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1 TECHNOLOGY HARDWARE INDUSTRY UPDATE Recent data points off; no upside surprise. Time to re-visit. Analyst: Mark Po, CFA; Tel: (8) ; April 13, 17 Recent data points suggest that there is limited positive news flow. Technology hardware, especially handset-related names, is one of the sectors that have reported strong year-to-date (YTD) performance. The HK-listed handset-related component names, on average, have reported a YTD return of.%, outperforming the HSI, HSCEI and MSCI by 13.9ppt, 1.7ppt and 1.8ppt, respectively. Their strong share price performance, in our view, is due to a) the broad-based market rally, and b) positive industry news flow, such as the improved outlook for the PC supply chain, strong memory pricing, and more importantly, expectations of a major upgrade of the iphone (iphone 8) by Apple. However, the recent data points may suggest that there is limited positive news flow to boost the share price performance of the technology hardware sector as a whole. Most of the Taiwanese-listed technology names (semiconductors, IC design, ODM, optical components & casings and PCBs) reported their Mar 17 turnover, and we note a slowdown in YoY top-line growth of the technology hardware sector, especially handset-related names in Mar 17 vs. Jan-Feb 17, which may suggest that shipments or turnover in Apr and May 17 should offer limited positive surprises to the market in the near term. Casing makers (Catcher & Castek) and PCBs (Flexium & Gigabyte) reported negative YoY growth in Mar 17. Apart from growth deceleration in Mar 17, there has been discussion about a delay in the launch of the iphone 8 with 3D-sensing ability due to technical issues which, in our view, puts pressure on shares of optical component names, such as Lagan and VMS. Recall that 3D-sensing has been one of the hottest topics related to the Apple supply chain since Feb-17, and share prices of 3D-sensing-related names outperformed other handset components makers. In the Hong Kong market, Sunny Optical [38.HK] released its Mar 17 results, which showed a sequential decline in shipments of camera modules in Mar 17, which also creates concern about the near-term growth prospects for handset-related names. The reasons for unexciting Mar 17 figures for the hardware supply chain are (a) general inventory adjustment for Chinese smartphones, and (b) Apple s inventory clean-up before its new-product launch. In the technology hardware sector, it seems that only the PC segment offered a positive surprise to the market, given growth in shipments of corporate PCs. Both IDC and Gartner released Q1 17 global PC shipment figures yesterday. According to IDC, global PC shipments grew.6% YoY to 6.3m units in Q1 17, better than the previous forecast of a 1.8% YoY decline. According to IDC, the.6% YoY growth in Q1 17 is the first positive unit growth since Q1 1. In the PC segment, the corporate PC market reported modest growth, but was offset by the declining consumer market. According to Gartner, global PC shipments totalled 6.m units in Q1 17, down.% YoY, the first quarter since 7 that the global PC market experienced shipments below 63m units. Despite the fact that the tone of statements from IDC & Gartner is different, at least there was no major negative in the latest shipment figures, and IDC s figures and the Taiwan-listed ODMs comments, in our view, offer a positive surprise to the market. Handsets. We share the view the recent data points offer no upside surprise to boost the share price performance of HK-listed handset component makers on the whole. However, it seems that the news flow on inventory adjustments by Chinese smartphone brands has continued for some time, and we maintain the view that key suppliers of Apple may benefit from product upgrades, given expectations of an increase of over 1% YoY