Intel’s forecast cut suggests that the deterioration in PC volume is worse thanexpectations. Currency plays an important role in 1Q weakness. With ongoingre-pricing as well as planned launches of Skylake and Windows 10 in 2H, weexpect the weakness to persist in 1H on a y/y comparison before a potentialrecovery in 3Q. Maintain Underperform on Lenovo which should see downsideto consensus of a 10-15% q/q decline in PC shipments for the current quarter.

　　Intel lowered 1Q outlook. While cutting revenue forecast by 7%, with data centermeeting expectations and ASPs moving higher, Intel should see a bigger degree ofdeterioration in PC volume. Although the downward revision should come as no completesurprise to the market since Taiwanese notebook ODMs have been lowering guidance,the magnitude is larger than we thought. Intel attributed the guidance cut to weakerdemand for business desktop PCs and lower inventory levels, due to slower XP refresh inSMB, increasingly challenging macro and unfavorable currency conditions. While Taiwanesenotebook ODMs are guiding about a 20% q/q decline in 1Q shipments, we see a similarmagnitude of weakness in desktop PCs. Checks suggest Lenovo and Dell are the mostaggressive in reducing forecasts.

　　Negative currency impacts. Channel inventories were high at last year end when PCvendors pushed aggressively before Microsoft restricts discounted Windows with Bing tosmaller notebooks. We believe currency also plays an important role in 1Q PC weakness.

　　PC vendors such as Lenovo and HP are raising prices particularly in Europe. In additionto the economic impact on units from higher prices, re-pricing leads to back-and-forthnegotiations along the channels, resulting in slower sales cycle. We believe the samephenomenon applies for other tech products in addition to PCs. In China which should seeless currency impacts, a late CNY allows a shorter window for market recovery until endof 1Q. In the US, checks also suggest softer demand after the market grew by 4%+ y/y forthree consecutive quarters.

　　Skylake and Windows 10 to add pressure before potential recovery in 3Q. As theUS dollar continues strengthening, demand will remain under pressure from ongoing repricing.

　　The planned launches of Intel’s Skylate processors and Windows 10 in 2H effectivelyask PC vendors to be conservative in pushing new products for the time being. In particular,given Broadwell was delayed, some PC vendors will upgrade directly from Haswell, thegeneration before Broadwell, directly to Skylake, thus creating the current window of lackof new products. At the same time, Consumers will also delay purchase ahead of the newplatforms. More importantly, distributors will keep inventories lean to minimize the riskof overstocking. Therefore, we expect the weakness to persist in 1H on a y/y comparison,despite sequential improvement in 2Q.