1. Industry update
Handsets
Korea / Handsets
Into the storm
5 March 2013 OVERWEIGHT
We maintain our OVERWEIGHT weighting for Korean handset makers and
recommend Samsung Electro-Mechanics (SEMCO; 009150 KS) as our sector
top pick. Smartphone demand growth in 2013 will be driven by emerging
markets. The recent rapid market share gains by Chinese smartphone makers
will lower industry-wide ASPs and margins, but help enhance the average
hardware performance of handsets, thus boosting demand for high-end
Stocks under coverage components going forward. In addition, the expected market share expansion
Company Rating Price Target price by SEC in 2013 should lead to qualitative and quantitative growth of SEMCO,
LG Electronics (066570 KS) BUY 78,300 88,000 the largest parts supplier for SEC.
SEMCO (009150 KS) BUY 95,500 125,000
LG Innotek (011070 KS) BUY 75,700 83,000
Melfas (096640 KS) BUY 20,550 35,000 Chinese handset makers to expand local market share
Silicon Works (108320 KS) BUY 21,300 38,000
Note: Prices are in KRW; price close as of 1 Mar. 2013
Chinese smartphone makers ZTE, Huawei and Lenovo are aiming to expand
local market share in 1H13; we expect their combined market share in China
Global handset market share in 4Q12 to rise by 3.9ppt YoY to 22.2% in 2013, as a result. At the Mobile World
Congress (MWC), we confirmed that the three Chinese handset makers are: 1)
Others,
30.4%
SEC, 23.6% rapidly advancing, in terms of smartphone hardware competitiveness; 2)
competitive against peers, in terms of production costs; and 3) set to see
HTC, 1.4%
shipment growth, with new smartphones slated for release in early 2Q12
through local telecom carriers (China Mobile, China Unicom and China
RIM, 1.6%
Nokia,
Telecom). We expect the three Chinese smartphone makers to swiftly expand
Google,
1.7% 18.3% their market shares in mid- to low-end smartphones and steadily eat into the
Sony, 1.7% white-box smartphone market going forward.
Apple,
Lenovo, 10.1%
Huawei,
1.8%
2.9% LGE, 3.3%
ZTE, 3.4%
Profitability of mid-to-low-end smartphones to decline in 2H13
We expect market competition among handset makers to stiffen further in 2H13,
Source: Gartner, Mirae Asset Research
with the three Chinese companies set to post rapid growth in 1H13 and new
flagship models to be released by Samsung Electronics and Apple in 2Q13.
Global smartphone market share in 4Q12
Meanwhile, we believe the increasing size of the Chinese market and the rise in
Others,
22.0%
Chinese handset makers’ global market share will pull down worldwide
SEC, 30.1% smartphone ASP by 13.6% YoY in 2013, driving up the cost burden of
Google,
2.2% components for handset makers, as a result. Moreover, the aggressive release of
Sony, 3.4%
new smartphones in 2H13 should spark subsidy competition, driving down the
LGE, 4.1% profitability of mid-to-low-end smartphones even further going forward. We thus
Nokia, 3.2% expect the operating margin of SEC’s IM division to decrease by 1.9ppt to 16.0%
ZTE, 4.0%
Apple,
in 2013 and the operating margin of LG Electronics’ MC division to increase to a
Huawei,
4.2% 20.9% high of 4.1% in 3Q13, before decreasing to 3.4% in 4Q13.
HTC, 3.2% RIM, 3.5%
Source: Gartner, Mirae Asset Research
Return of smartphone paradigm identity and eco-system
At this year’s MWC, we noted that handset suppliers are focusing on building
the identities of new flagship models through UX and killer applications, while
seeking to develop an independent ecosystem by diversifying platforms
beyond the oligopolistic Android (whose smartphone OS market share stood at
64% in 2012) in 2013. Through these efforts, handset makers are seeking to
protect the premium of high-margin flagship smartphones, reinforce customer
loyalty through the emphasis on differentiation and reduce marketing costs for
Jinho Cho, Analyst
82 2 3774 3831 jcho@miraeasset.com
mid- to low-end models. Between 2011 and 2012, competition in the handset
industry had focused primarily on developing advanced hardware features.
