Investment strategy: 1Q16 global smartphone shipments were shy of our inhouseestimate, remaining virtually flattish YoY. Apple's share loss in 1Q16seems to have been taken up by Chinese OEMs during the late cycle of iPhone6s. Huawei, OPPO and Vivo, which focus on mid/high-end (~US$200-500),emerged as new leaders and continued to strengthen their share. The trenddoes not bode well for pricing trend to suppliers, as enlarged scale likely givesOEMs the upper hand in pricing negotiation. However, it is a positive for Tierone component suppliers to expand their share through market consolidation.

　　Suppliers with dual exposure to Apple/Top 4 Chinese OEMs are betterpositioned; our top picks are Largan, AAC and Luxshare in that regard.

　　1Q16 global smartphone shipments below expectations: IDC releasedpreliminary 1Q16 global smartphone shipments of 334.9mn units, down16.9% QoQ and up a mere 0.2% YoY. 1Q16 shipments were 5% below our inhouseforecast, and the YoY growth rate is the lowest, vs. 7-55% in the past 12quarters.

　　Chinese OEMs took share away from Apple: Samsung kept its leadingposition with a 24.5% market share in 1Q16 vs 24.6%/20.3% in 1Q15 and4Q15. Apple's market share dropped to 15.3% in 1Q16 vs. 18.3%/18.5% in1Q15/4Q15. Huawei captured 8.2% share in 1Q16 to rank no.3 globally.

　　Notably, OPPO and Vivo, leveraging to their strong offline channels, replacedLenovo and Xiaomi to rank top five globally. Aggregate global share fromemerging Chinese top 4 OEMs (Huawei, OPPO, Vivo and Xiaomi) market sharehas been steadily growing to 22% in 1Q16 from 12% in 1Q14, narrowing itsgap vs. Samsung.