Pay by Finger - Fingerprint Sensor Adoption Growth to Benefit O-Film

Transcription

1 July 21, 2015 Greater China Technology Hardware Pay by Finger - Fingerprint Sensor Adoption Growth to Benefit O-Film Fingerprint payment is set to grow and could accelerate fingerprint sensor adoption in China smartphones to 25%/46% in 2015/16. We upgrade O-Film, the major fingerprint module maker in China, to OW on new business bearing fruit, meaningful profit growth and attractive valuation (28x 2016 PE). MORGAN STANLEY TAIWAN LIMITED+ Sharon Shih Sharon.Shih@morganstanley.com Gill Yin Gill.Yin@morganstanley.com Howard Kao Howard.Kao@morganstanley.com MORGAN STANLEY ASIA LIMITED+ Jasmine Lu Jasmine.Lu@morganstanley.com Greater China Technology Hardware Asia Pacific IndustryView In-Line Mobile payment to drive fingerprint sensor adoption in China smartphones: Mobile payment has become popular in China with an estimated Rmb9.1 trillion transaction value in 2015 or a 19% 4-year CAGR in We believe fingerprint payment is acting as a key driver given enhanced user experience and security along with an established fingerprint payment ecosystem by the non-apple smartphone camp. Ticker Company Change Old (Rmb) New (Rmb) Rating EW OW PT SZ O-Film 2015e EPS e EPS e EPS Fingerprint sensor adoption in flagship smartphone models in 2H15: Huawei Honor 7 and Meizu MX5, available this July, are designed with the fingerprint payment function and partnership with Alipay, Tenpay, and others, as are LeTV LeMax and Gionee Elife E8. These models are flagship phones in China in 2H15 with prices above Rmb1,799. Fingerprint sensor adoption in China smartphones to grow to 25%/46% in 2016/2017: With enhanced user experience and improved fingerprint sensor module cost, we expect fingerprint sensor adoption to extend to mass market smartphones, or Rmb1,000 above in 2016, implying total fingerprint sensor module shipments will grow 403% YoY to 204mn units in We expect fingerprint sensors to become standard features in smartphones with 46% penetration in Fingerprint Cards and O-Film the dominant suppliers: Fingerprint sensor and module assembly share 53% and 18% of total module BoM cost, respectively. Our checks suggest Fingerprint Cards is the major sensor supplier to China smartphone brands, owing to its early mover advantage and ample supply. O-Film leverages its sizable capacity build (8mn units per month by end-2015) and strong relationship with China smartphone brands, becoming the major module maker with an estimated 65% market share in Upgrade O-Film to OW on dominant fingerprint sensor exposure and favorable product mix shift: O-Film's business transition from touch panel offering to fingerprint sensor modules and camera modules should bearing fruit from 2H15. Our 8%-19% earnings estimate cuts for e reflect its touch panel business slowdown but substantial ramp in the new module assembly business will still lead to profit growth of 32%-51% YoY in E. Current valuation is also attractive at 28x 2016 PE, vs. A-share peers' 21-55x. Our new price target of Rmb47.5 implies 40% upside. Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report. += Analysts employed by non -U.S. affiliates are not registered w ith FINRA, may n ot be associated person s of th e member an d may n ot be su bject to NASD/NYSE restrictions on communications w ith a subject company, public appearances and trading securities held by a research analyst account. 1

2 Analysis Substantial mobile payment growth in China - Rmb18.3 trillion in 2018e Total third-party mobile payment transaction value in China amounted to Rmb6,000bn in 2014 and is estimated to grow 51% YoY to Rmb9,071bn in 2015 or a 19% 4-year CAGR to reach Rmb18.3 trillion in 2018e, based on iresearch data. Similar to the internet trend, mobile payment in China will extend from cities to towns and villages, along with increased smartphone penetration. Most importantly, increasingly more offline sectors have started to accept mobile payments, such as taxis, shops, including supermarkets, and medical treatment. Thus, mobile users can pay with pre-installed credit cards, NFC or bar code scans. This will likely lead to mobile payment gradually replacing bank cards or even cash as the major payment tool. Among third party mobile payment players in China, Alipay earned the lion's share at 78.5% in 1Q15, followed by Tenpay 11.3% and Lakala 3%. Exhibit 1: China Third-Party Mobile Payment Market Source: iresearch, Morgan Stanley Research 2