Yongjei Jeong However, due to the rapid improvement in flagship smartphone hardware,
82 2 3774 1938 yongjei@miraeasset.com competition to find differentiation points in hardware ceased in 2013, with
latecomers closing the gap with top-tiers, in terms of hardware
competitiveness.
See the last page of this report for important disclosures
2. Jinho Cho, Analyst, 82 2 3774 3831, jcho@miraeasset.com
Yongjei Jeong, 82 2 3774 1938, yongjei@miraeasset.com Handsets
SEMCO remains our top pick, LG Electronics our second pick
We expect Samsung Electronics’ global market share to continue to grow by 0.4ppt YoY to
23.6% in 2013, benefiting its largest parts supplier, SEMCO (009150 KS). SEMCO remains our
top pick, as: 1) parts shipments are set to grow visibly, with Samsung Electronics’ smartphone
shipments forecast to rise by 34.4% YoY to 290m units in 2013; 2) backed by 89% YoY
growth in Samsung Electronics’ flagship smartphone shipments to 146m units in 2013,
product mix improvement should drive up SEMCO’s profitability; and 3) market prices of
handsets components are unlikely to decline, despite the recently improved profitability of
Japanese parts makers. LG Electronics (066570 KS) is selected as our second top pick, given:
1) the steady improvement in the competitiveness of its flagship smartphones; and 2)
forecasts for market share recovery in Korea and Latin America and improvement in
profitability in 1H13, backed by a competitive smartphone lineup and its platform-sharing
strategy.
22
Mirae Asset Securities
3. Jinho Cho, Analyst, 82 2 3774 3831, jcho@miraeasset.com
Yongjei Jeong, 82 2 3774 1938, yongjei@miraeasset.com Handsets
T a b l e o f c o n t e n t s
Ⅰ. Executive Summary 4
1. Summary 4
2. Valuation 6
Ⅱ. Investment Points 13
1. Continued demand growth in emerging markets 13
2. Chinese peers to expand local market share on reinforced competitiveness 15
3. SEC to outshine peers in cost and supply chain competitiveness 22
4. Smartphone industry paradigm returning to identity and ecosystem 26
5. SEMCO (009150 KS) remains our top-pick, LGE is our second pick 32
Ⅲ. Appendix 33
1. 1Q13E smartphone peers’ earnings guidance & consensus 33
2. Handset peers’ shipment portions by country 35
3. Handset market share by vendor in 2012 36
4. Smartphone market share by vendor in 2012 37
5. Tablet PC market share and line-up in 2013 38
Company Analysis 39
Samsung Electro-Mechanics (009150 KS, BUY, TP: KRW125,000) 40
LG Electronics (066570 KS, BUY, TP: KRW88,00) 54
33
Mirae Asset Securities
4. Jinho Cho, Analyst, 82 2 3774 3831, jcho@miraeasset.com
Yongjei Jeong, 82 2 3774 1938, yongjei@miraeasset.com Handsets
Ⅰ. Executive summary
1. Summary
Demand growth to be driven by emerging markets
Demand: Global demand We forecast global demand for handsets and smartphones in 2013 to reach 1.89bn units (+8.7%
growth will continue into YoY) and 897m units (+32.4% YoY), respectively. We expect China to drive global demand
2013, driven by China
growth in 2013, as demand for handsets and smartphones in China should expand by 21.8% YoY
(to 495m units) and 56% YoY (to 270m units), respectively. Notably, China’s contribution to
global demand should rise by 4.6ppt YoY to 30.2% in 2013. We see ample upside in demand
growth in China, given that: 1) smartphone users’ portion of mobile phone subscribers in China
remains relatively low, at 24% (compared with 48% in North America); and 2) the smartphone
penetration rate in China is also lower than that of North America (42.6%, versus 65.3%); and 3)
the portion of white-box smartphones in China is also high (45.2% in 2012).
