Research Report Htc

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October 12, 2010

Pierre Ferragu (Senior Analyst) • pierre.ferragu@bernstein.com • +44-207-170-5005 Jasmeet Chadha • jasmeet.chadha@bernstein.com • +44-207-170-0528

HTC - Initiating Coverage: The Best of All Clones. Outperform Coverage Initiation
11/10/2010 Closing Price 715.00 458.82 Target Price 1100.00 TTM Rel. Perf. 101.4% EPS 2009A 28.18 23.63 2010E 47.57 31.02 2011E 74.32 35.63 2009A 25.4 19.4 P/E 2010E 15.0 14.8 2011E 9.6 12.9 Yield 3.6% 2.7%

Ticker 2498.TT MXAPJ

Rating O

CUR TWD

O – Outperform, M – Market-Perform, U – Underperform, N – Not Rated

Highlights

HTC appears like an early winner in the massive shifts we are currently witnessing in the handset industry, and if investors have started to recognise the situation (the stock outperformed its index by more than 100% YTD), we still see significant further upside. We expect EPS 26% above consensus next year, 45% in 2012. We believe that Android, the operating system developed by Google provides a decisive competitive advantage to manufacturers adopting it. As a consequence these manufacturers are gaining market share, and against conventional wisdom, they see a positive development of their pricing power. In that context, we believe HTC is very well positioned. The company has the best technical capabilities, the best cost base and is rapidly building a strong brand equity. The recent acceleration of the smartphone phenomenon coupled with the company's strength give HTC an unusually strong growth and profitability improvement potential. We expect the company to grow earnings by 69% this year and by 56% next year.

Global Telecom Equipment

The paradigm set by Touchscreen smartphones and Android has had a profound impact on the mobile phone industry.  We see 2 major changes happening today: 1) More and more of the objective features that consumers care about are software defined or at least depend heavily on the software platform of the phone; 2) Android is successfully creating an independent software layer.  These changes are profoundly impacting the competitive landscape. Software has brought in 2 new Key Success Factors: first mover advantage and software development capabilities. Unsurprisingly, this has created a disequilibrium in the competitive landscape, to the disadvantage of the largest incumbents.  As an immediate consequence, The War of Clones has begun. Because it concentrates very strong Key Success Factors, Android is giving a second life to subscale branded players and the platform represents a unique opportunity for unbranded Asian manufacturers to take significant market share.  Against conventional wisdom, we believe Android will have a positive impact on margins of manufacturers, at least in the medium term, and most likely a neutral effect on the overall profit pool of the industry, which implies pressure on margins of players with an inferior operating system.

See Disclosure Appendix of this publication for important disclosures and analyst certifications.

October 12, 2010 Pierre Ferragu (Senior Analyst)

• pierre.ferragu@bernstein.com • +44-207-170-5005

In such a context, we believe HTC is very well positioned.  On the technical front, we see HTC as the best positioned Android-backed player. Developing Android-based phone requires a significant and non-trivial effort to pull together the right user experience onto the right hardware platform. HTC launched the first commercial Android phone in October '08 and has built since then a significant time-and-experience-based competitive advantage.  HTC is rapidly creating a strong brand equity, building on the company's technical leadership. Several indicators show that the HTC brand is gaining very strong momentum. In western markets, HTC's brand awareness increased from ~10% in 2009 to >40% in 2010. Globally, HTC has the best shelf visibility of all android-backed manufacturers and most importantly, several surveys show a very high level of user...
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