3 Exhibit 2: 1Q15 Leading Third-Party Mobile Payment Market Share Breakdown Greater China Technology Hardware July 21, 2015 Source: iresearch, Morgan Stanley Research Fingerprint payment ecosystem is ready To enhance payment security and user experience, Alipay was the first to launch fingerprint recognition for payment on smartphones in China - it introduced a fingerprint payment service on Samsung Galaxy S5 on July 16, 2014 and on Huawei Mate 7 on September 1, Tenpay, the second largest mobile payment player in China, also launched a fingerprint payment service on July 8, 2015, featuring payment in one second with enhanced payment security. It's currently only available on iphone 5s/6/6 Plus, ipad Air 2, ipad mini 3 and Huawei Mate 7. In comparison, Apple has included fingerprint sensor recognition, Touch ID, since iphone 5S in September 2013, but Apple Pay was not officially released in the US until October 20, Samsung has adopted fingerprint sensors since Galaxy S5 in April 2014, but the Samsung Pay service might not be available until this September. To make the fingerprint payment work on smartphones, it is important to have five different elements ready as an ecosystem, including: 1) fingerprint sensor; 2) application processor in the mobile device; 3) security mechanism coding, i.e., Trusted Execution Environment (TEE); 4) third-party payment platform; and 5) operating system, software and app. Apple has built a complete ecosystem for fingerprint payment on iphone and ipad to enhance the payment security, recognition accuracy and stability, as shown in Exhibit 3. According to our analyst covering Apple, Katy Huberty, Apple Wallet, the renamed Passbook, appears to have the intention of replacing every credit/debit card, rewards program, and ticket with perhaps cash and identification in the future. This should allow Apple to accelerate its platform monetization. 3

4 Exhibit 3: Apple Fingerprint Payment Ecosystem Greater China Technology Hardware July 21, 2015 Operating System ios Fingerprint Sensor Application Processor AuthenTec Apple Trusted Execution Environment Secure Enclave Third-Party Online Payment Platform Apple Pay Note: Au th en Tec w as acqu ired by Apple In Ju ly 2012 Source: Morgan Stanley Research We note the fingerprint payment ecosystem has also been recently building up in the non-apple smartphone camp. As per Exhibit 4, Synaptics provides fingerprint sensors for Samsung Galaxy S6 while Fingerprint Cards supplies fingerprint sensor solutions to China Smartphone brands, like Huawei and Meizu. These, together with the newly introduced fingerprint payment mechanism by the third party online payment platforms, such as Alipay and Tenpay, as well as enhanced security coding design (TEE) from Trustonic and Neusoft, signal that fingerprint payment is set to grow in 2H15 onwards. 4

5 Exhibit 4: Non-Apple Fingerprint Payment Eco-system Greater China Technology Hardware July 21, 2015 Source: Morgan Stanley Research Fingerprint sensor function adopted at Rmb1,799 & above flagship smartphone models With the fingerprint payment ecosystem built, we note quite a few flagship models launched by China smartphone brands are equipped with fingerprint sensors for payment or unlock function. For example, Huawei Honor 7, announced on June 30, 2015, adopts Fingerprint Cards' 1025 sensor IC and partnership with Alipay, Tenpay and Baidu wallet for mobile payment. Meizu introduced MX5 on June 30, 2015, featuring Fingerprint Cards' 1155 sensor IC with Alipay access. As shown in Exhibit 5, these flagship smartphone models are priced from Rmb1,799, implying fingerprint sensor adoption is kicking off in the high-end smartphone segment first in 2H15. 5

6 Exhibit 5: Comparison of China Flagship Smartphone Models Greater China Technology Hardware July 21, 2015 Source: Company data, Morgan Stanley Research Security and cost are key for other biometric recognition solutions being adopted Our checks suggest fingerprint recognition is not the only solution for payment identity on mobile devices. For example, Microsoft will include iris recognition as standard feature in its upcoming operating system, Windows 10. Some smartphone brands are also considering adding facial recognition as an incremental solution to enhance payment security. We expect a few different alternatives will be adopted in mobile devices but we tend to believe cost performance will remain the key for mass adoption. Fingerprint sensor recognition is by far the suitable design, in view of sensor availability, ecosystem build, cost structure, and user experience. 6

