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RWC Emerging & Frontier MarketsStrategy Update Q2 2019

www.rwcpartners.com | E [email protected] | Authorised and regulated by the Financial Conduct Authority

The Team

John Malloy and James Johnstone co-manage the RWC emerging and frontier markets strategies. The team is composed of a further 16 analysts, economists and strategists based in Miami, London and Singapore, many of whom have worked together for over twenty years. The team joined RWC Partners in 2015 and now manages c. $8bn for its clients.

Emerging and frontier markets represent the fastest growing countries in the world. The RWC team believes the continued growth in these markets represents opportunities across a range of industries.

The highly experienced and dedicated team takes an index-agnostic, opportunistic approach which allows it to explore investment opportunities that are often off the beaten track.

In this edition, we give an overview of the second quarter of 2019 before exploring 5G and the investment opportunities it presents.

RWC Partners Limited Verde, 10 Bressenden Place, London, SW1E 5DH | T +44 (0)20 7227 6000 | F +44 (0)20 7227 6003

RWC Emerging & Frontier Markets 3

All markets referred to above relate the respective MSCI index.Past performance is not a guide to the future. The price of investments and the income from them may fall as well as rise and investors may not get back the full amount invested. The names shown above are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or advice.

RWC Emerging & Frontier Markets

Emerging and frontier market equities endured a volatile quarter as trade tensions re-ignited during the month of May following a collapse in negotiations between the US and China. Markets recovered towards the end of the quarter partially due to a dovish Federal Reserve in addition to expectations of a recommencement in trade negotiations. Global macroeconomic data remains generally robust, despite weakening trade and manufacturing data in Europe and some parts of Asia. Valuations are attractive, especially relative to developed markets, inflation remains under control and current accounts are at stable levels. The MSCI Emerging Markets Index ended up rising +0.8% while the RWC Emerging Markets Equity Fund was up +0.2%. The MSCI Frontier Markets Index rose +5.0%, The MSCI Frontier Markets Index ex GCC fell -0.6% and the RWC Frontier Markets Equity Fund rose +0.4%. China’s first quarter GDP growth rose +6.4% year-on-year, consumption is recovering due to accommodative fiscal policy and foreign exchange reserves remain well supported at $3.1 trillion. In Latin America, Brazil rose +7.2% as the inflation remains controlled in addition to positive expectations regarding social security reform. Russia rose +17.3% during the quarter as the country continues to profit from an environment of higher oil prices. The BJP-led alliance under Narendra Modi won a decisive majority in India’s elections which should result in a continuation of economic reform that we have seen since 2014. In Frontier Markets, Kuwait rose +10.5% in anticipation of MSCI’s re-classification of the country to Emerging Market status at the end of the quarter. Argentina rose +7.0% as the equity market recovered following an announcement from the former President, Cristina Fernandez de Kirchner, outlining that she will run as Vice President to Alberto Fernández in the country’s

elections later this year. Incumbent President, Mauricio Macri announced that Miguel Angel Pichetto, a moderate Peronist, will be his vice-president running mate. This implies a broadening of the Cambiemos coalition which bodes well for the incumbent President. Vietnam fell -3.7% despite recording second quarter GDP growth of +6.7% and a +9.4% expansion in the country’s industrial production index.

Russia was a significant contributor to performance for the RWC Emerging Markets Equity Fund. Sberbank, the country’s dominant bank, rose +23.6% as the bank continues to benefit from an improvement in net interest margins. Yandex was up +10.7% as the company reported earnings results with RUB 1.4 billion generated in EBITDA from the company’s core Taxi operations. The Greek banks rose considerably with National Bank of Greece and Eurobank up +57.1% and +23.6%, respectively. New Democracy secured an emphatic win in the European elections and a law relating to household insolvency was passed which will increase non-performing loan recoveries. Brazil was also a contributor to performance. Healthcare provider, Hapvida, rose +30.7%. The company announced the acquisition of Sao Francisco Saude and the purchase of a portfolio of health insurance companies from the America Group, both of which will increase the company’s geographical and operational coverage. While China recovered significantly during the latter part of the quarter, it was still an absolute detractor to performance. Bilibili declined -14.1%, despite a positive outlook for the company. Bilibili provides online entertainment for China’s younger generations with 100 million monthly active users and is at nascent stages of monetization.

