Report
Allen Cheng
EUR 850.00 For Business Accounts Only

Morningstar | MediaTek Posts a Strong Profit Growth in 1Q From Further Margin Improvement; Raising FVE to TWD 308

No-moat Taiwanese chipset maker MediaTek’s first-quarter operating profit of TWD 3.17 billion, up 64% year on year, marked a good start to the year and beat our expectation, driven by growth in higher-margin non-mobile SoC chipsets, including Internet of Things and power management IC. The strategy to shift its R&D focus toward non-smartphone solutions has started to bear fruit, in our view. Profitability improved significantly due to favorable product mix, with the operating margin up 210 basis points from last year to 6% in the first quarter. Management guided to a modest (about 3% year on year) revenue growth for the second quarter and seems to be optimistic about the growth momentum in the second half, fueled by its new higher-end smartphone chipset SoCs.

We are raising our fair value estimate to TWD 308 from TWD 290, after tuning up our revenue and gross margin assumptions mainly for 2019, as we expect the mobile business will gradually improve from the design wins for the Chinese smartphone vendors, while the non-mobile business continues to drive the growth. We increase our revenue growth CAGR to 5% from 4.2% previously and revise up the average gross margin forecast to 41.2% from 40.8% previously. We view the shares as fairly valued and think the positive outlook for the margin expansion is priced in.

Revenue for the first quarter reached the higher end of the company’s prior projection at TWD 52.7 billion, up 6.2% year on year, which was higher than our 1.4% growth forecast. Mobile SoCs including chip solutions for smartphones and tablets accounted 30%-35% of total sales in the first quarter. Gross margin advanced 2.3 percentage points from a year ago to 40.7%, owing to a favorable product mix. The operating expenses/sales ratio was largely in line, up 17 basis points for higher R&D costs. As such, operating profit and net profit jumped 64% and 35% year on year, respectively.

The company expects to post revenue of between TWD 59.6 billion and TWD 64.8 billion in the second quarter, representing a negative 1.5% to up 7.1% year-on-year growth. It also guides gross margin to be between 39% and 42%. The Helio P70 will ship more in the second quarter. Also, the first phones powered by the upcoming Helio P90 are expected to hit the market in the same period. MediaTek will reveal its 5G SoC series by the end of this year and is ready to prepare its mmWave solutions in 2020.
Underlying
MEDIATEK INC.

Mediatek is engaged in the research, development, manufacture and sales of multi-media integrated circuit ("IC"), IC for computer peripherals, IC for advanced consumer electronics, IC for other special applications and decoders of optical storage; software application design, testing, maintenance and technical consultation services for IC; the import and export of products related to IC. Co.'s product items include optical storage chipset; CD-ROM chipset and single chip, DVD-ROM chipset and single chip, CD-R/RW chipset, combi chipset; and advanced digital consumer chipset DVD-Player chipset (RF chip, servo controller chip and highly integrated chip).

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
Allen Cheng

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