Window(s) of Opportunity - morganstanleyfa.com · May 31, 2012 Morgan Stanley does and seeks to do...

May 31, 2012

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M O R G A N S T A N L E Y B L U E P A P E R

Tablet Landscape Evolution Window(s) of Opportunity

The tablet is the fastest ramping mobile device in history. To measure the rapid rate of change in this important but still nascent market, we revisit our initial Blue Paper published in February 2011 and update our list of global stocks best-positioned and challenged in the tablet market. Below are our three key takeaways.

1. The market is even bigger and growing faster than we initially forecast. Tablet shipments in the last two years were over 20% higher than we estimated in the last Blue Paper, and purchase intentions in our new survey indicate shipments of 133 million and 216 million in 2012 and 2013, or 57% and 112% larger than our initial estimates.

2. Microsoft shifts from a challenged to a best-positioned company in the tablet market, as Windows 8 with Office has the potential to drive market growth and share gains. Our survey suggests 25% of users expect to buy Windows 8 tablet and Office is a key feature, especially for those considering their first tablet purchase.

3. Pricing is the key variable that will determine the success of Microsoft and its partners. We believe Microsoft will bundle Office with Windows 8 at a discount to bring OEMs on board and drive user adoption. Our analysis suggests Microsoft could charge $82-114 for Windows and Office before OEMs would lose money on tablets.

M O R G A N S T A N L E Y R E S E A R C H

G l o b a l

Kathryn Huberty, CFA1

Adam Holt1

Joseph Moore1

Sanjay Devgan1

Francois Meunier2

Ehud Gelblum, PhD1

Scott Devitt1

Jasmine Lu3

Grace Chen4

Sharon Shih4

Shawn Kim5

Kazuo Yoshikawa, CFA6

Global Technology Team See page 2 for all contributors to this report

1 Morgan Stanley & Co. LLC

2 Morgan Stanley & Co. International plc+ 3 Morgan Stanley Asia Limited+ 4 Morgan Stanley Taiwan Limited+ 5 Morgan Stanley & Co. International plc, Seoul

Branch+ 6 Morgan Stanley MUFG Securities Co., Ltd.+

Please see “Tablet Demand and Disruption: Mobile Users Come of Age”, February 14, 2011

Morgan Stanley Blue Papers focus on critical investment themes that require coordinated perspectives across industry sectors, regions, or asset classes.

AlphaWise conducts evidence-based investment research to help validate key investment debates on behalf of Morgan Stanley Research analysts worldwide.

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May 31, 2012 Tablet Landscape Evolution

Global Technology Team Contributors to this Report

US Hardware

Kathryn Huberty, CFA1 +1 (212) 761-6249 [email protected] Scott Schmitz1 +1 (617) 856-8074 [email protected] Dan Dolev1 +1 (212) 761-3206 [email protected] Jerry Liu1 +1 (212) 761-3735 [email protected]

US Software

Adam Holt1 +1 (415) 576-2320 [email protected] Jennifer Swanson Lowe, CFA1 +1 (212) 761-3665 [email protected] Keith Weiss, CFA1 +1 (212) 761-4149 [email protected] Melissa Gorham1 +1 (212) 761-3607 [email protected]

US Semiconductors

Joseph Moore1 +1 (212) 761-7516 [email protected] Sanjay Devgan1 +1 (415) 576 2382 [email protected]

Europe Semiconductors

Francois Meunier2 +44 20 7425-6603 [email protected] Andrew Humphrey2 +44 20 7425-2630 [email protected]

US Communications Equipment

Ehud Gelblum, PhD1 +1 (212) 761-8564 [email protected] Jeremy David1 +1 (212) 761-1738 [email protected]

US Internet

Scott Devitt1 +1 (212) 761-3365 [email protected] Jordan Monahan1 +1 (212) 761-8094 [email protected] Andrew Ruud1 +1 (212) 761-5978 [email protected]

Asia Technology

Jasmine Lu3 +852 2239-1348 [email protected] Grace Chen4 +886 2 2730-2890 [email protected] Sharon Shih4 +886 2 2730-2865 [email protected] Shawn Kim5 +82 2 399-4940 [email protected] Kazuo Yoshikawa, CFA6 +81 3 5424-5389 [email protected] Po-Ling Chen4 +886 2 7712-3031 [email protected] Brad Lin4 +886 2 2730-2989 [email protected]

1Morgan Stanley & Co. LLC 2Morgan Stanley & Co. International plc

3Morgan Stanley Asia Limited 4Morgan Stanley Taiwan Limited

5Morgan Stanley & Co. International plc, Seoul Branch

6Morgan Stanley MUFG Securities Co., Ltd.

See page 30 for recent Blue Paper reports.

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M P A P E R O R G A N S T A N L E Y B L U E Table of Contents

Executive Summary .............................................................................................................................................................. 4

There are three key findings in this Blue Paper: (1) tablet market is even bigger than we initially forecast; (2) Microsoft has the potential to drive tablet market growth and take share; and (3) pricing is the key variable that will determine the success of Microsoft and its partners.

Investment conclusions: best-positioned and challenged stocks.

Survey data on market size, penetration and usage of popular computing devices.

Hardware................................................................................................................................................................................ 10

Apple continues to dominate the tablet market, though several other traditional PC vendors are poised to gain share.

Tablet cannibalization of PC and printing demand are more severe than we initially thought.

Best-positioned: Apple, Lenovo

Challenged: Lexmark, HP, Dell, Seagate, Western Digital

Software and Internet............................................................................................................................................................ 16

Microsoft will be more competitive in the tablet market in late 2012 and in 2013 with the new release of Windows 8 and Office 15, which will include versions on ARM processor architecture.

Best-positioned: Microsoft

Challenged: Google, Amazon.com

Semiconductors and Communications Equipment ........................................................................................................... 21

ARM and its vendors continue to dominate the application processor market.

Leading NAND flash vendors benefit from tablet proliferation.

Baseband, connectivity and related suppliers benefit from tablet proliferation and adoption of multi-device carrier data plans.

Best-positioned: ARM, NVIDIA, Texas Instruments, Samsung, Toshiba, SanDisk, Qualcomm, Broadcom, Avago, Skyworks

Challenged: Intel, AMD

Components and Assembly Supply Chain ......................................................................................................................... 26

Suppliers and assemblers with exposure to Apple will benefit from its dominant position in the market.

The survey suggests touchscreen quality and large display size are important tablet features, which should benefit TPK.

Best-positioned: Hon Hai, AAC, TPK and Foxconn Tech

Appendices: Tablet and PC Models..................................................................................................................................... 28

3



Executive Summary

The tablet is the fastest ramping mobile device in history. Apple, the market leader, just shipped more iPads in the December 2011 quarter than any single PC vendor shipped PCs, a remarkable feat considering the company only established the category in early 2010. Cumulative tablet shipments in 2010 and 2011 were more than double the cumulative shipments of any other mobile device in its first two years.

Exhibit 1

Tablets Are the Fastest Ramping Mobile Device

Cumulative Shipments of Mobile Devices in First Five Years

0

200

400

600

800

1 2 3 4 5

Tablets

Smartphones

Feature Phones

Netbooks

Gaming Devices

MP3 Players

Notebooks

E-Readers

Source: Gartner, IDC, Company Data, Morgan Stanley Research

There are three key findings in our second global tablet survey. To measure the rapid rate of change in this important but still nascent market, we revisited our initial survey and Blue Paper published in February 2011 in this follow-up.

1. The market is even bigger and growing faster than we initially forecast. We conducted a second tablet survey in May 2012, reaching 7,500 respondents in the US, UK, Germany, France and Japan. Purchase intentions indicate tablet shipments will increase to 133 million and 216 million in 2012 and 2013, or 57% and 112% larger than our initial estimates. In 2010 and 2011, the tablet market was already more than 20% larger than we first forecast in the last Blue Paper.

Exhibit 2

The Tablet Market Will Be 57% and 112% Larger Than We Initially Forecast by 2012 and 2013

2010 2011 2012e 2013e 2014e 2015e

Shipments (Millions)Original Estimates 16 55 85 102 114 122New Estimates 19 70 133 216 282 352

Difference 21% 26% 57% 112% 147% 188%

Y/Y Growth

Original Estimates 245% 54% 20% 12% 7%New Estimates 258% 92% 62% 30% 25% Source: IDC, Morgan Stanley Research

2. Microsoft Windows 8 with Office has the potential to drive tablet market growth and take share. In the last two years, Apple iPad has dominated the market with 62% unit share, while Google Android-based tablets have had mixed results. However, Microsoft has made a lot of progress since our last survey with its Metro user interface, first introduced in Windows Phone 7 and included in the upcoming Windows 8 release. Consumers, especially those considering their first tablet purchase, believe Microsoft Office is a key feature, suggesting Windows 8 with Office could overtake Android as the second largest platform in the tablet market.

Exhibit 3

Microsoft Windows 8 with Office Could Become the Second-Largest Tablet Platform

Tablet Purchase Intentions by Platform

Google Android,

22%

Other, 7%

Apple iOS, 46%

Microsoft Windows 8,

25%

Note: Other includes Amazon.com and Barnes & Noble Source: AlphaWise, Morgan Stanley Research

3. Pricing is the key variable that will determine the success of Microsoft and its partners. The maximum price respondents said they would be willing to pay for Windows 8 tablets with Office is $469, or a 6% discount to Apple’s iPad. It is unclear how much Microsoft will charge OEMs for Windows 8 and Office, but we conduct a scenario analysis assuming a Windows tablet’s cost of goods is roughly 0-10% more

4



expensive than an iPad’s due to lower volume discounting, while R&D and SG&A expenses are lower than for an iPad. Our analysis shows the maximum Microsoft could charge is $114 before OEMs would lose money on a Windows tablet, assuming similar component costs relative to an iPad. If Microsoft OEMs’ component costs are 10% higher than Apple’s, Microsoft could charge a maximum $82 for Windows and Office. We expect Windows 8 tablet license pricing to be similar to PC license pricing of ~$50. This suggests a $32-$64 license price for Office, which may be lower than what Microsoft currently charges. However, the bundled version of Office with Windows RT (the ARM version) will likely be a “light” version, so it is entirely reasonable to assume Microsoft will price it at a discount to normal editions. If Microsoft only charged $50 for software, OEMs would earn a reasonable margin of ~7%, assuming 10% more expensive component prices for a Windows tablet relative to an iPad.

In the near term, multiple partners could launch products and try to establish a foothold in the tablet market. While tablets with modest or flat margins are not entirely compelling, OEMs are already seeing high cannibalization rates in the PC market and a better foothold in the tablet market than Android could

provide is a win. Other variables that could help OEMs price Windows 8 tablets at a discount to the iPad and still at least breakeven include lower retailer margins and/or OEMs willing to accept low- to mid-single digit margins long-term, like the PC market, vs. smartphone margins.

Exhibit 4

Microsoft Windows 8 and Office License Fees Key Variables for a Successful Second Tablet Platform

Tablet with Wi-Fi and 16GB

Scenario 1 Scenario 2 Scenario 3iPad 3 Windows 8 Windows 8 Windows 8

Price 499 469 469 469

Component Cost vs. iPad +0% +5% +10%Components 306 306 321 337Microsoft Licenses 0 114 98 82Manufacturing 10 11 12 13

Total COGS 316 431 431 432

Gross Profit 183 38 38 37GM 37% 8% 8% 8%

R&D 12 9 9 9SG&A 32 28 28 28

Total OPEX 45 38 38 38

Operating Profit 138 0 0 0OPM 28% 0% 0% 0%

Source: iSuppli, Company Data, Morgan Stanley Research

5



Key Investment Conclusions

We have higher conviction and an increased number of stock ideas to play the tablet proliferation thesis, compared to our original tablet Blue Paper. This report applies the thesis to the four main segments of the tablet value chain: (1) hardware, (2) software and Internet, (3) semiconductors and communications equipment, and (4) components and assembly supply chain. Below is a summary of our investment ideas in each segment.