For the RWC Frontier Markets Equity Fund, Argentina was a positive contributor to performance with Banco Macro, Grupo Supervielle and Grupo Financiero


Past performance is not a guide to the future. The price of investments and the income from them may fall as well as rise and investors may not get back the full amount invested.The names shown above are for illustrative purposes only and is not intended to be, and should not be interpreted as, recommendations or advice.

Galicia rising +52.3%, 31.4% and 35.3%, respectively. All three banks recorded encouraging earnings results in addition to positive news regarding the country’s elections later this year. Kazakhstan was also a positive contributor. Halyk Savings Bank, one of the country’s largest financial institutions, rose +22.1% as the company reported strong earnings results with encouraging guidance with Return on Equity above 22% and Net Interest Margins above 5% in addition to an increase in the company’s pay-out ratio. The United Arab Emirates also performed well as Emaar Development rose +10.6% on the back of good operational results showing significant market share gains in off-plan sales. Pakistan was a detractor for the fund during the second quarter as the country continues to undergo a substantial macroeconomic adjustment. The currency weakened -14% to 160:$, despite the announcement of a $6 billion IMF program. The outlook for the country is becoming more positive, especially for the financial sector. Companies such as United Bank Limited and Meezan Bank have strong deposit franchises and their net interest margins should benefit from an environment of rising interest rates.

Team Update

We would like to congratulate Muchemi Wandimi for being selected as the CFO of a company called ‘Africa’s Talking’ (“AT”). We will miss Muchemi, but wish him and his family all the best as they return home to Kenya. James talks about Frontier Markets being the beneficiaries of returning talent – people that leave for education and experience and then return to capture the high growth opportunities that are present within Frontier Markets – this is a perfect example. Muchemi will be bringing a capital markets capability to the executive team. AT is a “communications platform as a service” technology company with presence in several African countries, with its headquarters in Kenya. The closest comparison in terms of the company’s business model is Twilio Inc, based in the United States. His sector coverage, copper and gold, will be picked up by Christopher DiSalvatore in Miami while his regional coverage, Sub-Saharan Africa, will be picked up by Shivesh Haulkhory and Victor Erch in London.



*Source: GSMA June 2019. Past performance is not a guide to the future. The price of investments and the income from them may fall as well as rise and investors may not get back the full amount invested.Forecasts and estimates are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. The forecasts and estimates are based upon subjective assumptions about circumstances and events that may not yet have taken place and may never do so. The names shown above are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or advice.

5GIntroduction

Fifth generation technology is the next step in the evolution of digital communications. Faster transfer of data, lower latency, reduced congestion and increased connectivity are just some of the improvements 5G will bring. *In 2018, mobile technologies and services generated $3.9 trillion of economic value which equates to c. 4.6% of GDP. GSMA estimates that

the economic contribution of mobile will increase by almost $850 billion by 2023 and 5G will contribute $2.2 trillion to World GDP by 2034. We believe 5G will not only facilitate the population’s voracious appetite for data, it will accelerate our consumption and pave the way for seamless connectivity and improve productivity worldwide.

FIGURE 1: Economic contribution of mobile services will likely increase $850 billion by 2023

Mobile Contribution to GDP ($ million)

Direct Indirect Productivity % of GDP (rhs)

2018 2019 2020 2021 202320220

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

4.5%

4.6%

4.7%

4.8%

4.9%

Source: RWC Partners, GSMA Intelligence as of 28 June 2019

FIGURE 2: 5G will likely contribute $2.2 trillion to the global economy by 2034

Agriculture & Mining 6%

ICT & Trade 14%

Manufacturing & Utilities 35%

Public Services 16%

Professional & Financial Services 29%

Source: RWC Partners, GSMA Intelligence as of 28 June 2019


Past performance is not a guide to the future. The price of investments and the income from them may fall as well as rise and investors may not get back the full amount invested.Forecasts and estimates are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. The forecasts and estimates are based upon subjective assumptions about circumstances and events that may not yet have taken place and may never do so. The names shown above are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or advice.

