Global Technology| July 22, 2015 AAssiiaa HHaarrddwwaarree Industry View: In-Line We are more constructive on Asia Hardware in light of significant exposure (~45-50%) to Apple where we see iPhone continuing to drive upside versus consensus estimates. On the other hand, server exposure is lower (~10-15%) which is where we see incremental risk if cloud data center capex slows, and their share gains should help offset the slower demand. Below we highlight companies with exposure to server and storage demand. Generally speaking, we're more positive on these names than our US counterparts given growing market share relative to US server OEMs. Quanta (2382.TW, OW): We maintain our OW rating on Quanta in view of its expansion in the datacenter hardware business, Apple Watch potential, and undemanding valuation (11x 1yr-forward EPS) with a 6% cash yield. Quanta’s datacenter hardware sales is on track with our expectation to grow 20-30% YoY in 2015, despite the market’s concerns about server demand slowdown. We attribute Quanta’s outperformance to 1) expanding product offerings to rack-level solutions from server boards/systems only; and 2) the expansion into the enterprise segment. Nonetheless, we expect its OPM for datacenter hardware may fall YoY in 2015 due to a higher sales mix of rack solutions as they yield a lower margin rate but higher profit dollar due to much higher ASPs than standalone servers. While there is debate about Apple Watch demand, we expect the margin for this project will be gradually improving for Quanta after it started mass production in the June quarter. Inspur (000977.SZ, OW): We have an OW rating on Inspur. Inspur’s server business remained on track with our forecast despite the market’s recent concern about a demand slowdown. Inspur’s server sales rose ~60% YoY in 1H15, which is on track to reach our full-year forecast of 63% YoY. Datacenter servers remained the key driver. In addition, we believe Inspur may likely benefit from share gain at the expense of other server brands. Hon Hai Precision (2317.TW, EW): Hon Hai generates roughly 10% of sales from server and storage products. We believe low-end, cloud-related shipments via partnership with HP could be around US$1 billion. These include sales into Microsoft and Chinese OEMs. Tripod (3044.TW, EW): Tripod has 35% revenue exposure to PC/NB segment and another 14% revenue contribution from server PCB. The demand slowdown at both server and PC segment will likely drag Tripod’s business momentum in 2H15 and 2016. Thus, we revised down our 2015-17e earnings estimates for Tripod by 7-9% and thus, lower our price target to NT$52.5, implying 11.4x 2015e PE. We retain our Equal-weight rating as we see its growing exposure at automotive segment should help mitigate some business shortfall at PC/server segment. Tripod trades at 12x 2015 PE, fair to its historical range of 8-15x or peers’ 9x-13x. 18