposure to iPhone 5 and have implied the levering to

the product roll out in the September guidance commentary. Conversely, we believe

a strong iPhone and iPad upgrade cycle is a likely negative for PC names such as

Intel and AMD due to cannibalization of PC demand and lack of exposure to the

iPhone/iPad.

From a U.S. SMid semiconductor perspective, we believe the iPhone 5 launch will

likely spur another strong product cycle for connectivity providers, Broadcom and

Peregrine Semiconductor. Both companies are already major suppliers of chip

solutions into the current generation iPhone 4S and iPad 3 and we believe that they

have been designed into the iPhone 5 as well.

Other component and technology enabler sector implications

We expect strong demand and expectation toward iPhone 5 launch to benefit key

Apple supply chain names in Asia-based supply chain, including LG Display (In-cell

panels), Samsung Electronics (AP, mDRAM), LG Innotek (Camera module), and

SEMCO (MLCC). However, as Apple diversifies its key component supply (NAND

Flash and mDRAM) into non-Korean suppliers, magnitude of benefit from iPhone 5

launch to Samsung Electronics and SEMCO shall be smaller given increasing

internal component consumption on back of strong Samsung smartphone

momentum. On the other hand, we believe that high-levered Apple supply names like

LG Display and LG Innotek should benefit more given relatively higher earningsexposure to iPhone demand.

Design change beneficiaries typically derive the most benefit from new iPhone

launches in the supply chain. In the iPhone 5, we believe the key winners from

iPhone 5 design change should be (1) Hon Hai group / Fanuc due to move to metal

Unibody casings, (2) LGD / Sharp (once yield issues are overcome) due to use of in-

cell touch panels (3) Murata due to move to LTE (higher number of MLCCs and

increased demand for RF front end modules, (4) Samsung for Application processors

(5) TSMC (and potentially UMC) for LTE baseband chips at 28nm.


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As relates to Asia electronic components, we expect particularly strong benefits for

high-frequency components. We expect the new iPhone to support LTE and therefore

have 50% more FDD bands than the existing model. Combined with volume growthfor the phone itself, we expect this to drive substantial growth in volume for high-

frequency components and in sales for Murata Mfg., Taiyo Yuden, TDK, the three

Japanese passive component makers involved in high-frequency parts including

duplexers and band-pass filters. The fact that there are few Asian competitors in

these areas suggests that Japanese companies could readily benefit from market

expansion. We think passive component makers could also benefit from the shift

toward higher added value in mainstay MLCCs.

In the context of Paul Costers Applied Tech coverage universe, one stock stands to

benefit from imminent Apple product introductions, including the iPhone 5 launch:

Omnivision. In contrast, the introduction of native mapping and TBT navigation on

iOS 6 on the iPhone 5 stands to be a mild negative for TeleNav (TNAV/N),

TeleCommunication Systems (TSYS/OW), and Garmin (GRMN/UW).

Wireless carrier sector implications

In the U.S., in the near term, we expect the iPhone 5 to drive higher than expected

upgrades in 3Q12 and 4Q12. We recently raised our upgrade rate for Verizon to

8.0% from 6.8%, AT&T to 8.0% from 6.3% and Sprint to 10.0% from 9.0%. In all

we now expect 9.2m iPhone sales in 3Q12, up from 7.3m previously (when we had

expected a 4Q versus late 3Q launch) and 7.5m in 2Q12. We estimate 12.8m iPhone

unit sales in 4Q12 versus the 13.1m estimate for 4Q11, when the iPhone 4S was

launched. The higher upgrade rates pressures margins for the wireless carriers and

we expect more downside risk to margins in 3Q and 4Q as iPhone 5 sales ramp.

Longer term, in the U.S., we expect the iPhone 5 to accelerate the already begun

upgrade cycle to 4G (LTE) for the U.S. wireless carriers from handset bases

dominated by 3G handsets today. Verizon is the largest U.S. carrier with LTE at

230m covered pops, followed by AT&T at ~80m and Sprint only covers a few

markets. We believe Verizon and the other carriers are eager to migrate customers

from loaded 3G networks to 4G networks to take advantage of relatively empty

networks as well as lower cost and more data efficient LTE.

As relates to European telecom services, it is yet unclear how disruptive the iPhone 5

will be in European markets, mainly because it is not yet known whether it will

support European LTE frequencies. In any case we do not think it will be as

disruptive as in the U.S., given:

The iPhone accounts for only about half of the proportion of smartphones sold inEurope compared to the U.S.

European markets have not displayed extreme margin seasonality in recent years

European LTE deployments are much less advanced than in the U.S. Only the

Scandinavian markets and Germany have seen substantial LTE at this stage

Unlike in the U.S. where T-Mobile is the big exception, most operators support the

iPhone


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The iPhone accounts for only about half of the proportion of smartphones sold in

Europe compared to the U.S. According to ComTech data, in the quarter leading up

to June 2012 iOS accounted for 37% of smartphones sold in the U.S., but only 26%in the UK, 20% in Italy, 17% in Germany, 15% in France, and 3% in Spain.


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U.S. IT Hardware

iPhone 5 to Sustain Apples Above-Peer Growth Potential; Handset/PC Makers to Be Hurt

Sector Implications

iPhone 5: Boon for Apple, Thorn for Handset and PC Makers

Our assumption is that the iPhone 5 will be revolutionary in terms of form factor and

software capabilities, driving a major upgrade-cycle over the next 12-18 months. We

expect the new device to sustain Apples above-peer growth potential and be an

incremental thorn for handset and PC makers. We expect the iPhone 5s battery

performance, screen size, and form factor thickness to sidestep the battery hog and

pocket hog labels of other LTE-based smartphones, likely hurting other handset

makers. Meanwhile, we think that a more user-friendly LTE-based device in the form

of iPhone 5 stands to sustain the land grab of smartphones taking IT dollars fromPCs, which stands to dampen the PC-related growth prospects at Dell and Hewlett-

Packard and other PC makers.

Table 6: Apple J.P. Morgan New vs. Old iPhone Estimates (as of September 5)

Units in 000s

C2012E C2013E

Sep-Q Dec-Q Mar-Q Jun-Q Sep-Q Dec-Q

NEW iPhone estimates 24,206 45,023 43,582 39,922 39,323 46,597OLD iPhone estimates 22,775 39,377 37,841 34,625 35,525 44,229

Source: J.P. Morgan estimates.

On September 5, we raised our iPhone quarterly unit estimates, as detailed in theabove table (Table 6). As stated often throughout the year, we believe that

smartphones and tablets are grabbing increasing share of IT dollars, specifically

hurting the PC market. We expect the iPhone 5 to be a negative catalyst for the PC

market, as the form factor and software enhancements of the new smartphone stand

to drive end users to refresh their smartphone before considering a refresh of their PC

device.