Exhibit 5

Best Ways to Play Tablet Proliferation

Best-Positioned Challenged

HardwareApple Tablet vendor Lexmark Printing vendorLenovo Tablet vendor Seagate Hard drive supplier

Western Digital Hard drive supplierHP PC and printing vendorDell PC vendor

Software and InternetMicrosoft Operating system vendor Google Operating system vendor

Amazon.com Tablet vendor and e-commerce

Semiconductors and Comm. EquipmentARM Processor designer Intel Processor supplierNVIDIA Processor supplier AMD Processor supplierTexas Instruments Processor supplierSamsung NAND supplierToshiba NAND supplierSanDisk NAND supplierQualcomm Processor and baseband supplierBroadcom Baseband and connectivity supplierAvago Filter and power amplifier supplierSkyworks Power amplifier supplier

Components and Assembly Supply ChainHon Hai Tablet assemblyAAC Acoustics supplierTPK Touch panel laminationFoxconn Tech Metal casing supplier Source: Morgan Stanley Research

Hardware

The most direct way to play tablet proliferation is through Apple, which has dominated the market with 62% unit share with its integrated software and hardware ecosystem. Lenovo moves from challenged to best-positioned, as it has executed well in Asia and Europe since launching its products just a year ago. Although Samsung is second with 6% unit share, we believe the company will continue to focus on smartphones instead of tablets due to the former’s favorable margin profile.

We are starting to see a longer list of challenged hardware companies. We are still in the early stages of PC and print cannibalization, and expect HP, Dell and Lexmark to remain challenged. As a derivative of the PC headwinds, we see long-term impact to Seagate and Western Digital despite recent consolidation in that industry.

Software and Internet

The big change in software is Microsoft, moving from challenged to best-positioned. A year ago, we put Microsoft

on the challenged list because Windows 7 could not truly address key tablet requirements, such as low power and touch interface, and Windows Phone 7 specifications did not fit the tablet form factor. A lot has changed since then, as Microsoft previewed Windows 8 with the Metro interface optimized for touch and announced support for ARM-based devices, which is the processor architecture the vast majority of tablets use today. Survey responses suggest Windows 8 tablets with Office have the potential to expand the market and take share if offered at the right price—although with additional features, such as pre-bundled Office, Microsoft may not need to necessarily compete on price.

In contrast, Google is in a more challenged position compared to a year ago. Android-based vendors have had mixed results since Google launched Honeycomb, a tablet-oriented Android release in February 2011, while Apple iPad’s market share has been steady. Our survey suggests Microsoft is poised to take share from both Android-based tablets and iPad. We are not counting Google out, as it took Android about two years after the iPhone launched to gain traction in the smartphone market, and the company recently acquired Motorola Mobility. However, Microsoft could be a credible alternative platform for hardware OEMs in tablets, which was not the case a few years ago in the smartphones.

Amazon.com was not in our Blue Paper a year ago. After a rapid Kindle Fire ramp in 4Q11, its long-term share looks uncertain. The company gained 17 points of tablet market share in 4Q11 after launching the Kindle Fire in mid-November. Just as quickly, the product lost steam and fell to 4% share in 1Q12. While the company looks to be committed to the tablet market long-term, it is not a preferred way to play tablet proliferation given the current uncertainty in our view.

Semiconductors and Communications Equipment

ARM and its vendors continue to dominate the application processor market, led by Apple and Samsung’s proprietary solutions. Survey respondents indicated battery life and price as the top two criteria when purchasing a tablet, which plays to ARM’s strengths.

We suggest two new groups of suppliers as derivative plays on tablet proliferation: NAND and connectivity. Tablets could consume about 12% of NAND flash demand in 2012 and more over time, and we believe the leading NAND suppliers are best-positioned in this market. We also believe Qualcomm, Broadcom, Avago and Skyworks will benefit as baseband, connectivity and related suppliers given their

6



exposure to the right tablet vendors and increasing 3G/4G penetration in tablets.

Similar to the last Blue Paper, we view Intel and AMD as challenged. The survey revealed higher-than-expected PC cannibalization rate, and a bigger and faster growing tablet market. Even if tablet application processors become meaningful for Intel beyond 2013, the company would be trading $120 notebook microprocessors for $20 tablet application processors. Therefore, we estimate tablet processors would still account for less than 1% of Intel’s total revenue in an Intel success case.

Components and Assembly Supply Chain

We believe suppliers and assemblers with high exposure to Apple will benefit from the latter’s dominant position in the market. In this context, Hon Hai, AAC and Foxconn Tech are best-positioned.

We also see TPK as the major beneficiary of a design shift to thin and light touch solutions. Our survey suggests touchscreen quality and large screen as important features when choosing a tablet.

7



AlphaWise Survey Findings

Market Sizing

Tablet penetration and purchase intentions are higher now compared to a year ago. In our new survey, 25% of respondents said they plan to purchase tablets in the next 12 months, compared to 19% that have them today.

Exhibit 6

2012 Survey Indicates 25% Plan to Purchase Tablets in the Next 12 Months vs. 19% That Have Tablets Today

Tablet Ownership and Purchase Intentions in 2011 vs. 2012 (%)

5

1917

25

2011 Survey 2012 SurveyPenetration Plan to Buy

Note: 2011 and 2012 Blue Paper surveys conducted in October 2010 and April to May 2012 respectively. Source: AlphaWise, Morgan Stanley Research

We expect tablet shipments to exceed notebook shipments in 2013 and almost match total PC shipments by 2015. The survey results suggest 25% of respondents plan to purchase tablets in the next 12 months while 19% of respondents have tablets today, which implies shipments from 2Q12 to 1Q13 will be 32% higher than the current tablet installed base. In our model, we discount the 32% growth rate by 20% in order to be conservative. Therefore, in the developed markets, we apply a 27% growth rate to the 84 million unit installed base (1Q10 to 1Q12) and forecast 107 million unit shipments from 2Q12 to 1Q13. In addition, we forecast shipments in Asia-Pacific, excluding Japan, will grow 77% over the installed base over the same period. The region accounted for one-quarter of shipments in 1Q12. We believe this is also reasonably conservative because the region grew over 400% in 2011 and Windows 8 will be a new catalyst in late 2012.

EvidenceEvidence

Exhibit 7

Updated Tablet and PC Model

2010 2011 2012e 2013e 2014e 2015e

Shipments (Millions)

Desktops 157 155 156 156 153 152Notebooks 200 209 210 215 217 218

Subtotal 357 363 366 371 370 370

Tablets 19 70 133 216 282 352

Total 377 433 499 587 652 722

Y/Y Growth

Desktops -1% 1% 0% -1% -1Notebooks 4% 1% 3% 1% 0

Subtotal 2% 1% 1% 0% 0%

Tablets 258% 92% 62% 30% 25%

Total 15% 15% 18% 11% 11%

Unit MixDesktops 42% 36% 31% 26% 24% 21%Notebooks 53% 48% 42% 37% 33% 30%Tablets 5% 16% 27% 37% 43% 49%

%%

Source: IDC, Morgan Stanley Research

Tablet Penetration

Smartphone and tablet penetration increased the most over the last year. Somewhat surprisingly, increase in gaming console penetration was a close third despite starting with a larger installed base. As expected, desktop was the only product where penetration decreased as consumers continue their multi-year migration towards a variety of

Core Questions for Evidence Research

What platform(s) will gain relevance and address the tablet market beyond Apple?

What are consumer’s tablet purchase intentions?

How will tablet purchases impact spending on other devices?

How are consumers using PCs and tablets?

Do tablets change consumers’ printing behavior?

What Gives Us Confidence

We surveyed 7,500 consumers across the US, UK, France, Germany, and Japan in May 2012

Sample is representative of the online adult population in terms of age, gender, and income of each country

Conclusions based on the total sample have a maximum margin of error of 3.2% at 90% confidence level

8



devices that are more mobile. The low penetration of tablets relative to other devices gives us further conviction that our tablet market growth rates are achievable.

Exhibit 8

Tablets Saw the Second Highest Increase in Penetration but Absolute Penetration Remains Low

Computing Device Penetration

0

20

40

60

80

Desktop Notebook Netbook Tablet E-Reader Smartphone GamingConsole

2011 Survey 2012 Survey

-2 pts+5 pts

+6 pts+14 pts

+10 pts

+23 pts+12 pts

(%)

Source: AlphaWise, Morgan Stanley Research

Computing Device Usage

Respondents rank notebooks and desktops as the most useful and enjoyable devices, followed by tablets and smartphones. Not surprisingly, netbooks rank last among multi-purpose computing devices. While Ultrabooks rank relatively low today, we believe the category could improve as OEMs introduce products with higher quality hardware and lower prices in late 2012 or 2013.

Exhibit 9

Notebooks and Desktops Most Used Useful and Enjoyable Devices, Followed by Tablets and Smartphones

Devices Ranked by How Useful and Enjoyable They Are(Higher Score = Most Useful and Enjoyable)

6.2 6.15.6 5.4

4.9 4.74.2 4.1

0

2

4

6

8

Notebook Desktop Tablet Smart-phone

Ultrabook Netbook E-Reader GamingConsole


Tablets are the third-best device, just behind desktops, for content consumption. Notebooks and desktops are still the most used devices for both content consumption and creation. However, respondents use tablets much less for content creation. While this may be partly due to the ease and speed of using the keyboard and mouse compared to the touch screen for power users, it is likely also due to a much lower penetration of tablets in the enterprise and fewer enterprise applications compared to the PC ecosystem so far. E-readers and gaming consoles, along with tablets, are the only devices that respondents use more for content consumption than creation, which is not a surprise. The ability to take pictures greatly boosted the smartphone as a content creation device.

Exhibit 10

Notebooks and Desktops Lead in Content Creation, but Tablets a Close Third for Content Consumption

% of Owners that Use Their Devices at Least Once a Week (Average % Across Content Consumption vs. Creation Tasks)

0%

10%

20%

30%

40%

50%

60%

Notebook Desktop Tablet Smart-phone

Ultrabook Netbook E-Reader GamingConsole

Content Consumption Content Creation Source: AlphaWise, Morgan Stanley Research

9



Hardware

US Tech Hardware Asia Technology US Internet

Katy Huberty Grace Chen Scott Devitt Scott Schmitz Shawn Kim Jordan Monahan Dan Dolev Andrew Ruud Jerry Liu

Which hardware vendors are best-positioned to benefit from tablet proliferation?

Apple continues to be the dominant leader, though several other traditional PC vendors are poised to gain share, potentially with Windows 8 tablets. There is decreasing interest in Amazon.com’s Kindle Fire and little interest in platforms outside of Apple iOS, Microsoft Windows 8, and Google Android.

What is the impact to the legacy PC market and the printing market?

Tablet cannibalization of PC and printing demand are more severe than we initially thought due to a combination of higher cannibalization rates and a larger tablet market.

Best positioned: Apple, Lenovo

Challenged: Lexmark, HP, Dell, Seagate, Western Digital

Tablet Vendors

We increase our Apple iPad estimates 8% in 2012 and 18% in 2013 on strong demand highlighted by our survey. Apple remains the dominant tablet leader. While the survey indicates it stands to lose eight points of unit share, that is more than offset by higher tablet market growth.

We believe our new estimates are likely conservative as Apple’s actual market share was nine points higher than the last survey predicted from 4Q10 to 3Q11, while we only model market share to be four points higher than the new survey predicts for the next 12 months. Furthermore, while the survey shows a share shift toward PC vendors, we believe this is unlikely to be meaningful before Windows 8 ships in volume – sometime in 4Q12. In 2013, our Apple model implies 45% tablet share, which is actually below our survey result of 46% share.

Exhibit 11

Apple to Lose Unit Share but Remain the Dominant Leader, while Most Other PC Vendors Gain Share

Tablet Ownership vs. Purchase Intentions by Vendor (%)

11

3

2

2

1

1

3

5

2

0

1

15

14

7

5

4

4

3

3

3

2

2

1

7

5446Apple

Samsung

Acer

Sony

Dell

HP

Toshiba

Asus

Amazon.com

RIM

HTC

Lenovo

Other

Current Installed Base

Purchase Intentions


Exhibit 12

Our Apple Tablet Forecast May Be Conservative as Actual Share Exceeded Last Survey by Nine Points

Apple Market Share: Survey Results vs. Tablet Model

0%

20%

40%

60%

80%

4Q10-3Q11 2Q12e-1Q13eSurvey Results IDC Historical / MS Estimate

+9 pts

+4 pts

Source: IDC, AlphaWise, Morgan Stanley Research

10



Amazon.com is the other vendor we expect to lose unit share. The Kindle Fire saw strong initial demand heading into the holiday season after launching in November 2011, allowing Amazon.com to garner 17% tablet unit share in 4Q11. However, the product quickly lost momentum in 1Q12, ending with 4% market share. We think Amazon.com has a unique offering long-term for consumers—cheaper product, and better content and e-commerce offerings—and we would not count them out yet given their ability to improve with each iteration, as they did with the Kindle in the e-reader market. However, our survey suggests lower purchase intentions at least in the near term.

