Philippine Markets Newsletter

The rise of 5G is benefitting this semiconductor company, garnering Uniform returns 4x more robust than as-reported

August 4, 2021

People have become more reliant on smartphones and the internet for daily activities now more than ever. As a result of consumers seeking even faster connection, 5G was born.

The release of 5G technology resulted in a massive boost in the smartphone industry, benefiting this company tremendously.

However, as-reported metrics do not seem to reflect this company’s recent successes, especially from its global expansion and in-demand products. On the other hand, Uniform Accounting shows that the business has a better Uniform return on assets (ROA) than what you might think.

Also below, Uniform Accounting Embedded Expectations Analysis and the Uniform Accounting Performance and Valuation Tearsheet for the company.

Philippine Markets Daily:
Wednesday Uniform Earnings Tearsheets – Asia-listed Focus
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Despite what textbooks say, first mover advantage is not always as advantageous as one would think, especially in the world of ever-changing technology.

For example, when 5G was first introduced in 2019 in 88 countries, it was only fully implemented on a large scale in South Korea.

Within a short period from its release, large companies such as Ericsson, Nokia, and Qualcomm emerged as initial producers of 5G-related technology.

Though these giant companies got a head start, this Taiwanese company rose within the ranks as a top producer and creator of 5G chips sets.

MediaTek Inc. is a semiconductor company and a market leader in cutting-edge systems-on-chip (SoC), founded on May 28, 1997 in Taiwan.

By following its brand vision “innovation is at the core,” the company has been able to create a wide range of innovative products such as smart televisions, smartphones, 5G modems, 5G chips, and Internet of Things (AI).

Moreover, with the goal of making these products accessible, the company makes sure that its product prices are affordable, which means smartphones that use its chip set tend to be cheaper than those that use its competitors’ products.

One of the ways MediaTek has grown its global footprint over the years is through acquisitions and partnerships with various technology companies.

In 2011, the acquisition of wireless chip manufacturer Ralink Technology Corporation resulted in growth opportunities driven by complementary technologies at the platform level as well as market expansion activities. With Ralink, MediaTek was able to jump on the bandwagon of WLAN chips that year.

A year later, MediaTek acquired Coresoni, following its breakthrough digital signal processor (DSP) architecture for wireless basebands. MediaTek used Corsoni’s DSP technology to further improve its product and expand its product lines, strengthening its position in the wireless communication and digital multimedia IC solutions space.

Aside from acquisitions, MediaTek also established various R&D centers throughout the world to strengthen its digital capabilities and expand to more ventures.

Just this year, MediaTek Inc. announced that it would be investing around USD 3 billion in research & development as it expects an increase in 5G demand going forward.

Since the smartphone industry held 40% of the 5G market share last year, the company predicts that 5G smartphone shipments will exceed 500 million units this year. MediaTek is preparing to meet that demand through Its latest products, such as the newest 5G chipset in 2020, Dimensity 700 catering to the mass market 5G smartphones.

Given the company’s acquisition strategy and R&D capitalization, MediaTek is expected to capture a wider customer base, which should lead to robust profitability.

However, as-reported metrics show that the company’s performance has been declining in the past sixteen years, with as-reported return on assets (ROA) falling from 20%+ levels in 2005-2007 to just 5% in 2020.


Uniform Accounting, however, shows how MediaTek’s R&D capitalization and acquisition strategies are actually generating returns for the company. Although it is also declining, Uniform ROA has been consistently stronger than what as-reported metrics show, ranging from 6% to 99% over the past sixteen years.


One key metric that causes distortions in as-reported ROAs is R&D expenses.

We have highlighted how MediaTek puts a premium in its research and development centers to take advantage of the current technology trends.

In as-reported metrics, these investments in R&D were recorded as outright expenses, which fails to follow the accounting principle that expenses should be recognized in the period when the related revenue is incurred. This distorts the company’s earning power.

R&D investment is actually an investment in the long-term cash flow generation of the company. If this remains treated as an expense, the company’s profitability may appear substantially weaker than it actually is.

After R&D and other significant adjustments are made, MediaTek’s Uniform ROA is at 19% in 2020, which is approximately 4x stronger than its as-reported ROA of 5%.

MediaTek’s profitability is much more robust than you think


As-reported metrics are distorting the market’s perception of the firm’s profitability. If you were to just look at as-reported ROA, you would think that the company is a weaker business than real economic metrics reveal.