Stock Implications

As for stock implications, we focus squarely on Apple. In our coverage list, we do

not expect any positive derivative plays. Instead, we expect the PC-related stocks to

be hurt, as the iPhone 5 stands to increase end user's interest in refreshing

smartphones prior to their PCs.

We are not too worried about supply constraints weighing on the iPhone 5 ramp

Our research indicates that Apple still faces supply constraints, but that the company

should be able to sidestep the constraints more than previously anticipated. The

trouble spots remain 1) 28nm chip shortages and 2) in-cell display shortages, but we

do not expect the hurdles to be as high as previously feared. Our assumption remains

that approximately 50-60% of iPhone units in the Dec-Q will be iPhone 5-related,

with the contribution increasing in 1H C2013. We expect the iPhone 5 to face some

gross margin headwinds in the initial stages of the launch, followed by gradual

increases in product gross margin as manufacturing yields improve.

Mark Moskowitz AC

(1-415) 315-6704

[email protected]

Anthony Luscri

(1-415) 315-6702

[email protected]

Mike Kim

(1-415) 315-6755

[email protected]



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Ability to absorb product cyclicality should improve over the next 12-18 months

In our view, Apple has become the leader of the mobility age from a device and

content perspective. With its optimized smartphone, tablet, and notebook PC formfactors, complemented by its iTunes/App Store ecosystem, the company single-

handily has disrupted the technology playing field. With the exception of the recent

June quarter, over the past 7-8 years, Apple has been able to avoid operating

volatility due to product cyclicality. To avoid further volatility and for the stock to

remain upward biased, we think it is important for the iPhone 5 and iPad mini to

construct a multi-quarter adoption period, which we expect to manifest.

Apple needs to reassert its ability to absorb the volatility associated with product

cycle-driven cyclicality, in our view. Based on our estimates, the iPhone and the iPad

segments now make up 60% and 20% of Apples quarterly gross profit dollars

respectively. The two product lines now comprise approximately 70% of total

revenue. The increased contribution from these segments increases the risk for

product cycle driven volatility. For the stock to remain upward biased, we think thetwo most important questions are 1) can Apple sustain its significant iPhone

momentum and 2) can the iPad exhibit a similar phenomenon? We think if the

answers to both questions are yes, then there is significant upside to the stock.

Alternatively, if the answer is yes to only one of the two, then we think the stock

should still perform well.

The issue comes if both the iPhone 5 and iPad mini are unable to construct a multi-

quarter adoption period. In such a case, there is increasing risk for greater operating

volatility a couple quarters after launch. If these next two product launches are not

successful on the adoption front, we think that investors could be concerned that

Apple is losing its ability to sustain its technology leadership over the competition.

There are potential offsets to absorb new product cyclicality, though, in the form of

more concentrated efforts in mobile payments, social media, and television. In our

view, these new opportunities could help Apple to restore its ability to absorb new

product cyclicality. We detail these potential opportunities, as well as Apples

ongoing smartphone and tablet growth potential in greater detail later in this report.

Do not be alarmed by any near-term selling pressure in the stock

In recent years, the lead-up to a major product launch has resulted in shares of Apple

appreciating only to trade flat or down in the days immediately following the launch

(seeTable 7). Following the potential iPhone 5 and iPad mini launches, we

recommend that investors take advantage of any near-term selling pressure. As the

below table illustrates, in the 30 days following a major launch, Apples stock has

more than recovered from any post-launch trading pressure.


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Table 7: Apple Stock Price Performance Pre and Post Product Announcements

Trading performance based on % return

Stock Price PerformanceAnnouncement Pre-Announcement Post Announcement

Date Stock Price 30 Days 7 Days 30 Days

Original iPad 1/27/2010 $207.88 (1.8%) (4.2%) (1.6%)iPhone 4 6/7/2010 $250.94 6.4% 1.3% 3.1%Verizon iPhone announcement 1/11/2011 $341.64 6.2% (0.3%) 3.8%iPad 2 3/2/2011 $352.12 3.8% 0.1% (2.1%)iPhone 4S 10/4/2011 $372.50 (0.4%) 7.5% 8.2%iPad 3 3/7/2012 $530.69 14.4% 11.1 19.9%iPhone 5 * TBD $662.74 9.2%

Average: 5.4% 2.6% 5.2%

Source: Bloomberg and company reports.

* Stock price is as of September 10, 2012. Stock price performance is since August 1, 2012.

Unprecedented break-out in the stock has been driven by the iPhone

It is no secret that a resolute focus on both innovation and design has helped Apple

cement its leadership in offering user-friendly, content-driven device experiences. A

critical driver to Apples success has been the company's focus on owning the

hardware and software platforms. Plus, Apple steadily has become tightly integrated

with the supply chain, due to 1) its above-market growth attributes and 2) strategic

investments in the capital equipment footprints of key suppliers. All of these factors

have combined to propel Apples growth trajectory above its end markets.

Key growth drivers include 1) Apples low market penetration rates in smartphones

and tablets, 2) a lower-priced iPad, 3) Apples role in enabling the burgeoning social

media/networking adoption curve, 4) potential entry into mobile payments, and 5)

potential TV market entry down the road. In total, we believe that these drivers cansustain the relative outperformance of Apples operating model and stock, as

illustrated in the below figure (Figure 1).

It is important to note that the unprecedented break-out in Apples stock price has

been driven primarily by the iPhones success in both revenue and profit

contribution. Apples stock is up 443% since the release of iPhone 2G version on

June 29, 2007, versus the S&P 500s decline of 5%. As shown below, other

significant events include the introduction of the iPad on April 3, 2010 and the

anticipation of, and the official announcement of the dividend and buyback program

on March 19, 2012.


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Figure 1: Apple Stock Price versus Major Product Introductions

Source: Capital IQ, J.P. Morgan, Company data.

As illustrated inFigure 2below, the success of the iPhone, and to a lesser extent theiPad, have made the Mac and iPod less significant contributors to Apples model.

Since the introduction of iPhone in Apples third fiscal quarter of 2007, the segment

has grown to over 60% of total gross profit dollars, based on our estimates. In

addition, the iPad has risen to over 20% of gross profit contribution since its

introduction in the third fiscal quarter of 2010, based on our estimates. The

unprecedented growth of these two product offerings has benefitted the overall

model, but the mix shift towards these two product lines, as a percentage of total

revenue and profits, has also increased the risk of higher operating volatility.

