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Morningstar | MediaTek’s 4Q Margins Improved, but Net Profit Was Down by Lower Non-Op Income; TWD 290 FVE Intact

While no-moat fabless chipmaker MediaTek’s fourth-quarter net profit was down 63% from last year due to a significant decrease in nonoperating income, its recurring operating profit of TWD 3.85 billion, up 199% year on year, was ahead of our forecast. Gross margin grew 154 basis points from the year-ago quarter to 38.9%, driven by strong shipments of new smartphone SoCs and non-mobile SoCs for Internet of Things-related applications and voice-assistant devices. Meanwhile, lower-than-expected operating costs helped the operating margin increase to 6.3% from 2.1% a year ago.

We forecast five-year revenue and operating profit CAGRs to be 4.2% and 13% through 2023, respectively, and our fair value estimate is intact at TWD 290 per share. The share price has risen 10% year to date for the improving profitability, but the market seems to be concerned about the challenging smartphone environment. That said, we think the current share price offers a slight upside, as we believe the margin improvement has yet fully reflected in.

MediaTek sees a weak start in 2019, given the channel inventory remains high, and expects its first-quarter revenue to arrive between TWD 48.7 billion and TWD 53.6 billion, or down 2% and up 8% year on year. However, its 39.5% (plus or minus 1.5%) gross margin guidance revealed the management’s positive views on improving its product mix. Although the company projects a flat or slight increase in revenue for full-year 2019, as it expects the smartphone demand remains weak until 5G-compatible devices become commercially available in 2020, it sets its target gross margin at 40%, 1.5 percentage points higher than in 2018, buoyed by mass shipments of its new Helio P90 and P35 mobile SoCs, both of which are Artificial Intelligent enabled and feature an enhanced camera and 3D sensing capabilities for AR and VR experiences, as well as growth in shipments of higher-margin non-mobile SoC products.

2018 full-year revenue was flat from last year, as revenue declines in the mobile computing business were offset by strong sales growth in the growth type non-mobile segment. Compared with Qualcomm’s 20% year-on-year declines in the chip business, we think MediaTek has gained some market share back in the China market. Encouragingly, we think MediaTek’s strategy on expanding its presence in non-mobile SoC field is bearing fruit that it helped the company on track toward a recovery and will remain as growth driver in the long term. The demand for Internet of Things-related, power management, automobiles, and application-specific ICs for game consoles or data storage will remain robust, in our view.