Top-3 Chinese handset makers to expand local market share
Supply: Top-three Chinese The top-three Chinese smartphone makers, ZTE, Huawei and Lenovo, are aiming to expand
smartphone makers (ZTE, local market share in 1H13; as a result, we expect their combined market share in China to
Huawei and Lenovo) to
expand their local market rise by 3.9ppt YoY to 22.2% in 2013. At this year’s Mobile World Congress (MWC), we
share confirmed that the three Chinese handset makers are: 1) rapidly advancing, in terms of
smartphone hardware competitiveness; 2) competitive against peers, in terms of production
costs; and 3) set to see shipment growth, with new smartphones slated for release in early
2Q12 through local telecom carriers (China Mobile, China Unicom and China Telecom). We
expect the three Chinese smartphone makers to rapidly expand their market shares in low-to
mid-end smartphones and steadily eat into the white-box smartphone market going forward.
SEC to outshine peers in cost and supply chain competitiveness
Competitive landscape: SEC We expect market competition among handset makers to stiffen further in 2H13, with the top-
to outshine peers in cost
three Chinese companies set to post rapid growth in 1H13 and new flagship models to be
and supply chain
competitiveness released by SEC and Apple in 2Q13. Meanwhile, we believe the increasing weight of the
Chinese market in global demand and the rise in Chinese handset makers’ global market share
will lower worldwide smartphone ASP by 13.6% YoY in 2013, driving up the cost burden of
components for handset makers as a result. Moreover, the aggressive release of new
smartphones in 2H13 should spark subsidy competition, driving down the industry’s
profitability even further going forward. Nevertheless, we expect SEC to continue to expand
its Chinese and global market share in 2013, outpacing market growth with limited
fluctuations in profitability. With a relatively high portion of in-house produced components
and strict control exerted over its (financially sound) supply chain, we believe SEC still has the
scope for additional reductions in components’ portion of total costs.
Smartphone paradigm returning to identity and eco-system
Industry paradigm At this year’s MWC, we noted that handset suppliers are focusing on building the identities of
returning to identity and their new flagship models through UX and killer applications, while seeking to develop an
eco-system independent ecosystem by diversifying platforms beyond the oligopolistic Android (whose
smartphone OS market share stood at 64% in 2012) in 2013. Through these efforts, handset
makers are seeking to preserve the premium of high-margin flagship smartphones, reinforce
customer loyalty through the emphasis on differentiation and reduce marketing costs for low-to
mid-end models. Between 2011 and 2012, competition in the handset industry had focused
primarily on developing advanced hardware features. However, due to the rapid improvement in
flagship smartphone hardware, competition to find differentiation points in hardware ceased in
2013, with latecomers closing the gap with top-tiers, in terms of hardware competitiveness.
Through efforts to establish a solid identity, handset makers are seeking to: 1) preserve
margins for high-margin flagship smartphones; 2) increase customer loyalty and expand
market share through the development of an independent ecosystem; 3) reduce marketing
costs for low-to mid-end models; and 4) diversify profit models to software/content (after
focusing primarily on hardware sales to date). In sharp contrast to Chinese smartphone
makers, which continued to emphasize the advanced hardware performance of their flagship
models at the 2013 MWC, other smartphone makers (SEC, LG Electronics, Nokia, HTC and
Sony) focused on the identity and differentiated UX of their new smartphone models.
44
Mirae Asset Securities
5. Jinho Cho, Analyst, 82 2 3774 3831, jcho@miraeasset.com
Yongjei Jeong, 82 2 3774 1938, yongjei@miraeasset.com Handsets
SEMCO (009150 KS) remains our top-pick; LGE is our second pick
SEMCO remains our sector- In light of the likely continued expansion in SEC’s global market share in 2013 (+0.4ppt YoY
top pick, with an unchanged to 23.6%), we reiterate our BUY rating and target price of KRW125,000 for SEMCO, as a top-
target price of KRW125,000
pick for the sector. We believe that: 1) 34.4% YoY growth in SEC’s smartphone shipments (to
290m units) expected in 2013 should drive up shipments of related components; 2) the
expected 89% YoY growth in SEC’s flagship smartphone shipments (to 146m units) should
improve SEMCO’s product mix, thus lifting its profitability; and 3) component ASPs are unlikely
to decline, despite the recent margin improvement by Japanese component makers. Our
second-pick for the sector is LGE, due to: 1) the gradual improvement in the competitiveness
of its flagship smartphone models; and 2) the likely recovery in its market shares in both
Korea and Latin America in 1H13, backed by its competitive new smartphone lineup and
platform-sharing strategy.