As the iPod and Mac business lines continue to fade as major contributors to the

overall revenue and profit profile, the Apple model of tomorrow has a higher risk of

reverting to its early 2000s profile. Here, product cycle operating volatility was the

norm. If the next two product launches (iPhone 5 and iPad mini) are not successfulon the adoption front, we think that investors could be concerned that Apple is losing

its ability to sustain its technology leadership over the competition. There are

potential offsets, though, in the form of potential entry into mobile payments and

television, as well as more concentrated efforts in social media/networking.

$0

$100

$200

$300

$400

$500

$600

$700

$800

iPad 3G

iPad 4G

iPod

Apple TV

iPhone 2G

iPod Touch

iPhone 3G

and AppStore

iPad WiFi

MacBook

MacBook Pro

MacBook Air

iTunes


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Figure 2: Apple - Gross Profit Contribution by ProductGross profit as a % of total, fiscal quarters

Source: Company reports and J.P. Morgan estimates.

As shown inFigure 3below, Apples revenue contribution by product mix tells asimilar story. Since the beginning of fiscal 2012, the iPhone and iPad have

contributed approximately 50% and 20% of revenue, respectively. Meanwhile, the

iPod and Mac have each decreased to less than approximately 15% of revenue

contribution respectively.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2Q01

4Q01

2Q02

4Q02

2Q03

4Q03

2Q04

4Q04

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4Q05

2Q06

4Q06

2Q07

4Q07

2Q08

4Q08

2Q09

4Q09

2Q10

4Q10

2Q11

4Q11

2Q12

iPod and Peripherals

Mac

iPad

iPhone


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Figure 3: Apple - Revenue Contribution by ProductRevenue contribution as a % of total, fiscal quarters

Source: Company reports and J.P. Morgan estimates.

We continue to expect a September product announcement related to the new iPhone5, followed by volume ramp in the last 10 days of the month. Previously, we had

expected volume ramp to being in the month of October. In addition, we expect an

iPad mini product to be released this fall, with sales volume beginning in early

October.

If the iPhone 5 is indeed a game changer, as is widely expected, we think that the

device can solidify the iPhones revenue contribution at greater than 50% of total

within the Apple model. Interestingly, this same dynamic occurred in 2006 with the

iPod. Soon thereafter, Apple followed with the introduction of the iPhone, a product

release which entered Apple into an entirely new product vertical of smartphones. In

our view, the likely permanency of the iPhone at greater than 50% of revenue could

signal another major product segment introduction is around the corner. We believe

such a release would be an effort to mitigate product cycle driven volatility and todrive future revenue growth in the model.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2Q01

4Q01

2Q02

4Q02

2Q03

4Q03

2Q04

4Q04

2Q05

4Q05

2Q06

4Q06

2Q07

4Q07

2Q08

4Q08

2Q09

4Q09

2Q10

4Q10

2Q11

4Q11

2Q12

iPod and Peripherals

Mac

iPad

iPhone


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Communications Equipment & Data Networking

Estimates Already Account for iPhone Driven Volume Ramp

Sector Implications

We believe that our total smartphone estimates already account for an iPhone driven

volume ramp in H212. We are currently forecasting 24% H/H growth in smartphone

shipments in H212 (28% H/H in H211). We see limited impact on the overall

handset market from the possible launch of a new iPhone, due to its small market

share (just 6% in Q212). We are already forecasting sequential growth of 3% and

9% in the overall handset market in Q3 and Q4, respectively.

Supply of Qualcomms 28nm chips is generally viewed as one of the key risks to

high-end smartphone industry growth in H212. However, in our 28nm chip

supply/demand analysis published on 8 June we concluded that Qualcomm should be

able to meet 28nm chip demand from Apple up to about 40m iPhone 5 units. At

present our Apple analyst, Mark Moskowitz, estimates that iPhone 5 shipments are

likely to be around 25m units in the December quarter well below QCOMs ability

to supply 9x15 modem chips. This means that there is plenty of room for upside to

QCOM shipments should the iPhone 5 outpace current market sales expectations.

Reminiscent of two years ago we believe there is some possibility that numerous new

iPhone 5s could pressure existing LTE signaling networks creating some additional

spend for companies like Ericsson.

Stock implications

Potential Winners

Qualcomm is the most exposed stock in our coverage to the new iPhone. We are

currently forecasting 23m Q/Q MSM unit growth in the December quarter for the

company. Ericsson might also have an outside chance of benefitting from signaling

overload in the LTE network.

Potential Losers

We believe NOK is the most negatively exposed name in our coverage to the new

iPhone. NOK plans to launch its new Lumia 920 and Lumia 820 phones in almost

the same time frame as the iPhone 5. RIM is also potentially exposed in early 2013

as they roll out their new BB10 devices/platform.

Rod Hall, CFAAC

(1-415) 315-6713

[email protected]


Joseph Park

(1-415) 315-6760

[email protected]


Ashwin Kesireddy

+1-415-315-6756

[email protected]


Rajat Gupta

(91-22) 6157-3347

[email protected]

J.P. Morgan India Private Limited
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


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Internet

iPhone 5 to Drive Incremental Mobile Usage, and Also Increase Competition for Internets

Sector Implications

iPhone 5 with iOS 6 to raise the bar in platform battle

We view the upcoming iPhone 5 release as a positive for the Internet space as it

continues to drive smartphone adoption contributing to incremental overall Internet

usage and time spent and greater eCommerce spending and search advertising. The

iPhone 5 is expected to ship with the new iOS 6, which we believe will provide

deeper integration with some online sites such as Facebook, Yelp, and OpenTable,

among others. Overall we believe the upcoming iPhone 5 and iOS 6 builds greater

functionality into the operating system and therefore raises the bar in the platform

battle with Google, Amazon, and other large Internet companies.

Stock Implications

Google (OW):

Googles Android and Apples iOS are currently the two leading smartphone

platforms. According to Gartner, Googles Android is the current leader in

smartphone penetration, with 64.1% share of smartphones in 2Q12 compared to

18.8% for Apples iOS. While there are several 4G Android devices in the

market, if the iPhone 5 were to be released with 4G/LTE capabilities, we believe

it is likely to help Apple continue to increase its market share as consumers'

appetite for data continues to increase. According to Cisco, the average

smartphone usage nearly tripled in 2011 to 150MB per month from 55MB in 2010,

and is forecasted to reach 2.6.GB by 2016.

Apple announced it plans to replace Googles Maps with an internally developed

maps product and no longer provide YouTube as a default apps beginning with the

launch of iOS 6. We think mobile usage of Google Maps along with related

advertising revenue is likely to be negatively impacted with the rollout of iOS 6 as

we think a significant portion of Google Maps users on mobile are on Apple devices.