FIGURE 3: Timeline for 5G Deployments starting from 2020

Japan

AustraliaMexico

2022 20252017 2018 2019 2020

3GPP Standards

Standard Frozen (March)Approval of SA 5G

specifications

Network Coverage

Adoption

Approval of NSA 5G Specifications (December)

77 Operators in 49 Countries

Spectrum

China

UAE

South Korea Preview (Winter Olympics)

Trials

Commercial Launches

400 million

>1.2billion

c.25% c.40%

Standard Frozen(September)

R16 5G Work Items

IMT - 2020 Specificationsapproved

R17 and beyond - '5G Evolution

20 markets in Europe10 markets in Asia

PacificCanadaUS

Progress on existing trials + new announcements

expectedOver 30 Markets planning to assign spectrum in 3.5 GHz and

26/28 GHzWRC-19

South Korea

Source: RWC Partners, Credit Suisse, GSMA Technology – 2017-2025E

Implementation

The United States and South Korea launched 5G commercially at the end of 2018 with 16 more countries launching during 2019. The Chinese government has awarded 5G spectrum licenses to all three telecommunications companies in order for them to conduct trials before commercial roll-out in late 2019. However, the majority of 5G deployments will happen after 2020 and will be dependent on 3rd Generation

Partnership Project (3GPP) standards. Huawei is an essential and integrated part of 5G as the company holds a substantial amount of 5G patents. Equipment vendors generally adopt a cross-licensing model which makes it very difficult to exclude Huawei from 5G network participation. The company has filed 1,975 5G patents, more than Qualcomm and Intel put together.

FIGURE 4: Number of 5G Patents Registered 5G Patents

1,975

1,471

1,448

1,444

1,316

1,146

1,029

583

543

495

236

Huawei

Nokia

LG

Ericsson

Samsung

Qualcomm

ZTE

Intel

Datang

Sharp

Others

Source: RWC Partners, European Telecommunications Standards Institute – 2019



No investment strategy or risk management technique can guarantee returns or eliminate risks in any market environment.

Fifth generation technology brings three new technical features. These are enhanced mobile broadband (eMBB), ultra-reliable low latency (uRLL) and massive machine type communications (mMTC). These

features will enable applications such as virtual and augmented reality (VR & AR), ultra-high speed video, high density internet of things (IoT), autonomous driving and smart cities.

Source: RWC Partners, HSBC Qianhai Securities – 2019

FIGURE 5: Investment Rationale

Base Station Demands Increases

Antenna and RF Components' Value per Device Increases

Optical Module Demand Increases

Improve Spectral

Efficiency

Massive MIMO

Beamforming Carrier Aggregation

Edge Cloud Computing

Enhanced Mobile Broadband (eMBB)

Ultra-Reliable and Low Latency Communications (uRLLC)

Massive Machine Type Communications (mMTC)

More Frequency Spectrum

More Intensive Base Stations

Introduce Milimetre Wave

Band

Optical Component

Optical Network Upgrade


Past performance is not a guide to the future. The price of investments and the income from them may fall as well as rise and investors may not get back the full amount invested.Forecasts and estimates are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. The forecasts and estimates are based upon subjective assumptions about circumstances and events that may not yet have taken place and may never do so. The names shown above are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or advice.

The technology is being implemented in two phases: Release 15, which focuses on eMBB and Release 16, which concentrates on uRLLC and mMTC, including IoT. Release 15 will concentrate on existing

applications whose process can be improved by utilising the higher capacity and cheaper data rates while Release 16 will focus on enhanced IoT including industrial and automotive connectivity.

Global wireless capital expenditures are expected to be around $500 billion between 2018 and 2020. However, this is dependent on the level of coverage that operators choose to have. Most mobile networks were built starting from places of affluence before

expanding regionally. Many 5G applications will have significantly different requirements and coverage will likely be a function of monetization opportunities in specific countries and regions.