in the bill of materials in 17 even with no major increase in shipments of iphones. We would like to suggest that investors shift to non-3d-sensing related names such as AAC Technologies [18.HK], which focuses on growth in dollar content rather than shipment numbers and will not be affected by concern about delays in launching the iphone with 3D-sensing ability. We also maintain the view that investors are sticking with leading high-end component manufacturers such as AAC Technologies due to a) more stable performance in terms of profitability, b) smartphone specification upgrades by both Apple and Chinese brands, and c) strong R&D capability. We share the view that the market might still hold a cautious view on Cowell e Holdings (Cowell) [11.HK], given its disappointing 16 results. However, Cowell is now trading at a lower valuation than HK-listed handset component names which, in our view, indicates that negatives such as weaker-than-expected 16 results have been factored in. We currently have a HOLD rating on Cowell with a target price of HK$.9 (based on 8x 17E PER). We believe that shares of Cowell may move when there are more signals about rebuilding confidence. We agreed that Sunny Optical is a quality handset component supplier with growth potential in other areas, such as ADAS. However, it seems that Sunny Optical s shipments are likely to remain lacklustre in Apr which may cap upside potential for its shares, especially since Sunny Optical is trading a higher valuation. Investors may take any share price weakness due to unexciting Apr 17 shipment figures as a revisit opportunity. PCs. The news flow may boost sentiment on PC names with higher exposure to the corporate market, including Lenovo [99.HK] and HP Inc. But we are still holding a cautious view on Lenovo, since its server and handset businesses are still facing a challenging environment. We also maintain the view that improvement in sentiment on the PC-related supply chain is positive for Ju Teng [3336.HK]. Semi-conductors. Shares of SMIC [981.HK] were under selling pressure after the Q 16 results announcement in mid-feb, which is line with our expectations. We maintain the view that shares of SMIC are likely to remain volatile in the near term, as Q1 17 and Q 17 will be challenging periods, given the QoQ and YoY drop in net profit in Q1 17. We still expect SMIC s operating performance to improve sequentially starting in Q 17. After the recent share price correction, SMIC is now trading at about 1x PBX, which is close to its historical mean, and we also suggest investors start looking at SMIC after a recent share price retreat. Hua Hong [137.HK] has outperformed SMIC since mid-feb, in line with our expectations, despite its slower turnover growth, given its more attractive valuation, high profitability and unique market position. However, Hua Hong s current valuation of.9x 16 PBV is higher than its historical mean, so a near-term catalyst is needed for further upside to its share price. Optical communications. After the recent share price correction, both O-Net [877.HK] and YOFC [6869.HK] are trading at a more reasonable valuation. We maintain the view that the outlook for both O-Net and YOFC remains positive, given continuous investment in wired networks by telecom operators. Both O-Net and YOFC are expected to report good growth in 17. We also like ZTE [763.HK]. Others. Regarding other hardware names, we suggest that BYD [111.HK] may catch up. According to CAAM, sales volume of NEVs in China picked up further to 31k units in Mar 17, up 76.9% MoM and 31.1% YoY. The pick-up in sales volume of NEVs in Mar 17 should be treated as a positive signal, given negative YoY growth in Jan 17 and accelerated growth since Feb 17. The upside for shares of companies in the NEV supply chain may be capped in 1H 17 given unexciting EV sales figures after the