We note that Google Maps will be available for download in the Apple App Store. In

contrast, we believe Google may have new monetization capabilities with YouTube

as a standalone app in the Apple App Store, which gives it the flexibility to be free of

restrictions that may be imposed on default installed apps. As a result, we believe

Google is likely to redesign the YouTube app and find ways to monetize it on iOS

devices, such as through pre-roll video ads. Though Apples moves away from

certain Google products have raised concerns with the possibility of changing itsdefault mobile search provider, we do not think this is likely to happen at this

time as we view Google to provide the best mobile search experience.

Facebook (OW):

At the WWDC 2012 in June, Apple announced a deep integration between iOS 6 and

Facebook. We expect this integration to be a significant driver of user

engagement as it lowers the barrier for iPhone and iPad users to post, update,

and check information on Facebook. Signing into Facebook accounts directly in

Apple iOS 6 allows for seamless content sharing from any interface on the iPhone

and iPad. While this may not drive direct revenue, we view any driver of

Douglas Anmuth AC

(1-212) 622-6571

[email protected]

Kaizad Gotla, CFA

(1-212) 622-6436

[email protected]

Bo Nam

(1-212) 622-5032

[email protected]

Shelby Taffer

(1-212) [email protected]



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19



increased engagement and content to be beneficial to Facebooks user

engagement, which in turn should result in incremental advertising dollars. We

also note that Facebook launched an update to its iOS mobile apps (bothiPhone/iPad) on August 24. We believe completely re-writing the app from the

ground up to focus on speed is consistent with the company's focus on the user

experience.

eBay (OW):

Apple announced the launch of Passbook in iOS 6, an application that enables users

to easily store and access digital passes including boarding passes, tickets, store

cards, and coupons. We believe Passbook resembles a bar code-enabled form of an

early digital wallet. And even though Passbook does not appear to enable

transactions upon release, we believe it could become the basis for a digital

payments platform going forward. Apple has more than 400M active iTunes

accounts with credit cards and we believe Passbook could become more competitive

with eBays PayPal and other payments systems over time.


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U.S. Semiconductors

iPhone 5 Likely to Benefit Select Analog Companies. Negative for PC Names

Sector Implications

Strong demand forecasts for the expected iPhone 5 roll out this month should benefit

Apple levered analog names in our universe that we believe include Analog Devices,

Fairchild, and Avago. We believe most of the analog suppliers have low single digit

dollar content exposure to iPhone 5 and have implied the levering to the product roll

out in the September guidance commentary. On the other hand, we believe that a

strong iPhone and iPad upgrade cycle is a likely negative for PC names such as Intel

and AMD due to cannibalization of PC demand.

Stock ImplicationsAnalog Devices. We believe ADIs exposure to iPhone 5 is in the low single digits

dollars per iPhone, roughly in the $1.00-$2.00 range for the MEMS microphone and

possibly a controller. The company has a strong historical relationship with Apple,

as it is an existing supplier for the MEMS digital microphone and a touch screen

controller in the iPad2. In addition, ADI commented on the most recent earnings call

that consumer segment should see solid growth in FQ4 due to specific product cycles

which believe implies leverage to the iPhone 5 launch. Assuming a quarterly run rate

of roughly 20M iPhone 5 units over the next few quarters, this would equate into

roughly $20.0-$40.0 million/quarter in revenues or roughly 3%-5% of ADIs total

revenues. We estimate Apple overall could contribute mid single digits of ADIs

revenues once iPhone 5 is fully ramped.

Fairchild. We believe Fairchilds exposure to iPhone 5 is roughly in the $0.50 range

for the battery charger components that include a MOSFET and the controller.

Management commented on the most recent earnings call that mobile products were

below expectations in 2Q due to 28nm chipset shortages in the industry but should

drive solid growth in 2H12 which believe implies leverage to the iPhone 5 launch.

Assuming a quarterly run rate of roughly 20M iPhone 5 units over the next few

quarters, this would equate into roughly $10.0-$15.0 million/quarter in revenues or

roughly 3-4% of Fairchilds total revenues. We estimate Apple overall could

contribute mid single digits of Fairchilds revenues once iPhone 5 is fully ramped.

Avago. We believe Avagos exposure to iPhone 5 is roughly in the $2.00-$3.00

range for the FBAR PA Duplexer. Avago already supplies FBAR duplexers for the

CDMA version of iPhone4 and the iPhone 4S. Management commented on therecent earnings calls that mobile and wireless segment was below expectations in

July due to 28nm chipset shortages talked about by Qualcomm but the shortages

should ease in 2H12 and drive solid growth afterwards. We believe these comments

imply leverage to the iPhone 5 launch. The company guided the mobile & wireless

segment to grow 20-30% in October while other segments remain flattish on a whole.

Assuming a quarterly run rate of roughly 20M iPhone 5 units over the next few

quarters, this would equate into roughly $40.0-$60.0 million/quarter in revenues or

roughly 8-10% of Avagos total revenues. We estimate Apple overall could

contribute close to 20% of Avagos revenues once iPhone 5 is fully ramped.

Chris Danely AC

(1-415) 315-6774

[email protected]

Shaon Baqui

(1-415) 315-6776

[email protected]

Sameer Kalucha

(1-415) 315-6762

[email protected]



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Intel/AMD. We believe the strong growth of the iPad and iPhone coupled with the

slowdown in PC shipments is a negative for Intel and AMD as neither company has

any meaningful share in tablets or smartphones. We believe tablets and smartphonescontinue to cannibalize PC shipments, driven by the success of the iPad/iPhone and

proliferation of low-cost Android-based devices. We note tablet shipments have

grown from only 7% of notebook shipments from in 2Q10 to roughly 51% of

notebook shipments during 3Q12E.


22/40


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23



Asia Technology Hardware

iPhone Implications

Sector Implications

Strong iPhone volume growth in next two quarters should help Greater ChinaApple supply chain stocks. iPhone is typically higher margin product for mostApple supply chain vendors. However, we see most Apple supply chain namesas trading Buys into the product launch since long-term earnings growth isaffected by continuous margin erosion as Apple puts more pressure on thesupply chain and tries to diversify supplier base.

With two previous generations of iPhone owners to target (4 and 4S),replacement demand is likely to remain quite strong in the first few months due

to new industrial design and adoption of LTE, but sustainability of demand afterthe first 2 quarters would be interesting to watch, given that there are no majornew carrier additions unlike iPhone 4S launch.