Several PC vendors are poised to gain tablet share, though they start from a small base and are dependent on Windows 8 gaining traction. Acer, Sony, Dell, HP and Toshiba could gain 2-4 points of share according to purchase intentions. Although Samsung remains second in terms of purchase intentions, we believe the company will focus on developing and marketing smartphones, such as Galaxy S III and Note, instead of tablets given the favorable margin profile in smartphones and a lack of traction with Android in tablets.

PC brands’ potential traction in tablets could become a long-term advantage for Microsoft against Google. Interestingly, consumers are also willing to pay more for tablets from historically PC-oriented brands than smartphone-oriented brands. Microsoft’s design principle with Windows 8 is to provide an uncompromised operating system for both PCs and tablets, as opposed to Apple’s belief that tablets should share an operating system with smartphones but not PCs. Microsoft and its long-term PC partners have an opportunity to capitalize on this consumer preference with Windows 8.

Exhibit 13

Consumers Willing to Pay More for Tablets from PC Vendors (Blue) than Smartphone Vendors (Yellow)

Maximum Respondents Willing to Pay for Next Tablet554 532 511 500 492 467 459 451 446 432 424 401 400

338

Apple

Asus

Leno

vo Dell

Samsu

ngHTC HP

Acer

Toshib

a

BlackB

erry

Sony

Mot

orola

Google

Amaz

on.co

m

Average = $503


So far, there is little interest in tablets from non-traditional players, such as Chinese Internet service providers Baidu and Alibaba. Excluding Apple iOS, Microsoft Windows 8 and Google Android, all other operating systems totaled only 7% share in purchase intentions. Similarly, there does not seem to be materially higher demand for the Asus Transformer form factor, which is an Android-based tablet that has a keyboard dock, as purchase intentions for Asus is in line with most other Android vendors.

Enterprise Adoption

One of the biggest surprises versus a year ago is the significant tablet adoption in the enterprise. Six percent of employers either purchased or subsidized survey respondents’ tablet for work use and another 10% are allowed to access their corporate network with a tablet purchased on their own. This is consistent with the recent uptick in enterprise tablet adoption, as noted in Morgan Stanley’s April CIO Survey. Sixty-five percent of companies currently purchase tablets for some employees while nearly 50% allow employee-owned tablets on their network; both numbers increased steadily over the past three quarters. Tying the CIO survey data directly back to our consumer tablet survey, the 6% of respondents that have a company purchased or subsidized tablet (7% in the US) compares closely to the 9% of employees that CIOs say they purchase tablets for currently.

Exhibit 14

Employers Fund Tablet Purchases for 6% of Respondents…

Enterprise Adoption of Tablets

2% 4%10% 12%

71%

Employersubsidizes

tablet

Employerprovides

tablet

Employerallows own

tablet toaccess

company’snetwork

Employerdoes notallow owntablets oncompany’s

network

Employer hasno rules / not

applicable


11



Exhibit 15

…which Matches Closely with CIO Feedback

Percent of Employees for Which Corporate Tablets Are Currently or Planned to Be Purchased

5% 5%

9% 9%10%

14%

0%

3%

6%

9%

12%

15%

Oct 11Survey

Jan 12Survey

Apr 12Survey

Oct 11Survey

Jan 12Survey

Apr 12Survey

Currently In 1 Year

% o

f R

esp

on

de

nts

Note: n = 75 (US and EU data) Source: Morgan Stanley CIO Survey

Exhibit 16

Growing Number of Companies with Tablet Strategy

CIOs Currently Purchasing Corporate Tablets or Allowing Employee-Owned Tablets on Corporate Network

53%

39%

57%

45%

65%

49%

0%

10%

20%

30%

40%

50%

60%

70%

Purchase for Employees Allow Employee-Owned Tablets onNetwork

% o

f R

es

po

nd

en

ts

Oct 11 Survey Jan 12 Survey Apr 12 Survey


Enterprise tablets begin to replace notebooks. Morgan Stanley’s April CIO Survey points to a 26% tablet cannibalization rate in the enterprise, based on 9% employee tablet penetration divided by the 2.3% of the PC installed base in which tablets replace PCs today. Anecdotal evidence from our conference calls with CIOs and commentary from vendors like Dell suggest the early adopters of tablets as replacements for notebooks are sales people, healthcare professionals and K-12 schools. Higher tablet adoption and notebook replacement rate in the enterprise is a key factor in our lower global PC unit forecast.

Exhibit 17

Tablet Cannibalization Weighing on Corporate PCs

Percentage of PC Installed Base That Could Shift to Tablet Form Factor

1.7%

2.9%

2.3%

4.0%

0%

1%

1%

2%

2%

3%

3%

4%

4%

5%

Today In 3 Years

% o

f P

C In

stal

led

Bas

e

Jan 2012 Survey Apr 2012 Survey


Tablet Cannibalization of PCs

We lower our PC shipment forecast for 2012 and 2013 from 2% and 5% respectively to 1% due to a combination of higher-than-expected PC cannibalization rate, increase in tablet shipment forecast, and anemic PC demand until at least fall 2012 when Microsoft launches Windows 8.

Exhibit 18

Lowering 2012 and 2013 PC Unit Growth to 1%

2010 2011 2012e 2013e 2014e 2015eShipments (Millions)Previous Estimates 347 352 358 376 NA NANew Estimates 357 363 366 371 370 370

Difference 3% 3% 2% -1% NA NA

Y/Y GrowthPrevious Estimates 2% 2% 5% NA NANew Estimates 2% 1% 1% 0% 0% Source: IDC, Morgan Stanley Research

Our new survey suggests 41% of tablet shipments in 2012 will delay or eliminate PC purchases. The 37% cannibalization rate in 2011, according to the new survey, was also higher than the 29% we estimated based on our original tablet survey. In fact, consumer PC shipments to developed regions have declined Y/Y every quarter since 3Q10 when the Apple iPad launched. Given the fast adoption of enterprise purchases and bring-your-own-device programs, we now expect both enterprise and consumer tablet purchases to cannibalize PC shipments, as opposed to just consumer purchases previously.

12



Exhibit 19

Tablet Cannibalization of PC Shipments Higher Than Expected in 2011 and Likely Even Higher in 2012

Estimated vs. Actual PC Cannibalization (% of Tablet Shipments that Delay or Eliminate PC Shipments)

29%

37%41%

2011 Estimate 2011 Actual 2012 Estimate


While tablet cannibalization is a headwind to all PC vendors, we are incrementally more negative on HP and Dell. Both vendors have large legacy PC exposures, with the industry accounting for about 30% and 18% of Dell and HP’s operating profits this year. In the last quarter, both companies also noted pricing pressure and Y/Y share loss, compounding the issue of tablet cannibalization. HP and Dell plan to attack the tablet market again with Windows 8 tablets despite their inability to gain traction with webOS and Android software last year. While they have scale and distribution advantages in some regions and the survey suggests a potential increase in their tablet market share, we believe HP and Dell will find it challenging to reconcile their stated intentions to improve margins and focus on opportunities in enterprise data centers long term with their plans to participate in Windows 8 tablets. See the software section for further analysis of Windows 8 tablet margins.

Among PC vendors, Apple is best-positioned and Lenovo moves from challenged in our last Blue Paper to best-positioned. Apple iPhone and iPad should account for over 80% of the company’s operating profits while Macs should account for less than 10% this year, in part because the former two having much higher margins. Apple also stands to gain share as consumers shift away from PCs, as it has 20% and 59% smartphone and tablet unit share (much higher in profit share) but only 5% PC unit share in the last 12 months. Lenovo moves from our challenged list in the last Blue Paper to best-positioned in this one. While it only had 3% tablet unit share in 1Q12 according to IDC, Lenovo has executed well since launching its products just a year ago, and has a unique opportunity to capitalize on the Chinese tablet market given its strong branding, higher market share and initiatives to

develop special applications and localized content. (Our survey shows a lower tablet share than IDC as about two-thirds of its shipments are to Asia-Pacific.) On the PC front, Lenovo should see less PC cannibalization impact than HP and Dell as it continues to gain PC share in the commercial market and has higher exposure to faster-growing emerging markets (i.e., lower tier cities in China), where tablet cannibalization of PCs is smaller.

We continue to believe tablet cannibalization of PCs is an incremental challenge for Seagate and Western Digital, in addition to several other long-term challenges, including solid-state drive adoption in servers, storage and PCs and the potential for desktop virtualization and cloud computing to drive higher utilization rates and a mix shift to lower priced hard disk drives.

Tablet Cannibalization of Printing

Tablets are also having a bigger than anticipated impact on printing. In our survey, 57% of potential tablet purchasers expect no change to their printing habits while 36% expect to decrease printing. However, the actual impact on printing is bigger than expected. Among current tablet users, only 51% report no change to printing while 39% report a decrease.

Exhibit 20

Tablet Users Cut Printing by More Than They Expect Change in Printing Behavior Due to Tablet Usage

0%

10%

20%

30%

40%

50%

60%

Significantlydecreased

Moderatelydecreased

Slightlydecreased

No change Slightlyincreased

Moderatelyincreased

Significantlyincreased

Current Tablet Users Potential Tablet Purchasers Source: AlphaWise, Morgan Stanley Research

Our current survey echoes key findings from our February 2012 survey of 700 tablet users in the enterprise. Respondents in our February survey said they planned to cut their printing by up to 16% as tablets ramp and companies move to curtail printing, the high end of our previous 8-15% estimate.

Respondents who own tablets expect to print even less a year from now. Our February survey showed that 57% of respondents say they will print less in one year, up from 46%

13



currently. This is not surprising given that 41% view “printing less” as a key benefit of the tablet. The attempts of many companies to curb printing (e.g. by eliminating individual printers) may also play a role in the decline of print volume.

Exhibit 21

Tablet’s Adverse Impact on Printing Will Likely Strengthen in the Future

Expected Impact on Printing Today vs. in 1 Year

13% 15%

32%

42%

54%

43%

Now In 1 Year

Will print significantly less Will print somewhat less Will not change Source: AlphaWise, Morgan Stanley Research

Exhibit 22

Companies Implementing Page-Reduction Measures

Attempts to Curtail Printing for Participants Who Reported Printing Significantly Less

20%

21%

23%

34%

36%

0% 5% 10% 15% 20% 25% 30% 35% 40%

Printer in the pantry/centrallocation without a password

Requires password for printingdocuments

Printer in the pantry/centrallocation with a password

No more individual printers

None of these


Across our coverage, Lexmark is the most exposed to a decline in enterprise printing. Our analysis shows that a 15% decline in enterprise print volumes combined with a 15% decline in personal print volumes translate into a 3% decline in 2013 supplies demand in the developed markets. Assuming roughly 60% gross margin, this would translate into an 8% hit to Lexmark’s 2013 EPS (~43% of sales impacted) and 1% hit to HP’s 2013 EPS (~6% of sales impacted).

Exhibit 23

Tablets Could Cut Printer Supply Revenue by 3% in 2013

0% 3% 5% 8% 10% 13% 15% 18% 20% 23%0% 0% 0% 1% 1% 2% 2% 3% 3% 4% 4%5% 0% 1% 1% 1% 2% 2% 3% 3% 4% 4%

10% 0% 1% 1% 2% 2% 2% 3% 3% 4% 4%15% 0% 1% 1% 2% 2% 3% 3% 3% 4% 4%20% 0% 1% 1% 2% 2% 3% 3% 4% 4% 4%25% 0% 1% 1% 2% 2% 3% 3% 4% 4% 5%30% 0% 1% 1% 2% 2% 3% 3% 4% 4% 5%35% 1% 1% 1% 2% 2% 3% 3% 4% 4% 5%40% 1% 1% 2% 2% 3% 3% 3% 4% 4% 5%45% 1% 1% 2% 2% 3% 3% 4% 4% 4% 5%

2013 Office Printing Decline %

Ho

me

Pri

nti

ng

De

clin

e %


Our April CIO survey also showed that printing and supplies spending outlook continues to deteriorate as tablet adoption increases. Only 11% of CIOs are planning to increase printing and supplies spending in the next 12 months, while 27% plan to decrease spending. As noted above, an increase in enterprises tablet adoption should further pressure printer and supplies spending. In the April survey, 44% of CIOs said they plan to decrease supplies spending due to tablet adoption, while only 3% plan to increase spending.