Figure 1 Handset shipment forecasts by supplier
1Q13E 2Q13E 3Q13E 4Q13E 2011 2012E 2013E 2014E 2015E
Population/m 7,022 7,041 7,060 7,079 7,062 7,135 7,207 7,279 7,425
Subscriber/m 6,192 6,308 6,424 6,540 5,613 6,120 6,559 6,955 7,319
Shipment/m Total 415 445 489 543 1,776 1,741 1,892 2,026 2,106
Smartphone 201 212 233 251 473 678 897 1,108 1,319
QoQ/YoY (%) Total (12.0) 7.0 10.0 11.0 11.2 (2.0) 8.7 7.1 4.0
Smartphone (3.0) 5.0 10.0 8.0 58.2 43.3 32.4 23.5 19.1
Penetration (%) 48.5 47.6 47.6 46.3 26.6 38.9 47.4 54.7 62.6
Net added 584 506 439 396 365
Replacement 1,191 1,234 1,453 1,629 1,741
Replacement/month 51 55 51 48 48
ASP/US$ 130 149 157 142 139
Market sales/US$ bn 231 260 297 287 294
Shipment/m
Total 415 445 489 543 1,776 1,741 1,892 2,026 2,106
Nokia 82 88 97 107 414 335 375 401 417
Samsung 100 108 114 123 328 405 446 536 615
LG Electronics 15 16 18 18 87 56 67 67 68
RIM 9 9 10 10 52 34 38 36 38
Sony 8 9 10 11 33 31 38 41 42
Google 8 8 11 13 41 34 41 48 49
Apple 35 37 43 50 91 134 166 207 259
HTC 9 8 8 12 43 32 36 45 46
ZTE 25 31 37 41 56 68 133 152 158
Huawei 17 22 29 38 41 47 106 142 147
Lenovo 12 13 15 16 16 28 57 61 63
MS (%) Nokia 19.8 19.8 19.8 19.8 23.3 19.2 19.8 19.8 19.8
Samsung 24.1 24.3 23.4 22.7 18.5 23.2 23.6 26.5 29.2
LG Electronics 3.7 3.6 3.6 3.3 4.9 3.2 3.5 3.3 3.2
RIM 2.2 2.1 2.0 1.8 2.9 2.0 2.0 1.8 1.8
Sony 2.0 2.0 2.0 2.0 1.8 1.8 2.0 2.0 2.0
Google 2.0 1.9 2.3 2.3 2.3 1.9 2.1 2.3 2.3
Apple 8.5 8.4 8.8 9.2 5.1 7.7 8.8 10.2 12.3
HTC 2.2 1.7 1.6 2.2 2.4 1.8 1.9 2.2 2.2
ZTE 6.0 7.0 7.5 7.5 3.1 3.9 7.1 7.5 7.5
Huawei 4.0 5.0 6.0 7.0 2.3 2.7 5.6 7.0 7.0
Lenovo 3.0 3.0 3.0 3.0 0.9 1.6 3.0 3.0 3.0
Smartphone shipments
Nokia 6.4 6.7 7.4 8.0 85.9 35.0 28.5 35.2 41.9
Samsung 60.1 69.1 76.0 85.1 97.0 216.0 290.3 393.2 483.3
LG Electronics 9.4 10.3 12.4 13.0 19.0 26.2 45.2 51.8 56.5
RIM 9.1 9.3 9.8 9.8 52.7 35.2 38.0 36.5 37.9
Sony 7.7 8.0 8.6 8.8 19.6 24.5 33.1 38.8 42.2
Google 5.6 5.7 6.3 6.5 18.6 19.5 24.2 31.2 46.2
Apple 35.4 37.5 42.8 49.8 90.6 133.8 165.5 207.4 259.2
HTC 9.1 7.6 7.8 11.9 43.6 32.1 36.5 44.6 46.3
ZTE 8.1 8.5 9.3 10.1 10.5 26.8 35.9 44.3 52.8
Huawei 8.4 8.8 9.7 10.5 15.6 27.2 37.4 46.2 55.0
Lenovo 8.1 8.5 9.3 10.1 1.7 21.7 35.9 44.3 52.8
Source: Gartner, IMF, Mirae Asset Research
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Mirae Asset Securities
6. Jinho Cho, Analyst, 82 2 3774 3831, jcho@miraeasset.com
Yongjei Jeong, 82 2 3774 1938, yongjei@miraeasset.com Handsets
2. Valuation
Pure smartphone suppliers Pure smartphone suppliers, such as Apple, HTC and RIM, have traded at an average P/B of
have traded within P/B
5.2x (3.6x-9.7x) since 2007, when the smartphone market began to expand significantly.
