Initiate HTC at CL-Buy:From hardware maker to platform owner:Vive to revive HTC

类型：投资策略机构：高盛高华证券有限责任公司研究员：高盛高华证券研究所日期：2016-06-06

Source of opportunity: US$80bn virtual reality market by 2025.

    We believe virtual/augmented reality (VR/AR) will become the next majorproduct cycle and create a US$80bn market by 2025. Given the early stageof VR technology, we expect platforms to rise first before hardware andcontent can take off. HTC’s Vive (jointly developed with Valve) is one of thefirst high-performing VR platforms. Unlike the smartphone cycle, which isnow commoditized, we view the platform approach as “sticky” and valuecreating.

    Based on our platform framework, this leads to a virtuous cycle.

    We thus expect Vive to revive HTC’s fortunes as it capitalizes on the VRproduct cycle by becoming a leading platform in the next few years.

    Moreover, we believe HTC is mispriced as the market is assigning no valueto the VR business. We thus initiate HTC at Buy and add the shares toour Conviction List, with our 12-month target price of NT$95 implying41% upside, the most in our coverage.

    Catalysts: Vive to reach 60% of HTC revenue by 2020.

    1) Higher Vive shipments: We expect over 6mn units of Vive by 2020E,with Vive-related revenue (hardware and software) contributing almost60% to HTC’s total revenue (rising from 13% in 2016E). To track theprogress of HTC’s VR business, we believe a pick-up of monthly revenuewill be an important indicator as Vive’s ASP is 3-4x its smartphone ASP.

    2) Rise in gross margin: We expect Vive’s gross margin to reach anormalized level of 20-25%, higher than the smartphone business at 15-20%. Gross margin should gradually improve with higher Vive shipments.

    3) Vive partnership announcements with vertical market partners.

    4) Sustainable long-term profits from hardware and software revenuesby targeting consumer/commercial segments through its VR platform.

    5) Smartphone breakeven in 4Q16: We expect HTC to be profitable onthe corporate level by 2017 led by mix and lower opex from restructuring.

    Valuation: 41% upside to our NT$95 target price.

    Our SOTP-based 12-m target price of NT$95 values the VR and smartphonebusinesses on P/B-ROE, and is equal weighted to a normal-uptake scenarioand a delayed-uptake scenario. Our target price implies 6.6x 2020E P/E.