Autochips:Strategic Cooperation to create new collaborative model

Mediatek, to sell Autochips to NavInfo, aiming for in-dash market.

    On May 13, Mediatek announced it has signed a Strategic Cooperation andFramework Agreement with NavInfo (subject to various relevant regulatoryapprovals). Per the agreement, Mediatek plans to sell its 82.9% stake inAutochips to NavInfo for US$497mn (total value of US$600mn). Founded in2013 and located in Hefei China, Autochips focuses on Auto Infotainment SOCand total solution. By October 2015, Autochips had captured 70% market sharein China’s aftermarket auto infotainment market and has generatedRmb500mn/Rmb196mn revenue/net income (NI) in the last 13 months.

    NavInfo is a leading mapping and navigation service provider for PC andmobile maps, auto in-dash and after-market navigation with 41% market share(as of 2015) and increasingly telematics and online services in China. Navinfosupplies in-dash map to automakers like BMW, Benz, Volkswagen and isproactively developing an ecosystem to provide auto telematics solutions(hardware + software) to its clients. Its telematics revenue grew 113% yoy in2015. Tencent has an 11% stake (as of 2015) in NavInfo to collaborate in autotelematics solutions.

    New business model expected to create “win-win” collaborationStrategically, while we do not take a view on the likelihood of the deal closing,we believe a 100% ownership in Autochips for NavInfo, could allow closercollaboration in fast growing markets (i.e. internet of vehicles). The relationshipcould also help Autochips SOC penetrate the higher-margin in-dash market viaNavinfo’s channel. Long term, Mediatek and Navinfo are likely to continue tocollaborate closely as Autochips is highly dependent on Mediatek’s currentand future IP such as 5G. Mediatek also announced on May 13 that it plans toinvest or co-invest with NavInfo (no more than US$100mn) to cooperatestrategically in Automotive ICs and IoV - a venture which may qualify forcurrent Chinese govt support on IC. This could supplement Navinfo’s currentefforts and enable a highly integrated total solution. Financially, Mediatekguided potential investment gain from the proposed deal to be NT$12bn or15% of GHe 2016E-18E NI. Based on reported Autochips NI (by Oct 2015), dealappears to be priced at 20X LTM P/E, above Mediatek’s current P/E of 13X2016E, but well below NavInfo’s P/E of 80X before trading suspension. Webelieve the Autochips deal offers the potential for cross-strait tech innovationand while Mediatek views the strategic coop as “a win-win scenario,” we noteculture differences between Mediatek and Navinfo could be a challenge.