Stock implications

Design change beneficiaries typically derive the most benefit from new iPhonelaunches in the supply chain. In the iPhone 5, we believe the key winners fromiPhone 5 design change should be (1) Hon Hai group / Fanuc due to move tometal Unibody casings, (2) LGD / Sharp (once yield issues are overcome) due touse of in-cell touch panels, (3) Murata due to move to LTE (higher number ofMLCCs and increased demand for RF front end modules, (4) Samsung forApplication processors, (5) TSMC (and potentially UMC) for LTE baseband

chips at 28nm.

Of these stocks, Hon Hai is our preferred pick, given iPhone margins aretypically much higher for Hon Hai compared to other Apple products. Weestimate iPhone to account for 35% of Hon Hais revenues in 4Q12 and henceexpect a meaningful pickup in OP margins in 3Q12 (up 60 bps).

Update on supply issues.

1. Display: In-cell yield bottlenecks have improved at LG Display in Augustand the company appears hopeful of achieving optimum yields exiting3Q12. Sharps situation however, appears to be uncertain. However, ifJapan display continues to ship and LGD improves the yields as expected by

the end of 3Q12, then the threat of a supply disruption in 4Q12 is likely tobe lower. Initial builds in 3Q12 however are still below plan, so initialvolumes available may be constrained post launch.

2. Casings: Casing supply is improving since Hon Hai appears to have excesssupply of CNC machines. While Jabil Green point yields are still lower thanoptimum, we feel that this may not be a key bottleneck for the supply chainin 4Q12.

Gokul Hariharan AC

(852) 2800-8564

[email protected]

J.P. Morgan Securities (Asia Pacific)Limited

Alvin Kwock AC

(852) 2800-8533

[email protected]

J.P. Morgan Securities (Asia Pacific)Limited

Ashish Gupta




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Asia Semiconductors

iPhone 5 Likely to Benefit Select Analog Companies. Negative for PC Names

Sector Implications

We expect strong demand and expectation toward iPhone 5 launch should benefit

key Apple supply chain names in our universe which we believe include LG Display

(In-cell panels), Samsung Electronics (AP, mDRAM), LG Innotek (Camera module),

and SEMCO (MLCC). However, as Apple diversifies its key component supply

(NAND Flash and mDRAM) into non-Korean suppliers, magnitude of benefit from

iPhone 5 launch to Samsung Electronics and SEMCO shall be smaller given

increasing internal component consumption on back of strong Samsung smartphone

momentum. On the other hand, we believe that high-levered Apple supply names like

LG Display and LG Innotek should benefit more given relatively higher earnings

exposure to iPhone demand.

Stock Implications

Samsung Electronics

We estimate Samsungs exposure to Apple is in the high-single digit % of total

revenue. The company traditionally had strong relationship, but has gradually

lowered its supply portion of semiconductor component since 2011 as Apple

diversifies into multiple vendor and Samsung drops off less profitable business.

However, we find increasing internal component consumption to offset decline in

Apple supply. On the other hand, we view Samsungs smartphone shipment to be

relatively stable after iPhone 5 launch and expect new flagship smartphones (i.e.

Galaxy S III and Galaxy Note II) to sustain its strong momentum.

LG Display

We believe in-cell panel will provide meaningful opportunity for LGD. As the

company begins to ship in-cell display for iPhone 5 from August, we forecast its

sales momentum to return in 3Q12 and begin to accelerate in 4Q12. We estimate

total iPhone panel supply to meaningfully contribute to its total OP by 35% in 2012E

while sales contribution is 6%. Given the poor execution by Sharp, we believe LGD

can cement its position in Apples various products. Of note, LGD will do an all In-

cell process including lamination, which is a clearly differentiating factor.

LG Innotek

We view LG Innotek to be the key beneficiary among Korea downstream players

given its stable camera module supply to Apple as a top vendor with market share~60%. As majority of shipments are skewed towards 4Q not only iPhone 5 but iPad

mini as well, we view traditional weak seasonality for 4Q will not be the case for

LGI this time. While we do not expect meaningful upside in ASP as products

supplied towards iPhone 5 and iPad mini remains the similar specification with

existing products, volume growth should suggest uptick in margin into 4Q.

JJ Park AC

(822) 758-5717

[email protected]

Helaine Kang

(82-2) 758-5712

[email protected]

Jay Kwon

(91-22) 6157-3261

[email protected]

J.P. Morgan Securities (Far East) Ltd,Seoul Branch

Narci Chang

(866-2) 2725-9899

[email protected]

J.P. Morgan Securities (Taiwan) Limited

Rahul Chadha

(91-22) 6157-3261

[email protected]



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Asia Electronic Components Sector

Expecting 50% Increase in High-frequency Components

Sector Implications

We see upcoming smartphone models as key to any recovery in Japanese electronic

component makers profits. In particular, we expect the new iPhone to feature a

multimode, multiband design along with a thinner form factor for the first time in two

years. We also expect increasing app performance to drive increased functionality that

could offer business opportunities to electronic component makers (Figure 4).

Figure 4: Sales Plan for Smartphone & Tablet-related Components by Company

100 mill ion

Source: J.P. Morgan, Company data.

Stock implications

We expect particularly strong benefits for high-frequency components. We expect

the new iPhone to support LTE and therefore have 50% more FDD bands than the

existing model. Combined with volume growth for the phone itself, we expect this to

drive substantial growth in volume for high-frequency components and in sales for

Murata Mfg., Taiyo Yuden, TDK, the three Japanese passive component makers

involved in high-frequency parts including duplexers and band-pass filters. The fact

that there are few Asian competitors in these areas suggests that Japanese companies

could readily benefit from market expansion.

We think passive component makers could also benefit from the shift toward higher

added value in mainstay MLCCs. Improving smartphone performance requires that

capacitors have greater capacitance than previously while also being more compact

to ensure sufficient space for the phones battery. We expect capacitance to increase

to 0.22F from 0.1F for 0402-size MLCCs, to 2.2F from 1.0F for 0603-size, and

to 22F from 10F for 1005-size.

Potential Winners

Taiyo Yuden (6976), Murata Mfg. (6981)

Potential Losers

TDK (6762), Hirose Elec. (6806)

FY 2011 FY2012 YOY

CoE

Communication modules 1,339 2,000 49%

in which high frequency module 300 600 100%

Taiyo Yuden SAW Device 169 250 48%

TDK High Frequency components 607 800 32%

Semiconductor parts 1,534 1,800 17%

in which Cmos package for smartphone 80 160 100%

Ibiden FCCSP 248 325 31%

Ibiden PCB 328 445 36%

FPC 1,816 2,355 30%

in which FPC for mobile phone 708 990 40%

Others Taiyo Yuden Super High-end MLCC 80 240 200%

Minebea LED Back Light 270 480 78%

TDK Batteries 790 950 20%

Alps Elec. VCM 84 220 162%

Mitsumi Elec. VCM 83 194 134%

JAE Communication Connector 220 430 95%

Total 7,568 10,489 39%

requirement for

new device

NOK

High

Frequency

Components

Substrate

Thinner

Multi-mode

/Multi-band

Murata Mfg.