change in the subsidy programme. The market has been losing interest in the EV supply chain since Q 16, given uncertainty created by the change in the subsidy program and the investigations. The pick-up in sales volume in Mar 17 should attract market attention to the NEV sector. Once growth in EV sales stabilizes as the uncertainty fades (likely to be in late 1H or early H 17), investors might re-visit EV makers and the EV supply chain. BYD [111.HK] is always treated as a proxy for the NEV sector, and once sentiment changes, shares of BYD should react faster than others. BYD released a profit warning on its Q1 17 results earlier, so we don t expect any company-specific negative news flow in the near term to trigger selling pressure. Given the vast majority of its turnover is hardware related, we maintain the view that Meitu [137.HK] still looks expensive even after the recent share price correction since our latest update on Mar 17. Unless Meitu continues to provide innovative smartphones to gain market share and reports significant growth in revenue of its Internet services and e-commerce business, its share price might remain volatile in the near term, given its high valuation. 1

2 Oct-9 Feb-1 May-1 Aug-1 Nov-1 Mar-11 Jun-11 Sep-11 Dec-11 Apr-1 Jul-1 Oct-1 Jan-13 May-13 Aug-13 Nov-13 Mar-1 Jun-1 Sep-1 Dec-1 Apr-1 Jul-1 Oct-1 Jan-16 May-16 Aug-16 Nov-16 Feb-17 March, 16 Figure 1: AAC Technologies earnings summary (in RMB m) Revenue 8, , ,6.8 19,97.8,18.3 Change (yoy %) Gross Profit 3,678.,87.1 6,. 8, ,9. Gross Margin % Net Profit, ,16.9,.7,97. 6,7.1 Net Margin % EPS (Basic) DPS $.96 $1. $1.7 $1.66 $1.9 HKD x 19x 16x 1x ROE (%) Dividend Yield (%) PER (x) PBR (x) FCF Yield (%).9% 1.31% 1.7%.68%.% 9x Capex (m) ,9. 1,73. 1,368. Free cash flow per sha Net Gearing (%) Net Cash Net Cash.8 Net Cash Net Cash Figure : Cowell earnings summary (in USDm) E 16E 19E Revenue ,8. 1,13.9 Change (YoY %) 1.6 (6.7) Gross Profit Gross Margin % Net Profit Net Margin % EPS (Basic) Change (YoY %).6 (3.) DPS $. $.1 $.9 $.1 $.1 ROE (%) Dividend Yield (%) PER (x) PBR (x) FCF Yield (%).8% -1.% 1.17% 1.% 1.8% Capex (m) (36.9) (3.) (39.1) (.9) (1.7) Free cash flow per share. (.)... Net Gearing (%) Net Cash 1.3 Net Cash Net Cash Net Cash

3 March, 16 Figure 3: SMIC earnings summary (in USD m) Revenue 1,97.,36.,91. 3,3. 3,878.7 Change (yoy %) (.8) Gross Profit ,18.8 Gross Margin % Net Profit Net Margin % EPS (Basic) DPS $. $. $. $. $. ROE (%) Dividend Yield (%) PER (x) PBR (x) FCF Yield (%) -1.39% -.3% -3.7% -1.93% 1.71% Capex (m) (977.) (1,98.) (,3.6) (,18.1) (83.8) Free cash flow per sha (.1) (.) (.) (.). Net Gearing (%) Figure : Hua Hong s earnings summary (in USD m) Revenue Change (yoy %) 13.7 (.) Gross Profit Gross Margin % Net Profit Net Margin % EPS (Basic) DPS $. $.3 $.37 $.36 $.38 ROE (%) Dividend Yield (%) PER (x) PBR (x) FCF Yield (%) 1.7%.17% 1.3% 1.1% 1.6% Capex (m) Free cash flow per sha Net Gearing (%). Net Cash Net Cash Net Cash Net Cash

4 April 13, 17 Figure : YOFC earnings summary (in RMBm) Revenue, , ,1.3 9,9. 1,1.8 Change (YoY %) Gross Profit 1,87.6 1,3. 1,67.1 1,873.,1.6 Gross Margin % Net Profit , Net Margin % EPS (Basic) Change (YoY %) 1..1 (6.3) DPS $. $.17 $. $.6 $.9 1 ROE (%) Dividend Yield (%) PER (x) PBR (x) FCF Yield (%).8%.8% 1.8%.3%.61% Capex (m) (36.3) (3.3) (8.) (8.) (9.) Free cash flow per share Net Gearing (%) Figure 6: O-Net s earnings summary (in HKDm) Revenue ,13. 1,98.3,118., Change (YoY %) Gross Profit Gross Margin % Net Profit Net Margin % EPS (Basic) Change (YoY %) DPS $. $. $. $. $.69 ROE (%) Dividend Yield (%) PER (x) PBR (x) FCF Yield (%) -.9% -.17% -1.38% -.6%.9% Capex (m) (116.7) (13.9) (11.) (.) (11.) Free cash flow per share (.) (.) (.1) (.).1 Net Gearing (%) Net cash Net cash