7 Fingerprint Sensor Module Supply Chain Fingerprint sensor adoption likely hit 25% of total China smartphone shipments in 2016 We estimate fingerprint sensor adoption in China smartphone to take off from 2H15 onwards. The adoption will kick off with the high-end segment, i.e., about Rmb2,000 above, and gradually extend to about the Rmb1,000 price level, in order to match mobile payment popularity. This implies 6% fingerprint sensor adoption in China smartphone shipments in 2015, mainly the back half of the year, or a total 41mn shipment units. Along with adoption extending to the lower price range, we estimate fingerprint sensor adoption to grow to 25% or a 403% YoY shipment increase to total 204mn units in Fingerprint sensor adoption is likely to turn into a standard feature in smartphones with 46% penetration in 2017, based on our estimates. Potential upside for fingerprint sensor module shipments includes 1) faster adoption if further cost reduction is available, and 2) penetration into tablets or wearable devices. Exhibit 6: Fingerprint Sensor Adoption in China Smartphones Estimates mn units e 2016e 2017e China brand smartphone shipment YoY (%) 26% 15% 12% Split by price (%) > Rmb3000 3% 4% 7% 7% Rmb % 18% 20% 21% Rmb % 30% 30% 30% Below Rmb % 48% 43% 42% Shipment by price (%) > Rmb Rmb Rmb Below Rmb Fingerprint sensor adoption (%) Total China smartphone shipment 0% 6% 25% 46% > Rmb % 50% 100% 100% Rmb % 50% 75% Rmb % 50% Below Rmb % Smartphone with Fingerprint sensor YoY (%) 2260% 403% 111% Source: Morgan Stanley Research E = Morgan Stanley Research Estimates Fingerprint sensor design and cost structure Judging from the latest fingerprint sensor design at newly released smartphone models, it is clear that the areatype fingerprint sensor design has become mainstream, as it assures recognition accuracy and a fast response, compared to the legacy swipe-type fingerprint sensor solution. Unlike the Apple Touch ID solution that is placed together with the home button, Android-based smartphones mostly design fingerprint print sensor areas on the back of the phone (right under phone camera), such as Huawei Honor 7 and LeTV LeMax, as most Android-based phones do not design a home button on the front and also to work around Apple's patented design. 7

8 Exhibit 7: Huawei Honor7 Fingerprint Sensor Design Greater China Technology Hardware July 21, 2015 Exhibit 8: LeTV LeMax Fingerprint Sensor Design Source: Company data, Morgan Stanley Research Source: Company data, Morgan Stanley Research However, we note Goodix has been working on fingerprint sensor and touch controller integrated IC solution, called IFS (Invisible Fingerprint Sensor), which should allow fingerprint sensing on the cover glass without drilling a hole. Qualcomm is also working on ultrasonic 3D fingerprint technology, a.k.a. SnapdragonSense ID, featuring enhanced sensing sensitivity even placed under a glass, aluminum, stainless steel or sapphire glass layer. We expect adoption will take off once this innovative solution enters mass production with decent production yield, likely in For a fingerprint sensor module, key components include fingerprint sensor (area type), cover glass (or sapphire), flexible PCB and metal rim. Based on our estimates, fingerprint sensor accounts for 53% of total BoM cost for the fingerprint sensor module, followed by processing and assembly 18%, metal rim 12% and cover glass 10%. Thus, we tend to believe fingerprint sensors and module assembly will play a critical role in fingerprint sensor module supply. Exhibit 9: Fingerprint Sensor Module BoM Cost Source: Morgan Stanley Research Fingerprint sensor (53% of BoM cost): While the fingerprint sensor design is important for recognition sensitivity and accuracy, the sensor compatibility with mobile application processors (like the Qualcomm, 8