FIGURE 6: 5G Roll Out Timeline

2019-2020 2021 onwards

Enhanced Mobile Broadband (eMBB) Including Fixed

Wireless Access

Ultra-Reliable, Low-Latency

Communications (uRLCC)

Massive Machine-Type Communications

(IoT)

Release 15 Examples: Release 16 Examples: Examples:

Mobile 4K/8K Video Rich Media and Entertainment Augmented Reality Home Entertainment

Industrial Automation Autonomous Vehicles Telemedicine

Smart Grid Smart Cities Health Monitoring

Source: RWC Partners, HSBC, Ovum - 2019

FIGURE 7: Total Capital Expenditures for 4G and 5G

Capital Expenditures Comparison ($ Billion)

4G 5G

United StatesChina South Korea Japan0

50

100

150

200

250

300

350

400

450

Source: RWC Partners, Morgan Stanley Estimates – 4G up to 2018, 5G 2018 and Beyond (estimates)

FIGURE 8: Global Wireless Capital Expenditures

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E0

50

100

150

200

250

($ b

illio

n)

Source: RWC Partners, Credit Suisse Estimates – 2009-2020E




Spectrum

The first priority is to allocate sufficient spectrum for 5G. Compared with previous mobile generations, 5G requires larger and more contiguous blocks of spectrum. Bandwidths ranging from 800 MHz and 2.6 GHz have historically been allocated for 2G, 3G and 4G. While it has not yet been finalised, the 5G network will be designed to use both high and low

band spectrum, crossing 400 MHz to 90 GHz. The higher frequency and bandwidth can transport more data and will enable greater capacity and speed while enhancements on the low bands below 1 GHz and mid-bands between 1-6 GHz will offer support for more IoT devices and higher cellular data rates.

FIGURE 9: 5G Spectrum

FIGURE 10: 5G Spectrum Auctions by Key Regions and Bands

Source: RWC Partners, Credit Suisse, 2019

Source: RWC Partners, Credit Suisse, 2019

Spectrum 2G 3G 4G 5G

Low Band (<1 GHz) 800 MHz

900 MHz 900 MHz

Mid Band (1-6 GHz) 1.8 GHz

2.1 GHz 2.1 GHz

2.6 GHz 2.6 GHz

High Band (mmWave) 3.5 GHz

24-39 GHz

Channel Bandwidths 25 MHz 25 MHz Up to 160 MHz Up to 1 GHz

Country 2017 2018 2019E 2020E

China 2.6 GHz, 3.5 GHz, 4.8 GHz

South Korea 3.5 GHz, 28 GHz

Japan 3.7 GHz, 4.5 GHz, 28 GHz

Australia 3.6 GHz

Germany 3.4-3.7 GHz

UK 3.4-3.8 GHz 3.4-3.8 GHz 3.6-3.8 GHz

Italy 3.4-3.8 GHz

France 3.6-3.8 GHz

Spain 3.4-3.8 GHz 700 MHz

USA 24 GHz, 28 GHz 37 GHz, 39 GHz, 47 GHz


Past performance is not a guide to the future. The price of investments and the income from them may fall as well as rise and investors may not get back the full amount invested.Forecasts and estimates are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. The forecasts and estimates are based upon subjective assumptions about circumstances and events that may not yet have taken place and may never do so.

One of the most important advancements in relation to fifth generation technology is the use of very high frequencies above 24 GHz. The most commonly discussed high frequency band is millimetre wave (mmWave). mmWave spectrums are high speed, with short wavelengths and have a high level of propagation loss. Due to the adoption of mmWave, GSMA estimates that 5G will support c. 1 million devices per square kilometre versus c.4,000 for 4G. 5G also uses a new digital technology called Massive Multiple Input Multiple Output (MIMO) that uses targeted beams to spotlight and follow users around a cell site, improving coverage speed and capacity. Therefore, 5G networks demand substantial capacity expansion for base stations in order to account for the use of higher frequencies.

