Executive summary
Where to turn?
PC industry growth should fall by 10.9% by our calculations. A decline of this magnitude is sure to disappoint the market, which is expecting erosion in the neighborhood of 5.9%. Mini PC form factor technology, the industry’s ‘next big thing’, will not lead to a demand boost. We forecast PC shipments in 2009 to reach 138.5mn mobile PCs and 120.9mn desktop PCs, down 2.97% YoY and 18.8% YoY. Nor do we see a dramatic improvement in the macro-economy, as the industry’s main catalyst, commercial IT spending, will not pick up till 1H 2010. Once this happens, downstream manufacturers like Quanta Computer, our top pick, will be the first to benefit. We believe any industry recovery will be ‘L-shaped’, with 2H09 marking the bottom corner of the L
ASP, a poisonous snake
PC sell-through is likely to rebound in 2H09, but this will do little to offset the eventual decline in ASPs once mini PC appeal begins to wane. We remain cautious on global PC shipment growth through till 2010 or until we see an unambiguous recovery in end-user demand. Brand players (HP, Dell, Lenovo, Acer, Asus), will suffer in the meantime given that the PC industry will be unable, in our view, to sustain its current supply-driven shipment growth at a time when both consumers and enterprises remain guarded over expenditures. On the macro-economic front, Chinese government subsidies, demand driven by the handset makers, and innovations by the telco players will be insufficient, to overcome the imminent crash of ASPs due to the recent economic downturn. The rise of the mini PC market has slowed the decay taking place in the mobile PC market. Consider that mini PC form factors will eventually amount to 23.0mn units shipped by the end of 2009 according to our calculation. This represents a 93.0% increase YoY. We see PC market revenue eroding by 20.2% in 2009, reaching USD219.9bn due to the encroachment of ultra-low-cost form factors.
PC industry decline of 10.9% will disappoint the market, which is expecting a mere 5.9% decline
Downstream manufacturers like Quanta will benefit once IT spending picks up
A rebound in PC sell-through in 2H09 will do little to offset the eventual decline in ASPs
Chinese government subsidies, demand driven by the handset makers, and innovations by the telco players will be insufficient to overcome the imminent crash of ASPs due to the recent economic downturn.
Although brands are trying to avoid price competition and are instead pursuing market share, a margin squeeze from mini PCs looks inevitable in 2009
A blurring of the lines
Over the long term, we foresee the PC industry growing ever more saturated, leaving little room to eke out additional market share. In this environment, with little to tell between handsets and PCs, the only remaining avenue towards secure margins is vertical integration and consolidation. We envision brand players expanding to more promising product lines, particularly the handset business, currently enjoying strong growth momentum and high margins. Yet we are skeptical of this strategy as we believe the opportunities arising from a move into the handheld market do not compensate for the high degree of risk such a move entails. Market consolidation is bound to accelerate in both frequency and volume as competition compels each player to lower margins.
Making the best of it
As the industry landscape for the foreseeable future will remain challenging, in our view, a conservative approach to both PC brand players and manufactures is warranted we believe. We remain Neutral on the PC industry based on growing competition from mini PC form factors squeezing out ASP and intensifying competition as handset players enter the ultra-portable form factor arena. Until 2H, we prefer manufactures like Quanta and Compal, over brand players, like Acer, Asustek and Lenovo, because of their stable shipment growth in 2Q and 3Q.

Executive summary 2
Where to turn? 2
ASP, a poisonous snake 2
A blurring of the lines 2
Making the best of it 2
PC shipments to bottom out in 2H09 4
PC industry gradually reaching saturation 4
1. Shall there be increased sell-through visibility? 7
2. Will IT spending execution be deferred for the purpose cost cutting? 8
3. Factors driving shipment increases 9
Averted price war for market expansion protects margins 13
Survive together or collapse individually 16
The brand business – a zero sum game 16
Manufacturing – a short-term beneficiary of expanded order visibility 20
Earnings forecast 22
Investment strategy 24
Company Section 26
Acer Inc: Market share at cost of margins 26
Asustek Computer: Revolution for Eee Evolution 33
Lenovo Group: China story – two edged sword 39
Quanta Computer: Sustainable Leadership 46
Compal Electronics: Stable growth on recovery 53
Wistron Corporation: Bottomed out in 1Q09 60
Analyst team profile 67