9 Meditek, Hisilicon solution) and algorithm matching are equally important to make the fingerprint sensing function work. Current proven fingerprint sensor suppliers are Apple/Authentec, Synaptics, Fingerprint Cards and Goodix. Our checks suggest Synaptics has focused on Samsung Galaxy smartphones since 2014 and recently started to send samples to China smartphone brands. Fingerprint Cards is the dominant sensor supplier to China smartphone brands, owing to its early mover advantage and ample supply (likely 5-6mn unit shipments per month in 2H15). Goodix supplied to Meizu MX4 in 2014 but did not win the MX5 project. Management attributed the miss to its efforts in enriching its sensor IC offering portfolio. We will monitor new developments at Goodix IFS fingerprint sensor design and Qualcomm's SnapdragonSense ultrasonic 3D fingerprint technology, as these could potentially alter the ID design at smartphones and accelerate fingerprint sensor adoption in mobile devices. Fingerprint sensor module assembly (18% of BoM cost): The core competence for module makers is the capability to handle coating and processing, sizable capacity builds, sensor supply relationships, as well as access to brand names. Major fingerprint sensor module makers are ASE for Apple iphone and ipad, CrucialTec in Korea, O-Film in China and Lite-On Tech in Taiwan. Our understanding is that CrucialTec had first mover advantage by supplying to Samsung Galaxy smartphones so it earned fingerprint sensor module project wins among China smartphone brands recently. O-Film started to build fingerprint sensor module capacity in March It currently has 4mn units capacity per month and plans to expand it to 8mn units per month by the end of this year and likely to 10-12mn units in Both CrucialTec and O-Film are major fingerprint sensor module suppliers to Huawei Honor 7 and Meizu MX5 flagship models. Lite-On Tech does not own much coating facilities in house, thus, it might stay a niche player in the space. Exhibit 10: Fingerprint key players Greater China Technology Hardware July 21, 2015 Sensor maker Ticker 2015 Revenue contribution (%) Solution Customers Synaptics SYNA.US n.a. Swipe, Small area touch fingerprint sensor Samsung FPC FING-B.ST 100% Goodix Unlisted <5% Touch, Swipe, Area type fingerprint sensor IFS (Invisible Fingerprint Sensor), Sapphire-covered, Glass-covered, Coating fingerprint sensor Meizu, Hauwei, Gionee, Oppo, Coolpad, Dazen, LeTV, HTC, Newman, Yulong Sensor module maker Ticker 2015 Revenue contribution (%) Sensor suppliers Customers O-Film SZ 5% FPC, Synaptics Major Chinese smartphone OEMs CrucialTec KS 35-40% FPC, Synaptics Samsung, Oppo, Huawei Lite-on 2301.TW <5% Synaptics n.a. Speed SZ <5% Goodix Meizu Source: Company data, Morgan Stanley Research Meizu 9

10 O-Film ( SZ): Upgrade to Overweight We upgrade O-Film to Overweight from Equal-weight as we expect its business transition from touch panel offerings to fingerprint sensor modules and camera modules to start bearing fruit from 2H15 onwards. Its recent announcement of expansion into IoVs and smart service platform should be viewed as long-term business drivers. Despite our earnings estimates and price target cut on weaker touch panel business momentum, we see O-Film's current valuation as attractive at 28x 2016 PE, vs. A-share peers' 21x-55x. Our new price target of Rmb47.5 implies 40% upside. Dominant fingerprint sensor module maker in China: We note fingerprint sensor adoption in China smartphones will kick off along with increasing mobile payment. Recently released flagship models including Meizu MX5 (Rmb1,799) and Huawei Honor 7 (Rmb1,999) are equipped with fingerprint sensors. We believe fingerprint sensor adoption will extend from flagship models (priced above Rmb1,799) in 2H15 to the mass market segment or priced above Rmb1,000 in We estimate fingerprint sensor shipments for China smartphones to amount to 204mn units in 2016, up from 41mn units in With a solid relationship with Chinese smartphone brands and fingerprint sensor suppliers, including FPC, Synaptics and Goodix,,O-Film is well-positioned to gain. It has build sizable capacity - 4mn units per monthly currently, 8mn units per month by the end of 2015 and 10-12mn units per month in some distance ahead of the competition. We estimate O-Film to ship 27mn units of fingerprint sensor modules in 2015 and 76mn units in This implies O-Film will obtain the lion's share of fingerprint sensor supply to China smartphones, we estimate 37% in Exhibit 11: O-Film: Dominant Fingerprint Sensor Module Maker in China e 2016e 2017e O-film fingerprint module shipment (mn) O-film market share (RHS) 70% 60% 50% 40% 30% 20% 10% 0% Source: Morgan Stanley Research ; e = Morgan Stanley Research estimates Favorable product mix shift to lift operating margin in : Based on our estimates, O-Film will lower its dependence on touch panel business (down to 42% of total revenue in 2017, vs. 82% in 2014) and diversify into camera module/fingerprint sensor module assembly and the internet-plus related service platform. Given better margins and less capex intensity required, O-Film should be able to recover its operating margin to 5% in e from 3.5% in