MediaTek’s Uniform ROA has been higher than its as-reported ROA in the past sixteen years. For example, when Uniform ROA was at 99% in 2005, as-reported ROA was only 19%.

The company’s Uniform ROA for the past sixteen years has ranged from 6% to 99%, while as-reported ROA has only ranged from 2% to 23% in the same timeframe.

Specifically, Uniform ROA declined from 99% in 2005 to 11% in 2011, before rebounding to 42% in 2014. It then fell to 6% levels in 2017-2020, before recovering to 19% in 2020.

MediaTek’s Uniform earnings margins are weaker than you think but its robust Uniform asset turns make up for it


Volatility in Uniform ROA has been driven by trends in both Uniform earnings margin and Uniform asset turns, with peaks and troughs lining up historically with that of Uniform ROA.

Uniform margins fell from 41% in 2005 to 13% levels in 2011-2012, before rebounding to 27% in 2014. It then declined to 7% in 2017, before recovering to 18% levels in 2020.

Meanwhile, Uniform turns steadily declined from 2.4x in 2005 to 0.8x in 2011, before recovering to 1.6x in 2014. It then fell to 0.8x levels in 2017-2019, before rebounding to 1.1x in 2020.

SUMMARY and MediaTek Inc. Tearsheet

As our Uniform Accounting tearsheet for MediaTek Inc. (2454:TAI) highlights, the Uniform P/E trades at 8.6x, which is below the global corporate average of 23.7x but around its own historical average of 9.5x.

Low P/Es require low EPS growth to sustain them. In the case of MediaTek, the company has recently shown a 108% Uniform EPS growth.

Sell-side analysts provide stock and valuation recommendations that in general provide very poor guidance or insight. However, sell-side analysts’ near-term earnings forecasts tend to have relevant information.

We take sell-side forecasts for Taiwan Financial Supervisory Commission: International Financial Reporting Standards (TIFRS) earnings and convert them to Uniform earnings forecasts. When we do this, MediaTek’s sell-side analyst-driven forecast is a 149% and 1% EPS growth in 2021 and 2022, respectively.

Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify MediaTek’s TWD 910 stock price. These are often referred to as market embedded expectations.

The company is currently being valued as if Uniform earnings were to shrink 2% annually over the next three years. What sell-side analysts expect for MediaTek’s earnings growth is above what the current stock market valuation requires in 2021 and 2022.

Furthermore, the company’s earning power is 3x above the long-run corporate average. Also, cash flows and cash on hand are 3x above its total obligations—including debt maturities, and capex maintenance. All in all, this signals a low credit and dividend risk.

To conclude, MediaTek’s Uniform earnings growth is in line with its peer averages. However, the company is trading below its average peer valuations.

About the Philippine Markets Daily
“Wednesday Uniform Earnings Tearsheets – Asia-listed Focus”

Some of the world’s greatest investors learned from the Father of Value Investing or have learned to follow his investment philosophy very closely. That pioneer of value investing is Professor Benjamin Graham. His followers:

Warren Buffett and Charles Munger of Berkshire Hathaway; Shelby C. Davis of Davis Funds; Marty Whitman of Third Avenue Value Fund; Jean-Marie Eveillard of First Eagle; Mitch Julis of Canyon Capital; just to name a few.

Each of these great investors studied security analysis and valuation, applying this methodology to manage their multi-billion dollar portfolios. They did this without relying on as-reported numbers.

Uniform Adjusted Financial Reporting Standards (UAFRS or Uniform Accounting) is an answer to the many inconsistencies present in GAAP and IFRS, as well as in PFRS.

Under UAFRS, each company’s financial statements are rebuilt under a consistent set of rules, resulting in an apples-to-apples comparison. Resulting UAFRS-based earnings, assets, debts, cash flows from operations, investing, and financing, and other key elements become the basis for more reliable financial statement analysis.

Every Wednesday, we focus on one company listed in Asia that’s relevant to the Philippines and that’s particularly interesting from a UAFRS vs as-reported standpoint. We highlight one adjustment that illustrates why the as-reported numbers are unreliable.

This way, we gain a better understanding of the factors driving a particular stock’s returns, and whether or not the firm’s true profitability is reflected in its current valuations.

Hope you’ve found this week’s Uniform Earning Tearsheet on an Asian company interesting and insightful.

Stay tuned for next week’s Asia company highlight!


Angelica Lim
Research Director
Philippine Markets Daily
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