Exhibit 24

Printing and Supplies Spend Remains Weak Printing and Supplies Spending Plans Over Next 12

Months(across recent surveys)

8% 9% 11%

-27% -29% -27%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

Oct 11 Survey Jan 12 Survey Apr 12 Survey

% o

f R

esp

on

den

ts Incr

eas

e S

pe

nd

Dec

reas

e S

pen

d

Note: n = 75 (US and EU data) Source: April 2012 CIO Survey, Morgan Stanley Research

14


15


Exhibit 25

Tablet Cannibalization of Supplies Spend

Impact of Tablets on Supplies SpendingOver Next 12 Months

Increase Supplies Spend,

3%

Flat Supplies Spend, 54%

Decrease Supplies Spend,

44%

Note: n = 75 (US and EU data) Source: April 2012 CIO Survey, Morgan Stanley Research



Software and Internet

US Software US Internet

Adam Holt Scott Devitt Jennifer Swanson Lowe, CFA Jordan Monahan Melissa Gorham Andrew Ruud

How will tablet adoption impact Microsoft?

While Microsoft has more than 90% share of the PC market, we believe that tablet cannibalization will have only a modest impact on Microsoft’s revenue and earnings in 2012/2013 as Microsoft begins to ramp tablet share with Win 8. If we assume a tablet cannibalization rate of 41% on PC sales vs. our Microsoft model which already assumes cannibalization of ~30% while Windows captures ~22% of the tablet market in CY13, we estimate that tablets would add $0.10 to Microsoft’s earnings in 2013, or approximately 3%, from incremental Windows revenue alone. We do not currently have tablets in our model, given the lack of pricing and availability detail to date, but we do reflect the impact of some cannibalization in our model with 4% and 6% PC growth in CY12 and CY13, respectively—despite stronger expected corporate growth.

What is Microsoft’s tablet strategy and can Windows 8 help it increase tablet share?

We think that Microsoft will be more competitive in the tablet market in late 2012/2013 with the new release of Windows 8, which will include Windows RT, the likely dominant tablet platform for Microsoft while Office on ARM will help Microsoft challenge the iPad and Android-based tablets, and gives Microsoft a better chance of unit upside in 2H12. Our survey supports this data as 25% of respondents indicate they plan to buy a Win 8 tablet vs. 46% that plan to buy an iPad and 22% a Google Android tablet. Medium term, as tablets become more prominent in the enterprise, Microsoft has significant advantages in security, application compatibility, and management that will likely enable Microsoft to garner a prominent role in the enterprise segment. If x86 chips can become a more important influence in the tablet market or if more Ultrabooks and hybrid devices emerge, Microsoft will likely benefit.

Best positioned: Microsoft

Challenged: Google, Amazon.com

Apple is the clear tablet operating system leader today and will likely remain so for the foreseeable future, but we are cautiously optimistic that Windows 8 will allow Microsoft to grow share and establish itself as a viable second player. Microsoft will be releasing two separate versions of Windows—Windows 8 (x86-based) and Windows RT (ARM-based) and in the near-term, we expect ARM-based devices to be Microsoft’s dominant tablet platform while Office on

ARM should help Microsoft challenge the iPad, giving it a better chance of unit upside in 2H12. Buy-side expectations are very low for Microsoft’s tablet release, and we currently have zero tablet units in our above-consensus estimates for CY13.

Additionally, while Microsoft has more than 90% share of the PC market, we believe that tablet cannibalization will have only a modest impact on Microsoft’s revenue and earnings in 2012/2013 while better than expected traction would offset any EPS downside. If we assume a tablet cannibalization rate of ~41% on PC sales vs. our Microsoft model at ~30%, and Windows captures ~22% of the tablet market in CY13, we estimate that tablets would impact Microsoft’s earnings by +$0.10 in 2013, or approximately 3%. Win 8 should also help Microsoft’s relative positioning in the tablet market, which has weighed on the multiple. At the same time, there are myriad other product catalysts from Windows 8 to SQL 2012 that are not fully in consensus, margins are too low for CY13, and we look for Microsoft to raise the dividend later this summer. At 7x EPS net cash, the risk-reward remains compelling and the above catalysts should drive the stock.

Microsoft well-positioned to grow the market and take share with the release of Win 8 by end of 2012. Our survey showed that Apple is the dominant tablet vendor, with 54% of the current installed base and 46% of prospective tablet buyers plan to purchase an iPad—which shows that Apple may cede a modest amount of share. Conversely, some of Microsoft’s key OEM partners, including Acer, Dell, and HP, could gain tablet market share—albeit off a small base.

While Windows 8 tablets are not yet on the market, our survey data points are more bullish than we expected. Of the respondents that intend to purchase a tablet, 25% plan to purchase a Win 8 tablet vs. 46% an iPad and 22% an Android tablet (with Win tablets at any price). Of those respondents that are planning on buying a tablet not from Apple, Amazon.com, Barnes & Noble, Blackberry, Google or Motorola, 54% said they plan on purchasing a device with Windows 8 vs. 42% who plan on purchasing an Android device. This suggests that Microsoft may be well-positioned to take share from Android and increase adoption from minimal share today to mid-teens of the tablet installed base. Additionally, when asked what tablet respondents would prefer if similarly priced, 34% of respondents chose an iPad and 30% a Win 8 tablet vs. 13% a Google Android tablet. However, given that Win 8 is not yet released—and likely will

16



not be until Q4—consumer demand will be shaped by the early feedback and reviews, and there could be upside to this estimate if Win 8 is better than expected.

Exhibit 26

25% of Respondents Plan on Purchasing a Win 8 Tablet vs. 46% for an iPad and 22% for Android

Tablet Purchase Intentions by Platform

Google Android,

22%

Other, 7%

Apple iOS, 46%

Microsoft Windows 8,

25%


Android-based vendors have had mixed results since Google launched Honeycomb, a tablet-oriented Android release in February 2011. We are not counting Google out, as it took Android about two years after the iPhone launched to gain traction in the smartphone market, and the company just acquired Motorola Mobility. However, Microsoft could be a credible alternative platform for hardware OEMs in tablets, which was not the case a few years ago in the smartphones.

Amazon.com’s Kindle Fire is also seeing less interest—with only 4% of the current tablet installed base and with only 3% of prospective tablet owners planning to purchase an Amazon.com tablet. However, we believe Amazon.com may refresh the Kindle Fire in Q3, with an update to the current 7-inch product and potentially a new 10-inch Kindle Fire. Amazon.com has been elusive about any upcoming product releases and consumers have not seen any prototype, so potential demand for a refreshed 7-inch Fire and a new 10-inch Fire tablet are likely not fully captured in this survey. While the company looks to be committed to the tablet market long-term, it is not a preferred way to play tablet proliferation given the current uncertainty in our view.

Exhibit 27

Key Windows Partners Acer, Sony, Dell, HP, Toshiba and Asus Are Poised to Gain Share


11

3

2

2

1

1

3

5

2

0

1

15

14

7

5

4

4

3

3

3

2

2

1

7

5446Apple

Samsung

Acer

Sony

Dell

HP

Toshiba

Asus

Amazon.com

RIM

HTC

Lenovo

Other


Purchase Intentions


Our survey indicated Microsoft Office is the most important software feature to consider when purchasing a tablet, especially for first-time purchasers. Today, tablets are used mainly for content consumption activities, such as reading, web browsing, and watching videos. However, tablets are evolving from their main use of content consumption towards content creation, and consumers—along with enterprises—are requiring more fully featured productivity applications. Sixty-one percent of prospective tablet purchasers indicated that Office was the most important software feature vs. 44% for current tablet owners—which suggests there may be pent up demand for a tablet offering with a prepackaged Office bundle.

Microsoft is creating two versions of Office and will release Office 15 with Win 8 on ARM processor architecture (WOA), which is key for Microsoft in the tablet market, while Office 15 for x86 processors may be released separately. The Office 15 beta should be out this summer, which means Office 15 for WOA should be out this Fall, with x86 shortly after. While WOA Office 15 applications will be included with the WOA launch, it is unclear if Microsoft will be offering the Office applications pre-installed for free or for an additional cost.

17



However, we do expect Microsoft to bundle a version of Office with its ARM based tablets. Given that Microsoft seeks to gain tablet market share, Microsoft may offer some form of Office 15 for free or as a trial on the initial WOA devices to incent consumer adoption.

Exhibit 28

Windows Office Is a Key Software Feature for Future Tablet Purchasers

Most Important Software Features when Considering a Tablet Purchase

57%

52%

30%

21%

61%

45%

34%

27%

61%

33%

47%

44%

39%

50%

Ability touse MS Office

Synch purchasesacross devices

Amount mediacontent for purchase

Quality ofthird-party apps

Number ofthird-party apps

Access toprevious

iTunes purchases

Voicerecognition

All Potential Purchasers Current Tablet Owners Source: AlphaWise, Morgan Stanley Research

The quality of third-party applications is more important than quantity. The availability of applications is key to tablet adoption, but our survey suggests that the quality of available applications is more important to consumers than the quantity as 47% of prospective tablet purchasers highlight the quality of applications as a top-three software feature vs. 33% that note the number of applications as a top-three feature. Both iOS and Android currently lead Microsoft in terms of tablet-friendly content, with Google Play (Android) citing ~500K applications as of May 2012 and iOS with >725,700 applications (>90K specifically for the iPad) as of February 2012. However, Microsoft has the opportunity to catch up in quality applications given the breadth of its developer base.

Windows 8 will include the Windows Store, which will offer “Metro-style” applications accessible via Win 8 or the more tablet-friendly ARM-based Win RT. This means that legacy x86 applications will not be available via the Windows Store and application vendors or third parties will be responsible for the development of new Win 8 applications, which will likely take some time. However, we expect a number of important partners to announce Metro-friendly applications concurrent

with the Win 8 / Win RT release, while Office 15 will be released concurrently with Win RT—which will be key to consumer adoption.

Additionally, over time, we believe Microsoft can differentiate its app store from iOS and Android, and attract developers through better economics and features. Microsoft will also offer a dashboard to developers to provide insight into application usage, while Microsoft will offer a tiered revenue sharing model—with Microsoft taking a 20-30% cut of the app rev, depending on scale, compared to 30% for iOS and Android, and the economics accrue to the developer as usage scales. With 1.25 billion PCs today, according to Gartner, a developer can reach more than $1 million in revenue by targeting less than 1% of the Win base—a more compelling value proposition for the developer community than other platforms.

Pricing will be key for Windows. While we do not yet have any details on pricing of Win 8 tablets, our survey shows that customers want to pay less for a Microsoft tablet with Office than an Apple iPad. The maximum price consumers would be willing to pay for a Win 8 tablet with Office is $469, a 6% discount to an iPad at $500. However, we do not know what the actual bundling will look like with Office, Skype and other features. Pricing preferences may shift and Microsoft may not necessarily compete on price.

Consumers are willing to pay a slight premium for a Windows versus Android device, which illustrates the potential for Windows to gain share in the mid-priced tablet market, whereas Android devices and particularly Amazon.com Kindle Fire may be more successful in the mid to low-end of the market. Additionally, Android devices are likely to capture more share in China, where a number of Chinese OEMs are coming out with modestly priced Android devices.