11 Exhibit 12: O-Film: Diversifying Product Mix, e Greater China Technology Hardware July 21, 2015 Source: Company data, Morgan Stanley Research ; e = Morgan Stanley Research estimates Earnings Estimate Changes We lower 2015/16/17e earnings estimates by 19%/8%/10% to reflect lower shipment in touch module given rising in-cell touch display and AMOLED panel adoption. We also tweak down touch module GM on intensifying competition. We now forecast fingerprint sensor modules to contribute 5%/9% of total O-Film revenue in 2015/16e. Based on the latest outstanding shares of 1,031mn shares, we estimate O-Film will deliver EPS of Rmb0.79/1.19 in 2015/16e, vs. our prior estimate of Rmb0.98/1.29 in the same periods. Exhibit 13: O-Film: Earnings Estimate Change Summary 2015e Earnings Estimates 2016e Earnings Estimates 2017e Earnings Estimates Rmb mn New Old Variance New Old Variance New Old Variance Net sales 22,203 23,950-7% 29,916 31,023-4% 37,981 38,220-1% COGS -19,625-21,051 7% -26,331-27,184 3% -33,222-33,177 0% Gross profit 2,578 2,900-11% 3,585 3,839-7% 4,757 5,047-6% Operating expenses -1,738-1,842-6% -2,184-2,315-6% -2,922-3,021-3% Operating income 840 1,058-21% 1,401 1,524-8% 1,835 2,026-9% Non-operating income % 0 0 NM 0 0 NM Pre-tax income 909 1,127-19% 1,401 1,524-8% 1,835 2,026-9% Income tax % % % Net income 812 1,006-19% 1,222 1,329-8% 1,609 1,782-10% EPS (Rmb) % % % Margins (%) ppt ppt ppt Gross margin 11.6% 12.1% % 12.4% % 13.2% -0.7 Operating margin 3.8% 4.4% % 4.9% % 5.3% -0.5 Pre-tax margin 4.1% 4.7% % 4.9% % 5.3% -0.5 Net margin 3.7% 4.2% % 4.3% % 4.7% -0.4 Source: Company Data, Morgan Stanley Research ; e = Morgan Stanley Research estimates Price Target Discussion and Valuation Our new price target of Rmb47.5 (down from Rmb51.6 earlier) is based on our multi-stage residual income (RI) model. To calculate intrinsic value, we use the company s beginning equity plus the present value of all future expected residual income of earnings in excess of the cost of capital. The RI is positive when ROAE is above the 11

12 cost of capital and negative when it is below. Our key assumptions are unchanged, which include a terminal growth rate of 5%, a cost of equity of 8.5%, and a medium-term growth rate of 14%. We upgrade our rating on O-Film from Equal-weight to Overweight as we believe the recent share price correction offers a good entry point. Currently, O-Film is trading at 42.8x/28.4x 2015/16e P/E. We see further upside from here given O-Film's strong earnings growth (50.5%/31.7% in 2016/17e). O-Film enjoyed substantial profit growth in when it rapidly expanded market share in touch panel offerings for smartphones. That resulted a P/E multiple premium to peers in Taiwan and Korea. The stock started to derate along with peers in 2014 when overcapacity in touch module offerings pressured profitability. Now, with the meaningful ramp of its new offerings ahead, camera modules and fingerprint sensor modules, we think investors will see growth potential in

13 Risk Reward Greater China Technology Hardware July 21, 2015 Attractive Risk-Reward Source: Thomson Reuters, Morgan Stanley Research Price Target Rmb47.5 Bull Rmb x base case 2016e EPS Base Rmb x base case 2016e EPS Base case, residual income valuation model Faster expansion in product offerings and greater market share increase: O-Film further strengthens its cost leadership in the camera and fingerprint sensor module segments and keeps its utilization at peak levels in Incremental intelligent project wins add an additional revenue stream in the long run. Business transition to camera and fingerprint sensor modules: O-Film expands product offerings from touch modules to camera and fingerprint sensor modules in to increase its business scale. Why upgrade to Overweight? New business, including camera and fingerprint sensor modules, should start to bear fruit in 2H15e onward. We forecast O-Film revenue to expand by 34.7%/27.0% in 2016/17e. Combined with mild margin improvement and operating leverage, we estimate earnings to grow 50.5%/31.7% YoY in the same period. ROAE should also improve from 13.2% in 2015 to 17.3%/19.3% in 2016/17e. This is a lot higher than TPK at 8-9%. Key Value Drivers Camera module business: Increasing market share in camera modules, starting with Chinese smartphone brands. Finger print sensor: O-Film would benefit from rising adoption of fingerprint sensors in non-apple smartphones/tablets. Cost control: Yield and breakthroughs in production technology are key to profitability. Potential Catalysts IoVs as potential new driver in long term Smart service offerings for government projects (smart travel), adding a steady revenue stream. Bear Rmb x base case 2016e EPS Chinese smartphone market slows amid fierce competition, and O-Film sees greater-than-expected challenges from incell touch display: Chinese smartphone market demand falls short of expectations, and peers continue to cut prices amid growing adoption of in-cell displays, capping O-Film's revenue and margin upside. Risks to Achieving Price Target Downside: Stronger competition from peers' capacity expansions in touch and camera modules; potential failures in fingerprint sensor business; slower adoption of metal mesh touch products. 13

