MWC 2016 kicked off on Sunday (21st February) in Barcelona with the debut offlagship smartphones from Samsung IGS7 and GS7 Edge, LGE (G5), HTC (OneX9) and HP (Elite X3). Besides major upgraded camera functions and mDRAM,we witnessed increased emphasis on VR handsets (HTV Vive, Gear VR and LG360 VR) as device OEMs shift focus to alternative high-growth areas amidst aslowing smartphone market. A converged computing device from HP andHuawei’s entrance into tablet-laptop hybrid also look interesting.

　　Samsung GS7 to show minor upgrades with similar form factor: Theoverall hardware specifications were in-line with market expectations, whileupgrading mDRAM to 4GB and a meaningful increase in battery capacity werepositive surprises. One notable part was an enhanced camera module (DPD:Dual-Pixel-Diode 12MPx, equivalent to 24MPx resolution) which makes autofocussignificantly faster. Finally, expandable storage and being waterproofshould appeal to Galaxy fans.

　　Expectations for GS7 shipments and impact on earnings: We forecast SECto ship a total of 40 mn units of GS7 in 2016, slightly lower than GS6 (~42million units) which included the GS6 Edge plus version. We cautiously expectSEC to ship 40 mn units given: 1) slightly longer sell-through impact (Marchlaunch for GS7 relative to April launch for GS6); 2) normalized edge screencapacity; and 3) slower iPhone 6S demand and low expectations for iPhone 7.Assuming 40 mn units with a 20% OPM thanks to low BOM cost burden, GS7will contribute ~50% of total SEC's IM division OP in FY16E.

　　LGE’s G5 clearly new changes but its accessories are not free: LGE alsoheld a G5 unpack event for the G5 phone with a full metal body design and alsoupgraded mDRAM to 4GB. One major change was module design; detachablebattery from metal body and its comparability with several other of its ownmodule types; camera dedicated package, B&O music package and others.Many reviewers are welcoming “new changes” which is modular build but wequestion how many people would be interested in building LG's companionhardware with extra dollars on top of LGE’s G5. iPhone users can get the iOSeco-system free while LGE’s hardware eco-system costs a lot.

　　LGE's G5 shipment target and impact to earnings: LGE expects to ship 8-9mn units of G5 vis-a-vis 4.5 mn units of G4 pointing to disappointing G4shipments given unattractive product design (leather back case). Although webelieve LGE will ship more than G4 shipments, the leading specs – dual-lenscamera module, detachable battery and metal casing, etc. – lead to an increase inBOM cost. Even if we assume 8.5 mn units of GS5 shipments, we estimate G5to account for 13% of LGE's FY16E OP.

　　Implications to supply chains: We identify SEMCO, SDI, Murata, Alps,Ibiden and BYD-E as key potential Samsung supply chain beneficiaries whilewe rank SEMCO and BYD-E the highest in terms of earnings sensitivity. In theLGE supply chain, we identify LGD, LGI and LGC. Given low volumes of G5,however, the earnings impact to the supply chain is low while LGI is the highestrelative to other names. Refer to Table 4 and 6 for details.