Kyocera

High

functionality

Masashi Itaya AC

(81-3) 6736-8603

[email protected]

JPMorgan Securities Japan Co., Ltd.


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Figure 5: iPhones Shift to Multi-band/ Multi-mode

$ million

Source: J.P. Morgan based on company data.

Model iPhone iPhone3G iPhone3GS iPhone4 iPhone4S Next iPhone

launch Jun/2007 July/2008 Jun/2009 Jun/2010 Oct/2011 Sep/2012e

GSM Mode 850/900/1800/1900

UMTS Mode Band

Band

Band

Band

Bandor

LTE Mode Bandor

Total FDD bands Band

Band

Band

Band

Bandor

Bandor 1.5x

1.3x


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Applied & Emerging Technologies

iPhone 5 Implications: Mixed

Sector Implications

iPhone 5: Good for One, Not So Good for Others

In the context of our Applied Tech coverage universe, one stock stands to benefit

from imminent Apple product introductions, including the iPhone 5 launch:

Omnivision. In contrast, the introduction of native mapping and TBT navigation on

iOS 6 on the iPhone 5 stands to be a mild negative for TeleNav (TNAV/N),

TeleCommunication Systems (TSYS/OW), and Garmin (GRMN/UW).

Stock Implications

The Good Omnivision (OVTI/OW) should benefit from Apples productintroductions this fall. With the introduction of second generation back-side

illumination (BSI) the firm is restored to a leadership position at the high end (5-

8MPx, HD Video, small form-factor) of the CIS market, as an alternative supplier to

Sony. Revenues are ramping dramatically (up ~70% in October quarter, we estimate)

to record levels and the firm is building BSI product to inventory in advance of one

or more Tier 1 OEM product launches (Apple iPad mini and iPhone 5 we believe).

Based on the firms incumbent role as a supplier of CIS chips for the iPad and front-

facing camera on the iPhone 4s, we believe OVTI is well positioned with Apple,

however it remains unclear whether OVTI has the prestigious back-facing slot on the

iPhone 5; which is hotly contested by Sony, we believe.

From an investment perspective, controversy centers largely on gross margins, which

have fallen to a record low 19% on the BSI-2 revenue ramp, however we believe this

is the trough now; a combination of scale and unit-based amortization of fixed cost

investment at wafer supplier TSMC should yield improving margins in the January

quarter, and gradual improvement towards 25% in CY13. We rate OVTI Overweight

and have a price target of $23.00 based on 13 times CY14 EPS. If OVTI is confirmed

in tear-down reports as winning the back-facing camera slot on the iPhone 5 (sole- or

dual-sourced), then the multiple could expand further.

The Not So Good Apple is introducing turn-by-turn (TBT) navigation and

mapping as native (and free) applications on the iPhone 5, displacing Google, and

adding to the disruption already taking place in the personal navigation device

(PND), navigation application and location-based service (LBS) markets. Apples

voice-based search, via Siri, and real-time navigation integrated with iOS, presents athreat to incumbents in the SatNav/PND market (e.g. Garmin, Magellan, and

TomToms hardware business) as well as fee-earning network-hosted smartphone

solutions from companies like TeleNav and Networks in Motion

(TeleCommunication Systems).

Apple has stated that it is in discussions with major automobile OEMs regarding

integration of this handset-based solution into the car cockpit (leveraging

infotainment consoles or in-car audio systems), which sounds like a tangential

though not immediate threat for OEM suppliers like Garmin, TomTom, Delphi,

Harman and Bosch that currently supply infotainment solutions to the auto industry.

Paul Coster, CFAAC

(1-212) 622-6425

[email protected]

Mark Strouse, CFA

(1-212) 622-8244

[email protected]

Paul J Chung

(1-212) 622-5552

[email protected]



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U.S. Telecom Services

iPhone 5 and Lower Priced 4S/4 Could Drive Higher 3Q Upgrade Rates and Lower Margins

Sector Implications

iPhone 5 Could Drive Higher Upgrades And Lower Margin

Near-term, we expect the iPhone 5 to drive higher than expected upgrades in 3Q12

and 4Q12. We recently raised our upgrade rate for Verizon to 8.0% from 6.8%,

AT&T to 8.0% from 6.3% and Sprint to 10.0% from 9.0%. In all we now expect

9.2m iPhone sales in 3Q12, up from 7.3m previously (when we had expected a 4Q

versus late 3Q launch) and 7.5m in 2Q12. We estimate 12.8m iPhone unit sales in

4Q12 versus the 13.1m estimate for 4Q11, when the iPhone 4S was launched. The

higher upgrade rates pressures margins for the wireless carriers and we expect more

downside risk to margins in 3Q and 4Q as iPhone 5 sales ramp.

Long-term, we expect the iPhone 5 to accelerate the already begun upgrade cycle to

4G (LTE) for the US wireless carriers from handset bases dominated by 3G handsets

today. Verizon is the largest US carrier with LTE at 230m covered pops, followed by

AT&T at ~80m and Sprint only covers a few markets. We believe Verizon and the

other carriers are eager to migrate customers from loaded 3G networks to 4G

networks to take advantage of relatively empty networks as well as lower cost and

more data efficient LTE.

Stock Implications

Verizon leads in LTE coverage and we expect aggressive migration push with

the iPhone 5

Verizon has about 40m smartphones in its subscriber base but only about 8m (20%)

are LTE. We believe the iPhone could help Verizon aggressively migrate subscribers

to the LTE network. Recently, we increased our estimate of iPhone sales at VZ from

2.9m to 3.6m. In addition, we increased our 3Q upgrade rate to 8.0% from 6.8%

previously, and 7.0% in 2Q to account for iPhone 5 demand as well as potentially a

lower entry price for the iPhone 4. Our wireless margin estimate fell to 48.0% from

50.0%.

Our estimates could be higher or lower depending actual launch date, supply of

iPhones and ability for customers to upgrade, though note that no Verizon iPhone

customer will have passed their 20 month upgrade date in September, so we expect

3Q iPhone 5 sales at Verizon to be dominated by non-smartphone customers

upgrading and new customers, rather than upgrading iPhone customers like weexpect to see at AT&T.