FIGURE 11: Number of 5G Connections

5G Connections vs. Market Share

5G Connections (millions) (lhs) 5G Share (%) (rhs)

2018 2019 2020 2021 20252023 20242022

$ m

illio

n

0

400

800

1,200

1,600

0%

4%

8%

12%

16%

20%

Source: RWC Partners, 3GPP – 2018-2025E

FIGURE 12: Base Stations

Global Base Stations ('000 Units)

2G Cells 3G Cells 4G Cells 5G Cells

2012 2013 2014 2015 2016 2017 2018 2020E2019E 2023E2022E2021E0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Source: RWC Partners, Credit Suisse – 2012-2023E

Base Stations

As 5G uses more bandwidth and higher frequency spectrum, there will need to be more base stations to achieve the same coverage as 4G. In China alone, forecast suggests that 8.5 million base stations will be built over the next six years and China Unicom estimates the total number of base stations to be 1.5-2.0 times higher than 4G. However, there is potentially significant upside to that number considering the constant increase in data penetration worldwide.




Furthermore, additional and higher frequency spectrum requires more sophisticated designs in radio frequency components, including antennae, amplifiers, filters, switches and basebands. 5G base stations are far more efficient than 4G. While 4G base stations just

use atennae, 5G base stations combine a remote radio unit (RRU) with an antenna to form an active antenna unit (AAU). 5G network architecture also requires middlehaul in addition fronthaul and backhaul which results in more demand for optical modules.

Use Cases

5G will likely take longer to reach maturity than previous upgrade cycles. It has the potential to open new markets and trigger major changes in the digital telecommunications market. For instance, 5G network architecture enables a phenomenon called ‘network slicing’ which allows a network operator to customise

the design of individual logistics networks to deliver dedicated services to specific customers. While Samsung, Huawei, Xiaomi and LG have all launched 5G handsets, the opportunity set over the long term is far greater.

FIGURE 13: 5G Network Architecture Change

Source: RWC Partners, Credit Suisse – 2012-2023E

4G 5G

Atenna AAU

RRU DU

BBU CU/MEC

CoreNetwork

CoreNetwork(Cloud)

Fronthaul

Fronthaul

Backhaul

Middlehaul

Backhaul


Forecasts and estimates are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. The forecasts and estimates are based upon subjective assumptions about circumstances and events that may not yet have taken place and may never do so.

FIGURE 14: 16 billion new IoT connections by 2025

IoT Connections (billions)

SmartHome

ConsumerElectronics

SmallVehicles

Wearables ConsumerOthers

SmartBuildings

SmartUtilities

SmartManufacturing

SmartCities

SmartRetail

Health Enterprises

9.1

3.21.3 0.7 0.5 0.3

5.01.6 0.8 0.7

0.3 0.2 1.5 25.2

202520180

5

10

15

20

25

30

Source: RWC Partners, Bloomberg, CLSA 2018

Internet of Things

With the power of fifth generation technology, the IoT phenomenon will likely grow exponentially. GSMA estimates that most of the value of IoT from now through to 2025 will come from applications, platforms and services which will increase by roughly $600 billion. 5G is the first wireless technology with high throughput, low latency and high reliability to replace wireline connectivity in factories. Consequently,

industrial IoT will also likely see robust growth as manufacturers move towards a leaner cost structure, digitalisation and flexibility in processes and production through methods such as condition-based monitoring. ABI Research estimates that by 2025 there will be c.90 million condition-based monitoring connections. Over time, enhanced IoT will lead to the evolution of smart cities which we believe will likely enhance productivity.

Source: RWC Partners, Industrial Safety Review 2018

Smartwearables

Smartmobility

Smartparking

Trafficpriority

EntertainmentApps beyond imagination

SmartCar

eHealth

Connectedhouse

SmartGridsDomotics

Security &Surveillance

Water qualityCar-to-car

communication

Utility management

FIGURE 15: Smart City




Automotive Sector

5G technology is expected to change the automotive landscape significantly. Fifth generation technology will allow connectivity between vehicles, pedestrians, infrastructure and application servers which will likely lead to safer and more efficient transportation. ABI Research estimates that there will be 60 million 5G connected vehicles by 2025. Advanced driver-assistance systems (ADAS) are already available in some vehicle models via 3D sensors and imaging. 5G’s ultra-low latency and high reliability properties suggest that the proliferation of ADAS will continue.

