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Morningstar | 2454 Updated Forecasts and Estimates from 07 Nov 2018

No-moat Taiwanese chipmaker MediaTek posted a strong third-quarter result that exceeded our forecast, with revenue and net profit up 5% and 36% year on year, respectively. This solid performance reaffirmed our view that the company’s gross margin continues to improve (maintained above 37% in four consecutive quarters), mainly helped by strong growth of new smartphone and nonmobile chipsets (Internet of Things, power management). Operating profit margin lifted 1.6 percentage points to 9.4%, close to its two-year high level.

Guidance for the fourth quarter is broadly in line with our forecast, with smartphone chip shipments to stay flat sequentially. Management is confident for the improving product mix, as the company will launch new smartphone chipset products in the mid- to high-end segment in the first half of 2019. Although we are concerned that the Chinese smartphone demand will be impacted by weakening economy growth, we expect the chipset price hikes for the company’s P series will partially offset volume decline. We anticipate MediaTek’s revenue and earnings to grow at a compound annual rate of 3.7% and 5.4%, respectively, through 2022. Our no-moat rating and TWD 290 fair value estimate are intact. We think the shares are undervalued at current levels, as they are at a 26% discount to our fair value estimate.

Revenue rose 5% from last year (or 11% quarter on quarter) to TWD 67 billion, reaching the higher-end of the company’s guidance. By sales breakdown, mobile computing, growth engine, and mature segments each accounted for 30%-35% of total sales. Combined shipments of its smartphone- and tablet-use SoCs was 100 million-110 million units. P22, P23, and P60 were in mass production for Chinese smartphone vendors, including Xiaomi, Vivo, and Oppo during the quarter. Growth products, including IoT, ASIC and PMIC, also grew at a double-digits rate.

Gross margin improved 2.1 percentage points year on year (or 30 basis points from last quarter) to 38.5%, in line with the company’s and our expectations, driven by strong volume growth of new smartphone chips. Operating profit was up 27% year on year (or up 54% sequentially) to TWD 6.3 billion, with operating margin lifted 1.6 percentage points from the year-ago quarter to 9.4%, given the higher operating expense ratio partially offset the gross margin expansion. Also, net profit grew 36% year on year (or down 8% sequentially) to TWD 6.87 billion.