AT&T lags Verizon in coverage, but is rapidly building to catch up, we expect

AT&T to sell 25.4m smartphones in 2012

AT&T lags in LTE coverage, but we expect the company to push its HSPA+ network

(which registers as 4G on the iPhone 4S) to compete with Verizons marketing. We

estimate 4.5m iPhone activations and 4.0m sales at AT&T from 3.4m and 3.1m

previously. We increased our upgrade rate to 8.0% from 6.3% previously. Our 3Q

wireless margin estimate fell to 41.5% from 45.0%. We model 2012 smartphone unit

sales for AT&T of 25.4m from 24.9m previously. As previously mentioned, our

Philip Cusick, CFA AC

(1-212) 622-1444

[email protected]

Richard Choe

(1-212) 622-6708

[email protected]

Derya Erdemli, CFA

(1-212) 622-8529

[email protected]

Eric Pan, CFA




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estimates could be higher or lower depending actual launch date, supply of iPhones

and ability for customers to upgrade.

Sprint could benefit from the iPhone 5, despite a limited LTE network

We would also not be surprised to see the iPhone 4 fall from $99 to $0 at a full

subsidy for Sprint as the carrier uses price and unlimited data as marketing tools

against AT&T and Verizon. The first 10 days of iPhone 5 sales in 3Q is expected to

pull forward a significant amount of sales (we estimate Sprint sold 400-500k iPhones

in first 10 days after 2011 launch) from 4Q. As such, we raise our 3Q iPhone units to

1.76m from 1.34m vs. 1.5m in 2Q12 and 1.8m in 4Q11. We now model 1.98m in

4Q12. In part due to higher upgrades driven by the iPhone 5, we lowered our

wireless EBITDA estimate to $897m from $1.059b and margins to 12.2% from

14.5% for 3Q12.

Figure 6: Verizon Handset Estimates

Source: J.P. Morgan estimates, Company data.

1Q11 2Q11 3Q11 4Q11 2011 1Q12 2Q12 3Q12E 4Q12E 2012E 1Q13E 2Q13E 3Q13E 4Q13E 2013E

Subs mix

Smartphone (iPhone) 2.6% 5.3% 7.3% 11.7% 11.7% 14.7% 16.5% 18.9% 22.4% 22.4% 23.6% 24.0% 23.9% 26.0% 26.0%

Smartphone (non-iPhone) 27.2% 27.9% 28.7% 28.7% 28.7% 28.2% 28.8% 28.8% 29.8% 29.8% 30.7% 31.5% 32.3% 33.5% 33.5%

3G Multimedia 13.0% 11.0% 9.0% 7.0% 7.0% 5.0% 4.0% 3.0% 2.0% 2.0% 1.0% 0.0% 0.0% 0.0% 0.0%

Internet* 7.3% 7.5% 7.8% 8.1% 8.1% 8.3% 8.4% 8.6% 8.8% 8.8% 9.0% 9.1% 9.2% 9.3% 9.3%

Feature 49.9% 48.3% 47.2% 44.5% 44.5% 43.8% 4 2.3% 40.7% 37.0% 37.0% 35.7% 35.4% 34.6% 31.3% 31.3%

Total Customer Devices 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Total smartphones as % of postpaid subs 29.8% 33.2% 36.0% 40.4% 40.4% 42.9% 45.3% 47.7% 52.2% 52.2% 54.3% 55.5% 56.2% 59.4% 59.4%

Total smartphones as % of postpaid phones 32.1% 35.9% 39.0% 44.0% 44.0% 46.8% 49.5% 52.2% 57.3% 57.3% 59.7% 61.0% 61.9% 65.5% 65.5%

Voice Sub Mix

Smartphone (iPhone) 3% 6% 8% 13% 13% 16% 18% 21% 25% 25% 26% 26% 26% 29% 29%

Smartphone (non-iPhone) 29% 31% 32% 32% 31% 32% 31% 32% 33% 33% 34% 35% 36% 37% 37%

3G Multimedia 14% 12% 10% 8% 8% 5% 4% 3% 2% 2% 1% 0% 0% 0% 0%

Feature 54% 52% 51% 48% 48% 48% 4 6% 44% 41% 41% 39% 39% 38% 34% 34%

Total voice devices 100% 101% 101% 101% 100% 101% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Smartphone % of Voice 32% 37% 40% 45% 44% 48% 49% 52% 57% 57% 60% 61% 62% 66% 66%

Subscribers

Smartphone (iPhone) 2,201 4,484 6,283 10,253 10,253 12,915 14,678 16,933 20,318 20,318 21,503 21,966 22,070 24,158 24,158

Smartphone (non-iPhone) 22,840 24,540 25,318 25,617 25,081 25,540 25,573 25,825 26,986 26,986 27,900 28,868 29,801 31,174 31,174

3G Multimedia 10,924 9,382 7,756 6,117 6,117 4,398 3,554 2,688 1,812 1,812 910 0 0 0 0

Internet* 6,134 6,397 6,722 7,078 7,078 7,301 7,462 7,705 7,972 7,972 8,189 8,339 8,486 8,657 8,657

Feature 41,931 41,189 40,711 38,854 38,854 38,514 3 7,571 3 6,438 33,500 33,500 32,485 32,466 31,881 29,099 29,099Total postpaid base 84,031 85,290 86,175 87,382 87,382 87,963 88,838 89,588 90,588 90,588 90,988 91,638 92,238 93,088 93,088

Total voice postpaid base 77,897 78,893 79,453 80,304 80,304 80,662 81,376 81,883 82,616 82,616 82,799 83,299 83,752 84,431 84,431

Total smartphone base 25,041 29,025 31,601 35,869 35,334 38,455 40,251 42,758 47,304 47,304 49,404 50,833 51,871 55,332 55,332

364 262 325 356 1,307 223 161 242 267 894 217 150 147 171 685

Handset sales split 2,576



3G Multimedia 110 0 0 0 110 0 0 0 0 0 0 0 0 0 0

Internet 1,045 1,077 1,178 1,253 4,552 1,158 1,121 1,228 1,286 4,793 1,268 1,224 1,240 1,286 5,018

Feature phone 3,537 3,433 3,895 3,379 14,244 2,582 2,283 2,402 2,205 9,472 2,015 2,045 1,939 1,527 7,525

Postpaid handset sales 10,960 11,137 10,673 12,332 45,102 10,040 9,304 10,373 12,467 42,183 11,319 10,899 10,597 12,783 45,598

Total smartphone sales 6,270 6,626 5,600 7,700 26,196 6,300 5,900 6,742 8,976 27,918 8,036 7,630 7,418 9,971 33,054