14 Exhibit 14: O-Film Financial Summary Income Statements Cash Flow Statements Rmb mn E 2016E 2017E Rmb mn E 2016E 2017E Net sales 19,482 22,203 29,916 37,981 Cashflow from operations ,136 1,705 2,472 COGS -17,145-19,625-26,331-33,222 Net Profits ,222 1,609 Gross profit 2,337 2,578 3,585 4,757 Depreciation Operating expenses -1,648-1,738-2,184-2,922 Equity investment losses (income) Promotion -1,280-1,321-1,719-2,363 Other adjustments -1,199 1, ADM R&D Cashflow from investing -1,396-1,000-1,200-1,200 Operating income ,401 1,835 (Purchases) sale of FA (capex) -1,061-1,000-1,200-1,200 Non-operating income (Purchases) sale of L/T investment Interest income (Purchases) sale of S/T investment Investment income Other adjustments Disposal of investment Disposal of fixed assets Cashflow from financing 2, ,377 1,315 Exchange gain Increase in L/T debt Other Increase in S/T debt ,500 1,500 Pre-tax income ,401 1,835 Issuance of stock Income tax Cash dividends Net income ,222 1,609 Dir.& Emp. Bonus EPS (Rmb) Changes in Treasury Stocks Other adjustments 2, Balance Sheets Exchange rate adjustment Net change in cash 715 2,027 1,883 2,587 Rmb mn E 2016E 2017E Cash 2,375 4,402 6,285 8,871 Financial Ratios Mkt securities Accounts/Notes receivables 3,453 3,935 5,302 6, E 2016E 2017E Inventory 2,928 3,925 5,266 6,644 Margins Other current assets Gross margin 12.0% 11.6% 12.0% 12.5% Current Assets 9,593 13,100 17,690 23,084 Operating margin 3.5% 3.8% 4.7% 4.8% Long-term investments Pretax margin 4.0% 4.1% 4.7% 4.8% Fixed assets 3,767 4,405 5,103 5,611 Net margin 3.5% 3.7% 4.1% 4.2% Other assets Total Assets 14,156 18,302 23,591 29,493 YoY growth Sales 114.0% 14.0% 34.7% 27.0% S/T borrowings 1,690 1,690 3,190 4,690 Operating profits 4.5% 21.9% 66.7% 31.0% AP/NP 3,494 6,869 9,216 11,628 Pretax profits 14.6% 16.4% 54.0% 31.0% Other ST liabilities 1,264 1,332 1,675 2,241 Net profits 19.3% 19.2% 50.5% 31.7% Other liabilities EPS -46.2% 19.2% 50.5% 31.7% L/T debt Total Liabilities 8,336 11,779 15,969 20,446 Net Debt/Equity (Net of mkt secs.) 5% -27% -28% -36% Net Debt/Equity 5% -27% -28% -36% Common shares 1,031 1,031 1,031 1,031 Liabilities/Equity 143% 181% 209% 226% Capital Collection Liabilities/Assets 59% 64% 68% 69% APIC 3,187 3,187 3,187 3,187 ROAE 15.0% 13.2% 17.3% 19.3% Retained earnings 1,562 2,271 3,371 4,795 ROAA 5.8% 5.0% 5.8% 6.1% Treasury Stock AR/NR Turnover (days) Other shareholders' equity AP/NP Turnover (days) Shareholders' equity 5,820 6,523 7,623 9,047 Inventory Turnover (days) Total Liab./Shrhldr's Equity 14,156 18,302 23,591 29,493 Cash conversion cycle (days) Source: Company data, Morgan Stanley Research, e= Morgan Stanley estimates 14