Exhibit 29

Price Consumers on Average Are Willing to Pay for a Windows Tablet Is at a 6% Discount to the iPad

500

469456

446

422

360

400

440

480

520

Apple iPad MicrosoftWindows 8

GoogleAndroid

Asus EeePad

Transformer

Amazon.comKindle Fire

Discount vs. iPad: -16%-6% -9% -11%

Maximum Price Willing to Pay for Each Offering vs. the Apple iPad


18


19


Exhibit 31 Exhibit 30

Hypothetical Tablet Platforms and Offerings Used in the Above Survey Question

Microsoft Windows 8 and Office License Fees Could Drive a Successful Second Tablet Platform

Windows 8 Tablet

Google Android Tablet

Asus Eee Pad Transformer

Amazon.com Kindle Fire

Operating System Windows 8 Android Android Android

Communications Skype Google Voice, Google+ Hangout

(Video)

Skype Skype

Cloud Service SkyDrive Google Drive Asus MyCloud and Webstorage

Amazon.com Cloud and

WhispersyncOnline Store Windows Store

and Xbox LiveGoogle Play Google Play Amazon.com

AppstoreSpecial Features Prepackaged

Office SuiteGoogle+ account

settings, bookmarks, etc

integration

Full QWERTY keyboard and 16 hours of battery

life when docked, and prepackaged with Polaris Office

software

Amazon.com Silk browser, and one

month free subscription to

Prime

Tablet with Wi-Fi and 16GB

Scenario 1 Scenario 2 Scenario 3iPad 3 Windows 8 Windows 8 Windows 8

Price 499 469 469 469

Component Cost vs. iPad +0% +5% +10%Components 306 306 321 337Microsoft Licenses 0 114 98 82Manufacturing 10 11 12 13

Total COGS 316 431 431 432

Gross Profit 183 38 38 37GM 37% 8% 8% 8%

R&D 12 9 9 9SG&A 32 28 28 28

Total OPEX 45 38 38 38

Operating Profit 138 0 0 0OPM 28% 0% 0% 0% Source: AlphaWise, Morgan Stanley Research

Source: iSuppli, Company Data, Morgan Stanley Research

Microsoft license pricing is a variable that will determine the success of Microsoft and its partners. It is unclear how much Microsoft will charge OEMs for Windows 8 and Office, but we conduct a scenario analysis assuming a Windows tablet’s cost of goods is roughly 0-10% more expensive than an iPad’s due to lower volume discounting, while R&D and SG&A expenses are lower than for an iPad. Our analysis shows the maximum Microsoft could charge is $114 before OEMs would lose money on a Windows tablet, assuming similar component costs relative to an iPad. If Microsoft OEMs’ component costs are 10% higher than Apple, Microsoft could charge a maximum $82 for Windows and Office. We expect Windows 8 license pricing to be similar to PC pricing of ~$50, which suggests a $32-$64 price for Office, which may be lower than what Microsoft currently charges. However, the bundled version of Office with Windows RT will likely be a “light” version, so it is entirely reasonable to assume Microsoft will price it at a discount to normal editions. If Microsoft charged $50 for software, OEMs would earn a reasonable margin of ~7%, assuming 10% more expensive component prices for a Windows tablet relative to an iPad.

To better illustrate potential outcomes over the next two years, we present a scenario analysis of tablet OS market share. Apple is likely to maintain market share leadership in the near term, but we also expect increasing fragmentation over time, similar to that of the smartphone market. To calculate the impact to Microsoft’s EPS, we analyze several scenarios that calculate potential revenue from Windows share gains in the tablet market versus incremental tablet cannibalization based on our survey results. Our current Microsoft model assumes 4% and 6% PC unit growth in CY12 and CY13, respectively, which implies ~30% cannibalization to PCs from tablets. However, our survey shows ~41% PC cannibalization, which will yield 1% PC growth in both CY12 and CY13. Using the new assumptions on PC cannibalization and growth, Microsoft may see an incremental 6 million and 17.5 million in cannibalized PCs in CY12 and CY13, respectively. However, this could be offset by incremental share gains in the tablet market.

We base our assumptions on our base case forecast of 22% Windows market share in new tablet shipments, which is below the 25-30% expected purchases implied by the survey. We also assume that the Windows OS on a tablet will garner approximately the same price point as it does on a cannibalized unit, but that assumption may be conservative, given that we expect netbooks to be the most affected by cannibalization, and Windows on a netbook has a 30-40% lower ASP than on a traditional notebook.

In the near term, multiple partners could launch products and try to establish a foothold in the tablet market. While tablets with modest or flat margins are not entirely compelling, OEMs are already seeing high cannibalization rates in the PC market and a better foothold in the tablet market than Android could provide is a win. Other variables that could help OEMs price Windows 8 tablets at a discount to the iPad and still at least breakeven include lower retailer margins and/or OEMs willing to accept low- to mid-single digit margins long-term, like the PC market, vs. smartphone margins.

Scenario A— Microsoft breaks even in CY13. iOS, 55% share; Android, 25% share; Windows, 8% share.

Scenario B— Windows becomes third market leader. iOS, 45% share; Android, 22% share; Windows, 22% share.

Scenario C— Windows overtakes Android. iOS, 42% share; Android, 20% share; Windows, 30% share.



Exhibit 32

Windows Likely to Suffer Some Additional Cannibalization Relative to our Model but Total EPS Impact Should Be Offset by Incremental Share Gains in 2013

2012 2013 Total 2012 2013 2012 2013 2012 2013Windows 6.1 17.5 23.6

Tablet OS Market ShareWindows 5% 8% 15% 22% 15% 30%iOS 60% 55% 54% 45% 54% 40%Android 25% 25% 21% 22% 21% 20%Other 10% 12% 10% 11% 10% 10%

Total 100% 100% 100% 100% 100% 100%UnitsWindows 6 18 20 48 20 65Apple 80 119 72 97 72 87Android 33 54 28 48 28 4Other 14 26 13 24 13 2

Total 55 89 143 133 216 133 216 133 216

MSFT Revenue Impact

2012 2013 Total 2012 2013 2012 2013 2012 2013Windows Market Share 5% 8% 15% 22% 15% 30%Windows Units 6 18 24 6 18 20 48 20 65Windows ASPs $50 $50 $50 $50 $50 $50 $50 $50 $50

MSFT Rev. Imp

32

a 305 875 1,180 2 0 696 1,505 696 2,370MSFT EPS Impact 0.00 0.00 0.04 0.10 0.04 0.15

Cannibalized UnitsScenario A Scenario B Scenario CIncremental

Scenario A Scenario B Scenario C

Incremental TabletsIncremental TabletsIncremental Tablets

Cannibalized Units Incremental Tablets Incremental Tablets Incremental Tablets

Source: AlphaWise, Company Data, Morgan Stanley Research

20



Semiconductors and Communications Equipment

US Semiconductors US Communications Equipment

Joseph Moore Ehud Gelblum. PhD Sanjay Devgan Jeremy David, CFA

Europe Semiconductors Japan Semiconductors

Francois Meunier Kazuo Yoshikawa Andrew Humphrey

Which semiconductor vendors are best-positioned to benefit from tablet proliferation?

The application processor market continues to be dominated by ARM vendors, led by Apple’s proprietary solution (fabricated at Samsung), Samsung’s proprietary solution, and merchant solutions from Qualcomm, Texas Instruments, and NVIDIA. The success of tablets is an incremental negative for the PC supply chain, particularly Intel and AMD, as the replacement rate for PCs should continue to slow.

NAND suppliers should also benefit from tablet proliferation. Tablets could consume about 12% of NAND flash demand in 2012 and more over time. We believe Samsung, Toshiba and SanDisk are best-positioned in this market.

Can family data plans or tablet upgraders boost cellular connectivity adoption in tablets?

Yes, at no incremental cost to consumers. We expect family/shared data plans to appear over the summer at Verizon and possibly AT&T, allowing subscribers to split data plans across users and/or devices. We believe this is likely to increase cellular penetration rate in tablets, with two-thirds of WiFi-only purchasers upgrading to cellular tablets in our survey. Our survey also indicates that current tablet owners perceive cellular connectivity to be a key requirement of tablets even more than non-tablet users. As the market matures, we expect to see increasing 3G/4G penetration. Qualcomm, Broadcom, Avago and Skyworks are best-positioned to benefit.

Best positioned: ARM, NVIDIA, Texas Instruments, Samsung, Toshiba, SanDisk, Qualcomm, Broadcom, Avago, Skyworks

Challenged: Intel, AMD

Battery life and pricing are the most important criteria when considering tablet purchases, according to our survey, with above 50% of respondents citing each criterion.

Exhibit 33

Battery Life and Price Clearly Most Important When Considering a Tablet Purchase

0%

10%

20%

30%

40%

50%

60%

Ba

ttery

Life Pric

e

Pro

cess

or

To

uchs

cree

nQ

ualit

y

Larg

eS

cree

n

Ligh

t-W

eig

ht

Brig

ht, H

i-Res

Scr

een

4G

LT

EC

onn

ectiv

ity

Thi

nne

ss

Cam

era

NF

C

First-Time Purchasers and Upgraders Upgraders

Most Important Hardware Features when Considering a Tablet Purchase


ARM

ARM has an advantage in terms of battery life… ARM has been a pioneer in enabling long standby time for devices, with the ability to leave most of the chip in idle mode. More importantly, the power curve of ARM chips is more scalable in our view, and the chip will only use the amount of power it needs with a higher level of granularity than competition. The battery life advantages of ARM are also based on (1) its proprietary instruction set architecture, (2) processor micro-architecture, and (3) system-on-chip design allowing more direct communication with the memory.

… yet it is also scalable in performance. ARM’s roadmap shows that it can deliver even stronger performance than today’s chips, which Apple uses in the iPad. The processing power of the second-generation iPad, based on a dual core Cortex A9 at 1.2GHz, outperforms the first-generation iPad by a factor of 2.5x. The roadmap for a 2GHz quad-core Cortex A15 shows a 20x improvement over the first iPad.

21



Exhibit 34

Scalable Power Processing

1.0x2.5x

5.0x

10.0x

20.0x

Cortex A8, 1Ghz(1st-Gen iPad)

Cortex A9, dualcore, 1.2GHz(2nd- and 3rd-

gen iPads)

Cortex A15,1.5GHz

Cortex A15, dualcore, 1.5GHz

Cortex A15, quadcore, 2GHz

Source: Company Data, Morgan Stanley Research

ARM provides a cost advantage for the market leaders. The three generations of the iPad have shown that tablets could become “content creation devices” despite running on a low-priced chip ($15-25 according to our estimates). iPhoto and iMovie run on a relatively small processor core yet can match the performance of Intel-based laptops for the average user. We also believe that Apple and Samsung generate cost savings by designing their own chips rather than using third-party providers, which would have to generate 40-60% gross margin above the wafer cost. Assuming savings of $10-15 per chip and a run-rate of 15 million iPads per quarter, this represents savings of $150-225 million for iPads alone. Furthermore, the market leaders reuse the same IP in other platforms, such as Apple TV, iPod Touch and iPhone for Apple, providing significant scale advantage in terms of development costs (OS, software in particular).

ARM is present in many other chips in tablets. ARM also provides cores for GPS, Bluetooth, WiFi, touchscreen controllers, and all 3G and LTE basebands. Intel does not have a LTE solution ready yet—we expect it to be sampling by the end of the year—while the survey shows that 33% of respondents care about 4G connectivity. This might give a first-mover advantage to the ARM camp (Apple, Samsung, Qualcomm), in our view. Note that all 3G/LTE basebands use ARM cores, including those designed by Intel.

ARM-based Processor Vendors

We are similarly enthusiastic about ARM’s customer, NVIDIA, given its tablet product portfolio. NVIDIA’s application processor family, Tegra, is particularly well-suited for tablets and very high-end smartphones. NVIDIA’s dual core ARM 9-based application processor, Tegra 2, had a very good year in 2011 with non-Apple tablets, with tablet designs

from Acer, Asus, Lenovo, LG, Motorola Mobility, Samsung and Toshiba. Unfortunately, the tablet addressable market excluding Apple and Samsung has taken a while to develop, and with high sell-in in 2011 (and low sell-through), we do not think tablets will drive much growth for NVIDIA this year.

Tegra 3, which is ARM-based quad-core solution, will drive 2012 tablet revenue, and its upgraded features from Tegra 2 including a fifth companion core for extremely efficient standby activity and improved graphics. Announced tablet customers include several repeats from Acer, Asus, Lenovo, and LG, though build rates are more cautious this time around. NVIDIA will not have the same participation from Samsung, who will increasingly use its own application processors. NVIDIA’s next generation Tegra 4, a quad-core Cortex A15, ships in early 2013.

We also think NVIDIA could have success with Windows 8 tablets, as we have heard from some in the supply chain that NVIDIA has had reasonably good experience designing for the Windows RT tablet market, given the company’s history of writing drivers with Windows compatibility, which will be a key challenge for the Windows RT supply chain.

We are also enthusiastic about the potential for Texas Instruments’ OMAP application processors in tablets, though with the same caveat as NVIDIA—that tablet success has not really spread far beyond Apple and sell-through of those products has been inconsistent. TI’s OMAP 4 has had good success in getting tablet design wins. In particular, it was the reference design for Google’s Ice Cream Sandwich tablet operating system early this year at CES, and has a flurry of new designs with Archos, Fujitsu, LG, Toshiba and e-readers (Kindle Fire and Nook).

OMAP 5 will ship later this year, with dual-core Cortex A15 built on 28nm. We do not think Windows 8 will be written to run on Cortex A15 initially, but this could be an important indicator for 2013.

Tablet Impacts on Intel and AMD

Intel has the most to lose from the continued success of tablets, to the extent that tablet purchases lead to delays in PC purchases, as our survey data shows. The company has put together a strong multipronged strategy to drive success in tablets, but we think it will take a while to play out.

