Kate Lin: Welcome to Morningstar. Smartphone shipments globally continue to decline even as China's rolling lockdowns and the threat of inflation hit seasonal demand. How does this impact Taiwan semiconductor designer MediaTek. Phelix Lee equity analyst at Morningstar is here to tell us.
Hi Phelix, MediaTek (2454) is a major supplier of smartphone system microchips, especially to Chinese phone makers like Xiaomi and Vivo. Are you worried that weaker smartphone sales will hit MediaTek?
Phelix Lee: Hi Kate. So MediaTek they are primarily a smartphone SOC system on the chip supplier to Chinese makers like Xiaomi, OPPO and Vivo. Together these three customers made up over 30% of its revenue in 2021. And we expect the ratio to be somewhat similar for 2022. In terms of the weak smartphone sales, we think the Q1 and Q2 sales are impacted by weak macroeconomic environment in China as well as some of the supply constraints because of lockdowns in March and April. Gradually we see lockdowns are easing as of early May and we believe the lockdowns will have a negligible impact as we enter into Q3 and Q4. And because of the easing lockdowns, we also expect people would be more confident as in buying smartphones as economic activities normalise in the second half.
Lin: So other than smartphones MediaTek also supplies components to enterprise and automaking usage clients, what role does it play in MediaTek's long term earnings outlook?
Lee: Right. So for enterprise and auto usage, on the auto side, the company is more -- for now it is more focused on providing infotainment systems to Asian as well as global automakers, but right now the contribution is still very small. So we believe as more and more cars become more connected, as well as smarter and electrified, we believe there will be more demand from the auto infotainment systems. On the enterprise side, we are expecting more data centres that would require power management solutions. So that will also benefit MediaTek's enterprise related outlook.
Lin: In your opinion, MediaTek is now undervalued by more than 50%. Why is that?
Lee: Well, we believe MediaTek is overall, sometimes misunderstood as merely a smartphone component company, even though we would concede that smartphones make up over 50% of its revenue. We believe MediaTek has a narrow moat based on its intangibles and that would be reflected in its knowhow in terms of chip design and its knowhow in WiFi, Bluetooth as well as other connectivity protocols. So these protocols can very readily be migrated into non-smartphone usages, such as enterprise, auto, industrial, as well as many other applications. So that's why we think the market is somewhat misunderstanding the company's potential. And also the market is also expecting MediaTek smartphone related revenue to go down with its profitability because Qualcomm is also hitting back with 5G products. But we think overall MediaTek is in a much better spot than where it was in the 4G era because of its superior technological offering in this, and possibly in the next one or two generations.
Lin: Right. Thank you so much, Phelix. From Morningstar I'm Kate Lin.
.jpg "Kate Lin")