15 Exhibit 15: O-Film: Quarterly earnings summary, Greater China Technology Hardware July 21, 2015 RMB mn 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15E 3Q15E 4Q15E E 2016E Sales 3,033 5,204 5,748 5,498 3,929 4,753 6,130 7,392 19,482 22,203 29,916 COGS -2,608-4,630-5,085-4,822-3,460-4,209-5,424-6,533-17,145-19,625-26,331 Gross profit ,337 2,578 3,585 Operating expenses ,648-1,738-2,184 - Promotion ,280-1,321-1,719 - ADM R&D Operating profit ,401 Non-operating income Interest income Investment income Disposal of investment Disposal of fixed assets Exchange gain Other Pre-tax profit ,401 Income tax Net profit ,222 Adj.wtd.avg.shrs (mn) 1,031 1,031 1,031 1,031 1,031 1,031 1,031 1,031 1,031 1,031 1,031 EPS (RMB) Margins Gross margin 14.0% 11.0% 11.5% 12.3% 11.9% 11.4% 11.5% 11.6% 12.0% 11.6% 12.0% Operating margin 4.7% 3.7% 4.1% 2.2% 2.4% 2.8% 4.0% 4.9% 3.5% 3.8% 4.7% Pre-tax margin 5.8% 3.7% 4.4% 2.9% 2.6% 3.3% 4.3% 5.2% 4.0% 4.1% 4.7% Net margin 4.8% 3.2% 3.6% 2.9% 2.0% 2.9% 3.6% 5.1% 3.5% 3.7% 4.1% QoQ Growth Sales -8.8% 71.6% 10.4% -4.3% -28.5% 21.0% 29.0% 20.6% Gross profit -15.9% 35.2% 15.2% 2.0% -30.5% 15.9% 29.9% 21.6% Operating profit -41.1% 36.4% 20.9% -48.0% -22.0% 42.9% 81.3% 48.7% Pre-tax profit -24.8% 9.5% 31.8% -36.4% -35.4% 49.3% 70.8% 45.0% Net profit -24.8% 15.5% 23.7% -24.7% -49.1% 70.7% 60.3% 71.6% YoY Growth Sales 153% 153% 128% 65% 30% -9% 7% 34% 114% 14% 35% Gross profit 86% 59% 69% 34% 10% -5% 7% 27% 57% 10% 39% Operating profit 86% 20% 28% -49% -33% -30% 5% 201% 4% 22% 67% Pre-tax profit 69% 20% 37% -31% -41% -19% 5% 139% 15% 16% 54% Net profit 72% 25% 34% -19% -45% -19% 5% 139% 19% 19% 50% Source: Company data, Morgan Stanley Research, e = Morgan Stanley estimates 15

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As of June 30, 2015, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research: Apple, Inc., AU Optronics, Catcher Technology, Delta Electronics Inc., Epistar, Everlight Electronics Co., Ltd., Flexium, Foxconn Technology, Innolux, Largan Precision, Pegatron Corporation, TPK Holding, Unimicron. Within the last 12 months, Morgan Stanley managed or co-managed a public offering (or 144A offering) of securities of Cowell eholdings. In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from AAC Technologies Holdings, Apple, Inc., Cowell eholdings, Epistar, GoerTek Inc, Innolux, Lenovo, Pegatron Corporation. Within the last 12 months, Morgan Stanley has received compensation for products and services other than investment banking services from AAC Technologies Holdings, Acer Inc., Apple, Inc., Asustek Computer Inc., AU Optronics, BYD Electronics, Compal Electronics, Hon Hai Precision, Innolux, Quanta Computer Inc., Synnex Technology International Corp., Tripod Technology. Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client relationship with, the following company: AAC Technologies Holdings, Apple, Inc., Cowell eholdings, Epistar, GoerTek Inc, Innolux, Lenovo, Pegatron Corporation. Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the past has entered into an agreement to provide services or has a client relationship with the following company: AAC Technologies Holdings, Acer Inc., Apple, Inc., Asustek Computer Inc., AU Optronics, BYD Electronics, Compal Electronics, Digital China Holdings Limited, Hon Hai Precision, Innolux, Lenovo, Quanta Computer Inc., Synnex Technology International Corp., TCL Communication, TPK Holding, Tripod Technology, Wistron Corporation. Morgan Stanley & Co. LLC makes a market in the securities of Apple, Inc., AU Optronics. The equity research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. Morgan Stanley and its affiliates do business that relates to companies/instruments covered in Morgan Stanley Research, including market making, providing liquidity and specialized trading, risk arbitrage and other proprietary trading, fund management, commercial banking, extension of credit, investment services and investment banking. Morgan Stanley sells to and buys from customers the securities/instruments of companies covered in Morgan Stanley Research on a principal basis. Morgan Stanley may have a position in the debt of the Company or instruments discussed in this report. Certain disclosures listed above are also for compliance with applicable regulations in non-us jurisdictions. STOCK RATINGS Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below). 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. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, since Morgan Stanley Research contains more complete information concerning the analyst's views, investors should carefully read Morgan Stanley Research, in its entirety, and not infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. 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. Global Stock Ratings Distribution (as of June 30, 2015) 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. 16