Handset sales split



3G Multimedia 1.0% 0.0% 0.0% 0.0% 0.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Internet 9.5% 9.7% 11.0% 10.2% 10.1% 11.5% 12.0% 11.8% 10.3% 11.4% 11.2% 11.2% 11.7% 10.1% 11.0%

Feature phone 32.3% 30.8% 36.5% 27.4% 31.6% 25.7% 24.5% 23.2% 17.7% 22.5% 17.8% 18.8% 18.3% 11.9% 16.5%

Postpaid handset sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

iPhone as % of smartphone sales 35.1% 34.7% 35.7% 55.8% 41.2% 50.8% 45.8% 49.2% 51.4% 49.5% 46.5% 41.4% 38.6% 48.7% 44.2%

Smartphone as % of total handset sales 57.2% 59.5% 59.0% 69.5% 58.1% 70.9% 73.0% 73.7% 80.3% 74.7% 80.0% 78.9% 79.3% 86.7% 81.5%


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Figure 7: AT&T Handset Estimates


Figure 8: Sprint Handset Estimates


1Q11 2Q11 3Q11 4Q11 2011 1Q12 2Q12E 3Q12E 4Q12E 2012 1Q13 2Q13 3Q13 4Q13 2013

Postpaid subs mix



Integrated devices (non-Smartphone) 17.7% 17.3% 16.5% 15.2% 15.2% 14.7% 13.1% 11.5% 9.5% 9.5% 8.0% 7.0% 5.9% 5.1% 5.1%

Laptop cards, MiFi, tablets, etc 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1%

Feature 33.9% 30.7% 28.8% 25.9% 25.9% 23.9% 2 2.9% 21.9% 20.9% 20.9% 19.9% 18.9% 17.5% 15.8% 15.8%


Total Smartphone as % of postpaid base 46.2% 49.9% 52.6% 56.8% 56.8% 59.3% 61.9% 64.5% 67.5% 67.5% 70.0% 72.0% 74.5% 77.0% 77.0%

Total smartphone as % of postpaid phones 47.2% 51.0% 53.7% 58.0% 58.0% 60.6% 63.2% 65.9% 69.0% 69.0% 71.5% 73.6% 76.1% 78.7% 78.7%

Total Integrated devices 66.1% 69.3% 71.2% 74.1% 74.1% 76.1% 77.1% 78.1% 79.1% 79.1% 80.1% 81.1% 82.5% 84.2% 84.2%

Postpaid subscribers



Integrated devices (non-Smartphone) 12,055 11,792 11,309 10,535 10,535 10,202 9,126 8,046 6,694 6,694 5,649 4,959 4,191 3,645 3,645

Laptop cards, MiFi, tablets, etc 1,455 1,455 1,455 1,455 1,455 1,465 1,475 1,485 1,495 1,495 1,505 1,515 1,525 1,535 1,535

Feature 23,107 20,998 19,759 17,952 17,952 16,580 1 5,942 1 5,307 14,712 14,712 14,031 13,362 12,399 11,257 11,257

Total postpaid base 68,062 68,353 68,614 69,309 69,309 69,403 69,666 69,966 70,466 70,466 70,616 70,841 71,041 71,466 71,466

Total Smartphone 31,445 34,108 36,091 39,368 39,368 41,156 43,123 45,128 47,565 47,565 49,431 51,006 52,926 55,029 55,029

Total integrated devices 43,500 45,900 47,400 49,902 49,902 51,358 52,250 53,174 54,259 54,259 55,080 55,964 57,117 58,674 58,674

Handset sales split



Integrated devices (non-Smartphone) 1,450 1,399 1,259 1,227 5,335 1,066 814 1,025 955 3,860 726 1,138 185 (65) 1,983

Laptop cards, MiFi, tablets, etc 128 124 111 171 535 110 99 121 158 488 111 123 113 149 496

Feature 1,407 1 ,200 1,222 628 4 ,458 623 560 687 896 2,766 630 698 638 842 2,809

Postpaid handset sales 8,528 8,277 7,407 11,427 35,639 7,331 6,585 8,084 10,541 32,541 7,416 8,217 7,507 9,902 33,042

Total smartphone sales 5,543 5,554 4,815 9,400 25,312 5,532 5,113 6,251 8,532 25,427 5,948 6,258 6,571 8,976 27,754

Handset sales split



Integrated devices (non-Smartphone) 17.0% 16.9% 17.0% 10.7% 15.0% 14.5% 12.4% 12.7% 9.1% 11.9% 9.8% 13.8% 2.5% -0.7% 6.0%

Laptop cards, MiFi, tablets, etc 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5%

Feature 16.5% 1 4.5% 1 6.5% 5.5% 1 2.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5%

Postpaid handset sales 100.0% 102.9% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Smartphone % of sales 65.0% 70.0% 65.0% 82.3% 71.0% 75.5% 77.6% 77.3% 80.9% 78.1% 80.2% 76.2% 87.5% 90.7% 84.0%

1Q11 2Q11 3Q11 4Q11 2011 1Q12 2Q12 3Q12 4Q12 2012 1Q13 2Q13 3Q13 4Q13 2013

Subs mix

Smartphone (iPhone) 5.5% 5 .5% 9.8% 14.0% 18.7% 23.4% 23.4% 27.0% 29.4% 31.7% 32.9% 32.9%


iDEN 15.9% 15.0% 1 4.2% 13.0% 1 3.0% 11.7% 9.6% 7.4% 5.1% 5.1% 2.8% 0.6% 0.1% 0.0% 0.0%

Internet* 11.0% 10.5% 10.0% 9.5% 9.5% 9.0% 8.5% 8.2% 8.0% 8.0% 7.8% 7.6% 7.4% 7.2% 7.2%

Feature/Multimedia (CDMA) 27.7% 25.2% 22.6% 20.1% 20.1% 18.4% 16.8% 13.6% 10.7% 10.7% 9.0% 8.5% 6.0% 5.3% 5.3%


Total smartphones as % of postpaid CDMA subs 54.0% 58.0% 62.0% 66.0% 57.4% 69.0% 72.0% 70.8% 76.2% 76.2% 80.4% 83.3% 86.5% 87.5% 87.5%

Total smartphones as % of postpaid phones 51.0% 55.1% 59.1% 63.5% 63.5% 67.0% 71.1% 77.1% 82.8% 82.8% 87.2% 90.2% 93.4% 94.2% 94.2%

Subscribers

Smartphone (iPhone) 1,800 1 ,800 3,219 4,574 6,032 7 ,474 7,474 8,535 9 ,176 9,860 10,282

iPhone 5 VCM

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