FIGURE 16: 5G Automotive Applications Driving Growth in Radio Frequency Components

Automotive Applications ($ millions)

Telematics (3G, 4G, 5G) V2X, C-V2X, DSRCInfotainment SDARS (Satellite Radio)

2018 2019 2020E 2021E 2023E2022E0

200

400

600

800

1,000

1,200

Source: RWC Partners, Qorvo – 2017-2022E

FIGURE 17: 5G Connectivity in an Electric Vehicle

Source: RWC Partners, Androidpit



Augmented/Virtual Reality

While 5G will likely bring down the per bit cost of delivering an ever-increasing amount of video data, the higher speeds and lower latency of fifth generation may significantly increase the penetration of cloud gaming, augmented and virtual reality. Current cloud

game platforms do not generally provide levels of image quality greater than 720 pixels. The introduction of 5G is expected to offer image quality of 4,000 pixels at 90 frames per second. Additionally, most augmented and virtual reality is highly data intensive.

FIGURE 19: Diverse Potential of AR/VR

Source: RWC Partners, Statista, Goldman Sachs – 2018-2025E

Predicted Market Size of VR/AR Software by 2025 ($ billion)

Consumer

Enterprise & Public Sector

0

2

4

6

8

10

12

14

Healthcare Engineering Real Estate Retail Military Education Videogames Live Events Video Entertainment

TOTAL – $35 Billion

FIGURE 18: AR/VR Applications to Roll Out in Stages

Source: RWC Partners, Huawei Wireless X Labs, Credit Suisse – 2019

Stage 1 Stage 2 Stage 3

PC VR Mobile VR Cloud Assisted VR Cloud VR

VR Applications Gaming 360 VideoEducation

Immersive Content, InteractiveSimulation, Visualisation / Design

Premium Gaming / Modelling Experience

2D AR 3D AR / Mixed Reality Cloud MR

AR Applications

Assembly Instructions, Gaming, Remote-Work,

Visualisation for Retail / Marketing

Holographic Visualisation,Connected Public

Safety Applications

Cloud-Based Mixed /Merged Reality Applications

Connectivity Requirements

Primarily Wifi & 4G Connectivity

Streaming to 20 Mbps50 ms latency

4.5GStreaming to 40 Mbps

20 ms latency

5GStreaming to 100 Mbps

9.4 Gbps2-10 ms latency




FIGURE 20: CYCLIST WARNING USING AR HOLOGRAPHICDiverse Potential of AR/VR

Source: RWC Partners, T-Mobile 5G Wireless


Remote Healthcare

Services such as remote diagnosis, real-time health tracking and medical robotics depend on interactions between the patient and a device terminal. 5G network

architecture will likely be the only phenomenon that can securely provide the uninterrupted connectivity and lower latency that is needed for such sensitive operations.

FIGURE 21: Architecture for Remote Healthcare

Source: RWC Partners, Research Gate 2019



Past performance is not a guide to the future. The price of investments and the income from them may fall as well as rise and investors may not get back the full amount invested. Forecasts and estimates are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. The forecasts and estimates are based upon subjective assumptions about circumstances and events that may not yet have taken place and may never do so.

Drones

5G network architecture will allow drones to transmit real-time, high definition video when moving at high speeds. Drone services will provide efficiency and

more security to multiple industries such as energy, infrastructure, agriculture and retail in addition to providing controlled and detailed surveillance for property owners.

FIGURE 22: 5G Drone Architecture

Source: RWC Partners, Prodrone 2019

FIGURE 23: Drone Market Value ($ Billions)

Source: RWC Partners, Cision 2018-2025E

2018 2019 2020E 2021E 2022E 2023E 2024E 2025E0

10

20

30

40

50

60

70


Past performance is not a guide to the future. The price of investments and the income from them may fall as well as rise and investors may not get back the full amount invested.Forecast and estimates are for illustrative purposes only and are not to be relied upon as advice or interpreted as recommendations. The forecast and estimates are based upon subjective assumptions about circumstances and events that may not have taken place and may never do. The names shown above are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or advice.

