Asia Essentials

Identifying the value behind the loT volume

We identify three major drivers behind the outperformance of the TaiwanNetworking sector vs the tech industry since 2015: 1) rising white box switchingand speed migration; 2) increasing car connectivity and ADAS/V2X penetration;and, 3) the migration in home network connection and Smart Home. We prefercompanies with higher exposure and growth potential in switches and carconnectivity/ADAS, as they have higher entry barriers and are at an early stageof a secular growth trend. While the home networking market offers basic LTdemand, it has lower IoT value share and higher pricing competition. Based onthese beliefs, we have an Outperform on Accton (2345 TT) and Wistron NeWeb(6285 TT), but a Neutral on Alpha Networks (3380 TT).

#1 White box switches and speed migration – 2016 the year

With the commoditization of server/storage, we expect white box switchingmarket to show a 53% CAGR in 2015-18. We expect a major take-off in 2016from the 18% penetration in the Public Cloud switch market in 2015 (or 1.5% ofthe total switch market) as new-gen silicon and software capability (SDN)becomes more accessible. Furthermore, migration to 40G/100G high speedswitches in the datacenter market should support value growth as their ASP is~10x that of avg. switches. We believe Accton is a purer play on these trends.

#2 Increasing car connectivity and ADAS/V2X penetration

We estimate the global car telematics solution market (diagnostics andinfotainment) will grow from US$12bn in 2015 to US$50bn+ in 2020, (out of theUS$150bn+ global connected car market in 2020). In-car entertainment is drivingpenetration of car connectivity – Bluetooth/Wi-Fi/cellular/satellite. Rising drivingsafety awareness is leading to initiatives in ADAS/V2X, providing secular growthin radar sensor demand. Among Taiwan networking companies, only WistronNeWeb has meaningful revenue contribution from auto electronics, due to thehigh entry barriers in this segment.

#3 Migration in home network connection and Smart Home

Migration in global home networking is progressing in different ways: 1)expansion of broadband coverage; for example, the aggressive optical fibredeployment in China, which boosts demand for xPON boxes; 2) upgrade inconnections such as ADSL to VDSL/G.fast or DOCSIS 3.0 to 3.1 for fixedbroadband and Wi-Fi 802.11a/b/g/n to 802.11ac for wireless; and, 3) the build-upof “Smart Homes” with IP cameras, sensors and customized gatewaysleveraging the home network. Taiwan networking companies mainly serve ashardware ODMs. With low entry barriers, outperformers are often those focusingon high-end, customized products, or those having share gains (client/region).

Initiations: Accton/Wistron NeWeb - OP, Alpha Networks-N

We are the first foreign broker to initiate on the sector and to cover Accton andAlpha Networks (May 11). Given an increased base in 2015 sales/stockperformance, we prefer names with higher technology/industry entry barriers,pricing/order sustainability, and attractive valuations. We initiate on WistronNeWeb with an OP for its exposure to car connectivity and ADAS, plus attractivevaluation. We prefer Accton (OP) over Alpha Networks (N), as we believe theformer has more growth potential in white box and high speed switching.