band of 3.6-9.7x since 2007
These companies have enjoyed a price premium to feature-phone suppliers, such as LGE and
Nokia, whose shares have traded at an average P/B of 2.1x (0.6x-6.3x) during the same
period. Compared with feature-phone suppliers, pure smartphone suppliers: 1) have been
able to achieve faster market share gains, thanks to steep increases in smartphone
penetration rates; 2) have maintained stronger profitability; and 3) have seen higher BPS
growth rate from 2007 to 2012 (+30.6%, compared with +28.2% for feature-phone vendors).
Valuation premium versus However, smartphone demand growth began to slow from 1Q12 (when the penetration rate
second-tiers should narrow of smartphones in North America exceeded 50%), while the rapid growth of Chinese handset
going forward
suppliers (ZTE, Huawei and Lenovo) intensified competiton over ASP. Moreover, SEC and
Apple confirmed their competitiveness in the smartphone market by increasing their market
shares.
Handset suppliers’ valuation In 2013, handset suppliers valuations should remain almost unchanged (in 2012, smartphone
should remain unchanged in suppliers’ average P/B was 2.3x, while that of feature-phone suppliers was 1.2x). Global
2013
demand should remain relatively strong, as handset and smartphone shipments should
increase by 8.7% YoY and 32.4% YoY in 2013. However, the profitability improvement of
second-tiers should remain limited, as: 1) the penetration rate of smartphones (+8.5ppt YoY
to 47.4%) should increase at a slower pace; and 2) top-tiers SEC and Apple, as well as
Chinese vendors, should continue to expand their shipments.
China’s top-three
smartphone makers should With their cost competitiveness, China’s top-three smartphone makers (ZTE, Huawei and
achieve market share gains Lenovo) should rapidly expand their presence in China, as well as emerging markets and thus
both in China and emerging
markets and thus maintain see a continued increase in shipments in 2013. As such, they should enjoy a valuation
valuation premium vs. peers premium to peers in 2013.
Figure 2 Smartphone vendors’ (Apple, HTC, RIM) P/B band Figure 3 Handset vendors’ (Nokia, LGE) P/B band
(x) (x)
16 7
14 6
12
5
10 High
4
8
3
6 Average Average
High
2
4
Low Low
1
2
0 0
2007 2008 2009 2010 2011 2012E 2013E 2007 2008 2009 2010 2011 2012E 2013E
Source: Bloomberg, Mirae Asset Research Source: Bloomberg, Mirae Asset Research
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Mirae Asset Securities
13. Jinho Cho, Analyst, 82 2 3774 3831, jcho@miraeasset.com
Yongjei Jeong, 82 2 3774 1938, yongjei@miraeasset.com Handsets
Ⅱ. Investment points
1. Continued demand growth in emerging markets
Global demand growth will We forecast global demand for handsets and smartphones in 2013 to reach 1.89bn units
continue to be driven by (+8.7% YoY) and 897m units (+32.4% YoY), respectively. We expect China to drive global
China in 2013 demand growth in 2013, as demand for handsets and smartphones in China should expand by
21.8% YoY (to 495m units) and 56% YoY (to 270m units), respectively. Notably, China’s
contribution to global demand should rise by 4.6ppt YoY to 30.2% in 2013. We see ample
upside in demand growth in China, given that: 1) smartphone users’ portion of mobile phone
subscribers in China remains relatively low, at 24% (compared with 48% in North America);
and 2) the smartphone penetration rate in China is also lower than that of North America
(42.6%, versus 65.3%); and 3) the portion of white-box smartphones is high (45.2% in 2012).