5 April 13, 17 Figure 7: Meitu earnings summary (in HKDm) Revenue ,8. 3,7.9 7,68.8 Change (YoY %) Gross Profit ,3. Gross Margin % Net Profit (1,77.3) (,17.9) (6,.8) (3.6) 1, Net Margin % (363.1) (99.) (.) (.9) 18. EPS (Basic) (1.1) (1.13) (.11) (.1).33 Change (YoY %) n.a. n.a. n.a. n.a. n.a. 1 DPS $. $. $. $. $.6 ROE (%) (1,18.) (.6). Dividend Yield (%) PER (x) (1.) (1.6) (.7) (1,66.8) 36.6 PBR (x) (1.9) (11.9) FCF Yield (%) -1.11% -6.% -1.% -.3%.36% Capex (m) (1.7) (17.7) (9.8) (7.) (118.6) Free cash flow per share (.1) (.7) (.) (.).3 Dec16 Jan17 Feb17 Mar17 Apr17 Net Gearing (%) n.a. n.a. n.a Net Cash Net Cash Figure 8: Ju Teng s earnings summary (in HKDm) Revenue 9,71. 8, ,. 9,.9 1,179. Change (YoY %) 3. (6.6) (1.) Gross Profit 1,8.3 1,9.6 1,3.9 1,6.8 1,8.9 Gross Margin % Net Profit Net Margin % EPS (Basic) Change (YoY %) (1.3) 17.6 (1.9) DPS $.1 $.1 $. $.17 $.1 ROE (%) Dividend Yield (%) PER (x) PBR (x)..... FCF Yield (%).66% 13.8% 7.96%.1%.98% Capex (m) (,.6) (1,6.6) (1,36.) (1,1.) (1,1.) Free cash flow per share Net Gearing (%)

6 Aprial 13, 17 Figure 9: Peer comparison Ticker Company PE EV/EBITDA P/B ROE ROA Div yield Share Price Performance 3M 6M 1M Price Market Cap 17F 18F 19F 17F 18F 19F 16 17F 16 17F 16 17F 16 17F 1M YTD Lcy US$m x x x x x x x x % % % % % % % % % % % HK listed names 878 HK Solomon Systech (Intl) Ltd.39 1 n.a. n.a. n.a. n.a. n.a. n.a. 1. n.a. -.8 n.a. -.8 n.a.. n.a HK Semiconductor Manufacturing 9.36, HK Advanced Semiconductor Man-H n.a. n.a. n.a. n.a. n.a. n.a. 1. n.a. 3.7 n.a..8 n.a.. n.a HK Hua Hong Semiconductor Ltd 1. 1, HK Asm Pacific Technology 17., n.a HK Aac Technologies Holdings In 9.8 1, HK Sunny Optical Tech.3 7, HK Cowell E Holdings Inc HK Q Technology Group Co Ltd HK Truly International Holdings HK Varitronix International Ltd n.a. n.a. n.a. n.a. n.a. n.a. 1. n.a n.a..8 n.a. 8. n.a HK Tcl Display Technology Holdi n.a n.a HK O-Net Technologies Group Ltd n.a HK Yeebo International Hldgs n.a. n.a. n.a. n.a. n.a. n.a.. n.a n.a. 7. n.a. 1.3 n.a HK Ten Pao Group Holdings Ltd n.a n.a HK Ju Teng International Hldgs n.a HK Byd Electronic Intl Co Ltd , HK Tongda Group Holdings Ltd.66, Average A share listed names 333 CH Lens Technology Co Ltd-A 33. 1, CH Shenzhen Sunway Communicat-A 33.9, n.a CH Chaozhou Three-Circle Grou-A.3, n.a CH Shenzhen Everwin Precision-A 9.3 3, n.a CH Shenzhen O-Film Tech Co-A 3.77, n.a CH Goertek Inc -A 3.6 7, n.a CH Zhejiang Crystal-Optech -A 1.97, n.a. n.a. n.a. n.a. n.a. n.a. n.a n.a. 7. n.a. n.a CH Janus Dongguan Precision-A 9.1 1, n.a. n.a. n.a CH Luxshare Precision Industr-A. 7, n.a CH Sunwoda Electronic Co Ltd-A 1.39, n.a. n.a CH Boe Technology Group Co Lt-A , n.a CH Sunwoda Electronic Co Ltd-A 1.39, n.a. n.a CH Shenzhen Huiding Technolog-A 9., n.a n.a n.a. n.a. -1. Average Taiwan listed names 33 TT Taiwan Semiconductor Manufac , n.a TT United Microelectronics Corp 1., n.a TT Novatek Microelectronics Cor 11., n.a Vanguard International Semi 8.8 3, n.a TT Advanced Semiconductor Engr , n.a TT Realtek Semiconductor Corp 17. 1, n.a n.a n.a TT Egis Technology Inc n.a n.a n.a TT Win Semiconductors Corp 1. 1, n.a n.a n.a TT Advanced Ceramic X Corp n.a n.a n.a TT Casetek Holdings Ltd 9. 1, n.a TT Catcher Technology Co Ltd 98. 7, n.a TT Largan Precision Co Ltd 7. 19, n.a TT Tpk Holding Co Ltd , n.a TT Chroma Ate Inc 89. 1, n.a TT Hon Hai Precision Industry 97.3, n.a TT Mediatek Inc 1. 11, n.a Average #DIV/! Korean listed names 667 KS Lg Electronics Inc 69. 9, n.a KS Lg Innotek Co Ltd 13., n.a KS Samsung Electro-Mechanics Co 69., n.a KS Samsung Electronics Co Ltd 9. 8, n.a KS Sk Hynix Inc 9. 31, n.a KS Partron Co Ltd n.a Average #DIV/! US & Europe listed names LITE US Lumentum Holdings Inc.7, OLED US Universal Display Corp , FNSR US Finisar Corporation., n.a STM FP Stmicroelectronics Nv , SOI FP S.O.I.T.E.C , n.a. n.a VIAV US Viavi Solutions Inc 9.83, n.a n.a AMS SW Ams Ag.3, n.a. n.a Average Sources: Bloomberg, CGIS Research

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