In our view, tablet application processors are unlikely to become meaningful for Intel in 2012-13. It is very hard to imagine revenues from tablets or phones being relevant to a

22



$60 billion revenue company in the next two years, which means tablet and smartphone trends will continue to be a net negative for Intel. Even if Intel is successful in tablets, tablet cannibalization of PCs is a net negative, as $20 application processors replace $120 notebook microprocessors.

The Intel tablet/smartphone strategy is threefold: (1) build a better smartphone processor, Medfield, and penetrate the traditional phone and tablet market; (2) build a more power-efficient PC processor, Haswell, in 2013 and move it down market into tablets; and (3) build foundry capacity to build tablet application processors.

Intel’s latest tablet/smartphone offering, Medfield, appears to be a significant leap in performance over prior efforts. It is a testament to what Intel can do, very quickly, when it falls behind in segments of the market. Importantly, the strong benchmarks for Medfield are also proof that if there is any inherent power consumption disadvantage to having x86 overhead, Intel will be likely to able to overcome it. Medfield is a nice proof point, with good performance from a single-core processor on an aging process technology. Once Intel ramps dual-core products on advanced technologies over the next couple of years, the benchmarks should continue to improve.

We do not think Medfield puts Intel on a level playing field in terms of performance with ARM just yet, though it is a big improvement. Most benchmarks we have seen pit Medfield against ARM’s Cortex A9. In our view, the more appropriate comparison would be Medfield vs. Cortex A15 architectures, such as Qualcomm’s Krait, in actual devices rather than development environments, which we should see in the coming months. Intel is now part of the debate, after proving it can make an x86 architecture that is much more competitive within ARM’s core markets.

At best, a couple of years down the road, we see Intel, NVIDIA, and TI vying for fourth place behind Apple’s custom application processor, Samsung’s internal application processor, and Qualcomm. It would be very impressive, in our view, if Intel’s Medfield and its follow-on products could catch up to NVIDIA or TI in these businesses within 2-3 years. NVIDIA earned $360 million in Tegra revenue last year and we estimate that TI did $630 million in OMAP, and we have fairly low growth estimates for both this year. An Intel success case would be overtaking these two vendors. This is unlikely to occur, in our view, and even if it did, application processors would still represent less than 1% of Intel’s revenue.

The other aspect of Intel’s strategy is “Ultrabook”, a very thin and light notebook similar to Apple’s Macbook Air, which seems likely to become a “convertible” (laptop with detachable keyboard) market next year when Haswell has better low power characteristics.

The survey indicates that only 15% of the respondents who do not own an Ultrabook type of product intend to buy one in the next 12 months. Of those who do not own a tablet, 31% intend to buy one in the next 12 months. E-readers and netbooks had similar purchase intentions to Ultrabook. Of course, the bulk of product introductions, and Intel marketing dollars, are still ahead of us.

AMD will also enter the low power x86 market for tablets with its "Hondo" processor, essentially an ultralow power (4.5 Watt) version of Brazos, likely in 4Q12 in conjunction with Windows 8 tablets. The company will then migrate to a 28nm product code-named "Tamesh" next year, based on the same Jaguar core as the other low-priced client CPU businesses on the 2013 roadmap. AMD has also alluded to being "instruction set agnostic", meaning they could pursue an ARM license at some point, though we think servers would be the target of any such activity. We do not expect much traction this year within tablets, while any slowing in the notebook market due to tablet cannibalization will obviously impact AMD.

Tablets a Boost for the Memory Markets

Tablets will consume about 12% of NAND flash in 2012, and we expect that number to keep growing over time. NAND is a unique enabler of both smartphones and tablets, and as prices fall, we expect to see large increases in content per unit in 2013. Twenty-to-forty percent of respondents said they use applications weekly that require substantial NAND content, including watching videos (28%), recording video (29%) or reading magazines (37%), and we think applications such as games (42%) will continue to grow over time. Apple in particular has been very successful in using NAND content to price discriminate, charging substantial premiums for higher NAND content devices. With NAND prices well below $1 per gigabyte, we expect higher NAND content next year.

23



Exhibit 35

20-40% of Respondents Use Applications that Require Substantial NAND Content Weekly

% of Respondents that Use Their Tablet for the Following Tasks at Least Once a Week

0%

20%

40%

60%

80%

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We are bullish on NAND generally, and specifically on Samsung Electronics, Toshiba and SanDisk. We believe Samsung Electronics (SEC) should be a key beneficiary of increasing NAND demand. Given its technology leadership and economies of scale, we expect SEC to maintain its market leadership and continue to be the key NAND supplier for Apple’s iPad and SEC's Galaxy Tab.

Toshiba also has relatively high exposure to embedded NAND. Due to higher requirement for reliability, we think that most of Toshiba's embedded products are 24nm or 32nm process currently. However, we expect Toshiba to develop embedded and SSD products based on its leading-edge 19nm process this year, which will enable the company to maintain cost competitiveness.

Although we view SanDisk as one of the best-positioned NAND vendors, we should note, however, that it has relatively low exposure to embedded NAND currently. That helped the company’s profitability last year, because categories such as retail or embedded flash cards sold to OEMs were more profitable than embedded tablet opportunities, but as more of the NAND market becomes embedded SanDisk will have to migrate. We think they will successfully do so.

Baseband, Connectivity and Related Vendors to Benefit

Family data plans likely to boost wireless penetration in tablets. According to IDC, 62% of tablets purchased in 1Q12 were WiFi only. However, we believe consumers aspire to wireless connectivity, as 76% said they plan to buy a tablet with 3G or 4G connectivity, with only 24% intending to purchase a WiFi only tablet. In addition, we found that

amongst respondents who planned to buy WiFi only tablets, two-thirds would actually change their purchasing intentions to cellular connectivity if they could add their new tablet to their existing smartphone data plan at no extra charge. Therefore, the tablet market could move to 90%+ wireless penetration over time as wireless pricing (upfront and monthly charges) becomes more consumer-friendly. We believe the introduction of family/shared data plans, likely over the summer, and the potential success of Windows-based tablets – which we expect to open up lower price points for baseband equipped tablets – should together finally catalyze the adoption of cellular connectivity in tablets.

Exhibit 36

62% of Tablets Bought in 1Q12 Were WiFi-Only, but 76% of Consumers Want Wireless Connectivity

Connectivity Preference for Next Tablet Purchase (%)

24

3442

62

27

11

Wi-Fi Only Wi-Fi + 3G Wi-Fi + 4G LTE

Purchase Intentions 1Q12 IDC Data Source: AlphaWise, Morgan Stanley Research

Exhibit 37

Two-Thirds of WiFi Tablet Purchasers Would Add Cellular Connectivity If They Could Add the Tablet to Their Current Data Plan at No Extra Cost

Tablet Connectivity Preferences if Carrier Data Plans Allowed Multiple Devices

66%

34%

3G or 4G LTE Wi-Fi only


Wireless tablets provide a superior consumer experience. Our survey also indicates that 32% of current tablet owners consider 4G connectivity as one of the top three most

24


25


important hardware features in a tablet, much higher than the 15% of respondents planning to purchase a tablet in the next 12 months, suggesting that, as the replacement market grows, wireless penetration rate in tablets is likely to increase.

Exhibit 38

4G Connectivity Is More Important for Repeat Tablet Purchasers than for First-Time Tablet Buyers

0%

10%

20%

30%

40%

50%

60%

Ba

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Life Pric

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Qualcomm best-positioned to benefit from tablet proliferation and the increase in wireless penetration. The move to 3G/4G (vs. WiFi-enabled) tablets is a positive for Qualcomm, as it expands the 3G/4G device market (on which Qualcomm collects royalties) while increasing the market opportunity for basebands and application processors. Qualcomm is the market leader in baseband, with a product portfolio across all tiers, and leading multi-band LTE chipsets. While the New iPad uses a Qualcomm LTE chipset and an Apple application processor, we expect Windows 8 tablets to embrace integrated solutions, with Qualcomm well positioned to sell its integrated application processors.

We believe Broadcom is one of the best-positioned names within the semiconductor space to benefit from the proliferation of tablet devices, with 65%+ share in wireless connectivity (Bluetooth, WiFi, GPS, FM). Broadcom is the incumbent supplier into Apple’s iPad platform, and has been for three generations. While connectivity solutions in general are standards-based (i.e., engineered in accordance with IEEE specifications), Broadcom’s ability to deal with radio interference across multiple radios within a single die

differentiates its solutions relative to competing solutions. Moreover, while most of Broadcom’s competitors are bringing first- or second-generation solutions to the market, Broadcom has delivered seven different generations of connectivity solutions. Lastly, we believe the integration of new radios (802.11ac and NFC), which many of Broadcom’s existing connectivity competitors currently lack, will serve to drive further differentiation that will enable Broadcom to continue to grow its connectivity business. Beyond connectivity, we note that Broadcom is also the major supplier for Apple iPad touch-screen controller.

We believe the migration to the LTE air standard will serve as a growth catalyst given Avago’s leadership position within the filter space. Avago’s film bulk acoustic resonator (FBAR) filters are the only available solution that we are currently aware of that can support band-2 of the LTE air interface. Consequently, for handset vendors looking to deliver global handsets, there exists a high probability that Avago’s FBAR filter technology will be used. Beyond Avago, we believe TriQuint Semiconductor is attempting to develop its own FBAR filter technology, although we do not believe TriQuint has any commercially available silicon. Lastly, while it has not traditionally been a major player within the power amplifier space, we believe Avago’s differentiated FBAR technology has opened up additional content opportunities to “piggy-back” sales of its power amplifiers with its filters. This was clearly reflected within the iPad as Avago has won the full front-end module (FEM) that incorporates both a filter and power amplifier.

With the completion of the SiGe and AATI acquisitions, Skyworks now has one of the broadest portfolios of radiofrequency (RF) products. Specifically, Skyworks is capable of providing power amplifiers (cellular, Bluetooth, WiFi, GPS), antenna switch modules, and filters. Consequently, while it historically only had 1-2 sockets available within a given smartphone or tablet, we now believe there are up to 6-7 sockets that Skyworks can capture. Moreover, we note that similar to Broadcom and Avago, Skyworks is one of the incumbent suppliers within Apple’s current iPad, currently supplying two WCDMA power amplifiers.



Component and Assembly Supply Chain

Asia Technology

Jasmine Lu Sharon Shih Po-Ling Chen Brad Lin

Who benefits most among the tablet supply chain from vendor share changes in 2012-13?

We believe Hon Hai, the main iPad assembler, and Foxconn Tech, Hon Hai’s main metal casing subsidiary, should benefit from the larger tablet market and the tightened supply relationship with Apple.

On the component front, we identify AAC as the key beneficiary given its new penetration into the tablet market starting from 2012, especially with the iPad, which we estimate to account for around 15-20% of total sales.

Which component supplier is better-positioned among the desired tablet feature shift?

We view TPK as the major beneficiary of a design shift to thin and light touch solutions given its dominant supplier share in Apple’s iPad, numerous non-Apple tablet design wins for 2H12, proven yield and production capability, and its full range of touch design offerings. The survey suggests battery life, price, processor, touchscreen quality and large display size are the most important tablet features for respondents’ next tablet purchase.

Best positioned: Hon Hai, AAC, TPK and Foxconn Tech

Implications of Tablet Vendor Share Shifts

Apple remains the dominant tablet vendor. Amazon.com is expected to lose unit share while several PC vendors are poised to gain share. Our in-house iPad forecasts were increased by 8% in 2012 and 18% in 2013 to 70 million units (up 72% Y/Y) and 97 million units (up 39% Y/Y), respectively. Our survey suggests lower purchase intentions for Amazon.com’s Kindle Fire, while a few PC brands, such as Acer, Sony, Dell, HP and Toshiba, could gain 2-4 points of share off a low base.

Assembly – Hon Hai is expected to handle at least 80% of iPad assembly orders with Pegatron sharing the rest. With the increased iPad volume estimates and improved yield and efficiency after Hon Hai’s site relocation to Chengdu, China for more than a year, we see upside risk to our estimates for iPad contribution. Note, our channel checks suggest Hon Hai is likely one of the assemblers for Amazon.com’s new tablet projects in 2H12. If these

projects continue to cannibalize regular notebooks, Hon Hai is the net beneficiary given its limited exposure to notebook assembly.