FIGURE 25: Mediatek Chipset Revenue

3G 4G 5G

2013 2014 2015 2016 2017 2018 2019 2020E 2021E0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000Mediatek Chipset Revenue by Network (NT$ millions)

Source: RWC Partners, Mediatek, Morgan Stanley - 2013-2021E

The company is currently developing a M70 modem specifically for 5G. Mediatek is targeting China’s sub-6 GHz frequencies first, with plans to develop mmWave products for China and global markets next year. The 5G replacement cycle will likely be a key driver for the

company and we believe this will likely boost growth in revenue and margins from 2020 onwards. Mediatek has also announced co-operation with Skyworks, Murata and Quorvo in addition to equipment vendor, Nokia. The stock trades at 15.3x 2020 earnings on our estimates.

Mediatek

Mediatek is a leading global integrated circuit design company. 30-35% of the company’s revenue comes from smartphones, 30-35% from growth products (ASIC, IoT, voice assistant, set-top box) and 25-30% comes from mature technology products. The company’s mobile business is still largely driven by 4G, but this is on the cusp of change.

FIGURE 24: Mediatek Share Price ($ Terms)

Source: RWC Partners, Bloomberg – July 2016 – July 2019

Jul-16 Dec-16 May-17 Oct-17 Mar-18 Aug-18 Jan-19 Jun-196

7

8

9

10

11

12

13

Investment Opportunities

The rollout of 5G helps the Asian hardware supply chain via capital expenditures relating to infrastructure and content gain for components. The transition to 5G should lift silicon content in radio frequency components, processors, modems and memory due to higher data rates, bands and frequencies.

The risk to these companies considering their hard-ware related nature is a continued deterioration in trade negotiations between the China and the US which could lead to significant potential downside.



Past performance is not a guide to the future. The price of investments and the income from them may fall as well as rise and investors may not get back the full amount invested.Forecast and estimates are for illustrative purposes only and are not to be relied upon as advice or interpreted as recommendations. The forecast and estimates are based upon subjective assumptions about circumstances and events that may not have taken place and may never do. The names shown above are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or advice.

Win Semiconductors

Win Semiconductors is the largest gallium arsenide (GaAs) foundry with 60% global market share. GaAs has superior electronic properties over silicon which makes it the best power amplifier for use in radio frequency devices such as smartphones, WiFi routers and industrial IoT components.

Risks to the thesis include a continuation of trade tensions between the United States and China.

The investment cycle for 5G base stations has already started with sub-6 GHz applications, while mmWave (28 GHz) will be more from 2022 and beyond. The company’s infrastructure business may profit from mmWave implementation as the company offers GaN technology for high power amplifiers which is more

efficient and provides better performance. Additionally radio frequency content could rise up to 50% from the 5G smartphone in addition to double the amount of filters and switches. The stock trades at 21.4x 2020 earnings on our estimates and has a 5 year earnings per share CAGR of 17% on our estimates.

FIGURE 26: Win Semiconductors Share Price ($ Terms)

Source: RWC Partners, Bloomberg – 2014 – 31 July 2019

2014 2015 2016 2017 2018 20190

2

4

6

8

10

12

FIGURE 27: Estimated New Sources of Revenue for Win Semiconductors

Source: RWC Partners, Morgan Stanley – 2019E-2021E

Win Semiconductors New Revenue Sources (NT$ millions)

Huawei RF Qualcomm RF Apple ToF VCSEL New drivers % of revenue

2019 2020E 2021E0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

0%

5%

10%

15%

20%

25%

30%


Taiwan Semiconductor Manufacturing

*TSMC is the largest foundry with over 50% market share in addition to being one of the worldwide leaders in advanced technology. Due to the company’s 7 nanometre process and high market share in advanced mobile technology, the company should benefit from

the implementation of 5G products. The company has raised capital expenditures due to confidence in a fast ramp up of 5G infrastructure and smartphones for its 7 nanometre and 5 nanometre advanced technology.

