Potential cut in 3G subsidies to impact MediaTek: report
May 20, 2014, 12:06 am TWN
TAIPEI -- An expected cut in subsidies for 3G handsets by China's top three mobile carriers could hurt Taiwanese chip designer MediaTek Inc. (聯發科), according to a Goldman Sachs report.
A May 15 report on the popular Chinese Web portal Sohu.com said that China Mobile Ltd. (中國行動), the world's biggest wireless company by costumers, plans to reduce the amount it subsidizes on 2G and 3G handsets while it increases subsidies for 4G LTE models.
The other two major operators in the country, China Telecom (中國電信) and China Unicom (中國聯通), have similar plans as they try to shore up interest in 4G LTE networks, amounting to 10 billion yuan (US$1.6 billion) less in subsidies from carriers, the report said.
Glodman Sachs, however, estimates that the three carriers have maintained a total handset subsidy budget worth 65 billion yuan for the year.
"This news (Sohu report), if true, supports our view of accelerating LTE transition from June and would be incrementally negative to high-end 3G demand," Goldman Sachs technology analyst Donald Lu wrote in a research note dated May 16.
1H SoC Shipments 59 Mil. Units
Lu estimated that China Mobile's 3G handset sales and MediaTek's SoC (system-on-a-chip) shipments will reach 95 million units and 59 million units, respectively, in the first half of 2014.
That means MediaTek's market share of all 3G handsets sold via China Mobile has increased to 60 percent from less than 50 percent in 2013, he said.
"Even with 3G inventory at normal levels now, MediaTek may still suffer from a potential inventory drawdown assuming there is declining demand in the third quarter of 2014, in our view," Lu said.
"A potential 3G subsidy cut could also negatively impact MediaTek's octa-core demand, which was just sold into the channel," the analyst said. He maintained his "neutral" rating on MediaTek shares and a price target of NT$431 (US$14.3).
On handset makers, Lu said he expected Coolpad Group Ltd. (酷派集團) to benefit the most from the accelerating 4G penetration in China in the second half of 2014 and beyond, thanks to its leading 4G market position and its high revenue share from 4G products.
He forecast handset manufacturers with high exposure to 3G and mid-to-high end smartphones to be in the worst position, pointing out Lenovo Group Ltd. (聯想集團) in particular.
Shares in MediaTek closed down 1.99 percent at NT$492 Monday in Taipei trading.