Components – AAC Technology is best-positioned. We believe AAC is the key beneficiary in terms of share allocation and sales contributions from tablets, especially from iPad and to a lesser extent Amazon.com’s new tablet projects. AAC emerges as a new supplier to the third-generation iPad since late 1Q12 and we estimate the iPad alone contributes nearly 15-20% of total sales. Foxconn Tech, as the dedicated metal casing supplier to Hon Hai, will benefit from Hon Hai’s growing tablet exposure in 2013.

Exhibit 39

Apple Remains the Dominant Tablet Vendor, while Several PC Vendors Are Poised to Gain Share


11

3

2

2

1

1

3

5

2

0

1

15

14

7

5

4

4

3

3

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2

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7

5446Apple

Samsung

Acer

Sony

Dell

HP

Toshiba

Asus

Amazon.com

RIM

HTC

Lenovo

Other


Purchase Intentions


Implications of Respondents’ Desired Tablet Features

Battery life and price are two major factors for potential tablet purchasers. Processor and touchscreen quality are also important while tablet thinness, camera resolution and near-field communication (NFC) turn out to be less important.

26



Battery life: Due to continuous display resolution upgrades, backlight module redesign, and processor power enhancement, the demand for better battery life continues to rise. For example, the battery life of the third-generation iPad increased by 70%; and thus the price of the battery pack is also 25% higher. We see the same adoption trend in non-Apple tablet products, which bodes well for the battery pack suppliers, such as Simplo and Dynapack.

Processor: The core processor adopted in tablets continues to evolve from dual-core to quad-core design and upgrade to 28/32nm production process for enhanced 3D game effect, video editing and lower power consumption, etc. Examples include Apple A5X and potentially A6 (iPhone and iPad), Samsung Exynos (Galaxy S III), NVIDIA Tegra 3 (Asustek tablet) and Qualcomm Snapdragon S4 (HTC One X). We view Kinsus as the major beneficiary of the continuous processor upgrade for its FC-CSP substrate offerings to Qualcomm and Apple and, to a lesser extent, Unimicron for exposure to NVIDIA Tegra 3.

Touchscreen quality: Touch design in tablets is moving toward thinner and lighter requirements but the touch sensitivity/quality should not be sacrificed at the same time. Thus, the single-glass touch design (OGS) and glass-film (G/F) touch structures are seeing increasing adoption for new tablet projects to debut in 2H12. We view TPK as a net beneficiary for touch design progress given its dominant supplier share for Apple’s iPad, proven yield and production capability, as well as its full range of touch design offerings (G/G, touch-on-lens, G/F and G/F/F).

Large screen size: The survey indicates potential tablet buyers prefer a 10” or 12” display size, larger than most of the existing design. We believe this suggests consumers care about reading comfort when using tablets. This implies the display design is important, including large screen size, greater display resolution but at the same time, optimization of color contrast ratio. This offers room for differentiation for most panel makers, including Sharp, Samsung, LG Display and AUO.

Exhibit 40

Respondents Care about Battery Life, Processor, Touchscreen Quality and Large Screen Size

0%

10%

20%

30%

40%

50%

60%

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Exhibit 41

Potential Tablet Purchasers Prefer Large Screen Sizes, with 10” and 12” the Top Two Choices

Screen Size Preference for Next Tablet Purchase (%)

2 2

9 118

38

5

25

5” 6” 7” 8” 9” 10” 11” 12” Source: AlphaWise, Morgan Stanley Research

Exhibit 42

iPad Supply Chain iPad 2 iPad 3

Ticker Company 2011 Sales % 2012 Sales % Items Supplied2018.HK AAC 0% 15-20% Acoustic components2317.TW Hon Hai 6-8% 9-11% Assembly4938.TW Pegatron 0% ~4% Assembly4958.TW Zhen Ding* 5% 5-10% Flexible PCB6269.TW Flexium* ~5% 5-10% Flexible PCB6153.TW Career* ~5% ~5% Flexible PCB8046.TW NY PCB* <5% 0% PCB3044.TW Tripod 5-10% 5-10% PCB2313.TW Compeq* 3-5% 3-5% PCB3037.TW Unimicron 0% 3-5% PCB2368.TW Gold Circuit* <5% 0% PCB3189.TW Kinsus 0% <3% IC substrate3673.TW TPK 25%+ ~20% Touch panel6121.TW Simplo* 25%+ 20-25% Battery3211.TW Dynapack* 40%+ 50-55% Battery2392.TW Cheng Uei* NA NA Connectors6230.TW CCIC* NA NA Heat dissemination module6286.TW Richtek 3-4% 5-10% Power management IC3406.TW GSEO* NA NA Camera lens3008.TW Largan ~5% 8-10% Camera lens2327.TW Yageo* <2% <2% Passive components2354.TW Foxconn Tech <5% <5% Casing6176.TW Radiant* 20% 23% Backlight module5371.TW Coretronics* <5% 0% Backlight module3042.TW TXC* <5% <5% Crystal resonator3149.TW G-Tech Opto* 10-20% 10-20% Glass

Source: Company Data, Morgan Stanley Research * non-covered companies; estimates from company

27



Appendix I: Tablet Model 1Q11 2Q11 3Q11 4Q11 1Q12e 2Q12e 3Q12e 4Q12e 1Q13e 2Q13e 3Q13e 4Q13e 2010 2011 2012e 2013e 2014e 2015e

Units (Millions)

United States 3.5 6.7 7.1 14.4 6.8 10.7 10.7 21.6 9.6 15.0 15.0 30.3 10.3 31.7 49.8 69.8 83.7 96.3Western Europe 1.3 2.6 3.4 4.7 3.6 5.6 5.7 8.1 5.4 8.4 8.6 12.1 3.8 11.9 23.0 34.5 41.4 47.6APAC ex-Japan 2.2 3.3 4.8 5.2 4.7 7.3 10.5 12.5 10.9 13.9 17.8 21.2 3.1 15.5 35.0 63.8 89.3 120.6ROW 1.0 2.1 2.9 4.4 3.5 5.0 6.5 10.6 7.4 9.6 12.3 19.0 2.2 10.5 25.6 48.3 67.6 87.9

Total 8.0 14.7 18.2 28.7 18.7 28.6 33.4 52.7 33.3 46.8 53.7 82.5 19.4 69.6 133.4 216.3 282.0 352.3

Y/Y Unit Growth United States 192% 188% 159% 96% 60% 50% 50% 40% 40% 40% 40% 207% 57% 40% 20% 15%Western Europe 354% 236% 111% 184% 120% 70% 70% 50% 50% 50% 50% 212% 93% 50% 20% 15%APAC ex-Japan 2872% 497% 141% 114% 120% 120% 140% 130% 90% 70% 70% 406% 126% 82% 40% 35%ROW 371% 325% 302% 246% 140% 120% 140% 110% 90% 90% 80% 369% 145% 89% 40% 30%

Total 330% 266% 160% 134% 96% 83% 83% 78% 64% 61% 57% 258% 92% 62% 30% 25%

Q/Q Unit Growth United States -37% 91% 7% 102% -52% 56% 0% 102% -56% 56% 0% 102%Western Europe -44% 103% 32% 41% -25% 58% 2% 41% -34% 58% 2% 41%APAC ex-Japan 3% 50% 44% 9% -9% 54% 44% 19% -12% 27% 28% 19%ROW -6% 105% 40% 49% -19% 42% 29% 63% -29% 29% 29% 54%

Total -28% 83% 24% 58% -35% 53% 16% 58% -37% 41% 15% 54%

Unit MixUnited States 44% 46% 39% 50% 37% 37% 32% 41% 29% 32% 28% 37% 53% 46% 37% 32% 30% 27%Western Europe 16% 17% 18% 17% 19% 20% 17% 15% 16% 18% 16% 15% 20% 17% 17% 16% 15% 14%APAC ex-Japan 28% 23% 26% 18% 25% 26% 31% 24% 33% 30% 33% 26% 16% 22% 26% 29% 32% 34%ROW 13% 14% 16% 15% 19% 18% 19% 20% 22% 20% 23% 23% 11% 15% 19% 22% 24% 25%


28


29


Appendix II: PC Model 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12e 3Q12e 4Q12e 1Q13e 2Q13e 3Q13e 4Q13e 2010 2011 2012e 2013e 2014e 2015e

Units (Millions)

Product SummaryDesktops 37 38 40 39 39 38 39 41 39 39 39 39 157 155 156 156 153 152 Notebooks 48 49 55 56 50 47 53 60 54 51 54 57 200 209 210 215 217 218

Total 85 87 96 96 89 85 91 100 93 90 92 96 357 363 366 371 370 370 Tablets 8 15 18 29 19 29 33 53 33 47 54 83 19 70 133 216 282 352

Total 93 101 114 124 108 114 125 153 126 137 146 178 377 433 499 587 652 722

Segment Summary (Ex-Tablets)Developed consumer 19 17 19 22 18 16 17 23 19 16 17 21 89 76 74 73 69 65 Developed commercial 17 17 19 18 17 17 18 18 17 17 17 16 73 72 71 68 64 60 Emerging consumer 27 29 33 31 30 30 32 32 32 31 33 32 107 120 124 129 133 136 Emerging commercial 22 23 25 24 23 23 25 26 25 25 25 26 88 95 97 101 105 109

Total 85 87 96 96 89 85 91 100 93 90 92 96 357 363 366 371 370 370

Consumer 46 46 51 53 49 45 49 56 51 47 50 53 196 197 198 202 202 201 Commercial 39 41 44 43 40 40 43 45 42 42 42 42 161 166 167 169 169 169

Total 85 87 96 96 89 85 91 100 93 90 92 96 357 363 366 371 370 370

Developed 35 34 38 40 36 33 35 41 36 33 34 37 163 148 145 141 132 124 Emerging 50 52 58 55 53 53 56 59 57 56 58 58 195 215 221 230 238 245

Total 85 87 96 96 89 85 91 100 93 90 92 96 357 363 366 371 370 370

Y/Y Unit Growth

Product SummaryDesktops -3% -1% 2% -4% 5% 0% -4% 3% 1% 1% 0% -4% 8% -1% 1% 0% -1% -1%Notebooks 0% 5% 8% 3% 5% -3% -5% 6% 7% 8% 2% -5% 19% 4% 1% 3% 1% 0%

Total -1% 2% 5% 0% 5% -2% -5% 5% 5% 5% 1% -4% 14% 2% 1% 1% 0% 0%Tablets 330% 266% 160% 134% 96% 83% 83% 78% 64% 61% 57% 258% 92% 62% 30% 25%

Total 8% 15% 19% 17% 16% 12% 9% 23% 17% 20% 17% 17% 20% 15% 15% 18% 11% 11%

Segment Summary (Ex-Tablets)Developed consumer -20% -19% -7% -12% -1% -8% -11% 6% 3% 3% 1% -10% 5% -15% -3% -2% -6% -5%Developed commercial -5% -1% 1% -4% 3% -2% -6% 0% 0% 1% -8% -10% 8% -2% -1% -4% -6% -6%Emerging consumer 11% 14% 12% 13% 11% 1% -2% 5% 6% 6% 4% 0% 26% 12% 3% 4% 3% 2%Emerging commercial 9% 11% 11% 2% 3% 0% -2% 8% 8% 9% 3% -2% 15% 8% 2% 4% 4% 4%

Total -1% 2% 5% 0% 5% -2% -5% 5% 5% 5% 1% -4% 14% 2% 1% 1% 0% 0%

Consumer -4% 0% 4% 1% 6% -2% -5% 5% 5% 5% 3% -4% 15% 0% 1% 2% 0% 0%Commercial 3% 5% 7% -1% 3% -1% -4% 5% 5% 6% -1% -5% 12% 3% 1% 1% 0% 0%

Total -1% 2% 5% 0% 5% -2% -5% 5% 5% 5% 1% -4% 14% 2% 1% 1% 0% 0%

Developed -13% -11% -3% -8% 1% -5% -8% 3% 1% 2% -3% -10% 6% -9% -2% -3% -6% -6%Emerging 10% 13% 12% 8% 7% 0% -2% 6% 7% 7% 4% -1% 21% 10% 3% 4% 3% 3%

Total -1% 2% 5% 0% 5% -2% -5% 5% 5% 5% 1% -4% 14% 2% 1% 1% 0% 0%

Q/Q Unit Growth

Product SummaryDesktops -10% 3% 6% -2% -2% -2% 2% 5% -4% -2% 0% 2%Notebooks -12% 1% 14% 1% -11% -6% 12% 13% -10% -5% 5% 6%

Total -11% 2% 10% 0% -7% -4% 7% 10% -7% -4% 3% 4%Tablets -28% 83% 24% 58% -35% 53% 16% 58% -37% 41% 15% 54%

Total -13% 9% 12% 9% -13% 6% 10% 23% -17% 8% 7% 22%

Segment Summary (Ex-Tablets)Developed consumer -26% -9% 12% 16% -17% -14% 7% 38% -19% -14% 6% 23%Developed commercial -11% 3% 10% -5% -5% -3% 6% 1% -5% -2% -3% -1%Emerging consumer 0% 7% 11% -5% -2% -3% 8% 1% 0% -3% 6% -2%Emerging commercial -8% 5% 8% -2% -7% 1% 6% 8% -7% 2% 0% 3%

Total -11% 2% 10% 0% -7% -4% 7% 10% -7% -4% 3% 4%

Consumer -12% 0% 11% 3% -8% -7% 8% 14% -8% -7% 6% 6%Commercial -10% 4% 9% -3% -6% 0% 6% 5% -6% 1% -1% 1%

Total -11% 2% 10% 0% -7% -4% 7% 10% -7% -4% 3% 4%

Developed -19% -3% 11% 6% -11% -9% 7% 19% -13% -8% 1% 11%Emerging -4% 6% 10% -4% -4% -1% 7% 4% -3% -1% 4% 0%

Total -11% 2% 10% 0% -7% -4% 7% 10% -7% -4% 3% 4%




Morgan Stanley Blue Papers

Morgan Stanley Blue Papers address long-term, structural business changes that are reshaping the fundamentals of entire economies and industries around the globe. Analysts, economists, and strategists in our global research network collaborate in the Blue Papers to address critical themes that require a coordinated perspective across regions, sectors, or asset classes.

