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Competition pushes rating for MediaTek down to 'sell'

TAIPEI -- CLSA Asia-Pacific Markets has downgraded its stock rating on Taiwanese chip designer MediaTek Inc. from "underperform" to "sell" because of intense competition and poor margin outlook.

In a report dated Sept. 27, CLSA said the market was optimistic about MediaTek's gross margin in the second half of 2012 and in 2013 after the company forecast gross margin expansion for the third quarter of this year that would end 11 consecutive quarters of contraction.

However, MediaTek's management told the press on Sept. 25 that the company's quarterly gross margin growth is likely to remain flat in the fourth quarter of this year and will not expand until the second half of 2013, the report said.

"This is slower than general expectations, which anticipated consecutive quarterly margin growth from the third quarter of 2012," CK Cheng, a Taipei-based analyst at CLSA, wrote in the report.

"This reinforces our belief that the market has underestimated the competition, which will push down MediaTek's average selling price and margin," he said.

On Sept. 27, U.S. chip-maker Qualcomm Inc. announced its first low-cost quad-core smart phone integrated circuit (IC) MSM8225Q, which is aimed at China and other emerging markets and will compete directly with MediaTek's similar MT6588.

One of the reasons investors were optimistic about MediaTek's 2013 margin was that they thought its new quad-core MT6588 chip had no competition, as Qualcomm made only very high-end quad-core ICs, Cheng said.

But the launch of the MSM8225Q will change that perception, Cheng said, noting that Qualcomm is aiming to release the chip for customer sampling by the end of 2012 and ship in volume in the first quarter of 2013.

Although the Qualcomm chip is scheduled to be launched a month or two later than MediaTek's, Qualcomm's price is likely to be 5-percent cheaper because of lower specifications, he said.

While MediaTek is believed to have superior products and better low-end smartphone ICs than Qualcomm, price does matter to Chinese handset makers, Cheng added.

"This is the main reason why MediaTek has been struggling to lift its average selling price and improve its margin since the third quarter of 2011, although it continues to offer faster processors and multi-core solutions," he said.

"We don't think MediaTek's quad-core solution can reverse this trend," Cheng said.

As for Chinese competitors, the increased production of RDA Microelectronics Inc.'s connectivity combo chip and Spreadtrum Communications Inc.'s 2G smart phone ICs will also weigh further on MediaTek's margins and average selling price, Cheng said.

CLSA raised its forecast for MediaTek's earnings per share by 3 percent for 2012 and by 8 percent for 2013, factoring in the company's acquisition of its smaller rival MStar Semiconductor Inc., but the brokerage maintained its target price of NT$250 on the stock.

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