17 COVERAGE UNIVERSE INVESTMENT BANKING CLIENTS (IBC) STOCK RATING CATEGORY COUNT % OF TOTAL COUNT % OF TOTAL IBC % OF RATING CATEGORY Overweight/Buy % % 27% Equal-weight/Hold % % 23% Not-Rated/Hold 93 3% 9 1% 10% Underweight/Sell % 79 11% 13% TOTAL 3, Data include common stock and ADRs currently assigned ratings. 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 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 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 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 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 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 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 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 or MSCI sub-regional index or MSCI AC Asia Pacific ex Japan Index. Stock Price, Price Target and Rating History (See Rating Definitions) 17

18 Important Disclosures for Morgan Stanley Smith Barney LLC Customers Important disclosures regarding the relationship between the companies that are the subject of Morgan Stanley Research and Morgan Stanley Smith Barney LLC or Morgan Stanley or any of their affiliates, are available on the Morgan Stanley Wealth Management disclosure website at For Morgan Stanley specific disclosures, you may refer to Each Morgan Stanley Equity Research report is reviewed and approved on behalf of Morgan Stanley Smith Barney LLC. This review and approval is conducted by the same person who reviews the Equity Research report on behalf of Morgan Stanley. This could create a conflict of interest. Other Important Disclosures Morgan Stanley & Co. International PLC and its affiliates have a significant financial interest in the debt securities of Apple, Inc., AU Optronics, Epistar, TPK Holding. Morgan Stanley is not acting as a municipal advisor and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Morgan Stanley produces an equity research product called a "Tactical Idea." Views contained in a "Tactical Idea" on a particular stock may be contrary to the recommendations or views expressed in research on the same stock. This may be the result of differing time horizons, methodologies, market events, or other factors. For all research available on a particular stock, please contact your sales representative or go to Matrix at Morgan Stanley Research is provided to our clients through our proprietary research portal on Matrix and also distributed electronically by Morgan Stanley to clients. Certain, but not all, Morgan Stanley Research products are also made available to clients through third-party vendors or redistributed to clients through alternate electronic means as a convenience. For access to all available Morgan Stanley Research, please contact your sales representative or go to Matrix at Any access and/or use of Morgan Stanley Research is subject to Morgan Stanley's Terms of Use ( By accessing and/or using Morgan Stanley Research, you are indicating that you have read and agree to be bound by our Terms of Use ( In addition you consent to Morgan Stanley processing your personal data and using cookies in accordance with our Privacy Policy and our Global Cookies Policy ( including for the purposes of setting your preferences and to collect readership data so that we can deliver better and more personalized service and products to you. To find out more information about how Morgan Stanley processes personal data, how we use cookies and how to reject cookies see our Privacy Policy and our Global Cookies Policy ( If you do not agree to our Terms of Use and/or if you do not wish to provide your consent to Morgan Stanley processing your personal data or using cookies please do not access our research. Morgan Stanley Research does not provide individually tailored investment advice. Morgan Stanley Research has been prepared without regard to the circumstances and objectives of those who receive it. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of an investment or strategy will depend on an investor's circumstances and objectives. The securities, instruments, or strategies discussed in Morgan Stanley Research may not be suitable for all investors, and certain investors may not be eligible to purchase or participate in some or all of them. Morgan Stanley Research is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy. The value of and income from your investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, market indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in securities/instruments transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. If provided, and unless otherwise stated, the closing price on the cover page is that of the primary exchange for the subject company's securities/instruments. The fixed income research analysts, strategists or economists principally responsible for the preparation of Morgan Stanley Research have received 18

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