Recently Published Blue Papers

Financials: CRE Funding Shift EU Shakes, US Selectively Takes May 25, 2012

Cloud Computing Takes Off Market Set to Boom as Migration Accelerates May 23, 2011

The China Files The Logistics Journey Is Just Beginning April 24, 2012

China High-Speed Rail On the Economic Fast Track May 15, 2011

Solvency The Long and Winding Road March 23, 2012

Asian Inflation Consumers Adjust As Inflation Worsens March 31, 2011

Wholesale & Investment Banking Outlook Decision Time for Wholesale Banks March 23, 2012

Wholesale & Investment Banking Reshaping the Model March 23, 2011

Banks Deleveraging and Real Estate Implication of a €400-700bn Financing Gap March 15, 2012

Global Gas A Decade of Two Halves March 14, 2011

The China Files China’s Appetite for Protein Turns Global October 25, 2011

Tablet Demand and Disruption Mobile Users Come of Age February 14, 2011

The US Healthcare Formula Cost Control and True Innovation June 16, 2011

The China Files Chinese Economy through 2020 November 8, 2010

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The China Files Asian Corporates & China’s Megatransition November 8, 2010

The China Files European Corporates & China’s Megatransition October 29, 2010

Petrochemicals Preparing for a Supercycle October 18, 2010

Solvency 2 Quantitative & Strategic Impact, The Tide is Going Out September 22, 2010

The China Files US Corporates and China’s Megatransition September 20, 2010

Brazil Infrastructure Paving the Way May 5, 2010

To find downloadable versions of these publications and information on Other Morgan Stanley reports, visit www.morganstanley.com

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Morgan Stanley provided certain financial advice to Barnes & Noble Inc. ("Barnes & Noble") with respect to the formation of a strategic partnership with Microsoft Corp. in a new Barnes & Noble subsidiary, as announced on April 30, 2012. Please refer to the notes at the end of the report.

Morgan Stanley is acting as financial advisor to Seagate Technology plc ("Seagate") in connection with its exclusive agreement with LaCie Group S.A. ("LaCie") to acquire a controlling interest in LaCie, as announced on May 23, 2012. Following the receipt of the customary approvals and the close of this transaction, Seagate would commence a tender offer to acquire the remaining outstanding shares of LaCie in accordance with the General Regulation of the French Autorité des Marchés Financiers.

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Seagate has agreed to pay fees to Morgan Stanley for its financial services that are contingent upon the consummation of the proposed transaction. Please refer to the notes at the end of the report.

Morgan Stanley is currently acting as financial advisor to Google Inc. ("Google") with respect to its proposed stock dividend, as announced on April 12, 2012. Certain aspects of the proposal are subject to approval by Google's shareholders. Google has agreed to pay fees to Morgan Stanley for its financial advice. Please refer to the notes at the end of the report.

Morgan Stanley is acting as financial advisor to Babcock & Wilcox with respect to its definitive agreement to make an investment alongside Toshiba Corporation in USEC Inc., as announced on May 25, 2010. The proposed transaction is subject to specific preconditions, including regulatory approvals, as well as other customary closing conditions.

Babcock & Wilcox has agreed to pay fees to Morgan Stanley for its financial advisory services.

Morgan Stanley is acting as financial advisor to IBM in relation to its definitive agreement announced April 17, 2012, whereby Toshiba TEC, a subsidiary of Toshiba Corp., will acquire IBM's Retail Store Solutions ("RSS") business. This transaction is subject to the satisfaction of regulatory requirements and customary closing conditions. IBM has agreed to pay fees to Morgan Stanley for its financial services. Please refer to the notes at the end of this report.

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Disclosure Section The information and opinions in Morgan Stanley Research were prepared by Morgan Stanley & Co. LLC, and/or Morgan Stanley C.T.V.M. S.A., and/or Morgan Stanley Mexico, Casa de Bolsa, S.A. de C.V. As used in this disclosure section, "Morgan Stanley" includes Morgan Stanley & Co. LLC, Morgan Stanley C.T.V.M. S.A., Morgan Stanley Mexico, Casa de Bolsa, S.A. de C.V. and their affiliates as necessary. For important disclosures, stock price charts and equity rating histories regarding companies that are the subject of this report, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures, or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY, 10036 USA. For valuation methodology and risks associated with any price targets referenced in this research report, please email [email protected] with a request for valuation methodology and risks on a particular stock or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY 10036 USA.

Analyst Certification The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Grace Chen, Po-Ling Chen, Terence Cheng, Sanjay Devgan, Scott Devitt, Ehud Gelblum, Sunil George, Adam Holt, Katy Huberty, Jennifer Lowe, Bill Lu, Jasmine Lu, Francois Meunier, Joseph Moore, Masahiro Ono, Shoji Sato, Sharon Shih, Young Suk Shin, Keith Weiss, Kazuo Yoshikawa. Unless otherwise stated, the individuals listed on the cover page of this report are research analysts.

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Important US Regulatory Disclosures on Subject Companies The following analyst or strategist (or a household member) owns securities (or related derivatives) in a company that he or she covers or recommends in Morgan Stanley Research: Terence Cheng - Apple, Inc.(common or preferred stock); Jasmine Lu - Acer Inc.(common or preferred stock). Morgan Stanley policy prohibits research analysts, strategists and research associates from investing in securities in their sub industry as defined by the Global Industry Classification Standard ("GICS," which was developed by and is the exclusive property of MSCI and S&P). Analysts may nevertheless own such securities to the extent acquired under a prior policy or in a merger, fund distribution or other involuntary acquisition. As of April 30, 2012, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research: Acer Inc., Amazon.com, Apple, Inc., ARM Holdings Plc, Asustek Computer Inc., Broadcom Corporation, DELL, Google, Hon Hai Precision, HTC Corporation, Microsoft, NVIDIA Corp., SanDisk Corporation, Seagate Technology, Sharp, TPK Holding. Within the last 12 months, Morgan Stanley managed or co-managed a public offering (or 144A offering) of securities of Broadcom Corporation, Hewlett-Packard, Samsung Electronics, Sony. Within the last 12 months, Morgan Stanley has received compensation for investment banking services from Amazon.com, Avago Technologies Ltd, Broadcom Corporation, DELL, Google, Hewlett-Packard, Hon Hai Precision, Intel Corporation, Lenovo, Microsoft, Qualcomm Inc., Samsung Electronics, SanDisk Corporation, Seagate Technology, Sharp, Sony, Texas Instruments, Toshiba. In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from AAC Technologies Holdings, Amazon.com, Apple, Inc., ARM Holdings Plc, Avago Technologies Ltd, Broadcom Corporation, DELL, Google, Hewlett-Packard, Hon Hai Precision, HTC Corporation, Intel Corporation, Lenovo, Lexmark International, Microsoft, NVIDIA Corp., Qualcomm Inc., Research In Motion Ltd., Samsung Electronics, SanDisk Corporation, Seagate Technology, Sharp, Sony, Texas Instruments, Toshiba. 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Global Stock Ratings Distribution (as of April 30, 2012)

For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively. Coverage Universe Investment Banking Clients (IBC)

Stock Rating Category Count % of Total Count

% of Total IBC

% of Rating Category

Overweight/Buy 1115 38% 459 42% 41%Equal-weight/Hold 1254 43% 474 44% 38%Not-Rated/Hold 100 3% 25 2% 25%Underweight/Sell 471 16% 124 11% 26%Total 2,940 1082 Data include common stock and ADRs currently assigned ratings. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the last 12 months.

Analyst Stock Ratings Overweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Equal-weight (E). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Not-Rated (NR). Currently the analyst does not have adequate conviction about the stock's total return relative to the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.

Analyst Industry Views Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated below. In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below. Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below. Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index. .

Stock Price, Price Target and Rating History (See Rating Definitions)

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The information in Morgan Stanley Research is being communicated by Morgan Stanley & Co. International plc (QFC Branch), regulated by the Qatar Financial Centre Regulatory Authority (the QFCRA), and is directed at business customers and market counterparties only and is not intended for Retail Customers as defined by the QFCRA. As required by the Capital Markets Board of Turkey, investment information, comments and recommendations stated here, are not within the scope of investment advisory activity. Investment advisory service is provided in accordance with a contract of engagement on investment advisory concluded between brokerage houses, portfolio management companies, non-deposit banks and clients. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences. For this reason, to make an investment decision by relying solely to this information stated here may not bring about outcomes that fit your expectations. The trademarks and service marks contained in Morgan Stanley Research are the property of their respective owners. Third-party data providers make no warranties or representations relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages relating to such data. The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of MSCI and S&P. Morgan Stanley bases projections, opinions, forecasts and trading strategies regarding the MSCI Country Index Series solely on public information. MSCI has not reviewed, approved or endorsed these projections, opinions, forecasts and trading strategies. Morgan Stanley has no influence on or control over MSCI's index compilation decisions. Morgan Stanley Research or portions of it may not be reprinted, sold or redistributed without the written consent of Morgan Stanley. Morgan Stanley research is disseminated and available primarily electronically, and, in some cases, in printed form. Additional information on recommended securities/instruments is available on request. Morgan Stanley Research, or any portion thereof may not be reprinted, sold or redistributed without the written consent of Morgan Stanley. Morgan Stanley Research is disseminated and available primarily electronically, and, in some cases, in printed form.

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M O R G A N S T A N L E Y B L U E P A P E R

Ticker Company Name Close Price

(as of 05/30/2012)

2018.HK AAC Technologies Holdings HKD 24.50

2353.TW Acer Inc. TWD 30.55

AMZN.O Amazon.com USD 209.23

AAPL.O Apple, Inc. USD 579.17

ARM.L ARM Holdings Plc GBp 508.50

2357.TW Asustek Computer Inc. TWD 299.00

2409.TW AU Optronics TWD 12.20

AVGO.O Avago Technologies Ltd USD 33.06

BRCM.O Broadcom Corporation USD 32.19

DELL.O DELL USD 12.56

2354.TW Foxconn Technology TWD 107.5

GOOG.O Google USD 588.23

HPQ.N Hewlett-Packard USD 22.74

2317.TW Hon Hai Precision TWD 87.50

2498.TW HTC Corporation TWD 430.00

INTC.O Intel Corporation USD 26.13

3189.TW Kinsus Interconnect Tech. TWD 86.50

0992.HK Lenovo HKD 6.60

Ticker Company Name Close Price (as of 05/30/2012)

LXK.N Lexmark International USD 25.10

MSFT.O Microsoft USD 29.34

NVDA.O NVIDIA Corp. USD 12.57

4938.TW Pegatron Corporation TWD 41.45

QCOM.O Qualcomm Inc. USD 57.45

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3673.TW TPK Holding TWD 445

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Window(s) of Opportunity - morganstanleyfa.com · May 31, 2012 Morgan Stanley does and seeks to do...

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