FIGURE 28: TSMC Share Price ($ Terms)

Source: RWC Partners, Bloomberg, 2014 – 31 July 2019

2014 2015 2016 2017 2018 20193

4

5

6

7

8

9

10

FIGURE 29: TSMC Revenues and Capital Expenditures

2016 2017 2018 2019E 2020E 2021E

Total Revenue (NT$ millions) (lhs) Capital expenditures ($ millions) (rhs)

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

9,500

10,000

10,500

11,000

11,500

12,000

TSMC Revenues vs. Capex

Source: RWC Partners Estimates – 2016 – 2021E

25-30% of the company’s sales come from high performance computing, 40-45% from smartphones, 5% from IoT and 10% from wireless infrastructure. We believe the company should profit from any lift in content per device that 5G provides in addition to higher data traffic. The stock trades on 15.1x 2020E earnings on our estimates.

*Source: TSMC Q1 2019 management conference call.Past performance is not a guide to the future. The price of investments and the income from them may fall as well as rise and investors may not get back the full amount invested.Forecast and estimates are for illustrative purposes only and are not to be relied upon as advice or interpreted as recommendations. The forecast and estimates are based upon subjective assumptions about circumstances and events that may not have taken place and may never do. The names shown above are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or advice.



Past performance is not a guide to the future. The price of investments and the income from them may fall as well as rise and investors may not get back the full amount invested. No investment strategy or risk management technique can guarantee returns or eliminate risks in any market environment. The name shown above is for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or advice.

Samsung Electronics

Samsung is one of the world’s largest technology hardware companies. It sells both branded and finished products and key technology components. The company is the global leader in memory production (DRAM and NAND) with roughly half of global market share. Samsung is exposed to the 5G transition as it is the largest smartphone maker in the world by number of volumes. It also constructs 5G infrastructure equipment and supplies key components through memory and 5G modem semiconductors.

FIGURE 30: Samsung Electronics Share Price ($ Terms)

Source: RWC Partners, Bloomberg – 2014 – 31 July 2019

2014 2015 2016 2017 2018 201915

20

25

30

35

40

45

50

55

Samsung has stated on their Q1 2019 investor conference call an ambition to regain its Top 3 status in 5G equipment vending by 2022. The company announced a $22 billion program for research and development in emerging technologies which we believe will help them achieve their goal. Samsung has already developed 5G equipment for 3.5 GHz

and 28 GHz spectrum with 2.5 GHz and 37 GHz currently under development. The company has already announced two flagship smartphone models with 5G capabilities through GS10 5G and Galaxy Fold 5G. The stock is attractively valued at 7.4x 2020 earnings with a 5 year earnings per share CAGR of 13% on our estimates.

FIGURE 31: Samsung Galaxy Foldable 5G Phone

Source: Samsung Electronics Galaxy F


No investment strategy or risk management technique can guarantee returns or eliminate risks in any market environment.The statements and opinions expressed in this article are those of the author as of the date of publication, and do not necessarily represent the view of RWC Partners Limited. This article does not constitute investment advice and the information shown above is for illustrative purposes only and should not be construed as a recommendation or advice to buy or sell any security.

Conclusion

5G is still at nascent stages of development. While expanded bandwidth, lower latency and increased connectivity will boost productivity in economies that adopt fifth generation technology, investment opportunities will likely differ from country to country. We believe the team’s experience in analysing technology, telecommunications regulation in addition to geopolitics will likely help uncover the best

investment opportunities relating to a phenomenon which will change the course of connectivity.

Additionally, as mentioned above, the risk to these companies considering their hard-ware related nature is a continued deterioration in trade negotiations between the China and the US which could lead to significant potential downside.



John Malloy, Dr. Condoleezza Rice and James Johnstone

Christopher Siow at a Gas Station in Mumbai

Marina Bulyguina at Lotos Headquarters in Poland Jaimin Shah with Anutin Charnvirakul in Thailand

On The Road / Investor Forum in New York City

The All Team Week

Colin Liang presenting at the RWC Investor Forum


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Unless expressed otherwise, all opinions within this document are those of the RWC Emerging & Frontier Markets investment team, as at 7 August 2019.

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