Figure 28 Global handset demand (new + replacement) and Figure 29 Smartphone users by country and portion
YoY growth
(m units) (%) (m people) (%)
2,500 35 300 70
30 250 60
2,000
25 50
200
20 40
1,500 150
15 30
100
1,000 10 20
50 10
5
500
0 0 0
il
a
y
a
UK
Ge ce
a
n
A
ea
0 -5
an
az
si
di
in
pa
US
an
r
ne
Ch
In
Br
rm
Ko
Ja
2006 2007 2008 2009 2010 2011 20122013E
2014E
2015E
Fr
do
In
New(LHS) Replacement(LHS) YoY(RHS) Smartphone Portion
Source: Gartner, Mirae Asset Research Source: KPCB Mary Meeker, Mirae Asset Research
Capex by China Mobile to Meanwhile, as of end-2012, 3G’s portion of mobile telecom network in Asia (including China)
drive demand growth in stood at 19.9%, far lower than the 89.1% in North America. Given the sharp expansion of
China
handset demand in North America, buoyed by network upgrades resulting from massive
investments in CDMA (2000) and 3G (2007), we believe that China’s smartphone demand
growth in 2013 should also be driven by 3G coverage expansion and investments in TD-LTE
by China Mobile (66.1% of total mobile subscribers in China, as of end-2012).
Figure 30 China handset demand in 2012 Figure 31 China handset supply market share trend
Mid-smartphone: (%)
Low
smartphone, CNY1,000~2,000 100
Others
16.6% 90 Ginoee
80 TCL
70 Yulong
Mid 60 Lenovo
smartphone, 50 Huawei
15.3% Feature, ZTE
40
57.4% HTC
30
20 Apple
High LGE
10
smartphone, SEC
10.7% 0
Nokia
1Q08
3Q08
1Q09
3Q09
1Q10
3Q10
1Q11
3Q11
1Q12
3Q12
1Q13
3Q13
Source: Mirae Asset Research Source: Gartner, Mirae Asset Research
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Mirae Asset Securities
14. Jinho Cho, Analyst, 82 2 3774 3831, jcho@miraeasset.com
Yongjei Jeong, 82 2 3774 1938, yongjei@miraeasset.com Handsets
China’s top-three We expect demand growth in China in 2013 to be led by demand increases for low-to mid-end
smartphone suppliers (ZTE, smartphones (mid-end: RMB1,000-2,000, low-end: RMB1,000 or below). We forecast demand
Huawei and Lenovo) to eat for mid-end and low-end smartphones in China to jump by 58.5% YoY (to 98.9m units) and
rapidly into low-to mid-end
market share in 2013 66.8% YoY (112.7m units), respectively. Chinese local smartphone suppliers plan to offer new
high-end smartphone models, with specifications comparable to SEC’s Galaxy S series and
Apple’s iPhone, for ASPs of RMB2,000 or below, thus stimulating demand for mid-end models.
In addition, their aggressive lineup expansion should lower the ASP for low-end smartphones
to the levels of feature-phones, thus boosting low-end demand.
Figure 32 China-based makers’ shipments by price Figure 33 China-based makers’ shipment portions by price
(m units) (%)
600 100
90
500
80
400 70
60
300
50
200 40
30
100
20
0 10
2011 2012 2013 2014 2015 2016
0
2011 2012 2013 2014 2015 2016
Less than $50 $51-$100 $101-$150 More than $150 Less than $50 $51-$100 $101-$150 More than $150
Source: Gartner, Mirae Asset Research Source: Gartner, Mirae Asset Research
High-end smartphone Notably, high-end smartphone demand in China should remain solid in 2013, as its high-end
demand in China to remain demand growth (YoY) should reach 35.6%, outpacing the global market grwoth (32.4% YoY).
solid
Likely continued concentration of mobile carriers’ subsidies in high-end smartphone models
should keep gross margins for high-end models higher than those of low-to mid-end models.
Figure 34 China handset supply market share in 4Q12 Figure 35 China smartphone supply market share in 4Q12
(%) (%)
SEC, 10.7 ZTE, 5.0 SEC, 15.9
Huawei, 5.5 Apple, 8.7
Others, 44.1
Lenovo, 7.5 ZTE, 8.2
Others, 66.6 Apple, 4.6
Huawei, 9.4
Lenovo,
13.6
Source: Gartner, Mirae Asset Research Source: Gartner, Mirae Asset Research
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15. Jinho Cho, Analyst, 82 2 3774 3831, jcho@miraeasset.com
Yongjei Jeong, 82 2 3774 1938, yongjei@miraeasset.com Handsets
2. Chinese peers to expand local market share on reinforced competitiveness
Chinese smartphone makers Based on developments witnessed at this year’s MWC, we expect China’s top-three
to expand local market smartphone makers, i.e. ZTE, Huawei and Lenovo, to show visible progress in 1H13, as they
share in 1H13, backed by:
1) reinforced hardware aim to expand their local market shares. With the three Chinese companies (ZTE, Huawei, and
competitiveness; Lenovo) quickly catching up to global peers, in terms of hardware competiveness, existing
players are finding it increasingly difficult to differentiate their products through enhancement
of hardware features. ZTE’s flagship smartphone, Grand Memo, slated for release in 1Q13,
employs Qualcomm Snapdragon 600, the fastest AP on the market, offering a 40%
improvement in performance, compared with its predecessor, the Qualcomm S4 Pro. The
Grand Memo model also adopts a 5.7”, 1280x720, 288ppi HD display, on par with other
display-focused smartphone models, such as LG Electronics’ Optimus G Pro (5.5”, 1920x1080,
400ppi display) and Sony’s Xperia Z (5”, 1920x1080, 441ppi display). Moreover, ZTE’s new
model runs on the latest version of the Android platform (4.1.2), demonstrating the
company’s advancement, in terms of software competitiveness.
…2) cost competitiveness; In addition to reinforcing hardware competitiveness, China’s top-three smartphone makers are
seeking to cut ASP to improve price competitiveness, backed by lower production costs. ZTE’s
Grand S, scheduled for market release in 1Q13, has an estimated bill of materials (BOM) of
US$178, 16.7% lower than Galaxy S3’s BOM of US$213.5. In addition, it is forecast to sell for
an ASP of US$499.99, US$100 cheaper than Galaxy S3. We do not expect the Chinese
companies to see rapid growth in sell-through of their smartphone models within 1H13, given
their absence of competitive brand images or differentiation points (setting their products
apart from the flagship models of existing companies). However, due to expanded marketing
spending, on the back of steady growth in shipments and reduction of materials costs, we
believe Chinese smartphone makers will gradually eat into the high-end market shares of
other second-tiers from 2H13.
Figure 36 Chinese makers’ flagship smartphone line-up
Vendor ZTE Huawei Lenovo Meizu OPPO
Picture
Name Grand S Ascend D2 K900 Meizu MX2 OPPO Find 5
Core Qualcomm S4 1.7GHz Hi-silicon K3V2 1.5GHz Intel Atom 2.0GHz 1.6GHz Quad core Qualcomm S4 1.5GHz
OS Android 4.1 Android 4.1.2 Android 4.2 Android 4.1 Android 4.1.2
Display 5.5" (1920x1080),
5" (1920x1080),441ppi 5" (1920x1080),441ppi 4.4" (1280x800), 343ppi 5" (1920x1080), 441ppi
400ppi
Size 142x69x6.9mm 140x71x9.4mm thickness: 6.9mm 124.9x64.9x10.2mm 141.8x68.8x8.9mm
Weight TBA 170g 162g 142g 165g
Memory 2GB RAM 2GB 2GB 2GB RAM 2GB RAM
Storage 16GB 32GB 16GB 64GB 16GB
Battery 1780mAh 3000mAh TBA 1800mAh 2500mAh
Release 2013.1Q 2013.01 2013.04 2012-11-27 2012-12-12
Source: Company data, PhoneArena, Mirae Asset Research
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